Your Brain and Investing

Your Brain and Investing


by Adam Ritt

Most investors are their own worst enemy. They buy high and sell low, allow the herd to dictate their decision-making and get caught up in the day-to-day movements of the market. The relatively new field of neuroeconomics, which studies how people make choices, helps explain why the market is anything but rational.

BetterInvesting recently spoke with Jason Zweig, author of the new book Your Money & Your Brain, about his research on neuroeconomics and what we can do to keep our worst impulses in check. Zweig is a senior writer for Money magazine and was also the editor of the revised edition of Benjamin Graham’s The Intelligent Investor. He serves on the editorial boards of Financial History magazine and The Journal of Behavior Finance.

How did researching this book change your views of investing?

The first and most important thing that came out of this is that it’s very comforting to find new proof of old truths. There’s very little I’ve changed about my own investing approach and not much I’ve changed about the investing advice I continue to give people.

The second principle that I took away from it is that people are unaware of how great an influence the unconscious mind holds over our decisions. I tell the story in the book about a doctor who buys a stock just because it has the same ticker symbol as his initials. There’s actually a whole field of research into this area, which psychologists call implicit egotism. It’s the idea that completely unconsciously, people favor things that are closely associated with themselves.

We often don’t know the real reason we’re doing things, and that can lead us to think we understand our decisions when in fact they never really were decisions in the first place. They were just ideas that came to us, and we didn’t really know why, but they felt right and we acted on them. This is what (author) Malcolm Gladwell calls “blink.” That’s a very good idea if you’re in a battle and you’re being shot at. If you think you should duck, you should. But it’s probably not such a good idea when you’re investing.

One of the main points of the book is that investors can solve a lot of the problems they’ll have to overcome by shutting out the noise. What are some of the negative effects of the instant availability of information?

If you’re hooked up to a machine that monitors your bodily functions and you watch an online stock ticker going down with a lot of red arrows, or you watch some CNBC show with some funny-looking man waving his arms and screaming, your blood pressure will go up, your pulse will climb, you’ll start breathing faster. Your temperature will rise, you’ll turn red in the face, you’ll sweat. Depending on how severe it is, you might be aware of the anxiety you’re feeling. Or it might not register in your conscious mind; it might just be a slight uptick in your body tension. But all it takes is a tiny change in your normal body state to skew your response.

If we take someone who’s mildly upset and ask him to sell a stock, he’ll accept a lower price than someone who’s in a neutral or positive mood. The evidence is overwhelming that paying attention to negative news does change your body, and when your body changes, your brain changes with it. This naturally inclines you toward making short-term-oriented decisions, panicky decisions and bad decisions.

It’s hard to say what the single worst thing an investor can do is, but my vote would probably be to pay close attention to the market news. Even if it’s good news, it will prompt you into doing things that are bad for you. And if it’s bad news, it will prompt you into doing things that are terrible.

Your underlying message seems to be to just follow a company’s fundamentals.

You really have to ask yourself, “What is the information that I would get from instantaneous sources that no one else would get before I got it?” Everyone else is watching CNBC, too. Everyone else can click on the same market website that I can.

There are a few reasons people feel the urge to do this. First, we all believe that being informed is better than being uninformed and that information must be inherently a good thing, because we know ignorance is bad.

Second, we tend to ignore what other people are doing. It’s very hard to remember that when you turn on CNBC, there are hundreds of thousands of other people watching at the same time.

We’re also afraid of what will happen if we don’t stay current. But there are experiments showing that when people do stay closely informed on what’s going on in their company, they actually earn lower returns. Because whenever you get news, you assume that it’s worth knowing, and because it’s worth knowing, it must be worth acting on. So if the news is good, you buy, and if the news is bad, you sell, when you actually would be much better off buying and holding (because of all the transaction costs from trading).

The thing to remember is that for the typical large-cap stock, the kind of company likely to be owned by BetterInvesting readers, through any market website you’ll see the price change three to 10 times a minute. Those one- or two-penny changes will register with you, and any time you see motion, your brain is designed to extrapolate from it.

So if a stock has two upticks in a row, you will expect a third. It’s the watching that tends to lead to doing.

Think back to the days when our parents were investing. Unless people lived in a major city, or unless they subscribed to The Wall Street Journal, they often would go for an entire week without being able to update a stock price. I distinctly remember in the 1970s, my dad buying a stock and awaiting the following Friday’s newspaper, because that was the one with the stock prices.

Here’s a simple test: If more information were good for people, then clearly, the returns of the average investor should go up as more information becomes available. But in fact, that’s not what we’ve seen.

In my opinion, the single biggest advantage individual investors have over professionals is that they don’t have to play that game. They can choose to say, “It’s 1:13 in the afternoon, and I don’t care what my stock price is.” If you run a mutual fund, you can’t do that.

Does having a system help us avoid the pitfalls you describe in the book?

Absolutely. Probably the best sentence ever written on investing is Benjamin Graham’s old saying, “The investor’s chief problem — and even his worst enemy — is likely to be himself.” That’s really true. Emotion isn’t always bad, but emotion that’s unchecked by reason usually is bad. It’s nice to have some emotional input into your decisions ... but if all you’re doing is going on your gut feeling, you’re highly likely to be making a mistake. You need to mix your emotions with some analysis.

The way you prevent yourself from being your worst enemy is by putting some policies and procedures in place. What you can do is say, “Well, it’s Jan. 1 or July 1, that’s the time of year when I do my rebalancing, and my target allocation of stocks is 70 percent to 80 percent. Right now I’m feeling nervous, so I’m going to go to the low end of my range.” If your gut feeling tells you the market is cheap, then you can go to the high end of your range.

But the important thing is that you have a range and you honor your own procedures; you don’t break your own rules. Because any time you break your own rules, you’re probably making a mistake.

But at some point, you have to go with your gut, because no system can tell you everything you need to know about a stock.

That’s true, but the key here is to make as few decisions as possible.

It must be hard to maintain discipline when you see the market rewarding stocks that you won’t buy.

It’s very hard. That’s why it’s important to have an investing policy statement, which is the starting point. This essentially explains what your money is for and how in general terms you’ll go about achieving those goals.

But you also need something more specific, a contract with yourself. It needs to be in the form of a checklist, and it needs to say, “I will do this” and “I won’t do that.” You should have it witnessed by a family member or a friend, and you should try to form a little support group of like-minded people.

The important thing is to track your decisions. If — heaven forbid — you break any of your rules, at the time you’re breaking it you have to write down why you’re doing it. Later on, whether the result is good or bad, you have to go back and look at what you said you were trying to accomplish and see whether breaking the rule was worth the trouble.

My prediction is that at least 80 percent of the time, you’ll be sorry you broke your rule.

Common Errors in Decision-Making

The following are some common biases people have, as identified by Max Bazerman of the Harvard Business School. This is adapted from a Babson Staff Letter of Nov. 11, 2005. For the complete article, see BetterInvesting’s February 2006 issue.

Availability: Making decisions on the vividness and recency of information.

Irretrievability: Failing to think beyond a preconceived notion.

The confirmation trap: Unconsciously searching for supporting evidence that we made the right decision.

