Keep INVESTING Simple and Safe (KISS) ****Investment Philosophy, Strategy and various Valuation Methods**** The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.
Tuesday 10 January 2023
Over 800,000 UK households to see mortgage rates double in 2023
Monday 9 January 2023
Profits of Malaysian plantation companies are heavily influenced by external factors
December 30, 2022
CPO expected to average at RM5,100 a tonne in 2022, seen at RM3,800 a tonne in 2023, says MPOB
KUALA LUMPUR (Dec 30): The Malaysian Palm Oil Board (MPOB) expects the price of crude palm oil (CPO) to average at RM5,100 a tonne in 2022, which is 15.7% higher compared to RM4,407 a tonne in 2021.
The government agency also foresees the price of CPO to stabilise at an average of RM3,800 a tonne in 2023 in anticipation of
- higher palm oil production,
- improved weather conditions in the second half of 2023 and
- higher availability of supply of other major vegetable oils.
MPOB director general Datuk Dr Ahmad Parveez Ghulam Kadir said soybean oil prices, which are expected to be low due to the higher production in Brazil and the US, may impact the price of CPO.
He said in a statement on Friday (Dec 30) that the strengthening of the ringgit against the US dollar may also affect the price of CPO.
According to MPOB, the average CPO price for January to November 2022 was RM5,167 a tonne, up 18.4% compared to RM4,363 a tonne for the same period in 2021.
It said CPO prices had experienced a decline beginning the third quarter of 2022 due to the
- high CPO production season,
- rising palm oil stocks and
- declining soybean oil prices.
Palm oil industry saw higher production, exports and revenue in 2022
MPOB expected the closing stocks of palm oil in 2022 to be at 1.85 million tonnes, up 14.9% compared to 1.61 million tonnes in December 2021 due to higher production.
Parveez said closing stocks of palm oil are projected at two million tonnes in 2023, higher than that in 2022, due to the expected higher supplies of other major vegetable oils including palm oil.
According to MPOB, CPO production for January to November 2022 stood at 16.83 million tonnes, an increase of 1% compared to 16.67 million tonnes achieved in the same period of 2021.
“This was attributed to an increase of 2.8% in processed fresh fruit bunches (FFBs) to 86.51 million tonnes in January to November 2022 compared to 84.17 million tonnes in the same period last year,” MPOB said.
Parveez said that CPO production is expected to increase slightly by 2.1% to 18.5 million tonnes in 2022 as compared to 18.12 million tonnes in 2021. He said the slow recovery is expected due to the issue of labour shortage in oil palm plantations' FFB harvesting and unloading activities.
Parveez projected CPO production to further increase to 19 million tonnes for 2023 due to the expected increase in the productive areas, especially in Peninsular Malaysia and Sarawak. He added that the workforce situation may stabilise next year as foreign worker applications are being approved in stages.
MPOB also provided data that the exports of palm oil and other palm-based products for January to November 2022 increased by 1.3% to 22.43 million tonnes compared to 22.14 million tonnes in the same period of 2021.
It said the higher price of palm oil in January to November 2022 has boosted total export revenue by 31.8% to RM120.43 billion from RM91.38 billion in January to November 2021.
Exports of palm oil alone itself rose slightly by 0.8% to 14.25 million tonnes in January to November 2022 compared to 14.14 million tonnes in the previous corresponding period, MPOB said.
“As such, palm oil export revenue surged 31% to RM80.22 billion from RM61.26 billion in the same period of 2021,” MPOB said.
Parveez said that Malaysia’s ratification of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) on Sept 30, 2022 will encourage demand for palm oil products as it broadens the country’s access to new markets such as Canada, Mexico and Peru, which are not covered by any existing free trade agreement.
“Based on cost benefit analysis on the potential impacts of the CPTPP, upon ratification and implementation of the CPTPP, tariffs for palm oil products are now reduced from a maximum of 6% for Canada, 5% for Mexico and 9% for Peru to lower tariffs based on the tariff elimination schedule,” he said.
