Networth Update

It's that time again to check out where I am in life, and just exactly how much closer I am to my million dollar goal.

As always, I've checked out my networth sheet twice, and I still don't like how far away I am.

Compared to last month's networth update, I have made a 0.13% improvement toward my goal, increasing by networth by about $1,400. This decreased change can be blamed on increasing consumption last month with a student loan consolidation that increased my outstanding loans about about $500, because my new lender over paid my old lender. This problem should be resolved by next month.

My new networth -$19,076.48, making me -1.91% on the way to my goal.

Blackstone IPO: Hype is gone, now go buy it!

Blackstone (BX) IPOed at $33/share last Friday, and quickly went up to a high of $38 before plunging to today's close price of $29.69.

While the fall has been consistent, I think it is about to hit the bottom and will start to go back up by next week.

I attribute much of the fall to the over-hyped nature of this IPO. People were scrambling to get in on this deal, reminiscent of Internet bubble days when IPOs were pounced upon, regardless of the company or the product. Once the shares began to be traded, rational thinking entered the market, and investors began to question rather Blackstone is worth such a high premium.

To be fair, Blackstone is not a random Internet company. It has been around for years and has been a very successful investment firm. It is for that reason that I believe the turnaround is about to occur. I believe the stock was overvalued by about 10-15%, and so I think a good range to buy in is $27-$30.

Market Thoughts

The stock market has been extremely volatile the last two days, with a consistent morning buildup and an afternoon drop. The volatility I believe reflects strongly the mixed economic data and investor confidence that pervades the market on pretty much every level.

On the one hand, you have quite a few deals on the back burner, with the auto industry in a state of flux, Barclay's still working on ABN, and KKR and perhaps other private equity firms looking to join the fray after Blackstone's IPO.

Going against is the huge drop in Blackstone's price (BX), decrease in housing market expectations, continued worries about the subprime market caused by Bear's two hedge funds busting, and a decrease in the consumer confidence index.

The market will rest heavily on what the Fed has to say this week.

Moving out, pt. 2

In my last post about moving out, I was still debating the merits of moving out, while actively checking out possible roommate situations. I had an "interview"-type meeting with a potential roommate this weekend, and I was told today that there were 3 other people looking at the apartment, and that he had chosen someone he knew better.

Frankly, that is good for me, because although I know I want to move out, I didn't think the situation was the best for me. I now know that I'm looking for a community where people are closer to my age, rather than the late 20s and early 30s crowd. Also, my potential roommate was the stereotypical bachelor, with similar cleanliness ideas, while I am much more of a neat freak.

Anyway, my search continues. I have been told there is someone seeking a roommate in one of the younger upscale communities so I will be pursing that the rest of this week.

My target is still to be moved out by end of July. Now I just need to buy a bed and other bedroom furniture.

That's a budgeting nightmare in and of itself...

Moving Out...?

I have been living at home with the parental units the past 3 months, which is about 20 miles from where I work. As I approach my 90-day review, I have increasingly become aware that I need to move out from the parents for three reasons:

(1) The commute is 1 hour each way
(2) I'm not learning independence by having the parents do everything for me
(3) I need to move out before I became a sad pathetic loser living in my parent's basement

I don't have any relationship issues living with the parents. I enjoy my parent's as much as any child can, and having my little brother around is an added bonus.

However, it is the nagging fear that if I don't do it now, I may never want to later that prompts this. But that fear is difficult to quantify, so I have been busy trying to place dollar values to my issues living at home.

The nominal cost of living at home is $0. The cost of the 2BR apartment I want to share with someone is $1200 per month per person. The best justification for moving out still remains the commute. Two hours a day versus 15 minutes a day is a huge difference. Multiplied out to the usual 20 business days a month, that is a 35 hour savings! On top of that, I will probably save about $100 worth of gas.

If I consider my personal time to be worth at least $25 / hour, that is a combined savings of $975, leaving $225 of my rent as a proxy for what I value as my independence and the value of not being called a sad pathetic loser.

Are those two things worth $225 a month? I'm not sure. And my parents do add value to my life, so to do an accurate cost-benefit analysis, the cost to me would be more than $225 a month. I think all together, the cost is really $500 a month to move out, versus staying at home.

And... I still have to buy bed, furniture, and my own food. Is my independence and not being called a sad pathetic loser worth that much a month? It's not a clear-cut decision.

Pay Inequity - Doesn't exist!

Last night, I posted about the "high" pay of financial analysts, and someone posted a comment about how "the priorities of our country" seems a bit askew.

That post bothered me because it implied somehow that the pay for i-bankers was in line with what they did, because the starting pay for teachers is a lot less.

I hate these comparisons because it ignores basic economic principles of supply and demand.

The classic economic question that is relevant here is:
What's worth more? A bucket of gold or a bucket of water?

