Two Must Do Saving Tips!

You may not want to clip coupons, or you may not go to discount stores. But at least, you should follow these two effortless saving tips that will save you big money in the long run:

  1. Earning interest from idle cash: Open an Emigrant Direct Saving account at 5.15%, or HSBC or Capital One accounts that consistently pays a higher interest rate.
  2. Earning cash while you spend: Get a Citi Dividend Platinum Select Card to get 5% cashback on your gas/drug/grocery purchases, and 1% cashback on all other purchases.

There may be other better banks or better cashback credit cards, but if you do the above, at least you have a very good start. How much money you can save in the long term? With #1, assuming that you have just an average balance of $1000 in the account, and let’s use the comparison of 5% in Emigrant Direct and 1% in Bank of America savings account (it’s probably lower), the difference in yield is 4%. I’m going to use 3% for the yield difference to be more conservative, since the money market account won’t always yield as high as 5%. Because of a consistent 3% higher interest rate, in one year, you can save $30 extra in interest money. For the next 40 years or so, you can get $1200 interest money. I’m using simple compounding because most likely you will spend those $30 right away every year. And that’s just for an average balance of $1000. If your average balance is higher, your extra savings will be higher. Now, tell me how much time does it take to open an online bank account? Yes, in about 30 minutes of one-time effort, you can probably earn $1200 in additional interest for every $1000 average balance. You just get paid at an hourly rate of $2400/hr. That’s a huge return on your time spent (using just $1000 average bank balance).

Now on the credit card, it’s an even better return (well, for people who spend more but save less). Monthly, let’s assume that your family needs to spend some $250 on gas, and $500 in grocery store, and another $750 in other expenses that you can charge on credit card. Using the Citibank card, you can get ($250 + $500) * 5% + $750 * 1% = $45 per month or $540 per year (by the way, Citibank card has an anual limit of $300 rebate, so you will need to apply for two cards to split this $540.) Now, multiply $540 by the next 40 years, and you will get $21600 in cash rebate in total, TAX-FREE by the way. Again, how much time does it take for you to apply credit cards? Half an hour or so, and you would have paid yourself at the rate of $43200/hr. Now, if that is not good use of your time, then I don’t really know where else you can earn $43200 per hour, tax-free. (Unfortunately, if you have some debt on your credit card, you may need to shop differently for a lower APY instead of getting cashback. Now you know why credit card debts are not good.)

Of course, the above scenarios assume that both the bank and the credit card continues their end of deal. As far as I can see, and from my personal experiences too, there seems to be no reason that they will change their way of doing business.

Please do yourself a favor. When you have time, go to the links and open those accounts. I’d rather see you get richer than big corporations getting filthy rich from scalping average people.

For more information, you can read the following posts on credit cards and banking:

  1. Why I would choose EmigrantDirect over others
  2. How I Bank
  3. Comparison of Cashback Credit Cards for other good deals on credit cards.

Portfolio Update: Bought Some Mutual Funds

I used some 20% of the cash in my 401K to buy some mutual funds, mostly large cap stocks (both value and growth).

S&P 500 is right at the resistance of 1290 – 1295, but I’m just going to get into this market first with plenty of cash left if it pulls back.

My networth page won’t be updated until tomorrow.

Good luck trading.

Personal Finance Carnival #63

This is the first time that I host PF carnival at 1stMillionAt33. Thanks to Flexo at Consumerism Commentary for giving me this chance to host PF carnival #63. If you’re first time here on my site, you can take a look at my SiteMap on the right column, or any categories that you like at the left column.

Before I start giving you the carnival, I just want to inform everyone that Sharon at The Frugal Duchess is starting her Friday Spotlight to take guest articles from everyone on her blog. Since she writes a weekly column in Miami Herald, had been a stringer for People Magazine, be sure to submit some quality article (on frugal living/finance) to her. Just maybe your article or blog may appear in the off-line world.

Okay, here are all of the 48 submissions for this week of PF carnival, categorized and listed by the submission order within each category. I added a short comment or summary for each submission for the benefit of readers.

RED entries had more votes than others. Voting results are closed now.

I also added a poll on the right column for anyone to vote. The number in front of the post always correspond to the number in the polling. Sorry that there is a little bit out-of-order numbering, for the sake of categorization. You’re allowed to vote multiple times on any number of articles that you like (and please do vote). I have given every article 1 vote as a host of this carnival, and I also added 1 additional vote for the articles that I like. Readers can use it as a reference for a guide to read the articles. Unfortunately, I couldn’t make the poll to be tampered-proof, without allowing multiple votes on different articles. Bloggers, you’re welcomed to add 1 vote to your own article, but if I see too many votes on the same article from the same IP address, I will block that IP for the future.

