"I didn't invest in this or just about any other tech company in the final twelve months of the boom, and I tried where I could to sell my tech investments. I had been investing in tech since 1995, but, to me, the fundamentals of the tech sector had changed. The quality of new tech companies had dropped tremendously and they were being funded with a lot of cheap money from naive investors."
The above investor made his decision despite the fact that share prices in the tech sector were trending straight upwards and that decision saved him a hell of alot of money when the crash came.
The tech crash is a great example of where fundamentals are the most important consideration, and where the trend may not be your friend. The strategy here is to monitor the fundamentals and to cut positions accordingly, even if the trend is still in your favour.
If the fundamentals have changed, adjust the position accordingly.
Showing posts with label investment strategy. Show all posts
Showing posts with label investment strategy. Show all posts
Monday 15 June 2009
Friday 12 June 2009
Investment Strategy and Superior Returns
"Style investing," where money managers rotate between small and large, and value and growth stocks, is all rage on Wall Street.
Historical data seem to imply that:
Historical data seem to imply that:
- small stocks outperform large stocks and
- value stocks outperform growth stocks
- The superior performance of small stocks over large stocks depends crucially on whether the 1975-1983 period is included.
- Furthermore, the superior performance of value stocks over growth stocks may not be inherent to the industry they are in but merely reflect fluctuations in investor enthusiasm about certain sectors.
All these implies that the average investor will do best by diversifying into all stock sectors.
- Trying to catch styles as they move in and out of favor not only is difficult but also is quite risky and costly.
- Hot sectors or investment styles can lull investors into a trap.
- When a sector reaches an extreme valuation level, such as the technology issues did at the end of the technology bull market, reducing its allocation will improve your returns.
An investor can use the lessons of history to avoid getting caught in the next technology, stock or market bubble.
Also read:
Bubbles: Does history guide us?
Bubble lessons never go out of style
Monday 16 March 2009
You've Sold Your Stocks. Now What?
You've Sold Your Stocks. Now What?
Friday, March 13, 2009
Back in the summer of 2007, Ben Mickus, a New York architect, had a bad feeling. He and his wife, Taryn, had invested in the stock market and had done well, but now that they had reached their goal of about $200,000 for a down payment on a house, Mr. Mickus was unsettled. “Things had been very erratic, and there had been a lot of press about the market becoming more chaotic,” he said.
In October of that year they sat down for a serious talk. Ms. Mickus had once lost a lot of money in the tech bubble, and the prospect of losing their down payment made Mr. Mickus nervous. “I wanted to pull everything out then; Taryn wanted to keep it all in,” he said. They compromised, cashing in 60 percent of their stocks that fall — just before the Dow began its slide.
A couple of months later, with the market still falling, Ms. Mickus was convinced that her husband was right, and they sold the remainder of their stocks. Their down payment was almost completely preserved. Ms. Mickus said that in private they had “been feeling pretty smug about it.”
“Now our quandary is, what do we do going forward?” Ms. Mickus said.
Having $200,000 in cash is a problem many people would like to have. But there is yet another worry: it’s no use taking money out of the market at the right time unless it is put back in at the right time. So to get the most from their move, the Mickuses will have to be right twice.
“Market timing requires two smart moves,” said Bruce R. Barton, a financial planner in San Jose, Calif. “Getting out ahead of a drop. And getting back in before the recovery.”
It’s a challenge many investors face, judging from the amount of cash on the sidelines. According to Fidelity Investments, in September 2007 money market accounts made up 15 percent of stock market capitalization in the United States. By December 2008, it was 40 percent.
“In 2008 people took money out of equities and took money out of bond funds,” said Steven Kaplan, a professor at the Booth School of Business at the University of Chicago.
He cited figures showing that in 2007 investors put $93 billion into equity funds. By contrast, in 2008 they took out $230 billion.
Michael Roden, a consultant to the Department of Defense from the Leesburg, Va., area, joined the ranks of the cash rich after a sense of déjà vu washed over him in August 2007, as the markets continued their steep climb. “I had taken quite a bath when the tech bubble burst,” he said. “I would never let that happen again.”
With his 2002 drubbing in mind, he started with some profit taking in the summer of 2007, but as the market turned he kept liquidating his investments in an orderly retreat. But he was not quite fast enough.
“When Bear Stearns went under I realized something was seriously wrong,” he said. The market was still in the 12,000 range at that time. When the Federal Reserve announced it would back Bear Stearns in March 2008, there was a brief market rebound. “I used that rally to get everything else out,” he said.
Mr. Roden said he had taken a 6 percent loss by not liquidating sooner, which still put him ahead of the current total market loss. Now he has about $130,000, with about 10 percent in gold mutual funds, 25 percent in foreign cash funds and the rest in a money market account.
“I am looking for parts of the economy where business is not impaired by the credit crunch or changes in consumer behavior,” he said. He is cautiously watching the energy markets, he said, but his chief strategy is “just trying not to lose money.”
As chief financial officer of Dewberry Capital in Atlanta, a real estate firm managing two million square feet of offices, stores and apartments, Steve Cesinger witnessed the financial collapse up close. Yet it was just a gut feeling that led him to cash out not only 95 percent of his personal equities, but also those of his firm in April 2007.
“I spent a lot of time trying to figure out what was happening in the financial industry, and I came to the conclusion that people weren’t fessing up,” he said. “In fact, they were going the other way.”
Now, he said, “We have cash on our statement, and it’s hard to know what to do with it.”
Having suffered through a real estate market crash in Los Angeles in the early 1990s, Mr. Cesinger is cautious to the point of re-examining the banks where he deposits his cash. “Basically, I’m making sure it’s somewhere it won’t disappear,” he said.
The F.D.I.C. assurance doesn’t give him “a lot of warm and fuzzy,” Mr. Cesinger said. “My recollection is, if the institution goes down, it can take you a while to get your money out. It doesn’t help to know you’ll get it one day if you have to pay your mortgage today.”
His plan is to re-enter the market when it looks safe. Very safe. “I would rather miss the brief rally, be late to the party and be happy with not a 30 percent return, but a bankable 10 percent return,” he said.
Not everyone is satisfied just to stem losses. John Branch, a business consultant in Los Angeles, said his accounts were up 100 percent from short-selling — essentially betting against recovery. “The real killer was, I missed the last leg down on this thing,” Mr. Branch said. “If I hadn’t missed it, I would be up 240 percent.”
Mr. Branch said he had seen signs of a bubble in the summer of 2007 and liquidated his stocks, leaving him with cash well into six figures. Then he waited for his chance to begin shorting. The Dow was overvalued, he said, and ripe for a fall.
Shorting is a risky strategy, which Mr. Branch readily admits. He said he had tried to limit risk by trading rather than investing. He rises at 4:30 a.m., puts his money in the market and sets up his electronic trading so a stock will automatically sell if it falls by one-half of 1 percent. “If it turns against me, I am out quickly,” he said. By 8, he is off to his regular job.
Because Mr. Branch switches his trades daily based on which stocks are changing the fastest, he cannot say in advance where he will put his money.
And if he did know, he’d rather not tell. “I hate giving people financial advice,” he said. “If they make money they might say thank you; if they miss the next run-up, they hate you.”
http://finance.yahoo.com/focus-retirement/article/106735/You've-Sold-Your-Stocks-Now-What;_ylt=AoiI.2en_9S5neo.3TcUqbiVBa1_?mod=fidelity-buildingwealth
Friday, March 13, 2009
Back in the summer of 2007, Ben Mickus, a New York architect, had a bad feeling. He and his wife, Taryn, had invested in the stock market and had done well, but now that they had reached their goal of about $200,000 for a down payment on a house, Mr. Mickus was unsettled. “Things had been very erratic, and there had been a lot of press about the market becoming more chaotic,” he said.
In October of that year they sat down for a serious talk. Ms. Mickus had once lost a lot of money in the tech bubble, and the prospect of losing their down payment made Mr. Mickus nervous. “I wanted to pull everything out then; Taryn wanted to keep it all in,” he said. They compromised, cashing in 60 percent of their stocks that fall — just before the Dow began its slide.
A couple of months later, with the market still falling, Ms. Mickus was convinced that her husband was right, and they sold the remainder of their stocks. Their down payment was almost completely preserved. Ms. Mickus said that in private they had “been feeling pretty smug about it.”
“Now our quandary is, what do we do going forward?” Ms. Mickus said.
Having $200,000 in cash is a problem many people would like to have. But there is yet another worry: it’s no use taking money out of the market at the right time unless it is put back in at the right time. So to get the most from their move, the Mickuses will have to be right twice.
“Market timing requires two smart moves,” said Bruce R. Barton, a financial planner in San Jose, Calif. “Getting out ahead of a drop. And getting back in before the recovery.”
It’s a challenge many investors face, judging from the amount of cash on the sidelines. According to Fidelity Investments, in September 2007 money market accounts made up 15 percent of stock market capitalization in the United States. By December 2008, it was 40 percent.
“In 2008 people took money out of equities and took money out of bond funds,” said Steven Kaplan, a professor at the Booth School of Business at the University of Chicago.
He cited figures showing that in 2007 investors put $93 billion into equity funds. By contrast, in 2008 they took out $230 billion.
Michael Roden, a consultant to the Department of Defense from the Leesburg, Va., area, joined the ranks of the cash rich after a sense of déjà vu washed over him in August 2007, as the markets continued their steep climb. “I had taken quite a bath when the tech bubble burst,” he said. “I would never let that happen again.”
With his 2002 drubbing in mind, he started with some profit taking in the summer of 2007, but as the market turned he kept liquidating his investments in an orderly retreat. But he was not quite fast enough.
“When Bear Stearns went under I realized something was seriously wrong,” he said. The market was still in the 12,000 range at that time. When the Federal Reserve announced it would back Bear Stearns in March 2008, there was a brief market rebound. “I used that rally to get everything else out,” he said.
Mr. Roden said he had taken a 6 percent loss by not liquidating sooner, which still put him ahead of the current total market loss. Now he has about $130,000, with about 10 percent in gold mutual funds, 25 percent in foreign cash funds and the rest in a money market account.
“I am looking for parts of the economy where business is not impaired by the credit crunch or changes in consumer behavior,” he said. He is cautiously watching the energy markets, he said, but his chief strategy is “just trying not to lose money.”
As chief financial officer of Dewberry Capital in Atlanta, a real estate firm managing two million square feet of offices, stores and apartments, Steve Cesinger witnessed the financial collapse up close. Yet it was just a gut feeling that led him to cash out not only 95 percent of his personal equities, but also those of his firm in April 2007.
“I spent a lot of time trying to figure out what was happening in the financial industry, and I came to the conclusion that people weren’t fessing up,” he said. “In fact, they were going the other way.”
Now, he said, “We have cash on our statement, and it’s hard to know what to do with it.”
Having suffered through a real estate market crash in Los Angeles in the early 1990s, Mr. Cesinger is cautious to the point of re-examining the banks where he deposits his cash. “Basically, I’m making sure it’s somewhere it won’t disappear,” he said.
The F.D.I.C. assurance doesn’t give him “a lot of warm and fuzzy,” Mr. Cesinger said. “My recollection is, if the institution goes down, it can take you a while to get your money out. It doesn’t help to know you’ll get it one day if you have to pay your mortgage today.”
His plan is to re-enter the market when it looks safe. Very safe. “I would rather miss the brief rally, be late to the party and be happy with not a 30 percent return, but a bankable 10 percent return,” he said.
Not everyone is satisfied just to stem losses. John Branch, a business consultant in Los Angeles, said his accounts were up 100 percent from short-selling — essentially betting against recovery. “The real killer was, I missed the last leg down on this thing,” Mr. Branch said. “If I hadn’t missed it, I would be up 240 percent.”
Mr. Branch said he had seen signs of a bubble in the summer of 2007 and liquidated his stocks, leaving him with cash well into six figures. Then he waited for his chance to begin shorting. The Dow was overvalued, he said, and ripe for a fall.
Shorting is a risky strategy, which Mr. Branch readily admits. He said he had tried to limit risk by trading rather than investing. He rises at 4:30 a.m., puts his money in the market and sets up his electronic trading so a stock will automatically sell if it falls by one-half of 1 percent. “If it turns against me, I am out quickly,” he said. By 8, he is off to his regular job.
Because Mr. Branch switches his trades daily based on which stocks are changing the fastest, he cannot say in advance where he will put his money.
And if he did know, he’d rather not tell. “I hate giving people financial advice,” he said. “If they make money they might say thank you; if they miss the next run-up, they hate you.”
http://finance.yahoo.com/focus-retirement/article/106735/You've-Sold-Your-Stocks-Now-What;_ylt=AoiI.2en_9S5neo.3TcUqbiVBa1_?mod=fidelity-buildingwealth
Thursday 12 March 2009
What Will It Take to Earn Your Money Back?
What Will It Take to Earn Your Money Back?
Tuesday March 10, 7:00 am ET
By David Kathman, CFA
The terrible market declines of the past year have investors everywhere licking their wounds and toting up their losses, even as they prepare for the possibility of more losses to come. Nearly every portfolio that holds stocks is down significantly since late 2007, with 40% declines not uncommon. Just about the only solace is the thought that the market is bound to turn around at some point, and then people can start making up some of the ground they've lost.
But what, exactly, will it take to make up those losses? Many people underestimate the gains needed to recover from big investment losses, and the extent to which additional losses put you deeper in the hole. Amid all the current market gloom, it's worth taking some time to understand what it might take to recover from the current market swoon.
Climbing Out of the Hole
Suppose you hold a stock that falls 50% in value. How much does that stock have to gain before you're back where you started? Many people instinctively say 50%, but that's wrong. If the stock's price starts at $10 and loses 50%, it's at $5; from there, gaining 50% would put it only back up to $7.50. To get back to $10, the stock would have to gain 100%, twice as much as it lost in percentage terms.
