My 1st Million At 33 – yes, you can do it too

A site to share my tips, tools, and humble thoughts on the journey to wealth

Legal disclaimer     Place your ad here    
  • Categories

  • Archives

  • Spam Blocked

  • Sponsors

  • Archive for March, 2007

    Catching up emails & comments this weekend

    Posted by Frugal on 31st March 2007

    If you have emailed me and don’t hear from me after this weekend, please feel free to email me again. With the tax season going on and the stock market actions, I have been about some 10 days behind on some of my replies.

    It has been busy no doubt like always. But I try very hard to keep the blogging going (without upsetting my wife too much).



    Posted in Announcement | 5 Comments »

    Net Commercials And Adapting To Change

    Posted by James on 30th March 2007

    Frugal’s notes: This post was originally posted on March 26th at before some market setbacks.

    Volatility Index

    VIX [ ]
    Commercials were sellers of the VIX index when it broke out, since, then the VIX has declined to retest old-resistance, which is now support at around 12 dollars. In the short-term, it looks like the VIX is overextended to the downside, so we will probably see a re-test of the 10-day moving average. From a longer-term perspective and the commercial setup, it looks like we are going to break below 12 and return to a period of low volatility.

    Broad Markets

    Russell 2000 [ ]
    Commercials were big buyers last week of this index, as well as all the other indexes. Not too long ago, commercials were sellers at these price levels, and now they have turned around 180 degrees and are buying at these levels. I was anticipating the market to decline further before commercials would get interested in the stock market, but they proved me wrong. It looks like the double bottom at 760 is for real, and that we are headed towards higher prices in the intermediate-future.

    S&P 500 [ ]
    Total net-commercial position currently stands at -4,783. The last time net-commercial position was this high was back in late-2005. This is very bullish as far as COT setups are concerned. The double bottom near 1378 should hold, as this setup is forecasting higher prices in the intermediate-term.

    NASDAQ 100 [ ]
    Net-commercial position increased by roughly 20,000 contracts, confirming the other bullish COT setups on the rest of the indexes. Once again, the double bottom at 1,720 should hold, and higher prices are the forecast for the intermediate-term.

    Dow Jones [ ]
    Net-commercial position increased by over 25,000 contracts. This probably means that the double bottom at 12,050 should hold, as this COT setup forecasts higher prices in the intermediate-term.

    After just one week, most of the index COT charts transformed from bearish setups to bullish setups. This just goes to show how dramatically the markets can change, and also that we – as investors – must be able to ADAPT to these sorts of changes. The key here is to stay open minded. A week ago the melt-down that started in late February looked like the beginning of something big; instead, it now looks like a critical bottom has been put in place. Also, notice the RUT broke right back above 800.


    Crude Oil [ ]
    Oil broke below $60, but found support near $57 and then rallied back above $60. Commercials continue to sell this market, so it looks like a bearish setup is in the works. There is very significant resistance above $64 for crude. For now, oil remains in a trading range (57 – 64); and even though commercials are sellers over the last little while, it is important to follow the trend which continues to point up…as long as oil remains above $60.

    Gold [ ]
    The picture with gold is not entirely clear. While commercials were buyers over the last little while, is this enough fuel for gold to go up and challenge its 2006-high near 730? This COT setup would have been much more bullish if net-commercial position moved to new highs on the 1-year-COT-chart, to roughly -75,000. For now, it looks like this market is poised to challenge its resistance at 690. Other than that, bullion continues to stay range-bound from a big-picture perspective, in between roughly 550 and 730.


    US Dollar [ ]
    The US dollars is setup for a rally, and is literally touching strong support at $82.5. If the USD holds above $82.5, then it looks like we will see a leg-up develop from these levels to perhaps challenge resistance at $85.5 – 87.5.

    Posted in Investing | Comments Off

    A couple of charts on oil

    Posted by ML on 28th March 2007

    The last time we looked at the oil chart was in a post about CanRoys. At the time, there were plenty of oil bears on CNBC predicting $20-30 oil, but I was pretty sure that $50 was going to hold. Fast forward two months, oil’s back up to $63 a barrel. The talking heads would again have you believe that geopolitical tension is the sole cause while completely glossing over the fact that the rebound started long before this latest Iranian incident.

