Balance Sheet Value: Assets at Work
Pure value investing starts with the balance sheet, the list of assets and liabilities, and the resulting difference called book value.
The following metrics can be derived:
· Net-net working capital
· Net asset value
· Liquidation value, and
· Reproduction cost
In some areas, our economic environment has outpaced our accounting principles so that sizable asset classes called intangibles bearing large values remain unrecorded on the asset side of a balance sheet.
Examples are:
· Intellectual property (copyrights, patents, and trademarks), and
· Human capital (a well-trained workforce, know-how, and specialized skill sets).
Also read:
1.Balance Sheet Value: Assets at Work
2.Reliability of financial data
3.Asset valuation approach in liquidation
4.Asset valuation approaches in active companies
5.Valuing Hidden assets
6.Subtracting liabilities in asset valuation
7.Balance Sheet Value: Summary
Sunday, 11 January 2009
What data most reliably indicate value
While all investors agree that intrinsic worth is the present value of cash that an asset generates for its owners, serious disagreement arises concerning the factors used to estimate cash flows and the relevant discount rate.
Debate concerning cash flows focuses on what data most reliably indicate this value.
Cash flows are picture of the future, and gauging the future can only be done by drawing on the past.
Historical indicators
Which historical indicators are the best gauges of future performance?
Candidates include:
Debate concerning cash flows focuses on what data most reliably indicate this value.
Cash flows are picture of the future, and gauging the future can only be done by drawing on the past.
Historical indicators
Which historical indicators are the best gauges of future performance?
Candidates include:
- historical cash flows themselves,
- recent earning history, and
- existing asset and liability levels.
Even among prominent value investors, emphasis varies concerning which gauges are best suited for valuation exercises.
All agree that in order of importance, analysis must focus on
- the balance sheet,
- the income statement, and
- the cash flow statement.
Also read:
Valuation
Hunting for good investment prospects
Selecting investments
In selecting investments, value investors choose those shown by valuation analysis to be the cheapest.
Valuation analysis takes account of all relevant business factors, including:
Good investment prospects
Hunting for good investment prospects entails assessing only the group of companies most likely to win the valuation contest.
Among these businesses are those ablest to deploy additional capital at high rates of return compared to capital costs.
Businesses to avoid are those that must employ additional capital at low rates of return compared to capital costs.
The former population is far smaller than the latter.
To minimize error risk: margin of safety
Applying the valuation equation to this universe of companies is difficult and poses substantial risk of error.
To minimize error risk, value investing calls for a key disciplining attitude: margin of saftety.
It prescribes never paying a price approximately equal to ( or greater than) the value estimate you've made. If the investor is wrong, he will lose.
If the investor insists on paying only a fraction of any value estimate she makes, even if she is wrong, she may avoid future losses and certainly will reduce them.
Also read:
Valuation
1. Value Measurements
2. Hunting for good investment prospects
3. What data most reliably indicate value
In selecting investments, value investors choose those shown by valuation analysis to be the cheapest.
Valuation analysis takes account of all relevant business factors, including:
- financial strength,
- relative business growth, and
- steadiness of earnings.
Good investment prospects
Hunting for good investment prospects entails assessing only the group of companies most likely to win the valuation contest.
Among these businesses are those ablest to deploy additional capital at high rates of return compared to capital costs.
Businesses to avoid are those that must employ additional capital at low rates of return compared to capital costs.
The former population is far smaller than the latter.
To minimize error risk: margin of safety
Applying the valuation equation to this universe of companies is difficult and poses substantial risk of error.
To minimize error risk, value investing calls for a key disciplining attitude: margin of saftety.
It prescribes never paying a price approximately equal to ( or greater than) the value estimate you've made. If the investor is wrong, he will lose.
If the investor insists on paying only a fraction of any value estimate she makes, even if she is wrong, she may avoid future losses and certainly will reduce them.
Also read:
Valuation
1. Value Measurements
2. Hunting for good investment prospects
3. What data most reliably indicate value
Value Measurements
Value Measurements
The value of any asset (stock, bond, business, or other) is a function of the cash inflows and outflows, discounted at an appropriate rate that an investor can reasonably expect it to generate during its remaining life.
Bonds
Bond values are easiest to measure.
Standard bonds bear a designated interest rate and a set maturity date.
The combination defines expected cash flows and appropriate discount rate.
Stocks
Common stocks have no such coupon, and their life is perpetual.
