Thursday, 20 November 2008
Buffett's Berkshire Falls Most in at Least 23 Years
Buffett's Berkshire Falls Most in at Least 23 Years (Update2)
By Hugh Son and Linda Shen
Nov. 19 (Bloomberg) -- Warren Buffett's Berkshire Hathaway Inc. fell the most in at least 23 years, dropping for the eighth straight day since reporting a 77 percent decline in third- quarter profit.
The stock plunged $11,550, or 12 percent, to $84,000 in New York Stock Exchange composite trading and has slipped 41 percent this year, compared with the 45 percent drop in the Standard & Poor's 500 Index. Berkshire, based in Omaha, Nebraska, rose in 17 of the past 20 years.
``There's nothing fundamentally wrong with Berkshire, what's really happening is people are wondering if there's something fundamentally wrong with the economy, and Berkshire is in some ways a bit of a proxy for that,'' said Michael Yoshikami, president of YCMNet Advisors in Walnut Creek, California, which manages $850 million including Berkshire shares.
Berkshire has posted four straight profit declines, the worst streak in at least 13 years, on falling returns at insurance businesses and investment losses. Buffett, ranked by Forbes magazine as the richest American, has committed at least $28 billion this year to acquire companies, finance buyouts and purchase securities as prices fell and competitors were hobbled by limited access to credit.
Berkshire's shareholder equity, a measure of assets minus liabilities, fell by about $9 billion in October on declines in debt and equity markets, the firm said Nov. 7. American Express Co., the credit-card company that is one of Berkshire's top 10 stock holdings, plunged 47 percent since Sept. 30 as borrower defaults increased. Wells Fargo & Co., Berkshire's No. 2 investment, dropped about 35 percent.
`Under Pressure'
``Many of the companies Berkshire owns, such as American Express, are under pressure,'' Yoshikami said. ``What you're seeing is a systematic de-leveraging process taking all financials down, including good-quality financials.''
Berkshire shareholders including Mohnish Pabrai, head of Pabrai Investment Funds, have said investors are concerned about losses on the company's $37 billion bet on world equity values more than a decade from now. Buffett sold contracts to undisclosed counterparties for $4.85 billion protecting the buyers against declines in four stock indexes including the S&P 500.
Under the agreements, Berkshire will pay as much as $37 billion if, on specific dates beginning in 2019, the indexes are below the point where they were when he made the agreements. By Sept. 30, Berkshire had written down the contracts by $6.73 billion as the S&P declined for a fourth straight quarter.
Credit-Default Swaps
The cost to protect against Berkshire being unable to meet its debt payments, based on credit-default swaps, has more than tripled in two months.
The swaps jumped to 475 basis points today from 129 points two months ago, according to CMA Datavision. That translates to $475,000 a year to protect $10 million for five years.
Jackie Wilson, a spokeswoman for Berkshire, didn't immediately return a message seeking comment.
To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net; Linda Shen in New York at lshen21@bloomberg.net Last Updated: November 19, 2008 17:58 EST
Terms of Service Privacy Policy Trademarks
http://www.bloomberg.com/apps/news?pid=20601103&sid=ayIRzsMlT.6k&refer=us#
Asia-Pacific Growth May Halve in 2009 as U.S. Slows, PECC Says
Asia-Pacific Growth May Halve in 2009 as U.S. Slows, PECC Says
By Kartik Goyal
Nov. 20 (Bloomberg) -- Growth in the Asia-Pacific region may expand in 2009 at less than half the pace of the previous two years as the global financial crisis causes the U.S. economy to contract, the Pacific Economic Cooperation Council said.
Growth in the 16 economies tracked by the council may slow to 1.2 percent next year from 3.6 percent in 2008 and 3.5 percent in 2007, it said in a statement today. The estimate includes the performance of the U.S., Chile, Peru and Japan.
The worst financial crisis since the Great Depression has pushed economies from Japan to Europe into recession, prompting policy makers around the world to cut interest rates and spend to stimulate growth. Still, falling commodity prices will help reduce Asian import costs while weakening currencies will make the region's exports more competitive, the PECC said.
``The U.S. sub-prime mortgage crisis has turned into an international financial crisis but it is not yet certain that the ensuing global downturn will result in a severe recession in Asia,'' the group said. ``In the near term, the focus for Asian governments will be to defend against further contagion effects.''
East Asia's growth is forecast to slip to 3.4 percent from 3.9 percent this year, the independent non-government group said.
The U.S. economy will probably shrink 0.5 percent in 2009 before recovering in 2010 with 2.4 percent growth, the PECC predicts. Japan may grow 0.8 percent next year, and China's growth will slow to 9 percent from 9.3 percent this year and 11.9 percent in 2007, it said.
China's growth will be supported by stronger domestic demand and government spending, the group said. China holds about half of Asia's estimated $4 trillion in foreign reserves, and surplus funds in Asia and Gulf states will be needed to recapitalize the U.S. banking industry and finance the government's deficits, it said.
``While the U.S. dollar has risen sharply since the crisis because of a flight to quality, the medium-term outlook for the greenback is more gloomy,'' said the PECC. ``With the U.S. dollar at current highs, the temptation for Asian central banks to diversify away from the dollar in the year ahead will be greater than ever. As the credit crunch eases, interest rates in the U.S. will have to rise in order to attract investment capital from the rest of the world.''
To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net. Last Updated: November 19, 2008 11:00 EST
http://www.bloomberg.com/apps/news?pid=20601081&refer=australia&sid=aoldAQKBpOaM#
By Kartik Goyal
Nov. 20 (Bloomberg) -- Growth in the Asia-Pacific region may expand in 2009 at less than half the pace of the previous two years as the global financial crisis causes the U.S. economy to contract, the Pacific Economic Cooperation Council said.
Growth in the 16 economies tracked by the council may slow to 1.2 percent next year from 3.6 percent in 2008 and 3.5 percent in 2007, it said in a statement today. The estimate includes the performance of the U.S., Chile, Peru and Japan.
The worst financial crisis since the Great Depression has pushed economies from Japan to Europe into recession, prompting policy makers around the world to cut interest rates and spend to stimulate growth. Still, falling commodity prices will help reduce Asian import costs while weakening currencies will make the region's exports more competitive, the PECC said.
``The U.S. sub-prime mortgage crisis has turned into an international financial crisis but it is not yet certain that the ensuing global downturn will result in a severe recession in Asia,'' the group said. ``In the near term, the focus for Asian governments will be to defend against further contagion effects.''
East Asia's growth is forecast to slip to 3.4 percent from 3.9 percent this year, the independent non-government group said.
The U.S. economy will probably shrink 0.5 percent in 2009 before recovering in 2010 with 2.4 percent growth, the PECC predicts. Japan may grow 0.8 percent next year, and China's growth will slow to 9 percent from 9.3 percent this year and 11.9 percent in 2007, it said.
China's growth will be supported by stronger domestic demand and government spending, the group said. China holds about half of Asia's estimated $4 trillion in foreign reserves, and surplus funds in Asia and Gulf states will be needed to recapitalize the U.S. banking industry and finance the government's deficits, it said.
``While the U.S. dollar has risen sharply since the crisis because of a flight to quality, the medium-term outlook for the greenback is more gloomy,'' said the PECC. ``With the U.S. dollar at current highs, the temptation for Asian central banks to diversify away from the dollar in the year ahead will be greater than ever. As the credit crunch eases, interest rates in the U.S. will have to rise in order to attract investment capital from the rest of the world.''
To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net. Last Updated: November 19, 2008 11:00 EST
http://www.bloomberg.com/apps/news?pid=20601081&refer=australia&sid=aoldAQKBpOaM#
Wednesday, 19 November 2008
Stock markets discount everything
Wednesday November 19, 2008
Stock markets discount everything
Current prices reflect all potential returns and risks
A LOT of investors find it difficult to predict the stock market’s movement. They cannot understand why whenever the market is faced with a lot of bad news, instead of tumbling, it goes up.
Each time the market has a lot of good news and they feel that it is the right time to buy stocks, the market drops. As a result, investors always enter the market at the wrong time and end up buying stocks at higher prices and selling them at lower prices.
In this article, we will look at whether the current market prices are reflecting all the information, including the good and bad news.
According to Eugene Fama, a market is considered efficient if the current market prices reflect all available information.
In an efficient market, investors will not be able to make money from the information they own as all the potential returns or risks are already reflected in the stock prices.
If you are an efficient market believer, you will believe it is not possible to make money from whatever available information such as stock prices, trading volume, the company’s financial statement or any insider information.
The best price to purchase any stock will be the current price as it reflects all the potential returns and risks involved in the company.
Recently, the Dow Jones Industrial Average surged from a low of 8,175.77 on Oct 27 to a high of 9,625.28 on Nov 4, the day of the US presidential election.
Despite higher stock prices, not many investors dared enter the market as they were uncertain if Barack Obama could win the election.
Obama’s landslide victory led many investors to believe it was the right time to purchase stocks but the Dow tumbled 486 points to close at 9,139.27 the very next day after the presidential election.
Our local investors, who rushed in to purchase stocks in the belief that the US market would soar following Obama’s victory, were deeply disappointed as the market did not behave as predicted.
The main reason behind this phenomenon was because the positive news of Obama’s victory had already been reflected in stock prices.
As a result, when the actual incident happened, the market tumbled instead of surging. Besides, after the short-lived euphoria on the US election, the US stock market still needed to reflect the poor fundamentals of the US economy and the possible economic recession. Hence, whenever we intend to take position on any positive or negative news, we need to determine whether that information is already reflected in the stock prices.
On Monday, even though the official data showed that Japan had slipped into recession, Japanese stocks shrugged off the news by closing higher.
Most investors could not understand why Japan’s stock market could close higher on such big negative news. Again, the main reason for this was the news on possible recession had already been reflected in Japanese stock prices.
In fact, some traders or investors might have over-reacted to the economic recession. Hence, when the Japanese government announced the actual numbers, investors reacted positively to the numbers as not being as bad as what they had predicted.
Since August 2007, markets in the Asia-Pacific have experienced several waves of massive selling. Each time the Asia-Pacific and European markets tumbled by more than 5%, raising investor concern over further crashes on the overnight US market, in most instances, the Dow would close higher as most of the negative news had been reflected in the stock prices.
