Michael Halls-Moore Investing Blog

What Can Real-Time Strategy Games Teach Us About Investing?

Sunday, 20th January 2013 - 0 Comments

A good many hours of my youth were spent playing real-time strategy (RTS) video games on my PC. Later on in life I often considered whether this was "wasted" time. I came to the conclusion that life was too short to be concerned about vaguely defined opportunity costs. In addition I came to realise how much these games are able to teach about resource management, cash flow and the nature of investing. Hence I was gaining an education in financial prudence, albeit while destroying an opponent on a virtual battlefield.

A critical aspect of nearly every RTS is resource management. There is often a finite supply of some highly-prized resource scattered throughout the terrain, which needs to be collected and refined to generate cash. This cash is subsequently utilised to train infantry, construct new buildings or deploy armoured vehicles, which can used to obliterate the enemy.

Early variants of these games incorporated a finite-resource-harvesting model. Famous examples are early games within the Command & Conquer franchise. This scenario involved a limited quantity of resource being scattered throughout the map. Harvesting units would patrol the areas and reduce the available quantity after transport and refinement. This encouraged aggressive expansion, as control of resources was generally the key to victory against one's opponent. Later variants allowed the resource to re-grow, albeit it a significantly reduced rate compared to the harvesting (which itself could be increased by deploying multiple harvester vehicles).

More sophisticated RTS games, an example of which is Total Annihilation, introduced the infinite-supply-rated-extraction model. Unit construction and subsequent power was not measured in absolute quantities of metal or energy, but rather in terms of resource consumed per unit time. The resource supply sites scattered throughout the terrain also provided a rate of extraction per unit time. Hence the goal was to make sure that the rates of extraction were always exceeding the rate of consumption.

More recent games introduce a hybrid of the two models where there is an initial fixed supply of a prized resource within the battlefield, but certain buildings or units can be constructed, which produce a recurring cash flow. The units and buildings varied in their tactical capabilities, as well as their yield. However, fundamentally they provided the commander of a team with a set of assets.

Often the commander of such an army is presented with the choice of how to deploy the capital received from harvesting finite resources. The choice comes down to short-term production of new units or investment in cash generating assets, which provide a hedge against dwindling resources on the battlefield. More often than not the average commander will choose the short-term benefit of additional units over the, admittedly expensive, cash-generating assets. Usually, this is the wrong strategy.

The more sophisticated approach is to invest a large fraction of the initial cash flow into construction of the cash-generating assets. In C&C: Generals, one of the aforementioned Command & Conquer games, this involves the construction of supply pads, hackers or black markets depending upon the choice of army. The real sophistication of this strategy becomes evident when the initial cash flow from these assets is further deployed into producing more cash generating assets.

The mathematically inclined among you will recognise this as a geometric, non-linear process, dependent upon time. These processes are characterised by slow initial growth but rapid expansion after extended periods of time. Thus, there soon comes a point where the cash-generating assets (such as the supply pads, hackers or black markets) are providing significant cash flows to fund huge expansion in unit construction, leading to easy victories.

It is straightforward to see how this scenario is analogous to the "real world" practice of investing. Consumers are often faced with the decision to deploy their initial resources (i.e. their cash!) towards a short term gratification, such as a daily coffee or expensive watch. In essence they are foregoing the ability to purchase cash-generating assets, such as a common stock which provides regular dividend payments.

Had these consumers instead put their money towards continual purchase of common stocks and re-invested the dividends into more common stock, then over a period of time cash would be generated automatically. This could ultimately be used to fund luxury items of the type previously described - without materially affecting the rate of new cash being provided.

One can also compare the finite nature of RTS battlefield supplies to a finite resource such as the amount of money earned as a salary. With finite resources on the battlefield, only a finite number of units could be ultimately produced. Analogously, with a lifetime salary earning, only a fixed number of luxury items could be purchased. By choosing to invest a fraction of this salary into cash-generating assets, with the aforementioned non-linear compounding, it would be possibly to purchase a far larger quantity of items - i.e. leverage a significantly larger amount of utility.

So, not only was I enjoying the thrill of military tactics, resource management and virtual destruction of my peers, I was setting myself up for a sound, long-term, investor mindset.

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Investing £10,000 Over a 2-5 Year Time Horizon

Sunday, 20th January 2013 - 1 Comment

I received a great question from Robin yesterday asking about the different methods of hypothetically investing £10,000 with access to the funds within 2-5 years. The question was posed on the post about the differences between saving and investing.

The most important constraint that Robin mentioned is that the money needs to be accessed within 2-5 years. I'm going to assume that this money is needed for an upcoming life event, such as a wedding, down payment/deposit or similar. If this is the case, then I would strongly advise not putting the money into an investment class such as property, the stock market or foreign exchange/commodities speculation (i.e. via spread betting). Although Robin was interested in a cost-benefit analysis of different areas for investment, I can straightforwardly recommend only one approach: Saving.

