Invest in Yourself

I was looking over at Free Money Finance this morning and saw a couple of posts that, although it seems that he did not intend to be related, kind of tied in together nicely. The first was M.B.A.s Don’t Prepare Managers for Real-Life Challenges, which I think you could apply to college or advanced degrees in many different areas. The first quoted sentence says it all:

An M.B.A. provides the strong general education that an executive needs but it doesn’t teach the skills needed in the day-to-day operation of a business, according to a survey of international executives.

I have an advanced degree, not an MBA, but I would definitely agree that my degree provided me a good general education, but did not provide the specific skills to do what I do. This does not mean that the degree was unnecessary. Rather, I was able to go in the right direction because of what I learned, so that when I didn’t know what to do, at least I could stumble in the right direction. Second, I interned while getting my degree and was able to see how things worked and to look at different areas in my field, which in turn helped me focus on what I should learn at school.

However, what really matters about a degree is #5, which reads in part:

The most valuable part (employment-wise) of a [degree] to me has been that it opened doors for me that would have never been opened otherwise.

In many situations, an advanced degree is required to get a job. Sometimes, like engineering or law, you cannot even enter the field without the right degree. Other times, you will receive a promotion or advancement faster (or at all) with an advanced degree. Most entry level positions today require a college degree, even if it’s just a liberal arts degree (which I have and am not complaining about).

This ties in with the second post, Stats on Income, Commute Time, and Vacation Days, which shows the difference in hourly wages between a high school and a college graduate. Essentially, people earn nearly twice as much with a college degree. $28.06 vs. $15.65 for men, and $21.30 vs. $12.34 for women. (The difference in income based on gender is the subject for a different post)

The point of this post (yes, there is a point) is that an education is an investment in yourself, and it pays off big time. If you don’t have an undergraduate degree, get one. If you do have one, try and get a graduate degree. Yes, I know it takes times and money, and if you are already successful, then a college or advanced degree is not necessary (see: Bill Gates). But if you want to advance, a degree can make it easier by opening doors and giving you opportunities that you would not have had otherwise. If you are currently working, sometimes your company will pay for you to go to school, and even going to school can look good to your boss. And many universities offer classes at night or on weekends for those that are currently working.

FMF has written extensively on the value of an education here.

Update: I received a comment from Shadox (thanks for the international review) stating that b-school taught him how to fish, to use the old analogy, rather than giving him a fish, in addition to providing many skills directly applicable to work.  This is a much better way to phrase what I want to say.  My graduate education examined issues from a theoretical perspective, but gave me the tools that I would use later on, even though we never addressed specific situations that I would face.

Asset Allocation: Stocks and Bonds

OK, before I talk about diversification, I should probably talk about what we will diversify first, so here is the big stocks and bonds discussion. This is gonna be a long , so more after the break..

Austin Burger Tour: Crown and Anchor

Crown and Anchor is a little bar/restaurant just north of the UT campus on San Jacinto.  They have an outdoor patio, some of it covered, pub games (darts and pool), and some of the best burgers in Austin.  I like to get the double patty, bacon cheeseburger.  One thing I have not talked about before, when it comes to burgers, is the bun-to-meat ratio.  There has to be enough bun to hold the burger and condiments in place, but not too much bun to overwhelm the burger.  The burgers at Crown are a little thin, what my friend referrs to as a “60’s style burger,” and I think that the buns are a little too big for just one patty.  Now I think that the patties, even one, are good at Crown: tasty and not too dry or too greasy.  However, I feel that two patties equals one think burger and gets the best burger/bun ratio.  In addition, the bacon is nice and crisp, and the fries are excellent.  Top off the experience with a sunny day (so you can sit out at an uncovered table) and a cold Shiner, and life is good…

Bonus: Just did a quick google and it seems they also have free wi-fi.

Overall score: 8 out of 10

Trolling the Bolgoverse

I was looking at the latest Carnival of Personal Finance today, and a few of the “state of the economy” posts caught my eye.

