Investing in Financials

One can’t figure out the best place to invest these days. Keeping money in the bank is not enough due to inflation. With today’s prices in both stocks and real estates one is tempted to invest in both. On the other hand, ‘low’ prices actually mean that past highs were not realistic so the bubble burst. Some articles advise readers to put money in stocks and real estate now because the price is right. At the moment, a slight bullish sentiment exists in the stock market. For real estate, a further decline is expected. The Case-Stiller real estate index forecast declining real-estate prices in some states until late 2010. One would think that investing in real estate is the best bet in present circumstances.


What about stocks? For example, some folks are starting to think that Citibank is a good investment in the long run. The new CEO may be the best candidate, all things considered although he does not have leadership gravitas. Information from other articles mention that he is a 'quant' – someone who is more mathematically inclined, more comfortable in financial equations than in human resources. Not a good combination considering the importance of emotional intelligence in leadership. But under the circumstances, a ‘quant’ maybe what Citibank needs to steer through all these complex financial derivatives the company finds itself possessing. Most CEOs in banks where clueless in the financial engineering that took place and resulted in disasters. See Bear Sterns, Lehman Brothers, UBS and even Citigroup.


With a ‘quant’ leading the bank, is that enough to steer the company through the challenges ahead? And what about government ownership via TARP? Looking at the bank’s reports, Citibank seem to have a good business model moving forward. The strategy is to leverage its global presence (in 110 countries) and get revenues in the only place where there is money and growth: Asia. The government investment is just another indication that the bank will not fail. Hence, the good factors are: a good business strategy for the future, a financial genius as a head, and a government ‘guarantee’ from bank failure plus restructuring and cost – cutting moves. Despite these good points though, the market does not believe the company will survive let alone thrive.


The stock price is an indication of this perception. Some articles even state that the company is already dead; it’s just a process of dismembering the corpse. But this view is not realistic considering above points. Perhaps the perception is that there are still some hidden surprises lurking somewhere in the balance sheet: maybe in commercial property foreclosures or credit card losses or maybe even in sub-prime mortgages. But again these are likely seen by a management team headed by a ‘quant’ and mitigated by the government presence. People like Robert Rubin say that Vikram Pandit is a genius and that he could see around ‘corners’. I watched some videos in the internet and he looks capable and smart.

The key is to keep the management team in place to foster stability. One assumes that the government perceives this problem and ongoing re-structuring such as breaking the company into two (Citigroup and Citi Holdings) will allow for better management while keeping Vikram Pandit in place. I think all these factors are sufficient to consider Citi stocks as a good long term investment. The market does not perceive these improvements possibly because it does not believe in the current leadership (which includes government ownership). Or perhaps there are intentional moves to keep this perception alive so a larger bank would gobble up Citibank. If another bank does come in, maybe JP Morgan or Goldman Sachs, investing is good as well. The ‘purchase’ stock price maybe expected to be profitable to insure taxpayers get their money back. Perhaps the final price should be around the USD $ 6 – 8 dollar range. Of course, there are a lot of risks because no one really knows how the future will play out.

On the other hand, considering all the other investment these maybe the most reasonable, all thing considered. But it’s the price that makes it attractive at USD $ 4 range. A less risky investment of course would be exchange traded fund (ETF) but recent prices from USD $ 25 to USD $ 45 would translate to lower number of shares and less profit. One should have at least 2,000 to 3,000 shares to experience a good return even with a slight increase in the share price. At the end of the day, investing in Citibank would mean keeping the money invested for at least 7-10 years to experience any significant profit. I think it’s a better bet than gambling in Las Vegas except for the much longer time frame.

Road To Innovation

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Road To Innovation

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Financial Innovation

The book ‘Fool’s Gold’ is the detailed story about those innovative financial products which caused the credit crisis. The book is written by Gillian Tett, an extremely competent writer from the Financial Times. She writes about those ‘exotic’ financial products with acronyms like CDO (credit default obligations) or CDS (credit default swaps) and other types of credit derivatives that led to the near global financial disaster. The book describes the creation of these financial instruments in JP Morgan which ultimately spread through out the financial world. But the real culprit for the disaster is really greed not the financial instruments themselves. In fact, I think these tools are great innovations if properly regulated or monitored to prevent greed from taking over.


