Networth of board members

[ericd1]

 

Keep in mind that NW is not really representative:

 

Give an idiot 1M, & you still have an idiot. The guy who saved 100K the hard way is actually the wealthier. The real metric is investment maturity.

 

SD

 

Best quote on the board in a long time!!!!

[FFHWatcher]

networth = total assets - total liabilities.

so it should include your house too.

 

bit if you're married, like do you consider you own 50% of your house or what?

 

There is a reason that equity in personal real estate is not considered part of net worth.... because if the price is carried on your balance sheet at "market" value..the value is notional.... not realized.

The day the home is sold  (after deducting all carrying costs and ALL PIT payments) at a profit, the cash so generated can be added to your net worth. You may be surprised to notice that very few homes in very few markets actually end up with a profit.

This is  because personal homes are a liability... they generate monthly expenses and impair your monthly cash flow (which is the real measure of wealth, not notional net worth).

One million dollars notionally stuck in a personal home generates huge monthly expenses. One million dollars invested at 12% generates ~ 10,000/ month.

Let's assume that scenario B pays 2000.00/month for rental expenses.

Who will be wealthier in a year? in a decade? Who will be a "victim" of the sudden mass realization that notional home equity is illusory.

 

 

 

Broxburnboy, what the crap are you talking about?

 

1/  To understand Net Worth, you have to understand that it has absolutely nothing to do with the past or the future.  It has to do with right now, just like a balance sheet.  It is essentially the number you get if you were to liquidate everything you own today and pay off all your debts, today. 

 

2/ There is a reason equity in your home IS considered part of a persons net worth.  It has value, it is realizable and you can sell it.  Home sell everyday.  If you don't want to count it for yourself, that is ok with me.  My understanding is that the rest of the world counts their home as part of their net worth. 

 

2/ Why wouldn't I carry the value of my home on my personal balance sheet at market value or some sort of net realizable value if I sold it today?  I had a client once (he was an accountant) and he carried the value of his Worldcom stock at what he paid for it (not sure how much, $25/share.?) on his personal balance sheet.  Market value was about $0.10/share and then $.0.  I suppose the $0.10 was notional, so best to ignore it so perhaps his net worth should have be $100,000 and not $0?  A good friend of mine is selling his house and it is on the market for $8.25M.  He paid $425k.  Just a notional gain?  Probably should or shouldn't include the $8M on his personal balance sheet?  Why would the interest he paid on his mortgage (he probably never had one) or the taxes he paid go into an asset - liability equation?  Let's say he paid $500k in property taxes on his house over the past 20 years, why would he subtract that from his net worth on a net worth statement?  He does owe it, he has paid it in the past.  You would, of course, subtract past expenses from a net profit calculation...sure.  He walks away with $8M in the bank...why would he subtract his interest and taxes from that number to see what he is worth today?  He is worth $8M if that is all he has and it is cash sitting in the bank after he sells his house, not $425k and not $8M subtract all the taxes and interest he has paid.

 

3/  Monthly expenses have nothing to do with a net worth calculation. They are in the past.  Future monthly expenses are in the future.  I have to eat everyday for the rest of my life but I am not going to subtract the present value of my future food cost in my current Net Worth calculation, nor would I subtract my past food costs in my Net Worth calculation. 

 

4/ Similarly, let's assume I had $1,000,000 in a stock and that was everything that I owned with no debt.  If that stock paid a 6% dividend for the past 10 years and it is likely going to pay a 6% dividend going forward, my Net Worth is still $1,000,000.  The $60,000 dividend in the past and in the future is ignored.  Who ever will be wealthier in a year has nothing to do with a Net Worth calculation. 

 

Assets - liabilities = net worth

[opihiman2]

From what I've read in various consumer financial magazines, the net worth calculation includes the home equity but subtracts the remaining debt as a liability.  The estimated market value was also used in the net worth calculation.  Of course, all of this is pre-tax, so estimated net worth is generally lower after liquidation or proceeds occur. 

