Friday, 31 July 2009

Can you beat the pros at their own game?

Here are some of the handicaps mutual fund managers and other professional investors are saddled with:

  • With billions of dollars under management, they must gravitate toward the biggest stocks - the only ones they can buy in the multimillion-dollar quantities they need to fill their portfolios. Thus many funds end up owning the same few overpriced giants.
  • Investors tend to pour more money into funds as the market rises. The managers use that new cash to buy more of the stocks they already own, driving prices to even more dangerous heights.
  • If fund investors ask for their money back when the market drops, the managers may need to sell stocks to cash them out. Just as the funds are forced to buy stocks at inflated prices in a rising market, they become forced sellers as stocks get cheap again.
  • Many portfolio managers get bonuses for beating the market, so they obsessively measure their returns against benchmarks like the S&P 500 index. If a company gets added to an index, hundreds of funds compulsively buy it. (If they don't and that stock then does well, the managers look foolish; on the other hand, if they buy it and it does poorly, no one will blame them.)
  • Increasingly, fund managers are expected to specialize. Just as in medicine the general practitioner has given way to the pediatric allergist and the geriatric otolaryngologist, fund managers must buy only "small growth" stocks, or only "mid-sized value" stocks, or nothing but "large blend" stocks. If a company get too big, or too small, or too cheap, or an itty bit too expensive, the fund has to sell it - even if the manager loves the stock.


So, there's no reason you can't do as well as the pros.

What you cannot do (despite all the pundits who say you can) is to "beat the pros at their own game." The pros can't even win their own game! Why should you want to play it at all?

If you follow their rules, you will lose - since you will end up as much a slave to Mr. Market as the professionals are.

One of Graham's most powerful insights is this: "The investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage."

The intelligent investor has the full freedom to choose whether or not to follow Mr. Market. You have the luxury of being able to think for yourself.

Ref: cc Intelligent Investor by Benjamin Graham

What keeps most individual investors from succeeding?

When asked what keeps most individual investors from suceeding.

Graham had a concise answer: "The primary cause of failure is that they pay too much attention to what the stock market is doing currently."

The manic-depressive Mr. Market does not always price stocks correctly.

On March 17, 2000, the stock of Inktomi Corp. hit a new high of $231.625.
  • Since they first came on the market in June 1998, shares in the Internet-searching software company had gained roughly 1,900%.
  • Just in the few weeks since December 1999, the stock had nearly tripled.

What was going on at Inktomi the business that could make Inktomi the stock so valuable?

  • The answer seems obvious: phenomenally fast growth.
  • In the three months ending in December 1999, Inktomi sold $36 million in products and services, more than it had in the entire year ending in December 1998.
  • If Inktomi could sustain its growth rate of the previous 12 months for just five more years, its revenues would explode from $36 million a quarter to $5 billion a month.
  • With such growth in sight, the faster the stock went up, the farther up it seemed certain to go.

But in his wild love affair with Inktomi's stock, Mr. Market was overlooking something about its business.

  • The company was losing money - lots of it.
  • It had lost $6 million in the most recent quarter, $24 million in the 12 months before that, and $24 million in the year before that.
  • In its entire corporate lifetime, Inktomi had never made a dime in profits.
  • Yet, on March 17, 2000, Mr. Market valued this tiny business at a total of $25 BILLION. (Yes, that's BILLION, with a B.)

And then Mr. Market went into a sudden, nightmarish depression.

  • On September 30, 2002, just two and a half years after hitting $231,625 per share, Inktomi's stock closed at 25 cents - collapsing from a total market value of $25 billion to less than $40 million.

Had Inktomi's business dried up?

  • Not at all; over the previous 12 months, the company had generated $113 million in revenues.
So what had changed? Only Mr. Market's mood:
  • In early 2000, investors were so wild about the Internet that they priced Inktomi's shares at 250 times the company's revenues.
  • Now, however, they would pay only 0.35 times its revenues.
  • Mr. Market had morphed from Dr. Jekyll to Mr. Hyde and was ferociously trashing every stock that had made a fool out of him.

But Mr. Market was no more justified in his midnight rage than he had been in his manic euphoria.

  • On December 23, 2002, Yahoo! Inc. announced that it would buy Inktomi for $1.65 per share.
  • That was nearly seven times Inktomi's stock price on September 30.
  • History will probably show that Yahoo! got a bargain.
  • When Mr. Market makes stocks so cheap, it's no wonder that entire companies get bought right out from under him.

(As Graham noted in a classic series of articles in 1932, the Great Depression caused the shares of dozens of companies to drop below the value of their cash and other liquid assets, making them "worth more dead than alive.")


Most of the time, the market is mostly accurate in pricing most stocks.

Millions of buyers and sellers haggling over price do a remarkably good job of valuing companies - on average.

But sometimes, the price is not right; occasionally, it is very wrong indeed.

And at such times, you need to understand Graham's image of Mr. Market, probably the most brilliant metaphor ever created for explaining how stocks can become mispriced.

The manic-depressive Mr. Market does not always price stocks the way an appraiser or a private buyer would value a business.

Instead, when stocks are going up, he happily pays more than their objective value; and, when they are going down, he is desperate to dump them for less than their true worth.

Is Mr. Market still around? Is he still bipolar? You bet he is.

Ref: cc Intelligent Investor by Benjamin Graham

Think for Yourself

In 1999, when Mr. Market was squealing with delight, American employees directed an average of 8.6% of their paychecks into their 401(k) retirement plans.

By 2002, after Mr. Market had spent three years stuffing stocks into black garbage bags, the average contribution rate had dropped by nearly one-quarter, to just 7%.


The cheaper stocks got, the less eager people became to buy them - because they were imitating Mr. Market, instead of thinking for themselves.

Would you willingly allow a certifiable lunatic to come by at least five times a week to tell you that you should feel exactly the way he feels?

Would you ever agree to be euphoric just because he is - or miserable just because he thinks you should be?

Of course not. You'd insist on your right to control of your own emotional life, based on your experiences and your beliefs.

But, when it comes to their financial lives, millions of people let Mr. Market tell them how to feel and what to do - despite the obvious fact that, from time to time, he can get nuttier than a fruitcake.

One of Graham's most powerful insights is this: "The investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage."

The intelligent investor has the full freedom to choose whether or not to follow Mr. Market. You have the luxury of being able to think for yourself.

Ref: cc Intelligent Investor by Benjamin Graham

Do business with Mr. Market only when it serves Your Interests.

The stock of CMGI, an "incubator" or holding company for Internet start-up firms, went up an astonishing 939.9% in 1999. Meanwhile, Berkshire Hathaway - the holding company through which Graham's greatest discipline, Warren Buffett, owns such Old Economy stalwarts as Coca-Cola, Gillette, and the Washington Post Co. - dropped by 24.9%.

But then, as it so often does, the market had a sudden mood swing. The stinkers of 1999 became the stars of 2000 through 2002.

As for those two holding companies, CMGI went on to lose 96% in 2000, another 70.9% in 2001, and still 39.8% more in 2002 - a cumulative loss of 99.3%. Berkshire Hathaway went up 26.6% in 2000 and 6.5% in 2001, then had a slight 3.8% loss in 2002 - a cumulative gain of 30%.


By refusing to let Mr. Market be your master, you transform him into your servant. After all, even when he seems to be destroying values, he is creating them elsewhere.

  • In 1999, the Wilshire 5000 index - the broadest measure of U.S. stock performance - gained 23.8%, powered by technology and telecommunications stocks.
  • But 3,743 of the 7,234 stocks in the Wilshire index went down in value even as the average was rising.
  • While those high-tech and telecom stocks were hotter , thousands of "Old Economy" shares were frozen in the mud - getting cheaper and cheaper.

The intelligent investor shouldn't ignore Mr. Market entirely. Instead, you should do business with him - but only to the extent that it serves your interests.

Mr. Market's job is to provide you with prices; your job is to decide whether it is to your advantage to act on them. You do not have to trade with him just because he constantly begs you to.

Ref: cc Intelligent Investor by Benjamin Graham

Controlling Yourself at Your Own Game: You are your own Worst Enemy

If you listen to financial TV, or read most market columnists, you'd think that investing is some kind of sport, or a war, or a struggle for survival in a hostile wilderness.

But investing isn't about beating others at their game.

It's about controlling yourself at your own game.

The challenge for the intelligent investor is not to find the stocks that will go up the most and down the least, but rather to prevent yourself from being your own worst enemy - from buying high just because Mr. Market says "Buy!" and from selling low just because Mr. Market says "Sell!"

