Friday, November 28, 2008

The Wine Industry: A lesson in marketing

An interesting thought experiment: How would you value your wine collection should the labels wash away?

Yesterday I've had the pleasure of visiting a local boutique winery. The winemaker took us on a short tour through his winery explaining about the high quality of the local terroir, a French term used to denote the special characteristics the vineyard's geography has and its affect on the quality of wine produced.

We then followed to the barrel storage room where he proudly displayed his French oak barrels bought at $1,000 a barrel to give the wine that special flavor, we continued on to bottling and learned that the wine apparently goes into shock after being bottled for the first time which actually causes it to close up and lock in flavors and aroma.

The tour ended with a series of tastings, in the shop of course. They were pretty good wines, if at all possible to judge by my standards (me being wine ignorant).

Marketing to the Elite

If you've noted a sarcastic tone, you're right. I've always felt antagonism towards the wine industry and its elegant way of marketing to the so-called elite.

Many products have branded themselves as gourmet and luxury. This is a sought our niche for any product as the net profit is simply mind boggling. There's no better way to market something as sophisticated and gourmet as complicating it so much it takes whole courses to learn to differentiate between wines.

The fine palette and nose required to tell if a wine is truly good remind me of the H. C. Andersen's the Emperor's new suit where only the wise can see the emperor's fine clothes.
I have no idea if it's true or not but I heard the weird scoring system in tennis was invented in order to prevent the poor from keeping up with the game. Even more interesting, I once heard the French language had so many vowels inserted into words in order to keep the poor from learning to write. These maybe funny notions but the truth they hold is real enough.

Australian and Californian Wines as a Test Case

The French are fanatic about their wine traditions. Region, maker, grape and everything else are strictly monitored and old customs are preserved and followed to the latter.

The French were understandably upset when Australian and Californian wine makers began producing wine differently. They had wine age in huge tanks with chunks of barrels thrown in for the flavor, no less! Such a disgrace was unheard of.

Needless to say Australian and Californian wines are considered among the best in the world and keep winning blind tasting tests.

A Thought Experiment

The taste of wine, in my opinion, is tremendously affected by our psychology. Imagine the through experiment suggested in my introduction which comes from a play I heard about recently.

Imagine you had a wine cellar full of prized wines slowly aging and improving to perfection. When you have friends over you walk down together, choose a bottle, and drink it with a nice dinner. Like a proud parent you present your wine collection telling the story of each and every bottle. Now imagine a flood in your cellar removing all the labels from your bottles yet leaving the wine intact. Isn't that just horrible?

Much of the wine drinking experience comes from the bottle's shape, the label's elegance and prestige and your knowledge of the wine. That's simply how the human mind works. That is also why we're willing to pay so much for wine.

The thought of me buying something at x100 the cost of producing it simply irritates me. Thankfully there are great wine critics out there which see through the marketing ruse and agree that 90% of great wines can be purchased for under $30.

Credit Information @

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Sunday, November 23, 2008

Citi in Trouble, Violent Market Swings and Staring at Stock Charts: My Thoughts

Citi won't be allowed to fall, we got accustomed to violent swings pretty fast and I admit it: I'm addicted to stock charts.

#1 Citi's troubles are a whole different ball game

During this crisis a lot of "unthinkables" occurred, changing our perspective on the financial markets and their institutions. I don't believe anyone dared dream both Bear Sterns and Lehman Brothers might go bankrupt nor Merrill Lynch sold.

Still, investment banks are one thing. Huge retail Banks are a whole other matter. Investment banks had the reputation of financial troublemakers, even though they were thought to be stable and profitable (which they were for quite a long time). Retail banking is one of the cornerstones of our economy.

Should Citi fall the ripples will surely tear through the global financial world faster than any shockwave. Banks worldwide have billions of dollars in exposures to Citi and its many activities, a staggering blow indeed.

That's why I'll risk saying Citi won't be allowed to fall (much like the automakers). I may be forced to eat my hat in the weeks to come but I'll take the chance. This obviously shouldn't motivate anyone to invest in Citi right now as we've seen how low bailed out stocks can go.

