Aug 312016

How You can Build the Perfect Investment Portfolio

By |August 31st, 2016|General Personal Finance|Comments Off on How You can Build the Perfect Investment Portfolio

Black MoneyInvesting isn’t for the faint of heart. Markets go up and down – historical trends have proven that the stock market moves this way. There is no such thing as achieving a “perfect performance” through market timing or even just picking out what you think are the best stocks to add to your investment portfolio, however you can definitely build a solid portfolio that allows you a margin for success and generally avoid the stress and worry that goes along with the market volatility.

Here are several considerations to keep in mind to build that investment portfolio just for you.


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Aug 292016

A Million is Just a Thousand Thousands

By |August 29th, 2016|General Personal Finance|Comments Off on A Million is Just a Thousand Thousands

bank-1238322_640This is a guest post from Pauline of InvestmentZen.com

Saving a million dollar is not a big deal. You just need to save $1,000… a thousand times. Whether or not that will be enough for retirement is another story. At 4% safe withdrawal rate, the million you are going to save will generate $40,000 yearly to cover your expenses. That should be amply sufficient if your mortgage is paid off and your kids out of the house, but that is not a lot if you still have these expenses.

Anyway, back to our million. Saving a million is daunting. Like, running a marathon scary. But if you break your big goal into a much more achievable $1,000, then it is starting to look more realistic. How often exactly do you need to save $1,000? Well, if you are 25, and plan on retiring at age 60, you have 35 years in front of you. 420 months. Saving $1,000 a month will only give you $420,000. That won’t cut it. You need your money to work extra hard for you. You must invest the money and get better returns.

But in the meanwhile, to stay motivated, let’s celebrate the first milestone, and your very first $1,000 saved. Because we are trying to get into good money habits, saving your first $1,000 shouldn’t be that difficult. You can have a look at your expenses and spot where you are wasting money.

  • Are you bringing your lunch to work?
  • Using your car as little as possible?
  • Do you have the lowest rate on your mortgage, credit cards and loans?
  • Are you resourceful when spending money, looking for bargains or ways to get things for free?
  • Do you get value out of everything you buy?

After you have transferred your debt to a lower interest deal, canceled your cable and gym membership if you don’t use them, and brown bagged your lunch, you should find more breathing room in your budget. Maybe the first thousand is there already. Now you can invest your $1,000 and watch them grow.

So we have $1,000. At an average of 8% over 35 years, it will grow to $16,400. That’s 16 thousands out of the 1,000 we need. 984 to go. Thank goodness we have 35 years.

Let’s try to invest $100 per month for the first five years.

  • $1,200 invested for 34 years will turn into $18,200
  • for 33 years, you’ll have $16,800
  • $15,500 for 32 years
  • $14,300 for 31 years
  • and $13,200 for 30 years

Yay, we have now saved $78,000! Plus our initial $16,400, our nest egg is almost at six figures, $94,400. And don’t tell me it is hard to find $100 a month to invest between the ages of 25 and 30. You can cut down on the partying a little bit, use your raises at work and live on last year’s income, keep living with roommates to save at least $200 a month on rent, etc. The first thing you should do when you start investing, is actually maxing out your 401k, or at least taking advantage of your company match. If they match your $100/month, you now have the opportunity to get almost $200,000 in your nest egg.

That is, if you don’t invest one cent after age 30. But since we still have 800 thousands to go to reach our million dollar goal, we need to keep going. With only 30 years to keep saving and investing, growing a $800,000 nest egg will require a $520 monthly sacrifice on your part. We’re stepping things up. But by this time, you will be making way more money at work than when you started, and investing $6,000 a year can be done without too much effort if you once more enjoy some company match. A 3% match on a $50,000 income is $1,500, or 25% of your savings needs accounted for. Add to that the tax saving, and your paycheck should be reduced only by $320 or so.

That is $10 a day, not so bad to retire a millionaire isn’t it?

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Aug 292016

Shell Games

By |August 29th, 2016|Blog|1 Comment


Don’t give this guy your money. Photocredit: Philip Robins.

I was on the street corner near Checkpoint Charlie this weekend and I noticed that some fellows were playing some sort of shell game on the ground.  For those not aware a shell game is played by placing a small ball underneath one of three plastic cups then moving the cups around so as to confuse the balls location.  The player then chooses one of the cups, if he chooses the cup with the ball under it he wins, usually a wager is placed on this.  This particular version of the shell game used a tiny white ball, three matchstick boxes, and took 50 euro wagers.

