Bad Deal - Good Deal

The second half of this investing puzzle is price. Put bluntly, the quality of a stock, bond, or property investment only matters in relation to its price. This means that a ram shackled, blighted property can be a phenomenal deal at a certain price. The stock of media darling companies such as Apple, Google, and Amazon can all be terrible investments at a certain price. It is certainly true that high-quality investments can frequently justify a higher price than lower quality investments. However, it is equally true that any investment can be a spectacular deal if the price is right.

The key for investors is to determine when the price of a high-quality stock, bond, or property is over-valued, or conversely when the price of a lower quality stock, bond, or property is under-valued. Any investment is a good deal at one price, and a poor deal at a different price. Unfortunately, it is frequently very difficult to determine exactly where these two boundaries are drawn for any particular investment.

One of the ideas that has become quite pervasive within the minds of investors is the notion of a "good stock" or a "good property" to own. This notion stems from a general desire on the part of most people to own things of quality. In our personal life, this frequently manifests itself as a desire to own a comfortable home, and a reliable automobile. Quality gives us a feeling of safety and security. Thus, it seems completely natural to want our investments to be the stock of a high quality company, the bonds of a high quality corporation of government, or a property that is desirable in both its quality of construction and location. The problem with this view is that it only provides one half of the information that you need to determine whether an investment is a good deal.

When estimating the appropriate price for a particular investment, there are two relevant factors that need to be considered. The first is the expected future price, the second is expected future cash flow, and the third is taxes and inflation. When combined, they will create a holistic picture of the value for any particular investment.

Expected Future Price

• In the world of stock and real estate investing, this is referred to as appreciation. Fundamentally, it represents the expectation that the future price of an investment will be higher than the price you paid to purchase it. This is frequently referred to as the 'buy low, sell high' philosophy. For most investors, this is the primary source of value that they see. Stock market tickers report the price of securities, and the Multiple Listing Service reports the price of properties.


• However, the ubiquitous availability of price information frequently causes people to over-emphasize price appreciation as a source of value. It is most certain that price appreciation is an important source of value for investments, but it is certainly not the only value vector. The fact that so many people focus on market prices has made them become very volatile over the past few years. Values for stocks, bonds, and real estate have all fluctuated significantly. This has made future price appreciation very difficult to predict.


• In addition to all of this, there is one further characteristic of price that investors must take into consideration. In order to capture the benefit of price appreciation, you must sell the investment. This means that watching the value of your stocks or real estate skyrocket means absolutely nothing unless you sell and lock-in the gain. Thus, in order to realize the full gains from future price appreciation, it means that you must sell at the right time. In practice, this is very difficult to do and frequently results in selling while values are still going up.

Expected Future Cash Flow

• Another key characteristic of what makes a good vs. bad deal for investors is the cash flow that is produced. In the case of stocks, this comes from dividends. In the case of bonds, this comes from interest payments and the future return of the bond face amount. In the case of real estate, this comes from rents that are paid by tenants for the use of your property. The importance of cash flow to the value of an investment is that it represents a current, tangible return. Typically, investments that produce the best cash flow don't always have the best appreciation. However, they also tend to be less volatile since the price tends to be more highly correlated with the rate of cash generation than the market expectations for future price increases.


• The way that most investors articulate the future cash flow of an investment is through its yield. In simple terms, the yield of an investment represents its annual cash flow divided by the price paid for the asset. In the case of stocks, the "dividend yield" is the annual dividends divided by the current market price. In the case of rental real estate, the "capitalization rate" is calculated by dividing the annual net operating income of the property by the purchase price. In the case of bonds, the discounted future value of all payments is compressed into an internal rate of return, which is articulated as the bond yield.


• In most cases, the rate of cash generation for an investment is much less volatile than the market price of that investment. Stocks that pay dividends tend to adjust their dividend rate at a much slower rate than the market value gyrations of its price. Rents from income properties tend to shift much more slowly than the value of the property. Bonds typically feature a fixed interest and repayment price, with their market value being determined by the movement in yield rates for similar instruments. When market yields increase, the price of bonds currently on the market go down. When market yields decrease, the price of bonds currently on the market go up.

Taxes and Inflation

• The final key characteristic that differentiates good vs. bad investments is inflation and taxes. Inflation represents the erosion of you investment's purchasing power and taxes represent the amount of your gains that need to be paid to the government. One of the oldest and most important concepts in finance is that "It's not what you make, it's what you keep"... fundamentally, this means that the "real" rate of return for your investments is much more important than the "nominal" performance.


• Starting with inflation, it is important to understand that when the amount of money in circulation expands more quickly than the amount of goods and services being traded, it creates upward pressure on prices. For some asset classes, the effect of inflation is relatively benign, for others it is beneficial, and for some it is devastating. By and large, property values tend to be lifted in proportion with inflation, while cash flows from dividends and rents are also increased by inflation. Some stocks move up with inflation, but certainly not all. On the other hand, bonds with a fixed interest rate are destroyed by inflation since it de-values the interest payments. Conversely, fixed-rate debt that you owe is wiped away by inflation as the dollars you use to re-pay the loan become less valuable.


