Mary4Money

I read today that Warren buffet will retire soon, leaving his famous Berkshire Hathaway Fund to other trusted followers of his approach to valuing and investing in stocks. The wonderful thing about Buffett is that he is not the least bit interested in Wall Street advisories or which stocks were most active yesterday. He ignores this information in favor of fundamentals; and he sees no profitable reason to diversify by purchasing mutual funds. Each Berkshire Hathaway share is worth over $100,000 today, proof that Buffett’s approach works; and it is doubtful that any single diversified mutual fund that exists today has outperformed the Berkshire Hathaway Fund. The reason is really quite simple. The promise that diversification provides is not profit or shareholder wealth, but minimal share price volatility relative to the market’s volatility. So, if all of the shares sold in the stock market were to decline in price by 50%, and many did after the September 11th 2001 World Trade Center event,a diversified mututal fund would attempt to ensure that it would decline by less than 50%. The converse is also true. That is, if all of shares sold in the market were to increase 50%, a diversified fund should not increase this much.
There are certain benefits to diversification if price stability is a goal. However, anyone who actually monitors the stock market knows, it is extremely volatile even when all the economic signs are positive; and this phenomenon reflects many things: insider trading, programmed trading of institutional investors, foreign investments;and options trading. Therefore, if the composition of a mutual fund can not offset the effects of factors that contribute both systematically and randomly to its price volatilty, I question the benefit that can be gained from investing in it. Alternatively, by analyzing the fundamentals of a publicly traded company, an investor has only himself or herself to blame if the share price of a stock declines persistently over time and he or she fails to react to this event. That is, it is up to an investor to evaluate a stock portfolio periodically in order to determine the causes of anything that reduces his or her wealth; and it it up to him or her to take action accordingly (i.e., sell off shares if it appears that management’s agenda conflicts with building shareholder wealth).

Buffett did not start his career with a huge investment portfolio. He was cautious initially about his investments, preferring insurance companies that are very judicious about considering both investments and risks because obligations that have to be met if and when policy holders file insurance claims against the companies’ assets. Ignoring the notion that risk is associated with share price volatility is an important Buffett concept. That is, anyone who has actually operated a business knows that it has operational, investment and financial risks. But, I would say that the underlying risk is really management risk. In order to obtain an estimate of this underlying risk,an investor has to read between the lines of a company’s financial statements in order to estimate if management’s hidden, long-term agenda conflicts with other shareholders’ agenda. This requires a little more effort and intuition than can be provided by a programmed model that spits out forecasts of share prices based on historical financial data and financial ratios. And, for this reason, I do not rely on advisories that most of the brokerage houses prepare for clients. Buffett eventually found that he could minimize ‘management risk’ by aquiring a large percentage or all of a company’s shares after which he could control, to a certain extent, the agendas of management and ensure that shareholders’ would benefit from their holdings of the Berkshire Hathaway Fund.

The proof that Buffett’s investment approach works is the performance of his fund. Conversely, the failure of many managed, diversified mutual funds to match Buffett’s performance should be a warning to all who have serious concerns about building their financial wealth. I end this article with an update of the share prices of 2 mutual funds and 2 publicly traded companies for 2 reasons. First, as a Buffett follower, I should expect that a company that is mangaged for the benefit of shareholders will outperform a diversfied mutual fund over time; and second, given the multitude of factors that effect price volatilty today, many of which have little to do with broad economic indicators, it will be interesting to see if the 2 mutual funds actually provide less price volatilty over time than the individual company shares provide. The 2 funds and 2 companies were listed in my article ‘Managing a Stock Portfolio’s Performance’ that was published on this website on February 18th, 2007.

For those readers who hate data and statistics, the table below does not have to be a turnoff. FUSVX is Fidelity’s Spartan Equity Index Fund.It holds 80% of its funds in stocks that are the composition of the Standard and Poor 500 Index. FSTVX  is Fidelity’s Total Market Index Fund; and 80% of this fund is also invested in companiesthat are the composition of the Standard and Poor 500 Index;but its objective is to outperform the the Wilshire 5000 Index, considered the broadest market index of companies in the U.S. stock market. FSTVX is fundamentally riskier than FUSVX because the Wilshire 5000 Index includes some shares of ‘young’ companies,some which have recently issued shares as  IPOs. Therefore, based upon the difference in the composition of the securities in each Fidelity fund and risks attached to them, you should expect greater price volatility with FSTVX offset by greater returns for investors in the form of share price appreciation.

