Alibaba's Year

"Price is what you pay. Value is what you get."

-Warren Buffett

Welcome to The Golden Sense! 2014 has been a big year, and no company had a bigger year than Alibaba Group Holding Ltd. The e-commerce behemoth became the biggest initial public offering ever as it raised $25 billion in September of 2014.

Alibaba operates a ecosystem platform for third parties on the Internet. As a platform, the company provides the fundamental technology infrastructure and marketing reach to help businesses leverage the power of the web. Essentially, Alibaba is a eBay, PayPal, Amazon, Amazon Web Services, and many more rolled into one.

Alibaba, led by Jack Ma, is a company that is continually expanding. They now operate a multitude of different platforms:

• Alibaba.com (a wholesale marketplace for international consumers).
• Taobao Marketplace (China’s most popular mobile commerce application).
• TMall (China’s largest retail platform, which features goods sold directly from brands).
• 1688.com (the leading online wholesale marketplace for domestic Chinese small businesses).

In addition to all this, Alibaba also runs Aliyun, a cloud services and infrastructure provider. According to SEC filings, Alibaba made $102 million from cloud and infrastructure services, which is up 26% from last year. That’s not quite as fast as Amazon Web Services, but it’s impressive nonetheless. The company also spun off Alipay, which is like a PayPal service that processed astonishing $623 billion digital payments during the fiscal year 2014.

Alibaba has also invested a huge amount of money into the U.S. market this year. It recently opened 11 Main, an e-commerce platform for high-end boutique products like clothing, home goods and jewelry.

Most American consumers aren't familiar with Alibaba yet. The company's success has been uniquely Asian thus far. Amazon, Walmart, Zappos and many others dominate the online retail market in the United States. Yet, Alibaba's success isn't dependent on the American marketplace. It is going to build on the enormous Chinese market which is three to four times larger than American market. 

Unlike the American consumer, the American investor has experienced a completely different story. Alibaba Group Holding has created an investment vehicle on the NYSE that allows the average American to profit from swelling Chinese market. Their ticker "BABA" can be purchased through any investment broker. As you may have heard, the investment has had a successful start.

Alibaba's initial public offering opened at a price of $68 per share. The shares popped 38% to $93 on its first day of trading. As of the end of December 2014, "BABA" trades between $105-110 a share.

Investors are giving "BABA" a lofty valuation, but the growth potential is there for all to see. Many analysts think "BABA" will be trading at $130 a share within the next three months. These projections are based on the company's recent performance. In November, Alibaba saw incredible sales on "Singles Day". China’s anti–Valentine’s Day has handily surpassed the U.S.’ s Black Friday as the world’s most lucrative online shopping day, and with the company passing $9 billion in sales in 24 hours, it has become one of the most profitable manufactured holidays in history.

Alibaba isn't a speculative company, they're the real deal. The owners are Chinese and they understand the Chinese consumer. This will help the company beat off foreign competition and dominate the Chinese market.

Personally, I am putting my down on this company. I am expecting the share price to increase after their next earnings release. China is a country with over a billion people in it. Enormous wealth is being created and the population is ready to start spending some of their new found money. Alibaba provides the perfect marketplace to do so.

As Alibaba profits, I hope to profit too.



Over and Out

T. Norman

The Oil Trade

"The formula for success: rise early, work hard, strike oil."

-J. Paul Getty

 

Welcome to The Golden Sense! Dutch painter Vincent Van Gogh lived from 1853 to 1890. What is less known about him is that he painted only for the final 10 years of his life until mental illness overcame him and he committed suicide. During that time he created a massive output, creating some 1,100 drawings and 900 oil paintings, plus numerous sketches and other works. Today he is one of the most admired and well-known painters of any era, although he did not sell even one painting during his lifetime.

Success comes in many different ways, whether it's expressing a deteriorating yet brilliant mind like Vincent Van Gogh or shrewdly building an oil empire like J. Paul Getty; success appears to be a product of timing.

Timing an event, trend, or pattern is very difficult. Nobody knows what the future holds but sometimes people take a chance on intuition and strike it rich.

In the latter part of 2014 some interesting developments have taken place in regard to the price of oil.

The price of oil has fallen below $70 a barrel for the first time since 2010. The chart below shows that the price of oil in the past four years has fluctuated between $90-$100 a barrel with the higher prices typically occurring in the spring to summer time period.

The falling oil price is a supply-demand problem. Demand is slowing with slow global growth while the supply is abundant. The Organization of the Petroleum Exporting Countries (OPEC) is a group of 12 nation including Saudi Arabia, Iran and Venezuela that holds enormous power over global energy market. They have been keeping oil production high despite the slowing demand.

