A Valuable Lesson

Still thrilled about what happened to me exactly a week a go, I'm going to tell you a story which has a lesson inside it.

If you are a student (as approximately 90 % of my readers are) you know how tedious it is to write job applications. Whether it is a part-time job in the cashier of Lidl or a internship position in your own field of study, it's just pain in the ass. Endless updates of your cv, coming up with new cover letters and exchanging phone calls and emails with the rectuires. That takes a big chunk of your day.

But you know what? It is worth it.

A long ago I decided that I want to include an internship for my Masters' studies. Preferably in abroad to gain some international insight. While scouting interesting positions, I also investigated the charasteristics of a good job application.

First of all, always include a picture in your cv. A friend of mine who is a CEO of his own company once stated that almost every application that is without a picture of the applicant gets rejected. Almost every one. So attaching a picture is something that you should definitely do so your application isn't faceless. Also the more personal and different the cv, the more is the propability of you being standing out of the crowd. Create something your own!

Another good point is the way you start your cover letter. Never, repeat, NEVER, start your cover letter with the following way:

Hi, I'm nönnönnöö, a XX-year-old student from Y. I'm studying K in H....

Most of the applications received start this way. If you want to stand out, never do this. I personally start with a story from my own life that is related to the job. This way the rectuiter reads more rows from YOUR application and uses more time for YOUR application when it's a bit different. Trust me, you will be remembered.

And remember that the recruites know nothing about you that you haven't told in your application! Remember to mention all the relevant things for the particular position.

You should also avoid certain word and phrases when describing yourself such as happy, brave, confident, team player, spontaneous and open-minded. This are the words that 15-year-olds use when applying summer jobs. What's even more, in prestigious vacancies there might exist more sophisticated technology that tracks these kind of words and rejects applications on bases of these words. True story.

I examined these charasteristics and updated my CV, and went for a quest to find my place of internship. I created one base structure of the cover letter so that only slight adjustments needed to be made for different positions. This saved time and allowed me to use the "shot-gun-tactic" that allowed me to blast my applications to pretty much all over the world (thank you, LinkedIn and EasyApply).

I can't count the amount of applications that I sent. I just figured out that if I'd sent 100 decent applications to different positions, I might get interviewed to 2 of those and see what happens.

If you made it this far I can reveal that this kind of research, workload and applying paid off. I was shocked when I was first interviewed and then accepted for an internship in the European Investment Bank in Luxembourg! (explains the first image of this blog).

I will start on 1st of February in the Operations Directoriate as an analyst-trainee for Baltic and Nordic midcap-enterprises. This was far away from the vacancies that I thought I would get. No idea where does this take me from now on and the 20-year-old Samu would have never believed that something like this could happen in life.

I'm almost done with preparations, I'm only missing an ridiciously expensive local accommodation but I'm working on it. This blog might become more travel-oriented because of that but I ensure you that this is not going to be another travelling blog. But of course I might be writing about the economical and financial issues that I'm dealing there at that moment at that scenery.

I promised you a lesson and here it it: Never consider that there exist a job position to which you are too young, undereducated or lacked in skills. You should always try. And try again. And try again for 100 other jobs of your dreams. Eventually if you have really put an effort for your application, made it personal and haven't give up, you might just really get the job of your dreams.

Merci beaucoup!

Text: SW
Pictures don't belong to me

How The Bank Evaluates You

In the real world credit markets are imperfect and present a real-life situation of a market failure. This is due to the existence of asymmetric information and limited commitment. So, whenever you are taking credit or a loan from your financial intermediary (Nordea, OP, JP Morgan, Santander), the creditor has more information about the markets than you. As I'm dealing with credits and household loans everyday at my work, I'm going to introduce you some methods on which you can evaluate the interest and the amount of the loan that you're probably getting from a bank in this blog.

What matters the bank the most when you are taking the loan? SOLVENCY! Keep this word in your mind while you are reading this blog forward. The bank wants to know that they are getting their money back. This is why the bank can charge a different kinds of interests for doctors and office-workers. What matters is not only your current occupation and income, but also your probabilities to keep your job. As you might guess, these probabilities are better for lawyers and for doctors, for instance. If the bank sees that you possess income and capabilities that make you solvent, you get the loan with a small interest.

But where does this interest come from? How it is actually calculated? In the bank it is basically done with computer calculations on the information you have provided and you usually can negotiate the marginal a bit lower. But if we take some macroeconomic theory, the formula is quite simple:

r2 = (1 + r1 / a) - 1

where,

r2 = the rate on which the bank is going to lend you

r1 = the rate of interest that you can get from depositing your money to the bank

a = the proportion of population who are "good borrowers" (pay their money back with no delays, with 100 % certainty)

For instance, the current interest paid on Nordea's Perk Accounts is 0,05 %. If we take this as a value of r1, and we suppose that 99 % of the borrowing population are considered as good borrowers, we get that the r2 equals approximately 1 %. This means that when applying the mortgage, the expected marginal you are going to be offered is going to be 1 % on your mortgage. However, we must remember that this is considered as average, supposed that 99 % of the borrowers are solvent enough. If you are a doctor or a lawyer, the bank might offer you considerable lower marginal since you are in the top percentages of solvent customers.

It is also easy to see the effect of scoundrels who have defaulted their loans or are in trouble with their solvency. If everyone would be considered as a "good borrower", r1 equals 1 and so r2 would equal 0,05 %. That would be a very cheap interest on your mortgage.

If I have the time, it would be interested to go around banks and to test this and ask for loan offers. They probably are going to offer different marginals. Then it would be interesting to use this value to predict their value of a while comparing the interest rates in their deposit accounts. Probably a sequel for this blog is coming some day.

In real-life this might not be the case. The house itself  and its location is going to also affect the amount of the marginal. Also we must not forget that banks compete fiercely against each other on who has the most solvent and satisfied customers and the most diverse portfolio in case of 2008-like mass-defaults.

What about the amount of loan that you can get? This depends on your lifetime-wealth.You have a budget constraint, which states that you cannot consume more than your current disposable income plus the amount that can be borrowed by you pledging the future value of your assets as a collateral. The bank knows this and calculates your current disposable income and asks about your collateral. For instance, if you have a lot of consumer credits that you have use to buy a car or a snowmobile and no collateral, you are already in danger to get into troubles with your solvency. Your current consumption is considered to be more than you can borrow with your assets as collateral, the bank might not give you the loan. Or will give with a high interest.

