P90X Results and What I Learned

So I finally finished my three month commitment to P90x and here's a final picture of my results:

All in all the whole program was amazing and was more than just a weight loss program, it was a total change in lifestyle going forward. Though the physical results I achieved through it are great, what was the most valuable aspect of the program is the mental durability you acquire. I noticed that from Day 1 you aren't just training your body, you are training your mind to a level it hasn't yet achieved. The complete transformation happens throughout the program between mind and body until by the end they match each other in leanness and durability.

I can't tell you how much the program has not only advanced my fitness a hundred fold, but the mental discipline I acquired from it will stay with me forever. I'm fully confident that nothing in the business world can break me down now ever because of the mental durability I now have. I stand by the fact that if you can do this program, you can do anything you put your mind to.

If any of you decide to try the program, let me bestow some words of advice. First of all, buy all the equipment needed. The total investment will probably cost you upwards of $300, but trust me if you want the change its worth it. If you torrent the program or if you just borrow the equipment from someone you have nothing invested in the program and it will make it easier for you to quit. Anytime I felt like not working, I'd remind myself of the money I just wasted and that was a huge motivation to get off my ass.

Second, follow the nutrition plan to the 'T'! If you do not you will be supremely disappointed. If there's one thing I realized from this program is that exercise & nutrition go hand in hand...having one without the other is the equivalent of a boxer going into the ring and using only one hand. Cut out the high glycemic index carbohydrates, refined sugars, and bleached flours.

Third, and I know this is going to be a tough one for a lot of people, is alcohol consumption. I did consume alcohol on the weekends, however, I changed my drinks of choice to bacardi and diet cokes, vodka w/ Fresca, or vodka and Sprite Zero. This way even though I was taking in extra calories from the alcohol, I wasn't having a ton of carbs with it to store those empty calories as fat. Even still, I wonder what my results would've been if I had cut it out completely and I'm starting to taper it down even more because I still want to take it to the next level (six pack baby!).

Fourth, you are going to be in A LOT of pain the first two weeks because you will not be used to working out at this intensity level. Just remember to push through it because the first two are the hardest, especially for Ab Ripper X. I've played every sport known to man up through high school, did seven years of jiu jitsu and mixed martial arts, and am a certified trainer through ACSM and I can still honestly say that this was the hardest training program I've ever done out of everything else.

I do recommend that you invest in some supplements to ease the pain and help with muscle rebuilding including creatine monohydrate, a whey protein powder, casein protein powder for before bedtime, and glutamine (either powder or pill form). If I didn't have these I can't imagine how much more painful the whole program would have been, so make the investment.

Another couple tidbits stick to complex carbohydrates and try to keep them in the morning at breakfast and after your workout. Cut out the cheese and substitute either fat free cheese or Laughing Cow Light spreadables (only 3 grams of fat). And after 8pm, no more carbs!

Anyways if you ever have any questions or just need some advice should you decide to do the program, just send me a message and I'd be glad to help you out.

Using Thanksgiving To Thrust Yourself Forward

First of all Happy Thanksgiving to everyone, if you're reading this I congratulate you on a) not being in a carb induced coma and b) reading on a day of rest.

Thanksgiving is a day when people hang back and relax with family and friends, eat a lot, watch football, and fall asleep. All these things have their place at some point during the day and should be enjoyed thoroughly, but I'd also like to suggest something wholesome and developmental.

I've been looking at the day like this: today we unwind and maybe throw the diet out the window for a day, but its also a great opportunity to reflect and map some stuff out. All the everyday garbage is out of our heads and we can now see the road ahead objectively, and that's a huge advantage that shouldn't go to waste!

To use a crude metaphor, we're both the cast-iron and the metalworker working on it...today's the day to remove yourself from the flame and allow yourself to cool to see what shape has taken form. Make some decisions as to what you want to become and then thrust yourself back into the fire. 

Use today to look at how far you've come and what you've done great these last few months. Similarly, look at what you've done not so great. Start to see how both the good and the bad have contributed to your current quality of life. Are you where you want to be? If not, are you on the right path? How do you know? What indicators have you chosen to let you know at this point?

If these are things you haven't considered in the past, its never to late to start! What to you want to do by, let's say, January? Why do you want to do it? What will you have gained from it? How do you think that will make you feel? What are you willing to do (or not do!) everyday to succeed? How do you know you've achieved it? And most importantly...how will this enhance the quality of life for you forever once you've got it? After all, nothing is worth accomplishing if the effects are only temporary or unsustainable.

These types of questions really help to strip back the layers of bologna when we are trying to make a change, but really aren't committing to it. If anything these types of questions can help realize just how unimportant something is to us! A lot of people have weight loss goals but find their only motivation is to look better. That's just the surface! They never considered how they'd feel about themselves, what they'd learn from it, why its important and how their success will enhance their lives beyond the goal itself.

These types of layer-penetrating questions can help us reach deeper levels of desire for success so that we are completely aligned with our goals for transformation. Wishing the best of holiday weekends to you, your families, and your friends!

Why Small and Micro-Cap Companies Are Better For Your Portfolio

I have MSNBC on in the background and they just mentioned that Cisco (CSCO) may now be undervalued due to its recent drop. A quick earnings power calculation using an 8% cost of capital due to their financing mix shows actually that they're pretty fairly valued in my opinion (plus or minus a dollar) which got me thinking about market prices in general.

A lot of investors, especially value investors, like to purchase companies selling for less than what they think they would be sold for. However, the inherent error in this thinking is that it leads one to believe that the market is pricing companies at how much they are truly worth, when its clear that it is pricing companies as a going concern. What does this mean? It means that the market price is only reflective of the expected future earnings power of the companies assets, not its buyout value.

In other words, let's say I have a unique lemonade machine that makes the greatest lemonade ever and I can make $10 a year with it by opening a lemonade stand. Assuming I have a 10% cost of capital (for a lemonade stand, I know this is ridiculous but just to prove a point!), the earnings power of that lemonade stand would be $100 ($10/.10). This $100 would be the reflected market capitalization if my stand was publicly traded. If however, you came along and offered to buy me out, it really wouldn't make sense for me to sell it to you only for a $100.

