J.C.’s Money Blog

The Heisenberg Uncertainty Principle from modern physics says the following: anytime you measure something, you impact it in some minute way. So anytime you measure something, your measurements are inaccurate by some quantity of uncertainty, because the simple act of measuring it, changes it. There is some math behind it, and it is completely irrelavent until you are talking about objects of minute size, such as subatomic particles.

That doesn’t seem to really apply to personal finance, but its analogy does. Simply by measuring things we do, we have an impact on the things we do. If you are serious about losing weight, just write down and tabulate all the calories you eat. This exercise will influence not only how much you eat, but also what kinds of foods, because suddenly those high caloric treats seem less appetizing.

My goals for 2008 were to not lose any money (no negative net worth growth, despite quitting my job) and to track all of my spending.

The reason why I want to track my spending, something I have never done before or wanted to do, is because I know it will help me achieve my first goal. Just doing the accounting and being honest with myself about how I spend money will make me make better money decisions.

When I first heard of Dave Ramsey and his debt snowball concept, I was shocked and dismayed. How could a professional personal finance writer propose a system that costs you more money in interest than you need to pay?!

For those who don’t know about the debt snowball, it works as following:

1. Take all your different debt accounts and pay the minimum payment each month.
2. With any extra money you can spare, pay it to the account with the smallest balance.
3. After the smallest balance debt is repaid, you have the extra money you can spare each month plus the minimum payment on the smallest balance that you don’t have to pay anymore, this money is then paid against the new smallest balance account.
4. Repeat until all debt is paid.

The snowball effect seems to come into play, because as you pay off each account, you can apply more money each month to the new target. You kill off the weakest enemy and gain strength to fight the next bigger one each time.

What I found bad about this system is that it is not mathematically correct. In order to pay off the debts the fastest (and therefore paying the least amount in finance charges) is to do the following:

1. Take all your different debt accounts and pay the minimum payment each month.
2. With any extra money you can spare, pay it to the account with the highest interest rate.
3. After the highest interest rate debt is repaid, you have the extra money you can each month plus the minimum payment on the highest interest rate balance that you don’t have to pay anymore, this money is then paid to the new highest interest rate account.
4. Repeat until all debt is paid.

The second method is correct, because the interest rate is the cost of the debt. You should pay off the most costly debt first to save on finance charges, because finance charges are what put you deeper and deeper into the whole. All those inspiring charts you see about the power of compound interest applied to savings work exactly the same for debt, except to make you poorer every month.

Although the second method is correct, it is wrong. Mathematically it is the cheapest and fastest way to get out of debt, but for most people Dave Ramsey´s debt snowball will work better, because personal finance is much more about psycology than math. People can to get excited about debt repayment and watching their debt enemies drop one after the other, not by rejoycing that their system works best on paper.

The reason Dave Ramsey’s system will work better, is because people will find extra money each month to pay off debt when they feel the momentum of closing accounts and writing one less check each time. The snowball effect is the psycological momentum that builds with the small victories, not the extra cash from minimum payments that no longer have to be paid.

Hey, if we were machines that could always make the best financial decisions based on sound reason and math, we wouldn’t get into consumer debt in the first place.

Oh man, now that I am back in the States, I can feed my bad habit of watching the Suze Orman Show on CNBC. Her advice, while generaly very sound financial advice, is completely predictable and she delivers it in the most annoying, obnoxious fashion, which is kind of like listening to someone scratch their fingernails down a chalkboard. Every time she calls a caller “girlfriend”, I want to poke my eyes out with a pitch fork.

So why do I subject myself to this everytime I possibly can? Because of the callers! Its absolutely terrible, but I love hearing how people have totally hosed up their finances and have huge consumer debt. Its unfortunate, and I am dissapointed in myself for having such a horrendous appetite for schadenfreude, but maybe coming out and admitting it is the first step to becoming a better person.

So, to anyone out there who has lived beyond their means at the expense of their future and called to tell Suze about it, this is a heartfelt thank you, for making me feel better about myself.

To my credit, I am not the only one that feels this way. Research shows that the actual amount people are rewarded is much less important than the relative amount people are rewarded more than their peers. I.e., people in general are more excited about receiving a $20 bonus when peers only get $10, than they would be about receiving $30 if their peers also receive $30.

Here is my portfolio as of US market close Dec 31:

Some comments

I haven’t changed any positions, and my portfolio is still very boring. I would like to use the cash to buy my next individual stock soon, since the market’s dropping off again, and I will have more time to do some due diligence, since my move to the States is mostly done, and I have quit my job.

I need to rework my portfolio table. I have cash listed in my portfolio, which probably doesn’t make sense, since anytime I add money to my brokerage account, this will be impacted. So showing gains and losses in the portfolio would be confusing, because the credit and debits to brokerage account would have to be taken into account.

Also, I need a way to take into account the dividends that have been paid.

On my to do list is a net worth table HTML generator, I need to do this for the portfolio as well, and build in functions to calculate my ROI, etc, taking into account the dividends. This is probably going to take quite a bit of time (~20 hours?), but its a worthwhile project, I think.

