What are my options?

We all like to do things, and sometimes we simply like the option of doing something.  Sometimes the mere existence of another option is enough to settle the stomach of a free spirit, who otherwise might feel shackled to the great machine of life.  So, if you're one of those people that like options, let's talk options. 

I'm not talking about the option of buying a Snickers over a Twix.  That's a decision nobody should have to make (eat both!).  I'm talking about options in business.  

The business world is riddled with options - options to buy or sell pretty much anything.  Understanding what an options is, or does, isn't difficult.  However, don't confuse that with the late-night infomercial that says you can make a killing by purchasing their software and then trade options while simultaneously sitting in your hot tub for 30 minutes a day. You can very well lose your shirt - no pun intended - if you don't do it right.  Many people don't do it right. But I digress...

I'd like to address Stock Options (basically because it sounds really cool.  Just say it 3 times and you'll know what I mean).  Basically a stock option means that you pay money (or give up monetary compensation) for an option to buy stock at a given price.  Let's listen in as Trevor is given the opportunity to buy stock from his company:

Big Boss: Trevor, you've been with the company for a while now, so we want to say thanks by giving you the opportunity to buy stock options.

Trevor: Uh, OK. How much are they?

Big Boss: Well, this option contract would allow you to buy 100 shares of company stock at $10 each.  That's called the STRIKE PRICE. So, whataya say? You want in?

Trevor: Well, Big Boss, I think that sounds faaaaantastic.  You see, company shares are currently selling for $12 on the open market. I'd like to exercise my "strike price" and buy those now and pocket the difference.

Big Boss: Slow down there, son.  We thought you'd say that, so we created something called a VESTING PERIOD.  It basically means that you have to buy the option now, and then exercise it later.  That cool?

Trevor: How much later?

Big Boss: 2 years. But you'll still be with the company in two years, and will have made us even more profitable by then, right? Right?

Trevor: Uh, ya. For sure.  Um, sounds OK to me.

So, in this scenario we have Trevor. A hard-working guy that has the opportunity to buy an option contract.  This contract is good IF company stock stays higher than $10 a share, and if Trevor intends on staying in compliance with any other terms in the contract.  In this scenario, the strike price was lower than the current selling price.  This rarely happens, and is referred to as IN THE MONEY.  Most likely, the option contract would have allowed Trevor to purchase shares at $15 a share (with current prices at $12/share).  This would be OUT OF THE MONEY.  Think of IN or OUT situations like this - if I bought and sold right NOW, would I lose or gain money?  If you made money in that scenario, start singing "I'm IN the money...." It's that easy.

That pretty much sums up the basics of stock options.  So, you in?

It's Bad Karma, Dude.

What's this, you say? A post? That's right, people. A post. It only took 10+ months, but some things only get better with time.  Right?

Last time we talked about how a country can go into debt.  The idea of a country in debt can seem kind of silly sometimes, but it has its merit - only if it isn't abused (as is the case in the U.S.).  I promised you that we'd talk about countries printing their own money and what that does.  So here we go!  Are you psyched?! Are you ready?! Cuz this one's gona rock your world.

Before we can really talk about what printing money does, let's talk about what money is.  What is money? Is this paper in my pocket really "worth" something, or is it just paper? And what's with all the cool drawings, watermarks, and other stuff in and on the paper?  What gives?!  Well, money - simply put - represents a resource, or the ability to obtain a resource.  (don't think about it too hard)  Some people think that money represents a certain amount of gold.  Well, it did.  Back in the 70's, Richard Nixon (I am not a croooooook!) ended the 'gold standard' which basically stated that a dollar represented a certain amount of gold.  Everybody likes gold (ooooooo, shiny!) and there isn't a ton of it, so therefore, it's valuable.  The theory was "he who has the gold, has the power" - so therefore "he who has gold, has the ability to trade that gold for pretty much anything he wants, and in the process, look powerful."  Well, the world decided that the gold standard wasn't fun, so they nixed it (no pun intended!) and decided to "let the market determine how much a country's money was worth."  ....aaaaaand that's where we are today.

Now that we know that money represents a resource - or, power, prestige, coolness, etc... - we have to have something that would tell us how many resources that means (or how cool we can look or feel after giving the money to someone else).  This is done by the "invisible hand" of the market. Lemme splain.  A ship is sailing in the ocean, and crashes on a small island.  The survivors are few, but of course they include: Cool Mike, Tim, Billy, and all 22 of their closest friends.  Well, after a few days they realize that they're going to be a while - so they get to work.  Cool Mike collects coconuts, Tim makes leafy blankets, and Billy catches fishies.  They all find some cool stuff, and it's all different.  But how do they trade these products?  After all, you can't just GIVE them away!  They need something that would represent their commodities - because, after all, everyone knows that trading one blanket for one fish isn't going to work.  Having the right amount of blankets or coconuts to trade at the right time, with the right people, was getting too hard.