But that's what it's worth right? Well yes, but its worth that much assuming nothing changes (as a going concern!). However, if you come in and offer to buy, suddenly the perceived value of my stand increases. As the owner I start to think "this is greatest lemonade stand in the world, they'll make a killing...and what about me? The only thing I know how to do is sell lemonade. Where can I find a stand of equal value once I sell? Nowhere! They better pay up then." So we have a small element of reflexivity coming into play here.

In a way, this happens in all acquisitions, that the very premise of an acquisition being proposed ups the perceived value of the entity from a going concern to a total buyout value. This is why when a potential acquisition is announced, the stock price jumps.When a possible acquisition manifests, suddenly book value and intangible asset value get factored in along with earnings power, which puts a premium on the original market price.

The positive outlook one could take from this then is that technically all public companies are undervalued to what they are really worth. The bad side about this is that "buyout" value will not justifiably manifest unless someone comes along to buy the company (it could manifest from market gyrations, but there's no fundamental basis to support this). With this in mind, what do you think the odds are of someone coming along and buying, say, Exxon-Mobil? ZERO!! Its one of the biggest companies in the world, who would even have the money to do so?

Which leads me to my premise that the individual investor has a better shot at having value realized by investing in smaller companies. Not only because smaller companies have a better chance at being acquired (that's a crapshoot, don't start trying to predict that stuff), but because less market participants are paying attention to them. If 10,000 CFA's are watching CSCO and valuing it accordingly so that the market prices it at around $19, what are the odds that all 10,000 CFA's and all the other market participants are wrong?

In the book The Wisdom of Crowds by James Surowiecki, he makes a point about this using the popular game show "Who Wants To Be A Millionaire." He noted that when someone Phoned a Friend, on average they received a correct answer about 65% of the time (actually seems pretty high to me!). Compare that to the Ask The Audience lifeline, which yielded a correct answer about 91% of the time. What does this tell you about market prices? They are usually right when lots of people are looking at them.

However, the less people looking at a company, the more of chance it could be unfairly valued. Perhaps only 100 CFA's looked at a particular small company, and because their priorities lie in getting through a ton of small caps and micro caps to move onto bigger and better projects, they might have overlooked crucial information. And that is where the individual investor's edge comes in. Those who are willing to do their homework and find value where a small amount of people were too rushed or lazy to look will get the payoff when the fundamentally supported value manifests in the price.

Something to think about...

Our Most Important Attribute

We all know people who aren't really going anywhere or doing anything. We look at them and we think "why don't they just do this?" or "if they only did that, they'd be all set." For some reason, they just can't seem to get ahead and get out of the rut. Alternatively, we know some people who for some reason just seem to be unstoppable, they're heading straight for the sky on a rocketship. What separates these two types of people?

We think well they must have a good attitude, that's why they're so successful and all those people who are stuck in a rut have a bad attitude about things and that's why they are where they are. The problem with this is that we ignore the reflexivity of the situation: that perhaps the person has a bad attitude because he's in a rut, or the person has a good attitude because he's on the up and up.

So where does each of these situations arise from? I like to think that each person's situation is, at the core, a result of one attribute. This attribute is the most important factor in both business and personal relationships and creates good fortune for you through others consistently into the future. That attribute is integrity.

When we say "integrity," we're talking about the definition of ourselves as a person, how reliable we are to others, and how we go about our lives when nobody is looking. Probably the most important component of these is the reliability factor.

When we think back to the past, we all start out perfectly trusting of others and then at some point we got burned. It hurt us so much that we resolve that we can't trust anybody anymore, we'll just get hurt and we're not going to put ourselves in that position again. But our very nature as humans is to want to trust people (that's how we got burned in the first place!), we just have developed this "shell" along the way to protect ourselves.

Instead of thinking "never trust anybody" and concentrating on the symptom, let's focus on the cause and work on that. When we work on ourselves first from the inside, we have the power to change our world on the outside. If we strive every day to work on our integrity...to do what we say we're going to do, to be there for others when they are relying on us, and to live by our own standards, we are putting things into motion on the outside. People over time will begin to see us as someone they can trust and someone who actually gets things done, and in return they will want to be the same back.

Let's look at an example of how vital integrity is. Let's assign a scale to integrity: if we always do what we say we're going to do, we'll say we have 100% integrity. If we are credible most of the time, we'll say we have 80-90% integrity. If we are credible some of the time we'll say we have 60-70% integrity, and so on and so forth all the way down to 0% integrity.

So let's say we are at work and figuratively speaking, we have a 100% integrity (unlikely as unexpected events do occur and nobody's perfect!). If we say we are going to do something by a certain day and we  don't, we have just gone from being credible all of the time to being credible most of the time. Now on the surface that's not too bad, we might say "well nobody's perfect, John. We're still reliable most of the time" and that'd be correct. However, if we look at the scale we've assigned, just from missing that one deadline we've now dropped our credibility 10-20%! That's huge! You tell any investor they just lost 10-20% of their money and they would be fuming. That's because they know that in order to get to their original goal of a proper return, now they will now need to earn back 30-40%! A lot harder to do than just the original 10-20% they needed.

It works the same way in personal relationships. If we show ourselves to be unreliable in any situation, we no longer have to show that we are x reliable, we now need to show that we are 2x reliable. If we let a friend down, we now have to work harder to earn that trust back. Why put the extra workload on ourselves?

The dichotomy of the situation is that in the social world, being unreliable can actually create social value on the surface. Social value in the sense that if we cancel on someone or don't show up, we are inconspicuously communicating "hey I've got options, I'm wanted by people, I'm not always available." However, how long do you think that person is going to put up with that before we just start to look like a jerk?

I remember I used to always be about creating social value. A few years ago I had just started to date this girl, and when I would compliment her, I used always do what's called a takeaway. A takeaway is when you give someone a compliment but you in effect, take it away at the last minute to leave them wanting more. My favorite one I used to use was "don't let that go to your head." So I could say to her "you know, you really know how to hold my attention...but don't let that go to your head." In essence, what this is is a protection mechanism that says in less obvious terms "I think you are this, but don't start taking advantage of me now that you know that because I've got options."

The fact of the matter is that a takeaway works on the surface, it does create social value no matter who you give it to. However, there came a day when I was on the phone with her and I gave her a compliment and did the usual takeaway and I'll never forget what she said to me. She said "you don't need to do that anymore, we're past that now." I was floored, but I learned something valuable. That as relationships begin to deepen, all those little social value mechanisms we use start to lose effectiveness because they now know who we really are.

