Agricultural Opportunities
September 23, 2009 by Vagabond Investors · 1 Comment
I have previously pointed out that the monetary and fiscal policy, which has been going on for decades, creates inflation. Aside from asset price inflation, which - if we are being completely honest - the richest 1% of population is after, consumer price inflation severely stresses the most vulnerable groups of the globe. The rich elite is hardly concerned about rising fuel and food prices, but the average person on the street may feel differently.
Today, I wish to address certain underlying causes of high food prices. Frequent readers will detect investment opportunities although I am not providing any investment advice.
World cereal stocks have been falling over the past few years. The current stocks for rice, wheat and corn are estimated to have fallen by 40% between 2002 and 2008. As to cyclical factors, depreciation of the US dollar against currencies of major Asian rice exporters has had the effect of raising dollar prices. The decline in US dollar has contributed to increase in the prices of soft commodities, whose prices are denominated in US dollars.
As to structural factors, rising energy prices and energy intensity of the agricultural sector have increased the cost of critical inputs like fertilizer, fuel and power. Both fertilizers and irrigation are critical inputs to the production of food. These are very energy intensive.
The diversion of cereal use from food to produce biofuel is increasing as oil prices become higher. Annually 100 million tons of food grains are being converted into biofuel. Since 2000, cereal use for food and feed increased by 4% and 7% respectively, while cereal demand for industrial purposes like biofuels jumped by more than 25%.
Moreover, since the 1990s the growth of yields have slowed significantly. In most countries, the yield gap between actual and potential is high. One reason for low food grains productivity is the low rate of capital accumulation in agriculture. However, I should wish to stress that this trend could reverse, if the bull cycle in commodities continues as Mr. Bernanke’s freshly printed dollars look for ways to making profits to their owners.
Then there are the coming economic powerhouses in Asia. Rising incomes in Asia have driven up food consumption significantly over the past decade. The demand for meat, milk, eggs and other livestock products have increased dramatically.
Food prices are expected to moderate somewhat later due to supply responses. However, presently farmers cannot get loans to even buy a fertilizer. At the same time, central banks and their agencies around the world are printing money to combat the financial crisis (which, in my opinion, they created exactly with the same measures that they are using to fight the crisis now). This increase in money supply along with out-of-balance in supply and demand should indicate classic investment opportunities in agricultural commodities in the coming decade.
I have to confess that I have no idea how long the crisis will last, but I am 100% certain that it will end up in inflation. Inflation can be created, if fiscal and monetary planners so decide. Presently, Mr. Bernanke is sowing the seeds of the next crisis. I wonder if they hired him because of his abilities to destroy the dollar or instead it.
I encourage everybody reading this post to be on the cutting edge instead of the bleeding edge of it. One of the ways to respond to his insanity may be to invest in agricultural commodities. As always, the choice is yours.
Jaakko
Does Money Make You Rich?
August 18, 2009 by Vagabond Investors · 1 Comment
For a decade, I’ve been obsessed with the question: What makes a person wealthy? I confess that although I think that in order for one to be truly wealthy, money comes after excellent health and deeply fulfilling relationships, I am a big fan of money. Philosophical attributes about wealth aside, I am going to talk about wealth in terms of the raw and almighty dollar (or any currency for that matter).
So does money make you rich? We all know people who work 40-60 hours a week, in other words they work hard for money, but fail to become rich. Ironically, many only get deeper into debt with each dollar they get their hands on. We have all heard stories of people who invested in commodities, stocks or real estate and lost it all. Maybe you are one of those people
Money alone does not make a person rich. Hard work does not make a person rich. Businesses, stocks, real estate, commodities or any investment does not make a person rich. You read that right. The explanation is very simple, yet something most people, my former self included, miss.
I’ve seen people win and lose with the same stock in the same market. I’ve seen people buy excellent investment properties and turn them into nightmares (foreclosed investors note). I’ve seen people own profitable businesses only to lose everything the next year. I bet we have all seen people who work hard and never get ahead financially.
So, it’s not the business, investment or hard work that makes you rich. It is information, knowledge, wisdom and know-how, in other words financial intelligence, that makes one wealthy. The asset is not valuable, it’s the information relative to the asset that is valuable.
Too many people invest with little financial education. Partly this is because they have to (remember, arbitrary low interest rates encourage speculation). Many people are also becoming to realize that Social Security and Medicare may not be around when they retire.
I think it is absolutely necessary for average people to learn the basics about money and investing. I am astounded that schools teach little to nothing about money and investing. Instead, people are funneled into jobs and encouraged to spend everything they make. If anything is left over (there seldom is), they are told to hand over their money to strangers who wear suits and sound intelligent. Most people work hard for money for 40 years and never learn the basics of making their money work for them.
It’s no use to blame others or justify the situation. It is time to take responsibility and get educated. Read books, attend seminars and learn the basic language of money and investing. You will soon realize that you know more than your financial planner and you are on a high-way to lifetime financial security, and if you dare, total financial independence.
I invite you to read our educational blog about financial intelligence and markets on our website: www.lessoninwealth.com
Best
Jaakko
The Birth Of State Capitalism
July 20, 2009 by Vagabond Investors · 1 Comment
Just a year ago some of our readers were sending skeptical emails to us about our then ultra bearish (now overly optimistic) views. Today nobody is denying the on-going crisis. It seems that people have divided into two camps: the other terrified of deflation and the other arguing that inflation is the greatest danger after all.
The Way It Was Supposed To Work
Capitalism is a system where people are allowed to fail. Corporate destruction is creative in a way that the ashes of dead corporations give rise to new and better ones. Corporations and investors who over-reach themselves suffer from the consequences. Then the cycle begins again.
At least so it was supposed to be.
In reality we are witnessing the birth of state capitalism in the once-dynamic West. This is not so far from the system in China, where state-controlled banks have just raised their lending targets. The only difference is that in the West banks have ended up on top.
So Where Are We Heading?
As I have previously pointed out, inflation and deflation are not mutually exclusive scenarios. We can have inflation in some asset classes and deflation in others. Furthermore, inflation can touch different asset classes at different times. One year it could be gold and collectibles, second real estate and third stocks and wages. Highly inflationary investment environments can be very tricky.
What I find remarkable is that we are already seeing deflation in many asset classes and inflation in necessities. Just look at how much transportation, insurance, electricity, food and water cost today compared to two years ago. You’ll get the picture.
What is even more significant is that all governments are throwing money into the system. This is attractive as is burning your furniture to get heat. Initially you feel warm. Eventually the fire runs out and things get even worse. In general in crisis such as this there is a demand shortage and large overcapacity, which leads to deflation. Now the governmental natural disasters are running their money-printers at full speed with little concern to the future.
Many markets have rebounded enormously. It is healthy to recognize that the recent surge in markets was caused by excess liquidity coming from banks. Skillful traders are in a position to make sound profits now. When money is pumped into the system and large deficits are created (politicians, note) the result is volatility.
Mr. Bernanke and Mr. Geithner are not completely useless people. The people who got the money from the US government must be feeling better now. Still, it pays to remember that all that money has to come from somewhere. As Marc Faber points out, you have to borrow it, tax it or print it.
Inflation Shifts Wealth To The Rich
How long can we afford to continue doing this? Tomorrow always comes, at least up to today, and eventually the deadly consequences of heavy inflation start to show up. I’m afraid that it will be very painful to the average person out there.
The problem I have with creating inflation is that it favors special groups and further shifts wealth from the poor and the middle class to the rich. This has been the case for many decades now. I am absolutely certain that Mr. Bernanke has no intention to keep inflation away. In fact, if S&P 500 starts to go south, I’m convinced that he will step up to the gas pedal and pump even more money into the system. Only history will tell how these ultra expansionary policies will be judged. As an investor, I have to invest somewhere, so I will take advantage of it (as I advise you to do as well). As a citizen, I cringe.
The old rules of capitalism where saving was a virtue no longer apply. The new rules favor speculators and groups close to the government. For average people like you and me, it may be easier to just play by the new rules than change the whole world. The choice is ours.
It always has been.
Jaakko
Passing The Bottom Of The Stock Market?
April 20, 2009 by Vagabond Investors · Leave a Comment
Have we finally seen the bottom of the stock market? We will know better by the end of this earning season. If the news continue to get worse, but the stock market refuses to make new lows, we will clearly see the foundation of a solid bottom.
So, if you are investing for the long term and you are not interested in the movement of the following months, by all means by the index and close your eyes for six months or so. Your investment could very well deliver its promise on a long time perspective.
As we look at the charts on a weekly basis, we clearly see how the price has moved from a significantly under-valued zone to the value zone. Note that the MACD histogram, which expresses the power of the uptrend, has reached a 10 year high! This tells how the market has been wildly optimistic and willing to buy. However, the wilder the party becomes, the more likely it is that there will be a hangover. It is very possible to see the index take some breath on the following weeks. It would be a healthy to retreat to around 740 points in order to gather strength to a new marvelous rally.
The daily chart shows how the index bounced from the bottom to tingle the upper level of the channel. In order to create a positive mood for the future, the bounce would have to reach the significant level around 870 and close above it. At present, the index is clearly above the value zone, where it tends to retreat to gather momentum. The rallies of the past days have not reached new short term highs.
Even the MACD histogram, which measures the power of previous power, has failed to make new highs. Instead it has fallen whenever there is a higher new high compared to the previous ones. This simply means the deceleration of the rising power. The struggle of the upcoming weeks shall be seen between 740 and 870. The result of that will show if there is basis for further bounce. Patience in timing purchases is no sign of being a sissy. It is simply sensible thinking.
It strongly seems that the longer trend is changing, but we could experience violent volatility during the upcoming weeks when new earnings are announced and the market gathers strength on slightly lower levels. If you are a short term trader, keep your stops tight and practice very prudent risk management.
The ride will be bumpy and it will offer tickly opportunities both on the short and long side. If you are planning a long term investment, it is desirable to make multiple enters to the market over time as this strategy will calm the mind.
I wish you pleasant investing. As always, let’s plan our moves carefully before we do anything.
Best,
Matias
Drug Dealing For Risk Management
March 10, 2009 by Vagabond Investors · 1 Comment
I thought I would share a little story with you guys. I had some headwind with one of my properties. It’s funny how unexpected and improbable things can turn out to be a real pain in the rectum.
I.
When the bill arrived in my mailbox, I was shocked to see the bottom line. One of my investment properties had been renovated. To be accurate, it wasn’t merely renovated. It was completely rebuilt from the inside. Everything - and I mean everything - that could be torn apart was torn apart and rebuilt. My tenant had thrashed the place and disappeared. He did a decent job at it. Needless to say, this meant losses to me as a landlord.
This was after I received a phone call from the narcotic police, which informed me that they had raided his home with some kind of a tactical team and found guns and heroine. The African guy, my tenant, had turned out to be a drug dealer in Helsinki. After he was arrested, he had been temporarily released until further evidence could be found. During this time he had played around with a water hose in his home (my property) and wetted everything in sight. He had especially taken the time to destroy the bathroom, which was under renovation anyway. He disappeared very quickly and went undercover. Nobody, not even the police, had any idea where had gone.
II.
Until there were any problems, I was happy to own the place. When I bought the property, I was aware of the fact that the property manager was going to renovate the bathrooms in the block. There had been a water leakage and many bathrooms needed to be dried before anything else could be done.
I knew there was an African guy living the property, which was fine with me. He had a good track record of paying rent in time. I even phoned the guy to make sure he didn’t use the bathroom, since it was strictly forbidden. He seemed a little shy as he said that he was using his friend’s bathroom next door. He didn’t have a criminal record. His credit score was fine. Of all I knew, everything was in good order. Yet something was bothering me.
The property manager informed me that they were not in schedule with my apartment. There were some legal problems that needed to be solved before they could move on. I thought that there was nothing I could do about it. So I kept buying new properties and enjoyed my life as a real estate investor. Meantime the tenant lived in an apartment without a bathroom.
Then hit the subprime crisis, which was easy to see before it happened. After all, it was a classic pattern of a crisis. What surprised me was the pace at which wealth disappeared and how quickly the financial sector began to tear apart. So far I had made no connection between my African tenant and the credit crisis. I thought I was properly protected.
My phone rang on an idle Tuesday when I was preparing to go train Krav Maga. The property manager told me that he had visited my apartment. He was taking the drying equipment out when he realized that something was wrong with the tenant. There were burned knifes and bent spoons all over the place. He also said that he felt a little dizzy because of a strange smell.
“Must be some kind of African herbs”, I said as I was putting on my gear.
“Yeah”, the property manager replied. ” wonder what they did with those spoons, though. Anyway, the neighbors said your guy is keeping noise with his friends. You might want to tell him to be quiet at night.”
“I’ll give him a call.” I put the phone down and took off.
I wasn’t used to restless tenants because I was extremely strict with tenant selection. I usually didn’t have tenants in my properties when I bought them. This way I could be more accurate with the selection. I had overlooked this factor when I saw the numbers of the deal (it is funny how I would advise every client to check and re-check everything but didn’t do it myself!) I thought that even though the tenant didnt pay their rent, I could always replace them and it would still be an excellent deal.
The next day the phone rang again. This time it was the narco police. They said they had raided the house based on a hint. They had found a good deal of heroine and some weapons. They suggested I kept an eye on the tenant. I remember thinking to myself that what the heck could I do about something like that. I remembered, though, that I had a statement in the lease agreement about controlled substances, including drugs and guns. Based on that I decided to evict the tenant. So I did.
The good part was that the guy left. The bad part was that he thrashed and watered the place which the property manager had taken time to dry during the past three months. Oddly, he cleaned everything before he left! He took with him every piece of wood that came out of kitchen doors - which he had torn with his hammer. He even wiped off the dust! The property was clean but… it was in a completely useless condition. I have never seen anything like that.
The tenant disappeared. Nobody knew where he went. The insurance company decided not to cover any losses. This was because the tenant had obviously done the damage intentionally. I wasn’t happy about that.
I had a renovation team get to work as soon as possible. They had to virtually rebuild the whole property from the inside. The window and front door weren’t broken so they could be left in place. Everything else (or what was left of it) had to be taken out and built over.
Here’s the twist. I had always thought that if ever something as unlikely as this would happen, I could always borrow the money to fix the property and have its value increase in the process. However, now that the financial crisis had become a full scale systemic banking crisis, nobody trusted anybody and that included me. The bank wouldn’t lend me any money “due to company policy in times like this.” I had to dig in my pockets. To finance the whole thing, I even had to sell a portion of my gold. I was miserable the day that I sold it.
Eventually the property got fixed. The cost was astronomical compared to the value it created. I was happy to have the property give me positive cash flow again but I was very unhappy about the losses it had given me.
The mistakes that I made with the property have taught me priceless lessons. Maybe someday the financial crisis is over and I have the chance to borrow money to cover my losses. Until then, my portfolio is lighter in gold but personally I am rich in lessons in wealth.
