obadobadope-2016-01-07-00:36:19.html

"He said they've already got one."

Our minds are the most powerful processors on earth.  Our selves are the most advanced operating systems and programs.  Our bodies are the inputs, outputs, displays, and wiring.  And all of this, making up us, is the user, the reason why.  We are one computer, wirelessly connected to the internet, and the rest of reality is the internet.

Update

GE released a statement today that they plan to increase their earnings and dividends in 2011.  Big surprise.  Not to me.  But the rest of the market thought this was worthy of a 5% price increase - and it's about time.  I thought GE would have been back to $20 a share by 6 months ago, but I'm overly realistic.

Things are going well with investment returns and continued savings.  Spending is still unchanged at about $8500 a year, maybe even a few hundred less.  I haven't been keeping track of spending, but I think my frugality has slowly gained momentum just based on the continued gentle intention to save.  Still planning an increase in consumption (on housing) after my current living situation runs out in a few months.  Hopefully that expense will be offset by a raise following the end of my training period at my new position.

Portfolio is doing well in 2010.  Up about 14% versus about 4 to 5% for the major indexes.  Value is up to $47K as of today, so it's been a quick start to the year.  Still got a long way to go though.

Data harvesting is inching along.  Have harvested about 400 companies out of 2900, and now have the data into spreadsheets (the next stage) for about 20.  Of those 20, GE is the clear pick for best cheapest company, even after its run up today.  And the big oil companies also seem cheap (but they always are, which I don't yet understand).

Yoga practices are also going well, according to the practices outlined at aypsite.org which I'd recommend as a yoga starter for anybody.

Robert Shiller Data

http://www.econ.yale.edu/~shiller/data.htm
Historical data on the S&P from 1870 to present.

Go to "long term stock, bond, interest rate, and consumption data."  If you change the data type from "general" to "number" and adjust the decimal placings, it becomes a lot easier to read.  I think I will just let this incredible data speak for itself.  I may compile my favorite parts into a graph and post them here in the next few days.

Consumption Down - $21 per day

Old readers might remember that last year I tracked my daily consumption for 5 months to figure out where I was at, and to systematically lower it.  Then I stopped because it was so tedious.  Well, I just calculated my consumption year to date in about 5 minutes.  And I can update it once a month in about 2 minutes.  How?

Since I only care about absolute consumption, I don't categorize any expenses.  And since I also receive all my pay checks into one bank account, I can reason that any consumption will have come from that account.  So, I can just track any withdrawals from that account that aren't investments, and put them on a consumption chart in chunks.  Rather than getting a day by day account of my expenditures, I will be getting an account of all my withdrawals that were used for expenditures.  In the long run (longer than a month or two) this will give me the same daily average consumption figures.  All of this is made very simple with online banking account registers.

There is a double counting of the change I receive back from transactions.  Usually I save it up in a jar and use it for laundry, and eventually deposit it back to the bank.  I can fix this in one of two ways.  I could either spend the change off from time to time and annoy the hell out of some cashiers.  Or I could just make a mental note to put in a negative entry on my consumption data when I deposit the change at the bank, since it's already been counted as spent.

Now to the good news.  After compiling the data from my bank account, year to date, my daily consumption is at an average of $20.94 which equates to $7665 per year.  I knew I had made some gains in this department , but I didn't think it was that much.  There may be other factors at work.  One possibility is a seasonal factor - less active in the winter time could mean less consumption.  I think I spend less on food in the summer because I can bike the few miles to the cheaper grocery store (probably saves a dollar or two per day).  And another possibility is that 2.5 months of data isn't very much and this could just be a randomly favorable period with low expenses.  I believe that I'm spending less than last time I kept track in at least a couple departments.  Drugs and alcohol consumption is down noticeably, and eating out is down noticeably.  One other explanation could be that I moved during my last check on consumption, so moving expenses could have pushed my average up to $8500/yr over that period.

