Mergers and Acquisitions: Introduction
By Ben McClure
Mergers and acquisitions (M&A) and corporate restructuring are a big part of the corporate finance world. Every day, Wall Street investment bankers arrange M&A transactions, which bring separate companies together to form larger ones. When they're not creating big companies from smaller ones, corporate finance deals do the reverse and break up companies through spinoffs, carve-outs or tracking stocks.
Not surprisingly, these actions often make the news. Deals can be worth hundreds of millions, or even billions, of dollars. They can dictate the fortunes of the companies involved for years to come. For a CEO, leading an M&A can represent the highlight of a whole career. And it is no wonder we hear about so many of these transactions; they happen all the time. Next time you flip open the newspaper’s business section, odds are good that at least one headline will announce some kind of M&A transaction.
Sure, M&A deals grab headlines, but what does this all mean to investors? To answer this question, this tutorial discusses the forces that drive companies to buy or merge with others, or to split-off or sell parts of their own businesses. Once you know the different ways in which these deals are executed, you'll have a better idea of whether you should cheer or weep when a company you own buys another company - or is bought by one. You will also be aware of the tax consequences for companies and for investors
Read more: http://www.investopedia.com/university/mergers/#ixzz2CtycWtUB
Mergers and Acquisitions: Definition
The Main Idea
One plus one makes three: this equation is the special alchemy of a merger or an acquisition. The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies - at least, that's the reasoning behind M&A.
This rationale is particularly alluring to companies when times are tough. Strong companies will act to buy other companies to create a more competitive, cost-efficient company. The companies will come together hoping to gain a greater market share or to achieve greater efficiency. Because of these potential benefits, target companies will often agree to be purchased when they know they cannot survive alone.
Distinction between Mergers and Acquisitions
Although they are often uttered in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things.
When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded.
In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks are surrendered and new company stock is issued in its place. For example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler, was created.
In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it's technically an acquisition. Being bought out often carries negative connotations, therefore, by describing the deal as a merger, deal makers and top managers try to make the takeover more palatable.
A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly - that is, when the target company does not want to be purchased - it is always regarded as an acquisition.
Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target company's board of directors, employees and shareholders.
Synergy
Synergy is the magic force that allows for enhanced cost efficiencies of the new business. Synergy takes the form of revenue enhancement and cost savings. By merging, the companies hope to benefit from the following:
Staff reductions - As every employee knows, mergers tend to mean job losses. Consider all the money saved from reducing the number of staff members from accounting, marketing and other departments. Job cuts will also include the former CEO, who typically leaves with a compensation package.
Economies of scale - Yes, size matters. Whether it's purchasing stationery or a new corporate IT system, a bigger company placing the orders can save more on costs. Mergers also translate into improved purchasing power to buy equipment or office supplies - when placing larger orders, companies have a greater ability to negotiate prices with their suppliers.
Acquiring new technology - To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a smaller company with unique technologies, a large company can maintain or develop a competitive edge.
Improved market reach and industry visibility - Companies buy companies to reach new markets and grow revenues and earnings. A merge may expand two companies' marketing and distribution, giving them new sales opportunities. A merger can also improve a company's standing in the investment community: bigger firms often have an easier time raising capital than smaller ones.
That said, achieving synergy is easier said than done - it is not automatically realized once two companies merge. Sure, there ought to be economies of scale when two businesses are combined, but sometimes a merger does just the opposite. In many cases, one and one add up to less than two.
Sadly, synergy opportunities may exist only in the minds of the corporate leaders and the deal makers. Where there is no value to be created, the CEO and investment bankers - who have much to gain from a successful M&A deal - will try to create an image of enhanced value. The market, however, eventually sees through this and penalizes the company by assigning it a discounted share price. We'll talk more about why M&A may fail in a later section of this tutorial.
Varieties of Mergers
From the perspective of business structures, there is a whole host of different mergers. Here are a few types, distinguished by the relationship between the two companies that are merging:
Horizontal merger - Two companies that are in direct competition and share the same product lines and markets.
Vertical merger - A customer and company or a supplier and company. Think of a cone supplier merging with an ice cream maker.
Market-extension merger - Two companies that sell the same products in different markets.
Product-extension merger - Two companies selling different but related products in the same market.
Conglomeration - Two companies that have no common business areas.
