What Bang for the Buck?!

By Brent Pritchard

Growing up, I remember my Grandpa Schlieman and uncles bird hunting on the farm around the holidays. I never remember them deer hunting. I’m pretty sure venison sausage would have been one of my earliest memories.

I remember my first finance class like it was yesterday—both as a student and educator. Your first finance class is fertile ground for one-liners. You know the kind I’m talking about: risk requires return.

Here’s an excerpt from my book Would Your Boomerang Return? What Birds, Hurdlers, and Boomerangs Can Teach Us About the Time Value of Money (2023):

If compound investment yield is an investor’s best friend, time is a close second. In the Time Value of Money nomenclature, the expected return on investment or true investment yield is denoted with an “i.” It’s the exponent “N” that makes return on return on investment or compound investment yield possible. It’s because of the power of “N” that Albert Einstein reportedly thought that “Compound interest is the most powerful force in the universe.” Implicit in this statement is that he thought it was even more powerful than gravity, which ironically helped the smaller snowball roll down the mountain in the comic strip illustration!

The true investment yield or expected return on investment as denoted by “i” is not to be confused with Return on Investment (ROI). ROI doesn’t consider that money has time value. To illustrate this point, let’s reconnect with our “investor” from the last chapter who had a bird in the hand and was staring at two in the bush.

The ROI on a successful “bird investment” would have been 100%: two birds for one. But there was no mention of time. Was this investor hunter thinking that delaying consumption—this takes on a new meaning—of the bird in the hand was worth two in the bush…in twelve months? In other words, should 100% have been thought of as a true annual investment yield? Time is an important consideration when it comes to determining the true investment yield. See how ROI ignores time. ROI has application in practice, and there’s a time and a place for using this and other metrics to measure and evaluate potential investments. But it’s not in the context of the Time Value of Money.

Since ROI doesn’t consider that money has time value, it’s incompatible with the Mathematics of Finance. ROI is a simple measure of return. When we dive deep into the discussion regarding the true investment yield, you’ll discover that the word simple or nominal is used to describe an investment yield that doesn’t consider the effects of compounding.

So if the investment metric ROI isn’t “i,” then what is? That would be the Internal Rate of Return (IRR or as I like to write it, i(RR)). The i(RR) is the discount rate that sets the Present Value of the future expected cash flows over the investment period equal to the investment. Unlike ROI, i(RR) is Time Value of Money approved! The time span of the i(RR) must correspond with the time span in between the periods or payments (on the timeline). For example, if the time span in between period markers on the timeline represents annual periods, then the i(RR) is a true annual investment yield. A product of the finance industry, of course i(RR) is going to consider time.

And if that’s not enough, here’s the starter:

Photo by Brent Pritchard. Copyright 2023 Brent Pritchard. All rights reserved.

What is your earliest memory from a finance class(room)?

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Brent Pritchard is an author and college finance educator with over two decades of industry experience and cofounder of Boxholm Press, LLC, a family-owned-and-operated publishing company providing educational content, products, and services. He pioneers an innovative and approachable new way of learning and teaching the Time Value of Money as well as thought leadership in other business topics. His most recent book is Would Your Boomerang Return? You can contact him on his website here.

Finance Students, Watch Out for This Red Flag.

By Brent Pritchard

When your time comes, I hope you get the chance to work with a living legend in your industry like the opportunity my former colleagues and I had.

There were lots of things that made the man special. One was his intuition. “Never make a loan to a person who drives a red sports car.” Why? Because they’ll never make the first payment: true story. He not only had a tremendous amount of smarts but a smile that made people smile and stories that made them belly laugh. Two that come to mind are the “Elk Meat” story and the one about the borrower who chose not to lay into him because the man thought he had brought his son, a coworker who shared the same last name but no relation, to the face-to-face meeting.

A woman, who will remain nameless, who works as a waitress has learned to watch out when a child orders the filet. Why? Chaos will ensue: you’re likely to get “talked up to.” Whether the meat is red or not on the inside, this gets to the same point: learn from past experiences.

This image was created with the assistance of DALL·E and prompts from Brent Pritchard.

A red flag in finance is that many aspiring finance professionals, dare I say most, don’t know how to manipulate the investment yield. (You can insert “interest rate” if you haven’t yet been enlightened by the fact that a non-interest bearing asset can also potentially compound.)

Here’s an excerpt from my book Would Your Boomerang Return? What Birds, Hurdlers, and Boomerangs Can Teach Us About the Time Value of Money (2023):

Before Clayton John made the trek to Cedar Rapids, Iowa, financial calculator in hand, responding to the job posting he saw in the Wall Street Journal and would later get, he was a high school math teacher in Albert City, Iowa.

I love this story for a lot of reasons. First and foremost, it showcases an important sequence that many people outright ignore. First comes the math, then comes the finance.

What do you estimate for the true quarterly investment yield based on an effective annual interest rate of 10.3813% with monthly compounding? (The answer isn’t 2.5953% and it’s definitely not 3.4604%, nor is it 2.6178% and it’s definitely not 3.5056%. It’s 2.5%.)

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Brent Pritchard is an author and college finance educator with over two decades of industry experience and cofounder of Boxholm Press, LLC, a family-owned-and-operated publishing company providing educational content, products, and services. He pioneers an innovative and approachable new way of learning and teaching the Time Value of Money as well as thought leadership in other business topics. His most recent book is Would Your Boomerang Return? You can contact him on his website here.

You Heard It Here First: Merry Christmas!

By Brent Pritchard

As we celebrate the “Happy Holidays,” I hope I’m one of many to wish you a “Merry Christmas.” Tis the season to take a little time off work, which reminds me of one of my favorite things to find in a legal document when I was practicing real estate:

“[Intentionally left blank]”

Not many people would call the act of reviewing complex legal documents fun like playing the guitar, for example. Notwithstanding anything to the contrary, here’s something one can’t help but love to read (after tearing through wrapping paper):

Photo by Brent Pritchard.

How do you plan to celebrate with the gift that comes from Nazareth?

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Brent Pritchard is an author and college finance lecturer with over two decades of industry experience and cofounder of Boxholm Press, LLC, a family-owned-and-operated publishing company providing educational content, products, and services. He pioneers an innovative and approachable new way of learning and teaching the Time Value of Money as well as thought leadership in other business topics. His most recent book is Would Your Boomerang Return? You can contact him on his website here.