The CEO Game

Many people invest their money in the stock market, but only a small percentage gains experience necessary in order to become a truly seasoned investor. This is because a large percentage of new investors don’t stay long enough in the stock market before they drop out.

Selling And Buying

We have gathered the most common tips that the experts suggest that a  new investor should learn before entering the big stock exchange game:

1. Just because you have earned anything on the stock market doesn’t mean you’re an expert. Enjoy your earnings but always keep in mind that the stock exchange is more complex than any single person can understand.
2. Options have a small life span. Always check closely for the expiration date and mark potential selling points.
3. Sometimes the party ends. As we saw in October 2008, the market can wipe out years of profit in a matter of months or even weeks. Understanding that the market has reached its peak is what differentiates the biggest winners and the worst-off losers. When you feel that the market reached its peak, you should sell.
4. Daring might reward you in remarkable profits. A sophisticated and daring investor can achieve what might seem impossible to all other average investors. Keep in mind, though, that rushing into a complicated situation without a real understanding is not sophisticated it is just plain stupid.
5. Sometimes, no matter how much you planned and thought about it, you lose money more and more. Knowing to cut your loses is an important attribute in an investor that expect to survive in the rough stock market. Even the great Warren Buffet lost from time to time, but the only difference is that he can afford losing a couple of million dollars and you can’t.
6. Every time that you lose money on the stock exchange, you gain a unique chance to learn from your mistakes. To waste this opportunity by not learning from your mistake will only assure that you will make the same mistake again.

Ailon.

The CEO Game

In my last article I discussed the factors in life and business that we have no control over, but still affect us in significant ways. In this article, I want to go one step further and talk about “Luck” and how we can use it for our own benefit.

Creating Your Own Luck

Why do we need Luck?
Two people are applying for the same position. Both have about the same GPA from the same university. Both have a good background and experience. Only one will get the job–do you think that the interviewer will know which one is better skilled for the job? He`ll probably base his decision on factors that have nothing to do with the candidate’s skills. It might be gender, age, skin color, the ethnicity etc. You`ll never know what the final decision was based on.
People will tell you that you don’t need luck. They will also tell you that the only thing you need is ambition and hard work. I`ll give you all the time in the world, but you still won`t be able to convince me that the last person who won the lottery`s jackpot had high ambition and worked hard for that. I`m not trying to tell you to play the lottery now, but this extreme example can show us that luck is a factor in life that should be taken under consideration and for sure you want it to be on your side.
Turn your luck into calculated risk:
The lottery is not the place you want to put effort to increase your odds. This is because there is nothing legal you can actually do in order to change your odds of winning – every ticket you buy has the same odds of winning, but if you buy all of the possible tickets you will end up losing money – not a great deal. You need to increase the odds in scenarios which your actions can actually make this difference.
If you own a startup, and your main goal is to sell it to a big company, you`ll need to go out and meet with people. Make sure everybody in the industry knows you. The more people that know you, the bigger your chances are to make the big exit. There might be a chance of 1:1,000,000,000 (this number has no statistical evidence) that a stranger who has no idea who you are or what you`re doing will come up to you and ask you “Hello, is there a chance that you`re working on this startup and you want to sell it?” But if more people know what you are doing, the odds increase magnificently. Focus your efforts in the right directions and in the right places in order to maximize your chances. In this example you control your luck by letting people know about your business.

In a different example, I want to invest money in the stock market. There is a constant risk in the market; we never know what`s going to happen tomorrow, things changes constantly and rapidly. New information sends the stocks up and down without prior notice. If you`ll buy one stock, you`re relying mostly on luck. We have seen good stocks go down in good market and we have seen bad stocks flying in a bad market. Nothing we can do about it. If we want to control the luck and turn it into a calculated risk, we need to have a wide and diverse portfolio.
The statistical error:
I personally look at good luck and bad luck as statistical errors. If we`ll look at the normal distribution, I believe that if something occurs on the right side of the distribution that’s a result of good luck, if something occurs on the left side that’s a result of bad luck. The middle is where we expect the result under normal circumstances. At this point, we want to put our efforts in moving to the right side of the scale, creating, by doing so, more “good luck”.

Assaf Arie.

The CEO Game.

Interest rate – What does that means? Well, interest rate is the extrapayment a borrower needs to pay the lender in addition to the loan, at the end of the loan period. In other words, it is the price paid for borrowed money.

Reacting To The Rates

How do the lender and the borrower decide what interest rate fits the?

First of all there is a benchmark for the interest rate; this benchmark is the central bank’s interest rate. The central bank in each country determines its interest rate in order to manage macro parameters such as: investment rates, unemployment, and inflation. Why is the central bank’s interest rate a benchmark? Because the main bank can always print more money and so there is no way that the central bank won’t return its debt and therefore this interest is considered to be free of risk or “safe”. This is not entirely true, however; if inflation increases the lender have less purchasing power in the end of the loan process.

But the central bank only gives loans to other banks, and then those banks give the public loans at a higher interest rate. How do those banks decide what interest rate to offer to which client? The commercial bank uses data it gathers on us as individual and estimates what the risk is that we won’t be able to repay the loan. The interest rate the bank offers us is based on a statistical model that most accurately predicts this chance.

How does the central bank control the investment in the country? Well, it’s easy to guess … The main bank uses the interest rate to control how much money will circulate the market and how much individual will desire to invest money. If the central bank’s interest rate is high, most people will prefer to save the money in the commercial banks and profit from the high interest rate. The high rate will cause much money to sit in the bank, and if the money just sits in the bank you can’t use it to open new businesses and promote new initiatives. On the other hand, a low rate of interest may cause many people to use their money to open new businesses and create more workplaces. For example, if you can open a business that promises a return of 7.5% of the money you invested each year, and the interest rate is 10%, you would just put your money in the bank and get 2.5% more on your investment. But if the interest rate is 2.5%, then you can open your business and earn 7.5%, 5% more than the interest rate that you will get form the commercial bank.