If your investment horizon is long - at least 25 or 30 years - there is only one sensible approach: Buy every month, automatically, and whenever else you can spare some money. (For many, the single best choice for this lifelong holding is a total stock-market index fund. )

After all, the whole point of investing is not to earn more money than average, but to earn enough money to meet your own needs. "Who cares? All I know is, my investments earned enough for me to end up in ----?"

The best way to measure your investment success is not by whether you're beating the market but by whether you've put in place a financial plan and a behavioural discipline that are likely to get you where you want to go. In the end, what matters isn't crossing the finish line before anybody else but just making sure that you do cross it.

Ref: cc Intelligent Investor by Benjamin Graham

Controlling the Controllable

Recognize that investing intelligently is about controlling the controllable.

You can't control whether the stocks or funds you buy will outperform the market today, next week, this month, or this year; in the short run, your returns will always be hostage to Mr. Market and his whims.

But you can control:
  • your brokerage costs, by trading rarely, patiently, and cheaply
  • your ownership costs, by refusing to buy mutual funds with excessive annual expenses
  • your expectations, by using realism, not fantasy, to forecast your returns
  • your risk, by deciding how much of your total assets to put at hazard in the stock market, by diversifying, and by rebalancing
  • your tax bills, by holding stocks for at least one year and, whenever possible, for at least five years, to lower your capital-gains liability
  • and, most of all, your own behaviour.

Ref: cc Intelligent Investor by Benjamin Graham

Urgent Strategy Update

Hello — this is Martin Weiss with an important strategy update.
It's only fair to acknowledge that the economic depression I foresaw in my book and in my reports is unfolding more slowly than I had expected.
For reasons I'll explain in a moment, the next phase of the crisis we've been warning you about has been delayed, and this change demands a parallel change in our short- and medium-term investment outlook.
The real estate bust we forecast four years ago has happened, but right now, the housing market appears to be stabilizing.
The depression I've written about extensively is here, but it's not as deep as I expected it would be by this time.
The first phase of the banking collapse I alerted you to has struck, but the second phase has been delayed.
The stock market has plunged, but this bear market rally has lasted longer than I believed it would.
My long-term outlook has not changed by one iota! All of this simply means that the calm before the next phase of this financial storm may be prolonged. And at a time like this, it is absolutely essential that intelligent and prudent investors adjust with the times — in our case, to adjust our shorter-term outlook, strategy and recommendations.
But before we talk about the forces that have prolonged this crisis, let's take a look at what has not changed:
First and foremost, the federal government is deeper in debt than ever. Washington now owes $15 trillion. Worse, it's adding as much as $2 trillion to the national debt this year alone and pushing new spending bills that, if passed, will make these record-shattering deficits even worse.
Second, toxic assets are still piling up in the U.S. banking system. Three new waves of defaults in adjustable-rate mortgages — each larger than the previous one — are still bearing down on us.
Third, unemployment is approaching depression-era levels and still rising.
Fourth, corporate and personal bankruptcies are off the charts and also still rising.
Fifth, the finances of our state and local governments are still a mess. Their tax revenues are plunging. Their costs to fund social safety nets are surging. Their deficits are exploding.
All of these very dangerous fundamentals are still in place, just as we've told you. But two forces have been introduced into the mix.

Force#1 is a short-term shift in investor psychology: Washington has been able to temporarily tamp down the FEAR on Wall Street.
It took a heck of a lot more money than they had imagined would ever be needed — trillions in spending and lending, trillions more in guarantees. And while none of this does a single thing to correct the nation's underlying problems with excess debt, they have had a positive impact on investor confidence — for now.
For now at least, they have been able to smother the fires that just a few months ago were burning out of control.
At the same time, they have convinced many investors to resume taking RISK. And in the case of some major investors, like big investment banks, we see more risk-taking now than at any time in history.
Goldman Sachs is a prime example. Emboldened by the belief that big banks are "too big to fail" — Goldman is now taking double the risk it was taking before this crisis began.
In short, although our leaders have done virtually nothing to solve the fundamental problems that caused this crisis, Washington does seem to have bought some time.
How much time? That remains to be seen.
But for some clues, we've taken a closer look at Japan's "lost decade" of the 1990s.
Before their lost decade, Japan experienced a massive bubble economy, which included many of the same elements we saw in our own bubble — massive speculation in real estate, huge risks taken by banks and a great gambling fever in stocks.
But beginning in early 1990, that bubble burst. Much like we've seen here today, their stock averages plunged, with the Nikkei Index crashing 62 percent. Much like in our crisis, real estate prices collapsed, brokerage firms failed, and big banks were buried in a morass of toxic paper.
And just like Washington today, their government threw everything, including the kitchen sink, at the crisis.
They slashed official interest rates to zero — just like Washington has.
They introduced a major stimulus package — just like Washington has.
They kept zombie banks alive — just like Washington is doing right now.
They tamped down the fear. They bought time. They attacked the symptoms of their economic disease. But they never addressed the causes.
Their massive bailouts and handouts postponed the day of reckoning. But then months later, the next major decline began. And this cycle repeated itself — not just once, but several times during their lost decade.
Even after prolonged bear market rallies, the Nikkei made new lows, again and again.
So the lesson from Japan is clear: It is possible that the U.S. economy and the U.S. markets will muddle through and even recover for months at a time.
We may see the economy stabilize for several quarters.
We may see this bear market rally prolonged as investors continue to take more and more risk.
And you will certainly hear more voices proclaiming that "the crisis is over," and "the recession is behind us" ...
... until, that is, the next wave of bad news crushes the economy and the next phase of this deep, long-term bear market begins, when stocks plunge again, busting through their lows.
In Japan, the Nikkei ultimately fell more than 80 percent from its peak. Don't be surprised to see the same happen here.
It's no coincidence that this change we're making now puts our outlook in closer alignment with the outlook of the Foundation for the Study of Cycles, whom we've partnered with in recent months. That partnership was a major evolution for my company, helping us to significantly enhance a key aspect of our research.
As everyone knows, it's one thing to see the direction of change. And if the last few years have proven anything, it's that we have foreseen those changes well ahead of time: The housing bust, the mortgage mess, the banking crisis, the stock market crash and the economic disaster.
But it's another thing to spot the precise timing of major turning points in the economy and the markets — and that's what this 75-year-old Foundation is helping us do more effectively.
Looking ahead, the Foundation sees the same perfect storm we see. They see the next phase of this great bear market starting to strike again next year.
So that's the first change in our outlook: It now seems likely that the next major downward phase of this crisis could be postponed for several months, perhaps even until next year.

Force #2 is the fact that the economies and stock markets in Brazil, India, China and other key countries have entered an important bullish phase, giving us many opportunities to go for substantial profits overseas.
Plus, now that Washington has bought some time for the U.S. economy, the path is clearer to pursue opportunities in U.S. stocks that derive a big portion of their revenues from the most promising regions overseas.
I am ready; indeed, eager to harness this medium-term profit potential and I hope you are too.
I was brought up in Latin America and I have lived in East Asia. I have studied every major world language except Arabic. I have been to every continent except Antarctica.
More important, I've assembled an international team of experts with decades of experience overseas and global investments. We know where the opportunities are — and where the pitfalls lie.
Beware, though: The U.S.-led debt crisis will return, and when it does, it will do so with a vengeance. Knowing when the next phase of this crisis is most likely to unfold will be crucial to protecting your capital.
So my message to you today is clear: This crisis is not over. Do not let down your guard. Do not plunge headlong into risk. But at the same time, do not ignore the short- and medium-term opportunities to grow your wealth.
Invest moderately, use prudent downside protection and cash management strategies and always have a clear exit plan.
Please be assured that, as always, you are our first priority. We are absolutely dedicated to helping you not only preserve your capital but also grow your wealth no matter how long the next phase of this crisis is delayed or how suddenly it strikes.
My staff and I are working diligently to improve every aspect of our service to you. And now that we have exclusive rights to the time-honored research of the Foundation for the Study of Cycles, we feel we're even better equipped to help you time your investment decisions in virtually every market environment. We here to help you cautiously harness the profit opportunities — both as foreign economies grow stronger and when the bear returns to the U.S.
Good luck and God bless!

About Money and MarketsFor more information and archived issues, visit

Instead of fearing a bear market, you should embrace it.

