My Financial Calculator recommended by AndroidPIT

Wow, I went to check my email and I’ve got this nice surprise. My Financial Calculator has been recommended as best financial app for all AndroidPIT english speakers.

I’m really proud of it. Twice on a roll this month!

You can get my financial calculator for Android and iOS here (or top link of if you are reading this from there).

A screenshot of the email I’ve received for posterity :)

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Just because, he is the man.

I usually don’t post financial stuff on this blog and instead direct those to my other blog:

But this article by Warren Buffett is so good I almost tear.

I admire the man for many reasons but one of them is because he is able to pack complex ideas into simple explanations. Warren debunked many financial books with what he said in one single page. Also many wrote books trying to explain what he said in one single page.

Mr. Buffett. You are just awesome.

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Interview in AndroidPIT

Recently I was contacted by AndroidPIT, the wordwide leading Android site to get my point of view on Android, what makes an app stand out and talk about Dogfight.
What I didn’t know is that they recently launched the spanish section and I was picked as the first indie dev to do an interview in Spanish. I felt honored that they placed the interview on their main page.

You can read the full text in Spanish here:
or use Google Translate to read it in English (or almost-english :)

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Dogfight official release!

It’s been over a year of development and lot of iterations and additions… but today it’s the official release of Dogfight!

It comes with a new promotional video:

Which you can get at

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Are Android users nicer than Apple users?

Are Android users nicer than Apple users?
Are Apple fan-boys inheriting the famous Steve Jobs character?
or is the Apple system more pro-negative reviews?

Before going into the core, let me write up the summary:

I have suggestions for both Android and Apple:
1) Allow author replies on comments. It fosters community and loyalty and it really help us reach the users.
I would love to be able to have a “reply” button next to a review so I can simply say things like: you forgot to press X. Or “update the app”.
It would solve 80% of bad reviews and it would also allow other users with the same issues to see what’s going on.

2) In-app review system. Some way to detect that you’ve used the app for a while and popup a review window without the need to go into android market or itunes page.
I’m actually doing something similar on Apple already, but if you want to review it will get you out of the app and get to the itunes page. Not convenient.

3) A clear visible “contact author” and “support” link next to the review buttons. In a way that you can actually see a big screaming “help me!” when you are about to write a 1 star review saying the app is not working and the author should go to hell and burn slowly for not even trying. We do try, damn it, we do try!

Now the core:

All my applications have gotten better reviews on Android than Apple devices, eventhough they work and look exactly the same way. Let me give you an example of the latest comments from Dogfight (it works for any given application) without skipping or modifying any.

On Android:
Average Rating for all reviews to date: 4 stars!

5 stars
by Nick (July 6, 2011)
If this game doesn’t deserve 5 stars, then I don’t know what does. Love the multiplayer I hope we get new maps soon with different base locations

5 stars
by Clayton (July 6, 2011)
Love it so fucking awsome now their.r tanks:-)

5 stars
by James (July 4, 2011)
Been playing a while and this game gets better and better. Regular proper updates. Well done zuperman great game.

5 stars
by skenny (July 4, 2011)
Finally something worth paying for!! GREAT GAME! Thanks

4 stars
by ねくろのみこん (July 3, 2011)
楽しいと思いますー。 遊んでいて不都合も特にないです。

5 stars
by Bharanidharan (July 1, 2011)
Amazing game. Amazing gameplay in samsung galaxy pad. Other than planes there are tanks and zeplins too! The best part is the game architect -beedee

3 stars
by Ron (July 1, 2011)
It was a until everyone started cheating.

5 stars
by Jeffery (June 29, 2011)
Best game on android market

5 stars
by Munim (June 29, 2011)
Its a great game and playing online is even more fun then the missions! But how do you chat online?

5 stars
by Adrian (June 28, 2011)
One if the best multiplayer games I’ve played on Android, highly recommend this game if you like a challenge

5 stars
by Paulo Henrique (June 27, 2011)
Muito bom! Vale a pena comprar. Física é boa, falta melhorar na curva da aeronave. Na curva não perde velocidade.

Now on Apple:
Average rating for all reviews to date: 2 stars!

Bug: 1 star
by Tap tanks on Jul 4, 2011 version 4.0.4
Plz fix bug preambles on I pad cause I can’t log in my account cause it says I already logged in..plz fix it somebody better connections also.

