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Finance #1: Intro, Real vs. Financial Assets

The productive power of an economy is determined by the real assets of an economy such as its land, buildings, machines, and the knowledge that can be used to produce goods and services. Real assets are what bring true value to an economy whereas financial assets, such as stocks and bonds.

Financial assets essentially determine the allocation of wealth and are claims to the income generated by the real assets mentioned earlier. Investors place their wealth into various securities provided by companies. This money, in turn, is then used to pay for real assets such as plant equipment, technology, and/or inventory.

In this series, I will be focusing primarily on financial assets, financial markets, and the investment process in general. My intentions are to discuss bonds and debt securities, equity such as common stock, and derivative securities as well as other concepts, investment tactics, and formulas to help you (the investor) make your decisions. I’ll also try to keep my posts shorter than my ones of the past while making them more informative and applicable to each of you. Thanks for reading!

 
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Posted by on June 14, 2011 in Finance/Investment 101

 

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Mutual Funds 101: Demystifying Investment

Definition: Mutual funds are an investment strategy which pools money from many, many different investors to construct a portfolio of stocks, bonds, real estate, and/or other securities, depending on its charter. Each investor in the fund gets a slice of the total pie.

What are the perks to investing in mutual funds? Diversification, one of the basic rules of investing in general is varying your portfolio. Diversification is a technique that mixes a wide variety of investments within a portfolio. This is meant to yield higher returns for lower risks because while you might take hits in some parts of your portfolio, the positives—if chosen correctly—will offset those.

“Studies and mathematical models have shown that maintaining a well-diversified portfolio of 25 to 30 stocks will yield the most cost-effective level of risk reduction.” – Investopedia

Another pro to the mutual funds game are the relatively low minimum investment amounts. Some you can join with just a few hundred dollars, spreading the risk across to more people, allowing investors to make some riskier decisions with higher potential returns.

So, there’s active management and passive management.

Active Management:

Is the actual practice of picking your stocks and market timing to pick securities which will beat out the market. This is the most common type of management. The high volume of trading results in higher expenses.

Passive Management:

These funds do not attempt to meet the market, but to match the risk with the return of the stock market. These usually track a market index such as the S&P 500. Those that follow this index, for example, tend to hold the stocks within the S&P 500.

Advantages:

1. The percentage of fees paid to the company to manage and operate the fund is less in passive funds than in active funds.
2. Lower mutual fund capital gains distributions.

A good analogy I found regarding the difference between active and passive investment management is the distinction between the actions of one individual vs. the actions of the group as a whole. “Active investment is like trying to bet on who will win the Super Bowl, while passive investing would be the ability to profit as all the NFL teams collectively made money on ticket and merchandise sales.”

Now, let’s move on. There are two different types of funds I’d like to talk about today: stock (equity) funds and bond funds.

Equity Funds:

Mutual fund that invests primarily in stocks; equity funds typically have their own distinct styles. Some focus on the different sizes of companies such as the size of businesses (small-cap versus large-cap) and their geography while others might buy shares within particular sectors such as health care or entertainment. These are sometimes referred to as “specialty stocks.”

Bond Funds:

Bond funds come in many different colors as well. There are safe investments with lower yields such as government bond funds, high-risk (and hopefully high-yield) bond funds. These can get extremely complicated, but if this is something you’re interested in, click here to be taken to a page which does an adequate job of explaining what type of things to look for to determine whether or not these bonds will be safe investments.

But don’t forget to pay your taxes. Regardless of whether or not you sell your fund shares, if you’re raking in money, you could be hit by a pretty hefty tax for both your dividends and capital gains. That sounds pretty painful doesn’t it? What if I told you that you’re stuck paying taxes even when your funds have declined in value? Well, the truth of it is that you’re going to end up paying taxes regardless of how your fund performs, but since there’s not much to be done about that, my only advice here is to be aware of this undeniable truth. According to CNN Money, the most tax-efficient funds avoid rapid trading.

CNN Money also advises investors to not chase winners and to look for consistency in the long-term rather than those particular funds which might be ranked highly at this one point in time. Investors are also told to not be too quick to dump underperforming funds as any fund can have an off year. Just make calculated decisions, watch for a pattern, and come up with a few forecasts.

