What’s Wrong with the Stock Market?

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

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

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

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

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

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

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

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

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

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

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

The Top 5 Ways to Lose Money Investing

The Top 5 Ways to Lose Money Investing

By Dan Dzombak
October 11, 2010


It is heart-wrenching when you hear stories of investors losing their life savings for avoidable reasons. A recent story in Bloomberg BusinessWeek about Leona Miller, an 84-year-old retired beautician who invested in derivatives, got me thinking of ways people lose money in stocks and how to avoid them.

1. Investing in a product or business you don't understand

Leona Miller bought a structured note called a "reverse convertible note with a knock-in put option tied to Merck stock." Even I was unsure what this meant, and this is one of the more basic structured notes.

Leona collected a 9% coupon and the right to receive her initial capital back at maturity. However, if at any time Merck fell below a certain level (called the "knock-in" level), instead of giving Leona her money back, the bank could give her a predetermined number of shares of Merck. As long as Merck's stock didn't fall, Leona collected her 9%.

If Merck did fall, she would lose huge amounts of money. As you might expect, Merck's price fell below the "knock-in" price, and Leona was left holding stock worth 30% less than her initial investment. I am hard-pressed to believe any amateur investor could fully understand exactly what a "reverse convertible note with a knock-in put option" is. By investing in products you don't understand, you are setting yourself up for disaster.

Peter Lynch has said to invest in businesses and products you understand. Leona's broker wrote that she was familiar with Merck as they manufactured one of her medications. Baloney!

Many people own mortgages and are having trouble paying them off, but that doesn't mean they should go out and invest in Annaly Capital Management (NYSE: NLY) or Chimera Investments (NYSE: CIM), which are real-estate investment trusts (REITs) that specialize in buying up mortgage-backed securities and assessing the risk inherent in residential real estate.

If you don't have an understanding of how a business truly works, don't invest in it! There are many simple businesses out there that anyone can understand.

Two examples: Netflix (Nasdaq: NFLX) has warehouses with DVDs and mail them to people that pay a monthly fee. Waste Management (NYSE: WM) collects trash and recycling. It's that simple.

2. Speculating

If the price of a stock you own drops by 50% tomorrow, do you like the stock more? If not, you are speculating. For example, if Philip Morris (NYSE: PM) drops by half tomorrow, Godsend! It's a financially sound business, recurring revenues, and a strong brand. I would love to be able to buy shares at $25 compared to the $50 per share you can get them for today.

3. Ignoring incentives

If you give someone incentives they will game them, meaning: Do what is in their best interest.

Regular investors, you would never ask a used car salesman if you need another car, or a life insurance salesman if you need more life insurance, so why would you ask a stock broker for advice on stocks? They don't have a professional obligation to put your interests before theirs, what's known as a fiduciary responsibility. If you are looking for advice, seek out a reputable financial advisor and double check they aren't merely brokers under a different name. Make sure they put your interests first and aren't being paid extra based on what funds and products you choose.

Stock pickers, if management is paid and incentivized based on revenue goals or share price goals, management will game them. Be wary of investing in companies with perverse management incentives, and recognize how management will likely game their incentives. Invest in companies in which management owns a considerable stake and how your interests and managements interests are aligned. The best example is Berkshire Hathaway (NYSE: BRK-B), whose management of Warren Buffett and Charlie Munger own a combined 24% of the company's stock.

4. Ignoring valuation

Buying outrageously priced companies is setting yourself up for disaster. Investors' memories are very short; does anyone remember the tech stock crash? Baidu (Nasdaq: BIDU) is trading at 100 times earnings. If you want to earn 10% on your money annually, the company must grow its earnings 30% a year for 10 years! One misstep and Baidu will be crushed. Buying a stock hoping to sell it to the next sucker that comes along is a fool's game; buy undervalued companies.

5. Putting all your eggs in one basket

When I meet people who have 50% or more of their portfolio in their company's stock I shudder. While they may "know" their company will do well, if something goes wrong they can be walloped by losing their jobs at the same time their portfolios take a dive. Anyone who worked at Lehman, Enron, etc., can attest to this.

This list could be much longer, but five is good enough for now (No. 6 would be paying high fees). As Warren Buffett once said, "An investor needs to do very little right as long as he or she avoids big mistakes." Avoid these mistakes and prosper.



http://www.fool.com/investing/general/2010/10/11/the-top-5-ways-to-lose-money-investing.aspx

Enthusiasm on Wall Street Is Dangerous

Graham warned ". . . that while enthusiasm may be necessary for great accomplishments elsewhere, in Wall Street it almost invariable leads to disaster."

He didn't explain his rationale for this view, but enthusiasm destroys our critical faculties and leads us to believe we have a "sure thing". Coupled with greed, thinking an investment is a sure thing is most dangerous. We tend to bet heavily on the stock, forgetting the legendary Bernard Baruch's warning that every investment is something of a gamble. Moreover, enthusiasm leads a person into speculation, which Graham greatly deplored.

