Archive for January, 2009

Over-training (The Financial Athlete #96)

January 31, 2009

In our culture of more is better, it is from contrary position to ask, “Is there an optimal level of activity?” The answer is yes for both exercise and investing.

Do too much strength training and this becomes counterproductive. The body will produce an excess of cortosol, the “stress hormone”. Cortisol excess increases blood pressure and blood sugar increases, and can cause muscle loss. So then, the rest period is equally important as the training period; and the higher intensity in strength training, the longer time the muscles need rest to recuperate.

Money is the investor’s muscle. Sometimes investors ask money to do too much in a relentless pursuit of very high returns. Observe the disastrous results of over-leveraging and of perpetuating financing for ill conceived businesses.

Steer clear of investing in any over-leveraged asset (business or real estate) and any underfunded enterprise. If it is within your nature to venture into speculative investing, be sure the enterprise has a very strong Balance Sheet for a long runway to reach profitability.

Move from the center (The Financial Athlete #95)

January 29, 2009

Sometimes my workouts take a little longer than expected. I let myself get distracted into interesting conversations. During a recent workout at the gym, a sweaty psychologist who is very serious about being fit approached me. “I’m so happy I can run again!” he said with the energy of a spring chicken. “Before my knee would hurt too much to run. Since I’ve learned how to RUN FROM THE CENTER, my knee doesn’t bother me while running. Now I’m once again running 6 miles twice a week.”*

“Yeah, I’m familiar with the concept of MOVE FROM THE CENTER from studying martial arts,” I said. “The body is aligned from head to shoulders to hips to knees to ankles. Power is generated from the body’s center of gravity, just below the naval, to the distal parts of the body (hands, feet, arms and legs).”

“That’s right!” said the psychologist with a wide grin. ” I run with my whole body in a diagonal line, slanted forward. I wish I had known about this a long time ago.”

That short conversation was the highlight of my workout. Not that my workout was boring. I was impressed by how the psychologist’s story illustrates how all physical movement should originate from the center. In fact, I would go further to assert all forms of your movement should originate from the center, not just physical movement.

To move from the center with a business is to revolve the business around customer needs, not the whims and preferences of management.

And to move from the center in the mind is to maintain equanimity, to not be easily swayed by emotions and external forces. It is no coincidence in the Western world, we call this “being centered”.

Investors’ biggest mistakes are often driven by anger or worry or greed or impatience or exuberance. If you are forced to make a quick decision on an investment, reject the offer. All decisions on investing should never be made in haste. Deliberate.

*This is not intended as a prescription for knee pain, for which there are numerous causes. If you suffer from knee pain, consult a doctor.

Afraid of the ball? (The Financial Athlete #94)

January 26, 2009

When my dad was a kid, he got a broken nose from playing baseball. When my uncle was a kid, he also got a broken nose from playing baseball. When I was a kid, I didn’t want a broken nose so I didn’t play baseball. I was afraid of that hardball thrown lightening fast at my face. No one ever told me every kid new to the game feels the same way; and that as your skills develop, you lose your fear of the ball. If they told me, I wasn’t listening.

On the playing field, one of the first things you learn is you need courage to play well. With investing and life itself, you need courage to succeed, too. To gain anything of value comes with risk. Be bold but not reckless.

ASK, an acronym for Abilities, Skills, and Knowledge (The Financial Athlete #93)

January 24, 2009

1. ABILITIES

Nothing happens without abilities, expert skills and knowledge notwithstanding. A broken wrist impairs the abilities of a professional golfer, enough to lose to an amateur with a high handicap.

No money impairs the abilities of the most astute investor, enough for a child to gain a higher return with only interest income drawn from a savings account.

The way for an athlete to grow in ability is by training for strength, endurance, and flexibility.

The way for an investor to grow in ability is by investing for income, a wellspring for greater wealth when reinvested.

2. SKILLS

Skills are diverse. They are the product of years of training, discipline, patience, and confidence.

The skills of golfing include driving, wedging, and putting.

The skills of investing include doing proper due diligence and exercising sound judgment.

3. KNOWLEDGE

Aging impairs some abilities of the golfer, but knowledge of the game and course compensates for some loss of abilities.

An investor must attain knowledge of financial literacy to know what to buy and knowledge of market dynamics to know when to buy and sell. Without knowledge, an investor will perish.

The common error is for a man to overestimate his abilities, skills, and knowledge. Losing is the teacher to assess these levels more accurately.

“Bodily exercise, when compulsory, does no harm to the body; but knowledge which is acquired when under compulsion obtains no hold on the mind.” – Plato, The Republic

Cross-train (The Financial Athlete #92)

January 23, 2009

A lovely, red-haired and very fit seventy-year-old Irish lady friend passed me by at the fitness center and said cheerfully, “Hello! So, what’s it going to be today? Swimming? Tennis? Weight lifting? Yoga? Did I miss something?”

I don’t remember my answer, but I do remember what she said after that. “The older we get, the more we have to cross-train. It’s not about being a specialist anymore. It’s about maintaining well rounded health and strength.”

