Thursday, May 25, 2006
Economy Update
5.3% (Q1) annual growth for the United States economy. The fastest growth in more than 2 years. Inflation holds steady at under 3%. Exports are also rising and have grown at 14.7% (annual). Housing spending is also up (3.1% instead of the estimated 2.4%). Looks like things are going good!
Monday, May 22, 2006
Don't Put Much Faith in the "Experts"
John Stossel wrote an article about his Princeton economics teacher, Burton Malkiel. I have been reading, Mr. Malkiel's book and am almost finished. I'm quite impressed with his numbers concerning stock investment and his index-fund based investment strategy. I'll post more about the book when I'm finished with it.
Stossel talks about things I've already learned in the course of earning my MBA. Most experts cannot consistently pick stocks for a portfolio that beats the S&P 500. Sure every year there are lucky ones, but too many factors over the long run reduce even the most highly educated and savvy fund manager to scampering to beat the almighty S&P.
If you've been reading Cashtalk for awhile now, you already know this. Brett has posted an article about his own foray into the market (Brett would hardly call himself a savvy investor, but at least he tried!) and his recommendations for a stock market strategy here. And our stock market simulation game also proved that because of all the brokerage fees, picking and holding a stock would do just as well as buying and selling on a daily basis (or did it?).
So when you're deciding which fund to buy or which basket of stocks to hold, remember that odds are, buying the S&P 500 index fund will get you better or equivalent returns over the long run, with the bonus of having lower commissions and fees.
Stossel talks about things I've already learned in the course of earning my MBA. Most experts cannot consistently pick stocks for a portfolio that beats the S&P 500. Sure every year there are lucky ones, but too many factors over the long run reduce even the most highly educated and savvy fund manager to scampering to beat the almighty S&P.
If you've been reading Cashtalk for awhile now, you already know this. Brett has posted an article about his own foray into the market (Brett would hardly call himself a savvy investor, but at least he tried!) and his recommendations for a stock market strategy here. And our stock market simulation game also proved that because of all the brokerage fees, picking and holding a stock would do just as well as buying and selling on a daily basis (or did it?).
So when you're deciding which fund to buy or which basket of stocks to hold, remember that odds are, buying the S&P 500 index fund will get you better or equivalent returns over the long run, with the bonus of having lower commissions and fees.
Stocks; Gold Fall in India: On Suicide Alert
Wow. The Mumbai exchange in India has lost almost 22% of its more than $600 billion value last week and beginning today. The Indian police are watching canals and rivers for brokers wishing to commit suicide.
No matter how bad you do in life with money, it certainly is never worth more than your life. Getting your priorities straight should prevent people from jumping out of buildings or tying a boulder to their leg and jumping off a bridge. Your family and values are way more important in life than money. Your dreams may be put on hold, but a short delay isn't worth the price of death.
Gold and other commodities are falling, too. Very strange. Some are recalling similarities to this crash and the 1987 "Black Monday" Wall-Street crash, citing fears about inflation and a sharp run-up of stock prices and weakness of bonds.
I'll keep you posted.
No matter how bad you do in life with money, it certainly is never worth more than your life. Getting your priorities straight should prevent people from jumping out of buildings or tying a boulder to their leg and jumping off a bridge. Your family and values are way more important in life than money. Your dreams may be put on hold, but a short delay isn't worth the price of death.
Gold and other commodities are falling, too. Very strange. Some are recalling similarities to this crash and the 1987 "Black Monday" Wall-Street crash, citing fears about inflation and a sharp run-up of stock prices and weakness of bonds.
I'll keep you posted.
Monday, May 15, 2006
Time Value of Money: Buying a Car
I thought I would review the Time Value of Money after a friend of mine sent me a problem to solve.
Let's say you want to buy a new car valued at $25,000. Wait a minute! What are you doing? A new car loses almost a fifth of its value as soon as you drive it off the lot! Never buy a new car!
Okay...Let's say two guys with trench coats kidnap you at gunpoint and bring you to a new car dealership. They bring you to the smirking salesman and he says, "You have two deals: You can buy the $25,000 car for no interest and payments for 60 months or you can get a $4000 rebate today and pay 7% (yearly) interest on the balance for 48 months." Which is the better deal?
Your eyes dart across the street to the used car lot. You glance down at the "used car" section in the classifieds. Then you hear a "click" as the thug pulls back the hammer of his revolver. "Enough stalling! What's your decision!?"
First, let's figure out the payments. The first option (no interest 100% financing) would have a payment of $416.67 for 60 months. What's $416.67 x 60? $25,000.20.
The second option has payments of $502.87 for 48 months. That comes to $24,137.76. Seems a little cheaper, but remember that this includes a $4,000 rebate, so the number should be $21,000. The 3,137.76 is interest on the financing of the $21,000.
My friend suggested that I use the Present Value of money to solve the problem. Is this the correct approach? On the first option, the future value of his payments would be $25,000.20 after 60 months. The Present Value could be discounted at an alternative use of the money, say a CD at 5%. We can set up an algebra equation that looks like this:
PV(1st Option) = ($-416.67/0.004167)*[1 - 1/(1.004167)^60]
Notice how I've divided the 5% interest by 12 to get the monthly interest of 0.004167? This will give us a more accurate number.
If we solve for the first option's Present Value, we get $22,079.42.
PV(2nd Option) = ($-502.87/0.004167)*[1-1/(1.004167)^48]
PV(2nd Option) = $21,835.93
What does this tell us? Do we really care what an alternative investment would make? We want a car, darn it! Especially to appease these goons and their revolver pointed at your head. The answer is yes. This tells us that for 7%, 48 month financing option, plus rebate , if I invested $21,835.93 at 5%, I'd have the equivalent future value. If I invested $22,079.42 today at 5%, I'd have the future value of the 1st option.
