You hear about the Dow Jones Industrial Average (DJIA) on nearly every major news station.  It seems to be every economist’s favorite way to watch the market.  What is it? How is it calculated? and Why is it no longer the best?

What is the Dow Jones?

It is one of the many Stock Market Indices used in the United States to guage total market performance.

The index was originally created by Charles Dow, cofounder of Dow Jones & Company- the Co. that produces the Wall Street Journal.

It was originally made to track the industrial sector of the market, hence the djIa.

The DJIA is composed of 30 of the largest companies in the United States.  The only company to remain from the original 12 that made up the DJIA in 1896 is General Electric.

So how is it Calculated?

Its actually pretty simple.

The formula is very simple.  You take the sum of all of the prices of the 30 stocks in the index and divide them by a divisor.

In 1896 the average was a pure average.  In other words, it was the sum of the prices divided by 12, the number of companies in the DJIA.

The divisor is changing though.  It changes, as companies in the DJIA go through situations like stock splits, in order to keep the value constant.

The divisor is currently 0.12283402.  Because it is below 1, it yields a DJIA value that is larger than the sum of the prices in the index.

This doesn’t sound so bad?

It wasn’t in 1896.  It was pretty cutting edge then.

You see- In 1896- there were no computers or calculators.  So, the trading day would close at 4:00PM so that all of the bankers could sort out the day afterward, and the most that any index could really handle- find the prices for, add them up and divide- was about 30 different companies.

In modern day, with computers running the show for us, there is no need to limit our stock analysis at 30 stocks.  With Indices like the Standard & Poors 500- analyzing 500 different companies - and the Wilshire 5000 - looking at 5000 different companies, the DJIA is simply not the most accurate way to follow the market any more.

So my advice?

Keep using it.  Everyone else is.  But dont use ONLY the DJIA.
Look at as many different indices as you can when guaging market performance.

Ladies and Gentlemen: Welcome Neville Medhora-

Tell us a little about yourself and what it is that you do.

Currently I own and manage the largest online rave company. I started HouseOfRave.com in high school, have always done it part time and have just recently gone full time with it.

What is it about money that most intrigues you?

I find it fascinating that money is completely fake. It’s not real. Every major currency is a fiat currency which means it’s essential fake. Until I fully understood that I never made much of it.

There is a simple test you can apply to anyone to see how much money they have:
What is their contribution to their fellow man? How much value have they provided?

Some easy examples of this:
-Guy flipping hamburgers at restaurant provides only a marginally useful service that anyone can do.
-Steve Jobs is a one in a billion guy who took his formerly failing company and turned it into one of the greatest success stories in just a few short years. He revolutionized personal computers and now the phone. He enriched and made millions of lives easier.

Guess which one of those provides the most value, and therefore has the biggest wallet?

What would you say the number one cause of your success is?

‘Success’ is kind of ambiguous, but without further complicating the question I’d say that focusing my efforts on ONE THING really helped. Back in college I was doing 5-10 businesses at once. Nothing ever took off until I took the plunge into just ONE.

What’s the best part about being self employed?

Being able to do my work at noon or save it till 4am. I also absolutely detest rush hour traffic and would rue the day I have to drive in it. I love my work, but I don’t always want to work from 9 to 5. Maybe I want to work a few hours now, go run errands, then work 10 straight hours way into the night. That freedom is what I like best. But with freedom comes having to discipline yourself…that took me a long time.

What are your best methods for finding/attracting clients?

Have something that significantly enriches their life or business in some way.

Name your 5 favorite websites:

www.NevBlog.com – It’s fun to look back at where I was each year. I can’t write about most of the cool stuff on the blog, but it gives me a general snapshot of what I was doing at this time several years ago.
www.ted.com – Single best source of fascinating videos online. I usually watch a ted video when I eat lunch.
www.Luxist.com – I like the luxury real estate section.
www.digg.com – Digg is pretty fun.
www.stumbleupon.com – Maybe once a week I’ll sit and use StumbleUpon for several hours into the wee hours of the morning. I can’t tell you how many fascinating things I’ve stumbled upon and good ideas I’ve got from using this seemingly time-wasting website.

