Apologies

I offer my sincerest apologies for not posting as regularly lately as I have been able to previously. However, for your wait, I am releasing a paper which I have been writing for recent college courses geared towards a degree in finance.

The paper describes the seven fundamental tools that can be used to determine movement in a stock--one which makes money. I am using it as a proof of concept for a program that makes investing accessible by any investor, extremely, and very foolproof.

The paper is in Adobe's Acrobat formatter. The free Adobe Reader or compatible software is required to read the software.

Download the paper here!

Maximizing Utility and the Brain: Cash or Status?

Scientific American has an article regarding a study of the brain that indicates the brain places a high value on money, but a higher value on social status. From the article:

"Our study shows that both behaviorally and in the brain, people place an importance on social status," says Caroline Zink, a postdoctoral fellow in neuroscience at the National Institute of Mental Health (NIMH) in Bethesda, Md., and co-author of one of studies. "It's hugely influential even [when we're not] in direct competition with someone else."

E-Money, Part 2

The introduction of the Euro is an example of progression in the classic economy toward an all-digital economy. On the first of January 2002, the Euro became the standard currency of the member countries of the European Union. The Euro was introduced because the barriers to trade created inefficiency and waste and current systems created less value in each of their monies. This affected European countries when conducting business with the remainder of the global marketplace. Standardization of the Euro as the single currency in 12 countries of the European Union reduced the cultural barriers to trading with one another and unified at least 12 separate markets. The unified European marketplace is making it easier for other major markets in the world to do business with them, as well. Despite earlier doubts, the Euro has gained market value to be nearly of the same value as the U.S. Dollar, the most compared-to currency in the world.

This introduction of the Euro has been indicative as a case study of what evolving several markets into a unified marketplace can do to an economic system. Unifying markets can be defined as unifying resources, however, there are the structural changes that need to take place including infrastructure, demand, and a single currency. The infrastructure, as noted earlier, exists in the current capacity of the Internet. Further redundancies, such as more “backbone servers” that operate the core of the Internet, are necessary; as is the need for more bandwidth increases and the standardization of the languages and protocols that transport data. The demand exists because of increased efficiency involved with international transactions, thus relieving some of any trade deficit or increasing any trade surplus: This effect alone would sell the governments of the world to the idea, keeping in mind that the U.S. Government accounts for roughly one third of all monetary transactions in our $10 trillion economy. The single currency in this new, all-digital system would be simple: The “credit.” If all national markets were to utilize this “credit,” it would decrease the amount of waste in the world today. A major problem that critics are likely to point out is the problem plaguing individual currencies today is inflation. The best way to arrange this is to mimic the way that the European Union dealt with introducing the Euro to member nations: Rules were enacted to impose a strict level of fluctuations on the Euro. These rules were strict, since countries who wished to participate in the euro and be a part of "Euroland" had to pass some economic tests referred to as convergence criteria:

• “The country's annual government budget deficit (the amount of money it owes) cannot exceed 3 percent of gross domestic product (GDP, the total output of the economy).
• The total outstanding government debt (the cumulative total of each year's budget deficit) cannot exceed 60 percent of GDP.
• In order to push down inflation rates and encourage more stable prices, the country's rate of inflation must be within 1.5 percent of the three best performing EU countries.
• The average nominal long-term interest rate must be within 2 percent of the average rate in the three countries with the lowest inflation rates. (Interest rates are measured on the basis of long-term government bonds and/or comparable securities.)
• The country's exchange rates must stay within "normal" fluctuation margins of the European Exchange Rate Mechanism (ERM) for at least two years. “ (Howstuffworks.com)

With such controls in place, it is likely that a universal “earth credit” would be an attainable standard.