Insufficient anchor adjustment: Seeing a situation very similar to a past event and interpreting it to mean the same thing will happen this time around.

Hindsight: Changing our evaluation of something or someone after events play out, when we have perfect knowledge.

Regret avoidance: Tending to feel more regret in an act of commission vs. omission. Buyers feel much more remorseful about committing to a purchase and having to live with the decision (be it a good decision or not).

Internal escalation of commitment: Increasing the support of an initial decision over time.

Keys to a Balanced Investing Life

Take the global view. Use a spreadsheet that emphasizes your total net worth — not the changes in each holding.

Hope for the best, but expect the worst. Diversify and learn from market history to help keep you from panicking.

Investigate, then invest. A stock is a piece of a living corporate organism. Study the company’s financial statements.

Never say always. No matter how sure you are that an investment is a winner, don’t put too much of your portfolio in it.

Know what you don’t know. Don’t believe you are already an expert. Ask what might make an investment go down; find out if the people pushing it have their own money in it.

The past is not prologue. Never buy a stock just because it has been going up.

Weigh what they say. Before trying any strategy, gather objective evidence on the performance of others who have used it in the past.

If it sounds too good to be true, it probably is. Anyone who offers high return at low risk in a short time is probably a fraud.

Costs are killers. If you want to get rich, comparison-shop for trading costs and trade at a snail’s pace.

Eggs go splat. So never put all your eggs in one basket.

Adapted from Your Money & Your Brain (Simon & Schuster, 2007) by Jason Zweig.


Adam Ritt, Editor, BetterInvesting Magazine.

http://www.betterinvesting.org/Public/StartLearning/BI+Mag/Articles+Archives/1007cspublic.htm

Dividend Growth: the Hidden Fundamental

Dividend Growth: the Hidden Fundamental

Yield Tells Only Part of the Story

by Michael C. Thomsett

Many investors, even the most conservative ones devoted to fundamentals, tend to overlook or ignore dividend yield as a primary indicator. One reason is that current yield — dividend per share divided by the stock’s price — is somewhat misleading.

Dividend yield is an oddity because the yield increases as the stock price falls. So you could be getting an ever-growing percentage of an ever-shrinking pot. Think back to 2008, for example. When prices of many stocks declined broadly, what happened to a stock falling by $5 a month and paying an annual dividend of $1 per share? As the price fell, the yield rose (see table, below).

In this case, the dividend yield doubled over six months. Good news by itself, but over the same period you lost half your value per share in the stock. This is one of the many reasons investors discount dividend yield as an indicator; it doesn’t reflect the relationship between fundamental value and current price. Whenever the market’s technical side is down — from late 2008 through early 2009, for example — yield is going to be misleading. If a company’s stock price has fallen because of inherent weakness of the company, its sector or the larger economy, the yield isn’t as sound a fundamental indicator as other tried-and-true metrics, such as revenue and earnings trends and the current, debt and price-earnings ratios.

Making Dividends a Reliable Indicator

But there’s another way to analyze dividends to identify exceptional opportunities, even in depressed markets. This requires analyzing dividends as part of a long-term trend and in conjunction with other key indicators. This not only improves the accuracy of the review but also helps narrow the list of viable investment candidates.

As of late April 2009, for example, it was quite difficult to select high-quality stocks based on the traditional analysis of revenue and earnings. So many companies — more than usual by most standards — were available at bargain prices, but were all of these exceptional long-term, buy-and-hold investments? A study of revenues and net earnings doesn’t reveal the distinctions between two types of companies: those most likely to bounce back once the recession ends and those suffering long-term degeneration in value.

Unfortunately, many firms honored in the past as safe and sound blue chips haven’t always endured. For example, General Motors and Eastman Kodak, two of the shining stars of the 20th century, have today become low-value, high-risk has-been investments.

They’re hardly alone. A few years ago, the financial sector was considered among the safest and most promising of long-term investment sectors. Companies such as Washington Mutual, Citigroup and Bank of America were held in high esteem. Today, however, the financial sector is in very poor shape and many companies — including Citigroup — will probably never recover fully.

We need to carefully quantify the popular belief that after prices fall, smart investors should gobble up bargain-priced companies. Investors look for companies that combine demonstrated long-term growth and prospects for stock price appreciation. But revenues and net earnings don’t tell the whole story after a down year. For example, consider these three well-known companies: Johnson & Johnson (ticker: JNJ), Coca-Cola (KO) and General Electric (GE). Which of these hold promise for growth in coming months, and which aren’t as likely to recover? (Companies are mentioned in this article for educational purposes only. No investment recommendation is intended.)



Click image to enlarge

Let’s begin by comparing 10 years of results for three popular indicators: revenues, net income and dividends per share (see tables, above). A glance at only the revenues and net income seems to place all three companies on the same footing. All have shown a decade of growth, the only major slip being GE’s net income decline in 2008. But the differences are more significant when you compare dividend history. Over the past decade, both Johnson & Johnson and Coca-Cola increased their dividend every year without fail. GE reduced its 2008 dividend for the first time in 10 years.

By itself, the dividend history doesn’t condemn GE. But when viewed with other important indicators, an investor likely will conclude that GE is the least promising of these three companies. For example, the price range for General Electric in 2008 was from $38 down to $12 per share, a drop of 68 percent. (In comparison, Johnson & Johnson ranged between $72 and $52, a 28 percent difference, and Coca-Cola ranged from $65 down to $40, a change of 38 percent.)

Another important difference is found in the debt ratio, the portion of total capitalization represented by long-term debt. Although Johnson & Johnson (15.6 percent) and Coca-Cola (11.5 percent) have kept long-term debt at the same level for the decade, GE’s has increased to 74 percent (not unusual for a company with a financial services arm) from 55 percent 10 years ago.


Click image to enlarge

Dividend Achiever Status as a Primary Test

Dividend yield is virtually useless as a trend indicator, especially compared with the more meaningful revenue, net profit and debt ratio changes over time. But companies that have increased their dividend every year for at least 10 years — the so-called dividend achievers — tend to be better-managed companies with lower-than-average price volatility, little or no core earnings adjustments and more capability to weather recessionary times. By definition, a company able to increase its dividends has to be in control of its cash flow.

Mergent Corporation follows dividend achievers and has created an index of companies meeting this criterion. In its most recent report, fewer than 300 companies met this important test. (Standard & Poor’s compiles a separate index called the Dividend Aristocrats.)

Increasing dividends every year without fail is a good test of working capital and quality of management. The dollar value of dividends is relatively small. Johnson & Johnson’s dividend of $180 annually for 100 shares is peanuts. But as a symptom of quality, the dividend achiever company is exceptional.

Growth in dividends also is important if you reinvest your dividends automatically through a dividend reinvestment plan, or DRIP. When Johnson & Johnson credits your account with dividends, you can let the cash ride or earn about 1 percent in your brokerage cash account, or you can reinvest it in more shares of Johnson & Johnson and get 3.6 percent on the growing share total. Dividend reinvestment is a smart idea, and with dividend achievers, the compound yield goes up every year.

Dividends by themselves are a small piece of the bigger puzzle. But limiting your search to the very small group of companies that have grown their dividends every year helps cut down the list of potential investments. Combined with analysis of revenue, net income, P/E, debt ratio and other key fundamental tests, dividend trends help you decide whether depressed-price companies are never going to come back — or are the most promising candidates for a strong rebound.


