Certainly, the life seams “easier” being dependent and not having to worry about anything. But stop and think for a minute how many times you took an easy road and it turned to be not the best choice after all? And how many examples from any area of life can be taken where the hard things and actions that require some effort are the best choice: be it fitness, relationships or whatever. Surely, it is easier to sit on the couch and watch TV. But isn’t it a better choice to get up you butt and do some exercises to improve your health? Have you ever heart quotes like: “what doesn’t kill you makes you stronger” or “faint heart doesn’t get fair lady”? The life is full of examples that the easy way is mostly not the best choice. Said that, lets get back to our topic. There are two big downturns being labour worker:

First, we become lazy and dumb sheeps. Like slaves we are doing what we are told to. We are working a fixed +40 hours week on some monkey-job we don’t even like. We have a fixed amount of holidays a year. The rest of the time we ARE slave of the system. We lack of freedom and flexibility.

Second, your work is undervalued. Just run the numbers. For example: if a company owner has 100 workers and pays each 50 bucks, that’s 5.000 a month. But if he makes 10.000 dollar from the value all workers produced that’s a return of 100 bucks per each worker’s generated value. And he only pays you half of it! Ok, his organizational work has to be paid, too. But not with 5.000 dollar! Or is the work of one man valued as much as the work of 100?

And worrst of all is that the fears do not disappear. The fear of unknown and fear of failure you might have had as an entrepreneur is replaced with fears of being fired and not being able to pay for all the consumer good you acquired with all those loans you have taken.

Suming up, you replace fear of unknown with fear of being fired and lose your freedom in the process. A fair trade…? Think about it!

A lot has changed since then. The spreadbetting project I wrote about in my last post has turned out to be quite successful. During the summer months of 2007 I have earned more with spreadbetting and options than working 40 hours in a financial institution! As the turbulences began I realized that the market’s future is too volatile and hence too risky. So I stopped investing in capital markets for almost a year. And I’m glad I did so if you consider the big crashes in February!

However, I did not stop investing my money. My new strategy requires some work and does not include speculating in conventional capital markets: the risk is minimal and the return is steady. My capital is growing and I might quit my job y the end of this year is everything goes well. More about this in some later posts.

Now, what I have in mind with this site is following: I am still fascinated by the idea of financial independence and value-generation by using your mind and capital, not spending your time doing some senseless monkey job. So, the aim and mission of this site will be changed slightly from “money investing” into “attaining financial freedom, independence and flexibility“.

That’s it for now. Stay tuned!

On the other hand, starting one day later means that I will lose all my money one day later, too, right?

1. Spreadbetting basics

First of all, I have looked up the spreadbetting basics. Apart from the info from Wikipedia, ETrade has also got a nice guide about the matter. It works much easier as I thought:

Let’s take as a betting target the DAX (german stock index). In the spreadbetting account you see 2 prices for DAX: BID and ASK. You always buy at ASK price and sell ad BID. In DAX, the difference between bid and ask are 2 points (in ETrade).

Example:

(6874-6876) Bid-Ask

Now, if you think that the prices are going up, you buy at ask price. And after the index rose X points, you cash out by closing the position: you sell at bid price.

Example:

- We bet $5 at 6874-6876 that the prices will go up (buy $5 at 6876).
- The prices rose to 6880-6882 and you decide to cash out (sell 5$ at 6880).
- Therefore, you have won $20 (6880 minus 6876 = 4. And 4 times $5 = $20).

Notice, that, in fact, DAX rose 6 points, but you only got paid for 4. The 2 points of the bid-ask “spread” are kind of “commission” the spreadbetting company gets. So, in the example above, if you buy at 6876, the index has to rise at least 2 points just to break even.

The bid for falling prices works just the same: you SELL at BID price, and you BUY at ASK to close the position later.

2. Defining the rules:

The essence of steady, constant progress is moderation: an equilibrium between risk and opportunity. It is better to go slow, but steady than to speed up and hit a wall at the end. Even in such a risky and volatile investment product like financial spreadbetting you can minimize a lot of risks by limiting yourself with a few pre-defined rules :-) Here are mine: 

• I will only be concentrating on one index: DAX
• I will play rising courses only. Playing both can be confusing and confusion is very risky. Therefore,
• confusion is our enemy. It gets you out of control. Avoid it by always knowing what you do. If you are not 80% sure, then don’t.
• Bet only few times/day. Less betting minimizes the risk of losing!:-) 1-2 times a day is more than enough. If you bet more, first, it is much more probable that you will hit a huge price spike/fall and lose all your money and, second, playing more affects you psychologically and can lead to unlogical, very subjective and, therefore, very risky decisions.
• Have an objective primary strategy that you follow (with small variations depending on the current situation).