#2 Getting used to violent market swings

Oddly enough we've got accustomed to violent market swings quite fast. Only half a year ago shifts of 4% in any market index were reason for extreme fears, panic or hope (remember that 10% daily surge?).

Today, 4% shifts are hardly breaking news anymore and almost nothing will surprise investors. Volatility is immediately translated into risk and risk into premium which surely enough puts enormous pressure downwards on stock prices.

The first sign for household investors to slowly yet steadily make their way back into the market (in the fortunate case you've liquidated yourself) will be reduced volatility. Sure we might miss on the significant surge up (which will eventually present itself) but we will also avoid another bull trap like the ones only recently avoided.

Keep in mind an old market saying: Pigs get fat and hogs get slaughtered. Are we, with all the required reserve, hogs or pigs? Are we waiting on lower and lower levels before jumping back in? I'm starting to move restlessly in my seat.

#3 Staring at stock charts

I don't know about you but I've found myself staring a lot more in stock charts lately. There's something fascinating about the way they plummet downwards. I think it's the assumption some stocks will skyrocket back to previous levels and new highs.

Unimaginable daily drops catch my eye and I keep wandering back to the screens whenever I have 5 minutes to spare. I do believe I'm becoming an addict.

I'd like to take this opportunity to share a few carnivals from the past weeks, in gratitude to their hosts:

Image by: glamhag

Tuesday, November 18, 2008

What Should I Do With My Money?

Turbulent times confuse household investors. I know I'm confused

An interesting and timely experiment was conducted by one of our local business papers. Trying to answer the eternal question of "what should I do with my money?" the paper set out to review what leading brokers, financial planners and money managers would recommend someone with a liquid saving of $50,000.

The question of what to do with our money is always present as money always has an alternative cost (and risk). Since money is a very flexible commodity we are often tempted to explore our options. At times of financial crisis this sort of behavior can be very risky.

What causes household investors to retreat back to the false safety of liquidity?

Not surprisingly, economic downturns cause the vast majority of household investors to retreat quickly, like frightened turtles, into liquid or short term bank deposits instead of exploring other more profitable ventures. I know I do.

I can testify, first hand, on the roots of this behavior:

#1 I worked very hard for this money. It'd be a shame to see it go to waste.

I feel my hard earned money shouldn't be carelessly spent while pursing the dream of fantastic returns. Each crisis is unique and carries surprises of its own. It is rather painful to see my money dwindling with each passing day as stock indices constantly search for new lows.
There are no guarantees in the markets. The Dow at 8,000 is not sacred and past indicators are never really relevant for the future. In the markets, very much like in wars, we are usually fighting the current crisis with the previous crisis' lessons.

I'd much rather sit this crisis out and join back in after a healthy spike in prices (although I'd probably be too scared as well).

#2 The need for a solid and healthy emergency fund has never been so relevant

It seems to me only the financially secure may have the luxury of making money out of this crisis. Personally, I've never been gladder to have my emergency fund as a comfy pillow to fall on should I need one.

Even though I've been able to save a bit more than I'd planned on in my emergency fund I sleep better knowing I've got two more months of living covered.

#3 I can't really commit myself to an appropriate investment term

Who really know when this crisis will end? Chances are we'll see a glimpse of financial hope during the second half of 2009 but who really knows? We can't afford to bet on averages with this crisis.

Furthermore, I've got too much going to really be able to commit to an appropriate investment term in stocks. As I've always written in the past, an investment term shorter than 5 years isn't suitable for a real long-term investment in stocks (preferably longer).

Again, only the financially secure seem to enjoy this luxury.

#4 I'm too greedy

Honestly, I may be just timing the market. I've recently written about a bull trap in the market that proved itself. Maybe next time it won't be a trap but the real deal. For now, I'm greedy.
Why did I call it the false safety of liquidity? As we all should know by now, liquidity is probably the worst long-term investment available. In the end, household investors lose big on their fears. But that doesn't mean those fears are unjust.

