Investments: Episode 51
Facebook raised another $500 million and looks to be on a course for IPO in the next year or so.
The market for initial public offerings (IPOs) has been anemic since the dot-com bubble burst in the early 2000s. But venture capital and angel investment has been very robust over the last five years. Eventually those investors are going to want to realize their gains.
IPOs serve three main purposes:
It's highly unlikely that Facebook needs the cash at this point. With over half a billion eyeballs viewing the ads it serves up they are almost certainly raking in tons of cash. And that cash makes acquisition relatively easy for all but the largest of targets.
Facebook's maneuvers are most likely aimed at facilitating liquidity. All those billions in valuation are worthless until they are turned into cash.
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Investments: Episode 50
My friend Eric Guerin sent me a link to an article titled "Are You Your Biggest Investment" by Tyler Newton. The article illustrates the very important point that your career can, and should, impact your portfolio.
If you have a career with a risky and volatile income (maybe you work at a startup as Tyler mentions) then it is wise to be more conservative with your investment portfolio. Conversely, if you work for an employer with very low risk of layoffs and generous retirement benefits you can likely take more investment risk with less fear of the downside.
Note: Don't forget to check out that cool Summer Infant whirlpool tub for babies.
Investments: Episode 49
Last night I started a conversation on Twitter and Facebook about Twitter’s valuation. Twitter raised another round of venture capital which put the company’s value at $3.7B. I Thought it was funny that Twitter is valued at $3.7B while Groupon turned down an offer of $6B from Google.
Thanks to ZFarls (@MaddenBible) and Terran Birrell (@TerranB) for riffing with me on Twitter. And also thanks to Michael Durwin and Eric Guerin for joining the conversation on Facebook.
Back in episode 18 I discussed how equity analysts come up with their price targets using Apple as an example.
Price is another word for valuation. What is the stock, which represents ownership of a company, worth?
There are two types of valuation: Buy Side and Sell Side. In stock parlance you often see Bid and Ask. What is someone offering to pay and what are you asking?
In Twitter’s case, the company needed to raise more capital and investors bought roughly 5.4% of the company for $200M which implies that Twitter as a whole is worth $3.7B or just under 20 x $200M.
Is Twitter worth it? Time will tell. They are only now beginning to monetize. Groupon however already has $100Ms in sales.
Valuing potential revenue or actual revenue? Who do you think has more potential in the long run? Is Groupon’s market position defensible?
What if Google decides to compete and use its $6B to do so? It already has millions of vendors buying Adwords and millions of sites using Adsense. Distribution wins.
In the end we’ll have to wait for both to go public or be sold to know their true value.
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It's December 1st and Movember has come to an end. Thank you very much for donating to help defeat cancer. If you did not get a chance to donate you still can. See the link below.
Please stop by my Movember page and donate what you can.
The mustache will live on for a few more days. It has some official photo ops and on air appearances to attend before it makes its exit.
Money changes in value over time.
During episode 47 I used some common financial formulas for present value (PV), future value (FV), and payment (PMT).
These are all functions of the time value of money concept. Which simply states that the value of money, its spending power and emotional value, change over time.
All things being equal, a dollar today is worth more than a dollar tomorrow. Give anyone a choice of “have it now” or “have it later” and they will choose now.
Unless, there is more value to be had by waiting. Convince me to wait by giving me more than the value of today’s dollar, in real spending power, later.
Inflation eats away at ones purchasing power over time so we need a return above the expected inflation rate to justify investment.
Spending money today feels good. I live in the now. Why should I wait to spend money? Maybe I want to retire from working someday? Okay, how much do I need to save to ensure I meet my future spending needs?
As you might expect calculating the FV of something is multiplication. PV x (1+ Rate of Return) = FV for a year from now. If we are dealing with multiple years we need to add an exponent. PV x (1+ROI)n.
So, if we require 8% to invest our money. Then the calculation works like this $1 x (1+8%) = $1.08. If we invest for 10 year it looks like this $1 x (1+8%)10 = $2.16.
As for PV, figuring out how much future dollars are worth today it is just the inverse. FV/(1+ROI)n
Here's the Time Value of Money spreadsheet so you can mess around with it.