The United States has seen a major growth in oil production, thanks to the shale oil revolution, in which new technologies like horizontal drilling have allowed access to hydrocarbons deep beneath the Earth's surface.

By suppressing the oil price, OPEC squeezes the profit margins of the costlier shale oil producers (fracking) in the United States. U.S. shale production is now a serious contender in the oil game and the world is taking notice.

The fall in oil has hurt the producing countries like Russia, Norway, Canada, Mexico and Brazil. These countries, like the U.S. shale oil producers, are seeing their profits squeezed by the lower price.

Most oil producers would prefer to have the price in the $90-$100 range. This price creates a much better profit margin. This price range is in everyone’s common interest. Some countries can produce at cheaper levels than others, but in grand scheme of things, a lower price is not a long term benefit.

It looks like this oversupply (lower oil price) could last awhile...but not forever. This is where opportunity arrives. The recent sell off in oil has created the perfect buy window. I don't know when, but there is a good chance we will see $90 barrel oil again.

There are many ways to play this trade. Sophisticated investors might find smaller oil companies with reduced share prices to purchase. This is a very legitimate play, but it takes research from someone that knows what they are doing.

Professionals often take positions out in the futures market to trade on the future price of oil. To do this you need to have a futures trading account. To have this kind of account you often need to show an investment bank that you have a boat load of money to cover your margins. These trades aren't practical for the little guy investor.

The best way to make this play is buy shares in oil ETF's (exchange traded funds). You can do this using any brokerage account. The following ETF's are worth a look.

• DBO- PowerShares DB Oil Fund
• USO- United States Oil Fund

Both of these ETF's invest in West Texas Intermediate future contracts. If the price of oil goes up or down you can expect the price of these ETF's to do the same thing. Purchasing one of these ETF's is as easy as buying any stock. This makes the oil trade straight forward and simple.

Of course, nothing is a sure thing and there are plenty of people claiming that lower oil prices are a thing of the future. I'm not so sure. Market forces are stronger than any group of producers, particularly in finite industries like oil production. I see the price of oil going back up over the long run.

Taking a chance isn't easy. However, this one might be worth looking into.

Over and Out,

T. Norman

 

Incentives dictate the future

"...the art of government consists in taking as much money as possible from one class of citizens to give to the other"

Voltaire

Welcome to The Golden Sense! There is a tropical island not too far away with warm temperatures year round, turquoise blue water, and all the conveniences of modern day America.

I am sure you can think of a few places that fit this description. Most of these islands are vacation destinations for Americans seeking a relaxing atmosphere and an escape from the 9-5 work week. Nobody ever seriously considers moving to these tropical islands because, unless you’re in the tourist industry, there is simply a lack of cutting edge work available along with a high cost of living.

This preconceived notion is about to change. The island of Puerto Rico is redefining its image. The island is an unincorporated territory of the United States and the commonwealth is poised for a huge upswing.

As with everything in life, change occurs and opportunities arrive. Incentives dictate the future. For the last decade Puerto Rico has struggled economically. The Puerto Rican government bankrupted itself by growing too big and taking on mountains of debt. The public debt of Puerto Rico has grown at a faster pace than the growth of its economy, reaching $46.7 billion in 2008. In January 2009, Luis Fortuño enacted several measures aimed at eliminating the government's deficit, including laying off 12,505 government employees. Puerto Rico's unemployment rate was 15.9 percent in January 2010. Consequently, the island became poorer than the poorest state of the United States with 41% of its population below the poverty line.

The terrible story of economic ruin is about to change for the better. In 2012 the government enacted Act 20 and Act 22. These laws were put into place to bolster a diversified economy. The local government has created an aggressive economic and tax incentives program with the purpose of helping operations on the island become more profitable to those companies which establish themselves there. These incentives were created to ensure Puerto Rico’s competitiveness in attracting investment. In a sense, Puerto Rico has made a 180 degree turn and has embraced capitalism.

A quick glance at Act 22 shows it seeks to attract new residents to Puerto Rico by providing a total exemption from Puerto Rico income taxes on all passive income. Investors and traders who are residents of Puerto Rico can exclude 100% of all short-term and long-term capital gains on investments. This includes sale of personal property accrued after moving to Puerto Rico.

Act 22 is the real gold mine, said Alex Daley of Casey Research, who commissioned a report called “Puerto Rico’s New Tax Advantages”, after moving to the island to take advantage of the new incentives.

To be a bona-fide resident of Puerto Rico a person has to be present for at least 183 days during the taxable year in Puerto Rico and does not have a tax home outside of Puerto Rico during the taxable year.

