WW: Cost

 Welcome to Word Wednesday. The word of the week is Cost.


Cost is what is exchanged for something else. This is not always apparent. For instance there is the idea of opportunity cost, which is that the cost of an action is the sum of alternative actions.

Cost also includes the long term affects. For instance, if you buy a car, the price may be $20,000. However the cost of owning a car includes gas, maintenance, insurance, etc. This is usually called the total cost of ownership.

Most people look at the price tag, and ignore the cost completely. Common decision discussions include things like "Can I afford the payments?" or "Do I have enough money to get X?" Those are the wrong questions to ask yourself. We should be asking ourselves if acquiring something fits in with our long term goals.

One example of cost versus price thinking is college. It is so ingrained in our society that when people leave high school they should go to a four year university. However, there is the opportunity cost (lost wages and experience while going to college) and total cost of ownership of a college degree (including interest payments). Ten years ago it was probably worth it to go to college directly out of high school. However, college tuition inflation skyrocketing since 2001, the value of a four (in my case four and a half) year degree has to be evaluated.

Of course our society, when dealing with inflation, turns to debt. College tuition no longer affordable? Finance it. Student loans don't require payments until you graduation (reminds me of the furniture store ads for no interest and no payments for the next N years). But do you receive enough value from a college education? Is there a way of receiving the same benefit for less? I don't know the answer, but it is something that we need to start looking at.

Another example is home ownership. Most people rely on the lender to determine how much home they can afford. I've heard that a good rule of thumb is that your payments (Principal, Interest, Taxes and Insurance) should be no more than 25% of your gross income. I've heard that lenders will offer you up to 40% of your gross income. Personally, I'd feel better if it was closer to 0%. Again, as home values rise and people feel they require a certain type of home in a certain area, they turn to debt to solve their problems. However, the cost of a home is much more than the Principal, Interest, Taxes and Insurance. There is maintenance, upkeep, repairs, window coverings, etc. The cost of owning a home is much higher than most people realize.

With both student loans and mortgage, when we turn to debt (because we cannot afford it) we are actually paying much more than the original price. The actual cost of a college degree or home ownership becomes astronomical as we turn to debt to solve our inability to pay the price.

My favorite things in life don't cost any money. It's really clear that the most precious resource we all have is time. 
Steve Jobs 

cost

 [kawst, kost]    Origin

cost

   [kawst, kost]  Show IPA noun, verb, cost or, for10–12, cost·ed, cost·ing.

noun

1.

the price paid to acquire, produce, accomplish, or maintainanything: the high cost of a good meal.

2.

an outlay or expenditure of money, time, labor, trouble,etc.: What will the cost be to me?

3.

a sacrifice, loss, or penalty: to work at the cost of one's health.

4.

costs, Law .

a.

money allowed to a successful party in a lawsuit incompensation for legal expenses incurred, chargeableto the unsuccessful party.

b.

money due to a court or one of its officers for servicesin a cause.

verb (used with object)

5.

to require the payment of (money or something else ofvalue) in an exchange: That camera cost $200.

6.

to result in or entail the loss of: Carelessness costs lives.

7.

to cause to lose or suffer: The accident cost her a broken leg.

8.

to entail (effort or inconvenience): Courtesy costs little.

9.

to cause to pay or sacrifice: That request will cost us two weeks'extra work.

verb (used without object)

11.

to estimate or determine costs, as of manufacturingsomething.

Verb phrase

12.

cost out, to calculate the cost of (a project, product, etc.)in advance: to cost out a major construction project.

Idiom

13.

at all costs, regardless of the effort involved; by anymeans necessary: The stolen painting must be recovered at allcosts. Also, at any cost.

Origin: 
1200–50;  (v.) Middle English costen  < Anglo-French, Old Frenchco ( u ) ster  < Latin constāre  to stand together, be settled, cost;compare constant;  (noun) Middle English  < Anglo-French, OldFrench,  noun derivative of the v.