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It's Movember Day 29 and the Mo is in the home stretch.
Please stop by my Movember page and donate what you can.
Now that the mustache has spoken it's on to the show...
How does the timing of when you pay taxes impact your investments return?
In episode 46 I answered a friend's question about whether she should first, rollover her 401(k), and second whether she should convert the new rollover IRA to a Roth IRA. This spurred another friend, Justin Whitaker, to ask why the Roth made sense and dig a little deeper as to whether the difference in tax timing impacts the overall return on investment.
Here is the spreadsheet that I used during the episode to evaluate the ROI differences between a Traditional 401(k) versus a Roth 401(k).
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It's Movember Day 23 and the Mo is thinking about Thanksgiving.
Please stop by my Movember page and donate what you can.
Now that the mustache has spoken it's on to the show...
What should you do with that 401(k) at your old employer?
My wife’s friend Stacy asked earlier today whether she should rollover her 401(k) to a Rollover IRA and then to a Roth IRA conversion.
Back in episode 20 I discussed Roth 401(k)s and the way things broke down there was that contributing to a Roth made sense if you valued more retirement spending over more current consumption. 50% more spending in your retirement years or 8% more spending pre-retirement?
However what Stacy is asking is a different question. She has a pool of money in a traditional 401(k) account at a company where she is no longer employed. What should she do?
This is a two part question. 1) Should she move the money? 2) If so where should she move it to?
The answer to question 1 is yes. There is no practical reason to leave your account under the stewardship of your former employer. Unless, maybe they offer access to an asset that you would NOT be able to acquire elsewhere. Highly unlikely!
You want ease of management and portfolio flexibility. Both can be had in a brokerage account. You could roll to your new employer but there’s no value there either unless you gain access to special investments.
Now, onto Rollover IRA or Roth IRA.
Rollover first to your new institution. Then convert. Ideally you’d be able to pay the taxes out of another account. Thus leaving your account intact.
The 59 1/2 Rule still applies. 10% penalty if you take funds out before.
There are Roth qualification rules. $105K 2010 $107K 2011 for singles. $167K $169K for couples.
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It's Movember Day 19 and the Mo is ready for manscaping.
Please stop by my Movember page and donate what you can.
Now that the mustache has spoken it's on to the show...
Are we on the eve of a MASSIVE bull market?
The law of large numbers ia about as difficult to escape as gravity. Eventually everything reverts to the mean. This can be a positive thing or a negative thing depending how you look at it. Just as markets can't go up forever they can't stay down forever either.
As an asset class stocks, as represented by the S&P 500, have returned an average of 8.4% per year since 1950. However, if we exclude the years 2000 - 2010 stocks have actually had a historic average annual return of 10.2%. Yet, over the last 10 years the S&P 500 has had a negative 0.48% average annual return. This is just way out whack for the asset class.
The Worst Decade on Record
If we look at the 611 ten year periods (comparing January 1950 to January 1960 and so on) between 1950 and November 1, 2010 we see the worst 10 year period on record happened between Feb 1999 and Feb 2009 when the S&P lost 40.6% of its value. This is nearly twice as bad as the previous worst decade which occurred between Sep 1964 and Sep 1974 when the S&P lost 24.5% of its value.
A Typical Decade
Historically the S&P 500 has increased in value by 120.2% per decade (123.7% if we exclude 2000 - 2010). This means that an investor in the S&P 500 should expect to see his money double every eight or nine years or so.
The Best Decades on Record
Remember the stock market crash of 1987? Well the decade that followed beginning in Dec 1988 and ending in Dec 1998 the S&P grew by 342.6%! You may also remember we had the savings and loan scandal in that period as well as the first gulf war. And if we look at Aug 1990 to Aug 2000 we see even more astounding growth at 370.5%.
Reverting to the Mean
Things average out. The S&P 500 and other stock indexes are upwardly biased. Notice that the extreme markets on the upside were much more extreme than the downside markets.
From the examples above we know that the market can go on decade long bear runs and huge decade long bull runs with an average run that produces 123% returns.
