Category Archives: Understanding Finance

Understanding Finance- Mark to market accounting

A junior excutive shopping for goodsMarket to market accounting is kind of a big deal. Captains of industry like Jeffrey Skilling adopted mark to market accounting when he became CEO of Enron. But what exactly is mark to market?

Simply put, mark to market accounting is a practice rooted in the history of corporate espionage. Corporate spies would account for times when marks, or in this case, corporate executives, would go to the market to buy groceries. When performed en masse, the theory is that the cumulative action of all corporate executives at grocery stores could provide accurate intelligence into the company’s conditions. For example:

  1. Lots of caffeine – When execs purchase a lot of caffeine, it tends to mean that they’re up to something big, so they’re working long hours. Expect big news.
  2. Lots of fiber – Execs hitting up the Kashi aisle are probably constipated. This means that they’re eating lots of expensive meat, which is backing them up. Expensive meat means that they’re sitting on a lot of cash. Expect higher than expected earnings.
  3. Lots of alcohol – It’s Tuesday. Nothing really to learn here – execs just like to buy alcohol on Tuesdays.

Though this sounds like fancy pants accounting and voodoo math, it has been shown to work on numerous occasions. For example, corporate spies found that in 1983, when Randolph and Mortimer Duke cornered the frozen concentrated orange juice market, they consumed copious amounts of caffeine in the days leading up to the release of the orange crop report, and they ate lots of fibrous foods as they expected a large influx of cash. However, once they found out that his crop report had been tampered with, they proceeded to drink a lot (because it was on a Tuesday).

So that’s really all there is to mark to market accounting. If you have a firm grasp of mark to market, you can also make some educated guessing around what mark to lingerie model accounting is too.

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An Original eBusiness – Communal Tax Preparation

0409_manandwomanatlaptop Tax season may be over “per se,” but is tax season ever really over? Once one tax season stops, the next one begins. That’s what inspired the idea for my latest eBusiness: Communal Tax Preparation. It combines Web 2.0, Open Source, and the financial savvy of the average Internet user to make tax preparation easy for everybody.

How does this work? Users enter all of their important financial information (name, address, social security number, income, etc) onto the Internet, and good willed Internet user, likely skilled in tax preparation, files their taxes for them. And the best part? It’s free! We’re completely funded by contextual advertising.

Some may ask, “but Al, isn’t it risky to put all of your financial information on the Internet?”

I say that it’s risky to not put all of your financial information on the Internet. Made up statistics show that 90% of half of all tax returns are audited by the federal government. Isn’t that scary? And really, how can you trust these monolithic, for-profit companies to do your taxes? Wouldn’t you rather have it out in the open for people like you to do your taxes? As the saying goes, with enough eyes, all tax mistakes are shallow.

So when next tax season comes, instead of putting your trust in one guy that you may know that works for a reputable organization, put your trust in a whole lot of people that you don’t know at all.

Understanding – Fake conflict diamonds

brownishpink.jpgStocks are so pedestrian these days. Every publicly traded company seems to offer them. And they’re so impersonal too. When was the last time you saw a person you saw a man drop to one knee to propose to a woman, offering a stock certificate?

These days, all the rage is in conflict diamonds. What women really want are shiny objects that tell the world, “my significant other loves me so much that he or she bought me a symbol of how we as a modern society cripple the third world.” The only problem: they’re expensive!

For those looking for alternatives to conflict diamonds, here are two:

  1. Kimberly Process Certified Diamonds. These are diamonds that have been tracked from their mining up until the point they reach your fiancee’s finger. What’s great about them? They are identical to conflict diamonds in appearance. Even your nosy neighbor’s diamond expert “friend” won’t be able to tell that they were not mined by starving children. However, they will also be roughly the same price as conflict diamonds.
  2. “Cultured” or “synthetic” diamonds. These diamonds are grown in a lab with a process similar to the way Cheez-Its are produced. A giant ball of carbon starts rolling from the top of a large hill until it reaches “terminal velocity.” At this point, the carbon collides with a cracker. The carbon’s own momentum compresses it until it is shiny like a diamond. The end result is a diamond almost indistinguishable from a conflict diamond (to the untrained eye). If a trained jeweler with a loupe does examine the diamond, you can always say, “oh, I didn’t want to be responsible for child labor and conflict in Africa” (though in secret, yes you do!)

Another note on diamonds — just because they weren’t mined with child labor and used to fund war between warlords doesn’t mean that you can’t still support this. Force your nephew to mine diamonds in the back yard. Use anything he finds to contribute to Republican campaigns. Ask for a certificate to keep track of what conflict your child labor has just supported when you buy the diamond back. After all, a synthetic-conflict diamond is still a synthetic conflict-diamond!

Understanding Finance – Investing in the lottery

the lotteryThe lottery is statistically a bad investment. The expected value of your return is always lower than the amount you’ll pay for tickets. Worst of all, much of the money you put in goes into school systems.

But what if this weren’t the case? What if you could ensure that you could make millions on each dollar you invest? Well, there is a way to do this, and it’s actually quite simple. The answer: used lottery tickets.

