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Watch Your Wallet

Solving financial problems and exploring new opportunities... investing, saving, financial planning, and the world of personal finance.

Updated: 2018-02-13T02:42:03.591-05:00


Should I put one space or two after a period?


Ok, this answer is easy:Unless you are using an old fashioned typewriter, you should only use one space after a period.Look at any professional publication you respect. Look at every book you have. Look in every magazine. You will find only one space after the periods.The reason why (older) people were taught to put two spaces after a period is because back before computers, people wrote things on typewriters. Typewriters used something called monospace fonts, that is, fonts in which every letter was the same width. In order to make a pleasing space after a period, two spaces were needed when using a typewriter.However, once the personal computer came into existence, every person had the power of a professionally typeset (i.e., non-monospace font) at their fingertips. Two spaces after a period were no longer required.If your coworkers use two spaces after a period, just ask them to stop. If you want to fix their document, you can just do a "find and replace" for ".  " (that is, a period with two spaces after it) and replace with ". " (a period with one space after it).The one instance where I would make an exception is in any technical sort of writing where part of the requirements you are given are specifically to add two spaces after a period. I would argue that anyone with such a rule is stuck in the past, but rather than put your career/script/legal brief etc. in jeopardy, just roll with it. (Side note: I ran into this situation once. I just wrote the document correctly (with one space after the period), then did a find and replace when I was finished to fix the formatting. I also gently informed the person who required this archaic practice about modern typesetting, and I never had to do this again.)Before this turns into a major debate like my post about not putting the MBA designation on your business card or in your email signature, just remember that you don't have to take my word for it.Listen to the Chicago Manual of Style, which is of the view  that there is "no reason for two spaces after a period in published work."Listen to the MLA Handbook, which only uses a single space after a period in all of its examples.Listen to Typography For Lawyers (a personal favorite), which says to "put exactly one space after any punctuation." (I particularly like how in this link they show you the difference between monospaced and non-monospaced fonts).Listen to the always cool Slate Magazine, which punches you right in the face with the following statement: "typing two spaces after a period is totally, completely, utterly, and inarguably wrong."Finally, listen to The Economist, which has a macro that automatically strips a second space from after a period if one should find its way onto the magazine's online content management system.The Economist does leave the door open a crack for some debate, taking the view that spaces after a period are a style choice rather than a hard and fast rule. I think they were a bit too kind in that approach. It is also a "style choice" not to wear bellbottoms or a stovepipe hat, which, if you use two spaces after a period, you might as well do because you are truly living in the past.Feel free to comment if you disagree- the internet is a beautiful thing![...]

Professionally Formatting a Word Document


Chances are if you work for a company, you may occasionally need to create a document in Microsoft Word, either by taking someone else's document and using it as a template or creating your own from scratch. If you just type things in Word and haven't taken the time to learn how to do it professionally, you are doing yourself a disservice. I've seen documents at different companies that have had pretty bad formatting. They have been passed around over time between 5 or 6 people, copied, pasted, formatting has been updated and adjusted, spaces have been put in where tabs should be, bullets aren't consistent, etc.You can significantly improve the quality of your work in MS word by putting in a few hours of practice that will pay off over the course of your career. (College students in particular, pay attention to this. The more time you spend learning this stuff now when you have more time to devote to learning, the more time you will save yourself later when you're going to work).I've always been able to learn a few things from the "For Dummies" books, and this is no exception. (Well, the one exception is with respect to investing. There are a lot of good books on investing outside of this series.) So if you're into having a book to hold in your hands, an investment in Word 2013 For Dummies or Word 2010 For Dummies will pay for itself many times over.If you don't want to use a book, there are a number of different sources/tutorials across the web, particularly on youtube, but they aren't very systematic, meaning they typically only address specific topics you might be searching for help on.Anyway, if you want my advice, the first thing to focus on if you want to create a professional looking document is styles (link directs you to people have never heard of "Styles" in Word (myself included, until a few years ago), or if you've heard of them you might have thought that they were some kind of super advanced thing you never needed to use. Let me tell you right now that you are wrong if you think that. They are actually very easy once you get used to them, and they are essential to creating a professionally formatted document. One of the key things styles allow you to do is ensure consistent formatting throughout your document. Consistency is extremely important because it helps the reader to orient themselves (and helping the reader is important- to quote Strunk and White's The Elements of Style, "you must sympathize with the reader's plight (most readers are in trouble about half the time)"). If all of the section headings look the same, the reader will always know exactly where they stand. Consistent formatting also gives the benefit of looking pleasing to the eye.Particularly among finance and engineering types, I have noticed an inability to properly use MS Word, but no matter how good your excel models or technical drawings are, if you can't communicate them in a professional looking format, you will be doing yourself a great disservice. A few more tips to help you out in Word:Break your words up with pictures. Use tables, figures, diagrams, and illustrations. Though your prose may be excellent, your report will be more appealing with some figures.Consistently format these figures. If you are using reasonably sized tables, use MS Word's embedded table function to create tables. They will have the same look and feel and will vastly improve the quality of your document vs. a Frankenstein-like compilation of tables extracted from various excel documents, pdf screenshots etc. It may take time to retype a table into word, but the results are often worth the effort. Also, caption the figures consistently. (by the way, if you need to move rows around in a Word table, try this trick, it changed my life. Even if you don't need to move rows around, try this trick out because I can almost guarantee it will come in handy.)Use a cover page, particularly for longer reports. The built in cover pages are pretty awesome and you can modify them a b[...]

