A blog to share my thoughts about trading, frugal living, money and the economy. Occasionally I might even throw in a few things about better living, technology, futurism, and science but these are always in some way related to finances or speculation.

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Location: Phoenixville, Pennsylvania, United States

"I have become all things to all men so that by all possible means I might save some."

Wednesday, January 24, 2007

Doom & Gloom

Because of the bearish bias I've had toward the economy and US financial markets in the past few years some might call me a "doom and gloomer". First, it is true that I closed my long positions in 2000 and avoided the losses that many other investors suffered during the last bear market. And admittedly I did NOT benefit as much as I would have liked in the bull market from 2002-2007 as I've been focused more on conservative investing and protecting my wealth. But I do NOT consider myself a "doom and gloomer"; this became especially apparent recently when I debated a bunch of TRUE doom and gloomers who seem to think anyone with even the slightest optimism for the future is "closed minded". These same people could not even come up with a single invention from the last 10 years that has made their lives better or more productive.

Anyway, I think a lot of people (not only the doom and gloomers) would benefit by just thinking about where we’ve come from in the last 100 years or longer. My living standard is much higher than my parents living standard was at my age, and my grandparents grew up on farms. My ancestors came to this country with almost nothing, they worked harder than you could imagine just to build their own houses, raise animals, and grow their own food. The picture at the top of this post is an actual photo of my ancestors at harvest time. They had little to save (and you think savings is low now!). They got up before dawn, labored until after dusk, and worked 6 days a week (the five day work week is a relatively new idea actually, did you know the stock market was even open on Saturdays up until the 1950's?). They built wagons on the side for extra income. They had to pool their money together in order to take care of the elderly and the widows because back then there were no welfare checks from the government (or social security or medicare). Yes, this communist living kept them alive. Incidentally, the town (and its history) that my ancestors built has been very nicely preserved.

With technological advancement, things are getting easier and easier for humans every year - if you can’t see this, you need to take a big step back to look at the big picture, where we were in the not so distant past, and where we are heading. Are you better off than your grand parents?

This chain of technological advancement will only stop if there is some mega catastrophe that destroys the Earth, and it isn’t likely to be global warming or “peak oil”. Anyway, we will eventually reach the point where virtually everything is mechanized and energy is free, no one will have to “work” in any traditional sense, and perhaps even the concept of money will not exist. This is where we are headed. I am not saying it will happen soon, I’m only saying this is where we are headed. If you are interested in “futurism” I highly recommend you check out “Robotic Nation” by Marshall Brain.

As for the doom and gloomers that can’t think of any inventions from the last 10 years that have made life better or more productive - again, wake up and open your eyes, you are looking at one right now! While the internet wasn’t invented in the last 10 years, it has certainly led to massive benefits to millions of businesses and individuals over the last 10 years. I can say that I have personally benefited tremendously. Costs of investing, research, communication, marketing, etc. have plunged as a result of the internet. I get my phone service over the internet, I pay my bills over the internet, I do my research over the internet for everything from the news to entertainment, personal projects, home improvement, investments, shopping, and more. The internet allows me to work remotely, to send pictures and videos instantly to anyone in the world for "free", and to easily communicate with millions of people all over the world. Other recent inventions that either improve quality of life or productivity include automated self checkout, high definition televisions, high definition content, robotic massage chairs, terabyte hard drives, cheap reliable database software, high speed computers, tarter control toothpaste, early detection and elimination of cancer, delicious abundance and variety of prepared foods and restaurants, state of the art entertainment (compare movie special effects for example from today to that of 10,20,30,40 years ago).

I could go on but if you couldn’t think of a single thing then you probably have your head buried so deep in pessimism that you can’t see anything else. Don't get me wrong, this country could be heading for economic turmoil, possibly even another depression, but the future is still VERY bright. In light of all that has happened in the last couple hundred years, even the Great Depression was really only a "blip" in the grand scheme of things. We will come out of any negative economic events stronger than before, and the relentless push of technological innovation will continue undaunted in ANY environment.

Monday, December 11, 2006

Big Solar Cell Improvement

Superefficient, Cost-Effective Solar Cell Breaks Conversion Records

This is great news, and a trend to keep a close eye on as a speculator. Perhaps the electric car concept will even pan out one of these days, a major downside has been the cost of electricity (not to mention environmental impact). Oil’s days are numbered and this is one more piece of evidence that we probably won’t skip a beat moving to alternatives as they become cost effective. Hopefully solar technology will be viable for "northerners" too, but in the very least we could one day see vast desert or ocean based power stations.

The article is not very specific about costs, but does mention “this system could potentially generate electricity in the range of 8 to 10 cents per kilowatt-hour--roughly equal to consumer electricity prices today.” It also said “"There are at least three or four different approaches to take the efficiency into the 45 percent range. And that means the price of energy harvested directly from the sun will continue to drop.”

Wednesday, December 06, 2006

Buy and Hold or Buy and Hope?

Have you ever wondered what happened to all of the companies mentioned in the classic market related books? "Reminiscences of a Stock Operator", "How I made $2,000,000 in the Stock Market", and "The Money Game" for example - are all filled with the names of companies that no longer exist! I have scoured the internet looking for statistics on the average lifespan of a listed company; while I have not found a definitive answer yet (for numerous reasons this is a very difficult number to crunch!), the consensus seems to be that a listed company lasts less than 20 years (possibly much less). Unlisted companies on average die much younger. Average human lifespans have been getting longer and longer -- if you are healthy today, you may live to be 100 years old or even longer if the biogenontologists succeed.

To state it simply, you are going to outlive almost any company you could invest in today. The longer you hold any given stock, the closer you are to losing the entire investment. Virtually any stock you buy is headed to zero, its only a matter of when. An important concept you should understand is that of "creative destruction". Creative destruction is the term popularized in 1942 by economist Joseph Schumpeter (Capitalism, Socialism and Democracy) that describes the inevitable process of transformation that accompanies innovation. Innovation from entrepreneurs and new market participants IS what sustains long term productivity gains and economic growth, even as established businesses are destroyed (incidentally this is also why layoffs are actually a net "good" in a productive society, but I'll save that for another post). Rivals introduce improved versions of existing products or radical new products that make other technology obsolete. The most self-preserving corporations buy up the competition to perpetuate their dominance (or at least their survival), but even that strategy is prone to failure over the long haul.

If anything, I believe the pace of innovation is increasing today, in part due to the vastly improved flow of information and communication that has resulted from the internet age, but also due to sheer numbers (innovation, like population, is geometric). The greater the number of entrepreneurs, researchers, and scientists out there, the more innovation you can expect. This means that going forward, corporate lifespans should become even shorter than they have been historically. Furthermore I would expect people to work for more companies over their lifetime than they ever did in the past (this is a trend that is already well underway, the concept of working for one company for your entire career is absent from younger workers).

Look at a few of the stock market "superstars" of the recent past, companies like Kodak, Polaroid, Ford, Xerox, IBM, etc. These companies and their products all still exist in 2006, and at one time each was a dominant market force and stock market megastar. But they have all gone to the brink of bankruptcy or even gone though an actual bankruptcy. New companies with better products will continue to erode market share and put them all out of business given enough time. Today's market darlings are in the same boat. Many of the booming stocks I traded only a few years ago no longer exist, and the booming stocks of today will likely implode over the next decade. This does NOT only apply to high flying tech stocks.

The following quote comes from Adam Smith's "The Money Game", chapter 9:

"One of my biases is so strong that I have to mention it immediately, because it runs counter to an idea that is very common, i.e., that if you buy good stocks and put them away, in the long run you can't go wrong. Well, as Keynes once remarked, "In the long run we are all dead," and, as the line in the ballad says, everything is born to die. The best anti-testimonial to buying good stocks and locking them away was published by the heirs of one Timothy Bancroft. Mr. Bancroft was shrewd enough to ride out the Panic of 1857, which he diagnosed thus: "I blame the Dred Scott fiasco, the easy money policies of the past few years, and the far, far too overconfident speculation in the railroads and farm lands of the Western states." What one should do, counseled Mr. Bancroft, is to "buy good securities, put them away, and forget them." These good securities, of course, should be companies "dealing in essential commodities that the Union and the World will always need in great quantities." Sounds reasonable enough. Mr. Bancroft died leaving an estate of $1,355,250 [TraderGordo NOTE: This is approximately $44 million adjusted for inflation to 2006 dollars] and if you remember that those are untaxed mid-nineteenth-century dollars, and that a full eight-course meal at Delmonico's cost less than a dollar at the time, that is quite a fortune. Where Mr. Bancroft erred was in the locking up and putting away, for by the time his descendants managed to get their fingers on the portfolio, Mr. Bancroft's Southern Zinc, Gold Belt Mining, Carrell Company of New Hampshire, and American Alarm Clock Company were all worth 0, and in fact, so was the estate, an event which prompted one of the descendants to take to print as a warning to his fellow heirs."

In all fairness to the buy and hold proponents, not recognizing the name of an older company does not necessarily mean they went belly up. I did some research on the original Dow Jones Industrial Average (first published in 1896) which consisted of:
American Cotton Oil Company (a predecessor of Bestfoods, now part of Unilever)
American Sugar Company (now Amstar Holdings)
American Tobacco Company
Chicago Gas Company (now Peoples Energy Corporation)
Distilling & Cattle Feeding Company (now Millennium Chemicals)
Edison General Electric Company (now General Electric)
Laclede Gas Light Company (now the Laclede Group)
National Lead Company (now NL Industries)
North American Company
Tennessee Coal, Iron and Railroad Company (bought by U.S. Steel)
U.S. Leather Company
United States Rubber Company (bought by Michelin)

A casual glance at the list of original names only would lead you to believe that nearly all of them have disappeared. Well actually this group has not done so bad, only 3 are completely gone, GE would have been one of the best investments you could have made and is still part of the DJIA index today. The others have gone though many name changes, buyouts and mergers, but essentially still exist in one form or another as of 2006. So buying and holding these 12 companies from 1896 probably would have done pretty well. Will you do as well on your own?