This all comes from macroeconomic theory. But what can an individual to do in practice to maximize the amount of loan and minimize the marginal? Probably the first things you should do are getting rid of excess credit cards etc that distress your solvency. Another key point is to keep our consumption within limits and as low as possible. If you have a steady full-time job, this helps also. If you are a doctor or a lawyer or studying to be one, the correct row for the jackpot is already given to you.

And the most important, keep your credit sheet clean and pay your debts! If you don't, we all are going to suffer from higher marginals that wouldn't exist in perfect credit markets.

Text SW

Pictures don't belong to me

Could AI make us all rich?

During the past week I found an interesting article about an ETF that is managed by AI. The ETF is all about IBM's Watson-platform managing the portfolio by analyzing one million market signals and news articles from 6000 companies on a daily basis. It uses a portfolio of 60-70 companies that Watson selects by optimizing lower risk and capital appreciation.

The concept is so fascinating that I couldn't help myself thinking it further and write about this. Could this kind of AI make human portfolio managers unemployed some day? Could this kind of ETF be more profitable in the long-run because it has no human error in portfolio optimization?

For these questions I had to consult my AI-expert (who we can call with an alias Kolari for example) so that I could have e better perception about an AI as a portfolio manager.

It is true that the AI is free of human emotion. It doesn't experience greed or fear, the two most common feelings in the stock-market. The AI doesn't make human errors in picking companies and it doesn't sell the equities in panic in case of a market crash. Similarly, it doesn't buy stocks that are hyped by third party analysts if it sees that the stocks are overvalued or present a risk that isn't valued to the price of the stock. The stock-prices are calculated by robots and transactions are made by robots (expect in NYSE), so why wouldn't stock picking made by a robot?

As stated in the article, in theory the AI should become more efficient and more "smart" as time goes by. The AI is placed to the context of financial markets, where by analyzing data continuously, it learns more and more about the movements of the financial markets. It will become more capable of making right decisions when it has figured out what inputs create wrong decisions that produce loss and what inputs create decisions that generate profit. It is also more efficient to analyze news, reports and social media and AI requires less time to process them than a human portfolio manager.

This has been witnessed before. In the video-game world several AI's have been created to observe and learn from the best players of certain strategy-based video-games. When the AI has observed millions and millions of games and transactions from the world's best players, it can copy those strategies in order to beat other players and to learn even more from the context in which it operates. It can also copy itself hundreds of millions of times to be able to play against itself in millions of different servers. Handy, am I right?

This is where the first question arise. In what transactions will the AI actually learn while managing a portfolio? In theory it can copy the other "human players", the investors in the market but they certainly make mistakes some time. Copying them would make the AI repeat the same mistakes. However, the AI is still able to learn from them.

What Kolari suggested is that this AI should be thought perhaps as a more sophisticated analytics. In terms of that the analytics should work just fine in certain circumstances. However, even with modern technology it is almost impossible to know in which way the stocks are going. Furthermore, this kind of technology would base also partly on historical information such as decisions made in the past and on what circumstances the stocks have gone up. This means that every single thing that affects them should be inputs in this system. But we all know that historical information cannot be used as a certain way of predicting where the stocks are heading.

Perhaps the biggest reason why I'm being careful on the hype for AI-investing, is the existence of unexpected shocks. A great amount of uncertainties exist in the stock market. Have you ever wondered why the stocks start sky-rocketing if a purchase offer or a fusion notice are announced? It is because no-one could expect that these events could happen. Usually the biggest volatility in the stock-market occur because of either positive or negative surprises. I highly doubt that even an AI could expect unexpected circumstances no matter how much information is gathered. The point is that the right information couldn't exist at all before the unexpected surprise.

Still, the AI portfolio management could work and it could be the next revolution in the financial markets. It would make the AI strategy transparent for all investors, not just hedge funds that might have use this kind of technology before. However, the development of this AI could take years or even decades before it would become efficient enough and making the minimum amount of errors in portfolio optimization. We don't have much data since this AI started trading on October the 18th, only a week ago. I'm following the ETF regularly and if I'm crazy, I might put a couple of euros to it and see where it is taking me.

But I'm not yet fully convinced. A guess is more proficient when it is backed with mathematics, but in the end of the day, it is still just a guess.

Text: SW
Pictures don't belong to me

Buying the Pot

First of all I would like to present my congratulations to Richard Thaler for winning the Nobel Prize in Economics this year. The award went basically to pioneer work in the field of behavioral economics.

Now, first when people think about economics it's purely about maths. Maths maths maths maths. Integrals, differentiation calculus, matrix algebra and optimization. But every single time I'm sitting in my lectures of Mathematical Economics a quote from the Great Milton Friedman comes into my mind:

Economics has become increasingly an arcane branch of mathematics rather than dealing with real economical problems.

It is true that mathematics forms the basis of economics. Some basic methods in mathematics are needed to solve economical problems such as optimal consumption bundles and utility maximization. But if we take a look at one definition of economics, it states that economics is about studying scarcity and how people use the resources their given. Economics focuses on the behaviour and interactions of economic agents and how economies work. The key-words here are behaviour and interactions.

Economics and financial markets are all about the people. The reasons of why prices vary, the levels of production are altered in the economy, why the stock-market goes up and down and why inflation exist comes from the actions you and I decide to make in different circumstances. It is all about us.

If I would be to perform research of any kinds, it would be probably to the fields of behavioral economics and behavioral finance. Let me explain why.

I don't consider myself as exceptionally good in maths, so often I and my class-mates ponder that how can I be good in economics if I'm just average in math? The answer is simple; I know my people. Through empathy it is possible to know how people feel and what do they think when making economic decisions. The're human just like me and they want to maximize their utility just like me. If you just focus on your environment and analyze people on how they behave every day, you can learn a lot about people and society and also some basics on economics.

