Archive for October, 2008

Noise (The Financial Athlete #65)

October 31, 2008

In a recent tennis game, a passerby who was on the other side of the fence felt I need coaching when the ball hit the net on my serve. He said aloud, “Hit the ball over the net!” I turned my head to see who said this. He was a complete stranger, probably someone who hasn’t hit a tennis ball in decades. Rather than confront the stranger, I ignored the “noise” and moved on with my game.

Noise cannot be controlled, but you can control your reaction to it. Noise is only a nuisance if you listen to it. Accept noise as part of the game. It is like the wind blowing the ball away from you or the bright sun in your eyes when you look up at the ball.

Noise is everywhere.

The business of business media on TV is noise. Message boards for stocks are full of noise in the form of false information, hype, relentless bashing, and non-material information blown out of proportion. . Noise accounts for much of the daily trading.

There is external noise and internal noise. Internal noise are found in counterproductive thoughts. Because internal noise is often accompanied by negative emotions, it is easier to gain a foothold over you than external noise. Recognize the counterproductive thoughts as noise, and let it drift away like a cloud.

Just the stats, ma’am! (The Financial Athlete #64)

October 30, 2008

“Baseball fans are junkies and their heroin is the statistic.” – Robert S. Weider

MLB (Major League Baseball) keeps statistics for everything you can put a number on. Numbers tell the long history of the game; and numbers tell the story of a particular game on a single sheet of paper. No other sport has a deeper appreciation for its history, and this is due in part to its love of statistics.

It is unthinkable for a General Manager of a MLB team to recruit without thoroughly reviewing a player’s individual statistics. It should be unthinkable for you to buy any stock without reviewing the financial data and ratios of the underlying company. These provide information on price history, the composition of ownership, and the financial condition of the company. They are crucial to determine valuation. Fortunately, stock screeners with key statistics can be found on online for free, saving investors a great deal of time.

Running in circles (The Financial Athlete #63)

October 30, 2008

I am not a long-distanced runner. If I run, I’m chasing a ball or someone with the ball. I associate running with playing, not an exercise regimen. Recently, I asked a long-distance runner, “How do you keep motivated to run?”

He explained, “I don’t run in circles, around a track or a lake, unless I’m timing myself. My mind is not stimulated in seeing the same things over and over again. I like to run toward a destination and then back. When running is a journey, I’m invigorated.”

Many of us live our lives “running in circles”, preferring the comfort of a risk-free, known daily routine rather than explore new knowledge and experiences. Investors are also encouraged to “run in circles” with a mindless system of buy-and-hold, dollar cost averaging into the stock market, regardless of market conditions.

Granted, everyone should not be a stock picker. It is wiser for most to invest in index funds. But rather than set aside a monthly fixed amount into an index fund and hold until retirement, consider setting aside a monthly fixed amount (or better yet, a percentage of income) into a flexible portfolio. Adjust your portfolio according to market conditions. In a down market where P/E ratios are below the historical average and dividend yields are higher than the historical average, increase equities (stocks) in your portfolio. In an up market where P/E ratios are far above the historical average and dividend yields are much lower than the historical average, decrease equities in your portfolio.

This macro approach is simple and should outperform the average results from dollar-cost-averaging.

Ribbit

October 25, 2008

Ribbit

by “pastamanvibration” (Ao)

(Copyright 2008)

“Rocket. Rabbit. Rodent,” croaked Abbott the frog.

“No. No. No!” cried his father. “It’s ribbit. Not rocket! Not rabbit. And certainly not rodent! Ribbit. R-I-B-B-I-T. Ribbit! No other croak will do!”

“But I can’t croak r-r-readit,” Abbott said meekly, his head bent down.

“Practice. Practice. Practice!” his father advised. “Practice until you cannot croak anything but ribbit. It is very strange for a frog to croak anything but ribbit.”

All night long Abbott croaked. He croaked, “Midget.” He croaked, “Widget.” He croaked, “Fidget”. And he croaked “ Fixit” and “Mixit”. But no matter how hard he tried, he could not croak ribbit.

