29 December 2009

Living Off Dividends

Living off dividends is one of the best goals you can aim for, and it is certainly something I aim to do.

Dividends are payments companies make to shareholders. If you own shares, every so often the company will will drop money into your bank account as dividends. By owning shares, you can provide income for yourself without actually doing any work. Income from work requires time and effort, but you can earn income from shares by sitting back and doing nothing. This passive nature of earning income is why dividends are a form of passive income.

It is important to understand that ownership of shares is not the only way you can earn money from doing nothing. You can receive passive income from savings accounts, term deposits, real estate, bonds, royalties from book sales, and so on. When I say that living off dividends ia a worthwhile goal, I am referring to living off passive income. I talk about dividends because I personally use stock ownership almost exclusively to earn passive income. For the average person, I think it is probably not a good idea to exclusively rely on stocks for passive income. Do as I say, not as I do. You should diversify into less risky income-producing inverstments like term deposits. There are some term deposits out there now that give you 7 per cent per year. I have not invested in these mainly because you need to save up a whopping $25,000 to invest in them.

The main benefit of living off dividends is the freedom it gives you. When you live off interest, rent, and dividends, you live off the fruits of other people's labour, not your own. You don't work for others. They work for you. This gives you incredible independence. Many people who are dependent on work income to fund their mortgage, car payments, etc are essentially slaves to their bosses. If the boss tells you to lick the toilets clean, if you depend on your job to pay for your food, mortage, car payments, etc then you have to lick the toilets clean in order to survive. There is no dignity in being a slave to your boss. However, if you had passive income, you don't need to lick the toilets clean if your boss tells you to do so because you can quit and still comfortably live off dividends. While you are unemployed you can find another job but even if you take a long time finding a job or even if you never find another job, it doesn't matter because you don't need to work for yourself. Others work for you.

Many people say that debt is dangerous. Just to be clear, I am not anti-debt. I think debt can be used as an effective tool to build wealth. If you borrow money and invest in an asset that goes up in value significantly, you can build yourself massive profits. The problem is that there is no asset that is guaranteed to go up significantly all the time. (If such an asset exists, why would anyone bother working. Just borrow money, buy that asset, and then retire.) For the average person, I recommend you stay out of debt. This not only means staying away from the debts that almost everyone thinks are bad such as car loans and credit cards but also the so-called good debts like home loans. I recommend you try to buy a second-hand car and to live with parents if you can. I am different to most people in that I broaden the definition of debt. Most people think of debt as obligations to pay money placed upon them because of some bill that appears in the mail, e.g. credit card bill. My definition of a monetary debt is as follows: "a future obligation to pay." Hence a credit card debt is a debt since you are obligated to pay X dollars by a certain date. The same applies to home loans and car loans. However, using this definition, it becomes logical that hunger and shelter are also debts. All humans have a need to eat food for energy and a need to cover himself for shelter from cold and heat. In order to eat and in order to cover himself, he need to pay. Hence eating and sheltering are future obligations to pay and hence by definition they are debts. We all are born with debts because we all need food and shelter. They are necesities for life. The best way I think you can eliminate these debts is to produce passive income. The more passive income you produce, the less indebted you are and the less indebted you are, the further away you move from a state of slavery. The greater your passive income, the greater your freedom.

If the need to feed and cover yourself is a debt, then image how much more debt you'd be in if you had a child. If you produced a baby, not only do you have to feed yourself but you are also legally obligated to feed your child (if you don't, you will go to prison). Hence having a child is one way of going into immense debt. The problem is worse because if you have a child without being able to pay the debt then you harm not just yourself but you also harm an innocent child.

CNN Money is a critic of living off passive income. In their article Living Off the Interest? Good Luck, they say that living off passive income is a poor strategy because "few people will amass a big enough nest egg to live without touching principal." The problem with many of these analyses is that they assume that your investments will not provide enough income for your lavish lifestyle. The way to live off dividends then is to keep your expenses low and to invest in high-yielding investments.

If you are an Australian resident who wants to produce passive income, I recommend you invest in the Vanguard High Yield Australian Shares Fund (High Yield Fund). The management fees of 0.90% are a little high, but given that this mutual fund gives you monthly distributions (most of the time) and franking credits, I think it's worth it. The High Yield Fund doesn't really track any existing index and so it cannot really be called an index fund but an actively managed fund or maybe a mixture of both. Rather, it takes the ASX200 index, strips AREITS out, and then invests in the companies in the index that pay the highest dividends. Another investment that I think shows good passive income potential is the SPDR S&P/ASX 200 Listed Property Fund (SLF), which in an ETF you can buy on the ASX. As of Christmas 2009, SLF has a 8.03 per cent dividend yield.

Ultimately, dividend investing is an inexact science as it is difficult to predict how dividends will change over time, so it is up to you to select the best investments. The two products I recommend above are just recommendations for those who don't know where to start. They are products that I use myself.

I have about 20,000 units in the High Yield Fund. The graph below shows the historical distribution payments from High Yield Fund if you had 20,000 units in it. The horizontal axis shows the date, the vertical axis is in Australian dollars, the blue line shows the distribution payment, and the red line shows the 12-month moving average of distribution payment.

As you can see, about 30% of the time the fund does not pay a distribution. The 12-month moving average suggests that on average the distirbutions are fairly stable. It would seem reasonable to live off this income stream. There are a few spikes, suggesting that some years there are windfall profits to companies.

According to my estimates, my passive income at the moment is about $254 per month, so I am about halfway to being able to live off passive income. At the moment I am investing 80% of my pay, which I think is the most I can handle without suffering immense pain. I think an individual should save up at least 50 per cent of his pay initially and, when he is comfortable, be more ambitious and slowly increase that savings rate higher if he can till it is, say, 70 or 80 per cent. This way you can most quickly get yourself into a position where you can live off dividends. If you are not living off dividends, you are a slave, and what is the best thing for a slave to do? Escape.

28 December 2009

Outcomes-Focused Thrift

Many people who save money save in different ways. I notice that Trent over at The Simple Dollar has a collection of tactics that he uses, for example, how to make your own laundry detergent. Even Ramit from I Will Teach You To Be Rich has what he calls the Scrooge Strategy that is essentially just a collection of tactics on how to save money, so it is really no different to the other tactics out there. What distinguishes Scrooge Strategy from others is that Ramit claims that you should focus on cutting costs on things you do not like, e.g. credit card bills, but you should spend extravagantly on things you love, e.g. if you love latte or buying wristwatches. A few days ago I spoke about a friend at work who tries to save money by never buying items at retail price. She always went for discounts (see Beware of Christmas Discounts).

All these people are inputs-focused. They focus on a collection of methods that, when implemented, is expected to save them money. I do things differently. Instead of focusing on how to save money, I initially set myself a goal of saving at least 80 per cent of my take-home pay. That is, every payday I log into my bank account and save 80 per cent of whatever came from my employer. I then try to live on what is left. If I can, that is great. I may even consider increasing the savings rate to, say, 85 per cent and seeing what happens. However, after increasing the savings rate bit-by-bit for a while, you will inevitably notice that you reach a point where you just cannot save any more. This happens when you start to pay on things using credit card and when payday comes you find that after you have paid off your credit card bill you can not longer afford to save 80 per cent of your take-home pay.

If you do not save 80 per cent in one pay period, then simply make up for it by saving more in the next pay period so that the net effect is that you save 80 per cent. To do this you create a speadsheet to track how much you undersave and then make sure that you oversave. Below is a chart that I use to track whether I am reaching my savings target. As you can see, I have undersaved by about $500, which tells me that I will need to be super frugal for a while to make up for this lack of savings. When I am in a super frugal state, I tend to question everything I buy.

An outcomes focus acknowledges that your objective is to save money and you focus on a metric that matches exactly what your objective is. This I believe is better that an inputs focus that can cause you to forget what your objective is. For example, if you focus so much on only buying discounted items, you may end up buying so many that even if each product is 50 per cent off you end up still paying heaps in total and not saving much money at all.

27 December 2009

Index Funds Are Overrated

Virtually every single personal finance blog or book I read claims that index funds are the solution to all your money problems. Simply invest in an index fund and you will be rich.

