Elusive Wealth

Sometimes the seemingly most complex problems can be analyzed fairly simply by applying some simple statistics and a little guesswork.  Since this blog is about personal finance I’ll use a financial example, but the process can be applied to many everyday decisions. (I recently decided the most cost effective periodontal treatment I should choose based on this kind of analysis – really!)

Preparing to Jump

So, let’s take a look at purchasing stock in a company you’re familiar with for which you can make some educated guesses about its future.  The trick is to identify as accurately as possible the areas of risk the company might encounter.  Examples could include market risk, political risk, management risk and capitalization risk.  You can choose as many areas of risk as you like, but 4 or 5 will typically get the answers you’re looking for.

In our hypothetical example, you live next door to Fuzzy Fungus, Inc (FFI) and know some of the management.  FFI has been around for 25 years, growing slowly, but you hear they’re about to introduce a brand new product. You want in.

Let’s look at some risk factors.

• Senior management are in their mid-50’s and have been running the show for about 10 years – risk is very low, say 5% chance of failure in the next two years.
• FFI is able to raise capital fairly easily, but with the tough lending environment risk of not being to raise money is a little higher than usual, but still only 10%
• They’re depending on a new product to bump revenues, but if it tanks, the revenues could go the other way.  This may be the biggest risk, so we’ll guess it’s around 25%.
• And lastly, this isn’t about guns, cars, oil or healthcare, so the current political climate “shouldn’t” have too much impact, but still let’s say it’s still around 5%.

Now, how do we calculate overall risk and what does it mean?  The answer we get will be a pretty general one, but essentially, we will know if the new product introduction will have a large positive effect on the stock price, given this risk factors we’ve considered.  The calculation is easy.  Simply multiple the chances of success for all of the risk factors to get an overall chance of success. (The chance of success is 1- % chance of failure, expressed as a decimal.)  And the answer –

Management X Capital X Market X Political     = Overall Chance of Success

(1-.05)    X (1-.10) X (1 – .25) X (1 – .05) = 61%

Based on this answer, I would probably continue my research into the company.  If the answer was 40% or less, I would almost certainly pass.

Of course, there are a myriad of other factors you should consider before investing in stocks, but this is a quick way of deciding whether it’s worth a further investment of time, effort. and, most importantly, money.

eBook readers have struggled in the past to gain significant ground until recently. Amazon’s Kindle has changed the playing field significantly, and Sony’s eBook Reader provides some good competition. The price of these devices though is significant. Also these devices are highly specialized, they tend not to read all major formats, and not all books are published electronically.  An alternative to eBook readers, netbooks,  address many of these issues. For instance, netbooks can do many things include accessing the Internet, watching videos, and providing readers for a wider variety of formats.

Late last year I purchased a Lenovo S10 netbook.  The netbook was great — very portable and versatile. The biggest downside to the netbook was just its speed, it sometimes got bogged down in handling tasks in the background while trying to surf the web. And it often struggled a bit with video. But overall the device met most of my needs, especially as a portable document reader. However in April I decided to purchase a Kindle anyway. What drove my decision, and has it been worth the price?

Here are the things that motivated me to make the purchase:

• Well let’s be honest, I am a gadget geek. I love gadgets. So I have to be truthful here and include this as a reason.
• There are publications and releases that are available on the Kindle that are not available elsewhere.
• The Kindle is even more portable than the netbook.
• The battery of the Kindle lasts longer, especially with the wireless turned off.
• Delivery of new books and many of the publications is free through Whispernet (though delivery of blog feeds costs $2 / month)
• The paper like screen of the Kindle is easier on the eyes than the netbook screen over a period of time.
• The whole device is well geared toward reading — making it easier to read anywhere. Finding Next Page on the Kindle is easier than finding Page Down on a netbook.
• The price of many of the books, newspapers, and magazines is less than the price in the bookstore or on the newsstand.

So those are the many reasons I decided to purchase the Kindle. And these reasons are fairly consistent with the pros you probably have already seen about the Kindle. However there are some negatives too, and often it is more important to consider the negative aspects before purchasing something than the positive ones.

Screen Looks Almost Like Paper

But I said this was a pro, why have I listed it here!?  It is a pro, and it is one of the best features of the Kindle.  However I have noticed a key difference with the Kindle versus using a computer eBook reader. The backlight on a computer, although sometimes harder on the eyes, helps me stay awake while reading. I have a wonderful habit of falling asleep if it is late while reading a paperback or hardcover book. The Kindle shares that same feature. The downside to the Kindle here, of course, is that it is more dangerous to drop the Kindle than it is a book!  This is a minor disadvantage, but I have found it to be true for me.

Newspapers and Magazines Are Incomplete

Most of the books are the full edition, though some of the figures in certain books are difficult to read. Periodicals and magazines on the other hand tend to have few of the illustrations, photos, and figures that the print edition has. Some of the magazines and newspapers actually have fewer articles than the print edition.  Although the price of these is generally much lower than print, it is disappointing to find a watered down Kindle edition of a publication. The good news here is that the magazines and newspapers all have a trial period so you can try it out before paying for it.

The new Kindle, with a larger screen, should help address the readability of some of the figures. The question remains as to whether the content providers will provide more of their content. But the new Kindle has a higher price point, so it may be wise to wait for the price to come down.

Missing Formats

The Kindle would be nearly complete if it supported PDF natively and MobiPocket. This would cover the majority of electronically published material. The newest Kindle edition supports native PDF, though I have not seen how accurate and readable its output is.  MobiPocket covers a wide range of content that is not already available through the Kindle. Overtime I expect more content to support the Kindle, eventually this will no longer be an issue.

