Once there was a little island country. The land of this country was the tiny island itself. The total money in circulation was 2 dollars as there were only two pieces of 1 dollar coins circulating around.
1) There were 3 citizens living on this island country. A owned the land. B and C each owned 1 dollar.
2) B decided to purchase the land from A for 1 dollar. So, now A and C own 1 dollar each while B owned a piece of land that is worth 1 dollar.
The net asset of the country now = 3 dollars.
3) Now C thought that since there is only one piece of land in the country, and land is non producible asset, its value must definitely go up. So, he borrowed 1 dollar from A, and together with his own 1 dollar, he bought the land from B for 2 dollars.
*A has a loan to C of 1 dollar, so his net asset is 1 dollar.
* B sold his land and got 2 dollars, so his net asset is 2 dollars.
* C owned the piece of land worth 2 dollars but with his 1 dollar debt to A, his net residual asset is 1 dollar.
Thus, the net asset of the country = 4 dollars.
4) A saw that the land he once owned has risen in value. He regretted having sold it. Luckily, he has a 1 dollar loan to C. He then borrowed 2 dollars from B and acquired the land back from C for 3 dollars. The payment is by 2 dollars cash (which he borrowed) and cancellation of the 1 dollar loan to C. As a result,
*A now owned a piece of land that is worth 3 dollars. But since he owed B 2 dollars, his net asset is 1 dollar.
* B loaned 2 dollars to A. So his net asset is 2 dollars.
* C now has the 2 coins. His net asset is also 2 dollars.
The net asset of the country = 5 dollars.
A bubble is building up.
(5) B saw that the value of land kept rising. He also wanted to own the land. So he bought the land from A for 4 dollars. The payment is by borrowing 2 dollars from C, and cancellation of his 2 dollars loan to A.
* As a result, A has got his debt cleared and he got the 2 coins. His net asset is 2 dollars.
* B owned a piece of land that is worth 4 dollars, but since he has a debt of 2 dollars with C, his net Asset is 2 dollars.
* C loaned 2 dollars to B, so his net asset is 2 dollars.
The net asset of the country = 6 dollars; even though, the country has
only one piece of land and 2 Dollars in circulation.
(6) Everybody has made money and everybody felt happy and prosperous.
(7) One day an evil wind blew, and an evil thought came to C's mind. "Hey, what if the land price stop going up, how could B repay my loan. There is only 2 dollars in circulation, and, I think after all the land that B owns is worth at most only 1 dollar, and no more."
(8) A also thought the same way.
(9) Nobody wanted to buy land anymore.
* So, in the end, A owns the 2 dollar coins, his net asset is 2 dollars.
* B owed C 2 dollars and the land he owned which he thought worth 4 dollars is now 1 dollar. So his net asset is only 1 dollar.
* C has a loan of 2 dollars to B. But it is a bad debt. Although his net asset is still 2 dollars, his Heart is palpitating.
The net asset of the country = 3 dollars again.
(10) So, who has stolen the 3 dollars from the country? Of course, before the bubble burst B thought his land was worth 4 dollars. Actually, right before the collapse, the net asset of the country was 6 dollars on paper. B's net asset is still 2 dollars, his heart is palpitating.
(11) B had no choice but to declare bankruptcy. C as to relinquish his 2 dollars bad debt to B, but in return he acquired the land which is worth 1 dollar now.
* A owns the 2 coins; his net asset is 2 dollars.
* B is bankrupt; his net asset is 0 dollar. (He lost everything)
* C got no choice but end up with a land worth only 1 dollar
The net asset of the country = 3 dollars.
End of the story; BUT
There is however a redistribution of wealth.
A is the winner, B is the loser, C is lucky that he is spared.
A few points worth noting -
(1) when a bubble is building up, the debt of individuals to one another in a country is also building up.
(2) This story of the island is a closed system whereby there is no other country and hence no foreign debt. The worth of the asset can only be calculated using the island's own currency. Hence, there is no net loss.
(3) An over-damped system is assumed when the bubble burst, meaning the land's value did not go down to below 1 dollar.
(4) When the bubble burst, the fellow with cash is the winner. The fellows having the land or extending loan to others are the losers. The asset could shrink or in worst case, they go bankrupt.
(5) If there is another citizen D either holding a dollar or another piece of land but refrains from taking part in the game, he will neither win nor lose. But he will see the value of his money or land goes up and down like a see saw.
(6) When the bubble was in the growing phase, everybody made money.
(7) If you are smart and know that you are living in a growing bubble, it is worthwhile to borrow money (like A) and take part in the game. But you must know when you should change everything back to cash.
(8) As in the case of land, the above phenomenon applies to stocks as well.
(9) The actual worth of land or stocks depends largely on psychology (or speculation).
*P.S: Got this story as a forward.
