What is the Difference Between Economics and Finance?

You hear the words "economics" and "finance" often used interchangeably. There are, in fact, important differences between the two.

Economics is the study of markets. Markets are places where participants come and trade goods and services.

Finance, on the other hand, is the study of the financial market. The financial market is a market where borrowers and lenders meet. Borrowers are people who need money straight away, e.g. to start their own business. They do they by taking out loans or raising money by issuing shares. When borrowers take out loans or issue shares, there must be lenders or stockholders on the other side of the trade. These people lend money or buy stock. Finance is simply a study of the market where the patient (lenders) and the impatient (borrowers) meet.

It is clear from this that finance then is a branch of economics just like neuroscience is a branch of medicine. Buying and selling stocks or bonds is a finance issue whereas buying and selling oil is an economic issue. Economics is broader than finance because economics studies all markets whereas finance only studies financial markets.

All finance is economics but not all economics is finance.

Similarities Between Economics and Medicine

What is economics? Adam Smith defined it as "the science of wealth." Lionel Robbins defines economics as the study of the "allocation and distribution of resources." There are many definitions, but when I think about economics I think about trade. Economics is the study of markets. Markets are places where trade takes place. Markets needn't be actual physical areas, e.g. Ebay is a market that exists on the Internet. Like a human body, markets can be healthy and unhealthy, and an economist's job is to analyze the market, make measurements, make forecasts, treat any sicknesses, and so on.

Economics then is very similar to medicine. The difference is that economists study markets while physicians study the human body. While physicians measure blood pressure, blood glucose, cholesterol levels, etc, economists measure interest rates, inflation, etc. Within medicine there are different schools of thought, e.g. allopathic medicine versus osteopathic medicine. Economics has different schools of thought as well, e.g. monetarism and Keynesianism.

Economics and medicine also share ambiguity. Because the two disciplines study complex systems, there are many unknowns. In medicine, nobody knows how drinking coffee seems to reduce the likelihood of getting Parkinson's disease. In economics, nobody really knows why or how business cycles form and what to do with them.

To Alarm or Not to Alarm?

If I go to bed and sleep normally, I usually get a little more than 8 hours of sleep. I once thought that this was okay because many people told me that you should get "at least eight hours of sleep."

According to WebMD, if I get over 8 hours of sleep per night, the risks of getting type 2 diabetes increases significantly: "A study in Diabetes Care shows men who got little sleep (up to five or six nightly hours) or a lot of sleep (more than eight hours per night) were more likely to develop diabetes than men with moderate amounts of nightly sleep."

Source: http://www.medscape.com/viewarticle/527652

I adjusted my lifestyle according once I read this. I use an alarm clock to wake me up 7.5 hours after I go to bed, ensuring that I do not get more than 8 hours of sleep.

However, I few weeks later I read a UK Daily Mail news article that claims that waking up to an alarm clock is bad for you because it can raise your blood pressure and lead to hypertension. Hypertension can lead to heart attack, stroke, or kidney failure.

"In a study conducted by the National Institute of Industrial Health in Japan, participants who were suddenly forced awake had higher blood pressure and heart rate than those allowed to wake up in their own time.

"Dr Chris Idzikowski of the Edinburgh Sleep Centre explains that subtle body changes that occur during sleep make us vulnerable in the early hours - and an alarm sounding only exacerbates this.

"During the later part of night, the body's general physiology is less well regulated. This means the fluctuations in blood pressure, heart rate and breathing are more extreme than usual. Also because you are lying relatively still, blood thickens up a bit more, with a degree of blood clotting."

Source: http://www.dailymail.co.uk/health/article-412283/How-alarming-Your-bedside-clock-bad-health.html

So I face a dilemma. Either I set my alarm every night and face high blood pressure, which leads to cardiovascular disease or I do not set the alarm every night, oversleep, get diabetes, which can also leads to cardiovascular disease. So either way it seems as if I get cardiovascular disease anyway.

What can I do to resolve this dilemma?

Lying to Children about Santa Claus

At work the other day a co-worker told me that she told her son the truth about Santa Claus and the boy, who was almost a teenager, was devastated. The son cried for a long time and accused his parents of cruelty. When the son asked why the mother did this to him, the mother said, "When you have kids, you'd do the same."

I asked this mother why she lied to her child like this and she said, "We're Christians, so it's part of our tradition to celebrate Christmas."

This doesn't make any sense to me. Look at what the Bible says:

Lying lips are an abomination to the Lord.
-Proverbs 12:22

If the Bible claims that lies are an abomination to the Lord, then why would a Christian knowingly lie to his or her child about Santa Claus? And what does Santa Claus have to do with Christianity? There is no mention of Santa Claus, flying reindeer, or Christmas trees in the Bible.

Buy or Rent in Melbourne?

The economic crisis has hit Melbourne's property markets. The government has tried to hold up property prices by increasing the First Home Buyer's Grant (FHBG). A first-home buyer can get around $20,000 or so for buying his first home. Many sellers have increased the price of their homes as an attempt to cash in. First home buyers tend to look for cheaper homes. It is unlikely that a first-home buyer will buy a $2 million Toorak mansion. Because of this, it is no surprise then that in the six months to September 2008, house prices in Toorak have fallen 24 per cent while house prices in Melton, a working-class suburb, have increased by 6 per cent in the same time period (read House Prices Fall in Top Suburbs).

Is this an opportunity to buy? I have a friend, a recent university graduate who is an engineer now, who believes that house prices in Melbourne are still overvalued. He is waiting for house prices to fall even further till he starts buying.

I went to Domain and do a search for houses in Melbourne. I tried to look for the cheapest house to buy and the cheapest house to rent. The cheapest house to buy in Melbourne that was listed when I checked was a unit in Albion for $159,000. The site claimed that a typical 25-year loan would see you pay $918 per month on mortgage repayments.

What about the cheapest place in Melbourne to rent? Based on my search, I found a unit in Altona for $170 a week. Both these places are very similar. They are both simple units in the Western suburbs of Melbourne. Paying $170 per week is equivalent to paying $680 per month.

Renting is cheaper in this case.

Remember you pay $918 a month if you buy a house. Paying $918 a month is equivalent to paying $230 a week. For $230 a week you can rent much nicer houses, for example this 2-bedroom seaside house in Altona. Based on casual observation of house and rent prices in Melbourne, it seems as if renting is cheaper than buying.

For someone who needs a home to live, they either have to take out a mortgage or rent a house. I currently live with my parents, so I have the freedom to save up first before I buy or rent a house. By buying a house without a loan, I am able to avoid interest, which can be quite substantial for 20-year loans. Some people claim that saving up will take too long. Suppose the house you want is $159,000 and the average salary is about $50,000. Assume you can save $40,000 of that, which would be fairly easy if you live with your parents. This means you should be able to save up for this house in about 3 or 4 years. That's not difficult.

One of the risks of buying houses that scares me is the fear of buying a house at a peak. For example, in Toorak the median house price is about $2,000,000. House prices in Toorak in the six months to September 2008 has gone down by 24 per cent, as I have stated earlier. This means that average house prices there went down $480,000! I would not feel good buying at a peak and then having my net worth drop by so much. Of course, if you buy cheap houses that problem is not so severe.

One solution to this problem is to diversify. Instead of buying one house with $159,000, put that money instead into a mutual fund that invests in various income-producing assets like property, bonds, and shares. Then simply use the income generated from this mutual fund to rent a house. Because your money is spread around so many different investments, risk is spread out. Furthermore, because you are renting, you have the freedom to move, which comes in handy if suddenly a child rapist moves next door or if a freeway or nuclear reactor is being built right next to your home. The income from this mutual fund will probably vary from time to time, so it is better to have to more money than $159,000 invested.

I predict that I will need about $200,000 invested to produce income that will allow me to rent a unit in a Western suburb. I will need $50,000 to produce income that will allow me to eat on about $3 a day. So all up I need a minimum of $250,000.

Copy China: How to Beat African Poverty

What is needed to really spread prosperity is to give these poor people jobs. This was how China stood up from poverty to prosperity: hundreds of millions migrated from the country to the city to work in low-paid job and bit-by-bit they became rich.

I would really like to see the same thing happening in Africa, but unfortunately Africa is a dry, harsh place filled with conflict and corrupt governments. Most people have given up on Africa but I think if we copy China we can rescue Africans from poverty.

Simply, we set up in developed countries like Australia, America, Canada, or England zones in secluded area where Africans can live. For example, in Australia, a wide area of outback desert can be deemed a Special Economic Zone. The government can then subsidize mass migration of Africans from Africa to Australia (or any other developed country) and put them in this Special Economic Zone. In this economic zone, companies like Nike, Reebok, and other manufacturers can employ African labor for very low costs, competing with the Chinese. Slowly, African wealth will increase. As the Australian government taxes companies 30% of profits, the government wins as well. Companies win because they have access to an even greater pool of cheap labor. Everyone wins.

