Author: Finance Dude

Charlie Munger is an advocate of using interdisciplinary discipline in solving problems.  As an example, in solving a business problem one must not simply be restricted using business or economic concepts and solutions.  But must also take into consideration psychology, biology, sociology, and any other disciplines.  Restricting to one’s discipline, would be like, according to him, a one legged person in an ass kicking contest.

The following puzzling questions are adapted from lectures by Mr. Charlie Munger.  Try to answer them.

1. An activity in the US, with one-on-one contests, and a national championship.  The same person won the championship on two occasions about 65 years apart.  Name the activity.

2. A new furniture and appliance store in a strange city opened up selling at a rate of more than $500 million a year (Before that the largest furniture and appliance store was selling $350 million a year).  From the day it opened up, 3200 spaces in the parking lot were full. In short it’s hugely successful.  What explains the runaway success of this new furniture and appliance store which is outselling everything else in the world? (You can state as much as you want.)

3.’You own a small casino in Las Vegas.  It has fifty standard slot machines.  Identical in appearance, they’re identical in the function.  They have exactly the same payout ratios.  The things that cause the payouts are exactly the same.  They occur in the same percentages.  But there’s one machine in this group of slot machines that, no matter where you put it among the fifty, in fairly short order, when you go to the machines at the end of the day, there will be 25% more winnings from this one machine than from any other machine.  What is different about that heavy winning machine?  Why do you think more people play it? ‘

4.’There’s a tire store chain in the Northwest, which has slowly succeeded over 50 years, the Les Schwab tire store chain.  It just ground ahead.  It started competing with the stores that were owned by the big tire companies that made all the tires, the Goodyears and so forth.  And, of course, the manufacturers favored their own stores.  Their “tied stores” had a big cost advantage.  Later, Les Schwab rose in competition with the huge price discounters like Costco and Sam’s Club and before that Sears Roebuck and so forth.  And yet here is Schwab now, with hundreds of millions of dollars in sales.  And here’s Les Schwab in his 80s, with no education, having done the whole thing.  How did he do it?’

5. The heart and soul of the integrity of a delivery system is that all the packages have to be shifted rapidly in one central location each night. And the system has no integrity if the whole shift can’t be done fast.  And Federal Express had one hell of a time getting the thing to work.  And they tried moral suasion, they tried everything in the world (including increasing hourly pay), and finally somebody got the right solution.  What do you think was his solution?

6.Early in the history of Xerox, Joe Wilson, who was then in the government, had to go back to Xerox because he couldn’t understand how their better, new machine was selling so poorly in relation to their older and inferior machine. Why?

Answers will be released next week. If you can’t wait for the answers. You can search for the speeches and read the whole thing.

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About the contributor:
Finance Dude
The writer is a financial planner, investor, speaker and a self confessed cheapaholic. (Cheapaholic- a term he invented to mean someone who is addicted to being very cheap).  Send in your questions.  He will try to answer any questions you might have, preferably on finance and money matters.  Although he does not object to questions on love and relationships, he never had one and due to his extreme cheapness, will probably never have one (In case you’ll send it mistakenly, he promised to forward it to HeaRty).

Disclaimer: Advice posted in this portion is merely opinions and views of the writer.  It does not constitute formal advice.  The writer will not be responsible for any of your gains or losses. If symptoms persist, contact your trusted financial planner.

To the real fathers’ :

whose wallet does not contain thick moneybills but is thick with pictures of his family and lots of discount cards and coupons.

whose pride is not having lots of women but loving and caring for one in his life.

whose abs are not well defined, but whose childrens’ future is.

whose hobbies are not golf or gulp, but working and making ends meet.

whose dreams are not getting famous, or getting filthy rich. but having a happy family.

Happy Father’s Day!

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About the contributor:
Finance Dude
The writer is a financial planner, investor, speaker and a self confessed cheapaholic. (Cheapaholic- a term he invented to mean someone who is addicted to being very cheap).  Send in your questions.  He will try to answer any questions you might have, preferably on finance and money matters.  Although he does not object to questions on love and relationships, he never had one and due to his extreme cheapness, will probably never have one (In case you’ll send it mistakenly, he promised to forward it to HeaRty).

Disclaimer: Advice posted in this portion is merely opinions and views of the writer.  It does not constitute formal advice.  The writer will not be responsible for any of your gains or losses. If symptoms persist, contact your trusted financial planner.

During the summer, I had a problem.  It was really hot.  Our house was made out of four-inch concrete and tiles for floor.  I was like a pig in an oven.  I can’t sleep well.  Two fans just won’t make it.  The cost of an air conditioner is about Php 10,000.  But I’m too cheap to buy one, because I think it’s not just Php 10,000. It’s more!

When you buy an appliance, you also pay for its electricity.  Electricity costs money.  The estimated cost is about another Php 1,000 (at least) a month.  In a year that’s Php 12,000. (Php 1,000 x 12 months). That’s assuming no increase in electricity will happen— ever!  Of course you know it’s not true.

