How an investor picks "good" businesses to invest

Buy Good Companies

This investor invests in "good' businesses.  What are "good" businesses?

• They are unchallenged by new entrants.
• They have growing earnings.
• They are not vulnerable to being technologically undermined.
• They can generate enough free cash flow on a regular basis to make the shareholders happy, either through dividends, share repurchase, or intelligent reinvestment.

However, he is not attracted to companies that have hit a rough patch and need to recover.

Although he buy shares with the expectation that he will one day sell them, he prefers to hold on to them for a number of years and rides the companies' performance.

If he will commit at least 5% of his assets to a company, he must be sure that it has a considerably more than a fair chance of working out.

Though he does not want to control the business, he sees himself as owner of a business and its surplus cash flow.

He expects to get his returns from the company's profitable operations as these become reflected in the price of its shares.

(This stance is considerably different from that of value investors who buy cheap stocks that have fallen below the reproduction cost of the assets and wait for the market to realise that it has overreacted.)

He looks for other signs that identify the kind of good businesses he covets. 

High profit margins are a positive mark; these make the company's earnings less vulnerable to changes in the level of sales.  They may also indicate that the company is operating within a franchise and is less susceptible to having its profits eroded by a new entrant.

He likes duopolies, because the two firms generally do not compete intensely with one another, and certainly not on price, so each is left with a high return on capital.  Monopolies, by contrast, are always subject to government intervention, either to break them up or regulate their earnings.  And even if governments do nothing, they are an invitation to new competitors to try to capture some of their very lucrative business, often by using a newer technology that allows the entrant to leapfrog the incumbent with lower prices or better products.

In making his long-term commitments, he wants to invest with smart management that has the shareholders' interests in mind.  He has had generally bad experiences when he tried to influence managers to change direction, and he is not contentious enough by temperament to enjoy the struggle.  It may be true that a company being run by superior executives has nowhere to go but down once those managers leave, and that buying the stock of a poorly run company at a deeply depressed price can position the investor for a profit once management improves.  But that is a speculative bet; sometimes bad management stays in place for decades. 

He expects to own his stock for 4 or 5 years.  He doesn't want to wait on the chance that better management will show up, and he doesn't want to lead a shareholder revolt to make that happen.  All he needs to know is that the current managers are healthy and young enough to keep the company on course for a few more years.

Buy Them Cheap

He normally holds shares in 10 or even fewer companies, on average he needs to put a lot of money into any one name.  Because great situations are so difficult to find, he is prepared to buy 20% or more of any one company. 

While there are around 1,500 or more companies large enough for him to own, his "good business" requirement probably shrinks that list by 80%, leaving him with no more than 300 possible candidates.  But even within this restricted universe, he is brutally selective.

He is looking for "two-inch putts," by which he means investments that will provide him with a high rate of return while subjecting him to a low level of risk.  There is only one way he can meet that goal.  He has to spot companies that meet all his standards and are still available at a price that will provide him a high rate of return based on future earnings growth.

He is not attracted to turnaround companies or cyclicals, where a successful investment depends on timing.  He does not believe in speculating that an underperforming company will be taken over, because most managements resist selling out.  Opportunities to make this kind of investment arise irregularly, and then due to unpredictable circumstances.  For example, a change in government regulations can be the vehicle.  The newness of the issue, and the volume of shares available at one time kept them cheap, at least initially.

Sometimes a cloud settles over whole industries based on little more than questionable assumptions about the future.  This provides him opportunities to buy good companies cheap.


Glenn Greenberg of the Chieftain Capital Management.

How to Identify Stock Bull Market Tops

Many Symptoms occur When Bull Market is at Major Top .These are given below

1. Yearly High of Stock Index much higher than Previous year’s High

2. Now of Shares hitting new High as percentage of Total Shares Climbs new peak

3. Very Fast upsurge in Stock prices and indices

4. Near unanimous view of Experts that This is Start of biggest bull in History

5. General Magazines Which Do not Care About Stock Markets in Normal time, puts bull run in Cover Story

6.New Theories to justify high prices, in 2008 we had the Decoupling Stheory

7. A Sea of New Investors enter the Stock market with Dreams of instant Rich

8.Market Stops reacting to Good News


http://nse2rich.com/how-to-identify-stock-bull-market-tops-are-sensex-nifty-near-the-top/

So these were the Symptoms.

Are we at Top of 2010 now or is This Bull market still Alive?

Are We are Still Quite Far From Bull market top?

What will be your decision?

What are your actions: staying invested, rebalancing or divesting partially or divesting totally?

But then you will be timing the market, a dangerous strategy too!

The Simplest Stock Buy-Sell Decision Rules

http://stockmarket.globalthoughtz.com/index.php/stock-buy-sell-decision-rule/

People gain from stock market because stock market does not fully reflect a stock’s “real” value. After all, why would we all are doing stock market analysis if the stock prices were always correct? In financial jargon, this true value is known as the intrinsic value.

For example, let’s say that a company’s stock was trading at $40. After doing extensive homework on the company, you determine that it really is worth $50. In other words, you determine the intrinsic value of the firm to be $50. This is clearly relevant because an investor wants to buy stocks that are trading at prices significantly below their estimated intrinsic value.

The comparison between market price and intrinsic value helps to make decisions regarding the buying or selling of a particular share.

The following notes show the comparison, decision and reason:

1 Market price < Intrinsic value
e.g. $ 50 < $ 60

• Under- priced
• Buy
• Because the market price increases to meet the value and we can gain from the price rise.

2 Market price > Intrinsic value
e.g. $ 40 > $ 30

• Over- priced
• Sell
• Because the market price falls to meet its value and we can avoid the loss by selling the share now.

3 Market price = Intrinsic value Correctly
e.g. $ 20 = $ 20 priced

• No action
• Because it is correctly priced and the price is not expected to change.
• Therefore there is no profit likely to be made from buying or selling the share.

4 Market price almost equal to Intrinsic value

e.g. $ 40 is almost equal to $ 42

• No action
• Because the difference in the value and price can not offset the transaction cost and we can incur losses.

The big unknowns are:

1) You don’t know if your estimate of intrinsic value is correct; and
2) You don’t know how long it will take for the intrinsic value to be reflected in the marketplace.

Mastering Your Craft at Stock Picking

The pattern of learning anything begins with theoretical understandings initially and practical understanding later. That is, general principles first, and then particular instances of those principles.

The 10,000-hour rule (i.e. one cannot master a subject or skill until he’s practiced it for at least 10,000 hours) is true.

To be good at picking stocks, a further 40,000 hours of studying it will certainly (all else equal) yield a better stock picker!

However, it would be better to attain 10,000 to 20,000 hours of study or practice in several, related fields.

http://prisonproxy.blogspot.com/2010/02/mastering-your-craft.html

Always stick to good companies. Invest cleverly into these and these only.

When you buy shares, you own part of the company, including its assets.

Although the value of money decreases with inflation, your investment in a good company can increase as the company grows and the value of its assets increases.

