The Big Picture: William Cohan
One of the biggest trends in the economy over the past few decades has been the increasingly prominent role of financial activity. One place where this can be seen is at companies like General Electric (GE).
The company started offering its customers financing options. When those were well-received, GE was able to expand that offering. Soon, a big source of profits came from the company’s financing activities.
This allowed GE to take advantage of its AAA credit rating to further expand into other opportunities. And their size gave them a tremendous advantage over competitors.
This increased value resulted in a massive return in GE shares during the 1980s and 1990s. And it allowed the company to expand outside the world of industrial production. That includes buying NBC Universal and starting media outlets such as CNBC.
This trend would eventually reverse during the credit crunch of the 2008 market meltdown. However, it shows the power of investing in companies that can finance goods and services to consumers.
Meanwhile, firms such as investment bankers also benefit from this increased financialization of the economy. These companies have found that it’s easier to make money from money, rather than produce a product that must be developed and sold.
Investors who look for companies capable of growing out a financial services division can potentially find a stock capable of leveraging modest growth from the core business into big returns.