How to react to stock market declines : DO’s & DO NOT’s

It’s safe to say 2020 has started pretty rough. The Coronavirus seems to keep spreading, schools, businesses, and even some factories are shutting down. And on top of that, the stock market saw one of it’s biggest declines of the last decades, followed by extreme volatility.

Continue reading “How to react to stock market declines : DO’s & DO NOT’s”

What is Gross Domestic Product (GDP)? The basics

GDP stands for Gross Domestic Product and is used to measure a country’s economy and wealth. There are many variants of GDP, each measure a different aspect of the economy.

What is GDP?

Gross Domestic Product is the market value of all finished goods and services produced within a country within a specific time frame (usually a year).

Why is it important to measure GDP?

GDP is important because it is used to measure a country’s economy and how much it is growing or shrinking. A growing GDP also indicates a healthy economy what usually means, wealthier inhabitants and less unemployment. During recessions, GDP’s tend to stagnate or even contract.

What is used in the calculation of GDP?

Only the finished goods and services produced in a specific country will add to its GDP. This also includes products that are exported to another country where it will be consumed or used.  Normally only goods and services that are sold in a market are counted in GDP. Because products without a market value can not be calculated at an accurate price.

Finished goods & services

Finished goods are those goods that are ready to be used or consumed and that will not be used as a part of another good.

Intermediate goods

Intermediate goods are goods that are not finished goods yet but that will be used in the production of finished goods. Some things, however, can change from category depending on who buys it. If for example, a factory buys potato’s to make chips, it’s considered an intermediate good. In this case, the bag of chips would be the finished good. If a consumer buys potatoes in the supermarket to make a meal at home, it’s considered a finished good and therefore calculated in the GDP.

Capital goods

Capital goods are used to make finished goods but are also considered finished goods. For example, a blender that’s used to make orange juice is also considered a finished product. The reason for this is that the blender will be used to make other goods instead of being part of a finished good.

The reason that goods and services are split up in categories is to avoid that the same good is counted twice in the calculation of GDP.

bernd-dittrich-eCc7FjMoR74-unsplashPhoto by Bernd Dittrich on Unsplash

How GDP is used to measure growth

To measure whether or not our economy is growing, and by how much, we need to compare today’s GDP to that of a previous point in time. However, When comparing current GDP to the GDP of the past, there is a problem. The GDP that we just described is the nominal GDP, calculated based on the product prices of today. If we want to get to the real GDP, we need to adjust it for inflation.

How can GDP grow?

GDP grows when a country produces more valuable products and services and in a higher quantity. This is often driven by an increase in demand for products and services.

Let’s take a closer look at the main drivers.


In times of low-interest rates, increased wages and confidence in the overall economy, the demand for products and services tends to increase. An increase in the demand side means that there is room to produce more, new and better products. This stimulates growth in the economy and therefore also GDP growth.

Productivity growth

Productivity growth of an economy can be stimulated by investments in new technology, think about farmers using big tractors instead of horses for example. Another way to stimulate productivity growth is by an increase in the working population due to immigration or a higher birth rate. Also, better education can result in productivity growth. Better education can lead to better technology and innovative solutions which drive productivity growth as well.

Nominal GDP to Real GDP

So before we can compare our current GDP to a GDP of the past, we need to adjust it for inflation.

In the conversion from nominal GDP to real GDP, we will, therefore, use the same product prices for all the periods.

The graph below shows the nominal GDP growth, thus a GDP that isn’t adjusted for the increase in product prices.

Us nominal GDP
Source: FRED

The graph above would make you believe the GDP has been growing by a staggering amount.

However, If you look at the graph below that is adjusted for inflation (= Real GDP), you can see that the growth was (good but) not as significant as the graph above would suggest.

us real gdp
Source: FRED

How does GDP measure wealth?

To measure the standard of living and by how much it has increased (or decreased), we use GDPPC or Gross Domestic Product Per Capita. This is calculated by adjusting the nominal GDP for inflation to get the real GDP and then dividing real GDP by the number of people living in that country.

GDP per capita = Real GDP/ Total number of Inhabitants

GDP per capita is often used to compare the standard of living between countries or with the past.


