Alternate Dimension Andy (ADA):
We've already decided that in most cases it's not okay for you to think for yourself. At least, that's been implicit in everything I've said in these posts so far. We've also decided that it would be totally sweet to find a knowledgeable expert who would invest in the stock market on your behalf.
It does sorta suck, though, about mutual funds charging 2% a year. That cuts into your profits! Or adds to your losses! If you would have made 10%, now you only make about 8%; and after inflation, more like 4.5%. LAMENESS. It would be Ninja Turtle radical if mutual funds didn't cost so much.
Well, here's a story you're gonna love, ADA. Once, there was this Leonardo-level cool dude named John Bogle. One day, he did a backflip into Foot Clan headquarters (a company called Vanguard), and said to The Shredder (the finance industry of corporate America has its roots in secret ninja clans of recent Japan), "You may know ninjitsu, but I soooo know it better than you." Well, the actual words he used were probably more like, "If I just made a mutual fund that copied an index, we wouldn't have to hire people to manage it; it would manage itself; I could charge, like 0.5%."
"Half of a cent on the dollar!?" Shredder screamed. Shredder was fucking pissed about that shit, but eventually he decided to let Bogle give it a try. When it worked, and Bogle's fund did better than most of the funds on the market, Shredder was all, "No fucking way."
Quoth Bogle: "Way." Then Raphael, Donatello and Michaelangelo came back-flipping in, and they all gave each other high-fives and ate pizza. It was quite rad.
See, in addition to charging customers less (thus increasing their profit), Bogle also realized that lots of mutual funds were falling way short of the indices to begin with. Add to that the fact that they were blowing money on shit like advertising and stock trading commissions, and it's sorta unsurprising that Bogle rocked so large.
The real story is actually even more interesting than I've told it here, though it is woefully lacking in the TMNT-metaphor department. And the metaphors don't suck as much (since Bogle actually worked for Vanguard, wasn't a ninja, etc.).
Still, you get the gist.
Showing posts with label mmm. Show all posts
Showing posts with label mmm. Show all posts
Tuesday, July 17, 2007
Saturday, June 9, 2007
MMM: Mutual Funds
Alternate Dimension Andy (ADA):
That stock market shit is nuts. I mean, there are thousands of stocks to pick from, and each of those stocks has about, oh, a kajillion factors that could make it a good or bad pick.
OMG WHAT TO DO
My first instinct is, "Christ, I wish there were someone who was not a fucking moron who would just pick stocks for me." Yeah man, that'd be nice.
HOLY HELL, THAT ALREADY EXISTS
It's called a mutual fund. Here's how it works:
There's a lot more to know about mutual funds, and I'll probably talk about that more in the future. For the time being, just know that they exist, and that they're a good way for a typical investor to invest safely.
Yes, even a jackass like you, ADA.
That stock market shit is nuts. I mean, there are thousands of stocks to pick from, and each of those stocks has about, oh, a kajillion factors that could make it a good or bad pick.
OMG WHAT TO DO
My first instinct is, "Christ, I wish there were someone who was not a fucking moron who would just pick stocks for me." Yeah man, that'd be nice.
HOLY HELL, THAT ALREADY EXISTS
It's called a mutual fund. Here's how it works:
- You put money into the fund. (This is an intentionally-vague black box, but the precise "hows" are left for a future post/ as an exercise for the reader).
- A fund manager uses that money to buy stocks, bonds, futures, and whole bunches of other shit. Exactly what she buys is determined by the type of fund.
- Based on how much you put in, you are given a percentage cut of the mutual fund. So, if you put in a total of 10% of the money into the fund (you'd have to be rich as hell to do it, but let's just pretend), you'd own 10% of the fund.
- You can cash out at any time. If the overall value of the fund has gone up, then so has your share.
- The mutual fund is automatically diverse. I'll talk more about what that means in the future, but the short version is this: you're not putting all your eggs into one basket.