Michael C. Thomsett of Nashville, Tenn., is author of over 70 books. His latest is Winning With Stocks (Amacom Books), which includes practical suggestions for picking stocks based on fundamental analysis. Thomsett is also author of Annual Reports 101 (Amacom Books), Getting Started in Fundamental Analysis (Wiley) and Investment and Securities Dictionary (McFarland).

http://www.betterinvesting.org/Public/StartLearning/BI+Mag/Articles+Archives/0909linespublic.htm

Cautiously, Small Investors Edge Back Into Stocks

Cautiously, Small Investors Edge Back Into Stocks

By JACK HEALY
Published: September 10, 2009

Like millions of ordinary investors, Cindy and Eric Canup are still recovering from Wall Street’s big downturn. Their portfolio is off by 25 percent. They are mindful of their spending. And their dreams of buying land in Northern California or Oregon have been delayed five to 10 years, until they can rebuild their retirement accounts.

Joe Mancini of Fredericksburg, Va., has losses on his portfolio of around 30 percent and has had to put off his retirement.

Mr. Mancini with his wife, Patricia, and their dog, Joshua. He has sold some financial stocks and become more conservative.

Yet with no guarantee they will ever be made whole again, individual investors like the Canups, who live in Oakland, Calif., are sticking with the stock market. Recently, with help from their financial adviser, they nudged some of their cash into mutual funds and took on riskier investments. They have even stopped tossing unopened 401(k) statements into a filing cabinet.

“This time last year it was doom and gloom and dire,” said Ms. Canup, 48, who works for the health care provider Kaiser Permanente. “I’m kind of amazed that we’re able to get back in as quickly as we are.”

When the financial crisis hit, some of Wall Street’s prophets warned that individual investors would be lost for years. The gospel of building a diversified portfolio, buying regularly and holding on till retirement, appeared dead. But despite a rout that erased fortunes and upended retirement plans, few smaller investors have folded their portfolios or cashed out: While they are poorer today and still leery of the markets’ returns, many are still chasing the gilded promise of profits and wealth.

“It’s got a track record,” Linda Blay, a bookkeeper in Orange County, Calif., said of the stock market. While her portfolio is still off by 30 percent, she said that “it outperforms any investment. I think it’ll come back.”

Participation in 401(k) plans held steady in 2008, even as the average account lost 28 percent of its value, according to Hewitt Associates, which tracks retirement plans. More people moved their money into cash or bonds for safety, but they did so at the margins. Over all, the contribution rate dropped less than half a percentage point.

And in the first half of 2009, when stocks hit their worst levels and then pivoted higher, only 9 percent of investors made trades in their 401(k) accounts, according to Vanguard. At the same time, alternative investments like real estate have suffered mightily, while interest rates on certificates of deposit or even high-yield savings accounts have plunged, making them less attractive.

“Inertia has really ruled,” said Pamela Hess, director of retirement research at Hewitt. “The vast majority of participants have changed nothing — not if they save, not how much they save. Nothing.”

Now, some of the money that fled stocks for safe harbors like money-market funds and government bonds last year is beginning to return. Even with trillions still sheltered on the sidelines, some $56 billion has poured into equity funds since April, according to the Investment Company Institute.

Of course, making money again can do a lot to bolster anybody’s confidence.

Over all, the average Vanguard 401(k) balance grew by $3,300 through the end of June, up about 6 percent for the year — not a great return, but better than before, according to the firm’s most recent numbers. In the first six months of 2008, the average Vanguard account lost $6,898, or nearly 9 percent, of its value.

As of Thursday the Standard & Poor’s 500-stock index was up about 10 percent for the year. But the index is still down a third from its peak, and investors are uncertain whether stocks will continue to rise in a fitful recovery hampered by high unemployment and sluggish consumer spending. Even with 10 percent annual returns, it would take typical stock investors close to three years to recoup the funds they had at the beginning of 2008.

Daniel Kelhoffer, 67, an investor in Georgia, visited his son in Germany this summer and cruised the lake near his house in his wooden 1959 Chris-Craft motorboat, encouraged by the steady rise in his monthly account statements. Joseph Fredrick, an investor in Cincinnati, exulted that, largely because of his financial adviser, his portfolio had fallen only 12 percent since the market tanked.

In North Carolina, a retired Wachovia executive, Robert Paynter, lost tens of thousands of dollars when his stock options and Wachovia shares hit the skids. In October, he told The New York Times that he felt as if he were witnessing his own death with each plunge of the stock market. This summer, he bought a year-old Corvette convertible. And while he and his wife canceled a trip to Europe, they are contemplating a Mediterranean cruise next year.

“I’m feeling a whole lot better,” he said. “As ugly as it got, I never got to a point where I thought I was going to have to go back to work or miss a meal. I can take a lot bigger hit than I thought I could.”

After the crash, Gil Livingston, a retired Hewlett-Packard manager from suburban Detroit, decided he would manage his own money instead of letting asset managers at UBS handle his portfolio. He missed the bottom of the market in early March, but has made money from well-timed purchases of technology stocks and investments in emerging markets.

“I’m slowly sticking my head back out of the ground,” he said. “I’m doing fairly well. My equities are up.”

Mr. Livingston, 67, and his wife still have a winter home in Cape Canaveral, Fla., and say they have not been forced to curtail their lifestyles. With their portfolio off by 20 percent, though, they have put off traveling and are considering whether to raise some cash by trading in their Michigan home for something smaller.

But many are more deeply scarred from the financial and psychological effects of their losses.

Last autumn, as his retirement account was plummeting in value, Joe Mancini decided to sell some financial stocks and seek more conservative investments like bonds, gold and metals funds. Even though he was able to cut his losses, he and his wife are still down about 30 percent.

“A few years ago I was hoping to retire when I got close to 60,” said Mr. Mancini, who is 58 and works for an electronics equipment distributor. “I can’t even put a date on it now.”

If thriftier consumers become a legacy of the recession, Wall Street’s plunge may have created a generation of more cautious individual investors.

Robert Furey, who works at a computer company in Naples, Fla., said he had followed all of the conventional rules of investing: he planned for the future, bought a diverse array of stocks, bonds and index funds and never tried to time the markets. He lost a decade’s worth of gains when the stock market plunged, and said he did not know whether he would ever trust the markets again.

“I was a deer in the headlights,” he said.

As Wall Street raced higher in the last few years, Ben Silbert, 38, a corporate lawyer in Manhattan, said he tried to talk his wife into funneling more of their money into stocks. But now, with their portfolio down 15 percent since last August, Mr. Silbert said he wanted to make a shift toward fixed-income investments.

“I’ve seen what can happen,” he said. “It’s been a good lesson. It’s been an eye opener for me.”


http://www.nytimes.com/2009/09/11/business/11investors.html?_r=1&ref=business

Start by Investing in Yourself

http://www.betterinvesting.org/demo/GS-Stock-v1.0-ps.htm

How to Invest in Today's Turbulent Stock Market

How to Invest in Today's Turbulent Stock Market

Location: BlogsAsk Doug!
Posted by: Doug Gerlach 10/1/2008 1:25 PM

With all of the uncertainty in today's markets, it can be a confusing time to be an investor.