As they were walking on the beach, they found a small pile of 1000 shiny black rocks with white speckles.  "These rocks rock!" was the consensus.  So, they each took 40 rocks and let the 'free market' do the rest.  Mike decided that climbing the trees was hard work - much harder than weaving silly leaves.  He would demand 3 shiny rocks per coconut.  Nobody wanted to trade 3 shiny rocks for a silly coconut, so they refused to trade.... so Mike had to lower his asking price to 2 shiny rocks. Deal!  Fish traded for 3 shiny rocks, and blankets for 4.  Poles were 2, and a bucket of sand was 1.  (whoever thought of selling sand was either a genius, or an idiot.  The market decides!)  As time went on, their little system of trading rocks for resources got more and more refined and they were pretty pleased with themselves.  But suddenly Cool Mike noticed that Tim showed up to trade some rocks for coconuts - But Tim had TONS of rocks!  "No fair!" cried Mike, "Where did those come from?!"  Knowing that they only had 100 rocks in the beginning, Mike knew that 200 rocks was "impossible!!"  Tim had found a new stash of shiny black rocks with white speckles.  What to do.... what to dooooo.......  Well, Mike now wants 5 rocks for a coconut. Deal!  But the next day Billy shows up with 400 rocks in a bag.  OK - Mike now wants 60 rocks for a coconut! Why the jump? well, Mike knows that the next day somebody's probably going to show up with 1,000 rocks - so he's planning ahead.  (The market always anticipates) True to their pattern, someone shows up with a wheelbarrow of rocks the next day, so Mike decides that black shiny rocks aren't worth anything.  The inflation got worse and worse, until it broke the system.

This simple scenario is exactly what happens in real life.  If a government goes hunting for more shiny rocks (i.e. prints money) then those rocks become worth less to whoever will receive them.  If a government keeps printing money, then eventually the money will become "worthless" and a society will revert back to a bartering situation where direct resources are traded instead of trading money that represents resources.  In other words, Mike would go back to trading coconuts for fish and blankets.  This is why educated people frown on printing money to pay people.  It's just bad karma.

Did I blow your mind?  I sure hope so.  I don't know what I'll talk about next time - but it'll be worth the wait!

Funyuns and Gummy Sharks!

Even if you're like me, and the idea of watching the news is similar to getting a root canal from a gerbal, you still hear a LOT about how the U.S. is going into more and more debt. And if you're like any normal person, you might say to yourself, "um, the U.S. going into debt? with who? and how? Ah, who cares - let's get Cafe Rio for dinner" I know I've said that a few times myself.

I'll make this one quick - because it's going to be painful. Promise.

First - think of the U.S. as a person, not a country.
Second - think of every country in the whole wide world as a person, not a 'country'
Third - put yourself in one of those person's shoes. What do YOU do when you want a specific resource and you don't have any resources to trade? You borrow a resource to trade! (personally, I like to borrow from family. It makes Sunday dinner much more interesting and tends to liven up the conversation)

Now, put the U.S. into that scenario. 'We' want stuff. And we want it now. Free food, free health care, free everything!!!! Unfortunately, we don't have anything to trade for it, so we decide to borrow stuff to trade for the stuff we want. (interesting how that works) This "stuff" is referred to as "money" but it can be anything of value (but most people like money, because they're more confident that the next guy in line will think that it's valuable as well, aka, it will be easier to trade for other stuff. Don't think about it too hard, remember, you have Cafe Rio waiting at 7:42 on the dot)

In our case, we like to borrow from China, Japan, and a bunch of other people, er, I mean, countries around the world. Technically they could come back and say "hey, gimme all your lunch money!" but if they did then we'd have to say "sorry, I spent it all on funyuns and gummy sharks" and then there'd be fighting and stuff. Countries are usually pretty good about paying other countries back, unless of course they borrow from the U.S. - then they just wait it out until we say "OK, keep it, we'll borrow more money and pay off your debt."

So, there you have it. "We" aka the U.S. like to have our stuff, and let other people just give it to us. Next time I'll talk about printing money, er, I mean, pulling our own resources out of the air, and we'll go into exchange rates. Now, depressurize and go get your dinner. It's already 7:43.

Eeyore Could Have Scored a Better Deal

I've heard a lot of talk lately about all the sweet tax credits and other incentives the government is dishing out to the American public in hopes of stimulating the economy. A couple notable examples include the Cash For Clunkers program and the $8,000 First-Time Home Buyer tax credit. While these programs are all well and dandy, let me propose something - Don't ever let the tail wag the dog. What do I mean when I say that? I mean, don't let programs or incentives entice you to act in a way that you wouldn't have acted otherwise.

