Archive for May, 2009

Wear a helmet (The Financial Athlete #127)

May 23, 2009

A road biker does not put on a helmet because he is overwhelmed by fear of reckless drivers or poor road conditions to cause him to crash. He puts on a helmet as part of procedure to prepare himself for the ride. Protection by wearing a helmet is an automatic action; and it does interfere with the ride.

An Investor should know how to protect himself. Like a helmet, protection should be an automatic response and not interfere with the process of investing. An Investor needs protection from unforeseen circumstances, financial predators, and perhaps above all, himself.

1. Unforeseen Circumstances

Health care insurance, life insurance, homeowners insurance, and rental property insurance…don’t do without these (if applicable). These protect the financial well being of you and your family. The worst of all possible scenarios can happen, and insurance guarantees your wealth is protected from a potential huge liability or severe illness.

Always rent a house with rental property insurance. Better yet, add on an umbrella policy to cover additional potential liability. Never think of insurance as a cost for “false fear”. Think of it as the cost of doing business.

As for stocks, the best “insurance” is to buy at a reasonable value the shares of companies with sustainable competitive advantages. Another form of “insurance” comes in the form of diversification. However, the financial industry over-prescribes diversification into stocks. When you are over-diversified, you own too many bad stocks. The financially literate with the time and interest to do due diligence should only invest into 10-20 strong companies in various industries and diversify into other asset classes for multiple streams of passive income.

2. Financial Predators

Don’t count on the government or police to rescue you from financial predators. The best protection against financial predators is financial literacy and to be less trusting of others in handling your money or who want your money “for an investment”. Financial predators are very skilled at trying to win over your trust. They may be your church members or community volunteers, anything to get you to drop your guard.

Always be in tune to “read people”. This is not being judgmental, it is sensing what is closer to reality (no one can comprehend full reality). Grasp verbal and non-verbal language. Verbal is more than the content of the spoken word. Often, how words are spoken communicates a truer message.

3. Protection from yourself

It is possible to make a quick fortune on one investment. We have all heard of how someone who put virtually all life savings in one investment and it paid off dearly. This story inspires greed. Rarely are results so fortuitous for others. It is more common for the results to be financially disastrous. Even if you were to win it big, chances are you will take another big gamble to try to repeat the experience but end up losing all the windfall profit you had gained. For an in depth knowledge on this subject, read Jason Zweig’s Your Money and Your Brain. This is the finest book on Behavioral Finance I have ever read.

Protect yourself from yourself with good judgment. Exercise discretion with logic, critical thinking, common sense, and experience,. Your thinking may be perfectly logical, but if only one premise is false, your conclusion will be false, too. Too many investors fail to question their premises. Use objective, critical thinking to evaluate the veracity of the premises. Without objective critical thinking, logic is useless. Whereas logic and critical thinking may be classified as “book smarts”, common sense and experience may be classified as “street smarts”. Common sense spares you time in not having to do unnecessary research, while experience teaches you to stay grounded.


Beyond the bottom line (The Financial Athlete #126)

May 12, 2009

“I’m not out there sweating for three hours every day just to find out what it feels like to sweat.” – Michael Jordan

What if a river rafter were to say, “I burned 1000 calories today river rafting” and made no mention of the experience of river rafting? From a statistical point of view, the bottom line may be how many calories were burnt, but this entirely misses the point of why people love to river raft. Can anyone enjoy river rafting with the single-mindedness to burn calories? Of course not.

A single-mindedness obsession with the bottom line (earnings) drives senior management at some companies.  Too concerned about meeting this quarter’s target numbers, they are willing to lay off the most valuable employees to cut expenses. Here management rationalizes the layoffs with the cliche,  “Everyone is expendable!” This managerial philosophy engenders the destruction of the enterprise.

All assets cannot be found on a Balance Sheet. Key employees are Off Balance Sheet assets. Dismiss a well respected business-to-business sales representative and risk losing the clients to another vendor. Generally, clients feel more loyal to a likable and effective sales representative than the company he represents.