My cash balance has exceeded $1000, which brings me above my stock purchase threshold, according to my second rule of money.

$1,000 is currently my minimum amount for making a stock purchase, because the $7 transaction fee comes to less than 1%, and the potential return or loss on $1,000 is just enough to make me do my due diligence seriously. (Otherwise the return on time is not worth it.)

My rule of money number 1, was to only seek out win-win transactions as a means to build wealth. For me long term investing is a win-win transaction, whereas day trading is hoping for a win-lose transaction.

In November 07 my sites generated $0.04 per day. This corresponds to yearly salary of $14.60, which would be bad even in any third world county, I guess.

In December 07 my sites earned $ 0.09 per day. Not much money at all, but the growth rate of 125% is excellent.

If I could keep up this growth rate, it would take until November 08 before my online revenue could replace my full time job, which I quit today.

Here is my updated net worth for January 2008:

Some highlites:

• I moved back to the States.
• I paid off my car, making me completely debt free.
• I sold my car which gives me two new problems:

1. I have to buy a new car. This has a kind of artificial impact on my figures for this month since I have cash and no ride. Therefore I have created the “I need a car” liability, since that cash will soon be gone. I’ll try to find a cheap used car for about 6 grand.
2. I have significant cash that I need to keep available. Right now I have most of it sitting in a Bank of America savings account earning 0.2% interest, which is pathetic.

I usually don’t keep so much cash around (as you can see by the 1670% monthly increase in savings), so I haven’t bothered to open a high yield savings account. I am beginning to do some research into that, so we’ll see soon which account I go with. Anyone have any good suggestions?

Overall a 5% gain is pretty good for the holiday season. Next month will be my last month with my company, so I will work hard to save every last penny of income that I can, because I’m going to need it!

Oil prices are running at nearly $100 a barrel, which means gas prices are high as well. Besides working on increasing fuel efficiency and cutting back on driving, there is another solution to make gas prices less painful: hedge them.

By finding an investment that increases as oil or gas prices increase, you can eliminate the impact of changing oil prices from your bottom line.

Take a look at this chart of recent oil prices.

If you look at a chart of XOM’s price change over the same period, you will notice the same trend, both have increased about 50%, which is logical because Exxon makes more money as oil prices increase, which means you as a shareholder are making more money.

Here is an investment strategy:

1. Estimate number of miles driven per year. ~ 10,000 miles per gallon
2. Estimate gasoline mileage of vehicle. ~ 20 miles
3. Calculate number of gallons used. ~500 gallons
4. Determine fuel cost at $3 per gallon. ~$1,500

An average American spends $1,500 on fuel at current gas prices. Unfortunately, its not possible to directly tie oil price, XOM’s profits, and price of gas, because there are too many factors, but the general price directions and rough order of magnitude is known. An investment of $5,000 in XOM would be a great hedge against rising gas costs.

If oil prices increase you spend more on gas, but make money from Exxon, but if oil prices fall you save more on gas, but make less money from Exxon.

So stop fretting over the oil companies taking you for a ride! If you can’t beat ‘em, join ‘em (or well, own them).

My goals for 2008 are fairly simple:

1. Don’t lose money
2. Track all spending

Since I don’t know if I’ll have much of an income next year after I quit my job, its likely I won’t be able to save much, but I don’t want to start moving in the wrong direction, so my fist goal for 2008 is to have a net worth of at least what I have at the end of 2007.To do this, I’ll have to focus on creating revenue from my websites as quickly as possible and more importantly be very careful with spending money. My other goal is to track all money received and spent in 2008. This is something new for me, I have never paid much attention to my spending or bank statements.

In order to achieve financial freedom, you have to generate enough wealth to live off the interest. That is, your capital base has to be big enough, that you can allocate enough money into low risk assets that pay you back. The amount that they pay you back must be large enough to meet your expenses, and then you are financially free. Two assets that pay you back are savings accounts and dividend paying stocks. These are great instruments for living off the interest, but they aren’t they best way to grow your wealth (I don’t like dividend stocks).

The best way to grow your wealth is through buying individual stocks. Here is why:

1. Work in your underwear - judging by the number of ads that pop up for working from home, the real American dream must be the opportunity to never leave the house. You can do all the necessary stock research sitting at home, reading reports in newspapers, newsletters, online, etc. With your online brokerage, you can buy and sell with a mouse click.
2. No commitment - as a man, these are my favorite two words. With stocks, you aren’t bound to some holding period. You can resell your stocks after a few seconds if you suddenly feel unattached. You aren’t required to do anything special through this ownership, as would be in the case of buying a piece of real estate, where you are suddenly in charge of upkeeping the property. If you decide to move to another country, your stocks don’t care.
3. Low transaction costs - I use Scottrade as my brokerage account, where my trades cost me $7. Now with Zecco, you can even trade for free. If I want to buy a house to rent out, the transaction costs will be much higher.
4. Scaleable - Until you have millions, you will most likely be able to make a transaction of exactly the size you want. In real estate, your deal size is set by the property. In stocks, you can buy as many as you want, you choose the size of the deal. You can find a strategy that works and repeat it over and over. When you finally have billions to invest, the situation gets pretty tough, though.
5. Ownership - When you buy a stock, you don’t just buy a piece of paper, you buy ownership of a company. Its fun to visit the stores of your company and see it making money. You can see people working for you. You know that your capital is part of the reason why they have a job. People shouldn’t look at their stocks as simply tickers that jump up and down, but as ownership in the underlying business. One major drawback to investing in mutual funds or index funds is the loss of the ownership feeling. With mutual funds and index funds, yes, you do own even more businesses, but you don’t own businesses that you hand-picked. Chances are you don’t know which businesses you own under a fund.
6. It works -I know lots of people who have achieved personal financial freedom through investing in individual stocks. While I am sure there are other people out there who have made it through real estate investing, but I don’t know them. I am going to stick with what I have seen work.