Your Money and Your Brain

Why, then, do investor find Mr. Market so seductive? It turns out that our brains are hardwired to get us into investing trouble; humans are pattern-seeking animals. Psychologists have shown that if you present people with a random sequence - and tell them that it's unpredictable - they will nevertheless insist on trying to guess what's coming next. Likewise, we "know" that the next roll of the dice will be a seven, that a baseball player is due for a base hit, that the next winning number in the Powerball lottery will definitely be 4-27-9-16-42-10- and that this hot little stock is the next Microsoft.

Groundbreaking new research in neuroscience shows that our brains are designed to perceive trends even where they might not exist. After an event occurs just two or three times in a row, regions of the human brain called the anterior cingulate and nucleus accumbens automatically anticipate that it will happen again. If it does repeat, a natural chemical called dopamine is released, flooding your brain with a soft euphoria. Thus, if a stock goes up a few times in a row, you reflexively expect it to keep going - and your brain chemistry changes as the stock rises, giving you a "natural high." You effectively become addicted to your own predictions.

But when stocks drop, that financial loss fires up your amygdala - the part of the brain that processes fear and anxiety and generates the famous "fight or flight" response that is common to all cornered animals. Just as you can't keep your heart rate from rising if a fire alarm goes off, just as you can't avoid flinching if a rattlesnake slithers onto your hiking path, you can't help feeling fearful when stock prices are plunging.

In fact, the brilliant psychologists Daniel Kahneman and Amos Tversky have shown that the pain of financial loss is more than twice as intense as the pleasure of an equivalent gain. Making $1,000 on a stock feels great - but a $1,000 loss wields an emotional wallop more than twice as powerful. Losing money is so painful that many people, terrified at the prospect of any further loss, sell out near the bottom or refuse to buy more.

That explains why we fixate on the raw magnitude of a market decline and forget to put the loss in proportion. So, if a TV reporter hollers, "The market is plunging - the Dow is down 100 points!" most people instinctively shudder. But, at the Dow's recent level of 8,000 that's a drop of just 1.2%. Now think how ridiculous it would sound if, on a day when it's 81 degrees outside, the TV weatherman shrieked, "The temperature is plunging - it's dropped from 81 degrees to 80 degrees!" That, too, is a 1.2% drop. When you forget to view changing market prices in percentage terms, it's all too easy to panic over minor vibrations. (If you have decades of investing ahead of you, there's a better way to visualize the financial news broadcasts: see---).

In the late 1990s, many people came to feel that they were in the dark unless they checked the prices of their stocks several times a day. But, as Graham puts it, the typical investor "would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgment." If, after checking the value of your stock portfolio at 1:24 p.m., you feel compelled to check it all over again at 1:37 p.m., ask yourself these questions:

  • Did I call a real-estate agent to check the market price of my house at 1:24 p.m.? Did I call back at 1:37 p.m.?
  • If I had, would the price have changed? If it did, would I have rushed to sell my house?
  • By not checking, or even knowing, the market price of my house from minute to minute, do I prevent its value from rising over time?

The only possible answer to these questions is of course not! And you should view your portfolio the same way. Over a 10- or 20- or 30- year investment horizon, Mr. Market's daily dipsy-doodles simply do not matter. In any case, for anyone who will be investing for years to come, falling stock prices are good news, not bad, since they enable you to buy more for less money. The longer and further stocks fall, and the more steadily you keep buying as they drop, the more money you will make in the end - if you remain steadfast until the end. Instead of fearing a bear market, you should embrace it. The intelligent investor should be perfectly comfortable owning a stock or mutual fund even if the stock market stopped supplying daily prices for the next 10 years.

Paradoxically, "you will be much more in control," explains neuroscientist Antonio Damasio, "if you realize how much you are not in control." By acknowledging your biological tendency to buy high and sell low, you can admit the need to dollar-cost average, rebalance, and sign an investment contract. By putting much of your portfolio on permanent autopilot, you can fight the prediction addiction, focus on your long-term financial goals, and tune out Mr. Market's mood swings.

Ref: Intelligent Investor by Benjamin Graham

Happiness of the Wise

The happiness of those who want to be popular depends on others; the happiness of those who seek pleasure fluctuates with moods outside their control; but the happiness of the wise grows out of their own free acts. - Marcus Aurelius

Non-convertible Preferred Stocks

  1. It is hardly worthwhile to talk about nonconvertible preferred stocks, since their special tax status makes the safe ones much more desirable holdings by corporations – e.g., insurance companies – than by individuals.
  2. The poorer-quality ones almost always fluctuate over a wide range, percentage wise, not too differently from common stocks. We can offer no other useful remark about them.

Ref: Intelligent Investor by Benjamin Graham

"Long-term Bond of the Future"

This may be a good place to make a suggestion about the “long term bond of the future.”

  1. Why should not the effects of changing interest rates be divided on some practical and equitable basis between the borrowers and the lender?
  2. One possibility would be to sell long-term bonds with interest payments that vary with an appropriate index of the going rate.
  3. The main results of such an arrangement would be: (1) the investor’s bond would always have a principal value of about 100, if the company maintains its credit rating, but the interest received will vary, say, with the rate offered on conventional new issues; (2) the corporation would have the advantages of long-term debt – being spared problems and costs of frequent renewals of refinancing – but its interest costs would change from year to year.

Over the past decade the bond investor has been confronted by increasingly serious dilemma:

  1. Shall he choose complete stability of principal value, but with varying and usually low (short-term) interest rates?
  2. Or shall he choose a fixed-interest income, with considerable variations (usually downwards, it seems) in his principal value?

It would be good for most investors if they could compromise between these extremes, and be assured that neither their interest return nor their principal value will fall below a stated minimum over, say, a 20-year period.

  1. This could be arranged, without great difficulty, in an appropriate bond contract of a new form.
  2. Important note: In effect the U.S. government has done a similar thing in its combination of the original savings-bonds contracts with their extensions at higher interest rates.
  3. The suggestion we make here would cover a longer fixed investment period than the savings bonds, and would introduce more flexibility in the interest-rate provisions.

Ref: Intelligent Investor by Benjamin Graham

Price Fluctuations of Convertible Bonds and Convertible Preferred Stocks

  1. The price fluctuations of convertible bonds and preferred stocks are the resultant of three different factors: (1) variations in the price of the related common stock, (2) variations in the credit standing of the company, and (3) variations in general interest rates.
  2. A good many of the convertible issues have been sold by companies that have credit ratings well below the best. Some of these were badly affected by the financial squeeze in 1970.
  3. As a result, convertible issues as a whole have been subjected to triply unsettling influences in recent years, and price variations have been unusually wide.
  4. In the typical case, therefore, the investor would delude himself if he expected to find in convertible issues that ideal combination of the safety of a high-grade bond and price protection plus a chance to benefit from an advance in the price of the common.

Ref: Intelligent Investor by Benjamin Graham

Unpredictable Price Movements of Bonds

  1. If it is virtually impossible to make worthwhile predictions about the price movements of stocks, it is completely impossible to do so for bonds.
  2. In the old days, at least, one could often find a useful clue to the coming end of a bull or bear market by studying the prior action of bonds, but no similar clues were given to a coming change in interest rates and bond prices.
  3. Hence the investor must choose between long-term and short-term bond investments on the basis chiefly of his personal preferences.

If he wants to be certain that the market values will not decrease, his best choices are probably U.S. savings bonds, Series E or H.

  1. Either issue will give him a 5% yield (after the first year), the Series E for up to 5 ½ years, the Series H for up to ten years, with a guaranteed resale value of cost or better.
  2. If the investor wants the 7.5% now available on good long-term corporate bonds, or the 5.3% on tax-free municipals, he must be prepared to see them fluctuate in price.
  3. Banks and insurance companies have the privilege of valuing high-rated bonds of this type on the mathematical basis of “amortized cost,” which disregards market prices; it would not be a bad idea for the individual investor to do something similar.

Ref: Intelligent Investor by Benjamin Graham

High-grade Bond Market

Since 1964 record movements in both directions have taken place in the high-grade bond market.

  1. Taking “prime municipals” (tax-free) as an example, their yield more than doubled, from 3.2% in January 1965 to 7% in June 1970. Their price index declined, correspondingly, from 110.8 to 67.5.
  2. In mid-1970 the yields on high-grade long-term bonds were higher than at any time in the nearly 200 years of this country’s economic history.
  3. Twenty-five years earlier, just before our protracted bull market began, bond yields were at their lowest point in history; long-term municipals returned as little as 1%, and industrials gave 2.4% compared with the 4 1/2 to 5% formerly considered “normal.”