    Personally I cringe every time I hear geopolitical events being used as an excuse for price increases, be it oil or gold or anything else. What’s usually left unsaid is that the prices invariably fall as such events subside. Except that quite often the prices don’t fall as much as they rise… While Iran may have contributed a couple of dollars to the oil price, there are greater forces at work. I’ll show a couple quick charts and links and leave you to make your own conclusions.

    The first is Saudi oil output in the past five years. The data from four different sources were averaged to produce the black line. Over 2006, Saudi production declined from 9.4 MM bpd to just above 8.5 MM bpd. The full article can be found at the OilDrum.

    The next chart is the Baker Hughes oil rig count for Saudi Arabia. The data is only up to early 2006. The rig count increased drastically in 2005, with no apparent corresponding increase in output. So it would seem that the new wells replaced declining production elsewhere, or Saudi Aramco embarked on a massive exploration program, or both. Oil price peaked in July 06, but other than a small supply bump in the middle of the year, Saudi production was a straight line down in 2006.

    Click to enlarge

    Was the reduction in Saudi oil output by choice or due to production limitations? I leave you to ponder that question. By the way, if you haven’t read Matt Simmons’ Twilight in the desert, now would be an excellent time.

    Caveat: This is a look at the long term supply of crude oil, not a short term call to buy oil or oil stocks. As a matter of fact, I think oil will likely move down in the short term to form the right shoulder of an inverse H&S formation. If concerns about world economic growth emerge then $WTIC may retest the lows at $50. It would be a grand buying opportunity if were to happen.

    Disclosure: I’m long oil stocks.

    Posted in Investing, Natural Resources | 7 Comments »

    My Friend Is Now A Deca-Millionaire

    Posted by Frugal on 27th March 2007

    I know personally one of the three founders at Afa Tech. This pre-IPO company currently has a OTC market cap value of about $120 million. Assuming a venture capitalist slice of 60%, 36% for founders, and 4% for employees, each founder would have a net worth of 14.4 million (before IPO). The company already has the second biggest market share (right after DiBoom) in DVB-T European digital TV market (link in Chinese), and they had the product on the market for only about two years.

    The founders of this company are one of the best dream team in an IC start-up. All three of them have different expertise, covering the entire scope of analog circuitry, system design and verification, digital circuitry, and software among all three. Such a team is really hard to come by in such a small group of people. I have never doubted their future success.

    My friend invited me to join their company several years ago. Assuming that I could get a stake of 0.4% in the early stage, that will be $480K at this time. I expect this small company to be on a high-growth curve, so a doubling of their stock price is probably given. Assuming a double in price, $480K can easily become a million dollar. But I guess I’m quite spoiled by the working culture in the USA which is quite humane. My future prospect at my current company is in no comparison to joining this start-up. But I certainly don’t need to work until 11pm or later everyday for some 4 or 5 years straight.

    Am I upset with the lost chance of earning a potential million dollar at this start-up? I guess not so much. Life is about making choices. Family time is important to me. Enough money to pay for kids’ college and sufficient buffering into retirement are my personal financial goals. Although I have never done a preliminary calculation, those goals most likely are within my reach (as long as I have a job that continues to pay my current expenses before the actual retirement). In fact, my friend probably has lost his chance of being able to have family & children at an earlier age. How about having a kid in college when you’re 60? You really cannot have it all.

    If you are single, willing to constantly work long hours, and is a native or speaks the particular foreign language, I think it’s not too late to join this company. You will not reach a million in the first year, but in ten years, I think that is probably very likely.

    P.S. I was not in the founders’ circle. If I had the chance to become a founder, I probably would seriously consider the venture.

    Posted in Business, Miscellany | 4 Comments »

    Examples of Wealth Generation From 1972 to 1982

    Posted by Frugal on 26th March 2007

    I recommend people to read this article from if you have not read it. It gave a very good illustration for different ways of wealth generation from 1972 to 1982, which could be applicable to the coming decade. It describes three distinct ways of managing money from 1972 to 1982. (Hindsight is 20/20 of course).

