Play the Lotto Like a Trader

Good odds look better than they actually are. A $540 million jackpot isn't worth $540 million if they pay it out over decades, once you take inflation and unearned interest into account. Calculate the odds based on today's lump sum payout. It will always be less than the advertised jackpot.

Photo by Mike Fleming

And then there are taxes. You'll lose nearly half of the lump sum payout to the government unless you can find a way to defer or eliminate being taxed on your winnings.

And then there's the law of diminishing returns. Dollar for dollar, $1000 spent on lottery tickets is a house payment that will keep some people from foreclosure. $1000 after you already have $100,000 cash is less precious. An extra $1000 after you have $540 million is peanuts.

Would you buy $1000 in lottery tickets to have an 11% chance to win $10,000? How about $1 million in lottery tickets to have an 11% chance to win $10 million?

Some of us would go for the first option, though I honestly don't see why after taxes and deferred payments are taken into account. Almost no one would go for the second: $1 million in your pocket today is not worth risking to have $10 million, which will not really be worth ten times as much to you.

When it comes to money, slow and steady wins the race.

More here: Is the $540 Million Lottery a Good Bet?

A Free Education

Reading as a form of self-education becomes more important the older a person gets. After college, reading becomes the primary form of self-education.

One of the best ways for a job applicant to elevate himself to the #1 position is to maintain a blog with book reviews and articles on topics related to the field the person wants to work in.

Getting good grades in college shows that the applicant has read in his field, but maintaining the blog shows that it is likely that he will continue to read widely and educate himself. It's an education with no tuition for the employee and no cost to the employer: a win for both.

Since one of the keys to self-funding is to earn more and spend less, preferably in a career where you can find fulfillment through service, it makes sense to make the most of your opportunities when applying for jobs.

Great Reads: A Flood of Trading Links

Don't say I didn't warn you.

Trading and Investing

The Ivy Portfolio vs. Ivy League endowments last year. (Mebane Faber)
Trend-following indicators reduce downside volatility. (MarketSci)
When momentum is poor, sell out. (Research Puzzle) 
Ideas about volatility-adjusted relative strength. (CXO Advisory)
Individual stocks mean-revert from month to month; industries trend. (SSRN)
Anomalies like momentum and value to go in and out of style. (CXO Advisory)
Selling puts or calls according to trend. (CXO Advisory)
Managed futures can save your tail. (Steven Koomar)
Investors allocate to the wrong asset class at the wrong time. (Mebane Faber)

A Softer World: 703

Software and brokers for options trading. (Condor Options)
Yes, bonds can be volatile instruments. Surprised? (ETF Replay)
Investing lessons from a pianist. (Marc Faber)
How to explain short selling to your mother. (BC Lund)
Are you a deranged trader? (Surly Trader)

In complex transactions involving a lot of people, be cynical. (Aleph)
"Never, ever take counterparty risk." (Reformed Broker)

It may be cheaper to buy ETF's than mutual funds. (Mebane Faber)
"Funds of funds face a huge hurdle because of the high fees." (Mebane Faber)
Can active managers add value when everything is correlated? (ETF Replay)
Commodity indices behave like mostly energy. (MarketSci)
Asset classes are becoming more correlated. (MarketSci)

Some of hedge funds' returns come from liquidity risk. (CXO Advisory)
Be careful about shorting that VXX. (MarketSci)
The state of short-term mean reversion. (MarketSci)
What happens to P/E ratios when rates and inflation change? (Mebane Faber)

Average market performance on the last day of the quarter. (MarketSci)
Average market performance on the first day of the quarter. (MarketSci)
The stock market tends to be strong in the fourth quarter. (MarketSci)
Dividend payers: less volatility and a significantly higher return. (SurlyTrader) 

Affordable Living

If you were a millionaire, would you act like one? (Reformed Broker)

An emergency fund can indirectly provide a good return on the money. (Aleph)
How to extend the life of laptop batteries. (Education Tech News)
Affordable ways to create gifts for men. (She So Crafty)

Career

Blogging is like working out. (The Basis Point)
How to find a job in finance. (Aleph)

Man Links

The importance of trusting men in your circle. (The Art of Manliness)
Are you a spectator or a doer? (The Art of Manliness)
Leaders lead people through fear. (Donald Miller)

Stop living for the approval of women. People-pleaser. (Art of Manliness)
Don't live for your mother's approval, either. (Art of Manliness)
Men, stick to your guns. (Art of Manliness)

How to improve your posture. (Art of Manliness)
The power of morning and evening routines. (Art of Manliness)
How to be the perfect party guest. (Art of Manliness)
Ten cheap date ideas she'll actually love. (Art of Manliness)

Marriage and Family

The personality types that make the best matches. (Personality Page)

Society and Worldview

Churches, are you sure you want your young adults back? (Immerse Journal)

Hypothesis: the efficient market hypothesis led to the financial crisis. (Aleph)

It costs 2% to 5% of GDP to file taxes. Not pay, just to file. (Dan Dascalescu)
Washington, D.C. is booming. What recession? (Reformed Broker)

