Stocks Are A Lot Less Risky Than You Think

The following is a guest post from Rob of A Rich Life. Rob is a long time reader of this blog and a prolific and passionate writer. The “RobCasts” section of his web site contains over 180 podcasts in which Rob describes the Valuation-Informed Indexing investing strategy, an approach to indexing which according to Rob greatly reduces the risks of stock investing by having investors lower their stock allocations at times of insanely dangerous valuations.

This post is one of several guest posts I am publishing while my family and I are living the good life on our family vacation in Costa Rica. I will resume publishing my original articles after the first of the year. Here is the post:

Most people have mixed feelings about stocks. They love the high return. They are not so crazy about the high risk. Stocks without risk -- that would be the middle-class investor’s dream!

The dream is available to us today. That’s my take.

There is nothing inherently risky about stocks. Many of us make stocks risky by believing crazy things about them. But it’s not fair to blame the investment class for that. That’s us. It’s our investing beliefs that make stock risky, not anything to do with the asset class itself.

When people say that stocks are risky, what they mean is that prices jump around a lot. One year you might see a 30 percent price increase. Another year you might see a 20 percent price drop. Volatility scares us. It’s because stock prices are volatile that we have come to view stocks as a risky asset class.

But you know what? The price volatility of stocks is an illusion. It’s not real. Change how you react to it and it goes away. Stop taking volatility seriously and it goes “Poof!”.

You’ve probably heard that the average return on U.S. stocks is 6.5 percent real. That’s because that’s the return justified by the productivity of the U.S. economy. When you buy a share of an index fund, what you are really buying is a share of U.S. productivity. So long as the U.S. economy remains roughly as productive as it has been for a long, long time, your reward for owning a share of an index fund is going to be a return something in the neighborhood of 6.5 percent real.

There’s no volatility in that reality, is there? You buy stocks, you get a 6.5 percent real return. Simple. Safe. Nice.

What causes us to perceive volatility where it doesn’t really exist is the newspaper and television reports that tell us that stocks are up 30 percent or down 20 percent. What if we tuned out the noise? Would that bring an end to volatility and risk? It would.

We have historical data on U.S. stock returns dating back to 1870. There’s a neat thing that happens if you work through the historical returns year by year, subtracting from the reported return to bring it back down to 6.5 percent real whenever the nominal number is higher than that and adding to the reported return whenever it is lower than that. If you take that step, you will see that stocks don’t just provide a return of 6.5 percent on average but each and every year. Yes, stocks provide the same return every year -- so long as the effect of volatility is ignored.

Volatility is not real. Volatility is an illusion. We should be making that adjustment in our returns each year. U.S. stocks have always paid a return in the neighborhood of 6.5 percent real, never more and never less.

Some will say this is crazy talk. They will point out that, if you sell stocks after they go up 30 percent, you really will obtain the higher price for them. That’s so. In this short-term sense, returns higher or lower than 6.5 percent are “real.”

However, the price that applies for a few months or a few years is immaterial to the long-term investor. So long as you have no immediate plans to sell, what practical difference does it make to you if stocks are temporarily selling for a price 30 percent higher than their true value or 20 percent lower than their true value? What matters to you is what your investment is really worth. Your investment is worth 6.5 percent more than it was worth 12 months earlier. That’s always so. Regardless of the current-day selling price.

How do I know?

I know from looking at the historical data that the stock price always returns to what it would be if stocks increased in value each year by 6.5 percent real like clockwork. Price changes that do not last are not real. Price increases greater than 6.5 percent real never last. And price changes less than 6.5 percent real never last. No matter how much crazy volatility we experience in one direction or the other, we always end up with that 6.5 percent number coming through for us in the long run.

That cannot be an accident. The reason why the 6.5 percent number always holds is that that number is the return that the productivity of the U.S. economy supports. You can count on earning 6.5 percent real from your stock investment each year. Any gains greater than that or less than that are a mirage that should be ignored for financial planning purposes.

When you see a gain of 30 percent, you should count 6.5 percent as the real gain and 23.5 percent as a mirage gain. When you see a loss of 20 percent, you should count 6.5 percent as the real gain and 26.5 percent as a mirage loss.

If you did this, volatility would disappear from your stock investing experience. You would enjoy all the benefits of owning stocks but not need to endure any of the downside. You would get gains without volatility, returns without risk. It’s the best of all worlds for the middle-class investor.

