Tuesday, August 28, 2007

Statement of Cash Flows

Hello everyone.
In my Aug. 19th post, entitled The Basics: Financial Statements and Accounting Terms, I wrote about the three major financial statements that are crucial to understand if you are to invest successfully. To recap (although I suggest you read that post too), there are three major statements and they are the balance sheet, the income statement, and the statement of cash flows.

Balance sheet: an accounting statement that summarizes a company's assets, liabilities, and shareholder's equity at a specific point in time. It basically gives a snapshot of how financially healthy a company is at a discrete instance. It must follow the rule of Assets = Liabilities + Owner's Equity. Read the Aug. 19th post to find out about owner's equity.

Income statement: an accounting statement that summarizes how much a company earns, and what its expenses are. The money that a company earns can be from selling goods, capital gains on stock investments, appreciation in real estate, and interest on bonds it holds.

Expenses can be from the materials it takes to make the goods a company sells, research and development, labor costs, pension costs, and rent/mortgages.

Now, onto the statement of cash flows. In order to understand the statement of cash flows, you must realize that there are two types of accounting used. One is called accrual basis accounting and the other is called cash basis accounting. To promote transparency, the FASB (Financial Accounting Standards Board) mandates that companies use accrual basis accounting.

Here's an example. Let's say you sell paper to a law firm. The law firm can either pay you immediately or in a more typical time frame for large intercompany transcations, a month. Let's go further and say that you sell the paper to the law firm on Jan.1 and they pay you on Jan. 31. On Jan. 1, a sale has taken place - it's just that no physical or electronic money has been transferred from the buyer to the seller. So companies record it in their balance sheets as an asset and on the income statement as revenue.

Unfortunately, this does not tell one a whole lot about how much physical cash comes into the company. This is where the statement of cash flows comes in. The cash flow statement takes the net income from the income statement - the very last line - and adds to it things that do not involve the transfer or cash, like depreciation and amortization and other non-cash expense. I'll discuss these at a later time.

Finally, the cash flow statement has three sections: the operating activities section, the financing section, and the investing sections. I'll be brief.

Operating activities: This portion involves the revenue from cash transactions that arise because of the sale of a company's products or services. It also involves the cash from expenses for the company to make its products or deliver its services.

Financing activities: This portion involves the revenue from cash transactions tha arise through the company raising money. This can be through raising money or issuing stock.

Investing activities: This portion involves the revenue from cash transactions that arise through the company buying or selling an investment, i,e, stock or real estate. These cash transactions also can arise from things like "capital improvements", i.e. renovations to a building.

Thanks for reading and in one of my upcoming posts, I will go more into depth about accounting. However, I won't scrimp on my squshy, less quantitative side.

The Power of Charity

Hello everyone.
On a daily basis, I try to do a tremendous amount of thinking. Not thinking while listening to music, or thinking while eating dinner, but just thinking where I sit down and remove myself from any possible form of disturbance. It is during these periods of uninterrupted thinking when I get my good ideas.

One of the ideas that I've been mulling over during the past few weeks is why I haven't given more to charities. I've already mentioned before that I have several tens of thousands of dollars in student loan debt to pay back, and that I wasn't born with a silver spoon in my mouth. And if you're anything like me, most of your paycheck is consumed by basic living expenses such as food and rent. However, I thought that there had to be more to my reluctance to giving to charity. Using the things I mentioned above as excuses was taking the easy way out.

After a few weeks of serious self-examination, I realized that for the most part, my money profile is that of "hoarder". You see, growing up, even though there was enough to go around, there was never excess money in my family. We got by, through thrift and the grace of God. I imagine that this subconsciously instilled in me a sense that I have to preserve and protect every single cent that I have. Unfortunately, this is not the way to wealth, and more importantly, it isn't the way to a fulfilled life. Let me explain.

God, or whatever higher universal power you believe in, has placed us on this earth, I believe, to be of service to others. This service can be through teaching, encouragement of others when they're feeling down, volunteering time and energy, and giving money. When I think about the atrocities that are taking place in Africa, particularly Sudan, and how such small sums can drastically change lives, I can't help but give. In college, in my Political Economy of Development class, I learned that half of the world lives on less than $2 a day. $2 a day! That's ridiculous. That's the fare to get on public transportation in New York City!

So I've decided that every paycheck, I will donate $25 to Africare - an African-American led organization that provides potable water, healthcare, and shelter for displaced Sudanese. It also contributes water/food and healthcare in other parts of Africa, but right now, Sudan and Chad is where their efforts are focused. I have also decided to give $100 to my junior high school alma mater, De La Salle Academy, in order to help the defray the cost of tuition for a low-income student.

