investment

Last week, a few fellow bloggers shared their investment portfolios as an answer to a money question asked by SVB @ The Digerati Life (part 1 and part 2). Initially, I was reluctant to share my story, but on second thoughts I decided to let the cat out of the bag - just because it was much different than what other bloggers had shared.

Before you continue reading the story, I want to mention what “Under Accumulator of Wealth (UAW)” means. According to “The Millionaire Next Door” by Stanley and Danko:

All too often high-income producing UAWs spend countless hours studying the market - but not the stock market. They can tell you the names of the top auto dealers, but not the top investment advisors. They can tell you how to shop and spend. But they can’t tell you how to invest. They the styles, prices, and availability at various car dealers. But they know little or nothing about the various values of equity market offerings.

Now, read my story in light of these characteristics of UAWs (and in light of the other things I have written on this blog earlier).

My current portfolio will make some investing enthusiasts sick to the gut. Here is how it looks like:

Cash: 98%
Stocks (ETFs): 2%

There are various reasons why it’s that way. The main reason is - I am not very *educated* when it comes to the stock market. Right now, I am in the process of learning more about how and where to invest so that my tax/fees burden is minimized and returns are maximized - but not yet quite there. In my opinion, people like me should not throw money in the stock market unless they know what they are doing (it’s like trying to win at poker without understanding how to play). So, as long as I am not comfortable with other investment options, the portfolio will sort of maintain its status quo. Also - for reasons that I will not elaborate - the cash is earning tax exempt interest at present, so it’s not that bad.

The other thing that has encouraged us to keep more cash is some anticipated uncertainty in our personal lives in near future. We foresee some specific events, in the coming year or two, which may require urgent and drastic financial actions on our part. Stock market presents too much risk (in our personal situation) in this short time span.

Does that sound cautious to you? or does it sound more like procrastination?

I think the UAW description in The Millionaire Next Door really got me. I think I am starting to show all those characteristics - not good; and if that is the case, the story sounds like more procrastination and less *caution*.

The only bright part is that I do have good intentions with investments in future. Towards that, I am trying to learn something new about how to invest sensibly. Progress is slow, but hopefully I will get there. Here is a rough plan:

However, as we reduce the uncertainties in time to come, I am planning for a portfolio that may roughly look like this:

Gold (this might happen very soon): 5%
Cash: 15%
US Stocks (mostly in the form of ETFs): 40%
Foreign Stocks: 30%
Bonds (on experimental basis - I just want to try these things out): 10%

My primary concern would be to get decent after-tax returns with sufficient stability and minimum headache (continuous market research). I don’t think I will be in it to “beat the market” - I just want to be as wealthy as I need to be.

Now, these thoughts are my *current* thoughts - when I am still a graduate student with no real *job*. I am sure my outlook will change after I graduate and start on a real job (possibly with a good salary). For now, I am just happy to have zero student loans and some positive net worth.

Do you think I am headed in the right direction with this?

I am not sure, but perhaps UAWs (like me) make *cautious* excuses to mask procrastination. If you have been (or are) in a similar boat we would like to hear your story.

Welcome to the 7th edition of the Investors Blog Network. Here are the festival entries.

• Is Early Release of Study Data to Doctors Unfair? by H.S. Ayoub @ BioHealth Investor. Hisham raises a very interesting question “Can the release of early results [drug testing results] to doctors be construed as insider information?“.

Regulators should keep on eye out for investment firms and hedge funds who claim to hire doctors as ‘analysts’, while the true purpose is to have insiders at the major medical meetings and conferences to acquire key preliminary data ahead of the general public.

I never thought along these lines. May be it helps to be investing buddies with a good doctor

• Stocks Vs Real Estate, Winning Investment Strategies by SVB @ The Digerati Life. SVB points out some advantages and disadvantages of investing in real estate as compared to investing in stocks. Of course, each approach has it’s own attractions, but personally, investing in real estate seems a bit intimidating to me - when I think real estate, I think negotiations, heavy leverages, and lack of sufficient scope for diversification.
  

• The Starbucks Effect and the Saturation Point by Market Matador @ Market Matador. Think Starbucks is doing a great job at expansion? Read this post.

