Friday, November 30, 2007

Understanding Important Hidden Psychological Aspects of Rent vs. Buy Comparisons

This article, a third in a series, is about the softer side of rent vs. buy. These comparisons have become very popular and can easily be made using one of the many online calculators available. However, the psychological aspects of this comparison have yet to receive their deserved attention. (I still recommend reading this post about how to properly compare rent vs. buy financially as many calculators don’t make the correct comparison).

As you may remember a correct comparison of rent vs. buy should be made for the same property in the same time frame where the two options are:
1. Buy the property today and repay it through out the period.
2. Rent the property today and buy it at the end of the period.

The problem with the rent vs. buy comparison is, as always, the human factor. In order to compare rent vs. buy correctly some assumptions need to be made which are not at all easy to meet up with in real life.

These assumptions are:

1. We’re talking about the same property to either rent or buy
2. By choosing to rent through out the period you commit to save regularly:
a. You commit to saving your initial equity throughout the period
b. You commit to monthly savings instead of monthly mortgage payments

What are the difficulties with these assumptions then? It is a well known fact that when one rents one is able to afford a much more expansive property. This is also usually the case. Think about it. Have you considered buying the property you currently rent? Can you afford it? For a true rent vs. buy you compare for the property you’re thinking of buying.

Another problem is with the human inability to postpone pleasures or basically put: consumption. We all know available cash flows and moneys have a tendency to be consumed rather then saved. Think of the rent option where you’re not repaying regular mortgage payments but saving them instead. Doesn’t that ski trip look inviting? By committing to monthly mortgage payments you’re avoiding temptations.

Many corporations make use of debt in order to educate general managers. Think of a CEO with a huge cash surplus. This is obviously unhealthy as CEO’s will usually use those moneys to build “empires”. Shareholder use debt as a tool to discipline managers. If you lack the self discipline to save monthly instead of repaying a mortgage then taking a mortgage as a disciplining tool for saving is recommended.

There are more psychological aspects to rent vs. buy such as ownership and confidence but these have been discussed at length in many other places. Understanding the psychological assumptions of the rent vs. buy comparison is as necessary as understanding its financials.

Relevant Posts:

1. Why Taking a Mortgage Is Leveraging Your Equity: Understanding the Potential Risks and Benefits

Rent vs. Buy: Some Assumptions May Have a Significant Impact on Your Decision

Should you Rent or Buy a Home

image by mrbill

Wednesday, November 28, 2007

Why Taking a Mortgage Is Leveraging Your Equity: Understanding the Potential Risks and Benefits

Buying a property with a combination of equity and mortgage is actually leveraging your own equity. Leverage is essentially the use of borrowed funds to complete a transaction. Leveraged transactions hold significant potential benefits and, more importantly, significant potential risks. It is important to understand why leverage is the source of these risks and benefits.

In order to simplify matters let’s look at the following example:

1. John has 1,000$ he wants to invest in ABC Inc. (ABC).

2. We’ll assume two scenarios:
a. One where ABC goes up by 10 and John gains 100$.
b. One where ABC goes down by 10% and John loses 100$.

Investing his 1,000$ John has either gained or lost 100$.

Reading a blog post about leveraging John has decided to loan an additional 1,000$ at 5% from GoodWill-NoSoul Bank (GWNS). John now has 2,000$ to invest but he also has a loan to repay with interest. Let’s examine the results of the two possible scenarios:

1. ABC goes up by 10%: John now gains 200$, repays 1,050$ and is left with a net gain of 150$
50% more then he had gained without leveraging

2. ABC goes down by 10%: John has lost 200$, repays 1,050$ and is left with a net loss of 250$
150% more then he had lost without leveraging

This outcome is due to the loan taken which is repaid in all scenarios. This fixed loan payment causes the results of the scenario’s to vary greatly thus increasing the inherent risk in the transaction (measured usually by the statistical variance of possibilities).

It should be clear by now why buying a property with a combination of equity and mortgage is leveraging. In the case of sudden drops in housing prices, much like the current market situation, a borrower might find himself (or herself) in a very difficult spot, having not only lost on his equity but on the debt as well. The mortgage is to be repaid in all scenarios.

This result of leveraging equity with mortgages is also behind the current sub-prime crisis. This crisis is essentially a sharp drop in housing prices which caused sub-prime lenders immense losses on both equity and mortgage and left them with no ability to repay the loan taken.

Image by D'Arcy Norman

Tuesday, November 27, 2007

Rent vs. Buy: Some Assumptions May Have a Significant Impact on Your Decision

Rent vs. buy comparisons are very common and have been already discussed in length. However, the impact of several common assumptions on costs and opportunities has yet to be fully uncovered and explained. I’ve recently compared the two alternatives and have decided to share my experience.

We all know that in rent vs. buy the alternative cost of each option should be compared. When deciding to rent the primary cost is the rent itself. When buying a property the primary cost is the interest paid on the mortgage.

However, there are no less significant costs and opportunities to consider. We usually refer to these as alternative costs or opportunity costs. When considering these costs and opportunities we usually make assumptions and let the internet calculator do its thing. You must be aware your assumptions greatly affect the end result. One must use sensitivity analysis in order to examine the impact of these assumptions on the comparison as a whole.

When considering buying a property the most significant assumptions, other then interest rate on mortgages, are:
1. The alternative return on investment – Consider your equity invested in alternative financial assets. Assuming a 4% or 8% annual return rate on equity invested elsewhere amounts an ROI of 48% vs. and ROI of 115% respectively.
2. The prospected return on investment on the property bought – The assumption on the rate of return on your property is crucial. This is due to the fact buying a home with a mortgage is actually a leveraged buy which makes use of the bank’s money. Every percent returned is gained on the bank’s money as well. Thus a 0.5 % or 2% annual return rate on your house amounts to 5% or 25% increase in your entire property’s worth.

