Archive for December, 2008

Obama, the most fit President in history

December 30, 2008

http://www.washingtonpost.com/wp-dyn/content/article/2008/12/24/AR2008122402590.html

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Pyramid power (The Financial Athlete #84)

December 29, 2008

The foundation (tier 1) of the Activities Pyramid is daily physical activities (walking the dog, taking the stairs rather than the elevator, etc.). This is followed by tier 2 of aerobic exercises (long walks, biking, swimming, recreational sports, circuit training, etc.). Building upon this is tier 3 of traditional strength training/stretch & leisure activities (golf, bowling, shopping, etc.). Lastly, the Activities Pyramid is capped by tier 4 of sedentary activities (watching TV, playing video games, reading, etc.) . This pyramid is designed to show how to move more and sit less without overexertion.

Many of  us have the Activities Pyramid upside down with sedentary activities as the foundation followed by leisure activities (golf, bowling, shopping, etc.), and no strength training/stretch and aerobic exercises to build upon this.

Coincidentally, many investors also have the Investing Pyramid upside down. The Investing Pyramid?

THE FINANCIAL ATHLETE INVESTING PYRAMID

1. The Foundation (tier 1)

Actually, Tier 1 doesn’t involve investing activities. It lays the groundwork to avoid having to sell at a loss to meet personal cash flow needs.

  • minimum of 6 months of cash reserve (living expenses)
  • expenses < 90% income
  • financial literacy
  • playbook for investing (a prepared plan for investing)

2. Invest for Positive Cash Flow (Tier 2)

  • distributions from real estate holdings
  • interest income from bonds
  • dividend income from common and preferred shares
  • royalties

3. Invest for Long-Term Capital Gains (Tier 3)

  • target stocks of strong, profitable, and growing companies at a reasonable price and plan to hold for the long-term (1+ years)
  • reside 4+ years in home purchased at a reasonable price and make home improvements to enhance value and then sell it (less than 4 years may not offset closing costs)
  • buy gold (other commodities) at a historically low price (adjusted for inflation)

WARNING: Tiers 4 & 5 are the so-called “fun” activities, which should only be done after cementing Tier 1 through 3 . In other words, due to the nature of higher risk, trading should only be done with excess money. Money set aside for Tier 1, 2, & 3 should never be placed at risk. Frankly, it is entirely unnecessary to partake in Tier 4 & 5 activities.

4. Invest for Short-term Capital Gains — Trading (Tier 4)

  • flip residential real estate purchased at a reasonable price
  • trade stocks using primarily technical analysis to profit from volatility (this should only be done with a portion of the carefully chosen stocks for long-term capital gains)

5. Speculation (not really an investing activity)

  • sell Covered Calls (Derivatives) expiring within 3 months for those “trading stocks” in portfolio
  • speculate on companies with explosive growth potential (unsuitable for most people)
  • collect art and other collectibles

The slaughter (The Financial Athlete #83)

December 26, 2008

Back when I was a college exchange student in Japan, an American friend and I were watching professional baseball at the stadium in Osaka. The Hanshin Tigers were up 5 to 0 against the Yokohama Baystars to start the 7th Inning. I predicted, “It’s about time for the Tigers to let the Baystars score at least one run. In Japanese professional baseball it is customary to not humiliate your opponent with a very lopsided score.”

My friend felt betrayed as a new fan. “So there’s no chance to see a final score of 12-0? That’s not real baseball! You got to always play your best.”

I laughed. “The Tigers want to win, just not with a slaughter.”

In the world of Wall Street, a humiliating slaughter is the norm. “Smart money” always outwits “dumb money”. Wall Street is no place for the financially illiterate unless invested in the safest of index funds and TIPS (Treasury Inflation Protection Securities).

As for active investors, remain skeptical. Trust no one wholeheartedly…not CEO’s, not analysts, not brokers, not fund managers, and certainly not hot-headed hedge funds. Keep your portfolio money in a major brokerage account under your name. Never let anyone trade stocks on your behalf. Never let anyone manage your money. Better to pay down your mortgage or save money in a bank than to allow someone to manage your money. You will prevent substantial losses if you hold the cynical world view of when it comes to money everyone is out for himself first.

As you will not have others manage your money, do not volunteer to manage other people’s money. Never involve friends’ and family’s money into your investments, no matter how eager they are to invest. This will keep relationships more harmonious. People overestimate their tolerance for risk and underestimate their appetite for reward. If things go wrong, you may get blamed. If things go “too right”, they may refuse to sell an overvalued stock. If you want to help your friends or family financially, then give them cash or shares from your account so they have nothing to lose and you are not beholden to them as a source of information.

