Balhiser LLC Financial Handbook

Even though it is very unlikely that Balhiser LLC will do any hiring in 2010, it makes sense to lay out a rough sketch of expectations and policies.   In many ways I’d like to follow the HP Way as outlined in David Packard’s excellent book.  So here is a first pass.

Balhiser LLC is:

• A for-profit financial company seeking to produce long-term returns for its shareholders.
• A company where every employee is a shareholder.
• An innovative, conservatively-managed company that values bold ideas and prudent actions.
• As true of a meritocracy as humanly possible.

While I as president retain final say-so, salary and other financial information will be governed as follows (as permitted by law):

• Transparency.  All employees and stockholders will have access to the company’s financial books.  This includes salary, other compensation, and ownership information.
• Employees will play a key role in hiring their co-workers.
• Employees will, as much as possible, have say-so on who is on their project team.
• Friendly competition between project teams is encouraged.
• Competition between project team members is generally discouraged.  Teamwork is strongly encouraged.
• Salary and compensation adjustments will be based on the following (in descending order of precedence):
  • Company performance
  • Project performance
  • Individual performance
• Company performance is #1 because without reasonable performance the wants of the shareholders and employees simply cannot be met.
• Project performance is #2.
• Individual performance is #3 because:
  • It is often difficult to measure objectively.
  • Competition between individuals for salary, position, etc is frequently at odds with teamwork.
  • Time spent on “getting credit” and “looking good” is time wasted.  What matters  is enjoying work, finding solutions, and making money.
• In the long term individual performance is still rewarded because:
  • The teams with the strongest individual performers will tend to be more successful.
  • The importance of project team success will result in high-performers being highly sought-after.
  • Long-term low performance that is detrimental to the team is unlikely to be tolerated by the team.

As a final bit here is what currently constitutes Balhiser LLC:

Business:

• Invests company resources to make cash-flow and profit.
• Financial commentary and general (not-individualized) investment advice.
• Financing long-term investments and constructing a long-term financial portfolio with a strong balance sheet.

Assets:

• An investment property (that is currently generating positive cash-flow).
• A business checking account.
• A handful of websites/domains.
• Over 75 articles on various financial topics.
• A computer, and other office equipment.
• A modest collection of accounts receivable.

Disclaimer:    The Crazy Ivan Account (CIA) is not a Balhiser LLC asset.  Commentary about the CIA is.

Free your Mind and Bogle the Broker. A Zen Guide to Investing.

Zen is uncomplicated.  Investing is uncomplicated, until it isn’t.

I like the short Zen story about attention.  It starts out

There’s an old Zen story: a student said to Master Ichu, ‘Please write for me something of great wisdom.’

Master Ichu picked up his brush and wrote one word: ‘Attention.’

Simple. Right?

On some level the concepts are simple.  They are also profound.  On some level Zen is remarkable, stunning.  On another level unremarkable.

Investing concepts are similar.  Simple, profound.

Possibly the most difficult investing thoughts to grasp and put into action are the most simple.

• Save.
• Balance.
• Own.
• See.

I believe these simple words capture all you need to know to be a wise investor.  Like ‘attention’ these ideas benefit from lots of practice.

To ‘Save’ is easy for some, difficult for others.  Investing starts with savings.  For those not born into a great inheritance savings is crucial.  Savings is the art of spending less than you make.  The art of delayed gratification.   Keeping some of your income and keeping it safe.  For many the verb ‘save’ is easy in the way that the verb ‘diet’ is easy.  Simple concept, challenging action.

‘Balance’ is a deceptively simple term.  Martial arts train balance.  Speed skating, ice skating, and tight-rope walking showcase balance.  In the investing arena ‘balance’ refers to two key ideas: diversification and emotional equanimity.  Diversifying means balancing risks between different types of assets.  Emotional balance means “Caring about your investments, but not THAT much.”

