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Grow Your Money: The Rhodes Society
8 minutes | Feb 18, 2018
Corporate Actions – Diamond in the Rough or Just Trash?
Remember those funky Snapchat Spectacles? People waited hours in line in New York when they came out. They sell on Amazon for a hundred and thirty bucks. Twelve months later the company wrote down forty million dollars because of unsold Spectacles. The stock tanked. Hi! I am Doctor Scott Brown and I am here to show you what works in the investment markets. I also show you what does not work and how to avoid it. Do managers of large corporations habitually overinvest in lower value pet projects? This is an important question. If they do invest in crappy stuff it destroys the value of stock investment. For this reason, some academics argue that dividends should be forced to pay or increased. But following such a hard stance requires conclusive proof of widespread bad corporate management. Is management that bad in corporations today? We can learn a lot from corporate actions. In the typical top management hijacked firm of today a corporate action must be approved by both the directors and the CEO as president of board. What are corporate actions? These directly impact ownership structure. Acquisitions and mergers are well known in the public. Ditto for takeovers. As such corporate actions are events that tend to jostle the common stock price. The most common is a cash dividend payment. Also common are share repurchases. Some firms offer direct shareholders a dividend reinvestment plan. Less common events are rights issues. Some corporate actions dilute the ownership of existing owners because new capital is not raised from the public. Stock dividends, stock splits, and bonus issues are described by professor Crack as votes of confidence. Reverse splits are not. Make sure you get his essential pocket guide to finance How to Ace Your Business Finance Class on Amazon today. Least understood among investors are a rare class of liquidations that involve selloffs, spin-offs, and carve-outs. Professor Crack has a PhD from MIT Sloan. My mentor Eric Powers holds the same degree. Eric published the most important study to date on how liquidations impact common stock prices in his Journal of Finance publication entitled Learning about Internal Capital Markets from Corporate Spin-offs coauthored with MIT Sloan finance professors Robert Gertner and David Scharfstein. A corporate spin-off creates an independent new company that is not under the control of parent management. So, does a sell off. What is the difference? The sell off generates cash for the conglomerate the spin off does not. The announcement of a spinoff, selloff or carveout increases the share price of the parent. New firms that have been spun off from large conglomerates tend to increase in profitability and share price. This is particularly so for cross industries. Companies that have been carved out decline in profits and share price. A follow up study in the Journal of Financial Research by professor Powers shows companies with weak operations opt to sell off or carveout a division. The carveout operates in an industry with more investment opportunities and employs higher value assets than the spin off. Carveout firms also tend to work in industries closely related to the parent. But operational performance has likely peaked. The takeaway is that conglomerates partially divest hot divisions with carveouts during strong bull markets. Management uses a selloff to take out the trash. Spin offs are the result of cash strapped firms seeking liquidity. Thus, it is no surprise that the announcement of a spin off has the strongest affect in buoying the parent company stock price. And these are more likely to show operational improvements. An example is the Ferrari divestiture from conglomerate Fiat Chrysler. Fiat Chrysler raised cash through an IPO of ten percent of the shares in Ferrari. These went to new shareholders. Eighty percent of shares spun to old Fiat Chrysler shareholders. The final ten percent is held by Ferrari Vice Chairman, Piero Ferrari son of founder Enzo. Look at the one-year daily price charts of Fiat Chrysler, symbol F-C-A-U and Ferrari, symbol R-A-C-E. Notice that both firms have a similar price pattern. You would have done well investing in either the parent conglomerate or carveout. Finally notice that Fiat Chrysler no longer owns shares of the firm but did raise cash through the small fraction in the IPO. Hence this deal has aspects of both a spin-off and a carve-out. What’s the takeaway? Just remember in general that carveouts are the best assets on the chopping block but say no to down trending operational profits. And you will often find yourself looking at two firms in the same industry after a selloff. Spinoffs are a mixed bag. But the divestiture produces to unrelated firms in different industries. This can ease analysis if it is obvious which industry is stronger. And selloffs are trash. If you want more information like this go to Rhodes Society dot Org right now.
