First off, thank you to Donny Tiger and Gary West from WBVP-WMBA Radio in Beaver Falls for the terrific airtime last week! Plenty of great questions and I hope that I provided insightful answer. In fact, this was probably even better than the previous week on KDKA with Marty Griffin.
If your organization is looking for a guest speaker, give me a shout. I will often speak for free (or a peanut butter and jelly sandwich) if given ample opportunity of a week or more notice. Also, I can speak about most things, from investing and banking through raising two (somewhat) normal kids while writing weekly, speaking, teaching and going to school (I start my Ph.D in Finance in May.)
Now, onto.......THE BLOG...
Take a look around today and you will see a whole bunch of people trying desperately to be different from everyone else. The way they accomplish this is by their manner of dress, hair and jewelery choices. So many people are trying to be different, in fact, that everyone is pretty much the same.
Think about it for a minute. Take a look around as you're reading this, and the odds are good if you're at work, most folks dress just like you, talk just like you and have the same interests as you do. Not that you're a bad person, or that this is a bad thing. It's simply an observation.
Betcha your friends are a lot like you, too.
With that said, I'm going to go one step further and suggest that you probably follow a lot of your friends, counterparts, work associates, etc. when it comes to heeding financial advice. I'm going to suggest that you do something a little bit, dare I say, different, than the rest of the crowd. Remember, they aren't that different from you; therefore, they probably struggle to make ends meet, get the kids on the bus, argue about family and are concerned about their financial future just like you are.
Begin thinking for yourself and trust your gut instinct. What's the worst thing that could happen? Could you be wrong? Absolutely. But what if, through some minor miracle, you were actually right in your thoughts? What if everyone was selling umbrellas because it hadn't rained in three months, and you actually decided to BUY umbrellas because it hadn't rained in three months?
Is it EVER going to rain again? Absolutely. When it does, will your umbrellas be worth more than when you bought them? Absolutely! This is supply and demand. Would you rather buy an umbrella when it's raining or when it's not raining?
I like to buy coats in July and bathing suits in January (and NOT because I'm a member of the Polar Bear Club.) I like this method because I pay less when demand is down.
Guess what? We are in the middle of a blizzard in January and there are warehouses filled with bathing suits. Some of the suits that used to cost $10 now cost $4, or in some instances, even less. The odds are good it won't snow forever and in fact, the dog days of summer will be fast upon us again. Buy the suits now.
What does this have to do with investing? Glad you asked.
EVERYTHING.
Nobody is buying ANYTHING right now. I think it's almost time to start buying, but be smart about it.
Here's how I see this playing out.
We have already elected a new president, so that eliminates a little uncertainty. President-elect Obama will begin selecting cabinet members in the coming weeks, too, which should further reduce some uncertainty. Combined with an influx of bailout bucks, I think the economy is close to stabilizing. Remember, government figures look backwards, not forward.
I expect unemployment to rise about another .5% to 7.0%. Inflation will hit about 6-8% next year, but several factors are at play here to offset these trends.
1. Fuel prices are down. In fact, they are lower today than they were a year ago. And despite arguments to the contrary, we have short-term memories. Odds are good that by February or March of next year, we will have forgotten this past July when it topped $4 per gallon and folks were predicting $10 per gallon by the end of this year. Where are those folks, by the way?
2. Consumers get tired of waiting. I don't care what common sense says, no one likes to wait. The U.S. consumer has been waiting around for about a year already to buy major goods and services. By February or March of 2009, they will have waited around 15 months. That's longer than most of Britney Spears' marriages. At some point in time, the consumer is going to start buying because they want to, not because they can afford to.
3. Jobs will increase in March or April. President-elect Obama is going to force jobs down our throats if it kills us, and like it or not, unemployment will eventually go back down to 5.5%.
4. Finally, right from the "like it or not" barrel of fun is the bailout bucks. You can't ignore $800 trillion going into a bad economy. Whether you agreed with the bailout (I hated the bailout) or not, the money is going to trickle in. We will feel that in March or April.
With all of that said, I do suggest holding tight through the end of this year, as mutual fund managers begin dumping shares for tax reasons at the end of this month, and earnings season is still in full swing.
But remember, buy bathing suits in January.
There are TONS of sexy bathing suits out there right now. Notably, GE, Citibank, Pfizer, Altria (spinoff from Phillip Morris) and Caterpillar. Some simple tips to help you out.
First, the easy part. You're an expert in something, and before you shake your head and say "no way, Ola," I'm going to ask you to consider this. Do you do something regularly, like a hobby or something you enjoy, like going for a coffee, or shopping, or ice skating, or cooking? If you do, you are an expert. Nobody around you knows the cooking industry as good as you do, including egghead analysts on Wall Street. In fact, those folks don't know the difference between Cayenne Pepper and the Cayman Islands.
Look for a company that is doing great things in something you enjoy, like cooking. Then we can move onto analyzing their financials, and hope that they are paying a dividend of 5% or more and a Price/Earnings multiplier in the low teens or less. Finally, hope that the company has a Beta Coefficient (we covered those several blogs ago) below 1.00. If this company has growth estimates of 10% or more for the next five years, it's time to buy.
If analysts aren't covering your company, that's even better. They don't know the whole story and you do. To quote Homer Simpson, "WHOO HOO!"
If your company doesn't hit the criteria, you've at least begun thinking like an investor. Now you can run an industry analysis of something you enjoy, like cooking or hockey equipment, to find the industry leader that WILL fit the criteria.
And then don't look back. This is going to be a once in a lifetime opportunity. Don't be afraid. The worst thing that can happen is you'll have a surplus of umbrellas during a drought. Eventually, it will rain. It must rain.
