Macquarie Global Infrastructure Fund

Macquarie Global Infrastructure 100 Index ETF (GII) is finally here for average investors to purchase now. But at its first day of trading, the volume is very small. It seemed that most of the trading volume was very sparely located along the time axis.

The index components are the so-called global infrastructure companies, which include economic infrastructures, utilities, and commercial infrastructures. Typical infrastructure companies are oil and gas pipelines, telecom equipment, transport services, electricity suppliers, gas distributors, and water suppliers. The index components are the largest 100 infrastructure companies listed on global exchanges. The index is updated twice a year in June and December.

Some of the U.S. companies included in the index are Kinder Morgan, American Electric Power Company, Duke Energy Corporation, and TXU Corporation. Some of the international companies like Macquarie Infrastructure Group of Australia, Eletrobras of Brazil, TransCanada of Canada, Suez of France, EON of Germany, CLP Holdings of Hong Kong, ENEL of Italy, Tokyo Gas of Japan, Endesa of Spain, and National Grid of the U.K.

Since most of the current components of GII are utilities companies. It is very likely that the GII may be highly correlated with some existing utilities funds like JXI (iShares S&P Global Utilities Sector Fund) and XLU (Utilities SPDR). I believe that GII can add diversification benefits to portfolios with traditional equity and bond funds.

Callaway Golf Clubs

After practicing at the driving range for half an hour, Guangyan and I went to play a few holes at the Ridgeview Ranch. A little bit later, Lihong joined us after we finished the third hole. Lihong bought a new set of golf clubs. This set has brand name – Callaway. The Big Bertha diver looked very impressive. All the clubs looked very neat. He said that he could not wait to try out his new clubs. He bought the clubs in a second hand store. He said the price tag was close to $2000 if the set was bought new.

Three of us started on the second hole again. After the second, we played the third hole. Because it was too dark to see the golf ball clearly, so we proceeded directly to the 9th hole. I got a par with regulation. This was the first time I got a par on that hole. The fairway for the 9th is fairly straight. There are several sand bunkers on the right side and low sloped hills at the left. I landed my first Driver shot on the right side of the fairway behind the series of bunkers. I used an 8-Iron sending the ball onto the edge of the green. The cup was about 20 yards away from the 2nd landing. First, I putted the ball near the cup within three feet. Then, I putted it into the cup with ease. I got the par.

Cumulatively I have had pars at the 1st, 3rd, 4th, 5th, and 9th holes in the first nine holes over the last three months. I probably had at least pars at three holes for the second nine holes over the same period. How wonderful would it be if I could play that many pars (together 8 pars) in just one game? I guess that I would like a new set of Callaway clubs if I could do 8 pars in one game.

Asset Allocation and Reservoir Operation

After the stock group meeting yesterday, every market is coming back almost at the same time. The oil is way up today. The USO jumped over 5% today. What a surprise it is about predicting the future. Just one day, every thing about the oil market is changed. When you think deeper about the world, a day really makes that much difference. I do not think so. Giving up about the prediction might be a better way to go ahead.

To predict has always been a false sense of our desire of knowing the future. So there were no good future-predictors and there will be no good ones in the future.

In traditional mathematics, there are definite relationships between variables. But in the past century, statistics (originally as a branch of mathematics) has gone far beyond the math about definite relationships. So we have two math tools to describe the physical, chemic, biological, and social phenomena.

So in my opinion, knowing what to happen and when to happen is beyond the human efforts. Our geo-world in the past several billion has advanced so much that the definite understanding of any thing without uncertainty is impossible. Can we describe anything without using statistical tools? No.

Interest rate or stock prices are such convoluted phenomena which involve so much of every thing else. At the least, the stock index price is a function of physics, chemistry, biology, economics, psychology, politics, and the mixed soup of many combinations of these ingredients. Can we fully understand any of the subsets with certainty? No.

Another thing is about the rate of change. Our brains are getting smarter every generation. The world is also getting more complicated every second. From the Big Bang to now, we have come a long way to the current status. Can our brain develop at a faster rate than the rate of the world changes? No.

I just list three questions with no answers. There are many more questions like these. So I would suggest giving up non-statistical predictions and come to statistically describe processes with time. Do we still remember that the length of time is relative to the speed of the observer? So I can almost conclude that a day is much longer in 2000 than a day in 2006, especially for those who trading stocks at both periods.