When considering renting a property the most significant assumptions, other then monthly rent payments, are respectively:
1. The return on equity (that was not used to buy the property)
2. The return on monthly savings generated by not buying the property

The significant affect these assumptions have on the end results is due to the following:
1. The nature of compound interest (The strongest force on earth according to Einstein)
2. The length of the prospective period examined in rent vs. buy (which actually kicks in

For a more detailed analysis of how to financially compare rent vs. buy correctly have a look at: Should you Rent or Buy a Home

Image by sufinawaz

Monday, November 26, 2007

Personal Finance Blogsphere Update

Carnival of Personal Finance #128 is up with some good posts. I was especially fond of the following:

1. Why passive investing beats active investing - This post by everything finance blog discusses one of the basic mistakes of both novice and veteran investors. I myself have written quite a bit about this point.

2. A healthy diet doesn't have to be expansive - This post by our family village refutes one of the basic myths about health foods. Indeed buying healthy food is expensive per product but it reduces the many expenses of unhealthy foods from candy and salty treats to health care.

3. Lessons from the dot-com bubble - This post by the investors journal has some everlasting market truths. Which lessons will we learn next is an interesting follow-up question.

The photo was taken by djinas

10 Things You Probably Didn’t Know about Chinese Business Culture

The recent awakening of the sleeping Chinese dragon has drawn many foreign corporations to China. These foreign corporations are lead by foreign executives who are ignorant of the more colourful Chinese business culture.The Chinese government has taken considerable action to acquaint the foreign businessman with Chinese business culture. However, there is still some unexplored territory left.

I read many stories of business meetings gone astray due to what appeared to be insignificant gestures. A senior executive was astound to see his efforts to stop by an important meeting on his busy schedule was actually taken as an insult. Another company handed out watches as gift to Chinese executives who where surprised by the reaction. Obviously these are more curiosities to be aware of then actual business but the lighter side of business is nothing to be trifled with.

This article is about the less known aspects of Chinese business culture and environment. I do not presume to be some sort of expert on Chinese culture. These are interesting little bits I picked around here and there. I do not know the reasons and sources for the following customs. I would appreciate your comments and sharing of knowledge very much. These are mainly for general knowledge.

1. Be careful with your sense of humour - Chinese businessmen are apparently cautious to people who tell jokes on preliminary and initial business meetings.

2. "No" will not be used in negotiations - It is uncustomary to directly negate anything in business negotiations. Be prepared to come up with creative ways and creative solutions to saying no.

3. Eating from the far side of the plate will render you greedy - As simple as it sounds.

4. Sticking your chop-sticks into your food is considered rude - Avoid sticking chop-sticks in your food in business meetings (or altogether). Practice eating with chop-sticks regularly.

5. Show happiness but do not display emotions or familiarity with senior executives - Hierarchy is strictly kept and is very important.

6. Calling cards are handed and received with both hands - Respect calling cards handed to you. Stock yourself with a decent amount of calling cards as you will hand them out often.

7. Patience is a virtue - Negotiations and deal closure might take longer then you are used to.
8. Don't hand out a watch as a gift - In Chinese culture watches relate to death.

9. Answering cellular phones during a meeting is customary - You should not take offence. However, your host will expect you to be attentive at all times.

10. Be wary of Chinese business culture but also be reassured as they are familiar with western business culture - Do not be intimidated or embarrassed. Faux-pas are usually forgiven. Business is business.

Friday, November 23, 2007

Economies of Blogging – Content and Blog Consolidation Due To Economies of Scope or: “Why I chose to change my blogging strategy”

In economics the term economy of scope is used to describe a competitive advantage of one company as a result of efficiencies associated with marketing and distribution. Economies of scope usually result in:
1. Reaching more people with each dollar spent
2. Family branding and product bundling
3. Further efficiency due to synergy between products

In my opinion the world of blogging and content is a very good case study for economies of scope. If we take a close look at blogging and content we find a very unattractive market, so to speak. The threat of entrants is very high as everyone may start a new content site or blog with ease. Customer bargaining power is extremely high as amounts of free and alternative content is abundant and of course so is the threat of substitutes as a result.

Nevertheless, out of hundreds of thousands of sites we see a few selected blogs or content sites emerge in every niche. How do they succeed where all others fail? The answer is two fold. Naturally these sites provide quality content which is updated constantly and meets the reader’s requirements. However, it is an illusion to believe quality content and timely updates will suffice. The difference lies in marketing and distribution.

Blogs and content sites which have successfully acquired a critical mass of content (and sometimes readership) have actually created a significant competitive advantage of economy of scope. Each new article or post published by any one of these sites is assured massive distribution and marketing which in turn will result in more interest in this site. Reaching critical mass of content and readership is very hard and requires a lot of work and investment.

For me personally writing is a hobby. The feedback I receive for writing online comes in three distinct ways: Page views, article sales or high article ratings. My writing strategy has been geared to generate either one of these three.

In order to do that I’ve been experimenting with several options available to online authors:
1. I’ve set up my own Blogger blog named Personal Financier.
2. I’ve published articles on Helium and Associated Content for page views and rating.
3. I’ve submitted article for sale on Constant Content and Helium.

The results of my experiments have been very enlightening. Here they are:
1. In three months I’ve posted 50 posts to my blog which has attracted 367 visitors who visited 656 pages and generated a whopping 4.5$ income.
2. In three months I’ve posted 36 articles on Helium, 3 of which to Marketplace. I’ve received a two star rating for my articles, sold one to marketplace for 60$ and received 4.5$ in page views.
3. In three weeks I’ve posted some of my 36 article on Associated Content for 600 page views or 0.83$ and a clout index of 3.
4. In two months I’ve submitted 17 articles for sale on Constant Content out of which I sold 6 for usage for 68.75$ total.

As a result of my performance I’ve decided to adopt a new strategy. I’ll be writing articles for sale on Constant Content as this venue is most profitable. Should an article not sale for unique use I’ll submit it to my blog, Helium and Associated Content for page views and on Constant Content for usage.

My performance strengthens the conclusions I’ve presented in this article. I’ve been posting quality content regularly to my blog and to content sites. Economies of scope enable the selected few to purchase quality articles and distribute them directly to their readership. I, the author, benefit from article income which would have never been generated through my personal blog and the content site benefits from scale and scope economies and generates income from advertisements.