On Monday, September 29, 2008, investors saw the largest point drop in the Dow Jones Industrial Average in its 102-year history.

On Tuesday, two-thirds of that loss was recovered.

On Wednesday, who knows what could happen?

But looking back at the stock market over time, it's clear that it's seen worse and has always recovered. There's no reason to believe that the market won't come back around -- given time, that is. Those investors who put their confidence in the resiliency of the U.S. stock markets will be rewarded, as long as they maintain the proper perspective. In five years, investments made at today's bargain basement stock prices will quite possibly be seen as smart moves.

Here are a few points to consider as you plan your moves in the weeks and months ahead:

1. Remember that the market always operates in cycles, expanding and contracting over time, but on a completely unpredictable schedule. Investing regularly throughout the peaks and valleys is key to a successful long-term investing approach. In fact, wealth is often created in greater scale as the result of investing during down markets. Of course, this requires courage and the conviction that the markets and your holdings will rebound.

2. Most certainly, don't stop investing in the stock market. Many stocks that you study will be offered at or near historically low valuations, and if you try to wait for the market to reach its absolute low, or if you wait for a "clear sign" that the market is rebounding, you'll miss plenty of opportunities. I've been increasing the monthly contributions that I make to both of my investment clubs, and expect to reap the rewards from the regular investments that my clubs will continue to make in the coming months.

3. Focus on quality companies, now more than ever. It's likely that the interest rates will rise and access to debt will tighten, so companies that are highly dependent on borrowed capital to finance growth or operations may struggle. Companies with low credit ratings should be avoided. Consider the trend of a company's debt-to-equity ratio over the past few years, as in Section 2C of Toolkit 6's Stock Study form. Look to the Complete Roster of Quality Companies on StockCentral for ideas to study.

4. Consider carefully before investing or continuing to hold financial companies. There's no doubt that the regulatory climate will change in the coming months and years, with big changes in government oversight of financial markets and the structure of financial companies. I expect continuing consolidation of financial companies, with mega-firms swallowing up smaller concerns, leading to a general state of uncertainty about the financial sector. With so much being stirred up at present, it may be some time before the dust settles and the winners in the sector become apparent.

5. Re-evaluate existing holdings in light of their exposure to the credit markets, the housing market, and their levels of debt. Companies that don't pass muster are prime candidates for replacement. With the high number of bargains available now in the market, chances are good that you can find stocks with higher quality and higher total return prospects than your questionable current holdings. Don't lose sleep over stocks that don't inspire confidence -- upgrade your portfolio by swapping out these stocks with better prospects.

As you invest in your personal or investment club portfolio in the next few months, always remember your long-term focus. ICLUBcentral's tools are designed to help you build wealth in the stock market over a five-year and longer horizon. Patience and confidence go hand in hand with successful investing.


http://www.stockcentral.com/learn/blog/tabid/159/EntryID/43/language/en-US/Default.aspx

Buffett dwells on book value

Over long periods, a stock will move in tandem with company's performance. In the short term, there may be no correlation between the two.

Stock price movements are so fickle. You cannot and should not measure a CEO's performance based on how much the stock has gained from year to year.

Earnings are pliable and a CEO can manipulate them in dozens of ways to inflate a company's bottom line fro several years. Using restructuring charges, asset sales, write-offs, employee layoffs, or "asset impairment" charges, corporations can generously, and legally, cook their books and give the impression they are functioning on all cyclinders, when, in fact, they could be throwing their profits down the drain.

For all the reasons above, Buffett dwells on book value. Understanding changes in book value is key to assessing whether a company is truly worth owning, in Buffett's view.

Buy Points

http://spreadsheets.google.com/pub?key=tyzNUux1KuWALlyinFp1h8g&output=html

Did you sell when the stocks were in stratosphere?

Following my previous posting on "Did you buy when the stocks were on sale?", I thought it would be interesting to write something related.

The severe bear markets of October 1987, the Asian Financial Crisis of 1997, the SARS crisis, and the recent severe bear market were preceded by bull markets. Did you sell at the peak of these bull markets? Did you get out of stocks before the onset of the bear?

In 1987, I was not in the stock market. In the 1997 bullmarket, I continued to hold stocks in my portfolio. When the Asian Financial Crisis started, I did not sell these stocks. What were the consequences?

One counter went "kaput" - 100% loss. The prices of the other stocks were beaten down badly. Many remained lowly priced for multiple years. However, gradually the prices recovered. From then to now, this portfolio registered a reasonable gain. What saved or protected this portfolio from loss?

There are many factors. Firstly, investing for the long term is safe. The risk is in misjudging the business prospects of the companies you have in your portfolio. The risk is not in the price volatility. Secondly, by buying good quality stocks regularly at a fair or bargain price (a form of cost averaging). Thirdly, a gutsy move to add stocks to your portfolio in a bear market. I bought some stocks when the index was 600, only to see these stocks decimated when the index fell towards 300. Finally, by not selling during the depth of the bear market. To be able to do so, one need to know the difference between price and value and the conviction and ability to hold.

The present bear market started in 2007. This was preceded by a strong bull market when the KLCI reached a high of 1500. Did you sell during at the height of the bull market? What did you do then when the bear took hold? What lessons have you learned from your actions?

Selling is often a more difficult decision than buying. A stock with deteriorating fundamentals should be sold, sometimes urgently. For others, a relative reason for selling would be if the price of the stock has risen too high (overpriced) not in keeping with its underlying fundamentals.

Peter Lim is 7th on S'pore rich list

This remarkable chap made his money from investing in stocks. To emulate him:

1. You would need to have accumulated a large capital to invest.
2. You would need to have the opportunity to invest a large amount into Wilmar or a similar vehicle at the opportune time.
3. You would need to stay invested in the stock long term to savour the gains.

----

7. Peter Lim
(Up) US$1.5 billion INVESTMENTS
56. Married, 2 children
Former stockbroker, now full-time investor gets bulk of fortune from stake in Wilmar, started by former client Kuok Khoon Hong (No 3). Other stakes in fashion retailer FJ Benjamin, brewery restaurant Brewerkz.

http://www.theedgemalaysia.com/business-news/149108-update-robert-kuoks-nephew-3rd-on-spore-rich-list.html

Did you buy when the stocks were on sale?

Did you take advantage of the best investing periods Mr. Market offered the last 20 years? Did you take advantage of Mr. Market or did you fall victim to Mr. Market during these times?

My first recollection was 1987. It would have been wonderful to have invested then, but my priorities were elsewhere and not in stocks then. I recalled the big fall in October 1987. Those invested in the stock market were stunned by the rapidity of its fall in a day. Many predicted the collapse of brokers and investment bankers. But the recovery was quick. Those who sold would have lost. Those who held or bought more were better off.

The next period was in 1997. It was the Asian Financial Crisis. It started with the Thai Baht being sold down. In its initial phase, it was thought that this could be contained to Thailand. Soon it spread to Indonesian rupee, and very soon after, Malaysian ringgit. The tremendous bull run of the decade had created a huge bubble which popped. The shares in many companies were trading at ridiculously high valuations at the peak of the bull market prior to the crisis. By 1998, the stock market had lost by a huge amount. The index plummeted to a low of just above 300. There were panic sellings by big investors, above all, the foreign funds. What did you do as an investor during this period?