Write some comments and visit our sponsors. It is helping me buy, buy, buy graduate school
Sunday, November 9, 2008
Sunday, November 2, 2008
Election election
What to do on Tuesday... that seems to be a perplexing thought for many of us. And while the obvious thing for me to do is blog about what seems to be a never-ending campaign of change, mavericks and mudslinging (I live in THE swing state, PA) I think that I'd rather try to uncover nuggets of truths that can help you improve your business.
In order to do this, however, we need to take the opposite approach of each candidate - who seem to be promising immediate change on everything without really planning for long-term issues.
As business people, we need to step away from our personal feelings for a few minutes in order to plan. Set our emotions aside, our personal ideologies aside and really plan for "what if" scenarios. What if Senator Obama is elected? What happens if McCain is elected? What if... you get my point.
With that said, the best advice I can give you is to begin proper planning NOW based upon either scenario. In fact, this should have been done as soon as it became evident who each party's nominee would be. It's not too late, though.
Set up a network consisting of a financial planner, accountant, attorney, local politician, marketing guru, real estate expert, college administrator, teacher, advertising person and restauranteer. Add more if you would like, but this is my mix and it seems to give me ten different angles on any certain issue.
Then ask your experts to give you "what if" scenarios based upon both candidates. You will now have 20 different insights to the same problem.
NOW you can begin to plan accordingly for the next four years based upon something other than our your own personal subjectivity. In fact, you may gain insight into multiple political views, economic arguments, educational debates and taxing issues as they relate to YOUR business.
Does it sound like you have just improved your bottom line? You betcha.
Ask each of your sources to do a SWOT analysis on your business based upon their what-if scenarios. A SWOT analysis, in case you don't know, stands for Strengths, Weaknesses, Opportunities, Threats as they relate to any item; most notably your business. Again, with ten or more experts at your disposal, you will get many answers to your questions and their personal analysis of your business. That's powerful stuff.
The other indirect benefit of doing this is that you've just included yourself in a very exclusive club compromised of various professionals in multiple industries rather than surround yourself with folks just like you. And while it might be uncomfortable for a short-time, the long-term benefits of obtaining differing views will yield results you cannot even imagine. In fact, these views will likely lead you to new markets, products and business ventures you might not have ever imagined.
Get out and vote with your conscience, but use your brain when it comes to business planning.
Drop me a comment below and let me know what you think.
In order to do this, however, we need to take the opposite approach of each candidate - who seem to be promising immediate change on everything without really planning for long-term issues.
As business people, we need to step away from our personal feelings for a few minutes in order to plan. Set our emotions aside, our personal ideologies aside and really plan for "what if" scenarios. What if Senator Obama is elected? What happens if McCain is elected? What if... you get my point.
With that said, the best advice I can give you is to begin proper planning NOW based upon either scenario. In fact, this should have been done as soon as it became evident who each party's nominee would be. It's not too late, though.
Set up a network consisting of a financial planner, accountant, attorney, local politician, marketing guru, real estate expert, college administrator, teacher, advertising person and restauranteer. Add more if you would like, but this is my mix and it seems to give me ten different angles on any certain issue.
Then ask your experts to give you "what if" scenarios based upon both candidates. You will now have 20 different insights to the same problem.
NOW you can begin to plan accordingly for the next four years based upon something other than our your own personal subjectivity. In fact, you may gain insight into multiple political views, economic arguments, educational debates and taxing issues as they relate to YOUR business.
Does it sound like you have just improved your bottom line? You betcha.
Ask each of your sources to do a SWOT analysis on your business based upon their what-if scenarios. A SWOT analysis, in case you don't know, stands for Strengths, Weaknesses, Opportunities, Threats as they relate to any item; most notably your business. Again, with ten or more experts at your disposal, you will get many answers to your questions and their personal analysis of your business. That's powerful stuff.
The other indirect benefit of doing this is that you've just included yourself in a very exclusive club compromised of various professionals in multiple industries rather than surround yourself with folks just like you. And while it might be uncomfortable for a short-time, the long-term benefits of obtaining differing views will yield results you cannot even imagine. In fact, these views will likely lead you to new markets, products and business ventures you might not have ever imagined.
Get out and vote with your conscience, but use your brain when it comes to business planning.
Drop me a comment below and let me know what you think.
Monday, October 20, 2008
Bailout part.... three? four?
I'm sorry but I have to address yet another bailout. And at the risk of running out of fingers to point, I can only address this to EVERY person living in the beltway who has a vote.
STOP SENDING ME CHECKS! That means you, speaker Pelosi, congressmen English and Altmire and Senators Specter and Casey.
The government, in their infinite wisdom, has decided that another round of stimulus checks is required to "kick start" the economy. Excuse me? Apparently the $835 billion they've passed already isn't enough of a kick start? If we need more, I would label this a quadruple bypass requiring electric paddles.
Remember folks. This is the same government that sent us a stimulus check over the summer. The same government that spent $43 million to tell us, via postal service, that we were getting a refund. Who knows how much it cost them to print the darn checks.
Somewhere down the line, don't ya think someone, somewhere would raise their hand and say "hey guys, maybe we should let things work themselves out. You know. Give the 'free market' a chance to right the ship."
Adam Smith is rolling over in his grave (he's my hero, by the way. If you want to learn more about him, read "The Wealth of Nations.")
The summertime bailout ran us about $100 billion. Apparently none of us spent our check at Walmart buying big screen televisions; instead opting to do crazy things like pay bills, fill our car with gas, save it for a rainy day.
The late summer bailout cost us $835 billion. Let's round everything up to a trillion bucks so far.
MY KIDS DON'T WANT TO PAY THIS DEBT! The Ola family is already on the hook for $33,000 EACH for the national debt. This doesn't include the defecit at the federal level or the defecit Pennsylvania is facing (abotu $3 billion.)