Most would jump and say gold, follow by a incredulous look and a snide comment about how dumb the questioner is.

But let's consider the context. You've been wandering the desert for 3 days, and you're thirsty. Do you want a bucket of gold or a bucket of water now?

The fact is, as you get more of something, each additional item, referred to as the marginal value, diminishes. Water in general is worth very little, since there is so much of it, while gold is scarce, and therefore valuable. But the cost of water does not suggest that water is not a necessity to life.

The same applies to teachers and i-bankers. Given no teachers and no i-bankers, no one would question the need for teachers before i-bankers. Teachers provide an important service. But, as the number of teachers increase, each additional teacher begins to lose value compared to the value of one more i-banker.

Additionally, the difference between a teacher and i-banker is significant in terms of training, hours worked, and job security.

Training-wise, teachers are given large amounts of scholarships and other educational incentives, while i-bankers spend much of their own capital and borrow to learn their trade.

While teachers definitely work hard, typically teachers would work no more 10 hours a day, and rarely on weekends or during the summer time. I-bankers on the other hand work at least 12 hours a day, and routinely work on weekends and during the summer time.

Finally, an average teacher can hold onto their position for life. For an i-banker, average performance allows for about 2-3 years of work, before they are forced out.

Please understand, I am not saying teachers should be living in poverty. Rather, I am suggesting that the market is efficient, and that teachers are being paid what the market will bear. And while it is easy heart-wrenching to report the low $20K salaries of first-year teachers, my MBA professors are being paid at least $150-$200K for teaching 4 classes a year, while having summer-time off to do other things.

Breaking down the "high" pay of a financial analyst

With stories coming from the Street about huge bonuses being paid at Goldman Sachs and other i-banks, there has been a flood of curiosity into why such high pays exist. Are finance professionals just taking their customers for a spin, charging much more than necessary?

Let's consider this from the viewpoint of an associate-level position at a typical i-bank.

This year, the typical i-banker is living in NYC, with a base salary of about $95K plus a $50K sign-on bonus and the possibility of a 50% annual bonus. Let's not consider that sign-on bonus, since much of that money is spent looking for an apartment, paying the security deposits and fees, and paying for the relocation costs.

$95K seems high, considering the median American individual income is about $32K. But let's break it down by hours.

At $32K a year, a typical workweek is no longer than 40 hours, with any extra hours almost unheard of, and definitely encouraged via overtime pay (time and a half). This works out to about 2000 hours a year, or $16 / hour.

Now, as an i-banking associate, a typical work week will be at least 60 hours, but more realistically about 70 hours a week, averaged over the year. This works out to about 3500 hours a year, or $27 / hour.

Now let's consider the original $16/hour median American. If he/she worked the extra 1500 hours a year, assuming time and a half on overtime, they would be making about $68K a year.

Still, there is about a $27K base salary difference and a potential 50% bonus (worth another $47K), totaling a $74K max difference.

But let's consider the tax differential. Let's assume both workers are single. At $68K a year, you owe $13,424 in federal income taxes. At $142K a year, you owe $33,871. This equates to an additional $20K owed by the i-banker, decreasing the after-tax difference to $54K.

So why is the i-banker worth an extra $54K a year?

They represent two types of scarcity: they hold an advanced degree and they have an innate intelligence that is rare; the laws of employment supply and demand dictate this premium to obtain such scarcities.

At the end of the day, I think the pay is worth it, because it is easy to find an average worker, and difficult to find an intelligent i-banker.

Thoughts from the Casino Floor

Today I was at Foxwoods casino, in Connecticut, playing blackjack and poker. For anyone familiar with the finance world, this is the draw at any casino. For anyone who even has the tiniest gambling itch, these two games are the most popular and fun to play.

There, sitting at blackjack, we joked about the MIT blackjack team, and consulted one person's "MIT Blackjack Rules" index card. After a few consultations, where the rule resulted was for the house and against the player, the dealer spoke up that the rules were meaningless, and that the thing going against the MIT Team was "a string of bad luck". He further stated that this was a clear indication why statistics is always beaten by the real world, and so you should never even play.

I thought about this statement, and matched it against what a lot of what finance does, using statistics to predict the payout across a large population. Investment-wise, this is especially relevant to the analysis and "picking" of stocks. So much of what happens is based on statistical probabilities that play out across many trials, they hold, but in few isolated instances could go totally against you.

It is this willingness to accept risk that really define the successful financial professionals from the mediocre, and the good investor from the bad. It is not to say that you should accept any risk, but rather you will consider reasonable risks as that is the only way to get good returns. To this end, a good investor must also understand that they will lose sometimes, but overall, they should be ahead.

