Investment Lesson #3 - Stocks

Stocks are one of the most popular and accessible investment vehicles for individuals as well as institutional investment firms. But what is a stock anyway?

According to Wikipedia:

The stock or capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors. Stock is distinct from the property and the assets of a business which may fluctuate in quantity and value.

Security, gee doesn't that sound safe? It's basically what is invested in a company also known as its market capitalization. You may have heard of stocks referred to as securities or equities. The value isn't just the value of the assets that it owns, it's also what price investors are willing to pay to own a piece of that company.

Back to Wikipedia:

Market capitalization/capitalisation (often market cap) is a measurement of size of a business enterprise (corporation) equal to the share price times the number of shares outstanding of a public company. As owning stock represents ownership of the company, including all its equity, capitalization could represent the public opinion of a company's net worth and is a determining factor in stock valuation.

When you buy the stock of a company you are basically becoming a part owner of that company. Although you might not make day-to-day business decisions, as a stock holder you do vote to accept or reject things like who should be president of the company, who should be on the board of directors, if they should continue to use the same accounting firm and other matters that the board of directors decide to present at a meeting with the stock holders. That's right, you actually get invited to a meeting though most of the stock holders at large publicly traded companies usually vote through a proxy. Some privately owned corporations issue stock but generally when we speak about stocks we're talking about tiny pieces of public companies that are bought and sold through the major stock exchanges via brokerage firms. There are several types of stocks, common stock, non-voting "preferred" stocks that pay dividends like bonds. Then there are some things like ETF's (exchange-traded funds) that are traded in the major stock exchanges which aren't really stocks but they represent groups of companies and then there are mutual funds which we'll get into detail later. It may sound complicated at first, and it gets even more complicated as you get deeper into it. That's why there are so many financial advisers, stock brokers, financial analysts and reporters broadcasting a never-ending stream of spreadsheets, earnings reports, graphs, ticker tape and, well--confusion.

The first point I should cover is why would a company want to go public and invite total strangers to become part owners? The simple answer is, to raise money. Why not just take out a loan? Companies do take out bank loans and issue bonds, which you've learned from our last lesson are loans that investors can buy and trade--but these are debts that must be paid back with interest. Debt reduces the value of a company. Stocks represent the equity of a company and doesn't need to be paid back. If a company is expected to be profitable, investors will tend to bid up the price of the stock. The price of the stock multiplied by the number of outstanding shares equals the company's market capitalization. The company can then sell some more stock which might somewhat dilute the value of those outstanding shares but the money raised does not need to be paid back.

It is to the company's best interest, and to their stockholders, to keep the stock price up. Sometimes companies even buy back their own shares to take them out of circulation and raise the value of the outstanding shares.

There are many factors that go into the value of a company's stock price. Obviously there's the number of outstanding shares, the hard assets owned by the company and the revenue it generates but there's also price to earnings ratio, debt ratio, price history, analysts' expectations, meeting estimated earnings and many other factors. Different industries are also valued in various ways. A hi-tech company developing a cure for cancer may need money for many years of research and testing before it becomes profitable, but if investors believe that the company will succeed, the stock price can go through the roof even while the company is loosing millions of dollars. Of course if the clinical tests fail the stock price will most likely come crashing down.

I should emphasis that I had no role model when it came to investing. In fact my father was very much opposed to investing in stocks and referred to it as legalized gambling. He blamed Wall Street for the economic recession that resulted in his becoming unemployed in the 1970's (see Recession of 1969-70) and he never invested in stocks. Neither did my mother, though she wanted to start a business, invest in real estate and do other things with the money she put away in the family savings account.

If there was only some reliable source of information that could guide me through this treacherous but potentially highly profitable stock market. In fact there was, or at least at the time I thought I found the sage who would make sense of the stock market. I was still in high school when Wall $treet Week with Louis Rukeyser first aired on the local public television station (PBS) but I tuned in every Friday evening whenever possible to listen to Louis Rukeyser explain complex investment strategies in simple to understand terms, quiz his panel of investment experts on the future direction of the market and find out what stocks his special guest was buying.

Years later when I still had my photography studio and was getting myself out of debt I decided to start investing in the stock market. I had a list of stocks which I thought might make good investments, not too risky with fair growth potential, and called up the local Merrill Lynch office, got in touch with a stock broker and set up an appointment. When I got to the office I was in awe, it seemed that I stepped right into a major stock exchange though it was just up the street from my studio which was at that time in Orange County, California. We discussed various stocks on my list and the broker suggested I buy shares in Weyerhaeuser. I was familiar with the name because I've seen it stamped on lumber, reams of paper and even my parents mortgage was through Weyerhaeuser's financial division. I bought 30 shares and became an investor. The broker was telling me strategies like buying more on the dips and selling if it outruns its 200 day moving average then buying back as it dips below the moving average but the stock didn't move very much. In fact, it was a very boring stock and underperformed the construction sector as well as the overall stock market. Obviously the broker recommended the wrong stock for me. I waited until it rose in price, just a bit, and sold out my position. Even though I sold at a higher price I didn't really make a profit because I had to pay the broker's commission. If I would have bought and sold several times like the broker suggested, I probably wouldn't have made more money but the broker would have received his commission every time I traded. This is known as "churning" and is illegal if overdone. In any case, I didn't loose my shirt and it was a good experience seeing how it all worked.

I still had an appetite for investing so I hit the books. That's when I found out about mutual funds. Oh sure, I knew something about mutual funds because many of the experts on Wall $treet Week were mutual fund managers but because it was a PBS series they were not allowed to advertise their funds on the air. Mutual funds are basically investment vehicles where a group of people pool their money and allow a manager to invest it for them. Sure, rich people have investment managers but they charge quite a lot for their services and have minimum investments of hundreds of thousands of dollars. Some mutual funds have minimum opening investments of just a few hundred dollars--some even waive the minimum if you sign up for an automatic monthly investment plan of as little as $20 per month. At least that's what it was when I was getting started. Some of these mutual funds were getting fantastic returns, far above the market averages and the mutual fund companies were hiring the best money managers and paying them a king's ransom. The Magellan Fund had returns averaging 20% when I looked into it and advanced as much as 116% in a single year! Alas, the minimum investment was far beyond what I could afford but I did find 20th Century (now American Century Investments), Strong Funds (now either out of business or absorbed by another company) and finally Fidelity Investments--the company behind the Magellan Fund.