7 minutes | Feb 11, 2018
Dividends – Should Dividends Be Outlawed?
Should dividends be outlawed? Take for example the perverse scenario in General Electric in twenty seventeen. Management cut the dividend by half. The stock dropped by eleven percent that day. Did this shock shareholders? I doubt it. The company had been bleeding cash. The firm continued to pay dividends regardless. The share price had already dropped from thirty to twenty dollars. Bad management lacked the courage to do the right thing. The takeaway is that there is a strong rational for well managed firms to not pay coffer draining dividends. And many stocks today do not pay dividends. This fact pokes a stick in the machinery of dividend yield investors. Beating the Dow is a classic read by Wall Street practitioner Michael O’Higgins. Another is Stocks for the Long Run by Jeremey Seigel, a finance professor at Wharton. Both books show that investors can get a few percentage points in return over the indexes buying stocks that pay lots of dividends relative to the stock price. But watch out! Recent evidence by financial economists indicates that the dividend yield premium has been arbitraged out of the market. The take way is that this strategy may well be a waste of time today because of market efficiency. Yale School of Management finance professor by day and Nobel Laureate by night Bob Shiller pointed out that common stock was a hard sell to bond investors back in sixteen hundred. So, the Dutch East India Company started paying an eighteen percent regular dividend to draw capital away from bonds. Common stock unlike interest bearing bonds offers no guarantee of payment. University of Toronto finance professor Myron Gordon developed an equation of how dividends impact common stock value. This simple equation I am looking at now is enormously useful for developing a sound economic intuition regarding how dividends impact the value of the stocks you invest in. In the simplest scenario dividend growth is constant. The discount rate is greater than the dividend growth rate. The equation teaches us that the value of common stock today is simply the upcoming dividend divided by the discount rate less the dividend growth rate. Most MBA students grasp this easily. But both professor Crack and I have noticed that they have difficulty understanding that the theoretical stock price grows at the dividend growth rate. And that the required stock return is a combination of both the capital gains rate and the dividend yield. Also, something subtler is that the dividend yield has to be constant if dividends and the stock grow at a constant rate. Strange values pop out of the model when the difference between the discount and dividend growth rate is very small. Another useful aspect of the Gordon-Shapiro model is that it can be rearranged to calculate the dividend growth rate. This is helpful when you know stock prices and dividend amounts as well as the discount rate. Finally, the model can be expanded for multiple dividend growth rates. What is the takeaway from all of this? The Gordon-Shapiro model is commonly used to generate expected future prices of stocks. If you understand the model and the intuition you can decide for yourself if you agree with Wall Street Analyst stock forecasts. Furthermore, and way beyond into option theory. Here is one subtle point. When a company pays a dividend, the earnings drop a little. Call prices drop a little too. I will explain in detail why in a podcast episode down the road when we talk about option theory. If you want to dig into actionable material right now, go over to Rhodes Society dot org and get on our e-mailing list. Then go to Amazon to pick up Beating the Dow and Stocks for the Long Run. Two killer reads, I assure you! Book List O’Higgins, Michael. Beating the Dow Siegel, Jeremy. Stocks for the Long Run.
14 minutes | Feb 4, 2018
Value Investing – Value Investing Is Dead.
