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Finance & investing

Buy low, sell high.

ROI 1926-87 (subtracting 3% for inflation)

  • Stocks           6.9%
  • Bonds          1.9%
  • Money Funds .5%

 40% of adults cannot use a road map; 80% can't figure out a restaurant tip or a bus schedule.

 Over the long haul, all costs are variable.

 "Past performance is no guarantee of future results." 

 from Investment Policy, How to Win the Loser's Game by Charles D. Ellis:  The undelegatable responsibilities of clients of investment managers are:

             setting explicit investment policies consistent with their objectives,

             defining long-range objectives which are appropriate to their particular fund, and

             managing their managers to ensure that their policies are being followed.

 The real purpose of investment management is not to "beat the market" but to do what is really right for a particular client.  The nation's investment managers are not beating the market; the market is beating them.  Unhappily, the basic assumption that most institutional investors can outperform the market is not true.  The institutions are the market.  In expert tennis, about 80 percent of the points are won; in amateur tennis, about 80 percent of the points are lost.  If investment managers are on balance not beating the market, then they certainly should at least consider joining it. 

 In investment management, the real opportunity to achieve superior results is not in scrambling to outperform the market, but in establishing and adhering to appropriate investment policies over the long term--policies that position the portfolio to benefit from riding with the main long-term forces in the market. 

 Time transforms investments from least to most attractive--and vice versa--because, while the average expected rate of return is not at all affected by time, the range or distribution of actual returns around the expected average is very greatly affected by time. 


1925-81 -- T-bills, after adjusting for inflation, have an average rate of return of zero.  No return on your money, just return of your money.

 It is clearly in the investor's interests to have stocks down in price so that he can buy more shares.

 Value of real estate in Tokyo = $8,000,000,000 = value of all U.S. real estate + market value of all public companies


from Jay’s HBS notes:

 The tradeoffs of finance are:

  •              risk vs. return
  •             continue vs. sell out
  •             now vs. later (life cycle)
  •             flexible vs. rigid (leverage)
  •             bear vs. bull (financial community)
  •             improve vs. grow


At camp, the counselors empty half each kid's toothpaste into the garbage and rub their toothbrushes in the dirt.  It's so that it appears they've brushed their trust.  So it is with bank financial statements and other things.  Esse quam videre.

 A few finance lessons from Columbia professor Louis Lowenstein:

             Wall Street gets paid for persuading people to change their minds.  There are only a certain number of shares of GM and Wall Street gets paid for persuading some people to buy and other people to sell -- to play a game of musical chairs.  It's like asking the croupier whether you ought to go to the roulette table.

             A junk bond is a common stock dressed up to look like a bond.  There's nothing underneath it.  It doesn't have the security of a bond, and it doesn't offer the rewards of a stock.  A lot of people argue that junk bonds are doing fine.  My answer is brief: If you ask a drunk a 11:30 at night how he feels, he'll tell you he feels fine.  The question is, how will he feel at 6 in the morning?

             Options and futures are a parasite on the markets.  Stock index futures are like trying to guess which way the bird will fly when it leaves the tree.  It's a zero-sum game.

             A share of a part-interest in a business.  And if you understand that, you;ll not only invest intellignetly and vote intelligently, you;ll act like an owner and youlll enable the market to function and the company to behave more efficiently.  But if you lose sight of that -- and think of stocks as a speculative medium, with the emphasis on stockmarket values rather than business values -- then you have no landmarks, no signposts to help you in your investment decisions.  All you'll have left is the stock market...and then you're subject to all the whims and changes of fancy of the stock market.  As a result, you'll find yourself both puzzled and, most often, poorer.

 Tight money, indicated by high interest rates, cause downturns in the market and depressions, while cheap money fuels booms.


J.P. Morgan, testifying before Congress in 1912, was asked on what basis he loaned money.  "The first thing is character."  "Before money or property?"  "Before money or anything else.  Money cannot buy it."

 "But where are the customers' yachts?"