There are two types of mergers that are distinguished by how the merger is financed. Each has certain implications for the companies involved and for investors:
Purchase Mergers - As the name suggests, this kind of merger occurs when one company purchases another. The purchase is made with cash or through the issue of some kind of debt instrument; the sale is taxable.
Acquiring companies often prefer this type of merger because it can provide them with a tax benefit. Acquired assets can be written-up to the actual purchase price, and the difference between the book value and the purchase price of the assets can depreciate annually, reducing taxes payable by the acquiring company.
Consolidation Mergers - With this merger, a brand new company is formed and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger.
Acquisitions
As you can see, an acquisition may be only slightly different from a merger. In fact, it may be different in name only. Like mergers, acquisitions are actions through which companies seek economies of scale, efficiencies and enhanced market visibility. Unlike all mergers, all acquisitions involve one firm purchasing another - there is no exchange of stock or consolidation as a new company. Acquisitions are often congenial, and all parties feel satisfied with the deal. Other times, acquisitions are more hostile.
In an acquisition, as in some of the merger deals we discuss above, a company can buy another company with cash, stock or a combination of the two. Another possibility, which is common in smaller deals, is for one company to acquire all the assets of another company. Company X buys all of Company Y's assets for cash, which means that Company Y will have only cash (and debt, if they had debt before). Of course, Company Y becomes merely a shell and will eventually liquidate or enter another area of business.
Another type of acquisition is a reverse merger, a deal that enables a private company to get publicly-listed in a relatively short time period. A reverse merger occurs when a private company that has strong prospects and is eager to raise financing buys a publicly-listed shell company, usually one with no business and limited assets. The private company reverse merges into the public company, and together they become an entirely new public corporation with tradable shares.
Regardless of their category or structure, all mergers and acquisitions have one common goal: they are all meant to create synergy that makes the value of the combined companies greater than the sum of the two parts. The success of a merger or acquisition depends on whether this synergy is achieved.
Read more: http://www.investopedia.com/university/mergers/mergers1.asp#ixzz2Ctzq6VA5
Thursday 22 November 2012
Wednesday 21 November 2012
Don't Fall For False Security Of 'Defensive' Stocks
In times of uncertainty, and in preparation for market declines,Wall Street’s advice to investors is always the same. The market cannot be timed, and cash does not pay enough interest to even keep up with inflation. So investors need to remain fully invested and continue to buy stocks, but can protect themselves by shifting to ‘defensive’ stocks and sectors.
No matter what happens to the economy people will still have to eat, drink, and take their medicines. So food, beverage, and drug companies will continue to do well in an economic or market downturn, and the stocks of utilities and other solid companies that pay high dividends will also do well since the dividends will help offset a decline in the stock prices.
Although consumers will still have to eat, drink, and take their medicines, investors will not have to continue to value the earnings of those companies as highly as they did in a rising market. Stocks that sell at 20 times earnings in the excitement of a rising market may only sell for 12 times earnings by the time a correction has made investors more fearful. So even though a company’s earnings continue to rise, its stock will still be dragged down by the falling market.
The same holds true for the high dividend payers. They also do not escape the problem of investors not being willing to value their earnings as highly as they did in a rising market.
In fact, since defensive stocks and sectors are touted so heavily by Wall Street near market tops, driving their prices to more over-valued levels than other stocks, their subsequent declines often exceed the decline of the rest of the market.
It doesn’t take much research to check it out, but unfortunately most investors aren’t inclined to bother. However, that is my job, and here are the facts.
Utilities are traditionally among the highest dividend paying stocks, yet the DJ Utilities Average plunged 60% in the 2000-2002 bear market, considerably more than the 50% decline of the S&P 500. And it plunged 48% in the 2007-2009 bear market, not much different than the 50% decline of the S&P 500.
In lesser corrections the degree of safety promised for high dividend paying stocks has been equally disappointing for those who accepted the theory. In the summer correction of 2010 the S&P 500 declined 15%. The DJ Utilities Average declined 13%. So far in the current correction, the S&P 500 is down 7.8%. But the DJ Utilities Average is down 11.6%. A similar relationship exists between the SPY and XLU ETFs.
Likewise, the ten highest dividend-paying solid companies in the 30-stock Dow are down an average of 18.9% in the current correction, compared to the S&P 500 being down 7.8%. Look at the DVY ETF and how it has now held up well during the past month.
