RESTORING HONOR.

These Are Scary Times. I know I promised to write about finance on my next post but after watching Glen Beck's Restore Honor Rally I am compelled to put my thoughts in writing. I know there are many who disagree with Mr. Beck's behavior and I am certainly not prepared to defend all of it. I am also not prepared to judge his motives in staging this rally; however, I saw little in the way of hate speech and negative politics this morning. I'm pretty sure that anyone who watched it carefully came away with an opinion. I had a flood of memories afterword and I wanted to put some of them out for your consideration.

I Will Always Remember The Morning Of September 11, 2001. The sight of the world trade center buildings coming down is burned into my memory. The anxiety I felt when I learned that the center of our military operations was attacked and there was another plane headed towards Washington is still with me when I think about it. Strangely enough, the most vivid memory comes from later that day when I walked out on the balcony outside my 9th floor office. I looked down towards the freeway and saw a lone figure standing on the overpass waving a huge American flag towards the cars passing underneath. Thinking about it still brings tears to my eyes. Here was one lone citizen who absolutely had to do something to express his feelings about his country. Those terrorists didn't attack George Bush or Bill Clinton, they attacked you and me, and, from that day forward, we have never been the same. Think about it. Think of your last trip to the airport when you had to take off your shoes, throw away your toothpaste, and walk through a metal detector just to get on an airplane. Think about the young men and women who had to leave their families and swelter in the heat to look for those terrorists. Think about the small children who will never know one of their parents because they died in places who's names we can't even pronounce.

Fast Forward 3 years. Three years later, I was driving down that same freeway and there were several young folks standing on that same overpass. They were holding a sign that said "Bush lied, thousands died." I am ashamed to admit I rolled down my window and gave them the finger as I drove by. Today, I think about the contrast between that young man who stood waving the flag as a sign of love for his country and the young man holding the sign accusing his president of being a liar. Whether you believe the President lied or not, there is no mistaking the hate in that sign. While I reserve the right to comment for or against the policies of our politicians, I have resolved not to participate in that kind of hate, tempting as though it may be from time to time.

Did The Terrorists Win? There is no doubt that they inflicted a horrendous blow to our country. Think of the human and financial cost incurred in the aftermath of that event. It is still being felt today. If you have become frustrated in the hassle of our airports, you are feeling the effects. If you lay awake worrying about the size of our huge federal deficit, you are feeling the effects. If you are anguished by the thought of our younger generation torn away from their families and in constant danger, you are feeling the effect. We don't have to let the terrorists win but it is not impossible that they might. It's time to stop all the hate and work together to keep our country strong.

I Have Been Called A Super-Patriot. Most of those who called me that definitely didn't mean it as a compliment. In my view, there is no such thing as a super-patriot. You either love your country and are willing to sacrifice for it or you don't.

I Saw My Nephew At The Rally. I watched it on TV. My nephew has gone from a shy four-year old who used to hide under the bed when we came to visit to a dedicated family physician. Was it a co-incidence that I saw him among the 300,000 or so who attended that rally. I think not. Would he be proud if we labeled him as a super-patriot. I think so.

ART WITH A PURPOSE.

Our Colorado Trip Is Almost Over. One of the main reasons we came up here was to tie up some loose ends on our real estate investments, catch up on some miscellaneous business and spend some time with family. A few things kept us from doing this as well as we would like, one of which was an illness that kept my wife in the hospital for a few days. Other obstacles like a burst hot water heater cost us some time in cleaning up the mess. Still, it has been a very enjoyable trip. As expected, I got to spend some quality time with family and take several spiritual journeys down clear creek, the land of my ancestors. What was unexpected was the enjoyment I got from associating with several individuals in the music business.

Down On The Farm Guitars. This is the name of a new guitar venue opened on the grounds of White Fence Farm. It is run by two of the most genuine people I know, Reed and Alice Bennett. I met Reed Bennett when I responded to an ad for a guitar he had for sale. We developed a kinship right away, I suspect because of our love for guitars for more than just the music they produced. I guess we're both part of a group labeled by musicians as "gear geeks." There is something inspirational about the aesthetics of the instrument. It took me awhile to figure out what it was but the answer is simple. More than just a musical instrument, a guitar is a work of art and those who produce them, called luthiers, are artists just as much as painters or sculptors. Reed and Alice have a wide variety of instruments in their store but less than half of them are for sale. Reed has developed such an attachment to some of them that you could never talk him into selling them. They do have a variety of instruments for sale, some of which are in the collectible category and should represent good investments for the future. Another excellent feature of their store is that they invite local musicians and groups to play under the grape arbor adjacent to their building. The time I have spent at Down on The Farm Guitars has been one of the high points of my trip. You can find out more about this unique store at http://downonthefarmguitars.com

