Archive for June, 2009

The comfort trap (The Financial Athlete #129)

June 22, 2009

“Otis” managed the apartment complex I was living in during my college years. Really, he didn’t manage the place; he mostly just collected the rent. All the tenants knew to contact the landlord if something had to be fixed right away or risk waiting forever for Otis to handle the problem. Otis wasn’t busy doing other work. He was just lazy.

One day the landlord was draining the pool and I approached him. Otis came up on in the conversation. The landlord explained, “It may surprise you to hear that for years Otis was a hard worker. He wisely set aside money to make a down payment on a house every 4 or 5 years. Now at age 40 he already owns and rents 5 houses and is satisfied with this rental income. Since he met his financial goal, he’s turned slothful. I need to find a better manager.”

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A rookie can become a multimillionaire before he plays his first professional game in the NBA, NFL, or MLB. Because he played so marvelously in college, the professional team is willing to pay big to put him on the roster for several years. Otherwise, another team would outbid them. This rookie then upsets high expectations with mediocre or poor performance in the professional league. After receiving that hefty initial check, his hard work ethic is no where to be found. He has settled into a “comfort trap”. Money, not love of game, was his real motivator. He only feels obligated to show up for games and practice, even if shamed by the media.

Athletes who shined in a college sport and later cave into mediocrity on the professional level should not be singled out. In almost every work environment, a good percentage just show up for the paycheck, doing what’s minimally required or less if they can get away with it. (Government bureaucracies are especially criticized for rewarding non-productive workers because they fire employees on the basis of seniority not performance.) Others, afraid of change, are productive but settle for years of routine in work they don’t enjoy. They too are confined by the comfort trap.

Do not invest in companies whose CEO’s are content with the status quo. Seek to invest in companies with CEO’s who exhibit a strong desire to revolutionize the industry and have the means to do so.

Do not allow the fire of ambition within you to extinguish. If you do, you will stagnate into a comfort trap. Reach higher and wider. To reach higher is doing more of the same successful action, such as buying more real estate with an eye on value. To reach wider is to try something new, broadening your experience such as returning to college for another study, or world traveling, or reading masterful works of fiction, or volunteering to help the community. All of these experiences enrich us. By refusing to stagnate into the comfort trap, you are always becoming.

After crossing the finish line, ready yourself for the next starting block.

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It’s the training, stupid! (The Financial Athlete #128)

June 11, 2009

A kung fu practitioner said to me, “For me it was all about advancing in the ranks as quickly as possible. I don’t care about that anymore. All that matters now is the training. Since I stopped concerning myself with advancing in rank, I enjoy my training a lot more, and find myself training longer and harder. The rewards will take care themselves.”

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Naive investors love to say, “The greater the risk, the greater the reward”. So, they can take on extraordinary risk in hopes of higher returns.

I am guilty for once believing this Wall Street myth of this risk/reward relationship. The first question to cross my mind with a prospective¬† investment in a stock was “What is the upside?” Now, the first question to pop into my mind is “Does the company have a sustainable competitive advantage?”

After a certain point, it would be more accurate to say, “The greater the risk, the greater the stupidity.” You don’t have to be stupid to make stupid investments. Smart people who invest also suffer from what I call “the tyranny of stupidity”. Smart people aren’t necessarily smart investors. Why? Smart people are more likely to be overconfident, which overrides managing risks properly. Seasoned investors know that the “bones” to investing is risk management.¬† As the framework of a body is held together by bones, so all investments should be held together by diligently managing risk.

Do not infer from this that managing risk is synonymous with no risk. To live life without taking any risks is hardly living. Managing risk protects you from severe losses (“taking a bath”). The first step to managing risk is to cease being obsessed with high returns, especially short and medium term returns. This will also set you free to enjoy the process of sound investing.

“Risk comes from not knowing what you’re doing.” — Warren Buffett