It caught my eye immediately because the game looked fair.  The man “running” the game paid out money when he lost, and occasionally bystanders won.  What was really striking however, was that from a distance I noticed that he’d occasionally slip and accidentally reveal the ball under one of the matchstick boxes.  If the folks playing the game chose the box that I had seen the ball get revealed under, they would win.  This further reinforced my belief that the game was fair.  After all, the guy running the game didn’t palm the ball right after I had accidentally seen it.

This looked like a game that could be won.  Simply wait long enough for the game runner to slip up, bet 50 euros and then win by picking the matchstick box that he’d revealed the ball under.  I waited long enough to see a tourist do precisely that.  He stepped into the game, made a bet on an accidentally revealed box and the whole game came to a halt.  The game runner made sure he got the man’s 50 euros before the box could be turned over, there was a short discussion between the tourist and game runner, but when the tourist flipped the box there was no ball.  The game runner flipped the other box and there the ball was…

It’s called a shell game for a reason

Shell games are practically synonymous with scams.  The operators of these games know it, and they know that you know it too.  So how in particular did this scam work?  I saw the operator take about 200 Euros from tourists over the course of 10-20 minutes, and it wasn’t until a few hours later turning the thing over in my mind that I had figured out exactly what was going on.

Step One: Build their trust

This was accomplished through the use of shills, people who stood around, playing the game, winning and losing several times before any actual players had even considered it.  In this case probably 3 or 4 people were working with the operator of the game to create the illusion that people were happening upon the game playing a few times, winning some, losing some, and walking away, as though this is just something one did in Berlin.  A little gambling on the streetcorner, why not?  After the fact, I realized that none of them were appropriately excited when they won 50 Euros, at least not excited in the way I would be excited.  They really didn’t seem to care whether or not they won, simply going through the motions of handing money back and forth to the operator of the game.  All of the playing at this point happened very very fast.

Step Two: Appeal to their greed

The other important part here is that the game was made to look winnable, not simply because other people won it, but because you could understand why they won or lost.  Almost always the operator would slip up and reveal the location of the ball just before a player had to make his choice, so you would almost always know what the “right” answer was.  When one of the shills picked the one you knew was the winner they would win, when they picked one you knew was a loser they would lose.  This is a game you could understand.  This was a game that you could beat, and they’re playing for 50 Euros a time.  Not enough that you can’t afford to risk it, but not so little that it wouldn’t be exciting to win.

So you watch the game play out maybe a dozen times, then you make your move.

Step Three: Gaslight the player

You offer to bet and the operator stamps on the matchbox you choose, so that you can’t reveal it until he knows that you’re going to pay he says.  You have to give him the 50 euros first and then you can flip over the box.  This negotiation takes a little while, and it accomplishes three things.  First, the operator gets your money and knows that you won’t skip out on him.  It’s harder for him to get you to pay after you know that you’ve lost after all.  Second, it takes your mind off where the ball is and onto convincing this guy to let you bet, after all you have a sure thing.  Third, it prevents you from doing any potentially embarrassing things like flipping all of the cups and revealing that there was no ball in any of them.

Taking your mind off the ball is important because, you have to remember, you’ve just seen him “accidentally” reveal the ball under this box you picked.  Without this 30 seconds of negotiation you’d know you’ve gotten cheated, with the extra time, did you really see what you thought you did?  Who knows?  Even so, what are you going to say?  “You slipped up and showed me the ball under this cup, I was trying to cheat you good sir!” After all the ball did turn out to be under the other cup, maybe you just made a mistake.  You let him keep your money and walk away.

Why am I telling you this

Reminiscing on the whole thing I’m strongly reminded of the experience of new people, and frankly some old hands, with the stock market.  The steps feel similar.  First, you see other people getting rich.  Second, you selectively remember the times you were right about stocks, especially stocks you thought were good which then enjoyed a significant upward run.  Third, when you actually get involved with your money it doesn’t turn out at all like you expect, but you keep your mouth shut because no one likes to brag about the mistakes they made in the market, so then the next generation gets ready to invest and…

In total I think that means there are a couple things to keep in mind about the market:

  • Making money in the market isn’t easy.  Beating the market by a few percent over 20 years is really great, really rare, and sounds really boring.  That’s the best you can hope for.  The average dollar in the market does average.  The average person in the market does much, much worse.  You can do as good as the average dollar just by indexing into a total market fund.
  • Selective memory is your enemy. Keep an actual record of your investment ideas before you start investing, in the mean time your money goes into index funds.  Though its important to remember that there are day trading strategies which work with play money but not with actual money.  Your investments have an effect on the market only when they’re real, and sometimes that effect can dry up the source you thought you were making money from.
  • Admit your mistakes.  It’s a lot easier to learn from your mistakes if you’re willing to talk to other people about them.  It’s also important to keep in mind that investing is a game of probabilities, not everything will work out, and not everything that doesn’t work out is necessarily a bad idea.  It’s always important to try to determine if you lost money because you were on the other end of a shell game, or a fair casino game.  Losing the dollar in either case sucks, but whether or not it was possible for you to win is important!