Keep in mind the advice of the blackjack dealer. If you can't deal with the random "strings of bad luck", don't play. But, remember that statistics does work, but only if you do the same thing across a large number of trials, not just in isolated instances.

Credit - The irrational fear

Why is it that most personal finance sites advocate the decreased use of credit?

While I understand that some people should not have as much credit as they do, I would assume most people reading PF sites are those who are much more responsible, searching for solutions to life's problems, not looking up ideal situations in hypothetical worlds.

FACT: If you are not personally wealthy, you will not get through life without credit, in some form.

People will always need credit. It's a fact of life. You will never have enough to pay for large expenses that you need, nor necessarily carry around enough cash to purchase any mundane things. Nor should you carry around large sums of cash.

Having a large amount of credit sitting around is never a bad thing. You will always have a buffer for when you need something large immediately, or can't pay for something normal temporarily.

What I do advocate is decreasing the balance you owe on credit when you can, and never charging more than you can afford to pay back when you do use it.

Frankly, I don't buy the excuse that somehow credit card companies have this magical sway over people to convince them they need to spend beyond their limit. When you reach the age of 21, you should have the mental capability to restrain yourself and understand the basics of how credit works.

You don't need to cut up all your credit cards or stop paying for things on credit. Just step up, be an adult, and assume responsibility for your actions!

Happiness - What is that worth?

I found myself in an extremely content mood today. It seemed so out of place as there were a lot of pressures at work, deadlines to meet, and errands I had squeeze in before the sun went down. And yet, I was skipping from cubicle to cubicle humming to myself.

Any outsider must have thought I was crazy.

I still not too sure I'm sane right now. But it is a great feeling, to finally be happy with where I am, what I am doing and who I am.

It seems very odd.

Maybe money is buying me happiness? I can eat what I want to eat, hang out with people I want to hang out with, and do what I feel like doing. Certainly while money is directly turning into happiness, using it is certainly feeling good.

Am I just buying into the American consumerism culture, or is karma just balancing the scale for all the bad days I've had?

Oh well. I'm going into this weekend with a packed schedule. But that's exactly the kind of schedule I like. Sure, it's going to be probably a $50-$200 weekend, but hey, when else am I going to spend money?

Future Plans

Yesterday, I was blogging about my career thoughts, and today I continue that topic. Many have been commenting about my lack of job experience and how a) I even got into a MBA school and b) why I went.

For me, the MBA seemed like an obvious choice. I wanted the liberal arts experience while studying economics and computer science, and then obtain a professional degree, ensuring I learned everything I could while I was still capable.

In the past two decades, most college graduates entered the work force for at least two years prior to going back, realizing they needed an advanced degree to both advance on the career path or to choose a totally different one. But before that, college straight to MBA was the norm. Waiting seemed odd, so maybe I'm just old fashioned!

Anyway, I've known since I found out it existed that I've wanted to be in asset management. But in order to get there, I need a lot of finance experience, and especially a stint in i-banking. My lack of experience prevented me from obtaining any associate-level job in an i-bank, so I went with corporate finance instead.

I figure, two years there, I can switch to a comparable senior associate-level work at an i-bank. In between, I have been talking with everyone about my interests and my market thoughts (including posting here). My parents recently presented me with an interesting
proposition:

$20K to invest in anyway I see fit, of which $10K is their money and $10K is technically a loan to me. We would split any profits/losses.

I think this could be a great opportunity to start my own track record, while feeling responsible about a "client's" money. At the same time, its always tough to accept money from the parents, in whatever form it comes.

Hot environment for finance jobs

Man, if I hadn't gotten my job so early this year, I would have so many to choose from right now. So many financial companies held back thinking summer would be a lull in business, but instead the market really picked up and now they are hiring anyone with anything related to financial experience.

It's just amazing. 2 months on the job, and I've already been approached by a hedge fund to go over there. A quick search of job sites reveals a whole host of associate-level finance jobs available.

It gets very tempting...although I know if I leave before I do at least one year, it will look bad on the resume.

Consolidating Loans

Yep, its that season again, when student loans all have their interest rates reset which prompts a lot of consolidation and re-consolidation action. I just reconsolidated mine, and I got a special interest rate reduction. Go out there and see if a consolidation or reconsolidation makes sense to you.

Graduation Over!

I just got in a few hours ago, and boy was a few days away exactly what I needed! I got some good R&R time catching up with friends, hanging out at bars, and getting sunburned at the amusement park (not to mention the fun screaming that goes with roller coasters).

But all of that does not compare with having your friends and family watch you go across the stage, and be given a Masters in Business Administration hood and listen to alumni speak of where their degree has lead them.

This time has also led me to a renewed sense of organization and drive for better personal accountability, especially as it pertains to my finances. I have finally written down all my current open credit cards, bank accounts, and brokerages, consolidated that information all into one Excel workbook, and password-protected it so that I have a reference everyday as to my fiduciary situation.

