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Why if only I had a dollar for each post I think the only interesting thing about these numbers is that if you divide page views by unique visitors, you get 2.3 which is as far as I have been able to gather is moderately high. I reckon this comes from those few that come here and then proceed to hang around for 3 hours reading 80+ posts or so. Incidentally, I take that as a compliment

I have been asked why I started blogging a couple of times. Now, there are two reasons to why anyone would start blogging and those reasons are to make the blogger rich and to make the blogger famous. I have certainly failed to become rich having consistently turned down all offers of buying links (sorry if I didn’t get back to you) and never bothering to set up the means to pay the government a part of more profit. I have not become famous either. Perhaps infamous is a better word

Actually the reason was that I wanted to create a more permanent and useful record of my writings. Prior to starting ERE I had been blogging on myspace for quite a while and even had a small fanbase or people who liked to disagree with whatever I was saying. However, I discovered that blogs also existed outside of myspace. Since then I have discovered that many other things exist outside of myspace such as reality and having a life

At the time, I had been calculating my “number” (click the link to see my very first post) quite religiously. I could at any date tell you exactly what my number was and what passive income that translated into. I had also come across these so-called personal finance blogs. They looked interesting and I figured I could write something like that.

When I started I had still not read more than a couple of personal finance books which of course makes me eminently qualified to not give you any kind of standard advice.

I quickly discovered a few laws such as the three-month rule that says that most bloggers last less than 3 months. I think the reason is that given one post a day most people have less than 100 different things — quite a lot actually — to say on any given topic. Apparently I had about 150 things to say so I lasted almost 5 months but around April/2008 I began to realize that I was running out of material. I therefore decided to take a break. Of course if you are a problogger, breaks are deadly. Readers are very fickle and quickly develop habits expecting you to post everyday at 8am and woe on you if you miss a post. Thus if you want readers viz. eyeballs viz. ad-revenue, you better post consistently and often. Luckily I had the freedom to take breaks and I still take them from time to time.

Another thing I have noticed is the tendency for blogs to turn into magazines once they get large and popular. This is no accident. If you set out to outcompete something taking up a niche, you are destined to become just like what you replaced (this is a very general observation). Hence probloggers have a tendency to turn into journalists. They lose their edge and they start writing for the masses taking care not to offend anyone or be too controversial. (During the past year I have had exactly two people call me a moron (a few more off site as in “That ERE dude is a moron”). Obviously, I reckon they have the poor judgment becoming of an idiot and thus I deleted their comments ).

The echo-chamber effect is also well-known. The echo-chamber is the effect where one blogger writes a post after which other bloggers write about the same thing over the next few days. I try to avoid it but it is not always easy. Coming up with something truly original is hard. The best way to avoid it is to simply postdate such an article by several weeks (unless it’s timely).

The most scary part about being a blogger happened just a couple of months after I started when a reader told me that he had sold his house and his car because he had been inspired by my writings. Something of a similar magnitude has happened about a handful of times later on and I surmise that there are also people making chances who are not telling me about it. Although people naturally are responsible for their own choices, I always feel a bit scared on their behalf. It is like handing a nuclear weapon to a politician: What if he does not understand the power he is suddenly wielding? Then again, banks are freely handing out credit cards and mortgage companies are freely giving out — well perhaps not so much more right now — mortgages, so am I any worse for saying that doing such things are a bad idea and that a, in my opinion, better alternative exists? I don’t think so. Yet, I still find myself reluctant to give specific investment advice.

As my final comment, I should probably unequivocally state that I AM working on a book (and talking with an editor, so I’m not operating in a complete vacuum ). I have hinted at it in the comments section earlier, but I have never directly admitted to it in a post. It is still a draft and maybe only 50% done, but I hope this explains why I am not posting 100% consistently sometimes vanishing for days. For those who read my earlier posts and compare them to my later posts and think “Man, this guy is getting boring/senile/normal…” (whatever your favorite derogative is — I think mine is “people” ), the reason is that I have been saving the best/most researched writings for the book and mainly posting interesting things that do not quite fit on the blog. It is a lot of work.

I just read this piece on CNBC which describes a blogging chain reaction following the Federal Reserves decision to spend $200 billion of the tax payers money to make it easier to extend consumer loans, student loans, and car loans. The thinking goes that without this stimulus, the economy would collapse. That’s right, it’s just what we need to cure the credit hangover, more beer!

And so how can this not be a good idea? Because removing the symptoms while exacerbating the disease is not a cure, stupid!

