Wo hoo – The Bear Market is here!

The stock market is officially in the bear market territory now. Whatever that means – in my mind it’s a technicality created by statisticians to keep themselves from being bored. Come on, now really does it make such a huge difference between Dow at 11,350 or 11,345? Should I panic because the Dow is in bear market at 11,345 and not at 11,350? I honestly don’t think so.

My stock portfolio has been significantly down this year (though not as much as the broader market), but I am thoroughly rejoicing these low levels of stocks. Stocks today are definitely cheaper than they were a month ago or were a year ago. This is something that really excites me. I have been buying more and more of financial stocks (I know I know – the sky is falling on financial companies) and am hoping for them to keep going down over the course of the year. Will I be correct in my judgment? I don’t know but I do know that there is a higher probability of good financial companies to emerge stronger from the current market turmoil than there is for them to cease to exist. Time should hopefully be an ally of good companies. The ultimate result remains to be seen and I am hopeful that you and I will be alive to discuss the outcome in a few years from now.
I have been contemplating if I should post details of my portfolio on the blog. I’ll sleep over it for the weekend.

What happened in Vegas....

I just got back from Vegas after celebrating bachelor party of a close friend. Need I say more? Anyways, everything that happened in Vegas has stayed in Vegas, except, an interesting thought that I could not help not bringing back – Isn’t racetrack betting very similar to investing in stocks? Now I am not saying that both are blind gambling or that the outcome in both situations could be random, what specifically caught my attention is the pari-mutuel system. The odds are not determined by betting against the house but by betting against other betters. The odds are constantly changing based on what’s being bet. The payoff in racetrack is odds and the payoff in stock market is appreciation.

Let’s discuss a little further. It’s easy to bet on the horse that has a great winning record but the payout on it is pretty low, sometimes as low as 11 to 10. Something we commonly see everyday in the stock market. Following the hottest stocks is something similar – if the investment horizon is fairly small, betting on these “winning horses” could generate a profit, but it would be a very limited profit. In case of bad horses winning, the payout is very high, sometimes 100 to 1 or more, which is understandable because the chances of a bad horse winning is typically very low. But the questions becomes, is the system so efficient that there is no chance of a mispricing? Since the odds are being determined by the betting public, I can be fairly confident that the betting is not completely efficient and the emotional element of humans must lead to infrequent mispricing.

Maybe a horse connoisseur can identify these mispricings easily, but there is still another complicating factor – the juice (or house fee) on the race track is 17% - fairly exorbitant! So in order to have a great winning bet, you need to not only be able to identify the mispricing but the mispricing should also have a margin of at least 17%.

This made me think about investing smart in the stock market – it is fairly similar. In order to generate above market returns, a canny investor must be able to (a) differentiate good horses from bad, (b) wait till the good horses are labeled as bad horses (i.e. mispriced in the market), (c) determine the level of mispricing, and (d) bet when the odds are heavily in his favor. In simple words – few bets, infrequent bets, big bets.

Web 2.0 Social Financing Site for Entrepreneurs

Financing and business development is going 2.0 or maybe a prosper.com is in development for start-ups. San-Fransisco-based company, TheFunded introduced today a new service that allows its members to post business plans on its website, which enables them to get feedback on their business plans from other members, as well as get referred by other members to potential financing sources. May I note that the members of TheFunded include founders, CEOs and executives of start-up companies and also venture capital, advisors, lawyers, etc. The website is free for business executives and founders but investors, advisors and lawyers have to pay a subscription fee. Prior to adding this service, TheFunded.com acted as a community where founders and entrepreneurs were able to rate and also share their experience in dealing with various venture capital funds and other financing sources.

In fairness, this is not a completely unique idea. There are a lot of entrepreneur-investor matching services, but TheFunded.com has some uniqueness in the way the CEOs and founders can contact investors and vice-versa.

During my career, I have dealt with companies seeking financing from institutional investors (i.e., venture capital, private equity, etc.) and I have mixed feelings about the success this kind of program may generate. On one side, it's about time that the stranglehold investment bankers/brokers hold in generating financing for companies loosens; but on the other hand, I am aware of the egos venture capital and private equity guys hold about generating "proprietary deal flow" (Wall Street gibberish for investing in companies that others are not aware of) and so I am not sure if they would warm up to an idea of investing in companies they come in contact with through a networking site, or in other words, investing in companies that the other venture capital guys are aware of.

Well time will tell....

Monthly Networth Update (May 2008)

Since this is the first update I am making to the blog on my networth, I thought I would share with you the networth as it stands today and the progress made since the beginning of the year. Couple of things that I would improve on my tracking in near future:

1. Account for tax liability I would incur at the sale of my investment assets - real estate and stocks.
2. Seperate the brokerage out into actual stocks held and money held for investments. There is a small portion of my cash in the brokerage account that is held in money market accounts for future investments. In my current tracking I have lumped them together.

So far this year, the increase in my networth has predominantly come from savings. The stock market has been sideways and has not generated much returns. However, given my value orientation to investing my stock portfolio has not declined much compared to the broader market. Stock portfolio details to come soon.