Abbott’s croaks annoyed the frogs tremendously. The next morning not one frog mouth smiled. They gathered together, each sitting comfortably on their own lily pad. Frankie the big bullfrog pointed his fat frog finger at Abbott and yelped, “Who can sleep with HIM croaking nonsense all night? It hurts my frog ears. I say Abbott must go!” At once all the frogs but Abbott’s best friends and family croaked, “Ribbit!” But this ribbit was not a friendly ribbit. It was grunt. And it made Abbott shiver.

The frog king of the pond flung out his sticky tongue to catch a fly. The fly disappeared into his mouth as though being flushed down a toilet. Then the king cleared his frog throat and said, “Only the hiss of a snake sounds worse than Abbott’s croaks.” Then he turned to Abbott and barked, “Croak ribbit this instant or leave this pond.”

Abbott the frog jumped on center stage, a lily pad in the middle of the pond. His skinny frog legs trembled. His small frog heart beat as fast as a hummingbird’s. He took a deep breath to calm down. Air swelled his throat in the shape of a ball. His eyes bulged and gazed at the crowd. Then in the loudest croak he could muster he croaked, “Racket!”

Now tears began to fall from his eyes, like leaves falling off a tree in a rushing wind. He murmured, “As you wish, I will leave.” And his mother wiped his tears with her frog belly.

Before he could say, “Farewell, my fellow frogs,” his mother tied a sack with all his belongings to the end of a twig. She handed it to him and said, “Go west young frog! Hop west until you come upon a dragonfly. When you see the dragonfly, follow it wherever she leads. Do not fear. You are a big frog who can go off on his own. Someday you will become known as a great frog, Abbott. In every pond frog folk will tell your story for a thousand moons to come.”

But Abbott did not feel like a great frog. Instead, he felt like a forsaken frog from his first long leap away from the home pond. He leaped westward over grass and weeds and dirt and rocks. For seven days he leaped westward. His limbs grew weary, and his frog feet blistered. He felt he could not leap another inch even if chased by an alligator. He rested under the shade of a weeping willow tree. It was there he saw a dragonfly circle above his frog head. Suddenly, Abbott forgot about his weary legs and blistered feet and sad frog heart. He jumped blissfully over bushes to follow the dragonfly. And the dragonfly led him to a shimmering waterfall cascading into a pond.

“Home!” he said with much relief.

Night after night, Abbott croaked alone all sorts of sounds. He croaked joyfully new sounds like “exhibit” and “inhibit”. No frog was there to complain – that is until one night a young frog lady from some unknown place introduced herself with a toothless smile, “Hello. I’m Bridget.”

Abbott the frog’s face blushed. A frog’s face could blush no more, which – by the way – isn’t very much. He stared at his frog knees and introduced himself. Then in a low voice he said, “I cannot croak r-r-rip-it.”

Bridget laughed, but not at him. She replied, “That’s okay. I can’t say r-r-rip-it, either!”

In that very moment Abbott and Bridget became frog soul mates. Abbott had not been this happy since he was a tadpole. And it was not long before he himself became a father of dozens of tadpoles.

However, during this happy and hot summertime, not a drop of rain fell from the clouds. By the last days of summer the pond shrunk to half its size, while Abbott ballooned into a giant bullfrog, even bigger than Frankie the bullfrog. So loud was Abbott’s croak, little frog ears could hear it hundreds of frog leaps away.

One night as Abbott and Bridget were croaking “inhabit”, familiar frog faces appeared. Among these frog faces were those of Abbott’s mother and father, which glowed in seeing their beloved son. Other frog faces were the king’s and Frankie the bullfrog’s, which showed shame.

Now Abbott was very happy to see his family and old friends. He was even happy to see Frankie and the king. He jumped high off his lily pad and splashed into the water in a belly flop. This hurt his belly, but he did not care. He said, “What brings you here?”

Abbott’s father replied, “Our pond has become dry as a dead bone. First we dug burrows with our webbed feet and hid in the mud from the hot sun. But no rain ever poured and the mud turned hard as a turtle shell. We have been leaping for days to search for a new home pond. But everywhere we leaped was on dry land.