Normally what happens is the person recommending index funds will claim that investing in passively managed funds is cheaper and less risky than investing in actively managed funds.

I think that index funds can be great (I use them myself) but there are many misconceptions people get from the index buy-and-holders that I feel I should warn you about.

1. Is the index diversified?

Many people say that investing in a single company is risky because that company could collapse. They then recommend you invest in a fund that tracks the S&P500 index. But the S&P500 index tracks the performance of only American companies. How can you be properly diversifying if you invest in companies that are headquartered in one country and there are hundreds of other countries whose companies you can invest in? What if national tax laws negatively affect American companies? What if the American economy simply collapsed?

2. Holding for the long run does not guarantee gain.

Many people say that if you buy-and-hold for the long run you will reduce risk. This is not true. There is no solid evidence for this. The companies that sell you mutual funds know they cannot give this guarantee so they tempt you by showing you long-run charts showing their investments going up over the long run to give you the impression that in the long run it will go up, but when you read carefully their contracts they always say, "Past performance is no indicator of long-term performance."

The reality is that perpetually rising index performance is dependent on perpetually rising company profits and perpetually rising company profits depend on perpetual technological innovation. How can perpetual technological innovation be guaranteed?

Many buy-and-holders often concede this, saying that of course there is risk in investing for the long term. But then they often say that they have incredible faith in business, in capitalism, in America, or whatever. Warren Buffett's line is, "It never pays to bet against America." I don't disagree with this. I think you should invest in whatever investments you strongly believe are undervalued. However, buy-and-hold indexers are not supposed to believe this. They are supposed to believe not in stock selection but in diversification. That is why they prefer indexing as opposed to selecting specific stocks. Likewise, if you want to diversify over time you cannot be a buy-and-holder because by doing so you bet on long-term success as opposed to short-term or medium-term success. If indexers believe in diversification they should diversify across time as well instead of just betting everything on the long-term performance of corporate America.

3. Laziness, not just greed, can create asset bubbles

The Great Recession of 2007-09 was triggered when the residential property market in American collapsed. Many citizens saw property values going up and up. "Property always goes up," they all said at barbecues and dinner functions. "Property doubles every seven years." "Property cannot go down." All these lies get passed around and people, driven by greed, invest in an asset based on ignorance. An asset bubble occurs when the value of an asset is above fundamental value. Price is above fundamental value if people investing in the asset are ignorant of its true value.

Just as greed can drive people to invest in poor assets, so too can laziness, which is how index funds can create asset price bubbles. Many people just lazily invest in index funds thinking it is an infallible investment. The problem has gotten worse lately as many retirement funds also invest in index funds, which mean that many average citizens invest in index funds without even knowing it. Because this investing is completely blind, prices are guaranteed not to reflect fundamental value since fundamental value requires people buy according to information about that asset and if people are lazy and just buy anyway, prices are bound to be higher than fundamental value.

This is most obvious when you look at the dividend yield of S&P500 funds. The Wikipedia article on the S&P500 dividend yield says the following:
In 1982 the dividend yield on the S&P 500 Index reached 6.7%. Over the following 16 years, the dividend yield declined to just a percentage value of 1.4% during 1998, because stock prices increased faster than dividend payments from earnings, and public company earnings increased slower than stock prices. During the 20th century, the highest growth rates for earnings and dividends over any 30-year period were 6.3% annually for dividends, and 7.8% for earnings. As of 2008, the average dividend yield is around 2%
Sure, investing in the S&P500 index fund would make sense when the yield is 6-7 per cent, but nowadays the yield is 2-3 per cent.

The chart below from Imarc.org shows how S&P500 dividend yields have gone down over time.

Now I do understand that not all indexers recommend you simply buy into a fund that tracks the S&P500 and then just leave it forever. Many now claim you should diversify into non-American stocks, into bonds, commodities, and so on. Many even recommend the Permanent Portfolio. But this is not how it used to be. I think many of the Bogleheads have become more conservative after losing so much money after the GFC.

I do think it's wise to diversify if you don't have information and you want safety, but if you're going to diversity you should diversify totally, which means more than just the S&P500. I only believe that you should totally diversify for money that you need, i.e. money you need to cover necessities like food. I believe that if you have quite a lot of money (a net worth of more than, say, $100,000) then you can afford to take on more risk, which means you should try to diversify less and, if you have time and think you're good enough, you should try to time markets or select good investments.

Excerps from I Will Teach You to Be Rich

As I have already mentioned in earlier posts, I really do like reading the I Will Teach You to Be Rich blog, but there are sone things written there that I think are puzzling.

1. Do I give in to emotion?

According to Top excuses and tactics: Why haven’t you started your own business?, Ramit is a robot who has no emotion. He acts according to reason and rationality: "I hate emotions. I tell my friends to call me an Emotional Robot because I care about the tactics, not how you feel."

However, according to Irrational but good things to buy, he claims that he loves to buy stuff that makes him feel good. What kind of robot is he?
2 things that (I think) are worth spending money on: the irrational things that make no financial sense, but you love, and anything that gives you the potential to make more money.

These are the things that you love, the ones you can’t resist. Your friends might wonder why you spend so much on them, but they make you feel good.

Maybe it’s a massage once a month, or eating out with your friends every Friday. My weakness is hot salsa and good pens. Yeah, I know.

But they make me so happy.

2. Should I buy a new car?

In Cost vs. Value: Why I Bought a New Car, Ramit goes against the mainstream personal finance rule that you should always buy a used car and uses the following rationalisation: "Sure, a new car costs more. But over the long-term, not that much more."

A new car lasts longer than an old car. A used car can be less reliable and buying one old car after another can have significant transaction costs. However, if you buy a new car and hold it for a long time, you will have to hold the car even when it is old and out-of-fashion. If you buy a 2009 car now and hold it for 30 years, by 2039 you will be driving an old bomb that's 30 years old while everyone else is driving flashy cars.

To summarize, Ramit says you should buy a new car and expect to hold it for a long time. However, he also claims in Why do delusional people think their spending will be different than other people’s? that most people underestimate the power of social influence and that you should give yourself the freedom to change your mind in the future. If you want to give yourself more options in the future, why lock yourself in by buying a new car and expecting yourself to hold it for the long run?
We like to believe we’re individual and different, but the entire field of social psychology illustrates how we mistakenly believe we’re in control of our own lives while systematically underestimating situational and social influence.
Ramit also quotes someone named Sara to back up his arguments:
To pretend you know exactly what you want now (at say, 25) for when you are 50 is the equivalent of adamantly stating when you are 5 that you hate all boys/girls and will never like them. It’s utterly ridiculous. All you can do is acknowledge that your current self cannot predict everything that will happen in your life, or everything that you will want...
If your "current self cannot predict everything that will happen in your life," how can you expect to buy a new car and hold it for the long run?

Social Influence is the Enemy of Thrift

A new personal finance blogger I am starting to read more about is Ramit Sethi. I have just been reading a blog post he has written titled 7 Lies We Tell Ourselves About Money.

One of the points he makes in this blog post is that you should not look to others as role models because most other people are failures when it comes to money. That is, if you see other people taking lots of vacations and buying luxury goods, you don't need to copy them. Ramit says the following:
Would you look at a bunch of blue whales for advice on losing weight? Then why would you look at your ordinary friends, who are making ordinary money decisions, and will end up with ordinary results — not having enough money — as role models? Refocus your financial aspirations to people you value and their conscious decisions...
Ramit has just told us not to be like everyone else. If other people buy a Mercedes, don't copy them. However, Ramit then goes on to say the complete opposite, that you should prepare yourself to be like everyone else, that you should save money based on the expectation that you will spend like everyone else.
People are delusional about what will happen in the next 10 years. For example, if you’re in your 20s, the next 10 years will bring kids, a new car, a mortgage, taxes, insurance, maintenance, travel, life insurance, medical insurance….etc.

Every day I get frustrated people who tell me they’ve implemented all my strategies, yet when I tell them the next step is to implement the Ten Year Savings Strategy — where they save for the most likely things they’ll encounter within ten years — they become oddly dismissive.
This strikes me as being contradictory. Earlier he said that you should not spend like others and then suddenly he is saying you should spend like others. Should I buy the new car or not?