Rip off: 1 star
by Yyyrtoo on Jul 1, 2011 version 4.0
So I paid for the game but now I can’t because it says I need an upgrade after a week and the upgrade is not free how come apple allows this tipoff con game on it’s system

Nice Try, But……..: 1 star
by BullSeye56 on Jul 1, 2011 version 4.0.4
I’ve been playing flight simulators for about 30 years. Played this game on the 3GS and it has potential but is nowhere near being a satisfying, single-player experience. The flight model is not realistic but I’d overlook that if I could actually complete the first tutorial. The plane handles OK and it’s easy enough to fly thru the hoops, but when the enemy fighter “appears” (I guess it appeared, so the game said, but I never saw it), forget it. I was turning so fast I must have been pulling about 10 G’s, looping, Immelman’s, the works, and I still can’t get the enemy off my six. If you can’t see ‘em, you can’t shoot ‘em. If you’re going to have me go up against another plane in a training mission, don’t make me fight the Red Baron, OK? Worse yet, you can’t skip the tutorial apparently. I paid, and all I’ve gotten so far is a tutorial I can’t finish or bypass. Bad design. I should get to decide what I want to do in the game; these linear games that force you to do the impossible or you don’t get any further are just nuts. I can’t understand why developers do this. It’s supposed to be fun, not frustrating.

Best game for the iPad: 5 stars
by Atvan on Jun 28, 2011 version 4.0
This game rocks! The single player missions are good, but the game really shines in multiplayer. Flying bombing, getting shot down, trying to evade planes while in your tank, it’s all fun!
Two small things that I would like changed- the single player opponent planes turn weird, making them hard to fight, as they can turn 90 degrees instantly. Also, I think there should be a free play where you can choose any plane or tank and just drive around and shoot targets.

Dogfight: 5 stars
by Ox15 on Jun 25, 2011 version 4.0
Dogfight is the best game I have. It’s challenging and pushes your skills to the limit. The graphics are awesome and it is easy to learn the controls. Nothing beats it. I don’t know why there are bad reviews because this game can’t be beat. And it’s usually the people who dislike the game that say something and the people who like the game are to busy playing the game to write a review. So that way you only get the negative side. But this game rules and so does everyone that plays it. The person who made the game plays it as well and keeps you informed on what’s new and what is still to come. There’s a ranking system where you earn points for shooting people down or bombing enemy hangers. On multiplayer mode there’s always people playing and usually never a dull moment. And with the new tanks things should get really interesting. You can play with friends and battle your enemy’s as you fly across the sky in DOGFIGHT(action music)!!!!!!!!!!!!!!!!!!!! :)

Very bad: 1 star
by Dude123098 on Jun 24, 2011 version 4.0
After purchase of the game it says that it is “highly recommends a mouse” be used. What? This is suppose to be an iPad app, why even put a game in here if it’s best to use a freaking mouse? Be warned, unless you iPad comes with a mouse, this game will be a waste of money.

Frustrating and not worth money: 1 star
by Acieu on Jun 13, 2011 version 3.2.7
The game never let you get past the training mission. No matter how well I fly through all the hoops without crashing etc I am in an endless loop, I have reloaded multiple times. Great potential but no one is reacting to feedback.

As you can see, things ain’t pretty. In all seriousness, I don’t think that Apple users are worse, it’s just the way the review system and the tech-savvyness difference between platforms.
After reading all the reviews (200+) I see a few trends:
1) Apple users want it easy. Like real easy. My game has complex missions, since they are hard to pass I get 2 reactions:
Apple instead of trying hard they write a review: I can’t fly, I can’t pass, etc…
Android try hard and if they can’t pass it they write a review: I love that this game is not so easy.

2) Android users seem more tech-savvy.
Check Apple’s previous comments: It asks for a mouse???? Seriously, I have no clue what he is talking because there is nothing on any ipad/ipod/iphone app that would ask for a mouse. Maybe on the “internes” :?
Another comment: I can’t log in, it says i’m already connected. (usually just wait 30 seconds to lose the other connection and it will work again).
Another: Controls suck, you can’t calibrate. (there is a big “settings” button to calibrate, plus the first time you load the game it asks you to calibrate).