His mother finished the story, “Last night from a great distance, we heard a frog croak loudly, ‘Drink-it’. I shouted, ‘Abbott! Only my boy Abbott croaks ‘drink-it’! Follow his sweet sound!’ And so here we are.”

The frogs bowed to Francis and Bridget and pleaded, “May we live in your pond?”

Now Abbott and Bridget took a giant leap toward them. The frogs flinched, afraid Abbott’s heavy belly might land on them.

Bridget said with open frog arms, “Welcome!”

Abbott added, “Here you are free to croak anyway you please.”

From then on, frogs throughout the world croak many sounds besides ribbit. Some even croak “Abbott” and “Bridget”.

(While rewriting the story I was listening to Ziggy Marley’s “Dragonfly”, which you can hear by clicking below.)

Peace of mind (The Financial Athlete #61)

October 21, 2008

Much action in sports and investing occurs unseen…within the mind. Unlearn that which tosses your emotional being to and fro. Relearn to steady the mind, the rudder of your being.

Random thoughts about living with peace of mind:

1. A man of laughter who lives in a bungalow is richer than a distressed man who lives in a palace.

2. Life is too short to rush through it.

3. The alchemy of turning a mistake into a gift happens when you accept responsibility for it.

4. Rise above your circumstances or be ruled by them.

5. Action reveals the subconscious mind.

6. A day without surrendering is a day of defeat.

7. Reach a mountaintop through the breath.

8. Be like grass, although cut again and again it never ceases to grow.

9. From the center all senses are sharpened.

10. How to turn work into play: work with passion.

Match ups (The Financial Athlete #60)

October 19, 2008

Basketball is all about match ups. A team should not expect an easy victory over Team X under the rational of “Team Y slaughtered team X, and we beat Team Y with our bench!” Team X may match up much better against your team than Team Y.

A basic function of financial planning is to match investments most suitable for you. We are all unique. And we have different levels of tolerance for risk, although most of us overestimate our own risk tolerance. To get an idea of how you should invest, first recognize what mode you’re in and then act in a prudent manner from that mode. My tennis instructor classifies these modes as: Survival, Defense, Neutral, and Offense. He says, “In a tennis game, we always hit the ball from one of these four modes.”

Survival: I return a difficult shot anywhere over the net just to keep the ball in play. My body is not positioned for good court coverage. I hope my opponent makes an error or I’m able to get back into a defensive move.

Those who are on Survival mode have the greatest need to secure cash. They are in no position to put their money at risk. They must only invest in their well being by putting food on the table and shelter over their heads.

Defense: My opponent is in command of the rally, moving me left and right. I am not trying to hit winners. I am keeping the ball in play. My court coverage is solid.

Many of the elderly are on Defense mode. They don’t have the luxury of “time on the market” to wait for stock prices and real estate prices to rebound from a down market. Their goal is preservation of capital, not return of capital.

Neutral: Both my opponent and I are keeping the ball in play. We hit the ball over the middle of the net to minimize errors.

Those who are on Neutral mode have cash on the side and wait patiently for better investing opportunities. Until the market becomes more conducive to investing, they remain on Defense mode before transitioning into Offense mode.

Offense: I am in command of the rally. If my opponent continues to return my shots, he probably will tire and lose the point.

Those who are on Offense mode are aggressively putting cash into equities and/or real estate to make higher returns. They have timed the market when market prices are below intrinsic value.

Connect to the earth (The Financial Athlete #59)

October 17, 2008

The horse stance in Kung Fu is a tool of endurance training, strengthening the quads and the muscles in the back. Beyond its physical benefits, the kung fu practitioner mystically feels “connected to the earth” or “grounded”. From the earth, he draws power in his stance, punches, and kicks. Without being connected to the earth, his opponent can toss him like the wind.

It is equally important for investors to feel “connected to the earth”. By doing so, he does not allow himself to get carried away with projections of medium-term and long-term future earnings. He knows with the passage of time too many variables come into play. Of these, some of the hapless ones no one preconceived.