In my mind, these financial innovations reflect the same brilliant creativity seen in software industry. These financial inventions rival the best design seen in products from Apple, Google or Microsoft. It also rivals the best piece of creative work from Hollywood or the music industry. So I think regulation that will stifle the creativity in the financial world will not be good. These innovations I think have resulted in increased home ownership, personal wealth and quality of life not seen in man’s history. But the common sense application of these innovative products was missing. For instance, irrational lending to sub-prime borrowers or insensible purchase of larger and larger houses by over leveraged buyers.


So it was the existence of greed and over consumption that ultimately led to the crisis. The result was the fatal under estimation of risk. So how does one regulate greed or an overly materialistic lifestyle? These are areas where spiritual guidance is more appropriate. Perhaps the decline of religion in the country and the world is to blame. From this premise, I venture to say that countries or states with strong religious sentiment will experience this problem less. For instance, what are the statistics of foreclosures in the Bible-belt or Southern or Midwest states? I think that most foreclosures have occurred in ‘liberal’ places like California, Nevada and Arizona. Nevertheless, the point is that these credit derivatives and other such financial innovation are not to blame for the current crisis.


In fact I think that these financial innovations together with innovation in software or film making or music have a high component of creativity unmatched anywhere in the world. It’s the comparative advantage that would keep the USA its superpower status as compared to its other traditional strengths like manufacturing or services. Perhaps the problem is that the regulatory infrastructure has not reached the scale needed to prevent a financial disaster. For instance, technological innovation in finance has not achieved the self-regulatory mechanism inherent in free markets due to greed. So perhaps government should provide this function until more maturity is reached. For instance, Theodore Roosevelt’s anti-trust actions did not hinder the country’s industrial rise but only provided the correct road map based on moral principles.

I am not sure how the regulation or transparency should be implemented. It should be the topic for experts. But I would think that the financial industry is one of the best places to invest based on this perspective. I think it’s a growth industry with its record of creative innovation that can be applied to the rising wealth in Asia. All the strands come together with the rising innovation in finance and software improvements to create a new world as forecasted by Alvin and Heidi Toffler in ‘Revolutionary Wealth.’ I guess it’s a world where the road is still bumpy and tortuous until the final destination is reached. But I guess I am in the minority today because most people look at the finance industry as a disaster where there are still hidden problems lurking behind these complex equations. I think these people are like those in the early age of the personal computer who like IBM thought the Personal Computer is useless.

Hence, today’s financial innovators such as the creators of CDO or CDS or even finance instruments like ETFs (exchange traded funds) can be seen to play a similar role as Bill Gates or Steve Jobs or the Google twins in the software industry. But changes are still needed to restructure the usual financial firm. It would need a transformation similar to what happened to IBM who transformed itself from hardware to a software services firm. It was a radical change that had skeptics within the industry itself and the public. I think it’s the same story in the financial sector. The trick is to prevent people from chasing fool’s gold so that a new industry can be born. I think people are in place who can achieve this change but who may have to navigate the current problems and misperceptions existing in the public today.

Digital Life

(Pictures: Carl Sandburg's home.)

Last weekend I updated my profile picture with an avatar. I am consolidating my presence in the Internet and having an avatar is a fun way to be recognized while remaining anonymous. Increasing one’s presence in cyberspace is something that must be done now. One must plan to teach their kids on how to create a web log. It would be a good start to learn Internet basics. It will help kids understand the technology and get their foot on the door with regards to being a techie. A presence in the Internet is like staking out territory in the Wild West in the past. Or it’s like having real estate in a rising community. Or more accurately, something like a billboard in cyberspace. There is a lot of opportunity in the near future once people’s digital life increases. So having an ‘Internet property’ is important. The key ingredient is CREATIVITY not CAPITAL in obtaining this real estate.

It’s preferable to remain anonymous due to identity theft so using an avatar is a prudent measure. Not much security I guess but it adds another layer away from visual identity theft. A lot of things are happening and I think a big fight is in the offing. Microsoft’s purchase of Yahoo search business is the opening salvo. But Google is responding with a lot of initiatives in a lot of different areas like mobile phone (Google Voice, Android), brainstorming (Google Wave), operating systems and browser (Chrome) and office applications (Google docs) and plus other initiatives. All of these efforts point to an increase in a person’s digital life. Soon everything will be take place, be stored and recorded in cyberspace. All these things are happening away from the sight of the users and one day one would just notice the changed Internet landscape.



