## Making Money

When I last updated my “play money” (Crazy Ivan) account info it was worth \$25,953.  As of market close yesterday it is worth \$28,174.  Equity and ETF positions have changed slightly. Then now include DTN, INTC, IVV, JNK, PBP, SPLV and XLE.   I like all of these positions, however XLE has been a short-term disappointment.  I hold XLE as only a hedge against rising gas prices.

All in all not bad performance for an account valued at \$15,784 in October 2005.  (There have been no deposits or withdrawals  during the whole time.)  This is about 11.2% annualized performance.

## Financial Toolkit: The Rule of 72

The rule of 72 is an easy way to make fast financial calculations in your head (or on a sheet of paper)… no calculator is necessary.  The idea is that you can determine how fast money will double based on an interest rate or rate of return.  Divide 72 by the interest rate and that is the number of years it will take for the investment to double.

For example if a CD (Certificate of Deposit) is paying 6% it will double in 12 years because 72/6 = 12.

The rule of 72 can be used for decreases in value, such as inflation.  If inflation is 4%, money under a mattress loses 4% per year in value.  Because 72/4 = 18, that money’s value will be cut in half in 18 years.   So positive returns divided into 72 tell how long it will take your investment to double and negative returns how long to lose half its value.

The rule of 72 provides convenient illustration of how fees can effect an investment.  Let’s say you are considering two investments in your IRA managed by your brother-in-law Sam.  Option A is to buy and hold SPY, an index fund that has an expense ratio of virtually 0% (0.09% actually) or option B tracking the same index  but managed by the Sam’s company with a 2% expense ratio.  Sam says “Hey buy my index and I get a commission and a chance to win a boat.” Using the rule of 72 you see that 72/2 is 36, meaning Sam’s index will only be worth half of SPY in 36 years.  If you are 29 years old and want to retire at 65 (in 36 years) that’s half of your retirement money!  Tell Sam to find some other sucker to win his stupid boat.

Finally you can use the rule of 72 together with inflation and expected return to plan your financial future.  If you expect a 7% (nominal) return on your retirement portfolio and 3% inflation, that’s a 4% annual return, so your money will double — in inflation-adjusted terms — in 18 years.  Now if inflation is 4% your real return is 3% and your real investment value will double in 24 years; that’s a whole 6 years longer.  Possibly 6 more years until you retire.  Add a 1% management fee and your real return drops to 2% and doubling time is now a whopping 36 years.  Yes, even a 1% fee can cost you 12 more years until you retire!

The example above shows the destructive power of inflation and why even a 1% annual inflation underestimation can be a big deal.  For tax payers that means tax brackets (based on the government’s CPI-U) gradually form an increasingly tight straight-jacket around your take-home pay.  For Social Security recipients this means cost of living adjustments that simply don’t keep up with real world expenses.

The rule of 72 is a powerful tool for financial estimation.  The rule of 72 is not perfectly accurate, but it is generally pretty close to the target.  It is, however, easy to use and can be used to explain financial concepts to people that aren’t that “mathy”.  It is a great way to start explaining finance to kids; while being a tool powerful enough that is also used by Wall Street pros.

## Financial Blog Year in Review

I’m starting to look back on 2011 numbers for the Balhiser Investing Blog.  The first thing that caught my attention is this investing blog has been visited by all 50 states except Wyoming.  Thanks all other 49 states for taking a browse.

I’ve been reviewing which topics and blogs have been the most popular.  Computing beta was the most popular topic, followed by my CBOE visit, then financial baseball.  Popular searches were what CPI stands for, bitcoin inflation, entrepreneur jobs, possible investments and living below your means.

Some analytics stats are better than last year, some are worse.  The most improved stat was time per visit which is up 70% to 2 minutes and 6 seconds per visit.

Finally, the financial blog has passed 150 blog posts.  This blog post will be #156.