Hence, we should not be too pessimistic whenever we encounter a lot of negative news. We need to sit back and think whether this negative news has been reflected in the stock prices.
Sometimes it may be the right time to purchase instead of selling stocks. In most instances, as a result of our panic selling, some investors end up regretting they sold the stocks too early. If they had more patience and had waited for a few days, they might have been able to sell at higher prices.
In conclusion, whenever we receive any positive or negative news, whether we are able to take advantage of it will very much depend on whether the information has been reflected in the stock prices.
If the stock prices have reacted to the news prior to the announcement, investors will not be able to benefit from the information.
Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.
http://biz.thestar.com.my/news/story.asp?file=/2008/11/19/business/2580026&sec=business
Stock markets discount everything
Current prices reflect all potential returns and risks
A LOT of investors find it difficult to predict the stock market’s movement. They cannot understand why whenever the market is faced with a lot of bad news, instead of tumbling, it goes up.
Each time the market has a lot of good news and they feel that it is the right time to buy stocks, the market drops. As a result, investors always enter the market at the wrong time and end up buying stocks at higher prices and selling them at lower prices.
In this article, we will look at whether the current market prices are reflecting all the information, including the good and bad news.
According to Eugene Fama, a market is considered efficient if the current market prices reflect all available information.
In an efficient market, investors will not be able to make money from the information they own as all the potential returns or risks are already reflected in the stock prices.
If you are an efficient market believer, you will believe it is not possible to make money from whatever available information such as stock prices, trading volume, the company’s financial statement or any insider information.
The best price to purchase any stock will be the current price as it reflects all the potential returns and risks involved in the company.
Recently, the Dow Jones Industrial Average surged from a low of 8,175.77 on Oct 27 to a high of 9,625.28 on Nov 4, the day of the US presidential election.
Despite higher stock prices, not many investors dared enter the market as they were uncertain if Barack Obama could win the election.
Obama’s landslide victory led many investors to believe it was the right time to purchase stocks but the Dow tumbled 486 points to close at 9,139.27 the very next day after the presidential election.
Our local investors, who rushed in to purchase stocks in the belief that the US market would soar following Obama’s victory, were deeply disappointed as the market did not behave as predicted.
The main reason behind this phenomenon was because the positive news of Obama’s victory had already been reflected in stock prices.
As a result, when the actual incident happened, the market tumbled instead of surging. Besides, after the short-lived euphoria on the US election, the US stock market still needed to reflect the poor fundamentals of the US economy and the possible economic recession. Hence, whenever we intend to take position on any positive or negative news, we need to determine whether that information is already reflected in the stock prices.
On Monday, even though the official data showed that Japan had slipped into recession, Japanese stocks shrugged off the news by closing higher.
Most investors could not understand why Japan’s stock market could close higher on such big negative news. Again, the main reason for this was the news on possible recession had already been reflected in Japanese stock prices.
In fact, some traders or investors might have over-reacted to the economic recession. Hence, when the Japanese government announced the actual numbers, investors reacted positively to the numbers as not being as bad as what they had predicted.
Since August 2007, markets in the Asia-Pacific have experienced several waves of massive selling. Each time the Asia-Pacific and European markets tumbled by more than 5%, raising investor concern over further crashes on the overnight US market, in most instances, the Dow would close higher as most of the negative news had been reflected in the stock prices.
Hence, we should not be too pessimistic whenever we encounter a lot of negative news. We need to sit back and think whether this negative news has been reflected in the stock prices.
Sometimes it may be the right time to purchase instead of selling stocks. In most instances, as a result of our panic selling, some investors end up regretting they sold the stocks too early. If they had more patience and had waited for a few days, they might have been able to sell at higher prices.
In conclusion, whenever we receive any positive or negative news, whether we are able to take advantage of it will very much depend on whether the information has been reflected in the stock prices.
If the stock prices have reacted to the news prior to the announcement, investors will not be able to benefit from the information.
Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.
http://biz.thestar.com.my/news/story.asp?file=/2008/11/19/business/2580026&sec=business
Monday, 17 November 2008
World oil prices sink below 60 dollars on recession fears
Agence France-Presse - 11/7/2008 2:48 AM GMT
World oil prices sink below 60 dollars on recession fears
World oil prices sank below 60 dollars in Asian trade Friday, with the market gripped by worries energy demand would be hit by a global economic downturn, dealers said.
New York's main contract, light sweet crude for December delivery briefly traded below the 60-dollar level at 59.97 dollars, its lowest level since March 2007, but later regained some ground to trade at 60.52 dollars.
The New York contract closed Thursday 4.53 dollars lower at 60.77 dollars.
Brent North Sea crude for December delivery was off 81 cents to 56.62 dollars a barrel from Thursday's close of 57.43 dollars.
Fears of a sharp global downturn intensified after the International Monetary Fund said Thursday that advanced economies would contract in 2009 for the first time since World War II.
In sharp downward revisions to its last economic projections made less than a month ago, the IMF said advanced economies would now shrink by 0.3 percent in 2009. The organisation had previously predicted a 0.5 percent growth.
Oil prices have plunged from record highs above 147 dollars a barrel in July on worries that slowing global growth, especially in the United States, would hit energy demand.
The United States is the world's biggest energy user.
"The big issue that remains a drag on investor sentiment is the parlous state of the global economy," said analysts from State Street Global Markets, the investment research and trading arm of US financial services provider State Street Corporation.
"This slowdown will spare no part of the globe," they said in a report.
On Thursday, the European Central Bank (ECB) and the Bank of England (BoE) were the latest to slash interest rates in a bid to shore up flagging economies following similar moves by Asian central banks and the US Federal Reserve.
The ECB cut its main lending rate by half a percentage point to 3.25 percent while the Boe slashed its key lending rate by a record 1.5 percentage points to 3.0 percent -- the lowest level in more than half a century -- as Britain heads towards recession.
Analysts said the sharp interest rate cuts by the BoE could indicate things were even worse than previously thought.
"The fear is now that the situation could be much more dire than first perceived," said Joshua Raymond, market strategist at City Index.
The British economy is on the verge of a recession after contracting in the third quarter for the first time since 1992. The European Commission forecast this week a similar fate awaited the 27-nation European Union by year's end.
Meanwhile, the International Energy Agency said Wednesday that it expected the price of oil to rebound above 100 dollars and eventually reach 200 dollars by 2030.
In a report on the global energy outlook, the agency said the price would average 100 dollars a barrel from 2008 to 2015.
burs-bh
http://news.my.msn.com/regional/article.aspx?cp-documentid=1774126
--------
Agence France-Presse - 11/6/2008 6:35 AM GMT
World oil prices extend losses on demand worries
World oil prices extended losses in Asian trade Thursday on concerns that demand is weakening in the United States, the world's biggest energy user, dealers said.
New York's main contract, light sweet crude for December delivery was off 74 cents to 64.56 dollars from its close of 65.30 dollars in the United States Wednesday. The contract fell 5.23 dollars Wednesday.
Brent North Sea crude for December delivery eased 73 cents to 61.14 dollars a barrel from 61.87 dollars. It dropped 4.57 dollars Wednesday.
Latest data released Wednesday by the US Department of Energy (DoE) showed US gasoline stockpiles jumped 1.1 million barrels in the week ended October 31, confounding market expectations for a drop of 600,000 barrels.
The DoE said crude reserves held steady instead of rising the 1.2 million barrels forecast by analysts.
US energy demand continued to decline. Americans consumed 6.7 percent less crude in the past four weeks compared with the same period a year ago, the government data showed.
"It's very difficult to sustain price rallies, especially since the demand deterioration theory is still intact," Jim Ritterbusch, president of the oil trading advisory firm Ritterbusch and Associates, was quoted as saying by Dow Jones Newswires.
Crude prices have more than halved since hitting record levels of above 147 dollars in July on concerns about the faltering global economy.
Members of the Organisation of Petroleum Exporting Countries, which pumps about 40 percent of the world's oil, have started to cut output in November as part of the cartel's plans to shore up prices.
The cartel announced in an emergency meeting last month it would cut output by 1.5 million barrels a day to 27.3 million bpd from November.
burs-bh/jw
http://news.my.msn.com/regional/article.aspx?cp-documentid=1742238
World oil prices sink below 60 dollars on recession fears
World oil prices sank below 60 dollars in Asian trade Friday, with the market gripped by worries energy demand would be hit by a global economic downturn, dealers said.
New York's main contract, light sweet crude for December delivery briefly traded below the 60-dollar level at 59.97 dollars, its lowest level since March 2007, but later regained some ground to trade at 60.52 dollars.
The New York contract closed Thursday 4.53 dollars lower at 60.77 dollars.
Brent North Sea crude for December delivery was off 81 cents to 56.62 dollars a barrel from Thursday's close of 57.43 dollars.
Fears of a sharp global downturn intensified after the International Monetary Fund said Thursday that advanced economies would contract in 2009 for the first time since World War II.
In sharp downward revisions to its last economic projections made less than a month ago, the IMF said advanced economies would now shrink by 0.3 percent in 2009. The organisation had previously predicted a 0.5 percent growth.
Oil prices have plunged from record highs above 147 dollars a barrel in July on worries that slowing global growth, especially in the United States, would hit energy demand.
The United States is the world's biggest energy user.
"The big issue that remains a drag on investor sentiment is the parlous state of the global economy," said analysts from State Street Global Markets, the investment research and trading arm of US financial services provider State Street Corporation.
"This slowdown will spare no part of the globe," they said in a report.
On Thursday, the European Central Bank (ECB) and the Bank of England (BoE) were the latest to slash interest rates in a bid to shore up flagging economies following similar moves by Asian central banks and the US Federal Reserve.
The ECB cut its main lending rate by half a percentage point to 3.25 percent while the Boe slashed its key lending rate by a record 1.5 percentage points to 3.0 percent -- the lowest level in more than half a century -- as Britain heads towards recession.
Analysts said the sharp interest rate cuts by the BoE could indicate things were even worse than previously thought.
"The fear is now that the situation could be much more dire than first perceived," said Joshua Raymond, market strategist at City Index.
The British economy is on the verge of a recession after contracting in the third quarter for the first time since 1992. The European Commission forecast this week a similar fate awaited the 27-nation European Union by year's end.
Meanwhile, the International Energy Agency said Wednesday that it expected the price of oil to rebound above 100 dollars and eventually reach 200 dollars by 2030.