The problem is that a consumer credit driven economy is fundamentally a broken concept. Credit implies borrowing money and borrowing money implies investing it. All investments need to have a positive rate of return, that is, an increased productivity that exceeds the cost. The problem with consumer debt is that they do not directly result in increased productivity. Indeed, buying that sexy car or that 5 bedrrom house does not make you more productive. They are, therefore, not investments. Many student loans are not invested properly either. Some are, but many are not e.g. $100,000 for a BA in English that leads to a $25,000 salary certainly is not. Without easy access to student loans, wannabe students would be forced to acknowledge what they are paying and what they get in return. Perhaps then, educations would not be so prohibitively expensive (what exactly are you paying for when you are handing over $40,000/semester, that you could not get with a public library card and an internet connection?). In additions, students would not show up for class as if they could not care less (they don’t because paying back the loan does not happen until far into the future).

Indirectly, however, you could think of such loans as investments in the aggregate or maybe more accurately, it helps other people’s investments. Consumers borrowing money leads to actual investors using their capital to build the things that consumers use.

I find it funny that we, more credit conservative bloggers, get accused of being puritanic and paternalistic. I also find it funny that you can’t hit a personal finance blogger without being mainly focused on debt (unless, you hit me ): either getting out of debt or handling it “responsibly”, respectively.

Let’s deal with the paternalistic part first. I would say that a majority of people in debt are incapable of analyzing debt. Yes, they may go to a lender and the lender will present them with various options such as “how long do you want your chain to be?”, “how heavy do you want your ball to be?”, and “how much time do you want to serve?” Most people have no clue and lack the mathematical acumen to solve for a time series of cash flows and so they say “Sure, 30 years with a $500,000 principal and a 25% load, sounds good to me. I’ll just sign here on the dotted line (I don’t want to ask questions and look stupid)”.

I think most people have been “institutionalized” to the point of not choosing deliberately. They do not know why they are going to college (To get an degree is not an answer). They do not know why they are are buying a house, a car or charging on credit. They just do it. Like drinking soda. From that perspective, credit is a bad idea just like giving a gun to a 5 year old is a bad idea.

So is it a good idea. It depends on how cynical you are. In fact, if more people were investors rather than consumers or if more people where savers rather than in debt, the interest rate would be much lower and thus I would not have been able to stop working for money so soon. So yeah, thank you for that. But seriously though, it’s not really in your best interest, and I will tell you that. I will, however, also take advantage of the situation at the same time.

Second, there’s the puritanical part. I must admit that I feel a slight bit of schadenfreude towards the people who were living it up last year clearly beyond their means while bragging about how their networth were going up although it was clear to me that most of that networth was sitting in their very much leveraged houses. Yeah, so they struggle now, but they reap as they sow. In the end, it balances out. If I’m puritanical, it means that I don’t get to live it up while the going is good, but it also means I don’t get to struggle when the tide goes out.

At the end of the day, there is indeed nothing intrinsically bad about personal consumer debt, but couldn’t one say the same thing about personal hand grenades; they do not intrinsically kill anyone.

Anyway, I have fought this forced exchange with some success over the years and thus made it slightly less stressful. My problem is that nobody is better qualified to know what I need than me. Also, nobody is better qualified to pay for it. Therefore, if I need or even want something bad enough, chances are (100%) that I already have it. This means that gift exchanges are a net negative for me. It would be more efficient if we all just bought things for ourselves than things for others. Verily, Xmas seems to be an excuse for inefficient purchasing which is, of course, what shopping is all about. Oh well.

Fear not young rational, below I have collected some suggestions, which have worked with more or less success, that should alleviate some of the senselessness of Xmas. So here we go…

The cynical accountant’s xmas:

• Instead of buying presents write down the price of the gifts you intend to give each other on a ledger and then subtract the amounts. Then write checks for the net amount dependent on what you owe. I keep suggesting this one and it keeps getting turned down

The creative frugality expert’s xmas:

• Set a limit of $5 per person and see how that works out. Don’t play this game with consumers or all the gifts will be bought at a drugstore.
• Decide that all gifts have to be bought used.
• Buy the gifts from people you know (a “homemade sweater”) and give them to other people.

The overstuffed home owner’s xmas:

• Give the gift of experience. This could be a simple trip. I personally favor an intro-course, like a “6 hours of sailing for beginners” introduction. Many clubs will offer a deal like this. Be very careful about the recipient though as this could easily backfire. Even if the person seems interested it does not mean that they are willing to commit or even have the time.
• Food is also a good idea. For instance, I love capsicum (the “hot” in hot sauce), so a few years ago I got various bottles from several people. I have more than 10 bottles and the lasted almost half a year Giving something exotic might not be a good idea; I’m thinking of those “make your own somethingyouveneverheardabout/somethingthattakesforevertomake” kits. These might just sit in the pantry until they expire.