By flooding the market with spots for coffee, Starbucks has been wasting growth potential, and opting for current market optimization. Unfortunately, the optimization is becoming wasteful and hurting the brand image.

The effect is apparent in the falling price of Starbucks ( SBUX ) shares. The matador points towards a potential buying opportunity if the trend continues - in the anticipation that the stock will rise in future.

• SBUX: StarBucks International Plans to Enter Russia and India by End of 2007 by TJP @ Investor Trip. Another post wondering whether it’s the right time to buy Starbucks stock ( SBUX ). With earnings projected to grow at 21% annually, and shares hovering near the lowest price over 52 weeks, it does sound tempting. However, in the previous bulleted post above, Market Matador predicts that the price may fall even lower - so a little more wait might be in order.

• Dividend Stock Analysis - Lowe’s Companies Inc (LOW) by Average Joe @ Investment Jungle. Average Joe analyzes the performance of Lowe’s dividend yields.

The posts mentions the term *intrinsic value* with regards to Lowe’s stock ( LOW ) price. For those who don’t know what that is, Investopedia defines “intrinsic value” as:

The actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. This value may or may not be the same as the current market value.

So, if a stock is trading at a price lower than it’s intrinsic value, then it is *undervalued* and probably it might be a good idea to buy it - generally, there will be a tendency for the stock price to move towards it’s intrinsic value in time to come - that means greater potential for gain (in my opinion).
Is Gold a Good Investment by WBL @ Wealth Building Lessons. An extensive analysis on the performance of gold as an investment. I started on this gold buying track earlier (you can read about it here and here), but eventually things got a bit complicated for me and I lost the tempo. WBL’s post puts me right back on track. I think I should buy it before I start hearing the words “inflation worries” with increasing frequency on the news.

• How Not To Make Money In Stocks Guaranteed! by Tyler @ Dividend Money. Tyler highlights some surefire ways of not benefiting from investments in stocks. This is for novices like me. With regards to keeping investment records, he says this:

If you’re really lucky, you won’t even know your adjusted cost base for tax purposes!

Well…I am almost there - even with the ridiculously small investments I have made so far.

• Sometimes You Should Roll The Dice by Fletchlives @ fletchlivesforecasts. The author expresses this worry:

What I haven’t learned throughout that process is the most advantageous way to keep track of my thoughts which lead me to make or not make those trades. Sure I can look at a printout, but I don’t have any explanation of why I made the decision in which I did at that time, or what factors led me to believe that the stock would move up or down.

At this point, you (and I) should go back to Tyler’s post above (the previous bulleted entry) and read up the section on record keeping - it will make better sense with this background.

• CNBC Million Dollar Portfolio Challenge - IBN Network Final Results by Super Saver @ My Wealth Builder. During one of the previous festivals, Super Saver initiated a Investors Blog Network (IBN) portfolio to be submitted to CNBC’s Million Dollar Challenge. He shares the results through this post. The portfolio ranked among the top 14% in terms of value with a gain of about 12%.

• Mining Merger Mania: Say It Three Times Fast by Michael K. Dawson @ The Time and Money Group. Michael discusses the increasing tendency of mining companies merging together - an effect caused by demand (mainly due to rapid growth in India and China) overtaking the supply. Invest wisely and make those mergers work in your favor.

• Find People Who Are Looking To Help Financially by Cade Krueger @ Write To Right. If you are in the market to raise money for your business, this article is for you. Cade highlights the questions that may be raised by potential investors before they promise you their money.

That concludes the seventh edition of the Investor’s Blog Network (IBN) Festival. Thanks are due to Hisham @ BioHealth Investor for letting me host this edition of the festival - and for rekindling the “learn more about investing” fire.

In a couple of days, I will be posting about my current investing attitude and will discuss my pathetic portfolio - or whatever is a collection of just a couple of stocks is called. So come back with all the investment advice you have, because I am probably going to need it.

Image sources: Gold - www.everythinginvestment.co.uk

Just received this email from Zecco Trading which says:

Thank you for opening an account with Zecco Trading.* This is just a friendly reminder that you have not funded your account and we wouldn’t want you to miss the opportunity to take advantage of our extraordinary offer. For the next 2 weeks, we’ve lowered the minimum to open an account from $2,500 to $1,000.