Also, just a word of caution, votes only serve as a guide, but not necessarily the best articles that you will like since everyone’s personal preferences are different. I will leave the poll there for 1 to 2 weeks, and then I will collect the results, and update this post with the yet-to-be determined top posts information. But if I detect that the poll result is likely to be tampered, with any one or two articles getting way too many votes, I will scratch all voting results.

Okay, here you go (enough of the polling. Not sure if it’s a stupid idea.):

Misc. Personal Finance

  1. By Mmm… life… : Get Rich Quick!. A commentary on the opposite effects of get-rich-quick.
  2. By Debt Free: The Three Strategies to Maximize Your Financial Success. The basics on how to achieve financial success.
  3. By Consumerism Commentary: Selling My Books on eBay: Probably Not Worth It. Interested in the Doctor. Who books? Ebay is sucking blood out of the sellers again.
  4. By Getting Out of Debt: Personal Finance: Making Difficult Decisions. Really tough choice made by this supermom for her vacation. I can’t imagine how I can be that brave to do the same thing and teach my kids.
  5. By Aridni: Financial bloggers losing focus. Less counting pennies, but more money-generating ideas.
  6. By My Money Forest: Basic Personal Finance Articles. A good collection of articles on how to handle your finance & how to invest.
  7. By My Financial Awareness: Feel Guilty about Your Finances? Good advices on taking responsibility for your finances, and separate it from guilt or love for that matter.
  8. By Roth & Company Tax Update: Bad Timing, Foot Fault Leads To Tax Debacle For Solv-Ex Exec. Lessons for stock gain tax planning. An example from an energy executive getting a margin call.
  9. By No Credit Needed Blog: 10 Steps For Personal Finance Organization. If you don’t have your personal finance scheme works out, check out this post.
  10. By No Credit Needed Podcast: No Credit Needed Podcast Episode 23. Episode #23….Sorry, I haven’t heard any Podcast before. You’d better listen to it yourself.
  11. By No Credit Needed Network: Highlights From This Week’s NCN Network Members. A highlight from the best PF posts in NCN network.

Saving Tips

  1. By Leahey.org: How I Saved Hundreds Per Month (Part I). Lots of money saving tips for you.
  2. By The MotherLoad: Aldi Supermarket: Price Sheets & Store Information. A truly comprehensive prices for anyone too lazy to go to the store.
  3. By Get Rich Slowly: A College Education for $10 a Course. Good tips on how you can learn some college-level courses for cheap. JD, you’re making me to really miss school. To all the college and school kids, enjoy the best learning time while you can.
  4. By FIREFinance – Financial Independence Retire Early: Research – From Junk to Joy! A super-easy way to trade your junk electronics for cash.
  5. By Frugal Duchess: 10 Luxe-for- Less Vacation Tips. Great tips for any end-of-summer travelling tips.

Career/Job

  1. By Young and Broke: How to make it. Great advices for anyone who are starting out on their jobs.
  2. By Free Money Finance: Which is More Important — A High Starting Salary or Higher Average Salary Increases? Math doesn’t lie. Check out the numbers for yourself.
  3. By It’s Just Money: Ways your personal life can hurt your professional life, or Don’t Be Tom Cruise. Advices on how to stay out of trouble on your job.
  4. By Entrepreneur’s Journey: Pricing Points, Perceived Value And How To Make More Money Per Sale. A personal and interesting experience on how to do pricing for his online editorial business.

Retirement

  1. By Hill’s Personal Finance: Pension Protection Act of 2006. A really good summary on the latest changes in pension.
  2. By Accumulating Money: Affluent Baby Boomers Ready To Retire With No Retirement Plan. Very good action plan for anyone who has no retirement plan yet.
  3. By Simran Gill: Personal Finance and Simulation Modelling. Using Monte Carlo simulation to project a future networth.
  4. By Investing Guide: Roth 401(k) status now permanent. Check out the Roth 401k benefits compared to regular IRA.

Insurance

  1. By Blueprint for Financial Prosperity: Effects of Changing Personal Insurance Details on Premiums. Tips on how different parameters will change your premium on auto insurance.
  2. By InsureBlog: $680,000 and Counting. A sad story, but a BIG warning for anyone who doesn’t have medical insurance.
  3. By Chrees’ World: Is your home underinsured? A good list of questions to go through to make sure you’re not under-insured.