Because the Africans are working in countries like Australia and America, corruption will hopefully lessen and businesses will have confidence hiring labor. Labor moving from Africa to developed countries mirrors the migration of peasants from rural China to the cities.

I understand that politically speaking many racists may not want mass migration of Africans and that unions may not want the increased competition to decrease the wages of their workers. Nevertheless, the massive tax revenue that can be collected from this activity can be used to effectively buy the votes of these groups of people, and I am hopeful that voters will think that the benefits of finally freeing the world from poverty is more important than the cost of losing a few manufacturing jobs here and there. Manufacturing jobs are already dead in rich countries anyway. If the Asians are already taking American jobs, why not bring the Africans in?

David Icke: The Lizards and the Jews

I have just seen one of the most bizarre documentaries ever. It is called The Lizards and the Jews. It is about a man named David Icke who believes that the world is being control by a group of elite reptiles who drink human children's blood. People like George Bush, the Queen, and Al Gore are all reptiles who have the ability to morph or shapeshift into humans.

Many people accuse him of being a racist. They claim that when David Icke talks about reptiles, he is actually talking about Jews. Whether this is true or not is a mystery. Icke claims it's not true, and given that he goes into detail about how similar humans and reptiles are, it leads me to believe that Icke is talking about actual lizards.

It's fine if Icke claims that people are lizards, but where is the evidence for this? Has he collected blood samples from elite bankers and measured genetic relatedness between their DNA and lizard DNA?

In an attempt to humiliate David Icke, a group of young people decide to try throw pie at Icke's face. I personally think this is very immature. If they want to attack him, they should attack his arguments. They should ask him whether he has any evidence for his claims, e.g. whether he has analyzed DNA.

Weight Loss is Serious

I have been talking about weight loss to a lot of people, both in my family and at work. I find that people don’t really take me seriously, and this frustrates me to a degree. I think most people think that only women worry about weight loss because women tend to care about how sexy they look. Losing weight then is all about vanity and making sure you are capable of getting a husband. When I tell other people that I am trying to lose weight, I think they laugh at me because they think that I am doing something that they perceive is feminine. I look at the issue differently.

Being fat is the most common way people get type 2 diabetes. This is no laughing matter. This is serious. This is survival. This is life and death. Yesterday my dad was taunting me, showing me Cherry Ripe and Picnic chocolate bars, holding them up to me with a huge grin in his face. This makes me angry because essentially what he is doing is offering me poison. He is like a drug dealer.

Overcoming Needle Phobia

I went to the doctor to get a blood test. I was sitting and waiting for the blood to be taken from me, but I didn’t want to look at the needle going into my arm, so the doctor told me to lie down. He jokingly told me that I was behaving like a little girl. I did not appreciate his gender stereotyping. When the needle went it, it stung a little, but it wasn’t that bad. I closed my eyes and didn’t look at anything. Even with my eyes open I was just looking up at the ceiling but I didn’t want to accidentally see anything. I think looking at all those contraptions is what really hurts me.

Then I started to think about the similarities between injections and rape. Women who have been raped can be traumatized by orgasm because it is too painful. Similarly, when I get a blood test, I am being raped because a metal object is being shoved into my arm. The problem is that penetrative sex is not really necessary for survival while needles are necessarily if you want to detect potential diseases.

I would love it if some scientist could invent something that draws blood from a person without any pain at all. Preferably this machine would draw blood without any penetration. If some scientist could invent this machine, I would imagine that he or she would be extremely rich. I am willing to pay at least $500 dollars to ensure that my injections are painless. Statistics show that about 10 per cent of people are needle phobic. If we assume that everyone in Australia (20 million people) needs to get injection and if we assume that each of these needle phobes are willing to pay $500 just like me, then you can collection revenue of $1 billion. That is just in Australia alone. You will be absolutely rich if you export this technology all over the world. Given that the pay is so good, scientists really should work on it.

Don't Treat Food Like a Luxury Good

Too many of us look at food as if it were a luxury good. We need to stop this because pleasurable foods tend to be bad for us. The thing about luxury objects like jewelry is that jewelry by itself is not harmful. A watch from Patek Phillipe or a car from BMW is not going to hurt you (it might hurt you economically though).

However, luxury food can hurt you! That is the difference. When I talk about luxury food I am not talking about caviar or expensive wine. I am talking about KFC. I consider something as a luxury if it gives you pleasure. I think therefore it is necessarily to look at food not as a luxury good but as a tool for survival. Get your luxuries elsewhere where it is harmless, e.g. from watching TV (although too much TV might get in the way of exercise).

Why You Should Do What You Love

Many teachers tell students to do what they love as a career. There are those who do not believe this, thinking that doing what you love may not pay well and that enduring the pain of doing something you hate can be worth it if it pays well.

I would just like to say that I have heard of a finance executive who worked in a stressful job in their 20s and then when he was 30 he had a heart attack and died. Many people say, "No pain, no gain." Since work stress leads to heart disease and diabetes, pain from career stress will have no gain. In fact, there is a cost of pain. Medical studies have shown that stress increase blood pressure as well.

By definition, something that you love doing is not stressful, which means that you can go on making money without chopping off years from your life expectancy.

It's important to remember that poverty can be stressful as well, so if you are young and you are starting from scratch then you may need to do something stressful to build up enough capital to cover necessities like food and clothing. You may need to work at McDonald's flipping burgers for a while and putting your income aside into a bank savings account until the interest from that account covers your food cost. Then you can be certain that you won't starve to death and you will have the freedom to pursue a better career.

Sex and Sloth: The Two Greatest Threats to Survival

Earlier I wrote about my new Casio watch that I purchased from Ebay for around $30. Someone commented on that post and said something like, "Good luck pulling chicks with that watch." I deleted the comment because it wasn't productive, but for a while I thought about what he said and I am going to talk about it now.

I believe that all humans are born with debt. Every human needs food and water to live. We need a certain amount of kilojoules of energy, a certain amount of protein, vitamins, minerals, etc. When we are hungry, it is as if your body is sending you a bill that you must pay off with food. I call this food debt.

I believe that debt is bad since it restricts freedom and happiness. Therefore, it is essential that I pay off this debt. One way I can pay off this debt is to buy income-producing assets like shares, property, and bonds. The more income-producing assets I buy, the greater my passive income is. As my passive income increases, it may one day increase to a level where I can completely cover my food debt.

In order to buy income-producing assets, I must save cash. I must not buy luxury goods like expensive watches or expensive cars. If I do buy these goods, I therefore save less, buy fewer income-producing assets, produce lower passive income, and thus increase my probability of death.

I understand that some or many females may be attracted by a man's signals of high reproductive fitness, such as an expensive car or an expensive house. I also understand that it is within the nature of humans to mate and propagate their genes. However, for the sake of survival it is necessary that I suppress this instinct. If I give in to the sex instinct, it means I put more resources into attracting a mate. If I do this, it steals resources from other endeavors in life, such as paying off food debt, which is essential to increase the probability of survival. Thus I have proven logically that sex kills.

Another threat to survival is sloth or laziness. Humans have a tendency to do what is pleasurable in the short-term to the detriment of the long term. For example, you may binge on sugar or alcohol, unaware that too much sugar can make you fat or alcohol, even in moderation, increases the risk of mouth cancer by 75 per cent.

Sex and sloth then are the two biggest threats to survival that I have identified, and I make a conscious effort to suppress these instincts for the sake of my own survival.

Virtual Bike

I have been riding my make-shift stationary recumbent exercise bike for about 80 minutes so far and it is giving me a great workout. However, riding a stationary bike is quite boring. It would be a great idea for someone to invent a virtual reality bike that allows me play a racing game and control the tank, bike, or car with my bike. It would be even better if you could change scenery (or levels), make your own scenery, or even race against other people.

It would be good if such an invention could allow you to simply plug your bike into a spare TV.

Update: It seems as if someone has already come up with this idea. See Virtual Bike Improves Safety. What I had in mind though is a cheap, mass-produced recumbent bike that can easily be plugged into the TV. The software will already be in the bike's computer. The virtual bike in the BBC article is for a motorbike and the equipment looks very expensive. Given that obesity is set to rise in the future at a rapid rate, such an invention I'm sure will be very popular.

The Genki 18kg Flywheel Fitness Gym Exercise Bike

I used to have an elliptical trainer than I used for exercise. It served me well but there were a few problems with it. Firstly, the elliptical trainer only let me stand. When I am exercising for a long period of time, I have to stand up for a long period of time, which meant that my ankles got sore. After some weeks of intense usage, I broke the machine beyond repair.