So, these were my 5 limitation rules, like speed signs on a highway. Before defining a strategy, I needed a theory based on past experience, though. In other words, I had to study the past DAX behaviour and then do a strategy.

I will publish my findings in the next post. Gotta go.

For now, farewell.

 1. Determine your income and spendings

Before we start, a little work from your part is required. You should know (more or less) what you earn and spend monthly because this data will be used to plan for the future. The earnings shouldn’t be a big problem as most of us know where the money comes from and how much! What could be a problem, is to determine and categorize your spendings.

Example:

Income:

Work: 2000$
Investments: 150$
Freelance: 500$

Spendings:

Rent: 800$
Bills (water, sewer, electricity, telecom.): 270$
Car Loan: 130$
Car Gas: 150$
Education (school): 120$
Food: 400$
Other: 450$

It’s a good idea to add 10-15% margin to your variable spendings like food, gas and other. We want to be very conservative in our calculations and plan for “the worst case”. You can always adjust these later on (if you see that you spend more/less than planned).

2. Excel structure

In our excel spreadsheet the columns will represent the months and rows will be the cashflow concepts.

On the beginning of the first month (example: mar 07) we put our starting capital (bank accounts + cash). Then we add income, subtract spendings and the result is the end balance of this month. The starting capital of the second month is the end capital of the first. And so on. In our example the spreadsheet would look like this:

I have used different colors to make the sheet more expressive. You can also freeze the month and concept cells so that they always stay above. You can do this by placing the cursor on B2 cell and clicking “Freeze Panes” in the “Window” menu.

3. Add functions

In the spreadsheet above I have already added some functionality:

Change - the change cells calculate capital change during the month. It is just the sum of income minus the sum of spendings using this formula (place in B14): =SUM(B3:B6)-SUM(B7:B13)

End capital - is the capital after applying the month’s change (place in B15): =B2-B14

Start capital - is the end capital of the previos month. I our example the start capital in abril 07 would be the end capital of march 07 (place in C2): =B15

Months - the following month is approx. the current month plus 31 days (place in C1): =B2+31

That’s it! In order to not write the functions again and again you can copy now the cells C1:C15 and paste them in following columns for as many months/years as you want.

What now?

In real life you don’t have same spendings each month. The data we have entered is just an approximation of most important cashflow. You should consider adding all non-monthly-recurring income and spendings to your plan. For example:

• You know that each July you spend 1200$ more for holidays. You can add this spending in “Other” (or create  new row/concept: “Holidays”) in July of each year.

• You pay for insurance every 3 months.

• You are planning to buy a $10,000 car on September 08

You should also personalize and add new concepts to your income/spendings like insurance, mortgage, rent income, etc. Depending on your needs.

After you have finished your plan, you will have a complete overview of your financial future and be able to plan months or even years ahead:

• You will always know how much you can spend,

• whether to take an additional financing in 4 months,

• cut on costs

• or be able to put $100 extra into your savings account monthly for the next x months without getting short on cash.

The spreadsheet we just made is a basic structure. In a more advanced version you could add investment dividends with re-investing functions, for example. If you have a solid undersanding of excel, you can play around and design a personalized cashflow spreadsheet that fits your needs.

You can download our cashflow example here.

While trying to make profit with financial gambling is like playing russian roulette, I have decided to try myself in this area and report the outcome. After all, I have a decent knowledge about the market, investing and statistical calculations. And, like in casino and horse races, knowledge is what makes the risk/chance relation to work in player’s favor.

For this purpose I have opened an account at ETrade Spreadbetting with an initial deposit of 150€. That’s the max I can afford to lose on this project for the sake of the science!

I have also chosen to play real money instead of demo account mainly because of two reasons:

• First, we humans tend to make different choices when it comes down to the “real thing”. It is like playing poker: You would probably play more conservatively with the real cash bets. For this project, I have decided to make it as real as possible and, therefore, play real.
• Second, should I win something, I would hate not being able to withdraw my winnings just because I have chosen to play a goddamn demo.

As I never did spreadbetting before, the first step will be to investigate and learn the basics. Then, I will have to chose which stock/index to play, study it and develop a sound strategy. Lastly, I will play my strategy and pray that it works and doesn’t affect my objective thinking.

Results and updates to follow, stay tuned!

In order for an investment to be an investment and not plain speculation, you need rock-hard, objective facts. Without facts, you either just gambling (which is a VERY risky way of “investing” your hard-earned money) or your putting a value on something just on the basis of what someone else has said. If that somebody has his own interests in the issue, it makes your decision also very risky.