Budgeting

  1. By Getting Finances Done: How to create a zero based budget. A very detailed guide on how to create your budget.
  2. By Taking Control Over Money: What Do You Spend Your Money On? Good advices on examining spending/expenses and coming up with a budget. You can download Quicken categories to help making your budget.

Consumption-related

  1. By Frugal Wisdom from Wenchypoo’s Warehouse: The “Con” in Lexicon. Discussion on marketing words for your emotion.
  2. By Free the Drones PF Blog: Dysfunctional Financial Personality #4 – The Emotional Spender. Tips on how to cope as an emotional spender.
  3. By Frugal Wisdom from Wenchypoo’s Warehouse: My Big Fat Inanimate Object. Discussion on America’s consumerism on homes.
  4. By Money and Values: Locally-Owned Businesses Vs. Corporate Chains. I fully agreed with Penny Nickel. I try to do the same thing to let my dollars stay locally.
  5. By Mapgirl’s Fiscal Challenge: Patient Advocacy: Are you getting your money’s worth at the doctor’s office? Tips on how to get your money worth when seeing the doctors.
  6. By FiveCentsNickel.com: Dish Network Customer Service Still Sucks. If you are thinking of getting Dish-network service, definitely read this article.
  7. By AmericanInventorSpot.com: War of the Off Brand Sodas. A cool article on different off-brand sodas at many stores.

Real Estate

  1. By Mad Kane’s Humor Blog: Hapless Home Buyer’s Guide. A step-by-step home buying guide with humor.
  2. By The Finance Journey: Lessons Learned From Selling For Sale By Owner. Learn from his mistakes on FSBO.
  3. By Bouncing Back: The Greatest Real Estate Tool Ever (Part 1). A tool guide on a real estate website.
  4. By “D”igital Breakfast: Foreclosure Investing – A Look At Essex County. Foreclosure investing in action. Lots of notices.
  5. By Queercents: Maintaining a Lifestyle of Conformity. A commentary on master-planned community.
  6. By The Mortgage Reports Blog: Competing for sales in the Chicago condo market. A good local study on the under/cross-currents in rental, resale and new home markets.

Investing

  1. By Stock Market Beat: Semiconductor Sucker’s Rally. Maybe you’re right, but I kind of like to keep my head buried in the sands.
  2. By Start an Online Business – Tips and Advice: Savings Vs. Investing. Good advices on when to save and when to invest.
  3. By The Dividend Guy Blog: Banks as Investments – Works for Me. Investing in canadian banks should be okay due to natural resource development, in my personal opinion.
  4. By No Limits Ladies: Shopping For Stocks. A comparison between buying stocks & other goodies.
  5. By Financial Options: The Week Ahead: Your Financial Roadmap for August 28 to September 1, 2006. Economic data releases and earning reports in next week.
  6. By The Real Returns: Thoughts About Earnings. A lot of thoughts from an investor looking forward.

Last submissions after I published the carnival prematurely (SORRY)

  1. By Frugal Duchess: 10 Luxe-for- Less Vacation Tips. Great tips for any end-of-summer travelling tips.
  2. By My Financial Awareness: Feel Guilty about Your Finances? Good advices on taking responsibility for your finances, and separate it from guilt or love for that matter.
  3. By Roth & Company Tax Update: Bad Timing, Foot Fault Leads To Tax Debacle For Solv-Ex Exec. Lessons for stock gain tax planning. An example from an energy executive getting a margin call.
  4. By No Credit Needed Blog: 10 Steps For Personal Finance Organization. If you don’t have your personal finance scheme works out, check out this post.
  5. By No Credit Needed Podcast: No Credit Needed Podcast Episode 23. Episode #23….Sorry, I haven’t heard any Podcast before. You’d better listen to it yourself.
  6. By No Credit Needed Network: Highlights From This Week’s NCN Network Members. A highlight from the best PF posts in NCN network.
  7. By FiveCentsNickel.com: Dish Network Customer Service Still Sucks. If you are thinking of getting Dish-network service, definitely read this article.
  8. By AmericanInventorSpot.com: War of the Off Brand Sodas. A cool article on different off-brand sodas at many stores.
  9. By The Mortgage Reports Blog: Competing for sales in the Chicago condo market. A good local study on the under/cross-currents in rental, resale and new home markets.
  10. By Investing Guide: Roth 401(k) status now permanent. Check out the Roth 401k benefits compared to regular IRA.
  11. By Entrepreneur’s Journey: Pricing Points, Perceived Value And How To Make More Money Per Sale. A personal and interesting experience on how to do pricing for his online editorial business.