Buying used lottery tickets is the sure-fire way to control the rate of return on your investment. When you go into a 7/11 and buy a lottery ticket, you’re placing a big bet where the odds are against you. When you buy a used lottery ticket, you can do research ahead of time to determine whether the ticket is a winner. Here’s what to do:

  1. Look for tickets. You can do a simple search on sites such as eBay, craigslist, or
  2. Look up the lotto number and date. This is the important part. As your browsing listings on the web site, be sure to do your research and find out whether the ticket is a winner. If the ticket did not win for the date it was issued, you should likely not buy it.
  3. Calculate the value of the ticket. When deciding how much you’re willing to pay for the ticket, you’ll want to know how much you’ll net from the ticket. Offer to pay any amount less than your net revenue after taxes.
  4. Execute. Once you’ve agreed on a price that would give you a return that you’re satisfied with, execute on the deal. Figure out payment and delivery details. To gain favor for future used lottery ticket transactions, be sure to provide the seller with good ratings on the web site.

When calculating the value of the used lottery ticket, be sure to factor in the opportunity cost of calculating the value of the used lottery ticket. You may find this to be difficult as it is infinitely recursive (or is it???). Just do your best. In the end, it’ll make for a great investment.

Thanks for reading.

Understanding Finance – The tale of the Walletin Spectre

Norse giantsAdam Smith was a big proponent of free market economics. Some may say that he “invented” capitalism. But who invented Adam Smith? Clearly, saying that Smith invented capitalism would be a naive statement, and nobody invented Adam Smith, but it was the old tale of the Walletin spectre that scared him straight into supporting self interest and competition.

The Celtic tale of the Walletin spectre dates back centuries before Smith’s time to the 12th century when the Vikings raided Scotland like it was a set of 5 inexpensive hard disks. According to Norse mythology, the Valhallamr was a galley on which a communal group of giants lived. At night, they would disembark at various locations, plundering coastal villages and sharing the profits.

Centuries pass, and a number of the Norse settle in Scotland. One group of Norse emigrants established the town of Walletin, a rough Celtic translation of Valhallamr. These former Vikings vowed to stay true to the ways of Valhallamr galley and tried to establish a communal village. Unfortunately, the village of Walletin failed to survive its first winter as the settlers lacked any agrarian skills (skills vital for sustaining a commune), so they resorted to plundering other villages.

But the pickins were slim for the Walletins. No longer having the advantage of mobility offered by their galleys, the Walletins were unable to plunder. Neighboring villagers were generally smart enough to move away. Slowly, the plundering settlers died in the blistery Scottish winter.

By the 18th century, the story of the Walletin evolved into a folk story used by Scottish parents to scare their children. The Walletin became a starving spectre, or ghost, that would plunder at night with the intention of sharing profits with fellow Walletins. It was this story, the story of the Walletin Spectre, that convinced Smith that it was the idea of self-interest and competition, and not the profit sharing model of the Walletin, that would lead to economic prosperity. And now you know of the tale of the Walletin Spectre and the birth of modern economics. Do share your new wealth of knowledge with all that you know (much like the Walletins would after plundering it).

Understanding Finance – Why Google is worth like, a bajillion dollars

Many people new to the stock market and unfamiliar with the tech industry find themselves asking a common question: What’s the deal with Google? Should I invest in it? While, many argue that it’s overvalued, others will argue that it’s undervalued. I’m here to put an end to that question: Yes. Invest in it. Here’s why:

  1. They have good leadership.
  2. They’re not evil.
  3. They’re investing in different markets.
  4. They have a strong brand name.
  5. Web 2.0
  6. Walmart was once a small business, and now they’re HUGE.

Now, I don’t have a billion spreadsheets like Goldman Sachs or anything, so I can’t tell you specifically how these 6 bullet points translate into the stock price. In fact, I have not met a single person that can. However, I can tell you that investing in the stock market is all about evaluating your risk tolerances. Perhaps your risk tolerance doesn’t allow you to invest in a company whose stock price you cannot really justify. For those that I know that argue the six points above, ehhh, it never really came up. After all, they’ve got good leadership, they’re not evil, they’re investing in different markets, they have a strong brand name, Web 2.0, and you know this company Walmart — they were once a small business, and now they’re huge!

So put your faith in Google, and let the magic of compounded interest take you the rest of the way.

Understanding Finance – Starting your first e-business

Do you have your own e-business? No? Why the hell not? What is wrong with you? In this new Web 2.0 era, running e-businesses is surely the only way to guarantee enough money for retirement. To date, I’ve started 9 e-businesses, but most of my friends have started well over 20 each. Here’s what you’ll need to get start an e-business:

  1. Capital. This is money that you will use to fund your investment. Luckily, this is next to nothing for e-businesses since the Internet does not actually exist. I started my Treadmill-powered-segway e-business with nothing but two roasted chickens from Safeway that I used for bargaining.
  2. A value proposition. This is the explanation of why customers should choose your e-business over your competition. It should be unique to your business and convey value to the customer. For example, the value proposition for my “book shirts” e-business is that it’s the only place where you can have your autobiography published onto an item of clothing with multiple pages – the way it was meant to be read.
  3. A computer. Computers put the ‘e’ in “e-business.” You’ll need a computer to run your e-business. When you’re not using your computer for starting your e-business, you can also use it for other things. I have friends that use it to play Minesweeper. I personally use it for Internet dating. To each his own.
  4. Persistence. I was told a thousand times that no one would ever want Porcupine Slippers. And you know what? The critics were wrong. When I went out to do my own research, I found that porcupine slippers ranked second highest in popularity in the “defensive and comfortable” category of clothing (beaten in a narrow margin by the “echidna pajamas”). Point being: don’t get discouraged when people call your idea stupid. Tell them that their faces are stupid. But don’t give up.