Let me give an example: Jimmy and Jane have been driving an "old" beat-up Honda, and have decided to "run it into the ground," so to speak. They've paid it off, and are now enjoying the use of transportation without the burden of a loan payment (of course they still have insurance, taxes, maintenance, and fuel, but we'll leave that discussion on the table). In our example, Jim and Jane aren't in a position to purchase a new car, because even the thought of another $400 bill each month is too much to swallow, plus they have a great deal of credit card debt they're trying to pay off. Jim and Jane are smart. Cars are BAD investments.

Along comes the federal government, offering $3,500 to Jim and Jane for their old "clunker" as long as they buy a new fuel efficient car. Immediately they picture themselves being cool, like the Fonz, driving down state street in their hot new ride. They hop in their clunker and head off to Honest Abe's, the local dealer in town. Honest Abe is well aware of Jim, Jane, and all the rest of their counterparts who would be in the market for a new car, thanks to the new program. In anticipation of their arrival, Abe has dutifully taken all the discount, rebate, and sales stickers off his cars - leaving the MSRP (or Stupid Price, as I like to call it - because only an idiot pays MSRP). Because Jim and Jane are getting $3,500 in "free money" their guard is lowered, and they aren't as picky when it comes to pricing or options. They drive away in a brand new, fuel efficient vehicle and take in the new car smell all the way home. What a government we have. Yes, what a government we have.

Let's break this purchase down a little, shall we?

The MSRP on the vehicle was a paltry $30,000. But with the government footing part of the bill, Jim and Jane only had to pay $26,500 - not too shabby. What Jim and Jane didn't realize is that 2 weeks earlier, Abe had been selling that very same vehicle for $25,000 because business was so slow. Eeyore could have scored a better deal than $26,500. Bottom line - when demand goes up (or skyrockets, as was the case in this program) merchants have very little incentive to keep prices low.

Second: Jim and Jane are now stuck with yet another 5, 6, or 7 year loan to pay off. Not cool when you're trying to pay off a bunch of other consumer debt.

I can already hear the naysayers... "but you haven't taken into account all the money they're going to save in fuel from buying a more efficient car." I've done the math, but I'll spare you the details. Basically, if the old car got 21 MPG and the new car gets 28 MPG (a reasonable proposition), and gas is $2.50 a gallon and Jim drives 10,000 miles a year, Jim will save around $300. $300 is better than a swift kick in the pants, but it doesn't even cover one of his loan payments. And surely the savings in gas will be offset by the inevitable increase in insurance costs.

So now we go back to Jim and Jane, one month later, no new car smell, and a loan payment they can't afford. Let's change the story a little bit. Let's assume that Jim and Jane were actually in the market for a newer, more reliable car. What could they have done? Assuming their car was actually worth something, they could have sold it and taken that money to the dealer when demand for cars was low. No, they wouldn't get much for their car when they sold it, but the deal they would have scored on their purchase would have outweighed any foregone money. Then Jim would have taken his sweet wife to the USED car dealership. Cars coming off of a 2 year lease are excellent targets - still in their warranty period, still looking good, low miles - all without the new car sticker shock.

So next time the government (or anyone else) runs an incentive program, think about two things:
How it will the increase in demand affect the price, and
Was I in the market for this product before the promotion?

Asking these two questions will help save you from overpaying, and dealing with the inevitable buyers remorse that comes when buying something you don't need.

Revenue, Expenses, and.... no Profit?! Oh, My!

I was asked by a good friend (I can call you that, right?) if I would be so kind as to write a post on P&L's - aka Profit & Loss statements, Income Statements, or Statement of Operations for all y'alls that are unfamiliar with cool accounting lingo. Who am I to pass up such a bodacious request?!

Let's start simple - (a very fine place to start) - let's start with... income. You know you love it - Say it with me! "Show me the money! Woot Woot!" (I think the editors cut part of that in the movie, but I'm not totally sure). Most people think of income as their hourly (or salary) wage.

For example:
If you were to make $10 an hour, and you worked 40 hours in a week, would you get $400 in your paycheck? Heck no. "Well, Mr. 'Numbers Guy' why is that?" Well, it's easy. Your paycheck is a basic example of a P&L. The absolute basics of a P&L are...(drumroll please)...

Revenue (Your 10 big ones for every hour of your life that you give to your boss)
- Expenses/Cost of goods sold (The portion of your hard-earned money that Obama gets to waste)
= Gross Profit
- Operating Expenses (any pre-tax deductions like retirement or insurance)
= Net Profit (What actually goes into your bank account to buy some bling-bling)

Now, in the confusion of all this edumacation, the thing I want to get across the most is the difference between Gross Profit and NET Profit. Is there really that big of a difference?! Oh ya, baby. Lemme splain. If I were to say to you "Hey, I'm in charge of casting the movie on the history of the New Kids on the Block and thought you'd make a great Joey." You'd say, "Dude, that's totaly rockin' rad! I know it'll make a ton of cazash!" (or whatever it is you kids say these days). Then I tell you the best news EVER - "I'm prepared to offer you the most lucrative deal in the history of NKOTB movies - 25% of the net income." You sit in silence as you contemplate all the slap bracelets and trapper keepers you could buy with that kind of scratch.

