2017-04-20 / The Motley Fool

Ask the Fool

Business Models

Q: What is a “business model”?

— R. P., Portland, Oregon

A: A business model is the way a company makes its money. Razor and ink-jet printer companies, for example, sell their razors and printers relatively inexpensively and then make money on higher-profit-margin blades and ink cartridges.

Ethan Allen and Ikea both sell furniture, but while Ethan Allen sells ready-made pieces, Ikea sells pieces you need to assemble yourself. It’s able to charge less for them in part because they’re unassembled and packed in flat boxes.

Mary Kay and Avon employ sales reps selling directly to customers (and recruiting some to sell), instead of sticking with more traditional retail outlets. While Amazon.com’s online business requires warehouses and deliveries, eBay’s model is different and less costly, facilitating transactions between buyers and sellers.

When evaluating a company, assess how attractive and profitable its business model is and what its risks and advantages are.

***

Q: If I had invested $1 in the stock market after the crash of 1929, how much would it be worth today?

— A. V., Venice, Florida

A: The Dow Jones Industrial Average (“the Dow”) peaked in early September 1929 at 381. The crash of 1929 took place over many months and continued beyond 1929, with the Dow initially plunging in October, falling by 12.8 percent on Oct. 28 and then another 12 percent on Oct. 29, when it closed at 230. It rallied to 294 in 1930 and later began a long descent, falling to 41 in July 1932.

With the Dow recently around 20,600, it’s up some 500-fold since the low of 41. That’s enough to turn your $1 into $500. Not too shabby, eh? That’s an annual average growth rate of roughly 7.6 percent. ¦

Want more information about stocks? Send us an email to foolnews@fool.com.

Return to top