As a thirfty person, of course I am not going to splash out on a new Mercedes. I'd be spending $100,000 for a car when I can easily get a car for maybe $20,000. Given that the average child costs $250,000, producing a child is monetarily equivalent to purchasing a Ferrari. If you've committed yourself to never touching luxury sports cars, why wouldn't you apply the same thrift to children?

This children-as-luxury-goods concept is something I always talk about to people. It's one of those topics of discussion that everyone loves. Whenever I tell people I plan to never get married and never have children, more often than not they tell me that I say that now because I am young, naive, stupid, or a combination of the three. According to them, I will change. What they normally say is that when they were my age they thought as I did but over time they fell in love and subsequently their whole way of thinking changed.

Ramit even says something similar to this to some degree. In the blog post Why do Delusional People Think Their Spending Will be Different Than Other People’s?, Ramit says, "We like to believe we’re individual and different, but the entire field of social psychology illustrates how we mistakenly believe we’re in control of our own lives while systematically underestimating situational and social influence." Ramit's main point, I think, is that even if you believe you won't have children, save up for it anyway because chances are you underestimate social influence and will end up having children.

I will concede that I do understand what he is talking about. I am fresh out of university and with my new full-time job I have a new group of friends who are more cashed-up than my old university friends. Already I do indeed notice how much social pressure there is, not just to wear the best clothes but also to drive a nice car, to have a beautiful wife and children, to fill your weekends with fun social activities, and so on. Being the rebel that says no to all this can be draining as I have to explain everything in detail from first principles. I am going against culture merely for the sake of saving money. To refuse to have children or buy a luxury car for monetary reasons is equivalent to walking into a wedding function naked because you want to save on the costs of clothing. You will save $100 or so from not having to buy a suit, but you pay for that with non-monetary and cultural costs, namely by incurring the emotions of shame, self-consciousness, embarrassment, and so forth.

So then what is the optimal trade-off? To what degree do we incur pain for cash? Saving money is a tool I use to gain security in the future, which in itself is something I do to achieve certain emotions since financial stability induces within me emotions like comfort and confidence. The solution then is to do what suits you. Do you value social conformity or are you willing to incur the costs of shame and embarrassment so that you can attain stability and comfort (as opposed to anxiety)? It's a dilemma because you either face shame or anxiety. If you buy a luxury car or produce children today, you reduce shame and gain pride but at the cost of comfort in the future as your loss of money creates anxiety. If you sacrifice the luxury car or children today, you feel ashamed at being such a rebel but the abnormal cash you accumulate reduces anxiety in the future and gives you comfort and stability. What is better for you depends on your preferences.

Ramit says that it is important to save up a lot because you are likely to underestimate the extent of unseen influences (such as social influence) on you. But saving up a lot is often dependent on your being able to resist social influence. Many of the big costs that we incur--buying mansions, having children, funding lavish weddings, buying expensive engagement rings, and buying luxury cars--are the result of social influence. How then can Ramit say that we should be thrifty for the sake of conforming to social influence when social influence itself is the enemy of thrift?

I haven't read too much of what Ramit has written, but based on casual observation I have a feeling that Ramit makes his living mainly by rebelling against mainstream thinking, kind of like Penelope Trunk and Jim Betts. Mainstream thinking is filled with contradiction, but knee-jerk rebellion or doing the opposite of what is mainstream will not fix that problem.

25 December 2009

Beware of Christmas Discounts

Many people spend a lot during Christmas. A friend at work told me that she was now broke because she had spent all her money while shopping. She said that in order to save money her strategy is to never buy anything at full price for the next four months. This I think is a horrible idea. What matters is not how discounted a product is. What matter is how much you save. Suppose person A purchased a widget for $100,000 and person B purchased two widgets, each for $80,000. Person B paid less than person A and received a 20% discount, but person A is better off because he spent only $100,000 in total while person B spend $160,000. I think many people are so focused on the discount that they are forget just how much they are spending in total.

I must admit I am guilty of this myself. Last Christmas I wanted to buy a suit. I went shopping with my mom and purchased a suit for $500 because it was 30% off. But what I didn't realize is that I overspent because, after checking on eBay, I learned that there are many suits out there for only about $200. The discount then is completely irrelevant. What you need to focus on is spending as little as possible.

23 December 2009

Australian Median Net Worth by Age

Source: http://www.livinginaustralia.org/Results_Income.htm

The graph above from Living in Australia shows how median household net worth changed between 2002 and 2006 for different age groups.

Couples have higher net worth growth than singles because typically single people live alone. Having children seems to have an effect on net worth. This may be because those who have children tend to buy larger houses and property prices in Australia have risen greatly recently, compensating those who buy more real estate.

Looking at household net worth I don't think is very useful as a measure of wealth. For example, if you are a young adult living with your parents, your household net worth may be high because your parents own the house plus they may have high income. But they won't necessary share this wealth with you or they may share only a small portion of it with you. What is important is wealth under your own personal control.

Below is a similar chart for Americans.

Source: http://money.cnn.com/2003/01/23/pf/millionaire/fedsurvey/index.htm

17 December 2009

Plasma TV versus Gold

Michael Pascoe wrote an article in The Age criticizing gold as an investment. In an article titled Is a Plasma TV Better than Gold?, Kris Sayce responds by saying that gold is a good investment because it is better than buying a plasma TV.

The value of your plasma TV isn't going to rise at any time, regardless of how long you own it.

Keep it for five years and you might be lucky to get back one-tenth your purchase price if you flog it on eBay. Adjusted for inflation it would probably be closer to one-twentieth the purchase price.

So why is there such a fuss about gold being in a price bubble? Sure, you can't watch your favourite soap opera on a bar of gold, but even if we look at gold as a consumer item rather than an investment item it doesn't make sense that so many professional investors and analysts and even the general public would rather not buy the stuff.

I mean, let's imagine you buy an ounce of gold at the current price of AUD$1,264.29, what do you think the worst possible outcome could be?

Could it fall to AUD$1,000? Sure it could. Could it fall to AUD$800? Why not.

And could it even fall to AUD$500? Of course it could. But we know the price of a TV is going to fall much more than that over the next five years. We know that as a fact.

Yet that doesn't stop consumers from splashing out a couple of grand on the latest 600 inch plasma.

I think what Sayce does not seem to consider is that you can get a lot of entertainment from a plasma TV whereas a bar of gold doesn't entertain you in the same way. You cannot watch a movie on a bar of gold.

I am personally not anti-gold. I think gold is a suitable element to use as an alternative currency simply because of gold's inherent physical and chemical properties, namely liquidity, scarcity, portability, and uniformity. These properties make gold very suitable as money. Paper money, I believe, is more suitable than gold mainly beause it's easy to carry around paper money (whereas carrying around a bar of gold to go shopping is not so practical). Even better is electonic money. But the problem with this type of money is that the supply is can be manipulated by government whereas gold supply depends on gold mining, which government has limited control over.

13 December 2009

Westpac Defends Rate Rise with Banana Smoothie Story

Westpac has been criticized for increasing interest rates above the Reserve Bank's rise in interest rates. In response to the criticism, the bank released an ad that explains their actions. Watch the ad at Westpac Banana Slip. The ad talks about how a storm that destroys banana crops would result in a rise in the price of banana smoothies. Likewise, the storm of the global economic crisis reduces the amount of money banks can lend and hence the price of money (interest rates) rise as well.

Many have criticized the bank's ad, saying it is patronizing. Even Kevin Rudd claims Westpac did the wrong thing and criticized the ad: "(They are) talking about people’s most basic things in life - a mortgage, an affordable mortgage, to underpin things as basic as a home."

I happen to think the ad is very good since it explains why interest rates rose very well. Kevin Rudd's claim that a mortgage is needed to underpin a basic thing like a home, but the reality is that although accomodation is a necessity, most people have gotten more home than they can afford, and that is the reason why they are complaining. If you save up, put down a large deposit, and buy a cheap home in the outer suburbs, a minor interest rate rise will have a negligible effect on you. However, if you saved up little and purchased an inner-city mansion, you really only have yourself to blame. When you sign a contract with the bank consenting to variable interest rates, that is what you do. It is silly then to complain about something you agreed to. If you don't like the volatility of variable interest rates, why did you sign up to it? It's like with any other good or service in life. If you don't like it, don't buy it.

