Is Investing Gambling?

I recently returned from a vacation in Las Vegas, Nevada and while I was out there, I received an interesting e-mail from a lawyer in Texas who was hesitant to let his teenage son begin investing because he thought it was just a legalized way for his son to gamble away his college savings. Now, I've heard many reluctant people refer to investing as "another legalized form of gambling" and I usually shrug it off with a smile but the fact is that investing is NOT gambling.

Webster's dictionary defines gambling as "to engage in a game of chance for something of value". In that sense, I suppose you could say investing is gambling but there is a more to it than just a dictionary definition.Gambling, for the most part, is simply a game of chance where the odds are in the house's favor. You hear amazing stories of how people have won thousands of dollars on a single slot pull, but the fact remains that you aren't expected to win. You enter a casino and you hope to win big but the odds of it happening are slim to none. That's the reason why a city like Las Vegas can grow so large. After all, the town wasn't built on winners.

Investing, on the other hand, is something in which the investor has the odds in their favor. One invests with the expectation of increasing the value of their portfolio. The reason is because the stock market has historically returned an average of 13% each year. Granted, there are risks involved and you don't always earn a positive return but, with the proper research, you can tip the odds even more in your favor.There are some professional gamblers who are successful but I doubt that they were successful from the very start. They probably lost money when they first started out and then learned from their mistakes in order to become as successful as they are now. But with investing, you don't have to lose money in order to invest properly. You can educate yourself before you begin by learning how investing works and then invest for the long-term.  Investing for the short-term or daytrading can be considered gambling because it's virtually impossible to see the very near-term future of a stock, but if you educate yourself and then take a long-term perspective, there is an excellent chance that you will earn a great return on your investment.

http://www.teenanalyst.com/investing/gambling.html

A criterion of investment vs. speculation:

Many see no benefit in distinguishing the investor from the speculator.

Graham disagrees -- he believes the margin of safety may be "the touchstone to distinguish an investment operation from a speculative one." 

The speculator believes the odds are in their favor when they take their chance and they might claim a margin of safety as a result from a propitious time, skill in analysis, adviser or system, etc. But these claims are unconvincing.


http://www.conscious-investor.com/books/intelligentinvestor.pdf

The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements.

The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements.  

The speculator’s primary interest lies in anticipating and profiting from market fluctuations. 

The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices.

Market movements are important to him in a practical sense, because they alternately create 

• low price levels at which he would be wise to buy and 
• high price levels at which he certainly should refrain from buying and probably would be wise to sell.

The Investor and Market Fluctuations

To the extent that the investor’s funds are placed

• in high-grade bonds of relatively short maturity—say, of seven years or less—he will not be affected significantly by changes in market prices and need not take them into account. 
• (This applies also to his holdings of U.S. savings bonds, which he can always turn in at his cost price or more.) 
• His longer-term bonds may have relatively wide price swings during their lifetimes, and 
• his common-stock portfolio is almost certain to fluctuate in value over any period of several years.

The investor should know about these possibilities and should be prepared for them both financially and psychologically.  He will want to benefit from changes in market levels—

• certainly through an advance in the value of his stock holdings as time goes on, and 
• perhaps also by making purchases and sales at advantageous prices. 

This interest on his part is inevitable, and legitimate enough. But it involves the very real danger that it will lead him into speculative attitudes and activities. 

• It is easy for us to tell you not to speculate; the hard thing will be for you to follow this advice. 
• Let us repeat what we said at the outset: If you want to speculate do so with your eyes open, knowing that you will probably lose money in the end; be sure to limit the amount at risk and to separate it completely from your investment program.

What can the past record of the market actions promises the investor—

• in either the form of long-term appreciation of a portfolio held relatively unchanged through successive rises and declines, 
• or in the possibilities of buying near bear-market lows and selling not too far below bull-market highs?

Ref:  Intelligent Investor by Benjamin Graham.

Interesting to Note that this is a development that hurts Berkshire Hathaway during 2011

-  Three large and very attractive fixed-income investments were called away from us by their issuers in 2011. Swiss Re, Goldman Sachs and General Electric paid us an aggregate of $12.8 billion to redeem securities that were producing about $1.2 billion of pre-tax earnings for Berkshire. That’s a lot of income to replace, though our Lubrizol purchase did offset most of it.

http://www.berkshirehathaway.com/letters/2011ltr.pdf


Comment:  Buffett emphasizes increasing the aggregate pre-tax earnings and incomes.  He reinvests into or replaces companies, to achieve growth in aggregate pre-tax earnings and incomes.   This is very sound strategy to follow.