“Apart from higher palm oil exports to the markets, the elimination of tariffs improves the Malaysian palm oil competitiveness in the CPTPP member countries.”
https://www.theedgemarkets.com/node/650017
Hailey Chung
theedgemarkets.com
Surin Murugiah
Conclusion:
Profits of plantation companies are affected by crude palm oil (commodity) prices which are heavily influenced by many external factors:
- seasonal fluctuation on palm oil production,
- weather conditions
- availability of supply of other major vegetable oils e.g. soya
- labour supply in oil palm plantations' FFB harvesting and unloading activities.
- strength of the ringgit
- increase in the oil palm productive areas
- tariffs for palm oil products
Structural problems impeding our Malaysian stock market
Malaysian stocks not performing because of serious structural impediments.
- Increasingly market-dominating government linked companies and government-linked investment companies - with explicit and/or implicit unfair advantages - led to the crowding-out of the private sector.
- The lower number of banks - after rounds of consolidation - resulted in less diversity in terms of lending strategies, practices and appetite for risks.
- Falling corporate profits and other factors, translated into chronic underinvestment in productive assets, technology, R&D and innovation.
- The quality of the local education system has been in a long-term decline.
- Companies that relied heavily on cheap, low-skilled foreign labour and failed to move up the value chain were, increasingly, faced with pricing pressure from digitalisation and technology disruption.
- Those that has in the past flourished under government subsidies were by and large unable to fully pass on rising costs, leading to a narrowing of margins. Unfortunately, many Malaysian companies remain simply rent-seekers.
- The issue of corporate governance may be another reason. If controlling shareholders can pay themselves half of the company's profit as annual compensation, which represents 4% to %% of the market capitalisation with no dividend paid to shareholders, surely it must be clear that this amounts to a blatant transfer of wealth of a public company to its controlling shareholders.
Summary
The above are some of the more obvious reasons for the chronic underperformance, in terms of corporate earnings and the stock market.
They must be addressed urgently and within a holistic framework if we want to see a sustainable turnaround.
But despite all the gloom, investors can still profit by investing wisely and rationally.
Reference: Tong's Portfolio Investing can be fun and profitable
Why had the Malaysian stock market done so badly from 2014 to 2018?
In June 2019, the FBM KLCI had fallen in four of the last five years (2014 to 2018). Why had the Malaysian stock market done so badly?
One of the biggest reasons had to be underlying earnings, which were the main driver of stock prices over the longer term.
Period of 5 years (2014 to 2018)
855 companies were categorised into their respective sectors
- To determine the profit trend and the compound annual growth rates (CAGRs) for each sector.
- The sector net margin for each year was also tabulated.
Findings:
Total net profit for all companies fell in 2015, 2016 and 2018 - the CAGR of the decline was 6.8%.
Net profit margin too had contracted sharply over those five years, from an average of 11.3% in 2014 to 7.7% in 2018.
The years in which total net profit fell were also the years in which the FBM KLCI and broader-based FBM EMAS Index ended in the red.
Share prices and P/E valuations
Notably, the share prices declined but the size of the drop was lower than that for earnings.
The result was the price-to-earnings valuations were higher in 2018 than they were in 2014.
And this was why the stock market was underperforming - valuations were not attractive even though share prices were lower.
It also meant a turnaround was unlikely until there is a broad-based earnings recovery.
Sector Analysis (2014 to 2018)
Energy (oil and gas) sector fared the worst in terms of profits, given the sharp fall in crude oil prices and resulting collapse in global exploration and production activities. Brent crude fell from US$110 a barrel at its 2014 peak to below US30 during the lows in 2016. Oil prices were hovering around US $60 a barrel in 2018.
Plantation companies' profits too were affected by commodity prices falling 15.6% annually, on average, since 2014. Crude palm oil fell from an average price of RM 2,400 a tonne in 2014 to RM 2,170 a tonne in 2015. CPO prices recovered to RM 2,630 and RM 2,800 in 2016 and 2017 respectively before dropping back to RM 2,240 a tonne in 2018.
Construction, consumer products and services, properties, transport and logistics, utilities, telecommunications and media and even real estate investment trusts reported negative profit growth between 2014 and 2018.