MM: Are the Poor Getting Poorer

Thoughts on poverty and how we look at it. Welcome to Movie Monday.

WW: Price

Welcome to Word Wednesday. The word of the week is Price.

Price is the upfront cost of something, for example the price tag. This is what is paid. To many people, this is the sole indicator of value. They will buy their meals off the value menus. They'll shop the dollar stores. While you can get a lot of stuff for less money, price should not be the sole indicator.

Some people prize price over value so much that when presented with a "deal" they will buy something they would not normally buy. Advertisers count on this. Author Robert Kiyosaki calls this turning your cash into trash.

As an example, say you can get a cell phone plan that gives you 700 minutes a month for $40 per month. The next tier gives you 1,500 minutes a month for $50. Some people would say that the first plan is almost 6 cents a minute and the second is a little over 3 cents a minute. The price per minute does not tell you the value. If you only use 500 minutes a month, you are really are paying 6 cents a minute for the first and 8 cents a minute for the second. I've heard people say that for $10 a month more they don't have to worry about going over. That's their value judgement, just don't use price as the reason for the purchase.

Bulk buying is another way many are tricked into spending more money. This is somewhat related to the 1,500 minutes. The more you have of something, the more you tend to use. We used to buy little cinnamon containers. They were more expensive per ounce than the big bulk containers so we switched. Then we noticed that we were using more cinnamon, because we had more. We didn't have to worry about running out. Kind of like no one wanting to drink the last of the milk in the fridge. When you get low, you tend to ration more (ie use less). When you buy in bulk, you get low less often and tend to use more. Also, if it is perishable you run the risk of throwing out (wasting) more. Add on top of that that sellers know that the mentality is that bulk costs less per unit, they will actually sell bulk at more per unit. Few people actually validate that bulk costs less per unit and will end up paying a lot more.

What is a cynic? A man who knows the price of everything and the value of nothing. 
Oscar Wilde 

price

 [prahys]    Origin

price

   [prahys]  Show IPA noun, verb, priced, pric·ing.

noun

1.

the sum or amount of money or its equivalent forwhich anything is bought, sold, or offered for sale.

2.

a sum offered for the capture of a person alive or dead: Theauthorities put a price on his head.

3.

the sum of money, or other consideration, for which aperson's support, consent, etc., may be obtained, especiallyin cases involving sacrifice of integrity: They claimed that everypolitician has a price.

4.

that which must be given, done, or undergone in order toobtain a thing: He gained the victory, but at a heavy price.

5.

odds ( def. 2 ) .

verb (used with object)

8.

to fix the price of.

9.

to ask or determine the price of: We spent the day pricingfurniture at various stores.

..

Idioms

10.

at any price, at any cost, no matter how great: Their orderswere to capture the town at any price.

11.

beyond / without price, of incalculable value; priceless:The crown jewels are beyond price.

Origin: 
1175–1225;  (noun) Middle English pris ( e ) < Old French  < Latinpretium  price, value, worth ( compare precious); (v.) late MiddleEnglish prisen  < Middle French prisier,  derivative of pris, OldFrench  as above; see prize² , praise

MM: The Fun Theory: Fast Lane Slide

Movie Monday with The Fun Theory. Make life more efficient and fun.

Why You Should Invest in the Stock Market

I've heard that everyone should be in the stock market because it gets, over the long haul, 12% returns. I've also heard that instead of trying to time the market and play games, you should get into an Index fund and just ride it out. Instead of just taking that advice at face value, I delved into it to see what is really going on.

I took the value of the Dow Jones Industrial Average as the basis for my investigation. I downloaded the full history available from Yahoo!.

I took the closing value of the Dow on the first of January of each year. The average gain from one year to the next was 6.55%. Not the 12% I've heard, but better than the around 1% rate on savings. The average inflation during that period was 3.23%, leaving our actual gains to be around 3.27%. Still, better than stuffing your mattress or putting the money in a savings account.