This is something I was looking forward to…but not expecting.

I opened a Zecco account a few months ago but I didn’t want to put in $2500…so never funded it. I think I will grab this new offer.

For those who are unaware about Zecco Trading, it is an investment portal…much like Sharebuilder or Etrade. The main difference being that Zecco offers free trades while other firms charge some kind of a commission or monthly fees. Here is a snapshot of what it has to say about trading fees:

For rookies like me, that sounds pretty good.

Blain @ Stock Trading 101 is running a short term stock trading contest. A group of blogs including this blog have shown interest in participating in the contest. The idea is to get some participation in the contest from a variety of reader groups and have some fun. My selfish motive is to learn something about short term stock performance predictions.

Here are the rules:

1. Entries will be accepted till Sunday, April 8, 2007 @ 12AM EST.
2. Readers are invited to provide two estimates:
   • One stock (represented by a ticker symbol) that you think will provide a high return for the week (stock picks must be over $1).
   • Predict the value at which you think the Nasdaq will close at on Friday the 13th.
3. To participate, just add a comment to this post (Blain will track your picks from here) mentioning the two items listed above.
4. The contest runs (your predictions and stocks will be tracked) officially from Monday April 9 until Friday April 13, 2007.
5. There are three ways to win: having the top stock pick, closest Nasdaq close, or best overall community pick average.

The other blogs that are involved in the contest are:

• Stock Trading 101
• Chris Perruna
• Million Dollar Journey
• Clever Dude
• The Bull Trader
• Derrich.com
• Investoid

So go ahead, leave a comment, flaunt your stock picking skills, and massage your ego.

Here are some handy resources for you to get going on this:

• MSN Money Market Summary

• MarketWatch.com

Long time back, I wrote a post on the calculations behind the rule of 72 with regards to estimating the time it takes to double your initial investment. The focus of that post was to understand exactly how the rule of 72 works and whether it is accurate for all rates of return (ROR). I did not explicitly show the answer to question “how long will it take to double your money at a given rate of return?”. That’s what I will do in this post by giving you a lookup table…just look up the rate of return/interest on your investment and see how many years it will take to double the initial amount (without any additional contributions to the initial investments). Of course, you could use the rule of 72 as a rough estimate..but the table below is far more accurate, and I wanted to do this in spite of the rule of thumb.

To get this lookup table, I have used this relation between time and rate of return (read here for details on how this formula is derived from compound interest formula):

In this formula, t is the time in years and r is the rate of return (rate of interest) in decimal form (5.10% => 0.051). Since I have assumed that the frequency of compounding is annual, r becomes analogous to APY if you are considering a savings account (or a CD). Graphically, this is what the formula tells us about how much time it will take to double the initial investment:

Here is the corresponding lookup table (rounded to the nearest number of months):

Another quick and crude way to estimate the time is to “double rate and half time”- meaning, if you double your rate of return (interest rate), it will take half as much time to double your money. For example, at 1% interest rate it takes about 70 years to double your initial investment, so at twice the interest rate (2%) it will take about 70/2 = 35 years; and if you double it once more (4%) it will take about 35/2 = 17.5 years.

I should point it out (although mathematically it is very obvious) that the graphical representation is very instructive. A rise of rate of return from 1% to 4% (a difference of 3%) has a drastic effect on reducing the time (from about 70 years to about 17.5 years), however, a rise from 17% to 20% (again a difference of 3%) reduces the time from 4 years and 5 months to just 3 years and 10 months. Instinctively, I think the risk increases much more rapidly in going from 17% to 20% than in going from 1% to 4%. I am almost tempted to overlap the above graph with some kind of risk curve (towards pointing out some sort of a *comfort zone*), but I was not able to find enough information on risk-return relationship. I will appreciate any input in this matter.

I am also trying to generate a similar (but more useful) lookup table that will incorporate regular additional investments on top of the initial principal amount….that would prove to be an useful tool to convince some people to save money..as in “look…saving just $X.XX per month will double your money is Y.YY years!”