I believe the strategy I’ve put forth is suitable to all competent authors who have been tempted to blog on their own for either exposure or profit. Submitting content for sale or for exposure to content site and blogs which have scope advantages is wise and economically sound for both.

If you can spare the time to market your own blog be prepared to put in a lot of work into blogging before getting the exposure you deserve.

Thursday, November 22, 2007

Investment Basics Carnival #1: Mutual Funds, Investment Psychology and More

Welcome to the first Investment Basics Carnival. This carnival is my initiative and will hopefully display great articles on investment basics. This first addition received a surprising 22 submission total. The selected entries are separated into categories. If you enjoy this carnival please help promote it on your website.

Mutual Funds

1. Larry Russell presents Where’s Waldo? - The illusion of superior professional mutual fund manager performance. posted at THE SKILLED INVESTOR Blog
2. Steve Faber presents - How to Find the Best Performing Mutual Funds posted at DebtBlog

Investment Psychology

1. Silicon Valley Blogger presents Taking The Emotion Out Of Stock Investing posted at The Digerati Life

2. Mark U Runta presents Breaking Rule # 1 of Investing posted at Smart Investing & Money Management

Transaction Costs

KCLau presents How to Minimize the Upfront Service Charge in Unit Trust Investment posted at KCLau's Money Tips


Market Poetry presents Ode to All Struggling Value Investors posted at Market Poetry

Personal Stories

Christine presents The Exchange Rate - The Euro vs The Dollar - The Declining Dollar posted at Me, My Kid and Life: An American Single Mom Living in France


Sagar presents 50+ Online Tools to Research, Select, and Donate to Charities posted at Credit Card Lowdown

Basic Concepts

1. Edith presents What’s a Cap Rate? posted at Stewart Hsu

2. Jeremy Wong presents Investment Types posted at Personal Finance Guide FinanceMind

Many Thanks to all contributers. I hope this carnival is off to a good start.

Wednesday, November 21, 2007

Iran's President Ahmadinajad On The US Dollar: "Worthless Piece of Paper"

Iran's president Mahmud Ahmadinejad said out loud what OPEC members have been discussing in closed doors (with an open mic, by accident). According to Ahmadinejad OPEC should stop selling and pricing oil in dollars as a result of the continuing weakness of the currency. Further more, OPEC members have experienced interest in converting reserves to other currencies.

Ahmadinejad's remark actually resulted in increased negative pressure on the American currency. Iran is walking a very tight rope signaling possible retaliations to US imposed sanctions due to its nuclear program.

The impact of OPEC converting to the Euro as a working currency is hard to predict. Oil is a commodity as any other. Commodity pricing should not change as a result of changing a currency. However pricing oil in euros combined with a continuing weakness of the US dollar will eventually result in higher oil prices which should up the pressures in the US for alternatives to fossil fuels. Is this a blessing in disguise?

Monday, November 19, 2007

Motivation Through Job Enrichment: What Are The Key Components?

Motivating employees is always one of every manager’s goals. Motivated employees contribute to productivity thus directly increasing profitability for the organization. Structuring jobs and roles correctly is very important in elevating the motivation of employees.

The main stream theory on motivation in general is based on Maslow’s needs hierarchy. Maslow’s constitutes a hierarchy of needs made of: Existence, Security, Social Relations, Esteem/Reputation, Autonomy and Self Realization. Every person strives to progress in the pyramid from existence to self realization. Motivation stems from the next unattained level. Each step forward is accompanied by satisfaction and each step back with frustration.

As most employees have realized the basic need in the hierarchy as existence, security and social relations motivation stems from the attempt to attain esteem, autonomy and self realization. Hence efforts to increase motivation should concentrate on providing employees with the proper chances and tools. Job enrichment is one of the most basic tools available.

The Job Characteristics model (JCM) proposed by Richard Hackman and Greg Oldham is a very influential model of job enrichment. This model is in compliance with Maslow’s needs hierarchy and tries to constitute job characteristics which will help motivate an employee in his quest for progress.

According to JCM there are five basic dimensions to job enrichment. The presence of these dimensions makes each job a platform of need fulfillment for the employee. Here are the five basic dimensions:

1. Skill Variety – A variety of tasks which require a variety of skills (not to be mistaken with many tasks which require the same skill).

2. Task Identity – Each task as clear and definite. Task identity should allow completing tasks and creating a sense of achievement.

3. Task Significance – Each task as important in the general scheme of the organization. Each task should also have perceived importance by other members of the organization.

4. Autonomy – Employee freedom to plan and execute decisions as one sees fit.

5. Feedback – Informative input to an employee on his or her performance by management and co-workers.

Creating these dimensions in a specific job could be challenging. Here are some suggested actions according to the model:

1. Combining Tasks – Combining tasks increases task significance and skill variety. An employee which handles various tasks needs do develop and adopt new skills and improve existing ones. For example, an employee for personnel may also be in charge of forming the personnel department’s goals for next year together with other related departments.

2. Forming Natural Work Units – Each task is regarded as several work units. In order to create task identity work units should be joined for possible task completion. If we take a look at many day to day processes such as bookkeeping or assembly line jobs it is easy to see each employee is under-motivated as his task is a very small work unit out of a whole task (Build a car). The larger the bundles of work units the more motivated the employee as he gets too see the fruits of his labor, so to speak.

3. Establishing Client Relationships – Establishing client relationships greatly enhances job autonomy as many decisions are called for on an everyday basis. Many more situations present them selves and allow employees to evolve through facing them.

4. Vertical Loading – Assigning more task variety and responsibility to a job.

5. Opening Feedback Channels – Opening feedback channels enables employees to receive valued information on their performance. This is very easy to achieve through timely evaluations, occasional personal chats, co-worker evaluations and more.

A manager’s intuition should play a key role in implementing this model. Managers often delegate authority and tasks to gifted employees. In turn these employees acquire new skills and develop old ones, show greater initiative and commitment and are usually highly motivated. Analyzing jobs through-out the organization using the JCM model will be very effective in creating more motivated employees for the organization.

