Calm down, tough guy. Not only have I read plenty on FA (stuff way beyond beginner’s books), I actually understood what I read. Perhaps you could try to do the same.
Columnist Michelle Singletary recommends:
1-2 thousand for “life happens” (unexpected repair bills and the like)
3-6 months living expenses (maybe more with the economy the way it is).
Note that it doesn’t all have to be in a regular (.001% interest) savings account, I suspect you’d be fine with putting it in shortish term CDs. You can always break the CD if necessary, with relatively small penalty.
Off to read the rest of the thread to see how duplicative this advice is :).
Suppose you had your 6 months’ savings on hand - invested in stocks - in October 2007.
Then you lost your job inFebruary 2009.
All of a sudden, you’ve got a LOT less cash for that emergency.
Note: I do believe that we should have a major portion of our investments in instruments that have greater earnings potential. The vast majority of our retirement money, for example (probably more than is recommended given our ages). But having a certain cushion in cash - which won’t earn much but won’t LOSE much either - is a very good idea.
Exactly how am I acting “tough”?
Also, why don’t you expand on your statement. You say you have read and understood Fundamental Analysis books. Do you simply disagree? Why don’t you attempt to demonstrate your understanding?
You say, essentially, that a stock can not be undervalued and there is no real value other than market value. What happens, in your mind, when a company either offers or consummates a transaction where they have purchased a company’s stock for more then the prior stock price? Have they simply overpaid?
But unless you are going to sell today (or need to value your net worth to get a loan or something), what its worth on paper is moot for an individual - as individuals we don’t do mark to market. Its fun to look at when the market is going up - and depressing to look at when the market has gone down.
I have a piece of art in my house that I’d guess is worth somewhere around $5k, just off comparative pieces on the internet. But that is moot, I’m not going to sell it. So it really doesn’t make any difference if I can get $25 for it at a garage sale, or $500 that I bought it for, or I auction it off and get $10k for it at this moment in time. When I do sell it - it may be worth much more - or it might be worth $25.
Wow, we’re seeing some textbook examples of loss aversion, aren’t we? To those who haven’t studied this, psychologically losses of X hurt more than gains of X feel good. Thus, people ride stocks and other investments down because they think they don’t need to feel the pain until they actually sell. Which often means they take bigger losses than people getting out early.
Rand I seem to recall that companies value their assets on a regular basis, based on the market, and not on what they hope they are worth. Am I right? it was an issue during the crash because banks valuing their holdings correctly would have had to get more capital to meet their capital requirements.
Why so much in checking, which pays little or no interest? Our money market account has check writing privileges, and we commonly move excess money into it, and use if for major purchases. It is linked to our investment accounts, so is a convenient place to put interest and dividends which are not rolled over.
And while it takes a day or so to sell stocks and bonds, I agree that it will never take much more than that. There is clearly no ceiling on non-cash investments, while having too much in cash doesn’t make a lot of sense.
If that happened to me I’d be perfectly fine, wouldn’t bat ab eyelid.
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I would in all likelihood find a new job before being let go from my old job (that’s just how my profession works).
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I wouldn’t have counted on 100% of the cash I invested being there later.
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I could use credit cards to pa mor things so I wouldn’t have to use cash at all.
Go look up “control premium” and “minority discount.”
By having the audacity to dare to dispute Rand Rover on an anonymous message board.
I think what he is trying to say is that the current market price of a stock currently reflects all known information about that stock, including what people will expect the future price to be. You can’t predict what a stock price will do by researching the hell out of it’s prior performance.
Of course from an investing standpoint, he is wrong. Sort of. Stocks do have an inherent value because they represent shares of ownership of a real company. And that company has real assets, real debt and a real cash flow that can be measured (iow “valuation”). And irrational exuberance can drive the price of a stock much higher (or lower) than the price of the underlying assets would seem to justify.
Sort of. One common valuation method is to calculate the expected discounted cash flows into perpetuity. Basically trying to predict how much money you think the compay will make over it’s lifetime. It’s a lot of guesswork, but you can reasonably infer that if a company would require growing 1000 times the GDP over the next century in order to meet earnings, it’s probably overvalued.
The 2008 crash happened because banks failed to properly value the CDOs they were buying. They bought billions of dollars worth of mortgages bundled together with the expectation that real estate never goes down in value. Unfortuantely it did.
It might be reasonable to argue, but it is a complicated argument. There are many additional markets that exist now that are clearly not very efficient. When the MBS market kicked off in the 1980’s it clearly wasn’t very efficient. How efficient are CDS securites? Sure, I’ll agree that if we are talking about blue chip stocks, the market is probably more efficient now than it was back Keynes’s day. What about all the other options that are available to investors now though? Also, more efficient certainly doesn’t mean that it is highly efficient.
Does he personally practice index investing? No, he recommends it to your average middle class person who doesn’t have the time to spend analyzing stocks nor the ability to make change-of-control type investments like him. The guy is clearly a value investor though.
Magically, I not only get to suspend mark-to-market account, I can also never adopt it in the first place. Of course, this just happens to put me in the exact same category as every other American.
