The paper I will be analyzing is “Systemic Risk and the Refinancing Ratchet Effect”, written by Amir E. Khandani, Andrew W. Lo , and Robert C. Merton. You may recognize one of the authors, Robert C. Merton, who is a Nobel laureate, though even the other professor, Andrew W.Lo, is a heavy-weight in the financial academic industry.
At 75 pages, it is a bit on the lengthy side, but I would consider this a must read for anyone interested in the real-estate finance or the recent financial crisis. It is a draft paper that I will be reviewing, so there are some omissions such as table figure numbers, but at least it is freely available and I would highly recommend to read it at:
http://www.argentumlux.org/documents/Khandani__Lo___Merton__Draft_6.12.11__-_Systemic_Risk_and_the_Refinancing_Ratchet_Effect.pdf
The main premise of the paper is that three separate and positive economic effects were (most-likely) the main factors responsible for the subprime mortgage crisis: rising housing prices, declining interest rates and easy very-low cost mortgage refinancing. These normally-looked-at-as positive economics effects lead to higher levels of housing leverage when housing prices increase, but there was no subsequent deleverage when housing prices dropped because of the easy refinancing available. This effect is what the paper calls the refinancing ratchet effect – a ratchet effect is essentially any mechanism that will increase something with time, with no way of reversing that trend – think of cars with more and more features, or textbooks with more and more content.
Mortgages are considered leveraged financial instruments since most of the mortgage is taken out as a loan by the homeowner, and the actual investment by the homeowner is a small 10-20% down payment. And the refinancing that is the cause of the high leverage is not a change of rate/length of term re-financing, but rather a cash-out refinancing, where the homeowner takes out in cash any home equity that has been build up (i.e. any increase in the house value after the mortgage has been signed and/or mortgage payments that payed down part of the principal) – and apparently there was a lot of that going in the years leading to the crisis. This essentially meant that a lot of the risk was transferred from the borrower (homeowner) to the lender (mortgage-lending institutions). On the other hand, if easy cash-out re-financing was not available, borrowers would have smaller mortgages and would be less over-levered, and in the case of defaults, lenders would be less impacted due to the home equity that was build up and could sell the house at a premium. The total simulated impact of the cash-out refinancing is estimated to be $1.6 trillion over a two and a half year span, and this was a figure too high for U.S. banks to absorb, and thus the financial crisis ensued.
Here is an example on how a homeowner can become over-leveraged through cash-out refinancing. If you purchase a house for 400,000$ with a 100,000$ downpayment, the loan-to-value is 300,000$/400,000$ = 0.75
If the value of the house went up to 500,000$, the home-owner can take out 75% of the 100,000$ increase in cash-out refinancing (typical scenario). But if the price of the house drops to the original cost, the loan to value has jumped from 0.75 to a staggering 0.95 (380,000$/400,000$). And from the report, most people do not invest it or pay down debt, but rather use it for such things such as home improvement which does not help in improving house value when the house has already been devalued.
A good amount of the paper goes over the methodology of the simulation and the derivative pricing model used to simulate the mortgage markets, along with details on how the input data was constructed. Having a background in financial engineering will be helpful in understanding some of that material.
The main recommendation given was to create an independent organization solely devoted to track and warn about systemic risk in the system created by the three factors outlined previously.
I have my doubts on the usefulness of creating yet another ineffective government or governmental-type agency, especially when you look at the track record of other financial governmental agencies such as the SEC and their lack of finding any fraud when there was many formal complaints about Bernie Madoff’s funds, and this was many years before he finally got exposed. Or even the U.S. Commodity Futures Trading Commission and its lack of power, oversight and capability to prevent the mortgage crisis, there could have been better rules on regulating the securitization of mortgage securities and diminishing the amount of leverage used by banks.
A solution would be to curb any of the three effects, especially easy cash-out refinancing, but it is not as easy as that since curtailing any of these ‘positive’ effects can lead to negative economic impact – which is precisely the situation we are trying to avoid in the first place.
Alas, I don’t have the solutions, but one thing is clear to me, no matter how much the aftermath of a crisis will be analyzed by academics, economists and governments, it will do little to prevent the next, albeit slightly different, crisis.
Other useful tidbits to note from the paper:
-Just like the term “Black Monday” is used to describe the stock market crash of October 19th, 1987, the recent financial crisis also has a term with capitalized letters to describe it: “Financial Crisis of 2007-2008”
-Matlab and the Financial Derivatives Toolbox plugin was used to price options – if you have access to it, I would highly recommend to learn it
-A pretty good mortgage crisis literature overview is provided, which can lead the reader to get more in-depth knowledge on the other papers written about the mortgage crisis and U.S. mortgage market
=========================================================
1. Systemic Risk and the Refinancing Ratchet Effect can be found at:
http://www.argentumlux.org/documents/Khandani__Lo___Merton__Draft_6.12.11__-_Systemic_Risk_and_the_Refinancing_Ratchet_Effect.pdf
2. Racthet Dollars photo courtsey of http://pronlinenews.com/?p=4203
Feel free to leave suggestions on any improvements / factual errors,
and some of my other business writings can be found on my site: ThePostMBA.com
Tuesday, January 10, 2012
Insights on the Mortgage Crisis from a Nobel Laureate
Monday, January 2, 2012
Got a new discovery ?...do not patent it!
A lot of people have ideas, you may be one of few with a truly great idea and to protect that idea you need to patent it. A patent gives you the right to essentially have a monopoly on an idea, process or invention on a per country or jurisdiction basis. The usual protection length is 20 years from filing the patent. The most popular countries to get patent protection are United States, Europe and Japan with the United States usually considered the primary area that you need to get an idea patented and protected.
But you need to be really careful if you go that route.
For one thing, patents can cost in the thousands of dollars if you hire a patent lawyer to draft the patent application. A survey among small Canadian law firms in Canadian Lawyer Magazine discloses the average patent application cost at a staggering $4,3001.
It's a lot cheaper if you don't hire a lawyer, yet it usually recommended to go the lawyer route because you won’t have the expertise to:
-Avoid making the patent too narrow and giving away important rights (non-use and assignment clauses)
-Avoid making the patent application too broad and getting it rejected
And much more importantly, 97% of all patents never make any money2. And you will have to wait three years to get a patent examiner to review your application. The odds are highly stacked against you.
There is a very simple solution to this problem that is often ignored and unfortunately not recommended enough by patent lawyers, and that is to apply for a provisional patent instead - and hence the reason for my chosen title of this post.