So I purchased the Genki 18kg Flywheel Fitness Gym Exercise Bike from Crazy Sales. I was pleased because the bike only cost me about $250 including delivery. The bike was delivered very quickly (about 3 days). The package is 48 kilograms, so be careful because it is incredibly heavy.

My parents set up the bike for me. I think this exercise bike is great, but I have noticed some problems. The first problem is that the pedals have sharp metal spikes on them, which means that you really cannot use the bike barefoot. This is a minor problem because I can easily put on some shoes.

The major problem with this bike is the seat, which is small and hard. I only had to be on the bike for 10 minutes before my bum got sore. It is absolutely intolerable! I am going to have to look for a bicycle seat that I can use to replace the seat given.

I have been looking at Ergo the Seat and what they say really is scary. They claim that bad bike seats can constrict nerves and cause impotence! What a way to make people buy your product.

Update: I have solved the problem. I was thinking of buying a new recumbant bicycle but didn't want to spend another $200 on it. Instead, I will just put a normal chair directly behind my exercise bike, sit on this chair, and then pedal like normal. For more comfort I can put a pillow on the chair. In other words, I use the upright bike as if it were a recumbent bicycle.

Property a Safe Haven from Volatile Shares?

Some people are saying that dropping share markets in Australia will see most investors putt their money into property, which is allegedly safer. The Rudd Government has also increased the First Home Owners Grant (FHOG), which makes it tempting for some people to buy property.

However, I will argue that the share market and the property market do not exist independently. One affects the other.

When the recession hits, Aussie businesses will not longer require as many immigrants, which will reduce the numbers coming here, which will reduce demand for houses, which will reduce house prices.

As unemployment increases, people will have less money to buy houses, which means demand decreases, decreasing prices of houses. Many of those workers laid off will not be able to pay off mortgages, meaning they will be forced to sell, meaning more houses flood the market, which decreases prices.

I have been looking at the economic analyses of economists Steve Keen at UNSW and Robert Shiller at Yale University. They show that real house prices in all countries over many centuries are constant at approximately 3 times average yearly income. Australia currently has the most expensive houses in the world at 7 or 8 times annual income. We are in the same position as California was before property crashed there, causing house prices to decline 40% in one year.

Some people say that property increases in the long term. They say that it may be the case that American house prices are going down, but in the future it will increase again. This may be true, but consider that historically property prices stagnate for long periods of time. Take house prices in Tokyo. After the 1990 Banking Crisis in Japan, property prices in Tokyo plunged by 70 per cent from then (1990) till today (2008). This means that in 18 years property prices have gone down by 70 per cent. Who knows how many more decades it will take before Tokyo property prices go back up to the levels it reached in 1990?

Related Podcast: The Property Bubble (Counterpoint)

Don't Classify Necessities Using Simplistic Categories

I have noticed that losing weight and being biologically healthy is very similar to being financially healthy. When you want to lose weight, you must burn off more calories than you consume. When you want to be financially healthy, you must spend less than you earn. Is it then not surprising that Americans and Australians are both obese and indebted. I believe that the behavioral make-up of those likely to be obese makes them likely to have huge debt. In fact, debt can be seen as a form of obesity.

When you want to be thrifty, you need to identify the difference between needs and wants. Needs are those things that you really need for physiological survival, e.g. food, water, a bed, a roof over your head, etc. Wants are things like luxury cars and plasma TVs. The problem is that the distinction between wants and needs is not clear-cut. One person's want is another person's need. For example, a drug addict really needs drugs because he or she is dependent on it. For someone who is not addicted to that drug, it is not so important.

One solution to this problem I use is to make money hard to get. For example, take a box, put $500 in it, then buy 10 small padlocks and lock the box up. Then hide the keys all around the house. If you want to spend that $500, you have to put in a lot of effort to go around the house, find the keys, and unlock the box. The difficulty of getting this money I believe will ensure that you will only go through the effort of opening the box if what you want the money for really is a necessity.

The reason why I started this post was to warn people against classifying necessities using simplistic categories. What I mean by this is thinking that, say, food is a necessity. Food may be a necessity, but that does mean that certain types of food are not wants. For example, eating bran cereal (which is high in fiber) for breakfast I think is a necessity. However, eating a $1000 meal at an upscale restaurant is a want, not a necessity. Someone who goes around thinking that food is a necessity will likely use this to rationalize buying luxury food.

Is It a Good Time to Buy?

After global markets have been battered, investor Warren Buffett is telling everyone to buy. The argument is that the panic selling was irrational and because of irrational selling the market is undervalued. The companies themselves are sound but the price has been discounted too far.

However, is this true? If the gloomy news about lower profits and credit freezes are true, then companies may not be fundamentally sound. One measure of a company is the price-earnings ratio, a measure of whether a company's stock is overvalued or undervalued. The problem with the PE ratio is that past earnings are used to calculate this ratio. In the past earnings may have been great because our economy was booming. However, with the credit freeze and looming recession, who is to say earnings won't go down? Maybe the market is rational if it reduces price in line with what is expected to be a reduction in earnings.

Nevertheless, I was looking at Wikipedia today and Robert Shiller has created a nice scatterplot showing how investing in companies with PE ratios of 10 or below gave the best returns.


In my opinion, the inherent value in shares comes from its dividends since earnings reports can be fudged by unethical accountants. The long run average price-dividend ratio for the S&P500 is 24.


This empirical evidence suggests that a contrarian investment strategy (similar to what Buffett suggests) is best. You go all-in to stocks when the market has low PE or PD ratios and you hold back (set aside more in cash) when the market has high PE or PD ratios. Of course, if everyone sees this opportunity to profit and employs this contrarian strategy, then the contrarians will become mainstream and then being contrary won't be contrarian anymore. I was talking with some friends before and one of them said, "Now is a great buying opportunity because stocks are do cheap. You should buy when everyone else is selling." However, another friend, a successful full-time day trader, replied by saying, "I am selling now because I am contrarian. There are plenty of irrational buyers still out there that I want to exploit." So as you can see, while there may be plenty of bulls who look for opportunities to buy low to exploit irrational sellers, inversely there are many bears who look for opportunities to sell high to exploit irrational buyers.

Bad Omen Precedes a Massive Stockmarket Crash

Last night when I was driving back from work I swerved to missed a dead cat on the road. The cat looked intact except for its behind, which was probably run over by tires. There was a pool of blood next to the cat. The thought that maybe this cat was still alive and suffered from excruciating pain made me feel horrible. Parents who do not watch their children can be charged with child abuse, so I don't know why so many cat owners do not watch their cats. Many seem happy to just let them run around on the streets.

When I woke up today and checked the news, I realized that the Australian stock market had tanked. The All Ords had fallen by about 8 per cent to 3900. All up I've probably lost about $8000 or $9000 now. I am thankful that I am still relatively young and have little invested in the stock market. Losing $8000 may seem painful but I have heard about older retirees losing $400,000. I suppose I can be thankful that this depression happened while I was young rather than it building up and hurting me even more when I'm older and have even more money in the market. I am hoping this depression scares the highly-leveraged permabulls away from the market so we can start again with a clean slate from the bottom.

I am tired of all the people saying that now is a good buying opportunity because prices have gone down so much. They were saying this when the market dropped to 5000. They were saying this when the market dropped to 4500. They are still saying it when the market dropped to 3900. I think these people have the gambler's desire to win back losses. I like to use the analogy of the car. Sure, a 50 per cent price reduction in a car seems like a good discount, but just because the price has gone down it may not be a good time to buy. What if the engine in the car has just blown? I fear that the stock market decline may be a rational response to the economic equivalent of a blown engine. The engine that runs our economy (probably debt) is stuffed and now we are entering a phase of deleverage.

Mutual Fund Indexing Not Good for Believers in EMH

I have been reading some sites and came across the following:

Even if you are a die-hard believer in the efficient market hypothesis, that doesn’t mean you have to invest only in index funds. If the efficient market hypothesis is correct, then you won’t do any worse (on average) with a random collection of stocks within an index than you will by holding the index. If stock picking doesn’t matter, then you are free to pick any collection of stocks within the index that vaguely represents the index.

Some index funds perform poorly against the index not because they have high fees, but because they are trying to track the index too closely. When a stock is added to S&P 500, millions of dollars invested in S&P 500 Index funds must all buy that stock in order to track the index exactly. Stocks added to the S&P 500 do very poorly the year after this surge of automated buying. Funds that delay purchasing these stocks can perform better than those who purchase them immediately and pay a premium. Similarly, stocks that are being removed from the S&P 500 will out perform the index over the next year because all the index funds dumping the stock drive the price down needlessly. Delaying the sale of this stock until it has had a chance to recover produces superior returns.