Over the time horizon mentioned (2-5 years) all of these markets will likely suffer a reasonable degree of volatility. There might be large price swings in the market value of the asset purchased. This means that if the funds needs to be accessed rapidly then a substantial loss in the asset value might occur on sale if the investment is withdrawn at an unfortunate time. For instance, £10,000 invested in the UK stock market (perhaps via a FTSE All-Share Index Tracker fund) in March 2007 would have been worth approximately £5,500 in March 2009! That is almost a 50% drop in value in only two years. The key lesson here is that the stock market is highly volatile!

I am assuming that capital preservation is more important than any potential gains that may be made by investing in these volatile markets. Therefore my recommendation is to place the money in a high-interest bank savings account or a tax-free shelter like the UK Individual Savings Account (ISA), of which there are equivalents around the world.

The return on such an investment will be low, particularly at today's interest rates. In the UK the savings interest rate is roughly matching inflation (as measured by the Consumer Price Index), so in reality this would only preserve purchasing power, rather than increase it. Despite the "boring" nature of investing this way, the piece of mind that comes with knowing you can withdraw the entirety of your principal without undue risk (assuming no bank collapses in that time frame!) is very reassuring and will encourage a much sounder financial footing over the long-run.

If however, a liquid capital reserve has already been generated, the £10,000 is not required for any future event and a much broader time horizon is targeted (say 25-30 years), then investing (wisely) in the stock market is a very reasonable strategy, although this is a discussion for another blog post!

I hope that helps, Robin!

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The Difference Between Saving and Investing

Saturday, 19th January 2013 - 2 Comments

A fundamental idea in finance is the contrast between saving money and investing money. Even though these terms are sometimes used synonymously, they are actually very different and should never be confused. In this article I will outline the differences between the two, allowing you to get off to a great start with your investing career.

One of the key differences is due to a concept known as liquidity. This refers to the ease at which an asset can be bought or sold. Cash stored in the bank is an example of a highly liquid asset. It can be redeemed rapidly without penalty. A rental property is an example of an illiquid asset. To sell the property requires time and strong demand, otherwise a penalty is incurred in the form of reduced price for the sale.

The Differences in Saving and Investing

Saving and investing are generally defined by their differences in liquidity, as well as the expected return earned on any potential asset.

Saving involves placing cash into a bank current account, bank savings account or into a Cash Individual Savings Account (ISA). At the current base rate of interest in the UK, these accounts are unlikely to generate an attractive return on investment. The goal of saving is to ensure that you have access to cash for the day-to-day situations. In particular - emergencies, an unexpected redundancy, a house deposit, university tuition fees.

Since cash is highly liquid, it can be deployed easily in these situations. The disadvantage of saving cash is that the interest rates offered by banks/ISAs is rather low. These rates often only match the current inflation rate. In another post I have advocated creating a cash liquidity buffer.

Investing differs substantially from saving. It involves deploying cash to purchase an asset that generates a return over a particular time-horizon. This return can take the form of a capital gain, which is when the sale price exceeds the purchase price. It can also take the form of a dividend or coupon, which is a quasi-consistent variable payment, usually the cost of lending money or a share of the profits from a business.

Investments are often (much) more illiquid than cash and most are designed to be held for long periods in order to see significant returns. There are a great deal of assets available to the investor, each of them requiring a substantial degree of experience in order to generate a solid return on investment:

Residential or Commercial Property
Government and Commercial Bonds
Equity Shares - Common Stock and Preferred Stock ("the stock market")
Investment Funds - Index Trackers, Exchange Traded Funds (ETF)
Collectibles: Art, Stamps, Cars, Wine
Private Small Businesses

When To Save and When To Invest

Unless you are part of the genetic lottery and have inherited a great deal of wealth, then in order to begin investing it is necessary to first begin saving. Once you have sufficient savings you will be in a position to begin purchasing investment assets.

Generate a cash liquidity buffer by keeping 9-12 months of monthly expenses in ready, liquid form. Leave this alone in a Cash ISA of high-interest savings account. Only then will you ready to begin investing.

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Pork Belly with Fennel and Roast Potatoes

Saturday, 19th January 2013 - 1 Comment

Roasted pork belly, fennel and potatoes. Delicious!