Consider for example the awkward situation when someone you've met at some party 1,5 years ago walks on the same corridor in the University. You probably hope that he/she doesn't recognize you and you try to look away. With a high probability, the other person is thinking exactly the same and tries to avoid eye-contact. This for example might support the theory that people tend to act in the same way in the same circumstances.

The basic presumption in both micro -and microeconomics is that all the agents in the economy are rational and predictable. Producers are profit-maximizers and consumers are utility-maximizers. This might be the case in general, but when you take a look at it, you realize that not ALL the agents in the economy work rationally or act in a same way as most of the other people. However, this presumption is important in order to fit different economic models into real-life situation, even though the presumption itself is rather irrational.

Good example is the theory called money illusion. This has to do with the controversial curve called the Phillips curve. A curve invented by William Phillips describes the inverse relationship between unemployment and inflation. Milton Friedman argued that there doesn't exist a relationship between inflation and unemployment. Why? Human behavior!

If the inflation rate is 2 %, then people expect that the inflation is 2 % and decide to negotiate an increase in wages on this rate. Now if in the same time unemployment is reduced with expansionary demand-side policies, this would increase the inflation tare and the demand for labor. In the short run unemployment will decrease when higher wages attract more workers. When the workers realize that their real wages have not risen because of the higher inflation rate, some workers might quit their jobs temporarily, causing the level of unemployment to go back to the natural level. The workers have suffered from money illusion, partly caused by their rational expectations on the inflation rate.

What about the stock-market? Even though there are some fundamentals that control the stock-market it is basically about psychology. Especially different kinds of organizations giving analyzes and preferences over stocks have a considerable power when it comes to steer people towards investing in particular stocks.

If you are into investing, you might have also heard the rule that if the persons of responsibility in a firm decide to sell their own stock, that could be alert that they know something that you don't and that something sends them to short their position. This can cause a mini-panic in the stock-market where the shareholders decide to follow and sell their stocks as well.

On the other end, if the CEO Antti Herlin decides to buy worth of 30m€ stocks of Kone Corporation, that means that the Head is confident on his own business. This can push investors to buy the stock even more and through that the market-value of Kone is increasing, no matter what is really going on in the firm's operations.

The insiders know with 100 % what their actions will cause. So there exists two options: Either they really really know something, or they are trying to get an advantage from the situation.

The latter one can be described probably the Rothschild legend. It tells a tale of Nathan Meyer Rothschild who was following the Waterloo-battle and was certain that England was going to beat Napoleon's army. Rothschild rushed to London for the stock exchange and started to sell rapidly English bonds. Soon whispers started to go around that Rothschild knows that France has won the battle. This caused a panic where the investors were selling all of their bonds in fear. When the panic was about to end and the value of the bonds was extremely low, Rothschild bought a huge amount of these bonds back. Soon the news broke that England has won in Waterloo and this sent the value of the bonds sky-rocketing and Rothschild made a fortune from the trade. True or not, this represents the role of investor behavior in the financial markets.

If you know yourself and the other people, you are not the fool in the market. The fool is usually the one who doesn't know who the fool is. People say that the stock-market is a game of lottery. No, it is not. It is a game of poker. If you want to make money, you need to analyze the people you are against and act with it. You might think that poker is about mathematics and probabilities as well, but it is also about psychology and human interaction.

We often think that the world is a rational place that can be explained with science and mathematics. That is wrong because we are people. People are irrational, unreliable and can be wrong and cannot be interpreted with quantitative methods. And when it comes to making money in the economy, buying the pot is the situation where you want to put yourself in.

Text: SW
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A Little Bit of Inflation

We all know our common friend, the inflation. Inflation basically means the increase in the general price level of goods and services. In practice this means that when time goes by, you are able to buy less with your monthly salary than before. For example if inflation-rate is 2 %, that means that the general price level is rising all the time with a rate of 2 % and the real value of your money is decreasing with a rate of 2 %.

The European Central Bank for example has a goal of maintaining the rate of inflation at below but close at 2 % in the medium term. However, in some countries like in Venezuela, the inflation-rate is currently estimated to be 11 200 000 %. That means that the Zimbabwean dollar is almost completely unvaluable! Even Habbo-coins are 60 000 times more valuable currency than the Zimbabwean dollar.

My friend actually showed me a bill of 1 000 000 000 000 Zimbabwean dollars that he has managed to get from his cousin in Africa. He also said that the monthly salaries of people are delivered by a truck! In the restrooms it is forbidden to use bills as a toilet paper. How on earth did Zimbabwe get into this situation

Couple of reasons exist for hyperinflation. First of all is corruption. In the countries where the government have their hands on the central bank, it might become lucrative to fund the government's deficit by printing more money. This increases rapidly the money supply in the economy, which according to quantity theory of money, increases inflation. For example in Zimbabwe, the Mugabe administration decided to print more money in the early 2000's to increase the salaries for the people in the government and in the military. These economic mis-steps inevitably lead to unrest and poverty. Because of corruption and excessive money creation, the economy and and the people are suffering.

Now the big question is that is the hyperinflation a fixable problem? Well, at least in Germany after the first World War, the government managed to get the hyperinflation in control. This was done basically by inventing a whole new currency to be backed by mortgage bonds indexed to the market price of gold at the time.

If Zimbabwe and Venezuela want to do the same, this suggests that they would have to also abandon the old currency and to develop a new one. Unfortunately in the current foreign exchange market most of the values of the currencies are determined by the supply and demand of these currencies. It is very rare to possess a currency that would have its value fixed or pegged to some commodity, for instance. This might make it difficult for example to Zimbabwe to find the demand for its new currency.

I started to think an interesting option: Bitcoin. Most of the currencies are inflationary, but would virtual currencies such as Bitcoin work as an official currency of a country? What if the official currency of Zimbabwe would be Bitcoin?

Bitcoin is considered a very controversial currency. For instance, the European Central Bank has stated that it doesn't define Bitcoin as a currency, since it doesn't possess enough characteristics and qualities of a currency. I would agree on that. Bitcoin seems more of a speculative instrument for investors than an official currency. Although Bitcoin is already used in the internet as a valid currency for payments between consumers and service providers all over the world.

 

If something is interesting in Bitcoin as a currency, it is the fact that unlike any other currency we know, Bitcoin is a deflationary currency. This means that the real of Bitcoin is increasing over time (or at least has increased). Euro, pound sterling and the dollar on the other hand have decreased in real value over time as you can see from the graphs above. Why you ask? The inflation.