[savant]

 

 

 

 

A good friend of mine is selling his house and it is on the market for $8.25M.  He paid $425k.  Just a notional gain?  Probably should or shouldn't include the $8M on his personal balance sheet?  Why would the interest he paid on his mortgage (he probably never had one) or the taxes he paid go into an asset - liability equation?  Let's say he paid $500k in property taxes on his house over the past 20 years, why would he subtract that from his net worth on a net worth statement?   He does owe it, he has paid it in the past.  You would, of course, subtract past expenses from a net profit calculation...sure.  He walks away with $8M in the bank...why would he subtract his interest and taxes from that number to see what he is worth today?  He is worth $8M if that is all he has and it is cash sitting in the bank after he sells his house, not $425k and not $8M subtract all the taxes and interest he has paid.

 

 

This might be a dumb question but where is your friend going to live now?

[twacowfca]

 

 

 

 

A good friend of mine is selling his house and it is on the market for $8.25M.  He paid $425k.  Just a notional gain?  Probably should or shouldn't include the $8M on his personal balance sheet?  Why would the interest he paid on his mortgage (he probably never had one) or the taxes he paid go into an asset - liability equation?  Let's say he paid $500k in property taxes on his house over the past 20 years, why would he subtract that from his net worth on a net worth statement?   He does owe it, he has paid it in the past.  You would, of course, subtract past expenses from a net profit calculation...sure.  He walks away with $8M in the bank...why would he subtract his interest and taxes from that number to see what he is worth today?  He is worth $8M if that is all he has and it is cash sitting in the bank after he sells his house, not $425k and not $8M subtract all the taxes and interest he has paid.

 

 

This might be a dumb question but where is your friend going to live now?

 

 

The answer's obvious:  Anywhere he wants to.  ;D

[savant]

 

The answer's obvious:  Anywhere he wants to.   ;D

 

Haha true but assuming he wants to maintain same standard of living in the same city, he will likely purchase another house for the same  price. So unless this is his second house, he still needs to cover his basic needs of providing shelter for himself / his family. So if one were conservative, he would consider the first house to be an expense which can be either capitalized upfront or paid for over a lifetime as rent expense but in either case is an expense and not an asset.

[rmitz]

Haha true but assuming he wants to maintain same standard of living in the same city, he will likely purchase another house for the same  price. So unless this is his second house, he still needs to cover his basic needs of providing shelter for himself / his family. So if one were conservative, he would consider the first house to be an expense which can be either capitalized upfront or paid for over a lifetime as rent expense but in either case is an expense and not an asset.

 

However, it's an asset because you don't ever *need* to maintain exactly the same "quality of life" in exactly the same location.  That is a choice as to how you allocate your assets. 

[savant]

 

 

However, it's an asset because you don't ever *need* to maintain exactly the same "quality of life" in exactly the same location.  That is a choice as to how you allocate your assets. 

 

I absolutely agree. However, I've never known many people to downgrade their quality of life in order to make a 'better' investment. Perhaps in extenuating circumstances. There may be the cases where an individual is strong-minded enough to downgrade current lifestyle to make an investment that will benefit in the future but I believe that to be the exception rather than the norm. You don't own the things - the things own you.

[Guest broxburnboy]

networth = total assets - total liabilities.

so it should include your house too.

 

bit if you're married, like do you consider you own 50% of your house or what?

 

There is a reason that equity in personal real estate is not considered part of net worth.... because if the price is carried on your balance sheet at "market" value..the value is notional.... not realized.

The day the home is sold  (after deducting all carrying costs and ALL PIT payments) at a profit, the cash so generated can be added to your net worth. You may be surprised to notice that very few homes in very few markets actually end up with a profit.

This is  because personal homes are a liability... they generate monthly expenses and impair your monthly cash flow (which is the real measure of wealth, not notional net worth).

One million dollars notionally stuck in a personal home generates huge monthly expenses. One million dollars invested at 12% generates ~ 10,000/ month.

Let's assume that scenario B pays 2000.00/month for rental expenses.

Who will be wealthier in a year? in a decade? Who will be a "victim" of the sudden mass realization that notional home equity is illusory.

