Financial B-OK

This page is dedicated to developing a Full Financial Body of Knowledge (BOK) from a business and personal financial planning perspective.  This page is geared for Millennials and all others that want to learn and expand their financial knowledge.  The approach will be -comprehensive, -critical thinking in nature and contrarian (at times) in comparison to what mainstream media and other blogging sites might offer.

The goal: Let’s get to second level thinking…that higher order of thinking that transcends the current financial product and service offerings and rather helps people build up their financial critical thinking skills so they can apply  them to any new economic situation over the next 50 plus years of their life….that is right I am talking about something long-term and sustainable.

Why am I doing this?  Well, frankly I have been working in the areas for years and I have been having this personal conversation on how I can give value back to others, to society and how can I make a difference.  Today, I mentor others on professional leadership development and I find it extremely rewarding.  So, here is a way I can take what I know professionally (business strategic financial planning, leadership development, professional development) along with my personal experience managing my own financials and investments to help others.

I look forward to the opportunities and challenges this will bring and in the end if we can collectively create exponential growth on this subject…this economic-, social- and political-subject, then our success will be our nation’s success….and I definitely believe that is worth doing!

-Rachel C. Ybarra  1/1/2015

Ray Dalio and Bridgewater Associates – How the Economic Machine Works

Ray Dalio, the largest Hedge Fund Manager of Bridgewater Associates with over $165B under management, has come to the conclusion that it is important to share his framework on macro economics.  He has put together a great 30 minute animated video that is simple yet smart.  His approach is based on an understanding of how the economy works.  If you agree with his approach, you will find out that economics can be simpler than we may have thought and therefore more transparent and less opaque.

In addition, Larry Summers, Former Treasury Secretary, held a one hour session at Harvard University with Ray Dalio to discuss this topic in more detail.  If you have more time, take a listen….and learn.

I hope you enjoy.

 

The $6.6 Trillion Dollar Gap

Tomorrow marks the 40th Anniversary of The Employee Retirement Income Security Act (ERISA) that was enacted on September 2, 1974.  The history behind ERISA is quite interesting.  At that time pensions were popular yet there was not a lot of rules in place and enough situations occurred that required legislation to be enacted.  Back then, it was thought that between pensions, social security and personal savings, this three legs of a stool would be enough to fund a person’s retirement.  Today, we know that pensions have diminished with only 20% of employees in the private sector having a pension.  Social security obligations are becoming more challenged with the Social Security Administration estimating the program can pay all promised benefits until 2033 after which point the reserves will be depleted and on going social security payroll taxes will only cover 77% of benefits.  Couple these two with the fact that individuals do not save enough either because they do not have the means, the know-how or I would dare to say the discipline you can see that individual action is needed.  The Center for Retirement Research at Boston College estimates that our nation’s “retirement income deficit” – the gap between the pension and retirement savings that American households have today versus what they should have today to maintain their standard of living in retirement – is $6.6 Trillion Dollars.  Yikes!

So this message is not for the several millions of Americans with income that is barely able to meet the demands of the basic living standards.  I am really addressing the folks who do have the means but maybe not the know-how or the discipline.  With some small changes in spending and saving habits, results will happen and that will create momentum to continue making even bigger changes.  That is how we close the gap….smalls steps at a time.

Check out my first infographic on the subject:

https://magic.piktochart.com/output/2633209-1974-vs-2014

McKinsey’s: The Seven Traits of Effective Digital Enterprise

I host a series of mentor sessions, which I truly enjoy. It gives me an opportunity to share great materials and learn from the mentees.  For this week’s session, I had the team read “The Seven Traits for Effective Digital Enterprises” by Tunde Olanrewju, Kate Smaje and Paul Willmott of McKinsey.

Some take a ways from the article that all employees, managers, owners and CEO’s can apply:

Be Unreasonably Aspirational – we are expected to think differently.  Utilize what makes us unique and really take it all the way to the edge.  Make those around you feel nervous with your forward leaning recommendations.

