Posts Tagged ‘investing’

Prophet of profits (The Financial Athlete #86)

January 3, 2009

Sports fans are good at predicting who will win or lose a game. They evaluate win-loss records, match-ups, home court (or field) advantage, and statistics.

Good predictions are based on observation, experience, and reason. A smart investor examines visibility of future earnings and cash flow to predict the future of the stock price.

Investing gets very interesting when a “catalyst” potentially enters the equation. In chemistry, a catalyst is a substance which causes a chemical reaction to occur at a much faster rate. For stocks, a “catalyst” is an event which would thrust the stock price upward.

Investors should use simple probability analysis to decide whether to hold or sell when a potential catalyst influences the stock price.

Suppose the catalyst is a widespread rumor of a buyout from a well-known and large publicly-held company.

Rumored buyout price: $15.00/share
Market price before rumor: $8.00/share
Market price after rumor: $11.00/share
Therefore, the market’s estimated probability of buyout (“catalyst”) is 73%.

You estimate the probability of a buyout at 60%. So, your calculated price is $9.00/share (0.60 x $15.00). In this case, it would be better to sell the stock at the market price of $11/share, which is a $2.00 more per share than your calculated price, rather than wait and hope for a buyout at $15.00/share. Remember, if the buyout doesn’t happen, the market price should return to the price range before the rumor of the buyout ($8.00/share) or lower. The price may trade lower than $8.00/share due to disappointment in management’s failure to close the deal.

Photos: Jamaica’s Usain Bolt entered the 2008 Summer Olympics as the favorite to win the 100 meters and 200 meters dash. No one was surprised he took the gold for both events, the first since Carl Lewis in 1984.


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

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.


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.

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.

Extreme fitness for what? (The Financial Athlete #56)

October 5, 2008

“Moderation in all things is a recipe for a boring life.” — Ao (pastamanvibration)

A very healthy young girl whom I’ve known for several years sat next to me on a lounge chair by the pool. She enthusiastically shared her new fitness goal, “I want to trim my body fat to 8% or less!”

I laid back basking in the sun, my hands behind my head. “Why? You look great just the way you are,” I said, not lying.

The girl sat upright on her lounge chair. She said resolutely, “Thanks but I want to my abs to be really cut. I want to be lean and muscular. Not a trace of body fat. I’ll work out in the gym for hours daily and eat only nutritious food.”

“You want a body of a triathlete?”

She smiled, probably relieved to find someone who understood her. “Yes!”

“Then be a triathlete. Extreme fitness, rather than being an end unto itself, should be a by-product of the sport you love. ”


If your goal is an athletic build with under 8% body fat or to accumulate millions worth of assets, then good luck to you. These are enviable things. Just ask yourself three questions:

1. What do I forsake in pursuit of this goal few obtain?

For every direction taken, thousands more are not taken. The best known alternatives are what economists call opportunity costs. Work 80+ hours a week and you will miss out on being with friends and family. Do this for years and later in life you may find yourself alone in the world.

2. Why do some many others who shares this goal never reach it?

The point of goal setting is to motivate yourself or organization to advance. Mistakenly, goals are usually strictly defined quantitatively, and not arrived through a process of visualization. Such is the way of M.B.O. (Management-by-Objectives), which bureaucracies subscribe to. To run an organization the M.B.O. way lacks vision and may be detrimental to performance. As a case study of this, a renown coffee shop chain determined to cut costs ended the practice of grinding coffee at the point-of-sale. They centralized this task elsewhere and delivered grounded coffee in bulk to the coffee shops. This succeeded in cutting cost. It also succeeded in cutting the flavor and aroma of the coffee.

Shun personal goals measured quantitatively. Visualize being what you want to become. Throw away the weight scale. The mirror reveals everything you need to know about your body: posture, muscular imbalances, muscle/fat composition…. From there, you can make corrections with nutrition and physical activities you enjoy without the vanity of obsessing over an arbitrary number.

Don’t pressure yourself with quantitative financial goals. Forget about “outperforming the S&P” or “keeping up with the Jones”. Let the Jones be the Jones and you be you.

3. Do I dread or love the work I do to reach this goal?

Similar to extreme fitness, financial wealth should be viewed as a by-product of the work you love — work which enhances the lives of customers. It should not be viewed as an end unto itself. If you dread the work, chances are wealth will not follow.

“We are shaped and fashioned by what we love.”
— Johann Wolfgang von Goethe

Lifting too much weight (The Financial Athlete #52)

September 14, 2008

Who walks into a weight room to lift three times his body weight without ever having weight lifted in his life? Even the inexperienced are aware of the danger of lifting too much weight. Unlike heavy weight measured in kilos, the gravitational pull of the weight of debt is not as feared. This kind of weight won’t hurt your back or cause sore muscles for the rest of the day. There are no immediate repercussions with debt. This may be one reason many don’t hesitate to try to lift three times the weight of debt they can bear.

