My First Business

I was talking to a friend about something related, then I remembered -- I actually created my own business in 4th or 5th grade... I forgot when exactly.. I think 5th, anyways here's my story.

My sister taught me how to make these awesome origami ninja stars, the material was pretty easy, basically 8 squares... could be any size, -- that was part of the awesomeness it was easily scalable. However they were only suitable for throwing at a small size, too large and it became floppy and not firm enough . Anyways I naturally showed off my ninja stars to my friends and they were a complete hit =D. Oh I forgot to mention you could "transform" them into octagonal discs... but they weren't as cool but that functionality was pretty awesome.

So you guessed it, I got the idea to start selling these little gems for 1$ a piece, for a 5th grader that was quite a bit of chump change. Paper was essentially free... just needed to cut, fold, combine, sell. A nearly 99% gross margin business, I guess there was also time, however I just did this during math lessons 'cuz I was way ahead of the curve anyways, so the opportunity costs were small as well. Eventually I was looking to expand so I hired some friends to help make and sell these ninja stars to their friends and family, and by hire I would give them a cut I suppose -- I don't recall ever handling out money to them tho lol... but my best guess is they just took the money themselves or something.

So what caused my downfall? Well it was actually a confluence of factors. First we severely lacked any competitive advantage... all that was required was paper, scissors, time, and knowledge of how to fold and combine the paper. So guess what happened? Some other boys in the class bought one and basically reverse engineered the product *cough* future Microsoft employees? *cough*. Competition... so what's left.. we're forced to compete on cost, and to be honest these other boys were more popular.. so if anything THEY had the competitive advantage ='(. So thus margins were dwindling. Second, as this was happening, there was a severe lack of sales, I saw this was happening so I took some preemptive measures to start deleveraging. I had to fire 2 of my 4 friends. So I did.. and guess what... I was accused of racism! I kid you not, in 5th grade.. accused of racism in firing. TBH I just picked my friends who I knew were the smartest/good kids like me... and I guess they were closer to me too.. so If anything I was doing nepotism not racism -- I swear! But b/c of this one of my other friends left too ='(, My empire was falling apart! Third, our teachers caught wind of these competing business' and the um... healthy competition... that was going on between them, I overhead this cuz I had to stay after school one time for doing something wrong.. insulting this taller girl who annoyed me I believe -- she insulted me back so we were both there. Anyways I was stereotypical "good" kid back then so I didn't want to get in further trouble so I decided to close shop and quit. I think this was a poor decision on the teachers' part as they should encourage/foster creativity and entrepreneurship =X. But anyways I was getting quite bored of it, and the market was becoming quickly saturated as these little ninja stars were easily reusable. The other "company" was also having problems and wanted my leadership by "merging" and so me and the other head would be "Co-Presidents", I declined, he offered me a position on top, I also declined... I just basically lost interest and didn't think there was any more money to be made, I never kept count how much we sold.. prob less than <30, but that was good money back then. And so ended my first foray into business.

Obama's Nobel Peace Prize: A Defense

By now we have all heard the news,

The Norwegian Nobel Committee said it gave the prize to Obama for his "efforts to strengthen international diplomacy," his "vision of and work for a world without nuclear weapons" and for inspiring hope and creating "a new climate in international politics." -- from CNN

Now critics have pointed out, validly, that he hasn't actually achieved any results to warrant such an award except possibly a bunch of speeches. I would argue that his speeches and words are the result, and his critics discount too highly the value of words, tone, and communication.

In fact a significant amount of peace is achieved by diplomacy. But what is diplomacy essentially? At it's foundational bases, diplomacy is also just words. Of course they are words arranged in such a way so that when parsed by friends and enemies are meant to achieve some lasting affect on the psychology of those who hear it.

So perhaps a significant end result hasn't been achieved, but to say Obama has not achieved anything is a tremendous understatement. One shouldn't discount the value of the inspiration that was the soul of his campaign. It motivated the constituents of his campaign to act voraciously on his behalf. That motivation helped propelled him to the presidency -- certainly a significant achievement personally, unless you think winning the presidency is easy. His speech in Cairo was widely praised. To have parts of the Muslim world give rousing applause to an American President is a significant step in achieving lasting peace in the middle east as well as home here domestically. One may argue that anyone can do that by pandering to the audience, but if you actually hear it, you will hear criticisms of both Israel and the Muslim world. Pushing against Israeli settlements is also a big step, one can not seem impartial allowing Israel to settle more land in the West Bank. Obama's speech to Europe was also very motivating and cooperative. Once against it wasn't one sided pandering, but a critical acknowledgment of mistakes done by both sides. Of course if you don't agree with these viewpoints, you will discount the value of these speeches, however I think the arguments he has made can be supported heavily.