I Have Always Wanted To Build A Guitar. Several years ago I decided to build my own guitar. After some preliminary due diligence, I decided that I was not cut out for this kind of endeavor. Still, I am fascinated by the process in which these instruments are created and always look for opportunities to meet the artists who create these instruments. Yesterday, I drove across town to pay a visit to Herb Taylor. Unlike most luthiers I have met, Herb really does consider himself an artist and he has a degree in art and a background as an art teacher to prove it. Rather than try to sustain himself as a "starving artist" he obtained a masters in computer science and worked as a software engineer until he retired in 1994. For the past 10 years, he has been making one-of-a kind stringed instruments, everything from mandolins and bouzoukis to guitars. I was particularly impressed with an archtop guitar made of redwood. It is an example of elegant simplicity with most of the beauty coming from the clean lines and beautiful wood. I also liked several of the "flat top" guitars he made. All of his guitars are unique creations and derive most of their aesthetic qualities from the unusual wood he collects. One aspect of the creation which is not totally under his control is the sound qualities of the finished product. He freely admits that he is unable to design an instrument that can match the sound of any other instrument. I played several of his guitars and didn't find any with other than excellent sound quality. Just about anyone with a decent bankroll can acquire an excellent Martin or Gibson guitar but if you want a unique instrument that is yours alone, you might want to talk to Herb. Check his web site at http://www.herbtaylor.com.

A Few Words About The Markets. One of the reasons I have not spent a lot of time talking about the financial markets lately is that there is little change from week to week even though there are some really bad days and a few good days. This kind of market is perfect for the strategy I employ. While there is little in the way of appreciation to brag about, option premiums and dividends have provided me with above-average returns. If you want to discuss how to apply some of these techniques to your own portfolio, don't hesitate to give me a call.

TWO PATHS TO WEALTH.

Before I Begin This Post. I should emphasize that this is strictly my opinion, based on my observations over the years. It is not based on scholarly research and there is plenty of room for disagreement. The first task is to describe my definition of financial independence and some of you may find plenty to disagree with already. My definition is that financial independence is the ability to lead a lifestyle that provides for the needs of my family with freedom from "woeful want" (I got that term from my mother who often told me that "Willful waste makes woeful want)." From that definition you can determine that financial independence can be different for two people with differing needs and wants. I can live with that. Given that definition, lets start with the most common path pursued today.

Work and Strive For Abundance. This is the path I decided on as a pre-teenager. Here are some of the things you can do if you choose this path.

Get A Good Education. While many may achieve an abundant lifestyle with little education, most parents advise their children to take this step. Statistics have shown that those among us with more education earn, on average, more income over their lifespan than those with less. These statistical methods may be somewhat flawed, still the prevailing opinion is that education is directly correlated with income.

Choose a High Paying Career Field. Some career fields pay more than others. Engineers earn more than teachers and computer scientists earn more than sociologists. Entrepreneurship pays well for those who are successful; however, starting your own business is usually a second step in a career path.

Make Aggressive Investments Using Leverage. All debt is not bad. If you can earn more on your investments than the cost of borrowed funds, you can magnify your rate of return and build wealth rapidly. Of course there is more risk. If your investment doesn't pan out, you have to pay the money back anyway.

Buy Nice Things, Lots of Them. Nice houses, cars, and other toys will give you the appearance of success and make others want to do business with you. If you don't have the cash, borrow it. There is an old saying that states, "Fake it until you make it." If you can convince yourself that these possessions mean you are competent, you will appear more confident and more people will think you are competent even if you aren't.

Thousands have become successful using this technique. Others have found themselves facing bankruptcy, prison terms, and there are some suicides among this group. It is obvious that this path can be stressful but there is no doubt that many have become very wealthy choosing it. The upside potential of this path is much higher than the other I will describe, particularly when measured in terms of total wealth accumulation. It also has a higher downside when measured in terms of overall life satisfaction.

Practice Frugality And Simplicity. There is an old saying that if you will live for 20 years like no one else will, you will be able to live the rest of your life like no one else can. I know several individuals who have achieved financial independence this way. There is no shortage of happiness among this group. Much of the benefit of financial independence arises from freedom from worry and not necessarily the expensive possessions you can buy. I have a client who achieved a windfall from a successful investment and was able to buy an expensive car and a large, luxurious house. Several months later he learned that the expensive house and car didn't bring him near as much happiness as the fact that he no longer had to worry about about how he would pay his living expenses each month.

