The Stages Of Industry Growth

The Stages Of Industry Growth
by Jason Van Bergen (Contact Author Biography)

It is no accident that companies within a particular industry move in lock-step with one another. Companies in a single industry are forever bound by the type of product or service that they provide, and they are constantly competing with one another for market share, consumer acceptance, as well as technological leadership in their particular sub-sector. These competitive and consumer forces shape an industry's corporations and determine the status of the industry as a whole. These forces have followed roughly the same patterns over time, providing a very clean model for the of an industry, the various stages of growth (and decline) experienced by its companies. Here we take a look at these stages and how they determine what kind of investments these companies are.


Initial Growth / Emerging Industries

All companies have to start their business somewhere, and it takes only a single company or small group of companies to jumpstart an entire industry. Looking back in time, we see that it was not even a company but an individual by the name of Alexander Graham Bell who, with the invention of the telephone, started the entire industry of telecommunications. More recently, companies like Texas Instruments and Fairchild Semiconductor Corporation pioneered the semiconductor industry with the invention of the microchip, the central component of all computers and most high-tech electronics gear. Companies involved in establishing emerging industries are generally participating in perilous business, as their primary concerns are raising sufficient funds to engage in early-stage research and development. In their developmental stages, which may last months or even years, these companies are likely operating on a shoestring budget, while at the same time presenting to the world a product or service that is yet to be accepted. These pioneering companies might face bankruptcy, development failure and poor consumer acceptance. Companies in emerging industries are typically recommended to investors with a very high risk tolerance. An adage often used in relation to an initial growth investment is "If you cannot afford to lose your investment in this company, do not make the investment in the first place!" Individual investors are likely to have access to initial growth companies through private investments, sometimes called "friends-and-family capital". At such an early stage, investors often know the company founders personally. And they can only hope to make a profit on their investment in the distant future, when the company offers its shares on a secondary trading market, or when the investor can find somebody else to purchase his or her ownership at a premium (which would take place, for example, if another company were to purchase all of the outstanding shares of the company). Companies in emerging industries are occasionally quoted on major stock exchanges or traded over the counter, and should always be considered in terms of the significant risk they pose. These companies will often be unprofitable, and the large initial start-up costs may result in ongoing negative cash flows. As such, traditional fundamental analysis is often not applicable in emerging industries, and investors must be sophisticated enough to learn or even develop entirely different means of analyzing these stocks. Investing in emerging industries is not for the faint of heart.

Rapid Growth Industries

Companies in industries that are benefiting from rapid growth have sales and earnings that are expanding at a faster rate than firms in other industries. As such, these companies should display an above average rate of earnings on invested capital for an extended period of time, probably years. Prospects for rapid growth companies should also appear bright for continued sales and earnings growth in ensuing years. During this period of rapid growth, companies will eventually begin to lower prices in response to competitive pressures and the decline of costs of production, which is often referred to as economies of scale. But costs decrease at a higher rate than prices, so companies entrenched in growth industries often experience growth in profits as their product or service becomes fully accepted in the marketplace. The consumer electronics industry, for example, is characterized by much research and development, followed by significant economies of scale in production. Prices in home electronics inevitably fall, but the costs of production fall faster, thereby ensuring increasing profitability. Publicly traded companies involved in rapid growth industries, often referred to as growth stocks, are some of the most potentially lucrative investments due to their ability to sustain growth in revenues and profits over long periods of time. Microsoft is an excellent example of a company that became very large in a growth industry (software) over a period of years, increasing its earnings all the while and, most importantly, maintaining its expectations for continued future growth.

Mature Industries

Once an industry has exhausted its period of rapid growth in revenues and earnings, it moves into maturity. Growth in the companies in mature industries closely resembles the overall rate of growth of the economy (the GDP). Earnings and cash flow are still likely positive for these companies, but their products and services have become less distinguishable from those of their competitors. Price competition becomes more vicious, taking profit margins along with it, and companies begin to explore other areas for products or services with potentially higher margins. Many of our economy’s most closely watched industries, such as airlines, insurance and utilities can be categorized as mature industries. Despite their rather staid position in mature industries, investments in these companies' stock can remain very attractive for many years. Share prices within mature industries tend to grow at a relatively stable rate that can often be predicted with some degree of accuracy based on sustainable growth prospects from historical trends. Perhaps even more importantly, companies in mature industries are able to withstand economic downturns and recessions better than growth companies, thanks to their strong financial resources. In troubled times, mature companies can draw from retained earnings for sustenance, and even concentrate on product development in order to capitalize on the economy’s eventual return to growth. Investors in mature industries are those who want to enjoy the potential for growth but also avoid extreme highs and lows.

Declining Industries

Industries that are unable to match even the basic barometer of economic growth are in a stage of decline. Some factors that could contribute to a declining industry are consumers decreasing their demand for the industry’s product or service, technology that supplants legacy products with new and better ones, or companies in the industry failing to be competitive in pricing. An industry that exemplifies all the tendencies of a declining market is the railroad industry, which has experienced decreased demand - largely due to newer and faster means of transporting goods (primarily air transport) - and has failed to remain competitive in pricing, at least in relation to the benefits of faster and more efficient transportation provided by airlines and trucking services. We should note that declining industries may experience periods of stable or even increasing growth from time to time, even if their overall prospects are on the way down. For example, railroad transport is still very much an active industry sector, as the non-competitive firms have been weeded out. Declining industries tend to be poor places to seek investment opportunities, although individual companies within these industries may still have investment merit. Even in the industries where prospects look bleakest, there are always companies that are able to buck the trend and generate growing revenues and profits while those around them falter. But investors who are not inclined to search for such companies are better advised to look for investments in industries that are in the younger stages.

Conclusion

Classifying industries according to their stage of growth can be extremely useful for the purposes of finding companies that match your investment objectives. Have a look at a graph above outlining the stages we discussed:

Conservative-minded investors who are looking for a bit of stability in the equity portion of their portfolios will first want to check out mature industries, where there is the best selection of blue-chip stocks that are widely traded, having extreme trading liquidity.

Investors with a taste for risk may want to take advantage of the higher potential for return that growth industries can provide.

And investors who like to live their lives on the razor edge between success and failure may consider investments in emerging industries, even though such investments tend to be geared toward private companies.

The only constant when it comes to considering investments in various industries is that it may be best to avoid industries in decline.

by Jason Van Bergen, (Contact Author Biography)

http://www.investopedia.com/articles/basics/04/030504.asp?partner=TOD5

Investing in a Bear Market

Investing in a Bear Market
How does one think about investing in a bear market?


Rules for Investing discipline
Many people think that the best way to invest is to fill it, shut it and forget it - and they are reinforced by the dramatic successes of people who found Reliance shares in their grandfather's trunk or bought L&T in the last bull run and held on for dear life.


Featured Comment: What is a rights issue?
Sujit asks:


Wednesday, September 05, 2007
Sensex overvalued? A Walk Down History Lane
Morgan Stanley thinks the Sensex is about 11% above fair value.


Wednesday, August 01, 2007
How To Handle A Sinking Market
The mayhem is here. Nifty is down 183 points to 4345 and Sensex is down 615 points to 14935. A 4% drop in a single day of trade. Every single index is in the red, and nearly 90% of stocks are down today. Is it time for the bears? Is it time to exit? To go home and forget about stocks for a while?