The table indicates that the FUSVX increased its share price by 5% between February 18th and May 4th with a volatilty of roughly 3%. This means that over the course of 3 months as the share price increased, there were days when the share price varied by as much a 3% around its average price (i.e., reflected a possible swing of 6%). FSTVX increased its share price by 3% over the same time period, during which time its share price varied by as much as 2.43% around the average price  (i.e., a possible swing of 4.8%). Oddly, the less risky FUSVX outperformed FXTVX on the basis price appreciation but was more volatile (i.e., neither fund achieved their design objectives from my persepective). The Dow Jones Industrial Index is listed in the table as one of several good indices against which performance of large companies can be evaluated. The DJI inreased almost 3.74% with a volatility measure of 2.73%. Microsoft is a ‘large’ company whose performance can be measured against the DJI. Microsoft’s (MSFT’s) share price increased 6% over the period with a volatility measure of 3.29% (i.e., the stock outperformed both Fidelity Funds in terms of share price appreciation with not much more volatility); andit outperformed the DJI. The same can not be said of Coach (COH). However, COH is not a ‘big’ company that can be compared with the DJI. Its market capitalization (i.e, its share price mulitiplied by the number of shares outstanding) is about $18 billion, relative to Microsoft’s capitalization of roughly $292 billion. Need I say more!  COH has a marvelous track record financially; but over the last 3 months, its price has dropped 3% and its volatility measure is 3.4%. This is where Buffett’s approach to valuing shares is really useful. That is,  if the management team was and remains strong and committed to increasing shareholder value, I would continue to hold COH shares, ignoring the volatility, and await poor fundamentals before deciding to sell off shares. 

If you have any questions, please feel free to comment and join our forum!

FUSVX    �
stdev 1.44
Closing price on February 18th 2007 $46.05
Closing price on March 4th 2007       $48.38
average price                         $46.15
%change  in price over the period        5.1%
Volatility Measure =stdev/average        3.1%

FSTVX
stdev 1.240579012
Closing price on February 18 2007   $51.77
Closing price on May 4th 2007        $53.34
average price over this period        $51.06
%change in price over the period     3.03%
Volatility Measure =stdev/average    2.43%
DJI�
stdev 342.8277927
Closing value on February 18th      12786�
Closing value on May 4th              13264
average price                              12564
%change in price over the period     3.74%
Volatility Measure= stdev/average  2.73%
MSFT�
stdev 0.93679494
Closing price on February 18th     $28.83
Closing price on May 4th           $30.56
average price                      $28.45
%change in price over the period   6.00%
Volatility Measure =stdev/average  3.29%

COH�
stdev 1.714360989
Closing price on February 18th   $50.83
Closing price of May 4th         $49.14
average price                    $50.07
%change in price over the period -3.32%
Volatility Measure =stdev/average 3.42%
 

�
�

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Rules for identifing ‘value’ stocks as possible candidates for an investment portfolio is a very different task from determining a reasonable price range to pay for these stocks. Irrespective of its industrial classification, a company can be in an early growth stage, a mature stage or a declining stage of development. The four rules that follow are a simple guide to identifying the most important attributes of successfully managed, mature companies. As such, following these rules quickly identifies the less impressive companies, making it easier to focus on the investments that will help you to ‘Win by not Losing’. 

 Rule 1: For Value Stocks: IF you can not obtain 5 years of financial data,  move on!    �

Definitions : Operating Revenues=R,Operating Earnings=E, Assets=A, Retained Earnings=RE, Owners’ or Shareholders’ Equity = OE; and Return on Equity (ROE)=E/RE.

Company X 

      $millions  $millions $millions  $millions  $millions
              ( R)       (E)         (A)         (RE)       (ROE)
2003    $953   $274      $618       $427       64.17%
2004  $1,321  $487    $1,029       $782      62.28%
2005  $1,710  $679    $1,347    $1,033      65.73%
2006  $2,112  $830    $1,627    $1,189      69.81%
    �
Rule 2: Understand  A Company’s Model    �
Financial leverage = Assets divided by Retained Earnings (A/RE). Any value over 1 reflects the share of Assets that were purchased using external (i.e., borrowed funds). The larger the share over 1, the greater is the company’s  sensitivity to interest rates and business cycles.  IF (A/RE) is greater than 1 and ROE is not greater than the greater of the cost of the borrowed funds or the prime interest rate (i.e., the rate quoted to the best commercial customers), move on! 