In a report on the global energy outlook, the agency said the price would average 100 dollars a barrel from 2008 to 2015.
burs-bh
http://news.my.msn.com/regional/article.aspx?cp-documentid=1774126
--------
Agence France-Presse - 11/6/2008 6:35 AM GMT
World oil prices extend losses on demand worries
World oil prices extended losses in Asian trade Thursday on concerns that demand is weakening in the United States, the world's biggest energy user, dealers said.
New York's main contract, light sweet crude for December delivery was off 74 cents to 64.56 dollars from its close of 65.30 dollars in the United States Wednesday. The contract fell 5.23 dollars Wednesday.
Brent North Sea crude for December delivery eased 73 cents to 61.14 dollars a barrel from 61.87 dollars. It dropped 4.57 dollars Wednesday.
Latest data released Wednesday by the US Department of Energy (DoE) showed US gasoline stockpiles jumped 1.1 million barrels in the week ended October 31, confounding market expectations for a drop of 600,000 barrels.
The DoE said crude reserves held steady instead of rising the 1.2 million barrels forecast by analysts.
US energy demand continued to decline. Americans consumed 6.7 percent less crude in the past four weeks compared with the same period a year ago, the government data showed.
"It's very difficult to sustain price rallies, especially since the demand deterioration theory is still intact," Jim Ritterbusch, president of the oil trading advisory firm Ritterbusch and Associates, was quoted as saying by Dow Jones Newswires.
Crude prices have more than halved since hitting record levels of above 147 dollars in July on concerns about the faltering global economy.
Members of the Organisation of Petroleum Exporting Countries, which pumps about 40 percent of the world's oil, have started to cut output in November as part of the cartel's plans to shore up prices.
The cartel announced in an emergency meeting last month it would cut output by 1.5 million barrels a day to 27.3 million bpd from November.
burs-bh/jw
http://news.my.msn.com/regional/article.aspx?cp-documentid=1742238
Lessons from Sovereign Wealth Funds
Agence France-Presse - 11/9/2008 3:50 AM GMT
Sovereign wealth funds turning cautious: analysts
Cash-rich sovereign wealth funds from Asia and the Middle East may be turning cautious after getting burnt by investments in Western firms hit by the current financial turmoil, analysts said.
Despite fresh opportunities, prudence now prevails as countries that own the funds sit on massive paper losses from investments made just before problems in the US housing market erupted into a full-blown global crisis.
Their multi-billion-dollar forays into Western financial giants such as Citigroup and Merrill Lynch appeared to be good bargains but the banking shakeout has since sharply reduced the value of their holdings.
"I think they've been burnt... They are not sure this is the right time and they are more cautious," said Zanny Minton-Beddoes, a Washington-based editor with The Economist, the widely-respected current affairs weekly.
"They put a lot of capital into financial institutions earlier on and they lost a lot of money," Minton-Beddoes, a former economist with the International Monetary Fund, told AFP.
Since last year, financial institutions hit by the unfolding slump in the US housing market have sought and received billions of dollars in fresh capital from sovereign wealth funds created to invest national savings and surpluses fed by crude-oil windfalls in the Gulf and rapid industrialisation in Asia.
The funds have come under increasing scrutiny after making high-profile investments in distressed banks and companies.
They were also criticised as too opaque in their operations and, in some cases, stakes in strategic sectors like telecommunications were seen as potential threats to national security.
The IMF has estimated that sovereign wealth funds collectively hold total assets of between 1.9 trillion and 2.8 trillion dollars and could be worth 12 trillion dollars by 2012, while the UN Conference on Trade and Development puts their current holdings at about 5.0 trillion dollars.
Christopher Balding, a researcher with the University of California, said sovereign wealth funds are by nature risk-averse and the ongoing financial turmoil would further accentuate that position.
"The current turmoil will, in my estimation, only reinforce the inherent conservative investment outlook," Balding, who specialises in international economics and sovereign wealth funds, told AFP.
"Right now there is a lot of fear in the marketplace from all investors... Sovereign wealth funds are not interested in making more large investments because of how their previous investments have turned out."
Singapore was among the most prominent investors with its two main funds, Temasek Holdings and the Government of Singapore Investment Corp (GIC), emerging as sought-after sources of capital by ailing Western financial firms.
Temasek invested 8.3 billion US dollars into Merrill Lynch, which was later acquired by Bank of America in an all-stock deal worth 50 billion dollars, while GIC pumped billions into Citigroup and Swiss banking behemoth UBS.
In response to AFP queries, GIC and Temasek both said they would continue to explore all investment opportunities but declined to give further details.
Funds from the oil-rich Middle East were also courted in the West.
The state-owned Kuwait Investment Authority injected a total of 5.0 billion dollars in Citigroup and Merrill Lynch in January this year.
The Abu Dhabi Investment Authority, controlled by the largest member of the United Arab Emirates, poured 7.52 billion dollars into Citigroup late last year.
Analysts said sovereign wealth funds from Asia and the Middle East would continue to be major financiers, but any potential partnerships would be carefully weighed before the cheque book is taken out.
"Western financials need the capital and they (sovereign wealth funds) have the capital... I just think they will be carefully considered," said Minton-Beddoes.
Michael Backman, an author of several business books on Asia, said now is the time for the region's funds to look at long-term investments in Western firms.
"It's a good time to have a lot of cash. Assets are being over-sold and there will be plenty of bargains," Backman told AFP from London.
"It's an excellent opportunity for sovereign wealth funds to diversify to the developed economies and to do it at bargain basement prices."
http://news.my.msn.com/regional/article.aspx?cp-documentid=1777581
Sovereign wealth funds turning cautious: analysts
Cash-rich sovereign wealth funds from Asia and the Middle East may be turning cautious after getting burnt by investments in Western firms hit by the current financial turmoil, analysts said.
Despite fresh opportunities, prudence now prevails as countries that own the funds sit on massive paper losses from investments made just before problems in the US housing market erupted into a full-blown global crisis.
Their multi-billion-dollar forays into Western financial giants such as Citigroup and Merrill Lynch appeared to be good bargains but the banking shakeout has since sharply reduced the value of their holdings.
"I think they've been burnt... They are not sure this is the right time and they are more cautious," said Zanny Minton-Beddoes, a Washington-based editor with The Economist, the widely-respected current affairs weekly.
"They put a lot of capital into financial institutions earlier on and they lost a lot of money," Minton-Beddoes, a former economist with the International Monetary Fund, told AFP.
Since last year, financial institutions hit by the unfolding slump in the US housing market have sought and received billions of dollars in fresh capital from sovereign wealth funds created to invest national savings and surpluses fed by crude-oil windfalls in the Gulf and rapid industrialisation in Asia.
The funds have come under increasing scrutiny after making high-profile investments in distressed banks and companies.
They were also criticised as too opaque in their operations and, in some cases, stakes in strategic sectors like telecommunications were seen as potential threats to national security.
The IMF has estimated that sovereign wealth funds collectively hold total assets of between 1.9 trillion and 2.8 trillion dollars and could be worth 12 trillion dollars by 2012, while the UN Conference on Trade and Development puts their current holdings at about 5.0 trillion dollars.
Christopher Balding, a researcher with the University of California, said sovereign wealth funds are by nature risk-averse and the ongoing financial turmoil would further accentuate that position.
"The current turmoil will, in my estimation, only reinforce the inherent conservative investment outlook," Balding, who specialises in international economics and sovereign wealth funds, told AFP.
"Right now there is a lot of fear in the marketplace from all investors... Sovereign wealth funds are not interested in making more large investments because of how their previous investments have turned out."
Singapore was among the most prominent investors with its two main funds, Temasek Holdings and the Government of Singapore Investment Corp (GIC), emerging as sought-after sources of capital by ailing Western financial firms.
Temasek invested 8.3 billion US dollars into Merrill Lynch, which was later acquired by Bank of America in an all-stock deal worth 50 billion dollars, while GIC pumped billions into Citigroup and Swiss banking behemoth UBS.
In response to AFP queries, GIC and Temasek both said they would continue to explore all investment opportunities but declined to give further details.
Funds from the oil-rich Middle East were also courted in the West.
The state-owned Kuwait Investment Authority injected a total of 5.0 billion dollars in Citigroup and Merrill Lynch in January this year.
The Abu Dhabi Investment Authority, controlled by the largest member of the United Arab Emirates, poured 7.52 billion dollars into Citigroup late last year.
Analysts said sovereign wealth funds from Asia and the Middle East would continue to be major financiers, but any potential partnerships would be carefully weighed before the cheque book is taken out.
"Western financials need the capital and they (sovereign wealth funds) have the capital... I just think they will be carefully considered," said Minton-Beddoes.
Michael Backman, an author of several business books on Asia, said now is the time for the region's funds to look at long-term investments in Western firms.
"It's a good time to have a lot of cash. Assets are being over-sold and there will be plenty of bargains," Backman told AFP from London.
"It's an excellent opportunity for sovereign wealth funds to diversify to the developed economies and to do it at bargain basement prices."
http://news.my.msn.com/regional/article.aspx?cp-documentid=1777581
Asia faces sharper slowdown next year: Morgan Stanley
Agence France-Presse - 11/11/2008 11:06 AM GMT
Asia faces sharper slowdown next year: Morgan Stanley
Asia is staring at a much sharper economic slowdown next year than earlier anticipated because of a deepening global recession, US bank Morgan Stanley said Tuesday.
The region is now expected to grow by 5.5 percent in 2009 instead of a previously forecast 6.4 percent, said Chetan Ahya, a Morgan Stanley economist for Southeast Asia and India.
Australia, South Korea, India and Indonesia will be vulnerable to financial contagion because of large current account deficits, while export-dependent countries will also suffer, he said at a news conference.
While downside risks could further drag the forecast growth rate to below 5.0 percent, it is unlikely to drop near the 2.4 percent expansion rate seen during the Asian financial crisis in 1997 and 1998, he said.
"The risk right now is it could dip below 5.0 percent," but not close to the levels of a decade ago, he said.
Ahya added that in 1997 and 1998 the gross domestic product (GDP) of five key Asian economies contracted between 4.0 and 13 percent, a situation which is unlikely during the current turmoil.
Ahya said the US economy is likely to shrink by 1.3 percent next year and the European economy should contract by 0.6 percent, more drastic than earlier projections.
