Personal Finance Blog by Debit versus Credit

Cash In On The Economy’s Problems

August 27, 2008 | Filed in: Investing | 5 comments

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The most unintelligent thing that you can do with your money during an economic downturn like the one that we’ve been facing is to cash out, stand back and wait until the smoke clears.  It seems like an obvious thing to do to so many people.  But by doing so you are not only taking away from current earnings (by investing when the market is down) but you are taking away future earnings as well.

To learn more about investing and how to cash in on economic problems we might benefit by taking lessons from the world of business and the Oracle of Omaha.

A Smart Company Uses A Recession To Their Advantage

What do you expect a company to do during a recession?  Take your favorite clothing manufacturer (or any other business, i.e. video game company, restaurant, etc.) for example.  Over the past six months have they spent less or more money?  Do you notice them advertising more or less?  You may not know if they’re spending more or less, but you probably have a good idea on if they have been advertising more or less.  If they have been advertising less you would probably assume that it is because they are trying to cut costs during this downturn.  After all they’re probably selling less and marketing seems like the most obvious thing to cut first, right?

Wrong.

A smart company uses a recession to their advantage.  They should never cut back on advertising.  They might actually consider increasing their marketing budget.  They should be more picky on the quality of their marketing, but if they want to be more successful they need to maintain - or increase - their current level of marketing.

Think about it this way.  Let’s say that you and I own a company.  We sell trinkets to consumers.  We’ve been affected by the slow economy, just like everyone else.  We have maintained a steady budget in the marketing department over the past four years.  However we are competing against another trinket company who has been able to capture a larger market share than we have.  Cash is slowing down and we are considering cutting our marketing costs, just like our competitor has done.  Do we do it?  Absolutely not.  Our competitor has decreased their level of permeation among the public.  They’ve cut the number of advertisements in half!  We should take advantage of this and put our name out there even more than before.  By doing this we will ensure that the majority of the trinket sales are coming to us and even more we are ensuring that once the recession ends and people begin again to buy trinkets on a much more regular basis they will be looking to us to purchase them.  They know our name.  We kept it out there.

Our company not only succeeded, in the short term, by continuing its “investment” in advertising, but it also managed to ensure even greater long term success.

A Smart Investor (Likewise) Uses A Recession To Their Advantage

Just as a company should be smart about investing (through the mediums of marketing and advertising) in order to place themselves in a better position for the future, so should an individual investor be smart about investing (through the mediums of stock & bond exchanges).  No one has ever been better at investing than the Oracle of Omaha, and likewise no one has ever said it better…

Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it. -  Warren Buffett

Bear with me on my analogy.  Just as a company uses market fluctuations to their advantage, so should the average person.  Why let a little bit of uncertainty get in your way?  Sure you might not know who is going to be President of the U.S. next year.  That decision alone may have an impact on the stock markets.  But are you investing in the stock markets, or are you investing in a business?  Warren Buffett prefers to invest in business, and frankly he’s the rich one.  Surely we could learn a little from him?  As he said you should “profit from folly.”

We have seen some severe market fluctuations over the past year.  This is scary and will always be scary.  It’s best to hold tight and hang in there.  Just because we’re facing a recession does not mean that you should stop investing, or worse pull out of your investments.  Do as Warren Buffett does.  Even in the midst of a recession he has been continuously investing.  Why should you do any different?

Technorati Tags: recession, stock market, investing, money, warren buffett, business

Tags: Business/Entrepreneurship, Investing, recession, warren buffett

IndyMac Bank Falls

July 14, 2008 | Filed in: Business/Entrepreneurship | No comment

It’s not every day that a multi-billion dollar bank fails and is taken over by the FDIC.  However last friday (July 11th, 2008) IndyMac Bank was seized by federal regulators after it was deemed illiquid and unable to continue on with business as usual.  As you may have read elsewhere The Office of Thrift Supervision has said that it transferred IndyMac’s assets to the FDIC because it did not think the lender could meet its depositors’ demands.  Here are some interesting facts about the bank and its failure:

• IndyMac had $32.01 billion in assets as of March 31
• The bank is the second-largest financial institution to close in U.S. history
• IndyMac specialized in Alt-A loans - loans which required very little proof of income or assets

Why Did It Fail?

I could argue until I’m blue in the face about what caused IndyMac Bank to fail, but I’d like to stick to the facts here.  First of all we’ll focus on the fact that they specialized in Alt-A loans.  These loans, although not subprime, are essentially “liar loans” considering that income and assets did not really need to be proven.  It would be safe to say that those who were applying for this type of loan did not have the means to legitimitely purchase the real estate that they were interested in, but caught up in the hype of the housing boom decided they could handle it for six months until they were able to sell said property for a nice hefty gain.  Of course we all know what happened then - and is still happening.  The “boom” turned into a bust.  Property values have been dropping drastically and as people were unable to unload these properties many of them have been forced to either foreclose or walk away from their purchases.  This in turn has taken a nasty toll on IndyMac Bank and their income statement & balance sheet.  To put things into perspective this bank lost $614 million last year, mostly coming from losses related to these Alt-A loans.

Of course huge losses are going to take a toll on any financial institution, no matter their size.  When banks are faced with liquidity crises they have to turn to several places in order to build up their cash deposits.  They need new depositors, they need investors and they often turn to the Federal Reserve to take advantage of their term loans, such as the discount window.  It would be safe to assume that IndyMac Bank had been following all of these channels in order to remain liquid enough for daily operations.  Somewhere along the line, however, something went wrong and they lost over $1 billion of their customers’ deposits.  Usually always the cause of bank failures IndyMac Bank experienced a run.  Within a matter of weeks customers had pulled out $1.3 billion in deposits.  This unfortunately was the root cause of their inability to function and hugely related to their failure.

The Irony Of Self-Fulfilling Prophecies

The part of this story that I was most interested in was not the fact that such a large bank failed but that it ironically was faced with this run after a politician issued a public letter (released on June 26) essentially stating that regulators should have been more focused on IndyMac and that they were facing collapse.  In the 11 days following this letter IndyMac Bank was stampeded with customers demanding to withdraw their deposits.  Hence the run on the bank.  It’s debatable whether IndyMac would have been faced with this run if this politician would have said nothing publicly.  He of course later followed up saying that the run on IndyMac was not his fault and that it was due to long-standing practices by the bank.  Obviously the root cause of their failure was their business practices, but it seems to me that if it weren’t for these remarks that IndyMac would as of today still be standing as a business.  They probably could have made it through these rough times with a little help from outside investors and The Fed.  They didn’t however.  I’m calling irony and self-fulfilling prophecy.  What do you think?

Tags: Business/Entrepreneurship, IndyMac Bank