Piling up debt to consume goods and services or speculate on investments with an insurmountable amount is a sure sign of addiction to debt. Every addiction gives a certain high. The high for an addiction to debt is living a richer lifestyle or feeling like you will once your “investment” pays off. But all addictions debilitate. Too much debt eventually leads to a lower standard of living, not higher. While I don’t practice a policy of zero debt, it may be a good idea for someone addicted to debt.

For the rest of us, how should debt be managed? Take a cue from weightlifting, which teaches us to build strength before lifting heavier weight. A weightlifter works out on the same muscles 3-4 times a week and increases weight incrementally over time. So the point is not minimize debt but to only take on a level of debt your income can sustain. The greater your income, the more debt can be leveraged to further increase your income. Recall the question: “Which is the cart and which is the horse?” In this case, income always should be the horse, and debt the cart. A costly mistake is thinking vice versa.

This principle applies not only to personal finance but also to investments. If a company or real estate property has too heavy a debt burden relative to its cash flow, take a pass on that investment opportunity.

What next? (The Financial Athlete #51)

September 11, 2008

In the Fall of 2003 I took a memorable short vacation to San Juan, Puerto Rico. The hotel’s concierge arranged for a tour guide to drive us on a day trip to the tropical rain forest of El Yunque National Forest and the famous Luquillo Beach. The guide was a rather large man, amicable and loved to chat beyond the usual prearranged monologue of historical facts. After an interesting conversation, he bellowed a question I hate to hear from strangers, especially when asked within 5 minutes of meeting them: “What do you do?” You get all sorts of undesirable reactions from looks of envy to requests for stock tips if you reply, “I’m an investor,” so normally I don’t. But this tour guide had a way with people to get them to open up and I was no exception. He was neither curious or envious with my profession, but he did have a story to tell.

He pinched his chin and began, “Not too long ago I took a business executive in his 60’s on a tour of the island with his wife. He told me he was stressed from work and wishes everyday he could retire. Being a bit nosy, I said to him, ‘You’re a business executive. Don’t you have enough to retire?’ The executive replied honestly, ‘No. my net worth is only $3 million. I need at least $5 million to retire comfortably to maintain my lifestyle.’ The calm voice of the tour guide suddenly became emotionally charged, one hand of his danced around and for our safety the other held onto the steering wheel. “Only $3 million! I couldn’t believe my ears! And to think in Puerto Rico many are struggling to make a few bucks.”

I nodded my head in agreement. “What did you say to him?”

The guide preached, “SIMPLIFY! SIMPLIFY YOUR LIFE.” He then paused as though I should digest this message before continuing, “But this was not an option for my ambitious and unhappy friend to consider. He would rather go on with his stressful life to make a couple million more. And if his net worth were to expand to $5 million, no doubt he will probably then say to himself, ‘Oh, $5 million is not enough. I need $10 million before I retire to maintain my lifestyle.'”

“How should a discontented, rich man live a simple life? Should he sit on a hammock at the beach all day?” I said with a smile.

The tour guide had a ready reply. His fingers touched his chest over the heart and said, “Go inward. Become a sage.”


Many of us have fixed ideas of who we are, mostly defined by what we do. This is not altogether a misguided notion. What we do largely shapes us into who we are. The problem lies in defining ourselves too narrowly. Outside the confines of what we do, many of us feel like the proverbial fish out of water.

When the inevitable time comes for an elite athlete to retire he struggles to adjust to life outside of the competitive sport he dearly loves. For him retiring must feel like Cinderella hearing the clock strike midnight while dancing with the prince at the formal ball. Usually it is not long before news breaks of his coming out of retirement to play the sport he elevated to a new level. His return is initially welcomed by fans who are later disappointed to witness their hero’s performance descend from superhuman to mere average for a professional athlete. He may rekindle some moments of his glorious past, as his diminished physical ability may be somewhat compensated by greater knowledge of the game than his younger peers possess and by an undiminished love and deeper appreciation for the game.

Although an athlete eventually will come to reconcile his new role outside of competitive sports, he doesn’t have to settle for a sedentary lifestyle. He should remain active throughout his life. Physically active old-timers like Jack Lalaine are my biggest role models in sports. In the investing world, I feel the same way about decades long investors like Warren Buffet and T. Boone Pickens. At age 80 T. Boone Pickens aims to transform the energy landscape in America.

These elderly folks are sages in their own right, showing rather than telling us to keep active and do what you love for your whole life.