And legend has it that somebody once told Warren Buffet he should look into real estate investing, to which he replied: “Why should I buy real estate when the stock market is so easy?” I don’t know whether he really said it or not, but this advice is good enough for me to focus my accumulation of assets to be in owning companies via purchasing individual stocks. The records show its true.

Hello faithful blog readers, I haven’t posted anything in a while, and I won’t be posting much over the next few days, because I’m moving to another country next week, which is taking up quite a bit of my free time.

Two things I’ve noticed since starting this blog roughly a month ago are:

1. It is more fun than I thought it would be, especially watching the traffic slowly growing. I am surprised to see that I have even gotten a few hits from Google searches
2. I underestimated the time needed. Originally, I thought I would spend about 10 hours a week on the blog, but so far it has been closer to 20, when I take into account the time spent researching articles (I have a few in-depth posts in progress to be posted).
3. No one has ever left a comment, probably because of the need to log in. I have changed this, so hopefully I can get some feedback, and not get too spammed.
4. Revenue of nearly nothing is inline with my expectations.

I plan on writing regularly again on December 22, so see you then.

One beautiful thing about money is that it generally represents the effect of a win-win transaction. I think most people view money as a fight between the haves and have-nots. The standard view is that there is a given amount of wealth available, and that wealth is simply redistributed around by money transactions. That’s not really right.

Lets take a simple example. I have a lamp that I inherited from my grandmother. It has ugly flowers and nasty earth tone colors because Grandma bought it back in the 70’s. To me this lamp has a value of $0. I would love to throw it away, but instead I decide to sell it in a garage sale.

Some hippie chick that’s totally into retro furnishings sees it and falls in love with it at first site. She just has to have it. She sees on the sticker that it has a price of $20. She thinks to herself, this thing would totally tie the hippie living room together and she’d pay $100 if she had to in order to take this lamp home.

The hippie chick offers me $5, correctly guessing that I’d be happy just to get the hideous lamp off my property. I counter-offer with $10 (already happy to know I’m going to make $5). She accepts my deal, and is excited because she just got a lamp worth $100 to her for $10, and I laugh knowing that I would have thrown the stupid thing in the garbage if she hadn’t come along.

So what happened there? We created wealth for both of us. I just got $10 and can go enjoy a date with my girlfriend at McDonalds, and the hippie got a lamp worth $90 to her. We created $100 of wealth in a win-win transaction.

Most financial transactions are win-win, but there are lots of win-lose transactions. I would like to avoid those win-lose transactions, because I want to create wealth, not just make myself wealthy.

I hate hearing people say, that it’s just so unfair that one person can be so rich. If that person got so filthy rich by a lifetime of win-win transactions, then that’s wonderful this person is so stinking rich, because he has generated wealth for others on the way, not taken it away.

So, in my quest to get stinking, filthy rich my ground rule number 1 is to seek only win-win money making schemes. Things I will not do are:

Credit Card 0% Balance Transfer Arbitrage
You know the deal, you use your really great credit score to get money for 0% interest for some period, stick the cash in a high interest savings account, and pocket a few grand with virtually no risk.

Why this is win-lose: You are making money more expensive for everyone else by doing this. The “evil” credit card company is owned by investors like us seeking a return on our investments. It costs them money to loan you money, and they make nothing, while you profit. You win, credit card company shareholders lose.

Not gonna do it.

Play online poker
I am good at math. I understand probability and statistics very well. I could likely discipline myself to sit at a computer and play poker online day and night and eek out an ever growing living. But poker is a zero-sum game, there is an equal amount lost for every dollar won (and the lost rake fees, but the gaming company gets that as their win).

You can argue that playing poker online is fun, so the people that lose money to you are being compensated by the fun they are having, but I will argue that only winning in poker is fun!

Multilevel Marketing / Pyramid Schemes
If you are wondering why this is win-lose, please get off my blog, and don’t ever come back. Ever.

Day Trading
My investment style is long term. Maybe there could be some quick money to be made through being a day trader, but day trading is simply hoping for a win-lose situation. You outsmart the rest by seeing some trends or whatever and make cash that others missed out on.

Warren Buffet proposes a 100% tax on capital gains earned by holding stocks for less than a year. I believe everything that guy says.