By comparison, a company I like, Apple (I’m writing the blog on my iPad), has a 13 times earning multiplier. Apple has an interesting business plan: make revolutionary devices for people that they hadn’t  thought of, and make them an iconic device.  In doing so, AAPL has become huge, and maybe could be a trillion dollar company.  At the same time, Apple sells at a 13 PE.  Apple also has a huge hoard of cash: $97 B. That means that Apple could buy Facebook, for cash.

I’m comparing the promise of the future (Facebook) with the promise of improvement.  It’s wild to me that a 104b IPO can go off at a relative price about seven times higher than the benchmark of new technology; especially when no product is involved. I must misperceive the value of Internet advertising, even though we occasionally use it.

That being said, I doubt Apple will buy Facebook. There are other, less expensive targets. They could buy the Corrections Company of America, the largest private prison company, and create the iCon. Or maybe buy the University of Phoenix, the nation’s largest private for-profit college, and have a degree called iKnow.  Or, they may look back and see that they should have bought Facebook and named it iWish. But I think not.  I’m more prone to think in five years Apple will be the iconic computer of this generation and Facebook will have the revenue struggles of any company, and Apple can say iOne.

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THE FIXED COST COVERAGE RATIO
The number of times your business covers its fixed costs each day is the how you determine if you win or lose, and that is called the Fixed Cost Coverage Ratio. In order to derive this critical number, you need to calculate your daily sales volume and divide it by your break-even volume. I will explain how to figure this out for your company.

Variable Costs
You need to start by determining your variable costs. Variable costs change based on your daily sales, and they are expressed as a percentage. This usually includes materials, direct labor, and staff wages that are paid based on production. On average, let’s assume this number is 30% for your business. This means that for every $1 in collect-able sales you produce, you pay $0.30 to the variable parts of your business.

Contribution Margin
For the sake of this article and the example below, I will assume that the variable cost percentage subtracted from 100% equals the contribution margin, or the percentage of every dollar of collections that is left after paying the variable costs to cover the fixed costs. In this example the contribution margin is, therefore, 70%.

Fixed Costs
Now we need to discuss fixed costs. Fixed costs do not change, regardless of your daily sales volume, and they are expressed as a flat dollar amount. This usually includes your rent, insurance, salaries and wages not tied to production, utilities, marketing, etc. I suggest business owners include all of their compensation in this number, regardless of what the compensation might be called (i.e. salary, dividends, guaranteed payment, interest, etc). Let’s assume your fixed costs are $50,000 per month.

Break-Even Calculation
To determine break-even, we need to divide the fixed costs by the contribution margin ($50,000 divided by 70%), which equals about $71,500 of monthly production required to pay your variable costs and barely have enough left to cover your fixed costs. This means you did not make any profit during the month.

To be more specific, if your business is open 20 days per month, you need to produce $3,575 per day to break-even. But hopefully you didn’t decide to own your business just so you could break even. The goal is produce as much more than $3,575 per day as is possible.

The Ratio
The concept of the fixed cost coverage ratio is to determine how many times your production each day can cover your fixed costs. By dividing your daily production by the break-even, you will know your ratio. If the ratio is one, then the business is being run at break-even. If the ratio is above one, then you are profitable. If you drop below one, then you lost money that day.

For example, if you sell $5,363 in a day, your break-even coverage ratio is 1.5 ($5,363 divided by $3,575). This is a good, profitable day. If the next day you only sell $3,225, then your break-even coverage ratio is 0.90, meaning you lost money that day.

Conclusion
Empowered with this daily metric on your business dashboard, you no longer need to wonder how you did each day. I recommend you revisit your variable and fixed costs quarterly to make any appropriate adjustments to your calculation. As you improve this ratio, you’ll find your cash flow and profitability increase significantly.

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Here’s an updated version for 2012. Share it with ALL your partners and ALL your team. Watch it together (it only takes a little over 5 minutes).

It is especially valuable for people who hesitate to change, keep pace, or dare to set the pace for accounting firms in your market.

It’s the week-end – take 5 minutes to watch. Then contemplate the information, share it and then make plans.

