1. Time
2. Experience
3. Capital
Any business needs all 3 elements in order to function.
A partnership where all the partners have lots of free time on their hands, but no capital or no expertise will not get anywhere. A business will need a sufficient amount of all 3 basic elements in order to succeed.
Therefore these are the ultimate criteria for selecting business partners in any venture.
The reality of it is that we all start out in life with little capital and little expertise. The only thing we have to offer is time. and so in the early stages of life you would look for partners who have capital and expertise but lack the time to manage the ventures.
As you grow older you gain expertise and hopefully some capital. and at the same time, you have less and less time to spare. This is when you start looking for partners who have time but lack capital or expertise.
If the partnership is rich in one of the 3 elements bringing on more partners with more of the same element will dilute the partnership and offer diminishing returns on that element provided.
so the idea is to always strike a balance, a balance that is different depending on the venture.
Tuesday, May 18, 2010
Monday, May 17, 2010
Day Trading the odds are against you
Since I have got my Interactive brokers account set up. and some free time on my hands, I was going in buy 100 shares of SU (suncor) as a permanent addition to my portfolio, This broker only charges 1$ per trade when your trading 100 share lots. so I thought I would try to day trade those 100 shares a few times just for fun. I was going to buy the shares anyway.
So over the course of the day I did 52 trades of 100 shares of SU. They added up quickly. I netted about 130$ from the trades, but after paying 52$ to the broker I ended up with approximately $80.
Okay I admit it was fun. It is clear to me that this is gambling, and since there is a 1$ fee for every trade, it is equivalent gambling at a casino where the house has an edge. The higher the commission the broker charges you the higher the house edge.
I used the strategy that there will be resistance at the $32.00 per share price since it is a round number. and the high bid size I saw in the level 2 quotes confirmed my theory. I was buying shares at 32.01 making my break even price 32.03, so I was selling the shares for 32.04 or better.
The only clear winner here was the broker. I can't even imagine how people can day trade with an account like investors edge. Even with 1 click trades and live streaming quotes and 1$ commissions your still at a disadvantage to an institutional trader.
Will I do this again? yes probably until I end up losing 100$ trying to make $1. then I can go back and read this post and say I should have listened to myself.
So over the course of the day I did 52 trades of 100 shares of SU. They added up quickly. I netted about 130$ from the trades, but after paying 52$ to the broker I ended up with approximately $80.
Okay I admit it was fun. It is clear to me that this is gambling, and since there is a 1$ fee for every trade, it is equivalent gambling at a casino where the house has an edge. The higher the commission the broker charges you the higher the house edge.
I used the strategy that there will be resistance at the $32.00 per share price since it is a round number. and the high bid size I saw in the level 2 quotes confirmed my theory. I was buying shares at 32.01 making my break even price 32.03, so I was selling the shares for 32.04 or better.
The only clear winner here was the broker. I can't even imagine how people can day trade with an account like investors edge. Even with 1 click trades and live streaming quotes and 1$ commissions your still at a disadvantage to an institutional trader.
Will I do this again? yes probably until I end up losing 100$ trying to make $1. then I can go back and read this post and say I should have listened to myself.
Thursday, May 13, 2010
GIC's do not make sence
Through out my investing career, I've only used GIC's once. I was a new immigrant to Canada. and my dad had given me some money to use for the university tuition that was due in 3 months.
In that situation I had absolutely no tolerance for risk. I had a short time frame. no income, no work visa, little investing experience and there was no way I was going to risk not being able to pay for my university tuition.
That was the first and last time I've used a GIC. This was as you can see an extremely conservative situation. and I still think it is okay to use GIC's in extreme situations like that.
Yes the G in GIC stands for guaranteed. but who is guaranteeing this money? it is the bank you are buying the GIC from and the CIDC for the first $100,000.
Now the CIDC insurance is for your total cash in all your accounts at this institution. so if you have more than 100,000 in the bank your GIC's are no longer covered by CIDC.