But why doesn't Bitcoin produce inflation? The maximum amount of Bitcoins in the world is fixed. The algorithm in the so called block-chain creates more and more Bitcoins with a decreasing growth rate, until the maximum amount is reached. In practice the calculations become more and more complex and when more Bitcoins are created, the more time it takes to create more. Because the supply of money in this case is fixed, Bitcoin doesn't create inflation in a way like traditional currencies do.

This is why the value of the currency is increasing. When the demand for Bitcoins increases, the value of the Bitcoin also increases since the supply cannot adjust to the increased demand for Bitcoins.

The consequences of using a deflationary currency could be interesting. There exist a danger that consumers are waiting for the value of their currency to increase before consuming goods and services. This would decrease the amount of consumption in the economy and can lead to lower rates of economic growth. Also the amount of investments will be reduced when the currency itself can be seen as a form of investment. Similarly the reduced revenue of firms and corporations can lead to unemployment.

But what about a country like Zimbabwe, where already the unemployment rate is over 90 % and the level of investments and consumption are relatively low? In theory the negative effects are already been gone through, so we would need to focus on the positive effects of deflation.

Deflation itself increases the amount of disposable funds especially for middle class and poor people, when the value of their small amount of money is increasing. This might be used to boost the consumption in the Zimbabwean economy. Similarly deflation would require the central bank to lower its interest rates, which would make loans more cheap for consumers, which could can increase the amount of consumption in the economy even more.

Deflation would also decrease the value of assets when the currency would become an alluring form of investment. Then the wealth of the rich government officials who own for example property and stocks, would decrease. When the wealth of the poor people on the other hand increases, this would also decrease the economic inequality in the economy.

When more loans are granted, this would also mean that the money supply in the economy would increase again. However the maximum amount of Bitcoins is fixed and this relationship would create an interesting dilemma I would need to think further. I also know there are probably many controversies concerning these theories but I wanted to discuss some of my thoughts on the matter.

Text SW
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A Gloomy Welcome To The Future

Partly inspired by the book Rise of the Robots by Martin Ford and partly because of the recent discussion about a global basic income, I started to picture the future inside my head. The future of economies, money, businesses and employment. And they seem very dark, disturbing and mysterious for me.

Currently the technological development is extremely rapid. New technological innovations designed to make our lives easier and our economy more efficient are born almost every hour. The production of goods of services becomes more cheaper and efficient and we people have more spare time in our hands than ever before. Well, at least it should be. I know myself that staring my WhatsApp takes several hours from my day in total. But if I wouldn't do that, I would have lots of spare time in my hands even as I'm writing this.

Even though digitalization and robotization destroy some well-known jobs that we know, it also creates new jobs. Now when we don't need the guy in the production line to pull the handle 8 hours a day, he will be replaced with a repair man who takes care of the machine, cleans it and updates its software. Also more people are needed to invent, build and to design these machines. So in theory, technological development shouldn't increase unemployment significantly in our economy.

But consider this: With the current pace of technological development, we might end up in a situation where artificial intelligence, robotization and digitalization are in a point where jobs and employment aren't needed. The machines could be so advanced that they don't require any updates or maintenance and the machines themselves can create more machines without any human intervention. In a situation like this, no-one would have a job! Several science-fiction movies have already tackled this potential problem with different kinds of representations.

So where does the money go then? The wealth and revenue produced by the machines would go to the owners of the machines and investors. Other people would be unemployed and receive only unemployment benefits (if those). What would other people do? How would they get along? History suggests that probably without any intervention this would inevitably lead to a rebellion, war or a insurrection. This sounds very dangerous at least in my opinion. What if the machines go to war instead of the people who own them? The development of artificial intelligence should be considered partly because of this reason. The machines could seriously turn against us if things get too far. This is what also Elon Musk has been thinking in his latest tweets.

This is where the global basic income would introduce itself. Either governments or an independent fund could arrange a basic income of some sort that would create the flow of wealth from investors and owners of the machines to all the people in the world. This might sound something very idealistic, since usually those who have the wealth, aren't interested to share it with others who "haven't earned it". This could for example be done through transfer incomes and universal corporate taxation, but this would require agreement on global fiscal policies. Are nationalist countries ready for that? I don't think so.

So the establishment of this kind of arrangement would be highly difficult if not impossible. But what about if money itself would become useless because of the technological development? What about if absolutely no one would have a job or a source of income. What would happen then? Most likely individuals and groups would get together and start to either trade or would slowly create a subsistence economy. People wouldn't even need jobs or money and money would become useless.

It is an interesting concept. The big question just is that how we could end up in a situation like the this and to avoid the situation described earlier. Money is something to integrated in our society, that I hardly see a way out of it. It is THE method to use for trade, to measure value and to maintain value. In what circumstances we would be likely to get rid of it? That is something I just can't figure out yet.

But the point is that our technological development is so fast that we hardly take notice. The truth is that the employment and jobs as the way we know it now, will be history. The regular life with nine-to-five days will be over. Then we have to know what else we could do in our lives. Could we finally have more time for exercise and culture? Would people educate themselves more? Or would we just be locked to the screens of our smartphones for a whole day when we got nothing else to do? I fear that the answer could be the latter one and I hope that it won't happen for the sake of humanity.

Anything could happen. Twitter can be used to declare a war, at least according to North-Korea.

Now I'm off to read my WhatsApp-messages, check my Instagram, write a Tweet that a new blog is out and to share this post in Facebook and LinkedIn. And then off to read the Rise of the Robots before going to the bed and prepare myself for the mathematics lectures of tomorrow morning. Oh boy the time indeed flies then.

PS. If you feel like I'm wrong and you're always in a hurry, try to offline yourself. Log out from all of your social media and relax. You will be amazed how much spare time you have in your hands.

Text: SW
Pictures on't belong to me

SW Q&A

I decided in this blog to answer some questions from my readers. I couldn't decide on what to write next so I decided to ask some of my readers if any of them would have anything in their mind related to economics, money, investing or the markets that they would like to know a bit more.