III.
Of all the factors that contributed to my losses with the property, perhaps the most obvious variable was the lack of proper tenant selection. This is of course apparent afterwards. I was so excited with the motivated seller and her low asking price that I bought the property unseen as soon as I had completed my due diligence.
Still, the real reason why I got into such trouble was not the tenant. It was me, the investor. It was my lack of proper asset allocation.
Remember, I thought I had protected myself. I had always thought that with a strong cash flow I could finance all kind of unexpected costs and simultaneously increase the value of my property. I assumed this, because in the past I could always get financing.
It turned out that every bank rejected my loan offer. The whole banking sector was in a systemic crisis. It was this lack of access to capital that caused me the trouble. I had to dig deep into my pockets to finance the rebuilding of my property. This severely unbalanced my asset allocation to meet any unexpected losses in the near future.
Every investor has to come to terms with losses. In my case, it is of no use to blame the tenant. It is also a waste of time to justify the loss with some kind of a tax deduction. It is only necessary to take responsibility and learn something from the experience. I certainly learned a ton of things about asset allocation and risk management. The lessons go well beyond the scope of that particular property.
From now on I am much better at recognizing possible bottlenecks with risk management. I learned a bitter lesson about the importance of a large enough safety basket. I will never run out of quick liquidity again. As an investor, I am prepared to go whichever way the economy goes. No matter what happens, I will be in a position to protect myself, exit or take advantage of the situation.
Those are some of the things I learned. Then there is a whole list of personal attitude changes I do not wish to address here. I have to tell you, this experience has changed my plans radically for the better.
Still, I got to tell you, I miss those gold coins every time I think of Mr. Bernanke’s money printing press.
Jaakko
The Architects of Re-Inflation
March 5, 2009 by Vagabond Investors · 1 Comment
It has become a somewhat popular sport to bash the European Central Bank for not acting fast enough to save the system. Many say that the ECB should take similar actions as the Fed has. That, at least, is the common viewpoint.
What Caused the Crisis?
The widespread view is that the cause of the current crisis is this. The people and the government do not borrow and spend enough on consumer goods. Therefore the government must force us all to borrow and spend more. This is as ridiculous as it sounds. It seems that today’s best comedians are not found in the theaters anymore. They are in the economic and financial arena and, for some logic that evades me, are taken as honest people. After all, a smiling central banker should scare you at least a little.
Let us not forget that it was exactly the government and their agencies around the world who constructed the crisis in the first place. It is these people that did not know how to prevent the current crisis. Instead they provided a massive credit bubble and allowed the asset bubble to get out of hand. Now we advocate the same people who caused this mess to fix it - with the same tools they created the mess!
The Free Market Did Not Fail
It is important to recognize that it wasn’t the free market that failed. The root cause of the current crisis is the same as it has been for decades: massive credit creation and government intervention. The architects of the current crisis are found where political and monetary powers bind together today. That is in the Treasury and the Federal Reserve. I should like to point out that central bankers aren’t completely useless people. Especially in times like this, we require what only they can provide: their absence.
The Fed and the US government seem to think that the way to solve the problem, which was caused by printing too much money, is to print more money. In case it should not work out as planned, their backup plan is to print even more money.
The point is, while money creation may help on the short term, they will indisputably overdo it. While many economists see light at the end of the tunnel, it may only be the headlamp of the upcoming train.
Even every ordinary person could immediately see that when debt growth enormously exceeds nominal GDP growth, sooner or later the party will come to an end. Yet even more massive money creation is the road the government and central banks have taken to combat the problem. I suspect that it will lead to even greater problems in the future.
The Road to Ruin
I believe that most people, including Mr. Bernanke and Mr. Geithner, do not fully realize what gigantic money printing will cause. The problem will be especially acute and severe in the US because of its colossal debt burden. Since half of US federal debt is held by foreigners, what happens when they realize that the US government has no intention to pay back? You see, the US is about to repay debt with the issuance of new debt. I suppose these gentlemen do not suffer from insanity, but enjoy every minute of it.
This is as hilarious and as frightful as it sounds. I would like to stress that now is the time to take care of proper asset allocation in your portfolio. Personally I continue to like gold as Mr. Bernanke is flooding the system with money (Mr. Geithner is doing his share by using taxpayers’ money to help out his friends on Wall Street). It could be wise to protect oneself from these financial predators. To do that, it is best to keep an eye on the macro data.
You Have To Do Your Share
I am doing my best to provide you occasional insights and investment considerations. Despite that, you have to make your own financial decisions. Instead of waiting for anybody to save you, I suggest you get educated and leave gentlemen like Mr. Bernanke and Mr. Geithner do their tricks. Luckily, it is easier to adapt to and take advantage from the circumstances than it is to change the whole world.
Jaakko
(C) Copyright Vagabond Investors 2009
The Dow Is Not Normal: Here Is Why
February 18, 2009 by Vagabond Investors · 1 Comment
For those of you that like the stock market (as I do) I will ll give you a nut to crack. Many of you already know this, but those of you that are just starting out your investing career will find this interesting.
Many of you consider investing in Dow Jones. The market says that the Dow did this and The Dow did that. It is as if The Dow was a synonym for the overall stock market. If you think that that is a fairly accurate statement, hang on.
Why is it that The Dow is outperforming on the downside?
What is driving the index?
I will quote Mr. Bianco, CEO of Bianco Research LLC. In his excellent blog post entitled The Dow Is Distorted he made the following points.
The Dow Jones Industrial Average (DJIA) is a price weighted index. The divisor for the DJIA is 7.964782. That means that every $1 a DJIA stock loses, the index loses 7.96 points, regardless of the company’s market capitalization.
Dow Jones, the keeper of the DJIA, has an unwritten rule that any DJIA stock that gets below $10 gets tossed out. As of last night’s close (January 20), The DJIA had the following stocks less than $10.
Citi (C) = $2.80
GM (GM) = $3.50
B of A (BAC) = $5.10
Alcoa (AA) = $8.35If all four of these stocks went to zero on today’s open, the DJIA would lose only 157.3 points. The financials in the DJIA are
Citi (C) = $2.80
B of A (BAC) = $5.10
Amex (AXP) = 15.60
JP Morgan (JPM) = $18.09If every financial stock in the DJIA went to zero on today’s open, it would only lose 331.25 points, less than it lost yesterday (332.13 points).
If you want to add GE into the financial sector, a debatable proposition, then:
GE (GE) = $12.93
If the four financial stocks above and GE opened at zero today, the DJIA would only lose 434.24 points.
The reason the DJIA is outperforming on the downside is the index committee is not doing its job [emphasis added] and replacing sub-$10 stocks and the financials are so beaten up that they cannot push the index much lower.
So what is driving the index? [emphasis added] The highest priced stocks:
IBM (IBM) = $81.98
Exxon (XOM) = $76.29
Chevron (CHV) = $68.31
P&G (PG) = $57.34
McDonalds (MCD) = $57.07
J&J (JNJ) = $56.75
3M (MMM) = $53.92
Wal-Mart (WMT) = $50.56For instance if all the sub-$10 stocks listed above, all the financials listed above and GE opened at zero, the DJIA loses 528.63 points. To repeat if C, BAC, GM, AA, JPM, AXP and GE all open at zero, the DJIA loses 528.63 points.
If IBM opens at zero, it loses 652.95 points. So, the DJIA says that IBM has more influence on the index than all the financials, autos, GE and Alcoa combined.
The DJIA is not normal as the Index committee is not doing their job during this crisis, possibly because of the political fallout of kicking out a Citi or GM [emphasis added]. As a result, this index is now severely distorted as it has a tiny weighting in financials and autos.
Now that is something for you to think about. We have talked extensively about the impact of politics on the market as well as the bailout plan with its shortcomings. The stock market, if let alone, is one of the freest markets there are. However, everything is subject to manipulation by central bankers, politicians and the like who are easily mistaken as honest people.
I will thank Mr. Bianco for his excellent comment and give a direct URL to his article if any of you should be interested: http://www.ritholtz.com/blog/2009/01/bianco-the-dow-is-distorted/
See you guys!
Jaakko
Getting Rich With A Good Plan Is Almost Automatic
February 2, 2009 by Vagabond Investors · 4 Comments
Years ago I met an old friend of mine. We had studied entrepreneurship and finance together. He asked me to join him to eat lunch that week and I agreed.
Over lunch, he asked me what I was doing. I told him I was an entrepreneur, investor and a coach to many people who wanted to become financially independent. His eyes widened and he wanted to know more immediately. He asked a lot of questions about financial independence and investing.
 I told him my formula and what I had found out it really took to become financially free. I thought my friend would be excited to hear that. Instead, he was disappointed.
âWhat?â he said. âIf it were so simple, why donât more people do it?â
âI donât knowâ I replied. âIâve thought about the same thing.â
âI donât believe you. Such a simple formula will not take you there. It has to be more complex. There has to be more risk. It canât be that easy!â he said raising his voice. I could hear the irritation in his voice.
âI never said itâs too easy. I just said itâs that simple.â
âYouâre lyingâ he said. âIâm getting out of here.â So he did and I was left alone eating Thai food.
I think my friend failed to understand that we donât need to be deco-millionaires to be financially independent. We donât even want the million dollars. We want what we think only those millions can buy. The truth is, most of our deepest dreams donât cost that much.
As to the formula I told him, investing is not what most people think it is. Most people want a hot tip or a quick fix. They think that investing is complex and risky. Most people actually prefer complex to simple. They seem to think that if a formula is not complex and difficult, it canât be a good formula.
To me, investing is not a magic formula. Investing is a plan. Investing is a simple, often boring and almost mechanical system of getting rich. Personally, I hate risk. To me risk is a four-letter word. Thereâs always some risk but it doesnât have to be risky. I believe that when it comes to investing, simple is better than complex. Just look at the financial mess on the market today which was caused by systems so complex that even the brightest minds on the planet didnât understand them. Human judgment is far more limited than we think. Weâve met the enemy, and he is us.
I like to keep it simple. If the formula is complex, itâs not worth following. Keeping it simple is always better. I realize why itâs so hard for most people to follow a simple plan. The reason is that it is boring. People want excitement and amusement. I want it too, but I find my adrenaline thrills somewhere else. I prefer simple, uncomplicated plans of getting rich. Because the world is changing all the time, my plan is constantly under revision but it remains simple.
A formula that has been a winning formula for wealth for at least 200 years is this: build businesses and have your businesses buy your real estate and paper assets. Thatâs it.
For most people, the real goal is to find a sense of financial freedom. They want freedom from the day-to-day grind of working for money. All they have to do is find a formula that will make them rich and follow it. When theyâre found it, all it takes is discipline. When it comes to money, discipline is often a rare commodity.
As with my friend, you have to ask yourself how badly do you want it? Are you willing to keep an open mind and accept that investing does not have to be risky and complex? Are you willing to increase your financial IQ so that you can become financially independent? Are you willing to be honest with where youâre starting from and give it some time? Are you willing to pay the price?
My friend obviously didnât. He thought itâs easier to work for the rest of his life. To me, that was too high a price. I have always chosen to pay the price to financial independence. That price is not always measured in money, but in deep feelings and courage to move on.
That is why keeping it simple is such a powerful idea. You will find the strategies and tools that we use on this website. In my opinion, the very best of them are the simplest ones.
Jaakko
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Visit Ground Zero: Kill All You Ever Knew About Investing!
January 20, 2009 by Vagabond Investors · 3 Comments
There is a story about Einstein and his assistant. Einstein gave a test to his science class. As he was collecting test papers his assistant came to him. “Dr. Einstein, wasn’t that the same test you gave to the class last year?” he asked. “Yes, indeed” said Einstein. Puzzled and confused the assistant asked, “But Dr. Einstein, how can that be?” Einstein laid back in his chair and smiled as he replied: “Because the answers have changed.”
That’s the point. The answers have changed. Answers are changing all the time. This is just a fact of life to every investor. Our life is different from what it was five years ago. So is everything else.
As the world is changing, we need go back to the basics. Now is the time to revisit everything we thought we knew about money and investing. Basic financial education has never been so important to us than it is right now. We have to dispose our old paradigms and crystallize our thinking. The following are the areas I am currently working on:
1. How do we make money?
2. How do we budget money?
3. How do we allocate money?
4. How do we leverage our money, time, systems and knowledge?
5. How do we protect our wealth?
6. How, when and under what circumstances do we exit?
7. What asset classes are likely to gain most in the upcoming years?
8. How may we serve more people with less effort?
There are a lot of people who are expecting us to deliver our views about the things I outlined above (which I will do to support your education). The problem is that these people have what is called the quick fix mentality. They want the quick fix. Quick weight-loss, quick buck, quick lunch. These people would want to go to heaven if it didn’t require dying.
The truth is that quick fixes never work. Only extensive working on anything produces a significant result. We have to commit to learning.
That doesn’t mean it has to be difficult. It can be super simple. It can be the easiest thing there is. Drinking water is easy and yet most of us don’t drink enough water. Raising financial education is like drinking water. It has to be over and over again. Like fluids in the body that eventually come out, out-dated financial education has to be disposed. Take everything you knew about money and investing and mentally destroy it. Kill it. Let the toilet swallow it. Why? You guessed it! The answers are changing.
Becoming financially independent has never been easier in the history of mankind. Some people think that the depression will last forever and that all hope is lost. Don’t you believe it. The sun will shine again. It’s not what happens to us but how we respond.
So, let’s get back to the basics. Resolve now to take time to re-educate yourself and answer at least the questions I outlined above. This work will pay in huge dividends. Forget what you thought you knew about the world. Test assumptions. Re-educate yourself as soon as possible. That is, of course, if you wish to become financially independent. In today’s world, that is not optional. Don’t expect anyone else (the government included) to support you.
Take the time. Put it in your calendar. If you’re still just looking for another quick-fix, you’re better buying instant coffee than investing.
See you on the next wave to wealth!
Jaakko
Lessons In Wealth #1: Accept Responsibility
January 12, 2009 by Vagabond Investors · 1 Comment
Everybody faces problems, big problems. That is a given constant and nobody can escape it. The most important thing that separates the rich from the rest of the population is their attitude towards life.
The rich firmly believe that they create their life. They believe that its not what happens but how we respond that matters. We cant control all the things that happen to us, but we have absolute control over our response to what happens.
The poor believe that life happens to them. They believe that the external world dominates what we can do. This difference in attitude determines how we handle the inevitable problems of life.
When the waves come, we can choose to take responsibility or play victim. No one of us really is a victim. It is a role we have to choose. We need to understand that there is no such thing as a wealthy victim. Fulfilling, sustained and life-supporting wealth didnt just happen. Life doesnt just happen to us. We are participators and thus co-creators of our destinies.
How do we know if we are playing victim? Its easy and simple. Lets just take a look at our lives and see if we can find any clues of victim behavior. Consider the following.
