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Table of Contents
Interesting Charts
Financial Commentary
Financial Equations
Financial Calculators
Financial Definitions
Investment Goals
Personnal Finance Rules of Thumb
Books Read and Worth Reading
On the Reading List

Interesting Charts
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Financial Commentary
  • The "Rescue Plan"...

    (graphics courtesy of SinFest)

    To stimulate lending, the bailout plan will attempt to recapitalize banks. The method of recapitalization is best described as robbing Taxpayer Pete to pay Wall Street Paul. In essence, money is taken from the poor (via taxes, printing, and weakening of the dollar) and given to the wealthy so the wealthy supposedly will have enough money to lend back (at interest) to those who have just been robbed.

    (comment courtesy of "Mish" aka Mike Shedlock 13 Oct 2008)

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    Financial Equations

    Future value of a Present amount with an interest rate per period for a number of periods.
    Interest rate per period
    Number of periods

    Future value with P=1

    Present value of a Future amount discounted for a number of periods at an interest rate per period.
    Interest rate per period
    Number of periods

    Discounted Future value with F=1


    Future value of a periodic Annuity invested at a compounded interest rate per period for a number of periods.
    Interest rate per period
    Number of periods

    Future value with A=1

    Periodic Annuity generated by a Future value with a compounded interest rate per period for a number of periods.
    Interest rate per period
    Number of periods

    Annuity with F=1


    Periodic Annuity generated by a Present value when compounded with an interest rate per period for a number of periods.
    Interest rate per period
    Number of periods

    Annuity with P=1

    Pesent value of a stream of discounted Annuities when compounded with an interest rate per period for a number of periods.
    Interest rate per period
    Number of periods

    Present Value with A=1
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    Financial Calculators
    • IRA Calculator for Monthly contributions.
      If you invest a fixed amount every month how much money will you have?
    • IRA Calculator for Annual contributions.
      If you invest a fixed amount each year how much money will you have?
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    Financial Definitions
    APRThe Annual Percentage Rate of Interest.
    (a) Refers to the intrinsic rate of return (IRR) in a mortgage or loan carrying specified payments over time. (ref: here)
    (b) The periodic rate times the number of periods in a year. For example, a 5% quarterly return has an A.P.R. of 20%. (ref: here) (see also and here)
    APYThe Annual Percentage Yield of Interest.
    (a) This refers to the APR compounded on a yearly basis. (ref: here)
    (b) The effective, or true, annual rate of return. The APY is the rate actually earned or paid in one year, taking into account the effect of compounding. The APY is calculated by taking one plus the periodic rate and raising it to the number of periods in a year. For example, a 1% per month rate has an APY of 12.68% (1.01^12 -1) (ref: here).
    This is similar to the financial equation shown above: F=P(1+i)n,
    but rewritten with P=1, and F defined as APY+1
    and simplified to
    (see also)
    Cash Flow Reported net income of a corporation plus amounts charged for depreciation, depletion, amortization, extraordinary charges to reserves, which are bookkeeping deductions and not paid out in actual dollars and cents. (ref: here) (see also and here)
    Dividend The payment designated by the Board of Directors to be distributed pro rata among the shares out-standing. For preferred shares, the dividend is usually a fixed amount. For common shares, the dividend varies with the fortunes of the company and the amount of cash on hand, and may be omitted if business is poor or if the directors determine to withhold earnings to invest in plants and equipment. Sometimes a company will pay a dividend out of past earnings even if it is not currently operating at a profit. (ref: here) (see also and here)
    DRIPDividend Reinvestment Programs whereby an investor acquires additional shares of the corporation by having the dividends automatically reinvested. (ref: here) (see also)
    Intrinsic Value(a) In valuing Equity, securities analysts may use Fundamental analysis - as opposed to Technical analysis - to determine the intrinsic value of a company. Here the "intrinsic" characteristic considered, is the cash flow production of the company in question. Intrinsic value is therefore defined to be the present value of all future net cash flows to the company; it is calculated via discounted cash flow valuation. (ref: here)
    (b) The economic value of an option if it is exercised immediately. The intrinsic value cannot be less than zero. (ref: here and here)

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    Investment Goals
    Caveat: I started off with Chuck Carlson's "Buying Stocks Without a Broker" and my strategy has evolved from a stable of DRIPs and index funds. During the late 90's, while I was getting my toes wet with individual investments, I learned some expensive lessons. Fortunately, while I got singed, I avoided the 3rd degree burns.