I am also not a fan of the bailouts the government gave to banks as it rewards poor behaviour, and certainly the financial sector in Australia may be better off with greater competition, but there are other places you can get a home loan besides Westpac or the the other Big Four.

06 December 2009

Lessons from the Tiger Woods Scandal

Revelations that Tiger Woods slept with multiple other females other than his wife have tarnished the clean image that many say helped him become so wealthy doing sponsorship deals with Nike, AT&T, and so forth.

During the early days when it was revealed Tiger was involved in a car accident and was alledged to have been saved by his wife, and when none of the other females (e.g. the cocktail waitress) emerged, many people I spoke to did not believe the rumors that he was sleeping with other women. They trusted him too much. However, after the evidence came, many of these people were disappointed.

I felt very confident from the very beginning that Tiger was cheating. A man of great wealth and talent is clearly going to get a lot of attention from women, so there would have been great temptation on him to cheat. Many people criticize Tiger by saying he is stupid to have slept with such ugly cocktail waitresses when he already had a beautiful wife. I find it surprising that these people judge woman by their appearance and occupations and then proceed to criticize Tiger's moral standards.

Even though I think Elin is very beautiful, humans naturally want variety. It is the reason why we get sick of our workplace and want to go on holidays.

The Tiger scandal also makes me wonder whether marriage is safe. Everyone says that marriage is worth it if you marry the right person. They say that you know you are marrying the right person if you are in a relationship with that person for a long time, which gives you an opportunity to check him or her for suitability. However, half of all marriages end in divorce, and surely these people who committed themselves to marriage thought they were doing the right thing. Furthermore, the world trusted Tiger woods when it turned out he was unfaithful, so if it's so easy for half the married population and for Tiger fans to be deceived, why would any individual think he is immune to deception from his spouse? People underestimate the power of deception. No matter how well you think you know someone, you really just don't know how they really are inside and if hypothetically they are perfect now, you just don't know if they will change in the future. Any potential husband or wife then needs to be aware of these credence attributes of spouses. They also need to be aware that not only can their spouses change behavior but their own behavior, tastes, and expectations can change over time.

What is one to do? Charlize Theron, a very beautiful woman, is not legally married, although she claims that she is "married but not married" to Stuart Townsend. The two have agreed to act as if they were married without actually getting married, similar to a de facto relationship. Some of my friends argue that marriage is important because it communicates to other people that you are together, but why would you want to communicate to other people that you are married? If someone thinks you are still on the market and tries to hit on you, just decline if you don't want it.

Another argument for marriage is the old-age argument. It is argued that it is important to marry because you don't want to be alone when you old otherwise you will rot in an stinky nursing home all by yourself, with nobody who loves you taking care of you. But if you have a wife, the argument goes, she can look after you, and you don't have to worry about dodgy nursing homes. This argument assumes that a poor-quality nursing home is the only option you have if you don't have a wife (or husband). But like everything in life, if you are willing to pay more, you get more. With nursing homes, you can pay more for high-quality nursing homes (or retirement villages). The other problem with relying on your spouse to take care of you is that she may not do it. Who is to say that once you are sick and bed-ridden your wife won't just dump you and go off with a healthier man? Love is fickle. On the other hand, if you paid a carer to take care of you, that person has a monetary incentive to take care of you. This is a personal preference but I have much more faith in the power of monetary incentives than I do in marital love's obligations or duties. If I had the option between having a family member cook for me out of love or a restaurant cook for me for cash, I would prefer the latter, and experience tells me that restaurant meals are far better quality than family meals simply because monetary incentives bring out quality in goods and services.

28 November 2009

Investing in AREITs

When the GFC hit, Australian shares as measured by the All Ords went down from peak to trough by about 50 per cent. However, Australian real estate investment trusts (AREITs) as measured by the S&P/ASX 200 A-REIT index went down by about 80 per cent as the listed property sector in Australia was savaged.

Even though the listed property sector is very unhealthy, if you believe the sector will eventually recover, it is a good idea to start buying into the SPDR S&P/ASX 200 Listed Property Fund (code SLF on the ASX). I purchased some last week.

I have recently been reading a now-old (June 2009) Kinetic Research ETF research paper on SLF. Here are some interesting points the paper makes:

- REITs are legal structures that force companies to pay a large portion (about 90 per cent or so) of their profits as distributions to shareholders. This is great for income but may not be great for tax effectiveness.

- The forecasted yield for SLF for 2009 is 9.56 per cent. For 2010 it is 8.3 per cent.

- The forecasted PE ratio for SLF for 2009 is 10.7. For 2010 it is 11.27. Compare this with the PE ratio of the iShares MSCI BRIC ETF (another ETF I have been thinking of purchasing) of 21.12. This means SLF gives about twice the earnings for the price.

- If State Street (the company that manages the ETF) collapses, unitholders receive back the unemcumbered assets within the trusts. In the event of collapse, unitholders will receive legal title of the component shares within the ETF, i.e. they will receive 40% Westfield, 16% Stockland, and so forth.

21 November 2009

The Second Wave of the Credit Crisis

I have just read a special report that Money Morning emailed me. The report is called What Every Australian Homeowner Needs to Know Now about the Coming "Second Wave" of the Credit Crisis.

Basically here is what is says:

- Rising share prices is backed by rising productivity. "What is the productive output of a house that causes it to continue rising in value?"

- Now is the worse time to buy Australian property because prices are at historic high and interest rates are at historic lows and will soon rise.

- Normally when a price bubble bursts there is a massive runup in prices (the article calls it a "super spike") before a collapse.


Lately I feel as if I have been becoming dumb. When I talk to people I just don't say interesting things anymore. This is surprising to me because when I was in high school and during my early days of university I was considered quite smart, and I also felt very smart as well. I suspect something has happened to me since then. My guess is that my life has gotten comfortable and I have been watching a lot of television and reading a lot of junk on the internet. As such I haven't really challenged my mind much, which means my brain does not get vital exercise it needs.

The solution to this problem is to do what I used to do a lot when I was young, which is to play lots of games, especially puzzle, strategy, or tactical games. I could always go out to the computer game store and buy some of the latest games, but why would I do that when there are so many free games for download over the internet.

One free game I recommend to people is called Pingus. This is a game I highly approve. It is very addictive. I managed to win the training quite easily and then finished all the levels. Some of them were challenging. The problem is that after I won all the levels and completed everything, I wanted to play more levels but didn't know how to. I read that you can download more levels to play but the problem is that I don't know how to install these levels.

31 October 2009

Risky Business (Catalyst)

Link: Risky Business (Catalyst)

Risky Business, from the ABC science show Catalyst, shows how poor payment systems for fund managers may have incentivized managers to take high risk.

The show also explains that human behavior (and the behavior of many other animals) is influenced by biochemistry. When a man fails, cortisol is produced in his body, which causes him to become risk averse. Conversely, if a man wins, testosterone is produced in his body, which causes him to become risk loving. This may explain why stock prices moving in one direction (up or down) can be exaggerated. In a bull market, traders win money, which increases their appetite for risk, which increases stock prices even further. Conversely, in bear markets, traders lose money, which increases risk aversion, which decreases stock prices even further.

24 October 2009

Old Car or New Car?

In the United States there exist so-called lemon laws that state that if a new car you buy stuffs up a certain number of times you are legally entitled to a replacement car.

To understand why there are calls for lemon laws in Australia, read Helen Moss's submission to Consumer Affairs Victoria regarding lemon laws.

Such lemon laws were proposed for Australia in 2007 by state governments here. But today, all of a sudden, the Commonwealth government has stepped in and claimed that lemon laws are not necessary because new legislation -- the Australian Consumer Law -- will cover consumers if their cars are dodgy.

It is possible that this new national legislation will work, but there is also the possibility that going to court to fight car manufacturers won't be practical for the average person because of high costs.

That some new cars may be lemons I believe is a good reason never to buy a new car.

If you buy an old car, even if the car turns out to be a lemon, you lose less money because the car you buy is not worth as much.