Excel data table for sensitivity analysis


I've used Microsoft Excel for so long that it has become kind of like another appendage at work. It is one of the most powerful tools you can learn to use to increase your productivity in an office. I played a lot of video games growing up, and in video game terms increasing your Excel skill is kind of like adding experience points and making your character more powerful. The better you know how to use excel, the more you can do in less time, especially if you're in finance/accounting/marketing/other numbers-oriented fields (and these days with rise of big data, almost every field is now numbers oriented). Every day I learn a new function, re-learn how to use an old one that I haven't tried in a while, or discover a new way to do something quicker.One powerful tool I use often enough to have memorized how to use it is the data table function. Let me put its usefulness in context...So you've created a working DCF model that values a company and you've assumed a discount rate and a revenue growth rate as part of this. Your boss/portfolio manager/wife/self looks at it and says "ok, but a DCF is just a tool to estimate value. You're giving me an precise number. How sensitive is that number to the discount rate you chose? By the way I don't believe the revenue growth rate you chose- what would the value look like if you dropped it by 5%?"You go back to your spreadsheet and build a table. You spend the next hour methodically changing the discount rate input, and the earnings rate input, and noting the results. You come up with a whole range of values. You format them nicely, print it out and show your boss/portfolio manager/wife/self. He/she says "great, this is what I was looking for. I'm not confident the revenue growth will be as high as it needs to be to make a good return buying the stock at its current price so I'm not sure what to do here. How about you change the margin assumption in your model and show me what it does to this sensitivity table?"You sigh. It's six o'clock. It will take another hour to do this, but you go back and make the change to your margin assumption. You then slog through, methodically changing the discount rate and the revenue growth rate and noting the results. You think about that beer waiting for you at home. Your mind wanders and you wonder if Excel has a way to automatically create a data table that will be sitting there, ready to update at a second's notice if you change any part of your model. One that will vary the assumptions for you behind the scenes and print out the results for you... You fire up the google. Your hard drive and RAM are jolted with electrical impulses. The google algorithm does your bidding. It sorts, it seeks. Your ISP brings you data at your maximum download speeds, your monitor renders bits and bytes into pleasing words and pictures.... and one second later you get search results. Pages upon pages of search results, all of them pointing you to the data table function. You fire up youtube, watch a tutorial, and seconds later you have a dynamically linked sensitivity table ready to do your bidding at a moment's notice. It takes a bit of time to get it right- some videos only use a single variable analysis, you keep getting the row and column inputs confused.... but it is time well spent. Learning how to use a data table just shaved an hour off of every future DCF you do. It made you more efficient. It made you better at your job. Anyway, if you haven't learned this yet, I strongly suggest you check out how to create a data table in Excel. Yes it is a bit complicated at first, but it gets much, much easier. As a side note, I've found the best way to learn how to do things in excel is with actual live problems. Something that you need to deliver and that would be mind-numbingly tedious without an excel trick. I suck at using blogger for anything but text, so as of now I'm not able to give you an effective tutorial on how to use data analysis (apologies to anyone who came here looking for this). W[...]



As many advanced googlers know, if you type in a search term with a minus sign before it, your search will not return results with that word in it. I was just sitting here doing a thought experiment- what if I spent the next few weeks only reading financial news stories/research/information that do not contain the word "bernanke." Better yet, what if I could just run the big "minus" filter on a host of terms including "qe," "fed," "gold," and also "bubble" for good measure.

I probably wouldn't be able to visit zerohedge anymore, which would be a bummer because that is one of my favorite sites.

I know this whole thing is in uncharted waters currently, but Every now and then don't you get bernanke fatigue? Fiat fatigue? Maybe it is just a part of getting older. Maybe my father was in this position 30 years ago when he was looking at the economic future of the country and hearing doubts about where it was going to be in 30 years. Maybe you can always find things to worry about.. Maybe my father had Volker fatigue in 1983. Maybe things have never looked good to anyone and all of us current market participants are just in the same position our fathers were in. Maybe it is time to stop worrying about it so much.

I know you can respond with umpteen stats about how this time it's different. How the gap between the rich and the poor has steadily increased, and how incomes have come down (or if you want to make the argument they've gone up in aggregate). Don't bother making them to me though. At this point I tend to just nod my head when I hear someone's prediction about where the economy and the country are headed.

I'll continue to read about and follow it all because that's the way I'm wired, but boy a vacation would be nice. 

Thoughts on 3G Capital's LBO of Heinz or "Warrant" Buffett Strikes Again


On Feb 14 (last Thursday), Berkshire and 3G Capital announced that they agreed to acquire food company H.J. Heinz Co. for $23 billion in cash ($72.50 per share, a 20% premium to where the stock closed the day before).Well, that's what the headlines would have you believe anyway. However, that is not what is happening. My headline is a bit more accurate. I'll explain below.Initial readI was pretty busy last Thursday so I didn't pay a whole lot of attention to the acquisition, but as may you know I'm a big Buffett buff and I made a mental note to take a closer look at the numbers at some point in the future. I like to check in on what smart people are valuing businesses at every now and then so I have a good market reference point in my head.My initial assumption based on the headlines alone was that the deal made sense- Buffett loves these big, high quality brand name companies and Heinz seems to make sense as a piece of the portfolio alongside Wrigley, Coke, and Gillette. I also know Buffett likes to pay a reasonable for a business (read basically any book about him and you'll see some reference to the "margin of safety" concept he learned from Ben Graham) so I assumed that he got a good deal. I haven't really followed Heinz, so I thought that maybe the stock had been neglected and possibly didn't take part in the recent market rally.Today I revisited the story, pulled open Heinz's last 10-K and realized that I was completely wrong. This was not an old-style Warren Buffett margin of safety "be greedy when others are fearful" acquisition of a great business at a substantial discount to intrinsic value. This was much more what I've come to think of as a "new style" Warren Buffett where he gets to put capital to use at rates no mere mortal can obtain. The price paid for Heinz was not a bargain from what I can see.The price tag was high - 25x earnings!Looking at Heinz's 2012 10-K (see page 33 for the income statement), the company earned about $939 million of net income for the year ended April 2012. I opened another couple of 10-Ks to look at the five year history, and net income averaged a bit below $939 million for this period, so I figured it was a pretty good number. Divide the purchase price of $23 billion by $939 million and you'll see the Buffett/3G team paid about 25 times trailing earnings for the company, not a low multiple by any stretch of the imagination. For the sake of comparision, Google sells for a similar multiple, is trading at an all time high, and though I'm getting out of my league here, I think it is considered more of a growth stock. Heinz does not make technology, it makes food products.Going a few pages further in the 10-K, I figured I'd get a rough sense of what the company's free cash flow is. Take net income of $939 million, add back $300 million of depreciation, $50 million of amortization, deduct CAPEX of $400 million and you're at roughly $900 million of free cash flow. If you pay $23 billion for the company, $900 million of free cash flow equates to roughly a 4% yield. The multiple is still about the same, roughly 25x FCF. I also checked how FCF looked over the past five or six years, and again the average was below the current $900 million number.I didn't create a DCF model of the company because I'd seen enough at this point and I didn't have the time to put into it, but I think if you do a DCF with some reasonable assumptions, you're not going to get to a $23 billion valuation for the company assuming things continue along as they have in the past.I believe I read in the press that the price was something along the lines of 8x book value and 14x EBITDA, again generally high multiples (though book value isn't the greatest metric for a company like this).Berkshire didn't buy the company, it bought half of the equity in the deal, plus high-yielding preferred and warrants as a kickerReading past the headlines of the articles, I realize[...]