On android on the other hand I’ve never got those kind of comments.

3) Android users tend to contact the author when trouble arises. Apple users just write a bad review.
This really bothers me. I’ve tried everything possible to make sure that I’m accesible. There is a big “help” with contact info. My personal email is listed on the app and there is a forum available for help & support. Yet… 95% of posts and emails I receive are from Android users.
Check the last review on Apple: “Great potential but no one is reacting to feedback.”. I’m always reading feedback and reacting on it, the problem is that Apple users seem not to be able to find out.
To give you an idea, the “I can’t login because it says i’m already logged in” review on Apple never happened to me on Android, but I did get emails asking me about it from Android users. A simple: just wait 1 minute, you’ll be back on. Worked.
Some Android users send me screenshots (which are not easy to take on Android) and even logcat reports (again, not easy) by email with their problem and questions.
I hardly get emails from Apple users, but bad reviews keep pilling up.

The problem with bad reviews is that I can’t reply to them personally. So even when I see a “I don’t have a mouse” comment, I can’t contact that person to help him out and they get the wrong impression: “Great potential but no one is reacting to feedback.”

4) Apple system is pro-bad reviews.
Until recently, when you removed an app Apple would ask you to review it. At no other time would it ask to do so. In summary: you are removing this application, mind to tell us why you don’t like it? (expect 5 stars here? ha!)
Another thing, when you download an app on itunes, you download it and never go back unless it really pissed you off. The info about “contact author” is not that visible but the “write review” button is pretty big.

On Android it never asks you to write a review, but for every update you get on the app there is an easy way to do so.

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Dogfight game has its own website

Since the game has been downloaded more than 200,000 times, I’ve decided it was time to give it its own site where Dogfighters could exchange their latest tricks:

Up and running!

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Beginning a highly recommended book

“Tomorrow can be better than today and we all have a personal moral obligation to make it so.” – Enough, by John Bogle.

I ramdonly came across this small book of close to 200 pages which was lost and seemly forgotten in between the thick Legal books of the IE Library. It caugh my attention since it looked pretty old, thin and with unassuming cover. I checked the back and it was recommended by David Swensen, Alan Blinder and a whole bunch of big names. Apparently it has been a New York Times bestseller for a few years and I´ve never heard of it. Completely lost and ignored at the IE Library I was the first person to check it out in 2 years.

So here we go, beginning to what it looks like will be a great book.

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Hire me, but only after reading this.

The open secret: I don’t need a job but I do want one.

Knowing this fact gives a tremendous advantage to anyone looking into hiring me. You know that if you want me to do something that I don’t really feel like doing but I happen to be good at, you have to pay a premium. On the other hand, if you are able to offer me something that I enjoy doing, you could pay me peanuts.

It is really that simple, you just need to figure out what makes me tick and whether I’m a good match for your company. In short, you need to research about me a bit, which probably includes reading this blog entry.

As amazing as it sounds, I get multiple calls a month from recruiters and companies who actually know nothing about me before calling. This the main reason I don’t take any of them seriously. Let me give you a short example of the past two weeks:

“Good morning Joaquin, we’ve got your cv from IE Careers Services and after reviewing it we thought you are a perfect match for a position we have available. [Description of position here]… let me ask you, do you speak English?”

Another call yesterday:

“Good morning, I was looking at your resume and it’s very impressive. I see you know some technology… oh… wait… you have a computer science degree… wow… do you happen to know how to do mobile applications?”

I could go on for an hour about how wrong this was but it does happen to me on a weekly basis! I would not expect anyone to know my life history when they call but hey! after 6 months sending resumes I haven’t gotten one single phone call where the person on the other side of the phone proved that they’ve done any research about me or read the first paragraph of my resume. I’m shocked. Everybody tells you not to upload compromising photos to fb because future employers might see them; on the other hand it seems that I could upload photos with underwear on my head while belly dancing and nobody would notice. I feel a bit insulted.