Recouping losses always requires a larger percentage gain than the loss itself, and the difference between the two gets more dramatic as the losses get larger. For example, as of March 5, Tivo (NasdaqGM:TIVO - News) stock had lost 10.1% over the past year, meaning it will have to gain 11.2% to recoup that loss. As of the same date, homebuilder Toll Brothers (NYSE:TOL - News) had lost 30% over the past year, but it will have to gain 43% to get back to where it was a year ago. Starbucks (NasdaqGS:SBUX - News) had lost 51%, and it will need to gain 103% to make up those losses.
Once the losses exceed 50%, as they have for many financial stocks, the numbers get even uglier. For example, regional bank KeyCorp (NYSE:KEY - News) has lost 68% of its value over the past year as of March 5, meaning it would need to more than triple in price (gaining 214%) in order to make up for that loss. (If KeyCorp gained 68% from this point, shareholders would still be down 46% overall.) The numerous stocks that have lost 80% or more over the past year--nearly 900 of which are traded on the New York Stock Exchange or on Nasdaq--are in much worse shape and are unlikely to get back to where they were in the foreseeable future.
Easing the Pain
All this may seem a bit depressing, and it is, but it highlights the importance of diversification. If you had your entire life's savings invested in one of the stocks that have completely imploded, your portfolio would be critically damaged and would be facing a long recovery. But, of course, very few investors have all their money tied up in a single stock, and with good reason; as we've pointed out many times before, diversifying your holdings helps stabilize a portfolio and lessens the chance of one investment torpedoing returns. Even in a market where everything is down, like last year, moderating your losses can make it much easier to bounce back.
The best way of diversifying a stock portfolio is through asset-class diversification. While major stock indexes all lost more than 30% in 2008, the Barclays Capital (formerly Lehman Brothers) Aggregate Bond Index gained 5%. Of course, many individual bonds and bond funds declined in value last year, but the magnitude of those losses was generally much less than for stocks. A portfolio consisting entirely of Vanguard 500 Index (NASDAQ:VFINX - News) would have lost 37% in 2008, and would need to gain almost 59% to regain that lost ground. Putting 20% of the portfolio in Vanguard Total Bond Market Index (NASDAQ:VBMFX - News) would have reduced that loss to 29%, and the percentage needed to make it up would be reduced to 41%. Putting 40% in the bond fund would reduce the portfolio's loss to 20%, which requires only a 25% gain to make up. Losing 20% or 30% in a year is certainly not fun, but it's a lot better than losing 40%, 50%, or 60%, as these figures illustrate so well.
One very basic rule of thumb for determining a good stock-bond allocation is to subtract your age from 100, which gives a rough estimate of the percentage you should have in stocks. Thus, if you're 50 years old, it's a good idea to have 50% of your portfolio in stocks; if you're 60, it makes sense to have 40% in stocks; and so on. Alternatively, tools like Morningstar's Asset Allocator (available to Premium members) can help you arrive at a customized stock/bond split.
In addition to making sure your portfolio is diversified by asset class, it's also important to ensure that its spread across different industries and individual securities. A simple way to get broad stock exposure is through an index fund such as Vanguard Total Stock Market Index (NASDAQ:VTSMX - News), which tracks the Dow Jones Wilshire 5000 Index, or Vanguard 500 Index, which tracks the S&P 500 benchmark. Vanguard 500 Index lost 37% in 2008, which was certainly painful, but not nearly as bad as many individual stocks performed. And such losses are very rare for broad market indexes like this one; only once since 1926 has the total return of the S&P 500 (or its predecessor the S&P 90) been lower than it was in 2008. (That was in 1931, when the index lost 43%.) On the other hand, the S&P 500 has gained at least 37% in eight different years since 1926, twice gaining more than 50% (in 1933 and 1954).
While there's certainly no guarantee that the market will go on a tear like that any time soon, the potential for sharp upward gains--or perhaps better yet, slow and steady gains over a period of several years--makes it possible that long-term stock investors will not only be able to make up their recent losses but will outpace conservative investments like cash and bonds over time.
David Kathman, CFA does not own shares in any of the securities mentioned above.
http://biz.yahoo.com/ms/090310/283348.html?.&.pf=retirement
Tuesday March 10, 7:00 am ET
By David Kathman, CFA
The terrible market declines of the past year have investors everywhere licking their wounds and toting up their losses, even as they prepare for the possibility of more losses to come. Nearly every portfolio that holds stocks is down significantly since late 2007, with 40% declines not uncommon. Just about the only solace is the thought that the market is bound to turn around at some point, and then people can start making up some of the ground they've lost.
But what, exactly, will it take to make up those losses? Many people underestimate the gains needed to recover from big investment losses, and the extent to which additional losses put you deeper in the hole. Amid all the current market gloom, it's worth taking some time to understand what it might take to recover from the current market swoon.
Climbing Out of the Hole
Suppose you hold a stock that falls 50% in value. How much does that stock have to gain before you're back where you started? Many people instinctively say 50%, but that's wrong. If the stock's price starts at $10 and loses 50%, it's at $5; from there, gaining 50% would put it only back up to $7.50. To get back to $10, the stock would have to gain 100%, twice as much as it lost in percentage terms.
Recouping losses always requires a larger percentage gain than the loss itself, and the difference between the two gets more dramatic as the losses get larger. For example, as of March 5, Tivo (NasdaqGM:TIVO - News) stock had lost 10.1% over the past year, meaning it will have to gain 11.2% to recoup that loss. As of the same date, homebuilder Toll Brothers (NYSE:TOL - News) had lost 30% over the past year, but it will have to gain 43% to get back to where it was a year ago. Starbucks (NasdaqGS:SBUX - News) had lost 51%, and it will need to gain 103% to make up those losses.
Once the losses exceed 50%, as they have for many financial stocks, the numbers get even uglier. For example, regional bank KeyCorp (NYSE:KEY - News) has lost 68% of its value over the past year as of March 5, meaning it would need to more than triple in price (gaining 214%) in order to make up for that loss. (If KeyCorp gained 68% from this point, shareholders would still be down 46% overall.) The numerous stocks that have lost 80% or more over the past year--nearly 900 of which are traded on the New York Stock Exchange or on Nasdaq--are in much worse shape and are unlikely to get back to where they were in the foreseeable future.
Easing the Pain
All this may seem a bit depressing, and it is, but it highlights the importance of diversification. If you had your entire life's savings invested in one of the stocks that have completely imploded, your portfolio would be critically damaged and would be facing a long recovery. But, of course, very few investors have all their money tied up in a single stock, and with good reason; as we've pointed out many times before, diversifying your holdings helps stabilize a portfolio and lessens the chance of one investment torpedoing returns. Even in a market where everything is down, like last year, moderating your losses can make it much easier to bounce back.
The best way of diversifying a stock portfolio is through asset-class diversification. While major stock indexes all lost more than 30% in 2008, the Barclays Capital (formerly Lehman Brothers) Aggregate Bond Index gained 5%. Of course, many individual bonds and bond funds declined in value last year, but the magnitude of those losses was generally much less than for stocks. A portfolio consisting entirely of Vanguard 500 Index (NASDAQ:VFINX - News) would have lost 37% in 2008, and would need to gain almost 59% to regain that lost ground. Putting 20% of the portfolio in Vanguard Total Bond Market Index (NASDAQ:VBMFX - News) would have reduced that loss to 29%, and the percentage needed to make it up would be reduced to 41%. Putting 40% in the bond fund would reduce the portfolio's loss to 20%, which requires only a 25% gain to make up. Losing 20% or 30% in a year is certainly not fun, but it's a lot better than losing 40%, 50%, or 60%, as these figures illustrate so well.
One very basic rule of thumb for determining a good stock-bond allocation is to subtract your age from 100, which gives a rough estimate of the percentage you should have in stocks. Thus, if you're 50 years old, it's a good idea to have 50% of your portfolio in stocks; if you're 60, it makes sense to have 40% in stocks; and so on. Alternatively, tools like Morningstar's Asset Allocator (available to Premium members) can help you arrive at a customized stock/bond split.
In addition to making sure your portfolio is diversified by asset class, it's also important to ensure that its spread across different industries and individual securities. A simple way to get broad stock exposure is through an index fund such as Vanguard Total Stock Market Index (NASDAQ:VTSMX - News), which tracks the Dow Jones Wilshire 5000 Index, or Vanguard 500 Index, which tracks the S&P 500 benchmark. Vanguard 500 Index lost 37% in 2008, which was certainly painful, but not nearly as bad as many individual stocks performed. And such losses are very rare for broad market indexes like this one; only once since 1926 has the total return of the S&P 500 (or its predecessor the S&P 90) been lower than it was in 2008. (That was in 1931, when the index lost 43%.) On the other hand, the S&P 500 has gained at least 37% in eight different years since 1926, twice gaining more than 50% (in 1933 and 1954).
While there's certainly no guarantee that the market will go on a tear like that any time soon, the potential for sharp upward gains--or perhaps better yet, slow and steady gains over a period of several years--makes it possible that long-term stock investors will not only be able to make up their recent losses but will outpace conservative investments like cash and bonds over time.
David Kathman, CFA does not own shares in any of the securities mentioned above.
http://biz.yahoo.com/ms/090310/283348.html?.&.pf=retirement
Banking Profits In Bull And Bear Markets
Banking Profits In Bull And Bear Markets
Chris Seabury
Monday March 9, 2009, 4:44 pm EDT
Both bear markets and bull markets represent tremendous opportunities to make money, and the key to success is to use strategies and ideas that can generate profits under a variety of conditions. This requires consistency, discipline, focus and the ability to take advantage of fear and greed. This article will help familiarize you with investments that can prosper in up or down markets.
Ways to Profit in Bear Markets
A bear market is defined as a drop of 20% or more in a market average over a one year period, measured from the closing low to the closing high. Generally, these types of markets occur during economic recessions or depressions, when pessimism prevails. But amidst the rubble lie opportunities to make money for those who know how to use the right tools. The following are some ways to profit in bear markets.
Short Positions
Taking a short position, also called short selling, occurs when you sell shares that you don't own in anticipation that the stock will fall in the future. If it works as planned and the share price drops, you must buy those shares at the lower price to cover the open sell or short position. For example, it you short ABC stock at $35 per share and the stock falls to $20, you can buy the shares back at $20 to close out the short position. Your overall profit would be $15 per share.
Put Options: A put option is the right to sell a stock at particular strike price until a certain date in the future, called the expiration date. The money you pay for the option is called a premium. As the price of the stock falls, you can either exercise the right to sell the stock at the higher strike price, or you can sell the put option, which increases in value as the stock falls, for a profit (provided the stock moves below the strike price).
Short ETFs: A short exchange traded fund (ETF), also called an inverse ETF, produces returns that are the inverse of a particular index. For example, an ETF that performs inversely to the Nasdaq 100 will drop about 25% if that index rises by 25%. But if the index falls 25%, the ETF will rise proportionally. This inverse relationship makes short/inverse ETFs appropriate for investors who want to profit from a downturn in the markets, or who wish to hedge long positions against such a downturn.
Ways to Profit in Bull Markets
A bull market occurs when security prices rise at a faster rate than the overall average rate. These types of markets are accompanied by periods of economic growth and optimism among investors. The following are some of the tools that are appropriate for rising stock markets.
Long Positions: A long position is simply buying a stock or any other security in anticipation that its price will rise. The overall objective is to buy the stock at a low price and sell it for more than you paid. The difference represents your profit.
Calls: A call option is the right to buy a stock at a particular price until a specified date. The buyer of a call option, who pays a premium, anticipates that the stock's price will rise, while the seller of the call option anticipates it will fall. If the price of the stock rises, the option buyer can exercise the right to buy the stock at the lower strike price and then sell it for a higher price on the open market. The option buyer can also sell the call option in the open market for a profit, assuming the stock is above the strike price.
Exchange-Traded Funds (ETFs): Most ETFs follow a particular market average, such as the Dow Jones Industrial Average (DJIA) or the Standard & Poor's 500 Index (S&P 500) and trade like stocks. Generally, the transaction costs and operating expenses are low and they require no investment minimum. ETFs seek to replicate the movement of the indexes they follow, less expenses. For example, if the S&P 500 rises 10%, an ETF based on the index will rise by approximately the same amount.
How to Spot Bear and Bull Markets
Markets trade in cycles, which means that most investors will experience both in a lifetime. The key to profiting in both types of markets is to spot when the markets are starting to top out or when they are bottoming. The following are two key indicators to look for.
Advance/Decline Line: The advance/decline line represents the number of advancing issues divided by the number of declining issues over a given period. A number greater than 1 is considered bullish, while a number less than 1 is considered bearish. A rising line confirms that the markets are moving higher. However, a declining line during a period when markets continue to rise could signal a correction. When the line has been declining for several months while the averages continue to move higher, this could be considered a negative correlation, and a major correction or a bear market is likely. An advance/decline line that continues to move down signals that the averages will remain weak. However, if the line rises for several months and the averages have moved down, this positive divergence could mean the start of a bull market.
Price Dividend Ratio: The price dividend ratio is the ratio that compares the share price of the stock with the dividend paid out over the past year. It is calculated by dividing the current price of the stock by the dividend. A decline in the ratio in the area of 14-17 could indicate an attractive bargain, while a reading above 26 may signal overvaluation. This ratio and its interpretation will vary by industry, as some industries traditionally pay high dividends, while growth sectors often pay little or no dividends.
Conclusion
There are many ways to profit in both bear and bull markets. The key to success is using the tools for each market to their full advantage. In addition, it is important to use the indicators in conjunction with one another to spot when both bull and bear markets are beginning or ending.
