“Obadobadope” Complete Blog Archive

The Personal Finance Blog Obadobadope went offline in 2010. It’s a treasure trove of unique thinking about investing, capitalism and consumption.

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Blog Archive Contents

Ownership 1: A line in the sand

Territory is an ancient idea, older than humans, maybe older than all animals. It is an area where an organism lays claim to the available life energy and resources. Imagine a plant that battles for available sunlight, blocking out competitors, and claiming a spot in the forest. Imagine a small animal defending its right to live in a particular tree. Organisms need territory to survive and reproduce : they are calling dibs on the food and habitat in an area, and telling everything else to go find another spot to live.

A balance exists between territories of different types of organisms. For example, the plants are fighting for available sunlight and ground space. Meanwhile small animals may be competing for available trees to live in and fruit to eat. Larger animals’ territories may be whole areas of the forest where they have hunting privileges. You get the idea; an organism’s territory can only be the resources that it can use. And so many organisms may claim the exact same physical area, but their territories are different subdivisions of the life energy system in that area.

What is territory for modern humans? Do you have any territory?

Ownership 2: One big farm

About 10,000 years ago some people created the first farm : and since then the practice has grown worldwide. Humans learned to manipulate the life energy systems so that more energy was in available and usable form. For plants this meant displacing non-useful plants and creating an area to grow useful plants. Then growing the plants, feeding them with fertilizer, defending them from damage, and guarding them from others wishing to eat or harvest them. For animals this meant constantly herding them or outright imprisoning them, feeding them, defending them, and guarding them from other predators.

This is a very strange relationship. It’s something between a predator/prey and a symbiotic relationship. The farmer gives up the effort of manipulating the energy system in exchange for some easy food. The farmed organisms give up their freedom in exchange for free food and free defense. And another key note is that the farmed have no defense against this strategy, they do not enter freely into the relationship. It just happens to them, and they live out their lives the only way that they know how under the circumstances. It is this inability to adapt to the situation that the farmer is betting on when they use their energy to manipulate the energy system.

Now, as noted above, farming has become common practice for all of humanity, and there are very few humans left that live without manipulating the life energy systems : and the few that are left are quickly dwindling away. That’s just the way it is. Over the last 10,000 years the world has become more and more, one giant farm. The making of this farm has displaced many natural ecosystems as humans have slowly but steadily harvested more and more and more of the available life energy on Earth. It is no coincidence that the Holocene extinction event occurred over the same period of time.

On this one big farm, there are workers and owners. I’m a worker, you probably are too. That’s because between 99% and 99.9% of people worldwide are workers. Although nearly all of humanity benefits from the farming of the rest of life, the 1% that are owners receive more than an equal share of benefits. Much of this blog is going to be about how to get into that 1% of owners, and also about how to hopefully increase that percentage so that more people don’t have to work so much.

I met a traveler this weekend

It was good to meet an actual person out there living a freer life, just to add some weight to the dream that there is another way. From what I piece together of his story, he didn’t fall for the work camp trap, and instead set out as a hitch-hiker sometime after finishing high school. Worked a few odd jobs here and there : but mostly got by on good will. He helped others and in turn received help, much like ancient societies must have functioned before money existed. He said he was broke, and longed for a place to call home base. While I was sitting with him he happily gave away 2 dollars, what must have been a significant amount to him, to a couple men who asked for money to buy some vodka while they were fishing nearby. He didn’t pay rent, and he said that hitchhiking and traveling were the greatest things he ever did for his soul, despite having peaks and valleys. He was willing to talk to anyone about anything, and was incredibly open and honest, and had a good sense of humor. In short : one of the only sane people I’ve ever met, even though I spent only a couple hours with him.

His message for me was simple: you don’t need to save a lot of money to go. Just go, get out, leave the work camp. Be willing to help people and do a LITTLE work here and there to pay your dues to the world. Don’t sell your soul for 10 times more money than you need. Serendipity will shine on your way.

Later that day I met another traveler. He stopped to tell me that the lake we were looking at reminded him of Jamaica. That life is always changing and the lake reminds us that our minds are big and open instead of small and enclosed. It is hard to remember that without a good lake to look at. He had been to 21 countries and said that when he was young and living in East Africa he thought that white people were lazy. But after living in America for 5 years he said that he now thought we work insanely hard. We do work hard. We have been trained to work from such a young age that it barely even hurts us to give up 9 straight hours a day. Only the strong survive here, he said.

Ownership 3: Territory wars

After the agricultural revolution, humans were able to work together in larger teams to claim larger territories. This is because team size is limited by the available life resources on the team’s territory. When I refer to teams, I’m talking about families, tribes, clans, villages, cities, nations, etc. Any group of humans working together, combining and specializing in their productivity. Before farming, a team could only support as many members as there were animals or fruit to eat in the nearby walkable area. I imagine this team size was anywhere from 1 to 1000 for almost all of human history. If the team size grew above the area’s capacity, some member’s basic needs would be going unsatisfied, and the team would break up.

After farming and concentrated food production, team size became virtually unlimited. Now a given area could support many more team members because of redirecting the life energy systems for that area toward human needs. And also if they team grew too large for an area, they could simply take over a nearby area and add to their territory to gain new farm land and support the extra team members.

Now, taking over new territory isn’t easy, but the very fact that this strategy was available has lead to the steady growth of team size from the previously stated 1-1000 members pre-AgRev all the way up to our modern day super nations and indeed now even international alliances. This happened slowly. First small individual farms started popping up. Then they teamed up into villages. Then small cities. Then city-states in which many large cities claimed control over the surrounding farmland and territory and possibly nearby smaller cities. Then eventually nations, all the way up to international unions, monetary funds, world banks, and united nations of today. In my personal prediction of the future, I don’t believe that we will move directly from the nation stage to world government, but that there are likely to be continental alliances for a while, and ultimately it will rest at a stage of 2 teams for a long period.

The reason for this team size growth is that it is an evolutionarily stable strategy, in game theory terms. Meaning that if your team’s size wasn’t growing, then your team was destined to eventually be taken over by a team who was growing. The age of empires. Thus, in order to not get taken over, any surviving team has had to grow sufficiently to be able to defend itself from the expanding teams.

This idea of team size growth is a very important topic when discussing freedom. Before AgRev nearly all of humanity was free. Either they were free, or they died trying. When I say they were free, I mean each human had their own territory where they did whatever they wanted, or as I said, died trying to defend that right, or gain that right. Now after AgRev, huge amounts of people fit into single territories. Think of the United States for example. We have about 300M people living in one territory. All 300M of us work together to not get taken over, but not all of us are free. Not getting taken over is not equivalent to freedom. I will save the specific deficiencies in modern day freedoms for another post, but for now, suffice it to say that in a given single territory there can only be a certain number of free people. They make the decisions, they hold the power, and they “farm” the rest of the team’s freedom in exchange for cheap defense and food (see previous post). How many people are actually free at the top? I think there are varying degrees of freedom. For those who are not outright worker bees and drones it is maybe in that 0.1% to 1.0% range of financially independent people. For actual decision makers and true power holders, maybe it is limited at that initial 1-1000 estimate per territory in the pre-AgRev times. With about 195 nations in the world right now, that would put the actual number of real decision makers between 195 and 195,000 which I think is a pretty good estimate : somewhere around 1 in 100,000 people worldwide.

Like I said, there are varying degrees of freedom and the 99% of people that I’m saying aren’t free, they actually have a decent amount of freedom. But I count myself as one of them, and just as one key example, I lack the freedom to simply work on whatever I want to. Instead I spend 40 hours a week working a job that I would never have any natural interest in. And to me, that is a huge deficiency.

Ownership 4: Ownership and Laws

Ownership and laws are modern human ideas that don’t exist for most other creatures. In nature, anything goes. There are no laws : only individual actions and consequences. There is no ownership, only territory. So why do we humans have ownership and laws?

Laws seems to be a logical necessity of large team size. Without some system of rules and cooperation, the team really isn’t a team. And it will eventually be taken over by a competitor. In ancient times, this type of cooperation was only with family and kin. Now we cooperate with total strangers who happen to have born into the same territory as we were. Indeed, some of the oldest and earliest laws were along the lines of “You can’t kill people and take all their stuff for no reason.” Which is indeed a very useful law for a team to have. These laws don’t apply to interactions with other teams. You don’t have to look far for an example of the utter breakdown of laws toward other teams. Think war, think racism, think genocide. Don’t think about it too long.

One particular aspect of law is ownership. There is an entire branch of law called property rights. Ownership is very hard to define for me, but I think of it as a subdivision of territory that is accepted among all members of that territory. That is to say, since team size has grown so large that huge numbers of people must share single territories, there are now very specific laws and customs in place to divide up the tiny pieces of the territory pie into things and areas that we “own.” I put own in quotations because ownership is an illusion. It is the false image of territory. With a territory, you have gained and defend the right to the things or area. With ownership, your right to the things or area are only as strong as the laws protecting it. That is, if somebody takes over your house and kicks you out, you can’t just kill them, but you can invoke the law and the police will come and remove them. This principle is also evident in that land owners must pay tax on the land : it is not true territory, they cannot just stop paying taxes because the IRS will come and arrest them.

Now zooming out a bit, the few people with real territorial rights and power need a system of control for that territory. Remember, territory must be defended. In addition to helping the team to remain cohesive, laws are also a form of defense for territory holders. As in, you can live in my territory as long as you follow these laws which will restrict your freedoms in such a way that you have very little chance to ever take my territory from me. In modern times this has taken the form of ownership. Territory holders make sure that everybody else works on the farm, harvesting the earth’s life energy. If the workers try to lay direct claim to the energy themselves, then that is a challenge to the territory holder’s claim. Ownership is the law’s system by which the territory holders legitimize their claim to the harvested life energy.

Ownership is a two way street though. Workers must have the right to own things as well otherwise they realize that their freedom is being farmed, and they will tend to revolt and make true attacks on the territory holder. There is a huge system of laws and customs in place that minimize how much the workers tend to own, and maximize what the territory holders own. The laws enforcing ownership are very strong in the modern world. The majority is definitely on your side when it comes to calling something yours. Whether a wealthy territory owner, or a poor worker, most people like the idea that what they own is safely and securely theirs. The key here is that territory holders tend to own the rights to the life energy being harvested, while workers tend to own a few discrete pieces of life energy. If the life energy being harvested were a river, territory holders own the river, while workers own a few jugs of water from it. If it were a farm, territory holders own all the food produced, and workers own one meal a day.

Ownership 5: Don’t get farmed

Workers are farming the earth’s life energy. The workers give their time and energy to harvest the earth, but they do not own the product of the work. Instead they are given money. Owners are actually farming the workers’ life energy. And in today’s crazy world, these life energy streams are actually quantifiable at some level in the form of money.

The exchange goes something like this.

Owner: I will give you money in exchange for you using your time and energy for whatever I desire.
Worker: Ok, I will take that money and exchange it for the goods and services I would have produced with my time and energy if I hadn’t sold it to you.
Owner: Excellent. I will use your time and energy to make the things that you need and sell them back to you while I keep some profit. I won’t have to work at all. I will be relatively free and you will do what I want.
Worker: Ok. This sucks. What can I possibly do to get some control of my life energy now?

In our crazy capitalistic time, the owner might not control their life energy either. What I mean is that in this whole exchange, the owner’s profit is in the form of money. Ultimately this substitution of money for life energy is right at the root of this whole problem. That bears repeating. Money, so they say, is the root of all evil today. So the owner doesn’t have to work all day to get the money, the worker does that. But at the end of the day, the owner and the worker are both sitting there with a bunch of money (usually the owner gets more). This money can be exchanged back into life energy in various real forms. E.g. buying food. The whole point of freedom though, is to control one’s own life energy and thus be doing what one wants to do. So, it’s easy for the owner to fall into the trap of exchanging all the easy money they get for life energy : but never really owning up to their personal life energy and acting freely. Many owners thus live in a big pointless playground where they always win whatever game they play but never do anything of real value. I’m getting ahead of myself though. That is a higher level of freedom I’m talking about. First let’s talk about getting that 8 hours a day back.

The worker is faced with a tough challenge. Worker is tired of getting farmed, and wants to just go somewhere and be free and do whatever they want. But everywhere is owned. All the assets of production are owned. What can the worker do to stop getting farmed? They still need to eat and have a place to live and eat. All the places to live and all the hunting land and farmland is owned. They can’t just stop working and go work for themselves to do and make what they need, because everything is owned.

Amazingly, we live in a time and a place where ownership is for sale. So, what the worker can do, is use any excess money they have, after purchasing their basic life energy needs, to buy some ownership. That is, they buy the rights to some of the life energy harvested. And why not? They are harvesting it all day long. The owners are making a profit. Why shouldn’t the worker be entitled to at least the full value of the work they do?

Imagine a worker who works at one company his whole life, and this worker has free access to buy stock in the company at a fair price whenever they want to. At the beginning of their career the worker gets fully farmed. Then they start to invest some of their excess wages and buy ownership in the company. Little by little, the worker will accumulate the rights to some of the stream of life energy that they are harvesting for the company. Over time, the worker accumulates enough rights that they are now recovering the full value of their work. I.e. they are no longer getting paid less than their work energy is worth and nobody is earning a profit off them. Even though this job isn’t something the worker would ever naturally choose to do, at least they now are getting full value for their work, however pointless it is. Imagine the worker continues to invest more and more in the company. Now they are starting to farm their coworkers and gain the rights to some of the energy that the coworkers are harvesting. The worker keeps investing, and eventually they have bought enough ownership that the profit stream covers all of their life energy needs. On that day, the worker is now a full fledged owner.

There are several levels along this continuum.
Slave: works a lot, doesn’t get paid at all. In various times and cultures throughout human history, outright slavery has been common practice. Currently it’s out of fashion in a big way, but America’s prison system is arguably not far from straight up slavery at certain facilities.
Indentured servant: this is your typical worker who has no ownership rights : usually their period of servitude seems to be from about age 15 through age 65-70. This is currently by far the biggest group of people on earth in my opinion.
Equilibrium owner: this is a worker who has purchased enough ownership to “break even” : that is they own just enough to compensate for the raw deal they are getting and keep the share of profit that they are fairly entitled to in this messed up system : this worker has attained “freedom” in a socialistic sense. But their time is not free for 8 hours a day.
Intermediate owner: this is a worker who owns more than the equilibrium amount but still must rely on working wage to cover their basic needs.
Master: hey I’m just calling it how I see it at the top and bottom. Masters have so much ownership that the income stream covers all of their expenses. The defining characteristic of the master is that they don’t work for their money. Their money works for them. Masters have freedom of time.

I believe that if ownership rights were averaged evenly across all humanity then everyone would only have to work a couple hours a day. I also believe the world is grossly overpopulated with humans and that any such system would be extremely unstable. But that’s beside the point. The message here is don’t get farmed.

The time value of money

What rate of return would you ask for on a loan of X dollars from person Y to be repaid at time N with default probability P? Your answer depends on your time value of money, and a few other things.

The time value of money is the idea that a dollar today is worth more than a dollar tomorrow. This happens to be true because the Federal Reserve has been regularly inflating the money supply by about 3% per year for about a hundred years now, but it would remain true even if the money supply were constant. Say I loan you a dollar and you agree to pay me back sometime. Until you pay me back, I can’t use that dollar. There are many opportunities and situations where I could use that dollar and I’m forgoing them until you pay me back. All of these foregone opportunities are worth the time value of money.

Different people have different time values of money. Even the same person will have different time values of money when in different situations. Some people assign high values to having money right now. They get paid on Friday and spend the whole check that weekend and are broke for 2 weeks. Then they borrow money so they can spend more money than they have right now, sacrificing future income for consumption in the present moment. Other people put a low value on having money right now. They loan their money out to others who promise to pay them back in the future. Again, even the same person could display either behavior at different times depending on what the situation and who they are dealing with.

My ownership history

I am an investor. From a young age I was calculating exponential growth rates. Growth rates of interest. I made big tables plotting rates of return against time and imagined my money growing. When I was 18 I began investing in the stock market. My only regret is that I waited so long to start saving. Dreaming of huge returns over short periods of time, I lost all my money by the age of 21 on poor investment choices. And I mean all of it. It was about 20 grand worth. 10 grand inheritance from my grandfather (who was also an investor) and 10 grand of my own wages. I was devastated.

But I started back up again shortly. Through a series of juggling my money among different companies during a falling market, I again lost all my money between 2005 and 2008. This time I didn’t lose all of it. I turned 10 grand into about 2 grand though. I was not upset this time. In fact I was thrilled. This time I had learned the lesson that my first whomping didn’t quite teach me. The lesson is that as a stock market investor you must act like an owner. An owner doesn’t sell his business just to take a profit. An owner holds his business and takes whatever profit it generates. Buy consistently profitable companies at low prices and hold them like an owner. That is the key.

In around June through August 2008 Fannie Mae and Freddie Mac bit the dust. And anybody who didn’t smell the shitstorm coming before that should have had alarms going off in their head by August. That’s when I started paying attention. I figured there was an amazing stock market crash coming, and I was right. In August I began living a spartan lifestyle and investing as much money as I could. I also began putting serious amounts of time into researching businesses. I studied what it meant to be wealthy. I read about bank panics of the past. I studied the nature and history of money itself. One thing was sure to me at that time, that this would be one of the most exciting years in history to be a value investor.

Since September 2008 I began investing as much as I could every 2 weeks from my paycheck. I was investing about 60% of my income. As the market panic unfolded I acquired some of the greatest companies on clearance. I saw the TARP bank panic as a scheme by the power elite. In specific, banks that were receiving money through TARP funding were getting a guarantee that they would survive this panic, meanwhile trading at panic prices. Some of the strongest banks in the world were on sale for a dime on the dollar. I did not hesitate to take advantage. I’m very glad with the companies I ended up with. A few banks, as well as some of the greatest companies in the world from other industries.

In about May I discovered a blog called Early Retirement Extreme. I liked it so much it inspired me to write this blog. That blog explains how to retire early even on a minimum wage income. The blog helped me cut my spending even more (mostly out of inspiration). Up until this point I had been maintaining a really high savings rate just because I knew that there were abundant investment opportunities of a lifetime around. I still thought I would work at pointless job for many years and retire on 50g/year someday. After I found ERE I began to entertain the idea of maintaining this spartan lifestyle for a longer period of time just so I can be free of work ASAP, even if that means living on a 10g/yr lifestyle. I have a link to it on the sidebar and it’s full of invaluable knowledge. Using calculations from that site, I could retire as early as 5 years from now if I have good returns and cut my expenses way down to about 6g a year. I doubt that I will though. Because I don’t think I could stand to live on 6g a year. So I will hope for even better than good returns and I will spend a period of time in semi-retirement before leaving work altogether.

That brings me up to now. Since September 2008 I’ve gone from 2g in capital up to 35g, fueled by 13g in savings on 22g of income. I plan to maintain my high savings rate although I am somewhat frustrated by a 9g consumption level. I’m searching for some kind of viable rent free lifestyle in which I don’t pay rent but continue to make my 22g/yr from my internet job. At the very least this would make life a little more adventureful. My hangups are about shelter and mobile internet possibilities.

I’m investigating boat living, van living, RV living, and backpack/hitchiker living for rent-free alternative lifestyles. Any of these options would have to beat my current rent situation which is $4680/yr = $390/month which includes heat electricity, and internet. Although, living on a boat sounds so awesome to me that if it were safely possible to do it under 7 grand a year while cruising occasionally (keep in mind I need reliable mobile internet), I would do it. If you’re reading this and you live rent-free in any of the above listed setups, could you please leave a comment on how much it costs you to maintain shelter in whatever mode you use per month or per year? For example, a boat would have fuel costs, insurance costs, docking fees, maintenance fees, mobile internet fees, etc. Same for an RV. Also for vans/RVs/boats, do you easily get away with parking for free/living on the hook/docking for free, etc?

And as for mobile internet, if anybody knows about using EVDO mobile broadband, or free wi-fi spots €¦ would EVDO work for RVing/boat living? That is, is it reliable enough that I could work for 8 hours a day without service interruptions, even if I’m traveling occasionally? For free wi-fi, would it be possible for me to work for 8 hours straight at a typical wifi location? At any location? How much would it costs for wi-fi internet for 8 hours? Thanks.

Three types of assets

There are three main asset types for investing. There are others, but these three encompass most investing.

Land: There’s only so much of it. Land owners pay property tax to the government. Land has a lease rate, meaning land owners can charge other people to use the land. Maybe those non-owners can’t afford land of their own or they don’t want to. This lease rate is what provides the positive cash flows that make land an asset. The lease income may come from a business, a dwelling/shelter, or even just the inherent potential value of the land. In practice, power controls land. That is because land is the foundation for all other asset types. Our wealth is only as much as the value of the life energy we’re harvesting, and we harvest it from land. Land tends to be a rather high value investment and so beginning investors might have to wait a while before buying their first land to avoid putting all their eggs in one basket to start off with.

Debt: A purchased promise. An IOU for a positive return rate. This is like money owners leasing out their money to other people. It comes with the distinct risk that you won’t get paid back, called credit risk. Sound familiar? Debt is the backbone of banking. Imagine a world where people never used debt, but instead saved up enough money to buy something before doing so. There would be no banks. It would never happen. People naturally purchase promises from each other all the time and money is just the quantification of those promises. Take it one step farther now and it gets cool. Imagine a world where people never used money, but instead traded directly with other individuals for goods and services. Now there would be no such thing as debt. Only broken promises. I think of debt as kind of a filthy asset. I don’t use credit, and I don’t want to, and I wouldn’t want anybody to borrow from me, although I would do it in an emergency. The reason is because of credit risk. I don’t like the idea of enforcing the debt agreement : it gets messy. The lease rate for debt varies depending on creditworthiness. Debt as a common investment is purchasable in blocks as small as 1g, and even lower if you’re willing to buy savings bonds or loan to individuals. If debt is your thing, it is a reasonable in any portfolio. Typically provides a reliable and low variance income stream which is a better holding than cash.

Business: A group of people working together to produce a (usually) useful product or service. Businesses are the structures set up to harvest life energy. They can be party or counterparty in either of the other two main asset types, meaning businesses can own land and money, or lease land and money. They are more of a relationship among a group of humans than a real physical asset or real promise. The relationship is that some of the people in the business are workers and others are owners. The workers get paid for their work, and the owners can keep whatever profit the business generates after everyone is paid. The businesses also have a producer/consumer relationship with their customers. So as an asset, businesses are risky in that small changes in the structure of the human relationships can cause the owners to lose their capital. From another point of view, businesses may be the least risky asset. This goes back to the idea of territory and there only being so much of it. The human relationships are the very power relationships that determine who actually controls the territory, and of the main asset types, business is most closely tied to the harvesting of life energy, which is the key claim on a territory. Perhaps a profitable business owned by a powerful group of people represents one of the safest investments on earth. As a broad asset class, business has historically had slightly higher returns and slightly higher risk than the other assets. Thanks to the stock market, small investors have the opportunity to buy businesses in chunks as small as $40 for most profitable companies. I recommend it as an ideal investment class when starting out.

The Dangers of Underconsumption

Overconsumption is a very common problem in America. I’m talking about money, but it applies to food too. People spend more than they make, or they don’t save any. I’m going to guess that’s not the case with most people who end up reading this blog. We’re more likely to be savers and online PF bloggers who are aware of the dangers of overconsumption. But what about the dangers of underconsumption?

When the stock market crashed in autumn 2008 I cut my expenses way down so that I could invest the savings in cheap companies. I went from saving about 5% of my income to about 55%. In order to do this I developed an attitude of not spending money unless I considered it to be an essential expense. Over the last year this has given my great success in savings. With a 55% savings rate I’m probably a world class saver. I’m going to guess that most wealthy people don’t even save 55% of their huge passive incomes. But I’m not wealthy. I earn a below average wage income. In order to save 55% of my income I must limit my spending to a minimalist lifestyle. I live with roommates to split the cost of rent, energy, and internet. I eat for fuel value instead of enjoyment. I ride my bike everywhere and don’t travel at all. I wear the same 2-3 outfits of clothes all year long. I pass on any social events that are not free or nearly free. Sometimes it feels like I’m sitting around and just saving money by doing nothing. By putting off all my consumption to a later date I have stopped pursuing my dreams and goals in the present. In a quest to learn to live with a high savings rate, I have gone from one end of the spectrum to the other and am now feeling the consequences of underconsumption.

When I set out to achieve financial independence, or freedom from work as I think of it more often, I decided to put my head down and work hard. I would postpone my enjoyment and happiness now in order to one day have the ultimate enjoyment of never having to work again. What I have found is that I am forgetting how to enjoy and be happy. I am forgetting what it’s like to have goals and dreams in the present and to be actively working on them. I am effectively waiting to live some day in the future. Ironically in my quest to become free from work, my behavioral identity has become entirely that of a worker, because that’s nearly all I do.

So don’t fall into the trap of trying to save so much that you’re living for tomorrow. It may never come. And even when it does, you’ll have gotten there, and you’ll have all this money saved up, and you won’t have any practice on how to use it for your own purposes, goals, and dreams. You’ll ask yourself, “well ok, I’m free from work, now what?” Why wait to ask that question. Ask “now what?” right now. Authorize some expenses in the present to live your life like you would if you were already free from work. Become an expert at consuming efficiently and effectively instead of becoming an expert at savings at all costs.

My consumption

For the last 4 months I have been monitoring my daily expenditures on an Excel spreadsheet. I highly recommend this to anybody who is serious about saving. I made columns for the date and my daily consumption, then added columns that showed weekly, monthly, yearly, and average consumption based on the daily data I entered. I also made some cool graphs. When I entered my daily consumption, I didn’t itemize it in any way, and included everything that qualifies as consumption. If you’re wondering what to include as consumption, put things through this simple test. Is this expense consumption, or is it savings that I can invest? If you’re not investing your savings in some kind of income generating asset, then it wasn’t savings, it was just delayed consumption. The motivation behind my spreadsheet was just to get a number on my consumption and know where I was at. This lets me make all kinds of fun calculations when I get bored, like how soon I can retire and how much money I will be rolling in when I do. Here’s what my average daily consumption looks like for 115 days. The jumps in the graph happen on the day when I pay my rent which is $390 a month. I’m slowly averaging towards about $24 per day which is about $8800 a year. You can click on the graph to enlarge it.