I did a quick test. My blog (and language skills) is at the first paragraph of my resume but maybe recruiters prefer Google. So let’s do it. typed in Joaquin Grech. 846,000 results. Check them below:

First link? This blog! First page results? Links to my mobile applications, to my financial obsessions and to my hundreds of entries at different forums and blogs. I’ve been an internet user since 1994 or so. It would literally take you 30 seconds to know the basics about me and in half hour you’ll have more information that you need for any job position you have in mind: MBA, dual degree in Computer Science and Latin American Studies, honors, my complete lack of fashion sense and modesty, obsession with technology, investing and worshipping of Warren Buffett, my entrepreneurial edge, my projects, clubs and other blogs, my linkedin, youtube, facebook and twitter! (just in case you didn’t want to go through the Google results).

If someone like me with 846,000 personal Google results is not contacted by any recruiter that seems to do any research, then I’m expecting this to be a common situation. Do you share the experience?

When applying for a job one basic rule is that you can’t go to a job interview without knowing the company. Otherwise it proves lack of interest on the applicant. The most obvious question at every interview is some variation of: why did you apply to this position and what interest you about our company? In theory, you should be able to answer this question fast, passionately, with a smile on your face and actually mean it. What most people fail to see is that it should work the other way around too.

I’ve done a test myself. I ask this question at interviews: “What caught your eye about my resume and why do you think I’m a potential employee at this company?”
Try it yourself. You’ll be surprised. First, you’ll look awesome; secondly, they’ll usually begin reading your resume while trying to look like they are not doing it. Looking fast for “why the heck did we call this guy?” And if the resume happens to be far from reach… you’ll be amazed at the ramblings. Some might be smarter and reply with “I can’t share that information, but why do you think you are a good candidate?” or in that line. In short, they haven’t done their job.

Ironically this doesn’t mean that you are interviewing for a horrible company. Usually they are recruiters that the company outsourced, they don’t even work IN the company or know anything really meaningful about it besides that they are “big” and “pay us”. Other times they are just horrible HR people but that you won’t ever see again after joining the company. In rare occasions he/she is actually your future boss, and if that’s the case… do you want to work for someone that doesn’t even show the least interest about you?

Let me finish this post on a positive note. I personally don’t want to program. I’m not looking for a programmer position although many recruiters seem to think so because it’s the most visible part of my profile: games, web sites, and so on. I actually enjoy leading teams in all kind of projects. What I found is that to get a great team you need to have genuine/sincere admiration and knowledge of your team members. As an example I’m doing two new mobile games for Android and Apple devices. I’m the project leader but I do the programming because it’s my hobby. The graphic design, music and so on is done by others. It took me literally 2 hours to find all and each of the team members. All of them are incredibly talented and rock stars in a field that could command a good amount of $. None I called saying: tell me about yourself. My calls (or emails) were more like: “I saw your site, I saw your blog, I ADMIRE your work. I can only offer this and that because this is a hobby for me, but I would love to have you on my team.” They don’t seem to be approached like this very often because some even offered to collaborate for free or take time out of their busy schedule to help me out. Meanwhile, I keep hearing recruiters complaining about how they are not able to find talent. I think there are some lessons to be learned here.

To find out more about myself, shoot me an email. And please, don’t ask me if I speak English.

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Balloon to space? Consider it done.

I was just watching this:

Pacific Star 3 from Colin Rich on Vimeo.

And as the saying goes, if they can do it… I can do it. Target: 2012
Let’s begin by thinking of a “spaceship” name… any ideas?

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My latest stock comments

First investing post on my financial blog on a long long time. Some of you always ask me for stock advice… well these are the ones I’ve posted on during the past year.

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Combined tanks and zeppelin ready for release

I’ve just finished the last touches on the improved parachuter, tanks, explosions and the zeppelin. I’ll release a beta for Android today and hopefully Apple will approve the final version 4.0 before the end of the week.

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Tanks and explosions

Today is a slow Sunday and since TV is not an option, I decided to do some nice explosions for the next version of the game.

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New Blog Design

I felt motivated today and I decided to give the blog a fresh new look. Let me know what you think.

I’ve also included the possibility of adding comments. You can do it directly here or through Facebook, Twitter, LinkedIn and even Tuenti integration. With precise timing, I might want to IPO this site in the near future for a couple billion $

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One busy year

It’s been more than a year since my last post in here. Oddly; I’ve been so busy that I was at awe when I checked the dates. What’s been going on?

