Originally written: January 25, 2013
Somehow I never lost my TI-89. Through the shuffle of moonlight study sessions, impromptu loans to friends, countless final exams, three graduations, and the shear complexities of time, I have always kept my calculator handy. Yes, even at a time when the majority of life’s computations require no more than an iPhone, I covet any opportunity to break the monotony of restaurant tabs and tip calculations. I force its need on even marginally difficult computations and giddily dig it from my desk drawer. And after nine years, having kept track of my trusty TI-89 is a feat that impresses me more and more with each pale green, pixelated calculation.
My old ECON140 textbook ("Investments" by Bodie, Kane & Marcus) tells a slightly more compelling story. On the sweltering first day of lecture, our professor, a second year economics PhD candidate, excitedly broke the drone of the syllabus overview. “You’ll want to keep this book for years to come! Many of my past classmates and colleagues in the financial world still keep a copy of ‘Bodie, Kane & Marcus’ to reference.”
I doubt it, but who (cares) knows whether or not that is true. With the wealth of knowledge available online, I found it difficult to believe at the time. Even so, it is the only thing I remember from that first lecture four summers ago.
Just as that memory has survived, so has my connection to the textbook. Long after final exams ended and the carefree joy of summer school passed, I could not bring myself to sell the book—not even at a time when I was most accurately described as a “starving college student”. It even survived the box of books packed, shipped, and condemned to my father’s attic following graduation. And so last Friday night, there it was on the dining table along with my TI-89.
On my most recent off day when I probably should have been writing this third post, I instead sat at my dining table sifting through BK&M and frantically punching at my TI-89—all the while alternating between icing my knees and stretching. Joining this unlikely Friday evening party was an equally unlikely half gallon of double chocolate fudge brownie ice cream; the spoils of a spontaneous craving and late night stroll to the grocery store. Trust me when I say you need fuel for the type of late night rager that was going on at my apartment. Yes, sarcasm. Unfortunately, I didn't quite think through the logic of picking up ice cream... In Boise... In the middle of January.
Insert Screenshot of Boise Live Weather Reading: 5ºF
Yea. Ice cream.
In the pale green chocolatey asset price modeling that followed, I stumbled across a thought provoking stock pricing relationship between plowback ratios, return on investment/equity (ROI/ROE) and present value growth opportunities (PVGO)—all concepts that could have only been destined for my eyes that evening. They are the inspiration for this post. Stick with me; some basketball will find its way to the page soon.
For assets (particularly stocks), the plowback ratio represents the proportion of a company’s earnings reinvested into the company and not paid out to shareholders as dividends. In this context, the ROE represents the return of the investments (be they new projects, capital expenditures, etc.) into which the company’s reinvested earnings are plowed. After a couple of equations, some substituting, and a few calculations one can arrive at the PVGO which is essentially the present value of the previously mentioned reinvestments. In this particular model, these variablse are then used to determine the price of the asset.
If you are still reading, eyes glazing over and a bit lost, do not bother rereading the last paragraph. For those wondering where the hell are the company’s capitalization rate, dividend growth rate, etc. I will refer you back to “After a couple equations, some substituting, and a few calculations…” and then to the previous sentence. Don't bother.
In the end, the revelation is not about the validity or usefulness of the model, but simply how I am reminded about time, habits, and personal growth. As I sat there mining to the core of the half gallon of chocolate with eyes blazing back and forth across equations, I could not help but use that very moment to solidify my comprehension of the pricing model.
Say I am the business. To my understanding, free time is comparable to a company’s earnings. Likewise, habits and hobbies might be considered investment opportunities. We are then left to decide both how much of our free time to reinvest in our own personal growth (plowback ratio) as well as the quality (ROE) of those time investments. If I engage in beneficial activities now, they will pay greater dividends in the future. For example, maybe I am then choosing between a low ROE outing partying into the morning at a club or a night filled with reading, ice cream and recovery exercises. I hesitate to say I consciously deliberated the “choice”; I think it sort of just happened. Either way, my legs surely appreciated the rest and my mind appreciated the workout.
So what then do we do with our free time? As a basketball player, what do I do with my offseason? How is even my off night invested? The question really applies to anyone. In my described situation, I realize there are plenty of options on an off day (especially a Friday night with a wide open Saturday to follow) and studying old textbooks and guzzling ice cream are not necessarily the first things to come to my mind. Nevertheless this improbable evening had an odd way of reminding me that our habits and free time have precious value. While, there are appropriate times for everything—even late night partying with friends or ice cream binges— I suppose at the moment my TI-89, BK&M, and recovery exercises require a bit less moderation. Happy investing.