Challenge Everything – Ask WHY again and again.  The further you are removed from the process, the easier it is to see the obvious.

Create a Zero-Based Budget, which aligns the resources with the values and strategies to be accomplished.  Invest across the value chain.  If you are not employing Zero-Based budget methodologies, I would say get with it.  The longer your organization has been alive, the bigger the opportunity to yield funds which can be reallocated to higher value solutions.

The Article is a quick read: The Seven Traits of Effective Digital Enterprises

 

Barron’s: Accounting Games Companies Play

Barron's (newspaper)
Barron’s (newspaper) (Photo credit: Wikipedia)

Each Saturday morning I look forward to my electronic copy of Barron’s.  It is to those who enjoy a morning cup of coffee and the paper my equivalent enjoyment.

Barron’s offers a section called “other voices” which is the ability for others to write a 1000 word essay or less with their thought provoking views.  This week Jack Adamo wrote a piece on adjusted earnings versus GAAP.  How should investors view “adjusted earnings?”

While I don’t know Jack Adamo, I can say that now days there are so many adjustments, for pension funding, mergers & acquisitions, stock compensation, severance adjustments, asset write-offs, restructuring, etc. In this fast past business environment, there are far too many of these to say that they are extraordinary.

In fact,  as I look at companies and their financial discipline, I am looking five plus years back keeping all of these adjustments included in the calculation.  It is part of the business of being an investor and owner.  As I tell my team, if we have to use “yeah, but” to explain things then we have lost the reader or listener.  As for investments, I want to keep my world as simple as I can.  In my view, a true restructure, asset write-down are decisions that were made some time back that are now having a negative consequence.  We should all be held to our decisions….both the excellent ones and the not so good ones.  Excluding what we don’t like and including what we do seems to be quite difficult for an investor to keep things straight.  I don’t know about you, but I am trying to figure out how to keep things simple.

In my view, while GAAP is not perfect at least it is consistent across the board and I can simply adjust for the known GAAP deficiencies instead of all the one-timers across the companies I am invested in.  To be clear, I invest in good well run companies with strong managers that think long term.  So this is not a knock on my investments or the CEO’s that run these companies.

Measuring short-term vs. long term results tends to produce tendencies and “one-timers” exclusion could be tenancies in this business.  As Investors we just have to be mindful of that.

One of the books on my list of reads this year:

Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports

by Howard Schilit and Jeremy Perler.

I know what you are thinking….but investing and reading are my Saturday cups of coffee.

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Top Five Wealth Building Factors

Net worth of the United States by sector as a ...
Net worth of the United States by sector as a fraction of GDP 1960-2008 (Photo credit: Wikipedia)

Today I found this Survey $25 Million Plus Investors 2012 by Spectrum Groups.  The site had some good insights that I would like to share plus I added my two cents.  Here are their top five factors:

5)  In the Right Place at the Right Time

Being in the right place at the right time.  For large investors of $25M or more, being at the right place at the right time was more important to frugality.  My two cents: Being at the right place happens probably more than you think.  Are you reading up on what is going on in the world?  Do you associate with similarly situated and minded folks as your aspiration and your interest?    I do agree being frugal is important…no doubt.  Living below your means is how you take some income and convert it into investments.  This is how you create momentum and with momentum comes the ability to cease an opportunity when the right one shows up.

4)  Taking Risk

Ah…the difference between high net worth and ultra-high net worth is the latter ranks taking risker higher than those with with investments less than $25M.  Do you know your risk tolerance level?  That is going to be important if you are going to leverage risk into your investment strategy.

3)  Smart Investing

In a recent study by Spectrum Group, millionaires, regardless of level agreed Smart Investing was the third most important factor. From my perspective, allocating your resources into asset classes and vehicles is such a critical decisions that requires thorough analysis and consideration.  If someone tells you it is a good thing and yet you know nothing about it….run away from yourself and your tendencies to give your money to someone else to invest.  Knowledge is Power and being knowledgeable about your money and investments is how you win.