Those of us with a long experience on Wall Street had seen Newton’s law of “action and reaction, equal and opposite” work itself out repeatedly in the stock market – the most noteworthy example being the rise in the DJIA from 64 in 1921 to 381 in 1929, followed by a record collapse to 41 in 1932.

  1. But this time the widest pendulum swings took place in the usually staid and slow-moving array of high-grade bond prices and yields.
  2. Moral: Nothing important on Wall Street can be counted on to occur exactly in the same way as it happened before. This represents the first half of our favorite dictum: “The more it changes, the more it’s the same thing.”

Ref: Intelligent Investor by Benjamin Graham

Fluctuations in Bond Prices

Long-term bond market prices and interest rates changes

  1. The investor should be aware that even though safety of its principal and interest may be unquestioned, a long-term bond could vary widely in market price in response to changes in interest rates.
  2. Because of their inverse relationship the low yields correspond to the high prices and vice versa.
  3. Note that bond prices do not fluctuate in the same (inverse) proportion as the calculated yields, because their fixed maturity value of 100% exerts a moderating influence.
  4. However, for very long maturities, prices and yields change at close to the same rate.

Ref: Intelligent Investor by Benjamin Graham

Sibling economics

Sibling Economics

Emmet and Jim Rosenfeld are twin brothers who earn vastly different incomes. Emmet wrote about those differences recently in the Post magazine (Family Finances, July 19). His story prompted the Color of Money Question of the Week: Does your sibling (or siblings) make significantly more or less than you and, if so, how does that play out in the family?

Here is what other siblings wrote about their economic differences:

Carrie Nelson of the District says: "While my younger sister would love to pull big figures, her line of work as a vet technician just doesn't lend itself to that. So she settles for less because she LOVES her work."

Kathleen Culberson of Fairfax, Va., got married, had kids and is now divorced. She returned to the job market after years as a stay at home mom and as a result, took a pay cut. Her sister never married.

"We both went to the same private Ivy League college. She makes three to four times what I do. She borrowed my kids when she felt the occasional need to be domestic; she voluntarily paid for one year of college for each child. I think we are both happy with our choices," wrote Culberson.

"I think it takes real effort for someone to 'overlook' the success of a sibling, especially if that someone is a male," says Ellen Mahoney of Jacksonville, Fla. "My younger brother feels some resentment toward other siblings who have more means and that comes out in pointed remarks he occasionally makes."

Carolyn Cihelka of Woodbridge, Va., wrote: "My mother had warned me that finances were a sore subject with my brother, but I mentioned something to him anyway a couple of years ago and he blew up. He said nobody deserved my good situation more than I did, but he didn't want to hear about it ever again. It makes me uncomfortable that there's this just-below the surface resentment of my situation."

Cassandra Logan of Bowie, Md., says, "I am by no means rich, but one of my siblings seems to like to incorporate me into her and my nephew's future plans. Sometimes I know she is joking but I do think there is this expectation that I will always be available as an emergency fund." Logan's nephew is in college. She sends him money monthly, "But," she says, "I don't ever want to feel obligated."

Family Finances

As brothers, they shared a birthday and Ivy League educations. Then their bank accounts parted ways.

By Emmet Rosenfeld
Sunday, July 19, 2009

On a weekend trip to visit my twin brother in New York City a year or so ago, we found time to take a run along the Hudson River. As a couple of midcareer dads each with two young sons, our lives had taken parallel paths. Except in one way.

"My bills are killing me this month," said Jim, as we skirted the driving range at Chelsea Piers.

What gee-whiz expense was it this time, I wondered -- $700 a month for off-street parking?

"I wrote 65,000 bucks worth of checks the other night."

"Huh?" I said, assuming I'd misheard.

"I couldn't believe it myself. But I'm floating two mortgages right now until we sell our place; then there's the construction loan on the brownstone, and I had to pay my quarterly taxes. That was about 30 grand right there."

I don't think I broke stride. But emotionally, at that moment, I buckled. I've come to accept over the years our disparity in income: He's a partner in a law firm, and I'm an educator. But right then it struck me just how far apart, financially, we really were.

My brother's monthly nut was almost the same as my entire year's pay.

As we ran, my eyes turned to the swirling currents of the Hudson.

"Ouch," I managed.


Before the financial meltdown turned the world upside down, rich wasn't that hard to figure out. Pulling down north of $350,000 a year put you in the top 1 percent of households in the United States, according to the U.S. Census Bureau. As a lawyer married to a psychiatrist, my twin and his wife are comfortably in that category. My spouse and I, both career educators, are happy to have finally cracked six figures combined after 15 years in our field.

So, how did twins who grew up playing on the same schoolyards in suburban Washington end up so many rungs apart on the income ladder? And for those of us on the schlub side, is a mid-six-figure salary truly the velvet rope between us and a thinner, tanner version of ourselves? More to the point, would I be happier with my brother's life?

Jim's journey to the courtroom and mine to the classroom began with our parents.

Mom's and Dad's upbringings fell on opposite ends of the bell curve that defined the mid-century spectrum of Jewish possibility. Dad was the son of a Pittsfield, Mass., clothier and a mother who volunteered for social organizations. He grew up playing tennis on clay courts in the family back yard, graduated from Harvard University, and eventually studied Russian at Columbia University on the way to a career as a high-profile journalist for this newspaper.

The daughter of a Providence, R.I., insurance salesman and a bookkeeper, my mother worked her way into Smith College and, later, graduate school at Radcliffe. She was a perennial PTA president whose unflagging civic participation reflected her up-by-the-bootstraps background.

My parents shared the unshakable faith that education and hard work were the bedrocks of success, and expected all four of us children to attend Ivy League schools as they had.

And so, at the public high school we attended, Jim edited the newspaper and played on the tennis team. I was student body president and a soccer midfielder. Jim added the first Yale sticker to the back window of the family wagon, while I slapped one on from Harvard.

It wasn't until after high school that our paths began to diverge. Driving an orange VW Microbus bought with tips from waiting tables, I took the road less traveled and spent part of a gap year in Colorado ski country. By the time I parked my van in Harvard Yard, my twin brother was already a sophomore in New Haven.

I continued to play grasshopper to Jim's ant. The summer after his junior year, Jim worked as an intern with the Washington, D.C., Public Defender Service. I put my formal education on hold again when a summer job teaching kids to swim in rural Alaska stretched into a stint in an Eskimo village as a substitute teacher.

As I huddled with those shivering, raven-haired children around a driftwood fire after lessons, something clicked for me. Not long after my return to Harvard, I enrolled in the School of Education to become a teacher.

Around the time I stood in front of a bunch of high school students for the first time, Jim was getting ready to take the LSATs, and he entered law school soon after. Out of college, I took a job leading outdoor trips with at-risk kids in Minnesota. By then Jim had landed a clerkship with a federal appeals court judge in Denver. My first real job was teaching ninth-grade English; his was on Wall Street.

Fast forward to today. Jim is a partner at a law firm in Manhattan, and I recently became dean of students at a private school in Falls Church, after a decade and a half of teaching in mostly public school classrooms.

I think our differing paths ultimately reflect a difference in temperament more than financial values. Sleeping under spruce trees in Alaska was part of my adolescent attempt to reject the suburban norms that my brother never had the urge to challenge. In clerking for a federal judge, he lived up to family expectations I didn't feel the need to fulfill.

As children, Jim and I embraced the mantra "You split, I choose" to prevent fights. It was absolutely fair: You didn't want to cut that last piece of cake into unequal parts because you'd be stuck with the smaller one. This Solomonic approach taught us to live with our choices. We also learned to keep an eye on the other guy's slice, and we've been doing it ever since.


My wife was giving the boys a bath, and I was sitting at my dining room table leafing through a stack of bills one recent evening when the phone rang.

"Did you remember we're coming down this weekend?" asked Jim. His wife, a clinical psychiatrist and researcher, had another conference in Washington.

"Sure," I replied vaguely, tearing open a Social Security statement. The column of numbers inside represented my work history. I considered how the gap between my earning power and my brother's has widened through the years.

"We got the boys into that school I was telling you about," Jim reported. For each son, the tuition is as much as my wife, Courtney, makes per year teaching preschool.

"Congrats," I mumbled. He started saying something about his sitters -- they juggle two to cover all the hours when he and his wife are at work -- but I was only half listening as I scribbled figures on the back of an envelope. There's enough coming in to cover expenses, more or less. As long as a $2,000 car repair bill doesn't hit when there's less.

"What's this check for $530?" I called upstairs to my wife as soon as I hung up.