Urban Hurricane Preparation


So I've recently lived through the effects of Hurricane Sandy here in the Northeast and I want to give my perspective on how to prepare for a Hurricane if you live in an urban area like me. This isn't a guide per se, but a few things I ran into.Thanks to modern weather forecasting, we knew there was a potential monster storm coming in at least 3 days before it actually hit. My first tip is not to ignore the weather forecasts. Especially if they are dire.  In fact, if you need to guarantee productivity (ie power and internet connection) for office/computer work etc., you might even want to fly you or some of your staff out of town and stay in a cheap hotel somewhere out of harm's way for a week.Gas up. Before the storm comes in, fill your car with gas, and if you have gas cans, fill those also. (Note: if you live in an apartment you likely can't keep gas cans in there due to fumes and general safety. This is more for people with garages and generators. Be extremely careful when storing and transporting gas.) There are long gas lines in NY, NJ and CT at the moment. Bonus points if you have a bicycle that you can attach a basket to for groceries in a pinch so you dont even need to use that much gas.This is an odd one, but something that came up. Your garage door opener might not work after a storm. Go into your garage and pull the disengagement handle for the electronic opening mechanism. You now have an old fashioned door that pulls up and down by hand. Tie a rope with a heavy weight on the end to weigh the door down so it does not blow up in strong winds.A lot of people were so focused on the storm that they ignored the weather forecast for after the storm, which was pretty cold. Be ready to stay warm if needed. Blankets!If you have an electric stovetop, you could be screwed. People with gas at least had something on which to cook, make coffee and tea etc. Ditto for the electric coffeemaker. I highly recommend this regardless of hurricaines, but get an Aerobie AeroPress Coffee and Espresso Maker immediately (check out my review of the aeropress here)!Stock up on dry, canned foods and water. Stuff sealed ziplock bags mostly full of water into the empty spaces in your freezer. They keep stuff cold longer if the power goes out and in a pinch you can even drink the water.Follow the advice on Go bags etc. are handy. If floods are a threat, you need to be ready to move.Have good battery powered lighting. I own a Fenix E21 Flashlight and I kept it on me at all times during the power outage. I love this thing. The advantages of this light are: 1) it is super bright. I'm talking daylight in a dark room bright. 2) it is small 3) It is heavy duty and waterproof. I saw a youtube video where someone had it lit in a bucket of water for a day or something and it still worked. 4) It takes common AA batteries. Another suggestion is to get a book light for reading and a LED lantern for general lighting. A headlamp is also good for doing dishes or other work in the dark. Try to get them all running on common batteries so you can stock up on those (AA for example). Also have CANDLES. I hadn't had a candlelight (only) dinner in years and its amazing how much light a couple of candles can throw off. Have a good battery powered radio. When the power goes off, BOOM, instant loss of all those nice news anchors giving you up to the second updates on doppler radar so you will be dying to hear some kind of news and the radio is your friend in this situation. Seems like all of our clock radios took 9 volt batteries and at one point we ALMOST considered taking the battery out of the smoke detector to put in a radio for a few minutes but luckily we found one. Bonus points if it also has a hand crank as backup in case you're out of batteries. I can see these things selling like hotcakes in the wake of the storm. If you had solar powered stuff, it might have been ok for a very brief p[...]

Smallcap Screen Part II - Lotus. Jiangbo and Huifeng


Ok, so maybe I should call this a microcap screen, but for now lets ignore the semantics.
I finally got around to checking into Lotus Pharmaceuticals. They use essentially the same corporate structure as Skystar, controlling a china-based entity through "contractual arrangements." They also executed a reverse split in 2010, yet the shares still trade for less than a dollar. I'm going to rule this one out as well. (If you want to know why, refer to my previous analysis.)

The final 2 similar-looking pharmas that show up on the list are Jiangbo Pharma and Huifeng Bio-Phar. I am going to save myself some work and assume that these companies also have a similar corporate structure as Skystar. To repeat: I'm not saying these are necessarily bad structures, I'm just saying they don't offer me enough certainty to invest my hard-earned money. You are free to make your own determination.

Smallcap Stock Screen - Investment Ideas


Although I don't recommend most people invest in individual stocks, I do keep a (very) small portion of my investable funds in an account I actively manage. My results have been decent. I have a few stocks I track regularly and have been in and out of them a few times over the years. I've also done some experimenting with options (failure), shorting (great success), and various other securities. At the moment, I'm about 50% cash in the account and have kept my eyes open for potential ideas. (Note: almost everything (except for a long term holding or 2) in this account and every company mentioned below falls into the category of speculation, not investment. An investment, upon thorough analysis, promises security safety of principal and a satisfactory return.) Though I try to stay away from the smaller end of the spectrum due to the higher risk I associate with tiny companies, I figured I might run a screen on the small end of the market to see what popped up. To that end, I did a screen of microcap stocks with market caps below $20 million, P/Es below 12x, 5 year average ROEs above 15%, trailing 12 months EPS above zero, and 5 year revenue growth above 10%. The result was a list of 24 stocks for further investigation. One thing that immediately stood out to me on the list was the pharmaceuticals. There were four of them on the list with similar sounding names: Huifeng Bio-Pharm (HFGB), Jiangbo Pharma (JGBO), Lotus Pharma (LTUS), and Skystar Bio-Pharm (SKBI). They all had P/E ratios of 1.13 or below and also made me immediately skeptical. Starting at the beginning, I pulled up a yahoo finance quote on Skystar. The stock trades for $2.15 per share and had a 52 week high/low of $1.39 and $10.58, respectively. All else equal, I'd rather buy a stock at its high than its low, so this was a positive sign. I did a quick calculation and if I bought this stock today at $2.15 a share, then sold it for $10.58, I would make a 392% return. (conversely, the people who bought it at $10.58 and sold it today are looking at an 80% loss). I also noticed it traded only 580 shares last friday, or about $1,200 of total volume, showing that the stock is very illiquid. If I owned shares of this company and needed to sell for any reason, the lack of potential buyers in the market could mean I would have to take a discount on the prevailing market price to sell them. Though this is a risk, you can also see this as a positive. If a lot of people aren't buying the stock, chances are very few people follow the company and you might notice something others have missed. If the stock ends up being a true winner, people will eventually come around to realize the value of the company I have no idea what the company does, so I decided to pull up its most recent 10-K. They might as well paint a bird on this thing and fly it above Busch Stadium because it looks like one giant red flag to me. The first page was enough to turn me off, and this rarely happens to me: "We were incorporated in Nevada on September 24, 1998. We are a holding company that, through our wholly owned subsidiaries in China, Skystar Bio Technology Co.(Skystar Jingzhou) and variable interest entity (“VIE”), Xi’an Tianxing Bio-Pharmaceutical Co., Ltd. (“Xi’an Tianxing”), researches, develops, manufactures, and distributes veterinary health care and medical care products in the People’s Republic of China (“PRC”). All of our operations are carried out by our subsidiaries in China and Xi’an Tianxing, which the Company controls through contractual arrangements between Xi’an Tianxing and Sida Biotechnology (Xi’an) Co., Ltd. (“Sida”), the wholly owned subsidiary of Fortunate Time International Limited, the wholly-owned subsidiary of Skystar Bio-Pharmaceutical (Cayman) Holdings Co., Ltd. (“Skystar Cayman”), which bec[...]