The first post is “Subprime Bail Out? Hell No!” while the next two posts deal with the lack of American savings.

Asset Allocation: Risk

Last time, I talked a little about risk. I wanted to expand a little more on this because risk is a concept that underlies much of investing.  I think that people generally understand what risk is, but not how it affects different asset classes as well as the decisions an individual should make when investing.

There are different types of risk, but here I want to start off by talking about the basic risk-return issue, which, as I stated before, is that if a person invests in a risky asset, meaning that there is an increased chance they could lose part or all of their investment, that person would demand a higher return to compensate for that risk.  This is true for any asset class.  The basic “risk free” investment is U.S. federal government bonds, because there is almost no chance that the U.S. government will default on its obligations.  If the U.S government does default, the economic/social/political situation would probably be so bad that basic survival would probably be a little more important than the return on your investments.

Other types of bonds are generally at the lower end of the risk spectrum, although you would expect that bonds issued by financially challenged entities would demand a premium.   Stocks are generally more risky than bonds, although stocks also vary in risk, from large, established companies with relatively consistent earnings to small start-up companies that promise explosive growth but could also go under just as easily.  If a risky investment does not provide the necessary return to justify the risk, then the investor can either switch to an investment that would provide the return, or put their money in a lower risk investment that also provides a lower return.

Evaluating this type of risk, and how a specific investor would respond to risk, is the first step of developing a suitable portfolio.  Someone who does not like risk should not invest in highly speculative stocks, while someone who could tolerate large changes in stock prices in seeking a large return should not invest solely in government bonds.

Next up: diversification and modern portfolio theory…

Austin Burgers: Huts

What can I say about Hut’s? It is almost an institution in Austin. It has been around for years, constantly voted as one of the best burger places in the annual Chronicle poll, has a nice, quirky dinerish atmosphere…oh, yeah, and the burgers are pretty good, too. There are 15 or 20 different types of burgers you can order on the menu, plus you can swap out the beef with buffalo, chicken breast, or a veggie burger. (Go ahead, try the buffalo, you know you want to…actually, it’s pretty good, leaner than the beef, with a richer taste)

The place is small, so get there early to avoid the wait. There is baseball and football pennants and other local memorabilia on the wall. You can also get hot dogs, sandwiches, and other things, but why? You go to Hut’s for the burgers (except on Friday, when they have the catfish special). I usually get the Hut’s Favorite (mayo, lettuce, tomatoes, bacon and American cheese), shake, and the fries/onion rings combo. The burgers are semi-thick, probably 1/3 lb, and are a little juicy/greasy, but not too much. Fries and onion rings are cooked well and are crispy.

But…(there’s always a but, and this is where I’m going to get the hate mail) while I think that the burgers are good (and consistently good), and I always enjoy going there, I think that other places in Austin have better burgers, like the previously reviewed Casino El Camino. So if you want a little bit of “classic” Austin, go to Hut’s. You will not be disappointed. However, I hope that I can introduce you to some other places that I think are a little better…

Overall score: 7 out of 10

Asset Allocation: An Introduction

So I put all my accounts through to Fidelity. Now what? It’s time to do the asset allocation dance…

When people talk about asset allocation, they usually just mean stocks and bonds. Stocks are ownership in a company. When you own a share of a company, you are own part of that company. If there are 100 shares in a company, and you buy one share, you own 1% of the company. When the company does well, the stock price goes up; when the company does…not so well, the stock price goes down. Investing in stocks can be very risky, because the company can go bankrupt, and all the money invested in the company (in stocks) will be lost. Generally, this doesn’t happen, but the risk is that you could lose your entire investment. However, a company could do extremely well, and the stock could shoot up in value (just as it could come crashing back down: see dot.com bubble).

