Strategic Financial Literacy


It doesn’t matter about how you do things until you know about the purpose, the limits and the underlying important things.

The “W” questions.

Financial success is merely organized common sense. Once you understand, the rest makes sense.

When you understand, the hype, the complexity and the urgency fade to black.

What.

Money does not do everything. You must decide what you want and then decide how money can help.

Where.

You can know what you want and how money fits, but that’s not helpful until you know where money comes from.

Money is always earned. You trade something of value for money. Usually time and skill in the beginning. What you earn and do not consume is capital. Capital is the basic of financial growth.

The other wheres

  1. Receive an inheritance or gift. Good to get, but hard to rely on. Someone else earned it. The earning thing again.  Most people inherit money in their 60s, so a bit late for entrepreneurs.
  2. Borrow is a source of capital. It works if you do it right. The obvious fact is it costs to do it. Not a problem if what you buy with borrowed money earns more than it costs or reduces other expenses enough. Borrowing for consumption eventually loses. You need capital of your own to borrow. No one will lend 100% of a deal. You have to save to be able to borrow.

When

The sooner you start money working the better. Money grows with compounding interest. To catch this you must learn to find how long it takes to double. 7% takes about 10 years. 12% takes about 6 years. How many years do you have?

That period matters because the last double earns more than all the ones before it. If you start late you won’t get to the last double.

Who.

The who capital gets you the other capital. Time.

Few successful people are good at everything. The best of them do what they are best at and not a lot else. Delegation gets you another source of capital. Someone else’s time and skill. It costs, just like interest, but capital wins.

Learning to trade money for time is a powerful tool.

The bonus is you don’t have to listen to the pundits

Financial literacy is about allocating your money and time capital to growing money and freeing time.  Once you learn about that, all the how rhetoric becomes just noise.

Schemes don’t matter.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. 

In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you. don@moneyfyi.com  866-285-7772

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Timing The Market


Are Super-Investors timing the market?

If we look at Buffett with $100 billion and Karman at 43% of assets in cash, you might think so. To decide they are timing is a mistake. You cannot infer motive from their cash holdings.

Super-Investors don’t time the market because they can’t time the market either.

So how come the cash?

You recall from yesterday, there are two prices for a business. They know both and they are disciplined enough to refuse to overpay even if it means doing nothing.

They have cash coming in from their existing businesses. After combing the world for value, they find none. They go home with their cash in hand. The cash builds. Sometimes for a long time.

Doesn’t that mean the market is too high?

Maybe, but who knows. The current prices might be reasonable, and just not low enough for them to have their preferred margin of safety.

I haven’t noticed them selling core positions, and selling when the market offers crazy high prices is part of their method. If Buffett sells Coke you might want to worry about the market.

Investing involves comparison.

Skilled investors put their money where they believe the greatest returns will be. Today, relative to the stock market, what is better? Bonds, real estate, precious metals?

Maybe cash

Cash is potential value. Cash is an asset class and only some people use it that way. The ones who do have a common trait. They are patient. They don’t require activity to validate their beliefs.

They know where cash came from.  Could be earnings from earlier investments or it could be savings. Knowing how it came to be there helps defeat the impulse buy problem. They are loss-phobic.

No one wants to have to earn their capital twice.

Buy and keep is their standard

If you don’t expect to sell a position, market timing is immaterial. Buying at a good price is important though, otherwise you don’t get your required return on investment and your required margin of safety. Discipline gets that for you, just not today.

Market timing can’t work

There are too many extraneous variables.

You cannot rationally evaluate a security if one of its defining factors is how Average Investor feels about the market. Or whether Average Investor needs money because mortgage rates went up. Or because Average Investor and wife split because of money pressure from mortgage rates going up. Or because Average Investor, Jr decided to go to Princeton instead of a state college. and a thousand more subjective factors

With no rational valuation, no one can tell when it is a bargain or grossly overpriced.

Rational investment relies on a single fact when addressing market timing.

Eventually the market price of the stock will become similar to its intrinsic value. For example, if a business fails, the market will soon become the intrinsic value zero. For the others the market price will still oscillate around that value number, but the trend line will follow the business’s ability to earn and grow.

We invest for the future.  Usually the long future. Our investment approach should have a similar overview.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. 

In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you. don@moneyfyi.com  866-285-7772

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Understanding How Super-Investors Ignore The Market Noise


Managing risk was yesterday’s idea.