My apology to the late posts but made the deadline. I listed your posts twice to make up your lost 10 hours in the spotlight.

Hope you have enjoyed reading these articles. Next week PF carnival will be hosted at Aridni, another great PF blog.

Reasons For Investing In Gold And Silver Market

Gold & silver, or more often referred as precious metals (PM) in general, are one kind of commodity. Investing in pure physical commodity usually cannot be done as a long term investment. A commodity has no other value besides its intrinsic value. It will never increase in quantity nor quality as an investment or product, unlike stock, ownership in a company where the corporate earnings can potentially increase with time. So why am I investing in such stupid and “boring” investments?

My primary reason for investing in precious metal & its associated mining stocks is for the inflation protection from fiat currency expansion and its relative undervalue. Yes, gold is undervalued even at today’s price of about $630 per troy ounce. On an inflation-adjusted basis, gold needs to exceed $2090 in 2006 dollar to overcome its 1980 peak.
Comparing to price of crude oil, the price of gold is again undervalued relatively speaking. Oil has almost tripled while the price of gold only doubled since the recent low. Especially with a potential Peak Oil in the global oil production, when oil rises, gold inevitably will rise together.

Comparing to Dow Jones, the cycle of paper stocks seems to be over while the cycle of tangibles like gold has begun. In fact, if you reference to the chart 13 on pg.18 of “The Return of the Bear” by Martin Pring, the well-known technical analyst, you can see that the trend line of S&P 500 over gold has been solidly broken. No matter how you parse it, either gold goes up or stocks go down.

You can read more details on the arguments for investing in gold in this gold-eagle.com article by Eric Hommelberg. It has an excellent summary for investing in gold.

Fundamentals in the Coming Years

With all the huge US budget and trade deficits, how can the US government still wage wars in Iraq, while promising more drug benefits to seniors? With all the entitlement programs that need to be paid, the least painful resolution for US government is to print money by inflating the monetary supply. While the benefits don’t get cancelled, they won’t get the promised matching increase with inflation either. By essentially diluting the value of $US, the government can also dilute the real value of debts that it needs to repay. Since US consumers are also heavily in debt, devaluation of $US can shift the majority of loss to foreign holders of $US and US bonds, albeit creating more inflation due to the rise of price in the import goods. Such US currency policy, gradual devaluation with empty talk of strong $US currency, is indeed the best for US. It keeps both the US as the debtor and foreign creditors afloat temporarily, so that US can keep its spending spree by borrowing global savings. Creditors in the meantime will not face a sudden huge loss on its bond portfolio.
The US debt overhang is definitely bullish for gold and fortells that inflation will not go away anytime soon.

A Technical Picture

Some people claim that precious metals have made its top in the recent bubble run, and it should be downhill from now on. I disagree strongly. Although the latest run up in PM is quite parabolic (one of the characteristic for financial bubbles), based on the percentage ownership of all market participants, I believe that the bubble has barely begun yet if there is one. At the height of a bubble, not only the news should be making headlines, but also mass of investors should flock and chase right into the top. However, that is definitely not the case. Instead, precious metals have corrected substantially back to the 200 days of moving average (click to see chart), and again is reasserting its bullish trend. While it is possible that gold may retouch the 200 days moving average line again later at the four year stock market cycle near September, the relative strength in precious metal market compared to the general market is simply undeniable (see chart here). I expect that any rally, especially due to a pause in the interest rate hike by Federal Reserve, will be accompanied by a stronger showing from PM market.

The Case for Silver

Many may argue that silver is not a monetary metal, but rather an industrial metal. While they may have a valid point, silver nevertheless tracks the price of gold somehow. What’s really amazing about silver is that it has been in production deficit for 60+ years, with an accumulated defict of some 10 billion ounces. The price has not increased but instead has been falling for the last 20 years. A production deficit requires a drawdown in inventory. While some silver usages do get recycled, this sustained deficit is still quite big by any measures. By the way, some people challenge the validity of the silver deficit (for example, Zurbuchen’s article). While I dare not to say how big the silver deficit is exactly, the current gold to silver ratio at about 55 is most likely out-of-lined from the historical average of 31. This ratio is expected to decline in favor of silver as the precious metal bull market continues to unfold.
According to Theodore Buttler at www.silver-investor.com, the silver naked shorts at COMEX have not covered their 100+ million ounces while the market seems to have bottomed. Physical deliveries of silvers are facing delays of months, showing strain of supply. We will see whether the current situation unfolds as a supply crisis going forward.

