As a was getting my shoeshine, I chatted with Miguel.  I wanted to practice my broken Spanish so I asked “¿Cómo se dice? ‘Where are you from?’”.  He replied “¿De dónde eres?”.  After several tries I managed to repeat the question with satisfactory pronunciation.  Then I asked “¿De dónde eres?” and he replied “Mexico”.

During the next couple days in Chicago I met two people on separate locations who were from Bulgaria but spoke better German that I do (I studied German for 4 years and can converse enough to feel reasonably comfortable at a German dinner table conversation).  And, Chicago, being Chicago, I encountered a wide variety of people from various and sundry places around the world.

In general the primary reason they are here in the States now is economic.  The economic opportunity here, even in the current abysmal economy, is better than most places in the world.

The financial literacy of folks also varied widely.  I heard a comedian quip that she thought a 401K was some kind of marathon run.  Many of the folks I interacted with probably were close to that end of the financial literacy spectrum.  The did at least know that they could make much better dinero in Denver or Chicago than in Chihuahua or Bulgaria.

Other folks I had longer interactions with were financial professionals of various stripes.  A couple were traders focused on interest rate futures and options.  I had long conversations with a financial software developer who also does extensive corn futures trading.  He has seen the financial trading floor evolving over the years.  The floor is a bit quieter and littered with half as many discarded bits of paper because more and more of the action is to electronic trading.

Picture from my recent CBOT visit

I walked out with more money than I walked in with.  I withdrew some cash from the ATM

There are 3 finance-related issues on my mind this election cycle:

1. Fiscal discipline.
2. Treasurer races.  How does Colorado invest for pensions?
3. Taxes.  How does Colorado structure its tax code?  Especially sales taxes and the internet.

These are the financial investment issues on my mind.   What are yours?

I liked the analogy and thought it might be helpful in explaining some of the details of the sub-prime mortgage crisis.

Applying this analogy to credit rating agencies who gave AAA ratings to crappy securities is like creating a fantasy baseball team that is rated to be as talented as the Yankees but is actually made of mostly minor league players.

1. Vastly reduced engine wear.
2. Longer oil life. (Meaning my oil will easily last 6,000-7,000 miles).

I don’t drive much compared to the average driver.  I drive about 8,000-9,000 miles per year.  But a lot of my driving is short distance, which is harder on the engine.  However the essentially homogeneous medium-length hydrocarbon chains help my engine fare well against frequent “cold-starts.”  That’s what research tells me.  Additionally I inherited my first car that made it to 287,000 miles with no engine work, from my family who used synthetic oil in it.

Another frugal investment that worked out great for me was a 4-year electrical engineering degree from a state college.  Could I have gone to MIT, Cal Tech, Stanford?  Sure… until I ran out of money or went up to my ears and beyond with student loans.  But, guess what?  When I came to interviews, I got job offers when folks from these same great schools as often as not got rejection letters.  Why?  Because it is a waste of time to get an BSEE from a big-name school.  I got a better undergrad education from a state school, at 1/5 the price!  Talk about a good deal.

A third example of fiscal frugality is paying for good snow tires.  I have a car I like, a life I like, and friends that I cherish.  I find good/great snow tires to be excellent insurance.  I want to keep these  safe.  And one easy way I can help do that is by having control and stopping power when the roads turn icy.  I already drive 10-15 MPH below the speed limit in bad winter road conditions… but if I drive much slower I increase the risk of  some huge, out-of-control, SUV rear-ending or side-swiping me.   Having great tires (I love Blizzaks) helps enormously.  The combination of driving for the conditions and being well equipped helps improve the odds.  A very high ROI proposition.

Finally, in the same vein as driving, is NOT driving.  I, for one, tend to believe the per mile statistics about driving vs. commercial flying.  Hands down flying is way safer than driving.  So, given a choice, I will shell out a few extra bucks to fly rather than drive for trips longer than about 700 miles.   Do I hate security lines? Yes!  Do I hate taking off my shoes and belt?  Yes!  Do I like sitting like a sardine in coach?  Hell, no!  But do I think it is safer to fly.  Ya, ya betcha!

So, investing is as much about the little things as the big ones.  Cheaper is not always better.

These are Crazy Ivan Account (CIA) trades.  My “sane and steady” portfolio is much unchanged.  I reallocated about 2% from equities to TIPS –  a relatively big move by my standards.  I also moved about $13K from equities to the newly re-opened Vanguard Convertible Securities Fund.  I viewed this latter move as largely an equities to equities move.  Both of these transitions are in my tax-differed accounts.  My taxable accounts are largely unchanged except for certain modest real-estate-related actions.

The common theme of my recent moves is pursuit of yield.  I’ve typically had a larger than typically overall cash holding in my portfolio.  I’ve preferred cash yielding 3-4% to bonds yielding 4-5% simply because of the flexibility.  In the same vein I’ve been pretty dogmatic about using any “spare cash” to pay down even my personal and company ~4-5% mortgage(s)/HELOC(s).  But with long bonds yielding 3% and cash yielding next to 0%, I’ve had to reinvent my investing posture.  Convertibles, munis, real estate, and modestly high-yield value stocks are gradually creeping into my investment mix.

The data:

So the trend is not so good. Ever increasing debt implies more debt supply. Can the demand keep up. Not a current yields, no. Yields up, prices down.