Knowing and Setting the Upper Limits of Share Price

The P/E also can be used to establish a cap on intrinsic value.

While asset values set the lowest level for estimating intrinsic value, the P/E can serve as an upper limit.

The P/E ratio establishes the maximum amount an investor should pay for earnings.

• If the investor decides that the appropriate P/E ratio for a stock is 10, the share price paid should be no more than 10 times most recent yearly earnings.

It is not wrong to pay more, Graham and Dodd noted; it is that doing so enters the realm of speculation.  

• Since young, rapidly expanding companies generally trade at a P/E ratio of 20 to 25 or above, Graham usually avoided them, which was one reason he never invested in some new start up stocks, though he used and was impressed by their products early in his career.

A Pricey P/E

High Pricey P/E

A company may be selling at an exceptionally high P/E because it is considered to have remarkably good prospects for growth.

No matter how high the quality of the car you are looking at, there is a price at which it is no longer worth buying.  No matter how junky a car is, there is a price at which it is a bargain.  Stocks are no different.

Some stocks with high multiples work out, but investors who consistently buy high multiple stocks are likely to lose money in the long run.

Often the highest multiples are present in a bull market which increases the risk.  

Graham and Dodd observed, " It is a truism to say that the more impressive the record and the more promising the prospects of stability and growth, the more liberally the per-share earnings should be valued, subject always to our principle that a multiplier higher than 20 (i.e., 'earning basis' of less than 5%) will carry the issue out of the investment range."

It is not wrong to pay more, Graham and Dodd noted; it is simply that doing so enters the realm of speculation.

Margin of Safety Concept in Speculation and Investment

A Criterion of Investment versus Speculation

Since there is no single definition of investment in general acceptance, authorities have the right to define it pretty much as they please.

• Many of them deny that there is any useful or dependable difference between the concepts of investment and of speculation. 
• We think this skepticism is unnecessary and harmful. 
• It is injurious because it lends encouragement to the innate leaning of many people toward the excitement and hazards of stock-market speculation. 
• We suggest that the margin-of-safety concept may be used to advantage as the touchstone to distinguish an investment operation from a speculative one.

Probably most speculators believe they have the odds in their favor when they take their chances, and therefore they may lay claim to a safety margin in their proceedings.

• Each one has the feeling that the time is propitious for his purchase, or that his skill is superior to the crowd’s, or that his adviser or system is trustworthy. 
• But such claims are unconvincing. 
• They rest on subjective judgment, unsupported by any body of favorable evidence or any conclusive line of reasoning. 
• We greatly doubt whether the man who stakes money on his view that the market is heading up or down can ever be said to be protected by a margin of safety in any useful sense of the phrase.

By contrast, the investor’s concept of the margin of safety—as developed earlier in this chapter—rests upon simple and definite arithmetical reasoning from statistical data.

• We believe, also, that it is well supported by practical investment experience. 
• There is no guarantee that this fundamental quantitative approach will continue to show favorable results under the unknown conditions of the future. 
• But, equally, there is no valid reason for pessimism on this score.

Thus, in sum, we say that to have a true investment there must be present a true margin of safety. And a true margin of safety is one that can be demonstrated by figures, by persuasive reasoning, and by reference to a body of actual experience.


Ref:  The Intelligent Investor by Benjamin Graham

CHAPTER 20  “Margin of Safety” as the Central Concept of Investment

Also read:

• Margin of Safety Concept in The Business Venture of Buying and Selling Stocks
• Margin of Safety Concept in Conventional and Unconventional Investments
• Margin of Safety Concept in Speculation and Investment
• Margin of Safety Concept in Diversification
• Margin of Safety Concept in Undervalued or Bargain Stocks
• Margin of Safety Concept in Growth Stocks
• Margin of Safety in Good-Quality and Low-Quality Stocks.
• Margin of Safety Concept in Common Stocks
• Margin of Safety Concept in Bonds and Preferred Stocks

Speculative-Growth Stocks - Conclusion: Numbers Matter

Some investors like to have a gut feeling about the business they are buying.