So yes, no end results, but before we get to the end, we must travel in between. I personally feel Obama has made many strides toward that end of peace, progressing 50% on 4 projects can be more successful than just finishing one project all the way. Mohamed ElBaradei(a former nobel peace prize winner himself) has said that Obama "has done in nine months what many people would take a generation to do."

Perhaps Obama can't compete with previous winners who have certainly achieve significant results toward world peace, but he wasn't competing with them, he was competing against everyone else/organization who hasn't won an award, perhaps the competition wasn't up to par this year? I haven't really read about who the critics would've awarded instead.

Book Review: The game: penetrating the secret society of pickup artists By Neil Strauss

Wow, first off -- put your prejudices aside, this book is NOT about picking up women. Though you would probably gain some knowledge by reading it. I read it through for most of this weekend and it was like 450+ pages... if you know me I NEVER read a book this fast -- 'cept maybe Harry Potter. It has VERY good writing and it hooks you effortlessly... sorta like a pick-up artist.

It starts off with one of the main characters, Mystery, (it's non-fiction but the people really do feel like characters) going suicidal and rambling on about the futility of life, and this is after he could bag any women he wanted (at least superficially). The book then stops that vignette and leads you through a whirlwind journey on how exactly they all got to that point. Sounds a little Siddhartha-ey (Buddha) in the way that Mystery reaches this hedonistic zenith and is still not ultimately satisfied, of course we all know he didn't simply gave up all his desires like Siddhartha a-la becoming a Buddhist Monk. Indeed if you keep up with pop-culture you'll recognize this Mystery as the same one on the VH1's reality show, "The Pick-up Artist". So does that mean this book didn't teach that moral? -- well I think it at the very least shows that laying any woman you want isn't going to fulfill everything you want out of life.

And that is what this book is ultimately trying to portray through the eyes of the author, Neil Strauss aka Style. In my opinion this book has two protagonists, Mystery who is very much a tragic character in the vein of Hamlet, and Style, who is much more observant, cool, but he goes through some of the same motions -- he's just chiller about it (or maybe that's cause it's his book). In many ways I relate to both, but the most poignant moment for me came when Mystery was discussing when he really wanted to kill himself in the 10th grade, but the only thing that kept him alive was the thought of Back To The Future II coming out in 23 days. Sometimes we all feel a little hopeless.. especially in love, but it's the hope of these good things in life that keeps us going.

I would love to say more, but that would be ruining it. Some words of caution, it is NOT a low-brow book, the author uses plenty of words I didn't know and had to look up myself, and I consider my vocabulary pretty top-notch. Also some scenes described are pretty graphic i.e. X-rated, but I don't think they're any worse than a similar scene from a romance novel (oh ladies, I know about those), just a little dirtier, cruder... simpler, as is perhaps fitting from a male perspective. Happy reading.

Kiva.org and Microfinance

Recently a friend asked me what I thought about CD's. My initial response was they are good if you need short term savings (~ less than 4 years) and know the amount of time before you need it in advance. I also said, recent "online" savings account can net you pretty similar returns as well and allow you much greater liquidity. After a little bit I thought about another option which I favor -- Microlending through institutions like Kiva.

You're probably asking "What is Microlending?" Well overall it is lending very small amounts (you seem to lend in increments of $25) of money to entrepreneur in third world countries. Now the objective of this is not to gain a high rate of return, because the best you can get is 0%. Looking at http://www.kiva.org/about/risk/statistics/, you can see that the default rate is 0% for 4-5 star rated partners. Which simply means after lending out millions to those 4-5 star partners.. no lender has loss a dime. The best part of this method of charity is that it barely costs lenders money (loss of interest you could've gained), and you teach the recipients "how to fish" rather than just "giving the fish". Right now interest rates are pretty much bottomed out.. they will probably rise after our economy recovers but for now, your loss of interest is pretty cheap.

Most of the recipients are also women (apparently they are more trustworthy than men in most of these countries). While traditionally in most of these countries women are given inferior "roles", this helps a lot in empowering them -- which I view as a very positive thing. Now you may be a free-market type person like me and ask yourself, "Wait.. if they have an idea so great why can't they get financing on their own?" This is an instance in which I believe the free-market fails. My reasoning is the fact that people of wealth can hold out much longer than their potential debtors. Thus they can just wait until the debtors become so desperate for financing that they are willing to accept absurd interest rates. This is basically usury. In the book, "Banker to the Poor", the author points out an example of this, where this basket weaver basically has to give back interest so absurd that she had no profits after interest.. she simply made enough to continue basket weaving, barely feed herself, and pay back the interest. I'm talking annualized rates of 300%+. So she was surviving ... basically to reward her creditors rather than herself, and the cycle continues and she makes no progress. With microlending you can help people like her break free from this vicious cycle.