Clearly people who understand the value of a business and who understand how the market prices the shares in those businesses will be way ahead of people who know neither. The process has two parts and some subtlety.

Valuing a business

There are many textbooks on the subject. To some extent it is as much art as science. No matter.  It always comes down to a simple fact. A business is worth what it will earn. Its intrinsic value can never be more. The simplest is the business is worth the present value of its future earnings at some discount rate.

Quite academic and objective.

But that is just the start.  There are many other factors that will define future earnings. Most are guesses.  We may disagree on the discount rate or the earnings even. The rate of growth of such earnings, free cash flow, the actions of competitors, the effect of governments, and the effect of management all matter. That is where the art part comes in. Good investors are better at that, but they need not be.

Top investors do not claim to be geniuses. They just need to be reasonably adequate at estimating all the soft factors.

Why don’t they need to get it right?

Because there is another pricing mechanism in play that lets them be wrong and still win.

The market prices stock, too

It does so with little attention to all of those objective ideas. It does so based on the hopes, fears, greed, and shortcut thinking each of us uses to make a decision and move forward.

Making a decision is good, but making a decision based on no reasonable foundation causes grief later. When the subjective assessment changes adversely, the hope turn to bitterness, the fear turns to greed and, just as easily, greed turns to fear .

Sometimes personal circumstances force us to come up with money. That downward pressure on price has no connection to real value.

Understand both prices.

It is about risk. If you have a reasonable idea about business value and the market offers you a steep discount, you could be wrong on your valuation and still be safe. You might not do as well as you hoped, but it will be hard to lose.

Similarly, if the market offers you far more than your estimate says the business is worth, you should sell. You will likely be able to get it back some other day.

Are most stock traders stupid?

Some people think so. Berkshire Hathaway vice-chairman Charlie Munger for one.

If the rest of the world was not so stupid, we would not be so rich.

To make money in the stock market, you don’t have to be smart. You do need to make fewer mistakes, though.

Munger’s partner, Warren Buffet has a thought too.

“Risk is what happens when you don’t know what you are doing.”

Many people don’t know what stock prices mean. Knowing more is a good defense to mistakes and therefore a defense to risk.

Noticing the two pricing systems is the beginning of practical risk management.

Thanks to Sean Behan for the idea. 

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. 

In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you. don@moneyfyi.com  866-285-7772

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Risk and Fortune


Is risk a bad thing? 

Most of us think so. Risk means possible loss. Losses are bad. I need to be careful.

That is not the mature view.

Fortune is a kind of risk, too. The risk or probability that something good could happen. When we see risk only as negative, we automatically forego the good fortune side.

Little in life is certain, so it behooves us to change tactics.

The mature view accepts risk, even seeks it.

Why?

The mature view does not seek all risk. It seeks manageable risks. The fortune for people who understand is that the opportunities that come to them are priced low because of other people’s fear.

If a situation has upside potential with downside risk many are not interested, but for the manager, accepting these is profitable. The principle factor is knowing when to quit.

If you stop the losses when things come clear, you lose little. The nice thing about things that work out is they usually run a long time.

Lose some small, win a few big, is a profitable arrangement.

What to learn

First, stow your ego. Being wrong about something says nothing about you or your character. Risk taking means you lose sometimes. Be prepared to stop if you learn it can’t work. 

Second, do your homework. Know what the downside could look like and learn to recognize and act on the symptoms. Act on them early.

Third, know risk taking is a process. Place limits on time and money. Honor them.

Fourth, know your edge. If the average outcome is in your favor all you have to do is play many times and the averages will work in your favor. Las Vegas does well with a small edge and many repetitions.

Objectivity rules

If you know your strengths and weaknesses, don’t fall in love with your decisions, and let winners run, you can expect to do well.

Under the right conditions, risk is good for you.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. 

In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you. don@moneyfyi.com  866-285-7772

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The Achievement Flowchart 


All dreams are realized in a predictable way.

  1. Specify the dream in some detail
  2. Define interim results.
  3. Define the end date.
  4. Break the process into steps that lead to the achievement.
  5. Put the steps in order of execution
  6. Find or devise actions that will execute each step. The early ones will be fairly clear, the longer ones more fuzzy.
  7. Assign time and money budgets.
  8. Start with the first step.

That doesn’t seem so hard. 

It is like Fourier analysis. Big complex things are made up of a combination of many simpler things. It is just a question of finding them and acting on them.

Big, complex things in life are usually like this. For example. How do you eat an elephant? Take a bite. Chew. Repeat.