I have maintained fairly constant spending habits over the 4 month time period. I have enough data on the sheet now to say that I’m living on about $8800 a year. I estimate about $6300 of that is rent, energy, food, and transportation. It would be possible, yet difficult to cut any of those expenses much lower. It would involve drastic moves such as living with 7 roommates, living out of a backpack, moving to the middle of nowhere, getting rid of my bike and walking everywhere, or eating only rice. Rent is by far my biggest expense and I’m looking for a way around that.

That leaves $2500 of discretionary spending. I don’t know exactly where that $2500 goes. I’ll estimate alcohol and other fun stuff is about $600 of it, and I have no idea on the rest so I’ll just call it miscellaneous. It includes such luxuries as buying contact lenses, deodorant, soap, toilet paper, an occasional admission ticket for entertainment, occasional police ticket from entertainment, and books and fees for professional exams.

As I mentioned in my previous post on Underconsumption, living on $8800 a year isn’t very fun, and I’m currently thinking of ways to deliberately increase my consumption a bit in a manner that is more satisfying than just buying things pointlessly.

Consumer Expenditures

As it turns out, just about no matter who you are, how much money you make, how old you are, what sex you are, what race you are, or whether you’re a spendthrift or up to your eyeballs in debt, your major consumption follows nearly the same pattern.

In 2007 the Bureau of Labor Statistics put out a survey of Consumer Expenditure. They probably do a regular survey but 2007 was their most recent. This survey gives data on all major expense categories for “consumer units” of Americans. The BLS website has a lot of great stats and I suggest you take a look around there.

The biggest expenditures, in order, for most American “consumer units” are Housing (including utilities, maintenance, etc if applicable), then Transportation, Food, Healthcare, Entertainment, Apparel, Donations, Education, Miscellaneous, Personal Care Products, Alcohol, Smoking, and Books. I left out a category called “Social Security and Pension” because this is really a form of investment and not expenditure.

It is amazing that for all income levels, major expenditures make up roughly the same percentage of total expenditures.
Housing : 25% to 40% of total expenditures. Lower income spends higher percentage and vice versa.
Transport : 13% to 19% of total expenditures.
Food : 12% to 15% of total expenditures.
Healthcare : 5% to 8% of total expenditures.
Entertainment : 4% to 6% of total expenditures.

“Consumer units” earning less than $30,000 per year tend to consume more than their income. On aggregate, people don’t really start significant savings levels until their “consumer unit” income level rises above the $50,000 mark.

Here’s how my expenditures stack up in the major categories. I spend $8800 a year right now and am looking for a way to add some planned consumption. I wonder what category it will end up in.

Housing : About 55% as my rent is $4800 a year, yeah it just went up.
Transport : About 4% as my bike probably costs me $200 a year in maintenance and depreciation. I also estimate I use $150 a year in occasional other transport.
Food : About 12%

This may seem pretty normal to you. It looks kind of like I’ve sacrificed some transportation expenses and moved them into paying for my sweet crib. But check out my percentages compared to my after tax income.
Housing : 25%
Transport : 2%
Food : 6%
So I’m actually doing a pretty good job of keeping expenses down. I’m doing excellent in Transport and Food, but Housing is killing me. I am at the low end of normal levels in Housing, whereas in pretty much all the other categories I’m waaaay below normal spending. This is, and has been my major project for a while now.


The equinox is in one week and I can feel it. About one month from now it will start to get cold here. And a month after that it will get so cold that I don’t feel like doing anything. And a month after that it will get so cold I will actually stop doing things and begin winter hibernation for the remaining 4 months of winter. So I’m gonna get out of here. I’m willing to spend some good money to do it too. As far as I’m concerned, those last 4 months of winter are lost time, lost energy that doesn’t need to happen. I plan on leaving sometime in November/December.

Here’s the options I’m considering.

Snowbird in the USA while working from my internet job. I can just pick up and move south for the winter while keeping my same job. All I have to do is find a place with an internet connection. Either go all out and find some place near the gulf of Mexico in FL or TX, or go cheap as possible with a small efficiency in the middle of nowhere somewhere in the South. With moving costs and a rental near the beach this will probably cost me about $2500 more than just staying here for the winter. TX coastal cities like Galveston, Corpus Christi, and Brownsville seem to be much more affordable than the FL options. Who knows, maybe I will like it there and stay.

Tour South America by backpack, hostels, and public transportation. This idea was suggested by a friend last week and also influenced by reading a lot of Frugal Bachelor lately. I don’t have a good idea of the cost, but I would want to be gone at least 2 months, and I would not be working. Even if I could figure a way to travel on less than $20 a day for my first ever backpacking trip, I would still be losing $55 a day by not working. So the opportunity cost of this is about $5000 more than just staying and working : even if I could get expenses well below $20 a day. Probably too much, and I lean away from this option just because I want to retire early and not working slows that down. But maybe not far in the future this will become a real option.

Move aboard an RV or camper van and travel the southern USA while working by mobile internet connection. This would be amazing. It would be a complete lifestyle change as opposed to a snowbirding strategy. Unlike most remote internet workers, I need to work fixed hours of 9-5 and so I need a reliable internet connection every day, which could be tricky : I don’t want to lose my job over staying warm. It also involves purchasing a vehicle/home along with all the risks and expenses that go with that. I had not planned on buying a vehicle or home for at least a couple years in my early retirement plan. I have calculated that after the initial costs, that this option would cost about as much as staying in my current apartment. The initial costs are significant though. I could easily spend anywhere from $2,000 to $20,000 on a camper and laptop. This is a real possibility right now, although it would probably be a setback to savings. It might be worth it though. The ability to travel around is one of the basic elements of freedom that I’m trying to achieve by retiring early.

Live aboard a houseboat or small yacht or sailboat and “live on the hook” anywhere in the Great Loop waterway. Among my friends we affectionately call this the “Shitty Barge” strategy. It involves buying or building a crappy barge-like boat with an enclosed shelter on it and anchoring out in various locations for a free, rentless lifestyle. I love being on the water and living aboard sounds awesome to me. It might be affordable if I got a standard houseboat (like a barge) for between $2,000 and $20,000. Which would basically be like a cheaper version of a mortgage with a lot more hassle. Having a boat with cruising capability is the way to go, a cruiser makes anchoring out much easier. It’s incredibly expensive though. Initial costs could range anywhere from $20,000 to $200,000 for a good seaworthy boat and after that, cruising costs are $10,000 a year at minimum. Internet connection seems a little more difficult for this option too, so for now it’s out.

I’m currently leaning toward the RV or a nice beach side apartment in TX. And probably leaning toward the apartment more than the RV. I would enjoy RV’ing more, but I am a little ahead of myself in terms of sound retirement strategy. Basically while the RV would eventually cost me the same as my current lifestyle, it would require me to buy an RV. The RV would be a liability that would be worth about 20% to 50% of my net assets right now. If that percentage shrank down a lot smaller, then I’d be a lot more comfortable doing it. Maybe the solution is to buy a really ridiculously cheap van that I only expect to work for one winter and that has no real amenities besides the necessary place to sleep and a generator.

Cash Flows

To become a good investor you must learn to understand cash flows. If you think of money in dollars, then a cash flow is in dollars/time. Using financial mathematics and the idea of the time value of money, it is possible to calculate the present value of future cash flows. The present value will depend on the interest rate.

Example of Cash Flows
I get paid $10.75/hour, that is a positive cash flow for me, and a negative cash flow for my employer.
I pay $8,800/year to live my current lifestyle, that is a negative cash flow for me.

Things that generate positive cash flows can be considered assets, while things that generate negative cash flows can be considered liabilities. When the present value of assets is calculated, all the future positive cash flows will equate to a positive present value. Thus assets are worth positive value today. When the present value of liabilities is calculated, the future negative cash flows will equate to a negative present value.

When you add the present value of assets and liabilities, the number may be positive, zero, or negative. When the number is positive, the difference is called Equity. Thus you can think of equity as having a consistent surplus positive cash flow, after all liabilities have been paid. When assets and liabilities add to zero, there is an equilibrium, positive and negative cash flows are offsetting each other. When assets and liabilities together are less than zero, there is a cash flow deficit. This is a grave situation for any entity. They must very quickly find a way to make up the cash flow deficit, and if they can’t, they will soon be unable to pay their liabilities and they will go bankrupt.

Ownership 6: Business

Businesses are the ownership entities that technically own the workers’ production. Whoever owns the business is entitled to the profits after all the wages and expenses are paid out and after the products are sold. This describes a power relationship around the harvesting of life energy. That power relationship has taken various forms over the course of human history.

In tribal times, the tribal leaders had control over this energy. At various times in history, kings, warriors, dynastic families, and nobles have had the control over the energy. In our current era, Capitalism is the system by which this life energy is distributed (and harvested).

Capitalism has slowly replaced the system of kingdoms between about 1500 up until present. By my personal measure, it appears that it has just reached the edges of all human existence sometime during the last century and it is in full force as the dominant social system on the planet. It’s very likely that it will continue to be the dominant social system for our entire lives.

The defining characteristic of the system is that capital is on sale all the time. It has become liquid. Meaning, it is now possible to buy or sell the assets of production : possible to buy the rights to the life energy harvested. It’s possible to buy or sell money (a loan). It’s possible to buy and sell just about anything. This wasn’t always the case. Try convincing a king in 1400 that you want to buy up the land that you work on so that you could own the products of your work. You’d probably be taught a harsh lesson : the king owned everything, and there were no questions about it.

Somewhere around 1500, people started pooling their money together to form companies. Business enterprises were designed to go after a profit, to provide for an existing demand and reap the benefits. The first profitable businesses were trading companies. Eventually, businesses were able to “undercut the price” of the kings’ because kings preferred to keep as much as they could for themselves, and so there was profit to be made everywhere. I don’t know what weakness the kings’ had in their financial system to allow this to happen, but I do know the end of the story. Today, existing profitable businesses are the dominant mode of production, and they are on sale on the stock market in very small shares, to just about anybody, with very small transaction costs. Like no time in all of history, the small guy has been able to buy into the big game.

What Lead Me to Leading?

What has lead me to want to be a leader? Ironically, I think every young man wants to be a leader at first. Until something goes wrong, and they realize how much hard work is involved. Their dreams seem impossible and it is easy to give up. So what lead me back to wanting to be a leader?

Well, I have always been an investor at heart. When I was very young, my grandfather, who was a tribal leader, gave my parents some money each year. It was a significant amount of money, although not so much that we had it easy, for both my parents worked full time. He owned his own small business in a farming community. It was a farm implements dealership and general hardware store. By all measures he was an important man in his local economy, and in his community. Small communities in rural America are tightly centered around religion, and my grandfather was a devout Catholic. The money he gave our family was earmarked to send us children to Catholic school. I had 12 years of Catholic schooling. I am no longer a Catholic, and in fact now view it as a form of misdirection for the masses, but I have no doubt now that my grandfather was doing this so that we could belong to a religious community : a social group. In his small corner of the world, if you weren’t a Catholic, you weren’t part of the tribe, and you had no chance of ever being a tribal leader. I grew up in a very different world, and for a long time, I regretted my Catholic schooling. Now that I can see what was behind it, I am glad for it.

My grandfather was about 77 years older than me, and in the year that I was born, he retired from his business, selling it a few years later. Now, in his retirement, he invested in the stock market. I wish I could have been there to see his own business, but instead as a young child I saw him monitoring his stocks in the newspapers. This somehow tied the act of investing to tribal leadership for me. My child’s mind made the connection that this was where my grandfather made the money with which he was able to lead the family. And so I’ve always wanted to be an investor.

When I was 18 years old I began investing in the stock market. I quickly lost all my money by the age of 21. Again I began investing, and again lost all my money at the age of 25. These harsh lessons taught me some very important knowledge : knowledge I would have learned much sooner if I had seen my grandfather running his own business. Investing is not a money making game, it is not some high stakes casino : it is the act of owning a business. At large international levels it can be difficult to see what businesses are. But in a small community it is easy. A business is a relationship of production between groups of people. It is a tribal structure. This is what subconsciously drew me towards investing. There was a conscious draw too €¦

Somewhere between the ages of 15 and 24, I gradually transitioned from a being a full time student into being a full time worker. From the very first time I was employed I have despised work. Not because it involves labor : I actually enjoy getting a job done and accomplishing things. No, I despised it because of the boss. I despised it because I was working for somebody else, doing the things they wanted, and taking orders for them. It made me feel small, underutilized, and unappreciated. When I was at work, I felt like a slave, that’s it. I was selling my freedom for money. Seeing no other way around this, I thought, if you can’t beat them, join them. So this gave me the conscious drive to become an investor and owner, rather than a worker and slave. At first I wanted to never work again. Now I see that I would enjoy work, if only I were working for myself.

So by around age 25 I was on a quest for ownership. I wanted very much to be free from working as a wage slave. The clearest path I saw was to become an owner of businesses instead of an employee of businesses. So I began investing in the stock market again. This time instead of trying to get rich quick, I chose excellent businesses and held them like an owner would. I value these businesses almost as much as I would my own, and I will hold them through thick and thin.

Around this time I began to research the lifestyles of the rich and famous, so to speak. Rather, I researched what it meant to be wealthy, what it meant to be an owner. Wealthy owners live entirely off the profits of their businesses and other investments. They do not dip into their capital for their living expenses, but rather live entirely off the income of their investments. I also noted that the extremely wealthy families of the world live truly free lives. They make many millions of times more money than the average person in the world does, and they can quite literally do whatever they want to because nobody can stop them. It was here that I realized there was a bigger concept than ownership, the concept of territory. Territory holders fight for their right to the resources in a given area, and with that right they feed their whole group and use the energy to mate with the females of the group. Anyway, at this point I set out to live my life like a wealthy person.

I lowered my spending down to the necessities, and increased my savings as high as I could. I intended to save up enough money and lower my expenses enough that I could retire early and be free from wage slavery. I would live like a wealthy person and not have to work, even though I would be living a bare bones lifestyle. And it has been working very well. But once I reached this stage, I began to be able to look forward to the next move. I thought, what will come next after I have saved enough to retire? What will I do? If I could be free from it all, what do I really want for my life?

I found that my true wants in life were quite simple. I wanted to love and be loved. All the cute girls I see every day, I wanted them. And I wanted them to want me. This was still a little short sighted of me, but I was getting closer. So I began on a quest to learn how I could get all these girls. Little did I know I was treating a symptom instead of the root problem. I believe male-female relationships are very closely tied to to social status and tribal leadership and they will be the topic of several of their own posts. Here I will suffice it to say that after much questing, I found out that in order to get women, I must be the tribal leader, and in order for women to want me, I must be the tribal leader. This brings me up pretty close to where I am at right now.

Once I had this revelation that all I want is to be a tribal leader, pieces of the puzzle have been falling into place. Whereas before I had been amassing money and shares of businesses for freedom from wage slavery, now I see that I was really after a high social position where I am able to decide what work is done, rather than taking orders on what work to do. Money was a subclass of investing. Investing was a subclass of Ownership. Ownership was a subclass of Territory. Territory was as subclass of Tribal Leadership. It’s not all so cut and dried as that, but all these topics are definitely linked together. Right now I have just recently zoomed out to this tribal group level. I do not know that there even is a higher level as I have the feeling that everything is starting to fit into place. I no longer feel like I need to figure out any more theory of how things work to get what I want. Rather I need to figure out how to do things to become a tribal leader. If there were a higher level than this understanding, I believe it would be some form of meta-tribal group in our highly populated, modern, capitalistic world. The last tribal societies on Earth are dying out and being replaced by a globalized economic system. However tribal groups fit into this greater system would be the last ultimate level.

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Consumption Update

My average consumption rate has steadily drifted down to $23/day. As of a few weeks ago I had estimated it at $24/day. This includes a recent nonrecurring $150 registration fee for an actuarial exam. This puts my yearly consumption at about $8400 (maybe closer to $8000 without actuary exam fees). Meaning that early retirement is now possible at $210,000 total savings, down from $220,000 when I was at the $24/d rate.

I’ve still got a long way to go, but the point is, I just got $10,000 closer to retirement by spending less money all the time, and an additional 1 dollar a day closer by saving more. You don’t need a million dollars to retire. If freedom from wage slavery is a priority to you, you can retire on much, much less, depending on how low you can cut your expenses.

You can (fairly) safely withdraw 4% of your savings per year for the rest of your life without damaging your base capital. In essence, living off the income only instead of the capital. The 4% number comes from the observation that in the long term (I’m talking centuries long, like the history of capitalism), investments like stocks and bonds have average returns of about 5%. What does (fairly) safely really mean though? What percentage chance do your investment have of lasting? The lower your withdrawal rate, the more likely your money is to last the rest of your life.

I can’t say it better than Jacob at http://earlyretirementextreme.com/ where I first read about it, and if you’re serious about retiring early, I recommend reading that blog front to back.

A couple of consumption goals are to eat out less, and spend less on alcohol and marijuana. I estimate I spend $800 per year right now on these three expenses.

How I Live on $8400/year

It occurs to me that some people may think it’s impossible to live on $8400 a year in America, and others may be looking for tips. I imagine this has been done a hundred times on other blogs, but for what it’s worth, here’s my version.

Housing and the related cost is my biggest expense at $4800 a year. I live in the downtown area of a midwest city with a population of about 250,000. I split rent, internet, and energy bills with 2 roommates, so 3 of us altogether. $400 a month is a pretty good deal for a downtown area, but I could find cheaper if I moved to the outskirts of town, or to a smaller city.

Since I live downtown, I don’t need a car. I ride a Trek 1200 road bike for any trips farther than about 4 blocks. I am in excellent shape, and if need be, I am able to bike easily to the edges of the city which are 5-10 miles away. I bought the bike used for $400, and as long as I clean it and lubricate the chain, the maintenance expenses for the bike are about $50-$100 a year. When I factor in depreciation, and the occasional larger repair, biking around costs me about $150 a year.

Food costs me around $2.50 a day. Most days it is closer to $1.25 but I occasionally eat out which drives the average up. I buy groceries at the cheapest store in town, which is a 3 mile ride. I eat mostly Jiffy Pancake mix, with “cheese product” and eggs, I call it a Panckeggwich. They are delicious and they get around 1600 calories per dollar. I also eat lots of bananas which at 49 cents a pound to round out my diet.

I engage in various free, or nearly free hobbies. These include disc golf, cycling, music, dota, reading, writing, meditation, and stock market investing research.

I’m single, and don’t spend much on social events or other relationship related expenses. For example, I have only 2-3 outfits of clothes, which I wash about every 3 weeks. I’m an introverted person and don’t need to go out much and pay for entertainment expenses. I don’t go out to bars, clubs, movies, or live music. I would potentially spend money on live music since I love music, except that 95% of musicians ruin the musical experience by playing ridiculously too loud for the venue. Apparently raping people’s eardrums and burning the guitars into people’s brains even if they’re standing at the back of the venue is more important than being able to hear the vocals or have a good time talking to, and hearing other people talk at the show. Anyway, avoiding “conspicuous consumption” is a big one.

Finally, I don’t buy “stuff” like so many Americans do. I just don’t want any of it. All my possessions fit in a 4x4x4 area if necessary and I like that. I very rarely go to stores except to buy food. Shopping is something I do when I need something, not a habit or hobby or activity that I enjoy.

That covers all the major bases. It’s really pretty easy and common sense once you start trying. Eliminate cars, big houses, food service, bars, travel, and pricey entertainment. It only takes a few months to make the transition down below $10,000 a year, and then paring it down lower is a slower process.

I’m not going to lie. Living this way is boring by comparison to spending every dollar you make. But I’m willing to accept that for the chance to one day be free of wage slavery.

Belief Manifests in Reality

What we believe is real, is real in effect, and reality forms our beliefs. This can be a vicious cycle, or a golden key.

One of my hobbies is playing disc golf. Since I ride my bike everywhere, I play the same course over and over again because it’s the closest course by a few miles. Last season I threw a par there, it was my best game ever. This season I had thrown 2 over on a couple occasions, my best scores of the season. To me, it felt like I had reached a skill cap for my game. My average scores tended to be 5 to 10 over and this hadn’t changed for years. Then 4 weeks ago, everything came together for me in one game, when I threw a 5 under, basically obliterating my old personal best. Since that time, nothing has fundamentally changed about my game : I’m using the same discs, and the same form : but my scores have been consistently between 4 under and 2 over ever since that one game. That is, my worst games since that one day are now equal with my best games before that day.

So, I shaved about 7 strokes off my game forever in the space of about 2 hours, just because my personal best of the season got 7 strokes better that day. Once I believed that I was capable of throwing a 5 under, I suddenly was. Reality forms our beliefs. Before that day, my reality and my results were consistently telling me that I was about a 6 over player who occasionally shoots a 2 over. So how did the shift occur? All it took was one single time and my reality shifted to, I am now a 1 under player who occasionally throws a 5 under.

Certainly I was working toward it, every golf player is always trying to improve their game. I think mostly I got lucky, in combination with working toward it, and focusing, and just letting it happen that one day without mentally sabotaging myself. But I feel that mostly it was luck. It was my existing skills all coming together perfectly in the same game.

This could mean that people who are lucky in their early attempts at something believe that they are good at it, and by believing they are good at it, they actually become good at it. Whereas people that are unlucky at first are stuck believing that they aren’t good, and they actually become bad at it. This reaches far beyond disc golf.

It also could mean that persisting at something until you get some luck could be the key to switch between being average or poor at it, to becoming good at it.

Finally, the golden key. All this could also mean that there is a way to circumvent the affirmation in reality. Basically creating the positive results in belief only, instead of waiting for it in reality. For example, if I had believed all along that I were capable of throwing a 5 under, how much sooner would I have achieved it? The implementation of this would be somewhere between constructive self deception and general positivity, but the potential benefits could be amazing. Where else are my beliefs limiting my reality? And where is the border between positive manifestation and delusion?

The Polynesian Big Man

A big man is a tribal leader in certain Polynesian and Melanesian tribes. The remote location of these tribes on small islands in the Pacific ocean have allowed them to maintain their tribal structures much longer than other areas without being destroyed by larger forces.

According to Wikipedia, “The big men have no formal authority, but maintain their recognition through skilled persuasion and wisdom. A big-man’s position is never secured in an inherited position at the top of a hierarchy, but is always challenged by the different big-men who compete with one another in an on-going process of reciprocity and (re-)distribution of material and political resources. As such the big-man is subject to a transactional order based on his ability to balance the simultaneously opposing pulls of securing his own renown through distributing resources to other big-man groups (thereby spreading the word of his power and abilities) and redistributing resources to the people of his own faction (thereby keeping them content followers of his able leadership).”

The big man had multiple wives, and acted as a trader, supplier, and ambassador for his group. The big man’s followers could switch between groups occasionally if they felt a different big man would be a better leader. The big man would take the food and resources of his group, and gift them to other big men and their groups. This gift would be repaid a couple of years later with a slightly bigger gift. If a gift could not be repaid, then the giver had established dominance over the other group and would gain some members from that group.

So the big man acted as a conduit of resources for his tribe. He made sure that everyone had food and resources, and he worked to increase the tribe’s prestige. He made sure the tribe repaid all their debts to other big men who had gifted them, and at the same time made sure that the tribe was giving out gifts to other tribes to maintain their prestige. Always trying to stay out of debt and be one gift ahead, the big man was a lot like a tribal bank. Taking resources from his tribe and investing them elsewhere, while getting paid back by a third tribe at a different rate. If he failed and went bankrupt, he lost everything and his tribe was in ruin.

What does this mean from a tribal leader perspective? Well, in this case, the tribal leader’s role was a provider and negotiator. He kept nothing extra for himself, but was rich in leadership.
1. Gather goods and skills from tribal members
2. Gift them to neighboring tribes
3. Receive repayment from neighboring tribes
4. Receive gifts from other neighboring tribes
5. Repay neighboring tribes who have given gifts
6. Redistribute resources to tribal members
7. Make sure the tribe can always pay back its gifts on time
8. Always outdo a gift when returning it
9. Up to the point when the neighboring tribe is unable to return a gift
10. At which point the tribe now provides for a neighboring tribe, establishing a higher provider status

The big man system is dying out as westernization and capitalism take over just like everywhere else. Not surprisingly, big men are the elected officials of choice in the new system. How can this information be integrated into the bigger capitalistic system?

Well if it were somehow possible to gather resources from people who trust me, and somehow gift them to another group in such a way that repayment was expected, and somehow implicit that if repayment didn’t occur, that my group would have a higher status than the other group and both groups would recognize that status difference, and somehow implicit that members of the other group could defect and join my group and prosper under my leadership if they wanted to enjoy the higher status : then the situation would be similar. Is that even possible in modern society?

Unfortunately these tribal leadership posts are leaving me with more questions than answers. I think what to take out of this is that tribal leaders must interact and trade with other tribes for the group, and that tribal resources flow through the tribal leader, while he keeps nothing for himself.

Waging Away

Last night the weight of wage slavery was feeling pretty heavy. I went to bed knowing I would wake up in 7 hours to sign in yet again. It has been about 2 years since I became a full time worker, although I was no stranger to it before then. And it haunts me to think how long this could continue, no end in sight. In these times I like to tally up how close I am to escape. First the shortcuts, then the hard way.

Work Part Time
Right now I spend $8400 a year, and have a passive income of $1600 a year. So I have a budget deficit of $6800 a year which I must make up in wages. If I can make $10/hour, I only need to work 680 hours a year. This is 17 weeks of full time work : after which I could take two thirds of the year off. Alternatively I could work 13 hours a week every week all year long. This is actually quite tempting, but my capital would stop growing and I would never retire early. It might be worth it, as I would feel comparatively as free as a bird for 8 months of the year. Maybe work through the winter and take the rest of the year off. Tax preparation might be a good job for this. If anybody knows any other good jobs where you can get lots of hours for 4 months, let me know.

Retire in Africa
According to Wikipedia’s List of countries by GDP per capita there are about 30 countries, mostly in Africa, which have a per capita GDP of less than $1600. I could live there in comfort on my passive income. Not actually considering this, however, it would be awesome to travel there on the cheap.

Live as a Hobo
I could drastically reduce my living expenses by living out of a backpack and sleeping under bridges and whatnot. I would find work here and there and trek on, never paying rent, getting by on good will. Obviously I don’t know how low I could go until I tried, but I think I could get down to $4000 a year expenses. I don’t think I could get under $1600 in the USA. This idea actually sounds pretty cool to me if I had a slightly higher passive income to serve as a safety net. But at that point it would really just be another form of travel on the cheap.