Definitions:(E/R)= gross operating profit margin, (R/A)=asset turnover, (A/RE)=financial leverage.
           (E/R) *  R/A * A/RE =   ROE�
2003    0.29    1.54    1.45  = 64.17%�
2004    0.37    1.28    1.32  = 62.28%�
2005    0.40    1.27    1.30  = 65.73%�
2006    0.39    1.30    1.37  = 69.89% 

Rule 3: If a company is not generating positive Free Cash Flow (FCF), move on or find out why it is negative!    �
    �
Rule 4: If a company’s FCF is negative and was created by acquisition costs that are not offset by subsequent higher earnings which restore RE growth and positive FCF, move on!   �

Defintions:

(1) Net Income (NI) equals Operating income (I) less interest expenses and taxes.  �
However, unlike operating income, (NI) does include any gains or losses from sale of property (i.e., non-operating income) or expenses from lawsuits.    �
(2) Operating Cash Flow (CFO) is (NI)+ the depreciation expense (- sign) on existing property (plant and equipment), + any amount that must be set aside for unpaid taxes or interest (- sign).    �
(3) Investing Cash Flow (CFI) reflects purchases of new property (-) or sale of property (+).    �
(4)Financing Cash Flow (CFF) reflects borrowed external funds (+), dividend payouts (-) or stock repurchases (-).    

               (NI)           CFO       CFI            CFF �
           $millions    $millions  $millions $millions�
2003      146.6         221.6      -57.1       -29.3�
2004      237.9         359.3    -375.3       49.57�
2005      390.8         475.6    -371.8      -211.9�
2006      494.3         596.6     -181.0      -426.8� 

(5) Beginning Cash  Balance (BCB)

(6) Change in Cash Balance (CCB)=CFO+CFI+CFF

(7) Ending Cash Balance (ECB)

(8) Free Cash Flow (FCF)=CFO+ CFI. FCF shows to what extent operating income covered the cost of a company’s growth. Negative FCF implies a shortage of funds, requiring that the company borrow funds externally to  finance its growth or  absorb some of shareholders’ retained earnings (RE) to do so. �

            (BCB)      (CCB)          (ECB)         (FCF) �
           $millions  $millions      $millions    $millions�
2003     135.20      94.00     229.20       164.50�
2004      33.57     229.20     262.77       -16.00�
2005    -108.10   262.77    154.67       103.80�
2006     -11.20    154.67     143.47       415.60�
To obtain related rules for developing a price-range for buying a value stock, contact merryay@hotmail.com. This rules-advisory is available for $150. For an additional $200, the rules and analysis will be applied to a particular publicly traded, domestic company that files with the SEC. All funds payable by mail.� �

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This past week provided a wonderful opportunity to demonstrate to investors that the best investment strategy for increasing wealth is not diversification in mutual funds. Diversification minimizes the volatility of a portfolio’s value, which is nice; but it does not necessarily increase a portfolio’s value. Over the past week, I listened to Wall Street commentators discuss how the market was due for a correction. Then, they spouted the conventional wisdom that the market ‘correction’ was long overdue, making it an excellent time to diversify portfolios by purchasing high-grade mutual stock or bond funds. The flaw in logic is that, both theoretically and practically, the benefit derived from diversification hinges on the ability to invest in a ‘global market’ portfolio comprised of ALL existing stocks and bonds, both foreign and domestic. Well, such a fund does not exist; and if it did, it would be too difficult to monitor all of the companies included in the fund. Read more…

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There are two major approaches to managing an investment portfolio. One approach is to select portfolio of securities as a mutual fund. The prices of the individual securities in the fund may be up on one day and down on another; but the value of the portfolio should have a trend with little variation around that trend. The second approach is to select individual shares of companies, and weight the percentage of your wealth in different companies based on the risk that you attach to them.