To fully ‘own’ your investments you must understand, control, and value them.  In the same way that a stable master may own and value a prize horse without understanding veterinary medicine, a stock holder may own  and value a stock without being a financial comptroller.  An owner cuts out the middlemen and makes decisions.  An owner weighs decisions and responsibilities carefully because the financial buck stops with her and no one else.

Finally, to ‘see’ your investments you must see beneath the surface.  You see that all investments inevitably change.  You see that some good investments go bad.   You see the fog that shrouds some investments so thickly that you move on by.  You see that taxes are constantly changing and possibly that an accountant may see the ever-changing tax waters more clearly than you.

That’s it.  To invest with wisdom is to save, balance, own, and see.

Now for a curve ball.   If you have been shot by poison arrows, first carefully remove them.  Do not dwell on the cause of their intrusion into your flesh.   After you have recovered, you may be tempted to ask “Why was I shot?”.  It is the ‘why’ that takes most of the ‘attention’.  The same is true for investing.   The ‘why’ is the tricky, time-consuming, complicated part.

I believe that for the beginning investor the why can be unimportant.   For the enlightened investor the why is also unimportant.    The journey to investing enlightenment is about discovering the why and then letting it go.

Working titles for an investing book?

Since I love to read investing books, I somehow got the idea in my head to write one.  So far I wrote an outline and a couple working titles and even a promo for the book jacket.  Now just to fill in the contents — piece of cake 🙂   I figure that with a hour here and hour there on nights and weekends I might just be able to have a rough draft in a year or two.  I thought I’d share some of my working titles for comment and criticism:

Risk

Charting the volatile seas of bounty and bust.

—or—

The Balhiser Principle

Integrating the financial alchemy of gurus and scholars into your personal risk profile.

Obvious, risk is  a key theme.  I believe risk is one of the most challenging concepts to intuitively grasp.  Benjamin Graham tackled risk with a “margin of safety” approach.   Warren Buffet modified Graham’s value approach to achieve phenomenal results.  Scholars developed the capital asset pricing model (CAPM) for stocks.  Scholes,  Black, and Merton took CAPM further applying extending it to stock option pricing and winning Nobel prizes.  Thinking they had tamed the financial oceans they made big gains until a financial maelstrom sunk their financial Titanic called Long Term Capital Management.  Finally, Nicholas Nassim Taleb rewrote the rules of finance in ways that are just bringing to change the modern financial landscape.

I would like to explain these concepts such that the busy Joe or Jane investor can easily understand and use them.  After all what is the point of financial ideas to the personal investor  if they are not readily usable by the personal investor?

Well there it is —  My intention to write an investing book over the next couple years.  Announced on Super Bowl Sunday, 2009.  Go Steelers!

Review: Ahead of the Curve

I just finished reading “Ahead of the Curve”, an book about Philip D. Broughton’s 2 years at Harvard Business School (HBS).   It was a quick, well-written read.    Broughton did a superb job of conveying the HBS experience, painting an vivid and clear picture of the campus, student, faculty and other who make HBS what it is.  Further he takes the reader off campus to interviews and field trips with the likes of Google and E-Bay.

This is not a book about investing, but it does touch on areas very close to investing such a building, managing, and analyzing companies.  It talks about investment bankers and Wall Street traders who go to HBS to take their careers to either a new level or in a completely different direction.  And it talks about the seduction nature (and reality) of hedge funds and venture capital.

This book might not help you fine tune you investing portfolio, but it may give you some insight into how executives at the companies you own have been taught.  Executives including Henry Paulson, George W. Bush, and Michael Bloomberg.

More books; more futures?

I’ve been reading a new book “Ahead of the Curve” by Philip D Broughton. This is fun for me because it gets me back into the habit of reading at least 2 books at a time. This allows me to continue with whichever I’m in the mood for when I next start reading.

“Ahead of the Curve” is the story of Broughton’s stint at Harvard Business School. So far so good. I’ll be reading it and Snowball interchangeably for a while.