In the speculative-growth market, unfortunately, that's often difficult.  

Many of these companies are bringing new concepts to market, and in the case of Internet companies, they're doing it in a new and evolving medium.

Experience can be a poor judge of their viability.

Five years ago in 1994, it would have been hard to believe that an Internet company (Internet?  What's that?) would have a market capitalization of more than $100 billion by the end of 1999.

And that may be a good lesson for investing in the speculative-growth market:  Trust the numbers, not your gut.

Sure, Yahoo is a risk.  The Internet is still evolving, and could look very different a few years from now.

But a disciplined analysis of its financial statements indicates that Yahoo is making increasingly efficient use of its assets, generating consistent sales growth, increasing net margins, and delivering cash from operations.

That's what we want from a speculative-growth stock.


Comment:  The Internet bubble burst in 2000.  To make profit in your investments, valuations and earnings were as important then as now.

Speculative-Growth Stocks - Are Net Margins on the Rise?

Although Yahoo is profitable, many speculative growth companies - including most Internet companies - lose money.

Of course, that is to be expected from a new venture.  It's investing heavily to exploit profit opportunities, and if those investments pay off, earnings will materialize.

But to curb risk, we want to find companies that are making progress toward profitability.

Even if a company is losing money, net margins should be improving, even if that means becoming less negative.  

Yahoo shows an encouraging trend in 1999.

• After losing money in its first three years, Yahoo made a profit in 1998, with a net margin close to 5%.  
• Furthermore, it had net margins above 20% in the third and fourth quarters of 1998 and the first quarter of 1999.  
• Net margins declined over the next few quarters because of non-cash charges resulting from mergers, but operating margins (which exclude such charges) remained solid.
• Yahoo appears to have left its money-losing phase behind.

(My comment:  A great company can still be a bad investment if you pay too high a price to own it.)

Mr. Market

MR. MARKET

“Common stocks have one important investment characteristic and one important speculative characteristic. 

Their investment value and average market price tend to increase irregularly but persistently over the decades, as their net worth builds up through the reinvestment of undistributed earnings. 

However, most of the time common stocks are subject to irrational and excessive price fluctuations in both directions, as the consequence of the ingrained tendency of most people to speculate or gamble”.

- Benjamin Graham

Why Return on Equity Matters

Let's say you want to open a whole chain of restaurants.

In the early years of building your business empire, you will be adding to your capital base aggressively.  

But because of the costs of opening restaurants, you will probably take losses; most companies in their formative stages lose money.  

If after a few years you have sunk $500,000 into your restaurants but are losing $50,000 annually, your return on capital is negative 10%.

It is not necessarily bad for a company to earn a negative return on equity - if it can earn a high return in the future, that is.

An investor will stomach a negative 10% ROE for his restaurants if he believes they can earn much higher returns in the future.

The trouble is, in a company's rapid-growth phase, when returns on equity are most often small or negative, it is tough to separate a good business (one that can earn a high ROE) from a bad business (one not able to).  After all, each is losing money.

Analyzing such companies means asking questions like

• "Is this a company with enough pricing power to eventually command a premium price for its product?"
• And "Is this a company with enough of a cost advantage that it can undercut the competition?"

It means, in other words, asking whether the company's business can either generate a high net margin (profit/sales) or a high asset turnover (sales/assets), the two key components of a high return on capital. 

Margin of Safety

Even after you think you have a good handle on what a stock should be worth, it is important to buy at a discount to this estimated fair value to give an adequate margin of safety.

After all, no projection about the future is foolproof, and protecting yourself from unforeseen events is entirely prudent.

For instance, if a company's new product falls flat and profit growth doesn't materialize, you want to be protected.

It is also important to realise that some companies are riskier and harder to predict than others.  In general, the riskier a company is, the larger the margin of safety should be.

The bottom line is that if you don't use a lot of discipline and conservatism in figuring out the prices you are willing to pay for stocks, you will regret it eventually.  

You might be able to sell some of your overvalued shares to some sucker who is willing to pay an even more inflated price, but in the end, this kind of speculating is the investing equivalent of musical chairs, with the last one holding the stock the loser.  Don't let it be you.

Buy at a price below fair value with an adequate margin of safety and sleep well at night.