What did the brokers have to say?

First and foremost, keep in mind money managers make their living of our investments. As a result, it's always a good time to start a new portfolio.

Second, don't expect to find any answers. Brokers and money managers aren't smarter than us when it comes to timing the market or they would have retired long ago. What they are good at is maintenance.

The "professional" replies split into three distinct types:

1. If you have the discipline and financial depth to watch your portfolio shrink by 50% and wait it out than you can start thinking about buying stocks.

2. Go solid.

3. Some would say this is a good time to buy stock (A redundant and obvious tautology).

All the brokers stated the current price levels are low and seemingly attractive. Yet all of the brokers also stated that volatility and uncertainty are extremely high and that investors should be cautious. Bottom line: You decide, it's your money.

When you think about it brokers, analysts, planners and all other money professionals have no real motivation to be original. If they're original and they're wrong (say bet on a violent up trend when all is lost) they pay dearly. If they go with the herd and they're wrong no one can really blame them.

I do think professional money managers are important. They have the ability to maintain our portfolio and some do have a competitive advantage both in skill and knowledge. However, ultimately, it's up to us as investors to make the right choices, mainly Investment term and risk level.

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Sunday, November 16, 2008

Negotiating Better Mortgages, Options Crash Course and Financial Fear @ The Round Up

A long overdue Round Up

It's been a long time since I posted a proper round-up. I find these very important in several aspects. First, they are a gesture to fellow bloggers, recognizing the hard work they put in which benefits us all. Second, there are some great blogs out there which we all should check out. And third, round-ups serve as a great source of information easily accessed. Hope you enjoy these as much as I do.

My favorite leading magazine and newspaper articles of the past weeks:

From the carnivals:

The Money Hacks Carnival No. 38: Aviation Month Edition was hosted by Taking Charge. My post on shortcuts to retirement was selected as an Editor's Pick! Here are my favorites from this edition:

The Carnival of Personal Finance #178 was hosted by The Digerati Life. Here are the more interesting posts from this edition:

The Festival of Frugality - Veterans Day Edition was hosted by On a Quest to be Debt Free. Here are some interesting posts from this edition:

More from fellow personal finance bloggers:

Friday, November 14, 2008

Surprising (and Promising) Aspects of the Financial Crisis

What do Playboy Playmates have to do with a very interesting article in the NY Times regarding the impact of financial crisis?

Bloomberg reported yesterday that the number of visitors to the baseball hall of fame has reduced by 12%, on average. Fewer visitors and fewer donations find their way to the museum which is located in Cooperstown, 200 miles from New York City. The slump in visitors is naturally attributed to the current financial crisis.

Naturally, at times of economic hardship people almost immediately save on what they perceive as luxuries, the impact of which is quickly felt everywhere. Private consumption is one of the strongest economic forces there are and is necessary for real growth.

The Surprise

There are, however, more interesting aspects and phenomenon which manifest in times of economic hardship and financial crisis (with all due respect to Baseball of course). In a very interesting article titled "A Hemline Index, Updated", Tamar Lewin (NY Times) discusses the more surprising aspects of financial crisis and bad times in general as studied by various researchers. Here's a quick summary (I recommend reading the entire article for more interesting indicators):

  • Looking at Billboard No. 1 songs from 1955 to 2003 for a study to be published in the journal Psychology of Music, prof. Pettijohn found that in uncertain times, people tend to prefer songs that are longer, slower, with more meaningful themes.

  • Playboy magazine’s Playmate of the Year in bad times tended to have a more mature appearance — that is, to be older, heavier, taller and less curvy — than those selected when times were good.

  • During a recession, laxatives go up, because people are under tremendous stress, and holding themselves back. During a boom, deodorant sales go up.

The Promise

I've tried researching more on the subject and found another, not so surprising, but rather promising aspect financial crisis.