You would also come to think about stocks very, very differently than you think about stocks today. Do you remember January 2000, when stocks were selling at a price three times their fair value? Most investors continued buying stocks even at those insane prices, prices at which the chance that stocks could provide a solid long-term return were virtually nil. Those of us who see through the nonsense volatility did not make that mistake. We lowered our stock allocations dramatically when prices went to the moon and thereby avoided most of the pain of the recent price crash.

We saw something that Buy-and-Hold investors did not. We saw that stocks always provide a return of 6.5 percent real. And that, when you pay three times fair value, you are obtaining stocks with only one-third of the money you are putting out; the rest goes to buying cotton-candy nothingness. What you want to buy is stocks, not the hot air created by deceptive volatility. Learn how to see through volatility and you can obtain far higher returns at far less risk. For the first time, you will be seeing stocks as they really are, not as The Stock-Selling Industry (which spends millions promoting Buy-and-Hold Investing) wants you to see them.

The investor who gives up the belief that crazy price increases are real (any price increase beyond that justified by economic productivity is crazy) gains the ability to avoid falling into the traps that cause him to suffer crazy price drops on the other side. The way to avoid the pain of bear markets is to understand the phoniness of bull markets.

If you think 6.5 percent real is a good enough return on your investing dollar (and I sure do), you are set. Just ignore all the volatility junk and it can no longer bother you. For you stocks will carry only a fraction of the risk experienced by investors who follow the Buy-and-Hold model.

[Shadox - I agree with Rob on many things including the fact that indexing is the way to go where stocks are concerned. I also strongly disagree with him on others such as his assertion that stock investing is essentially risk free. I recently wrote a post about stock market volatility. While that particular post discussed daily price volatility, in a coming post I will try to extend the concept to the longer time horizons to which Rob is referring]

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Going Paperless With Your Financial Life

The following is a guest post by Revanche of A Gai Shan Life. It is one of several guest posts that I am publishing as my family and I are vacationing in Costa Rica. Original Shadox posts will resume after the first of the year. Here is the post:

As I dug around in my desk drawer hunting down my checkbook, I reminisced that this time two years ago there would have been no question where it was. I always had it at hand, and was constantly making notes in it. Now, *dig dig* I know where it lives, but it so rarely comes out that it gets buried way in the back. It’s a nuisance, but a startling reminder of how completely my organizational and financial system has changed in such a short period.

For the past several months, I’ve been laboriously scanning and shedding paper waste, either shredding the identity-rich documents, or using the safe junk documents as printing paper for my couponing. My filing cabinet used to be jammed tight with those thick expandable green folders, part accordion, part pronged. Oh, the paper cuts! Going paperless called for a hulking 18-lb All-in-One (my review here), but as it serves to reduce the overall clutter in my little office area I’m at peace with it. At least ten reams of paper have been removed from the system – no small beans!

I’ve always managed banking online, but integrated up to 95% of my financial life online this year. All paper statements have been canceled in favor of emailed PDFs or online access with a quick click or two on each institution’s website. Even checkwriting has gone online, thanks to ING Electric Orange, which means that I can very easily verify that payments have been made online at a moment’s notice (and given free wi-fi!). I still have the checkbook for the occasional purchase, but just carry a single check with me when it’s needed. No sense in putting the whole checkbook at risk of theft or loss.

Of course, all this automation requires a little more in the way of techie doodads for security purposes. I have a Maxtor One-Touch external hard drive where all my records are backed up and safeguarded by passwords. I highly recommend getting at least one form of back-up if you have any significant amount of data on your computer, two if you’ve converted entirely because even your back-up can become compromised or damaged.

Seven years ago, losing the contents of my old laptop was annoying, today it would be disastrous.

I’ll concede that going paperless is kind of a painful process at first, especially if you don’t care for cleaning. There are some great resources online for creating an organizational system that works for you, but I’ve found that the most effective piece of advice I could ever give to someone looking to go paperless is just get started. Pick a pile and start there.

Fabulously Broke has a unique naming convention, while I prefer to use a nesting strategy by categories, like Records > Investments > Vanguard/Treasury Direct/TradeKing > 2009 > Statements.

There are days I’m just not in the mood for it, but when a pile is starting up I’ll just grab a sheaf of papers, scan and discard them. I’ll come back, rename and file the PDFs later. It’s ok not to be perfect in the process, so long as you do a little bit regularly to keep the piles from forming.