How did you get your start? Did you study something in particular or were you self taught?

I was completely self taught. My immediate family doesn’t have any business experience, so I had to branch out on my own to gain that experience and motivation.

I used to be a big computer nerd back in middle school and high school, and would learn all sorts of different computer programs, how to make webpages etc. Eventually I got interested in seeing if I could make money doing those things.

I also started asking family friends who owned businesses, “Ummm…sir….what do you do?” They were glad to invite me out to their companies and show me around. I was hooked.

Here’s a little elaboration on how I started.

What are the tools that you couldn’t live without?

Photoshop, my tablet PC, fast internet access and books. Especially books.

What do you feel are the most important skills to have in order to manage money?

Common sense. Spend less than you earn. During the good times, make sure you save for the bad times. It’s seriously that simple. People who say otherwise are undisciplined and/or lazy.

How are you coping and dealing with the current downturn in the economy?

I’m trying to boost HouseOfRave.com sales to a $1,000,000/year, and a downturn doesn’t exactly help. I feel I’ll have to work twice as hard to just maintain the level I’m at….and get 10 times as creative to hit my goal. Using more creativity I believe is the way to prosper during bad times.

Wherever there is a big problem, there is an even bigger opportunity.

Which one person would you say has had the biggest influence on you?

Earl Nightingale.

What is your number one tip for a college student freshly started in money management?

Start saving. Be cheap (or frugal, whatever you want to call it). Bargain for everything. Every penny counts. If you don’t graduate with at least 6 months of living expenses saved and ready to use, you’re at a significant disadvantage.

I wrote about this Here.

Is there anything else that you would like to share with the readers at UseTheDollar.com?

Yes. There’s this thing called the library where they have vast collections of the life works of thousands of fascinating, successful and brilliant people. They keep all these secrets in one place, and let anyone use them for absolutely free.

They’re called books, and they often answer every question you could ever have, and impart on you vast amounts of knowledge 99% of the population will never bother to attain. Reading one (non-fiction) book every two weeks can put you so unbelievably far ahead of the curve it blows my mind that more people don’t do it.

Make sure to check out Neville’s personal financial blog (the very first result when conducting a google search for “Finance Blog’) at www.NevBlog.com!

Thanks again Neville!

Man consider the stock market to be a source of passive income.

I do not.

It can be manipulated into passive income by investing in mutual funds or allowing your stock broker to take care of your investments.
Because you would be putting forth no or little effort, it would be considered passive income.

But if you choose to invest on your own- you had better be making that active income.

In the entries to come we will go over different tools and necessary methods to use with investing, but today we will be covering the time consuming aspect.  Your “homework“, as Jim Cramer puts it, should take up at least one hour per stock that you own per week.

So if you own shares of Google, TBSI, Boeing, MNKD, and WaMu(haha) then you should be doing five hours of homework per week.

We will go deeper into what is expected of your homework in the weeks to come, but it should include things like researching management, listening and watching press conferences, keeping track of the multiple, etc.

By managing these sorts of issues you make the giant leap from being a hobbyist to creating what I consider a second job.

But by doing so you are becoming an educated investor, prepared for both the bull and the bear.  People are making money in the good and the bad markets- and the only thing that distinguished them from you is that they educate themselves.
Why not you?

One can make a sizeable profit by taking and selling quality class notes in a college setting and then mass marketing them to all of the students in their class.

Idea Tested during Summer 2008 Semester

——-

Step One(June 3, 2008):

First day of Class; Develop a sellable product.

I went to class with a notebook and pen (primitive I know) and took my notes by hand. Then when I came home I transferred them into a word document.  I found this was helpful to me because it forced me to go through my notes again, but it also seemed to yield much more professional looking and coherent notes than if I were to type them in class.

——–

Step Two(July 3, 2008)

Market my Product!

My school uses a system called Web CT Vista. Most of the students hate it, but I find it makes it relatively easy to communicate with my classmates.

I mailed out a quick email to everyone in my class saying,

“Hey there Everybody!