So, what does this have to do with the CEO Game? Well, the CEO Game is unique among business simulations for the degree of realism involved in game play — that is why it is a serious game, and not just a game. Interest rates will change as you play the CEO Game, reflecting changes in the real world. In order to be a successful business tycoon, you will have to understand how the changing interest rate changes your interests — and make changes accordingly.

Omri.

The CEO Game.

Predicting what the future holds for our product might be one of the most interesting questions out there, but until someone will build a time-traveling machine all we have to estimate the future are our business simulations. An example of such business simulation that assists in predicting the success of video game products is simExchange. simExchange is an online business simulation game that helps predict the success of products in the video game world by acting as a virtual stock market. The game allows players to predict the quantity of sales and types of reviews that upcoming products might get. simExchange uses the “wisdom of the crowds” to assist in predicting the future of upcoming video games.

Well, how does it work?

Using the virtual stock market, the business simulation allows players to predict the success of the video game/console or what reviews a video game might get. The players create these predictions by using a global stock market in which they can buy or sell stocks of the upcoming video game. Using those stocks the game tries to forecast the how one video game might succeed or fail. The trade inside the game consists of three types of contracts: Stocks, NPD Futures (Assuming Sales) and Metacritic Futures (Assuming critic reviews).

Who uses this game?

The simExchange business simulation has been noted to be used by real-world investors who seek data that will assist in analyzing the future of the market. Also the data received from this business simulation was noted to be used by Wall Street analysts such as Michal Pachter.

The idea behind the CEO game is based on the same concept: Allowing the wisdom of the crowds to predict the success or failures of management process or products. This is way using the CEO game as business simulation might assist in improving your business management skills.

Console Sales Prediction

Ailon.

The CEO Game.

How can industry analysis and business strategy influence your decision-making process as a CEO?
This article discusses industry analysis and business strategy and the use of Six Forces Model (by Michael E. Porter of Harvard Business School) in the business world.

What is the Six Forces Model? And what is it good for?
The Six Forces Model developed by Porter is a tool that determines the competition level in any industry and the attractiveness of the industry.

The six Forces are:

• Competition – this parameter is determined by the number of the competitors and their aggressiveness. If in your industry you have many competitors, and your competitors might be drawn into price wars, this will cause the profit rate to drop towards a competitive level (perfect competition)

• New Entrants – if your industry is highly profitable and doesn’t have any barriers to entry, many companies will enter your industry. This may cause the profit rate to drop towards a low, competitive level (perfect competition). If your industry has many entrance barriers such as high fixed costs, patent laws etc. your profit will soar. For example, if your company has a patent on any product, you can sell this product at almost any price you want without fearing any competition (but if you know the demand curve you’ll set the product price in such way that will lead to highest rate of profit).

Porter's Old 5 Forces Model

• End users/Buyers/costumers – this parameter is the bargaining power of the customer. If the product, like luxury products, is not necessary to the customer he might buy it at a lower price. If on the other hand the customer depends on this product, he might pay much more. This is the case for essential goods such as gas and water. In other words the parameter describes the ability of customers to put the firm under pressure and also the reaction of the customers to price changes.

• Suppliers – every company needs a supply of materials in order to make new products. These materials can be components, labor, and services, etc. Suppliers may refuse to work with a firm, such as many Arab countries that sell trade oil to Israel. Or suppliers may charge excessively high prices for unique resources like highly trained workers.

• Substitutes (Product or service) – the existence of similar products or services raise the barging power of the customers over the products. The customer has the most power when two products are practically identical. In that case, the customers don’t have any incentive to pay more for any one product and so the customers will buy the cheapest product available in the market. This case may lead to high elasticity of demand.

• Complementary products/ the government/ the public – this is a relatively new parameter and it is determined by how the government, complementary products or the public perception can change the profit rate of your company. For example, sometimes corporations can grow too much and the government tries to limit the company control over the market through the use of competition law (aka antitrust law in the US).

Omri.

The CEO Game.

In part 2, I talked about the definition through the eyes of an investor. In this article I go through some key definitions for traders. As I mentioned in previous articles, there are big differences between an investor and a trader. In the last article I told you that the important thing for an investor is the seek for value (I gave you Warren Buffet as an example for the value method); an investor is constantly searching for assets which trade for undervalue, discounted prices. A good trader does not care for the “real” value of the asset (it can be a stock, or any other tradable asset), the only things he cares is whether he will be able to sell it tomorrow, or at any other future time, in a higher price.

Knowing When To Trade

What makes you a good trader?

A trader looks for short-to-medium term trades, meaning that a trader looks for quick movements in the market. In order to become a good trade,r you`ve got to be cold-blooded and follow specific rules you set to yourself. You also need to understand the movements, trends and the psychology behind the market and the other investors or costumers. You need to remember that trading is all about buying cheap and selling expensive. As a trader, you don’t care about what it is that you are buying, the only thing you care about is to sell it in a higher price than you paid. It can be a stock, land, house, commodity or any other merchandise that have a market you can buy and sell at any time. Liquidity is very important for traders; the last thing you want to happen is to be stuck with an asset without the ability to sell.

The three questions that need to be answered are the same from part one and two of the article:

1. What are you buying?
2. Why are you buying?
3. When are you selling?

What are you buying? This time, the answer is a little different from part one and two. You want to buy an asset that is tradable at any time. As I wrote in paragraph two, liquidity is one of the most important factors for traders; you cannot be a trader in an illiquid market (unless you have very high margins to cover the risk you are taking).