If you have a particular talent for finding companies producing new products that should ensure massive revenue growth over the next few years, by all means cash in on the ride, just be sure to unload when 20+ years of future gangbuster growth are already priced into the stock. If you are up to the challenge, you might also be able to find great short candidates to profit from in any market considering the constant stream of companies going downhill. You might focus on income producing investments, or creative long/short hedges. The average hands off investor may do best buying an index (indexes like the S&P 500 are continuously updated, ETFs offer additional low cost diversification including foreign exposure and commodity related exposure). Although you should still expect the possibility of at least one very long period of negative returns after speculative manias. You could be underwater for a decade or longer buying the S&P 500 at historically high price to peak earnings ratios (which exist at the time of this writing). Another option would be to entrust your wealth to competent managers that are likely to survive and thrive in any type of market (I would personally focus my search on funds with the best return per unit of risk characteristics). However fund managers usually under-perform, especially after fees are taken into account. Perhaps you are better off investing directly -- building businesses, providing services, and creating jobs yourself instead of working with the middle man that is the stock market? How about investing in your own education or career or something that will actually improve your own happiness?

Thursday, November 30, 2006

Three Market Idiots

Three Market Idiots
by Brett Steenbarger

Idiot #1: The True Believer - You've probably encountered at least one of these dolts during your market sojourns. They are the ones who have figured out the answer to the market. Not an answer, mind you. *The* answer. It usually is some kind of numerological or astrological scheme, and it is always a hidden secret. Unfortunately, True Believers don't seem content with keeping their knowledge hidden. They're always after you to "unlock the mysteries" of the market by sharing in their discoveries. A surprising number of True Believers are also True Bears, which means that they're forever predicting the end of the financial universe as we know it. They predicted it in 1980, 1990, 2000, and they're still predicting it. And when the market rallies and proves them wrong? Well, that just means the bubble is getting even bigger and the implosion of the universe will be even more profound. My take on True Believers? This is not investing or trading; it's cultism. And true believers are at the point where they *have* to believe, or they'd come face to face with the awful realization of the utter waste of time and money their beliefs have brought, as the Dow has risen from 775 to over 12,000 within a 25-year period.

Idiot #2: The Gambler - This is the "I'm-giving-up-my-job-to-become-a-trader-because-I-don't-like-working-9-to-5" idiot. Observe that this bottom-dwelling resident of the phylogenetic scale is not giving up his job because he's had success at trading. He's also not giving up his career because he so loves trading that he researches it day or night and has found a winning edge. No, The Gambler doesn't do anything beyond 9-to-5, because what he's after are easy riches, not effort and earned success. He hears that others have been successful (usually from Idiot #3), and he figures, "That means I can do it too". Invariably, the Gambler is attracted to daytrading. Why? It gives him a sense of action, and it justifies his decision to abandon all efforts at productive work. Besides, you can't really explain to your wife and kids why you're not out there with working humanity supporting your household when you're sitting around doing nothing, holding positions for weeks at a time. So the Gambler actively trades in and out of markets, pretends like he’s got a job, and every so often berates his spouse when she wonders when the family will be able to pay its bills. My take on Gamblers? They're not interested in trading; they're interested in their fantasy. So interested that they'll take their bank accounts and families down with them.

Idiot #3: The Self Promoter - It's easy to find the Self-Promoters. By their very nature, they're in your face hawking their wares, lauding their recent market calls, and promising easy trading success. Open any trading magazine and you'll see their well-coiffed, grinning idiot faces leering at you, usually as part of a trading "event" that just happens to be selling all their products. The key to recognizing Self-Promoters is that they promote themselves, not ideas or methods. Indeed, a substantial number of them don't trade. Those include the "Trading Coaches" who promise to improve your confidence, but offer no concrete trading guidance that you could ever feel confident in. They also include the "Gurus" who tout simple chart patterns and indicators, carefully avoiding any possible objective testing of their wonderful setups. Self-Promoters never talk about how hard it is to achieve trading success; that would not sell well, especially among The Gamblers. Instead, they borrow their pitches from the "no money down" real estate guys and tell you how easy it will be to succeed with no capital. My take on Self Promoters? I don't mind people who deceive others; they're merely dishonest. It's the ones that deceive themselves that frighten me. That's when dishonesty becomes delusion.

So there you have it: a rogue's gallery of trading idiots. Once you tune your mind to this threefold taxonomy, you'll have no problems at all recognizing them within moments of their opening their mouths. And, if you want to be happy, you'll follow the advice of literary critic Dorothy Parker and not toss these idiots aside lightly. Rather, you'll hurl them with great force.

Wednesday, November 15, 2006

The healthier you are the richer you'll get

We already know that frugal living can lead to wealth, but does it also lead to superior health and long life? Probably... (don't confuse cause and affect though)

Lean times: The healthier you are the richer you'll get

By Thomas Kostigen, MarketWatch Nov 14, 2006

SANTA MONICA, Calif. (MarketWatch) -- In the immortal words of Dean Vernon Wormer in the film "Animal House:" "Fat, drunk, and stupid is no way to go through life, son." And it won't make you rich either.

A new study published in the British Medical Journal finds the healthier you are, the richer you will be. Researchers examined the link between health and wealth in rich countries and found that healthier people are more productive at work, earn more and spend more days in the work force because they don't take as much sick leave.

It may seem obvious but an investment in health produces big returns for individuals, their families and the economy as a whole.

It's been widely accepted by economists that better health increases economic growth in poor countries. But the health-wealth correlation hadn't been examined in rich countries. That was until Prof. Martin McKee of the London School of Hygiene and Tropical Medicine and several of his colleagues took on the task in a study for the European Commission, the results of which were released this week.

They found some truly curious factors that lead to wealth, the first among them height. That's right, the taller you are the more likely you'll have more money than short people. Napoleon complex aside, height, it seems, has to do with childhood health.

"Some studies have examined measures such as height, which reflects health in childhood, and body mass index, which provides an indirect measure of health. All other things considered, taller people earn more than average whereas obese people tend to earn less, although the adverse consequences of obesity are greater for women than for men. However, these findings could reflect biases linked to the social acceptability of body images rather than a direct link to productivity," the study says.

Whether linked to social acceptability or not, the fact remains, at least according to this data, that being a tall guy provides a far greater advantage for earning more money than being a fat woman.

This type of information may be upsetting to some, especially if you are, say, short and fat and a woman. But overall it points to the importance of public health in society. Indeed, the rationale for the study was to showcase that point.

Five years ago, a major international study concluded that ill health was contributing to the low level of economic growth in poor countries. The landmark report showed that investment in some basic health interventions would lead to substantial economic growth. Simply put, its conclusion was that a sick population is an expensive population.

Just look at Africa, where scant immunization, lack of access to health care and drugs, and communicable diseases add up to lower life expectancies, a drained work force and disabled economic growth.

Conversely, a study of 10 industrialized countries from the beginning of the 20th Century through the mid-1990s found that better health increased the rate of economic growth by about 30%. This has to do with better dietary and health standards instilled on these populations, as well as better medical care.

Here's an even better example: "In an analysis of 26 rich countries during 1960 to 2000, reductions in cardiovascular mortality emerge as a robust predictor of subsequent economic growth. In one model, a 10% fall in cardiovascular mortality is associated with a 1% increase in per capita income. Although this may not seem large, it amounts to a substantial contribution over the long term," McKee's study says.

Many studies show that better health increases both the number of hours worked and the probability an individual will be employed. Poor health, on the other hand, increases the likelihood that someone will be out of work or retire early.

Ill health also extends its effects to family members. In general, men whose wives become ill reduce the amount they work whereas women work more if their husbands become ill, the study finds. In either scenario, economically the family suffers.

Meanwhile, healthy people can put their money to work in other ways, namely to increase their quality of life. They are, for instance, more apt to invest in their own education, which will increase their productivity, and save more in expectation of a longer life -- for example, for retirement -- increasing the funds available for investment in the economy. This helps not only their prosperity, but also society.

So don't be stupid: Get in shape to get rich.

Tuesday, October 31, 2006

Card Tricks - Making Money from Credit Card Companies

By request I am elaborating on something mentioned earlier - that is, how I make thousands of dollars off of the credit card companies. First let me say that even though I don't think any of this is rocket science, it definitely is not for everyone, so be careful before you just blindly imitate me.

First the obvious - I have a primary card that gets me 5% cash back on gas, groceries, and drug store purchases, 1% cash back on everything else. I put everything I possibly can onto that card to maximize the everyday expense rewards and benefit from one month delay in paying for things (interest benefit). And of course, I always pay this balance off in full every month and use my credit wisely.

The bigger money though, comes from taking advantage of zero percent offers from the credit card companies. READ THE FINE PRINT: You have to play the game on their terms. You must look for caveats like transaction fees (you must have no transaction fee or a CAPPED transaction fee, you must make sure the 0% applies to the type of transfer you are doing (balance transfer or cash advance). You must also determine the EXACT date for which the loans must be repaid in full to avoid massive fees (and they do their best to trick you, so you REALLY have to get the correct date in writing from the company and set up a reliable reminder giving yourself enough time to move the funds around). You must NOT USE the 0% cards for ANYTHING while you have the loan (unless all purchases are also at 0% for the same timeframe). And of course you have to be organized enough to pay the minimum balances every month, I have an electronic reminder system for this Memo To Me - Free Reminder Service and pre-schedule all payments online, so it isn't a real big deal. For the time that I put into it, I am compensated at a rate >$500/hour.

I currently have more than $150,000 in zero percent credit card debt. And you should SEE the looks on people's faces when I tell them I have that much credit card debt! :) There are little tricks for raising your credit lines, managing your credit score, consolidating lines etc. You can find all of the details elsewhere on the net (fatwallet, app-o-rama, creditboards, etc).