Now that the theoretical groundwork has been laid, how is this somewhat evolutionary, somewhat revolutionary system going to change the way individuals and businesses buy and sell goods and services? Every time that a consumer purchases a good or service a small stream of credits will flow from one place (the consumer’s bank account) to another (the business’s merchant account) through cyberspace; every time that a business takes their margin of the profits gained from that sale to the consumer, and spends that on providing more, better items for the consumer, their account will see a decrease of funds while the business that they purchased the goods from sees an increase in their account. Imagining the endless flow of goods from their manufacturers to the consumers, and the endless flow of credits from them to the companies that serve them, a seamless flow develops between the consumer and the business. This shortens the metaphorical distance between the two, and makes the relationship that the business has with the consumer stronger. This will allow a better product for the consumer and better customer relationship management by the business. It will also allow for the business to better understand the consumers that it serves, and produce better products based on the changing needs of the consumer. By changing the system by which everyone makes their transactions with one another, everything is streamlined and people grow closer and understand one another better.

The forthcoming e-economy will change the way that the world does business in every respect. It will make money worth more, easier to purchase any item in any country, and make relations between businesses and consumers better, streamlined, and more beneficial to both parties. The true question of the e-economy, as I have implied earlier, is rather a question of when as to how: Already the amount of money that passes through “automated clearing houses,” or ACH transactions, each day numbers in the billions of dollars. Even though the governments of the world distribute most of this money, the government has always acted as a catalyst for change in a society.

Dollars and Sense

Financial success does not happen overnight; money is not something to be had instantly. Rather, financial success is the manifestation of a specific behavior set.

Once upon a time there was a boy born in the Midwest; for the purposes of this story, we’ll simply call him W. A bookworm with a natural ability in math, he went to work at his father’s brokerage in 1941. During his first year working there, W purchased a couple shares of stock, just for kicks. Purchasing them for a bit more than $38, he sold them for $40, not making much money from them: The Cities Services stock would soar to $200 months later. In 1944, at the age of 14, he started installing pinball machines in barber shops. Earning $1,400 from the deal, he purchased 40 acres of land and rented it to tenant farmers. A good student, his love of being an entrepreneur came before his desire to attend college. By the time he graduated high school at the age of 16, he had done so in the top 20 of his class and had saved nearly $5,000. His father coaxed him into attending university; yielding to his advice and matriculating at the Wharton School for three years and transferring in the last year. In 1951 he would earn his Masters degree in Economics. By 1956, he founded his first investment partnership with $100 out of his own pocket (and several thousand from multiple limited partners, family and friends). Spending much time learning, from multiple sources, the art of investing, he would run his investment partnership from his bedroom making an excess of 30% compounded returns in a market (1956 to 1969) when 7%-11% is the norm.

In 1962 W would start purchasing shares of a failing textile company, leaving his partnerships to operate it full-time in 1969. Turning it into a holding company, he began purchasing other companies with an emphasis in insurance concerns due to their large cash reserves that they must keep. Over the years, W fashioned himself a “capital allocator,” putting significant sums of money into high-value companies and keeping existing management.

How does such a man perceive his wealth?

“I don't have a problem with guilt about money. The way I see it is that my money represents an enormous number of claim checks on society. It's like I have these little pieces of paper that I can turn into consumption. If I wanted to, I could hire 10,000 people to do nothing but paint my picture every day for the rest of my life. And the GNP would go up. But the utility of the product would be zilch, and I would be keeping those 10,000 people from doing AIDS research, or teaching, or nursing. I don't do that though. I don't use very many of those claim checks. There's nothing material I want very much. And I'm going to give virtually all of those claim checks to charity when my wife and I die.”

The man? Warren E. Buffet, worth $52.4 billion as of 2007.

What can his rise to power tell the rest of us in the rise to ours?

1. Wealth-building decisions are long-term ones. Studies have shown that wealthy people made decisions for the long-term; usually doing a cost-benefit analysis for a 20-year period. Those on the opposite end of the wealth spectrum, on the other hand, make decisions for the short-term, “what will make me happy now?” In fact, you are more apt to make your own million than to inherit it from someone else: 86 percent of millionaires are first generation; the money is not inherited. Your wealth is the sum total of your decisions to date.

2. Wealth relates more to behaviors and less to number crunching. Think that there is something special about the affluent, like getting an inheritance or maybe that you have “bad luck” over other people? Research has found that wealth disparity couldn’t be explained by income—differences by income only accounted for a 5 percent dispersion. Furthermore the researchers noticed that “’chance events’—inheritances, medical bills, marital status, number of children— explained about 4% of the dispersion.”