• Another key characteristic to understand is taxes. Different types of income are subject to different rates of taxation. Generally speaking, income that is earned from a job encounters the most taxes. Income that is earned passively encounters less taxes, and income earned from capital investment encounters the least taxes. Astute investors also understand the impact of legitimate business deductions, non-cash expenses such as depreciation, and deferring capital gains through a 1031 exchange to reduce their tax burden down to the legal minimum. In many cases, it is tax advantages that turn a good investment into a great investment.

Ultimately, it is the responsibility of each person to determine what constitutes a superior investment deal. Since people have different appetites for risk, there will always be a variety of investors bidding for a variety of assets. What is most important for the individual investor to do is take an honest assessment of their personal investment tolerance and make decisions that incorporate all of the major value factors. By balancing the future price, future cash flow, inflation risk, and tax characteristics, it will allow you to build a strong portfolio of optimized deals.

Safe Experience Using a Razor Scooter For How to Ensure

Before letting your child onto their scooter you need to make sure they are wearing the proper safety equipment. It doesn't matter if they are just riding around in circles in your driveway, a helmet is a must each and every time your child rides their scooter. Additional safety equipment such as wrist guards, elbow guards and knee pads are a great idea for children just getting introduced to riding on a scooter for the first time. Accidents do happen and it is quite important that your child have the necessary safety gear should they have a spill.

Each time before you let your child ride on their Razor Scooter you need to perform a visible inspection of the scooter. Take a close look and make sure there are no visible signs of damage to the handles, the bar-stem, the foot platform or the wheels. The wheels should spin freely without any friction and all adjustable parts should be securely fashioned. Since most Razor Scooters are designed for many sized people you will have to make sure that the handlebars are at the correct height. Another important thing to check is the foot break. The foot break should be able to be depressed with little effort. If you notice anything that seems like it could cause injury (loose handlebars or major cracks in the metal for example) you should definitely not let your child ride it and you should seek out a replacement. Once you decide the Razor Scooter is safe to operate you can proceed to the next step.

After your child has finished enjoying their Razor Scooter for the day you may opt to do another quick visible inspection of the scooter to ensure that no major damage that would affect the performance has occurred. Once that is complete the scooter should be stored in a safe spot. Since Razor Scooters are made primarily from metal you should store it in a place that is out of the elements and since Razor Scooters collapse this makes for easy and low impact storage. Never store the scooter outside where fog or rain can come in contact with it. Water creates rust which can make the scooter unsafe to operate

More Kids Like This One Imagine If We Had

Cogitating rather than dilly-dallying as most teenagers her age, Cheyenne thought about ways to prevent accidents on a rather busy street near her house. Looking out from her window, Cheyenne witnessed many accidents occurring because of careless lead-foot drivers putting the pedal to the medal without regard to the lives they might be risking. Her idea to create a speed bump which would detect an approaching speeding car and thus deploy itself, won her the chance to compete at the 13th annual Discovery 3M Young Scientist Challenge. At this final event, Cheyenne stands the chance to nail the coveted award of America's Top Young Scientist along with a $25,000 prize. Not bad for cogitating while looking outside her bedroom window.

As though this one invention were not enough, Cheyenne has also come up with another ingenious idea, one which could have implications for potential victims of future hurricanes and other nasty acts of nature. Prior to Hurricane Irene, which lashed out at the eastern seaboard, Cheyenne put forth a flood protection idea: a kind of waterproof sheet that would wrap around a house and essentially rise with impending flooding. The sheet would have built -in sensors that would monitor the level and water and thus rise or fall accordingly. The sheet thus would protect the house from water damage. I think insurance companies, hard-hit over the years by damages incurred from mother-nature-like storms, would welcome and even support such ideas.

Anyone who reads the news regularly or who keeps up with current events, knows that the country is in deep trouble. Unrelenting fiscal debt, staggering unemployment figures, and consumer confidence levels that have not been this low since the Great Depression. So it is heartening when I read in the newspaper something more positive, such as the story about fourteen year old Cheyenne Hua, a ninth-grader at Hunter College Junior High School in Queens, New York, who is coming up with ideas to prevent fatalities from speeding drivers and to ward off future victims of such calamities as hurricanes and flooding.

Cheyenne's parents are obviously very proud of her. In fact, Cheyenne gets a pass on most household chores because of the time she spends cogitating on her inventions. Then again, if more kids did what Cheyenne did, I think most parents would agree to give them a pass on other mundane chores. Certainly the insurance companies would agree. Let's give our hats off to such promising young kids.

Joe is a prolific writer of self-help and educational material and is the creator and author of over a dozen books and ebooks which have been read throughout the world. He is a former teacher of high school and college mathematics and has recently returned as a professor of mathematics at a local community college in New Jersey.