Covers all topics finance and financial education spanning from financial management for companies and individuals.
The COVID pandemic has impacted the global economy in many ways. Supply chain shortages, stimulus packages, already low-interest rates, and unprecedented government spending have led to an economy that overheated. Inflation is the natural end result of these changes. For…
Perfect Opportunity Cost Introduced This article strives to accomplish what many have tried – coin and define a new economic definition, Perfect Opportunity Cost. The definition is derived from two well-known economic concepts, opportunity cost, and perfect competition, defined below: …
“The appropriate multiple for a business compared to the S&P 500 depends on its return on equity and return on incremental invested capital. I wouldn’t look at a single valuation metric like relative P/E ratio. I don’t think price-to-earnings, price-to-book…
A dollar earned from a horseshoe company is the same as a dollar earned from a hospital. Strip everything away from a business, its economic characteristics, its people. Cash in and cash out is all you are left with as…
You have likely heard the phrase “more risk, more reward”. But, this is the wrong way to think about an investment or capital allocation decision. The financial definition of risk should be: The probability of loss X amount of possible…
EBIDTA is a flawed measure of earnings that is commonly mistakenly but commonly used as a proxy for the earnings of a business. Interest, debt, taxes, and amortization are real costs to a business and generally reflect real charges against…
Franchise economics are those in which a company’s product or service are: If a company has all three of these characteristics it will demonstrate them by having the ability to regularly price its product or service aggressively and as a…
Business owners and managers have only five ways to use the earnings from their business. They are: How to determine what do to with business earnings: Determining what to do with earnings is a simple calculation for shareholders. Management should…
The Paradox of investment skill is the concept that as individuals become better at investment activity, the difference between the best, average and worst gets smaller. As skill of the group increases, luck plays a bigger role. Telling the difference…
An illiquidity premium the concept that an investor will require additional return for holding or acquiring an investment that cannot be easily sold. A liquidity premium by contrast is additional value an investor would be willing to give up for…
Risk should be thought of in the vein of Fermat and Pascal:Probability of loss X amount of possible loss from the probability of the gain X amount of possible gain. When I was a young analyst I had the opportunity…
What is dollar cost averaging? Dollar cost averaging is the process of buying into a security over time in equal installments. The action helps investors to not fear buy or sell at the wrong time. Investors may benefit from extreme…
For most, the result of investing in a low-interest rate environment may easily mirror the effect of mixing alcohol and prescription medication. The cocktail is dangerous and the hangover can put investors in the proverbial hospital to serve a long…
What makes a business a good business? The best type of business? This list is was generated by reviewing personal notes during operating experience and a compiled set of notes from public information shared by Berkshire Hathaway. This article seeks…
When should you invest in bonds rather than stocks? Stocks and bonds are alternates. This tenant used to be sacrosanct in the American investing lexicon. Sadly, this once well understood phrase appears to have faded into the miasma of modern…
Idle cash for a short period of time in a business tends to add up to substantial cost over the life of the business. Consider that the average savings account in the United States of say $20,000 in reserve can…
Investors and managers should use owner earnings, as defined by Warren Buffet in his 1986 letter to shareholders, to calculate earnings. This analysis applies to business valuation and management. Owner earnings definition : These represent (a) reported earnings plus (b)…
Reflection on the sources of American wealth illustrate a very important concept. Wealth disproportionately exists as a result of ownership of and participation in the component parts of markets. Businesses are the component parts and the representative share of the…
All businesses are subject to the same laws of economics, finance and rules of accounting. Leaving economic components aside for a moment, return on invested capital is the mechanism for decision making within a business. Stated another way, accounting is…