November 28, 2012

Price vs. Value

Credit: digitalart
My Georgia Bulldogs recently clinched a berth to the Southeastern Conference (SEC) Championship Game to be held in Atlanta on December 1, 2012. I, like many of my Bulldog brethren, am very proud and excited that they have the honor and opportunity to play in such a game. Since I’ve been a true Georgia fan, I’ve only seen the Bulldogs actually win one SEC Championship. The game on December 1 is not a once-in-a-lifetime opportunity, but it’s a very valuable and rare opportunity to say the least. That is what got me thinking about the value of the $90 ticket to the game.

Don’t get me wrong - $90 is a lot of money for a football game, but when it means I’ll have the chance to see my favorite team win a championship in person, $90 doesn’t seem that expensive anymore. Why is that? It’s because price does not equal value, and that’s what I’d like to talk about today.

Price can be defined as the sum or amount of money or its equivalent for which anything is bought, sold, or offered for sale.

Value can be defined, in this case, as the usefulness or importance to the possessor, the utility, the merit.

In the case of $90 SEC tickets to see the Georgia Bulldogs, the value of owning tickets and the thrill of being able to go to the championship game greatly exceed the money I will spend and the sacrifices I will have to make going forward to cover my unplanned and unbudgeted expenditure.

If the $90 tickets were to see another team that I don’t passionately root for (and wear lucky garments for) in the SEC Championship, there would be no way I’d pay that price to go to the game! The value of being at a championship game that my team isn’t in is easily dwarfed by the money I would have to fork over.

Price and value decisions are part of our everyday lives, and everyone needs to understand the differences. The price of a manicure and pedicure may be worth it to you, but for me, the value of such services is minimal. The price of a really nice bottle of wine may be worth it to you, but for me, the value that I would get out of a glass or two just isn’t there. You might be perfectly content with a serving of apple cobbler at a lower price, but the value of that ice cream a la mode deliciousness is worth the extra cost to me! No one is right or wrong as long as they can afford their price and value decisions, but when it comes to living within a budget and cutting back expenses, you need to take a close look at all of your expenditures and make sure the value of each of your purchases justifies its price.

As MasterCard might say, “SEC Championship tickets: $90 a piece, parking pass: $30, seeing my Bulldogs win a championship: priceless.” Well not priceless, but in my book, worth a few sacrifices over the next couple of weeks to make happen.

Go Dawgs!


November 26, 2012

Fantasy Football

Credit: Idea go
When I sit at my desk in the fall and should be thinking about investing, I occasionally have my thoughts wander to football and fantasy football. A few glorious Saturdays ago at a splendid tailgate I came up with the notion that instead of fighting my fall thoughts it might be fun to combine them and see what fantasy football can teach us about investing. Maybe it was that 7-layer dip, or maybe it was my Dixie Cup “talking,” but the more I’ve thought about it, the more I think there are some simple investing lessons buried in the fantasy football world:
  • Diversify- In one of the leagues I’m in, I walked away from the draft with an unusually high number of Green Bay Packers. It wasn’t my plan, it just kind of happened that way. Aaron Rodgers, Randall Cobb, Mason Crosby, and the Green Bay defense aren’t too shabby, but they are all from one team. My fantasy team seems to do well when Green Bay does well, and it stinks when Green Bay stinks. When Green Bay had their bye week, do you think that was fun? No, my fantasy team was a wreck. This could happen to your investment portfolio, too! If most of your investments are in one stock, one industry, or even one mutual fund, you can lose a lot when your investments don’t perform well, just like I lose a lot when the Green Bay Packers don’t perform well. Had I sprinkled in a few more 49ers, Falcons, and Steelers who didn’t have Week 10 byes in my fantasy football portfolio, I could have avoided relying on the Green Bay Packers every week, and skipped my Week 10 bye problem entirely.
  • Long-Term Strategy- If you are in a “keeper league,” you already know where I’m headed. Most fantasy leagues have completely new drafts every year where every manager starts from scratch, but some leagues allow you to keep a certain number of players from the previous year. If you know you are going to have the opportunity to keep some of your players, deciding between drafting Peyton Manning (who is nearing the sunset of his career) and drafting Robert Griffin, III (who could be around for the next fifteen years) becomes a little bit more difficult of a decision. In a “keeper league,” you probably should lean more favorably toward the up-and-coming players with potential and a high probability of future growth. The stock market is also a keeper league, as you don’t get to start fresh every time you invest and your previous gains and losses go with you. Therefore, in the stock market you need to think long term and focus on earnings potential and future cash flows - not how the stock will briefly overreact to tomorrow’s earnings announcement.
  • Buy Low, Sell High- Take my team for example: had I traded away Tony Romo after his Week 1 307 pass yards and 3 TDs performance for Alfred Morris, Washington’s little-known running back at the time who has been lighting it up lately, I would have bought low and sold high. Everyone in my league would have thought I was crazy then, but my team would be better now as we speak. It’s almost counter-intuitive to buy low and sell high, but that’s how you win fantasy leagues, and come to think of it, make money investing. When do you want to purchase a stock? When it’s very cheap or low. When do you want to sell a stock? When it’s high or overpriced. This sounds easy, but it’s very hard to do. Did you naturally want to buy Bank of America at $3 and sell Apple at $700? I rest my case. 
  • Active Management- Let me go on the record for all fantasy sports enthusiasts out there and express my displeasure with those of you who draft your team and don’t keep up with it. You sadden me. You don’t have any idea when your fantasy team does well, and you don’t have any idea when your fantasy team gets crushed. There is nothing more frustrating than losing to someone who has not updated his or her team, but I can honestly say I’ve never been in a league where, by the end of the year, someone who had not managed his or her team took home the trophy. I believe the same holds true for investing. You, or at least your financial advisor, need to pay attention to what’s going on in your investment portfolio, or the risk of terrible losses is huge. Passively letting your investment portfolio (or drafted fantasy team) roll on its own can work for a while (cough, cough, team I beat in the playoffs last year), but I’m a firm believer that, eventually, active management will win.
For those of you who play fantasy sports, I hope you got something out of this. For those of you who think fantasy sports are for geeks or crazed sport fanatics, you’re right, but you’re also missing out on the fun. Either way, I believe diversifying, having a long-term strategy, buying low and selling high, and actively managing your investments add up to a simple recipe for success for your fantasy and  financial portfolios.

