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Engineering Out Luck
By JD Bluefield | April 24, 2008
When engineers factor Luck out of the equation, its called a Factor of Safety (FoS). Put in enough of a Factor of Safety when you buy a house, stock, study for an exam or practice in sports and you won’t have to worry about luck.
Engineering FoS: When an engineer or architect designs a bridge in an earthquake zone, you’ll never hear him say, “You know what, this area just got hit by a 3.0 on the Richter, I’ll design the new bridge to withstand a 3.05 and cross my fingers that it never gets worse.” No, they design it higher than expected for good measure. In engineering, the Factors of Safety is literally the Design Failure Load divided by the Expected Load.
Home Buying FoS: Buying a house you can afford, taking into account temporary financial set backs, is how you Engineer your home buying with a FoS. As a commenter stated in Top Ten Market Crashes, he was offered a big loan that was ridiculously high. Smartly, he decided on a home that would suit his budget and not strain his wallet in hard times. People who didn’t do the same are now facing very tough times.
Stocks FoS: When buying stocks, the FoS is a low P/E and low Price-to-Book. P/E or Price-to-Earnings, shows that the stock is not priced at a premium compared to the earnings that it generates. Price-to-Book is the price of the stock relative to its book value, or the value of it’s assets. These aren’t the only factors in buying a stock, but are simple evaluators of it’s “value”.
Food for thought: per Money Magazine, the average P/E in 1980 was 9.2, the average now is 17.5.
Topics: Investing, Personal Finance |
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