The Hard Way
The put my head down and keep working until my passive income rises to the point where I can retire early way. My calculations show about 3 to 7 years until I’m free from waging away, depending whether I get a higher paying job, investment returns, and how low I can go on expenses. This is what I’ll end up doing, most likely. Bummer.

H1N1: Swine Flu

For the last week I’ve been fighting and recovering from swine flu. I will continue to call it swine flu because that’s much more hilarious than H1N1. It started out with a sore throat and got worse from there.

I checked my symptoms against the swine flu and they are a perfect match. Sore throat, nasal congestion, hacking cough, high fever for the first 1 to 5 days : subsiding to a persistent cough and fatigue for the next two weeks. Some people may get nausea and vomiting but it’s less common. Once I knew what I had, I did some research on the virus on the CDC’s website.

The flu is a seasonal illness. Every year, the flu virus mutates slightly and a new strain infects humans. If it didn’t do this, humans would quickly build up antibodies to the virus and it would never have any hosts. Flu season in the northern hemisphere is late fall and winter. During spring and summer there are usually very few flu infections at all. However, the swine flu outbreak began in spring, and has persisted in North America throughout the regular off season for the flu. It is irregular for a flu strain to have such resistance through the summer. As far as I can tell, this is the main reason that has given epidemiologists such alarm, and spiked such alarm in the media. All the hype happened in mid-spring when disease researchers realized the flu wasn’t going away like usual.

Next up, currently (as of last week of September) over 99% of all flu cases in America are the H1N1 strain, so if you get the flu, you can bet which one it is.

Next up, H1N1 has been a rather mild version of the flu, as far as flu’s go. It’s survivable and has a low kill ratio. Vomiting is low. I can tell you it still sucks to have it though.

However, we are at the beginning of the 2009-2010 fall/winter flu season in the Northern hemisphere, which means that a new strain of flu is about to enter the scene. The main concern about this pandemic is that a mutated and more deadly version of 2009 H1N1 will retain its same resilience and cause mass disease and death.

Only time will tell now, and according to the CDC stats, H1N1 infection rates have been consistently soaring above even regular seasonal flu’s spike numbers in Dec : Feb. So we’ll see just how bad it gets starting in Winter, but I’m glad I’ve already had it so close to this year’s flu season : it will probably give me antibodies to prevent infection from this years strain. I will be a survivor.

Here’s a link to the CDC’s FluView where you can find detailed graphs and stats on the flu. I strongly suggest you look at the yearly cyclical graphs on the sheer number of people getting infected with flu over the summer when usually it’s zero. It is alarming. Keep an eye on it, especially starting in November and December when flu infections typically spike. I’m not sure, but I believe the CDC updates this site on a weekly basis (with about a two week delay on the data it seems) so you can track the flu’s progression there.

TARP Bank Stocks

Banks have been capitalized at dangerously low levels for a long time. Most of the banks I look at have equity of only about 10% of assets, many are even lower. Several major banks were around 20 to 1 last year.

This set the stage for a credit collapse. Pair that up with making some questionable homeloans in the subprime market. A few bad breaks created a snowball effect, bank stocks plummeted. Credit markets froze over.

The US government stepped in and gave temporary loans to capitalize certain favorite banks. This, in effect, was a government guarantee that certain banks would not fail. Not only that, but the banks that would not fail had money to lend at a time when credit was frozen, a huge business advantage. These TARP banks’ stocks plummeted in a market panic and were available for ridiculously low prices with a guarantee sticker from the government.

I thought this was the greatest thing in the world and saved as much as I could from every paycheck to buy more and more. I’m happy to say I ended up with 3 TARP bank stocks. I picked ones that were a combination of the cheapest, and the most likely to return quickly to profitability.

Now that the smoke is clearing, my picks are playing out like the once in a lifetime investment opportunities I thought they were. Many banks have returned to profitability, or are expecting small and survivable losses for a period.

Third quarter earning season is coming in the next few weeks, and we’re not out of the woods yet with this unemployment. But so far nothing has indicated that it’s anything more than an intense, but regular credit cycle downturn.

Picking stocks is no longer the shooting fish in a barrel fest it was up until July, but things are still on sale. It’s just that they’re half off instead of 90% off.


Last weekend I sold a speaker set, one of my remaining largest possessions. It’s part of an ongoing effort to get rid of most of the large stuff I own. Why? Stuff is like having an anchor out. Moving around becomes difficult and expensive. I have moved from one rental to another several times, and it’s always an ordeal of epic proportions. Since I’d like to travel around a bit, downsizing has been in order. Perhaps if I were older and more settled, or had a much higher income, I wouldn’t be fighting so hard against stuff. But stuff is expensive, right now I can’t afford it.

Other remaining large possessions are:
Full size bed
Road Bike
Desktop Computer
Small Chest of Drawers
Collapsible Bookshelf

The synth is to be sold, or stored with the intention of selling.
The bike comes with me.
The desktop may be changed to a laptop.
The drawers will probably tossed after I downsize my wardrobe.
The bookshelf doesn’t actually take up much room and I’d like to keep it.
The bed is the biggest thing and I see no way of keeping it if I’m to travel.

Other small stuff:
Clothes : I want to get down to about 3 outfits, that’s all I wear anyway.
Books : I have about 2 boxes of books that I haven’t read in years
CD’s : got a couple hundred old CD’s I rarely use
Various Crap that I never use : too much to list, but fills a small box or two

Ideally, all of my things will fit into either a backpack that I can live out of while moving from one lodging to another. Or fit into a van that I can live out of while moving from once place to another.

The backpack strat seems a little too light to me, while the van strat seems a little excessively expensive.

Finding the Right Companies

For the past several months, I’ve been slowly working my way through a list of about 10,000 publicly traded companies in America. I use morningstar.com to look at the last ten years of financials for each company, and then I decide whether or not the company is worth further investigation as a possible investment.

What I’m looking for in this preliminary check is consistent profitability and compounding growth. I look at 3 things. Net Income, Common Equity, and Shares Outstanding. They are the bottom lines of the income sheet and balance sheet. These three things combined give me a rough idea of the per share growth in earnings and equity over the last ten years. If the company has non-negative earnings and equity growth, I will add it to my list of good companies.

Using these criteria, I have eliminated some 60% of companies that I’m just not interested in. They are eliminated for various reasons : extremely young companies, dying companies that have suffered enormous losses over the last few years, consistently unprofitable companies, and companies which have a growing share count but sporadic profits, to name a few.

The other 40% of companies have shown some level of consistent profitability in the last ten years. I’m interested in keeping these companies on my radar in case they become attractively priced. I’ll be doing further cuts on them to figure out which of them are truly compounding companies.

The really good companies, the ones I’m looking for, have growing net income, growing common equity, and constant or even decreasing share count. This means they are expanding their business and buying back shares at the same time : the key ingredients for growing exponentially. Some companies are able to do this for ten years at a time, some companies have been able to do it for a hundred years.

Why am I doing all this? Well, I believe it’s possible to achieve above average investment returns simply by owning the right mix of excellent companies (compounding companies). I also believe it’s possible to achieve even higher returns by buying and selling those companies at the right times during the business cycle. And I believe all this is possible because there are underlying business conditions which cause profitable companies to tend to remain profitable, while unprofitable companies tend to remain unprofitable.

Cash Flows for Average Joes

Everyone, from the biggest company, to the poorest individual, has to balance their positive and negative cash flows. Here’s what the equation looks like.

(Wage Income) + (Capital Income) = (Consumption) + (Debt Payments) + (Investment)
Each one of these has their own function, so the equation can be expanded even further, but we’ll keep it simple for now.

More succinctly,
Income = Consumption + Investment

This equation pretty much sums up all you ever need to know about personal finance. Everything else is bells and whistles. Let’s dig deeper into this second equation

First, you pick your income. Wage income is controlled by you, to a certain degree. For the most part, you have the choice of how much you want to work, whether it’s 20 hours a week, or 100 hours a week. You also have the choice to invest your time and energy to get higher paying jobs. For Average Joe, the upper limit on income is between 50,000 and 100,000. That would be 100 hours a week at 10 to 20 dollars per hour.

Next, you pick your consumption. You can choose to consume the barebones minimum of around 5,000 a year, or you can consume all the way up to your full income. If you consume less than your income, you will have a budget surplus, or positive Investment. If you consume more than your income, you will have a budget deficit, and have to take on debt, or negative Investment.

Notice that Investment is a function of Income and Consumption and not the other way around. It is common for people to have this mixed around. They have a target amount that they are trying to save and invest, and they try to set aside some money from each paycheck. They ignore their consumption levels and income levels and focus only on savings. What ends up happening? They save up the money from each paycheck for a few years and then spend it! Or they don’t even make it a few years, perhaps only a few weeks.

The effective investor targets Income and Consumption. By consistently keeping consumption below income, they always meet their savings targets. Which brings us to investment, and to the top equation.

When consumption is consistently below income, there is a budget surplus, which is invested in capital. Capital is any productive asset that generates a profit without additional work, meaning it pays you. It is another form of income, a passive income.

Conversely, if you consume more than you earn, you will take on debt. Debt is an exchange of consumption today for consumption tomorrow. So you will have to make payments on the debt, which will crowd out your future consumption. Notice that your debt is actually somebody else’s capital, since they receive a positive income stream for doing no work. So debt is literally negative capital.

So your positive cash flows are Wage Income, and Capital Income, and negative cash flows are Consumption and Debt Payments. Taxes and a couple other things are getting ignored here. When you add up those positive and negative cash flows, the leftovers are investment.

Thinking about these things in terms of cash flows rather than present values is much more effective for calculations. When a consistent investor saves up enough capital so that their capital income exceeds their consumption and debt payments, they can stop working. Until that time, they must make up the difference with wage income.

Buying a House

Here’s another topic that’s probably overdone, but this is my 2 cents. Big houses are ridiculously expensive. Many houses I see today are what would have been considered castles a few hundred years ago. Dwellings once reserved for the upper class are now available to the working man. Ah, progress. But at what cost?

When I was a kid I was told by many sources that buying a house with a mortgage was one of the greatest investment moves I could make. I would be paying money towards ownership of an asset rather than money to a landlord who owned the asset. I could deduct the interest payments on my mortgage from my taxes. And now this past year, the government would even pay me up to $8,000 to buy a house. All of this sounds amazing, why on earth am I not buying a house yet? The short answer is, I can’t afford it. Not only can I not afford it, I believe very few people can afford it. Yet many people do it, and they are paying for it with 45 years of labor.

Is it categorically wrong or bad? No. I grew up in a house, and it was awesome. Mostly because it was entirely our own house. We had a small place that we could pretend was our territory, and for most purposes, it was. I have rented for several years now since moving out, and I don’t have as much space or freedom. So buying a house is definitely worth something : as long as you realize what you’re really paying for it. Most houses in cities right now are around $150K. Which at 5% interest rate is about $7,500 in interest per year : surprisingly close to the $8,500 a year I need to retire from working for the next 40 years.

The farther I’ve gotten into personal financial analysis, the more I come to realize this one factor, home ownership (and vehicle ownership as a smaller but still vastly important issue), is the key point in personal finance for the working class in America. Whether or not somebody has a mortgage will nearly by itself decide a person’s financial fate. It will decide whether they live in abundance, or live scraping to get by every month for their whole lives.

The problem arises when people take on a huge debt without any capital to offset it. In order to pay the interest on this debt, they literally must earn a wage income for 30 years. If you look at the last post on Cash Flows, taking on a large debt crowds out investment and consumption. And the magnitude of debt that people take on is amazing. It astounds me that people think they can afford something that costs more than $100,000 when they only earn a fifth of that per year.

The counter-argument is that people have to pay rent anyway, why not have it go toward the equity on a loan rather than into the pocket of a landlord. Several reasons, actually, all to do with hidden costs of owning.

First off, most houses are larger than anyone really needs, and so people tend to buy bigger houses than they rent. So people tend to have larger house payments than rent payments. This is evident in how apartment buildings and rental houses are split up into several smaller units.

Second is insurance. A mortgage is a debt on a house so large that the borrower couldn’t possibly repay if it burns down, or blows down, or blows up. So tack on a thousand dollars a year in insurance to buying a house.

Finally, property costs. Owning a house means paying property taxes, maintenance costs, and fixed costs related to stocking a home with everything it needs (like tools and appliances). Some of these costs are passed on from landlord to renter, but again, they are split several ways because the property is divided into multiple units. A homeowner must pay all these costs themselves.

All this adds up to large negative cash flows that crowd out investment, which is why this decision can single handedly decide somebody’s financial fate. People tend to buy as much mortgage as a bank will let them, and it can literally make it impossible for them to invest any money until their mortgage is paid off 30 years later. While a house is a real asset that will retain its value, even after it’s paid for it still has negative cash flows related to depreciation and maintenance. So while it is an asset that holds its value to a degree, it is not a productive asset.

With all that said, someday should I want to settle down and have a spare $200K, I would love to own a house. Preferably made of brick or stone rather than wood and plastic like so many that I see. But until then, I have no illusions that I could pay $200K for anything. This whole post has really been an indictment of the buy now pay later attitude. Houses are just the biggest thing most people ever buy on credit.

Stock Ownership

In the last week my portfolio is down about 12%, probably because it has done so well in the past months, people are taking profits, while the major indexes are down about 6% in the same week. I am utterly unconcerned. Instead of running around and pulling my hair out, or panic selling my portfolio, I am totally unphased. In fact, I am more likely to buy additional shares of these companies.

When I buy a stock, I think of myself as an owner of the company. I own the rights to a share of their stream of profits and losses, although my losses are limited to the amount I invested. This is basically the definition of stock ownership : owning a share of the company. Knowing this gives me an unwavering sense of security about my investments. When there are sudden huge price movements for no apparent reason, I’m not bothered. I knew what I was getting into when I bought the shares, and I have no illusions about what stock ownership means.

What would bother me is if the underlying productive assets of the company were somehow compromised or damaged. In other words, bad news, really bad news. Let me point out that missing earnings by a couple cents per share is not really bad news. Variations in earnings are common and unpredictable. If a company consistently earns less over several years that’s a real issue. In fact that is the real issue that people are worried about when they panic sell after a bad earnings report. Back to the subject at hand though, I’m talking about news that significantly changes the underlying capacities of the company for now and for ever. Like if the factory burned down, or the accountants had been cooking the books for the last ten years, or the government regulated the business in some new way. These news stories warrant a change in the real value of the company.

This long term owner mindset is fundamentally different from the way that most people think about stock ownership, despite the fact that it is literally the definition of ownership. They treat stock ownership like race track gambling where you guess the short term movements of the prices of four letter symbols. If that’s the way they think about it, then I can understand why they panic sell : they have no idea what’s going on. Fear of the unknown.

When I select which companies to buy, I choose strong companies that I would be happy to own through thick and thin. I choose compounding companies that have a good chance of compounding in the future. I choose companies that I’m willing to invest some money in, and take their return whatever their fate may be. If I owned my own business, it would be mine, and I wouldn’t want to give it up on some fickle feeling I had one day. I would not sell it unless somebody made me a ridiculously over priced offer, and I treat my stocks the same way : they’re the closest thing to my own business I have.

This is the fundamentally different mindset. If you can think about it like an owner, you will do well. If you think about it like an investor, you’ll do average. If you think about it like a gambler, you will probably lose.

The owner’s mindset and how to own stocks well.
It is first and by far the most important to choose and own good companies, this is what gives them their value. And this is what makes you an owner. Something about these companies makes them better than others : they have a long term advantage. Hold a portfolio of good companies like you own them. Like they are something that is yours and you wouldn’t give away because you know that they have great intrinsic value. That value is the rights to their profits, and even the rights to their stream of life force harvested. Check the ownership posts in the archives at the very beginning of this blog for an explanation of how life force plays into all this. There is much more at stake here than just stocks, profits, businesses, and money. This is literally about the difference between freedom, and working like a slave : ownership is extremely valuable. Treat it as such and you will do well. So first and foremost, be an owner of good productive assets.

In a far second place, it is important to buy stocks (or any productive assets for that matter) at low prices relative to their value. Buying in at a lower price will slightly increase your return, but in the long term, whether you buy a stock half off, or at twice its fair value, your return will equalize out to the average return of the company. That’s why it’s so much more important to pick a good company than a good price.

In last place, is to sell the stock if it becomes ridiculously over priced, or if it ceases to be a good company. This one is not so important if you don’t do it, because if you hold an over priced excellent company, you are still the owner of an excellent company. It is still a good position to be in. If you sell, you have a position in cash, which is not a productive asset. However, *everything has a price, even productive assets : and if some sucker will buy your shares at a high enough price, you take it. How high that line is depends on the owner and the asset. Note that if I actually did own my own private company, or if I felt one of my stocks was one of the best companies in the world and I was especially tied to it, I may never sell it for any amount. These assets would be priceless. *Well, maybe not everything.

What is Money?

It’s a simple question, but the answer is mind boggling. Money, in its simplest form, is a token of a promise which is recognized as such by both parties in a transaction. The token is by itself worthless, but when the promise is attached to it, it is given great value. In other words, it’s a widely accepted IOU. Money is a promise. It is trust on paper. It is one person giving another person something of real value, like food : and getting back a promise in exchange. A promise that in the future, they will receive something of real value back. Note that real value now is better than a risky real value in the future : thus giving rise to the “time value of money.”

Why would people do this? This system of IOU’s greatly increases the efficiency of exchange transactions in a specialization economy. Before money existed, trade only took place by barter exchanges. It would be possible that if you knew somebody closely you would take their word as promise. But if you were to trade with a stranger you would reasonably demand that the goods be traded up front, less you be swindled. With a system of money, it became possible to make transactions with only one party trading the goods up front. The other party exchanged money. And since the system of IOU’s was widely accepted, those IOU’s held their value and could be exchanged with other people.

As team size grew larger and larger, again see the posts at the beginning of the blog for what I mean by team size, people on the same team became less and less related to each other. They had less individual incentive to work together and trust each other. But they still needed a system to help them work together because they had much to gain as a group. Teams that worked together better had an advantage over other teams. Money was an internal system of trust exchange. Different teams had different currencies, all of them valid only in their internal contexts. Currencies between teams also existed. Gold, silver, these were universal currencies.

So why does the system work? What keeps people honest? What stops people from conning the system and giving out a token of a promise without ever fulfilling that promise? How come one guy couldn’t buy a cow with a small piece of metal, and then never give anything of value back for it?

Well, as far as I can tell, the only thing holding up this house of cards is the power of the government behind the currency. So the short answer to the questions in the paragraph above is “force.” Governments force the people to respect the value of money by penalty of law. And really what this means is that the society of people on a given team enforce their system of promise exchange. Somebody who consistently fails to meet their promises is a debtor or perhaps an outright fraud. They will go to jail or go bankrupt, and they will be trusted by no-one. When reading some of the most ancient systems of law ever created, it is interesting how many of the laws have to do with basic honesty and accountability. It is also interesting how following the fall of the gold standard, the US dollar became the international exchange currency. It is no coincidence that the US government was the strongest military power in the world at the time. The only reason the dollar was respected as international currency was because the US had the power to enforce it. And it still does, for the time being.

So individuals are made to keep good on their promises by a society wide system of enforcement. But what keeps people from defrauding the whole system by creating their own money? Again, the government regulates counterfeiting. In the past, commodity currencies such as silver and gold were used because they were scarce resources. It was difficult to find or create or counterfeit them. Nowadays, paper currencies have intricate designs and are regularly updated and changed slightly to stay one step ahead of counterfeiters.

But who controls the printing of today’s fiat currencies? Who issues the money? And what stops them from printing a larger money supply and just spending the extra money? This is where it gets interesting, and it really deserves its own post. So, to be continued €¦

Mixed Bag

Haven’t posted in a while because I was busy studying for a professional exam. With about 18 years of school under my belt, I figure studying is what I do best, why not study my way into a higher income level? If I pass some exams and land a high paying job it will move my retirement up to about 3 years from now instead of a decade from now at my current $20K a year.

With the exam out of the way I’m now turning my time and attention back to harvesting huge amounts of financial statement data on the few thousand companies I consider to be worth keeping on my radar. I’m trying for above average investment returns. Obviously I can’t keep an active eye on 3000 companies. But I at least want to have the old data on them in case I ever want it. For some reason, financial statement data older than 10 years is no longer freely available on the ‘net. And I don’t mean it wasn’t recorded before 1999. I mean after 10 years, it is removed from all major sites. Last year you could have seen ’98 data, but now you can’t, the year before that you could have seen ’97 data, but now it’s gone, etc. As if it’s no longer important. I have a secret source to get data from up to 15 years back, but there’s a dark curtain at that point. If you have a free source for this info, let me know. The only method I know of for data over 15 years old right now is old S&P manuals, which are hard to find. My conspiracy theory is that this data is intentionally removed to keep average investors focused on the short term so they cannot recognize the true value of equity.

In other news, after about 5 months, I’m going to stop counting how much money I spend every day, at the risk of my consumption floating upward. It is tedious, and well, just kind of weird. I’m sure that I’ll still be doing it in the back of my mind anyway. As I mentioned somewhere else already, the actual counting isn’t as important as the attitude toward consumption. Since I have the right attitude now, I don’t need to count anymore. But I highly recommend a daily consumption spreadsheet to anybody trying to get into that attitude or out of debt or whatever the personal goal may be. With stock prices back up into reasonable ranges it’s no longer as important to be saving every single penny I can any longer, so I’m going to relax a bit, possibly spend a couple thousand dollars I don’t have to, maybe get out of the winter lands while they freeze over. I’ll probably start a new spreadsheet in another year or so to see where I’m at. The final number on my average consumption over the last 5 months ended up at about $23.50 a day, or about $8600 a year.

And finally some random news, today Berkshire announced they will acquire the rest of Burlington Northern / Santa Fe Railroads for about $26B. They’re paying about P/E 18 for it, and that’s roughly normalized since BNI’s earnings weren’t really hit hard by the “recession.” In quotations because to me it seems like it has very little to do with underlying economic factors, and very much to do with money supply and asset price factors. Anyway, railroads are good companies. High barrier to entry, been around for a long time and still going strong. Probably going to be around longer than other bulk transportation. BNI has had compound growth since 1980 or so which is the earliest data I have on it. The huge drop in their share price in 1989 was some kind of divestiture, possibly related to the merger with Santa Fe. Not sure of the details, but it was a divestiture, not a stock crash. Anyway, the acquisition is good news in my book. For both companies, and for the market atmosphere.

And my own portfolio’s random news. My tiniest company, a small FL insurer, which was also one of my tiniest holdings, weighing in at $37M market cap had a buyout offer a week or two ago at about a 20% premium to the share price. Now, when the offer came in, the stock soared about 10-15%. They rejected the offer yesterday, stating that it grossly undervalued the company (which I independently agree with, in fact I think it’s worth about 4 times its current price) and that shareholder value was better protected by sticking to their own plans for growth. They also announced a share buyback totaling about 1/8th of the common shares. I considered this great news that this company I had bought on value also had a management which not only recognized that value, but also had the shareholders’ best interests in mind! And I love share buybacks, they consolidate value for long term holders. But the stock has tumbled since then, proving to me that nobody has a clue what is going on, and that above average returns are not only possible, but probably easy. Maybe everybody read the headline that the offer was rejected but didn’t read the company’s statement where they mentioned the grossly undervalued part. So I doubled my position with some cash I had been saving up for a good occasion. Shootin’ fish in a barrell.

Money Part 2

So, picking up right where I left off from the “What is Money?” post, governments should be in charge of issuing, regulating, and maintaining the money supply. This is no easy task, but it definitely belongs to the government. Any individual or private institution put in charge of this power would have the ability to print their own money. So the government has to maintain the money supply by replacing old and broken money , and also changing the absolute money supply to hold a steady currency value.

Money’s value will naturally drift depending on lots of factors. Most notably is the amount of promises and transactions taking place. If you recall, money is just an IOU, or a promise. If there are more and more promises happening, due to population growth or a period of intense trade and productivity, but the same amount of money in circulation, the promises per unit of money on a nation wide scale will go up. Money will become more valuable. In this way, money is actually a flow rather than a constant. People depend on the system of promise exchange to remain stable, and so a government has to modify the money supply to keep a stable value level. If the currency doesn’t have a steady value, it will cease to perform its function. So my point here is, that there are legitimate reasons for a government to be printing extra money : which makes it very difficult to stop it when it’s done for profit.

Which brings me to seigniorage, the term for the profit derived by the issuer of new money. There’s really no way around it. When new money needs to be created, whoever makes it is going to earn the profit of the value of the money, minus the cost of creating it. This profit should be offset by losses when a government needs to lower the money supply by destroying money, that is they should have to purchase the money back to destroy it. Unfortunately, because of the profit derived from creating money, it is mostly a one way street. They have every incentive to keep printing more money, and no incentive to destroy it. In practice, governments do not responsibly maintain a steady currency value, but instead slowly increase the money supply and pocket the profits. This is called inflation.

Inflation, as measured by the CPI in the United States has averaged out to about 3% yearly growth since 1918, my earliest data on it. In other words, the value of a US dollar in promises per dollar has gone down about 20 fold over the last 90 years. This means that the currency has been inflated at 3% average annual rate above the natural increases in money supply that would be necessary to maintain steady currency value for an expanding country with growing population, trade, and productivity.

In economics courses in college, the issue of why inflation existed was always dodged by my professors. It was included in all the economic models, but never explained. My theory is that it wasn’t talked about because “they” didn’t want people to know about it. They, in this case, being the people benefiting directly from seigniorage. That is, whoever controls the printing of money.

So, inflation is effectively a 3% a year interest being paid from all users of money, to the beneficiaries of seigniorage. In this way, the whole money supply, and using money in general is a form of “debt.” A debt that cannot be paid off. Debt is actually the wrong word for it. I don’t know of a word for it. It’s not quite a tax either. It’s a leak of value due to the current government policies.

What a major bummer. That’s not the whole picture on modern money, but I’m going to have to make another post on it again.

Money Part 3

Money is loaned into existence. Imagine the first day that money was ever used. On that day, money was created when one person gave another person a promise to be paid back in the future. This was just like any other promise except it was denoted by a physical token. Real goods were exchanged for money with the understanding that the money could be exchanged back for real goods in the future. Now imagine that the same two people transact again in the future, and the reverse transaction takes place. The promise has now been fulfilled, and the money is returned to its original issuer. The promise that initially imparted value to the physical token has now been fulfilled. The token is now worthless again. Money has been destroyed.