Healthcare (15 companies) was the best performing sector with a CAGR of 5.7% in their profits.
Financial services (34 companies) grew at a CAGR of 4.3% in their profits.
Technology (81 companies) expanded just 2% in their profits.
Industrial products and services (239 companies) is the biggest sector by number of companies and its profits were up only 0.4% a year.
Consumer products and services (183 companies), their profits fell 2.3% annually on average.
Property companies' profits declined at an average of 3.1% annually for the past four years.
Summary:
The energy and plantation sectors are heavily influence by external factors.
Overall, the average Malaysian company had not fared well at all from 2014 to 2018.
Net profit margin for all sectors declined throughout the five-year period from 2014 to 2018.
Underlying earnings were the main driver of stock prices over the longer term.
Is the yield curve inversion a signal to sell stocks?
Even if a yield curve inversion does precede recession, it can neither predict the timing, length nor depth of the recession - and, crucially, how stock markets react.
Historically, inversions have happened between six months and two years before a recession - during which stocks have traded flattish, up and down.
All this just means that trying to predict stock market movements is a fool's errand. Narratives, it seems, do not move stock prices. Rather, reasons are provided for stock movements, after the facts.
As value investors, we would be much better off looking at the underlying business, earnings, cash flows and balance sheet instead of trying to time the market.
In reality, most recessions are triggered by exogenous events - such as geopolitics, war, trade conflicts and asset bubbles - that are inherently unpredictable.
Additional notes:
Yields on the long-dated bonds are typically higher than those for shorter-duration ones, owing to the additional term premium - to compensate for inflation over the duration.
The difference in yields between the two- and 10-year bonds is the most popular market yardstick for Treasury yield spread.
When this gap turns negative, we deem the yield curve as inverted.
But a bear market isn't all bad news.
But a bear market isn't all bad news. Sure, it can hurt when your portfolio takes a hit when stock prices fall. But you'd still better be prepared for the inevitable downturns in the stock market, and remember that the situation is only temporary, after all.
In every instance when the overall market dropped, it returned and then grew to greater heights. In fact, the stock market has a 100 percent success rate when it comes to recovering from a bear market! The only thing to remember is that sometimes it takes longer for the bounce-back to occur.
If you follow a long-term approach to investing, then you know that patience is a virtue whenever you're investing in the stock market. It also helps to keep your vision focused on your long-term horizon whenever the market hits some turbulence.
By using dollar cost averaging and by investing regularly, you can even make the bear market work for you by taking advantage of generally lower prices with additional purchases. Knowing the market's infallible past record, you can sleep easy -- even when other investors are panicking.
Necessary Bears
Friday 6 January 2023
Actions in an overvalued market
When markets are overvalued, Graham recommends the following actions:
Inflation and the Defensive Investor
Investment Mistakes in a Bear Market
Successful investing is not magic, just keep things simple and maybe follow few investing and money rules of thumb and you’ll be fine in the long run.
Investment Mistakes in a Bear Market
1. Selling without any logical reasoning or attention to long-term goals. Often they all miss the fact that they are selling at the bottom to only repurchase them back at the top. Stop selling without a reason, only sell if the fundamentals have changed for the long term or the investment does not fit in your plan, not because everyone else is selling in the market.
2. The only worse thing one can do than selling out in a bear market is stop investing during the bear market. Would you stop shopping if retail prices dropped 30%? No. When you stop investing during a bear market you will miss out on many undervalued investment opportunities which can have great returns in the long run.
3. Some investors start to look at alternative investments, (e.g. gold) because they believe somehow these will perform better than the equity markets. Although alternative investments have their place in a portfolio the excessive focus during bear markets makes them dangerous.
4. Just stop wasting your time and money trying to time the markets. Investors are more likely to time the markets during a bear market, as there are often big swings, which are seen as opportunities by investors, this strategy will only hurt your portfolio.
I know bear markets hurt, but you trying to “improve” things will only make things worse.
- What were your investment mistakes during this bear market?
- What have you learned from them?