These questions are gathered from my readers and I try to answer them the best of my knowledge, spiced with my personal opinions. So let us begin:

The value of household deposits in Finland is currently over 80 billion euros, which is almost half of the Gross Domestic Product of Finland. Even though the interest rates of the bank accounts are practically zero, still they are one of the most popular forms of savings and investments. Where does this come from and is there anything that could be done to change this? - Sonja

A difficult question to answer. I think that main reason behind this is the unwillingness of us Finns to take risks with savings. The bad depression in the 1990's, the burst of the IT-bubble in the start of the new millennium and the black year of 2008 might still sound scary for the most of the potential investors. The money is considered to be safe when it is in a bank account.

Two solutions could exist. First of all people should be educated somehow to really know about what investing really is. What are the benefits of investing, how large the risks really are and how inflation really affects the savings in the bank account. Seems to me that people aren't aware of these things. Another point that boosts the flow of savings from bank accounts to the stock market, for instance, are the extremely low interest rates. At least in my job I've noticed that this really creates increasing incentives to consider investing for many.

What is your opinion on the current fiscal policy here in Finland? - Heikki

I sincerely think that our current government takes the right actions to tackle the problems in our economy. The actions are highly unpopular but I think they are a must so that the future of our welfare-nation wouldn't be compromised and our economy would be competitive in the global markets.. It is too soon however to say if the actions have a real effect, but we will see it in a couple of years or so.

I still honestly think that something has to be done on the level of wages in our economy as well to increase international competitiveness. Finland is a relatively open country, which means that most of the wealth is created from competitive export-products.

How do the fiscal policies of the large countries in the Eurozone affect the economy of Finland? -Eelis

I think that the fiscal policies of large countries in the Eurozone such as Germany and France have no straight effect for the economy of Finland, but for example the change in the tax-rates in countries where we have operations or export might affect the competitiveness of certain industries and corporations. But the economy of Finland is more depended on the monetary policy than the fiscal policies in the Eurozone.

How could we reduce the inequality in the finance of modern football? Is it ok for foreign millionaires poor money to the clubs and is there an alternative system that could be developed? -Tatu

Interesting question! The money that goes around modern football are soon getting out of hand. Even more and more money are paid on certain players and hundreds of millions of euros are going from one club to another despite FIFA's efforts to prevent this. This will lead to the situation where the most wealthiest football clubs (with the richest owners) can have the best players and the best baselines to win the leagues and earn more money.

I would prefer an alternative system. But what it is, I don't know. Maybe a system where all the clubs have a common owner might decrease financial inequality in football leagues? But organizing this would be very difficult if not possible. This is a question that I need more time to think about.

Is it a good idea to support for example wind-power with tariffs? -Eemeli

Feed-in tariffs are commonly used in Germany, for instance to support investments in renewable energy sources such as wind-power. Personally I'm not sure if it is the best incentive to produce and to develop renewable energy sources. If the market-price of electricity is less than the guaranteed price for the producers of the renewable energy, the consumers have to pay a higher bill from their electricity that comes from renewable energy sources.

Generally the tariffs and the costs of production decrease over time when the technology develops. But when it comes to wind-power, it rises the question on which wind-power itself is efficient and how well can it produce the electricity for consumption.

If someone would be interested to start investing, is there any tips that you could give? Or do you know a book that could be helpful to get things going? -Saana

The most valuable tip is "Buy and hold, never sell". The wealth is created through holding and buying more of your investments, but never getting rid of them. I would advice first of all to get familiar with different financial instruments: Bonds, stocks, ETF's, funds etc and to decide which one of those would suit for you the best. You need to also ask yourself how much time and effort are you willing to put on your investments when you are deciding your road to prosperity.

The book that taught me everything about investing is the Miten sijoitan pörssiosakkeisiin by Seppo Saario, which is also known as the Finnish "Bourse-bible". I can warmly recommend that to everyone.

Is the current monetary policy of European Central Bank just a great con game, because the expectations on inflation are still extremely low and the pace of current economic growth is very slow? -Tuomas

ECB is pretty much screwed right now. The quantitative easing will soon face an end, since the available bonds to buy are soon going to run out. The ECB has no option than to continue QE and to maintain low interest rates now when the Euro is currently strengthening against other currencies. Seems that the interest rates can't go any more lower and the possible rise of the interest rates would feed the strengthening of the Euro even more, which would harm the competitiveness of EU's export products significantly. ECB has to rely on FED and the value of the US Dollar on its monetary policy. If the interest rates in the US start to rise even more, ECB would have more space to breath with its monetary policy.

It is commonly stated that the growth of economic inequality is bad because it is but could it be justified in economic terms? In addition in what circumstances the "tricke-down"-effect could exist or is it just populism? -Anna

Economic inequality generally harms economic growth. A good example is the role of consumption in economic growth. When more individuals have more wealth to dispose on goods and services, this stimulates the economy when more goods and services are being sold and bought. According to some research, the middle-class does most of the consumption in the United States, for instance. They are the people who are paying on their food, housing and hobbies the most. The richest 1 % don't eat any more food than the people in the other income-classes, or in some cases they buy food even less if their family is small. Bill Gates still needs only 1 pillow for sleeping, even though his earnings are a bit more than the consumers in the middle-class. Their extra money can be however considered to form investments in the economy, which also stimulates the economic growth.

What about the trickle-down effect? The answer is more political than scientific. My personal opinion is that trickle-down effect could exist and I don't consider it as populism. By tax-cuts to corporations the costs of production and the costs of doing business would decrease. This CAN but necessary DOESN'T stimulate economy and create more jobs or investments. What if the businesses don't have any use for the extra money? In that case, the corporations wouldn't build new factories or hire new people; they could just pay the extra money as dividends to investors. Trickle-down effect thus exists in my opinion but not in all circumstances.



So here we are. Thank you so much for your questions! They weren't easy one and I hope that my answers are adequate and most of all, clear. If any of you have any additional questions or think that I didn't answer these questions well enough or have mistakes or I misunderstood something, you can also ask me additional questions. I'm happy to answer them.