So if your choice comes down to low interest rates of 1-2% in CD's/Savings/Money Market accounts, or barely risking your money(0% default rate! for 4-5 star rated field partners) and at the same time alleviating poverty in third world countries, empowering women to be equal in those societies, and have that all be sustainable and have a potentially big chain effect ... I think the choice is clear. So check out the site, figure out the details and see if it's something you want to be a part of.

Now I'm a big believer in "eating your own dog food", "put your money where your mouth is", etc. So I'm going to allocate 1000$ and look for opportunities to microlend sometime in the near future. I hope you'll join me.

And for those who care I bought 3 shares of Google for 455$ each on Monday.

Importance of Financial Education for the Public

I was hoping to make my second post more fun and universal and also not so soon after the first, but I read an article that was too relevant. In this article, Paul Krugman basically explains why profits from high-speed trading is socially bad/economically inefficient.

I agree mostly with him in this article but I disagree some on the approach to fix it. Attempting to control pay of private institutions is definitely a no-no in my book. Giving shareholders more power in determining pay is a better approach. Higher tax rates on super-size incomes is OK -- however I feel he's missing a crucial piece of a comprehensive and sustainable solution. We need to better educate the people about financial instruments such as stocks. The reason this will help is because the only way the Wall St. firms will in aggregate make money from high speed trading is if they have a partner to tango with, i.e. the general public. Short term trading is pretty much a zero-sum game, where the main winners are the brokers who make money off each trade and the Wall St. firms who take advantage of stupid saps which don't truly know what they are doing. However if you see the stock market as a vehicle for investment rather than a casino -- we can all win. If you invest prudently and truly understand the value of a stock -- you can invest in the long term and not partake in such foolishness of day trading. Without people to rip off, the Wall St. firms will also focus more attention on their more socially beneficial economic function and profiting from that instead.

It is a bit idealistic to think we can prevent all people from being drawn to the appeal of gambling, however we barely make ANY effort to educate our children financially -- hell I didn't understand all of this until junior year of College, and I consider myself a pretty intelligent person. Because of this I believe additional efforts to educate people financially will have really high marginal utility (we'll get a lot out of not that much additional effort).

I should've mentioned this in my previous post so I'll just mention it now. I regularly use Mint.com to help me manage my money/keep track of all my assets/loans etc. It's pretty damn useful. I'm also trying out CreditKarma.com, but it hasn't proven too useful yet, I do like knowing my credit score tho.

Disclosure: I own shares of Goldman Sachs.

Finance Lesson/Personal Finance Tips

So... it's come to my attention a lot of my peers are inadequately prepared to manage their own finances and I've been helping some of them from time to time, but it's probably a good idea to put it in writing.

Now I'm not talking about not carrying a balance on their credit cards... that I believe most of my friends already know (If you do, that is probably the first priority to take care of). I'm talking about what you want to do with excess money/preparing for retirement. If you don't want to read, the gist of it is at the very least contribute enough to get the maximum contribution from your 401k plan and invest it in a very well diversified fund(s) (US & Foreign stocks, small & large). However this is probably not enough for a good retirement IMO.

I'm going to explain how stocks work as there are a lot of misconceptions out there, and you can appreciate/understand my advice rather than take it blindly or dismiss me completely.

So what is a stock? -- It is a legal right to a share of a company. This kind of doesn't make sense without some context. So if a company existed which had 1,000,000 shares and you owned 100,000 shares, you would effectively own 10% of the company. However what's the consequences of owning part of a company? Well there are two monetary ones -- dividends and rights to proceeds from liquidation in the case of bankruptcy/stopping of operations. Sometimes a company will give some of the money it makes back to shareholders which is called a dividend. In this case you get a certain amount of money (cold hard cash) per share you own. A real life example: I own 27 shares of KO(Coke), and I got a $11.07 dividend from them last quarter (That's $0.41/share). The other way you can get cash from the company is if they liquidate, in which case they sell all their assets, pay all their liabilities.. and then cover preferred shares and possibly some more exotic financial instruments. At this point if there is any cash left -- they distribute it proportionally to common shareholders. Naturally this is probably not what you want to buy a stock for -- however there are some people in Wall St. who's job is to examine bankruptcy proceedings and try to make a profit buying extremely cheap stock that will profit if the distributed proceeds/share are worth more than the share. Each share also brings with it a voting right for special shareholder votes, it works how democracies usually work. Theoretically if you owned 50% + 1 share of a company you can control its fortune (Appoint yourself CEO etc.). So fundamentally that is all a stock is. The fact that people want to buy it is a consequence of these rights.

