ROT: Return on Tomatoes

I eat dinner every Sunday with my family, usually my parents, sister, her husband, and my girlfriend. At the beginning of every summer my parents always planted a small garden. Ever since I was a kid, they'd be in the backyard tilling the soil, planting seeds and just getting plain old dirty.

This past Sunday, I walked around the house to check out how the garden was coming along and was surprised by what I saw. Of course, I saw the zucchini, fresh peppers, lettuce, and some other lil' knick knacks in there, but what really caught my eye were the tomatoes. There were tons of them, some riper than others of course, but it was the shear number of them that made me really see them in a different light.

I couldn't help but think of how novel the idea of a garden is. You spend some time doing a little research on how to garden, then spend some time planting, getting dirty and tired in the sun. And once you're done, you're not done. You gotta water...and wait....and water...and wait...until something starts to grow.

But when you finally see the pay off it, you learn something. Something just clicks. About how doing something today and letting it grow for tomorrow really ends up working out. This can apply to your career, relationships, finances, and even your hopes and dreams. Gardening...I mean its a really novel idea, and the pay off is astounding in two ways. First because if you've never tasted a fresh homegrown tomato you haven't lived, and second, because of the pride you must get from knowing that "I...created...this."

How similar to life gardening is, especially investing. We put away money, not knowing how it'll ripen or what it will truly yield. During the interim watering periods nothing seems to happen. During dry spells some stocks shriveling and dying...others coming close, all the while we're sweating, and watering, and sweating, and watering!

Yet there's one thing that a garden can teach you about stocks, and its that all the tomatoes don't ripen at the same time. Some turn red before others, so while you're picking today's salad or sandwich topping there are still others that are there for tomorrow.

Just concentrate on the ones that are turning ripe today, and leave the unripe ones for another day.

So maybe its time to ask you: how's your garden coming along?

~J

The Stock Market is a Lot Like Baseball

The stock market has always amazed me. It's such an integral part of our economy, our jobs and our financial futures yet the average person has very little knowledge as to how it functions. You would think that such an important aspect of our daily lives would have been taught to us in school, yet we walk away with only basic economic concepts.

The underlying fact is that because so many people know little about it, investing can be a daunting and in the case of Madoff, be a harmful experience. So much relies upon what we have already accumulated, yet we still aren't where we want to be. Understanding the stock market and how it functions can help us make investment decisions with a little more confidence.

The stock market can be compared to the World Series. There are two teams, announcers, an audience and a whole bunch of other components that really tie the two together concepts together in similarities.

In the stock market there are buyers and sellers, these can be likened to the two teams playing. There are two teams playing against each other and only one will win. The fundamental truth here is that in order to buy a stock, someone has to sell it to you. That means that the person selling it to you thinks no more economic value will be extracted from it while you think there is still potential. One of you is wrong.

Another component in the stock market is mutual funds. Mutual funds are the employees who work in the back office for the championship team. They'll get a ring if their team wins, but their bonus is never as big as the players themselves.

The audience can be likened to index funds, they're just there to watch be at the game and win over time just for being there. However, they don't really see any immediate benefit besides exposure to the game.

The announcers are like Wall Street, calling the play by play and reporting on recent happenings. They sway between excitement to lethargy depending on what is happening in the moment. However, as knowledgeable as they may seem, they cannot be relied upon to accurately predict the long term outcome. The only thing they do is broadcast and sometimes point out arbitrary facts.

Now that all the basic components of the stock market have been described, we need to talk about the game itself. Now while a typical World Series game lasts nine innings, the stock market world series is game that doesn't end. So how is a winner determined? The winner is determined depending upon the individual time horizon of the players on each team.

So if you are buying Procter & Gamble for a long term investment and it drops in the short term, you haven't lost the game yet until your time horizon has been reached. This allows there to be multiple winners and losers all simultaneously, making the game a little more fair to the participants involved.

Also, unlike the World Series where only one game is played at a time, there are many games being played all at once in the stock market depending upon what stock you are talking about. Each stock has its own game being played. So there is the Johnson & Johnson game being played along side the Procter & Gamble game and so on and so forth. As an investor, you will find yourself playing in different games on all different teams depending upon the position you've taken in your portfolio. Some you may feel are going to be winners making you a buyer, while some you may feel is going nowhere or down, making you a seller (or even a short).

This sort of competitive play goes on in all the different markets associated with the stock markets (derivatives, CDS's, futures, etc.) and it is up to you as an investor to decide what games you want to be in and what your role is going to be. Are you a player, a back office manager, or an audience member? It depends upon your strengths and comfort level in the games you are a part of.

