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  • Archive for July, 2006

    Carnival of Investing #33

    Posted by Frugal on 31st July 2006

    Welcome to the 33rd Carnival of Investing, hosted at My 1st Million At 33! What a coincidence in the numbers. Thanks to all the contributors to the carnival to make this another great carnival for more learnings on investing your money, and thanks to MyMoneyBlog for making hosting arrangements.

    Using my own judgment, I grouped the posts by categories and added a short summary or some comments for the benefit of the readers to sift through 20+ articles.  Under each category, posts are arranged in the order of submission.  Also I’m using the name of blogs which is probably more important than the name of bloggers.

    Technical analysis related:

    Individual stock picks:

    Good investing advices in general:

    Good personal finance advices in respect to investing:

    Miscellaneous posts (including real estates):

    If I missed your post, please email me so that I can include it.  Next week the carnival of investing will be hosted at MyMoneyForest who is the maintainer for Carnivals of Business by the way.  Check him out now for more business ideas.

    Posted in Announcement, Investing | 5 Comments »

    $2.54 per month for a Pre-paid Cell Phone

    Posted by Frugal on 29th July 2006

    As you may be aware from my previous cell phone post, that I was paying $3.21 a month for my cell phone on my AT&T (now Cingular) Free2Go plan. Because I could no longer buy those $10 refill card from grocery store, my minimum rate will be going to $8.33 a month instead (one $100 refill card per year). Because of this incoming change in a few more months, I have decided to shop around and see what I can find. So much for all the wireless competitions in the last few years, I was amazed that most of the major wireless carriers have increased their rate on various plans. But fortunately and surprisingly, I found another cheaper pre-paid cell phone plan offered by Page Plus Cellular from forum of Here are the details of this pre-paid plan:

    1. You can buy $10, $25, $50 refill cards, each won’t expire in 120 days. The rate per minute ranges from 14 cents on $10, to about 12 cents on $50 cards.
    2. There is a monthly maintainence charge of 50 cents.
    3. Wireless network is from Verizon Wireless, and it uses CDMA technology.
    4. Minutes can be roll-over before expiration.
    5. Roaming is expensive at $1.99 per minute. Text messaging is 8 cents per minute. And according to raderator at the forum of, they charge for leaving voice mail.

    So based upon the above information, the minimum that you need to pay per month is $10 / 120 days * 365 days / 12 months = $2.54 / month. Because there is a monthly maintainence of 50 cents, I calculated that paying the minimum will get you 175 minutes (at 14 cents per minute) which is about 15 minutes per month (but can be accumulated and carried over). Adding more minutes will be easy by just refilling with more. Let’s assume that every year, you only refill with $10, $10, $10, $25 cards which are $55 in total. You can get 32 minutes per month, at the price of $4.58 per month. At any rate, because you can roll-over your minutes, often you can simply accumulate your minutes for emergency usage, and eventually settling down on paying only the minimum of $2.54 per month (assuming you don’t talk more than 16 minutes per month).

    On my Free2Go phone, I know I use very little, even though I pay $10 for 40 minutes about every 3 months, just about 13 minutes per month. Most of the time, I just use the phone to tell my wife about my whereabouts, and that only takes 1 minute (or 2 minutes on both phones). Currently, I have accumulated some $30 and $10 dollars on the two phones that I have due to all the roll-overs.

    By the way, user raderator at the forum suggested to activate the phone from Ebay for only $14.95 with 100 minutes (in case the auction expires, you can search for “page plus cellular prepaid” on ebay), and I did check it out. It looked easy, fast, and reliable to me.

    Here is an user who has used the service for 7 months plus.

    I won’t be switching to this plan yet, until probably early next year when all of my $10 refill cards run out. But I can’t wait to tell you about this cheap pre-paid cell phone plan. If anyone has any good or bad experiences with Page Plus Cellular phone service, please be so kind to share with me & the readers. Their home page looks not 100% professional to me, but since someone has used their service for more than 7 months, I assume that it must be sufficiently good. If anyone gets to try their service out, please let me and everyone reading here know about your experience. Thanks in advance.

    P.S. Another VERY GOOD (if not better) pre-paid cell phone plan is T-Mobile. Be sure to check the comment sections for the details.

    Posted in Frugal Ways | 12 Comments »

    Questions to Ask Yourself Before You Invest

    Posted by Frugal on 28th July 2006

    Before I go any further, I want to remind you that I’m not a professional financial advisor, and you should just take any of my advices AS IS. Check the details in my disclaimer.