    1. Invest all in stock market, supposedly a hedge against inflation. Stock market lost 13% in absolute value, but lost 62% in inflation-adjusted value.
    2. Paid off all mortgage debt. House in the long term simply tracks inflation.
    3. Mortgage more from 50% LTV to 80% LTV, and buy gold which was the asset choice that gained above the inflation rate.

    This article illustrates the following points quite clearly through that decade of mild to high inflation:

    1. It has happened before. Stock markets can go nowhere in 10 years.
    2. House value tracks inflation rate in the long term.
    3. Under a good amount of inflation, mortgage or equivalently shorting bonds is good for your pocket.

    But don’t rush out and do exactly as the article described. In practice (or at this moment), generating wealth is not as easy as described. For one thing, there is one serious pitfall in this article. In case #2, the author did not account for the non-payment of mortgage or rent, which after compounding, would actually be quite a big sum of money. While in case #1, you need to pay rent which goes up along with inflation, in case #3, your mortgage payment is “supposedly” fixed and doesn’t go up. Between case #1 and case #3, case #1 has additional loss due to rent increase.

    To properly account for the extra positive cash flow in case #2 and make the right comparison with case #3, you must compare the annual return rate of your purchased asset through the proceeds from the mortgage money. If your mortgage payment is fixed at 6.5%, and buying gold or whatever other appreciating assets does not return more than 6.5% annualized before adjusting for inflation through the comparison period, then you would be better off paying off your mortgage instead. If you consider tax effect, and assume that gold or any other real asset returns 6.5% exactly, you are simply transfering the current tax obligation to the future capital gain tax obligation.

    In fact, if gold is returning about the same annualized rate in case #3 as the mortgage rate, you would actually get very similar return in case #2 and case #3.

    The key here is that the return rate of gold must exceed your mortgage interest rate to be worthwhile. Actually the same principle also applies to case #1. If stock market return exceeds mortgage interest rate, then investing in stock market would have made sense. The real problem in practice is to determine which asset class will return you the most, whether it is to invest in stock market (case #1), or to invest in your “own mortgage” (case #2), or to invest in gold (case #3). Obviously, we all know that with the exception of a fixed rate mortgage, you wouldn’t know for sure whether it is better to invest in stock market or in gold or in real estate for that matter. Besides, the return rate is not constant and changes with time.

    In conclusion, the article is ONLY illustrative of what you could do. But it may not work in practice. If you could identify beforehand which asset class would rise more, then you will gain wealth without a doubt.

    As I have said many times on this site that I am expecting a higher than usual inflation rate going forward. So if you think that the mortgage rate is quite close or even below the potential inflation rate, it would be a relatively safe/profitable leverage to take, since most assets will appreciate on the average closer to the rate of inflation.

    For the people who cannot invest their money prudently or if their tolerance of volatility is low, I would suggest paying down debt.

    Personally, I’m in between case #2 and case #3, and I do investing heavily in gold. Gold has out-returned most of other asset class so far, but past performance is no guarantee for future return.

    Posted in Investing | 2 Comments »

    New Roth conversion eligibility rule and solo-401(k)

    Posted by ML on 23rd March 2007

    One of the most exciting developments in terms of retirement savings for high incomer earners in last year’s Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA, signed by President Bush on May 17, 2006) was elimination of the Roth conversion eligibility limit after 2009. In addition, in 2010 only, the extra tax incurred for this conversion can be spread over two years. Currently, married joint filers can convert their traditional IRA into Roth only if their modified adjusted gross income (MAGI) is under $100,000. Somewhat perversely, this provision is billed as a means to increase revenue, since taxes will have to be paid for the traditional to Roth conversion (at the expense of future tax revenue — but that’s someone else’s problem).