(This article originally posted on April 19th, 2010 on Technorati. Read the original article here.)

Is Intrinsic Value the Most Important Thing in Investing?

Many people may be familiar with investing in common stocks as growth vehicles in their financial portfolio. With information a click away on the internet and various books just as available on investing, it seems that everyone has the power to manage their own portfolio like they were a professional investment manager.

Many of these sources point toward Warren Buffet's style of investing, commonly known as value investing. The premise behind the strategy cites that investors own a small piece of a company. The basic philosophy is that a good investment is made in good companies selling at a discount to their intrinsic value.

However, caution and an analytical approach should be taken when defining intrinsic value, which is loosely defined as the price at which a person would be willing to pay for the whole business. This assumption is vague and not useful in practicum at all.

The truth about intrinsic value is that it is subject to the participants involved, meaning that, depending on the buyers and sellers own reasoning, intrinsic value will differ. If you were a small bank up for sale, you would most likely charge a far lower price to a private buyer than you would, say to Bank of America. This is mostly because variables such as the size of the buyer and synergy value come into play.

Furthermore, intrinsic value differs between how the buyer or the seller are evaluating it. While things such as future earnings are factored into both perspective values, there are variables that will discount the value of the business on the side of the buyer that would not affect the value to the seller. These are things such as lack of liquidity and non-diversifiable risk.

Likewise, the value of the business to the seller will factor in the size of the buyer that would not affect the value calculation on the part of the buyer. As a buyer, how big the company is should not make me change my estimate of what another prospective company is worth to me, but it will to the seller.

How Much Is That Business In The Window?

Let's pretend for a second, you are the owner of a dry cleaners business. Business has been good the past few years, you've managed to grow your business at about 20% per year by opening a few new locations. You've even managed to sock away about $50k per year in cash after all expenses and re-investments. You remember back only four years ago that with only a $15,000 investment, you've come a long way.

One day, a representative from a larger chain of dry cleaners, comes in and offers you $250,000 to buy you out. Do you take the money?

Knowing the value of your business is a crucial part of being a business owner. Unfortunately, the price of a business is not as clearly defined as say, the value of your house, which has comparables and mortgage value assigned to it by a bank. Unlike a single asset such as a house, anything that produces a profit takes a significant amount of financial analysis, future projections, and discounting to determine what the true value is.

In this example above, you'd be foolish to accept such a low price since a worst case scenario, valuation would still put your worth at well over $200,000. Ironically, about five years ago, insurance agents found themselves in the same scenario when a large insurance corporation came around offering independent agents a buyout price. Most of them had no idea what they were worth and were ill-prepared for the situation.

The truth of the matter is, a buyout proposition can happen at any time to any business, especially in highly fragmented industries that are cost competitive. It is the responsibility of the business owner to know what they're worth in multiple income scenarios so they can make sure the price offered is fair.

Hiring a skilled business appraiser is an investment in your business that will pay for itself many times over in the future.

I would suggest this to anyone who in the future plans to sell their business or pass it on to their children through their estate. You can do an online search for one in your area. Just make sure they have credible experience or are certified by one of the accredited valuation bureaus (IBA, ASA, NACVA, CFA Institute, or a CPA with a ABV distinction).

Having the financial transparency of a proper business appraisal will give you and anyone else the proper assurance that your business is worth the time and effort you put into it.

The Inevitable Bankruptcy of Domino's Pizza

I happened to get a stock tip that Domino's Pizza (DPZ) was undervalued and was both shocked and appalled at what I saw after further analysis. Over the past 10 years, Domino's Pizza has had increasing negative stockholder's equity, a situation which I thought was only theoretical and seen in business books. Alas, here it is in the flesh.

For those of you with limited accounting background, stockholder's equity appears on the balance sheet. Every company has assets with a certain total worth and the money that the company used to obtain those assets can come from three main sources: borrowing, purchase of stock from investors, or retained earnings (from business operations).

So what we have here on the balance sheet is that domino's assets in total are worth $453 million. But it has borrowed over $1.7 billion dollars! This results that should the company default, the stockholders will owe the creditors an extra $1.2 billion dollars* (and that's excluding the interest on those loans!)! I have never seen this in practice before, never mind in a company with such huge brand equity such as Domino's.

But wait! There's more! In 2008, Domino's Pizza recapitalized its debt by issuing long term notes at about 6%, due in 2037, in order to pay off its current loans. This is the equivalent of paying off your student loans with credit cards. Smart move...