    There are many questions that one should ask before investing. And hopefully, this post can let you start on the necessary thinkings.

    Before you start investing your hard-earned money, the most important questions that everyone should ask him/herself are “how much can I afford to lose”, and “how much am I willing to lose”. Essentially, it’s RISK. How much risk one can take (1st question) is different from how much risk one is willing to take (2nd question). Gamblers are willing to take bigger risk than they can afford. The conservatives probably will always take an under-sized risk relative to their risk affordability. There are no right answers to these questions, but only answers that can put you to sleep soundly at night.

    Very often, the answers are tied heavily to the ratio of your monthly or annual saving to your portfolio size and to your total networth. I will actually look at networth to annual saving, and portfolio (or liquid networth) to annual saving. Both of these ratios together give you a fairly good idea of your financial picture. The first ratio tells you how fast you’re increasing (or decreasing for that matter) your networth, and can help you answer on “how much you can afford to lose”. The second ratio tells you the relative importance of your savings to your investing, and lets you understand that maybe you should be focusing your energy more on savings rather than investing, or vice versa. Obviously, if the absolute numbers for savings & portfolio sizes are relatively small, then definitely you should “go back to the drawing board” and work on your savings. If your savings is relatively large compared to your portfolio AND you are young, it means that you can afford to take relatively bigger risk. If your portfolio is quite large compared to your savings, then probably you want to start to rein in a bit on your risk-taking, even if you’re young.

    Here is an example. Suppose that if your portfolio to your annual savings is 10 to 1. It means that it will take 10 years of savings to replace your entire portfolio, if your portfolio goes to zero overnight. Put it another way, if your networth goes down by 10%, there it goes your entire year of savings with it. A big ratio of your networth/portfolio to your annual savings can mean two things: either your networth is quite significant, or your savings is quite insignificant. The case of having $100K networth with a $10K saving is quite different from the case of having $1K networth with $10 annual saving. In both cases, the ratio for evaluating your risk is the same, but instead of working on your investment, you may want to work on saving more money if you only save $10 a year.

    To understand how your age affects the RISK tolerance, I will compare the “ratio of networth to annual savings” and “the number of working years before the retirement”. A simple comparison of these two numbers gives you a clear picture of risk relatively to your age.

    For example, if your networth to your saving is 20 to 1, and you’re 5 years away from your retirement, then it’s time for some risk moderation. You don’t want to lose a big portion of it before going into retirement. If you are still 10+ years away from your retirement, you may be able to afford to take some risk since the time horizon may be long enough for any markets to recover from a big fall. In another extreme example, if your networth to your saving is 100 to 1, and you’re still 25 years away from your retirement, what should you do? In this case, I would advise a more conservative portfolio even if you’re still young. The reason is that your networth is quite big that a 20% drop of networth will require you to work another 20 years to make up such shortfall. And if you’re already into retirement, I would only put any excess money beyond the total required amount for the projected length of retirement into more risky investments. You may put more or less than the excess amount depending on your risk tolerance, but you definitely don’t want to screw up your retirement plan that has been well-executed in the past.

    I always examine my networth to my monthly savings when I do my monthly networth review. The reason is that it gives me a picture how my finances are rolling forward, assuming everything else is stagnant. It also helps me to assess the risk that I can take. Whenever I invest a portion of my money into something, I always want to know what can happen in the worst case scenario. And one of the scenarios that I mentally go through is “what if this investment goes to ZERO?” How will it affect my daily life? When it goes to zero, the only thing that I can count on is my new incoming savings. Therefore, I always look at my investment transaction size relative to my monthly or annual savings. It tells me essentially how stupid I can afford to be for this time around.

    Once you have done a good analysis on both your networth, portfolio and your saving rate, and have compared their sizes, and compared it to your age to retirement, you will have a very good assessment of how much you can afford to lose (relatively speaking). How much you are willing to lose should always be less than how much you can afford to lose. There are gamblers out there who will bet repeatedly on small probability events in the hope of big payout days. Oftentimes, they are either saved by their families and relatives, or by their age, or by the society through bankruptcy mechanisms. I simply don’t know any opportunity that warrants you to leverage and bet more than you can afford to lose. I guess it’s possible that a person may face such difficult decision once or even twice in their lifetime. But even when the outcome is positive, it is never guaranteed. I will always advise not to risk what you cannot afford to lose.

