The Financial Analysis Guy

Try to calculate the Return on Investment (or Internal Rate of Return) of doing this…good luck.  Today, I spent several hours doing household chores.  My wife went back to Detroit for a business trip and left me a little honey-do list.  So today, like the good robot husband I am sometimes, I did my thing and went through that list.  I spent every agonizing, errr enlightening, moment on checking off every task and achieved the whole thing - save some last minute cleaning she wanted done right before she comes home on Tuesday.

One thing that wasn’t on her list but was on mine, was replace every dinosaur light bulb we have in the house with those new fandangled bulbs that look like a bowl of spaghetti. Since I am all about saving money and doing my own financial analysis to justify my actions, I had to look at this based on my return on my investment (or Internal Rate of Return).  It took the idea of saving money bigtime for me to actually do the right thing - what kind of person am I???

I thought this process would have taken me about 20 minutes, but after spending roughly 2 full hours on this little project, I was felling pretty good about myself.  I replaced nearly 40 light bulbs and did a variety of equivalent 60 watts, 75 watts and 100 watts.

What is cool about this is the learning process.  What I learned was the following:

• the old 60 watt version uses only 14 watts in the new version
• the old 75 watt version uses only 18 watts in the new version
• the old 100 watt version uses only 23 watts in the new version

These new light bulbs use 1/5 of the electricity as the old version.  HUGE savings when it comes to paying my those really nice folks at the utility company.  The package says I can save, under normal uses, the following:

• the 14 watt version saves $46/year
• the 18 watt version saves $56/year
• the 23 watt version saves $77/year

Since I replaced nearly 40 light bulbs today, I know the savings could very well be huge.  If the average savings per yer is $50 per bulb (on average since most of them were the small kind) and I replaced 40 of them (I need my calculator), but I think that is roughly $2,000 per year in energy savings.  I am not that optimistic and I know that it simply can’t be true, but lets say I was off by 50% and it only saves me a cool grand each year.

Time to crack out one of my best friends (Microsoft Excel) and do a little investment return.  The total investment in light bulbs was $33.  My time is free since I was working around the house and my wife gets a special discount - for barter of course…  ;)  The internal rate of return on this investment is silly to discuss.  It is off the charts, so let’s not even discuss it. 

What is truly neat to look at is how these 10 C-notes are going to multiply over time, invested VERY mildly at 8% return.   To see what this means to me in 30 years time - saving the $1000 every year; invested at 8% annual return - simply use the following formula in excel   “=FV(.08,-1000,30)”. 

(BTW, I am writing this with The Matrix on in the background…killer flick)

This silly little bulb replacement exercise just netted me an additional $113,283.21 for our retirement.  If my adjustment down to $1000 per year is wrong and I actually save the $2000 per year, my take at the end of all of this (just replace the 1000 with 2000 in Excel) is an unbelievable $226,556.  I am besides myself right now.  Somebody needs to come on over my pad and punch me in the face a bunch of times for not doing this sooner.  If not in the face, then at least a couple swift kicks in the beans.  What the heck was I thinking? 

Oh yeah, one more thing, I of course put all my dinosaur bulbs on craigslist to try to offset my $33 initial investment.  For some reason, spending the initial scratch still gets to me.  Those light bulbs seem perfectly fine, but in the in long run, those things were eating me out of house and home.  Taking food off my table sort of speak.  And the Financial Analysis Guy can never have that!

One more thing, the Financial Analysis Gal has this amazingly beautiful floor lamp in the corner of our living room.  It is artwork - I will give it that.  She loves it and we can’t craigslist it quite yet, but the time is coming.  Why?  That halogen lamp uses 300 watts (that’s 21 FREAKING times more energy than my little spaghetti style friend).   That lamp is now officially put on notice!!!

I am a simpleton.  I know I am, so no sense trying to debate or hide this fact.  I was asked the other day what I would consider a good rate of return on my investment.  Well, it’s all relative as the smartest guy in the room (Warren Buffett) would say. 

My Dad would say, “so long as I don’t lose money, it’s good.”  This is probably what Mr. Buffett would say as well - if it came down to it.

A good rate of return on “safe” money would be the return on Treasuries, but who knows nowadays.  A good return on investment or IRR for a risky land deal (which I am often in as a part of my business) is 25%.  A killer Internal Rate of Return (IRR) is 40% - which ironically is doubling your investment in just 2 years. 

Everything else is “close nuff” - as the genius Lonnie Skruggs once said.  For those who don’t know who Lonnie is…he is the Godfather of mobile home investing.  I used to be in the mobile home business, but really, his lessons can be used in anything anywhere and he is a genius…no other way to put it.

1. Doubling your money in 3 years gives an internal rate of return of 25%. 
2. Doubling your money in 2 years gives an internal rate of return of 40%.
3. Both are darn good and nothing to sneeze at…
4. Use leverage (debt), and that only magnifies your return of your investment

Also, both are VERY difficult to obtain.  Regardless of what anyone tells you, it is the vast minority who obtain these returns year over year.  Some might do it one year at time - which is not that difficult, but most will not achieve this in the long-term.