## Occupy Wall Street

Wall Street is both a physical location and a metaphor for many things.  Wall Street is a metaphor for U.S. stock markets, stock markets, bond markets, futures markets, options markets, commodities markets, OTC markets, banking, investment banking, even business and CEOs…. the list goes on.

Even if the Occupy Wall Street movement has a financial focus, the term “Wall Street” is just too overloaded.   And that is assuming the folks gathered there are focused on financial institutions and markets.  Some are protesting the Federal Reserve, others the Government, others corporations, others still capitalism.  Most are upset about our crappy US economy.

I think much of America looks at the financial world as a mysterious black box, or as a series of opaque entities tied together in a labyrinth only a few now how to navigate.

Some view this financial black box as useful.  They invest in mutual funds, stocks, bonds, and ETFs.  They take out mortgages and buy insurance.  They trust their investment advisers, or go it alone and trust in themselves.

Others view the financial black box as a “wretched hive of scum and villainy”.  Some from this group are part of Occupy Wall Street.

I have many good things to say about the version of “Wall Street” that I use.   However, I am critical of many parts of Wall Street that I don’t use.   Number 1 on my sh– list are many (not all) financial advisers and stock brokers.  All too often they put people into funds that are commission-laden, undiversified, and unsuited to the needs of their clients, just to make a lot of extra bucks for themselves.  Number 2 on my list are financial analysts (many, not all) whose job seems to be pumping up investments for their proprietary trading beneficiaries.

Nonetheless there are many good things about “Wall Street” and US  markets in general.  Vastly lower commissions on (online) trades, decimal pricing, lower spreads, low-cost ETFs and mutual fund (esp. index and enhanced-index funds).  Free stock quotes and online research.

Back to Occupy Wall Street.  I might as well join (though not support per se) with some virtual protests.

1. I want a full, independent, and complete audit of the the Federal Reserve and the US Treasury [no I am *not* a Ron Paul supporter].
2. I want all shareholder initiatives that pass to be legally binding.
3. I want, at a minimum, the right as an index ETF or mutual fund to have my portion of shares be abstain votes (e.g. the fund manager may not vote *my* shares).
4. I want (and this is a stretch!) no exit packages for failed CEOs.  I’m fine for paying for real success, but I am not fine with paying for failure.  If a new CEO wants a financial exit package of more than zero dollars, I want a CEO with more self confidence.
5. I want the government to get out of the bailout business.

If any of you Occupy Wall Street (or Occupy XYZ) folks want to use my protests, be my guest.

## Bitcoin: The More the Merrier, up to 21 Million

S&P made the right declaration: AA+.  Moody’s and Fitch showed relative weakness.   The downgrade of US Treasurys makes complete sense given that US debt loads will easily surpass 100%  of GDP within a decade.  The US Treasury accuses S&P of negligence for not using their \$20T vs \$22T figures.  I’ve heard stronger arguments from 8th grade debate teams. [Been there. Done that.]

Here I am, Joe investor, watching the markets whipsaw like mad.  I braced for impact in my oh-so-slow way and mitigated perhaps 10% of the damage, but my investments have been generally damaged too.

Maximum caution lies not on either side of the coin, but on the edges.  100% “safe” investments are not safe in the same way that 100% aggressive investments are not safe.  Safety should be measured in terms of the following risk factors 1) situational 2) statistical (non-monetary)  3) inflationary (monetary).

In the midst of worldwide and US market turmoil there has been similar chaos in the fledgling currency called bitcoin.  It is so “new” that my spell checker suggests “bitchiness” or “bit coin” as alternatives.   Meanwhile I’m thinking of a very small exposure to bitcoin as an alternative to precious metals or commodities.

I should disclose that I have I have an emotional connection to bitcoin.   Bitcoin has aspects of finance, technology, and financial engineering that are intriguing to me.  So please consider this factor as I continue to write.