    Current investment goals are to find well managed companies with the following characteristics:
    • Little or no debt.
    • Pays a dividend.
    • Has positive cash flow.
    • Sells at a (substantial) discount to intrinsic value.
    • Has honest, capable and investor friendly management.
    • Sells a needed product or service, preferably a product or service that people have to keep buying.

    And to avoid doing anything really stupid.
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    Personnal Finance Rules of Thumb
    Caveat: Caution, while this system works for me, your "mileage may vary". I use financial software to simplify my life, manage my accounts, and track my income and expenses.

    In the mid '80s, due to divorce-related debt I lived uncomfortably close to the edge. Unfortunately, my paper-based "financial management" system was not quite good enough to accomodate such a precarious existence and I unintentially bounced a check.

    Here's how I solved my problem.

    • Set up check overdraft protection with my bank. It's not been used in over twenty years, but it was free to set up and there if needed.
    • Cut my controllable expenses. I turned up the temp on the A/C during the summer (in Houston), turned down the temp on the heater during the winter. Ate simple. Did my own house and pickup maintenance.
    • Took in a series of roommates. The rent they paid helped a lot.
    • Took a second job.
    • Stuck it out until the divorce debt was paid off.

    While some of the accommodations were not really enjoyable, they were at least tolerable and were for a limited amount of time (2 years).

    And yes, I dated while single. I'd show up at my date's apartment, bring what I needed, fix her an oriental dinner (one of the skills I learned from multiple years in Japan) and then clean and pack up. It was a bit different from the usual wine and dine routine, but the girls I dated claimed to enjoy the experience.

    What I learned, and what I still do:
    • Live under my means. There are many reasons for doing so. The one I like best is, doing so enables options otherwise not otherwise available.
    • I don't budget, I pre-allocate. I self tax each paycheck for the appropriate fractional amount of each upcoming quarterly, semi-annual, and annual bill. Quicken calls such a self-imposed tax a "savings-goal" and handles the associated bookkeeping automatically. What's left after all the estimated amounts are "taxed" away is mine to spend. Also, I give myself a small portion of the pay raise my boss provides. The rest is allocated to my savings "tax".
    • No credit card debt. Yes, I have a card. It's convenient. But I pay it off each month. Why pay 20% or more of the balance to 'rent' money I wouldn't otherwise have to buy things I don't need?
      Furthermore, the card I use pays me a percentage of what I spend. Over the years I've paid $0 in card fees and card interest, but the card companies have paid me upwards of ten thousand dollars in cash rewards.
    • Don't buy new cars and don't finance vehicles when I do buy. For more than ten years I've paid cash for the used vehicles I've bought... Though for the last car, I paid for it with my credit card, then paid the card bill off that same night. The result was a cash refund from the card company.
    • Buy less house than I can afford. My house is not a status symbol. It is a place to live. I put 20% down on a 30 year mortgage and paid off the balance in 7 years. I also bought close to work. House to office is less than 2 miles. I can (and do) bike to work. Restaurants are within walking distance. So is a super market. And I walk a lot.
    • Maintain an emergency fund. It is a comfort to know I won't have to declare bankruptcy if I hit a financial pothole.
    • Carry insurance. If I don't want to "eat" the expense, I insure against it: flood insurance, property insurance, life insurance, health insurance, Long-Term-Care insurance. Shopping around I've found a huge difference in rates for the same coverage. And because I have an emergency fund to handle the mundane, I can go for castrophic coverage which charges a lower rate.
    • Save and invest for retirement. I max out my 401(k) each year, max out my ROTH IRA each year, earmark money for my daughter's education, and invest reguarly in non-tax advantaged long-term assets. I'm not betting my retirement on the long-term viability of Social Security and Medicare.

    And I try to avoid doing anything really stupid.
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    Books Read and Worth Reading
    Black Swan: The Impact of the Highly Improbable.
    More good ideas and quotes per page than any other book I've read recently. This is one of those books that presents a concept that in retrospect is perfectly obvious, but before the concept is properly presented, is well, highly improbable.

    One of the key concepts reminds me of the geologic argument years ago between uniformitarianism (the processes operating today are the same that operated in the past) and catastrophism. In the Black Swan, Taleb poses the argument that the processes today are not necessarily the processes that will operate in the future due to "unknown unknowns" -- highly improbable events that are not only impossible to forecast, but that have definite and very profound effects (drastically changing the future). After the fact we build a story to explain what was not only unexplainable but also inconceivable, as if it had always been (or should have been) obvious.