Since we have been talking about Keynes, a worthwhile quote to bring up is “markets can remain irrational far longer than you or I can remain solvent.” I happen to agree with this. I certainly don’t think that some valuation that I personally come up with for a company is the true correct value. I don’t believe that a value determined by the best analyst is necessarily the correct value. It is also very possible that the market value may never approach what the underlying fundamentals tell us a company is worth. Nevertheless, stating that the only correct value is the current market value is insane.
Furthermore, getting back to how this all started, I would never want to put myself in the position that meant that I had to rely on the current market value of stocks for my source of emergency liquidity.
Crap, I think I was a little too vague in my OP, so there appears to be two overlapping questions. The first is the “how much savings should I have” which tends to be answered as “3-6 months living expenses.”
But the real question I meant to ask was how much of that should be in liquidable cash? Obviously it shouldn’t all be tied up in a 10 year CD or chunk of land in Florida. We already have a retirement savings plan going, and we have a long term savings plan that’s mostly company stock. After that we have a brokerage account, and the rest is cash in our checking/savings accounts.
What I’ve found is that cash builds up in my checking account, and I haven’t figure out a system to put it to better use.
At the heart of the issue is that if things go bad it’s likely that the stock market and company stock will fall as well. And as immigrants I kind of have an irrational fear that the government will cease my assets.
I was also under the impression that after selling stock it could take up to 3 days before the cash is available. My first brokerage was terrible and took up to a week to transfer funds, ING was like that as well.
Now I need to go back and read through, thanks for the replies, lots of good stuff.
The real problem with the “invest it” concept is that I consider anything I invest (in stocks) as having the potential to vanish. But then because my brokerage account does so well I see no point in bothering with a CD that is only paying 1%.
As I said, I need some sort of a system to get cash out of my checking account and into something more useful.
That’s it. That’s really your argument? Obviously control premiums / minority discounts exist; also, obviously they are not the sole (or even primary, in most cases) reasons for paying a premium for a stock. Do you realize that argument falls on it’s face when you are talking about the controlling shareholder taking a company private, for instance?
It depends on what type of asset (or liability for that matter) it is. Most types of assets that a company owns are booked on a cost basis. This sometimes has to be tested periodically to determine if it needs to be impaired. Therefore, an asset might be reduced on the books if the cost basis valuation is below whatever impairment test valuation (which might be a fair market value approach) is used. The converse is not usually true (although sometimes it is). You do not write up the value above cost simply because the fair market value is higher.
Securities act a little different although of course most companies aren’t in the securities owning business. Here it depends on how they are classified. You value a security differently if it is classified as “available-for-sale” versus “hold-to-maturity” for example. Just because the fair market value has declined doesn’t necessarily mean you need to reduce your book value. For example, if a company buys a 5 year bond and interest rates rise, that bond has a lower vlaue. If I am planning to hold it to maturity though it doesn’t matter that I can’t currently sell it for par value.
Also, the issue with bank valuations wasn’t simply that they did not want to value a security at market value. The problem was also how do you value something at market value when there is no market. It is incredibly stupid to value it at zero (or some ridiculous fire sale price) if any reasonable cash flow forecast states you would receive much more by simply holding on to it. Of course, you need to be able to demonstrate that you have the capability to hold on to it.
I wasn’t making an argument. I was only providing one answer to the specific question I responded to. Of course there can be other reasons why an acquirer would pay more than the current market price (eg, the company is worth more dead than alive, it’s juice for the SH vote), but I don’t have time to personally correct all the deficiencies in your thinking on this subject.
just throw the excess in ther brokerage account, easy-peasy. That’s what I do every month as soon after payday as possible.
What a joke. You say there is no “real value” other than current market value, and I’m the one with deficiencies in my thinking? Yea, right. You won’t try because you know you have an elementary understanding of valuation.
In today’s world of easy access to accounts and investments, the question should really be: how much cash should I keep ready access to and incur the least amount of tax penalty? With a volatile job market, it would probably be a good idea to be able to get your hands on a year’s salary on fairly short notice (spread out over whatever period is necessary). Use cash first, liquidate low interest paying instruments second (CDs, savings bonds), longer-term held investments third, short-term last. This helps defer some tax hits, particularly for short-term capital gains. I encourage my kids to have a year’s worth of income invested somewhere - anywhere - in case the worst scenario occurs.
It’s the “excess” part I can’t quite figure out.
So to clarify a bit further: My wife moved to the US first, needed a bank account asap and signed up at the first one she encountered so that she could get direct deposit from her employer. I moved down after and had a chance to shop around for a better bank, which is what I use for my direct deposit.
It’s this second account that became our default. It has the mortgage, ebills, credit card, and links up with the brokerage and money market accounts. We essentially live of my salary from this account. This is where the first problem is: for some reason I feel I need a huge cash reserve to cover up coming expenses. I think it’s the result of when rent was the largest expense, and I was always terrified of bouncing a check. So I tend to just let it build and have a hard time moving money of out it.
Meanwhile, all her salary goes into that other account, which is the second problem. I tend to use it for big purchases, but that’s really just travel, so in between it keeps building. Admittedly there is no reason to have more than a few thousand in it at any given time, but it’s a pain in the ass to move money in and out of.
I need a better system.