Get the Best Job You Can Find and Keep it. You can build equity in a job by staying in one place, working hard, and being loyal to your employer. There are exceptions to this in the event that you find your loyalty isn't reciprocated. The best thing to do in this case is to move somewhere in which it is. While this isn't as easy to do as it used to be, it still pays off for a lot of employees.

Start Saving Early and Leave it Saved. Someone once asked Albert Einstein what was the most amazing thing he had learned about the universe. His reply was "compound interest." As an example, let's assume a 25 year old starts saving $200 a month at 5% interest. At 65 he will have accumulated $305,204. If he decides to draw out his $2400 at the end of year one, his nest egg at 65 will be $288,013. That $2400 withdrawal shrinks his nest egg by a little over $17,000. The $2,400 spent now costs 7.2 times that at age 65.

Remember the Buffet Rules. One of the most successful investors of all time, Warren Buffet says that there are two rules to successful investment. Rule 1. Don't lose money. Rule 2. Don't forget rule number 1. If you choose this wealth building path you will have to keep your risk low in order to avoid losses.

Shop Carefully and Buy Only Bargains. Look for sales. Don't be embarrassed to buy used, particularly cars. The new car buyer bears the lion's share of depreciation for the privilege of being the first owner. Buying used vehicles can add a considerable amount to your net worth over your life span.

Take Care of What You Have. If you walk into a lot where my father's car is parked, it will catch your eye as the nicest in the lot. It is a sixteen year old pearl white Buick with a blue cloth top that looks like it just rolled off the showroom floor. You can still have pride of ownership without laying out huge sums of money for car payments every month. The same holds true for your house. A little extra effort keeps your home value at the top for your neighborhood.

This Includes Your Health. My father has spent virtually no time in the hospital over his 91 years. He has eaten healthfully and exercised faithfully for six days each week. There is no doubt that this requires considerable time and effort. The choice is yours. Either spend your time staying healthy or waste your time being sick.

Don't Borrow. It is difficult to invest in totally safe investments and earn a higher return on investments than your borrowing costs. Even deductible mortgage interest is more expensive than most investments of equivalent safety. If you follow this strategy it is a good idea to strive for a free and clear house. This means buying less house than you can qualify for and developing a plan for early repayment.

I Know What Most of You Are Saying. You don't read this column to be told how to scrimp and save your way to success. It's not my style either but these economic times may call for different strategies. Having to cut back on your lifestyle can be painful but its not the end of the world. I have known several folks who have done well this way and, as a group, they are more satisfied with their life than the first group. Of course, the two strategies I describe are the extremes. There options between the two and you can choose the ones you want to follow. I'll go back to my normal style on my next post.

CARE AND FEEDING OF THE BRAIN.

The Power of Positive Thinking. What do Napoleon Hill, Og Mandino, Mike Dooley, and Tony Robbins have in common? They all believe we can shape our future by controlling our thoughts. This is but a small sample of individuals who have written or spoken on this topic over the past 50 years. Many entrepreneurs, sales people, and religious leaders subscribe to these theories; however, others who might like to believe remain skeptics. You can count me among the latter group.

Enter The Neuroscientists. In recent years, a large body of research has been conducted that shows that the positive thinking gurus may be on to something. Most of this research comes out of academia and was conducted by doctoral level researchers, many of whom were MD’s. A notable example comes from the University of Pennsylvania where Dr. Martin Seligman heads the Positive Psychology Center and Dr. Andrew Newburg directs the Center for Spirituality and the Mind. Both have published books and research papers as a result of their research into this area. Their approach is strictly scientific. Although I have read the work of several others, these two attracted my attention the most.

What is Brain Plasticity? For many years, scientists have known that the brain will physically change in response to a number of factors. This ability is known as plasticity. It is a remarkable ability and is much more prevalent in man than in the so-called lower animals. Dr. Newburg has used modern research tools such as PET scans and MRI to track these changes. His research shows that spiritual practices such as prayer and meditation cause physiological changes in the brain. These changes can be permanent and generally beneficial. One of the interesting aspects of the research into prayer is that changes occur regardless of the religious characteristics of the person praying. Buddhists, Christians, Jews, and Muslims all achieve similar results. While I don’t claim to understand the details of the anatomical changes that occur (even the researchers lack complete understanding), the result of these changes is a reduction of activity in areas where primitive emotions such as fear and anger reside. These emotions interrupt your ability to be rational. In addition, you lose the awareness that you are acting in an irrational way. Spiritual practices result in an increase in areas crucial for empathy and compassion. Extensive research shows that individuals who regularly engage in spiritual practices are generally less prone to depression, have stronger immune systems, and overall have longer and more fulfilling lives.