Just think about buying (investing your money in) a new car: The seller will try to raise the value of the car either by lying or just showing the “good sides” avoiding any problems the car might have. Your job as an investor is to get the truth as truthful as possible.

How do you manage that? Investor’s #1 rule:

Know what you invest in

Get as many facts as possible from as many independent/objective sources as possible.

Never rely on just what somebody said. Verify the information. Objective information is your power and your insurance. Speculators base their decisions on subjective information. For example, they invest in stock just because it has gone up, not because it’s underlying value rose. Or as Graham put it once:

Investors judge “the market price by established standards of value,” while speculators “base [their] standards of value upon the market price.”

Below is a simple graph that shows how manipulable and, therefore, risky speculating is:

Everything in life is investing: You use a set of resources in order to obtain something, which value is greater than the sum of those resources. Be it “investing” in its classical meaning or anything else created in life.

For example, your work. Is it investing? Of course! You invest one of the most important resources, your time, in order to obtain a return, a paycheck at the end of the month. This investment can be a good one, if you feel that the payment is OK for the time you have invested, or not. It can also be a risky investment, if you work without any contract or commission-based.

Other example, you buy an mp3 player. Is it an investment? Hell yeah! You spend one of your resources, money, to obtain a result: ability to play music for thousands of hours of entertainment. You would not buy this gadget, if the subjective value you put on its usage was below the price you have to pay, right? It can be a good investment, if you are happy with the player, and it can be a risky one: when its quality is not as good as expected or it goes broken very soon.

There are thousands of examples. Can you think of any?

Let’s say you have:

• a very secure product like a normal bank deposit, which return % is known and
• a risky product, which best and worst result can be estimated based on historic data.

Question: How much should I invest In one and the other in order to:

• guarantee x% of return even in the worst case and still
• have a chance of more return than just what I get by investing in low-risk-low-return product?

Well, here’s the answer:

Enjoy and use with care!

1. Information

How easy it would be to become a millionaire in a matter of few weeks if you just knew what would happen the next day!… Or even the next few hours! This omni-knowledge makes the picking of the right investment a childs game. The risk is non-existent.

Did you ever wondered what the difference between experienced and a newbie investor is? Knowledge. Information lessens the risk of investing. Now, no one can tell what will happen the very next day, not even the best investors, because of the mere fact that no one has the WHOLE information that may influence the performance of your investment.

The “butterfly effect” says that even a butterfly could provoke a chain of events that could be world-changing. And who can predict such a chain? Nobody, because nobody has the information about the source and the result of this chain of events up-front. And while the example of a “butterfly changing the price of your stocks” is quite unrealistic, many other event-changing sources exist that are much more probable to influence your investments. And those are the sources that you should study and have the information about.

So, the first rule is to learn everything you can about what you will invest in and about everything that might influence your investment either way.

2. Diversification

Because of the problem of uncertainity discussed above (that no one has ALL information that can change the course of an investment project, which means that risk ALWAYS exists) you should ALWAYS diversify your investment capital in several investment projects.

Note: I call “investment project” one or a set of same or different investment products: real estate, stocks, bonds, etc.

An example to prove my point:

Lets say an investment has the probablility of 1 out of 10 to be unsuccessful. That means there are 10% risk.

Now lets say you invest your money in 2 different projects of the same risk level (10%). The probability that both turn negative is therefore:

(1-(0.9*0.9+0.9*0.1*2))*100=1%

You have successfully lowered the risk of 10% to 1% by investing in 2 different projects of the 10%-risk-level! Of course you shouldn´t forget the 0,09*2*100=18% chances that one of them will turn negative, but this problem can also be solved by playing with projects of different risk levels and by investing different amounts based on risk level of the project.

I won´t explain on this point how the probability caluculation works. Maybe the next time. Just keep in mind: the more you diversify, the better.

1. First, you’ve got to record what you are spending for several months: rent, food, bills, etc. So you can approximately plan what you’re spending monthly.
2. Add 20% margin to it for unexpected stuff.
3. The rest can be invested without fear.

Example: your paycheck is 3000. You spend monthly 1500. You can chip aside: 3000-1500*1.20=1200 -> some 40% of your paycheck.
Still, the money you have put aside for monthly spendings can still be “invested” in very secure products and can be used anytime. Just ask your financial advisor for “very conservative, but liquid products”. We offer a “money market” account that is almost like a checking account, but gives you some extra bucks a month.

Move your money, USE your money. It’s having good time right now in your checking account doing nothing. Make it WORK for you, damnit. Otherwise it will be slowly eaten up by the good ol’ inflation. Your bank will have a good profit from it… but will YOU?

Think about it.