For residential real estate, the full value of a house cannot be conveyed in the MLS (Multiple Listing Service) data. You must go and visit the houses to evaluate the floor plan and quality of construction. Get a “feel for the place”. An artist instinctively knows as soon as she walks into a home whether the environment is conducive to creativity. Much value is intangible.

‘Wish you were here’ by Alpha Blondy

May 3, 2009

Alpha Blondy, a native of the Ivory Coast, grooves Pink Floyd’s classic tune, ‘Wish you were here’. I love the addition of the bag pipes, which surprisingly fit in very well with reggae. I’m also pleased with the female background vocalists, who blend a gospel music texture to the song.

First the studio version, which I prefer (as usual):

And then the live version:

Mindless Exercise (The Financial Athlete #125)

May 3, 2009

“Develop intuitive judgment and understanding for everything….Perceive those things which cannot be seen….Pay attention even to trifles.” — Miyamoto Musashi

We encounter mindlessness everywhere, from the cashier’s robotic blessing, “Have a nice day” to the willfully ignorant investor who takes comfort in the saying, “Good things happen to those who wait.” In reality, bad things happen to investors who wait too long and good things happen to those who know when to stop waiting.

Forms of Mindlessness

  • Being oblivious
  • Too lazy to think (no understanding of cause and effect)
  • Willfully ignorant (hearing what you want to hear)
  • Not thinking for yourself (too dependent on others)
  • Lost in routine (no spark of creative thinking)

The gym is home to mindless exercise…watching television while on the cardio machines. There is no mind and body connection whatsoever. Even stretching is done mindlessly. To be mindful with a stretch, just visualize the movement of your bones. In the yoga practice, stretching is never mindless for the serious yoga student. Yoga means “uniting” in Sanskrit. Mind, body, and spirit are united through the breath and postures. Beyond this, yoga cultivates a sense of unity with all creation.

In all activities, engage mindfulness.

Forms of Mindfulness

  • Concentration (narrow focus of attention/critical thinking)
  • Awareness (broad focus of attention/intuitive feeling)

To invest mindfully is to be in harmony with facts, reason and trends. Intuitive feeling (awareness) and critical thinking (concentration) are aligned. The natural course of mindful investing is sustainable gain, while the natural course of mindless investing is losing. Losing has a redeeming quality if you allow it awaken the mind to greater concentration and awareness.

Mindfulness need not be complex. Interestingly, you can be financially illiterate for Financial Statements and still engage in the mindful and yet simple long-term strategy of dollar-cost-averaging into the S&P 500. This strategy beats most funds which try to outperform the S&P 500. On the surface this strategy seems robotic, but I call it mindful because it takes discipline to execute.

Another mindful and simple strategy is to pay off the mortgage and live a debt free life. Although you may have become much wealthier if had leveraged debt with low interest into more lucrative investments, you achieved freedom from anxiety related to money.

“Mindless habitual behavior is the enemy of innovation.” – Rosabeth Moss Kanter

2nd Place (The Financial Athlete #124)

May 1, 2009

In sports everyone wants to be in 1st Place. 2nd Place is not good enough. To the fans the 2nd Place person or team is nothing more than the loser who came closest to being the winner.

Investors think highly of new 1st Place Winners, too. These are companies that have created and penetrated a market for a new product or service. They are praised for actually executing the vision. Supposedly, these pioneering companies are blessed with “first-mover advantage”. More often than not, within a few years their dominant market share erodes. Another company comes along with superior technology, savvy marketing, greater financial resources, and professional management, or some combination thereof, and takes over the market. Here are some examples of 2nd Place Winners (2nd to market) usurping the 1st Place Winner (1st to market):

1st Place…………2nd Place

Circuit City………Best Buy
Rio………………..iPod (Apple)……….Amazon

So much for the overrated, first-mover advantage. After developing wide awareness of a new product solution, these companies become thanklessly forgotten. Instead of investing in “exciting companies” with a pioneering strategy, wait for the stronger follower, the 2nd Place Winner with 2nd-mover advantage.

“Show me a good loser, and I’ll show you a loser.” – Vince Lombardi