    Today, joint/single filers with MAGI over $160,000/$110,000 are not eligible for Roth contribution. Phase-in starts at $150,000/$95,000 respectively. Non-deductible traditional IRA is pretty much the only IRA option for these people, assuming they are not self-employed. Many financial advisors are pointing out that the elimination of conversion eligibility limit creates a loophole where high income earners can simply contribute to a non-deductible IRA and immediately convert it into a Roth. The high income earner gets the Roth benefit without additional income tax liability. This plan works as advertised only if there is no other IRA with pre-tax contributions (traditional, SEP etc.). Since the IRS treats all non-Roth IRAs as a single pool of money, it’s impossible to single out the after-tax contribution for Roth conversion if there are other pre-tax contributions. [To calculate the actual income tax liability requires knowing the value of the IRAs and the basis in them. Some might still decide to do the Roth conversion even though they incur extra tax doing so.] However, all is not lost.

    It’s a curious fact that although 401(k) plans share many of the characteristics as traditional IRAs, they are not included in the pool of IRAs when considering the characteristics of the withdrawals/conversions. Thus some interesting possibilities present themselves.

    1. For those intending to take advantage of the new Roth conversion rule and changing jobs between now and 2010, the best thing to do with their 401(k) is to leave them with the old employer or roll-over to the new employer’s 401(k) instead of rolling over to a traditional IRA.
    2. For those self-employed, consider a solo-401(k) [aka self-employed 401(k)] instead of a SEP-IRA if there is no employee other than the spouse.
    3. More research needs to be done but the Fidelity solo-401(k) appears to accept roll-over from a traditional IRA. If that were true, one can simply roll-over all IRAs with pre-tax contributions and voila, the trick mentioned above works beautifully!

    In conclusion, those above the Roth eligibility limit and planning on doing the conversion should contribute to non-deductible IRAs now. Those having IRAs with pre-tax contributions should explore the possibility of rolling them into 401(k)s. By the way, the bar for establishing a solo-401(k) is not high. Check out these two articles at MyMoneyBlog (link 1, link 2) for more information. I have a sneaky suspicion that several PF bloggers would benefit from this financial maneuver.

    Disclaimer: I’m not a tax professional. Make sure you consult with a CPA/financial planner before making any decisions.

    Posted in Investing | 8 Comments »

    My Asset Allocation Strategy (Some Clarification)

    Posted by Frugal on 22nd March 2007

    In response to Rag2Riches & others’ recent questions,

    1. You said you liquidated 100% of your stock market holdings, yet you will gain more from long than short positions. Are you referring to your company stock, or are you still holding other stock?
    2. What do you mean you were caught unhedged? You mean you don’t have puts or short positions? Because your heavy allocation to PM seems to be a hedge.
    3. You have high net worth already, why not go with a more conservative asset allocation rather than shooting for high outperformance with concentrated (risky?) positions?

    First of all, from my net worth page (where you can see the daily history since last May) and 3/20/07 post, I have

    17.5% in home equity
    21% in my company holdings (stock options, shares, etc.)
    61% in my owned stocks+cash+etc.

    Within that 61% of stocks+cash, I have
    26% in cash (which can be calculated from 87832.96 / 333851.28, taken from 07-03-20 date on my net worth page).

    Within 61% * (1-26%)=45% for the rest, I have (from 3/20/07 post)
    57.5% in metals
    34.6% in energy
    7.9% in water, agriculture, consumer staples, etc.

    Here are some detailed answers to the above question, so that readers know exactly where I stand (in terms of my investment):

    1. By “general stock market” holdings, I meant things like SPY, QQQQ, DIA, or any large to small cap mutual funds. I bought some in last summer. I’ve pretty much liquidated 100% of any holdings related to general stock market.

    I don’t consider most of my metals+energy stocks as “general stocks” since they usually have less correlation to the general stock market.

    But the synchronization theme is still with us since last May. Currently, the correlation of all international markets, energy, and metals is still pretty high. Therefore, I said I would still benefit from my long positions in energy+metals.

    I am not considering any effects from my company holdings in the above statement (although I should definitely benefit more).

    2. All of my metals & energy positions were unhedged. They went down along with the stock market (and actually by twice the percentile amount). Synchronization still. I didn’t have significant shorts/puts against general stock market nor my positions in metals & energy.