Even with the small inconveniences like keeping track of longer lead times on sending check payments, I’d highly recommend going paperless with your records. It’s quite a lifesaver come tax-time because I’ve already organized all my tax-related receipts during the year!

[Shadox - ohhhh, if only I could bring myself to take this advice. Alpaca and I have PILES AND PILES of paper records. Alpaca in particular never throws away anything. You want to see a record of our July 1999 electric bill? She can probably dig it out for you... ]

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The American Dream

The following is a guest post by Ryan of PortfolioBalancer. This week and next I am running a number of guest posts while I am vacationing with my family in Costa Rica. I will resume posting my own original content after the first of the new year. Speaking about new years and new year resolutions, Ryan's guest post is all about making decisions and taking some action. Here goes:

You can achieve anything in this country, or by extension, anywhere. That is the American dream. The American Dream has nothing to do with homeownership. That is a nice goal, but too shortsighted to truly hold the title THE American Dream. Homeownership seems like an easy goal designed to make you relax, feeling that you have accomplished something. Well, I don’t want to relax, pacified, and neither should you. I want to see what one can accomplish in such a free society, that is my goal.

Ah, there lies the true American dream: freedom. Freedom of mobility, across the country, out of social classes, above the norm. There is a beaten path of a standard life, laid out before us. If you follow the path, and convention, you will achieve a reward of comfortable years without work in the future. But what if. . . I always wonder, inserting the financial or health catastrophe of the moment. You only live once, why not impress yourself, let go of the fears. Insure against disaster and move on. You can do anything. You never have to settle, you are never beaten. Time and action can fix all.

You are blessed, to live in a country this free. You can achieve anything, but it will not be given to you. Whatever you want your life to be, it can be. But you must take action. I can attest to the fact that many small steps over time begin to turn into something extraordinary. You simply need to persevere until the achievement becomes clear to you. Time does not stop, and the amount you have on your clock is finite. So, take a concrete step. Decide where you want to be in five years. Is this goal attainable? If not, then you must change something, or face reality. Think where you would be today if you had acted five years ago.

What effect does a one degree change in your life’s path equate to ten years out? How far apart would these two paths be at the end?

What are you afraid of? Failure? Do you think that everything always works out for everybody? You can decide on your level of commitment, but there is no limit, anything you can think of can be done. Maybe you don't have enough income to achieve your goal. How would you survive? Figure out a solution. Maybe you can build investments that produce income, so that you do not need to work, only live beneath the income level. There is a way around every obstacle, so focus on solutions not on excuses.

Reach. Turn off the T.V. and do one thing. Start with one action, one phone call, one budget. The dream is different for everyone, but each is just as relevant and as attainable. Life is a game, and there are some rules, but as long as you follow these rules you can play freely within their confines. Play.

I am nobody special, just someone inspired to attempt what this country is so proud of. Something that the masses seem so disillusioned with the possibility of attaining. Holistic freedom. I am nobody, yet I did one thing today, I wrote this post. What about you?

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Guest Post: Does Your Realtor Care About the House Price?

The following guest post is Part II in a two part superb article by Edwin Ivanauskas. Part I of the article was published yesterday. This week and next I am mostly publishing guest posts, as I am traveling with my family in the jungles, volcanoes and towns of Costa Rica. Hooray!

In part I of this post, I’ve been assuming that houses just cost a flat $200,000. Let’s take this a step further and see if it’s worthwhile for an agent to spend a lot of time getting you the best price. For this I will assume you are selling your house and you are dealing with a listing agent.

Let’s assume if the agent worked hard enough they could sell the house for 10% above its price. On a $200,000 house that would $220,000. That’s a huge difference you might say, and well… it is. But the commission for your agent on that goes from $6,000 to $6,600, still nothing to scoff at.

The trouble we run into is how much effort it would take to sell that house for $220,000. If we are going off the assumption that this agent can sell the house in 320 total hours to make $18.75 per hour, we can use that to see how many hours it is worth working to raise the price to $220,000.

With some simple math we find that if the agent worked 32 more hours to get the price up to $220,000, they will continue making $18.75 an hour. Let’s think about this for a moment, the agent already has to spend 320 hours to sell the house at $200,000; is it really realistic to spend only 32 more hours and increase the price by $20,000, netting himself $600 more in commission? I don’t think so.

In this example, there is no reason for an agent to bid up the house for the seller because it will take far more time than selling the house quickly and moving on to a new one.

