Every New Years day a local television station (CW11) broadcasts an all day marathon of the 1950’s series the Honeymooners. It’s still funny, and there’s a lot to be learned about American culture of that period because the show was a lot edger in its day than other programs about family life. This is a finance site, so I will keep my discussion to financial issues. After watching a few episodes, it becomes evident that Ralph Kramden (played by Jackie Gleason) and Ed Norton (played by Art Carney) lead very different consumer lives.
Ed’s apartment is furnished well, with window treatments, furniture and the modern devices of the era (TV, phone). In contrast, Ralph’s apartment is quite spartan. Ralph often chastizes his wife about overspending and all the extras his wife gets, but that of course is really just a joke. One could conclude that Norton is more prosperous than Ed.
In one of the episodes, it is revealed where each of them stand in terms of their finances. Surprise, it was revealed that they both earn the same salary. What accounts for their differing lifestyles? That is also partially covered. Apparently Ed can afford his lifestyle because he has borrowed heavily to pay for it all. It isn’t made as clear in any of the episodes how Ralph “affords” his lifestyle, but his wife often complains about the previous schemes where he loses money. So, his money is likely frittered away on get rich schemes that of course never payoff (it they did it wouldn’t be funny).
Norton is one payment away from bankruptcy, while Ralph is one scheme away from riches (which very likely will never occur). Both have very little savings.
Here’s the lessons to be learned:
- Moderation in your finances is preferable.
- Have reasonable expectations about returns on your investments.
- Spend money now to live your life.
You’ve identified a great investment which you think is valued attractively (e.g., that great company is selling at a P/E which is near its earnings growth rate).
How much money will you make? Before you buy, you should have a good idea and an equal amount of confidence of how you will make money and how much you will make. If you don’t do this, the market will surely test your confidence in that investment through volatility, bear markets and reactions to company news.
Any kind of return model will necessarily have to model your capital gains (increase in the price of your investment). If you are a value investor, whereby you are buying investments that pay you dividends, your job is much easier. The return model I will talk about ignores capital gains as an input.
Finding great investment ideas involves using screens, valuation criteria, and fundamental analysis. Value investors are better off using hard criteria like this because it’s easy and it works. I wouldn’t suggest otherwise.
But, there are times when you can and should turn off the screens and invest in companies that might not at first look like attractive investments. Here’s an example of a company that doesn’t look that attractive:
For the first time a major Republican candidate (Rick Perry) has supported a Flat Tax proposal. Also, we can at least partially credit Herman Cain’s Flat Tax proposal (the so-called 9-9-9 plan) for elevating him to the top of the candidate heap. Flat Tax proposals have been around as long as taxes have existed. You may remember Steve Forbes, a second tier former presidential candidate who proposed such a tax plan when he ran in years 1996 and 2000. At that time it didn’t gain any traction.
Why are these proposals gaining traction now? The main reason is that economists, politicians, and other exports are realizing that as a country we are losing our competitiveness at least in part because of the tax system. There is pretty much a consensus in Washington that the Corporate Tax system is uncompetitive with other nations. The best that we could do is to at least get the U.S. back into the middle of the pack in tax competitiveness so that business decisions could be made on the other merits.
A new page has been added to this site that organizes the best investing articles in one place. It’s on the top navigation bar on this site.
Check it out. It’s just getting started, over time more articles will be added. Let me know if you find it useful or are there topics you think need to added that are not covered here. I encourage your feedback.