How do we cross-train with investing? With money we do this by investing in different asset classes. Not all money is directed to paper assets (stocks and bonds) or real estate. In a bear market, about 3 out every 4 stocks decline. So, if you’re only invested in stocks, you’re not really diversified even if you own stocks of hundreds of companies. For this reason, you diversify into other assets classes that generally have little or no correlation with the returns of the assets you own.

Beyond this, think of investing in broader terms, “cross-train” to develop body, mind, and spirit. This makes for a much richer life.

Bob Marley’s “Soul Shakedown Party” (1979 Tuff Gong demo)

January 22, 2009

What a great morning today. For the first time in my life I heard this Bob Marley demo song. It was on the radio, 88.1 FM in fun, fun, fun Santa Cruz, California. This version has a heavy base, giving the song a much needed groove. It registers high on my funk-a-meter and is far superior to the original studio version of the early Wailers, which I rarely listen to. I absolutely love this demo!

A few years ago my uncle, the intellectual of the extended family who was a huge fan of and expert on Ludwig Van Beethoven, said with authority, “Bob Marley is the Beethoven of Reggae music! No one else in reggae music has ever or will ever compare.” I couldn’t agree more.

The other Wailer

January 20, 2009

Peter Tosh. He gave the Wailers an edge with the sharpness of a blade.

While Bob Marley is remembered for music conveying love and peace, Tosh is remembered for his cry for justice and the rights of man.

“Without the truth there is no consciousness.” — Peter Tosh

Two picks for a listen:

You Can’t Blame the Youth

Bumbo Klaat
M

‘Walk the Proud Land’ by the Wailers

January 19, 2009

Here’s a gem from the early music of the incomparable Wailers (Bob Marley, Peter Tosh, and Bunny Wailer). The song is called ‘Rude Boy’ and alternatively, ‘Walk the Proud Land’. This early version is ska and worth a listen.

In the 1970’s the Wailers recorded the song in a powerful, Roots Reggae variation. Click here to listen. It’s one of my all-time favorite Bob Marley and the Wailers songs. Unfortunately, unless you want to see a baby learn how to walk there is no video available for this song, but you can settle for an entertaining, live version (6/23/07) from Bunny Wailer below.

Stop and go (The Financial Athlete #91)

January 19, 2009

Land animals move in a pattern of stop-and-go.

All ball sports are stop-and-go. So is hockey and surfing and weight lifting and badminton. Only the man who runs a marathon, or completes in a triathlon, or swims across the English Channel sees fit to move without stopping.

If day trading stocks were a sport, it would be an endurance sport. It’s go, go, go from the moment of the opening bell (or beforehand with premarket trades). The idea is to watch the tape during all trading hours and act upon the daily volatility.

If investing were a sport, it would be a stop-and-go sport. Here’s the stop-and-go cycle for investing in a particular stock:
1. Go: Do due diligence and buy if criteria met.
2. Stop.
3. Go: Updated due diligence. (Accumulate or hold or sell.)
4. Stop.
5. Repeat steps 3 and 4 until position closed.

I am biased toward stop-and-go activities. I believe it’s a healthier choice than endurance activities. For example, trading is more stressful than investing, while marathons are more taxing on the body than breaking a sweat playing ping pong. Ironically, an endurance sport is not a factor contributing to longevity of life, but the stop-and-go activity of strength training is.

“Of course, it is known that lean body mass is the best predictor of longevity once one becomes older. It is far more important to train your strength than to do aerobics (which wastes lean body mass) to live long.”
— Arthur De Vany

The playbook (The Financial Athlete #90)

January 16, 2009

“If you don’t know where you’re going, you could wind up someplace else.” – Yogi Berra

The football playbook lays out the plans on how to execute plays. It details only “DO’s”, not “DON’Ts”. The more practice put into particular plays, the sharper the execution. The playbook is not a case of “the more (plays), the better”. Working off of too many plays in a playbook causes confusion. Better to limit offensive football plays to about 20.

Investors should also have a playbook for investing. Most don’t. That’s why so many of them chase performance or listen to a random analyst touting stocks. A playbook should not be complicated. It should be straightforward and not dumb-downed.

I was very proud of my old investing playbook because it could work like a charm in a normal market. I called it the “Yin and Yang of investing”. On the Yin side, I invested in real estate for passive income. On the Yang side, I invested in small-cap, growth stocks purchased at a perceived reasonable price. When the market prices of these stocks appreciated considerably, I would invest half of the capital gains into more real estate for passive income. The other half was invested into other growth stocks. Of course, this was supposed to go on and on, but it was no match against the liquidity crisis of 2008, which hit like a tsunami wave. Suddenly, some passive income dried up from commercial real estate and the stock prices of the “growth companies” plummeted. My playbook failed on account of insufficient cash to take advantage of deep discounts on various classes of assets and also insufficient interest income from bonds.

A well thought-out investing playbook prepares the investor with contingency plans for a wide spectrum of possible future scenarios. This is its greatest value. My revised playbook now includes contingency plans for both hyperinflation and deflation.

Lastly, an investing playbook should be coupled with a playbook on financial planning, which includes life insurance, living trusts, cash reserve for emergencies, and retirement accounts.