What GDP growth tells us

GDP growth tells us the rate at which our economy is growing. This rate is very important to measure the health of our economy. The ideal GDP growth has been determined to be between 2.5% and 3.5%.

What happens when GDP grows too fast?

When GDP grows too fast, the demand for goods grows faster than its production. Unemployment levels bottom out, therefore companies have to raise wages to keep their employees. These raises in wages further increase the demand for products which in turn forces companies to increase prices. These events eventually drive hyperinflation.

(hyperinflation = very high and accelerated inflation)

What happens when GDP grows to slow?

When GDP grows too slow, the supply of money becomes bigger than the supply of goods. Therefore prices start to rise and money becomes worth less. It’s also called inflation.

Do you want to improve your knowledge about finance, investing and productivity? Consider following this blog!

“It’s truly remarkable how much you can learn during those moments you would otherwise waste by scrolling through Facebook or Instagram. Time is my most valuable asset, Blinkist allows me to use it well.”

What makes a company’s management great?

When we are looking to buy a share in a company, we usually go through financial data. We look at how good or bad the earnings are or how much debt the company has taken on. However, there are some other things that should be looked at as well. One of these things is management.

Management is to a company, what a captain is to his ship. The ship can be the best ship in the world. If the captain sails into the cliffs, it will sink.

“Don’t find fault, find a remedy. ” ~ Henry Ford

Let’s look at what we want to find out about a company’s management. Continue reading “What makes a company’s management great?”

This is how you get high returns in the stock market

When it comes to investing in the stock market, you’ll find a lot of advice. There are many strategies used to try getting great returns. And as it goes with everything, you have good strategies and bad ones. The strategy you want to choose for your portfolio is up to you. Let me share some important basics you should be aware of before investing in the stock market.


” The big money is not in the buying and the selling, but in the waiting. ” ~ Charlie Munger

Continue reading “This is how you get high returns in the stock market”

Investing in real estate with less than $1.000

Investing in real estate can be very lucrative. It’s generally considered as a safe investment, it protects the owner against inflation, and provides an extra income stream in the form of rental money.

Usually investing in real estate demands big capital. However, there are a few ways you can invest in real estate for less than your paycheck provides.

” Buy land, they aren’t making anymore of it. “

Continue reading “Investing in real estate with less than $1.000”

Shareholders’ equity: What does it mean and why is it so important?

“Book value is the amount you paid for an asset, minus its depreciation. “


Equity or book value represents the shareholder’s interest in a company and represents the value of its assets that are not financed by debt. Book value is nothing more than equity per share.

Equity = Total assets – total liabilities Continue reading “Shareholders’ equity: What does it mean and why is it so important?”

Quarterly reports: how to read

What is a quarterly report? (10Q)

The quarterly report or 10Q shows a company’s earnings, cash flow and income (or loss) for a specific quarter. In one business year, a company states four quarterly reports and one annual report (10k).

The main parts of a Quarterly report are:

Continue reading “Quarterly reports: how to read”

The cash flow statement: how to read

Key takeaways:

The cash flow statement shows all the cash inflows and outflows occurred during the reporting period.

Cash flow analysis is a critical part of any investment decision as it is influenced less by accounting practices.

On the income statement, a transaction is recognized when the earnings process is completed. This does not necessarily coincide with the time that cash is exchanged.

Continue reading “The cash flow statement: how to read”

The income statement: how to read

Key takeaways:

The income statement shows how much a company earned or lost during the year (or quarter).

An income statement matches the revenues earned from selling goods and services, against all costs and expenses incurred in the operation of the company. The difference is what we call net income (or loss).

On top of the Income statement, we find the revenue (or net sales)  which is called “the top line”. From the top line, all costs and expenses are deducted until we arrive at the net income, also called “the bottom line”.

Continue reading “The income statement: how to read”

The balance sheet: How to read

Key takeaways:

“The balance sheet is a snapshot of what a given company owns and owes at the time of reporting.”

The balance sheet is divided into two main halves: “assets” and “liabilities and shareholders’ equity”.

The first half will tell us what the company owns and the second half will show us what the company owes to creditors and shareholders. The two halves should always offset each other as every dollar in assets has been financed either by shareholders’ equity or by creditors (liabilities).

Continue reading “The balance sheet: How to read”