The first approach, based on Markowitz’s financial theory of portfolio diversification defines ‘risk’ as the volatility in the share price of a stock. By diversifying across companies whose share prices are negatively correlated, an investor can minimize both the random shocks caused by random unanticipated economic events. Read more…

|| tags: Money Management, Investing || comments: None

Although I prefer to invest in good companies on a long term basis, market conditions change and management practices change over time.  Therefore, if you do not keep up with the daily news about the companies in which you have invested, it is a good idea to review your portfolio’s performance on a quarterly basis.   Anyone can pick a stock or mutual fund and compute how much $1,000 would have earned had it been invested as of a certain date. The trick is that the starting date (i.e., hypothetical investment date) can always be varied in order to show the largest growth rate in that $1,000. Anyone can also compute a portfolio’s value from the dates that diffrerent shares of stock were purchased. The trick is that this performance measure does not reveal the superior or inferior results that other portfolios of the same or lesser risk level would have generated over the same period of time. Many investors who are engaged in leisurely activities are simply content with being told that their portfolios will continue to enable them to live out their lives pursuing the lifestyles that they enjoy. This also is not really a performance measure; but it does keep financial consultants very happy. Read more…

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How or why do you reinvent a company that has unquestionably had the most significant impact on the global economy since the invention of the telephone? Perhaps, it is because its current share price has remained relatively flat, at about $28-$30, for the past 6 years. The sad truth is that many developing nations subsidize their export industries and their domestic infant industries, while the U.S. does not engage in this policy. In 2001, the U.S. initiated actions against MSFT for violations against domestic ant-trust laws that prohibit unfair pricing strategies and tying arrangements. Domestic companies and foreign authorities joined suit; but adding insult to injury, instead of taking a hard look at U.S. domestic anti-trust laws that are unrealistically applied to companies engaged in global competition, the U.S. did little to remedy its laws. Moreover, U.S. trade experts have been only slightly successful in negotiating penalties abroad against foreign pirates of Microsoft’s software. Given the fact that these conditions have cost shareholders billions of dollars in earnings that could have been used more productively, Microsoft had to take a hard look at its corporate philosophy, its management style; and the product areas where it had to commit substantially more dollars to R&D. Read more…

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Owners of nascent ‘private’ companies who are fortunate enough to have a good first couple of years of sales growth frequently decide to take their companies ‘public’ (have an initial public offering (IPO)) at which point they issue common shares to interested investors in exchange for capital.
Everybody loves a winner; and since high growth rates in sales revenue are used as a proxy for anticipated high profits, investors can be enticed into paying very high share prices for companies that have not established a record of high growth rates in earnings.

How does an investor know which nascent companies will emerge winners and which ones will be duds? Some nascent companies definitely warrant going public because they need capital from investors in order to develop and launch their products, or to expand their market share in order to increase earnings. On the other hand, other nascent companies that become flush with cash are never able to launch their products. Perhaps, their products became obsolete before they were launched. These companies will simply draw against investors’ capital until they burn out (i.e., declare bankruptcy).  Anyone who invested in some of the dot-coms that went public prior to 2001 will fully appreciate the fact that a ‘great concept on paper’ does not mean it will ever be marketed and sold.  That is what competition is all about. Read more…

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Valuing the share price of a growth company is determining the price at which you believe you can purchase shares and make a risk-adjusted return on your investment. The value of a share has little to do with its market price, unless you believe that the stock market is perfectly efficient…which it is not! The last time I checked the share price of Google, the youngest search engine provider on the internet, it was $489 (January 21, 2007). Its closest competitor’s share price (currently Yahoo) sold for $27.66 on the same date.These prices translate into a Price Earning ratio (P/E) of about 62.3 for GOOG vs. 35.3 for YHOO. I do not subscribe to using P/Es as a basis for comparing the price of one company’s shares to another; but many investors do. So, I thought that I would mention it.

 Google’s high P/E at the present time is driven primarily by the expectation that it will continue to double its earnings per share (EPS) as it did in both 2004 and 2005. This is probably a reasonable expectation of earnings for 2007, considering Google obtained an addtional $7 billion in cash from issuing $20 million shares in 2006 that has not been fully utilized. Therefore, if you double Google’s 2006 EPS and use it as an estimate of the company’s 2007 EPS,and if you plug this estimate into the denominator of Google’s current P/E ratio, then you will obtain a P/E ratio that is closer to that of its competitor, Yahoo. My point with this exercise is that Google’s current share price has already factored in its expected 2007 EPS, so that any disappointment (i.e., quarterly earnings that fail to meet expectations in 2007) will result in a downside correction in Google’s share price. It also follows that any earnings surprise that exceeds expectations will produce a spike in Google’s share price. This pattern is exhibited with share prices of many ‘growth’ companies,particularly those with only a few years of earnings or losses behind them. Share price volatility upwards (downwards) depends on whether future EPS values exceed (fall below) previous expectations. That is why the valuation of a company’s share price differs from its market price. On any given day, the share price of a company may be more or less than it ‘valuation’; and the value that you place on a share (i.e., the price at which you believe that you can earn a reasonable rate of return for the risk involved) will be governed in part by your tolerance to risk.