The essence of value investing

Speculation is where you might willingly pay more for a stock than it’s actually worth, in the hope of passing it on to a ‘greater fool’ at an even higher price.  It is a very dangerous game to play.   It is rather like chain letters and ‘ponzi schemes’: some people will make money along the way, but sooner or later most will find that there isn’t in fact a greater fool after all. 

And because a stock’s intrinsic value will ultimately be realised, the net effect for all investors of buying stocks above their intrinsic value will be a loss, while the net effect for all investors of buying stocks below their intrinsic value will be a gain.

• 12 Apr 06

The word value comes in for a lot of abuse these days. You’ll often hear that ‘so and so is a value investor’ or that ‘such and such is a value share’, but it’s not always very clear what these things actually mean. For some it’s all about buying shares on low PERs; for others it’s about buying tangible assets for less than their book value; while still others claim that a stock like Cochlear can offer value, despite a PER of 36 and a price to tangible book value of 9.

So what’s the theory that can tie up all these loose ends? 

Old as the hills

The idea of value investing is, in fact, as old as the hills—or at least it’s as old as the people that have lived on their slopes. Take the ancient Yir Yoront people of the Cape York peninsular for example. They desperately needed stone axes for a whole range of daily activities: collecting firewood, making tools, building huts and climbing trees to gather honey (for an idea of how this might work, head along to the woodchop arena at Sydney’s Royal Easter Show). Yet, living as they did on a flat alluvial coastline, they didn’t have the materials or the know-how to make these vital tools.

In fact, the axes were made from a dense basaltic rock found close to what is now Mount Isa. This rock could be chipped easily into shape, but it maintained its sharp edge well, and it was skillfully crafted into axe heads by the Kalkadoon people. But the Kalkadoon lacked the stingray barbs they needed to make their preferred style of spear—which was excellent news for the Yir Yoront who lived and breathed stingray barbs.

So the stingray barbs flowed down a trade route from the north, in exchange for the stone axe heads that flowed along in the other direction. As the items got further from their source, their value increased.

A Yir Yoront would perhaps have given a dozen stingray barbs to secure one axe head, while a Kalkadoon tribesman might have offered a dozen axe heads for one stingray barb. Somewhere between the two, you might have found someone exchanging seven axe heads for five stingray barbs, in the knowledge that he could keep one barb and swap the other four for eight stone axes on the other side of his territory (keeping one and leaving seven to sell).

Value finds its own level

The increase in the price and value of the items as they moved along the trade route was a reflection of the effort needed to get them there. Everyone in the chain added enough labour capital (either producing goods or transporting them) to secure the items that they needed. If someone decided it was worth walking the extra 50 kilometres to get an additional stingray barb in return for his surplus axe heads, then he might do just that. And if someone tried to charge more for his stingray barbs than they were worth in his region, then the trade route would soon find its way around him.

Value, like water, finds its own level. Sooner or later, the true value of something—in terms of what it can do for people—will be recognised. And that’s the essence of value investing: you aim to buy something for less than it’s worth, so that you can keep a portion of that value for yourself when it comes to be realised. Indeed, as our ancient traders showed, value is not so much an investing strategy as the very force that keeps markets ticking along.

But when the items you’re trading have their price quoted minute by minute throughout the working day, something strange seems to happen. People start to care less about the value of the items themselves and become fixated instead on where they think their prices are headed.

At a basic level, that might be a matter of imagining that a stock price seems to be moving in a particular direction and that it might continue that way. At a more complex level, any number of arguments might be advanced to divine a stock’s next movement—maybe ‘interest rate concerns are expected to weigh heavily on housebuilders’ or perhaps ‘continued strong demand from China will maintain positive sentiment towards mining stocks’.

Greater fool

This kind of speculation, where you might willingly pay more for a stock than it’s actually worth, in the hope of passing it on to a ‘greater fool’ at an even higher price, would have struck the Yir Yoront and the Kalkadoon as a very dangerous game to play. It also strikes us as a dangerous game to play. It’s rather like chain letters and ‘ponzi schemes’: some people will make money along the way, but sooner or later most will find that there isn’t in fact a greater fool after all. And because a stock’s intrinsic value will ultimately be realised, the net effect for all investors of buying stocks above their intrinsic value will be a loss, while the net effect for all investors of buying stocks below their intrinsic value will be a gain.