Note that we say a 'good' company.

Not all companies are good companies and not all share prices will increase over time, simply because not all companies will expand and grow.

That is why it is important to be clever when you make equity investments.

Reviewing the basics of investing in equities

Although investing in equities is risky, it is a sure way to beat inflation - especially if

• you are patient and
• have a long time horizon.

Five important don'ts when you want to buy shares

Mistakes to avoid when you invest in equities

Do not buy on tips or rumours.  Consult someone who has long experience of equity investment.

Do not buy with borrowed money.

Do not buy shares in boom times when everybody is buying and sell in bust times when everybody is selling.  Or put differently:  do not buy when shares are at a high and sell when they are at a low - you will make a loss!

Do not invest in a share that has been in the spotlight recently - the price might already have been driven up significantly.

Do not buy a share just because the price has dropped substantially and you think it is a bargain.  There might be sound reasons why it has dropped.

Two important strategies to help you avoid large losses: STOP LOSSES and REBALANCING

Stop losses and rebalancing are strategies to help you avoid large losses when you invest in equities.

Stop-loss strategy

A stop loss is a specified minimum price at which you will sell a particular share in order to stop the loss.  This is a good strategy with which to protect yourself against large capital losses.  You decide on a percentage loss that you are prepared to take on your investment, and sell when it reaches that percentage.  Stop losses are implemented when the buying of shares (normally not unit trusts) takes place, i.e. an instruction is given by the investor to the stockbroker to buy 1000 shares in XYZ at, say $10,00 and to implement a stop loss at, say $9,00 (the investor perceives XYZ to be a somewhat risky proposition).  The investor has done his sums and comes to the conclusion that the maximum loss he can bear is $1000, hence he limits his potential losses to $1000 by implementing a stop-loss strategy ($1000 divided by 1000 shares = $1.00 per share; $10.00 per share - $1.00 per share = a stop-loss level of $9.00)


Rebalancing

This strategy is best explained by an example.  Following the analysis of your investment profile (time horizon, risk tolerance, and investment objectives), you decide to invest 50% of an amount of $1000 in equities and 50% in other asset classes, such as bonds and cash.

Assume that after a year your equities have decreased to $400 and your other investmens have increased to $800.  This means your original $1000 portfolio is now worth $1200.

Rebalancing means that you adjust your portfolio constituents to get back to a point where half is again invested in equities and half in bonds and cash.  You will therefore have to sell some bonds and buy some equities.  This is an important strategy to keep your portfolio diversified and in line with your time horizon, risk appetite and investment objectives.

Costs of a standard equity transaction

The cost of a standard equity transaction is made up of:

• a stockbrokers's fee,
• taxes,
• a levy for the adminsitrative cost of the electronic settlement system,
• insider trading levy and
• other compulsory administrative charges.

Brokerage

Your broker could charge you a percentage of the value of your trade, depending on the size of the trade and the nature of the service required.

• All brokers charge a minimum per deal, even if your order is very small.
• If your investment is too small, the charges could dilute your returns considerably.  Your investment would need to deliver sizeable returns before expenses are recovered. 

The stock market provides a market for setting prices based on supply and demand

More about the stock market

The stock market provides a market for dealing in listed shares, and for setting prices based on supply and demand.

It is for this reason that prices of equities fluctuate.

Just as in any open market, prices will go up if there are more buyers than sellers and vice versa.

Most of the buying and selling occurs electronically today.

The performance of the stock market is often gauged by the performance of an important index.  An index reflects the performance of a grouping of shares. 

The best known index in the world is the Morgan Stanley Capital Internation (MSCI) Index, which represents the biggest shares in the world based on market capitalization.  When the prices of these shares dip, the index will also go down, and vice versa.

For each country, the main index consists of the biggest shares based on market capitalization.  There are also other sub-indices (financials, industrials, mining, etc.).  Each of these indices represents a certain grouping of shares based on their market capitalisation.

Listed and Unlisted companies.

You can hold shares in companies that are

• listed on the stock market or
• in unlisted companies. 

The bulk of equity investments are in listed shares. 

• Companies list on a stock exchange in order to gain access to more capital, and
• they must comply with stringent criteria set by the stock exchange to protect investors.

Be very careful when you invest in unlisted shares. 

• Unlike the listed companies, the unlisted companies are not scrutinised that closely. 
• Shares in unlisted companies therefore carry a bigger risk and
• are also much more difficult to sell as there is no open market.

Inflation is your ultimate enemy. Your other enemy: IMPATIENCE

Inflation is your ultimate enemy.  But impatience can be an even worse enemy when it comes to equity investing.

The important thing when you invest in equities is time.

Over the long term - 10, 20, 30 years of longer - equities offer you the best chance to generate returns that will beat inflation. 

To buy equities only to keep them for a short while is a guaranteed recipe for failure.

You therefore have to be aware of

• your time horizon and
• your risk appetite

when you decide to invest in equities.

You should be aware that huge fluctuations can occur and that the portion of your equity holdings should decrease the closer you get to retirement.

Equities carry the highest risk. Why, then, invest in equities?

You can also make a lot of money investing in equities.

During the long term, US stocks gave a historical compound annual return of 11% to its investors.  During the period January 1960 to December 2000, you could have earned a compound after tax return of 16.9% a year on your shares on the South African stock market.

Equities are one of the few asset classes that give you a real chance to fight inflation over the longer term.

The reason for this lies in the nature of equities.  Equities are investments that give you part-ownership in a company.

Companies issue shares because they need money (or capital) to expand. 

• When you buy shares, you own part of the company, including its assets. 
• That explains why, although the value of money decreases with inflation, your investment in a good company can increase as the company grows and the value of its assets increases. 

Note that we say a 'good' company. 

• Not all companies are good companies and not all share prices will increase over time, simply because not all companies will expand and grow. 
• That is why it is important to be clever when you make equity investments.

Besides your share in a company's capital (i.e. its assets less its liabilities), you can also share in its profits by way of dividend payments to the company's shareholders.  This is another reason why investment in equities provides one of the few opportunities to safeguard the REAL VALUE of your capital.  The term 'real' is very important in investment terminology.  It means that you have taken the impact of inflation into account.

The risk involved in equities

You can lose a lot of money investing in equities. 

That is why it is the asset class carrying the highest risk. 

If you had bought shares during the height of the Internet boom in March 2000, you would have lost 72% if you had sold them 18 months later!

Equities are affected by many risks, including:

• commercial risk, for example, interest rate changes and trade cycles
• political risk, for example, negative sentiment about Third World countries
• market risk, for example buying shares at the top (when they are too expensive) and selling them at the bottom (just before prices start to increase again).

Anyone who has invested in equities over the past few years knows how it feels to be on a roller-coaster ride. 

• In the end of the last century, investors witnessed huge stock market crashes (in 1987, and again in 1998), interspersed with a spectacular rise in share prices as investors started to become hyped-up about the new economy and Internet stocks. 
• Then, of course, a major downswing was experienced in September 2001 after terrorist attack in the USA. 
• Due to low interest environment for many years following 911, the US stock market crashed in 2008 due to the subprime credit crunch.