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Aug 192016

Outerwall (OUTR) Going Private

By |August 19th, 2016|Blog|Comments Off on Outerwall (OUTR) Going Private

Thanks to hcalderonmeister

Your chance to invest in a failing physical media format. Thanks to hcalderonmeister

Outerwall (OUTR) is a company you probably haven’t heard of but have probably made use of at least once.  Formerly known as Redbox the company changed its name to Outerwall in hopes of not being so closely connected with an obviously dying medium.  You should be aware that DVD rentals probably aren’t going to exist in 10 years, and the vast majority of Outerwall’s sales are generated by DVD rentals.

The Business

Outerwall’s business consists of two divisions, Redbox and Coinstar.  Redbox operates the eponymous automated DVD rental kiosks in McDonald’s and grocery stores throughout the United States.  Coinstar operates automated coin changing machines.  Both lines of business seem destined to dissappear within the next couple decades, though I admit I can’t see Blu-Ray’s lasting even that long.  Roughly 80% of sales are produced by Redbox.


An optimistic valuation in my view is that Coinstar revenue is basically flat for eternity and Redbox’s revenue disappears smoothly over the next five years or so.  If we assume that corporate costs stay the same for eternity (obviously this isn’t true but they could go either way, so that’s why we’re using an estimate), we can combine the corporate costs and Coinstar’s net income to come up with an annuity of roughly $26 million.  If we discount this annuity at 10% (chosen as a rule of thumb, be careful about this, it could have substantial changes to the current value). This gives Coinstar a value of $260 million. We then add in the value of the cash which can be extracted from Redbox before it’s inevitable demise.

I assume that the depreciation, direct operating costs, and marketing costs shrink along with revenue, I figure that other costs stay stable.  I discount this these values at 10% annually as well. Based on these assumptions, I figure that Redbox is worth $475 million if management absolutely nails the moment to quit.  Together, this makes me figure that the business is worth $735 million (roughly $45.35 per share) in total.  Current valuation of the business is $835 million.

Buyout Offer

Apollo Funds has offered to buy the entire company, for $52 per share.  They have made a tender offer which expires at the beginning of September and if you participate in the tender offer (by instructing your broker to tender your shares) you will probably also get paid within a few weeks of September 1st.  At that point Apollo will use its newfound voting power to buy the remaining shares at the same price $52 per share.  In order for the deal to go through more than half of the shares need to get tendered to Apollo in the tender period.


Given that Outerwall currently trades for just about $52 ($51.86 as of this writing) a share you might be wondering why in the world you’d be willing to buy it only to get a microscopic gain come September. As it turns out that’s a little bit of a trick.  If you purchase the stock on or before August 19th you will also get a $0.60 dividend. Therefore should the company get bought out you’ll get your $0.14 and a $0.60 dividend.  This will be a 1.5% gain over the course of a little less than a month.  Annualized that works out to 18%, a respectable return by any measure.  However, you have to weigh that against the downside that the deal might break and you’ll be left with your Outerwall shares which I consider to be worth about $45, so this break would represent a downside of 13%.  In order for this to have positive expected value you’ve got to be thinking that the chances that this deal goes through are about 10x the chances that it breaks.

Additionally, there has been a bevy of legal interest and at least one lawsuit filed on behalf of the shareholders questioning the deal price.  There is a small chance that either Apollo Funds raises the buyout price or another buyer comes in with a better price. Without this possible upside Outerwall at this price probably isn’t worth the risk.  This is probably no more than a 5% scenario, but the additional possible buck or two adds a significant amount to the expected value that you shouldn’t ignore.

Hidden Opportunity

The real opportunity is that the deal breaks.  If that happens the price will probably fall substantially as everyone heads for the door at once.  This would be an opportunity to make some easy money if the price falls far below intrinsic value.  I own shares of Outerwall, and am not adding in order to pick up the possible 1.5% gain (which given the tight time period probably doesn’t need to get scoffed at).  But I will probably add to the position by buying either their bonds or stock depending on which gets knocked more out of whack.  Outerwall is obviously going largely out of business in the future, but someone is going to extract a great deal of money from it between now and then.

