December 29, 2014

Value Of A Medical Degree

Here’s Buffett on how to calculate the intrinsic value of a college education:


“Book value is the cost of the college education plus foregone earnings one didn’t receive for those 4 years.  Intrinsic value is the earnings over a lifetime less what would have been made without college discount to grad day at appropriate risk rate.”


Let’s see how getting a medical degree looks in terms of its book value versus its intrinsic value.


Is Medical School Worth It?

First, let’s have our subject attend an Ivy League school to maximize the over all odds of getting in to medical school.  The cost of a four-year Ivy League education is approximately $250,000 in hard costs.  Buffett adds in the value of the earning not received, another $100,000, but I’m not going to include that.  I’m going to assume our student goes to a good college.    Total book value of the undergrad education is $250,000.


Now our student attends a wonderful medical school, again to maximize future earnings.  These four years cost about $80,000 per year for a total hard cost of $320,000.  In addition, we now forego a significant income.


Let’s assume we have a smart kid here who, instead of choosing biology, picks finance, graduates near the top of her class and goes on to a career in finance.  This Ivy Leaguer begins her finance career at about $60,000 a year in earnings, with that amount rising quickly.  At the end of four years, she will have taken home (after tax) about $300,000.


Our student’s book value (invested capital) now has an additional $300,000 invested, a new total of $620,000.


Our student is a doctor but the investing is not yet complete.  She now begins a 5-year residency program where she will earn about $50,000 a year while working 80 or more hours a week.  This apprenticeship adds to the investment cost of her career choice.  The alternate choice of a career in finance would have provided our superstar with an income of $100,000 a year after four years in the field and the next five years will deliver another $500,000 in after-tax income.  We have to add to the investment in this career the difference between the $40,000 a year after tax income for five years, i.e., $200,000, she will receive and the $500,000 she would have made in finance.  That is another $300,000 invested.  She now has invested $920,000.


Calculating the Sticker Price

Five years after medical school our doctor begins her career and starts making serious money as a return on her equity (aka book value, aka invested capital).  Now we can calculate the Sticker Price or intrinsic value (aka ‘what its worth’) of this ‘business’.


Doctor’s incomes vary widely depending on their specialty and how hard they are working, not to mention the impact of the quasi-nationalization of their profession but let’s assume this five-year residency produces a great surgeon who makes average money in one of the higher paid specialties like orthopedics or urology.  The expected income for that surgeon is about $470,000 a year; after taxes let’s call it $300,000 in current dollars.  Assuming her income will increase at the rate of inflation, we’ll keep that $300,000 as a constant.  In addition, she can probably sell her practice for 3 years of net income in current dollars when she retires in 30 years so in the last year we’ll add an additional $900,000.


Now we can do a calculation that tells us if we should pay $920,000 for this stream of cash.  This is a discount rate calculation and the result is what we call the ‘Sticker Price’ of the business.  Once we know the dollars invested ($920,000) and the dollars coming out ($300,000 for 30 years with a $900,000 payoff at the end), we need to determine a critical number, the Minimum Acceptable Rate of Return (MARR) which the rest of the world calls the ‘Discount Rate’.


We discount future cash flow because common sense says that it is better to receive $300,000 today than $300,000  thirty years from today.  The key question to ask is ‘how much better?’.  Well, the answer to that depends on:


  1. The risk you have of never receiving the $300,000 in 2044
  2. Some reasonable return for waiting for the money instead of getting it today.


Essentially the question becomes this: If I gave you a choice between #1: get $300,000 dollars today or #2: get Y dollars in 30 years, which one do you want, #1 or #2?  Our job is to figure out Y, a number than makes the result of either choice financially the same.


A first step to an answer is to recognize that this is just the inverse of another question: What is my rate of return on a risk-free investment where I won’t get my money back for 30 years?


The answer to that question is the current 30-year Treasury bond interest rate, currently a bit less than 3%.    This is assumed to be the minimum return anyone would accept since every other investment has more risk associated with it.


Since this is an alternate investment to the ‘risk free’ Treasury bond, the second step  is to figure out how much risk there is and then assign that risk a premium return.  In essence what we need to know is what the chances are that the $300,000 a year won’t come in.  As risk goes, a doctor’s income is low on the list but still, there is risk; she could decide she doesn’t like medicine, the US government could nationalize all the doctors and reduce her income, she could get hurt and be unable to do surgery, surgeons might be replaced by robots, etc.


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December 11, 2014

The Basics of Dividends

Lets talk about the basics of stock dividends, what they mean, and how we look at dividends as Rule #1 Investors.


What are Dividends?


What are dividends? Dividends are a distribution of a companies earnings, decided by the board of directors, to its shareholders. They may be in the form of cash, stock or property.


Dividends are the money that the company pays out to its shareholders in cash.


For example, Coca Cola probably pays about a 2% dividend. If Coca Cola stock is, say, $40 dollars a share, 2% of 40 dollars is about a buck, .80 cents to a dollar and thats what its dividend is.


A lot of people live on the dividends of a company. In fact, in the great depression, people thought that the only value of stocks at all is the value of the dividend being paid out, because stocks weren’t going up they were going way down.