Equity investing: Every time one man buys, another sells, and both think they are astute.

Investing in equities can be compared to an exciting, if scary, roller-coaster ride.

You will need to learn about the dangers of equity investing, but also why you should nevertheless invest in equities.

One of the funny things about the stock market is that every time one man buys, another sells, and both think they are astute. (William Feather)

Reviewing the basics of getting my timing right

If your time horizon, risk tolerance profile and investment objectives remain unchanged,

• it is better not to change your investment portfolio in times of uncertainty, when it may be a temptation to consider selling investments and reinvesting when prices are lower. 
• This technique is known as market timing and is a high-risk strategy simply because nobody knows what the future holds.

Patient investors will be rewarded:  research has shown that missing out on the performance of the stock market for only a few days could have a significant effect on performance.

The techniques of dollar cost averaging and phasing in can be preferable to market timing.

Two techniques for Getting your timing right: 'dollar cost averaging' and 'phasing in' your investments

Experience has shown that investors can benefit from being patient.  Impatience is your big enemy. 

Too often investors panic and sell their shares and equity unit trusts at a low, which could result in substantial losses.

There are two techniques:

• dollar cost averaging, and
• phasing in

which can diminish the negative impact of buying and selling at the wrong times.


Dollar cost averaging

Those who continue investing at regular intervals in the expectation that the market will recover, benefit from dollar cost averaging.

Dollar cost averaging can be used to great effect with unit trusts, because as you buy more units for the same amount as prices fall (or fewere units as prices rise), you will ultimately pay a lower average price for your units.


Phasing in your investments

In times of uncertainty new unit trust investors are faced with a tough choice: 

• should they invest a lump sum, or
• should they phase in their investment over a period? 

They have two possibilities:

A lump-sum investment can be made in

• unit trusts with a large cash element,
• a share component that does not correlate with the general direction of the stock market, and
• a portfolio manager who does not hesitate to take action.

Phasing in:  Prudent or less experienced investors can consider

• phasing in their investments over some months,
• potentially benefiting from lower prices because of downward reactions.

Time, and not timing, is the key to successful investment.

So who has the best chance of success?

Another approach is to disregard the risks of market timing and to ask how great the benefits would have been if an investor's timing had been right.

Let us take a hypothetical situation of 3 people who invested a fixed amount every year for 20 years.

• Person A is extremely lucky and annually invests at a market low, as determined by a particular Stock Market Share Index (JSE All Share Index). 
• Person B is unlucky and annually invests at a market high.
• Person C invests on a 'random' date every year, in this case 31st January.

The compound return earned by

• person A over the period is 14.0% a year,
• while in the case of person B it amounts to 11.3%. 
• person C achieved a return of 12.9% a year. 

(Dividend income was not taken into account in the research.)

It is

• not surprising that an investment at a market low achieved a better return than an investment at a market high, but
• the difference in return between the high and the low/'random' date is less than expected.

Although there are times when you should be more heavily invested,

• the risk of underperformance increases considerably if you are continually with-drawing from and returning to the market. 

Investors who buy and hold have the best chance of being successful.

How does market timing impact on investments?

An analysis of the daily returns of a particular Share Market Index for the period 1991 to 2000 (dividend income excluded) showed that missing out on performance of the equity market for only a few days could have a significant effect.

DIFFERENT RETURNS IF YOU MISS OUT ON A FEW DAYS

Strategy========================Return per annum
Always fully invested===============11.8%
Miss out on 10 best days============7.1%
Miss out on 20 best days============3.9%
Miss out on 30 best days============1.3%
Miss out on 40 best days============(-1.0%)

(Source:  Plexus Asset Management)

The table shows that:

• by missing only 10 days (equal to only 1 day a year), the annual return was reduced by nearly 40%.
• by missing 40 days (only 4 days a year), the return became a loss.

Instead of reducing investment risk, market timing can, in fact, be a high-risk strategy.

Market timing sounds good in theory. It seldom works consistently in practice.

Market timing is an investment strategy that relies on:

• your being able to predict the future so that you can protect your capital by not getting caught in any market downswing. 
• You must also know when the market is going to turn around, so that you can effectively exploit any new upswings.

A market timer must always make two correct decisions:

• when to withdraw and
• when to re-enter the market.

A major issue regarding stock market or unit trust investment is the question of whether or not market timing works.  Buying low and selling high is easier said than done.

A fund that applies market timing - buys or sells depending on the direction in which the market is moving -

• can prevent you from losing money in bear markets, but
• can also result in your missing out on bull markets.

Research has shown that although market timing sounds good in theory, it seldom works consistently in practice.

How do I get my timing right?

The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell.

Sir John Templeton

How does investor psychology affect timing?

Investors are inclined to become over-enthusiastic during a bullish phase on the stock market and to become despondent when the market declines.

In order to be a successful investor, it is important to distance yourself from the herd mentality and to take objective decisions based on fundamental reasons.

The typical behaviour of investors is linked to the so-called psychological cycle of investors (Source:  Adapted from Geld-Rapport, 18 March 2001).

Contempt: According to the cycle, a bull market typically starts when a market is at a low and investors scorn stocks.

Doubt and suspicion: They try to decide whether what they have left should be invested in a safe haven, such as a money market fund. They've burnt their fingers on stocks, and vow never to invest again.

Caution: The market then gradually starts showing signs of recovery. Most remain cautious, but prudent investors are already drooling at the possibility of profit.  Now is the best time to buy shares.

Confidence: As stock prices rise, investors’ feeling of mistrust changes to confidence and ultimately to enthusiasm. Most investors start buying stocks at this stage.

Enthusiasm: During the enthusiasm stage, prudent investors are already starting to take profits and get out of the stock market, because they realize that the bull market is coming to an end.

Greed and conviction: Investors’ enthusiasm is followed by greed - often accompanied by numerous new listings or IPOs on the stock market.

Indifference: Investors look beyond unsustainably high price-earnings ratios.

Dismissal: As the market declines, investors show a lack or interest that quickly turns to dismissal.

Denial: They then reach the denial stage, where they regularly affirm their belief that the market definitely cannot fall any further.

Fear, panic and contempt: Concern starts to take hold; fear, panic and despair soon follow. Investors again start scorning the market. Once again, they vow never to invest in stocks again.

http://www.minyanville.com/articles/markets-cycles-psychology-bull-bear-panic/index/a/18736

Also Read:

Sentiment curves
http://myinvestingnotes.blogspot.com/2009/05/sentiment-curves.html

Dealers say one of the biggest casualties of the margin calls is Resorts World at Sentosa operator Genting Singapore PLC.

