04/03/98; 04/09/98; 04/18/98; 05/10/98
Division of Money*
Deployment of Free Money*
Types of Long-term Investment*
Decisions in Small Business*
Something for Nothing*
Ideas of Products*
Profit as Limitation*
There are many market-related problems, which cannot be solved with economic concepts; hence we have to employ psychological concepts.
In the rich society as US laborers have the opportunity of active market participation. Usually this is done in the form of investment - some laborers are quite wealthy. This investment is a major factor of the current market activity. We will look at the mechanics of the proper investment decisions done by the laborer.
Division of Money
We need to divide cash flow and assets into groups to find what can be invested.
Covering the Needs - there are needs (food, close, shelter, safety) and we have to pay to satisfy them. Basically this is not difficult to estimate how much is needed for this purpose. Note that this group does not include luxury, only what is really needed.
Available Money - there is some amount of money we need for our everyday life, this money has to be available at will. Luckily banks are ready to give us savings accounts where we can keep this money and even keep-up with inflation.
Savings - this is what in business called reserve fund. We need savings to be freer in our decisions, this is a kind of safety net in case of unexpected events or erroneous decisions. Savings have to be available at relatively short notice. We can keep savings in CDs or other Money Market instruments.
Scheduled Payments - some future payments we can estimate in advance, as planned purchases of the house, car, etc., or payments for the college, or supplements of regular retirement payments. These payments cannot be delayed hence money has to be available in time. The natural financial instruments in this case are bonds. They have to mature exactly when money is needed.
Free Money - this is what is left.
This division is not a division according to any traditional rules of accounting. This is a special division for the purpose of financial analysis. It does not need to be precise - we rely on our understanding of what is needed for different goals, and here we do not have precision to begin with. Also we lump together the cash flow (paycheck) and assets (saving accounts, house, etc). It is important to make an attempt of such rough division to assess our desires and needs, ability to take risk and ability to plan ahead. This is more psychological measure, than economic one. It is very important, because if we can make such division, we can move to more sure ground of economic concepts and models.
The actual division is unique to each person and often it changes in time. It is important to make this division clearly and maintain it.
Deployment of Free Money
This is very important to understand that any business activity is available only with Free Money - only with money, which is not needed to support our everyday life and our interests.
Let say, we analyze our income and we do not see any Free Money. It means - we do not have money to invest, or to start business.
However if we have Free Money, we can proceed to the next level of the game of life.
For example we can gamble with it. Gambling brings satisfaction associated with risk taking. This is a main goal of gambling. Simply if one is skillful and lucky, one can gamble longer.
We can purchase or start the business. Ownership brings satisfaction of the control, power and it brings cash flow. Cash flow we can use to increase our wealth.
We can invest our assets. Growing investment brings satisfaction of feeling of being increasingly wealthy. To be wealthy means to have the ability to acquire goods and services. However, we had allocated money for the actual acquisition, hence money, which we invest, we do not expect to spend, actually. The main goal of investment is to bring a special feeling. From the experience it is known, that sometimes the situation with investment is so good, that we can reallocate some of investment into other categories, as Available Money. There is no guarantee that this happens in any foreseen period of time, however.
Let us assume that we do not want the enjoyment of gambling, and we work already and we do not want the additional work of running the business and we decided to go with investment.
We are grown-ups and we know that money does not grow by itself. We have to work for that. What is our work as investor?
There is no investment, which grows all the time, and there is no way to successfully invest by making random decisions. We have to monitor our investment and we have to monitor and analyze the market in general. In other words, we participate in the very important work of establishment of market prices. The growth of our investment is a compensation for this work.
Usually the laborer does not have much of the time to dedicate to the analysis of the market and the particular investment. Hence we have to do the work, which does not require such intensive analysis. This is long-term investment. Because short-term investment requires very close monitoring of the market, and the fast access to the information, and this is expensive.
Types of Long-term Investment
The simplest investment for the laborer is an investment in the own house. This is not hard to compute how much of money paid for the house can qualify as investment. We estimate how much we have to pay for the dwelling any way. The rest is investment, and this investment has an additional feature - we enjoy living in the better house.
Bonds, stocks and mutual funds are vehicles of the investment. It is a lot said about it, we will not repeat it. We only remind, that when the retirement is close, over the sudden we have additional Scheduled Payments - what we need to supplement retirement payments, which we do not manage. This means that we have to reassess what is Free Money in the new situation and act accordingly - move some money in fixed income financial instruments.