So learning Internet tools is the first step to prepare for the new world. Cell phones, television sets, game consoles, tablets like Kindle will open up the digital life aside from the traditional way via computers. But soon computers may even change with net books and tablet PCs making it much easier for users to ‘utilize’ the Internet. It will no longer be a passive tool for entertainment and information but a way to create a proactive relationship especially with social networking sites, twitter and web logs to increase one’s digital life aside from just email and connecting to banks or Amazon or trading platforms to do one’s purchases. So learning everything about the Internet from mash-ups to tools like Google Earth is indispensable to tomorrow’s digital life. Otherwise, one will be a digital illiterate; comparable to someone who is not able to read or write in the last century.

It’s interesting to see how the new world will come about. Face book, Microsoft, Google, Amazon, Apple, Twitter, Yahoo and other giants are working to bridge us to the next wave of innovation. All these efforts will impact investments in technology now that ‘cloud computing’ and ‘service oriented architectures’ are the rule. What is good is that most of the investments will be done by the corporations as they increase their data centers, servers and hard disks for the consuming public. The challenge remains on how to ‘monetize’ or make money out of the new digital life. Only Google I think has been successful in earning money from the Internet without burdening the public. Advertisers have been the source of revenue in their business model. It’s a different model than that pursued by Microsoft or Apple or Amazon, for example.



Everything offered by Google seems to be free and even tools like AdWords or AdSense offers the public to earn some money. But new and extremely intelligent management teams in companies like Face book and Yahoo and now planning new innovations. Hopefully their new business models would not be at the expense of the public but companies. All these ideas are not new but I feel that one has crossed a threshold recently. Perhaps it’s the economic crisis that has forced people to look at new ways of earning money or doing business. It’s the only one of the areas left where the USA can maintain its expertise as most business have left to low cost countries.

The world was flat for a few years but now competition may attempt to make it less flat again. But the resulting landscape will be a complex interlinked world. The USA will still be on top, buttressed by the money and the production base of China, the technical expertise and services of India, but all of it led and managed by innovations from Wall Street and Silicon Valley. Driving all these innovations will be the profit motive and the unique combination of political and economic leadership of the USA. It’s actually the competitive advantage that cannot be replicated by Europe or Asean or Canada. Often times it seems like a brutal desire driven by greed and glory and riches. Something like the British Empire before the empire accepted socialist principles. America still has it’s raw instincts of power and superiority as recently demonstrated in the last Bush administration.

A New Religion

Two new branches in economics called behavioral economics and neuroeconomics attempt to explain the recent financial calamity. To explain briefly, the crisis is due to old thinking patterns that existed when man was living in the Stone Age. In other words, certain mental patterns or heuristics are hard wired in the brain and caused the bubbles and busts in the real estate and stock markets. These wrong patterns of though or inner bias are seen in overconfidence, herd mentality and knee jerk reactions to new information. These reside more in the intuitive process of making judgments than in rational thinking.


The burgeoning field of Neuroeconomics even uses brain scans to provide biological proof of these wrong thinking patters. One bias is called ‘money illusion’ where people underestimate inflation, for example or react against a financial loss rather than a gain even when the arrangement is similar. This field has provided undisputed evidence that man cannot be a true investor until he recognizes these erroneous mental patterns in his brain. Brain scans show areas in the brain that work when the so-called ‘money illusion’ occurs. But how does one explain the many successful stories of investors in the market? In one word: plain dumb LUCK.


A typical investment success is more attributable to luck than to inner ability. These ideas prove the point raised by the writer Nassim Taleb in his books like ‘The Black Swan’ wherein investment success is more due to luck rather than skill. Investing in the stock market or real estate for most people is actually like gambling in a casino due to this inner bias. But gambling may even provide better returns rather than investments. True financial geniuses like Warren Buffet or George Soros are those rare rational individuals who can logically assess an investment correctly. These people seem to possess characteristics of autistic individuals.