The busy/stressed out person’s xmas:

• Give the gift of time. How about lawn service for a year?
• Give the gift of agreeing not to give gifts. Not everybody likes to participate in gift exchanges, especially those who are no longer teenagers.

The lazy person’s xmas:

• Toothbrushes and toothpaste. Many years ago, I kept telling everyone “Toothbrushes” as a first defense. It worked, and as a result I ended up with enough toothbrushes to last me almost a decade. I never had to think about toothbrushes. Just don’t give someone a truckload of toilet paper. And don’t give your wife 5 gallons of dish detergent as she will not be able to appreciate the imminent and sophisticated rationality behind such a gift
• Socks, underwear, standardized jeans, etc. also works this way.

There are also things you should stay clear off.

• Gift cards! In this environment any gift card better be issued from a financially strong company. If they fold and go bankrupt before your gift card is used, the gift card is worthless. Cash is king!
• Treasury bonds. See above.
• Lottery tickets, at least for the financially or statistically savvy. Fun fact: According to the BLS, people who earn less than $13000 annually spend almost 10% of their income on lottery tickets. Talk about regressive taxes!!
• Gifts that require a buy-in. For instance, a shaving kit which requires frequent replacement of expensive blades.
• Any kind of pet. See above.

I’d be interested in hearing other ideas! Post comments below.

- Nah, I’m going to stay at home and read my book.

- What book could be more fun than shopping?

- My bank book!

Anyone else not joining the mayhem today?

Alright, so here’s one way to do it. I call it the sloppy joe pinto bean one dollar meal.

You need a can opener, a knife, a pressure cooker, and a spoon. These are all available from the minimalist kitchen. If you don’t have one of those, here’s how to get one. Aside from that you need some ingredients.

• Pinto beans, soaked and cooked (these are essential). We got a 10lb bag of these on freecycle. Pinot beans are good for anything that gets mushy e.g. refried beans.
• Sliced and diced onion (this is essential)
• Can of tomato paste (this is also essential)
• Chopped jalapeno peppers. (this is optional) We used to have them in the garden. One of the few things that actually worked (tomatoes being the other one), but this came out of a can.
• Basil (optional)
• Oregano (optional)
• Tabasco (optional)
• Chili pepper (optional)
• Black pepper (optional)
• Garlic (optional)

Leaving out the optional parts changes the taste but does not affect the general idea.

Fry the onions in a pan. Add the rest except the beans. Stir. Now add the beans. You’re done.

You can serve it on bread with lettuce, tomatos, olives, etc. or with rice and pasta. All these options create a balanced amino acid profile. Have fun.

It’s raining outside, yet it’s not dripping inside, so I am proud to note that I seemingly successfully sealed the previously leaky skylight when I was on the roof the other day. Apparently that job did not require an expert.

Or should I wait to see if it still holds tight in a month or so?

(*) Pop-quiz: Name a couple of Nobel prize winners whose fund failed resulting in systemic problems that had to be bailed out.

I have questioned this collective wisdomherd behavior behind index investing before (here, here, and here). The problem is that index investing basically attempts to free-ride on institutional, mutual, and pension funds (larger drivers of the equity market) which naturally have their own agendas.

(**) Yikes!!!

There is a problem in perception as well. Anyone who buy stocks often fancy themselves investors,. Yet buying regularly with no concept of valuation is not investing anymore than sitting in your car while making engine sounds with your voice is driving. Such “investing” is simply saving. In that sense dollar cost averaging maybe be considered a form of saving denominated in the productive capacity of the country rather than in its currency, where the currency is nothing but a claim on its production. In other words, the choice is simply made in terms of saving in future products or future productive factors.

I commend either way. Savings is good! But don’t call it what it is not. Investing is the process of spending savings to purchase something of value to increase future returns. For individuals, this is not done by buying a broad basket whether it be productive factors or products. It is not done by buying at any price. What kind of deal is that anyway, say, going into a supermarket and buying a bit of everything in proportion to what everybody else is buying. Is that a deal? Think about it. Who benefits if the mass of people follows this advice? Yup, that’s right, the supermarket, not you.

It is easy to see why this would fail to provide superior returns. Businessweek recently wrote an article that summarized how buying and holding the market for the long run often required some staggeringly long runs. Here are some numbers for the longest periods during which the market was lagging inflation:

• U.S 16 years (1905-1920)
• Britain 22 years (1900-1921)
• France 53 years (1900-1952)
• Germany 55 years (1900-1955)
• Japan 51 years (1900-1950)
• Italy 73 years (1906-1978)

That is a long run indeed. So, you may argue that these periods have been selected. Of course they have. You can however find other periods at later times, even recent in your lifetime, that span decades. A span comparable to a normal person’s “investment career”.