1. Blame
Poor people tend to blame other people and circumstances that they are no rich yet. These same people really believe that the lottery tickets will solve their money problems some day. Probably they wont. Statistically most of the lottery winners back in the start square or in worse situation than before the lottery win in five years. Now thats something to think about.
The first step is to stop blaming and taking responsibility on everything that happens in our lives. If we are honest, we have contributed somehow to the problem. Its not that we chose to blow things, but we were part of the process. Lets accept it.
2. Justifying
The second typical victim behavior is justifying and rationalizing the situation. One common justification is that money is really not that important for me after all. Really? Is it not? Lets face it right now. Money is unbelievably important in areas in where it works and totally useless in areas in the areas in which it doesnt. When we need money, there simply arent that many substitutes.
Lets think about our loved ones. What if we choose to believe that theyre not important to us? Well he/she is not really that important. I dont really need a spouse anyway. Chances are they would not stay around for much longer.
Whether we like it or not, the same is true with money. If we believe that money is not important to us, we probably wont see much of it. The rich people admit and accept that money is important. They treat it as something important. They believe and behave accordingly.
3. Complaining
Complaining is passive aggression. We can complain as much as we want but its effect on solving our problems is exactly zero. Its a waste of valuable life energy. In our interpretation of the world, whatever we focus on grows. Whats wrong is always available and so is whats right. Which one we choose to focus on determines what we call our life. We are living magnets and we attract what we think most of the time.
The fact is that we can always choose between victim and victor behavior. To some extent, we are all choosing to be victims and victors. The key is to make a conscious choice to take the road of victors, that is, take responsibility.
We can always accept the situation as it is and take responsibility. We can either change the problem itself or change our perception of it. We can do something differently to solve the problem or at least we can try to find something we can learn from it. Blaming, justifying and complaining just wont work.
Remember, we create our wealth and non-wealth through our attitudes, thoughts and actions. Its not what happens but how we respond. As the saying goes, circumstances do not make a man, they reveal him. The choice is ours.
It always has been.
Matias
Two Simple Rules That Keep You In The Trading Game
December 15, 2008 by Vagabond Investors · 2 Comments
Money management and position sizing are probably the most misunderstood concepts in trading. We have only two goals in every single trade we make.
1. Make money
2. Learn
We canât do both every time but for sure we should get at least one of them.
In my early days of trading I wasnât aware of the importance of solid money management. In my opinion, it pays big money to take it very seriously. Money management keeps us in the game. It makes sure that we donât get lethally hurt in any trade. Iâll run you through one simple and easy-to-use money management system, which I have used for several years.
The Rule Of 2%
The rule of 2% simply says that you never risk more than 2% of your trading account capital in one trade. I always â and I do mean always â follow this rule. If 2% seems a lot, I donât have to ever risk that much if I donât want to. I might choose to risk 0.5%, 1%, 1.5% or 2%. I never ever risk more than 2%.
So what does this mean?
Letâs look at an overly simplified example. Letâs say we have $100,000 in our trading account. We have found a very attractive trading candidate. We decide to enter this trade. The stock trades near its support level at $15.38. We figure out that a suitable stop-loss level would be at $14.12. Following the rule of 2%, how many shares do we buy?
The maximum loss we are willing to take is $15.38-$14.12=$1.26. On the other hand, 2% of our trading account of $100,000 is $2,000. We divide $2,000 by $1.26 (per share) and get 1,587 shares. Always round the number down never up. Include your brokerage fees and possible slippage in the 2%. So we decide to buy 1,500 shares.
One more thing we want to do here. We check that the total amount we put in the trade doesnât exceed 25% of our total account. That would be $25,000 in this case.
The rule of 2% applies to any single trade I make. Thatâs very important. Thereâs another vitally important rule I wish to stress here.
The Rule Of 6%
The rule of 6% applies to my total open risk. It says that I never want to have more open risk positions than 6% of my trading account capital at the time. In other words, before I enter a trade, I check that my open positions in this new planned position donât exceed $6,000, which is 6% of my $100,000.
Whenever the value of my account dips 6% below its closing value at the end of last month, I stop trading for the rest of this month.
Putting It Together
Hereâs the idea of these rules. The 2% rule will keep me out from disastrous losses while the 6% rule will keep me out of long losing strings. Will I miss some fabulous opportunities as I follow these rules? Sure. Itâs still vitally more important to follow the rules. Why? It keeps me in the game in the long run. It pays to have rules that keep you in the money tree year after year.
Letâs look at an example. Letâs say I make 30 horrible trades in a row, each of which loses the maximum following the rules I outlined above. I will still easily manage to protect over 55% of my trading capital.
|
Account |
MAX Risk |
 |
Account |
MAX Risk |
 |
Account |
MAX Risk |
|
100 000 |
2 000 |
 |
81 707 |
1 634 |
 |
66 761 |
1 335 |
|
98 000 |
1 960 |
 |
80 073 |
1 601 |
 |
65 426 |
1 309 |
|
96 040 |
1 921 |
 |
78 472 |
1 569 |
 |
64 117 |
1 282 |
|
94 119 |
1 882 |
 |
76 902 |
1 538 |
 |
62 835 |
1 257 |
|
92 237 |
1 845 |
 |
75 364 |
1 507 |
 |
61 578 |
1 232 |
|
90 392 |
1 808 |
 |
73 857 |
1 477 |
 |
60 346 |
1 207 |
|
88 584 |
1 772 |
 |
72 380 |
1 448 |
 |
59 140 |
1 183 |
|
86 813 |
1 736 |
 |
70 932 |
1 419 |
 |
57 957 |
1 159 |
|
85 076 |
1 702 |
 |
69 514 |
1 390 |
 |
56 798 |
1 136 |
|
83 375 |
1 667 |
 |
68 123 |
1 362 |
 |
55 662 |
1 113 |
Following these rules protect your capital. It gives you time and possibilities to learn from your trades. It gives you time to develop your trading system and setups. Combine this with a good record keeping and you will become a successful trader.
Although investing is one of my greatest passions, there are more important things in life than money. Personally, I’m about to have some more fun with my wife and daughter here in Thailand. I wish you all Merry Christmas and a Happy New Year!
Matias
How Banks Work: Money Creation Leads To Inflation
December 9, 2008 by Vagabond Investors · 6 Comments
How Banks Work
Let me tell you in overly simplified terms how banks work. Banks make money by making loans. Depositors put money into the bank and the bank lends the money out to a borrower. The banks charge a higher interest rate on the borrower than the rate it pays to the depositor. This difference is known as spread.
Banks can lend more money out than they have. In other words, they can lend out money that they donât actually own. What? Yes. Letâs see how that works.
Money Creation
How much they can lend depends on the reserve required given by the central bank (for example, the Federal Reserve). This is typically 10%. A low reserve rate magnifies the amount of money banks make from lending money. The fact that banks donât have to keep 100% reserves but only a fraction of that is called fractional reserve banking.
Suppose you deposit $10,000 in your account. The bank has a reserve ratio of 10%. It has to keep 10% of your deposit or $1,000. It is free to lend the rest 90% or $9,000 at interest. The person who borrows it will spend it somewhere and the money ultimately gets deposited again. From that new deposit of $9,000, the bank again keeps $900 and lends $8,100. This process is repeated over and over. Each time the bank gets money, it keeps 10% and lends out the rest at interest.
This process is repeated as many times as possible. Ultimately your $10,000 can become up to $100,000 in the overall money supply. You can calculate this by dividing the initial deposit of $10,000 by 10%. The total money supply of in the economy increases as banks make loans. Therefore, for every $1 that is deposited, up to $9 new money can be created on top of it. This process is called the money multiplier.
It works with the Federal Government as well. The government wants to borrow $10 billion. It prints bonds and gives them to the Fed. The Fed in turn prints $10 billion worth money and gives it to the government in exchange of those bonds. It was all created out of thin air. The government then deposits this money into a bank. The bank keeps 10% or $1 billion of this in required reserves. It has an excess of $9 billion in reserves which is lends out. Hereâs the twist:
The Federal Government borrowed                        $10 billion
The bank holds a fractional cash deposit of          - $1  billion
The bank lent out the rest                                      = $9  billion
Â
Now, it is important to recognize that the $9 billion is created on top of the $10 billion. It comes on top of the existing money supply. Where did that new money come from? It was created out of thin air because of the fractional reserve system. New money comes into existence in loans.
This creates an interesting outcome.
Inflation
When a person needs money, it borrows money from the bank. The bank lends the person the money. That money is debt. The loan principal has to be paid back with interest. Almost every single dollar must be paid back with interest as well. The interest must come from the existing money supply.
But wait a minute! All money comes from central banks. It is expanded by commercial banks through loans. The principal is the money supply. Where is the money that is needed to cover the interest?
It doesnât exist. It needs to be created.
In the economy, the money that is needed back to the banks (principal + interest) will always be more than is available in circulation. New money must be created to cover the interest. An increase in money supply leads to inflation.
This is why inflation is a constant in the economy. Money is debt. The game of modern capitalism is: Who is indebted to whom? In times of inflation, savers are losers and debtors are winners.
As an academic side note, which is almost too boring even for me, I know that some of the people reading this are keen to point out this: Inflation is actually an increase on the money supply and that it is the increase that leads to higher prices. Inflation is the devaluation of the currency and leads to higher nominal prices. I am aware of that. For simplicityâs sake, we will define inflation simply as higher prices. In other words, the money is worth less. Things cost more.
The Fed Creates Inflation
Who is in control of the money supply in the United States? Itâs the Federal Reserve. Interestingly enough, the Federal Reserve is accountable to no one. It has no budget. It is subject to no audit. Nobody can truly supervise its operations. It is in almost total control of the nationâs money supply. Yet its chairman Ben Bernanke was never elected by the general public and he thinks that printing money at will is a good idea. It may be, but for whom?
The fact that it is accountable to nobody is trumpeted as a virtue. Still, it is the Fed that is responsible for money creation and thus creating inflation. Theyâre happy to create $700 billion out of thin air to bail out their banker friends in Wall Street and more, much more is on the pipeline.
Who Pays The Price?
Who pays the price in taxes? Whoâs left out dry with the upcoming inflation from that money creation? Who gets the short end of the stick?
Itâs the taxpayer. Itâs the average Joe Blow on the street. Itâs you and me. Such is life and itâs getting sucher and sucher all the time.
Get Educated
Thatâs why getting financial education is so important. Unfortunately, you donât get it in school. We have dedicated this website for your future. Please take the time to educate yourself and learn how you can ride the upcoming inflation waves instead of be run over by them. You can survive and profit handsomely, if you know the rules of the game.
So how do we survive? How do we profit? Which asset classes thrive on inflation?
Letâs look at that in the upcoming posts.
Jaakko
Dare to Dream: Aim Higher, Much Higher!
December 5, 2008 by Vagabond Investors · Leave a Comment
Only one out of hundred people think that they can achieve something extraordinary. This, of course, has nothing to do with the fact that most people have within themselves the capacity to something much larger than their present reality suggests. The majority of population chooses to settle to mediocre results. This is because their goals are not big and exciting. If we dream only of small and achievable things, we are not willing to make the necessary contributions to make things radically better.
I have found that small goals are not exciting enough to generate the kind of momentum that is needed to solve any problem and go through any uncomfortable challenge. I need something big, completely unrealistic that would change the quality of our lives to a completely new level. The results have to be worth the effort. Iâm willing to sacrifice my feeling of comfort, some time and capital to create something outstanding. We need to be a bit naĂŻve to do this.
It seems that there is less competition when weâre after big things. 99 % of people focus on playing it safe and small. It is much, much easier to acquire âŹ100,000 financing for a deal than âŹ10,000. âŹ10,000,000 is more reachable than âŹ1,000,000. Similarly, itâs easier to get a date with one 10 point beauty in the bar than trying to get five 8âs. Most people donât even dare to approach the 10 point lady. That eliminates most competition right there. At the same time, thereâs more flirting work to do with five ladies than focusing on the perfect one. In addition, all the other guys are there too. So aim high! Be grateful for whatever it is that you get.
Everything was possible, when we were kids. If we wanted to be astronauts or pilots, nobody told us it was impossible. Our mommy and daddy said that we could be anything we wanted to be. We were invincible. In the same way, our parents seemed flawless and their capabilities were limitless. Everything was possible for them. So it would be for us when we grow up, right?
Not quite. At the edge of adulthood we learned to be realistic and to listen to other peopleâs depressing comments. We learned to believe in our own smallness. You donât need much to survive. In Finland thereâs this saying that states that those who try to reach high ultimately fall to the ground. The fact is this is just a cowardâs cry. We try to bring our loved ones to the ground because we donât dare to try reach our dreams.
Donât get me wrong. Iâm not saying that more is always better. Iâm saying that life can be about excitement, growth and possibilities! Each one of us chooses the things that are most important in our lives.
Wake up our inner child. Dare to dream. Dare to get excited! Get excited of your possibilities and visions. Donât worry if itâs possible or not or how youâre going to do it. Just get the feeling! Spend 15 minutes dreaming of the most thrilling things you can possibly imagine. You might even write it down and clip pictures out of magazines and put them where you can see them.
What could you dream of? Traveling around the world? Paragliding in Pery? A business meeting in a private jet? Your own island? 10 schools for the children in Africa? Go for it!
Get the feeling. Thereâs nothing wrong with dreaming. Even though you never reached a single one of those dreams in your lifetime itâs still better to be excited of things that you love inside than living a life of quiet desperation.
Live with passion!
Matias
Â
Parody Video: Hitler Faces Foreclosure And Wants To Be Bailed Out
December 5, 2008 by Vagabond Investors · 1 Comment
Hey all,
Somebody had a brilliant idea to make a video parody of Hitler as a real estate flipper. He bought a house to flip, faces foreclosure and wants to be bailed out.
I watched it and laughed my butt off! Iâll post it here for you to see. Enjoy!
JaakkoÂ
The Seven Levels Of Investors
December 1, 2008 by Vagabond Investors · 1 Comment
A few weeks ago as I was traveling to hold a seminar I reread some of my old business books on the way. I came across Robert Kiyosakiâs âCashflow Quadrantâ (an excellent book, which I remember knocked me out mentally years ago). Iâm going to reiterate an excellent point in the book. I highly recommend you buy and read the book carefully from cover to cover.
The Seven Levels Of Investors
Level 0: Those with nothing to invest. These people have no money to invest. They spend all they make or more than they make. About 50% of adult population is on this level.
Level 1: Borrowers. These people solve financial problems by borrowing money. Theyâre not conscious of their spending habits. They may have some assets, but their level of debt is simply too high.
Level 2: Savers. These people save small amounts of money in low-risk, low-return vehicles such as a CD. They often save to consume rather than invest. They have a deep need for security. Theyâre afraid of debt and pay in cash. People in this group waste their most precious commodity, time, trying to save pennies instead of learning how to invest. In times of inflation, they end up as losers.
