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

In the late 18th century our economy has changed, modern machines were rolled out, the division of labour was founded and the people started to work in big factories where they were specialised on different work steps. We called this process industrialization and it changed the way we worked and lived in many ways. Now, nearly 300 years later, we are facing a new revolution which sadly hasn’t got a name yet, so I fell so free to call it “robotalisation” temporary.

I want to introduce you to this post with a law of the famous computer scientist Gordon Moore which says that computer systems are doubling their performance every 18 months, so if we keep on doubling our computer performance at this rate we could theoretically be able to create humanoid artificial intelligence within the coming 30 - 50 years. That’s philosophically speaking - but it’s a fact that there are already dozens of wise folks in many universities and companies today who are doing research on artificial intelligence and new robotic technologies.

But what happens if the artificial intelligence of the machines is developed so far that it could replace the humans? A famous economist once called this situation a paradox and explained this way: if somebody in a cinema stands up he has an advantage because he sees better; but if everybody stands up everybody sees worse. So if one businessman replaces his workers by machines, he will surely have an advantage, but if everybody does it, everybody will have a disadvantage because the businessmen can’t sell their products anymore or rather the people don’t have the money to buy the products because they’re unemployed. The shear between the poor and the rich people would separate enormously and our economic system would not work anymore.

That would be the worst case. But as the old Chinese philosophy yin yang once told us that every shadow also has a sun, there is an enormous potential in this technology, a potential which could not just change our economy but could change the way we live on this earth and how we treat each other and our planet. Theoretically, we got the chance to create a world where everybody has access to all tangible values. A world without poverty, ecological destruction and wars. A world where people are free to decide what to do with their lives. But that’s just a dream, fact is that we have to find a new economic system, a system which is based on brain work and intellectual property.

Also we should not ignore this process because there are already thousands of industrial robots worldwide working in factories at the same assembly lines where the industrial revolution began 200 years ago and where humans worked 50 years ago. So in my opinion the robotalisation has already started by now. After the assembly line workers many jobs of the service sector will follow geriatric nurses, cashiers, charwoman… - all jobs which could possibly be replaced by robots within the next decades.

Stock investing is hard work and inexperienced and untrained beginners have a lot of difficulties when investing for the first time. For some it looks easy during bull markets and incredibly tough during bear markets. But the main target is to make money even if the market is in a bad condition.
Of course there are always people who give expensive but useless advice about investing. I am sure, you heard of “Buy low and sell high”, which is indeed quite useless, because how would one know what is the expected low and the expected high of a stock. Some people just give wrong advice and you can get into serious financial trouble following their ideas.
Here are three stock investing misconceptions that you should definitely avoid:

Wrong: Low price stocks are better than high price stocks

A widespread misconception is that a low price stock should be preferred to a high price stock, for example a $100 stock vs. a $10 stock. This is wrong. The value of a company is expressed by its market capitalisation (stock price * number of stocks), whereby the real value of a company differs from this value. It must be calculated by analyzing the company. So, the assumption that low price stocks are better is wrong because every company has a different number of stocks on the market. The price of the stock is the effect, not the cause.

Wrong: Stocks that have fallen will rise again

We see the traders attitude here, because when a stock falls e.g. 25% on a single day, some will speculate that there will be an up rise of e.g. 5% the next day. This effect has been observed many times, but we discuss long-term investing here, so it is clearly a misconception. Stocks usually fall for a reason, even if it is not clear for everyone. But fallen stocks will rise only when the factors which led to the fall are corrected. For example, if a stock fell, because the company announced that it will suffer from a recession for the next years and earnings are down, then it won’t rise before those factors change to normal again.

Wrong: The stock market is a place where you can get rich quickly

By investing intelligent you can for sure get rich on the stock market, but this is not supposed to happen quickly. Many people behave like gamblers on the market by making quick, impulsive and blindfold decisions. They lose money and again behave like being at the casino by increasing the amount of money in the game in the intention to wipe out their loses. Logic is dominated by emotion and the game is soon over.
However this misconception can be changed into a perfectly true advise: “The stock market is a place where you can get rich as quickly as possible”. This does not mean “Get rich slowly”, it means that you can get rich as quickly as possible. With the assumption of a historical return of 10% a year and a few years of your time, you get pretty good results. Never forget that the most important thing in investing is not to lose your money.