A VERY SUCCINT DISCUSSION OF A FEW DIFFERENT TYPES OF STOCK FUNDS:

1. Value funds: look for cheap stocks. Either big companies/corporations which have been suffering in recent days and are selling shares at lower, discounted prices, or smaller companies which have been beaten out by competition or other investors but could have brighter days ahead.
2. Growth funds: varies depending on how aggressive the investor might be. Tend to favor established names, but look for rapidly growing companies as well. Good for long-term investors who should build around such funds in their portfolios.
3. Sector funds: as I mentioned before, these investors focus on particular sectors such as health care, entertainment, technology, etc. Just be aware that entire sectors are also liable to head south.

A VERY SUCCINT DISCUSSION OF A FEW DIFFERENT TYPES OF BOND FUNDS:

1. U.S. government bond funds: bonds issued by the U.S. Treasury or federal government agencies. Seen as extremely safe, so you shouldn’t expect extremely high returns with these. The longer you hold on to the bonds, the higher your yield. So if you’re comfortable with sitting on them—they fluctuate with the interest rate—then you probably might as well be in it for the long run.
2. Corporate bond funds: bonds issued by corporations. Each corporation has a credit quality issued to them, the highest being AAA. The longer the average maturity, the greater the volatility.
3. High-yield bond funds: focus on smaller and/or riskier companies. Expect a few defaults here and there. Shouldn’t be a huge proportion of your portfolio unless you’re comfortable taking risks for the chance of seeing higher returns.
4. Municipal bond funds: issued by cities, states, and other government localities. Are tax-exempt. Don’t have much more to say about these myself, so just click through the link if you’re interested in safe, low-yield prospects.

Now that we’ve hopefully demystified mutual funds (or at least opened a few doors for you) you might be wondering why exactly some active funds underperform. The costs of research, administration, management salaries, and other expenses are borne by the shareholders.

If you’re new to the game and want to try to get your own slice of the market, explore U.S. Securities and Exchange Commissions’ page to get started. Look for more posts on the subject of investing in the days and weeks to come!

Sources:CNN Money, Investopedia & About.com

 
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Posted by on March 23, 2011 in Business/Technology

 

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“Only Rapper to Rewrite History Without A Pen”

Written jointly by Edris Bemanian and Adi Gulati.

Unless you’ve been living under a rock, most of you are familiar with the artist Jay-Z. You know – BET’s 2009 and 2010 Best Live Performer of the Year, the Grammy’s 2010 Best Rap Solo Performance winner, etc. There is no denying that this man has revolutionized the music industry and if you disagree with me you can take it up with the decision-makers of Billboard Magazine who, in 2009, ranked him as the 10th most successful artist of the decade and the 4th best rapper. To date, he has sold approximately 50 million albums worldwide! Imagine the kind of dough he rakes in each year.

But it’s important to remember that “Jay-Z” is so much more so a brand than it is a name. In fact, the illustrious Shawn Carter goes by many nicknames, including: Jazzy, Icerberg Slim, Joe Camel, Jigga and on and on, though it’s no secret which one stuck. More impressive than even his accomplishments as a rapper are those he has made as a businessman.

Jay-Z wears many different hats depending on what he’s doing that day, from his hip hop mogul self (who’s currently on tour and will be performing in Melbourne, Australia tomorrow), to being a loving husband (check out the lucky bastard’s wife), to his current position as CEO of Roc-A-Fella Records.

After numerous successes as a direct player in the industry, Jay-Z shifted his focus to the business aspect and became president of Def Jam Recordings. During his time there, he signed Rihanna, Ne-Yo, and Young Jeezy.  After resigning from this post, he signed a deal with Live Nation—a concert promotion company—which provided funding for Roc Nation, Carter’s music development and endorsement company, allowing him to fund for his music and investment projects.

Furthermore, Jay-Z co-founded Rocawear, an urban-style clothing apparel line, and then bought out his co-founder’s shares for 30 million dollars in 2005. Jay-Z then utilized his reputation to bring as much attention to the line as he could to reach extremely high sales levels. He grew the company to the point where achieved more than $700 million in retail sales annually before it was acquired by Iconix for approximately $204 million.