- Do you know anyone who made these mistakes?
To win in the stock market over the long haul, be willing to lose over the short-term
In the short-term, market downturns feel like they will never end.
In the long-term, all corrections look like buying opportunities.
Bear-Market Rally or New Bull?
- On the New York Stock Exchange, the NYSE American, and Nasdaq, 90% of the common stocks trade above their 10-day moving averages.
- Stocks advancing on the NYSE outpace those declining by nearly a 2-to-1 margin for at least 10 days.
- More than 55% of the stocks on the NYSE set new highs over a 20-day period.
The three bears scenario: how the bear market plays out if a recession occurs in 2022, 2023 or not at all.
In its “three bears” scenario, NDR lays out possibilities for how the bear market plays out if a recession occurs this year, next year, or not at all.
1. If a recession occurs sometime in the second half of 2022, the stock market could drop another 10% or more. Bear markets that coincide with recessions tend to decline nearly 35% on average and last for 15.3 months. If this were to be the case, the sooner it would start, the sooner it would be over given that a bear market bottoms four months before a recession, setting the stage for a “shorter than average” recessionary bear market.
2. If a recession occurs in 2023 that would make the current bear market twice as long as average, and likely lead to numerous bear-market rallies that eventually fail as they have in past instances. Clissold cites 1973, 1978, and 2000 as past bear markets that saw numerous rallies between their start and finish with a maximum gain of 15.9%, 14.3%, and 15.5%, respectively.
3. The last and best scenario is if there is no recession at all. Stocks decline on average by 25% in a non-recessionary bear market over 9.1 months. In the past 50 years, the average decline has been 18% over 6.8 months.
If the Fed can achieve the delicate balance of taming inflation by slowing the economy without tipping the country into a recession, Clissold says, “the cyclical bear is likely close to being over.”
NDR = Ned Davis Research, an independent provider of global investment research based in Nokomis, Florida
How Do You Tell a Bear-Market Rally in Stocks From a New Bull Run? | Morningstar
Bed Bath & Beyond shares plummet after company warns of potential bankruptcy
Bed Bath & Beyond shares plummet after company warns of potential bankruptcy
- Bed Bath & Beyond warned Thursday it’s running out of cash and is considering bankruptcy.
- The embattled home goods retailer is having trouble getting enough merchandise to fill its shelves and is drawing fewer customers to its stores and website.
- It anticipates a net loss of about $385.8 million for the third quarter, a nearly 40% jump in losses year over year.
Thursday 5 January 2023
UOB One Savings Account Raises Interest Rates to 7.8% - Should You Save Or Invest?
Enya Rodrigues
12 December 2022·
Earlier this week, UOB announced that they are raising the interest rate of their One Savings Account to up to 7.8% p.a interest. UOB is not alone in doing so. Across the board, we see banks in Singapore fighting to remain competitive by offering increasingly attractive interest rates to encourage people to deposit their money with them.
During the COVID-19 pandemic, many countries were cutting their federal interest rates in an effort to increase lending and spending in order to stimulate the economy. This led to record low levels of interest rates on savings accounts. Many individuals opted to expose themselves to some level of risk and invest their savings rather than leave them idle in low-interest savings accounts.
However, with the current upsized interest rates on savings accounts, is it still worthwhile to invest your money into various investment vehicles, such as fixed deposits, treasury bills or even ETFs, or are you better off saving your money in a high-interest savings account?
If You Have A Small Amount Of Savings
One major caveat to the current high-interest rate promotions banks are running on their savings accounts is that you need a large amount of money in your savings account to be able to reap the full advertised interest rate.
For example, with the UOB One savings account, you are only able to enjoy the full 7.8% interest on your savings if you have an account monthly average balance of over S$75,000.
If you have less than S$30,000 in your savings account, you will only enjoy an interest rate of 3.85% p.a. This is almost half of the advertised high-interest rate of 7.8% p.a.
This is in contrast to the six-month tenor for Singapore Treasury Bills, released on 8 December 2022, which has an interest rate of 4.30%. The minimum bid amount for a Treasury Bill is S$1,000. Hence, with a smaller amount of money, you can get a higher rate of return if you invest rather than place your money in a high-interest savings account.