Isn't it time to give our kids a break and not make them pay for our sins of overspending, extending our credit and keeping up with the Jones's? Give me a break.
If you can keep a little secret, I'll let you in on something. I think the economy is already on the way back up folks. To be sure, there is room left for the dow to go down (I'm betting we'll see about 7500 before it's 'the bottom.') But have you noticed that you have a few bucks left in your wallet at the end of the week yet? If not, you will begin to feel it soon.
Want to know what it is that created that little jingle in your pocket? It's called saving your money for stuff that's really important like gasoline and lunch meat for your brown bag lunch. It's called being uncertain about how you'll make another credit card payment, so you only pay cash. It's called being responsible. It's something we all should be everyday.
To answer this call with extending another freebie is called enabling, and if we enable an alcholic another drink or a drug addict another hit from the crackpipe we are shunned by society. Why is the government enabling us and why are we sitting here taking it?
Please, fight back. If you do nothing else today, take a few minutes and call your congressman and tell him or her to stop sending you checks. You're tired of putting your kids, or grandkids, further into debt.
Tell them to paydown the national debt with the new money.
Here is what you're going to see happen, by the way. And you don't need a fancy degree to figure this one out.
We will receive an artificial infusion of cash via $1 trillion stimulus package and another round of checks to each of us. OPEC is going to reduce output, thus reducing the supply of oil. Everyone knows that as supply dwindles, prices go up.
Since there will be an extra $1.1 trillion bucks floating around by the early part of next year, prices for other things will go up. That's called inflation. We will see inflation of approximately 6% to 8% next year. So if you like the way your food bill looks this year compared to last year, you'll LOVE next year!
By the way, your wages won't keep pace, so enjoy your 3% cost of living adjustment next year. You'll be starting the year of 3% - 5% behind the 8-ball. But don't worry. By this time next year, the credit markets will be unfrozen and you can borrow again!
Remember, there's nothing a line of credit can't fix...
Please follow this simple advice. Take their check, put it in the bank and don't touch it. Payoff your credit cards and cut all but one up. Continue paying cash for everything. There's something real about knowing that $50 debit for a Wii game is coming out of your checking account immediately. Live below your means.
Sorry to go off on this tangent, but I can't take this anymore. I am going to ensure that my kids don't inherit my debts. It's unfair and it's bad parenting. It's a terrible message we are sending to them.
STOP SENDING ME CHECKS! That means you, speaker Pelosi, congressmen English and Altmire and Senators Specter and Casey.
The government, in their infinite wisdom, has decided that another round of stimulus checks is required to "kick start" the economy. Excuse me? Apparently the $835 billion they've passed already isn't enough of a kick start? If we need more, I would label this a quadruple bypass requiring electric paddles.
Remember folks. This is the same government that sent us a stimulus check over the summer. The same government that spent $43 million to tell us, via postal service, that we were getting a refund. Who knows how much it cost them to print the darn checks.
Somewhere down the line, don't ya think someone, somewhere would raise their hand and say "hey guys, maybe we should let things work themselves out. You know. Give the 'free market' a chance to right the ship."
Adam Smith is rolling over in his grave (he's my hero, by the way. If you want to learn more about him, read "The Wealth of Nations.")
The summertime bailout ran us about $100 billion. Apparently none of us spent our check at Walmart buying big screen televisions; instead opting to do crazy things like pay bills, fill our car with gas, save it for a rainy day.
The late summer bailout cost us $835 billion. Let's round everything up to a trillion bucks so far.
MY KIDS DON'T WANT TO PAY THIS DEBT! The Ola family is already on the hook for $33,000 EACH for the national debt. This doesn't include the defecit at the federal level or the defecit Pennsylvania is facing (abotu $3 billion.)
Isn't it time to give our kids a break and not make them pay for our sins of overspending, extending our credit and keeping up with the Jones's? Give me a break.
If you can keep a little secret, I'll let you in on something. I think the economy is already on the way back up folks. To be sure, there is room left for the dow to go down (I'm betting we'll see about 7500 before it's 'the bottom.') But have you noticed that you have a few bucks left in your wallet at the end of the week yet? If not, you will begin to feel it soon.
Want to know what it is that created that little jingle in your pocket? It's called saving your money for stuff that's really important like gasoline and lunch meat for your brown bag lunch. It's called being uncertain about how you'll make another credit card payment, so you only pay cash. It's called being responsible. It's something we all should be everyday.
To answer this call with extending another freebie is called enabling, and if we enable an alcholic another drink or a drug addict another hit from the crackpipe we are shunned by society. Why is the government enabling us and why are we sitting here taking it?
Please, fight back. If you do nothing else today, take a few minutes and call your congressman and tell him or her to stop sending you checks. You're tired of putting your kids, or grandkids, further into debt.
Tell them to paydown the national debt with the new money.
Here is what you're going to see happen, by the way. And you don't need a fancy degree to figure this one out.
We will receive an artificial infusion of cash via $1 trillion stimulus package and another round of checks to each of us. OPEC is going to reduce output, thus reducing the supply of oil. Everyone knows that as supply dwindles, prices go up.
Since there will be an extra $1.1 trillion bucks floating around by the early part of next year, prices for other things will go up. That's called inflation. We will see inflation of approximately 6% to 8% next year. So if you like the way your food bill looks this year compared to last year, you'll LOVE next year!
By the way, your wages won't keep pace, so enjoy your 3% cost of living adjustment next year. You'll be starting the year of 3% - 5% behind the 8-ball. But don't worry. By this time next year, the credit markets will be unfrozen and you can borrow again!
Remember, there's nothing a line of credit can't fix...
Please follow this simple advice. Take their check, put it in the bank and don't touch it. Payoff your credit cards and cut all but one up. Continue paying cash for everything. There's something real about knowing that $50 debit for a Wii game is coming out of your checking account immediately. Live below your means.