If we are wealthy enough that we do not need to work, than we can live from the cash flow generated by our investment. We have to dedicate part of our investment to covering of our needs and desires, and we have to invest if in the fixed income instruments, which generate cash flow. The rest of the analysis is the same.
It is important, that even if we are actively engaged in the short-term investment, we cannot allow ourselves to rely on the cash flow generated by our overall portfolio. We have to treat our active investment as the business, and we cannot allow ourselves to rely on the business for our living. This does not work for many reasons, in particular because it can lower the risk tolerance to the level, which is not acceptable in the business.
Hence, we have to divide the invested assets into two groups - one for living, it has to generate predictable cash flow and the other for business, which is Free Money.
Decisions in Small Business
Business has many ways of counting money - for general accounting, for financial analysis, etc. However the main decisions of the Small Business can be done on the principles described above. The little secret of the business is - there is no economic sense to run the business if the very rough estimate does not show enough profit to be interesting. Accounting is needed to keep things in order, the major business decisions can be (and should be) done based on simple estimates.
As above in the case of personal finance, we divide business' money into groups. This allows us to move from fuzzy psychological factors to economic estimates.
Covering the Needs - materials, payroll, equipment, taxes, etc. - generally speaking, expenses. There is no hard numbers in this category, because it depends on the plans and future situation.
Available Money - there is no enjoyment in running the business if there is no at least some freedom in spending money, and if there is no enjoyment, than there is no business. Hence this is an important category, which has to be well funded.
Reserve Fund - it is needed as means of the business survival in unpredictable situation. If there is no money for the reserve - it is time to close the business, business is not gambling: the general feeling of the business instability can destroy it very fast, this feeling is picked up very fast by the employees and clients.
Scheduled Payments - this is often a cause of the failure from cash flow crunch, if it is mismanaged. It should be managed carefully and matched with receivables. In the real word this is fuzzy - the more it needs careful management.
Profit - this is Free Money of the business. The boundaries on this category vary greatly from business to business. Some businesses operate even without profit - owners are grateful that they can get fair compensation for their work in the business and can employ their relatives. However this approach is dangerous - it does not leave the room to maneuver in adverse situation, it does not live the room to change or to grow. The profit can be deployed to grow the business - this is an investment of it.
The important point is - there is no way to make precise estimates in this area. Hence if we are not really happy with the level of profit, which we estimate the business should generate, than we should not run this business. The life is full of surprises and the real profit is very often much lower than the estimate.
In the current state, Market does not operate on the phenomenon of the need - everything that is needed is produced. The proper concept is desire. All desires are based on some kind of need, but we should not care much about it. The product has to be seen as something that simultaneously creates and satisfies some desire. These creation and satisfaction of the desire exist together as different sides of the coin.
Desires exist in the environment of the system of existing desires; hence each product builds the new desire based on existing ones. For example, if the customer came in the supermarket with the desire of some function, of some type of the product, than this is a moment to offer the product, which delivers the desired function at lower price than other similar products. If the product is relatively new or we have the big share of the market for this product, than we have to perpetually recreate the desire for the product. We use all kinds of advertisement for this purpose.
The great majority of products are associated with artificially created desires, which have to be maintained as long as the product exists - this is a nature of Market. Marketing is the activity of generation and maintenance of this side of the product - desire side. Hence marketing participates in the creation of the value of the product as the manufacturing does.
One of the most powerful tools of marketing is creation and wide distribution of images related to the product. These images get interwoven into the fabric of images, which the society and each member of it use to think and communicate. They serve as a foundation for the process of recreation of the desire. The society eagerly participates in this process of enrichment of its image base - it wants new creative images, it wants suggestions about possible new desires. However, if the marketing becomes deceptive, the backlash of the society can be severe and the product can be destroyed.
Selling is a special branch of the activity of creation of desire. It is done on the personal level. In the time the salesperson gets in touch with the customer, the customer already has the experience delivered by the marketing. The need for the salesperson attack means that all that experience is not enough to create sufficient level of desire and break barriers of resistance, hence the goal of the salesperson is to make a final push - overcome customerís defense system. This produces adversary situation.
Salesperson-customer contact is a tag of war. Salesperson cannot afford being compassionate, cannot afford thinking about customerís interests. If the salesperson does it, then other salespeople are more successful and this one gradually looses the playing field. Salesperson has to find a weak spot of the customer and drive the customerís desire over the edge of decision-making (purchase). The customer has to be aware of it - this is the knowledge everyone on the Market has to have.