Level 3: âSmartâ investors. These are educated intelligent people. However, when it comes to investing, theyâre uneducated. Some of these people have convinced themselves that they donât understand money and never will. Some are cynics. They sound intelligent but are really cowards under their intellectual exterior. Others are gamblers who think that investing is like Las Vegas. Itâs just luck. They have no rules or principles and often lose it all.
Level 4: Long-term investors. These investors have a clearly laid out long-term plan that will allow them to reach their financial objectives. They get educated before actually buying an investment. If youâre not yet a long-term investor, get yourself there as quickly as you can. Keep it simple. Forget sophisticated investments. Put some money down and start small. This level is where most of the millionaires in America come from. Live within your means, minimize your debt and incrementally increase your assets. You donât have to be great to start, but you have to start.
Level 5: Sophisticated investors. These people have more aggressive investment strategies, because they can afford them. They have good money habits and have a long track record of winning. They have a solid foundation of money and conservative investments. Â Their debt-to-equity levels are under control. They put their own deals together. They are clear on their own principles and rules of investing. They reinvest their gains and hold their wealth in legal entities such as corporations.
Level 6: Capitalists. Very few people reach this level of investment excellence. These are the movers and shakers of the world. Their purpose is to make money by orchestrating other peopleâs money, other peopleâs talents and other peopleâs time. They usually have large businesses and large investments. True capitalist create investments and sell them to the market. They love the game of money and are generally very generous. They think that money is not a thing but an idea created in their head.
What level of investor are you?
What level of investor do you need to be in the near future?
Remember, anyone with the goal of becoming a level 5 or level 6 investor must develop their skills first as a level 4 investor. Level 4 can never ever be skipped. Anyone who tries to skip it is actually a level 3 investor â a gambler!
As I approached the city I was going to give my speech, I was thrilled. Something so simple and so profound reminded me of how important it is to be clear on your current level and objectives. Needless to say, I was more than inspired to give my speech.
Jaakko
What Is Lifestyle Design?
November 24, 2008 by Vagabond Investors · Leave a Comment
Times have changed. In the industrial age one needed to be a millionaire to enjoy the millionaireâs lifestyle. Back then the two could not be separated. How much you had money greatly dictated your way of life. Today, you can have the millionaire lifestyle without first having the million.
As analogical world became digital, much of the old rules became obsolete. Something disturbing emerged as the young generation became adults. Something fascinating and striking called Lifestyle Design began to take place.
What is Lifestyle Design?
Lifestyle Design is like tuning a car or tweaking a computer only that it is done with life itself. For example, you can tune a car to run faster with less fuel and look cooler. You can tweak a computer to make programs run smoother and crash less often. No more system resets in the middle of something important.
Similarly, you can tweak your life. You can make your life run smoother, eliminate unnecessary loopholes and have less often those âsystem crashesâ that require you to reset your brain to be able to function again. You can tune your life to be cooler, more fun and more exciting.
Consider the following examples and analogies:
Car                                     Computer                             Life
Consume less fuel             Consume less disk space       Consume less time
Run faster                         Smoother performance         Less headache
Turbo charger                   Assistant application             Personal virtual assistant
Automatic gears                Automatic virus scan             Automated income streams
More horsepower             More processing power        Massive action
Fewer engine crashes       Fewer system crashes           Fewer mental crashes
Transportation                   Computing                             Excitement
Many people run their lives without any Lifestyle Design whatsoever. Theyâre like a computer with tons of fragmented files on hard disk, too many simultaneous applications, not enough processing power, no virus scan, no firewall, slow internet and no manual. They then try to consume their way to happiness through useless stuff which they cannot afford. No wonder so many of us feel empty inside.
Lifestyle Design reverses it.
The purpose of Lifestyle Design is to make life much, much more exciting! It is actually a tool by which we can become wealthier. Wealth, in this context, refers to having income, time and mobility. Itâs not just about money, although itâs fun, but excitement and time for the things we really love.
So how is it done?
Itâs quick to apply and disturbingly easy to understand. In this category of our posts, we will share with you the experiments of our Lifestyle Design. You will find more and more ways to do less the things you do not want and more the things you do want. Yes, this applies to our work as well, although you might not readily believe it.
This category is a collection of Lifestyle Design tools ready for immediate use. Weâre sure youâll find them just as useful and enjoyable as we and our fellow vagabond investors. Letâs get started to tweak your life!
Jaakko & Matias
An Inconvenient Truth: I.O.U.S.A.
November 18, 2008 by Vagabond Investors · Leave a Comment
As our frequent readers know, one of our central themes is responsibility over finances. This applies to both individuals and governments (and their agencies). While many politicians are touting fiscal responsibility, the truth of the matter is, many governments are not acting responsibly.
Many mistakes have been made on the side of central bankers, namely Dr. Greenspan and Dr. Bernanke. The most important mark of the 21st century economic history is likely to be the demise of the dollar. Such is has been their response to the cycles of economy.
This time instead of us shouting about fiscal and monetary responsibility, we let Addison Wiggin from Agora Financial explain in simple terms what is going on in the USA these days. He and his colleagues do an excellent job in their free 30 min video entitled âI.O.U.S.A.â.
We highly recommend you take 30 minutes of your life and watch it. We know, weâre the first people to tell you to be frugal about your finite time. Trust us, this is well worth it! Reuters called it âTo the US economy what âAn Inconvenient Truthâ was to the environmentâ. We think itâs amazing for average people like you and us.
Matias & Jaakko
The Likely Outcome Of The Crisis (Plus: Tools For Future Prediction)
November 6, 2008 by Vagabond Investors · 1 Comment
Insights are part facts and part opinions. The opinion part has to be based on facts, but an insight always has uncertainty. Despite that many people state their insights as facts, even though the future is very difficult to predict.
How is it possible to have a relatively accurate insight despite uncertainty? It helps to realize that there are two things we can use to estimate the future:
-
The direction of change
-
The speed of change
In our speed-addicted society most people are good at recognizing quick changes. When change happens gradually, even most experts do not see it. This is because they are still watching the daily or monthly charts. They are too close. They recognize changes in speed but they donât identify changes in direction, when it happens slowly.
For example, what is the likely outcome of the current credit meltdown? Most academics are keen to point out that it is deflation. Prices will fall, they say. Central banks around the world are lowering key interest rates and pumping money to the market. Nobody invests in commodity production anymore. The price of oil has come down. Deflation it is, they say. Weâre heading down. Right?
Hold on! Letâs back pedal. The speed of recent changes indicates just that. Asset prices have come down. What about the big picture? What about the direction of change? Letâs think about this for a while and ignore that prices may come down for a year or two.
Think five years in the future. Imagine the economy was up. China is still the largest commodity importer of the world. Picture you only knew five years ago these were the facts: decreasing supply of commodities, low interest rates, and massive money creation. What is the likely outcome?
You guessed it. Itâs massive inflation! Considering what the central banks are doing now and how out of range supply and demand are with most commodities, thatâs exactly whatâs going to happen! I donât care if thereâs some deflation along the road. Eventually we are going to see a massive inflation wave.
The fact is that history shows that this has always been the case when money is printed at will. The fact is that supply and demand are out of whack. The opinion is that this will happen again. How valid is the opinion? Unless the law of causality is not cancelled, I would say itâs very valid.
This is my opinion of the likely outcome of this crisis. The speed may be slow at first, but the direction is clear. Hard assets are likely to come out as winners in this crisis. Personally, I believe in commodities (such as oil and agriculture) and solid cash flow based real estate with low fixed interest rates. While oil is low now, by 2015 it is likely to hit incredible new highs. On the other hand, increases is rent are mainly due to inflation.
I donât mind high inflation. I feel for the little guy on the street who is told to save money and keep it on their bank account. While this may seem valid at first, in the end it will prove bad advice.
Thatâs my insight. I may be wrong. But if Iâm right, will you suffer or profit?
Jaakko
PS. I would have everyone look at the comments of a legendary investor Jim Rogers.
Introducing BIG Change, Part 2: Announcing The Rules Of Tomorrow
October 17, 2008 by Vagabond Investors · 1 Comment
What did you spend money on today?
A big part of Gross Domestic Product is consumption. It means simply that you and I spend money. As people retire, they have less money to spend. This has a big impact on our GDP.
Americans may not like the sound of that, but the US may not be able to maintain the economic dynamism of the late 20th century in the 21st century. Sooner or later, wishful thinking is going to crash into financial reality. In a few years the biggest baby boom generation in history begins to retire all over the world. Do not think that you are entitled to a secure life.
Letâs think about the US. The fact is that 75 million baby boomers start to retire. Suppose each of them need $1,000 in terms of Social Security and Medicare. That becomes 75 billion dollars a month. Thatâs approximately the annual cost of one Iraq war â every month.
Most governments donât have financial resources to keep their promises. Mr. Paulson will no doubt call the Fed chairman. Then in the dens of Federal Reserve Mr. Bernanke will fuel his helicopter, which he will then fly over the cities to drop money from. That is both insane and dangerous. Of course the Fed can always print money and give it to people, but it would only lead to hyperinflation and eventually the average personâs savings would be wiped out.
The fact that baby boomers around the world are reaching retirement age is a MEGA challenge for our countries and economies. It is one of the most overlooked gradual changes. The fact that it will come about in an acute way is highly predictable. It is likely to lead to higher taxes in many countries.Â
Politicians have reluctant to take the bull by the horns on their terms. The politicians that ultimately have to deal with this problem will take action but it will be all too late by then. They are likely to run in to desperate solutions, because nothing was done when there still was time.
Still, we as individuals are 100% responsible for our futures. As much as we would like to blame for the government, it doesnât help. Some people have started building wealth. Some have made smart choices. Others have merely bought what their financial advisor has sold them. That is usually a 401(k), IRA or something of the kind.
It is estimated that 401(k) plans will not adequate for 80% of people who have it. In addition, inflation is eating the purchasing power of their 401(k) all the time. The plan is on the mercy of market forces. It is a very risky investment. A single market crash near their retirement could wipe it out. They may not have time to wait for the recovery.
What happens when people realize that their 401(k) has become a 201(k)?
As entrepreneurs and investors, itâs not our job to predict the future. But as always, your response to the future is on your hands. Becoming financially intelligent so that you can become financially independent is optional. You can choose to become a victor, rather than victim. Remember, to every move there is a counter.
The ONLY functional way to respond is to increase our financial IQ. There is no time to wait for the future. Itâs time to learn before itâs too late.
There is a recipe to wealth. Itâs easier than it sounds. We are here to help you. Help us by commenting and sharing these posts. We have held seminars, written books and taught hundreds of people the principles that we have learned. Help us share this message.
Itâs not too late.
Jaakko
Introducing BIG Change, Part 1: What Is Already Here?
September 28, 2008 by Vagabond Investors · 2 Comments
Big changes do happen.
They happen very gradually. They go unnoticed. They are missed by most people who focus on weekly performance results. They are hardly noticeable until the symptoms become acute. As big changes happen, the rules of the game change. A new set of threats and opportunities arise.
Between 1998 and 2000 oil prices tripled, but nobody paid attention to it even though it outperformed Nasdaq index. Why should they? It was the New Era. Right?
The crisis in the banking sector was gradually becoming evident before it hit the markets. When Northern Rock had a bank run, not many people reacted. Even when Bear Sterns was bailed out, most people didnât get it. Even when Fannie Mae and Freddie Mac were nationalized some people still didnât take it seriously. It was only after Lehman Brothers went bankrupt that it really hit the last one of investors.
 âWhat the BLEEP, the financial sector is toast!â
Yes, it has been for a long time. Don’t expect a quick rebound either.
As investors, we have to adjust our thinking. When the rules change, we have to change our thinking and actions. The best part is that big changes provide huge opportunities to become wealthy! Itâs not only about surviving. It is about profiting from that change, too. To every market move there is a counter.
For example, just a few hundred dollars on put options on banking sector would have made you a load of money by now. Thatâs the power of seeing patterns and the courage to act on it. I admit that on this particular case it didn’t take that much visionary skills to that, but many people still didn’t do it.
Every time the rules of the game change superior opportunities to become wealthy are presented. We, the US government, central bankers or anybody else canât stop it. There is no more powerful force than an idea, whose time has come. The waves are going to come no matter what we do. Instead of blaming, I suggest we learn to SURF the waves. It’s a low-risk idea.
We canât control what happens in the market, but we have absolute control over our response to what happens. To every market move there is a counter. To every counter there is a counter.
 So What Is Here Already?
The brief financial history of the 21st century could be summarized as follows:
1.     The bursting of Nasdaq bubble in March 2000
2.     Commodities bottomed out in 2001
3.     The great housing boom, and the end of it
4.     The end of a 20 year global equity boom
5.     Credit bubble collapses
How many of these did you capitalize on? I doubt that anyone got them all. I know people who have made millions with the changes listed above, but none of them utilized them all. Still, if youâre a professional investor, donât tell me you didnât get any of them 
Some of these changes are under suspicion by some parts of the investor community. Many will fight hard and long before they admit that the equity boom came to an end. As to us, for you and me, it would seem to be true.
The most overlooked and misunderstood big change is the bursting of the credit bubble. It was very clearly signaled by the market when the total collapse of financial firms happened. It has changed the rules of the game big time. In my opinion, it is as important as the crash of 1929.
The old rules said that in the United States credit growth can outpace GDP growth. Under the old rules, for 20 years, three forces boosted asset prices:
1.     Strong credit growth
2.     Falling commodity prices
3.     Low interest rates
The crisis is not nearly over yet. What we have seen is the first wave. More waves will come. The US is hit. Rest assured, Euro are will be hit too. So will the emerging markets. Many people will be stunned by the outcomes of this change. I believe that those who believe strongly in emerging economies will be staggered within a year. As a surfer would say, the ultimate wave is upon us, let’s surf!
To every market move there is a counter. To every counter there is a counter. Letâs keep our eyes open now! Judging from the blood on the streets, somebody is making a killing.
Letâs join the party!-)
Jaakko
Blood On The Streets? Time To Make A Killing.
September 22, 2008 by Vagabond Investors · 3 Comments
The very best time to find new and profitable opportunities is when the market goes bad. In other words, when the news is full of gloomy data, itâs time to get excited. That day has come.
Successful investors keep on seeing opportunities when the markets are deeply in red and stormy clounds fill the horizon. Financially intelligent people see problems as opportunities. Solve a problem and you reap a profit. For example, Warren Buffet is looking for to buy some parts of Goldman Sachs on discount at the moment. While itâs true that you and I canât put together deals like that, we can make other outstanding deals in the market.
How can an average person like you and me benefit from the down market?
First, identify the direction. It doesnât matter which way the market is going as long as we can recognize it. Second, take proper action. For example, letâs say that youâre expecting the stock market to go down. You can buy put options, short ETFs or short stocks on sectors that are going down. This is just like buying call options, ETFs and stocks on a bull market. Itâs just that now weâre doing it in the opposite direction. You have to let go of the obsession that you can only make money when the markets go up. The truth is you can make money in good and bad times.