SO this borrowed money sits in either money market accounts or CDs with rates of return currently from 5.15% to 6%. I'm making about $7-8k a year doing this, not huge, but enough to pay my property taxes and go on a vacation every year. The offers are probably better now than I have ever seen before, but it is a cyclical thing, I don't expect it to be this good forever, the deals will ebb and flow over time.

There is also the signup bonus cash, which can be considerable, and is yet another way I make money from the credit card companies. These offers seem more permanent. I've gotten anywhere from $50-$100 cash, airline tickets, ipods, and palm pilots (hocked on eBay). You can easily make a thousand or more from signup bonuses alone in any given year.

WARNING - it is important to understand these techniques in full before trying them. You should understand how your credit score will be impacted, and you should have a good idea of how a lower credit score might impact your own life (for example if there is a possibility that you will have to take out a mortgage or car loan over the next year, even job applications these days often pull a credit report).

I really could care less at this point in my life what my credit score is, I don't need credit to buy anything. But to tell you the truth, I haven't really trashed my score THAT much (I have no late or missed payments which is obviously important - but I do have high total utilization and lowish age of accounts which lowers my score). My score is still >700 and paying off the loans would bring it higher very rapidly. The fluctuating score is expected, and the score should generally be brought up significantly before doing mass credit applications.

NOTE: Temporary score "hits" will occur when you apply for credit, which is one reason it is best to apply for as many cards as you can at the same time because these hits take a few days to flow though the system. The score decrease from applications will reverse itself after a couple of months. It is important to understand that just having a lot of unused credit cards does NOT lower your score, in fact it generally makes it higher (because you will have lower total credit utilization) and most experts recommend that you NEVER cancel/close any credit card you own even if you do not use it (you can however move most of its credit line to another card).

Follow the links in this post if you want more information.

Thursday, October 19, 2006

Don't Buy Stuff You Cannot Afford

I keep hearing again and again silly advice like "Buy the biggest home you can get a loan for since homes tend to appreciate over time". But I say stick to something you can afford, a house is not really an investment. Median home appreciation historically over decades, is only about 5-6%. If inflation is 4%, and you are paying 2% in real estate taxes, you are basically braking even (usually losing money after maintenance and improvement costs - not to mention transaction costs and insurance). Don't base your appreciation expectations on what has happened in the last 5 years. To me, investment real-estate is something that is cash flow positive after all expenses, and since your personal residence has no cash flow (unless you have tenants) it isn't an investment. A house is a lifestyle choice. Don't sell your future short because you are sinking everything into a house you cannot afford.

Don't Buy Stuff You Cannot Afford
Scene: a typical American kitchen. A husband (Steve Martin) and wife (Amy Poehler) are puzzling over their finances.

Wife: Oh, I just can’t get these numbers to add up
Husband: Like we’re never going to get out of this hole.
Wife: Credit card debt, does it ever end?
Salesman: [entering from who-knows-where] Maybe I can help.
Husband: We sure could use it.
Wife: We’ve tried debt consolidation companies.
Husband: We’ve even taken out loans to help make payments.
Salesman: Well, you’re not the only one. Did you know that millions of Americans live with debt they can not control? That’s why I developed this unique new program for managing your debt. [Holds up book] It’s called, “Don’t Buy Stuff You Cannot Afford”
Wife: Let me see that. [Reading from book] If you don’t have any money, you should not buy anything. Hmmm … sounds interesting.
Husband: Sounds confusing.
Wife: I don’t know honey, this makes a lot of sense. There’s a whole section here on how to buy expensive things using money you’ve “saved”.
Husband: Give me that. And where do you get this “saved” money?
Salesman: I tell you where and how in Chapter 3.
Wife: OK, what if I want something but I don’t have any money?
Salesman: You don’t buy it.
Husband: Let’s say, I don’t have enough money to buy something. Should I buy it anyway?
Salesman: No.
Husband: Now I’m really confused.
Salesman: It’s a little confusing at first.
Wife: What if you have the money, can you buy something?
Salesman: Yes.
Wife: Now, take the money away. Same story?
Salesman: Nope. You shouldn’t buy stuff when you don’t have the money.
Husband: I think I’ve got it. I buy something I want, then hope that I can pay for it. Right?
Salesman: No. You make sure you have money, then you buy it.
Husband: Oh, then you buy it! But shouldn’t you buy it before you have the money?
Salesman: No.
Wife: Why not?
Salesman: It’s in the book. It’s only one page long. The advice is priceless and the book is free.
Wife: Wow. I like the sound of that.
Husband: Yeah, we can put it on our credit card.
Announcer: So, get out of debt now. Write for your free copy of “Don’t Buy Stuff You Cannot Afford”. And, if you order now, you’ll also receive, “Seriously, If You Don’t Have the Money, Don’t Buy It” along with a twelve month subscription to “Stop Buying Stuff” Magazine. Order today.

There seems to be a whole new generation of people that have not had this timetested advice passed down to them from their parents. The latest incredible example is Casey Serin a 24 year old real estate guru with over $2 million in debt he cannot possibly repay. Greed makes you stupid.

Wednesday, October 11, 2006

Election Cycles and Inverted Yield Curves

From my favorite fund manager and market commentator, Dr. Hussman:

"Since July, we've observed an inverted yield curve, with the 10-year Treasury yield below the 3-month Treasury bill yield. Bill Hester observed last week that whenever the Fed has raised the discount rate by at least 1%, ending in a yield curve inversion for more than a few weeks, the U.S. economy has entered a recession after a median lag of 8 months. We can't rule out the possibility that the current yield curve inversion will be followed by further economic growth, but such an exception would be outside the oval.

"On the valuation front, the current P/E ratio for the S&P 500 is 18 times record earnings (on record profit margins). Historically, the combination of an inverted yield curve and a P/E ratio over 15 has been associated with negative market returns, on average. The current observation, moreover, is even further outside the oval. The only time we've observed an inverted yield curve and a P/E at or above 18 times record earnings was at the 2000 market top. The runner-up (just below 18) was near the heights of the “Go-Go” market leading into the '69-'70 bear market."

" there's a distinction between analysis and superstition. Wall Street is littered with the ruins of people who mined for patterns in the data and invested on them without knowing why they should work. In terms of the 4-year cycle, the typical explanation for the strong seasonal returns is that fiscal and monetary policy often become accommodative during this part of the Presidential term. That was certainly the case in late-2002 and 2003, but isn't quite so likely here.

"Beyond that, there are other factors at work. In 12 of the 15 cases, the S&P 500 had been at least 10% below its prior 52-week high within several weeks (and no more than 6 months) before the seasonally favorable period. At present, the market is strenuously overbought, and long overdue for a 10% correction.

"Of the 11 recessions in the post-war period, 9 were in force a year or less prior to the seasonally favorable period. Evidently, the majority of the strength was linked to post-recession recovery momentum.

"Only 4 of these periods began at P/E ratios above 15 on the S&P 500, and of those, none began with the S&P 500 above its 6-month moving average (as it clearly is at present). Once again, you generally build sustained rallies off of prior losses, not off of overextended advances.

"Of the 9 cycles since 1963 (when Investors Intelligence began publishing its advisory sentiment data), all but one began at a lower level of advisory bullishness than today.

"In short, the favorable 4-year seasonal period has a “snap-back” component to it, where the market was typically recovering from a recession, a substantial market drop, or at least a period of consolidation. Indeed, many of the start-years (e.g. 1970, 1974, 1982, 1990, 2002) are familiar exactly because they represented memorable bear market lows."

Monday, October 09, 2006

The House that Swallowed Don and Shelly Cruz

The House that Swallowed Don and Shelly Cruz

The winners of a TV dream home have seen their giant fantasy house become a financial nightmare.

I really hope this isn’t representative of America right now. The wife is a secretary, the husband stays at home and doesn’t work, the kid is 10 years old they have hired help for housework (what does dad do again while kids at school and wife is working?). They can’t even sleep in the master bedroom because dad needs to be closer to 10 year old son whom he obsessively watches via live video feed? Thousands for electricity every month? Seven cars for two adults? $3k/month for “upkeep”, $7k/year for home insurance? These people are idiots. Took out a million dollar loan to pay $672,000 in taxes. I suspect these guys will blow everything even after moving back to their old house.

But the important part of the article:

“But like the Cruzes, millions of Americans may soon find themselves struggling to pay the bills for a house that's bigger than they really need and suddenly more expensive than they can afford.

Blame the strain of gigantism that has crept into U.S. home design, as well as rising interest rates and the expiration of low-rate introductory periods on popular adjustable-rate loans. estimates that at least 1 million homeowners will see their house payments double in the next two years. A study by First American Corp. suggests that one in seven who have recently taken out adjustable-rate mortgages will have trouble making their payments.”

Thursday, October 05, 2006

Global Warming, PEAK OIL, and Your Portfolio

A friend of mine has a skeptic's interest in global warming. Recently he dragged me along with him to a lecture on this topic. The presentation was, if anything, a sad example of the decline in quality of education in America. The lecturer claimed to be "an educator" but I have no idea what he was educating us about, and his old school slide show was a mix of random "man is bad" photos and personal anecdotes (like I got a bad sunburn on vacation last year - maybe from the hole in the ozone or global warming or something...).

Anyway, I actually am an environmentalist of sorts and have always been concerned about the environment so I don't want anyone to get the wrong idea. I drive economy cars that get nearly 40MPG, I use compact florescent lighting in my house, use heating and cooling sparingly, etc. Even though I'm skeptical about everything including global warming and peak oil scaremongers, I still think its prudent to think about various future scenarios and how you can thrive under any circumstances.

