Topics

Here is a quick collection of ideas for future blogs:

  • Personal Finance 101.  It all starts with savings.
  • Personal Finance 102.  Compound interest.
  • Personal Finance 103.  Quit paying rent.
  • Taxes and investing: What I have learned so far.
  • Note to self… (series)
    • Start a business.
      • Get a license. Form an LLC.  Get a tax ID. Get a PO Box/bank account/etc.
    • Manage taxes better.
      • Foreign dividend tax exclusion. (research)
  • Continuing stock pick/investing updates.
  • My favorite financial books.
  • Negotiation: An important financial skill.

This should be a good start for the next week or two.

Paydirt

BAC and BCS (Bank of America and Barclays ADR) have been good to me in the 2.5 days I have owned them.  They are up 28% and 15% since I bought them.  This kind of sudden paper gain is pretty rare.  All sorts of thoughts and emotions enter my mind:

  • I’m a financial mastermind.
  • I’m just lucky.
  • I should have bought more.
  • Maybe I should hedge… BAC is announcing Monday.

(Actually the last idea, about hedging, is a bit impulsive;  I may yet do it Monday morning.  These stocks are in my smaller IRA which functions as my tax-deferred mad money account.  Playing and being impulsive is OK with these funds.)

All of these thoughts, I realize, are silly and fleeting.  I don’t take them too seriously.  However, part of me thinks I should be beyond such unprofessional emotions and thoughts.  I’ve been investing since I was about 10 years old… to one degree or another.  I have over 20 years of investing experience.  I’ve studied finance in college and discuss finance all the time with a variety of successful people.  I’ve read and absorbed book after book after book about money and investing.  And still I have reactions that I consider a touch foolish.

Gambling: Keeping it at the Casino and away from the Brokerage Accounts.

My occasional risk-seeking tenancies are one reason I took up poker (and other gambling) about nine years ago.  I figured it would be a good way to familiarize myself with my potentially unhelpful emotions.  Mathematically, gambling is a bad deal.  Arguably there are only two games that potentially make mathematical sense: poker and blackjack.  Assuming one is skilled and patient enough.

So I started with blackjack.  I bought a book and practiced counting cards at home.  I developed a passing proficiency.  I then played for real.  I more or less broke even.  But I found it very boring.

I moved on to poker.  Primarily seven-card stud and Texas hold ’em.  I found some good poker books (Boy are there some bad ones!  However, I recommend anything authored by Sklansky.)  Over years I developed some skill.  I found that I did best with tight play — staying out of most hands.  When I consistent play tight and with focus, I do reasonably well.  I also found that I can be my own worst enemy.  Two emotions can cause me particular harm at the poker table.  Anger and boredom.

Boredom eventually causes me to take marginal bets that I shouldn’t to avoid the tedium of sitting out hands.  Anger clouds my judgment and leads me to careless, impulsive decisions.  Over the years at the poker table I’ve learned a variety of skills and techniques to mitigate and manage the impact of anger on my game.  I have been generally unsuccessful so far at finding techniques to mitigate my boredom at the table.  The only thing that I have found helpful to target boredom is taking myself away from the poker table for a break — usually at the craps table.

Craps

Craps is a stupid game.  It can also be a ton of fun.  There are simply no workable systems to make money playing craps.  One could put twenty dollar bills into a shredder, but craps is simply a more fun way to waste money. Playing craps lets me address my temporary poker boredom, and have fun.  When I return to the poker table down 20 or 30 bucks, I play better poker because I am no longer bored.  This can sometimes save me 100 or more and sometimes helps me make back my craps losses and more.

It was some pretty circuitous logic that took me from investing to blackjack to poker to craps.  There are some decent reasons I bring up these things:

  1. Investing can easily spill over into gambling and speculating.  Trying to take the gambling aspect out of investing is a worthwhile goal which should be sought but is never fully achieved.
  2. Any gambling is dangerous.  Especially if one cannot differentiate between luck and skill.  A player can be eaten alive at the poker table if he incorrectly assumes he is more skilled than the others.  Same thing can happen with stocks and especially with more exotic things like options, futures, and commodities.
  3. Investing in stocks, index funds, and quality bonds is like playing poker or blackjack.
  4. Trading options (and futures, etc) is more like playing craps.
  5. Moderation and caution are paramount.  Without these virtues one risks losing everything.

Loose Ends

I’ve only scratched the surface of my eclectic perspective on investing vs. gambling.  I’ve temporarily made some nice bling on my BAC and BCS buys.  I strive to be a rational investor, but acknowledge that I am not yet a Vulcan.  I’ve briefly explored some ways I channel and manage my emotional, impulsive energies.  Hopefully, the paydirt I hit this week is not simply making some money on these two stocks.  It is perhaps in finding different ways to explore the money/emotion connection.  Hopefully soon I’ll get this blog open and running such that I get reader comments.  I look forward to hearing from you.

Millionaire or No Deal

I was watching an exciting episode of Millionaire this morning (Ogi/Meridith) and realized that this game has elements in common with investing (psychology & decisions).  The other game that came to mind is Deal or No Deal.  I started to ponder which is most like investing.

The main difference between Millionaire and Deal is knowledge.  The right knowledge is critical to Millionaire while knowledge is essentially irrelevant to Deal.  What they have in common is large sums of money, decision making, and uncertainty, risk, and reward.