Bitcoin is all that fiat money is not… Bitcoin is finite!   The number one rule I am painfully learning about ANY fiat currency is that it is potentially infinite.  (Unbounded, if you will.)  The fiat currency “presses” are only bounded by the constitution and discipline of the political systems that underlie them.  And these very systems have show over historically documented periods to be ultimately undisciplined. Simply put: lack of monetary discipline leads to economic calamity leads to runaway inflation.

That is one factor that is engineered against in the bitcoin ecosystem.  The bitcoin “printing presses” are inherently limited to 21,000,000 bitcoins.  Further some bitcoins will be forever lost into the digital black hole.

I am not here to say that there are not flaws with bitcoin (BTC).  Just that very few have been discovered yet, and those are very minor so far.  I am saying that bitcoin also has unprecedented advantages: 1) digital portability, 2) relative anonymity, 3) potentially fee-less transfer, 4) agent-less security, 5) inflation-resistance.  I love all of these factors, especially resistance to inflation.

I am here to say that the business cycle is real.  There are booms and busts.  And there is government meddling with the business cycle that, in the long run, only magnifies booms and busts.  And that bitcoin is one possible antidote.  That said, I am sticking with stocks, bonds, ETFs, etc in a not-so-contrarian manner.  I just happen to be mining a few bitcoins on the side.  Not familar with bitcoin mining?  Google it!  🙂

{EAV_BLOG_VER:520117bfcf76c4b9}   See the odd characters at the start of this blog post?  They are just part of my effort to build my small business.  The allow another website, in this case Empire Avenue to verify that I own this finance blog.  Promoting and growing a small business is a marathon.  That’s why I’m thinking of starting yet another venture, websqurl.com, to help bloggers and small businesses build their web presence in a very “white-hat” way.

Sorry for this bit of shameless promotion.  I’ll be right back to real finance blog posts soon.  Ya know… personal finance, ETFs, savings, investing… that kind of stuff.

## Entrepreneur in Training

Walking to the Rockies game yesterday, I was struck by the bustling entrepreneurial spirit on display.  From the myriad pop-up game-day parking lots (ranging from \$25 – \$40 per spot), to the ticket sellers (“I buy tickets”, means “I sell tickets”), to the independent street vendors outside the ballpark marketing peanuts and beverages for half the in-ballpark price.

I have been an entrepreneur in training for most of my life.  For much of that time I didn’t associate the term entrepreneur with what I was doing, nor would I have been able to spell it.  Yet there were several entrepreneurial things I did even before graduating from high school.

• Ran a paper-route (at age 12)
• Door-to-door newspaper sales.  To get more revenue and “signing bonuses”
• Picked up odd jobs to make a few bucks.  Jobs like fence painting, baby sitting & lawn mowing
• Traded collectible cards… for fun and for profit
• Built a “sluice-box” and panned for gold

In college I did even more.  I was trading and auctioning collectible cards via Usenet and the Web… in addition to trading face-to-face.  I found that trading up (trading several lower-value cards for one or two high-value cards) was my most lucrative strategy for making money.  I had to give up my personal collector’s mindset; to be willing to break up my collections when good deals became available.    I learned to put together targeted, marketable, ready-to-use (turnkey) sets in order persuade folks to part with one of their rare, sought-after cards.  As I got more market savvy, I learned to trade high convenience for high value.  This helped hone my fledgling negotiation skills.

I built up a reputation as a trustworthy vendor/trader who represented the quality of my cards honestly, who mailed them promptly, and packaged them carefully so they arrived in good condition.  I was doing this before anyone ever heard of eBay.

In college, I developed a software product called Visual Math 3D.  Looking through my notes, the proposed company structure was:

EngimaSoft, a division of Paradigm Software, a branch of Millennium Corp.

No shortage of boldness there!  I see now that others have grabbed most of these names.  Good for them, they are good names.