If you read some of the more balanced reviews of "THE INCONVENIENT TRUTH" over at Amazon you will see that it is unbalanced, contains quite a few errors, omissions, inconsistencies, and unsubstantiated opinion. Some scientists today believe the current warming trend has actually peaked, others recognize global warming and man's contribution to it but insist that the empirical data indicates that it is not and will not be a serious problem (for example see Meltdown: The Predictable Distortion of Global Warming by Scientists, Politicians, and the Media (written by Patrick J. Michaels, a professional climatologist with a Ph.D. in Ecological Climatology, who is a professor of environmental science at the University of Virginia). But perhaps one of the stranger aspects of the debate is that the global warming doom and gloomers generally talk about a couple degree temperature change over the next 100 years despite the evidence that we are unlikely to be dumping massive quantities of greenhouse gasses into the atmosphere for another 100 years.

This is one reason I'm not that concerned about global warming (not to mention that its even possible more people would benefit from warming than would be harmed). Peak oil is in my opinion a much bigger potential issue. We have become utterly dependent on cheap, easy oil and we are currently living in the great oil empire era. None of our ancestors had to face a problem like peak oil, so it's just not on the public's radar.

Last night I watched a documentary called The End of Suburbia

It’s all about peak oil. First let me say that the film is full of sensationalism and political nonsense, and the peak oil junkies in the film will probably be wrong about almost everything :) That said, I'd recommend you check it out if for nothing else, just to stimulate thought. Apparently most oil industry experts and geologists agree we will reach global peak oil before 2030 (the consensus range is more like anytime from right now to 2030 with many pointing to the 2015-2025 timeframe). I should also note (and you won't see this in the film) that some experts (like the execs at Exxon and Saudi Arabia's Aramco) believe we have over a 100 years worth of supply at today's consumption rate so the peak oil timeframe is very much in debate. That said, the only way we will stay at the existing consumption rates is if we conserve (improve efficiency or alter usage behavior) or have zero global growth which is extremely unlikely.

Yes, many of the peak oil junkies are similar to the global warming junkies. They correctly identify a trend but badly gauge the “how soon, how severe, and who cares” aspects. Global peak oil will probably happen sometime between 2020 and 2030. The biggest variable is simply what kind of energy demand changes we will see. 3 trillion barrels of reserves (if even accurate) may not be all that much in the grand scheme of things depending on demand. For example India’s automobile sales jumped 18% last year and its truck and bus industry is growing at a 30% pace (China is similar). Over the next 20 years India and China alone could end up with 2, 3, 4 times the energy demands of the United States (why not, they have 10 times our population). Meanwhile the US is currently using more than 25% of global oil production while at the same time oil production is in decline in 33 of the 48 largest oil producing countries.

I think the decline of global oil production after we hit peak oil will probably mirror what we saw in the US when we peaked in the 70’s – a pretty steep decline but obviously not instantaneous. The rapid rise in prices will stall the decline and give us time to move towards viable alternatives. I don’t think it will be the end of the world, just the end of the world as we know it! :) The new world will be even better than the old one; energy will probably end up being cheaper, cleaner, and more abundant than it is now, which will lead to new records in productivity and quality of life.

The time (perhaps a decade or two) we have before peak oil is exceptionally long when it comes to technology and investing, so I’m optimistic that alternatives will become viable before oil supplies become seriously constrained. We will have many years, decades maybe, of post-peak oil (albeit with tight supplies and elevated prices) giving us time to work out and deploy alternatives. Nothing is going to happen over night. There is a lot of promising research going on right now in the fields of battery design, solar and geothermal energy, hydrogen, organic based fuels, and many others. I have even personally made my own biodiesel in 55 gallon drums from waste vegetable oil (acquired from local restaurants) and run it in a friend's Ford truck. Biodiesel is a great renewable alternative, but we are talking about MASSIVE changes that must take place before alternatives can be rolled out and some argue that they CANNOT be rolled out at the required scale (for example due to land constraints or manufacturing capacity constraints, or the cost of deployment, particularly in a post-peak oil world). Many also question the net energy equation of alternative fuels like ethanol, hydrogen, and biodiesel (the energy that must be put into producing and delivering the fuel vs. the energy that the consumer will pull out of it).

There will undoubtedly be some new oil and gas discoveries, some benefit from being able to extract more from existing wells, and some supply from non-traditional sources like the Canadian tar sands and deep offshore drilling. But most experts suggest that these will not be enough to satisfy global demands.

One of the more famous geologists of the 20th century, Hubbert, predicted in 1956 that the US would hit peak oil by 1970 and he was pretty much right on (we peaked in ’71). One of the worlds biggest oil companies, chevron, now has their own discussion web site related to peak oil ( so even big oil players are taking this seriously. Here’s a quote from Chevron's site: “While supplies are currently abundant, they won't last forever. Oil production is in decline in 33 of the 48 largest oil producing countries, yet energy demand is increasing around the globe as economies grow and nations develop.”

When we first hit peak oil, it will be somewhat uneventful. In fact, we won't KNOW we hit peak oil for at least a year after we reach that milestone. Then prices will rise more rapidly. Perhaps slowly at first, then more dramatically. People will first search for explanations, then they will play the blame game. In fact we have already seen this in 2006 - we had a dramatic rise in prices with all sorts of mixed explanations and LOTS AND LOTS of blame game and political posturing - this has led some to suggest we have already hit peak oil. This is unlikely though, in fact oil prices have fallen pretty hard over the last few months, production levels have hit new highs, AND OPEC recently announced production cuts - so by definition we have not hit peak oil). On the other hand Bank Credit Analyst announced last week that “Global oil production growth has been decelerating for almost two years, and is now nil. Moreover, there is a marked divergence between global oil production (decelerating) and total global industrial production (accelerating). The deceleration in oil production is striking given that the number of operating rigs has climbed by almost 50% since 2004.” So a big increase in operating rigs and very little increase in total production - what does that tell you?

Of the three largest oil fields in the world, two have peaked. Mexico announced that its giant Cantarell Field entered depletion in March, 2006, as did the huge Burgan field in Kuwait in November, 2005. Due to past overproduction, Cantarell is now declining rapidly, at a rate of -13% year over year. In April, 2006, a Saudi Aramco spokesman admitted that its mature fields are now declining at a rate of 8% per year, and its composite decline rate of producing fields is about 2%, thus implying that Ghawar, the largest oil field in the world, may have peaked.

Anyway, after the initial price increases, it's only going to get worse. Of course things will move in cycles, as higher prices and shortages reduce demand. Everyone will feel the squeeze at first, then only the "rich" countries will be able to afford substantial supplies. That means we might keep the pumps flowing in the United States for many years after we hit peak oil (assuming the middle east cares more about money than ideology which remains to be seen). But the decline will be terminal.

Only if technology does not save the day (an unlikely scenario): We would be forced to virtually eliminate long commutes and there would be a new build out of mass transit, especially rails. Many would be forced to either live in cities or live in the country and grow their own food - exactly the way it used to be before the great modern oil era. There will be a surge in organic farming (which could be a good thing, although expensive and labor intensive). Domestic manufacturing will have a big resurgence because it will be prohibitively expensive to import goods from low cost of labor countries as we do today. And of course by that point there will be a frenzied focus on alternative energy. More nuclear and coal power plants will be built (for as long as we have coal and radioactive isotopes) and more people will heat their homes with wood, possibly resulting in deforestation.

I can't emphasize enough the fact that any serious consequences from the end of the oil age could be completely avoided given technological advancements so you can't go betting the ranch on a disaster that probably won't materialize. But I can guarantee there will be exceptional investment opportunities as a result of peak oil, disaster or not. There are going to be BIG winners and BIG losers resulting from the inevitable changes that will occur and you should be thinking about how to invest accordingly and what to look for in the future. If and only if no viable solutions emerge, the transition will be very painful for financial markets, with international indexes taking the biggest early hits. The optimists usually triumph, but every investor should be cognizant of long range trends that may impact investments and behavior.

Monday, October 02, 2006

Deceptively Narrow Rally in Bigcaps and Fed Hope

The market has been acting well over the last few months, even the housing sector which was the focus of much doom & gloom has had a big rally. There has been muted excitement about the DOW hitting a new all time high. And yet MANY signs of concern persist.

Lowry's writes: “The rally in big-caps has been deceptively narrow. As of Thursday's close, with the DJ Average within just a few points of a new all-time high, none of the 30 components rose to new all-time highs. Further, 63.3% of the components showed losses of -20% or more from their individual all-time highs, and 43.3% showed losses of -40% or more. As of Thursday's close, 5.7% of domestic common stocks rose to new 52-week highs, while 26.7% already show losses of -20% or more. A concern for the future is that this degree of selectivity has typically been found near major market tops.”

John Hussman further writes: "Of all the hopes that investors have at present, the strongest ones are centered on the Federal Reserve and its probable decisions regarding the Federal Funds rate. This obsession with the Fed comes at the expense of attention that should be focused on profit margins, normalized valuations, market internals, credit spreads, fiscal policy and the U.S. current account. In hopes of refocusing attention on factors that matter, my hope is that the following bit will further explain why the Fed is, in my view, irrelevant.

"I should note at the outset that yes, as long as investors believe the Fed matters, it is important to consider the Fed. The real issue, however, is whether the Fed actually has any impact, and my argument is that it does not. It's an argument that goes against what we're conditioned to take for granted (and even what I once used to teach my own economics students). Nonetheless, the evidence against an effective Fed, when you scrutinize the data, is fairly compelling."

I recommend you read Dr. Hussman's analysis (he publishes every Monday at I remain very cautious and largely out of the market with the exception of some HSGFX (Hussman Strategic Growth Fund), a tiny exposure to international funds (American Funds), and a short on oil and coal (uncovered calls written almost to the day at the recent peak of the oil market).

If you are interested in lower risk internation funds see this article:
3 global funds for uncertain times.

Friday, September 29, 2006

Get your kid up to speed with dirt cheap outsourced tutoring!