    This is also a book, that once I finished reading it, I immediately realized I needed to read it again. The author's casual conversational style slides down easily, but I found the book so loaded with "aha" moments, it demanded rereading. It is also the first book since I finished post-grad work twenty years ago, where I've highlight key passages for my own reference.

    Bull's Eye Investing
    Buying Stocks Without a Broker
    Economics in One Lesson
    Empire of Debt
    Financial Shenanigans
    Halo Effect... and the Eight Other Business Delusions That Deceive Managers
    The author states that many things we commonly believe
    lead to company performance: corporate culture, leadership, and more; are often simply attributions based on company performance. Such attributions are termed a Halo Effect. This concept along with the others can and, I believe, should be more widely generalized. The eight other delusions are:
    • The Delusion of Correlation and Causality. Correlation is not a cause. [My Editorial Comment: During my early college years, a math professor held up his watch, stating that he had observed that each day as the hands of his watch clicked over to twelve noon, the campus chimes sounded. That was an observed correlation. Equating causality with correlation implied that either his watch caused the chimes to ring, or the chimes caused the hands of his watch to click over to twelve o'clock. Either assertion was obviously ridiculous.]
    • The Delusion of Single Explanations. So many things contribute to performance that it is difficult to know exactly how much is due to any one particular factor.
    • The Delusion of Connecting the Winning Dots. By only looking at companies that perform well, we can never hope to show what makes them different from companies that perform less well.
    • The Delusion of Rigorous Research. If the research data are colored by the Halo Effect, we'll never know what drives high or low performance, we'll merely find out how high and low performance are described.
    • The Delusion of Lasting Success. Success is not random, but it is fleeting because the basic force at work in capitalism is that of competition through innovation, whether of new products, or new services, or new ways of doing business. The dominant pattern is not stability or endurance, but the "perennial gale of creative destruction."
    • The Delusion of Absolute Performance. Understanding this delusion is important because it suggests companies can achieve high performance by following a simple formula, regardless of the actions of its competitors. Yet once we understand that performance is relative, it is obvious that companies can never achieve success by following a rote set of steps. Success will always be affected by what the competition does.
    • The Delusion of the Wrong End of the Stick. If comparison populations are not correctly selected, the behavior of statistical outlyers can be taken as recommending courses of action.
    • The Delusion of Organizational Physics. The problem of "physics envy" leads people astray. [My Editorial Comment: Many non-physics problems are more complex, less tractable, and more difficult, than physics. As a result, it is difficult if not impossible, to reduce such problems to useful mathematical form. And the descriptive mathematics that do exist are most likely suspect due to improper modeling and invalid simplifying assumptions.]

    From the chapter entitled,
    Managing Without Coconut Headsets, the following summation:
    • Any good strategy involves risk. If you think your strategy is foolproof, the fool may well be you.
    • Execution, too, is uncertain--what works in one company with one workforce may have different results elsewhere.
    • Chance often plays a greater role that we think, or than successful managers usually like to admit.
    • The link between inputs and outputs is tenuous. Bad outcomes don't always mean that managers made mistakes; and good outcomes don't always mean they acted brilliantly.
    • But when the die is cast, the best managers act as if chance is irrelevant--persistence and tenacity are everything. [My Editorial Comment: When in the military, I was told "when push comes to shove, make a decision, even a bad decision, and push on... while a bad decision may kill you, waffling definitely will."]
    Mastering Financial Calculations
    Mobs, Messiahs, and Markets: Surviving the Public Spectacle in Finance and Politics.
    Read: 2008 February
    Top Level Summary: you can't excel if you do what everyone else does.
    One Up On Wall Street
    Parlay Your IRA into a Family Fortune: 3 Easy Steps Ed Slott
    Quality of Earnings
    Richest Man in Babylon
    Seeds of Wealth
    Stocks for the Long Run
    The 5 Lesons a Millionaire Taught Me
    The Dividend Growth Investment Strategy
    The Little Book That Beats the Market
    Value Investing for Dummies
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    On the Reading List
    The Dollar Crisis: Causes, Consequences, Cures Richard Duncan
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Revised 2013.04.05 © 1997..2013 by Keith S. Brown