If the desire stays with the customer long after the sale was made - the sale is a proper. If it dissipates a moment later because of some new information or because the customer had lost an induced feeling of excitement, than the situation is wrong. The civilized society developed special customer protection measures to protect from this kind of social imbalance.
It is easy to see that the position of salesperson tempts for socially marginal behavior or even outright fraud. This produces the special social climate around it: this position attracts predators, and there is a wide spread distrust and resentment of salespeople.
In many cases of the niche market there is no boundary between marketing and selling - the same people do both.
Something for Nothing
In spite of popular adage about free lunch market always offers freebees. Mostly it is done through the advertising - as the concepts and images delivered in commercials and as the payment for the entertainment where the commercials are embedded. Sometimes it is in the form of the deep discount of the price of the one type of the product, which acceptance leads to the demand for the other type of the product, which is priced fully. This last idea was taken recently to its logical conclusion with offering of free software products.
This is an important property of the market - this is a property, which creates more even distribution of the wealth in the society.
Any introduction of new product has to take this in consideration - before there is a revenue stream generated by the new product there are always expenses associated with the giving away for free something, that generates desires.
Ideas of Products
Obviously the idea of the product proceeds the product itself. Some ideas are vague - they include only technical concepts. Other ideas are developed - they include the prospects of the chain of the improvements of the technical concept, different variants of this chain and different variants of the concept itself, plans of the creation of desires of customers (marketing plans), and variants of implementation (technological aspects, financial aspects, etc.). Each start-up business has a developed idea of the product behind it, but the experience shows that only a small fraction of start-ups survive their first year of operation. Even smaller fraction of potential products survive research and development stage in the big corporations.
This is a general phenomenon. Market works as the random optimizer. It tests huge amount of ideas and accepts only ones, which fit in it well. The real reason behind such ineffective mechanism is a tremendous complexity of the market-based society. Simply there is no better mechanism of market expansion.
The same complexity leaves little choice to particular active market participants - they have to employ similar tactics. Active market participants create hundreds and hundreds of ideas of products and test them, first mentally, after on the small scale, and so on. Only a tiny fraction of these ideas have the chance to become the product.
This creates a special psychological environment on the Market. The anticipation of success, supported by the success stories drives the active market participants. In the same time the odds, that particular idea succeeds are very small, even for talented participants. Hence the only chance to succeed is perpetual generating of new ideas of products, perpetual filtering and polishing ones, which have potential to survive, and perpetual learning in the process of the attempts of realization of these ideas.
This requires resources - free money, which can be potentially lost completely.
Also this requires good understanding of the uncertainty, which is always involved with the introduction of new product. It is as with military operation: if you do not have the plan what to do in any conceivable situation - you are loosing already. Only when you are a hundred percent prepared - your idea of the product is developed as much as it can be, you have a chance to succeed. The fact that you are prepared means, that when you start an implementation of your idea and when you face an unanticipated situation, you might have enough resources and skills to solve the problem.
Profit as Limitation
In the Market there are activities of the different level of complexity and hence different level of risk. The only reason the person moves from the less complex and less risky activity to more complex and more risky activity is the higher level of actual profit. This produces the natural gradations of the levels of profit according to the levels of complexity and risk.
Hence, active Market participants are restricted in their actions: as the result of their activity, their wealth has to accumulate, and the speed of this accumulation cannot be lower then some specific value.
This how the Market works, this what brings people into the Market. If one tries to violate this rule, one is treated with the suspicion and, finally, cannot actively participate in the Market.
In other words, if someone actively participates in the Market (runs the business), than there is a level of profit one has to have from this participation.
Hence, if there is a product idea, and after simple calculations we are not sure that we can achieve the level of profit, which corresponds to the levels of complexity and risk associated with this idea, than this is a dead idea.
This minimal "required" level of profit is relatively low. The great majority of Market activities produce much higher level of profit. The difference between actual and "required" levels of profit defines the area of freedom to pursue specific goals by market participants.
In many cases what drives the market participant is the desire of some kind of personal expansion, where the business serves as a tool. This what makes business exiting.