U.S. homework outsourced as "e-tutoring" grows

OK - the article's title is wrong, but I like the concept of inexpensive outsourced education. I am a big proponent of online education as well. In some ways I think (hope) the spiraling costs of college will be a self-correcting problem. In many ways universities are shooting themselves in the foot. One day virtual universities (and it may start with hybrids) will be dirt cheap compared to today's universities and they will offer a far superior education. Imagine having the greatest, most talented, gifted teachers in every subject, available to teach a nearly limitless class size with customization for the student's personal interests and aptitude.

How many more years before the inevitable becomes reality? My state already has not just one, but several 100% online k-12 schools (costs the parents nothing, includes free laptop and broadband connection). These are essentially an alternative to home schooling right now, but I can see this moving OUT of the home in the future, so that children will still "go to school" but the experience, teaching methods, and content, will be optimized to their benefit. The way I see it the online schools we have now are a shadow of what is to come. The traditional high priced school is going to either change or die.

Of course there will other challenges such as replacing the social aspect of going away to college or k-12 schools. But there are solutions to every problem.

Thursday, September 28, 2006

20 FREE Ways to Save Energy

From Consumer Reports. The only one I disagree with is the direct vent fireplace - they are for asthetics only and NOT for saving energy. They are not as efficient as your furnace when running - and cold air WILL pour into your room whenever it is NOT running (if you really want to learn why, google on "stack effect" or see Selecting and Locating a Chimney. Gas fireplaces are pretty worthless, and don't even think about a vent free model - combustion appliances should ALWAYS be vented - otherwise they are a health hazard.

  • Wash clothes in cold water. You might guess that most of the energy used by a washing machine goes into vigorously swishing the clothes around. In fact, about 90 percent of it is spent elsewhere, heating the water for the load. You can save substantially by washing and rinsing at cooler temperatures. Warm water helps the suds to get at the dirt, but cold-water detergents will work effectively for just about everything in the hamper.

  • Hang it up. Clotheslines aren't just a bit of backyard nostalgia. They really work, given a stretch of decent weather. You spare the energy a dryer would use, and your clothes will smell as fresh as all outdoors without the perfumes in fabric softeners and dryer sheets. You'll also get more useful life out of clothes dried on indoor or outdoor clotheslines--after all, dryer lint is nothing but your wardrobe in the process of wearing out.

  • Don't overdry your laundry. Clothes will need less ironing and hold up better if you remove them from the dryer while they're still just a bit damp. If you are in the market for a dryer, look for one with a moisture sensor; it will be less likely than thermostat-equipped models to run too long.

  • Let the dishwasher do the work. Don't bother prerinsing dishes with the idea that your dishwasher will work less hard. Consumer Reports has found that this added step can waste 20 gallons of heated water a day. All you need to do is scrape off leftover food. Enzyme-based detergents will help make sure the dishes emerge spotless.

  • Put your PC to sleep. Keep your computer and its monitor in sleep mode rather than leaving them on around the clock. You stand to use 80 percent less electricity, which over the course of a year could have the effect of cutting CO2 emissions by up to 1,250 pounds, according to EPA estimates.

  • Turn down the heat in the winter, and turn down the cool in the summer. Lower the thermostat 5° to 10° F when you're sleeping or are out of the house. "A 10° decrease can cut your heating bill by as much as 20 percent," says Jim Nanni, manager of the appliance and home-improvement testing department of Consumer Reports. And before you put on a cotton sweater to ward off a slight chill from the AC in summer, consider that for every degree you raise the thermostat setting, you can expect to cut your cooling costs by at least 3 percent.

  • A cold hearth for a warmer house. A conventional fireplace draws a small gale out of the room and sends it up the chimney. Assuming the indoor air has been warmed by your central heating system, that means your energy dollars are going up the chimney, too. Instead, consider a direct-vent, sealed-combustion gas fireplace. Consumer Reports has found that those units have an energy efficiency of about 70 percent--and the sight of the flames is a lot more warming than staring at a radiator.

  • Lower the shades and raise the windows. Not at the same time, of course, but your windows and shades are great tools to help moderate temperatures in the home. Because of central air conditioning, we tend to forget these time-tested, traditional ways of making the house comfortable. Shades are particularly helpful in blocking the sun from west-facing rooms in the afternoon. At night, if the forecast calls for cooler temperatures and low humidity, give the AC a rest. Open windows upstairs and down, and use window fans or a whole-house fan.

  • Put a spin on home cooling. You can operate a couple of fans with a fraction of the electricity needed for air conditioning, and their cooling effect may make it possible to cut back on AC use.

  • Take care of your air conditioner, and it will take care of you. Your air conditioner will run more efficiently if you clean or replace its filter every other week during heaviest use. Keep leaves and other debris away from the central air's exterior condenser, and keep the condenser coils clean.

  • Spend less for hot water. Set the hot water heater at 120° F (or the "low" setting), which is hot enough for most needs. If the tank feels warm to the touch, consider wrapping it with conventional insulation or a blanket made for that purpose. To help conserve the water's heat on its way to the faucets, insulate the plumbing with pipe sleeves; with these, you can raise the end-use temperature by 2° to 4° F.

  • Think twice before turning on the oven. Heating food in the microwave uses only 20 percent of the energy required by a full-sized oven. And while the second-hand heat from the oven may be welcome in winter, it can put an added load on your air conditioner in warmer months.

  • Use the right pan. When cooking on the stovetop, pick your pan, then put it on an element or burner that's roughly the same size. You'll use much less energy than you would with a mismatched burner and pan. Steam foods instead of boiling. If you do boil, be sure to put a lid on the pot to make the water come to a boil faster.

  • Read the label. The EnergyGuide label, that is. When you shop for a new appliance, look for the label that gives an estimate of annual energy consumption. To help you make sense of that statistic, the label also states the highest and lowest figures for similar models.

  • Dust off the Crock-Pot. Slow cooking in a Crock-Pot uses a lot less energy than simmering on the stove.

  • Clean the coils on your refrigerator using a tapered appliance brush. Your fridge's motor won't have to run as long or as often. In addition to saving energy dollars, you'll prolong the life of the appliance.

  • Drive steadily--and a bit slower. Hard acceleration and abrupt braking will use more fuel than if you start and slow more moderately. Keeping down your overall speed matters, too, because aerodynamic drag increases dramatically as you drive faster. If you travel at 65 mph instead of 55, you are penalized by lowering your mileage 12.5 percent. If you get your vehicle up to 75 mph, you're losing 25 percent compared with mileage at 55 mph.

  • Roof racks are a drag. Most cars are reasonably streamlined, but you work against their slipperiness if you carry things on the roof. A loaded roof rack can decrease an SUV's fuel efficiency by 5 percent, and that of a more aerodynamic car by 15 percent or more. Even driving with empty ski racks wastes gas.

  • Stick with regular. If your car's manufacturer specifies regular gas, don't buy premium with the thought of going faster or operating more efficiently. You'd be spending more with no benefit. Most cars have built-in sensors that adjust the engine timing to the gas in the tank. Even if the owner's manual recommends high-octane gas, ask the dealership about switching to regular.

  • No loitering. Don't let the engine run at idle any longer than necessary. After starting the car in the morning, begin driving right away; don't let it sit and "warm up" for several minutes. An engine actually warms up faster while driving. With most gasoline engines, it's more efficient to turn off the engine than to idle longer than 30 seconds.

  • And if you don't mind spending a few dollars:

  • A tighter home is a toastier home. Insulation is your home's first line of defense against the weather, right? Wrong. Before you bulk up with fiberglass blankets, seal the leaks. Inexpensive foam strips and caulking can cut your heating and cooling bills by 5 to 30 percent.

  • Try do-it-yourself low-E windows. If your windows don't have a low-E coating, consider applying a self-adhesive film on the glass. This treatment is a lot cheaper than replacing the units, and better-quality films are quite durable.

  • Use a programmable thermostat. Roughly half of the typical home's energy bill goes for heating and cooling, according to the Department of Energy. The easiest way to save, short of sweating or shivering, is to use programmable thermostats. They can pay for themselves in about a year.

  • Switch to those funny-looking fluorescents. You may not be familiar with compact fluorescent lamps (CFLs), but give them a try. A single bulb can save from $25 to $45 over its life. And it's a long life: Manufacturers claim that CFLs last between 5 and 13 times longer than standard incandescent bulbs.
  • Tuesday, September 26, 2006

    Simple frugal living

    I must admit, I almost got caught up in the consumerism culture that is so prevalent in America today. At first I didn't want to be like my parents, who have never bought a new car in their entire lives despite doing pretty well for themselves (read The Millionaire Next Door and you will get the picture). Today however I recognize the value of frugal living. My brief stint with consumerism is long gone. I have returned to my roots, the roots of my ancestors, and it feels right!

    If you are "off-track" like I once was, you should know that the things you should be doing now to get on track to financial independence aren't temporary, they are life long changes. I could buy any car I want, but when I recently needed new transportation, I bought a $5500 used Toyota echo (private sale of course!) with 38,000 miles on it. It had nothing wrong with it, it gets 38+ MPG, has no timing belt to replace, and is very reliable and safe. I still shop at yard sales and thrift stores. I have no cable or satellite television (digital and High Definition content is broadcast FREE to a vast majority of the US population and yet I'm the only person I personally know that is taking advantage of this). I take advantage of excellent free resources such as the local libraries. This year I'm even planning on heating my house with free wood. I switched to a dirt cheap internet based phone service, and pay less than $9/month for my cell phone. I grow some of my own food, and even planted an orchard. My recurring monthly expenses are miniscule, my biggest bill is for property taxes.

    Personally I think frugal living is FUN and it has it's rewards! I never inherited a dime, but I don't have to worry about losing my job, because I can live off the interest alone from my savings and investments. I paid cash for my house (incidentally, if you don't hold a title to something, you don't own it, that applies to cars and houses). The credit card companies pay ME (I'll explain this later, but I am currently making THOUSANDS of dollars a year in income from the credit card companies). I can travel anywhere in the world, stick it to da man, and do anything I want without worries. Great freedom comes from the frugal way of life.