Personally, I like bad times better. Public panic is more electrifying than public optimism. Why is that?
Down movements in the market are typically more aggressive than the up movements. They offer faster profits. If youâre like me, you prefer to have your profits sooner than later. Anybody who invested a couple of hundred dollars in the financial sector put options last spring has made tens of thousands in profits by now. Their total risk was limited to those couple of hundred bucks all the time.
How could these people see the coming crash of the financial sector?
Difficulties in the financial sector have been in the news headlines for more than a year now. It didnât take a rocket scientist to find the companies that have been on a bad shape. After Bear Sterns was rescued and the mega bailout of Fannie Mae and Freddie Mac was announced, even the rest of us should have understood that the situation is going to get a lot worse (and it did). These troubles were clearly announced and it is a perfect example of a problem turned into a huge opportunity.
What about real estate? Do the same principles apply there too?
Yes! Itâs no different. Forget the price speculation. Focus on the essentials. Keep looking for deals that give you positive cash flow. There is a sustained period of exceptional opportunities in the market! There are a lot of people who suffer and theyâre desperately trying to get rid of their houses, because theyâre late on their payments. They want you to buy their houses âat almost any price! Help them move on in their lives and make a fortune on the process. Thatâs a great way to help people. Think about it.
My message is simple. Keep your eyes open and try to figure out, what kind of opportunities Mr. Market is offering you today. Itâs your job to find them, and the best news is, theyâre always there! The deal of the decade comes along about once a week, if not more often. Now is the time to find your opportunities and take a GIANT step closer to financial freedom.
Now is the time to make big profits. There will come a day that the sun is shining again, and the best opportunities are gone. Are you going to say “I’m glad I did” or “I wish I had?” One these days you’re going to have to answer to that question.
Matias
Update - Comment on Forecast: Oil $60, Recession
September 15, 2008 by Vagabond Investors · 5 Comments
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Dear Readers,
You can rest assured that the credit bubble has burst. I donât think anybody is trying to deny that anymore. The reward of a correct bearish forecast is questionable. One can feel intellectual satisfaction for that, but the true test of oneâs character is if he can refrain from saying âI told you that was going to happen!â
The r-word is on everybodyâs lips. The financial sector is not keen on saying it aloud. Letâs just face the facts that weâre in the middle of an unusually large meltdown.
Mr. Edwards had a highly bearish forecast on the market. I have some reservations about his forecast. I think that if S&P 500 would approach that 500 points level, US bond yields would be far from 2%. This is because the US Government and the Fed would probably arrange large bail outs. This would boost the US budget deficit, which I believe would put the dollar under significant downward pressure. US bonds would likely go down to BBB or CCC rating. Under that scenario, I don’t think that 2% yields are very realistic.
So the global liquitity is tightening.
Do I believe that itâs going to lead to a recession? Yes. I think the result of this mess is a global slump with all asset markets hit one way or another. I would even say that the USA is in recession already, although traditional Slump-o-Meters donât show that. For the average person, though, rising unemployment is recession. It gets very personal and very negative when you lose your income streams no matter what the GDP figures say. In my opinion, it might be time to check if traditional ways to measure recession are up to date anymore.
So whatâs new? Lehman Brothers faced bankruptcy less than one week after the video post. Bank of America announced that it would buy Merrill Lynch. American International Group is in big trouble. Rumors of Washington Post bank run shake confidence. Central banks and the market have reacted accordingly â making the show even more exciting and hilarious!
Movement is lovely for the technical momentum investor. I canât say that a put option play on banking sector was a bad idea. I hope our fellow readers profit from this volatility. It may take time before we see such great opportunities in such a short period of time again. Not to worry, though, itâs not even nearly over yet. The results of this mess are yet to be seen and are likely to surprise many people.
Now letâs see what Mr. Bernanke and Mr. Paulson are up to. Iâm sure itâs a blast! As the song from Pointer Sisters says âIâm so excited and I just canât hide it!â
Letâs keep an eye on the market. Now is the time of great wealth transfers. The collapse of the banking sector was without a doubt The-Biggest-Investment-Opportunity-Of-The-Year.
Successful investing!
Jaakko
Investments Will Not Make You Rich
September 3, 2008 by Vagabond Investors · 4 Comments
Dear readers,
I want to share something with you. Iâm going to talk about a problem. In fact, not even a problem. Iâm going to issue The-One-Big-Mistake-That-People-Make-With-Financial-Matters.
Please, pay close attention now.
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The most common mistake people make with their money is that they think that their business or investments can make them rich. In other words, they think that stocks, bonds, mutual funds, gold, real estate, hard work or a good business can make them rich. It isnât so. None of them can make you rich.
Itâs not about what you have. Itâs all about two things:
1. What you know about money, investing, business etc.
2. How you apply that information to benefit yourself and others.
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This is exactly what we mean by financial intelligence. This is the key to a more abundant life. It is the only key.
We all face financial problems. Problems will never go away. The only place where you donât have problems is the cemetery. Problems are a sign of life. They are hidden opportunities that challenge us to learn.
The only way to increase your financial IQ is to solve financial problems. The better you get at it the bigger problems you can solve. Bigger problems mean better opportunities to learn. Problems can be converted to income, if they are solved in a creative way.
The wealthy tend to think that each problem has a hidden opportunity in it. They turn their problems into questions. How fast can I turn this around? What can I learn from this?
We live in a world of cause and effect. We choose to do something and it leads us to some outcome. If youâre in a good physical condition, youâve chosen something different from the individual who looks like a Michelin man.
Wealth is a result of specific causes. The lack of money is never the problem. Itâs just an outcome of some causes that inevitably lead to it. It may be something as common as doing nothing. Many a problem has come about when good people have done nothing. That is an active choice as well. There are always lateral options to do something.
So what is intelligence? It is the ability to find causes behind desired results and act on them. We need both information and action. The ability to act is also called personal power. In most cases, wealth creation requires massive action in few critical areas. One of them is increasing your financial IQ so that you know what you should do in the first place. There is no more important investment than that.
Let me give you an example. Letâs say you have a stock portfolio which has taken some serious beating on the market. You decide to take responsibility (response-ability). You ask how you could have protected yourself from the downturn. You come to realize that you could have used protective stop-loss orders or change your strategy after noticing that the support level has failed. The options are virtually unlimited. Personally, I think that owning a stock without stop-loss orders is like having casual sex without a condom. It could be exciting and adventurous for a while but there comes a day that things will go seriously wrong.
How do you increase your financial IQ? The quickest way is to study the subject. Go to the market and get some experiences (might be learning experiences at first). Then analyze it. Ask good quality questions and learn from your experience.
Focus on one asset class at a time. Find a working strategy, keep learning until you master it, and then learn a new one. Then open your mind for a different view on some other asset class or instrument.
For example, you can start with long-term buy-and-hold real estate deals with excess cash flow as your goal. You can then move to flipping houses, if that catches your attention. You could turn to trading stocks or building automated businesses. The game of money is fantastic, because there are zillions of ways to make a ton of money and have fun doing it! Expand your view. You can never learn less.
I hope this clarifies that itâs not about the investment but the investor. The investor is far more important than the investment. Ultimately, all profit and risk lie on the investor, not the investment.
Take care!
Matias
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Reality Check: Lessons in Shaping Your World
August 24, 2008 by Vagabond Investors · Leave a Comment
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Your reality is different from other peopleâs realities. We live in the same world only in a geographical sense. That sounds like a harsh statement. I know and I agree. Thanks for your support. Letâs look at how our reality is constructed and what we can do about it.
The world is full of information and stimuli, which is filtered in our minds. Only a small fraction of what we sense is coming through. Do you remember the last time you bought a car? Did you notice how many similar cars were suddenly in the traffic jam with you? In the same way, babies seem to pop up everywhere when you hear that you (or your wife) is pregnant.
Hold on. The cars and babies were always there, right? How come we didnât notice that?
First, our conscious mind is only capable of accepting things that grab our interest. In the face of tragic news, we find it hard to accept the circumstances. The first reaction is to say that what has happened is not true! It canât be, we think, but it is.
Second, our mind is constantly looking for ways to support the beliefs that we have created. We find evidence to support whatever we have chosen to believe â in a conscious or an unconscious way. Most things that we donât believe in get little attention from our minds. We literally do not see them.
Imagine you live in a world filled with possibilities. Imagine virtually everyone you meet wants to help you. This is world is a projection of a mind which has prosperity consciousness. If we choose to believe in it, itâs a very different world from somebody elseâs ârealityâ if they happen to think exactly the opposite. They might believe that the world is constantly becoming a worse place to everyone living in it and that people are only there to serve their own selfish interests with little caring to anybody else. They have what is called a scarcity consciousness. Our beliefs literally shape the world we see, touch, smell, hear and taste.
Third, our fears shape our thinking. Fear gets our full attention in such a way that all other things are wiped out of the conscious mind. Let me give you an example. Suppose you knew beyond a shadow of a doubt that you would be in a terrible accident this week. Do you think it would affect the way you think of your upcoming sky diving course or rock climbing session? I bet it would. You would probably be so afraid of it that you would miss out on most of the positive things in your life. You see, fears shrink us. Fears make us live a smaller life. When we do the thing we fear, the death of fear is certain. Therefore faith is the key to a bigger life.
Just in case you should say think that the world is a terminally boring or unsafe place, let me tell you something. Thatâs the good news! Itâs all in your mind! You have the power to shape your thoughts, beliefs and fears. There is no âout thereâ out there. There is no the state of things as they actually exist. Your mind represents (re-presents) everything!
You are not in control of the outside world but you have total control of your inside world. We donât see situations as they are. We see them as we are, that is, as we see ourselves.
Give these ideas a little room in your mind this week and see if you could see a new world. See if you could become more sensitive to the heart beat of life. You can respond to the world with your new thoughts, new beliefs and new faith. Try it out for just this week!
Matias
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On Oil $300, Recession, Fed (Plus: Q&A Session)
August 19, 2008 by Vagabond Investors · 4 Comments
This video on YouTube caused a flow of critical questions to me. I thought Iâd answer them all here so that everyone can see the answers. Consider it another FAQ :o)
Question: Why such a critical attitude towards America?
Answer: In fact, no criticism towards American people at all. Many of the people I respect deeply are from the USA. Iâm bullish on America, but Iâm bearish on the dollar.
It makes me feel sick when I see certain people, namely Mr. Bernanke in the Federal Reserve, abuse their position. Heâs not playing by the rules of capitalism. Instead the man is promoting socialism for the rich. He was never elected by the simple person on the street, yet the average person has to pay for that. Take the case of Bear Sterns on the video.
Question: Without bail-outs the economy would have gone into recession and that would have been bad! What do you have to say about that?
Answer: First of all, the world economy may already be in recession. The worst of this crisis is yet to be seen both (especially in the USA banking sector) and in the EU. Thatâs my opinion.
Secondly, the Fed is over-reacting. A five percent correction in the stock market made him lower the interest rate. What happens if the market falls by 35%?
Thirdly, in 1907 everybody on Wall Street was bankrupt. After that America emerged as a dominant player in the world economy. In the 60s almost all Japanese bankers were bankrupt. Yet after that Japan became an economical powerhouse. Letâs just accept the fact that banks tend to run into problems like this and the financial sector too can have recessions. Itâs not the end of the world. Itâs painful - very painful! - but itâs better to have serious dips than witness a total wipeout of the system! Right now it seems that Mr. Bernanke is deliberately destroying the US Dollar.
Question: That prediction on oil at $100 / $300 per barrel is ridiculous. What were you thinking???
Answer: Many commodities have experienced serious corrections from their peaks on this commodity boom. I would not be surprised to see oil do the same at $100 per barrel. Just watch the world economy slow down and oil prices fall.
On the long run, I believe that oil prices will go much higher. No major (elephant) discoveries have been made in 40 years. There will be a day that oil demand picks pace again. 3 billion people now want to buy cars. There could be a war on some key areas. On times like that, oil prices could hit $300 per barrel.
Question: Youâre not a central banker, analyst, government official or economist. What do you think you know about these things anyway?
Answer: Thatâs a valid point. Fair enough. I can be wrong. I have made colossal mistakes in the past. That can happen again. The real question is not whether Iâm right or wrong. The true question is, what are you going to do, if things turn out as I said? Will it be good or bad for your portfolio? I’m just asking you to think!
Question: What makes you think that the Fed would go down someday???
Answer: Just read economic history and you’ll see why. I believe history tends to repeat itself especially if same mistakes are being made over and over again.
The last one is my favorite one!
Question: Why are you speaking English? Itâs obvious that itâs not your mother-tongue.
Answer: Well, simply because most of you would not understand if I made my point in Finnish. Youâre right, I donât speak 100% correct English, heck itâs not even 80% correct! Then again, most of the readers of this blog donât either. Despite all the progress in the world, many people still speak in foreign languages :o)
There you have it.
Kiitos ettÀ luitte tÀmÀn kirjoituksen. NÀhdÀÀn ensi kerralla!
(Didnât get it? âThanks for reading this post. See you next time!â)
Jaakko
Example on Lifestyle Design: Visit Ground Zero in Berlin
July 19, 2008 by Vagabond Investors · 11 Comments
I landed in Berlin in a funny Zen-like state of mind. I thought I had gotten used to slowing down when I want to. It turned out I wasnât.
Waking up in the morning with no alarm clock and having no to-do list for the day was like going from triple espressos to de-caffeine. In addition, I had forbidden myself from checking email and news except for every second Monday for one hour. I was having serious disorders. What the hell was I gonna do all day?!
Itâs impossible to realize how much constant motion blurs you until you stop. Based on my discussions with many serial vagabonders it takes 2-3 months before you can truly settle down and get rid of the addictions of Western work life environment. Hence the prohibition of news, email and non-fiction text books. Itâs time to fill the void with something fun and exciting!
I have been to almost all major cities in Europe when I was vagabonding back in 2003. After seeing many places I finally fell in love with Berlin and have made several visits here ever since. The city is highly affordable and is rich in culture.
The shift from vacations to mini retirements is life changing. Vacations merely reward hard work, but mini retirements justify it. If you are new to mini retirements, youâll find filling the void is a major challenge. When youâve done ripping off your ass in frustration because you donât have an alarm clock and a to-do list anymore, consider doing something you really love. Unplugging from your normal life may take a week of silence.
Hereâs a simple example of what is possible with little money and little time. No, I’m not suggesting you go vagabonding around the planet for three years. This is just a little trip to give you an idea.
- An enormous fully furnished apartment in the trendy Prenzlauer Berg with wireless internet access and a Jacuzzi (never mind my confusion about Mitte on the video, I don’t know where that came from). Cost: âŹ420 / month including water and energy.