Basically, Act 22 is one of many economic incentives that the government of Puerto Rico has developed to benefit the island's economy. The Act provides significant tax breaks for those looking to relocate their company on the island. Additional incentives offer unique benefits to investors for sectors like manufacturing, hospitality and tourism, international insurance and banking, export services, and agriculture.

The other incentive put in place by the Puerto Rican government is Act 20. This Act seeks to incentivize businesses to come to Puerto Rico by taxing corporations at a flat 4% on earnings, as well as offering them 100% tax exemption on dividends or profit distributions from export services. To qualify, a company has to employ at least 3 people. The act also allows a 3% fixed income tax rate in case of services considered strategic.

The laws aim to promote the export of services from the Caribbean island and to encourage the ‘import’ of wealthy individuals. Now, few places on earth offer a return on investment the way Puerto Rico does. With a growing array of services and emerging industries, there are a multitude of opportunities with incentives available.

Not only does Puerto Rico have great financial and economic incentives, it also has a strong existing infrastructure. The roads are better than those which are here in California; the health facilities are equivalent to mainland America; and there are quality schools and education available to children as well. On top of this, the current median home price in Puerto Rico is $155,000.

Of course, Puerto Rico is not perfect. It's recovering from an economic disaster. But, like I said, incentives dictate the future. Puerto Rico is coming back to life. There is a chance that if circumstances allow it, you could actually own a business or work for a multinational company earning top wages all the while enjoying a fantastic tropical island lifestyle.

It is up to you.

Over and Out

T. Norman

The Millennial Generation

 

 

“Conformity is the last refuge of the unimaginative.”
―Oscar Wilde

Welcome to The Golden Sense! There is a special moment that occurs in nature that we all know about. We learned the details at some point yet we have forgotten them as well. I am talking about the amazing process of chrysalis. This unique metamorphosis occurs when caterpillar reaches maturity. As soon as a caterpillar has rested after coming out of the chrysalis, it will have transformed into a butterfly. The butterfly will pump blood into the wings in order to get them working and flapping. At this point the butterfly will take off and fly. For all to see, this is an amazing event.

Humans go through their own transformations in life as well. One of the most scrutinized changes is the shift from student to the professional workforce. Today, the millennial generation has been put under much criticism for this transformation. Commentators use the millennial classification for people born in the 1980’s through the 1990’s, also known as generation Y.

The criticism often claims millennials don't understand the work ethic it took in the "good 'ol days" or they are simply lazy and have "get rich quick" attitudes. Study after study shows that younger American adults ages 18 to 33 are less likely to own a home, have a full-time job, own a car, or even use a credit card than older American generations when they were that age. Are these indicators a reflection of the generation’s aptitude or a consequence of economic environment?

The criticism is well founded in regard to many selfie-taking, Snapchatting millennials who do need to get their act together. However, there is much more to this demographic than meets the eye.

The economic climate has changed rapidly over the past 10 years. The housing bubble, the financial crisis, and sky rocketing education costs have changed the landscape of what was once America. The evolution of technology, the large scale exchange of information, and the ease of travel have also made a substantial imprint on this generation.

As with all major evolutions or changes many people will struggle, others will embrace a new life, and some will profit handsomely.

The struggle has gripped a large portion of millennials. These millennials are stuck with massive student loans and earning low or even no wages. Their sluggish motivation may be as bad as the tattoos on their arm. This is troubling but it isn’t a far cry from the long haired gnomes that inhabited the communes of the 1960’s. It’s just a different style, that’s all. Let these people be.

Many in this generation don’t own homes or carry credit cards. This is a simple reflection of the economic environment in which taking on long-term debt is equivalent to strapping a huge ball and chain around your leg. This generation is trying to find a way to free itself and reducing monthly payments is one of the first things that will lead to a more mobile and productive lifestyle.

Many have embraced the new economic landscape and have accepted its reality. "Lazy" is hardly a fair characteristic to pigeonhole everyone with. I've personally witnessed many 18-22 year-olds (those in college or other types of school) spend countless sleepless nights working their millennial behinds off just to make the most out of their $150,000 education. These people have used their education and understanding of technology to propel them into key roles of many successful businesses throughout the country. Many of these individuals make decent salaries in a very competitive globalized labor market. Others have embraced technology and travel and have traversed the globe making connections everywhere from as far as China to Paris. The world is a big place and the millennial generation is one of the first generations not to be tied to a particular country but to embrace the world for everything it has to offer.