That was a simplified version of money creation, but the core principal still holds in the world today. Money is created when real goods are loaned for a promise to be repaid in the future. The difference in the real world is that money is not destroyed when loans are repaid. Instead there is a money supply that remains always in existence to be used in ongoing transactions between multiple parties. The loan / promise part of money works at a national level. You receive money from person A in exchange for work. You are repaid in food by person B in exchange for money. Person B is repaid by by person C with clothes in exchange for money. All of these promises hold their value from one transaction to the next. The integrity of the promises are upheld by the government. In all of these regular transactions money is neither created nor destroyed. The promise is just shuffled around. The net effect is that whoever is holding the money at a given time is owed real goods in the future. This is a good thing. It allows a reliable system of exchange among the people of a given team.

Taking a moment to look at this from a tribal standpoint, the money supply is a bunch of half finished exchanges, outstanding promises, and unfulfilled favors that is just constantly present in our tribal group as a nation. We all owe each other. In America, money accumulation has become a national religion of sorts. What does that mean from a tribal perspective? Money accumulation is just accumulation of promises / IOU’s / favors. Perhaps the obsession over money is an outgrowth of a tribal respect for a very productive and trustworthy tribe member, who everybody owes because they are usually giving more to the tribe than taking. This consistent value provided for the tribe would lead to respect, trust, loyalty, and allegiance within the tribe. Perhaps this is ultimately what we’re after in the accumulation of money. And perhaps if we focused more on these human relationships and less on government issued money, we could become truly wealthy. For example, I may be too poor in money to own a car, but if I know 5 people who would give me a ride any time because I provide value for them in other ways, I wouldn’t need to own a car. I would be wealthy in people. In my observation, this kind of tribal exchange only exists at the core family level in America.

Next money post will deal with actual real world money creation : which means banking.


“It is common knowledge that if we want to be successful at something, at anything, we must desire it continuously, and be willing to act to fulfill that desire every day. Think of the most successful people you know. Isn’t this what they have in common? If we look at their lives, we see that they have worked long and hard to achieve excellence in their chosen field. Behind that, an insatiable desire to succeed in their efforts kept them driving them forward, overcoming obstacles, working for years toward their objective. It is like that in yoga and religion, which is working toward divine union.”


Advanced Yoga Practices



Update on the Downsize

Slowly but steadily I continue to shed the weight of carrying all of the stuff I have accumulated over the years. At first the pounds melted off as I easily gave away huge piles of things I hadn’t used in years. Now I am considerably leaner, and the rest of the process is going to be streamlining the remaining things I do have.

There is a cost to having things that’s gone unspoken in my life. But it’s always been there, implicit in the environment. It’s the cost of carry. Everything I own has a weight to it. This weight makes it hard to move. 3 years ago it would have taken a small U-haul to carry that weight. Today a minivan or pickup would suffice. But the weight is always there, not only when moving from one place to another. At those times it is only made evident just how painful it is to move around while carrying so much weight.

The carrying cost is cloaked by other costs. Part of it is storage cost. How much of monthly rent payments is for a place to sleep, and how much is for storing my things? I once rented a storage unit to hold all of my things to facilitate a move. It cost $55 a month or about 1/8th my rent. Another part of it is vehicle cost. Renting a U-haul to move, or owning a vehicle to move are both very expensive. Also things just plain cost time, effort, and money to have. They must be maintained and replaced. And finally, there is the opportunity cost of not being able to just get up and go anywhere, anytime. That’s ultimately why I’m doing it. Freedom of foot is one of my most basic freedoms, one that I have tasted on vacations, but never truly enjoyed yet.

What I Have Left

A desktop computer, soon to be converted to a laptop
A 2 €² x 5 €² folding table
An office chair
A double bed and bedding
A small nightstand with drawers
A lamp
5 pairs of shoes
A collapsible bookshelf
One small box of books and papers
A box fan
A Walmart white plastic “space saver” drawer full of odds and ends that I rarely use
A Trek roadbike
About 3 outfits of clothes
About 10 DVD’s and 100 CD’s
Various personal care products, about one small box worth

My parents, who love their mortgage, have thankfully stored a few other things. I’m getting close. I don’t know to what yet, but I’m getting close. I will replace my desktop with a laptop. I will lose the table and chair. Bed and bedding will replaced by sleeping pad and sleeping bag. Drawers and bookshelf will be replaced by pack. When it all finally fits in a pack : I will truly know how much it costs to carry it around.

1.25 Million Dollars

I finally have enough money. Not enough to stop working forever, but enough that if I stopped working, I’d be fine for a long time. Enough that I could get by working 4 months a year. Enough that I never have to worry about it. I didn’t have enough until recently, and didn’t even realize it until just now. I still felt the mindset of a debtor.

On a T.I. blackjack run some years ago, I calculated I’d need to win about $1.25 million to be free from work forever. I figured I’d just go double up 20 times in a row. With free use of my parents’ house and car at the time, I was accustomed to a lifestyle that would require over a million dollars to retire. It seemed impossible. I would never have enough to even start saving at that consumption level. I was going to have to work extra just to break out even, and more on top of that if I wanted to save. I was running a deficit. I knew I would never have enough unless I won the lottery.

Or learned that I didn’t need as much as I thought. Now I put the magic number around $200,000. All my bets are paying a 6 to 1 bonus now. I can’t lose. I don’t even have to bet. But I’ma do it anyway.

I now run a massive surplus. If I set my investment rate to zero and maintained consumption levels starting today, I would only work 4 months a year for the rest of my life. My old casino dream is now a reality. I would have needed $800k to be at this point under my old consumption habits, and it would have taken decades. Now I am suddenly here on the home stretch like I won the lottery.

Good Habits: Meditation

Some goals are easy and can be accomplished in one day. Other goals are enormous and are impossible unless worked on a little bit every day. Some big goals like this that I have encountered are weightlifting and financial freedom. Every day’s practice builds on all the practice put in previously. Any newbie can progress to advanced status just by sticking with the practice every day. And it doesn’t take any secret shortcuts or incredible luck to succeed. It just takes continued effort toward the goal, and some common sense to learn the right way. Shortcuts do exist, but are only useful in conjunction with daily practice of the core activity.

For example, in financial freedom, it is only worthwhile to become skilled at managing investments if you are already saving money every day that you have to invest. Then it will increase your return rate on a large sum of money. You could be the smartest investment manager in the world, but if you’re not saving money, you will still be outperformed by Joe Blow who invests solely in government bonds but maintains a high savings rate.

What it really comes down to is having good habits. Saving money is a good habit. Regular cardiovascular activity is a good habit. These simple good habits lead to amazing long term goals. Financial independence, and long term health, in these two examples. I’ve found that these simple long term goals seem to be more worthwhile than short term goals. And I’m interested in starting more simple worthwhile good habits that reap long term results. One such habit I’ve just found is meditation.

Recently I posted a link to www.aypsite.org which is a website about the spiritual practice of Yoga. I am not a yoga practitioner as one would regularly think of it. I am in fact very inflexible right now. I stumbled upon the site because of meditation. On the site, the author describes daily meditation to a state of pure consciousness (quieting the mind and other noisy energies) as one such daily practice which leads to the long term goal of “spiritual enlightenment.” The rest of the site is about the specific applications and techniques along the way (the shortcuts to be used on top of meditation), and the traditional western view of yoga as stretches and poses (called “asanas”) is just a limited view of some of the advanced side techniques and shortcuts to be used with daily meditation. But the site continually emphasizes that the one key core practice is daily meditation, and if you can do that every day, you will still be moving toward the goal every day, and you will get there sooner than anyone who studies all the shortcuts without the core practice of meditation. This reminded me very much of the daily effort needed to move toward financial freedom, and I was intrigued.

I’ve meditated before, and even had some amazing experiences, but never made it a daily practice until a couple weeks ago. So far I am very pleased with it. In addition to the spiritual benefits, it is also an entirely free practice, which fits well with the practice of saving consistently. I recommend aypsite.org to anybody. I also began cardiovascular workouts (jogging, also free) on a daily basis a couple weeks ago. Please share any other worthwhile daily practices you’ve found in life with a comment here. ThanQ.

Money Part 4

I’ve delayed writing this last post for a while because I don’t really know how all of this works. I think this is the most important post on money from a practical viewpoint though, and it’s actually the reason I started the whole series. The previous money posts, although conjecture, were pretty well grounded in their assumptions, and generally hypothetical in nature.. This post is about money creation in the real world, and is mostly just my opinion on how this works, so take it with a grain of salt.

Now, responsible governments would only run a deficit in times of dire need, such as a war or famine, or some horrible thing like that. These days they are running a deficit every year it seems, and for no good reason. When governments run a budget deficit, they need to make up that money some how. The way I see it there are two options. They could simply print more money, or they could take a loan.

If they print money, they will inflate the existing money supply. They will be paying off their deficit by diluting all money holders. Inflation is a huge issue here, and obviously they can only print a certain percent of the existing money supply without violating the integrity of the whole monetary system.

If they take a loan, who do they take it from? If the money is borrowed from a private bank, it will be repaid to the bank using tax dollars in the future. The people of the nation pay taxes to the government, who repays the loan to the private bank. If no money is printed, the cash flow of this situation means that the people are taking a loan for government services rendered in excess of their tax payments in a given year. But that loan is repaid with taxes eventually anyway. This method of paying the deficit is essentially deferred taxation.

This makes a lot of sense because a third possible way the government could pay its deficit would be to raise the money through taxation. However, it would be very unpopular to levy a high additional tax rate in a year of large deficit, so the sneakier deferred taxation is used in practice.

Going back to the loan option, what if the private bank is replaced by a public, government owned bank? I submit that this is no different than printing money by a different name.

Notice that in the private loan option, money is still created. All of the money that is paid back in interest to the private bank did not exist before the transaction, it was created. And that doesn’t even account for the question: where did the private bank get enough money to make this loan? Mostly, that money is created too.

Which brings me to how I actually think all of this works in practice in the United States. When the U.S. government needs additional money, they take a loan from the Federal Reserve, a central bank. The Fed is a semi private institution. Private in the sense that it is privately owned by a group of banks and individuals, and public in the sense that it is a U.S. government institution. Please note that this last sentence is fact, while much of this post is opinion. When I first discovered that the Fed was privately owned, it blew my mind. You can go read it on their own website yourself if you want to : read their FAQ and the Federal Reserve Act of 1913. It is a privately owned institution run by an internally appointed board of governors, which is more common referred to by the word corporation.

Moving on, The Federal Reserve Bank controls the money supply in the US, meaning they are in charge of the decision to print money. The money is actually printed by the US Treasury. This is the part that I’m iffy on, but bear with me. The US government requests a loan to pay its deficit. The Federal Reserve approves the loan, and tells the Treasury to print the money. The money is given to the government, and the Federal Reserve gets treasury bonds in return. The US government is responsible for repaying these bonds with tax dollars in the future. The Federal Reserve keeps some of these treasury bonds, but also sells some of them to major banks (primary dealer banks) and to foreign banks. The amount of treasury bonds that are kept versus sold is the method by which the Fed maintains money supply stability (by which I actually mean a stable rate of inflation). In this way, the Fed can defer inflation to make it appear stable, whereas the amount of money actually printed in a given year is the real level of inflation.

Now there is a lot to digest in that last paragraph. The main part that I am unsure of is how much of the deficit is just straight up printed by the US Treasury, and how much is backed by already existent Federal Reserve assets. I imagine how it works is that they print as much as they can get away with, and the excess is backed by Fed assets.

What this means in terms of the previous discussion, is that the government is using both options at the same time to cover their deficit. They are both printing the money to pay for their deficit, and promising to repay that money to the Federal Reserve. If it’s not quite clear yet, here it is: the Fed is just getting all the created money for free, and they’re also getting paid interest on it. The money supply is diluted, and interest is being paid on it.

If you recall the previous money posts, you remember the term seigniorage. Somebody must benefit from seigniorage, and typically it is whoever controls the government. If that is a king, the king is richer for it. If that is a democracy, then the seigniorage can be used to provide government services and the people are richer for it. In our government, it is the Federal Reserve. So don’t hate the Fed (but I won’t blame you if you do) because if it wasn’t them, there would be some other group of powerful politicians who were getting the seigniorage money in some other way. In an ideal world, perhaps a democratic government could operate as fiscally responsibly as I do, saving money up each year so there was a consistent surplus that would be available in times of need, printing money to cover their deficits, but never needing so much that they would need to take a loan : but much more realistically, power hungry individuals will always have benefit to gain by taking the money for themselves.

Recall also that money is nothing more than a token of a promise. In this system, the promise is never fulfilled. The money supply is constantly diluted at a rate of about 3% per year, and wealth is constantly flowing towards the issuers of money. This all goes back to the posts at the very beginning of this blog a few months ago. Due to gross overpopulation, only a very small fraction of people on Earth are still free : the rest of us are getting farmed at a rate of 3% a year, and that doesn’t even count the interest payments, which I estimate at an additional 3% per year. And it also doesn’t count the countless other ways in which our basic freedoms are encroached upon by all the mass of humanity around us all the time. Even the ultra wealthy can afford to buy only the illusion of respite from that.

I don’t get too upset about all these revelations, despite the fact that it is horribly “unfair.” The way I see it, as I mentioned above, overpopulation means that not everyone can be free to have their own territory, and in order to survive, many people must submit to being farmed for the good of the team. The people who are most free will naturally be those that are best at tricking others out of their freedoms : and so it is no surprise that this leak in the money supply is occurring, and is not commonly known.

US Debt Clock

Check out http://www.usdebtclock.org/

Lots of interesting information there illustrating the deficit spending, fiscal irresponsibility, and inflationary practices of the US. I wanted to point out the $39,000 national debt per citizen. Obviously the debt is not paid equally by each citizen, but it still works as a good ball park figure. It also quotes $338B as the yearly interest payment on national debt. That’s roughly $3,000 per taxpayer per year. Again, a ballpark figure because taxes are not split evenly. Because of our consistent budget deficit, US taxpayers who are saving for retirement are starting out in the hole by a few grand a year. So if you thought something didn’t quite add up, and saving for financial freedom was a little harder than it ought to be, you were right. We inherited a great debt. I have a hunch the current, and next few generations will be paying it.

Which reminds me, in my personal consumption calculations, I left out taxes, and insurance, which I can easily add in by checking my paystubs and tax returns.

Reverse transactions

I came across an interesting concept in the book “Derivatives Markets” while studying for my recent exam. In any transaction, we think of a buyer exchanging money for goods, and a seller exchanging goods for money. These labels of buyer and seller are arbitrary, because each party is both buying the asset they receive, and selling the asset they give. This becomes obvious if you consider a barter transaction. You are buying whatever you’re getting, and selling whatever you’re giving away. So if I buy food from a grocer, I have bought food, and sold money. The grocer has bought money, and sold food. If I sell my time and energy, I can buy money from an employer. Say I work for a grocery store. The grocer is buying my work, and selling money. Bartering is rare these days. Money is common to nearly every transaction.


Insurance is the exchange of certainty for risk and money. Colloquially, when we say ‘buying insurance’ or ‘selling insurance’ we mean the buying or selling of certainty. To many people in many situations, certainty is worth more than uncertainty, and so insurance costs money. It is a form of option. A premium is paid for the option to exchange an asset for a predetermined price. For example, a homeowner pays an insurance premium giving the option to exchange a house for its original value in money. If the house is undamaged, the option is worthless, and they lost the premium. If the house is damaged, the option is worth the value of the loss : the homeowner cashes in the option, which cancels out the loss, but they still paid the premium.

The net effect of this transaction is that the insurance buyer is paying the premium every month, they don’t earn or lose money when the loss occurs, so their net cash flow is “pay the premium.” The insurance seller is gaining the premium every month, but occasionally pays for losses when the insured event occurs. For the insurance buyer, this cash flow resembles a liability. For the insurance seller, the cash flow resembles something between an asset and a wager. The more “fairly” priced the insurance policy is, the more it would resemble a wager. And for premiums above the fair price, it would resemble an asset.

In practice, insurance policies can have lots of specific rules about when losses are covered and how much of the loss is covered. The above discussion is a simple form of the situation (which does occur in practice as well), but the general concepts hold.

Now, notice that insurance creates no value, it only transfers it around. Barring fraud, it is a wager on events that are independent of the transaction. Secondly, notice that the expected value of a perfectly “fairly” priced insurance policy for the insurance seller is zero for the insurance seller (actually slightly above zero because they can invest the float between loss occurrences), and negative premium per month for the insurance buyer. Summing these expected values gives a total of negative premium per month. So not only does insurance not create value, it is shuffling around a negative cash flow. What is this inherent negative cash flow?

Well, things fall apart. It’s the way of the world. Sometimes they slowly depreciate, and sometimes they are destroyed all at once. The negative value of the premium could be thought of as an amortized payment toward this all at once type of loss, typical of disasters. But I ask, isn’t that risk of loss already priced into the value of a situation? Yes, I believe it is. People understand that there is a chance of loss in any situation, and the expected value of anything takes these negative outcomes into consideration.

This leads me to the conclusion that insurance is only valuable to those who cannot afford the loss. For those who can afford to take the loss, it is just a zero sum game that amounts to pointless paperwork and transaction costs. Take a moment to imagine how ridiculous it would be to purchase insurance for something that you can easily afford to replace many times over, and you will see that if the policy is fairly priced you are just paying somebody else to replace it for you. Why make regular payments with transaction costs if you can just make one payment to replace the loss when it occurs?

So now, in typical fashion at the bottom of the post, I am getting to the point of insurance. It allows people to own assets, or take risks that they cannot afford to take. In many cases, it seems to be a requirement for taking risks they cannot afford. For example, home ownership on credit (mortgage) is a risk most home buyers can’t afford. If they were to lose their $200k home they would probably be bankrupt shortly thereafter since they would have to arrange for new living expenses, plus pay off the old mortgage debt. Knowing this, banks will not finance mortgages to people who don’t get homeowners insurance. In this way, insurance could be thought of as paying somebody to vouch for a debt that cannot be paid in the event of a loss. Again, it goes back to the similar idea of an amortized payment toward the event of a large unaffordable loss. Thus heavily indebted people are not only paying interest on their debt, but also leaking money to insure the event that they can’t pay back the debt. They must purchase certainty that they can repay the debt by insuring against all events that would prevent payment.

On the flip side, responsible people can use insurance to allow them to take risks which are beneficial but otherwise impossible. For example, starting a business, driving a car, getting advanced health care, etc. Whether or not this is a good thing is a socioeconomic debate. Personally, I prefer to keep my own risks.

In my canvassing of publicly traded corporations in America, insurance companies routinely appear to be some of the most solid companies around. This could mean that in the last decade the loss occurrences have been low, but more likely, it means that because many people in our nation are heavily in debt, that insurance is a must have item. There’s also a high barrier to entry in the insurance field, which is heavily regulated, and requires huge sums of start up capital to begin business. All of this adds up to the freedom to set prices higher than fair value, which is a formula for profit. Insurance companies employ leagues of statisticians and mathematicians armed with computers, who like professional oddsmakers calculate the fair price systematically.

It would be no surprise to me that people who are forced into buying insurance because of their leveraged lifestyles are overpaying for it. I also wouldn’t be surprised to see the high debt lifestyle continue in America, and for government to continue to require insurance in many situations as overpopulation continues to cause people’s liabilities to overlap more and more. And so I will avoid insurance costs wherever possible by simply not owning things that I cannot afford. And I will also continue to invest in the insurance industry because it’s overpowered, and it’s not going anywhere.

No dude, that had not occurred to us.


I just finished reading a guest post by Todd Tresidder on Early Retirement Extreme who wrote an excellent account of his early retirement with sound and succinct advice for aspirants as well. One gem I picked up was the idea of buying a rental property and living in it. Todd points out that most wealth is built through private business and real estate, while paper assets such as stocks and bonds are commonly a parking place for already existing wealth.

Since I’ve spent at least a few minutes each day racking my brain for a way to beat the rent game, and even longer every day learning about investing and wealth accumulation, I can’t believe I didn’t think of the old adage: If you can’t beat ‘em, join ‘em. I’m beating wage slavery by becoming a business owner, why not beat rent by becoming a property owner? I like it so far.

I’ve got a few thousand saved right now for the very purpose of beating rent somehow, which would leverage me up to maybe a $30k property. Not even close to enough yet, but I still love this idea. Maybe I can find a way to make it work.

The others

Over the holidays, my parents told me in no fewer words that they believe I am chasing a dream that isn’t there. They believe I am pointlessly subjecting myself to a life of poverty. They told me to get a car, get a steady apartment, or even better, buy a house, get a better job, get a wife, and have kids. In short, they shat all over the dream. Fully expecting this and unshaken in my beliefs, I told them no, and to mind their own business. No hard feelings though, we just agreed to disagree.

They were, after all, just telling me the best advice they knew. In their minds the formula for success in life is the debt-based consumerist wage slavery. That is what worked for them, and in many ways, it is a good formula for success. From an evolutionary standpoint, for example, it gives one pretty good odds of survival and reproduction in the American environment. It’s amazing how differently such similar people can see the same situation, and how sure we can each be of our own conclusions.

I realized how strange my decisions and lifestyle must seem to not only my parents, but also to many, many people around me. They don’t believe it’s possible to save your way to financial freedom. To them, it would appear that I’m fighting a pointless battle against an imaginary opponent. So far I’ve been trying to tell people about this unseen opponent, but nobody likes bad news. I want to help them to be free, and I want allies and friends on this journey, but nobody wants to hear I am fighting for freedom, and that they, too, are a wage slave. And if somebody doesn’t want to hear it, no amount of argument will convince them.

So I keep on walking down this road, a little quieter. This is one journey I’ll be making alone. I’m still going whether or not it makes sense to other people. Perhaps I will find a brighter message to tell the others along the way.

Extraordinary Returns

Why would I believe in such a crazy thing?

I must have read a hundred books in search of extraordinary returns. Not until I sat down on my own and tried to solve the problem with common sense did I make any progress. This was about August or September last year. On October 1st 2008 I began tracking my results. Since then, my portfolio has grown to 1.26 times its value, compared to 0.94 for the DJIA, 0.91 for the S&P500, and 1.01 for the NASDAQ. So, although it’s only been 14 months, I am starting to get some affirmative feedback that what I did figure out may be as valuable as I thought.

First things first, I knew that, at the very least, above average returns existed because of variance alone. That is, nearly any stock would yield incredible returns, if you owned it over the low to high periods, and sold it over the high to low periods. This is a common strategy, called technical investing, or day trading. But variance by its nature is unpredictable. Winning that way is like winning at the casino, 99% luck.

So I set out to examine real returns on stocks. I wanted to see if there were any instances of companies that yielded consistently above average returns over longer periods that could not be due to variance. I arbitrarily selected something like 10 to 20 years as a sufficiently long period. Factoring high and low yearly prices and average yearly dividend yields, I made plots of rolling long period returns for all of the DJIA stocks. I had graphs of their 10 year, 15 year, and 20 year returns, some of them going back to the 1960 €²s.

The graphs showed that there are long term above average returns, and consistent differences in returns between companies. That is, some companies not only had above average returns over a single 20 year period, but they had above average returns over every 20 year period, in some cases, for as long as 50 years (and probably longer if I had more data). And also, a company’s long term returns tended to hover around a certain number, which was different for different companies. That is, one company might return around 17% long term, but in any 20 year period could vary between 10% and 25%. A different company that returns around 5% would vary between 0% and 10% in any 20 year period.

So, historically, the data suggests that non-variance above average returns are possible by simply owning the right company over the right long period of time. The time periods I used were long enough that it barely even mattered if you bought the stock at its high or low price for the year. For a few excellent companies, the data suggested it didn’t even matter what year you bought the stock in, only that you picked the right company.

This all might seem silly to you, and like a lot of pointless work. But I was sick of reading somebody else’s explanation of stock investing, and I was ready to find my own answers. When I started out as an investor, there were an overwhelming amount of companies available to choose from (there are about 10,000 readily tradable public companies on the main US exchanges). Most of the data that was available on those companies was short term, on the scale of 3 to 10 years into the past. While I had read about value investing, it was very hard for me to see and understand the concepts for myself before I carried out the above exercise.

Now that I knew extraordinary returns existed in the form of the right company, rather than the right buy and sell times, the question became, how do I find those companies without using 20/20 hindsight?

An Attitude of Gratitude

Learning all of the things I’ve shared here on this blog has made me a little bitter about my situation. It seems unfair that I am a worker, that my freedoms are restricted, that I’m getting farmed. There was an ignorant bliss before I came to understand these things. But there’s no such thing as fair. Maybe events are all balanced out in some vast karmic equation. In my one small life, though, there is only my situation. I would rather know the truth about that situation than not know it. And I can still be happy about it, even knowing the truth.

When I discovered that financial freedom was possible, and came to believe in it, and began on my path toward it, I was so happy and excited every day. Freedom was at my finger tips. There was much to learn and the quicker I learned it the better. Now a year down the road, the journey is feeling long, there is not much learning left, but lots of doing left. The rewards don’t come until the end. It would be easy to despair, slow down, or give up. Instead I’ll just remember that excitement from day 1. Remember why I’m doing this. Remember that I was going to have to work all this time anyway, and that some day, not too far off, I will be released from these chains to this desk.

It doesn’t end there, though. Life is both ugly and beautiful at the same time. Whatever point I’m at, it can hurt or feel good. It’s all right next to each other, intertwined. And most of the time it’s just a matter of what lens I’m looking at the world through, what angle I take, what light I use to see, or what frame I put around the picture. Sometimes there is true pain, or true ecstasy, and it doesn’t matter how I’m observing things, because every angle works the same. But most of the time, I’ll remember, just drink out of the half full glass.

Reach out your hand if your cup be empty
If your cup is full may it be again
Let it be known there is a fountain
That was not made by the hands of men

Robert Hunter
Jerry Garcia

Who wants it more?

Many things in life come down to who wants it more. Whoever wants something more, and is willing to do things that others aren’t willing to do to get it, will tend to get it. It’s a question in the realm of territory. Economics would say that the person who wants it more is willing to pay a higher price, but it goes beyond money. The person who truly wants something of recognized value pays a price in time, effort, and life force €¦. just to be able to compete with others who want the same thing.

