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.

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.

So, for example, if you are 25 years old and want to accumulate $600,000 by age 65, you’d have to save about $175 per month (assuming 8% annual growth). Over your entire life of saving, this would translate into about $84,000 out of your pocket that grew to $600,000. Not too shabby.

But what if you wait until age 35 to start saving toward your $600,000? Then you’ll need to save about $410 per month, or more than double, to accumulate the same $600,000 at retirement. And even though you saved for retirement for 10 years less than the 25-year-old, you’ll end up dishing out about $147,000!

At age 45, your monthly savings number jumps to $1,000 per month that you’ll need to save for retirement,
or about $242,000 out of pocket. See the point? If you’re not saving toward retirement early, you will have to pay for it exponentially later.

If you are spending money instead of saving, whether it is going toward vacations or interest on your debts
and loans, there’s an opportunity cost. Getting your debts paid off as soon as possible means that you’ll be
able to put money toward these goals while they are still within reason.

You cannot beat a crook—even with a team of great lawyers, real estate agents, accountants, private detectives, and other professionals. Even if you successfully litigate, and you get what you think you are owed, the crooks will have taken something else somewhere else along the way, not to mention all the wasted time, effort, and energy that you put into dealing with these people in the first place, and then cleaning up the mess they precipitated.

There is only one solution: Deal with ethical people. You may not make money as fast, but it will last longer, and you will feel better about it.

One tremendous advantage of dealing with ethical people is that they tend to hang around with other ethical people. Your circle of acquaintances spirals into more and more enlightened levels of fairness, kindness, and awareness. Conversely, when you hang with rogues and rascals, your circle of acquaintances tends to spiral into depraved levels of increasingly severe cheating and deception.

Remember, you become the company you keep, so choose your friends and associates very carefully. John Baen is not only one of the most knowledgeable people I know concerning real estate, but he has a heart of gold. That is not to say he is weak— never confuse kindness for weakness.

Be firm about your expectations. Most disagreements come about because of a mismatch of expectations between two parties. Therefore, be aware of your own expectations and, equally important, discuss them with your associates. If you discover a chasm between your way of doing things and that of some associates, turn them into former associates. The world is too full of interesting, kind, knowledgeable, and energetic people to be bothered wasting time with takers, no matter how fancy the cars they drive or the homes they live in.