Stock Options

I've just discovered the world of stock options. It's an excellent way to make money in the stock market. My first trade was writing (i.e. selling) a covered call on some shares that I own.


I'm finding that my philosophy regarding the capital markets has also changed. I will write more on that later.

Begin with the end in mind

The following is an excerpt from The 7 Habits of Highly Effective People, by Stephen R. Covey.

In your mind's eye, see yourself going to the funeral of a loved one.  Picture yourself driving to the funeral parlor or chapel, parking the car, and getting out.  As you walk inside the building, you notice the flowers, the soft organ music.  You see the faces of friends and family you pass along the way.  You feel the shared sorrow of losing, the joy of having known, that radiates from the hearts of the people there.

As you walk down to the front of the room and look inside the casket, you suddenly come face to face with yourself.  This is your funeral, three years from today.  All these people have come to honour you, to express feelings of love and appreciation for your life.

As you take a seat and wait for the services to begin, you look at the program in your hand.  These are to be four speakers.  The first is from your family, immediate and also extended - children, brothers, sisters, nephews, nieces, aunts, uncles, cousins, and grandparents who have come from all over the country to attend.  The second speaker is one of your friends, someone who can give a sense of what you were as a person.  The third speaker is from your work or profession.  And the fourWth is from your church or some community organization where you've been involved in service.

Now think deeply.  What would you like each of these speakers to say about you and your life?  What kind of husband, wife, father, or mother would you like their words to reflect?  What kind of son or daughter or cousin?  What kind of friend?  What kind of working associate?

What character would you like them to have seen in you?  What contributions, what achievements would you want them to remember?  Look carefully at the people around you.  What difference would you like to have made in their lives?

What it means to "begin with the end in mind"

The most fundamental application of "begin with the end in mind" is to begin today with the image, picture, or paradigm of the end of your life as your frame of reference or the criterion by which everything else is examined.  Each part of your life - today's behaviour, tomorrow's behaviour, next week's behaviour, next month's behaviour - can be exhamined in the context of the whole, of what really matters most to you.  By keeping that end clearly in mind, you can make certain that whatever you do on any particular day does not violate the criteria you have defined as supremely important, and that each day of your life contributes in meaningful way to the vision you have of your life as a whole.

It's incredibly easy to get caught up in an activity trap, in the busy-ness of life, to work harder and harder at climbing the ladder of success only to discover it's leaning against the wrong wall.  It is possible to be busy - very busy - without being very effective.

People often find themselves achieving victories that are empty, successes that have come at the expense of things they suddenly realize were far more valuable to them.  People from every walk of life - doctors, academicians, actors, politicians, business professionals, athletes, and plumbers - often struggle to achieve a higher income, more recognition or a certain degree of professional competence, only to find that their drive to achieve their goals blinded them to the things that really mattered most and now are gone.

How different our lives are when we really know what is deeply important to us, and, keeping that picture in mind, we manage oursleves each day to be and to do what really matters most.  If the ladder is not leaning against the right wall, every step we take just gets us to the wrong place faster.  We may be very busy, we may be very efficient, but we will also be truly effective only when we begin with the end in mind.

If you carefully consider what you wanted to be said of you in the funeral experience, you will find your definition of success.  It may be very different from the definition you thought you had in mind.  Perhaps fame, achievement, money, or some of the other things we strive for are not even part of the right wall.

When you begin with the end in mind, you gain a different perspective.

Related Post: The 7 Habits of Highly Effective People

The 7 Habits of Highly Effective People

The 7 Habits of Highly Effective People is a book by Stephen R. Covey. So, what are the seven habits?

1. Be Proactive

- Being proactive means "as human beings, we are responsible for our own lives."

- "Our behaviour is a function of our decisions, not our conditions. We can subordinate feelings to values. We have the initiative and the responsibility to make things happen."

2. Begin with the end in mind

- "Begin with the end in mind is based on the principle that all things are created twice. There's a mental or first creation, and a physical or second creation to all things."

- "To begin with the end in mind means to start with a clear understanding of your destination. It means to know where you're going so that the steps you take are always in the right direction."

3. Put first things first

- The ability of put first things first is the common denominator of success.

- "If you want to get something done, give it to a busy man."

4. Think win/win

- "Win/Win means that agreements or solutions are mutually beneficial, mutually satisfying" for all parties.

- "Win/Win" is based on the paradigm that there is plenty for everybody, that one person's success is not achieved at the expense or exclusion of the success of others."

- "Win/Win" is a belief in the Third Alternative. It's not your way or my way; it's a better way, a higher way."

5. Seek first to understand, then to be understood

- "Most people do not listen with the intent to understand; they listen with the intent to reply."