I'm glad to have an easily tracked consumption chart up and running again!  And hopefully more gains to come in this area.  Perhaps I can gain the option to retire much earlier now if I can keep consumption going downward.  Passive income using a 4% withdrawal rate is at least $1900 right now, or about $5.20 per day.  And as I mentioned in a recent post, I'd like to think that my look through earnings (looking through rosy glasses) are about $4500, or $12 per day, and I only need to wait for the market to revalue those earnings more appropriately before I can withdraw from the capital base.  Consumption is at $7665 or $21 per day.  Meet somewhere in the middle?

Historical S&P P/E Ratios from Shiller Data

Here is a graph of the S&P's composite P/E ratio from 1870 to 2009 compiled from the Robert Shiller data link I posted a few days ago.  Robert Shiller is or was (I think) an economics professor at Yale University.  To me, he is famous for compiling this S&P data.  He's also the Shiller from the "Case-Shiller Home Price Index" that you may occasionally hear about.  You can find the data any time by Googling "Shiller data" and it will be the first search result, from Yale's Econ site.  I may post more graphs from this data set soon.  Click on the graph to enlarge it.

The data suggests we have just crossed a "peak" of incredible "irrational exuberance" (Shiller's book title) and are now on the downward slope toward a "valley" which we should reach around 2020.  From a different graph I compiled from the same data file, it also suggests that normalized S&P earnings for 2010 would be about $45 to $50 per unit of the index (with a very strong indication that this is an accurate assumption - I.E. low variance).  Using that normalized value, it implies a P/E of 24 currently, which is right at the level of historical peaks prior to the 2000 peak.  It also implies a historically average P/E of about 15 during last years "crash" in March.  So, not only does it appear we are on the downward slope, but we may have a long way to go to the bottom.  This is partially because of how high of a peak we were just on, with P/E's reaching up into the 40's at a composite level.  So, it seems there is further revaluation to occur, whether it be a crash, or a several years long period of little to no growth in prices.  For my own personal finance journey, I see great news from this graph.  It means there is a high probability that during my saving and investing over the next 5-20 years, I will be buying into a valley.  Note that I will be buying anyway, no matter what (maybe I'd sell given this data, if the indexes made a quick run back up to 2007 levels, but it would have to be pretty quick here).  Because to me, capital accumulation at any price is a strictly dominant strategy for a worker.  Its value is near infinite to me until I have the option not to work.  I also believe there are undervalued buying opportunities (or even just appropriately priced companies) even if the composite is overpriced.  They're just harder to find.  This graph also means that when I do choose to stop working, that it will probably be near a periodic valley, and my withdrawals will be unlikely to damage my capital base which is a danger during some periods.  For example, retiring in the 1999 peak with a borderline withdrawal rate would not have worked.  People who did that are now having to go back to work or lower their consumption as their withdrawal rates creep upward and eat into the capital base.  I won't have that problem if I retire around a valley.  And I also probably wouldn't use a borderline withdrawal rate.

Early Investing Mistakes

I've been investing now for about 9 years, buying individual stocks.  People would call me a "value investor" because I pay attention to value.  But really, that's just common sense.  Here are some of my earliest and dumbest mistakes.

Trying to get rich quick
As in make a million by finding a way to constantly be doubling my money once every 3 months on crappy companies.  I liken this to the fantasy of the idea of finding the perfect bet in a casino, as if you could predict which machine is about to pay out with a clairvoyance.  Doesn't work this way.  Most penny stocks (under $1 per share lets' say) are trash because they have recently gone through at least a tenfold decrease in price, which is related to value.  So there's a high probability that value has just undergone at least a tenfold decrease as well.  And stocks that are consistently losing value are bad investments.  Value investors want stocks that are consistently increasing in value.  Don't buy a broken business in the stock market - you have no power to fix it up.

Ignoring transaction fees
TDAmeritrade charges $10 per trade.  When I first started out I didn't have a lot of money, so I would buy in chunks of $300-2000, depending on how reckless I was being at the time.  Those $300 dollar moves were a waste.  Try to keep transaction size high enough that fees are 1% or less.  Even if it means having to save for a while to make a purchase.  Make quality buys that you can hold a long time to reduce transaction fees when you're starting out.