An analyst thus must estimate both components (expected cash flows and discount rate) of the valuation exercise.
Another crucial difference is that qualitative variables such as managerial probity and skill have a direct bearing on common stock values, but a limited effect on bond values.
Also read:
Valuation
1. Value Measurements
2. Hunting for good investment prospects
3. What data most reliably indicate value
The value of any asset (stock, bond, business, or other) is a function of the cash inflows and outflows, discounted at an appropriate rate that an investor can reasonably expect it to generate during its remaining life.
Bonds
Bond values are easiest to measure.
Standard bonds bear a designated interest rate and a set maturity date.
The combination defines expected cash flows and appropriate discount rate.
Stocks
Common stocks have no such coupon, and their life is perpetual.
An analyst thus must estimate both components (expected cash flows and discount rate) of the valuation exercise.
Another crucial difference is that qualitative variables such as managerial probity and skill have a direct bearing on common stock values, but a limited effect on bond values.
Also read:
Valuation
1. Value Measurements
2. Hunting for good investment prospects
3. What data most reliably indicate value
Saturday, 10 January 2009
Shares are cheap but it's not the time to buy
Shares are cheap but it's not the time to buy
Three days after Lehman Brothers collapsed in mid-September, stock markets were in freefall.
By Chris Hughes, breakingviews.com
Last Updated: 6:33AM GMT 09 Jan 2009
The world looked so gloomy that some equity investors hailed the week as the so-called "capitulation event" - the painful point of maximum bearishness that clearly establishes the trough of the market. The announcement of the US Troubled Asset Relief Programme arrested the selling.
But by late November, the MSCI World Index and S&P500 had fallen another 35pc. Equities had fallen 54pc from their October 2007 high, before the worst of the crisis hit.
Equity investors never know when they are at the bottom. But if the market rout prompted by Lehman was a false floor, the rally since late November is proving resilient. As of January 8, the World Index was up 22pc from last year's low, touched only seven weeks earlier. The question facing equity investors is whether this is just another bear-market rally, and, if not, how quickly markets will continue to recover.
Bear markets usually last longer than two years. But the latest downturn has been particularly accelerated. And there are multiple arguments why equities have now found their floor.
While higher current dividend yields partly reflect the risk of imminent dividend cuts, the equity yields still look good compared to government bonds and cash, whose yields have plummeted. Cash has never looked so expensive. The equity risk premium is at its highest in a decade, according to Morgan Stanley. Furthermore, corporate insiders, who should know something, are buying at record levels.
Analysts expect the recession to cut corporate earnings in half, including a 10pc decline in 2008. But equities appear to have fallen enough to reflect that savage drop. Global equities have not been so cheap on either spot or trough earnings for over two decades, says Citigroup. They are trading on a historic price-earnings ratio of around 11 times. Credit Suisse says historic consensus earnings multiples were an average 15 in the last four market lows.
Stock market history suggests that equity markets recover before bad news from corporations has stopped and while earnings are still falling. Equities can bottom out as early as five quarters before earnings trough, and do so on average after two quarters.
But to be buying now, equity investors need to satisfy themselves of two things.
The massive government stimulus packages that investors hope will underpin recovery carry risks of their own, in particular if weak currencies create an inflationary squeeze on corporate profits. The financial pummeling could slow the pace of any stock market recovery, even if profits are recovering. There must also be doubts about the new normal price-to-earnings ratio is a de-levered world.
And these uncertainties should be sufficient to keep equities cheap for a while yet.
For more agenda-setting financial analysis, visit www.breakingviews.com
http://www.telegraph.co.uk/finance/markets/4205812/Shares-are-cheap-but-its-not-the-time-to-buy.html
Also read:
Investing in time of uncertainties
Three days after Lehman Brothers collapsed in mid-September, stock markets were in freefall.
By Chris Hughes, breakingviews.com
Last Updated: 6:33AM GMT 09 Jan 2009
The world looked so gloomy that some equity investors hailed the week as the so-called "capitulation event" - the painful point of maximum bearishness that clearly establishes the trough of the market. The announcement of the US Troubled Asset Relief Programme arrested the selling.
But by late November, the MSCI World Index and S&P500 had fallen another 35pc. Equities had fallen 54pc from their October 2007 high, before the worst of the crisis hit.