I wanted to send out an offer to everyone in the class. I am a very proficient note taker and I transfer my notes into MS Word each day after class. Here is a sample of my notes: http://www.theisticthinking.com/samplenotes.htmlI am offering copies of my notes up for sale at the rate of $15.00 for the entire semester. By purchasing them now, you will receive them by the day after each class via email or I can bring you a hard copy of each class’ notes by the next class meeting.If you would prefer to wait until the final exam, I will be selling the complete package together for $20.00

A few important details: I will be absent on June 24 and 26, so my notes will be taken out of the book for those days and not the notes from class. They should be just as good though.I will accept Cash, check or paypal as methods of payment. Just message me back here on Web CT or at Michael@theisticthinking.com if you’re interested!Again, My samples are here http://www.theisticthinking.com/samplenotes.html

I hope this finds you all well! Grace and Peace!

–Michael Caldwell “

Disclaimer: It may be a good idea to speak to your professor before sending out a message like this; or, like me, you may prefer to ask forgiveness than to ask permission

————–

Step Three(June 3, 2008)

I’ve already had three replies to my original email. Each of them are planning to meet me at class on Thursday and pay me for the notes at which point I will email them to them and continue to email the notes after class each day.

Step Four(June 5, 2008)

Between the Third and today I have had another email and will be meeting all four people before class to get their money.

The money has been received. Now I will be able to keep marketing and the best part is; these notes don’t expire after the course- I can continue to sell them to students in this Econ 2100 class until I’m graduated (or even after really, I just dont see that happening.)

Total Run Down:

Marginal Revenue: $15.00 per set sold
Total Revenue: $60.00
Total Expenses: $0.00 and 0 time; I was already registered for the class!

Total Profit: $60.00

Keep in mind that this was only for one class. I tried the experiment on a small scale, but come the fall I will be doing this in all five classes and marketing much more heavily. I don’t see why I shouldn’t be able to yield atleast 5-10 customers per class times five classes.

I had a friend come pick me up to get coffee this morning.

Living near a university, there are coffee shops nearly everywhere—but we knew we’d either be going to Caribou Coffee or Starbucks.

Caribou Coffee was about 10 miles north, Starbucks was about a mile south.

Why were we even considering Caribou? Because my friend David had a gift card.

Which made me ask the question…

How far out of your way do you go to use a gift card?

Ten miles?

We didn’t. My friend even took the time to say, “I know that using the gift card is the financially smart decision…”

We ended up at Starbucks.

We couldn’t make ourselves drive ten miles just to save a few dollars. The time and the gasoline made the idea of a Starbucks a mile away much more appealing.

Gift cards may be free money; but they’re not nearly as valuable and are almost always completely illiquid.

I used to get Best Buy gift certificates for my birthday every year.  I hated that. It meant I had to drive 5 exits down the interstate, deal with traffic in the busiest part of town (the area is a nightmare), fight the lines in Best Buy, and buy something I never would have bought or wanted had I not had a Best Buy Gift Card.

Why was I stuck buying things I didn’t want in stores I didn’t shop at?

People Think They Can Spend Your Money Better Than You Can

Just look around. It started with the Government, now its your friends. Are they trying to upset or control you?

Probably not—if they are, get a new friend. They probably just feel strange giving you cash instead of a present.  For some reason, if they give you a card they feel like they’ve personalized the gift.

It probably seemed that way for the other thousands of people who bought that identical gift card as well.

Money is plenty personal for me!

There are however, those occasional people that truly did buy you a gift card because they wanted to make sure you spent it in that store. These people drive me insane.

Gift Cards are the Gifts of Tyrants.

Sadly—I’m not talking to those people.  There’s no talking sense into those people. But to all of you who are simply trying to personalize your gift:

Money is a great gift for most people.  It always comes in the right size, color and everything else! Perfectly customizable and easily exchanged.

Don’t Overthink Gifts! Give Cash!