In hydraulic engineering, the hydrologists or hydraulic engineers can never predict when floods or droughts are coming with absolute certainty. But they build reservoirs and water wells to serve all human kinds very well. We hardly feel the water shortage very often. A friend of mine who study the optimal operations of reservoirs in the Missouri River basis and founded out that we can only increase the annual hydropower generation by a few percentage points even if we know the incoming stream flow in advance. One of the main reasons for such a limited improvement in operational efficiency is due to the relative large reservoirs capacity to the total annual stream flow. In other words, after thoughts may not be a bad thing in reservoirs operations.

In a way, we can only build reservoirs large enough to catch some flood water and release them during the drought years. The size of reservoirs is a function of economic development levels. The developed countries can effectively control about 100% of the average annual flow with reservoirs while the developing countries can control much less. For example, the total reservoirs capacity in the US is more than 100% of the total average annual flows of all rivers. The number is less than 10% for China.

If analogy is used here, we can just build cash reserves large enough to mitigate any gyration of the financial markets. The question now is how we can determine the optimal cash reserve. Actually, the strategic and tactical asset allocation models are tools which can be used for solving this kind of problems.

Beginning Golf Class at CCCC

The lecture part last Thursday of the Beginning Golf was very good. The Coach talked about the major terms used for golf teaching such as slice, hook, push, pull, etc. He introduced the evolution of the golf clubs. He mentioned some critical mistakes for amateur golfers in stance and during swings.

One most critical technique I learned in the class was about the body torque produced during the back swings (just before the down-swings). He said Tiger Woods can produce a torque angle of 51 degrees. For average professionals, the torque angle is about 30 degrees. For amateurs, it is great if the toque angle can reach 20 degrees. The torque angle is the angle between shoulder turns relative to the hip line. It is not good to turn the shoulders and the hips at the same rate. One should turn shoulders more than the hips.

Another technique the Coach talked about was the back-spine angle during the swings. The back-spine has to be straight during the swings when eyes are fixed on the golf ball. Do not turn the head before the balls is out already.

I practiced for one hour at the Ridgeview Ranch driving range using this new technique, I felt that I got many more solid shots with the all the clubs, especially for the irons. Today I practiced for about one hour before going to the stock meeting. I tried to do the swing with the following five conditions:

First, the stance is solid with my both feet being square to the intended line. Eyes are fixed at the ball. Keep the left arm straight.

Second, keep the left arm straight and the back straight during the back-swing and slowly raise the height of the club.

Third, during the down-swing, try to come down along the same circle of the back-swing without enforcing my arm strength on to the club.

Fourth, do not move my head and eyes before the club face has the impact with the golf ball. This is required to keep the body return to the starting position when the club face was set to be square to the golf ball at the stance.

Fifth, when the ball has left the ground, gradually turn my head and eyes to watch the trajectory of the golf ball. At the same time, let the club finish its swing without any intention of stopping it quickly or suddenly.

If I could do all the above five steps correctly, then I feel the golf is played right. Otherwise, the golf was definitely not very good. I played two full baskets of golf balls (about 120 balls), I might have done three forth of the swings well. I was happy for practice today.

Local Stock Gurus on 2007 Investing

Rujing called for a meeting about stocks at Escape. When I got there Rujing was the only one there. I was about a few minutes late already. Later one Olina, Max, and William came for the meeting. I felt that everyone enjoyed the meeting. The discussions were great. The difference in opinions was as many as the number of participants.

Rujing had quite a few ideas about the stocks and energy. His thought about oil was very interesting. Generally, the oil price will dip to about $42 per barrel by the middle of the year. Next year, the oil price will advance to about $100 per barrel. If that’s case, there is tremendous profit potential if one can play this volatility right. He offered his idea about the interest rate. The discount will be raised by the Fed in next meetings. Ultimately it will rise at about 6%. That means that the Fed will increase the rate three times if the 25 basis points raise is continued in the future. His view about the stock market was very negative. Most of the stock sectors are over-valued, especially the technology sector. The only industries he likes are the wind-energy related companies and the medical technology companies. He mentioned his current positions of investments. Majority is cash and with some short positions.