The most useful things I've ever purchased


Time and time again I've gotten household/automotive appliances (eg: george foreman grill or a $20 paper shredder) that have either broken or I've stopped using. Below are a few items I've gotten off of Amazon over the years that I have found to be well made and gotten a lot of use out of and I have no hesitation recommending.

1) Giant, Powerful Scissors.
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Ok well maybe they refer to them as "Tin Snips" but these things are awesome, and amazingly useful. According to Amazon: "Super sharp blades easily cut through sheet metal, aluminum sliding and more ." I've used these to cut through so many things I can hardly keep count. In particular, they are good on packaging. The hard plastic packaging that most electronics seem to come in most days can be easily disposed of with this thing. It also eats right through whatever plastic ring in a package may be securing the item inside. Do yourself a favor and get the twelve inch ones. Whenever you need scissors on steroids, keep these handy.

2) Tire Inflator

I've had this Slime compressor for about a year and it is great. Throw it in your trunk and you will never have to pay a dollar at the gas station each time you want to inflate your tires. This particular model is pretty heavy duty and feels like it will last a long time. Plus, when you get that inevidable flat tire only to find out your spare needs 40 pounds of pressure, this thing will be there to help you out. It will also get you to the gas station if you discover a nail has slow-leaked your tire flat overnight. As a bonus, it also comes with attachments to inflate things like bicycle tires, basketballs and other inflatables.

3) Aeropress
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If you need single serving coffee, forget about the tasteless pods that everybody seems to be buying these days. The Aeropress is the way to go. The reviews on Amazon speak for themselves. I've had mine for over three years now and it is the only thing I use to make coffee at home. This is especially good for people who (like me) enjoy strong coffee. Read all of the Amazon reviews if you don't believe me.
Being a finance person, I'm not a big fan of buying crap you don't need or can't use, but this stuff is either incredibly useful and built to last forever (the snips), saves you money and gives you peace of mind (the tire inflator), or saves you money and gives you delicious life-giving coffee (the AeroPress) and I'm willing to go out on a limb and recommend all of the items above. As long as you can comfortably afford them, you won't regret buying them.

S&P Downgrades US Government Rating from AAA


Late this evening, S&P announced it is downgrading the US Government's credit rating to AA+ with a negative outlook.
If we learned anything from the financial crisis of 2008, it is that investors should do their own credit analysis and not rely on what the rating agencies say. That is why, to me, the downgrade itself is a non-event.

I'm not saying there won't be reaction in the the markets. There may be a reaction, but in my opinion, if people react to S&P's release, they are reacting to the wrong thing because all it does is state some things we already know about the country.

The only reason I see this as an event is the headline value. People who have never even heard of S&P are going to be treated to plenty of headlines about this downgrade (and chances are all they are going to read are the headlines). This could put fear into the markets. Political talking heads will blame both parties (Republicans: see what happened on the Democrats and Obama's watch?? Democrats: see what the GOP brinkmanship did to the country??) but it is the fault of both parties that we are in this current position.

It has been apparent for some time now that the US government is in an unsustainable financial position. We spend too much money. We spend more than we earn, so we have to take out loans. It is a basic problem that every person reading this blog can easily understand: if you spend more than you earn for a long period of time and borrow heavily to keep up your lifestyle, you end up with an ever-growing pile of debt.

Did you really need S&P to tell you that?

I don't see the S&P announcement as a bad thing. Maybe it will cause more people to investigate our government's finances and figure out how to fix them. We can do it the right way (cut spending/entitlements, IMHO) or the wrong way (increasing revenues, A.K.A. tax increases), but if we do nothing, it puts the future status of the USA at risk and as a US citizen, that is my least preferred outcome.

I'm not going to turn on the TV or read a financial news article this weekend and suggest you do the same. If you want, go to the us government website and read about what government expenditures look like and where the money comes from.

A few good reads


I came across a post by Jason Cohen called Rich vs. King in the Real World: Why I Sold my Company for the second time in the past few months today and highly recommend you check it out.

He talks about the way cash in the bank affects your lifestyle and makes the point that the relationship is not linear.

I'm now as jealous of Jason as I am of Scott Adams and his Dilbert Money, but I don't begrudge either of them their well earned financial freedom.

By the way, you are correct- I haven't posted anything in a long time. I'm still keeping up with the markets though. One blog I started reading regularly over the past few years is called Zero Hedge. I recommend you check it out if you're looking for some good reading. They write a lot more than I do and take an interesting, alternate view you won't see on a lot of the big financial news websites.

My comments on the current state of the market are as follows: I haven't seen a truly positive headline in years, gold is shooting through all time highs, interest rates are practically nothing, the dollar continues its decline, the US may default on its treasury debt, yet the equity markets have seen a strong rally since they recently bottomed out in 2009.

I'm most of the way through a pretty good book called More Money Than God: Hedge Funds and the Making of a New Elite (Council on Foreign Relations Books (Penguin Press))(image) . It is a history of hedge funds, tracing managers and styles from the early days of the industry to today. In my opinion, the author has a pretty strong agenda - pushing his viewpoint that hedge funds are good for the economy and shouldn't be strongly regulated - but aside from the few opinion sections, the book is a great read sofar.