A report from The Shullman Research Center, titled "Millionaires Have Their Own Generation Gap," found that 23 percent of today's millionaires are millennials. There are now about 5 million millennial millionaires. That's half as many as the boomers. But it's more than the older and more established Gen-Xers, who count only 4 million millionaires among their ranks. The millennial generation has produced entrepreneurial geniuses like Mark Zuckerberg and many others who lead the technology industry. 

The world is dynamic and it doesn't make sense for all people to tie themselves down, take on debt, or purchase over valued assets. This is going to be tough on particular industries, but "times are a changing".

All ages and all generations will have to keep up with this fast paced environment or they will struggle and get left behind. It is not only a subset of tattoo ridden hipster millennials that need to up their game, but many aging baby boomers and debt sloshed Gen-Xers need to make serious adaptations as well. In a competitive and expansive global market it is up to each individual to make the most of it. There is a fine line between getting sucked into poverty and becoming successful. It is a choice. Each person will have to choose which path they want to take.

Signing Off
T. Norman 



















  

The Money World

"Civilization is the process of setting man free from men"
Ayn Rand

Welcome to The Golden Sense! Times are changing in the banking industry. Just like in many other areas of life, advances in technology are forcing banks to get with the times or fade into obscurity. It is not just the local banks that are forced to change, it is the central banks and the money we use on a daily basis that are due for a big change. The changes taking place are in regard to the privacy of customer information, customer interaction, and the very issuance of money. 

First, regulation and technology are coming head to head. Present day banking portrays anything but a free world. The regulation with which banks must comply is excruciatingly long.
Over the years severe laws have been passed. Many of these laws stem from the war on terror, the war on drugs, or are de facto capital controls due to the U.S. governments ballooning national debt. These regulations force banks to scrutinize every monetary transaction their client makes. The following list is just the tip of the iceberg in regards to regulations enacted on the banking industry:

• Currency Transaction Report (CTR)- Filed when a customer withdraws more than $10k in cash.
• Suspicious Activity Report (SAR)- Filed if a customer's behavior is abnormal.
• Office of Foreign Asset Control (OFAC-) New clients are checked on a wanted list when a bank account is opened.
• Financial Crimes Enforcement Network (FINCEN)- Bank's must check that no clients are on this "wanted" list periodically.
• Foreign Account Tax Compliance Act (FATCA)- Foreign Banks must report U.S. customers to the U.S. government.
• Foreign Bank Account Report (FBAR)- U.S. citizens must file this report when having a bank account in a foreign country exceeding $10k at any point in time during a calendar year.
• Bank Secrecy Act (BSA)- Money laundering 'prevention'.

Money doesn't freely move throughout the world and there are unintended consequences to these laws. Heavy regulation and reporting requirements invade individual privacy, restrain economic growth, and burden the banking system with heavy expenditures. All these laws are just the beginning. There is so much "fear" in the world that, unfortunately, in the intermediate future more regulation is to come. Due to these complex laws, banks literally have to hire teams of people to form compliance departments to sift through all these rules and regulations.

Secondly, technology is changing the way customers interact with a bank. This is happening in present day and it is a blessing for the customer. Almost everyone uses a debit card or credit card. Payment by plastic is convenient and an easy way to pay for goods and services. Accepting these types of payments are as easy as ever with mobile applications (apps) that you can install on you cell phone. If you receive a check as payment all you have to do is use your mobile deposit app. Simply take a picture of the check and the app sends it to the bank for deposit. Companies that conduct business with a high volume of checks can use a remote deposit system. This is essentially a scanner that processes multiple checks at once and sends the images to the bank for processing. 

The same is true for accepting credit or debit card payments on your mobile phone. Just use an app and a connecting card reader to accept the payment. Technology is making the banking world more efficient as transactions are faster for customers and businesses alike.

Finally, the long term future is as bright as ever when it comes to conducting transactions. New digital currencies are being developed such as Bitcoin. Transactions are made with no middle men – meaning, no banks! Bitcoins are viewed as a legitimate currency because they cannot be reproduced and their value cannot be manipulated. This is a big appeal to users. Also, there are no transaction fees and no need to give your real name. Rest assured, other digital currencies will be developed and exchange for goods and services will be as easy as ever.

Mobile payment will eventually be available as well. The mobile phone user will simply use their device to scan and pay for a product or service. One day the user will be able to choose which currency (domestic, foreign, or digital) they will want to pay with! All this technology will bring incredible power to the individual and create a world with fewer barriers and less red tape.

The intermediate future looks bleak. More regulation and laws will be enacted in the name of some war, cause, or one off event. Rest assured, as always, technology will move faster than any bureaucracy. The individual will benefit from these technological advances and eventually antiquate the overly burdensome regulation. This is going to force change and the world will be better off in the long run.