Text: SW

The Alexandria Experience

Lately a lot has been on the media concerning investment advisors and financial advisors. Private bankers and different banking brokerages have been presented as impostors, the advisors as frauds and the advices themselves as completely inappropriate. Especially old people have been reported to suffered from poor investment advices, where the financial instruments are sold for profit, not for them being the most appropriate for the people seeking for advice in savings and investments. The costs, terms and conditions and the risks haven't been fully understoord By the clients who these products and instruments were sold to.

As an employee in a bank and a keen follower of economics and financial markets, I consider that savings, investments and wealth are important to all of us and the information from these should be emphasized more on the media. Unfortunately, only the negative sides of financial consultation are commonly presented in the media. These kinds of hoaxes create even less interest towards investing among the common people. I wanted to see what the whole fuss of inappropriate investment advices was all about. I don't want that bad investment advisors ruin the reputation of reliable advices on one's own savings and investments.

I decided to set up a meeting undercover to one of these brokerages presented in the media, Alexandria. Undercover by meaning not telling that I currently work in a bank and that I'm currently in my 4th year studying economics. I wanted to see what kind of advices and recommendations these companies would give to the average-joe. I filled up the pre-information forms to be according to my new identity: Someone who hasn't got a clue even what a stock is.

I started by converting myself from the typical business school-student to somewhat more of the common man. The common man who looks like he is not possessing much information concerning the financial markets or investments and has no experience or expertise from the area.

On the day before the meeting, a young gentleman kindly called me and asked if I wanted a cup of tea or coffee during the meeting that was scheduled to me on the next day. What a peculiar way of sending a reminder for the meeting, I thought in my head. Also I was feeling a bit sick of the cheesynes of this kind of contact since after all, I know what I was expecting from the meeting. I was expecting myself to be bamboozled.

When I entered the negotiation room, I first noticed the simple greyscale that was controlling the room. Black and white paintings of sail boats on a grey wall behind a grey desk created the atmosphere of something to be created in this room. It was brilliant. The room was decorated clearly and closely to create this kind of feeling for the client.

The advisor who kindly offered me a cup of coffee with chocolate was older than me and looked very experienced. Right from the first moment I sensed that his presence was intented to low my self-esteem and create new division of power for the situation. Everything that he would say would be the truth and I should be quiet and accept his message at any cost.

We started the conversation by him asking about why I was there, what I do for my living etc. I said that I'm interested in invest some of my funds from my current account to some more profitable investments and that I would be interested to hear what Alexandria has to offer. I said that I've been working as a mason for a year or so.

Suddenly the advisor calmed, looked me straight into the eyes and dropped a bomb to the room by asking: "Are you really telling the truth?"

Huge letters saying GAME OVER came straight into my eyes. He had done his homework. He had googled me, checked my LinkedIn-profile and read my blog posts before the meeting. The fraud knew that I'm the fraud and that I work in a bank. Everything that I told him was complete bullshit.

He started to ask questions of my true agenda. Why did I really arrive? Did my employer send me to the meeting for corporate espionage or something?

By caughting me red-handed I was forced to reveal my true agenda of pretending to be someone else just to be fooled by him. I told my plans of revealing in this blog that how I would be fooled to invest in non-profitable, expensive and inappropriate instruments.

Source: Alexandria (http://www.alexandria.fi/alexandria-menestyi-erinomaisesti-yksityispankkien-vertailussa)

After that the advisor started presenting me indicators presenting customer satisfaction and pointed out that even well-known banks have gotten themselves into similiar trouble as Alexandria. Also a good point was that the soon arriving MiFid II-directive would regulate their business even more than before and their business was already (propably because of the media attention) well regulated. Only certain amounts of certain instruments can be sold to people and a certain amount of capital would be required to certain instruments in order to prevent the hoaxes presented in the media. MiFid II -directive is aimed to stop these kinds of hoaxes by more regulation and they were well aware of it.

He was well aware of the hoaxes and told that no such cases from individual employees have never been found in the firms' archives. Fair enough.

I friend of mine told me that people to be hired in these kinds firms are people who have no experience from the financial markets or a relevant university education. This is why they easily believe in their own jargon and can be so convincing in selling these awful instruments with 3,3 % management fees for people. On the other hand it would be unfair to make sudden conclusions and generalizations from this. These people still have to complete the APV1-degree in order to be qualified for the job. That means that they still have know something alright.

It was a shame that I didn't get to see the process or my recommendation that would give them the highest fees. I was adviced to try my luck on another local brokerage that is really bad according to them. Propably because my potential blog would hurt the competitor more than them? I don't know.

Two lessons I learnt: First of all, you cannot judge the brokerage without going there and asking for advice. You can only tell if its bad by having some knowledge of investing before going to the meeting. Then you can make your own conclusions on the potential of the instruments recommended for you. I'm not saying that Alexandria is a bad company for everyone, I say it is not a company for me.

Secondly with as strong social media presence that I possess, it is possible to be anonymous. I still wonder why on earth did they decide to google their customer and watch their LinkedIn-profile. Have similiar frauds been there before? Do they need to be careful now when they have a bad reputation? Even a day after the meeting I noticed that several employees of Alexandria have been stalking my profile after the meeting and I'm certain that you are reading this.

Anywho, I didn't achieve what I planned but I managed a get a thing crossed out from my bucket list: Being a con artist and pretenting to be someone else for a day. My mistake was to introduce myself with my real name. Booking up meetings with a fake name on the other hand is nowadays almost impossible.

For my readers there in Alexandria, I did this only for myself and for my readers, not for my organisation. Thanks for having me still and thanks for the coffee. It was propably one of the best coffees I've had in my life, although it came in the expense for me losing my face.

Text SW

Does Ethical Business Exist?

In the current society where all the consumers are very green in terms of values and very aware of the current state of the world. This emphasizes the importance of big corporations ans even smaller firms to be more transparent and responsible in their operations. Thus responsible business has become on of the most important things in doing business in these modern times and corporations just cannot pollute the whole Gulf of Mexico without some serious consequences am I right?

Many arguments are for and against responsible business. By being responsible, the corporations wouldn't run their operations in ways that would endanger the environment, for instance. Also by being green the corporations would also create competitiveness of the firms who are seen as less ethical by potential consumers.