Release the toxins (The Financial Athlete #82)

December 22, 2008

For years I have been told, “Heavy sweating releases toxins.” I had never questioned this conventional wisdom until I researched this online.

Medical experts say only trace amount of toxins are released through sweat. The purpose of the sweat glands is to cool an overheated body. The liver and the kidneys filter toxins from the blood, toxic metals are released through urine and feces.

For years I have also heard this conventional wisdom for portfolio management: “Sell your losers. Ride your winners.” While this is true for stocks of underlying companies with deteriorating fundamentals, it is blindly followed in the final months of the year for tax loss selling to offset other capital gains. Many of those paper assets sold are not “toxic”. Rather, they are undervalued. Therefore, unless tax rates on capital gain are marginal the best bargains for stocks are typically ripe at the end of the year.

The Comeback Kid (The Financial Athlete #81)

December 17, 2008

Why does the boxing story of the ‘Comeback Kid’ resonate?

Whether at the pinnacle or nadir of success, the self-image of the ‘Comeback Kid’ is always a champion. At his low point, he does not whine and grow bitter. Rather, he becomes more resolute to sharpen his skills to reclaim his title of champion. In pursuit of his first title of champion, he had emphasized “bigger, stronger, faster” in his training. In pursuit of his next title, his experience has taught him he must emphasize “smarter” above all else.

All admire the ‘Comeback Kid’ for his willpower and goal-setting. These are the obvious, positive attributes. Less apparent attributes are his visualization of himself as a champion along with other habitual patterns of thinking which rise above his circumstances. He does not allow obstacles to distract him. Instead, the obstacles serve to challenge him to reach for a higher level. All the while, he is grounded in reality. Overconfidence is not his foible.

Glory hardly motivates the ‘Comeback Kid’, perhaps not at all. Ironically, what drives him is the mundane and repetitious training. In the heart of a champion mundane training is never void of emotional content. Training becomes a joy, and from training neural patterns in his mind develop. This rewiring in the brain sparks the mental framework to achieve greater success.

Knowing this, we can conclude everyone can train his mind into that of champion’s.

“A champion is someone who gets up when he can’t.” — Jack Dempsey
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THE LION CUB (A story from India)

A lioness gave birth to a cub. A short while later hunters shot dead the lioness. Soon after the cub found himself among a herd of sheep. Together with the sheep, the lion cub ate grass and leaves and drank milk and bleated “baaaaaa.”

One day, a lion stood on a hill above the sheep and roared. The sheep trembled and ran off. Only the lion cub remained, meekly eating grass. The lion approached the lion cub and asked, “Who are you?” The lion cub replied sheepishly, “A lamb.”

The lion led the cub to a pond. There the lion cub gazed upon his reflection on the water. At that moment the lion cub realized his true nature and roared like only a lion can roar.

(Above picture: James Braddock, “Cinderella Man”. Below picture: A rare, white lion.)

Sequencing for Safety (The Financial Athlete #80)

December 14, 2008

“In comic strips, the person on the left always speaks first.” – George Carlin

Squats. Dead lifts. Lunges. These multi-joint motion exercises are the heart of an effective weight training workout for legs.

Fencers lunge to strike an opponent. Ball players lunge to catch a ball. Sprinters thrust themselves into the race from a lunge position. Lunges develop strength in asymmetric positions.

Squatting has a functional role in sports, too. A “ready position” in tennis and basketball is a high squat with heels lifted off the ground to prepare for an explosive movement.

For my weight training, I no longer do lunges and squats with a barbell resting on my shoulders. The extra weight on the spine can cause damage to discs. I do lunges and squats just with body weight or dumbbells. Although I may do dead lifts with a barbell, I am careful to initiate the movement with the legs, hips, and glutes (buttocks muscles), not the lower back.

Before I safely do lunges and squats, I usually do back friendly core stabilization exercises as taught by Stuart McGill (planks, side bridges, isometric abdominal crunches, bird dogs). These are designed for muscular endurance, rather than muscular strength. I’ve eliminated traditional sit-ups and crunches from my workout, as these repetitive forward bends also can cause damage to the discs. This sequence is done to ensure the core is braced during leg strengthening exercises.

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Is there a sequence to long-term, successful investing? Yes. It follows the same principle of core stabilization proceeding strengthening exercises. Stabilization keeps you in the game. Sound money management is the stabilization component and investing is the strengthening exercise component. Money management involves setting aside “emergency money” for at least 6 months of expenses, controlling expenditures within 90% of income, and only investing what you can afford to lose. Make no exception to this if you are fully invested in so-called “conservative investments”.

