The Theories of Excellence - Finance

The book is organized by chapters that correlate to important money issues:  1. Know the Score  Orman says that the most important thing twenty- and thirty-something-year-olds can do for their financial future is to know and improve their credit score. She thoroughly explains what the FICO score is comprised of, how to improve it, how to run a credit score report, how to fix errors, and how your credit score can affect your financial future.  2. Career Moves  Orman’s advice in this chapter is sometimes surprising. She advocates that you find a job you love, and not just work for the money. She even advocates using credit cards for a few years to supplement your income if you have a job you love but that does not pay much in the beginning. Orman doesn’t advise that you finance an expensive lifestyle, but rather that you use credit to help survive by meeting basic needs until your career pays enough to support you completely.  3. Give Yourself Credit  Because...

Taking Stock of Your Financial Life – Covers goal setting, tracking your spending, and financial organization Dealing with Debt – Credit cards, student loans, car loans, credit scores, identity theft, and bankruptcy are covered here  Basic Banking – How to find a good bank, and whether to do joint or separate accounts  All You Really Need To Know About Investing – Pointers for new investors, and good explanations of all the basic financial instruments (money market funds, stocks, bonds). Also covers financial advisors  Living the Good Life in 2070 – Saving for retirement, including overviews of 401ks, IRA’s and options for the self-employed  Oh, Give Me a Home – Buying vs. renting, qualifying/shopping for a mortgage, and the costs of home ownership  Insurance: What You Need and What You Don’t – An overview of all the key types of insurance (health, car, disability, home, life, and types you don’t need  How to Make Your Life Less Taxing – Tax basics, tax rat...

“Accountants in the United States rely on a set of guidelines known as Generally Accepted Accounting Principles, or GAAP (pronounced gap) for short… Companies take those guidelines and apply a logic that makes sense for their particular situations. The key, as accountants like to say, is reasonableness and consistency… The rest of the world—more than one hundred countries—uses… International Financial Reporting Standards, or IFRS.”  “The most important GAAP guideline that accountants rely on for recording or recognizing a sale is that the revenue must have been earned. A products company must have shipped the product. A service company must have performed the work… Project-based companies typically have rules allowing partial revenue recognition when a project reaches certain milestones… The ‘sales’ figure on a company’s top line always reflects the accountant’s judgments about when they should recognize revenue. And where there is judgment, there is room for dispute—not to say man...

A penny saved is actually two pennies earned when you also consider taxes. So get creative on ways to save money in all areas of life. The simple proven way to grow your net worth is to spend less than you make.  Never ever fall into the trap of piling up credit card debt by buying things you don’t need that you can’t afford.  Always buy in bulk for home supplies—it will save you more money than you imagine over the years.  Set up a financial plan for you, or your family, in this order: 1) Tally your net worth, 2) Set goals, 3) Figure your annual earnings, 4) Add up your expenses, 5) Take a second look at your expenses, 6) Refine your plan, 7) Find a way to track your progress (mint.com), 8) Give yourself a break.  Save a few thousand dollars in an emergency fund in case something bad happens—you lose your job, end up in the hospital, or face an unexpected high expense—before you start investing.  You shouldn’t trust anyone to take care of your money more than y...

The Theory of Investment Value by John Burr Williams is a classic, and was referenced by Warren Buffett in his 1992 annual shareholder letter as “the equation for value”. This post will present and explain this exact formula published by John Burr Williams and help modernize it in today’s terms. Nobody has done it better than Warren Buffett himself, and so I recommend reading his 1992 letter for yourself for additional insight.  The equation for (intrinsic) value that eventually came to form the basis for modern DCF valuation is admittedly difficult to model even when reading the John Burr Williams classic, so I’ll have to explain some of the Greek symbols he presents in the final equation, which are scattered throughout the book.  Keep in mind that some of these Greek terms won’t necessarily correlate to the general terms used in regular algebra.  Capital Vo (on the left of the equation) is defined as the investment value per share (page 76), which is what we are trying ...

Take-Aways  When people sell a share short, they intend to repurchase it for less. This is how they expect to earn a profit.  The market falls when there’re many sellers. Or when selling stops.  “Larry Livingston” (fictional name for Jesse Livermore) was excellent at mental math.  When Livingston was 15, he started day-trading for a living.  Livingston earned $1,000, the equal of one year’s income, at just 15.  He had a unique “ticker sense.” Livingston could remember stock trades two decades later.  While Livingston was building a stock position, he ordered buy and sell commands. This was to test the market’s strength.  Naïve investors lose money in share market because of many reasons. It could be poor judgment, evil temper, bad timing or lack of knowledge.  To be successful, be patient, confident, and trust your judgment. Also, invest in trends and keep a formal sell and buy discipline.  If you’re buying shares, every new purchase mus...

PART ONE. TWO SYSTEMS  Kahneman explains that there are two systems when it comes to considering judgement and choice. The first system is fast and automatic in comparison to the second system which is slower and more deliberate. We will discuss these in more detail below.  System one  Kahneman considers the first system to be fast thinking. It is thinking done almost automatically or instinctively. Thinking is done with almost no effort from the person and there is no feeling of control. Kahneman explains that this is the system of thinking that is incredibly influential, more than you think, as it influences almost all of your regular judgements and choices. Answering simple equations such as 2+2 or knowing that the second part of the phrase “bread and…” is butter is due to the first system of thinking.  System one executes skilled responses and generates skilled intuitions, after adequate training. System one creates a coherent pattern of activated ideas in associ...

Take-Aways  · People investing in common stocks must focus on long-range returns. They must not attempt selling high and buying low.  · Use “scuttlebutt” to get knowledge of a firm. This is the information you get by speaking with consumers, competitors, and suppliers.  · Purchase shares of companies that have well-planned strategies for long-term growth and profits. Then keep them till you are sure that the company’s future is not bright anymore.  · For a more focused search, use 15 points which judge a company’s finances and management.  · You can seek companies with robust profit margins, great marketing, and healthy employee relations.  · Pick an investment advisor with at least 5-years’ experience in both bad-and-good markets.  · Assign the majority of your money to huge “institutional stocks.” Besides, invest a small part to smaller and upcoming companies.  · Capitalize on downt...