- Someone else is doing all the work for you. All you have to do is give them your money.
- The mutual fund manager, believe it or not, is not doing this out of the kindness of her heart. Indeed, she's probably taking a cut of about 2% of the total fund for herself every year. If the fund is worth 100 hojillion dollars, she keeps about half a hojillion dollars for herself every quarter. FUCKED UP, RIGHT
- Because you don't have all your eggs in one basket, you're less likely to make a shit ton of money. On average, over the long haul, you'll probably make a little bit of money every year.
There's a lot more to know about mutual funds, and I'll probably talk about that more in the future. For the time being, just know that they exist, and that they're a good way for a typical investor to invest safely.
Yes, even a jackass like you, ADA.
Thursday, May 10, 2007
MMM: The Stock Market, Part 2
Alternate Dimension Andy (ADA):
The stock market is much more complicated than a flea market to facilitate the trading of parts of goatee wax companies. In fact, in the real world, there is not a single "goatee wax and wart remover" company that sells stock. (I'll talk more about this in a future post, "MMM: Starting a Goatee Wax And Wart Remover Company.")
For starters, there are dozens of different types of companies: automotive, software, oil... even comic book companies.
Plus, "the stock market" isn't even an actual place. There is a place where stocks are traded; that's called a "stock exchange." The stock exchange you're probably most familiar with is the New York Stock Exchange (NYSE). Worldwide, there are hundreds of exchanges. When people talk about "The stock market," though, they're just talking about the activity that is buying and selling stocks.
Snore.
The most important thing for you to know about the stock market is that it's risky. If you put money into the stock market, it's not going to grow at a fixed, predictable rate like your savings account. One day, a company's stock might go down 20%. A company might go out of business, making your shares worthless. If you put all of your money into the stock market, you might very well lose it all.
Why on earth would rich people put their money into the stock market, then? 'Cause there's an even better chance that your shares will gain money. Not only that: on average, they'll gain money even faster than if they invested it in something else. Bonds and other investments typically bring in between 6 - 7%. The stock market, on the other hand has, over the long haul, averaged about 10.5%.
Asterisk. Footnote. Bullet point.
It is not the case that a given stock is guaranteed to bring in 10%. It's just the case that the whole market will, on average, over many years, return about 10%. So... if you put $d into the stock market, then waited n years (where n is at least 20), in the end you'd probably have about $d(1.10^n).
MATHS YAY
Some years, you might go way up, some years you might go way down. What's even more nuts is, this "10%" number isn't even for individual companies. It has to do with the market as a whole. Like, if you added up the value of all the shares of stock, then a bunch of years later, added up the value of all of those shares of stock, the number would be 1.1^n times larger. But for an individual stock, the numbers could be much more whack. Hella whack, even.
There is another downside to spending your money on a stock: it doesn't put cash into your pocket. If you want to cash out of the stock market, you have to place a "sell" order and wait for someone else to agree to your price. If there aren't a lot of people trading the stock, you could be waiting for weeks.
Some companies are all, "That's bullshit, yo! People who own part of this company should get a paycheck!" So, every so often, they send those people money. This money is called a dividend payment.
Coca-Cola (NYSE: KO), for instance, pays out dividends every quarter (three months). Usually, they pay out about 0.5% of the share price. So, if you bought a share of Coca-cola for $100, Coca-Cola would send you a check every three months for $0.50 (along with a note that said "DON'T SPEND IT ALL IN ONE PLACE LOLZ!").
What's particularly awesome about dividends is that you can still cash out on the stock. So in the Coca-Cola example, you'd still be able to place a "sell" order and get your $100 back. (Well, sort of. Once Coca-Cola pays out that $0.50, the shares are worth $0.50 less 'cause the company is worth slightly less. But for the sake of simplicity, let's just say you could sell the stock for your $100). Over time, while the shares are increasing in value (as most stocks tend to do), you're receiving dividend payments.