Juggling
Not holding on to a company long enough.  Juggling is another form of trying to get rich quick.  During the early stages of investing, there is a period when we only have 1 investment.  Then 2 investments.  If it's value investing in the stock market, then it means there's going to be a period when we're not diversified.  It's important to move beyond this stage as quickly as possible, so that all the eggs are no longer in one basket.  But an early mistake of mine was to keep only 1 or 2 eggs, and move them around (almost randomly) between baskets.  Find some good stocks and stick with them for your first few buys.  Create a core holding of solid companies that you can add to.  Take the time to own a company for the long term instead of juggling between ticker symbols.

Gambling
This has to do with the attitude, and the reason for investing.  When I started out I was gambling.  Once I got wiser, I was accumulating capital.  Adding on to a core, growing foundation of capital.  Buying assets for the long term and just keeping them, and adding on to them consistently.  That's the ticket.  I was trying to make a longshot bet, so that (in my mind at the time) I could afford to move my money into safer assets then.  This was a messed up way of thinking about it.  The right way to do it is to start with a foundation of safe, solid companies.  That's the core allocation of assets.  The bulk of the capital should be solid.  Then the fringes can be longshot bets.

Buying unknowns
I thought of myself as quite the intelligent investor back in the day.  And I thought I could find the most undervalued stock, and buy it at the perfect time, and make tenfold, and then do it again.  There are about 10,000 legitimate investment options for publicly traded companies of appreciable size.  A beginning investor has only a fractional awareness of this whole, and hasn't even heard of 95% of the companies.  Don't try too hard.  Don't go looking for that sweet company you've never heard of before - at least not for your first few investments.  Take a pass on that Chinese start up and buy buy solid companies that you know.  Literally.  Make a list of companies that you know that you think are good companies.  Fill the list with companies that you support with your own money and consumption on a regular basis.  Pay attention to the labels on the things that you buy and find out what companies make them.  Then do some basic analysis of the fundamentals to make sure it's a profitable company, and then just buy them and hold them until you get a firmer grasp of evaluating companies you've never heard of before.  In other words, build your core first few investments with companies you know and understand.  Be an investor first.  And then learn to be a value investor.  Who cares if you bought these first companies at the perfect time and perfect value?  If you stick with this value investing thing, try some fancy stuff once you have a few solid bets down.

Trying too hard
There are lots of stats, numbers, and methods to learn when starting out evaluating companies.  I focused too much on the numbers, and not enough on the obvious.  Ask obvious questions.  Is this company profitable?  Is it growing over the long term?  Cover the basics before you get fancy.

Short term dreams
Finally, being a hurry - big mistake.  I kept thinking short term pay day.  Gambler mentality.  Double up my money and cash out so I can spend it.  Or try to continuously double up to 1.25 million.  Time is on your side if you start young.  Don't invest money unless you don't plan on getting it back.  That's my honest advice.  If you can't permanently give this money to your capital base, and take the risk that it will never pay out ever, then don't do it.  If you do choose to invest, leave that money in investments until the day it pays all your expenses.  Otherwise it's just delayed consumption.  And if that's all you're after, let me tell you - you can save a lot of time, effort, and probably money too, by just spending your money right now instead of investing.  I used to cash out.  Now I only make deposits to the investing account, and it keeps snowballing.  Bets take years to play out in the stock market.  Sometimes decades.  It wouldn't be at all uncommon to buy a solid company, hold it for ten years, and have the stock price be the exact same as when you bought it.  Then the next ten years it may grow ten fold.  Be prepared to wait decades.