High-dividend payers have an added incentive for selling in the current correction since one of the risks of the ‘fiscal cliff’ is that taxes on dividends might jump significantly. And that’s true. But those same ten stocks plunged an average of 65.3% in the 2000-2002 bear market, and an average of 55.4% in the 2007-2009 bear, much worse than the Dow and S&P 500.
Meanwhile, we’re seeing the same historical pattern for the ‘still gotta eat, drink, and take their meds’ stocks.
So far in the current pullback, while the S&P 500 is down 7.8%, the still gotta eat and drink category is holding up fairly well, although Coca Cola (KO) is down 10.2% and PepsiCo (PEP) is down 7.3%.
In the ‘still gotta take their meds’ category, while the S&P 500 is down 7.8%, most major drug-makers are down more. Abbott Laboratories (ABT) is down 12.4%, Bristol Myers (BMY) is down 14.8%, Eli Lilly (LLY) is down 14.6%, and Merck (MRK) is down 10.7%.
You can blame it on concerns about drug company profits under Obamacare. But just as the high-dividend paying stocks plunged right along with the rest of the market in the 2000-2002 and 2007-2009 bear markets, so too did the drug-makers. Abbott Labs, Bristol Myers, Eli Lilly, and Merck, plunged an average of 54.5% in the 2000-2002 bear market, and an average of 49.1% in the 2007-2009 bear.
Several conclusions could be drawn from that history. The first is that there seems to be nothing to gain by repositioning into the so-called defensive stocks or sectors. In fact, by doing so one may come out the other side even more damaged than by holding onto current holdings.
Taking profits and moving to cash when risk is high would be a much better strategy, even though the cash would earn nothing, since one keeps the previous profits and can re-enter when the correction ends, rather than having huge losses and needing the next bull market just to get back to even. If the expected correction doesn’t materialize, the cost is only some lost opportunity for more gains, not the actual painful losses incurred by remaining fully invested and moving into so-called defensive stocks.
Another approach, which I prefer, is that the best defense is often a good offense. For instance, an ‘inverse’ etf or mutual fund designed to move opposite to the S&P 500, like the Rydex Inverse S&P 500 fund (RYURX), or the ProShares Short S&P 500 ETF (SH) will gain roughly 20% if the S&P declines 20%, more in larger corrections.
Regardless of what decision is made, let’s be street smart and realize that so-called ‘defensive stocks’ usually are not close to being so.
Sy Harding is president of Asset Management Research Corp.
http://www.forbes.com/sites/greatspeculations/2012/11/20/dont-fall-for-false-security-of-defensive-stocks/?partner=yahootix
Malaysians among the world’s top workaholics, says survey
Tuesday November 20, 2012
By P. ARUNA
aruna@thestar.com.my
PETALING JAYA: Malaysians are proving to be among the world's biggest workaholics, with almost 90% of the workforce working even when they are on holiday.
According to Expedia's 2012 Vacation Deprivation Survey, Malaysia has the world's fourth most dedicated workforce, after India, Brazil and Italy, with employees who can't seem to “let go” of their work during vacations.
Conducted based on 8,000 employed adults from 22 countries throughout the globe, the survey also revealed that Malaysians spent about 40 hours a week at work but received only an average of 14 days of annual leave, among the lowest in the world.
The survey, by the online travel website, also found that despite the limited number of days, Malaysians, on average, did not use about 7% of their leave.
The main reasons cited by respondents for not using up their leave include the option of carrying-forward their leave to the next calendar year, and being unable to coordinate travel dates with their travel partners.
A shocking 40% of the respondents said they were reluctant to go on vacation because they feared their bosses would not be happy about it.
About 15% were worried that going on holiday would reflect negatively on their careers.
“It is worrying that so many Malaysians feel guilty about going on holiday.
“Studies have shown that employees who take regular breaks to revitalise their minds and bodies are often more productive and effective in the workplace,” said AirAsia Expedia CEO Dan Lynn in a statement yesterday.
The survey found that respondents in most developed nations had cited financial constraints as the main reason for not going on vacation.
Among Malaysians, however, only 9% of the respondents said they would sacrifice a holiday due to limited funds.
Asia proved to be the world's most “vacation-deprived” region, with Asians taking the lowest number of holidays and clocking-in the most number of hours each week.