Short selling, put options, and short or inverse ETFs are just a few bear market tools that allow investors to take advantage of the market weakness, while long positions in stocks and ETFs and a call option are suitable for bull markets. The advanced decline line and price dividend ratio will allow you to spot market tops and bottoms.
http://finance.yahoo.com/news/Banking-Profits-In-Bull-And-investopedia-14586735.html;_ylt=AhOkCA7MIJySEnHuserF1MO7YWsA
Chris Seabury
Monday March 9, 2009, 4:44 pm EDT
Both bear markets and bull markets represent tremendous opportunities to make money, and the key to success is to use strategies and ideas that can generate profits under a variety of conditions. This requires consistency, discipline, focus and the ability to take advantage of fear and greed. This article will help familiarize you with investments that can prosper in up or down markets.
Ways to Profit in Bear Markets
A bear market is defined as a drop of 20% or more in a market average over a one year period, measured from the closing low to the closing high. Generally, these types of markets occur during economic recessions or depressions, when pessimism prevails. But amidst the rubble lie opportunities to make money for those who know how to use the right tools. The following are some ways to profit in bear markets.
Short Positions
Taking a short position, also called short selling, occurs when you sell shares that you don't own in anticipation that the stock will fall in the future. If it works as planned and the share price drops, you must buy those shares at the lower price to cover the open sell or short position. For example, it you short ABC stock at $35 per share and the stock falls to $20, you can buy the shares back at $20 to close out the short position. Your overall profit would be $15 per share.
Put Options: A put option is the right to sell a stock at particular strike price until a certain date in the future, called the expiration date. The money you pay for the option is called a premium. As the price of the stock falls, you can either exercise the right to sell the stock at the higher strike price, or you can sell the put option, which increases in value as the stock falls, for a profit (provided the stock moves below the strike price).
Short ETFs: A short exchange traded fund (ETF), also called an inverse ETF, produces returns that are the inverse of a particular index. For example, an ETF that performs inversely to the Nasdaq 100 will drop about 25% if that index rises by 25%. But if the index falls 25%, the ETF will rise proportionally. This inverse relationship makes short/inverse ETFs appropriate for investors who want to profit from a downturn in the markets, or who wish to hedge long positions against such a downturn.
Ways to Profit in Bull Markets
A bull market occurs when security prices rise at a faster rate than the overall average rate. These types of markets are accompanied by periods of economic growth and optimism among investors. The following are some of the tools that are appropriate for rising stock markets.
Long Positions: A long position is simply buying a stock or any other security in anticipation that its price will rise. The overall objective is to buy the stock at a low price and sell it for more than you paid. The difference represents your profit.
Calls: A call option is the right to buy a stock at a particular price until a specified date. The buyer of a call option, who pays a premium, anticipates that the stock's price will rise, while the seller of the call option anticipates it will fall. If the price of the stock rises, the option buyer can exercise the right to buy the stock at the lower strike price and then sell it for a higher price on the open market. The option buyer can also sell the call option in the open market for a profit, assuming the stock is above the strike price.
Exchange-Traded Funds (ETFs): Most ETFs follow a particular market average, such as the Dow Jones Industrial Average (DJIA) or the Standard & Poor's 500 Index (S&P 500) and trade like stocks. Generally, the transaction costs and operating expenses are low and they require no investment minimum. ETFs seek to replicate the movement of the indexes they follow, less expenses. For example, if the S&P 500 rises 10%, an ETF based on the index will rise by approximately the same amount.
How to Spot Bear and Bull Markets
Markets trade in cycles, which means that most investors will experience both in a lifetime. The key to profiting in both types of markets is to spot when the markets are starting to top out or when they are bottoming. The following are two key indicators to look for.
Advance/Decline Line: The advance/decline line represents the number of advancing issues divided by the number of declining issues over a given period. A number greater than 1 is considered bullish, while a number less than 1 is considered bearish. A rising line confirms that the markets are moving higher. However, a declining line during a period when markets continue to rise could signal a correction. When the line has been declining for several months while the averages continue to move higher, this could be considered a negative correlation, and a major correction or a bear market is likely. An advance/decline line that continues to move down signals that the averages will remain weak. However, if the line rises for several months and the averages have moved down, this positive divergence could mean the start of a bull market.
Price Dividend Ratio: The price dividend ratio is the ratio that compares the share price of the stock with the dividend paid out over the past year. It is calculated by dividing the current price of the stock by the dividend. A decline in the ratio in the area of 14-17 could indicate an attractive bargain, while a reading above 26 may signal overvaluation. This ratio and its interpretation will vary by industry, as some industries traditionally pay high dividends, while growth sectors often pay little or no dividends.
Conclusion
There are many ways to profit in both bear and bull markets. The key to success is using the tools for each market to their full advantage. In addition, it is important to use the indicators in conjunction with one another to spot when both bull and bear markets are beginning or ending.
Short selling, put options, and short or inverse ETFs are just a few bear market tools that allow investors to take advantage of the market weakness, while long positions in stocks and ETFs and a call option are suitable for bull markets. The advanced decline line and price dividend ratio will allow you to spot market tops and bottoms.
http://finance.yahoo.com/news/Banking-Profits-In-Bull-And-investopedia-14586735.html;_ylt=AhOkCA7MIJySEnHuserF1MO7YWsA
Sunday 15 February 2009
A generation shy of risk?
A generation shy of risk?
FEB 15 – You did what you were supposed to do. College. Graduate school, maybe. Bought a home. Invested in mutual funds. Bought a house.
And now? You have student loan debt. Your degree has not shielded you from unemployment (or the fear of it). The house is worth 20 per cent less than two years ago, and your retirement portfolio is down 40 per cent from its peak.
So at this moment, can you blame people in their 20s and 30s for giving up altogether on risk of any sort? It’s one of the bigger questions preoccupying those who think about money management all day.
Are we in the process of minting a new generation of adults who are averse to taking chances, whether it’s buying real estate or investing in stocks?
“We trained people that if you took risk and diversified and played by the rules that you’d have a great life for yourself,” said Howard L. Simons of the bond specialist Bianco Research. “But all of that can disappear in a hurry. And most of us can look in the mirror and say, ‘What did I do to cause this?’ And nothing springs to mind.”
I’m not sure we can say for sure whether there has been some permanent change in attitudes toward risk. It’s easy to overestimate the extent to which the world – and our perception of it – has changed in the middle of a crisis. But this one has not lasted long. And its duration does not come close to matching the period in the 1930s that left a permanent imprint on so many people’s financial habits.
Even before the downturn, younger adults were not necessarily enthusiastic about riskier forms of investing, even though they are far from retirement.
A joint study by the Investment Company Institute and the Securities Industry and Financial Markets Association noted that just 45 per cent of households headed by people under 40 held 51 per cent or more of their portfolios in stocks, mutual funds and other, similar investments last spring. That is less than what households headed by those 40 to 64 owned. Fifty per cent of them invested more than half their money in equities.
Data from Vanguard, however, suggests that its investors under 45 who use target-date mutual funds, which allocate assets among stocks and bonds for the investor, tend to have significantly more money in stocks than those who do not use these mutual funds.
As more employers automatically sign up younger workers for 401(k) plans and use fairly aggressive target-date funds as a default investment, those employees’ exposure to stocks will grow.
So perhaps a better question to ask is not whether people in the first half of their working lives are becoming more risk-averse, but whether they should be.
On Thursday night, Kevin Brosious, a financial planner in Allentown, Pa., polled the students in his financial management class at DeSales University on the percentage of their portfolios they would allocate to stocks right now. The majority would put less than half in stocks; among their reasons were fear of job loss, lack of accountability on Wall
Street and economic fears amplified by the news media.
The problem with their approach, according to Brosious, is that by investing conservatively they are probably guaranteeing themselves a smaller return and a more meagre standard of living in retirement.
Or, as Robert N. Siegmann, chief operating officer and senior adviser of the Financial Management Group in Cincinnati, wrote to me in an e-mail message, “Why would you consider taking less risk NOW after most of the risk has already been paid for in the market over the past 12 months?”
If investing still seems too risky to you right now, you’re not alone. At Charles Schwab, according to a spokesman, younger 401(k) participants are not making many big investment moves. But there is a sense that at least some younger investors may divert 401(k) contributions to other uses, especially as more companies reduce or suspend their 401(k) matches.
In that case, one sensible way to reduce overall risk is to pay down high-interest debt, like credit cards or private student loans. That, at least, offers a guaranteed return, since every extra dollar you pay now keeps you from having to pay more interest later. Also, the sooner you rid yourself of debt payments, the less you would need in your monthly budget if you lost your job.
“I think the only thing younger people should be more risk-averse about is the leverage they take on,” said Jeffrey G. Cribbs, president of Chicago Wealth Management in Oak Park, Ill.
In particular, he suggested they buy real estate and cars at levels below what they can actually afford.
So what kind of risk should you take on with the savings you have left over? To Moshe A. Milevsky, the author of “Are You a Stock or a Bond?,” risk should have less to do with the era in which you live and more to do with what you do for a living.
If you are a tenured professor, a teacher, a firefighter or other government employee, you have better job security than most other people. Your income stream is stable, like a bond. Certain service providers, like plumbers and doctors, have similar security.
Investment bankers and many technology and media workers, however, have more volatility in their career paths. A chart of their income might bounce around like one showing a stock’s price.
“The idea is that we should focus on our human capital and invest in places where our human capital is not,” Milevsky said. “It’s not about risk tolerance or time horizon but about what you do for a living.”
As a tenured professor, he invests entirely in equities. Other people with bond-like characteristics who are far from retirement could take similar risks, and withstand 2008-level losses, because their incomes are fairly stable. Those who have more stock-like careers, however, probably ought to invest a bit more conservatively, in both their retirement accounts and in their primary residences.
For most young people, however, their biggest asset is not a 401(k) account or a home but the trajectory of their career and the value of 20 or 30 or 40 years of future earnings. It makes nearly everyone a millionaire on paper.
So whether you are taking on too much risk right now or not, all of that money will provide many more chances to fix any mistakes you have already made.
Has your risk tolerance changed forever? – NYT
FEB 15 – You did what you were supposed to do. College. Graduate school, maybe. Bought a home. Invested in mutual funds. Bought a house.
And now? You have student loan debt. Your degree has not shielded you from unemployment (or the fear of it). The house is worth 20 per cent less than two years ago, and your retirement portfolio is down 40 per cent from its peak.
So at this moment, can you blame people in their 20s and 30s for giving up altogether on risk of any sort? It’s one of the bigger questions preoccupying those who think about money management all day.
Are we in the process of minting a new generation of adults who are averse to taking chances, whether it’s buying real estate or investing in stocks?
“We trained people that if you took risk and diversified and played by the rules that you’d have a great life for yourself,” said Howard L. Simons of the bond specialist Bianco Research. “But all of that can disappear in a hurry. And most of us can look in the mirror and say, ‘What did I do to cause this?’ And nothing springs to mind.”
I’m not sure we can say for sure whether there has been some permanent change in attitudes toward risk. It’s easy to overestimate the extent to which the world – and our perception of it – has changed in the middle of a crisis. But this one has not lasted long. And its duration does not come close to matching the period in the 1930s that left a permanent imprint on so many people’s financial habits.
Even before the downturn, younger adults were not necessarily enthusiastic about riskier forms of investing, even though they are far from retirement.
A joint study by the Investment Company Institute and the Securities Industry and Financial Markets Association noted that just 45 per cent of households headed by people under 40 held 51 per cent or more of their portfolios in stocks, mutual funds and other, similar investments last spring. That is less than what households headed by those 40 to 64 owned. Fifty per cent of them invested more than half their money in equities.
Data from Vanguard, however, suggests that its investors under 45 who use target-date mutual funds, which allocate assets among stocks and bonds for the investor, tend to have significantly more money in stocks than those who do not use these mutual funds.
As more employers automatically sign up younger workers for 401(k) plans and use fairly aggressive target-date funds as a default investment, those employees’ exposure to stocks will grow.
So perhaps a better question to ask is not whether people in the first half of their working lives are becoming more risk-averse, but whether they should be.
On Thursday night, Kevin Brosious, a financial planner in Allentown, Pa., polled the students in his financial management class at DeSales University on the percentage of their portfolios they would allocate to stocks right now. The majority would put less than half in stocks; among their reasons were fear of job loss, lack of accountability on Wall
Street and economic fears amplified by the news media.
The problem with their approach, according to Brosious, is that by investing conservatively they are probably guaranteeing themselves a smaller return and a more meagre standard of living in retirement.
Or, as Robert N. Siegmann, chief operating officer and senior adviser of the Financial Management Group in Cincinnati, wrote to me in an e-mail message, “Why would you consider taking less risk NOW after most of the risk has already been paid for in the market over the past 12 months?”
If investing still seems too risky to you right now, you’re not alone. At Charles Schwab, according to a spokesman, younger 401(k) participants are not making many big investment moves. But there is a sense that at least some younger investors may divert 401(k) contributions to other uses, especially as more companies reduce or suspend their 401(k) matches.
In that case, one sensible way to reduce overall risk is to pay down high-interest debt, like credit cards or private student loans. That, at least, offers a guaranteed return, since every extra dollar you pay now keeps you from having to pay more interest later. Also, the sooner you rid yourself of debt payments, the less you would need in your monthly budget if you lost your job.
“I think the only thing younger people should be more risk-averse about is the leverage they take on,” said Jeffrey G. Cribbs, president of Chicago Wealth Management in Oak Park, Ill.
In particular, he suggested they buy real estate and cars at levels below what they can actually afford.
So what kind of risk should you take on with the savings you have left over? To Moshe A. Milevsky, the author of “Are You a Stock or a Bond?,” risk should have less to do with the era in which you live and more to do with what you do for a living.
