QandO

May 31, 2004

Slackernomics
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As you know by now, my book, Slackernomics: Basic Economics For People Who Think Economics is Boring has just been released.

What is the book about? Well, as the jacket blurb says:

If you think economics is boring, then maybe you’ve been learning about it in the wrong places. The humorous, informal style of Slackernomics makes it easy to learn a wealth of information that you will find useful in business, politics, or regular daily life. From the basics of economics to current political controversies, Slackernomics cuts through the dull, boring economic arguments you’re used to hearing, and presents them in a lively, interesting fashion.

If you want to know about the basics of investing, or trade, or how the government uses—and misuses—you money, Slackernomics will give you the basics. Slackernomics is a must-have book for anyone who wants to know how the economy works, but who doesn’t want to be bored to tears while learning it.

Slackernomics uses witty, fun—sometimes outrageous—examples to help you learn the basics of economics, and maybe get a few good laughs while doing it. By the time you’re finished, you’ll be able to speak about the economy as knowledgeably as any real economist.

And you’ll be just as wrong as they are.

But, that's just the boring old marketing hype. What really matters, of course, is what's inside. So, just for QandO readers, here's a little excerpt from Chapter 3: Savings and Investment.

Stocks

A stock is a share of ownership in a company. As a general rule, every company has stock, but many companies are privately held, which means that all the stock is held by a very small number of people. Privately held companies do not offer shares of stock to the general public. Publicly held companies, on the other hand, are companies that offer their stocks for sale to the general public. These are the companies in which you and I have the opportunity to invest.

When you buy a share of stock in a company, you become an owner of the company. As an owner, you receive a share of the company’s profits. But don’t let the idea of being an owner of the company go to your head. Most publicly traded companies issue millions of shares of stock. For example, in December of 1999, Microsoft had 5.16 billion shares of stock in the hands of investors.

Now, that is a lot of stock, so if you own 1 share of Microsoft stock, you don’t really have much ownership weight to throw around. You can’t drop by the company’s offices and make free Xerox copies. Frankly, owning a single share of stock won’t even prevent the Microsoft security guards from thumping your skull if you show up in Redmond and even hint at causing trouble. On the other hand, if you own 51% of the stock, you can borrow the corporate jet to fly out to Philadelphia for a cheesesteak just about any time you want.

Most of us however, don’t own a 51% percent of a company, so why would we want to buy a stock? Well, because there are some goodies that come with owning stock. First of all, stocks can pay dividends. The simplest way to define a dividend is that it is like an interest rate that you get paid for owning the stock. A company may set a dividend payment that stockholders receive automatically every quarter (every three months). The amount of the dividend is usually some small percentage of the stock price. That percentage is called the dividend yield. A stock which costs $1 per share and pays a dividend of ten cents per share has a dividend yield of 10% per year.

The amount of the dividend payment can actually vary greatly from company to company. For example, in December of 1999, the dividend yield of the nation’s 30 largest stocks averaged about 1.9%. At the same time, the dividend yield for the Philip Morris Company was 7.3%. So if the Philip Morris stock was worth $100 per share, you would get a dividend payment of $7.30 per share every year. Dividends are paid out of the company’s profits. Some companies have such high and regular dividends that their stock is bought for this income alone. Some companies pay no dividends at all.

Stocks also pay earnings. Earnings are payments to the shareholders of the profits the company has made, after subtracting taxes and dividend payments. Every quarter, companies figure out how much money they’ve made in profits for the last three months, and they divide the money equally among the shares.

Sometimes, the company makes really great earnings. In one quarter of 1999, the reported earnings for Black Rock Incorporated were 182.44 per share. At the same time, the price of the stock was only around $19.00 per share! Some companies lose money, however. In that case, stockholders get nothing.

The price of a stock also can be an attraction. The price of a company’s stock may fluctuate quite a bit, and some companies fail completely. But as a whole, stock prices trend upwards. So if you buy a stock at $10 per share today, in five years it may be worth $25. Or it may be $3. The trick is to pick a company whose stock price will rise. This is called speculation.

In many cases, the stock of a company rises so much, that even if the company pays no earnings or dividends, the rise in the price of the stock makes it a very lucrative investment. To use Microsoft as an example again, the price of their stock in December of 1994 was about $7.50 per share. Five years later, the stock was worth about $95.00 per share. So in five years, your original investment would have gained 1,266%! Microsoft pays no dividends and the earnings are only $1.52 per share, but who cares? The price of the stock rose so high and so fast that it more than made up for the lack of earnings and dividends.

This high rate of price appreciation can also be matched by a high rate of price depreciation in stocks as well. Stocks can be very volatile, meaning that the price can rise or fall very quickly. If you invest in a company, the price might shoot through the roof when the company releases a new product everyone in the country wants. The price can collapse just as quickly when it is learned that the new product emits some previously unknown type of radiation that makes all male users impotent.

Because of this volatility, many investment advisors recommend that you never keep more than 5% of your investments tied up in a single company’s stock. Sure, this will prevent you from making huge gains when the company patents its new breast enlargement pills, but it will also protect you from large losses when Consumers Union learns that the company’s major product line explodes when exposed to children.

As you can see, it's not the run of the mill economics book. You can also see previous excerpts here and here.

So, If you've enjoyed what you've read of it so far, head on over to Barnes & Noble for your copy today!

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