Source: How to Blend Index Funds

Here's my situation. I suspect that buying individual stocks yourself can be cheaper than investing in index mutual funds or ETFs because holding individual stocks doesn't eat up any management fees. You have to pay brokerage fees to buy the stocks, but you only pay once rather than annually, so that over the long run (30 or 40 years) your costs are virtually zero.

There are exception to the rule here. Many foreign, high-cost investments should be accessed using ETFs, such as emerging markets or frontier markets. However, if your discount online brokerage offers $20 trades to buy stock in domestic companies, I think that replicating the index yourself can save you money.

One problem is trying to constantly sell and buy once companies go off and on the index. This problem comes about because indexers set an arbitrary line between big and small companies. Many choose the S&P500. But why the top 500 companies? William Bernstein in The 15-Stock Diversification Myth claims the following: "Fifteen stocks is not enough. Thirty is not enough. Even 200 is not enough. The only way to truly minimize the risks of stock ownership is by owning the whole market." The whole market means the whole market, not the S&P500. It means everything, from small caps to large caps.

What I suggest then is using ETFs to cover the high-cost areas and for the low-cost areas, randomly sample from a population of all stocks using market cap as weight. Over time, as you buy, your cumulative sample will converge towards the market.

DIY (do-it-yourself) indexing will give you identical expected returns to an index mutual fund but because DIY indexing carries significantly lower costs, it follows that DIY indexing will beat index mutual fund investing over the long run in the same way that index mutual fund investing will beat active mutual fund investing in the long run (mainly because of fees).

Subprime Crisis and Japanese Banking Crisis

I am starting to worry that the Subprime Crisis in America may play out similarly to the Japanese Banking Crisis. In Japan, property prices and stock prices were rising rapidly until about 1990 when both crashed. The Nikkei 225 has not recovered to this day, as you can see on the graph above, which I obtained from Wikipedia. What this teaches is that the future is uncertain and that stock markets don't necessarily go up in the long run. One could argue that in the future the Japanese stock market will recover, but 18 years of stagnation for me is sufficient evidence to disprove the assertion that stock markets always go up in the long run. It reminds me of what economist John Maynard Keynes said: "In the long run we are all dead."

Some argue that in America the S&P500 always goes up in the long run and historical data proves this. Indeed it does, but before 1990 we could say the same thing about the Nikkei 225. Who is to say that the credit crunch in America now won't produce the same stagnation for the next 10 to 20 years that we saw in Japan?

The Subprime Crisis and the Japanese Banking Crisis were both similar in that they were triggered by a stock market and property market bubble that popped and resulting in a drying up of liquidity as banks refused to lend. The response of regulators in both Japan and the US were similar in that they both tried to restore liquidity by lowering interest rates. Regardless of the regulators' intentions to prop up the banks, most were too scared to lend.

STW Versus ASX20

Many people buy STW on the Australian Stock Exchange if they want to buy an index fund that tracks the S&P/ASX 200. While on Ninemsn, I looked at the recent five-year performance of STW and then compared it to the performance of the ASX20 index. What I found was that there is a difference but the difference is quite small, and the ASX20 actually beats STW in this instance. This makes me wonder whether it's worth it to buy an index fund like STW and pay MER of 0.29% when I can easily build up a collection of 20 stocks that replicates the ASX20 using a broker like Commsec for a lot less. If I have a lot of money invested, even if I put half in an index fund and half in direct stocks that replicate an index, I am sure I can save a considerable amount in management fees and not have that much impact on investment performance.

Net Worth Report for September 2008

Cash: $189
Kiva: $566

Vanguard Mutual Fund: $24442
Hesta Super Fund: $3336

Woodside Petroleum Shares: $1057

Car: $5825

Net Worth: $35,415

Losses in the share market reduced my net worth this month, as did a $1000 car engine repair bill. My Hesta fund seems to always have a constant balance, which is suspicious.

In spite of the losses, I made an income of approximately $2000 this month, so my overall net worth has only dropped a bit.

US Economy Sinks

Here's a funny comic I found.

Markets Fall After Bailout Rejected

Tomorrow I will have to report on my net worth and I am not looking forward to it. In the US, the bailout has been rejected and world markets have crashed. Here in Australia the All Ords has fallen about 3 per cent to 4500. Some people who are geared into the stock market, such as Enough Wealth, don't seem to be posting anything. They have become very quiet.

Last week I purchased 20 shares in Woodside Petroleum, hoping the bailout would be passed, economic growth would resume, and oil and gas prices would go up. I purchased each share at $57. Today each share is $52. When I purchased the shares, the price of oil was US$106 per barrel. Now it is US$96 per barrel. I'm not complaining because I rely on petrol a lot since I drive about 50 kilometers every weekday. I think it's important that I hedge myself against rises in petrol prices. If this downturn continues and oil prices remain low, I should be able to pick up cheap shares in oil companies to prepare myself for what might be an oil boom in the future.

Councils Use Google Earth to Spy on Houses

According to Eye Spy with my Google Eyes, Australian local governments are using Google Earth to see if any renovations from people comply with regulations. They also have access to satellites that are able to pick up an A4 piece of paper in our backyard.

I have listened to a Spoonman argument (on talkback radio) about this topic and many people who were for Google Earth said that the fear over privacy was caused by people being unaware of the technology. They claim that what is in our backyards as well as the look of our houses are public anyway.

Google Earth will not only catch people naked in their bathrooms through open windows but will also catch people walking into adult bookstores.

By broadcasting pictures in public and displaying it on the Internet, Google Earth has set a legal precedent that will legitimize pedophile Jack McClellan's practice of taping little girls at shopping malls and posting the videos up on the Internet for pedophiles to watch.

There are many times in public when you make a mistake. If few people are looking at you, it's not a major problem. However, if someones takes a picture of you and puts it on the Internet, you are in trouble. For example, what if you are at the beach and suddenly you accidentally let your bathers fall down so that your private parts are exposed. Then someone takes a picture and posts it up on the Internet so that your private parts are exposed for the whole world. Even if you have children your children may accidentally expose too much flesh (e.g. by taking their shirt off) and then someone like Jack McClellan may take a picture and post it up on the Internet. Since no private parts are showing the picture may not be classified as child pornography, yet your child may be traumatized by this.

Some people claim that if you ask Google to remove embarrassing pictures, they are likely to do so. This is fine, but it is the legal precedent I am concerned about. If Google is allowed to take pictures and post it up on the Internet, then what is stopping anyone from doing the same? What is stopping Jack McClellan from hunting for little girls and posting pictures online?

Investing in Oil Companies

With the recent collapse of Lehman Brothers, shock waves have hit the world markets. The All Ords is at 4700, which is very low. The price of oil has gone down from US$147 per barrel to US$90 per barrel. The price of petrol here in Australia is still high because the Australian dollar has depreciated. One Australian dollar used to buy US$0.98. Now it buys only US$0.80. I am happy that my mutual fund invests about 40 per cent in non-Australian assets because that will definitely boost my returns as the Australian dollar depreciates. I have always said that a home country bias is stupid, and now this currency depreciation proves it.

If I am going to buy shares in a company, I am thinking of buying an oil company. The reason why is because oil seems rather cheap at the moment, which would have depressed the stock prices of oil companies. Another reason is because it can provide me with a hedge against rising petrol prices. Petrol prices are by far my biggest expense. Jack at The Survival Podcast believes that this reduction in the price of oil is temporary and oil will keep going up. Many people who believe in the dominance of China and India believe that oil will continue to go up in the future. The real question then is whether supply can keep up with what is expected to be rising demand. The supply of oil is highly manipulated by cartels like OPEC. In general, suppliers of oil are criminals who control countries. They sell oil to us as if they are drug dealers taking advantage of our addiction. Many say that we are near Peak Oil and that oil producers are lying to us about how much oil they hold. I am scared about the opposite, which is Deep Oil. I am worried that there is plenty of oil in the world but the suppliers are hiding it so that they can extract as much money from us as possible. The Peak Oil versus Deep Oil controversy is far too complicated for me at the moment. Most of the articles on the Internet delve into conspiracy theories.

A Study in Scarlet

I have just finished reading A Study in Scarlet, a story by Sir Arthur Conan Doyle. This was the first book to feature Sherlock Holmes.

In this book, Sherlock Holmes is called to a murder of two men in London. Together with some other characters, he chases down the killer and catches him very quickly. The book then moves into what seems like an unrelated story about a man and daughter in the desert who find a group of Mormons. At the end of story, the seemingly unrelated story about the Mormons is tied into the killings in London.

What I like about this book was the nice language used to describe the desert in the Western frontier. What I didn't like about the book was the fact that all the explanations for everything that happened were lumped in at the very end, although this I suppose may be normal for a detective novel. The character of Sherlock Holmes I find is very annoying. If I were working in the police force I would not want to work with a man with that sort of attitude.

