AskDong

Just as I broke the mythical 800 barrier in my credit score, I’m doing it again. Yep, I signed up for another credit card. I can’t help it, when a credit card company offers to give me a sizeable chunk of money, I stick my hand out and take it. Though this time, I feel a bit dirty about the matter. My Money Blog highlighted a promotion Bank of America is running for University of Iowa Branded credit card. If you’ve read my about page, you know that I didn’t attend the University of Iowa, and hence the dirty feeling I have for applying for the car. However given that the application doesn’t actually ask if I attended the University of Iowa, I assume that anyone can apply. Still if feels a little dishonest.

The only requirement I believe to recieve the 25,000 WorldPoints is to spend $300 on the card. Given that I can easily spend $300 on credit card, it’s basically free money. The 25,000 WorldPoints is reedemable for a flight within the U.S. or a 250 check. I’ll opt for the check given that I have no trips planned in the next 6 months. I expect to recieve the credit card in the next week, and then hopefully recieve my bonus in the next 3 months.

The other day I wrote about how I had rediscovered the Investment Club I co-founded in college. That club has done much better than I have personally as an investor. The club has done better than the S&P 500. The fact that it only owns two stock, one of which is AAPL(Apple Computer), probably makes it a poor portfolio comparison. However as comparison it does highlight one my main shortcomings as an investor. Soon after I rediscovered my club, I was reading SuperSaver’s post on “Why Most People Get Returns Less than the Market.” and thought about how it applied to me. My actively managed stock portfolio is currently trailing the market (as defined by the S&P 500) by a 1.5%, it’s also displayed much less volatility so it’s not all bad. I’m not particularly disturbed by the fact that I’m under performing the market for the year. Since my bonus is not paid on January 1st, it cannot be expected that my portfolio would track the Jan 1st to date performance of any index.   I should calculate the performance of the index as timed with the additions made into my account.   Given that current short term performance is not my primary concern,  I’m not bothered by lagging the index in the current year as much as what I think is behavior that drags on my long term performance.

Reading SuperSaver’s article made me think harder about the investing mistake I’ve made and continue to make. Given that I was assessing my end of year goals, I’ve been actively thinking about how I invest and could do better. As I stated earlier, the main holding of the Investment club is AAPL. I also purchased shares of AAPL in 2002 (or around there) in my own personal brokerage account. AAPL shares are not to be found in my account today. Why? I brought AAPL at about $10, and sold it at $12.5, split adjusted. Pretty nice 25% gain for what I believe was a 6 month investment. Not so nice given that those shares are now worth about $130.

When it comes to investing, I think of myself as long term value investor. However I suffer from the 1st behavioral problem that SuperSaver outlines, loss aversion. I’m quick to sell winners and slow to sell losers. When it comes to losers, in my taxable accounts, I’m OK. It’s only in my tax deferred accounts that I really have a problem selling losers.  In my taxable accounts, I take solace in selling a loser with the ability to take a tax loss, something I can’t do in my tax deferred accounts.  Holding onto winners is a problem I have in both taxable and tax deferred account. If I’m truly a long term investor as I believe myself to be, there is really very little reason for me to sell. A traders takes his profits quickly, and investor builds a portfolio. I need start to behaving more like what I believe myself to be.

I haven’t been terrible. I’m far from an active trader, but there are definitely holdings I should’ve let run. Recently I’ve taken to selling option calls rather than trying to sell the shares outright. Still these sales have not worked out particularly well. While, I think I do an OK job identifying purchases, I need to have a more concrete plan of attack when it comes to sales. From the outset, I should define how much I want to hold onto company as permanent part of my portfolio, and constantly reevaluate what I consider to be an “irrational” price at which I would take profits. Currently I do not reevaluate enough. Given that I work in job that requires me to constantly do this, you would think I would be better at it.   While I have a framework to evaluate my investments overall, I don’t have a framework to evaluate specific stocks.   One of the goals I have with regards to the investment club is to have members create “stock reports” in a fixed format.  I believe this framework will make the job of reevaluation easier.