The total cost is about P22,000 and increasing. (Php 10,000 for the appliance, Php 12,000 a year for the electricity.)

How much would I need to invest to make Php 12,000 a year?  Let’s assume I could get an investment with a return of 6% a year. (Pause for a while and refresh your math operations to answer this.)

The answer is Php 200,000.  Divide Php 12,000 by 6% to get this amount. (Now you know how powerful your fourth grade math is.)  If I’ll have Php 200,000 and invest it at 6% return yearly, I’ll receive Php 12,000 every year to support my electricity expenses.

But what if electric rates increases again?  How will we able to cover our expenses? (Some nose bleed terms of offsetting or covering or matching are: hedging, squaring, netting)

To answer this question, let us ask a simple question: Who gets the benefit when electric rates increase? (This is not a trick question. The answer is not Nobody.)

Answer: Power Producers.

How do we become an owner of power producers?  Some companies are traded in the stock exchange. (A stock exchange is a place where stocks, which represents ownership rights of a corporation, are bought and sold.)  We could buy the stocks at the right price.  The increase in our electric bill expenses would mean an increase of the income of the power producer companies we would own which could then translate to an increase in its stock price and a profit for us.  The profit would then be able to pay for the increased electric bill.  Sounds simple.  But the truth is that it’s more complicated than that.

What did I do? I really can’t take it anymore.  Sooooo, on the late summer month of May, I bought the cheapest available air conditioner with the highest EER (A higher EER is supposed to mean more efficient use of energy and a lower electric bill.)  I’m now forced to make at least P200,000 to support it passively (I’ll give myself until end of this year to make it) or… I could become a Power Ranger and look for power producers to own.

(P.S. Two cheap air conditioners I saw are Korean brands. I won’t tell you the brands until they pay me advertising fees and I don’t own the company who makes them.)

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About the contributor:
Finance Dude
The writer is a financial planner, investor, speaker and a self confessed cheapaholic. (Cheapaholic- a term he invented to mean someone who is addicted to being very cheap).  Send in your questions.  He will try to answer any questions you might have, preferably on finance and money matters.  Although he does not object to questions on love and relationships, he never had one and due to his extreme cheapness, will probably never have one (In case you’ll send it mistakenly, he promised to forward it to HeaRty).

Disclaimer: Advice posted in this portion is merely opinions and views of the writer.  It does not constitute formal advice.  The writer will not be responsible for any of your gains or losses. If symptoms persist, contact your trusted financial planner.

“Before becoming a money master, first be a self master” –J.P. Morgan

A finance guru once said that there are three ways to be rich: 1.) Marry it. 2.) Inherit it. Or… 3.) Make more than you spend. Feel free to use any combinations of the three. The last way is the simplest but not the easiest.

Where Did My Money Go?
Have you wondered how you basically end up using all your money paycheck after paycheck with little or no savings left? After reading all the financial books and seeing a thousand planners, it all boils down to character—discipline.

It’s similar to food and diet where you basically count your calories and plan your meals. All it takes is discipline. It is not the amount of money you make that is the issue for most. It’s the amount you keep. (I know you heard it a million times. But it’s the truth.)

Sources and Uses of Cash
How does your cash flow? I know you hate numbers. I used to hate it too. But money is basically expressed in numeric terms and thus having knowledge of basic mathematics is a must. Make a budget. (So cliché!) Everytime you spend, list down all your expenses. This amount must not exceed your budgeted expense. You can use software such as the basic excel templates to keep track of not only your expenses but also your finances. An example of a money managing software can be found at http://www.pocketsmith.ph/.

What’s Important to You?
How do you decide what to spend on? Simple. You have to know what’s important in your life. Assuming you plan to take your family to a vacation in Hong Kong. In doing so, you’ll be indebted and you might risk not saving enough for the kids’ college education. Ask yourself why are you taking this family vacation? Your answer might be “To have an enjoyable quality time with your family.” Is there any affordable site that would meet your goal of mainly “having an enjoyable quality time with your family”. I’m sure you could list down a whole lot. Pick about 5 or 10 of them. Decide as a family.

A book by David Bach called The Automatic Millionaire started something called the Latte Factor. The basic idea is that you can save a whole lot by simply reducing nonessential expenses in your budget such as Premium Coffee Shop Coffee (Latte). Some things are unnecessary, such as daily intakes of soda. Water on the other hand is actually cheaper and healthier.

Hope these helps!

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About the contributor:
Finance Dude
The writer is a financial planner, investor, speaker and a self confessed cheapaholic. (Cheapaholic- a term he invented to mean someone who is addicted to being very cheap).  Send in your questions.  He will try to answer any questions you might have, preferably on finance and money matters.  Although he does not object to questions on love and relationships, he never had one and due to his extreme cheapness, will probably never have one (In case you’ll send it mistakenly, he promised to forward it to HeaRty).

Disclaimer: Advice posted in this portion is merely opinions and views of the writer. It does not constitute formal advice. The writer will not be responsible for any of your gains or losses. If symptoms persist, contact your trusted financial planner.