Saturday, October 31, 2009

Happy Halloween

I hope everyone enjoys their Halloween Weekend. I suspect the candy levels for children will increase this weekend from all those treats they will be getting. Speaking of candy here is my top 5 list for candy bars:

1) Hershey (original)
2) Milky Way Midnight
3) Snickers
4) Crunch
5) Tootsie Roll

Friday, October 30, 2009

Investing for The Individual Investor

Investing can be a great thing. Although, in recent times the market has taken quite a fall investing over a long period of time will not leave the individual investor disappointed. If I were to recommend any two books for the individual investor they would be "A Random Walk Down Wall-Street" by Burton Malkiel and "Stocks for The Long Run" by Jeremy Siegel. I should note these books are not just fads but have stood the test of times when it comes to investing. In Random Walk Malkiel discusses the Efficient Market Hypothesis which simply states that no one can beat the expected returns of the market year after year consistently. Malkiel recommends that the individual investor invest a wide variety of mutual funds to diversify. Diversification is a great idea because instead of putting all your eggs into one basket your risk is spread across many different investments. Siegel talks about how stocks are actually one of the safest forms of investing when looking at performance compared to risk and inflation. Siegel describes how over 30 year holding periods stocks have statically done better then bonds, Treasury bills, or CD's.

The recent market meltdown has given a bad name to the financial services industry. This industry does serve the public a very important function. I wanted to take some time to discuss the different groups within the industry. When you see commercials for Charles Schwab or Merrill Lynch these types of companies are known as broker-dealers. Broker-dealers usually have millions of accounts with hundreds of brokers trying to sell individuals different financial products. Brokers make their living selling you different insurance policies or mutual funds. The SEC regulates broker-dealers to make sure they are not doing anything illegal or unethical. The problem I see with broker- dealers is they have an incentive to sell the individual investor products instead of actually looking at the whole financial picture. Think of a broker as a doctor who keeps prescribing you different medication. Each time you get prescribed medication it costs you money which over time will affect your performance. On the other hand there are Registered Investment Advisors. This group is smaller than broker-dealers but they are bound by the SEC to put the client's financial interests above their own. When it comes to designations there are so many within the financial industry below I talk about the differences between them:

CFP (Certified Financial Planner)- CFP’s look at everything at the whole financial perspective of a person and most likely do a financial plan for them. These people are educated in investments, insurance, estate planning, retirement planning, and tax implications. To become a CFP one must take 5 individual tests along with a 10 hour comprehensive exam. Study time is around 300 or more hours.

CFA (Certified Financial Analyst)- This designation is for either investment professionals or sometimes people in corporate finance. Many times investment banks look for this designation in prospective hires. The CFA is much more technical then the CFP. One CFA summed it up quite well, "CFP is the shotgun approach, while the CFA is a sniper approach to investing". CFA focuses on statistics, equity evaluation, economics, and financial analysis. To become a CFA one must take 3 (6 hour) tests in order to become designated. The average study time for each exam is around 300 hours for each exam.

CPA- most people know what this designation is. These people are well versed in accounting and pretty good when it comes to taxes. Although, CPA's are usually not very focused on the investing side they can save people money with tax strategies and tips.

Series 7- general test in order to become a stockbroker

Using any professional with one of these designations will leave you better than getting a brother in law or someone you know when it comes to your financial matters. Also be weary of broker-dealers since they have their own incentives for you to switch products or buy insurance policies that you may not need.

Most Underappreciated Man in Music

Most of my music tastes are from the 1980's. The 80's were known for big hair, synthesizers, and MTV. During this time a artist named Richard Marx made in debut in the late 1987. He did had hits such as "Right Here Waiting", "Hold On To The Nights", “Endless Summer Nights”, and "Angelia". I recently was looking to see what he has done since the 1980's and found a few songs that he has done. He had a new album Emotional Remains which was not bad. My favorite song is "Through My Veins". When listening to these old recordings it seems clear that the music stills holds the test of time. Marx has sold over 30 million records. What really people don't know about Marx is how many songs he has written for other people. In 1999, he wrote "This I Promise You" for N*Sync and won a Grammy for "Dance My Father" with the late Luther Vandross. Clearly this singer-songwriter has talent. Although, I would argue most of his talent is from his songwriting/producing. My question how does he look so young?





Who Wrote That Song?

I was searching around the internet and found this cool search engine to look up basically any artist to see what songs they themselves have written. ASCAP provides this. ASCAP is an organization to make sure artist are fairly paid for their music. For example, every time you go to a restaurant or store and hear music ASCAP makes sure that the vendor has a license to play that music and makes sure that the artists collect royalties every time the song is played.

http://www.ascap.com/ace/search.cfm?mode=search

What Should I Major In?

While I was at Texas Christian University I had the opportunity to mentor younger business students in a program called Neeley Mentors. The most frequent question I got asked was, "What concentration should I do?" Below is a summary of all the majors most undergraduate business programs offer.