I have been digging up information from a lot of sources on the subject of investing in gold after my last post “Gold as Investment: The Basics“. I have to admit that it’s a bit intimidating to find stuff about gold investing that really makes sense for a rookie like me. I constantly came across many articles that say something to this effect: “gold is a hedge against inflation” or “gold is an insurance against inflation”. However, I had difficulties in understanding some of these terms, and most articles raised more questions for me like “what do you mean by insurance against inflation” and “what has gold got to do with it”? I will try to address some of these questions in this post in an overly simplified manner.

Gold prices: First and foremost, it is important to understand that gold is a *global* commodity. The price of gold is set by considering the global supply and demand. The term “supply and demand” incorporates the difference between annual gold production from gold mines and annual demand, as well as, the changes in public sentiments. This is slightly different than other commodities like onions or gasoline. Gold is not *consumed* in the same way as most other commodities. Till date, about 155,000 tonnes of gold has been already mined (as compared to just about 2500 tonnes produced annually) and almost all of it is still lying around with people (or governments) in some kind of physical form (usually referred to as “aboveground stock”). Because of this huge aboveground stock, gold prices can change in two ways: 1. gold prices can rise or fall if the production from the mines is decreased or increased, and 2. prices can also rise or fall if people (or governments) suddenly start buying or selling gold (even if gold production is held steady).

In addition to the supply-demand factors, the price of gold also depends on the value of the currency with which you are buying the gold. This is a bit complicated and I will try to explain it in the following section, while I explain why gold is considered as an insurance.

Before I end this section, I want to quote an interesting take on why gold is something more than just a commodity (this may also explain why gold prices are more difficult to understand than other commodity prices). The excerpt is from an article titled “Understanding the gold price” by Paul Van Eeden:

If gold is a commodity like rice or aluminum, then it should be priced as such. It would seem that under such circumstances, gold is the most overpriced commodity in the world. The value of gold as a commodity stems from its physical properties: electrical and thermal conductivity, resistance to corrosion, malleability and ductility. The biggest market for gold will be in the electronic industry where it will compete with other metals, notably copper. If gold were to truly compete with copper in mass production of electrical components then the price of gold would have to be competitive with the price of copper. Copper trades for around $0.80 a pound and gold for more than $4,000 a pound. This means that the gold price would have to drop to less than $0.06 (six cents) an ounce to be in the same region as the copper price. Obviously gold is not being priced as a commodity. There is a demand for gold that inspires people to pay substantially more for it than its commodity value. Gold is money.

Gold as insurance: On one of the gold trading websites (Austin Rare Coins and Bullion), I read this:

In the case of the most severe circumstances like high inflation or currency deflation, gold offers you both safety and security.

To understand what such statements mean, let’s consider a hypothetical situation in which the value of 1 Australian dollar (1 AUD) is equal to 1 US dollar (1 USD), and you can buy 1 ounce of gold in 1 AUD or 1 USD. Assume that there is some kind of a supply-demand equilibrium and gold prices are not affected by it. At this time, the price of gold as perceived by a person in the US is $1 (USD) per ounce. Also, it is the same $1 (AUD) per ounce as perceived by a person in Australia.

1 USD = 1 ounce of gold = 1 AUD

Now, assume that the US dollar falls in value (inflation happens - you need more dollars to buy a certain thing/commodity than what you needed before inflation) against the Australian dollar. Let us say that now it will now take you 2 USD to buy 1 ounce of gold or 1 AUD. This has nothing to do with the *global* price of gold and the equation will look like this:

2 USD = 1 ounce of gold = 1 AUD

When this happens, for a person in the US, the price of gold has suddenly shot up by 100% to $2 per ounce, whereas, for the Australians, it is still $1 per ounce. This is where the *insurance* comes into play. If you had just kept your 1 USD as paper money, you buying power would have been reduced to half after the inflation. Whereas, if you had bought 1 ounce of gold before the inflation, you could get 2 USD in return for that one ounce of gold after the inflation…so basically, you could keep up with the inflation by buying gold. This is what is generally meant by “gold as an hedge/insurance against inflation”.

Also notice that for a person in the US who bought gold before the inflation, there is an apparent gain in the net worth due to rise in the gold prices. But, in our example, the global gold prices did not change (Australians are still paying 1 AUD per ounce of gold) so the rise in the prices is just US specific….just goes towards showing that one has to be careful in interpreting historical gold price data based on US dollars.