Speculative Excesses Drove Huge U.S. Market Rout

Speculative Excesses Drove Huge U.S. Market Rout: NuWave
By REUTERS
Published: May 6, 2010


Filed at 7:11 p.m. ET

NEW YORK (Reuters) - Thursday's sharp sell-off in U.S. stocks was sparked by nothing more than too many traders betting on energy, equity and metals markets going higher that then popped in a cascade of stop-loss selling, a hedge fund manager said.

A proprietary index that NuWave Investment Management LLC uses to gauge risk about 10 days ago posted its highest reading ever -- greater even than fall of 2008, said Troy Buckner, managing principal and co-founder at the Morristown, New Jersey-based hedge fund.

NuWave pared its exposure to only 40 percent of normal levels, mildly counter to the risk trade in general, he said.

"We were expecting a significant correction to most of the markets," Buckner said. "While we wouldn't claim to know the day, we recognize that periods like this generate our worst-risk profiles historically."

A wave of selling on Thursday knocked U.S. stocks down as much as 9 percent, pushed the euro to an almost 14 month-low and gold prices climbed to close to record highs.

NuWave gave a presentation about tail risk at Morgan Stanley in late April to an audience of about 120 investors. The presentation outlined the hedge fund's concerns that markets were leaning too heavily in one direction.

Buckner said while traders and others will point to any number of triggers or catalysts, such as Greece's debt woes or a fat thumb, as causing Thursday's rout, which included the Dow's biggest intraday point drop ever, he disagreed.

"I'll be surprised if that's the case. There's heavy pressure and uniformly excess positioning on the speculative side across multiple sectors, including equities as probably the worst," said Buckner, who also cited metals and energy.

After hitting lows produced by the worst financial crisis in 70 years, stocks jumped about 80 percent, copper prices nearly tripled and crude oil rose 250 percent driven by direction bets placed by speculators, Buckner said.

"Multiple sectors were exposed to these excesses," he said. "By our measurement these are greater speculative imbalances than even the fall of 2008."

NuWave has a special perspective on the market as it holds long-short and market-neutral positions, and as a commodity trading advisor, operates managed futures, Buckner said.

"From our perspective I think it's not surprising to us that there are massive corrections in store, and from today's action we didn't sense there was anything other than a cascade of speculative positions triggering stop losses."

(Reporting by Herbert Lash)

http://www.nytimes.com/reuters/2010/05/06/business/business-us-markets-rout-nuwave.html?_r=1&src=busln

There is ALWAYS a Speculative Component of Stock Investment. There is no sure thing.

There is no sure thing.  There is always risk in stock market investing.

 

Risks are inherent in buying stocks and the investors should have a clear idea of these risks when buying.

 

These risks are inseparable from the opportunities of profit that they offer.  Both of these must be allowed for in the investor's calcuations.

 

Investors should be aware of this speculative component of investing.  This should be distinguished from stock speculation explained below.

 

It is the investor's task to keep this speculative component of investing within minor limits and to be prepared financially and psychologically for adverse results that may be of short or long durations.  There is no way around this market effect.

 

Speculative Component of Stock Investment vs Stock Speculation

 

There is always a speculative component of investing when you buy and hold. 

 

However, this speculative component of investing should be distinguished from stock speculation.

 

Benjamin Graham, in his texbook, Security Analysis, attempted a precise formulation to distinguish the difference between investment and speculation.

"An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative."


This is what he wrote on speculation.

• Some speculation is necessary and unavoidable, for in many common stock situations, there are substantial possibilities for both profit and loss, and the risks therein must be assumed by someone.
• There is intelligent speculation as there is intelligent investing.
• There are also many ways in which speculation may be unintelligent:

1. speculating when you think you are investing;
2. speculating seriously instead of as a pastime, when you lack proper knowledge and skill for it; and
3. risking more money in speculation than you can afford to lose.

• Every nonprofessional who operates on margin (investing with money borrowed from your broker with your shares as collateral) should recognize that he is ipso facto speculating.
• And everyone who buys a so-called "hot" stock is either speculating or gambling.

 

Benjamin Graham recognised that speculation can be a lot of fun while you are ahead of the game.  He advised those who want to try their luck at it, to put aside a portion -- the smaller the better -- of your money in a separate fund for this purpose. 

• Never add more money to this account just because the market has gone up and profits are rolling.  (That's the time to think of taking money out of your speculative fund.)
• Never mingle your speculative and investment operations in the same account, nor in any part of your thinking.

Speculation and Manipulation in the Vietnamese Stock Market

Swimming with shark


Last updated: Saturday, December 5, 2009 |

VnnNews – Predatory stock ‘sharks’ hunt in packs, grouping together to invest big money small-time companies to boost share prices and feast on profits.

