Wise Economic Decisions Part 4 and Work Cited

This is the 4th and final  part in a 4 part series which discusses the ideas of recessions and there devastating effects.  It points out that well most peopleare destroyed in  these terrible recessions some people actually thrive and become exceedingly wealthy.  This paper tries to look at similarities between these entrepreneurs and hope to gain some insight from the past.  My hope is that the reader will find this series interesting and helpful.  If you have question, comments, or even suggestions on future topics please feel free to comment on the blog or email me on my Contact Me page. The works cited page has been included in this section of the 4th part series:

Those practices which made Cecil Rhodes so successful in business was that he was able to see inefficiencies in the market he was working in and figure out ways to fix them.  When he arrived on the diamond field he was able to realize that the diamond field as a business market lacked most of the qualities that a free market needs to be successful.   There was lawlessness in the area, people would steal from each other or when someone found a bunch of diamonds they would be beaten up and his profits would be taken away (Traub, 35).  So there was no protection of private property.    There was competition but there wasn’t any pure competition because people were trying to sell their diamonds on the black market.  Finally, the profit motive seemed like it was there,  for there was the idea of getting rich quick, but the reality was that there was no correlation to working hard or doing something right and that being related to a profit.  Under these conditions working on the diamond field was just a gamble or a crap shoot.  In order for entrepreneurs to be successful he needs to have to take risk, but he should try and minimize as much risk as possible.  An entrepreneur should not start a venture with no chance of success or that is completely out of his control (Rotberg, 245-250).   What Rhodes did was try and make his businesses increase the presence of these factors.  He bought up more than one claim and went in with a partner and tried to take advantage of economies of scale.  He also, like Rockefeller, did not become extremely successful until bust where the soil became too hard for the average diamond miner to be worth their time mining the diamonds and he began buying up all the mining fields.  When his company became a huge mining company they were now able to stop the thievery and the selling on the black market.  The product could now be standardized and profits could be realized.  Rhodes showed that one way to make profits in a market is to look for markets that are chaotic and that there is a lot of variability and risk and try and find a way to bring stability to market (Traub, 43).   The 1973-75 oil shock recession is an example of this.  People could and have made money by trying to find alternate sources of energy besides petroleum.  They have also finding different supplier besides just OPEC.  These methods were what brought America out of the recession.

 

A man that demonstrated great business and financial savvy was Warren Buffett.  He was born in Omaha, Nebraska on August 30, 1930, the son of Howard Buffett.  When he was twelve years old, Buffet filed his first income tax return, deducting his bicycle and watch as a work expense for $35 for his work as newspaper delivery boy.  Buffet then proceeded to get a degree in Economics and a master in Economics as well.  He started working as an investment salesmen.  Buffet was extremely influenced by his teacher Ben Graham at Columbia University where he got his masters.  Mr. Graham was very influential in shaping Buffett’s views of the market and investing (Hagstrom, 33).  On May 1, 1956 Buffet ended up starting his own business called Buffett Associates, Ltd.  He pulled six people’s money together worth about 105,000 dollars and started investing the money.  By the end of the year it was worth around 300,000 dollars.  Over the next five years he made 251% profit and the Dow only made about 74.3% over that same time.  Ten years after its founding, the Buffett Partnership assets were up more than 1,156% compared to the Dow’s 122.9%. Acting as lord over assets that had ballooned to $44 million dollars, Warren and Susie’s personal stake was $6,849,936 (Hagstrom, 50).  He had become extremely wealthy.  He took over Berkshire Hathaway on May 10, 1965 and made himself director of the board.  The business had been extremely mismanaged and he was able to turn the company around.  He also did the same thing with a See’s candy and GEICO the car insurance company. Buffett is famous for finding companies that are undervalued or poorly managed and turning them around with making huge amounts of money. Warren Buffett is a extremely wealthy individual worth 37 billion dollars making him the second richest man in the world after Bill Gates (Hagstrom, 62).  He is also very frugal and hates to waste money. Because of that he still lives in his house in Omaha, Nebraska where he originally bought the house in 1958 for $31,500 (Hagstrom, 75).