On the other hand, doing business ethically and responsibly comes with a cost. Firms must pace resources to ethical and responsible business continuously and this can be against the basic idea of a firm; to create maximum amount of wealth for the shareholders. A new program or marketing designed to be environmentally friendly, can be shown as a reduction of dividends, for instance. This can create unsatisfied shareholders that would like to take their investments out of the firm.

In my personal opinion corporations should be ethical and show responsible behavior in their business. But the big question is that can they be and will it matter? Will it matter in our world filled with greed and capitalism? Can you be ethical when after all, your actions themselves still are unethical?

The market system is inherently unethical. The law of supply and demand is in the heart of economics. Still, it is based on the willingness of consumers to buy the product and the suppliers to supply the product in a given price. The price mechanism doesn't necessarily present the real value of the product. It is only based on the mechanism of creating the most welfare in the economy (and maximum profits for the firm). Demand and supply aren't ethically driven.

Business is based on self-interest. Exchange will happen with a motivation for a benefit. Business is based on creating profits or a win-loss situation of the maximum kind. In theory, other man's win is an other's loss. Making profits out of someone's losses, well, that sounds unethical.

A good example comes from my dear world of banking. Back in the ancient times, Aristotle argued that interest is unnatural, since money, as a sterile element, cannot naturally reproduce itself. That's why taking on the interest on the money that you loan to someone else is unethical. You are not going to loan the money on your good will: You are doing it to get a benefit in the form of interest. The whole business idea of banks and the financial sector bases highly on taking interest and commissions on loans and financial transactions. The stock-broker trades stocks that lead to profit for the broker. The investment advisers advice you to buy the products on which they get the most profit. The two latter of these have gotten us into much trouble before.

The unethical nature of the world economy is also one causation of the business cycle with its booms and recessions. When a mass of economic agents are buying or selling products purely for the sake of making profits without considering the current economic conditions will inevitably lead to inflation and bubble economies.

So where this has gotten us?

It is still important businesses to be ethical and responsible in their actions, but people aiming their accusations on these firms on obtaining profits should aim their focus on the whole society and human nature itself. Although the truth is that we are probably a bit crazy of creating ourselves this kind of an unethical system.

But that's the way the world works. I'll say we abandon our political argumentation and our accusations of big corporations if we don't focus more on the philosophy behind our system when taking stands for or against ethical business. No matter how ethical a business tries to be, inherently business of any kind is unethical.

Text: SW
Pictured don't belong to me

The Great Portfolio Race

Right after the relatively moist New Year's Eve, me and my friend TV decided to become investors. We decided to start saving monthly to the stocks of our own choice on 9th of January. The strategy was to save in practice the worth of 1 pack of cigarettes per day. As this totals roughly 5€ per day, the monthly amount saved to the stocks was approximately 150€.

The competition is now ended and it is time to evaluate the profits and to choose the winner. It is also a good checkpoint for us to evaluate our portfolios' 6-month return. But before that, we'd like to present our portfolios, strategies and reasons for picking the shares that we did.

Portfolio SW

SW: My strategy was plain and simple by few rules of my own. The basic idea is to invest in firms with a high dividend-yield and a moderate valuation. Few rules of my own were to invest only for the firms that I know extremely well and whose business is familiar to me either through visits to the headquarters or regularly followed news feed. The aim was to diversify my portfolio efficiently and with equal weights to different industries and from Europe and outside Europe.

Tesla Motors Inc.

But first, every portfolio needs a one stock from pure emotion. That stock for me is Tesla Motors Inc. Perhaps mesmerized by the stories of Elon Musk and the future of the electric car, I see a huge potential in the firm. A company which was told to never make it to produce or sell electric cars at all has developed a brand among petrol heads and consumers that we haven’t seen before; all without marketing of what so ever. Owning and buying a Tesla nowadays is a statement emphasizing green values and entering to the future.

The risk is the firm hasn’t actually made any profits and the stock has been soaring like hell for the whole year. Tesla might be a tech-bubble. All the expectations are on the cheaper Model 3 that will come to production and the value of the stock has been soaring for this reason. Model 3 might be a perfect ten, but there are concerns concerning the production of the car itself. Is it produced fast enough with quality to meet the demand and will it hurt the sales of Model S and Model X too much? Nevertheless, I believe that the investments on the battery-technologies and solar might pay off in the long-run. You just can’t value Tesla as a car company.

Nordea Bank AB

The biggest bank in Scandinavia is known for one thing: Dividends. The current Chairman of the Board, Björn “Nalle” Wahlroos is known to share all the extra wealth with the investors. The numbers tell it all: The average dividend-yield of Nordea has been over 4 %!

Even though the dividend-yield is high, the current valuation is well below the industry average, with a P/E-value of 11,71. Also the heavy investments in digital banking could decrease costs of the bank, increase competitiveness in the sector and to ensure the current position of Nordea in Europe. The conditions to keep the current dividend-yield and to achieve growth are more than good, even though Nordea exposes to the basic risks in credits and liquidity in case of a financial crisis.

Nokia Oyj

You just can’t be a Finnish investor without owning this stock. After the acquisition by Microsoft led Nokia to sell all its mobile phone manufacturing away from Finland, the crown jewel of Finnish information technology has slowly waned away. Still Nokia is considered as one of the leaders globally in information technology.

However, nowadays the future for Nokia seems a bit brighter. The firm is going through massive investments for telecommunications and especially 5G-technology. Even though Nokia isn’t going to sell as much phones as in the start of the century, the knowhow is extremely intense inside this firm and I honestly believe that the investments to 5G-technology for instance will start to pay off during 2018-2019.

Capman

My another pick from the financial sector is a Scandinavian wealth-management group Capman. The company started to pay dividends early this year, which has raised interest among investors. The firm has managed to seek growth and to cut costs and give positive signals to the stock market. The stock can be considered to be relatively undervalued at the moment, because the P/E-ratio is 12 and the dividend-yield over 5 %.

Wal-Mart Stores Inc.

One of the biggest firms in the planet offers a dividend-aristocrat from the United States. Wal-Mart has been raising its dividend for 44 years in a row! Even though the challenges in retail business are to be seen, Wal-Mart has been aggressively investing in e-commerce to compete against Amazon.com Inc. The company has managed to create competitiveness from its chain and by its own logistics. Currently the company trades with a P/E of 17,48, dividend-yield of 2,7 % and most of all, a debt-to-equity ratio of 0,54.