Mid-Week Comment Jan 27: Margin calls, S-chip woes drag down STI

Tags: China Milk Products Group | China Printg & Dyeing Hldg | Delong Holdings | Ferrochina | Genting Singapore Plc | Ks Energy Services | New Lakeside Holdings | Sunshine Holdings
Written by Goola Warden
Thursday, 28 January 2010 09:16

ON WEDNESDAY, ‘forced selling’ by local traders on margin calls hit the market and drove the benchmark Straits Times Index down a further 34 points to close at 2,706.26. In all, the STI has fallen 187 points since last Wednesday, and 227 points from its Jan 11 high of 2,933.

Dealers say one of the biggest casualties of the margin calls is Resorts World at Sentosa operator Genting Singapore PLC. Its share price is down almost 20% since the start of the year. According to a report by DBS Group Research, there could be a potential share overhang from the “mandatory conversion of remaining $321 million Convertible Bonds 2 at 95 cents (338 million shares) on Feb 9”.

Separately, KS Energy Services, the offshore oil & gas and marine services and support company run by Indonesian millionaire Kris Wiluan, announced it plans to issue $50 million in principal amount of 3% convertible bonds due 2015 at an issue price of 89.34% of the principal. The $44.67 million raised will be used to refinance existing debts. The initial conversion price is $1.60 per share, representing a 30% premium to its last traded price of $1.23. KS Energy may also undertake a further issue of convertible bonds worth up to $57 million if required.

According to OCBC Investment Research, the funds are likely to be used because bondholders of the previous tranche of convertible bonds issued in 2007 might opt for early redemption. The bonds issued to Stark funds were at a conversion price of $4.05. “Early redemption would require a yield to maturity of 5.5% for Stark, and we therefore estimate KS Energy would need about $113 million ready,” OCBC says. The report believes that KS Energy could come to the market with new shares “at any time, given the capital-intensive nature of its business” and has a “hold” recommendation.

Convertible bonds have been a poisoned chalice of sorts for some stocks, particularly S-chips. On Monday, the South China Morning Post said six of 11 S-chips which sold convertible bonds between 2005 and 2008 have insufficient funds to repay their convertible bondholders. The S-chips named were China Milk Products Group, steel coil maker Delong Holdings, property developer Sunshine Holdings, China Printing & Dyeing Holding, waste treatment services provider Sino-Environment Technology Group and steel group FerroChina.

Meanwhile, a local broker report says S-chip New Lakeside Holdings, the producer of apple concentrate, could be insolvent, following the company’s decision to make an RMB22.75 million ($4.7 million) provision for its liability to Bank of China. This may also force the other two principal bankers China Construction Bank and ICBC to demand immediate repayment of RMB14.5 million and RMB10 million. As a result of these claims, the company’s liabilities will exceed its assets.

To be sure, Singapore stocks weren’t the only ones being sold down. Markets everywhere in Asia reeled, largely because of China’s credit-tightening measures. According to a Citigroup Research report dated Jan 25, Asian fund inflows were down 94% week-on-week to US$29 million ($40.7 million) last week. Month-to-date, net inflows to Asian funds barely rose above US$670 million, the report says. This is much smaller than average inflows of US$2.1 billion in the month of January between 2004 and 2007. Asian fund inflows were dampened by China tightening and the strong dollar, the report says.

CHART VIEW
The market is becoming increasingly “oversold” based on short-term oscillators. For the STI, the 21-day RSI is at 34% and the 14-day RSI at 24%. These are at their lowest levels since March last year. Support appears in the 2,700 area which was tested several times before the index eventually broke out. On the flip side, the STI is below its still rising 100-day moving average now at 2,748 and the 200-day moving average at 2,539. With support appearing soon, and indicators — including the five-day stochastics — at extreme lows, the market should attempt a rebound at resistance level to 2,748. A stronger upmove would only develop after a series of positive divergences, which would take four to five weeks to develop.

http://www.theedgesingapore.com/blog-heads/goola-warden/12036-mid-week-comment-jan-27-margin-calls-s-chip-woes-drag-down-sti.html

Rubber glove companies enjoy pricing power and steadily rising sales

Judging from the capacity expansion by rubber glove companies, it appears that larger glove companies like Top Glove, Supermax and Sempermed (Thailand) have more moderate expansion plans as a percentage of existing capacity, while smaller ones like Latexx and Adventa have more aggressive expansion plans and are likely to show higher earnings growth in 2010. 

An oversupply of rubber gloves is unlikely in 2010 but could be a worry in 2011 when more capacity comes onstream. Assuming that the 150 billion-a-year medical glove market grows by 8% a year, an additional capacity of 12 billion gloves will be required per year.  Rubber glove companies have been able to pass on higher costs arising from rising latex prices, with Top Glove increasing prices again in January 2010. 

Nevertheless, producers of nitrile gloves may now enjoy better margins as the cost advantage that latex gloves enjoy over nitrile gloves may have narrowed as latex prices have risen faster than nitrile prices.  Ratings of Malaysian rubber glove companies are still cheaper than those of Ansell, SSL International and the Malaysian market.

The Edge
1.2.2010
By Choong Khuat Hock


Comments:

The whole glove industry is growing.  Due to capacity expansion and their smaller sizes, the smaller glove companies are expected to show faster earnings growth than the bigger glove companies.

The industry business is still resilient.  Profit margin is either maintained or improving.  Glove companies are still able to pass the cost to the customers.  How long will this last?

This industry is highly competitive.  The business is driven by volume and price.  When capacity to supply outstrips demand, those companies with durable competitive advantage are expected to survive.  Those low cost producers will be the big winners and leaders.  Those companies that automate their production with good quality control will probably be able to lower their costs per unit through increasing productivity.  It is possible that those leveraging on low human labour costs now with no or few plans for increasing automation of the manufacturing processes, may eventually lose out to the former in the future both in terms of quality, productivity and costs.

The Only Three Questions That Count: Investing by Knowing What Others Don't

Investing is far more complex than that.

The idea is to get us to think more deeply.

The three questions are:

• What do you believe that is actually false? Test the received wisdom to see if it is really true. 
• What can you fathom that others find unfathomable? Look for unusual areas of competitive advantage that you have that are possessed by few. 
• What the heck is my brain doing to blindside me now? Your emotions will often lead you astray: Look for opportunity amid fear; look for shelter amid wild abandon.

Competitive advantage in investing is an elusive thing.

• The clever idea that you might discover is just one journal article away from an academic toiling in obscurity, but will go to a hedge fund two years from now.
• Patterns that work in one market should work in most markets. If your discovery seems to work in most places, it might work well, until it is discovered and used heavily.

Fisher uses E/P relative to bond yields to try to estimate whether markets are rich or cheap.

Now, in the intermediate-run, most things that people are scared about don’t affect the market much.

• Government deficits? Seem to be a positive for stocks in the short run.
• Trade deficit? Little effect on stocks.
• Weak dollar? Little effect.

This book debunks a number of common worries.

Ref:
The Only Three Questions That Count: Investing by Knowing What Others Don’t
(Fisher Investments Press)
 http://seekingalpha.com/article/182970-fisher-s-the-only-three-questions-that-count?source=hp_wc

Importance of Financial Education

Flip-flopping from gloom and doom back to boom... this is fun!