My Own Strategy

Majority of my precious metal investment is in mining company stocks instead of physical gold & silver bullions. I invest in them for additional leverage, explained in my post on Intro to Investing in Natural Resources. And obviously, with leverage, it also comes with additional risk beyond physical bullions. To learn how to invest in gold & silver, you can check out my post on Intro to Investing in Precious & Base Metals.

Some Counter Arguments

No article will be complete without examining some opposing arguments. Here are the two best sources for counter arguments for investing in gold that I have found so far. While both are cautiously bullish on the commodity markets, neither seemed to subscribe to the concepts of Peak Oil or Commodity Super-cycle which are widely believed by commodity bulls. Both are extremely well articulated.

I have not finished the above book, but it tries to dispel hypes in the commodity investing. I highly recommend anyone to take a look and understand what are the hypes and what are the truths.
The other source is Energy Mania and Actuarially-Driven Investors & Financial Fads by Bob Hoye at www.institutionaladvisors.com. His last call to get out of precious metal market was right on the money, and made his arguments even more convincing. He doesn’t subscribe to Peak Oil in his Energy Mania article. However, he is definitely a long term commodity bull from his interview and from his own articles.

More Information

Here are a couple of articles from the mainstream media that explains why you may want to own gold:

  1. From CNN: Hedging a decline in $US using gold.
  2. From USA Today: How to hedge against hyperinflation using gold.

P.S. I want to thank Eric Hommelberg at www.golddrivers.com for making all the figures available for this article. I myself is a subscriber to his golddrivers newsletter, and I can attest to the fact that a couple of his recommendations that have truly hit the jackpot (10X return). The volatility can be extreme (+1000% to -90%) for junior mining companies if bought at the wrong time. With the potential high returns, it is always accompanied with high risks. I will not recommended investing in junior minings for any beginning investors.

 

Why Stock Markets Crash?

It has been a while that I haven’t done a book review. I want to review this book to lay the foundation for my future discussions on several important topics. This post is a bit mathematical, and if you are not into it, you can skip the paragraphs forward to the RED sentence, starting after the equations. The post is less of a review, but more of a discussion on the results from the book.

Didier Sornette is a UCLA (University of California at Los Angeles) geophysics professor. For him to write such a book with his arcane mathematical model is almost outright weird. Such is the inter-disciplinary nature in the advanced studies of scientific frontier. The scientific frontier here is essentially the studies related to complex systems, not an informative name but descriptive nevertheless. Mathematicians have not been able to sort out many of the complex systems in nature. The mathematical study of complex systems is called chaos theory. Here is a pointer to the introduction of chaos theory. Many of nonlinear dynamic complex systems have tremendous amount of random inputs and numerous known or unknown rules, and yet exhibiting some simple order or behavior. Some systems has very few simple rules, and yet exhibiting much more complex results. One of the better known studies in chaos theory is Fractals. Within the complex systems, sometimes there exists one or many strange attractors. I can’t find any good webpages on strange attractors. Here is from wikipedia. Essentially, the attractor is (one of) the convergence of the most initial states evolved through time. There are many books on Chaos Theory if you’re interested. Lots of math involved, but extremely interesting. In any case, let me regress to this particular study of the complex system: Stock Market.

Through Sornette’s study on predicting earthquake and phase changes (from liquid to solid, etc), he applied his knowledge to this critical phenomenon of a stock market crash event. Here, “critical” carries more of the mathematical meaning of having some orders of derivative undefined (usually the 1st order, which is the slope of the curve) or discontinous. After such critical event, things no longer behave the same way. You can pretty much concatenate a different function after that point. By observing the information network among traders which gives rise to the inherent fractal nature in the stock market price, Sornette was able to come up with a simple model for the behaviors of financial bubbles (equation 18, pg.335), where P(T) is the price of the financial product in time=T:

log( P(T) ) = A + B ((Tc – T)^m) (1 + C cos(w log((Tc-T) + beta) )) for bubbles, and

log( P(T) ) = A + B ((T – Tc)^m) (1 + C cos(w log((T-Tc) + beta) )) for anti-bubbles or deflation of the bubble.

where A, B, C, m, beta, and Tc are modelling constants. In the special case of C=0, no price oscillation, the equation simplifies to

log( P(T) ) = A + B ((Tc – T)^m) for bubbles

For the following discussion, I will only use the simplified equation. Obviously, for the swing traders, oscillation in the price is extremely important to identify the local peak and valley in the prices for sell & buy points.