Edwin, This Is Just Too Simple and Unrealistic

Wow hold on there, let me explain. I used this modeling to help illustrate how agent’s compensation can affect their incentives when it comes to selling a house. The model is extremely simplified to give a basic representation of the idea.

Some things I didn’t discuss are that an agent working like this would likely have issues growing his client base in the long term because he just uses them and discards them. Good, established agents often work closely with their clients to deal with their needs rather than to make a quick buck. These good agents also tend to become real estate brokers and have other agents working under them to expand their business and their earnings.

My Take

Given how easy it is to become a licensed agent (40-90 hours of coursework plus a certification test) you are likely to be dealing with an entry level agent, particularly if you aren’t in the market for an expensive house. You could easily have to deal with poor performance because they are incentivized to sell houses quickly rather than negotiate the price or help you spend a long time searching.

My view is that the ease of becoming an agent tends to bring in newcomers who are looking for a quick buck. These people will find that they barely get any more money by spending a lot of time helping their clients so find ways to cut corners so they can get houses sold ASAP. When buying something as big and expensive as a house, you should be forewarned that your agent may not have your interests at heart. Don’t be fooled into complacency when dealing with a real estate agent.

Do you have any stories of terrible or wonderful agents? What do you think of the simple model I’ve constructed here, is it accurate or total B.S?

[In the coming days, I will offer my own ideas based on Edwin's excellent 2-part guest post. Stay tuned. - Shadox]

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Guest Post: Is Your Real Estate Agent Out to Screw You

The following guest post is Part I in a two part superb article by Edwin Ivanauskas. Part II of the article will be published tomorrow. This week and next I am mostly publishing guest posts, as I am traveling with my family in the jungles, volcanoes and towns of Costa Rica. Hooray!

When buying or selling a house, most of us hire a real estate agent. They help us appraise the value of a house, market the house to potential buyers, help with the paperwork and assist in whatever else we might need during the sales process.

But all of this effort comes at a price, as it should. Generally the price of the house takes into account the 6% compensation for commission the real estate agents are making. This means if the house is valued at $200,000, you pay $212,000.

Dealing with agents can be quite diverse. Two of my friends who bought houses help illustrate the extremes of good and bad experiences.

One friend, Rich, used an agent who is a long time family friend and has been helping their family and friends buy and sell houses for over two decades. He gave the exact requirements to his agent and the agent worked hard to make sure those requirements were met (only showing listings which fit the criteria, showing houses whenever Rich found the time in his busy schedule, etc.). It was his first home purchase and his interaction with his real estate agent was spectacular

My other friend, let’s call him Scott, had a vastly different experience. He had very specific requirements for the house (particularly location) and gave them to his agent. Scott’s agent was an old friend who he found out was an agent and she turned out to be fairly green. She continuously sent him house listing that didn’t fit the criteria. She even attempted to get him to sign contracts that were screwing him out of money (she didn’t even read the contracts). He hired a lawyer to go over all contracts and agreements because his real estate agent was too incompetent. He ended up dropping that agent and picking up another one, which was also less than he expected.

This goes to show just how different your experience with a real estate agent can be. To help me get to the bottom of this big divide between good and bad I’m going to explore how agents get paid and how that pay structure might affect the way in which they deal with you.

How Agents Are Paid

To help me, I’m going to build a basic model to show agent commissions and how different things can affect their pay.

Let’s assume $36,000 a year is a decent starting wage for a real estate agent. Let’s also assume they are working 40 hours a week. This means they need to make $18.75 an hour to reach that wage (we will ignore taxes to make this simple). Making a few more assumptions will let us better understand what a real estate agent must do:

• The median house price is $200,000
• The commission paid is 6% total, 3% to each agent, meaning the commission is $6,000 per house

Below, I take this information and graph the hours worked on that single house and the compensation the agent makes per hour:

To make the $18.75 required, an agent must work 320 hours per house at the most. However if they spend any less time their pay increases as they can sell more houses that year.

Get Rich Quick?

Now, I’m doubtful a new agent came up with this graph for himself; he tends to use intuition to come to the same conclusion. Here are three different buying agents who have been on the job for just over a year now.

Jane sells a house about every 320 hours for $200,000; this is our baseline and holds up with our above example. Last year, Jane made $36,000. Jane spends as much time as necessary with her clients helping them pick the perfect house.