It is probably inappropriate to compare Google to Yahoo…even though they are competitors….because Google is in its ‘growth’ phase of development and Yahoo has moved onto a more ‘mature’ phase. What this means is that Yahoo’s history of EPS, retained earnings per share RE/share and free cash flow (FCF) have already established a  pattern upon which the ‘valuation’ of Yahoo’s share price can be easier to forecast than the ‘valuation’ of Google’ share price. Illustrating, at the moment,Google’s EPS growth is being driven by infusions of capital investment; and Google is not yet generating free cash flow (i.e., Google is using more than its earnings to fund its research and development). Therefore, if comparisons are too be made, Google’s performance should be compared with other young companies that are flush with cash that has not been fully utilized. Market expectations may push Google’s share price up to over $500/share in 2007; but I would value it closer to $467/share. In addition, because the market price of Google’s shares has been volatile, I would need a significant discount below $467 in order to purchase shares of Google in 2007. I also expect a lot of speculation that will add to Google’s share price volatility.

I am neither a Google Doodler nor a speculator, however.  It is not that I do not want to purchase shares of Google whose price might increase 130% next year (Who wouldn’t!). But, if a stock price is going to vary 30% in a single year, as Google’s share price did between January and March 2006, I would like it to do so for more fundamental reasons based on performance indicators, as opposed to a belief that Google’s EPS can continue to exhibit a growth rate of 120% per year for the next 5 years.  Google’s future and the valuation of its shares depend upon its ability to continue to use its ‘model’ to attract viewers who will buy products from other companies that advertise on its website. With no tangible barriers to entry,however, Google will have a hard time establishing, maintaining and growing its market share (Case in point. Yahoo and AOL have lost market share to Google because viewers were quick to change search engines when they saw something appealing about Google’s website). Therefore, from my perspective, there are simply better prospects for investment because they have less downside risk attached to them. For example, both Genetech (DNA) and Coach (COH) are growth companies that have partially ‘protected markets’. DNA is a pharmaseutical company with protected patents on several popular drugs. The major risk factor for DNA currently is that the FDA may deny or delay approval of its Phase III clinical trials on certain products. FDA approval is necessary in the USA in order to market procduct in the U.S.. COH is a maufacturer-retailer of high-end, leather goods that has established a strong customer base; and it is expanding its outlets both in the U.S. and Japan. The highest risk with COH is that it underestimated the market potential for Coach-Japan, which COH acquired it July 2006. An excessive payment for Coach-Japan’s goodwill could erode COH’s future EPS, RE/share, free cashflow and ultimately its valuation. Neither company has Google’s name recognition;  but they both have excellent track records of double digit growth in EPS and retained earnings/share (i.e., shareholder value). COH is also forging ahead with its business plans using mainly its own earnings. Need I say more!. EPS growth for the last 3 years running has been over 20%/year and the annualized growth in retained earnings (i.e., shareholder wealth) over the last 4 years has been over 50%. COH’s share price is currently undervalued at $45, with a current P/E of 14.7 and a valuation of $52 for 2007. Since January 2003, COH’s share price of $7.35 has increased over 600%.

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I suspect that some people avoid investing in stocks or bonds because they see them as a  form of gambling. If they truly believe this, they should avoid these investments because they will probably turn out badly.

On the other hand, the true investor is not a gambler who aims at making a large profit within a matter of a few days. She is a person who has a particular long term objective, all of which entails saving a share of her earnings today, so that income from savings will be available for some intended purpose in the future (e.g., education for oneself or one’s children, retirement income as a supplement to social security, or pension income). She never loses sight of this objective and is always guided by one rule of thumb, namely  ‘Show Me the Money’. In simplest terms, this means that she avoids all the marketing hype and looks directly at a company’s financials. Negative cash-flow, less than desirable earnings growth among other factors immediately raises a red flag because the true investor moves on to find better stocks to acquire at the right prices. 