Max was in generally disagreement with Rujing with one exception about energy. Max thought ExxonMobil had been right many time in the past in timing the oil market. Over the last several years, ExxonMobil did not add any major oil assets because the company thought the oil price about $50 could not be sustainable. Basically Max confirmed the Rujing’s bearishness on the oil price in the near future. Another thought about the geopolitical speculation of the potential US-Iran war. Rujing thought the US-Iran war is very possible. Max thought the war potential was none. William and Max thought that there was a potential for Israel to invade Iran if conditions were ripe because that Iran had views about eliminating Israel from the Middle East.

William’s current concentration is the International market. His performance was very good. He was a little bit worried about the potential bubble in the Chinese stock market. It seemed that Max and Rujing were in agreement with William on this point. Max even offered a potential situation that the bullishness could be extended to 2008 when Olympics would take place then. Basically they thought the Chinese government had great influence and control over the stock market.

Olina was talking about her concentration of investment on exchange-related stocks like the NYSE and CME. She said that the market had very little to do with the companies she had watched and traded. In some days when the market was down, her positions could be mostly positive. Rujing thought the exchange-related companies were over-valued since the transaction price had been in the downward direction. Ultimately the exchange-related companies would come down to realty. Max and William seemed that the bullishness could be sustained for an extended period of time. William thought NYSE was one of the best stocks to invest. As long as people trade stocks, NYSE will continue to make money.

I felt that the stock market was undervalued at least 30% at the current corporate erning rates. I also believed that investing in energy now would produce a great average entry price so that the return could be significant if what Rujing said wouold come true in the coming years.

William had to leave for his next activity. Then everyone was ready to leave. Every left around 6:30 p.m. The meeting might have started by 4:00 p.m. So the 2.5-hour meeting was productive and interesting. Several other invited gusts were not present in the meeting.

Distance from A to B and from B to A

Zhen and I were trying to increase portfolio diversification by introducing an additional fund. When the staring fund is an S&P 500 index fund, the diversification can be increased by adding a REIT fund. The level of diversification (we call them the distance between the two funds) is more than 60%.

Our first thought was that we could get the same level of diversification by adding S&P 500 index fund to a portfolio with a REIT fund. We used the exactly same methodology to determine the distance again. The new distance we got was less than 40%.

We were confused by these two results. How can the distance between two funds be different when measuring from a different staring point?

We looked at the mathematical equations which contained biased estimates of parameters. So this is one source which can explain why the distance estimates were different. This is the easy part since the mathematical equations are not the financial insights.

We first thought about explaining the difference from our daily experience. For example, if we are going to hire two software engineers to form a team with four skill sets, the sequence of hiring can be different. Suppose there are two engineers are qualified to form this team. Engineer A has three skill sets while Engineer B has two skill sets. One of their skill sets is overlapping between them. The team qualification is exactly the same. However, the difference hiring consequence may have different financial consequence. If Engineer A is hired first, then Engineer B may be hired at a lower cost. If Engineer B is hired fist, then Engineer A may be hired at a higher cost.

Another real life experience is that the diving form home to a downtown neighborhood restaurant can be different from the restaurant to home, especially if there are many one-way streets along the way.

The sequence of fund selection may be very important for portfolio construction as well. If we start with a bad fund, we may ultimately find the optimal portfolio, but the process may be very long. If we start with a good fund, we may find a similarly optimal portfolio, the process may be shorter. The two paths can be different.

It is my current expectation, the selection process should start with lest volatility fund. First we start with a 100% cash position. We gradually increase the number of funds in the portfolio by selecting the fund with least volatility to the highest volatility when other parameters are similar.

Higher risk is associated with higher return. The fund selection process is also from the lowest return fund to the highest return fund. If we select funds according to these two rules, we actually select fund along the risk-return frontier. This way we are increasing the risk-level and the return-level for each of the individual funds.

Strategic Petroleum Reserves

The SPR was created around 1970s after the US oil crisis during the early decade of 1970s. The current SPR capacity is 727 million barrels. The total cost for the SPR is 22 billion dollars (5 billion dollars was for facilities and 17 billion dollars was for purchasing sweet and sour petroleum). The SPR is stored in Salt caverns along the US costal areas.

The Department of Energy has plans to increase the capacity to 1 billion barrels. During the State of Union Address on 1/23/2007, President George Bush asked the Congress to double its capacity by 2027 to 1.5 billion barrels.