Sorry to go off on this tangent, but I can't take this anymore. I am going to ensure that my kids don't inherit my debts. It's unfair and it's bad parenting. It's a terrible message we are sending to them.
Sunday, October 12, 2008
You must be positively negative
Ah the dreaded bye week. Those of us here in Pittsburgh have come to loathe a weekend away from the Steeler football season. After all, what else is there to do on a Sunday afternoon after church and brunch besides watch football?
Glad you asked! We can talk about positive and negative coorelation and how it relates to your portfolio of stocks and investments, of course!
Let me start with a simple illustration. How many of you are married? Oops. I forgot that I can't see if you're raising your hand or not, but I can tell you this. For those of you that are married, I'm fairly certain that you and your significant other don't often see eye to eye on what to do during the dreaded bye week. Am I right?
After all, some of us (myself included) are excited that we can still watch Brett Favre throw a couple of zingers or the Colts play someone, etc. Football doesn't stop just because (gasp) the Steelers aren't playing.
Others (usually the other half of the married couple) find this a perfect excuse to head to the shopping outlets, meet aunt Ethel for a late lunch, shop some more and basically avoid the television set at all costs.
Hmph... a dilemma here for our married couple, isn't it? Well, not really.
This couple has (in investment terminology) a "NEGATIVE" coorelation. They are moving in opposite directions, and while it might not be a good thing at the time, it has great long term ramifications that are a good thing. For instance, the husband may compromise and shop for a while, so long as they can stop at the Quaker Steak and Lube for the 4 o'clock game and some wings. Both parties win out by meeting in the middle. This compromise is what eventually makes the marriage stronger, the bonds thicker and the relationship great.
The newlyweds, however, cave to each other and try to do whatever the other wants, right? This is called "POSITIVE" coorelation, and it can be deadly; not just to the strength of the marriage, but to a portfolio of stocks.
Huh? How does this relate to stocks?
Think of it like this. If you had a portfolio of stocks that had Microsoft, Dell, Gateway and Hewlitt Packard, how would all of them react to a slowdown in the economy? Well, since they're all technology stocks, all would likely respond the same way. This is just like the newlyweds reacting the same way to every issue. POSITIVE COORELATION is very bad for a portfolio.
Now think of a portfolio that has MSFT, Exxon, Pfizer and Wells Fargo. All four of these stocks are in different industries (software, oil, pharmaceuticals and banking) so all four might react differently given the same economic conditions such as an oil crisis, recession, war or market meltdown. This is NEGATIVE COORELATION and something we desperately want for our portfolio. In fact, we strive to acheive total negative coorelation in portfolios (at least the eggheads running our mutual funds do, anyway.)
We can then either OVERWEIGHT or UNDERWEIGHT our portfolio while still maintaining negative coorelation. For instance, you might really think that the oil industry is set to boom, so you can own more shares of Exxon while at the same time, still own Microsoft, Pfizer and Wells Fargo. This is what CFA (Chartered Financial Analysts) do on a daily basis to ensure diversification and negative coorelation for their clients.
With all this said, it would be unfair to NOT mention the recent pummeling the market has taken in the past two weeks. However, with proper BETA weighting, portfolio diversification and patience, I can tell you that I believe there is light at the end of the tunnel - although the Feds had nothing to do with this.
It is my best guess that there is another six to nine months of market jitters remaining, but we are through the worst at this point in time. As soon as consumer confidence rebounds (again, my opinion, but when gas prices drop below $3.00 per gallon nationwide) and we have a president elected, things will come back. It is going to be a slow, methodical climb out, but one worth watching.
I would also suggest that we are near some historic price lows for some very strong companies that have been dragged down by the market, such as GE, Pfizer, Coca Cola and Altria (Phillip Morris.) These are companies with strong fundamentals, good balance sheets and solid products that traditionally can survive a recession. I do not currently own any of the companies listed, but I plan to very shortly.
Well, the 4 o'clock game is on now (we compromised today) and that's all for now.
Click on our Google and Adsense partners to help me pay the rent and please send me some comments. It gets lonely here in cyberspace.
Glad you asked! We can talk about positive and negative coorelation and how it relates to your portfolio of stocks and investments, of course!
Let me start with a simple illustration. How many of you are married? Oops. I forgot that I can't see if you're raising your hand or not, but I can tell you this. For those of you that are married, I'm fairly certain that you and your significant other don't often see eye to eye on what to do during the dreaded bye week. Am I right?
After all, some of us (myself included) are excited that we can still watch Brett Favre throw a couple of zingers or the Colts play someone, etc. Football doesn't stop just because (gasp) the Steelers aren't playing.
Others (usually the other half of the married couple) find this a perfect excuse to head to the shopping outlets, meet aunt Ethel for a late lunch, shop some more and basically avoid the television set at all costs.
Hmph... a dilemma here for our married couple, isn't it? Well, not really.
This couple has (in investment terminology) a "NEGATIVE" coorelation. They are moving in opposite directions, and while it might not be a good thing at the time, it has great long term ramifications that are a good thing. For instance, the husband may compromise and shop for a while, so long as they can stop at the Quaker Steak and Lube for the 4 o'clock game and some wings. Both parties win out by meeting in the middle. This compromise is what eventually makes the marriage stronger, the bonds thicker and the relationship great.
The newlyweds, however, cave to each other and try to do whatever the other wants, right? This is called "POSITIVE" coorelation, and it can be deadly; not just to the strength of the marriage, but to a portfolio of stocks.
Huh? How does this relate to stocks?
Think of it like this. If you had a portfolio of stocks that had Microsoft, Dell, Gateway and Hewlitt Packard, how would all of them react to a slowdown in the economy? Well, since they're all technology stocks, all would likely respond the same way. This is just like the newlyweds reacting the same way to every issue. POSITIVE COORELATION is very bad for a portfolio.