 

 

 

Broxburnboy, what the crap are you talking about?

 

 

Assets - liabilities = net worth

 

 

 

What is an asset? - something that produces cash flow

                          - sits on the balance sheet and produces income  on the income statement

What is a liability? - something that produces negative cash flow

                          - sits on the balance sheet and produces monthly expenses

How do you grow net worth?

                            - buy yet more assets with your positive cash flow

How do you reduce net worth?

                            - buy yet more liabilities with your cash flow

 

 

 

 

[ERICOPOLY]

networth = total assets - total liabilities.

so it should include your house too.

 

bit if you're married, like do you consider you own 50% of your house or what?

 

There is a reason that equity in personal real estate is not considered part of net worth.... because if the price is carried on your balance sheet at "market" value..the value is notional.... not realized.

The day the home is sold  (after deducting all carrying costs and ALL PIT payments) at a profit, the cash so generated can be added to your net worth. You may be surprised to notice that very few homes in very few markets actually end up with a profit.

This is  because personal homes are a liability... they generate monthly expenses and impair your monthly cash flow (which is the real measure of wealth, not notional net worth).

One million dollars notionally stuck in a personal home generates huge monthly expenses. One million dollars invested at 12% generates ~ 10,000/ month.

Let's assume that scenario B pays 2000.00/month for rental expenses.

Who will be wealthier in a year? in a decade? Who will be a "victim" of the sudden mass realization that notional home equity is illusory.

 

 

 

Broxburnboy, what the crap are you talking about?

 

 

Assets - liabilities = net worth

 

 

 

What is an asset? - something that produces cash flow

                           - sits on the balance sheet and produces income  on the income statement

What is a liability? - something that produces negative cash flow

                           - sits on the balance sheet and produces monthly expenses

How do you grow net worth?

                             - buy yet more assets with your positive cash flow

How do you reduce net worth?

                             - buy yet more liabilities with your cash flow

 

 

 

 

 

This means that physical gold is not an asset, but a liability.  It does not produce income -- instead it produces monthly expenses because you have to pay somebody to securely store it.

 

[FFHWatcher]

 

 

However, it's an asset because you don't ever *need* to maintain exactly the same "quality of life" in exactly the same location.  That is a choice as to how you allocate your assets. 

 

I absolutely agree. However, I've never known many people to downgrade their quality of life in order to make a 'better' investment. Perhaps in extenuating circumstances. There may be the cases where an individual is strong-minded enough to downgrade current lifestyle to make an investment that will benefit in the future but I believe that to be the exception rather than the norm. You don't own the things - the things own you.

 

Sounds like you are talking about Net Investable Assets.  Your house would be excluded from that calculation.  This thread is talking about Net Worth which includes all of your assets, including your home.  With the friend of mine that I referred to earlier, when he sells his house, pockets the $8M, will his Net Worth Increase by $8M on that day?  His Net Investable Assets will increase by $8M but not his Net Worth.  To answer the other question as to where he will live...People who own $8M houses, don't only own one or two.  Question: If the US Treasury issues debt at 0% and my friend puts his $8M cash into those treasuries, does his Net Worth go down to $0 the moment he buys those treasuries, just because they don't pay any income and because they will never grow in value?  Sounds crazy, right?  If Berkshire has $10B cash sitting on their balance she at 0% interest, do they not count it as an asset?  It doesn't pay any interest and is not growing in value.

 

Broxburnboy - with all due respect, you can't arbitrarily create or alter definitions for words.  I can see that you are trying to make your definitions more specific to investing but Net Worth is not really about investing and generating cash flow nor does it have anything to do with how much it will be worth in the future.  A persons Net Worth certainly can and should be used to do that but Net Worth is a very simple calculation (not complex, like you are suggesting) to put a number on adding up everything that you own, realistically estimating what you could liquidate it for (I have never seen taxes excluded although that is arguable and to be conservative, could be subtracted) and then subtract all debts owing at that moment in time.  If you cashed out, put all the proceeds in the bank, paid off all debt, lived in your parents basement, how much money would you have in the bank.  That number is Net Worth. 