Furthermore, if you do not have a large amount of capital right now but are able to budget a small amount of your monthly income towards investing, taking a dollar-cost averaging approach might also be more lucrative for you in the long run.
The S&P 500, an index that tracks the 500 largest companies in the United States, has averaged an annual rate of return of 11.88% from 1957 to 2021. Choosing to dollar-cost average into an ETF every month might be a better allocation of your money. Granted, this incurs more risk than a savings account as you are exposing yourself to market volatility. However, the risk-to-reward ratio might be easier to stomach when working with a smaller budget.
If You Have A Large Amount Of Savings
Conversely, if you have a large amount of capital, choosing to deposit it into a high-interest savings account like UOB One might be a good option. With Singapore’s inflation rate in 2022 sitting at around 6%, an interest rate of 7.8% is not only matching but slightly beating inflation.
There are currently very low hurdles to achieve the 7.8% p.a. interest rate on deposit accounts with more than S$75,000. All that is required is for you to credit your monthly salary of at least S$1,600 into your UOB One account and spend at least S$500 on any UOB credit or debit card. For the average working adult, it should not be too difficult to meet this requirement.
Savings accounts are seen as an extremely low-risk asset. The Singapore Deposit Insurance Corporation (SDIC) insures all member banks and financial companies for up to S$75,000. This means that in the very unlikely event that a bank goes bankrupt, all of your deposits, up to S$75,000, will be guaranteed and returned to you. Hence, there is very little risk of you losing your initial capital, unlike when you are invested in the stock market.
Furthermore, a savings account provides the most liquidity. There is no lock-up period like with a fixed deposit or Singapore treasury bill. Savings accounts are also not subject to market fluctuations the way ETFs are. If you need to dip into this pot of savings for emergencies or investing opportunities along the way, you can do so without facing any penalties or losses.
This prevents one from jumping into an investment that they do not have a full understanding of just because they do not want to let their idle cash get eroded by inflation. With a high-interest savings account, you are able to buy yourself time to wait on the sidelines for the perfect investment opportunity to arise.
Conclusion
Whether you choose to take advantage of the high-interest savings accounts now or to continue investing depends on both your personal financial situation and risk appetite.
While choosing to invest may not be as lucrative a decision if you have a smaller amount of savings, the peace of mind you get from knowing that your money is currently accruing interest in a rather risk-free vehicle could be good enough, even if you do not enjoy the full 7.8% p.a. interest rate.
For more information on different options available to you on the market right now, check out our round-up of the best savings accounts out there.
Reference:
https://sg.finance.yahoo.com/news/uob-one-savings-account-raises-022013039.html
Read Also: Best Savings Accounts in Singapore 2022
https://www.valuechampion.sg/bank-accounts/best-savings-accounts-singapore
Wednesday 4 January 2023
"We Want to Be More Cautious." Goldman Sachs CEO on 2023's Global Financial Outlook
Monday 2 January 2023
Glossary (7)
Glossary
Tax-loss selling—selling just prior to year-end to realize losses for tax purposes
Technical analysis—analysis of past security-price fluctuations using charts
Tender offer—a cash bid to buy some or all of the securities of a target company
Thrift conversion—the conversion of a mutual thrift institution to stock ownership
Top-down investing—strategy involving making a macroeconomic forecast and then applying it to choose individual investments
Torpedo stocks—stocks for which investors have high expectations and which are therefore vulnerable to substantial price declines
Trader—a person whose job it is to buy and sell securities, earning a spread or commission for bringing buyers and sellers together
Trading flat—available for sale or purchase without payment for accrued interest
Treasury bills (T-bills)—noninterest-bearing obligations of the U.S. government, issued on a discount basis with original maturities ranging from three months to one year; the interest income from Treasury bills is the difference between the purchase price and par
Treasury bonds (T-bonds) —U.S. government obligations with original maturities of ten years or more; interest is paid semiannually
Treasury notes (T-notes) —U.S. government obligations with original maturities ranging from one to ten years; interest is paid semiannually