China has plans to build its own Strategic Petroleum Reserves. There is a three-stage development plan. The total capacity will reach 68 million tons. In first stage, the capacity is 12 million tons. The second and third stage the capacity is 28 million tons each. There is no specific time schedule to finish all the China SPR projects.

I am always confused by the petroleum volume unit of barrel. I have discovered the following basic conversions after careful research. I keep these conversion relationships for future reference. The first three relationships are exact. The last three relationships are derived numbers.

1 barrel is 42 US gallons.
1 gallon is 231 cubic-inches.
1 inch is 2.54 centimeter.
1 gallon is 3.785411784 liter.
1 barrel is 158.987294928 liter.
1 cubic-meter is 6.28981 barrels.

The petroleum specific weight (relative to water) is 0.82. Based on the above relationships, one ton of petroleum is 7.6705 barrels. The China SPR capacity of 68 million tons is equivalent to 521.594 million barrels. If the capacity was filled up at the current petroleum price of $55 per barrel, the total cost would be $286.88 million dollars. If the $5 billion cost for the US SPR facilities was used for building the Chinese counterparts, the total cost for the China SPR projects would be more than $33 billion dollars.

道德经 第九章

持而盈之 不如其已
揣而棁之 不可长保
金玉满堂 莫之能守
富贵而骄 自遗其咎
功遂身退 天之道

[译]

Holding it to the fullest is not as good as giving it up in time.
Sharpening it to the sharpest cannot be kept for long.
Gold-and-jade-filled houses in no way can be defended.
Over-pride in wealth and status will lay troubles for the future.
Returning home after achieving success is naturally Tao.

[注]

Warren Buffett once said he was taking the last puff when he bought the Berkshire Hathaway when it was a textile company. After his first success, he never bought another company that way. Did Warren Buffet study the Tao before he changed his investment philosophy? I have no way to find it out. Almost all his long-term holdings are average companies. There is no splendid value in any of his holdings. Yet he has been proven the best investor in the world. So I know his success is due to his intuitive understanding of the Tao if he has never learned the Tao.

Based on my current understanding of Buffett investing philosophy, he has two basic principles. One is the margin of safety. Another is the enduring value. He can concentrate on only a few holdings because there is a margin of safety when purchasing a new stock. He can hold his investments for a long time because there is enduring value of the companies he holds. He has even gone over his way by saying that he likes the company a fool can run well. The enduring value comes from the imperfectness and improvability of the company. In other words, the company is run by people far from the sharpest. So the distance of the company from its perfect shape is the source of enduring value.

In similar ways, one can examine the principle of Tao is applied to the margin of safety. By admitting the imperfect understanding of the company when purchasing a stock, the margin of safety is built in the system at the very beginning. If investors are over-pride in his calculations for investing, they are only lay troubles for their future. By admitting the potential calculation errors, investors can eliminate laying troubles for themselves.

It is simply the law of large numbers that one can only beat the market by holding a very small number of stocks. When the number of holding stocks is large, the statistical law of the average takes over the extreme events. In statistics, the standard error of an estimate is inversely proportional to the square root of the number of samples. The father of value investing Benjamin Graham recommended committing at least 25% of your net worth in the stock you like the best. If one follows his recommendation, he should only hold four stocks. When you look at Buffet holdings, most of his investments are indeed concentrated on four to five stocks. The possible danger of holding only a handful of stocks is gaining a return much below the market return. So there are only a few really practice what Graham did and Buffett have done.

For the average investors, diversification is the only way out without gambling his sweat money. So in a way, the Tao is applicable to the extreme smart investors and the average investors as well.

Holding a stock until its potential gain reaching the maximum is not as good as giving it up early enough so that other investors have some further potential to harvest. So the Tao is applicable to stock investing even today. Buying low and selling high expresses the exactly same feeling as returning home after achieving success.

Economics and Hydrology

Jie checked out from the local Plano Library “the Commanding Heights,” which is a 3-volume TV series. I watched the first volume. Basically this volume discussed the economic ideas of Keynes and the Chicago school.

In Keynesian theory, the government should be involved in economy directly to regulate the economic activities. When the time is bad (or recession time when the unemployment rate is high), the government should increase spending at deficits to increase the employment rate. When the time is very good (or bubble time when the inflation is very high), the government should reduce spending and increase savings. Many think that the Keynesian theory had saved the American economy during the Great Depression time when the US government increased spending to increase employment rate. The government let people work at roads, reservoirs, and other public goods.