Where Am I Going With This? Dr. Newburg has given us a list of ways to exercise your brain to increase it’s effectiveness. I will list the three most important for your consideration. In order of ascending importance, they are as follows:

3. Aerobic Exercise. Physical exercise strengthens all areas of the body and the brain is no exception. Studies have shown that it enhances relaxation and spiritual well being. It lowers the risk of circulatory diseases as well as mental disorders such as depression. Dr. Newburg cites one study in which an exercise program has the equivalent benefits of twelve sessions of psychotherapy. You may be skeptical of some of the research stated by Dr. Newburg (as am I) but the overall body of research provides overwhelming evidence that exercise is very beneficial to our physical and mental well being.

2. Dialogue With Others. Most neuroscientists agree with Dr. Newburg on the importance of dialogue with others. Dr. Newburg states that “Any form of social isolation will damage important mechanisms in the brain and lead to aggression, depression, and various neuropsychiatric disorders". I have noticed this among some of my aging friends who gradually withdraw as they age. Undoubtedly, the brain has evolved as a social organ and needs the nourishment of social contact for continued health.

3. Faith. This point surprised me the most of all the others but it is what correlates the beliefs of several neuroscientists with the positive thinking advocates. We all have choices to make which will affect our physical, emotional, and spiritual health. In reality, these choices are nothing more than educated guesses. There will always remain some degree of uncertainty but the degree with which we can have faith in our beliefs is of primary importance to our mental health. Research has shown that, even irrational belief in is better than no belief at all. Remember the placebo effect in which a sugar pill can cure up to 30% of most physical and emotional disorders.

Whether You Think You Can Or You Think You Can’t, You’re Correct. I don’t know who came up with this saying, but much research shows that it is true. I have taken a course on physiology of the brain and read several books by neuroscientists on the how the brain works. What I have learned shows me how very little I know. While these books have been written for non-professionals, I sometimes feel that they are still beyond my ability to comprehend. I will continue to read new publications in this area and re-read what I have already read. The ability to do this is one of the benefits that come with the freedom of getting older. I am grateful for these benefits.

WATCHING THE VIX.

I Hate To Be Boring. One of the biggest sins a writer can commit is to be boring. I would almost rather be dead wrong than boring. As I contemplate this post, I can picture the eyes of many readers glazing over because they don't care about the VIX. Unfortunately, I think it is of sufficient importance that I can't afford not to give you the opportunity to know what it is and how it can affect your investments.

Definition: The VIX comes from a calculation by the Chicago Board of Options Exchange (CBOE). It is a measure of the implied volatility in the market place. A high number means the market is more volatile than normal while a low number means less. High numbers usually occur in falling markets while low numbers usually occur when the market is rising. As a rule, most investors consider the VIX as a measure of fear in the investment community. At high fear levels, option demand picks up as more folks try to hedge their bets. You can buy put options which give you a right to sell at a given price. If the price of the stock drops, your loss is limited to the strike price of the put minus the premium you paid when you purchased it. You can also sell a call against a stock you own in order to earn a premium to offset part of the loss should the price drop.

Implications. Some investors use the VIX as a means of predicting highs and lows in the market. An old rule says when the VIX exceeds 40, the market is nearing an oversold situation and a rebound can be expected. Conversely, when the VIX is below 20, the market is approaching an overbought situation and a correction is anticipated. Although I use this rule, I consider it just another data point and would encourage investors not to place too much credence in these numbers. For example, in the debacle of 2008, the VIX went right past 40 into the 80's. This level is unprecedented in all the years in which this number has been published. If you had been depending on a bottom in the 40's, you would have found that you had a considerable period of falling prices before a turnaround occurred.

Another implication is that option prices will be higher when the VIX is high and lower when the VIX is low. Although each security has its own volatility levels, a general rule is that you should be buying options when the volatility is low and selling when volatility is high. If you own a stock and are considering writing calls against it, you are better off doing this at periods of high volatility. At that point, call buyers are willing to pay higher premiums and you will make money if volatility drops and you will have more downside protection if the stock price drops. At times when the VIX is lower, you might consider buying options instead of the stock.

Understanding The VIX Can Give You An Edge. While this information can give you a bit of an edge over investors who ignore it, it will probably not make you wealthy. Other fundamental and technical data is necessary for sound investment decisions.

This is My 150th Post or Close To It. I have enjoyed writing this blog and interacting with my readers. While I still have topics in mind for future posts, I would invite my readers to suggest others. You can send me an e-mail or comment in the comment sections. I will post most comments as long as they are in good taste and not too hostile.