Best investment books (says Forbes):  The Money Masters by John Train (verrry entertaining, too); the Intelligent Investor by Benjamin Graham (bible of value investing); The New Contrarian Investment Strategy by David Dreman (low P/E stocks, etc); Classics, An Investor's Anthology by Charles D. Ellis (excerpts from the masters).  6/26/89


anti-IPO.  Only half the initial public offerings since the beginning of 1979 now (6/89) sell for more than their offer price.  Only a third beat the S&P 500.  Pathetic.


the thin file strategy   "When the file gets fat with brokerage firm reports and clippings--when the company has been discovered and turns up on the cover of a business magazine--then you know it's time to sell."  Peter Cannell (If a company gets mentioned frequently, chances are the world has fully, or more than fully, incorporated its future into today's stock price.)

 Rosenberg: investor must chose between eating well and sleeping well


John Train (in Harvard)...  "Quite often great investors develop entirely new techniques for discovering value and so have easy pickings until others catch on.  Spotting countries just as their markets become suitable for investment is an interesting example."

 "A bank is a place where they lend you an umbrella in fair weather and ask for it back again when it begins to rain."  -- Robert Frost


"Buy low, sell high and charge a fee."

"You can't go broke taking a profit."

"What everybody knows isn't worth knowing."

"When they raid the house, they take all the girls."

(vs. "It's a market of stocks, not a stock market.")

"The trend is your friend."

"Buy on the rumors and sell on the news."


From Liar's Poker, an irreverent history of Salomon Brothers


            To succeed on the Salomon Brothers trading floor, a person had to wake up each morning "ready to bite the ass off a bear."

             On October 6, 1979, Volcker announced that the money supply would cease to fluctuate with the business cycle; money supply would be fixed, and interest rates would float.

             Government, consumer and corporate indebtness grew from $323 billion in 1977 to $7 trillion in 1985.

             Who needed the fucking customers anyway?

             If somebody quit on the trading floor, they'd look at the nearest body and say, "Do the job.  Hey, kid, you're a smart kid, sit here."

             "I'm sorry, we're in the middle of a feeding frenzy, I'll have to call you back"

             "God gave you eyes.  Plagiarize"

             Milken noticed that investors were constrained by appearances and, as a result, had left a window of opportunity for a trader who was not.  (Opportunity for socially reprehensible investing?)  Milken was saying that the entire American credit-rating system was flawed.  It focused on the past when it should have focused on the future, and it was burdened by a phony sense of prudence.


Peter Lynch, Beating the Street

 ·        Putting money into stocks is far more profitable than putting it into bonds, certificates of deposit, or money-market accounts.

 ·        Never invest in any idea you can't illustrate with a crayon.

 ·        Hold no more stocks than you can remain informed on. Invest regularly.

 ·        The key to making money in stocks is not to get scared out of them.

 ·        Today approximately 75% of all mutual fund dollars is parked in bond and money market funds.

 ·        People who can't tolerate seeing their stocks lose 50% of their value shouldn't own stocks also applies to stock funds.

 ·        If you are an average investor, you can duplicate this strategy in a simpler way by dividing your portfolio into, say, six parts and investing in one fund from each of the five fund types mentioned above, plus a utility fund or an equity and income fund for ballast ina stormy market. (Above are value, quality gowth, capital appreciation, emerging growth, dividend raisers fund, and convertible securities fund.)

 ·        When you add money to your portfolio, put it into the fund that's invested in the sector that has lagged the market for several years.

 ·        The Rule of 72 is useful in determining how fast money will grow. Take the annual return from any investment, expressed as a percentage, and divide it into 72. The result is the number of years it will take to double your money.

 ·        If you like the store, chances are you'll love the stock.

 ·        A stock should see at or below its growth rate. (Its p/e should be below the % increase in earnings.)

 ·        "It's so popular, nobody goes there anymore." When an industry gets to popular, nobody makes money there anymore.

 ·        You can beat the market by ignoring the herd.

 ·        In the long term, there is a 100 percent correlation between the success of the company and the success of its stock.