From a tribal perspective, what I’m saying is, whoever is willing to kill for territory, and lose one’s own life for territory, is the one who will tend to win that territory over another who is unwilling to do those same things. In straight up life and death competition over something, the winner will tend to be the more devious, diabolical, and deceitful. Not because evil triumphs over good or anything like that. If morals are thrown out the window, then what we’re looking at is one person with a greater arsenal of strategies than the other person in the game. In game theory there are players, strategies, and outcomes. A player with more available strategies than the other will have an equal or greater influence on the outcome compared to a player with less strategies. In the extreme case, one player could have a single available strategy, and the other player could effectively choose from many outcomes based on their choice of many strategies. Somebody who is unwilling to attack, and claim territory for themselves because of morals, or conformity, or whatever reason, is not going to get any territory.

I believe wage slaves are heavily encouraged, from many angles of life, to be that player with less available strategies to get what they want. Whether it’s higher income, land, reproductive opportunities, or even basic freedoms, I believe the working class is encouraged to think that they don’t deserve these benefits, that they can’t have a bigger piece of the pie because it doesn’t exist for them, that they are morally wrong to even try to advance themselves at the cost of another.

This declawing of the people is especially evident to me on television, and in increasingly more movies. The heroes of the stories of our time are becoming the paradigm of mediocrity instead of pillars of virtues. I don’t know if it is an intentional campaign by big media to spread mediocre memes and self identities, or if it is a reflection in the art of our time of the rise of mediocrity among a class of wage slaves who have lived a life of being farmed.

As I’ve mentioned in past posts, I want to reiterate here that I believe it is a problem of overpopulation. There is not, and has not been for a a long time, enough territory for everyone on earth to be free. Whoever wants it more is going to tend to get it. And also, whoever has it, is going to tend to pass it on to their children. But those children must also want it, and defend it.

In the overpopulated world where the very notion of territory is fuzzy, the smallest things could be considered to be a little more territory. They are every day things. They are little things like who gets to go first, all the way up to things like who gets to live in a mini castle, and even farther up to who gets to have 10 castles with a helicopter to fly between them at will. And in our society that is 99% declawed workers, I believe these things (the smaller ones at least) are there for the taking 99% of the time. It’s just a matter of who’s willing to do what it takes to get what they want. I’m not turning toward the dark side. In truth, I think I just want the same things most everyone around me wants €¦ to live and be happy and have a family without being a slave to do it. Whether I’m right or wrong, good or evil, this is the sad truth of how things work : that in order to get what I want, a price must be paid. And it’s paid in the life force that I use to do the things I want. And it’s paid by the people, creatures, and things that I am displacing by living the way that I want. The more I am willing to displace, the easier it becomes to get what I want. For most creatures it is not a question of how much they are willing to displace, it is a question of how much they are able to. For humans, using technology, we are able to displace huge amounts of life force, and we have the choice whether or not to exercise that ability to its full extent. We displace so much life force so quickly, that we have been the cause of a mass extinction event on planet earth, called the Holocene extinction event. We are crowding out other forms of life. As a whole species, I think humanity is operating to displace as much life force as possible. As individual humans, I think we compete for pieces of that pie that the species displaces as a whole, and we are displacing other humans in our own level of consumption.

Stock Picking / Oil Age

When I last wrote about extraordinary returns, I left off with the question, how do I find a company that will produce high returns without the benefit of 20/20 hindsight? I put a lot of time and energy into investment research in search of a few extra percentage points of growth, and here’s one cornerstone of my research.

My personal method is to use 20/20 hindsight anyways. Here’s why. I believe the reason certain companies consistently have above average returns is that they are enjoying some sort of underlying economic advantage. The consistently high returns are usually evidence of such an advantage, and less often are evidence of luck. This advantage can manifest itself in many forms: an expanding market, a monopoly, technological discovery, and government favoritism, to name a few ideas. As long as the underlying advantage continues, the company will tend to have above average returns. And profitable companies will do everything they can to retain their economic advantages. I know, this is a rosy little picture I’ve painted for myself.

There is no guarantee that the economic advantage will continue. Business situations are constantly changing, and what is profitable one decade, may be ancient history the next decade. But in my experience of looking at many companies’ performances over long periods of time, these underlying advantages change slowly : over the course of decades, not the course of a few years. For example, Eastman Kodak, the photography company, which once enjoyed such an economic advantage, has been in steady decline since the rise of digital photography, over the period of a decade from 1999 to 2009. A similar decline is occurring to newspaper companies which are losing market to the internet.

Prior to this major shift in the way things work, from print to digital, these companies had been exponential growth powerhouses for a century. I’m willing to take the gamble that most consistently profitable companies will continue to dominate. Maybe once in a while I’ll choose a company that was consistently profitable, but declines shortly after I buy it. I’m willing to risk that though. I see most profitable companies have a longer life cycle, and so that decade of decline will tend to have some decades of prosperity ahead of it. I find it easier to pick existing winners with known valuations at bargain prices than to pick future winners. Picking future winners requires economic foresight : otherwise it’s kind of a gamble, but if the gamble pays off, it pays off big.

One major concern I have with the whole idea of relying on past results for picks is that we are on top of what will probably someday be called the Oil Age. During this age, humans are harvesting millions (maybe billions) of years worth of oil from the Earth. Oil has a huge return on energy invested, and we’re getting easy energy right now. Eventually we will burn up nearly all the oil and it will become a slowly renewable resource. My calculations go something like this. If it takes us 1000 years to burn nearly all the oil that was created in a billion years, then we have been consuming it at a rate of a million times faster than it renews. So equilibrium oil consumption on earth will eventually go down to about one millionth of today’s worldwide consumption. Anyway, I’m not by any means well informed on the matter, but it seems like humans are going to keep burning up available oil as fast as they can, and that we’re going to run out sometime in the near future. Once the cheap, easy energy supply is exhausted, it is very likely that the high rates of return and global economic growth of the last couple centuries will slow down. People will not have so much extra energy to expend, and productive assets will be held tightly. Most notably, in my opinion, transportation will be slower, and more costly. My point of this whole paragraph is that the decline of the Oil Age is likely to coincide with a decrease in return on assets across the entire worldwide economy : thus making 20/20 hindsight all wrong. On the flip side, I think the decline of the Oil Age will have a lot of good opportunities for companies providing alternative solutions. Just like investing in certain internet companies and digital solutions would have earned a tidy profit during the decline of photography and newspapers. On that tangent, I think we’ve seen the beginning of a “computer age” starting about 20-30 years ago.

We are at a time in human history where it is possible for a worker like me to buy into the ownership class, and to see high enough returns in my lifetime to attain financial freedom quickly enough to enjoy it. This was very uncommon a couple centuries ago, and I think it will be very uncommon again in a couple centuries.

Fractured Tribal Structures

I see three main “tribal structures” in my world today. These structures are simply groups of people working together that I feel like I belong to.
1. Family and friends
2. Businesses / Workplace
3. Sovereign groups / GovernmentIn a real tribe of somewhere from a few members up to a few hundred members, all three of these structures are fused into one group, which is just called the tribe. A tribe is closely related, and everybody knows each other. It may be that the tribe is entirely related as family. A tribe works together to harvest life force for the continued survival and prosperity of the tribe. The group that they work with is the same group that they live with, the family and friends. And the tribe is also its own sovereign group. There is autonomy in the tribe. Family, friends, and coworkers are also the same people who make the decisions for the tribe.Whereas in a tribe, these three groups of people are one and the same, in the modern world, these structures have become fractured and diluted for most people. The three groups are often made up of three entirely different sets of people. Family and friends remains the strongest tribal group in my experience. Business can be a strong tribal group for owners, but for workers it doesn’t much matter. Labor unions are a decent tribal structure, but I think most workers even within the same company, are only weakly including each other in the same tribe. With that said, I see that many people identify as workers, and as such develop friendships and family relations within their work community, thus enforcing their tribal identity as a worker. Government, sovereignty, and autonomy are diluted so much by overpopulation that they are probably the weakest of the three listed tribal structures, for most people. I have little to no say in the decisions of the USA. And few people do. The pieces of the pie of autonomy are sliced so thin in a nation of this size that nobody really enjoys it anymore. Nevertheless, sovereignty does still exist, and if you ask me if I’m a member of the USA tribe, I say I am.

As an add-on to this post, I just realized the religious groups are a big tribal structure for many people, just not for me. Religious groups share common beliefs about reality and reinforce each others beliefs within the group : another aspect that would have simply been a de facto part of a real tribe.

Ice Age !!!

Haha. I’ve spent the last few days reading about various risks to human life as we know it. Da Da Dum. It started with reading about overpopulation, and then spread to all kinds of other apocalyptic scenarios. I don’t recommend going out and studying the stuff : it is incredibly depressing, or maybe that’s the winter time taking hold.

Anyway, I did find one sparkling gem in all the muck. And that is ice age theory. Ice age theory makes the whole global warming panic about as relevant as day trading compared to value investing. Using core samples from polar ice sheets (and possibly other core samples), scientists are able to estimate global temperature changes dating waaaay into the past. We’re talking millions of years in the past. One limitation on this data is that it’s taken from polar ice sheets, so the data is for polar temperatures, but other than that it is reasonable data. All these millions of years of data show a predictable cyclical trend, that even fits with our current data on Earth today. Compare this with the global warming panic that’s presently based on a few hundred years of atmospheric temperature statistics. It is the short term versus the long term. When you zoom out far enough, the global warming debate seems like a big overreaction to a little bit of data. I invite you to check out a summary of ice age theory on wikipedia (the graphs there illustrate more than I can write here), but here is a summary of what they’ve figured out.

Earth has alternated between periods of ice ages and warmer periods for at least 2.1 Billion years. During the ice ages, polar ice sheets remain on the north and south poles, and during the warmer periods, there is no permanent ice on all of planet Earth, even at the poles. At present, we have been in one such ice age for the last 2.58 Million years, and indeed you can see that we have ice sheets on the poles right now. Ice sheets tend to crush and wipe away evidence of previous ice ages, but it is known that Earth has had at least 4 of these major ice ages in its history. It is also not known what causes the major ice ages. To me, it makes sense that whatever causes these huge shifts in Earth’s temperature must also be huge. I only see two reasonable sources of such heat variation. One is something cosmic : either related to the Sun (most likely scenario, since the Sun is by far the largest, closest energy source), or other nearby stars, and two is something internal : that is related to Earth’s core, and heat release form that source. So while much is unknown about these long period ice ages, they have historically lasted on the order of several millions of years. The one that we are currently in has been steadily getting colder over the last 2.5 million years, although the rate of cooling is now slowing instead of increasing, perhaps signaling a minimum in global temperatures during the next few “glacials.”

In addition to these long period ice ages, there are shorter period oscillations in Earth’s temperature called glacials. These oscillations occur about a mean, which is the average temperature on the larger period ice ages discussed above. Temperature oscillations below the mean are termed “glacials” because there’s a lot more ice on Earth. And periods when temperature oscillates above the long term mean are called “interglacials.” These glacial oscillations occur with a period of between 40 thousand and 100 thousand years. There are two underlying cycles, one with a 40 thousand year period, and one with a 100 thousand year period. They can interfere with each other, or be additive if they synchronize. The warming periods happen quickly, taking about 10,000 years, then the cooling periods take longer, taking about 30,000 to 90,000 years depending on how the two underlying cycles are synched up.

At present, Earth has just undergone a 10,000 year period of warming, and is near the peak temperature of an interglacial period. Meaning for the next 30,000 to 90,000 years it is highly likely that the Earth will be cooling and glaciers will extend out into lower latitudes again. However, when viewed on the small scale of 10,000 years, or even a few hundred years, it would appear that Earth’s temperature is increasing at a runaway rate. And indeed, the global temperature may continue to rise quickly for a short time. But that will quickly be followed by another cooling period. And these oscillations have been ongoing for 2 billion years, and will continue long after humans are gone. Zooming out with ice age theory I think we can easily put our global warming panic to rest. While it is still possible that human release of atmospheric gases is having an effect on global temperature, that effect is miniscule compared to whatever forces are moving the glaciation cycles, and even smaller compared to whatever force is moving the major ice age cycles. Looking at geological history of atmospheric CO2, it has been as high as 4,000 ppm before, and we are currently sitting at a very historically low 350 ppm. So it is nothing Earth hasn’t seen before. And maybe we are royally screwing ourselves in some unforeseeable way, but it’s nothing that wasn’t happening on Earth before anyway, nothing we weren’t going have to deal with eventually.

This link to wikipedia is especially illustrative: http://commons.wikimedia.org/wiki/File:Holocene_Temperature_Variations.png
It shows that on a scale of 500, or 2000 years, there might be a case for warming, but even zoomed out to the small scale of 12,000 years, it appears we are at the maximum temperature of an interglacial. Or even that we are already a few thousand years into the slow cooling phase that will slowly bring about the next glacial.

So yeah, global warming is real, but only in the short term. In the long term it is a ridiculous media hype after looking at this ice age theory. That doesn’t mean that I support going out and raping mother nature and releasing all the greenhouse gases possible. Indeed, I actually think humans are doing a very poor job of taking care of the Earth. But climate change is real, it always has been, and it always will be. The climate is always changing. On the other hand, there are very real problems related to global overconsumption and overpopulation which threaten to kill off large percentages of the species on earth, and ultimately lead to a catastrophic population decline as our resource base is farmed to death. Sadly, like Thomas Malthus, I see no way to take that train off its collision course. Again, nothing Earth hasn’t seen before.

So I think we can rest easy on global warming, but maybe you should start to worry about “global cooling” coupled with continued population growth. 10,000 years from now there could be a glacier on top of where I’m writing from. Where are all those extra people going to live? Not here. OMG THE ICE AGE IS COMING WE’RE ALL GONNA DIE!!! HAHAHAAHAHA!

Car cost

Some estimates on car ownership €¦ eventually, I may cave in and get one.

Depreciation: $1000/yr
Insurance: $1000/yr
Gasoline: $500/yr
Maintenance: $500/yr

This assumes a car that’s worth about $25K : $30K brand new, and lasts 25 to 30 years. Obviously depreciation and insurance will be greater earlier on in the car’s life, but maintenance will be lower, so it cancels out to a degree. Insurance costs could be lowered by paying only liability insurance, in which case damage to the car is not covered, again canceling out the difference.

So, about $3000 per year. It’s a lumpy cash flow, most of the depreciation cost is paid up front at purchase of the vehicle. And maintenance might go several years below the projection, but then one year could be way over. But $3K per year is a good estimate, I think, of the price of having a serviceable car.

I recently asked a friend who keeps a cheap beat up car how much his expenses were, including maintenance. He’s had a 95 Corolla which now has 185K miles on it, for about 2 years. He paid 800 for the car, 800 in maintenance, doesn’t pay insurance (not required in our state), plus gasoline. If I use my gas estimate, that would come out to only $1300 a year. So it’s possible to do it cheaper. Especially it seems by buying a car with 150K+ miles on it. My friend said he used “Consumer Reports” to choose a make and model that supposedly held up well even with lots of miles on it.. $1300 a year is still a lot of money though.


I’ve been thinking of ending this blog for a while. The prophetic urgency of my message that marked the beginning of the blog, has puttered out. I have run out of things to say, and am wasting both my time and yours by continuing to write. The people that I share my theories with face to face tend to not care at all : almost like I am speaking a different language to them. And so I will keep my grand revelations and delusions to myself for now. Perhaps I will keep a journal.

A final synopsis. I wanted to tell people some of my key observations about life. That workers are getting farmed, that working for somebody is not a “normal” or “free” way for a human to live, and that there may be a way out through savings and investing. That overpopulation and a scarcity of territory has been the driving factor of most problems for the “under class” and that even the “upper class” of territory holders is disappearing as the pieces of the territory pie are sliced ever thinner with growing global population. That humans are adapted to living in small tribal groups and the runaway population has caused the disintegration of those groups, leading to lots of little everyday social problems related to living and working with a bunch of strangers. And that global overconsumption and overpopulation are slowly but surely displacing other life forms and bankrupting the resource base on which the oversized human population relies. I haven’t done much reading of economic philosophers, but it occurs to me that it’s probable that all of this information has been known for a long time : for anybody willing to go look for it. I just wanted it to reach a few minds that otherwise wouldn’t have known it. I wanted it to be one website to serve as a key to unlock the mystery of why things were so fucked up in the world. But I’ve found out that key is already out there, and people just don’t want to see it. Or maybe they already know it, but would rather not think about it. And I don’t blame them. It is depressing to know this stuff, economics is called the dismal science for a reason.

I enjoyed writing, but looking through my posts, they look like a bunch of half baked theories, personal goals, and personal political economical opinions that belong in a personal journal, or a textbook, or an internet message board, or in some stoner conversation. When I started the blog, I was hoping to derive some income from it, but as I kept writing, it turned into a way for me to solidify and legitimize my “crazy” beliefs and newly found savings habits. They are solid and legitimate now : I’ve found what I believe and do is more important than validation by anybody else. And I don’t think writing is for me, at least not on the level of doing it regularly for money. I also wanted to help some people out of the same trap that I find myself in. But we are each in our own cell, and we must each of us plan our own escape. If you are a trapped worker and reading this, know that your own personal efforts, devotion, and solutions will get you farther toward freedom than anything you read. And so farewell.

Best of luck to all of you on your journeys.


Hello Hello

I don’t know why you say goodbye I say hello.

Well, I am back to write more. Couldn’t stay away. In the last week I find that I am still saving up tidbits of info in my head that I would like to share on the blog. Writing it down helps me sort through the ideas. I appreciate the comments on the last post. Somebody really is reading this. And it might resonate with them, and that is good. As Ryan mentioned, I was frustrated, and writing for the wrong reasons. I will take a slightly different tone now. I’m no longer here to make money, or to save the world. Just to think out loud. Now I will post more quality than quantity, and try to share just the best of my thoughts, experiences, and observations : and allow the reader to draw their own conclusions.

Like it or not, we’re all we’ve got
My family and friends are all I’ve got. Even though this form is a broken remnant of a true tribe, it is the best there is for me right now. Any solution must be born out of this situation. I learned a little more about my heritage over the holidays, and I thought to myself, if I am ever wealthy enough, it would be good to be able to buy back the land that my ancestors lived on, the farms that they came to in America, and the houses where their urbanized children moved to. A hundred or a hundred-fifty years ago, my fathers ancestors built a small town bearing my family’s name. There is nothing left there but ruins and my heritage, that would be good land to live on.

The Spartan Student reading list
Recently Ken posted a list of favorite adventure books on his site. I checked several out from the library. Finished Kon-Tiki a week ago, and now on to Walden.

The idea of farming plankton from the sea for food. Whales, the largest mammals, and indeed largest creatures on earth feed almost exclusively by filtering small organisms from sea water. On the raft, they harvest some plankton in a sieve and find it edible. Heyerdahl posits that one day humans will use this as food when land food is scarce. I hope this does not happen. And at the same time, I am not willing to stop eating and reproducing.

The idea of light coming from all directions. When the adventurers swam below the raft in the Pacific, light appeared to be coming from all directions, it was omnipresent. I had a similar experience last night in the fresh snow after a blizzard. The city lights blanketed by clouds above and white snow below give a purplish glow to everything. It was like walking around in the negative of a photograph. Beautiful.

Walden Pond
I started reading it. So much from this is so familiar. Thoreau went through a similar “awakening” a hundred-fifty years ago. Maybe the problems that I see with the capitalist consumerist lifestyle are not as immediately fatal as they seem. Maybe they are not catastrophic problems after all. Maybe overconsumption is just a harmless and foolish spectacle to be laughed at. I do not yet know. Much of what I’ve written here on this blog can be found in the pages of Walden in much better writing. He also seems to have a front row seat to the rise of capitalism, which is now just an omnipresent force in our society. What is all around me, was a growing trend in his time, and this 150 year gap on the same subject matter gives much perspective.

A few interesting ideas so far. One, the idea that humans carry around a fire with them, their “vital heat” as he calls it. Houses and shelters can be thought of as enclosed fires. A big house means burning a big fire all the time. This idea resonated with me here in winter time. I’ve found winter isn’t so bad (probably thanks more to El Nino than this observation) if I just get outside anyway. In order to do that though, I have to remain constantly moving to keep my internal fire burning hot. Otherwise I get cold and miserable. So that means activities outside, never rest. So far for me it has been running daily.

Another familiar Walden idea was that a person only really needs one suit of quality clothing. I liked this because I wear the same uniform, as I jokingly call it, 9 days out of 10. I only change into my backup set to wash the regulars, or for severe weather. Here’s a good quote (roughly, from memory): “I say, beware of all enterprises which require new clothes rather than a new wearer of clothes.”

And finally, from Walden, the idea of living/sleeping in a box with air holes in it to live a rent free life. The box he describes basically sounds a lot like a coffin to me. Living on a friend’s porch in such a box for a small rent could be a possibility.

A Warren Buffet Quote: “It is far better to buy an excellent company at a fair price than to buy a fair company at an excellent price.”
What he’s getting at is that if you can find a company that will grow exponentially for decades, you can buy it at a PE of 5 or 25, and it will be a great investment either way. There is a lot of wisdom in this quote, a lot. It takes discipline to buy a lackluster company at a PE 15-20 when you could shoot for the moon instead by buying a high growth company at PE 30-40, or a busted bank at a PE of 5. So, I bought myself a $1000 Christmas present on Wednesday the 23 €²rd. It was 16 shares of Church and Dwight (ticker: CHD), a company I’ve had my eyes on for a year now. I bought it at a normalized PE of about 18-20, which is probably the most expensive company I’ve bought in a year in a half, but I feel really good about it anyway.

Their cornerstone product is Arm and Hammer baking soda. They also make cleaner such as Oxi-clean, and Orange-Glo. I take comfort in the fact that the legendary Billie Mays is pitching my products from the grave. CHD also has Trojan condoms : good for curbing overpopulation. They also have their foot in the door in the almighty toothpaste and deodorant market : everybody brushes : which is currently dominated by Proctor&Gamble and Colgate-Palmolive. CHD sells products there under the brands Aim, Pepsodent, Arm and Hammer, and Arrid. And several other lesser known products.

CHD is a company that is part of the consumer personal health products industry. It includes long time compounding companies such as Johnson and Johnson, Proctor and Gamble, Clorox, and Colgate-Palmolive. CHD, however, is much smaller than these giants. At a market cap of about $4B it has room to grow a hundred fold if it were lucky enough to become one of the biggest companies in the world. PG and JNJ, while still excellent companies, don’t have quite as much room to grow. While the personal health products industry may be slowing down in its growth rates in America, demand is still rising in other parts of the world. And even if growth is slowing, I don’t see a retreat of the industry anytime, people will keep cleaning, brushing, shaving, deodorizing, and contracepting for as long as I can see. You need only look at CHD’s price chart on an exponential scale to see that it has been a remarkably consistent exponential gainer : this is why I love the stock. This is my first purchase in a series of moves I’ll be making to just acquire a diversified collection of excellent companies in $1000 blocks.

I feel like I should throw in a disclaimer here. I am telling you about my personal experience of purchasing a stock that I like (a good experience for me), and my personal analysis of its long term positioning in its industry. I am not recommending any course of action for you, that is entirely your decision, to be based on your own research.

Keep Moving

Seasonal Affective Disorder
I’m not a fan of the name. I think everybody undergoes a massive energy loss during the winter in cold climates. Some people notice it more than others : is that a disorder, or a better sense of energy flow? Some people are very energetic, and others are lazier. I belong to the latter group, and I must habitually force myself outside lest I literally sit around for 4 months straight. From what I’ve read, research has linked the disorder to natural light exposure. Going outside in the daytime, the light can be anywhere from 10 to 10,000 times brighter than typical indoor lighting. The point is, indoor lighting never gets even close to daytime brightness outside. At winter solstice here, the sun comes up at about 7 am and goes down around 4 pm : the same hours workers are stuck inside. This gives the body the message of “eternal night” for several months and it wants to hibernate to conserve energy. So workers in moderate latitudes may be getting a winter body response similar to outdoorsmen in polar latitudes. Yet another reason to keep saving for freedom :-) More on Getting Outside in the Cold
So, this winter I’m continuing to get outside every day, no matter what. In order to avoid paying for a gym membership, I started running outside in about November. I’ve found I can run in just about any temperature, as long as I keep moving. There’s been a recent cold spell here with highs around 0 F, -15C. That’s the coldest I’ve ran in, but I’m so comfortable at that temp, I’m sure I could run down at least to -20F, -25C. If the head, hands, and feet are well insulated, and the skin is covered from wind, then the metabolic heat generated from running is enough to keep me warm. The heat loss to the environment actually makes it quite comfortable compared to running in warm weather (when it’s hard not to overheat), and if I get a little airflow to my body, I barely sweat because the skin stays cool while the core stays hot.When I start out running, it is still painfully cold for the first few minutes, but then I get warm, and after a few miles, I actually feel hot, and then it’s OK for me to walk for several minutes. But it does not work the other way around. Today I learned that the hard way : I must start out running. I wanted to relax and take a slower pace, so I went for a walk on which I would intermittently run to keep my blood pumping. I started out running a couple blocks and then walked a few blocks, and so on. My core stayed warm, but my hands started getting cold when I was a couple miles from home. I actually stopped for a couple minutes to admire the sun shining on a river that still had unfrozen water. I didn’t think much of it, hands always get cold in winter. But it was 0 degrees F outside, and just a few minutes later, my hands were in pain. Realizing what was coming, I ran back the whole way to try to warm up my hands with body heat and blood flow, but it didn’t work. My hands hurt more and more even with gloves on and I probably ran the last mile in 6 minutes, but the pain kept growing.

I got a little frostnip in my finger tips which are still sensitive right now 8 hours later, but feeling steadily better. When I got home I read about frostbite. What happens is the body constricts the blood vessels in the effected area to limit heat loss from blood flow. It is a survival mechanism against extended exposure to cold. So no matter how fast I ran, the increased blood flow was not going to my fingers once they got cold : the blood was cut off and being reserved for my core survival. I’m guessing if I had kept running a couple more miles my hands may have warmed up, but I’m not going there unless I have to. I could have brought better gloves/mittens : but on a run my hands and head usually start sweating heavily if they are over insulated, so I brought light gloves. In fact I often take my gloves off and run with no hand protection at the end of my run. So the pain snuck up on me and I wasn’t expecting it to get as bad as it did.

Moral of the story: Keep moving no matter what. If you feel HOT you can stop for a bit, but WARM isn’t good enough, keep moving. NEVER let COLD set in to the extremities and expect to reverse it.