    Frugal living is a lifestyle choice. Are you going to take the path of everyone around you, or are you going to make a serious change? Are you prepared for any (often sudden and unpredictable) event that might come along in your life? Are you on a path to a satisfying retirement?

    How can you get out of debt? SNL a few years back put it into shockingly simple terms: Don't Buy Stuff You Cannot Afford.

    Here is a list of traits that describe the typical millionaire in America:

    Who is the prototypical American millionaire? What would he tell you about himself?(*)

    * About one in five of us is retired. About two-thirds of us who are working are self-employed. Interestingly, self-employed people make up less than 20 percent of the workers in America but account for two-thirds of the millionaires. Also, three out of four of us who are self-employed consider ourselves to be entrepreneurs. Most of the others are self-employed professionals, such as doctors and accountants.

    * Many of the types of businesses we are in could be classified as dull/normal. We are welding contractors, auctioneers, rice farmers, owners of mobile-home parks, pest controllers, coin and stamp dealers, and paving contractors.

    * About half of our wives do not work outside the home. The number-one occupation for those wives who do work is teacher.

    * Our household's total annual realized (taxable) income is $131,000 (median, or 50th percentile), while our average income is $247,000. Note that those of us who have incomes in the $500,000 to $999,999 category (8 percent) and the $1 million or more category (5 percent) skew the average upward.

    * We have an average household net worth of $3.7 million. Of course, some of our cohorts have accumulated much more. Nearly 6 percent have a net worth of over $10 million. Again, these people skew our average upward. The typical (median, or 50th percentile) millionaire household has a net worth of $1.6 million.

    * On average, our total annual realized income is less than 7 percent of our wealth. In other words, we live on less than 7 percent of our wealth.

    * Most of us (97 percent) are homeowners. We live in homes currently valued at an average of $320,000. About half of us have occupied the same home for more than twenty years. Thus, we have enjoyed significant increases in the value of our homes.

    * Most of us have never felt at a disadvantage because we did not receive any inheritance. About 80 percent of us are first-generation affluent.

    * We live well below our means. We wear inexpensive suits and drive American-made cars. Only a minority of us drive the current-model-year automobile. Only a minority ever lease our motor vehicles.

    * Most of our wives are planners and meticulous budgeters. In fact, only 18 percent of us disagreed with the statement "Charity begins at home." Most of us will tell you that our wives are a lot more conservative with money than we are.

    * We have a "go-to-hell fund." In other words, we have accumulated enough wealth to live without working for ten or more years. Thus, those of us with a net worth of $1.6 million could live comfortably for more than twelve years. Actually, we could live longer than that, since we save at least 15 percent of our earned income.

    * We have more than six and one-half times the level of wealth of our nonmillionaire neighbors, but, in our neighborhood, these nonmillionaires outnumber us better than three to one. Could it be that they have chosen to trade wealth for acquiring high-status material possessions?

    * As a group, we are fairly well educated. Only about one in five are not college graduates. Many of us hold advanced degrees. Eighteen percent have master's degrees, 8 percent law degrees, 6 percent medical degrees, and 6 percent Ph.D.s.

    * Only 17 percent of us or our spouses ever attended a private elementary or private high school. But 55 percent of our children are currently attending or have attended private schools.

    * As a group, we believe that education is extremely important for ourselves, our children, and our grandchildren. We spend heavily for the educations of our offspring.

    * About two-thirds of us work between forty-five and fifty-five hours per week.

    * We are fastidious investors. On average, we invest nearly 20 percent of our household realized income each year. Most of us invest at least 15 percent. Seventy-nine percent of us have at least one account with a brokerage company. But we make our own investment decisions.

    * We hold nearly 20 percent of our household's wealth in transaction securities such as publicly traded stocks and mutual funds. But we rarely sell our equity investments. We hold even more in our pension plans. On average, 21 percent of our household's wealth is in our private businesses.

    * As a group, we feel that our daughters are financially handicapped in comparison to our sons. Men seem to make much more money even within the same occupational categories. That is why most of us would not hesitate to share some of our wealth with our daughters. Our sons, and men in general, have the deck of economic cards stacked in their favor. They should not need subsidies from their parents.

    * What would be the ideal occupations for our sons and daughters? There are about 3.5 millionaire households like ours. Our numbers are growing much faster than the general population. Our kids should consider providing affluent people with some valuable service. Overall, our most trusted financial advisors are our accountants. Our attorneys are also very important. So we recommend accounting and law to our children. Tax advisors and estate-planning experts will be in big demand over the next fifteen years.

    * I am a tightwad. That's one of the main reasons I completed a long questionnaire for a crispy $1 bill. Why else would I spend two or three hours being personally interviewed by these authors? They paid me $100, $200, or $250. Oh, they made me another offer--to donate in my name the money I earned for my interview to my favorite charity. But I told them, "I am my favorite charity."

    Monday, September 25, 2006

    Tax Cuts Really Do Lead to Higher Tax Receipts?

    With news like this you do have to question forecasts for imminent "doom and gloom".

    US Treasury Sets New 1-Day Tax Receipt Record Of $85.8 Billion
    -By Benton Ives-Halperin, Dow Jones Newswires; 202-862-9255;
    Tuesday September 19th, 2006

    WASHINGTON -(Dow Jones)- The U.S. government recorded record-high overall and corporate tax receipts on Sept. 15, which was a quarterly deadline for tax payments, the Treasury said Monday.

    Total tax receipts were $85.8 billion on Friday, compared with the previous one-day record of $71 billion on Sept. 15 of last year, the Treasury said.

    Within the overall figure, corporate tax receipts Friday were $71.8 billion, up from $63 billion in September of last year.

    Treasury Undersecretary for Domestic Finance Randal Quarles said Friday's numbers provided a "continuing demonstration of the strength of the U.S. economy."

    "In fact, Friday's gross receipts were the largest in a single day in the nation's history - 20% higher than receipts on the same quarterly tax payment date last year," Quarles said in a statement.


    Recently "housing" has been on the minds of just about every trader I know, the Fed is also concerned. A big headline today is the drop in median existing home prices (first drop in 11 years).

    But housing doom and gloom seems to have peaked recently in the media after seemingly everyone ran multiple stories on it and all the builders and realtors aired their pain and grievances. The housing stocks bottomed months ago and have been showing a nice slow consistent climb ever since. The 10-year yield (and 30 year fixed rate mortgages) continues its creep lower (4.55% right now). Annecdotally I’ve noticed that recently (as in the last 2 weeks) the glut of homes on the market in my area seems to have all but disappeared, houses are selling again. My brother in California just put his house on the market (up there around the 3/4 million range), the very first day it was listed, without even having an open house, he had over 20 visits, one offer, and two more offers expected. His timing is great, he is moving to Utah where he'll be able to buy a much larger house for half the price.

    So is this just the first wave of “suckers” responding to reports in the media that it’s a buyers market and that this is a good time to buy since prices are down? Who knows? All I know is what I observe, and things look like they are firming for the moment… For a nice summary of the negatives we face as they relate to housing, see this recent Schwab Market Outlook by Liz Ann Sonders: Housing: ARMed and Dangerous.

    Also if you haven't read it yet, check out this recent article on housing "lesson's learned": A Cautionary Housing Tale from Japan

    [Our housing bubble seems downright tame compared to theirs. At least we never got to the point of “multi-generational” mortgages (60 year loans)!]

    Thursday, September 21, 2006

    The Persuasive Personality Enemy to Traders [PPET]

    The speculator faces many enemies. Once you have overcome the basic enemies: fear, greed, & hope, you must learn to overcome equally dangerous enemies. One of these is the persuasive personality. Many traders do not realize that throughout the history of speculative markets there has always existed an enemy known as “the persuasive personality”. You cannot graduate to the higher levels of successful speculation until you can easily identify this enemy.

    The following are some of my observations and generalizations concerning PPETs. This is a composite taken from many examples and is not intended to describe any one person in particular.

    Common characteristics of the PPET:

    1) Typically male. Specifically, a man with a magnetic personality.

    2) He has a history of financial failure. Usually has at least one outright bankruptcy on his record or a total trading capital wipeout. Frequently will have a string of catastrophic failures or near total wipeouts.

    3) Could not achieve lasting success as a speculator and has a strong desire to live though others’ success. This is manifested in offering opinions and commentary to others under the delusion of trying to help or “give back” to the investment community.

    4) Distorted self image. Delusions of grandeur and irrationally inflated ego (sometimes this comes and goes in spurts). This ego is maintained at all costs, particularly manifesting itself in the burial of past failures and the incessant trumpeting of successes even when trumpeting is not warranted (i.e. success was highly illusory).

    5) Failure to admit mistakes or take losses when appropriate. Sometimes revises history (either consciously or unconsciously) to “improve” record of past performance.

    6) Failure to correct misjudgments when evidence arises that indicates they were wrong in conclusions reached and touted to others as unquestionable.

    7) Inability to grow. Rejects all criticism out of hand. Discards all arguments, no matter how rational or well formed if they disagree with an already stated conclusion. Lacks maturity.

    8) Has no objectivity. If the evidence does not agree with preconceived conclusions, the evidence is wrong. There is no room for debate.

    9) Is reactive, often jumping on trends just as they have peaked and are ready to change direction. Also known as “piling on”. Thinks his odds of impressing other people are increased by jumping on recent trends and boasting about how they have “been right all along”. They are rarely early on a new trend because they wait for a trend to be established first before jumping on.

    10) Has a background in a trading related industry and enough knowledge and wisdom to offer such that audiences are attracted. This is a key attribute that PPETs need in order to gain the widespread attention they seek. If they do not sound authoritative, convincing, rational, and wise, they will not meet their subconscious desires.