 

What makes Warren Buffett profitable is that he is extremely thrifty and that he does not waste his money.  Waste not want not is a famous saying.  Living within a person’s means is essential because it reduces their amount of waste (Hagstrom, 95).  If they can live more modestly by living responsibly and by not buying unnecessary things they are less likely to go out of business.  If someone is not worried about the glitz and glamour and buying the latest equipment and just content with practical equipment, a company’s expenses will go down.  And expenses are the subtractors of profit so if one can reduce expense or keep them low it creates a very low hurdle before they are able to start making profit.  Another reason that Buffett is so successful is that he doesn’t get caught up in trends.  He once said that when everyone in the market is going one way he usually try to go the other way.  This actually makes sense because there is only a limited amount to be made in a certain area and if the entire public is investing in a certain area the profit is going to be used up and odds are the capital structure is going to be over built.  Bust or crash may end up happening.  Buffett tries to see through what is popular and looks for the real values.  He views economic down turns as an opportunity to pick up stocks and companies that are undervalued because people are depressed about a certain situation or a certain industry (Hagstrom, 105).  They assume that every company is doing poorly when this just is not the case.  There are plenty of health industries that are just struggling because of the economic times but are still good companies.

 

An important quality that all of the people mentioned have had is that they all had a partner.  Americans always pride themselves on being independent spirits and that they can do it all themselves.  This fact however is not really in support of this view.  Ecclesiastes 4: 9 -12 says, “Two are better than one, because they have a good return for their work:  If one falls down, his friend can help him up.   But pity the man who falls and has no one to help him up!  Also, if two lie down together, they will keep warm.  But how can one keep warm alone? Though one may be overpowered, two can defend themselves.   A cord of three strands is not quickly broken.”  The truth of the matter is that people are not perfect and that they have inefficiency. A partner can help a person make up for qualities or skills that he is lacking.  Business partners also help people to raise capital at the beginning of the business.  The person that is too proud to accept help will never be able to be successful and will never be as successful as the person who accepts help from people. Rockefeller once said about his wife, “Her judgment was always better than mine.  Without her keen advice I would be a poor man.”  A second opinion is needed to double check a decision to make sure that the entrepreneur hasn’t made a big mistake or that they haven’t missed a opportunity somewhere (Litan, 33).

 

Every situation or person that was looked at was unique in their business practices and thoughts.  No one method stood out as a sure thing that was guaranteed to make money.  If anything, more often than not the sure thing that the media or Joe Shmoe is saying is a guaranteed success will probably end up busting (Dewald, 20).  When an entrepreneur is looking to make a good investment he needs to be careful and try to look past the easy surface of the business and see if the company or venture is really profitable.  He should also see if the company or venture really adds to the market value and will then end in profit because of it.  He has to be careful that the need is really there and that it is not just seemingly there because of a government subsidy or because it is the hot new thing (Hunter).  The entrepreneur should also observe the market that he is entering to make sure that it is favorable to businessmen and that it at least has some characteristics of a free market economy.  He should also make sure that his works are measured and the venture is not just a gamble but a carefully measured out business plan of risk and reward.   He must also make sure not to be wasteful.  Finally he should not be working alone, but seeking the advice of other people who help complement and strengthen the skills he has and needs (Iwata and Hess, 439-442).  If a person follows all of these examples of great entrepreneurs they will not be sucked into fad investments and will then flourish during the economic downturn because they never fell for the bad investment and therefore reap the rewards.

 

Works Cited

 

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  • Baumohl, Bernard. The Secrets of Economic Indicators: Hidden Clues to Future Economic Trends and Investment Opportunities. Upper Saddle River, NJ: Wharton School Publishing, 2004.
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