The Carnival of Personal Finance #127 - Hosted by Moolanomy

I'd like to take the opportunity and thank Moolanomy for hosting The Carnival of Personal Finance #127 and choosing to include my article on Investing mistakes to avoid.
I've personally found the following posts very interesting:

1. The Dough Roller presents Slow Motion Retirement (or Retire Early, Retire Often)
2. Home Finance Freedom presents Payoff Mortgage v. Invest Stocks: Housing Myths Part 12
3. Advanced Personal Finance presents The Most Misunderstood Tax - The Estate Tax

Sunday, November 18, 2007

Update of Freelance Writing Income Online

I've updated my online freelance writing income.

I've been quite successful at constant-content and have sold 6 articles for usage licenses. It is really quite profitable as sums of 10$-25$ an article are very hard to get elsewhere.

On Helium there hasn't been a lot of personal finance publishers lately and page views have generated very little income so far (about 4.5$).

Associated Content's page views update every week so I'm unable to update page view income from AC.

My blog has began to generate some traffic (approx. about 20 visitors a day). Hopefully this will enable me to learn which content is more sought after by my readers.

Could You Tell If You Were Just A Brain In A Vat?

Movies like ‘Total Recall’, ‘Vanilla Sky’ and of course ‘The Matrix’ have already posed that question. In these movies a hero is trapped in a virtual reality so real he could not know the difference between being and being a brain wired to receive stimulations that create an identical alternative reality.

Being movies, they all ended happily for our prospected “brain in a vat” whether it is Kiano Reeves, Tom Cruise or Arnold Schwarzenegger. Schwarzenegger could tell it was no dream, Tom cruise chose to leave his lucid dream and Reeves, of course, took the blue pill.

But could one really know the difference between being and being a brain in vat? The concept of brain in a vat is a known philosophical thought experiment. In this experiment a brain sits in a lab, wired to a computer of sorts, and receives electrical pulses which stimulate the brains neurons to create a virtual reality full of feelings, smells, sights and sounds. The brain’s previous owner is oblivious to its current existence as a brain in vat as reality for him continues on as it has. Would you know you are now a brain in a vat living some scientist’s scenario of a life?

Regrettably the only answer to this question is no. This philosophical thought experiment is influenced by Descartes ‘Meditations on First Philosophy’ from which the famous “I think therefore I am” (Cogito Ergo Sum) quote is taken. Descartes is desperately seeking an anchor for his knowledge and beliefs. Descartes, before reaching his famous conclusion, deduces he can not rely on mathematical truths as some evil demon might have planted those inside him with a firm belief in their a-priory nature.

Another philosophical principle which plays here is Solipsism – Perhaps only I exist and all other are but an illusion. I can be sure of my existence but can I be sure of the others’? Solipsism, as the brain in a vat, has no good reply. One can not argue with the solipsist arguing you are just his imagination (and so are your replies).

Philosophers have tried to answer this thought experiment in unique ways. Hillary Putnam, a famous American philosopher, argued the brain in a vat could not have a thought about the vat it is in (His thought would only be of an image of a vat since this brain could not have the interactions required to picture the actual vat). This solution relies on theories of meaning and is quite unsatisfying.

The Causes of Organizational Commitment: How to Create the Suitable Environment

Organizational commitment is very influenced by organizational design. In order to create commitment in the organization managers must create a suitable environment for it to evolve.

In principal manager who wish to create a suitable environment for commitment must strive to adopt characteristics of an organizational design which reduces class identity and increases company identity.

There are several, independent, ways to achieve higher levels of company Identity. In this article I will discuss some of the most common and effective ones.

1. Fine hierarchy – The opposite of manager/ employee hierarchy is a type of hierarchy which is understated. A message of self efficacy should be relayed: “Everyone can become a manager”. As every message this message should be composed of three elements: The source, the message and the target audience. For example, in order to create a finer hierarchy, managers might adopt a more collective decision process such as consulting with a team. This does not mean it’s the group’s decision but sharing often yields better results.

2. Internal Job Market – An organization which creates an internal job market relays a vote of confidence in employee capability and skills. Naturally employees of such an organization will have a general sense of potential and direction thus enhancing commitment. Creating an internal job market can be created by making a significant share of promotions from inside the organization, holding on to employee’s from life and by creating firm specific skills which enable employees to become distinct professional in the organization.

3. Social Mechanisms – We all know Google, Cisco, EY and many others as good places to work for. One of the main reasons this organizations have become so attractive to employees is their success in creating the right social mechanisms. In Google spare time for personal activities is available, welfare activities and environment such as gourmet foods and what not is readily available to all employees. You don’t have to be Google to create an attractive environment for employees. Allowing for personal time (no phones or emails for a couple of nights), vacations and proper working environment would work effectively to create commitment in employees.

4. Social Values – An identity of an employee’s and an organization’s values is a powerful tool in creating commitment. An organization which adopts employee values such as environmentalism, social responsibility and awareness and employee support will earn plenty in employee commitment.

5. Job Satisfaction and Job Design – Creating job satisfaction for employees obviously influences commitment positively. Job satisfaction and commitment are sometimes two sides of the same coin. People need to know they are making some sort of difference in the world. The level of difference a person makes can be influenced by proper marketing, titling and authority. Another side to job satisfaction is to allow employees to express them selves and their skills. There is much more to creating job satisfaction: Allowing for personal growth, providing training and opportunities, utilizing technology and more.

Commitment to an organization is more then the salary paid to an employee. People look for supportive, challenging and rewarding work places and will readily commit to the proper workplace.

Thursday, November 15, 2007

Outsourcing: Why Outsource? Potential Benefits and Risks

Outsourcing has quickly become a commonly used tool in organizations. What has made outsourcing so popular? The popularity of outsourcing is well justified as it generates significant advantages. However, outsourcing has some inherent risks which should be identified and dealt with preemptively.

Why Outsource then? Organizations make use of outsourcing when a certain function has a potential to become more economic with little strategic cost to the organization. Outsourcing is usually used if one of the following applies to the specific function required:

1. Special skills are required and it is unwise to invest in their development within the organization – It is wise to outsource if it is not economically sound to invest in developing a set of skills. Another consideration should be the quality of skills developed in comparison to those available outside the organization.