Another fantastic period was in 2001. This was when the SARS epidemic hit Singapore. The broad market was sold down. Those who bought during this period would have profited.

This brings us to the present period. The best prices were seen during the October 2008 to March 2009 following the post-Lehman crash. By then, the bear market has been in place for more than a year and a half. Many stocks were already lowly priced and the post-Lehman crash led to even lower prices of these stocks. What did you do during this investing period?

These were the 4 periods from 1987 to 2009 when the market sold off by a huge amount. Many stocks were priced at low valuations. What did you do during these markets?

Did you buy?
Did you sell?
Did you hold?

Buffett is right. "Be greedy when everyone is fearful and be fearful when everyone is greedy."

What further lessons can you learn from these four periods?

How to screen overseas stocks

Wednesday August 12, 2009
How to screen overseas stocks
Personal Investing - By ooi Kok Hwa


Four criteria to look at when choosing counters that are suitable for long-term investment


LATELY, interest has grown in overseas stock investment. Given the foreign markets’ relatively high volatility of returns compared with the local market, a lot of retail investors find it more exciting to invest in overseas stocks.

However, a common problem most investors face is how to filter, from among all the listed companies in the respective markets, the right stocks that are suitable for long-term investment.

Market capitalisation

One of the most important selection criteria is buying stocks with big market capitalisation. The market cap of a listed company can be computed by multiplying the number of its outstanding shares with the current share price.

In general, we should buy stocks with big market cap because they are normally well-established blue-chip stocks with higher turnover and widely-accepted products and services.

Even though some academic research shows that buying into small market cap stocks can provide higher returns compared with big market cap companies, unless we are quite familiar with the stocks available in those overseas markets, it is safer to put our money into bigger market cap stocks.


It is not difficult to find out which companies have the largest market cap in any stock exchange.

Such information is available in most major newspapers in that particular country or the stock exchanges themselves.

For example, if we intend to buy some Singapore stocks, we should pay attention to companies that are ranked in the top 30 in terms of market cap. One can get the rankings by market cap for the Singapore Exchange in StarBiz monthly.

Price/earnings ratio

Once we have filtered out the blue-chip stocks, the next selection criteria is the price/earnings ratio (PER), which should be lower than the overall market PER. This is computed by dividing the current stock price by the earnings per share (EPS) of the company. It represents the number of years that we need to get back our money, assuming the company maintains identical earnings throughout the period.

Even though some published PER may use historical audited EPS compared with forecast EPS, given that our key objective is to do stock screening, the PER testing will provide us with a quick check on the top 30 companies – whether they are profitable and selling at reasonable PER compared with the overall market PER.

If we cannot get access to the overall market PER, we may want to consider Benjamin Graham’s suggestion of buying stocks with PER of lower than 15 times.

Dividend yield

A good company should pay dividends. We strongly believe that this is one of the most important ways for the investors to get any returns from the companies that they invest in.

Our rule of thumb is that a good company should have a dividend yield that at least equals or is higher than the risk-free return, which is usually based on the fixed deposit rates.

The dividend yield is computed by dividing the dividend per share by the current share price. In general, most blue-chip stocks do have a fixed dividend payout policy and reward investors with a consistent and growing dividend returns.

Based on our observation, most smaller companies may not be able to pay good dividends as they may need the capital for future expansion programmes.

Price-to-book ratio

Most investors would like to invest at a market price lower than the owners’ costs in the company. The book value of a company represents the owners’ costs invested in it.

In a normal business environment, unless the company has some problems that the general public may not be aware of, it is quite difficult to find stocks selling at a price lower than the book value of the company.

As a result, we may need to purchase at a market price higher than the book value. According to Graham, the maximum price one should pay for any stock is the price which gives a price-to-book ratio no greater than 1.5 times. This means that we should not pay more than 1.5 times the owners’ costs invested in the company.

Lastly, the above four selection criteria are merely a preliminary quick stock screening process. Even though investors may be able to find stocks that fit the criteria, we suggest investors check further the fundamentals of the company, such as the balance sheet strength, its gearing, future business prospects and the quality of the management before deciding to invest.

● Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.

http://biz.thestar.com.my/news/story.asp?file=/2009/8/12/business/4499990&sec=business

Keep it Simple and … Smart

Keep it Simple and … Smart
By Benny Lee, Chief Market Strategist, NextView Investors Education Group

You would be surprised find that many successful traders do not have advanced knowledge or a PHD in analyzing charts to make trading decisions. Many traders who have acquired professional certificates or degrees in finance and investing may be good analysts but failed when they start to trade. Many are engrossed in techniques and ideas and have forgotten the bottom line – making money from trading.

The objective of every trader (including investors) is to make money on a consistent basis. Many traders still think that their trading decisions should be correct all the time. Of course, not every trade or trading day or even trading month is going to be profitable. This is simply the nature of trading. There is no one successful trader who has not lost any money before in their trades. Keeping it simple can go a long way toward changing the traders’ mindsets about trading so that they can start to trade successfully and make money consistently.

A trader can make hundreds of possible trades during the course of a trading day or week. However, how many of these are your setups. A setup is a set of rule or rules to make the trading decision. How many of these setups have you traded in the past and how many are you intimately familiar with? Getting familiar with the set ups means that you know the characteristics of the set up, i.e. its advantages and disadvantages.

Your set up should be easy to understand and not complicated. Many traders think that putting in more rules and advanced ideas makes a better setup. Most of the time, it leads to confusion. Have simple trading rules in your setup, as long as the rules are able to minimize your trading decision risk by getting a clear picture of what the market is telling you.

Trade only a few setups, 1 to 3 is plenty. You cannot possibly trade every setup or even identify them in a real-time environment, unless you have programmed your setups in automated trading systems. Even that said, you may not have the money to trade all the setups. Furthermore, many setups can also be in opposing directions leading to even greater confusion.

Choose a few setups that you are most comfortable with and profitable (with the highest reward to risk ratio and low drawdowns). Stick with those and ignore all the others. Trade the setups that provide clear and obvious visual recognition. When choosing the setups that you want to trade, select the ones that can easily be identified visually.

Become intimately familiar with your setups. Reducing the number of setups of your trade will allow you to understand how they act, when they are likely to set up and when they are likely to fail. You will have an idea of the expected outcome whenever you make that trading decision. A good trader knows why he lose a trade.

Many traders often let their emotions take over their trading decisions. I have experienced losing a trade and then wanting to take revenge by trying to trade using my instinct. Of course, that will eventually lead to more losing trades. If you do not have a setup, wait. If your setup does not trigger, wait for the next one, even if it takes hours, days or even weeks, depending on the setup that you have. Exercise patience and discipline while waiting for your setup to trigger.

Losses often occur not because of a poor entry, but because the trader did not have the confidence of what he or she saw and allowed a small volatility in the market to take him or her out or, even worse, refused to take the stop loss that the trader had set because of a failed setup.