I've been discussing with Juliette for a while now whether to try my hand at cooking pork belly, one of my favourite dishes when out at a restaurant. I was well aware that it is not a straightforward meal to prepare, so I had always been apprehensive. However, I decided tonight that I would give it a go. I dug out a recipe online for roasted pork belly with fennel. Juliette and I also wanted some roasted potatoes, so we modified the recipe and headed to Tesco to purchase the necessary ingredients. The following ingredients serve 3-4:

1kg of rolled pork belly
3-4 sprigs of rosemary
1 large fennel bulb
1 tbsp rock salt
1 tbsp ground black pepper
1 lemon
2-3 large potatoes
250ml white wine
2-3 tbsp of sunflower oil
2-3 cloves of garlic

The recipe itself wasn't too hard in the end. Most of it involved waiting for the pork to cook on various temperatures! Here it is in full:

Unroll the pork belly and score it (with a sharp knife or stanley knife) into the hide, but not through to the meat. The score lines should be approximately 1.5cm apart and should traverse the entire length of the belly.
The rosemary leaves should be removed and chopped finely. Once chopped, the rock salt and ground pepper should be added together. The lemon should also be zested and added to the mix (keep the lemon for later though!).
Add the sunflower oil to both sides of the pork belly, then spread it evenly over the surface. Once complete, add the herb mix to both sides of the pork and work it into each of the scores. Put the pork onto a roasting rack within a roasting tin, at 220 degrees C, for 35 mins (until the edge becomes brown).
Remove the fennel stalks from the bulb and chop it thinly, right through to the base. Use the heel of your hand to flatten the garlic cloves, remove the skin and add to the fennel (do not crush them). Chop and boil the potatoes for 20 minutes, concurrently.
Add the fennel and garlic to the base of the roasting tin, along with the white wine, after the 35 minutes cooking and put the pork and fennel on to cook at 160 degrees C for one hour. Also put the potatoes on to cook, in a separate roasting tin (but in the same oven!).
After the one hour remove the fennel and place on a separate dish. Squeeze half a lemon onto the fennel. Put the potatoes into the roasting tin previously occupied by the fennel and mix in the juices. Then cook the pork and potatoes for 15-20 minutes at 210-220 degrees C, making sure to check after 10 minutes that the pork is not singed.
After cooking has completed slice the pork into as many pieces as are required and then add the potatoes. Now serve and enjoy!

I also thought it would be fun to document the recipe visually. Here are some photos I took during the process:

Pork belly assembled ingredients minus the garlic

The assembled ingredients, straight from Tesco, for the roasted pork belly. The garlic is missing as we already had a few bulbs. We ended up with 1kg of pork, which was the right amount for two people, over two meals.

Three sprigs of rosemary for the pork belly mix

Three sprigs of rosemary formed the basis of the herb coating. They were chopped along with rock salt, pepper and lemon zest.

Cutting the rolled pork belly to open it out

Here I am cutting the rolled pork belly, prior to additional scoring of the hide.

Juliette continues the scores added by the butcher. It is necessary to score through the hide, so that the rosemary/salt mix seeps through and augments the crisping.

This was the basis of the herb mix. It consisted of chopped rosemary, sea salt and pepper. The next task was to zest a lemon.

Mixing the lemon zest into the rosemary mix in order to enhance the flavour.

Pork belly with sunflower oil and herb mix added

A generous glug of sunflower oil is added to both sides of the pork belly and spread evenly. The herb mix is then added in between the scores, on both sides, in order to flavour the meat and enhance the crispiness.

The chopped fennel provided the base of the dish. Fennel has a distinct aniseed taste that combines well with the white wine.

The potatoes are chopped and ready for boiling, prior to being roasted along with the pork.

At this stage the fennel was added to the oven, after ~35 mins of high-cooking the pork. The pork juices mix with the fennel underneath to produce a delicious flavour.

Finalised fennel after an hour of cooking

The fennel was roasted for an hour, after which chopped fennel stalks are added as a garnish.

After an additional 20 minutes on a high gas mark, the pork belly was ready to eat.

Juliette was given the first opportunity to sample the pork belly. Here she is cutting into the crackling to test it out!

I'm looking forward to trying out more meals in the future, although the next may be somewhat healthier. Pork belly is not something one can eat often - even if it is delicious!

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Lego Technic 8043 Excavator Construction

Tuesday, 15th January 2013 - 0 Comments

As mentioned in the post about the construction of the Lego 9398 4x4 Crawler, my Dad has been buying up quite a few Lego models in order to obtain all of the parts necessary for a Zorex-220 Excavator. Given the similarity to this model, he actually bought two, of which I received one to build and send on.

This excavator build is very different from my previous crane truck builds (9397 and 8258) and the 4x4. The obvious difference is that it is caterpillar driven, not wheel-based. Thus the entire chassis is quite different. Secondly it has four separate motors. Three of these are used for driving and one is used as a "servo" to change the gearing over. It consists of four separate pistons to control the arm and a substantial number of gears!