I was shocked! A recent article by Seeking Alpha proclaims the death of value investing. Hi. I am Dr. Scott Brown. I am the Rhodes Society co-founder along with wealth attorney Daniel Hall, JD. Check out our cutting-edge investment club over at Rhodes Society dot org. The bible of value investing is Security Analysis by Columbia finance professor Benjamin Graham. He printed the first edition in 1934 with less well known fellow faculty member David Dodd. They pencil out a three-point model to explain the valuation of common stock. The first is the dividend rate and record. Zealots point out that dividend yield should be at least two thirds of investment grade bond yields according to the Graham and Dodd original recipe. The second is the earning power in the income statement. This is measured by earnings yield which is also called the earnings per share or EPS. A company with deep value would have an EPS at least double triple A bond yields and a price no greater than sixteen times earnings. The third is the asset value in the balance sheet. Debt should not be greater than two-thirds liquidation book value according to the value investing bible. Another Ben Graham strategy is to scour bargain basement lists of firms with share prices trading below net asset value. Bestselling financial author and famed value investor Mohnish Pabrai calls companies trading below liquidation value to be “net-net” opportunities. In the United States today valuations are so high that not a single firm qualifies as a deep value net-net opportunity from the Dodd and Graham filter according to GMO, a well-known investment firm. Does this mean that value investing is dead? Friedrich Nietzsche famously stated that God is dead. The philosophical genius was not trying to draw followers away from Christianity. What he meant was that individual members of society must think for themselves rather than be led around by Dogma dictated by Church leaders. At the time the Catholic church was the largest component of the European political economy. Nietzsche was also living during the inception of Lutheran protestant Germany. And these two forces dictated what roads scientists could safely purse. Doctor Nietzsche writes that freedom is won in independently deciding right or wrong on the path to determining one’s definite major purpose in life. Professor Nietzsche admitted that neither task is easy. Socrates said much the same in a different way. He taught that a life unexamined was not worth living. Greek society did not like him for it. He was sentenced to death as a radical. The pinkos didn’t pick up Socrate’s message either. Marx’s partner in crime Engel felt that a life without women wasn’t worth living. And by the way I prefer Bill and Ted’s pronunciation of Socrates. Trust me. The American pronunciation is wrong. Panayiotis Theodossiou is a finance professor and Dean of the Faculty of Management and Economics at the Cyprus University of Technology. He is also an expert on Socrates. And when he says Socrates in Greek it doesn’t sound anything like what comes out of our American mouths. Both of these “think for yourself” philosophers described the introspective philosophy of famed value investor Warren Buffett exactly. The danger with the deep value filters employed by such financial professionals as GMO is that the dogma of value investing obscures true independent analyses. Esteemed value investor Mohnish Pabrai explains that such intensive stock research can be injurious to your financial health in a YouTube video of the same title. He describes an important lesson from Charlie Munger who noticed how quickly bias formed in the minds of Berkeley law students arguing cases in class. Munger points to a best ideas fund by that experienced dismal returns because of bias. How can we eliminate bias from our independent financial analysis of the stocks we buy and sell as investors? Mohnish Pabrai offers up a simple hack. First spend very little time on a given company. Buffett trained himself at the beginning of his career by scanning each page of the Moody’s manual which summarizes the key information of thousands of stocks one page per firm. As a mature investor Warren Buffett enjoyed stellar returns in Korea. He purchased shares of firms he did not know in exact detail. He discovered these opportunities by rapidly scanning through a manual with thousands of stocks with summary information of each firm on one page. The Japan Company Handbook is another example. Buffett will scan tens of thousands of companies a year across different stock markets around the world. Pabrai points this out to emphasize that Buffett does not spend much time analyzing a particular company. “It has to be a stock that just stops you in your tracks” he explains “a hundred thousand in book value trading at forty thousand making twenty-five thousand a year. Many firms are scanned but very, very few are chosen. Those that are chosen must have a pattern that hits Buffett over the head with a two by four. Warren Buffet typically decides “no” after scanning a company in ten seconds. Mohnish discovered from reading Berkshire Hathaway letters to shareholders the importance of being extremely selective. This frees up a lot of time for Pabrai to intensively study just a few businesses after scanning a lot of stuff on the