My 2009

I don’t mind the numbers for the days much. Auspices in general for that matter. The turning of the seasons, or great events, those are important. But to me 2009/2010 is just a useful line drawn between two cold days. Useful for historically telling one year from another and talking about them with other people, and so my 2009:

Personal Finance
Looking back on it, I will mostly remember 2009 as the year I took responsibility for my finances, and took control of my investing. These two changes are slowly paying growing dividends in my life. I did this because in late 2008 I realized that there was a special stock market crash coming. It is not often that 100 billion dollar companies come crashing to bankruptcy one after the next.

And so at first I devoted myself to solid investing to take advantage of the crash. I put in the time, effort, and research to act like an owner and make my own decisions, whereas before I took a half-assed and scattered approach, relying on the advice of others and a gambler’s mentality. Next I devoted myself to getting as much money into the market as I could at the bottom, which meant saving as much as I could. This led me to Jacob’s website, Early Retirement Extreme. I quickly adopted many of the mindsets and strategies there, which admittedly fit well with the lifestyle I already led : namely that of a poor college student. I already had no car, no house. I mostly just learned to stop spending money for no good reason. I also had some downsizing to do. It sounds so simple now, but there was definitely an adjustment period. Eventually those habits gained a momentum of their own, and now I have not, want not, and save a lot without even thinking about it. What started as a means to take advantage of a stock market crash has now become a lifelong habit.

I started the year with about $6,000 equity. Of which $3,000 was in individual stocks in a private account, and $3,000 was in mutual funds in a retirement account. I earned about $20,500 in wages. Of this I was able to invest about $9,000, mostly at the beginning of the year. In the second half of the year I accumulated a cash balance, which is at about $2,500 in a checking account at the end of the year.

I emptied my retirement account into a private account in late February because it wasn’t accessible until I was 60 some odd years old which is much too late for me. I used the retirement money to buy Hartford Insurance Group around $7.00 a share, and US Bank at about $10.00 a share back at the bottom of the crash, so the withdrawal penalty on the retirement funds has been more than paid for :)

My time weighted return for the year was 1.69. Meaning a dollar from the beginning of the year that was weighted proportionately between all my investments and constantly reweighted with every new investment decision I made, is now worth $1.69. At the end of the year I now have about $41,000 in equity, so I made about $23,000 in unrealized (ownership mentality) capital gains and dividends. Extraordinary returns for an extraordinary year. I believe I have a couple more extraordinary years lined up too. It was a great year to be a young investor. From $6K to $41K, nearly a 7-fold increase in equity. A year like that goes a long way toward making the seemingly impossible seem possible.

Habit Formation
Perhaps even more important than getting my financial freedom, the whole experience of making the changes necessary for it has taught me the ability to choose and form good habits. I am very much addicted to my habits. I think we all are, especially as we age. The status quo feels easy and right, while change can be stressful and difficult. During a transition period from one habit to another, there is discordance and internal conflict. Yet after a change in habits has taken place, it is the new status quo that feels easy. What a paradox. I would now feel uneasy if I were to switch back to full consumption, and mutual fund investing.

Along these lines, toward the end of 2009, I have consciously adopted 3 new habits. Yoga, running, and dishes. My yoga to this point has been only breath exercises, and meditation, I do them twice a day every day. I will slowly add in the “asanas” or postures to my practice as I progress. Running is running about 4 or 5 days a week. And dishes is doing the dishes. I live with 2 roommates with a small kitchen : the dishes are a classic free rider problem, it will occasionally get quite disgusting. So I have just started doing them daily. It is a first step in what I hope will be an ongoing habit of maintaining a cleaner and more organized environment around myself.

As mentioned just above, I began yoga practices at the end of the year. It is the first time in a long time that I have felt genuinely spiritual about anything. I was raised Catholic but left the church in my early teens, disagreeing with the religion on a fundamental level. For several years after that I had what I’d call a negative spirituality : a misguided backlash against all that was a part of the Catholic tradition : moving away from instead of toward something. Then in my late teens up until the recent past, my spirituality was derived from psychedelic drug experiences. While these peak experiences can provide windows into the spiritual world, they are only windows. Brief moments of intense clarity were surrounded by long periods spiritual wastelands. It was not the way, only a window. I tried studying Buddhism, Taoism, and Islam, but nothing really grew on me until Yoga, and cultivating the divine energy awareness that is inside. Hopefully that is a part of the story of 2010.

My Most Popular Post

My most popular post by number of comments is The Dangers of Underconsumption. It seems like it struck a chord with some fellow savers out there, or maybe it was just short and to the point. It’s worth more discussion here. Since that post, I haven’t made any major changes to my consumption habits. If anything, my yearly consumption rate has probably dropped by about two hundred dollars, closer now to the $8,500 mark.

Buy the ticket, take the ride
“The possibility of physical and mental collapse is now very real. No sympathy for the Devil, keep that in mind. Buy the ticket, take the ride.” : Raoul Duke, Fear and Loathing in Las Vegas, Hunter S. Thompson

A great book, and a great movie. It is the only movie adaptation of a book that I’ve ever seen that captures the book word for word. You can literally read along with the movie. It is a testament to the genius of both HST and Terry Gilliam.

At some point in this self constructed journey of mine, going back has become a pointless option. Yes, I could still do it, but I’m not going to. I’ve found that life has a way of giving me what I ask for, just not quite in the way that I expected it. I dreamed of wealth, and now, in a strange way, I have it. I’ve noticed that life’s answers to my requests usually hurt a little more than my expectations. Sometimes we get on the ride, and pay the ticket price once we’re in motion.

A quote from “The Dangers of Underconsumption” that’s at the heart of the post.
“What I have found is that I am forgetting how to enjoy and be happy. I am forgetting what it’s like to have goals and dreams in the present and to be actively working on them. I am effectively waiting to live some day in the future. Ironically in my quest to become free from work, my behavioral identity has become entirely that of a worker, because that’s nearly all I do.”

That was 4 months ago. I have good news. My goals and dreams never stop, I don’t think anybody’s do. I think it’s a deep part of being human. And they are not inextricably tied to work, money, or consumption. We only get so much energy in a day, and it’s true that a lot of it is used up at work. But the extra we are free to use as we choose. And at that time, I was using it on changing my life in the areas of work, consumption, and ownership. I was using all of it, every day for that. Ironically, as I wrote “I am forgetting what it’s like to have goals €¦” I was probably working the hardest toward a goal that I ever had in my whole life. That’s why my identity was so cramped. Now much of what I learned during that time period is on autopilot. A daily devotion to freeing myself from work has built its own momentum, and now maintaining that progress is much easier than it was to initially get the ball rolling, which took all of my powers at the time.

It’s also impossible to forget how to enjoy and be happy. Peaks and valleys, as one man once put it, peaks and valleys. Again, it’s impossible to shut this stuff off : it’s in the nature of the life force. It finds a way through. It will express itself in new ways within whatever framework I put around it. I once made a list of things that made me happy to cheer me up during a particularly mind numbing shift at a particularly soul sucking job. Nearly everything on the list was free. We are taught to link happiness with consumption, but it is a loose correlation at best, and an outright scam at the other end of the spectrum.

With all that said, my thoughts on underconsumption in my life gravitate toward one thing now. It definitely costs a lot, and it’s definitely a source of happiness. It’s that I’m postponing family, kids, and personal physical independence (having a “territory” of my own, i.e. “apartment”) until I can better afford them. Animals need, or at least should have, a territory to reproduce. I am a passenger right now. It doesn’t even feel right to reproduce like this. I’m sure there is a solution in the environment, it will just be more of a challenge, and possibly delay freedom. At 26, my natural body impulse is to go reproduce now, actually it would be to have already done it! On the other side of the balance, there is great benefit for a child, and a family, to be born into a free life. As a man, I have time to spare, and can afford to save for a while. For a woman, this dilemma must hit a lot harder in our society that continues to delay reproduction later and later in the life cycle.

Long-term Economic Growth Trends

In a recent conversation with my brother, who is equally unqualified as I am to make any future predictions, he said he thinks that economic growth will actually accelerate during our lifetimes. This went against what I have been thinking. And now I don’t know what to think any more. So I’m going to keep investing and not going to worry about it, but here’s some stuff to think about.

Economic growth can come from lots of places : from population growth, increased human capital, increased physical capital, technological advances, and I’m sure more that I don’t know. It can be thought of as the net utility that humans are getting. A flow of “utility” whatever the hell that is, haha. It might be absolutely limited by the amount of life energy we can harvest. Or it might be that we can find better ways to use that energy, ways that provide more utility per unit of energy. So far, we’ve been in a growth stage where we’ve been able to just keep harvesting more and more energy.

Now, I tend to think that we’re pushing the carrying capacity of humans on earth. But, people have been saying that for a really long time now, hundreds of years. And yet we keep finding a way for population to increase. I’m going to call this an “insectization” of humanity. Cramming more people into smaller spaces. Giving each of them more specialized roles to play in the system. This trend is what keeps pointing toward overpopulation, and what keeps solving it. Who knows how far this will go? Nobody. But it could potentially go much farther than it is right now. In an extreme case, we could potentially evolve toward smaller body sizes and lower activity/metabolic rates in order to support more and more specialized workers. Body size is one evolutionary trait that is quickly adaptable. Look at small breed domesticated dogs, entirely evolved from the gray wolf over the last 10,000 years. And as humans seem to be directly evolved from smaller animals, it would not take long for us to evolve down to 1/10th our size, for example, especially with the power of the understanding of the evolutionary process. I tend to view all this as a negative, as I’m sure you know by now. I’m just saying though, economic growth has lots of potential room in the direction of population efficiency.

For human capital, in the last few centuries up to today we are in an accelerating age of information and communication. Today, I’m a pretty normal guy who got a pretty normal education in America, which admittedly is not a normal country, BUT I have the book knowledge that only super rich philosophers had access to even only two hundred years ago. On aypsite.org I have access to the knowledge of yoga practices that only sages living in India knew about until recently. We have the rough equivalent of a world full of the smartest people in the world from a few hundred years back who are able to communicate with each other across oceans in the blink of an eye. In the words of Monty Python, “how do you know he’s a king?” : “because he hasn’t got shit all over him.” In this way, we are all living like kings from not too long ago. Cheers! :-)

For physical capital, this is one that I actually think we could be pushing the limits on. This is where the maximum pressure on our resource base comes into play. How many more buildings and cars can we support before we are overdoing it? Maybe more yes, but I don’t see the same room for potentially unlimited growth in this one. For example, I don’t see humans engineering a more efficient way of storing the sun’s energy and maintaining atmospheric oxygen levels than that which plants have evolved over billions of years. At some point we MUST reach an energy equilibrium with mother Earth, lest we over farm it, and see the classic population catastrophe.

What about technological advance? If I look back to about the year 1400 or so, we’ve been seeing an increasing rate of technological revolutions taking place. The computer age, which is only several decades old, has the potential to grow astronomically for a long, long time in terms of processing speed and memory capacity. And how about genetics? How about the wireless revolution? And where are the flying cars?!?! I think I can safely write a giant “we have no damn clue” next to what’s going to happen for technological advance, but that it is in a current trend of acceleration.

So yes, humans will continue to quickly spend the vast storehouse of cheap energy in oil reserves. And yes, we are definitely pushing the limits of Earth’s resource base. But I’m now opening up to the trends above that could offset the negative pressures on economic growth. Like I said, I’m not making any predictions, it’s food for thought, a different perspective. Investing has worked well in the recent past as a potential path to financial freedom, and here’s to hoping that it remains so for the near future.

The Mindset

If there were one thing I could give you, my personal finance readers, it would be the desire to be an owner rather than a worker. Once you have it, the details slowly take care of themselves, as you find the path to the goal. And so I don’t give many details here on how to save money. It’s common sense really, it’s spending less than earnings. It’s simple to do, if you want to do it. But you have to want it for yourself, and I can’t really give that to you. In order to want it for yourself, you have to have a good reason, and you have to believe it’s possible.

For me it happened at my first day of work. Back then I didn’t realize ownership was the way out, but I wanted some way out. On some level, I have to think everybody dreams of a way out in their early days. On my birthday that year, after expressing my feelings to my parents, they gave me a magnet in the image of a road sign that says “Fuck Work” on it, with a stick figure holding a smoke and a drink. I still have it on my fridge. I think my parents silently bear the same feelings I have toward work, but as the years passed, and lacking the knowledge necessary, they ceased to believe there was a way out. Work always seemed wrong to me, deep down. Ever since then I’ve wanted to be free from it. My plan for escape has changed over the years, but the desire to escape hasn’t changed a bit. My reason is freedom.


I wonder if part of the fun of being on vacation (not that I’ve been on any lately) is that we only bring along a couple bags worth of stuff. Carrying less bags around frees up the energy to simply enjoy life. Kind of like no longer having to carry around the job, the house, and everything that goes with them. That is heavy stuff to carry around every day. Most vacationers end up paying a hundred dollars a day to replace most of that stuff while on vacation in the form of hotels and restaurants. But we don’t think about that while on vacation :-)

Part of it is also going to a new place, but looking back on the vacations I’ve been on, I’ve mostly done the same things I’d do at home. I went out to eat more often on vacation, and did touristy crap that I don’t even like, and yet I loved every minute of it. Hotels are probably the major expense on a vacation, and they are really just dwellings on the go, no different in practice than our regular home. If it’s not additional consumption, what is it about the vacation experience that is so amazing?

Perhaps it is being free from work for a week. I have noticed an observable growing sense of freedom whenever I get a 3 or 4 day weekend compared to the usual 2 day weekend. Day 3 and 4 somehow feel more free, my behaviors change and open up into activities I wouldn’t normally do, and that first day back to work somehow hurts a little more than a usual Monday. There might also be an effect of taking a few days to replenish energy levels after draining them at work. Ignoring work and all the stuff we carry around is a little taste of the kind of freedom I’m trying to build permanently. It’s not even that much freedom, it’s really just a token freedom, but it feels so good.

If I were inclined to take a vacation, it would be an interesting experiment to take one right here in my home town and test the theory. Would it be just as much fun to stay home, clean the house/apartment, get everything organized and taken care of so I have nothing to worry about (I could put my clothes and toiletries in a suitcase to create the full experience), and then spend a little extra on entertainment and company for a week while mentally sweeping my job under the rug for a few days?

€” €” €” €” €” €” €” €” €” €” €” €” €” €” €”:
This is an add-on to the original post.
I just remembered back to going on vacation when I was a kid. That’s a useful control group for the above experiment. I didn’t have to work back then. There was still something magical about it though. Maybe it was the different vibe my parents were experiencing by being on vacation. It was also about getting to play with new stuff in a new place, and visit relatives. I remember car rides and air travel were excruciatingly boring. Overall I remember my childhood vacations as new experiences mixed in with the never ending playground that was my life at the time. And so my conclusion in the absence of a real experiment is that the vacation formula is comprised mostly of new experience + non-stop play.

Real Assets

Home Ownership
A comment by Christopher on the post about Home Ownership has inspired this post. First of all, I’ve done some more research on home ownership : and while it’s not for me right now, it is not the equivalent of financially shooting yourself in the foot as I make it out to be in that post. Notably, it’s possible to buy a cheap house that is affordable. It’s also possible to offset the negative cash flows of home ownership by renting out a room, or simply buying rental property and living in one of the units. The real shooting yourself in the foot comes from people who are buying a house they CANNOT afford, are not planning on renting out any part of it, and it’s actually more of a financial shooting themselves in the head. The $4500 a year I drain on rent would roughly cover the expenses of a cheap home in a low property value area. Additionally there are certain states with lower property taxes, and places where you can get away with less insurance coverage. So it is possible if it’s done wisely. My previous post was more of a rant toward people taking on $200K+ of debt with no real plans of offsetting it in any way other than working for the next 40 years of their lives : which is all too common around here.Real Tribal Assets
Christopher actually made a business of renting the properties, and that brings me to the reason I started this post. It goes back to something one of my friends once told me as well: stocks are not real ownership. Their income streams are real. But if I go to one of my companies’ factories or headquarters, and start acting like an owner and making real decisions that effect real people’s lives, I would be thrown off the premises. On the other hand, Christopher’s rental properties are very real. He has the real human relationship of landlord to his tenants. It reminds me of a guest post on ERE (by Todd I think), which I mentioned here in a previous post. He said that stocks and bonds are not how most people become wealthy. It is a parking place for wealth gained through entrepreneurship. Very few people develop real wealth and freedom by investing alone. And the reason for that is because if they were to develop it by investing alone, it would mean that they were never a real owner, and they never developed the owner mindset.In this way I have the process backwards. I sit in a room and research companies to latch onto instead of making something of my own. I’m piggybacking on other people’s work. I’m not a real leader or owner in the tribal sense : I’m still just a worker who has to work a little less. At some point I must actually provide something to the community as an owner and leader, lest I just become a 35 year old retiree. I’ve been indirectly cutting away at this problem in some of my past posts but have been unable to hit on a solution so far. I have built a solid foundation of finances on which I can build something of my own, but I don’t yet know what that is. I don’t feel bad about this right now. It is just the way that I’ve discovered it. Stock market investing is the first way that this whole problem of financial freedom ever made sense to me, and I’ve spent a lot of time to become quite skilled at it (at least I like to think so, I’ve certainly learned my share of lessons). But if my journey to ownership stopped here, and I just topped off my early retirement, I wouldn’t feel right about it. There’s something more to it, and it’s inside the relationships to the people involved. Not everybody can be an owner (I wish we all could be, but see the posts on the incredible scarcity of territory), and so owners have the responsibility of leadership and stewardship for workers. I am entirely shirking that responsibility right now, but I’m also not really an owner yet.

I do have some possibilities already. Perhaps rental is the way to go. I’ve also got a buddy who is interested in starting up a tourism business. And another buddy who’s interested in starting a gym. And I have an idea for a food cart business as well. Hard to say what will happen. Rental seems like a good start though, because I need a place to live anyway, it would be more of a seamless transition. There are lots of obstacles to getting started. Look for more on this as times goes by and the blog continues on. Ideas welcome.


As with all my stock posts, this is me telling you about my experience buying a company that I like, on my path to financial freedom through investing. Do not interpret this as any form of financial advice to you. Think for yourself, make your own decisions. Even if you mess up doing it yourself, at least you will learn a lesson.

I just got done buying another stock that was uncharacteristically pricey for my value investor style. Ten years ago they were just an idea of two Stanford PhD students, and today they own the internet. They’re suddenly the largest advertising company in the world, and they’re using their cash flow to invest across the spectrum of the future of the internet : internet browsers and mobile devices to name their first few launches into other areas.

This is part of my ongoing strategy of simply buying $1000 blocks of companies that I really like, and then holding them forever. I consider it one of my riskier moves, but I had to do it. I had to because they have a monopoly on advertising on the internet medium : and by all indications, we are still in the early stages of the age of the internet medium. To me, owning Google is like owning a giant newspaper company in the late 1800 €²s, or a giant broadcasting company in 1950.

They are what I call a juggernaut company. By which I mean they operate like a big stack in a poker tournament. They have the free cash flow advantages that allow them to just buy up the small new innovations that are coming out all the time. They are setting the agenda for the whole industry. They are in a position to invest in, and take advantage of, new shit that comes to light. They have their hand in everybody else’s honeypots, as my brother puts it. Some examples of other juggernauts of the past that are still steamrolling are GE, IBM, MSFT, and AT&T. They just keep going and investing in new stuff because they are in a position to do so. Well, I think Google is going to be one of these juggernauts, and I think they’re just getting started. And I may be wrong, but the small chance that I’m right makes it worth the risk.

That’s the good news. The bad news is I paid a P/E of about 35. I literally would not do this for any other company. Anything else and I’d cap things off around 25 and just wait for a better time. But I don’t see Google going below 25, although it did briefly during the stock market crash €¦ I had much better options at the time. But like I said above, I think it’s worth it. Google is on the cutting edge of communications and technology. I don’t want to be kicking myself 20 years from now because I saw this ship sailing but didn’t take the risk to get on board. I’m already kicking myself because I didn’t have the wisdom to invest in Google back at their IPO at $85 a share back in 2004, even thought I was aware of it.

All in all, it is an excellent addition to my portfolio, and I feel really good about it. When it comes down to it, that’s what matters : feeling good about the companies I own.


It’s been a busy few days and I’m exhausted. I took a promotion at my job into a more career-like situation as opposed to the mindless hourly work I had been doing. It’s more difficult (especially the learning phase), but I like that I’m doing some actual problem solving. Basically it involves a lot of mindless work, plus a little bit of set theory. It’s an immediate bump up to about $23k to $24k per year : and probably more after successful completion of a trial period. I continue to be able to work from home over the internet, which I view as a big positive in terms of mobility : especially looking forward as wireless internet coverage and computer mobility will probably continue to improve. And also a positive in not needing a car, or a wardrobe.

Supposedly they were looking to fill the position with somebody who had 15 years of mortgage industry experience, but they hired me internally instead. Anybody have a ballpark figure what a salary for somebody with 15 years mortgage experience is? It may help in salary negotiation in a few months. If they pay me 30k I’d be happy with a career there. At 30k, I’d be consuming about 9k/32k = 28% consumption. The extra 2k coming from 4% of my 45k stock portfolio. I think the stocks are going to do better than that, but I’m not going to bank on it. At that rate, retirement would be on track for my early 30s. I’m glad to have more investment money coming in.

Brute Force Investing

In times past, and even very recently, I’ve invested lots of time in studying investments. I put great effort into finding the perfect timing to buy undervalued stocks. Even several hours per day for long periods.

I thought I needed incredible returns or my goals would be impossible. As I have spent more time stabilized in my high savings habits, I have been more attracted to a brute force investing style. I’m still grateful to have learned so much about value style investing because it is quite useful. Thanks to decreased consumption my money goals are not so impossible. I no longer need to find that perfect investment that will yield me 25% for 25 years.

Now I am content to just keep buying $1000 blocks of companies that I consider to be excellent. All I really require of my companies is to return 5% a year plus inflation. And if you know anything about value investing and can tell a solid company from an iffy company, then that’s like shooting fish in a barrel.

In other words, the short term brute force of my savings rate is now significantly outweighing the value of finding a few extra percentage point returns in the form of bargain companies. Whether I get 5% returns or 15% returns, I will have reached my financial goals in about 5-10 years. I am saving 14k per year. And finding a way to make an extra 5% a year by skillful investing is only worth an extra 2k per year right now.

Brute force investing is arguably more important, the earlier in the investing career. Because as portfolio size grows, those extra few percentage points may some day dwarf my yearly savings. But for some reason I had it backwards. I was all about skillful investing early on, and as I’ve grown, I’m now all about the brute force.

And so now investing has become an exercise solely in selecting the right companies : almost regardless of their price. A normalized P/E over 25 seems like a foolish time to buy something, because most all companies drop below that level regularly. But previously I was looking for normalized P/E’s under 10. I can effectively buy any excellent company I want at any time.

If I were particularly risk averse, I could even achieve my goals by buying nothing but treasury bonds. It would just take an extra 10 years or so.

What’s the point of doing brute force investing? Well, it’s really easy :)

Immunity to Buyers Remorse

The first day after I buy a new stock, and even for the first couple months that I own it, I find myself being pulled back toward the gambler mindset instead of the owner mindset. I find myself watching the stock price like a hawk : trying to see if I made the right decision to buy at that time, or if I should have waited. I used to get it really bad, to the point where my emotions were sucked into it and even up ’til a couple years ago : I would make investment decisions based on those short term price fluctuations and emotions. I do still always care about news about the underlying health of the company : which can often affect price.

Invariably though, after a few months, it settles in that I own the company for the long haul, and then I gradually start to not care about price movements. Lately I’ve found that this period of gambler/investor mindset isn’t lasting very long. I feel much more confident in my owner mindset decisions, and they sink in faster.

I mention it because Google just posted Q4 earnings (they did well) and the price has dropped 5% in after hours trading following the news. This brings up another point of interest. Following earnings reports, there are often highly volatile swings in a stock price. And amazingly : they often swing in the opposite direction of the news. So often that it leads me to believe that there are great masses of people out there have no frickin’ idea what they are doing when they buy or sell a stock. If I were a short term trader, I would target the stupidity and inability of people to comprehend an earnings release. Sometimes a great earnings release comes out and the stock falls just because that’s what everybody else is doing. Silly sheeple. But I wouldn’t do that : ownership style buying is so much better.

So, I’m down 5% on GOOG already, but because all the underlying reasons I bought them are still intact, I feel no remorse whatsoever about prices dropping. That’s the owner mindset. Google posted about $6.75 for the quarter. And their earnings don’t seem to be seasonally affected at this point, and by all indications they seem to be steadily rising quarter by quarter even through a nasty recession. So if I get rough with the numbers and make some assumptions, $6.75 times 4 is $27 a year instantaneous normalized earnings rate. And I bought Google at $580, or a P/E of 22 :-). Not nearly as bad as I originally thought (the P/E 35 I originally posted my purchase at was its trailing P/E. Yes, it’s growing that fast still). Tomorrow morning, if the after hours earnings reaction holds, they will be on sale for a P/E of 20-21.

Tomorrow morning, I’m going to buy $1000 dollars worth of another excellent company. I haven’t decided what yet. But that will just about empty my coffers of the money I had saved up at the end of 2009. I had saved up a cash balance for the possibility of going somewhere warm for the winter, but I ended up preferring not to spend the money. And as winter is over halfway done now, I just can’t resist buying stocks :-).

My wish list is a thousand items long, but I think I’m going health care sector.


From an ownership perspective, I made my last mistake a little less than a year ago. I sold JNJ and WAG (about 500 dollars each) in order to buy some BAC : selling 2 excellent companies to buy another one (although BAC’s status as excellent is temporarily questionable, in the past they certainly were). It was the last time I ever “juggled” stocks, thinking in the short term rather than the long term. As it turns out, I’ve made about 3 times more money on BAC than I would have on either of them, so it was a mistake in principle, not in practice. Well, JNJ and WAG are both excellent companies, and that’s why I bought them before. And since they have a special little place in my heart, they’ve gotten bumped up to the top of my buy list.

So this morning I picked up 30 shares of Walgreen’s. There are several companies whose yearly dividends, when plotted out on an exponential chart, fit neatly onto an upward sloping line, but very few whose earnings do. Walgreen’s is one of them. And the growth rate of that line is 15%. A company with a small payout ratio can exponentially increase their dividend for a long time before the payout ratio starts to pressure their earnings, so that’s quite common. But no company has that level control over their actual earnings. They depend on the success of the business. Earnings that are consistently growing that predictably are an indicator of a very strong underlying business. Walgreen’s is in excellent company in that regard. Since their earnings are so predictable, I can take the trailling 12 month earnings, and say I picked them up for a normalized P/E of 17 on the dot.