Because of this, "Asia is unlikely to emerge unscathed in an environment where the global economy is likely to see a deeper recession," Morgan Stanley the bank said in a report.
It said the region's economies will start a "tepid" rebound in 2010.
The bank projects Asian economies outside Japan to grow by 6.9 percent in 2010, faster than the forecast global growth rate of 3.6 percent, but lower than the expected 7.6 percent expansion in 2008.
"We're not looking for the same kind of (high-growth) environment to come back soon. In that sense, we're looking for the duration of this global risk aversion to be longer than what we had all expected," Ahya said.
http://news.my.msn.com/regional/article.aspx?cp-documentid=1780901
Asia faces sharper slowdown next year: Morgan Stanley
Asia is staring at a much sharper economic slowdown next year than earlier anticipated because of a deepening global recession, US bank Morgan Stanley said Tuesday.
The region is now expected to grow by 5.5 percent in 2009 instead of a previously forecast 6.4 percent, said Chetan Ahya, a Morgan Stanley economist for Southeast Asia and India.
Australia, South Korea, India and Indonesia will be vulnerable to financial contagion because of large current account deficits, while export-dependent countries will also suffer, he said at a news conference.
While downside risks could further drag the forecast growth rate to below 5.0 percent, it is unlikely to drop near the 2.4 percent expansion rate seen during the Asian financial crisis in 1997 and 1998, he said.
"The risk right now is it could dip below 5.0 percent," but not close to the levels of a decade ago, he said.
Ahya added that in 1997 and 1998 the gross domestic product (GDP) of five key Asian economies contracted between 4.0 and 13 percent, a situation which is unlikely during the current turmoil.
Ahya said the US economy is likely to shrink by 1.3 percent next year and the European economy should contract by 0.6 percent, more drastic than earlier projections.
Because of this, "Asia is unlikely to emerge unscathed in an environment where the global economy is likely to see a deeper recession," Morgan Stanley the bank said in a report.
It said the region's economies will start a "tepid" rebound in 2010.
The bank projects Asian economies outside Japan to grow by 6.9 percent in 2010, faster than the forecast global growth rate of 3.6 percent, but lower than the expected 7.6 percent expansion in 2008.
"We're not looking for the same kind of (high-growth) environment to come back soon. In that sense, we're looking for the duration of this global risk aversion to be longer than what we had all expected," Ahya said.
http://news.my.msn.com/regional/article.aspx?cp-documentid=1780901
Is it time to get back into the market?
Fear index shows its time to buy
By David Uren November 17, 2008 12:00am
Some experts are saying its time to get back into the market
But more economic pain is in store
Markets: The latest trading news and share prices
AFTER each thumping day of share market falls, a few hopeful investors open their wallets and, following Warren Buffett's dictum to "be greedy when others are fearful'', buy a few stocks.
Often as not, they are thumped again the next day, but sooner or later, the wisdom of hindsight will illuminate their vision, The Australian reports.
If you accept the latest economic forecasts from either Treasury, or the more pessimistic ones from the Reserve Bank, the time to buy is now. An outlook in which the economy slows this year and next to somewhere between 1.5 to 2.25 per cent before rising back above 3 per cent in 2010-11 will soon reveal that stocks have been over-sold.
These forecasts imply little growth in profit, but no great falls over the next 18 months or so, with a return to robust growth thereafter. It is the uncertainty around those growth forecasts that is the problem.
Since the beginning of this year, every time anyone revisits their economic forecasts, they have been revising them down.
There was barely four weeks between the last two sets of downward revisions by the International Monetary Fund and then only a week before the OECD put out some even more pessimistic numbers.
So far, all Australia has seen is a lot of market action that has made people nervous. Shares have plunged, and the less visible money markets have been volatile beyond precedent.
That market punishment has been stretched out over the better part of a year, but there has been little real economic fallout, at least in this country.
Treasury secretary Ken Henry could put the telescope to his eye last week and, looking backwards at the 4.3 per cent unemployment rate and 11 per cent growth in gross company profits in the June quarter, declare that Australia had little to fear from the economic squalls ahead.
The Reserve Bank, which has long been a fan of equities, published the first chart in its quarterly economic review last week, showing that the share market has now taken values far below their long-term average relationship with profits. This is so, whether the comparison is with historic earnings or analysts' projections of future profits.
The second chart, prepared by University of California professor James Hamilton, makes the same point for the United States market, but over a 130 year time span.
He says the academic literature has established that the ratios of price to earnings and dividends to earnings do not wander too far from their long-term historical averages.
"The implication of that finding is that when prices are high relative to dividends and earnings, you can expect below-average stock returns,'' he says, and vice versa.
At present, with price earnings ratios below the long-term average, superior long-term returns are to be won.
A similar point was made recently by the Reserve Bank's deputy governor, Ric Battellino. The prospective earnings yield on Australian shares now stands at 11 per cent, almost double the long-term average.
"When the yield has risen to these levels in the past, the return on shares over the subsequent 10 years has almost always been well above average,'' he says.
The damage to the real economy is coming. We're seeing it around the world as lay-offs mount, industrial production slumps and one economy after another records quarters of contraction.
It is certainly true that the Australian economy has some insulation. It enters the economic downturn with a strong budget surplus and high corporate profitability. The floating exchange rate provides a buffer, and will help to extend the last gasp of the commodities boom.
Some of these strengths may prove ephemeral, however. Profit levels are the most obvious.
Gross profits have reached a record 27.8 per cent of the economy, a long way north of the long-term average of 20.0 per cent.
Read the full article at The Australian.
By David Uren November 17, 2008 12:00am
Some experts are saying its time to get back into the market
But more economic pain is in store
Markets: The latest trading news and share prices
AFTER each thumping day of share market falls, a few hopeful investors open their wallets and, following Warren Buffett's dictum to "be greedy when others are fearful'', buy a few stocks.
Often as not, they are thumped again the next day, but sooner or later, the wisdom of hindsight will illuminate their vision, The Australian reports.
If you accept the latest economic forecasts from either Treasury, or the more pessimistic ones from the Reserve Bank, the time to buy is now. An outlook in which the economy slows this year and next to somewhere between 1.5 to 2.25 per cent before rising back above 3 per cent in 2010-11 will soon reveal that stocks have been over-sold.
These forecasts imply little growth in profit, but no great falls over the next 18 months or so, with a return to robust growth thereafter. It is the uncertainty around those growth forecasts that is the problem.
Since the beginning of this year, every time anyone revisits their economic forecasts, they have been revising them down.
There was barely four weeks between the last two sets of downward revisions by the International Monetary Fund and then only a week before the OECD put out some even more pessimistic numbers.
So far, all Australia has seen is a lot of market action that has made people nervous. Shares have plunged, and the less visible money markets have been volatile beyond precedent.
That market punishment has been stretched out over the better part of a year, but there has been little real economic fallout, at least in this country.
Treasury secretary Ken Henry could put the telescope to his eye last week and, looking backwards at the 4.3 per cent unemployment rate and 11 per cent growth in gross company profits in the June quarter, declare that Australia had little to fear from the economic squalls ahead.
The Reserve Bank, which has long been a fan of equities, published the first chart in its quarterly economic review last week, showing that the share market has now taken values far below their long-term average relationship with profits. This is so, whether the comparison is with historic earnings or analysts' projections of future profits.
The second chart, prepared by University of California professor James Hamilton, makes the same point for the United States market, but over a 130 year time span.
He says the academic literature has established that the ratios of price to earnings and dividends to earnings do not wander too far from their long-term historical averages.
"The implication of that finding is that when prices are high relative to dividends and earnings, you can expect below-average stock returns,'' he says, and vice versa.
At present, with price earnings ratios below the long-term average, superior long-term returns are to be won.
A similar point was made recently by the Reserve Bank's deputy governor, Ric Battellino. The prospective earnings yield on Australian shares now stands at 11 per cent, almost double the long-term average.
"When the yield has risen to these levels in the past, the return on shares over the subsequent 10 years has almost always been well above average,'' he says.
The damage to the real economy is coming. We're seeing it around the world as lay-offs mount, industrial production slumps and one economy after another records quarters of contraction.
It is certainly true that the Australian economy has some insulation. It enters the economic downturn with a strong budget surplus and high corporate profitability. The floating exchange rate provides a buffer, and will help to extend the last gasp of the commodities boom.
Some of these strengths may prove ephemeral, however. Profit levels are the most obvious.
Gross profits have reached a record 27.8 per cent of the economy, a long way north of the long-term average of 20.0 per cent.
Read the full article at The Australian.
Investment Considerations in a Bear Market
Investment Considerations in a Bear Market
Making Smart Decisions When Markets Are Volatile Can Pay Off
By Jeremy Vohwinkle
The idea of investing is to make your money grow, but there are times when the stock market doesn’t want cooperate. Regular market fluctuations are common and expected, but extended periods of decline can strike fear in even seasoned investors. These bear markets can last months or even years. So, what should you do when faced with a bear market?
Examine Your Investment Objective
The first thing anyone should do before making changes to their portfolio is to think about what the purpose of the investment is. Is it money for retirement? College savings? A down payment on a house? Each of these investment goals have to be treated differently, and you need take into account what the money is going to be used for before you can decide if any changes need to be made.
The investment objective is important because it primarily deals with a specific time horizon. If you’re 35 years old and saving for retirement, you know that your money has a few decades left to grow. On the other hand, if you’re 35 and preparing to send your child off to college in 8 years, that is a completely different scenario.
Consider Your Risk Tolerance
Most people make changes to their investments because of losses. When you begin to see your account drop in value, it’s only natural to want to stop this from happening. Unfortunately, this type of behavior is reactionary, and it can often do more harm than good.
If the idea of seeing a loss on your statement has you feeling uneasy and ready to make changes, then chances are you’re taking on more risk than you should be. You should be allocating your investments in a way that minimizes risk, maximizes returns, and allows you to sleep at night regardless of what the market is doing. If you’re losing sleep because of a few bad days in the market, it’s time to reconsider how much risk you’re willing to take.
Don’t Chase the Market
You’ve probably heard the saying “buy low and sell high” many times, and we all know that’s how you make money, but the reality is that most people do just the opposite. The average investor will happily put more and more money into the market, and take on more risk when the market and economy is strong, and pull back or stop investing at all when the markets are heading south.
This is the opposite of what you want to do. If you’re only saving and investing when the markets are doing well, and investing little or selling stocks when the markets are down, you’re buying high and selling low, which is a very ineffective way to make money.