Now think of a portfolio that has MSFT, Exxon, Pfizer and Wells Fargo. All four of these stocks are in different industries (software, oil, pharmaceuticals and banking) so all four might react differently given the same economic conditions such as an oil crisis, recession, war or market meltdown. This is NEGATIVE COORELATION and something we desperately want for our portfolio. In fact, we strive to acheive total negative coorelation in portfolios (at least the eggheads running our mutual funds do, anyway.)
We can then either OVERWEIGHT or UNDERWEIGHT our portfolio while still maintaining negative coorelation. For instance, you might really think that the oil industry is set to boom, so you can own more shares of Exxon while at the same time, still own Microsoft, Pfizer and Wells Fargo. This is what CFA (Chartered Financial Analysts) do on a daily basis to ensure diversification and negative coorelation for their clients.
With all this said, it would be unfair to NOT mention the recent pummeling the market has taken in the past two weeks. However, with proper BETA weighting, portfolio diversification and patience, I can tell you that I believe there is light at the end of the tunnel - although the Feds had nothing to do with this.
It is my best guess that there is another six to nine months of market jitters remaining, but we are through the worst at this point in time. As soon as consumer confidence rebounds (again, my opinion, but when gas prices drop below $3.00 per gallon nationwide) and we have a president elected, things will come back. It is going to be a slow, methodical climb out, but one worth watching.
I would also suggest that we are near some historic price lows for some very strong companies that have been dragged down by the market, such as GE, Pfizer, Coca Cola and Altria (Phillip Morris.) These are companies with strong fundamentals, good balance sheets and solid products that traditionally can survive a recession. I do not currently own any of the companies listed, but I plan to very shortly.
Well, the 4 o'clock game is on now (we compromised today) and that's all for now.
Click on our Google and Adsense partners to help me pay the rent and please send me some comments. It gets lonely here in cyberspace.
Sunday, October 5, 2008
Deviant Behavior and Beta
As promised from last week, now it's time to analyze risk and put some numbers to risk.
We've already discovered the difference between market risk and diversifiable risk, so how do we eliminate risk and what kind of risk can we focus on eliminating?
Well, we cannot eliminate market risk, so we are only left with the possibility of eliminating diversifiable risk. And being a finance geek, I like numbers to help me choose which project is the least risky. Let's look at an example first.
Assume that since you're my friend, I left you $100,000 to invest anyway you see fit and you're left with two possible choices. Choice "A" is to invest in a little stock we'll call "GE." GE has been around 100 years and is very steady and consistent, although not very sexy or glamorous when it comes to a crazy return. You can expect to earn 9% per year from GE.
Choice "B" is a little-known company called "Ola's Tapioca Mine and Tattoo Parlor." The main office is located in Key West, FL and they hope to franchise the concept throughout the country. They, too, expect to give you an 9% return on your investment next year.
So where do you invest and why?
Unless you have a real strong, strange urge for a new tattoo and some tapioca pudding, you will most certainly put your money into GE since there is far less risk and the return is exactly the same as a risky proposition. This is an investors natural reaction to avoid risk and maximize returns and the only way you'd consider "Ola's Tapioca Mine..." is if they had an expected rate of return greater than 9%.
But remember, greater return comes with greater risk. Let's call this risk "BETA."
Now let's also assume that the stock market has a BETA of 1.00, and we know that the average return in the stock market is about 9%. We need a number to show how much more, or less, risk is associated with our investment.
GE is old and consistent. When I hit YAHOO Finance and checked out their key statistics, their BETA was .75. This means that for every 1% the stock market moves up or down, GE will move 75% of the distance. So, if we expect the stock market to go up 10% next year, we would expect GE to go up 7.5% next year. Similarly, if we expect the stock market to go DOWN 10% next year, we'd expect GE to go down only 7.5%. So while our expected rate of return is the same as the stock market, our risk is actually 25% LESS. Hmmm..
Our Tapioca Mine might have a BETA of 1.5. This means that if the stock market went up 10%, we'd expect the Tapioca Mine to go up 15%, and vice versa if the market went down. In essence, our investment is 1.5 times riskier than the stock market and offers only a similar return. Not good.
There is a different figure we can use as well that capitalizes upon standard deviation, but that's not necessarily a blog type of entry. I just want you to be comfortable when you see the term BETA Coefficient going forward and recognize what it means.
Also recognize that BETA is utilized to compare projects that you are considering as a business, along with standard deviation and coefficient variation. If you'd like help with any project analysis, including PERT charts, please let me know as I have experience in these things and would be delighted to assist you.
Finally, recognize that you can get most of these figures for free from YAHOO Finance, CNNFN, etc. Research doesn't have to be expensive or time consuming.
Former Magellan Fund Manager and investing legend Peter Lynch often said his best source of research was his wife and his teenage daughters. They knew retail trends and hot fashion better than a 50-year old investment fund manager, so he learned to trust their judgment on what was hot and what was not. He simply put pen to paper to see if the numbers made sense, which they often did.
Use your common sense when looking at investment choices. Many times, you know something the pros don't or something they miss in their analysis; something you can use to make a lot (or save a lot) of money.
Next up: Positive and Negative Coorelation (not much of a teaser, but certainly a reminder to me of what the heck to write next week.)
Visit our sponsors and help me keep the lights on! Click the links above and please send me a comment or two. It gets lonely out here in cyberspace.
We've already discovered the difference between market risk and diversifiable risk, so how do we eliminate risk and what kind of risk can we focus on eliminating?
Well, we cannot eliminate market risk, so we are only left with the possibility of eliminating diversifiable risk. And being a finance geek, I like numbers to help me choose which project is the least risky. Let's look at an example first.