3. Don’t spend more than you earn. This is a simple axiom: If your net income is negative over a long enough period of time, no matter what your financial goals are, you will not be able to achieve them.

4. Pay off debts. The less debts you have, the more your cash flow will increase. Your income is the most powerful wealth-building tool that you have, and the less strain it has to provide for you, the more ability you will have to become financially successful.

5. Have a clear plan laid out—financial and otherwise. Dream big, but fashion it with rationality. If you plan to be a millionaire in 5 years and you’re currently making $30,000 per year…something drastic will need to happen to get to where you want to be.

6. Find opportunities and learn how exploit them. Success is when opportunity meets preparation. This means everything from being able to spot something that could be profitable in the stock market to knowing when to make a move at your job that could be advantageous to you.

7. Persevere. History is riddled with stories of the greats that kept on doing something “just a bit longer” than everyone else. Their determination and purpose to achieve their desired result allowed them to achieve their goal, which often led to financial success of some fashion.

8. Invest in yourself. If your income is your most valuable wealth-building tool, you are the reason that your income is such a valuable tool. Investing in yourself means sharpening and expanding your skill set through self-directed study and formal education. It also means doing those things to enhance the positive aspects of your life and minimize—or get rid of—the negatives.

9. Help others achieve. Success begets success. Helping others achieve not only helps them, it also helps you: Mentoring offers a different perspective that many people don’t realize and, therefore, don’t care to tap into. Humans are a creature that relies on community; we each have a symbiotic relationship with one another in the sense that what comes around goes around. Just s your success relies on the choices of other people; the success of other people will rely on the choices which you make.

10. Become an entrepreneur. Take an attorney, for example: With about 10 years experience, they have a median salary of about $100,000; considering a conservative 2,000 billable hours each year (for about 2,800 hours worked) at $250 per hour that the client is being charged, you are only realizing 20 percent of the business you are bringing into your law firm. All “blue sky value” aside, you could still make more doing that—albeit with more work—than the alternative of working for someone else. In the greater scheme of things where the affluent are separated from the economically (behaviorally) disadvantaged, having employees that earn you money is what sets the financially successful apart from the rest.

Lastly, think of earning money in this fashion: Split the day into 24 hours and divide your daily earnings by 24. How much money are you making per hour? If you’re working at McDonalds, chances are that you are making, what, about $3 per hour? If you’re the lawyer above, you’re earning significantly more than that. Determine ways to be creative and raise that “hourly earnings” rate that you have.

Money is almost entirely about the decisions that we make from day to day about tomorrow. To repeat something I mentioned earlier: Your wealth is the sum total of your decisions to date.

The Value of Money

Money: It’s the root of all evil, right? Not necessarily. Actually, the original quote from The Bible (King James Version) comes from 1 Timothy 6:10—“For the love of money is the root of all evil.” Money, finances, and all which they entail intermittently come up in conversation. Prior to discussing money as a quantitative entity, let’s look at it from a qualitative perspective.

I have seen, over the course of my years, so many people who have seen examples of people whom they do not want to become, exhibiting traits which they do not care to exhibit. For every person who is financially successful, a person can point out an example of someone who they’d ridicule for their actions—because of their wealth. Using this fear as a crutch, they limit themselves from seeking true financial success—often for very irrational reasons.

A culture has developed in this country—something that has been around the world for longer—steeped in the tradition that the various people in their various income classes throughout society have been dealt an unfair hand. Politicians with agendas have long engrained into people of the inequality of income and that it should be re-distributed among the different economic classes of individuals: Transfer payments derived from taxes on the affluent become welfare payments for the poor. Sure, there is a time and place for everything, but when the public is constantly being told that one person’s success over another’s complacency is unfair and that one should be punished to subsidize the other, a perception becomes commonplace amongst people that money can be a bad thing.