This essentially allows you to protect your idea and iron out the details whether you want to file a full fledge patent application, for a small entity (i.e. small business/individual), it will only cost you $125 and should protect you for a year3. The complete fee schedule is available here, albeit a bit complicated on what items get charged:
http://www.uspto.gov/web/offices/ac/qs/ope/fee092611.htm
If you are starting to line up potential customers and can clearly demonstrate real business value and sales revenues, then it is time to exercise the option of turning the provisional patent into a patent application.
A few good places to start the patent search to see if the idea is unique and novel:
- http://www.google.com/patents
- http://patft.uspto.gov/netahtml/PTO/search-bool.html
- The World Intellectual Property database - http://www.wipo.int/portal/index.html.en
=================================================
1. http://www.canadianlawyermag.com/images/stories/pdfs/Surveys/2011/legalfeessurvey.pdf
2. http://www.businessweek.com/smallbiz/content/sep2007/sb20070912_726423.htm
3. I am not a lawyer, so even though this is legal advice, this is not officially legal advice.
Wednesday, September 28, 2011
NBA Collective Bargaining Agreement
The NBA lock-out just ended, this is not the first time it has occurred and most likely not the last either. It is a common occurrence every few years to have this type of lockout in major league sports, and there is simple explanation why.
Even though the NBA has a monopoly in professional basketball which means they could underpay if they wanted too, the NBA players have a monopoly on the supply side and they are banded together in a powerful union known as the NBA players association.
Bringing the two together essentially creates a head-on collision between two run-away freight trains, and in the ensuing confusion and debris, we hope both sides reach an agreement, or in other words a market equilibrium for the pay and benefits and regulations that the league and the players will abide too.
I don't plan to go through the agreement, the last collective bargaining agreement was signed in 2005 and it was 300 pages of legalese and loopholes. It is interesting to note how much less the non-prime professional basketball leagues pay, Kenyon Martin who reportedly made $16.5 million in the 2007-2008 season is going to play in the Chinese Basketball Association and make the highest ever paid in that league: 500,000$ a month. That is still a 70% drop in salary!
The average NBA player in Europe is expected to make 50-75k a month, while in the NBA, the average salary is 5.8 million$. It just goes to show you that the main league still has all the power and control to recruit the most talented players.
Saturday, May 28, 2011
Learn the merchant's trade
The new Elder Scrolls videogame is out and it has been an instant hit, selling millions of copies in only few days. There is a line one of the non-playable characters say "I like to spend time at the market, to learn the merchant's trade". It is a very important concept that a lot of business students ignore, the fact that learning the industry (merchant's trade) is essential.
1) Recruiting
2) Retaining Talent
3) Training Managers
4) Payroll
5) Pension / Benefits committees
6) Disciplinary actions / Rule violations
The same could be said about the science of job motivation, which many people do not know that job motivation, satisfaction and performance are all different and should be treated uniquely and differently.
The same could be said for retail, where you have your retail floor/sales personnel, retail management and corporate office - all 3 distinct areas with some similarities but enough differences to be unique.
Accounting is treated differently for different industries such as: real estate, mining, small companies, private companies. People outside of the accounting field are usually not aware of that.
Saturday, September 18, 2010
Don't Just Roll the Dice Guide part 1
I will be reviewing the "Don't Just Roll the Dice" book on pricing software. The great part about this 81 page guide book is that it is available for free!! So you can actually go to the source and not just rely on this review. The book is freely available at :
http://www.neildavidson.com/dontjustrollthedice.html
If you like the book, you should support the author and purchase a real copy from Amazon for 11$: http://www.amazon.com/Dont-Just-Roll-Dice-usefully/dp/1906434387/
Even though the author is targeting a specialized subset: software, a lot of the pricing strategies easily applies to other industries.
Review+Analysis of Chapters 1,2 and 3 - Pricing Economics, Psychology and Pitfalls:
-A very interesting bit of pricing history for technology:
The two Hewlett-Packard founders sold their first oscilloscope in 1938 for 54.40$ because that is the latitude and longitude of the northern border of the United States of America! There was a comparable oscilloscope being sold for 400$ by General Radio at that time. This goes to show you that some very smart people (they were Stanford grads!!) can make some foolish pricing mistakes.
-You should be aware of how increasing the price will affect the demand in quantities sold. The end-goal is to increase revenue (quantity times price) after all..though a more important goal is profit margins and this can affect the desired quantity you want to produce too.
-In software, you are selling more then just the executable code, you are also selling: technical support, on-going documentation needs, re-assurance of new features being implemented (roadmap), and breeding familiarity to your staff...hence the reason why Microsoft dominates so much in the corporate environment while there exists much cheaper alternatives.
-pricing by companies is often done by comparing to existing reference points and what the market will bear
-fives and nines lower's the perceived cost of a product: example: 1,995$ feels significantly cheaper then 2,000$ even though it's only 5$ (0.25% of the cost of the product)
http://www.neildavidson.com/dontjustrollthedice.html
If you like the book, you should support the author and purchase a real copy from Amazon for 11$: http://www.amazon.com/Dont-Just-Roll-Dice-usefully/dp/1906434387/
Even though the author is targeting a specialized subset: software, a lot of the pricing strategies easily applies to other industries.
Review+Analysis of Chapters 1,2 and 3 - Pricing Economics, Psychology and Pitfalls:
-A very interesting bit of pricing history for technology:
The two Hewlett-Packard founders sold their first oscilloscope in 1938 for 54.40$ because that is the latitude and longitude of the northern border of the United States of America! There was a comparable oscilloscope being sold for 400$ by General Radio at that time. This goes to show you that some very smart people (they were Stanford grads!!) can make some foolish pricing mistakes.
-You should be aware of how increasing the price will affect the demand in quantities sold. The end-goal is to increase revenue (quantity times price) after all..though a more important goal is profit margins and this can affect the desired quantity you want to produce too.
-In software, you are selling more then just the executable code, you are also selling: technical support, on-going documentation needs, re-assurance of new features being implemented (roadmap), and breeding familiarity to your staff...hence the reason why Microsoft dominates so much in the corporate environment while there exists much cheaper alternatives.