There are winners to financial crisis as well. An interesting line of thought is presented by Andrew O'Connell for Harvard Business Publishing in this regard. Mr. O'Connell discusses the merits of what he calls Intergenerational transfer of wealth: "As housing prices fall, older generations of Americans are seeing significant amounts of their wealth evaporate, but the decline presents opportunities for younger people". Surprisingly enough, the fact that many homeowners are seeing their life savings evaporate (to put it rather drastically) is beneficial to the younger ones of us, who may now be able to afford actually becoming homeowners and seeing their net worth rise with their property by sitting out the housing slump.

Apparently in 1929, before the great depression, the social inequality in the US was at a peak. Financial crisis serve as stress relief in this regard as the rich get much less rich while the poor get a bit poorer. It's almost like the financial nature restores balance through systematic shocks.

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Tuesday, November 11, 2008

The Bull Trap Snapped – What Now?

My spontaneous observations on recent events

About two weeks ago I wrote a post titled How to Recognize a Bull Trap. Since then the markets seem to have been struggling to hold on to any shred of optimism but I believe pessimism found its way back to the markets for now, as expected.

The high levels of volatility and edginess are still here. Manic depression still rules and as long as these remain there's no real reason to believe pessimism is letting go. Even now the S&P500 is clinging on for dear life barely holding the 900's. I'm not a chartist nor am I a big fan of technical analysis but certainly each level represents another psychological barrier for investors.

Although sound investing dictates avoiding trying to time the market I couldn't bring myself to start buying. I believe dollar cost averaging is a good strategy for these times but I can't bring myself to invest money in these markets. I admit I'm guilty of market timing sin. Human vanity I guess.

Another thought which constantly comes to my mind is that my recently acquired, still liquidated savings, serve as a healthy emergency fund for troubled times, should they present themselves. I know this behavior is very risk averse but I'm willing to pay the price in lost return on investment.

The Cup Half Full Part

I strongly believe in being the cup half full kind of person and accordingly I find there are actually quite a few good reasons to be optimistic about the markets and the economy:

  • Oil and commodity prices are hitting new lows with every passing day easing the aching economy and the toll on consumers.

  • Interest-rates are low worldwide and getting lower every day as fears of recession and deflation grow. Low interest rates encourage growth as the cost of money is relatively low compared to the alternatives.

  • As with all recessions and crisis the firms that withstand them emerge stronger and more competitive.

  • The Federal Reserve and central banks worldwide are responding with amazing speed and timing never seen before.

  • A new, yet unclear, breeze is blowing through the US government.

All we have to do is wither the storm. I am a big fan of determinism and I do believe the events we are witnessing simply have to happen and there's really no avoiding them. Every now and again a certain asset becomes overpriced while its risk is undervalued. Every now and again these problematic assets wrack havoc and cause financial institutions to run for the safety of liquidity thus crunching available credit. Stock market will crash; central banks will continue to bailout irresponsible CEO's and the wheel will continue turning… It's the circle of financial life.
Slowly but surely prices will be too tempting not to buy. I promise to post when I decide to jump back in. It'll be an interesting experiment for the personal financier.

Image by: Big Grey Mare

Saturday, November 8, 2008

Email Becoming a Distraction? Here's How to Keep Control of your Inbox and your time

Are you wasting 8 and 1/2 hours a week figuring out what you were doing moments before?

Email have very quickly become one of more useful tools of our everyday lives. In the office, the omnipresent inbox is constantly beeping and teaming with new messages.

The presence of email is hard to ignore. When a new incoming message appears it's quite difficult not to take a peek at what just popped up in out inbox. The human nature is an inquisitive one and I find it impossible to simply ignore it.

According to an interesting research published in the Sydney Morning Herald Email is actually becoming a dangerous distraction. Apparently email is costing companies millions. The Sydney Morning Herald quotes a study by Dr Thomas Jackson of Loughborough University, England. In this study Dr Jackson found that it takes an average of 64 seconds to recover your train of thought after interruption by email. So people who check their email every five minutes waste 8 and 1/2 hours a week figuring out what they were doing moments before.