    In fact, all the above questions should be re-assessed on a constant basis because of changes in your financial situations. You should adjust your personal finance risk as time goes on. The more difficult things are the market risks, and risks inherent in every stock selection or every real estate transaction. But sometimes (or often?), even a professional will get it wrong. There are no magic tricks for investing as I have explained in “My Advice to Preserving Wealth in 30s thru 50s“. Such magic Midas trick is self-defeating. One can pretty much devour all the money in the world through a consistent and compounding trick significantly higher than inflation rate. Since you know that’s not realistic, you know either such tricks cannot be consistent, or that they are consistent but with a return much much closer to the inflation rate.

    Posted in Investing | Comments Off

    Revealing of Stock Market Plunge Protection Team

    Posted by Frugal on 27th July 2006

    Check out this article from NY post. The mythical PPT or Plunge Protection Team or formally called as Working Group on Financial Markets finally reveals themselves in a more clear fashion. The Greenspan Put all along has been right. No wonder the stock market has been going up these couple of days. I always thought it may or may not exist. But now I’m certain of its existence after inquiry of Congressman Ron Paul. By the way, Ron Paul is the congressman that has the truly the BEST understanding about monetary system that I’ve ever seen. I had a post with a link to his article on gold, and I can’t find it now. It’s a classic.

    Here is another article from Washington Post on PPT. That’s the only two articles from traditional established media that I’ve ever read on PPT. From what I heard, PPT will come in and place BIG market orders on S&P 500 (or other index) futures or options market, and lift/reverse the entire market through that. Those future/option markets don’t require direct ownership of the stocks, so that they can be more “politically neutral” to the stocks.

    I rushed this post out on Thursday so that you can hear about PPT from me first, :) . Now I got to go back and work on my short positions, which PPT is trying to screw me on. Definitely unfair to small investors & free money for big wallstreet firms.

    A BIG moral hazard by the way.

    Posted in Investing, Stock Market | 4 Comments »

    My Advice To Preserving Wealth in 30s thru 50s

    Posted by Frugal on 26th July 2006

    At 30s to 50s, if you have put in some efforts in saving up a nest egg, you probably will have a okay to decent size of money, depending on your saving rate and age. At this stage, you probably should start constructing a picture of your networth & portfolio, if you have not already done so. The picture of your networth by market value gives you the idea of where your money is. The picture of your networth by the leveraged total value gives you the idea of how your networth may change per different asset classes that you have. Most people have their networth view as marked to value, but I strongly advise one to always take a look at the alternative picture of the leveraged view on the networth. I won’t go into details of the leveraged view, which you can read more about it by clicking the link.

    With all the money in your nest egg, the most important thing for it is how one can preserve (if not expand) the buying power of the money through time before retirement or the time when you need it. Since the modern paper money is a fiat money backed only by the faith in the government, combating above inflation rate is the minimum goal that every money holder or investor should achieve.

    Investing money is probably the most difficult task for anyone. Every minute, every second, every dollar from everyone is trying to gain the best return on investment (ROI). You can see how much competition is out there. If there is someone (including me) who tells you that he can consistently produce an annual return of 20% above inflation, you can almost be certain that he is telling a lie. Why? Compounding 20% for 25 years will give you 95.4 times back for your money. A mere $1000 dollar will become $95,400. Now if he has such investment knowledge to have such mida golden touch, will he be investing only $1000? He should be borrowing as much as he can and probably invest $100K to get some $9.54 million dollars. And if he has some $9.54 million dollars, I bet that he won’t be talking to you, but probably even making even more money for himself, or retired in some Carribean island. Such outrageous return simply don’t last long, or if it’s true, no one will be telling you about it. This applies to ALL investment, whether it’s real estate, precious metals, or stocks in general. The investing world is pretty much a self-correcting process. Any inefficiency (for investing trick) in the market will be immediately exploited in a short time to the extent that such inefficiency doesn’t work anymore. Every now and then, there will be some inefficiency in the market, but with so many investors and so much capital in the whole world, you can bet on that it will disappear before you know about it.

    Despite the tremendous difficulty in investing, you can be sure that if you don’t pay attention or don’t do it, you will be at the bottom of the ROI (unless by pure luck). There are mainly two approaches to investing: passive and active. Passive investors follows the style of index investing by putting money into the general market weighted by market capitalization. An index investing style believes in the EMH, efficient market hypothesis, that the best current asset allocation is the current opinion of the market, which is expressed through the market capitalization of every stock. Therefore, buying index funds or ETF will give you the best asset allocation. I highly recommend the book Four Pillars of Investing by . It’s one of the most outstanding investment book that one can ever read. The arguments for index investing are so strong that I can barely find any faults in them.