The Facebook Gross National Happiness indicator. (Facebook)
Welcome to the genomic revolution. (YouTube)

Christian Living

How to stop worrying. (Max Lucado: part 1 and part 2)
"God understood Elijah's weary despair, and he let him sleep." (CCEL)

Technology

Get rid of line breaks that bother you when you copy from the Web. (Text Fixer)

LOL

Why go to college? (SurlyTrader)
Watch out! (Signs of Danger)

Scary church signs. (Ed Stetzer)
How different Christian denominations see each other. (Ed Stetzer)

How to win at Monopoly: buy the orange properties. (BBC)

Penguins attack:

Life is the Adventure

I volunteer for Habitat for Humanity on the weekends. I may not enjoy painting my own house, but I like doing it for others.

What words would you use to describe a short-term mission trip? Perhaps not fun, but worthwhile? Difficult? Significant? Memorable? Exciting?

Adventure

The word adventure sums it up for me. We team up and face challenges, overcome them, and come out the other side having achieved a memorable goal. We rescue people. Maybe someone even gets the girl.

Why do we compartmentalize life? Painting is a chore, but Habitat for Humanity is fun. Preparing a lesson is boring, but a short-term mission trip is a thrill. Playing with the kids is tiresome, but soccer is real football.

It's tempting to grind through life waiting for the next great thing. Besides being tedious, the problem with this is that life today may be a preparation for that great thing, but you're not enjoying it.

Some of us may even find that life itself is that great thing, that it was right in front of us all along, and that we can change the world right where we are.

Whistle While You Wait

Time produces compound growth, both for money and for wisdom. If you save money and wait long enough, you'll eventually be able to fund a great adventure.

In the meantime, think about what makes adventures fun. What can you do to make painting the living room more like Habitat for Humanity? Maybe you can bring in a big group, serve them lunch, and let them debate philosophy while splashing paint on each other.

How can playing with your kids become more like a soccer game for you, not just for them?

What if life is the adventure?

Book: Mr. China

Those of us who thirst for adventure get more than we bargain for. Such was the case for Tim Clissold, who moved to China in 1990 in the wake of Tiananmen Square, learned Mandarin, and raised more than $100 million of Wall Street's money with the intent to profitably transform Chinese businesses.

He discovered that the Chinese weren't numbers on a spreadsheet. They were real people, full of guile and greed. Successful business in China meant breaking contracts, speaking in half-truths, secretly moving money around, and staying one step ahead of a controlling but disorganized Communist government.

Chinese businessmen took Wall Street's money and then drove their factories into the ground, moving the capital to other bank accounts so they could start their new, competing factories. They had learned to live by their wits in a Communist world. Why treat these American foreigners any differently?

In the end, Clissold got taken, but so did all the American efforts to invest in China. The fund he helped manage lost money, but it was the only China fund to survive the 1990's intact. Meanwhile, local Chinese companies went public, China's stock market soared, and the standard of living rose rapidly in the coastal cities.

What Can We Learn From This?

As an investor, stick to what you understand. Clissold had a thesis that China was on the verge of a capitalist transformation. He was right, but he lost money. Buying private businesses in a foreign country and trying to improve the management is a venture fraught with difficulties, since there are so many variables to control and even more that we can't see.

If you have an investment thesis but not extensive expertise, it can make more sense to express that thesis by trading liquid markets (stocks, funds, and futures) than to start a business. Managing a business also concentrates your risk. Unless you have a high net worth, it ends up concentrating all your risk in one place, and you can't get out easily if you decide it's not working out.

I used to romanticize the idea of going overseas, as I'm sure many others do. After years of working in China, Clissold's fund lost money, but he learned to appreciate the Chinese as a people rather than just an investment. If this is the main lesson you learn while overseas, will you be satisfied with your life? Yes is a good answer but not an easy one.

I'll leave you with an excerpt from the inside flap:

The idea of China has always exerted a pull on the adventurous type. There is a kind of entrepreneurial Westerner who just can't resist it: red flags, a billion bicycles, and the largest untapped market on earth. What more could they want? After the first few visits, they start to feel more in tune and experience the first stirrings of a fatal ambition: the secret hope of becoming the Mr. China of their time.

In the 1990s, China went through a miraculous transformation from a closed backwater to the workshop of the world. Many smart young men saw this transformation coming and mistook it for their destiny. Not a few rushed East to gain strategic footholds, plant their flags, and prosper. After all, the Chinese had numbers on their side: a seemingly endless population, a thirst for resources, and the tide of history. What they needed was Western knowledge and lots of capital. Or so it seemed...

Mr. China tells the rollicking story of one man's encounter with the Chinese. Armed with hundreds of millions of dollars and a strong sense that he and his partners were -- like missionaries of capitalism -- descending into the industrial past to bring the Chinese into the modern world, Clissold got the education of a lifetime.

The ordinary Chinese workers, business owners, local bureaucrats, and party cadres Clissold encountered were some of the most committed, resourceful, and creative operators he would ever meet. They were happy to take the foreigner's money but resisted just about anything else. At every turn, the locals seemed one step ahead of Clissold's crew threatening to take the Westerners for all they were worth.