How Rule #1 Investors Look at Dividends


When we look at dividends as Rule #1 Investors, we look at it very differently than most people do. we see dividends, not as a return on our investment of 2% or 3% a year, we see it as a simple return of our capital. We’re looking to get our money off of the table.


Using Dividends to Lower Risk


We want to lower our risk every year by receiving dividends, so that reduces the amount of what we call basis every single year. As our basis goes down every single year, our risk of owning that business goes down. If the dividend is very high, lets say 6% a year, then in 10 years we might have removed 60% of our risk off of the table and we have a very low chance of losing money on that investment.


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December 05, 2014

Why You Should Practice Paper Trading

I'm going to talk to you real quick about using something called “paper money” in order to learn how to invest. Paper money trading is really cool. Let me tell you about it.

What is Paper Money and Paper Trading?

What is paper trading? It’s an idea that basically means working with pretend money, but doing it with real numbers in real time.


By combining the internet with the idea of paper trading, we have a really great package for online stock trading that helps us develop ourselves as investors, without taking any real money risk. We can also trade paper money without incurring the kind of emotional trauma when we use real money and we know that we don’t know what were doing.


How to Set Up a Paper Trading Account

What you should do is get yourself onto one of the paper money trading sites. Think or Swim is the one that we use a lot, but there might be some other great sites out there. Just google “paper money” or “paper trading” and go out there and get your account set up.


After you sign up, on you end up with about 200,000 dollars of pretend money to “invest” with in a system thats using virtually real time data.


Why You Should Practice Stock Trading

When you start investing you want to see that the effects are going well for you before you go out and start investing with real money. You want to have the benefit of doing some real trades before you start using real money because, stock trading for beginners is scary using real money when you’ve never done it before.


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November 26, 2014

How to Be Thankful as a Guide to Investing

I spent some time in Japan with a good friend of mine named Wahei Takeda. He’s known as the Warren Buffett of Japan, who made his entire fortune from scratch in post WWII Japan. Let me share with you what he told me about being thankful...

Wahei told me that the most important thing that you can do every day, the thing that was responsible for him making billions of dollars, is...


"Be thankful 1,000 times a day."


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November 21, 2014

Rule #1 Investing Call Options

Call options are a fantastic way to generate cash flow and reduce basis on companies we already own. When we already own a company we call a call option a "Rule #1 Call Option." Let me briefly explain the call option definition.


What is a Call Option?

Essentially, a call option example is a coupon to get cheap milk. There's two sides to this coupon. There’s the grocery store, which is essentially selling the coupon at a very, very, cheap price and there's the buyer of the coupon who is getting a right to go buy this milk.


So, when we use the coupon between the store, the store has an obligation to sell the milk at a set price and the buyer of the coupon gets the right to buy that milk at a set price. That’s just a coupon and we’re used to using them all day long.


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November 14, 2014

Bull Markets vs. Bear Markets

I sometimes get asked by investors what is a bull market and what is a bear market and how does it relate to Rule #1 Investing?  

Well let me put it in our terms…

We’re really excited about buying when there’s a lot of fear and we’re really excited about selling when there’s a lot of greed in the stock market. I’m going to tell you about how to take advantage of a bull and bear market.


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November 06, 2014

Events That Cause Stock Prices to Change

This is a one of the most critical things I could ever show you about stock market prices… 

How is a stock price determined?

What are the reasons stocks go on sale?

The reason this is so essential is on the grounds that there's a colossal number of individuals who invest into stocks, who have been taught in business school that stocks never go on sale.

They are taught that the value of the business is determines the price of the stock.

Rule #1 investors don't believe that is genuine. Warren Buffett doesn't think it’s true, and the rest of the best financial specialists on the planet don't think it’s true either. 


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October 30, 2014

The Best Companies to Invest in Have a Great CEO

In Rule #1 Investing, one of the things we search for when we're attempting to truly understand what the best organizations to invest in are, is the management of the organization. What we attempt to discover is a truly incredible CEO.


Take after these 3 tips to discover characteristics of a great CEO, who you would be glad to own a bit of the organization.


1) Is the CEO an Owner of the Company?


One of the main things we take a look at when we search for how to discover the best organizations to invest in is the manager of the organization.


A manager is some individual who established this company. These are people that moved into the business at such an early stage in the organization they are basically founders. Were searching for somebody who is connected to the business where they're kind of sitting on the same side of the table as us. They have a considerable measure of stock and they don't profit, unless we profit.


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October 23, 2014

Responsible Investing With Your Own Personal Values

Our individual values are extraordinarily important to successful investing. Practically nobody discusses how to vote your values, or your heart to where your cash is going.

I think it is the most important vote in your life to put your cash into the things that you value and that you need to see in the world in the future.

Keep in mind that wherever you're putting your cash is what is going to develop on the planet…


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October 15, 2014

3 Common Stock Market Investing Myths Busted

There are regular myths about investing that to a degree can drive away the individual and make them think about whether investing is worth it.

Here are 3 myths about investing and the realities so you can develop your riches and achieve financial independence. And you can do it with Rule #1. 

Myth #1: You Have to be an Expert to Manage Money

You don't need to be a expert, all you must be is an expert at one little piece of the business sector. We call it being an inch wide and a mile deep…

What are the other two myths? Click the link below to find out.


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