Why Wouldn't a Capitalist Support Public Schools?

I speak to many people who call themselves capitalists and many of them say they are against public schools. Many capitalists believe that vouchers should be given to parents and parents themselves choose which school they send their children to.

Let us define capitalism as a system whereby individual rights are protected. Capitalism ensures that nobody has the right to coerce others to do anything they don't want to do. Capitalism ensures freedom.

The problem with the voucher system is that parents choose for their children. The child does not choose himself. Already, the child is denied freedom and is coerced into a school by his or her parents. This lack of choice and obvious coercion already goes against the principles of capitalism.

However, many believe children are an exception because they do not have the ability to decide what is best for themselves. Hence parents make decisions for them. The child is the property of the parents.

The problem here is that parents can make poor decisions because e.g. they are lazy, unintelligent, or they don't care about their children. Let us assume that a particular parent wants to teach his child sex education and the way he teaches this child is to bring this child to a hands-on sex school that encourages the child to actually have sex with a prostitute. This would be fully legitimate under a pure capitalist system since the child is the property of the parent and the parent makes the decision of what is best for his or her child regardless of social or collective morality. Thus capitalists support child rape. If someone were to say that a particular capitalist who wants to send his child to a sex school is wrong, then the accuser can be labeled as a socialist who wants to impose his morality on others. According to capitalist principles, the father choose what he wants to do with his own property and therefore he choose how he wants to educated his son or daughter, which means he can have sex with them if he wants to educate them about sex.

If we assume that a child is better off being reared according to the morality of the community rather than the morality of whatever pervert parent he might have, then we must have public schools. Public school curriculum can be set democratically.

Pay Everyone $10,000

I would like to talk about Basic Income, the idea that the government should pay every single person a living income. I estimate that a living income would be about $10,000 per year, but this would change depending on inflation rates, and so a Basic Income Commission of the government needs to be set up to increase Basic Income in line with inflation.

I think a Basic Income is important because it gets rid of wage slavery. Many people think a pure capitalist society is a free society, but it is not. It allows the most able to prosper while crushing and enslaving the poor and turning them against themselves. This was the view of George Fitzhugh in his book The Failure of Free Society.

Slavery in Egypt involves giving slaves an option to work. If they do not work, a whip is used to inflict pain. Given the choice between work and high pain from a whip, the slave opts for work. Wage slavery is similar. A capitalist gives a worker the option to work or to quit. For many workers, quitting means poverty and starvation, which mean pain and death. (Note: I am assuming a perfect idealized capitalist state, i.e. no Medicare or welfare in general.) Effectively, pure capitalism leads to slavery as the worker is slave to need.

Where will we find the money to pay everyone $10,000 per year? Simply, we abolish all other welfare. We abolish public schools, Medicare, stimulus cheques, etc. A Basic Income is capitalistic in that it allows the consumer to decide how to help himself and lets private suppliers help. This is in opposition to the State giving the poor what the State believes is right for them. Moving welfare into the private sector allows for efficiency and competition.

Paying everyone a Basic Income would require taxation. I suggest that citizens be taxed to the point where maximum revenue is extracted. This doesn't mean that citizens are taxed 100 per cent because then the economy cease to exist. If your income tax were 100 per cent, would you work? The tax rate that maximizes revenue may need to be found out by constructing a Laffer Curve (Ronald Raegan concept). It may be the case that tax revenue turns out to be greater than the transfer to people. For example, suppose that $200 million is collected in tax revenue. Suppose that $10,000 is the Basic Income and we have 1,000 people in the population. This means we need to distribute $10 million (1,000 times $10,000 = $10 million). We have $200 million collected in tax revenue and have sent $10 million in obligations to people, so we have $190 million left over. What do we do with this extra cash? I suggest bringing more people in from other countries so that more and more humans can be freed from wage slavery.

What happens if the tax revenue collected is not enough to pay everyone $10,000? Then simply the Basic Income will have to be reduced. Since the Basic Income is what we assume is the bare minimum needed for survival, there will be some wage slavery and exploitation, but this is unavoidable. This system will mitigate wage slavery but it will not get rid of it entirely.

Vanguard Too Expensive?

I invest in a mutual fund from Vanguard Australia. Vanguard loves to talk about how cheap its index funds are. They are right in that their index funds are cheap compared to mutual funds from big, well-known companies like Colonial First State. The problem is that they aren't cheap compared to direct share ownership or ETFs. Vanguard in the US provides ETFs, but Vanguard Australia doesn't. Vanguard Australia's MERs are also quite high. I pay 0.9 per cent per year. I am starting to believe that if I purchase shares directly I can replicate the broad market myself while paying zero management fees.

Some people argue that DIY indexing is more expensive because, for example, if you wanted to replicate the S&P500 (probably the most replicated index in the world) you would have to buy shares in 500 different companies and you would have to constantly buy and sell as companies go in and out of the index. The whole idea of indexing is that you follow an index. What makes one index better than another? For example, you could use the S&P500, but you could also use the Dow Jones Industrial Average (DJIA). In Australia, you could use the S&P/ASX 200 but you could also use the S&P/ASX 300 or even the broader All Ordinaries. Who ever said that 200, 300, or 500 is a sacred cut-off number? If you hold 500 companies, in reality if you added 100 more there wouldn't be much difference because each marginal company you add has a relatively small market capitalization. At some point you are overdiversified. If there is no such thing as overdiversification, then why do indexers only hold the top 500 or top 200 companies in a country? Why not hold every single company in the country or the world? I think that holding the top 20 companies is enough, but if you want to go further you can easily, and the costs will be lower if you held them directly. I think that if you factor in costs of diversification you can use calculus to derive the optimal number of companies to hold. William Bernstein claims that the best option is to hold "every single company" but I doubt he actually holds every single company in the world. If you're an indexer, you hold an index, which is a selection of companies.

Of course, companies change. Some top performers fall from grace. For example, Enron collapsed. If a certain company falls from an index, the index fund manager will sell the shares. The DIY indexer can do the same.

I happen to think that minimizing cost is more important than strictly following an index. Strictly following an index I think is quite dogmatic. I recommend buying randomly using the top companies (using market cap as weights) and then every now and then superimpose the performance of your portfolio onto to the index to see if it roughly matches. You could use statistical techniques but I think just eyeballing is enough. By doing it yourself you pay zero management fees. Vanguard argues that costs matter. If you believe them, you should ditch them.

It is true that you pay brokerage fees for buying stocks directly but you must also remember that Vanguard has a buy spread. As long as you're not putting in small amount all the time, you should be okay.

Casio W-800H-1AVDF

I like to think of myself as a thrifty person, but I have just received from a delivery man a wristwatch that I ordered from Ebay. It is the Casio W-800H-1AVDF. All up I paid A$33 for the watch. This price includes postage and handling.

My old watch was running out of batteries. The watch still worked, but the numbers were very dim, which meant I couldn't read it well.



One question I asked myself is whether I needed a watch. Many people say that because we have mobile phones now that display the time there is no need for wristwatches. This is a fair argument. The problem for me is that I don't have my mobile phone with me everywhere I go. For example, at work my mobile phone is banned, so I have to keep it in my bad in my locker. Nevertheless, many of my co-workers flout the rules and bring their mobile phones in. This is a moot point because at work I can easily get the time from the computer as well as several wall clocks.

One place where I need a watch is when I'm in the shower. My mobile phone is not water resistant. It might be able to tolerate a few splashes, but I am sure that it will die if I put it into a stream of shower water. Why do I need to tell the time in the shower? I floss in the shower and I time how long I floss with my stopwatch. I also have another stopwatch running to time how long I take in the shower. This prevents me from using up too much water.



Another time when I need a wristwatch is when I'm exercising on my elliptical trainer. Using a stopwatch, I time how much cardiovascular exercise I do and aim to achieve 210 minutes per week on average. My elliptical trainer faces no wall clocks. While I am on the elliptical trainer I usually leave my mobile phone lying on a table nearby. When I am exercising on the elliptical trainer I cannot see the display on this mobile. I don't like to put the mobile phone in my pockets because that will ruin weight distribution and affect my running.

One problem with relying on time displays from wall clocks is that they could be wrong. In fact, they often are. People care about their own time-keeping devices but don't care about public time-keeping devices. I often see wall clocks at work and then say to a co-workers, "That time is wrong." The co-worker usually just nods and walks away. Usually wall clocks are wrong because they drift away from the proper time and become either slow or fast. Often after daylight savings people don't bother to change them. If you have your own wristwatch you can regularly synchronize it to the time on an atomic clock (via the Internet) and you can walk around certain that you have the right time. However, if you rely on the time-keeping devices of others, you will get contradictory numbers, which adds to uncertainty.