Europeans, on the other hand, have between 25 and 30 days of leave each year, without taking into account state and religious holidays.
British, Norwegian and Swedish workers said they utilised all 25 days given to them.
The Dutch, on the other hand, work only 35 hours a week, the lowest among the 22 countries surveyed.
Tuesday 20 November 2012
Are You Running With the Bull Market or Staying on the Sidelines?
Professors at the University of Pennsylvania’s Wharton School weigh the pros and cons of leaping into the stock market rally in a recent article in Knowledge@Wharton: “In or Out? The Case for — and Against — the Stock Market.”
For equity investors, Wharton finance professor Jeremy Siegel says pulling out of the stock market is a mistake.
“‘The public unfortunately lags (behind) what’s going on in the market,’ says Siegel, noting that rank-and-file investors tend to be bullish at the top of the market and bearish when the market is about to recover. ‘It is not unusual for the public to miss the first half to two-thirds of a bull market. Then they get in at the end, and they ride it down.’
“To sophisticated market watchers, the fact that most retail investors are staying out of the market right now is actually a positive indicator, since history shows that public flows in and out of the market are usually badly timed, Siegel says. ‘I still think this bull market definitely has room to run,’ he notes. ‘I can easily see stocks up another 20% to 30% from these levels in a year or two.’”
Not all of his colleagues agree with Siegel, the article notes.
“Wharton finance professor Richard J. Herring says the market outlook remains uncertain. ‘It is hard to imagine earnings continuing to grow since they are already at an historical high relative to GDP, and the economic outlook is tepid at best,’ he notes. ‘Many experts believe this is a market pumped up by QE3 and little else.’”
7 China stocks facing boom, not doom
By MarketWatch
HSBC weighed in on China's leadership transition Friday, identifying seven sectors -- and selected individual stocks -- as likely beneficiaries from the nation's new government.
Among them, the research house named: consumption, urbanization, innovation, environment, health care, culture and financial reform.
While the list offered similar investment ideas to those already mentioned by other research brokerages, the bigger standout was HSBC's bullish tone towards China's new administration.
It noted that events over the past week in Beijing suggest the new leadership is poised to deliver positive change, even though the final unveiling of the seven-member Politburo Standing Committee included a lineup that left out two reform-minded candidates.
The research house also said that the handover was an "orderly transition of power," and it praised a key political report presented by departing President Hu Jintao as making the "right noises about the country's direction in the next five years."
HSBC said the 90-minute address delivered to the Party Congress on Nov. 9 -– viewed as influencing the reform agenda for the incoming leadership -- made all the right noises, using the phrase "scientific development" 19 times, "socialism with Chinese characteristics" 79 times and "reform" 84 times. The phase "the people" appeared 145 times. The keywords show Beijing's sensitivity to the need for reforms, HSBC said.
Still, while HSBC praised the open talk about reform, it also cautioned that delivering such reforms won't be easy. In a nod to the challenges ahead, HSBC's outlook for China's economy calls for a slow recovery -- more "U-shaped" than "V-shaped."
It noted an improving backdrop, and that Chinese stocks were "fairly valued" rather than expensive.
Among selected ways to invest in each theme, it laid out its respective picks: Hengan International Group Co. , Zoomlion Heavy Industry Science & Technology Development Co. , Lenovo Group Ltd. , China Longyuan Power Group Corp. , Sinopharm Group Co. , Youku Tudou Inc. , and China Construction Bank Corp.
-- Chris Oliver
Follow The Tell blog on Twitter @thetellblog
http://finance.yahoo.com/news/7-china-stocks-facing-boom-032900464.html
Here's What The 'Fiscal Cliff' Tax Deal Is Starting To Look Like
The Economist | Nov. 18, 2012
Barack Obama and Republicans grope towards common ground on taxes...
THE election dust had barely settled when Barack Obama and his Republican adversaries returned to their traditional rhetoric over taxes. "Raising tax rates is unacceptable," John Boehner, the Speaker of the House of Representatives, declared on November 8th. The next day Mr Obama said "I am not going to ask students and seniors and middle-class families to pay down the entire deficit while people like me, making over $250,000, aren’t asked to pay a dime more in taxes."