Sticky: Shenoy's Investment Fundas
This post contains an organised series of links to my blog posts about investing.
Why Invest?
Are you Investing or just Saving?
How to go about investing
Creating an Investment Game Plan
The Value Cost Averaging Strategy
Stocks
Opening a brokerage account in India (21/5/07)
Investing in Stock Markets: A roundup of posts
Introduction to Shares, IPOs and Stock Markets
IPOs: What's important in an offer document
What are EPS and P/E ratios?
How to choose stocks in a downturn
Mutual Funds
Introduction to Mutual Funds
Mutual Fund FAQs
Dividend option or Growth option?
Difference between shares and mutual funds.
Choosing Funds: The Dividend Yield Strategy
Closed Ended Funds: Misleading name and High costs.
Myth: Is a lower NAV better for you?
Mutual Fund Dividends: Playing with your own money
How Entry and Exit loads affect you
Exchange Traded Funds (ETFs)
What are ETFs?
Insurance
What is Insurance?
How much Insurance do you need?
Unit Linked Insurance Plans (ULIPs)
How ULIPs can loot you: A real exampleTerm Plans + MFs are better than ULIPs: With data!ULIPs' lower management fees must be matched by performanceULIPs: A Good Investment?
ULIP Net Asset Values: Where to find them.
Comparing ULIP returns to Mutual Funds
Term Plan Premiums
Real Estate
Rent vs. Buy: Should you buy or rent?
The Real Estate Cash Flow Calculator
Taxation
Filling out IT return forms (ITR-1) for 2006-07 *NEW*
How can FMPs save you tax? Capital Gains Tax: A primer
Fundas: Long Term Capital Gains
Bonus Shares: A Tax Saving Scheme?
Can I really save Rs. 33,660 in tax?
Futures and Options
What are Employee Stock Options (ESOPs)?
An Introduction to Futures & Options
Become a Smarter Investor
Liquid funds are better than Fixed Deposits
The cost of IPO funding
Capital Guarantee Plus Appreciation: Possible?
How much money do you need for retirement?
SIPs are not necessarily less risky
Don't believe media headlines; do your own research
Beware of Dividend pushers
Timing the market: A good thing
Commentary
DLF IPO Analysis *NEW*
Buffet on Risking what you should not*NEW*
Small number are not really small.
FIIs are not the source of all problems
Budget 2007 Analysis: A compendium of posts
NFO: Benchmark Gold ETF
Is the Nifty Overvalued? (Feb 7, 2007)
The lack of irrational exuberance (Jan 26, 2007)
Can I save Rs. 33,660 in tax? (Jan 21, 2007)
Your savings may be taxed next year (Dec 4, 2006)
The stock market is all about percentages
Links
Blogs talking about Indian Investments
GlossaryGlossary of Investment Terms, Part 1.
Linkfests: 1, 2, 3, 4, 5, 6, 7


Sunday, October 29, 2006
Bonus shares: A tax saving scheme?
Lots of Indian companies offer "bonus" shares: a 1:1 bonus means that for every share you own, you get one "free" share. Now given that the company's fundamentals don't change, the number of outstanding shares doubles but the net profit remains the same. Meaning, to retain the same P/E, the share price must come down by half.


Monday, January 30, 2006
Two Great posts for investors
Charu Majumdar has two very good posts on investing:
Ten Steps to Wealth Creation (talks about how you can invest and grow your money)
Personal Investment Questions answered: Describes thought processes a lay investor would have. Makes for some very good reading. Charu also reconfirms my view that term insurance is the only insurance that makes any sense.


Friday, January 20, 2006
Insurance: A primer
Everyone's talking about Insurance nowadays. What is it? And why should you, a regular salaried employee buy it? Why should the business owner buy it? Why should ANYONE buy it?

The story of Uncle Chua

How did Uncle Chua accumulate so much wealth in his portfolio?

Uncle Chua's Portfolio & Dividend Income
Here is Uncle Chua's portfolio & dividend income, reproduced here as accurately as was depicted in the book:
Uncle Chua's portfolio
http://spreadsheets.google.com/pub?key=r5DhwS2nWTiIAK0pDCIPD-Q

All the shares he dealt in were ALL blue chip stocks.

In mid-1997, when the Asian Financial Crisis started sweeping across regional markets, Uncle Chua didn't sell a single share. Instead, he started buying shares - again ALL blue chips and ONLY blue chips. He bought bit by bit as the STI index broke one low after another. This was unlike others who began panicking and dumping their shares to preserve what they had left.

Pretty soon, the index was somewhere in the 800-plus region, almost the lowest level then. But many were still convinced that the market could fall further. After all, there was blood on the streets and panic and pessimism everywhere. All news that was coming out was never assuring and very demoralizing.

Uncle Chua's gutsiness and calmness in such a chaotic situation was very puzzling.

However, Uncle Chua's portfolio statement comprised stocks of astronomical value. The most unbelievable part was that his entire portfolio consisted of nothing else but blue chip stocks. There was not even a single junk stock in the list. How did he pick those stocks?

Uncle Chua explained: "I bought some of them as early as in the 60s. I was then in my 50s and retired. I reckoned that I needed to have some sort of passive income and so I made a simple comparison between bank fixed deposits and stock dividends. I decided that the latter offered a better return, and so based on this very simple reasoning, I looked through the Chinese newspapers to select and buy into companies which paid good dividends that would maintain my family."

"Of course, I also made sure that the management team of the companies I bought was committed and acted in favour of shareholder intersts. That's why I asked you today, to tell me what the management said in this annual report about its future palans to steer the company and how much dividends they are proposing this year."


"Those stocks that I have bought also often issued bonus shares. Some even did stock splits, and with the dividends accrued, I reinvested everything back into those stocks I owned. That's how my portfolio grew to this size, but it certainly took me many years..."

Uncle Chua was a rare example of a successful invetor whose winning strategy was simple, direct, clear-cut, straightforward and hassle-free.

Reference: Why am I always Lo$ing in the Stock Market? Publisher: Heritt & Company


Related readings:

Uncle Chua's Portfolio and Dividend Income
http://myinvestingnotes.blogspot.com/2009/05/uncle-chuas-portfolio-dividend-income.html

Investing Philosophy and Strategy:  Keep It Simple and Safe (KISS)
http://myinvestingnotes.blogspot.com/p/keep-investing-simple-and-safe-kiss.html

Best Way to Minimize Risk of Your Portfolio:  Asset Allocation
http://myinvestingnotes.blogspot.com/2011/01/asset-allocation-best-way-to-minimize.html

Economists' letter spells out what went wrong

Economists' letter spells out what went wrong

Last Updated: 7:13PM BST 11 May 2009

Comments 3 Comment on this article

Dear Sir,

The prevailing view amongst the commentariat (reflected in the recent deliberations of the G20) that the financial crash of 2008 was caused by market failure is both wrong and dangerous. Government failure had a leading role in creating the conditions that led to the crash.

Central banks created a monetary bubble that fed an asset price boom and distorted the pricing of risk.

US government policy encouraged high-risk lending through support for Fannie Mae and Freddie Mac (which had explicit government targets of providing over 50pc of mortgage finance to poor households) and through the Community Reinvestment Act and related regulations.
Regulators and central bankers failed to use their considerable powers to stop risks building up in the financial system and an extension of regulation will not make a future crash less likely.

Much existing banking regulation exacerbated the crisis and reduced the effectiveness of market monitoring of banks. The FSA, in the UK, has failed in its statutory duty to “maintain market confidence”.

The tax and regulatory systems encourage complex and opaque methods of increasing gearing in the financial system.

Financial institutions that have made mistakes have lost the majority of their value. On the other hand, regulators are being rewarded for failure by an extension of their size and powers.
Evidence suggests that serious systemic problems have not arisen amongst unregulated institutions.

As such, no significant changes are needed to the regulatory environment surrounding hedge funds, short-selling, offshore banks, private equity or tax havens.

A revolution in financial regulation is needed. The proposals of the G20 governments and the EU are wholly misconceived. Specific and targeted laws and regulations could restore market discipline. These should include:

• Making bank depositors prior creditors. This will provide better incentives for prudent behaviour and make a call on deposit insurance funds less likely.
  
• Provisions to ensure an orderly winding up, recapitalisation or sale of systemic financial institutions in difficulty. Banks must be allowed to fail.
  
• Enhancing market disclosure by ensuring that banks report relevant information to shareholders.
  

This should be reinforced with central bank action to ensure that:

• Proper use is made of lender-of-last-resort facilities to deal with illiquid banks.
  
• The growth of broad money is monitored together with the build-up of wider inflationary risks.