More interesting findings include:

  • People tend to respond to email as it arrives, taking an average of only one minute and 44 seconds to act upon a new email notification; 70% of alerts got a reaction within six seconds.

  • A July 2006 study by ClearContext, an email management tools vendor, surveyed 250 users and discovered that 56% spent more than two hours a day in their inbox.

  • By January 2008, 38% of respondents received more than 100 emails a day - and that it stopped them from doing other things.

How to Keep Control of the Inbox? (Advice on Efficiency Revisited)

Email is very easy to operate, immediate, time efficient and free. As a result emails have become the preferred method of communication in business and private life.

Waste in emails is abundant. This is of course the case with any resource which is readily available and costs nothing. This doesn’t mean you can’t change that for both yourself and your organization. The advantages of emails significantly outweigh the disadvantages but with an extra effort emails can be really harnessed to empower your time management.

Here are some tips and advice which can help you become more efficient and save you precious time on emails:

1. Make a habit of reading emails early in the morning, and only in the morning

2. If you’re reading an email, read it

3. Don’t jump at any incoming email

Imagine the following situation: You arrive at the office and read your mail, reply to most of it and save a couple emails for later reference. During the day incoming mail constantly distracts you from your work with replies on replies, new emails or follow-ups. You browse through a couple, reply if it’s quick and mark the rest as unread so you won’t forget to re-read it when you have the time.

Jumping at any incoming email is a complete waste of time. You are distracted from your work; you don’t really focus that incoming email and you’ll just have to read it again later when you have the time.

My advice is to process emails in batches. Make a habit of reading emails early in the morning when the day has yet to start. Read each email thoroughly and act on it on the same moment (forward, sort, translate to a task etc.). Let incoming email accumulate and process those the next morning. Meanwhile your colleagues have had the chance to reply properly and maybe do something about it. It is tempting to take a peek in incoming emails but remember you’ll probably just mark them as unread for later reference and waste precious time.

Emails are mostly used for communication of information or tasks which have a lifespan of over a couple of days. Use that characteristic to your advantage.

4. Always consider whether email is the right form of communication – Emails have become so popular that many people use them for all communication sorts. From deciding on lunch to small talk. This is of course an utter and complete waste of time. Many times talking on the phone or face to face is faster, more efficient and does not create havoc in your inbox. Emails are often the retreat of less assertive people trying to assert themselves. Confronting them either on the phone or face to face may help you put an end to problems before they’re born.

5. Nothing will probably happen if you ignore CC’s for a while – Quite risky but worth it. This tip depends greatly on organizational culture. People often use CC to include many, mostly irrelevant, colleagues in email conversations. This is done for a variety of reasons:

a. Share their work (see, I’m working).

b. Share the responsibility (I’ve updated you on that).

c. Feel important

You can put an end to it. First, create a rule which moves emails where you are CC’ied to another folder. When you have the time, stop and read those. You’ll be surprised why you insisted on reading those at the first place. Second, try and change that in your close surroundings. Comment people who include you in irrelevant email conversations. CC’s are one of the major waste multipliers in emails as they easily spread.

6. Email only to the relevant people – The other side of tip #5. By including only the relevant people in your email conversations you’re reducing the potential number of replies and you’re also keeping the replies practical and to the point.

7. Arrange emails by conversations – I find Gmail’s sort by conversation very helpful. Sorting by conversation help’s you keep each email in its proper reference point and relations. This, in turn, greatly shortens the length of time required to understand “where did that email come from?”

8. Use rules to sort out emails by “friendly” spammers – “Friendly” spammers exist in every organization. Starting from human resources to other colleagues which insist on sending birthdays, jokes and who knows what. Conveniently create rules to send emails from these sources to specific folders and browse through them when you’re bored (or never …).

9. Actually, avoid it altogether if you can – Get yourself removed from as many lists and groups as possible. This will eventually reduce your incoming emails by amazing percents. Important information has its ways to find you.

10. Use flags and colors to manage email follow-up – Email applications offer many tools for sorting and follow-up. Tools such as colors and flags by topics are very helpful to keep efficient follow-up. It is very important not to misuse these tools to mark email which need to be read again later (we’ve discussed that already). Use these tools only to follow-up and sort emails which you’ve already acted on.