Optimists, however, took note of what the men did not say: Mr Boehner did not rule out raising tax revenues. Mr Obama did not explicitly insist that the two top income tax rates, now 33% and 35%, return to 35% and 39.6%, as they are scheduled to do when George W. Bush’s tax cuts expire at the end of this year.
This has aroused hopes that the two men can find common ground on tax reform that leaves marginal tax rates where they are while raising new revenue by curbing credits, deductions and exemptions (collectively called tax expenditures), which distort economic activity. Numerous such proposals have been aired in recent years, some of which Republicans hated because they raised new revenue; others Democrats rejected because they gave a windfall to the wealthy.
One way this could be done is to target deductions that primarily benefit the rich. During the election campaign, Mitt Romney proposed paying for big marginal rate cuts by setting a cap on total deductions. The Tax Policy Centre, a think-tank, reckons a cap of $50,000 would raise $749 billion over ten years, comparable to the $800 billion that Mr Boehner entertained during failed negotiations with Mr Obama in 2011. Importantly, this fix would make the tax system much more progressive: 80% of the additional money would come from the top 1% of earners. This has helped draw interest from some Democrats.
A slightly different proposal by Martin Feldstein, a prominent Republican economist, and Maya MacGuineas of the Committee for a Responsible Federal Budget, a think-tank, would cap the tax benefit of itemised deductions at 2% of income for all households. Mr Feldstein reckons that would raise more than $2 trillion over ten years, although almost all families would pay more tax, not just the rich.
As it happens, Mr Obama has already proposed curbing tax breaks for the wealthy (see table). His budget would restore the limits on their exemptions and deductions that Mr Bush’s tax cuts eliminated. A separate proposal would limit the tax benefit of deductions for mortgage interest, charitable contributions, municipal bond interest, employer-provided health care, and individual retirement plans to 28%, even for taxpayers paying a 35% or 39.6% marginal rate.
Despite their superficial appeal, such proposals face daunting obstacles. Foremost is that they may not raise enough revenue to satisfy Mr Obama. In the run-up to formal negotiations due to begin on November 16th, Mr Obama signalled he would begin by asking for $1.6 trillion in revenue over the coming decade, as his latest budget does. At a press conference on November 14th, he said "it’s very difficult to see how you make up" the revenue lost from failing to restore the higher rates just by closing deductions: "The math tends not to work." But, he added, "I’m not going to just slam the door" on alternatives that accomplish what he wants.
The second obstacle is the calendar. Politicians are racing against a year-end deadline when Mr Bush’s tax cuts and other stimulus measures expire and automatic spending cuts are triggered. The collective fiscal tightening, if sustained, could push the economy into recession. Even if the two sides agreed that tax reform would be the main vehicle for raising more revenue, the task would be too complex to accomplish by year-end. A smaller deal would be needed to avert the cliff, leaving bigger tax and entitlement changes for next year. The challenge then would be to bind the hands of both parties to consummating a big deal next year.
For all the appeal of curbing loopholes, each has vocal and influential defenders. When the Obama administration first proposed its 28% cap on tax expenditures, "we got killed," Peter Orszag, Mr Obama’s first budget director, recalls, in particular by charities and non-profit groups. For Mr Obama and Mr Boehner, finding agreement with each other may very well prove to be the easy part.
Read more: http://www.businessinsider.com/fiscal-cliff-taxes-2012-11#ixzz2CcJe0KbY
Monday 19 November 2012
Money Has Much Less To Do With Happiness Than We Think
Max Nisen | Nov. 12, 2012,
A recent NBER working paper from John Helliwell of the University Of British Columbia argues that focusing on the individual is wrong, and that the real source of happiness, ingrained by years of social evolution, is our interaction with other people.
Income matters less than the chance to connect with others, thereby improving our own lives and especially the lives of others. There is even evolutionary evidence that bulging human brains, and especially their prefrontal cortexes, have been crucial in allowing humans to be the most social beings, living better lives through co-operation.
Within workplaces, the importance of the social context dwarfs the impact of salary and bonuses. To work where trust in management is one point higher, on a 10-point scale, has the same relation to life satisfaction as a one-third higher income.
Essentially, money matters, but we're evolutionarily conditioned to be happiest when we feel like we're part of a community, are in a positive social context, and take actions that we feel benefit other people. That significantly surpasses how much we care about money, despite the amount society focuses on it.