Sincerely,
T. Norman

U.S. Soccer Success

"I don’t believe skill was, or ever will be, the result of coaches. It is a result of a love affair between the child and the ball."

-Manfred Schellscheidt


Welcome to The Golden Sense! If U.S. Soccer was a stock, I would buy it. Soccer in America is growing by the day and this trend is continuing to get stronger. 

Recently, ABC/ESPN and Univision had their best World Cup ever this year, with ESPN/ABC up 39% in viewership over the 2010 World Cup and up 96% over the 2006 World Cup. Worldwide roughly 1 billion people watched the World Cup final. 

Facebook says that 88 million people had more than 280 million interactions related to the World Cup final. The previous champ was Super Bowl XLVII on Feb 3, 2013 with 245 million interactions.

Elsewhere on social media, the final set a new Twitter record with 618,725 tweets per minute when the World Cup final whistle sounded. During the semifinal 35.6 million tweeted about the Germany-Brazil game which became the most-discussed sporting event in its history.

It is not just the World Cup; NBC paid broadcasting rights last year for the English Premier League that was in the multiple billion dollar range. Now, almost every premier league game can be viewed across America. Television exposure is helping Americans understand and take interest in the game.

The most telling metric is youth enrollment. Youth enrollment in soccer is higher than any other sport in the country and will contribute to producing future stars for the U.S. men's national team.

American fans crave success and that is the only thing holding back a full love affair with soccer in the United States. The men's national team is a powerhouse in North America, Central America, and Caribbean regions but not on the global scale. In the past two World Cups the United States reached the round of sixteen. In the recent World Cup the United States achieved this despite being in one the toughest groups in the tournament. Despite these respectable performances, United States soccer fans want more and they want to actually win a World Cup.

Unfortunately, tasting this success is going to be difficult. You don't just wake up one day and say "let's go win a World Cup". It doesn't work like that. It doesn't matter how athletic your players are or how much money you throw at the sport. Winning a World Cup takes infrastructure and generations of player development in the technical and tactical aspects of the game. The problem is that America is still relatively young in its development and seriously lacking in developing technical players with a creative vision.

U.S. soccer has some very strong features embedded in its culture. The men's national teams are typically very organized, athletic, and have a "never say die" attitude. These are great qualities to have, but in reality, every team that wins a World Cup has these qualities along with a few other very important qualities such as superior tactical and technical ability.

The U.S. desperately needs to improve on developing young players with technical ability that can go on and shine at the national team level.

Technical ability is defined as the ability to individually control and handle the ball. It is the ability to hold the ball under pressure and have confidence in tight spaces amongst oncoming defenders. It also means the ability of individual players to dribble with the ball at speed and find and connect passes that break apart opposing defenses. 

If you go back and watch the United States men's national team at the World Cup you will notice their lack of ability to sustain meaningful possession in the opposing teams half. The U.S. does not have the players with the technical and creative ability to pin back and cut through the top teams of the world. 

The question that arises is:

How do we develop technically gifted players in the U.S.?

There are three things the U.S. needs to do for the men's national team to find technical players and become a top team in the world. 

First, coaches at the youth levels need to stop coaching the "individual" out of the players. Too often I hear coaches criticize young players for dribbling too much or using their right foot when they should have used their left foot. Most often at the youth level, coaches choose and favor players because they are bigger and more athletic than other players. This is a very "American" mentality that is extremely counterproductive to producing technically gifted soccer players. You can put together a team of eleven of the most athletic men in the world and they would have no chance of winning a World Cup unless they actually had technical ball skills. The best player in the world, Lionel Messi, is only 5"6. Yet his ball control, passing ability, and shooting ability are second to none. Coaches need to allow players to go out and take risks and develop their own relationship with the soccer ball. Most of the best players in history had no access to coaching at a young age. They simply played obsessively in the streets or local parks. This is how unique individual skills are developed. 


Second, every MLS club needs to develop a youth program. This is already taking place. This means each team needs to have a youth program all the way from under 18 to under 10 age groups. These teams need to be free of charge to the players and paid for by the clubs. The clubs need to have the intent on developing young players to eventually play for the senior "professional" MLS team itself. By allowing the players to play for free it will help gain access to all classes of children and widen the pool of player development. Currently, young players have to pay to join a club team and for all the expensive travel that goes along with it. By eliminating the cost to the player the MLS teams will be able to discover talented players who currently don't have the resources to play in the expensive club system.

The MLS teams will benefit from this youth program by eventually "cashing in" on players who make it onto the professional teams. The MLS teams can provide further incentive by making connections with colleges to help youth players who don't make the professional team at the age of 18 to get college scholarships and play collegiate ball. This will add to the appeal and create an incentive for players to try out for a youth MLS team. If each MLS team invests in a youth program, the U.S. men's national team will eventually benefit. It is simple probability, the more players you develop the better chance you have at developing the next world superstar. 