I’ve been pondering a couple things. I’ve wanted to obtain a Master’s in Financial Engineering and/or Risk Management for a few years now. I’ve been resisting the MBA (not to be confused with the NBA :). Now, at least today, I’m wondering if obtaining an MBA wouldn’t be so bad.

On another note, I almost signed up for an futures account.  The legalese scared me away from completing the application.  I’m interested in having the ability to trade SPY futures.  I’ve spent time exploring the use of options to hedge my exposure to SPY (and, indirectly, VTI) as well as gain income from covered SPY call writing.   The idea of incorporating  futures into the mix is appealing to me.

I am someone who prefers to learn by doing.   Here are some of my concerns…

1. Hitting the wrong button and entering a futures position I did not want to be in.
2. Misunderstanding a particular futures commitment (100 shares or 200 shares?).
3. Being responsible for liabilities in excess of the amount held in the futures account.
4. Liquidity concerns.  (What is the volume?)
5. Concern about the unknown unknown.

Thus while I conceptually understand futures, I have gaps in my intuitive and practical understanding of them.  I hope to mitigate these gaps in a couple ways:

1. Talk with (or exchange email with) folks familiar with futures trading.
2. Read and research more about futures.  I’ve already started this process.

Until then my present will have no “futures”.

Happy investing!

Holidays, Snowballs, and Deals

I’ve been enjoying my Christmas break and doing some reading.  I’ve been reading “The Snowball: Warren Buffett and the Business of Life” by Alice Schroeder.  I’m only to page 65 of this 838-page tome (plus additional notes pages) but I’ve already been sucked in. The book was a gift, but not to me, and I’m hopping on a plane tomorrow, so I’ll have to buy myself a copy to finish it.

Speaking of books, I was reminded of another great “investing” book, “Negotiate This!” by Herb Cohen. It didn’t meet my top-8 list only because 1) It isn’t, strictly speaking, an investing book 2) I liked the number 8 and couldn’t manage to bump a book off in it’s place. Needless to say getting a good deal through shopping for great values (as Warren does) or through negotiating great deals (as Warren also does). Regardless, consider picking up “Negotiate This!” and help improve your personal bottom line.

It’s dinner time, so goodbye for now. Merry Christmas and Happy Holidays!

Favorite Investing Books

Here they are.  Read ’em and profit:

1. The Black Swan. Nassim Nicholas Taleb (NNT).  Random House.
2. Fooled by Randomness. NNT.  Texere.
3. The Intelligent Investor (Revised Edition). Benjamin Graham (w/ Jason Zweig).  Collins.
4. When Genius Failed. Roger Lowenstein.  Random House.
5. Your Money & Your Brain. Jason Zweig.  Simon & Schuster.
6. The Ascent of Money. Niall Ferguson.  The Penguin Press.
7. All About Index Funds. Richard Ferri.  McGraw-Hill.
8. Investments. (Textbook)  Bodie, Kane, Marcus.  McGraw-Hill.

The first three are must reads in my opinion (though #2 overlaps with The Black Swan.)  I can’t say enough about the first two, though I try.   The Intelligent Investor is the book on value investing, period.

If you want to understand today’s financial crisis, read #4, in addition to #1.  These books provide the blueprints and some solutions.  If only Greenspan, Paulson, Bernanke, etc, had listened.

#5 provides a much needed perspective into the reality of financial decisions and the emotions behind them.  This book confirms the wisdom of having a play money (Crazy Ivan) fund to give emotion an outlet and aid in maximizing overall portfolio objectivity.

#6 is an excellent history of money and how we got to where we are today in the financial universe.   #7 is the best read I’ve found about the ins and outs of index funds and ETFs.  Finally #8 is a surprisingly readable text and reference for those who want to know how the financial world thinks (Read it to understand, not slavishly believe).

Read (and re-read) these books and you’ll be light-years ahead of 90% of the financial advisors out there.