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Sunday, October 20, 2013

Famous financial quotes and what they mean

"Someone's sitting in the shade today because someone planted a tree a long time ago."-Warren Buffett

This quote seems straightforward; invest with foresight and you'll be protected from the glare of bad investments in the future. That much appears to be obvious if not anecdotal. The real question is how do you invest now? What is your time horizon? and how do you avoid not using the money as the investment grows?

What good is $100 dollar investment if it takes 50 years to flourish? If you're saving for retirement, then it makes a big difference. Low risk, compounding, high rate of return, low management expenses, due diligence,  value investing, and dollar cost averaging are all relevant to investing for the future. If you can do all these things right, then you're more likely to be the one sitting in the shade, unless someone buys your tree.

The longer the time horizon and the more you invest, the greater the chance all the above listed methods can work their magic. Inflation, risk, income gaps, unplanned for expenses and insufficient investment capital are factors that work against you.

Locking money into a retirement vehicle that penalizes you is one way to avoid the temptation of borrowing against your retirement investments. Of course, good old financial discipline works too.

"Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful." -Warren Buffett  (Source: Business Insider/Letter to shareholders, 2004)

Being greedy when others are fearful seems to reflect some of what has been going on with the equity market ever since the Great Recession. Stock indexes are now reaching record highs. This is partly due to the help of monetary policy, but also because there was a rebound from the fear of investment risk in the wake of the dot.com bubble and the housing bubble bursts, both of which caused share prices to drop.

What is the basis for such a contrarian perpsective? When everyone is being greedy it represents excitement, therefore an irrational and possibly unbridled greed; there is more risk involved when investing in these conditions. Similarly, when fear has a grip on investors, selling is more prevalent; value becomes more available hence the timing for greed.

Are these pieces of advice priceless and guaranteed? Not exactly, the Buffett quote itself states timing the market is not a good idea as it is not easy to do. Thus the tips are general guidelines for long-term investors seeking ideal conditions to buy into opportunities.

"Behind every great fortune there is a crime."  - Honore de Balzac

Not sure exactly who Honore de Balzac is, but the implication of the quote seems to be that great wealth involves some kind of moral, ethical or legal violation if not all three. Balzac is associating wrongdoing with wealth accumulation, and that wealth building involves some kind of failure of human integrity. The quote would go well alongside "power corrupts, and absolute power corrupts absolutely". Moreover, since great wealth brings power, and if power corrupts, then the financial means to that power is negative in one way or the other.

"For I don't care too much for money, for money can't buy me love." - The Beatles

This quote goes right alongside, "The best things in life are free". Some argue that money can buy love, however that is subjective. The whole idea and concept of love is vast with varying levels of depth and intensity. It also depends on the person; one person may value money more than love and vice versa. The quote therefore, is not necessarily a universal truth. Rather, it is a commentary on the nature of money in contrast to love and who the two are different; one is a tangible material thing, and the other is not something you can hold in your hand even though holding hands is a reflection or indication of it.

I am opposed to millionaires, but it would be dangerous to offer me the position.  -Mark Twain

The first part of the above quote is perhaps explained best by another quote from a work by Mark Twain:

"What is the chief end of man?--to get rich. In what way?--dishonestly if we can; honestly if we must. Who is God, the one only and true? Money is God. God and Greenbacks and Stock--father, son, and the ghost of same--three persons in one; these are the true and only God, mighty and supreme..."

- "The Revised Catechism" 9/27/1871

So if "The Revised Catechism" reflects Twain's view on wealth, then millionaires are more inclined to become so via dishonesty, and even idolatry of money, hence the opposition. Since Mark Twain probably viewed himself as no less human than the next person, then he might also have realized that being that wealthy himself would amount to him becoming too enamored by money, and either having a more likely chance of becoming dishonest or more dishonest, or having been such on the way to those riches.

“Many small businesses would rather face an angry barbarian horde than tackle their cash flow statement or price a new product.” - Nicole Fende

Effectively tackling a difficult business cash flow issue or effectively managing the impact of an unknown cash flow variable such as a new product release is challenging for businesses. Properly maintaining a fast cash conversion cycle, ensuring earnings exceed expenses, obtaining low-cost financing to ensure a high internal rate of return and so on are essential, and involved tasks for business financial managers to balance.

Operating a business requires a positive cash flow to remain functional over the long-term. Having a cash flow problems is a financial headache and a core business issue that isn't always easy to resolve without taking on more debt. To illustrate how widespread cash flow issues are, according to the American Express Small Business Monitor 77 percent of small-businesses in California have cash flow difficulties.

If a new product is priced too high, then the chance it will negatively impact cash flow rises. If it is too low, the risk of shrinking earnings goes up. Finding the right price equilibrium sometimes takes time, and with a new or untested product or market, the result on a cash flow statement can be a bookkeeping nightmare for a business.

 “A man always has two reasons for what he does--a good one, and the real one.” - J.P. Morgan

This one is interesting; J.P. Morgan was himself a financier and a philanthropist, so at least he had more than one reason to make money.

Whether or not men or women always have two reasons for what they do is debatable, but they certainly can and do have multiple reasons a lot of the time. To illustrate this, in business negotiation it's not always a good idea to specify motives for particular deals because then one's counter parties can take advantage of that knowledge by offering less for what is wanted most. In this sense, the poker analogy of bluffing a hand is relevant since letting your opponent know your hand is no good yields less chance of them folding and the bluffer winning.

There are also event chains, the end result of which are a benefit from an initial action. For example, a quarterback passes a ball to an open receiver to gain yards and potentially score more points. However, he also does it because he loves the game and earns a high salary. In finance, pursuing one transaction such as a covered call not only generates a sale premium in case the stock price doesn't move enough, but can also multiply dividends. In this way, the covered call seller has multiple reasons to write the option, specifically a hedge against static price movement and two income earning opportunities.

"An investment in knowledge pays the best interest." - Benjamin Franklin

Knowledge helps investors make informed decisions, but investments in knowledge are still subject to numerous types of risk. These include vocational risk, information obsolescence and misuse. Perhaps what Benjamin Franklin, himself a prudent investor, should have said was wise investment in financial knowledge helps improve investment decisions.

How financial knowledge is used is just as important as what you have learned. For example, clearly understanding how to calculate bond duration does not necessarily mean buying a bond is the right choice, or that the duration equation will be carried out without error. Moreover, investment intuition and financial discernment aren't as easily learned as one might think; and effective financial planning and prioritization of analysis results are skills that are next to priceless, if not invaluable when used side-by-side with other investment knowledge.

"A big part of financial freedom is having your heart and mind free from worry about the what-ifs of life."-Suze Orman

My first impression of this quote is it merges finance and psychology. Since psychologically, freedom is a matter of perception, the big part of financial freedom being referred to here is relative and depends on the individual's definition and understanding of freedom.

Psychologically, one is financially free if one simply chooses not to be mentally controlled by the notion and concept of money. This does not mean money is not a part of life, what it does mean is that money, and all that have it, do not literally 'own' your mind or heart just because it is a part of life.