Making a living out of crumbs

Today I was reading a really good post by Evan Davis.
He raises the point that huge events such as the upcoming Glastonbury festival etc create huge cashflows, and when that starts happening, though the cash may be flowing in externally, and then flowing out, the community as a whole, gains incredibly, though most of the gains go elsewhere.

And this got me thinking about a lot of successful businesses kicking around today such as EBay, Amazon, Youtube, or even Google and countless others. What do all these have in common? The main part of their business depends on external sources inputting for their own gain, yet the "hoster" which in a sense is the website, get a cut of the profits - the crumbs. Only Amazon actually sells its own stuff, the rest of them just depend on other people. But the point is, that if a million people come to buy someone else's stuff on your site, chances are that a considerable amount buy from you too.

This leads onto a topic Adam Smith discusses in his Fait Principal , "The Wealth of Nations". Here he highlights that protectionist, isolationist policies are not good for the economic well being of a country. He used the example of China, who only had one port open to other nations to trade, and as a result the economy was stagnant.

An example of why this isn't successful: China is good at making toys. Switzerland is good at making chocolate. If the Chinese chocolate makers get advantages over the Swiss from the government, this would mean, due to the lesser number of chocolate makers in China, and due to the lesser quality, the Chinese masses get a raw deal. And vice versa for Swiss people with the toys. This means that no fresh money is coming into the countries and people are spending more than they need on everything.

However if both countries kept their borders open, everyone would be better off as to the price of toys and chocolate, and at the same time, foreign investment would start flowing into them, as people spot that these countries are sitting on quite a lucrative business, and as the money flows in, invariably some of it is going to leak down to the masses, the result of which is a better economy.

Amazon do this too, as, rather than being in direct competition with these other sellers, they just say "Hey, just sell at our place instead". This is a pretty good advertisement for capitalism and the free-market world economy, as really when we consider, the overall benefit to everyone, this is the way forward.

Its like the shops we see, all selling the same kind of stuff, all lined up together. Ever wondered why they are together, thinking that wouldn't it be better for each shop to be away from each other and not have competition? Wonder no more.

The Internet, is the perfect testing ground for the free-market economy - where there are no restrictions, tariffs etc. Where you have access to all the "prices" of different products at the same time, which would naturally stimulate sales of the lowest, and thus drive prices down.

Price doesn't have to refer to the actual price, it could be quality too. So a good quality information website would be placed higher than a worse one, and thus the quality is driven up as the one that's 2ND improves to be first and the first works hard to remain first etc. And the place where all this comparison takes place....the search engine - the ultimate crumb-earning cash-cow.

Egypt

I am off to the land of the Pharoahs, Egypt for the next two months so I may be kinda slow to write so sorry for that, but I'll try to get in a few posts before I go.
I'm going to learn arabic so wish me luck, apparently its really hard.
But I'll take my camera and post some pics as I go along...and somehow work in an Egyptian theme into my improvised novel.

An idiots guide to investing on the stockmarket - part 2

I'll basically highlight the desireable things in a stock...

a low P/E (see last post) - this means good returns on investment

high dividends - this means that even in a falling market these stocks will be falling less generally as no-one likes to lose a big fat dividend source. So both ways its win win.

Another is look for a low PEG as then it means that the P/E is low and the gains are high.

As for market cap...well I still don't really have much of a clue as to its effects. drop a line if you know.

Now other factors, look for a company with low debts, look for a blue chip firm - these don't generally go bust....

look for a company with prices that have fallen recently...but ofcourse this may mean they might fall further, but look at their actual value (Another post I think for that (seems kinda scary at first glance)) and if its lower than that, then the market will correct itself, but ofcourse if its higher, then don't be swayed by the emotions and actions of others, rather just sell straight away.

okay, part 3 of the guide is here.

My new trading book that takes you through money-making step-by-step:

http://economicsguide.blogspot.com/2010/05/why-i-wrote-trading-guide-to-sell-then.html

An idiots guide to investing on the stockmarket.

Okay first of all what are shares? They are basically (very basically), what a company does to gain some cash to expand. What they do is essentially sell you a share of the business which means you are eligible to receive a share of the profits (called dividends). Obviously a company going in loss means your share price goes down, as no-one wants a stock that's not paying dividends and going down in price due to its failure.