Assume that since you're my friend, I left you $100,000 to invest anyway you see fit and you're left with two possible choices. Choice "A" is to invest in a little stock we'll call "GE." GE has been around 100 years and is very steady and consistent, although not very sexy or glamorous when it comes to a crazy return. You can expect to earn 9% per year from GE.
Choice "B" is a little-known company called "Ola's Tapioca Mine and Tattoo Parlor." The main office is located in Key West, FL and they hope to franchise the concept throughout the country. They, too, expect to give you an 9% return on your investment next year.
So where do you invest and why?
Unless you have a real strong, strange urge for a new tattoo and some tapioca pudding, you will most certainly put your money into GE since there is far less risk and the return is exactly the same as a risky proposition. This is an investors natural reaction to avoid risk and maximize returns and the only way you'd consider "Ola's Tapioca Mine..." is if they had an expected rate of return greater than 9%.
But remember, greater return comes with greater risk. Let's call this risk "BETA."
Now let's also assume that the stock market has a BETA of 1.00, and we know that the average return in the stock market is about 9%. We need a number to show how much more, or less, risk is associated with our investment.
GE is old and consistent. When I hit YAHOO Finance and checked out their key statistics, their BETA was .75. This means that for every 1% the stock market moves up or down, GE will move 75% of the distance. So, if we expect the stock market to go up 10% next year, we would expect GE to go up 7.5% next year. Similarly, if we expect the stock market to go DOWN 10% next year, we'd expect GE to go down only 7.5%. So while our expected rate of return is the same as the stock market, our risk is actually 25% LESS. Hmmm..
Our Tapioca Mine might have a BETA of 1.5. This means that if the stock market went up 10%, we'd expect the Tapioca Mine to go up 15%, and vice versa if the market went down. In essence, our investment is 1.5 times riskier than the stock market and offers only a similar return. Not good.
There is a different figure we can use as well that capitalizes upon standard deviation, but that's not necessarily a blog type of entry. I just want you to be comfortable when you see the term BETA Coefficient going forward and recognize what it means.
Also recognize that BETA is utilized to compare projects that you are considering as a business, along with standard deviation and coefficient variation. If you'd like help with any project analysis, including PERT charts, please let me know as I have experience in these things and would be delighted to assist you.
Finally, recognize that you can get most of these figures for free from YAHOO Finance, CNNFN, etc. Research doesn't have to be expensive or time consuming.
Former Magellan Fund Manager and investing legend Peter Lynch often said his best source of research was his wife and his teenage daughters. They knew retail trends and hot fashion better than a 50-year old investment fund manager, so he learned to trust their judgment on what was hot and what was not. He simply put pen to paper to see if the numbers made sense, which they often did.
Use your common sense when looking at investment choices. Many times, you know something the pros don't or something they miss in their analysis; something you can use to make a lot (or save a lot) of money.
Next up: Positive and Negative Coorelation (not much of a teaser, but certainly a reminder to me of what the heck to write next week.)
Visit our sponsors and help me keep the lights on! Click the links above and please send me a comment or two. It gets lonely out here in cyberspace.
Sunday, September 28, 2008
Risk can be...well, risky!
For the last few weeks we've been hearing how much risk there is in the economy.
One of the key words being thrown around is "systemic" risk, and I thought it might be wise to analyze the two basic types of risk one faces when running or managing a business. For some readers this will be a refresher course on managing and measuring risk; for others, we're going to slap some formal terms onto things you probably already know. Consider it a free Finance course.
The first goal of ANY venture is to remove as much risk as possible from the equation. By doing so we increase our assuredness that our project or investment will be predictable. We like predictability since it helps us create reasonable, realistic figures that we can present to our banker, shareholders or business partners. The way to remove risk is by doing something called "diversifying." Many of you know that word from meeting with your financial professional and them telling you to diversify your portfolio. It's a fancy way of asking you to not own only one type of stock, but rather, many different types of stocks. This creates a layering effect, so that one investment goes down, another might go up. It's a way of offsetting one risk with another.
Any risk that can be removed through diversification is known as non-systemic risk.
Let's look at a pizza shop for example since it's Sunday and pizza goes with church and football.
A pizza shop owner wants to remove as much risk from his or her business as possible. What are some risks they face on a daily basis that can be tweaked or changed?
Costs are largely contained in ingredients, so if the cost of mozarella cheese goes up from one supplier, our owner can look to another, cheaper substitute. Similarly, if business is slow during the lunch hour, our pizza shop could expand into new products such as salads, sandwiches, finger foods, etc. If our pizza shop is in a large metroplitan area, they may decide to eliminate delivery altogether and save the cost of labor. Basically, anything that can be readily changed to keep costs down/revenue high is a non-systemic risk.
On the flip side of the coin, however, is "systemic" risk. This is risk that CANNOT be eliminated through diversification.
For example (and there are many) oil prices. There is absolutely nothing our pizza shop owner can do about the cost of oil, which ultimately results in higher produce costs. Similarly, minimum wage increases set by government bodies will have an impact on the bottom line and there is nothing our business operator can do about those either. Other examples include inflation, unemployment, acts of terror, war, election results, interest rates,etc.
So as business people, it is our job to eliminate or diversify ALL of our non-systemic risk while carefully planning for ALL systemic risk.
We are very good at the first part since we know our business forwards, backwards and inside out. But for some reason, we are not real good at the second part, whether it's a result of too little time to plan for this type of risk or we aren't really interested in figures like CPI, PPI, GDP, Prime Rate and unemployment figures (both locally and nationally.)
I'm here to tell you that if you are to be successful for the long-haul, you have no choice but to be concerned about systemic risk. Otherwise, you are living a lie even though you have every product that could appeal to any consumer in the world.