Big-time investment “teams” whose members are known as “sharks” have been fixing stock prices by investing via several different accounts to manipulate market sentiment, a Thanh Nien investigation has found.

Though Vietnamese law only allows stock market investors to open one account at one brokerage firm, sharks use accounts opened by their friends and family to place buy and sell orders.

With combined financial resources of up to thousands of billions of dong (dozens of millions of dollars) bolstered by leverage from brokers, a team can fix the price of any stock with a flood of sell or buy orders.

Saigon Securities Inc. stocks were hit by a team of sharks earlier this year. The predators were able to push the price of the major blue-chip public company up nearly four-fold from mid March to early June, a shark in Hanoi told Thanh Nien.

But in many cases, the sharks focus less conspicuously on small or newly listed stocks. Thanh Nien found out that sharks had doubled stock prices at least three Hanoi-listed Song Da Corporation subsidiaries, as well Vinavico Company and the Education and Finance Investment Company, for short periods of time this year.

A shark told Thanh Nien that small companies with a chartered capital of less than VND50 billion were often the targets of big predators. The ideal firms to “hit,” he said, were those with 50 percent stakes owned by board members and other executives who are not allowed to sell within six months after the issue. He said Vietnam’s stock environment was perfect for sharks because it nurtures rumors that easily fuel price hikes.

At such companies, board members and executives’ relatives usually hold another 20 percent, so only about 30 percent of shares are actually traded in the market, a broker whose clients are mostly sharks told Thanh Nien.

“[Sharks] only need to buy about 1-2 million shares to be able to manipulate the market prices of that stock,” said the broker, who refused to be named.

The sharks’ manipulative power has become so strong that small investors, who once based their decisions on foreign investors‘ moves, now bet on shark intelligence.

VIPs

It’s no wonder that many brokerage companies who enjoy hefty fees from big-time investors welcome sharks as VIPs, offering them many privileges that in turn help multiply the sharks’ strength.

Since many brokerages are owned by banks, they are also able to offer attractive leverages. Most sharks only need to provide 20-30 percent of a security’s value for a purchase, the rest is funded by the brokers. In some special cases, the leverage could be as high as 9 to 1.

“It’s the leverage that helps create ‘super investors.’ Cash can’t,” a Hanoi-based shark told Thanh Nien, adding that very few investors actually possess hundreds of billions of dong in cash.

While normal investors can only sell a stock four days after they buy it, many brokers also let sharks sell a stock within three days of purchase, allowing them to make quick profits or retreat in times of strong market fluctuation.

Sharks and brokers have also joined hands to spread rumors and “reveal” information that can help them fix prices.

Such “intelligence” is in fact highly valued by many opportunistic investors who do not care about studying the official statistics of listed companies in which they want to buy stocks.

One such investor, known only as N.V.T., said the purchases made on “mainstream” stock consulting are like “buying government bonds.”

“Following sharks is risky but hugely profitable,” he said.

The limits of power

However, one shark, who preferred not to be named, told Thanh Nien that the big investment teams were in fact not that powerful.

“[Big-time investors] can fix prices successfully mostly because they follow market trends to inflate prices of a certain stocks. It’s not that they can manipulate the market at will,” she said.

“When the market becomes really bearish, not even the big-timers, nor even god, can push stock prices. Fleeing is the best policy then.”

Indeed, many sharks admitted that the bear market since late October had left many of them “soaked in blood” as their leverages – their beloved weapon – turned out to be double-edged swords.

Black Friday

The 23rd of October this year is a painful memory for many sharks. The VN-Index has been bearish since then, falling from the peak of 626,14 to under 500 this month. Within just 10 days of that dark Friday, the index plummeted by nearly 60 points.

“For 10 consecutive days, I lost VND1 billion each. It was so painful,” said a shark in Hanoi known as H. Stock brokerage companies, which had treated big investors like kings, began preying upon the predators to recover their loans.

H. said leaders at the brokerage where she had accounts told the media that they did not force investors to sell when the VNIndex fell.

“Indeed they did not have to force anyone,” H. said with sarcasm. “On their own, they sold investors’ stocks to get claim their debts.”

Many investors who had been leveraged 4-to-1 said their brokers sold their stocks after just two bearish sessions. This practice usually ignites a vicious circle: other investors, seeing bigger ones selling en masse, also rush to sell, which drives prices further into the deep south and thus inflicts even more damage to the sharks’ pocketbooks.

At the same time, the central bank recently asked brokers to strengthen a ban on short-selling stocks, reiterating that investors can sell only stocks that they own in their accounts, meaning the soonest they can sell a stock is four days after they buy it, nullifying the sharks’ advantage of first sale.

As a result, sharks have “bled all over the floor,” said an investor who requested anonymity.

Fall from grace

In a bearish market, big speculators are always ready to break their relations with, or even betray, their “teammates,” brokers told Thanh Nien.