So what next. Well there is two things to consider in investing, one, what shares to buy and two, what strategy to employ in deciding what shares to buy.Here is a clip of the FTSE 100 share index. This is a list of the top 100 companies in the country and they all have a worth of over a billion. They are known as blue-chip companies, and are seen as safer investments, in that they are more reliable in giving dividends, and as they generally don't go bankrupt, never making the shares worthless. There is always a market to buy and sell these shares, meaning you wont struggle to buy or offload any stocks in these companies.

Next how to read the graph, here are a few definitions:
Price: Average price per share.
30 day change: price change in 30 days.
Beta: this is the measure of risk for an investor in investing in this company, the lower the better.
P/E: Price per share/earnings per share. The lower this is the better. This is used as a measure of the investability of a share.
PEG: P/E/annual growth rate of a company. If this is less than 1 then the share is under-priced, and if it is over one then the share is overpriced - though this is only generally.
Div Yield: This is the dividend yield, as in the percentage of money per share compared to the price: the higher the better...generally, and should be couples with a few other variables.
Market Cap: This is the number of shares a company has in circulation multiplied by the price of the shares.

So that's how to read a basic table. Phew. Its hard work for the beginners.
I'm off now, but next post I'll continue the "idiots guide to investing" by expounding further on how to choose a good stock. And then probably the next post after that will concentrate on the real "thing" in investing - the strategy.

My new trading book that takes you through money-making step-by-step:

http://economicsguide.blogspot.com/2010/05/why-i-wrote-trading-guide-to-sell-then.html

Heres an interesting and self-proving formula I came across recently:
MV=PT
where M=money in circulation of an economy
v=the velocity of the money circulation (how fast its exchanging hands)
p=the pricing in an economy
t=the number of transactions taking place.

this can be rearranged to find the recommended pricing:
P=MV/T
and this can also be used to show, if assuming that the V, velocity, and T, number of transactions, are constant, that inflation increases steadily with the money supply in the country.

This was proposed by John Stuart Mill who used Hume's work to base his formula. Another thing economics owes to the Great 18Th century Scottish Enlightenment.

Recycling in the Economy and Dickens

I was recently reading "Our Mutual Friend" by Charles Dickens. The story revolves around the will of a very rich man, who leaves all his money to his son - as long as he marries this random girl, otherwise all the money is going to be inherited by the old mans faithful servants. Where does this link in with Economics you may ask...

Well the old man actually made his money from recycling, by getting peoples rubbish, arranging it into piles and then sorting through it, with the dust being useful for some random people, with the wood being useful for some other random trade, and of course if any jewels etc are found, then they can be sold. A personification of economy really.

Now the interesting thing is that even in the mid 19Th century, 900,000 tonnes of dust was being produced by the households of London. Nowadays this figure would be far larger, with London's population having increased enormously, and consequently its waste has increased. So actually a vital part of the economy is how we manage our rubbish, and as always, with anything that is described as "vital", there is a lot of money to be made.

Nowadays we know that we definitely need to recycle, as the Earth's resources are finite. This makes this sector even more important. But what is also important is an economical usage of farmland, because when we look at some farmlands, the farmers can either opt for output of £50 per annum for eternity, or he could go for intensive farming techniques, and get about £400 per annum for the next 15 years.

Unfortunately the farmer will often opt for the short-term option. This is further exacerbated by the supposedly "low" interest earning loans given by the IMF and the World Bank. No loans given by these selfish organisations have been paid back yet, and the amount keeps rising too...due to the "reasonable" interest charged on the loans. This usage of Western interest-earning loans is in my opinion the new hidden imperialistic tool of oppression. The debtors are always going to be less well off than the creditors, and due to the very nature of the loans, will be subservient to the Western nations.

But the beautiful thing is, that there is no costs of invasion, maintenance, crushing of the odd rebellion etc to be incurred by the imperialists, rather its just a steady flow of cash flowing in, almost as tributes were being paid to the Caesar by smaller kingdoms who had to pay to be left free, during the Roman Empire.