Equity investors never know when they are at the bottom. But if the market rout prompted by Lehman was a false floor, the rally since late November is proving resilient. As of January 8, the World Index was up 22pc from last year's low, touched only seven weeks earlier. The question facing equity investors is whether this is just another bear-market rally, and, if not, how quickly markets will continue to recover.
Bear markets usually last longer than two years. But the latest downturn has been particularly accelerated. And there are multiple arguments why equities have now found their floor.
While higher current dividend yields partly reflect the risk of imminent dividend cuts, the equity yields still look good compared to government bonds and cash, whose yields have plummeted. Cash has never looked so expensive. The equity risk premium is at its highest in a decade, according to Morgan Stanley. Furthermore, corporate insiders, who should know something, are buying at record levels.
Analysts expect the recession to cut corporate earnings in half, including a 10pc decline in 2008. But equities appear to have fallen enough to reflect that savage drop. Global equities have not been so cheap on either spot or trough earnings for over two decades, says Citigroup. They are trading on a historic price-earnings ratio of around 11 times. Credit Suisse says historic consensus earnings multiples were an average 15 in the last four market lows.
Stock market history suggests that equity markets recover before bad news from corporations has stopped and while earnings are still falling. Equities can bottom out as early as five quarters before earnings trough, and do so on average after two quarters.
But to be buying now, equity investors need to satisfy themselves of two things.
- First, that earnings will indeed trough this year.
- And second, that this time will not be different, even in the face of a global deleveraging of unprecedented intensity.
The massive government stimulus packages that investors hope will underpin recovery carry risks of their own, in particular if weak currencies create an inflationary squeeze on corporate profits. The financial pummeling could slow the pace of any stock market recovery, even if profits are recovering. There must also be doubts about the new normal price-to-earnings ratio is a de-levered world.
And these uncertainties should be sufficient to keep equities cheap for a while yet.
For more agenda-setting financial analysis, visit www.breakingviews.com
http://www.telegraph.co.uk/finance/markets/4205812/Shares-are-cheap-but-its-not-the-time-to-buy.html
Also read:
Investing in time of uncertainties
Friday, 9 January 2009
How Bad Will It Get?
How Bad Will It Get?
By Tim Hanson October 9, 2008 Comments (74)
It's grim out there. The market is down 24% since the beginning of September. The financial contagion that started with the U.S. subprime mortgage defaults has spread to Europe and Asia. Fully 60% of Americans now believe that a depression -- replete with 25% unemployment and widespread homelessness and hunger -- is "likely." And just 9% of Americans, an all-time low, are satisfied with the way things are going in the country.
It's gotten so bad, in fact, that the Booyah Bull himself, Jim Cramer, told investors on Monday to pull any money they need for the next five years out of the market.
Now, that's not necessarily bad advice
Of course, you should never be investing the hard-earned dollars that you need to pay your bills over the next few years. But if you heed the wisdom of the late Sir John Templeton -- whom we recently eulogized as the world's most important investor -- you should always be ready, willing, and able to invest some of your long-term savings in common stocks at -- and this is crucial -- the point of maximum pessimism.
What can happen when you buy at the point of maximum pessimism? Well, as Sir John proved when he famously purchased 100 shares of 104 companies trading for $1 per share or less in 1939, as the market panicked at the outset of World War II, you can make a lot of money.
The good news for you today is that given that data presented above, we're getting pretty darn close to that point -- only 9% of Americans are left to be convinced.
An important caveat
This, however, does not mean that the market has bottomed. It could well get worse before it gets better, particularly since the credit markets remain frozen and home prices look like they have a bit more "rationalizing" to do.
But some stellar businesses are already selling at hefty discounts to the norm:
Company
Current P/E ....5-Year Average P/E
Microsoft (Nasdaq: MSFT)
12.3....25.1
Paychex (Nasdaq: PAYX)
17.9....35.3
Intel (Nasdaq: INTC)
13.4....24.4
Fastenal (Nasdaq: FAST)
20.9....33.9
Ritchie Bros. Auctioneers (NYSE: RBA)
27.2....31.2
Nike (NYSE: NKE)
15.3....20.0
Best Buy (NYSE: BBY)
12.1....22.4
Data from Morningstar.com.
Are you brave enough to start today?
Rather than try to time the market and catch these names on the way back up, start dollar-cost averaging into an array of superior names now (remember, Sir John purchased shares in 104 companies) with a commitment to holding shares for the next five years or more. That's the only time-tested way to turn current market volatility to your advantage, and the rewards will be great for those with the courage and resources to do so.