The risk with Wal-Mart is Amazon.com. After Amazon acquired Whole Foods Inc, investors around the world scared that this would be the end of the retail. Similiarly Warren Buffet sold almost all of his stakes in Wal-Mart earlier this year. But I don’t think so. I think the role of retail is going to change significanlt, but retail stores aren’t going to disappear anytime soon. People still want to see the product and try it out before buying it online, for instance. Another point is that currently the customer segments of Wal-Mart and Amazon are a bit different in terms of age and income, for instance.

Johnson&Johnson

Another dividend-aristocrat offers a relatively safe, diversified return to my portfolio. American medical giant Johnson&Johnson has also been able to increase steadily its dividend-yield during the years and the value of the stock has been going steadily up without any bigger plunges or surprises. The balance sheet is extremely strong so the company has good conditions to keep the growth in the future as well. I’d like to call this the safe “human sector” of my portfolio.

Outokumpu Oyj

Outokumpu is the global leader in the production of stainless steel and is the only steel-company in the world that’s solvent with its own ferrochrome. This also introduces a risk for the company, since the revenues are extremely dependent on the market price of commodities and ferrochrome.

Company is clearly undervalued compared to the sector, propably because of the amount of risk in this stock. The stock has waned for a while but signs have been seen that Outokumpu would start to be profitable again after the years of misery. Outokumpu hasn’t used its losses in taxing and I believe that the cash-flows are increasing significantly for the next couple of years. There are even hopes in the market that Outokumpu would start to pay over 3 % dividends again anytime soon. Tesla and Outokumpu are the “lottery-stocks” in my portfolio.

Kone Oyj

Another global leader in its industry is the Finnish manufacturer of elevators, Kone. Kone has been famous for increasing its value over the years with aggressive acquisitions and it has also had a high-dividend-yield. The truth is that the company is trading with a premium compared to the competitors, but the knowhow of making business and seeking growth is very strong in Kone. The dividend-yield of 3,4 % also attracts competitors and the firm is in an excellent condition to pay similar dividends also in the future.

Kone made a significant drop in value earlier this year, which offered me a chance to get relatively cheap Kone-stocks to my portfolio. Even I consider the stock as a safe choice, the risk comes with China. We are not quite sure yet how investments the Chinese market will affect the revenues of Kone. Only time will show.

Telia AB

My final pick for my portfolio is a Swedish mobile network provider, Telia. With a P/E-ratio of 13 and a dividend-yield of over 5 %. The immense amount of dividends to be paid for any firm is considered as a risk, but investments that Telia is going through at the moment are going to increase the efficiency and profitability. The stock offers steady profitability, low-risk and a decent dividend-yield for my portfolio.

Portfolio TV

As I’m writing this I’m enjoying an amazing cup of blueberry juice on a flight operated none other than Finnair. This company holds a special place in my heart as I fly for business several times every quarter and it always gets me from point A to point B with ease and believe me, in comparison to after flying on some airlines in the states they treat me like royalty. This would be almost everything I’m looking for in the companies I invest in: innovation, great customer service and sustainability. Funnily enough it’s not in my portfolio mainly because of airlines’ low profitability.

However, getting to the companies that I do own. They were picked mostly using fundamentals. I aim to understand the core function of the business and the factors that drive their growth. This in addition to providing services in modern megatrends and a steadily growing EPS allowing for increasing dividends is what intrigues me. Now none of the companies in my portfolio are exactly cheap but that is just the way it is in this market and since we’re putting in even amounts every month prices are bound to average down at some point. I cannot tell the future so the best way is to just keep rolling.

Sampo Oyj

Sampo was on the top of my pick, the cornerstone of the portfolio and the anchor keeping it steady. As SW already mentioned the inspirational “Nalle” Wahlroos is known for his generous creation of shareholder value. Now take that and combine it with his right hand Kari Stadigh and you have yourself a prime example of great leadership doing everything they can to keep the machine running smoothly. In addition, since Sampo owns large Nordic insurance companies like If and a third of its value is held in shares of Nordea Bank AB it is a dividend churning machine.

Neste Oyj

Neste appeals to the environmentalist side of me as they are heavily investing in biodiesel. A good step towards a greener future. They’re heavily invested in Europe and USA and even with the Trump administration cracking down on any kind of innovation I believe they have what it takes.

Kone Oyj

Kone is one of the companies that I have that are riding on one of the megatrends of our time. That is the urbanisation of the world. Definitely a solid company and it feels good seeing that logo in elevators halfway across the globe. Kone is another heavy hitter in my portfolio with most revenue coming from china giving diversification away from the Nordics. 

Verkkokauppa.com

Now this one was a new one even for me as they only listed onto First North Finland in 2016. However, I have been purchasing my electronics from verkkokauppa.com for as long as I can remember. This is another company riding on changes as more consumers flock online to make purchases. Verkkokauppa.com has had a flying start and aim to grow aggressively in the next few years. The dividend stream is pretty light at 2.4% at purchase price but I will accept this in exchange for growth following recent heavy investments into new spaces.¨

Nokian Renkaat

Nokian Renkaat has had a rough few years with their main market in Russia tanking but now there are finally signs of improvement as car sales are increasing. Despite the troubles they had they still managed to keep an increasing dividend stream through the hard times showing the strength the company has. The company is investing heavily in new factories following increased demand and the brand is strong among specialty tires giving Nokian Renkaat a competitive edge in the market.

The rest

The rest of the companies in my portfolio fall under one or more of the criteria that I have elaborated on with the previous ones. Each one, however, was picked based on quality of the business and for the moment I won’t concern myself with fluctuations in prices. “Steady does it” is the word.

And the results are in......

after declaring the winner in the local pub, the loser had to offer a pint for the winner. The winner was Portfolio TV with a 6 month return of 2,9 % at this point. Portfolio SW had a return of 1,7 %. Even though the strategies were in somewhat similar, we managed to get some deviation between the two portfolios with our picks.

What's next? The monthly investing still goes on with these portfolios. What do you think about these portfolios and their 6 month return? Feel free to comment below.

Text: SW & TV