Zen is uncomplicated. Investing is uncomplicated, until it isn’t.
I like the short Zen story about attention. It starts out
There’s an old Zen story: a student said to Master Ichu, ‘Please write for me something of great wisdom.’
Master Ichu picked up his brush and wrote one word: ‘Attention.’
Simple. Right?
On some level the concepts are simple. They are also profound. On some level Zen is remarkable, stunning. On another level unremarkable.
Investing concepts are similar. Simple, profound.
Possibly the most difficult investing thoughts to grasp and put into action are the most simple.
- Save.
- Balance.
- Own.
- See.
I believe these simple words capture all you need to know to be a wise investor. Like ‘attention’ these ideas benefit from lots of practice.
To ‘Save’ is easy for some, difficult for others. Investing starts with savings. For those not born into a great inheritance savings is crucial. Savings is the art of spending less than you make. The art of delayed gratification. Keeping some of your income and keeping it safe. For many the verb ‘save’ is easy in the way that the verb ‘diet’ is easy. Simple concept, challenging action.
‘Balance’ is a deceptively simple term. Martial arts train balance. Speed skating, ice skating, and tight-rope walking showcase balance. In the investing arena ‘balance’ refers to two key ideas: diversification and emotional equanimity. Diversifying means balancing risks between different types of assets. Emotional balance means “Caring about your investments, but not THAT much.”
To fully ‘own’ your investments you must understand, control, and value them. In the same way that a stable master may own and value a prize horse without understanding veterinary medicine, a stock holder may own and value a stock without being a financial comptroller. An owner cuts out the middlemen and makes decisions. An owner weighs decisions and responsibilities carefully because the financial buck stops with her and no one else.
Finally, to ‘see’ your investments you must see beneath the surface. You see that all investments inevitably change. You see that some good investments go bad. You see the fog that shrouds some investments so thickly that you move on by. You see that taxes are constantly changing and possibly that an accountant may see the ever-changing tax waters more clearly than you.
That’s it. To invest with wisdom is to save, balance, own, and see.
Now for a curve ball. If you have been shot by poison arrows, first carefully remove them. Do not dwell on the cause of their intrusion into your flesh. After you have recovered, you may be tempted to ask “Why was I shot?”. It is the ‘why’ that takes most of the ‘attention’. The same is true for investing. The ‘why’ is the tricky, time-consuming, complicated part.
I believe that for the beginning investor the why can be unimportant. For the enlightened investor the why is also unimportant. The journey to investing enlightenment is about discovering the why and then letting it go.
The last few weeks have been busy for Balhiser LLC. First the small biz was denied a $50,000 line of credit from a bank despite an excellent credit credit score, collateral and cash flow. That’s where creative financing come into play. It occurred to me, as president of Balhiser LLC, that the real estate venture was a good investment, and the the bank had made an error by rejecting the application on the basis of “industry: real estate”. I came up with the idea of a risk-sharing loan that would pay the lender a percentage of gross revenue from the income property in proportion to the loan-to-value of the property. The “angel” lender turned out to be a non-bank individual. The terms of the gross revenue agreement include a minimum 6-month term at which point the loan becomes callable and repayable in full or in part.
The lender gets a good deal because they realize proportional gross revenue. Balhiser LLC gets a good deal because it receives financing to close the capitalization gap with a non-bank lender sharing the revenue risk. The classic win-win business deal. So long as the property goes unrented no “interest” is due.
As it turns out, a 12-month lease on the property was signed on January 27th. If all goes according to plan both my small biz and the private lender will do reasonably well. The lender stands to receive just over 8% return.
Balhiser LLC is entering the real estate investing world. As president, I am working on the last steps of financing a payoff and transfer of a ~$175,000 property to Balhiser LLC. So far, I have secured 65% of the capital and financing. Financing the remaining 35% is in the works, and I am hopeful that a line of credit Balhiser LLC has applied for will help close the gap. Alternately, I am prepared to liquidate some of my Vanguard portfolio, as required to complete the transfer.