Yours faithfully,

Dr James Alexander, Head of Equity Research, M&G; Prof Michael Beenstock, Professor of Economics, Hebrew University of Jerusalem; Prof Philip Booth, Professor of Insurance and Risk Management, Cass Business School; Dr Eamonn Butler, Director, Adam Smith Institute; Prof Tim Congdon, Founder, Lombard Street Research; Prof Laurence Copeland, Professor of Finance, Cardiff Business School; Prof Kevin Dowd, Professor of Financial Risk Management, Nottingham University Business School; Dr John Greenwood, Chief Economist, Invesco; Dr Samuel Gregg, Research Director, Acton Institute; Prof John Kay, St John’s College, Oxford; Prof David Llewellyn, Professor of Money and Banking, Loughborough University; Prof Alan Morrison, Professor of Finance, University of Oxford; Prof D R Myddelton, Emeritus Professor of Finance and Accounting, Cranfield University; Prof Geoffrey Wood, Professor of Economics, Cass Business School.

http://www.telegraph.co.uk/finance/financetopics/recession/5309591/Economists-letter-spells-out-what-went-wrong.html

Asian shares fall from seven-month high

Asian shares fall from seven-month high


Stock markets across Asia dropped from their highest level in seven months as investors took the opportunity to take profits fon the recent rally.

By Telegraph staff
Last Updated: 8:20AM BST 12 May 2009

In Tokyo, Mitsubishi UFJ Financial fell almost 4pc after soaring 26pc in the past three days. Sony was also on the backfoot, slipping 3pc, as the yen climbed against a weaker dollar.

Meanwhile, in Sydney, Fortescue Metals Group, Australia’s third-largest iron ore producer, was down 6.2pc after analysts at JP Morgan Chase slashed their recommendation on the shares.

Jim Rogers, who co-founded the Quantum Fund with George Soros, told Bloomberg News that "of course its time for a correction, that’s the way markets work.”I don’t see the stock market as a great place to be for the next two to three years, maybe for the next decade.”

Overall, the MSCI Asia Pacific Index fell 1.1pc to 97.44 in Tokyo. The pullback comes after six days of advance fulled by hopes that the global economy is recovering. Japan’s Nikkei 225 Stock Average retreated 1.4pc to 9,315.67.

http://www.telegraph.co.uk/finance/markets/5311098/Asian-shares-fall-from-seven-month-high.html

Are B-Schools To Blame?

Serchuk David, Forbes.com 05/08/09 13:00:06 GMT

Are B-Schools To Blame?

Field Marshall Arthur Wellesley, better known as the first Duke of Wellington (1769-1852), stands astride British history like a colossus. A two-time prime minister, Wellington remains best remembered for his defeat of Napoleon at the Battle of Waterloo in 1815.

This stirring victory also birthed Wellington's most famous quote: "The battle of Waterloo was won on the playing fields of Eton." Except Wellington didn't actually say it: As discovered by the seventh Duke of Wellington, this quote didn't circulate until three years after the first duke's death. As for Eton, the seventh duke told Time magazine in 1951: "He had no particular affection for the place." More galling, he didn't care for organized sports all that much, either. What Wellington did say about his most famed victory is appropriately more world-weary: "Nothing except a battle lost can be half so melancholy as a battle won."

Yet despite this debunking the former quote lives on in the public's imagination. And it's easy to see why, as education is such a formative experience in many of our lives. If that is the case, than what sort of leaders are the playing fields of Wharton, Harvard and Stanford business schools turning out? Judging by the most recent financial crisis, it's easy to say that today's business schools are making far more in the way of subprime rib than Beef Wellington.

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According to Jeffrey Pfeffer, of the Graduate School of Business at Stanford University, the leadership skills imparted in business fail to measure up in many obvious ways. His 2009 paper "Leadership Development in Business Schools: An Agenda for Change" shows that although one-third of all chief executives hold M.B.A. degrees, their success is, at best, mixed. For starters, having an M.B.A. didn't result in higher compensation. Another shocker: having an MBA from a ranking school did not correlate to higher performance at the firm level versus having such a degree from a lower-ranked school. Pfeffer also quotes evidence showing that firms lead by CEOs lacking either M.B.A.s or law degrees "had slightly better risk-adjusted market performance."

Why? One possible reason is because graduate-level business schools inculcate values incompatible with long-term firm performance. As noted by the Aspen Institute in 2001, during their two years in typical business school M.B.A. programs, students place more and more emphasis on shareholder returns and less on product quality, employees and customers. As the institute updated the study in 2008, they also found that students cared less about having a positive impact on society the longer they were in MB.A. programs.

But perhaps the most troubling studies reveal that M.B.A. students are more likely to cheat than other students. As found by Donald McCabe, a professor of finance at Rutgers University, and Linda Trevino, a Cook Fellow of business ethics at the Smeal College of Business at Penn State University, 56% of M.B.A. students admitted that they cheated in class, versus 47% of non-business students. McCabe and Trevino compiled data from 2002 through 2004, studying 5,331 students, and published the results in "Academic Dishonesty in Graduate Business Programs: Prevalence, Causes & Proposed Action."

But what can be done? Pfeffer says that business schools can improve their quality by taking their eyes off their rankings, which have become like the sword of Damocles for many. The problem with this, he says, is that the rankings are poor indicators of school quality. Also, schools often rate their faculty by how often and where they publish their academic work, which is again a poor indicator of actual quality of scholarship, let alone what is taught in the classroom. Also, schools need to account for how well their grads do over the lifetimes of their careers, versus the present focus on starting salaries.

But not everyone accepts the idea that business schools are to blame. Anant Sundaram, a professor of finance at Dartmouth University's Tuck School of Business, says that in his classes and the school, real, useful fundamentals are not only taught but emphasized. "What we witnessed in the capital markets violates Finance 101 ideas," he says. "Things like value comes from real assets, not shuffling pieces of paper. If you think arbitrage opportunities are to be had, think again. We teach a lot of skepticism."

If this is so, how can Sundaram account for the spectacular failure of so many former B-school grads? He says that once they graduate, students often get sucked into the murky world of Wall Street, where risk and reward are divorced, and no one cares about anything as long as assets rise. "This is a Wall Street crisis," he says. "It's not chief financial officers that have caused this crisis, this is a small group of paper shufflers." Of course this fails to address the issue of where these paper shufflers came from.

The Forbes Investor Team is also skeptical that business schools are all that much to blame. While noting that recent B-school grads are more arrogant and self-absorbed, Vince Farrell, chief investment officer for Soleil Securities, adds "I don't know if it's the job of B-schools to be responsible for America." As for ways to correct this arrogant mindset, Farrell recommends that M.B.A. grads should do hard volunteer work and also read The Rise and Fall of the Third Reich, in order to understand how powerful empires crumble.

Bernie McSherry, senior vice president at Cuttone & Co., says that he doesn't particularly blame business schools, as ethical breaches are tolerated at the business level all the time. He also doubts that a couple of years in grad school will correct whatever ethical problems a student would have.

Michael Ervolini, the head of Cabot Research, which looks at business through a behavioral lens, says that time developing self-awareness and introspection would be valuable for business-school grads, and even lead to better business decisions. Wellington would approve.

A Better B-School?

Forbes: Have business schools failed America? There seems to be a growing sense that B-schools are really passing on the whole moral aspect of business and teaching very little in the way of corporate governance, including the rights and responsibilities of boards.

OK, Deans Ervolini, McSherry and Farrell, what are some of the courses you would make mandatory in your B-schools? What are some things that need to be taught that just aren't being taught right now? What courses would you remove? Give me somewhat of a lesson plan, maybe even a syllabus of texts to read, and a few sample questions you would require your students to know before you allow them to graduate.

Bernie McSherry: Well, for starters, I would require all schools at the high-school level to teach a personal finance course. Too many of our young people are stepping into the world without knowledge of basic consumer finance, and we should recognize that it is in the interests of society that we teach folks the basics about money management and credit.

Michael Ervolini: I guess that I want to start by redirecting the question. We first might ask--how much of the responsibility belongs to the business schools and how much to the companies that hire these M.B.A.s, their boards of directors, and the market (all of us) as a whole? For that matter, where were the nation's journalists as overall debt spiraled out of control, bank leverage grew to great proportions and the credit markets became clogged with poor quality paper?

B-schools serve a purpose to provide talented employees that have received some minimum training for their career. You can not expect too much from a two-year stint, however, even at the most prestigious of programs. This is particularly the case with an average of only 18 months actually on campus.

What courses might help? Taking the behavioral perspective, it seems that some time spent developing self-awareness and introspection might help. Knowing what really motivates you and why you are doing what you are doing seems like a better choice than simply following the crowd. It might lead both to higher career satisfaction and better business decisions.