Value - the worth, calculated through fundamental analysis, of an asset, business, or security
Value investing—a risk-averse investment approach designed to buy securities at a discount from underlying value
Value investment—undervalued security; a bargain
Volume—the number of shares traded
Window dressing—the practice of making a portfolio look good for quarterly reporting purposes
Working capital—current assets minus current liabilities
Writing call options—selling call options on securities owned
Yield —return calculated over a specific period
Zero-coupon bond—a bond that accrues interest until maturity rather than paying it in cash
Glossary (6)
Glossary
Puttable bond—bond with embedded put features allowing holders to sell the bonds back to the issuer at a specified price and time (see callable bond)
Recapitalization—financial restructuring of a company whereby the company borrows against its assets and distributes the proceeds to shareholders
Relative-performance orientation—the tendency to evaluate investment results by comparing one’s investment performance with that of the market as a whole
Return—potential gain
Rights offering—a financing technique whereby a company issues to its shareholders the preemptive right to purchase new stock (or bonds) in the company or occasionally in a subsidiary company
Risk—amount and probability of potential loss
Risk arbitrage—a specialized area involving investment in far-from-risk-free takeovers as well as spinoffs, liquidations, and other extraordinary corporate transactions
Secured debt—debt backed by a security interest in specific assets
Security—a marketable piece of paper representing the fractional ownership of a business or loan to a business or government entity
Self-tender—an offer by a company to repurchase its own securities
Senior-debt security—security with the highest priority in the hierarchy of a company’s capital structure
Sensitivity analysis—a method of ascertaining the sensitivity of business value to small changes in the assumptions made by investors
Share buybacks—corporate stock repurchases
Shareholder’s (owner’s) equity—the residual after liabilities are subtracted from assets
Short-selling—the sale of a borrowed security (see going long)
Short-term relative-performance derby—manifestation of the tendency by institutional investors to measure investment results, not against an absolute standard, but against broad stock market indices resulting in an often speculative orientation
Sinking fund—obligation of a company to periodically retire part of a bond issue prior to maturity
Speculation—an asset having no underlying economics and throwing off no cash flow to the benefit of its owner (see investment)
Spinoff—the distribution of the shares of a subsidiary company to the shareholders of the parent company
Stock—a marketable piece of paper representing the fractional ownership of an underlying business
Stock index Futures—contracts for the future delivery of a market basket of stocks
Stock market proxy—estimate of the price at which a company, or its subsidiaries considered separately, would trade in the stock market
Subordinated-debt security - security with a secondary priority in the hierarchy of a company’s capital structure
Tactical-asset allocation—computer program designed to indicate whether stocks or bonds are a better buy
Takeover multiple— multiple of earnings, cash flow, or revenues paid to acquire a company
Tangible asset—an asset physically in existence
Glossary (5)
Glossary
Net operating-loss carryforward (NOL)—the carryforward of past losses for tax purposes, enabling a company to shield future income from taxation
Net present value (NPV)—calculation of the value of an investment by discounting future estimates of cash flow back to the present
Non-cash-pay securities—securities permitted to pay interest or dividends in kind or at a later date rather than in cash as due (see cash-pay securities, pay-in-kind, and zero-coupon bond)
Nonrecourse—the lender looks only to the borrowing entity for payment
Open end mutual fund—mutual fund offering to issue or redeem shares at a price equal to underlying net asset value
Opportunity cost—the loss represented by forgone opportunities
Option—the right to buy (call) or sell (put) specified items at specified prices by specified dates
Over-the-counter (OTC)—the market for stocks not listed on a securities exchange (e.g., New York, American, Philadelphia, Boston, Pacific, Toronto)
Par—the face amount of a bond; the contractual amount of the bondholder’s claim
Pay-in-kind (PIK)—a security paying interest or dividends in kind rather than in cash
Plan of reorganization—the terms under which a company expects to emerge from Chapter 11 bankruptcy
Portfolio cash flow—the cash flowing into a portfolio net of outflows
Portfolio insurance—a strategy involving the periodic sale of stock-index futures designed to eliminate downside risk in a portfolio at a minor up-front cost