    3. My investment would appear to be risky to anyone. But I balance them out through large holding of cash (26% * 61% = 16% of my current net worth) plus my home equity (17.5% of my net worth). All of those are cash or bonds (“paying interests” to myself) which is already some 33.5% of my total net worth. Home equity is obviously subjected to the house valuation, but I would prefer a cheaper housing so that I can upgrade.

    In any case, I have about two thirds (1-33.5%) of my net worth in “risky” investments, which supposedly should balance themselves out somewhat. They are

    45% of my net worth in mostly energy+metal stocks, and
    21% of my net worth in company holdings (high-tech) but the leveraged power of my company holdings is actually much bigger than my 45% unleveraged holdings in energy+metals (less than 2X however).

    I think by most measures, I am probably taking less risk than I should be taking, especially given my age.

    I’ve gone through some crash analysis of my own net worth, and I can sustain a 100% loss in my company holding (21% of my net worth), or 100% loss in my home equity (17.5% of my net worth), or 50% loss in my own energy+metal stocks (~22.5% of my net worth). All the above events, I will still have 80% of my net worth, assuming they don’t happen simultaneously.

    The bet is that energy+metal will negatively correlate to my high-tech company holdings and my home equity. In the case of falling home equity, it will only translate into an improvement of my life standard. So I don’t worry about that. Overall I think I should be in pretty good shape, with my asset allocation plan.

    At other times when I’m more bullish in my own investment, I would be utilizing more cash to hold more energy+metal stocks in order to counter-balance the combined total of my high-tech company holdings and home equity which are quite a big sum to hedge in leveraged terms.

    Obviously I believe in what I’m investing in energy and metals. But even more importantly than a potential high(??) performance, they also serve as a very good counter-balance against my high-tech company holdings (well, not all the time obviously, but at least that is the plan.)

    If I have liquidated my stock options, my asset allocation will most certainly look a lot different. At the minimum, I will increase my general stock market holdings from 0% to some significant percentage. Currently, I’m assuming that my company stock will positively correlate to the general stock market, and I don’t want to increase any more exposure to it. This assumption is an aggressive bet which is counter-balanced by my commodity investments.

    You can see how spectacularly my strategy failed from 05/09/06 to 06/13/06 (21.2% loss in 1 month), and 05/09/06 to 7/23/06 (28.4% loss in 2.5 months) timeframe in the history of my net worth, when my commodity stocks + my company stock went down together very hard. The biggest reason for such a big fall was that my company holdings were about 31% of my net worth on 05/09/06, and I almost lost all of that. But I’m willing to take the risk with the leverage afforded to me through my stock options for a couple of more years. In fact, it is with this leverage in my company stock options, such that I’m willing to allocate more to commodity investments. I have made up most of the lost grounds in my net worth through savings and my investments since 05/09/06 even when the value of my company holdings needs to be 50% higher to be on par with 05/09/06.

    This is probably the most detailed and up-to-dated account/analysis of my current net worth & my own asset allocation strategy.

    My strategy is definitely not for everyone, given my own special situation. If I calculate my metal holdings using a leveraged combined/controlling value of my home, stock options, etc. as 100%, the PM only comes out to be just 15% to 20%. This is more than 5% recommended by “textbooks”, but probably not an out-sized bet.

    Posted in My Portfolio | 1 Comment »

    Shorting, Holding, or Folding?

    Posted by Frugal on 21st March 2007

    Stock market is zooming after the Fed meeting. Looks like my expected market fall is going to be delayed. However, I still expect the market to fall later this year.

    Since I was caught unhedged this time, if the stock market goes back up, it will be good news for my portfolio. I still have a couple of outstanding short positions that I have not covered. But I don’t worry too much about them. I would gain a lot more from my long positions than losing money in shorts.

    In any case, I have liquidated almost 100% of my general stock market holdings, and have built up my cash position to 26% of my liquid portfolio. It is a lot of cash by any standards, but it is my way of keeping my sanity in this volatile market, since my regular income is relatively small compared to my portfolio.

