Things you can do with paper money
Saturday, June 28th, 2008
You can find some more of these cool pictures at 1Cup1Coffee
Archive for June, 2008
Warren Buffett made a million dollar bet
Friday, June 27th, 2008
Warren Buffett has made a million dollar bet that the S&P 500 index fund will return more to investors over the next 10 years than a collection of hedge funds that are carefully selected by experts.
The bet was made between Buffett and a company called Protégé Partners LLC - a company that specializes in running funds of funds. Those in the dark - a fund of funds is just like a hedge fund but instead of owning stocks or bonds, it owns other funds.
This has some positive and negative aspects.
The Good
A fund of funds is extremely diversified. Since it consists of funds that each consist of hundreds of stocks it is relatively risk free. This is good during the bad times.
The Bad
When compared to owning stocks or index funds a fund of funds has extremely high fees. Such a fund has an annual management fee of 1% and each one of the funds that it consists of have fees of about 1,5% a year. In contrast - owning the Vanguards S&P 500 index fund has a yearly fee of only 0,07%.
Hedge funds also typically collect 20% of the gains they make - this leaves you 80% of which the fund of funds also takes its share - typically about 5%.
Why Buffett Decided to Take This Bet
The high management fees of funds of funds are what Buffett thinks will win him the bet.
In order for a fund or a fund of funds to equal the return of the S&P 500 index, it has to have a lot higher yield than the index. Buffett is essentially saying that even if the fund he is betting against can surpass the yield of S&P 500, the costs associated with the fund will be so high that net of all fees the yield of S&P 500 will be greater than the fund of funds Protégé Partners is running.
You can read Warren Buffett’s and the Protégé Partners views on the bet at Long Bets.
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The Endowment Effect
Thursday, June 26th, 2008
According to the dominant economic theory all decisions made by humans are rational. Humans are looked as beings who make rational decisions in order to maximize their wealth. Scientists even have a name for it - Homo economicus.
The problem with Homo economicus is that it is the cornerstone in almost all modern theories that try to explain how markets and economies work. At the same time it is more and more evident that contrary to popular scientific belief humans are not always trying to maximize their wealth and can therefore make decisions that are money wise irrational.
The Endowment Effect
The Endowment Effect says that once someone owns something, he places a higher value on it than he did before acquiring it.
This seems like common sense for an ordinary person but this revelation has made quite a storm in the scientific world because this means that there are situations when the Homo economicus theory is wrong.
According to the endowment effect if you were to buy a bike for 100 dollars you would be unwilling to sell it immediately afterwards for the same $100. After feeling a sense of ownership the bike is not just an ordinary bike it used to be but YOUR BIKE. In a way it feels that your new bike is special just because it belongs to you.
The theory of rational markets says just the opposite - the value someone gives something does not depend on whether he actually owns it. According to the modern economic theory a bike that is worth 100 dollars is always worth a 100 dollars - no matter who owns it!
It seems that the dominant economic theories and the way people actually behave can be totally different.
Examples of The Endowment Effect
One of the fist experiments that showed the endowment effect in action found that students were surprisingly reluctant to trade a coffee mug they had been given for a bar of chocolate, even though they did not prefer coffee mugs to chocolate when given a choice between the two.
Since then, there have been hundreds of experiments and observations made in real life about the endowment effect
Investors
According to professor Pete Lunn working in the Economic and Social Research Institute in Dublin, professional investors are sometimes reluctant to sell investments they already hold even when they could trade these investments for something they would buy if starting from scratch.
I have also felt the same effect in my personal investment portfolio but never knew what it was before hearing of the endowment effect.
Monkeys
Keith Chen from Yale University showed in 2006 that capuchin monkeys could learn to trade and in doing so also developed the endowment effect. This suggests that the nature of this effect could be hidden in our evolution. Some scientists believe that in the past it was too risky to give up anything that you already owned and that is why we give a higher value to the things we own versus the things we don’t. Giving up something you owned could mean certain death.
In the study done by Keith Chen the monkeys were given the option to choose between peanut butter and frozen juice bars. 60% of monkeys chose peanut butter and 40% juice bars.
However when a monkey was given peanut butter without being able to choose anything else in the beginning and afterwards presented with an option to trade it for a juice bar, 80% of monkeys decided to keep the peanut butter. Since actually only 60% of monkeys preferred peanut butter when presented with a choice, it seemed that the peanut butter had somehow gotten more valuable to them after owning it. This experiment proved that the endowment effect is also present with other primates not only humans.
Explanation of the Endowment Effect
As of now there are two competing explanations to the endowment effec.