The build took three nights and probably around 7-8 hours. The middle manual, when building the cab, was extremely complicated. I spent a significant amount of time making sure that the gears were all able to turn and were in the exact place. Certainly not a straightforward construction.

The model has dual-channel infra-red remote control capabilities. Thus the arm can be lowered/hinged while the backhoe rotates or the model can be driven while the cab rotates in a 360 degree fashion. My Dad wants to build the Zorex because all movements are capable simultaneously, which is quite an impressive feature.

The 8043 excavator is a complicated model. As such, it recommends ages 12-16, rather than 11-16 for the 4x4 crawler. Given the extensive transmission complexity, I would agree! Although it really should be 12+!

As per the usual tradition, all of the pieces have been separated into containers. My girlfriend doesn't get to take food into university for a few nights, but this is a small price to pay for the joy of building Lego! As you can see, it is a three manual build. The last manual is rather short in comparison the the rest.

Lego 8043 excavator piece separation close-up

This is a close-up of some of the piece separation. Notably, this model had a huge number of axles, of varying lengths and types. The eBay model that my Dad purchased actually had two missing. I managed to make do by "borrowing" from the 4x4 crawler cab support.

Lego 8043 excavator lower caterpillar track chassis mount

Juliette begins construction of the lower caterpillar track chassis mount. The build wouldn't be complete without tea and brandy (see background).

Here is some detail on the reverse of the lower chassis. The grey protrusions connect the track runner wheels.

Lego 8043 excavator lower chassis without track

This is taken just prior to the addition of the caterpillar track onto the lower chassis. Although it might be hard to discern, each track actually has an independent drive chain, allowing 360 degree rotation on the spot, as well as general steering.

Lego 8043 excavator with cab rotation gearing mechanism

This shows a close-up of the chassis, but with the addition of the cab rotation gearing mount. The axle through the centre is actually for one of the track drives.

Lego 8043 excavator early cab gearing mechanism

This is an early shot of the cab gearing mechanism used to transmit the caterpillar drive functionality. Even at this stage the complexity of the model is apparent.

Lego 8043 excavator rear cab engine and battery packs

The rear of the cab consists of four low-speed, high-torque drive motors in parallel, with two infra-red receivers (separately channeled) to control both the cab drive/rotation and the arm hinging via the "pneumatic" pistons.

Lego 8043 excavator rear cab added to central chassis

This shows a detail close-up of the rear cab, as seen in the previous photo, attached to the central cab rotational mount. The centre of mass was such that the caterpillar would tilt significantly if the rotation angle was incorrectly aligned.

Lego 8043 excavator front two pistons added

The front two "pneumatic" pistons have been added. These control the height of the excavation arm. Given the extensive weight of the arm, Lego decided that two would be more appropriate than one!

Lego 8043 excavator arm transmission axle housing

This close-up shows the detail of the arm transmission axle housing. Notice the crossing of the axles via the universal joint mechanism.

This photo was taken just prior to the addition of the large backhoe. The arm is extraordinarily complicated and was rather fiddly to construct. It has two transmission axles to power the two "pneumatic" pistons that allow hinging of the arm in the centre and rotation of the hoe itself.

Lego 8043 excavator arm, and backhoe, attached

The backhoe has been attached to the arm, while the arm itself has been attached to the cab. You can get a feel for the scale of this model - it is rather large! Juliette is now building the cab driver's housing.

Lego 8043 excavator completed cab driver's housing

This photo shows a detail close-up of the cab driver's housing. The eagle-eyed among you will realise that I had to "borrow" one of the drive lever axles to replace a missing piece, which actually would have affected structural integrity had it not been placed.

Juliette applies the decals to the cab paneling and places it onto the right hand side of the cab itself. You can see that I've already added the battery pack and have tested the model RC capabilities out, prior to full construction!

The completed model! Cab paneling has been added to both sides. Juliette and I spent a good number of minutes playing around with the RC functions. Once I obtain a better video camera, I will video all of the Lego models in action and put them in their respective blog posts.

Lego 8043 excavator and Lego 9398 4x4 crawler comparison

I thought it would be fun to place the 8043 excavator in context with the aforementioned 9398 4x4 crawler, if only for a size comparison. It is possible to run both models concurrently since the infra-red remote control has 4 separate channels and the models require a total of 3.

This build was extremely fun. I really enjoyed the added complexity of the model, even if I was pretty sure I had made a mistake somewhere! I was doubly impressed by the capability of the model to automatically be able to switch via the cab drives or the arm drives, using the fourth motor as a "servo". I would definitely recommend getting hold of this if you are a Lego Technic fan, if only to play with the RC functions.

Stay tuned, because I believe the Unimog model is on its way soon. That will almost certainly be the next build.