The good news is that banks also guarantee another type of investment. The banks Corporate bonds. If the bank does not pay you what you are owed you can force them into bankruptcy. In other words both your principal and your interest from corporate bonds are guaranteed by the same entity guaranteeing the GIC.
yet the GIC pays you much less.
Okay still not convinced that corporate bonds from say TD are just as safe as GIC's from TD?
Say you've bought a corporate bond from TD. The only way you will not get all your principal or interest is if TD goes into bankruptcy. All TD common and preferred shareholders are wiped out. TD shares are worth $0. They cannot issue more shares because no one is interested in buying the TD shares. and The government decides not to bail out TD by offering them loan guarantees or by buying mortgage backed securities from them which the bank of canada has done before during the mess of last year just in case.
Now this is unlikely but lets say it does happen. How much better off are you holding a GIC? well we are talking about a situation of total economic chaos. A situation where even holding Canadian cash is risky. A situation where your 100,000$ CDIC insured money that you got many months later from the CDIC is probably worthless. The only asset worth anything today is gold.
GIC's are a great way for banks to make money off of your money.
Put money you need for the next 3-6 months in high interest savings account.
Anything for a longer time frame into a portfolio of stocks and bonds.
Never buy a GIC for a period longer than 1 year.
In that situation I had absolutely no tolerance for risk. I had a short time frame. no income, no work visa, little investing experience and there was no way I was going to risk not being able to pay for my university tuition.
That was the first and last time I've used a GIC. This was as you can see an extremely conservative situation. and I still think it is okay to use GIC's in extreme situations like that.
Yes the G in GIC stands for guaranteed. but who is guaranteeing this money? it is the bank you are buying the GIC from and the CIDC for the first $100,000.
Now the CIDC insurance is for your total cash in all your accounts at this institution. so if you have more than 100,000 in the bank your GIC's are no longer covered by CIDC.
The good news is that banks also guarantee another type of investment. The banks Corporate bonds. If the bank does not pay you what you are owed you can force them into bankruptcy. In other words both your principal and your interest from corporate bonds are guaranteed by the same entity guaranteeing the GIC.
yet the GIC pays you much less.
Okay still not convinced that corporate bonds from say TD are just as safe as GIC's from TD?
Say you've bought a corporate bond from TD. The only way you will not get all your principal or interest is if TD goes into bankruptcy. All TD common and preferred shareholders are wiped out. TD shares are worth $0. They cannot issue more shares because no one is interested in buying the TD shares. and The government decides not to bail out TD by offering them loan guarantees or by buying mortgage backed securities from them which the bank of canada has done before during the mess of last year just in case.
Now this is unlikely but lets say it does happen. How much better off are you holding a GIC? well we are talking about a situation of total economic chaos. A situation where even holding Canadian cash is risky. A situation where your 100,000$ CDIC insured money that you got many months later from the CDIC is probably worthless. The only asset worth anything today is gold.
GIC's are a great way for banks to make money off of your money.
Put money you need for the next 3-6 months in high interest savings account.
Anything for a longer time frame into a portfolio of stocks and bonds.
Never buy a GIC for a period longer than 1 year.
Wednesday, May 12, 2010
Bears in Bulls Clothing
Investors like to see the value of their stock appreciate, sure you have made some paper money.
However many of us are still in the accumulation phase of our lives. we are net buyers of stocks. so when stocks appreciate sure our holdings go increase in value. however future investments will be more expensive therefore ultimately less profitable.
As an Investor, the best thing that can happen to you is to have low stock prices during your accumulation phase and high stock prices during your exit phase.
What you do not want is surging stock prices during your accumulation phase ending with a crash during your exit phase.
That what makes us bears in bulls clothing. we invest like bulls, by taking long positions in dividend stocks. yet at the same time your hoping the stock will not increase because your still not done buying. often when one of my holdings appreciates I'm unhappy because now can't lower my cost basis, and buying more will increase my average price.
However many of us are still in the accumulation phase of our lives. we are net buyers of stocks. so when stocks appreciate sure our holdings go increase in value. however future investments will be more expensive therefore ultimately less profitable.