Noting from the boldfaced equation, Tc is the Crash Time. At T=Tc, the value of 0^m becomes undefined. If you take the derivative respect to T for both sides, you get

d (P(T)) / dP = 1 / P(T) = – B m (Tc – T)^(m-1) * (dT / dP) or

dP / P(T) = – B m (Tc – T)^(m-1) dT or

dP / dT = -B m (Tc – T)^(m-1) * P(T) or

dP / dT = b / ((Tc – T)^n) * P(T),

where both b and n are positive, T < Tc, for a bubble

Essentially, this is a super-exponential function. An exponential function has its increase in price proportional to the price (dP/dT is proportional to P(T) ). A super-exponential function increases even faster than exponential function. As time increases towards Tc, the rate of increase or dP/dT increases even faster. The term that is multiplied to P(T) races towards infinity as T approaches Tc. For obvious reason, no physical processes can have a rate of increase infinitely large. At such rate of increase, the price P(T) is bound to be busted.

Let’s plug in some numbers into the dP/dT equation. Assuming that b=1, and n=2, when Tc-T =1, dP/dT = P(T). When Tc-T=0.5, closer to crash point, dP/dT=4P(T), or dP=4P(T)dT. When Tc-T=0.25, even closer to crash point, dP=16P(T)dT. Putting into discrete terms, the time it takes for the price to double (again and again) exponentially shrinks shorter, or can be expressed as

dP / P(T) = b / ((Tc – T)^n) * dT

Alright, I’m very sorry if I have lost all of you. Just remember this: a Bubble-like behavior is such that the time it takes for the price to double (again and again) exponentially shrinks shorter. By the way, it doesn’t need to do a double to qualify. You can substitute double by any percentage amount of increase, more or less, as long as the time to achieve that multiple shrinks exponentially. In some way, a bubble closely resembles a money-making pyramid scheme. In a pyramid scheme, the late comers funnels their money to the early comers. Since the growth of the pyramid is exponential, that is the growth rate is porportional to the current size of the participants, very soon the pyramid runs out of new participants, stops growing and is unable to bring money to the late participants.

In the book, Sornette is not that crazy yet to ask readers to go through all of these derivations. The only equation that you will find are the very first 2 or 3 equations. The rest is my contribution (or dis-contribution for more confusion). Now let’s go back and answer this question of Why Stock Market Crash. In the evolution of the bubble, as described by the so-called log-periodic power law equation, the bubble experiences an unsustainable exponential growth. The bubble may collapse earlier due to a help from external factors or events, due to its inherent instability going towards the crashing peak. However, bubble is destined to collapse because of its own weight. Nothing in nature can have a growth rate reaching infinity as dictated by the equation. And nothing can grow exponentially indefinitely when the resource or money to participate in the market is finite. Actually, another term in the technical analysis of stocks is that the price has gone parabolic. I believe parabolic, a 2nd order function, is simply used as an approximation to this super-exponential model. The key observation again is that price increases faster even with less time. Using NASDAQ 2000 bubble as an example, the price for NASDAQ took more than 3 years to double to about 2500, and then it only took about 6 months for another double to complete. Such growth is indicative of the existence of a bubble.

So don’t blame anyone on any stock market crash. What goes up must come down. That is simply the law of mathematics and physics. That’s the way it works. It is so much better to have a steady growth than an unsustainable growth. However, bubbles are repeated throughout the history, and it is probably inherent in the human nature of greed and fear in the fight of grabbing ever increasing returns.

Want more predictions from this book. In fact, I will be posting more on the unsustainable human population growth and its derived consequences. In the last chapter of the book, Sornette has applied his model to various other sets of data, and based on the data fitting, the growth era of human may stop at around 2050. What does that mean for the human race as a whole? Read my future posts. By the way, his prediction on USA real estate market bubble is set to peak around summer 2006. I guess that is turning out to be quite close so far. Some may date the peak of this bubble at November 2005. It depends. I personally believe that the current cycle of real estate has peaked already.