A possible way to be totally rich: buy d dollars worth of shares of a dividend-paying stock every week when you get paid. Do so for 30 years. If we assume that the dividend stock grows at an average of 8%:
Think about it.
The stock market is much more complicated than a flea market to facilitate the trading of parts of goatee wax companies. In fact, in the real world, there is not a single "goatee wax and wart remover" company that sells stock. (I'll talk more about this in a future post, "MMM: Starting a Goatee Wax And Wart Remover Company.")
For starters, there are dozens of different types of companies: automotive, software, oil... even comic book companies.
Plus, "the stock market" isn't even an actual place. There is a place where stocks are traded; that's called a "stock exchange." The stock exchange you're probably most familiar with is the New York Stock Exchange (NYSE). Worldwide, there are hundreds of exchanges. When people talk about "The stock market," though, they're just talking about the activity that is buying and selling stocks.
Snore.
The most important thing for you to know about the stock market is that it's risky. If you put money into the stock market, it's not going to grow at a fixed, predictable rate like your savings account. One day, a company's stock might go down 20%. A company might go out of business, making your shares worthless. If you put all of your money into the stock market, you might very well lose it all.
Why on earth would rich people put their money into the stock market, then? 'Cause there's an even better chance that your shares will gain money. Not only that: on average, they'll gain money even faster than if they invested it in something else. Bonds and other investments typically bring in between 6 - 7%. The stock market, on the other hand has, over the long haul, averaged about 10.5%.
Asterisk. Footnote. Bullet point.
It is not the case that a given stock is guaranteed to bring in 10%. It's just the case that the whole market will, on average, over many years, return about 10%. So... if you put $d into the stock market, then waited n years (where n is at least 20), in the end you'd probably have about $d(1.10^n).
MATHS YAY
Some years, you might go way up, some years you might go way down. What's even more nuts is, this "10%" number isn't even for individual companies. It has to do with the market as a whole. Like, if you added up the value of all the shares of stock, then a bunch of years later, added up the value of all of those shares of stock, the number would be 1.1^n times larger. But for an individual stock, the numbers could be much more whack. Hella whack, even.
There is another downside to spending your money on a stock: it doesn't put cash into your pocket. If you want to cash out of the stock market, you have to place a "sell" order and wait for someone else to agree to your price. If there aren't a lot of people trading the stock, you could be waiting for weeks.
Some companies are all, "That's bullshit, yo! People who own part of this company should get a paycheck!" So, every so often, they send those people money. This money is called a dividend payment.
Coca-Cola (NYSE: KO), for instance, pays out dividends every quarter (three months). Usually, they pay out about 0.5% of the share price. So, if you bought a share of Coca-cola for $100, Coca-Cola would send you a check every three months for $0.50 (along with a note that said "DON'T SPEND IT ALL IN ONE PLACE LOLZ!").
What's particularly awesome about dividends is that you can still cash out on the stock. So in the Coca-Cola example, you'd still be able to place a "sell" order and get your $100 back. (Well, sort of. Once Coca-Cola pays out that $0.50, the shares are worth $0.50 less 'cause the company is worth slightly less. But for the sake of simplicity, let's just say you could sell the stock for your $100). Over time, while the shares are increasing in value (as most stocks tend to do), you're receiving dividend payments.
A possible way to be totally rich: buy d dollars worth of shares of a dividend-paying stock every week when you get paid. Do so for 30 years. If we assume that the dividend stock grows at an average of 8%:
- You'll own about $6413d in shares of the company.
- You'll receive dividend payments every quarter for 30 years.
- At the end of those 30 years, every year, you'll be getting back $32.07d every quarter (about $2.46d every week) forever.
Think about it.
Saturday, May 5, 2007
MMM: The Stock Market, Part 1
Alternate Dimension Andy (ADA):
The stock market is one of those magical money machines (MMMs) I was talking about before. You've heard about it. There's always some boring-ass news story about the DOW dropping seventeen points (or some such bullshit). People talk about buying "shares" of Coca-Cola. There was even that unit in high school social studies about what the stock market is.