- In modern societies with multiple markets a customers can go elsewhere when he doesn’t like the price of what he is buying but in small ancient communities there were no alternative sellers. In that case, those who were reluctant to sell might have gotten better prices because the buyers knew that if they truly wanted to buy something they had to pay the price they were asked to. The sellers had a lot of negotiating power while the buyer had almost none. We could simply value our things pricier than those not belonging to us because deep down our brains still think that we are the only people in possession of what we have and therefore the buyer will have to pay the price we are asking.
- As already mentioned in this post - In the past it could have been too risky to give up anything that you already owned. For example giving up food could have meant death even if you traded it for a lot of gold.
Conclusion
Whatever the real reasons behind the endowment effect there is one thing for sure - human beings are way more complex than economic theories assume. It should be possible to take into account the psychological aspects we know about humans and use them to make a small fortune.
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How to get out of a traffic ticket
Wednesday, June 25th, 2008
I got pulled over for speeding this weekend.
I was doing 71 km/h in a 50 zone. For those thinking in miles this translates roughly to 44 miles in a 31 miles an hour zone.
To tell the truth it didn’t feel like I was speeding too much (and it still doesn’t) but anyone speeding more than 20 km/h for the first time can expect a decent fine here in Estonia.
The maximum fine for my offense is about 2000 dollars + suspension of driving license for 6 months. When pulled over, my initial thought was that the fine will probably be between 400 and 800 dollars - the average for that kind of speeding. Instead - I got a ticket for 30 dollars.
Here is how I did it.
- Tell the truth. I immediately accepted that I was speeding. In fact I told the police that I thought I was driving a bit faster than their radar registered.
- Make friends first, customers second. When I was a door-to-door salesman this rule never failed to deliver. Whenever I got into trouble with people or the authority I was taught to always make friends first and only afterward try to resolve the situation. Just as everyone else - the police is more likely to help when they like you. Make the officers your friends. This is how I did it:
There are a lot of people who get pulled over every day and most of them lie in order to get a smaller fine. Finding someone who is totally honest can be a breath of fresh air for a police officer.
- Show interest in what others do. While writing me the ticket a police officer verified some information and asked for my signature for at least 3 different papers - I told him that as an IT student it doesn’t make a lot of sense - all the information I gave them was already downloaded to their on-board computer via wireless internet. They had my picture, where I live and etc but they were still required to ask all this information from me. I told the police that it would be a lot faster when they could simply print the information out or if I could sign everything with my electronic signature (everyone has 1 here in Estonia) - that way there would be no need for paper and the process would be 3 or 4 times faster. Not surprisingly both police officers agreed and they also had some personal views and ideas that they eagerly shared! I just made 2 friends!
- Ask questions and tell something of interest. This is the best way to establish rapport and quickly befriend someone you didn’t know before. I told the police that this was my first speeding ticket in Estonia but that I had gotten 1 in the States. The officer writing the ticket was very interested in getting to know how it exactly works in the US and what are the biggest “speeding ticket differences” in the two countries. I told him everything I knew.
I also asked a few questions about how exactly the speed radar works since I was genuinely interested. It got to the point where 1 officer proposed that if I want I can drive by their car and they can measure my speed again - just to better explain how it works. I laughed and refused but I got the feeling that they were enjoying talking with me.
The Secret
As you can see there are no mysteries on how to get a smaller fine. Make the police your friend first and only after that deal with the ticket part. Put yourself in their shoes - who would you rather let go - the guy who is obviously lying or the guy who seems genuinely interested and asks a lot of questions about your job.
1 more (evil) tip
Being honest or coming up with a little lie can depend on the situation you are in and your ability to read other people. If you are going to lie and you are from Europe but driving in the US you can say that you accidentally mixed miles and kilometers since in Europe we only have the latter. This has worked at least 3 times for me! 
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Top 10 countries with highest press freedom
Sunday, June 15th, 2008
Bad news is good news for media companies - it sells way more than positive stuff.
Writing about negative things can have a positive impact - it makes it more difficult for these things to happen in the future. If a newspaper exposes wide spread corruption it is almost certain that the officials involved will lose their positions.
Giving journalists the freedom to write about whatever they want ensures that in the long run the country they live in will have a better business environment which is good for sustained economic growth.
Reporters Without Borders is a world wide organization that stands for press freedom across the world. They also manage the Worldwide Press Freedom Index that lists the countries of the world by their press freedom.
Top 10 countries with free press in the world
1 - Iceland
2 - Norway
3 - Estonia
4 - Slovakia
5 - Belgium
6 - Finland
7 - Sweden
8 - Denmark
9 - Ireland
10 - Portugal
Other notable countries
Canada - 18th place
Germany - 20th place
United Kingdom - 24th place
USA - 48th place
Russia - 144th place
Map of press freedom
On the freedom of press map below green indicates the countries with highest press freedom and red lowest press freedom
FinancialJesus.com is a true believer of press freedom, so we are very delighted to see Estonia (this is where we run our business) ranking in the 3rd position.
