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Do you save? We save a lot.
Hi, I am doctor Scott Brown and welcome back to this podcast designed to help you get the most out of your money. I am coming to you right now from the cutting-edge Rhodes Society club that fosters your x-ray vision of the investment markets.
Let’s explore the next vital concept. The essential importance of systematically saving.
In the communist ten-point system money can’t be lent to entrepreneurs. New ideas are not brought to the market.
Product development is retarded. Consumers suffer.
Rick Rule says “Invest in financial education first” …
Karl Marx placed no value on waiting or risk-taking. Waiting delays pleasure.
And he was the quintessential hedonist.
In a capitalist society interest is the cost of doing business. But how is this waiting for money?
John Maynard Keynes, also of Cambridge fame, explains how household savings are deposited in banks. Banks then make corporate loans.
In this light interest paid the bank, that the bank then shares with the depositor, is the cost of doing business for commercial borrowers. Savings involves sacrifice that merits reimbursement. Interest received is the award to savings depositors for waiting.
Keynes was a consummate saver and stock investor. Ironically, his advice to a nation in a depression or recession was to get consumers to spend more.
He did not follow this aspect of his own advice. He applied concepts from his Treatise on Money that offered his readers new insights into the connection between savings and investment.
Keynes saved then invested in one or two key business in which he felt would win the overwhelming favor of the public and he had high confidence. His highly focused net worth grew to the equivalent of thirty-six million dollars today.
As an economist he was second only to David Ricardo in investment success.
Keynes was instrumental in convincing large first world governments to influence capital market conditions through the supply of money under the administration of central banks. The Federal Reserve of the United States fulfills this function today.
According to Forbes just 45% of households save. Businesses sell bonds to these households.
The household must wait five years to recoup the cash on a bond with five years yet to mature. The business pays interest to the household over the five years.
The amount lent is repaid only at the very end. Interest is paid to compensate the household for the long wait to fully recover savings.
Professor Timothy Crack holds a Ph.D. in finance from The Massachusetts Institute of Technology. Timothy is the chair of the University of Otago finance department. Not only does professor Crack hold numerous teaching awards but I also know of no other finance professor who has been taught by more Nobel Laureates in economics and finance.
Dr. Crack does the best job of anybody I know in explaining the mathematics of economic waiting and entrepreneurship. This body of knowledge is known as discounted cash flow analysis.
The deceptively simple concept that completely escaped Karl Marx was first described by Harvard economist John Burr Williams in his 1938 article “The Theory of Investment Value.”
Williams explains that cash flows must be adjusted “for changes in the value of money.” University of Oregon finance professor O. K. Burrell extended the analysis of Williams further in nineteen sixty to show that the value of a stock depends on the levels of interest and risk as well.
Professor Crack explains that the value of money changes over time with fluctuations in levels of interest rates, risk, and in some cases a market risk premium.
Imagine two people with an extra $100 now. The first person is a spendthrift like Karl Marx; the second a saver such as John Maynard Keynes.
The spendthrift will have nothing even in a year in which annual interest levels are about 5%. The money is blown before it makes it to the bank.
Case in point Karl Marx relocated 10 times in a 5-year period to escape from creditors as a student at the University of Berlin. The money was cut off when his father died.
He could no longer afford the academic rigor of Berlin. He purchased his doctorate from the University of Jena; a diploma mill in eighteen forty-one exactly forty years after the anti-religion philosopher Hegel. Hegel is the twisted thinker behind the abolition of religion during Stalinist Russia.
Back to the one-hundred-dollar example of professor Crack.
On the other hand, a saver like Keynes will have one hundred and five dollars at the end of the year.
If the investment is extended to two years with simple interest the net amount with no taxes is a hundred and ten dollars. If the interest is compounded the saver earns an extra quarter and the net amount is one hundred ten dollars and twenty-five cents.
Twenty-five cents may not seem like much but if the return on the investment is high enough the interest on interest grows much faster than with simple interest.
This relationship can be mathematically rearranged. Professor Crack explains that if you want to have five hundred dollars two years from now in a four percent interest rate market that you must deposit four hundred and sixty-two dollars and forty-eight cents today.
This concept can be kicked up a notch or two.
In the New York Times Bestseller, “The Automatic Millionaire” David Bach shows how one hundred dollars saved per month invested at twelve percent grows to one million, one hundred and eighty-eight thousand, two hundred and forty-two dollars in forty years.
Professor Crack offers another example. Imagine you have a thousand dollars today in an eight percent interest rate market. When will you have three thousand dollars?
Using logarithms, he shows that it will take you about fourteen years and a quarter in time. Discounted cash flow analysis is easily extended to the valuation of annuities and from there to bonds.
Understanding discounting helps you when shopping for a loan; paying off a loan; managing credit cards; dealing with fees and taxes; running a note buying business; or managing an international factoring business.
An excellent starting point to mastery is this amazing pocket book I am holding in my hand titled “How to Ace Your Business Finance Class” by Timothy Falcon Crack PhD Third Edition. I am now looking at the listing
on Amazon. Get it now on Amazon.
And leave a good review.
Another great read is “New Ideas from Dead Economists” by Todd Buccholz. Get it on Amazon the same time you order professor Crack’s classic finance learning companion.
And if you want more of this distilled knowledge go to Rhodes Society dot org right now as well to subscribe to our list for an exclusive invite to the next free webinar on stock investing.
When Adam Smith was a kid he was kidnapped by savvy gypsies. After a few hours they realized that he would not have made a good gypsy. The odd looking Scottish boy had a nervous twitch, speech impediment, large nose, bulging eyes, and a protruding lower lip.
They left him on the roadside.
Likewise, the odd behaving Karl Marx would not have been a good captive of capitalists. He was a bad consumer.
He was always in debt and blamed capitalist society rather than his own personal choices all the long way to his bitter and angry end of his live at the age of sixty-five.