Make a plan that includes tracking interest rates, inflation figures and employment figures; whether daily, weekly or at the least monthly. This will help you begin to see where the economy is heading six, nine or twelve months from now. By doing so, you would have known that this crash was likely to occur and you could have applied for that business line of credit in May rather than scrambling now to shore up some extra cash. Maybe you held off on that new piece of equipment because you were too busy to stop by the bank and make a loan application. Now, the cost of the equipment has gone up due to production costs and you are having a tough time getting approval for the loan since lending is being restricted.
Plan for the long-run by analyzing systemic risk and run your business day to day by measuring non-systemic risk.
It's really nothing more than a study in Macroeconomics (systemic) versus Microeconomics (non-systemic.)
Next week we will uncover some figures that help us put a number to the amount of risk we're taking on.
One of the key words being thrown around is "systemic" risk, and I thought it might be wise to analyze the two basic types of risk one faces when running or managing a business. For some readers this will be a refresher course on managing and measuring risk; for others, we're going to slap some formal terms onto things you probably already know. Consider it a free Finance course.
The first goal of ANY venture is to remove as much risk as possible from the equation. By doing so we increase our assuredness that our project or investment will be predictable. We like predictability since it helps us create reasonable, realistic figures that we can present to our banker, shareholders or business partners. The way to remove risk is by doing something called "diversifying." Many of you know that word from meeting with your financial professional and them telling you to diversify your portfolio. It's a fancy way of asking you to not own only one type of stock, but rather, many different types of stocks. This creates a layering effect, so that one investment goes down, another might go up. It's a way of offsetting one risk with another.
Any risk that can be removed through diversification is known as non-systemic risk.
Let's look at a pizza shop for example since it's Sunday and pizza goes with church and football.
A pizza shop owner wants to remove as much risk from his or her business as possible. What are some risks they face on a daily basis that can be tweaked or changed?
Costs are largely contained in ingredients, so if the cost of mozarella cheese goes up from one supplier, our owner can look to another, cheaper substitute. Similarly, if business is slow during the lunch hour, our pizza shop could expand into new products such as salads, sandwiches, finger foods, etc. If our pizza shop is in a large metroplitan area, they may decide to eliminate delivery altogether and save the cost of labor. Basically, anything that can be readily changed to keep costs down/revenue high is a non-systemic risk.
On the flip side of the coin, however, is "systemic" risk. This is risk that CANNOT be eliminated through diversification.
For example (and there are many) oil prices. There is absolutely nothing our pizza shop owner can do about the cost of oil, which ultimately results in higher produce costs. Similarly, minimum wage increases set by government bodies will have an impact on the bottom line and there is nothing our business operator can do about those either. Other examples include inflation, unemployment, acts of terror, war, election results, interest rates,etc.
So as business people, it is our job to eliminate or diversify ALL of our non-systemic risk while carefully planning for ALL systemic risk.
We are very good at the first part since we know our business forwards, backwards and inside out. But for some reason, we are not real good at the second part, whether it's a result of too little time to plan for this type of risk or we aren't really interested in figures like CPI, PPI, GDP, Prime Rate and unemployment figures (both locally and nationally.)
I'm here to tell you that if you are to be successful for the long-haul, you have no choice but to be concerned about systemic risk. Otherwise, you are living a lie even though you have every product that could appeal to any consumer in the world.
Make a plan that includes tracking interest rates, inflation figures and employment figures; whether daily, weekly or at the least monthly. This will help you begin to see where the economy is heading six, nine or twelve months from now. By doing so, you would have known that this crash was likely to occur and you could have applied for that business line of credit in May rather than scrambling now to shore up some extra cash. Maybe you held off on that new piece of equipment because you were too busy to stop by the bank and make a loan application. Now, the cost of the equipment has gone up due to production costs and you are having a tough time getting approval for the loan since lending is being restricted.
Plan for the long-run by analyzing systemic risk and run your business day to day by measuring non-systemic risk.
It's really nothing more than a study in Macroeconomics (systemic) versus Microeconomics (non-systemic.)
Next week we will uncover some figures that help us put a number to the amount of risk we're taking on.
Tuesday, September 23, 2008
$700 Billion bomb
I told you that a vacation would do me a world of good. The result is two blogs in three days. But all of the credit cannot be given to rest - let's thank Treasury Secretary Paulson and Fed Chairman Bernake too. After all, it's not everyday the two get together on CNBC and talk to members of congress asking for quick passage of $700 Billion.
And at the risk of being labeled conservative in my common-sense approach to this whole thing, I would ask each of you to consider the following before giving Paulson carte blanche authority to buy these mortgages at "a deep discount."
If the assets can be purchased at such a deep discount, why isn't anyone else rushing into the market to scoop these up? Additionally, consider the fact that Bernake and Paulson are suggesting that they will pay a fair market value for these assets. Huh? If they pay fair value for these assets, or in some instances, above fair value, isn't that the same as creating profits for Wall Street?
The next point to consider is that Paulson used to work for Goldman Sachs. Before the White House tapped him to be Treasury Secretary, Paulson ran Goldman Sachs and made about $50 million per year. I can only speculate that he still has shares in GS today. By the way, Sachs is no longer an investment bank and will likely survive this implosion. The cynic in me is guessing that they will be the first in line when it comes time to dump these valuable mortgage assets, too.
Here is the point that drives it home, however. I know that we all hate history, but I'm going to ask you to go back to your eighth grade civics class and revisit the New Deal in 1933.
That year, the New Deal disallowed investment banks from also acting like commercial banks. Five years later, the New Deal created Fannie Mae to increase liquidity in the mortgage market. This allowed lower down payments and easier terms to obtain home loan financing. Freddie Maca was created in 1970.
