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
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
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. I’m willing to sacrifice my feeling of comfort, some time and capital to create something outstanding. We need to be a bit naïve to do this.
It seems that there is less competition when we’re after big things. 99 % of people focus on playing it safe and small. It is much, much easier to acquire €100,000 financing for a deal than €10,000. €10,000,000 is more reachable than €1,000,000. Similarly, it’s easier to get a date with one 10 point beauty in the bar than trying to get five 8’s. Most people don’t even dare to approach the 10 point lady. That eliminates most competition right there. At the same time, there’s 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 people’s depressing comments. We learned to believe in our own smallness. You don’t need much to survive. In Finland there’s this saying that states that those who try to reach high ultimately fall to the ground. The fact is this is just a coward’s cry. We try to bring our loved ones to the ground because we don’t dare to try reach our dreams.
Don’t get me wrong. I’m not saying that more is always better. I’m 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. Don’t worry if it’s possible or not or how you’re 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. There’s nothing wrong with dreaming. Even though you never reached a single one of those dreams in your lifetime it’s still better to be excited of things that you love inside than living a life of quiet desperation.
Live with passion!
Matias
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:
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The direction of change
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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 don’t 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. We’re heading down. Right?
Hold on! Let’s 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? Let’s 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. It’s massive inflation! Considering what the central banks are doing now and how out of range supply and demand are with most commodities, that’s exactly what’s going to happen! I don’t care if there’s 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 it’s 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 don’t 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.
That’s my insight. I may be wrong. But if I’m right, will you suffer or profit?
Jaakko
PS. I would have everyone look at the comments of a legendary investor Jim Rogers.
Investments Will Not Make You Rich
September 3, 2008 by Vagabond Investors · 4 Comments
Dear readers,
I want to share something with you. I’m going to talk about a problem. In fact, not even a problem. I’m going to issue The-One-Big-Mistake-That-People-Make-With-Financial-Matters.
Please, pay close attention now.
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 isn’t so. None of them can make you rich.
It’s not about what you have. It’s all about two things:
1. What you know about money, investing, business etc.
2. How you apply that information to benefit yourself and others.
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 don’t 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 you’re in a good physical condition, you’ve 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. It’s 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. Let’s 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 it’s 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
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 I’d 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. I’m bullish on America, but I’m bearish on the dollar.
It makes me feel sick when I see certain people, namely Mr. Bernanke in the Federal Reserve, abuse their position. He’s 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. That’s 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. Let’s just accept the fact that banks tend to run into problems like this and the financial sector too can have recessions. It’s not the end of the world. It’s painful - very painful! - but it’s 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: You’re not a central banker, analyst, government official or economist. What do you think you know about these things anyway?
Answer: That’s 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 I’m 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? It’s obvious that it’s not your mother-tongue.
Answer: Well, simply because most of you would not understand if I made my point in Finnish. You’re right, I don’t speak 100% correct English, heck it’s not even 80% correct! Then again, most of the readers of this blog don’t either. Despite all the progress in the world, many people still speak in foreign languages :o)
There you have it.
Kiitos että luitte tämän kirjoituksen. Nähdään ensi kerralla!
(Didn’t get it? ”Thanks for reading this post. See you next time!”)
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 wasn’t.
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?!
It’s 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. It’s 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, you’ll find filling the void is a major challenge. When you’ve done ripping off your ass in frustration because you don’t 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.
Here’s 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: €420 / month including water and energy.
- Tasty food dishes in pleasant restaurants. There’s everything from sushi and Vietnamese wok to huge steaks with a delicious wine or fantastic German beer. Cost: €15.
- Full contact Mixed Martial Arts for six times a week in one of Berlin’s top MMA gyms. This is as intense and real as it gets! It’s a blast! Cost: €56 / 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: €200 / month.
- Make money in a cool Sony Center with free internet access. You can go to the money tree every day. If you don’t 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: €60.
- Front row seats to Cirque du Soleil show. This group’s shows are the most incredible, most impressive and most bizarre audiovisual overloads I’ve ever seen in my life. Being there again was intentional. Cost: €80.
- Delicious breakfast on a corner café. Hotel-style breakfast with an excellent cappuccino. Cost: €4.