It's a powerful effect, to the point where people that perform positive actions get more out of them than the people they're helping.
Read more: http://www.businessinsider.com/money-is-less-important-than-social-context-2012-11#ixzz2CcMDxUWk
How To Spend Time In Ways That Make You Happy
By Joshua Berlinger
How you spend your time could be the key to unlocking happiness.
Research on the subject was analyzed in a paper in ScienceDirect by Jennifer L. Aaker and Melanie Rudd of Stanford Business School and Cassie Mogilner of Wharton.
The psychologists identified five principles for good use of time:
1. Spend your time with the right people
People who spend time with other people tend to be happier, but equally important is with whom who they spend time.
"Interaction partners associated with the greatest happiness levels include friends, family, and significant others, whereas bosses and co-workers tend to be associated with the least happiness."
Still since people have to spend time at work, they can benefit from developing friendly relationships at the office.
2. Spend your time on the right activities
What you do with your time is crucial in determining happiness. Working and commuting seem to make people the most unhappy, while socializing is one of the best activities for increasing happiness levels.
Thinking of your time as an investment can be helpful. For example, asking yourself what are the chances that the value of that temporal expenditure will increase over time?" The study adds:
When deciding how to spend the next hour, simply asking yourself the question, “Will what I do right now become more valuable over time?” could increase your likelihood to behave in ways that more clearly map onto what will really make you happy. Note that this question is slightly different than asking, “What is better for me in the long run?” or, “What will lead to greater long-term happiness?” — two questions that often cause a tinge of guilt or moral dilemma. This particular question focuses less on perceived trade-offs between short and long-term happiness, and more on maximizing the value of the present moment.
3. Enjoy the experience without spending the time
Thinking about things you enjoy can be almost as effective as actually doing the activity which makes you happy: "the part of the brain responsible for feeling pleasure, the mesolimbic dopamine system, can be activated when merely thinking about something pleasurable, such as drinking one's favorite brand of beer or driving one's favorite type of sports car. In fact, the brain sometimes enjoys anticipating a reward more than receiving the reward."
4. Expand your time
Since time is fixed, it helps to focus on the "here and now."
Thinking about the present "slows down the perceived passage of time, allowing people to feel less rushed and hurried. Similar effects accrue when individuals simply breathe more deeply."
Having or perceiving that one has control over their time has been correlated to higher levels of happiness. "Having spare time and perceiving control over how to spend that time (i.e. discretionary time) has been shown to have a strong and consistent effect on life satisfaction and happiness, even controlling for the actual amount of free time one has."
5. Be aware that happiness changes over time
Happiness is affected by a myriad of intertwined factors: culture, time, and perhaps most importantly, age. Younger people, for example, "are more likely to associate happiness with excitement, whereas older individuals are more likely to experience happiness as feeling peaceful."
The amount of happiness one derives from social interactions changes as well. As people get older, " the value of spending time with interesting new acquaintances decreases, while the value of spending time with familiar friends and family increases."
Don't miss: All You Have To Do Is Smile >
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Sunday 18 November 2012
50 Unfortunate Truths About Investing
Sorry, but ...
1. Saying "I'll be greedy when others are fearful" is much easier than actually doing it.
2. The gulf between a great company and a great investment can be extraordinary.
3. Markets go through at least one big pullback every year, and one massive one every decade. Get used to it. It's just what they do.
4. There is virtually no accountability in the financial pundit arena. People who have been wrong about everything for years still draw crowds.
5. As Erik Falkenstein says: "In expert tennis, 80% of the points are won, while in amateur tennis, 80% are lost. The same is true for wrestling, chess, and investing: Beginners should focus on avoiding mistakes, experts on making great moves."
6. There are tens of thousands of professional money managers. Statistically, a handful of them have been successful by pure chance. Which ones? I don't know, but I bet a few are famous.
7. On that note, some investors who we call "legendary" have barely, if at all, beaten an index fund over their careers. On Wall Street, big wealth isn't indicative of big returns.
8. During recessions, elections, and Federal Reserve policy meetings, people become unshakably certain about things they know nothing about.
9. The more comfortable an investment feels, the more likely you are to be slaughtered.
10. Time-saving tip: Instead of trading penny stocks, just light your money on fire. Same for leveraged ETFs.
11. Not a single person in the world knows what the market will do in the short run. End of story.
12. The analyst who talks about his mistakes is the guy you want to listen to. Avoid the guy who doesn't -- his are much bigger.