Part II - Health Roadmap

"Chains of habit are too light to be felt until they are too heavy to be broken"

That is the motto of my health road map. In my opinion, staying healthy is a by-product of lifelong healthy habits. I have seen many of my friends unsuccessfully try for several years establishing goals for workout schedules, goals for losing lbs, goals for diets, etc. Almost all of them failed every time (with some initial non-lasting success). Eventually I realized the failure did not lie in their discipline, but in the system they was trying to create to stay healthy. We are quantitative minds and tend to think of health in terms of numbers and figures (e.g., my weight should be x lbs, my body-fat index should be y%, and so on..). Though these are good numbers to measure your progress, they tend to make us short-sighted about health and the goals to achieve. Faltering from them is easy. So my goals for health are not quantitative but to continue on my healthy habits and to establish new ones. Below is my list of healthy habits I have and I wish to continue to grow on:

1. Early to Rise: To wake up at or just before sunrise. Sun has a lot of positive energy in its first rays. This secret has been known to many eastern cultures and they have capitalized on it for centuries. I have personally seen that exposing myself to the first rays on sunlight in the morning gives me a higher amount of energy all day long.
2. Early to Bed: In order to be early to rise, I need to be in bed appropriately. For me 6-8 hours of sleep is plenty and so hitting the sac by about 10pm works. Generally try and take a break from this once a week when I go out with my friends.
3. Disciplined Meal Timings: Scientifically, it has been proven that people who eat their meals at disciplined times have a much higher health quotient than others. Have experienced it myself and though I am not able to do it all the times, I plan to eventually be very disciplined about this habit.
4. No Over-Eating / Limited Over-Indulgences: Over-eating is the worst thing to do to your body. The ideal meal size is to get up from the table feeling just a tad hungry. Need to work on this a bit more.
5. Limit Alcohol Consumption: Too much alcohol (not talking about alcoholism here) destroys not only liver cells but also brain cells - making you a bit dumber every time! How true is that - it is debatable but in my mind it is true and so my alcohol consumption is going to be limited to once a week.
6. More Vegetarian Food: Another eastern concept - we are what we eat. Can't site any medical research but from my own experience, eating more vegetarian food makes mind calmer, happier and relaxed. Results may be different for different people but my experience is strong enough to work towards this goal.
7. Control of Thoughts: Filling mind with positive energy and positive thoughts and actively controlling flow of negative thoughts in my mind.

Part I - Wealth Roadmap

Wealth always somehow takes precedence in the human mind and I am no different. So, as promised here is the Part I of my plan - Wealth

(1) Where I am in this pursuit?

I am a fairly young professional. About four years ago I graduated from business school and began my career with a net worth of about negative (-) $85,000. My balance sheet had no assets and huge liabilities - predominantly student loans and car loan. However, in my mind, I was living the high life of LA and burying myself deeper in debt. It took me about 6 months to realize what a rut I was in and that the first thing I need to do was stop digging the hole further. After many sleepless nights, I develop a game plan to get out of the bad financial situation. Had to make some very drastic decisions and choices about life and money (e.g., moving to a ultra-low cost city for a few years and finding ways to live rent-free or for very low-rent. By God's grace, the plan worked and the situation turned around to where it stands today. Below is a breakdown of my current net worth as of May 2008

Assets
Cash $36,292
Stocks $102,338
Home $440,000
401K $48,153
Other $15,000
Total $641,783

Liabilities
Mortgage $250,622
Credit Cards $7,010
Total $257,632

Net Worth $384,151

(2) Wealth Goals

Long-Term - Accumulate $10 million by 2030 (before I turn 50)
Intermediate Term - Accumulate $1 million by 2015 (Before I turn 35)

I neither like nor believe in "retirement". I have too much energy to imagine or even dream of a time when I will be sitting and doing nothing. The wealth goals I have is not for retirement but for independence. I always imaging myself as an 85-year old actively working on something I absolutely love and continuing to create wealth and acquiring wisdom.

(3) Road map

Simple - being a true capitalist.

The greatest strength of America is its capitalistic society. If anyone wants maximum benefits of America - there is only one way - being an intelligent capitalist - putting capital to work intelligently and diligently. The assets of choice could be diverse and often present themselves at deep bargains. All anyone needs to do is be ready when those situations arise. On a regular basis, I evaluate a wide number of asset classes for personal investing and I will share with you my thoughts as we progress.

Obviously, the question is - where will I find capital to be a capitalist. I have a good paying job that I don't absolutely love (but that's a separate discussion topic) and so till my investments generate enough income, I'll stick with some job but hope to consistently decrease my commitment to a job. Here is my 2008 personal capital allocation plan

Income - 100%
Fixed Expenses (Mortgage, health club membership, charity donations, utilities, etc.) - 35%
Variable Expenses (Grocery, entertainment, dry cleaning/laundry, etc.) - 30%
Savings (capital for investing) - 35%

For the past 4 years I have created and adhered to strict household budgets and will be sharing the details with you as we go forward.

Laying it Out

Over the course of next few days, I will lay out the landscape of:
(1) Where I am in my pursuit for the three pillars;
(2) Where I would ideally like to be;
(3) What I would like to accomplish in the near-,intermediate-, and long-term;
(4) How (roadmap) will I accomplish the set goals; and
(5) What benchmarks will provide a good measure of my progress.

Have some thinking to do. Will be in touch soon.