If you have a regular investment plan through your 401(k) or individual retirement accounts, keep those investments flowing through good times and bad. Because you’re investing on a regular and frequent interval, you’re buying stocks when they are up, down, and everywhere in-between. This is called dollar-cost averaging, and it is a great way to take some of the volatility out of your portfolio and maximize your overall returns.
Rebalance Your Portfolio
When the markets experience an extended period of growth or decline, it can throw your portfolio out of its original investment mix, or asset allocation. For example, if you’ve determined that a 70% stock and 30% bond portfolio is suitable for you and the stock market has taken a bit of a dive, you might find that after just six months, your investment mix might be at 60% stocks and 40% bonds, or even a 50% mix.
Ideally, you want to maintain your portfolio so that it remains close to your target investment mix. By rebalancing to your target mix, you’re forced to sell some of the investments that have done well, and buy more of the investments that haven’t done as well. This is allowing you to buy low and sell high instead of the reverse.
Shore Up Your Short-Term Investments
Investing your short-term savings takes a different approach from investing for retirement or other long-term goals. The general idea here is not to generate as much money as possible, but instead it is more focused on safety of principal while making as much money as possible.
When the economy is struggling, it pays to have a well-funded emergency fund. A weak economy can put some uncertainty in the air in terms of job security and obtaining credit. This is where your savings can come in handy. If you have the cash on hand in the event of an emergency, you don’t have to worry about using credit cards or possibly hurt your credit score.
So, when it comes to your savings, whether an emergency fund, money for a down payment on a house or a vehicle, or just the extra spending money you like to keep on hand, you want to make sure it’s safe and working as hard as it can for you. There are a number of places to safely keep your cash, so you’ll want to explore all the different options. It’s also a good idea to make sure your money is FDIC insured so that if times get really tough and your bank goes under, you’ll be protected.
http://financialplan.about.com/od/personalfinance/a/BearInvesting.htm
Making Smart Decisions When Markets Are Volatile Can Pay Off
By Jeremy Vohwinkle
The idea of investing is to make your money grow, but there are times when the stock market doesn’t want cooperate. Regular market fluctuations are common and expected, but extended periods of decline can strike fear in even seasoned investors. These bear markets can last months or even years. So, what should you do when faced with a bear market?
Examine Your Investment Objective
The first thing anyone should do before making changes to their portfolio is to think about what the purpose of the investment is. Is it money for retirement? College savings? A down payment on a house? Each of these investment goals have to be treated differently, and you need take into account what the money is going to be used for before you can decide if any changes need to be made.
The investment objective is important because it primarily deals with a specific time horizon. If you’re 35 years old and saving for retirement, you know that your money has a few decades left to grow. On the other hand, if you’re 35 and preparing to send your child off to college in 8 years, that is a completely different scenario.
Consider Your Risk Tolerance
Most people make changes to their investments because of losses. When you begin to see your account drop in value, it’s only natural to want to stop this from happening. Unfortunately, this type of behavior is reactionary, and it can often do more harm than good.
If the idea of seeing a loss on your statement has you feeling uneasy and ready to make changes, then chances are you’re taking on more risk than you should be. You should be allocating your investments in a way that minimizes risk, maximizes returns, and allows you to sleep at night regardless of what the market is doing. If you’re losing sleep because of a few bad days in the market, it’s time to reconsider how much risk you’re willing to take.
Don’t Chase the Market
You’ve probably heard the saying “buy low and sell high” many times, and we all know that’s how you make money, but the reality is that most people do just the opposite. The average investor will happily put more and more money into the market, and take on more risk when the market and economy is strong, and pull back or stop investing at all when the markets are heading south.
This is the opposite of what you want to do. If you’re only saving and investing when the markets are doing well, and investing little or selling stocks when the markets are down, you’re buying high and selling low, which is a very ineffective way to make money.
If you have a regular investment plan through your 401(k) or individual retirement accounts, keep those investments flowing through good times and bad. Because you’re investing on a regular and frequent interval, you’re buying stocks when they are up, down, and everywhere in-between. This is called dollar-cost averaging, and it is a great way to take some of the volatility out of your portfolio and maximize your overall returns.
Rebalance Your Portfolio
When the markets experience an extended period of growth or decline, it can throw your portfolio out of its original investment mix, or asset allocation. For example, if you’ve determined that a 70% stock and 30% bond portfolio is suitable for you and the stock market has taken a bit of a dive, you might find that after just six months, your investment mix might be at 60% stocks and 40% bonds, or even a 50% mix.
Ideally, you want to maintain your portfolio so that it remains close to your target investment mix. By rebalancing to your target mix, you’re forced to sell some of the investments that have done well, and buy more of the investments that haven’t done as well. This is allowing you to buy low and sell high instead of the reverse.
Shore Up Your Short-Term Investments
Investing your short-term savings takes a different approach from investing for retirement or other long-term goals. The general idea here is not to generate as much money as possible, but instead it is more focused on safety of principal while making as much money as possible.
When the economy is struggling, it pays to have a well-funded emergency fund. A weak economy can put some uncertainty in the air in terms of job security and obtaining credit. This is where your savings can come in handy. If you have the cash on hand in the event of an emergency, you don’t have to worry about using credit cards or possibly hurt your credit score.
So, when it comes to your savings, whether an emergency fund, money for a down payment on a house or a vehicle, or just the extra spending money you like to keep on hand, you want to make sure it’s safe and working as hard as it can for you. There are a number of places to safely keep your cash, so you’ll want to explore all the different options. It’s also a good idea to make sure your money is FDIC insured so that if times get really tough and your bank goes under, you’ll be protected.
http://financialplan.about.com/od/personalfinance/a/BearInvesting.htm
Saturday, 15 November 2008
5 Investing Statements That Make You Sound Stupid
5 Investing Statements That Make You Sound Stupid
by Amy Fontinelle
Some people love to talk stocks, and some people love to laugh at those people when they try to sound smart and important but they don't know what they're talking about. If you want to be a part of group No. 1 and avoid being the brunt of the jokes from group No. 2, you've come to the right place. This article will help you sound knowledgeable and wise while talking about the market. Here are five things you shouldn't say, why you shouldn't say them and what an experienced investor would have said instead.
Statement No. 1: "My investment in Company X is a sure thing.
"Misconception: If a company is hot, you'll definitely see great returns by investing in it.
Explanation: No investment is a sure thing. Any company can have serious problems that are hidden from investors. Many big-name companies - Enron, WorldCom, Adephia and Global Crossing, to name a few - have fallen. Even the most financially sound company with the best management could be struck by an uncontrollable disaster or a major change in the marketplace, such as a new competitor or a change in technology. Further, if you buy a stock when it's hot, it might be overvalued, which makes it harder to get a good return. To protect yourself from disaster, diversify your investments. This is particularly important if you choose to invest in individual stocks instead of or in addition to already-diversified mutual funds. To further improve your returns and reduce your risk when investing in individual stocks, learn how to identify companies that may not be glamorous, but that offer long-term value.(To learn about other "sure things" that went bad, read The Biggest Stock Scams of All Time.)
What an experienced investor would say: "I'm willing to bet that my investment in Company X will do great, but to be on the safe side I've only put 5% of my savings in it."
Statement No. 2: "I would never buy stocks now because the market is doing terribly."
Misconception: It's not a good idea to invest in something that is currently declining in price.
Explanation: If the stocks you're purchasing still have stable fundamentals, then their currently low prices are likely only a reflection of short-term investor fear. In this case, look at the stocks you're interested in as if they're on sale. Take advantage of their temporarily lower prices and buy up. But do your due diligence first to find out why a stock's price has been driven down. Make sure it's just market doldrums and not a more serious problem. Remember that the stock market is cyclical, and just because most people are panic selling doesn't mean you should, too. (To learn more read, What Are Fundamentals? and Buy When There's Blood In The Streets.)
What an experienced investor would say: "I'm getting great deals on stocks right now since the market is tanking. I'm going to love myself for this in a few years when things have turned around and stock prices have rebounded.
"Statement No. 3: "I just hired a great new broker, and I'm sure to beat the market."
Misconception: Actively managed investments do better than passively managed investments.
Explanation: Actively managed portfolios tend to underperform the market for several reasons. Here are three important ones:
Instead of hiring a broker who, because of the way the business is structured, may make decisions that aren't in your best interests, hire a fee-only financial planner. These planners don't make any money off of your investment decisions; they only receive an hourly fee for their expert advice. (To learn more, Understanding Dishonest Broker Tactics and Words From The Wise On Active Management.)
What an experienced investor would say: "Now that I've hired a fee-only financial planner, my net worth will increase since I'll have an unbiased professional helping me make sound investment decisions."
Statement No. 4: "My investments are well-diversified because I own a mutual fund that tracks the S&P 500."
Misconception: Investing in a lot of stocks makes you well-diversified.
Explanation: This isn't a bad start - owning shares of 500 stocks is better than owning just a few stocks. However, to have a truly diversified portfolio, you'll want to branch out into other asset classes, like bonds, treasuries, money market funds, international stock mutual funds or exchange traded funds (ETF). Since the S&P 500 stocks are all large-cap stocks, you can diversify even further and potentially boost your overall returns by investing in a small-cap index fund or ETF. Owning a mutual fund that holds several stocks helps diversify the stock portion of a portfolio, but owning securities in several asset classes helps diversify the complete portfolio. (To get started, read Diversification Beyond Equities and Diversification: It's All About (Asset) Class.)
What an experienced investor would say: "I've diversified the stock component of my portfolio by buying an index fund that tracks the S&P 500, but that's just one component of my portfolio."
Statement No. 5: "I made $1,000 in the stock market today."
Misconception: You make money when your investments go up in value and you lose money when they go down.
Explanation: If your gain is only on paper, you haven't gained any money. Nothing is set in stone until you actually sell. That's yet another reason why you don't need to worry too much about cyclical declines in the stock market - if you hang onto your investments, there's a very good chance that they'll go up in value. And if you're a long-term investor, you'll have plenty of good opportunities over the years to sell at a profit. Better yet, if current tax law remains unchanged, you'll be taxed at a lower rate on the gains from your long-term investments, allowing you to keep more of your profit. Portfolio values fluctuate constantly but gains and losses are not realized until you act upon the fluctuations.