For one; I’ve recently graduated with an MBA from IE Business School. IE is ranked 8th Top Business School in the World and 1st or 2nd in Europe by Financial Times but apparently it’s not that well-known outside of Europe and Latin America. I’ve had to explain that “IE” does not stand for Internet Explorer on a couple occasions.

I’m actually very proud of my country because of this. We have three business schools at the top 20 worldwide ranking. By order: IE, IESE and ESADE.  It seems we don’t “only” win World Cups!

That brings me to a quick summary of the year:

1) During the MBA I founded IE Spain Club. The team managed to grow it from zero to 250+ registered members in less than 7 months. Events included: NBA, BBVA, Santander, Microsoft, etc, etc and Capea: a semi-bull fighting event where the only ones injured are the people in the field. We’ve had a blast and we couldn’t have picked a better year to begin the club because, you know, we WON the World Cup (and the Tour of France and Nadal is #1 Tennis Player in the world and Shakira is dating Pique… damn, we spaniards are good). Visit IE Spain Club page: to check the amazing team behind it.

2) Also during the MBA I took some time to finish up and improve my mobile applications. The Financial Calculator continues to get amazing reviews but I’ve focused more time on my game. Dogfight game is looking awesome:

It’s already achieved more than 150,000 downloads and multiplayer mode is 24/7 with people.

3) Investing wise, I can’t complain. My second hobby is acting up pretty good. I’ve been ranked 97 to 98 percentile at the Motley Fool stock picking contest for a while. That’s interesting but my real portfolio is actually much better than the Fool’s contest. This is my
performance for the past 2 years:

Remember my recommendation on Eaton at my blog? “Eaton Corp My First Public Stock Analysis” got some heat for recommending it. ETN today stands at $51, after a 2-1 stock split. In summary, it went from $30 to $102 in little over a year.

If you like it, you can follow my financial posts on Facebook, my Principle Investing blog or just spy me on Motley Fool. From time to time I post what stocks I like but that doesn’t mean I own them. I’m very picky about what stocks I choose to purchase, that’s why my Motley Fool Stock Contest (250+ picks per year) perform much worse than my real portfolio (less than 25 picks in 2 years).

And this is all I’m allowed to show-off today. I’m hitting myself and going back to humble mode.

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Entry on my finance blog: A Year After a Cataclysm, Little Change on Wall St.

New entry on Principle Investing (my financial blog):
A Year After a Cataclysm, Little Change on Wall St.

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New Financial Entry: The effect of business education in Spain

New entry in Principle Investing (my Financial Blog):
The effect of business education in Spain

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I submitted our first iPhone game. A WWII airplane simulator that should be in the Apple Store here. I’ve put a video of the beta in here.

Also the iPhone Financial Calculator has been downloaded more than 5,000 times and I’m receiving lots of email with kind words. I’m glad it’s helping so many people with their homework and financial calculations. I will release an update shortly with all the received suggestions and requests.

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The Snowball

The SnowballFew times it happens that you are enjoying a book so much that you begin reading it slowly because you don’t want it to end. That was
the case with The Snowball, Warren Buffett and the Business of Life. A must read book for every MBA

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New financial entry: A new paradigm… for those who don’t study history

New entry at Principle Investing:
A new paradigm… for those who don’t study history

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MilestoneI hit two milestones today. The first, the iPhone Financial Calculator (video here) that I created less than a month ago, has been purchased over 1,000 times. I was very surprised and I had no idea there were so many people looking for a financial calculator on the iPhone. I started it as a hobby but seeing the interest I will continue improving it during my free time.

The second milestone is also related to a hobby. I recently ranked above 90 percentile on the Motley Fool CAPS contest. Those are my stocks picks. I don’t own most of the stocks in that list, I just pick based on what I believe will outperform the market at the current price. I do own COP, ETN, MO, MCD, KO, GE, NRG, WFC and some european stocks at the moment but I don’t go around buying/selling like I do in the caps game. It’s just nonsensical due to dividend payments, option strategies and taxes. Nevertheless when you see a $ next to a stock, high chances I own or would like to own it if i had cash.

Let’s see how far up I can make it on CAPS. It is harder to jump from 90 to 95 percentile than from 50 to 80, but I invest for the long-term so in average I believe I’ll be OK.