By trading fewer setups and becoming comfortable with them, you will be able to plan the trade ahead of time and develop much greater confidence in your trading.

The Advantages to Keeping It Simple… and Smart
First, good entries become profitable trades because the trader has confidence in the setup and will not be shaken out at the first bit of market noise. The trader understands the consequences of making that trading decision and would expect how the trade will react to these market noises because of the previous experience.

Second, the trader has become familiar with the setups so that the trader can quickly and easily identify when the setup has failed, exit and limit losses. The trader is able to accept losses because he or she knows that this is part of the plan and if he or she continues to follow the plan using the set ups, he or she will eventually make money from the market after a period of time.

Third, with this newfound trust and confidence that comes with following fewer setups, the trader is less inclined to chase setups that he or she is not familiar with and does not fully understand because the trader knows “his” or “her” setups will be profitable.

The Bottom Line for Your Trading
If your trading method is complicated or requires too much evaluation in real time, you will hesitate before entering and not trust it while in the trade. In the end, you will not follow your own method, which is equivalent to having no trading method at all.

Do not analyze during the market. Sometimes when a setup is triggered, the trader starts to analyze further using other indicators or setups because he or she just do not have enough confidence and do not want to lose on that trade.

Simple strategies work best because they allow you to trade with confidence, and, if you trade with confidence, you are one step closer to eliminating the emotion of fear in your trading.


Benny Lee is a trainer, trader and practitioner of technical analysis. He conducts Technical Analysis workshops, seminars and courses for private and professional investors, traders, remisiers and fund managers in Malaysia, Singapore and Thailand. For more of his articles, please visit: Benny Lee's column )


http://investasiaonline.com/forum/view_topic.php?id=64

Comments: Any investing system should be simple and easy to follow and implement. The system should be applied consistently and can be shown to be productive over a long period. The above article has so many ifs and buts.

China alarmed by US money printing

China alarmed by US money printing

The US Federal Reserve's policy of printing money to buy Treasury debt threatens to set off a serious decline of the dollar and compel China to redesign its foreign reserve policy, according to a top member of the Communist hierarchy.

By Ambrose Evans-Pritchard, in Cernobbio, Italy
Published: 9:06PM BST 06 Sep 2009


Cheng Siwei, former vice-chairman of the Standing Committee and now head of China's green energy drive, said Beijing was dismayed by the Fed's recourse to "credit easing".

"We hope there will be a change in monetary policy as soon as they have positive growth again," he said at the Ambrosetti Workshop, a policy gathering on Lake Como.

"If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies," he said.

China's reserves are more than – $2 trillion, the world's largest.

"Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets," he added.

The comments suggest that China has become the driving force in the gold market and can be counted on to buy whenever there is a price dip, putting a floor under any correction.

Mr Cheng said the Fed's loose monetary policy was stoking an unstable asset boom in China. "If we raise interest rates, we will be flooded with hot money. We have to wait for them. If they raise, we raise.

"Credit in China is too loose. We have a bubble in the housing market and in stocks so we have to be very careful, because this could fall down."

Mr Cheng said China had learned from the West that it is a mistake for central banks to target retail price inflation and take their eye off assets.

"This is where Greenspan went wrong from 2000 to 2004," he said. "He thought everything was alright because inflation was low, but assets absorbed the liquidity."

Mr Cheng said China had lost 20m jobs as a result of the crisis and advised the West not to over-estimate the role that his country can play in global recovery.

China's task is to switch from export dependency to internal consumption, but that requires a "change in the ideology of the Chinese people" to discourage excess saving. "This is very difficult".

Mr Cheng said the root cause of global imbalances is spending patterns in US (and UK) and China.

"The US spends tomorrow's money today," he said. "We Chinese spend today's money tomorrow. That's why we have this financial crisis."

Yet the consequences are not symmetric.

"He who goes borrowing, goes sorrowing," said Mr Cheng.

It was a quote from US founding father Benjamin Franklin.


http://www.telegraph.co.uk/finance/economics/6146957/China-alarmed-by-US-money-printing.html

FTSE 100 hits 5,000 level for first time since October

FTSE 100 hits 5,000 level for first time since October

The FTSE 100 has touched the 5,000 level for the first time since the height of the banking crisis last October as investors seize on better news from the economy.

Published: 3:17PM BST 09 Sep 2009

The index of blue-chip companies has rallied more than 40pc since slumping to its low for the year in early March. The move to 5,000, a level last touched on October 3, comes as a new survey from Nationwide showed that British consumers are feeling more confident than at any point in the past 12 months.

Home Retail Group, the owner of Argos, was up 1pc, and Tesco, Britain's biggest supermarket, also added 1pc. Beyond retailing, BG Group was one of the biggest risers after telling shareholders that it had discovered a deepwater field off the coast of Brazil that contains between 1 billion and 2 billion barrels of oil.

"Difficult as it is to buy up here, the bulls will be taking confidence from the lack (just yet) of a reaction pull back," said Simon Denham, managing director of Capital Spreads. "The big hope is that all this spending does not just build a short term bubble."

Stock markets around the world have recovered from their lows as investors anticipate a recovery in the global economy. However, given the scale of the rally some analysts question whether the momentum can be sustained.

The six-month rally has driven the price-to-earnings ratio on the FTSE 100 to 70.9, the most expensive level in seven years, according to Bloomberg.

http://www.telegraph.co.uk/finance/markets/6162632/FTSE-100-hits-5000-level-for-first-time-since-October.html

UK: 40pc chance of a rate cut? Really?

A 40pc chance of a rate cut? Really?

By Edmund Conway Economics Last updated: September 9th, 2009

2 Comments Comment on this article

About a month ago, in a throw-away comment at an economic conference, Charles Goodhart, a former member of the Bank of England’s Monetary Policy Committee unwittingly caused a stir in the money markets. As I wrote at the time, he raised the idea of the Bank imposing a negative interest rate, in other words charging a fee, on the cash Britain’s leading banks keep in store at the BoE itself.

The idea has snowballed, to the extent that in the run up to tomorrow’s MPC meeting, the odds on the Bank cutting its rate are, according to market participants, about 40pc. So might tomorrow mark the onset of negative interest rates for the first time in the UK? I am sceptical.

First, let’s examine the problem. The Bank is trying to get the economy going by pumping £175bn into it through quantitative easing. What this actually means is creating money (yes, printing it - electronically) and using this to buy bonds - almost exclusively government bonds (gilts) - off private investors. The upshot is that as that money goes into the system it finds its way pretty quickly to banks’ balance sheets (either because they sell the Bank the gilts or because pension funds pocket the proceeds and put them in their bank accounts).
Banks tend to keep a good deal of their cash in their own equivalent of a current account - reserves at the Bank of

England. So the upshot of quantitative easing has been to lift the amount sitting in reserves at the Bank to unprecedented highs - up from below £10bn to £142bn at the last count, in August. At the moment, the Bank pays banks a 0.5pc interest rate on this “current account” cash - the same as the BoE bank rate.
The problem is that much of this money is sitting dormant in the banks’ reserves rather than being used to lend to businesses, where it will actually help fertilise UK economic growth. This is the problem the Japanese faced in the 1990s and early 2000s when they first experimented with QE.