Furthermore, do not think that warranties will protect you. If you buy a car and there is a fault and you bring it to the dealer for repair, the dealer has no incentive to fix the problem for you for free. They waste time and money, so they have an incentive to lie and say that there is nothing wrong with the car. However, if you have no warranty and you simply bring your car to the mechanic if there is a fault, you pay for the service and the mechanic has an incentive to fix the problem because he gets paid for the service. He will therefore likely do it and also be polite to you because he has an incentive to do so.

Before you buy a second-hand car, make sure you get it RACV tested.

Why Invest in Australian Companies?

The views expressed here are for education purposes only.

About 55% of my net worth is in Australian shares, 30% in non-Australian shares, 10% in bonds, and 5% in other assets like cash and one car.

I have heavily weighted my portfolio to Australian shares because I have a lot of faith in the future of the Australian economy. I will list below the arguments for investing in corporate Australia.

High exposure to resource companies
Concerns about government debt and money-printing in developed economies have stoked inflation fears. When people are worried about inflation, they seek refuge in assets like gold, silver, oil, copper, etc. One-third of the companies in the ASX200 index is made up of resource companies. If inflation does explode, rsource companies are able to sell their products for more, increase revenue, and hence increase dividends and stock prices.

Australian companies pay higher dividends
For the price of their stock, Australian companies tend to pay higher dividends than non-Australian companies. Thanks to the imputation credit system introduced by Paul Keating in the '90s, Australian investors are also advantaged because company profits are no longer double-taxed.

Eventually the stock market will rise
Many fund manager talk on and on about how if you hold stocks for the long run you are guaranteed to make a killing. This view has been challenged by Professor Zvi Bodie who claims that holding stocks for the long run is actually more risky than holding stocks for the short term. Professor Bodie's assertions should be taken very seriously. They suggest that most of those who rely on their superannuation (or 401(k) in America) are playing roulette with their retirement money. Let us assume that Professor Bodie is right. Let us also assume the worst-case scenario, which is that the ASX200 follows a random walk. This is in line with the idea that the stock market is a casino (as Keynes said it was) and that holding stocks for the long-term does not reduce risk. Let us also assume that the ASX200 cannot reach zero. I make this assumption because it implies that the entire Australian economy is destroyed and that civilization is no more in this country. While apocalypse in Australia is certain possible, let us assume it cannot happen. Even if we simulate the ASX200 index following a random walk and never reaching zero, eventually there must be a rally, and when this rally happens, it is a good time to sell. In reality, when humans see stock going up, they buy more stock, which pushes stocks up even further, creating an even bigger bubble. This herd mentality should ensure that if a rally does occur, it will be amplified. The difficult part is knowing when to sell, which is similar to the decision of when to walk away from the casino once you have made enough money.

27 September 2009

District 9

This post contains spoilers.

I watched District 9 yesterday. It was a good movie. If I had to give criticisms I would say that I didn’t really appreciate the gore. I also thought the ending where the hero sacrifices himself to help someone is quite clich├ęd and very similar to the ending of Blood Diamond. I was also not happy with some of the unanswered questions such as what eventually happened to the hero. I do not like it when moviemakers deliberately leave questions unanswered in order to make a film mysterious.

26 August 2009

Getting Tired of Sandwiches

I am so tired of bringing sandwiches to work. The problem is that when I eat the sandwiches at lunch, most of the components of the sandwich has already deteriorated. E.g. the salad is dry, the bread has become soggy, and the ham smells. The alternative is to eat at restaurants. The problem with this is that it often costs quite a lot to eat out and I feel guilty not saving money.

What I need is a simple-to-prepare lunch that is tasty and healthy. I am thinking of bringing to work sandwiches with Vegemite on them. I have heard that Vegemite has too much salt in it. However, the New Vegemite contains less salt and apparently it tastes better.

23 August 2009

How to Reduce Taxes with Salary Sacrifice

A great way to reduce your tax burden is to salary sacrifice into your superannuation fund. This is not for everyone because some people need to maintain high take-home pay to sustain their lifestyles. Money going into super is taxed at 15 per cent. Your income between $6,000 and $35,000 is taxed at 15 per cent. Hence it only makes sense to salary sacrifice into super once you earn over $35,000 and you're taxed at 30 per cent on each additional dollar.

To use an example, a person earning $46,000 a year can salary sacrifice $11,000 so his taxable income is $35,000. This means the maximum amount he is taxed is 15 per cent. He saves $2755 and sacrifices only about $200 to $300 per fortnight in take-home pay. Saving $2755 per year may not seem like much but if we assume this person is aged 25 and will retire in 40 years and if we also assume the super fund can give a return of 7 per cent per year then this $2755 will become $41,254 during retirement.

There is a limit to salary sacrifice. Recent changes by the Rudd Government mean that the maximum you can salary sacrifice is $50,000. Once you earn over $85,000 then you will have to think up another way of reducing tax. One possible way is negative gearing. But we'll cross that bridge when we get to it.

Some people argue that salary sacrificing your money into superannuation is a bad idea because you reduce your take-home pay and your money in super is locked up till you at 65 years old. I believe that this is only a problem for me if I urgently need the money for something, e.g. if I were unemployed or if I needed money for medical treatment. However, if you are suffering from financial hardship, you can submit a form with APRA to take money from your super fund under compassionate grounds (see Super Rules That Will Save Your Mortgage). In fact, salary sacrificing into super is a better idea if you want to protect yourself against emergencies because the amount you save on taxes will allow you to save up more quickly. If you do need to access your super for emergencies, if you have salary sacrificed, you will be able to access more money because you have saved on taxes.

Another argument someone made to me was that you are better off sacrificing the extra tax and getting money in your hands because you may be able to invest the money better yourself than rely on your super fund to do it. For example, you may believe it is a better investment to buy an investment property. But this assumes that you cannot invest in property through superannuation. You can by setting up a self-managed super fund (SMSF). Putting money into super doesn't affect the assets you invest in. The main difference between money in super and outside super is the tax treatment.

15 August 2009

Net Worth Report for July 2009

At the start of this year my net worth was about $35,000. That took many many years to save up mainly because before this year I have been studying and working in a part-time job and before that I worked casually. Add to that the global economic recession and you can see why my net worth grew very slowly for such a long time.

However, in just seven months, my net worth has almost doubled to a little under $60,000. There are two reasons for this: firstly, I have a full-time job; and secondly, the stock market has been booming since the start of this year.

Although I do have portions of my wealth allocated to non-Australian stocks and various government bonds, the vast majority of my net worth is in Australian stocks, which means that my net worth is highly dependent on the resources sector and the financial sector (the two dominant sectors of the Australian economy).

The reason why I have a lot of faith in Australian public companies is because I believe that the finance and resource sectors are very important. Resources like iron ore, natural gas, and oil are essential inputs for just about any economic activity. Withholding oil from an economy is like withholding blood from a human body. The finance sector I think is also important because it coordinates the interests of borrowers and lenders. The finance sector insures that money flows around and that it ends up at the person who needs it most, e.g. to start up a business.

Ross Gittens wrote a piece in The Age called Why China is Thriving Despite the Downturn. In it he claims that the Chinese economy has decoupled. They no longer need to export to other countries because they have sufficient domestic demand. It does not matter if the US collapses because the Chinese can buy their own products. China is not fully developed yet, so much more economic growth needs to occur if living standard will be on par with that of, say, the US. As the Chinese thrive towards a higher living standard, they will need resources from Australia to build their buildings, their roads, etc.

Poor Earphones on $30 MP3 Player

I purchased a 2GB MP3 player from Overstock Outlet. I purchased a new MP3 player because the battery in my old one is starting to die out. I have noticed this because whenever I charge the player up to the max, the battery runs out with a normal day's use. When buying MP3 players, I think it is much better to get one that has an inbuilt rechargeable lithium-ion battery rather than one that is powered by AA or AAA batteries.

Like many products from Overstock Outlet, this product is very cheap. I have not tried the actual MP3 player, but in this post I want to complain about the earphones, which I think are very poor quality. The plastic coating around the earphone wire is too hard and after normal usage the plastic starts to tear (see image below). Note the image below depicts the new earphones attached to my old MP3 player.

Buying Dumbbells Over the Internet

I have purchased a dumbbell set from Overstock Outlet. You get four dumbbells delivered to you by post. Two of them are 4 kilograms, and the other two are 2 kilograms.