horizon before letting it in. Once a company really grabs him then and only then does he take the time to really get to know it. Case in point is that he spent two months studying General Motors and Fiat Chrysler which both had unusual traits. He earned eleven hundred percent on his value investments from two thousand to twenty thirteen. Some stock investing opportunities come through the door that are obvious no-brainers. Warren Buffett when approached with the opportunity to buy Dairy Queen was able to make an offer in a half an hour because of the clarity that arises from this approach. Make sure you pick up Security Analysis by Graham and The Dhando Investor by Mohnish Pabrai on Amazon. Both are excellent reads that will help you understand Buffett better. Then google “Warren Buffet Letters to Shareholders.” That’ll get you to the right part of the Berkshire Hathaway website to download and read each free of charge. Don’t forget to pick up the book “The Big Short” by Michael Lewis for a raw look at the stinking armpit of Wall Street. And for fun watch the nineteen eighty-nine Keanu Reaves flick “Bill & Ted's Excellent Adventure.” What’s the monster takeaway from this podcast? And it is a monster. It’s vital to your financial health to flip through summaries of thousands of companies from time to time. And the more mindless you make it the better. This gives you a shot at tapping your unconscious mind. These summaries may be complicated data gleaned from the financial statements. Or they can be simple price and volume data charted over time. You choose. But I ask you this. Do you want monster paydays? Either way you must sit and stare with sparkly eyes. And very good things only come to investors who stare at goats. Book List: Security Analysis Dhando Investor Buffett Letters to Shareholders Bill and Ted movie.
12 minutes | Jan 29, 2018
How to Avoid This Terribly Biting Impact on Earnings
Who cares about inflation? You probably don’t even notice it. If you’re an American. A percentage or two a year is slow acting; like rust on stainless steel. Merchandisers had to re-sticker the stuff on supermarket shelves two or three times a day in Brazil. Inflation was over one thousand percent in the eighties. That’s right. Clack-clack-clack went their price guns. All day and all-night long no matter. They were slapping new price stickers over others a few hours old whenever I shopped. Making cash was just the start of the problem for store owners. Retailers had to get daily revenue out of the worthless Brazilian money into something stable. Hi I am Dr. Scott Brown and I am the co-founder of the Rhodes Society. That was when I lived in Salvador de Bahia and Aracaju. The black market for stable currency was fierce. Exchanging my dollars for Brazilian money was a harrowing experience. I remember being picked up by armed escorts on motor bikes for transport to illegal bankers who would buy my dollars. Once there they stood facing the door with machine guns while we transacted. I saw piles and piles of Euros, Pounds and Greenbacks in strange rooms, in strange buildings in strange parts of the city. It was insane. Where did all the cash come from? The same black-market currency exchange system serviced retailers nightly. Households were less nimble. The salaried middle class had their net worth creamed. And I don’t ever want to go through it again. According to professor Crack in his essential pocketbook How to Ace Your Business Finance Class that you should own by now, inflation is the change in the price of some real good or service. He directs readers to an interesting take on inflation and investing in the classic paperback, The Intelligent Investor by long deceased Columbia professor Benjamin Graham. This is the same book that inspired a nineteen-year-old Warren Buffett to greatness as Graham’s underling. Graham recognized that stock prices and inflation are not correlated. Furthermore, he knew that inflation was so difficult to forecast as to be perhaps unpredictable. As such he warned his readers to disregard inflation hedging. You’ll understand why in a second. Inflation increases the cost of living but not corporate profits. Since inflation does not impact the earnings rate on capital investment Graham explains that stock prices do not rise with inflation. Unit costs of public utilities in electricity and gas don’t rise as fast as the consumer price index due to government regulation. These firms may have a stronger strategic position during periods of high inflation. But inflation increases the cost of corporate borrowing because it is imbedded in the interest rate. However, utility companies are entitled by law to charge rates that guarantee an adequate return on invested capital. Graham says that this protects utility company shareholders. He warns investors to ignore inflation in stock investing and futures trading. Today, in New Zealand MIT trained professor Crack explains that inflation can be confusing for his students. He walks through the common thinking errors. The Bureau of Labor Statistics, also called the BLS tracks inflation of consumer prices. You would think that calculating inflation would be simple. Apparently, it takes a room full of PHDs for the BLS to pull it off. The result of all this think tank level Keynesian brain power is the