“When the market is bullish, they work closely together to push prices and fix prices. Everyone is too happy looking in the same direction. But when the wind turns, everyone cares only for his fate,” a deputy CEO of a Ho Chi Minh City-based brokerage said.

Some sharks told Thanh Nien their “shoals” broke a few days around October 23 when some “teammates” secretly sold their stocks at low prices to cut losses while the teams had agreed to push prices to higher levels.

In one such case, a big-time team agreed to push Ha Nam Mineral Company (KSH) stock prices to VND100,000 apiece, a shark told Thanh Nien. But some members who sensed a market U-turn coming, secretly sold the stocks at just VND82,000. The team’s whole plot then collapsed, as did the stock price, which now stands at just around VND50,000.

Intelligence on big-time teams’ plans to fix prices, once eagerly sought, embraced and followed by small investors and even some brokers, is now shunned as fraudulent rumors the biggies set up to sell their own stocks.

In fact, the trust in the “biggies’ stock market control power” vanished within a week of October 23, some investors said. During that week, small investors more than once pinned high hopes on the return of the bull market based on rumors that sharks would push the prices of a certain number of stocks. It turned out later, however, that it was a trick the sharks used to clear their own stocks.

VietNamNet/Thanh Nien


----

Sharks a valuable part of the food chain: Brokerage director

Le Dinh Ngoc, general director of the Hanoi-based Thang Long Securities Company said “shark” investors played a valuable role on the market, describing them as “professional investors.”

“They create demand. They merely invest in stocks and do not do anything else.”

Ngoc said the risks that these investors caused to the market should be considered side by side with the contributions they make.

His counterpart Nguyen Dinh Phong from VNDirect Securities Joint Stock Co., also in Hanoi, said shark investors created high liquidity and made trading more active.

These investors are also believed to enrich their brokerages as they pay brokering service fees of VND500 million to VND1 billion a month, a senior executive at another brokerage company said.

However leaders from other brokerages such as Bao Viet and Ban Viet said brokerages that offer privileges to VIP investors have robbed law-abiding brokerages and have helped big investors knock out smaller ones.

Nguyen Hoang Long, a small investor in Hanoi, said “When the market was rising, I could never buy although I tried many times, and I couldn’t sell either when the market was going down.”

Another investor in Hanoi named Le Thi Huong said in anger that “the stock market should be a transparent place that offers equal chances for anyone.”

A senior official from the State Securities Commission, who requested anonymity, told Thanh Nien “It is not that we don’t know about the pricing tricks, but investigating these claims and finding evidence to punish people involved is not easy.

“The investors can say they bought a certain stock because they found it promising. That’s not violating the law, for sure.”

A senior investigative officer from the commission said an investigation was possible but needed to be planned slowly and carefully, otherwise the commission would be shamed if both investors and brokerages manage to evade punishment.


http://www.vnnnews.net/swimming-with-shark

Differences between investment and speculation

Differences between investment and speculation

1.  Investment:  Investment is rationally based on the knowledge of past share price behaviour.  From such knowledge, it is possible to compute the probability of future return. 

• A common method of investment analysis is to study the past range of PER or DY of a particular share or a class of shares. 
• From this study of its past price range, we can predict the likelihood of its price being out of this range in the future. 
• By comparing its current price with the expected future price range (future price = future PER x future earnings) we know whether the current price is too high or too low and take the necessary action accordingly.

Speculation:  Speculation is purely based on the HOPE that the future price will be higher rather than on anything tangible.

2.  Investment:  Investment requires an investor to do some work before hand and decisions are made based on known facts and figure. 

• Such work typically may consist of estimating future level of Earnings Per Share and computing the past range of the PER. 
• By multiplying the future EPS with the likely PER, we have an estimate of the future level of price. 
• If the present price is very low compared with the future price, we buy and vice versa.

Speculation:  Speculation is usually based on wild rumours and unsubstantiated hearsays which cannot be checked for accuracy.  Undoubtely, speculation is a lot easier than investment but one tends to reap what one sows.

3.  Investment: Investment is made for the long term (i.e. two years or more) based on the idea that one is much more certain when one is trying to predict the cumulative results of many daily movement.  Once invests with the knowledge that over the long run, the real investors will always make a gain.

Speculation: Speculation is usually for the short run (i.e three months or less unless one is caught whence a speculator is then forced to become an investor), based on the idea that certain events may result in a rise in price (bonus, rights, takeovers, and others).

4.  Investment: Over a long period of time, true investment tends to produce a positive result.  Based on many years of research in the US and Europe, Long Term Investment consistently produced much higher return than fixed deposit or the inflation rate.  The Malaysian experience has mirrored the Western experience.

Speculation: Since speculation is not based on anything concrete, its result is not at all predictable.  Speculation can occasionally produce very high gains just as it can produce very high losses.  Over a long period of time, speculation is most unlikely to produce better return than true investment. 