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Entry on my financial blog: “Eaton Corp: My first public stock analysis”

New entry on Principle Investing:
Eaton Corp: My first public stock analysis

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Matt Sedensky

Matt, one of my closest friends, is as much of an excellent person as of an excellent writer. Today, I almost jumped out of my chair when I saw an article with his name in Yahoo Finance. His words: “I finally managed to write about something you care about!” True, true, I’m still waiting to pose as his assistant the day he interviews Warren Buffett or Joel Greenblatt. Matt doesn’t like to write about finance: nobody is perfect. He writes beautifully nevertheless.

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Financial Calculator

My first public iPhone application. Just for fun. You can download it from Apple’s iTunes store here or watch it in action here

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Oh Berkshire

I’ve been courting Miss Hathaway for three years. We were introduced by a common friend and I developed an instant crush. I’m not sure her father would approve, but every few months I managed to get the guts to arrive with flowers to her door.

She has hardly noticed me. The always beautiful and refined Berkshire moves in higher circles surrounded by majesty, hedge fund managers and famous CEOs. She is in the A list of every major club. I watch her flirt with Mr. Cola and go out with Miss Eaton and Miss Ir to chic restaurants. Jealousy is killing me. Her status hasn’t deterred me from trying to impress her. I’ve saved money, I’ve let her known about my business education plans and I’ve even written a letter to her father complimenting his work raising her. All I managed to achieve was to take her out for dinner where she gave me a few B-kisses before dropping her back at home.  It was a very expensive night with little results.

But times are changing. Her latest flings are provoking envy among her friends. They say she is uptight, that she is expending money unwisely and confident in her status-quo as the most desired lady in town. Some of her closest friends are turning their back on her. They are just jealous of her success. All the while I’m here waiting for her to notice me, enjoying Eaton’s company in private. But my heart belongs to you Berkshire. I hope one day you look down and bring me up to your A list.

Oh Berkshire, when will you notice me?

Berkshire Hathaway lives in Omaha with her adoptive parents Warren Buffett and Charlie Munger. She’s currently offering her services at $80,000

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NYU Spain Alumni Club

To all NYU Spain students/alumni, a call to join the NYU Spain group in facebook. I’ll keep you posted in events and meetings. Let your friends know and invite them to

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Principle Investing

Finally, after annoying everybody with my financial ramblings I decided to spare the pain to my loved ones and create my own financial blog: Principle Investing and my Principle Investing – Introductory Post
I followed Mona‘s advice and created my blog at WordPress. After all; she is a pro blogger and no one could be better advicer.

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Trust Your Research

Investing is a peculiar beast: just as one can sin from overconfidence, one can also sin from the lack of. An investor has no guarantee that getting 10 calls right is not due to pure luck and when things go
wrong for an extended period of time, it’s not easy for the investor to stick to his or her approach. Unfortunately, there is not an easy way: learning to distinguish right from wrong in your investing research comes with experience. With that in mind, I decided to summarize my predictions and outcomes of 2008.

My bragging rights:

Around January 2007 I wrote an email to my family telling them to get off the stock market. Rising inflation, mortgage applications on the rise, oil prices skyrocketing, and S&P 500 on the 20s P/E. I was just amazed the stock market was still going up! The Dow Jones shot up 15% before falling 40% from its peak. 30% lower from the moment I made the call.

Nov 5, 2007; I wrote about Credit Derivatives: “If things get worse politicians will try to regulate this largely unregulated business”. I nailed this one. When I wrote about CDS/CDO in 2007 I had to explain them. Nowadays even Joe the Plumber seems to know about them. On September Christopher Cox called for regulation and on November, regulators gave the CME the go-ahead sign.

March 31, 2008; “I’m surprised that not many small hedge funds have collapsed. I would expect a round of bankruptcy declarations coming up soon.” Do you really need links for this one?

The dollar. I was bearish on the dollar for quite some time. Unfortunately I don’t have a specific date but switching currencies gave me about 30% profit in the
past 2 years. Nowadays; I can’t make a call on the currency and I don’t like to gamble.

A whole list of stocks to buy and sell. I was bearish on oil after hitting $100 per barrel. Bullish on pharma and food which outperformed the market by a wide margin. Even though it was considered extremely cheap, I got out of Washington Mutual for the simple fact that I realized I had no idea where I had put my money on.