dissemination of several consumer price index series for different uses. The rate of inflation is calculated from the consumer price index. A big mistake among finance students when learning to discount cash flows is adding inflation to the discount rate. If a bank offers a three percent return to savers this is the nominal rate. If inflation is one percent the real return to the saver is shaved down to two percent. The three percent return must compensate you not just for waiting but also for the degradation of your investment from inflation. See now? Ignore inflation hedging. Incidentally, waiting is another way to say time preference. If rates are highly volatile or if you invest in long term bonds you face additional interest rate risk. Professor Crack points out that when interest rates are artificially depressed as they have been in the aftermath of the big short, that the nominal rate won’t even compensate you for inflation. Naïve savers ended up losing money in certificates of deposit during this period. There is also liquidity risk to deal with if you are buying bonds. This worsens when no ready and willing buyers will help you sell out before maturity. New Zealand housing is expensive where doctor Crack lives. A typical house in Dunedin was about eighty thousand twenty-five years ago. Today the average house costs three hundred thousand. Not surprising for a nice country that scores third on the Mercer Quality of Living Survey. This calculates to a five-point four percent rate of inflation. At that rate the average house will cost over a million in another twenty-five years. We can use the same concept to determine whether salaries professors at the University of Puerto Rico earn make us better or worse off than twenty-five years ago. Puerto Rico has been through a twenty-year depression that ended in bankruptcy and a category five hurricane named Maria. My sixty-five thousand dollar a year salary was frozen a decade ago, but inflation was not. This sets the stage for the disconnect. Assessing real estate prices for inflation looks like discounting and compounding but it is not. Again, the discount rate already has inflation embedded. Do not add inflation to the interest rate when discounting or compounding. Nominal futures cash flows are discounted at the nominal interest rate. Exceptions to this rule are rare. Professor Crack gives us a chilling warning about inflation. Savers who excessively fear the investment and stuff their money under a mattress suffer a “terribly biting impact” on earnings. What’s in this for you? Always sweep your cash into the money market in your savings, checking, and trading accounts to combat inflation. Go order Benjamin Graham’s investment classic The Intelligent Investor from Amazon today. And if you have not already done so go to Rhodes Society dot org if you want to get on our training list. And hey, by the way. Here is another cool read. It’s a story portraying the American communist movement by John Steinbeck from the thirties. The book is In Dubious Battle. It will needle your memory of the last podcast episode on the king of slobs, Karl Marx. Steinbeck was a journalist by trade. Hence, you will get a fresh perspective on the dark forces that led to McCarthyism. Book List: Graham, Benjamin. 200?. The Intelligent Investor. Steinbeck, John. 1936. In Dubious Battle. The Big Short
20 minutes | Jan 29, 2018
Nothing Happens Until Someone Saves
Do you save? We save a lot. Hi, I am doctor Scott Brown and welcome back to this podcast designed to help you get the most out of your money. I am coming to you right now from the cutting-edge Rhodes Society club that fosters your x-ray vision of the investment markets. Let’s explore the next vital concept. The essential importance of systematically saving. In the communist ten-point system money can’t be lent to entrepreneurs. New ideas are not brought to the market. Product development is retarded. Consumers suffer. Karl Marx placed no value on waiting or risk-taking. Waiting delays pleasure. And he was the quintessential hedonist. In a capitalist society interest is the cost of doing business. But how is this waiting for money? John Maynard Keynes, also of Cambridge fame, explains how household savings are deposited in banks. Banks then make corporate loans. In this light interest paid the bank, that the bank then shares with the depositor, is the cost of doing business for commercial borrowers. Savings involves sacrifice that merits reimbursement. Interest received is the award to savings depositors for waiting. Keynes was a consummate saver and stock investor. Ironically, his advice to a nation in a depression or recession was to get consumers to spend more. He did not follow this aspect of his own advice. He applied concepts from his Treatise on Money that offered his readers new insights into the connection between savings and investment. Keynes saved then invested in one or two key business in which he felt would win the overwhelming favor of the public and he had high confidence. His highly focused net worth grew to the equivalent of thirty-six million dollars today. As an economist he was second only to David Ricardo in investment success. Keynes was instrumental in convincing large first world governments to influence capital market conditions through the supply