There are couple things that I do that rationally don’t make much sense, but I do them to keep myself honest. While objectively speaking I’m pretty fiscally responsible, and generally very rational with money, I know in the end I have my shortcomings like most people. What do I do that doesn’t make sense?

• I rather use my overdraft on my checking account rather than pull from the savings account attached to the account. I have a Citibank account and the overdraft is effectively a line of credit that’s currently 19.75%. Yikes. My fund levels are usually back to normal within a week (once I get paid), so I never pay that much interest, a few dollars at most. Still, it’s interest that I don’t really have to pay

• I’ve consistently not changed my exemptions so instead of paying the right amount taxes, I used pay too much for most of the last 5 year. I rather get refund than owe taxes even though I’m effectively giving the Government a free loan that I could otherwise earning interest on myself.

Those two example are mental shortcuts I use to keep myself honest. I don’t like transferring from my savings account because I fear I might not put back in. The balance on my credit line is impetus for me to spend less and therefore get my balances back in order. While ideally I should pay the right amount taxes, I rather pay more through the year and shrink my paycheck instead of having a false sense of wealth that might come when not enough is deducted from my paycheck.

Other people put further limitations on themselves

• They Don’t Use Credit Cards, even though the reward system is so compelling
• Some people only pay with cold hard cash forgoing even debit cards

And some other take even more extremes

• Refuse to hold debt of any kind even when it might make sense to borrow
• Save money, but refuse to buy stock holdings

None of the actions above make rational sense in absolute terms. However, I think some of them can be appropriate actions for certain individuals. Others such as refusing invest in stocks may be truly costly mistake. What do you do that doesn’t make sense rationally, but still makes sense for you?

This weekend I have some extra time on my hands, so I’ve decided to come in and clean up and update my blog. I’ve updated my blogroll to add:

Discoursive Monologues
GoldnSilver

Both are fellow Boston residents (Go Red Sox!), and both also thought highly enough of my blog (I think) to add it to their blogroll. Most importantly they keep excellent blogs, and I encourage my readers to check them out. In addition I’ve cleaned out a few blogs which do not update regularly enough to warrant inclusion in the blogroll. I’ll leave the guilty unnamed.

I realize when it comes to personal finance, most of it is personal rather than financial. Most people who take up the mantle of personal finance has a reason to do so. Many like Trent at The Simple Dollar and J.D. at Get Rich Slowly found themselves at a financial precipice they needed to back away from. My own story is more mundane, but even so for that reason I’ve decided to add more detail on my about page. I’m not done quite yet. I’m at year 26 of my life. Take a peek if you want to learn more about me. I’ll finish it off through year 31 next week.

Backend Changes:
I’ve added “Subscribe to Comments” plugin to better facillitate comments by allowing people to subscribe
I’ve replaced the “Share This” Plugin with Feedburner’s FeedFlare service. I believe FeedFlare is more accessible and configurable way to use social bookmarks such as Digg, del.ico.us, and Stumble UponOn.

I’ve also decided to activate Feedburner’s Email Subscription service. Please signup here if you wish to subscribe to this blog via email. If you’re not currently signed up to the standard RSS feed, please do so here.

Also, while I’ve been effectively following this schedule, I figure it would be good to actually notify my readers officially what my posting schedule is: Weekdays monday through friday, generally posted between 11 am - 1 pm. I’m also aiming to make one post during the weekend.

If anyone has any suggestions, or comments, please let me know. I’m always happy to answer questions, and get input.

Recently I got a call from an old friend of mine. A few years ago he, another friend of mine, and I started an Investment Club. This was actually more than a few years ago as this took place my sophomore year in college, about 12 years ago. Like many college students we took interest and then quickly lost interest. However, my friend called me the other day about the matter as he moved back to his hometown and started reviewing the records. His parents have been receiving the records for the last few years. Our investments have done quite well, mostly because we purchased shares of Apple Computer back in 1996 at $30/share. AAPL has since split twice and is now worth about $130/per share. That’s what Peter Lynch would call a 15 bagger. Split adjusted, the cost of our shares is $7.5 a share. Not too bad for a couple of college kids. The only regret I have is we only put in $300 into AAPL. Still that’s $300 investment has turned into one worth over $5000.

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