Third, at the teenage level, a standardized approach needs to be established. The United States is so big that it is often a blessing and a curse. The curse that comes with soccer is that there are too many ideas on how to play the game. If MLS youth teams standardize an approach on coaching players an offensive and possession style game, more technically gifted players will thrive. 

In Holland, almost all teams use a 4-3-3 formation with emphasis on possession and attacking style. Holland is renowned for developing some of the best individual talent. The U.S. can learn from this approach and replicate it for our own benefit. 

United States soccer is constantly growing. By setting up a system that helps generate technically gifted players, the U.S. national team will improve dramatically. If the United States can integrate their ability to organize, their athleticism, winning attitude, and technically gifted players they will have every chance of winning multiple World Cups in the future. 

Pele once called futbol (soccer) "the beautiful game". It was the most accurate statement he ever muttered. Soccer is a direct reflection of life, culture, success, failure and deceit that happens every day in the world. The game itself serves as a lesson in life. Americans are beginning to discover the last piece of the puzzle: "individual technique".  When all the pieces come together "the beautiful game" will truly be enjoyed.

Over and Out,

T. Norman

Spotting a Good Business

"If anything is good for pounding humility into you permanently, it's the restaurant business."

-Anthony Bourdain

Welcome to The Golden Sense! For many, achieving the American Dream means taking control of their destiny, quitting their nine to five, and opening the doors of their very own business. These brave entrepreneurial souls have shaped American enterprise, and today, they’re playing the very important role of helping business grow in America.

Purchasing a business or starting a new business is an exciting venture. It's an opportunity to change paths and create wealth for yourself and others. There are numerous variables to look at when evaluating a new business. The best way to gain clarity on the future success of a business is to break through the noise and look at a three simple metrics.  

First you want to look at the net profit margin. While that may seem obvious, some people confuse sales growth with profits. Sales may be growing in a particular industry, but if profit margins are thin or nonexistent, you could have your work cut out for you when it comes to building the business and taking home a paycheck. After all, the profit margin represents how much you take home for every dollar in sales, so higher margins are definitely a good thing. More simply put, the net profit margin is the most reliable indicator you could use in trying to determine whether you will actually make money from your venture or not.

Sageworks, a financial information company that analyzes privately held companies, recently researched which industries had the highest profit margins over the past 12 months.

As the list shows the majority of industries with solid net profit margins are in professional services. These industries show consistent demand (no matter what the economy is doing). When a company has a strong profit margin it shows that not only the owners are taking home a solid income but that the company itself is equipped to handle the many financial challenges and variables it will face in the future.

The second indicator to look at is product or service differentiation. Differentiation looks to make a product more attractive by contrasting its unique qualities with other competing products. Successful product or service differentiation creates a competitive advantage for the business, as customers view the company as superior. If the company lacks differentiation their sales will slowly diminish as the customers will not find value in the company. 

The third indicator to look at is the cost of customer acquisition. This is the cost associated in convincing a customer to buy a product or service. This cost is inclusive of the product cost, research cost, marketing, and accessibility costs. This is an important metric because it plays a major role in calculating the value of the customer to the company and the resulting return on investment.

A common problem for new business start-ups is to hurry into elaborate print advertisements and radio commercials without knowing the target market and researching other market data. The costs associated with marketing and advertising can be expensive. If a business does not know who its target market is, then it may be a waste of money to print these ads that may contain incorrect messaging and don’t reach the company’s target market.

Cost of customer acquisition tells you whether your marketing and advertising investments are paying for themselves. Over time, your cost of acquisition should go down as growth and your brand image goes up. Sometimes customer acquisition is just about location. Some locations lend itself to naturally attract customers so marketing is less of a focus. It is important to understand the industry norms for your type of business to see if you are competitive.

By understanding the net profit margin, differentiation, and cost of customer acquisition you can get a good understanding of whether a business will either succeed or fail. A business start-up requires a tremendous time commitment and a strong will. By strategically making the right moves and keeping a close eye on these key metrics you can fulfill the dream of owning a successful business. 

As Sanford Weill said:

"Details create the big picture"

Signing off for now

T. Norman

References:

http://smallbiztrends.com/2013/03/infographic-failed-small-businesses.html

http://www.insidermonkey.com/blog/most-profitable-businesses-270123/#BiUsyQ2GPXcXmutc.99

http://www.forbes.com/2010/04/15/most-profitable-small-businesses-entrepreneurs-finance-sageworks.html

Banking on Bank Profits

"If only God would give me some clear sign! Like making a large deposit in my name at a Swiss bank."