Let me just begin by saying, I totally agree with you that this shit can be boring as hell. But since I'm here to preach to you about mastering the art of personal finance, you're gonna have to sit through this anyway.
Pretend that in your dimension, a dude named Horace invents goatee wax. Since everyone in your dimension sports a goatee, Horace is bound to make a kajillion dollars, right? Other than the fact that a kajillion isn't actually a number, Horace also has to make the goatee wax before he can sell it and make money off of it.
So, Horace makes up a few batches of goatee wax and the small-time local shops put it on their shelves (it is labeled as Horace's Amazing Fun Time Momme and Poppe Shoppe Goatee Wax And Wart Remover. Oh yeah, I didn't mention before: the goatee wax is also a wart remover). Well just as fast as Horace can make batches of this stuff, it's jumping off the shelves. Some of the other shop(pe)s in town get in touch with Horace and offer to sell his wax too.
As the number of shops carrying the product grows, the demand for Horace's product grows exponentially. The goatees just keep coming. There are too many of them. It's like a zombie movie, but instead of zombies, it's goatees, and instead of shotguns, it's goatee wax.
So Horace gets an idea. "Ah ha!" he says aloud, perhaps creating an awkward moment for all the people around him until he explains, "I shall make a machine that will facilitate the easy creation of my wart-removing goatee wax!" (Everyone then nods in silent, profound approval.)
The problem is, Horace (rich though this wax is making him) just doesn't have enough money to pay for such a machine. Even though the machine would help him make the wax a hundred times faster, even though there is demand for his product, Horace just can't afford to make a machine.
Then, Horace hears from an investment bank (What's that? We'll talk about it later.). They've heard about his amazing wart-removal wax; they use it to wax their own goatees. They want to help him raise money to get his company running. Their idea: they'll sell "pieces" of Horace's company. They'll have a total of 1,000,000 pieces, and they'll sell them for $10 each. Each of those pieces -- let's call 'em "shares of stock," -- is a tiny piece of every machine, every chair, and every potted plant that Horace's company owns. In return, Horace will get $10,000,000 to build factories. He'll also use the money to hire workers, advertise, and generally get his company running.
Now the owners of the shares of stock -- "shareholders" -- each own a bit of Horace's company. If the company sells a lot of extra goatee wax, they'll bring in a lot of money from those sales and the value of the company will increase. So too will the value of the shares increase. If the company starts buying private jets and spending too much on advertising, the value of the shares might decrease.
Now, Horace's company isn't going to make more shares of stock. If another person wants to buy shares of stock in Horace's company, he would have to find someone who already owns shares and is willing to sell them. The buyer and seller would then negotiate a price.
That might be easy if there were only a few people who knew about the shares of Horace's stock, but that brokerage that helped Horace out before made sure there were lots of shares of the stock. Lots of people know about it. And lots of people want to buy or sell shares of that stock. Wouldn't it be nice if there were a sort of flea market people could go to to buy and sell those shares of stock?
ADA, that's what the stock market is. It's a flea market where people sell pieces of companies. I'm not even fucking kidding. But instead of just imaginary facial hair wax companies, there are all kinds of companies. Hundreds of 'em.
So how do the rich make money in the stock market?
Go wax your goatee. We'll talk more about this later.
The stock market is one of those magical money machines (MMMs) I was talking about before. You've heard about it. There's always some boring-ass news story about the DOW dropping seventeen points (or some such bullshit). People talk about buying "shares" of Coca-Cola. There was even that unit in high school social studies about what the stock market is.
Let me just begin by saying, I totally agree with you that this shit can be boring as hell. But since I'm here to preach to you about mastering the art of personal finance, you're gonna have to sit through this anyway.