If you are a tenured professor, a teacher, a firefighter or other government employee, you have better job security than most other people. Your income stream is stable, like a bond. Certain service providers, like plumbers and doctors, have similar security.
Investment bankers and many technology and media workers, however, have more volatility in their career paths. A chart of their income might bounce around like one showing a stock’s price.
“The idea is that we should focus on our human capital and invest in places where our human capital is not,” Milevsky said. “It’s not about risk tolerance or time horizon but about what you do for a living.”
As a tenured professor, he invests entirely in equities. Other people with bond-like characteristics who are far from retirement could take similar risks, and withstand 2008-level losses, because their incomes are fairly stable. Those who have more stock-like careers, however, probably ought to invest a bit more conservatively, in both their retirement accounts and in their primary residences.
For most young people, however, their biggest asset is not a 401(k) account or a home but the trajectory of their career and the value of 20 or 30 or 40 years of future earnings. It makes nearly everyone a millionaire on paper.
So whether you are taking on too much risk right now or not, all of that money will provide many more chances to fix any mistakes you have already made.
Has your risk tolerance changed forever? – NYT
Saturday 14 February 2009
Investing During Uncertainty
Investing During Uncertainty
by Investopedia Staff, (Investopedia.com) (Contact Author Biography)
Every day it seems like the world is getting smaller. If you watch any financial television station or read the newspaper, you are most likely aware of how events in one country seem to have an ever-increasing affect on other countries around the world. We are more interconnected now than at any other time in history. It goes without mention that globalization definitely has its positives, but when threats of financial crisis, war, global recession, trade imbalances, etc, do occur it often leads to talk of moving money to safer investments and increasing government deficits. This rising uncertainty can confuse even the well-informed investor.
Uncertainty
Any time you put money at risk for the chance of profit there is an inherent level of uncertainty. When new threats such as war or recession arise, the level of uncertainty increases significantly as companies can no longer accurately predict their future earnings. As a result, institutional investors will reduce their holdings in stocks considered unsafe and move the funds to other sources like precious metals, government bonds and money-market instruments. This sell-off, which occurs as large portfolios reposition themselves, can cause the stock market to depreciate.
Effects of Uncertainty
Uncertainty is the inability to forecast future events; people can't predict the extent of a possible recession, when it's going to start/end, how much it will cost, or what companies will be able to make it through unscathed. Most companies normally predict sales and production trends for the investing public to follow assuming normal market conditions, but increasing levels of uncertainty can make these numbers significantly inaccurate. (For more, see Recession: What Does It Mean To Investors.)
Uncertainty itself can affect the economy on both the micro and macro level; a description of uncertainty on a micro level focuses on the effect on individual companies within an economy faced with the threat of war or recession, whereas the view of uncertainty on a macro level looks at the economy as a whole (To learn more, see Economics Basics.):
From a company-specific point of view, uncertainty provides a major concern for those that produce consumer goods every day. For example, consumption may fall on the threat of a recession as individuals refrain from purchasing new cars, computers and other non-essentials. This uncertainty may force the companies in certain sectors to layoff some of its employees so that it can combat the impacts of lower sales. The level of uncertainty that surrounds a company's sales also extends into the stock market. Consequently, stock prices of companies that produce non-essential goods sometimes experience a selloff when levels of uncertainty rise. (For more, see The Impact Of Recession On Businesses.)
On a macro level, uncertainty is magnified if the countries at war are major suppliers or consumers of goods. A good example is a country that supplies a large portion of the world's oil. Should this country go to war, uncertainty regarding the level of the world's oil reserves would grow. Because the demand for oil would be high and the supply uncertain, a country unable to produce enough oil within its own borders would be required to ensure that enough oil was stored to cover operations. As a result, the price of oil would increase.
Another macro-level event that affects companies and investors is the flight of capital and devaluation of exchange rates. When a country faces the threat of war or recession, its economy is considered uncertain. Investors attempt to move their currency away from unstable sources to stable ones; the currency of a country under a threat of war is sold and the currencies from countries without the threat are bought. The average investor probably would not do this; however, the large institutional investors and currency futures traders would. These actions translate into a devaluation of exchange rates.
What's an Investor to Do?
When situations of heightened uncertainty arise, the best defense is to be as well informed as possible. Keep updated by reading the newspaper and researching individual companies. Analyze which sectors have more to gain and lose with a war and decide on a long-term plan. Times of heightened uncertainty can lead to great opportunities for investors who position themselves to take advantage of it. Some investors might decide to be offensive and search for companies that provide goods or services that will lead to great returns when things turn around. It is difficult to commit capital during uncertain times, but it can often reap huge rewards in the longer run. Those who want to mitigate uncertainty and risk might be content leaving their money where it is or perhaps moving it to safer securities. Regardless of which strategy you decide to take (if any), you can't go wrong over the long term by keeping yourself well informed and getting into a position so that you can take advantage of prices when the things reverse.
For further reading, see Intro To Fundamental Analysis.
by Investopedia Staff, (Contact Author Biography)Investopedia.com believes that individuals can excel at managing their financial affairs. As such, we strive to provide free educational content and tools to empower individual investors, including thousands of original and objective articles and tutorials on a wide variety of financial topics.
http://www.investopedia.com/articles/basics/03/021403.asp?partner=basics2
by Investopedia Staff, (Investopedia.com) (Contact Author Biography)
Every day it seems like the world is getting smaller. If you watch any financial television station or read the newspaper, you are most likely aware of how events in one country seem to have an ever-increasing affect on other countries around the world. We are more interconnected now than at any other time in history. It goes without mention that globalization definitely has its positives, but when threats of financial crisis, war, global recession, trade imbalances, etc, do occur it often leads to talk of moving money to safer investments and increasing government deficits. This rising uncertainty can confuse even the well-informed investor.
Uncertainty
Any time you put money at risk for the chance of profit there is an inherent level of uncertainty. When new threats such as war or recession arise, the level of uncertainty increases significantly as companies can no longer accurately predict their future earnings. As a result, institutional investors will reduce their holdings in stocks considered unsafe and move the funds to other sources like precious metals, government bonds and money-market instruments. This sell-off, which occurs as large portfolios reposition themselves, can cause the stock market to depreciate.
Effects of Uncertainty
Uncertainty is the inability to forecast future events; people can't predict the extent of a possible recession, when it's going to start/end, how much it will cost, or what companies will be able to make it through unscathed. Most companies normally predict sales and production trends for the investing public to follow assuming normal market conditions, but increasing levels of uncertainty can make these numbers significantly inaccurate. (For more, see Recession: What Does It Mean To Investors.)
Uncertainty itself can affect the economy on both the micro and macro level; a description of uncertainty on a micro level focuses on the effect on individual companies within an economy faced with the threat of war or recession, whereas the view of uncertainty on a macro level looks at the economy as a whole (To learn more, see Economics Basics.):
From a company-specific point of view, uncertainty provides a major concern for those that produce consumer goods every day. For example, consumption may fall on the threat of a recession as individuals refrain from purchasing new cars, computers and other non-essentials. This uncertainty may force the companies in certain sectors to layoff some of its employees so that it can combat the impacts of lower sales. The level of uncertainty that surrounds a company's sales also extends into the stock market. Consequently, stock prices of companies that produce non-essential goods sometimes experience a selloff when levels of uncertainty rise. (For more, see The Impact Of Recession On Businesses.)
On a macro level, uncertainty is magnified if the countries at war are major suppliers or consumers of goods. A good example is a country that supplies a large portion of the world's oil. Should this country go to war, uncertainty regarding the level of the world's oil reserves would grow. Because the demand for oil would be high and the supply uncertain, a country unable to produce enough oil within its own borders would be required to ensure that enough oil was stored to cover operations. As a result, the price of oil would increase.
Another macro-level event that affects companies and investors is the flight of capital and devaluation of exchange rates. When a country faces the threat of war or recession, its economy is considered uncertain. Investors attempt to move their currency away from unstable sources to stable ones; the currency of a country under a threat of war is sold and the currencies from countries without the threat are bought. The average investor probably would not do this; however, the large institutional investors and currency futures traders would. These actions translate into a devaluation of exchange rates.
What's an Investor to Do?
When situations of heightened uncertainty arise, the best defense is to be as well informed as possible. Keep updated by reading the newspaper and researching individual companies. Analyze which sectors have more to gain and lose with a war and decide on a long-term plan. Times of heightened uncertainty can lead to great opportunities for investors who position themselves to take advantage of it. Some investors might decide to be offensive and search for companies that provide goods or services that will lead to great returns when things turn around. It is difficult to commit capital during uncertain times, but it can often reap huge rewards in the longer run. Those who want to mitigate uncertainty and risk might be content leaving their money where it is or perhaps moving it to safer securities. Regardless of which strategy you decide to take (if any), you can't go wrong over the long term by keeping yourself well informed and getting into a position so that you can take advantage of prices when the things reverse.
For further reading, see Intro To Fundamental Analysis.
by Investopedia Staff, (Contact Author Biography)Investopedia.com believes that individuals can excel at managing their financial affairs. As such, we strive to provide free educational content and tools to empower individual investors, including thousands of original and objective articles and tutorials on a wide variety of financial topics.
http://www.investopedia.com/articles/basics/03/021403.asp?partner=basics2
Friday 23 January 2009
Buffett-Style Buy And Hold
Investing Strategies
Buffett-Style Buy And Hold
Drew Tignanelli, 01.22.09, 03:52 PM EST
Buy good values, hold them until they're fully priced and move along, unless the business keeps improving.
Warren Buffett is not a buy-and-hold investor, so why are you?
The concept of buy and hold is nothing more than a sales pitch that was created by the financial services industry in the last secular bull market preparing for the next secular bear market (what we are currently experiencing). The industry is the only one making money on the buy-and-hold myth. They even use Buffett as the poster boy for this philosophy, but when you read his biography Snowball and study his investment moves, he certainly is not a buy-and-hold investor.
Yes, Buffett started buying Geico in 1950 and owns the whole company today. Yes, he has owned The Washington Post (nyse: WPO - news - people ) for 30-plus years. He also owned Freddie Mac (nyse: FRE - news - people ) and sold it after 15 years. He has owned Petro China (nyse: PTR - news - people ) and sold it after three years. He even owned Hospital Corp. of America and sold it in less than a year.
The truth is that Warren is a risk manager and buys what he believes is a good value. Value can arise from income, assets, economic expectations, company expectations or intrinsic values. He wants to own a good company run by good people and buy it for a good price. He then constantly monitors his thesis for owning the property and will sell when he admits his assessment was wrong, the situation has changed or the value has been extravagantly realized. Sometimes that happens in a few days, a few weeks, a few years or a few decades, and he has not been investing long enough to say if it would be a few centuries.
Risk, in fact, is wrongly assessed as the volatility of an asset. The emerging markets are assumed risky, because the past trading range can be up or down double digits. When China declines as it did in 2008 by 65%, I would suggest that there is less risk today in China's market than in the U.S. market, which went down only 38% in 2008. American investors have a false belief that our markets are more developed and therefore less risky, but I would say due to our economic and demographic landscape the general U.S. market is riskier, especially considering the significant discount difference that took place in 2008. As a shopper I would not be attracted to a DVD player marked down 30% as compared to the latest iPhone 3G marked down 60%. This is in essence what is happening in the mature U.S. vs. the upcoming China.
Special Offer: Economist and Forbes columnist Gary Shilling warned in 2005 of the housing crash, the credit crunch and the deep recession to follow. Think the problems have passed? Click here for advice to keep your wealth with Gary Shilling's Insight.
Risk is about the price you pay and what you get for that price. If I know what I own for the price I paid, then the daily price other investors are willing to pay is irrelevant. The flip side of buying a solid asset at a good price is selling that solid asset at an irrational price. It may also mean selling an asset when the economic conditions have shifted, reducing future value.
Risk managers focus on not losing money and not on making money (although you have to wonder what at all they were doing at the big Wall Street firms these past few years). The most ridiculous concept young people have learned is, "I am young so it is OK if my account goes down 50%, because I have time for it to come back." A young Buffett would consider that foolish. Buy a great asset at a great price so that it is less likely to go down, but if it does you know for sure it will come back. If you buy a mediocre asset at a bad price, it may never come back, or it may take many years for it to recover. This defines the average American investor trying diligently to be a long-term buy-and-hold investor, but after 10 years of losing money their patience is running thin. American markets are currently mediocre assets at a fair price but certainly not a cheap price.
Comment On This Story
It is true you cannot time the market, but you can tell in general when the risk reward ratio is not in your favor. You can also tell where the price decline of a good long-term asset is reflecting value and lower risk due to the price decline. Great examples of these value opportunities today are the Asian tigers and commodity companies. If you buy into these ideas, then make sure you understand why so that you can be ready to sell in the future when new investors and economic shifts have consumed the opportunity.
Related Stories
Wisdom From The Value Crowd
Holding A Candle To Buffett
Investing Books For The Stockings
Buying Stocks On The Way Down
Out Of Treasuries And Boldly Into The Fire
Related Videos
Microsoft's Surprise
BAC Kicks Out Thain
Apple Beats, Intel Cuts
Green Energy Train Wreck
Small Will Be Big In 2009
Stories
Videos
The sell decision is the key of a great investor, more so than the buy decision. Buffett knew it was time to unload Freddie Mac because things changed. He also knew that Geico was still a great company after 50 years.
Many professional and amateur investors want a simple investment concept that takes minimal effort, but great investing takes work and requires an understanding of some concepts that are worth learning.
It's important to have a good understanding of economics and how governmental policy, currency movements, tax policy, interest rates and monetary policy impact the risk of a country's market for stocks and bonds. You also need to understand the drivers of investment values and where market prices stand in relation.