of money under the administration of central banks. The Federal Reserve of the United States fulfills this function today. According to Forbes just 45% of households save. Businesses sell bonds to these households. The household must wait five years to recoup the cash on a bond with five years yet to mature. The business pays interest to the household over the five years. The amount lent is repaid only at the very end. Interest is paid to compensate the household for the long wait to fully recover savings. Professor Timothy Crack holds a Ph.D. in finance from The Massachusetts Institute of Technology. Timothy is the chair of the University of Otago finance department. Not only does professor Crack hold numerous teaching awards but I also know of no other finance professor who has been taught by more Nobel Laureates in economics and finance. Dr. Crack does the best job of anybody I know in explaining the mathematics of economic waiting and entrepreneurship. This body of knowledge is known as discounted cash flow analysis. The deceptively simple concept that completely escaped Karl Marx was first described by Harvard economist John Burr Williams in his 1938 article “The Theory of Investment Value.” Williams explains that cash flows must be adjusted “for changes in the value of money.” University of Oregon finance professor O. K. Burrell extended the analysis of Williams further in nineteen sixty to show that the value of a stock depends on the levels of interest and risk as well. Professor Crack explains that the value of money changes over time with fluctuations in levels of interest rates, risk, and in some cases a market risk premium. Imagine two people with an extra $100 now. The first person is a spendthrift like Karl Marx; the second a saver such as John Maynard Keynes. The spendthrift will have nothing even in a year in which annual interest levels are about 5%. The money is blown before it makes it to the bank. Case in point Karl Marx relocated 10 times in a 5-year period to escape from creditors as a student at the University of Berlin. The money was cut off when his father died. He could no longer afford the academic rigor of Berlin. He purchased his doctorate from the University of Jena; a diploma mill in eighteen forty-one exactly forty years after the anti-religion philosopher Hegel. Hegel is the twisted thinker behind the abolition of religion during Stalinist Russia. Back to the one-hundred-dollar example of professor Crack. On the other hand, a saver like Keynes will have one hundred and five dollars at the end of the year. If the investment is extended to two years with simple interest the net amount with no taxes is a hundred and ten dollars. If the interest is compounded the saver earns an extra quarter and the net amount is one hundred ten dollars and twenty-five cents. Twenty-five cents may not seem like much but if the return on the investment is high enough the interest on interest grows much faster than with simple interest. This relationship can be mathematically rearranged. Professor Crack explains that if you want to have five hundred dollars two years from now in a four percent interest rate market that you must deposit four hundred and sixty-two dollars and forty-eight cents today. This concept can be kicked up a notch or two. In the New York Times Bestseller, “The Automatic Millionaire” David Bach shows how one hundred dollars saved per month invested at twelve percent grows to one million, one hundred and eighty-eight thousand, two hundred and forty-two dollars in forty years. Professor Crack offers another example. Imagine you have a thousand dollars today in an eight percent interest rate market. When will you have three thousand dollars? Using logarithms, he shows that it will take you about fourteen years and a quarter in time. Discounted cash flow analysis is easily extended to the valuation of annuities and from there to bonds. Understanding discounting helps you when shopping for a loan; paying off a loan; managing credit cards; dealing with fees and taxes; running a note buying business; or managing an international factoring business. An excellent starting point to mastery is this amazing pocket book I am holding in my hand titled “How to Ace Your Business Finance Class” by Timothy Falcon Crack PhD Third Edition. I am now looking at the listing on Amazon. Get it now on Amazon. And leave a good review. Another great read is “New Ideas from Dead Economists” by Todd Buccholz. Get it on Amazon the same time you order professor Crack’s classic finance learning companion. And if you want more of this distilled knowledge go to Rhodes Society dot org right now as well to subscribe to our list for an exclusive invite to the next free webinar on stock investing. When Adam Smith was a kid he was kidnapped by savvy gypsies. After a few hours they realized that he would not have made a good gypsy. The odd looking Scottish boy had a nervous twitch, speech impediment, large nose, bulging eyes, and a protruding lower lip. They left him on the roadside. Likewise, the odd behaving Karl Marx would not have been a good captive of capitalists. He was a bad consumer. He was always in debt and blamed capitalist society rather than his own personal choices all the long way to his bitter and angry end of his live at the age of sixty-five.