These dumbbells are fairly cheap ($45 not including delivery costs), and the option of buying them over the Internet makes getting them convenient. The problem is that the handles are made of steel and feel cold and rough against your palm. This is easily fixed, however, by wrapping a piece of blank paper around those handles.

08 August 2009

High Income Households in Melbourne

Below is a map of where high income households are located in Melbourne. High-income households tend to be in the city, the inner-city, the Bayside suburbs, and the suburbs near the Yarra River.

12 July 2009

New Directions for Affordable Housing

I've been reading an ALP document called New Directions for Affordable Housing. The paper addresses the issue of housing affordability in Australia. One of the points made in the paper is that house prices are not going to come down if the government simply increases the supply of land.
There simply is no getting around the fact that the bulk of the increase in housing demand came from existing homeowners seeking "upgrades" to better houses at better addresses in well located suburbs, not for new homes in new suburbs further from town. So even if State and local governments had released new housing land much more aggressively on the periphery – and "fixed the fringes" - increased demand for well-located homes still would have been unsatisfied at the old home-price level, and most of Australia's housing-affordability problem still would be staring us in the face.
In other words, houses out in the fringes are quite cheap. The problem is that nobody wants them. The housing unaffordability problem in Australia is the result of citizens wanting the government to help them buy in premium inner-city suburbs.

Some will argue that buying land in the fringes of town is inappropriate because those who lives in these houses will need to travel a long way to get to the city. Even if houses are cheap in the outer suburbs, traveling back and forth to the city all the time to get to work will waste a lot of time and petrol. The solution to this problem is simple. When government releases land in the fringes of town, don't just zone them residential but also zone them commercial or industrial. This will allow businesses to build offices in the outer suburbs, providing jobs to nearby citizens.

I think that the housing affordability problem in Australia can be fixed by doing the following:

- get rid of urban growth boundaries to allow the supply of land to keep up with demand;
- get rid of building height restrictions to allow the supply of accommodation to quickly adjust in high-demand suburbs;
- spread out commercial and industrial zones all over the city or, alternatively, get rid of zoning rules completely; and
- get rid of transaction taxes like stamp duty to allow people to move around to locations that suit them.

27 June 2009

Why Slash Land Tax?

There is an article in The Age called Pressure to Slash Land Tax. It claims that land tax is too high and there is pressure to cut it, especially now when property prices are starting to fall.

On the State Revenue Office website there is a website that lists the 2009 land tax rates. Land tax is not a fixed amount you pay all the time. The amount you pay on land tax depends on the value of your property. If your property goes up in value, you pay more. If your property goes down in value, you pay less. Hence the requirement to slash land tax simply because property prices are falling makes little sense because land tax goes down as property prices fall.

26 June 2009

Days When People Die

I have just been to The Age and on the first page alone there is so much reference to death. Have a look at the image below, which is a screenshot of The Age website with the death-related headlines marked in red.

This is not meant to prove anything. It's just an interesting observation. The news of Michael Jackson's death seems to have overshadowed all other news. I happen to think that Michael was a great singer and dancer, and I especially liked his music when I was a child.

17 June 2009

Million Dollar Traders

I have just finished watching Million Dollar Traders on TV. Million Dollars Traders is a reality TV show in which a rich hedge fund manager gives his own money to eight novices and tries to teach these novices to trade stocks to use his own money to make more money.

I have always dreamed of quitting my normal job and trading stocks at home for a living, so I watched this program hoping to get some pointers on how I can make this dream a reality. Million Dollar Traders, however, was very disappointing because it gave me no insight into how I can become a trader.

What I found annoying about the show is that the novices were simply given a computer, a telephone, and were told to buy and sell by themselves. There seemed to be no education about when they should buy and what they should buy. Most of the time it looked like the novices were just making guesses about which stocks they needed to buy or sell. Some traders made huge losses and in order to fix this problem, instead of teaching the traders economics, fundamental analysis, or technical analysis, they resorted to things like limiting how long their lunch or coffee breaks were. They even tried to improve stock trading performance by suggesting that the traders be rude to their stock brokers over the phone.

31 May 2009

Increasing Bedtime Volatility

Above is a time series chart of when I go to bed. The date is on the horizontal axis and on the vertical axis is the hour at which I go to bed. Zero is midnight, -1 is 11:00pm, 1 is 1:00am, and so forth.

You can see from the chart that a major change in average bedtime occurred at the beginning of February 2009. This happened because I changed jobs from working part-time during the afternoon to working 9 till 5.

Normally what happens is I wake up at 6:30 in the morning on Mondays to Fridays. However, on weekends I normally stay up late, which is what causes those spikes to appear. About a week ago I went to a sleepover, and I stayed up till 5:30 in the morning for that. This explains that major spike towards the end of the chart. As you can see, I adjusted for that by going to sleep really early the following day.

What I have only just noticed from plotting the data is that the volatility of my bedtime seems to be increasing over time. My sleep is becoming more and more erratic, which may not be good for my internal body clock.

23 May 2009

Coffee at Work

In a previous blog post titled Frugality at Work, I claimed that being frugal made it difficult for me to behave normally at work. I have discussed this idea with friends, family, and strangers, and I have taken steps to address the issue.

I have noticed that many people at work bring their own lunch. The economic recession may the reason for this. There are some people who always eat out, and in order to still have lunch with them I normally eat my meal either before going out with them or after. When I go out to lunch with then I usually only drink a cup of coffee, usually a latte or a flat white (even though the two are quite similar). A cup of coffee costs about $2.80 to $3.00 per cup, increases my concentration, and provides lots of antioxidants. Normally my friends pay about $10 or $15 for a full meal, so I do save quite a lot of money by only drinking coffee. I prefer to just have a coffee at a cafe or restaurant instead of bringing my own lunch. The reason is because many restaurants or cafes actually do not allow you to bring in outside food.

Sometimes I wonder whether paying $2.80 per coffee is a good deal. You can easily make your own cup of coffee with your own machine or even just make instant coffee, and the overall cost is probably a few cents per cup. Nevertheless, I understand that I am paying not really for the coffee itself but for the atmosphere, the warmth, the environment, etc. It's also a great way to socialize rather than just staying at your desk and eating all by yourself. Walking to the restaurant or cafe gives you exercise and fresh air as well.

Losing Motivation to Exercise

The chart above shows how much aerobic exercise (on my exercise bike) I have actually done (in blue) and how much aerobic exercise I think I should be doing (in pink). I assume that I should be getting 30 minutes of exercise per day.

The chart shows that lately I have been doing very poorly and I no longer have an aerobic exercise surplus. Rather, I am in deficit, and I will need to do a lot of exercise to get back into the black.

The chart shows that in the early days when I started recording exercise data I did much more exercise than I should be doing. These were the exercise boom times. In fact, I used to weigh about 82 kilograms and now I have gone down to 72 kilograms. I am 1.82 meters tall, so that is a BMI fall from 24.8 to 21.8. I do not exercise to lose weight. In fact, I think that now I am a little bit on the skinny side, so weight loss is not something I consider.

The chart shows that this boom gave way to a recession at the start of 2009. I started working full time at February 2009 and my exercise picked up again but now you will notice that the lines aren't smooth anymore. The lines seem to resemble stairs. This occurs because, during full-time work, I only had time to exercise on the weekend, so instead of doing 30 minutes of exercise per day I would do about four hours on the weekend. Lately, however, my exercise has completely fallen flat. This latest exercise recession is nothing like the one I experienced at the beginning of 2009. This recession is seeing no growth in exercise duration whereas the recession at the beginning of 2009 saw exercise duration increasing very slowly.

02 May 2009

Vitamin D Supplements

For a long time now I have been taking Cenovis multivitamin tablets. Each one of these tablets contains 200IU of vitamin D3. I have recently read that scientists are starting to believe that 200IU per day of vitamin D (the amount recommended by the U.S. government) is not enough. Many scientists now believe that 1000IU of vitamin D3 per day should be the new recommended intake.

I began recording my vitamin intake from November last year (2008). At around April of this year (2009) I started taking pure vitamin D3 supplements (Oste-Vit-D) in addition to my normal Cenovis multivitamins. Since I take both Oste-Vit-D and Cenovis multivitamins, this means I get 1200IU of vitamin D3 per day. However, because I don't always remember to take these tablets every day, I am confident my intake of vitamin D3 will average out to about 1000IU per day from now on. My graph below confirms it. It shows how much total vitamin D3 supplements I have taken since November last year.