Disclaimer: I am long OUTR (This means that I own Outerwall stock, or that I profit when the stock goes up.  Short would mean that I profit if the stock goes down.). I have no plans to buy or sell any of the mentioned stocks within then next 72 hours. I wrote this article myself, and it expresses my own opinions. This is not a recommendation to buy or sell any stock. I am not receiving compensation for it (other than from the owner of the blog District Media Corp). I have no business relationship with any company whose stock is mentioned in this article.  Always do your own research before making any trade, buying or selling any stock mentioned.

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Aug 82016

XIV (VelocityShares daily inverse vix)

By |August 8th, 2016|Blog|Comments Off on XIV (VelocityShares daily inverse vix)

Thanks to eatmilesleep.

Thanks to eatmilesleep.

The stock that makes the most sense for me to own isn’t a stock at all.  It’s an ETF.  Basically, it’s a fund that trades like a stock.  This fund (XIV) is designed to exploit the fact that people don’t like risk.  That makes sense.  Risk isn’t a good thing.  I don’t like risk, and you shouldn’t either. Some people, have decided that volatility and risk are the same thing.  To me, risk means losing my money.  Volatility is a measurement of the change in the quoted value in your portfolio.

Okay, so what?

The beautiful thing about the free market is that when someone is willing to pay for something you can offer to provide it.  Since I don’t mind the volatility people can simply pay me to take it on.  XIV is a method for selling your willingness to accept volatility.

How much volatility?

The answer to that question is lots!  In the past XIV has lost over 90% of its value!  There is even a provision in the fund which will cause the fund to liquidate if it loses too much value too quickly.  This could certainly result in losing 100% of your investment.  Why is this level of volatility worth accepting?  Well, since inception in late 2010 it has returned 274%, compared to 107% including dividends from the S&P 500.

So how does this literally work?

Mind you, this will get slightly technical, so bear with me.  It’s really necessary to fully understand anything that you’re going to invest in and the XIV is no exception.  In order to understand the XIV etf you must first understand the index it attempts to short (ie, be the opposite of).


The VIX is a volatility index. It attempts to measure how much risk there is in the market, by measuring how much the market expects prices to go up and down over the next month.  In the context of the VIX, “the market” means the S&P 500.  The index itself is calculated from the implied volatility of both calls and puts on the S&P 500 index.  Prices of calls and puts both sooner than one month from now, and after one month from now are used to interpolate the volatility over the next month.  For a step by step explanation of how to calculate the VIX yourself, please see the Chicago Board of Exchange’s white paper on the subject.

The calculation is designed so that a VIX index level corresponds to an annualized expected percentage change in the market over the next month.  So if the VIX is 36 that means that there is an expected 3% (36% / 12 months in the year) change in the market over the next month.  Higher VIX levels correspond to expectations that the S&P 500 will change by larger amounts.


It isn’t immediately clear from that why a fund based on doing the opposite of the VIX would make money.  Well, if you had a fund that wanted to mirror the VIX, you’d have to own a bunch of options on the S&P 500 at different strike prices.  These options have expiration dates, and you need to maintain a weighted average of options exactly 30 days into the future.  So, as each day goes by, you have to buy enough options with expiration dates more than 30 days away, and sell enough options with expiration dates closer than 30 days to keep your weighted average exactly 30 days away.

This means, on average, you’re selling options with nearby expirations, and buying options with distant expirations.  Generally the future has more implied volatility than the present because there is simply less known about the future than the present.  This means that the value of options tend to decay as days go by, and therefore a VIX fund loses a little bit of money, on average, each day.  Since inception in 2009 a VIX fund (VXX) which attempts to match the daily change in the VIX has lost 99.9% of its value.

The XIV does the exact opposite.  Rather than buying these options, it sells these options, so it, on average sells options with distant expirations and buys options with nearby exipirations.  Therefore, you should expect the XIV to make a little bit of money each day, on average.  As I mentioned before, since inception XIV has gained 274% in value.

So therefore what

Well there’s a real chance that this guy will go to zero.  I wouldn’t put all of your money into it.  I keep a very small percentage of my investable net worth in XIV.   I put a little more in everytime the world loses its collective mind (Brexit, US Goverment Shutdown, the Euro Crisis).  If it ever becomes too large a percentage of my portfolio 4-5%, I plan to sell it back down to 1-2%.  This breaks my cardinal rule of never selling, but I’m not sure that XIV will ever pay dividends, and the continued risk of going to zero seems non-trivial to me.