Vince Farrell: I don't know that it's the job of B-schools to be responsible for America. But over the years, I have found the B-school grads to be increasingly self-absorbed and ego driven. I think that down-in-the-dirt charity work would be a great elective. For the most part, the students are smart and have a history of success. Life will teach them the ups and downs, but some exposure to those less fortunate might be a good start.

I remember a lacrosse coach that made some defensemen practice without sticks. They were too reliant and had to learn how to be successful while at a disadvantage. B-schoolers have had a lot of advantages, and humility would be a good course. From humility could come some understanding and perspective.

Forbes: Where have B-schools fallen down? What do you think they need to do to correct that? What are some books every B-school student needs to read? By the way, these don't have to be business books. In fact, it might be more interesting where they not.

Farrell: They should all read The Rise and Fall of the Third Reich. How Nazi Germany grew in arrogance and self-importance and how it came close to destroying the world. And then almost any other history book that would deal with the rise and fall of people one time considered great. Match King is out now, and also House of Cards shows how blind arrogance destroyed Bear Stearns.

McSherry: Governance is becoming a hot topic in business schools. I am currently enrolled in a doctoral program at Pace University, and as part of the program I have recently taken a governance class taught by Professor Jack James. The course addressed most of the current issues in governance and presented a good overview of international corporate governance rules. Professor James is about to propose that Pace offer a major in governance. The school has been a leader in that area, and I hope that it creates that major. Other schools are likely to follow suit.

As far as complaints about ethics go, I am skeptical of the idea that ethics can be taught in school. I recognize that it may be useful to offer students an ethical framework to view the business world through and case studies could provoke some lively discussion, but I am doubtful that many students emerge from those classes with markedly improved ethical practices.

Ethics are most reliably taught in a home setting. Young people often absorb their view of the world from parents and family members, and attitudes regarding honesty and personal integrity tend to be developed during our formative years. Some are lucky to be inspired by a mentor or teacher and may develop better ethical ideals as a result, but most of us are fully formed in that regard long before entering B-school.

Farrell: Bernie, you are so right and what insight. We can't reach into people's homes, but a course should be entitled, "Character is what you do when no one is watching."

Forbes: Hi Mike, let's take this a step further. How should B-students develop self-awareness and introspection?

Ervolini: Developing self-awareness is, of course, a lifelong process. While in business school, students might consider any of the following: Emulate stars of integrity, find a couple of leaders whose approach fits your view of life and learn how they do what they do; read, there are lots of books and papers on the challenges of introspection and personal growth; test yourself, many schools have programs in experimental finance that might offer simulations to help you uncover your tendencies under varying circumstances; and, of course, participate in discussions on topics that challenge your thinking, not so much about facts, but about what decision is right for you.

McSherry: Personally, I don't think that B-schools are doing a particularly bad job. Sadly, ethical breaches are tolerated and, at times, even encouraged by many in the business world. It is hard to believe that taking a class or two in an M.B.A. program will improve people's ability to avoid temptation were they to land in one of those organizations.

Students should be made to understand that our current age is not so different from previous eras, both in good ways and bad. In fact, they may gain a better perspective knowing that some of the unsavory aspects of a free-market economy have long been with us. To that end, I would require that all students read two books:

The Gilded Age by Mark Twain and Charles Dudley Warner. Written in 1873, the novel satirizes a world beset by greed and political corruption that sounds like it could have been written today. And The Way We Live Now by Anthony Trollope, written in 1875. Also a satire, the novel presents us Augustus Melmotte, a mysterious financier whose schemes will bring Bernie Madoff to mind.

There is not much that is new under the sun.

Forbes: Interesting point. Guys, do you agree with Bernie that ethics are basically baked in by the time students enter B-school, or do you feel there is still time to change behavior for the hopefully better by that stage? If so, how? And what should be taught?

Ervolini: "Baked in" may be a little too strong, but a great deal of our personality is certainly formed well before graduate school. Also of importance is that many studies show that people do behave quite differently as their environment changes. Social norms and expectations are critical. Who are we celebrating, and who are we reprimanding? What stories get the most news coverage? Bernie's point about the family being the origin of ethics and morality is a good one. Similarly, what is expected or demanded of us in a particular environment will affect the choices we make.

See More Intelligent Investing Features.

http://news.my.msn.com/business/article.aspx?cp-documentid=3281323

Who is to blame for the economic crisis? The Ministers.

Ministers 'to blame' for financial crisis

Governments and central bankers must take the blame for the financial crisis - not bankers, investors and others in the market, according to a new study.

By Edmund ConwayLast Updated: 7:38AM BST 12 May 2009
Comments 6 Comment on this article

In a comprehensive analysis of the causes for the financial and economic crisis, the Institute of Economic Affairs (IEA) has concluded that the disaster was caused by authorities' mistakes rather than market failures. In an associated letter to The Daily Telegraph, the IEA, supported by a number of leading economists, including Tim Congdon and John Kay, said that despite these failures regulators were being rewarded with more responsibilities.

The study suggests that hedge funds and tax havens should not be unduly punished, and that in the future central banks and regulators should pay greater attention to imbalances building up in the economy. The detailed analysis, Verdict on the Crash, will come as a further blow for Gordon Brown, claiming that the system he created to monitor the financial and economic system was found entirely wanting and is in need of a major overhaul.

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http://www.telegraph.co.uk/finance/financetopics/recession/5309590/Ministers-to-blame-for-financial-crisis.html

Hardest hit shares rise faster than the rest

Diary of a private investor: 'Dash for so-called trash shares has given me a 16pc return this year'

My shares which had been hardest hit – such as Enterprise Inns, which owns pubs – began to rise faster than the rest.

By James Bartholomew
Last Updated: 10:48AM BST 06 May 2009

'Enterprise Inns, which owns pubs, began to rise faster than the rest' Photo: GETTY This year has started extraordinarily well. As at the beginning of this week, my Individual Savings Account (ISA) in which I have most of my investments was up 16 per cent. That compares with a four per cent fall in the FTSE 100 index.

How on earth did this outperformance happen?


In the first few months, things went badly for me. But from early March, everything changed. My shares which had been hardest hit – such as Enterprise Inns, which owns pubs – began to rise faster than the rest. Some people have called this a "dash for trash" but that is unfair.

What has happened, rather, is the reverse of what occurred in 2008. At that time, panic and fear set in. I remember it vividly and felt it myself.

People sold out of any company that had the slightest element of doubt about its future: clothing companies – "demand might collapse"; banks – "you can't trust their supposed assets"; house-builders – "probably will go bust"; heavily-indebted companies – "the banks might pull the plug". Investors sold them down. Then others saw the shares falling and joined in the selling. The shares fell further and further to – I would suggest – absurdly low levels. Shares in Enterprise Inns fell so low that, to my mind, the share price was mere option money on the company's survival.

These companies were not really 'trash'. They were just ones who had extra problems to face in the recession. My difficulty was finding the courage to buy shares that had done nothing but fall for six months or more. How could one presume to call the bottom?

Well, I don't claim to have declared 'the bear market is over' loud and clear. The best I managed was to say in March that shares were "extremely good value". But I did steadily start re-investing, especially after Tim Congdon said with such confidence that the economy would turn round towards the end of this year because of the 'quantitative easing'.

I bought more share in R.E.A. Holdings, a palm oil plantation company, in Enterprise Inns, in Home Products a Thai DIY store chain, Staffline, a blue-collar recruitment company, Griffin Mining and a few others. Most of these have risen and some of them quite spectacularly.

I bought more REA Holdings at prices varying between 209p to 287p.The price has since soared to 350p. I added to my original purchase of Enterprise Inns at 69.75p with further purchases at 93.5p and 128.25p. Since then they have they have reached 160p.

One of the most satisfying moments came when Harvey Nash, a company that recruits staff particularly in Information Technology and outsources IT work, produced a good set of results last week. I have held a 'full weighting' in this company for many months now – that is to say a full ten per cent of all my financial assets. It seemed remarkable good value.

Now, finally, the stock market was reassured that yes, this company is getting through the recession in good shape. Its business model is working. The shares jumped by over a quarter in a single day. It was relief and the beginning of belief.

Frankly it has been a very exciting time and I think it will go further, albeit with relapses. The companies in which people lost almost all faith are still cheap on normal criteria. I am continuing to move out of 'safe' investments into more adventurous ones. Last Friday I bought a few shares in Carpathian at 22.75p. The company invests in Eastern European commercial property. It produced results and the conclusion of a strategic review that day.