5.  Investment: True investors can sleep soundly at night since they have a fairly good idea of the possible extent of their loss and gain before hand. Besides, since they are investing for the long term, they can forget about short term movements and ignore the market most of the time. 

Speculation: Speculation is likely to lead to many sleepless nights and anxious days since its result is so uncertain.  The speculator will have to be always on the alert to take the necessary quick action to catch the right moment. 

There is intelligent speculation as there is intelligent investing.

April 14, 2009
Wellcare Group – An Intelligent Speculation?

Filed under: From the co-founders — Tags: Marcelo Lima, WCG, Wellcare Group — Jane Scottsdale @ 1:11 pm

Common stock investing is inherently risky, and those risks cannot be divorced from the rewards that come with them. Often, it isn’t easy to separate the speculative from the investment component of a common stock commitment. On this topic, Ben Graham, author of the classic The Intelligent Investor, has written most clearly:

Outright speculation is neither illegal, immoral, nor (for most people) fattening to the pocketbook. More than that, some speculation is necessary and unavoidable, for in many common-stock situations there are substantial possibilities of both profit and loss, and the risks therein must be assumed by someone. There is intelligent speculation as there is intelligent investing. But there are many ways in which speculation may be unintelligent. Of these the foremost are:
(1) speculating when you think you are investing;
(2) speculating seriously instead of as a pastime, when you lack proper knowledge and skill for it; and
(3) risking more money in speculation than you can afford to lose.


With that caveat, here’s Wellcare Group (WCG), a stock that has a reasonable chance of going higher once its legal problems are resolved and its earnings normalized. As such, it may present an intelligent speculation.

First, a quick background. Wellcare is a healthcare management organization focused on Medicare and Medicaid, government-run entitlement programs for the elderly and low-income population. It has over 2.5 million members enrolled in its programs nationwide, with a large portion of them in Florida.

Its stock hovered around $120 per share when in October 2007 about 200 FBI agents raided its Tampa campus. The stock collapsed to $40, wiping out $3.3bn in shareholder value. The uncertainty was large; there was no official word of what the FBI raid was for, although newspaper reports stated that one of Wellcare’s subsidiaries had overbilled the government by $35m. In this context, the share price collapse was wildly overdone.

A quick resolution of the problem didn’t happen. Instead, the company went “dark,” not filing its quarterly and yearly financial statements and risking stock exchange delisting for its non-compliance. Periodic SEC filings kept shareholders apprised of the slow progress, but it wasn’t until early 2009 that things became clearer. The company finally filed all of its late financial statements and set a shareholder’s meeting – the first since the FBI raid – for July 30.

Wellcare is well capitalized. As of 12/31/2008, it had about $1.2 billion in cash and $153 million in debt. This debt proved to be another Achilles heel for the stock. When the company reported in 2008 that it was in technical default for not having filed its financial statements, the price dropped precipitously yet again. Fairholme Capital, which owns nearly 20% of the stock, bought a majority of the debt, likely in a move to protect its equity investment.

Throughout this misadventure, the stock has swung wildly, hitting a low of $6.12 in November and $6.23 in March of this year. Yet Wellcare’s core business remains sound, generating substantial free cash flows. The exact number for 2008 involves reversing a goodwill write-down and removing a non-recurring $103m in litigation expenses, but a normalized estimate of $4 in free cash flow per share is probably on the conservative side. While there is significant regulatory uncertainty surrounding its Medicare and Medicaid businesses, at the current price of around $13.80, it’s hard to find a way to lose.

Yet all of these uncertainties – particularly those surrounding the FBI investigation – are still large, which is where the speculative component of this investment comes in. There might be a probability of the government’s penalties being larger than expected. The company is also facing various lawsuits related to its illegal activities, including a class-action lawsuit. Defending against these will cost management’s time and shareholders’ cash.

On the other hand, Wellcare may soon begin conducting conference calls with shareholders and analysts, may soon settle with the government by paying a fine, and may ultimately get sold to a larger competitor, such as UnitedHealth Group. After it fired its disgraced former management, the board brought in Charles Berg, formerly a UnitedHealth executive, Oxford Health Plans CEO and “deal guy.”

With these factors in mind, and taking into account Graham’s three points above, Wellcare may seem like an intelligent speculation after all.

Marcelo P. Lima is a securities analyst. He may be reached at MPL4@cornell.edu

http://blog.valueinvestingcongress.com/2009/04/14/wellcare-group-%e2%80%93-an-intelligent-speculation/
http://blog.valueinvestingcongress.com/?utm_source=VIC&utm_medium=W&utm_campaign=BLOGLA09T

Price is what you pay, value is what you get.

If stocks are bought without reference to value, they will in turn be sold without reference to value.

----

When prices increase at a greater rate than can be justified by business performance, they must eventually stagnate until the value catches up or they must retreat in the directions of the value.