- Tasty food dishes in pleasant restaurants. Thereâs everything from sushi and Vietnamese wok to huge steaks with a delicious wine or fantastic German beer. Cost: âŹ15.
- Full contact Mixed Martial Arts for six times a week in one of Berlinâs top MMA gyms. This is as intense and real as it gets! Itâs a blast! Cost: âŹ56 / month.
- Want to become conversationally fluent in German in 3 months? Learning the language is the window to a new culture. Try intensive learning in Nollendorf Platz. Meet other students and get a dramatic discount for transportation with your student card. Cost: âŹ200 / month.
- Make money in a cool Sony Center with free internet access. You can go to the money tree every day. If you donât want to spend much time doing it but want to enjoy a high-tech environment, this is one of the most appealing places in Europe to do that. Cost: FREE
- Dancing in the hottest clubs in West-Berlin with your friends. Have the time of your life and go on a buzz to party and meet new people! Entrance, food, champagne and snacks. Cost: âŹ60.
- Front row seats to Cirque du Soleil show. This groupâs shows are the most incredible, most impressive and most bizarre audiovisual overloads Iâve ever seen in my life. Being there again was intentional. Cost: âŹ80.
- Delicious breakfast on a corner cafĂ©. Hotel-style breakfast with an excellent cappuccino. Cost: âŹ4.
- Want to move on? Berlin is a hub. Travel all around Europe for less than âŹ90 and all the way to Asia for around âŹ400. I suggest you take a flight to one of Europeâs hubs (London and Berlin are the best) and take a local flight. I have traveled in a decent Airbus aircraft from Berlin to Helsinki for âŹ29.
You could easily save 60% of the expenses I listed above. My goal was not survival, though, but royal enjoyment. Total cost for all of the things listed above (except for extending trip to Asia) plus transportation is highly affordable. Total cost: âŹ1,600 / month. One good deal can so easily finance it.
How does this compare your normal expenses at home? If you think of the most expensive part of the trip (learning German quickly), youâll notice that itâs probably 2-3 weeksâ cost of distracting yourself from all the stress in work. Once you get conversationally fluent, you can leave it out.
With a monthly expense in mind you can start designing your lifestyle. The trick is to make your finite cash flow provide you an almost infinite return in lifestyle output. Think itâs difficult to come up with figures like âŹ1,000 / month in automated income? Not so. Itâs a matter of financial IQ. I suggest you pay the price to learn that subject well. Thatâs what the Vagabond Investors is all about. We do our best to help you out.
Time for Mixed Martial Arts! Until next time,
Jaakko
@ you guessed it, Sony Center Berlin
The Scapegoat Game: Why Speculators Are Not to Blame for Rising Commodity Prices
July 11, 2008 by Vagabond Investors · 14 Comments
I am astonished that many finance ministers and âexpertsâ blame speculators for the rise in commodity prices â especially oil. Italyâs finance minister believes that there is a âmagnum of speculative champagneâ included in the price of each oil barrel. Some EU members want the union to impose tax and regulation on speculation.
Itâs a shame that economic discussion has disintegrated into such disinformation and manipulation of facts. Any attempt to curtail speculation is likely to make oil even more expensive. Speculators do play an important role in setting the price of commodities. However, if they had somehow managed to push prices to unjustified heights, then demand would contract and unsold oil would be left on the market. At the moment, there is little sign of that. All big exporters are pumping as fast as they can.
The reason for the rise in oil price is elsewhere. Itâs always easy to blame somebody and speculators have become the most appealing scapegoat. There is little evidence to support such blaming statements.
It should be obvious that speculators do not buy physical oil. Instead, they buy futures and options which they settle with a cash payment when they fall due. The real currency of these contracts is cash and not oil barrels. Thereâs no limit to the number of bets that can be made. No oil is ever held back from the market. All positions are closed out in a futures market. The impact of speculators is essentially market neutral. These bets do not affect the price of oil any more than bets on a horse race affect the result.
The market for nickel provides a good illustration of this. Speculative investment in the metal has been growing over the past year. Still nickel prices have come down by some 50% of their peak. At the same time, the prices of many other commodities have been rising almost as fast as oil even though they are not traded on any exchanges. Iron and rice are two good examples of this.
Itâs not long ago that all asset classes were inflating. As I have pointed out in my other posts, now the credit supply is contracting and lending standards are tightening despite the fact that the Fed has lowered the Fed Fund rate. Over the long term, there has been a close relationship between M3 money supply growth and oil prices.
The public invests in those sectors of the economy that provide superior profit opportunities. If short-term interest rates are set below the rate of consumer price increases, paper money is no longer a store of value. What then is the difference between a hedger and a speculator is not clear to me. Under constant growth of M3, it was acceptable for people to hedge the loss of purchasing power by buying into the Nasdaq until the burst of the tech bubble. There were no complaints when the public bought homes between 2002 and 2007. Some âexpertsâ even believed it created wealth, (although I think this is one of the most stupid statements one can make: rising equity in homes might be a good at first but the inevitable correction is usually too painful!) However, when the public moves into commodities, itâs not considered acceptable. Such are the double standards.
Excessive speculation is a direct result to the easy monetary policies by central banks. They are eroding the purchasing power of their currency and undermining the working classes for the benefit of the elite. The easy monetary conditions have hit the consumers with a commodity price surge. At the same time, it is causing a global flight from dollar assets. Since oil prices follow the growth of M3, who would you say is the biggest speculator of them all if not the Federal Reserve itself?
However, I should like to congratulate the Federal Reserve and especially Mr. Bernanke for an amazing cover story. It seems that there are academics who know a lot more about monetary theory and too little about currency markets and price signals in the real world. They are doing a proper job blaming other people for their mistakes with the easy money experiment. At the same time, I hope more people would pay attention to the real causes of bubbles and changes in the investment environment.
Jaakko
Why Paying Down Debt and Saving Money Is Stupid
July 3, 2008 by Vagabond Investors · 5 Comments
It’s everywhere. The newspapers, TV shows, you name it. People and institutions have too much debt. Savings rate is low. Recession raises its ugly head and the consensus is starting to feel fearful. Panic is not far away. Then come the financial advocating a message that is familiar to most people: “Pay down all your debt and save money.”. Some disregard it, some believe it and some - like us - think that it’s not good financial advice. How can we say that?
We have a different philosophy on debt. You see, we happen to like debt. There is a radical difference between good debt and bad debt. Simply put, good debt makes you rich and bad debt makes you poor. This distinction is critical and it can make the difference between getting rich or falling behind.
For example, if you buy a leveraged investment which pays for its own debt, it would be considered good debt. Then again, if you buy stuff that goes down in value and does not pay for its own debt, it is bad debt.We like good debt and we do not believe you should get rid of it. After all, it’s one of the best ways to leverage investments.
We do think, though, that it makes sense to pay down your bad debt. Debt is like a loaded gun. It should be respected on all circumstances. It’s always potentially dangerous. Yet it makes a big difference whether you aim the gun on the target or on your own foot.
In order to use good debt in a correct manner, check your asset allocation. It is the most important thing you should do right now, if you have not done it already. Do it now.
What about savings? Don’t we think that saving money is a good idea? After all, most people are not saving money and that is a big problem, right?
No, I wouldn’t say so. Not for the new rich, anyway. A currency is designed to lose value. Inflation is running high. Although we believe that the numbers are manipulated, even some 4% inflation will do serious damage to your savings. The problem is that central banks can print money faster than you can save it. They are doing it all the time. Instead of saving money, we once again recommend you check your asset allocation.
Don’t try to avoid risk by saving money. Learn to manage risk and invest money. It should be relatively safe, profitable and fun too! The next time you hear financial advice that states that you should pay down all your debt and save money, think if you can be smarter than that. It all comes down to financial intelligence.
Remember, you can never learn less. That’s why we have given you this blog to read. The safest and most profitable investment of all is to raise your financial IQ. With it all is possible, without it nothing is possible in the game of money.
Until next time,
Jaakko
How to Earn an Extra Million in Your Lifetime the Lazy Way
June 26, 2008 by Vagabond Investors · 12 Comments
How much is âŹ1 worth?
Most people would think that itâs a trick question. Itâs not. Not for the new rich, anyway. A dollar is a dollar is a dollar? Guess again. Herein lays the secret to insane wealth. If you follow this advice, you will soon have the cash flow and time to live the life you desire.
First of all, that âŹ1 is a seed. Put it on work and let it grow. How much it is ultimately worth depends on how long you let it grow and what growth rate you get. Letâs suppose you take that single euro and deposit it into a special account that gives you 5% interest. It will take 100 years for it to grow into âŹ1 million. What? Not planning on living 100 years? Relax. Weâre not done with this yet. Weâve got to supercharge it. Rather than just planting one seed, you can plant them more often. A euro a day becomes a âŹ1 million in the span of a normal life time, in 34 years.
What makes this happen is the power of compound interest. It means that you re-invest the returns you get on your initial investment. For example, letâs suppose you invest âŹ100 and get a 10% return. You now have âŹ100 plus that 10%, which is âŹ10, for a grand total of âŹ110. You now invest the whole âŹ110. If you get a 10% return again, you re-invest that âŹ121 as well.
This way âŹ1 a day becomes âŹ1 million in 34 years if you get a consistent 20% return on it. In fact, âŹ1 a day becomes âŹ1 billion in 66 years with that 20% interest. Einstein himself said, âThe most powerful invention of man is compound interest.â
This is a lazy way to get âŹ1,000,000. You donât have to become a good investor if you donât want to. The price, though, is not measured in money. Itâs measured in time.
In my opinion, 34 years is a gross price. There is a way to do it much, much faster. You donât have to wait 20-40 years to reach a questionable pot of gold at the end of your life. There is a way, and weâll show it to you. From building business that requires no more than 6 hours a week to maintain to buying real estate and paper assets in order to finance your lifestyle, you can reach financial independence in a relatively short period of time.
This is not to say that compounded growth is not important. It is the key to huge financial reserves with little effort. Letâs say you want to reach that goal in 5-10 years and live and exciting life while youâre getting rich. What then?
You have to increase your financial IQ. Itâs not difficult. Itâs just a matter of learning and the prize is well worth it: 20-40 years of exciting life.
Keep on reading this section and youâll soon learn the new rich way to do this.
Jaakko
The Leverage of Your Mind (Plus: How to Create Supreme Ideas)
June 26, 2008 by Vagabond Investors · 5 Comments
The greatest leverage of all is the leverage of your mind. The six inches between your ears is definitely your most valuable asset. You have no idea what you are capable at. Your brain is so complex and so powerful that you are only using a small fraction of its capacity. The limit of better quality life is not out there. It is in your mind.
What is reality? Simply, what we think is real, is our reality. Itâs not how things actually are, itâs how you perceive them to be. A good example of this is if you think you canât afford something. We all do this once in a while. The reality is not that you canât afford it. Itâs just that the thing you pursuit is outside of your current reality, i.e. you donât know how you could afford it.
Itâs not money that makes people rich. It is the ability to expand the reality that ultimately makes people richer. Money is not the solution to money problems. The mind is. It is the cure-all. Any constraint in the outside world can be overcome with creativity. The ultimate resource is resourcefulness. The reality is a mind game.
A large part of what we call reality is constructed on our beliefs. A belief is nothing more than a feeling of certainty. We have beliefs of life, ourselves, people around us, money, our abilities, everything. The big realization is, of course, that none of these are true. Belief systems are all fundamentally false. Yet the human mind inevitably constructs beliefs to perceive the world. The good news is you can change your beliefs. You can change your reality.
Many arguments in life are caused by differences in reality. People donât really argue about things themselves. What they argue about is their realities that collide against one another.
You have to ability to choose your reality. The way that you are constantly doing this is by focusing your mind. At the moment, you are focusing on this. Yet at the same time, your heartbeat in your left ear is just as real. Were you aware of it? Chances are that you werenât. Thatâs because you didnât focus on it. Wherever focus goes, energy flows.
As to creating a better reality, you have to solve some problems. Problems will never go away. They are a sign of life. Getting rich is a matter of having better quality problems. From too little money you can go to having too much money. Both realities are possible and both problems are real. Yet the difference in quality of those problems is enormous. One comes from scarcity, the other from abundance. Wealth, after all, is all about abundance. Itâs about a better reality and better problems.
The question then becomes, how do you change your reality? The answer is, by solving problems. That is, by answering questions. Problems are questions, arenât they? Thatâs a question, too. Isnât it?
To solve better problems ask better questions. Better solutions mean better ideas. Ideas are the doorway to new realities. For example, donât say âI canât afford it.â I contend that itâs a sign of mental laziness. Ask âHow can I afford thisâ.
Iâve listed some good and bad questions below to let you see the difference here.
Bad question                                           Good question
Why donât I have any money?                How can I make a ton of money and have fun doing it?
Should I work longer hours?                   How can I increase the number and size of my assets?
Whoâs to blame?                                    How can I turn this around quickly?
Whatâs wrong with my life?                   Whatâs right with my life?
How can I earn more?                            How can I earn more and work less?
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Turn your problems into questions. Focus on finding solutions. Spend a maximum 20% of your time and energy on problems and at least 80% on solutions. This alone will yield supreme results in your reality.
Expand your reality by reading and listening to people who already have achieved what you want to achieve. Raising financial IQ is all about the leverage of your mind. The fastest way to become financially independent is to be able to change your realities faster. If you want to progress quickly, you need to have an open mind to new ideas and have the skill to take on possibilities greater than your current abilities.
Reality is negotiable. Expand the limits of your reality. Earl Nightingale put it eloquently: You become what you think about most of the time.
How do you create superior ideas? Iâll give you a quick guide to something that has worked like a miracle to me. This method is worth its weight in gold.
1.     Gather raw material for your ideas. Get specific material as well as general. Try to find quickly as much as you can. Work consistently and donât give up. File the material to notebook or a computer file. I personally prefer a notebook. I clip pictures and everything that relates to the problem and put them to the pages of my notebook.
2.     Work it over in your mind. Ideas are just new combinations. Take one fact and look at it in different angels and lights. Bring two facts together and see how they fit. First you will get partial ideas. Keep on generating new ideas even if you think you canât find anything more.. Write them all down regardless if they sound a bit silly.
3.     Let go and forget your puzzle. Do something totally different that stimulates your imagination and emotions. Take a shower, listen to music or exercise. I like to train muay thai, krav maga, Brazilian jiu-jitsu or some other combat sport to empty my mind.
4.     An idea will appear out of nowhere. This will happen when you least expect it. In the middle of something else, you suddenly get the solution or a brilliant partial one.
5.     Bring your idea into the reality. Develop your idea with other people. Submit it for criticism. Shape and develop the idea to practical usefulness.
There you have it. The leverage of your mind is the most powerful form of leverage there is. All you need is within you right now. Keep on increasing your financial IQ. You will find that making superior deals to finance your lifestyle and creating automated income streams through all three asset classes become easier and easier. With cash flow and time, everything is possible.