- Want to move on? Berlin is a hub. Travel all around Europe for less than €90 and all the way to Asia for around €400. I suggest you take a flight to one of Europe’s 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 €29.
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: €1,600 / 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), you’ll notice that it’s probably 2-3 weeks’ 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 it’s difficult to come up with figures like €1,000 / month in automated income? Not so. It’s a matter of financial IQ. I suggest you pay the price to learn that subject well. That’s 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 “experts” blame speculators for the rise in commodity prices – especially oil. Italy’s finance minister believes that there is a “magnum of speculative champagne” included in the price of each oil barrel. Some EU members want the union to impose tax and regulation on speculation.
It’s 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. It’s 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. There’s 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.
It’s 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 “experts” 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, it’s 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 €1 worth?
Most people would think that it’s a trick question. It’s 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 €1 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. Let’s 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 €1 million. What? Not planning on living 100 years? Relax. We’re not done with this yet. We’ve got to supercharge it. Rather than just planting one seed, you can plant them more often. A euro a day becomes a €1 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, let’s suppose you invest €100 and get a 10% return. You now have €100 plus that 10%, which is €10, for a grand total of €110. You now invest the whole €110. If you get a 10% return again, you re-invest that €121 as well.
This way €1 a day becomes €1 million in 34 years if you get a consistent 20% return on it. In fact, €1 a day becomes €1 billion in 66 years with that 20% interest. Einstein himself said, “The most powerful invention of man is compound interest.”
This is a lazy way to get €1,000,000. You don’t have to become a good investor if you don’t want to. The price, though, is not measured in money. It’s measured in time.
In my opinion, 34 years is a gross price. There is a way to do it much, much faster. You don’t have to wait 20-40 years to reach a questionable pot of gold at the end of your life. There is a way, and we’ll 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. Let’s say you want to reach that goal in 5-10 years and live and exciting life while you’re getting rich. What then?
You have to increase your financial IQ. It’s not difficult. It’s just a matter of learning and the prize is well worth it: 20-40 years of exciting life.
Keep on reading this section and you’ll 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. It’s not how things actually are, it’s how you perceive them to be. A good example of this is if you think you can’t afford something. We all do this once in a while. The reality is not that you can’t afford it. It’s just that the thing you pursuit is outside of your current reality, i.e. you don’t know how you could afford it.
It’s 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 don’t 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 weren’t. That’s because you didn’t 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. It’s 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, aren’t they? That’s a question, too. Isn’t it?
To solve better problems ask better questions. Better solutions mean better ideas. Ideas are the doorway to new realities. For example, don’t say “I can’t afford it.” I contend that it’s a sign of mental laziness. Ask “How can I afford this”.
I’ve listed some good and bad questions below to let you see the difference here.
Bad question Good question
Why don’t 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?
Who’s to blame? How can I turn this around quickly?
What’s wrong with my life? What’s right with my life?
How can I earn more? How can I earn more and work less?
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? I’ll 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 don’t 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 can’t 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
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
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. Let’s take a look.
As some of you know, US mortgages are no-recourse loans. This means that lenders have no recourse to the house’s 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 – not just real estate and not just in the US – with high leverage. 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 haven’t 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.
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 companies’ 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
I’m a big fan of Ken Heebner. That’s the man behind Capital Growth Management. Heebner is definitely one of the very best mutual fund managers on this planet. It’s not just the hefty returns that get me going. It’s his true contrarian style that gets my unshared attention and deep respect. I’m truly madly deeply in love with this guy’s way of investing. He has placed some of the same bets I did back in 2004-2005. Despite that, I really adore Heebner’s incredible capability to see things coming before anybody else.
So how well has he performed compared to the other big names in the industry? Let’s compare his results to a well-known, now-retired money manager Peter Lynch. Lynch’s 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. That’s 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! That’s something to pay for!
What about Heebner? Ken Heebner’s Focus fund has beaten the market by 20 points a year during his glamorous period. This was from May 1998 to May 2008.
It’s characteristic for Heebner’s style to find emerging trends and play big games with them. He’s open to all new ideas, the kind of possibilities that the masses aren’t even aware of. He seems to be the happiest when everyone else thinks he’s nuts. He is a happy-finger-trader so his positions can change in a heart-beat from long to short.