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Jul 292016

Be Pro-Globalization

By |July 29th, 2016|Blog|2 Comments

Global poverty is not something recently invented for the benefit of multinational corporations.

~Paul Krugman (Nobel winning left-leaning economist)

Globalization has been wildly good for the world, in particular it’s been good for the poor.  It’s interesting because most Americans, 67%, believe that global poverty has increased over the last 40 years.  Fortunately for the world, this just isn’t true.

So what’s to blame for this?  Well, globalization.  Poverty decreases have been fastest where trade with the rest of the world is strongest.


In my view sweatshops are terrible soul crushing places, the faster the world is rid of them the better.

You would be very mistaken however, to think that sweatshops cause poverty.  Sweatshops are a symptom of poverty, and poverty will not be cured by removing the cause.  For example, one of the worst places to work is undoubtably in a Nike factory in Bangladesh. Unless you live in Bangladesh, there a job at a state owned factory pays only a third of what a Nike factory worker can make.  It’s easy in the west to simply say, “well that’s still unfair, it’s still too little. Nike should pay more”.  That’s easy for privileged westerners to say.  If Nike then moves out of Bangladesh and stops using sweatshops we will pay a little more for sneakers.

I don’t know anyone who says they would be unwilling to pay more for sneakers to improve the lives of the Bangladeshi.  Paying more for sneakers wouldn’t hurt middle class Americans much at all, and really, why should we care about how much middle class Americans pay for shoes when the vast majority of the world lives in terrible poverty?  But, if Nike moves out of Bangladesh, it won’t be middle class Americans who will truly suffer for it.  It will be the Bangladeshi.

Take this example from Nicholas Kristof about the people in Cambodia who scavenge a garbage dump for recyclables:

Talk to these families in the dump, and a job in a sweatshop is a cherished dream, an escalator out of poverty, the kind of gauzy if probably unrealistic ambition that parents everywhere often have for their children.

Vath Sam Oeun, hopes her 10-year-old boy, scavenging beside her, grows up to get a factory job, partly because she has seen other children run over by garbage trucks. Her boy has never been to a doctor or a dentist, and last bathed when he was 2, so a sweatshop job by comparison would be far more pleasant and less dangerous.

Americans have a very selfish view of this, many would harm their country and others to end globalization and tear up trade agreements.  They’d prefer this sort of thing to continue instead of sweatshops because then they don’t have to feel morally responsible for it.  Refusing to help other people at your own expense isn’t nice, but it is normal behavior, and it is occasionally defensible.  Injuring yourself to do real harm to other people, and then pretending not to notice the harm you do is the most morally reprehensible thing I can think of.

Buying Local; Supporting Global Poverty

This, in a nutshell, is why I think that buying local is just about the nuttiest thing I’ve ever heard of.  Paying more for a good, not because it’s quality is higher, but just because it happened to be made nearby impoverishes everyone, but the poor of the world most of all.  Putting the global poor out of work so that you can feel morally superior supporting someone with a college education making fancy doilies seems crazy to me.

But, buying local keeps the money in the community!

You have fallen prey to the money illusion.  The standard of living of a community is determined by what it produces not money that it has.  The problem with your reasoning is made obvious if you extrapolate it.  If a community is made better off by buying worse goods preferentially from each other, would the community be better off if everyone paid each other all of their money for spending all of their working hours producing the shoddiest good of all, nothing.  Your community would quickly starve.  Whenever someone is trying to convince you of their economic argument by paying attention to money rather than the actual goods and services, they do not understand economics.

If you think that your local producer of a good makes it better, that’s great, buy it.  If the goods that you buy local are equally good for the same price, then there’s no need for the inducement to buy it locally!  The degree to which the goods you purchase locally are worse, or overpriced (I generally find that a local good commands a 100% markup over its equivalent), is the degree to which you impoverish your community by buying them.

Poverty Matters

It’s very hard for Americans to understand real poverty.  Everything so much poorer than us looks equally wretched and miserable. The only important question in this debate is, what will most quickly bring global poverty to an end.  I’m sorry you don’t like that globalization and its attendant sweatshops are the only answer, but they have reduced poverty at a rate faster than has ever been seen in the history of man.  Many other things have been tried, including just giving people more money.  They don’t work.  Wishing won’t make it different.  Refusing to understand doesn’t improve the situation.  Sweatshops are dirty, miserable and dangerous, but they are their own cure.

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