Anyway, Prof Goodhart’s suggestion was that the Bank should charge banks to keep this cash with them, rather than giving them 0.5pc interest. This is something the Riksbank in Sweden is experimenting with. The result would not necessarily be that reserves would fall throughout the system as a whole, but the cash would at least be sloshed around the system a little more (velocity is the technical term here) in the form of lending to businesses and companies.

It was an interesting suggestion - interesting enough for BoE Governor Mervyn King to say this at the Inflation Report press conference last month:

It is certainly true that it would be useful to think about ways to encourage banks individually to try to convert some of their reserves into say shorter term gilt holdings or purchases of other assets which would then reinforce the transmission mechanism of the direct assets purchases that we make. And in normal circumstances you might expect that to have some impact. And there is no doubt that the interest rate that we pay on reserves does affect the incentives which banks face to turn those reserves bank by bank individually into other assets. And it’s an idea we will certainly be looking at to see whether in fact the effectiveness of our asset purchases could be increased by reducing the rate at which we remunerate reserves.

Hence the fact that the market is all of a flutter about the prospects that the Bank would do so at this month’s meeting. However, there are some things people have overlooked. The first is that cutting the rate paid on reserves to banks from, say, 0.5pc to 0pc, would be an overall interest rate cut in all but name. It would push down the overnight rate in money markets to close to zero, which in turn would cut borrowing costs across the wider economy (though it wouldn’t affect tracker mortgages etc). So if you’re cutting the rate paid on reserves, why not cut the Bank rate? It is a prospect that is not beyond the realms of possibility tomorrow, though the Bank did make it pretty clear back in March that it viewed 0.5pc as “effective zero” for rates: below that level weird and not so wonderful things would happen in financial markets; certain businesses could malfunction. Think of it as the “millennium bug” effect for financial markets.

Should the Bank be unwilling effectively to cut Bank rate, it could still charge a fee to banks on a proportion of their reserves, allowing them to keep a certain amount (say, in comparison with the size of their balance sheet) but levying a penalty on any extra cash in their coffers. This is pretty close to what Goodhart was suggesting and is a feasible option tomorrow. But I wouldn’t put a 40pc chance on it.

My scepticism stems from a couple of key points. First, there are some early signs that QE is working even without such assistance. The amount of cash flowing around the wider economy - beyond reserves - is starting to pick up. Second, such a move would effectively amount to a tax on the banking sector as a whole. Third, it would also mean tearing up the complex set of rules and regulations that frame Britain’s monetary system once again.

Fourth, and perhaps most importantly, people seem to have forgotten that at the last MPC meeting something unusual happened: Mervyn King was outvoted. The Governor wanted the QE total to reach £200bn rather than the £175bn the MPC eventually opted for. In other occasions when he was outvoted, King usually attempts to get his way in a subsequent meeting. So might it not be more likely that the Bank will opt for a little more in the way of QE?

Perhaps, perhaps not. The fact is that market participants, having been surprised by the Bank’s decisions again and again in recent months, are suffering a slight degree of paranoia these days. Having been burnt more than once, they are putting greater odds on a surprise decision than they really ought to be. This is a tougher meeting to call than last month’s (to my mind at least, though the markets misjudged that one). And that’s for good reason: the economy is showing at least some signs of recovery - though this does not rule out a further relapse next year, something I’ve written about a number of times. This may well be one of those meetings when the MPC judges it best simply to do as little as possible. A boring MPC meeting? Never thought I’d see the day that one of those would be the exception rather than the norm.

http://www.telegraph.co.uk/?source=refresh

Building a Financial Plan

Sales forecast
Two to three years
Detailed assumptions

• Sales per customer
  
• Number of customers
  
• Sales growth rate
  

Cost forecast
Costs of operating and costs per sale

Income statement and balance sheet
a/r, a/p

Cash flow forecast

Summary statement of sources & uses of cash

http://w4.stern.nyu.edu/berkley/docs/Glenn_Okun.ppt#19

Cash Flow Calculations

Net income
+ depreciation
working capital from operations
- net increase in current assets
+ net increase in current liabilities
cash flow from operations
- net increase in gross fixed assets
+ net increase in debt & equity invested
- dividends paid
net cash flow
+ beginning cash balance
- required ending cash balance
net cash surplus or borrowing required




http://w4.stern.nyu.edu/berkley/docs/Glenn_Okun.ppt#19

Business Model Analysis

The Importance of Cash Flow Management

Personal Dividends AboutSite/Privacy PoliciesContact UsAdvertiseWrite for UsHomeMoney Lifestyle Culture and Arts News Opinions

The Importance of Cash Flow Management
By Miranda on August 27th, 2009


One of the things that can make you or break you financially is your skill at cash flow management. For the purposes of personal finances and individual wealth management, your cash flow is the way money moves through your own small financial system. It’s the way your income flows into your bank accounts and then flows out to expenses and investments. And what is left over. Figuring out how your cash moves through your personal financial system is vital if you want to turn your money to better use, and if you want to be financially successful.

Figuring your cash flow

You will want to know whether your cash flow is positive, negative or zero. With a positive cash flow, you will have a surplus at the end of the month. With a negative cash flow, it will appear that you are overrunning your income — leading to excess debt and additional costs due to interest. And, finally, zero cash flow means that your inflows and outflows are balanced. (If you are into the zero-based budget, your goal is to reach zero cash flows.) One of the easiest ways to figure your cash flow is to use a calculator.

However, you can also do it on your own. First, add up your monthly income from all sources, including what you get from dividends or other income investing. Pay attention to where you are getting your money from. Next, add up all of your expenses. This includes money that you put into savings, retirements accounts and other investments, and money that you give to charity or your church. Catalog where your money is going. There are many tools available in the market, some even online, that can help you understand and plan your income, expenses, debt and savings.

I like to take it a step further, and look at when I receive income and when expenses are due. In cash flow management, when matters. I found this out the hard way a couple of years ago. Excited about a new client, I wrote a bunch of checks for bills, even though some of them weren’t due until the end of the month. What I forgot to figure was that my mortgage payment came out automatically on the 15th. And my mid-month income didn’t come until that day — and it takes three to four business days to get it from PayPal into my bank account. As you might imagine, overdraft charges ensued (no bounced checks, though). $300 in bank charges taught me to schedule bill payments in a manner that matches up with when I am paid.

Tweaking your cash flow

After you have an idea of where you are at (a calculator or personal finance software can provide it for you in all it’s color-coded glory), it’s time to tweak the way money moves through your personal financial system. Look at your expenses. As much as possible, they should be focused on things that will pay you back some how. Examine your priorities to see what provides you a benefit. If you enjoy eating out, but you aren’t that into watching TV, perhaps you should shift some of your resources toward eating out, and cut your cable package.
You should also examine where you can put more money into items that will pay you back down the road. Being able to increase money outflows into investments are likely to repay you, justifying the expense. Charitable giving provides intangible benefits such as a feeling of satisfaction from helping others or spiritual benefits (for believers). And besides, there’s a tax benefit.