I’m a die-hard free enterprise capitalist at heart: In a generally unregulated economy (other than central banks and select industries) that each person is free to lawfully pursue making a dollar either by selling his or her labors to another in return for a salary or hourly wage or going into business and producing and/or selling a product or service to someone willing to purchase it, we are all free to earn as much for as much work and/or innovation which we are willing to put into something. Left and right there are examples of people becoming successful either way, even if you choose to work for someone else. Some statistics from About.com show:

· In 1999, average annual earnings ranged from $18,900 for high school dropouts to $25,900 for high school graduates, $45,400 for college graduates and $99,300 for the holders of professional degrees (medical doctors, dentists, veterinarians and lawyers).

· Over a work life, earnings for a worker with a bachelor's degree compared with one who had just a high school diploma increase by about $1 million.

Additionally, there are fluctuations within degree field & occupation (courtesy of the Royal Society of Chemists):

“The average earnings premium of having a degree relative to those with 2 or more A Levels was approximately £129,000 [about $257,500 USD]. The figure represents the difference in lifetime earnings after tax. Graduates in chemistry or physics on average earn well above this value, with a £185,000 - £190,000 [$370,000 to $380,000 USD] premium above those with no degree…Year-on-year statistics show that these subject differentials start to become apparent in the mid-career years: it is beyond the age of 30 that chemists and physicists start to pull away from their contemporaries in their earning power…For any graduate, the average rate of return is about 12% per annum but rises to 15% per annum for chemistry graduates. Psychology graduates will enjoy only a 10% rate of return.”

Regardless of how much working for someone else will gain you, the hallmark of the great American economy is the stalwart of entrepreneurism fueled with a hefty amount of innovativeness, is the best path to financial success and affluence, even if it can be the most difficult.

At any rate, people often equate money with power. People also tend to equate money—in a financial inequity sense—with greed.

Power: “Possessing or exercising power or influence or authority” or “possession of the qualities (especially mental qualities) required to do something or get something done.”

Greed: “excessive desire to acquire or possess more (especially more material wealth) than one needs or deserves,” or, more generally, “avarice.”

Paul Johnson, British journalist, historian, and author, recently wrote a column published in Forbes Magazine entitled “Greed is Safer Than Power-Seeking” in which he begins, beautifully, by stating:

“Able, industrious, imaginative and creative people— the top 5% of mankind—divide into two broad categories: those who make money and those who make trouble.”

The stage is certainly set for a tour de force comparing and contrasting a potential effect on an individual with wealth versus one with simple enthusiasm, zeal, and an agenda. “It is striking that the hugely wicked are quite innocent of avarice,” Johnson writes, showing that tyrants and dictators such as Adolf Hitler, Joseph Stalin, and Mao Zedong weren’t oriented towards the accumulation of wealth; rather, they were obsessed with the accumulation of power. In people that you and I come across each day, he goes on to categorize groups of individuals which exemplify “troublemaking” through their activities. Among them: Attorneys who are concerned more with their interpretation of justice and fairness than an enriched society; Politicians who exist solely to translate their agendas into legislation; and the self-proclaimed environmentalists who, “buoyed by a sense of mission and high-principled idealism that often make them a little careless about the accuracy of their assertions,” have helped push the world into a shortage of energy supply by zealously convincing anyone they can that alternative sources such as atomic energy should not be pursued.

Oddly enough, he closes his column with the thought that “Of course, we need troublemakers,” in the sense that they have, historically, been the impetus for societal changes in civilizations throughout history. Whereas greed—the excessive desire to acquire wealth—can be a bad thing—the net result can always be reflected through the character of the individual in the sense that money only fuels the flames of character traits, be them good, bad, or ugly.

I once worked with a staff sergeant in the South Dakota Army National Guard who had the saying: “Money is like oxygen—the more you have, the easier it is to breathe.” Try this thought on for size: Money, wealth, does not accomplish things—people do. Money is a tool for accomplishing those things which the individual wants done; in doing so, it accentuates character traits that are already present in the individual: If you are predisposed to be greedy and love to acquire “things,” money will only make it worse; if you are predisposed to not like a certain race of people and believe that your land is home to a “master race,” then chances are that wealth will only fuel your need for power, manifesting itself as genocide and a world war.

If you have a predisposition, however, of trying to benefit humankind, no amount of riches will stand in your way of filling the shoes of purpose, desire, and motivation to accomplish something. However, with wealth as a tool, you might be able to accomplish great things.