Monday, March 2, 2015

Opportunity Costs of Today

(Have to be terse. No time)

Learning some fundamentals of Finance of late. One of the concepts I found to be really insightful. It goes like this:

If you purchased a home 20 years ago for $100,000 and today it's worth say $1,000,0000 - How much should you rent it out for? One school of thought is to compare it against whatever rate of interest you have readily accessible to yourself. The thought goes that if I can get a 5% interest rate today on my money, then in theory I could sell my 1 million dollar home and deposit the cash while getting $50,000 interest. That being the case I have no reason to rent the house out unless I atleast get that amount. You then are receiving a 5% return on your investment.

Maybe it's obvious to others, but the thing that really struck me was this -- there's no relevance to what your purchase price was of the home in regards to the present calculation of managing your house. You could have looked at the house as a running investment -- from the date of purchase to the current day. in which case you've had a great run -- 10X your initial investment plus the future cash flow of rent, whatever amount you decide to rent out for.

But you don't. Why? Because today you're making a separate choice of investing $1,000,000, not $100K. The question is not anymore what to do with a house that i bought for $100K, it's what to do with $1 Million, and it's on that number alone that you benchmark your success or failure.

And so, the insight for me -- no matter what a man has made of himself; no matter what great talmid chacham he has become, what institutions he's founded, what families he's grown -- vis-a-vis the future outlook of the rest of his life -- it's entirely irrelevant. That would be all fine and dandy if he dies today. Then  you could take a look back and benchmark where he started and where he ended. But so long as he's alive -- today, tomorrow and the next -- the only relevant issue is how are you optimizing the resources and achievements you have in your life - today!  Because you're not gauging what has Daniel Mokhtar become since the day he was born. You're gauging what has the Daniel Mokhtar of the past done with himself for that extra day he was given existence today - March  2, 2015.

Is there any positive ROI for today alone?

Here's to hoping.