The economic problems in the early 1970s could not be cured by the Keynesian theory. The economy was in stagflation when the unemployment rate was high and the inflation was high as well. This situation was considered impossible theoretically in the Keynesian framework. So the Chicago School of economics of free-market system came into dominance. Hayek in 1974 and Milton Freedman in 1976 were given the Nobel Prizes for their contributions in economic theory. By then the Keynesian theory was no longer very popular any more. Hayek and Freedman’s economic thoughts were fully embraced by Regan and are fully accepted as common sense today. The US economy has enjoyed the longest expansion for the last several decades ever since.

Why these theories did worked in one period and did not work in other periods like the Keynesian theory of economics? I could not answer the question.

Today after lunch, the weather was not hot enough for me to play golf. The teacher in my Golf class once said that temperature below 40F would not be good for playing golf. So I went for a walk along the small creek near my home. The walk took about one hour as usual. The creek flow was above normal. The rain over the last two weeks is still contributing to the above-normal flow in the White Rock creek. By watching the flowing water, my mind went to think water in the world. Why is there just the right amount of water in the world so that everything works perfectly as it is?

The water is flowing to the lowest points which are the oceans and terminal lakes around world. Then it is picked-up by the Sun and up into the air and come down as rains or snows, which gives live along the way. Whatever is left will come back to the oceans or terminal lakes again. This hydrological cycle is going on again and again. Every thing benefits from water.

What happens if there were too much water so that everything was submerged in the water? The world would be a totally different world. I could not imagine if there were fish then. I have to think further but not too further so that I have to think in terms of religious beliefs.

There are two things in this balance. One is the average depth of water on the Earth. Another is the variation of height of landscape such as the mountain peaks and the ocean abysses. If the variations of landscape (in elevation) are larger than the average depth of water, the world can work as it is. If the variation of landscape was smaller than the average depth of water, everything would be underneath the water surface.

So the perfect world is the balance between the average depth of water and the elevation variation of landscape. Water is working towards evening out all the variations while the internal force of the Earth is working just hard enough to keep the earth surface rugged enough to make this perfect balance between water and land.

Then I came back to think about the Keynesian theory and Freedman theory of economics. The Keynesian theory worked during the extreme volatility time of economic activities while the Freedman theory works much better when the economic volatility is mild as it is today. This way their respective theories can have their places in economics at all times.

Chinese Stocks at 10 Trillion Yuan

As of 1/129/2007 the total market value of listed companies in the two major exchanges in China reached at 10.7 trillion Yuan. This is the first time the market value of all stocks passed the 10 trillion Yuan mark. This is a significant number for the Chinese capital market.

Comparatively the US stock market value is approximately 14 trillion US dollars. The current currency exchange rate is one US dollar for about 8 Yuan. Then the US stock market is approximately 10 times the Chinese stock market.

The Chinese stock market value today is equivalent to the US stock market value at 25 years ago (1981). So it is very easy to say that the Chinese stock market value will reach 100 trillion Yuan in 25 years. This is equivalent to annual percentage rate of 10%. I believe this kind of long-time predictions.

Portfolio Management at UTD

This semester I am auditing another class from UTD - Portfolio Management. The class teacher Kurtay thinks the name should be Institutional Fund Management. Basically he thinks that the time for security analysis is already gone. Now it is the time for asset allocation – strategically or tactically. In the second day of the class, the class last two and a half hours without interruptions for rests. Overall I like the teacher. His teaching of practical matters seems very interesting, especially for me.

There are about 30 students in the class. Many of them are graduate students. I think a few of them are not regular students. I talked with two students after the class. They are all graduate students but they have regular work besides schooling.

The teacher is from Turkey. His first name Kurtay is a combination of two words (Kurt means Wolf and Ay means the Moon). He said his parents gave him this unique name in the world. He has not yet met or known anyone with this name.

In yesterday class, Kurtay introduced many concepts in investment. His experience is mainly from the institutional side of the investment. He introduced the current structure for institutional investors.

Investors are usually corporate pension funds, university endowments, public retirement systems, and private foundations. The investors are usually organized as the boards which are to oversee all investment decisions.