 ·        Sell a stock because the company's fundamentals deteriorate, not because the sky is falling.

 ·        If you don't study any companies, you have the same chance of success buying stocks as you do in a poker game if you bet without looking at your cards.


from The Wall Street Journal, May 20, 1994, On mutual funds...

 You're probably better off in an index fund. Diversified stock funds returned 12.8% in last 10 years, compared with 14.9% for the S&P. Large fund complexes generate more consistent results because there has to be a certain level of competence to hold a job there. You're better off with a no-load fund (12.8% vs. 12.7% before the load). Go for growth-oriented stock funds if you're worried about taxes. (THeir dividends are more stable than fluctuating capital gains payouts.) Favor low-cost funds (their returns are 13.4% vs. 11.5%).

Time Value of Money: CPI


        YEAR      CPI   /90 CPI   in 1990$

        1913      9.9     0.08      $13.00

        1914       10     0.08       12.87

        1915     10.1     0.08       12.74

        1916     10.9     0.08       11.81

        1917     12.8     0.10       10.05

        1918     15.1     0.12        8.52

        1919       17     0.13        7.57

        1920       20     0.16        6.43

        1921     17.9     0.14        7.19

        1922     16.8     0.13        7.66

        1923     17.1     0.13        7.53

        1924     17.1     0.13        7.53

        1925     27.5     0.21        4.68

        1926     17.7     0.14        7.27

        1927     17.4     0.14        7.40

        1928     17.1     0.13        7.53

        1929     17.1     0.13        7.53

        1930     16.7     0.13        7.71

        1931     15.2     0.12        8.47

        1932     13.7     0.11        9.39

        1933       13     0.10        9.90

        1934     13.4     0.10        9.60

        1935     13.7     0.11        9.39

        1936     13.9     0.11        9.26

        1937     14.4     0.11        8.94

        1938     14.1     0.11        9.13

        1939     13.9     0.11        9.26

        1940       14     0.11        9.19

        1941     14.7     0.11        8.76

        1942     16.3     0.13        7.90

        1943     17.3     0.13        7.44

        1944     17.6     0.14        7.31

        1945       18     0.14        7.15

        1946     19.5     0.15        6.60

        1947     22.3     0.17        5.77

        1948     24.1     0.19        5.34

        1949     23.8     0.18        5.41

        1950     24.1     0.19        5.34

        1951       26     0.20        4.95

        1952     26.5     0.21        4.86

        1953     26.7     0.21        4.82

        1954     26.9     0.21        4.78

        1955     26.8     0.21        4.80

        1956     27.2     0.21        4.73

        1957     28.1     0.22        4.58

        1958     28.9     0.22        4.45

        1959     29.1     0.23        4.42

        1960     29.6     0.23        4.35

        1961     29.9     0.23        4.30

        1962     30.2     0.23        4.26

        1963     30.6     0.24        4.21

        1964       31     0.24        4.15

        1965     31.5     0.24        4.09

        1966     32.4     0.25        3.97

        1967     33.4     0.26        3.85

        1968     34.8     0.27        3.70

        1969     36.7     0.29        3.51

        1970     38.8     0.30        3.32

        1971     40.5     0.31        3.18

        1972     41.8     0.32        3.08

        1973     44.4     0.34        2.90

        1974     49.3     0.38        2.61

        1975     53.8     0.42        2.39

        1976     56.9     0.44        2.26

        1977     60.6     0.47        2.12

        1978     65.2     0.51        1.97

        1979     72.6     0.56        1.77

        1980     82.4     0.64        1.56

        1981     90.9     0.71        1.42

        1982     96.5     0.75        1.33

        1983     99.6     0.77        1.29

        1984    103.9     0.81        1.24

        1985    107.6     0.84        1.20

        1986    109.6     0.85        1.17

        1987    113.6     0.88        1.13

        1988      118     0.92        1.09

        1989    122.6     0.95        1.05

        1990    128.7     1.00        1.00


Annual Consumer Price Index Increases (December/December)

  • 1998: 1.6%.
  • 1997: 1.7%.
  • 1996: 3.3%.
  • 1995: 2.5%.
  • 1994: 2.7%.
  • 1993: 2.7%.
  • 1992: 2.9%.
  • 1991: 3.1%.
  • 1990: 6.1%.