We make the movie - it's wildly successful - and I send you on your way with the promise that I'll mail you a check whenever we realize a net profit. You can hardly wait to get your hands on a sweet new walkman. Only problem - I never send you money, and you never get to listen to Madonna sing "Material Girl" while walking down the street. Why?! Well, unfortunately, with all the expenses of the movie (including my awesome salary of every penny that isn't spent somewhere else) we never realized an ultimate profit. You fell for the oldest trick in the BOOK! Never, never, never make deals based on Net Profit. Always go for Sales or Revenue - that way it's up to the company to control their other expenses and you get to go on your merry way.

Now, for those of you that think this scenario is a bit far-fetched... just ask David Prowse. He's the guy that played Darth Vader in Return of the Jedi. He signed a contract just like this - and because Return of the Jedi hasn't made any money yet (because of George Lucas's sweet salary), he hasn't been paid a dime. Doh!

Now, make me proud and go make some net profit!

The Misuse of Credit is what?

I just read an article in the Harvard Business Review on Debt that was very concise and well-written. (http://hbr.harvardbusiness.org/2009/07/selling-to-the-debt-averse-consumer/ar/1) It talked about the "monthly payer" - the person who doesn't care how much something costs, they just care what the monthly payments are going to be. This monthly payer is a big part of why the world is in such financial trouble (but don't think for a second that it's the only problem). Just when I thought the article was spot-on, I read the last sentance: "Misuse of consumer credit is gone for good."

Are you on crack?!

Ya, right. Do these people think before they write? Nothing is EVER gone for good. I don't care if it's finance, food, or romantic smoochie stuff - very few people learn from the past, and societies as a whole rarely if ever learn from the past. It's a group-think kind of thing.

The question is not IF we'll get into another financial meltdown - but WHEN, and whether or not you'll be prepared.

Don't be a Monthly Payer. Be a cash payer. Now THAT'S sound advice. http://providentliving.org/content/display/0,11666,7417-1-4006-1,00.html

Assets, Liabilities, and What?

OK - enough of the chit chat. It's time to talk about some cold, hard, assets, baby! That's right. We all love em - but few understand em. I decided to include Liabilities and Equity (Equi wha?) in this little round table discussion of ours, because let's face it - very few assets in life are EVER acquired without liabilities and equity attached. I'm thinkin the BEST way to explain Assets, Liabilities, and Equity would be to give a little example - something we're ALL really familiar with; buying a high-powered sniper rifle for those weekends when 4-wheeling just doesn't cut it. Oh, YA baby!

Let's say that you have your eye on this thing, and it's only $10,000. Problem? Not really, except you don't HAVE $10k and The Mrs. isn't about to let you cash in the 401k (more on those later). In all your brilliance you decide that Bob (the banker) would be sympathetic to your plight. You decide to approach him in all your humility and plead your case - because out of all people, Bob would understand. Bob IS sympathetic, but not to the tune of $10,000 sympathetic - more like $7,500 sympathetic. All is LOST! Oh, the humanity! You don't want to settle for that other "piece" the store has behind the counter - you want the one with the 4 ft. scope, and the cool tripod on the front. Just at the very moment when you're about to consign yourself to the trenches of misery (filled with guys who can't buy cool stuff), you realize that you saved 10% of your income ever since you were a child - and your savings Shoooould be right around $2,500 by now. Success! You're mom always told you to save - and NOW it's paying off! She's Brilliant! You TAKE the $7,500 unsecured, high interest rate loan from Bob (more on those later) and run home. You combine the two sacks of money (your $2,500 and the banks $7,500) and head off to the store. As you return home, you now have an aire of confidence, like a king entering his royal palace - for not many men in the kingdom can plink "stuff" from a mile away. Life never tasted SO good.

OK - let's take a look at where your finances are. You just bought a gun that cost $10,000 - THIS is your Asset. What's your liability? Why, the $7,500 of course. You still OWE that to the bank - that's pretty much the definition of a Liability - You're still LIABLE for it. So, now that we've established our Asset and Liability, what's our Equity? That's EASY, it's just the $2,500 we put down on the gun. Now let's say we find it in our heart to pay the bank back a little (because we're cool like that and we would NEVER want America to end up in a big huge recession) so we cut the bank a check for $500. Now we only owe $7,000 and our equity in the gun goes up to $3,000. The asset still stays at $10,000 - because that's what we bought it for.

Pretty Easy? I thought so. Now - go get that gun! Just invite me along when you start plinkin stuff.