Investment Consultants are to help the investors to write investment policies, investment objectives, investment constraints, and hire investment managers, mutual fund managers, hedge fund managers, and/or portfolio managers. Usually the investment consultants do not touch the green (money).

Investment Managers perform actual management of money. One special group is the fund of funds, which are the collections of other hedge funds.

He wants the students to have the above framework of institutional investment memorized so that his talk can make sense over the semester. He said that the current investment landscape would not change over the next five years. However, the concept of meta-consultants is emerging. Mcube Investment Technology (http://www.mcubeit.com) is one example along this line.

He introduced several behavioral finance concepts such as disappointment aversion, loss aversion, and regret aversion. I had heard about the loss aversion before. But it is the first time I am aware of the disappointment aversion and regret aversion. All these concepts are an integral part of the prospect theory. Another concept of prospect theory is mental accounting.

There is another psychological process – the heuristic decision which is comparable to the prospect theory. The heuristic decision processes involves overconfidence in decision making. The teacher has yet to introduce these behavioral finance concepts.

The investment theory based on the Markowitz theory has developed beyond the risk-return space for stocks. Now the theory has been extended to the asset classes. Different institutions have developed their own asset allocation models to capture the fruits of the new applications of an old theory. Ultimately the theory will be applied to all among all institutions, all assets classes, and all security analyses.

道德经 第八章

上善若水

水善
利万物而不争
处众人之所恶
故几于道

居善地
心善渊
与善仁
言善信
正善治
事善能
动善时

夫唯不争
故无尤


[译]

The highest good is like water

Water is good.
It benefits the world but it does not contend.
It flows where many consider bad.
Therefore it is similar to the Tao.

Residence is good because it is well-located.
Heart is good because it is bottomless.
Relationship is good because it is charitable.
Talk is good because it is trustworthy.
Regulation is good because it is uniform.
Work is good because it is well-done.
Change is good because it is timely.

Therefore, the less you contend, the less you err.

[注]

This chapter tells us one can learn to be good just by watching how water flows. In biology we learned that water makes life. Water benefits every living organism on the Earth but water never asks for any returns.

I studied rivers to be a hydraulic engineer. I have learned that water flowing in the rivers has many characteristics like human beings. Hydraulic engineers classify rivers into the up-streams, the mid-streams, and the down-streams. It is just like human beings are called young, middle-aged, and senior. Young men are similar to the up-streams while the senior people are similar to the down-streams.

In the up-streams, the river flow tries to carry as much as there are sediments. The river flow can move very large stones. The sediment sizes are very large. There are gravels and pebbles in the up-stream river bed.

In the mid-streams, the river flow is mild. It no longer carries any large gravels or pebbles. It only carries sands or silts. When it feels tired, it downloads some sediment along the river bed. When it feels strong, it uploads the sediment and carries it downstream.

In the downstream, the river flow is very tired. It moves very slowly. It can now only carry very fine sediment such as silt or clay. As soon as it reaches the ocean, the water flow feels it has finished its journey and dumps its sediment load in the river mouth.

I feel that the human beings are doing the same things as the river flow. As a young man, he is trying to load up as much as he can. When he reaches middle-age, he feels the load of responsibility. But as much as he can carry, he always maximizes his loads to carry the family responsibilities. However, when he reaches retirement age, he often feels that his responsibility is finished. He is no longer ambitious just like the tired downstream river.

My grandfather told me that human beings were descendents of fish. Maybe that is why we are still behaving like rivers.

Self-Correcting Mechanism

I like this picture very much. It shows the self-correcting mechanism between the values of real estate versus stocks. Over the last 50+ years, the relative weights of real estate value and the stocks and mutual funds value in the US households come together four times. It is approximate 15 years per cycle.

There are short-term views. Many investors are trying to predict the next best moves regarding stock selections or investment choices. This process is trying to harvest the short-term volatilities of various asset classes. It is very good to expect to reach the goal. However, there are only a very small percentage of investors can actually achieve this goal.

There are long-term views. Asset allocation methodology is one of the best examples to take the long-term views of the capital markets. In a way, anyone who is willing to suffer the mediocre returns of investment can achieve this goal. Ironically, very few average investors are willing to admit their average market intelligence compared with the entire investment communities.