What do you want money for?
Thursday, June 12th, 2008
This is INSIGHT 8 from a set of rules about how to get rich
If you are reading FinancialJesus.com, you are probably here because you want to get rich.
Everybody wants to get rich!
Before setting your mind into achieving that first magical million you should have a clear vision what to do with the money once you have it.
If you had a lot of money, what would you use it for?
Could it be possible that you want a lot of money for something that you could probably do with a lot less money and a bit more imagination?
If you need money in order to travel, then you could probably do it with a lot less. If you want money to insure the lives of your children if you were to suddenly die, you could probably just sign up for a life insurance contract.
Take care not to save money for something that you could already afford just by changing your mindset.
Things you only get with enough money
There is a vast amount of stuff you can only do or get when you have enough money. This can include things as different as buying expensive supercars or living of interest that your money generates.
Why do you need money?
Money can be a solution to problems but is it also a solution for your problem? Think.
If you truly believe that you need more money you should write down how much do you need and for what. Money doesn’t have any value just by itself - it is only useful when you can exchange it for something else.
If you have a clear idea of how much money you need in order to exchange it for something of real value, you will also know how much you need. Having goals makes things a lot easier!
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What does 1 million pennies look like?
Tuesday, June 10th, 2008
This is what 1 million pennies looks like.
1 million pennies is a total of 10 000 dollars and weights about 2.3 tons.
An interesting fact about pennies is that because of the falling dollar 1 penny is actually worth more when sold as metal as opposed to its nominal value. The US government passed a special law that says it is illegal to sell pennies as metal.
If it would be legal we wouldn’t soon have any pennies left… (For most people that would be a good thing but for some reason the government thinks they are important)
PS! If you have noticed that the amount of posts has dropped a bit recently it is because I am actually on a inflatable boat trip with some of my friends and the articles appearing here in FinancialJesus.com have been written before the trip and are automatically scheduled for release by Wordpress!
What is Estonia?
Monday, June 9th, 2008
This post is about Estonia - a small, yet technologically advanced country where I run FinancialJesus.com from.
Background
Estonia is a very small country - about 1.3 million people live on 17 000 square miles (45000 sq km).
The largest city Tallinn has a population of about 400 000 - all other cities are smaller than 100 000 people.
Our better known neighbours include Finland to the north, Sweden to the west and Russia to the east.
Cool things about Estonia that you didn’t know
Let’s be honest - there is about a 99% chance that you don’t know anything about Estonia, but here is a list of things that make us unique and show just how advanced technologically we are.
E-government
From the year 2000 all Estonian government’s hearings are entirely paper free. The members of the government still have gatherings but all documents are held entirely online. If it is necessary to pass a new law it can be signed digitally.
ID-cards and Electronical signatures
All Estonians have an ID-card with a small chip that can be used to give electronic signatures. An Estonian can pretty much do every bureaucratic procedure online - this includes filing your taxes which is entirely web based and takes about 5 minutes. All relevant information is pre-entered into the tax forms - you just need to check if everything is OK.
E-democracy
Estonia is the first country in the world to have a unique system where every citizen can make suggestions for changing laws online. Other Estonians can vote if they like the suggestion and in the end the government has to consider carefully whether or not this suggestion can be implemented. You can basically change a law with one single post online.
Electronic voting
Estonia is the first country in the world to have successfully implemented national e-voting. A person wanting to give his vote to his favorite candidate online needs to have his ID-card that he uses to identify himself. A person can change his vote for as many times as he likes until the deadline.
Secure voting with mobile phones has already been used in smaller scale and there is a debate whether we should have mobile voting in addition to online voting.
Wireless Internet
Estonia is entirely covered with wireless internet. We have free wireless internet access in every gas station and in every cafe that hopes to have any visitors. In fact, it is very difficult to find a place where there is no free public wireless internet access! The many wireless networks that cover the whole country include 3G, 3.5G, WiMax and CDMA.
Estonia is the only country in the world where internet access is a basic human right. (Yes we have a law for that).
98% of people use online banking. Nobody uses checks.
Glimpse of World War 3
Being too wired can also have some negative aspects. In May 2007 Estonia became the first country in the world to become under a country wide cyber attack. The attack was headed from Russia with millions of computers around the world bombarding Estonian media, government and banking websites. Many of them become temporarily unavailable. Luckily for us - Estonia is the home of the cyber defense headquarters of NATO.
Mobile parking
Estonia was the first country to implement mobile parking tickets. You drive to the center of the city, park your car and dial a special number or send a text message. If you are done parking just call the number again. The money is taken directly from your bank account or added to your phone bill. If you are a fan of public transport you can of course buy a bus ticket with your phone or transfer money to your friends bank account just by dialing a special phone number. There are almost no regular parking meters.