The Best Vacuum I Could Find


SEBO X4 - the best vacuum I could find.A while back, I wrote a post about the best medium-duty shredder I could find. The moral of that story was that I was tired of burning out the motors on cheap shredders or sitting in front of them feeding one sheet at a time, so I spent a little more on a better quality shredder. I ended up with a powerful little machine that destroys junk mail like a savage, shreds 12 sheets at a time and has been doing an incredible job of protecting me from ID theft for over four years now. By paying more for a quality applicance, I actually saved myself money in the long run and it really cemented my philosophy that you should be prepared to pay up for a quality appliance. Buying one well-made (and likely costlier) product that you don't have to replace is ultimately cheaper than buying five cheap ones, and it is also so much more satisfying to use.At the end of that post, I mentioned that the next appliance I had on my radar for an upgrade was my vacuum. There are few appliances as basic and essential to a clean, hygenic dwelling place than a vacuum.My old vacuum was a piece of junk bagless upright. I threw it out a while back and I don't remember the exact model name or number, but it was a sub-$100 model similar to the Dirt Devil UD40285 Featherlite Bagless Upright.It was great at first. Nice suction, always worked, had shiny new parts and attachments. But after a few months, it started getting on my nerves. It seemed to have a weak motor and wouldn't pick up the little stray pieces of lint and string I could see in my carpet. I felt like I was following my vacuum around picking up whatever it missed. It was also a major pain to clean. When I bought my previous vacuum, I didn't give it too much thought. I figured it would be great to get a vacuum without bags because I'd save on the price of buying new ones when the old ones filled up. I figured when the dirt container got full, I would just dump it in the garbage, put it back in the vacuum, and get back to cleaning up. Right?Wrong. The dirt reservoir was an incredible pain in the neck. Cleaning it made me feel like Mike Rowe in an episode of "dirty jobs." After you've tired yourself out by vaccuming (in my case moving furniture out of the way to get under tables and chairs), you bring this container chock full of dust over to the garbage can, turn it upside down, and watch as a mushroom cloud of dust rises from the can, putting the stuff you just took out of the carpet back into the air in tiny, microscopic particles. I tried everything to keep the dust down when cleaning out the container- putting it inside its own plastic bag, emptying it really slowly, covering the garbage can as quickly as possible... but nothing I did got rid of the fact that cleaning the vacuum put the dust back into the air. Not to mention the fact that it was impossible to get the entire container clean. Dust stuck EVERYWHERE inside the vacuum, on the sides of the reservoir, in the little mesh cover at the bottom of the intake, on the underside of the lid... it was dust city inside that thing and the problem only got worse over time.The vacuum also had a cheap belt which started slipping after about 6 months of normal use. For those of you who have had a vaccum with a slipping belt you'll know what that meant- burnt rubber smell every time you use the vacuum.I began to dread vacuuming and I cursed that machine every time I laid eyes on it.I finally gave up and began looking for a replacement. I wanted something like my shredder- a quality workhorse. I was willing to pay whatever it took (within reason) to get an animal of a vacuum. I figured if I had to replace a $100 vacuum every year, I could pay $800 to $1000 [...]

Warren Buffett's 2010 Letter to Berkshire Shareholders


So as of a couple of weeks ago, the market was up almost 100% since the 12 year low reached in March 2009. It was also up 7% since the beginning of this year. I have to agree with the headline in the linked article though- this feels like "the unhappiest bull market ever."Maybe it is just what I focus on, but despite the numbers on the big board, all of the other news seems pretty negative for the average US investor. In fact, it's downright depressing if you think about it. For example, some of the major themes that have pounded into our skulls for the past couple of years are: 1) The FED has been printing money and flooding it into circulation, devaluing the US dollar2) China's economy is going to overtake the US economy by 20183) We are entering a "New Normal" era of low stock returns, low GDP growth, deleveraging, etc. I think this view is most convincingly espoused by Bill Gross and his colleagues at PIMCO4) The US government has bailed out shareholders at the expense of taxpayers, (more about that here and here, here (it bailed out people who couldnt pay for their mortgages also)). It also put other costly programs into place, 5) Based on pundit's views, state governments are headed for bankruptcy also6) Stocks are overvalued  - note this is a more recent trend7) Unemployment is high in the US. We are losing manufacturing jobs hand over fist. We no longer make stuff in the US, we are a "knowledge economy" 8) The rich are getting richer, at the expense of the poorOh, not to mention the social security crisis starting now as the baby boomer generation reaches retirement age and global warming (to anyone on either side of the debate, im not taking a stance on global warming, merely saying it is often in the news). These are all off the top of my head.Combine these with the myriad personal financial problems each of us might be having - job security, sickness, disability, disease, divorce, credit card debt, foreclosure, car repairs, taxes, home maintenance, rent (which is too damn high by the way)- and it seems like the situation is pretty hopeless.However, among this host of negative news, Warren Buffett's 2010 letter to shareholders arrived this weekend as a beacon of hope.I suggest you read the letter yourself, but I just wanted to give you my $0.02 and call out some of the more interesting/informative parts of the letter.Almost right off the bat, Buffett wrote something that you won't hear very often from the talking heads on CNBC in the current unhappy environment:I agree with Warren and I don't share what seems to be the prevailing sentiment that the US is doomed to failure. This is why I invest the biggest portion of my retirement savings in US equity index funds. Put simply, I believe in the American system."Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born. The prophets of doom have overlooked the all-important factor that is far from exhausted, and the American system for unleashing that potential – a system that has worked wondersfor over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and effective....We are not natively smarter than we were when our country was founded nor do we work harder. But look around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932 and 1941, America’s best days lie ahead."The next part of his letter that I liked (and anyone who has studied Buffett will be familiar with) is the section entitled "Intrinsic Value - Today and Tomorrow." In it, Warren talks [...]

It's Expensive to be Poor


I read a pretty compelling story online today called "The High Cost of Poverty: Why the Poor Pay More", written by DeNeen Brown for the Washington Post. It raised some issues that you might never think of, sort of "hidden taxes" on being poor.