All in all, there are always intelligent people with experience, who know what they are talking about. Do not follow the loudest voice in the crowd, search for the smart ones.
But most of all, always check thoroughly every advice which is given to you, because in the end it is your hard-earned money which is at risk.

5 years ago you had to pay 0,80 US-Dollar to receive one Euro, now 5 years later in 2008 you have to pay two times the price. That´s enormous, the Euro has won 100 % in value against the Dollar in just 5 years and achieved it´s all-time high on the 22.04.08 with a exchange rate of 1,6018. By the way, this was seemingly so exciting that even Europe’s yellow press took notice of it and came up with headlines like “Shopping for the half price” or “Visit New York, now”. I had to laugh when in November 2007 the international Supermodel Gisele Buendchen explained that from now on she will only accept Euro for her payment. The European exports went down and particularly the world export champion Germany yammered very much.

So the question is how long will the dollar fall in price? Sure thing is that the dollar will come back, so don´t worry. The question is when it will happen, which is not easy to answer. However, in my opinion the dollar will come back either in the next month or at the latest just after the U.S. elections.

Here´s why:

The first and most important reason for my theory is fact that the FED can´t relax the monetary policy anymore and the FED wouldn´t do that neither. On tuesday the third of Juli, for example, even Ben Bernanke the chief of the FED did something which is extremely rare for the FED he spoke about the exchange rate of the US-Dollar and claimed the U.S. Dollar is sharply underrated. And even though also the EZB, the European central bank, has announced to rise the bank lending rates again in my opinion the comeback will come.

Because whereas Europe and the rest of the world are slipping in a recession the weak dollar is helping the U.S. economy to get better through the crisis. Companies like IKEA, Toyota or BMW are investing huge amounts of money in in the U.S. now, the U.S export will grow while the imports will decrease. That all will help the dollar to recover. There is only the impulse from the FED missing but that surely will come right after the elections or even earlier.

But nobody can exactly know how the markets will behave so don´t take my words at face value, it´s just an opinion…

Warren Buffett the legend of the capital markets has some very intelligent investment principles. His principles aren´t very complex and you probably don´t have to be a mathematical or a social science genius to understand them. But in order to apply them you need a very conservative, clear and analytical character. Also you should read very much about value investing especially every opus Benjamin Graham and David Dodd ever wrote, so don´t think it´s a quick there´s quick way to become a superinvestor. However when you did that these 5 rules will put the final touch on your investment style.

1. Buy the boring not the pompous ones.

Invest your money in companies and business models you understand and which are needed by the world. Warren Buffett for example buys confectionery manufacturers, drink producers, producers of clay-bricks or if he really wants to have something exciting, assurances.

The Reason: Because these companies are always needed they will always grow just like the population of world does so actually you can´t do wrong really much.

2. Beware a cool head and have patience.

If you think Warren Buffett would sell one of his stocks just because it falls in price you are definitely wrong. Because actually he does exactly the opposite he buys new ones.

The Reason: Warren Buffett always buys his stocks to a very cheap price if you want to know how he does that read the chapter margin of safety. So when these cheap companies get even more cheap he is the happiest man in the world because he can buy more share of fools to an even better price.

3. Watch out for fortresses.

Mr. Buffett says you should buy castles with a big castle moat. Translated that means Warren Buffett buys companies with a very good business model which can´t be copied so easily. His companies should be something like a monopole just like Coka Cola, Gilette or Microsoft.

The Reason: The main problem of the capitalism is the profit margin when the margin is too high it attracts others who also want to participate in it and the margin falls. In order to circumvent that Warren buys companies which can´t be copied so easily.

4. Concentration instead of diversification.

Many people say you should diversify and spread the risk on at least ten different stocks. Warren Buffett says diversification is something for people who don´t know what they do.

The Reason: If you know that a stock is really cheap and you make a snap why should you also buy other stocks?

5. Don´t hit every ball !

Take your time by finding good stocks and wait until they get even more cheap. Sometimes Warren Buffett even waits 2 or 3 years before he buys a stock.