-Woody Allen

Welcome to The Golden Sense! Everyone wants to fatten their bank account. Woody Allen found a way to do it and it sure wasn't a deposit from God. Yet, many of us take a different route in life as we aren't all actors and film directors. A good way to make your bank account grow is to invest your money. Investing is a challenge. From the outside the markets look rigged with the big money dictating the pace of the game. Companies on these crowded exchanges are having their earnings calculated and re-valued every second of the day by millions of investors using every metric possible. Large bank stocks are at the heart of this action. Banks are given special attention because these institutions earn substantial sums of money. Their business model generates huge revenues with loans and investments raking in the money day by day. Unfortunately, these stocks are saturated and it is no fun getting into a bidding war with a million other professionals who have insider knowledge. However, there is a way for the common investor to get a piece of the banking action. Like they say, when there is a crowd, try using the back door. Good investments can be made in small community bank stocks where the volume is thin and the growth potential is high.

The community banking sector is small but large enough where at least one exists in every county. Many of these banks are corporations that are traded on the OTC (over the counter) exchange. You can view the exchange on the link below:

http://www.otcmarkets.com/home

Community banks are often ignored by investors simply because of their small size and a perceived lack of public information. For these exact same reasons, making a educated investment in these institutions can provide significant capital gains. Despite being over the counter stocks you can still purchase them through a common broker such as Morgan Stanley or TD Ameritrade.

In fact, getting the necessary financial information on these companies isn't as hard as it appears. You just have to know where the back door is.

The information on all these banks can be obtained from the following website:

https://cdr.ffiec.gov/public/ManageFacsimiles.aspx

This website provides you with UBPR reports (Uniform Bank Performance Reports). These reports will give you all the metrics you would ever need on any bank of interest. The UBPR report provides you with the balance sheet, income statement, and financial ratios that can be compared on a quarter to quarter basis. 

A stock price is basically the going rate for the current and assumed future earnings of a company. This makes it pretty cut and dry for the price movement of a community bank. By breaking it down to a few basic metrics it is easy to spot a community bank with good potential.

It's all about loans. Yes it's that simple. Community banks live and die by loan volume with many of these banks earning 90% of their income off traditional loans. All you have to do is track the loan volume of a bank. If the bank increases its loan volume on a quarter to quarter basis then it is likely to start reporting higher income levels. This of course will eventually translate into a higher stock price. 

There are risks you have to be aware of. Increased lending is not a 100% guarantee that earnings will increase. There are always risks in banking such as loans that default, interest rate risk, economic disasters, and substantial expenditures that arise. By following a few basic metrics you can see if a bank will be able to survive and possibly thrive.

There are always going to be loans that default and these loans will eventually be charged off by the bank. Banks prepare for this by allocating a portion of their earning to "allowance for loan losses". In today's environment it is healthy to have over a 1.5% allowance for loan loss to total loans ratio. You can easily find this ratio on the UBPR report. It is difficult for an outsider to assess credit quality but knowing the bank has the ability absorb some losses is a sign of good management. 

A category to keep an eye on is loans on non-accrual status. Non-accrual loans are non-performing loans that are not generating the stated interest rate because of non-payment from a borrower, typically due to financial difficulties. Non-accrual loans are more likely to default, meaning that the bank will not recoup their principal. Avoid banks with any significant amount of non-accrual loans. Of course, this can be found on the UBPR report as well.

By looking into the UBPR report you can view the balance sheet of the bank. On the balance sheet you will be able to see what type of loans the bank has. Like regular investors, a healthy bank has a diversified portfolio of loans. Beware of banks with huge concentrations in one particular loan type. This increases the risk that if a disaster hits the economy the bank could see heavy loan defaults in that one particular subcategory.

Finally, check the tier 1 capital ratio. The higher the ratio the more stable the bank is. The regulatory guidelines in the U.S. are minimum 5% tier 1 capital ratio. You want to invest in banks with ratios much higher than that. As an investor, think of the tier 1 capital ratio as the "oh shit" ratio.  The tier 1 capital ratio is the core measure of a bank's financial strength. If the bank gets into serious financial problems it will need sufficient capital to see it through the hard times. If a bank fails, your stock will go to zero. Invest in banks with higher tier 1 capital ratios to give you the best chance this tragedy will never happen. In the community banking industry, there is no such thing as "too big to fail". If management messes up, the government is not going to come in and help these little institutions.