My whoops:

I can’t time the market. March 31, 2008 “we are near the bottom of the credit crisis”. Oops. Define “near”.

I failed to trust my own research. I made the call for a stock market crash on early 2007 but when by the end of the year the stock market was up 15%, I doubted myself. I got into the stock market again. A painful experience not only because I lost money but because “I told myself so, dummy!”.

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Habitat For Humanity

My friend Kyle and I are going to spend the coming week in New Orleans helping out at a Habitat For Humanity project. If you would like to help out construct a house for a family in need, don’t hesitate to click on the link and check out their different projects. I will post pictures of the progress when I get access to an internet connection.

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Regulation On The Way

I ended up my “Credit Crunch” blog entry on Nov 05, 2007 like this: “If things get worse politicians will try to regulate this largely unregulated business, but for now, these are interesting times to be in the financial industry” and today I wake up to these news from Yahoo Finance “the recent credit market upheaval is spurring new proposals to better regulate the financial markets”. You can find today’s articles in here and here.

Historically this means we are near the bottom of the credit crisis (not the economic crisis, I think we are already in a recession). I believe fed rates will be held steady and even rise in the coming months while big financial institutions are going to take advantage of the situation and make an incredible amount of money borrowing cheap and lending rich. Still, I’m surprised that not many small hedge funds have collapsed. I would expect a round of bankruptcy declarations coming up soon.

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Credit Crunch

It’s all over the news, we see investment banks all around the world losing billions because of subprime and credit crunch and the sporadic use of the word “CDO” in between. For the finance illiterate this is the most cryptic any news headline can get. In fact, few finance experts actually know what it means. How is possible to lose $8 billion and notice it last minute?

Common agreement is to blame a real estate bubble that provoked billions in loses, and although true, this is only part of the story. The real problem is greed and the use of derivatives and how investment banks, rating agencies and hedge funds tried to utilize them to gain quick profit.

To my friends I’m talking geek speak, so let me explain how this all works using human language.

Let’s suppose you are an online used cars seller “CARS A FULL”. You want to sell 100 Mercedes D this month. This will be a simulated scenario for the sell:

- You go to ebay and search for the model you are trying to sell. See similar sales and come up with an average sell price of $25000 (I have no idea about cars so bare with me). You also see a lot of people asking for a Mercedes D and willing to buy at that price.

- Knowing the average sell price, you call up your dealer and ask for 100 Mercedes. If the dealer gives you a price of $25000 or more, you know it’s not worth the effort to even try this whole sell, they either lower the price or you don’t want the deal.

Pretty simple, this is more or less how you trade stocks. You have an index where you see the average bid/ask price (sell price) of shares, so you know you can buy or sell Microsoft at certain amount. There is no doubt about it, if you were to execute the sell at this moment you know how much money you’ll be getting. It’s an open market and very liquid: you can sell almost instantaneously and everybody sees the price you are willing to buy or sell for.

Now, let’s go back to the online used cars seller example. Imagine now that ebay doesn’t exist. No online site where you can actually see what’s the average price or how many people is willing to buy a Mercedes D. Things get a little interesting. You know for sure people want a Mercedes D, there is definitely market for it but you need to figure out a fair value. You neither want to sell cars at a lost nor set a price too high for anyone to buy them.

What do you do? Well, you hire 5 people that all they do is randomly call customers, potential buyers and recent buyers to try to figure out the current cars’ value.

This is the situation with banks and CDOs. There is no common place where they can all look and see a price. Most of the time, this actually works to their advantage because customers can’t see others banks prices and they can rip customers off easily.

Business is good and several years later your monthly sells has grown from 100 to 2000 cars. But competition is fierce against 200 other car dealers around your area. Not only that, sometimes a couple of cars come defectious and you lose money because you can’t sell those for a profit. Other times the car comes with 0 miles of usage, completely like new but you already agreed to sell them at certain price and you could have made more profit. You need an edge in the business.

You think about it and come up with a great idea. You call up your dealer and put a condition on him: He has to hire an independent rating company that will check the cars and notify of their conditions. Depending on their usage, scratches, miles, defects and so on they can get ratings ranging from AAA to DDD. This will help you to know beforehand which cars are in what conditions.