2. Not a core-competence of the organization – If a specific function required to an organization is not a part of its core competencies or core strategy there is little sense in performing that function within the organization. Organizations carefully select focal points in adherence to their competitive advantage.

3. Need for constant technological improvement and upkeep – Technology requires high investments in maintenance, updates and r&d. If a technology is a means and not an end outsourcing should be considered as a specializing company will be more effective.

4. Specialization produces greater effectiveness and advantages to scale – Some functions have significant scale advantages. Outsourcing these functions will often result in better outputs with lower costs.

5. Improving organizational effectiveness by utilizing a third party – Sometimes outsourcing enables using the advantages of the third party company to the organization’s advantage (for example in negotiations, networks etc.)

6. Lowering organizational complexity for increased ‘managementability’- Outsourcing certain function may simplify the organization and enable management to focus on core-competencies and core-functions with greater clarity.

Outsourcing might have many potential benefits. However organizations should also be wary of potential risks. The following is a list of the common risks of outsourcing:

1. Information leaks - Obviously when a function is outsourced interface with another organization are set up. These may be a source for information leaks which might damage the organization’s ability to compete.

2. Losing the ability to re-establish outsourced functions - By outsourcing a function given up on. This results in losing professional know-how and infrastructure in case the organization decides to re-establish the function within itself.

3. Lowered employee loyalty - Obviously outsourced functions are performed by employees with little or no organizational relevance.

4. Inner oppositions to outsourcing - Outsourcing functions results in personnel changes. Naturally organizations should expect employee opposition to outsourcing.

5. Unclear borders for cooperation - Co operating with another organization is not a clear cut undertaking. There is a risk of creating unclear borders between the organizations.

6. Problems with quality, consistency and oversight - Outsourcing requires setting up an oversight function within the organization as there is a requirement for quality and consistency. Keeping an eye on outsourced functions is crucial to ensure the quality of product or service outsourced.

In today’s global and dynamic environment speed and effectiveness is important. Advantages to scale and learning curves force organizations to outsource functions and abilities which are not at the core of their business. Outsourcing holds many benefits but many risks as well.

The Carnival of Personal Finance #126 - Hosted by Million Dollar Journey

I'd like to take the opportunity and thank Million Dollar Journey for hosting The Carnival of Personal Finance #126 and choosing to include my article on Investing mistakes to avoid.

Excellent articles have been chosen to appear in the carnival and I urge you to take the time and visit.

Wednesday, November 14, 2007

How to Measure a Blog Posts Popularity - A Novel Idea

I've been posting quite a few about content sites. I've recently thought about an interesting idea of how to measure which topics are more interesting to readers.

I've been posting on Associated Content and Helium for about a month now. It occurred to me that Associated Content's Page Views or Helium article earnings can be used to measure the popularity of certain topics or issues. This can only be achieved, of course, if you have enough articles with relatively constant quality on various subjects.

In my case I found the following results which surprised me quite a bit:
1. 2 out of 25 articles, both dealing with managing employees, generated 33% of page views.
2. Further down the list 16 investment related articles generated another 50% of page views
2. Last came other personal finance issues like credit cards and mortgages with 7 articles for 18% of page views.

This astounds me as the two articles on managing employees where of the same relative quality as the others.

This finding has brought me to add a readers survey to my blog. I would appreciate it if you stooped and tell me which topics are of most interest to you as readers.

Tuesday, November 13, 2007

Economies of Content: Should you Post your articles to a personal Blog or to Content sites such as Helium or Associated Content?

This blog started out as a series of articles written for Helium. I discovered Helium by mistake and immediately discovered the joys of writing. After posting several personal finance articles to Helium an obvious thought occurred to me. Why not take these articles and start my own personal finance blog?

Having set up my blog I continued writing at Helium and also began posting the articles I’ve written to my blog. A couple of weeks later I found associated content and Constant-content and began to ponder the wisdom of posting to content sites vs. posting to your own blog.

Obviously the following tradeoffs need to be considered:

1. Exposure – Starting your own blog is easy. Getting exposure is the hard part. Posts to content sites gain exposure quite rapidly (depending on quality of course). Getting regular readers for you blog is another matter entirely which requires to put in extra time and marketing efforts.

2. Profitability – If you are posting for additional income a careful consideration of where to post is required. Content sites use different revenue models which suit different authors. A more detailed look and a good comparison of these models can be found here. The main consideration here is how good a writer are you and how much time can you spend on a personal blog. The financial comparison should be income per time spent.

Publishing content on your own blog can be very profitable as Adsense pays generously for content oriented advertising. However, as aforementioned, marketing efforts and time is required to generate significant income.

In my opinion posting for page view payments is a waste of time.

More competent writers should not suffice with posting to Helium or Associated Content for page view payments. Competent writers should look at Helium’s Marketplace, Associated Content’s advance payments or Constant Content’s author-publisher platform.

Less competent writers should try and produce massive amounts of content for a personal blog and after a while post to content sites for page view payments.

I’d dare say more competent writers would do better off selling content then writing a personal blog financially wise and income per time spent. There are other advantages to having you own blog of course.

Monday, November 12, 2007

Associated Content's Clout Index and Helium Stars: Brilliant Motivators

I've been posting articles to Helium and Associated Content for a while now. While this might lack complete economic reason the joys of writing are many. However, I've recently began to reflect upon AC's Clout Index and Helium's Stars as marketing tools.

It is fairly obvious content sites must have a way of distinguishing authors of quality. Helium awards stars as a function of ranking and quantity and AC has their clout index to indicate how many view an author has received. The simple ingeniousness behind establishing these indicators is creating another motivation for authors, other then money to posting quantity and quality.

If you've been posting to Helium or AC stop and think about it. Haven't you been trying ranking and writing for more stars for the sake of the stars themselves? Haven't you been posting to AC like crazy to receive recognition in the form of a little Saturn like dots? Haven't these indicators became a goal in themselves?