Another use of this watch is when I am in bed and I need to look at the time. The mobile phone is away from my body so when I wake up in the middle of the night I have no idea where it is. However, this watch has an illuminator function that allows the watch to light up with the press of a button. I can check the time even when it is dark.

Another reason why a watch is good is because when you are having coffee, lunch, dinner, or a meeting with others, it is rude to look at the time beuase it signals to them that you want to leave. If you take your mobile phone out of your pocket to look at the time, that is very obvious. However, however a quick glance at your watch can be done with subtlety. You can put your arms on your legs and then look down as if you are tired.

I needed to look at a cheap watch that had all the features I needed, that is, accurate time, stopwatch, water resistant to 50 meters or more, and date display. It is incredible how many expensive watches don't even have these basic features.

Underbelly

Last night I watched Underbelly on TV. Underbelly is a 13-part TV series that depicts the Melbourne Gangland Killings, which involved more than 30 people being murdered over a decade.

I never followed the killings with much interest, and with so many people killed, it's hard to make sense of everything you read in the news. But Underbelly very effectively put all the pieces together into a coherent story, which I appreciated even if elements of it were fictionalized.

Underbelly was due to come on TV many months before, but a court injunction at the last minute banned the show from airing in Victoria. Nevertheless, it became a hit in other states and many people traded DVDs or downloaded the series through the Internet.

According to Jim Schembri from The Age, the series was poor because the criminals were such dumb thugs that viewers do not care if they get murdered. The real-life Carl Williams claims that he was badly portrayed in the movie. (Underbelly portrayed Carl as a bumbling idiot.) I think it's important to emphasize that I don't think there is much correlation between morality and intelligence. You may hate someone because he is immoral but immoral people can be highly intelligent.

Something else that I found interesting is how these criminals were able to collect girlfriends and wives so easily. It's a cliche to say that women love bad men, but I suspect that most women actually know that their boyfriends or husbands have a dark side but rationalize it away because they are so attracted to the dominant personality or maybe the cash.

I watched the edited version of Underbelly. One of the characters in the show had a pixellated face.

Assimilating to Australia's Fat Culture

I have been reading an article that claims that weightism is more widespread than racism. According to the article, surveys show that most people believe it's wrong to discriminate according to gender or skin color but it's okay to discriminate based on weight.

Australia is the most overweight nation on earth with 60 per cent of the adult population overweight. This means overweight people here are in the majority and that normal weight and underweight people are a minority. Wouldn't this translate into more political power for overweight people and as a result discrimination against thin people?

Because the majority of Australians are overweight, this means that being overweight is part of Australian culture. When the Howard Government was in power here in Australia they introduced a citizenship test for people who want to become Australian citizens. Ever since then I have heard people say that migrants who come here to Australia must fit in and conform to the local culture. However, since most Australians are overweight, then a migrant who is optimal weight or underweight (BMI <25) is not fitting in since he or she has a feature (low weight) that makes him or her a minority. Under the doctrine of assimilation it is therefore essential that any healthy, optimal-weight migrant who comes to Australia must start eating more and more foods with lots of refined sugar and saturated fats. The migrant must also reduce the amount of exercise he or she is doing.

After logically applying the doctrine of assimilation to these new health facts on obesity in Australia, we also reach the conclusion that anyone in Australia who is currently not overweight is un-Australian.

Given that this result is absurd, doesn't this prove that the idea of assimilation is also absurd?

Are Americans Getting Enough Vitamins?

There is nothing I hate more than contradictory findings, and in the world of health, contradiction is everywhere. For example, does the average American get enough vitamins in his diet? According to an article in the Sydney Morning Herald that advocates taking multivitamin tablets, Americans do not get enough vitamins in their diets:

Given the medical profession's history of damning vitamin supplements, the last thing you'd expect in a medical journal is advice urging all adults to take a daily multivitamin pill.

That's exactly what appeared in the June 2002 issue of the Journal of the American Medical Association, when doctors from Harvard Medical School concluded that the diets of most Americans were inadequate, and contributed to so much chronic disease that all adults needed a supplement to plug the gap.

However, according to an article that attacks Vitamin Water, most Americans do in fact have enough vitamins in their diet:

A vitamin-fortified drink may sound like a swell idea, but there are two caveats to keep in mind. First, most Americans aren’t vitamin-deficient, according to Marion Nestle, a nutrition professor at New York University. A government survey in 1999 showed that the median American adult man or woman already consumes more than the Recommended Dietary Allowance (RDA) of vitamins thiamin, riboflavin, niacin, B6 and B12, and three-quarters of the RDA of vitamins C, B9 and A (including carotenes).

What I Didn't Learn at School But Wish I Had

I am reading Jamie McIntyre's book What I Didn't Learn at School But Which I Had. The man claims to have become a multi-millionaire in a few years. Of course I am highly skeptical of all his claims now that I have realized that he has received a slap on the wrist by ASIC. Nevertheless, his writing so far is fairly entertaining. He claims that when he was young he started his own business and got killed (not literally) doing so. He was $150,000 in debt. Then a rich mentor taught him how to become rich again. What surprises me is how similar this story is to Robert Kiyosaki's stories. What I can find in common are two things: (1) a disaster and (2) a mentor. Kiyosaki was a failure at school and when he started his own business he also failed. He had a rich dad and a poor dad and his rich dad acted like a mentor and taught him all he needed to know to be rich.

That being said, I would like to point out a strange inconsistency in McIntyre's book. On page 1 he says the following:

Unfortunately, now the standard of living for many Australians is dropping rapidly, despite our politicians trying to convince us otherwise. With all the wealth that still exists, why is it that so few Australians get to share in it? What is going on that limits us to sharing in only a fraction of this country’s wealth, and what can we do about it?

This suggests that it is all doom and gloom for most Australians, and we need to listen to wealth experts like him to save ourselves. However, on page 8 he claims the following:

In this country we are all incredibly wealthy. Do you think anyone in Australia in their right mind would want to trade places with someone in Bangladesh or Ethiopia? We have a tremendous amount of wealth already and I had to start to recognise that. In fact we already have everything we need to be successful. And that is a lot to be grateful for.

Net Worth Report for August 2008

Cash: $136
Mutual Funds: $25,683
Superannuation Funds: $3,335
Car: $5,825
Kiva: $528

Net Worth: $35,507

Comments:

My net worth has increased by over $2200 this month, but I think this is misleading. My car has just suffered from a massive oil leak that has ruined the engine. The mechanic gave me two options: sell it and buy another car or fix everything for $1100. After talking with many people, I decided to fix the car because selling it would see me lose a lot of money because the buyers will factor in the stuffed engine. Add transaction costs like stamp duty and insurance and I will definitely be worse off. In order to get enough cash to pay my mechanic (he only deals with cash) I had to get a loan from my brother.

Peak Oil?

Most of the petrol we consume today comes from oil fields where crude oil can be cheaply converted into petrol. The largest is in Saudi Arabia. However, there are plenty of oil fields containing e.g. shale oil where crude oil can be extracted and made into petrol if high enough petrol prices justify it.

Furthermore, a company called Sosal in South Africa has the technology to convert coal into petroleum. Using this technology, the amount of coal in America alone can provide for that country's consumption needs for the next 250 years.

All this makes me wonder why so many are going around yelling about peak oil. It is a well know sales trick to make buyers believe that their product is scarce. It creates a sense of urgency and the perceived scarcity allows the seller to charge higher prices and make fatter profits. The Saudis and the oil companies would love to convince everyone that oil is scarce.

Buying Land in the Country for Emergencies

I listen to many podcasts, but my favorite at the moment is The Survival Podcast. The guy makes these podcasts while he drives to and from work. Apparently he drives 50 miles (80 kilometers) to work, which is incredibly far. (I only live about 25 kilometers from the city.) I am guessing he drives on the freeway to work because driving in regular traffic usually requires a lot of concentration, and you don't have the ability to concentrate on making a podcast while you're checking out traffic lights, watching pedestrians, changing lanes, etc.

The Survivial Podcasts (TSPC) is about survival. Surivival is the number one reason why I aim to be a millionaire by 35. TSPC claims that when many people think about survival and survivalism they think of the extreme survivalists, e.g. people who buy guns, stock up on food, live in the country, wear camouflage, etc. Some survivialists are environmental extremists who think that being self-sufficient is necessary to help the environment. The other extremists are skeptical of government and believe that the Illuminati control the world. TSPC wants to appeal to the mainstream, to teach them that many survivalist concepts can be applied by urban people.

In the car I have been listening to 15 No Risk Survival Tactics Anyone Can Implement. These tactics include the following: buy land in the country, stock up on food, get a second job and save up cash, get out of the stock market, have an evacuation plan, and many others.