As an Investor, the best thing that can happen to you is to have low stock prices during your accumulation phase and high stock prices during your exit phase.
What you do not want is surging stock prices during your accumulation phase ending with a crash during your exit phase.
That what makes us bears in bulls clothing. we invest like bulls, by taking long positions in dividend stocks. yet at the same time your hoping the stock will not increase because your still not done buying. often when one of my holdings appreciates I'm unhappy because now can't lower my cost basis, and buying more will increase my average price.
Tuesday, May 11, 2010
Good debt, bad debt, Tax Deductable debt. The Cost of Capital.
A lot of articles try to classify debt as good and bad,
If you borrow to invest it is good debt,
If you borrow to spend it is bad debt.
If you can tax deduct it, it is good debt.
If you can't tax deduct it, it is bad debt.
But I am posting this to say that the way i see it money is money the source and purpose are irrelevant. and the only number that matters is the cost of capital.
If you are at Home Depot and you are buying some construction materials, The brick buying a big screen TV or sears buying whatever it is people buy from sears. It does not matter what you are buying, it could be for consumption, it could be a vacation or it could be for investment. regardless of what you are purchasing you must use the cheapest source of funds to finance the purchase. In this case it will be the 0% don't pay for a year retail credit card these places offer.
If you are buying a car and the dealer is offering 0% financing, you take it.
Using your own cash for these situation will cost you the opportunity cost of that cash which is more than 0%.
Normalize Interest on debt then prioritize for borrowing / repayment according to cost.
Say you borrowed some money from your line of credit to invest. now the line of credit is a tax deductible 6% loan. good for you. now say your in the 35% tax bracket that would be equivalent 4.45% non deductible loan. so even though this loan is tax deductible you should still pay it off before any non deductible loan costing less than 4.45% regardless of which loan was used for what purpose.
I see capital as a stack of cards, where the cheapest sources are at the top, you use the cheapest sources first. and as you deploy more capital, you deplete the cheapest sources and so the cost of new capital gradually rises, until you reach a point where it is not worth the risk to deploy the more expensive capital.
Need money for an investment or consumption, take the top card on the stack, which is the cheapest way to pay for it.
Got some new source of funds, add it into the stack at the appropriate spot according to its cost.
Then optimize the stack as needed, moving funds from cheaper sources to pay off more expensive sources.
Good debt or bad debt is meaningless, only the cost of capital matters.
If you borrow to invest it is good debt,
If you borrow to spend it is bad debt.
If you can tax deduct it, it is good debt.
If you can't tax deduct it, it is bad debt.
But I am posting this to say that the way i see it money is money the source and purpose are irrelevant. and the only number that matters is the cost of capital.
Finance the deal at hand with the cheapest source of funds.The source is irrelevant, it could be cash or it could be a loan. The item being purchased is irrelevant, it could be a consumer item or an investment.
If you are at Home Depot and you are buying some construction materials, The brick buying a big screen TV or sears buying whatever it is people buy from sears. It does not matter what you are buying, it could be for consumption, it could be a vacation or it could be for investment. regardless of what you are purchasing you must use the cheapest source of funds to finance the purchase. In this case it will be the 0% don't pay for a year retail credit card these places offer.
If you are buying a car and the dealer is offering 0% financing, you take it.
Using your own cash for these situation will cost you the opportunity cost of that cash which is more than 0%.
Normalize Interest on debt then prioritize for borrowing / repayment according to cost.
Say you borrowed some money from your line of credit to invest. now the line of credit is a tax deductible 6% loan. good for you. now say your in the 35% tax bracket that would be equivalent 4.45% non deductible loan. so even though this loan is tax deductible you should still pay it off before any non deductible loan costing less than 4.45% regardless of which loan was used for what purpose.
I see capital as a stack of cards, where the cheapest sources are at the top, you use the cheapest sources first. and as you deploy more capital, you deplete the cheapest sources and so the cost of new capital gradually rises, until you reach a point where it is not worth the risk to deploy the more expensive capital.