Thoughtfully arranging your spending so that you make the most of the money you have coming in can help you in the future. Understanding how money moves through your personal financial system right now can help you cut back on waste, and help you create a realistic financial plan that can help you walk the path to financial freedom.


http://personaldividends.com/money/miranda/the-importance-of-cash-flow-management

$7 a day will make you a million

$7 a day will make you a million
by William Spetrino Jr

How would you like buy a stock at 30 years ago prices? How would you like to be partners with the one investor who has made over 100 billion dollars solely from investing? This article will get you started on the road to financial independence.

33 years ago you could have bought Berkshire Hathaway at 40 dollars per share .Today the same shares are about $110,000 . Question if you knew back then you wanted to own Berkshire 33 years ago what price would you have wanted to pay for the shares, $40 dollars or $110,000 per share? Obviously $40 would be a "bit cheaper". Back then someone who had the ingenuity to raise $1000 dollars and could "free up 20 cents per day" Someone who could borrow $1000 dollars at 7% from a relative would have paid $70 dollars debt service on their 25 shares of BRK-A. Today that $70 a year “investment” would be worth a grand total of 2.7 million dollars. And guess what how much tax you have paid? ZERO.

Berkshire B (BRK-B) now trades at $3590 per share. Someone who borrowed $36000 dollars could buy 10 BRK-B shares. The same 7% loan would cost you $2520 per year or a little over $200 a month which is about 7 dollars a day. Just assuming a 12% return rate (Pabrai thinks 15% at price of $5000 but let’s be conservative), your stock will be worth 1,152,000 million dollars in 30 years and guess how much tax you pay, ZERO! What about 15% compounded like Pabrai "projects" in 33.6years that stock will be worth over 4.6 million.

What are the odds that Berkshire B will be worth less in 30 years? Looking for the "extra 7 dollars" a day and raising the seed capital is ALL that stands in your way. You don't need to change your present investment but just add this to "your arsenal". Many financial advisors stress "diversification" and this simple idea could add millions to your net worth in the future

Ok what’s stopping you? Will most of you achieve wealth and financial independence anyhow if you have not already? Probably so. Anyone out here bought a nice vehicle to treat yourself for achieving "wealth". Think of this article and my book as a great way to "tune up" the engine and make your dream car run "even faster". The small investment in time and money could be worth millions. Would you drive your expensive dream car and have no insurance or spare tire? Think about it.

http://www.atfreeforum.com/billyticketswin/viewtopic.php?t=8&sid=3cad471082afa7fd5d2acf583a92a5e4&mforum=billyticketswin

Footnotes: Early Warning Signs For Investors

Footnotes: Early Warning Signs For Investors

by Rick Wayman

Understanding accounting disclosures gives investors the ability to recognize early warning signs that can help prevent investment disasters. Companies are required to disclose the impact of adopting new accounting rules. This information sometimes reveals some bad news that may hurt stock prices. The adverse reaction could come from the revelation of off-balance-sheet entities, reduced earnings per share (EPS) or increased debt load. Reading between the lines of these disclosures will give the diligent investor an advantage. This overview provides a quick way to evaluate the investment risk that arises from adopting new accounting rules. (For related reading, see An Investor's Checklist To Financial Footnotes.)

Finding the Disclosures
Companies are required to disclose the potential impact of adopting new accounting regulations. Unfortunately, the disclosures are filled with legal boilerplate that may be difficult to read.

Accounting policy disclosures have their own financial notes and/or are discussed in another note. Some companies also repeat the disclosures in the management discussion and analysis (MD&A) section of their 10-K, 10-Q filings and annual company reports. The disclosure may be addressed in several areas, but the main one is usually one of the notes to financial statements with a title like "Summary of Significant Accounting Policies." In 10-Qs and company quarterly reports, the discussion of new accounting rules will most likely be limited to a note entitled "Recently Adopted Accounting Policies." Generally, each new rule is discussed in its own paragraph.

A quick way to read these disclosures is to focus on the second and last sentence. The second sentence will talk about what the rule does and the last sentence discloses management's expectation of what impact the new rule will have. The first sentence generally gives the name of the rule and indicates when the company has or will adopt it. It is best to read the entire disclosure to fully understand the potential ramifications, but focusing on both the second and the last sentence provides the most important information.

Determining What the Disclosures Reveal
Investors should focus on the last sentence where management discusses the new accounting techniques that may impact the company. There are three phrases investors should pay attention to that will raise green, yellow or red flags.



The Green Flag
"No material impact" according to management's assessment indicates the change will have no impact on financial reporting. An example of this is in Huffy Corp.'s, 10-Q for June 2003. Note 11 discussed recently adopted accounting standards. The first item is Statement of Financial Accounting Standards (SFAS) 143, which is accounting for asset retirement obligations. The last sentence reads, "The cumulative effect of implementing SFAS 143 has had an immaterial effect on the company's financial statements taken as a whole." (To view delisted stocks financial statements, visit the U.S. Securities and Exchange Commission)

The Yellow Flag
Phrases may vary, but pay attention if the last sentence tells you that rule will have an impact. You need to be extra careful of elusive language, which management may use because it is reluctant to disclose bad news. Look out for statements like: "The adoption of SFAS 142 did not have an impact on the company's results of operations or its financial position in 2002." Note that this statement does not address how the new rule may impact future results.

The Red Flag
The absence of any conclusive statement indicating the impact of the accounting changes is a big red flag. If the disclosure is missing in this statement, it could mean that management either has not determined the effect of the new accounting or has chosen not to break any bad news to investors. If a definitive impact statement is missing, investors will need to read the entire disclosure in order to evaluate the investment risk.

Take a look at General Electric's (NYSE:GE) 2002 financial statements. In the "Accounting Changes" section of the financial notes, GE states:

"In November 2002, the Financial Accounting Standards Board (FASB) issued Interpretation No. (FIN) 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The resulting disclosure provisions are effective for year-end 2002 and such disclosures are provided in notes 29 and 30. Recognition and measurement provisions of FIN 45 become effective for guarantees issued or modified on or after January 1, 2003.

In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities and an Interpretation of Accounting Research Bulletin No. 51. FIN 46's disclosure requirements are effective for year-end 2002 and such disclosures are provided in note 29. We plan to adopt FIN 46's accounting provisions on July 1, 2003."

The disclosure only indicates that these changes will become effective in the future and does not provide any information on the impact of the change. Investors need to determine what this impact may be. In this case, GE had significant amounts of off-balance-sheet liabilities that would increase the debt load on its balance sheet. Investors need to evaluate how the market might react when the debt is consolidated. In GE's case, there might be little reaction due to the stature of the company and its management. In other situations, such news may be unexpected to those who did not bother to read between the lines.

The Bottom Line
Changes in generally accepted accounting principles (GAAP) are meant to correct accounting rules that can result in financial disasters for investors. Companies must disclose when the rules will be adopted and what impact they will have. Reading between the lines of disclosures made in Securities and Exchange Commission filings and corporate reports may give investors an early warning system to spot potential issues such as increased debt load from consolidating off-balance-sheet entities. Unambiguous impact statements are signs of a credible and competent management team. Lack of a clear impact statement or no statement at all is a warning sign. (For more insight, see Footnotes: Start Reading The Fine Print.)


by Rick Wayman, (Contact Author Biography)

http://investopedia.com/articles/analyst/03/101503.asp