The point I'm making is this, that if we decide to show who we really are from the beginning, we can create an even bigger impression on someone. That while others may be doing these social value parlor tricks and backflips with us all the time, we remain consistent in our integrity and in our belief of who we are. When the relationship does begin to deepen and the players have to show their cards, your cards are what you have been representing to them all along. This makes such a huge impact on people and inspires a great deal of admiration because they think "wow this person was exactly who I thought they were from the beginning." How often can we think that about the people we meet?

That makes us inspirational because they have just learned something valuable from us through example. And what would you rather people think about you, "hey they are pretty cool" or "wow, they are really an inspiration"?

I think the difference is clear.

Life is Only As Good As The Questions We Ask Ourselves

It hasn't been until now that I've realized the value of a good question. A good question has the power to persuade, direct thought, and change lives. Theories are formed and crushed, sales are made, and relationships are created through asking the right questions. I always knew that questions were how we learned, but I never put together that the questions we ask directly affect the quality of our lives.

If we think about all the great people that have lived throughout time, the very essence of who they are or were is a result of the questions they asked themselves and others. Why was Albert Einstein so much more intelligent than other scientists of his era? Because he asked himself questions that no other scientist bothered to ask. Questions like "if I were traveling at the speed of light and I held up a mirror, would I be able to see my reflection?" He concluded that no, you could not see your reflection, but that's a whole other fascinating discussion! However, this question went on to form the basis for the theory of relativity. The searching for the answers to his own questions made him one of the most brilliant minds to have ever lived and he ended up changing the world forever.

A basic truth of life is that we cannot search for the answers we seek until we first know the correct question to ask. A common question people ask themselves is "what do I want to do with my life." Usually the answer is always the same..."I don't know." That's because that question is too large and it needs to be broken down. Its too large because we haven't analyzed what's important to us. Then and only then will we know how we can do what's most important to us every day to make our lives meaningful.

If we never became better at anything ever again, I can guarantee that if we become very good at asking good penetrating questions, we will never need to be better at anything else. Our lives would be so fulfilled through the enlightenment and knowledge we gain from asking the right questions because it is through asking questions that we become better at anything else.

Also, never underestimate the power of the most simple question in the world: Why? "Why" is such an effective tool for the mind because it forces intellectual penetration. When we ask ourselves "why" about anything, we cannot help but become curious and want to find out, well....why! And don't worry about not being able to find the answers right away, sometimes we have to backtrack to find out how we got somewhere in the first place before we can move forward again. We don't worry about these things and we know the answers will come eventually as long as we persistently and continually make an effort every day to ask a different question.

Hope that helps!

Rehab Hardrock and the Destruction of a Brand

Nightclubs rise, nightclubs fall...just the way of the entertainment industry. And while people are fickle and move on to new things quickly, it doesn't help if your making it easy for them.

I'm planning to go out to Las Vegas in January and have been watching a show on TruTV called Rehab: Party at the Hardrock. I liked watching the show because I love business and its like getting a crash course in everyday operations of a nightclub. Watching how the staff handled things and worked together to reach their fiscal goal was really something unique.

If you've never watched the show, the former general manager (GM), Justin got married and left the show and his position as the GM. When this happened, Matt, the Director of Nightlife at the Hardrock decided to take his spot as the "man in charge" both in the club and on the show. Due to Matt's "Torquemada & the Inquisition" management style, I saw this as a perfect opportunity to discuss both the principles and role of management within a company and why Matt is 100% ineffective as a manager.

Management's role in any business is the same: to lead and direct its employers into one orchestrated effort to make profits. Throughout history, you've had two styles of management: machiavellian and inspirational. Machiavellian management is based on Machiavelli's medieval work "The Prince" in which he says that it is better to rule by fear than by love. Interesting concept, considering Machiavelli by the time of his death was exiled from Italy...

Inspirational leadership works to inspire employee cohesion and morale. This is more of the leadership style that management great Peter Drucker, Steve Jobs, and Jack Welch have used to achieve their success. It is based on the fact that people will do their job better if they love the people, the environment, and the work they are doing. It's sole purpose is to bring out the best in people through communication, incentives, equity, and leadership.

Now that we're briefed on management itself, Rehab's success was based on Justin's leadership (former GM). Justin's management style was strict, yet fair and supportive. The employees worked together, formed friendships, and went above and beyond their call of duty. Rehab's present success is due to its past management action.

Now that Matt's in charge, its a regular occurrence during pre-shift meetings to threaten everybody that they will be fired. How does that style inspire people? Well, it doesn't. We've all had crappy bosses before and if we think back to their management style and how we responded, we pretty much would do just enough so that we wouldn't get fired. Helping other people was just too risky, as if we messed up something helping them, then it was our ass on the line.

The atmosphere this creates is an atmosphere of stress among the employees at Rehab now and the worse part about it is that the employees are pissed off when they deal with the customers who then spread that vibe to other customers. Its a vicious circle, one that starts from the top. There's an old saying that a company in nothing more than the shadow of the one man in charge and it stands true at Rehab.

The worse part about the whole Rehab situation is that most businesses can go on for a long time operating inefficiently simply because the only people who can see it happening is the employees. But they are televising this!!! Every disgusting act of management on Matt's part on how miserable the employees are is filmed and shown on National TV! Talk about destroying a brand! You can't help but feel tension and hatred when you watch the show, which is why I stopped. If you're feeling tense just watching it, how do you think it would feel to be there and have to deal with pissed off bartenders and a very rude staff? Its not their fault, they aren't their behavior, they are a reflection of their leader who is nothing less than inadequate.

In the end it comes down to this whether its a business or a human being, where you are today is a result of your past actions. Where you are tomorrow is a result of today's actions. Rehab's success today is not attributed to Matt's management, its because of Justin's. And I'd be willing to wager that Rehab's success in the future will start to decline to area competition (Wet Republic) unless Matt's management style changes (highly unlikely) or there is a change in management. One thing is for sure, that a great show about a great nightclub business is now nothing more than a celebrity version of Jerry Springer.