2)  Education

Higher Education and Advanced Education is an important factor.  I would add to this category that we should include daily reading materials on global/geopolitical, political, and economics in order to stay knowledgeable.

1)  Hard Work

Millionaires, regardless of level, credit their wealth to hard work.  I do think, also, the harder your work the luckier you get which loops #1 to #5.

And for me, I have added an extra one…number zero, where it all begins.

0)  All People can Make Money, it Takes a GENIUS to Keep It!

Be strategic on what you make, how you spend it and what you invest in.  Live below what you need, and be respectful of the economy, it can get shaky and you have to be ready for what it will bring you.

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Warren Buffett – Value Strategy on Purchases

I am listening to an audio of the life of Warren Buffett called The Snowball. Interesting observations so far (half way through the audio book). While these are not overt observations depicted in the book, you can draw the conclusions.

For most folks, their home is where a majority of their wealth is resides. At the time Warren and his wife Suzy purchased their home where he still lives today, he called it a “Folly” understanding that his $100K investment was really a $1M in 30 years. How many of us think of our purchases of cars, homes, shoes, and vices as opportunity costs of what it could be worth in 5,10, 20 or 30 years? Something to think about when you are wanting that new car right after you got done paying off your last car payment.

My second observation is: Those with the most information and knowledge along with a humble disposition will win out over those that are ill informed and/or without humility. Today as back then, Warren reads feverishly reports about his businesses along with possible opportunities presented. How much have you read about the investments you are invested in (401K, IRA, Investment Account)? I have started this process myself. It is definitely a lot of time and effort; however anything worth having requires work…and the harder your work the luckier you get.

My third and by far the most cementing observation is it is better to invest in the “really good” at a fair price than the “really good price” for the fairly good. This applies whether you are talking about buying a business, a home, stock in a business, employees or a product/service. My experience as it relates to hiring employees is to focus on the talent and what their capabilities are in the future and not necessarily their current skills if they are less experienced. If they are more experienced, I am willing to pay more for the experience so we can yield greater results more effectively and efficiently. The saying you get what you pay for…is so true.

We can create our own wealth by taking some tips from Warren Buffett. The Less You Buy, the More You Have.

Corporate Culture: The Sleeper in a Company’s Valuation Equation

MATH ON TV
Image by JAHPEACEFUL666 via Flickr

I recently heard a story of a woman who bought a CPA firm.  In essence, she believed she was paying for the client list of the seller.  She had the seller sign a non-compete agreement to protect the customers.  She also agreed to keep the two tenured employees onboard as part of the seller’s request.  For the buyer, life was good for about six months.

Soon thereafter the first employee decides to leave the business and informs the clients she will be starting her own bookkeeping practice.  The clients move with the employee.  The other employee sees this and soon follows the same plan leaving the buyer short $100K a year in fees.

Litigation later, the buyer loses the cases and is required to pay the defendants’ fees.  Oh by the way, did I tell you one of the employees was wife to the seller?

There are so many life lessons here, so let’s focus on the overarching one.

When you are thinking of buying an existing business, be very clear in your own mind that you are not buying the revenue, assets and profits.  You are buying the culture and the relationships.

The culture tells you if there are good financial controls in place, leadership is honorable and respected, employees are valued and motivated to stay, customers feel a sense of loyalty to a company that has given them more than they paid for.  Culture tells you if you are buying a transactional versus transformational business.

When buying a business, you are also buying the relationships.  There is no certainty the customers will return post close.  Frankly, there is no certainty the customer list even represents repeat customers to the seller.  While it is not possible to know the relationship with every customer, it is necessary when establishing a good price to know the relationship with the top customers and a sampling of the mid-size and smaller customers.

Want to know the price you should pay for a business, find out the company culture.  It is the sleeper element in the valuation equation.

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