Game Theory and Worker Investors

Capital is a desirable thing.  It is the accumulation of excess.  Having it is better than not having it, in nearly every way, and most of the other ways are equal.  For the purposes here, having capital is a weakly dominant strategy.  If you have capital, at the very least you could give it all away and not have capital, so weakly dominant.  In my opinion, it ranks very high in importance.  To a worker, its value is measurable in time as well as money.  Capital has diminishing returns beyond the point of getting back all of the time spent working.  But up to that point it might as well be right up there with food, water, air, and shelter.  Up to that point it is literally worth 1/3rd of my waking life, which is currently spent as a worker.  In many ways, the modern wage earner is an indentured servant, to a corporate task master, bonded by debt.  The sooner this bond is paid off, the better.

With that in place, it makes sense for the worker to buy capital with every free dollar.  Capital is the only currency the corporate task master will accept for payment of the debt.  So, it makes sense to buy capital at the going rate, almost at any price offered.  Any amount is better than none.  The worker isn't using the extra money for anything else (my personal opinion).  What price is too much for time?

The above is directly related to my thoughts on attempting to time the market for the best times to buy and sell.  If a stock is underpriced, it is appropriate to buy it.  If a stock is appropriately priced, it is appropriate to buy it.  If a stock is overpriced, it MIGHT still be appropriate to buy it.  But finally the two other actions also become appropriate.  It could also be appropriate to not buy it.  And it could also be appropriate to even sell it.

So, imagine there is a continuum of price for capital (measured in expected return rate and variance, by the way).  At the lowest prices, the outcome is buy.  At medium prices, outcome is buy.  At high prices, outcome is buy.  At even higher prices, outcome is not buy.  At highest prices, outcome is sell.  It is almost never correct for a worker to sell a good underlying company.  I have never yet been a non-worker, but I imagine the correct sell barrier is only very slightly lower for these people.  It is almost never correct to sell based on pricing, period.  It is an interruption of ownership.  Cardinal slip.  It generates taxes, and exposes the capital to risk of not being reinvested in a good company.  Note, it can still be correct to sell at any time if the company is not a quality company, or if its quality decreases.  For non-workers (investment income already paying for free time), the barrier between buy and not buy is significantly lower than for workers.  It makes sense for non-workers to buy only when the capital is selling cheaper than the historical average return rate.  Timing the market is the business of the already paid.

Awesome Data Site

http://www.data360.org/index.aspx

Another Data Site

More good charts, all in one place.
http://a-candle-in-the-dark.blogspot.com/

Here's one from the site that's pertinent to the subject matter here.
http://www.nytimes.com/interactive/2008/05/03/business/20080403_SPENDING_GRAPHIC.html

Update

Plugging away at the stock research project.  Awaiting details of a probable raise in 2 weeks.  Considering upgrading the quality of my clothing (I wear the same 3 sets of clothes all year long, they might as well be nice).  Researching housing situations (none of them are cheap enough for my liking).  Not much in the way of insights into personal finance or economics.  I'm growing out of an initial wide eyed stage of learning, and into a second stage of just doing it.  Once the basics are understood and the habits are in place, there's not much to add.  It becomes an exercise in sustained will power.

Interactive Brokers

I'm thinking of switching to Interactive Brokers from Ameritrade.  It trades publicly (Nasdaq: IBKR) and basically blows away all the competitors in commissions and margin interest rates.  TDAmeritrade's base margin rate is 7.75%, IBG's is about 1.5%.  TDAmeritrade charges $9.99 per trade.  IBG charges $0.005 per share (or roughly 50 cents per trade for an normal order).  TDAmeritrade supposedly has much better stock research tools available, but I don't need them.  All in all it would save me a few hundred dollars a year (if I continue holding a margin balance, which is questionable).  But even if I don't hold a margin balance, the fact that I may in the future use margin is a strong argument for IBG.  Anybody have any experience with them?

That is a bummer, man

Like an aging pet that eventually gets too tired to try to escape any more, I'm gradually accepting my status as a lowly worker.  The kind of freedom I wrote about in the early posts of this blog is not gained by investing alone.  It is a game of king of the hill with a hundred thousand people on each hill.  That type of freedom is taken, seized.  Freedom itself is a zero sum game.  The word freedom implies the absence of some restriction.  And that restriction is the weight of all the people standing on your face who are trying to climb to get to the top.  Some of them are willing to do much more devious and selfish things than invest the majority of their income.

