Wednesday, May 14, 2008

School Stories 2 - Investments!

My Investments class was really fantastic today.

We talked a lot about how it wasn't a GET RICH QUICK!!!!!!! class. And about how risky it would have been to buy Microsoft stock in 1986. (Our textbook mentions that if you invested $10,000 in Microsoft in 1986, ten years later it was worth $500,000.) She said that in 1986 Microsoft made personal computer software and like basically nobody had personal computers. So buying Microsoft back then would have been totally risky. And most of the people who had it would have sold it when it doubled, or whatever, so really not too many people actually made half a million dollars on it.

But she also said, "Should all of you have a million dollars at some point, if you want it? Definitely. And I'll prove it to you when we get to Chapter 4." I'm sure she's right, but that will be interesting.

She told us about a couple articles she had. In one, this grandma was doing a huge Easter egg hunt for her grandkids. So she fills these eggs with money. Some eggs have $5, $20, $100... and this is all for her grandkids. Except! She dies before her grandkids have their hunt. So the family cleans out her house and donates all the Easter eggs to Goodwill. And then, they're reading her journal and they realize she had this big money hunt planned and that they had just donated, like, her savings to Goodwill. So they put an ad in the paper saying, you know, this is what happened, and if you got the eggs, can you please be honest and bring them back. And the likelihood that people did is of course slim-none.

And then there was a second article with a happier ending. Okay. These people buy cooler at a garage sale. And they get it home, and whuddayaknow, there's a paper bag in the cooler. With hundreds of thousands of dollars in it. And they're shocked. They bought a $3 cooler, and it just didn't seem like they were supposed to get all that. It didn't seem right to them. So they took the money back. Turned out, it had been Grandpa's life savings. Nobody had known.

Both true stories. Her conclusion was, it's always better to have a paper trail.

She also gave us her first "Rules of Finance", which we're going to get all through the term.

Rule #1: You don't spend more than you make. "The fastest way not to accumulate wealth is to spend more than you earn."

Rule #2: Every investment has risk. If you're not investing, that is also a risk.

Rule #3: The more risk, the more you can potentially earn, and the more you can potentially lose.

I picked those out of the lecture, but she didn't give them all at once. (It kind of reminds me of that Office episode where Michael telling Ryan the "10 Rules of Business", which he is making up as he goes along. Except that her advice is much more sound.)

There was one other thing that I wanted to share. We were talking about the different types of risk in investments. Some of them are specific to particular businesses or industries, and others affect all investments. One type of risk, is "Financial Risk" (like companies that have too many loans out, and that sort of thing.) Another type is "Business Risk" (like start-up companies, or technology based companies, etc.)

One of the things that went along with that was the management. She said sometimes a company can have a really good product and it would do well, except that the company is managed poorly, or has too many loans and is always making payments, and so it never really makes money or is successful. This really made me think.

I think in that sense, people are kind of like businesses. If we are diligent, and have self-control, and do what we're supposed to (like studying when we're supposed to study, instead of playing), we have SO much potential. We can be great. We can excel in our fields. We can have such a positive impact on the world. Beyond just pecuniary interests, self-mastery can make us rich in anything. Spirituality is the same way. God made us as these individuals that are full of potential. And if we do the right things, instead of what seems enticing or distracting at a certain time, we can really develop that potential. But if we squander it, then it didn't really matter too much that we had it to begin with. There is greatness in everyone. It isn't enough that we have it in us, though. We have to really work at being our best selves.

Even really great businesses fail when mismanaged. Every decision we make is a decision to either develop our self-control, or not to. Ultimately, our greatness is determined by small but consistent decisions to do what we need to.

Something to think about, anyway.

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