Only when a stock is bought at less than its value can price increases that exceed incremental increases in value be justified.

Investing is the intention to seek a required rate of return (RR) relative to risk, based on an assessment of value.

Investing in stocks is not about buying scrip that will go up and down in price, but about investing long term in a sound business that represents good value at its present price.

Margin of Safety as a Criterion of Investment versus Speculation

Margin of Safety concept can be used to distinguish an investment from a speculation

1. Since there is no single definition of investment in general acceptance, authorities have the right to define it pretty much as they please. Many of them deny that there is any useful or dependable difference between the concepts of investment and of speculation.
2. We think this skepticism is unnecessary and harmful. It is injurious because it lends encouragement to the innate leaning of many people toward the excitement and hazards of stock-market speculation. We suggest that the margin-of-safety concept may be used to advantage as the touchstone to distinguish an investment operation from a speculative one.
3. Probably most speculators believe they have the odds in their favour when they take their chances, and therefore they may lay claim to a safety margin in their proceedings.
4. Each one has the feeling that the time is propitious for his purchase, or that his skill is superior to the crowd’s, or that his adviser or system is trustworthy.
5. But such claims are unconvincing. They rest on subjective judgement, unsupported by any body of favourable evidence or any conclusive line of reasoning.
6. We greatly doubt whether the man who stakes money on his view that the market is heading up or down can ever be said to be protected by a margin of safety in any useful sense of the phrase.
7. By contrast, the investor’s concept of the margin of safety – as developed earlier in this chapter – rests upon simple and definite arithmetical reasoning from statistical data. We believe, also, that it is well supported by practical investment experience.
8. There is no guarantee that this fundamental quantitative approach will continue to show favourable results under the unknown conditions of the future. But, equally, there is no valid reason for pessimism on this score.
9. Thus, in sum, we say that to have a true investment there must be present a true margin of safety.
10. And a true margin of safety is one that can be demonstrated by figures, by persuasive reasoning, and by reference to a body of actual experience.

Ref: Intelligent Investor by Benjamin Graham

Five ways to profit from oil

Five ways to profit from oil
Analysts warned last week that the average price of fuel could reach 115p a litre over the next few months - motorists will lose out but investors could profit from this rise.

By Rosie Murray-West
Published: 12:40PM BST 08 Jun 2009

Motorists are facing a summer of rising petrol costs, thanks to recent increases to the price of oil. Analysts warned last week that the average price of fuel could reach 115p a litre over the next few months.

Goldman Sachs, the city bank, has raised its forecast on the price that oil will reach by the end of 2009, which has already convinced many speculators to take the plunge. If you think that oil has further to go, however, there are still ways that you can benefit – rather than just fuming at the petrol pumps. Here are five ways to speculate on oil.


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1. Buy the big boys
BP and Shell are Britain's two big oil and gas companies. Both have been popular buys due to their high dividend yields and exposure to the price of oil. Neither company is expected to cut its dividend in the coming months, although this is likely to lead to an increase in borrowing.

Potential investors in Shell should note that UK investors need to buy Shell's 'B' Class shares.

2. Consider the minnows
BP and Shell may be the supertankers of the oil market, but you can also buy shares in other smaller companies which will also give you exposure to this market.

Many of them have already enjoyed healthy price rises, however, and you may feel that there is little scope for future gains. Tullow Oil and Soco International have recently seen huge rises in price. Dragon Oil and Bowleven are other possibilities in this sector.


3. Look at funds
If you invest in funds, exposure to the oil price is actually quite hard to avoid as commodities and resources companies make up about a third of the FTSE Index. However, some are more heavily exposed than others. Two BlackRock funds – BlackRock Commodities Income investment trust and the Blackrock World Energy fund – have large oil investments.

Investec Global Energy is another hefty investor in a combination of oil producers, refiners and services companies. If you are looking to take risk in this area, the CF Junior Oils Trust invests only in smaller gas exploration and production companies, including many of the minnows mentioned above.


4. Try an ETF or ETC
Exchange Traded Funds and Commodities have become increasingly popular with investors seeking easy ways to take a punt on commodities or indices. An ETF is a relatively low-cost way of gaining exposure to the price of a commodity or to a specific index for either the short or long term.

They can be bought through stockbrokers. Lyxor, for instance, offers the Lyxor DJ Stoxx 600 Oil and Gas ETF, or ETF Securities offers a crude oil fund.

However, buyers of these funds should beware an effect known as 'contango', which occurs when oil prices for future delivery are higher than the current oil price. This effect has caused erosion on funds that invest in near-term futures contracts based on the price of oil, so ETF investments may not be as simple as they seem. Do consult a stockbroker if you are keen on investing in ETFs.

5. Spread betting
Many investors have been seduced by spread betting as a low-cost way of gambling on the price of commodities, but you should always beware the risks. With spread betting, you would take a bet on the future movement of the oil price, but could lose out very rapidly if the price goes the other way.