The laborer comes to the companyís "gate", shows the set of skills and the discipline, and if there is an opening, is hired to perform any job the employer asks in some specified area. The employer decides what and how is done and pays the specified rate for the time the employee is used. Laborers "enjoy an equal opportunity employment" - the employer does not care who the employee is, and the pay schedule and working conditions are prearranged, and do not depend on the employee. Employees are exchangeable, and the pay rate is set by the market (labor market).
When the laborer-specialist asks for the employment, the situation is somewhat different. There is a part of employment agreement (largely assumed but unwritten and unspoken) that the laborer works at specified area at employer will, as other laborers do. And there is a salary paid for it, the same way the ordinary laborer has it. However the specialist offers some service on top of it. This service the specialist has to sell to potential employer. The specialist has to evoke the desire for this service in the employer.
At this point the specialist acts as a businessperson - he/she has to create a potential service and has to create the desire for this service. If the sale is successful the potential service becomes a product and there is a compensation for this product. This compensation goes on top of the laborer's compensation.
The specialist plays dual role and has dual compensation. There is very little control over the laborer part of this compensation, but a lot can be done with the service part.
Resume is a tool of marketing the offered service. As any marketing tool it has to be tailored to potential customers (employers), it has to give the customer a set of proper images, and it has to generate in the customer the desire to have the offered service. It is not a place to show ones general smarts and achievements (no one cares) - the show of achievements should be a show of the potential service. It should not be deceptive advertisement - the promised service should be deliverable. There are as many ways to write it, as many ways to prepare any advertisement.
College graduates spend a lot on this advertisement. Practically everyone knows that the knowledge, which is needed in the particular job, can be learnt at place in a month or so. Also it is a common knowledge, that more than 90% of what was learnt in the college has no practical application. However the fact of graduation from the college shows the richness and flexibility of the mind and dedication to personal success. This is an attractive service feature for the employer, and employer is ready to pay to the college graduate the premium on top of the laborerís rate.
Recent immigrants usually do not have the experience in developing the service as it is described here. Hence in the beginning they can ask only the laborerís rate. However it changes fast as the time goes by, and with the next carrier move the person can offer and can sell the special service, and the pay goes up accordingly.
There is a general misconception that recent immigrants compete with the rest for the jobs. These are different markets - specialists do not want pure laborerís positions with low pay, and recent immigrants cannot offer the service, which commands the higher pay. And if one can sell the service to the employer, the employer is ready to find the work for the laborerís part of the compensation.
The dual nature of the compensation of the specialist carries a danger, which in lesser form familiar to the laborers. The employer gets accustomed very fast to the service created, developed and sold by the employee, and the next time he hires, he sets this service as a requirement - skills required for the laborerís part of the position. This time he pays much less for it.
The results are twofold. The employer has a hard time finding employees who have this set of skills. The specialists have to create new services simply to stay employed at certain level of compensation.
In this circle the technological progress goes ahead, and the specialists, who move it ahead, have to run fast to keep with the pace.
Trade unions became aware of this phenomenon a long time ago and they actively discourage their members from any technological or administrating innovation, which can lead to higher productivity or more intense work. The policy is self-defeating - if the Market in general or particular business does not innovate fast enough, it self-distracts taking all jobs with it.
Now specialists are in the similar position.
From the social point of view the solution is in gradual reduction of the laborer part of employment and increase in the service part of employment - increase in the business relationship between employer and employee.
The ordinary labor market is flexible - place the small note that you need a worker for the long term and at prevailing rate, and soon after you have someone to hire - the unemployment works. The market of employment of specialists is rigid - the requirements of employers are narrow, the variety of services developed by employees is great, both are changing fast and unemployment rate is low. This is a situation for brokers - recruiters. They put people together and charge for it. The amount they charge is lower than the amount, which both parties have to spend to find and learn each other and to adjust the presentation properly.
Obviously, the laborer part of the job does not need any assistance from the broker hence brokers help to sell the services, created by specialists. They help in the generating of the employerís desire.
Generally speaking, the price paid to the broker can be split between the employer and employee if they do not need the broker - less expenses for the employer and higher compensation for the employee. They have to share this part of the wealth with the broker, because they do not have better tools. If one is interested in the measurement of the rigidity of this market, one has to compare the compensation for the service part of the employee hired with the help of recruiter, and the compensation paid to recruiter for this help.
The good recruiter learns well its customers-employers and filters and adjusts presentations of the potential employees. The good potential employees seek the advice of the recruiter on which services can be attractive to the particular employer, and what kind of presentation (resume) can work better.