Financial Mathematics: Flow of Funds Table

A Flow of Funds Table is a simple heuristic that can be useful in understanding assets, especially in more complicated scenarios.

The flow of funds chart has two parties which I call Buyer and Seller. Initially, the Buyer exchanges Capital for an asset; the Seller exchanges an asset for Capital. Eventually at some settlement period (which may be multiple periods), the Seller will make payments back to the buyer.

Shareholder Yield (Quasi-Book Review)

Mebane Faber has a nice read entitled Shareholder Yield: A Better Approach to Dividend Investing. If you keep an eye out, you may be able to get it the kindle edition for free. Regardless, it's still less than $6 for either the Kindle or paperback edition. This will be a quasi review/discussion of the book.

To be successful, managers of a company need to be good at two things: operations and capital allocation. While Faber notes many books focus on operations, the focus of this book is devoted to (a subset of) capital allocation.

Capital allocation concerns itself with whether or not to obtain financing, what type of financing (debt, equity, preferred, etc), how and when it should be employed, and how and when it should be paid back. Faber's book is concerned with the latter aspect of paying back financing.

Financial Mathematics: Geometric Series

For a refresher on sequences and series, see here.

A geometric sequence is a sequence in which the following term is a multiple of the previous term. For example:

What about the Fed's Balance Sheet?

So I often see a lot of discussion regarding the Fed's Balance Sheet related both to its size and to its liabilities. A recent example of a question by John Hussman:

Should Fed be subject to capital requirements? A $3.7 trillion balance sheet and $55bn of capital is 67-to-1 leverage http://t.co/OuX3KFLpng
— John P. Hussman (@hussmanjp) August 16, 2013

The main question I think to ask is: Why does the Fed's balance sheet matter?

The corollary question is this: In what sense is the Fed's balance sheet like that of a balance sheet of a private bank or nonfinancial company?

On why #themarketis up (down) today

So I'm suggesting that a new hashtag be used: #themarketis. The idea is to use it to explain why the market is up (down, etc) on a given day. Why, you ask? Allow me to explain.

Almost every day there's a "news" story on the market's price movements. Many of them offer explanations (rationalizations) on why the market price has moved. The explanations sound plausible but I think in most cases they are, at best, simplistic hypotheses which would not stand up to a robust statistical analysis.

Keynes on Investment, Speculation and Uncertainty Part II

In the first part of this series (duo?) we began looking at Chapter 12 from John Maynard Keynes' General Theory. Today we will finish that discussion a bit.

In the first part we looked at the role uncertainty has in investment. In particular, Keynes notes that there is great difficulty in predicting future variables regarding investment opportunities. As a result we mainly rely on the convention that the future will, more or less, behave like the recent past.

Financial Mathematics: Sequences and Series

In mathematics, a sequence is an ordered list of numbers. A series is the sum of the terms of a sequence. Series are also a kind of sequence. Series are an essential tool in dealing with certain kinds of financial instruments.

Financial Mathematics: Annuities

An annuity is any stream of payments.  Examples include savings accounts where regular deposits are made, loans in which regular payments are made, annuities (the financial product offered by many insurance companies) and so on.

There are a variety of types of annuities and it would be difficult to cover them all. We'll look at a few common ones to get a flavor for how annuities work.