A lot of books write about the new economics. These books debunk the classic economic theories such as the efficient market theorem wherein people are rational investors rather than irrational fools which is the true reality. This irrationality impacts both the institutional lenders as well as the investing public. New theories abound such as the adaptive market hypotheses that try to bridge the new findings with the old. These new books are useful to read:

1. Your Money and Your Brain: How the New Science of Neuro-economics Can Help Make You Rich by Jason Zweig, 2007

2. The Mind of the Market by Michael Shermer, 2008

3. The Subprime Solution: How Today’s Global Financial Crisis Happened and What to do about it by Robert J. Shiller

4. Animal Spirits: How Human Psychology Drives the Economy and Why it Matters for Global Capitalism by George A. Akerlof and Robert J. Shiller

5. Nudge: Improving Decisions about Health, Wealth and Happiness by Richard H. Thaler and Cass R. Sunstein

Someday these new branch of economics may soon replace religion and spiritualism. After all, seekers of truth really try to find out more about themselves, to know who they really are, to find the truth and be free. Behavioral economics and neuro economics can soon provide the answers in the field of investing. Hence, you will know more about yourself by understanding these new theories rather than looking for a spiritual guru in India, for example. I guess this is as close as modern man can get to a new relevant religion. A religion for the moneyed class so to speak.

A new religion that is tied to the material life and how one can prosper in the affluent age. Where a true rational investor can be made after understanding the ‘hidden’ laws of neuro and behavioral economics. Of course, the spiritual founders or gurus of these new ways of thought are Warren Buffet or George Soros who have mastered themselves, surveyed the illiterate investor masses in the market and profited immensely. The annual meetings of Berkshire Hathaway can now be seen to be like a spiritual meeting, perhaps like Khumb Mela in India where masses of the investing public learn at the knee from an oracle or guru. Sometimes it takes a catastrophe like the recent financial mess to allow the truth to come out.

Investment Experience

From: http://www.wordle.net/

I assessed my modest investments in stocks, Exchange Traded Funds (ETF) and unit trusts today. Mainly to see if I have enough to pay for my kids college education. The results are mixed; roughly break-even considering those that increased and those that decreased at this nascent phase of the market recovery. It’s roughly an even performance because of the diversification from unit trust to stocks. But I am slightly positive mainly because of the company stock that I bought at an employee discount. This meager investment kept me positive considering all the losses. Only my Malaysia country fund is doing well compared to my other investments.



On the other hand, my real estate investments have done well. My small property in the Philippines is being rented and I was able to pay my loan about 3 years ago. I sold my tiny Singapore flat last August and gained about 67%. Of course, after paying off the loan and returning the money I borrowed from the provident fund, I gained about 25% in my investment. So compared to my investments in the stock market, my property venture was the more rewarding encounter. But I am still keen in investing in the US stock market because of all the books that I have read. Of course I had one significant success way back in the Philippines when I bought Ayala corporation stock. It was my first investment success, my first stock market venture which earned more than 100%.

Of course, the market is still down from its heights although it’s on the road to recovery. But with the last economic crisis, will the market still rise in the way it did in the past? Past performance is never an indication of the future so one wonders if it will recover. If one decides to proceed, the best instrument is index funds or ETFs invested for the long term. I just finished listening to John Bogle’s book ‘The Common Sense Investing Guide’ which I should have read long ago. It will reduce all the time I wasted reading all those investment guides from different authors. I guess the best way is to invest in ETFs or index funds (preferably Vanguard) with the lowest expense ratio and lowest P/E ratio.

Even at today’s levels, some stock prices may still be overvalued although some have good prices. I have always read that the stock market is the best way to grow wealth following Warren Buffet’s example. But real estate has done me well so I guess I need to find a balance for both. Perhaps renting out my present townhouse and investing in another home with the current low prices maybe a good way. I think it will be a buyers market until the end of next year or possibly into 2011 even. This feels like a good investment strategy to have both modest property investments plus ETFs invested in the US market. I think I would like to invest as well my provident fund in the Singapore stock market to get the benefit of an improving economy by 2010.

The key to this success is to have enough cash to handle any problem. For instance, failure to rent the townhouse will require me to have funds to pay the monthly mortgage until someone can rent it. This maybe risky considering my father’s experience when his tenant declared bankruptcy. But I can mitigate this risk by working with rental specialists. Nevertheless, I should have access to another source of income other than my monthly salary. The strategy here is to have a separate career as a writer or speaker. Hopefully this will be a success or otherwise my wife and kids can look for work or I can have another job during the weekend. All these plans are possible I think only here in this country and no where else.