Why Do We Laugh? The Function Of Laughter

That was funny...that's why you laughed, right? You sure? I was watching the Roast of David Hasselhoff on Comedy Central, and it got me thinking. What exactly is laughter?! Evolutionarily, it must have some sort of function. And after some research and digging through a lot of crackpot theories, I found that it does.

You can go anywhere in the world, visit any culture, no matter what their language or their value system, they have laughter. There is something very important about this enjoyable but elusive little tendency of ours. Turns out that laughter isn't put there just for our enjoyment. Its actually serves a crucial and very important function in our lives.

Humans are tribal by nature, meaning we have a tendency to herd and form cliques (yes high school cliques are completely natural, sorry to disapoint). But the mechanism we use to form the bonds that build tribes is the very feeling we enjoy the most: laughter. Laughter is a way for our minds to both anchor positive feelings about others and to express those feelings externally. This way others can read our social cues about how we feel about them too.

So I started digging a little more and started to think of things like "Ok, well what makes something funny?" Comedians and researchers all over the country have come up with three theories as to what makes things funny, each having tendencies to contradict each other. So for my own sanity, I decided to come up with a new one that incorporates them all, coupled with an interesting piece of science to back it up.

Laughter is actually nothing more than the end result, its actually whats behind the laughter that is interesting. We have these things in our brains called mirror neurons. They are the neurons that allow us to visualize and empathize with people. They are the very reason why laughter as well as depression is infectious: we see some one laughing and we start laughing, we see someone crying and we get teared up. We as humans, use these neurons to empathize and understand people in order to solidify relationships. And these mirror neurons are the very reason why we laugh too.

Take a stand up comic for example. The reason we laugh is because these mirror neurons allow us to empathize or visualize a situation (or a joke) being described. This empathy then causes a building of tension as you listen and picture him in this situation. And for a brief moment you step into the comic's reality. This reality is meant to directly conflict with normal reality. This cognitive dissonance builds further until we become self-aware again. The moment of self-awareness creates surprise (due to how much tension we realize we now have!) which leads to a release of the tension through laughter. Which leads me to two important principles of humor:

1) Laughter is a mechanism for the release of tension and thus pleasurable feelings, (Think of a massage, that release of tension feels good right?), with the external action itself being a social cue to others as to what we are feeling about them.

2) The two required elements in all humor: tension and surprise.

And in case you try to notice all this happening at once, you probably won't, I tried. It all happens in less than a second!

To prove 2) take this for example. You can't tickle yourself, and when I say that I mean you can't tickle yourself to the extent someone else can. This is because when someone else tickles you, the anticipation of them tickling you builds the necessary tension, which is released by surprise when they actually do it! The mind's mechanism for laughter uses the same two ingredients in all cases.

As far as the social mechanism goes, it makes perfect sense. How many times have you found you've liked a person who never makes you laugh, nor who you've never seen laugh? Probably none. Laughter is a genius and enjoyable way that humans solidify relationships. This also explains forced laughter, which is what people do to bad jokes to show the person "hey i liked it! I like you!"

Its also why women always look for a man who can make them laugh. They instinctively know that laughter forms the bond they need to feel closer to him. Guys, how many times have you had girls laughing at stuff you said that wasn't even that funny? Girls, how many times have you found yourself laughing at everything he says? Social bonding at its finest.

I will point out something else I learned through all this is that humor relies on the individual's tension levels, which thus makes it subjective and thus more of an art than a science. What someone may find funny someone else may not because it failed to either raise or release their tension levels. Therefore there is both a values and an intelligence factor in humor.

Intelligence (intelligence being defined as "awareness") affects humor because in order for us to find something funny, we need to be able to visualize it or empathize with the person. If we can't visualize it, we won't find it funny. When someone says "I don't get it," chances are they failed to visualize or empathize with what was said. And it may not be you, it may be them. If someone lacks the awareness (i.e a calculus joke), its going to be harder for them to empathize with your funny calculus joke. They just "won't get it" because they can't visualize it happening. The more intelligence or global awareness of different experiences someone has, the more likely they will have the necessary empathy to understand the humor.

While intelligence affects empathy ability, values affect tension levels. If you crack a joke about a sensitive subject, you'll send tension levels through the roof without proper release caused by surprise. If you crack a racial joke that ends badly, its because the person on the receiving end's tension flew through the roof, but was not released through surprise. Maybe they weren't surprised because they have a personal experience with that particular perspective of reality that didn't end well for them. This leaves them just tense, and thus, feeling outraged.

Hope you found this interesting, its late and I'm going to bed.

Being Dynamic In A Dynamic World

There's a lot of bad information and bad advice circulating out there. The problem with bad advice is that it presents itself in the form of good advice by containing a kernel of truth. Its akin to a wolf in sheep's clothing that taught himself how to to say "BAA-AHH-AHH!"

Ever hear the phrase "don't be someone you're not?" Well what I'm about to talk about is really going to fly in the face of "don't be someone you're not." So here we go.

When we say "don't be someone your not," what are we talking about? Identity. Okay, so what is identity? Who are we, right? Well, we are our thoughts, beliefs, values, and actions. All of these come together to form a self perception of what kind of person we are. So essentially what we are saying is don't be someone that doesn't hold the same beliefs and values as you and don't do something that other person would do. But there is an inherent assumption in this, and that assumption is that beliefs and values do not change.

Usually when we see someone acting different and "being someone they're not," it's because some or all of the above factors have changed. What they used to believe they found doesn't hold up all the time or what they valued isn't really what they were after in the first place. These changes in beliefs and values lead to different actions, which in turn, completes the shift of identity.

But what about the creepy people acting all weird and stuff?! They're trying too hard, it just doesn't go, the shoe doesn't fit, or somethings just off. What we are perceiving is a lack of congruence. Essentially, we are seeing a divide in what they are thinking and what they are doing. Its like if someone is gritting their teeth, yelling, and turning red in the face, our social senses tell us they're angry. But what if someone lightly puts their hands on their hips, scowls in disappoint at you and then says, "Oooo I am soooo angry at you?" Incongruity, between what they're saying and what they really are thinking tells us they aren't really that angry.