Tim has found a few things he can do to help him sell houses quicker:

• He convinces his clients that a house is the perfect price even though he knows it could be lower
• He mass mails house listings to his clients without having to spend the time making sure they are houses his clients are actually interested in
• He spends less time showing off houses and doesn’t like to work with his client’s schedule
• To top it off, he makes sure that you sign an exclusive right to sell so his clients are forced to work with him. Even if they don’t work with him, Tim gets the commission on a sale

Well, in this case Tim is being a bit more underhanded than Jane but is managing to sell houses at the same $200,000 price level but cutting out 100 hours per house. Tim is pulling in $27.27 per hour and $52,358 for the year.

Uncle Willy is the slickest son of a bitch around and has had years of experience in the used car business before moving his career to real estate. He employs the same tactics he used on cars to get people into houses as fast as he can. Uncle Willy has cut down the time he spends per house to only 100 hours. This will get them $60 an hour and $115,500 a year!

While Jane may be the one customers like dealing with the most, Willy is the one getting piles of money in commissions. Being able to cut down the amount of hours spent on each house can dramatically increase the amount of money a real estate agent gets paid.

[Stay tuned for part II of the article coming tomorrow, in which Edwin explains other financial incentives real-estate agents have to work against you. - Shadox]

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How Predictable is the Stock Market?

Is the stock market predictable or inherently unpredictable? If you believe Nassim Taleb, author of The Black Swan, trying to predict the market is not only impossible, it is also a very risky proposition. I recently finished reading this thought provoking book and a number of interesting points stuck with me. One of these key points is Taleb's claim that the stock market is "Mandelbrotian" by nature, i.e. daily returns in the market are not "normally distributed", they don't follow a neat Gauss-like distribution, where daily returns don't stray too much from the average daily return.

Taleb's claim - which I tested for myself (but more about that in a second) - is that stock returns are "scale free". While on most days returns in the market remain in a relatively tight range, once in a while, a Black Swan strikes. A Black Swan is a completely unexpected event that greatly impacts the market in unforeseen ways, resulting in dramatic up or down days. These rare but dramatic events account for a large percentage of stock market returns over the long term.

I must admit that my assumption (even though I never really articulated it) was that while on a daily basis the market can swing up or down, these swings are largely confined to a pretty narrow range that would fall more or less neatly on a normal distribution curve. Well, Taleb claims (and I checked) that this is not the case.

Those that dislike statistics can skip this next paragraph, but for the rest of you, here goes: from Yahoo! Finance, I downloaded the daily returns for the S&P500 from January 3, 1950 to December 4, 2009. Almost 60 years of data. Through the miracle of Excel, I calculated the daily returns on the S&P500 (using closing prices in each case). From this population I calculated the average daily return (0.033%) and the standard deviation (0.966%). I then proceeded to calculate the z-score for each daily return figure. I won't bore you with all the results and analysis, but here are a few eye openers:

- I found a total of 90 days in which the z-score of daily returns exceeded 4 or -4. If stock market returns are normally distributed, we would expect to see one such event every approximately 143 year...

- I also found a total of 24 days in which the z-score of daily returns exceeded 6 or -6. Once again, if stock market returns were normally distributed we would expect to see one such event every approx. 4.6 million years...

- now here's a real doozy: on October 19, 1987 the S&P fell about 20.4% which translates to a z-score of -21.2 or one event every approximately... wait for it... 10 to the power of 93 years. For the sake of comparison, the age of the universe is estimated to be approximately 14.3 times 10 to the power of 17 seconds (or about 6000 years if you choose to get your information from certain unreliable sources). Another comparison point: the number of atoms in the universe is estimated to be approximately 10 to the power of 80...

Point spectacularly made. Stock market returns are NOT normally distributed.

Now, what are the implications of this discovery and what are we to do about it? Well, to be honest with you, I don't think I have good answers to this, but I will do my best to take a crack at some sort of answer over the next couple of days. Stay tuned.

