The Savvy Wallet

Volatility Explained in One Minute: From Definition/Meaning & Examples to the Volatility Index (VIX) Volatility is a term that describes how much the price of an asset, such as a stock, a bond, or a commodity, fluctuates over time. It is a measure of risk and uncertainty in the market, as well as a potential source of profit or loss for investors. There are different ways to measure volatility, but one of the most common and popular ones is the CBOE Volatility Index, or VIX. The VIX is an index that tracks the expected volatility of the S&P 500, a benchmark index of the US stock market, over the next 30 days. It is calculated based on the prices of options contracts on the S&P 500, which are financial instruments that give the buyer the right to buy or sell the underlying asset at a specified price and date. The VIX is often called the “fear index” or the “fear gauge” because it tends to rise when investors are nervous or pessimistic about the market, and fall when they are...

  # Correlation Does Not Imply Causation: A One Minute Perspective on Correlation vs. Causation If you are interested in finance, you have probably encountered many graphs, charts, and statistics that show the relationship between two variables. For example, you might see a graph that shows the correlation between the stock market performance and the unemployment rate, or the correlation between the inflation rate and the consumer price index. But what does correlation really mean? And does it imply causation? ## What is correlation? Correlation is a measure of how closely two variables move together. It ranges from -1 to 1, where -1 means that the variables move in opposite directions, 0 means that there is no relationship, and 1 means that the variables move in the same direction. For example, if the correlation between the stock market performance and the unemployment rate is -0.8, it means that they tend to move in opposite directions: when the stock market goes up, the unemplo...

The Earnings Per Share (EPS) & Price-to-Earnings Ratio (P/E Ratio): Definitions. Formulas. Examples. If you are interested in investing in stocks, you may have come across the terms earnings per share (EPS) and price-to-earnings ratio (P/E ratio). These are two important metrics that can help you evaluate a company’s profitability and valuation. In this blog post, we will explain what they are, how to calculate them, and how to use them in your investment decisions. What is Earnings Per Share (EPS)? Earnings per share (EPS) is the amount of a company’s profit allocated to each outstanding share of a company’s common stock. It is a measure of how much money a company makes for its shareholders. EPS is calculated by dividing the net income by the number of outstanding shares. The formula is: � � � � � � � = � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � ℎ � � � � t e x t EPS = f r a c t e x t N e t I n co m e t e x t N u mb ero f O u t s t an d in g...

The Book Value and Price-to-Book Ratio (P/B Ratio) Explained: From Definition to Formulas & Examples If you are a value investor, you might have heard of the price-to-book ratio (P/B ratio), a financial metric that compares a company’s market value to its book value. But what exactly is the book value and the P/B ratio, and how can they help you find undervalued stocks? In this blog post, we will explain the meaning, formula, and interpretation of the book value and the P/B ratio, and provide some examples of how to use them in your investing decisions. What is the book value? The book value of a company is the value of its assets minus its liabilities, as reported on its balance sheet. It represents the net worth of the company, or the amount of money that would be left over if the company sold all its assets and paid off all its debts. The book value can also be divided by the number of outstanding shares to get the book value per share (BVPS), which is the value of each share of...

Volatility Explained in One Minute: From Definition/Meaning & Examples to the Volatility Index (VIX) Volatility is a term that describes how much the price of an asset, such as a stock, a bond, or an index, fluctuates over time. It is a measure of risk and uncertainty in the market. The higher the volatility, the more unpredictable the price movements are, and the more potential for profit or loss. One way to measure volatility is by using the standard deviation, which is a statistical tool that shows how much the returns of an asset deviate from their average. For example, if the average return of a stock is 10% and its standard deviation is 5%, it means that most of the time, the return will be between 5% and 15%. However, there is also a chance that the return will be much higher or lower than that range. Another way to measure volatility is by using the implied volatility, which is derived from the prices of options, which are contracts that give the right to buy or sell an ass...

