Monday, 28 December 2015

Personal finance: "Is it a good idea to take a bank loan to finance pure consumption?" - Probably not.

Currently, there are so many credit institutions offering loans for pure consumption such as for e.g. vacation, a car, a boat, a new mobile phone and whatsoever.

In principal, I'd recommend you not to do that. The reason lies in the attribute of consumer goods not to generate cash flow in future. But to payback your interests and debt amount you will need future cash flows.

When you take a loan, first you get cash inflow, which is followed monthly by cash outflows. But when you go on vacation with the borrowed money, you probably won't generate any cash. Probably, you would spend additional money for joy activities etc.

In case, you would expect a cash inflow - such as end year bonus from your employer - then taking a short-term loan would be ok, otherwise you better stay out of debt to avoid liquidity problems followed a downgrade of your personal credit rating.

If you take a loan to buy an asset (to make an investment), this would be a different story, since buying assets starts with a cash outflow theoretically followed by regular cash inflows, which automatically can be used pay down your interest and debt amount over time.

Be careful of risks: there are less risky assets and more risky assets. If you take a loan to invest in a risky asset, please be aware that you could also end in misery.

To be financially safe, you'd better adjust your spendings to your monthly income.

Golden rule: spend less than you earn.

Living the exclusive life. With heavy loads of debt. Congratulations




Sunday, 27 December 2015

Corporate finance: why do companies merge? Think of a marriage!

2015 was a great year for mergers and acquisitions (M&A). Many acquisitions as well as mergers have taken place. But why do companies merge? It's like with marriages. The answer is "synergy potentials".

Through business combinations two kinds of synergies can be created: 1) revenue synergies and 2) cost synergies. Revenue synergies can be achieved through combination or optimisation of  distribution/ sales channels, but those kind of synergies are harder to achieve than cost synergies (reduction of redundant costs). 

If you merge two companies you can shut down one headquarter and manage the newly merged entity with one common headquarter. In general, by latest after marriage, couples tend to move together and live in a common home. Thus, in total, they save at least one rent expense.

Marriage is also a institution by law, so that tax advantages come into place. Typically the merger of two companies is often related with reduction of tax expenses.

Of course, I could go far more into detail (e.g. becoming the market leader by combining market shares, leverage technology know-how, takeover a competitor), but we leave it at the basic idea.




Personal finance: If you only spend money on consumer goods, in the long run you're broke

"I will invest my savings in a new car/ new hand bag/ new bike/ new television."

- So what's wrong with this saying?

There is a fundamental difference between an investment and consumption. Generally, an investment starts with spending money followed by receiving money (cash outflow followed by cash inflow). A consumption starts with spending money (cash outflow) with no future cash inflows expected.

So let's take a closer look and make it simple. If you buy a car for your personal enjoyment and do not plan to make any money with your car, then it should be regarded as an consumer good (cash outflow). Otherwise, if you plan to drive people around and maybe start your own transportation or taxi company, then it would be an investment (in case your guests pay you with money ;) ).

Same principle applies to everything that you can buy. So each time you are going to buy something, try to differentiate between an investment and consumption. If you buy something that is probably going to generate cash, then you would call it an asset, otherwise it is just a consumer good.
If you want to make money, you should invest money.

But in what kind of assets should you invest or what the hell should I buy that generates cash?

Always remember: There are only two things you can do with money. Either 1) invest or 2) consume.
Consume or invest? Choose wisely.

Feel free to discuss guys,


PS: Of course you can say things like: "I invest money on vacation and increase my health status or happiness." It's nothing wrong with it. But this is not what we call an investment in financial terms. Financial terms are purely cash related. Happiness is difficult to measure, whereas cash amount is not. 

Saturday, 26 December 2015

Introduction: finance is pretty easy. Welcome to bruceinvests

Hi guys,

my blog teaches you how to analyse financial data to better understand a company's health or performance. But what differentiates my blog from another one? Good question. Maybe it's just the way I try to explain things. Finance guys have a special jargon to leave the impression that finance is too complicated. But why is that? It's easy: we somehow have to justify our high salaries ;)

But in my opinion: finance is pretty easy. Once you gather a better understanding of financial topics over time, you will enjoy talking about finance.

What motivates me to introduce you into financial topics? As an investment banking analyst working for a leading European investment bank, I'd like to share my knowledge with you to become financially independent. 


First lesson: cash is king!