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!

Economics and the Common Man

Have you ever seen those polls where John Q. Public is asked about questions of a general economic nature? How many of them have, at the very least, a basic understanding of economics?

Yeah, me too; I think such an exercise is akin to asking a medical doctor about auto repair, an auto repair technician about quantum physics, or a particle physicist about literature: It makes about as much sense as, well, insert a colorful metaphor here.

Before Warren Buffet was interviewed that one Monday morning on CNBC and said that we practically have a recession, though we may not be in one technically, many people can only say as much when they’re asked about the “R-word.” In addition, I’ve noticed that the public tends to insert more emotion into their economic analysis than such things warrant.

Let me say this first: There is room for emotion in economics. When, however, a person’s opinion regarding the nation’s current economic state is based more on emotion than well-founded rational thought. Henceforth, my point: John Q. and Jane Public don’t know enough of a darned thing about economics to offer their opinion; at least not enough for it to be meaningful. In the spirit of that I’m going to point out a couple of economic concepts that might help to alleviate the problem.

Gross Domestic Product, otherwise GDP, once taught as Gross National Product, or GNP, is the number that sums all of the products and services rendered in the United States (or any country, for that matter). Right now GDP is around $13 Trillion or so, give or take a few hundred billion dollars. GDP is calculated as a combination of many things:

GDP = consumption + gross investment + government spending + (exports − imports)

While there are several nuances associated with each variable, there are a few things to point out.

· Consumption is the largest driver of the economy; essentially that is all of the dollars that you and I spend.

· Investment is nearly as powerful as consumption

· Government spending is relatively valued at one quarter the effect of investment spending.

This illustrates exactly the reason why it would be great for government to curtail spending, lower taxes, and help the marketplace—government spending doesn’t do nearly enough for the economy, lowering taxes allows for individuals to have the option to save or consume more (marginal propensity to save or marginal propensity to consume, respectively) –driving consumption and, perhaps, helping investments.

This makes sense to me, but I consider myself a fiscal conservative.

There will be the contingent out there that says that paying taxes is good because it funds essential services that the government must supply to people, and there’s the whole debate about which rights one has in regards to healthcare and such—that is not within the scope of this article—but if government were forced to act like business in their daily management then we would be able to get a lot more value from our investment in government than not. Put another way, we allow government to spend too much and, I think everyone can agree, that we get too little from it. Wasteful government spending becomes something four times as bad when you have this understanding.

So, in an ideal world there is a happy medium between extreme government spending and extreme tax breaks for everyone. We don’t live in an ideal world, however, and economics works in cycles. The best thing to remember is the economy will go up most of the time, but will go down every now and again. Panic is not something that needs to happen when it goes down. Markets correct, stocks fluctuate, and indexes do the same. It’s nothing to worry about.

Why do I say this? I say this largely because of my believe that our most recent economic downturn in 2008 has been worse than it needed to be because people tend to overreact to what they feel are negative changing market conditions. If they understood the underlying dynamics of the market and the philosophy that “this, too, shall pass,” it wouldn’t have been as bad as it was.

My tone about “was?” There are multiple indicators that are pointing towards the worst of the current downturn being over, and us being on our way back up. The recent rallies in the stock market, the change in CPI and labor numbers all point towards an increasing economy.

So, in light of whatever the market is doing, irrationality rarely does the market good in the long run. In fact, if it did well with it then we wouldn’t have had the downturn in the market which we have had.

Nothing Risked…

I recently had a brief conversation about risk with a client and friend of mine that leads the Information Technology Department for a nearby Ritz Carlton. One of the sum results of that conversation was that there are two kinds of risk: The stupid kind and the smart kind. There are countless individuals in the world who behave in such a way that they don’t factor risk much into their actions and behaviors. There are, however, those who calculate risks into their activities and understand the dynamics of this powerful thing.

Drive somewhere in the town or city in which you live. I will bet that the larger the municipality in which you live, the worse the drivers are: It appears that they use minimal, if any judgment. Maybe they have a cell phone to their ears; maybe they are exhibiting poor driving skills; maybe it is a combination of factors. At any rate, professional drivers are often taught the art of “defensive driving” which dictates that you, as a driver out on the roadways, must drive with the anticipation that someone is going to use poor judgment and that you must be able to drive in such a way as to be proactive or react accordingly to these drivers whom have increasing amounts of risk factors piling up on them.

I’ve once heard it said, or read it on a bumper sticker, that life is difficult; more so if you’re stupid. Stupidity has often been equated to ignorance. Think of the driver while you are out and about that is ignorant of the traffic laws, or (worse yet) ignorant of those around him or her. Those who aren’t aware of risk often overlook the power that it has in their lives and the world around them. Perhaps I could even go as far as saying that they are more apt to be “victimized” than the alternative.

I’ve often equated risk management and the world of insurance as one that assigns numerical values to behaviors and calls these information sets “risk factors.” For example, take a driver who fails to use their blinker all the time. This driver has a higher probability of getting into a collision with another driver by not notifying those around them as to their intentions on the roadways. If they also fail to use their mirrors properly, the earlier risk factor adds to this new risk factor. Additional factors only add to the mess. While one can easily apply this to any part of life, not just driving, there are ways to minimize your exposure to such risk factors.

For a few years I lived in the Rapid City, SD area. Just as the schools were heavy into “character counts” campaigns with their students, a local television station ran a series of advertisements much to the same effect geared towards adult audiences. One of these public service messages included a judge discussing the merits of discipline. Essentially the message was that even just a daily investment in self-discipline works wonders for hedging against. If you are self-disciplined enough that you can take a walk or do another sort of moderate exercise you decrease risk factors that would otherwise influence you becoming obese, becoming depressed, getting diabetes, or otherwise becoming physically or mentally unhealthy. Think of the things that you could do less of or do more of on a daily basis that would make your life better, increase your value, or otherwise might make you or those around you better.

With that being said, there is absolutely no way to mitigate all risk involved with something. Just as the stock market has something called systemic risk that is inherent to a particular industry or to the entire market. Whenever there is the potential for gain or reward, there is always risk. In fact, since there is always risk involved any time there is reward or gain possible, it has been argued that gain and reward are possible because there is risk involved.

This is why the best risk is that which is of the calculated variety: This is why the stock markets will always correct itself, will always (eventually) increase in value, and why most of us will realize gains to ourselves or our lifestyles over a long enough timeline and given enough effort. If we are able to learn how to calculate risk in our lives we can then move our lives from being at the unsophisticated level of the haphazard risk-taker into being the sophisticated, calculated risk-taker and, along with it, move our lives along a more successful avenue.