The lack of posts lately has been because of this realization.  This is all small beans.  Bush league.  Money accumulation as a worker is not that important in the grand scheme.  I could write a thousand more posts about personal finance and it wouldn't do any good.  The formula is simple.  Consumption <= Income.  There just read that last sentence a thousand times for the next thousand days.

I'm accepting that I am a part of this huge team of 300 million people called the United States.  There is no better option than to accept it.  The other option is to act from a position of personal sovereignty, which would manifest in many ways, most of which would be followed shortly by near certain imprisonment and or death.  If everybody spontaneously began acting from a place of personal freedom, there would be an instantaneous massive population war resulting in depopulation.  Imagine if nobody went to work tomorrow, nobody at all in the whole world, because they didn't feel right about it, because they didn't feel free at work.  Yet all of these people will still want food, shelter, and children.  Who gets the rights to those things?  That's all a hypothetical thought exercise, but that's what I'm talking about when I say acting from a place of personal freedom.

The question now is, once I've accepted that I have no personal sovereignty, that I am not free and very likely never will be in my lifetime, what else is there?  What's the consolation prize?  What's the door prize for attending the big team dinner and clapping along?  The palliatives of domestication?  Soft things, plentiful food, good drugs, easy living, one mate and exactly 2.0 children?  I've already spent a good chunk of time as an Epicurean.  I long for something more, but it beats staring at the bars of the cage.  It will be interesting to see if the insecticization of humanity continues when fertility is controlled on a worldwide scale.  China's already doing it.  Guess who gets to have more than 1 child there?  The wealthy.  I don't know whether I hope to live to see that day or not.

Google Maps - Bicycling

I heart Google.  It's seems too good to be free, but it is.  My latest toys are under the "More" section of Google maps.  Check out bike paths laid over street maps.  Once upon a time I remember hunting the whole web for a good bike map and coming up empty handed.  And then Google also has real estate listings, including rentals.  For real estate for sale, zillow.com now has an incredible map feature too.  Thinking of relocating, or finding a cheaper living situation, that's the place to do it.

Marijuana Half Life and Dose

The half life of marijuana (THC specifically) is often quoted between 1 to 10 days, depending frequency of use, and good old variance.  Frequency of use is positively correlated with half life time.  A drug half life is the idea that substances are eliminated from the body at rates that are exponentially correlated to the amount of substance present.  I imagine there's a lot of misinformation on the subject, but I'm very confident in the wide range of 1 to 10 days.  Empirically, I would guess 2 days.  And I'll call it 2 for the rest of this post, but you can substitute whatever you think it is.

Marijuana smokers conventionally smoke way too much marijuana, given the long half life.  Myself included from time to time.  It happens because of dependency.  Which is easy to build up with the long half life - a vicious cycle.

Anyone who's a regular smoker knows that if you haven't smoked for a month, you'll get super high off one single toke.  This is because in 30 days, 15 half lives have gone by.  1 over 2 to the 15th is 1/32768.  It's incredibly difficult to have more than 32768 hits of pot in you (although it is possible because of the long half life).  After 30 days there is effectively zero THC left in the system.  Some people think it takes frequent users longer than this to sober out (as evidenced by positive drug tests) so there is something to the positive correlation between frequency and half life.  I imagine the mechanism operating like a half life until the rate of elimination maxes out at a certain level, and then the half life rises significantly - but that is a wild guess based on no medical evidence.  Lots of biological processes work like this.  Once all the enzymes (or larger mechanisms and processes of elimination) are busy, the rate caps off at a maximum.