What an experienced investor would say: "The value of my portfolio went up $1,000 today - I guess it was a good day in the market, but it doesn't really affect me since I'm not selling anytime soon."
Conclusion
These misconceptions are so widespread that even your smartest friends and acquaintances are likely to reference at least one of them from time to time. They may even tell you you're wrong if you try to correct them. Of course, in the end, the most important thing when it comes to your investments isn't looking or sounding smart, but actually being smart. Avoid making the mistakes described in these five verbal blunders and you'll be on the right path to higher returns.
by Amy Fontinelle, (Contact Author Biography)
Amy Fontinelle earned her Bachelor of Arts degree from Washington University in St. Louis. In addition to writing for Investopedia, Amy also has her own personal finance website, Two Pennies Earned, which makes it easy and fun to save more, earn more and be financially secure both today and in the future. Amy is also a special contributing writer to the website Personal Finance Advice. When she's not writing, Amy enjoys photography, traveling and trying new restaurants. To learn more about Amy, please visit her personal site.
http://www.investopedia.com/articles/basics/08/investment-verbal-blunders.asp?partner=basics
by Amy Fontinelle
Some people love to talk stocks, and some people love to laugh at those people when they try to sound smart and important but they don't know what they're talking about. If you want to be a part of group No. 1 and avoid being the brunt of the jokes from group No. 2, you've come to the right place. This article will help you sound knowledgeable and wise while talking about the market. Here are five things you shouldn't say, why you shouldn't say them and what an experienced investor would have said instead.
Statement No. 1: "My investment in Company X is a sure thing.
"Misconception: If a company is hot, you'll definitely see great returns by investing in it.
Explanation: No investment is a sure thing. Any company can have serious problems that are hidden from investors. Many big-name companies - Enron, WorldCom, Adephia and Global Crossing, to name a few - have fallen. Even the most financially sound company with the best management could be struck by an uncontrollable disaster or a major change in the marketplace, such as a new competitor or a change in technology. Further, if you buy a stock when it's hot, it might be overvalued, which makes it harder to get a good return. To protect yourself from disaster, diversify your investments. This is particularly important if you choose to invest in individual stocks instead of or in addition to already-diversified mutual funds. To further improve your returns and reduce your risk when investing in individual stocks, learn how to identify companies that may not be glamorous, but that offer long-term value.(To learn about other "sure things" that went bad, read The Biggest Stock Scams of All Time.)
What an experienced investor would say: "I'm willing to bet that my investment in Company X will do great, but to be on the safe side I've only put 5% of my savings in it."
Statement No. 2: "I would never buy stocks now because the market is doing terribly."
Misconception: It's not a good idea to invest in something that is currently declining in price.
Explanation: If the stocks you're purchasing still have stable fundamentals, then their currently low prices are likely only a reflection of short-term investor fear. In this case, look at the stocks you're interested in as if they're on sale. Take advantage of their temporarily lower prices and buy up. But do your due diligence first to find out why a stock's price has been driven down. Make sure it's just market doldrums and not a more serious problem. Remember that the stock market is cyclical, and just because most people are panic selling doesn't mean you should, too. (To learn more read, What Are Fundamentals? and Buy When There's Blood In The Streets.)
What an experienced investor would say: "I'm getting great deals on stocks right now since the market is tanking. I'm going to love myself for this in a few years when things have turned around and stock prices have rebounded.
"Statement No. 3: "I just hired a great new broker, and I'm sure to beat the market."
Misconception: Actively managed investments do better than passively managed investments.
Explanation: Actively managed portfolios tend to underperform the market for several reasons. Here are three important ones:
- Whenever you make a trade, you must pay a commission. Even most online discount brokerage companies charge a fee of at least $5 per trade, and that's with you doing the work yourself. If you've hired an actual broker to do the work for you, your fees will be significantly higher and may also include advisory fees. These fees add up over time, eating into your returns.
- There is the risk that your broker might mismanage your portfolio. Brokers can pad their own pockets by engaging in excessive trading to increase commissions or choosing investments that aren't appropriate for your goals just to receive a company incentive or bonus. While this behavior is not ethical, it still happens.
- The odds are slim that you can find a broker who can actually beat the market consistently if you don't have a few hundred thousand dollars to manage.
Instead of hiring a broker who, because of the way the business is structured, may make decisions that aren't in your best interests, hire a fee-only financial planner. These planners don't make any money off of your investment decisions; they only receive an hourly fee for their expert advice. (To learn more, Understanding Dishonest Broker Tactics and Words From The Wise On Active Management.)
What an experienced investor would say: "Now that I've hired a fee-only financial planner, my net worth will increase since I'll have an unbiased professional helping me make sound investment decisions."
Statement No. 4: "My investments are well-diversified because I own a mutual fund that tracks the S&P 500."
Misconception: Investing in a lot of stocks makes you well-diversified.
Explanation: This isn't a bad start - owning shares of 500 stocks is better than owning just a few stocks. However, to have a truly diversified portfolio, you'll want to branch out into other asset classes, like bonds, treasuries, money market funds, international stock mutual funds or exchange traded funds (ETF). Since the S&P 500 stocks are all large-cap stocks, you can diversify even further and potentially boost your overall returns by investing in a small-cap index fund or ETF. Owning a mutual fund that holds several stocks helps diversify the stock portion of a portfolio, but owning securities in several asset classes helps diversify the complete portfolio. (To get started, read Diversification Beyond Equities and Diversification: It's All About (Asset) Class.)
What an experienced investor would say: "I've diversified the stock component of my portfolio by buying an index fund that tracks the S&P 500, but that's just one component of my portfolio."
Statement No. 5: "I made $1,000 in the stock market today."
Misconception: You make money when your investments go up in value and you lose money when they go down.
Explanation: If your gain is only on paper, you haven't gained any money. Nothing is set in stone until you actually sell. That's yet another reason why you don't need to worry too much about cyclical declines in the stock market - if you hang onto your investments, there's a very good chance that they'll go up in value. And if you're a long-term investor, you'll have plenty of good opportunities over the years to sell at a profit. Better yet, if current tax law remains unchanged, you'll be taxed at a lower rate on the gains from your long-term investments, allowing you to keep more of your profit. Portfolio values fluctuate constantly but gains and losses are not realized until you act upon the fluctuations.
What an experienced investor would say: "The value of my portfolio went up $1,000 today - I guess it was a good day in the market, but it doesn't really affect me since I'm not selling anytime soon."
Conclusion
These misconceptions are so widespread that even your smartest friends and acquaintances are likely to reference at least one of them from time to time. They may even tell you you're wrong if you try to correct them. Of course, in the end, the most important thing when it comes to your investments isn't looking or sounding smart, but actually being smart. Avoid making the mistakes described in these five verbal blunders and you'll be on the right path to higher returns.
by Amy Fontinelle, (Contact Author Biography)
Amy Fontinelle earned her Bachelor of Arts degree from Washington University in St. Louis. In addition to writing for Investopedia, Amy also has her own personal finance website, Two Pennies Earned, which makes it easy and fun to save more, earn more and be financially secure both today and in the future. Amy is also a special contributing writer to the website Personal Finance Advice. When she's not writing, Amy enjoys photography, traveling and trying new restaurants. To learn more about Amy, please visit her personal site.
http://www.investopedia.com/articles/basics/08/investment-verbal-blunders.asp?partner=basics
Friday, 14 November 2008
Stockpicking in a bear market using cash bailout potentials
Medium-term horizon
Long-term horizon
Cash bailout potentials
Fundamental strength of the business
Dividend
Capital appreciation potential
Privatisation potential
------------
Stockpicking in a bear market can be a hazardous business. Picking bottoms is not easy. Beware of intermediate bottoms and long-term bottoms.
One strategy during the bear market is to avoid risk and not hold stocks altogether. This is also the reason why we have a bear market at all --- risk aversion leads to lower volumes and the stock prices drop by gravity due to lack of support.
But yet, if we define risk* as the potential loss on investment over say 3-5 years, then buying stocks during a bear market could be a low-risk proposition indeed (because you are buying at a lower base and hence risk of losing is lessened over the long term), assuming that the bear cycle reverses in several years.
-----------
A good model for picking stocks in a bear market would be to examine the cash bailout potential of a stock over the medium to long term. The general idea is to view a stock with regard to its potential to allow the holder to eventually bail out. Under this umbrella of "cash bailouts" are:
This way of viewing a stock is especially useful in a bear market where most small-cap stocks may be thinly-traded and selling out of them may be difficult. Yet, illiquid small-caps often offer the best potential gains.
----------
Two-horizon approach to picking these stocks in a bear market are:
----------
Dividend streams tend to be more easily predictable especially for older companies, and high dividends, perhaps in excess of 5-10% yield, would be a good clearing mark for potential stockpicks.
Privatisation potential is harder to judge. Companies with the following:
----------
Long-term horizon
Under the long-term horizon, capital gains look like a more viable, and probably the most profitable, cash bailout avenue. This is of course the preferred bailout avenue of the long-term growth investor.
Two main issues must be considered with respect to stockpicking for this horizon:
For the second issue, it boils down to an examination of the company's accounts and operating business. The balance sheet (complete with footnotes) is the single most important source of information to make the judgment. Things to look out for would be:
------------
Ideally the selected stock would be satisfactory on all counts, both medium-term and long-term. Of course, it may be difficult to find one has multi-bagger potential and yet has clear indications of being taken over. Or it might pay miserly dividends.
The dividends and the fundamental strength of the business to negotiate through the recession override the other two factors, privatisation or capital appreciation, in terms of importance.
Dividends and fundamental strength of the business are the ones that are most easily judged from current and past data. These can be judged objectively, and provide a clear operating basis to fall back on should privatisation or capital appreciation not work out. In short, they provide a floor for the stock price. Look out for these two parameters most of all.
----------
*Risk
For long term investors with a longer investing horizon, we define risk as the potential loss on investment over say 3-5 years.
The standard definition of risk as price volatility is more appropriate for short-term leveraged players.
----------
Reference: http://mystockthoughts.blogspot.com/2008/11/stockpicking-in-bear-market.html
Long-term horizon
Cash bailout potentials
Fundamental strength of the business
Dividend
Capital appreciation potential
Privatisation potential
------------
Stockpicking in a bear market can be a hazardous business. Picking bottoms is not easy. Beware of intermediate bottoms and long-term bottoms.