Having grown up in pretty modest means myself, I am pretty familiar with the amount of time you waste when you don't have much money or your own house. Poor people have to spend time at the laundromat waiting for clothes to wash and dry every week (I have done this) and time waiting for multiple public transportation connections to get to work every day (I have done this too). But the article points out that it is sometimes impossible for poor people to go to the big grocery stores where the middle class shop for discounted food. They have to buy their milk and butter from the local corner store, costing them significantly more.

The article also points to high rates charged by check cashing places as a cost of being poor, but I'm not as convinced that they are a necessity. For example, a man quoted in the story pays a fee to have the check cashing place pay a bill for him... it seems to me that fee (at least) is avoidable).

In any event, this article is an eye-opener (and includes a pretty memorable exchange between a man and the checkout person at a grocery store) that I think is worth a few minutes of your time. If you are in this situation- you're not alone. If you're not- be thankful for what you have.

Richard Bernstein's Investment Guidelines


A blurb in the Wall Street Journal's "Heard on the Street" section caught my eye as I was on my way in to work last week:"Overheard - Most people gush thanks (or occasionally spit bile) in their farewell address. Richard Bernstein, whose 20 years at Merrill Lynch drew to a close on Wednesday, went 10 steps further. In a final note, having thanked colleagues and clients, the bank's chief investment strategist signed off with 10 guidelines. All are worth remembering, but perhaps the last resonates strongest: 'Leverage gives the illusion of wealth. Saving is wealth.'"This caught my eye and I made a mental note to see if I could find the complete list of 10. Lo and behold, through the magic of the Internet, I found the guidelines on seeking alpha. They are the following: 1. Income is as important as capital gains. Because most investors ignore income opportunities, income may be more important than capital gains.2. Most stock market indicators have never actually been tested. Most don’t work.3. Most investors’ time horizons are much too short. Statistics indicate that day trading is largely based on luck.4. Bull markets are made of risk aversion and undervalued assets. They are not made of cheering and a rush to buy.5. Diversification doesn’t depend on the number of asset classes in a portfolio. Rather, it depends on the correlations between the asset classes in a portfolio.6. Balance sheets are generally more important than income or cash-flow statements.7. Investors should focus strongly on GAAP accounting and should pay little attention to “pro forma” or “unaudited” financial statements.8. Investors should be providers of scarce capital. Return on capital is typically highest where capital is scarce.9. Investors should research financial history as much as possible.10. Leverage gives the illusion of wealth. Saving is wealth.I thought these were some pretty good observations. Number 1 definitely hit close to home for me. As I've grown my savings more over time and seen the impact a huge market downturn can have on the value of certain stocks, I've begun to pay a little more attention to income. Although I still believe capital gains are where the big payoff comes from in stocks, income is something tangible and shouldn't be overlooked. Number 5 is pretty important as well... over the past 2 years, people have seen every single asset class in their "diversified" portfolios sink almost in unison. Many were operating under an illusion of diversification and when the tide went out, we saw who wasn't wearing a bathing suit. I cocked my head sideways when I read number 4 because I think nothing fuels a bull market more than cheering and a rush to buy. I kind of see his point though. He is saying bull markets are more the result of assets being unfairly punished and undervalued prior to the bull market than the actual enthusiasm during the bull market. In my opinion, you can't have one without the other so this is kind of a circular argument.This list reminded me of another post I made a while back on nine market lessons from John Dorfman, a Bloomberg columnist who retired a while back. For the sake of completeness and comparison, I list Dorfman's lessons here:1) Out-of-favor stocks are the best road to capital gains.2) Don't be swayed by what Wall Street analysts say. 3) High portfolio turnover is not necessary for good results. 4) The investment value of a stock is independent of whether it has been moving up or down. 5) Predicting the market with consistency is extremely difficult. 6) Predicting the economy is probably even harder. 7) High valuations alone aren't a good reason to sell a stock short.8) High profits alone are no reason t[...]

A Year off Work, With Pay


I came across an interesting article in the New York Times (which I rarely read, since I prefer the WSJ) about a lawyer who is getting paid $80,000 to take a year off from work. Apparently the big NYC lawfirm Skadden is offering some of its workers a year off at 1/3 of their salary as a way to reduce costs and retain employees during the current economic downturn. Since this particular woman made $240,000 a year, her drastic paycut still leaves her with a pretty hefty salary so she decided to take the year off and tour around the world.

I don't blame her. I would take this deal if I could (though I am sure I wouldn't be able to travel and would only just be able to scrape by on 1/3 of my salary). I've worked with people at big lawfirms like this in the past and I know the kind of grueling schedules they put in. I put in these kinds of hours myself for certains stretches throughout the year and over time it tends to get to you. A break like this would be a most welcome relief.

But of course I am not getting this deal. And neither are you. But we can dream.

What would you do if you got this offer?

Buffett Invests in Chinese Electric Car Company


Fortune published a recent article describing Berkshire Hathaway's purchase of a 10% stake in BYD, a Chinese electric car manufacturer last fall. I didn't really notice this announcement when it came out, but it was a decent-sized investment at $230 million for the 10% stake.

Looking at the net income graph in the article, it looks like BYD earned about $180 million in 2008. Dividing that by 10 gets about 18 million of earnings, or a P/E of about 12.7x. (This is just to give you a general sense of valuation, see this site for the current P/E of the S&P 500. Not sure if this site gets the calculation right or not, but I found it after a brief google search).

The reason this acquisition caught my attention is because (as others have noted), Buffett broke some of his own rules to make it. I don't see how an auto company could ever meet his criteria for an excellent business (for more on his criteria, see my review of Buffettology, particularly the 9 questions). I don't think he understands the industry either. It seems like this investment was more likely the brainchild of David Sokol, chariman of MidAmerican Energy and Charlie Munger than it was of Buffett.

I don't have much of an opinion either way but I do note that it continues the trend of Berkshire making acquisitions outside of the United States.

How to Become As Rich As Bill Gates


I came across this pretty instructional post written by Philip Greenspun that offers some simple steps showing how you can become as rich as Bill Gates. It's funny I had this vision in my head that Gates was more of a self-made man but as it turns out, he came from pretty fortunate circumstances. Interesting stuff.

I haven't been posting all that much lately, but there has been much to absorb in the markets. There has been no shortage of negative headlines. We can't go a day without a new company being bailed out or a headline about a financial catastrophe of epic proportions.

I think people are starting to get numb to it all.