On another bright note, I had expected my expenses to be well over $500 for this event, but I ended up spending no more that $440!

Graduation

From Wednesday to Sunday, I will be going back to school... for my own graduation week and ceremonies. Although I have technically graduated with a MBA, this is the official "hooding" ceremony, where the large sash-like object is put over my head, symboling my new ability to bear the brunt of business world.

Or so I like to believe.

I am a big fan of ceremonies, both for the memories and for the clear delineation of an end to one aspect of your life and the beginning of another.

While I can't wait to see old school buddies, and have fun at all the graduation week festivities, I am a bit worried about how to account for the expenses according to my budget. Maybe I should start contributing monthly to a "big event" fund, that I can deduct for birthdays, travel, and other large expensive items.

A quick glance at the expected costs:

Round-trip gas: $100
Food: $15 / daily, $60
Drinks: $15 / daily, $60
Saturday Night: $250, dinner for family
Graduation memorabilia: $100

All totaled: $570

It's going to be a financially rough, but emotionally fun week.

More Market Thoughts

Today at work, my boss asked me about my opinion on the stock market. My response? I am as bullish as ever. Looking at the main economic indicators, very little leads me to worry other than rising oil costs. Unemployment rates, corporate spending, and inflation are all at a good places. Oil costs can have a hit to the bottom line throughout the year, but more especially for companies who depend heavily on transportation.

Moving to the stock front, I am still in love with Google (GOOG). As they continue their strategic acquisitions, it ensures that even as a ever enlarging entity, they are still staying on the forefront of 'net technologies. Their large cash base and intellectual capital combine to be a force capable of anything.

Housing still worries me personally, as I see the market starting to bottom out. At the same time, I am torn between buying in now to ride it up, or wait it out and see how low it can go.

Lotto Tickets - Are they worth it?

There is of course, a quick and easy common sense answer: No. But on my blog posts, I never like the common sense answer, since it rarely takes into account any economic or financial reasoning.

Take for instance New York State Lottery Instant Win (Scratch-Off) tickets. According to New York State's Revenue Estimating Methodology Rules, instant wins have a 65 percent payout ratio (page 128). So now let's run a typical cost benefit analysis.

Consider for this argument that I had driven to the gas station to fill up my tank, and I walked inside to pay when I noticed the tickets. There are no outside costs of arriving at the ticket other than the time I spent tapping my foot waiting for the cashier to hand me the ticket and to scratch off the silver stuff. Although this is probably about 2 minutes of my life, you'll have to bear with me when I say I'm going to consider that a sunk cost, and not worth considering at this point.

Consider then a $1 scratch-off ticket. At 65% payout, the net is -35 cents, which is clearly not worth playing.

But, consider that for every ticket, I gain a 25 cent benefit from feeling like I'm living on the edge. Sometimes, you need a little risk in your life, and this helps fulfill it. Now the net is -10 cents.

Next, consider that I feel an extra bit of good knowing I'm helping out New York education, and this good feeling is worth another 25 cents to me. Now the net is +15 cents!.

Suddenly, it becomes no skin off my nose to go out and buy a ticket. Heck, I'm getting 15 cents of value out of it! I'm essentially buying some good feelings when I buy a ticket, just as if I were to donate some money to charity.

Now with this in mind, you would think I'd be going around willy nilly buying tickets, and feeling extremely good about myself. But let's throw in that sunk cost, and make it actually affect me. Those two minutes do become a drain on my time, and I think it comes out to a 15 cent hit. Now, the net is 0 cents, which means I feel indifferent about buying one or not.

And that is exactly what happens. When I'm feeling lucky, I buy one, since my utility from feeling good is a bit higher that day. If I'm not, the net could be negative for me, so I don't.

CFA Level 1s

Oof, what a rough day. Starting your weekend with a 6-hour test is never a good thing to do. But that's what I did today. I had to take my CFA (Chartered Financial Analyst) Level 1s today. There are 3 levels, and once you pass all 3 levels, you obtain the designation of CFA, which essentially means you get the merit badge that deems you worth to manage other people's money professionally.

The CFA is a tough designation that most financial analyst of any rank or experience is trying to obtain, because inherent in the designation is a large amount of prestige, and more importantly, a quick way to boost the salary (we're talking probably $20-40K differences, all else the same).

So how tough is it? Well, according to the CFA website, only 39% passed the level 1s last December, and unlike the SATs, people who take this test actually want to be there. That is a scary statistic considering the pass rate hovers at 40% year to year.

Although at the test, I did notice about 50% of the available seats were not filled, implying that there were supposed to be more people there. I hope that the low pass rates include those who don't even show. If anyone knows how the pass rate is calculated, please tell me!