At this point I wasn't completely out of debt and if there one thing I learned from all that reading was to pay off creditors before investing. Then an interesting event happened, Black Monday -- the stock market crash of 1987. Stock market crashes have happened many times in history. Perhaps the most famous was the crash that triggered the Great Depression in the 1930's, aka Black Tuesday, but similar events have happened long before, for example the panic of 1901 and tulipmania in the 1600's. It seemed like everyone was panicking in 1987, everyone except Louis Rukeyser. What did he know? Were his personal investments impervious to the crash? What he knew was that a crash was a perfectly normal event in the crazy world of stock market investment and it should be seen as a buying opportunity. In fact there is a style called "contrarian investing" where you basically try to do opposite of what the majority of investors are doing.

Once out of debt and into investing through mutual funds a few interesting changes occurred with me. First of all, it was much easier to save because I didn't have as many bills to pay. I also found that instead of buying the latest and greatest photography equipment or getting a new car, I was more interested in building up my investment portfolio. I did almost buy a house around this time but we'll get into that story in the real estate lesson. I set a goal of building my investment portfolio to $500,000, move to a quiet town and retire as early as possible--certainly no later than 55 years old. This was a time when my father was very ill and eventually died of liver cancer. Working, making lots of money and collecting material possessions didn't seem very important to me anymore.

My mom was getting interested in what I was doing and asked if I could help her out with some money she had set aside. Reviewing her finances, one of the first things I recommended was to pay off her mortgage. Even though there was only a few years left to pay off the house I was able to save her several thousand dollars in interest. We opened up a joint account at Fidelity Investments and deposited $20,000. I was much more conservative with her money and found out that her account would often outperform my own more aggressively invested portfolio.

It was around this time that I started working in the motion picture industry. I liked photography, but I didn't enjoy paying bills, going on appointments, collecting what was due to me, much of my profit would have to go back into the business in order to grow and things like health insurance for a self employed single guy was getting very expensive. Working a union job I got free health care, retirement benefits, a decent salary, had few expenses and it was fun, or at least it was a change from what I was doing the past 10 years as a still photographer.

I continued to read investment books. I found out that when the news reported on "The Dow" it was only a group of 30 companies picked by the company that owns the Wall Street Journal. There are other indexes that are useful for reporting stock market averages like the Standard and Poor's 500 (here's a link directly to Standard and Poor's), the Russell 3000 and the Wilshire 5000. All of these indexes give the "big picture" of how the overall market is performing. But who wants to be "average" right? I was looking for ways of doing better than the market averages.

One method involved investing in only no-load mutual funds offered by Fidelity Investments. The idea behind this is that there are far too many mutual funds to try and follow, about 9,000 in total, so by picking just one company and narrowing it down to only the funds without up-front fees or commissions, known as loads, you would be choosing from some of the best quality funds. There were still too many funds but by subscribing to a newsletter called Fidelity Monitor, you could get recommendations depending on your investment goal and model portfolios showing how well the picks performed.

Another method involved investing only in one Fidelity sector fund at a time. The way this works is that not all market sectors move in the same direction at the same time so if you can identify which sector is moving up the fastest, jump on that and ride it until another sector performs better. Investing in a sector fund was supposedly safer and easier than picking individual stocks and there were several indexes that could be used to verify movement in the various market sectors. I subscribed to a mutual fund newsletter called the All Star Fund Trader. because their single sector fund history included several years of outstanding performance, over 40% in some years, while managing to avoid the worst market downturns by switching into a money market fund.

Mutual fund investment newsletters are plentiful, all promising fantastic returns. There's even a company that rates the newsletters, Lipper. However, subscribing to these newsletters can get expensive. I was paying about $400 per year for just two newsletters. Somehow I wasn't getting the same returns they were reporting. Maybe I wasn't switching funds at exactly the right time? Maybe they had more money and thus lower fees in their accounts? As it turns out, most newsletters overstate their returns.

I was doing fine with mutual funds and was satisfied with the strategies and returns I was getting until the early 90's when I signed up for America Online and got access to a whole new world of real-time investment advice. One of the most popular forums at AOL became The Motley Fool which was started by a couple of brothers, David and Tom Gardner, just out of college. They wrote articles which turned into books about investing using an entertaining writing style. They suggested beginning investors start with an index mutual fund that tracks the Standard and Poor's 500 stock index. However, they also wrote about why small-time individual investors have an advantage over large institutional investors when it comes to picking individual stocks. Things have changed since I bought those few shares of Weyerhaeuser as discount brokerage firms started becoming more popular. You no longer had to deal with a stock broker, trading stocks could now be done online. I followed the Gardner brothers portfolios online and they outperformed everything I have ever seen before. I was interested in improving my returns so I started selling my mutual funds and buying individual stocks.

This was also around the time I met Rosie, got married and bought a condominium. We'll get into more details about our first home in the real estate lesson but let's just say that I was able to put a down payment of 20% and still had plenty of investment money left over to continue playing the market. I kept reading and taking on more risk, it seemed so easy to make money. I didn't know it at the time but I was riding one of the longest running bull markets in history.

As you've learned from the previous lessons, I don't like to borrow money. However, there are some situations where taking out a loan makes sense. One of them is to leverage an investment. My Fidelity brokerage account qualified for margin trading. What this meant was that I could buy more stocks than I had money in my cash reserves. The way it works is that I basically take out a loan using the stocks that I own as collateral. Fidelity would charge interest on the margin positions but the rate was low compared to other kinds of loans because it was secured by the value of my investment portfolio. I could pay off the loan by depositing more cash or selling some stock. Buying more stock than I could afford has it's risks. If the value of my portfolio falls below the outstanding margin balance I could get a margin call and some people have been wiped out financially when the stock price fell so rapidly that they couldn't sell the stock fast enough to cover the margin call. I used margin sparingly back then but don't use it at all these days.

There is another form of borrowing that I learned from reading The Motley Fool, but never used. If you believe that the price of a stock is going to fall, you can actually profit from it. The technique is called short selling or shorting a stock. The way it works is that you borrow some shares of the stock you want to short from the brokerage firm, sell it, wait for the price to fall, buy it back when it hits your target price and then return the stock to the brokerage firm. You get charged interest for the value of the shares you borrow so it is very much like taking out a loan. Some people have make fortunes on other people's misfortunes but short selling involves quite a bit of risk. The possible gains are limited (the price can only go to zero) but there are no limits to the possible losses you can incur if the stock price goes up.

