The ability to distinguish between the noise and the signal is a rare skill within the confines of the financial markets and investment world. In our modern times, there is too much emphasis on the stock market while this particular market may tend to disguise macroeconomic realities, especially when isolated in the broader context of indices. Especially for a retail investor, there are many other investment vehicles ranging from physical assets such as real estate and precious metals to commodities and other diversified portfolios the underlying assets of which may still be the physical assets. In this article, I will introduce other important financial markets that will be utilized as reliable proxies to understand current market conditions and are generally ignored by retail investors. In these perilous times, ignoring these fundamental markets and solely focusing on stocks may ruin your wealth and derail your plans to financial freedom. The content can also be used as a blueprint for understanding different set of investment vehicles and comprehending the fundamental differences between markets, as well as increasing your financial acumen with respect to removing the noise from the signal.
Tag Archives: Financial Education
On economics you have been taught wrong 🧭
Unfortunately, the dismal science taught in our schools and universities rests on many blatantly wrong assumptions.
From the definition and calculation of inflation to investment management and worshipping only a small subset of assets while ignoring those that would lead to greater financial freedom, the economics, as a subject, is losing ground while being mired in farfetched quant analyses and losing its connection with the realities of daily life and our changing world.
In this article, I elaborated on the most common misconceptions that are being perpetuated through the teaching of economics. The reality appears to be quite different from what you are being told every day.
Which company is this?
Which company is this?
Hints:
-It operates in a traditionally analog business that is tested by digital challengers.
-However, it continues to beat every one of them in terms of profitability.
-Operational excellence, efficient cash flow management, customer loyalty, and customer service are their hallmarks.
-It also started its digitization initiative, currently comprising 16% of its total net sales at maximum (does not disclose exact number)
-It has a positive book value, so do not mistake it for other companies that are technically accounting insolvent.
-Its stock is currently traded at a P/E of 45-50.
-Its stock is currently traded at a P/B of 15.
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Note: This article is based on a social media post I wrote almost 4 years ago. In the article, I will unveil the company and dissect its operations and its stock. Moreover, we will try to look into whether much has changed since the first time I published my post.
Retirement, Financial Independence, and Withdrawal Rates 💸
Can a portfolio containing bonds increase the success rate of an orderly retirement?
What is the required withdrawal rate for such a portfolio to succeed?
As riskier securities, stocks may provide more returns and higher sustainable withdrawal rates, however at what cost, i.e. risk?
What may be the composition of a portfolio that would allow you to withdraw at 4% annually, $3500 each month for the next 20 years?
As assets that are more dependent on the current fiat currency rules continue to struggle, the success rate of such portfolios will dwindle.
In this article, I expand on how retirement funds are constructed and why many of them will fail eventually given today’s gloomy conditions while also answering each question mentioned above. In addition, I will also share my thoughts on what I myself do to survive and explain the illusion of measuring your returns in terms of just percentages and fiat currencies.
Historical Returns: Commodity Futures vs Equities. Revisiting the work of Gorton and Rouwenhorst
They did not teach you this in your finance classes 💡
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When using Treasury bills as the margin collateral for the futures position without leverage, fully collateralized commodity futures have essentially the same returns and Sharpe ratio as equities.
Agree or disagree?
In this article, I will investigate how the returns on commodity futures compare with those on Equities.
Solution to Management Science Series #195: Valuing Options to Expand
Casca is a video games company based in Midland. It has created many of the most well-known IPs in the video game industry.
Financial analysts of Casca estimate that Casca has a total value of $2.3B according to their DCF models. These IPs and franchises are highly valuable and Casca aims to create new video game franchises for the foreseeable future.
Developing these video game franchises also allows Casca to enter toy and merchandising industry, establishing a new adjacent business activity. Casca could initiate and expand this business activity over the next 4 years.
Current cost of this business activity is estimated to be $1B. Expected cash flows are after-tax $120M per year for 18 years. Cost of capital for toy companies is estimated to be 17%. Casca analysts investigated annualized standard deviations in firm value for publicly-traded toy companies.
With appropriate risk and company-specific adjustments, Casca thinks that the appropriate volatility value for this project is around 27%. Should Casca expand into toy business?
Solution to Management Science Series #194: Valuing Oil Reserves
Ace Chemicals has claims on oil reserves amounting to 5 billion barrels in the South Arkham Sea. Ace’s rights to develop these reserves will expire in 30 years.
Currently, developing these reserves will cost Ace $20 per barrel. Use Crude Oil WTI Futures as a proxy for the current market price of oil. Production costs per barrel is estimated to be $40 per barrel.
Use appropriate risk-free rate for this project. Also, how would your model consider the volatility of this project?
Factor in the cost of delay of the project in your model and decide whether Ace should start developing reserves now or rather wait.
Solution to Management Science Series #193: Valuing Patents/Licenses by Using Options
Toy company called Shippuden made a license agreement with the video games company called ‘SUGA’. The license would allow Shippuden to produce the toys including figures and playsets of the IP owned by SUGA for the next 10 years. Shippuden will produce and market the toys.
Financial analysts of Shippuden completed the DCF analysis and it was estimated that future cash flows for this licensing project would amount to $6.7 billion. It is also estimated that current cost of developing the products and starting production would be around $7.2 billion.
This is a new project for Shippuden and it has not been involved in such projects before. So, its analysts adjusted the risk of the project accordingly and the standard deviation of returns on such projects is estimated conservatively at 53%.
Should Shippuden collaborate with SUGA immediately on this licensing project?
How valuable will this project be if Shippuden has the option to delay the development and the production?
What would have been the right action for Shippuden if the development and production of the toy had cost $6 billion instead of $7.2 billion originally? Should Shippuden develop and start production in this case?
On education and financial literacy and how financial literacy taught early can impact our world for the better
Remember what I posted on the 7th of February, 2022:
https://bit.ly/3NC9y1f
On the 22nd of March, 2022, it is required for high school students in Florida to take a financial literacy course before graduation.
Financial literacy has always been important and many people, especially young people, has not had the tools to develop their understanding towards finance and investment management.
This knowledge is required.
Countries educating their youth on finance and investment will be more likely to reap the rewards in the future as the youth will be able to make sound financial decisions without squandering their time, money, as well as their country’s wealth.
In this article, I try to idealize a world in which financial literacy is prevalent, elaborating on what could be done to increase financial literacy and how it could change the financial decisions of current and next generations while also providing some snippets and true stories from my own life. I also briefly investigate how financially literate generations will impact the world we live in macroeconomically.
Financial Accounting is a forensic tool! This time, the focus is accounting for receivables! Detecting frauds ranging from channel stuffing and bill and hold to roundtripping
Ability to use financial accounting at expert level gives the user a forensic tool.
Accounting frauds and schemes will become easier to detect, solve, and track when one masters it.
Innumerable scandals in the business world have been related to accounting frauds and they are still happening (why it is so is a long debate)
For example, think of a retailer having a hard time to hit its fourth quarter sales target. The trend shows that it will not hit the target by quarter end. However, by a sleight of hand, it magically hit the revenue target.
Where would you look at first? Which accounts and ratios would lead you to the detection of these inflated revenue numbers?
While answering all of these questions, I will also provide you with some recent examples of accounting scandals and how you could have detected them in the first place. I will also present you with some additional resources concerning the topic.