In class last night I mentioned the following post. It is an an oldie but a goody. I originally wrote it back in December of 2004. I just reread it and still think it hits the main points very well. Read it. :)
And to the graduates, congratulations and thanks for a good semester!
FinanceClass: December 2004: "I am always nervous about the first and last classes of the year. So I wanted to write out some notes for today’s class. When I began typing I just wanted to recap what the semester. But that has been done before. So I guess these are either the some of the notes to the last class or to the first graduation address. Or both!
Congratulations. You have made it. Ok, so maybe it is not graduation time yet, but you are getting there. And minimally you have made it through all but the final from this class.
So I started out with the intent to write about what finance teaches us about life in general. But then I decided to open it up even further. So this entry is what have we learned in the business classes and how can that be incorporated into our every day lives? Consider it your first graduation address.
Accounting: In accounting classes we learned the importance of having checks and balances. We learned how to read a balance sheet and that every event has positive and negative aspects (i.e. you debit some accounts, while crediting others). We also learned (or should have learned) to keep score and periodically check to make sure we are where we think we are.
Statistics: From Stats classes we learn that few things in life are certain. Therefore, the best we can do is to “play the percentages.” We also learn to make informed decisions. We also learned that no matter how sure we are of a model, randomness does impact our models.
Economics: Arguably economics is the most all encompassing of any of the classes we have taken. Indeed Finance is just applied economics. So to list everything we learned would take a long time, but a few of the key things we learned: Specialization makes society better off. Free trade makes both sides better off. People maximize their own utility. Things at the margin matter!
Management: Management classes tend to fall into one of two camps. One stresses the interpersonal skills necessary to be a manager. The other camp is more number based—the so-called management science. We learn much from each. From the former we are reminded that leaders are important and that how we interact matters. From the latter, we learn to be efficient, to look for ways to continually improve, and that by basing decisions on quantifiable things we can do things much better.
Marketing: We learned that it is not just what you know, but how you come across. We learned that reputation matters and that psychology is important.
Business Information Systems: In BIS we learned that you have to be technologically competent. We learned that systems are only as good as what you put into them and that systems are only as good as their weakest link.
Finance: Finance is in many ways the key holding all of this together. Finance, in the terminology of economists, finance helps to aggregate all that we have learned in other classes. But finance is even more than that. In finance, we learned
- that compounding is very powerful. Let it work for you and not against you. This means to save early, save often, and save regularly.
- that taxes and transaction costs matter. Therefore take advantage of tax advantaged investment accounts and watch excessive fees and trading costs.
- that markets are pretty efficient (although maybe not perfectly so). This means that there is no free lunch so when things sound too good to be true, be skeptical.
- that too much debt is a bad thing. Financial distress does not just happen to firms. Be careful about borrowing. Used correctly, debt is a great tool. Used incorrectly, it leads to many problems.
- that governance matters. Just like by structuring contracts differently can influence a firms’ market value, so too our own governance influences our returns.
- that luck sometimes is good and sometimes bad. Plan for the worse, but hope for the best!
- that investment is important. So invest in your assets—all of your assets. Your assets include your investments (stocks, bonds, mutual funds, etc), tangible assets (real estate, baseball cards, car, etc), and intangible (reputation, goodwill, your friends, your health, your mind). What does this mean? It means that while you care for your bank balance, your real property, don’t forget your friends, your family, your health, and your reputation. Sure it may not always be fun—(driving to see a sick friend never is), but do it anyways! (see next item)
- to think long term. Not only is most of a stock’s value derived from long term growth, so too is our value. The Enrons, the Worldcoms, and others forgot this. Sure you may have to pass up some things you want, but in the long run you will be glad you did! (indeed, drug addicts have some of the lowest discount rates known: they discount the future for short-term gains.)
- Both diversification and specialization have their places. On one hand specialization allows us to be very good at something. However, in a constantly changing world, too much specialization can be very risky. Moreover, too much of anything will lead to staleness (and often is bad for your health too). So have varied interests, be willing to learn new things, and never stop learning.
- that there are many ways increase utility. Money is not the only thing that makes people happy. People are REMMs and care about all things. More money is good, but so too are more free time, a better standard of living, and a clean conscience. How you draw your indifference curves is a personal decision.
To these, I would also add the importance of
- staying confident—many of you sell yourselves short. Both collectively and individually. I am not sure if it is a function of going to a small school, or not. But you should not sell yourself short!!! IF YOU WANT IT TO BE, the education you get here is every bit as good as you could get at any school in the world. Too many of you use “it is too hard” or “no one else is doing it” or “I can’t do it” as an excuse. You can do it. You just have to want to do it!
- never get too worried about money. Yes, it is money. Yes, it matters, but only to a degree. I’ve seen too many people destroy themselves (physically and mentally) over money. Do not let it happen to you. This may mean some advanced planning and might mean you do not have the fanciest car, or the largest TV. But who cares? Along these lines, the best definition of wealth I have ever heard is Wealth = monetary wealth / wants.
- staying active. Both physically and mentally. It is way too easy to stop. Don’t stop! Learn something new every day. Read, risten, take classes. Do some physical activity every day. Run, bike, walk, you name it! But to quote Nike, JUST DO IT! You will be glad in the long run!
- having fun! Life is too short to not have fun! Find hobbies that you like doing. But also at work. Remember: Work should be enjoyable, not something you have to do!!! as Anthony Annuziado said in our class: find a job you love and you'll never have to work a day in yout life!
See, I told you finance was everything :) Good luck and keep in touch!!! jim