**P.P.S: I'm not that creative ;)
Showing posts with label Business. Show all posts
Showing posts with label Business. Show all posts
Tuesday, October 14, 2008
Tuesday, July 15, 2008
My view on Network Marketing / Mulit-level Marketing
First of all, i'll try to give a impartial view on this hugely successful topic. I have never been a member of this, nor heard any promotional talks on these. Next I'll quote some doucments/blogs that deal with this subject. So what makes me think and write on this topic? It's a simple answer : A logical mind will want to investigate into something that is, lets say "controversial". I'll not quote any company names directly, nor will I take this on a personal front. So you can expect an unemotional document here!
What is Mulit-level Marketing (hereafter referred to as MLM) ?
It is a business distribution model that allows a parent multi-level marketing company to market their products directly to consumers by means of relationship referral and direct selling. Business organisations have long relied on direct marketing to target customers without spending a lot of money on retail distribution. However the Network (Multilevel) Marketers have taken the direct model one step further, i.e. not only they do the sales, but recruit and train new distributors i.e., independent sales persons who are members in the network marketing company.
The big draw card in network marketing is the commission paid not only for direct sales made by
the salesperson , but also from the sales made by the recruits made by him.
Is this a legal business?
Network marketing is absolutely legal, and is governed by strict regulations in most countries. There are some countries where this is banned, due to heavy influx of money that these companies generate.
What is the difference between network marketing and pyramid selling?
It is sometimes difficult to distinguish legal and reputable MLMs from illegal pyramid or Ponzi schemes (Please go through these two business models before continuing). Both of which are highly illegal in almost all countries. It is considered as fraud and money laundering to have a business in pyramid scheme.
In a 2004 FTC Staff Advisory letter to the Direct Selling Association it was stated that - "The amount of personal consumption in any multi-level compensation business does not determine whether or not the FTC will consider the plan a pyramid scheme. The critical question for the FTC is whether the revenues that primarily support the commissions paid to all participants are generated from the purchase of goods and services that are not simply incidental to the purchase of the right to participate in a money making venture."
Is network marketing ethical?
I have a firm opinion on this. According to me it is highly unethical. It is immoral to make money out of trust in relations viz friends, relatives, family, colleague. A lot of studies have been conducted on this regard, and many have come to a conclusion that, it exploits the basic nature of a relation for a gain. People join the network marketing mainly because of persuasion by friends and relatives.Marketers should be aware of the fact that network marketing foundation lies with relationships.
It is up to the channel members to decide at what cost relationship may be selected, maintained
and nourished. It should be a win–win situation with no exploitation of relationships whatsoever
for it to be enduring.
There is another way of looking at this :
Conventional business is very much a tiered system. The chairman or president at the head of a company makes a lot of money, and those beneath him (or her) make proportionately less depending on their level of expertise and responsibility. This seems superficially like MLM.
Some people have registered with NM opportunities and behaved in a non-ethical manner, but this is not at all a criticism of the industry - just on those particular individuals. Plenty of people abuse their privileges in jobs. We don't boycott the entire medical profession because of the occasional rare example where a doctor has abused their position for personal gain. We don't call for a ban on baseball bats because they are occasionally used by thugs! A business should be judged on its own merits, not on the qualities of some of its ambassadors.
But I dont tag along with this kind of reasoning, purely because, you are sure in this kind of scheme, the lower lying people never get anything. Where as in conventional business there is something that everyone gets for their work.
Do I believe in MLM ?
I have thought about this for sometime now. And I feel that there is no business which deals in material products (not human emotions and services like say the film industry/entertainment) result in a PROFIT for all. No business can be a win-win for all. This according to me is a basic economical concept. For someone to make a profit, someone else should bear the loss. Sometimes this 'someone else' can be non-human, like the earth, trees etc.
So the answer to the question is, Yes and No. Yes, I do believe that no business can be profit for all, but No, I do not believe in MLM because it is prejudiced and people directly and knowingly make profit of lower lying member's loss. This is unacceptable.
Is this brainwashing?
Yes, every time you watch a TV commercial, read the news paper or speak to any of your opinionated friends. Your opinions on pretty much everything are the result of brainwashing, some of which is accurate and some is not.
But this brainwashing is for the personal interest of the "brainwasher"! There is little concept of a organization, as "LIVE ALONE, DIE TOGETHER", cut-throat, back stabbing, is common here. In typical business, the organization makes the profit, and there is a perfect sharing scheme.
Is this a 'get rich quick' scheme?
Absolutely! MLM is no different from crime or gambling where you are in search of 'quick money'. And as in those cases, you have a good chance of getting caught/losing! But, the only difference is that, you are doing this legally! The thing is, although this involves hard work to get the quick money, it hardly takes a brilliant person to make this money. So there is no difference between a intelligent/educated person, and a thug! In this business, everyone starts from a equal playing field, regardless of his current financial status.
Will these businesses saturate/end?
I don't think so. People have come up with theories like : "What if all the people who really intend to buy, are already members?". This has not happened in past 50 years, and is not about to happen in the next 50 years is it? Because, there is always that one person, who craves for the extra quick money. And also, every day thousands of people are born!
Some Links to ponder over:
http://kishan-livinglifetothefullest.blogspot.com/2008/06/beware-of-pit-called-quest.html
http://en.wikipedia.org/wiki/Multi-level_marketing
http://en.wikipedia.org/wiki/List_of_multi-level_marketing_companies
I sincerely hope that I have presented an unbiased opinion here. If I have unknowingly hurt someone, my apologies.