- "Diagnose before you prescribe."

- "When you can present your own ideas clearly, specifically, visually, and most important, contextually - in the context of a deep understanding of their paradigms and concerns - you significantly increase the credibility of your ideas."

6. Synergize

- Synergy means that "the whole is greater than the sum of its parts."

- "The essence of synergy is to value differences - to respect them, to build on strengths, to compensate for weaknesses."

7. Sharpen the saw

- Habit 7 is "preserving and enhancing the greatest asset you have - you."

- Habit 7 is "renewing the four dimensions of your nature - physical, spiritual, mental, and social/emotional."

- Sharpen the saw means "exercising all four dimensions of your nature, regularly and consistently in wise and balanced ways."

Related Post: Begin with the end in mind

Disclosure of Executive Compensation

Is it a good idea for companies to disclose their CEO's compensation package?

Many decades ago, the United States' Securities and Exchange Commission (SEC) made it mandatory for companies to disclose what they were paying to their Chief Executive Officer (CEO). This was done in the interest of the shareholders, who collectively, are the silent owners of the company. The SEC rightly contemplated that shareholders have a right to know what the person running their company is earning.

At the time (early in the 20th century) when the disclosure rule was put in place, the CEO's salary was a reasonable few notches higher than the workers who actually "ran" the company and did all the work. At the time, the CEO's remuneration actually made sense. The CEO was a leader who made tough decisions and captained the company in the direction of prosperity. Being the head of the organization, the CEO was understandably paid more than everyone else. A study found that CEO salaries were quite stable prior to the implementation of the disclosure rule.

Fast forward to the 21st century and the CEOs compensation packages have skyrocketed into the stratosphere. The highest paid CEO in 2008 earned over US$700,000,000! In a ploy to mislead the company's shareholders, the CEO's base salary was only US$350,000; the rest of his salary came in the form of bonuses, stock options and other incentives. I have discussed this trick to fool the shareholders here.

Today's CEO's salary is not just a few notches above the workers salary, but at least 1000 times higher than a worker's salary. One explanation for why this has happened has to do with the SEC making it mandatory to disclose CEO compensation. A study on executive compensation found that CEO salaries have been consistently going up since that rule was put in place. The explanation provided is that disclosure made it possible for CEOs to know what CEOs of competitor companies were earning. This lead to competition in salaries, which in turn lead to a rise in salaries.

I think it will probably be a good idea if we, once again, go back to an era where CEO compensation was not disclosed. It will probably ease the pressure on salaries to rise.

What do you think?

Mark-to-Market Rules

In April 2009, the Financial Accounting Standards Board (FASB) eased the mark-to-market (MTM) rules, which required companies to report on their balance sheets all their investments (financial instruments, real estate) valued at the current market price (and not the price at which they were bought, or the price at which the company hopes to sell in the future).

The MTM rules have been blamed for the Credit Crunch that we are in today, and also the bankruptcy of several banks. Banks and investment firms held billions of dollars of CDO (Collateralized Debt Obligation) investments. CDOs are complex derivatives that contain U.S. mortgages and other loan receivables. The firms holding CDOs have had to take significant write-downs on their balance sheets owing to the rising mortgage default rates in the U.S., which affected the CDO's value. The market for CDOs also dried up (i.e. low liquidity) following the collapse of the U.S. housing market, which further negatively affected the prices.

According to the rules, when a company prepares its balance sheet and income statement, if an investment that a company holds has fallen in value, then the (paper) loss in value has to come out of the earnings. Therefore, billions of dollars in write-downs have led to billions of dollars in losses for companies.

Is it fair to force companies to take write-downs on their investments even if they don't intend to sell their investments today? What if the company believes that they might be able to receive a higher price in the future when the market improves? In this case, isn't it logical that they should value their investments at prices they believe they might be able to receive for them? These were exactly the arguments the FASB board took into account when easing the MTM rules.

Did you notice that there haven't been a rash of write-downs since April when the rules were eased? I think the easing of the rules was a band-aid solution to the problem. It might lead to major problems later when companies start to misuse the "power" that they now have to value their investments according to what they "think" they might receive for them when they sell those in the future. Obviously, we should expect companies to overstate the value of their investment to "beef up" their balance sheets. Once everyone starts misusing the power, and FASB decides to do something about it (e.g. reinstate the MTM rules), it will lead to another rash of write-downs - and another bear market.

Also, it will now be difficult to compare balance sheets of two companies because they might value the same investment differently. Earlier, at least we knew that if two companies held the same investment, then those would have the same value on their respective balance sheets - even if the prices were artificially low due to liquidity problems or a bear market.

What do you think? Did FASB make the right decision by easing the MTM rules?