    The other style of investing is active investing, which is my current style of investing. I believe that I still have time to experiment with different investing strategies, and afford to get sub-par returns. But the biggest reason for me to follow such investing strategy is that the reasons for $US dollar devaluation and investing in natural resource sectors are so compelling that I cannot turn my eyes away from it. I will have separate posts on my reasons, but it is known that index investing gives you the average performance. Besides, it is also know that EMH in the most strict sense does not hold, and academics are discovering examples of market inefficiencies here and there (which gets exploited right away of course).

    My own criticism to EMH is that in the entire formulation of EMH, there exists no time element. Obviously, nothing happens instantaneously. The time during which the market digests the information should be full of opportunities for smart people to take advantage. And while EMH claims that there is no market advantage at every time instant, I believe it does not directly translate into a conclusion that when you look out further in time for months or years, there exist no advantages. In essence, I believe that the entire formulation of EMH lacks the very important element of Time. That’s why I believe that by investing long enough (and smart enough), one should be able to harvest the inefficiency accumulated through time, and/or inefficiency projected into the future.

    Of course, I may be wrong in my active investing, but it is for sure, that in every market, there are out-performers and under-performers, and index investing gives you the average performance of all market participants. One of the better books for active investing is the book from the master market technician Martin Pring “The Investor’s Guide to Active Asset Allocation”. It has explanations of how one can use potential knowledge of business cycle to dynamically allocate one’s asset.

    While there is not a lot of concrete advices that I can give you for investing, definitely invest, invest, and invest to at least beat inflation. Also I suggest you to at least read my article on the importance of diversification, which relates directly to preserving wealth through diversification. And I won’t tell you that I know a trick to return 20% every year because I will be flatly out lying as I have explained. I have and will have many more articles on Introduction to Investing in certain asset classes, and Reasons for Investing in certain asset classes, to help you on how-to and understand why. But since I have no magic trick, you will need to make up your own portfolio compositions, and invest accordingly. And if you have time to spare, the following two books will probably increase your knowledge in investing tremendously, whether you choose to invest actively or passively.

    Posted in Book Review, Investing, Miscellany | 8 Comments »

    I’m short of my desired shares

    Posted by Frugal on 24th July 2006

    I just sold my NG positioins. Don’t want to mess around in the merger business anymore. I forgot to add in that post that PDG went thru a wrenching period of ups & downs when bought out by ABX. Yeah, I got a 25% to 30% lift too, but it’s just quite too much to go through post-merger/acquisition news.

    Because I sold NG, I immediately want to switch them into other gold positions. After spending 30 minutes just to watch gold to go up, and then another 30 minutes to drive to work, now I’m still short of my desired shares.

    Market likes to kick you around. Darn, just after I post the possible buy alert in PM, the PM market has gone into almost all green in less than 30 minutes.

    Oh well, maybe I will get my desired shares back towards closing or tomorrow. I hate to be selling out at this level. Should have used market order, I guess. My screen refreshing rate was too slow, and I kept chasing it without hitting it.

    Posted in Market Pulses, My Portfolio | Comments Off

    I hate gold mergers

    Posted by Frugal on 24th July 2006

    NG just got an offer from ABX for $14.5 in cash, but it pops to about $15.50.  While I’m very happy to have an immediate return of 33%, I hate this kind of low-ball mergers.  Last time, when HMY tries to buy GFI, market reaction was similar.  GFI was trading above the offering price by more than 5% to 10% almost the entire time.  The merger ended up not happening without any new acquirer or a better offer price, but it took my portfolio down for some wrenching $30K to $40K in the meantime.

    Again, the market has spoken this time, and NG is trading at $15.50, significantly higher than $14.50 offer.  While I can’t say what will happen this time, and I even venture to guess that there may be a better offer price + a new acquirer, I won’t bet my money on it.  Truly had enough last time.  I especially dislike the management at HMY who had insisted not withdrawing the offer, and simply waited for stupid people or arbitragers to tender their shares.  I hope ABX won’t be this blatant to ignore the market power.

    By the way, in this arena, sometimes, it does pay to invest in smaller player like NG.