Why are gift cards worse than money?  Loads of reasons! Here are a few:

1. Gift cards limit you to just one store.
2. It’s never the right amount.
   Whether the item you choose to get is less than or more than your gift card, you’ve been screwed.
   Either you end up with money that your gift giver paid on your card that you never use
   Or you have to spend extra money in the store that you wouldn’t have spent to make up the difference.
3. Gift Certificates have Expiration Dates
   I promise your money won’t have an expiration date.  Well, actually, at the rate the Government’s going now… nevermind.  A post for another day.
4. Gift Certificates force someone to go to a Store
   Giving  someone money allows them to hang on to it, invest it, save it or anything else.  A gift certificate is like saying, “Here.  I didn’t want to get anything so you get up and do it.”
5. Gift Certificates have no Earning Potential
   I can invest a $20 bill and make an average of $2.48 a year according to the last 80 years of market history.  My $20 gift certificate will be worth exactly the same a year from now though.

Please—for the sake of your friends and for me. If we all start giving cash instead, we may start the pattern and end the horrid reign of gift cards. Let’s make cash an acceptable gift again.

If you have a story about gifts in the form of cash or giftcards, let us know! Drop a comment below, or reach us on Twitter.

Common corporate and business training will teach you to strive after efficiency and effectiveness.
These are both great goals for both a business and an individual, but one can be rather tricky.

What’s the Difference?

Effective:
Adequate to accomplish a purpose; producing the intended or expected result: effective teaching methods; effective steps toward peace.

Efficient:
Performing or functioning in the best possible manner with the least waste of time and effort; having and using requisite knowledge, skill, and industry; competent; capable: a reliable, efficient secretary.

Thanks Dictionary.com!

Effective people always have goals in mind.  Efficient people can be efficient at just about anything.
In other words: you can be efficient without ever having been effective.  If you own a plumbing business, and your plumber plants 1000 flowers in all of your customers’ yards each day- he is being incredibly efficient without ever being effective, as your goal is to have him fix plumbing, not plant flowers.

How to Be Effective

Effective means Accomplishing your Goals.

How do you accomplish goals?  First you should set up some goals.
Goals need to be Realistic, Timely and Specific. To learn more about setting goals, read here.

Set up check points in order to reach these goals.  Keeping track of your goals and forecasting.

Want to be effective?
Do what you say you’re going to do.

Turning Effective into Efficiently Effective

Now just because efficiency can be turned the wrong way does not mean we don’t want it.
Efficiency is crucial to success.
Why? — We only get a limited number of days in our lives.
If we don’t make the most out of each one, we’ll never know how much we could have accomplished.

In order to become efficient, Don’t just pay attention to accomplishing goals- keep track of how long they take.

If you maintain effectiveness but not efficiency, you risk falling behind.

If you maintain efficiency but not effectiveness, you risk never accomplishing anything.

In order to be SUCCESSFUL, you need ot be Both Efficient and Effective.

His website has him quoted as saying:

“We can achieve universal access to quality, affordable health care without bankrupting our children with trillions more in debt or imposing draconian tax hikes on all Americans.”

I haven’t spent much time looking into his plan: the Patient’s Choice Act; so I am by no means claiming that he has a good plan here.  I have no idea.

What caught me off guard was something else that he said during his interview.

“We are simply not in a position as a nation to be increasing our spending any more.”

This reminded me of what debt counselors tell people.  Its a lesson everyone needs to learn at one point or another.  Don’t purchase things until you’re in a position to purchase them.

For some reason, it all made sense to me.

Although we have many, many fiscally wise people in charge of our nation; Group think has reduced America to a teenage money mindset.

The nature of our government reduces the vast majority of politicians and leaders to being utterly powerless with these sort of issues.

If they’re not in power- who is?

Well; although we tried to put some of the more educated people in the hot seat to deal with fiscal issues– Americans want something and they want it now.  When that happens- politicians either deliver or they leave office.

With this approach nearing 250 years in the making, America’s debt is well over $11 Trillion dollars.
In fact: Since September 2007 it has increased an average of $3.88 Billion per day!

As America decides that they don’t care about their current debt- they want healthcare and what’s another trillion on top of eleven trillion; she reminds me of a girl I met in a marketing class.

“I lost my job, but its no big deal.  I just took out another student loan and I figure I’ll live off of that for a year.  That way I don’t have to worry about money.”

Noooooooooooooo!!!!

That’s the road we’re walking down, Nation.

Do you want to live in a hormonal teenage country?

Or do you want to live in a country that has control over it’s own destiny?