  # Correlation Does Not Imply Causation: A One Minute Perspective on Correlation vs. Causation If you are interested in finance, you have probably encountered many graphs, charts, and statistics that show the relationship between two variables. For example, you might see a graph that shows how the stock market performance is correlated with the unemployment rate, or how the inflation rate is correlated with the consumer price index. But what do these correlations mean? And can we use them to make predictions or draw conclusions about the causes of financial phenomena? ## What is correlation? Correlation is a measure of how closely two variables move together. It ranges from -1 to 1, where -1 means that the variables move in opposite directions, 0 means that there is no relationship, and 1 means that the variables move in the same direction. For example, if the correlation between the stock market and the unemployment rate is -0.8, it means that when the stock market goes up, the u...

Past Performance Does Not Guarantee Future Results: Popular Quote/Disclaimer If you have ever read a mutual fund prospectus, an investment newsletter, or any other financial material, you have probably seen this phrase: Past performance does not guarantee future results. But what does it mean, and why is it important for investors to understand? What Does It Mean? The phrase past performance does not guarantee future results is a standard disclaimer that is required by the Securities and Exchange Commission (SEC) for any investment product or service that uses past performance as part of its advertising or marketing 1 . The SEC wants to remind investors that investing involves risk, and that the returns or performance of an asset in the past may not be repeated or sustained in the future. The phrase also implies that past performance is not a reliable indicator of future performance, because there are many factors that can affect the performance of an asset, such as market conditions, ...

  Survivorship Bias Explained in One Minute: From Definition/Meaning to Examples (Finance and Trading) Survivorship bias is a cognitive error that makes us overestimate the chances of success by focusing only on the winners and ignoring the losers. It can lead to false conclusions and poor decisions in many areas of life, especially in finance and trading. Here are some examples of how survivorship bias can affect your financial decisions: Investing in mutual funds : You might be tempted to invest in a mutual fund that has a stellar track record of beating the market. But you should be aware that many funds fail and disappear over time, leaving only the successful ones in the data. This means that the average performance of mutual funds is inflated by survivorship bias and does not reflect the true risks and returns of investing in them 1 Following successful traders : You might be inspired by the stories of traders who made millions or billions of dollars in the stock market. But ...

The Economics Behind Instant and Delayed Gratification Explained in One Minute: Consuming vs. Saving Have you ever faced a dilemma between buying something you want now or saving money for later? If so, you are not alone. Many people struggle with balancing their present and future needs, especially when it comes to money. This is because we are influenced by two psychological forces: instant gratification and delayed gratification. Instant gratification is the desire to experience pleasure or fulfillment without delay or deferment. It is the tendency to choose immediate rewards over long-term benefits, even if the latter are more valuable. For example, you might buy a new gadget or a fancy meal instead of saving money for a vacation or retirement. Delayed gratification is the ability to resist the temptation of an immediate reward and wait for a later reward. It is the willingness to sacrifice short-term pleasure for long-term goals, even if the former are more appealing. For example,...

Longing vs. Buying and Shorting vs. Selling: One Minute Comparison, from Definition to Differences If you are interested in trading stocks, options, or other financial instruments, you may have heard of the terms longing, buying, shorting, and selling. But what do they mean and how are they different? In this blog post, we will explain the basics of these concepts and compare them in one minute. Longing and Buying Longing and buying are two ways of expressing a bullish view on an asset, meaning that you expect its price to rise in the future. When you long or buy an asset, you own it and benefit from its appreciation. However, there is a subtle difference between longing and buying. Buying simply means acquiring an asset with cash or other means of payment. Longing, on the other hand, implies that you are using leverage to amplify your exposure to the asset. Leverage means borrowing money or using derivatives to increase your potential returns (and risks) from a trade. For example, if ...

Have you ever wondered why some people make irrational decisions when it comes to money and investing? Why do some people panic and sell their stocks when the market crashes, while others stay calm and buy more? Why do some people chase after risky and speculative investments, while others stick to safe and conservative ones? The answer lies in the two powerful emotions that drive human behavior: fear and greed. Fear and greed are the opposite ends of the spectrum of emotional investing. Fear is the emotion that makes us avoid losses, while greed is the emotion that makes us seek gains. Both emotions can cloud our judgment and interfere with our rational thinking. Fear can make us overreact to negative news and events, and cause us to sell our investments at a low price, locking in our losses. Fear can also make us miss out on opportunities, as we become too cautious and skeptical to invest in anything. Fear can lead to underperformance and regret. Greed can make us overconfident and o...