One strategy during the bear market is to avoid risk and not hold stocks altogether. This is also the reason why we have a bear market at all --- risk aversion leads to lower volumes and the stock prices drop by gravity due to lack of support.
But yet, if we define risk* as the potential loss on investment over say 3-5 years, then buying stocks during a bear market could be a low-risk proposition indeed (because you are buying at a lower base and hence risk of losing is lessened over the long term), assuming that the bear cycle reverses in several years.
-----------
A good model for picking stocks in a bear market would be to examine the cash bailout potential of a stock over the medium to long term. The general idea is to view a stock with regard to its potential to allow the holder to eventually bail out. Under this umbrella of "cash bailouts" are:
- selling in the open market for capital gains
- dividends and
- privatisation.
This way of viewing a stock is especially useful in a bear market where most small-cap stocks may be thinly-traded and selling out of them may be difficult. Yet, illiquid small-caps often offer the best potential gains.
----------
Two-horizon approach to picking these stocks in a bear market are:
- the medium-term horizon (6-12 months) and
- the long-term horizon (3-5 years).
----------
Medium-term horizon
One should expect a lower potential returns for the medium term as opposed to the long-term horizon. Under the medium-term horizon, two main factors to look out for are
- privatisation potential and
- dividend yield.
Dividend streams tend to be more easily predictable especially for older companies, and high dividends, perhaps in excess of 5-10% yield, would be a good clearing mark for potential stockpicks.
Privatisation potential is harder to judge. Companies with the following:
- the usual "good earnings/business" criteria
- tight ownership under a strong cash-rich owner,
- an operating niche or desirable brand name and
- steady free cashflows (operating cashflow minus investing cashflow)
----------
Long-term horizon
Under the long-term horizon, capital gains look like a more viable, and probably the most profitable, cash bailout avenue. This is of course the preferred bailout avenue of the long-term growth investor.
Two main issues must be considered with respect to stockpicking for this horizon:
- firstly, how many times can the stock price appreciate;
- secondly, can the company's fundamentals survive the recession unblemished.
For the second issue, it boils down to an examination of the company's accounts and operating business. The balance sheet (complete with footnotes) is the single most important source of information to make the judgment. Things to look out for would be:
- heavy debt,
- contingent liabilities (under footnotes),
- consistently negative operating cashflows and
- insider selling.
------------
Ideally the selected stock would be satisfactory on all counts, both medium-term and long-term. Of course, it may be difficult to find one has multi-bagger potential and yet has clear indications of being taken over. Or it might pay miserly dividends.
The dividends and the fundamental strength of the business to negotiate through the recession override the other two factors, privatisation or capital appreciation, in terms of importance.
Dividends and fundamental strength of the business are the ones that are most easily judged from current and past data. These can be judged objectively, and provide a clear operating basis to fall back on should privatisation or capital appreciation not work out. In short, they provide a floor for the stock price. Look out for these two parameters most of all.
----------
*Risk
For long term investors with a longer investing horizon, we define risk as the potential loss on investment over say 3-5 years.
The standard definition of risk as price volatility is more appropriate for short-term leveraged players.
----------
Reference: http://mystockthoughts.blogspot.com/2008/11/stockpicking-in-bear-market.html
Thursday, 13 November 2008
What is Recession? What is Depression?
The key question facing markets these days is the difference between recession and depression. A recession is an economic slowdown that may last for 6 to 18 months. A depression is an economic pullback that may last from two to four years. We'd rather not have a recession at all but if we have to choose one or the other, I'd rather be recessed than depressed!
In either case, the market moves in anticipation of the event. The market decline develops before the fundamental signs of a recession or depression become evident. The market leads the confirmation of conditions.
The market also leads a recovery. In a recession, the market will develop strong trending behavior many months prior to the official confirmation of the end of a recession. This recovery provides trend trading opportunities.
The market also leads a recovery. In a recession, the market will develop strong trending behavior many months prior to the official confirmation of the end of a recession. This recovery provides trend trading opportunities.
In a depression the market will develop a long-term consolidation pattern. This is an investment period that lays the foundations for generational fortunes. Trend-trading opportunities do not develop for several years. This consolidation and accumulation phase concentrates on creating income flow from dividends. The fundamental end of a depression is not recognized until many months after the market has already reacted.
Right now, market is hovering near significant support levels. The closest of these we call recession support targets. The lowest of these we call depression targets. Many analysts have compared the current market situation to the market collapse in 1929. This week we look at charts from the 1929 period. In particular we look at the similarity of behavior.
The above chart is the weekly Dow for 1929 to 1930. The significant features are these:
The rapid fall is followed by a rebound and rebound failure.
The primary rebound failure occurs rapidly with another market collapse.
The pile driver low is retested within 12 months
Support, defined by the pile driver low, is not successful.
The pink circle shows the comparable position of today’s market. This is a period of high volatility, but volatility lessens and the market moves into a more clearly defined trending behavior. This pattern of behavior suggests that a rebound from the current support levels may persist for around 20 weeks.
The important feature is the rapid failure of the trend line followed by a rapid failure of the pile driver low support-level. The failure of pile driver support brings the really bad news. This failure is acute because the pile driver low support does not equal any previous historical support level.
The low of the market develops in 1932, about three years after the 1929 crash. The key trigger is the failure of support set by the pile driver low. The disaster is that it takes 25 years for the market to exceed the high of 380 set in July 1929. This is why the Depression is referred to as a generational event. The current situation has the potential to have the same generational impact.
SEE CHART ABOVE
The key trigger that separates a recession from a depression is the behavior of the rebound from the pile driver low. After the 1987 crash the rebound quickly developed strong trending behavior. The move above the midway point in the market fall signaled a continuation of the uptrend. This is recession behavior. Depression behavior is when the market fails to move above the midpoint of the extreme fall area.
On the current Dow chart, the area near 12,000 is the key level to watch. Failure to move above this level suggests a depression scenario may develop.
A sustained move above 12,000 signals a recession. There is one caution in this analysis. The Dow has not yet developed a confirmed pile driver bottom pattern on the weekly chart. The low of this pattern will determine the mid-point resistance level that is used to signal a recession recovery.
Markets will not behave the same way as in 1930, but they will develop in a similar fashion. There is a high probability that these behaviors will develop in shorter time frames.
CNBC assumes no responsibility for any losses, damages or liability whatsoever suffered or incurred by any person, resulting from or attributable to the use of the information published on this site. User is using this information at his/her sole risk.
© 2008 CNBC, Inc. All Rights Reserved
© 2008 CNBC, Inc. All Rights Reserved
Capitulation - the point when everybody gives up.
Sunday, 12 Oct 2008
Identifying Capitulation: How to Tell We've Hit Bottom
Posted By:Daryl Guppy
In many ways it's a pointless question. Even if we could identify the turning point in the market with a high level of certainty, there are very few people with the courage to enter at these low points.
The more important thing to look for are the features that will help to identify, first, the end of the market fall and second, the development of a market recovery. These two events may be separated by a few months, or by many months.
There are two important features that identify climax selling. The first is the rapid acceleration in the speed of the market fall. Like a Stuka dive-bomber, the market first rolls over slowly and then plunges in a vertical dive. This is fear at work.
The second feature is a massive increase in volume. This is panic. Ordinary people are desperate to get out of the market. Generally the funds and institutions got out of the long-side of the market many months ago. The selling in January and February was dominated by institutions and funds. The current panic selling is thousands of small orders from retail investors desperate to get out of the market.
During the bear market collapse, volumes decline. Fewer people want to buy stock so volatility increases because small trades have a disproportionate impact in a shallow market.
This selling climax shakes out all the weak hands in the market. It kills the margin speculators. It wipes out those who have finally lost patience. It removes the speculative money in the market because people think the risk is too great. This is also called capitulation. Everybody gives up – and it influences the thinking of a generation. My parents, who lived through the depression, could never entirely shake the idea that the market was a dangerous place.
The activity in the Dow Jones Industrial Average and other global markets shows an acceleration of downwards momentum. The massive increase in volume has not yet developed and this suggests the market bottom is not yet established. There is a high probability that markets will see a selling climax in the next 3 to 5 days. But here is the important difference.
The recovery rally after climax selling is temporary. It is part of a longer-term consolidation pattern that may last months, or even a year, and make more new lows before a new sustainable uptrend can develop. The potential shape of the recovery is shown in the chart. The bull market rebound rally follows a temporary selloff. A bear market rebound rally follows climax selling. It is a relief really, but it is not part of a sustainable trend change.
After a bear market, volumes remain low. When you lose trillions of dollars it takes a long time for spare change to start rattling around the economy again. Spare change drives the bull market because money is available for speculation.
In the immediate bear market recovery period the market is dominated by professionals. Finance industry professionals are already being laid off. The least effective are the first to be let go. Only the best will survive the employment washout in the industry and these will be the ones defining the behavior of the consolidation and recovery market.
When you trade in these market conditions you are most likely trading against these professional survivors. Education, not money, is the most important premium after the bear market.
CNBC assumes no responsibility for any losses, damages or liability whatsoever suffered or incurred by any person, resulting from or attributable to the use of the information published on this site. User is using this information at his/her sole risk.