Okay, now lets get back to those weirdos acting all strange and stuff, so what is this lack of congruence caused from? Why is there a divide between what they're saying and what they're doing? It all boils down to one concept: reference experiences. Case in point, lets take a guy who's very successful with women. Where does the road to his success in the sack start? It starts the very first time he has a crush on a girl, probably around elementary school. This innocent little crush at a very young age will set precedent for the rest of his pubescent years (and possibly longer in some cases!), because if the little girl returns the affection, it will boost his ego and solidify his identity as a young Giacomo Casanova. If he is rejected, he will remember the crushing blow for years to come. Either way the ego registers an experience to reference back to when placed in similar situations in the future.

Fast forward to his next pre-pubescent crush, what is going to happen here? Well if he was successful the first time he'll probably be thinking "well Suzy liked me, so she'll probably too, because I'm the shiz-nit and I got it goin' on!" On the flip side if he was unsuccessful, he will may very well be thinking "I dunno, Suzy turned me down, she's probably too, why would she like YOU? I can't do anything right" Then when he displays his affection, he does something incongruent because there's a divide between what he's saying and what he's thinking. In turn, Suzy thinks he's weird and blows him off.

The interesting thing about this is that it doesn't really matter what happens as a result of the first crush, or the second, or any for that matter. What matters is how it is perceived by the ego and integrated into our identity. The most fundamental law about the ego is that it always wants to be right, even when its wrong. It doesn't care that you can't get a date, it doesn't care that you can't go to the high school prom, and it certainly doesn't care that you are now a forty year old virgin. What it does care about is this: "Hey, at least I was right about being a loser! I always knew it! You can't say I was wrong!"

Is this any way to go through life? Being slaves of our egos? The problem with the ego is this: its static, doesn't wanna change. Comfortable. All Set. Its A-Okay! The mind is a resource-conserving machine and will do anything possible to be efficient and resourceful. Changing neural synapses is a burden and takes effort and energy. The ego is the mind's way of providing resistance towards environmental influence (which can be a good thing!). If every time someone told you something, you believed it...you'd probably be dead in a week. The ego is what protects us and solidifies our identity and ultimately enables us to operate with confidence.

What we must do then is to work around the ego, and the way to do that is with logic. As stubborn as the ego is, its rational. Its a slow process but essentially if we can find things that rattle our beliefs and values, we can create enough cognitive dissonance to influence a change. Remember how the ego is always right? Well its also pattern-finding and likes to assume things. So if we give it reasons why a belief isn't necessarily true, it will take those logical reasons as to why that belief doesn't work and form a new belief that takes into account the new information.

Case in point, lets say you have a personal belief that all Chinese people are short. Okay, well we could say well how short is short? Shorter than who? Than me? I'm pretty tall though. Have I really not met any Chinese people taller than me? What about Yao Ming? He's tall.

So our ego has just received a barrage of contradictory information that flies in the face of what it initially perceived to be reality. It will now make a new belief along the lines of "Okay, Okay, GENERALLY Chinese people are of shorter stature. However, exceptions and genetics play a huge factor in addition to cultural origin." It has taken our old belief plus the new information and created a new all encompassing belief.

So getting back to our little discussion on "don't be someone your not," all we are essentially saying is "don't be dynamic, don't adapt, don't change." But as with all bad advice, there is always a kernel of truth that makes it believable, and that kernel of truth is that you shouldn't be someone that is of different ethical or moral standards than you perceive yourself to be. Case in point, if you consider yourself to be a honest and good person, being a con artist would not be a wise career decision. This is because there is a divide between the ethical standards of a good and honest person and con artist. You can't be an honest con artist and be successful.

What it comes down to is this: don't be afraid to be dynamic and fluid, the only thing constant in life is change and yes, that includes you! Just remember that the mind and body come with complicated software, and sometimes it takes a little bit of time to make a totally congruent change.

ROT: Return on Tomatoes

I eat dinner every Sunday with my family, usually my parents, sister, her husband, and my girlfriend. At the beginning of every summer my parents always planted a small garden. Ever since I was a kid, they'd be in the backyard tilling the soil, planting seeds and just getting plain old dirty.

This past Sunday, I walked around the house to check out how the garden was coming along and was surprised by what I saw. Of course, I saw the zucchini, fresh peppers, lettuce, and some other lil' knick knacks in there, but what really caught my eye were the tomatoes. There were tons of them, some riper than others of course, but it was the shear number of them that made me really see them in a different light.

I couldn't help but think of how novel the idea of a garden is. You spend some time doing a little research on how to garden, then spend some time planting, getting dirty and tired in the sun. And once you're done, you're not done. You gotta water...and wait....and water...and wait...until something starts to grow.

But when you finally see the pay off it, you learn something. Something just clicks. About how doing something today and letting it grow for tomorrow really ends up working out. This can apply to your career, relationships, finances, and even your hopes and dreams. Gardening...I mean its a really novel idea, and the pay off is astounding in two ways. First because if you've never tasted a fresh homegrown tomato you haven't lived, and second, because of the pride you must get from knowing that "I...created...this."

How similar to life gardening is, especially investing. We put away money, not knowing how it'll ripen or what it will truly yield. During the interim watering periods nothing seems to happen. During dry spells some stocks shriveling and dying...others coming close, all the while we're sweating, and watering, and sweating, and watering!

Yet there's one thing that a garden can teach you about stocks, and its that all the tomatoes don't ripen at the same time. Some turn red before others, so while you're picking today's salad or sandwich topping there are still others that are there for tomorrow.

Just concentrate on the ones that are turning ripe today, and leave the unripe ones for another day.

So maybe its time to ask you: how's your garden coming along?

~J

The Stock Market is a Lot Like Baseball

The stock market has always amazed me. It's such an integral part of our economy, our jobs and our financial futures yet the average person has very little knowledge as to how it functions. You would think that such an important aspect of our daily lives would have been taught to us in school, yet we walk away with only basic economic concepts.

The underlying fact is that because so many people know little about it, investing can be a daunting and in the case of Madoff, be a harmful experience. So much relies upon what we have already accumulated, yet we still aren't where we want to be. Understanding the stock market and how it functions can help us make investment decisions with a little more confidence.

The stock market can be compared to the World Series. There are two teams, announcers, an audience and a whole bunch of other components that really tie the two together concepts together in similarities.

In the stock market there are buyers and sellers, these can be likened to the two teams playing. There are two teams playing against each other and only one will win. The fundamental truth here is that in order to buy a stock, someone has to sell it to you. That means that the person selling it to you thinks no more economic value will be extracted from it while you think there is still potential. One of you is wrong.