So in effect, buying stock is like buying partial ownership of a company -- you own part of those profits -- all those workers are working partially for you, doesn't that sound enticing? However as you probably know buying stocks can be risky if a company starts doing bad -- so how do you protect yourself from this risk yet take advantage of capitalism? Well you can do as I suggested to buy a very well diversified equity fund that covers the whole world of capitalism. Real life example: my 401k account is invested 75% in FUSEX, 25% in FIISX. You can read their descriptions at their respective pages but basically FUSEX covers the US stock market and FIISX covers everything else. Apparently US stocks are worth about 42% of all the stocks(probably decreased recently) so I'm more heavily weighted in US Stocks -- I guess I trust US companies a bit more and I'm still exposed to international economies through multinational US corporations. Most 401k plans have the option to invest in something similar. Doing this you take advantage of the whole world of workers making profits for you, yeah some companies will fail but some will make billions -- overall the world's economy will keep rising barring some catastrophic event, in which case no matter where you put your money it'll probably not be worth much (except if you buy hard assets/commodities that you physically own nearby and can secure with firearms, hmm, actually i guess in this case just buy guns.) however I think that small risk is worth it.

How much can you reasonably expect to gain from this? The long term return of the stock market is about 9%/year, however Warren Buffet (The greatest proven investor) predicts around 5-6% growth in the US stock market for the future(All amounts unadjusted for inflation). The rest of the world will probably be greater as they have a lot more growth ahead of them. So lets take a rather conservative approach and assume a 5%/year growth using my strategy. If you invest 1000$ when you're 22 and don't invest anything else and look at your account when you're are 60, you will see this amount 1000*(1.05)^(60-22) = 6385.48. This is a pretty easy formula, Principal*(1 + return rate/year)^(number of years). This is a >500% return after 38 years. Not the best return.. but pretty damn safe considering you are diversified across the whole world. Again.. nothing is certain but I believe 5% return (unadjusted for inflation) is a reasonable bet. And this is just 1000$ once when you're 22, assuming a 50k salary and a 4% matching 401k, you'll be saving at least 4000$ a year (That's 50,000 * 4% * 2(for the match) ). Which is this sum series, 4000*1.05^38 + 4000*1.05^37 + ... + 4000*1.05 + 4000, there is probably a formula to do this calculation without so many operations but there are definitely computer programs out there to do this for you as well, as you can see it adds up. Keep in mind this is assuming a 5% return every year... in reality some years will be very good/very bad/mediocre ... this analysis simply states that overall your return will be similar to if you earned a 5% return rate every year.

Now I glossed over some details you should definitely consider later. Towards reaching retirement age you should invest less in stocks and more in bonds/safer assets, so this will most likely reduce your returns the last 10 years or so. Also you can invest more than your 401k matching -- in fact I believe 99% of the American Public should do just this and not try to time/play the market. Do the calculations(assume a relatively low return rate -- 4-5% is prob not a bad idea) and figure out how much you need to save each year. Don't forget to take into account inflation -- 2% is probably a good estimate. You should assume low because most likely you won't have less money than that (no bad surprises), and if it's higher you will have a nice surprise waiting for you.

There are probably some criticisms these days because the stock market has gone down so much in the past 2 years. However I don't think most people can time it right, its better to get a piece of the productivity of the world and let the ups and downs wash themselves out as you invest a little bit of each paycheck. Every time there is a major drop, people don't want to be in the stock market.. every time there is a major gain, everyone wants in.. however this precisely leads to selling(leaving) when its at the low point, and buying(entering) when its at the high point. Which doesn't make much sense, just because the market is valued less doesn't mean it actually is worth less, another way to think about it is.. would you prefer to buy an apple for 2$ or 1$? Of course 1$ it's the same apple for less money... same thing with stocks.. you can buy the same stock for less money when the market is down.. so you should be entering/buying after a major drop rather than leaving/selling as many did these past 6 months and loss out on the 30% gain since march. A company isn't going to magically lose some assets or ability to make money when their stock declines, actually it affects their ability to raise money -- however this only matters if they need financing which is usually not the case or the decline not so great to have material impact.

Now personally, I actually invest in some stocks besides my diversified funds in my 401k (thus I believe I'm in the 1% of the American people that can do it right) -- I'll explain how I do my analysis in a future post. I'm sure I missed a lot of details both intentionally/unintentionally, feel free to leave a comment if you have criticism and want a spirited debate, have any questions, or just want to comment.

Here are some sources which I believe are pretty good:
http://www.fool.com/personal-finance/index.aspx?source=ifltnvpnv0000001
http://money.cnn.com/magazines/moneymag/money101/index.html
They cover a much wider variety of topics in personal finance.

Full Disclaimer: I work for a Financial Research Software company, I'm not a financial advisor of any sort professionally... but honestly they don't add much more value then what I told you here.. if they tell you anything else, it is probably a bad idea.