Also keep in mind that market movements are both rational and irrational. The market you see daily is the inefficient market that is irrational, emotional and psychologically driven by investors overcome with greed and fear. The invisible, efficient market is driven by smart investors who seek value and buy assets priced right for a solid risk-reward opportunity. This efficiency can take days, weeks, months or years to be realized.
You need to be a risk manager like Buffett.
Drew Tignanelli is president of The Financial Consulate, a financial advisory firm in Hunt Valley, Md.
http://www.forbes.com/2009/01/22/buffett-value-investing-fan-is-in_dt_0122investingstrategies_fan.html?partner=alerts
My comment: Buy, hold and selective selling
Buffett-Style Buy And Hold
Drew Tignanelli, 01.22.09, 03:52 PM EST
Buy good values, hold them until they're fully priced and move along, unless the business keeps improving.
Warren Buffett is not a buy-and-hold investor, so why are you?
The concept of buy and hold is nothing more than a sales pitch that was created by the financial services industry in the last secular bull market preparing for the next secular bear market (what we are currently experiencing). The industry is the only one making money on the buy-and-hold myth. They even use Buffett as the poster boy for this philosophy, but when you read his biography Snowball and study his investment moves, he certainly is not a buy-and-hold investor.
Yes, Buffett started buying Geico in 1950 and owns the whole company today. Yes, he has owned The Washington Post (nyse: WPO - news - people ) for 30-plus years. He also owned Freddie Mac (nyse: FRE - news - people ) and sold it after 15 years. He has owned Petro China (nyse: PTR - news - people ) and sold it after three years. He even owned Hospital Corp. of America and sold it in less than a year.
The truth is that Warren is a risk manager and buys what he believes is a good value. Value can arise from income, assets, economic expectations, company expectations or intrinsic values. He wants to own a good company run by good people and buy it for a good price. He then constantly monitors his thesis for owning the property and will sell when he admits his assessment was wrong, the situation has changed or the value has been extravagantly realized. Sometimes that happens in a few days, a few weeks, a few years or a few decades, and he has not been investing long enough to say if it would be a few centuries.
Risk, in fact, is wrongly assessed as the volatility of an asset. The emerging markets are assumed risky, because the past trading range can be up or down double digits. When China declines as it did in 2008 by 65%, I would suggest that there is less risk today in China's market than in the U.S. market, which went down only 38% in 2008. American investors have a false belief that our markets are more developed and therefore less risky, but I would say due to our economic and demographic landscape the general U.S. market is riskier, especially considering the significant discount difference that took place in 2008. As a shopper I would not be attracted to a DVD player marked down 30% as compared to the latest iPhone 3G marked down 60%. This is in essence what is happening in the mature U.S. vs. the upcoming China.
Special Offer: Economist and Forbes columnist Gary Shilling warned in 2005 of the housing crash, the credit crunch and the deep recession to follow. Think the problems have passed? Click here for advice to keep your wealth with Gary Shilling's Insight.
Risk is about the price you pay and what you get for that price. If I know what I own for the price I paid, then the daily price other investors are willing to pay is irrelevant. The flip side of buying a solid asset at a good price is selling that solid asset at an irrational price. It may also mean selling an asset when the economic conditions have shifted, reducing future value.
Risk managers focus on not losing money and not on making money (although you have to wonder what at all they were doing at the big Wall Street firms these past few years). The most ridiculous concept young people have learned is, "I am young so it is OK if my account goes down 50%, because I have time for it to come back." A young Buffett would consider that foolish. Buy a great asset at a great price so that it is less likely to go down, but if it does you know for sure it will come back. If you buy a mediocre asset at a bad price, it may never come back, or it may take many years for it to recover. This defines the average American investor trying diligently to be a long-term buy-and-hold investor, but after 10 years of losing money their patience is running thin. American markets are currently mediocre assets at a fair price but certainly not a cheap price.
Comment On This Story
It is true you cannot time the market, but you can tell in general when the risk reward ratio is not in your favor. You can also tell where the price decline of a good long-term asset is reflecting value and lower risk due to the price decline. Great examples of these value opportunities today are the Asian tigers and commodity companies. If you buy into these ideas, then make sure you understand why so that you can be ready to sell in the future when new investors and economic shifts have consumed the opportunity.
Related Stories
Wisdom From The Value Crowd
Holding A Candle To Buffett
Investing Books For The Stockings
Buying Stocks On The Way Down
Out Of Treasuries And Boldly Into The Fire
Related Videos
Microsoft's Surprise
BAC Kicks Out Thain
Apple Beats, Intel Cuts
Green Energy Train Wreck
Small Will Be Big In 2009
Stories
Videos
The sell decision is the key of a great investor, more so than the buy decision. Buffett knew it was time to unload Freddie Mac because things changed. He also knew that Geico was still a great company after 50 years.
Many professional and amateur investors want a simple investment concept that takes minimal effort, but great investing takes work and requires an understanding of some concepts that are worth learning.
It's important to have a good understanding of economics and how governmental policy, currency movements, tax policy, interest rates and monetary policy impact the risk of a country's market for stocks and bonds. You also need to understand the drivers of investment values and where market prices stand in relation.
Also keep in mind that market movements are both rational and irrational. The market you see daily is the inefficient market that is irrational, emotional and psychologically driven by investors overcome with greed and fear. The invisible, efficient market is driven by smart investors who seek value and buy assets priced right for a solid risk-reward opportunity. This efficiency can take days, weeks, months or years to be realized.
You need to be a risk manager like Buffett.
Drew Tignanelli is president of The Financial Consulate, a financial advisory firm in Hunt Valley, Md.
http://www.forbes.com/2009/01/22/buffett-value-investing-fan-is-in_dt_0122investingstrategies_fan.html?partner=alerts
My comment: Buy, hold and selective selling
Wednesday 24 December 2008
Secrets of 6 top financial advisers
Secrets of 6 top financial advisers
Some of the financial planning profession's most respected veterans reveal their favorite strategies for tough times.
Strategies from those who know
• Send feedback to Money MagazineWhen you're paddling in rough financial waters, it helps to have an experienced guide. That's why we've taken some of the most pressing money questions you have and posed them to people who tackle these problems every day.
These half-dozen pros are among the most esteemed advisers in the field. Some serve only wealthy clients, some the merely affluent.
But whatever their outlook, they share wisdom based on years of experience - a grand total of 158 years - and thousands of hours working with people who, like you, want the best possible future for their families.
Let the learning begin.
By George Mannes, Money Magazine senior writer
The secret to staying cool in this market
Years in business: 23Client assets: $50 millionKnown for: Leading planner voice in the Latino community
• Send feedback to Money Magazine
Know what you can control
Louis Barajas - The coachLouis Barajas, Wealth Planning Santa Fe Springs, Calif.
Obviously, it's okay to feel upset. If you're really interested in helping yourself, think about what is within your control - and what isn't.
You can control how much money you're spending. You can control whether you're becoming more valuable at work. You can't control your office being shut down. You can control whether you put a résumé together and start looking for a job.
You're saying, "I've lost $50,000. I've lost $100,000." You can't change the event. What you need to focus on is the outcome you want. I've gone through this with a lot of clients: "What was the money for?" I ask. "For my retirement," they say. "I just wanted to play golf a couple of times a week and travel once in a while."
And we've sat down and looked at their portfolios. A lot of times they're still on target for that retirement. Or maybe instead of playing golf three times a week, they're going to be able to play twice a week. The feeling of having lost control of outcomes is what creates panic and fear. Don't forget that you do have options.
The secret to creating the right mix
Years in business: 39Client assets: $500 millionKnown for: Wrote the textbook "Personal Financial Planning;" teaches at Pace University
• Send feedback to Money Magazine
Tailor the averages to who you are
Lew Altfest - The teacherL.J. Altfest & Co., New York City
Start out with a portfolio that's 65% stocks and 35% bonds and cash. That's my clients' average asset allocation. That's moderate: It gives you the upside of stock with significant protection for times such as now.
Then you have to take into account your personality and your circumstances. How safe is your job, how much money have you accumulated, can you afford to take risks?
If you're young and have decent risk tolerance, you could go to 80% stocks. If a lot of your money goes toward debt repayment, shift more toward bonds. But if your portfolio is less than 50% stocks, be prepared to accept a lower standard of living in retirement.
You can make tactical moves too. I think you should be overweighted in stocks now because you have the potential for above-average returns. Pull back when everybody says, "Why did we ever doubt the market?"
People want to tilt a portfolio toward that which has performed well and away from the areas that have not performed well. You should be doing the opposite. The thing that you should do robotically is rebalance and get back to your original allocation every quarter or once a year.
The secret to saving more money
Years in business: 29Client assets: $120 millionKnown for: Former chairwoman, National Association of Personal Financial Advisors
• Send feedback to Money Magazine
Fund your goals before you spend
Peggy Cabaniss - The calm voiceHC Financial Advisors, Lafayette, Calif.
It's easy to fritter money away. What you need is a plan.
Let's say you make $10,000 a month gross. Write that down. Take out what your income tax is and what you pay for Social Security. Take out whatever is deducted from your paycheck for your health plan and your 401(k).Notice that I set out goals first. What 95% of people do is, money comes into their checking account, they spend it, and at the end of the month there's nothing left. Of course they don't accomplish their goals.
On the day that money hits your checking account, have a certain amount automatically transferred to a savings or brokerage account. The main thing is that it doesn't sit around tempting you to spend.
The secret making your money last
Years in business: 27Client assets: $650 millionKnown for: Former chairman, Certified Financial Planner Board of Standards
• Send feedback to Money Magazine
Keep two years in cash
Harold Evensky - The deanEvensky & Katz, Coral Gables, Fla.
In retirement, if you start taking money out of stocks at the wrong time, you're in trouble: "Gosh, the market's down, but I've got to sell because I need groceries." So I developed the cash-flow-reserve strategy.
We don't believe in investing in stocks or bonds unless we expect to hold on for at least five years. Problem is, carving five years' worth of cash out of a portfolio puts too big a chunk in money markets. There's an opportunity cost to not being in the market. Two years of cash provides a significant cushion.
So if someone has a million dollars and needs 5% a year - $50,000 - we have two portfolios: a $900,000 stock and bond portfolio, and a $100,000 cash reserve. Maybe put the first year in a money-market account and the second in a short-term bond fund.
We've never run out of cash, but if we did, we would simply sell short-term bonds in the investment portfolio. We wouldn't have to sell stocks or long-term bonds when they're in the tank. The system worked well in the crash of '87 and the tech crash, and it's working very well now.
The secret to avoiding a high tax bill
Years in business: 26Client assets: $150 millionKnown for: Helped establish the personal financial specialist designation for C.P.A.s.
• Send feedback to Money Magazine
Shelter your best investments
Jim Shambo - The tax cutterLifetime Planning Concepts, Colorado Springs, Colo.
You should always maximize tax-deferred 401(k)s and IRAs, but what assets do you hold in them? The usual argument is to keep stocks outside your 401(k) so that when you sell you're taxed on the capital gain, not ordinary income.
But most people ignore a fund's portfolio turnover to their detriment. Even if you don't sell a single share of your actively managed stock fund, you're going to have gains because the whole portfolio turns over every five years, maybe less. The longer you hold the fund, the better off you are having it in a tax-deferred account. If you're under 40, you've got maybe 40 years of tax deferral.
Outside an IRA you're paying capital-gains taxes every year. Turnover is why I like index funds. Their portfolios turn over maybe once every 20 years. If you invest only in index funds, keeping stocks on the outside of an IRA and a 401(k) and bonds inside makes sense.
Actually, it's important to have a blend of stocks and bonds inside and out of your retirement accounts so you have the flexibility to rebalance in the IRAs. You don't want to sell stocks in a taxable account and generate gains.
The secret to balancing goals
Years in business: 14Client assets: $40 millionKnown for: Wrote "The Young Couple's Guide to Growing Rich Together"
• Send feedback to Money Magazine
Make long-term targets No.1
Jill Gianola - The family's helperGianola Financial Planning, Columbus, Ohio
I start with clients' longest-term goals first - usually retirement - and see what it would take to fund those. Then I work backward. Their second-longest- term goal is often their children's college. The furthest goals are usually the big ones; if you don't start working on them now, you're not going to make it.
People are willing to rearrange their short-term goals - "Okay, we can't buy the house for another couple of years" - but they don't necessarily want to postpone retirement. You have to make progress on several fronts to make sure you get to the finish line.Start with the minimum. With a 401(k), the minimum is to get the match. For me the minimum on a credit card is what it takes to pay it off in three years. If you have enough to meet both goals, you're good to go.
More galleries
Some of the financial planning profession's most respected veterans reveal their favorite strategies for tough times.
Strategies from those who know
• Send feedback to Money MagazineWhen you're paddling in rough financial waters, it helps to have an experienced guide. That's why we've taken some of the most pressing money questions you have and posed them to people who tackle these problems every day.
These half-dozen pros are among the most esteemed advisers in the field. Some serve only wealthy clients, some the merely affluent.
But whatever their outlook, they share wisdom based on years of experience - a grand total of 158 years - and thousands of hours working with people who, like you, want the best possible future for their families.
Let the learning begin.
By George Mannes, Money Magazine senior writer
The secret to staying cool in this market
Years in business: 23Client assets: $50 millionKnown for: Leading planner voice in the Latino community
• Send feedback to Money Magazine
Know what you can control
Louis Barajas - The coachLouis Barajas, Wealth Planning Santa Fe Springs, Calif.
Obviously, it's okay to feel upset. If you're really interested in helping yourself, think about what is within your control - and what isn't.
You can control how much money you're spending. You can control whether you're becoming more valuable at work. You can't control your office being shut down. You can control whether you put a résumé together and start looking for a job.