I hope Twitter is a Fad


I hope Twitter is the POG of this decade and that after a few years it sinks into oblivion, never to be heard from again. I really don't get it. You couldn't pay me to go on to Twitter and write that im tying my shoe or read about someone else tying theirs. But a lot of people are talking about it.

The reason I hope it fades away is that it would really ruin my faith in humanity to find out that we've stooped as low as making this kind of thing an integral part of our daily lives. Reading about some guy who is buying eggs, or some gal who is getting a new key made. Really?

I hope it's a fad.

Update 1/1/2016: So twitter was not a fad (at least in the medium term). Turns out it ended up being decent for things like real time news etc. However (like basically all good things on the internet that get popular) it became polluted by advertising, publicists, vapid celebrities etc. and I'm not a fan.

Buffett Invests in Harley Davidson


As many of you know, I'm an avid Warren Buffett follower, so I was interested to read that Buffett agreed to buy $300 million of debt issued by Harley Davidson (NYSE: HOG) yesterday.

(Note: many people use Buffett and Berkshire interchangably, as if he makes every decision at the company he runs. While I am sure this is not true, I often use the two interchangably as well, so whenever you see me mentioning Buffett and Berkshire in the same entry, assume I'm referring to Berkshire Hathaway in all cases unless I specify otherwise. I promise to try to be more precise in the future.)

Harley announced that it was selling $600 million of senior unsecured debt to two investors: Berkshire Hathaway (Buffett's company), and Davis Advisors, LP, which is Harley's biggest shareholder. According to an article I read, Buffett hasn't invested any other money in Harley besides this purchase. The notes are a pretty sweet deal. Though unsecured, they are senior in the capital structure which means they get paid pretty quickly if the company goes bankrupt. I am not sure what Harley's capital structure looks like, but being that Berkshire bought the notes, I'm willing to bet that Buffett or someone at BRK took a good look at it and feels there is a good chance the notes will be repaid when they mature in 2014. The best part of the deal? They pay FIFTEEN PERCENT INTEREST. So for lending Harley $300 million now, Buffett will collect a check for $45 million each year for the next five years. That's a total of $225 million in interest, plus the return of his original principal.

Harley plans to use the money for its consumer lending unit, ie to lend money to people so that they can afford to buy its motorcycles. I don't follow the company too closely, but apparently it is in the midst of a turnaround plan.

The stock jumped something like 15% yesterday on the news that Buffett was "investing" in the company. I noticed it fell about 7% today. I think it's pretty crazy when people view Berkshire buying preferred stock (as he did recently with Goldman Sachs) or loaning money via a debt purchase as some kind of an endorsement from Buffett that the company's equity is undervalued. If he thought Harley was undervalued, he could have bought the entire company, which has a market cap of only about $3 billion compared with Berkshire's $30 billion pile of cash. But he didn't. Instead he chose to lend them money for a relatively short period of time at a high interest rate. Being one of the few people with $30B cash in hand during a financial crisis helps Buffett to get some very favorable investment opportunities. 

I noticed that Moody's poured icewater on the announcement by immediately downgrading Harley Davidson Funding Corp., which is the fundraising arm of Harley's consumer finance unit. This will make it more expensive for the unit to raise money, which is not a good thing. Though Moody's does not directly come out and say it, it appears that the new $600M of debt was the catalyst for the downgrade.

In any event, I assume Buffett did his homework on this one and in the end he will get his 15% per year. 

Is now a good time to buy stocks?


I get this question a lot: "Is now a good time to buy stocks?"It's actually pretty easy to answer this right now. But first you have to ask yourself a few questions: 1) Do I need the money I would be using to buy stocks? Your answer should be no. If you are planning on using this money for a down payment on a house in less than 5 years, then you should not be buying stocks with it. If you need to live off this money and couldn't afford to live your life without it, then you should not be buying stocks with it. Stocks are risky and you could lose every cent you put into them (not the most likely scenario, but a possibility that you can't completely ignore). Another way to phrase this question would be "Do I have a long time horizon of 20-30 years?"2) Do I understand the difference between investing and speculating? Most people do not. If you want a good explanation, read The Intelligent Investor by Benjamin Graham. (I actually own this version of the book, which is hardcover and will hold up better over time, but the one I linked to first is cheaper.)3) Do I have the time and skill to research individual stocks? If your answer here is "no", this does not rule out stocks as a whole but to me it would rule out purchasing anything but a small amount of individual stocks. Instead, I would personally invest in index funds and look for the lowest fees possible.You'll notice I didn't mention anything about the market. This is because I don't know if it is high or low right now as compared to where it will be in a couple of months or years from now. I do know that equity investments look more attractive to me (and to Warren Buffett and Scott Adams) than they did a year ago, but I'm not going to make any forecasts. And yes, the rumors are true: you have me to thank for the recent market declines. One of my 2006 year-end wishes was for lower stock prices in 2007 and although it took until 2008 for the market to fully grant it, my wish was fulfilled. Thank you, Mr. Market. You really helped my retirement years by allowing me to buy your shares so cheaply in 08 and hopefully for the next couple of years as well.Please invest responsibly.Oh, and for the majority of my readers who rely on a salary like me, you should worry more about your job than where you invest your money. Now is not the time to be slacking off at work trading stocks when you should be working to dodge the next round of layoffs. That said, there are some great bargains out there.[...]

CEO Compensation


So we all know that CEOs are paid ridiculous amounts of money. I've often thought that if I spent a week or 2 as CEO of a major corporation, I'd be set for life. I would be able to pay cash for a pretty nice house and then only work to pay my basic bills every year. Not only would one paycheck be more than I make in a few years, but I'd also get the nice golden parachute to boot.

Our new president is very public about his disdain for CEO salaries, and as I read in today's Wall St. Journal, Sen. Claire McCaskill (D., Mo.) has now introduced a bill to limit CEO salary to no more than what the president earns: $400k a year. The next sentence was a classic and I applaud the authors of the story for putting it in there: "In 2007, Goldman Sachs Group Inc. Chief Executive Lloyd Blankfein earned that much in about two days."

Two days!

I gotta get me one of them jobs.

New Fico Credit Score


An article in the Wall Street Journal caught my attention on the train in to work today. I'd heard the credit bureaus were coming up with a new credit score calculation called "FICO 08", but I wasn't sure when it was coming into play. According to the article, TransUnion is going to begin offering the score today, but it could be months or years before it comes into common use and consumers can find out their own scores.