Watch all the media types get whiplash flip-flopping from gloom and doom back to boom - wheeeee, this is fun!

http://seekingalpha.com/article/185412-thank-gdp-it-s-friday?source=article_sb_picks

Limiting portfolio risk to extreme "black swan" events.

I am not looking for a systematic way to call market tops or bubbles, I don’t think they exist.

I am far more interested in finding ways to limit the exposure on the downside of a portfolio due to “black swan” events. The expression made famous by Nicholas Taleeb in his book The Black Swan. Such events would be defined as

• unlikely events with disastrous circumstances,
• bursting of bubbles, or
• other low probability events that could have disastrous consequences on a portfolio.

Also,  such thing as a perfect hedge that protects the downside and retains the potential for upside gains… is either non-existing or very rare.

http://seekingalpha.com/article/185531-in-search-of-the-illusive-black-swan-hedge-one-idea-worth-trying

Be careful when playing momentum – the trend may appear to be your friend, but can quickly turn into a foe

Momentum – The trend is not always your friend

Posted by indianmutualfund

Have you ever thought why most stock tips you receive are about buying a stock that has done well recently, a recent winner? Are your brokers and friends great stock pickers who pick stocks that do well, or is it just momentum – picking stocks AFTER they have done well – at work? With no offense to anybody’s skills, it’s probably the latter.

Momentum is India’s favourite market strategy. Most stock picks and market recommendations, whether they come from a broker’s desk or a cocktail party, when looked at in any detail, point to momentum. What does that mean? Quite simply, it means betting on things that have done well recently – whether it is an individual stock, a particular sector or the market as a whole. A classic recent example – everyone wants to buy steel stocks because they have done well, everyone wants to sell telecom stocks because they have done badly. Buy winners, sell losers, it’s as simple as that.

Indians are not the only ones who understand or love momentum, and there is no magic behind it. Momentum is a time-tested globally known investment strategy with its roots in behavioural finance. When good news comes out, people under react because they are not sure, and the stock price doesn’t rise enough. The stock has room to go, and as more good news comes out, people overreact, driving the stock price up further. Similarly, on the downside, as bad news comes out, people over react to bad news, and in despair run for an exit, leading to a further correction. The tendency to overreact to bad news and under react to good news is timeless and inherent in human nature, and as long as it works, momentum trading will continue to work.

In fact, momentum has historically been even more powerful in India, than other global markets, and is one of the best performing strategies over the last 15 years. The most basic indicators have made for very favourable trading strategies. What makes it even more popular is that momentum is one of the easiest things to do – it takes very little to get the past prices of stocks and figure out which ones are doing well. You don’t need to know anything about the stock or the business to trade momentum – you could be following the price of bananas for all it matters.

Moreover, for a broker or an individual, momentum is a professional and socially safe strategy. You’re always following the trend, always selling what is doing well, and that’s a pretty easy sale to make. You always sound right, and who doesn’t like that? Compare this to value investing – after all the work involved in understanding a company’s inherent value and financials, you are the one rooting for an undervalued firm whose stock price has been beaten down. Even tougher, you’re running down a company that has done well because it is overvalued, even though everyone else loves it. It’s a pretty unpopular place to be in and a tough sale to make to a client.

Unfortunately, for all its ease and apparent money making abilities, momentum can revert pretty quickly, and when it does, it gets ugly. No trend sustains itself forever, definitely not in the short to medium term, and when a trend reverts, it is painful being a momentum trader. Think of 2007. For the three year bull run, markets were doing well, and every trader was bullish – momentum did well and every investor felt they had discovered a gold mine…until 2008 struck. The upward trend reverted, the market crashed and momentum crashed with it, and quickly. Momentum traders saw gains made over three years quickly erode as markets took a turn.

My favourite story about the dangers of playing momentum is Religare AGILE, a mutual fund that claimed to be a quant fund, but is actually just playing momentum. AGILE launched when the tide just turned and momentum was having its worse run. In a year when the markets were down 60%, AGILE bled much more. A period of downward momentum followed and AGILE did fine, but come May 2009, the downward trend reverted. The markets rallied nearly 90%, momentum strategies suffered, and AGILE returned less than 50%. AGILE’s poor performance, incidentally, has nothing to do with being a quant fund – many quants have done well over this period – it is simply playing momentum.

Cut to the last quarter of 2009 – another great period for momentum as the markets have had an upward trend, and to no surprise, AGILE has done superbly, as have other funds that have played the same trick. What will happen to them when the trend reverts, however, is the question?

Should you not play momentum or invest in a momentum fund? In general, yes, investing in a concentrated strategy is a bad idea – investments should be diversified across investment styles. If you do have to play momentum, do it in a conservative way with moderate risk. Most of all don’t be fooled by a manager’s great returns over a period – he may just be playing momentum. Check out his returns when the trend reverts.

Be careful when playing momentum – following the trend may appear to be your friend, but can quickly turn into a foe you had never bargained for.

Source: http://www.moneycontrol.com/news/mf-experts/momentum-–-the-trend-is-not-always-your-friend_438780.html

Aim for durable, long-term outperformance in your stock market investing

Long term investors in the stock market will know that most go through hot and cold streaks.

 

More importantly, investors should aim for durable, long-term outperformance.

 

However, many investors either

• lose in equity investment or
• end up in a no profit-no loss situation.

 

Often, it happens that you start putting money in equities and the market moves to new highs. Then you are tempted to put in more money, since you are getting higher returns. Suddenly, the market starts to slide down.

Forget returns on investment, you are not even able to recover your capital. This is a common grouse of most investors.

 

Why? Is it because you make wrong decision or because the market is only meant for speculators and gamblers?

 

No, that’s not true. We go through this pain again and again because we do not learn from our previous experiences in the market.

 

Only the ‘smart investors’ survive the ups and downs in the market and make pots of money.

Relative quality often a matter of time

Luukko: Relative quality often a matter of time

Published On Sat Jan 30 2010

By Rudy Luukko
Mutual Funds Columnist

As any investing textbook will tell you, good stocks with superior fundamentals will eventually outperform bad stocks. What you also need to realize – as a direct holder of stocks or as a fund investor – is that stock markets don't always reward good stocks.

Paradoxically, stocks whose characteristics are exactly the opposite of what the textbooks advise you to look for are sometimes the biggest winners. At least over shorter periods.

This is what happened after the 2008-09 bear market, says fund manager James O'Shaughnessy, who is based in Stamford, Conn., and manages about $3.4 billion for RBC Asset Management Inc.

A practitioner of enhanced indexing (he calls his methodology strategy indexing), O'Shaughnessy employs quantitative screening techniques to try to beat market benchmarks. The criteria vary for the various mandates, but among his key factors are stock-price momentum, stock price to book value and dividend yield.

During the past two years of mostly bearish markets, O'Shaughnessy's screening methods flopped. All six of his RBC fund mandates with at least two years of history lagged in their peer groups. Five performed in the dreaded fourth quartile, meaning the bottom 25 per cent of fund rankings.