Visual Math 3D had a logo and marketing pitch for the cover of the box.  Unfortunately, I had too much school work (and school play) to bring the software to market.  Had I been more business-savvy at the time I would have brought in one or two partners to help market the product.  Who knows… it could have grown into a competitor of Mathematica, AutoCAD, or Excel — it had aspects of all three.

I continue to be an entrepreneur in training.  I’ve learned a few things.

2. Smile, listen, and mingle.
3. Listen to feedback.
4. Keep your sales pitch short, then converse like a real human being, not a sales droid.
5. Market both yourself and your company/venture.  Online and offline.
6. Market to people who are actually interested.  Don’t waste time selling ice to Eskimos.
7. Advertising.  A necessary evil.  Yes, you will likely have to part with some capital to grab the right people’s attention in a positive way.
8. Branding.  Logos, tag lines, style.  Done right branding creates a sense of professionalism, familiarity, and trust.

Financially my most successful ventures have not been lofty, swing-for-the-fences efforts.  Balhiser LLC’s rental property has earned over \$10,000 and prospects remain good.   The Sigma1 proprietary-trading group is currently up \$2700, but markets are fickle.  My card trading activities netted about \$1200 over 4 years.  My paper route earned about \$1100 over 1.5 years.

Except for the rental property business, all my business ventures have been self financed and operated on shoe-string budgets.  They have also been part-time, night and weekend activities.  I have a full-time career in engineering, and while my employer hasn’t given me the golden handcuffs yet, I do wear a nice silver pair.  Thus entrepreneurship will continue to be a part-time activity

My entrepreneurial successes have been modest, yet I am undaunted (at least most of the time).  Today I am a minor league entrepreneur.   I believe that within the next ten years I am likely to make it to the majors, because I have good ideas, tenacity, and passion.  Luckily I know several successful entrepreneurs, and I listen to and learn from them.  They encourage and inspire me when I need a little emotional support.

Entrepreneurship is not for everyone.  It is difficult, if not impossible, to teach in a classroom; entrepreneurship must be experienced.  It can be fraught with setbacks and dead ends.  Passion can turn lead to burnout and frustration.  Yet entrepreneurship can be exhilarating, stimulating, empowering, fulfilling and fun.

Entrepreneurs continue to drive the US economy.   The best, most concise, most creative ideas come from entrepreneurs .  Entrepreneurs also deliver mundane, but necessary goods and services ranging from car washes, to restaurants, street-side baseball snacks,  and rental properties.

The entrepreneurial spirit is alive and well in the US.   Recessions wipe out jobs, and some of the unemployed try out an entrepreneurial path.  While many fail, some succeed.  Some that succeed thrive, and build the businesses of tomorrow.  These people create not only jobs for themselves, they create jobs for others.  They drive innovation and keep America competitive.

I am not expert on entrepreneurship, but I am an entrepreneur.  I work with other entrepreneurs and admire their spirit.  While Washington pays lip-service to entrepreneurs, it seems to be ignoring the obstacles it puts into place, impeding entrepreneurs:

• Self-employment taxes.  Small business pays Social Security and Medicare twice on every dollar earned.  Even on the very first dollar.
• Employment and payroll rules and regulations.  The red tape is one reason I hesitate to hire any employees.
• Regulations.  The only reason my hedge fund is not open to the public (at least to select accredited investors) is the mountain of regulatory requirements.

Even against daunting odds and government red tape, entrepreneurs find a way.  There are many who let red tape and taxes cause them either not enter the entrepreneurial game or quit it out of frustration.  This is a shame, and a loss for the US economy.  There are those who give up one entrepreneurial path (their first) choice, to pursue an alternate entrepreneurial path.  This, too is a loss, but perhaps not a severe.  Finally, there are some small businesses that simply stop growing… not from lack of opportunity, but to avoid the deep, sticky, red tape of employment law.

Right now I’m the category of entrepreneurs who are forgoing (for now) my first venture: the Sigma1 Hedge Fund, and pursuing my secondary venture — financial blogging.  I have a couple accredited investors willing to invest with me, but I have told them for now to put that on hold.

