Llama-nomics 101

An interesting story about the investment lesson learned by one man's desire to become a llama tycoon. Let's follow my hypothetical friend, Fred, as he pursues his lifelong dream of having a large llama ranch and find out what he learns about investing in the constantly changing llama market.

It all starts one cool, gray, November morning when Fred decided to start a llama ranch. His plan? Spend $100 each month buying as many llamas as he can until he gets a large herd. This month llamas cost $50 each. Fred has $100 to spend, so he buys 2. He is on his way, the first steps toward the wealth and freedom that only a herd of llamas can provide.

It's December now, time to buy more animals. The llama market is just booming and prices have gone up. It seems that everyone wants to buy llamas. They cost $100 each now. Not to be deterred from his quest, Fred buys one more to add to his herd.

January rolls around and llama prices are still at $100 each, and the news media is buzzing about the exciting and wonderful llama market boom we are having. No matter where you go, people are talking about the exciting growth in the llama market. Television commercials play every few minutes with some guy proclaiming, "I expect llama prices to go to $200 in the next few months!" Other wiser and more even-tempered llama analysts warn that the current market is overpriced and the llama "bubble" will burst soon. "Llama prices will fall dramatically", they say. In fact, some even predict that the llama market could collapse completely.

Fred just smiles, and staying true to his original plan, he purchases one more in January.

But then February brings bad news for the llama market. Apparently somebody mixed some risky armadillo futures with some unstable alpaca loans and sold them to investors on the llama market. In a "crash" that happens almost overnight, the price for llamas has plummets to a mere $5 each.

Everybody's herd is now worth 1/20th of what it was in December and January. Now, most llama ranchers would be jumping out of windows at this point, but Fred is undaunted and remains focused on his goal of becoming a llama mogul. He takes the $100 he budgeted and buys several more.

In March, the price has recovered a little bit, but the llama market is still looking bad. Llamas are only selling for $10 each. "Onward!" Fred declares, and he spends another $100.

April rolls around and the llama market has improved a little more. Llama prices have risen to $20 each, so Fred buys some more to add to his growing herd.

Now it's May. Fred has had enough. Those llamas are tearing up the place and they are really smelly, so he decides to RETIRE and sell the whole heard. The problem is that the llama market still hasn't returned to those glorious "Boom Market" prices of last November, December and January. Right now Fred can only sell his animals for $25 apiece. Remembering those glorious days of $100 llama prices, Fred sighs. "Oh well," he thinks. "You can't win them all." So off they go to be sold.

Then Fred gets his check from selling the llamas. Wait a minute! "I made a profit?" Fred exclaims. How'd that happen? Let's take a closer look:

Over a six-month period Fred spent $100 each month purchasing llamas for a total cash outlay of $600.

Fred purchased llamas at various prices.

In May, Fred sold his 39 animals at $25 each for a total of $975. Subtract the original $600 investment, and Fred walks away with a tidy profit of $375.

Congratulations! Fred has discovered the power of "Time and Consistency" coupled with the principle of "Llama Cost Averaging". (Dollar Cost Averaging)

Legal disclaimer: No llamas were hurt or injured in writing this story. This article is for educational purposes only and is not a solicitation to buy, sell, or transact any type of investment, (llama or otherwise).

When Does $35,000 Equal $190,000?

Here is an illustration of the high cost of waiting to start a simple saving program.

Bob is 21 years old and he decides to begin saving for his retirement.  He starts putting $5000 each year into some type of  account, (a IRA, for example).  He does that for 7 years until he turns 28 and then he decides to quit and spend his money on other things.  He lets the money in his account sit and earn interest until he retires at age 65.

Fred, who is also 21 years old, decides that he will start saving later.  He spends all his money and doesn't have any left over to put in savings.  Then, when he turns 28, Fred decides he had better start putting money away for his retirement. He begins to put $5000 a year away just like Bob did, only Fred faithfully puts $5000 in every year starting at age 28 until he turns 65.

At age 65, which one has the most money? 

Remember they are both using the same type of savings program and they both realize the same rate of return.  Since Fred has put a total $190,000 in his account, compared to Bob's $35,000, it would be reasonable to assume that Fred will have more money. 

In truth Bob will have more money than Fred when they reach age 65.

Because Bob started earlier, his money has had more time to "compound", (doubling periods).  Using an example rate of 10%, Bob's $35,000 will grow to $1,944,326 by the time he is 65.  Meanwhile, Fred's $190,000 will have only grown to $1,820,217.  That is a difference of over $100,000 !

This simple illustration underscores the importance of time and consistency when saving money for future needs.

Disclaimer:  The above is for illustrative purposes only and is not representative of any specific type of investment, and is not a solicitation to conduct any type of business or investment transaction.

What They Didn't Tell You About Prop 14

Proposition 14 is being advertised as making the primary process more open by allowing voters of any party to vote for any candidate on the ballot.  I like the sound of that, BUT, it is the other things that they don't tell you about that have me concerned.

First:  Once the primary is over, the only people who will be on the ballot in the general election will be the two people who got the most votes in the primary, no one else.  That means that the smaller political groups will not be allowed to participate in the general election.  To me that seems wrong. 

Currently in the general election we are allowed to vote for anybody we want and we have the opportunity to choose between many different candidates.  If this passes, we only get to choose between two.

I know that for a candidate from a smaller party, such as the "Peace and Freedom" or "Green" parties, the chances of winning a general election may be small, but just having the candidate on the ballot means that I can vote for him or her if I want.  Not if Prop 14 passes.  Also, just having such a candidate on the ballot makes the other candidates address the issues they raise.

Second:  Under the new law, none of the candidates have to tell you what their party affiliation is.  How can you have a election and not know a candidate's party affiliation?  We could end up with two candidates on the ballot, both from the same party, and never know it until after the election is over.

This whole thing just doesn't seem right.