By the late 1990's I amassed a sizable portfolio for Rosie and me as well as for my mom. I was also working on a job that required lots of overtime so I was earning a rather large salary but didn't have the time to enjoy it. We did have cable service at work and we had the financial news running in the background. It was impossible to ignore what was going on with the technology sector of the market. Anything associated with computers, networks or had a dot-com in the company name was skyrocketing in price. I started trading companies like Yahoo, Amazon.com, AOL, Microsoft, Apple and lots of lesser known start ups that have gone extinct since the Dot-com bubble. Of course I didn't know we were in a bubble and I was getting into dangerous territory but I was making lots of money. I didn't feel comfortable, one day I'd make a 20% profit on a trade and the next day I'd loose 40%, I still owed a hefty mortgage on the house, I was burning out at work. Keeping up the portfolio was taking up more of my time. I would get up before the stock market would open to place my orders and would use tactics like stop loss and limit orders to keep any losses to a minimum. These were the days when everyday people were getting into day trading and even though some of my orders would trigger buy and sell commands on the same day, I didn't want to get into what was looking more and more like gambling.

I decided to sell out most of my non-retirement positions and pay off the mortgage. I was a great feeling for Rosie and me not to owe on the house. Some of my friends thought I was crazy to do this, they were taking out home equity loans in order to buy more stocks. For about a year it looked like I made the wrong choice, the market kept climbing. I did continue trading in our retirement accounts and there was my mom's portfolio that I was still managing but I wasn't trading at a maniacal pace.

I also started investing in ETF's which are sort of like index mutual funds but they can be traded like stocks. The advantages they had over mutual funds included being able to set buy and sell order automatic triggers. The disadvantages included not being able to setup automatic reinvestment of dividends (some companies pay stockholders dividends on the profits) and having to pay the bid and asked for spread which is something that brokerage firms would rather you not find out about because it adds to their profit and isn't as up front as the discounted commission fees given to online traders.

At this point I also started investing in an index mutual fund. I read about John Bogle and his market theories. To quote: "Mutual Funds can make no claims to superiority over the Market Averages." In fact the majority of mutual funds under perform the market averages and in addition are tax inefficient because they tend to trade often and the mutual fund investors are taxed for any distribution even though they don't usually receive the pay out. I opened an account in his Vanguard S&P 500 Index Fund and set up an automatic investment plan starting at something like $200 per month. We never noticed the money going out every month and every year I increased it a little more.

When the dot-com bubble did finally burst I was in the process of buying our current home so I was almost completely out of the stock market and since my mom was moving in with us, her account was mostly in cash. Well, so I'd like to say, our retirement accounts were still heavily invested in stocks and I saw the value of our retirement portfolio tumble. At one point my retirement account was worth about half of what it was when the market peaked. Remembering my lessons from Louis Rukeyser and the Motley Fools, I didn't panic, I saw it as an opportunity to get back into the market so I started building back our investment portfolio.

Most of my new investments in our Fidelity account were either ETF's or stocks of companies I knew quite well. When I started working at DreamWorks Animation the company gave every employee 100 shares of stock when it first went public. I thought that was a good gesture so I bought another 100 shares in their employee plan. However, I always liked Pixar movies better so I also bought Pixar stock too. As it turned out Pixar far outperformed DreamWorks Animation until Disney bought Pixar in 2006.

Now I must admit that every once in a while I'd take a very small portion of my portfolio and invest in something outrageous. Once we were discussing electric cars at work and I discovered a company called ZAP, for zero air pollution, that imported electric cars, scooters and bicycles. I found out that their stock was trading very cheap because a deal they were trying to make to import Smart cars fell through. I did some research and found that many investors were shorting the stock and it was down to about $0.30 per share. I bought 1,000 shares for about $300. As it turned out the company announced plans to import cars from China, the stock started to climb, I bought another 1,000 at $0.50 per share and then something amazing happened, the stock was caught in a short squeeze. One day I looked at my account balance and found that the stock shot up to over $1 a share. I sold enough to cover my initial investment so whatever happened next would be pure profit. It went as far as $3 per share then started heading back down. I've heard of 10 baggers but this was the first time I experienced it.

This lesson on stocks came out much longer than I anticipated. Of course there's much more that I could have included. Here are a few more tidbits just to make the lesson more complete.

Warren Buffet - Berkshire Hathaway.

Warren Buffet is one of the wealthiest men in the world. He is the chief executive officer (CEO) and primary shareholder of Berkshire Hathaway, Inc. He made his fortune by investing in companies. There are many books about him, his investment style and his philosophy but what I found interesting was that you could hitch a ride on his current investment strategies simply by buying shares of his company. The original (A shares) Berkshire Hathaway stock never split, as I write this one share of Berkshire Hathaway will cost you $120,600. There's also a second offering (B shares) that does split and is much more affordable for the average investor. I owned some of these B shares for a while. During the time I owned them, the stock underperformed. Sure, Warren Buffet was one of those people who made some very good decisions early in his career and was able to maintain an average investment return of about 20% for many years, but eventually his investment portfolio became so big that now it is difficult for him to outperform the market averages. In fact many people would probably agree that his investment portfolio affects the overall market.

More foolishness.

What about the Motley Fools? They are still around but the outstanding returns they were reporting in the mid-nineties aren't looking so impressive these days. Much of their early successes had to do with them including America Online in their portfolio which at the time was one of the best performing stocks. As far as I know the main reason they bought share of AOL was because they started as an AOL forum and included the stock out of courtesy to their sponsor. Their other stock picks did go up, but lagged way behind AOL. They wrote several books about stock investing including one for more conservative investors called "The Foolish Four." The idea behind this was based on an older strategy called Beating the Dow or Dogs of the Dow. Basically, you buy the worst performing stocks from the 30 companies in the Dow Jones Industrial Average. The idea being that these are the best managed companies in the world and their excellent management team would do everything possible to keep up with the other companies on the index or Dow Jones will drop them from the list. How well has it worked? Below average and they stopped recommending that strategy. After the dot-com bubble burst the Motley Fool lost 80% of their staff and they nearly went out of business. If you look at their current portfolios you'll see that they can't consistently outperform the market averages.

We still haven't recovered from the dot-com crash.

Most of the hi-tech companies that fueled the dot-com craziness of the late-nineties were listed on the NASDAQ. An index which includes all of the companies in that stock exchange, called the NASDAQ Composite Index, reached an all time high of 5,132.52 on March 10, 2000. Today, over 10 years later, the index stands at 2,288.47, less than half its peak value. The overall market has done much better. For example, the Dow Jones Industrial Average which was at 10,367.78 on March 10, 2000 is now at 10,653.56.

Note: Just to clear up any possible confusion, you can't directly compare one company's stock price to another company's stock price and you can't compare stock indexes to each other by their "points." These are relative values and it is like comparing the currencies of different countries.