My Investing Advice

With $1000, you can start investing in many mutual funds. Here is what I would suggest:

  1. Invest in a low expense ratio mutual fund. Find something that has a good 5 year track record, especially through the 2002 bear years. Use Yahoo’s mutual fund screener for your research.
  2. If you have more than $3000, one of the better “mutual fund” that I can recommend is BRK/B, the B share of Berkshire Hathaway, the company of Warren Buffett. You can only buy 1 share since each share is about $3000. I did a comparison of his company to S&P 500, and his record is simply super-outstanding. Berkshire Hathaway holds many valuable and diverse types of business. Therefore, I am willing to put it into the category of “mutual fund”. Besides, I believe BRK will outperform S&P 500 going forward.
  3. Buy some 1-ounce silver Eagle coins to just preserve your buying power.

With this amount of money, I would NOT invest in individual stocks or sector funds, both are too risky for a small amount of investable assets.

P.S. I added comments on Warren Buffett’s old age. Be sure to check it out.

Definition Of Success

Most people associated success as having achieved fame or recognition in a respected field and/or just being able to earn/accumulate a large sum of money and assets. However, whether fame or money, it seems to be too narrowedly focused and mundane. Is life just about money & fame?

During the years of my biggest personal failure, I was forced to seek the basic definition of Sucess for myself amidst my depression. If you have never experienced a depression, you should feel lucky. If you did, I hope you have recovered from it fully. Depression is a state of mind and a transient state of your life for sure. While you’re in it, it is emotionally very taxing, and others around you may not understand the cause nor your reactions to it. The cause of depression is a LOSS and a significant and important loss to you. What is significant and important depends on the persons and the stages in life. It can be a loved one, or a job loss, or academically and career-related cause in my case.

When I “crawled” through my life on a day by day basis in my depression, I came up with a definition of success: Whatever I have done today, I have tried my very best; I know that after years looking back, I could still tell myself without regrets that I just couldn’t have done better on that particular day. It was simple as that. Success to me was and is having given a best effort without regards to the results. After about 10 years of academic endeavor, I was facing a potential delay in my Master degree or non-degree for that matter, plus a nil job prospect simply because I chose a major that I thought I could contribute scientifically more, instead of a major that I could make more money and find jobs more easily. While emotionally depressed, I stopped looking at the fruits of my efforts. Mentally I told myself that success was giving the best effort everyday.

Recovered from my depth of depression, I have become a much stronger person. There is some truth in “what cannot kill you makes you stronger” (but I certainly would always opt for not going through such pain or emotional hurt of “near-death” experience). And I’m glad that I found a personal definition of success. Everyday I wake up, I thank God for another day, and I will not waste my life for this given day. I will give my best efforts in whatever things that I choose to do, to make it a worthwhile and successful day.

P.S. In case you ask what happened to my academic pursuit, I ended up going for another Master degree. If you have read my definition of being lucky, there are three factors to help you get lucky. I have tried the first two using my best efforts. So at the end, I went for choice #3: changing the target of my pursuit.

Intro: Bond Investing Fundamentals

Before you invest in bonds, you should learn some fundamentals related to bonds:

  1. Yield & its relation to Price:This is one of the most fundamental thing that novice investors can get confused. When the (effective) yield of a bond or bond mutual fund goes higher, the actual price goes lower; when the yield goes lower, the price goes higher. Because the paid out yields are already determined at the time of the issue of the bonds, the interest pay-outs are fixed by the term of the issue, while the actual price of the bonds can fluctuate. So when the price of these original bonds go down, its effective yields actually go up (because you pay less money for that fixed interest payout). And vice versa, when the price of bonds go up, the interest rates go down.Once you understand this concept (you may need to repeat it in your head a couple of times higher yields = lower prices and lower yields = higher prices, or at least that’s what I did), you need to understand the next step about bond investing: you want to buy low and sell high (yeah, of course) by investing your money into bonds when the interest yields will be going DOWN so that by the time when the interest yields stop going down, you can sell your bonds AT a HIGH point. Got that? Let me give you a real example:

    Let’s say you bought your bond (or bond mutual fund) when it is yielding at 5%. So if you put $100, you should get $5 back as interest every year.
    Now, because of Federal Reserve’s interest rate policy, the newly issued bonds that are coming out are yielding at 2.5% instead. Now, if a new guy who invest $100, they will only get $2.5 as interest. Let’s assume that your bond has exactly the same quality/maturity as before (actually the time to maturity will change), it should be yielding at 2.5% also. What does that mean? Now because you are still getting $5 interest on your original investment of $100, at the prevailing interest rate of 2.5%, your bond will actually be valued at $200 because 2.5% of $200 is $5 interest.