14 minutes | Jan 29, 2018
Topic 1: The Rhodes Society Manifesto
When you read the Wall Street Journal does it seem like it’s written in Egyptian hieroglyphs? When you listen to CNN Money does it sound as unintelligible as ancient Greek? Do you want more out of your money? Are you looking for growth and better income but feel like you are looking in all the wrong places? I am Doctor Scott Brown and I want to extend to you a kind entrance to this sharing of ideas that’s designed to be your can opener to the secrets of sound investing. And these really are secrets. Academic papers in finance are different than other parts of business. You can read a journal article in psychology, management, or marketing and understand all the important takeaways. No problem. Not so for financial economics. Research from top business schools in finance is written in terse verses describing the results of rocket science doctoral level thinking. And unlike the ongoing subterranean search of Oak Island, following this treasure map requires a lot of undergraduate and graduate courses in pure math and economics. Welcome to the highest hurdle in the social sciences. That’s why there is so much miss-information in the investment markets bombarding you now. It’s a dirty stream of information generated by pseudo-intellectuals claiming to be money gurus. An MBA in finance is not enough to pull you through to a full understanding of the markets. You’d need a PhD. And that is where I come in. I am one of the two most highly regarded financial researchers in the Caribbean. My close friends joke that I live like Jimmy Buffett but think like Warren. By the way, neither Jimmy nor Warren Buffett are related. They did a DNA test and discovered that their identical family names are far apart genetically. Nonetheless the two Buffetts are mutual fans. I am a fan of both, but you won’t find me wasting away in Margaritaville anytime soon. I am a successful researcher because I am a tenured professor of finance at the AACSB accredited Graduate School of Business of the University of Puerto Rico. just 5 percent of business schools worldwide hold this distinction. This position of prestige makes my full-time job research of the financial markets and teaching finance to MBA and doctoral students. I love what I do. I am like a pig in slop. I whistle my way to work every day. I am dug into this like a tick. I also hold a PhD in finance from the highly regarded Darla Moore School of Business of the University of South Carolina. “What is the Rhodes Society?” you may be wondering. The Rohdes Society is a private club for likeminded investors who are tired of being hoodwinked out of their money. Members come from all paths in society with a couple of important commonalities. Most are successful in their careers. All are seeking the truth about getting the most out of their money. And, none are communists. The Rhodes Society podcast is a public service radio show that is your Rosetta Stone to developing a systematic unbiased understanding of investments with me as your guide. Your first major roadblock to investing success Is the strange vocabulary of Wall Street. Take for example the two seemingly simple words, “time preference.” Time is the indefinite continued progress of events in the past, present, and future. Preference is a greater liking for one alternative over others. Let’s jackhammer the economic concept of time preference to pieces. By the end of this first episode you will understand why this is the cornerstone from which we map the very real El Dorado of today … modern investment markets. But first, let me ask you something of the utmost importance. Do you have any communist friends? I do. They are obstinate in their belief of the ten-point plan, Abolition of land ownership and rents. Imposition of progressive taxes. Abolition of rights of inheritance. Property confiscation of emigrants and rebels. National bank state monopoly of credit and capital. State control of communications and transport. State controlled factories and agriculture. Full employment through industrial armies. Mixed use of manufacturing and agriculture. Free education and abolition of child labor. The funny thing about this list is that it has a little stuff mashed into capitalist economies. We already