Btw, sometimes the US dollar gains strength globally in spite of inflation (from what I have read) and makes it even more difficult to understand gold pricing…but things/concepts like those have “not-for-rookies” stamped all over it …so I am not even daring to go in that direction.

That’s all for this time.

In the next post of this series we will start with some pros and cons of gold as investment…in a way that will be useful for a someone who is just interested in buying some gold…and doesn’t care much about the dynamics of gold economics (people like me).

Feel free to suggest any corrections/modifications/additions to the above write up in order to make it more useful for people who are starting out in this area.

If you are interested in reading details about gold pricing and it’s relation to inflation and related concepts, here are some references (these are also the references I used for this post):

• Understanding the gold price - by Paul Van Eeden
• Gold as an investment - Wikipedia
  
• Gold and inflation - by Eric Hommelberg (it will take you a while with this one )
• Gold a commodity? - by Paul Van Eeden
• Gold and inflation by John Lee
  
• Gold an inflation hedge? - by Robert Blumen

Image source: www.everythinginvestment.co.uk

I have mentioned earlier that this article and this article sort of sparked my interest into looking towards gold as an investment. I started reading more about it from a point of view of a potential gold buyer and came across some interesting websites and things that I intend to share with this post (or series of posts). Currently, I intend to run “Gold as Investment” as a series and eventually discuss progressively involved issues like buying options, storing options, and selling options. However, for now, let’s take some baby steps and just stick to the basics as we start with the idea. Basically, in this post, I am describing my personal views (sort of a note to myself) as I embark upon learning more about gold as an investment. The attempt is to write this in such a manner that a rookie like me can understand.

The following bulleted facts are in the spirit of “know-your-gold-well” type of understanding. If you are getting ready to put some money into buying gold, you better understand what “gold” means. The first step is to understand the measure of gold purity because this thing (and the terms involved) will keep coming up for ever and ever into any gold buying decisions/comparisons you make.

• Pure gold is a very soft metal (in sense you can scratch it with a needle or easily hammer it into different shapes). If you handle pure gold often, it will invariably gather some dings and scratches. At times, these external defects will reduce some of it’s value, especially in the case of gold coins.
• Therefore, to improve it’s handling quality, people add some alloys (a mixture of other metals) to make it harder (more resistant to scratching and deforming).As alloys are added, the purity falls down and there is a need to quantify the drop in this purity. This is done by using the the unit of “karat” of purity-scale.
• The numbers on the karat scale have a linear relation to purity of gold by weight. The highest number being 24 karat (written as 24k) and denotes the gold of highest purity (100% pure gold by weight; scientifically, 100% pure is only a theoretical purity. In reality, gold is considered 24k when it is more than 99.95% pure). Since the scale is linear, 12k gold will contain 50% gold and 50% alloy (by weight). For example, if you have 1 pound of 12k gold specimen, it means that there is half pound of pure gold and half pound of alloy in that specimen. Similarly, a 6k gold specimen will have 25% gold and 75% alloy by weight. You may get a better feel of the “karat” scale from the graph shown below.

  

  The popular purity numbers and the percentage of gold corresponding to them are summarized below-

  • 24k gold contains 99.95 % (or more) gold by weight
  • 22k gold contains 91.67% gold by weight
  • 18k gold contains 75.00% gold by weight
  • 14k gold contains 58.33% gold by weight (in US, commonly advertised jewelry is usually 14k, as far as I have observed)
  • 10k gold contains 41.67% gold by weight
• The prices that are published on a lot of websites are for one ounce of 24k gold. For example, today’s price for gold at market close was $649.90; which means that one ounce of 24k gold can be bought at $649.90 (of course, there are markups usually to cover minting, handling, and distribution which increase the cost by the time it comes to the market, but for now we will assume it’s just $649.90). It’s important you understand this. If someone tries to sell you an ounce of 6k gold for $649.90….you need to recognize that it’s not a good deal. On a linear scale the price of one ounce of 6k gold should be roughly 1/4th the price of 24k gold because an ounce of 6k gold contains only 25% of gold by weight. In this example, an ounce of 6k gold should be roughly around $162 (perhaps slightly more).
• Edited and corrected (March 9th): Thanks to Jay’s comment below, there is another important piece of information that fits in here. Usually gold bullion weight is mentioned in terms of amount of pure gold itself. Not the total weight of the sample. For example, consider a form of gold bullion from the US mint: American Eagle One Ounce Gold Reserve coins which are always listed as a “1 ounce”. Earlier, I thought (I did mention I am a rookie in this right) that the weight of the coins is just 1 ounce and hence the weight of pure gold in the coins must be about 0.9167 ounces. Apparently, that is not true. In the US Mint brochure, the weight of the coin is listed as 1.0909 ounces of which 1 ounce is pure gold and rest is taken up by the alloying material.