Many people are curious to know why I take vitamin D supplements. They tell me that spending time in the sun gives enough vitamin D. Spending time in the sun can give you vitamin D, but spending time in the sun also increases the risk of skin cancer. Many people laugh at me because I have dark skin. They claim that because I have lots of melatonin in my skin that I have lower risk of getting skin cancer. That is true. However, just as dark skin reduced the probability of getting skin cancer by blocking UV rays, it also reduces the ability the body has to synthesize vitamin D from sunlight since UV rays are necessary for vitamin D synthesis. Hence skin darkness is irrelevant.

Further Reading: Skin Color Matters in the Vitamin D Debate

25 April 2009

Big Sugar

I have just watched a documentary on Google Video called Big Sugar. I have embedded the video above.

Big Sugar talks about how important sugar is as a commodity. The documentary also looks into how sugar suppliers corrupt politicians in the United States. Also highlighted is the poor labor conditions that workers face in sugar plantations.

I have always dreamed of owning a large plantation where I could grow coffee, sugar, or some other important crop. I believe that the best way to help the poor is to give them a job. Poor people tend to be unskilled and less education, so a simple job, usually in agriculture or manufacturing, is best. How much to pay workers and how well to treat them is a tough issue. If you pay workers too little, some people may see this as unethical or cruel. If you pay workers too much, your business may no longer be profitable, which means you cannot expand the business, which means fewer people are employed.

Harry Browne's Permanent Portfolio

How should you invest your money? I'd like to talk about what I think is the best way to invest your money. It is called the permanent portfolio and it is invented by a libertarian named Harry Browne. The permanent portfolio is simple. Divide your money in the following way:

25% in cash
25% in gold
25% in government bonds
25% in stocks.

The rationale for this is that you have investments that perform well in any economic environment. Government bonds performs well during deflation, gold performs well during inflation, cash performs well during bear markets, and stocks perform well in bull markets.

When I explain to other people why this approach makes sense, I like to use a medical analogy. The discipline of medicine exists to protect people from death and pain, which are caused by diseases. In order to be healthy, an individual takes steps to immunize himself from various diseases. To immunize yourself from the flu, you take flu shots; to immunize yourself from obesity, you exercise and eat less; to immunize yourself from calcium deficiency, you drink milk; and so forth.

Investing is the same. You invest to protect yourself from death or pain from poverty. Poverty is caused by economic diseases, such as inflation and stagflation. To immunize yourself from inflation, you hold gold; to immunize yourself from deflation, you hold cash; to immunize yourself from a bear market, you hold government bonds; and so forth.

How do you move from the economic theory and actually implement this permanent portfolio in practice? Here in Australia you can buy government treasury bonds from the Reserve Bank. It may be simpler, however, to just allocate your superannuation fund in such a way so that the right amount is in fixed-interest investments, e.g. read MTAA's website about diversified fixed interest. To invest in cash, there are various funds that invest in short-term money markets, e.g. Vanguard Index Cash Plus Fund. Another alternative is to use your super fund to invest in cash or simply put your money in your bank's savings account, which at the moment is government guaranteed. Investing in stocks can be achieved easily using a mutual fund, e.g. from Vanguard or Colonial First State. You can also use ETFs if you're comfortable with it, e.g. from iShares or State Street Global Advisors. Gold is more difficult. Buying physical gold, in my opinion, is dangerous. You can buy gold certificates from the Perth Mint. Your deposit at the Perth Mint is guaranteed by the Western Australian government. Another way you can protect yourself against inflation, I think, is to buy energy and mining stocks, e.g. buy up BHP stock. Even investing in most Australian or emerging markets mutual funds, I think, gives you adequate exposure to energy and mining companies, so maybe gold is not necessary.

Frugality at Work

Last Friday, three other co-workers invited me out to lunch with them. We went to a restaurant and ate. To convince the restaurant that I was not a parasite using up their space without paying, I purchased a Coke Zero to drink with my sandwich. While I ate the sandwich, everyone else ate lasagne, chips, and lettuce purchased from the restaurant.

Even though I saved money by not buying food from the restaurant, I felt as if I was not fitting in to the organization's culture and that this might have adverse long-term effects. Everyone else had plates, cutlery, and fine food while I was eating a simple sandwich prepared from home.

This issue applies not only to the food I eat at work. I am frugal in many other ways. For example, I wear a $30 wristwatch and I have a $500 suit that's slightly too big for me but I am reluctant to change it because of the costs.

Over the weekend, in order to save money, I usually just sit at home and read things on the Internet. I also exercise. On Monday, when I return to work, co-workers usually ask me, "What did you do over the weekend?" I usually tell them I did nothing and they usually have a look of disappointment on their face. Conversations are harder to sustain when you seem like a boring person. I have thought about inventing stuff up and lying to co-workers, telling them that I go rockclimbing, bushwalking, etc. However, being a Christian I remember that the Bible says, "Lying lips are an abomination to the Lord." I therefore have to be honest.

13 April 2009

Capitalism Magazine Praises James Bond

Capitalism Magazine's article Why Do We Love James Bond? praises the character James Bond in the movie Casino Royale.

In case you're wondering why a capitalist is praising a public servant, here is one reason the author, David Gulbraa, gives: "Bond is a good guy, fighting on the side of freedom and Western values."

Capitalism Magazine supports a political ideology similar to libertarianism, which states that government interference in citizens' lives should be minimal. Government should protect the lives and property of individuals and should not be e.g. protecting them from themselves, going to war with other countries, etc. James Bond, as a character, has a license to kill, so already this is a violation of libertarian ideology. A license for one person to kill or murder also seems to go against freedom. So much for the idea that Bond fights on the side of freedom.

For anything, James Bond is the personification of socialism. He is the ultimate example of effective government interference.

If you read David's article, you'll notice that he doesn't really address this issue. Rather, he seems to be more preoccupied by the idea that the Bond character looks good, does great stunts, drives great cars, etc.

11 April 2009

Stocks Going Up?

After so many months of dismal stock performance, it looks as if things are getting better. March this year saw the All Ordinaries rise by about 17 per cent or so. Some say it's the bottom while others say it's a false dawn. Nevertheless, my net worth has increased to about $45,000. I have been receiving dividend payments into my bank account. All up I receive on average about $160 per month in dividends, which is about $5 per day. I think this is enough money to feed myself if I ever lose my job.

Losing my job is a possibility because I only started 2.5 months ago and the 3-month probationary period is almost over, which means my employer might decide to get rid of me. I am quite worried because being unemployed during an economic recession won't be easy, and even though I have enough passive income to cover my food expenses, I don't have enough passive income to put a roof over my head. If I do end up unemployed, I will have to continue living with my parents, which will be very shameful if I am unemployed because I'm sure no parent wants to be around unemployed adult children.

I think one of the worst parts about unemployment is the shame, which means that if I am to be unemployed, I would want to be in a position where I have the ability to hide myself from society. If I am able to isolate myself, there is no shame since feeling ashamed requires an audience.

Gore: Ultimate Soldier

I am so glad it is Easter! This means I get a four-day weekend. Today I downloaded the game Gore: Ultimate Soldier. The ISP iiNet allows me to download this game through their freezone, which meant I didn't pay for bandwidth costs. The game is free.

Gore is a first-person shooter. It has a single player mode as well as multiplaying capabilities online. I tried the single player mode and thought it was enjoyable. The graphics were good, the control was good, and the weapons were good. I am currently stuck at a level at the moment, so it is quite frustrating. I find that the game is quite difficult. At this level at which I am stuck, I don't seem to have enough ammo or health.

The Gamespot review for this game claims that Gore is a plain and ordinary FPS.

05 April 2009

Overcoming Status Anxiety

I have just watched episode one of Status Anxiety on Youtube. The first 10 minutes of the documentary is below. I have also provided links further below of the rest of the first episode as well as the next two episodes (episode two and episode three).