What is Mulit-level Marketing (hereafter referred to as MLM) ?
It is a business distribution model that allows a parent multi-level marketing company to market their products directly to consumers by means of relationship referral and direct selling. Business organisations have long relied on direct marketing to target customers without spending a lot of money on retail distribution. However the Network (Multilevel) Marketers have taken the direct model one step further, i.e. not only they do the sales, but recruit and train new distributors i.e., independent sales persons who are members in the network marketing company.
The big draw card in network marketing is the commission paid not only for direct sales made by
the salesperson , but also from the sales made by the recruits made by him.
Is this a legal business?
Network marketing is absolutely legal, and is governed by strict regulations in most countries. There are some countries where this is banned, due to heavy influx of money that these companies generate.
What is the difference between network marketing and pyramid selling?
It is sometimes difficult to distinguish legal and reputable MLMs from illegal pyramid or Ponzi schemes (Please go through these two business models before continuing). Both of which are highly illegal in almost all countries. It is considered as fraud and money laundering to have a business in pyramid scheme.
In a 2004 FTC Staff Advisory letter to the Direct Selling Association it was stated that - "The amount of personal consumption in any multi-level compensation business does not determine whether or not the FTC will consider the plan a pyramid scheme. The critical question for the FTC is whether the revenues that primarily support the commissions paid to all participants are generated from the purchase of goods and services that are not simply incidental to the purchase of the right to participate in a money making venture."
Is network marketing ethical?
I have a firm opinion on this. According to me it is highly unethical. It is immoral to make money out of trust in relations viz friends, relatives, family, colleague. A lot of studies have been conducted on this regard, and many have come to a conclusion that, it exploits the basic nature of a relation for a gain. People join the network marketing mainly because of persuasion by friends and relatives.Marketers should be aware of the fact that network marketing foundation lies with relationships.
It is up to the channel members to decide at what cost relationship may be selected, maintained
and nourished. It should be a win–win situation with no exploitation of relationships whatsoever
for it to be enduring.
There is another way of looking at this :
Conventional business is very much a tiered system. The chairman or president at the head of a company makes a lot of money, and those beneath him (or her) make proportionately less depending on their level of expertise and responsibility. This seems superficially like MLM.
Some people have registered with NM opportunities and behaved in a non-ethical manner, but this is not at all a criticism of the industry - just on those particular individuals. Plenty of people abuse their privileges in jobs. We don't boycott the entire medical profession because of the occasional rare example where a doctor has abused their position for personal gain. We don't call for a ban on baseball bats because they are occasionally used by thugs! A business should be judged on its own merits, not on the qualities of some of its ambassadors.
But I dont tag along with this kind of reasoning, purely because, you are sure in this kind of scheme, the lower lying people never get anything. Where as in conventional business there is something that everyone gets for their work.
Do I believe in MLM ?
I have thought about this for sometime now. And I feel that there is no business which deals in material products (not human emotions and services like say the film industry/entertainment) result in a PROFIT for all. No business can be a win-win for all. This according to me is a basic economical concept. For someone to make a profit, someone else should bear the loss. Sometimes this 'someone else' can be non-human, like the earth, trees etc.
So the answer to the question is, Yes and No. Yes, I do believe that no business can be profit for all, but No, I do not believe in MLM because it is prejudiced and people directly and knowingly make profit of lower lying member's loss. This is unacceptable.
Is this brainwashing?
Yes, every time you watch a TV commercial, read the news paper or speak to any of your opinionated friends. Your opinions on pretty much everything are the result of brainwashing, some of which is accurate and some is not.
But this brainwashing is for the personal interest of the "brainwasher"! There is little concept of a organization, as "LIVE ALONE, DIE TOGETHER", cut-throat, back stabbing, is common here. In typical business, the organization makes the profit, and there is a perfect sharing scheme.
Is this a 'get rich quick' scheme?
Absolutely! MLM is no different from crime or gambling where you are in search of 'quick money'. And as in those cases, you have a good chance of getting caught/losing! But, the only difference is that, you are doing this legally! The thing is, although this involves hard work to get the quick money, it hardly takes a brilliant person to make this money. So there is no difference between a intelligent/educated person, and a thug! In this business, everyone starts from a equal playing field, regardless of his current financial status.
Will these businesses saturate/end?
I don't think so. People have come up with theories like : "What if all the people who really intend to buy, are already members?". This has not happened in past 50 years, and is not about to happen in the next 50 years is it? Because, there is always that one person, who craves for the extra quick money. And also, every day thousands of people are born!
Some Links to ponder over:
http://kishan-livinglifetothefullest.blogspot.com/2008/06/beware-of-pit-called-quest.html
http://en.wikipedia.org/wiki/Multi-level_marketing
http://en.wikipedia.org/wiki/List_of_multi-level_marketing_companies
I sincerely hope that I have presented an unbiased opinion here. If I have unknowingly hurt someone, my apologies.
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