-pricing by companies is often done by comparing to existing reference points and what the market will bear
-fives and nines lower's the perceived cost of a product: example: 1,995$ feels significantly cheaper then 2,000$ even though it's only 5$ (0.25% of the cost of the product)
Saturday, September 4, 2010
Analysis of Dollarama
http://www.thespec.com/news/business/article/256030--making-millions-on-your-dollar
http://www.winnipegfreepress.com/business/breakingnews/discount-retailer-dollarama-reports-21-million-profit-for-second-quarter-102847959.html
http://www.canada.com/nationalpost/financialpost/story.html?id=7dcebed2-ab61-413f-bf93-19b08cd945d9
-32 per cent of its sales now are paid for with debit cards
-From a credit-card standpoint we have concluded — following our 12-month test period — that we will not implement the credit card service as it has had no significant impact, negative or positive, on our sales
-No franchises, all stores are owned and managed by Dollarama's corporate headquarters
-IPO in 2009, now we can detailed information on it's business due to public disclosures such as like the annual report
-Same-store sales, which measure revenues from stores open at least a year, grew by 7.8 per cent
-The year-earlier results included a $21.3-million gain on foreign exchange derivatives...they take part in foreign exchange hedging even though it is a purely Canadian company.
-623 stores stores in total
-Nearly 40 per cent of items sold in its 623 stores across the country are priced at more than $1. That's up from 24 per cent a year ago and 34 per cent in the previous quarter.
-Sales grew by 13.2 per cent to $343.5 million in the second quarter, driven by the net addition of 12 stores.
-The average transaction at the retailer was up 6.2 per cent in its latest quarter compared with a year ago as the stores continued to expand their offerings of items priced above beyond their usual "everything for a buck" level.
Individual store sales is 2.2 million:
1. Sales for all quarters, extrapolate by using second-quarter sales: $343.5 million in the second quarter times four = $1.374 billion
2. 623 stores total
3. $1.374 billion divided by 623 comes out to a per-store revenue of $2.2 million
Store expanding at a relatively slow rate - it's a sign to explore other geographic markets such as the United States:
2% store expansion rate - 12 new stores out of the 623 stores
http://www.winnipegfreepress.com/business/breakingnews/discount-retailer-dollarama-reports-21-million-profit-for-second-quarter-102847959.html
http://www.canada.com/nationalpost/financialpost/story.html?id=7dcebed2-ab61-413f-bf93-19b08cd945d9
-32 per cent of its sales now are paid for with debit cards
-From a credit-card standpoint we have concluded — following our 12-month test period — that we will not implement the credit card service as it has had no significant impact, negative or positive, on our sales
-No franchises, all stores are owned and managed by Dollarama's corporate headquarters
-IPO in 2009, now we can detailed information on it's business due to public disclosures such as like the annual report
-Same-store sales, which measure revenues from stores open at least a year, grew by 7.8 per cent
-The year-earlier results included a $21.3-million gain on foreign exchange derivatives...they take part in foreign exchange hedging even though it is a purely Canadian company.
-623 stores stores in total
-Nearly 40 per cent of items sold in its 623 stores across the country are priced at more than $1. That's up from 24 per cent a year ago and 34 per cent in the previous quarter.
-Sales grew by 13.2 per cent to $343.5 million in the second quarter, driven by the net addition of 12 stores.
-The average transaction at the retailer was up 6.2 per cent in its latest quarter compared with a year ago as the stores continued to expand their offerings of items priced above beyond their usual "everything for a buck" level.
Individual store sales is 2.2 million:
1. Sales for all quarters, extrapolate by using second-quarter sales: $343.5 million in the second quarter times four = $1.374 billion
2. 623 stores total
3. $1.374 billion divided by 623 comes out to a per-store revenue of $2.2 million
Store expanding at a relatively slow rate - it's a sign to explore other geographic markets such as the United States:
2% store expansion rate - 12 new stores out of the 623 stores
Saturday, August 21, 2010
Distance and Online MBA degrees
With the rise of for-profit schools and the popularity of business degrees, there's a greater demand then ever for MBA programs, and along with the demand comes a very large price tag.
Due to this huge price tag, it is well advised to only enter a top business program as the return on investment will be low otherwise. Salary, recruiter demand and prestige are much higher for top schools, but not all of us can quit our jobs, relocate our families for the 1 to 2 years it takes to complete these programs, and the online programs tend to be low prestige and offered by non top-tier universities. But don't fret, here's a list I complied of top online and distance programs (the list is only 2 schools due to a lack of top schools offering solid distance programs):
1) Cornell–Queen’s Executive MBA
2 MBA degrees granted at the end of this 18 month distance program, offered 3 weekend days per month in 20 metropolitain cities in North America via teleconferencing equipment:
NewYork, Syracuse, Buffalo, Ithaca, Salem, Washington, Cincinnati, Cleveland, Columbus, Portland, Atlanta, Dallas, Houston, Seattle, Toronto, Ottawa, Montreal, Calgary, Edmonton, Vancouver
Also, there is no mention of "Executive" on the two MBA degrees, they are considered normal MBA degrees, this is not a bad thing as some people consider EMBA programs to be diluted versions of the normal MBA programs.
Tuition: prace for it....98,000$!
2) Kelley School of Business - Indiana University
Online program by a lesser known Top 20 United States MBA program.
Tuition: 995$ per semester credit, since there's 51 credits: 50,745$
Note: tuition is cheaper if you take the non-online program at Kelley! Of course, then you would have to factor loss of income and room&board costs.
Due to this huge price tag, it is well advised to only enter a top business program as the return on investment will be low otherwise. Salary, recruiter demand and prestige are much higher for top schools, but not all of us can quit our jobs, relocate our families for the 1 to 2 years it takes to complete these programs, and the online programs tend to be low prestige and offered by non top-tier universities. But don't fret, here's a list I complied of top online and distance programs (the list is only 2 schools due to a lack of top schools offering solid distance programs):
1) Cornell–Queen’s Executive MBA
2 MBA degrees granted at the end of this 18 month distance program, offered 3 weekend days per month in 20 metropolitain cities in North America via teleconferencing equipment:
NewYork, Syracuse, Buffalo, Ithaca, Salem, Washington, Cincinnati, Cleveland, Columbus, Portland, Atlanta, Dallas, Houston, Seattle, Toronto, Ottawa, Montreal, Calgary, Edmonton, Vancouver
Also, there is no mention of "Executive" on the two MBA degrees, they are considered normal MBA degrees, this is not a bad thing as some people consider EMBA programs to be diluted versions of the normal MBA programs.
Tuition: prace for it....98,000$!
2) Kelley School of Business - Indiana University
Online program by a lesser known Top 20 United States MBA program.
Tuition: 995$ per semester credit, since there's 51 credits: 50,745$
Note: tuition is cheaper if you take the non-online program at Kelley! Of course, then you would have to factor loss of income and room&board costs.