    So let this Goldilock story continues. We will see how it will turn out. I guess Robert Kiyosaki is really bad at his timing. I remember a study done related to smart & dumb traders. The most reliable information among all traders is actually from the dumb traders because they ALWAYS do the wrong thing at the market turn. So if you simply do the opposite of the dumb traders, you will statistically gain over time, :) .

    Posted in My Portfolio | 3 Comments »

    Robert Kiyosaki, A Smart Investor?

    Posted by Frugal on 21st March 2007

    Making predictions is a tough business, but learn from this master of words, Robert Kiyosaki (RK), on making “accurate” predictions.

    What does this guy think of the recent stock market right now?

    When my book “Rich Dad’s Prophecy” was released in 2002, most financial newspapers and magazines trashed it because I discussed a looming stock market crash. Ironically, much of what I predicted in the book is coming true earlier than I expected.

    In fact, you can almost use RK as a pretty good contrarian indicator. Back in March of 2006, when I read RK recommending buying gold/silver, I really got a chill. I knew very well that he is not part of the smart money. And when the dumb money of the mass people come in, a significant top could be established. I didn’t follow my intuition, but rather I held out hoping for the PI date to come.

    Do you still remember what books were published in bookstore near 2000 stock market mania? It was ‘Dow 36000″ and the like. Well, RK published his bearish book in year 2002 (when stock market bottomed), and now he wants to take credit for his “prediction”??? Don’t you think that if he is such a smart investor, he should have been publishing “SPY 1500″ to help people buying stocks at the bottom rather than the other way around?

    I really wonder how much gold/silver RK is buying. I stand by my words, and I disclose my stake (3/20/07) by sectors here again (temporarily not available on my networth page, but I hope to make it available again as soon as possible on a daily basis):
    Metals 57.5%
    Energy 34.6%
    Misc. 7.9% (water, agriculture, consumer staples)
    Silver/Metals = 26%
    My portfolio above is 61.24% of my total net worth.

    For someone who never tells you what he is buying, and then tells you what he “did” with 20/20 hindsight, I would not take such “advice”. If you can really make some real money by reading RK’s books, I would be really surprised. No dates or concrete methods for any investing advice. Most of the things that he talks about are hard to achieve, making you to believe that “yeah, that’s why I’m not rich”.

    A prediction without a date or a timeframe is usually not very useful. At the minimum, I’m willing to be wrong and add some dates or timeframe for my own expectation about markets. I think rather than playing to be always “smart” like RK, it is more pragmatic for you as readers if I take the chance to be wrong, and be battered by all of your comments.

    Since RK has come out and said it again, I presume that by following contrarian thinking, stock market this year may not fall as hard. Unfortunately, I think his “glow” is waning, so this contrarian indicator is probably not as good as before.

    I do believe that what he describes in that prophecy book may come true with some chance, but most probably NOT this year. I have marked his own words in boldface. He said it’s coming true earlier than he expected, so the best interpretation is that the scenarios in his book should be unfolding right now. We will see whether he is right or I’m.

    Posted in Investing | 6 Comments »

    I had a big salary raise!

    Posted by Frugal on 20th March 2007

    Finally just now, I think my salary is closer (although probably still below) to the my market value. For so many YEARS, it simply felt no good when you are underpaid days in and days out. Until I complained about my technical rank last year, my company had done nothing. I was almost going to make an internal transfer. So besides the big raise, I also got a promotion in non-managerial technical rank, an event that I have been waiting for too long.

    To put this raise into perspective, I had a comparison point, an actual recent offer by my company to a new hire who is 3 years less experienced than I am, but had a 6.5% higher salary than mine (before the raise adjustment). Now my salary is somewhat higher than this new hire. If I assume a nominal annual raise of 3.5%, my base salary level is still about 3% less than what it should be for my level of experiences, not counting any credits from my above average performance at my job.

    For all the regular blog readers out there, I also wish that you are compensated handsomely or at least fairly.

    I have updated my net worth page to reflect my new option/share grants.

    Posted in My Portfolio | 8 Comments »