I lively remember the time when I got a wakeup call for commodities in 2004 after reading Jim Rogers’ 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 don’t 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 – can’t blame him for that ride, can I?
As I said, I really admire Heebner’s capability to see the upcoming trends. I give him enormous credit for seeing the fertilized and agricultural trend (which I had doubts on and didn’t 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 what’s holding us back on a daily basis?
First, there’s 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. That’s 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 it’s not coming in the form that we had hoped. It’s typical that we don’t 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 don’t think of the things that you do not want. You become what you think about most of the time. You’re 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. Isn’t 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.
It’s not so hard after all.
Matias
The Leverage of Money
May 23, 2008 by Vagabond Investors · 5 Comments
You’re about to discover some über 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.
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 don’t really know how to use leverage in their favor? After all it’s 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.
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.
Here’s 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?
Here’s an example of bad debt. Let’s 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, you’re using bad debt.
You might say “I get that. Tell me about the mysterious good debt if there is such a thing!” Here it comes. If you use debt to generate more income and wealth for you, you’re using good debt. For example, you buy a nice piece of real estate using 20% of your own money and 80% of your banker’s 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. What’s 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!
It’s 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? Let’s look at some numbers.
|
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 % |
The calculations above are based on these numbers:
Ø Interest rate: 5%.
Ø Net rental income: 6 %
Ø Tax rate of rental income: 28 %
Ø No depreciation.
Ø Real estate purchase price: $100,000
Ø Equity: $20,000
Ø Banker’s money: $80,000
Ø Rental income after expenses: $6,000 (6% of $100,000)
Ø Interest rate expenses: $4,000 (5% of $80,000)
Ø Tax expenses: $5,60 (28% of $6,000-$4,000)
Ø Appreciation: $2,000 (2% of $100,000)
Ø Total capital gain and income: $3,440 ($2,000-$560+$2,000)
Ø Return on equity: $3,440 / $20,000 = 17.2 %
Let’s 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 it’s 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.
Investment advisors’ advice
However, most investment advisors will say you that you’re nuts if you tell them that your goal is to get around 17 % return on your equity. They will say it’s far too risky. The fact is that investments are never risky. The risk is in the investor that does not know what he’s doing. Do you think you can find a mutual fund that gives your equity a 17% annual return year after year? I wouldn’t bet my financial future on that horse.
Why hasn’t your investment advisor told you about this? That’s 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 can’t 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 you’re 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 don’t shoot yourself in the foot with bad debt.
Find out more about this subject in this Vagabond Investors’ blog.
Matias
The Hall of Shame: King Kong, Godzilla, The Subprime Six…
May 19, 2008 by Vagabond Investors · 3 Comments
I’m 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. It’s a bit like watching horror movies from the 70s. You see a monster’s head fall off but you can’t 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.
It’s 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 bankers’ panic in 1907 and beyond. Let’s 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 don’t 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.
It’s 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 don’t 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, shouldn’t 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, I’m confident that Mr. Bernanke will get his hands on that somehow and postpone the horror show to a later date. It’s 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 Fed’s 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 let’s begin.
We think the Fed now have two options.
1) 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 “The Inflation Solution to the Housing Mess”. 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 can’t 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 country’s 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) 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 wouldn’t 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. It’s 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
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 this…
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, that’s 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 there’s something else in life that I haven’t seen even when it’s right in front of me.
It’s 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 you’re not satisfied with your results, stop doing what you’re doing right now! Find a better approach!
It’s pure insanity to keep on doing the same old things and expecting different results. Focus on the cause instead. Results will follow automatically. It’s 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 doesn’t necessarily mean that it’s 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 I’m 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
Looking those trees keep me wondering which way to pass the tree
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.
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 ºC (272 ºF respectively) and it will boil every time, assuming constant pressure. On the other hand, put a human under pressure and it is anybody’s guess what will happen. He/she is unpredictable, irrational and acts in bizarre ways.
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.
One can tell the where the market is by listening to people’s 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.
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). 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.
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.
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.
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.
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.
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.
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 public’s need to feel right about their opinions, most people get dead right.
Jaakko
