World Financial Blog » Investing

What is the Impact of Materialism on Economics ?

23 February 2011 Sören Zschoche 57 Comments Investing

Economics is a science that studies how societies share their resources to meet their needs. In this study we can see how the resources are utilized by the consumers to fulfill their desires and requirements. As they try to satisfy their needs they often incur debt and then these indebted consumers are forced to take the help of a debt settlement programs. But are you aware that materialism has an immense effect on economics in both positive and negative ways?

Growth and expenditure of the consumers

Economists at Hoover Institution, Stanford University state that the consumers spend nearly 70% of the US gross domestic product (GDP). GDP is the calculation for total economic output. The consumers are forced to spend their non-refundable income to obtain more goods due to an approach towards the economic materialism. As the demand in the market is high so the firms have to supply more products to meet the demand of the consumers that renders into economic growth. Therefore, this boosts the spending which consequently increases the GDP.

Conspicuous Consumption

Most of the consumers spend for the purpose of flaunting their wealth as this is the ultimate motive for conspicuous consumption. Materialism can be coined as conspicuous consumption. People who are in awe with materialism focus their attention to “keeping up with the Joneses,” a popular phrase for conspicuous consumption. In this situation you gauge your wealth by comparing it with your neighbor’s prosperity. In order to prove his power of wealth he will invest more money on a larger house, more expensive cars and other luxury goods.

Savings Rate is low

Consumer’s approach towards materialism instigates them to spend more to acquire more goods. Presently, people are not interested in saving as they spend their full income to purchase goods and services. The economists in the government as well as in the private sectors have cautioned about the severe impact due to the diminishing savings rate of the Nation. Capital investment is decreasing with low savings rate amongst the Americans. Lack of investment capital fails to give scope for economic expansion. In a way, the U.S economy is controlled by the foreign investors.

Consumer Debt

The psychological impact of materialism on people drives them to buy things that exceed their budget. They usually incur insurmountable debts on credit cards with high interest or huge amount of mortgage for large houses. Mortgage is taking a serious shape in the U.S economy and around the globe. People are taking out loans to buy large and expensive houses but they default with the crash in the housing and credit market. Even post recession, many Americans have come across a dangerous situation as there is lack of financial security and no job security.

Learn about Fisher Investments, one of the top investing resources.

What´s a fair valuation for facebook?

26 January 2011 Sören Zschoche 13 Comments Investing

A few days ago the Clients of Goldman Sachs and Digital Sky Technologies estimated the value of Facebook at 50 billion USD. As an investor, I have to question what Facebook’s value is to an investor and what it’s value is to a speculator.

Facebook: an investor’s valuation

So lets begin with the view as an investor. An investor would estimate the earnings and the assets and would come to a value he could live with. If it´s an intelligent Investor he would pay less than the real worth of the assets, so that he can make profit. So let´s assume that Facebook’s sales are 2 billion USD . Facebook has more than 1,700 employees, and offices in 12 countries. If we assume that facebook pays an average salary of 60.000 to each of its employees that gives us salary expenses of 102000000 USD. Add to that the costs of the server landscape the EBITDA is probably no higher than 20 to 70 Million USD. If we are fair investors we will probably also pay a price for the Facebook brand. So let´s value the assets of facebook at 2 billion USD. So in the end an investor would probably not pay more than 400 – 500 Million USD for Facebook.

Facebook: a speculator’s valuation

But if we evaluate Facebook from a speculative point of view – and high tech companies are always a speculative investment when they begin to grow – the price of Facebook is probably closer 150 billion USD. The idea is that also google was not that profitable in the first years but google subsequently discovered a way of converting search queries into money. Perhaps you also could convert facebook users. But the question is how to convert facebook users into money? Facebook could have some very interesting answers for this question. Facebook could enter into the ecommerce sector, build little games, sell market research and could earn a lot of money with customized advertisements. But is this really currently worth a valuation of 50 billion USD? Probably not, but there are other ways to earn money. For example by steering facebook users into real brick & mortar shops with facebook places or by offering skype-based voice communication for the price of 50 USD a year. Anyway the basic idea is that if you have 580 million (or even better one billion) Facebook users, if you only make 40 USD from every user, you end up with sales of 23 to 40 billion USD. In 2009 google had sales of 23 billion and a margin of 27 % and today google is worth 197 billion USD.