    P.S.  I’m in no way recommending buying NG, because assuming that my previous post on a low forming in HUI/Gold is correct, a cash offer is the worse offer that you can get.  While the market may be rising, your offer is fixed by the cash price.  Eventually, ABX can raise it’s offer to $15.50, and still pay zero or even negative premium given today’s HUI level.

    Posted in My Portfolio | Comments Off

    PM Market Possible Buy Alert

    Posted by Frugal on 24th July 2006

    The gold spot is reaching the lower band of my target from $610 to $685 while HUI is very close to 300 now, a good support level.  Assuming that precious metal markets are in a bull market, I believe that this is a good entry point for anyone who has no positions in this sector.  The downside risk should be small, no more than 10%-15%, whether you buy into physical bullions or mining equities.

    I may wait one more day and see how things unfold before I make some move.  But in any case, I believe that the downside should be fairly limited at the current price.

    By the way, I do want to add that there was a rumor of central bank heavy selling their gold in this summer (from I believe).  It looks like it’s probably true, since gold market is acting relatively weak since the last short-term peak.  While that’s a negative factor, we will also have an Indian gold-buying season from November to December.

    What we see for the fourth quarter of each is the impact of the gift-giving tradition associated with the druid Winter Solstice, now known as Christmas. Layered on top of that is the Indian festival season of Diwali, which kicks off in November and continues through the first leg of the traditional wedding season in December.
    You can see noticeable spikes in both January and September, months when Indian manufacturers typically restock inventories to meet the demands of the two Indian wedding seasons. The first, mentioned above, starts in November and ends in December. The second starts in late March and runs through into early May.

    Good luck trading.

    Posted in Gold/Silver, Market Pulses | 2 Comments »

    Why I would choose EmigrantDirect over others

    Posted by Frugal on 24th July 2006

    Obviously, when opening a bank account, interest yield is very high on my list. The more important thing than having the absolutely highest yield is whether the bank is consistently competitive in offering their bank yield. You don’t want to open a bank account and several years later go through all the hassle of moving money around to another better bank. Consistency for me is more important than absolutely highest yield. Among the online bank of choices from NetBank, ING, EmigrantDirect, CapitalOne, HSBC, IndyMac, both NetBank and ING have fallen behind the curve of competitiveness of the market. While NetBank still have the attractiveness of close to full banking service for writing checks and free online payments, ING has no additional attractiveness other than being the first to market with more credibility. IndyMac bank requires a minimum deposit of $25000 to get their highest quoted APY. For most people to find higher bank yields then, one is left with the choices of EmigrantDirect, CapitalOne, and HSBC. (There are always many other ones, but I’m only limiting my discussion to the more well-known choices.)

    To narrow down my choice, I would be using a criterion that not many people pay attention to: financial risk of the bank. Most people overlook the financial risk of the bank when opening a bank account because bank deposits have FDIC insurance for upto $100K. But as with everything else, extra yield almost always come with extra risk. Nothing is riskless, even for bank accounts in my opinion. The financial risk with bank accounts is whether the bank institution will go belly up and force you to go through FDIC to recover all of your money below $100K. It’s a hassle that you would probably never want to go through. The best way to avoid that risk is to have your money split in two different banks, so that the probability of simultaneous belly-up is close to nil. This way, you will be always left with some money to get through the period of recovering your money from FDIC. But if you don’t want to have the hassle of managing two bank accounts, and just want to consolidate into one bank, which one of the above three would you choose?

    From my stock investing experiences, I can tell you that I would choose EmigrantDirect over others. In 2002 slowdown, when I was looking for short-selling candidates in the area of consumer credits, I found two companies that had higher deliquency and bad loans on their consumer credit cards among others: Metris (MXT for its symbol, Yahoo’s message board & joked that you definitely don’t want to put your money under this mattress or Metris), and Capital One (COF for its symbol). And guess what? Metris is now under HSBC through acquisition, and Capital One has started offering banking services more actively. Is this a coincidence? I think not. In fact, it may really make a lot of sense. The only reason that banks want to offer higher bank yields than others is to attract more cash money, and nothing else. Why would a bank give you more interest money besides that? It’s a capitalistic society, and they are not charities. Now, the next question that you should ask yourself is that why do they want your cash. And the answer could be that they REALLY need it (for their delinquent real estate or consumer credit card loans). If they are desperate, or close to edge of going belly-up, you definitely don’t want to get into that mess.