Even before this recession, keeping a close eye on the bottom line was a depressing but necessary midmonth habit. Like most educators, our belts have always been snug.

"Didn't I ask you to wait until next week to pay the sitter?"

Perversely, while we make more today than we have in the past, things didn't always seem this tight. Before the crash, our house was a piggy bank, allowing us to go to the wine store on the corner just like the 30-something AOL retirees in the trendy neighborhood where we'd settled during the '90s.

Our first home in Del Ray was a little Cape Cod with a galley kitchen and a koi pond out back. I built a white picket fence around the patch of a front yard and planted a maple tree near the garage when our son was born. A few years and another kid later, we waded into the pounding surf of the local housing market. Back then, we got outbid by laughable sums -- once $100,000 -- before finally making an offer on a place a few blocks away for $70,000 over the asking price. Even that amount seemed like Monopoly money when our own starter home sold the next week for $500,000 more than we'd originally paid for it.

"You guys are teachers," I remember Jim saying on his first visit to our handsome, two-story farmhouse on a double lot. "How'd you get a place like this?"


The weekend after our phone chat, Jim steered a brand-new Subaru Outback into the driveway, parking behind my used luxury station wagon.

"Nice," I said, trying not to look too impressed. I've never owned a new car in my life.

For him, the vehicle is a practical choice: a people-mover with puke-proof leather seats, not too high-end to garage in the city. Paid for in cash.

"Thanks," he grunted, hauling out the luggage. "And remind me why you're the one with the Audi?"

Our fancy import had come to us with 60,000 miles after a neighborhood teenager deemed it not cool enough to drive to her tony private high school.

Twin math: For more than $30,000 plus a monthly parking bill double my loan payment, my brother got the outdoorsy brand I would have splurged on if I could afford to buy new. For $20,000 less, I'd picked up a used version of the ride he might have driven out of the showroom, if only he weren't strapped with a double mortgage.

"Did that come with the bike rack," I asked, "Or was it extra?"

Later, we sat out back on the deck near the grill, nursing a couple of beers as our sons, ages 4 to 8, played in the yard. I'd rebuilt the deck, enjoying the satisfaction of knowing I'd done it myself, the sort of feeling that budget-conscious teachers tend to experience a lot more than time-strapped lawyers.

We chatted as the boys made their alliances and began an assault on the woodpile. Wiffle bats littered the lawn, and a playground ball bounced toward the butterfly bush.

"Easy on the flowers," I called. "And watch out for land mines." The dogs panted under the picnic table.

"Man," said my brother, gazing around the neatly fenced area. "You don't know what a yard like this would cost in Brooklyn." There was a note of envy in his voice I couldn't help but savor, maybe because I know it all too well.


A month or two later, I eased into a parking space right in front of my brother's new brownstone in Brooklyn Heights.

"We made it," I declared to the kids, groggy in the back seat.

"That's it?" asked my wife, sizing up the nondescript stairs leading to a heavy wooden door. For the past year, the real estate saga had unfolded: the slow sale of the Chelsea condo, the purchase of this place complete with prickly downstairs neighbor, the dizzyingly over-budget renovation. We'd wondered along the way why anyone would buy the top three floors of anything without getting a back yard.

"There's Uncle Jimmy!" called the boys.

"I haven't gotten that parking spot since we moved in," he greeted us. "Welcome to Brooklyn."

Jim dropped our bags in a room sparsely furnished with two raspberry chairs and a foldout couch. "You'll be here," he said. "The boys are down the hall." Already, the kids were dumping bins of plastic dinosaurs onto the floor.

"And here," he said, as we followed him upstairs to the next level, "is the rest." I suddenly knew what real estate agents mean by the "wow" factor. A dining area with a dramatic two-story ceiling lay before us, an open kitchen at one end and a tastefully appointed living room at the other. White columns sprang from creamy antique pine floors, leading the eye to the level above, where glass panels hovered between stainless steel railings on the landing. The furniture was Danish modern; the sound system zoned. A brand-new flat-screen TV hung on an invisible mount beyond the Arts and Crafts mantle. Across from it, modular bookshelves floated against one wall.

Overlooking all was a glass-walled master suite with gauzy curtains. This, I thought as I took in the scene, is a sweet house.

Later, we went for a jog, just as we had a year earlier. I felt the familiar electricity of running in the city, but the landscape was new to me. "This area is called Dumbo," Jim tour-guided, "Down Under the Manhattan Bridge Overpass."

We ran past spray-painted doors and decrepit buildings where artists keep lofts, though most of the Bohemian pioneers have already been chased out by the inexorable creep of monied couples from Manhattan. Suddenly the East River appeared before us.

"That's the Brooklyn Bridge, right?" I asked.

"Yeah, and they're going to turn all these piers into parks and stuff," Jim said, waving his arm at the line of old docks that stretched to the south. I pictured the scene for a moment: hopscotching greensward packed with high-net-worth couples pushing $900 strollers.

We paused to stretch on one of the barren piers. Wall Street glittered across the water, and just downriver, with her back to us, the Statue of Liberty held her torch aloft.

"How's the new job?" asked Jim.

"Good," I grunted. "No more getting home at four in the afternoon."

Seven is closer to normal these days, at which hour I'm greeted at the door by the nuzzling of an under-exercised dog, the fried-onion smell of red sauce on the stove, and a third-grader calling for help with his homework.

"That's not so bad," lamented Jim. "If I know I can't get home for bedtime, I'll call the boys at 7:30 and then stay at work till midnight."

By this time, we were running again, circling back to the house. To the steady rhythm of our steps, I mulled the ebb and flow of anxiety over money that has come with being an educator. Was being home for bath time worth it?

I got an answer of sorts later that evening as I watched my brother thumb his BlackBerry to answer West Coast e-mails while the rest of us sat around drinking his expensive Scotch and playing our version of "Six Degrees of Separation" on Facebook. The kids were zonked, and the last dishwasher load had finally run.

"Dude, check this out," I chuckled. A friend from fifth grade popped up on the screen.

"One minute," Jim said, frowning.

A while later, I headed for the stairs, leaving Jim splayed out in a modern chair, his BlackBerry idle at last. "Don't stay up too late," I called.

It's best to go to bed with the score tied.

Emmet Rosenfeld is dean of students at the Congressional Schools of Virginia and a teacher consultant with the Northern Virginia Writing Project. He can be reached at

Time is Money for the Young Investor

It's a great time to invest.

Time is Money

Oh, to be young again. For one, I would go back and correct some investing mistakes. When I first started investing in a 401 (k) plan I opted for mostly bonds, which was way too conservative for a young investor. Don't make the mistake I did, advises Kiplinger's Erin Burt.

Although the stock market is still scary (despite its recent upswing), if you've got decades before you retire, don't let the recession chase you away from equities. Read more in If You're Young, Rock the Recession (July 19).

If You're Young, Rock the Recession

By Erin Burt
Sunday, July 19, 2009

If you're older than 40, you would be forgiven if you took the glass-half-empty view of the economy. After all, your retirement account has been decimated, your home's value has plummeted, your credit has dried up and your job may be teetering on a cliff.

But if you're in your 20s or 30s, you have time to rebound from any personal setback and even use the crisis to your advantage.

It's a great time to invest.

Yes, the stock market has been in the toilet lately, but that's what makes investing so attractive, especially to first-timers. As of July 8, the Standard & Poor's 500-stock index stood 44 percent below the all-time high set on Oct. 9, 2007. Yes, that's a good thing -- for you. You have 30, 40, maybe 50 years until you retire. That's plenty of time to come out ahead. The stock market has never lost money over a 30-year period. Even if you had invested in 1928, before the Great Depression, you would have earned an average annual return of about 8.5 percent over the next 30 years, according to T. Rowe Price.

You can get a deal on a home.

Median home prices have dropped about 25 percent since 2006, with some metro areas seeing values drop by more than half, according to the National Association of Realtors. Mortgage rates are also near record lows, making for smaller monthly payments. Plus, Uncle Sam is sweetening the deal with a tax credit worth up to $8,000 for first-time home buyers.

Your career options are still open.

The nation's unemployment rate topped 9.5 percent in June. And hiring for new grads has slowed significantly. But this is a minor setback when you're young, compared with the blow it would be if you were older and more established. In fact, the recession may lead you to explore life and job paths you might not have considered otherwise.

You haven't put down roots, yet.

So it's easier for you to move to where the jobs are. Job markets in big -- and pricey -- cities, such as New York, Chicago and San Francisco, have been hit hard. But look at opportunities and a more affordable lifestyle in such places as Albuquerque, Austin, Charlottesville and Huntsville, Ala.