 

You are referring to something else and you should not be using the term Net Worth, as it is already taken.

[stahleyp]

5 years ago my NW was 2% of what it is now.   ;D ( I haven't done a 50 bagger in 50 years, more like low 20% p.a) Partially from investment results and from reinvesting those results and fees earned from family members/partners for making them 20%. 

 

 

 

Do you manage investments like stocks or something else?

[StubbleJumper]

Hmmm.  I seem to recall that the accounting definition of an asset is, "something that you own, control and that provides future economic benefits."  By this definition, a house is most definitely an asset to the extent that your tenure there constitutes an economic benefit (ie, imputed rent and future resale).

 

 

SJ

[Guest broxburnboy]

 

Broxburnboy - with all due respect, you can't arbitrarily create or alter definitions for words.  I can see that you are trying to make your definitions more specific to investing but Net Worth is not really about investing and generating cash flow nor does it have anything to do with how much it will be worth in the future.  A persons Net Worth certainly can and should be used to do that but Net Worth is a very simple calculation (not complex, like you are suggesting) to put a number on adding up everything that you own, realistically estimating what you could liquidate it for (I have never seen taxes excluded although that is arguable and to be conservative, could be subtracted) and then subtract all debts owing at that moment in time.  If you cashed out, put all the proceeds in the bank, paid off all debt, lived in your parents basement, how much money would you have in the bank.  That number is Net Worth. 

 

You are referring to something else and you should not be using the term Net Worth, as it is already taken.

 

Commercial real estate is regarded as a financial asset, personal real estate is not. Why?  One produces net income, the other produces net expenses.

You have heard of people who are "house poor", who have high "mark to market" calculations of personal real estate but have a very current cash flow problem...

 

Your definition of net worth is not very simple at all.. it requires a theoretical liquidated value of all your possessions... and assumes that they can be sold at some price. It requires some form of risk assessment and neglects the expenses generated by the liquidation. It is in every sense "notional".. it is in fact "mark-to-market" accounting and subject to its own risks. At best it provides a blurry snapshot of theoretical value, but no indication of ability to meet current expenses, or to purchase more assets. There is a reason that GAAP financial statements includes both balance sheet and income statement. One provides a statement of solvency and the other a measure of whether you are going forward of backward. Both must be considered in any analysis of net worth or share price, in fact most analysts use the income statement not the balance sheet as the primary tool in valuation.

 

Re: gold as an investment

It produces no cash flow either positive or negative, if you store it yourself. It does however keep its relative purchasing power and can not be devalued like fiat money... it is the ultimate store of value and has accordingly to WEB, outperfomed BRK over the last decade (in fiat money terms).

[Myth465]

This is a pretty stupid disagreement. Though I can see where you are going broxburnboy, you are basically trying to redefine the definition of a word to suit yourself. While that's fine I think its ruining the discussion everyone else is trying to have  :).

 

http://en.wikipedia.org/wiki/Net_worth

 

In business, net worth (sometimes called net liabilities) is the total assets minus total outside liabilities of an individual or a company. For a company, this is called shareholders' preference and may be referred to as book value. Net worth is stated as at a particular year in time. In the case of an individual, the term estate is used in relation to deceased individuals in probate. For businesses, the term is used in the context of fraudulent law and on the dissolution of the company.

 

In personal finance, net worth (or wealth) refers to an individual's net economic position; similarly, it uses the value of all assets (long term assets) minus the value of all liabilities.

 

Net worth in business is generally based on the value of all assets and liabilities at the carrying value which is the value as expressed on the financial statements. To the extent items on the balance sheet do not express their true (market) value, the net worth will also be inaccurate.

[scorpioncapital]

only in Wonderland would people  be having a discussion of what net worth is and if it includes your house and if an $8 million house should be considered part of your net worth. There are people in the world with nothing, whether you include your house or not, sell it or not, most Americans are rich by global standards.

 

 

 

[jegenolf]

This means that physical gold is not an asset, but a liability.  It does not produce income -- instead it produces monthly expenses because you have to pay somebody to securely store it.