So go ahead, donate. Even if you feel it might hurt your pockets. You'll see how good it feels to be of assistance to someone who needs your money much more than you do. Boy, am I glad that I didn't wait until I had my loans paid off in order to start giving back to the world, monetarily.

Thanks for reading and until next time...

Sunday, August 19, 2007

The Basics: Financial Statements and Accouting Terms

Hello everyone.
I hope that you all enjoyed your weekend. I will try to keep tonight's post relatively short, but I will cover something that's very crucial to your investing journey - accounting. Don't get me wrong, I'm not an accounting guru. Heck, I only took one accounting class in college and didn't take any economics courses. But recently, I've been reading "Accounting for Dummies" and would like to share some valuable insights that I've gleaned.

Every company that is publicly traded (that is, every company whose stock you can own) is required by the Securities and Exchange Commission to file something called a 10Q and a 10K. A 10Q is a report that is an overview of a company's financial performance for the past three months, or the last quarter. The 10Q is filed three times a year and is intended to provide visibility into a company's operations for the company's shareholders. A 10K, which is also inside the annual report, is a comprehensive report of the company's financial performance over the past year. This report is only filed once a year - typically at the end of the year, depending on the accounting/fiscal calendar that the company uses.

Within these reports - the 10Q and the 10K - there is a whole lot of valuable information about how much the company makes. But before I get into that, let me specify the types of statements you will find in these reports. The three statements are:

the income statement

the balance sheet, and

the statement of cash flows.

The income statement is a statement which talks about the company's revenues (how much it earns) and its expenses (how much it has to pay out over a certain period of time). A company can earn revenue from many things such as the things it sells, investments it holds, real estate that may appreciate in value, and interest from bonds it may hold. Similarly, a company's expenses include the price that it paid for raw materials for its product, the cost of research and development, salaries for the employees, rent, and the interest that it pays on its debt, if the company has any debt. When CEOs and stock market commentators talk about a company raising its top line, they are talking about increasing revenue.

The balance sheet is a statement that is akin to your annual banking statement. It states how much money you have (your assets), how much debt you owe (your liabilities), and another thing which is completely unrelated to an individual's financial position - owner's equity. Owner's equity is essentially the amount of capital the company received from investors in exchange for stock. It is also the difference between assets and liabilities, i.e. Assets - Liabilities = Owner's Equity. Or, Assets = Liabilities + Owner's Equity. A company's assets can be divided up into long-term assets and short-term assets. Long-term assets are things such as real estate and equipment/machinery. Generally, long-term assets cannot be easily converted into cash. Conversely, short-term assets are things like cash and marketable securities (stock) that will be used to pay for expenses in the next twelve months. When CEOs and financial commentators, talk about increasing a company's bottom line, they are talking about increasing the net profit a company earns - the last line on the balance sheet.

The statement of cash flows was/is for me the hardest statement to get my head around, since it involves so many adjustments. I will elaborate on it in my next post, in addition to giving some basic formulas to help you dig into accounting statements. But for now, I will just tell you that it is a statement that shows how efficiently a company uses cash. This statement adjusts for how much cash comes into the company, and how much goes out. Normally, statements like the income statement add the proceeds from a sale to their top line when a customer receives a product. But this does not necessarily mean that cash has been given to the company. Sometimes customers pay for an item a month later, and receive the product beforehand. When companies record this sale and add it to their revenue before cash/physical money has been received, this is called accrual based accounting. The statement of cash flows adjusts for sales on a cash-basis only. That is, the statement of cash flows shows how much cold hard cash the company received and how much it paid out. Nothing more, nothing less.

Thanks for reading and if you have any questions, please feel free to post them or email me. Until next time...

Monday, August 13, 2007

Is All Credit Card Debt Bad?:The Allure of Convenience Checks

Hello everyone.
In my Sunday, July 8th post, I wrote about how to manage debt by paying the minimum for debt service and placing your money where it can earn higher returns. This only works when the interest rates on your debt are low.

On Saturday, I received some convenience checks in the mail. When I get these, I usually tear them up because I don't like carrying a credit card balance. But because I have pretty good credit (above 700), I often get offers for the ability to write checks to myself at rates like .99% until May 2008 or 4.99% until the balance is paid off. I had been offered an APR (annual percentage rate) of 4.99% before, but Saturday was the first time that I had gotten one as low as .99%. I knew that I had to take advantage of this offer.

Normally I would not advocate borrowing money to buy stocks. Buying stocks on margin is something that I would only recommend for experienced investment professionals. But using a credit card convenience check to buy stocks when you're getting an incredible rate is something that I think can be profitable if planned carefully.