    11) Their true character is often revealed when seriously challenged publicly. This can be manifested with anger, spite, or censorship.

    12) They get a high from media attention (radio, television, print). Likewise, they get a high from industry attention, and try to surround themselves with industry experts and proven successes. Experienced traders on the other hand often recognize them as a PPET and will have nothing to do with them much to the bewilderment of the PPET.

    13) While they often pretend to be emotionally detached, they are often HIGHLY sensitive people that live for positive affirmation which is one reason they get involved in the media.

    14) Pattern of personal relationship failure. Typically has been divorced at least once. Often has had multiple failed marriages, and estranged family members. Sometimes the PPET himself has done jail time or has close friends or relatives who have. PPETs often fail to take responsibility for their own role in their volatile relationships. They push people away rather than take time and energy resolving relational issues or putting others first. This leads to bouts of loneliness, which serve to perpetuate the vicious cycle of seeking new followers.

    15) They inevitably lead their blind followers to the slaughter. It’s not in any way intentional, just inevitable. While they feel bad about it, they will do everything in their power to hide the facts and often make new attempts to gain trust after such incidents, making every effort to censor critics.

    I have found that occasionally PPETs who are bullish will make television appearances. When they are bearish they tend to flourish only in print or on the radio (traditional home for most big-time PPETs). Financial history is littered with PPETs and the carcasses of speculators they have destroyed. This is why I always teach people to develop and nurture their own critical thinking skills. Question everything and everyone. Know your enemies or be destroyed by them.

    In closing I’d like to quote from the greatest book on speculation ever written, Reminiscences of a Stock Operator by Edwin Lefevre, copyright 1923.

    [Select quotes from Chapter 12]
    “[The persuasive personality] was a thinker… an unusually well-informed man… He loved to hear and to express ideas and theories and abstractions… he had traded for years and had made and lost vast sums…”

    “When I said to you some time ago that a speculator has a host of enemies, many of whom successfully bore from within, I had in mind my many mistakes. I have learned that a man may possess an original mind and a lifelong habit of independent thinking and withal be vulnerable to attacks by a persuasive personality. I am fairly immune from the commoner speculative ailments, such as greed and fear and hope. But being an ordinary man I find I can err with great ease.”

    “I ought to have been on my guard at this particular time because not long before that I had had an experience that proved how easily a man may be talked into doing something against his judgment and even against his wishes…”

    “It was always a pleasure for me to listen to him, he knew so much and he expressed his knowledge so interestingly. I think he is the most magnetic man I ever met.”

    “We talked of many things, for he is a widely read man with an amazing grasp of many subjects and a remarkable gift for interesting generalization. The wisdom of his speech is impressive; and as for plausibility, he hasn’t an equal. I have heard many people accuse him of many things, including insincerity, but I sometimes wonder if his remarkable plausibility does not come from the fact that he first convinces himself so thoroughly as to acquire thereby a greatly increased power to convince others…”

    “He kept at it until I no longer felt sure of my own information… That meant I couldn’t see the market with my own eyes. A man cannot be convinced against his own convictions, but he can be talked into a state of uncertainty and indecision, which is even worse, for that means that he cannot trade with confidence and comfort.”

    “I cannot say that I got all mixed up, exactly, but I lost my poise; or rather, I ceased to do my own thinking. I cannot give you in detail the various steps by which I reached the state of mind that was to prove so costly to me.”

    Needless to say, the protagonist (Jesse Livermore) went broke following this persuasive personality and learned his lesson so as not to repeat it. It is my hope that others can learn these lessons WITHOUT going though the pain. I’ll leave you with Jesse’s conclusion:

    “To learn that a man can make foolish plays for no reason whatever was a valuable lesson. It cost me millions to learn that another dangerous enemy to a trader is his susceptibility to the urgings of a magnetic personality when plausibly expressed by a brilliant mind. It has always seemed to me, however, that I might have learned my lesson quite as well if the cost had been only one million. But Fate does not always let you fix the tuition fee. She delivers the educational wallop and presents her own bill, knowing you have to pay it, no matter what the amount may be. Having learned what folly I was capable of I closed that particular incident. [The PPET] went out of my life.”

    If you happen to have a PPET in your financial life, do not attempt to rationalize keeping these influences in your life. PPETs will be correct for a time, but ultimately cloud your judgment and lead you to financial ruin. Be objective and seek input from objective sources. There will always be a host of suckers to satisfy the PPET, don’t be one of them. If you happen to be a PPET: do not attempt to change your format, just get completely and permanently out of the media altogether if you really care. Focus on making an honest living and rebuilding damaged relationships. It may be the hardest thing you have ever done, but it will be well worth it.

    The money-and-happiness correlation

    The money-and-happiness correlation
    Tuesday August 22, 6:00 am ET
    Jay MacDonald

    Wise men from Aristotle to The Beatles have observed that money can't buy happiness, but what inquiring minds really want to know is: Why not?
    After all, we're constantly bombarded with evidence to the contrary, some of which must surely be true. The rich and famous seem to be fabulously happy as they scamper the globe in their private jets, acquiring real estate and adopting orphans, while we mere mortals simmer in rush-hour traffic just to keep food on the table.

    Heck, money and happiness even seem to go together better than love and marriage, which, statistically at least, continues to have the same success rate as a coin toss.

    But appearances can be deceiving.

    According to a June 2006 study spearheaded by Princeton economist Alan Krueger and Nobel Prize-winning psychologist Daniel Kahneman, once you reach a certain income level, more money does not contribute significantly to well-being and may actually result in more stress and less bliss.

    "The belief that high income is associated with good mood is widespread but mostly illusory," according to the study. "People with above-average income are relatively satisfied with their lives but are barely happier than others in moment-to-moment experience, tend to be more tense and do not spend more time in particularly enjoyable activities."

    The study found a weaker-than-expected correlation between income and moment-to-moment happiness in two surveys: a 2004 survey of 909 employed women in Texas and a 2005 survey of 810 women in Ohio. The researchers also looked at a Bureau of Labor Statistics survey on how folks at various points of the income spectrum spend their time. They discovered that women who make over $100,000 a year spend 19.6 percent of their time on passive leisure (i.e., fun), compared to women who make less than $20,000, who spend 33.5 percent of their time kicking back or socializing. The findings suggest a "focusing illusion" that leads people to work for more money even when happier pursuits would ultimately do them more good.

    "Despite the weak relationship between income and global life satisfaction or experienced happiness, many people are highly motivated to increase their income," according to the study. "In some cases, this focusing illusion may lead to a misallocation of time, from accepting lengthy commutes (which are among the worst moments of the day) to sacrificing time spent socializing (which are among the best moments of the day)."

    While we like to think we're just a lotto combination away from solving all of life's problems, experts agree that money itself has very little to do with living happily ever after.

    The Jones factor
    Remember the Joneses down the street? Daniel Gilbert says they actually might have more influence on your happiness than all the zeros in your savings account.

    The Harvard psychology professor recently condensed 15 years of thinking about the elusive concept of happiness into his new book, "Stumbling on Happiness." He says that beyond a certain point, money has very little to do with happiness.

    "The basic idea that 'If I could make more money I would be happier' is true if you're living in a cardboard box under a bridge; it's probably not true if you're making $190,000 a year," he says. "Money does make a difference when it moves you from abject poverty into the middle class, but it stops making a large difference at about that point. In terms of happiness, the difference between making $5,000 a year and $50,000 a year is dramatic, but the difference between making $100,000 and $100 million is negligible, almost nonexistent."

    Nevertheless, an asset shortfall can dampen your bliss when it comes to keeping up with the Joneses.

    "A lot of the happiness we get from money we don't get from money, per se -- we get it from our money divided by our neighbor's money. So much of our satisfaction with our income is relative, not absolute; it's not based on the number of dollars we make, it's the number of dollars we make relative to the number of dollars that other people around us are making. When people say, 'Gosh, if I could just earn a little more I'd be happier,' well, if you're the poorest guy in the neighborhood, that might be true, even if you're the poorest guy in Greenwich, Conn. But if you're the richest guy in the neighborhood, even if you're the richest guy in the Bronx, it probably isn't true."

    Gilbert says one way to free ourselves from the "money-go-round" is to recognize when enough is enough.

    "People would be wise to earn money up to the point of inflection, to the point where more money isn't going to make much of a difference," he says. "One of the things that people have to think about when they talk about money and happiness is where they are in their reference group. If you're in the middle or high end of your reference group, more money isn't going to make it better. If you're in the low end, it actually might make a difference."

    Paul Taylor says Americans have always stalked life's pleasures, so studying the causes seems prudent.

    "The pursuit of happiness has had a particular resonance in our own national history; it's embedded right there in our founding document. But it has a pride of place in the whole of human history; human beings want to be happy. So understanding what the track record has been and what elements contribute to that pursuit is important," he says.

    As executive vice president of the Washington, D.C.-based Pew Research Center, Taylor headed up a February 2006 survey -- "a snapshot," he calls it -- of how that pursuit is going early into the new millennium.

    February 2006 survey -- a snapshot

    Among its findings:

    Republicans are happier than Democrats.

    Married people are happier than unmarried.

    Churchgoers are happier than nonchurchgoers.

    Sunbelt residents are happier than those living elsewhere.

    Contrary to expectations, however:

    Retirees are no happier than workers.

    Pet owners are no happier than those without pets.

    Where income is concerned, the Pew survey found that happiness does indeed increase with income; those who said they were "very happy" increased consistently with income, from 24 percent in the under-$30,000 income category to 49 percent in the $100,000-plus category.

    But Taylor is quick to point out that there's a chicken-and-egg element to these findings that might lead to misinterpretation: "Perhaps money leads to happiness. Perhaps happiness leads to money. Or perhaps both are influenced by some other, more powerful factor."

    Whatever the case, Taylor says the findings indicate that while money might not make you happy, not having money certainly contributes to unhappiness.