 

Re: gold as an investment

It produces no cash flow either positive or negative, if you store it yourself. It does however keep its relative purchasing power and can not be devalued like fiat money... it is the ultimate store of value and has accordingly to WEB, outperfomed BRK over the last decade (in fiat money terms).

 

As a fisherman, I appreciate the quality of the bait, Ericopoly.

 

Broxburnboy, all of a sudden stored purchasing power exists? I thought your model was purely cashflow driven which leaves no room for stored purchasing power. Where does stored purchasing power show up on the income statement?

 

Obviously gold should be included in net worth, but I don't see how you can be a goldbug AND find owner-occupied real estate to be purely a liability. Being a goldbug seems predicated on the fact that purchasing power storage is paramount. It just seems to me that real estate is one of the most tangible methods of purchasing power storage so I find your stance confusing. I can see thinking the stored value will decline dramatically, but I cannot see putting a value of 0 on it. Are we implicitly saying that property rights will have no chance of being enforced in the future making ALL real estate worthless? In a world like that, I can guarantee you'd incur expenses protecting your gold hoard though...

 

I just genuinely don't know how to connect the dots of this thought process. I'd like to see it though.

 

 

 

[SmallCap]

What is an asset? - something that produces cash flow

                          - sits on the balance sheet and produces income  on the income statement

What is a liability? - something that produces negative cash flow

                          - sits on the balance sheet and produces monthly expenses

How do you grow net worth?

                            - buy yet more assets with your positive cash flow

How do you reduce net worth?

                            - buy yet more liabilities with your cash flow

 

Broxburnboy, this is a brilliant statement when you consider investments in a pure vacuum and it seems very much based on Robert Kiyosaki which I assume is where you have gotten this logic. The problem with this way of thinking is that it takes investing out of the real world, because in the real world I have a physical body and I need a place to live and function. If there was no such need and I didn't need to live any place then your argument might have more merit.

 

Now looking this way at RE investments outside of the location that you need to live in also produces some problems. Using this logic, the way that assets and liabilities flip across the balance sheet based on whether or not they are rented is problematic. according to this definition if they are rented then they are an asset but as soon as that renter moves out then that RE is now a liability. So, when you buy some RE with the plan of renting it out you are actually buying a liability which goes against your definition of creating net worth. So by your argument you should only buy RE after someone else has gotten renters into it and if the renters ever leave then you should sell it immediately because you don't want to have any liabilities.

 

This sounds like a recipe for poor returns.

 

Remember that investing always happens in the real world where we need a place to live and we need a good night of rest to be able to function properly. Any investment strategy that doesn't take these basic things into account is a recipe for disaster.

 

SmallCap

the other problem with this thinking is how

 

[Guest broxburnboy]

This means that physical gold is not an asset, but a liability.  It does not produce income -- instead it produces monthly expenses because you have to pay somebody to securely store it.

 

Re: gold as an investment

It produces no cash flow either positive or negative, if you store it yourself. It does however keep its relative purchasing power and can not be devalued like fiat money... it is the ultimate store of value and has accordingly to WEB, outperfomed BRK over the last decade (in fiat money terms).

 

The whole net worth argument that personal real estate

 

As a fisherman, I appreciate the quality of the bait, Ericopoly.

 

Broxburnboy, all of a sudden stored purchasing power exists? I thought your model was purely cashflow driven which leaves no room for stored purchasing power. Where does stored purchasing power show up on the income statement?

 

Obviously gold should be included in net worth, but I don't see how you can be a goldbug AND find owner-occupied real estate to be purely a liability. Being a goldbug seems predicated on the fact that purchasing power storage is paramount. It just seems to me that real estate is one of the most tangible methods of purchasing power storage so I find your stance confusing. I can see thinking the stored value will decline dramatically, but I cannot see putting a value of 0 on it. Are we implicitly saying that property rights will have no chance of being enforced in the future making ALL real estate worthless? In a world like that, I can guarantee you'd incur expenses protecting your gold hoard though...

 

I just genuinely don't know how to connect the dots of this thought process. I'd like to see it though.