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It’s a strength, in the same sense that most of the best athletes could do well at a wide number of games.  I follow a wide number of themes in the financial markets and economics.  I like to think that I bring more perspective to a wide umber of issues because:

• I have been trained in neoclassical economic theory, and I reject it.
• I have been trained in modern portfolio theory, and I reject it.
• I’ve worked in most areas of the financial markets, and have seen similar events happen in different markets.
• I have quantitative skills, but I have spent a lot of time of economic history.
• Having practiced as an actuary, I have additional skills analyzing liability structures, which are underanalyzed.

My perspective is different.  I don’t expect you to agree with me, because some of my views are “out there,” and I know that when I write it.  I sometimes write things knowing that there is no way that these will be adopted, absent major changes to society.  I write those, knowing that radical change is not impossible, and when change happens, they will need sensible guidelines.

So what have I written about?  From my categories:

I write about economics, stocks and bonds. That’s me.  I want to describe what is going on and how it affects those holding fixed claims (bonds), and variable claims (stocks).

After that, I write about portfolio management and value investing — how do we manage the assets that we own?

The next group is the guts of the market: how does government and Fed policy affect things?  How do insurance, real estate, and derivatives affect our lives?

Beyond those, I write about many things, and I appreciate that you read me.  Your time is valuable; thanks for reading me.

My Performance

My greatest fear when starting up my firm was that after having a great 10-year run with my own assets (and for an employer), that I would go cold when I started managing assets for others.  That is what has happened, with underperformance of 9%+ versus the S&P 500 over the last 16 months.  This is my worst sustained performance over the last 20 years.

I don’t think my methods are poor, nor am I planning on changing.  Every investment method goes through dry times; I have to live through this.

So what will I do?  I will persist in the strategies that have done so well for me  over the last 20 years.  I will continue to do value investing.

I don’t know that it will work, but I think it will.  Value investing is the reliable weak signal amid a lot of investment noise.

And so I act and invest.  My time is coming, and thanks for reading me.

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As probably everyone is aware, Ford Motor Company is preparing to offer a series of one-time voluntary lump-sum pension payments to its salaried retirees. The purpose of the lump sum is to reduce Ford’s pension liabilities, under the concept that some retirees will opt for the payment, thereby removing their pension liability from Ford’s books (and the balance sheet).  Of course, the retiree decision is highly individualized, so we’ve been working on a comprehensive White Paper for our Ford clients, but as I worked on the section of the paper ‘shifting of mortality risk’, it occurred to me that this action (the lump sum payment) could actually increase liabilities to Ford, at least on a relative basis.  Here’s why:

1. Tom, a 63 year old male, single with an adult child, high blood pressure and a history of heart disease.
2. Candace, a 63 year old female, single with no children, marathon runner, yoga practitioner, and in perfect health with a living nonagenarian mother and aunts.
3. Mike, 63 in poor health, married to Sue, 63, in great health.
4. Kathy, 63 in good health, married to John, 63 in poor health.

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I didn’t even know what you called it. That irritating vocal style (mostly used by women) where every sentence ends in a gravelly vibrato. I notice it being used by young women interviewed on TV and mostly because my husband complains about it and mocks it. They drive him crazy and he in turn drives me crazy because he can imitate the style quite well.

A recent post by Fast Company describes it quite well using a situation where a job candidate was ruled out immediately because of how she talked on the phone. The position required someone to have a high degree of interaction with senior executive clients and required that the person in the position establish their credibility in the first few seconds of a conversation with those senior executives.

When a young lady, who appeared perfect for the position on paper, was interviewed over the phone, every sentence ended in a gravelly low vibrato. They describe it as a grating, kazoo-like effect that made the candidate sound immature, unconfident, and, frankly, annoying. A recently published article in the Journal of Voice reports that 2/3 of the female college students studied used vocal fry.

Watch the video for an amusing example. While it makes me smile, it’s a serious topic if you are a young lady looking for a job in public accounting.

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But if my hypothesis is wrong, I’ll post on it anyway.  The last post I did on this was on SPY, the S&P 500 Spider.  The slippage was 7%+/year.