The choice is being left up to each and every one of us.  We need to make clear that debt is not acceptable.
Our country needs to get this deficit under control; or else we’ll each be paying for our nation’s childish decisions in the frighteningly near future.

If you want to Fix this problem:

Contact your Senator and Representative! Let them know what you think.
As I said before: their job is to appease you in congress. They are there to represent your ideas!

Don’t know your congressmen?
Use Visi.com’s tool “Contacting the Congress” to find your congressmen and their email addresses.

Have you ever wondered why the government is so terrible at fixing our economy?  Well, its not all their fault.  Today we’ll start a series about why they can’t quite make it work and the Lags associated with Fed Intervention.

Show me This Business Cycle thing

Below is what is known in MacroEconomics as “The Business Cycle”:
This is just a fancy way of saying “Showing that the economy goes up and down on a graph“.

The blue line is the business cycle as is, with its ups and downs- and the black dotted line is the long term trend of the business cycle.
As you will see, a free market economy (like the USA) always goes upward with time in the long term trend.

These ups and downs are awfully dramatic.

So what is the Gov’t Trying to Do?

The government’s goal is to achieve a line closer to the green one below, with less up and down swing.  The less dramatic our economy as it continues its upward trend, the more content are the people.  And as we all know- Government strives for the happiness of its people at all times….

Now - as the government tries to solves these issues with actions like tax increases and decreases, interest rate adjustments and spending, certain Time Lags come into play which disrupt their actions.

What do we mean by Time Lags?

If you’re a gamer, you’re familiar with the term Lag.  There are three types of lag that affect the Fed’s response to economic woes or booms.

The Recognition Lag

The recognition lag takes place because when a Recession starts or ends, we simply can’t know it!
Huh?

It takes somwhere between 3 and 6 months for our Government Census bureaus to recognize that the economy has taken a turn for the better or worse.

So if the economy actually takes the turn downward at T1 (above), the government will continue high taxation, high interest rates and low spending as if the economy were in a boom until T2 months later.

This means that the government is actually fueling the recession for several months before it sees that it should be responding to a falling economy.

Well we Finally Realized it…

But notice… T2 is awfully close to the natural end of the recession.

Now that the Feds will start responding to a recession, it may well be nearing an end.
This means the Fed’s are unnaturally fueling a Boom now- which will have to come crashing back downward toward the trend, causing a more violent crash in the future.

But-
Even if we could somehow eliminate this Response Lag- the USA leaves us with two more.

So we’ve finally made it through the Response Lag.
The Feds have realized that we’re in a recession.

Putting a plan into action shouldn’t be hard! … Right?

Why Democracy Screws Up Economic Aid

As with everything else:
Our Government must argue over the means by which we come to an end.

The Bipartisanship of our government causes an Implementation Lag-
This is the time it takes for the government to draw up a plan and execute.

Let’s say that it now takes from T2 to T3 for the Government Officials to finally agree to a plan and implement it.

I’m being very generous illustrating it as less than the Response lag.
Implementation Lags are almost always MUCH longer than response lags.
Politicians don’t tend to get along well when it comes to money.

So as you can see- By the time that the government is responding to the crisis- we are naturally out of the Crisis and on our way up.

Atleast this must be where the lagging ends.

Wrong.

The government and our checkbooks have managed to make it through the Response Lag and Implementation Lags now.

The Recognition Lag is caused by the time it takes for Government’s actions to actually affect the economy.

Money takes time to Spread

As money is spent by the government and taxes are lowered- two things start to happen.

While highways are being built, schools are being built, people are being employed to perform meaningless tasks- money is being pulled out of the Government’s coffers (actually Lenders’, but that’s another post) and put in the peoples’.

Brokers in New York and across the country are also regaining their confidence in the economy.

These sort of events take time.

As you can see in the picture- By the time we reach T4, we have already come fully out of the dip- and the government stimulation has pushed us into an unnatural boom.

This boom MUST come back down to even out with the long term trend (because growth beyond the maximum can’t be sustained by the economy in the long run) causing an even worse recession.

This is Why the Government Can’t Help!

As the government tries to help, good intentioned they may be, they simply are unable to respond quickly enough and in the end do more damage than good.