Excessive debt is passé.

Conspicuous consumption is out. Frugality is in. In recent years, we hardly saved a dime (zero percent, actually). Now, with the economy in the dumps, Americans are saving nearly 7 percent, according to the Bureau of Economic Analysis. Getting in the habit of saving money and spending wisely in your 20s and 30s will pay dividends for a lifetime.

Financial Planning and Investment Management

If you’re visiting our Web site, chances are you’re facing critical decisions about your financial future. Perhaps you’re thinking about issues such as:

How do I preserve capital while getting the best return on my investments?
Can I maintain my lifestyle indefinitely?
How much should I spend on a second home — and what is the best way to finance it?
What is the most efficient way to fund my children’s or grandchildren's education?
When is the right time to retire?
Should I take my pension as a lump sum?
Which company stock options should I exercise, and when?
Do I have too much life insurance? What about long-term care?
How do I minimize taxes?
How can I efficiently transfer wealth to my heirs?

As you probably realize, the answers to these questions are fundamentally interrelated, which is why it’s best to seek multi-disciplined advice that is seamless and integrated. And if you prefer guidance that is very personalized, highly professional, independent, and objective, consider Brinton Eaton Wealth Advisors, a firm built upon long-term trust-based client relationships.

A full-service, fee-only, wealth management firm, Brinton Eaton Wealth Advisors provides integrated financial planning, tax advisory, and investment management services to individuals and institutions nationwide.

Thursday, 30 July 2009

Market Price Fluctuations

52W Hg 32.000
52W Lw 26.000
Close 32.000

Price fluctuations:
The share price showed a steady up-trend with little volatility.
At 32.00, the share price has risen 23.1% from the 52 week low price.

52W Hg 12.400
52W Lw 8.100
Close 11.300

Price fluctuations:
The share price dropped 34.7% from its 52 week high price.
At 11.30, the share price has risen 39.5% from the 52 week low price.

52W Hg 6.250
52W Lw 4.460
Close 6.200

Price fluctuations:
The share price rose steadily with some volatility to its present price which is also the 52 week high price.
At 6.20, the share price has risen 39% from the 52 week low price.

52W Hg 1.320
52W Lw 0.800
Close 1.200

Price fluctuations:
The share price dropped 39% from its 52 week high price.
At 1.20, the share price has risen 50% from the 52 week low price.

52W Hg 2.380
52W Lw 0.790
Close 1.840

Price fluctuations
The share price dropped 67% from its 52 week high price.
At 1.84, the share price has risen 133% from the 52 week low price.

How can a short-term investor profits from these market price fluctuations?

How can a long-term investor profits from these market price fluctuations?

Who gains more: those who bought and hold long term or those who sold when the market trended downwards and then bought back when the market trended upwards?

The latter group needed to get both the sell and decision correct. Some in this latter group were caught with little allocation to stocks when the market turned in March, missing the best upward returns offered by this severe bear market.

Make volatility your friend.

For an investor who will be putting in more new capital yearly into the market, an understanding of market price fluctuations is important.

It is to be expected that the price of a stock can goes down by a third and can goes up by a half, even in normal market situations.

In fact, when the market is being sold down, the long term value investor gets excited and enthused.

The risk is not in the price volatility.

  • The risk is in oneself, reacting "stupidly" to price fluctuations.
  • The other risk of course is making a wrong assessment of the future earnings and future earnings growth of the business of the company you bought.

iCap poses a challenge to active investors - Is it time for a re-think?

I started a new portfolio in October 2005. This coincided with the inception of iCap. closed ended fund.

Let us look at some data.

In Oct 2005:

KLCI was around 900

iCap NAV was $1.00 ($0.99 after deducting expenses)

23.7.2009 (after 45 months of investing = 3.75 years)

KLCI is around 1200, giving a cumulative total return of about 33% or a CAGR of 8%.

iCap NAV is $1.87, giving a cumulative total return of 86% or a CAGR of 18%. These are net of all expenses incurred by the fund. iCap in its latest report held 15.6% cash (41 m) with the rest invested in equity.

For the same period:

Savings in FD would have given a cumulative return of 15.84% at the generous annual interest rate of 4%.

My portfolio has a cumulative return of 45% or a CAGR of 10.4% for the same period.

Further observations:

At no period did the portfolio give a negative return, even during the recent severe bear market.

Of course, the return was very small at the depth of the severe bear market, threatening the loss of invested capital.

(However, as a long term investor, one can be comforted that the intrinsic value of the portfolio was definitely much higher than its market valuation.)

The time when the disparity between these two values of the portfolio was the biggest was also the best time to look for bargains. This called for courage and conviction on the part of the investor who has the capital to invest.

The cumulative total return of 45% for this portfolio, as of today, is made up of:
o dividend return of 12.2%,
o realised capital gain of 18.8% and
o unrealised capital gain of 13.9%.

Just like iCap, the calculations for this portfolio were based as if the investment was a lump sum at the start of the period (in reality, this was not the case), with dividends and realized capital gains reinvested. No cash was held in this portfolio, as this was the portion of my asset allocated to equity.

The Big Question.

Given the vastly superior performance of iCap closed ended fund, the question posed is: 'Should I continue to actively manage my own portfolio or should I turn into an even bigger investor into iCap fund?'

But then, this is a happy problem I can live with for a while yet.

CAGR: The Good, The Bad And The Ugly

CAGR: The Good, The Bad And The Ugly

by Rick Wayman (Contact Author Biography)

Compound annual growth rate, or CAGR, is a term that gets used when investment advisors tout their market savvy and funds promote their returns. But what does it really show? This article will define CAGR and discuss its good and bad points.

CAGR Defined
The CAGR is a mathematical formula that provides a "smoothed" rate of return. It is really a pro forma number that tells you what an investment yields on an annually compounded basis; it indicates to investors what they really have at the end of the investment period. For example, let's assume you invested $1,000 at the beginning of 1999 and by year-end your investment was worth $3,000, a 200% return. The next year, the market corrected, and you lost 50% and ended up with $1,500 at year-end 2000.

What was the return on your investment for the period? Using the average annual return does not work. The average annual return on this investment was 75% (the average of 200% gain and 50% loss), but in this two-year period you ended up with $1,500 not $3,065 ($1,000 for two years at an annual rate of 75%). To determine what your annual return was for the period, you need to calculate the CAGR.

To calculate the CAGR you take the nth root of the total return, where "n" is the number of years you held the investment. In this example, you take the square root (because your investment was for two years) of 50% (the total return for the period) and get a CAGR of 22.5%. Table 1 illustrates the annual returns, CAGR, and average annual return of this hypothetical portfolio. The lower portion of the table illustrates how applying the CAGR gives the number that equates the ending value of the initial investment.

Table 1

Figure 1 is a graphical representation of Table 1 and illustrates the smoothing effect of the CAGR. Notice how the lines vary but the ending value is the same.

Figure 1

The Good
CAGR is the best formula for evaluating how different investments have performed over time. Investors can compare the CAGR in order to evaluate how well one stock performed against other stocks in a peer group or against a market index. The CAGR can also be used to compare the historical returns of stocks to bonds or a savings account.

The Bad
When using the CAGR, it is important to remember two things:

  • the CAGR does not reflect investment risk
  • you must use the same time periods.

Investment returns are volatile, meaning they can vary significantly from one year to another, and CAGR does not reflect volatility. CAGR is a pro forma number that provides a "smoothed" annual yield, so it can give the illusion that there is a steady growth rate even when the value of the underlying investment can vary significantly. This volatility, or investment risk, is important to consider when making investment decisions.

Investment results vary depending on the time periods. For example, (AMZN) could be viewed as a great investment if you were smart enough to buy it in December 1997 at $4.52 and sell it in April 1999 at $105.06 for a 2,224% gain. If you bought the stock in September 1998 at $13.28 and still have it in your portfolio today, you would be about even. If you bought AMZN in late 2000 and still have it today, you would have lost 88% (from $115 to $13).

To demonstrate both CAGR and volatility risk, let's look at three investment alternatives: a blue chip (General Electric), a dotcom (Yahoo) and the five-year Treasury bond. We will examine the CAGR and average growth rate for each investment (adjusted for dividends and splits) for the five years ending December 31, 2001. We will then compare the volatility of these investments by using a statistic called the standard deviation.