As the title suggests, the documentary is about how many people are so preoccupied with their status in society. The documentary claims that the average American does not compare himself to people like Bill Gates. Rather, they compare themselves to people like them or near them, e.g. neighbors, friends, relatives, etc. If they are doing better than people like them, they feel successful.

How successful we feel depends on what our expectations are. If we compared ourselves to Bill Gates, we will probably never be satisfied. On the other extreme, if we compare ourselves to the most unfortunate people in the world, e.g. people who live in poverty with disabilities, then the average person can always feel satisfied. Too much satisfaction can lead to gluttony and inaction. There needs to be a nice balance between the two extremes.

I do admit that when I interacting with other people in society, I too feel some status anxiety, and I suspect it's a normal human emotion. When I tell other people that sometimes I feel status anxiety, they tell me things like, "Don't worry what other people think about you." Many other people tend to believe that what others think is trivial, but many people also try hard to look good in the eyes of others, so that seems like a contradiction. Instead of downplaying the magnitude of your own vanity, I think the first step to curing status anxiety is to admit that you feel it and that you are vulnerable to it.

My expectations are fairly low. I think that all you really need in life is about A$100,000. This amount of money should be enough to cover your food and accommodation needs. I get status anxiety when I am around other people. The two areas where I am in contact with others is mainly at work and at home. At work there are those people who earn more than me, and I don't get along too well with them. I merely do what they tell me to do because they are in a more senior position. But I do get along well with people who are paid my salary. These people tend to be just like me, that is, they are in their twenties, recently graduated from university, etc.

Once I am able to save up $100,000 then this should cover my food and rent. I will then be able to live without going to work and without living with my parents. In other words, I will be independent. Being independent and having the freedom to not be around other people means that other people cannot look down upon me. Many people think that by moving away from their parents they are becoming independent. However, many of these people have jobs and because they move away from their parents to buy their own homes, they usually have mortgages they have to pay to the bank, which means that they must keep working to be able to afford these mortgage repayments. Hence by moving away from parents they are not independent but rather they have become dependent on their employment. At their place of employment they are exposed to co-workers who can then give them status anxiety.

Overcoming status anxiety then requires true independence from all social circles. You must have the ability to pull out when you notice that the social environment is giving you anxiety. I don't think that pulling out of all social circles is a good idea because social isolation can lead to other forms of anxiety.

Status Anxiety Part 1 (1 of 5) [Above]
Status Anxiety Part 1 (2 of 5)
Status Anxiety Part 1 (3 of 5)
Status Anxiety Part 1 (4 of 5)
Status Anxiety Part 1 (5 of 5)

Status Anxiety Part 2 (1 of 5)
Status Anxiety Part 2 (2 of 5)
Status Anxiety Part 2 (3 of 5)
Status Anxiety Part 2 (4 of 5)
Status Anxiety Part 2 (5 of 5)

Status Anxiety Part 3 (1 of 6)
Status Anxiety Part 3 (2 of 6)
Status Anxiety Part 3 (3 of 6)
Status Anxiety Part 3 (4 of 6)
Status Anxiety Part 3 (5 of 6)
Status Anxiety Part 3 (6 of 6)

22 March 2009

Overpopulation and Environmental Degredation

While on my exercise bike, I listed to a Counterpoint podcast called Population and Environment. In this podcast, Mark O'Connor claims that Australia is overpopulated and action needs to be taken to reduce population in Australia by reducing immigration and birth rate. I think there are problems with reducing immigration and birth rate.

If we look at carbon dioxide emissions, reducing immigration, I doubt, will have much effect on global carbon emissions. Suppose an American comes to Australia, purchases a car, and drives it. By driving he is producing pollution in the form of carbon dioxide emissions. However, had this individual stayed in America instead of coming to Australia, who is to say that this individual wouldn't have driven around in a car in America and caused the same problem? Some people, e.g. Ross Gittens, argues that people move from one place to another to better their lives, and by doing so they must increase the degree to which they pollute. For example, the individual in my example may be unemployed in America and hence he stays home and does nothing, which means he is environmentally friendly. However, once he gets a job offer in Australia, he travels here, spews jet emissions, and then spews even more carbon emissions once he drives to and from work in his car. This is a fair argument. Free immigration increases the potential for economic growth, which in turn increases pollution because trade usually involves energy consumption of some kind. However, we have now a tricky trade-off between environment and economy. Suppose that environment is more important than economy. We could achieve the same economic inefficiency simply by increasing taxes or by implementing an emissions trading scheme. Blocking immigration may even be both economically and environmentally inefficient if it blocks the transfer of knowledge and skills related to environmental productivity. For example, suppose that BHP Billiton in Australia wants to reduce emissions from its mining operations. Suppose also that in a Japanese university there is an scientist there who knows how to reduce emissions using some technology. BHP wants to hire this scientist but because immigration is banned, the scientist cannot come to Australia and BHP cannot implement green technology into its business. This means that BHP is not able to be as green as it wants to be.

O'Connor also claims that Australia ought to reduce natural population growth by getting rid of the Baby Bonus. An idea would be to introduce a tax on childbirth. I believe that lower birth rate can be achieved simply by taxing energy or by establishing an emissions trading scheme. A child costs approximately $250,000 to raise from birth till 18. When a couple wants to have a baby and believes that it has the ability to produce $250,000 over the next 18 years, the couple will have a baby. However, suppose a cap-and-trade scheme is implemented. This should raise the price of energy, which means the cost of having a baby should also increase, say, from $250,000 to $300,000. An increase in the cost of having a baby should decrease birth rate.

Applying a global tax on energy or a global emissions trading scheme will reduce carbon emissions. However, many poor people will not be able to cope with the higher costs of energy, and that is why I suggest a global redistribution system.

According to someone at Sustainable Population Australia, there are more problems that high population creates behind carbon emissions (see "Overloading Australia" Author Gets Opinion Piece in The Advertiser): "Mark pointed out that many of the environmental problems we face in Australia today - including water shortages, unaffordable housing, excessive greenhouse gas emission - are all linked to excess population."

Water shortage is not a problem. If there is a lack of water in Australia, we can simply import water (see Australia Could Import Water from Japan). Currently Australia has more than enough coal, oil, and food to feed its population, but currently about 54 per cent of Australia's exports are food, minerals, or energy. Because of global trade, shortage of food, energy, or minerals is not really an Australian problem. Rather, it is a global problem. When there is a scarcity of some good, there is a tendency for technology to improve to take advantage of the high prices from scarcity. If oil prices climb very high because of increasing scarcity, technology may improve to find alternative sources of energy. Of course, it is possible for humans to find no technology to fix problems of water and oil scarcity. It is possible, I think, for humans to live without oil, but it is not possible for humans to live without water. If there is finite water then we will have no choice but to all die. The human race will be wiped out eventually. In reality, clean water comes from rivers and streams after it has been filtered through rock, etc. Water can even be filtered using machines.

Another problem mentioned at SPA is unaffordable housing. This problem I believe is easily fixed. Suppose we have a fixed number of house and all of a sudden we have a surge in population. We have more people bidding for the same amount of houses, so obviously the price of houses goes up. This problem can easily be fixed simply by increasing the number of houses available. This can be achieved by reducing barriers that are imposed currently on property developers, including complex zoning laws, urban limits, etc. One of the reason why American property is so cheap at the moment is because there are so many houses there that have been abandoned after the 2007 residential real estate crash.

21 March 2009

China and India Cooperation Needed?

Many claim that without cooperation from China and India, global coordinated reduction in carbon dioxide emission is doomed.

It is true that China and India are large economies but the economy outside these two countries is large as well.

Suppose, say, 20% of the world's coal, petrol, and gas is in India and China. If the other 80% is subject to taxation or emissions trading then this will increase the price of energy even in China and India.

OPEC controls less than 50% of the world's oil and they have considerable influence on the price. If the rest of the world controls about 80% of the world's raw material then together they will have a lot of influence on the price, and high price is what reduces consumption and emissions.

If China and India do not cooperate, raw materials may be cheap in China and India but expensive around the rest of the world. Companies may move to China and India. However, this cannot continue forever. If the whole world depends on China and India for energy then the heavy consumption will eventually deplete resources in the two countries and then China and India will be reliant on importing energy at higher prices.

Currently China and India already have to import oil, natural gas, and coal.