The company announcement was one of the most impressive I have ever read. The managing director described the company's situation with clarity, addressing all the issues and details which investors and his bankers would want to understand. Yes, the company has endured a major loss in asset values.

Yes, it has been in breach of some of its banking covenants. There were details of each property and the loans attached. I reckoned that with such competent, articulate leadership the company will be able to keep the show on the road. Meanwhile the reduced net asset value is apparently 80p – more than three times the current share price. Worth a flutter, I thought.

To pay for this, I sold my recently purchased holding in index-linked government stock. The time will come for outright inflation hedges like index-linked stock. But perhaps that time has not arrived yet.

Right now it seems the turn of the shares which were heavily sold down to return to more sensible valuations. The fallen have become mighty. The rise of a share from a miserably unkind valuation to a fair one can mean a doubling and more.

http://www.telegraph.co.uk/finance/personalfinance/investing/5277843/Diary-of-a-private-investor-Dash-for-so-called-trash-shares-has-given-me-a-16pc-return-this-year.html

'The risk of losing money in the short-term is high'

'The risk of losing money in the short-term is high'

The stock market, that maddening babble of millions of differing points of view, has done it again.

By Ian Cowie
Last Updated: 1:07PM BST 11 May 2009

Just when many people decided never to have anything to do with shares, prices took off.

This is good news for millions of people hoping endowments will repay mortgages, pensions will fund retirement and unit or investment trusts will prosper. Even if it is also rather galling for anyone who shunned their individual savings account (Isa) or annual pension allowances last month.

So the index of Britain's biggest shares soared by 25pc in two months. When you consider how many "experts" have produced books on economic meltdown in recent weeks, you would need a heart of stone not to laugh.

Perhaps the market will be higher still by the time the more ponderous pessimists have published. Nor is the Footsie's progress being driven by obscure stocks which few people hold. Barclays Bank, for example, has seen its share price rise more than six-fold this year from 47p, when doom-mongers feared bankruptcy, to 291p this week.

Nobody knows if this will last but I draw comfort from the fact that so many experts remain bearish. The same people were bullish before the crash.

It is human nature to assume that the future will be like the immediate past. But, as the bar chart on this page demonstrates, a longer term view is more encouraging. M&G looked at 20 years' returns from the British and global stock markets, measuring hundreds of periods starting at the beginning of each month.

What comes through loud and clear is that the risk of losing money in the short term is high. Where shares were held for only one year, losses were suffered a quarter of the time. However, where holdings were extended to five years, the risk of loss fell to one in five.

Most reassuringly, where shares were held for a decade, losses were suffered less than 1 per cent of the time. That illustrates what an extraordinarily dire decade we have lived through, since the FTSE peaked at 6,930 in December 1999.

It even suggests, dare I say it, that we may make further progress before that decade is complete. Most importantly, it illustrates that long-term investors are not taking the same risks as short-term speculators.

http://www.telegraph.co.uk/finance/personalfinance/comment/5305053/The-risk-of-losing-money-in-the-short-term-is-high.html

Sustainable Growth

Sustainable Growth



Good growth continues over time. It has a sustainable trajectory. You are NOT looking for a quick spike upward in revenues, caused by cutting prices or by throwing substantial resources against a one-shot opportunity. The goal is to have the growth continue year after year.



For example, the growth of Southwest Airlines has been based on a consitent set of actions. New routes are carefully vetted - the goal is to have them be profitable in less than a year - and turnaround times (the period from when a plane pulls into a gate until it pushes back on another flight) are substantially faster than the industry average, allowing Southwest planes to fly more trips a day than its competitors.



If you look at one of the suppliers to the airline industry, you can see another example of sustainable growth. In this case, the move toward sustainability was prompted out of necessity.



When the airline industry declined in the early 1990s, it led to a decerease in the revenues of firms that sold aircraft engines. GE Aircraft Engines redefined the needs of its airline customers to include not just the engines themselves but also servicing them on a regular basis. Up to that point, a major airline would use the service shop of one company in, say, Chicago and that of completely different companies in its other locations around the world. Some also did the service themselves in their own shops.



GE's new value proposition was to provide total service around the globe. Through innovation, use of information technology, and managerial ability to provide better maintenance, the result would be less downtime for the airlines and lower costs.



For example, doing a major overhaul on its own might have required an airline to fly its plane back empty to its service facility. With service operations around the world, GE can do the work wherever a plane is, which gets the plane back in the air, generating revenues sooner. And because it specialises, GE can do the necessary service work faster, increasing productivity for the airlines once again. Scores of airlines took advantage of the chance to outsource the maintenance part of their business to a single supplier.



Before its chief competitor, Pratt & Whitney, woke up, GE Aircraft Engines captured 70% of the airplane-service market. And, of course, the service contracts tied customers more closely to GE, giving it a leg up in selling the core product -engines - and developing a sustained trajectory of growth by having a built-in-revenue stream, the money that comes in month in and month out from the service contracts.



In this case, the "single" and "double" of adding a service coponent to a product created a platform that is a home run in terms of a sustained, decades-long trajectory of growth. The recurring revenues from the service work are extremely reliable. Not only has GE Aircraft Engines otgrown the competition - its model of adding service to products became a best practice for other GE businesses, which are now adding high-margin service work into their product mix.



It is also an example of building both scale and scope and then learning how to leverage for growth. GE Aircraft's number-one position in the marketplace, combined with organic growth and simultaneous productivity, gave it the leverage to make acquisitions in the service area.



But the only way this growth is going to occur is if everyone in the organization believes it to be possible. It is up to the organization's leadership to create the right mind-set.

Enjoy the rally while it lasts - but expect to take a sucker punch

Enjoy the rally while it lasts - but expect to take a sucker punch


Our delicious spring rally is nearing the limits. The 40pc rise on global bourses since March assumes that central banks have conjured away the debt overhang by slashing rates to zero and printing money. Nothing of the sort has occurred. Two thirds of the world economy will be in deflation by July.

By Ambrose Evans-Pritchard
Last Updated: 6:43AM BST 11 May 2009

Comments 20 Comment on this article

Bear market rallies can be explosive. Japan had four violent spikes during its Lost Decade (33pc, 55pc, 44pc, and 79pc). Wall Street had seven during the Great Depression, lasting 40 days on average. The spring of 1931 was a corker.

James Montier at Société Générale said that even hard-bitten bears are starting to throw in the towel, suspecting that we really are on the cusp of new boom. That is a tell-tale sign.

"Prolonged suckers' rallies tend to be especially vicious as they force everyone back into the market before cruelly dashing them on the rocks of despair yet again," he said. Genuine bottoms tend to be "quiet affairs", carved slowly in a fog of investor gloom.

Another sign of fakery – apart from the implausible 'V' shape – is the "dash for trash" in this rally. The mostly heavily shorted stocks are up 70pc: the least shorted are up 21pc. Stocks with bad fundamentals in SocGen's model (Anheuser-Busch, Cairn Energy, Ericsson) are up 60pc: the best are up 30pc.

Teun Draaisma, Morgan Stanley's stock guru, expects another shake-out. "We think the bear market rally will end sooner rather than later. None of our signposts of the next bull market has flashed green yet. We're not convinced the banking system has been fully fixed," he said

Mr Draaisma said US housing busts typically last nearly about 42 months. We are just 26 months into this one. The overhang of unsold properties on the US market is still near a record 11 months. He expects the new bull market to kick off later this year – perhaps in October – anticipating real recovery in 2010.

Keep an eye on the upward creep in yields on the 10-year US Treasury, the benchmark price of world credit. This alone threatens to short-circuit the rally. The yield reached 3.3pc last week, up over 1pc since January and above the level in March when the US Federal Reserve first launched its buying blitz to pull rates down. Bond vigilantes are taunting the Bank of England in much the same way, driving the 10-year gilt yield to 3.73pc.

The happy view is that this tightening of the bond markets is proof of recovery fever, but there is a dark side.

Governments need to raise $6 trillion (£4 trillion) this year to fund bail-outs and deficits, led by this abject isle with needs of 13.8pc of GDP (EU figures). China fired a warning shot last week, saying the West risks setting off "inflation for the whole world" by printing money. It hinted at a bond crisis.