My own valuation

To be honest I personally don’t really have a valuation for this company, as I really don´t know what I would pay for it. I belive that a possible IPO of Facebook could reach 50 billion USD and the value could also rise in the first few weeks after their flotation. But if the numbers facebook presents don’t impress, the value of facebook will be assessed through the eyes of an investor – and that means the market capitalization will fall to 500 or 1 billion USD. So in my eyes 50 billion is far too much at the beginning. If may perhaps be a fair value when the numbers are right but not yet. You have to remember in 2004 when google went to the stock market the estimates were around

2.7 billion USD and at that time google had 1900 and sales of nearly
1.5 Billion USD. But then again – google was already much more profitable by then.

What a Double-Dip Recession Could Do To the Biofuel Industry

2 December 2010 Sören Zschoche 12 Comments Investing

Biofuel stocks are hurting. In fact, due to the very bleak economic outlook in the United States for the 2nd half of 2010, those prices could be headed much lower and this economic downturn is only serving to increase investor hesitancy toward investing capital into the biofuel industry.

Possibility of Double-Dip

The U.S. recovery was moving along quite nicely in early 2010, but the weight of the EuroZone Debt Crisis and domestic problems in the United States led to very disappointing U.S. economic data in June and July. Consumer demand dropped, employment began to fall as the U.S. Census season ended, retail sales figures disappointed, and several other key data combined to clearly communicate that the U.S. recovery was hitting a major wall of resistance.

In late July, Fed Chairman Ben Bernanke testified before Congress and stated that his economic outlook for the U.S. economy and economic recovery is “unusually uncertain.” If the leading economic minds of our times are unsure of the economic outlook, it means we are most likely in for a bit of pain during Q3 and Q4. This very bleak outlook from the Federal Reserve has begun to weigh on equity markets, and on August 11th, the Dow tumbled over 200 points. There is just no bright spot in the economy right now.

The term “double-dip recession” has begun surfacing in news commentaries and editorials throughout the United States. The housing sector is showing strong signs of possible contraction, and if it does begin to contract significantly, that could push an already fragile U.S. recovery back into recession. The Federal Reserve has made it clear they will do all in their power to prevent this from happening, no matter how much money that have to print.

This economic downturn could not have come at a worse time for the biofuel industry. Currently, the Renewable Fuels Standard is mandating a consistent increase in the amount of next generation ethanol that is produced in the U.S. By 2016, the RFS estimates that 16 billion gallons of it will be produced yearly. This goal is huge and in order for it to be reached, there must be a massive amount of expansion and growth in the industry; however, there is a correspondingly huge shortage of cash available in the industry right now. It is estimated that $500 million will be needed for each facility that will be built, and capital has been extremely hard to come by as many investors are still on the sidelines. Even the forex has not reached the daily volume of pre-Crisis levels.

The Effects of a Double-Dip

Due to a myriad of reasons, investors have been somewhat turned off to the idea of putting up large amounts of capital. This problem will only be exacerbated by a severe economic slow-down, or, even worse, a contraction. If capital is difficult to raise during the decent economic growth of early 2010, it will be nearly impossible during a slow-down. Venture capitalists, of course, do not like to take risk during times of economic uncertainty. All of the cash that investors have sitting on the sidelines may stay there for the foreseeable future.

Projecting further into the future with our economic analysis, if the United States does enter into another recession, it will be nothing less than devastating for the economy over the next decade, and it will increase deflationary fears, which will scare off investors even more. Another recession at this point in our fragile recovery would set the U.S. economy back years and would most likely result in an extended period of very slow economic growth for 5-10 years. This sort of economic climate will make it almost impossible for raising capital, and it could serve to deal a deafening blow to the industry.

Independent Financial Business Advisors: How They Can Help Your Business Through the Cuts.

17 November 2010 Sören Zschoche 27 Comments Investing

All business owners, as I’m sure you’re already aware, are having to ride out not only the recession, but also now the cuts that were announced in the Spending Review last month. With
statements such as “unemployment to rise to 3 million” and “500,000 public sector jobs to go”,
there’s no doubting it’s going to be a tough time, but surely this should be the time when small to
medium businesses can really flourish? Not only providing jobs, but acting as a crucial part in the
recovery of the economy.

So, maybe your wondering how financial business advisors could help? Well, everyone can do
with a helping hand at some point and independent financial business advisors want to get your
business not only through the recession, but also to formulate your business a strategy to ensure
you survive the cuts, and grow through them, too.