The key, though (and this bears repeating), is to average in -- keeping some money on the sidelines if the market continues to drop -- and adding new money, even in a small amounts, on a regular basis. That's a particularly prudent tack today, given the low costs of trading and the violent unpredictability of today's stock market.
Tim Hanson owns no shares of any company mentioned ... yet. The Motley Fool owns shares of Best Buy. Microsoft, Intel, and Best Buy are Motley Fool Inside Value recommendations. Best Buy is also a Stock Advisor pick. Paychex is an Income Investor selection.
Read/Post Comments (74)
http://www.fool.com/investing/general/2008/10/09/how-bad-will-it-get.aspx
By Tim Hanson October 9, 2008 Comments (74)
It's grim out there. The market is down 24% since the beginning of September. The financial contagion that started with the U.S. subprime mortgage defaults has spread to Europe and Asia. Fully 60% of Americans now believe that a depression -- replete with 25% unemployment and widespread homelessness and hunger -- is "likely." And just 9% of Americans, an all-time low, are satisfied with the way things are going in the country.
It's gotten so bad, in fact, that the Booyah Bull himself, Jim Cramer, told investors on Monday to pull any money they need for the next five years out of the market.
Now, that's not necessarily bad advice
Of course, you should never be investing the hard-earned dollars that you need to pay your bills over the next few years. But if you heed the wisdom of the late Sir John Templeton -- whom we recently eulogized as the world's most important investor -- you should always be ready, willing, and able to invest some of your long-term savings in common stocks at -- and this is crucial -- the point of maximum pessimism.
What can happen when you buy at the point of maximum pessimism? Well, as Sir John proved when he famously purchased 100 shares of 104 companies trading for $1 per share or less in 1939, as the market panicked at the outset of World War II, you can make a lot of money.
The good news for you today is that given that data presented above, we're getting pretty darn close to that point -- only 9% of Americans are left to be convinced.
An important caveat
This, however, does not mean that the market has bottomed. It could well get worse before it gets better, particularly since the credit markets remain frozen and home prices look like they have a bit more "rationalizing" to do.
But some stellar businesses are already selling at hefty discounts to the norm:
Company
Current P/E ....5-Year Average P/E
Microsoft (Nasdaq: MSFT)
12.3....25.1
Paychex (Nasdaq: PAYX)
17.9....35.3
Intel (Nasdaq: INTC)
13.4....24.4
Fastenal (Nasdaq: FAST)
20.9....33.9
Ritchie Bros. Auctioneers (NYSE: RBA)
27.2....31.2
Nike (NYSE: NKE)
15.3....20.0
Best Buy (NYSE: BBY)
12.1....22.4
Data from Morningstar.com.
Are you brave enough to start today?
Rather than try to time the market and catch these names on the way back up, start dollar-cost averaging into an array of superior names now (remember, Sir John purchased shares in 104 companies) with a commitment to holding shares for the next five years or more. That's the only time-tested way to turn current market volatility to your advantage, and the rewards will be great for those with the courage and resources to do so.
The key, though (and this bears repeating), is to average in -- keeping some money on the sidelines if the market continues to drop -- and adding new money, even in a small amounts, on a regular basis. That's a particularly prudent tack today, given the low costs of trading and the violent unpredictability of today's stock market.
Tim Hanson owns no shares of any company mentioned ... yet. The Motley Fool owns shares of Best Buy. Microsoft, Intel, and Best Buy are Motley Fool Inside Value recommendations. Best Buy is also a Stock Advisor pick. Paychex is an Income Investor selection.
Read/Post Comments (74)
http://www.fool.com/investing/general/2008/10/09/how-bad-will-it-get.aspx
Satyam: Slumdog Millionaire
Satyam: Slumdog Millionaire
By Rick Aristotle Munarriz January 7, 2009 Comments (32)
SAY it ain't so, Satyam.
Shares of Indian IT outsourcing giant Satyam Computer Services (NYSE: SAY) got pummeled this morning, after Chairman B. Ramalinga Raju admitted that the company's books are cooked.
It's not pretty. Satyam's balance sheet cash is inflated by the rupees equivalent of more than $1 billion, as the result of several years of inflated profits.
"It was like riding a tiger, not knowing how to get off without being eaten," Raju confesses in a note to the company's board, presumably unaware of the chairman's number-crunching trickery. Fearing that the gaps would become public under a buyout -- and the stock had risen yesterday on newspaper reports that it was an acquisition target -- Raju came clean.