Be mindful of the proper sequence for investing.

The possession of muscular strength and the courage to use it in contests with other men for physical supremacy does not necessarily imply a lack of appreciation for the finer and better things in life.”

– Jack Johnson (boxer)

Click here for source of photo.

‘Me Naw Give Up’

December 12, 2008

In 1960 the name of Derrick Morgan was simultaneously on the #1 through #7 top songs on Jamaica’s national charts. No one, including Bob Marley, had accomplished this before or since. Morgan’s musical career was shortchanged by failing eyesight of which he sadly described as seeing only “lights and clouds”.

Here’s a Derrick Morgan song fitting for our recessionary times, when hardly a day passes without hearing about more layoffs: Me Naw Give Up.

“Things turn out the best for the people who make the best of the way things turn out.”
— John Wooden

Building and maintaining muscle (The Financial Athlete #79)

December 10, 2008

Gyms have no lack of members who lift weights improperly. On top of being unaware of going about it wrongly, these people are convinced they know what they’re doing. To make matters worse, the bulk of them refuse help from a personal trainer. “I don’t need a motivator!”

The learning curve for proper muscle building techniques is steeper than meets the eye. A good personal trainer educates the client on the principles of kinesiology, the study of human body mechanics and anatomy. First the client must learn the basic exercise motions to prevent injury before she refines and refines the motions. After at least several months of regularly scheduled training, she develops her desired level of strength. From then on, her fitness goal for strength changes from building muscle mass to maintaining it. Further muscle development is not practical. How often do you lift a car? Except for body builders and power lifters, less time is devoted to maintain muscle mass than to build it.

My workout with weights lasts not much more than 30 minutes. The shorter duration of the workout makes ongoing resistance training easier to commit to, and it’s enough to generate greater power-to-weight ratio in sports.

How does this relate to investing?

First of all, new investors commonly approach investing like those who lift weights without any idea about body mechanics — in blissful ignorance. This is partly because in the midst of a rising market even a monkey can make money by selecting what to buy with a throw of darts landing randomly on a list of stocks or real estate property for sale. Supply of bananas abounds for this lucky monkey until the market reverses course.

Secondly, a disciplined investor shifts gears mentally from a primary focus on building wealth to preserving wealth. This mental process is no different than the conscious decision the weight lifter makes to redirect his workout from the goal of building muscle to maintaining it. In contrast,an undisciplined investor will risk all his fortune made in an effort to build greater wealth.

Lastly, maintaining wealth requires less time and energy than building wealth ethically, again like maintaining muscle versus building it.

‘Feel the Spirit’

December 8, 2008

Nothing like starting the day with dark chocolate in my mouth and roots reggae in my ears…a double dose of endorphins rush through my brain.

‘Feel the Spirit’ by the Wailing Souls fits my mood these days. If you have a chance to see the the Wailing Souls (Winston “Pipe” Matthews and Lloyd “Bread” MacDonald) in concert, you’ll enjoy one of the best roots reggae performances still around. Unfortunately, the live version of ‘Feel the Spirit’ on youtube.com doesn’t compare to the studio recording from their 1979 album, Wild Suspense. So, here’s the studio version: Feel the Spirit by the Wailing Souls

Recognition (The Financial Athlete #78)

December 8, 2008

We dined at an Italian restaurant, a candle lit on the table between me and a young, devout Catholic woman. Perhaps the delicious Fettuccine Alfredo with shrimp and a glass of white wine relaxed her to open up. “I’m known for softball pitching. Strangers seemingly everywhere complement me on my game. My coach and teammates look up to me as a team leader. All this is good, but I wish they’d appreciate my spirituality, too. It means infinitely more to me.”

I almost said, “Spirituality is found in ordinary activities….like pitching.” Instead, I kept silent. She just needed someone to listen.

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Never stop exploring within. By exploring within, an investor considers his true motive. Is it external recognition or expanding financial freedom? If his motive is the former, then he may come to be recognized for something he would not want to be remembered by, such as greed or failure. If his motive is the latter, then he has taken the first step on the right path to achieving this goal.

Never stop exploring without. By exploring without, an investor practices on-going due diligence. This unleashes an inquisitive mind.

“It is up to us to give ourselves recognition. If we wait for it to come from others, we feel resentful when it doesn’t, and when it does, we may well reject it.” – Spencer Tracy