You're saying, "I've lost $50,000. I've lost $100,000." You can't change the event. What you need to focus on is the outcome you want. I've gone through this with a lot of clients: "What was the money for?" I ask. "For my retirement," they say. "I just wanted to play golf a couple of times a week and travel once in a while."
And we've sat down and looked at their portfolios. A lot of times they're still on target for that retirement. Or maybe instead of playing golf three times a week, they're going to be able to play twice a week. The feeling of having lost control of outcomes is what creates panic and fear. Don't forget that you do have options.
The secret to creating the right mix
Years in business: 39Client assets: $500 millionKnown for: Wrote the textbook "Personal Financial Planning;" teaches at Pace University
• Send feedback to Money Magazine
Tailor the averages to who you are
Lew Altfest - The teacherL.J. Altfest & Co., New York City
Start out with a portfolio that's 65% stocks and 35% bonds and cash. That's my clients' average asset allocation. That's moderate: It gives you the upside of stock with significant protection for times such as now.
Then you have to take into account your personality and your circumstances. How safe is your job, how much money have you accumulated, can you afford to take risks?
If you're young and have decent risk tolerance, you could go to 80% stocks. If a lot of your money goes toward debt repayment, shift more toward bonds. But if your portfolio is less than 50% stocks, be prepared to accept a lower standard of living in retirement.
You can make tactical moves too. I think you should be overweighted in stocks now because you have the potential for above-average returns. Pull back when everybody says, "Why did we ever doubt the market?"
People want to tilt a portfolio toward that which has performed well and away from the areas that have not performed well. You should be doing the opposite. The thing that you should do robotically is rebalance and get back to your original allocation every quarter or once a year.
The secret to saving more money
Years in business: 29Client assets: $120 millionKnown for: Former chairwoman, National Association of Personal Financial Advisors
• Send feedback to Money Magazine
Fund your goals before you spend
Peggy Cabaniss - The calm voiceHC Financial Advisors, Lafayette, Calif.
It's easy to fritter money away. What you need is a plan.
Let's say you make $10,000 a month gross. Write that down. Take out what your income tax is and what you pay for Social Security. Take out whatever is deducted from your paycheck for your health plan and your 401(k).Notice that I set out goals first. What 95% of people do is, money comes into their checking account, they spend it, and at the end of the month there's nothing left. Of course they don't accomplish their goals.
On the day that money hits your checking account, have a certain amount automatically transferred to a savings or brokerage account. The main thing is that it doesn't sit around tempting you to spend.
The secret making your money last
Years in business: 27Client assets: $650 millionKnown for: Former chairman, Certified Financial Planner Board of Standards
• Send feedback to Money Magazine
Keep two years in cash
Harold Evensky - The deanEvensky & Katz, Coral Gables, Fla.
In retirement, if you start taking money out of stocks at the wrong time, you're in trouble: "Gosh, the market's down, but I've got to sell because I need groceries." So I developed the cash-flow-reserve strategy.
We don't believe in investing in stocks or bonds unless we expect to hold on for at least five years. Problem is, carving five years' worth of cash out of a portfolio puts too big a chunk in money markets. There's an opportunity cost to not being in the market. Two years of cash provides a significant cushion.
So if someone has a million dollars and needs 5% a year - $50,000 - we have two portfolios: a $900,000 stock and bond portfolio, and a $100,000 cash reserve. Maybe put the first year in a money-market account and the second in a short-term bond fund.
We've never run out of cash, but if we did, we would simply sell short-term bonds in the investment portfolio. We wouldn't have to sell stocks or long-term bonds when they're in the tank. The system worked well in the crash of '87 and the tech crash, and it's working very well now.
The secret to avoiding a high tax bill
Years in business: 26Client assets: $150 millionKnown for: Helped establish the personal financial specialist designation for C.P.A.s.
• Send feedback to Money Magazine
Shelter your best investments
Jim Shambo - The tax cutterLifetime Planning Concepts, Colorado Springs, Colo.
You should always maximize tax-deferred 401(k)s and IRAs, but what assets do you hold in them? The usual argument is to keep stocks outside your 401(k) so that when you sell you're taxed on the capital gain, not ordinary income.
But most people ignore a fund's portfolio turnover to their detriment. Even if you don't sell a single share of your actively managed stock fund, you're going to have gains because the whole portfolio turns over every five years, maybe less. The longer you hold the fund, the better off you are having it in a tax-deferred account. If you're under 40, you've got maybe 40 years of tax deferral.
Outside an IRA you're paying capital-gains taxes every year. Turnover is why I like index funds. Their portfolios turn over maybe once every 20 years. If you invest only in index funds, keeping stocks on the outside of an IRA and a 401(k) and bonds inside makes sense.
Actually, it's important to have a blend of stocks and bonds inside and out of your retirement accounts so you have the flexibility to rebalance in the IRAs. You don't want to sell stocks in a taxable account and generate gains.
The secret to balancing goals
Years in business: 14Client assets: $40 millionKnown for: Wrote "The Young Couple's Guide to Growing Rich Together"
• Send feedback to Money Magazine
Make long-term targets No.1
Jill Gianola - The family's helperGianola Financial Planning, Columbus, Ohio
I start with clients' longest-term goals first - usually retirement - and see what it would take to fund those. Then I work backward. Their second-longest- term goal is often their children's college. The furthest goals are usually the big ones; if you don't start working on them now, you're not going to make it.
People are willing to rearrange their short-term goals - "Okay, we can't buy the house for another couple of years" - but they don't necessarily want to postpone retirement. You have to make progress on several fronts to make sure you get to the finish line.Start with the minimum. With a 401(k), the minimum is to get the match. For me the minimum on a credit card is what it takes to pay it off in three years. If you have enough to meet both goals, you're good to go.
More galleries
Monday 1 December 2008
Investment : Types & Overview
Investment : Types & Overview
Though the term investment simply means using the present income for generating wealth in the future or net addition to the stock of capital, still it has its infinite meanings through its versatile application in the real practices.
The term investment has gained its strength in the recent years through changing economic climate over the world. The world business climate is changing very fast and it is the term investment, which is in the perfect direction to provide smell to more than 6 billions over the world.
From the latest United Nations Conference on Trade and Development( UNCTAD report, it is found that the developing nations over the world have actively participated in the field of investment. As to UNCTAD statistics, investment to the developing countries over the world has nearly doubled in two years.
Increasing liberalization among the countries over the world can justify the best result from investment. Present economic success brought by the countries such as India and China have gained a lot from the investment boom.
Present economic growth is largely dependent upon investment factor. This section covers meaning of investment, trend in investment and investment companies over the world.
Investment refers to an asset which is purchased with the expectation that it will generate income in the future or its’ value will appreciate in future so that it will be sold at a higher price. In other sense, we can say that Investment is the purchase of the goods which are not consumed at the present but is used to create wealth in the future. Investment cannot be done without Savings. Savings provides the funds necessary for investment. Investment is influenced by Rate of Interest. Falling interest rates result in increasing rate of Investment. Investment plays a vital role in economic growth of the country as Investment increases the production capacity of the economy.
The meaning of the term Investment is different in different genres. In Economics, Investment is the production per unit time of goods which are not consumed at present and are used for future production. According to economic theory Investment depends on income and rate of interest. An increase in income positively affects the Investment but an increasing rate of interest has a negative effect on it. The interest rate in this case is nothing but the opportunity cost of investing the funds rather than using them at the present. In Finance, Investment means purchasing of securities or any other assets in money market or capital market or purchase of any liquid assets like gold or residential real estate property or commercial real estate property.
Find below various Investment types , investment companies, and real estate investment:
Investment Companies & Types
Edward Jones Investment
Fidelity Investment
Franklin Templeton Investments
Vanguard Investment
Fremont Investment
Land Investment
Property Investment
Bank of America Investment
Financial Advisors
Financial Planning
Private Equity
Retirement Planning
Investment Overview
Finance Investment
Investment Brokerage
Investment Guide
Online Investment
Investment Securities
Return on Investment
Business Investment Opportunity
Investment Strategy
Types of Financial Advisors
Unit Trust
Venture Capital
Wealth Management
Real Estate Investment
Real Estate Investment
Real Estate Investment Property
Real Estate Investment Trust
Investment Firm
Fremont Investment and Loan
Investment Property Loan
Investment Banks
http://www.economywatch.com/investment/
Though the term investment simply means using the present income for generating wealth in the future or net addition to the stock of capital, still it has its infinite meanings through its versatile application in the real practices.
The term investment has gained its strength in the recent years through changing economic climate over the world. The world business climate is changing very fast and it is the term investment, which is in the perfect direction to provide smell to more than 6 billions over the world.
From the latest United Nations Conference on Trade and Development( UNCTAD report, it is found that the developing nations over the world have actively participated in the field of investment. As to UNCTAD statistics, investment to the developing countries over the world has nearly doubled in two years.
Increasing liberalization among the countries over the world can justify the best result from investment. Present economic success brought by the countries such as India and China have gained a lot from the investment boom.
Present economic growth is largely dependent upon investment factor. This section covers meaning of investment, trend in investment and investment companies over the world.
Investment refers to an asset which is purchased with the expectation that it will generate income in the future or its’ value will appreciate in future so that it will be sold at a higher price. In other sense, we can say that Investment is the purchase of the goods which are not consumed at the present but is used to create wealth in the future. Investment cannot be done without Savings. Savings provides the funds necessary for investment. Investment is influenced by Rate of Interest. Falling interest rates result in increasing rate of Investment. Investment plays a vital role in economic growth of the country as Investment increases the production capacity of the economy.
The meaning of the term Investment is different in different genres. In Economics, Investment is the production per unit time of goods which are not consumed at present and are used for future production. According to economic theory Investment depends on income and rate of interest. An increase in income positively affects the Investment but an increasing rate of interest has a negative effect on it. The interest rate in this case is nothing but the opportunity cost of investing the funds rather than using them at the present. In Finance, Investment means purchasing of securities or any other assets in money market or capital market or purchase of any liquid assets like gold or residential real estate property or commercial real estate property.
Find below various Investment types , investment companies, and real estate investment:
Investment Companies & Types
Edward Jones Investment
Fidelity Investment
Franklin Templeton Investments
Vanguard Investment
Fremont Investment
Land Investment
Property Investment
Bank of America Investment
Financial Advisors
Financial Planning
Private Equity
Retirement Planning
Investment Overview
Finance Investment
Investment Brokerage
Investment Guide
Online Investment
Investment Securities
Return on Investment
Business Investment Opportunity
Investment Strategy
Types of Financial Advisors
Unit Trust
Venture Capital
Wealth Management
Real Estate Investment
Real Estate Investment
Real Estate Investment Property
Real Estate Investment Trust
Investment Firm
Fremont Investment and Loan
Investment Property Loan
Investment Banks
http://www.economywatch.com/investment/
Friday 28 November 2008
Help for Mounting Losses
Help for Mounting 401(k) Losses
by Walter Updegrave
Thursday, November 27, 2008
Question: I'm retired and my 401(k) has lost approximately 35% over the past year. My financial adviser tells me to stay the course, but the losses keep mounting. What should I do? -Dale Marcos, Lafayette, Indiana
Answer: For starters, you should demand a better answer from your financial adviser. Just telling someone to "stay the course" isn't an adequate answer any time an investor expresses doubt or confusion about an investing or planning strategy, and it's certainly not an acceptable reply given the virtually unprecedented turmoil and uncertainty we're experiencing today.
More from CNNMoney.com: • How to Bet on Emerging Markets • 4 Lessons From the Financial Crisis • Whatever You Do, Don't Buy Sears
You can't blame your adviser for not foreseeing the severity of this downturn before it occurred. Nobody's crystal ball is that clear. But an adviser, or at least a good one, is supposed to help you create an investing strategy and retirement plan that can see you through a variety of economic and market scenarios.
Your adviser can't immunize you against losses altogether. That would be unrealistic if you also want your retirement savings to grow and support you for the rest of your life. But the plan should balance upside potential with some measure of downside protection that makes sense given your age, risk tolerance and your financial resources.
Most important, your adviser should be willing to get together with you in times like these to go over the plan, see if it's working as expected and discuss whether or not it needs to be revised.
On the face of it, a 35% decline over the past 12 months seems a bit much for someone who's retired. Given that stocks are down about 40% over that period and the broad bond market is flat to slightly up, that suggests a stock allocation somewhere between 80% and 90%. That strikes me as pretty risky for a retiree. But without more information about your overall finances - like whether the decline you cite includes withdrawals, what other investments you own and how heavily you'll be relying on your 401(k) for living expenses - I can't say for sure whether your 401(k) is invested too aggressively.
Ask for More Transparency
Whatever the particulars of your situation, this much is clear: You are upset about the performance of your account and you aren't getting enough feedback from your adviser to know whether the path he wants you to stay on is the right one.
Here's what I recommend. Go back to your adviser and explain that you need to know what course it is exactly that you are on and why you should stick to it. I'd ask to see how my portfolio is divvied up between stocks and bonds (as well as among different types of stocks and bonds) and I'd want an explanation of why that allocation makes sense given today's conditions.
I'd also want to see some sort of analysis that shows how much income I can reasonably expect throughout retirement from my investments, Social Security and pensions, if any, and how that income compares to my projected living expenses.
Move On
If your adviser can't or won't do this, you have two choices. You can take this kind of comprehensive look at your retirement finances on your own by revving up an online tool like Fidelity's Retirement Income Planner or T. Rowe Price's Retirement Income Calculator.
Or you can switch to an adviser who is willing to do this type of assessment for you. If you do move on to another adviser, be careful. There are lots of people with impressive-sounding credentials who really operate more as a salesman than financial adviser, looking to take advantage of fearful investors in uncertain times like these. To find a reputable adviser, search the Financial Planning Association Web site or the Garrett Planning Network.
