What I learned: Arbitrage

I'd heard the word before without ever understanding it. Arbitrage is the ability to find identical investments that have differing prices and taking advantage of this disparity without risking a cent of your own money.

For example, if iPads are selling in the US for $500 but are only available in Europe for the equivalent of $600, you can borrow $500 from the bank, buy an iPad, sell it via the internet for $550, pay back the bank, and pocket the $50. You haven’t used a penny of your own money. If you owe any interest to the bank, it is probably minimal. This is arbitrage.

What I learned: Stock diversification

If you load up your investment portfolio with only tech stocks or only pharmaceuticals, for example, your risk level is high because what impacts one type of stock will likely impact all the other similar stocks. This is called independent risk, or idiosyncratic risk, and it’s completely unnecessary. You can virtually eliminate this risk – diversify it away – simply by having a minimum of 30 different types of investments in your portfolio.

A lot of folks who are interested in investing for the future also own a home. Of course a home is a great investment but, unless you’re a millionaire, you’re putting a whole lot of eggs in the same basket (subjecting yourself to idiosyncratic risk). This is especially true if you also own an index fund that is in REITs (Real Estate Investment Trusts) and maybe even own a second home for rental income.

Here’s how to find out how diversified you are. Take your net worth (assets minus your debts) and divide by 30. This is the theoretical maximum you should have in any single investment in order to be properly diversified. If your net worth is, say, $450,000 (including the estimated resale value of your home minus your mortgage balance), then the most you should be holding in real estate is $15,000.
However, if you’re like most Americans, your home is probably at least 40% of your portfolio. Add to that your REITs and that rental property, and you’re way under-diversified. If you don’t own a home, maybe you should just own $15,000 worth of REITs. It is, of course, a personal choice. Just keep this in mind when you consider the riskiness of your investments.

What I learned: About Curves

A “curve” in college is usually a straight line.

In Economics there are two curves: the demand curve and the supply curve. Draw both on a graph and you basically have an X. No one bothers to calculate the actual curve, if there is one.

Grade on the curve, or apply a curve at the end of the semester. This also means a straight line. Sure, the bell-shaped graph representing all the grades is curvy, but the cut-off point is still a straight line.

Had one prof who declared at the beginning of the semester that 25% of the class would get an A, 50% would get a B, and 25% would get a C. Period. Seems like a straight "curve" to me! Theoretically I suppose one could possibly do nothing other than register for his class and still get a C, but I wasn’t willing to find out. I got a B.

What I Learned: Point-slope formula

Probably the biggest thing college did for me was in the area of math refresher. Ashamed to say I had let my math skills slip mightily over the years.

I know I probably learned this formula in high school but since there was a 30-year gap for me between high school and college, I guess I plumb forgot it!

The point-slope formula (also known as the slope-intercept equation) was the very first thing I learned in remedial math class. Those of us who failed the math assessment during student orientation had to take this extra class designed to get us up to speed before taking real college math.

First day of class Dr. Jessica Knapp (who looks nothing like a math teacher, by the way!) brought stacks and stacks of styrofoam cups and passed out maybe 10 or 12 cups to each group of 2 or 3 students. Our task was to construct a formula that would tell her how high the stack was. And the formula had to work even when she combined two of the stacks.

Some of the students got out their trusty ruler, measured one of the cups, and multiplied that by the number of cups. Okay, okay, I almost did the same thing. But then I noticed another measurement we needed to have. The distance between the lip of the first cup and the lip of the second.

So you really need TWO measurements in this formula. One will be used just once, and the other will be repeated as many times as you have cups. This is called the point-slope formula: y = mx + b

y is the height of the entire stack
m is the number of cups
x is the height of the lip
b is the height of the first cup below the lip

So the height of the stack is 12 (cups) x .5 (half an inch) + 4 (inches)

I can’t tell you how many times over the course of my four year college career this formula popped up. Over and over and over again - in economics, finance, statistics - everywhere. Very useful formula! I think it's magic in its simplicity.

Next phase coming up!

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All changes, even the most longed for, have their melancholy; for what we leave behind us is a part of ourselves; we must die to one life before we can enter another. -Anatole France, novelist, essayist, Nobel laureate (1844-1924)
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As you may have guessed, my college career is over! Even though I "walked" (graduated) in May, I still had two general education classes to finish up in the summer. That's done so just waiting for them to officially issue the degree. Somewhat anticlimactic! It's strange to think there's whole new crop of freshmen eagerly anticipating their first taste of college - and they're all FOUR YEARS YOUNGER than the toddlers in my class!

So the door is closing on the school phase of my life. Turns out it is also closing on the retirement/leisure phase - I start my first accounting job next week! Thankfully it is only part time and probably temporary. After four years of primarily being home, it will be difficult to have to report to work every day again. But I'm looking forward to finally learning how accounting works in real life. Turns out college accounting courses only touch the surface of a wide array of topics. It takes real job experience before most of it makes sense.

My new company is in residential and commercial property management - mostly in Arizona, but branching out to other states. I'll start out in Accounts Receivable but they promised I will learn a lot about the other facets of accounting, too. Having only worked as a secretary for a state government-owned university, the public sector is a giant blind spot for me. I'm looking forward to learning a lot!

At a recent family reunion, a very astute cousin asked me some interesting questions about my college experience. She got me to thinking about the key things I learned so I'll try to post some observations in the next few weeks in case you find them interesting, too.