And, as I always tell my friends, [insert your favorite team here] before fantasy. Go Falcons!


November 06, 2012

My Fellow Americans

Credit: the photoholic
My Fellow Americans:

By this time tomorrow, President Barack Obama or Governor Mitt Romney will be our next president-elect. By this time tomorrow, television channel 2, channel 46, and channel 202 will either be rejoicing or mourning. Channel 360 will have launched fireworks across its scrolling bottom line, or its pundits will already be discussing the year 2016. By this time tomorrow, close to 50% of the country will be happy and 50% of the country will be disappointed, but we need to keep this in perspective.

Regardless, the campaign or “easy” part will be over, and our elected leaders will face the same challenges our country did this morning. Our national debt will still be more than $16,000,000,000,000, our annual budget (which Congress hasn’t officially passed in more than 3 years) still isn’t sustainable, our unemployment rate is still high, our consumer sentiment is still pretty low, and our individual and corporate tax laws need substantial reform. In order to save you from additional political fatigue, I’m not even going to begin listing the serious national security and social issues our country is facing.

However, even if the candidate you preferred does not win, it’s important to take comfort knowing that our nation still remains one of the strongest in the world. Other countries still flock to our economy and currency for stability and opportunity, we have the best armed forces, and in the words of Winston Churchill, “Americans can always be counted on to do the right thing after they have exhausted all other possibilities.” We can only hope that our nation and its leaders prove the late prime minister correct going forward.

I’m expressing my perspective because my friends, family, and clients have driven me to be neither a Democrat nor a Republican. I simply believe both parties have done America wrong, and it’s going to take both parties to set America right. While I acknowledge many of my values and beliefs are fairly ingrained, in this historically divided political climate, I often find myself trying to pull supporters of the far left to the right and pull supporters of the far right to the left. The Democratic Party has better plans and ideas on some issues, and the Republican Party has better plans and ideas on others. It’s important to acknowledge that there is no way that 150 million other Americans have a “stupid” opinion just because it is different than your own. In my opinion, our government and we, the people, should recognize the need for swift action from our government on many issues and start walking towards each other in a middle-of-the-road, compromising kind of way. Since when did it become more important to win red versus blue and not win as the red, white, and blue?

So what does politics have to do with personal finance? More than it should. Many of those same friends, family members, and clients who have driven me to try to see things from the middle have slowly been allowing their political views to seep into their investment philosophy. As a financial planner who is trying to be a trusted advisor, I cannot let you do that. It’s at least my duty to try to help you differentiate your politics from your portfolio.

What impact should the immediate election results have on your long-term investment strategy? Probably not much. Look, neither I, nor anyone else, know what the markets are going to do in the short term, but I do know that over the long term, they will rise. I don’t know which sector will perform the best in the first quarter of 2013 under a Romney or Obama administration, but I do know that your current interest rate on your cash accounts or Treasury Securities isn’t going to win versus inflation. I don’t know which candidate is going to hit the magic 270 in the Electoral College tonight, but I do know that the intrinsic values of well established companies like Home Depot and Coca-Cola are not going to diminish that much regardless of the election outcome.

If by tomorrow you are not sure you can emotionally or physically get through the next four years based on how your investments are allocated, then maybe you should do something. If you feel this way though, chances are you probably should have started doing something differently a long time ago, not just because of this election. If the election results give you an impulse to change your portfolio to 100% equities or 100% cash and gold, please step away from the televisions, radios, and social media sites, go to sleep, and call your financial advisor in the morning after you have had some time to cool down and differentiate your politics from your portfolio.

I stay away from politics on 2MuchCents as much as I can, but I felt like this needed to be said. Next time we’ll also be looking at some investing tips, but in terms of fantasy football.

Go vote.