Who knows, maybe your adviser has already revisited the advice he or she gave to you and other clients and crunched the numbers again. Perhaps that's why your adviser can so confidently tell you to stay the course. But if I were as worried as you seem to be, I'd want more convincing (and maybe a look at some alternatives) before I went along.
E-mail Updegrave at wupdegrave@moneymail.com.
Copyrighted, CNNMoney. All Rights Reserved.
http://finance.yahoo.com/focus-retirement/article/106216/Help-for-Mounting-401(k)-Losses;_ylt=ApmNvqTpXRlKoIp6cJnk1T67YWsA?mod=retirement-401k
by Walter Updegrave
Thursday, November 27, 2008
Question: I'm retired and my 401(k) has lost approximately 35% over the past year. My financial adviser tells me to stay the course, but the losses keep mounting. What should I do? -Dale Marcos, Lafayette, Indiana
Answer: For starters, you should demand a better answer from your financial adviser. Just telling someone to "stay the course" isn't an adequate answer any time an investor expresses doubt or confusion about an investing or planning strategy, and it's certainly not an acceptable reply given the virtually unprecedented turmoil and uncertainty we're experiencing today.
More from CNNMoney.com: • How to Bet on Emerging Markets • 4 Lessons From the Financial Crisis • Whatever You Do, Don't Buy Sears
You can't blame your adviser for not foreseeing the severity of this downturn before it occurred. Nobody's crystal ball is that clear. But an adviser, or at least a good one, is supposed to help you create an investing strategy and retirement plan that can see you through a variety of economic and market scenarios.
Your adviser can't immunize you against losses altogether. That would be unrealistic if you also want your retirement savings to grow and support you for the rest of your life. But the plan should balance upside potential with some measure of downside protection that makes sense given your age, risk tolerance and your financial resources.
Most important, your adviser should be willing to get together with you in times like these to go over the plan, see if it's working as expected and discuss whether or not it needs to be revised.
On the face of it, a 35% decline over the past 12 months seems a bit much for someone who's retired. Given that stocks are down about 40% over that period and the broad bond market is flat to slightly up, that suggests a stock allocation somewhere between 80% and 90%. That strikes me as pretty risky for a retiree. But without more information about your overall finances - like whether the decline you cite includes withdrawals, what other investments you own and how heavily you'll be relying on your 401(k) for living expenses - I can't say for sure whether your 401(k) is invested too aggressively.
Ask for More Transparency
Whatever the particulars of your situation, this much is clear: You are upset about the performance of your account and you aren't getting enough feedback from your adviser to know whether the path he wants you to stay on is the right one.
Here's what I recommend. Go back to your adviser and explain that you need to know what course it is exactly that you are on and why you should stick to it. I'd ask to see how my portfolio is divvied up between stocks and bonds (as well as among different types of stocks and bonds) and I'd want an explanation of why that allocation makes sense given today's conditions.
I'd also want to see some sort of analysis that shows how much income I can reasonably expect throughout retirement from my investments, Social Security and pensions, if any, and how that income compares to my projected living expenses.
Move On
If your adviser can't or won't do this, you have two choices. You can take this kind of comprehensive look at your retirement finances on your own by revving up an online tool like Fidelity's Retirement Income Planner or T. Rowe Price's Retirement Income Calculator.
Or you can switch to an adviser who is willing to do this type of assessment for you. If you do move on to another adviser, be careful. There are lots of people with impressive-sounding credentials who really operate more as a salesman than financial adviser, looking to take advantage of fearful investors in uncertain times like these. To find a reputable adviser, search the Financial Planning Association Web site or the Garrett Planning Network.
Who knows, maybe your adviser has already revisited the advice he or she gave to you and other clients and crunched the numbers again. Perhaps that's why your adviser can so confidently tell you to stay the course. But if I were as worried as you seem to be, I'd want more convincing (and maybe a look at some alternatives) before I went along.
E-mail Updegrave at wupdegrave@moneymail.com.
Copyrighted, CNNMoney. All Rights Reserved.
http://finance.yahoo.com/focus-retirement/article/106216/Help-for-Mounting-401(k)-Losses;_ylt=ApmNvqTpXRlKoIp6cJnk1T67YWsA?mod=retirement-401k
Saturday 22 November 2008
Is now the time to bail out?
Is now the time to bail out?
A volatile market isn't necessarily a bad market. But selling when stocks are down is usually a bad idea.
By the Mole, Money Magazine's undercover financial planner
October 29, 2008: 5:47 AM ET
NEW YORK (Money) -- Question: I know market timing is a loser's game. However, I do think there is abundant evidence that the next 12-18 months are going to be very difficult for equities. Do you see any merit in trimming some equity holdings, parking the proceeds in short-term bonds or cash, and committing to immediately dollar-cost averaging back into the market on a monthly fixed schedule?
The Mole's Answer: Your question is a very sophisticated way of asking whether you should bail from the market right now. While I don't know your total situation, I can tell you that selling after equities are down by 40% is usually a bad thing.
First of all, I wholeheartedly agree with your statement that market timing is a loser's game. Many studies have shown the systematically bad job that individual investors do of timing the market.
We are constantly testing the market winds. When conditions are favorable, we increase our exposure. When conditions become so far from favorable that they're in another zip code, such as what we're currently experiencing, we decrease our exposure.
Unfortunately, we tend to do both of these things after the fact. Truth be told, we all want stock returns during bull markets and money market returns in bear markets. But as much as we may want them, no one really knows exactly how to get them, since we can't predict when bear markets and bull markets are beginning or ending.
Second, when you state that the next 12-18 months are likely to be "difficult" for equities, I'm not sure I agree with you. If by "difficult," you mean volatile, then you are probably right.
The last few weeks in the stock market has set all sorts of records for volatility. Emotions are running wild and there is a likelihood that this volatility will not end anytime soon.
But I would not agree that this translates into a bad period for the stock market. Primarily because the stock market is a better buy today than it was last year. In fact, I can quantify it by saying it's a 40% better value.
Which begs the question, why wasn't I getting as many inquiries about selling last year when the market was hitting new highs?
But that's a rhetorical question - the answer is that we humans have a tendency to predict the future based on the recent past.
This "recency bias," as it's known in the financial planning world, has us thinking inside the box of current events. If the market is thriving, as it was between 2003 and 2007, then we believe it will always be thriving. And in times like these when the sustained market dive is giving us all nose bleeds, we believe we'll never pull out of it.
Onto your question of whether you should sell now with a commitment to buy back in with periodic purchases, also known as dollar-cost averaging. As sophisticated and well thought out as this sounds, it still means selling your equities after they are down by 40%, and still equals market timing.
A better time to consider selling would have been last year after equities had more than doubled.
I can't tell you how the stock market will perform over the next 12 -18 months. No one can. It may very well turn out to be the right thing to do but the odds are very much against you.
Studies actually quantify that we pay an average penalty of 1.5% annually for timing the stock market and chasing the hot performers. Many of us come up with all sorts of rationale for doing what we're doing, but it ultimately just results in outsmarting ourselves.
The fact that you say you will commit to buying back periodically is a bit confusing. I'm glad you realize the market doesn't signal to us that we have hit bottom and that now is the time to buy, but it also hasn't sent you a signal that now is the time to sell.
Systematic rebalancing would have had you selling some of your stocks between 2002 and 2007, as they were skyrocketing. Now is probably when you should be buying.
My advice: Find an asset allocation that is right for you and stick to it. Try to rebalance in times like these, which actually means buying more stocks. Remember that investing during a rough economy can be the right thing to do. If someone tells you that you can have the upside of the market without the risk, don't believe them.
The Mole is a certified financial planner and certified public accountant who - in the interest of fairness - thinks you should know what goes on behind the scenes in financial planning. Want to make contact? E-mail him at http://money.cnn.com/2008/10/28/pf/Ask_the_mole.moneymag/mailto:themole@moneymail.com. Send feedback to Money Magazine
Find this article at: http://money.cnn.com/2008/10/28/pf/Ask_the_mole.moneymag/index.htm
A volatile market isn't necessarily a bad market. But selling when stocks are down is usually a bad idea.
By the Mole, Money Magazine's undercover financial planner
October 29, 2008: 5:47 AM ET
NEW YORK (Money) -- Question: I know market timing is a loser's game. However, I do think there is abundant evidence that the next 12-18 months are going to be very difficult for equities. Do you see any merit in trimming some equity holdings, parking the proceeds in short-term bonds or cash, and committing to immediately dollar-cost averaging back into the market on a monthly fixed schedule?
The Mole's Answer: Your question is a very sophisticated way of asking whether you should bail from the market right now. While I don't know your total situation, I can tell you that selling after equities are down by 40% is usually a bad thing.
First of all, I wholeheartedly agree with your statement that market timing is a loser's game. Many studies have shown the systematically bad job that individual investors do of timing the market.
We are constantly testing the market winds. When conditions are favorable, we increase our exposure. When conditions become so far from favorable that they're in another zip code, such as what we're currently experiencing, we decrease our exposure.
Unfortunately, we tend to do both of these things after the fact. Truth be told, we all want stock returns during bull markets and money market returns in bear markets. But as much as we may want them, no one really knows exactly how to get them, since we can't predict when bear markets and bull markets are beginning or ending.
Second, when you state that the next 12-18 months are likely to be "difficult" for equities, I'm not sure I agree with you. If by "difficult," you mean volatile, then you are probably right.
The last few weeks in the stock market has set all sorts of records for volatility. Emotions are running wild and there is a likelihood that this volatility will not end anytime soon.
But I would not agree that this translates into a bad period for the stock market. Primarily because the stock market is a better buy today than it was last year. In fact, I can quantify it by saying it's a 40% better value.
Which begs the question, why wasn't I getting as many inquiries about selling last year when the market was hitting new highs?
But that's a rhetorical question - the answer is that we humans have a tendency to predict the future based on the recent past.
This "recency bias," as it's known in the financial planning world, has us thinking inside the box of current events. If the market is thriving, as it was between 2003 and 2007, then we believe it will always be thriving. And in times like these when the sustained market dive is giving us all nose bleeds, we believe we'll never pull out of it.
Onto your question of whether you should sell now with a commitment to buy back in with periodic purchases, also known as dollar-cost averaging. As sophisticated and well thought out as this sounds, it still means selling your equities after they are down by 40%, and still equals market timing.
A better time to consider selling would have been last year after equities had more than doubled.
I can't tell you how the stock market will perform over the next 12 -18 months. No one can. It may very well turn out to be the right thing to do but the odds are very much against you.
Studies actually quantify that we pay an average penalty of 1.5% annually for timing the stock market and chasing the hot performers. Many of us come up with all sorts of rationale for doing what we're doing, but it ultimately just results in outsmarting ourselves.
The fact that you say you will commit to buying back periodically is a bit confusing. I'm glad you realize the market doesn't signal to us that we have hit bottom and that now is the time to buy, but it also hasn't sent you a signal that now is the time to sell.
Systematic rebalancing would have had you selling some of your stocks between 2002 and 2007, as they were skyrocketing. Now is probably when you should be buying.
My advice: Find an asset allocation that is right for you and stick to it. Try to rebalance in times like these, which actually means buying more stocks. Remember that investing during a rough economy can be the right thing to do. If someone tells you that you can have the upside of the market without the risk, don't believe them.
The Mole is a certified financial planner and certified public accountant who - in the interest of fairness - thinks you should know what goes on behind the scenes in financial planning. Want to make contact? E-mail him at http://money.cnn.com/2008/10/28/pf/Ask_the_mole.moneymag/mailto:themole@moneymail.com. Send feedback to Money Magazine
Find this article at: http://money.cnn.com/2008/10/28/pf/Ask_the_mole.moneymag/index.htm
Friday 21 November 2008
Four Investment Objectives Define Strategy
Four Investment Objectives Define Strategy
By Ken Little, About.com
In broad terms, four main investment objectives cover how you accomplish most financial goals.
These investment objectives are important because certain products and strategies work for one objective, but may produce poor results for another objective.
It is quite likely you will use several of these investment objectives simultaneously to accomplish different objectives without any conflict.
Let’s examine these objectives and see how they differ.
Capital Appreciation
Capital appreciation is concerned with long-term growth. This strategy is most familiar in retirement plans where investments work for many years inside a qualified plan.
However, investing for capital appreciation is not limited to qualified retirement accounts. If this is your objective, you are planning to hold the stocks for many years.
You are content to let them grow within your portfolio, reinvesting dividends to purchase more shares. A typical strategy employs making regular purchases.
You are not very concerned with day-to-day fluctuations, but keep a close eye on the fundamentals of the company for changes that could affect long-term growth.
Current Income
If your objective is current income, you are most likely interested in stocks that pay a consistent and high dividend. You may also include some top-quality real estate investment trusts (REITs) and highly-rated bonds.
All of these products produce current income on a regular basis.
Many people who pursue a strategy of current income are retired and use the income for living expenses. Other people take advantage of a lump sum of capital to create an income stream that never touches the principal, yet provides cash for certain current needs (college, for example).
Capital Preservation
Capital preservation is a strategy you often associate with elderly people who want to make sure they don’t outlive their money.
Retired on nearly retired people often use this strategy to hold on the detention has.
For this investor, safety is extremely important – even to the extent of giving up return for security.
The logic for this safety is clear. If they lose their money through foolish investment and are retired, it is unlike they will get a chance to replace it.
Investors who use capital preservation tend to invest in bank CDs, U.S. Treasury issues, savings accounts.
Speculation
The speculator is not a true investor, but a trader who enjoys jumping into and out of stocks as if they were bad shoes.
Speculators or traders are interested in quick profits and used advanced trading techniques like shorting stocks, trading on the margin, options and other special equipment.
They have no love for the companies they trade and, in fact may not know much about them at all other than the stock is volatile and ripe for a quick profit.