Friday, August 13, 2010
Three small sales tips that you really need to know
-Small Tip#1: Closed on Mondays
Why don't most small businesses leave their shop open on Sunday or even extend their hours on Sunday while closing on Mondays ? Mondays are probably the slowest business day for a lot of different businesses...
It's most likely that these small shops with the owner being the manager, cashier, stock boy, cleaner wants to enjoy his weekend too, but the added revenue may be worthwhile...
-Small Tip#2: Upsell right before closing the sale
It's a technique that a lot of business use, but there's still enough companies out there who still don't know how to upsell properly right before the close of a sale.The best way to implement it with online sales, offer a solid feature-base product, and right before they are about to checkout, offer them a stronger feature-base product for slightly more money.A perfect example is from the Veritas GMAT prep courses: they offer a solid class package of 20-30 hours for 1,200-1,500$ and when you click on the Register button, they give you extra premium options such as adding more expensive private tutoring (at a discount to normal tutoring cost!) or Continue on with the normal class package.
-Small Tip#3: Be careful with your marketing words
For example, the word "used" has a lot of negative connatations, that is why the word "pre-owned" is favored. And the car industry has taken it a step further and the used cars go through a mechanical inspection, allowing car dealers to use the word "certified pre-owned vehicules" which sounds a lot nicer then saying "used cars"...
Why don't most small businesses leave their shop open on Sunday or even extend their hours on Sunday while closing on Mondays ? Mondays are probably the slowest business day for a lot of different businesses...
It's most likely that these small shops with the owner being the manager, cashier, stock boy, cleaner wants to enjoy his weekend too, but the added revenue may be worthwhile...
-Small Tip#2: Upsell right before closing the sale
It's a technique that a lot of business use, but there's still enough companies out there who still don't know how to upsell properly right before the close of a sale.The best way to implement it with online sales, offer a solid feature-base product, and right before they are about to checkout, offer them a stronger feature-base product for slightly more money.A perfect example is from the Veritas GMAT prep courses: they offer a solid class package of 20-30 hours for 1,200-1,500$ and when you click on the Register button, they give you extra premium options such as adding more expensive private tutoring (at a discount to normal tutoring cost!) or Continue on with the normal class package.
-Small Tip#3: Be careful with your marketing words
For example, the word "used" has a lot of negative connatations, that is why the word "pre-owned" is favored. And the car industry has taken it a step further and the used cars go through a mechanical inspection, allowing car dealers to use the word "certified pre-owned vehicules" which sounds a lot nicer then saying "used cars"...
Monday, August 9, 2010
The Expendables - Business Analysis of a movie
So what would a movie have to do with business you may ask ?
Especially one that is filled with some of the greatest Hollywood action stars:
Sylvester Stallone, Jason Statham, Jet Li, Mickey Rourke, Randy Couture, Steve Austin, Bruce Willis, Arnold Schwarzenegger, Terry Crews among others...
I would have never thought that you could coordinate and get all these stars in one movie. Not only that, but you have to destroy some of their egos, as it seems that Stallone is the main hero of the film.
So what makes this movie special from a business perspective ?
Getting all these stars for next to nothing - how ? Because a lot of them are far from their peaks and can't demand the $20 million dollars that a Brad Pitt can demand. And I am sure some have trouble finding gigs nowadays. In fact, the entire movie cost only a reported $70 million dollars. In comparaison, another 2010 movie, The Last Airbender, had a production budget of $150 mil with a marketing budget of $130 mil for a total combined cost of $280 mil! (Note: I do not know if the $70 mil figure includes marketing, probably not).
And it also has one of the best marketing lines ever: "The greatest action heros assembled for the first and LAST time". Which is true when you think about it, all you need is for one of the major action heroes to not show up in another movie and it's a different cast, and who counts as the greatest action hero is very very subjective. Nonetheless, well played by the marketing PR group.
Sunday, August 8, 2010
MBA Admission and Business Cases
It has been a while since I have written an article, a mixture of being busy and not having my priorities straight.
In the meantime, I have recently received the good news that I will be starting my MBA degree at a well-known local school in my hometown. Hopefully, as I progress through my degree, the quality of my posts should improve with better thought-out articles and references...along with a higher frequency of posting. My goal would be to produce 50 articles in a year...that basically means one post per week though I doubt I will post one per week, more like two-three-four every 3 weeks.
I am also going to change the direction and purpose of the finance school website with a more broad subject definition...anything related to business or money is good enough to be published...whether it is the labor market or quantitative finance or the price of goods & services.
One thing I have learned from perusing MBA programs is that one of the best business schools in Canada, the Richard Ivey School of Business (Western Ontario) sells management cases that its professor produces. They are all seem to be priced at 3$ USD and range from 5-20 pages. I might purchase one of these to then post my analysis on the site. And they are half the price of what you would have to pay as an individual if you wanted cases from the Kellogg School of Management (NorthWestern).
Let me know what you think.
In the meantime, I have recently received the good news that I will be starting my MBA degree at a well-known local school in my hometown. Hopefully, as I progress through my degree, the quality of my posts should improve with better thought-out articles and references...along with a higher frequency of posting. My goal would be to produce 50 articles in a year...that basically means one post per week though I doubt I will post one per week, more like two-three-four every 3 weeks.
I am also going to change the direction and purpose of the finance school website with a more broad subject definition...anything related to business or money is good enough to be published...whether it is the labor market or quantitative finance or the price of goods & services.
One thing I have learned from perusing MBA programs is that one of the best business schools in Canada, the Richard Ivey School of Business (Western Ontario) sells management cases that its professor produces. They are all seem to be priced at 3$ USD and range from 5-20 pages. I might purchase one of these to then post my analysis on the site. And they are half the price of what you would have to pay as an individual if you wanted cases from the Kellogg School of Management (NorthWestern).
Let me know what you think.
Friday, February 26, 2010
How 4G will lower costs by spending more
Can you save money by spending more ?
Yes you can if you are talking about the newest cellular technology called 4G.
You might have heard of 2G and 3G, those are standards for mobile internet data speeds.
4G will be at least 2-3x faster then 3G and will usher in a new world of very fast mobile broadband speeds.
There are two kinds of expenses that tellcos have to face:
1. Capital Expenditures (CAPEX) - one-time costs for hardware, software, installations
2. Operational Expenditures (OPEX) - on-going costs for electricity, labor and renting land
To move to 4G, service providers will have to spend CAPEX to upgrade their networks, but they can actually reduce their OPEX by going to 4G, see below:
Normally, to move data from the user to the service provider, you need to connect the cellular antenna towers to service provider`s equipments. Usually this link is done with sophisticated telephone lines called T1`s that are leased at a high cost.
