Economics isn’t a theoretical academic disciple that is out of touch with the real world. In fact, some basic and essential knowledge in Economics enables you to interpret crucial economic indicators which in turn assist you in tracking down investment ideas. The details of which shall be further explored in this blog.

After all, the prices of all goods and services we purchase, from food, energy, automobiles, clothing, and new apartments determine the profitability of businesses involved in procuring them. A sharp rise in oil barrel prices somehow translate into a few billions dollars more of profits for major oil companies like Exxon Mobil, chevron etc.

Basic concepts in Economic, scarcity, supply and demand, marginal utility are useful frames of reference in predicting market performances. It is no surprise that Creative Technology experiences operating losses for a few consecutive quarters, a person who buys an Ipod is highly unlikely to buy another Creative Zen. This is due to two fundamental concepts in Economics, first is scarcity Plato thinking, spending hundreds on another Mp3 player means less money for other stuffs. Secondly, happiness or utility in consuming a particular product decreases with each additional unit. In other words, owning an Ipod makes you happy but having 2 Ipods doesn’t mean the happiness is doubled. Given the preference for Ipod by consumers as a result of its branding or whatsoever, Creative does sells less of its Mp3 players.

As such, it is recommended for you to take an Introductory Economics course for one semester if you are still in college or buy this Economics Textbook by Ben S. Bernanke I find it give a very good illustrations of basic economics principles and will further inspire you in the subject.

Remember during the good old days of high school time, in the learning of basic sciences, classification is one common component among all science subjects, from Physics, Chemistry, and Biology to even Geography.

By using classification, information and knowledge are more manageable. In Chemistry, specifically organic Chemistry, organic compounds are grouped based on their functional groups, and each functional group react in a specific way. Of course, there are a dozen ways to group organic compounds to other features. But as Chemistry is a disciple that deals with the study and prediction of reactions between matters, this method of classification is used.

Similarly, in the selection of stocks, companies are also categorized into different industries and sectors. The distinctive features which differentiate them, other than obvious differences in products and services sold, are that their earnings and profitability are affected in the same ways by certain economic factors.

Consequently, by knowing the business is under which industries and sectors, predictions of when to buy and when to sell are made more accurate. In addition, by considering their roles from macroeconomic point of view, you will have a better feel of whether they are in a sunrise industry, with potential for growth in the long run. Conversely, you better cashed out and exit if demand for their goods and services are heading downwards.

Engineers, scientists, monks, economists or pastors looked at this world differently. In other words, they have different perspectives by which objects and events are seen as.

To be a wise and successfully investor, you need to look at the place we live in through an investment paradigm.

When a hard core engineer walks into a Starbucks café, different images and sets of questions run in his head from an investor.

Looking at the coffee maker, questions that ran through the engineer’ head are what are the raw materials that are used for its constructions? Metal and plastics, specifically what type of metals and plastics. Metals can comprised of steel, bronze, iron with different percentage and constituents of other components like carbon. Then Plastics got thermoplastics, thermosets etc. There are even further more categories from the two major types of plastics.

How are they being converted from metals and plastics to the finished products of the elegant coffee maker that you see in a typical Starbucks café?

Images and videos of metal and polymers melted before being molded into the complex shape of coffee makers. All the different components being assembled together in an economical way in a factory using machines are imagined in his head.

In contrast, what a master investor views is totally different from that of engineers, doctors, lawyers, toilet cleaners, machine operators etc.

Chances are they are more interested in the companies that provide the raw materials, metals and plastics, companies that manufacture coffee makers from metals and plastics. Businesses involved in the transportation of raw materials and finished products from factories to retail stores to customers.

Other than that, things like how pricing of a cup of mocha is determined? What’s the age group visiting the café often? How do these cafes, factories and retail stores survive and make profit?

If throughout the decades only some firms for each industry and sector survives and prosper, which ones are they and why?

You get it!

The investment perspective.