To start your first e-business, you will need all 4 of these. An initiative with lots of capital and computers but not enough value proposition will result in an unsuccessful e-business. Once you start your first e-business, make it a goal to start one every few weeks. Use holidays to boost your sales. My one-way chimney valve, for example, sells great around Christmas. And in ten years, when you have a thousand e-businesses and you’re sitting in a Winnebago in Tahiti, you’ll think, “damn, I am sure glad I took the time out to understanding finance.

’til next time, folks. Thanks for taking the time to get closer to understanding finance.

Understanding Finance – 10 reasons not to invest in the stock market

trading placesMany will tell you that the best place to invest your money is the stock market, but in this day in age, can you really trust them? Are they really looking out for you, or do they have an ulterior motive? Decide for yourself. The following are 10 reasons not to invest in the stock market.

  1. Your mattress returns 12% annually, and investing in an S&P 500 index fund, which has averaged 11% annually for the past 90 years, would prevent you from stashing your cash under your mattress which would in turn give you 12%.
  2. You don’t love your family. Perhaps your daughter won’t stop practicing the saxophone (and she sucks at it) or your son got his ear pierced. The best way to teach them a lesson is to be financially dependent on them when it’s time to retire.
  3. You know a guy that has lost a guy in the stock market. Face it. History repeats itself. If a guy you know little about invests in a stock that he hasn’t named specifically and lost what he describes as “a lot” of money, the S&P 500 will clearly stop averaging 11% annually.
  4. You are on a bus that is rigged to explode if you go below 65mph. You have more important things to worry about than investing your money.
  5. Your car’s spoiler isn’t big enough. Some things just take higher priority than investing. Ricing out your car is a life-long pursuit that will make you whole.
  6. Social security is just way too reliable and pays way too well. Saving money now would be silly. You should invest in a bigger spoiler for your car instead.
  7. In a twist of fate, the stock market has started to invest in you. Investing, in turn, in the stock market would throw the world off of its equilibrium, and you cannot be the one that has to take responsibility for that.
  8. Finance is hard. You barely passed the third grade. How are you expected to go on the Internet and sign up for a brokerage account? Wait a minute… wtf is the Internet?
  9. Your friend told you that the market isn’t doing well. Winning strategies in the stock market generally involve buying when prices are high and then waiting for them to fall before selling.
  10. You invented the stock market with the intention of destroying it. Gene Roddenberry was buried in space. What’s the lesson here? Don’t get caught in your own games.

Do any of these sound like you? If so, beware. The people telling you to invest in the stock market are trying to screw you. If you decide to do something about it, be sure that the revenge you plot is applicable to the crime.

Otherwise, perhaps it’s time to start investing. You’ll eventually find a great payoff from understanding finance.

Understanding Finance – Put the "you" in "usury"

NasdaqSo you know you have to invest your money, check. That’s step one. Now the question is: How do I make the most of my money in these uncertain times? It’s easy to get discouraged by the tales of inflation, sub-prime mortgages crunches, and sky-rocketing oil prices. Is now the time to buy low? Or should I wait it out longer for stock prices to fall in order to capitalize on the inevitability of their eventual rise? One approach to answering these questions is by looking at the past to learn lessons from history.

And no, I don’t mean the 80s.

Rather, we can look at a group of people who had a similar problem similar to the sub prime mortgage crunch, preventing them from owning land — the Jews.

William Shakespeare’s Merchant of Venice chronicles the Italian Renaissance, a time when Jews were prevented by law from owning land at all. Without the ability to invest in real-estate, the Jews looked toward another market — stupid people needing money. That is, they provided loans with the expectation of full repayment plus interest. This was dubbed “usury,” which is now synonymous with “loan sharking,” and was considered unchristian.

You too can be usurious and unchristian. Hey, it almost worked for Al Pacino Shylock. He almost had a return of 100% (had he not been mad for revenge.) All you need are:

  1. Money to begin with. This is called “capital.”
  2. Goons. They protect your investment. Should your goons turn on you, you may want an extra set of goons to protect you.
  3. Mercilessness. Don’t call off your goons before they’re done. Remind yourself that ample warnings were provided.

With all investments, however, remember that there is a level of risk involved. Be sure to do your own research into usury to understand whether it falls within your risk threshold. Even if you do not end up loan sharking, understanding usury will bring you one step closer to really understanding finance. Thanks for reading.