To get back to this average stocks will need to produce an annual return of 22.6% for the next ten years. Will they do it? History suggests they will. At least at some point they will.
]]>Investments: Episode 44
It's Movember Day 18 and the Mo is in need of some grooming. I'm trying to walk the fine line of scraggy pirate and someone you'd trust to manage your money. Not and easy task. So....
Please stop by my Movember page and donate what you can.
Now that the mustache has spoken it's on to the show...
Investment Fees
Fees are funny things. Whatever we have to pay someone else always seems too high and whatever we get paid always seems too low.
Side Note:
Increasingly we live in a culture of cheap or free. No closing costs. No fee checking.
Yet in the very next breath after we demand free service we complain about how little we make and how horrible it is that American jobs are going overseas. Never pausing to acknowledge that our addiction to free might have actually caused those jobs to go overseas.
The financial world is no different than any other industry. People want fees to be low here too.
Important Concept:
Fees aren’t bad. Paying someone for providing value is good.
People are worth whatever someone is willing to pay them. People who are good at what they do tend to charge a lot for their time and expertise.
The Various Forms of Investment Fees:
As in all other areas of business compensation should match your desired result. What’s the overall goal of hiring an investment manager?
]]>Investments: Episode 43
It's Movember Day 16 and the Mo in fine form. Get your first glimpse of the pirate look in this episode.
Please stop by my Movember page and donate what you can.
Now that the mustache has spoken it's on to the show...
Cash Balance Pension Plan
Chad Northrup asked if I would share my thoughts on Cash Balance Pension plans. Great idea Chad!
Cash Balance Pensions are a relatively new retirement plan variants that are gaining some traction.
They are a form of a defined benefit plan. However, unlike a traditional DB plan which guarantees a certain amount of income during retirement. These plans guarantee a certain cash balance on a certain date.
Example: Instead of the company saying "you get $60K a year until you die." With a cash balance plan it's like they are saying "you’ll get $200K at age 65." Then you can annuitize that amount or take a lump sum.
Benefits of Cash Balance Pension plans:
Some Small Negatives of Cash Balance Pension plans:
Remember, you still need to plan. Understand it the guaranteed cash balance will be enough to support your desired retirement lifestyle.
Source: Cash-Balance Pensions Get Boost (http://online.wsj.com/article/SB20001424052702303891804575576202728320426.html) by JILIAN MINCER
Source: FAQs About Cash Balance Pension Plans (http://www.dol.gov/ebsa/faqs/faq_consumer_cashbalanceplans.html) by United States Department of Labor
Investments: Episode 42
It's Movember Day 11 and the Mo now look like it's always been there. Last night I was at an event and met some new people and saw some old friends, none of whom acted as if the Mo were out of place.
Please stop by my Movember page and donate what you can.
Now that the mustache has spoken it's on to the show...
Growth
Whenever I think of veterans I think of the WWII generation. I know millions have served since then and continue to serve now but for some reason I always think of WWII. And when I think of WWII I think of the baby boom and the astonishing growth that followed their arrival.
When the men and women who served our country came home they got busy making babies and being productive. They built the interstate highway system which led to better transportation of goods and eventually to the suburbs.
My grandparents had big families (8 kids on Dad's side and 7 on Mom's) and those kids needed clothes, food, and all the other stuff kids need growing up. When those kids left home they needed their own cars and homes. The growth seemed like it would continue forever.
American companies and governments had it easy for decades. They new that every quarter they would sell more than the last and for government they would get more taxes by virtue of a growing populace. Growth just happened.
But then something happened that changed the game. The baby boomers didn't have as many kids as their parents. My parents only had two. Population growth since the early 1970s has slowed dramatically.
Suddenly everyone who wanted a car had a car. Everyone who wanted a home and could afford one had one. We moved from growth to replacement economy. The ripple effects are massive.
See my friend Tom Osenton's book "The Death of Demand: Finding Growth in a Saturated Global Economy" to get a rich picture of what's going on.
Waiting for New Customers
So, if the US population isn't growing fast enough to generate the new customers and tax payers we need what do we do?