The goal is to lease the property, a 3 bedroom townhouse, for $1150/mo. Info about the property is available here.
Investing can be more than just stocks, bonds, ETFs, and options. It is exciting to extend Balhiser LLC into the arena of real estate investment.
As we reflect on Thanksgiving, here are some personal finance things I am thankful for:
- Decimal stock pricing. Remember all those pesky fractions? Decimal pricing is so much easier. And the spreads are much better too.
- Online stock trading. I don’t know about you, but I don’t want to talk to a broker. I want fast quotes and cheap trades without the conversation.
- Free online financial data. Thank you all you online publishers of stock data. It’s 2:00 AM and I just have to know the market premium on the BEP closed-end fund — No problem.
- Index funds. Thanks John Bogle and others for these diversified, tax-efficient, cost-efficient funds.
- Good financial planning. Thanks, Dad, and others along the way who taught me money management, investing, and financial planning.
- 401K, IRA, and Roth IRA accounts. These tax advantaged accounts were spectacular ideas, and they work.
- Good accountants. Thanks for helping me make some sense of the US tax code.
- Buying opportunities. Every now and again a great investment comes along and a great price. Doubling my money on PCU comes to mind. Such opportunities are what make investing fun for me and keep me searching for the next great buy.
- Dividends. Even when stocks are down, many still pay dividends. A lot of stocks are currently repaying 3% dividend yields. These quarterly dribbles of cash do feel good to receive.
For investors, there is a lot to be thankful for. Yes, our equity investments are generally down, and our economy is lethargic. Equities have been a wild ride to nowhere in the last decade. But bonds and, yes, in many places even real estate have fared much better. And as long-term investor I am excited about the prospects finding buying opportunities. I wouldn’t say equities are cheap, but I am thankful that they are not all that expensive either. I am looking forward to the next 10, 20, 30+ years of investing.
One or twice a year I take some time to reflect on my investments and investment decisions. This time I’m writing up this process for the world to see. Here goes…
Questions I’m asking myself this time (5 point scale, 1=poor, 5=excellent):
- In the last 10 years, how has your personal portfolio performed against the S&P500 in terms of return?
- … In terms of volatility?
- How have your returns compared against money markets? (softball benchmark usually, but no so much in 1999-2009 period)
- Rate your investment tax efficiency.
- Rate your diversification.
- Rate your objectivity of investing decisions (esp. for big-scale asset allocation changes).
- Rate your savings rate. (1=negative, 2=none, 3=up to 10% of gross income, 4=20%, 5 =>30%)
- Progress toward retirement goals?
- Understanding of your portfolio and its performance?
- Paying reasonable fees and expenses?
And here’s how I score myself:
- 5. I definitely crushed the S&P500 over the last 10 years. (S&P went from 1422 down to 1105 in this period)
- 4. Much less volatile than the S&P500, but still volatile. Could have made better use of options to dampen volatility.
- 3. My overall returns have, in aggregate, not performed dramatically better than 10-year money market returns.
- 4. Good, but not great. Managed cap gains very well (keeping them long-term and largely unrealized). Still payed lots of tax on interest income. Could have made better use of municipal bonds.
- 5. Broadly diversified including international exposure, real estate, bonds of various durations and styles, etc. Almost completely avoided the tech bubble.
- 4. Steady and disciplined decisions. Reasonable and contained risk taking.
- 5. At least 30% AGI on average saved. If anything I saved a bit too much.
- 5. I am on track to “retire” early. Maybe by age 50 or 55.
- 5. I understand my investments and follow their performance.
- 4. My average expense ratio is approx 0.7% including commissions for trades.
So how did I score? I gave myself 44 out of a possible 50 points, or 88%. In my book that’s a B+.
The 2009 401k contributions limits are up from last year. You can contribute up to $16,500. If you are 50 or older the limit is a whopping $22,000 this year.
$20,062. Essentially flat since early December. Holdings: $10.9K cash, $9.1K SPY, $800 BCS, -$640 SPY call.
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.
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