In the end, Mr. China isn't a tale of business or an expatriate's love for his adopted land. It's one man's coming-of-age story where he learns to respect and admire the nation he sought to conquer.

Book Review: How Women Help Men Find God

Jesus wasn't a nice guy. And neither should you be.

Few of us have heard the above sentiment expressed in church, let alone explored. Yet, after reading the gospels, it's hard to come away with the impression that Jesus was a safe, predictable person who would have made a good churchgoer.

Can you imagine one of your church's deacons grabbing a flesh-eating whip and creating instant pandemonium in God's house of worship, driving out money changers and overturning their tables?

What Would Jesus Do?

Here's a selection of Jesus' "nice guy" stories from Mark 11 alone: 

He curses a fig tree and says, “May no one ever eat fruit from you again.” Peter notices later that the fig tree has withered.

After driving the money changers from the temple, he says “Is it not written: ‘My house will be called a house of prayer for all nations’? But you have made it ‘a den of robbers.’ ” This definitely isn't perceived as a nice saying, as it prompts the religious authorities to fear Jesus and begin looking for a way to kill Him.

Instead of answering a question, Jesus shoots back more questions. When His questioners fail to answer, Jesus ends the conversation on His own terms (vv. 27-33).

What Have We Done?

According to David Murrow's book How Women Help Men Find God, we've spent the past half century making church a safe, predictable place where families can gather and children can be protected from a cruel world. The unintended consequence is that men now perceive church as a place where women can be safe and successful, and they've shifted their lives to center around things that are culturally perceived as manly, such as work, hobbies, and sporting events.

Murrow thinks that women can help bring men back by being gentle witnesses and by making sacrifices to make church more appealing to men. We can change the decor, create volunteer opportunities men can feel fulfilled in, make our churches more theologically oriented (and make arguing about theology okay), and intentionally encourage discipleship between men.

While all this is important, it dances around something more central, which is the what that is passed down by good theology and man-to-man discipleship. That something is what it means to live the Christian life as a man.

The Art of Manliness

I've written about this before: for example, check out How to Trade Like Zorro. When I step back, though, I think we are rushing to catch up with what those outside of the church have realized for a while now. We no longer live in a culture that understands what it means to be a gentleman, an honorable guy who defends others but has the strength to stand up for the interests of his own family.

We're happy to tell our sons to be nice like Jesus was (whatever that means). Then they get married and feel they have to bend over for that life insurance salesman who pushes the most expensive policies so he can get a big commission up front. We teach our men to be nice, but they're suddenly supposed to summon supernatural courage to share their faith at work or do the right thing at a great cost.

Dave Murrow's books are a great start, but they're also a late start, as the case usually is when the church tries to address a contemporary problem. Non-Christian sites like the Art of Manliness provide a wealth of insight about being men in this relativistic culture. The effort we put into taking every thought captive to the obedience of Christ will be worth it.

If you're really brave, take a look at this parody of our Christian-ized view of masculinity:

Mad Markets

Growing in masculine maturity has a side benefit: It will make you a more effective trader and investor. Markets are driven by fear, greed, and crowd behavior. This creates profit opportunities for us, but only if we're willing to go against the crowd at turning points in the market.

In the moments when we're most tempted to buy or sell, it takes a lot of internal strength to do the opposite. If you're a people-pleaser, you'll always face the strong temptation to do what others tell you to do, even if your trading systems tell you otherwise. Markets are rough on nice guys: just ask Sir Isaac Newton.

Like Zorro, you can follow the crowd when it suits you and buck the trend at the right time. The less other people are able to manipulate your beliefs, the more control you'll have over how you respond to the markets.

I'll leave you with an excerpt from the back cover of How Women Help Men Find God:

Millions of married women worship alone every Sunday. Mothers grieve as their teenage sons abandon the faith. Single women search in vain for godly men.

In this dynamic follow-up to his best-selling Why Men Hate Going to Church, David Murrow speaks directly to women to help them understand the real reasons men resist Christianity. It's the first book of its kind - written to help women reach all the men in their lives - not just their husbands. With straight talk, personal stories, and a dose of good humor, David shows women how to draw men to Christ - without guilt, manipulation, or pushy evangelism.

Volatility Does Matter

On the whole "volatility doesn't matter" thing: Yes, it does.

Imagine if you had a guarantee that your stocks or silver or whatever would be worth in ten years at least what they are worth today. They can't go down.

This Is Indexed: Learning Curves
on Winding Roads

You'd probably feel more comfortable increasing your risk somewhere else. You might start a business, buy a rental property, or take a vacation.

Lower market risk makes you feel more comfortable about taking risk in other areas, and rightly so. People even pay for this privilege: it's called a put option, a form of financial insurance.

If you had a strategy that could keep you out of high-volatility periods of the market, would you use it?

That's what trend-following, a form of momentum trading, does. The market tends to have high volatility when it's going down. Momentum strategies avoid being in the market during those times.