Most community banks are priced somewhere between $5-20 a share. This makes them an affordable investment. These stocks are thinly traded and many are completely ignored. This offers a great benefit to you as an investor. By tracking the loan growth and keeping an eye on key ratios you can make an educated investment with high potential for capital gains. Not only are these banks constantly trying to grow, they are also ripe targets for acquisitions from larger institutions. When a community bank is bought out by a bigger bank they often get 1.5 times book value for the shares. That is when the shareholder makes a killing on his or her investment. 

The opportunity is there. This is an investment practice that takes a little due diligence but could offer better rewards than playing against the big boys on the large exchanges.

Thomas Edison made a good point:

"Opportunity is missed by most people because it is dressed in overalls and looks like work"

Signing off for now,

T. Norman

The New Trend in Business

"Being the richest man in the cemetery doesn't matter to me. Going to bed at night saying we've done something wonderful, that's what matters to me."

-Steve Jobs

Welcome to The Golden Sense! Things change. Styles, trends, business, and economics constantly change. Some of these changes are for the better and some are for the worse.  Business in particular has changed rapidly over the last hundred years as communication, transportation, and technology have developed so rapidly that they have permanently altered the nature of modern day business practices. In the past big brands have dominated and the local guy got crushed by superior pricing and distribution logistics. This is slowly changing and will eventually no longer be the case. As with many things in life, people want the unique and the special. It's the individual inherent in every person that seeks this out. People desire the accessable and the affordable and now localized products are able to compete next to the brand names on a global scale. Local businesses can now start operating as global businesses and etch out niche markets the big guys can't touch.

The trend of small businesses competing on a world wide scale has already occurred in many different industries. 

For the last ten years local craft beer breweries have been eating into the profits of the big global beer distributors such as InBev. InBev owns Budweiser, Michelob, Stella, etc. They are one of the largest brewing companies in the world and now the local craft beer companies are sticking it to them. InBev is rapidly losing market share to the craft brewers in the United States. People are seeking out local brands and a unique taste. These local companies aren't just selling beer; they are selling an experience that comes with drinking the beer. Local beers are now routinely preferred over the brand names. Furthermore, these local breweries have access to distribution channels that can deliver their suds around the world. Budweiser and Miller are taking a back seat as this trend is continually growing.

The beef jerky industry is changing as well. Ever heard of Biltong? Biltong is a variety of cured meat (jerky) that was originated in South Africa. Various types of meat are used to produce it, ranging from beef and game meats to fillets of ostrich from South African farms. Whether it's your typical Jack Links jerky, Shalhoob jerky from Santa Barbara California or Biltong, consumers can now chew on specialized meat from anywhere in the world. You see, the big brands are now competing with niche flavors. People can have beef jerky from any corner of the globe and it can easily be delivered to their own doorstep with a click of a button.  

Online communities are not new, but local neighborhood communities are now connecting on the Internet. People living in a common neighborhood are now communicating online and using the Internet to optimize life in their own local neighborhood. Neighborhoods and communities are now gathering online to communicate about things such as social events, casual interests, safety concerns, odd jobs, etc. This is different from social networking because it is bringing real communities to the Internet and using online communication to bring together neighbors of a geographical area for a common purpose. The big players such as Facebook are dominating social networks but small online communities are finding a separate space to connect and fulfill their local community needs. 

Big banks have dominated the banking industry for some time now, but small community banks are now redefining their image and identity. Just as the consumer of beer seeks a great experience, that is how it is for community banking customers. Product choice is practically identical from the outside, so community bankers differentiate products and services based on experience and high quality customer service. To customers, a checking account is a checking account and they are all the same regardless of bank. People love the feel of a community bank but they also want nationwide and global access to their money. Advances in technology are allowing community banks to offer this and compete with the big banks. Community banks are offering the ability to deposit checks by mobile phone. Electronic banking platforms combine applications for Apple and Android devices for online banking, bill pay, and mobile deposit. Local banks routinely reimburse ATM fees. This allows customers to withdraw cash at any ATM nationwide for free. Community banks are also more likely to meet the lending needs of local communities, so it is a "no brainer" for customers to choose their local bank over a mega bank. This technology trend is sparking a big change in the banking industry and it now allows the small banks to compete with the big boys.

People don't want a brand, they want an experience. The advances of technology, communication, and distribution channels have allowed small business a way to offer unique products and services to the entire world. People want to touch, feel, and connect with something unique. The local product and service is now marketable to a global audience and it has redefined the consumer's appetite. 

The result is that business is changing and this has opened up a world of opportunities. The world faces many challenges in the near future but niche markets are exploding with upside potential.

Bill Gates once made a great point:

"We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don't let yourself be lulled into inaction."

Signing off for now,

T.Norman