As O'Shaughnessy explains, no stock characteristics will consistently protect portfolios in down markets. His funds also suffered because the types of stocks he held weren't the ones that rebounded most strongly after the bear-market low of March 2009.

Instead, the market recovery was led by stocks that had been "priced for extinction," meaning they had fallen the most on fears that the issuing companies' very survival was threatened.

Historically, the shorter the holding period, the less likely it is O'Shaughnessy's funds will have outperformed their market benchmarks.

For example, RBC O'Shaughnessy Canadian Equity outperformed the S&P/TSX over all rolling 10-year periods dating back to its inception in late 1997. But it did so in just over half of all the three-year periods. And over all the one-year periods, the fund beat the index only 37 per cent of the time.

Of the three oldest funds, RBC O'Shaughnessy Canadian Equity and RBC O'Shaughnessy U.S. Value both rank in the top quartile of their peer groups over 10 years, and RBC O'Shaughnessy U.S. Growth performed in the second quartile. "We take solace from the fact that, over long periods of time, we can have the odds on our side," O'Shaughnessy told me.

More evidence that the ugliest-looking stocks will sometimes be market darlings comes from the so-called "Dangerous Portfolio," a demonstration model created by the CPMS division of Morningstar Canada. It's designed to illustrate the perils of choosing overpriced, debt-laden stocks with deteriorating earnings.

Yet in 2009, this portfolio returned 85.3 per cent, more than double the 35.1 per cent of the S&P/TSX Composite Total Return Index. Over 10 years, however, the Dangerous Portfolio has been the hypothetical wealth destroyer it was designed to be, losing an annualized 16.8 per cent, while the index gained an average 5.7 per cent.

Since you can do so badly over time with a portfolio of lousy stocks, it follows that there are merits in screening techniques that seek to identify the good ones. But as we've seen both with hypothetical portfolios and with real-life funds such as those managed by O'Shaughnessy, this is a game of probabilities. The only certainty is that no stock-picking system will work all the time.

rudy.luukko@morningstar.com
http://www.thestar.com/business/article/757949--luukko-relative-quality-often-a-matter-of-time

Investing requires continuous learning from the market.

Lessons to learn from markets

Ashish Pai / New Delhi January 31, 2010, 0:19 IST

There is money to be made. But remember the basics.

Also Read

- Simple strategies for small investors
- The top 10 business bestsellers
- Be curious about companies
- News you should not use
- Time your stock sale
- The momentum psychology


The best way to learn your investment lesson is by investing in equities. Each occasion in the market teaches new lessons, which will empower you to achieve your ultimate goal of building wealth.

Often, it happens that you start putting money in equities and the market moves to new highs. Then you are tempted to put in more money, since you are getting higher returns. Suddenly, the market starts to slide down. Forget returns on investment, you are not even able to recover your capital. This is a common grouse of most investors. They either lose in equity investment or end up in a no profit-no loss situation. Why? Is it because you make wrong decision or because the market is only meant for speculators and gamblers?

No, that’s not true. We go through this pain again and again because we do not learn from our previous experiences in the market. Only the ‘smart investors’ survive the ups and downs in the market and make pots of money. Here are some lessons required to be learnt from the market.

Evaluate when you lose money in the market. Do not just shrug and say, “I am not going to invest any more!”. Investing does not mean making no mistakes, it means learning from experience. All of us made mistakes, when we started - such as going by tips from broker or buying penny stocks. As time passed by, we learnt that by not following the herd, we may have limited gains but our capital will be protected.

Be patient when investing in the market. Investors who show the right kind of patience make the most from the stocks they invest in.

• You need to be patient by not booking losses at the slightest market provocation or
• by not selling stocks before they have reached an optimum price.
• Also, be patient by not panicking when in a market downslide or
• by not buying stocks which you know are good but currently priced higher.

Look for opportunities to invest. There will be many opportunities to grab in the market, such as

• FII selling,
• global downturn,
• credit crisis,
• currency crisis, etc.

Each such occasion is to be looked at as an opportunity. ‘Smart investors’ will fill their pockets with the crème de la crème stocks in the equity market on such occassions. For example, blue-chip stocks like BHEL, HDFC, NTPC and ITC were quoting low prices in the first quarter of last calendar year due to the global credit crisis. It was an opportunity to buy these stocks.

Look for quality advice before investing. Do not follow the herd mentality. Always remember, quality stock picking will help you generate substantial wealth over a period of time. The quality picks can be large-cap, such as SBI, HDFC Bank and Tata Power or mid-caps such as Petronet LNG, Power Grid and Marico.

Learn to invest systematically. Getting into a systematic investment plan (SIP) in mutual funds or directly in an equity portfolio is the preferred mode of investing. At the end of five to 10 years, this portfolio is likely to appreciate by leaps and bounds. If the market is in a bullish phase, the money may even double in less than three years.

Learn the importance of diversification. You can better your returns and reduce risks by diversifying your portfolio. You can diversify across asset classes like gold, commodity futures, property, etc, as well.

A profit booking policy is advisable. The profit booking policy can be based on expectations from equities. Suppose an investor has put money in a stock and it rises by 100 per cent in a year, he may book profits either partially or fully. One strategy could be to book profits in a way that the initial investment is recovered and the profit portion continues to be invested in the stock.

Assess risks before investing in the market. Many a time, we invest in a particular stock or fund without assessing the risks involved with the stock. For example, sectors such as real estate or metals are riskier as compared to FMCG or power. If you don’t have a high risk taking ability, do not go for risky stocks or sectors.

Do not borrow to invest. In a sliding market, such investors are most impacted, as they have to offload stocks due to margin calls or liquidity issues.

Do not chase momentum stocks. In most cases, investors enter such stocks at the peak and are stuck with these for a long period or have to sell at a loss. Some of the momentum stocks in the recent past were Unitech, DLF, Jet Airways, Reliance Industrial Infrastructure and Jai Corp. The prices of such stocks reach a peak on sustained buying and then slide, roller-coaster, in a few sessions.

Conclusion :
Investing requires continuous learning from the market. Like driving a car, investment is more of learning practically and hands on. It requires discipline. When you are driving a car, what speed to drive and which lane to drive in are decided by the driver. Similarly, in case of investment, you must know how much to invest, where to do so and when to sell.

The best is to have a disciplined approach, combined with an investment philosophy. Some of the great investors like Warren Buffet or George Soros have been successful as they have a disciplined way of investing. There is no easy way to make money. All of us have to learn lessons in investing in the same market and in the same way. Each time, investors are put to different tests. Only the learned investors will succeed. Be a ‘smart’ investor.

In brief :
* Learn from your past experience
* Have a strategy to invest
* Iinvest systematically
* Look at your liquidity requirements
* Diversification is advisable
* You will need discipline and patience

The writer is a freelancer


http://www.business-standard.com/india/news/lessons-to-learnmarkets/384131/

Congratulations, You're an Investor!