Post petition interest—interest accruing from the date of a bankruptcy filing forward
Preferred stock—an equity security senior in priority to common stock with a specified entitlement to dividend payments
Prepackaged bankruptcy—a technique whereby each class of creditors in a bankruptcy agree on a plan of reorganization prior to the bankruptcy filing
Prepetition interest—interest accruing from the most recent coupon payment up to the date of a bankruptcy filing
Price/earnings (P/E) ratio—market price of a stock divided by the annualized earnings per share
Price-to-book-value ratio—market price of a stock divided by book value per share
Principal— the face amount or par value of a debt security
Principal-only mortgage security (PO)—principal payments stripped from a pool of mortgages which, in response to changes in interest rates, fluctuate in value in the same direction as conventional mortgages but with greater volatility
Private-market value—the price that a sophisticated businessperson would be likely to pay for a business based on the valuation multiples paid on similar transactions
Pro forma financial information —earnings and book value adjusted to reflect a recent or proposed merger, recapitalization, tender offer, or other extraordinary transaction
Proxy contest—a fight for corporate control through the solicitation of proxies or the election of directors
Prudent-man standard—the obligation under ERISA to restrict one’s investments to those a “prudent” (conservative) person would make (see Employee Retirement Income Security Act of 1974 (ERISA)
Put option—a contract enabling the purchaser to sell a security at a fixed price on a particular date
Glossary (4)
Glossary
Inside information—information unavailable to the public, upon which it is illegal to base transactions
Institutional investors —money managers, pension fund managers, and managers of mutual funds
Intangible asset—an asset without physical presence; examples include intellectual property rights (patents) or going-concern value (goodwill)
Interest—payment for the use of borrowed money
Interest-coverage ratio—the ratio of pretax earnings to interest expense
Interest-only mortgage security (IO)—interest payments stripped from a pool of mortgages which, for a given change in interest rates, fluctuates in value inversely to conventional mortgages (see principal-only mortgage security)
Interest rate reset—a promise made by an issuer to adjust the coupon on a bond at a specified future date in order to cause it to trade at a predetermined price
Internal rate of return (IRR)—calculation of the rate of return of an investment that assumes reinvestment of cash flows at the same rate of return the investment itself offers
Investment—an asset purchased to provide a return; investments, in contrast to speculations, eventually generate cash flow for the benefit of the owners (see speculation)
Investment banking—profession involving raising capital for companies as well as underwriting and trading securities, arranging for the purchase and sale of entire companies, providing financial advice, and opining on the fairness of specific transactions
Investment grade—fixed income security rated BBB or higher
Junk bond - fixed-income security rated below investment grade
Leveraged buyout (LBO)—acquisition of a business by an investor group relying heavily on debt financing
Liability—a debt or other obligation to pay
Liquidating distribution—cash or securities distributed to shareholders by a company in the process of liquidation
Liquidating trust—an entity established to complete a corporate liquidation
Liquidation value—the expected proceeds if the assets of a company were sold off, but not as part of an ongoing enterprise
Liquidity—having ample cash on hand
Liquid security—a security that trades frequently and within a narrow spread between the bid and asked prices
Making a market—acting as a securities dealer by simultaneously bidding for and offering a security
Margin of safety—investing at considerable discounts from underlying value, an individual provides himself or herself room for imprecision, bad luck, or analytical error (i.e., a “margin of safety”) while avoiding sizable losses
Market price—the price of the most recent transaction in a company’s publicly traded stock or bonds
Maturity—the date on which the face value of a debt security is due and payable
Merchant banking—an activity whereby Wall Street firms commit their own capital while acting as principal in investment banking transactions
Merger—a combination of two corporations into one
Mutual fund—a pooled investment portfolio managed by professional investors
Net asset value (NAV)—the per share value of a mutual fund calculated by dividing the total market value of assets by the number of shares outstanding
Net-net working capital—net working capital less all long-term liabilities