(Photo above: a hammock at a beach in Bora, Bora in Tahiti)

Go deep but never too deep (The Financial Athlete #50)

September 2, 2008

One of my life’s cherished memories is diving 80 feet below the surface in a Hawaiian coral reef teaming with a rainbow of colors in tropical fish. This dive was my reward for getting certified by PADI with practice in the frigid waters (I hate cold!) of Monterey Bay in California. In this same trip to Hawaii, I went snorkeling too, but this experience was no where near as dramatic as the diving expedition in the reef, where I felt immersed in another planet.

With investing I also like to go deeper than the shallow waters but not too deep. I concentrate my portfolio with a carefully chosen 10 to 20 stocks rather than cast a wider net and diversify with dozens or hundreds of stocks. For me, wide diversification is like snorkeling, only a step better than the passive experience of watching fish on TV. Snorkeling may be a bit safer than diving, but far less satisfying. Going deep enhances my learning. I get involved with the companies I invest in, calling Investor Relations and Management of small to mid size corporations, following the industry and company news and SEC filings, and discussing the company performance with other investors. No one has the time to do this deeply for hundreds of companies.

While I like to invest deeply, I’ve learned to be cautious to not invest too deeply with more than 20% of my portfolio in any single equity. Investing too deeply in a single investment is like diving too deep in water. Pressure doubles for each 33 feet under water. If a diver dives too deep he will implode. The same can happen to your portfolio if it’s too concentrated.

(Photo above: Professional diver Mehgan Heaney-Grier dives to her first 155-foot record. Do not try this at your home port or any other body of water.)

What’s your dosha? (The Financial Athlete #49)

August 31, 2008

By way of yoga, I have learned of ayurveda, a medicine system from India dating back 5,000 years. Ayurveda teaches that the human body and mind are comprised of three psycho-physiological functional principles called doshas: Pitta (fire), Vata (wind), Kapha (earth). Most people are dominated by one or two of these.

Interestingly, the dominant dosha for your body may be different than for your mind. Here only the doshas of the mind is explored. It’s important to know your strength and weaknesses and why you do what you do including your manner of investing.

Vata (wind or air)
Positive characteristics: spontaneous, imaginative, active, flexibility, visionary, trend setter
Negative characteristics: restless, nervous, anxious, acts too hastily

The vata mind craves excitement. Thanks to the vata mind we have extreme sports and funding for new companies with promising, revolutionary technology. The investor with the vata mind is in tune with trends. She focuses on the future. Stocks with tremendous growth prospects attract her. Although she may identify future trends correctly, she tends to invest too prematurely as progress materializes more slowly than she had anticipated. This reality of life tires her with worry.

Pitta (fire)
Positive characteristics: ambitious, hard-working, intelligent, strong-willed
Negative characteristics: anger, critical, loss of self-control, overconfident

The prototype of warrior and athlete are pitta types. The pitta mind loves to compete. A Pitta tends to rise to the top or sink to the bottom. He does not fear failure because he believes he can always bounce back.

The pitta type over commits on investments because he is on the fast track to success. For him to take on big risks for potentially big returns is a noble venture. The challenge for the pitta type is to control aggression. If he learns to control it, then this is the fire which nurtures the soil. If left uncontrolled then this is the fire of intense heat which damages the soil.

Kapha (earth)
Positive characteristics: down to earth, analytical, methodical, patient, calm, affectionate
Negative characteristics: stubborn, lazy, slow moving, more attention on past

In sports kaphas are the heavyweight athletes. Think sumo wrestlers and weightlifters. The Kapha type likes to take it nice and slow. He is good at saving money, as his main concern is return of principle rather than return on principle. At the edge of his comfort zone is investing in brick and mortar or solid, blue chip stocks. When the economy is sluggish, the kapha type is the wisest. But when boom time rolls around, he still behaves with excessive caution for fear the economy suddenly will turn for the worst.

All three doshas lie within us. Being conscious of which dosha is dominant is the first step towards bringing them into balance. For example, when we are conscious pitta is too strong we should engage kapha qualities.

One more (The Financial Athlete #48)

August 28, 2008

“Ask yourself: ‘Can I give more?’ The answer is usually ‘Yes’.” – Paul Tergat

During track practice in high school we had to run around the track with no idea how much more running we had to do on that day. After running about a mile someone would pass the coach and ask, “How many more laps?” He’d always replied, “One more.” In reality, we could have 4, 8, or 16 more laps to go, but he wanted us only to think about “one more”.

Tell yourself, “one more” every month you set money aside to invest and don’t worry about how much more you need to invest. “One more!”

“Once you learn to quit, it becomes a habit.” – Vince Lombardi