Investors knew that something wasn't quite right with Raju. The stock took a spill last month when Raju announced the proposed $1.6 billion purchase of distressed assets. The problem? The targeted Maytas Properties buy consisted of businesses owned by the chairman's sons, and completely unrelated to Satyam's outsourcing stronghold.
"How would shareholders have known whether Satyam was simply bailing out family members by sorely overpaying for these assets?" I asked at the time.
It turns out that it was actually the sons trying to bail out Raju.
"The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones," he confesses.
The crushing Satyam news is having a favorable impact on its rivals. Cognizant Technology (Nasdaq: CTSH) and Infosys (Nasdaq: INFY) are moving higher today, while Wipro (NYSE: WIT) is only trading marginally lower. Rather than focus on the lack of market credibility in India-based companies, savvy investors realize that incensed Satyam customers are likely to head elsewhere for their IT outsourcing needs.
Other Indian-based growth stocks, like online access specialist Sify (Nasdaq: SIFY) and new media player Rediff.com (Nasdaq: REDF), are trading all over the map.
In the critically acclaimed Slumdog Millionaire, the Indian protagonist surprises a quiz show host by knowing all of the right answers. As it turns out, the correct responses typically come from heart-wrenching episodes in his life. Satyam has it the other way around, with investors getting poorer as Raju provides all of the wrong answers.
He is naturally stepping down, ready to face his fate. Satyam will likely settle for a bargain-priced buyout from someone -- anyone -- willing to take a chance on the mystery box of a company that Satyam has become.
"It is written," is how Slumdog Millionaire ends, before breaking into an uplifting Bollywood dance sequence at a train station. Satyam's ending now appears to be more of a train wreck instead.
The painful Satyam saga:
No Heads Rolling at Satyam -- Yet
Satyam Seeks to Build Future for Its Family
How Bad Will It Get?
http://www.fool.com/investing/general/2009/01/07/satyam-slumdog-millionaire.aspx
By Rick Aristotle Munarriz January 7, 2009 Comments (32)
SAY it ain't so, Satyam.
Shares of Indian IT outsourcing giant Satyam Computer Services (NYSE: SAY) got pummeled this morning, after Chairman B. Ramalinga Raju admitted that the company's books are cooked.
It's not pretty. Satyam's balance sheet cash is inflated by the rupees equivalent of more than $1 billion, as the result of several years of inflated profits.
"It was like riding a tiger, not knowing how to get off without being eaten," Raju confesses in a note to the company's board, presumably unaware of the chairman's number-crunching trickery. Fearing that the gaps would become public under a buyout -- and the stock had risen yesterday on newspaper reports that it was an acquisition target -- Raju came clean.
Investors knew that something wasn't quite right with Raju. The stock took a spill last month when Raju announced the proposed $1.6 billion purchase of distressed assets. The problem? The targeted Maytas Properties buy consisted of businesses owned by the chairman's sons, and completely unrelated to Satyam's outsourcing stronghold.
"How would shareholders have known whether Satyam was simply bailing out family members by sorely overpaying for these assets?" I asked at the time.
It turns out that it was actually the sons trying to bail out Raju.
"The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones," he confesses.
The crushing Satyam news is having a favorable impact on its rivals. Cognizant Technology (Nasdaq: CTSH) and Infosys (Nasdaq: INFY) are moving higher today, while Wipro (NYSE: WIT) is only trading marginally lower. Rather than focus on the lack of market credibility in India-based companies, savvy investors realize that incensed Satyam customers are likely to head elsewhere for their IT outsourcing needs.
Other Indian-based growth stocks, like online access specialist Sify (Nasdaq: SIFY) and new media player Rediff.com (Nasdaq: REDF), are trading all over the map.
In the critically acclaimed Slumdog Millionaire, the Indian protagonist surprises a quiz show host by knowing all of the right answers. As it turns out, the correct responses typically come from heart-wrenching episodes in his life. Satyam has it the other way around, with investors getting poorer as Raju provides all of the wrong answers.
He is naturally stepping down, ready to face his fate. Satyam will likely settle for a bargain-priced buyout from someone -- anyone -- willing to take a chance on the mystery box of a company that Satyam has become.
"It is written," is how Slumdog Millionaire ends, before breaking into an uplifting Bollywood dance sequence at a train station. Satyam's ending now appears to be more of a train wreck instead.