    Wow!! You just doubled your money. Isn’t that great? Better than stocks, huh? Now imagine that if interest rate goes from 2.5% to 5%, you would have lost 50% of your money in case you decide to sell. Despite the fact that interest rates change very slowly, bond investing is NOT without risk. This risk of losing money in your principal can be totally eliminated when you invest in actual bonds, instead of bond mutual funds (see the how-to post in this series) but it will take TIME.

  2. Time to Maturity:This determines when the principal of bonds will be repaid. The longer to the maturity it is, the higher interest yield you should be compensated (with the assumption that the yield curve is not inverted, see below).
  3. Yield Curve:When you plot the yields of short term bonds to the long term bonds against their time to maturity, it’s called the yield curve (click to see Wikipedia’s explanation). The yield curve is one of the most important tools for macro-economic analysis. When the yield curve is inverted (the long term bonds have less yield than short term bonds), it almost always indicates an economic recession in the near horizon. I don’t have the exact numbers, but I think it’s prediction power is higher than 90%, extremely high for any economic theories. Here is an article from FinancialSense that studies the yield curve and recession. Just pause and think that why in the world will someone invest in 30-year bonds for less yields than 10-year or even 1-year bond for that matter? The only plausible reason is that the shorter term bonds are too good to be true and can only last for 1 year or 10 year, or whatever terms for that particular bond. Well, of course, all the yields are true yields (instead of too good to be true), except that they only last as long as their term. In such cases, often it is caused by central banks to control the economic growth to a more sustainable rate.
  4. Credit rating:The best ratings of AAA are for US treasury bonds, or GSE (including Fannie Mae and Freddie Mac) bonds. The biggest corporate companies such as GE have pretty good credit ratings too. Then there is municipal bonds that may or may not have good credit ratings. Here is the credit ratings from Moody’s site. S&P also has its set of credit ratings (which you need to register & login to see).
  5. Is the interest taxable, and how is it taxed?Municipal bonds are usually both state tax-free, and federal tax-free. US treasury bonds are only state tax-free. If you don’t have any state taxes to pay, this tax benefit does not matter to you. Since you still need to pay federal taxes on bonds, the exists a bond called series EE saving bond which allows you to pay taxes on all the interests only at the end of redeeming the bond. Some people like to use this to their tax advantage when buying EE saving bonds for their child who has a lower tax bracket, and won’t need to pay kiddie tax after age of 14.
  6. Is it callable?Callable bonds allow the issuer of the bonds to repay the debt before maturity. This kind of bond, the issuers may give you a better up-front interest rate, but once the issuers find a cheaper way to refinance their debt, they will do so, and immediately pay you off on the bonds that you bought. Therefore, the expected length to maturity can be much shorter in reality. Do NOT price such bonds at their time to maturity with the assumption that the bonds will not be repaid earlier.

Here are all the posts in the same bond investing series:

  1. Intro to Investing in Bonds: Fundamentals
  2. Intro to Investing in Bonds: How-to
  3. Intro to Investing in Bonds: Risk Factors
  4. Reasons for (Not) Investing in Bonds

Do You Carpool?

I just started carpooling with another work colleague a few months ago. I drive on Monday/Wednesday, while my partner drives on Tuesday/Thursday. Yeah, there is no rules in the book that says 1stMillionAt?? cannot carpool. Besides splitting the cost of gas money, there are a few other advantages & disadvantages from my own experience:

    1. Advantages:

    2. Not only car-related expenses (besides insurance) are cut in half or whatever factor based on the number of people doing carpool, the rush hour stress is cut in half too. I never feel so good about not needing to take the driving wheel, and just take a quick nap.
    3. Toll road cost can be more reasonable if there is any.
    4. You can drive the in the carpool lane. Save a lot of time during traffics hour.
    5. Tell your boss that your carpool partner is leaving, and he can understand to let you go.
    6. A much regular work schedule, instead endless working hours.

Disadvantages:

  1. If you need to go somewhere else during lunch break, you cannot, unless you are the driver that day.
  2. For family emergency, you may need to come up with some extraordinary arrangement.
  3. A little time overhead & inconvenience is required to meet to leave for work and come back home.
  4. That’s how I caught my cold this week, from my carpool partner. Next time I will stop carpooling when either of us get sick.