As humans I believe we constantly look for recognition in various forms. Posting to content sites often begins as an economic effort but endures thanks to these little shining articles of recognition.

Valuation Methods – Discounting Cash Flows vs. Using Multiples

Discounting cash flows (DCF) is the preferred way to valuating a firm’s worth but is a lengthy process which requires skill and expertise. Using multiples for valuations is convenient and straightforward but it can also be very misleading. And that is an understatement.

In DCF a firm’s future cash flows are used to determine its current value by adjusting for risk and time. Multiples such as profit, capital, assets and sales are used to determine values of companies by comparing similar companies to one another and by direct multiplying. Multiples are also used to compare various companies in terms of profitability, effectiveness and more. The most common use of profit multiples, for example, is in comparing valuations of similar companies in the same industry.

For a better understanding of valuation techniques and the appropriate use them a look into the pros and cons of each valuation technique is required. Obviously the shortfalls of one technique are the other’s advantages. Here are the main points of reference between the two techniques:

1. Simplicity – Using multiples is simple. Extrapolating data is easy and multiplying is very basic math. DCF requires skill and expertise and is much more complicated technically.

2. Informative - Using multiples often yield significant data in a very short time. DCF is also very informative but requires time to be invested. Using multiples also help in quickly comparing two companies and might yield more relevant information.

3. Forecasting - Unlike DCF multiples use existing date which is, of course, their Achilles heel. Using DCF requires forecasting future cash flows which are, at times, quite difficult.

4. Sensitivity to various accounting choices and alternatives – Using multiples is very sensitive to various accounting choices and alternatives. Different methods of revenue recognition adopted by a company might distort a profit multiplier quite badly. DCF does not suffer this shortfall as a company’s cash flows are not affected by accounting for revenue for the long term.

5. Sensitivity to unique events – Using multiples is also sensitive to unique events such as unique revenues or expanses which should be corrected, valuation wise. These one time occurrences will affect multiples and could have very significant implications. In DCF these one time occurrences are cleaned out as only cash flows matter.

6. Unique future circumstances - Multiples rely on past data. A company just might have significant potential or benefiting circumstances which should be taken into account in a valuation. In DCF future circumstances are accounted for through cash flow forecasts. A potential for market expansion would be reflected in future cash flows.

A direr problem with using multiples is that the search for similar companies often leads us to compare different companies entirely. In order to really identify similar companies we need to carefully examine growth, dividend pay-out ratio, discount rate and beta (Theory wise).

To conclude, using multiples is appropriate when “quick and dirty” analysis and benchmarking is required. When a thorough diligent valuation is needed using DCF is the only way to receive more reliable results.

Sunday, November 11, 2007

Israel to Support New Electric Car Initative

The Israeli government has announced its support of an electric car initiative named "Project Better Place". The initiative is headed by Shay Agasi, a former senior VP in the software giant SAP. The initiative has already raised approximately 200 million dollars from strategic investors.

The innovative strategy adopted by the company is to create a business model very much the same as the one used by cellular companies. The company will deploy a vast network of charging stations across countries which will enable it to sell cars cheaply with binding, long term, recharging contracts.

This strategy will be complemented by its implementation in small, island like countries such as: Japan, Denmark, Hong Kong and Israel.

In my opinion this will be a very interesting initiative, well worth observing. The potential benefits of this initiative are obvious to everyone - reducing green house gas emissions and, of course, reducing global dependency on fossil fuels and the countries that produce them and

Saturday, November 10, 2007

Content Sites Compared: Helium, Associated Content and Constant Content

This blog started out as a series of articles written for Helium. I discovered Helium by mistake and immediately discovered the joys of writing. After posting several personal finance articles to Helium and after starting my own blog I found associated content and Constant-content. The following is a summary of the comparison of these content publishing sites:

Constant Content
Constant Content strategy simplified is selling quality articles for publishers for either usage, unique of full rights use.

Constant Content has high quality standards and examines every article submitted. Authors name their price for either usage, unique or full rights use and get paid when publishers buy their articles. Prices for 500 word article vary for usage (7$-15$), unique (50$-70$) or full rights (70$-90$). Authors are paid 65% of the price.

Constant Content is more suitable for competent established authors which have the ability to produce quality content.

Helium’s strategy simplified is generating amounts of content and letting authors rate and sort for quality.

Exposure wise Helium is second to associated content. Helium has three main revenue generating channels for authors:

1) Pay per view – Helium pays a writer according to the number of views the article written receives. High rated article obviously generate more revenue. Helium pays around 1c-2c per view.
2) Contests – Helium authors can participate in contests which require posting a considerable amount of quality articles in a short time.
3) Marketplace – Helium authors can submit articles for publishers requests. Leading articles are selected, published and paid for.

Helium is more suitable for:
1) Beginners and less competent authors as content is accepted and published instantly.
2) Authors which are able to generate massive amounts of content.
3) Quality authors which target Marketplace requests.

Associated Content
Associated Content’s strategy simplified is generating amounts of quality content by screening.
Associated Content has three main revenue generating channels:

1) Advance on articles – Associated Content pays authors in advance after screening articles. Each article accepted receives a payment depending on various paramenters. These payments may very but are approximately 2$-7$ each.
2) Performance pay – Associated Content pays a writer according to the number of views the article written receives. High rated article obviously generate more revenue. Associated Content pays 1.5$ for every 1,000 views (0.15c per view).
3) Contests – Associated Content also holds contents where authors can win cash prizes.

Associated Content is more suitable for:
1) More competent writers which are able to pass quality screening.
2) US resident’s as they are the only ones eligible for advance payments.

Basic Human Rules for Creating World Wide Movements

Tim Castree has recently created a difference. Mr. Castree is the CEO of Leo Brent Australia and has successfully turned the lights off at Sidney Australia for one hour – “Earth hour”. 2.2 Million People participated in this initiative that resulted in a decrease of 10.2% in Sidney carbon emissions.