Standard deviation is a statistic that measures how annual returns might vary from the expected return. Very volatile investments have large standard deviations because their annual returns can vary significantly from their average annual return. Less volatile stocks have smaller standard deviations because their annual returns are closer to their average annual return. For example, the standard deviation of a savings account is zero because the annual rate is the expected rate of return (assuming you don't deposit or withdraw any money). In contrast, a stock's price can vary significantly from its average return, thus causing a higher standard deviation. The standard deviation of a stock is generally greater than the savings account or a bond held to maturity.

The annual returns, CAGR, average annual return, and standard deviation (StDev) of each of the three investments are summarized in Table 2. We will assume that the investments were made at the end of 1996 and that the five-year bond was held to maturity. The market priced the five-year bond to yield 6.21% at the end of 1996, and we show the annual accrued amounts, not the bond's price. The stock prices are those of the end of the respective years.

Table 2

Because we have treated the five-year bond like a savings account (ignoring the market price of the bond), the average annual return is equal to the CGAR. The risk of not achieving the expected return was 0.0 because the expected return was "locked in". The standard deviation is zero also because the CAGR was the same as the annual returns.

General Electric (GE) shares were more volatile than the five-year bond, but not as much as YHOO's. The CAGR for GE was slightly less than 20%, but was lower than the average annual return of 23.5%. Because of this difference, the standard deviation was 0.32.

Yahoo (YHOO) outperformed GE by posting a CAGR of 65.7%, but this investment was also more risky because the stock's price fluctuated more than GE's. This volatility is shown by the high standard deviation of 3.07.

The following graphs compare the year-end prices to the CAGR and illustrates two things. First, the graphs show how the CAGR for each investment relates to the actual year-end values. For the bond, there is no difference (so we didn't display its graph for the CAGR comparison) because the actual returns do not vary from the CAGR. Second, the difference between the actual value and the CAGR value illustrates investment risk.

Figure 2

Figure 3

Figure 4

In order to compare the performance and risk characteristics between investment alternatives, investors can use a risk-adjusted CAGR. A simple method for calculating a risk-adjusted CAGR is to multiply the CAGR by one minus the standard deviation. If the standard deviation (risk) is zero, the risk-adjusted CAGR is unaffected. The larger the standard deviation, the lower the risk-adjusted CAGR. For example, here is the risk-adjusted CAGR comparison for the bond, GE and YHOO:

Bond: 6.21%
GE: 13.6% (instead of 19.96%)
YHOO: -136% (instead of 65.70%)

This analysis shows two things:

•While the bond holds no investment risk, the return is below that of the stocks.
•GE appears to be a preferable investment than YHOO. YHOO's CAGR was much greater than GE's (65.7% versus 19.9%), but because YHOO shares were more volatile, its risk-adjusted CAGR is lower than GE's.

While historical performance is not a 100% indicator of future results, it does provide the investor with some valuable information.

The Ugly
Things get ugly when the CAGR is used to promote investment results without incorporating the risk factor. Mutual fund companies emphasize their CAGRs from different time periods in order to get you to invest in their funds, but they rarely incorporate a risk adjustment. It is also important to read the fine print in order to know what time period is being used. Ads can tout a fund's 20% CAGR in bold type, but the time period used may be from the peak of the last bubble, which has no bearing on the most recent performance.

The CAGR is a good and valuable tool to evaluate investment options, but it does not tell the whole story. Investors can analyze investment alternatives by comparing their CAGRs from identical time periods. Investors, however, also need to evaluate the relative investment risk. This requires the use of another measure such as standard deviation.

by Rick Wayman, (Contact Author Biography)

'Stockmarkets climbing wall of worry'

'Stockmarkets climbing wall of worry'
The market action we have seen unfolding so far is very similar to the recovery from the March 2003 lows at the end of the ‘dotcom’ bear market.

By Jeff Hochman, director of technical analysis, Fidelity
Published: 2:49PM BST 29 Jul 2009

If that analogy holds, we can expect to see some market gyrations in the short term as investors wait for further evidence of economic and corporate improvement, which may be a few months away. Markets always have to climb this wall of worry and the fear of being left behind will become increasingly strong.

There is a risk that markets could fall by around 5pc, however this should be seen as a buying opportunity.

The alternative scenario is that markets stay fairly flat, within a trading range, before trending higher as each piece of new data adds weight to the evolving recovery story.

Renewed investor interest has helped emerging markets to move up strongly, so much so that they may see some short-term consolidation in what remains a strong secular story.

There is a considerable amount of money waiting on the sidelines in money market funds. This missed the first stage of the rally but it can be committed to the market once conditions improve.

Around two thirds of the money is institutional and some of it will be specifically allocated to cash, but a big chunk of it is cash that it is likely to be used for reallocating to equities.

By any historical standards, investors are currently holding extreme levels of cash at a time when the yield is modest. In the past, when cash levels have either met or exceeded the value of the equity market, this has marked a significant low.

Wednesday, 29 July 2009

KAF-Seagroatt returns to RM12m profit in fourth quarter

KAF-Seagroatt returns to RM12m profit in fourth quarter

Tags: fourth quarter KAF-Seagroatt & Campbell Bhd

Written by Financial Daily
Friday, 24 July 2009 09:53

KUALA LUMPUR: KAF-SEAGROATT & CAMPBELL BHD [] returned to profitability, with a net profit of RM12.12 million in its fourth quarter (4Q) ended May 31, 2009 versus a net loss of RM37,000 in the previous three months to Feb 28, 2009 due to higher volume of transactions and writeback in allowance for the diminution in the value of equity.

Revenue jumped 129% to RM6.78 million from RM2.96 million. No final dividend was proposed.

For the year ended May 31, 2009 (FY09), KAF-Seagroatt posted a net loss of RM2.96 million versus a net profit of RM17.49 million in FY08, while revenue fell 53% to RM19.73 million from RM42.54 million.

The group’s financial year-end was changed from March to May, starting with the 14-month period ended May 31, 2008. The stock was untraded yesterday, while it closed at RM1.18 on Wednesday.

This article appeared in The Edge Financial Daily, July 24, 2009


Tough times ahead but KAF won't cut jobs
By Chong Pooi Koon
Published: 2008/11/12

There's no way any brokers are going to maintain the 2007 or 2008 earnings into 2009, says KAF-Seagroatt's managing director Datuk Khatijah Ahmad

STOCKBROKING firm KAF-Seagroatt & Campbell Bhd (5096) will make a smaller profit in the year to May 2009 as market volume dwindles, but it will not cut jobs even as it anticipates the next three years to be tough.

Instead, managing director Datuk Khatijah Ahmad sees an opportunity to hire and strengthen the staff force of the research-driven broking house as other global banks start to retrench amid the financial crisis.

"There're no job cuts or pay cuts although the bonus may not be as good as last year's. We want to retain good people," Khatijah said after a shareholder meeting in Kuala Lumpur yesterday.

KAF-Seagroatt made RM17.5 million net profit in the 14 months to May 31 2008 on revenue of RM42.5 million.
Khatijah said, however, that such earnings would not be sustained this year.

"The foreign investors are leaving or have left, the volume has dropped in the equity market. There's no way any brokers are going to maintain the 2007 or 2008 earnings into 2009," she said.

The global financial market is in unchartered waters and, until the foreign investors return to Malaysia, there's little catalyst for the stock market.

"One should be prepared for a very slow market. As long as we are not losing money and can maintain the business, we should be fine," Khatijah said.

KAF-Seagroatt is a low-cost operator and can ride out the market trough in the next few years through earnings from its solid balance sheet, she added.

As at May this year, its total current assets were more than double its current liabilities and the broker has had no borrowings.

Khatijah is also not too concerned over the investment revaluation loss after its asset prices were marked-to-market, which dragged the company to a first quarter net loss of RM4.7 million.

"These are blue-chip shares that pay good dividend. It'll be silly to liquidate in this bottoming market," she said.

Kossan owns up to wrong judgment

Kossan owns up to wrong judgment

Tags: forex hedging Kossan Lim Kuang Sia

Written by Tony C H Goh
Monday, 27 July 2009 11:05

KUALA LUMPUR: KOSSAN RUBBER INDUSTRIES BHD [] chief executive officer Lim Kuang Sia has owned up to making a wrong judgment in carrying out speculative foreign exchange (forex) hedging.

“It is not the company’s policy to engage in speculative hedge, and we assure our investors that this kind of wrong judgment call will not happen again,” he told The Edge Financial Daily in a telephone interview last Friday.

Lim was responding to analysts’ reports that the glove maker may incur an estimated forex loss of RM8 million to RM9 million in the second quarter ended June 30, 2009 (2QFY09), after having written off RM12 million in similar losses in 1QFY09.