Sometimes I envy people like Warren Buffet or John Bogle or even Frank Frazetta, the artist. I envy them not because of their wealth or their talent but their ability to focus only on the one thing that gives them their bliss. They have devoted their lives on a singular pursuit and have achieved enormous success. On the other hand, I have a lot of interests that I am cultivating. I don’t have any focus except working here as an employee in the same company for nearly 15 years, my journal writing for about 15 to 20 years (though sporadically) and my constant reading. I am familiar with a lot of things but I am a master of none. As an investor, perhaps I have had modest success but not really enough to satisfy me or be proud of.

But what is good for me is that I have kept at it for so long that I have achieved a modest level of expertise. As an investor, I have had actual experience and have kept up my readings and studies on stocks as well as real estate. As a writer, I have had my journal writings and book readings as well. As an employee working as a project manager or functional analyst, I also have significant experience. Hence, I am neither a novice nor an expert but I am well-above average perhaps a so-called talented veteran. I guess keeping at it for more years will actually make me better. It’s just staying the course will achieve dreams. Perhaps if I had focused on one area, without distractions, I would have reached my goal much faster. But I guess I wanted to experience everything.

Asian Angst

At my age one can’t avoid worrying about the future, about life, about family and about one’s kids. Anxiety and dread fills you that one has an urge to compensate by the easiest thing possible. Often times this means spending money, to buy better things for one’s family. Perhaps it is a larger home, an exotic vacation, a new car and other trapping of the material middle class existence. What is lost is something more meaningful, to be able to feel a sort of substantive spiritual worth. Is that what most American authors write about? The spiritual decay in the modern affluent suburbia?


Perhaps that is why some people look to the East such as India, searching for answers to spiritual needs. I guess for an Asian to move to an affluent society, one cannot help but be seduced by the material life. With money and shopping opportunities abounding, that spending one’s way out of anxiety and fear is perhaps the easiest temptation. I had always wondered about the angst of wealthy people and it’s only now that I realized what it means. It means seeing your friends or co-workers in bigger homes or better cars that one is tempted to follow their lead. It is the slow insidious rise of envy or jealousy.


It’s easy to borrow money and the whole economic infrastructure is geared to have a lot of dough floating around and encourage spending. Spending after all brings up the economy in a virtuous cycle until the society achieves material progress and rises out of the recession. It’s therapy for the moneyed class. The situation in the East is different although it is changing as well. I grew up in a society of scarcity where people try to preserve what they have instead of buying the latest model or fashion. It’s the virtue of living frugally and simply. Can this value still exist in a world of constant media bombardment and advertising? In fact is living a simple life considered a virtue today?


There are a lot of Asians living here in this country. A lot of Indians especially who have embraced this culture which is an irony since coming from a country of religion, mysticism and spiritualism. But it’s the way of the world now to buy a bigger house or a better car. Previously, one’s anxious thoughts are about survival or keeping one’s job or looking for work. In an affluent society, one’s anxiety is focused on where to spend one’s money, where is the better deal, what should one do in a country of ultimate possibilities, i.e. driving, fishing, skiing, etc. It’s a strange sort of reversal from one extreme to another.

Of course, it s pleasant form of anxiety wherein one does not lose sleep due to the worry of losing one’s job. But that’s not quite true. In fact one does lose sleep while being wealthy because one is always busy. Or more accurately one is distracted with constant television and Internet surfing that one sleeps late. I guess it’s the comparison of a poor man’s anxiety as against a rich man’s anxiety. Perhaps the true fear of the rich is boredom and the rich man’s mind keeps constantly churning into anxious thoughts. So one can’t really compare on who is the most virtuous. Perhaps the secret is balance, maintaining one’s Asian values by living simply despite being in a society of affluence and without succumbing to the material life.

Perhaps the secret is to focus on work. To devote one’s energy towards an endeavor that can transcend any feeling of trivial anxiety. Focusing on work I guess is a good remedy for both the poor man and rich man’s anxiety. Idleness and distraction is prevented and avoid corrupting the soul. Too much books, movies or activities are enough to tire oneself and moves one away from one’s spirituality. Quiet moments and rest, meditation and fulfilling work are the age-old remedies for society’s ills. Finally, the classics are still relevant and there is no such thing as the modern life because the age-old truths still apply.