Supposedly the new methodology will make credit scores more accurate at predicting defaults, which will allow lenders such as mortgage companies to more properly price loans to consumers.

My FICO score is very high (I don't think much has changed since the last time I looked at it), but the problem I've run into being in my late 20s is that my credit history is relatively short, which worked against my credit score. From what I've read in the article, FICO 08 is supposed to correct this somewhat:

"The score, which will still range from 300 to 850 -- the higher, the better --
is fine-tuned to do a deeper analysis of subprime borrowers or those with "thin"
or young credit histories, according to Fair Isaac. More consumers with accounts
in good standing should also see their scores increase slightly, says Tom Quinn,
vice president of global scoring solutions at Fair Isaac. Overall, Fair Isaac
predicts FICO 08 will improve the accuracy of lending decisions by as much as

Not life-changing news by any stretch of the imagination, but as someone who is potentially in the market to buy a home, it piqued my interest.

Personal Finance Blogger Falls off the Map


One of the PF (personal finance) blogs I've read regularly for the past few years is PF Blog, which detailed "MM's" (the author) quest to reach $1 million net worth by the age of 40 in the year 2016. When he was roughly 27 years old at the end of 2003, the author's net worth was approximately $132,000 (details here) and this had grown to about $885,000 as of the end of May 2008 (details) at the age of 32. If I'm following his story right, he is a Microsoft employee who was sent over to Asia to work overseas. He is pretty well paid and has a side business he used to generate extra income.At the end of May, his portfolio was worth about $900,000. 30% of this was in 12 stocks he selected himself, with roughly $20k in AIG, $20k in American Express and other positions, with a heavy concentration in financials, which he felt were becoming undervalued. Another 12% was in US mutual funds, 30% in international mutual funds, and the remaining 30% was in cash, divided between the US Dollar and the Chinese Yuan.Unfortunately, May 2008 is the last time he posted a net worth update. Since then, the S&P 500 Index has fallen from about 1400 to about 750, a decline of almost 50%, and his blog has been relatively silent, except for some irate comments made by readers. Some of my favorites are "Even though he seems to have abandoned his blog I hope he wasn't ignoring the market and sold out of his AIG position with at least a little something. He bought it at $62 and its now essentially worthless." and "I made a copy of his portfolio with where it stood in May and since then it has lost about $148,000 from those May prices."I have enjoyed reading his posts over the past few years and I have to say he was much more diligent that I've been in terms of posting frequency. Some months he made 30+ posts. He also kept meticulous records of his net worth and updated them monthly for five years. That required an incredible amount of discipline and was an extremely valuable case study for everyone reading his blog. I didn't agree with everything he's written (for example I am not a fan of taking short-term zero interest credit card loans and putting the money into a bank account, which I believe he does to earn extra income), but I've been a fan of the site. His English and writing skills aren't fantastic, but they were good enough to get his points across.So why has he stopped posting? I can think of a few reasons. I know that many people find it hard to look at a stock portfolio that has fallen in value. During down markets, I always hear the phrase "I don't even open my 401(k) statement anymore." Looking at your 401(k) statement is hard enough, but going through the detailed analysis that "MM" goes through each month probably gets pretty grueling when your net worth, which is heavily exposed to the stock market, is taking 30% hits.Also, if he is like me and every other working person, he is probably facing increasing demands and stress at work lately. With layoff announcements in the news every day, it can be hard to focus on the work you have to do, and companies often cut back on staff without cutting back on work, placing increasing demands on those who remain behind. This would not leave much free time for him to devote to his blog, which is most likely not a priority in his life.I don't think the reason he has stopped posting is embarassment about recent net worth declines, as some of the commenters on his site seem to s[...]

How Scott Adams Manages His Money


I came across an interesting blog post the other day... it was written by Scott Adams, the creator of Dilbert, describing how he manages his money.Statements like this make me very jealous: "When I first started making serious Dilbert money, I let experts manage half of it, and I managed the rest, as a hedge against both the experts and myself."Can you imagine making "Dilbert money"? Me neither. I'd imagine Dilbert money amounts to a pretty tidy sum.But I digress. The part of the post that most interested me was this part: "The experts invested in Enron, Worldcom, and a number of other companies that promptly exploded. The experts reduced their portion of my money by about a third over five years. (The experts work for one of the most respected financial institutions on Earth, by the way.) My own investments did better, precisely because they were more diversified. So now I handle my own investments, probably incompetently."I smiled when I read that. One of the biggest lessons the current financial crisis has driven home again and again is that nine times out of 10, the so-called "financial experts" aren't worth the paper their MBA degrees are printed on. Tens of examples appear in the papers every day. From the "geniuses" who created the whole mess by engineering clever securities to the Wall Street research analysts who scrambled to lower their price targets and ratings every time the market dropped 15% this year, the majority of "experts" were outed as frauds. If you had followed their advice, you would find yourself extremely poor right now.I went to school with these people. I worked with them in investment banks and I worked for the companies they peddled their wares to. Half of the time I couldn't follow what they were saying and the other half I couldn't understand why someone would want to take the kinds of risks they were talking about taking, or why someone would want to hedge against the risks they were trying to get them to hedge against. Warren Buffett warned that derivatives were a "ticking time bomb" back in 2003 a warning that put a bad taste in my mouth for the "financial engineering" I was just beginning to get exposed to at the time. Derivatives and complex financial instruments got really popular though. The big stars at the companies I worked for were those who understood the lingo, who could create increasing layers of complexity to get around accounting rules and "redistribute" risk. Incidentally, these kinds of people were also the big stars at Enron. (And ended up being relocated for their troubles). I'm getting into rant territory, so I'll stop here. I realize a variation on this theme has been repeated thousands of times over the past hundred years or so. The most recent one I read was Andrew Lahde of Lahde capital, who wrote a similar rant when he recently quit his job. I highly recommend you read the letter he sent to his shareholders- if nothing else, it's quite an entertaining read. (And I think Lahde money would actually make me more jealous than Dilbert money.)In an interesting twist, Adams ended his blog post with an endorsement for stocks: "In order to diversify more, I started migrating money over to the stock market during this recent plunge. The market could go a lot lower still, but this is either the beginning of the end of the United States as we know it, in which case it doesn't matter how I invested, or it is a once-in-a-lifetime s[...]