So as Domino's reaches terminal velocity falling down the black hole of debt, it looks like its just a matter of time until it splatters on the bottom. My question is, who the heck are these analysts issuing "buy" ratings for Domino's (here)?! These people need to be reevaluated by their respective firms for not being able to read an annual report. Shame on you Wall Street...




*Of course, due to the laws of incorporation, shareholder's would not be personally liable for these liabilities. See the value of being incorporated? ;o)

Maximizing Your Chances of Getting Rich

Per my last post, I want to talk about how "The Ways to Get Rich" list can be used as an effective tool in maximizing your chances of getting rich.

Take a look at the list (see it here) and start to mull the categories over in your mind. Which jump out at you? Which categories do you feel you may have an advantage in? Which categories seem too risky for you? Which do you have the patience for? Which ones do you not even have a chance in? If you come don't come from a rich family, you can cross Inheritance off right away.

The fact of the matter is that everyone is different and some categories may carry more risk depending on your knowledge base in that particular category. Gambling may seem risky to you, but to the MIT Black Jack team, its risk-adjusted. Likewise, stock market speculation may seem too risky if you an unfamiliar with how to analyze a business.

Also, some categories may require significantly more start-up investment. You may know a lot about real estate speculation, but if you can't afford a down payment and monthly mortgage payments, that isn't feasible for you right now.

Also be aware that some seemingly low initial start-up cost categories may contain hidden costs. For example, inventing something costs nothing in the early stage if you can make the product yourself. However, chances are that makeshift MacGyver-like doohickey you just made won't be sold with all that duct tape wrapped around it...or with those exact materials. At some point you're going to need to have either some engineering involved, as well as some production costs.

I had an idea for a beverage that I made in my own home, but after about a month's worth of research, it turned out creating a beverage from creation to distribution will cost about $60,000-$80,000 (that's including formula creation, product design, co-packing, warehousing, and distribution methods).

It goes without saying that the more categories you choose to pursue on the list, the better your chances are of getting rich. However, doing all categories half-assed will get you nowhere. Wealth and fortune are created because it takes skill, work, and determination. My advice to you would be to fully master one category, that will be challenging enough for most people.

For the people who really have the commitment, choose two or three categories to master. If you find yourself doing more than that, you have to ask yourself "have I really gone as far as I can in my first categories?" Unless you've been working at them for years, I can say with certainty that you have not.

Also, be careful with the Frugality category. Tendency here would be to say "yeah I'm already cheap" and move on. However, there's an art and science to everything. The Cheapest Woman in the World appeared on Opera and said she was able to purchase two homes and 20ft boat just from her frugal ways. Still think you're cheap enough?

Good luck and I'd love to hear your success stories. You can send them to TruWealth1@gmail.com. If your story is interesting, I'll write a post on it as inspiration for others.

The Ways To Get Rich

I made a list of all the possible ways to get rich. For my own personal morality, I did not include anything unethical (drug dealing, stealing, etc.). My goal is to have this list be the most exhaustive category based reference tool of ways to get rich, meaning that every way to get rich somehow falls into one of these categories.

To clear up any ambiguities, "rich" can have many different values depending on the person. But for the article's sake, we will define "rich" as $1,000,000 in net worth. And for those of you who don't know what net worth is, everything you own minus everything you owe.


The Ways to Get Rich:

-Inheritance
-Grow a Business (Hold it)
-Grow a Business (Sell it)
-Real Estate Speculation
-Income Property Investment
-Flipping Real Estate
-Stock Market Speculation
-Inventions
-High Salary
-Frugality
-Collecting (art, antiques, treasure, etc.)
-Publishing (book, blog, article, music, etc.)
-Gambling
-Lottery/Contests
-Marriage
-Professional Practice (doctor, lawyer, etc.)
-Celebrity
-Litigation
-Talent
-Oil Well Investment
-Currency Trading


To clarify, growing a business and holding it is separate from growing a business and selling it because there are people in the world who have sold their businesses and gotten rich, but wouldn't have done so if they held it (think of the unprofitable companies in the .com bubble).

Also, professional practice is separate from growing a business because it requires an educational variable not inherent in growing a business. Also, a lot of professional practitioners have never grown their practice and have still gotten rich.

If you have any additions to this list that you feel do not fit into these categories, email me at TruWealth1@gmail.com with your suggestion along with ample evidence why. I'll give you a shout out if its well supported!