Famous software
Estonia is also the birthplace for such famous software as Kazaa and Skype. The best days of the file sharing software Kazaa are already over, but the free internet based voice chat program Skype was sold to eBay for $4.1 billion.
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World Problems for Future Hedge Fund Managers
Sunday, June 8th, 2008
Here is a list of financial “problems” for children who desire to become fund managers. I found it originally from an Estonian investing forum and it is great fun! It seems that the original author is someone called Bob Woodiwiss.
Elementary (AGES 5–10)
1. Dick has $1 million. Jane has $1 million. If Dick and Jane both give their $1 million to T. Boone, how many millions will he claim he can turn it into?
2. On his way home from school, Kyle stops to buy a candy bar. It costs 69 cents. How much change should Kyle get back if he pays for the candy with a $1,000,000,000 bill?
3. Among those earning 10-figure incomes, Mr. Soros’s total annual compensation is greater than Mr. Falcone’s. Mr. Falcone’s is greater than Mr. Griffin’s. Mr. Griffin’s is smaller than Mr. Soros’s, and Mr. Paulson’s is greater than Mr. Soros’s.
In descending order, list the men by the respective hotness of their trophy wives.
4. A hedge-fund manager gets up at 5 a.m. It takes him 12 minutes to shower, 8 minutes to get dressed, and 20 minutes to eat breakfast. How big is his domestic staff?
Intermediate (AGES 11–15)
1. Your middle-class parents have a combined household income of $115,000. You receive an allowance of $20 per week. If you save all your allowance for two years, how much debt will you have to finance to hostilely take over your family? How will you structure the debt?
2. The number of hours left in the New York Stock Exchange’s trading day is one-third of the number of hours already passed. How many hours are there until you can start trading on the Tokyo Stock Exchange?
3. At 10 a.m., a private Gulfstream G650 takes off from New York, headed south to the Caribbean island of St. Bart’s, traveling at a speed of Mach .9. At 11 a.m., a private Gulfstream G550 takes off from St. Bart’s, headed north to New York, traveling at Mach .885. Both jets fly at 50,000 feet on parallel flight paths. When the aircraft pass each other somewhere over the Atlantic, how long after seeing the G650 will the owner of the G550 kick himself for not going top-of-the-line? (Answer should be expressed in nautical miles.)
4. In a given year, the Dow Jones Industrial Average rises 8.3 percent, the NASDAQ rises 7.6 percent, and the S&P 500 rises 7.9 percent. If, in that same period, you manage a $29 billion hedge fund that loses 11.6 percent, how large a year-end bonus are you entitled to? (Round to the nearest $10 million.)
Advanced (AGES 16–18)
1. Mr. Smith is being investigated by the SEC for insider trading. Calculate the probability of Mr. Smith’s relocation to Dubai.
2. If an American hedge-fund manager makes $900 million and is taxed at a rate of 15 percent, how many American factory workers making $32,500 and being taxed at a rate of 25 percent does that make a sucker of? (Show your work.)
3. Your mother gives you x dollars to put gas in the family car. Your father gives you y dollars to get a haircut. You lose x + y dollars betting against your high school’s undefeated football team. Explain to your familial investors how “that’s life.”
4. Days before the housing bubble bursts, you short the ABX subprime index and, when the ensuing mortgage crisis causes millions of families to lose their homes to foreclosure, you realize a $550 million profit.
Since, for you, this is the opposite of a problem, find the opposite of an answer.
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I didn’t check my website from different browsers and that’s what happened
Friday, June 6th, 2008I am a big fan of Firefox and use it almost exclusively for all my web surfing.
Firefox was also the only browser that I used when redesigning the theme that this blog comes with.
Here is what I thought FinancialJesus.com looked like to our visitors:
And indeed it looked like this for 75% of all my readers - because they use Firefox.
Here is what FinancialJesus.com looked for the 24% of visitors who used Internet Explorer or Safari:
Notice the magically appeared Google Adsense ad on the right! It was not inserted there by me and until yesterday I had no idea that it was there at all!
Whose ad was it?
The ad was included by the author of my blogs theme. When redesigning the theme I tried to comment out the code for the ad but I did a sloppy job! The ad did not show up in Firefox but it displayed just fine in Internet Explorer.
This was totally against my policy of keeping the site clean and ad free. I have recently added some experimental ads but none of them were above the fold (the part of the website that is visible without scrolling down).
This ad had probably the best CTR on FinancialJesus.com. Unfortunately I have no way of knowing how it did, since it made money to someone else and I don’t have a way to getting my hands on its statistics!
If you want to be sure what your website looks like and you don’t like making money for someone else you should check your website with different browsers.
You never know when something strange (and somewhat stupid) like this happens!
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