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Questions for Your 401K Plan Administrators

Not all 401K plans are created equal - some can be pretty good while others lack important features or impose ridiculous costs on participants. In my previous company I was involved in running my employer's 401K plan (read this post for that interesting story). In my current company I haven't done anything about our plan, primarily because I thought it was reasonable from the get-go, but also because I found my work as a new executive to be extremely interesting and challenging - quite frankly, I just didn't have the time. It has been almost two years since I started my current position (it's amazing how quickly time passes), and I am now thinking about pushing for some changes in our 401K plan. This week a plan representative will be coming to visit us for a "lunch and learn" session and I was planning on bringing up a few issues that I think we need to address. Here they are:

Roth 401K - my company offers only a traditional 401K plan. No Roth 401K. Given prevailing expectations that tax rates will only go up in the coming decades, being able to squirrel away retirement savings without having any future tax liability is a pretty attractive proposition. Alpaca and I "make too much money" to invest in a ROTH-IRA, but participation in a ROTH-401K has no income caps. The mission: get my company to adopt a ROTH-401K option.

Expenses - as far as I can tell, Fidelity has been pretty above board with their disclosure of plan expenses. Checking my 401K account the other day, I was able to find a line that stated very clearly a charge of $30 for plan expenses in 2009. Obviously, this charge is on top of any expenses charged by the mutual funds themselves. Nevertheless, 401K plans are renowned for having all kinds of hidden fees and charges. In my former company even the 401K committee (of which I was a member) did not have clear information about what our employees were paying in fees. We were simply unable to get that data from our plan provider. Fees are a major scourge of the long term investor. They can quietly leech away returns without a lot of evidence that this is happening. The mission: get full disclosure of plan fees.

Index Funds - most of my 401K money (70% of my allocation) is directed towards Fidelity's excellent total market index fund, with an expense ratio of only 0.1%. However, this is the only index fund available in the plan. International index? Nope. Bond index? Niet. REIT index? Better luck next time. Once again, it goes back to the issue of expenses. I don't believe that fund managers can beat their benchmark indexes in the long run, and if that is the case, why should I pay them for the disservice they are doing to me? The mission: Let's have more index funds and fewer fees.

Automatic Re-balancing - Fidelity offers automatic re-balancing of plan funds, but it only allows this on an annual basis. I re-balance my funds quarterly (I think it's particularly important after such dramatic asset price increases as we've had in recent months), but I need to do this manually. The mission: can we have quarterly automatic re-balancing options?

Opt-Out Enrollment - I am a big believer in the concept that employers need to nudge employees to make the best long term decisions. Automatically enrolling people in the 401K plan unless they opt out is a great way to send a signal to people that they should be thinking about saving for their retirement.

My company's 401K plan is run by Fidelity and overall, I am very happy with the plan. Documentation is plentiful and simple to understand, the website is easily accessible and manageable, and fund choices (for the most part) are reasonable. Still, there is always room for improvement.

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Guest Posters Wanted

For the holidays this year the family and I are going to Costa Rica for 10 days. Insanely expensive, but I am told that we only live once, so what the hell, right?

Anyway, while we are gone, I would hate for Money and Such to go completely dark, so I am opening the floor to anyone who would like to write a guest post on this blog. Of course, I reserve the right to accept, reject or edit submissions. Your post can include links to your own site or other external sites (all within reason). I will not be accepting any commercial posts.

If you have an idea for a post which is somehow related to personal finance, I would love to hear from you. Send me an email to shadox1 at the domain name gmail.com.

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The Benefits of Unhappiness

Last week I hosted an important customer visit for the entire week. This extended visit allowed me to get to know my customers well and to also chat with them about non-business issues. One day, one of my visitors told me how a few years ago he had to do a biopsy to rule-out the possibility of lymphoma. Happily, the biopsy came back negative, but for the few days he was waiting for the results, my customer was understandably freaking out. This experience changed his world view, at least for a little while. He realized that every day he was able to get out of bed was a gift to be cherished. However, after a while this new found perspective wore-off and he reverted his old, stressed and busy self.

So what?

Humans can't go-around being thankful and happy all the time. That's contrary to our basic nature. It's not a bad thing. In fact, I would argue that it's a pretty good thing. You can't go about your daily business, constantly being aware of your mortality and of your fragility. That way lies madness and depression. What makes us function as humans is our ability to ignore the inevitable. What makes us better as a society (and as a species) is the fact that we refuse to be happy with what we have. We must have more. It is in our nature to strive.

If we were all happy with what we have, we would all still be living in caves, subsisting off of random berries and spearing antelopes for dinner. Hey, I like living in a house. In fact, I like my own house, but that doesn't mean that I don't want a bigger and better one. I enjoy my work, but that doesn't mean that I will be satisfied with it forever. I am happy with who I am and what I have learned over the years, but that doesn't stop me from wishing for more knowledge and more learning. What's wrong with that?