Getting land in the country I think sounds good. I have been checking out Domain and prices of land in the country seem very cheap, about $20,000 or so compared to the clearly overpriced $400,000 houses in Australian capital cities. Even though my net worth is a little over $30,000 right now, I only have about $23,000 in liquid cash, so I could probably buy property outright. The Surivival Podcast claims that buying land in the country is a good safety net. If everything goes wrong, e.g. you lose your job, then you can always move to the country and live cheaply off your land. He claims that even if nothing goes wrong, you have an investment. This sounds rational.

Another piece of advice he gives is to stockpile non-perishable food. This is something I am uncertain about. The reason why is because food can easily rot (even non-perishable food can rot if not stored well) and food can be stolen easily. Buying non-perishable food can be a good hedge against food price inflation, but I happen to think that buying land in the country is a good hedge against food price inflation. The value of land in the country is related to how useful that land is. If food prices go up, land in the country is more valuable, and therefore prices of rural property in theory should go up as food prices go up. Land prices in urban areas however are likely to be influenced by the state of the economy in that urban area.

Another recommendation given is saving up cash and getting out of the stock market. This is where he and I diverge. TSPC is much more cynical than I am, believing that the economy is going downhill and will not recover for a long time. This pessimism is probably due to the fact that TSPC is created in the US where the economy is in fact doing terribly. Another problem is that saving up cash in the currency used in your own country means that you have a lot of faith in the fiat currency of that country. TSPC does in fact recommend people diversify currency by buying commodities and currencies of other economies, e.g. Japanese Yen or Euros.

Melbourne McMansions

I've been reading Social Gap Widens from Outer to Inner Melbourne from The Age. The article claims that rising petrol prices and higher interest rates have divided outer Melbourne and inner Melbourne. Residents of inner Melbourne suburbs such as Toorak and Fitzroy have access to better public transport and social infrastructure while those in the outer suburbs (e.g. Lynbrook, Epping, Sunshine, and South Morang) have little. Home prices in inner Melbourne have been booming while prices in outer suburbs have been stagnant. Those in inner Melbourne also tend to earn more.

Google has set up Street View in Melbourne, so I decided to dive into some of these houses in the outer suburbs. What I noticed is that many houses in the outer suburbs seem very large, which is quite surprising given that these people are supposed to be low-income first-time home buyers. Many houses in the inner-suburbs, by contrast, tend to be smaller, e.g. the ones in Carlton. I have a screenshot below.


At work I have heard anecdotes about young people who have such high expectations that they immediately buy a large McMansion instead of a small unit. Such extravagance was apparently common in the post-9/11 era of excess that was encouraged by low interest rates. Now that the global credit crunch has hit, people are starting to feel the pain as interest rates rise.

Basic Income and Sin Taxes

Many people think that politics is just whatever politicians do, but I define politics to be a system of organizing large groups of people. Hence, politics exists in all places where there are large numbers of people, e.g. in families and companies. Politics is the study of the way that groups of people organize and end up deciding what to do. Unless you live in the country by yourself, chances are you are to some degree a politician and you are involved in politics.

One political concept I want to talk about today is the Basic Income. I think that Government should give everyone $10,000 per year regardless of whether you are rich or poor. This money is a Basic Income necessary for living. It provides a safety net just in case you run into some trouble. Some people believe that such a plan would be expensive but if all other benefits were taken out, e.g. Medicare, Family Tax Benefits, Baby Bonus, various subsidies to farmers, and so on, I'm sure enough money could be found. There is also the problem of inflation, that is prices of goods go up, and so the cost of living increases over time. This is easily fixed with a Basic Income Commission meeting up every so often to increase the Basic Income in line with cost of living. The Basic Income concerns how money should be spent by Government. What about how money is raised?

To get taxation, I believe that Government should tax bad things rather than good things. Currently in Australia (as well as in America) the more you earn, the higher you are taxed. I believe that income taxes should be abolished completely. Taxes should then be applied on goods and services that are genuinely bad, e.g. tobacco, alcohol, saturated fats, and energy consumption. These things are genuinely bad. Tobacco, alcohol, and saturated fats are bad for your health and energy is bad for the environment.

The Psychology of SUV Drivers

In my parking lot at work, a really small woman got into her 4WD (or SUV) and backed into a concrete pillar. She swore and then lurched the car forward, almost hitting me as I walked by. She got out to inspect the damage. I told her, "It looks okay." She replied, "Thank God I drive a 4WD." That started to make me wonder if this woman drives a 4WD just because she knows deep down that she is a poor driver.

A friend of mine who works at university as a chemist purchased a 4WD. He told me that he wanted it so that he could, as he said, "drive down the road and tell other people to get out of my way or I'll run them over." Once again, it seems as if 4WDs give their drivers a sense of strength, invincibility, or superiority.

Another friend, a carpenter, purchased a 4WD and told me that he wanted to get a 4WD so that he can "watch the environmentalists squirm." Getting a 4WD then is for the purpose of rebellion. Given that a car is a major purchase, it's quite strange that this person is basing his decision to buy on the childish emotion of rebellion, wanting to be cool or unique by being bad.

The catch is that these three people were driving small 4WDs. The girl at work was driving a two-door compact Suzuki 4WD while the chemist was driving a Toyota Rav4. The anti-environmentalist was driving a Nissan X-Trail. When I think of 4WDs I don't think of these cars. I think mainly of three cars: the Land Rovers (Discovery and Range Rover), Toyota Landcruiser, and the Nissan Patrol. The Land Rover is a marque that is dedicated to 4WDs and the brand has a strong reputation of building vehicles that can go through almost any terrain in the bush or the desert. On the downside Land Rover has a poor history of reliability. The company has changed hands countless times. It used to be owned by BMW, who then sold it to Ford, who then sold it to Tata. The Toyota Landcruiser is a favorite especially among Australians. The Nissan Patrol is used by the United Nations. While these three are highly able off-road vehicles, on road they are not pleasant to drive. Marketers then decided to capitalize on the imagery of the 4WD and created what is known as the soft-roader. These cars are really just normal hatchbacks that are jacked up a little to make it look like a 4WD. Therefore, they have the fuel economy and drive comfort of a small car but the imagery of a 4WD. This marketing magic resulted in a huge swing from real, truck-like 4WDs to these pretend cars. Soft-roaders include cars like the Toyota Rav4, Honda CRV, Nissan X-Trail, BMW 5-Series, and Mercedes M-class. Some of the ads really go far to express the 4WD psychological imagery inherent in these cars. For example, the Nissan X-Trail's ad features a man who, instead of driving around with a puppy dog, drives around and plays with a crocodile as a pet. How many of these soft-road drivers will actually use their cars to haul around crocodiles?

As petrol prices go up, many people are switching away from large cars, but although small cars sell well, many people are also switching to these soft-road cars.

The Sucker to Saint Phenomenon

I have been reading an article called Suckers and Saints: How We Rationalize Being Wimpy about a phenomenon whereby a person who is insecure e.g. about being weak rationalizes it by acting morally superior. As the author says, "Claiming the moral high ground is driven by a basic insecurity." This would suggest that those who are poor would be more inclined to believe that money is evil. It also suggests that morality is just rationalization and that a person who is not insecure in any way would have no morality.

For example, many people believe that rape is bad. If you watch the news you may hear about a rapist and you may think that the rapist is an evil person and that you are morally superior to the rapist because you would never rape anyone. However, maybe this feeling of moral superiority is driven by insecurity. Perhaps you claim you are morally superior to a rapist because you do not have the guts to rape people.

This suggests that the fully secure and confident person with self-esteem is the person with no morals, a person who goes around robbing banks and raping women because he believes that nothing is morally wrong.

Sense of Entitlement

I hear many people complaining that too many people nowadays have a sense of entitlement. One person I spoke to said that this is because children are nowadays overprotected and therefore come to believe that the world will protect them when in reality nobody will.

If we all have human rights, aren't we all entitled to something? For example, imagine if a man was raping a woman. The woman complains about this and says that she has the right to not have sex with the man if that is what she wants. However, the man who rapes her can claim that she has a sense of entitlement because she believes that she is entitled to this right to choose whom she has sex with. If it is wrong for anyone to have a sense of entitlement then it is therefore wrong for the rape victim to believe that she or he is entitled to freedom from coercion.