In the meantime...check out my much lighter blog where I'm writing an improvised novel:
www.history-philosophy.blogspot.com

virtual trader review

I came across this neat little program that MSN have started offering:

https://secure.digitallook.com/cgi-bin/digitalcorporate/msn/home.cgi



Basically what this is, is that it offers you £100,000 start-up money and then you can trade real shares with realistic market conditions etc. Its an excellent way of enjoying all the excitement of playing the stock market, but without the money involved, which obviously could be good or bad depending on how good you are.


And basically they rate you on how much you gain on the 100000 in terms of your assets. And then you get put on a ranking table, on which I'm currently 27 (get in!), and for the 15-19 year old league I'm currently 3rd (GET IN!).


Finally to conclude the post here's a few tips I've picked up during my reading of "Investing in Stocks and Shares" by Dr. John Wright

• Decide on what you want from these stocks - if its long term growth then look at a company which has been growing in price steadily over the last few years, and that's pretty much most companies in the FTSE 100.
  
• Another thing to consider is the dividends, which is a share of the profits. This will be high for some companies and generally will accompany a high price.
  
• A good way to make money is to do some good research on undervalued companies which generally will be better conducted on less known stocks, which are less analysed and your looking at the AIM 350, FTSE 250 etc.
• Finally diversify the portfolio of shares into lots of different sectors. This alleviates the risk of one falling - as then the money from that sector will be invested in other sectors fueling a rise in another sector, so basically you don't lose. Interestingly if you invest in 10 sectors that alleviates 90% of the alpha risk which arises from investing in just one company. Investing in 20 alleviates 95% of the risk.

Finally I'll end with a little stock market axiom "The trend is your friend" - but in true stock market fashion it can also prove totally untrue.

The Goldsmith opens Pandoras box

Many years ago, gold used to be the medium for exchange - money in other words. Now goldsmiths had excellent storage facilities, safe from most things, etc. So people would leave their gold at the goldsmiths and get a receipt in return. Now what happened was people started trading these receipts for other things, basically using these receipts as money. So the goldsmith gradually worked out that maybe he should start charging people a basic rate for usage of the facilities which he duly did.

Now the goldsmith got greedy. He realised that the receipt holders very rarely cashed in their receipts and retrieved their gold...so he decided to use this idle wealth for his own purposes: He started lending it out on interest. So now he was making a load of extra cash, none of the holders were any the wiser and the goldsmith bought himself a flashy new horse and cart...made out of pure gold (just the cart).

Now the goldsmith got even more adventurous (eyeing the platinum cart now), he decided that as the receipts were now accepted as money, why couldn't he just write receipts for gold he didn't have and lend that out on interest too. This resulted in a whole load of cash and the aforementioned platinum cart and the goldsmith was enjoying life. All the cash was flowing to him, he could just as easily destroy money which, when returned, would still be worth nothing, and he would basically rip it up and write a new one to dupe people with or just keep using that one. of course the interest was given to him in very much real money, so he was getting all of the "real" money which was actually worth something.

Now the people who had their money in the bank got suspicious and made what is known as a "run on the bank". They basically asked for their gold back...which the goldsmith had loaned out...thus the goldsmith went bankrupt. Life wasn't so rosy any longer.

Nowadays this so blatantly unfair system is practised legally by all the banks in the world (apart from some Islamic Banks), and even "runs" on the bank wont make a difference, because the Central Bank will just lend the bank money and get them out of their spot of bother. money is not backed by anything and is truly "worthless", hence the rising inflation rates we see.

There are a few incy wincy restrictions such as the reserve the banks have to have in comparison to the money they create and loan out on interest...such as it was 10% in the UK but is essentially down to less than 1% now. so for (using the 10% fractional reserve), £10 in the bank, £90 could be loaned out on interest.

This coupled with the scary fact that banks are the source of 95%+ of the money in circulation today, leads us to understand that the interest to be payable to the bank is only payable if the bank creates new interest fueled loans to pour into the economy, and to pay them we will need even more bank money with interest on top of that loan, and to pay that....

This vicious cycle will go on and on. Inflation, economy collapses and the boom and bust cycle can all be traced back to the abolition of the gold standard (not backing the paper money with gold), and by the adoption of fractional reserve banking.

We need to start to realise the crippling effects of interest in the society such as its widening of the rich-poor divide. And we should campaign for breaking of the yolk that the interest earning bankers have placed upon us, and look to establish an interest-free economy.

(My views find their origin in common sense and Islam, which forbids interest)