Those who cannot remember the past are condemned to repeat it. With the recent media frenzy over Facebook raising $500M in private capital, and companies such as LinkedIn, Groupon, and Zynga set to enter the public markets, it’s not hard to draw parallels to the dot com bubble that took place a little more than a decade ago.
Investors who get the chance to flock to this latest fad will hope to cash in on the social media boom. But is social media just a giant bust waiting to happen?
Much like in the late 1990’s, once the big players start the trend of going public, everyone will want a piece of the social media action.
We may start to see ridiculously high valuations on companies you’ve never heard of because they will supposedly become the next Facebook or Twitter. Even the valuation given to Facebook at $50 billion seems crazy when they had approximately $1 billion in revenue in 2010.
Social Media: The Problem is that it’s Free
Facebook, Twitter, and LinkedIn are all great websites in their own way, each building and sustaining huge online communities. There is little doubt that social media has changed the way we communicate and do business in the 21st century.
However, the problem with social media as a business model is that the membership and user generated content is absolutely free. The only way to make money is to sell advertising and try to seamlessly integrate it into these online communities without turning off its users.
You can argue that Google is the ultimate free internet tool, and they managed to generate a market value of over $160 billion. But Google acts as a portal to the rest of the web, users go there first to get answers on where to go next. You can build a business off of that kind of demand.
Facebook is meant to keep users on its own site, engaging with friends and family or just mindlessly wasting time. People spend more time on Facebook than on any other website. Facebook is well aware of this and is still trying to work with advertisers to find the best way to leverage this into a sustainable revenue model without ruining the user experience.
So How Will They Make Money?
To quote my favorite Dragon’s Den investor Kevin O’Leary, “So how do I make MONEY?”.
How many businesses do you know that have a Facebook fan page? Or a Twitter account that hasn’t been updated in months? Advertisers continue to struggle with social media because the communities and individual users were not built to be sold to.
Perhaps the more sustainable revenue model would have been to charge businesses to set up Facebook fan pages or Twitter business accounts. Or perhaps they could also get a percentage of revenue from any links to or sales made from that account.
I believe that Groupon has the most potential as a public company, with a proven revenue model that has estimated sales at $800 million in only 2 short years. The users obviously expect to be sold to since they are looking for a deal when shopping online.
So Groupon has the benefit of building a loyal group of subscribers which will attract more merchants who want to sell their products through Groupon. And by pocketing a percentage of each deal, Groupon can be the middle man without having to make a difficult choice on how to connect advertisers to subscribers.
Social Media Bubble?
Either way you look at it, these social media companies are going to attract a lot of money and a lot of attention over the next year or two. But for those investors who were burned during the dot com bubble, this situation must look eerily familiar.
Time will tell if the social media phenomenon will become the next big boom or the next big bust. All I know is, some people will get rich off of these companies in the short term, but not me, I won’t be playing.
In a previous post I suggested getting and perusing a copy of our credit report to check for accuracy. Enquiries were made as to how to obtain the actual credit score.
Although by law everyone is allowed a free copy of their credit report once a year from Equifax.ca or TransUnion.ca, unfortunately these companies charge extra to get the credit score. For about $24 you can get a copy of your credit report and credit score combined.
Related: What Does Your Credit Score Really Mean?
Beware of some websites that claim to offer free credit scores. They may sell your contact information to online marketers of credit monitoring services. Also, read the agreement carefully to make sure you will not be automatically charged a monthly membership fee.
Read the fine print of any site that says “FREE.”
Credit Score
Your credit score is a complicated series of calculations based on your credit history. The final number will be somewhere between 300 and 850. The average credit score is about 650.
A score of 720 or higher is considered good, and most lenders will give you their best deals. One under 600 will leave little or no negotiating room, so it pays to do whatever you can to increase the credit score – paying on time, not going over the limit, not opening a lot of new accounts, keeping balances below the credit limit, etc.
Related: Best Balance Transfer Credit Cards
I previously mentioned closing any accounts that are not being used. To clarify, don’t close all your accounts. Keep at least one or two revolving credit accounts open (especially ones that have been open for a long time), and use them periodically.