Skip ahead to 1989 and the Savings & Loan debacle. The government stepped in when the S&L's were writing bad loans before it was en vogue and had a TON of bad loans on the books. This action changed everything - setting precedent to banks and other investment firms that if you make bad loans, the government had yoru back and would bail you out.
In 1995, Congress re-established the CRA (Community Reinvestment Act) that emphasized lending to low-moderate income borrowers in less affluent communities. If a bank was going to buy another bank or merge with another entity, it had better adhere to CRA standards in order to get its plan approved. Homeownership skyrockets to over 65% of all Americans that could be homeowners becoming homeowners.
Flash forward to 9/11. Rather than allowing the market to shoulder the burden for bad loans that occurred as a result of the business slowdown due to the terrorist acts of that day, the Feds decide to continually lower interest rates; from 6.5% to 1%. This allowed an artificial "inflation" in the market for loans and created a new demand.
Now, we find ourselves in the same predicament and we are following the same exact path! It has to stop.
Worse yet, we are allowing Paulson the ability to do whatever he wants, whenever he wants, with our money. No checks or balances here, sir.
There is an alternative and it's a simple thing to enact. Sadly for congress, it doesn't come with pomp and circumstance or a $700 Billion price tag. It's changing an accounting rule that currently requires banks to list loans as assets and value them at their current price. In case you haven't followed the mortgage market, you probably would have more luck selling sand in the desert right now than selling a mortgage on Wall Street. This is why the market liquidity crunch has hit. Not because of foreclosures, which are bad, and not because of subprime lending, which is also part of the problem.
Think about it this way. If you absolutely HAD to sell your house today. Not tomorrow, not next week, but today, would you get top dollar for it? NO WAY JOSE (my five year old daughter's favorite quote.) THAT'S what is going on in the mortgage/banking market right now.
These investment banks don't have to sell their mortgage loans today, but they have to value them on their books based upon today's demand... go figure.
The real culprit is a little accounting requirement. Sorry it's not sexier, but that's too hard to explain I guess.
Please, I am asking you as someone that really doesn't want his children to pay for this horrible plan to spend two minutes and contact Congressman Altmire and Senators Casey and Specter and ask them to please NOT sign this horrible piece of legislation.
Send me your comments and don't worry, there will be another post Monday.
And at the risk of being labeled conservative in my common-sense approach to this whole thing, I would ask each of you to consider the following before giving Paulson carte blanche authority to buy these mortgages at "a deep discount."
If the assets can be purchased at such a deep discount, why isn't anyone else rushing into the market to scoop these up? Additionally, consider the fact that Bernake and Paulson are suggesting that they will pay a fair market value for these assets. Huh? If they pay fair value for these assets, or in some instances, above fair value, isn't that the same as creating profits for Wall Street?
The next point to consider is that Paulson used to work for Goldman Sachs. Before the White House tapped him to be Treasury Secretary, Paulson ran Goldman Sachs and made about $50 million per year. I can only speculate that he still has shares in GS today. By the way, Sachs is no longer an investment bank and will likely survive this implosion. The cynic in me is guessing that they will be the first in line when it comes time to dump these valuable mortgage assets, too.
Here is the point that drives it home, however. I know that we all hate history, but I'm going to ask you to go back to your eighth grade civics class and revisit the New Deal in 1933.
That year, the New Deal disallowed investment banks from also acting like commercial banks. Five years later, the New Deal created Fannie Mae to increase liquidity in the mortgage market. This allowed lower down payments and easier terms to obtain home loan financing. Freddie Maca was created in 1970.
Skip ahead to 1989 and the Savings & Loan debacle. The government stepped in when the S&L's were writing bad loans before it was en vogue and had a TON of bad loans on the books. This action changed everything - setting precedent to banks and other investment firms that if you make bad loans, the government had yoru back and would bail you out.
In 1995, Congress re-established the CRA (Community Reinvestment Act) that emphasized lending to low-moderate income borrowers in less affluent communities. If a bank was going to buy another bank or merge with another entity, it had better adhere to CRA standards in order to get its plan approved. Homeownership skyrockets to over 65% of all Americans that could be homeowners becoming homeowners.
Flash forward to 9/11. Rather than allowing the market to shoulder the burden for bad loans that occurred as a result of the business slowdown due to the terrorist acts of that day, the Feds decide to continually lower interest rates; from 6.5% to 1%. This allowed an artificial "inflation" in the market for loans and created a new demand.
Now, we find ourselves in the same predicament and we are following the same exact path! It has to stop.
Worse yet, we are allowing Paulson the ability to do whatever he wants, whenever he wants, with our money. No checks or balances here, sir.
There is an alternative and it's a simple thing to enact. Sadly for congress, it doesn't come with pomp and circumstance or a $700 Billion price tag. It's changing an accounting rule that currently requires banks to list loans as assets and value them at their current price. In case you haven't followed the mortgage market, you probably would have more luck selling sand in the desert right now than selling a mortgage on Wall Street. This is why the market liquidity crunch has hit. Not because of foreclosures, which are bad, and not because of subprime lending, which is also part of the problem.
Think about it this way. If you absolutely HAD to sell your house today. Not tomorrow, not next week, but today, would you get top dollar for it? NO WAY JOSE (my five year old daughter's favorite quote.) THAT'S what is going on in the mortgage/banking market right now.
These investment banks don't have to sell their mortgage loans today, but they have to value them on their books based upon today's demand... go figure.
The real culprit is a little accounting requirement. Sorry it's not sexier, but that's too hard to explain I guess.
Please, I am asking you as someone that really doesn't want his children to pay for this horrible plan to spend two minutes and contact Congressman Altmire and Senators Casey and Specter and ask them to please NOT sign this horrible piece of legislation.
Send me your comments and don't worry, there will be another post Monday.
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