Roger Cuddy

Many people seem to either over or under value their pension payments. It’s always arguable if any given pension will survive the test of time and such discussions can be incredibly complex. Calculating the present value on the pension payment however is extremely simple. The only decision you have to make is the choice of a withdrawal rate. For a personal retirement account that you have funded yourself the recommended rates are 3 to 4% as ‘safe’ values that you should be able to withdraw each year and never run out if invested reasonably. I believe 4% is a good choice. The guaranteed pension payment is basically a perpetuity and it’s PV can be valued using that methodology.

Present Value of a perpetuity = cash flow divided by rate. or PV = C/r .

For an example assume a $1000 monthly payment or $12000 per year. Using the 4% mentioned earlier:

PV = 12000/.04 = 300000. Stated another way, the pension payment may be treated as 300K in retirement account balance when figuring the total amount of retirement funds you need for a given lifestyle in retirement.

Poor Man Investment Club uses the Unit Valuation System (UVS) to determine and track each member’s contributions and current share of worth. The Unit Valuation System has been used by Mutual Funds and investment partnerships for a very long time and only appears complicated at first pass. I will attempt here to provide a simple explanation of how it works and a few simplistic but explanatory examples.

The basic formula for calculating ‘Unit Value’ is:

UV =  (Market value + Cash + Income – Liabilities – Expenses) / # units

Examining the case of a newly formed partnership with 2 partners who each contribute $100 to starting capital. The partners can either attach any value they wish to a unit at this time and then ‘buy’ the units desired or probably more commonly done they pick a number of units to start with that simplifies the first set of math. In this case they agree that the partnership will start with 100 units of which they will have 50 each.

Now the partners wish to put their capital to work in investments. They decide to buy 10 shares of sprocket’s ‘r’ us (ticker SPACELY) at $10 each as their first investment. In purchasing the shares they incur a $5 commission charge. Let’s examine how the unit value changes. We can handle the commission in two ways for this example. We can net it against the remaining cash after the stock purchase or we can just put it in the expenses column until the end of month/quarter/etc and net everything then. Let’s use the second method for now as it demonstrates the concept well.

So our sum of all unit values declined by the commission expense and when attributed out to each unit it was a nickel per unit.  Continuing with this example, let’s assume that the market value of sprocket’s r us rises to $12 per share and our partners are so pleased with themselves that they wish to add another $50 each to the partnership. How do we accommodate the addition of new money? First we find the new unit value at the time of adding the new funds.

So the new unit value is $2.15. Each partner wishes to add $50 which will purchase 50/2.15 = 23.2558 . So now each partner has 73.2558 units at a value of $2.15 per unit. Easy enough. Note that the beautiful feature of this is that allows any partner to purchase any amount of new shares at anytime just by calculating the current unit value and ‘selling’ the units at that cost to the partner adding funds.  Let’s look at our values after the purchase in example here and pay particular attention that the unit value doesn’t change. We just create more units for the influx of new cash.

For the last example let’s assume that the shares of sprockets ‘r’ us keep going up and reach $15 share. At $13 a share the partners bought 10 more shares with another $5 commission. The original 10 shares issued a $1 dividend (income). The new table would be:

I hope this short write up has helped everyone understand. If you still have questions you can leave a note here or just catch me at the next meeting.

Yep, it’s rough out there. In a sign of just how tough times are on stocks of major companies the New York Stock Exchange is considering lifting it’s requirement that a companies shares must trade above a dollar per share to be listed on the big board. Currently if shares fall below the dollar mark then the company has a couple of months to get the price back up or face being delisted from the exchange. With several major companies trading below a buck and numerous more in the two dollar area the exchange might be smart to suspend the rule for a time. The exchange has already lowered it’s market capitalization requirement temporarily.

At his BlogSpot blog, John Hempton has one of the best written and informative articles I’ve seen regarding the solvency issue around banks. It’s a tricky topic and I caught myself on both sides of the debate on mark to market. If you read one article today then read Bank solvency and the "Geithner Plan"

The compensation caps at companies taking government handouts are perhaps even more controversial than mark to market. Freakonomics has a good post and some hot comments on the possibility of the best of breed in banking finding a new playground. Check out Let the Human-Capital Exodus Begin

Poor Man Investment Club uses the Unit Valuation System (UVS) to determine and track each member’s contributions and current share of worth. The Unit Valuation System has been used by Mutual Funds and investment partnerships for a very long time and only appears complicated at first pass. I will attempt here to provide a simple explanation of how it works and a few simplistic but explanatory examples.

The basic formula for calculating ‘Unit Value’ is:

UV =  (Market value + Cash + Income – Liabilities – Expenses) / # units

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The question of how to get a weighted average or weighted mean in Excel arises frequently among new investors. This is largely due to the importance of weighted averages in answering many of the new investor’s questions such as the overall yield of a portfolio.

The investor will of course turn to his most handy and reliable tool in analyzing his portfolio namely Excel. Upon discovering that there is not a single function to calculate the value needed, many end up taking a circuitous route to arrive at the answer needed. While Excel does not have a weighted average function per se it does indeed have the components needed to render the process quite simple.  Below we will walk through the process step by step. I often find when searching for simpler methods of accomplishing tasks that it is helpful to start with an answer derived the long way and then that answer can be used to prove out the new method. I will proceed in that manner here by first providing an example with long hand solution and then demonstrating how to simplify the steps via Excel.

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Sooner or later it seems my permalinks always get hosed with WordPress. I figure I’ll try one more time and exercise great caution this go round. WordPress is so widely used it almost has to be me that is having the problem and not the software .