Warning flags will be raised if someone over, say, thirty years of age has no credit record at all. One example is someone closing all their credit cards and then using the secondary card of a spouse for all purchases. This may make life easier, but the credit history will only be displayed on the spouse’s record.
On a personal note, my husband’s credit score was always higher than mine even though I take care of the family finances and pay the bills, and I’m clearly a better credit risk than he is. I was determined to find out why.
It turns out that when we applied for our first credit card, he became the primary cardholder and the secondary card had the same account number and his name on it also.
I subsequently received a card in my name with a different number, but this made his credit history longer than mine. I imagine it should have evened up by now. Perhaps, out of curiosity, when I get copies of our credit report next time I’ll pay the extra money to get the credit score as well.
This is part three of a four part series on how to invest your money. The main focus of this series of articles is to discuss the psychology of investing, how to get started, finding your strategy, and building your portfolio. I hope this can be a resource for many people who are looking for information on how to invest their money.
Finding Your Strategy
Now that you have identified your investment goals it’s time to determine how to invest your money. There are many different investing strategies to choose from. Experts in each discipline will claim to have the best method for you to invest your money, but ultimately you need to find the right strategy for your situation.
The two most common methods of investing would be a passive investing approach and an active investing approach.
Passive Investing
Passive investing is a strategy involving very limited ongoing purchasing and selling actions. Passive investors purchase an indexed ETF or mutual fund and hold it for the long term based on a pre-determined asset allocation. When the asset allocation becomes out of balance due to over/under performance of certain sectors or when new money is added, the portfolio should be re-balanced.
Unlike active investors, passive investors buy a security and typically don’t actively attempt to profit from short-term price fluctuations. Passive investors instead rely on their belief that in the long term the investment will be profitable.
One of the most common passive indexing strategies is the Global Couch Potato. This portfolio includes a Canadian Equity index fund, a U.S. and International equity index, and a Canadian Bond index. The benefits of a portfolio like the Global Couch Potato is the diversification and relatively lower risk (with the fixed income component), as well as the minimal fees required to maintain the portfolio.
A common misconception is that you can’t be a passive investor if you hold individual stocks. This is simply not true, as the famous buy-and-hold investor Warren Buffet said, “Our favorite holding period is forever”.
The idea behind dividend growth investing is to purchase worthwhile amounts of blue chip stocks that have a history of raising their dividends and holding them for the growing income.
This method takes patience and discipline to hold the dividend stocks for decades through the ups and downs of the market, but does not require any more active management than an index investor re-balancing their portfolio.
Active Investing
An active investment strategy involves ongoing buying and selling actions by the investor. Active investing is highly involved.
Unlike passive investors, who invest in a stock when they believe in its potential for long-term appreciation, active investors will typically look at the price movements of their stocks many times a day. Typically, active investors are seeking short-term profits. Some active investing methods would include:
- Swing Trading – A style of trading that attempts to capture gains in a stock within one to four days. Swing traders look for stocks with short-term price momentum. These traders aren’t interested in the fundamental or intrinsic value of stocks, but rather in their price trends and patterns.
- Momentum Investing – Also known as “Fair Weather Investing”, is a system of buying stocks or other securities that have had high returns over the past three to twelve months, and selling those that have had poor returns over the same period.
- Dogs of the Dow/TSX – A method where an investor buys the 10 highest yielding stocks in the Dow Jones Industrial Average or the TSX 60 and holds them for a period of one year, at which time the investor would sell the portfolio and purchase the new “dogs”.
What’s Right For You?
In order to figure out how to invest your money you need to understand what type of investor you want to be. You can choose to be an active investor who takes on greater risks in trying to beat the market, but enjoys analyzing stocks and the excitement of short term buying and selling.
Or you can choose to be a passive investor who wants to limit risk, accept what the overall market returns, pay less fees, and trust in the long term benefits of staying invested in the market.
In the final part of this four part series on how to invest your money I will talk about building your investment portfolio in order to achieve your financial goals.