However, most of us do not have the luxury of going back 85 years to put our money in the stock market. This is why the phrase "past performance is not a guarantee of future returns" was invented. If we take a closer look at the average gains in each decade we can get a clearer picture of what might be going on.

Imagine if you picked the 70's to get started investing in the stock market. By the 90's you'd be pretty impressed with yourself as an investing guru. So it really depends on when you get in and when you get out, timing the market.

Let's take another look at the Dow. Compare the chart below to the Dow chart I started out with.

Notice any similarities? The first chart was the entire history I got of the Dow from Yahoo!. This chart is the same data, just up to 1982. So what do the mid 60's and early 2000's have in common? War, specifically Vietnam and the War on Terror. If you look for the pre-Vietnam run up and the flatline afterwards on the first graph you'll notice that it doesn't even register. The ramp up in the early 80's and even more so the late 90's dwarf the "problems" in the 70's.

So is the trend that following a war flatline there are two decades of growth followed by incredible growth? I think it is more of a warning about government spending, especially war spending, and what it does to the economy.

There were three events I think led to the 80's (mild compared to the 90's) boom. The first is the baby boomers (those born between 1946 and 1964). They have changed the rules at every stage of life. In the mid 80's baby boomers started turning 40. They were past the arrogant years and starting to worry about retirement. That alone would not have had that much of an impact on the stock market if it had not been for the other two events, women entering the workforce and the invention of the 401(k).

From 1970 to 1990 the percent of women working jumped over 30%. In 1970 around 1/3 of the female potential workforce was employed. By 1990 over half of the female potential workforce was employed. This increased the household income (but was in large part needed to keep up with inflation, but that is another story entirely) and added to the 401(k) boom.

The 401(k) gave companies an incentive to help their employees invest in the stock market with pre-tax money. Given that baby boomers were starting to think about retirement and taxes and companies were given incentives to help them put their money in the stock market, this led to a large cash infusion in the stock market. This is what I think led to us leaving the post-Vietnam stock slump.

The 90's also had two events that helped accelerate the stock boom, the internet (and online trading) and more available housing. I am not referring to the dot-com bubble when  I am referring to the internet, but the availability of information about companies and the ease with which the internet afforded stock trading (eTrade went public in 1996). Like the roaring 20's when the people caught the stock bug when they saw the large returns, more individuals had access to the stock market and it became popular to trade stocks online. This provided another infusion of cash into the market.

The changes to the Community Reinvestment Act in 1995 made housing available to more people. This increased the demand for housing, thus raising the prices (more people could buy homes but the number of homes did not increase as fast). This combined with the ease of online trading increased the cash available to infuse the market.

So now we look into our crystal ball to see what the future has for us. Just like the period around the Vietnam war we have a boom in the stock market, followed by some bouncy but overall flat years. Where are we going to get the cash infusion to the market for the next ride? Here are a couple of things to think about.

1. Baby boomers are going to start retiring (turning 65 in 2011 - 2030) and start pulling money out of the market instead of putting money in. Again, they are going to change the rules. If their investing started a minor boom, what will their withdrawals do?
2. Is there some new mechanism (tax law like 401(k) or new invention like online trading) that will encourage more people to invest in the market? Given that our economy is hurting and people are paying more attention to immediate needs than investing I don't know how we are going to squeeze more money out of people to put in the market.

So, why do I think you should invest in the stock market? Here are my reasons:

1. You want to support baby boomers with money you'll probably never see again (kind of like Social Security)
2. You live in a warm climate and will not need the cash to burn to keep you warm
3. Your Investment Advisor's children are getting ready to go through college
4. You have more money than you know what to do with
5. You'd rather pay 22% on your credit cards and throw your money down the stock market drain

What should you do instead of invest in the stock market? I'm not going to tell you. Go out and figure it out for yourself. Learning is your best defense against poverty.