Moving on.  My point is that regular users rarely sober out before smoking again.  A heavy smoker might smoke 64 hits per day.  At half life 2 days, they're walking around with 184 hits in them at all times.  For somebody who had never smoked before, this would be enough pot to knock them unconscious.  Not sobering up before smoking again creates a tolerance.  The sweet spot is at a level where no tolerance is built up.  At a rate of one hit per two weeks, just under 1% THC is left in the system at the next smoke.  The tolerance buildup is negligible.  The smoker will be walking around with 1.007 hits in them right after smoking, all the way down to 0.007 right before they smoke.  Here's a table, with frequency of use, and how many hits are in the system right before smoking a hit.  I'm only 99% sure on the math, but even if it's wrong, it's not by too much.

One per 14 days = 0.007
One per 12 days = 0.016
One per 10 days = 0.032
One per 8 days = 0.067
One per 6 days = 0.143
One per 4 days = 0.333
One per 2 days = 1.000
One per day = 2.412
Two per day = 5.285
Four per day = 11.049
Eight per day = 22.587
16 per day = 45.668
32 per day = 91.833
64 per day = 184.164

Add on top of that the correlation between frequency and half life, and it makes an even stronger case to stay below smoking less than once per two days.  Being that it's uncommon for somebody to smoke a single hit in a sitting, the sweet spot would be a balance between about 1 to 10 hits per session, and about 2 to 14 days between sessions.  Frequency is the dominant, exponential factor.  Amount smoked per sitting is the weaker, linear factor.  The point is, you just can't smoke every day.  Not with the long half life.  If you do, you're at least half way stoned all day every day, and probably way more than half way.  You might be 100 times stoned, and your one hit might take you only 1% higher.  Somebody who smokes a few hits per day might be the half life equivalent of somebody who drinks all day every day.  This could be why marijuana gets a bad reputation compared to alcohol and tobacco - most people who use it never come down off it.  That's just not good drug use.  This is smokey the bear, and only you can prevent tolerance.

What does value investing provide?

I'm sitting here, working on what is turning into a magnum opus of a stock market project, and wondering what it is accomplishing in the grand scheme of things.  I decided, not much, but also not nothing.  There is some value to value investing.

Market makers transact between the bid and ask prices to facilitate trade.  It has a smoothing effect on the price of transaction, which will occur between the bid and ask, rather than at the bid and ask.  Additionally, market makers compete with each other to offer the best prices to both buyers and sellers, while still turning a profit.  On aggregate, traders will tend to go with the market maker who has the best prices.  If the volume is high enough on a good, its transaction price will smoothly react to its true market value in nearly real time.

Value investing isn't so different from market making on a longer time scale. Value investors will buy when others are panic selling, and sell when everybody else wants to buy.  In other words, they are the providing the "other side of the market" at the extremes.  When there is no other bidder left, they will buy at the ask price, and vice versa.  It has a smoothing effect on long term prices of the good.  Value investors compete with each other to offer the prices closest to true long term value of a good while still being able to turn a profit.

Zooming out, value investing is providing an accurate pricing of capital service to society.  The accurate market pricing of capital would be incredibly valuable to the poorly informed, the gullable, and the easily frightened.  Imagine if it were impossible to lose everything in a stock market panic because value investors absorbed the entire crash as it was happening.  By coldly evaluating investments, deciding their worth, and then deciding whether or not buy or sell, value investors are the true agents of the efficient market hypothesis.  That is the service provided.  And it will be provided to the degree that profit is available by doing so.  So there is a balance between how efficiently a good's price will correspond to its value, and how much profit is available to be made by agents who are willing to calculate its value and transact in the good.  In the big picture, value investing will always be dominated by the underlying market forces.  That is to say, I still think truly efficient markets are a pipe dream.  Stock market crashes and peaks will still occur because, quite frankly, many people don't have, and don't want to have the time, money, and discipline to do value investing.

This is part of a much bigger, humanity wide trend of increasing efficiency.  Efficiency is valuable, and increasingly valuable in our closed system.  And where there's value, there's potential profit.  And where there's potential profit, there are agents willing to do some work.  And so back to work on the project.