Yes you can if you are talking about the newest cellular technology called 4G.
You might have heard of 2G and 3G, those are standards for mobile internet data speeds.
4G will be at least 2-3x faster then 3G and will usher in a new world of very fast mobile broadband speeds.
There are two kinds of expenses that tellcos have to face:
1. Capital Expenditures (CAPEX) - one-time costs for hardware, software, installations
2. Operational Expenditures (OPEX) - on-going costs for electricity, labor and renting land
To move to 4G, service providers will have to spend CAPEX to upgrade their networks, but they can actually reduce their OPEX by going to 4G, see below:
Normally, to move data from the user to the service provider, you need to connect the cellular antenna towers to service provider`s equipments. Usually this link is done with sophisticated telephone lines called T1`s that are leased at a high cost.
I will throw some numbers to get an idea of the costs involved: An operator can have thousands of cell sites, each cell site can have 6-12 T1 lines. Each T1 line cost 500-1000$ US a month. Leasing these lines tends to be the single most expensive OPEX item, sometimes it account for as much as 30% of total operational expenses.
The move the 4G will no longer require these leased links since the architecture is completely IP. It costs a whole lot less to operate an IP network then to rent T1 lines.
Friday, December 18, 2009
Technical Engineer versus Non-Technical Engineer
Who wins the battle between technical engineer versus non-technical (soft-skills) engineer ?
Though this might not be directly related to business, it has huge implications for technology companies and their bottom line. The culture that a company tries to promote, technical like Google/Facebook or business like Oracle/SAP has huge implications on the ways of working and what positions are valued inside the company.
Here is my rant on the engineering labor strategy that places the non-technical engineer as more important then the technical engineer to the company:
What role is more important ?A lot of people would say the non-technical engineer, since the non-technical engineering positions are usually sales engineers and project mangement engineers.
The topic is probably something a lot of people in tech companies think about but do not overtly talk about.
I think the issue is not just with money, but also how a technical person versus project manager/sales person is perceived. From what I see, project management/sales is perceived as a higher status/value then going the technical route (for example: solution architect or principal engineer). Not just internally in the company but externally also.
Example:
A project manager with PMP certification can use his experience here and be able to go anywhere else and be seen as creating value to the new company because of his past experience (same with other soft skills like sales).
On the other hand, being technical on a proprietary xyz technology pretty much limits you to a much smaller market and skillset. And your skills lose value pretty fast if you don't keep up with the latest and greatest revision of software/hardware.
Even though a company should not care where a person may go in the future, this creates a situation where one career path is a whole lot less attractive then another career path. And a difference in salary will just aggravate the situation more.
I feel that every technical company out there should try to build 2 career paths that are equally rewarding because to be able to deliver complex technical products and services in a timely manner, requires technical experts that can make/fix thing, project managers that can ensure execution and sales people who can bring in the revenue.
So to answer the question posed at the beginning, in an ideal world, either career path should be equally rewarding so there is no winner between technical versus non-technical engineer.
Though this might not be directly related to business, it has huge implications for technology companies and their bottom line. The culture that a company tries to promote, technical like Google/Facebook or business like Oracle/SAP has huge implications on the ways of working and what positions are valued inside the company.
Here is my rant on the engineering labor strategy that places the non-technical engineer as more important then the technical engineer to the company:
What role is more important ?A lot of people would say the non-technical engineer, since the non-technical engineering positions are usually sales engineers and project mangement engineers.
The topic is probably something a lot of people in tech companies think about but do not overtly talk about.
I think the issue is not just with money, but also how a technical person versus project manager/sales person is perceived. From what I see, project management/sales is perceived as a higher status/value then going the technical route (for example: solution architect or principal engineer). Not just internally in the company but externally also.
Example:
A project manager with PMP certification can use his experience here and be able to go anywhere else and be seen as creating value to the new company because of his past experience (same with other soft skills like sales).
On the other hand, being technical on a proprietary xyz technology pretty much limits you to a much smaller market and skillset. And your skills lose value pretty fast if you don't keep up with the latest and greatest revision of software/hardware.
Even though a company should not care where a person may go in the future, this creates a situation where one career path is a whole lot less attractive then another career path. And a difference in salary will just aggravate the situation more.
I feel that every technical company out there should try to build 2 career paths that are equally rewarding because to be able to deliver complex technical products and services in a timely manner, requires technical experts that can make/fix thing, project managers that can ensure execution and sales people who can bring in the revenue.
So to answer the question posed at the beginning, in an ideal world, either career path should be equally rewarding so there is no winner between technical versus non-technical engineer.
Monday, November 9, 2009
Business Startup Checklist
Inspired by a friend re-evaluating his new business strategy
What every business owner should be able to answer :
1. BUSINESS PLAN: Do you have a solid long-term business plan ?
2. ELEVATOR SPEECH: What is your 60 second summary of the business plan ?
3. WHO TO SELL: Who is your target market and how will you sell to them ?
4. UNIQUENESS: What problem are you solving with your product/service ? (Not only what need is it fufilling but also how is it different ?)
5. REVENUE MODEL: What is the revenue model - how do you make money and how do you establish pricing ?
6. OBSTACLES: What are the barriers of entry for the business/new product/new project, and how will you overcome them ?
7. COMPETITION: Who are your competeitors and how many are they roughly and what kind of market share they have ?
8. COSTS: What are the startup costs ? (for a new business, or for a new product or new project)
If you can't answer all of these eight questions, then you need to re-evaluate what you are missing to bridge the knowledge gap about your own business.
What every business owner should be able to answer :
1. BUSINESS PLAN: Do you have a solid long-term business plan ?
2. ELEVATOR SPEECH: What is your 60 second summary of the business plan ?
3. WHO TO SELL: Who is your target market and how will you sell to them ?
4. UNIQUENESS: What problem are you solving with your product/service ? (Not only what need is it fufilling but also how is it different ?)
5. REVENUE MODEL: What is the revenue model - how do you make money and how do you establish pricing ?
6. OBSTACLES: What are the barriers of entry for the business/new product/new project, and how will you overcome them ?
7. COMPETITION: Who are your competeitors and how many are they roughly and what kind of market share they have ?
8. COSTS: What are the startup costs ? (for a new business, or for a new product or new project)
If you can't answer all of these eight questions, then you need to re-evaluate what you are missing to bridge the knowledge gap about your own business.