Don't try to time the market.

You've probably heard the old rule, "Buy Low and Sell High." When applied to stock trading this is known at "Market Timing." Basically, you buy when the market drops and stock prices are relatively cheap and sell when the market peaks and stock prices are expensive. The problem is, how high and low will the market go? Jumping in and out of stocks often causes what's known as a "Whipsaw Effect." The way this happens is that your buy order is executed then shortly thereafter the stock drops enough to trigger your stop-loss order. Forecasting market direction is difficult though in hindsight it seems easy to figure out when you should have bought and sold. I tried to time the market and have failed to do any better than average. That said, though I don't really believe in luck, I guess I've been lucky--that's a paradox, isn't it? I cashed out of my non-retirement stock investments in the late 1990's in order to pay off the mortgage, just about a year before the dot-com bubble burst. I also made a major change in our investment portfolio in early 2008 in order to reduce risk and simplify. By putting about half our money in a bond mutual fund I kept our losses from being much worse during the housing bubble crash that caused a very serious economic recession. Had I tried to time these events I most likely would have missed them.

Dollar cost averaging vs. a systematic investment plan

I didn't really explain Dollar Cost Averaging properly. The way it works is if you have money saved up and ready to invest but instead of investing all of it at once in one lump sum you make small periodic investments until it is all invested. This works when your investment period includes a market dip but basically dollar cost averaging is a form of market timing and it generally doesn't work any better than lump sum investing. In fact if you're investing during a bull market dollar cost averaging does much worse.

However, a systematic investment plan does work--Finally, you're probably thinking, something that works! In this case you're also making periodic investments but you never had a lump sum in the first place. If you invest the same amount every period which is usually monthly but it could be weekly, quarterly or yearly, you're buying more when prices are low and less when prices are high. In the long run this investment strategy works very well. Of course systematically saving is the first step in building wealth and the more you can put aside, the faster your savings will grow. The more money you have saved, the more you can invest--just don't invest it all, remember to always have a cash reserve just in case.

Looks like I ended up on my soapbox lecturing about savings once again so I'll end with another famous quote, this time by cowboy philosopher Will Rogers:

• "If you got a dollar, soak it away, put it in a savings bank, bury it, do anything but spend it. Spending when we didn't have it put us where we are today. Saving when we've got it will get us back to where we was before we went cuckoo."

--Will Rogers, Nov. 24, 1930

Investment Lesson #2 - Debt Securities

In the first lesson I made it a point to emphasize that debt is bad -- in fact debt is slavery. Now I'm going to turn it all around and tell you that it's good to be on the other side of a debt. In other words, if you owe money, that's bad but if money is owed to you, that's good.

Of course it isn't that simple. There are situations where borrowing money makes sense. Businesses borrow money all the time, so do governments and banks. It would be very difficult to buy a home without taking out a mortgage. There are even situations where you can leverage your investments by using a form of borrowing called margin--but we'll get into that later.

My mom wanted to teach us about saving so she took us to the local savings and loan. I was earning interest on the money I had on deposit there because someone else was borrowing that money and paying interest on it. Basically, that's how banks work. I was aware that the bank was lending out my money at a higher interest rate than they were paying me, but it would have been very difficult for me to find who was borrowing my money so I could deal with them directly. In addition, all the depositors' money was pooled together so it was impossible to determine who's money was going to which borrower.

What would happen, I thought, if a majority of the depositors decided to withdraw their money at the same time? That actually happens, it's called a run on the bank. People are afraid that the bank would make bad loans, fail and they would loose their money. It happened a lot during the Great Depression in the 1930's so the U.S. government created the Federal Deposit Insurance Corporation (FDIC) which protected depositors. When I opened my savings account, it was insured up to a limit of $15,000. Wow, I thought I'd never reach that. Today the FDIC limit is $250,000 per depositor. Federally insured savings accounts are one of the safest investments you can make, they also pay the lowest interest rates.

Up until this point we've been covering savings, though I sometimes refer to a savings account as an investment. There's a fuzzy line between savings and investing. Some people might define savings as money hidden under the mattress, others say that short term investments like 3-month treasury bills and money market mutual funds are savings, not an investment. Still others define all government issues as savings. It doesn't really matter where you draw the line. As far as I'm concerned when you are accumulating money, you are saving. When you put that money to work for you, you're investing.

Collecting interest on a savings account might sound very basic, but is it really? I didn't withdraw the interest that the bank was paying me, it went right back into my account so that the interest would compound. In other words, the bank started paying me interest on the interest that they already paid me. Over the short term it doesn't seem like much, but over a long period of time it can really add up.

• "Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it."

--Albert Einstein

There is dispute whether this is an actual quote by Albert Einstein, it probably isn't--but it's a good quote nonetheless. Einstein was also credited for discovering a simple mathematical formula for compound interest called the Rule of 72 but the formula has been found in the writings of Italian mathematician Luca Pacioli dating back to 1494. The way you use the rule of 72 is like this: 72/(interest rate) = (years required for the investment to double). My passbook savings account was earning 5.5% so using this formula, 72/5.5=13 years to double. If you can find an investment that returns 12% it would take just 6 years to double. I've made trades that doubled in just a few days, but those are very rare. Why is finding the doubling rate important? Exponential growth. You might have heard of the Wheat and Chessboard fable. Basically, if you put one grain of wheat (or rice or sand or whatever) on one square of a chessboard then 2 on the next, 4 on the next and keep doubling it for each square, how many grains would you have when you finished all 64 squares? The answer is such a huge number that it is greater than the amount of all the grain that was harvested in the history of humanity and the pile would be bigger than Mount Everest. That's the power of compound interest.

The rule of 72 breaks down in the real world of investing as does exponential growth. Still, the greater the return and the longer the time, the more likely you'll be able to accumulate a large sum.

Investing in debt securities may seem very simple and safe at first and once you know about the power of compounding interest and exponential growth--heck it's a no-brainer. Just find the investment that gives you the highest interest rate for the longest time and that's it, right? Wrong! First of all, a bond (a long term debt) that pays the highest interest rate relative to other debt securities is usually referred to as a junk bond. What it means is that the interest rate on a junk bond is high because there is a good chance that the entity that issued that bond will likely default on the payment. In addition, interest is taxable as regular income so depending on your tax bracket the amount you will be able to keep from your interest income is a fraction of the actual interest rate. Another thing to consider is that if you want to sell a debt security that you own before its maturity date, it may be worth more or less than face value due to fluctuations in the prevailing interest rates.