In the next article in this series, we will discuss some investment issues about gold. Till then, you can read and gather some more knowledge and start falling in love with the yellow metal. Here are some resources for you (also the sources of information for this post):

Wikipedia on Gold

Wikipedia on Carat (purity)

Gold image source: www.certifiedgoldexchange.com

This is from the time when I had just joined grad school, was not yet married, didn’t have a car, and lived about 25 minutes (walking distance) from my school. Unfortunately, the university transport buses did not service our area of the town. So, my only option was to walk up to school everyday. It was not a very good setting for various reasons. With 25 minutes of walking each way, it was not possible to walk back to my apartment for lunch during the break. Also, I was neither smart enough to carry my own lunches nor brave enough to ask for a refrigerator and a microwave in my laboratory…that meant lot of Subway lunches.

This was all going OK till about summer, when the sun really started smarting my eyes out and it grew really sweaty and tiresome to walk. Then, I bought a bicycle (bike) and rode it for about a week, after which someone stole it. Then, I bought another bicycle and someone stole the damn thing again! I don’t know what’s with bicycles and the thieves in this town; if you locked the front wheel, the rest of the bicycle used to go away, and if you locked the frame, the front wheel used to vanish. In my case, both the times, the bicycle and the lock…all went away. I was done with bicycles after that.

Next, I started looking for other feasible alternatives. I didn’t have enough money to afford a car, but had just enough to buy a used motorcycle. I convinced myself that it would be a good investment because I would save a lot of transit time and save some money by coming back home for lunch everyday. So I went ahead and bought a used Kawasaki Ninja (like the one shown in the image below, with a different color) in the middle of summer :

Life was really good after that. Here are some reasons that made the investment worth it’s value:

• Transit time was cut down from 25 minutes each way to 5 minutes.
• I stopped eating outside and came home for lunch everyday.
• I had a lot of energy left to pursue other sporting activities at the end of the day.
• Motorcycle parking was right outside my laboratory, and was very cheap ($50 per year compared to $300+ for a car). Btw, if you have a parking violation for a motorcycle, the fines are usually much less when compared to fines on car violations.
• Motorcycle insurance is dirt cheap as compared to car insurance.
• It gave me a mileage in the range of 40~50 MPG.
• I could show off.
• Riding the motorcycle gave me an incredible feeling and sort of put me on a high all day long.

This happy story went on till late fall and then, suddenly, things turned from bullish to bearish. Here are the reasons that started diminishing the value of my investment:

• It’s not very enjoyable to ride a motorcycle when it’s very cold; it’s worse when it’s raining and worst when it’s raining and cold at the same time.
• Motorcycles that run fine in summer suddenly start giving problems during the cold season. Most of the time, my motorcycle just wouldn’t start up. On very cold days, it made some loud and strange noises while starting up and earned me some choicest cursing from my neighbors.
• At times, I had to leave it at school because it just wouldn’t start. It sort of started disturbing my time-table.
• Wet roads (or bad roads) and motorcycles are not a good combination. There were problems with braking and traction.
• I dropped it once on a wet road. Fixing it after the accident cost me about $700. Those shining plastic bodies on motorcycles are horribly expensive. Also, injuries from the accident hurt like hell…especially those to the elbows and knees.
• I got married sometime during this period and *had* to get a car. This sort of further devalued the motorcycle.
• I started worrying more about safety and the “joy” aspect of the ride started diminishing rapidly.