Congratulations, You're an Investor!
By Dayana Yochim
January 29, 2010 


During this monthlong Fiscal Fitness Boot Camp, we worked some money magic -- saving big bucks by scrutinizing our major (and even some minor) expenses.

What's the point? Sure, padding the bank account is good. Freeing up cash to more quickly pay down high-interest debt is even better.

But once the basics are taken care of -- once that debt is but a distant memory, and you've got a decent emergency cash cushion for life's just-in-case events -- the very best thing you can do with your money is to make it grow. In other words: You've mastered the art of saving. Now it's time to become a bona-fide investor.

Channel your inner Warren Buffett
The truth is that every one of us is already an investor. Every dollar decision we make is an investment, whether for long-term gain (retirement savings), short-term safety (emergency fund), or immediate pleasure (mocha latte -- hey, I'm not one to judge). (This mind-set -- "Treat Every Dollar as an Investment" -- is such an important part of successful money management that we've made it a key part of our Motley Fool Magna Carta.)

However, today we're going to venture into the world of traditional investing. If you complete today's homework, you'll snag the most handsome payoff of this entire series -- adding tens of thousands of dollars to your bottom line.

Don't start mentally spending that money just yet. Investing is a long-term exercise. The kind of savings we're talking about will accumulate over years -- decades, even. But it's not going to happen magically on its own. So let's get started.

Your first investment
As scary as the stock market has been as of late, it's still the best place for your long-term savings. (Note the emphasis on long-term. We're talking about money you do not need to touch for five to 10 years, depending on your tolerance for risk.) With that in mind, when it comes to traditional investing -- as in IRAs, 401(k)s, stocks, bonds, mutual funds, gold doubloons -- start with the basics and you're 90% of the way there.

Last year, we recommended three stocks -- Costco (Nasdaq: COST), Paychex (Nasdaq: PAYX), and National Oilwell Varco (NYSE: NOV) -- to our Fiscal Fitness graduates. But if you don't want to jump into individual stocks, that doesn't mean you shouldn't invest.

One of the easiest ways to get started investing is to sign up for a 401(k), 403(b), or 457 plan at work, if your employer offers one. The money is deducted from your paycheck and sent straight to your 401(k), 403(b), or 457, before income taxes are taken out.

Another reason to do so? Free money! Many employers add money to your account based on the amount that you sock away. Incredibly, however, many people don't take their employers up on the offer. That's essentially dissing an instant, guaranteed return on their money. For example, save $5,000 with a 25% employer match, and you suddenly have $6,250. (Whatever you do, don't make one of these six common 401(k) blunders!)

Once you've maxed out your 401(k) -- or if you don't have one at your place of employment -- it's time to move on to phase 2 of building a portfolio.

How to invest $50, $500, and $5,000-plus
First, determine how much you have to invest. Depending on how much money you've freed up to invest, some investment battle plans make more sense than others. Here's advice on how to proceed with $50, $500, and $5,000-plus.

How to invest $50:Thanks to the miracle of compound interest, even small sums can add up to big nest eggs over time. (Get a load of these charts to see what I mean.) If you're just starting out, the very best thing you can do is to commit to investing on a regular basis.

One of the best ways to invest small amounts of money regularly and cheaply is through a DRP -- dividend reinvestment plans. They and their cousins, direct stock purchase plans (DSPs), allow you to bypass brokers (and their commissions) by buying stock directly from the companies or their agents. They also allow you to reinvest dividends directly into more shares of stock. More than 1,000 major corporations offer these types of stock plans, many of them with fees low enough (or free) to make it worthwhile to invest as little as $50 at a time. Some plans even allow investments of as little as $20. Once you're in the plan, you can set up an automatic payment plan, and you don't even have to buy a full share each time you make a contribution.

What to do with $500: With this amount of money your investment options open up. You've got enough money to meet many companies' minimum initial investment requirement to open an IRA (or even a taxable brokerage account). (Here are 10 ways to size up a broker.)

Mutual funds are a popular investment option for many investors. You'll want to consider whether to go with an index fund, which simply tracks a particular benchmark, or an actively managed fund. You may want to start with a large-cap-oriented fund, which will give you exposure to well-known companies like ExxonMobil (NYSE: XOM), AT&T (NYSE: T), and Procter & Gamble (NYSE: PG). But you can also buy funds in just about any category, from bonds and small-cap stocks to shares of international companies like Vale (NYSE: VALE).

Some funds require as little as $250 for you to invest (typically restricted to IRAs). After your initial investment, you can add as much money as you like, as frequently as you like -- and if you choose a no-load fund and purchase directly from the fund company, there won't be any commissions. For beginners, a high-quality mutual fund is a great portfolio building block.

How to manage a $5,000-plus portfolio: As you establish a decent-sized retirement kitty (yay, you!), diversification should be your aim. You want to spread your money around -- allocate your assets -- owning both mutual funds and stocks to cushion yourself from stock market belly flops. (Here's the Fool's rules for asset allocation, including a handy chart that'll help you determine how much of your money should be invested in stocks.)

At this savings level, again, the power of making regular investments over time is very strong.

If you start with $1,000 at age 25 and invest an additional $1,000 each year, and your money earns 10% annually, then when you're ready to retire at age 65, you'll have more than $500,000 set aside. Yup. The key is to make sure that your costs of investing (including brokerage commissions, mutual fund management fees, etc.) add up to less than 2% of your account's overall worth. That's money that you've worked hard to save -- so make sure it's not slipping away in dribs and drabs!

Finally, let's end with the secret to investment success ...

Save more and invest more
End of story. Sounds dull, but if you get serious about those two things, you will turn your entire financial future around.

Let's say your Fiscal Fitness Boot Camp frees up 3% of your salary to invest this year. If you sock away $1,500 (3% of a $50,000 salary) and earn an 8% average annual return over five years (for a grand total of around $2,200), you'll bank $700 more than if you hadn't become an investor. Commit to the 3% savings goal for the next five years (for a total of $7,500 invested), and your portfolio will blossom to more than $11,000 -- that's an extra $3,500 in nest egg padding.

What's the point?
At the beginning of this article, I asked, "What's the point?" The example above just puts a dollar figure on the benefits of investing.

But the real point of this entire exercise is what that money represents.

• For some of you, the savings we've found during this month means freedom from the shackles of debt.
• For others, it means peace of mind, being financially prepared should you lose your job or if the water heater goes on the fritz.
• And for a few folks out there, this month of becoming fiscally aware will pave the way to an early retirement, the ability to put a down payment on a house in 10 years, or even just a sense of control and stability that you've never felt before.

So what's the point of saving and investing for you? Do share in the comments area below.

http://www.fool.com/investing/general/2010/01/29/congratulations-youre-an-investor.aspx

Reviewing the basics of interest-bearing investments

To have a good understanding of interest-bearing investments, learn and know the followings.

The risks of interest-bearing investments, for example:

• inflation,
• interest rate cycles and
• dubious borrowers with poor credit ratings.