Speculators keep their eyes open for a quick profit situation and hope to trade in and out without much thought about the underlying companies.
Many people try speculating in the stock market with the misguided goal of getting rich. It doesn’t work that way.
If you want to try your hand, make sure you are using money you can afford to lose. It’s easy to get addicted, so make sure you understand the real possibilities of losing your investment.
Conclusion
Your investment style should match you financial objectives. If it doesn’t, you should see professional help in dealing with investment choices that match you financial objectives.
http://stocks.about.com/od/investingstrategies/a/021906technque.htm
By Ken Little, About.com
In broad terms, four main investment objectives cover how you accomplish most financial goals.
These investment objectives are important because certain products and strategies work for one objective, but may produce poor results for another objective.
It is quite likely you will use several of these investment objectives simultaneously to accomplish different objectives without any conflict.
Let’s examine these objectives and see how they differ.
Capital Appreciation
Capital appreciation is concerned with long-term growth. This strategy is most familiar in retirement plans where investments work for many years inside a qualified plan.
However, investing for capital appreciation is not limited to qualified retirement accounts. If this is your objective, you are planning to hold the stocks for many years.
You are content to let them grow within your portfolio, reinvesting dividends to purchase more shares. A typical strategy employs making regular purchases.
You are not very concerned with day-to-day fluctuations, but keep a close eye on the fundamentals of the company for changes that could affect long-term growth.
Current Income
If your objective is current income, you are most likely interested in stocks that pay a consistent and high dividend. You may also include some top-quality real estate investment trusts (REITs) and highly-rated bonds.
All of these products produce current income on a regular basis.
Many people who pursue a strategy of current income are retired and use the income for living expenses. Other people take advantage of a lump sum of capital to create an income stream that never touches the principal, yet provides cash for certain current needs (college, for example).
Capital Preservation
Capital preservation is a strategy you often associate with elderly people who want to make sure they don’t outlive their money.
Retired on nearly retired people often use this strategy to hold on the detention has.
For this investor, safety is extremely important – even to the extent of giving up return for security.
The logic for this safety is clear. If they lose their money through foolish investment and are retired, it is unlike they will get a chance to replace it.
Investors who use capital preservation tend to invest in bank CDs, U.S. Treasury issues, savings accounts.
Speculation
The speculator is not a true investor, but a trader who enjoys jumping into and out of stocks as if they were bad shoes.
Speculators or traders are interested in quick profits and used advanced trading techniques like shorting stocks, trading on the margin, options and other special equipment.
They have no love for the companies they trade and, in fact may not know much about them at all other than the stock is volatile and ripe for a quick profit.
Speculators keep their eyes open for a quick profit situation and hope to trade in and out without much thought about the underlying companies.
Many people try speculating in the stock market with the misguided goal of getting rich. It doesn’t work that way.
If you want to try your hand, make sure you are using money you can afford to lose. It’s easy to get addicted, so make sure you understand the real possibilities of losing your investment.
Conclusion
Your investment style should match you financial objectives. If it doesn’t, you should see professional help in dealing with investment choices that match you financial objectives.
http://stocks.about.com/od/investingstrategies/a/021906technque.htm
A Look at Growth, Income and Value Investing
Investing Philosophies - Part One
A Look at Growth, Income, and Value Investing
By Ken Little, About.com
Developing an investing philosophy may seem like an academic exercise, however over time, it will help shape your thinking about the types of stocks that work for your portfolio.
This first of a two-part series looks at the three main investing philosophies:
Growth
Value
Income
Most investors fall into one or a combination of these investing philosophies.
Growth Investors
As the name implies, growth investors look for the rising stars. They are interested in companies that have high potential for earning growth. High earning growth invariable leads to high stock prices – at least in theory. Growth investors are willing to bet on young companies that show promise of becoming leaders in their industry.
The technology stocks, especially during the late 1990s, were the perfect example of growth stocks. Many of these young companies started with an idea and nothing more and now are large successful companies.
Of course, a great many more of those same technology companies started out with an idea and nothing more and ended up where they started. Which is to say that growth investing carries the risk that some of your investments are going to fail. As much as Americans like success stories, there are more failures than successes when it comes to market leadership.
Value Investors
Value investors look for the stocks that the market has overlooked. Value doesn’t mean cheap as in low per share price, but under priced relative to the value of the company.
These are stocks the market has passed over while chasing some other industry sector or more glamorous investments. The value investor looks for stocks with a low price/earnings ratio meaning the market is not willing to pay much in the way of a premium for the stock.
Of course, the value investor needs to make sure there in nothing wrong with the company that would warrant a low stock price other than neglect or market inattention. Assuming the company is solid, the value investor’s strategy is to buy and hold the stock, anticipating the future time when the market will recognize the company’s worth and bid the stock up to its true value.
Income Investors
Income investing is the most straight-forward of all philosophies and the most conservative. Income is the motivation and investors target companies paying high and consistent dividends.
People near or in retirement are fond of this strategy for obvious reasons. The companies that qualify for the income investor tend to be large and well-established. There is always some risk involved in investing in stocks, however this remains the most conservative of the investing philosophies.
If the stock price increases, that’s icing on the cake for the income investor who would probably trade some capital appreciation for a higher dividend.
Conclusion
These three investing philosophies take in a large number of investors, however it is not required that you fall purely in one camp or another. As a practical matter, you will likely modify your investing philosophy as your life circumstances change.
http://stocks.about.com/od/investingphilisophies/a/Investphilone.htm
A Look at Growth, Income, and Value Investing
By Ken Little, About.com
Developing an investing philosophy may seem like an academic exercise, however over time, it will help shape your thinking about the types of stocks that work for your portfolio.
This first of a two-part series looks at the three main investing philosophies:
Growth
Value
Income
Most investors fall into one or a combination of these investing philosophies.
Growth Investors
As the name implies, growth investors look for the rising stars. They are interested in companies that have high potential for earning growth. High earning growth invariable leads to high stock prices – at least in theory. Growth investors are willing to bet on young companies that show promise of becoming leaders in their industry.
The technology stocks, especially during the late 1990s, were the perfect example of growth stocks. Many of these young companies started with an idea and nothing more and now are large successful companies.
Of course, a great many more of those same technology companies started out with an idea and nothing more and ended up where they started. Which is to say that growth investing carries the risk that some of your investments are going to fail. As much as Americans like success stories, there are more failures than successes when it comes to market leadership.
Value Investors
Value investors look for the stocks that the market has overlooked. Value doesn’t mean cheap as in low per share price, but under priced relative to the value of the company.
These are stocks the market has passed over while chasing some other industry sector or more glamorous investments. The value investor looks for stocks with a low price/earnings ratio meaning the market is not willing to pay much in the way of a premium for the stock.
Of course, the value investor needs to make sure there in nothing wrong with the company that would warrant a low stock price other than neglect or market inattention. Assuming the company is solid, the value investor’s strategy is to buy and hold the stock, anticipating the future time when the market will recognize the company’s worth and bid the stock up to its true value.
Income Investors
Income investing is the most straight-forward of all philosophies and the most conservative. Income is the motivation and investors target companies paying high and consistent dividends.
People near or in retirement are fond of this strategy for obvious reasons. The companies that qualify for the income investor tend to be large and well-established. There is always some risk involved in investing in stocks, however this remains the most conservative of the investing philosophies.
If the stock price increases, that’s icing on the cake for the income investor who would probably trade some capital appreciation for a higher dividend.
Conclusion
These three investing philosophies take in a large number of investors, however it is not required that you fall purely in one camp or another. As a practical matter, you will likely modify your investing philosophy as your life circumstances change.
http://stocks.about.com/od/investingphilisophies/a/Investphilone.htm
Friday 14 November 2008
Stockpicking in a bear market using cash bailout potentials
Medium-term horizon
Long-term horizon
Cash bailout potentials
Fundamental strength of the business
Dividend
Capital appreciation potential
Privatisation potential
------------
Stockpicking in a bear market can be a hazardous business. Picking bottoms is not easy. Beware of intermediate bottoms and long-term bottoms.
One strategy during the bear market is to avoid risk and not hold stocks altogether. This is also the reason why we have a bear market at all --- risk aversion leads to lower volumes and the stock prices drop by gravity due to lack of support.
But yet, if we define risk* as the potential loss on investment over say 3-5 years, then buying stocks during a bear market could be a low-risk proposition indeed (because you are buying at a lower base and hence risk of losing is lessened over the long term), assuming that the bear cycle reverses in several years.
-----------
A good model for picking stocks in a bear market would be to examine the cash bailout potential of a stock over the medium to long term. The general idea is to view a stock with regard to its potential to allow the holder to eventually bail out. Under this umbrella of "cash bailouts" are:
This way of viewing a stock is especially useful in a bear market where most small-cap stocks may be thinly-traded and selling out of them may be difficult. Yet, illiquid small-caps often offer the best potential gains.
----------
Two-horizon approach to picking these stocks in a bear market are:
----------
Dividend streams tend to be more easily predictable especially for older companies, and high dividends, perhaps in excess of 5-10% yield, would be a good clearing mark for potential stockpicks.
Privatisation potential is harder to judge. Companies with the following:
----------
Long-term horizon
Under the long-term horizon, capital gains look like a more viable, and probably the most profitable, cash bailout avenue. This is of course the preferred bailout avenue of the long-term growth investor.
Two main issues must be considered with respect to stockpicking for this horizon:
For the second issue, it boils down to an examination of the company's accounts and operating business. The balance sheet (complete with footnotes) is the single most important source of information to make the judgment. Things to look out for would be:
------------
Ideally the selected stock would be satisfactory on all counts, both medium-term and long-term. Of course, it may be difficult to find one has multi-bagger potential and yet has clear indications of being taken over. Or it might pay miserly dividends.
The dividends and the fundamental strength of the business to negotiate through the recession override the other two factors, privatisation or capital appreciation, in terms of importance.
Dividends and fundamental strength of the business are the ones that are most easily judged from current and past data. These can be judged objectively, and provide a clear operating basis to fall back on should privatisation or capital appreciation not work out. In short, they provide a floor for the stock price. Look out for these two parameters most of all.
----------
*Risk
For long term investors with a longer investing horizon, we define risk as the potential loss on investment over say 3-5 years.
The standard definition of risk as price volatility is more appropriate for short-term leveraged players.
----------
Reference: http://mystockthoughts.blogspot.com/2008/11/stockpicking-in-bear-market.html
Long-term horizon
Cash bailout potentials
Fundamental strength of the business
Dividend
Capital appreciation potential
Privatisation potential
------------
Stockpicking in a bear market can be a hazardous business. Picking bottoms is not easy. Beware of intermediate bottoms and long-term bottoms.
One strategy during the bear market is to avoid risk and not hold stocks altogether. This is also the reason why we have a bear market at all --- risk aversion leads to lower volumes and the stock prices drop by gravity due to lack of support.
But yet, if we define risk* as the potential loss on investment over say 3-5 years, then buying stocks during a bear market could be a low-risk proposition indeed (because you are buying at a lower base and hence risk of losing is lessened over the long term), assuming that the bear cycle reverses in several years.
-----------
A good model for picking stocks in a bear market would be to examine the cash bailout potential of a stock over the medium to long term. The general idea is to view a stock with regard to its potential to allow the holder to eventually bail out. Under this umbrella of "cash bailouts" are:
- selling in the open market for capital gains
- dividends and
- privatisation.
This way of viewing a stock is especially useful in a bear market where most small-cap stocks may be thinly-traded and selling out of them may be difficult. Yet, illiquid small-caps often offer the best potential gains.
----------
Two-horizon approach to picking these stocks in a bear market are:
- the medium-term horizon (6-12 months) and
- the long-term horizon (3-5 years).
----------
Medium-term horizon
One should expect a lower potential returns for the medium term as opposed to the long-term horizon. Under the medium-term horizon, two main factors to look out for are
- privatisation potential and
- dividend yield.
Dividend streams tend to be more easily predictable especially for older companies, and high dividends, perhaps in excess of 5-10% yield, would be a good clearing mark for potential stockpicks.
Privatisation potential is harder to judge. Companies with the following:
- the usual "good earnings/business" criteria
- tight ownership under a strong cash-rich owner,
- an operating niche or desirable brand name and
- steady free cashflows (operating cashflow minus investing cashflow)
----------
Long-term horizon
Under the long-term horizon, capital gains look like a more viable, and probably the most profitable, cash bailout avenue. This is of course the preferred bailout avenue of the long-term growth investor.
Two main issues must be considered with respect to stockpicking for this horizon:
- firstly, how many times can the stock price appreciate;
- secondly, can the company's fundamentals survive the recession unblemished.
For the second issue, it boils down to an examination of the company's accounts and operating business. The balance sheet (complete with footnotes) is the single most important source of information to make the judgment. Things to look out for would be:
- heavy debt,
- contingent liabilities (under footnotes),
- consistently negative operating cashflows and
- insider selling.
------------
Ideally the selected stock would be satisfactory on all counts, both medium-term and long-term. Of course, it may be difficult to find one has multi-bagger potential and yet has clear indications of being taken over. Or it might pay miserly dividends.
The dividends and the fundamental strength of the business to negotiate through the recession override the other two factors, privatisation or capital appreciation, in terms of importance.
Dividends and fundamental strength of the business are the ones that are most easily judged from current and past data. These can be judged objectively, and provide a clear operating basis to fall back on should privatisation or capital appreciation not work out. In short, they provide a floor for the stock price. Look out for these two parameters most of all.
----------
*Risk
For long term investors with a longer investing horizon, we define risk as the potential loss on investment over say 3-5 years.
The standard definition of risk as price volatility is more appropriate for short-term leveraged players.
----------
Reference: http://mystockthoughts.blogspot.com/2008/11/stockpicking-in-bear-market.html
Subscribe to:
Posts (Atom)