Now you hire a team of experts that write the “cars model book”. In this book, given the year of manufacture, miles and rating (AAA-DDD) of the car, you can come up quickly with an estimated sale price.

CARS A FULL is rocking, every first of the month you order a couple hundred cars, the dealer gives you a list of car’s ratings and prices. You look up in your cars model book what is a good sell price and either accept or reject the dealer’s offer. Business is good, the idea is brilliant and soon it catches up with other cars sellers. They also start requiring a third party rating agency and create their own “cars model book” to get an idea of what is a “good” price. They all pool customers and other companies to try to see how well their models actually match the market (practice known as mark to market in finance). And this is how most banks operate.

So what went wrong?

Back to our online car seller. As the happy owner of CARS A FULL you wake up a common morning just to see the news: “Manufacturer of Mercedes D mixed engines and a half of them were sent out to dealers with a Honda engine”. You think, this is going to suck for the dealers. CARS A FULL should be in good standing because the cars pass through the third party rating company and they are all AAA. Good to go, we are safe.

This couldn’t be further from the truth. You arrive to the office to find the phone ringing non-stop, your employees going crazy and a long list of complains. It seems half of your last month sales had Honda engines. But this is impossible! Pissed at the madness you decide to open the hood of one of the cars that you were about to ship today. You’ve never bothered to check any car, you fully trusted your dealer and rating agency, but to your surprise you find a Honda inside the Mercedes.

Things get worse. One employee comes running to you with a printed page from the New York Times. It appears that some Mercedes D were shipped with the right engine but they got a defectuous steering wheel that might get stuck during driving if not exchanged. In addition, the only way to detect the steering problem is with special equipment and expertise which you don’t have and can’t get at the time. So not only you have Hondas in your garage but you might have defected steering wheels with no way to tell them apart.

More news come in: “Rating agencies purposely ‘failed’ to detect the issues because of shared commissions with dealers.” Now you know what happened. The dealer wanted to sell the cars, they hired rating agencies to inspect the cars. Dealers wanted to get the better prices with better ratings so they offered commission to the rating agencies for the amount of sales. It was convenient for the agencies to fail to detect these car’s issues.

You are fuming. You call up your dealer who doesn’t pick up the phone. You call the rating agency to find busy signal. You are just starting to realize the consequences, you got more than 1000 cars in your garage to sell and you can’t price them correctly. Your “cars model book” is useless without the correct input data. You need to first find out the situation of every single car in your garage. This is going to be expensive but it’s the only way to get out of the hole, or so you believe. After spending an extraordinary amount of money to figure the cars’ condition, you find out you can’t sell them at the price your book is suggesting. The word has spread on the market and all other online car sellers are in the same situation, all your competitors are in trouble too and nobody wants to buy Mercedes D because they are afraid to get a Honda or a defected steering wheel. Your book is clearly useless at this moment and you can’t figure out a good sell price.

You only have an option, try to sell a couple cars and see what they sell for. (Mark to market). You put some cars out for sale and you don’t see any bids coming in. You know your cars are not worthless but there are no offers at the moment so you have no clue what a decent sale price is. There is no liquidity, you are trying to sell completely blind.

This is the current situation at banks. They got into the business of selling and buying derivatives without checking under the hood. The business was doing great and earnings skyrocketed but they built their business on models with incorrect input. When the news about mortgages defaults broke, they found that their supposedly safe AAA investments were in reality BBB or CCC and they tried to get rid of them as fast as possible just to realize that the whole finance industry was under the same umbrella. Every investment bank wanted a way out but nobody wanted to buy. Nobody trusted anyone and nobody was lending money to anyone. The federal reserve tried to add billions to add liquidity but it hasn’t help much. Nobody wants to buy unknown instruments with high risk and the people selling are selling way undervalued, losing billions in the process.

Whose fault is it? The rating agencies who ignored the warnings? The dealers who looked left while this happened just to get a nice paycheck? Or the seller that didn’t bother to open the hood and sold cars without having some basic knowledge?

They all had their part on it and they are all trying to recover their losses, praying for the Fed to come to their rescue. If things get worse politicians will try to regulate this largely unregulated business, but for now, these are interesting times to be in the financial industry.

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