Now I have done the calculation for the QQQ, the PowerShares QQQ Trust, which mimics the Nasdaq 100.  The Nasdaq 100 is more volatile than the S&P 500, so I expected the gap to be worse, but it wasn’t: from the inception in March 1999 to the end of the fiscal year in September of 2011, the dollar weighted return was 0.38%/year versus a time-weighted return that a buy-and-hold investor would get of 0.77%/year.  0.4% of difference isn’t much to talk about.  It still indicates a little bad trading.

That said, the net amount of unit creation and liquidation tended to be small.  Maybe that is the difference.  I have to think more about this, but my advice to anyone using exchange traded products remains the same — read your prospectus carefully, and understand the weaknesses of the vehicle.  If creation units don’t have to be something exact, ask what that might imply for your returns.

Anyway, here were the figures from my dollar-weighted return calculation:

I used annual data, and assumed midperiod dates for the cashflows.

The next ETF I plan to analyze is XLF, the Financial Sector Spider.  I suspect that will look bad, but who knows?
Full disclosure: short SPY in some hedged accounts.

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How do I sum all of that up into one term? And out of my mouth came brawn. But that sounded like only brute force, the roll-up-your-shirt-sleeves and get the work done element that would result in physical brawn, and neglected giving credit to all of the intellectual and emotional prowess required for everything mentioned above. So I put the word professional in front of brawn and thought I might be onto something.

Whatever you call it, we all need it, and we all hope everyone we hire has at least some of it.

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But in the ‘90s and 2000s, large parts of the world came into the capitalist system.  In relative terms, labor, particularly low-end labor was no longer scarce, and resources were the least scarce of the triad of labor, capital and resources.

Then There Were None takes a middling view of resource scarcity.  Commodity prices have risen significantly. Many low-cost resource deposits have been mined out.  Demand for commodities has risen dramatically because of new demand from China and other emerging markets.

There are 21 chapters in the book:

1. two deal with a classes of minerals: rare earths and fertilizers
2. 18 deal with individual minerals, and
3. the last tries to tie the book together.

Each chapter explains why there is demand for the resource in question, shows the change in demand, who produces it, and companies that benefit from the changes.

It also describes what the minerals are used for, so that you can get a better sense of what might drive the pricing of the minerals/metals, and of the products that derive from them.

There has been a shift in the world, and there is more demand on resources than there used to be.  This book fleshes out the effect of the change in demand, and tries to explain, mineral by mineral, the effects on the global economy.

Quibbles

The book focuses too much on China.  It also occasionally makes it sound like China could use up all of the resources of the world, which is ridiculous.

Who would benefit from this book: For investors, and ordinary folks, if you want a good view of what is happening globally with critical minerals, you can read it here.  If you want to, you can buy it here: Then There Were None: Chinese Demand for Critical Materials in the Coming Decades.

Full disclosure: The publisher offered me the book.  I said “yes” and he sent it to me.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

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My husband and I have been looking forward to April 18, 2012 for a couple of years. We are frequent visitors to the National Museum of the United States Air Force near our home in Beavercreek, Ohio. We knew that on the mentioned date twenty B25 bombers from WWII would be flying in for the 70th Reunion and anniversary of the Doolittle Raid on Japan.

If you don’t know much about it – here’s the short version. After the attack on Pearl Harbor, U.S. morale was very low. The U.S. could not fly the distance to attack Japan. The Japanese morale was extremely high; their people had been assured that the U.S. could not attack them on their soil.  Under great secrecy, 80 men were chosen, lead by Jimmy Doolittle, to fly sixteen B25s off the deck of an aircraft carrier and attack the Japanese – just to show them we could (although they did not expect to do much damage). The planes had to be lightened, B25s had never taken off from an aircraft carrier before. Secrecy had to be maintained, etc. The pilots and crew knew they must try to land in China before they ran out of fuel after they delivered their bombs. Short story: They accomplished their mission, some giving their lives to do so. Seventy years later five of them are still living – all are in their 90s and four of them gathered this week to observe the anniversary.

Seeing the 20 B25s land on Tuesday, see them take off (about 30 seconds apart) and fly over in formation prior to the ceremony was awesome. It was one of those “I’m so  proud to be an American” moments. I hope you’ll follow the links above to learn more about it.

Here’s a link to a video I took with my trusty iPhone (it takes a few moments to load) and here are some of my photos.

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