Management? Fiscal discipline? Not anytime soon. Cash flow? The situation is not positive.

So I’m not very inspired to buy US Debt today. Maybe, Maybe TIPS. But traditional US Bonds. I don’t think so.

There are similarities between gambling and investing, however there are key differences.  Here are the big ones:

• Expect to make money investing; expect to lose money gambling.
• Investing returns are best measured over a year or decade.  Gambling results are almost instant.
• The “best” gambling is exciting.  The “best” investments are boring.

Trading stocks and especially options can turn investing vehicles into gambling vehicles.  However the opposite process is virtually impossible: turning gambling into investing.  Playing poker (well) can do this, but it is more like working a job than investing.  The best way to turn gambling into investing is to buy gaming stocks.

I like the short Zen story about attention.  It starts out

There’s an old Zen story: a student said to Master Ichu, ‘Please write for me something of great wisdom.’

Master Ichu picked up his brush and wrote one word: ‘Attention.’

Simple. Right?

On some level the concepts are simple.  They are also profound.  On some level Zen is remarkable, stunning.  On another level unremarkable.

Investing concepts are similar.  Simple, profound.

Possibly the most difficult investing thoughts to grasp and put into action are the most simple.

• Save.
• Balance.
• Own.
• See.

I believe these simple words capture all you need to know to be a wise investor.  Like ‘attention’ these ideas benefit from lots of practice.

To ‘Save’ is easy for some, difficult for others.  Investing starts with savings.  For those not born into a great inheritance savings is crucial.  Savings is the art of spending less than you make.  The art of delayed gratification.   Keeping some of your income and keeping it safe.  For many the verb ‘save’ is easy in the way that the verb ‘diet’ is easy.  Simple concept, challenging action.

‘Balance’ is a deceptively simple term.  Martial arts train balance.  Speed skating, ice skating, and tight-rope walking showcase balance.  In the investing arena ‘balance’ refers to two key ideas: diversification and emotional equanimity.  Diversifying means balancing risks between different types of assets.  Emotional balance means “Caring about your investments, but not THAT much.”

To fully ‘own’ your investments you must understand, control, and value them.  In the same way that a stable master may own and value a prize horse without understanding veterinary medicine, a stock holder may own  and value a stock without being a financial comptroller.  An owner cuts out the middlemen and makes decisions.  An owner weighs decisions and responsibilities carefully because the financial buck stops with her and no one else.

Finally, to ‘see’ your investments you must see beneath the surface.  You see that all investments inevitably change.  You see that some good investments go bad.   You see the fog that shrouds some investments so thickly that you move on by.  You see that taxes are constantly changing and possibly that an accountant may see the ever-changing tax waters more clearly than you.

That’s it.  To invest with wisdom is to save, balance, own, and see.

Now for a curve ball.   If you have been shot by poison arrows, first carefully remove them.  Do not dwell on the cause of their intrusion into your flesh.   After you have recovered, you may be tempted to ask “Why was I shot?”.  It is the ‘why’ that takes most of the ‘attention’.  The same is true for investing.   The ‘why’ is the tricky, time-consuming, complicated part.

I believe that for the beginning investor the why can be unimportant.   For the enlightened investor the why is also unimportant.    The journey to investing enlightenment is about discovering the why and then letting it go.

- Save.
- Buy from Vanguard.  (It’s the most logical choice)
- Buy no-load funds with low expense ratios.
- Do their investing homework before buying anything.
- Study historical market data (50, 100, 200+ years worth).
- Observe but detach from market sentiments.
- Invest for the long run.
- Diversify.
- Read the fine print.
- Just say “No” to stock pushers, brokers, and middlemen.
- Do their own research.
- Make their own decisions.
- Analyze the outcome of their decisions and learn.

My goal is to be a Vulcan investor.   Naturally that is not entirely possible, however, I believe I come reasonably close.  I save.  I read the fine print.  I say “No” to investing solicitations.  I do my own research.  I avoid loads and seek out low fees and expense ratios.  I invest for the long run.

I acknowledge my emotion.  I find outlets for it to leave my investing mind cool, logical, creative, and rigorous.  One outlet is the Crazy Ivan Account (CIA).  Using CIA play money releases my pent up investing emotions.  Another outlet is occasional gambling.  Why recklessly gamble big money on the stock/bond/options/futures markets when it is relatively easy to gamble small money at the casino and get free drinks to boot?  A $200 or $300 bank roll tends to last quite a while at a $5 craps table, often for several hours, if the “bad bets” (bigger house advantage) are avoided.

I say the object of gambling is to gamble…  To be irrational, even superstitious, and above all to have fun.  Whereas the object of investing is to maximize return and minimize risk.  Fun, generally speaking, should have little to do with investing.  All things equal, I believe that the best investments tend to be boring.  Accounting, and tax planning are also best when boring.  Enron accounting might have been exciting… but it was also disastrous.  The CIA allows me to bend this rule in a limited way, allowing my non-Vulcan desire for fun and impulsive investing to be contained.

I’m not a exactly a Vulcan investor, but I try to act like one.   Are you a Vulcan investor?  Do you want to be?  Please share your thoughts by commenting on this post.  Its easy.  I look forward to hearing from you.