What Services Could Independent Financial Business Advisors Offer Me?

If you’ve never dealt with independent financial business advisors before, an important point to
be aware of is that they are independent-they have no affiliation with any lenders, meaning all
businesses will get totally impartial advice and the best strategy possible. If this is your first time
dealing with independent financial business advisors, you might be wondering, what exactly can
they do for me? Well, all services are aimed at maximising your profit, these can be accountancy
services, business cost reduction and invoice factoring.

At a time when money may be tough for your business, but you still want to grow, invoice
could prove to be the perfect solution. Seen as the modern day equivalent of a bank
overdraft, businesses will receive immediate cash to continue their growth in exchange for a
portion of your accounts which you sell to a third party.

As well as lending you money, independent financial business advisors can also save you money
and time. Debt recovery services are becoming increasingly important as going through the
traditional way of using the courts is becoming both a lengthy and costly process. By outsourcing
debt collectors you can save yourself valuable money and time enabling you to concentrate on the
growth of your business.

If you’re a business owner and you are wondering what help you can get to help you through the
cuts, get in touch with independent financial advisors Target Business for impartial advice and a
wide range of services tailored to your business.


Non profit debt consolidation companies: How do they work?

29 December 2009 Michael Szumielewski 128 Comments Investing

Choosing the right consolidation company is an important decision that you need to make during debt consolidation. There are both for-profit and non-profit debt consolidation companies operating in the market.

Debt consolidation in a non-profit way:

There are debt consolidation non profit firms that are certified by the IRS as charitable organizations that can help you in consolidating your debts. These companies have obtained 501(c)(3) charitable status from the IRS. Check the company’s ‘About us’ page to make sure that they are indeed a non profit organization.

How do they manage to work in non profit manner?

The word “non profit” may create an illusion in the mind of the customer. In this world where nothing comes for free, how can these companies survive as non profit? Well, the word non profit doesn’t necessarily mean that the service is free of cost rather it only means that there wouldn’t be any overall profit for the company at the end of the negotiation.

These debt consolidation non profit companies are normally funded by donation, and not a business cash advance, from the customers as well as creditors. Creditors would pay a percentage of the settled amount to the non profit organization for their services. Some companies may also charge nominal fees from the customer.

How would they help you?

The debt consolidation non profit companies don’t work very differently than the for-profit ones. You would be assigned to a case manager who would look into your debt situation and guide you accordingly.

You would then be presented with an agreement which would explain how your consolidation program would work and how much you would need to spend for it. Once you agree to the contract, the counselor would then negotiate with the creditors to lower your interest rates.

You are required to make monthly payments which then will be disbursed amongst your creditors to satisfy your debt obligation. The advantage of this program is that it will stop harassment from the creditors.

Anyway, even to do debt consolidation non profit way you must look at few companies before joining one since there can be many sham companies too. Hence, check out the past record as well the authenticity of the IRS certificate before joining their program.

This is a guest article by author Robin Williams.

How to invest in cyclical companies

28 December 2008 Michael Szumielewski 26 Comments Investing

Cyclical companies are companies who are strongly tied to the business cycle and their stocks move sharply up and down when economy turns around. Because of this, they require special handling by the intelligent investor.

Definition of a cyclical company

During recessions and economical downswings the stock market as a whole usually goes down, but a special type of companies suffers most: the cyclicals. Examples for cyclical companies are Caterpillar, US Steel, General Motors and International Paper, all makers of products with a fairly flexible demand curve. Automobile manufacturers, airlines, steel, paper, heavy machinery and hotels are the best examples. Examples for non-cyclical companies are Coca Cola, Proctor & Gamble, and Quaker Oats, all makers of products with a fairly inflexible demand curve. In bad times, people still have to eat and buy stuff for the household. Getting a new car or some new whirlpool parts on the other hand, can be delayed for some time.

Marc Thomson, a friend of mine who works at a big bank here in Munich, Germany, said last week: “A lot of our clients feel it now, the recession is hitting them hard. We’ve seen that before in downturns, but as usual, industries like the steel and automobile industry suffer the most and request new credits. ”

Chart for AAR Corporation
Chart for aviation support company AAR Corporation

Great opportunities ahead

When you look at charts of cyclical companies like the one above, there are always big up and downs. But when economy turns around, cyclicals can outperform growth companies and be great turnarounds. The problem is to catch the right moment of the cycle to buy. Take a second and analyse the chart of AAR Corporation for yourself and you will recognise that after this recession great opportunities will come ahead.