Friday, August 14, 2009
Two Basic Business Rules - Lowering and Increasing
Running a succesful business does not have to be as complicated as this diagram tries to make it seem:
What you really need to know are these two basic rules:
And if you say your business has brought in the same amount of cash as last year, then you can consider it as shrinking, since the motif of any successful profit-making business is to make more money then last year. Plus, you can't forget that with inflation, you are in fact making 2% less, since your purchasing power decreased, if you earned the same amount of money as last year.
The corollary to LOWERING YOUR COSTS, is to INCREASE YOUR REVENUE. Sell things higher, or get more people to buy stuff.
So applied to the real world in a restaurant:
-lower the costs of your food: find a different supplier, renegotiate with your existing supplier or find alternative ingredients that can be interchanged with your currently used ingredients.
-increase revenue: get more foot traffic, offer appetizers/wine at a lower cost if they purchase high-margin meals - this will increase the amount they spend in a restaurant which is what we want.
Now go apply it in the real world - it's never too late to start your own business!!
And before you know it, your restaurant will be this packed:
What you really need to know are these two basic rules:
1. Lowering Your CostsYou want to always be looking for ways to lower your costs. A relentless pursuit I might add. Because there is no such thing as being neutral or stable. Your business is either growing or shrinking.
2. Increasing Your Revenue
And if you say your business has brought in the same amount of cash as last year, then you can consider it as shrinking, since the motif of any successful profit-making business is to make more money then last year. Plus, you can't forget that with inflation, you are in fact making 2% less, since your purchasing power decreased, if you earned the same amount of money as last year.
The corollary to LOWERING YOUR COSTS, is to INCREASE YOUR REVENUE. Sell things higher, or get more people to buy stuff.
So applied to the real world in a restaurant:
-lower the costs of your food: find a different supplier, renegotiate with your existing supplier or find alternative ingredients that can be interchanged with your currently used ingredients.
-increase revenue: get more foot traffic, offer appetizers/wine at a lower cost if they purchase high-margin meals - this will increase the amount they spend in a restaurant which is what we want.
Now go apply it in the real world - it's never too late to start your own business!!
And before you know it, your restaurant will be this packed:
Friday, May 1, 2009
Net Present Value
It's time that I start talking more about finance topics, since that is the name of the blog, after all...
Net Present Value or NPV for short is the value TODAY of a series of cash flows over time.
So for instance:
If you are getting 5,000$ a year for the next 3 years cause you won the mini-lotto. It would be wrong to assume that the value of the cash you are getting is 15,000$ (5,000$ times three), since the value of cash goes down with time (otherwise known as inflation).
If we took a discount value of 2% (the same as inflation), then the this year's 5000$ would be the same 5,000$ today, next years 5,000$ would actually just be the same as 4,901$ today (5,000$ divided by 1.02), and the 5000$ the following year would be only worth 4,805$ today (5,000$ divided by 1.02 and then divided again by 1.02)
In this example the discount rate it only equal to inflation, but in other cases it can be much greater, since you can make the discount rate the same value as the % you would be able to get in the stock market for instance, since this is money that you are not getting now and can't invest with it, and hence there's a penalty associated to it.
This is an extremely important topic in finance. One of my project managers at work was telling me that it was a very important concept in their Project Manegement Certificaion (PMP - project management professional), since a lot of projects are based on the time value of money over several years. This becomes a really important point when the projects are in the millions of dollars.
Lessons Learned:
1. Talk about NPV in your next team meeting, and you will look smart
2. Invest your money TODAY and start saving (like the ING Direct guy says in those funny commercials), since you lose money every year by NOT MAKING any money. Put 10,000$ under your bed today, come back 30 years later, your money has the buying power of only 5,000$ due to inflation!!!!!
Net Present Value or NPV for short is the value TODAY of a series of cash flows over time.
So for instance:
If you are getting 5,000$ a year for the next 3 years cause you won the mini-lotto. It would be wrong to assume that the value of the cash you are getting is 15,000$ (5,000$ times three), since the value of cash goes down with time (otherwise known as inflation).
If we took a discount value of 2% (the same as inflation), then the this year's 5000$ would be the same 5,000$ today, next years 5,000$ would actually just be the same as 4,901$ today (5,000$ divided by 1.02), and the 5000$ the following year would be only worth 4,805$ today (5,000$ divided by 1.02 and then divided again by 1.02)
In this example the discount rate it only equal to inflation, but in other cases it can be much greater, since you can make the discount rate the same value as the % you would be able to get in the stock market for instance, since this is money that you are not getting now and can't invest with it, and hence there's a penalty associated to it.
This is an extremely important topic in finance. One of my project managers at work was telling me that it was a very important concept in their Project Manegement Certificaion (PMP - project management professional), since a lot of projects are based on the time value of money over several years. This becomes a really important point when the projects are in the millions of dollars.
Lessons Learned:
1. Talk about NPV in your next team meeting, and you will look smart
2. Invest your money TODAY and start saving (like the ING Direct guy says in those funny commercials), since you lose money every year by NOT MAKING any money. Put 10,000$ under your bed today, come back 30 years later, your money has the buying power of only 5,000$ due to inflation!!!!!
Friday, April 17, 2009
Crisis of Credit Visualized
An amazing video that explains how the mortgage crisis caused a rupture in the global financial system. This is the reason why its useful to be multi-skilled...in this case a mixture of art and finance.
http://www.crisisofcredit.com/
http://www.crisisofcredit.com/
Saturday, March 7, 2009
The Case for Diversification
Why should you diversify your investment portfolio?
There has been a lot of fuss about schools losing a large % of their endowments. The most famous endowment of them all: Harvard has lost 8 billion$ out of 36 billions$ in ONLY 4 months!! (Of course this is only paper value loss, and if or when the USA get back on track, the fund might regain its value back).
What are endowments?
Money that is given to an institution can be spent right away OR they can save it and make it grow. When you save the money from donations, and only spend the money you earn through investments, that is called an endowment. Big name schools tend to have endowments.
Harvard Portfolio Pie Chart from 1996:
Quebec Pension Plan only expects to pay for 25% of your retirement costs :
-------------------------------------------------------------------------------------------------
One year ago (Feb 2007), S&P 500 was at 1300, that translates to a one year loss of 36% (compared to Quebec's pension plan loss of 25%).
What can we learn from this?
It's not just about diversifying, your goal should be to diversify to minimize risk!!