Of course, as in everything else, moderation is needed. Being constantly thankful that you are not dying of cancer will make you a very strange person. Constantly obsessing that you don't make enough money will make you a very unhappy (and probably unpleasant) person. A moderate level of dissatisfaction is a good thing. It has many names, two of which are ambition and aspiration.

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How to be a Millionaire... Not!

Every personal finance, business and self help shelf in your local book store is filled with books that offer to tell you the secrets of how to become [insert desirable attribute here]. Good to Great offers to unlock the secrets of how to build the next great company; The Millionaire Mind promises to teach you to think like a millionaire, and so on and so on. I would like to direct your attention to another book I recently finished reading, called The Black Swan. I must admit that The Black Swan is written in a rather annoying way, but it contains a number of highly valuable concepts and ideas. One such concept, "looking at the graveyard", does a lot to discredit a vast range of self-help and "instant insight" books.

To understand this concept, let's discuss a non-existent book whose ambition is to teach readers how to become rich by looking at millionaires and identifying the characteristics that all of these individuals share. Let's say the author does a great job of collecting and sorting through information and comes up with a list of three critical attributes shared by all of these individuals: frugality, education and generosity. One of the points Nassim Taleb makes in The Black Swan is that this information is insufficient to draw the conclusion that the way to become a millionaire is to be frugal, educated and generous. Why? Taleb explains that to validate your theory, you would need to look at the population of non-millionaires and make sure that it does not contain a large percentage of individuals who share the exact same attribute, i.e. look at the population of "failed experiments" that does not support your theory. Taleb points out that people rarely do this - for example in trying to identify what made a certain company successful they fail to look at all the companies who did the exact same thing and failed miserably...

That's not to say that in my example above frugality is not a worthwhile pursuit. All I am saying is that in that hypothetical experiment the data collected is not sufficient to draw the conclusion that if you are frugal you will become wealthy. There are plenty of frugal people who never become rich.

So what's Taleb's point? Unfortunately his conclusion is somewhat discouraging. His book is primarily about the role that luck plays in the outcome of the game of life. We all like to think that we control our destiny, but Taleb points out that the real control we exercise is very limited... a sobering thoughts.

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A New Job for Alpaca

After about 7 months of unemployment - and just after she received her final unemployment check - Alpaca has landed a new job. I sort of let the cat out of the bag in a twitter posting last week, but now it's official, today she received and signed the offer. This is a very welcome development. The current job market is nothing short of demoralizing for job seekers. Jobs are few and far between, but at least in our case the story has a happy ending.

A few interesting pieces of information to share about this new job. First, the compensation package is a good one. Alpaca's salary will actually be about 10% higher than in her last full time position (which was over a year ago). Given the rotten job market, I was mentally bracing for a pay cut.

The company she will be joining is a public one, and they offer a range of benefits, including an employee stock purchase plan (ESPP). For those who are unfamiliar with the term, an ESPP is a program by which employees can purchase company stock for a discount - typically 15% - without any obligation to hold onto the stock. Previously when Alpaca participated in such plans, we sold the shares immediately after they were purchased, in essence getting a 15% boost on the amount invested. I am all for immediate and guaranteed returns... who isn't? We plan to use the same strategy.

Also, while my start-up offers medical coverage for my family, the cost of this coverage to me is about $200 per pay period or $400 a month. Being able to remove Alpaca from this plan will save us some cash, and depending on the cost of insuring the kids through Alpaca's company, there may be some additional savings possible.

Another interesting thing about this job: Alpaca landed it through... wait for it... an online job posting. No networking involved whatsoever. After all my talk and preaching about networking, it turns out that the lowly and much maligned online job board can actually help you land a job. Who would have thunk it? To be fair, Alpaca did a lot of networking, and even I was able to land a hand on a small number of occasions, helping her get some interviews. In the end, the swing that connected was a random job post response. It just goes to show you, in your search for a job you have to fire with every gun in your arsenal, and not rule out any options in advance.

Alpaca's first day of work is this Thursday. She is reporting a lot of nervousness about getting back to work and about having to prove herself in a brand new place. I can report that my stress level has gone down dramatically. While my company is financially solid for a few more months, we are a start-up, and are always reliant on fund raising to finance our operations. There are never guarantees that our investors will pony up the cash. Now, at least, the prospect of both my wife and I being unemployed simultaneously, seems to be more remote. Happy, happy, joy, joy!

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