My experience with debt securities began when I opened my first Individual Retirement Account, IRA. I was just turning 30 and realizing that I've got to start doing something about retirement. Interest earned in an IRA are sheltered from taxes until you start withdrawing at retirement. I figured that I should play it safe so I invested in short-term debt securities issued by the U.S. government. The simplest way to invest in these treasury notes, bills and bonds (they have different names depending on the length of maturity) was through a mutual fund. An advantage of investing through a mutual fund was that instead of investing the entire $2,000 IRA limit at one time I could invest $166.67 per month--that made it much easier for me to get started. I kept close watch on my IRA and saw it gradually go up in value, never going down. I was definitely playing it safe, too safe. As it turned out, the mutual fund was a "tax advantaged" account meaning that a portion of the interest was exempt of state and local taxes--but the IRA was already exempt from all income taxes so it didn't make sense using this investment in an IRA. If I had invested instead in a taxable bond fund I would have gotten a better return. I eventually changed my investment strategy for my IRA from bonds to stocks but a couple of years ago I went back into bonds for my IRA. Why? Because bonds are a valuable mix in a total investment portfolio and the interest is sheltered from taxes in the retirement account.

One of the biggest risks to debt securities, even a greater possibility than default, is interest rate fluctuation. I read about it and thought I understood it but it didn't sink in until I experienced it. Once my father died my mom started relying on me to help her with her finances. She had some money that she put into a mutual fund in that same savings and loan where I had my first savings account. She wanted something that paid a better than average interest rate but preferred it to be non-taxable, she hated to see her earnings get eaten up by taxes. The manager at the savings and loan suggested a tax-free mutual fund for her. Tax-free mutual funds invest in bonds issued by local and state governments (municipal bonds) for community projects like building bridges, dams and schools. Since it is an investment in the community these municipal bonds are either not taxed at all or are taxed only by state but not federal or federal and not state. Many municipal bonds have very long maturity dates and very low interest rates. My mom was happy getting her meager tax-free interest but what she didn't realize was that her principal, her original investment, was dropping in value faster than the interest that was coming in. The way it works is like this--let's say you buy a $1,000 bond that earns 5% interest and you decide to sell it before the maturity date. At the time you put the bond back on the market the interest rates have gone up to 10%. In order to get that 10% the bond will sell for less than face value. It depends how many years to maturity, dividend date and other factors but basically, your bond has lost value. Of course the reverse is true if interest rates drop. If you intend to hold onto the bond until maturity, it shouldn't really matter to you if the value goes up or down, you will still get the same interest (coupon rate) but since a mutual fund has to report the value of it's portfolio they have to report the current market value. In addition, a mutual fund may need to sell or trade bonds before maturity to meet customer redemption demands. In my mom's case, interest rates were rising and her mutual fund lost value. She had no idea until I pointed it out on her statements. I also discovered that the fund she was invested in had very high fees and were commission based, also known as load funds, so the drop in value was even more severe.

There are a wide variety of bonds, some have interest rates that change during the life of the bond (like the Treasury Inflation-Protected Securities - TIPS) some bonds are callable, meaning that the issuer can pay them off before the maturity date, some don't pay interest at all but are sold at a discount to their face value like series EE Savings Bonds. There are also many rules how they are taxed and reported. I got to play the rich uncle when I sent my nephews Kevin and Brian $100 Savings Bonds for Christmas that only cost me $50--and since it was a gift to a minor nobody had to report taxes on them. There's lots to bonds, the way they are reported in basis points (0.01% = 1 basis point), the way they are listed, some can be converted for company stock, etc. It can get very complicated and as a result bonds are neglected in many portfolios--I didn't invest for bonds for several years.

What I do these days is to put a portion of my investment in a mutual fund that invests in a large number of bonds in order to match an index of the total bond market. I'll get into this more in another lesson on asset allocation.

In the next lesson we'll finally get into stocks--something that I'm sure you'll find much more exciting. However, some people that know the stock market much better than I do put all of their money in bonds. Joe Dominguez, the author of "Your Money Or Your Life" worked in a Wall Street firm but put all of his own money into 30 year treasury bonds. He retired when he was 31 years old. Of course back then the "Long Bonds" as they are known were paying over 13% interest. I'd gladly put all of my money in 30-year treasuries with that sort of return. Today they pay a measly 3.73%. Of course interest rates are at historically low levels, but what happens to today's bonds if, or rather when, interest rates rise?

Next lesson--the stock market.

Investment Lesson #1 - Before you invest you should save.

There's lots of ways to invest and it can be a very complicated subject or it can be very simple. I have dabbled in stocks, bonds, real estate so I'll tell you about my experience in these areas. Let's start with the first lesson and how I learned it.

Lesson #1 - Before you invest you should save.

When I was about 10 years old my mom took me to the local savings and loan and opened a passbook savings account for me and my sister. After depositing a few dollars that I earned mowing lawns I received a little booklet that listed my account balance. Once a month I would go deposit a few more dollars and get my passbook updated with the amount of interest I earned. It may seem a little outdated these days but savings accounts are still around. Of course my motivation for saving back then was to buy something that I wanted. What was interesting was that once I saved enough money to buy that something, I didn't really want it as badly any more. I also found out that if I took money out of my account, the interest that I would earn would go down. I can still remember the interest rate that I got on my first savings account, 5.5%. I also remember that when I would walk into the savings and loan they would have advertisements for their other services. I learned that once I had enough in my savings account I could earn a higher interest rate in a different type of account called a certificate of deposit (CD). There was a catch though, I couldn't withdraw my money for a period of time called a maturity date. The longer the maturity date, the more interest they would pay me. I bought a 6-month CD and earned a whopping 7%. It seemed like a very long time back then, but every month I'd go to get the interest stamped into my booklet and watched it grow. Of course I didn't save all of my money, I also bought stuff--paint for my bicycle, a tennis racket, model rockets, you know--stuff. The stuff that I bought became more and more expensive as I earned more money, cameras, stereos, even cars, but I kept my savings account, though at times the balance went down to just a few dollars.

Of course I eventually opened up a checking account and once I was in college I got my very first credit card--an American Express Card. It may seem like an unlikely card to start with, but they were running a promotion for college students that can prove they had a guaranteed job upon graduation. I had an uncle who ran a TV repair shop in Mar Vista and he helped me with the job guarantee, though I never went to work for him. Once I got that card, other credit cards were easy. In a few months I had at least two Visa and two Mastercards, a Shell gas card, a JC Penny's card a Sears card and probably a few more I forgot about.

