Disruptive technology shakes up the norm. It unexpectedly displaces an established technology and forces the standard man outside of his comfort zone. Often arising during financial crises, disruptive technology sprouts new inventions and increases efficiency. Often in the midst of this chaos wild predictions are made about the future. On March 22, 1876, the New York Times made this prediction: “Thus the telephone, by bringing music and ministers into every home, will empty the concert-halls and the churches.” For an investor, disruptive technology has the following important implications – big opportunities and accompanied with the need for intelligent deduction. The catch is, traditional Blue Chip companies usually make incremental changes rather than disruptive ones. This causes them to risk loosing market share to upstart companies. They become what I call “Black and Blue Companies.”   For more information on all of these topics, I encourage you to listen to About Money, a weekly podcast and radio show. You can also follow us on Facebook and Twitter for blog updates, podcast news, and more! I want to hear your opinions; please leave a comment below and let me know your thoughts.  

Have you ever gotten a particularly nasty infection? The kind of infection which won’t go away until your doctor prescribes antibiotics? I have. It’s magical what those little pills can do. Yet in 1918 when WWI was ending, there weren’t any magical cures for disease. The Spanish Flu took the lives of an estimated 50 to 100 million people. It often killed within 48 hours of its victim’s first cough, filling their lungs with fluid. The epidemic triggered years of unfruitful research. Scientists in small labs around Europe worked with samples of the Spanish Flu virus. However, it was in Scotland where Alexander Fleming had a break through. In 1928, Fleming took a vacation from his Petri dishes. Leaving the windows to his laboratory open, he came back to find a green mold growing on his samples. We know this mold as penicillin. Turning mold into medicine wasn’t easy. It was a temperamental process with an extremely low yield. The isolation and extraction process was very difficult. It took almost a decade and a half for penicillin to be mass-produced. For the next 50 years, drug discoveries happened in nearly the same trial-and-error method as Fleming’s. Real changes in drug discovery came when James Watson and Francis Crick identified the DNA-helix – the molecule that carries genetic information from one generation to another. When I first heard about the helix, I remember thinking, “So what?” How wrong I was! The helix led to biotechnology and revolutionized the drug industry. With biotechnology, drugs which were once stumbled upon are now engineered.   For more information on all of these topics, I encourage you to listen to About Money, a weekly podcast and radio show. You can also follow us on Facebook and Twitter for blog updates, podcast news, and more! I want to hear your opinions; please leave a comment below and let me know your thoughts.  

Did the Great Recession make you weary of real estate investments? Or, were you among those who benefited from short sales and foreclosures? Nearly all of us were hit by the economic fallout. While this might make us shy away from investing, it’s important to remember every economic problem creates the potential for economic gain. Making smart decisions as we move forward requires a firm grasp on where we’ve been. Many historical factors can help intelligently influence our understanding of current and future markets. Here are a few things to understand about the housing market: Collateralized Mortgage Obligations In 1983, Gordon Taylor and Dexter Senft from Saloman Brothers developed the idea of bundling mortgage payments into $1000 increments which they sold to investors. These bundles became known as Collateralized Mortgage Obligations. How did this create a profit? For example, if a mortgage had a seven percent interest rate, they paid investors six percent. This was good for banks because they could get money from investors to make loans on which the banks would make a margin. They were also able to spin the risk off to the investors. If borrowers defaulted on their loan, it was the investors who mostly lost. This development was also good for homeowners because it created a pool of money from which they could borrow to buy a home. And, it was good for Wall Street because they profited from the fees this process created. Collateralized Debt Obligation Spring forward roughly 20 years. The principle of Collateralized Mortgage Obligation was expanded to more than just home mortgages. This became known as the Collateralized Debt Obligations. Loans (for anything from homes to cars, planes, vacations, and boats) were bundled into bonds called Tranches. Think of Tranches as building blocks, stacked one on top of another. The first money to come in paid off the top block and so on and so forth. Meaning, the bottom Tranches had the most risk. Lenders were able to get Tranches rated by rating agencies which used the historical default rate on mortgages to determine the bond’s worth. To cover the potential default from borrowers, a few additional mortgages were added to the bond beyond the bond’s determined worth. Thus, the bond appeared to be a foolproof investment. Unfortunately, if too many borrowers defaulted, bond holders took a cut. REPO In the 1930s, Congress and the President signed into law the Federal Deposit Insurance Corporation (FDIC). This insured individual accounts up to $100,000 should a bank fail. However, in the 1970s depositors began carrying much higher balances, in the $10 to $100 million range. These large depositors wanted insurance. To insure depositor’s money, banks created REPO (short for repossess). REPO normally consisted of Collateralized Mortgage Obligations and Collateralized Debt Obligations. Adjustable Mortgage Rates Adjustable Mortgage Rates were created out of the big push to sell more and more homes. Teaser rates offered low mortgage rates, such as 0.5, 1.0, and 1.5 percent, for a given period of time. This low rate was then adjusted to a much higher percentage, requiring homeowners to pay significantly increased sums. During this same time, No Income No Job No Asset Loans (NINJA Loans) were introduced. Borrowers needed no qualifications to buy a home. Lenders saw NINJA Loans as a win-win. If the borrower defaulted with an annual property value increase of 14 or 15 percent, they could sell the home and still turn a profit. Artificial Drops Part of the initial dip in the housing market was artificial. For example: Four homes are sold in one year, two for $500,000 and two for $100,000. The average home price would be $300,000. One year later, the people who bought their home $100,000 sold for $200,000 and the people who bought for $500,000 sold for $1 million. The profit would be a factor of two. But, suppose the new buyers for the $500,000 home (now priced at the inflated $1 million) didn’t get financed and the sale didn’t go through. It would appear home prices fell by 50 percent. In reality, they’d increased by 100 percent. This example is grossly exaggerated, but done so to illustrate what was happening – high-end homes were not selling. Lower priced homes were. Additionally, understanding what helped some companies succeed can help you identify those same characteristics in potential future investments. Each week on About Money, I interview a successful business owner whose company survived the Great Recession.   For more information on all of these topics, I encourage you to listen to About Money, a weekly podcast and radio show. You can also follow us on Facebook and Twitter for blog updates, podcast news, and more! I want to hear your opinions; please leave a comment below and let me know your thoughts.  