Need money for an investment or consumption, take the top card on the stack, which is the cheapest way to pay for it.
Got some new source of funds, add it into the stack at the appropriate spot according to its cost.
Then optimize the stack as needed, moving funds from cheaper sources to pay off more expensive sources.
Good debt or bad debt is meaningless, only the cost of capital matters.
Wednesday, May 5, 2010
Consumption Propensity
You want to splurge on a 1,000$ all inclusive vacation to Cuba for yourself and your girlfriend.
Will you take 1,000$ out of your savings account and buy the tickets? That would make you feel guilty the entire trip now wouldn't it.
What if you have an extra 1,000$ a month from your salary that is not going to essentials? you can use it for a vacation this time instead of saving / other purchases? will you go now?
What if you collected your tax refund for 5,000$ today? yes pack your bags babe were off to Varadero.
Consumers have a different propensity to consume depending on the source of the funds.
But money is money. It should not matter where it came from. The vacation is going to cost the same no matter what.
Will you take 1,000$ out of your savings account and buy the tickets? That would make you feel guilty the entire trip now wouldn't it.
What if you have an extra 1,000$ a month from your salary that is not going to essentials? you can use it for a vacation this time instead of saving / other purchases? will you go now?
What if you collected your tax refund for 5,000$ today? yes pack your bags babe were off to Varadero.
Consumers have a different propensity to consume depending on the source of the funds.
Total Consumption = X * savings + Y * income + Z * bonusIt is easy to spend away a bonus, more difficult to spend from income, and the most difficult to dip into savings.
where X < Y < Z
But money is money. It should not matter where it came from. The vacation is going to cost the same no matter what.
Saturday, May 1, 2010
Capitalism is the Evolution of Slavery
This is not a capitalism bashing hippie post. on the contrary I am very much a Capitalist.
In the old days of slavery, The Egyptians had to use whips and chains to make sure workers did their jobs. First you have to capture the slaves somehow, hire supervisors to whip the slaves, you need a place to lock them up so they don't escape and hire guards to make sure they don't turn on you. etc etc, as you can see there is a lot of overhead associated with slavery. so in order to advance we need a more efficient system.
In the new revised system instead of a whip, there is a clock. The alarm clock wakes up the slaves from their beds, the slaves get to work on time. and do not leave until the clock lets them leave.
Instead of the slave driver slaves have their bills and mortgage, slaves work because slaves need money to pay their bills. There is no need to hire someone to whip the slaves.
There is no need for a camp to lock the slaves up, they don't try to escape because they don't even realize they are slaves. There is no place to for the slaves to escape to anyway.
The Egyptian Pharohs would be very impressed with efficiencies achieved with this updated system of slavery.
In a capitalist society it is up to you if you want to become the slave or the master. Build your capital and you become the master, don't and you become a slave.
Which role do you want to play? slave or master.
In the old days of slavery, The Egyptians had to use whips and chains to make sure workers did their jobs. First you have to capture the slaves somehow, hire supervisors to whip the slaves, you need a place to lock them up so they don't escape and hire guards to make sure they don't turn on you. etc etc, as you can see there is a lot of overhead associated with slavery. so in order to advance we need a more efficient system.
In the new revised system instead of a whip, there is a clock. The alarm clock wakes up the slaves from their beds, the slaves get to work on time. and do not leave until the clock lets them leave.
Instead of the slave driver slaves have their bills and mortgage, slaves work because slaves need money to pay their bills. There is no need to hire someone to whip the slaves.
There is no need for a camp to lock the slaves up, they don't try to escape because they don't even realize they are slaves. There is no place to for the slaves to escape to anyway.
The Egyptian Pharohs would be very impressed with efficiencies achieved with this updated system of slavery.
In a capitalist society it is up to you if you want to become the slave or the master. Build your capital and you become the master, don't and you become a slave.
Which role do you want to play? slave or master.
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