February 8, 2012

Accounting & Finance

Benjamin Graham Intrinsic Value Formula

Benjamin Graham Value Investing Allegory

A Look At How the Father of Value Investing Calculated the Intrinsic Value of an Ordinary Share of Common Stock Benjamin Graham, the rich investor, professor, and mentor to Warren Buffett, once proposed a quick back-of-the-envelope intrinsic value formula for investors to determine if their stocks were at least somewhat rationally priced.  He encouraged investors to only buy shares that passed the test and, if the market fell substantially as it is prone to do from time to time, to sit … [Read more...]

The Fortune 500+ Web App Rules

Fortune 1000 and Fortune 500 Web App Food Companies

This morning, I bought an annual subscription to the Fortune 500+ web app, which cost only $9 for the year.  You can use it to sort and filter the 1000 companies in the Fortune list, viewing by sector or industry, profit margins, return on assets, return on equity, sales, absolute profits, and more.  It's really well done except the inability to print. … [Read more...]

You Can’t Always Rely on Reported P/E Ratio for Stocks

The Coca-Cola Company

The P/E Ratio Can Be Overstated or Understated Depending Upon Accounting Issues and Temporary One-Time Gains or Losses It isn't enough to pull up a stock quote and check the p/e ratio of a stock.  Last night, I was sitting in bed, reading through the transcript of The Coca-Cola Company conference call and watching interviews about various political issues.  I thought it might be a great time to explain what I mean so I scratched out some notes to write you about the p/e ratio and the inverse, … [Read more...]

I’m Having This Time Value of Money Future Value Chart Framed and Put at Headquarters

Future Value Chart

I'm having this chart framed and put on display. I'm also thinking about having index-card reproductions made to hand out as Christmas cards each year. It is appropriate, I think. … [Read more...]

Stock Dividends Are Not Income – They Are a Balance Sheet Reclassification for Accounting Purposes

Stock dividends

The trust fund book I'm reading is talking about how it is extremely important to define "income" and "principal" in any trust fund documents.  The example is as follows: Tom is the income beneficiary of a trust.  He is to receive all income until he reaches age 35.  At that time, the trust is distributed to Jane.  The trust is invested in a single stock, XYZ, Inc.  XYZ, Inc. declares a cash dividend.  This is clearly income and is paid to Tom.  Later, XYZ, Inc., declares a stock … [Read more...]

A Deeper Look at Gross Profit and Gross Profit Margin

Gross Profit Margin Investing

As I explained in my investing lesson on how to read an income statement over at About.com, a division of The New York Times, gross profit and the gross profit margin are both important because they determine how much money out of each dollar sold is available for salaries, benefits, advertising, expansion, debt reduction, and dividend payments to shareholders.  But too often, managers and investors obsess about high gross profit margins because they think that is the goal of a business. You … [Read more...]

The McDonald’s Monopoly $1,000,000 Prize Will Cost the Company Pennies on the Dollar

McDonald's Monopoly Big Mac

The Monopoly game at McDonald's has returned.  The top prize for collecting Boardwalk and Park Place is a cool $1,000,000 in cash.  The winner will not collect that money upfront.  Instead, he or she will be mailed a check for $50,000 each year for the next 20 years, without interest.  This steady payment is known as an annuity.  Given my calculation the other day of what it would take to own the entire Monopoly board in real life, I thought it would be useful to explain how this … [Read more...]

Banks Brace for New Basel III Regulations

Basel III Bank Regulations to Require Higher Bank Equity Reserves

According to The Wall Street Journal and The Financial Times, regulators from 27 countries are meeting in Basel, Switzerland right now to hammer out tough new banking rules designed to prevent another catastrophic global meltdown like the one that occurred in 2008.  These new rules, called Basel III because these are the third incarnation of the banking framework, will require banks to keep a minimum of 7% of their balance sheet in equity (money belonging to owners, or net worth), which … [Read more...]

I’m Working on a New Book

Finance Book

I turn down several book contracts a year and have for probably the past 5 or 6 years.  Despite having one of the largest investing audiences online, other than my Penguin book contract in 2006, I avoid the commitments because I don't like being tied to deadlines (even though I tend to work faster than most other people - it's just something about having control over my own time). However, I have been working on some ideas for a series of books that cover everything from finance (how to … [Read more...]

Why Income Inequality Will Always Exist as Part of the Post-Industrial Revolution Global Economy

First: Before we begin, the education system in the United States over the past few decades has done such a poor job teaching basic logic that by virtue of the headline alone, it is statistically likely that you have already made a decision about whether or not this short essay on pay inequality is "good" or "bad".  You've done this without considering any of the factual data or evidence I'm going to offer by virtue of my own experiences in finance, based nothing more on your own political … [Read more...]