Pay Your Debt First

One of my co-workers mentioned to me he's lost some money in the stock market, and he's still got two student loans to pay off. Some of the student loan was for his education, but some was put in the stock market. He must be thinking of making a fortune at that time, but it didn't turn out that well, and he lost almost all of them. What he said to me got me start thinking in his shoes. If I were him, I would definitely not do a swap like he did, using loans to play in the stock market. I probably would take out the loan and put it in a high-yield saving account to earn some free interest since most student loan are interest free while you are still a student. If I were him, I definitely would pay off those student loans first before investing huge amount of money in the stock market. But if I were him, I would try to avoid taking out any loans at the first place.

"Avoid debt!" My mother used to tell me when I was a little boy. As a result, I was able to get a college education without paying a penny. Thanks to scholarships and financial aid. As a result, not only I don't pay anything out of my pocket for tuition+books+room+board, I even receive a refund check every semester. I'm very proud that I'm still debt free at this point of my life. I often hear people saying that it's necessary to take out this loan or that loan, which I disagree with completely. When you have to take out a loan to do something, this suggests one and only one thing, and that is the thing you are aiming for is not something you can afford now. You have to ask yourself, "Is it really worth it?" Of course you will have to fill in the blanks for the definition of this worth here. But one thing you have to be clear is that taking out a loan will for sure put a burden on your financial freedom, which will affect your overall freedom inevitably. Be cautious, and avoid debt.

Take Your Losses?

Today with the Dow dropped below 12,000, one of my co-workers sold another big chunk of stock holdings. Well, he had to since he got a margin call and had no extra cash or confidence to cover it. "Well, now, I feel relieved." thus said by him. I commented that a conservative long term perspective is crucial. He said immediately "the long term way does not work because it totally depends on when you get in (the market) and what kind of portfolio you have." Another co-worker overheard the conversation, and said, "Conservatism is not needed when you are young. If I can double my money in 6 months, then why would I go with 30 years?"

I could've said to the first person, "Instead of blindly concluding the long term doesn't work, why doesn't you figure out the timing and the kind of portfolio you are most confident with and give it a shot?" I could've said to the second person, "How certain are you about doubling your money in 6 months? For me, I am more certain that my money will double in 30 years than in 6 months." But I kept myself quiet for I know that we are coming from different planets when it comes to putting money to work.

I am an investor, but they are opportunists deeply in their hearts, though they claim that they are investing their money as well. For me, investing is all about minimize the risk of my capital loss. For them, trading is all about maximize the capital gain and minimize the capital loss; they focus too much on the former, and too less on the latter. It is worth of pointing out one thing, and that is inherently, time means much more to them than to me because capital gaining or losing is directly related with time and flashed out by time, while risk is not. If we use the time sensitivity of stock prices as a benchmark, then we can think of risk as time-free. But the opportunistic attitude is not their problem, their problem is that they do not know that they are opportunists; they thought they were investors. The investor's way of thinking for them is merely a comfort shot, and they take this shot every time they start loosing money. Until one day that they realize that this shot is addictive and can only kill them, they abandon the shot and rant about it. But it ain't the fault of the shot, it is the doctor who prescribe the shot should be blamed. So they really should blame on themselves, well, maybe the so called "professional investing" information as well.

"What am I?" I asked myself this question before taking my first serious amount of money out of my pocket. And my answer is that I am an investor. As a result, I focus on hedging risk. There are many risk hedging techniques including diversification, dollar cost averaging, buy and keep buying, options and its underlying stocks, etc. I'm learning them as I go, and never rush myself into any of them before the full understanding hit me. I've a friend whose answer to that question is that he is an opportunist and a day trader. As a result, he doesn't care about risk at all. Instead, he focuses on making gains and taking losses. Actually, I think he is more focused on taking losses. -7% is his cut-off point and he's very good at following it. By the way, he started with $30,000 five years ago and now it becomes about $500,000. More importantly, his experience doesn't convert me to an opportunist. Sure, a gain of $470,000 in five years is nice, but I am conservative and most comfortable with being an investor. There is nothing wrong with being a conservative, especially when it comes to money. And there is nothing wrong with not getting out of your comfort zone, again, especially when it comes to money.

By the way, how did I know that I was an investor? I asked myself another question, "Will you shop naked at a shopping mall?" My answer was that "No. But if I'm guaranteed that I won't be arrested, that people who know me won't be present, that no camera, video tape or any sort of media allowed, and that there will certain incentives such as cash prize (above $1,000) or other rare gifts upon the completion of the naked act, then I will do it." After that, I knew for certain that I was an investor and never thought otherwise.