Although gold has been prospected for over 6000 years, not more than 110,000 tons have been produced to date. This is equivalent to a cube measuring about 18 meters or 59 feet, along each side.

the new economy

alan webber: the new economy is first and foremost a celebration of individualism and enterprise. More than simply overturning the old notion of accounting, it overturns the old notion of corporatism: the correct unit of measurement today is "the unit of one"-one person with a powerful idea, enough technology to support the idea, enough money to grow the idea, and enough of a network of allies to proliferate the idea. It is an economy of "free agents" in the best sense, an economy that liberates individuals to do their best work, develop their best abilities, generate their best opportunities-and then hold themselves accountable for their performance.

 Notes from Robert Reich's The Work of Nations

 The American economy of the 1950s was the engineer of mass production. Its defining characteristics are still solidly fixed in America's collective memory, and although the image bears almost no relation to how the economy is organized today, it continues to condition the thinking of many Americans at century's end.

 At its core stood about five hundred major corporations which, by midcentruy, produced about half of the nation's industrial output (about a quarter of the output of the free world), accounted for about 40 percent of the nation's corporate profits, and employed more than one out of eight of the nation's nonfarm workers.

 Today the core corporation is, increasingly, a facade, behind which teems an array of decentralized groups and subgroups continuously contracting with similarly diffuse working units all over the world.

 High volume--->high value

 Core pyramids-->global webs

 "American" corporations and "American" industries are ceasing to exist in any form that cna meaningfully be distinguished from the rest of the global economy. Nor, for that matter, is the American economy as a whole retaining a distinct identity, within which Americans succeed or fail together. Thus, to assume that revitalization of these abstract entities will help Americans is to engage in a form of vestigial thought. The standard of living of Americans, as well as of the citizens of other nations, is coming to depend less on the success of the nation's core corporations and industries, or even on something called the "national economy," than it is on the worldwide demand for their skills and insights.

 In the high-value enterprise, only one asseeet grows more valuable as it is uded: the problem-solving, -identifying, and brokering skills of key people.

                       routine production jobs                       in-person service jobs                       symbolic analysts


jobs of symbolic analysts:

































Americans love to get worked up over American education. Everyone has views of education because it is one of the few fields in which everyone can claim to have had some direct experience. Those with the strongest views tend to be thoses on whom the experience has had the least lasting effect. The truly educated person understands how multifaceted are the goals of education in a free society, and how complex are the means.

 Remarkably often in American life, when the need for change is more urgent, the demands grow most insistent that we go "back to basics."


The formal education of an incipient symbolic analyst entails refining four basic skills: abstraction, system thinking, experimentation, and collaboration.

 The secession of symbolic analysts form the rest of America has proceeded calmly and quietly. ...widening divergence in incomes, growing difference in working conditions, regressive shift in tax burden, difference in quality of education available to their children, increasing difference in recreational facilities, roads, security, and other local amenities available to them....

 Rather than increase the profitability of corporations flying its flag, or enlarge the worldwide holdings of its citizens, a nation's economic role is to improve its citizen's standard of living by enhacing the value of what they contribute to the world economy. It is not what we own that counts; it is what we do.

 "The predictable future of all prediction notwithstanding...."

From the WELL:

 Factors outlined by Reich or the MIT Task Force on U.S. Competitiveness surely hit the bulls-eye (lagging investment, inadequate worker skills and education, declining R&D expenditures, absence of long range  planning, paper entrepreneurialism, etc.)  But to acknowledge  that does not mean Japanese economic behavior is not a variable of considerable importance, especially where strategic, new technologies are involved.




Charles D. Ellis

Louis Lowenstein

Peter Lynch

Liar's Poker


New Economy



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