Another component in the stock market is mutual funds. Mutual funds are the employees who work in the back office for the championship team. They'll get a ring if their team wins, but their bonus is never as big as the players themselves.

The audience can be likened to index funds, they're just there to watch be at the game and win over time just for being there. However, they don't really see any immediate benefit besides exposure to the game.

The announcers are like Wall Street, calling the play by play and reporting on recent happenings. They sway between excitement to lethargy depending on what is happening in the moment. However, as knowledgeable as they may seem, they cannot be relied upon to accurately predict the long term outcome. The only thing they do is broadcast and sometimes point out arbitrary facts.

Now that all the basic components of the stock market have been described, we need to talk about the game itself. Now while a typical World Series game lasts nine innings, the stock market world series is game that doesn't end. So how is a winner determined? The winner is determined depending upon the individual time horizon of the players on each team.

So if you are buying Procter & Gamble for a long term investment and it drops in the short term, you haven't lost the game yet until your time horizon has been reached. This allows there to be multiple winners and losers all simultaneously, making the game a little more fair to the participants involved.

Also, unlike the World Series where only one game is played at a time, there are many games being played all at once in the stock market depending upon what stock you are talking about. Each stock has its own game being played. So there is the Johnson & Johnson game being played along side the Procter & Gamble game and so on and so forth. As an investor, you will find yourself playing in different games on all different teams depending upon the position you've taken in your portfolio. Some you may feel are going to be winners making you a buyer, while some you may feel is going nowhere or down, making you a seller (or even a short).

This sort of competitive play goes on in all the different markets associated with the stock markets (derivatives, CDS's, futures, etc.) and it is up to you as an investor to decide what games you want to be in and what your role is going to be. Are you a player, a back office manager, or an audience member? It depends upon your strengths and comfort level in the games you are a part of.

(This article originally posted on April 19th, 2010 on Technorati. Read the original article here.)

Is Intrinsic Value the Most Important Thing in Investing?

Many people may be familiar with investing in common stocks as growth vehicles in their financial portfolio. With information a click away on the internet and various books just as available on investing, it seems that everyone has the power to manage their own portfolio like they were a professional investment manager.

Many of these sources point toward Warren Buffet's style of investing, commonly known as value investing. The premise behind the strategy cites that investors own a small piece of a company. The basic philosophy is that a good investment is made in good companies selling at a discount to their intrinsic value.

However, caution and an analytical approach should be taken when defining intrinsic value, which is loosely defined as the price at which a person would be willing to pay for the whole business. This assumption is vague and not useful in practicum at all.

The truth about intrinsic value is that it is subject to the participants involved, meaning that, depending on the buyers and sellers own reasoning, intrinsic value will differ. If you were a small bank up for sale, you would most likely charge a far lower price to a private buyer than you would, say to Bank of America. This is mostly because variables such as the size of the buyer and synergy value come into play.

Furthermore, intrinsic value differs between how the buyer or the seller are evaluating it. While things such as future earnings are factored into both perspective values, there are variables that will discount the value of the business on the side of the buyer that would not affect the value to the seller. These are things such as lack of liquidity and non-diversifiable risk.

Likewise, the value of the business to the seller will factor in the size of the buyer that would not affect the value calculation on the part of the buyer. As a buyer, how big the company is should not make me change my estimate of what another prospective company is worth to me, but it will to the seller.

How Much Is That Business In The Window?

Let's pretend for a second, you are the owner of a dry cleaners business. Business has been good the past few years, you've managed to grow your business at about 20% per year by opening a few new locations. You've even managed to sock away about $50k per year in cash after all expenses and re-investments. You remember back only four years ago that with only a $15,000 investment, you've come a long way.

One day, a representative from a larger chain of dry cleaners, comes in and offers you $250,000 to buy you out. Do you take the money?

Knowing the value of your business is a crucial part of being a business owner. Unfortunately, the price of a business is not as clearly defined as say, the value of your house, which has comparables and mortgage value assigned to it by a bank. Unlike a single asset such as a house, anything that produces a profit takes a significant amount of financial analysis, future projections, and discounting to determine what the true value is.

In this example above, you'd be foolish to accept such a low price since a worst case scenario, valuation would still put your worth at well over $200,000. Ironically, about five years ago, insurance agents found themselves in the same scenario when a large insurance corporation came around offering independent agents a buyout price. Most of them had no idea what they were worth and were ill-prepared for the situation.

The truth of the matter is, a buyout proposition can happen at any time to any business, especially in highly fragmented industries that are cost competitive. It is the responsibility of the business owner to know what they're worth in multiple income scenarios so they can make sure the price offered is fair.

Hiring a skilled business appraiser is an investment in your business that will pay for itself many times over in the future.

I would suggest this to anyone who in the future plans to sell their business or pass it on to their children through their estate. You can do an online search for one in your area. Just make sure they have credible experience or are certified by one of the accredited valuation bureaus (IBA, ASA, NACVA, CFA Institute, or a CPA with a ABV distinction).

Having the financial transparency of a proper business appraisal will give you and anyone else the proper assurance that your business is worth the time and effort you put into it.

The Inevitable Bankruptcy of Domino's Pizza

I happened to get a stock tip that Domino's Pizza (DPZ) was undervalued and was both shocked and appalled at what I saw after further analysis. Over the past 10 years, Domino's Pizza has had increasing negative stockholder's equity, a situation which I thought was only theoretical and seen in business books. Alas, here it is in the flesh.

For those of you with limited accounting background, stockholder's equity appears on the balance sheet. Every company has assets with a certain total worth and the money that the company used to obtain those assets can come from three main sources: borrowing, purchase of stock from investors, or retained earnings (from business operations).

So what we have here on the balance sheet is that domino's assets in total are worth $453 million. But it has borrowed over $1.7 billion dollars! This results that should the company default, the stockholders will owe the creditors an extra $1.2 billion dollars* (and that's excluding the interest on those loans!)! I have never seen this in practice before, never mind in a company with such huge brand equity such as Domino's.

But wait! There's more! In 2008, Domino's Pizza recapitalized its debt by issuing long term notes at about 6%, due in 2037, in order to pay off its current loans. This is the equivalent of paying off your student loans with credit cards. Smart move...

