The analysis of an industry’s life cycle is useful for making projections about profit margins, earnings growth, trends in sales and profitability. To simplify things it is quite common to reduce the entire life cycle of an industry to 5 stages Such a 5-stage model is described by Reilly and Brown (2003). Abrief description of the different stages will follow next.

Pioneering development: A modest sales growth is accompanied by small or negative profit margins and profits. The firms face high R&D costs. Most recent examples are high-tech companies or internet-based companies with unproven business models. Most of the financing is obtained through venture capital or private equity.

Rapid accelerating growth: Demand for products and services grows and due to only few competitors, profit margins are high. Firms experience substantial backlogs and production capacity is being built up. At this stage successful companies will be able to access the capital markets for further financing.

Mature growth: An increasing number of competitors enter the market. The demand for the industry’s goods and services is satisfied, prices decline and profit margins begin to decline. At this stage financial discipline is important because future earnings might be lower due to competition. Companies with sustainable debt levels will benefit in the long run.

Stabilization and market maturity: The growth rate of the industry declines to the growth rate of the aggregate economy and profit growth will vary by industry due to different competitive structures. Competition will result in lower profit margins. In this stage industry trends will contribute to the development of aggregate credit quality.

Deceleration of growth and decline: Sales growth declines because of changes in demand and new substitutes. An increasing number of companies start to generate losses. The industry experiences a negative credit trend.

Besides fundamental developments the risk appetite of investors is a driver of the spread differentials between various risk classes. Risk appetite in general describes the willingness of market participants to invest in risky assets as opposed to risk-free assets. Clearly, risk appetite is an unobservable factor but there are various indicators that are designed to extract a measure for risk appetite or risk aversion from market data. More details on this subject are provided later With respect to the performance of subordinated bonds versus senior bonds, there is an impact of risk appetite.

Spreads usually widen when risk appetite falls and tighten when risk appetite increases. From this chart there seems to be a lead–lag relationship between risk appetite and subsequent credit spread changes. If the leading character of risk appetite holds for the future it may provide valuable trading signals for subordinated financials.

What does it cost to run this property? That is  the next component to understand. Expenses include such things
as:

Property taxes
Insurance premiums
Utilities
Gardening costs
Management fees
Maintenance and repair costs
Vacancies, etc.

Note that you will not be including interest expense here for  the capitalization-of – income approach assumes you paid all cash  for your building (even though you didn’t).  Although getting an accurate analysis of expenses may be easier  said than done, it is still imperative that you do so. One owner  might not pay for professional management yet another may, and  one owner may have rents too low and another may be right on.

Whatever the case, finding out what the expenses actually are is  critical to determining if the property is a sound investment.  Often, appraisers are forced to estimate the expenses for a certain  property based on the type of property that is being appraised and the area where it is located. Obviously, a duplex with no amenities  has far less expenses than a full-security building with tennis  courts and extensive landscaping does. Similarly, the cost of heating  a building in Boston, for example, will be considerably more than  heating one in Arizona. Remember that these types of size and regional  differences must be accounted for when analyzing expenses.

The final item needed for this valuation method is the expected capitalization rate. The capitalization rate is determined by understanding how much of a return investors can expect to realize in a particular market. The rate will vary in different parts of the country, in different parts of a city, even in buildings within a few blocks of each other.

Additionally, residential, commercial, and industrial properties also have varying capitalization rates. Remember, because the capitalization rate measures the profitability of an investment, certain types of properties involve other risks and thus dissimilar profit possibilities.

Before all the hype about stocks, back in the Dark Ages of investing, novice investors put everything into savings accounts. After a few years of experience, they ventured into the bond market. Five years playing with government bonds led to another five years investing in corporate bonds. Having built up capital and emotional tools, these apprentice investors then bought utility stocks, blue chip stocks, or real estate. Another decade or so and they were ready for speculation in tech stocks, emerging market stocks, commodities, and anything else the markets could throw at them. At each stage of development, the investor learned the emotional twists and turns of investing along with the knowledge of companies and markets.

Today, investors start with tech stocks, possessing little knowledge of companies or markets and never building the emotional skills needed to handle the most challenging investments. Each stage of investment maturity triggers different emotions. Saving triggers different emotions than investing, which in turn triggers different emotions than speculating. Some of you have MBAs or CPAs and can quickly pick up company and market data. Others are therapists or trained emotionally to handle conflicts. Most readers are neither. This chapter will define common types of emotional traps you will encounter with investments. Chapters 4, 5, and 6 will show how savings, investments, and speculations trigger emotional reactions. Then, Chapter 7 shows how portfolio structure can twist your emotions. These five chapters will give you the emotional information equivalent to that of a 20-year, full-time investor. Step 2 will raise your level of self-knowledge so that you can determine what investments are appropriate for you.

It’s a question that comes up almost every time I sit down to help someone dig their way out of debt: should I wait until I’m out of debt to start saving toward retirement? Unfortunately, the answer doesn’t consist of a simple yes or no. Rather, the answer is probably a combination of “maybe” and “some.”

For the most part, we want to free up everything we can to get rid of our short-term debts before we dive headfirst into retirement planning. But there are four things you should be doing today, even if you are putting the majority of your free income toward paying down debt:

1. Take the 401(k) match. If your employer is willing to match your retirement plan contributions, I’d recommend contributing up to the point where they stop matching. Even if they only match you fifty cents for every dollar you contribute, that’s like getting a 50% interest rate on your savings in the first year.

2. Take the IRS match. Did you know Uncle Sam will also match you for saving money into a retirement plan or an IRA? The Retirement Savings Contribution Credit effectively gives you a bonus on your tax return in the form of a tax credit. This credit ranges anywhere from 10 to 50% of the amount contributed for unmarried wage earners who make under $26,000 ($52,000 for married filing jointly). Check out IRS Publication 590 for more details.

3. Buy your company’s stock. If your employer gives you an opportunity to buy shares of your company stock at a discount, this may be worth doing. Often, companies offer their employees a substantial discount on the current purchase price of their stock—sometimes as much as 15%. Additionally, the IRS may offer additional tax benefits in retirement to employees who invest a portion of their 401(k) or employer-sponsored plan assets in company stock. Of course, if you think your company’s stock is headed south, you’ll probably want to steer clear. Talk with your investment and tax advisor for more details.

4. Stay put at that good job. Do you have one of those increasingly rare jobs that promises to pay you a monthly pension when you retire? If you do, I’m jealous. Before you jump ship and go searching for greener pastures, find out how much longer you need to stay to lock in your future benefits. Another couple years at
the same desk may be a worthwhile trade-off for that monthly check at retirement.

One of the aspects of commercial real estate that I particularly enjoy is that you can buy a property, have some rudimentary management in place, and then all but forget about it. In fact, you could take a six-month cruise and not worry on a day-to-day basis whether everything is all right. If you need more nail-biting, nerve-racking excitement than that, then trade stocks, where you generally have to monitor the market by the day; or trade options, where you have to monitor the market by the hour; or trade futures, where you have to monitor the market by the minute; or trade currencies or other derivatives, where you have to monitor the market by the second.

Also take note that you will not find many stock traders over 50, many options traders over 40, many currency traders over 30, or many futures traders over 25. These nail-biting, glued-toyour-screen professions burn people out. They also require that their practitioners complete another deal to earn another dollar of income.

Meanwhile, back on your cruise boat, you are reading books or mingling with people, knowing that your tenants will pay rent that month whether you have worked or not.