Capitalism at Work

Capitalism can be seen everywhere….. if you are aware of the signs.

Down the block from my office in Woodcliff Lake, NJ , there is currently a new townhouse community beginning built.  The development is being built by Putle Homes.  PulteGroup, Inc. (NYSE: PHM), based in Atlanta, Georgia, is one of America’s largest homebuilding companies with operations throughout the country. Its brand portfolio includes Centex, Pulte Homes, Del Webb, DiVosta Homes and John Wieland Homes & Neighborhoods.

PulteGroup started as a single home-built 60 years ago by the entrepreneurial spirit of an 18-year-old named Bill Pulte.  The company now operates in approximately 50 markets throughout the country, and is a member of the S&P 500 Index. The S&P 500 is widely regarded as the best single gauge of large-company U.S. stocks.

At the building site down the block, Pulte had to do the following.  The company first purchased approximately a dozen single family homes and razed them.  Now they are building 40 townhouses in 10 buildings.  The prices are generally selling for $850,000 to $875,000 with standard upgrades.  The company had to purchase the single family homes, pay for the permitting; pay for the razing and grading of the property before any potential buyers even began to consider purchasing a unit.

Next the company had to design multiple homes, pay for the construction and materials, pay for the sales personnel and landscaping and paving of the streets…..all before a single sale of a home.

How is the firm able to undertake all of these expensive operations without any revenue from this site until most of the money has been spent?

The short answer is capitalism.  Investors can either decide to either lend the company money by purchasing the company bonds, or invest in the company as an owner by purchasing stock shares.  Without the free voluntary exchange of money, the company would be limited to money that is earned from other projects the company engages in.

Having the ability to “raise” money that will be repaid as a loan or to an owner, allows the company operations to grow.  The investors bear the risk that the company is unable to complete the project, or sell the units for a profit.  Understandably, these risks are very apparent for home builders during market downturns when people postpone the purchase of a home.

The company management and board are tasked with using the investors’ money for the benefit of the owners, workers and community.  Depending on the investors’ belief that the company will be able to pay back the loan (bond), the interest rate is established.  Companies that have more uncertainty about their ability to pay the interest and return the principal of a timely basis will be required to pay a higher interest rate.

This investment return calculation also occurs for investors when they purchase the shares of companies on the public stock markets.  The expected ability of the company to earn reliable profits into the foreseen future will be considered less of a risk for investors than a company that struggles to maintain profitability through the years. Thus, the expected return for investors’ who invest in companies with stable financials will be less than a company that has less stable financials.

So take a look around to see the great benefits of capitalism for society as a whole.  Invest in this incredible force.

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About Dan Crimmins

Dan Crimmins, co-founder of Crimmins Wealth Management, is a financial coach and fee only financial planner. Have a financial question? ASK DAN

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