13. You don't understand a big bank's balance sheet. The people running the place and their accountants don't, either.
14. There will be seven to 10 recessions over the next 50 years. Don't act surprised when they come.
15. Thirty years ago, there was one hour of market TV per day. Today there's upwards of 18 hours. What changed isn't the volume of news, but the volume of drivel.
16. Warren Buffett's best returns were achieved when markets were much less competitive. It's doubtful anyone will ever match his 50-year record.
17. Most of what is taught about investing in school is theoretical nonsense. There are very few rich professors.
18. The more someone is on TV, the less likely his or her predictions are to come true. (U.C. Berkeley psychologist Phil Tetlock has data on this).
19. Related: Trust no one who is on CNBC more than twice a week.
20. The market doesn't care how much you paid for a stock. Or your house. Or what you think is a "fair" price.
21. The majority of market news is not only useless, but also harmful to your financial health.
22. Professional investors have better information and faster computers than you do. You will never beat them short-term trading. Don't even try.
23. How much experience a money manager has doesn't tell you much. You can underperform the market for an entire career. And many have.
24. The decline of trading costs is one of the worst things to happen to investors, as it made frequent trading possible. High transaction costs used to cause people to think hard before they acted.
25. Professional investing is one of the hardest careers to succeed at, but it has lowbarriers to entry and requires no credentials. That creates legions of "experts" who have no idea what they are doing. People forget this because it doesn't apply to many other fields.
26. Most IPOs will burn you. People with more information than you have want to sell. Think about that.
27. When someone mentions charts, moving averages, head-and-shoulders patterns, or resistance levels, walk away.
28. The phrase "double-dip recession" was mentioned 10.8 million times in 2010 and 2011, according to Google. It never came. There were virtually no mentions of "financial collapse" in 2006 and 2007. It did come.
29. The real interest rate on 20-year Treasuries is negative, and investors are plowing money into them. Fear can be a much stronger force than arithmetic.
30. The book Where Are the Customers' Yachts? was written in 1940, and most still haven't figured out that financial advisors don't have their best interest at heart.
31. The low-cost index fund is one of the most useful financial inventions in history. Boring but beautiful.
32. The best investors in the world have more of an edge in psychology than in finance.
33. What markets do day to day is overwhelmingly driven by random chance. Ascribing explanations to short-term moves is like trying to explain lottery numbers.
34. For most, finding ways to save more money is more important than finding great investments.
35. If you have credit card debt and are thinking about investing in anything, stop. You will never beat 30% annual interest.
36. A large portion of share buybacks are just offsetting shares issued to management as compensation. Managers still tout the buybacks as "returning money to shareholders."
37. The odds that at least one well-known company is insolvent and hiding behind fraudulent accounting are high.
38. Twenty years from now the S&P 500 (INDEX: ^GSPC ) will look nothing like it does today. Companies die and new ones emerge.
39. Twelve years ago General Motors (NYSE: GM ) was on top of the world and Apple(Nasdaq: AAPL ) was laughed at. A similar shift will occur over the next decade, but no one knows to what companies.
40. Most would be better off if they stopped obsessing about Congress, the Federal Reserve, and the president and focused on their own financial mismanagement.
41. For many, a house is a large liability masquerading as a safe asset.
42. The president has much less influence over the economy than people think.
43. However much money you think you'll need for retirement, double it. Now you're closer to reality.
44. The next recession is never like the last one.
45. Remember what Buffett says about progress: "First come the innovators, then come the imitators, then come the idiots."
46. And what Mark Twain says about truth: "A lie can travel halfway around the world while truth is putting on its shoes."
47. And what Marty Whitman says about information: "Rarely do more than three or four variables really count. Everything else is noise."
48. The bigger a merger is, the higher the odds it will be a flop. CEOs love empire-building by overpaying for companies.
49. Investments that offer little upside and big downside outnumber those with the opposite characteristics at least 10-to-1.
50. The most boring companies -- toothpaste, food, bolts -- can make some of the bestlong-term investments. The most innovative, some of the worst.
50 Unfortunate Truths About Investing
By Morgan Housel November 14, 2012
http://www.fool.com/investing/general/2012/11/14/50-unfortunate-truths-about-investing.aspx
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