© 2008 CNBC, Inc. All Rights Reserved
© 2008 CNBC, Inc. All Rights Reserved
Capital Preservation is Key - CNBC Video
Capital preservation is key in such difficult times, says Fan Cheuk Wan, head of private banking research, Asia Pacific at Credit Suisse. Her advice to investors? Reduce your risk exposure and sell risky assets into any rallies.
http://www.cnbc.com/id/15840232?video=920838388
Related readings:
The risk is not in our stocks, but in ourselves
Consequences must dominate Probabilities
http://www.cnbc.com/id/15840232?video=920838388
Related readings:
The risk is not in our stocks, but in ourselves
Consequences must dominate Probabilities
Monday, 10 November 2008
Saving and Investing - Videos
1. Compounding
2. Providers and Users of Capital
3. Providers and Users of Capital:
4. What is Leverage? -
5. Principles of Leverage -
6. Borrowing Money
7. High Credit Card Interest Rates
8. Debt Consolidation -
9. The Income Statement
10. What is a Balance Sheet
11. The Cash Flow Statement
12. Links between Financial
13. What is a Stock?
14. What is a Bond?
15. The Capital Structure of a Company
16. Private Equity, IPO, Public Equity
17. Who issues Bonds?
18. What is a Stock Market Index? -
19. Why do Financial Markets
20. Mutual Funds 1: What is a Mutual
21. Mutual Funds 2: Types of Mutual
22. Mutual Funds 3: Active and Passive
23. Market Efficiency
24. Index Funds and ETFs
25. Hedge Funds 1: What is a Hedge
26. Hedge Funds 2: What is Short-
27. Hedge Funds 3: Different Strategies
28. Hedge Funds 4: Funds of (Hedge)
29. Hedge Funds 5: Prime Brokers
30. The Impact of Time
31. Timing Investments and
32. Taxes and Compounding -
33. First Principles of Taxation
34. Two Generic Types of Pension
35. Diversification - savingandinvest
36. Following the Crowd and the Role
37. Transaction Costs
38. Getting Started
Introduction to Diversification
Introduction to Valuation - Videos
V1. Introduction to Valuation
V1B. Remarks on Valuation
V2. The P/E Ratio
V2B. One Year of Earnings might not
V2C. The P/E to Growth Ratio
V3. The Price/Sales Ratio
V4. The EV/EBITDA Ratio
V5. The Price to Book (P/Book)
V5B. Return on Equity
V6. Introduction to the Dividend
V7. Introduction to the Discounted Cash Flow (DCF) Model
V7B. Discounting
V7C. The Risk-Free Rate
V8. What is Yield?
V8B. Dividend Yield
V8C. Bond Yields
V8D. Earnings Yield
Saving and Investing are very important topics - Introduction Videos
Saving and investing are very important topics!
How savers and investors (as providers of capital), and users of capital (like companies and governments) interact forms the basis of a very large part of the society that we live in today.
This interaction allows companies to raise capital to build factories, create jobs, and deliver better products.
It is this interaction that allows us to enjoy many of the things that we enjoy today.
And this interaction allows savers to compound and grow their money by earning a return for making it available.
Furthermore - stocks, bonds, interest rates, equity and other financial topics surround us in the press, on TV and in conversation all day long – without knowledge of this subject, a huge part of the world just passes us by!
Perhaps most importantly, without some knowledge of this subject, we are unlikely to achieve our saving and investing dreams!!
Key Reasons to focus on saving and investing include:
The beautiful thing is that it is not hard if we get the complete picture once – furthermore a large part of saving and investing can ultimately even be automated.
http://www.savingandinvesting.com/invest.htm
------------
Videos
Introduction 1 (INT1) - by savingandinvest ing.com
Intro 2 (INT2): SavingandInvest ing.com
INT3. My Background
INT4. Why the Subject is so Important!
INT5. Starting with the Right Thing - savingandinvest ing.com
INT6. 5 Popular Misconceptions Part 1
INT7. 5 Popular Misconceptions Part 2
How savers and investors (as providers of capital), and users of capital (like companies and governments) interact forms the basis of a very large part of the society that we live in today.
This interaction allows companies to raise capital to build factories, create jobs, and deliver better products.
It is this interaction that allows us to enjoy many of the things that we enjoy today.
And this interaction allows savers to compound and grow their money by earning a return for making it available.
Furthermore - stocks, bonds, interest rates, equity and other financial topics surround us in the press, on TV and in conversation all day long – without knowledge of this subject, a huge part of the world just passes us by!
Perhaps most importantly, without some knowledge of this subject, we are unlikely to achieve our saving and investing dreams!!
Key Reasons to focus on saving and investing include:
- If done properly, it allows money to grow;
- Consistent saving allows sums to be amassed that it would never be possible to save with a single action;
- It can be very lucrative, and be a key element of becoming rich;
- It creates a financial ‘cushion’;
- It can mean paying less tax because the government wants us to do it;
- Without investment our financial system would break down;
- By allocating some capital actively, it allows us to provide capital where we think it should go, and not in areas where we think it is not deserved, thereby making us a participant in the financial system;
- It is a key element of companies and governments getting access to funding that allows them to provide services, products and jobs for society;
- By understanding the subject once, we will have demystified are very large part of the world around us.
The beautiful thing is that it is not hard if we get the complete picture once – furthermore a large part of saving and investing can ultimately even be automated.
http://www.savingandinvesting.com/invest.htm
------------
Videos
Introduction 1 (INT1) - by savingandinvest ing.com
Intro 2 (INT2): SavingandInvest ing.com
INT3. My Background
INT4. Why the Subject is so Important!
INT5. Starting with the Right Thing - savingandinvest ing.com
INT6. 5 Popular Misconceptions Part 1
INT7. 5 Popular Misconceptions Part 2
Saturday, 8 November 2008
7 Lessons To Learn From A Market Downturn
7 Lessons To Learn From A Market Downturn
by Stephanie Powers (Contact Author Biography)
You can never really understand investing until you weather a market downturn. The valuable lessons learned can help you through the bad times and can be applied to your portfolio when the economy recovers. Listed below are some common investor experiences during tough economic times and the lessons each investor can come away with after surviving the events.
Lesson #1: Evaluate Your Egg Baskets
You're pulling your hair out because everything you invest in goes down. The lesson: Always keep a diversified portfolio, regardless of current market conditions.
If everything you own is moving in the same direction, at the same rate, your portfolio is probably not well diversified, and you could stand to reconsider your asset-allocation choices. The specific assets in your portfolio will depend on your objectives and risk-tolerance level, but you should always include multiple types of investments. (Read Personalizing Risk Tolerance to find out how much uncertainty you can stand.)
Taking a more conservative stance to preserve capital should mean changing the percentages of holdings from aggressive, risky stocks to more conservative holdings, not moving everything to a single investment type. For example, increasing bonds and decreasing small-cap growth holdings maintains diversification, whereas liquidating everything to money market securities does not. Under normal market conditions, a diversified portfolio reduces big swings in performance over time. (For more information, read Diversification: It's All About (Asset) Class.)
Lesson #2: No Such Thing As A Sure Thing
That stock you thought was a sure thing just tanked. The lesson: Sometimes the unpredictable happens. It happens to the best analysts, the best fund managers, the best advisors, and, it can happen to you.
The perfect chart interpretation, fundamental analysis, or tarot card reading won't predict every possible incident that can impact your investment.
- Use due diligence to mitigate risk as much as possible.
- Review quarterly and annual reports for clues on risks to the company's business as well as their responses to the risks.
- You can also glean industry weaknesses from current events and industry associations.
Lesson #3: Proper Risk Management
You thought an investment was risk-free, but it wasn't. The lesson: Every investment has some type of risk.
You can attempt to measure the risk and try to offset it, but you must acknowledge that risk is inherent in each trade. Evaluate your willingness to take each risk. (See Measuring And Managing Investment Risk for information on keeping necessary risk under control.)
Lesson #4: Liquidity Matters
You always stay fully invested, so you miss out on opportunities requiring accessible cash. The lesson: Having cash in a certificate of deposit (CD) or money market account enables you to take advantage of high-quality investments at fire sale prices. It also decreases overall portfolio risk.
Plan ahead to replenish cash accounts. For example, use the proceeds from a called bond to invest in the money market instead of purchasing a new bond.Sometimes cash can be obtained by reorganizing debt or trimming discretionary spending. Set a specific percentage of your overall portfolio to hold in cash. (Learn how to take advantage of the safety of the money market in our Money Market tutorial.)
Lesson #5: Patience
Your account balance is lower than it was last quarter, so you overhaul your investment strategy before taking advantage of your current investments. The lesson: Sometimes it takes the market an extended period of time to bounce back.
Your overall portfolio balance on a given date is not as important as the direction it is trending and expected returns for the future. The key is preparedness for the impending market upturn based on an estimated lag time behind market indicators. Evaluate your strategy, but remember that sometimes patience is the solution. (Doing nothing can mean good returns. Find out more in Patience Is A Trader's Virtue.)
Lesson #6: Be Your Own Advisor
The market news gets bleaker every day - now you're paralyzed with fear! The lesson: Market news has to be interpreted relative to your situation.
Sometimes investors overreact, particularly with large or popular stocks, because bad news is replayed continuously via every news outlet. Here are some steps you can follow to help you keep your head in the face of bad news:
- Pay attention and understand the news, then analyze the financials yourself. (Read What You Need To Know About Financial Statements for help.)
- Determine if the information represents a significant downward financial trend, a major negative shift in a company's business, or just a temporary blip.
- Listen for cues the company may be downgrading its own expected returns. Find out if the downgrade is for one quarter, one year or if it is so abstract you can't tell.
- Conduct an industry analysis of the company's competitors.
After a thorough evaluation, you can decide if your portfolio needs a change. (For more information, read Do You Need a Financial Advisor?)
Lesson #7: When To Sell And When To Hold
The market indicators don't seem to have a silver lining. The lesson: Know when to sell existing positions and when to hold on.
Don't be afraid to cut your losses. If the current value of your portfolio is lower than your cost basis and showing signs of dropping further, consider taking some losses now. Remember, those losses can be carried forward to offset capital gains for up to seven years. (For more information, read Selling Losing Securities For A Tax Advantage.)
Selective selling can produce cash needed to buy investments with better earnings potential. On the other hand, maintain investments with solid financials that are experiencing price corrections based on expected price-earnings ratios. Make decisions on each investment, but don't forget to evaluate your overall asset allocation. (Read more in Asset Allocation: One Decision To Rule Them All.)
Conclusion
Downward stock market swings are inevitable. The better-prepared you are to deal with them, the better your portfolio will endure them. You may have already learned some of these lessons the hard way, but if not, take the time to learn from others' mistakes before they become yours.
Read Adapt To A Bear Market to learn how to structure your portfolio to withstand tough economic times.
by Stephanie Powers, (Contact Author Biography)
Stephanie Powers has worked in the financial services industry since 1995. She uses her experience as a financial advisor to write investment and personal finance articles that educate readers and help them make informed decisions. Her credentials include FINRA securities licenses, an MBA, and experience consulting with individuals and businesses for Edward Jones Investments and Merrill Lynch. Previous experience includes working as a business consultant for American General Insurance and IBM.In her spare time, Stephanie enjoys traveling, playing golf, and genealogy research.
** This article and more are available at Investopedia.com - Your Source for Investing Education **
http://www.investopedia.com/articles/basics/08/lessons-market-downturn.asp?partner=basics
Subscribe to:
Posts (Atom)