So the aim of value investing is to make sure you buy things for less than they’re worth. That way, you don’t have to rely on an accommodating ‘greater fool’ appearing on cue. Of course, if you’re able to buy something for much less than it’s intrinsically worth, then you might find that you can later sell it to someone else for only a little less than it’s intrinsically worth. And you might then find that you can employ the resulting capital by buying something else again for much less than it’s intrinsically worth.

In this way a skilled value investor can make profits more quickly than by simply waiting for his investments to deliver up their value. But the crucial point is that time is on the value investor’s side: maybe someone will come along next year and make us an offer we can’t refuse for our investments, but maybe they won’t.

http://www.intelligentinvestor.com.au/articles/197/The-essence-of-value-investing-.cfm

Building Wealth Through Stock Market Investments

Sound Investment Strategies Which Will Stand Out All The Time:
 
It is sad to say that the majority of investors like to listen to tips from all sources instead of doing their own homework prior to investing. Even fund managers conveniently buy shares listed in the top actives of the day. Thus fund managers of yesteryear lost heavily when their shares  dropped heavily, and unit trust holders also lost heavily.

Wise investors must follow the following steps before deciding to buy any share in the market if they want to avoid heavy losses when the market collapses. They are as follows:

1) Has the company been making money for the past 3 years out of the lst 5 years at least.

2) Has the company been paying consistent dividends for the last 5 years as you can manufacture profits, but you cannot manufacture cash to pay out the dividends if the accounts are phony.

3) Is the dividend yield based on the share price which you intend to buy has a yield of at least 4%, i.e. if the share you are buying is $1,000, you must get at least $40 in dividend even consider it as a safe investment. If not, don't buy at all. 

If this passes the above 3 guidelines, you are reasonably assured that it is an investment grade share and not a speculative buy. It will automatically eliminate some 80% of all shares listed on stock markets throughout the world.  

You must read the latest Annual Report and analyse the Balance Sheet, Profit & Loss Statement, etc. If you don't even bother to do this, you deserve to lose money as there is no such thing as a free lunch. 
Initially all will make money when the market is going up, and when the market collapses, some 90% of them will be losing money. Remember this, if it is really so easy to make money, nobody will be working today. All of us will just be buying shares to be rich. Alas, this is just a pipe dream.

http://www.sap-basis-abap.com/shares/building-wealth-through-stock-market-investments.htm

3 Different Stock Investing Tips

Depending upon the type of stock, you may need an altogether different investment strategy. We are providing you with three investing tips which will assist you in figuring out as to which one best suit your requirements.

Investing Tip #1: Income
Income stocks are a good investment option for getting regular income from a company. In this investor are paid in the shape of dividends. Though income is taxed yet it provides for a regular income to investors from the stocks.

A company usually divides any excess amount of cash it has as dividend when its operations do no need that money for growth. It can happen because company may have borrowed cash from market or banks or has decided not to expand due to narrow opportunities in the growth.

Investing Tip #2: Growth
These are termed as the hot stocks. They are so called because of their ability to double, triple or even quadruple the investment made by investors in short period of few years. However, to hunt growth stocks is quite a challenge. Like for example, it is not easy to find another Microsoft or Wal-Mart.

But I have some tips for you. You must search and find stocks which have good Earning per Share Growth Rate, have rapidly growing sales and have sufficient operating cash flow and nice profits. When you buy such stocks you become certain that stocks will grow with the time.

Investing Tip #3: Speculative
Investment in speculative stock is based on high risk with high return formula. This is all about getting 100 % returns in shortest time or maybe losing your invested amount altogether! Though returns can usually be good as they normally deal in penny stocks, but all said, risk is there as nobody is sure if speculation is there in stocks. If you are new in stock trade you must resist investing in these stocks.

http://www.makemoneyinstocks.net/3-different-stock-investing-tips/

Speculator vs Investor

Speculator vs Investor

"People who invest make money for themselves; people who speculate make money for their brokers.”

- Jason Zweig

INVESTORS

An investor would carry out background research to:
1. Understand the company’s business.
2. Protect from losses by buying company stock when it’s undervalued.
3. Avoid succumbing to “herd mentality” by buying into hotly-tipped stocks.
The investor would do well, look forward to the assurance of adequate returns and safety principal.

SPECULATORS

Speculators are akin to gambling which carries high risk. And if you consider the matter carefully, would you want to put your hard-earned income to such an uncertain outcome?