There has been a lot of fuss about schools losing a large % of their endowments. The most famous endowment of them all: Harvard has lost 8 billion$ out of 36 billions$ in ONLY 4 months!! (Of course this is only paper value loss, and if or when the USA get back on track, the fund might regain its value back).
What are endowments?
Money that is given to an institution can be spent right away OR they can save it and make it grow. When you save the money from donations, and only spend the money you earn through investments, that is called an endowment. Big name schools tend to have endowments.
Harvard Portfolio Pie Chart from 1996:
That amount to a whopping loss of a whopping 22%. Even Burger King whoppers are trembling in fear.
In my part of the country, the public Quebec Pension Plan Fund administered by the Caisse de dépôt et placement du Québec has lost 40 billion $ out of its 160 billion $ reserve in its 2008 report. That translates to a 25% loss in one year, similar to what the Harvard Fund is facing.
Since this is a public fund that every Quebecer who works has to contribute too, it has been shown as a national disaster on TV, since it affects everyone, especially the senior citizens who are about to retire. A 25% loss is normal in this kind of economic climate, and yet there probably will be a provincial inquiry on how the fund is managed and what kind of risk models the managers are using.
In my part of the country, the public Quebec Pension Plan Fund administered by the Caisse de dépôt et placement du Québec has lost 40 billion $ out of its 160 billion $ reserve in its 2008 report. That translates to a 25% loss in one year, similar to what the Harvard Fund is facing.
Since this is a public fund that every Quebecer who works has to contribute too, it has been shown as a national disaster on TV, since it affects everyone, especially the senior citizens who are about to retire. A 25% loss is normal in this kind of economic climate, and yet there probably will be a provincial inquiry on how the fund is managed and what kind of risk models the managers are using.
Quebec Pension Plan only expects to pay for 25% of your retirement costs :
-------------------------------------------------------------------------------------------------
How do these losses compare to what's happening in the stock market?
Take a look at the S&P 500, was at 1160 at the beginning of October then by beginning of Feb was 830, so in 4 months, it has lost 28% of its value (compared to 22% at Harvard).
One year ago (Feb 2007), S&P 500 was at 1300, that translates to a one year loss of 36% (compared to Quebec's pension plan loss of 25%).
And as a benchmark, the Dow Jones has lost 28% in 4 months also, and 35% in one year. Numbers that are very comparable to the S&P 500.
What can we learn from this?
It's a well known fact that the vast majority of fund managers can't beat the indexes (which points to how useless they are since you have to pay them EXTRA just to manage the fund, and they collect some of the profits too).
But in this case they actually did perform a little better, why is that?
Because they did not solely invest all of their clients money in STOCK!! You need to diversify: invest in bonds, money markets, treasury bills, etc. You should also invest in different industries and countries. So if one market takes a huge hit (like stocks in our case), you can minimize your losses.
Even though their portfolios are diversified, why did these funds take such huge losses?
To make big gains, you need to take big risks. Both the Harvard and Quebec funds were making big gains over the years, mainly because they invested in some risky financial instruments (such as commodities, private equity funds and mortgage-backed assets - Asset-Backed Commercial Paper - ABCP) and they took leveraged positions (borrowing money to make money, hoping to make enough money to pay back the borrowed money, and have a little extra for yourself).
It's not just about diversifying, your goal should be to diversify to minimize risk!!
Thursday, February 19, 2009
How companies are saving money these days
Even though I am relatively new to the career world, I have noticed numerous ways that companies try to save money over the years. But nothing like what I am seeing these days.
Being in the middle of this recession, I have seen creative ways into how companies are trying to save money. I have seen letters of employment being revoked anf leaving my friends jobless. Companies moving to a 4-day workweek (with the 20% cut in salary and still expecting no loss in productivity...), along with no longer paying for overtime. As well as the massive layoffs happening everywhere.
For one of my past employers, which is in the telecommunications sector, I have noticed these specific points being implemented:
So, let's analyze these 5 points.
1. Even though companies usually save by hiring consultants, since they don't have to pay any benefits, and they are great for short-term projects where you only need somebody for less then a year. But in the telecom deployment field, projects can last for 2 years, and these consultants cost at least twice the salary of a employee. Plus, with an employee, it's easier to get away with not paying for overtime.
2. Employee layoffs, get rid of products with low margins, or non-essential staff like R&D and overheard administration. It's not wise to make your R&D department smaller, but in times of crisis, they are usually the first things to go since in the short-term, sales do not get affected.
3. This leads to mistrust with employees, but I have known cases where employees were pretty "loose" with expense reports. The temptation is strong to want to get a more comfortable airline ticket or hotel accomodation that costs more money. Even I was offered blank receipts by taxi drivers, and I had to fill in the details. I could have easily cheated the system but I didn't.
4. Freezing salaries saves 3-4% in labour costs alone.
(every company seems to be doing it..even the strong ones like Microsoft, this seems like just an excuse to please shareholders)
5. Consolidating helps lower R&D costs, helps lower the costs of creating patches and fixes, and improves the competency of staff since there is not too many software and hardware platforms to work on. But one must be very very very careful not to give the impression to customers/clients that this is a company with only one product line. There must be a differentiation factor so the illusion of having many robust products gives the customer the feeling of choice. The best way to do this is only to consolidate the basic structure, and then change on the superficial things (such as the look, the options, the colour, etc. of your product)
One of the most clever ways is in the microchip industry with Intel and AMD. The would sell a lower-end of their chips that were defective. For instance, nowadays you can have 4 chips in a single package. Well if one of them is defective, AMD was selling a special lower-end three chip version, without making it too obvious that it's in fact just a defective four-chip version. The same thing happened with "cache" with Intel. Cache is how much memory there is on a chip. Cache is made up of modules, when one of the modules was defective, Intel would sell the chip as a lower-end model.
Nearly every car manufactuerer does that too these days. Most car companies are actually two or three companies put together, so different companies within the same entity would sell different models but based on the same chassis from the same manufacturing plant. This helps a lot in cost savings for the automotive industry.
When you think about, even if these five points suck if you are an employee, these are actually excellent techniques that you can use for your own home or small business to save on money.
Being in the middle of this recession, I have seen creative ways into how companies are trying to save money. I have seen letters of employment being revoked anf leaving my friends jobless. Companies moving to a 4-day workweek (with the 20% cut in salary and still expecting no loss in productivity...), along with no longer paying for overtime. As well as the massive layoffs happening everywhere.