Bonds are essentially an IOU. Governments (federal, state, local) and businesses issue bonds, you buy the bond, the bond pays interest during the life of the bond, and you get your initial money back at the end. The life of the bond could be anywhere from one month to thirty years. Bonds are generally safer than stocks, and as the risk is less, so is the growth potential. That is, the interest paid on bonds is usually less than the return on stocks. Less risk, less reward.

So the conventional thinking is that when people are younger (assuming that this money is for retirement), they can withstand the greater risk in stocks, and should hold more of their assets in stocks. As you get older, the tolerance for risk goes down, because the investment time frame is shorter, and you don’t have as long to allow a stock to recover if price if it falls. At this point, you want to preserve the money that you have, and you shift more money to bonds.

Of course, this is a vast simplification of stocks, bonds, and asset allocation, and leaves out many of the nuances and other asset classes, but we are just starting…

CEO pay going crazy?

Seems there is some complaining about CEO pay and performance, Ford and Home Depot being but two recent examples. The latest headline I saw today: Occidental CEO got more than $400 million in 2006. According to the article, most of this $400 M is from the exercise of options awarded during the last ten years. Dr. Ray Irani’s pay was “only” $1.3 M, with a cash bonus of $1.4 M, with $55.6 M in stock and other options, and $93.3 M in stock and options from a deferred stock program. With the $270.2 M in options, this comes to a total of $421.8 M. Wow.

Occidental’s proxy statement (filed here with the SEC), states that “during his leadership as CEO since December 1990, the strategy set by Dr. Irani has resulted in significant increase in stockholder value. From December 1990 through 2005, Occidental’s stock price increased from approximately $9 per share to approximately $40 per share, and its cumulative total stockholder return for this period has been 699 percent.”  However, during the last ten years, haven’t we also seen a dramatic increase in the price of oil, from around $10 a barrel in 1998-99 to just over $60 today?  (Source)  And looking at the stock chart, we can see that most of the increase in the stock price occurred since 2003, when oil was still in the $25-30 range.  If you had owned Occidental stock from 1990 to 2003, you would have not seen any gain in share price, although I have not been able to find out how the stock performed with the dividend.

The question that should be asked is whether this amount of compensation (and options, and bonuses, and deferred compensation) is justified.  The market cap is currently $41 billion, revenues (as of 12/31/06) of $18 B, and net income of $4 B, so the compensation total is 10% of the company’s net income for the entire year (although I’m not sure how the compensation would be accounted for in the company’s balance sheets).  Was the increase in stock price the result of Dr. Irani’s leadership, or the fortuitous result of the 6X increase in oil prices?  Let’s just say I think Dr. Irani is pretty glad that oil is as expensive as it is…

BTW, serving as a Director of the company seems to be a pretty good gig as well.  There are only 6 meetings during the year (with some additional subcommittee meetings), and the Directors earned from $334,000 to $469,000.  Pretty nice…

Where we are now, financially…

So I moved all may accounts over to Fidelity. What do I have? An IRA and Roth IRA for both my wife and I, which were the transferred accounts, plus my wife’s 401(k), are at Fidelity. I have my own 401(k) through my work at yet another company. I was initially interested in Vanguard, with its extensive line of index funds. However, I had less in the Roth IRA accounts than the account minimum, which is currently $3000. (Vanguard also charges a $10 fee on accounts of less than $5000, which also includes my IRA account, plus a $10 fee on each index fund in each account.) So, for the moment, Vanguard is out, although I might consider moving the accounts over once I have more than in each account. In any event, as my wife and I are contributing into our 401(k)s, I will roll over the IRAs into the Roth IRA accounts in 2010, when the income limits on this type of transaction go away.

Austin Burgers: Casino El Camino and Roaring Fork

Got a comment (Whoo-ho! First Comment!) pointing out the Roaring Fork and Casino El Camino, as, I would assume, the best burgers in Austin (this detail was left out of the comment). It just so happens that I have been to both of these places, and they represent two extremes on the burger goodness experience.