I'm not a financial blogger, and I don't recommend following my investment strategies (if you can call them strategies). However, I have spent the greater part of the last few years learning about money. The fundamentals are pretty basic, but it is apparent most people don't know them. So, in the spirit of "My Thoughts" the following is a few thoughts I have on money:
Due to my business school affiliation, I receive a copy of Business Week every week and a copy of the Wall Street Journal every day. Both are invaluable to a business student (and I assume business execs). Every now and again, I run across something worth sharing. For example, this week Business Week released their "Year in Reveiew." One of the sections is on U.S. Currency or the dollar. To our eyes, the prices of some commodities have gone up (coffee, gasoline, etc.). However, currency is merely a piece of paper that serves an economy for trade. We trade currency every day based on macro- and micro- economic principles that make us 'value' things a certain way. This is why bread in the 1940s cost only a few cents while now it is a few dollars. Bread itself has not changed. Actually, if bread was not perishable, one could have saved bread from the 1940s until today and sold it for a hefty profit (according to the value of the currency). This fundamental idea is shared in a more real sense by Business Week. Last year, one could have bought a gallon of gasoline for a mere 0.85 lb of bacon. This year, that same gallon of gasoline only cost you 0.75 lb of bacon. So, if you bought your gasoline in bacon, it is cheaper this year than last year. Bacon, like bread, isn't a sustainable form of currency (unless you are a pig farmer I suppose). So, we resort to other forms of currency. How then do you protect yourself from inflation of commodities with a deflating form of currency (a dollar)?
The bottom line... Cash flow is the way to go. It is very simple on paper. Invest your money (current value of your cash) in things that provide a return that is greater than inflation at a later date. If you buy a stock today at $10.00, in a year from now if inflation is 2.5% you want that stock to be valued a least at $12.50. If the stock is valued at more than $12.50, then you have wisely invested your money. If not, then it would have been more valuable in another investment. There are a multitude of vehicles that one can use for investing: common stock, stock options, preferred stock, bonds, bonds with warrants, convertible bonds, mutual funds, hedge funds, exchange traded funds, 401k, IRAs, etc. Each of these has unique risk versus return criterion that make them lucrative in their own right. So, how do you choose, what is best. I try to think of it in a different way...
Think of investing as an exercise in value maximization. In the study of Finance, one learns how to value a company, an asset, a purchase decision, etc. through a series of cash flows. Cash flows are an interesting animal. Cash is currency. Value is what something is worth (its risk versus return). How does cash translate to value? The answer is cash flows. For example, a company that buys a machine to make widgets will evaluate this asset in a series of cash flows. The company purchases the machine with capital dollars, operates it with O&M dollars, and receives revenues from the sales of the widgets. Very basically, the cash flow is a combination of the amortized capital, O&M, and revenues from widgets in a period of time (usually per month). Using the cash flows a net present value (NPV) can be calculated based on today's dollars. If NPV is positive, then the company should purchase the equipment, make the widgets, and sell them. The whole process is many times more complex, but the basic idea of cash flows is what we're going for here.
Now, translate that to investing. Invest in things that provide positive cash flows. A real-estate investor will purchase a property and rent it out to receive revenues from the rental. That monthly revenue is a cash flow. No matter what the value of the dollar in the short term (duration of the lease) the cash flows are set. Most people are education investors. They invest in a degree from a college or university and use their expertise to get a job that provides them a salary. That salary is a series of cash flows based on an employment contract. Hopefully, the company that provides the salary will increase the salary greater than or equal to inflation. Lately, this has not been the case.
Therefore, in order to make up the difference, one must use other vehicles of investment. That sounds easy... if you have extra cash laying around. Most people do not. I had a conversation recently with a neighbor of mine who said some of her family buys a lot of their Christmas presents with debt. They buy their house with debt, their car with debt, debt, debt, debt... it adds up with credit cards, car leases or loans, mortgages, student loans (to finance that education), etc. These all add up to what I like to call negative cash flows. Debt in itself is not bad and is sometimes inevitable/necessary. However, too much debt is bad. When the salary that pays you positive cash flows is all used up by negative cash flows and necessities, there is no room left for investments. Most if not all financial problems are due to debt. Companies file bankruptcy because they can not cover interest payments. Marriages turn into divorce due to stress from debt. I could go on for pages.
I know exactly what you are thinking. Wow, being debt free sounds nice but that Dave Ramsey stuff doesn't work for real people. (Actually, I've never read Dave, but I hear he does write good stuff.) What I'm saying is don't get caught up in the "gotta have it" American mindset and buy things you can not afford. In most cases, I reccommend not buying anything unless you have the cash to cover the purchase. Credit cards are fine but pay them off each month. Mortgages provide tax incentives, auto loans are sometimes unavoidable. I understand. Just don't buy "stuff" for the sake of having it. I'm reminded of the song
Daddy Never Was the Caddilac Kind by Confederate Railroad. The song is dated but the lyrics still stand "Daddy'd say you can't judge a book by looking at its cover/ It's what's inside that really matters/ Daddy never was the Cadillac kind/ He said some things just glitter and shine/ He taught us that love was the one thing money couldn't buy."
Money is a powerful thing, but it is what we make it to be. If we allow it to compel us only to get more of it, money will control us. However, if we use money in a way that is beneficial to us with the right investments and spending decisions, we will prosper. The bottom line is that you control your money, don't let it control you.