11. If you’re replying to similar emails create templates – If you’re constantly replying similar content use ready templates to save on typing and phrasing.

12. Use predefined groups – If you have to (and I mean have to) email the masses often use predefined mailing lists. Save time on redundant search and don’t risk forgetting someone.

13. Keep answers short and to the point – Keep you’re emails practical, short and on topic. Use short and clear topics and content. This will help keeping replies as practical and save you time on dealing with other issues which do not interest you.

14. Use Google desktop for efficient and effective search – Most email application lack good search tools. Google Desktop is great in finding those hard to find emails and saves precious time on search and continued browsing in all those sub-folders.

15. Sort emails regularly into sub-folders – A regular part of acting on emails is to sort them to relevant sub-folders. Keep your inbox (and sent items) nice and clean. Sub-folders are very helpful in creating order in the chaos.

Implementing several of the aforementioned tips and advice at once creates synergies which will benefit you and your organization even more. As with any change constant implementation and monitoring is required. Self discipline is called for. Fight you habits and rip the rewards.

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Tuesday, November 4, 2008

Shortcuts to Early Retirement – Absurd Frugal Thinking or Common Financial Sense?

Permanent income gone astray

The past week has been exceptionally long. I've managed to work 42.5 hours in just three days. Since I found this particular project very interesting it hardly felt like work was robbing me of my spare time. I often dislike working long hours as it simply seems like the days are glued together, endlessly working through the week.

Something else was different this time around as well. I've been accustomed to a global salary which remains the same no matter how many hours one invests. These are naturally higher salaries but they weaken the link between office hours and salary and often cause frustration, especially when your colleagues always seem to be relatively underworked and overpaid.

Getting paid for overtime is fantastic in that aspect. Even though I'm well into my 14th hour at the office on any given day my "reward" is directly linked to the time invested.

Since I spend considerable time pondering personal finance in general I started thinking about overtime from a financial-philosophical perspective. Thankfully, we've currently got our hands full of work. Each and everyone who wishes to get more done are quickly assigned another project and another. Many of those who wish for more spare time are often assigned more and more as well.

My financial-philosophical line of thinking quickly led me to a hopeful yet somewhat disturbing conclusion. Walk with me through this simple line of thought: Each extra hour of overtime I put in is quickly translated to a higher salary at the end of the month. Now, since we are currently able to save a portion of our income each month an additional hour of overtime would simply increase our savings by that amount directly.

Now comes the hopeful yet disturbing part. Since we all know the power of compounding interest each hour of overtime is quickly translated to 2.5-3 hours of early retirement 20 years from now! (compounded using a modest 4.5% return for 20 years). Assuming approximately 1,800 work hours a year, all I have to do to retry a year early is to work 2 more hours every day for 3 years.

The more I work today, the higher the compounding effect so I might as well go for 4 hours a day, right? That's where the disturbing part kicks in. Mortgaging the present for future's sake is a part of extreme financial frugal thinking.

The basic economic logic behind this line of thought is called permanent income and states an individual wishes to smooth income over the course of one's life. When earning more one will save more to compensate for a potential future in which less income would be available (such as retirement).

But there is more to this line of thought than permanent income. Philosophers often disprove arguments by giving absurd examples which the argument supports. This technique is called Reductio ad absurdum and it is very fun to use.

If we continue with this line of thinking than every vacation we postpone will compound and be worth so much more in the future (far future). Every expense we avoid can be saved and left to compound for eternity. There's more to life than compounding, isn't there?

We financial people tend to see everything in terms of present and future value, interest rates, returns and capital. It seems we forgot to enjoy life as it is. The assumption early retirement will bring us some great joy is dubious at best. If ever, many retirees I've talked to have distinctly pointed out they miss work and meaning. I do believe I will be able to find meaning in retirement as well but I think I'll avoid thinking about overtime as a shortcut for early retirement for now.

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