But what about dollar cost averaging? Dollar cost averaging is a sword that cuts both ways. If you DCA in a market that first goes down and then goes up again to close at the starting price, you benefitted. If you DCA in a market that first goes up and then goes down again to close at the starting price, you lost. Dollar cost averaging is not supplying any free lunch to anyone. It only spreads risk equitably. Consider that there are probably a comparable number of people dollar cost averaging out of the market, namely those retiring who need a certain amount each month. Why would one group benefit from another(*)?

(*) If they did in any predictable fashion there would have been someone to arbitrage this gain out already.

In conclusion: DCA, buy and hold, and index investing are all good, but they are not a silver bullet. They are going to make you richer than your peers if you stick to them, but it is not due to their superior strategic virtues. Rather it is due to the discipline which you have and others do not. If you want to produce superior returns, you have to provide some kind of value. If you have buy shares when they are cheap and sell when they are expensive (trivial in theory, hard in practice). You have to provide liquidity when the market is starved and accept liquidity when nobody wants it. You have to take risk, when everybody is risk averse and be afraid when everybody is complacent. TANSTAAFL!

I’d hate to sound like a luddite, but exploring ever more details of the universe to be published in some paper in some obscure journal is not what space missions should be about. The greatest accomplishment of the space race is often said to be the technology that was developed and later used in the “real world”. While that was nice and all, that was, in my opinion, not the most important result of the space race.

The most important thing was that a small group of humans went into space and realized some things on a visceral level that is intellectually less meaningful: From space, borders do not exist, but are arbitrary human constructs. From space, Earth is really fragile. From space, Earth is really small. With such a perspective, it is hard to understand why humans living next to each other would squabble over where borders are drawn. It is to understand why humans would pollute their nest to make it unlivable. It is hard to understand why humans do not take better care of their home. I wish more people could have the chance to go into space. And this time, send the poets and the writers so that they can tell the rest of us, and send the political leaders and the religious heads so that they may gain a different perspective. Do not keep sending engineers and scientists. Thanks to the latter we may know more, but we are none the wiser.

This is a response to Frugal Bachelor who noted that pf bloggers have gotten awfully quiet about the market. On the same note, pf bloggers have also gotten awfully quiet about the 100 push up challenge, but I digress (as usual).

For me and other people who do not want to rely on the job market as a source of income, this market crash is not a tragedy. It is an awesome opportunity! I am bullish on extreme early retirement

What we are seeing is the greatest wealth transfer in a generation from those who are selling to those who are buying. Many people make the mistake of completely ignoring what they are buying. Yes, the market has crashed, but I now have many more shares than before (larger fraction of the entire economy) and they are cheaper to buy too. How can this not be a good thing?

I’ll tell you why. Because people have developed some screwed up perceptions about wealth. You see, in this economy wealth has come to be asset based rather than income based. When something is income based, you get a salary, or dividends or interest payments. Someone is actively giving you money. If these money transfers are large, you are rich. When something is asset based, you rely on appreciation of something you own, that is, that someone else will buy what you own for more than what you paid for it. This is essentially nothing but long term trading and it is not a good idea. It is especially heinous in an inflationary Keynesian economy. Here people get used to assets inflating. If they own them (houses), then they are happy (nobody cares about those who do not own houses who are naturally unhappy). If they do not own them (oil), then they are unhappy and talk about taxing windfalls. Asset bubbles are simply an emergent systemic behavior of a Keynesian (government stimulus) based economy.

Assets do not make you rich. Income makes you rich. Assets make you wealthy. However, as many are discovering, paper wealth is not real wealth. What makes the current market great is that there are many more opportunities for buying income generating assets.

For extreme early retirement, I am not going to stake my financial stability on past results, even when they are based on Monte Carlo simulations, rather I am going to arrange for an alternative income stream (stock and bond based) that will generate enough income for me without ever having to sell anything.

This means I do not care so much about my networth as I care about two other factors. Those factors are

1. How much income I’m generating
2. How much I spend

Thanks to the market decline the first one just got easier. Twice as easy with the caveat that some companies might halt their dividend. In terms of how much I spend, I am already doing pretty well.

As far as I am concerned, with an income generating portfolio, the market can stay flat forever, something it has done before for 10-15 years. I do not have a net worth target. I only have income and expense targets and these are a lot less volatile than asset based targets.

So now this got me wondering what else do people know that I don’t(*). I’d like to draw on the collective wisdom. You see, before I die, there are many things I want to do, so my question to my readers is:

1. Does anyone practice kendo?
2. Has anyone ever piloted a glide plane?

(*) No snarky comments on that one please )

Incidentally, reader questions are quite welcome. Solicitations for my “opinion” are even more welcome (I am very opinionated if you hadn’t noticed ). Send them to jacob at e….com