Jay-Z decided to also try his hand in the club and entertainment industry which resulted in his starting the 40/40 Club in Las Vegas, Atlantic City, and New York City. But few, even the most successful of entrepreneurs, aren’t without their failures. A measly eight months after the Vegas club’s 2008 opening, Jay-Z had to make the decision to cut his losses and exit. The official 40/40 website, however, has tentative dates for their Chicago, Dallas, Tokyo, and Macau club sites.

“I love sports and wanted to create an environment that is conducive to my lifestyle, while being able to watch the games at the same time,” says Jay-Z on his website. Incidentally, Jay-Z paid $4.5 million to gain a minor stake in the New Jersey Nets, though their recent 2009-1010 performance dropped their value by 9% according to Forbes. But I guess we can’t exactly blame Jay-Z for that.

In an interview, Jay-Z disclosed how one of the most meaningful investments to Carter will always be his TriBeCa penthouse, where he married Beyonce. He invested $6.85 million in 2004 for his 8,000 square foot home. I wonder whether he has trouble deciding which is easier on the eyes, his house or his wife?

Jay-Z’s firm, Gain Global Investments Network, LLC invested in an events promotion company Aqueduct Entertainment Group (AEG) which tried to settle a deal with New York State officials to open up the only gambling site in New York – a race track and casino. Due to the ethical difficulties involved in this deal, Jay-Z lost a decent chunk of money when the deal failed to pull through. He owns a 28.6 percent stake in AEG.

Jay-Z was not immune from the effects of the recession. He was forced to walk away from a project to develop a luxury J Hotel in New York City. His company borrowed $52 million for the project, but Carter dropped it all and ended up suing Highland Capital—the lender—for delaying the closing of the loan in order to continue receiving interest payments on the principal. Jay-Z sued for over $3.7 million but ultimately suffered a net loss.

Despite these setbacks, Jay-Z remains on top of the world with his approximated net worth of $1 billion, his numerous endorsements, his records of which over fifteen have gone platinum, his ownership stakes in the New Jersey Nets, the Arsenal Football Club, his nightclubs, and Def Jam Records, and his numerous other endeavors. Oh, and I almost forgot! Throw Beyonce into the mix and we get to watch his worth shoot up another $400 million. Why you muggin, Jazzy?

To learn more about Jay-Z, you should check out his recently released book titled, Decoded, though you should know the book is more so an insight into his songs and the contexts behind them rather than his business moves.

And this article should drive my point home.

For more on Adi Gulati, visit the Contributors page of the blog.

 
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Posted by on November 30, 2010 in Business/Technology

 

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Franchises

The capitalist’s best friend is an investment opportunity requiring low cost but with the potential for great returns on the initial principal payment, right? Why not consider buying into a franchise system? Franchising is quickly becoming one of the most popular business practices these days. Generally, a franchisee (the person who purchases a franchise from a franchisor) pays an upfront fee followed by regular royalties in exchange for the rights to a business. The benefits? You have your own business to manage how you’d like (though you have to follow some basic rules and guidelines) and your business profits from the hopefully positive reputation of the franchise from the moment it becomes yours. What’s more, you already have a business model you can expand from!

The top ten most popular franchises (according to CNNmoney.com) are:

  1. Subway – 7% failure rate.
  2. Quiznos – 25% failure rate.
  3. The UPS Store – 12% failure rate.
  4. Cold Stone Creamery – 31% failure rate.
  5. Dairy Queen – 8% failure rate.
  6. Dunkin Donuts – 8% failure rate.
  7. Super 8 Motel – 4% failure rate.
  8. Days Inn – 6% failure rate.
  9. Curves for Women – 16% failure rate.
  10. Matco Tools – 36% failure rate.

But make no mistake about it, despite the many advantages to entering this business, it’s no walk in the park. Many find themselves slaving away for years just to break even. Another problem one can run into is limited growth potential and territorial disputes (many franchisees are unable to expand due to geographical restrictions determined by the franchisor).

Here are the startup costs for a few of the most commonly known franchises.

Click here for a list of all the different types of franchises.

 
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Posted by on November 17, 2010 in Business/Technology

 

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