 

 

My point is that:

 

1.  I understand that wealth includes many non tangible elements, quality of life, view from the window, satisfactory interpersonal realistionships, health ... etc.

    But when we use terms like net worth we are attempting to value  these things in monetary terms and should use GAAP accounting practises.... and          

    a complete set of financial statements.

 

2.  We seem to be hung up on whether personal real estate is an asset or a liability...

    If we account for it in the most conservative sense.. by using depreciated replacement cost (this is the method most municipalities use to set the

    tax rate, and which most insurance companies use to calculate their exposure), we see immediately that it is a depreciating asset... it has intrisic (but        decreasing) value, but creates net monthly expenses and ongoing liabilities. A statement of net worth may include this number (whatever it is), but net worth on the balance sheet

    is only an instantaneous snapshot of wealth, it does not address the issue of current solvency (which is perhaps the most meaningful measure of wealth).

   

   I am not making this up, or changing definitions to suit my point of view... personal real estate in the strictest income statement sense is an ongoing financial

   liability... just ask those millions who have lost their solvency over the inability to deal with the cash flow liabilities, generated by this "asset".

   Net worth calculated by mark-to-market valuations of personal real estate are notional at best and deceptive at worst.

 

   As for gold: Gold is money.

   Fiat currencies are depreciating Federal Reserve Notes (in the US)... a promise to pay an ever decreasing share of notional net worth

   of an enterprise whose cash flow situation is deeply and ever increasingly, impaired. Financial statements use this fiat currency as a constant measure

   and as such are subject to the credit risks inherent in the dollar. If calculated in goldgrams or ounces, they would definitely show a more accurate and

   uninflated view of net worth as a measure of wealth.

   

   

[FFHWatcher]

Brox; We are not hung up on whether Personal Real Estate qualifies as an asset on an individual's personal Net Worth Statement/Calculation.  We are all in agreement that it DOES count and only one person is arguing against it.  Let's agree to disagree and move on.

 

Perhaps the Personal Net Worth calculation sucks and it tells us nothing about an individuals true wealth.  I think more people would agree with you on that one, I might too.  That doesn't mean you arbitrarily change the definition just because it sucks, you feel it is the most meaningless measure of wealth and it can be very deceptive.  How about you just stop using the term and call your calculation something different, because as I mentioned earlier, the term Net Worth is already taken and it includes Personal Real Estate.  Let's call your definition "GAAP Personal Net Worth" or GAAPPNW for short  :) 

[stahleyp]

My net worth isn't that high, but my savings rate is somewhere around 90% of net income.

[Myth465]

Brox; We are not hung up on whether Personal Real Estate qualifies as an asset on an individual's personal Net Worth Statement/Calculation.  We are all in agreement that it DOES count and only one person is arguing against it.  Let's agree to disagree and move on.

 

Lol

 

Perhaps the Personal Net Worth calculation sucks and it tells us nothing about an individuals true wealth.  I think more people would agree with you on that one, I might too.  That doesn't mean you arbitrarily change the definition just because it sucks, you feel it is the most meaningless measure of wealth and it can be very deceptive.  How about you just stop using the term and call your calculation something different, because as I mentioned earlier, the term Net Worth is already taken and it includes Personal Real Estate.  Let's call your definition "GAAP Personal Net Worth" or GAAPPNW for short  :) 

 

Also this is not US GAAP.  :)

[Guest Dazel]

 

"Soon a fool and is his money are invited everywhere"

Take Warren's advice....and be careful what you wish for...

 

SD...there are a lot of rich idiots out there!

 

Dazel.

[Uccmal]

We have alot of brain power on this board being dedicated to one of the more inane arguments I have seen recently.   

 

Shouldn't you all be researching value ideas and sending them to me, or something else more useful such as lying on the beach. 

 

Dad.

 

:P

[beerbaron]

My net worth isn't that high, but my savings rate is somewhere around 90% of net income.

 

Aren't your parent complaining about having you in their basement?

 

Lol just kidding... how can you achieve 90% saving rate, I'm at 40% and I don't know anybody that can match me.

 

BeerBaron