Companies such as City Index, Cantor Finspreads or IG will allow you to take a bet on the future price of Brent crude. However, do not indulge in spread betting unless you are sure you understand the implications and have appropriate measures in place to limit your losses.

Speculation is usually only successful when it is in line with the fundamentals

Speculators are often unfairly criticised. The market needs them. Speculators add important liquidity.

Those who invest in small stocks will know. Often these stocks would not have much daily turnovers if it were not for speculators. The longer term holders of these stocks do not buy or sell very often. For those wishing to find buyers or sellers of these stocks, it is a great benefit to have speculators as they are more active.

Speculators also play an important role in taking over risk that others don't want. Wheat farmers, may sell their crop well before harvest at a fixed price for a future delivery date. That way, they can remove the risk that there is a bumper season and an oversupply that forces prices lower.

Speculators are often criticised for pushing prices to unrealistic levels. This argument is flawed. In fact, speculators are usually punished when they do this, because if they are wrong about the real values, they are usually the big losers. The tech boom and bust, where perhaps it was speculators who drove prices to very high levesl, is a great example. Most of them paid very heavily when market prices crashed to a fraction of the higher levels. Though what a great opportunity it was for the more savvy investors to sell near the highs.

So, speculation is usually only successful when it is in line with the fundamentals, and when it is pushing prices to a level that more closely reflects fair value.

Buying low, selling lower!

Kerkorian sells off Ford shares at deep loss


Reuters – Billionaire investor Kirk Kerkorian leaves the Roybal Federal Building in Los Angeles August 20, 2008. …

DETROIT (Reuters) – Billionaire investor Kirk Kerkorian has sold off all of his remaining shares of Ford Motor Co, completing a retreat from a high-profile stake in the No. 2 U.S. automaker that cost him hundreds of millions of dollars.
A spokeswoman for Kerkorian's investment firm, Tracinda Corp, said that the firm's remaining Ford shares had been sold. A spokesman for Ford had no comment on the development.
Tracinda, which briefly ranked as Ford's largest outside investor, said in a regulatory filing in October that it had begun working with bankers to sell the 133.5 million shares of the No. 2 U.S. automaker it still held at that time.
It was not immediately clear when Tracinda had completed those remaining sales of Ford stock over the past two months.
The pullout from Ford by Kerkorian caps a two-year period during which the activist investor took a run at all three Detroit-based car companies as they struggled to restructure.
Kerkorian, 91, previously held a nearly 10 percent stake in General Motors Corp and made a failed bid for Chrysler LLC last year.
Since October, he has been cutting his losses on a $1 billion investment in Ford that had lost most of its value.
It was not immediately clear how deep Kerkorian's losses on the Ford investment were. But even if Tracinda sold all its remaining shares at the recent high for Ford stock, the firm would have been facing a loss of some $475 million based on its average acquisition cost for the shares.
If the firm had sold out at the bottom of the market for Ford stock in November, it would have lost more than $800 million.
Kerkorian surprised analysts and investors in April when he began buying Ford shares and spent more than $1 billion to take a stake in the automaker at an average price per share of $7.10.
At the peak of his investment, Kerkorian held a 6.5 percent stake in Ford. In June, he had also offered to support the automaker's turnaround efforts with an infusion of additional capital.
Ford has been widely considered to be the best-positioned of the three Detroit automakers at a time when all three have been hit hard by declining sales and tight credit.
When GM and Chrysler negotiated $17.4 billion of emergency loans from the U.S. government earlier this month, Ford held back, saying it expected to be able to weather the downturn on its own.
But conditions across the auto industry have taken a dramatic turn for the worse since September when credit suddenly tightened for both car shoppers and dealers.
In late October, Tracinda began selling Ford shares at $2.43, representing a loss of almost 66 percent from what the fund paid on average.
Since then, Ford's shares have traded between a low of $1.02 in November and a high of $3.54 earlier this month.
Ford shares closed down 3 percent on Monday to end the New York trading day at $2.22.
The Ford family holds slightly less than 3 percent of the automaker's shares but controls 40 percent of the voting power through a separate class of shares.
Kerkorian's offer of additional capital for Ford had been seen as an endorsement of the company's strategy and management under Chief Executive Alan Mulally.
But Kerkorian's record as an activist investor had also raised questions earlier this year about whether his investment could be a threat to the Ford family's continued control of the automaker.
(Reporting by Kevin Krolicki; editing by Phil Berlowitz and Matthew Lewis).

http://news.yahoo.com/s/nm/20081229/bs_nm/us_ford_kerkorian

A Young Analyst on Wall Street, Benjamin Graham

An Enterprising Young Analyst on Wall Street by the name of Benjamin Graham

In the early 1930s an enterprising young analyst on Wall Street by the name of Benjamin Graham noticed that the vast majority of hotshot stock pickers on Wall Street didn’t care at all about the long-term economics of the businesses that they are busy buying a selling. All they cared about was whether the stock prices, over the short run, were going up or down.