    While my information from 2002 is quite out-dated but still may be true, I really don’t want to take such chance with my money. Here are my views for each, assuming that not too much has changed since 2002:

    1. Capital One: Based on the risk assessment, this could be the worst choice. Why would they start offering banking services more actively? If you understand banking, you would know that for every dollar of bank deposit, they are allowed to lend out about $10 of loan. It’s called fractional reserve banking. With sufficient bank deposits, they can make both of their book on consumer loan and banking to look sufficiently decent, with this 10X help.
    2. HSBC: Because Metris was acquired by HSBC in Dec. 2005, your risk is averaged with the new merged company. I assume that the averaged risk should definitely be lower than Metris standalone, and therefore, HSBC should have lower risk than Capital One.
    3. EmigrantDirect: I cannot find their stock symbol (if it exists). I believe that they are probably a relative new player. A new player is good in the sense that it will take quite a long time before they screw up themselves totally, with the help of the 10X fractional banking reserve. They could pretty much mess up, and still limping forward. It’s very hard to get a bank to fail in general, and even harder to get a new bank to fail financially. While there are other risks such as internet security, I have no such information to be compared for these three banks. But a newer bank like EmigrantDirect in respect to financial risk of the bank should be on a solid ground.

    I still believe that the above three should be quite good choices because it’s simply very hard to get a bank to fail. However, I prefer not to take a higher risk for such a tiny difference in the interest yield. Yes, you would earn $8 more a year on every $10,000 of deposit at Capital One, and receive $25 if you pay $100 Costco executive membership. And yes, you would earn $5 more a year on every $10,000 of deposit at HSBC. But the race of chasing the absolutely highest yield is simply elusive, especially when EmigrantDirect will be raising its 5.00% APY to 5.15% very soon.

    Here is a short review for EmigrantDirect in case you want to read it over before opening an account. And if you appreciate for my effrots in offering you good financial information on this site, please open the EmigrantDirect account through the sponsoring ads on my site. It will help me defray the website hosting costs and misc. for the year and the coming years. I would really appreciate it.

    P.S.  Please do check out the comment sections.  I won’t be pretending to “know all”.  In fact, I probably looked a little stupid.  But in any case, no one can know all, and no one can be perfect, and that’s why in the comment sections, there could always be some people who are kind enough to share their knowledge.

    Posted in Banking | 12 Comments »

    Importance of Diversification

    Posted by Frugal on 22nd July 2006

    How many times have you heard a successful wealthy person had their fortune reversed on him/her and fallen all the way down?  Although this kind of story happens mostly to business owners and some investors, understanding the causes will help you greatly to avoid such scenario, even if your networth is on a smaller scale.

    A lot of such stories go like this.

    1. Start-up: The business owner started small in something.
    2. Ramp-up: He/she was at the right place and at the right time, and good things start to happen one after another.
    3. Peak: He/she was very successful, and with one final investing bet, or one final big expansion at the peak of his/her business, things start to go against him.  (Of course, the term “final” can only be seen from hind-sight, and post-peak.)
    4. Downturn: Because of his/her over-confidence and over-leveraging at the peak, everything simply crumbles down so much faster when luck does not work in his/her favor.  He/she lost almost everything to the line of the business or investment from exactly where he/she gained those wealth.

    Now if you observe the above sequence carefully, there are three major reasons that he/she cannot preserve his/her wealth.

    1. External factor: Business and investment go through cycles of up and down.  It’s seldom a straight line up.
    2. Internal factor: A person gets over-confident, and instead of realizing that a significant factor that contributed to his/her success is because of the business/investment cycles, he/she thinks that he/she is the major if not the only factor to his/her success.
    3. Leverage: A leverage works both ways.  Going up, it’s terrific.  And just when you think that it cannot possibly go down, it goes down and eats you alive, 2X or 10X faster, depending on the amount of leveraging factor that was used.

    What are the key lessons that one can take away from this?

    1. Understanding the business cycle is extremely important.
    2. Diversification of one’s networth or investment or business among different un-correlated sectors will prevent a big downturn cycle in a particular sector to wipe out one’s entire stake.
    3. Use leverage extremely carefully.  It’s a dual-edge sword.

    I will post more on business cycle in respect to stock investment.  However, no one can have a clear crystal ball everytime or every moment.  It is far better to diversify your assets somehow, and make gradual shifts depending on the business/investing environment.  Without diversification, you will need to rely on being close to 100% correct, and run the big risk of giving it all back, going from 0 to 100, and then back to 0 (and some more if you use leverage).

    Posted in Investing | 4 Comments »