Now I want to make sure you understand the time line here. This was after I was in the Navy (1975-77) and before I started Art Center College(1981). You see, I didn't have enough money saved up to go to Art Center (the college of my choice) so I went to Cal State Long Beach for a couple of years and got a degree in journalism. As a Vietnam era veteran I was paid to go to college. It didn't matter which college or how much the tuition, I got paid the same. So instead of getting a job I went to an inexpensive, state funded college. It was with my government subsidy income that I was able to qualify for all this credit. I was also able to save up enough money to go to Art Center for one semester. With my good grades and credit rating I qualified for student loans.

I did graduate, a BFA in photography, with distinction no less, but only because I was awarded a scholarship and got a couple of those student loans. For the first time in my life--I went into debt. It wasn't terrible, I had several months after graduation before I had to start paying back the loans, the interest rate was a very low 3% and they gave me a 10 year payment plan so the monthly payments were doable. So--I went off to New York City to apprentice with some of the best photographers in the world. I made very little money and paid a lot in rent. I had to watch every penny. I mean that quite literally, I got some accounting ledgers and kept track of all my income and expenses, including a few coins I found on the street. It was very tough in the city and I was barely scraping by but I was determined not to give up. I started getting my first "real" photography assignments in New York about 6 months after I arrived. I had several magazine assignments, including my first cover. My assistant days were over sooner than I could imagine. However, magazine publishers and advertising agencies tend to be a bit slow in paying. They expect you to cover the expenses of the assignment until their client pays them or when the accounting department decides to pay your invoice, 30 to 90 days later--or more. Those credit cards sure came in handy and I went further into debt. My plans were to learn from the best in New York then return to Southern California where the weather was much more to my liking so I started looking for assignments out West. I got offers to shoot corporate annual reports--good money, good work, so I packed up and bought a ticket home, paying with my credit card. I kept busy and in a few months I rented a studio space and bought a brand new mini van, financed of course and I even had a line of credit at the bank and open accounts at the local pro photography stores. I was still in my 20's with my career well on the way--but why did I feel poor? Debt.

There's an old mining song where the chorus line goes like this:

You load sixteen tons, what do you get
Another day older and deeper in debt
Saint Peter don't you call me 'cause I can't go
I owe my soul to the company store

The way mines used to operate was that the workers were allowed to bring their families to live in the shacks near the mining site and instead of being paid with money they were paid with credit vouchers which could redeem at the company store. Everything they needed, well at least their basic survival necessities, were available at the company store. If they needed more than they had earned vouchers, the owners would give them credit which they could pay off by working. Eventually, the miners got so far into debt that they couldn't leave to work somewhere else. This was known as "Debt Bondage" and it was essentially a form of slavery. The practice continued until the United Mine Workers and other unions put an end to it.

Think about it, the practice of Debt Bondage is illegal yet people continue to get themselves into debt all the time. They are working to pay interest to the bank, credit union, mortgage company, loan shark, etc. There are basically two ways out of debt, bankruptcy or death. Okay, there is another option, pay off the debt--that's what I decided to do.

I moved back home with my parents. It wasn't too bad, I basically just slept there. I was also getting along much better with my parents in my 30's than I was when I was in my early 20's. I did the math and found out that if I got out of my studio and only took the location jobs I would take in less money but would cut my overhead costs dramatically so when my lease was up, I moved out of the studio. First of all I paid off my high interest debt, the credit cards. From then on, I always paid off their balances in full. I also paid off the loan on my van, early. I even paid off my student loan way ahead of the 10 year payment plan. I was going to buy a house and almost closed a deal on one but it fell through at the last minute--so, I continued living at home instead of renting an apartment.

Things were going okay for me. Though I wasn't rich yet, my savings were growing. I had just enough work to keep me busy enough. On the weekends I would go sailing. And my relationships with girls were starting to get more serious. Then I got the worst news ever--my father had cancer and only a few months left to live.

I tried taking him to different doctors, maybe there was something someone could do, but there was nothing. The only thing I could do was to spend as much time with him as possible--and get to know him better. Some of our conversations were barely coherent. He told me to eat lots of meat because cattle were big, powerful animals. Mind you the doctor advised my father to cut back on red meat when he had a heart attack 20 years earlier--he really missed his steaks. My dad wasn't religious but he did get interested in eastern philosophy in his later years. Zen and Buddhists believe in reincarnation so I was surprised when he told me to, "find what you really want to do with your life and do it--you only live once." I hadn't worked or earned any money in months but because I had no debt and enough savings I was able to spend that precious time with my dad. I was right next to him when he died.

I made a few decisions at this point. I always wanted to work in the motion picture industry but was talked out of it so I settled on my second choice, photography. Though I liked photography, I didn't like running the business. I decided to find a good paying position making movies. I also decided that I didn't want to work until mandatory retirement age, do a couple of trips and drop dead--like my father. I was going to get healthy and leave the rat race early. In order to do this I had to start getting serious about saving as much money as possible. I wasn't too concerned about finding the right person, getting married or having kids. My friends who got married early and had kids were either miserable, divorced or both--and they were all in debt.

I'll spare you the story of how I got into the movie industry but it was during that first year working in film that I got really serious about building up my savings and to start investing. I did have an Individual Retirement Account that I started when I had the studio and was starting to take care of some of my mom's money--I always seemed to do better managing her money than my own, probably because I didn't take as much risk with her investments. I was also getting a fairly substantial salary and had almost no expenses. I was still living at home with my mom on the weekends and staying with my brother during the week. He didn't have much room so I slept in a sleeping bag in his living room for an entire year. When I finally got an apartment my requirements were to be in a nice neighborhood, I choose Beverly Hills, and the rent had to be so low that I could pay for it even if I was on unemployment, I found a place in Beverly Hills for $500 per month, my unemployment benefits were about $1,000 per month back then. However, I never went on unemployment while I had that place.

You might have heard of "rules" like save 10% of your income. I'd say that would be good but it isn't really a rule, just a suggestion. What really helps is to have a reason to save and to set a realistic goal. My reason to save was to have the freedom to go where I pleased, when I want, having the option of taking a job or not working, in other words--to be financially independent. I wanted to reach that point as soon as possible, certainly no latter than 55 years old so I could have several years of leisurely living. I also had a dollar amount in mind, $500,000. I figured with that I could live a nice quiet, simple yet secure life as a bachelor. You could call it early retirement. I'd rather call it an alternate lifestyle because for me retirement brings up images of old people sitting in rocking chairs waiting for the Grim Reaper to arrive.

I didn't remain a bachelor, I got married. Matrimony, well that's a whole different lesson. Let's just say that I was very fortunate to meet someone who shares my dreams.