According to Castree there are seven basic human rules for creating world wide movements such as facebook or Earth hour which are first and foremost about marketing:

1. The need to be a part of something – People are imprinted with a strong urge to belong and follow.

2. Identifying with successful people – Recruiting celebrities for people to identify with.

3. Self expression – People need and want self expression. Creating a buzz and excitement is necessary. An issue should be made accessible to people.

4. Work is not divided equally – Game theory describes how people tend to do less in larger groups. The wisdom is letting passionate people lead and others to join.

5. Motivation and inspiration are key – fear and shame are not adequate drivers.

6. Change should be made in small portions – Small and feasible changes quickly become a process.

7. Share achievements – Participants should feel rewarded.


Thursday, November 8, 2007

6 Tips on How to Make yourself a Desired Employee

I doubt there is such a thing as an ideal employee as everything in life is context related. There are however key characteristics of employees which are most desirable by organizations.

Positioning and branding one self as having these characteristics is a right step on the way to success:

1. Professionalism – First and foremost an employee is hired to perform a task or service. Professionalism is the very fundamental requirement from any desirable employee.

2. Curiosity – An employee should be curious of his job and his surroundings. Employee and organizational evolution stems from employee curiosity and the drive to explore processes and methodologies.

3. Solution oriented – A solution oriented employee is an asset. Most people tend to focus on the problem and to seek guidance and counsel. Some, if mentored, can understand and adopt solution oriented behavior which requires self-confidence and assertiveness. When given an assignment or issue to address a solution oriented employee acts as a fire and forget missile and return with results. These might require further tuning but is much more valuable then an employee which constantly checks back with more issues, clarifications and guidance.

4. Courageousness – Strictly linked to #4 an employee should take calculated risks and make independent decisions. An employee should not be completely dependent on his superior for guidance and solutions.

5. Ambitiousness – A striving employee is an employee which sets goals, has long-term vision and endurance and identifies with the organization.

6. Not yes-mans – Surprisingly, yes-mans are undesirable employees. Many managers state that yes-mans, as easy to manage and control as they might be, are undesirable to the organization in the long-term. This sort of employees makes fine junior level employees but lack of disagreements and conflicts is harmful in senior executive levels. Managers require challenges in order to affirm decisions or adopt new points of view.

Sunday, November 4, 2007

Using Multiples for Valuations: Pros and Cons

Using multiples for evaluations is convenient and straightforward but it can also be very misleading. And that is an understatement.

Various multiples such as profit, capital, assets and sales multiples are used to compare various companies in terms of profitability, valuation, effectiveness and more. The most common use of profit multiples, for example, is in comparing valuations of similar companies in the same industry.

The advantages of using multiples are obvious:

1. Simplicity - Extrapolating data is easy and multiplying is very basic math.

2. Informative - Using multiples often yield significant data in a short time.

3. Does not require forecasts - Unlike other methods of valuations multiples use existing date (which is, of course, their Achilles heel).

However, one must also pay careful attention to the shortfalls of using multiples:

1. Sensitivity to various accounting choices and alternatives - A different method of revenue recognition adopted by a company might distort a profit multiplier quite badly.

2. Sensitivity to unique events - Unique revenues or expanses which should be corrected, valuation wise, will be effect multiples. These unique events could have very significant implications.

3. Ignores unique future circumstances for the company - Multiples rely on past data. A company just might have significant potential or benefiting circumstances which should be taken into account in a valuation.

4. Ignores various other issues

A direr problem with using multiples is that the search for similar companies often leads us to compare different companies entirely. In order to really identify similar companies we need to carefully examine growth, dividend pay-out ratio, discount rate and beta (Theory wise).

A much more preferred valuation method is of course DCF (or Discounted Cash Flows) which I will discuss in some length in the future.

Saturday, November 3, 2007

Understanding the difference between investing and gambling

While this title sounds intuitive many so called investors are in fact gamblers. In order to substantiate the difference between the two we need to a closer look in to the basics of investing.

When we invest money in a financial asset we are basically risking a sum of money for potential future return. Financial assets vary by risk and return. The latter two are tightly bound in a reverse relationship the higher the risk the higher the potential return. For example, some of the least risky financial assets (or risks free) are cash deposits and government bonds where the chances of losing your investment are slim and returns are known at the time of investment. At the other hand we have options and derivatives which offer high risks with high potential returns.

Now, what exactly is risk of a financial asset? Think about any raffle or draw. A financial asset is very like one. A coin toss for example has a 50% chance to land on tails or heads. Buying a specific financial asset holds the same sort of risk due to the uncertainty of financial outcomes. A stock, for example, might be priced at 10$ while it's actual worth is 5$ or 15$ depending on certain assumptions. These might turn to be true or false in certain scenarios. This certain scenarios have creation probabilities of success.

When buying a specific financial asset, like a stock, we are basically gambling on the financial results of that stock. The odds might be in our favour as we have analysed the firms finance and business but we are still talking about odds or risks.
So, whether we like it or not, buying a specific financial asset is gambling.

What is investing then?

Investing is making use of statistics by participating in many small draws with favourable chances over a long time - Diversification and Long term investment.

Think about betting 10,000$ on one coin toss with the possibility of winning 25,000$ and loosing everything. Now think about betting 1$ on each of 10,000 coin tosses with the possibility of wining 2.5$ and loosing 1$ each time. That is diversification in a nutshell. While participating in both bets yield, on average, the same gain (7,500$) the second bet seems much more inviting. The appeal of the second bet is due to the fact each one of the 10,000 bets is a small version of the large one thus reducing risk of losing everything in one big bet.
Simply put, a diversified portfolio is a portfolio which has many "bets", each with a relatively low investment when compared to the sum of the portfolio. The risk level of the entire portfolio can still be high (all stock for example) but a diversified risky portfolio is, of course, better then having just a risky portfolio.

Diversification is one of the most basic tools of investors. Diversification will enable your portfolio to minimize specific risk (Not to be confused with market risk of the portfolio), lower the portfolio's variability and change over time and help generate better return on investment.
The other side of investing is holding on for the long term. Buying a financial asset for 1 minute, for example, is much like placing a bet on a roulette table as specific risks are the highest possible (it might go up or down with even chances for example). Buying financial assets for the long term smooths over those specific risks and leaves us with the stock's business risk.
By combining diversification and long term investment we reduce specific risks to a minimum this becoming investors and not gamblers.