Today, I wrote myself a check for $3,000. I will use $1,250 of that to pay for my LSAT prep course (I will pay off this balance at the end of the month). The remaining $1,750 will be used to purchase 100 shares of Ceragon Networks (CRNT). Ceragon Networks is a telecommunications company that provides Wi-Max, and wireless cellular infrastructure to cellular operators. Given the growth of broadband and cellular technology in emerging markets such as India, China, Brazil, and Mexico - many of which are the markets that Ceragon Networks operates in - Ceragon is posied to profit nicely.

I think that CRNT will be more than .99% higher 9 months from now, which is when I would start paying the regular APR on the $3,000 that I'm borrowing. CRNT has a market cap of approximatey $450 million, is growing revenues at 57%, its quarterly earnings recently more than tripled, and it trades at $15.93 right now. Couple these factors with the typical end of the year tech rally, and you have a recipe for tons of upside price action.

Of course this is an oversimplification, but hopefully it provides a starting point for more research on CRNT. The bottom line though is that I can afford to pay back the $3,000 I'm borrowing if anything goes awry with this trade, the APR on the money is ridiculously low, and CRNT has major growth potential. I don't recommend others doing this without knowing their risk tolerance level. I just wanted to put the idea out there - using low-interest rate money to invest is a much better alternative to using that money for a vacation, designer jeans, or a flat-screen t.v. Thanks for reading and until next time...

Thursday, August 9, 2007

Lessons from the Pool

Hello everyone.
Tonight, I want to talk about a personal experience of mine and how it relates to investing.
Recently, I signed up for swimming lessons at the Harlem YMCA. I'm not the greatest of swimmers, even though I've taken lessons before. And since I know that I need to review the basics, I decided to enroll in the beginner's class.
To my surprise, on the first day, I saw a huge amount of older people in the class. And when I say older, I mean older. There were a few women in their late 50s and one in her early 60s. What struck me immediately was that these women did not let their age prevent them from learning a skill that's crucial.
Inspired by these women, one day during class, I volunteered to be the first to swim a full lap across the pool with a kickboard. I kicked as hard as I could and fortunately I made it across safely, but when I got to the deep end, I started to question whether I had the stamina to make it across. I could feel myself start to sink, and I realized that the only way for me to not die was to calm myself down.
So how does this relate to investing? Well, in order to be a successful investor, youi have to remain cool in the face of fear. It is impossible to trade/invest profitably when you are fearful. This is similar to the way that one begins to sink in the water once fear takes hold. Today, the Dow Jones Industrial Average index dropped 387 points, or nearly 3%. This is huge. And even though my portfolio consists of small-cap stocks - while the Dow is made up of large cap stocks - my portfolio still took a hit.
One of my stocks, First Marblehead (FMD) - a student loan services provider - was down 4% today and is down 16% overall. Why do I still hold onto it when it's being beaten so harshly? My reason is simple: I believe wholeheartedly in the long-term prospects of the private student loan industry. First Marblehead has a great balance sheet, sports a 3% dividend, is growing earnings and revenue at around 20%, and trades at 7 times next year's earnings estimates. Sometimes you have to hold your ground and wait for the market to turn around and recognize value.
To come back to my original point, swimming requires you to be relaxed and alert at the same time. The same can be said for investing. If you can't be relaxed in a stock market as volatile as the one we've had in the past few months, you should get more comfortable controlling your emotions by monitoring a mock portfolio on Yahoo! finance or Marketwatch.
Thanks for reading and until next time...

Sunday, August 5, 2007

A Slightly Different Approach

Hello everyone.
Today, I'd like to talk about how I will change Generation Y Financial Freedom and my vision for it.

I intend to continue dispensing financial advice to 20somethings and members of other age groups. But I've realized recently that most financial advice that I could possibly give has been dispensed at some point in time before my blog ever existed. And one can only talk about how to get out of credit debt and the importance for saving for retirement in your 20s so much. So I've decided to switch to a different approach. The following are things that I will be doing from now on:

1. I will write about issues that I find relevant to my life and that may or not pertain to the lives of others. These issues will pertain to personal finance, but they will also pertain to spiritual and emotional health. This is because our spiritual and emotional health affects our financial health.

2. I will start giving stock recommendations/my opinions on certain stocks based upon the research that I've done. I am a little hesitant to start doing this as I don't want people to lose money because of me. But I've decided that it'd be a good learning process for me to write down, in a candid format, my thesis for why an investment is good. These recommendations are intended to be a basis for further investigation.

3. I will make blog posts shorter and more frequent. People like reading straight-to-the-point advice. It's easy to ramble on when your writings are long. Keeping things short is a way to make sure you stay on track.

Thanks for reading. If you have any questions, please feel free to write me or post a comment. Until next time...