There are two problems when it comes to investing in cyclicals: timing and selection.

When it comes to timing, no one really can predict the economy as a whole and additionally cyclicals tend to doing well many months before the economy comes out of a recession. Best indicators seem to be interest rates and the companies’ financial ratios which show when demand goes up again, but also insider buying. It also helps if you know the industry. But all in all it is quite difficult to catch the best moment for the ride.

When it comes to selection, it makes sense to pick an industry that is due for a bounce. Choose the biggest company for more safety and smaller companies if you want to take some risk. These companies who suffered the most can produce the most impressive returns, but you have to make sure, they also don’t go bankrupt. More than usually, you have to check the balance sheet. An indicators that the company is healthy is for example a strong cash position.

If you do your homework well, I’m sure you can find plenty of good opportunities. While it certainly never hurts to have a college education you don’t need a bachelors degree to find good investments. Solid research, patience and a solid understanding of your limits will go a long way in your success.

How to invest successfully

So, successful investing in cyclicals requires careful timing and a good selection. At this point, it’s time to make a watchlist and be prepared to invest when the recession comes to an end which no one know how long it will take. When taking action, take advantage of cost-averaging by buying the stock for several months and building up your position. To be save, you should also set a stop-loss limit to protect you from loses.

Most of all, never forget the up-and-down nature of the economy. And be careful, some cyclical companies die when it finally comes to a economic slump, because of bad management which thought the good times will go on forever and building up a cash reserve is not necessary. When you decide to invest in a cyclical company, you have to follow the news about the global economy and the industry the stock is in. Also cyclicals are not suitable for long-term purposes because of no protection in recessions. Buy-and-hold doesn’t work here. Please keep that in mind.

The magic of compound interest

9 August 2008 Michael Szumielewski 154 Comments Investing

Compound interest is one of the most interesting things in the financial world. If you truly understand how it works, it can make you a lot of money. Check out this impressive quote:

Compound interest is the greatest mathematical discovery of all time.
Albert Einstein

Compound interest can be explained as the adding of accumulated interest back to the principal. Interest is earned on interest. Compounding depends on three factors: percentage, basis and time.
Example: You have a bank account with $10000 in it and get 4% interest per year. After the first year you have $10400, but ten years later you already have $14802.44. Sounds great, doesn’t it?

Even 0.5% make a difference

Let’s take the example from above and modify the percentage to 4.5%. After ten years you have $15529.69. That means that you get 10.77% more than with a percentage of 4%. Amazing. Always seek for that extra 0.1% to 0.5% when searching for a good investment. Over time it changes a lot and you will see the difference.

The more you have, the more you will get

It’s true, rich people get richer. We earn $400 in our first example, but with a basis of $20000 we would have earned $800. The higher the basis, the higher the profits. Don’t forget to make regular payments into your savings account, so your basis gets bigger. Ideally you save money for a reason, for example your retirement. Then you need the endurance letting the money where it is for let’s say 20 years. But trust me, the motivation is great to pay in every month, because you will see amazing results and retire completely without financial problems.

Time is on your side

How long you let your money earn money is up to you, but the longer the better.
Remember, you earn money by doing nothing. And the money you earned by letting it earn more money will earn you even more money. You just put money in your account and watch it grow over time. If you don’t need the money, let it multiply. Be disciplined and patient enough and don’t touch this money.

The three factors have to work together

The whole concept of compound interest sounds great, but it is dependent on the three factors. They have to work together well, or you will get poor results. Basically, it is up to you how long you can do without the money you put in your account. It is also your choice how much you put in,dependent on how much money you have, of course. To get the max, the basis and time should be relative high, because the third factor “percentage” is aligned with risk. You get a small percentage with little to no risk but every percentage point more goes hand in hand with more risk. It is essential to find the right balance.

Sometimes it is magic

To conclude this article, here is a amazing example on compound interest at work:
“If the Native American tribe that accepted goods worth 60 guilders for the sale of Manhattan in 1626 had invested the money in a Dutch bank at 6.5% interest, compounded annually, then in 2005 their investment would be worth over €700 billion (around USD $1,000 billion), more than the assessed value of the real estate in all five boroughs of New York City. With a 6.0% interest however, the value of their investment today would have been €100 billion (7 times less!).”

Sources: Wikipedia