So to wrap up this first lesson:

1. Live below your means - Spend less than you earn, the difference between your income and expenses is called savings.
2. Stay out of debt - Debt is Slavery!
3. Make attainable goals - It is much easier to save if you have a plan. Make sure your goals are reachable, don't set them too high but definitely don't make them too easy!
4. Avoid compulsive buying - Stop and think before purchasing anything. Is that item really necessary? Is it really going to make you happier? Are you willing to push back your financial goals to make that purchase?
5. Don't spend windfalls, save it - A windfall is when you come upon money that you weren't really planning to get. I could be an inheritance, winning a law suit selling some property or taking the prize in the lottery. There are plenty of stories of lottery winners going bankrupt.

I got rid of lots of books when we downsized to fit in the back house, but there were a couple of books that I saved. I read them a few times and passed them on to one of my nephews.

Your Money Or Your Life - by Joe Dominguez and Vicki Robin

Debt is Slavery: and 9 Other Things I Wish My Dad Had Taught Me About Money - by Michael Mihalik

So start saving. In the next lesson we'll get started on investing.

My Very Quiet Year - and 1/2

It has been one and one-half years since I last blogged. Yeah, that's quite some time off. I guess it is about time for an excuse and an update.

Well, I guess I just didn't have a compelling reason to post anything. This blog evolved from a racewalking training diary to a way to keep in touch with my nephews to saving some interesting notes and articles for future reference to sort of a pointless collection of wandering musings. Note that my last post was about downsizing to one car and a scooter, but there was a lot more going on at that time that I didn't write about. Why? Maybe I was a bit afraid--afraid that what I was doing would be a complete failure or perhaps I might be doing something wrong and a government agency would use my post as proof of illicit activity.

Enough with the fear, it seems that there is way too much of it going around these days. As for what wrong I might be doing--I'm having so much fun that it probably isn't legal. We did a few upgrades to the studio that the previous owner built over the garage and converted it into a very cozy guest house. Then we moved into the guest house and rented out our main house. Now for the best part, when I finished up the show I was working on at DreamWorks Animation, my wife Rosie and I took a trip to Greece and toured around some of the islands. When we got back I enrolled at Los Angeles City College and signed up for drawing and guitar class. I went back to work between semesters, but just long enough to keep my union hours updated so that we wouldn't lose our health insurance benefits. Oh, and we also took a trip to New Mexico to deliver a car to a friend who was working out there and another trip to Spain for a friend's wedding.

All this traveling around has changed my perspective on the world, or more specifically on how we live in the United States of America. We downsized and rented out our house so we could work less and have more time for ourselves. In other words, we wanted to check out of the rat race. Not surprisingly, people in the US tend to work more and travel less than Europeans. I think that a part of that is the fear that the government has instilled on its population, of course there are terrorists going after Americans--just look at the government's foreign policy. In addition, we have higher medical costs than most countries. In fact one of the main causes of bankruptcy in the US is caused by medical bills. The one thing that is keeping us in the workforce is the fear of losing our health insurance. If we need to buy the coverage that we're getting from the Motion Picture Industry Pension & Health Plan we'd need to find a part-time job. However, there are no part-time jobs in our professions, there are only jobs with long days. No wonder one of my co-workers at DreamWorks used to say, "yeah I served time on that show" whenever we talked about work.

Where am I headed from here? I'm playing around with doing some hand-drawn animation. I've only done a little bit of it so far but it is great fun and totally different from the army of "creative" people employed by the studios cranking out ****--well, I guess it's called entertainment. Sometimes something really good comes out of Hollywood, but not very often.

I'll be getting back to posting, if for nothing else than to save a few notes and have them out in the open to share with anyone--without fear.

Trying Hard to be Green

I've been talking about getting a Vespa for a long time--well, I finally did it. It is a used 2001 model ET4 with less than 500 miles on it. Yeah, I know--crazy. We've been a one-car household for a while now and although I really like riding the bicycle/bus/train sometimes I want something that I can run some errands and get me to/from work a little quicker.

Well, it turned out that riding the Vespa around town was such a blast that it has become my main transportation. I even took Rosie out for a 2-up ride and she loved it.

Oh yeah--the one car we settled on was a new Prius. I've heard the arguments for and against it, but for our needs it seemed to make the most sense.

Good Blood, Bad Blood

I had my yearly physical a week ago and got the results of my blood test. A little over a year ago I was diagnosed with very high cholesterol and was prescribed statin medication which I decided not to take and to try lowering it with diet and exercise alone. Here's how it's been going:

                 January '08   June '08  August '08  March '09 ***April '11 ***May '12  *August '16  **August '18 ****August '19
Total Cholesterol     289         215         183        195          197        189          221           197          179
LDL Cholesterol       214         121         115        122          115        112          131           110          110
HDL Cholesterol        48          46          42         47           52         43           51            52           46

*   Added August 21, 2018 - darn it, cholesterol is still too high after all these years.
**  Added August 31, 2018 - well, it is headed in the right direction but not far enough.
*** Added October 3, 2018 - Dr. McDougall 10-Day program from 2012
****Added September 20, 2019 - so now LDL between 70 and 189 mg/dL is a reason to consider statin therapy. Ugh.

In November I had it checked at a health fair where I work and got a reading of under 150 but I doubt that was accurate. In any case, I've been successful at keeping it down but it has creeped up since the summer.

I've got to confess that because of that super low reading in November I started getting a bit careless with my diet and exercise. I'm still riding my bicycle and eat mostly vegetarian and low fat, but the dessert bar at work is way too tempting and I tend to gobble down whatever is put in front of me.

Feeling a bit apprehensive over this last exam I decided to do the equivalent of cramming for an exam. I rode my bicycle hard and fast over the hill to work all week and cut out all the fat I could from my meals. I'm not sure if it made a difference on my cholesterol but something else popped up on the blood test:

Hematocrit 40.3

YOU ARE MILDLY ANEMIC. STOP BY FOR ADDITIONAL BLOOD TESTS TO FIND OUT WHY YOU ARE ANEMIC.

Geez, if it's not one thing it's another! In addition, my blood pressure was rather low. What's up with low blood pressure and anemia?

Well a quick check on the Internet (what did we do before Google?) calmed me down. It turns out that many athletes experience these same symptoms when starting up a strenuous exercise program. So much for cramming for a blood test by over training. In addition, there's a slight chance of vitamin B-12 deficiency that could also cause anemia but I'm not a big fan of popping pills (including vitamin pills) for a quick fix.

I need to go back for another blood test but I won't be cramming for the test.