The Reason: Finding a good company isn´t that difficult much more difficult is to find a good company to a good price. So Warren Buffett looks for an interesting company and waits, waits and waits until he can buy the company for the price he want´s to pay.

In 2007 more than 850 million people worldwide went hungry, everyday 25.000 of them died of the direct consequences of undernourishment. As if that wouldn´t be bad enough it´s alarming to hear that the number of hungry people has increased dramatically as a result of the enormous increase of the prices for basic foods.

But what´s the reason for the recent price explosion? According to the governments of the industrialised countries also in this case the main inflater is the unstoppable demand of the Asian region and the other emerging markets. On the other side environmental organisations blame bio fuel for the boost.

However in my opinion the problem originated elsewhere and started long before china was trendy and bio fuel a problem. The only thing is that through bio fuel and China the problem came to light. But to explain what i mean let´s go back to the year 1970 when new machines, fertilizers and new kinds of seeds revolutionized the whole agriculture. And as you know when the supply of a commodity grows but the demand stays constant it falls in price and that’s exactly what the agrarian commodities did. Well actually falling prices for food aren´t a bad thing wouldn´t there be the side effect that now thousands of farmers earn nothing anymore. So the governments of the industrialised countries had a fantastic idea, they just paid subsides for all agrarian products of the farmers so that the farmers could survive. The plan worked out the people had food in abundance and the farmers became money for producing too much, there was only one thing the politicians overlooked. Because instead of trowing the overproduces food away the farmers began to sell their commodities to developing countries. It sounds strange but it´s cheaper to carry potatoes from Europe to Africa than growing them there and so the clever industrialised counties began to sell their overproduced food there. After a certain time these governments even liked the idea of selling our goods on the markets of the third world and I guess that´s why the developing countries were not allowed to impose protective duties against this foods. The consequences for the farmers of the developing countries has been disastrous not that they just lost their existence they also lost their farming land because when you don´t use it for a longer period of time it it gets lost. So everything was fine the poor people worked to buy our food and we could use them the win other commodities we needed.

But then during the turn of millennium everything changed china climbed up to a net importer of food and just like China many other emerging market countries built cities on their reproductive land. Also the industrialised countries discovered bio fuel and how higher the oil price gets the more agrarian commodities will be used for that

What is sure is that we have to find a way that every county has the chance to produce its own food only this would solve the problem.

Today’s article is about the reason to invest in a particular stock and the important fact, that just because a stock went up, it doesn’t mean you are right. One could argue, that when something works, the reason is unimportant, but that’s just not true. For example, if you jump into a lake and don’t know how deep the water is, there are two options: you break your neck or you enjoy your bath. Got it?

There are a lot of bad reasons to buy a stock, almost to much to mention. Let’s discuss a few.

Buying/Selling a stock because it went up/down: This is a common mistake. As written in Do not listen to Mr. Market, the stock market suffers from huge fluctuations regularly. If you want to buy a stock, don’t buy it when it’s totally overpriced. Instead search for great companies with a low price and it will be a successful investment. Also don’t panic and sell because the stock went down. Instead check the fundamentals again and make sure you didn’t overlook something.

Buying/Selling for the wrong reason: Today everything is linked to everything, so we call it globalization.This fact often makes it difficult to understand certain developments. It’s not enough to check out the product of a company and know the local business circumstances any more. You have to know exactly what the company does, understand the business model and figure out which variables are critical for success. The lack of understanding world economics like, for example, the euro/dollar constellation, might bring you into serious trouble and may cause unexpected surprises. Read Investment Research: What does the company do? for more information.

Bad investment advise: Especially dangerous for inexperienced investors who keep asking “What’s your favorite stock at the moment? What should I buy?” Again, check out our article Do not trust analysts and fund managers, which tells you why you should make your own investment decisions. Even if you have a good friend who invests successfully, you should probably not invest in the same stocks, because he buys them for specific reasons, which he monitors regularly. You will probably misjudge the case and make mistakes, because you don’t understand the company like he does. You know probably more about other industries.

Remember, we do serious long-term investing here, so if you have a trader attitude, this conclusions may not apply for you.

On the other hand, you’re not necessarily wrong, when your stocks go down. If you invest reasonably, but the stock market is not ready yet, you can also suffer months/years of falling prices, but in the end the attitude of value investing will be superior.