Jaakko
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Financial Intelligence & Financial IQ
June 23, 2008 by Vagabond Investors · 7 Comments
Reading this you are gonna learn the basics that will catapult your financial future to the very different level. These are the building block for the long-term financial freedom and LifeStyle design.
The most important common dominator for successful investors and people enjoying financial freedom is high financial IQ. Financial IQ is a measurement of the financial intelligence. We all have money problems. Some of us have a problem of having not enough money same time as some of us are solving the problem of too much money.
Financial intelligence is that part of our intelligence we use to solve financial problems. To get to the next level of the money game we should increase our financial intelligence. That simply means that we are ready to solve different and more complicated money problems. We are ready to learn new strategies and abandon some old believes and habits. Let’s have a look at the five basic financial IQs
- Making more money
- Protecting your money
- Budgeting your money
- Leveraging your money
- Financial knowledge
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1. Making More Money
The more money you are capable to make the higher your money making intelligence is. The lowest level is to work for money. Higher solution is to make money and other people work for you. This includes the capability to use different investment strategies and generate automated and portfolio income.
Which one of the following guys has higher financial IQ? Patric works 50 hours a week and earns respectable 8 grand per month and Mystery Mike works 10 hours a week and earns huge 3 grand per month. Is Patric more intelligence than Mike? if we focus on absolute returns the answer is expectable yes. How about relative income? Mike has 40 extra weekly hours and earns 68 per hour compared to Patric’s 36 per hour. In case of relative income Mike’s financial intelligence is a lot higher.
2. Protecting Your Money
It is never about how much money you make but how much money you keep. This is absolutely true in everyday money habits as well as tax planing and investment strategies. It is crucial how much you keep when you make a wrong investment decision. It is only a mater of time when mister market will fool you. It is a part of the game.
3. Budgeting Your Money
Taking control of your spending habits will jump start you wealth accumulation. Spend less than you earn and invest the difference. Isn’t it SEXY? The life won’t get any better than that. Look carefully your expenses to recognize the good expenses and to eliminate the bad ones. Pay always your self first. Put aside 10 to 30 % of your income and live with rest. Having surplus is something you have to actively budget for.
Let’s have an example. Person A earns 60 000 annually and his expenses are 55 000. His surplus is 5 grand. Not bad at all. Let’s have a look at the person B. She earns 43 000 annually and her expenses are just 22 000. Her surplus is 21 000 per year.
If both of them invest the surplus and get 10 % p.a next 10 years Person A have a portfolio of respectable 79 687. That is a great start but a way from financial freedom. To keep the calculation simple we forget inflation. Portfolio represents 17 moths of expenses of current life style.
Person B has a portfolio of 350 623. If she continues to get 10 % return on capital she doesn’t need to work anymore.
Which one of these has a higher financial intelligence? Not a tricky question.
4. Leveraging Your Money
This is absolutely my favorite. After getting a surplus the next thing is to leverage the money to earn higher return on investment. A person who earns 25 % p.a on investment have higher financial IQ than person who gets only 7 %.
I can already hear you screaming that no one can accumulate over time such a high return on investment. If you believe so, it is true for you. In my world it is possible. Let’s live in my world for a while. I guarantee it is more fun anyway.
5. Financial Knowledge
It is true in life that you should first learn the basics to move one. The money game is not anyhow different. To make your money game more predictable you have to improve your financial knowledge and capabilities to understand financial information. This includes all different investment strategies you are gonna learn later from Vagabond Investors.
I can’t guarantee that the strategies we tell you will necessary work for you and they definitely don’t work every single time but we have been very successful among many others using these.
One thing I can guarantee is that increasing your financial IQ is the only 100 % secure investment you can do. You can’t learn less. Reading our E-Books, watching our videos and DVD seminars you are gonna know more about making money than 98 % of people who are working in the financial industry. Think about that the next time you give money to experts aka. put money in the mutual funds.
Matias
P.S. You don’t have to be a millionaire to live exiting and fulfilling life. Just in case you might still wanna be one, watch the following video clip.
Changes in the Investment Environment, Part 1 June 19th 2008
June 19, 2008 by Vagabond Investors · 25 Comments
Dear fellow Vagabond Investors,
We have made some market and investment observations that we would like to share with you. Over the past few weeks there has been a significant change in the investment environment, which could have important consequences for the near future. Letâs take a look.
As some of you know, US mortgages are no-recourse loans. This means that lenders have no recourse to the houseâs owner beyond the value of the house. Therefore, individuals with negative equity (loan amount exceeds value of the house) have an incentive to default.
A downward spiral in the house prices would cause a fall in household wealth and in the capital of financial institutions. This could lead to a deeper and longer recession than those seen in the past several decades. Many people are just becoming to realize this.
The current crisis is of course the result of governments and their agencies around the world that have created asset bubbles by keeping interest rates artificially low. This has encouraged the purchase of all sorts of assets â not just real estate and not just in the US â with high leverage. Â In inflated asset markets, it is expensive and difficult for first-time buyers to purchase assets without leverage. We presume that over time, the housing market, S&P 500 and other asset markets will adjust to the downside and become affordable again, or that inflation will increase earnings significantly.
The Fed fund rate was increased between June 2004 and August 2006 from 1% to 5.25%. It seems that no actual tightening of monetary conditions really occurred. Lending standards were eased and leverage increased in all asset classes. On the other hand, when the Fed cuts its fund rate since September 2007 from 5.25% to 2%, the impact of the interest rate cut was limited because of tighter lending standards from the private sector.
In inflation-adjusted terms, the sharp decline in home prices is likely to negatively affect the commercial real estate market because of tighter lending standards and declining consumption. It is our observation that whereas in the past residential and commercial real estate booms were usually local or in a specific market, at the present there seems to be a construction boom on a global scale. If this construction activity slows down meaningfully, prices could come down everywhere, although with different intensities.
Both commercial and residential property prices could be vulnerable to a significant downturn in the financial sector. This holds true in other financial centers than US as well. It is our view, though, that these changes are problematic primarily in the West, but less so in Asia.
We are concerned that investors havenât paid sufficient attention to the problems that could arise if asset classes should decline meaningfully. This is exactly why proper asset allocation is so important. Please see our Financial IQ section for further advice and specific strategies.
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We would like to underline that at the moment it would seem that both the US trade deficit and the US current account deficit are now contracting. The US current account deficit was the primary source of global excess liquidity, and it is now contracting because the US trade deficit is contracting. This is the result of weakening domestic consumption. Therefore the US dollar may have some upside potential from its current level. We are expecting global economic growth to slow down and commodity prices to disappoint in the near term.
Nothing goes down in a straight line, though. Intermediate strong rallies should be expected to interrupt the downtrends. The question then becomes, which assets would gain the most if commodity prices (especially oil) declined?
A significant slowdown in economic growth would be negative for currencies of countries that have benefited from rising commodity prices (i.e. Australia, Canada, New Zealand). Therefore, for the next few months, US and perhaps Japanese equities could outperform the emerging stock markets in commodity-rich countries. Yet we believe that the S&P 500 is somewhat overbought at the moment. Therefore significant gains should not be expected.
Declining oil prices could be beneficial for airline companiesâ shares. You might want to consider Singapore Airlines, Lufthansa and Thai International. Lower oil prices are generally perceived to be a good thing in the investment community. It is our view that declining oil prices through economic weakness would hurt the entire material and metal sector. Therefore we believe that stocks like US Steel have significant downside potential.
What about the bond market? If commodity prices were to decline due to a weak global economy, it would seem rational to expect bond yields to decline. However, this is not certain. Economic weakness would be an incentive for central banks around the world to ease their monetary policy. The bond market might not like it and sell off. Of course, higher bond yields would be supportive for the US dollar.
The only reason we think that commodity prices could significantly decline is a widespread economic weakness. This is not just in the US but where the demand is the strongest, that is, in the emerging economies. Therefore, we suggest you pay close attention to the US housing market and its ripple effects on the global economy.
Happy asset allocation and, as always, successful investing!
Jaakko
An astonishing 24% annualized return since 1998
June 5, 2008 by Vagabond Investors · 1 Comment
Iâm a big fan of Ken Heebner. Thatâs the man behind Capital Growth Management. Heebner is definitely one of the very best mutual fund managers on this planet. Itâs not just the hefty returns that get me going. Itâs his true contrarian style that gets my unshared attention and deep respect. Iâm truly madly deeply in love with this guyâs way of investing. He has placed some of the same bets I did back in 2004-2005. Despite that, I really adore Heebnerâs incredible capability to see things coming before anybody else.
So how well has he performed compared to the other big names in the industry? Letâs compare his results to a well-known, now-retired money manager Peter Lynch. Lynchâs 14-year tenure at Fidelity Magellan fund has long been the benchmark for mutual fund excellence. During his best ten years from August 1997 to August 1987 he recorded an average annual return of 36 points. Thatâs am amazing achievement. Over the same period, the S&P 500 returned a remarkable 19 % per annum. So what? So, he over-performed the market by 17 points a year. Not a bad job at all! Thatâs something to pay for!
What about Heebner? Ken Heebnerâs Focus fund has beaten the market by 20 points a year during his glamorous period. This was from May 1998 to May 2008.
Itâs characteristic for Heebnerâs style to find emerging trends and play big games with them. Heâs open to all new ideas, the kind of possibilities that the masses arenât even aware of. He seems to be the happiest when everyone else thinks heâs nuts. He is a happy-finger-trader so his positions can change in a heart-beat from long to short.
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I lively remember the time when I got a wakeup call for commodities in 2004 after reading Jim Rogersâ fabulous book entitled Hot Commodities. I tried to rush into the commodities market with little hope. The only way for me was to buy commodities-related stocks and some emerging market funds. I finally ended up trading PCU (Southern Copper Corporation). What started as a channeling game became a momentum leap trade. Soon after came APA (Oil Producers Apache), NOV (National Oil Well Varco), and MRO (Marathon Oil) which I enjoyed playing with covered calls, deep in-the-money leaps and calendar spreads along with some marginal equity placements. So far my only uranium bet has been CCJ (Cameco Corporation) since 2004. I also put some of my eggs to mutual funds like FIM Russia Fund , which is under Glitnir bank today.
At the time most money managers burst out laughing when I mentioned my (stolen) ideas of a rising bull in commodities. Heck did I let their comments hurt me at the time. Well, I donât have to argue about that opportunity anymore. I have to admit, though, that I totally missed the big gold train that my dear brother Vagabond Investor Jaakko was happily riding back then. I thought it was somewhat unorthodox but what the hell â canât blame him for that ride, can I?
As I said, I really admire Heebnerâs capability to see the upcoming trends. I give him enormous credit for seeing the fertilized and agricultural trend (which I had doubts on and didnât invest in). His philosophy is to simply find a trend and place big bets on it. That has brought enormous success for his funds and the courage to sell short doomed trends.
I wanted to share my enthusiasm of this guy because I think it would be beneficial for you to be interested in his philosophy and actions. Study his moves and try to learn his way of thinking. He is such a brilliant trader in so many ways.
Trade with passion!
Matias
Three Inner Obstacles to Building the Wealth You Desire
June 2, 2008 by Vagabond Investors · 1 Comment
I have good news for you. There are only three basic obstacles to our indefinite success. So whatâs holding us back on a daily basis?
First, thereâs impatience. The antidote to this is patience. Second, we doubt. The antidote to this is belief. In the Bible it says, upon to your belief it is done unto you. The third, disappointment is not being grateful for what we get. Disappointment can be overcome by gratitude. The moment we choose to live by these virtues will be the greatest moment of our lives. We have within us the power to beat our inner demons. We have to be patient, believe and be grateful.
All growth is growth towards our inner selves. Thatâs what life is about. We have to turn these three stones to make them our friends, not our enemies.
One of the greatest pains in life comes from not knowing that we always get more than we give. Time after time we feel confused, because what we are asking for is not always given to us or itâs not coming in the form that we had hoped. Itâs typical that we donât know when we get what we ask for. It may come in many forms, sometimes confusing us even more.
It is wise to be careful for what we ask for. When you know what it is that you truly want, ask a bit more than that. You see, you get what you settle for. Everything that we need is given to us. In most cases, we get even more than that.
Focus on what you want and donât think of the things that you do not want. You become what you think about most of the time. Youâre not what you think you are, but what you think⊠you are. You will see it manifest in your everyday life. Right after you bought your car, you immediately began to notice those cars come around every street corner. Isnât that right?
Seek good and beautiful and that is what you will find. Focus on misery and you can rest assured that you will find it grow in your life. This is simple but not necessarily easy.
Life is a weird adventure filled with paradoxes. Whenever we feel scarcity, we should give for that is what we get. We get whatever it is that we are trying to give other people. You get what you give, be it money, respect or friendship.
Itâs not so hard after all.
Matias
The Leverage of Money
May 23, 2008 by Vagabond Investors · 5 Comments
Youâre about to discover some ĂŒber fantastic ways to multiply your returns with the next five minutes that you spend reading this article. Implementing these simple ideas can open a whole new world for you. You might also recognize some adverse behavior you want to get rid of.
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The definition of leverage is this: better results with less effort. The most well-known form of leverage is debt. Why is it that most people donât really know how to use leverage in their favor? After all itâs all about super simple math. You need not be a rocket scientiest, but you have to figure out some basics. First, you have to understand the difference between good debt and bad debt. Second, you need to know how leverage affects your expected outcome in different scenarios. Third, you need to use leverage in a safe way.
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Good Debt VS. Bad Debt
Leverage is like a loaded gun. You have to be extremely careful with it and know how to handle it. The reckless use of debt is a financial suicide while the appropriate use of it will catapult your financial future to the orbit.
Hereâs the twist. Good debt makes you richer and bad debt makes you poorer. Now what the hell does that mean? In simple terms, everything that puts money in your pocket is good and everything that takes money out of your pocket is stupid. Get the picture?
Hereâs an example of bad debt. Letâs say you buy something on credit. That something then depreciates in value and does not put money in your pocket. This might be your car, stereos, boat, summer cottage, consumer debt, you name it. This is the kind of stuff that goes down in value. If you buy it before you can really afford it, youâre using bad debt.
You might say âI get that. Tell me about the mysterious good debt if there is such a thing!â Here it comes. If you use debt to generate more income and wealth for you, youâre using good debt. For example, you buy a nice piece of real estate using 20% of your own money and 80% of your bankerâs money. You then collect an annual rent of $8,000. Your expenses before interest payments and taxes are $1,500 and your interest payments are $4,000 per annum. Whatâs left is a solid $2,500 before taxes (remember, interest payments on real estate are tax-deductable in most parts of this planet). This is cash that you get every year no matter what happens to the price of that property. It might go up or down but you still collect the money!