Creating and managing effective teams in the workplace

Teams have the potential of exponentially empowering an organization as every member completes the other and in turn creates synergy. Creating and managing effective teams is a challenge worth taking on as the benefits of synergy are a great reward.

This article will offer tools and thoughts on how to create and manage effective teams in the workplace.

Management theory identifies a team as 3 or more members with the opportunity to create hierarchies and interactions amongst them (therefore a large group of people is not a team).

There are three distinct types of teams:
1. Organic teams - Teams which are supported by an organizational structure.
2. Project teams - Teams which are assembled for a specific project.
3. Non-organic teams - Teams which are assembled in an organization for a specific process or task or multi-disciplinary teams.

In every team the manager plays a role in which professional as well as procedural guidance holds an extremely important place.

Effectiveness of teams can be described as effectiveness compared to the target set at the forming of the team or as effectiveness compared to resources.

What we look for in effective teams is the Synergy. Synergy is what separates a good team from just a team and what enables team based organizations to create a viable competitive advantage over time.

In order to create and manage effective teams a manager must work to enable the advantages of a team to bloom. A manager of a good effective team must use the following characteristics to most benefit the organization:

1. Use the differential knowledge of team members - The sum of knowledge in a team is obviously greater then of any individual. Moreover, differential knowledge creates that sought after synergy.

2. Enable diversity of opinion and approach - Different team members have accumulated different experience and to solving problems. Use that resource in order to address issues in a variety of ways.

3. Acceptance and commitment - Being a part of a process or team creates acceptance and commitment to the team and to its goals. Encourage the team to share and make use of every team member in order to create that commitment.

4. Offer team members a stage to show intellectual abilities - Team members will flourish if given the opportunity do express themselves.

5. Do not be afraid of disputes - Disputes lead to growth in a team.

A manager of a good effective team must also be wary of the following unwanted characteristics of teams:

1. Avoid group pressure - Try to minimize group pressure and dominance of certain members. Group pressure effects free thought and expression subduing great possible ideas.

2. Do not let one member take control over a team

3. Politics should be avoided - Do not enable politics between team members. Compromises made using political power harm the team’s goals and effectiveness as they might not be the optimum outcome of a team.

4. Keep the original goals of the team at the centre - Many teams naturally shift the centre of attention to other issues and goals.

5. Avoid group think - Group think is one of the most dangerous characteristics of teams and should be avoided at all costs. Group think usually leads to unwanted solutions and can severely harm an organization.

Utilising the tools mentioned above will help create synergy in a team as a result of mutual fertilization of ideas. This process is as intuitive as it might be analytical.

Friday, November 2, 2007

How to manage change in business

Many potentially good initiatives fail due to a lack of strategy and misunderstanding. How should change be managed?

While the purpose of the initiative is often clear the way to implement it is shrouded in mist. Many organizational change initiatives often fail at implementation. While the benefits of the process are usually very clear and understandable it is a whole other matter getting the organization to willingly adopt the change.

As any process organizational change must begin with a strategy. What is the purpose of the change process but also: How to market it, how to introduce it to the organization and how to ensure employees and co-workers will willingly adopt it?

A few common mistakes in managing change have been mentioned in Laurent Keller Johnson’s article for Harvard Business Monday Morning (Leading Change and Succeeding). The following are common mistakes of poorly managed change processes:

1. Take the time to study organizational culture

Change will not happen on its merits alone. Furthermore, even though a process of change might offer much more to the organization or to its employees it will generally be regarded suspiciously. This is human nature. We are creatures of routine and habit. We fear the unknown. Thus, when managing change one must carefully examine organizational culture and understand the finer subtleties in order to better introduce change into the organization.

2. Get management commitment to change

No process of change will succeed without the commitment of senior management. A clear message regarding the process of change should be heard through out the organization. Employees and co-workers need to know the change is welcomed and required and they are a part of its success.

3. Take the time to identify opposition to change and subdue it

Identify the major oppositions to change and adopt to subdue it. No process of change will succeed with the worker’s union objecting to it or not being a part of it, for example. Take the time to meet and discuss change with the oppositions. More often then not this process will benefit both sides and lead to better results.

4. Set up a good implementation team

Implementation is key in processes of change. No process of change will succeed with out constant follow up and a tight implementation. Change requires close attention, and accompanying the organization and its members through. Employees and co-workers will always revert back to old routines with out proper guidance.

5. Identify good candidates for leading change through out the organization

Identify agents of change through out the organization promotes the process of change enormously. These agents should be leaders and central members of the organization look up to by other members.

Common sense advice for credit card use

The use of credit cards is very convenient but without a good level of consumer awareness might become a highway into financial distress.

Credit cards are a very efficient payment method as you can keep track of all your purchases, make use of promotions and of course do without cash and checks and the logistics involved. However, for the unwary, credit cards are also means of encouraging higher consumption which is not always needed.

Educated consuming is always recommended and is strongly advised in the case of credit cards as well.

A couple of do’s and don’ts for a more efficient use of credit cards:


1. Do not pay on installments
Paying on installments often helps buy that desired item today instead of in a couple of months. But paying on installments also has a few major disadvantages. Paying on installments creates an illusion of extra funds which, in turn, can be used to purchase another item, on installments of course. This method of purchase quickly leads to lose of control over expanses and results in a tight budget for the upcoming months as your paycheck is already spent.

2. Do not pay using credit
Interest rates on credit are quite high using credit cards. The accumulating interest is significant.


1. Use one credit card
Having more then one credit card is a risk. The use of one credit card and one alone is crucial in order to manage and control your expenses, credit lines and more. Having more then one credit card might result high debt and tight budgets.

2. Try to use your credit card for fixed costs alone. Use cash for variable costs
Using credit cards for expenses such as food, gas, electricity and communications will help you take advantage of the benefits of credit cards with out losing control over expenses. Using cash for variable costs such as a one time purchase would help you better control your budget as you only buy what you can afford.