Normally, what they buy:
1. A whispered “hot tip” that a particular stock will soon rise in value.
2. Without doing any research on the company, its past performance, or its dividend yield.
3. Media hype on the stock. 

http://special-situation-investing.blogspot.com/

The majority of market participants are speculators not investors.

The Internet and cable networks are full on a daily basis of these types of market calls. In order to be correct, a market prognosticator needs to be correct not only about short and medium-term economic fundamentals but also about market participants’ mass psychology. Can anybody do this on a consistent basis?

The world pays attention because the majority of market participants are speculators not investors. What’s the difference? If you’re a speculator you’re focused on trying to figure out what the price of a given security is going to do in the short term.

If you’re an investor, you’re focused on doing deep fundamental research and finding a situation where the value you receive in making the investment is greater than the cash you invest. Moreover, the payoff more than compensates you for the risk that you are taking. An investor generally has no idea when the market will recognize the under-appreciated value in his investment. He doesn’t overly fret about this because the timing – absent a clear catalyst – is generally not known.

The problem with this thinking is that the evidence shows that the real wealth has been generated by true investors.

http://gregspeicher.com/?p=398

What’s Wrong with the Stock Market?

What’s Wrong with the Stock Market?
April 14th, 2009

The problem with the stock market started back before the end of the 18th century—in 1792 as a matter of fact. This was when the stock market as we know it was born under a tree in lower Manhattan. It was there and then that those who first bought and sold stocks as a business got together and formed what became the New York Stock Exchange. From those beginnings, an industry was born that has grown to be one of the most powerful and financially influential in the world.

Transaction-based Compensation – the Wrong Dynamic
Actually, the problem arose from the fact that these people made their money not from any appreciation in the value of the investments they bought and sold but rather from just putting buyers and sellers of those shares together. They profited from the transaction itself. To this day, the majority of brokers receive their compensation as a result of the purchase or sale. It makes no financial difference to them whether their customer gains or loses.

I don’t mean to imply that, just because these people fill a need and are compensated for doing so, they’re bad people. Certainly the existence of this industry is what makes the ownership of stock feasible for the average person. It’s responsible for elevating common stock to the level of liquidity that allows us to own it without fear of being stuck with it when or if we choose to sell it. And it certainly makes it much easier for us to buy those shares when we wish to. If we’re interested in putting our money to work for us in what is arguably the most lucrative manner possible for the least amount of risk, we can’t get along without this industry. But, the difference in perception and fact between what a broker does or is qualified to do and what the uninitiated think he or she is qualified to do is a major source of the problem.

In the beginning, the whole idea of shares was just that: sharing in the fortunes of an enterprise. Where it might be difficult for a company or individual to come up with enough money to finance all that was necessary alone, sharing the business with others in a fashion that limited their liability and exposure to only the amount of money invested was a great way to obtain the necessary funds. Anyone who wanted to participate in a business—sharing both the rewards and the risks—would buy shares and hold them as legal documents that vouched for their entitlement to a proportionate share in the fruits of that enterprise’s operations. Originally, therefore, folks bought shares because they thought the business would be profitable one and they wanted a piece of the action.

The formation of a ready market for stocks, while it performed a very useful service in terms of liquidity and convenience, had a serious side effect. So easy was it to trade that the perception of what a share of stock really was became obscured, giving way to the notion that the stock, like currency, had some intrinsic value that could vary for reasons other than the success or failure of the underlying enterprise.

Easy Trading changed the Nature of the Market
Moreover, the ability to manipulate the perceived value of those shares erected a persistent barrier between those that manipulated it and those that didn’t. It was de rigueur for unscrupulous traders to spread rumors appealing to the fear of the uninitiated, driving down the price of a certain stock, and furnishing an opportunity to pick up a large position at that favorable price. And then it was an equally simple process for those same individuals to spread favorable rumors that appealed to the greedy, drove up the price, and resulted in a great selling opportunity for those who then owned it. Not until well into the 20th century, after the devastating crash of 1929, was there a real effort to address that issue legislatively and make such activities illegal.

However, there was—and is—no way to legislate the greed and fear out of the stock market. Those are still its basic drivers. In fact, as recently as within the last decade, a young kid from New Jersey managed to make nearly a million dollars when he flooded the Internet with glowing stories about a penny stock he had selected for his venture. Unwitting investors bid up the price of the stock with no more to go on than his fiction; and he made a killing.