The advantages of investing in this asset class, particularly

• the interest income on which you can rely.

Some of the main interest-bearing investments in the market.  These include: 

• cash,
• money market funds,
• bonds,
• participation mortgage bonds and
• voluntary purchased term annuities.

You have to know about two new market places other than the stock market: 

• the money market, where short-term interest-bearing secuities are traded, and
• the bond market, where longer-term interest-bearing securites such as bonds are traded.

Mistakes to avoid when investing in interest-bearing instruments

Interest-bearing investments may be relatively stress-free, but they too have their pitfalls.  Watch out for the following:

• Do not accept the first interest rate you are offered.  Compare interest rates, negotiate where possible and find out more about fixed versus fluctuating interest rates and the term of fixed-interest investments.
• Do not think interest-bearing investments are safe, risk-free havens.  Remember the impact of inflation.
• Do not forget about interest rate risk.  When interest rates increase, bond prices will decrease, resulting in a loss on your investment.  The longer the term of the bonds, the greater the drop in the market price.
• Do not invest in bonds without understanding the terms of the bonds and the interest rate environment.  Invest in well-known and reputable bonds rather than in unknown corporate bonds.

Other interesting interest-bearing investments: Mortgage Bonds and Term Annuities

Today a myriad of unit trusts invest in interest-bearing investments.  These include:

• money market funds,
• income funds, and,
• bond funds.

Mortgage Bonds

One of the most attractive interest-bearing investments with a fixed capital value is participation mortgage bonds. 

• Here you invest in units in large mortgage loans that are granted against the security of a first-class physical asset, for example, commercial, industrial or other property. 
• Your capital is guaranteed and you earn interest at a competitive rate that can be variable or fixed. 
• A great advantge is that a participation bond becomes quite liquid after the initial five-year period when you can still enjoy the interest income and withdraw on only three months' notice.
• (These mortgage bonds caused the subprime credit crisis in 2007-2008 in US).

Term Annuity

A voluntary purchased term annuity is another important investment product from which you can earn a regular income.  It is simply the exchange of a cash lump sum for income, which is paid annually, half-yearly, quarterly or in monthly instalments over a specified period (minimum five years). 

• This basically means that your original capital is refunded by way of regular instalments together with interest earned on the investment. 
• You will therefore not get back any capital at the end of the period as in the case of fixed deposit. 
• A voluntary term annuity can be purchased at any life office and is in essence an insurance contract. 
• The interest or annuity rate is fixed for the term of the contract, but varies from institution to institution. 
• This investment product also offers a tax benefit, as you pay tax only on the interest part of your annuity.

More about another interest bearing investments: bonds

Bonds are fixed-income securities that governments and companies issue in order to borrow money.  They pay interest to you for that privilege. 

The maturity date is the date on which the full amount that was borrowed is returned to you .

The investment term is normally a fairly long period, say ten years or longer.

The coupon is the interest rate you receive. 

Bonds are traded on the capital market in the same way that equities are traded on the stock market.

Bonds are medium-risk investments because the interest rate cycle has a definite impact on the value of bonds. 

If you want to understand bonds, this is the most important thing to remember:  when interest rates fall, bond prices rise; when interest rates rise, bond prices fall. 

This is simply because the coupon on the bond is fixed, and the market value of the bond is adjusted to bring the coupon in line with the external interest rate. 

Bonds are a very important part of a well-diversified portfolio.  In difficult stock markets, bonds can provide a cushion to soften the blow.

Money market funds have become very popular alternative to bank deposit

A money market fund is a type of unit trust that invests in interest-bearing instruments issued by banks, government and companies when they want to borrow money.

These short-term instruments are

• traded on the money market, and
• have a maturity of less than 12 months.

Money market funds have major advantages in comparison with other cash investments.  For example:

• You gain access to money market instruments even though you invest only a small amount.
• The interest rate is higher than for a bank deposit, as you are part of a group that can bargain for the best wholesale rates.
• You can withdraw your money at any time, like a call deposit at a bank.
• Interest rate risk is largely eliminated because money market funds are allowed to invest only in instruments with an average term of not more than 90 days.

Units in a money market fund have a fixed value of $1, and the only changing aspect is the interest income an investor earns on that unit.

This income is capitalised, or reinvested, which means the investor earns interest on interest.

Money market funds are ideal

• for pensioners who must live on their interest income or
• for the creation of an emergency fund from which you can withdraw money at any time. 

Money market funds also provide useful parking for investors

• to limit the risk of an investment portfolio in uncertain times or
• to phase in their funds.

When you invest in a money market acount, you should know the difference between the nominal and effective rate. 

• The effective rate is the interest rate you will earn if your money is deposited for the whole year and all the interest is reinvested. 
• The nominal rate is lower because this is the rate you earn every month before any reinvestment of interest is taken into account.

The 'safe' option of cash

Cash has always been seen as a fairly safe investment, and our forefathers were quite happy to put their money under the mattress and leave it there.

Today we realise that you cannot just put your money away and forget about it, because inflation will erode its value.

If you want a stable income, a bank deposit is still a valuable investment option.

However, money market funds have become a very popular alternative.

The calmer waters of interest-bearing investments: their risks and rewards

The interest-bearing investments include:

• cash
• bonds
• the money market securities.

Compared to the roller-coaster ride of equities, interest-bearing investments are like a sea of tranquillity.

The focus of interest-bearing investments is not on the appreciation (increase) of the capital you have invested, but rather on the provision of a steady interest income - often at a fixed rate.

While shares offer you higher returns at a higher risk, interest-bearing investments offer you lower returns at a lower risk, making them a safe haven for many investors.

But this safe asset class is not safe from inflation. 

Interest-bearing investments often do not generate the kind of return that beats inflation, and it is very important to remember that interest income is taxable.  After taking tax into account, the return on interest-bearing investments often struggles to beat the inflation rate.

The reason for this is simple.  Interest-bearing investments are normally money you lend to a bank, government, company or other institution with the undertaking that this exact amount will be paid back after a period of time. 

In return for this, you earn interest.

Since you only get the same amount back after a couple of months or years, that amount is usually worth less as a result of inflation. 

Your only real benefit is the income that you receive.

Interest-bearing investments also hold other risks. 

• This asset class is subject to the ups and downs of the interest rate cycle.  As interest rates increase or decrease, your cash flow can be affected - unless you have a fixed interest rate.
• Furthermore, you should beware of institutions with credit risk.  A high interest rate is not everything:  you must also be sure that your capital will be paid back. 

The so-called junk bond market in America is well known as a market where companies with poor credit ratings offer exceptionally high interest rates.  Sometimes it is better to earn less interest, but know that your money is safe.

Interest-bearing investments do, however, play an important part in an investment portfolio.  Although inflation will still erode the capital value of your investment, these investments do have advantages, including:

• offering you a relatively safe and predictable income.
• offering you less risk and volatility than an investment in equities
• offering diversification in your portfolio in case stock markets collapse
• giving you instant access to cash when you need it.