Of course, slavery and coercion is much more complicated than the example given above. When someone is a victim of rape, usually the rapist is stronger then the rape victim, and this difference in strength results in the victim not being able to exercise his or her option to stop having sex. With slavery, the slave can disobey but there are usually punishments set up to make this option not preferred. A slave has choice but the best choice leads to a poor outcome. For example, in Ancient Egypt it is widely believed that slaves were used to make pyramids. A slave had freedom in that he could choose two options: (1) work, e.g. pull heavy stones or (2) not work and get whipped. The slave has freedom to choose between working and not working but since the latter option leads to extreme pain, the slave is driven by fear of pain to work for the slave owner. This slave situation is analogous to the plight of workers in modern capitalist societies. In Australia, if you cannot get a job, you must go to Centrelink, which is a government agency that helps the disadvantaged. Centrelink will pay you a certain amount every fortnight but in return you must look for a job. To prove that you are looking for a job, you must write diaries and attend Centrelink seminars. I know all this because one of my friends went through all this. This system of welfare is analogous to slavery because the worker does have choice. For example, suppose an 18-year-old girl is dumped by her parents and needs to get a job to feed herself. Assume she is not intelligent and therefore cannot get any job other than being a prostitute. She doesn't want to be a prostitute because she hates sex and therefore resigns and is taken to Centrelink. The only thing Centrelink will do is put her back into employment, which means she will be a prostitute again. Therefore, she cannot escape work, which therefore means she is a slave. The fact that she is forced into sex against her will also means that she is being raped. What if she can find another job? It doesn't matter. It's still slavery because the individual cannot escape work, and the work available will likely be low paying and just as demeaning and nasty as a job as a prostitute. What if she gets a good job that she likes? What if she likes being a prostitute? If that is the case, then she is fine. She is doing what she loves. However, preferences tend to differ among people and there will always be those who don't like what they are doing but have to do it.

Many people who see those who don't like their job and choose to quit call them lazy. However, if you saw a slave complaining about how horrible being a slave is, would these people blame them for being lazy even though their situation is analogous? Would these people judge rape victims?

Having a sense of entitlement can be beneficial because we therefore fight for those rights we think we should have. For example, if nobody had a sense of entitlement, people would never fight and die to secure for women rights to vote.

My Thoughts on Dave Ramsey

I've been reading about Dave Ramsey, who is a financial guru. His financial advice is apparently based on the Bible and has a strong dislike for debt.

Many say that by borrowing money to invest, one can make more money because investing more money earns more than investing little money, and the only way to get more money if you don't have that money is to borrow it. Dave claims that although this is true, the added risk or leveraging to invest makes debt investing worthless. He even quotes the book of Proverbs in the Bible that claims that "the borrower is slave to the lender."

Ultimately I think risk versus return is a matter of personal preference. Each of us have different risk tolerance. Since using debt to invest is a way to increasing both potential return and risk then whether it is good for you depends on you and how much you can stomach risk. If you are a fearful, risk-averse individual who is worried about losing money and would rather settle with little money instead, debt is not for you.

Dave is against credit cards because he claims that it gives people the impression that they have infinite money. I think credit cards can indeed do that. However, credit cards have many benefits. For example, you need a credit card to buy many things over the Internet. Buying stuff online saves petrol. (Using Paypal, you can choose to debit your bank account rather than use credit card.) The credit card I use, the Coles Group Source Mastercard, has a 2-month interest free period. This means you can leave money in investments for those two periods to accumulate interest. Because I spend so little, doing this doesn't earn me much money. The main reason why I use credit card is because I don't have much money in my bank account. If I used debit card all the time, as Dave recommends, then I may spend more money than I have and be charged an overdraft fee. Dave claims that I shouldn't spend money I don't have, but what if I have no money and I need to buy necessities like petrol or food? Dave claims that you should have savings in your bank account. The problem with this is that money in currency form in your bank account does not earn interest, so money in cash form is wasted. Dave claims that personal finance is 80% behavioral and that the problem with credit cards is that users think they have infinite cash. This may be true, but having heaps of cash in your bank account also gives you the impression that you have lots of money. Many people use savings accounts from their bank accounts to save up money for a deposit on a house, and what I often see is people hesitant to buy a house because of all the risks attached to it. They then have heaps of money in their bank account, and the temptation to just withdraw cash from an ATM or spend using debt card is huge.

Apart from my credit card, I am quite anti-debt. Dave recommends that you should attack your home loan as fast as possible. I would even go so far as to say that you don't need a home. If my parents kick me out of their house then I am prepared to live in a van. What you need is a roof over your head. A van provides that. Hopefully I will never be that desperate!

Dave talks often about teaching children good financial habits. I happen to believe that by having children you are putting yourself into debt. Why is this? First we must define debt. Debt is the obligation to pay or do something. By having a child, you automatically create an obligation to pay for the child's food, clothes, and so forth. You are obliged to do this by law. Thus having a child is no different to taking out a home loan. This therefore means that because each of us has to provide for himself then all of us have a debt. Because I need to eat, pay for rent/board, etc, then it follow that I have personal necessity debt. However, this debt can be eliminated. If I save enough money and invest it all, the returns on this investment could pay for necessities and then I would truly be debt free. There is the problem is inflation, that is a change in prices of necessities, however this can be fixed with hedging.

Net Worth Report for July 2008

Cash: $91
Mutual Fund: $23,448
Super Fund: $3,491
Car: $5,825
Kiva: $431

Net Worth: $33,286

Comments:

Not only do I have a normal streamline account with the Commonwealth Bank but I also have a cash management account with Commsec. This will allow me to purchase stocks. I also have a Paypal account and an Ebay account, which I used to buy $11 speakers for my Mp3 player because I want to be able to listen to my mp3s in my car without using headphones.

I increased the number of loans I make to Kiva, which meant my Australian dollars were converted to US dollars. Luckily, at this moment one Australian dollar buys 93 US cents, down from 98 US cents about a fortnight ago, which meant the Australian dollar has depreciated against the US currency, which means the value of my microloans have increased in terms of Australian dollars. I always tell people that even if you don't get any interest, you can achieve currency diversification with Kiva if you live outside the US.

My mutual fund balance went up, but don't be fooled. The stock market has been doing down and the only reason why there was an increase in value was because I worked longer hours and because I received half-yearly distributions of $1067 re-invested into the fund on 1 July 2008. This year I have made a capital loss.

My super fund is increasing even though the market is going down, which I suspect may be because it is actively managed. It could also be because I am working slightly more. The last time I checked my HESTA fund they were charging me contributions tax as well as insurance premiums. I am definitely going to try see if I can get a better deal at another super fund. I start my new job next year so it'll be interesting to see what kind of super fund my new employer gives me.

My grandma and co-workers are all telling me to buy a house as if it's something I've got to do. I've given up trying to convince them otherwise because I think it makes me sound arrogant or rebellious.

I am yet to fill out my tax papers. I am still waiting for my tax statement from Vanguard. Given that I've made capital losses on investments as well as donations to charities, I hope to get something from the ATO this year.

Australians Angry as Superannuation Funds Tank

I have been reading How to Cope with the Super Blowout. In Australia, like America, there is a forced savings policy whereby employers must give 9 per cent of income into a retirement fund. Most Australians it seems have no idea what the fund manager does with this money. They just seem to have faith in the government. Around about now annual reports are arriving in the mail telling Australians that in the last year their super fund has gone down in value by 10 to 20 per cent thanks to global financial uncertainty.

As the comments section suggests, many are not happy. Some are blaming the Rudd Government who went into power just as things started to go bad. This doesn't necessarily mean that Rudd is guilty of anything. If I walk into the house just before the vase falls and breaks, who says the vase wouldn't have fallen if I hadn't walked into the house? Some are saying buy gold. No doubt, gold has done well recently, but who says it will continue to do well. Some say buy property because it only ever goes up. This is just false. The super fund mangers are telling everyone to relax and to look at the long term.

Although I am a fan of investing my money in super, I do not like the arrogant and paternalistic policy whereby the Government thinks it is a better money manager than the average person and therefore forces a portion of income to go into investment they deem are superior. Not everyone wants to be invested in shares and long term increases in share value are not guaranteed. If they were, these gains would be arbitraged away. In my opinion, forced savings or superannuation should be done away with altogether so that regular Australians can do what they want with their money. Some say that with SMSF (self-managed super funds) individual do have control. But this is not total control. You cannot purchase a Coke with money in your SMSF.

The Prestige of Darkness

I haven't seen The Dark Knight yet. I will see it soon. I have read a lot about it, and most people who saw it seem to agree that it is good. Their reasons, however, are interesting. Many say that The Dark Knight is dark, gritty, and brooding. It seems as if any film that is violent, dark, somber, serious, and cynical about human nature, is lauded by critics.

I have read somewhere that so-called erotica is just a name for pornography that is tweaked for upper class consumption. Erotica allows individuals to indulge in pornography without feeling guilty that what they are consumed is sinful.

The same might apply for violent movies. Many serious critics disapprove of the gratuitous violence and gore in teen slasher movies like House of Wax. However, many of these critics praise violent movies like Road to Perdition and Mystic River (both good movies, by the way). These dark, gritty, and brooding films popping up all of a sudden are like the erotica of violence.