Pretend that in your dimension, a dude named Horace invents goatee wax. Since everyone in your dimension sports a goatee, Horace is bound to make a kajillion dollars, right? Other than the fact that a kajillion isn't actually a number, Horace also has to make the goatee wax before he can sell it and make money off of it.
So, Horace makes up a few batches of goatee wax and the small-time local shops put it on their shelves (it is labeled as Horace's Amazing Fun Time Momme and Poppe Shoppe Goatee Wax And Wart Remover. Oh yeah, I didn't mention before: the goatee wax is also a wart remover). Well just as fast as Horace can make batches of this stuff, it's jumping off the shelves. Some of the other shop(pe)s in town get in touch with Horace and offer to sell his wax too.
As the number of shops carrying the product grows, the demand for Horace's product grows exponentially. The goatees just keep coming. There are too many of them. It's like a zombie movie, but instead of zombies, it's goatees, and instead of shotguns, it's goatee wax.
So Horace gets an idea. "Ah ha!" he says aloud, perhaps creating an awkward moment for all the people around him until he explains, "I shall make a machine that will facilitate the easy creation of my wart-removing goatee wax!" (Everyone then nods in silent, profound approval.)
The problem is, Horace (rich though this wax is making him) just doesn't have enough money to pay for such a machine. Even though the machine would help him make the wax a hundred times faster, even though there is demand for his product, Horace just can't afford to make a machine.
Then, Horace hears from an investment bank (What's that? We'll talk about it later.). They've heard about his amazing wart-removal wax; they use it to wax their own goatees. They want to help him raise money to get his company running. Their idea: they'll sell "pieces" of Horace's company. They'll have a total of 1,000,000 pieces, and they'll sell them for $10 each. Each of those pieces -- let's call 'em "shares of stock," -- is a tiny piece of every machine, every chair, and every potted plant that Horace's company owns. In return, Horace will get $10,000,000 to build factories. He'll also use the money to hire workers, advertise, and generally get his company running.
Now the owners of the shares of stock -- "shareholders" -- each own a bit of Horace's company. If the company sells a lot of extra goatee wax, they'll bring in a lot of money from those sales and the value of the company will increase. So too will the value of the shares increase. If the company starts buying private jets and spending too much on advertising, the value of the shares might decrease.
Now, Horace's company isn't going to make more shares of stock. If another person wants to buy shares of stock in Horace's company, he would have to find someone who already owns shares and is willing to sell them. The buyer and seller would then negotiate a price.
That might be easy if there were only a few people who knew about the shares of Horace's stock, but that brokerage that helped Horace out before made sure there were lots of shares of the stock. Lots of people know about it. And lots of people want to buy or sell shares of that stock. Wouldn't it be nice if there were a sort of flea market people could go to to buy and sell those shares of stock?
ADA, that's what the stock market is. It's a flea market where people sell pieces of companies. I'm not even fucking kidding. But instead of just imaginary facial hair wax companies, there are all kinds of companies. Hundreds of 'em.
So how do the rich make money in the stock market?
- They find a company that is going to make a lot of money.
- They "go to the stock market" and buy shares in that company.
- When that company is done making money, or when they need some cash, the rich sell their shares of stock in that company (for more than they purchased the shares).
Go wax your goatee. We'll talk more about this later.
Tuesday, May 1, 2007
ADA: Rich People Have Magical Money Machines
Alternate Dimension Andy (ADA):
I know you don't necessarily want to be rich. Not much point, as long as you can eat and do something that you love (amirite?). You agree with me, I'm sure, that having more money will not, on its own, make a person happier.
On the other hand, rich peeps are kind of an interesting academic topic. How did they get so rich? How do they stay rich? Why rich peeps gots to be like that, yo?
Don't pretend that you don't love sitting around just thinking about academic shit. I know you do, dude. I know you love to just puzzle things through. Arrogant bastard that you are, I'm sure you think you're smarter than all of your starving actor friends (side note: I don't think those people are starving in this dimension). I assure you, ADA, that you are not smarter than they are, but your willingness to puzzle about the finer points of the universe's operation is an admirable quality that I hope you never lose.