Accounting- although this major is usually associated with a lot of math it really isn't. The most complicated form of math you have to do is add, subtract, multiply, and divide. The hard part is figuring out what rules apply to what. For instance an example might be: Do we include or exclude this cost into the financial statements. What is really interesting is many accounting majors go to law school since accounting and the law are pretty much based upon rules

Marketing- this major is usually for people that are pretty creative and enjoy working in teams to get ideas across. Even though I call marketing the tom-foolery of business they serve an important roll in educating consumers about products and their benefits. My only problem is that if a product is good won't it sell itself? Nevertheless, they do inform consumers about what they can offer.

Finance- Since I majored in this I can tell you all you need to know. Finance deals with not only understanding risk and corporations but the core idea of finance is the relationship between risk and reward. This is interesting because it can be applied to many different places. For example, if you are thinking about eating your favorite dessert shouldn't also think about the costs associated with that dessert? By costs I don't mean money prices I mean what you give up for eating your favorite dessert. Would you incur more calories possibly leading to weight gain? Could you get a stomach ache after you eat it? There is a risk/reward relationship that we encounter in our daily lives. In addition to this, finance can show people how to invest their own personal money (personal finance) or show individuals how to evaluate how financial stable a company is (important if you are looking for a job). Finance majors usually have to take a bunch of accounting courses so they can understand the difference between a: balance sheet, income statement, and cash flow statements

E-business- this major is pretty interesting. When I was younger I was really into computer technology. These people are really good with information technology and can make sure a company's software program is running properly. A misconception is that these majors have to program computers. From my understanding there really isn't any programming. The nuts and bolts of the major is understanding how a business can use information technology to improve their website, fix information technology problems, and possibly benchmark their technology versus competitors.

Supply Chain- A lot of people have no clue what supply chain management is. Supply chain management is about understanding the most efficient way of delivering goods to their point of destination (think FedEx). Although, most of it seems like common sense (and it really is) there are a lot of programs and technology that these majors use to find the most efficient delivery path for products. Next time you get a package you can thank supply chain majors for making it possible!

Management- these majors are really good in bringing out the best in people. You especially want these people in any type of conflict situation. Getting along with people and being able to communicate is not only important in the business world but also important in live as well.

Current Thoughts on The Economy

Many I tell people that I majored in finance they immediately believe I am a skillful accountant as well. While finance and accounting are similar they are not exactly the same. Finance has to deal with risk, reward, understanding the right mix of corporate financing (example how much stock or bonds should the company sell). On the other hand accounting deals with understanding financial statements, how companies collect money from individuals, and auditing the books to make sure financial statements are correct. I would say that economics and finance are more closely related in the sense that one must understand economics before they can understand finance. My macroeconomics professor Dr. Harvey summed it up quite well. He basically said that the difference between economics and finance was policy. I agree with this statement. Economics generally look at the overall economy and how to make society better off economically while finance looks at how to make individuals and corporations well off. This distinction is important because it helps us understand the current financial crisis.

Many people have blamed greed Wall-Street executives for the current crisis. I agree somewhat with this. Yes, these executives did take excessive risks and money from shareholders to take these risks. However, companies had an incentive to take risks since history has shown that the government has a tendency to bail companies out. Examples of this can be seen in late 1980's and early 1990's, with auto companies (GM, Chrysler), and throughout history. Bailouts create the notion that companies in the future can be bailed out. An analogy to this might be the following: Let's say that you have a friend who has a little bit of an alcohol problem and constantly gets into fights and causes trouble. Every time he gets into a brawl you (the loyal good friend) are there for him and try to help in anyway. A few times your friend ended up in jail and you paid his bail money to make sure it wouldn't happen again. If your friend believes you will keep bailing him out doesn't he have every incentive to continue the same behavior? The similar logic can be applied to the current economic situation. The government is bailing out your friend and millions of his friends. Clearly, this is not a good situation. This situation is known as moral hazard. It would be important to give your friend incentives to try to limit his alcohol and try to get him to sober up. Moreover, the government could stop the "bailout" problem by simply not bailout out future companies. Companies knowing that they couldn't get money from the government or bailed out if they went bankrupt would have different incentives to make sure they didn't do anything foolish. The basic of economic is incentives and giving people the right incentives can go a long way.

I do believe that the economy will pick back up. I don't like how the media and everyone seem to compare recession to the Great Depression. Looking at historical data the recession the current economy looks most comparable to the 1990-1991 recession. In past year, businesses have fired millions of workers and millions more are trying to find jobs. However, the silver lining here is that businesses will increase their productivity (same amount of work/less workers). Although, it make take time businesses will once again reap the same profits they did before the recession. The recession can't continue forever! The business cycle shows that firms dip into recession and then bounce back over time. The $64,000 question is when. No economist really knows this answer. From the current situation I can only see the economy improving and not getting any worse.

Welcome to My Blog!

Well I decided to start blogging since I thought it would be good to get my ideas out there/have some form of digital diary over time. I must start by saying I have been inspired by many bloggers/writers. In a way I think of blogging as improv writing. Bloggers should be able to be able to really write about anything on any topic and be able to provide a logical yet meaningful. The point of my blog is to really talk about a bunch of different topics. Although, most of the writing might be focused on finance, economics, current events from time to time you will find me going into different subjects. Comments are of course welcome. I will moderate the comments to make sure they are appropriate. My mission will be to be consistent with my blogging as much as possible. I welcome any comments or questions.