To be grounded is to dwell on “WHAT IS” more so than what will be. “WHAT IS” has certainty. What will be has no certainty.

To be grounded with both feet is superior to grounding with only one foot. The right foot represents the asset side of the ledger, while the left foot represents the liability side of the ledger. To be grounded with both feet is to increase assets and decrease liabilities simultaneously. Many are very adept at increasing assets with corresponding increasing liabilities. All is well with this until asset prices depreciate. While your assets depreciate in market price, nobody forgives your liabilities.

Revised bailout plan is much better for taxpayers

October 15, 2008

Bankers and their US Treasurer stooge, Paulson, had schemed for taxpayers to bail them out by paying above market prices for their worst “mortgage-back securities (“assets”). Now that the Western European governments had taken the lead in taking equity for recapitalizing their banks, the US government felt more at ease to follow suit with as much as $250 billion. Paulson conceded to the equity stake plan only to get money into the banks faster.

To begin 9 U.S. banks will get a total cash infusion of $125 billion. It’s a good deal for taxpayers. No one pays a lower rate for the cost of capital than the federal government (the US pays low interest rates for issuing Treasuries). Since this will result in positive cash flow, I’d call this an investment for taxpayers. This investment will provide a dividend yield of 5% for the first 5 years and 9% thereafter on Preferred Shares. Banks are projected to be more financially stable in 5 years to buy back the Preferred Shares rather than pay the 9% dividend.

All is not great about the revised plan, however. The Bush Administration still intends to buy $100 billion of those worst mortgage-backed securities. You didn’t think Wall Street wouldn’t get its “cake and eat it too”, did you?

On your mark. Get set. Go! (The Financial Athlete #58)

October 12, 2008

Can smart investing criteria for stocks be as simple as 1-2-3? Yes, but remember, simple is not necessarily easy.

On your mark…

Imagine starting blocks not aligned with the finish line. No One runner runs parallel to the finish line, while another runs in the opposite direction, and another runs diagonally. runners cross the finish line! This ridiculous scenario illustrates why so many investments go wrong: the starting block was not properly aligned with the finish line. .

For right alignment for stocks, choose only companies with a dominant market share not threatened by competitors. Warren Buffett calls this a “wide economic moat”.

For real estate, be selective with location. To limit your selection to desirable areas, you begin the investment process with a good exit strategy.

Get set…

Of the above companies, choose only those which are well-capitalized. Look at net cash (cash and cash equivalents — short-term and long-term debt). Compare net cash to capitalization (equity + debt). Examine the quality of earnings, plus operating and free cash flow.

As for real estate investments, narrow the search to properties with a steady stream of positive cash flow.

Go!

Be patient to buy stocks and real estate when the market price is at a discount to intrinsic value. Benjamin Graham called this a “margin of safety”.

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”. – Warren Buffett

Where the eyes go, the body goes (The Financial Athlete #57)

October 9, 2008

If the ball is high, you jump to reach it. If it is low, you bend down to catch it. The body follows the eyes.

In the same manner, your money follows your eyes. If you analyze only 3 stocks, your money will flow in only up to 3 stocks. If you visit Open Houses in only one county, you will buy residential real estate in only one county.

Focus your eyes too narrowly and you will miss out on better opportunities. You may also find yourself trapped in a few illiquid investments. Beware of focusing your eyes too narrowly. Look up. Look down. Look left and right. Look behind and in front. Look everywhere. The more places your eyes look, the more opportunities you will see.

Occasionally I get asked, “Should I be a top-down or bottom-up investor?” I answer, “Be both.”

A top-down investor looks at overall economic conditions and industrial sectors and makes investment decisions based on his analysis of this. A bottom-up investor focuses attention on companies on an individual basis and concerns herself less with economic and industrial conditions.

If you see an economic storm on the horizon, hold onto cash. As the storm subsides, oftentimes the best value for the stock of strong company is to be found. In time the stock of that strong company will fall in favor again.