I like Walgreen’s, it’s one of the few places I shop (deodorant, toothpaste, envelopes). In my city, they have two stores located on about the best two corners in all of town. They’re a mix of convenience store (leaning toward personal health care) and pharmacy. In long term trends I think they sit favorably. Prescription drug use, as well as the use of consumer health care products is not going anywhere. I also think urbanization, population, and fuel prices are going to continue to grow, favoring Walgreen’s sweet convenient locations. If worse comes to worse, they have some of the most valuable street corners in the USA.

I also like the way the company seems to be managed. Measured growth over a long period. High equity percentage, sustainable dividend rate, no balance sheet bending acquisitions. Usually I’m not a big fan of retailers (although I am tempted to get some WMT) because by the time I see them on the map, they have already grown to near their ceiling. But Walgreen’s isn’t selling crap. They’re selling location, convenience, and drugs. Quite a combo. Maybe their growth slows down soon, but they are a solid company, which has continued to grow through the last couple years unphased. I think they’ll continue to do well along with the continued trend of use of health care products.


The economy is a highly advanced system of sharing. All of money is our system of giving and receiving. I give my time to my job. My company gives something to the society. My company receives money. I receive money. I give money. I receive something from society. The ancient tribal economies were gift giving exchanges. We are the same. It is inherent in our social nature. It works even when no money is involved. It works when it’s 2 people, or 7 billion. It is balanced, nothing is lost.

Consumption != Happiness

I was just looking back through the old posts in the blog. I notice an attitude increasing consumption was important to me. That it would somehow solve something for me. Ultimately, (hopefully) delaying consumption will give me time back that I would have otherwise spent working the rest of my life : and in that regard it will solve something.

But consumption itself will not get me happiness. Money can’t buy you love. I realize this because I’ve lived most of my life spending probably around 15k to 25k per year (most of this consumption in the form of gifts from my parents). Now I consume between 8k and 9k per year. And I don’t feel any different for it. When I think of things that make me happy, “not working” doesn’t come to mind. Things that make me happy are love, laughter, and fun : free stuff. They tend to happen outside of work, but “not working” is moving away from something. It’s not enough. Once the link between consumption and happiness is broken, it’s time to start moving toward real happiness. There are still an abundance of resources; no need to worry about not having enough.

It is like Maslow’s Hierarchy of Needs on wikipedia. There are layers. The bottom two layers, physiological and safety, cost money. And we need them in order to get to the top three layers. Everything in the top three layers, love/belonging, esteem, and self-actualization, are free. The three free layers on top are the best ones. Over consumption is over doing the bottom two layers. In fact I think we are always being gently pushed by society toward over spending toward the bottom, and we are misled that the top layers actually do cost money, when in fact they are free. It’s easy to keep building the bottom, without working on the top. But it’s better to complete the pyramid to the top, and then start adding to the bottom and expanding. If I can build a solid foundation for $9k a year that gets the job done just as well as the 25k a year bottom, then why not?

Update and Intel

Not much posting lately. Still riding out the winter here. I’ve been learning yoga from aypsite.org with a lot of my time. Saving and investing going according to plan. DJIA and SP500 are flirting with 10K and 1K again, which is fine by me since I plan on buying for the next 5 years and selling practically never.Intel
I just bought about $1000 worth of Intel. I already owned some, but wanted to increase my holding. Double bet on Intel. I like INTC because they have what I view as a natural monopoly due to Moore’s Law. They also run the company at 80% equity, and are aggressively buying back shares. Normalized P/E was about 15, possibly lower if the computer age boom continues. On the downside, revenue seems to have stalled out around $30B per year for the last decade. I think it’s a bump in the road, but who knows.The same advantage Intel has from Moore’s Law could also be a thorn in its side. As computing speed continues to grow exponentially, the extra speed for the casual computer user becomes unnecessary at some point. If somebody uses their computer only for email, internet browsing, and processing documents, then functionally not much has changed for them in the last 5 years even though their computer is about 8X faster. In this way, Intel’s own research could make processing power so cheap that it puts itself out of business. I think that’s what’s behind the company’s stalling growth for the last 10 years.

It’s a risk I’m willing to take. I have a feeling software innovation will tend to lag behind processing speed, but will always eventually find a way to use the excess : even if not for the casual user. And I think after 10 years, it’s finally priced into the shares. Now they will enter a phase of slower growth. In any case, I feel good about it. Monopolistic PC chip maker near the beginning of the computer age making sound decisions with their cash flow : worth a double bet.

Do I Need This?

I just got back from an adventure in Consumer Land. McDonald’s and Target.

I knew what I needed from Target the moment I walked in the doors, and once I had it I took a lap around the store and watched people. I tried to imagine what they were thinking : and over and over again it looked like they were thinking “Do I need this?” and “What about this €¦ do I need this?” It had been a while for me, and it was strangely foreign to see people going shopping with no particular aim in mind. Oddly, they know they’re doing it, and they love it.

I’m reluctant to invest in big retailers (I think of WAG as more of a pharmacy/health store), but if I were going to, it would be Walmart. I’m reluctant because mercantilism is ancient, and merchants have risen and fallen from generation to generation all the way back to its beginnings. WMT has some staying power though. They do it cheaper and more efficiently than everybody else, and are able to because of their economy of scale from being on top. I’m not totally sure of it, but I believe their company is still partly held and controlled by the Walton family too. WMT and TGT increasingly both have pharmacies as well. Maybe that will be a shift in the staying power of retailers.

Walking around this Target store, I found myself comparing it to a WMT, which I have a lot more experience with. I noticed their clothing section was more like a department store style than WMT’s. TGT seems to have a better store layout in general, more navigable. Since I went to McDonald’s first, I had the opportunity to check out TGT’s restrooms. I don’t know if they do this across the whole company, but this particular TGT had A+ toilet paper. WMT uses packing tissue I think. TGT seems lik e an every so slightly classier WMT.

The whole reason I went on this adventure was McDonald’s. I needed to get out of the house and I hadn’t been to Consumer Land for a long time. They had a supposed 50 nuggets for $10 deal for this weekend that turned out to be a fake. So, after I was tricked onto the premises, I decided to eat some food anyway. It was a kind of checking back in on an old way of living. And it was just as expensive and gross as I remember it. Anyway, MCD is king of the QSR’s (quick service restaurants). The next closest company in size is YUM brands at about 1/4th the size. And YUM is Pizza Hut, Taco Bell, and KFC all in one company. So really MCD is about 12 times larger than the closest. Not only that, they run at about double the profit margin (roughly 20-25%) of any of the other QSR’s.

Of particular note to me was a sign on the door: “Free Wi-Fi provided by AT&T” no comment here, that’s some food for thought.

I’ve wanted to pull the trigger on a few different restaurants, but I can never quite do it. Usually it’s because I don’t think they have a very good chance of being around 30 years from now, but MCD is safe in that regard. MCD is the only investment grade restaurant, but I think they’re too gross to feel good about owning them. I realize that it’s probably a rare thing for any of my companies to truly have the good of their customers placed ahead of the almighty dollar. But there’s a degree to which a company is providing a service for society, otherwise it wouldn’t be afloat. If I bought MCD, I would feel more like I was taking advantage of other people’s poor health habits rather than owning a valuable piece of society’s productive assets. I’m sure there was once a time when MCD sold good food (I have been able to observe a steady decline in quality in my short life) but now they have traded that in for 25% margins.

Margin Loans

The last 4K I’ve invested has been into a margin enabled brokerage account where I plan on putting most of my savings from here on out. (I will leave the rest in a non-margin account). I’ve known about margin trading since shortly after I opened my first brokerage account nearly 10 years ago. But not until recently did I realize margin loans are available not only for buying stocks on credit, but also for withdrawal for any purpose. This means I can use my stocks as collateral at any time for an instantly approved loan that will clear in one day. Obviously I’m not inclined to do anything like that, but I’m glad to know I can if I need to. It certainly defeats the purpose of a credit card for me. I have one card that I have never used. I got it with the idea that I would build my credit. Whole lot of good that did.

Anyway, I’m excited. Even though I would never take out any significant percentage of my equity in a loan, this is very useful for me. I have a small addiction to buying stocks, if you haven’t noticed. And consequently, I have trouble holding a cash balance. Problem solved. If I ever need a few grand, I can have it in my checking account tomorrow. I know I’m good for it. The interest rate on the loan isn’t particularly attractive at 8% but I wouldn’t ever plan on leaving an outstanding balance for long. In the long run that 8% will tend to be canceled out by the return on the capital too. I will probably use margin loans like an “emergency fund” that is so talked about but which was never quite compelling enough to actually hold large amounts of cash. And I’ll probably also use it for any bigger purchases I make down the road. I.e. car, travel, relocation, etc. This way I can just keep investing every paycheck, and take out a loan if I choose to buy anything that costs more than a month or two worth of savings. I’m paying now, buying later : without sacrificing ownership of the companies I have.

It’s certainly not for everybody. But for my style of consistent savings and pure equity, this is an easy way to manage my equity percentage without ever having to deal with creditors.

Update and Intel

Not much posting lately. Still riding out the winter here. I’ve been learning yoga from aypsite.org with a lot of my time. Saving and investing going according to plan. DJIA and SP500 are flirting with 10K and 1K again, which is fine by me since I plan on buying for the next 5 years and selling practically never.Intel
I just bought about $1000 worth of Intel. I already owned some, but wanted to increase my holding. Double bet on Intel. I like INTC because they have what I view as a natural monopoly due to Moore’s Law. They also run the company at 80% equity, and are aggressively buying back shares. Normalized P/E was about 15, possibly lower if the computer age boom continues. On the downside, revenue seems to have stalled out around $30B per year for the last decade. I think it’s a bump in the road, but who knows.The same advantage Intel has from Moore’s Law could also be a thorn in its side. As computing speed continues to grow exponentially, the extra speed for the casual computer user becomes unnecessary at some point. If somebody uses their computer only for email, internet browsing, and processing documents, then functionally not much has changed for them in the last 5 years even though their computer is about 8X faster. In this way, Intel’s own research could make processing power so cheap that it puts itself out of business. I think that’s what’s behind the company’s stalling growth for the last 10 years.

It’s a risk I’m willing to take. I have a feeling software innovation will tend to lag behind processing speed, but will always eventually find a way to use the excess : even if not for the casual user. And I think after 10 years, it’s finally priced into the shares. Now they will enter a phase of slower growth. In any case, I feel good about it. Monopolistic PC chip maker near the beginning of the computer age making sound decisions with their cash flow : worth a double bet.

Do I Need This?

I just got back from an adventure in Consumer Land. McDonald’s and Target.

I knew what I needed from Target the moment I walked in the doors, and once I had it I took a lap around the store and watched people. I tried to imagine what they were thinking : and over and over again it looked like they were thinking “Do I need this?” and “What about this €¦ do I need this?” It had been a while for me, and it was strangely foreign to see people going shopping with no particular aim in mind. Oddly, they know they’re doing it, and they love it.

I’m reluctant to invest in big retailers (I think of WAG as more of a pharmacy/health store), but if I were going to, it would be Walmart. I’m reluctant because mercantilism is ancient, and merchants have risen and fallen from generation to generation all the way back to its beginnings. WMT has some staying power though. They do it cheaper and more efficiently than everybody else, and are able to because of their economy of scale from being on top. I’m not totally sure of it, but I believe their company is still partly held and controlled by the Walton family too. WMT and TGT increasingly both have pharmacies as well. Maybe that will be a shift in the staying power of retailers.

Walking around this Target store, I found myself comparing it to a WMT, which I have a lot more experience with. I noticed their clothing section was more like a department store style than WMT’s. TGT seems to have a better store layout in general, more navigable. Since I went to McDonald’s first, I had the opportunity to check out TGT’s restrooms. I don’t know if they do this across the whole company, but this particular TGT had A+ toilet paper. WMT uses packing tissue I think. TGT seems lik e an every so slightly classier WMT.

The whole reason I went on this adventure was McDonald’s. I needed to get out of the house and I hadn’t been to Consumer Land for a long time. They had a supposed 50 nuggets for $10 deal for this weekend that turned out to be a fake. So, after I was tricked onto the premises, I decided to eat some food anyway. It was a kind of checking back in on an old way of living. And it was just as expensive and gross as I remember it. Anyway, MCD is king of the QSR’s (quick service restaurants). The next closest company in size is YUM brands at about 1/4th the size. And YUM is Pizza Hut, Taco Bell, and KFC all in one company. So really MCD is about 12 times larger than the closest. Not only that, they run at about double the profit margin (roughly 20-25%) of any of the other QSR’s.

Of particular note to me was a sign on the door: “Free Wi-Fi provided by AT&T” no comment here, that’s some food for thought.

I’ve wanted to pull the trigger on a few different restaurants, but I can never quite do it. Usually it’s because I don’t think they have a very good chance of being around 30 years from now, but MCD is safe in that regard. MCD is the only investment grade restaurant, but I think they’re too gross to feel good about owning them. I realize that it’s probably a rare thing for any of my companies to truly have the good of their customers placed ahead of the almighty dollar. But there’s a degree to which a company is providing a service for society, otherwise it wouldn’t be afloat. If I bought MCD, I would feel more like I was taking advantage of other people’s poor health habits rather than owning a valuable piece of society’s productive assets. I’m sure there was once a time when MCD sold good food (I have been able to observe a steady decline in quality in my short life) but now they have traded that in for 25% margins.

Margin Loans

The last 4K I’ve invested has been into a margin enabled brokerage account where I plan on putting most of my savings from here on out. (I will leave the rest in a non-margin account). I’ve known about margin trading since shortly after I opened my first brokerage account nearly 10 years ago. But not until recently did I realize margin loans are available not only for buying stocks on credit, but also for withdrawal for any purpose. This means I can use my stocks as collateral at any time for an instantly approved loan that will clear in one day. Obviously I’m not inclined to do anything like that, but I’m glad to know I can if I need to. It certainly defeats the purpose of a credit card for me. I have one card that I have never used. I got it with the idea that I would build my credit. Whole lot of good that did.

Anyway, I’m excited. Even though I would never take out any significant percentage of my equity in a loan, this is very useful for me. I have a small addiction to buying stocks, if you haven’t noticed. And consequently, I have trouble holding a cash balance. Problem solved. If I ever need a few grand, I can have it in my checking account tomorrow. I know I’m good for it. The interest rate on the loan isn’t particularly attractive at 8% but I wouldn’t ever plan on leaving an outstanding balance for long. In the long run that 8% will tend to be canceled out by the return on the capital too. I will probably use margin loans like an “emergency fund” that is so talked about but which was never quite compelling enough to actually hold large amounts of cash. And I’ll probably also use it for any bigger purchases I make down the road. I.e. car, travel, relocation, etc. This way I can just keep investing every paycheck, and take out a loan if I choose to buy anything that costs more than a month or two worth of savings. I’m paying now, buying later : without sacrificing ownership of the companies I have.

It’s certainly not for everybody. But for my style of consistent savings and pure equity, this is an easy way to manage my equity percentage without ever having to deal with creditors.

My Capital One Experience

I just canceled my credit card which I mentioned in the last post. I got it three years ago following the popular idea that I would use it for small purchases to build my credit. Haven’t used it one single time. I was just carrying it around waiting for somebody to steal my identity and my 500 dollar credit limit. Too late for them now.

Maybe I’ll take it one step farther and buy some Capital One stock. They had good customer service. For a while here I’ve been buying non-financials because I felt I was over exposed. But now that I’ve diversified a bit, there are still some bargains out there and I might pick up some more power banks.

Normalized Earnings and Stock Update

Normalized Earnings
While talking to a friend about the blog recently, it came to my attention that the idea of “normalized” earnings might not be crystal clear. The word normalized here comes loosely from the log normal model of stock prices. In this case it’s the log normal model of earnings.The idea is that for a compounding business, earnings grow at an average exponential rate. But for most companies there is significant variation around that average. For example, quality insurance companies will occasionally have a bad year here and there when there were a lot of claims. Maybe it was a bad wind season, or flood season. But 9 out of 10 years they will have a good year. Normalized earnings is that average growth line of earnings. So in a good year, normalized earnings might be below a company’s actual profits. In a bad year, it will be above the actual profits. Either way, earnings will tend to move back toward the average exponential growth line.The use of normalized earnings tends to work best for consistently profitable companies that are already exhibiting compounding, but which also have some variance in their yearly performances. During a recession especially, these companies might trade at regular P/E ratios of around 20, when their normalized P/E’s are down in the 5-10 range. If there’s no variance, then normalized P/E will always be roughly equal to instantaneous P/E. Companies that display this characteristic are extremely rare, and they tend to be among the best companies in the whole world because of that unshakable consistency.

So, normalized earnings is an average expected earnings, given the recent performance of the company over the last decade or two. Is it a perfect science? Of course not. But is certainly a useful tool. Many healthy compounding businesses report poor earnings in recession years and that gives the potential for undervaluation by short term thinkers.

Stock Buys
I bought some JNJ, Johnson and Johnson. As I mentioned before, WAG and JNJ were high on my list because I wanted to “recover” them after my last mistake. I joke with my brother that companies with names of the format “Blank and Blank” become consumer health care powerhouses. Like Johnson and Johnson, Proctor and Gamble, and Church and Dwight. PG is high on my list too. JNJ is a diversified health care products giant. They do prescriptions, OTC meds, wide range of consumer health products, and serious medical devices. Long time compounder.

I also bought some BK. On margin. I had to try it out. Perhaps foolish of me. I don’t know where the whole margin thing is going for me. I will probably keep full equity, or nearly so. I might use the margin like a big bat to swing at a home run stock opportunity if I should see one. Haven’t seen any home runs since about July. Still a lot of hittable pitches right now though, so it’s tempting to just leverage up two fold and start myself a serious stock collection. I got a wish list 5 pages long.

Anyway, BK : I’m not talking Burger King here, that’s BKC. I’m talking about Bank of New York Mellon. Until a few years ago they were just called the Bank of New York. Somehow they added the word Mellon onto the end of that wonderful name. Nothing against Mellon and Sons, but The Bank of New York has a nice ring to it. The name is the result of the 2007 merger with Mellon Financial, another financial powerhouse.

The Bank of New York Mellon is the oldest surviving company in the United States, established in 1784 by the Alexander Hamilton (First Secretary of the Treasury, One of the Founding Fathers, Face of the $10 Bill, Founder of the Bank of New York). I am literally buying BK entirely because of the last sentence and no other reason. (Actually, to be honest, I did have to check to make sure they were profitable and reasonably priced). Anybody who has read this blog from the beginning knows that I believe that there are entrenched power structures, and their roots run deep. That’s bankable. I also have a strong respect for any company that can grow and change for 200 years and continue to be consistently profitable. While I’m not a big fan of the marriage of banks and government, that is the way things are done right now. Alexander Hamilton was the seed of privatized national banking in the US that took over the New World like an invasive species with no natural predators and an abundant food supply. That seed is still alive today, and somewhere in its trunk is BNY-Mellon.

A stacked deck

Because of the productive nature of capital assets, they can be incredibly valuable at almost any price. This is because in our system they can be used to buy back time otherwise spent working, which to some people is priceless. What I’m getting at here is that different people have different values for different things.

Personally I place a high value on productive assets. I view them as underpriced in general : it is just my personal valuation. Even if there were only one type of investment to buy for the rest of my life, and it only returned 1% above inflation, I would still be an investor. Well, maybe that is extreme (but before I was an investor, I was a gambler, and was content to make negative return “investments” so maybe I would still be buying this hypothetical 1% investment). Here’s another illustration. If I were a millionaire and the only investment choice I had was one where I would slowly lose my millions of dollars to negative returns, but I would still get a livable dividend payment each year, would I invest? Or would I spend my million dollars and become a worker? You get the idea. Capital can be priceless.

With an attitude like this, buying productive assets becomes “right” almost all the time. And making investment “mistakes” is difficult to do. As long as my assets are still producing, I’m happy and I don’t care what their present market value is.

Translating this to the stock market, nearly any time, and any price level is the right time for me to buy. As long as I’m accumulating, I’m moving toward my goal. Additionally, capital in general has a long term average positive return rate associated with it (about 5%) which seems to be an inherent characteristic of capitalism and aggregate time value’s of money. Because of this inherent positive trend, most of the time it is right to be buying/holding and wrong to be selling. And a smaller portion of the time it is wrong to be buying, and right to be selling. In other words, divesting is rarely a good decision. I’ll keep on buying and holding unless prices rise to utterly ridiculous levels.

So I’m not asking myself questions like, is there another crash coming? Will the stock market trade sideways for a few more years? Should I wait to buy?

Instead I’m noticing things like, a crash just happened and now stocks are priced at least appropriately. Maybe they are even slightly undervalued. Now is a safe time to be accumulating. Maybe another crash will come or the stock market will trade sideways for a few years and I can accumulate more at these fair to attractive price levels.

Look Through Earnings

In Warren Buffett’s annual letters to Berkshire Hathaway shareholders (and his limited partners before BRK) he uses a metric he calls “look through earnings” to describe the company’s yearly performance. The main idea of look through earnings is that a company with a lot of investments in other companies will not show an accurate picture of real earnings. The earnings of all the investments added together provide a better picture.

I’ve decided to figure my own look through earnings. Instead of calculating how much I made in dividends and capital gains as a measure of my earnings, what if I calculate how much my investments earned per share, and multiplied them all out by how many shares I have? This is how an owner would think about it. And it’s a better idea of the long term average I could expect to make per year.

Taking it a step further, I can use normalized earnings to get a better idea of the long term average. This is a lot rosier of a picture than 2009 earnings, since I bought banks last year (which didn’t have much for earnings, but bounced back very well in price). If I use a conservative normalized EPS, I could expect to make $5000-6000 this year. This would imply a long term average value of around $100K for the portfolio (P/E 16 to 20).

Using the standard 4% withdrawal rate, I am only at $1800 per year in passive income right now. But using normalized look through earnings, I am closer to matching my $8500 a year of expenses. It’s just that I need to wait for the economy to recover so that those normalized earnings return, and the prices catch up with the earnings potential. So I’d at least like to think that I’m closer than it seems right now.

On overpopulation and business

As overpopulation continues to rise, the efficient interaction of humans on a global level will become increasingly important. In order to support higher numbers, we will need to advance in specialization, trade, and technology. Capitalism, despite its pitfalls of non stop profiteering, has so far shown itself to be the most efficient system of production and distribution of resources for large populations. And I don’t see that changing in our life times. I see a leaner, more efficient capitalism, one in which margins are lower, and efficient existing providers are entrenched as long term institutions. But fundamentally, it is still capitalism.

I don’t know why it works this way, but for some reason, big business providers have a better bottom line than small guys. My gut level reaction is that it is an efficiency of scale on both the supply and demand side. Quantity over quality. And yet everybody loves it. The producers are more efficient because they’re providing the good/service on a larger scale. And the consumers get some sort of efficiency from the shortcut of just going with the big brands. No doubt the distributors in the middle of this transaction chain are also being more efficient as evidenced by the prevalence of big brands on the shelves everywhere.

I guess what I’m really getting at here, is that large corporations now exist alongside governments in the efficient distribution of resources to ever increasing populations of interdependent people who are individually helpless at obtaining those same resources (some of them necessities). And because of that, I believe more efficient and larger businesses will continue to do well throughout this phase of human history.

This is partially justification for my recent behavior of high savings and investing in large corporations. But also, it’s noticing that despite my drastically reduced consumption, that I am still entirely dependent on those corporations (just the most useful among them), and that if I can’t divorce them with my strong discipline, just about nobody can. It is just plain easier to use them.

I’ve been slacking

This blog is great as a personal accountability journal. Somehow telling my goals to strangers over the internet makes me follow through on them. I wouldn’t want to disappoint. My theory is that it works out this way because I don’t have a peer group of fellow investors “in real life” to talk to about this.

For the last couple months I’ve spent a lot of my free time learning and incorporating a daily yoga practice into my life. I don’t do any asanas (postures/poses) yet, but instead have focused entirely on daily breathing exercises and meditation which I think is the root of the benefits.

Anyway, this has taken time away from my ongoing project of compiling a personal database of bottom line information on about 3000 publicly traded companies which I found to be consistently profitable over the last decade. Of course I made minor exceptions here and there, especially for certain sectors in 2008 and 2009 when selecting companies. If a company was borderline, I tended to include it in the list. I can cut it out later with closer inspection if need be. The finer details of the project are in the old posts.

Before beginning yoga practices, I had just finished compiling the list of prospects, and had just began harvesting the last 15 years of their financial info from Mergent Online (I got about 50 done). I don’t have a subscription with Mergent, but I currently live with my brother who has access to the site through his university for about 10 more months. Since this info is potentially very valuable to me, I’m going to buckle down and harvest all 3000 companies in a redoubling of my efforts.

This is a long, ongoing project which could potentially take a couple hours per day. But hopefully one day it will be the only job I ever need. Making money without working is hard work.

Blog question

Could another blogger help me out with a n00b question? Where can I learn about / what do I need to customize my blog more? Does it cost extra money as opposed to Google’s free service? Specifically I’d like to make it much wider. Like the Information Processing blog I recently added to my links list. Could somebody please point me in the right direction? Thanks.

By the way, Information Processing is written by physics professor Steve Hsu, with a pleasantly rational treatment of economics and financial news.

Median Net Worth Stats

Have you ever wondered how your personal savings stacks up against the rest of America? Here’s a link to the best data I’ve found so far. It’s from the Census Bureau and it’s 2002 data.


There you can scroll down and find data in tables or graphs showing median net worth with and without home equity, divided by income quintiles, householder age groups, race, gender, and asset types. The table on page 10 of the pdf had the most interesting info for me.

I don’t know why, but I find myself checking around for these absolute rankings even though it has no bearing on my personal situation. For some reason it’s fun. I think the 2002 data is still probably fairly accurate (maybe a little low) since asset prices haven’t appreciated that much in the last 8 years.

Eyes on the prize

How much does it cost to feel good? To have love, a safe and warm place of my own, family, and food. It is so easy to get pulled into money obsession, so easy. Capital accumulation is addicting, and I will take care not to identify with my capital : or maybe I shouldn’t even think of it as mine. It may be better to think of it as time served to society.