Hybrid Bicycle Experiment

We recently became a one-car household so I've been doing some experimenting with alternate forms of transportation. The bicycle was working fine, especially when combined with public transportation, but it was nowhere nearly as fast or convenient as a car. However, driving the one and only car we own to work just so it can sit in the parking structure all day and leaving my wife stranded at home without wheels--well, that wasn't an option.

Riding the bike was fun for the most part but mashing my way over the Cahuenga pass, in traffic, in the rain, late at night, not so much. What I needed was a little push to make it a little easier and the answer seemed to be to augment the energy from my legs with an electric motor.

I already had a couple of bicycles so I had a backup in case the experiment went awry. Good thing too.


The motor I settled on was a Bafang geared front hub. The reason I went with a front hub was because it seemed simpler to mount. A geared motor should have more torque than a direct drive which should make climbing the hill pretty much effortless. Another advantage of a geared motor is that it freewheels. Some may say freewheeling is a disadvantage because it cannot regenerate electricity and recharge the battery like a hybrid car--but this requires a special controller and I didn't want to over complicate things since this was my first e-bike build.

I got the motor as a kit that included building the hub into a 700c wheel along with an ecrazyman controller, twist throttle and brake levers with cutoff switches so you can't apply power and brakes at the same time.

What the kit didn't include was a battery and that's where I went all out and got the latest craze in e-bikes, a lithium iron phosphate, LiFePO4, 48 volt 20 amp hour Ping battery pack.

Granted, it doesn't look like much more than a bunch of metal strips wrapped up in black duct tape, but it should deliver quite a jolt of power for many years, more than enough to get me to and from work. Notice that it has three wires, a positive, a charging negative and a discharging negative. Also notice that it doesn't have a connector and the end of the wires. The charger came with a connector but the controller had a completely different connector. Neither of these connectors were standard of the shelf items so I soldered common XLR audio connectors that are available in any neighborhood Radio Shack store--though you might have to do some searching because the sales people probably won't know they have XLR connectors.

I was able to find a Topeak trunk bag that fit the battery perfectly. The bag, paired with a Topeak rack made it very easy to remove the pack from the bike and take it inside for charging. However, in order to make this practical the controller and all the other wires and connectors had to live somewhere other than the trunk bag so I got a frame bag which worked great for this purpose.

Except for the connector for the battery everything seemed pretty much straight forward even though absolutely no instructions were included with any of the items that I ordered. Some wire colors didn't match up but the connectors did, like this one for the brakes:


While on the brakes, the controller had only one brake connector but of course there's a front and rear brake. I ended up splicing the brake wires in parallel so that applying either brake would cut off power to the motor.

So, all the connectors fit and the wires matched up by color and it was time to go for a test ride.




It worked! It ran little rougher than I expected and there wasn't much pull, but it pulled--for about two blocks then it cut out. That wasn't very impressive, but whoa did the motor get hot! It turned out that I succeeded in burning out the motor on the very first test run.

With the help of John Robert Homes from Holmes Hobbies we were able to determine that the problem was that the proper way of hooking things up is connecting the green wire to the yellow and the yellow to green. What? That's right, the motor manufacturer and the controller maker obviously weren't talking to each other when they made their products. In any case, JRH replaced my burned out motor stator assembly at no charge and once I got the wires switched over it finally delivered as promised.


This time I made it a few blocks before encountering yet another problem. The hub motor attaches to the front fork with a sort of "key" in the axle:


The fit was nice and tight but after just a few accelerations--wow that was cool, it has so much torque that the front wheel spins when I take off. Oops:


The fork dropouts deformed and the axle spun around a few turns and nearly broke off the cable! It turns out that what I needed was a set of torque arms, another hard learned lesson. Gee, this would be so much easier if it came with instructions!


I didn't have the facility to fabricate anything beefy enough so I ended up Googling around and found some made specifically for e-bikes made by AmpedBikes. Just to be safe I bought a pair and put one on each side.


Finished, finally--or so I thought.


The spinning front wheel was annoying so I put on my extra large Wald front basket. I was planning on using the removable battery feature for bus rides but technically, you're not supposed to mount a bicycle with an "over sized" basket on a bus bike rack. However, as it turned out I got to work much faster without having to use the bus so it didn't make a difference. Besides, I now had a cargo bike capable of carrying three bags of groceries--and then some with the panniers on the trunk bag deployed.

I did take the bike on the metro rail system regularly for the ride home--no need to remove the battery for that.

The cruising speed on the flats was a rather quick 22 miles per hour. Yeah, I know, that doesn't sound like much but believe me, on a bicycle without any suspension it is plenty fast. Even the hill that had me huffing and puffing before the conversion was an easy 18 MPH on the uphill side and coasting downhill, geared motor so no drag, was the same scary 35 MPH. I burned out a few brake pads on that route!

One thing that was a problem was plugging in the battery, the connector would always arc. If the pins were not lined up properly it could make a rather loud pop. Of course this wasn't very good on the connector so I tried this trick:

I used XLR instead of Deans connectors and it seemed like it would work.


But it didn't stop the arcing so I removed it. I think a better solution would be to put a heavy duty switch on the power line but I got used to the spark when connecting the battery, though it did blacken the pins on the XLR connector it didn't seem to affect performance.

I rode the bike daily for a little over a month through wind, cold and even rain over the brutal Los Angeles winter--OK, it wasn't all that brutal but I rode the bike when my bike riding co-workers wimped out.

There were a few problems, like the time I got off work late and I was in a hurry to get home so I decided to ride over the hill instead of take the train. There's several miles of rough road without street lights and I hit a huge pot hole at full speed. I usually don't get flats but with the extra weight of the battery my rear tire didn't stand a chance. My wife came to the rescue so I wouldn't have to do a repair job on a dark road in the rain--glad we kept one car, and the bicycle carrier!

The only other problem that I had was when the brake levers got wet they would short out. It wasn't all that bad, just a quick brake and release would shake them dry enough to continue. That problem went away after one day without rain.

All stories have an ending and this one ended one morning going into work. After crossing the Cahuenga Pass the motor lost most of it's power and it was feeling very rough. Did I wear out the gears? Did the motor burn out? I'm not really sure. It might be repairable but the quick fix would be to replace the motor--or get a Vespa. Since it was my dream all along to get a Vespa and the e-bike was just an experiment I decided to end the experiment and put the bike up for sale.

The motor might be shot, the bike abused but the battery is in even better shape than when I bought it. Turns out that LiFePO4 batteries need a break in period of about a month before they can stand a deep discharge without damaging the cells. How far will the bike go on a charge? Only the next owner will be able to answer that question.