Yes, the glass is half full. China's PMI optimism gauge has jumped back above the recession line. The global PMI has been rising for seven months. But this usually happens after a crash as companies rebuild battered inventories for a quarter or two.

Note that container volumes in Shanghai fell 17pc in January, 22pc in February, and 9pc in March. Rail freight volumes in the US were down 32pc in April on a year earlier.

The Economic Cycle Research Institute (ECRI) says the US recession will be over by summer, insisting that its leading indicators have never been wrong – except once, in the Great Depression. Quite.

SocGen's other bear, Albert Edwards, says the new element in this slump is that GDP is contracting in "nominal" terms, not just real terms. Money incomes are flat. It is a crucial difference.

"This is like drinking hemlock. The US is gradually slipping further towards outright deflation, just as Japan did," he said. As companies retrench en masse they risk tipping the whole economy into Irving Fisher's "debt deflation trap".

If we are spared – still a big if – we can thank a handful of central bank governors and policy-makers who tore up the rule book, defied tabloid opinion, and took revolutionary action in the nick of time.

We owe much to the Fed's Ben Bernanke (leaving aside past sins as Greenspan's cheerleader), to Britain's Mervyn King, and the Canadian, Japanese and Swiss governors. Hats off, too, to the Greek speakers at the European Central Bank who have just carried out a monetary putsch, outflanking German tank-traps on the Rhine. The hero is Athanasios Orphanides, the Cypriot governor who drafted the Fed's anti-deflation strategy during his 17-year stint in Washington.

The ECB's belated embrace of QE is a watershed moment, even if only a token purchase of €60bn of covered bonds. What poisoned the early 1930s was beggar-thy-neighbour monetary policies. Any country that tried to reflate alone was punished by currency flight (gold loss), yet the mediocrities in charge lacked the imagination to reflate together.

We can now test the Friedman-Bernanke hypothesis that the Fed could have halted the Depression by letting rip with bond purchases. Japan was not a proper test. It eked out a recovery of sorts earlier this decade by embracing QE, but only in the context of a global boom and a yen crash.

There is at least one more boil to lance before we put this debt debacle behind us. The IMF says eurozone banks have so far written down a fifth of likely losses ($750bn) compared to half for US banks. They must raise $375bn in fresh capital. Good luck.

Germany's BaFin regulator goes further, warning of $1.1 trillion of toxic assets on German bank books. Landesbanken are a calamity. If the IMF and BaFin are right, Europe has not yet had its crisis. When it does, we will see a second stress pulse through Eastern Europe and Club Med.

The echoes of 1931 are ominous. That year began with green shoots, until Austria's Credit-Anstalt buckled in the summer and took Central Europe with it. Continentals who still thought it was an American crisis learned otherwise. Plus ça change.


http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5301123/bEnjoy-the-rally-while-it-lasts---but-expect-to-take-a-sucker-punchb.html

Profitable Growth

Good growth has to be not only profitable but capital-efficient - that is, it needs to earn a return on its investment greater than the company could have received by putting its money in something ultra-safe, such as a Treasury bill. Colgate-Palmolive's growth is definitely profitable.



For more than a decade, Colgate has been on a sustained march to becoming number one in the oral-care consumer-products market, and, as mentioned, has edged out both Procter & Gamble and Unilever. As important as its growth in revenues has been Colgate's steady improvement in profitability. Its gross margin has increased from 39% in 1984 to close to 60% in 2003, an improvement of almost one point per year.



Gross margin - your revenue less what it costs to make the product to obtain those revenues - is an important indicator of a company's profitability and often not given the due it deserves. Increasing gross margin and at the same time growing revenues at a rate better than the overall market is what makes for a great growth company. It is here that you can directly see the relationship between improved productivity and profitable growth. Colgate for more than a decade has been able to find ways to consistently enhance its competitive position by making its operations more productive and streamlining its processes.

The improvement of Colgate's gross margin also reflects its ability to innovate ahead of its two chief competitors. Colgate has created a corporate "growth group" with two major responsibilities.

1. The first is to be continuously focused on developing new products, extending existing products, and improving packaging.


2. The second, equally important, job is to concentrate on logistic, production, delivery, and speed and responsiveness to retailers through the effective use of data warehousing, information technology, and cost productivity.

Again, it is an example of a top company recognizing that it must simultaneously improve productivity costs and grow.



Both processes resulted in Colgate's winning shelf space. It also meant lowering costs not only for Colgate but for retailers as well. Colgate reduced what it cost retailers to stock and sell its products while increasing retailers' inventory turns of Colgate products, thereby reducing the retailers' cost.



Colgate grew and grew more profitably than the competition, despite the huge lead that Procter & Gamble and Unilever had at the beginning of the race. It did so by continually focusing on the core business and findinng ways to make it better. It emphasized "singles and doubles." Colgate obsessed about what was happening to its brands in each retail outlet, focused on :

• the needs of retailers,


• created consumer awareness,


• continued to improve its products, and


• persuaded the consumer to prefer its products.

The growth path that Colgate chose has been good for shareholders and employees. The company's rapid growth has allowed it to attract the best managers in the industry - managers who are committed to growth.

****Seek good growth and avoid bad growth

I love to invest in good quality long-term profitable growth businesses available at reasonable or bargain prices. Yet, growth can be good and can also be bad. Let's take a look.

A framework for distinguishing good from bad growth is a crucial element in generating revenue growth.

Good growth:

• not only increases revenues but improves profits,
• is sustainable over time, and
• does not use unacceptable levels of capital.
• is also primarily organic (internally generated) and
• based on differentiated products and services that fill new or unmet needs, creating value for customers.

The ability to generate internal growth separates leaders who build their businesses on a solid foundation of long-term profitable growth from those who, through acquisitions and financial engineering, increase revenues like crazy but who create that growth on shaky footings that ultimately crumble.

Many acquisitions provide a one-shot improvement, as duplicative costs are removed from the combined companies. But few, if any, demonstrate any significant improvement in the RATE of growth of revenues.

Mistakes to Avoid - Trying to Time the Market

Trying to Time the Market

Market timing is one of the all-time great myths of investing.

There is no strategy that consistenly tells you when to be in the market and when to be out of it, and anyone who says otherwise usually has a market-timing service to sell you.

Consider an interesting study in the February 2001 issue of Financial Analysts Journal, which looked at the difference between buy-and-hold and market-timing strategies from 1926 through 1999 using a very elegant method.

They compared the results of a buy-and-hold strategy with all of the possible market-timing strategies to see what percentage of the timing combinations produced a return greater than simply buying and holding.

The answer? About one-third of the possible monthly market-timing combinations beat the buy-and-hold strategy. You may be thinking, "I have a 33% chance of beating the market if I try to time it. I'll take those odds!" But before you run out and subscribe to some timing service, consider three issues:

1. The results in the paper cited previously OVERSTATE the benefits of timing because they looked at each year as a discrete period - which means they ignore the benefits of compounding (as long as you assume that the market will generally rise over long periods of time, that is).

2. Stock market returns are highly skewed - that is, the bulk of the returns (positve and negative) from any given year comes from relatively few days in that year. This means that the risk of NOT being in the market is high for anyone looking to build wealth over a long period of time.

3. Not a single one of the thousands of funds Morningstar has tracked over the past two decades has been able to consistently time the market. Sure, some funds have made the occasional great call, but none have posted any kind of superior track record by jumping frequently in and out of the market based on the signals generated by the quantitative model.

That's pretty powerful evidence that market timing is not a viable strategy because running a mutual fund is a very profitable business - if someone had figured out a way to reliably time the market, you can bet your life they'd have started a fund to do so.

Ref: Richard J. Bauer Jr. and Julie R. Dahlquist, "Market Timing and Roulette Wheels," Financial Analysts Journal, 57(1), pp. 28-40

Mistakes to Avoid - Ignoring Valuation

Ignoring Valuation

Although it's certainly possible that another investor will pay you 50 times earnings down the road for the company you just bought for 30 times earnings, that's a very risky bet to make.

Sure, you could have made a ton of money in CMGI or Yahoo! during the Internet bubble, but only if you had gotten out in time. Can you honestly say to yourself that you would have?

The only reason you should EVER buy a stock is that you think the business is worth more than it's selling for - not because you think a greater fool will pay more for the shares a few months down the road.