The losses spilled over from last year when Kossan hedged its receivables at an average contract of RM3.37 to the US dollar in anticipation of further weaknesses in the US currency. Instead, the dollar strengthened against the ringgit.

Lim said he did not expect any major impact from the forex losses this year.

“We are confident that the forex losses will fizzle out by the end of this financial year. In fact, a turnaround is expected to begin from the second half of this year and what happened was something that is common for industries that are involved in exports,” he said.

OSK Research said in its latest update on the company that FY09 would be a challenging year for Kossan, as it had to deal with unforeseen events such as a factory fire in May that disrupted much-needed production and the slowdown in the automotive sector that dampened demand for its technical gloves.

However, the research house said the problem of forex losses was not unique to Kossan, citing the example of ADVENTA BHD [] which incurred a forex loss of RM4.3 million in 1QFY09 and also in 2QFY09, which wiped out more than 50% of its quarterly net profit.

Other major glove makers such as Top Glove Corp Bhd, Supermax Corp Bhd and HARTALEGA HOLDINGS BHD [] were also believed to have suffered forex losses although their hedging exposure was less significant, according to OSK Research.

Lim said Kossan’s business strategies, including capacity expansion and a better product mix, were paying off. He anticipated supply to remain tight this year but said the positive results of its measures would be reflected in the next fiscal year, as the company’s internal projections were on track.

Kossan’s plant is running at around 95% of capacity and it expects to produce 9.3 billion to 9.5 billion gloves this year, an increase of 8%-10% from 8.5 billion last year. About a quarter of its total production would consist of higher-end nitrile gloves.

Nitrile gloves fetch a better selling price of US$27.50-US$28.50 per 1,000 pieces, compared with US$24-US$25 for natural rubber gloves. It also offers 10% to 15% higher margin than conventional rubber gloves.

OSK Research is maintaining a buy call on Kossan with a target price of RM4.48, in anticipation of the turnaround next year and the overall favourable view on the glove industry. The research house added that it was keeping Kossan’s FY09 forecast of RM62.5 million in net profit on revenue of RM964.7 million unchanged, until confirmation on the actual amount of forex loss.

“We believe investors would be buying the stock now for next year rather than 2009. There should also be recovery in the automotive sector, which will spur demand for its technical rubber products, and the overall recovery in the global economy should boost the demand for gloves, especially from the non-medical segment,” said OSK Research.

It said some of the growth catalysts for FY10 would include the commissioning of all its 22 new lines, which should be running at optimum level, thus enlarging its nitrile contribution to 40% from 25% now.

This article appeared in The Edge Financial Daily, July 27, 2009.

Running ahead of fundamentals?

Running ahead of fundamentals?

Written by Ellina Badri, Isabelle Francis & Surin Murugiah
Tuesday, 28 July 2009 23:51

KUALA LUMPUR: Regional markets continued to rise on July 28, driven by high liquidity but some analysts caution that equities may have run ahead of fundamentals.

Some hint of profit-taking emerged as Japan’s Nikkei 225 snapped its nine-day run and dipped 0.01% to 10,087.26 points. European markets turned negative in early trade on July 28, dragged down by losses in energy stocks.

Hong Kong’s Hang Seng Index gained 1.84% to 20,624.54, Shanghai’s Composite Index added 0.09% to 3,438.37, South Korea’s Kospi rose 0.13% to 1,526.03, Taiwan’s Taiex Index advanced 1.62% to 7,142.63 and Singapore’s Straits Times Index was up 1.84% to 2,624.04.

Macquarie Research, in a report titled When depositors become investors on Monday, said liquidity was returning to Asia and global emerging markets.

It said the fund flow numbers for the week ended July 22 showed that liquidity returned to Asia, ex-Japan and global emerging markets with net weekly inflows of US$973.2 million (RM3.41 billion) and US$1.1 billion, respectively.
This reversed the net outflow trend of the past four weeks, it said.

It said Greater China (China, Hong Kong and Taiwan) funds saw their biggest inflows since December 2007 (US$213.3 million), adding that sentiment towards China remained positive, with investors looking to achieve a broad and diversified exposure.

“In our view, the market conditions continue to be driven by liquidity rather than fundamental factors. Importantly, foreign investors are not the only source of liquidity,” it said, adding that domestic sources were also playing an important role, as depositors were switching from time deposits to demand deposits.

“Interest rate differentials between time and demand deposits are narrowing. With the opportunity cost of liquidity low, a greater proportion of funds are moving to liquid assets (demand deposits),” it said.

The research house also said while liquidity conditions were often a function of economic fundamentals, in the very near term there was the obvious potential for more money to chase equities despite what it viewed as elevated valuations.

“The yield gap between the earnings yield and the deposit rate expanded to an historical high. Despite elevated valuations, the significant yield differential between equities and bank deposits could induce investors to continue to switch from bank deposits to equities.

“Retail participation could rise further. The low returns on alternative investments, such as bank deposits, as well as the strong market momentum, were two likely drivers of the increase in retail investor participation,” it said.

Macquarie said the strong liquidity was pushing Asian equities to stretched valuation levels.

“We think a strong recovery in global final demand is now priced in.

“While hard signs of demand recovery are absent, we would ‘lean into’ the current rally, progressively reducing beta as equity markets move further and further away from levels justified by economic fundamentals,” it said.

On Malaysia, Macquarie said the yield gap, which it defined as 12-month forward earnings yield minus demand deposit rate, had widened further. “Admittedly, the domestic monetary base could be the next potential source of liquidity driving up the market,” it said.

Scott Lim, MIDF Asset Management chief executive and chief investment officer, agreed that the market was liquidity-driven, and valuations were getting stretched.

“The bulk of the rally has reflected liquidity more than fundamentals. Apart from liquidity and efforts by governments to increase access to financing, there is nothing much else driving the market.

“Investors have grounds to be cautious. Either fundamentals have to catch up with valuations, or valuations have to come down to meet it. Either one has to give,” he said.

Lim added that the liquidity was trying to rebuild a bubble, potentially the biggest one of all, but certain markets such as China were showing they were ready to stage a fierce formation of a stock market bubble.

However, Merrill Lynch Global Wealth Management Asia-Pacific investment strategist Stephen Corry said the next six months would still present buying opportunities in equities, regardless of it being an extended bear market rally or the start of a new bull market.

Corry was bullish on emerging market stocks, driven by recovery numbers in terms of car sales, while financial stocks remained favourites.

However, he cautioned that strong corporate earnings growth would need to be supported by equities’ current valuations.

Light crude oil rose nine cents per barrel to US$68.47 as at 6.20pm. Crude palm oil futures for third-month delivery gained RM42 per tonne to RM2,140.

At Bursa Malaysia, the FBM KLCI jumped 1.38% or 15.95 points to 1,172.38, its highest level since July 1 last year, led by gains by blue chips.

TA Securities technical analyst Stephen Soo said the immediate resistance level was 1,188 with the next level at 1,200. He said the respective support levels would be 1,165 and 1,148.

Turnover rose to 1.12 billion shares valued at RM1.63 billion. Gainers led losers by 491 to 194, while 249 counters traded unchanged. Market capitalisation over the last 12 trading days increased by RM60.48 billion to RM876.75 billion. The FBM100 [] gained 100.83 points to 7,689.37 and the FBM Emas added 103.69 points to 7,905.20.

Among the major gainers, SIME DARBY BHD [] and UMW HOLDINGS BHD [] added 25 sen each to RM8.15 and RM6.30, IOI CORPORATION BHD [] was up 22 sen to RM5 and GENTING BHD [] gained 15 sen to RM6.70.

MALAYAN BANKING BHD [], BUMIPUTRA-COMMERCE HOLDINGS [] Bhd and PUBLIC BANK BHD [] rose 10 sen each to RM6.55, RM10.20 and RM10.40, respectively, while Genting Malaysia Bhd added 12 sen to RM3.

PPB GROUP BHD [] was the top loser, shedding 20 sen to RM14.30; KFC HOLDINGS (M) BHD [] fell 15 sen to RM7.35, TALIWORKS CORPORATION BHD [] lost 13 sen to RM1.61, while LOH & LOH CORPORATION BHD [] and LEBAR DAUN BHD [] fell 12 sen each to RM4.18 and 60 sen.

KNM GROUP BHD [] was the most actively traded stock with 56.8 million shares done. It fell one sen to 89.5 sen.

From the Edge Malaysia