Graham also noticed that these hot stock pickers, while caught up in their speculative frenzy, would sometimes drive up the stock prices to ridiculous levels in relation to the long-term economic realities of the underlying businesses. He also realized that these same hotshots would sometimes send stock prices spiraling to insane lows that similarly ignored the businesses’ long term prospects. It was in these insane lows that Graham saw a fantastic opportunity to make money.

Graham reasoned that if he bought these “oversold businesses” at prices below their long-term intrinsic value, eventually the market would acknowledge its mistake and revalue them upward. Once they were revalued upward, he could sell them at a profit. This is the basis for what we know today as value investing. Graham was the father of it.

What we have to realize, however, is that Graham really didn’t care about what kind of business he was buying. In his world every business had a price at which it was a bargain. When he started practicing value investing back in the 1930s, he was focused on finding companies trading at less than half of what they held in cash. He called it “buying a dollar for 50 cents.” He had other standards as well, such as never paying more than 10 times a company’s earnings and selling the stock if it was up 50%. If it didn’t go up within 2 years, he would sell it anyway.

Yes, his perspective was a bit longer than that of the Wall Street speculators, but in truth he had zero interest in where the company would be in ten years.

Also read:
Warren seeks Companies with Durable Competitive Advantage
Young Warren Buffett learned under Graham
A Young Analyst on Wall Street, Benjamin Graham
Knowing the Stock Market and its Major Players
The Time To Sell
The Right Time To Buy A Fantastic Business
Warren Buffett’s Concept of Equity Bond in action....
Warren Buffett's concept of Equity Bond

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

Investment, speculation and gambling

It is commonly thought that investment, is good for everybody and at all times. Speculation, on the other hand, may be good or bad, depending on the conditions and the person who speculates.

It should be essential, therefore, for anyone engaging in financial operations to know whether he is investing or speculating and, if the latter, to make sure that his speculation is a justifiable one.

Investment, speculation and gambling (Security Analysis, Ben Graham.):

1. Graham defined investment thus: An INVESTMENT OPERATION is one which, upon THOROUGH ANALYSIS, promises SAFETY OF PRINCIPAL and a SATISFACTORY RETURN. Operations NOT meeting these requirements are speculative.

The difference between investment and speculation, when the two are thus opposed, is understood in a general way by nearly everyone; but it can be difficult to formulate it precisely. In fact something can be said for the cynic's definition that an investment is a successful speculation and a speculation is an unsuccessful investment.

The failure properly to distinguish between investment and speculation was in large measure responsible for the market excesses and calamities that ensued, as well as, for much continuing confusion in the ideas and policies of would-be investors.

2. Graham's addition criterion of investment: An investment operation is one that can be justified on BOTH QUALITATIVE and QUANTITATIVE grounds.

Investment must always consider the PRICE as well as the QUALITY of the security.



Main points:______________

INVESTMENT OPERATION: rather than an issue or a purchase.

PRICE: is frequently an essential element, so that a stock (and even a bond) may have investment merit at one price level but not at another.

DIVERSIFICATION: An investment might be justified in a group of issues, which would not be sufficiently safe if made in any one of them singly.

ARBITRAGE AND HEDGING: it is also proper to consider as investment operations certain types of arbitrage and hedging commitments which involve the sale of one security against the purchase of another. In these rather specialised operations the element of SAFETY is provided by the combination of purchase and sale.

THOROUGH ANALYSIS: the study of the facts in the light of established standards of safety and value, including all quality of thoroughness.

SAFETY: The SAFETY sought in investment is not absolute or complete; the word means, rather, protection against loss under all normal or reasonably likely conditions or variations. A safe stock is one which holds every prospect of being worth the price paid except under quite unlikely contingencies. Where study and experiences indicate that an appreciable chance of loss must be recognized and allowed for, we have a speculative situation.

SATISFACTORY RETURN: is a wider expression than "adequate income", since it allows for capital appreciation or profit as well as current interest or dividend yield. "Satisfactory" is a subjective term; it covers any rate or amount of return, however low, which the investor is willing to accept, provided he acts with reasonable intelligence.

_______________


For investment, the future is essentially something to be guarded against rather than to be profited from. If the future brings improvement, so much the better; but investment as such cannot be founded in any important degree upon the expectation of improvement.

Speculation, on the other hand, may always properly – and often soundly – derive its basis and its justification from prospective developments that differ from past performances.

GAMBLING: represents the creation of risks not previously existing – e.g. race-track betting.

SPECULATION: applies to the taking of risks that are implicit in a situation and so must be taken.

INTELLIGENT SPECULATION: the taking of a risk that appears justified after careful weighing of the pros and cons.

UNINTELLIGENT SPECULATION: risk taking without adequate study of the situation.