The best way to mitigate your investing risk is to pay careful attention to valuation.

If the market's expectation are low, there's a much greater chance that the company you purchase will exceed them.

Buying a stock on the expectation of POSITIVE NEWS FLOW or STRONG RELATIVE STRENGTH is asking for trouble.

Ignoring valuation will come back to haunt many people in the subsequent years.

Mistakes to Avoid - Swinging for the Fences

Swinging for the Fences

Loading up your portfolio with risky, all-or-nothing stocks, is a sure route to investment disaster. In other words, swing for the fences on every pitch.

For one thing, the insidious math of investing means that making up large losses is a very difficult proposition - a stock that drops 50% needs to double just to break even.

For another, finding the next Microsoft when it's still a tiny start-up is really, really difficult. You're much more likely to wind up with a company that fizzles than a truly world-changing company, because it's extremely difficult to discern which is which when the firm is just starting out.

In fact, small growth stocks are the worst-returning equity category over the long haul. Why?

First, the numbers: According to Professor Kenneth French at Dartmouth, small growth stocks have posted an average annual return of 9.3% since 1927, which is a good deal lower than the 10.7% return of the S&P 500 over the same time period. The 1.4% difference between the two returns, has an absolutely enormous effect on long-run asset returns - over 30 years, a 9.3% return on $1,000 would yield about $14,000, but a 10.7% return would yield more than $21,000.

Moreover, many smaller firms never do anything but muddle along as small firms - assuming they don't go belly up, which many do. For example, between 1997 and 2002, 8% of the firms on the Nasdaq were delisted each year. That's about 2,200 firms whose shareholders likely suffered huge losses before the stocks were kicked off the Nasdaq.

Also read:
Compounded Effects of Market Underperformance

Mistakes to Avoid - Panicking When the Market Is Down

Panicking When the Market Is Down

Going against the grain takes courage but pays off.

Stocks are generally more attractive when no one else wants to buy them, not when barbers are giving stock tips. It's very tempting to look for VALIDATION - or other people doing the same thing - when you're investing, but history has shown repeatedly that assets are cheap when everyone else is avoiding them. (Sir John Templeton: "The time of maximum pessimism is the best time to buy.")

1979: Business Week cover story asked the question, "The Death of Equities?"
Not long after, it was the start of an 18 year bull market in stocks.

1999: Barron's featured Warren Buffett on its cover, asking, "What's Wrong, Warren?" and bemoaning Buffett's aversion to technology stocks.
Over the next three years, the Nasdaq tanked more than 60 percent, and Berkshire Hathaway shares appreciated 40%.

Morningstar has conducted every year for the past several years, in which the performance of unpopular funds were looked at. The asset classes that everyone hated outperformed the ones that everyone loved in all but one rolling three-year period over the past dozen years.

The difference can be striking. For example, investors who went where others feared to tread and bought the three least-popular fund categories at the beginning of 2000 would have had roughly flat investment returns over the subsequent three years. That was much better than the market's average annual loss of about 15% over the same time period and miles ahead of the performance of the popular fund categories, which declined an average of 26% during the three-year period.

Going against the grain takes courage, but that courage pays off. You'll do better as an investor is you think for yourself and seek out bargains in parts of the market that everyone else has forsaken, rather than buying the flavour of the month in the financial press.

Buffett firm loses 1.5 billion dollars

Agence France-Presse - 5/8/2009 10:18 PM GMT

Buffett firm loses 1.5 billion dollars

Billionaire Warren Buffett's investment firm Berkshire Hathaway said Friday it lost 1.5 billion dollars in the first quarter amid market turmoil as the value of its assets fell by 6.1 billion dollars.

The investment company controlled by Buffett, the world's second richest person, took a hit from its insurance holdings and a loss as it sold a big stake in oil giant ConocoPhillips.

Berkshire said it set aside a reserve of 3.7 billion dollars for potential losses from insurance firms that offer credit default swaps, which insure against a default of bonds or other investments.

The company has big stakes in General Re, a reinsurance firm, as well as US insurer GEICO.

It also has stakes in the energy sector and Washington Post newspaper.

In the past year, it acquired stakes in investment bank Goldman Sachs and conglomerate General Electric as well as gum maker Wrigley and the insurer Swiss Re.

Last month, ratings agency Moody's Investors Service downgraded the "AAA" rating the billionaire investor's Berkshire Hathaway, citing damage from falling stocks on its insurance business.

The firm posted a net profit of 4.99 billion dollars for 2008, despite a deepening US recession and a global economic and financial crisis.

Its assets, however, have lost nearly 10 percent of their value, a performance unusually weak for Buffett, known as the "Oracle of Omaha" for his astute investment decisions.

Oil prices breach 58 dollars

Agence France-Presse - 5/8/2009 7:44 PM GMT

Oil prices breach 58 dollars

Oil prices breached 58 dollars per barrel Friday as better-than-expected jobs data in key energy consumer the United States signaled a possible easing of a severe economic slump.

New York's main futures contract, light sweet crude for delivery in June, rose 1.92 dollars from Thursday's closing price to end at 58.63 dollars a barrel, capping a more than 10 percent rise over the week.

It hit an intraday high of 58.69 dollars on Friday, a level unseen since mid-November.

Brent North Sea crude for June delivery climbed 1.67 dollars to close at 58.14 dollars a barrel, after touching 58.30 dollars.

Amid the rally, some worried the jumping prices could dampen the very prospects of recovery.

"Energy bears are stunned. They say it is impossible and there is no reason for it," said Phil Flynn of Alaron Trading. "Energy seems to be defying gravity.

"The bears and the rest of the world are waking up to the fact that something has changed in the energy complex," he said.

Flynn said oil demand was still tepid and the rising prices might dampen demand.

This week, oil has also won support from rising stock markets amid increasing signs of economic recovery in the recession-hit United States, traders said.

Crude oil was boosted Friday after official data showed that US labor market losses eased in April with 539,000 jobs axed, while the unemployment rate hit 8.9 percent, suggesting the economy may be stabilizing.

The jobless rate hit its highest level since September 1983 but the pace of job losses slowed appreciably, offering another possible sign of an easing of the severe economic slump.

The number of job losses was not nearly as bad as the consensus Wall Street estimate of 600,000 in the Labor Department monthly payrolls report, one of the best indicators of economic momentum.

Prices have posted solid gains this week on hopes of a recovery in energy demand, but they remain far below last July's record peaks above 147 dollars a barrel.

"Oil prices have been surging this week on titbits of information indicating that the economic crisis has reached its trough and that recovery could be around the corner," said analysts at JBC Energy.

The markets were also reassured by the release of "stress tests" on the US banking system, with major lenders seen as being able to cover capital shortfalls.

"US banks appear to be doing better than everybody thought according to the Fed's preliminary release on the stress test, while the rate of job losses in the country has slowed," JBC analysts said.

"In the wider picture there are also tentative signs that economic activity in China and India has been picking up with Chinese manufacturing having accelerated for the first time in nine months."

burs-pp/rl

Commodity prices climb on economic recovery hopes

Agence France-Presse - 5/8/2009 5:14 PM GMT

Commodity prices climb on economic recovery hopes

Commodity prices rallied this week, with oil striking 2009 highs on growing optimism about an economic recovery, as traders also tracked the results of key "stress tests" on troubled US banks.

"Commodity index returns have rebounded over the past week," said Deutsche Bank analyst Michael Lewis in a research note to clients.

"In our view, this reflects the market's less pessimistic assessment towards the global growth outlook. However, in most instances index returns are still trading lower on a year to date basis."

Financial markets appeared unruffled by the stress tests, which found that 10 major US banks need to raise a total of 74.6 billion dollars (55.7 billion euros) in new funds to shield against the risk of a further economic downturn.

Official data showed Friday that the US unemployment rate rose to 8.9 percent in April with 539,000 jobs lost, according to a report which was not as bad as feared by private analysts for the recession-stricken economy.

The jobless rate hit its highest level since September 1983 but the pace of job losses slowed appreciably, offering another possible sign of an easing of the severe economic slump.

The unemployment rate was in line with forecasts but the number of job losses not nearly as bad as the consensus Wall Street estimate of 600,000.