have progressive taxes as a shock absorber for recessions. I prefer no income tax. But that’s me. We do have free education and no child labor. That’s good. Socialism is not. Thought leaders as far back as ancient Greece have warned that collective ownership reduces the productive energy of mankind and arrests economic growth. German poet Heinrich Heine described the Marx led communist society in Paris as a crowd of godless, self-appointed gods. The Marxist pitch is that your oppressive capitalist employer stiffs you with a fraction of the wage you are worth. I recently read up on long dead Cambridge economist Alfred Marshal. Regarding the Communist Manifesto he explains that nobody makes anything. Workers rearrange matter to make it more satisfying for customers. Workers exchange their time for money. Capitalists satisfy others by contributing their savings. Savers exchange their money for interest. Interest or other gain is the reward to the capitalist for waiting for the return of the family investment. Marx never understood this. How could he? He blew every dime he made on alcohol and academic journals condemning his wife and children to a life of poverty, disease, suffering and death. The ten-point plan of Marxist Communism collapses because It doesn’t account for waiting for return of investment. Totalitarian control of capital by socialists means no lending to people with the best business ideas. Marx ignored the value of imagination. He saw no justification for interest on loans. Karl Marx thinking regarding home economics was as infantile as that of J. Wellington Wimpy who will gladly repay you Tuesday for a hamburger today. Neither Wimpy nor Marx care that a dollar revenue from a hamburger today is worth less to the hamburger stand next Tuesday. The mathematics of discounting reveals this. People who have time preferences such that they want everything right now with no effort deserve no reward for waiting. Alternatively, those heads of households who have long time preferences deserve compensation for the long wait for return of investment. That is why Marx died broke for his childish impatience with money. Warren Buffett on the other hand rewarded a middle-class New York engineering professor with a fortune worth close to eight hundred million on a twenty-five-thousand-dollar investment. What’s the difference? Karl Marx couldn’t wait. He spent his money as fast as he could run away from his landlords. Donald and Mildred Othmer waited patiently with Warren Buffett for over three decades sliding safely into home near billionaires! I always give you an actionable takeaway in every episode of this podcast. The takeaway for this episode is that to become a great investor you must maximize the time you wait for the return of your investment. But that’s just half of the process. You must also maximize the percentage of your after-tax income you save for investments. A millennial can save up two thousand a month into a Roth IRA and Roth 401K and trade behind a tax barrier. The stock market indexes return about ten percent on average. Buffett has extracted about twenty percent over the decades. At ten percent it would take sixteen years to become a millionaire investing in the Dow Jones Industrial Average. If you can extract returns like Buffett it would take you just over eleven years to become a millionaire. Doubling the returns shaves off a third of the time it takes to find your El Dorado in the stock market. Make sure you subscribe to this podcast today if you like these financial insights and money hacks. Go now to Rhodes Society dot org. I recommend important books related to investing for you to read in every episode. Here is the first. The Communist Manifesto by Karl Marx and Friedrich Engels is available in paperback for six dollars and forty-nine cents on Amazon. But I do not want you to buy it. We do not condone giving money to communists. Since the Communist Manifesto was published in 1848 it is in the public domain. You can Google search it and read this utter piece of trash for free in PDF. Just one simple warning though. If you read the manifesto and turn communist all I can say on behalf of the Rhodes Society is “Thank you Comrade, please don’t come back!”
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