At times, I just wanted to get rid of it. However, I was not able to sell it because it was still cold and the damn thing was not reliable in cold weather (there was a good chance that it wouldn’t have started if a potential buyer came for a test ride). I waited till about summer (there is a lot of demand for buying motorcycles in summer) and was happy to see the back of it then. Even after truthfully declaring all the problems with the motorcycle, I still got a good price for it. In all, the Ninja cost me about $1300 including the $700 for post accident repairs and another $200 of general repairs. That’s not bad considering that I did enjoy it a lot (except when it was cold) and used it for about an year. Btw, if I had not dropped it, my cost would have been just $600 for a year and that would have been an awesome *return on investment* for the amount of fun I had.

I don’t know whether this encourages or discourages your plans of ever getting a motorcycle; however, if you do plan to get one, here are some helpful tips:

• In terms of value for money, motorcycles are incredible.
• Always buy them with cash (or check for the full amount). They are not very expensive (well the reasonable ones are not expensive) and it’s not worth it to get a loan for these things.
• If possible, get a brand new one. Motorcycles have very low depreciation, so they don’t really lose a lot of value fast. You will get most of your money back when you sell it.
• If you *must* get a used motorcycle, look for one in late fall. Lot of people start hating their motorcycles during this time and many will ready to accept surprisingly low prices. Also, it’s good to test drive a motorcycle when it’s cold…if it works in the cold season, it will work all year round.
• When riding a motorcycle, your helmet is the only thing between you and death. Spend some money and buy a good quality helmet and always wear it. No amount of goodwill and/or prayers can save you if you fall from a motorcycle at 60 ~ 70 mph without a helmet.
• They don’t sell Kevlar reinforced jackets and trousers for motorcyclists without any reason. When people fall from a motorcycle, instinctively they put their hands and knees in front of them to break their fall…and those are the parts that get hurt the most. Most minor motorcycle injuries will involve scratching of the palms, elbows, and knees. Get yourself a Kevlar reinforced jacket, trousers, and a good pair of gloves before you start showing off.
• If you have any problems/questions with your motorcycle, ask other motorcyclists about it before going to the repair shop.
• If you start having increasing safety concerns, you are probably nearing the end of your joy ride and it may be time for you to move on to four wheelers.

Stolen bicycle image source: A photograph by Kristian Ovaska (via Wiki Commons)

Presently, I have taken upon myself, the task of learning more about how to (efficiently) invest in the stock market. There are two reasons for this: 1. I am a stock market dummy, and 2. I miss not writing about investments and stock market on this blog. The depth of my lack of judgement in this matter will be very clear if I mention the fact that my first ever investment in the stock market was in WorldCom….just a few months before it collapsed! Fortunately, it was just an experiment and I didn’t loose much in the debacle.

Ok back to the subject. So I was reading a few things on the internet and came across this website which describes the work of Eugene F. Fama, in which he concluded that the behavior of stock market is essentially unpredictable (this was done in 1965). The theory made a lot of financial analysts and investors uncomfortable. Here is an interesting story that follows Fama’s theory:

At the 1968 Institutional Investor conference, one irate money manager insisted that what he and others did for investors had to be worth more than just throwing darts at the Wall Street Journal. The “dart board portfolio” soon became a new benchmark for active investors, appearing in newspapers, magazines, and in a 1992 20/20 ABC news segment entitled, Who Needs the Experts? In that segment, a giant wall-sized version of the Wall Street Journal was made into a dartboard. Reporter John Stossel threw several darts as he described the firms he randomly hit. The results of that portfolio were compared to those of the major Wall Street Firm experts. The darts beat ninety percent of the experts! When ABC requested interviews with several of these expert firms, none of them would speak or comment on their humiliating inability to beat the darts.

If you are game, you can try this yourself (of course, at your own risk) and create a model portfolio and see how it goes from there. May be you won’t make a killing, but my engineering instincts are ready to give you some hopes.

If you are unsure about what I mean by “engineering instincts”, it’s time for you to read Dilbert more often.

To put a closure, Fama’s work suggests that the stock market is mainly governed by randomness due to a variety of factors. Due to this random nature, very complicated mathematics is required to attempt the prediction of performance at a future date. Investors don’t appreciate this fully, but the very idea of portfolio diversification is based on this kind of market behavior. If it were possible for financial analysts  to *guarantee* better performance for certain stocks in future, there would be no need for any diversification.