How can you distinguish a plan from a dream?

Plans can be distinguished from dreams by a simple factor. To achieve the goal, what specifically, should I be doing now?

Suppose a high school student wants to become a doctor. There are many steps and obstacles but most are not current.

Today’s task? Go to school. Pay attention. Do the work.

Absent the immediate action, the dream will remain just a dream.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. 

In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you. don@moneyfyi.com  866-285-7772

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Life’s Conflicts Feed Emotions


Life is conflicted.

Almost everything you achieve comes at the cost of something. Quite possibly something you would like to have too.  Nice car, less money.

We already understand most of those.

There are more.

Some are more subtle. The most common is the stock or money problem. When you buy stock you give up money. The mistake is to think stocks are money. They are not. Not any more than a house is money or a car is money.

They may have value as quoted or appraised, but they are not money. They can only become money if you sell.

Why does that matter?

Because people treat money as an absolute. A constant. Stocks are variable. The thought process must be different. People must think in comparative terms. A range of value. Not natural for us.

The flaw becomes real when people begin to treat market prices as a description of value. Value is likely a part of the price but there are many other factors. Like market sentiment. Like other investment choices and their prices. Like carrying costs.

The stock market is not a department store where the sticker is conclusive.

There are emotional conflicts

Growth versus security. You cannot grow investment value without giving up some security. You cannot make life changing gains with a savings account in a big bank.

Now versus then. We all use hyperbolic discounting. A task far in the future has no cost. Money to use at retirement is not as valuable as money to spend today. Emotionally.

Risk versus reward. This one is most misunderstood. The risk is not clearly understood most of the time. Variance is a risk only if the need for the value happens when the price is down. It is about the convergence of two variables. The market and your need.

Naming emotional conflicts.

A psychologist told me that boys have trouble with emotions because they cannot name them. Fear, anger, embarrassment all look the same.

The same is true with investors.  Emotions are a very difficult variable to deal with, but it is a little easier if you can name the conflicted thoughts that give rise to them. Listen to them and deal with them after you name them.

I don’t want to save today is a present future conflict.  That stock makes me nervous is a security growth conflict.

Naming emotions frees you to be more objective.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. 

In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you. don@moneyfyi.com  866-285-7772

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Seeking Financial Literacy


“A child comes out of college with a credit card and a diploma. They don’t know how to buy a house or a car or health insurance or life insurance. They don’t know basic microeconomics.” Jesse Jackson

Any argument?

Where to begin. 

Financial literacy is a lot more than understanding credit cards and paychecks. Teaching facts might not be all the difference.

Financial literacy is like playing guitar or becoming an adept programmer. Knowing all the facts and theories won’t make it work. You have to do it before you get it and all the theories don’t help much at first. Later when you can do it they come together and then it makes sense.

When to start

Now. You can’t start sooner.

You must learn to use money and other financial tools before you can consider yourself literate. Knowing about them won’t cut it. Start your children on the same track.

The key to success

Make cheap mistakes. A child who spends all his allowance the day he gets it will learn a little about spreading paychecks over the time to the next one.

With a little success saving will be an easy step. A $20 purchase can be had by keeping $2 per week for 10 weeks. That will turn out to be easier than waiting for the allowance to reach $20 a week.

Time matters.

A person is well on their way to literacy if they understand how money and time interact.

Eventually they discover the idea that they consume money in the present and that accounts for less than half their income. The rest pays for taxes, debt, and savings for future consumption when paychecks stop.

Get the idea of present after tax income paying for all three time zones, debt is past spending, saving is future spending and the present is lifestyle.

This where tools come in

Learn to invest to make the transfer to the future more effective. A lifetime course. The first part is about you and your emotions. Investments are neutral. They don’t care about you. Be objective.

Learn to assess the value of debt. Sometimes the future call on income is more than whatever it bought is worth. Be careful with credit cards. They look like free money.

Learn about insurance of all kinds. Life comes with no guarantees. If you need your income, be sure it doesn’t stop when your income stops.

Learn to shop for bargains. That minimizes consumption. Never leave the purchase of things you use all the time to the day you need them. If dishwasher soap is on sale today buy some and store it.

It’s as much about attitude as fact. 

You don’t have to spend to be happy. Saving and being debt free is satisfying. Financial independence is a worthy goal.

It isn’t the work I don’t like. It is having to work I don’t like. Financial literacy is the key.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. 

In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you. don@moneyfyi.com  866-285-7772

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