Five Cents Ten Cents

Posted: 16 Jan 2009 12:26 AM CST

Life’s a gas

The current global financial crisis has taught me an important lesson. It is a lesson that one has to go through to understand, grasp and internalise. It is a lesson that is paid in fear, doubt and uncertainty. It is a lesson about the illusion of profits.

A bird in hand is worth two in the bush

As my equity portfolio values declined along with the spectacular collapse of the Straits Times index from the 3000+ levels all the way to the 1700+ levels in the short span of 3 to 6 months, it made me realise how fragile this entire story of unrealised capital gains. The initial low five figure unrealised capital gains had turned into a high five figure unrealised losses all in a short span of time.

Are unrealised profits REAL?

When something like this happens to you, you begin to wonder about how real were the profits in the first place? To have it happen to you when you are still employed is not too bad as you can still recover so long as you do not sell your shares. This is my current strategy as most of the shares in my portfolio have been paying dividends (so far!). Dividends are not guaranteed but most companies that have a track record of profitability and dividend payout would likely continue but at reduced payout levels.

We know from investing principles that when one invests in an equity portfolio, one is investing in a share of the business of the company. Hence, one’s time horizon is longer than a period of a few months or a year unless one is a trader looking for quick profits based on price movements. In practice, when you see your share values sink faster than the Titanic, it’s hard not to moan and groan about marketing timing, i.e. “I wish I’d had exited the market when I had $xx,xxx in unrealised gains!”

Market timing is difficult and is as random as it gets. Thus, realising profits through dividends from my own limited investment experience is a better approach for me in the longer run than trying to time the market with buy low-sell high strategies. Naked short selling is more difficult now with SGX’s penalties for doing so.

If Profits are Illusionary Then What Do I Do?

So we know share prices can go up or down in theory. Nowadays, we see it dramatically in practice. So what can you do about it?

Diversify

The key lesson I continue to learn is to avoid investing 100% of all available investible savings into one asset class i.e. equities or bonds or treasury bills. Another lesson I learn is that if you are prepared to hold whilst having unrealised losses, you need to be prepared to defer your financial freedom dreams. Let’s face it, under the current market situation I cannot exit without high 5 digit losses in my equity. Fortunately, my plan is not to exit this year or the next so it’s not as bad. However, given that I will exit my portfolio if I intend to achieve my goal of being financially free in the near future, I need to make plans on how to get my money out and consider other cash generating vehicles to support my financially free lifestyle.

Try different investment approaches

Tim Ferris of the Four Hour Workweek has sworn off equity investing and prefers to put his money into private investments where he can value-add to the business directly. Nicholas Nassim Taleb proposes a 5-10% investments in options with 90-95% in treasury bills type of rock-solid investments. The 5-10% exposes him to positive black swans that could generate the payoffs that lead to financial freedom.

I’ve started more aggressively in doing alternate sources of income. Besides my blogs which generate enough to cover internet expenses and a little extra, I’m currently exploring collaborative small internet ventures by bringing win-win strategies to other bloggers. Panzer’s Guide Part II is also on the drawing board and it will be more a commercial venture to bring paid-value to readers

Live an unconventional life

Given the illusionary nature of using market timing to buy low and sell high so as to reap capital gains, I realised I also need to take an unconventional approach towards financial freedom. Living below my means is another way by constantly tinkering how I can do more with less resources in my life while maintaining a similar standard of living. Instead of being a totally frugal person who doesn’t enjoy life one bit, I balance between needs and wants and focus on simplicity. Enjoying life with LESS. Less resources, less travelling, less hassle, less stuff.

The thing about moving my lifestyle towards a simpler one is that the less physical clutter I have in my life, the more relaxed about life I become. Ever since my daughter was born, my night-time routine before bed becomes even more simple. Put her to bed, household chores, preparing for work tomorrow and off to bed. Less TV, less PC games and less time spent trying to entertain myself. With a 10 month old daughter to care for, sleep comes rather easily nowadays.

Conclusion

The more I invest in the stock market and learn about financial freedom, the more I realise the transient nature of the money you can make (or lose) in the market. It is somewhat liberating because you come to realise you cannot depend on it for your financial freedom and you need to seek out other avenues to grow your means whilst living within your means.

How has making or losing money on the stock market affected you?

Share with Panzer your views in the comments section.

Be well and prosper.