Stop stroking that goatee and we'll get back to the topic at hand: how do rich people get rich?
Think about it.
I'm not fucking around, really think about it. Ponder. I want real details. Go sit in a quiet place for ten minutes and really pound away at this question.
Give up?
Answer: I don't really know. If you know an absolutely flawless formula for getting rich, I'd love to hear it. I'm not a rich dude myself. Of course, I think I have a pretty strong theory. Ready? Theory: they use Magical Money Machines (hereafter MMMs).
I have not gone off the deep end, ADA. There is such a thing as an MMM. Only, they're not called that. They're called other things with really arcane names like "The Stock Market," "Certificates of Deposit," and "Oculus Repairo." Okay, not that last one, but the other two are legit. Seriously, there's a million of these MMMs. Each MMM works a little differently, but they have one thing in common: the way the rich use them. Here's the recipe that wealthy people follow:
And now for the point of this message: you can use them too. Anyone with a little bit of money is allowed to use these MMMs.
Excited? Intrigued? Can't wait to learn more? Are you literally sweating bullets?
All right. Calm down. Let's just take a breather.
Here's what I propose to you, ADA. I am going to teach you magic; in exchange, you will use that magic for good. I'm going to tell you about the internal workings of dozens of MMMs, in the vain hope that you actually learn to use them. Maybe you'll actually get rich...ish.
From now on, any post whose title starts "MMM" is about one of these Magical Money Machines. Enjoy, yo.
I know you don't necessarily want to be rich. Not much point, as long as you can eat and do something that you love (amirite?). You agree with me, I'm sure, that having more money will not, on its own, make a person happier.
On the other hand, rich peeps are kind of an interesting academic topic. How did they get so rich? How do they stay rich? Why rich peeps gots to be like that, yo?
Don't pretend that you don't love sitting around just thinking about academic shit. I know you do, dude. I know you love to just puzzle things through. Arrogant bastard that you are, I'm sure you think you're smarter than all of your starving actor friends (side note: I don't think those people are starving in this dimension). I assure you, ADA, that you are not smarter than they are, but your willingness to puzzle about the finer points of the universe's operation is an admirable quality that I hope you never lose.
Stop stroking that goatee and we'll get back to the topic at hand: how do rich people get rich?
Think about it.
I'm not fucking around, really think about it. Ponder. I want real details. Go sit in a quiet place for ten minutes and really pound away at this question.
Give up?
Answer: I don't really know. If you know an absolutely flawless formula for getting rich, I'd love to hear it. I'm not a rich dude myself. Of course, I think I have a pretty strong theory. Ready? Theory: they use Magical Money Machines (hereafter MMMs).
I have not gone off the deep end, ADA. There is such a thing as an MMM. Only, they're not called that. They're called other things with really arcane names like "The Stock Market," "Certificates of Deposit," and "Oculus Repairo." Okay, not that last one, but the other two are legit. Seriously, there's a million of these MMMs. Each MMM works a little differently, but they have one thing in common: the way the rich use them. Here's the recipe that wealthy people follow:
- Put money into an MMM.
- Wait.
- Slowly, the MMM spits out more money than was put in.
And now for the point of this message: you can use them too. Anyone with a little bit of money is allowed to use these MMMs.
Excited? Intrigued? Can't wait to learn more? Are you literally sweating bullets?
All right. Calm down. Let's just take a breather.
Here's what I propose to you, ADA. I am going to teach you magic; in exchange, you will use that magic for good. I'm going to tell you about the internal workings of dozens of MMMs, in the vain hope that you actually learn to use them. Maybe you'll actually get rich...ish.
From now on, any post whose title starts "MMM" is about one of these Magical Money Machines. Enjoy, yo.
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