Itâs in the very nature of good debt on real estate that it brings cash in every year. In addition, the formula is not based on any appreciation expectations. So what happens when the price of that property invariably changes in one way or another? Letâs look at some numbers.
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|
Equity / |
Price change |
-2 % |
0 % |
2 % |
3 % |
5 % |
6 % |
|
10 % |
-9,2 % |
10,8 % |
30,8 % |
40,8 % |
60,8 % |
70,8 % |
|
|
20 % |
-2,8 % |
7,2 % |
17,2 % |
22,2 % |
32,2 % |
37,2 % |
|
|
30 % |
-0,7 % |
6,0 % |
12,7 % |
16,0 % |
22,7 % |
26,0 % |
|
|
40 % |
0,4 % |
5,4 % |
10,4 % |
12,9 % |
17,9 % |
20,4 % |
|
|
50 % |
1,0 % |
5,0 % |
9,0 % |
11,0 % |
15,0 % |
17,0 % |
|
|
100 % |
2,3 % |
4,3 % |
6,3 % |
7,3 % |
9,3 % |
10,3 % |
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The calculations above are based on these numbers:
ĂÂ Interest rate: Â 5%.
ĂÂ Net rental income: 6 %
ĂÂ Tax rate of rental income: 28 %
ĂÂ No depreciation.
ĂÂ Real estate purchase price: $100,000
ĂÂ Equity: $20,000
ĂÂ Bankerâs money: $80,000
ĂÂ Rental income after expenses:Â $6,000 (6% of $100,000)
ĂÂ Interest rate expenses: Â $4,000 (5% of $80,000)
ĂÂ Tax expenses: $5,60 (28% of $6,000-$4,000)
ĂÂ Appreciation: $2,000 (2% of $100,000)
ĂÂ Total capital gain and income: $3,440 ($2,000-$560+$2,000)
ĂÂ Return on equity: $3,440 / $20,000 = 17.2 %
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Letâs say we have two people we call Julia and Harry. Julia is a sophisticated investor and has 90/10 leverage (90% debt, 10% equity) on his portfolio. Her property does not appreciate in value at all. Harry is a conservative investor and uses 100% equity to finance his purchase. He enjoys a solid 6 % annual appreciation in his property. We can easily see that they both almost get the same return! The difference is in the leverage. This is exactly the reason why itâs so important to finance your investments in an appropriate way. If you do your homework and buy the right investments, debt can be your best friend.
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Investment advisorsâ advice
However, most investment advisors will say you that youâre nuts if you tell them that your goal is to get around 17 % return on your equity. They will say itâs far too risky. The fact is that investments are never risky. The risk is in the investor that does not know what heâs doing. Do you think you can find a mutual fund that gives your equity a 17% annual return year after year? I wouldnât bet my financial future on that horse.
Why hasnât your investment advisor told you about this? Thatâs because most investment advisors are not good investors. In fact, most of them probably have no investments at all. Be careful whose advice you take seriously.
Personally, I never use debt in speculative investments. I always require a positive cash flow from my assets. Period.
I canât emphasize enough how important it is to understand the beauty of good leverage. To be able to create financial freedom you must understand the use of good debt in a deep level. Dismiss it and youâre like a race horse with three legs.
The use of debt can make you enormously wealthy or exceptionally poor. The difference is whether you use good debt or bad debt. Do yourself a big favor and donât shoot yourself in the foot with bad debt.
Find out more about this subject in this Vagabond Investorsâ blog.
Matias
The Hall of Shame: King Kong, Godzilla, The Subprime SixâŠ
May 19, 2008 by Vagabond Investors · 3 Comments
Iâm happily surprised. I have known for a couple of years that banking will become hilarious some day. What I did not know back then was how obnoxious the entire financial world would turn out to be.
I have had great fun reading the scary news about the bursting of the credit bubble. Itâs a bit like watching horror movies from the 70s. You see a monsterâs head fall off but you canât help laughing at the poorly made visual illusions. I have no doubt that is exactly what the professionals of the future will feel like about the banking practices of today.
Itâs always a surprise to the market - and especially to newspapers - that something terrible happens in the banking sector. The blow-up of Long-Term Capital Management in 1998, the bursting of leveraged buy-out bubble in the early 1990s, the Nordic banking crisis and the Japanese experience in the same decade⊠The list goes on and on way back to the bankersâ panic in 1907 and beyond. Letâs just agree that it is characteristic of banks to get into mess like this.
I must admit that there is something good about the ignorance of the masses. If people knew how retail banks work, the society as we know it today would be history overnight. That would make a lot of things awfully difficult. I accept that the masses donât realize the nature of banks, but I have yet to figure out why most professionals have a hard time getting the point.
I am especially amused of the debate on the timing of risk. Regulatory regimes that are based on market prices implicitly assume that risk goes down when the markets do well. The value-at-risk measure is the most obvious example. It demands less capital from banks when the data show a longer period of calm, and more capital when markets have become volatile. But that (ass)umption makes very little sense. Up until today, busts follow booms like day follows night.
Financial crashes are not that random. In fact, they occur just after the top of the economic cycle. I bet that market participants were all well aware that too much credit was being created too cheaply. Yet models showed that risk-weighted capital ratios were healthy.
Itâs nice to see that financial houses rely on mathematical models. The results are amazing indeed. Right at the top of the hall of shame is Citigroup with write-downs of some $40 bn since January 2007. Right behind are UBS (some $38 bn) and Merrill Lynch (some $32 bn).
When the news of Northern Rock arrived I was immediately with a popcorn can ready to watch the show on TV. I was keenly expecting a series of bank failures to entertain me. I certainly hoped for some banks to fail in order to teach the market some discipline. What followed was the tragicomic news: even the smallest investment bank on Wall Street was too entangled to fail. Bear Sterns just had to saved!
Now donât you think that it sounds like an invitation to moral hazard? If investment banks have access to the same central-bank funding as commercial banks and represent just as much of a threat to the stability of the financial system, shouldnât they be subject to the same prudential and capital standards? You might think so. Guess again.
It is questionable if re-regulation helps. I believe that the outcome of this mess will be a more stringent approach to liquidity and capital. That makes credit more expensive. Still, higher capital charges should not be used to make up for the deficiencies in market discipline.
It would be healthy to let some banks fail. Line the banks up and shoot the dog. The rest will quickly learn the lesson. However, Iâm confident that Mr. Bernanke will get his hands on that somehow and postpone the horror show to a later date. Itâs like eventually showing King Kong 1-3 all at once. You might want to have a crap load of popcorn when that happens. It will be a long show.
See you guys!
Jaakko
Market Conclusions May 12th 2008
May 12, 2008 by Vagabond Investors · 5 Comments
The following thoughts of recent market movements and economic conditions might be helpful for you. First, we play with the idea of Fedâs two possible strategies and their consequences. Second, we take a look at some investment considerations. We try to keep this short and easy to follow. So letâs begin.
We think the Fed now have two options.
1)Â Â Â Â Â They could continue to pursue their interventionist policy that is obviously designed to support the suffering US housing and equity markets. That will happen at the expense of further sharp decline in the value of US dollar. You can read more about this in WSJ April-14-2008 entitled âThe Inflation Solution to the Housing Messâ. That is a staggering article.
A sharply declining dollar would leas the US to suffer from rapidly increasing import prices (appreciating currencies) and inflation. Overseas particularly the EU would suffer from the further weakening of the dollar. We canât highlight enough that a total of 31 % of the S&P earnings come from overseas. This will easily lead to disappointing corporate profits and nasty surprises in valuations and future guidance. This scenario makes us seriously think about shorting US long-term Treasuries. No doubt that would be the short of the century.
We would like to warn fellow Vagabond Investors not to be overly bearish about US equities in dollar terms. You can find many cases that show that stocks have rallied strongly in local currency even if the countryâs economy is going through its darkest era. At the same time, of course, their currency has collapsed. Keep that in mind. You might still find some opportunities out there. We believe that oil and energy related stocks might offset the weakness in other sectors of the stock market in the near and midterm future. Some of you might remember that this was the case in the energy sector in the 1970s.
2)Â Â Â Â Â The second alternative is to tighten the monetary policy to support the US dollar. We think that this is not likely, though. Tightening would lead to weaker US asset markets. If it were the case, we wouldnât be surprised to see the US stock market slide 20-40 %.
The US dollar would be more stable in this scenario than the first one. A stronger dollar would lead to an increasing cost of living in the US. Would that be beneficial for the median US household? Who knows?
Both of these alternatives sound very unattractive for global economy and asset markets. In both scenarios the US stock market is in a great danger to move even lower in dollar and euro terms. The Fed may have run out of right choices.
The rate cuts since September 2007 have set a furious fire under commodities. We have been very bullish on commodities since 2004. However, a weak US consumption means weaker global liquidity and would consequently hurt most asset markets. This includes real estate, equities, art and most commodities.
At the moment, at least for the short run, we are especially looking forward to the end of this liquidity-driven strength in commodities including gold. However, we are looking for gold to correct around $800 before its bull market resumes. We see this level of $800 a very attractive buying opportunity. We would also add our positions in the future weakness in gold.
We really do not see very much upside room for the US dollar under current US monetary policies. The case with Asian currencies is quite the opposite. Most Asian still look very attractive. They have gained strength against the US dollar, but they remain depressed against the euro. You might want to have a look at the Singapore dollar. It looks like a fun future play for us.
Be careful out there. Itâs going to be a bumpy ride. With the right knowledge, you can make great investment decisions. Feel free to share them with us!
Victorious investing!
Matias
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The Road Less Travelled
May 5, 2008 by Vagabond Investors · 2 Comments
Sometimes it just so happens to be that seeing a tree right in the middle of the road is a surprising thing. Seeing one after another makes me wonder if there are any better ways to make roads. Look at thisâŠÂ
 
 
 
 
 I would understand one tree in the middle of the road. Can you imagine that you can find four of these within a 15 minute walk in Helsinki Finland? Yep, thatâs the same country where Nokia came from.
The idea behind the road planning is not clear to me, but seeing these trees on the way leads me to interesting thoughts. The road less traveled can be found astonishingly close to our everyday life. I have walked tens of times these same streets, yet today was the very first time I noticed these trees. It makes me wonder if thereâs something else in life that I havenât seen even when itâs right in front of me.
Itâs a very healthy habit to stop every now and then to take a careful look at where you are in your life. At the moment you stop, remember that your best thinking brought you where you are. To progress you have to adapt new and better thoughts and abandon the old ones at the same time.
Spend a minute to think, whose ideas and thoughts you have been taking seriously for the last years. The fruits of the ideas will tell the whole story. If youâre not satisfied with your results, stop doing what youâre doing right now! Find a better approach!
Itâs pure insanity to keep on doing the same old things and expecting different results. Focus on the cause instead. Results will follow automatically. Itâs not difficult. Yes, it is uncomfortable to change habits and adopt better thinking patterns, but it surely is not difficult.
The fact that something is common doesnât necessarily mean that itâs intelligent or anyhow a good idea. Many times we just adopt socially reinforced thinking patterns and unconsciously think that it must be the best practice even if it could be the dumbest one ever. Watch over your thoughts. You might be surprised to realize what you find in your everyday thinking.
You probably hate this, but Iâm sure you have been face to face with a million dollar/pound/euro opportunity 3 times during the last 12 months and not even understood that. You see only the things that you think are possible for you. Choose a road less traveled and open your eyes to new opportunities that you have never believed to exist.
Wealth is an attitude. Financial freedom is a state of mind. Money is just an idea.
Have an adventurous day!
Matias
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Looking those trees keep me wondering which way to pass the tree
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Markets Are Not Rational
May 5, 2008 by Vagabond Investors · 5 Comments
Every now and then newspapers argue that markets have changed. Over the past decades massive structural changes have taken place in terms of credit creation, regulation and deregulation, the development of derivative markets and the value of currencies. Leverage and liquidity have led to a bubbly economy with capital flowing from one asset class to another, creating volatility and turbulence.
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While massive changes have taken place, there are some things that have not been affected in 100 years. One particular about markets has remained the same. That is the human factor, which is the wildcard of financial markets. It is specifically because of this factor that one should not think investing as a hard science. In fact, it is perhaps closer to art than science. The difference is obvious. One can heat a pot of water in 100 ÂșC (272 ÂșF respectively) and it will boil every time, assuming constant pressure. On the other hand, put a human under pressure and it is anybodyâs guess what will happen. He/she is unpredictable, irrational and acts in bizarre ways.
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It is useless to try to understand an irrational creature with logic. It is vain to expect financial markets to act in a rational way. Humans operate the markets, and the last time the author of this article checked most people were human.
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One can tell the where the market is by listening to peopleâs opinions. At the height of boom, mobs and media invent explanations to why prices are high and will continue to rise. People tend to make personal relationships with their investments and fail to realize that money is nothing more than a commodity.
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Tomorrow always comes, at least up until now, and eventually booms turn to busts. Newspapers declare that certain asset classes are dead (Business Week ran an infamous cover in 1979 entitled Equities Are Dead). Â Amusingly, financial salesmen are busy calling their customers to tell that it is only a momentarily correction. Prices will rise, they say, so investors should diversify and invest for the long term.
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Long term is a flexible concept in inflation-adjusted terms. It is easy to be deluded by nominal figures. Yet in real terms, the S&P 500 at its 1990 low of 460 was radically below its real high of 647 in 1968. Moreover, it was just 20% above its inflation-adjusted 1929 peak.
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A rational person would avoid the apparent manias at the end of bull markets. Sadly, the masses get blinded by their own thinking and feel that the rainy day will never come. Most people are ill prepared to meet financial shocks. Many are merely relying on the central banks or the government to bail them out. This creates an obvious moral hazard to the market and encourages excessive risk-taking.
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As to the people pointing out the rationality of traditional long term strategies in US equities, it is enlightening to realize that US equities have grossly underperformed any other asset class since 2002. In a world of very high credit growth, a rational investor needs to look at asset price movements in inflation-adjusted terms. The long term value of any paper currency is zero. The same law holds true with humans. The mean for human beings is non-existence or death.
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In times of irrational exuberance, human strengths morph into weaknesses. One can have too much of a good thing. In excess, most actions take on the characteristics of their opposite. Pacifists become militants, blessings become curses, and help becomes hindrance. Even National Socialism in Germany was initially promoting peace, but it became the most militaristic creed on the planet. More becomes less.
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Time and again this is apparent in the markets, which are supposed to be efficient and rational. In reality, the unpredictable human factor is always present. Coupled with mounting and increasingly more complex leverage, left alone the market is liable of over-extending itself and eventually breaking systems down. For example, several countries have experienced two or more banking crises since 1980: Argentina, Indonesia, Malaysia, Philippines, Thailand and Turkey.
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Systemic banking crises typically accompany the implosion of economic bubbles.  When economic cycles turn, it seems the masses are revoltingly blind to the changes at hand. As to the publicâs need to feel right about their opinions, most people get dead right.
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Jaakko