So as Domino's reaches terminal velocity falling down the black hole of debt, it looks like its just a matter of time until it splatters on the bottom. My question is, who the heck are these analysts issuing "buy" ratings for Domino's (here)?! These people need to be reevaluated by their respective firms for not being able to read an annual report. Shame on you Wall Street...




*Of course, due to the laws of incorporation, shareholder's would not be personally liable for these liabilities. See the value of being incorporated? ;o)

Maximizing Your Chances of Getting Rich

Per my last post, I want to talk about how "The Ways to Get Rich" list can be used as an effective tool in maximizing your chances of getting rich.

Take a look at the list (see it here) and start to mull the categories over in your mind. Which jump out at you? Which categories do you feel you may have an advantage in? Which categories seem too risky for you? Which do you have the patience for? Which ones do you not even have a chance in? If you come don't come from a rich family, you can cross Inheritance off right away.

The fact of the matter is that everyone is different and some categories may carry more risk depending on your knowledge base in that particular category. Gambling may seem risky to you, but to the MIT Black Jack team, its risk-adjusted. Likewise, stock market speculation may seem too risky if you an unfamiliar with how to analyze a business.

Also, some categories may require significantly more start-up investment. You may know a lot about real estate speculation, but if you can't afford a down payment and monthly mortgage payments, that isn't feasible for you right now.

Also be aware that some seemingly low initial start-up cost categories may contain hidden costs. For example, inventing something costs nothing in the early stage if you can make the product yourself. However, chances are that makeshift MacGyver-like doohickey you just made won't be sold with all that duct tape wrapped around it...or with those exact materials. At some point you're going to need to have either some engineering involved, as well as some production costs.

I had an idea for a beverage that I made in my own home, but after about a month's worth of research, it turned out creating a beverage from creation to distribution will cost about $60,000-$80,000 (that's including formula creation, product design, co-packing, warehousing, and distribution methods).

It goes without saying that the more categories you choose to pursue on the list, the better your chances are of getting rich. However, doing all categories half-assed will get you nowhere. Wealth and fortune are created because it takes skill, work, and determination. My advice to you would be to fully master one category, that will be challenging enough for most people.

For the people who really have the commitment, choose two or three categories to master. If you find yourself doing more than that, you have to ask yourself "have I really gone as far as I can in my first categories?" Unless you've been working at them for years, I can say with certainty that you have not.

Also, be careful with the Frugality category. Tendency here would be to say "yeah I'm already cheap" and move on. However, there's an art and science to everything. The Cheapest Woman in the World appeared on Opera and said she was able to purchase two homes and 20ft boat just from her frugal ways. Still think you're cheap enough?

Good luck and I'd love to hear your success stories. You can send them to TruWealth1@gmail.com. If your story is interesting, I'll write a post on it as inspiration for others.

The Ways To Get Rich

I made a list of all the possible ways to get rich. For my own personal morality, I did not include anything unethical (drug dealing, stealing, etc.). My goal is to have this list be the most exhaustive category based reference tool of ways to get rich, meaning that every way to get rich somehow falls into one of these categories.

To clear up any ambiguities, "rich" can have many different values depending on the person. But for the article's sake, we will define "rich" as $1,000,000 in net worth. And for those of you who don't know what net worth is, everything you own minus everything you owe.


The Ways to Get Rich:

-Inheritance
-Grow a Business (Hold it)
-Grow a Business (Sell it)
-Real Estate Speculation
-Income Property Investment
-Flipping Real Estate
-Stock Market Speculation
-Inventions
-High Salary
-Frugality
-Collecting (art, antiques, treasure, etc.)
-Publishing (book, blog, article, music, etc.)
-Gambling
-Lottery/Contests
-Marriage
-Professional Practice (doctor, lawyer, etc.)
-Celebrity
-Litigation
-Talent
-Oil Well Investment
-Currency Trading


To clarify, growing a business and holding it is separate from growing a business and selling it because there are people in the world who have sold their businesses and gotten rich, but wouldn't have done so if they held it (think of the unprofitable companies in the .com bubble).

Also, professional practice is separate from growing a business because it requires an educational variable not inherent in growing a business. Also, a lot of professional practitioners have never grown their practice and have still gotten rich.

If you have any additions to this list that you feel do not fit into these categories, email me at TruWealth1@gmail.com with your suggestion along with ample evidence why. I'll give you a shout out if its well supported!

Refining The Capital Asset Pricing Model for Practical Investment Use

The capital asset pricing model is a great display of academic prowess in financial theory. However, it does have its limitations. Mainly, the criticism it receives is that it makes a number of assumptions that do not necessarily hold true in market conditions. The biggest one I feel is is the beta coefficient, or β.

To break it down the capital asset pricing model (CAPM) is a way of determining the cost of equity for a company. This is often also referred to as the investor's expected rate of return for investing in a security. The formula is as follows:

where:

E (Ri) = expected rate of return of investment i
Rf = the risk free rate of return (usually the 10-year bond return)
βi = beta coefficient of investment i (the individual price volatility of the investment relative to the market as a whole).
E(Rm) = expected return of the market as a whole


The biggest concern is with β. The capital asset pricing model as it stands alone assumes that the riskiness of an investment is based upon the past price volatility of the investment. This is HUGE assumption, because future prices cannot be accurately extrapolated from the past prices. Market prices of a security are determined not only by supply and demand from investors, but also the profitability and growth prospects of a security. The beta coefficient is assuming that market prices are efficient and that all information is known to all investors.

However, we know that not all information is known to all investors, and not all information is important to all investors. Also time horizons for investors differ (another huge assumption of the model), therefore even if all information was known, some information may disregarded by short term investors if it does not serve their time horizon. The information that a trader will be looking at may affect his view of the price, while a long term value investor may see information that reflects his view of the price.

In present circumstances, the current market prices are the averages of investor perceptions. Therefore, if most investors are arguably short term oriented, the price of that stock will more favorably reflect short term prospects. For example, if Ford stock has low upwards movement prospects in the short term because Ford is taking non-cash charges (thus reducing current earnings) , the majority of investors may be uninterested in that stock, and the price of the stock will reflect there lack of demand for it.