Earlier this week, a survey by payrolls firm ADP data showed that the US private sector shed 491,000 jobs in April, which was much lower than analysts had forecast.

OIL: Prices rocketed to near six-month highs above 58 dollars per barrel as stock markets gained on increasing signs of economic recovery in the United States, the world's biggest energy consumer.

"Crude oil prices are being driven higher by a combination of building confidence of a faster economic recovery, increased funds flow into commodities, and higher utilisation at US refineries," said Lewis.

"However we believe the fundamental outlook remains weak and that inventories are set to remain high."

Prices have posted solid gains this week on hopes of a recovery in energy demand, but they remain far below last July's record peaks above 147 dollars a barrel.

"Oil prices have been surging this week on titbits of information indicating that the economic crisis has reached its trough and that recovery could be around the corner," said analysts at JBC Energy.

"US banks appear to be doing better than everybody thought according to the Fed's preliminary release on the stress test, while the rate of job losses in the country has slowed.

"In the wider picture there are also tentative signs that economic activity in China and India has been picking up with Chinese manufacturing having accelerated for the first time in nine months.

"The Baltic Dry Index also surged by 8.9 percent, day-on-day, and was last seen at over 2,000 points; the Index is a daily average of the costs of shipping raw materials to end customers and so can be seen as a good barometer of the health of the world economy," added the JBC analysts in a research note.

However Nimit Khamar at the Sucden brokerage in London warned that oil prices could head lower in coming weeks should investors begin to show less optimism regarding an economic recovery.

By Friday, on the New York Mercantile Exchange (NYMEX), light sweet crude for delivery in June surged to 57.60 dollars a barrel from 52.11 dollars a week earlier.

On London's InterContinental Exchange (ICE), Brent North Sea crude for June soared to 57.28 dollars a barrel from 51.63 dollars a week earlier.

PRECIOUS METALS: Precious metals sparkled, with gold hitting 925 dollars per ounce on Thursday, drawing strength from the weak US currency.

A struggling greenback makes dollar-priced commodities cheaper for foreign buyers using stronger currencies -- and therefore tends to stimulate demand.

By late Friday on the London Bullion Market, gold rose to 907 dollars an ounce from 884.50 dollars the previous week.

Silver advanced to 13.90 dollars an ounce from 12.15 dollars.

On the London Platinum and Palladium Market, platinum increased to 1,149 dollars an ounce at the late fixing on Friday from 1,076 dollars.

Palladium leapt to 242 dollars an ounce from 212 dollars.

BASE METALS: Base metals prices soared on hopes that a global economic recovery would boost demand.

"Prices strengthened across the complex... as sentiment was boosted by a higher than expected figure for US employment data offering further evidence that the macro outlook may be beginning to improve," said Barclays Capital analysts.

"Sentiment towards the broader global macro outlook has been turning more positive recently and this is being reflected in base metals prices."

By Friday on the London Metal Exchange, copper for delivery in three months climbed to 4,763 dollars a tonne from 4,515 dollars the previous week.

Three-month aluminium jumped to 1,564 dollars a tonne from 1,518 dollars.

Three-month lead rose to 1,484 dollars a tonne from 1,356 dollars.

Three-month tin surged to 14,214 dollars a tonne from 12,475 dollars.

Three-month zinc increased to 1,557 dollars a tonne from 1,475 dollars.

Three-month nickel rallied to 13,303 dollars a tonne from 11,725 dollars.

COCOA: Cocoa prices advanced on signs of strengthening demand.

By Friday on LIFFE, London's futures exchange, the price of cocoa for delivery in July rose to 1,751 pounds a tonne from 1,703 pounds the previous week.

On the New York Board of Trade (NYBOT), the July cocoa contract gained to 2,507 dollars a tonne from 2,388 dollars.

COFFEE: Coffee prices also climbed, hitting 125.80 US cents per pound in New York -- a level last seen on February 9.

By Friday on LIFFE, Robusta for delivery in July increased to 1,493 dollars a tonne from 1,475 dollars the previous week.

On the NYBOT, Arabica for July stood at 125.20 US cents a pound from 116.35 cents.

GRAINS AND SOYA: Prices gained ground amid production delays and higher crude oil prices. Corn, or maize, is used to produce ethanol -- a clean plant-based fuel which is cheaper than oil.

"Support for corn prices stems from delays in corn plantings especially in the eastern US corn belt, as well as the strong rise in crude oil prices," said Barclays Capital analysts.

By Friday on the Chicago Board of Trade, maize for delivery in July rose to 4.19 dollars a bushel from 4.13 dollars the previous week.

July-dated soyabean meal -- used in animal feed -- gained to 11.04 dollars from 10.91 dollars.

Wheat for July advanced to 5.80 dollars a bushel from 5.70 dollars.

SUGAR: Sugar prices surged close to a three-year peaks, stretching as high as 452.20 pounds in London and 15.60 cents in New York -- the highest points since July 2006.

"Sugar prices have shot higher on an anticipated tightening of stocks in India and on supportive developments in the biofuel industry in the United States," said Standard Chartered analysts.

Sugar is used to make ethanol, a cheaper alternative to gasoline used to power road vehicles.

By Friday on LIFFE, the price of a tonne of white sugar for delivery in August rose to 445.90 pounds from 431.80 pounds the previous week.

On NYBOT, the price of unrefined sugar for July increased to 15.37 US cents a pound from 14.47 cents.

RUBBER: Malaysian rubber prices tracked rising oil prices to close higher Friday.

Traders said the rubber price was also benefitting from tight supply. The price of natural rubber is linked with the cost of crude oil, which affects the price of synthetic rubber products.

The Malaysian Rubber Board's benchmark SMR20 was at 165.90 US cents per kilo, compared to 157.15 US cents on April 30.

burs-rfj/rlp

Why dividends are important for investors' portfolios.

There are 2 paths of returns for the stock investors. These are:

1. Capital appreciation
2. Dividend yield.

Although every investors hope for capital appreciation, hope is not a really sound investment strategy.

We need something more concrete and more dependable, that is when dividend comes in.

Dividend being paid on a regular basis provides a more dependable return. You know you get a tangible return on your investment whenever the dividend is in your pocket, to either spend on your need or to be re-invested.

http://www.moneyshow.com/video/video.asp?wid=3508&t=3&scode=009393&th=1

Also read:
3 measures of a stock's value

3 measures of a stock's value

Value can be a subjective term depending on who is talking about it and how they measure values for themselves.

3 long-held fundamental measures of value are:

P/E
P/B
DY

Price: Price by itself without any other analytical factor is in fact worthless.

Earning: Earning can be a nebulous figure. Earnings can be modified and adjusted according to what the company's needs are. Sometimes if the company likes to have a different tax basis for one quarter, they may adjust their earnings up or earnings down. There are companies that depress earnings for one quarter and then lifted up earnings the next quarter to facilitate selling of stock options to important executives.

Earnings are what accountants say they are. P/E s are somewhat suspect, because earnings themselves can be suspects.

Book value: Book value also can be quite nebulous.

Often a company carries an asset at cost of 30 years to 40 years ago. Therefore, the book value does not give measure of true value of these assets of this company.

Dividend: Dividend tells us 3 things.

1. Dividend can only come as a result of earnings. In other words, company cannot pay what it doesn't have. In order for a company to pay dividend, it has to have earnings. This let us know that the company we are investing in, is a profitable concern.

2. Dividend represents income. It is a tangible return on your investment you receive every quarter. It is cash in your pocket. You can spend it on your needs, or you can reinvest that dividend into other dividend paying stocks and compound your returns.

3. Dividend helps us provide a basis for value. High quality stocks have some shared characteristics and repetitive patterns. These stocks tend to trade between 2 different bands of dividend yield. One band is when the price is low and the yield is high. The second band is when the price is high and the yield is low. Also, these stocks tend to trade in between these 2 bands over long period of time which gives us a good range to understand when to buy the stock and when to sell the stock.

To summarise: Dividend does 3 things.
1. It shows us our company is a profitable concern.
2. It puts income into our pocket.
3. It tells us when to buy and when to sell a stock.

http://articles.moneycentral.msn.com/learn-how-to-invest/new-investor-center-video-ap.aspx?cp-documentid=9d33155e-df9b-43b7-8535-9f2a8d87c769

Also read:
Why dividends are important for investors' portfolios.