It’s not that financial blogging is not enjoyable, it’s simply far more difficult to make reasonable profits from a finance blog.   Given a choice, I’d rather make \$250,000/year from blogging than managing a hedge fund.  It’s much more likely that managing a hedge fund has a greater chance of making that kind of money.  That, dear readers, is why blogging is my second choice for a business undertaking.

Entrepreneurs, I’d love to hear your stories.  How you succeeded, how you failed, what you learned?  Has government (federal, state, local) red tape gotten in your way?  Have you found ways to succeed in spite of all that?

## Financial Diversions: The Business of Blogging

When it comes to business and finance I have two things in common with Lady Gaga and Frank Sinatra; I have my own style, and I do it my way.  I blog about finance for several reasons: my readers, as a financial journal, to clarify financial ideas and strategies, and as a business venture.  Today I explore the business of financial blogging.

The business plan for the Balhiser Financial Blog consists of three main phases:

1. Build an audience of financially-minded readers and investors.
3. Write one or more financial books, published electronically, and sell for a modest price (say \$2.99).

Currently, I’m focused on phase 1, audience building.  As I blogged in May the Balhiser Finance Blog has had over 58,000 unique visitors and counting.  Had the blog been running ads, the finance blog may have earned about 500 dollars in revenue.  Clearly the blog is a small business. This estimate is based on an earlier time, when web traffic was lower, and the blog accumulated just over 15 dollars in revenue.  These low numbers persuaded me to postpone running ads until traffic increased.

So I looked at my traffic using Google Analytics (a great and free tool).  Comparing this month’s traffic with last month’s showed visits up 89%, page views up 182% and average time on site up 273%. Comparing to 12 months ago visits are up 4,400% and page views are up 9,380%.  Yay!  While the Balhiser Investing Blog is a small business, it’s a growing small business.

I know a lot of web professionals, who give me all sorts of advice on growing blog readership.  The common themes, ideas, and rules that have worked best for my blog:

1. Blog frequently
3. Write good content

I have amended rule #3 to “Write interesting content.”  Following rule #2, this means writing content that the blog’s audience finds interesting.  Three way of finding what’s interesting to the blog’s audience are:

2. What search keywords bring the most visitors?

What’s humbling for me is that the blog articles I consider my very best work are seldom the most popular.  My most recent surprise was the popularity of the post Financial Baseball which sought to explain the mortgage mess around synthetic CDOs using an analogy to fantasy baseball.  Based on the positive response I penned the article Financial Baseball and the Finance of Baseball discussing what I’d consider if I was in a position to buy an MLB franchise.  Sorry readers, neither of these blog posts would make my personal “Best financial articles of this decade” list.  I’m glad many of you enjoyed reading them.

Occasionally a financial topic that I am passionate about also gets great readership.  That happened with the blog article CPI Really Stands for… which talked about the Consumer Price Index (CPI).  Consequently, I plan to write more blog articles about the CPI, the definition of CPI, the shortcomings of the current CPI, and alternative price measures to the CPI.

Some advertising and media pros have suggested that I add more news and web trending topics, relating them back to finance.  Such as how Rep. Antony Weiner’s situation will effect the House and pending financial legislation, or how a divorce could effect Rep. Weiner’s finances.  There are practically an “infiniti” of trends if one follows Google Trends:  blogging about the financial impact of Gabrielle Giffords’ tragic injury and the roll of short-term disability insurance, blogging about how trendy celebrities like Colin Farrell, Ice T, and Jessica Simpson make and invest (or lose) their money, even talking about the finance of NASCAR versus Formula 1 (perhaps the most expensive sports enterprise on the planet).  Actually, I kind of like the NASCAR v. F1 idea… it could be fun to research.

Mostly I’ll stick with the 3 tried-and-true rules above.   If and when my audience grows an additional 10-20 times, I’ll probably start running ads again (even though they can be a bit annoying).  And I’ll keep on blogging.