One reason for investing in the stock market is that doing so can be an inflation hedge. For the past 60+ years,  with the exception of 1949,  there has been no instance of negative inflation in the U.S. (source:InflationData.com). If this trend persists, and most if not all economic forecasts do not suggest otherwise, an investor who holds on to cash will incur at least a  1.5% to  2% annual loss in purchasing power for each year that the cash is not invested elsewhere. Setting aside investments in tangible assets such as real estate, gold and other precious metals that can be an inflation hedge, the stock market is an excellent option if shares are selected carefully and purchased at fair prices.

The purchase of particular stocks that will be held for share price appreciation or dividend income can be a very profitable investment if the strategy employed to select and purchase shares is ‘thorough’ and ‘consistently applied’; and if the strategy relies on one set of rules that is used to rate companies in terms of their risks and required rates of return. I emphasize the word ‘thoroughly’ because people often suffer from tunnel vision and they select shares for purchase based on recommendations, having spent too little time reviewing the company’s past performance and future prospects. I use the word ‘consistently’because determining a company’s value and ‘fair’ share price or price range can be tedious,which means that investors may be inclined to perform a better analysis on the first company that was chosen, and less diligent analyses on this company’s competitors. I use the phrase ‘one set of rules’ to emphasize that profitable investing is winning by not losing.
Over the past year, I monitored performance for two personal investment portfolios, one of which I can not control entirely because it is a ‘deferred comp’ plan that limits investment selections to different mutual funds.The second is a stock portfolio that has been referreed, so to speak, because a record of actual transactions exists that does not lie. The mutual fund account was allocated almost equally across 3 diversified funds which earned about 4.6% after fees were deducted. The fund was diversified into (1) domestic small cap stocks,(2)  large cap, domestic securities targeted by fund managers for capital appreciation; and (3) international growth & income stocks. The second portfolio was based on my personal selection, namely  purchase of shares in 5 companies, 2 of which turned out to be relatively poor investments. The poor investment shares were traded during the year in favor of  companies that had better prospects. In each case, the companies that were inferior were purchased on a ‘whim’, which explains why it is so important to remain consistent and thorough with respect to employing a single stategy for selecting and  investing in stocks. The second account earned 15% in 2006, which would have been 26%, had I been more diligent in performing the analyses of my whimiscal investment choices. Comparing the two options for the two types of accounts, the investment based on ‘due dilegence’ provided a far better return than the one that relied on diversification.

With respect to investing in shares of stock in individual companies, an investor should always be aware of her options, among which are the virtual risk-free assets that are available as TIPs (i.e., tax indexed protected securities). These securities can be purchased directly absent fees from the U.S. Treasury Department. The TIPS are indexed to inflation; and they currently pay about 4.25% (unindexed) or 4.6% (indexed for inflation).They can be purchased in increments of $1,000 for terms of 5, 10 or 20 years. TIPS are exempt from state and local taxation; and they are virtually risk-free (i.e., with zero probability of default). Therefore, any other type of CD or corporate bond of a comparable term (e.g., 5, 10 or 20 years) should provide a higher rate return because of the greater risks attached to ownerhip in companies (e.g., bankruptcy, lack of due dilegence among management).

The investor’s first rule for selecting shares that might be candidates for investment should always be based on ‘Show Me The Money’ principle. Simply put, you are purchasing a piece of a company when you invest in it.  As such, your primary concern is or should be whether or not a company’s management has established or can establish shareholder wealth for you. Shareholder wealth is not, as one might think, measured by net earnings or earnings per share. It is measured by growth in shareholders’ equity per share (ie., retained earnings per share). The latter is listed on the balance sheets of corporate reports that are filed online annually and quarterly with the Securites Exchange Commission (SEC).

The second rule, after selecting a good set of candidates for investment, is determining the prices at which these shares should be purchased or sold….because every investment can be a good one or a bad one depending upon the prices that are paid for them. For the purposes of this narrative, it is sufficient to say that the analysis of pricing begins with the analyses of each company’s abilty to grow retained earnings. Therefore, if your investment portfolio…. after fees, taxes and transaction costs… is not earning as much as a risk-free asset such as a TIP, you would be wise to review other options and reinvest in assets that provide you with a better rate of return. If your portfolio is earning more than a risk-free rate, the next step is managing that portfolio …a topic that will be addressed in subsequent narratives.

