Caught long in a bubble...!!

due diligence (noun)
(i) the care that a reasonable person exercises to avoid harm to other persons or their property
(ii) research and analysis of a company or organization done in preparation for a business transaction

I'm talking about the second definition and why it is so important. Say, you come across this one investment which really appeals to you. And since you've been a good stock picker you trust your instincts and go for it. Of-course you analyze the fundamentals and nothing seems terribly wrong, maybe a few line items here and there, but nothing serious. Seeing that you have started acquiring this stock, the market reacts favorably and all those stupid "sell-side" analysts issue positive ratings.

Somehow, it occurs to you that this could be the next big thing, so you lever up your investment, which essentially means you borrow. The banks think this looks like a good investment too, so they also lend to you at favorable rates. Slowly you start to build up a significant position in this stock. It has been some time since you've started building up a position, and now you are pretty close to filing form 13D.

Then......without anticipation, the stock starts going the other way. It is now moving against the market...and you are left wondering whats going on. After a few weeks of decline, the stock starts gaining again. You think maybe the market reacted foolishly previously and that you are back on track. A few days of up movement turned out to be a "dead cat bounce".

Then one day...the bubble bursts...and its a free fall. Due Diligence failed and you suddenly discover that the books were never audited. You are getting margin calls every day, margins you can't meet. You can't get out of the stock because now its turned illiquid.....the debt can't be rolled over anymore cause now the bankers have started talking to one another...and they are talking about you.

This just one example of how the cardinal principle of investing was violated.
Rule#1: Don't lose money
Rule#2: Follow rule #1

And it goes on and on and on...!!!

The human life cycle in some ways can be compared to that of a corporation. Here is my version of how this happens.

0-9 Months: Seed Stage Financing
As the name says, this is when the seed is planted. This period requires close monitoring since business is most susceptible to failure at this stage.

9 Months - 2 Years: Angel Financing
Mommy is the angel and you're the apple of the daddy's eye.


2 - 4 Years: Early Stage/ Venture Capital
So now you've been through the initial tests and you've passed. You've learnt how to walk and maybe talk. Now let's see if product feasibility can be established.


4 - 15 Years - Expansion
The world is your oyster. Go ahead, explore, innovate, catch the rainbow.

15 - 21 Years - Buyout
"Maybe I should ask her out". If you thought something like this, well you just entered the exotic field of M&A. And if on the other hand someone asked you out, you just received an acquisition bid.

This is actually a pretty complex stage. Some choose to merge, some either get acquired or acquire someone else and some still carry on as independent corporations.

21 - 30+ - IPO
This is when the original founders (parents) sell their stake to a professional management (your spouse)and take in the cash. Now you are liable for public reporting and distributing dividends (producing children).

And finally, when the corporation reaches a mature stage, its time to spin-off a new division and start the whole cycle again.

Please note, this pattern is not typical and you will find many exceptions, however, this is the norm and not the exception.

A penny spent ..... is a penny earned..

No, It's not a typo and no, I'm not under the influence of anything. Here I'm going to explain another unique concept I came up with which encompasses three different philosophies.

Why "Greed is Good", why "credit" is good and why you need to spend...

Now, let's begin with a simple example. Suppose you earn $1000/month and you save 25% of it (a very conservative estimate...for some people it might be as high as 50%). Anyways, so after every 4 months you have saved a months salary. So if you stopped working after one year, you could live for another 5-6 months. Isn't that a wonderful life.....If you thought "Yes", you might wanna exit the page..!!

Now take the second case. Your monthly salary is the same at $1000, but now you spend $1100. So what do you do??.. you borrow..simple. So the next month either you cut down your personal spending to $900 and return the $100 (assuming no interest) or you borrow again. Now , most people would say that the first option is the correct one since people may not be able to borrow indefinitely into the future.

True, but there's another option...... generate extra $200 as income for the next month...return the loan and cut back "just a little".... So if you keep continuing this process for one year, guess who will be making more money....you or the first person ??...... This was to prove that "Greed is Good".

Now to demonstrate the second point about credit. Say company A has a lot of debt and company B has no debt. Assuming both are operationally sound and company A does not go into default, which is a better company. You might be tempted to say B, but I'd rather prefer A. In order to service the debt, company A has to generate a minimum amount of revenue year on year wheres company B's managers have no such incentive. Company B's managers can afford to have a bad year....not company A. You see my point......guess who's more motivated to perform ????

So coming to my last point. Spend more than you have.....only then will you be inclined to earn more than you do now....and the cycle goes on..!!!!!

"If you are living within your means..........you lack imagination"