Actually, the long-term versus short-term views themselves are a dialectic pair of the entire investment universe. Without either side of views, the other view can not even exist for a minute.

In others words, the dialectic pairs can be presented in other forms. There are traders and investors. There are mutual funds and hedge funds. There are stocks and bonds. There are real assets and securitized assets. There are technical analysis and fundamental analysis. There are many such pairs existed in the investment universe.

In such a complicated universe of investment, how can we achieve the expected return we are aiming for?

The state can be stated is not the normal state.

道德经 第七章

天长地久

天地所以能长且久者
以其不自生
故能长生

是以圣人
后其身而身先
外其身而身存

非
以其无私邪
故能成其私

[译]

The world lasts forever.

Why can the world last forever? It is because it does not self-produce. Therefore, it can forever produce.

Therefore the Ancient Masters put their self-interest behind while they go forward. They expose their weaknesses while they are themselves.

Isn’t it because they are so selfish-less that they can fulfill themselves?


[注]

There is a saying in the western world that you can make money if you can make a lot of money for the others. The more you contribute to bigger causes, the more you can win rewards. Therefore the world can move forward in this way.

There are so many things in the world we call them natural resources. We use trees to build homes. But trees are there not for themselves. The petroleum is there not for itself. The coal is there not for itself. Water flowing in the river is not for itself.

Everything in the world exists for something else. Grass is growing for the buffalos. Buffalos are growing for the lions. All the natural resources are there for the human beings. Every human being has some goals other than itself. So the human societies have advanced from primitive living to the modern living.

Working for others or producing for others is the source for self-development. Chairman Mao works for the public so that he is remembered by the Chinese for centuries to come. Washington created the United States without claiming any crown status so that his name is forever associated with the country.

Prediction is difficult about the future

Larry called this afternoon from Spokane of Washington State. Now he works as a testing engineering for Worldwide Packets (http://www.wwp.com), a start-up company specialized in Ethernet solutions for telecommunications services providers. He mentioned about some predictions for 2007 which could have serious impacts to millions of people.

Last night I came across a saying “prediction is very difficult, especially about the future” when I was reading a speech by the Fed Chairman Ben Bernanke. Bernanke attributes this saying to Yogi Berra. I checked on the Internet about the origin of this saying. I have found several sources for the same words.

One attributes this saying to Niels Bohr (1885-1962). Bohr was a Nobel Prize winner of Physics in 1922. He discovered the atomic structure and made contribution to the understanding of Quantum Physics.

Another one attributes this saying to Paul Dirac (1902-1984). Dirac was a famous mathematician who discovered the Dirac Delta δ(x) and physicist who made contribution to the understanding of Quantum Physics.

Yogi Berra is still alive (1925 - ). He was with George Bush in a state dinner when Bernanke might be present. So this saying is attributed to him even by Ben Bernanke.

I truly believe that “Prediction is very difficult, especially about the future” was first said by someone long before Bohr, Dirac, and certainly Berra. But such a fundamental philosophical saying has to be attributed to someone who is famous enough to take the credits.

道德经 第六章

谷神不死
是谓玄牝

玄牝之门
是谓天地根

绵绵若存
用之不勤

[译]

The fantastic valley never dies. It is the female wonder.

The door to the female wonder is the root of the world.

It exists like waves. Use it without efforts.

[注]

In the valley, everything seems invisible. The past is like a dream; the future is too far to reach. It is the valley which dominates all the landscapes. Mountains are just brief excitements in the vast wild continent. The gateway to the never-dying valley is to use it without efforts. How is it used without efforts?

In the flood seasons, the highly visible storms create flood peaks in the mountain streams; the floods flats out in the vastly wide valley. In the drought seasons, everything in the valley dies out except the green lines along the river beds. These green lines are tapping the deep groundwater, which comes in a gentle way, totally different from the rapidness of floods.

The groundwater is like bonds while the floods are like stocks. Groundwater flow is measured in terms of “yield,” which is the same word used for measuring bonds. Floods are characterized by fast-rising peaks and quick-dying tails just like stock prices can go up and down in a hurry.

The nature is using the valley effortlessly. The valley survives when water floods the valley; the valley stays green by tapping the groundwater when no water in the stream . The fantastic valley never dies.

By watching the changing valley years after years, one can easily figure out the changing markets of stocks and bonds.