Tuesday, January 21, 2014

TVM Lies

While we greatly respect Warren Buffett as an investor, we are disappointed at his time value of money skills. Buffett's Berkshire Hathaway has agreed to insure a reported $1 billion prize given to anyone who correctly predicts a perfect bracket in this year's NCAA March Madness. If you win, you don't get the $1 billion now, but rather $25 million per year for 40 years. If you want a lump sum, you would receive $500 million today. We would expect that the Oracle of Omaha would know that advertising the total annuity payments as the value of the annuity winnings is misleading, even though state sponsored lotteries use the same deception. For the record, see if you don't agree that the choices offered you result in an interest rate of 3.93 percent. And while we wouldn't turn down the $500 million and encourage you to enter since the entry is free, the odds of winning are 1 in  9.2 quintillion.