The rule here is that a return on investment or internal rate of return (using time value of money) is relevant to what you require as an investor to the amount of risk taken.  For me, I want the highest return possible in the shortest period of time.  What makes the smart investor smart is they want this, but ALSO want the lowest risk possible for that return.  It’s the balancing act that differentiates folks.  Everyone wants huge returns, but what risk are you willing to take to get it.  Oftentimes, it is NEVER worth the risk of long-term capital loss to achieve a few extra percentage points.  In the recent past, many professionals forgot this rule (not guideline, but a rule)…

Do your homework and listen to your gut when making your investment.  This will always yield the highest possible return in the long run.

“They are the same, right?  I mean, finance is finance and doing analysis is the same regardless of what you are doing it for.  Right?”  Something that I am sure most people believe is the case.  Well, that is partially true, but not 100%.  Let me explain.

Making Better Decisions

Corporate and personal financial analysis are the same when it comes to what they will do for the person using the information - to help make better decisions.  That is the essential purpose of doing financial analysis.   That is it.  People make decisions every day using their own financial analysis, but of course not everything can be boiled down to understanding the financials.

Some people in the financial analysis/investment industry believe that the act is actually the cure.  It is not and don’t let anyone try to tell you differently.  We must keep in mind that doing proper financial analysis is a way to support decision making in all walks of life - corporate/business AND personal.

Corporate Financial Analysis

I will address this in several other posts, but in general, corporate financial analysis is there to support the business operations - regardless of the size of the business.   Ask any CEO (or any other business owner) how their business makes money and they will talk about their operations, growth, logistics, customers, brand, etc.  Sound financial management and analysis is almost always never mentioned.  However, all will admit it is essential in the “measurement” of those items.  It is also essential in the efficient management of those core competencies when making strategic decisions. 

Measurement and decision making are core to what financial managers do in the business world.  It is by far not that simplistic, but, in general, it is essentially what we do.  There are countless tools to assist in this artwork that the corporate financial manager performs.  We will address these in various other entries.

Personal Financial Analysis

Yup.  Most of us do this every day in one way or another.  Whether we are simply trying to balance our budgets and trying to make decisions about household expenditures or when we are deciding on types of investments for our family units - we are analyzing the numbers.  Numbers are boring compared to the emotional side of these decisions, no doubt, but we all know they are essential.  

Remember, at the beginning of this commentary, I said you were partially right on that they were same.  Well here it is - personal financial analysis has two main goals: measurement and improved decision making.  That’s right - the very same goals as corporate financial analysis.  Looking at the numbers in our every day lives is essential to see how we are doing and how we will be doing after making today’s decisions.

The key differences lie in the depth of analysis and emotions.  In business, you NEVER want emotions part of the decision making process or clouding up the measurement of operations.  Unfortunately, emotion always creeps into the equation and makes it a little more complicated.  In our personal lives, emotion is at the forefront of everything we do.  The numbers tell only part of the story and sometimes we move in complete opposite direction of what the numbers tell us to do - simply because emotion gets in the way.  And that, my friends, can be a very good thing for your family and friends.

In any event, the numbers are always a factor.  You must understand them and respect them, but never let them completely dictate your decision making.  Also, one must be wary not to let the numbers dominate your analysis of past performance. 

My name is Chuck and I am the Financial Analysis Guy.  Wanna know a little more about me?  Read this lovely little quip. 

I know a ton about financial analysis and real estate investing.  I live in Las Vegas where the real estate market is a little down right now.  You think?  Seriously, I could not think of a worse place (or worse profession) to be doing business right now if you are a real estate guy in Vegas (other than Detroit and that is where I came from).  I am doomed!

I wanted to start this up to tackle the complex and often hated topic of financial analysis.  Since I work for a small private equity/investment firm here in Vegas that specializes in real estate, it will also focus a bunch on this as well. 

I like to keep things simple, but I will from time to time use obscure references to movies, TV shows, MAD TV, SNL, Colbert, and several other pop culture “thingies”.   I will stray from the boring financial analysis and Vegas real estate market to hit some personal stuff as well.  But, always, I will try to keep it simple, short and sweet. 

Personal Finance
I will hit this pretty hard and use several other bloggers out there that are excellent.  I read these folks every day and it is worth every minute I assure you.  Trent at the The Simple Dollar is flat out fantastic.  Sometimes a little long winded, but who cares when he writes about the most amazing stuff.  J.D. at Get Rich Slowly is also very good.  Both are professional writers, which I am not.  They are much more refined and clean, which is why I read them to get better at this.

Vegas Real Estate
I am a real estate investor and broker in Las Vegas.  I specialize in raw land and entitlements and you will get your fill of the Vegas real estate market right here.  I will dazzle you with reports, MLS figures, and several other fun tidbits if you are interested in knowing more about our market.  I encourage all Las Vegas real estate pro’s to comment and contact me to guest blog.  I want more Vegas real estate content on this site all the time. 

Investing Whales
Warren Buffett, Carl Icahn, Donald Trump, Kirk Kerkorian, and many more or the big-time fella’s will be quoted and watched here.  I love em all and they are my financial hero’s.   

Simplicity and Fun
Financial investment and analysis is difficult and can be as boring as watching Pulp Fiction for the 52nd time with my drinking buddies.   Yes, I do like to throw em down with friends and am not ashamed of it. 

If you have read this post, my first post, you are one of the lucky ones (that most likely has a lot of time on their hands).  Which CAN mean that you have attained the ultimate goal - financial freedom.  This goal means you can what you want, when you want, and have your bills covered with passive income.  Now that’s nice.  But it also could mean, you just have too much time on your hands…