## Smart People, Dumb Investments

When I started this financial blog a couple years ago, I wondered if I would run out of ideas to blog about.  Luckily, so far anyhow, I have had a different problem — How to choose amongst all of the ideas that pop into my head.

Thing train of thought takes me to consider what explains the relative success and failure — the investing fates if you will — of various investors.  It would be foolish (and wrong) of me to make the blanket statement that smart people make poor investors.  On the contrary I believe that successful investors are very smart people — John Bogle, Warren Buffett, Carlos Slim, Peter Lynch, Bill Gross.

What is interesting and occasionally baffling to me are the poor choices that I see smart people making.  For whatever reason, people tend to share two things with me:  personal information and personal investing information.  If I had to guess why, it is for two reasons.  1) I am actually interested, fascinated in fact. 2) I am very discrete.  Still this doesn’t quite explain why relative strangers tell me these things.

One thing is for sure.  I listen. And on thing I have learned is that people love to tell of their investing success and are hesitant to share their investing misses.  I feel privileged to hear both types of stories.

For the record there is, perhaps, no such thing as a bad (or good) investment in the present.  The “goodness” or “badness” of a given investment is only truly realized when the position is closed and the gains and/or losses are counted.   There are, however, in my opinion, poor portfolio decisions.

Here is my overall impression of the types of under-performing (aka bad) portfolio decisions that smart people make.  Most notably rationalizations for extreme non-diversification.

1) I work in field X.  I understand field X.  I believe the outlook for field X is tremendous, therefore I’m going to pick my favorite stocks that participate in X.  [I heard this all the time during the tech/dot-com pre-bubble and bubble].  I’m going to focus my portfolio in X…. meaning I’m going to severely underweight all other sectors.

2) I’ve followed fund manager, fund company, or my investment manager Y, and I trust and believe in them.  I’m going to put most/all of my money in their hands.

3) I understand the economy, the markets, and what’s going on.  I’m going to make my own decisions, and cut my losses when appropriate.  I’m going to manage my own money, and I’m not going to sheepishly follow conventional wisdom (things such as time-horizon-based asset allocation and CAPM models).  I’m going to bet big and win big on what I believe in.

Over the years I’ve seen that hubris and pride are subject to positive self-reinforcement.  When bets pay off, bettors place bigger bets.  In most cases though, luck eventually runs out and large losses are realized.  This is soul searching time.  Some respond by becoming hyper-conservative for a while (I will only save money in the bank and in T-Bills), some by becoming moderate for a while (I will own some stocks, but mostly bonds), and some by doubling down.

I understand these impulses.  In fact I see that impulse control is a key factor in rational investing.  I understand that smart people are accustomed to being correct.  It is instinctual to believe that this extends to investment decisions.  I’m saying, “If you believe you are orders of magnitude smarter than ‘the market’, think twice.” Or put another way, it is better to be wise than smart when it comes to investing.

To summarized, I know first hand that smart people sometimes make very dumb portfolio decisions.  They believe that their personal academic and career success will translate directly to investment success.  I also know that many such very smart people have been burned, to the tune of \$100,000+ (if not millions) of losses directly attributable to non-diversification.

And finally, as to my personal investments, I happily say that I have been relatively steadfast in my Boglehead-like investing style.  So far it has paid dividends.

## U.S. Armed Forces kill Osama Bin Laden

President Obama and other sources confirm that Osama Bin Laden is dead.  Reports say he was killed by Navy SEALs working closely with CIA agents, and DNA tests confirm that the body is indeed OBL.

The impact of this news on U.S. and global markets is yet to be seen, but the Nikkei’s performance is positive — up about 1.5%.

The impact of the 9/11 attacks had a traumatic multi-year impact on the U.S. economy, and a proportionally lesser, but nonetheless dramatic, impact on the world economy.

What can I add, but that this is very good news, both financially and in general.