Investments - Risk and Return
When you borrow money from a bank, they require you to pay it back over a certain time period. They also require you to pay interest, the amount over and above the principal that you borrowed. The bank expects the interest to exceed inflation, cover any costs of servicing the loan, and make a little profit.
You are an investment for the bank. They invest in your ability to pay them back plus interest. The interest is their return. Your interest rate will depend on their assessment of your creditworthiness. If they deem that you are a good credit risk (ie, low risk), they will give you a low rate (ie, low return for the bank). If you are seen as a high credit risk, you will be charged a high rate.
This balance between risk and return is the entire basis of modern portfolio theory (MPT) and upholds the underpinnings of every investment made, by the bank, by hedge fund managers, and by you. However, just because Warren Buffett uses MPT when making investment decisions does not mean that it is too complicated or too difficult for you and your investments.
Yes, the underlying mathematical formulas are not simple. Harry Markowitz, Merton Miller and William Sharpe did not win the Nobel Prize for strolling in the park, but you do not need a degree in economics or finance to benefit from their award winning findings.
All assets have the same characteristics: risk and return. They also tend to have some correlation to each other, meaning if one particular assets changes in price, another asset will change in price as well, sometimes more, sometime less, and sometimes in the opposite direction (negative correlation).
The degree to which an asset fluctuates is called standard deviation. The higher the standard deviation, the greater the fluctuations are likely to be. If you do not like to see your portfolio move from great highs to great lows and back again over short periods of time, you would prefer to have your standard deviation as low as possible while your portfolio is growing at the highest rate possible.
By combining assets with low correlations into a portfolio, you can offset some of the risk in the riskier assets while still maintaining a higher return. The Nobel Prize was given for discovering the “efficient frontier” – that line along which a combination of assets can give you the best return for the lowest risk.
The problem with investing along the “efficient frontier” is that correlations are all based on historic performance, which if you have spent anytime listening to investment shows or reading about different assets, you will know that “historic performance is not predictive of future performance.”
So what now? Did I just lead you in a giant circle? Yes and no. Trying to build a portfolio of individual securities along the efficient frontier would be a useless statistical exercise because the volume of data that is constantly shifting would make it impossible to keep your portfolio on that frontier for any lengthy period of time.
Imagine trying to bake a cake by selecting just the appropriate number of sugar crystals and flour specs. It would take forever and would not yield a better cake than following the recipe by taking one cup of sugar and two cups of flour.
Basically, that is what your portfolio is, a recipe made to your taste, with each asset class representing a different ingredient. Tomorrow I’ll cover asset allocation and how to spread your investments across asset classes to lower your risk for a comparable return.
Meeting in Public Places
If you are very tied into the business community in your area, you may find some difficulty having meetings in public places. In our community, there are a number of local cafes and restaurants that are perfect for business meetings.
The drawback is everyone thinks so. When choosing to meet at a public place, make sure of the following:
- It’s not an issue to be meeting with the person you are meeting with. If someone sees you, would that scuttle a deal, be a cause for gossip, or start unfounded rumors.
- Don’t talk about anything or anyone in a negative light if you don’t want it to get back to that person. It’s amazing who knows who and someone might overhear a snippet of a conversation and pass it on.
- Be prepared to see people who you know and greet them. It’s embarrassing to see someone out and not recognize him or her.
- Be pleasant with people you know who are not in your party, but don’t spend more than 30 seconds talking with them. Not only does it interrupt his or her conversation, but it is also rude to the person you are meeting with.
Meeting in a public place is a nice way to mix business with pleasure; however, make sure you follow these simple rules to stay out of trouble.
DoD 2008.2 SBIR SOLICITATION
The DoD is now accepting proposals for the 2008.2 SBIR Solicitation. If you are interested in winning a grant from the DoD, start preparing your proposal immediately.
Schedule:
April 21, 2008: Solicitation was issued for public release
May 19, 2008: DoD began accepting proposals
June 18, 2008: Deadline for receipt of proposals by 6:00 a.m. EST — plan ahead and submit early.
Also, don’t forget proposals for the latest NSF SBIR solicitation are due on June 10th at 5:00 pm.
Running a Contest - Creating Your Rules
If you decide to create a contest, either as a marketing ploy or as an employee motivation tool, be careful when writing the rules. When someone writes contest rules, he or she can only write from his or her perspective. The problem is that this person is not the one reading the rules.
Because the English language is complex, sentences can be interpreted in different ways. It would be too bad if one reading of your rules allowed everyone who is entered to win.
Therefore, always have two or three others read your rules for interpretation issues. It is best if those people are not like you at all. For example, if you are an engineer, have a marketing person and the receptionist read the rules.
Finally, always allow yourself an out. The last rule should read, “In the case of a tie or other dispute, the final winner will be determined by the judge/panel/committee. All such decisions are final and not up for debate.”
Preventing Employee Theft
One of the most distressing things to face is finding out that a trusted employee is stealing from you. Sadly, it is more common than most people think.
Theft and fraud can take many forms:
- Stealing of supplies and petty cash
- Creation of fictitious employees
- Exaggerating or fabricating expense reports
- Running a personal business on company computers
- Excessively using corporate time to complete personal tasks
- Shipping and billing scams
- Creating false vendors
- Stealing and forging checks
Most employers think that it can’t happen to them because they have hired trusted employees or their employees have been with them for multiple years. But what they don’t realize is that the typical perpetrator is a first-time offender.
The offense often starts because the employee is facing financial troubles and often just “borrows” money or supplies, but then has to steal again to cover the initial crime. In other cases, the employee feels justified, believing that the employer owes him more than he is being paid.
What should be really frightening is that the average time it takes for an employer to catch a fraud scheme is 18 months, and on average, 42 % of fraud victims recover none of their loss.
Prevention
- Segregate accounting duties and change who has what duty at random intervals
- Have easily readable and organized invoices and shipping records
- Minimize the amount of cash on-hand
- Keep blank checks locked up
- Have payroll additions done by a different person than the person who runs payroll
- Follow up on customer complaints about credit for payments
- Conduct background/credit checks on all employees
- Secure fidelity bond dishonesty insurance
- Include an anti-theft policy in your employee handbook
If you suspect employee theft, don’t wait to begin an investigation. If you find evidence of a theft, you should contact your attorney for steps how to proceed.
If you decide to confront the employee, keep calm and allow the employee to explain. Although you would not want to keep that employee, you may find in the explanation that additional fraud had occurred or other employees were involved. Don’t threaten the employee to get your goods or money returned as it may be seen as blackmail and hurt your case in the future.
The best way to stop employee theft and fraud is to prevent them from happening in the first place. Be clear in your policies and make sure that they are followed. Hire trustworthy employees and pay attention to them over time. Your business may be at risk if you don’t.