For one of my past employers, which is in the telecommunications sector, I have noticed these specific points being implemented:
1. Getting rid of expensive contractors and consultant engineers.
2. Mass employee layoffs
3. Scrutinizing all expense reports
4. Salary freeze across the board
5. And the one I find the most interesting...trying to consolidate their hardware and software to a single platform. Even the communication links between different hardware types is being moved to a single communication protocol.
So, let's analyze these 5 points.
1. Even though companies usually save by hiring consultants, since they don't have to pay any benefits, and they are great for short-term projects where you only need somebody for less then a year. But in the telecom deployment field, projects can last for 2 years, and these consultants cost at least twice the salary of a employee. Plus, with an employee, it's easier to get away with not paying for overtime.
2. Employee layoffs, get rid of products with low margins, or non-essential staff like R&D and overheard administration. It's not wise to make your R&D department smaller, but in times of crisis, they are usually the first things to go since in the short-term, sales do not get affected.
3. This leads to mistrust with employees, but I have known cases where employees were pretty "loose" with expense reports. The temptation is strong to want to get a more comfortable airline ticket or hotel accomodation that costs more money. Even I was offered blank receipts by taxi drivers, and I had to fill in the details. I could have easily cheated the system but I didn't.
4. Freezing salaries saves 3-4% in labour costs alone.
(every company seems to be doing it..even the strong ones like Microsoft, this seems like just an excuse to please shareholders)
5. Consolidating helps lower R&D costs, helps lower the costs of creating patches and fixes, and improves the competency of staff since there is not too many software and hardware platforms to work on. But one must be very very very careful not to give the impression to customers/clients that this is a company with only one product line. There must be a differentiation factor so the illusion of having many robust products gives the customer the feeling of choice. The best way to do this is only to consolidate the basic structure, and then change on the superficial things (such as the look, the options, the colour, etc. of your product)
One of the most clever ways is in the microchip industry with Intel and AMD. The would sell a lower-end of their chips that were defective. For instance, nowadays you can have 4 chips in a single package. Well if one of them is defective, AMD was selling a special lower-end three chip version, without making it too obvious that it's in fact just a defective four-chip version. The same thing happened with "cache" with Intel. Cache is how much memory there is on a chip. Cache is made up of modules, when one of the modules was defective, Intel would sell the chip as a lower-end model.
Nearly every car manufactuerer does that too these days. Most car companies are actually two or three companies put together, so different companies within the same entity would sell different models but based on the same chassis from the same manufacturing plant. This helps a lot in cost savings for the automotive industry.
When you think about, even if these five points suck if you are an employee, these are actually excellent techniques that you can use for your own home or small business to save on money.
Tuesday, February 10, 2009
The 3 Rules: Service, Quality and Price
My marketing prof who was also an MBA and successful business owner ( a bar) told me once that ALL BUSINESSES are rated on these three criteria:
The good can only do 2 well. The best do all 3 right.
He mentioned that McDonalds was one of the few that can do all three well.
Let me explain. Compared to other fast-food restaurants and even table restaurants, their service is provided quickly and courteously. I have seen more apathetic waiters and waitresses then I have ever seen bad cashiers at McDonalds. They can make a huge lunch lineup disappear in a matter of minutes. Their food is cheap and their quality is high. They are pros at what they do.
About the quality. I use to remember as a kid that people would spread rumors about what's in the meat.
"It's made of dark horse meat"
Even worse,
"They put worms in the hamburgers"
Well, after reading Fast Food Nation, the facts disprove all the fiction. They only use triple-A meat, in fact, they single-handily pushed the American cattle industry to increase their quality standards. (AAA-grade facility)
Not only that, but the food preparation is visible, unlike in a restaurant, where you have no idea what the chef is doing behind the scenes. Ever heard of anyone get stomach illness due to McDonalds? I haven't, but that's not the case for others restaurants.
They even support the cattle ranches of local countries, such as in Canada, they only purchase Canadian beef.
Heck, even their ads are creative:
Okay, so you may think I have a bias for McDonalds, but it's not cause of its food. I am biased because this company executes like a well-oiled machine. There were many hamburger makers in the 50's, but it was through the genius of Ray Croc who brought the idea of "manufacturing" hamburgers as if it were an assembly-line. Fifty years later, McDonald's is a 60 billion dollar company.
1. Service
2. Quality
3. Price
The good can only do 2 well. The best do all 3 right.
He mentioned that McDonalds was one of the few that can do all three well.
Let me explain. Compared to other fast-food restaurants and even table restaurants, their service is provided quickly and courteously. I have seen more apathetic waiters and waitresses then I have ever seen bad cashiers at McDonalds. They can make a huge lunch lineup disappear in a matter of minutes. Their food is cheap and their quality is high. They are pros at what they do.
About the quality. I use to remember as a kid that people would spread rumors about what's in the meat.
"It's made of dark horse meat"
Even worse,
"They put worms in the hamburgers"
Well, after reading Fast Food Nation, the facts disprove all the fiction. They only use triple-A meat, in fact, they single-handily pushed the American cattle industry to increase their quality standards. (AAA-grade facility)
Not only that, but the food preparation is visible, unlike in a restaurant, where you have no idea what the chef is doing behind the scenes. Ever heard of anyone get stomach illness due to McDonalds? I haven't, but that's not the case for others restaurants.
They even support the cattle ranches of local countries, such as in Canada, they only purchase Canadian beef.
Heck, even their ads are creative:
Okay, so you may think I have a bias for McDonalds, but it's not cause of its food. I am biased because this company executes like a well-oiled machine. There were many hamburger makers in the 50's, but it was through the genius of Ray Croc who brought the idea of "manufacturing" hamburgers as if it were an assembly-line. Fifty years later, McDonald's is a 60 billion dollar company.
Wednesday, February 4, 2009
Investing in a house 1
If you are a renter, it must have crossed your mind whether you should be investing that money by putting off all that hard-earned cash into a mortgage rather then your landlord's pocket.
Its an equation that seems so simple. It is obviously better to buy a house then to rent an appartment.
But what if I told you its not that simple.
First you need the downpayment (and there's no way you can get one of those zero down payment houses today becasue of the subprime mortgage mess in the states). Then you need to make sure you can actually pay off the mortgage each month.
Since renting almost always means a cheaper monthly bill, you can use the extra money that you would have spent paying off a mortgage, and invest it in a mutual fund. And the difference between renting and mortgag-ing (yes I know that's not a real word) can be so great that in 20 years, you can have enough money to pay off the house nearly in full without having to make all those interest payments.
Stay tuned for more details to come in the coming weeks...
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