With my current savings and my current wage, I need to work only 12 hours per week to offset my costs, and I cannot bring myself to work less than 36 hours per week. Even with zero savings, I would only need a 16 hour work week. Who can take only what they need? Who can walk away when they have enough? Too few.

General Electric Historical Stock Statistics

GE is by far my largest holding at 20% of portfolio by current value. At one point it was as high as 30% and I may be buying more shares to keep it in the 20-25% range. I estimate fair value around $40 per share. The reason I keep such a high percentage allocated in GE is that it’s this undervalued, plus it has a long term reliability factor that few other companies can match. In other words, it’s practically a sure bet that it will return to its long term fair value eventually.

I love the underlying economics for the company. It’s a multinational conglomerate, and its divisions read like a check list of the most powerful industries in the world. “The Company’s products and services include aircraft engines, power generation, water processing, security technology, medical imaging, business and consumer financing, media content, and industrial products” : Google Finance. This is just my opinion, but I believe GE’s ongoing success is closely linked with humanity’s ongoing success in living together at a global level.

I will spare you several paragraphs of praise for this great American company : Thomas Edison’s original electric light bulb company (Ok, I’m done now really). What I wanted to do was show you what my graphs look like for a company. None of this information is secret, it’s all public, you just rarely see it zoomed out this far unless you have thousands of dollars to pay somebody to prepare a special report for you. Or if you have the time to make them, and value the information at millions of dollars. So without further adieu (click on the graphs to enlarge them).

High and low prices with growth rates

Payout Ratio and moving average

Earnings per share and growth rate
Revenue per share and growth rate
Equity per share and growth rate
Percentage Equity (equity/assets)

20 Year Real Return: If you bought the stock at its average price in a year, what would the real return be at the average price 20 years later with dividends (at average price per year) factored in?

Dividends and growth rate

110 years worth of dividend history (from an S&P manual)

This last graph is particularly interesting to me. Particularly I notice that 6% exponential : very close to the average return on capital over the long term of about 5%. And then I notice the 18% growth spurt from 1975-2008.

I only have pre-1970 data on a few companies, and it’s from S&P manuals that I had to page through manually. It’s so slow that it’s essentially not worth collecting the data. However, Yahoo finance has just added price and dividend info from 1962 through 1969 onto their site for several companies. And since the business world is cyclical (mainly due to the credit cycle, in my opinion) I highly value any data before the 1980-2001 boom period which tends to make me overestimate real returns.

The 1964-1982 period was a lackluster time for American stocks, as I imagine will be the 2001-20XX period. In fact, looking back historically, if you were buying stocks between 1979 and 1982, you could almost do no wrong. It was like March 2009 but it lasted 3 years long. The entire DJIA was about to grow by 17% per year for 17 years. That data is all very skewed, and now it’s back to reality time for America for at least several more years. I think our current situation actually has more in common with the 1929-1931 crashes in that we have just crashed from a period of gross overvaluation. Whereas the 1964-1982 period, the market slowly traded sideways for 18 years gradually become more and more undervalued after leaving from a point of roughly fair value. In my opinion after 10 years of trading sideways from 2001-2010, we are just now getting back to fair valuations (and last year were slightly undervalued) around the DOW 10,000 and S&P 1,000 levels. I’m not making any predictions, but I will say that there is the potential for things to trade sideways for a long time, potentially up to 15 more years. Or not : but I am hoping for cheap stocks for the next 5 years while I’m buying. OK, personal opinion time tangent over.

So there it is, there’s the general idea behind the data collection project I’ve been writing about here on the blog. A disclaimer: all of this data is just to my best knowledge. It was compiled from several different sources, and I was not precise in verifying any of it.. I’m not claiming that it is even close to 100% accurate. It is just a rough picture that I use to keep stats on companies. I’m doing it for the purpose of bettering my own personal investing, and truthfully I kind of enjoy it.

So I’ll be gradually making graphs like those for about 3000 companies (should take me several years) and updating them once per year, compiling their key stats into one spreadsheet, and hopefully using the data to make a few key timely buys and sells throughout my investing lifetime. I know it’s not all about the stats. But, with that said : something special has to be going on for a company to keep growing decade after decade after decade. And stats are good for revealing those companies who got it going on. They reveal the companies that keep growing exponentially through the recessions like clockwork. Those are what I’m looking for even more than the timely buys.

“He said they’ve already got one.”

Our minds are the most powerful processors on earth. Our selves are the most advanced operating systems and programs. Our bodies are the inputs, outputs, displays, and wiring. And all of this, making up us, is the user, the reason why. We are one computer, wirelessly connected to the internet, and the rest of reality is the internet.


GE released a statement today that they plan to increase their earnings and dividends in 2011. Big surprise. Not to me. But the rest of the market thought this was worthy of a 5% price increase : and it’s about time. I thought GE would have been back to $20 a share by 6 months ago, but I’m overly realistic.

Things are going well with investment returns and continued savings. Spending is still unchanged at about $8500 a year, maybe even a few hundred less. I haven’t been keeping track of spending, but I think my frugality has slowly gained momentum just based on the continued gentle intention to save. Still planning an increase in consumption (on housing) after my current living situation runs out in a few months. Hopefully that expense will be offset by a raise following the end of my training period at my new position.

Portfolio is doing well in 2010. Up about 14% versus about 4 to 5% for the major indexes. Value is up to $47K as of today, so it’s been a quick start to the year. Still got a long way to go though.

Data harvesting is inching along. Have harvested about 400 companies out of 2900, and now have the data into spreadsheets (the next stage) for about 20. Of those 20, GE is the clear pick for best cheapest company, even after its run up today. And the big oil companies also seem cheap (but they always are, which I don’t yet understand).

Yoga practices are also going well, according to the practices outlined at aypsite.org which I’d recommend as a yoga starter for anybody.

Robert Shiller Data

Historical data on the S&P from 1870 to present.Go to “long term stock, bond, interest rate, and consumption data.” If you change the data type from “general” to “number” and adjust the decimal placings, it becomes a lot easier to read. I think I will just let this incredible data speak for itself. I may compile my favorite parts into a graph and post them here in the next few days.

Consumption Down : $21 per day

Old readers might remember that last year I tracked my daily consumption for 5 months to figure out where I was at, and to systematically lower it. Then I stopped because it was so tedious. Well, I just calculated my consumption year to date in about 5 minutes. And I can update it once a month in about 2 minutes. How?

Since I only care about absolute consumption, I don’t categorize any expenses. And since I also receive all my pay checks into one bank account, I can reason that any consumption will have come from that account. So, I can just track any withdrawals from that account that aren’t investments, and put them on a consumption chart in chunks. Rather than getting a day by day account of my expenditures, I will be getting an account of all my withdrawals that were used for expenditures. In the long run (longer than a month or two) this will give me the same daily average consumption figures. All of this is made very simple with online banking account registers.

There is a double counting of the change I receive back from transactions. Usually I save it up in a jar and use it for laundry, and eventually deposit it back to the bank. I can fix this in one of two ways. I could either spend the change off from time to time and annoy the hell out of some cashiers. Or I could just make a mental note to put in a negative entry on my consumption data when I deposit the change at the bank, since it’s already been counted as spent.

Now to the good news. After compiling the data from my bank account, year to date, my daily consumption is at an average of $20.94 which equates to $7665 per year. I knew I had made some gains in this department , but I didn’t think it was that much. There may be other factors at work. One possibility is a seasonal factor : less active in the winter time could mean less consumption. I think I spend less on food in the summer because I can bike the few miles to the cheaper grocery store (probably saves a dollar or two per day). And another possibility is that 2.5 months of data isn’t very much and this could just be a randomly favorable period with low expenses. I believe that I’m spending less than last time I kept track in at least a couple departments. Drugs and alcohol consumption is down noticeably, and eating out is down noticeably. One other explanation could be that I moved during my last check on consumption, so moving expenses could have pushed my average up to $8500/yr over that period.

I’m glad to have an easily tracked consumption chart up and running again! And hopefully more gains to come in this area. Perhaps I can gain the option to retire much earlier now if I can keep consumption going downward. Passive income using a 4% withdrawal rate is at least $1900 right now, or about $5.20 per day. And as I mentioned in a recent post, I’d like to think that my look through earnings (looking through rosy glasses) are about $4500, or $12 per day, and I only need to wait for the market to revalue those earnings more appropriately before I can withdraw from the capital base. Consumption is at $7665 or $21 per day. Meet somewhere in the middle?

Historical S&P P/E Ratios from Shiller Data

Here is a graph of the S&P’s composite P/E ratio from 1870 to 2009 compiled from the Robert Shiller data link I posted a few days ago. Robert Shiller is or was (I think) an economics professor at Yale University. To me, he is famous for compiling this S&P data. He’s also the Shiller from the “Case-Shiller Home Price Index” that you may occasionally hear about. You can find the data any time by Googling “Shiller data” and it will be the first search result, from Yale’s Econ site. I may post more graphs from this data set soon. Click on the graph to enlarge it.

The data suggests we have just crossed a “peak” of incredible “irrational exuberance” (Shiller’s book title) and are now on the downward slope toward a “valley” which we should reach around 2020. From a different graph I compiled from the same data file, it also suggests that normalized S&P earnings for 2010 would be about $45 to $50 per unit of the index (with a very strong indication that this is an accurate assumption : I.E. low variance). Using that normalized value, it implies a P/E of 24 currently, which is right at the level of historical peaks prior to the 2000 peak. It also implies a historically average P/E of about 15 during last years “crash” in March. So, not only does it appear we are on the downward slope, but we may have a long way to go to the bottom. This is partially because of how high of a peak we were just on, with P/E’s reaching up into the 40 €²s at a composite level. So, it seems there is further revaluation to occur, whether it be a crash, or a several years long period of little to no growth in prices. For my own personal finance journey, I see great news from this graph. It means there is a high probability that during my saving and investing over the next 5-20 years, I will be buying into a valley. Note that I will be buying anyway, no matter what (maybe I’d sell given this data, if the indexes made a quick run back up to 2007 levels, but it would have to be pretty quick here). Because to me, capital accumulation at any price is a strictly dominant strategy for a worker. Its value is near infinite to me until I have the option not to work. I also believe there are undervalued buying opportunities (or even just appropriately priced companies) even if the composite is overpriced. They’re just harder to find. This graph also means that when I do choose to stop working, that it will probably be near a periodic valley, and my withdrawals will be unlikely to damage my capital base which is a danger during some periods. For example, retiring in the 1999 peak with a borderline withdrawal rate would not have worked. People who did that are now having to go back to work or lower their consumption as their withdrawal rates creep upward and eat into the capital base. I won’t have that problem if I retire around a valley. And I also probably wouldn’t use a borderline withdrawal rate.

Early Investing Mistakes

I’ve been investing now for about 9 years, buying individual stocks. People would call me a “value investor” because I pay attention to value. But really, that’s just common sense. Here are some of my earliest and dumbest mistakes.

Trying to get rich quick
As in make a million by finding a way to constantly be doubling my money once every 3 months on crappy companies. I liken this to the fantasy of the idea of finding the perfect bet in a casino, as if you could predict which machine is about to pay out with a clairvoyance. Doesn’t work this way. Most penny stocks (under $1 per share lets’ say) are trash because they have recently gone through at least a tenfold decrease in price, which is related to value. So there’s a high probability that value has just undergone at least a tenfold decrease as well. And stocks that are consistently losing value are bad investments. Value investors want stocks that are consistently increasing in value. Don’t buy a broken business in the stock market : you have no power to fix it up.

Ignoring transaction fees
TDAmeritrade charges $10 per trade. When I first started out I didn’t have a lot of money, so I would buy in chunks of $300-2000, depending on how reckless I was being at the time. Those $300 dollar moves were a waste. Try to keep transaction size high enough that fees are 1% or less. Even if it means having to save for a while to make a purchase. Make quality buys that you can hold a long time to reduce transaction fees when you’re starting out.

Not holding on to a company long enough. Juggling is another form of trying to get rich quick. During the early stages of investing, there is a period when we only have 1 investment. Then 2 investments. If it’s value investing in the stock market, then it means there’s going to be a period when we’re not diversified. It’s important to move beyond this stage as quickly as possible, so that all the eggs are no longer in one basket. But an early mistake of mine was to keep only 1 or 2 eggs, and move them around (almost randomly) between baskets. Find some good stocks and stick with them for your first few buys. Create a core holding of solid companies that you can add to. Take the time to own a company for the long term instead of juggling between ticker symbols.

This has to do with the attitude, and the reason for investing. When I started out I was gambling. Once I got wiser, I was accumulating capital. Adding on to a core, growing foundation of capital. Buying assets for the long term and just keeping them, and adding on to them consistently. That’s the ticket. I was trying to make a longshot bet, so that (in my mind at the time) I could afford to move my money into safer assets then. This was a messed up way of thinking about it. The right way to do it is to start with a foundation of safe, solid companies. That’s the core allocation of assets. The bulk of the capital should be solid. Then the fringes can be longshot bets.

Buying unknowns
I thought of myself as quite the intelligent investor back in the day. And I thought I could find the most undervalued stock, and buy it at the perfect time, and make tenfold, and then do it again. There are about 10,000 legitimate investment options for publicly traded companies of appreciable size. A beginning investor has only a fractional awareness of this whole, and hasn’t even heard of 95% of the companies. Don’t try too hard. Don’t go looking for that sweet company you’ve never heard of before : at least not for your first few investments. Take a pass on that Chinese start up and buy buy solid companies that you know. Literally. Make a list of companies that you know that you think are good companies. Fill the list with companies that you support with your own money and consumption on a regular basis. Pay attention to the labels on the things that you buy and find out what companies make them. Then do some basic analysis of the fundamentals to make sure it’s a profitable company, and then just buy them and hold them until you get a firmer grasp of evaluating companies you’ve never heard of before. In other words, build your core first few investments with companies you know and understand. Be an investor first. And then learn to be a value investor. Who cares if you bought these first companies at the perfect time and perfect value? If you stick with this value investing thing, try some fancy stuff once you have a few solid bets down.

Trying too hard
There are lots of stats, numbers, and methods to learn when starting out evaluating companies. I focused too much on the numbers, and not enough on the obvious. Ask obvious questions. Is this company profitable? Is it growing over the long term? Cover the basics before you get fancy.

Short term dreams
Finally, being a hurry : big mistake. I kept thinking short term pay day. Gambler mentality. Double up my money and cash out so I can spend it. Or try to continuously double up to 1.25 million. Time is on your side if you start young. Don’t invest money unless you don’t plan on getting it back. That’s my honest advice. If you can’t permanently give this money to your capital base, and take the risk that it will never pay out ever, then don’t do it. If you do choose to invest, leave that money in investments until the day it pays all your expenses. Otherwise it’s just delayed consumption. And if that’s all you’re after, let me tell you : you can save a lot of time, effort, and probably money too, by just spending your money right now instead of investing. I used to cash out. Now I only make deposits to the investing account, and it keeps snowballing. Bets take years to play out in the stock market. Sometimes decades. It wouldn’t be at all uncommon to buy a solid company, hold it for ten years, and have the stock price be the exact same as when you bought it. Then the next ten years it may grow ten fold. Be prepared to wait decades.

Game Theory and Worker Investors

Capital is a desirable thing. It is the accumulation of excess. Having it is better than not having it, in nearly every way, and most of the other ways are equal. For the purposes here, having capital is a weakly dominant strategy. If you have capital, at the very least you could give it all away and not have capital, so weakly dominant. In my opinion, it ranks very high in importance. To a worker, its value is measurable in time as well as money. Capital has diminishing returns beyond the point of getting back all of the time spent working. But up to that point it might as well be right up there with food, water, air, and shelter. Up to that point it is literally worth 1/3rd of my waking life, which is currently spent as a worker. In many ways, the modern wage earner is an indentured servant, to a corporate task master, bonded by debt. The sooner this bond is paid off, the better.

With that in place, it makes sense for the worker to buy capital with every free dollar. Capital is the only currency the corporate task master will accept for payment of the debt. So, it makes sense to buy capital at the going rate, almost at any price offered. Any amount is better than none. The worker isn’t using the extra money for anything else (my personal opinion). What price is too much for time?

The above is directly related to my thoughts on attempting to time the market for the best times to buy and sell. If a stock is underpriced, it is appropriate to buy it. If a stock is appropriately priced, it is appropriate to buy it. If a stock is overpriced, it MIGHT still be appropriate to buy it. But finally the two other actions also become appropriate. It could also be appropriate to not buy it. And it could also be appropriate to even sell it.

So, imagine there is a continuum of price for capital (measured in expected return rate and variance, by the way). At the lowest prices, the outcome is buy. At medium prices, outcome is buy. At high prices, outcome is buy. At even higher prices, outcome is not buy. At highest prices, outcome is sell. It is almost never correct for a worker to sell a good underlying company. I have never yet been a non-worker, but I imagine the correct sell barrier is only very slightly lower for these people. It is almost never correct to sell based on pricing, period. It is an interruption of ownership. Cardinal slip. It generates taxes, and exposes the capital to risk of not being reinvested in a good company. Note, it can still be correct to sell at any time if the company is not a quality company, or if its quality decreases. For non-workers (investment income already paying for free time), the barrier between buy and not buy is significantly lower than for workers. It makes sense for non-workers to buy only when the capital is selling cheaper than the historical average return rate. Timing the market is the business of the already paid.

Awesome Data Site


Another Data Site

More good charts, all in one place.
http://a-candle-in-the-dark.blogspot.com/Here’s one from the site that’s pertinent to the subject matter here.



Plugging away at the stock research project. Awaiting details of a probable raise in 2 weeks. Considering upgrading the quality of my clothing (I wear the same 3 sets of clothes all year long, they might as well be nice). Researching housing situations (none of them are cheap enough for my liking). Not much in the way of insights into personal finance or economics. I’m growing out of an initial wide eyed stage of learning, and into a second stage of just doing it. Once the basics are understood and the habits are in place, there’s not much to add. It becomes an exercise in sustained will power.

Interactive Brokers

I’m thinking of switching to Interactive Brokers from Ameritrade. It trades publicly (Nasdaq: IBKR) and basically blows away all the competitors in commissions and margin interest rates. TDAmeritrade’s base margin rate is 7.75%, IBG’s is about 1.5%. TDAmeritrade charges $9.99 per trade. IBG charges $0.005 per share (or roughly 50 cents per trade for an normal order). TDAmeritrade supposedly has much better stock research tools available, but I don’t need them. All in all it would save me a few hundred dollars a year (if I continue holding a margin balance, which is questionable). But even if I don’t hold a margin balance, the fact that I may in the future use margin is a strong argument for IBG. Anybody have any experience with them?

That is a bummer, man

Like an aging pet that eventually gets too tired to try to escape any more, I’m gradually accepting my status as a lowly worker. The kind of freedom I wrote about in the early posts of this blog is not gained by investing alone. It is a game of king of the hill with a hundred thousand people on each hill. That type of freedom is taken, seized. Freedom itself is a zero sum game. The word freedom implies the absence of some restriction. And that restriction is the weight of all the people standing on your face who are trying to climb to get to the top. Some of them are willing to do much more devious and selfish things than invest the majority of their income.

The lack of posts lately has been because of this realization. This is all small beans. Bush league. Money accumulation as a worker is not that important in the grand scheme. I could write a thousand more posts about personal finance and it wouldn’t do any good. The formula is simple. Consumption <= Income. There just read that last sentence a thousand times for the next thousand days.

I’m accepting that I am a part of this huge team of 300 million people called the United States. There is no better option than to accept it. The other option is to act from a position of personal sovereignty, which would manifest in many ways, most of which would be followed shortly by near certain imprisonment and or death. If everybody spontaneously began acting from a place of personal freedom, there would be an instantaneous massive population war resulting in depopulation. Imagine if nobody went to work tomorrow, nobody at all in the whole world, because they didn’t feel right about it, because they didn’t feel free at work. Yet all of these people will still want food, shelter, and children. Who gets the rights to those things? That’s all a hypothetical thought exercise, but that’s what I’m talking about when I say acting from a place of personal freedom.

The question now is, once I’ve accepted that I have no personal sovereignty, that I am not free and very likely never will be in my lifetime, what else is there? What’s the consolation prize? What’s the door prize for attending the big team dinner and clapping along? The palliatives of domestication? Soft things, plentiful food, good drugs, easy living, one mate and exactly 2.0 children? I’ve already spent a good chunk of time as an Epicurean. I long for something more, but it beats staring at the bars of the cage. It will be interesting to see if the insecticization of humanity continues when fertility is controlled on a worldwide scale. China’s already doing it. Guess who gets to have more than 1 child there? The wealthy. I don’t know whether I hope to live to see that day or not.

Google Maps : Bicycling

I heart Google. It’s seems too good to be free, but it is. My latest toys are under the “More” section of Google maps. Check out bike paths laid over street maps. Once upon a time I remember hunting the whole web for a good bike map and coming up empty handed. And then Google also has real estate listings, including rentals. For real estate for sale, zillow.com now has an incredible map feature too. Thinking of relocating, or finding a cheaper living situation, that’s the place to do it.

Marijuana Half Life and Dose

The half life of marijuana (THC specifically) is often quoted between 1 to 10 days, depending frequency of use, and good old variance. Frequency of use is positively correlated with half life time. A drug half life is the idea that substances are eliminated from the body at rates that are exponentially correlated to the amount of substance present. I imagine there’s a lot of misinformation on the subject, but I’m very confident in the wide range of 1 to 10 days. Empirically, I would guess 2 days. And I’ll call it 2 for the rest of this post, but you can substitute whatever you think it is.

Marijuana smokers conventionally smoke way too much marijuana, given the long half life. Myself included from time to time. It happens because of dependency. Which is easy to build up with the long half life : a vicious cycle.

Anyone who’s a regular smoker knows that if you haven’t smoked for a month, you’ll get super high off one single toke. This is because in 30 days, 15 half lives have gone by. 1 over 2 to the 15th is 1/32768. It’s incredibly difficult to have more than 32768 hits of pot in you (although it is possible because of the long half life). After 30 days there is effectively zero THC left in the system. Some people think it takes frequent users longer than this to sober out (as evidenced by positive drug tests) so there is something to the positive correlation between frequency and half life. I imagine the mechanism operating like a half life until the rate of elimination maxes out at a certain level, and then the half life rises significantly : but that is a wild guess based on no medical evidence. Lots of biological processes work like this. Once all the enzymes (or larger mechanisms and processes of elimination) are busy, the rate caps off at a maximum.

Moving on. My point is that regular users rarely sober out before smoking again. A heavy smoker might smoke 64 hits per day. At half life 2 days, they’re walking around with 184 hits in them at all times. For somebody who had never smoked before, this would be enough pot to knock them unconscious. Not sobering up before smoking again creates a tolerance. The sweet spot is at a level where no tolerance is built up. At a rate of one hit per two weeks, just under 1% THC is left in the system at the next smoke. The tolerance buildup is negligible. The smoker will be walking around with 1.007 hits in them right after smoking, all the way down to 0.007 right before they smoke. Here’s a table, with frequency of use, and how many hits are in the system right before smoking a hit. I’m only 99% sure on the math, but even if it’s wrong, it’s not by too much.

One per 14 days = 0.007
One per 12 days = 0.016
One per 10 days = 0.032
One per 8 days = 0.067
One per 6 days = 0.143
One per 4 days = 0.333
One per 2 days = 1.000
One per day = 2.412
Two per day = 5.285
Four per day = 11.049
Eight per day = 22.587
16 per day = 45.668
32 per day = 91.833
64 per day = 184.164

Add on top of that the correlation between frequency and half life, and it makes an even stronger case to stay below smoking less than once per two days. Being that it’s uncommon for somebody to smoke a single hit in a sitting, the sweet spot would be a balance between about 1 to 10 hits per session, and about 2 to 14 days between sessions. Frequency is the dominant, exponential factor. Amount smoked per sitting is the weaker, linear factor. The point is, you just can’t smoke every day. Not with the long half life. If you do, you’re at least half way stoned all day every day, and probably way more than half way. You might be 100 times stoned, and your one hit might take you only 1% higher. Somebody who smokes a few hits per day might be the half life equivalent of somebody who drinks all day every day. This could be why marijuana gets a bad reputation compared to alcohol and tobacco : most people who use it never come down off it. That’s just not good drug use. This is smokey the bear, and only you can prevent tolerance.

What does value investing provide?

I’m sitting here, working on what is turning into a magnum opus of a stock market project, and wondering what it is accomplishing in the grand scheme of things. I decided, not much, but also not nothing. There is some value to value investing.

Market makers transact between the bid and ask prices to facilitate trade. It has a smoothing effect on the price of transaction, which will occur between the bid and ask, rather than at the bid and ask. Additionally, market makers compete with each other to offer the best prices to both buyers and sellers, while still turning a profit. On aggregate, traders will tend to go with the market maker who has the best prices. If the volume is high enough on a good, its transaction price will smoothly react to its true market value in nearly real time.

Value investing isn’t so different from market making on a longer time scale. Value investors will buy when others are panic selling, and sell when everybody else wants to buy. In other words, they are the providing the “other side of the market” at the extremes. When there is no other bidder left, they will buy at the ask price, and vice versa. It has a smoothing effect on long term prices of the good. Value investors compete with each other to offer the prices closest to true long term value of a good while still being able to turn a profit.

Zooming out, value investing is providing an accurate pricing of capital service to society. The accurate market pricing of capital would be incredibly valuable to the poorly informed, the gullable, and the easily frightened. Imagine if it were impossible to lose everything in a stock market panic because value investors absorbed the entire crash as it was happening. By coldly evaluating investments, deciding their worth, and then deciding whether or not buy or sell, value investors are the true agents of the efficient market hypothesis. That is the service provided. And it will be provided to the degree that profit is available by doing so. So there is a balance between how efficiently a good’s price will correspond to its value, and how much profit is available to be made by agents who are willing to calculate its value and transact in the good. In the big picture, value investing will always be dominated by the underlying market forces. That is to say, I still think truly efficient markets are a pipe dream. Stock market crashes and peaks will still occur because, quite frankly, many people don’t have, and don’t want to have the time, money, and discipline to do value investing.

This is part of a much bigger, humanity wide trend of increasing efficiency. Efficiency is valuable, and increasingly valuable in our closed system. And where there’s value, there’s potential profit. And where there’s potential profit, there are agents willing to do some work. And so back to work on the project.


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