The Lindy Effect Explained in One Minute: From Albert Goldman to Nassim Taleb, & Gold to… Bitcoin? What is the Lindy effect and why should you care? The Lindy effect is a theory that says the longer something has existed, the longer it will continue to exist. It applies to things that do not have a natural expiration date, such as ideas, technologies, or investments. The Lindy effect was first coined by Albert Goldman, a writer and critic, who observed that the life expectancy of a comedian was proportional to the amount of time they had been performing. 1 Later, Nassim Taleb, a mathematician and author, popularized the concept in his books The Black Swan and Antifragile, where he argued that the Lindy effect can help us deal with uncertainty and randomness in the world 2 How does the Lindy effect relate to gold and bitcoin? Gold and bitcoin are both considered as alternative forms of money that can hedge against inflation and economic crises. Gold has a long history of being a st...

Downsizing Your Home (Life?) Explained in One Minute: Should You Move to a Smaller House/Apartment? Many people consider downsizing their home at some point in their lives, whether it’s for financial, lifestyle, or environmental reasons. But is it the right decision for you? Here are some of the pros and cons of moving to a smaller space. Pros of Downsizing You’ll save money. A smaller home usually means a lower mortgage payment, lower property taxes, lower utility bills, and lower maintenance costs. You can use the extra money to pay off debt, save for retirement, travel, or pursue your passions. You’ll have more time. A smaller home requires less cleaning, organizing, and repairing. You’ll have more time to spend on things that matter to you, such as hobbies, family, friends, or volunteering. You’ll enjoy a simpler lifestyle. A smaller home forces you to declutter and keep only the things that you need and love. You’ll have less stress and more peace of mind. You’ll also be more m...

Stop-Loss and Take-Profit Orders Explained in One Minute: From Definition to Examples~Trailing Stops If you are a trader, you probably know how important it is to manage your risk and reward. One of the ways to do that is by using stop-loss and take-profit orders, which are types of limit orders that automatically close your position when the price reaches a certain level. In this post, we will explain what they are, how they work, and how to use them effectively. What are stop-loss and take-profit orders? A stop-loss (SL) order is an order that closes your position at a predetermined price below the current price, to limit your loss if the market moves against you. For example, if you buy a stock at $100 and set a stop-loss at $95, your broker will sell your stock if the price drops to $95 or lower, preventing you from losing more than 5%. A take-profit (TP) order is an order that closes your position at a predetermined price above the current price, to lock in your profit if the ma...

The Pros and Cons of Economic Sanctions Explained: Definition, Examples, Advantages and Disadvantages Economic sanctions are penalties imposed by one country or a group of countries on another country, entity, or person for political or security reasons. They can take various forms, such as trade barriers, asset freezes, travel bans, arms embargoes, and financial restrictions. Economic sanctions are often used as a tool of foreign policy to influence the behavior or policies of the target, or to punish them for violating international norms or agreements. But do economic sanctions work? What are the benefits and drawbacks of using them? In this blog post, we will explore the definition, examples, advantages and disadvantages of economic sanctions. Definition of Economic Sanctions According to the Council on Foreign Relations 1 , economic sanctions are defined as “the withdrawal of customary trade and financial relations for foreign- and security-policy purposes”. They can be comprehens...

The Coase Theorem Explained: Coasean Bargaining Definition, Conditions/Assumptions and Examples Have you ever wondered how people can resolve conflicts over property rights without resorting to lawsuits or government intervention? If so, you might be interested in learning about the Coase Theorem, a legal and economic theory developed by Nobel laureate Ronald Coase. The Coase Theorem states that when there are conflicting property rights, the parties involved can bargain or negotiate terms that will reflect the full costs and benefits of the property rights at issue, resulting in an efficient and optimal outcome, no matter who has the initial property rights, as long as the transaction costs of bargaining are negligible. Sounds too good to be true, right? Well, there are some important conditions and assumptions that must be met for the Coase Theorem to work. Let’s take a closer look at what they are and how they affect the applicability of the Coase Theorem in the real world. Coasean ...