Investing is somewhere in-between.  Knowledge is helpful, but not THAT helpful.

Millionaire is progressive and often abrupt.  Deal is a volatile up and down ride.

Emotionally I think Deal is easier.  I’d have less fear of making a fool of myself on Deal.  However, if i missed a question I should know on Millionaire I’d fear that it would haunt me long after the show.

Maybe my initial query is not the most interesting part of this discussion.  Each show is a way to see a wide range of human behavior compressed into an entertaining package.  Literally millions of such financial decisions, quandaries, and sometimes struggles happen on a daily basis without such TV coverage.  Most of us make such decisions at least a few times a year.  That is perhaps why so many of us can relate to game shows.  They can be a window into the more dramatic aspects of money.

Yesterday I myself was in the hot seat.  I heard about BAC and BCS (Bank of America and Barclays ADR) yields given their precipitous drop.  A classic value play. I decided to buy some right away with my “play money” account.  But I didn’t get to it Tues.  I bought today, but not after they were up 15% and 6% respectively in less than a day.

Q: Did I feel foolish?     A: Not really.

Q: Did I feel anything?  A: Yes, right… but a touch slow Laughing

Q: Am I right?             A: Yes, until proven wrong.

So a little bit of Millionaire (possible knowledge about value) and a bit of Deal (do I feel lucky?).  And emotion.  It was exhilarating to buy stock after a one year hiatus.  Sure I’ve been writing covered calls against index ETFs, but that is not the same rush as getting into new stocks. It felt good.  Such emotion, ideally, would not enter into my decision making and response.  Generally I have less emotional reaction to re-balancing my primary portfolio.  It should be careful and generally boring and infrequent work.  My play money account is an outlet into which to channel my more impulsive financial energies and help keep my primary money-management decisions calm, deliberate, and sober.

I haven’t really answered my initial question. I have, however, had a fun romp into an investing tangent.  Perhaps soon I will stroll into gambling and investing (poker vs. craps).  I hope you had fun going on this short journey.  I did.  Until next time, dear intrepid reader.

Retirement: Is It Contagious?

Today one of my friends and coworkers is retired after 20 years in the tech industry.  Not such an unusual thing, except that he’s only 44 years old.  He’s doing so about one year after another friend and co-worker, also way, way under 50 retired as well.

At his going away party it was interesting to see and hear the folks wishing him well.  For some there came a verbal statement of envy; for others there was a look of, perhaps, longing for a similar fortune.

For myself… I feel a bit of longing for such a possibility.  I’m 33 years old. I have enough assets to live relatively comfortably for 7-10 years without working.  But what good would that do?  I guess I could take a year or two off, learn a third language (probably Spanish) and tour the globe.  Then I could go back to school and finish my graduate work in finance with a Financial Engineering and Risk Management Master’s.  Depending on where I went to school tuition could set me back about $12,000-60,000 (state vs. private).  At which point I’d probably go back to work, either back to work as an Engineer or entering a new job in Finance. Either way any retirement at this point would be temporary.  I have not yet achieved escape velocity from planet Work.  I can achieve low-Work orbit, but any such launch would decay after 10 years or so.

Looking forward I see my median work escape window (or WEW) as likely to wax and wane depending on time at work and my investment performance.  My current WEW, which I guesstimate at 7-10 years, currently has a median expected value of 8.5. In a high-return year my median WEW can grow about 3 years.  In a strongly negative-return year my WEW stays about constant or can even retract (say by 0.5).  On average my WEW has grown about 0.77 years per working year over the last 11 years.  11 years ago, when I started my engineering career, my WEW was about 0 (perhaps closer to -0.2).

So for now my financial immune system is fending off the (early) retirement bug.  For others, in their forties and fifties, [and with bigger WEWs] early retirement may indeed be contagious.  As with many other future looking statements, only time will tell.

Hot Days, Cold Stocks… Cool Logic?

My retirements accounts are down 12.3% and 10.1% YTD (as of 7/11).  The market is down again today so these number are likely to be a shade worse when the YTD return on the website updates later today.

At the same time the weather has been hot.  In the 90’s and flirting with 100 degrees.

Today the S&P closed at 1228. Not much different from where it was 10 years ago at 1177. At less than half a percent appreciation per year plus about 1.5% yield that’s a whooping 2% per year return for a 10-yr investment window.  Taking a look at the chart is unlikely dollar-cost-averaging would have significantly altered the return up or down over that period [hmm… sounds like an analysis for a future blog].

Not exactly a PSA for the merits of stock investing.

So, how’s my personal investment strategy going to change?  Not much.  My “fun” money account has been doing better because I’ve been selling SPY calls high and re-buying to cover low.  This has been a helpful hedge so far and something I may wish to write about further.  My “core” money allocation is unlikely to change… a mix of large/small/international low-cost index funds, some bond funds, and some cash.

Cool logic reflecting on history suggests that over any 20 year period stocks beat bonds… and likely commodities, cash, real-estate, etc.  Perhaps the S&P500 values 1177 and 1228 are some worthwhile data points to start my blog with and to test against over the next ten years.  Maybe these numbers will be part of an unprecedented counter example.  Time will tell — but for now I’m putting much of my money on the bet that stocks will outperform in the end.