The Kindle Doesn’t Come With a Cover

Considering the device costs over $300, throwing in a $20 cover to make sure it makes it past the first week would be considerate of Amazon.

Conclusion

Despite the few issues, I still love the Kindle and highly recommend it to everyone who likes to read, and even some people who don’t. The Kindle is a great resource for professional growth, staying informed, and entertainment. You can purchase the Kindle directly from Amazon.  Though for the frugal minded, if the price of the Kindle is close to affordable but still a roadblock for you, consider purchasing an older edition through eBay.

Because I highly recommend the Kindle, I feel it is worth endorsing.  If you are considering buying one, you can find it in one of the following two places:

http://www.ebay.com/

Elusive Wealth is growing fast, in fact we are doubling our team of authors!  Yes this just means we are going from one to two, but it is worth bragging about. Joining me in providing commentary, insight, news and occasional bad humor is Jon.

Having Jon as part of the team will help provide some alternative views from my own. I will leave you to guess whether he is more or less liberal than I am    Anyway Elusive Wealth welcomes him to the team, and we look forward to some good discussions.

Keep an eye out on his first post, and please provide your input!  Thanks for visiting Elusive Wealth.

Dave Ramsey’s Town Hall for Hope broadcast is available on Hulu right now.  I did not get to see the broadcast the first time around, but now that it is available on Hulu I watched it.  If you are interested you can check out the broadcast here:

http://www.hulu.com/watch/74840/the-dave-ramsey-show-frid-may-2-2009

Now that I have been able to watch it, I have some thoughts that I want to share on the event.  First and foremost I do recommend that everyone watch the Town Hall for Hope. The message is excellent despite any shortcomings I mention in the rest of this post.  It is important that we continue to work our way out of difficult economic times with as much optimism and hope as possible. Key components of Dave’s message in this event include:

• The fear and hysteria can get to anyone, the media has done an excellent job publicizing it.
• Although 45+% of people believe there job may be at jeopardy, the reality is that unemployment has increased only around 3% (this has gone up slightly since the broadcast; also, 3% is based on the official unemployment number — some believe it is optimistic because it does not include underemployed).
• For those who have lost their jobs, attitude is a critical component to moving on and landing the next job.
• Although it is always difficult starting a new business during an economic downturn, there are advantages and opportunities that exist when compared to times of strong economy.

Dave’s message is extremely consistent with his show, and as he puts it, this is common sense — this is advice your grandmother might give.  That is true to an extent, though not everyone believes that avoiding debt completely is necessary. In fact many believe debt can be a key to financial well being (for example, buy real estate at no money down). If you have listened to Dave’s radio show, watched his television program, or read his book The Total Money Makeover, you will see that much of the content of the Town Hall for Hope has been delivered before. That is acceptable here, because in this event it is delivered to a potentially wider audience.

Dave believes that you cannot separate the spiritual from finances. Maybe more accurately he believes you cannot separate the spiritual from anything in one’s life, financies being a component of life. Although occasionally he will encourage his listeners to seek advice from their pastor or their church, usually he keeps religion out of the discussion unless he knows one’s faith. A big part of his delivery of Financial Peace is through the church community, so clearly his message has tie-ins with religion. Like his traditional shows, this event was mostly finance and economy with a little bit of spiritual mixed in.  This may turn off viewers who do not hold views of any religion, or believe in religions other than Christianity.

Near the end of the event the question / answer session between David Asman and Dave Ramsey added less value to the overall conversation than the initial discussion and the question / answer session with viewers. With the crowd gone and the seats empty, it made me feel as if it were time for me to leave as well.

Dave adds many of his usual quips and expressions to much of the conversation, and if you listen to or watch his show you may be quite familiar with them – to the point where they are overused. But there is something rewarding in Dave’s delivery in general, whether part of this event or his show. To me that reward is a very motivating financial adviser that constantly reminding me of my own financial goals. There are certainly other ways to attain the same motivation, however for those that are looking for the motivation, Dave Ramsey provides it.

In the end, for anyone with uncertainty and concern about our economic climate, the Town Hall for Hope is a must watch. For those who want motivation and want to help spread the message of hope, there is value in the event as well. The only group I might recommend not watch the program are doomsayers, there may be too much hope for even the pessimistic to withstand.

In a previous post, Voting with Dollars: Credit Bureaus, I mentioned freezing credit at each of the bureaus. In

Frozen Credit (Actually Just Water)

that post I also said that freezing your credit was free at TransUnion.  In fact, it was… but today I received a message from the credit bureau that it will no longer be free.  Maybe signs of inflation?

At any rate, here is an excerpt from the e-mail:

“ We have offered the Security Freeze services free of charge through our online self-service channel since its launch in 2008. As mentioned in our online Terms & Conditions, this service was being offered free of charge, but subject to change at any time. Beginning July 14, 2009, TransUnion will assess fees for Security Freeze services through the online channel as permitted by state law…”

TransUnion has provided a fee table that details the fees for each state. The good news is that the fee is no higher than $10 for all states, and still free in many. Well, except Delaware — sorry Delaware!  Appartently in Delaware freezing credit takes lower temperatures, so it is $20.

So despite this fee change, I am a big advocate of freezing your credit. If you do not have any upcoming purchases within the next few years that will require credit, I recommend freezing credit scores on each bureau. This is the best way to protect yourself from credit identity theft. So if you are planning on freezing your credit, be sure to make it to TransUnion before July 14th before the price is increased.

Other Blogosphere Posts on Freezing Credit:

Fine Tuned Finances (How to Freeze Your Credit and Stop Identity Thieves in Their Tracks)