This is why it is important to have a somewhat longer investment horizon. You want to account for short term prospects and long term prospects. Yeah, Ford may be taking short-term non-cash charges and reducing their earnings, but is a non-cash charge really a reflection of a change in business value, especially if the company is still making adequate capital expenditures to improve the business for the long term?

The market is not perfectly efficient, which gives the individual investor an edge if they are willing to resist the temptation of short term sentiments.

So how do we adapt CAPM for reliably determining the cost of equity? Simplistically, an investor can expect the market to return 11% on average over time. Therefore, it is reasonable to say that an investor should expect no more than an 11% return on average from their portfolio (this is supported by the latest indexing fad).

Even though the expected return may fall short of what an investor's actual return may be, it is fair to say that a prudent and rational investor should expect no more than what the market will return (unless of course the risk free rate were to exceed that, in which case the last thing anybody would be concerned about is their return on investment when the whole market is collapsing!).

With the cost of equity set to be at a value of 11%, the discount rate for a security can thus be figured out by the company's weighted cost of capital, utilizing the borrowing rates of a company after taxes and our constant cost of equity. Thus we have a maximum discount rate for a public company to be no more than 11%* (if the company is 100% equity financed).

This figure to me seems fair, considering Warren Buffet discounts utilizing only the risk free rate.





*This discount rate only can be comfortably applied to non-controlling shares of publicly traded companies of a reasonable size (excluding micro caps) without getting into liquidity discounts, size discounts, and control premiums.

Benjamin Graham Was Wrong

I was doing some equities research and I ran across this from Benjamin Graham's classic 1934 edition of Security Analysis:

This was one of Ben Graham's examples of calculating the Net Current Asset value for a stock, by using a discount rate to calculate the true liquidation value of various types of assets on the balance sheet. The only thing is that Ben Graham's White Motor Company example was actually incorrect.

If you look at the liquidation value of the Total Current Assets, he only subtracts Current Liabilities to arrive at the Net Current Assets Result of $16,300 when in fact he should of subtracted Total Liabilities.

In practice, if a company goes bankrupt, all creditors go to the front of the line because the assets are collateralized by debt. That would mean that ALL creditors go to the front of the line, not just the ones who are due in one year or less. If long term creditors were left out, how would they receive their repayment if the shareholders got what's left way before the creditor's debt needed to be serviced?

The answer is it would never happen. That would be the equivalent of the owners of a house in foreclosure receiving the rest of the sale price of the house after only the first year of debt had been paid for on a 30 year mortgage. What about the other 29 years worth of money the bank forked up so the owners could buy the house? The same is true for a company. The long term creditors are due their piece of the pie and will always get theirs well before the shareholder even see the leftovers.

The funny thing is that Benjamin Graham knew this and stated on the page before this example:

"The striking fact that the cash assets alone considerably exceed this figure, after deducting all liabilities, completely clinched the argument on this score."

However, its clear in the example that he only deducted current liabilities. Perhaps this was just a flub up, but the conclusions he derives are based upon the erroneous fact of subtracting current liabilities. The funny thing is that people like Buffet, Ruane, and Graham himself based the majority of their investing decisions on this calculation when it is in fact wrong. Talk about luck!

Home Depot Your Next Great Investment

Say you have to buy some paint to add some pep to your livingroom, where are you going to go?

If Home Depot even crossed your mind (just in case you said Lowes), you've just realized the hedge to this investment. Right now, Home Depot is severely undervalued in relation to its long term prospects. The reason why its down is because home improvement projects took a dive when the housing market dropped. Why do home improvement if your not planning on selling anytime soon?

The fact of the matter is that Home Depot has a huge market share, contested only by Lowes. Its brand equity serves as a great hedge against long term risk exposure, in addition to the housing market already having been through the worst. And surprisingly, even though earnings are down for HD, free cash flow is at some of its highest levels even compared to years with stronger revenue growth. Management's refocusing on merchandising also will serve to lower expenses and capital expenditures to help that free cash flow figure grow.

As I step down from my soapbox, I will be adding this holding to both my own and my girlfriend's portfolios.

Why nobody has been able to replicate Warren Buffett's success

I'm currently reading Snowball, and I wanted to address the issue as to why nobody has been able to replicate Warren Buffet's success as an investor.

Diana Sonis at UnitConnect pegged it right on the money in her blog (here) as to why nobody has been able to duplicate it: patience. Wall Street is the cross between a mosh pit and a cash register, and its very easy to get caught up in the whirlwind. CNBC doesn't help it with all that Fast Money stuff either. I feel like Pete Najarian sometimes wishes to go back to his heydey as a Minnesota Viking, and sack Rick Santelli: entertaining yes, but insightful, no.

Warren nailed it when he said that the equities market is a voting machine in the short term but a weighing machine in the long term. Common sense would dictate "do as Warren does," but as we know, common sense is not so common.

In fact, our very nature as human beings often prevents us from replicating another outlier's success. Being essentially animal by nature, human beings have a tendency to "herd." There is no shame in this, its actually a defense mechanism. Herding is evolutionary psychology's learned defense that in primitive times, there is safety in large numbers. And it makes perfect sense: if the edge of your herd is attacked and you're in the middle of the pack, you'll probably survive.

Unfortunately, our evolutionary computers are as outdated as Vic-20's. We find ourselves in new world circumstances, using practically prehistoric evolutionary mechanisms to survive. The truth we must face is that our evolutionary development as humans will never be able to catch up to the speed of the information age, because as it whole it takes millions of years to make a change. Quite contrasting to the speed of a stock ticker on the bottom of a TV screen, which can change in seconds.

Which leads us to reframe our initial question. Is it possible to replicate Warren Buffet's success? Without a doubt, yes. However, to do so requires a rebelliousness that contrasts to the standard activity of the Wall Street herd.

And as we see in Snowball, Warren's personality growing up almost lends itself to this certain rebelliousness. He was always different, awkward, and sometimes even annoying. He said himself he felt he never fit in socially, convention just fit him awkwardly. We see this anti-herd personality in Graham as well, which is probably a major reason why Warren looked up to him so much. Here was a man, much like himself, who is quirky and yet, successful by his own means...and is revered for it!

So if you do wish to produce fruitful gains in your portfolio as bountiful as Warren has, it will take a conscious effort to switch off that social calibration. The more socially calibrated you are, the more conscious effort it will take on your part.