So which one is better? The lower PV gets me the same car at "less"money. And since these guys are pointing a gun at your head, you should just take the 2nd option: the $4,000 rebate and 7% interest. You'll save $243.54.
There you have it. Easy peasy!
Let's say you want to buy a new car valued at $25,000. Wait a minute! What are you doing? A new car loses almost a fifth of its value as soon as you drive it off the lot! Never buy a new car!
Okay...Let's say two guys with trench coats kidnap you at gunpoint and bring you to a new car dealership. They bring you to the smirking salesman and he says, "You have two deals: You can buy the $25,000 car for no interest and payments for 60 months or you can get a $4000 rebate today and pay 7% (yearly) interest on the balance for 48 months." Which is the better deal?
Your eyes dart across the street to the used car lot. You glance down at the "used car" section in the classifieds. Then you hear a "click" as the thug pulls back the hammer of his revolver. "Enough stalling! What's your decision!?"
First, let's figure out the payments. The first option (no interest 100% financing) would have a payment of $416.67 for 60 months. What's $416.67 x 60? $25,000.20.
The second option has payments of $502.87 for 48 months. That comes to $24,137.76. Seems a little cheaper, but remember that this includes a $4,000 rebate, so the number should be $21,000. The 3,137.76 is interest on the financing of the $21,000.
My friend suggested that I use the Present Value of money to solve the problem. Is this the correct approach? On the first option, the future value of his payments would be $25,000.20 after 60 months. The Present Value could be discounted at an alternative use of the money, say a CD at 5%. We can set up an algebra equation that looks like this:
PV(1st Option) = ($-416.67/0.004167)*[1 - 1/(1.004167)^60]
Notice how I've divided the 5% interest by 12 to get the monthly interest of 0.004167? This will give us a more accurate number.
If we solve for the first option's Present Value, we get $22,079.42.
PV(2nd Option) = ($-502.87/0.004167)*[1-1/(1.004167)^48]
PV(2nd Option) = $21,835.93
What does this tell us? Do we really care what an alternative investment would make? We want a car, darn it! Especially to appease these goons and their revolver pointed at your head. The answer is yes. This tells us that for 7%, 48 month financing option, plus rebate , if I invested $21,835.93 at 5%, I'd have the equivalent future value. If I invested $22,079.42 today at 5%, I'd have the future value of the 1st option.
So which one is better? The lower PV gets me the same car at "less"money. And since these guys are pointing a gun at your head, you should just take the 2nd option: the $4,000 rebate and 7% interest. You'll save $243.54.
There you have it. Easy peasy!
Thursday, May 11, 2006
The Smell of Money
When I was in China, I would often try to stay current with world news by either reading the Economist or Newsweek (International Edition). In one issue of Newsweek, there was a "perpective" article written by a former resident of a town in Iowa with a lot of pig farms around. The person recalls how her father and her would drive into town and the locals would sniff the air and smell the horrible odor of pig manure. Her father would take a particularly big whiff and then say, "Do you smell that? That's the smell of money."
Not all jobs are highly desirable, but after beginning the "Millionaire Mind" by Thomas J. Stanley, it seems that many millionaires tend to gravitate toward low competition, undesirable businesses with high profit margins. That's something you should keep in mind when choosing your own career path. Pigs, while stinky, often pay well.
But I digress. I was reminded of that article when I read this article today. Apparently scientists at the University of Illinois have found a way to convert pig manure into crude oil. That's right. Millions of tons of pig manure could potentially be transformed into oil and used in vehicles or other applications. Ain't technology great? I guess in the future, there will be one more way for that smell to be the "smell of money."
Not all jobs are highly desirable, but after beginning the "Millionaire Mind" by Thomas J. Stanley, it seems that many millionaires tend to gravitate toward low competition, undesirable businesses with high profit margins. That's something you should keep in mind when choosing your own career path. Pigs, while stinky, often pay well.
But I digress. I was reminded of that article when I read this article today. Apparently scientists at the University of Illinois have found a way to convert pig manure into crude oil. That's right. Millions of tons of pig manure could potentially be transformed into oil and used in vehicles or other applications. Ain't technology great? I guess in the future, there will be one more way for that smell to be the "smell of money."
Tuesday, May 09, 2006
Investing for Education
Two guys from SmithBarney in Houston, TX (actually they're Vice Presidents) wrote this article about investing for their children's education. They are adamantly against the 529 plans and any of the state educational savings accounts. Why? They claim that recent laws in Congress open the door for states to tax other states' plans. Not good.
They also correctly point out that in 2010, the 401(k), Roth IRA, and 529 plans tax laws will expire. They may or may not be renewed by Congress. I can't imagine any Congress would remove the tax sheltered properties of the 401(k) or other savings devices, but it is a risk, I suppose.
Their strategy is composed of putting half of an investment into a municipal bond and the other half into a few, dividend-paying, high return stocks (if only they had pointed out a few examples!). Their ideas intrigue me, but I'm a bit skeptical. I'd like to hear your thoughts.
They also correctly point out that in 2010, the 401(k), Roth IRA, and 529 plans tax laws will expire. They may or may not be renewed by Congress. I can't imagine any Congress would remove the tax sheltered properties of the 401(k) or other savings devices, but it is a risk, I suppose.
Their strategy is composed of putting half of an investment into a municipal bond and the other half into a few, dividend-paying, high return stocks (if only they had pointed out a few examples!). Their ideas intrigue me, but I'm a bit skeptical. I'd like to hear your thoughts.
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