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Women who are the target group for this web site are able to vote,  they are employed; but they are not yet financially independent.

Women gained the right to vote in 1920 after the 19th amendment to the U.S. Constitution was enacted (Thank you Susan B. Anthony and Elizabeth Cady Stanton). However, it is a misconception to think that voting power and the ability to choose to work in the labor market also gave women the ability to attain financial freedom.

Forty+  years after they obtained their right to vote, Betty Friedman’s ‘Feminine Mystique’ suggested that many women were victims of a false belief that they should take their identity in the lives of their husbands and children. Friedman’s book was quite controversial in its day because minorities felt that she overlooked the plight of employed females and single parents who were more interested in access to better jobs and better salaries.

Friedman’s work  initiated a slow but permanent change in attitudes about the purpose of education for women and the importance of their economic contribution to society, both as homemakers, and through their participation in the labor market. However, it  did not address the importance of their financial freedom and how they might achieve it.

Women who entered the labor market between the 60’s and 80’s as educated professionals faced unusual double standards in ‘Corporate America’. They were not granted ‘paid’ maternity leave. The costs of child-care were not subsidized, as they are today, by taking credits against federal income taxes. Young married women were often denied promotions because employers anticipated that they would leave their jobs after they gave birth to children; and women were frequently told that they should expect to earn less than their male counterparts because men had families to support. For women with less than professional degrees, working conditions were worse. Confronted with these obstacles, most working women were not, and probably did not expect to become, financially independent.

Fortunately, I believe that the 90’s marked the beginning of an era that provided women with better career opportunities in the labor market. Perhaps future historians will be able to explain it better than I. However, I believe that two factors contributed to the change. First, some women decided they could attain their highest potential by starting their own  businesses (e.g., Mary Kay Cosmetics); and they were successful. Their choice was an excellent one; and they may have been influenced by Morrison et.al, the authors who suggested in 1987 that Corporate America was highly resistant to qualified  women if they attempted to  become top executives in their organizations. Morrison labeled this resistance the ‘glass ceiling’; and I am unconvinced today that this barrier has disappeared entirely for the following reasons. First, the salary gap between equally educated men and women has not disappeared. (i.e., According to the U.S. Census Bureau,  among persons 25 years and older with advanced or professional degrees, the median annual income for men and women in 2005 was $71,918 and $49,319, respectively). Second, although a recently published Harvard Business School study suggests the opposite conclusion, namely that there is no difference between the income of men and women after accounting for experience and education, the study was inconclusive statistically because the design of the HBS’s survey  was not based on a ‘matched’ sample of women and men for each category of education and experience. As such, the really interesting aspect of the HBS study is that it makes a better case for the existence of a ‘glass ceiling’  That is, someone could argue that the scarce number of educated and experienced women for the HBS survey was caused by a ‘glass ceilng’ that forced women to withdraw from the labor market because they are being denied the higher paying salaries and better positions that were being  granted to males with equivalent levels education and experience.    

I also believe that the Internet is a second major factor that has contributed to the creation of better career opportunities for women.  Internet provides easy, inexpensive access to a global market for practically any product or service. Therefore, women with very little capital investment have been able to start businesses, compete with Corporate America; and earn income…absent any ‘glass ceiling’. These women may be able to earn more income than would ever have been possible, had they chosen instead to enter the labor market as corporate employees.   

The road to financial freedoom is difficult for women to achieve because it is difficult to visualize how to achieve it.  Therefore, it should come as no surprise that among Forbes’ list of the wealthiest people in America today, only 6 women were among the top 40 and these women inherited their wealth from men: (1&2) Alice Walton & Helen Walton - $18 billion each from their Walmart inheritance, (3) Abigail Johnson - $12 billion, co-manages the Fidelity Investments with her father who was the founder, (4&5) Barbara and Ann Cox- $11.3 billion each, inherited the Cox media empire; and (6) Jacqueline Mars -$10 billion, inherited Mars Candies).

The good news is that many women today earn higher salaries than ever before, which puts them on the road to financial freedom. This website is  a road map, so to speak, designed to provide these women with useful financial tips that will enable them to navigate their way to financial freedom. Hopefully, it will be an enjoyable and worthwhile journey!

Related article: Women in the Executive Suite Correlate to High Profits

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