Disconnect Between Value and Price Creates Bubbles and Busts
The very same dynamics of greed and fear were responsible for an even more spectacular event that impacted millions of shareholders. The appeal of the dot.coms, most of them with no visible means of support—and the technology companies that depended upon them for their burgeoning customer base—inflated one of history’s biggest bubbles. Investors, eager to make a killing, continued to bid up the price of the stock in those companies with no regard for or even any understanding of the factors that comprised their underlying value. This was what the Street refers to as the Greater Fool Theory: “I may be a fool to buy this stock at this price; but I’ll find a greater fool to take it off my hands for more than I paid for it!”

The market of course collapsed when those companies—like Wiley Coyote racing off a cliff only to discover he had nothing under him—learned the hard way that a company had to earn money to live. The extent of that collapse went well beyond rational concerns about the profitability of the affected companies, being exacerbated in large measure by irrational fears growing out of the September 11th, 2001, attack on New York’s World Trade Center and our country’s bellicose activities following that tragedy.

http://www.financialiteracy.us/wordpress/articles/what%E2%80%99s-wrong-with-the-stock-market/

M’sian capital market need more informed investors

by Chin Kee Leong. Posted on November 1, 2010, Monday

MIRI: The Malaysian capital market need more informed investors who are encouraged to trade online.

Q&A SESSION: (From left) Shin, Mo and Tan on stage fielding questions from the floor during the roadshow.

OSK Investment Bank Bhd (OSK) organised Market Chat 2010 roadshow in Grand Palace Hotel here recently that provided insights on stock market investment to educate and create awareness on the securities market as well as to encourage online trading amongst retail investors.

“A good investor is an informed investor – creating more informed investors is one of the goals of our Market Chat roadshows,” said Bursa Malaysia Bhd (Bursa Malaysia) head of surveillance research and development (R&D) and market surveillance, Arshad Azizi Kamaruddin in his opening speech.

Arshad welcomed some 150 participants who turned up at the fourth season of Market Chat roadshow.

“Retail investors have always been a crucial investor segment of our Malaysian capital market.

“We have been steadfast in working hand-in-hand with our stakeholders and broker partners to stimulate interest amongst Malaysians to invest in our stock market,” said Arshad who explained the main aim in boosting the retail stock market with Market Chat started in 2006.

According to him, Bursa partnered with nine selected brokers which included OSK, and has since conducted 117 roadshows and reaching nearly 18,000 investors in the past three years.

“We were able to generate nearly 3,600 new CDS accounts over the period.Naturally, we intend to make Market Chat bigger and better each year,” he said.

He hoped to see expansion to more cities and non-urban areas, and eventually reach out to all segments of society.

“Our government is committed to make Malaysia more business-friendly to investors.

“The call for the divestment of government stakes in public listed companies are examples of measures to promote vibrancy, free float and liquidity in our market to enhance the attractiveness of the Malaysian capital market.

“These developments hold opportunities for all investors like you,” he said.

In order to achieve greater efficiency and offering convenience to the public, Bursa has introduced the eDividend to enhance payment efficiency.

“We would like to see the younger generations take keener interest in the stock market. It is very important for stakeholders to collaborate in enhancing the pool of retail investors,” he said.

He urged participants to spread the word and encourage others to participate in future roadshows.

“I believe that there are always opportunities if we know what we’re looking for. And yes, there are hidden gems in our capital market,” he added.

During the Q&A session, he replied to a participant that he will bring up the matter with Bursa of introducing similar e-payment systems for the Warrants and Futures trade, which involve larger sums of money.

The main speakers were Shin Kao Jack of OSK Research Sdn Bhd, Kuala Lumpur (KL) who presented ‘Market sOutlook’, Eric Tan of OSK Investment Bank (Derivatives and Structured Products), KL with ‘Understand Call Warrants and ETF’, and Grace Mo of OSK Investment Bank, Sibu with ‘How to trade KLCI Futures and CPO Futures’.

The guest speakers were Sarawak Plantation Bhd (SPB) corporate finance manager Koay Bee Eng, and Naim Cendera Holdings Bhd senior director Ricky Kho who enlightened participants with the portfolios of their respective companies listed on the stock exchange.

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