You load sixteen tons, what do you get Another day older and deeper in debt O’ Saint Peter don’t you call me yet I owe my soul to the company store – Sixteen Tons, by Ford Tennessee Ernie I remember when Tennessee Ernie Ford sang Sixteen Tons. It described working conditions 100 years ago and the control a company had over its employees. Men worked for the same company their entire life. The company provided housing. People bought everything from groceries to clothes on credit at the company store. On payday, the company took what it was owed straight from their paycheck. I imagine this kind of life was a lot less stressful. You didn’t worry as much about losing your job or your home. You knew you always had a place where you could get food. Your life had no uncertainty. A clear path was laid out for you. By the 1950’s when this song came out, this lifestyle was disappearing. People were becoming more mobile. They were buying their own homes and going to college. Supermarkets opened and purchases were made with cash rather than a line of company credit. Even one generation ago, men kept the same job for an average of 13 years. Now, the average tenure with a company is just eight. The Occupy Wall Street movement, with its “99% verses 1%” slogan, brought the nations wealth inequality to the forefront of people’s attention. The wealthier have gotten wealthier, while the 99 percent have essentially kept the same income. What it doesn’t illustrate is the standard of living seems to have improved for everyone. In 1960, the poverty rate was 22 percent. By 2000, it dropped to 11 percent. The standard of living since the 1960’s has drastically improved, even with the effects of the Great Recession. Take the TV for example. I remember when we didn’t have remotes. Many TVs were black and white. My parents spent an enormous sum for a large color TV. Today, you could spend that same amount for a screen two or three times the size, with better definition. The standard of living’s improvement has run parallel with the increase in workplace stress. In 2008, studies show a large majority of people worried about losing their job. But, what do these changes mean for investors? It means investors need to choose companies with the ability to adapt, gain productivity, and reduce costs. It means investing in companies which can save other companies or the government money.  

How relevant are you? In today’s market, technology and productivity are turning routine jobs into machine automated ones. When I graduated from high school, you could always work in a factory or as a ditch digger if you didn’t go to college. Now, many jobs with a reproducible input-output are being replaced by computers. You might expect only manual labor jobs to be eliminated by technology, but every industry faces the same push for productivity. For example, lawyers face the same “relevancy” test. In 1978, a case study examined six million documents. It required an army of lawyers and paralegals, which cost more than $2.2 million. In January of 2011, Blackstone Discovery of Palo Alto, Calif., helped analyze 1.5 million documents for less than $100,000. That’s a lot of jobs replaced by computers. What does this mean for job seekers? It means education will continue to be more and more vital in the job market. You’ll need more to earn a living than just the sweat off your back. Relevant technical skills will be a top priority for recruiters. In his recently released book, That Used To Be Us, Thomas L. Friedman said job seekers will need three qualities: Think Like an Immigrant – Work like the world doesn’t owe you anything. Think Like an Artisan – Look outside the box for new ways to accomplish tasks. Think Like a Waitress – Always go above and beyond your job description.   For more information on all of these topics, I encourage you to listen to About Money, a weekly podcast and radio show. You can also follow us on Facebook and Twitter for blog updates, podcast news, and more! I want to hear your opinions; please leave a comment below and let me know your thoughts.