    "The linear relationship that 'the more income you have, the happier you are' has been around a long time, despite the persistence of the old adage, 'Money doesn't buy you happiness.' Well, the one may not buy the other, but they do seem to hang out together in ways that suggest there is a relationship between the two," he says.

    The Pew researchers intentionally left it to the 3,014 respondents to define what happiness means for them.

    "That's going to mean different things to different people, but if you take a big enough sample, you'll at least get some broad gauge of people's self-assessment," he says.

    The happiness paradox
    Bruce Weinstein, "The Ethics Guy" and author of "Life Principles: Feeling Good by Doing Good," says those who confuse the accumulation of quantifiable things like money, power or fame with happiness are doomed to miss the love train.

    "Aristotle says that happiness is the only thing that is coveted for its own sake rather than for the sake of something else. It's the ultimate end, the ultimate good. Money is only of instrumental value, only good for what it gets us. So what we find is that people who value money never have enough. If you ask anyone whose primary purpose in life is to acquire wealth if they have enough now, they will say no, I don't. The same with power or fame -- it's never enough.

    "Beyond a certain point, more money does not equate with more happiness. If it did, you would expect to find the wealthiest or most famous people to be the happiest, and that simply is not the case. Once our basic needs are met, it turns out that it's friendship and being loved and having someone to love that makes life worth living," he says.

    Want to find true happiness? Weinstein has a suggestion:

    "I think the solution to happiness lies in the little things. When you're on the bus, instead of whipping out the BlackBerry, maybe actually strike up a conversation with the stranger next to you. Or do nothing; stare out the window or be quiet. I suspect that either or both of those things, practiced regularly, would bring a bigger sense of well-being."

    Gilbert maintains that the whole concept of somehow accumulating happiness is both foolhardy and even a little scary.

    "It's important to recognize that you're not meant to be happy all the time," he says. "That's not what your brain is generating emotions for. Emotions are a very primitive guidance system. It's your brain's way of telling you when you're doing the right thing or the wrong thing. That's why you get a positive emotional reaction when you approach a naked woman but not a bear. Imagine that you somehow found a medication or a surgery or a deodorant or whatever that made you permanently happy all the time. Well, now you're smiling when you approach the bear, and that's a problem.

    "At least, luckily, we could say you won't have children to pass this problem along to.

    "Your emotional system is guiding you through life, so it has to respond positively and negatively. A compass that's stuck on north all the time is useless, and that's what a person who is stuck on happy would be."

    Wednesday, September 20, 2006

    How NOT to buy happiness

    Well, I think "How to buy happiness" would be a more constructive topic, but the basis of my title comes from an interesting research paper I stumbled upon a while back from the MIT Press: How not to buy happiness by Robert H. Frank. Here's a brief excerpt:

    "An enduring paradox in the literature on human happiness is that although the rich are significantly happier than the poor within any country at any moment, average happiness levels change very little as people’s incomes rise in tandem over time.1 Richard Easterlin and others have interpreted these observations to mean that happiness depends on relative rather than absolute income.

    "In this essay I offer a slightly different interpretation of the evidence–namely, that gains in happiness that might have been expected to result from growth in absolute income have not materialized because of the ways in which people in affluent societies have generally spent their incomes.

    "In effect, I wish to propose two different answers to the question “Does money buy happiness?” Considerable evidence suggests that if we use an increase in our incomes, as many of us do, simply to buy bigger houses and more expensive cars, then we do not end up any happier than before. But if we use an increase in our incomes to buy more of certain inconspicuous goods–such as freedom from a long commute or a stressful job–then the evidence paints a very different picture. The less we spend on conspicuous consumption goods, the better we can afford to alleviate congestion; and the more time we can devote to family and friends, to exercise, sleep, travel, and other restorative activities. On the best available evidence, reallocating our time and money in these and similar ways would result in healthier, longer– and happier–lives. "

    I'd like to go beyond the philosophical or a discussion limited to this research alone and actually discuss my ideas for "long term happiness bang for the buck" if such a thing makes any sense. The goal is to devote more time "to family and friends, to exercise, sleep, travel, and other restorative activities" with the result of "healthier, longer– and happier–lives" (to quote the above article).

    The things already mentioned in the research are the obvious (save money instead of wasting it, so you can ultimately work fewer hours. Find a job and/or house that enables shorter commute times. Do not move towards isolation - i.e. no neighbors).

    Happiness and long life are highly correlated. Many of the ideas for achieving both involve reducing stress. This recent article on aging covers many of the categories mentioned in the Robert Frank article.

    Some other ideas:

    Category - exercise

    Join some amateur sports team or activity. Not only is it great exercise, but it can make for good comradery with friends. A friend of mine just got really into road biking - he does this with coworkers several times a week. My brother races "quads" with his father in law. I joined an indoor soccer league last winter (hadn't played soccer in over 15 years, and there were people there of all ages). I also took up kayaking a couple years ago, which ties in well with camping vacations (which are also cheap by the way!). To me, hiking & camping, going out in nature, are very "restorative".

    Category - family

    I'm a big believer in "the family vacation", which is typically a week out of the year, but if you can get away with it, do it more often. Anyway, one of the most memorable vacations I've taken was actually a trip my wife and I took with my in-laws. We rented a house (cheaper than hotels and more amenities!) in a tropical island, and had a blast. One thing we do is take "crazy pictures" (funny pictures) which just seems to make the whole experience all the more fun and memorable. Anyway, even though its been a couple years, every time I think about that vacation I can't help but smile. I think another thing that contributes to happiness is trying new things, and perhaps just as worthwhile - being with people you love when they try new things (which incidentally, I think is where the major joy of raising your own kids probably comes from). For example, being with my in-laws as they experienced snorkeling and deep sea fishing for the first time was immensely entertaining.

    Another in this category: You would not believe how many strange reactions I get when I tell people every Wednesday night is "date night" with my wife. "Why do you still date, aren't you already married?" or "Every week?". Yes, once a week "date night" with the spouse definitely fills the "happy" meter, plus its something to look forward to in the middle of the week. And no, we aren't newlyweds. In fact, we didn't start the official "date night" until after several years of marriage. Throwing something crazy into the mix is always good for creating memories that will last a lifetime, but they don't always have to be elaborate either. Making a meal together, or just going for a walk while discussing something interesting all qualify.

    Finally - an idea I think my wife and I invented that may sound strange but you should try it. This could just as easily be in the friends category by the way... Rent a comedy movie, and decide ahead of time that you are going to laugh at everything, even if it isn't really funny. The mere fact that other people are laughing will force you to laugh anyway, this is SO MUCH fun. Just make sure everyone in the room is fully on board with the concept before the movie starts or you won't get the desired effect. The thing is, you won't know at the end of the movie if it was actually a great comedy, or if you just made it feel like one. Either way - you will have a great time and feel great afterwards. I think laughter is probably one of the best things you can do for your physical & mental health. One thing I've heard of is "laughter groups" which seems almost a little TOO odd but I wouldn't mind trying it ONCE maybe. These groups of people just get together and start laughing - at absolutely nothing. At first its forced, but after a few seconds, you can't control it and you are just laughing because everyone else is. It's supposedly very therapeutic, but I don't know how you find these groups or where they exist (I'll probably stick to the movie idea).

    Category - friends

    I think just spending more time with friends and neighbors is key. I know its almost cliche now, but since the whole poker craze began, I've been playing cards with neighbors once a month (about 10 guys). I definitely enjoy this a lot and would consider it "restorative". Assuming your skills are as good as everyone else's this shouldn't cost you any money over time. That's what they keep telling me anyway ;)

    Inviting groups of people over for "game night" also falls in this category. These can be some of the most entertaining nights of the year. Also a good way to get to know new people. Some games that are good for this: Cranium, Scatergories, Mad Gab, I know there are many others... with smaller groups, yahtzee, dominos, card games, etc. millions of great choices.

    Vacations, cookouts, camping, hiking, etc. can all apply to the "friends" category.

    Category - sleep

    OK - it might seem odd to even include this category. But I have a couple of thoughts on this. First - I am a much happier person when I get 8 hours of sleep. I've actually done a LOT of "sleep research". Not everyone has the same sleep requirements, some only need 7 hours, others need 9. If you find yourself "sleeping in" on weekends (or sleeping longer), its actually a sure sign that you aren't getting enough sleep during the week. Your health suffers when you don't get enough sleep.

    Dreaming - somewhat unrelated to the above, but another hobby of mine that falls into the "sleep" category is Lucid Dreaming. I don't want to get too far off course - so if you are interested - just follow my link or see if your library has the book "Exploring the World of Lucid Dreaming" by Stephen LaBerge, Ph.D. and Howard Rheingold. There are many books on the subject, but that one is the best (and incidentally, the only book on the subject I've found to be worth reading!). Anyway, most people don't realize that you can even increase your happiness WHILE YOU SLEEP!

    Category - giving

    This is the only category not mentioned in the original article. Anyway, I think giving to charity is another way to "buy happiness" so to speak. Things like habitat for humanity (helping to build a house for someone in a desperate situation), or the million other service organizations out there. I'm involved with Big Brothers Big Sisters where I mentor a boy - we basically just get together a couple times a month - play baseball, watch movies, hang out. There are millions of kids growing up with no father present - while you might not think you can do anything to make a difference - you can. Similarly I give financially to causes that help underprivileged children in 3rd world countries. Note: I don't give either time or money because I expect "happiness" out of it, I just think that the more people in general who give, the better off society is - which leads to higher overall "happiness". I also think everyone's quality of life improves when there are fewer people living in desperation or involved in crime, etc. I'm also motivated because I am a Christian, and I just know inside it's the right thing to do.

    Well - I've rambled for way to long... I would really love to see others' ideas as I've never really come across a discussion of this before.

    I know some readers might be wondering, "What's this have to do with finances?" And my response is: "EVERYTHING!".