The painful Satyam saga:
No Heads Rolling at Satyam -- Yet
Satyam Seeks to Build Future for Its Family
How Bad Will It Get?
http://www.fool.com/investing/general/2009/01/07/satyam-slumdog-millionaire.aspx
This Could Destroy Your Retirement: Inflation
This Could Destroy Your Retirement
By Todd Wenning September 10, 2008 Comments (0)
I'm sure none of us has spent time with our grandparents without hearing statements like "I remember when the movies only cost a quarter," and "A thousand dollars sure doesn't buy what it used to."
After a few college economics courses, I simply chalked it up to stuff that grandparents say. Obviously, they just didn't understand the forces of inflation compounded over 40 years.
What a smart aleck But after a recent trip to the grocery store, I caught myself sounding like my grandparents. "Four dollars for milk?" I lamented to my wife. "I remember when a gallon of milk cost $2! And that was just a few years ago."
Without getting into a complex macroeconomic analysis of why milk prices have doubled in eight years, my trip to the grocery store was a valuable reminder of inflation's destructive power.
I don't even want to think about what a gallon of milk will cost when I retire. But I'm still going to want it on my cereal, so it's best to develop a plan now that will let me enjoy my Apple Jacks when I'm 70.
Affording $12 milk in 2040
In May, The Economist reported the average world inflation rate had risen to 5.5%. The U.S. rate is slightly above that figure at 5.6%. In emerging markets like China and India, prices have risen 8% to 10% -- and those are the official statistics.
Try outpacing those rates with Treasury bills. At present, you'd actually be losing purchasing power by investing in most Treasuries.
When it comes to battling inflation, our only good defense is a good offense. That means keeping an appropriate allocation of your portfolio in equities, even well into retirement.
Note that this Vanguard fund is designed for investors currently in retirement. The further you are from your ideal retirement age, the greater the percentage of your portfolio that should be invested in equities.
Bring inflation to its knees
See, prices will continue to rise for the rest of our lives. Equities give us the best chance to not only keep up with inflation, but even stay ahead of it, in order to increase our purchasing power down the road.
http://www.fool.com/personal-finance/retirement/2008/09/10/this-could-destroy-your-retirement.aspx
By Todd Wenning September 10, 2008 Comments (0)
I'm sure none of us has spent time with our grandparents without hearing statements like "I remember when the movies only cost a quarter," and "A thousand dollars sure doesn't buy what it used to."
After a few college economics courses, I simply chalked it up to stuff that grandparents say. Obviously, they just didn't understand the forces of inflation compounded over 40 years.
What a smart aleck But after a recent trip to the grocery store, I caught myself sounding like my grandparents. "Four dollars for milk?" I lamented to my wife. "I remember when a gallon of milk cost $2! And that was just a few years ago."
Without getting into a complex macroeconomic analysis of why milk prices have doubled in eight years, my trip to the grocery store was a valuable reminder of inflation's destructive power.
I don't even want to think about what a gallon of milk will cost when I retire. But I'm still going to want it on my cereal, so it's best to develop a plan now that will let me enjoy my Apple Jacks when I'm 70.
Affording $12 milk in 2040
In May, The Economist reported the average world inflation rate had risen to 5.5%. The U.S. rate is slightly above that figure at 5.6%. In emerging markets like China and India, prices have risen 8% to 10% -- and those are the official statistics.
Try outpacing those rates with Treasury bills. At present, you'd actually be losing purchasing power by investing in most Treasuries.
When it comes to battling inflation, our only good defense is a good offense. That means keeping an appropriate allocation of your portfolio in equities, even well into retirement.
Note that this Vanguard fund is designed for investors currently in retirement. The further you are from your ideal retirement age, the greater the percentage of your portfolio that should be invested in equities.
Bring inflation to its knees
See, prices will continue to rise for the rest of our lives. Equities give us the best chance to not only keep up with inflation, but even stay ahead of it, in order to increase our purchasing power down the road.
http://www.fool.com/personal-finance/retirement/2008/09/10/this-could-destroy-your-retirement.aspx
Hyperinflation Is U-G-L-Y
Hyperinflation Is U-G-L-Y
By Selena Maranjian January 7, 2009 Comments (1)
Do you know what hyperinflation is? It's what you get when inflation gets way, way out of hand. It's happening in Zimbabwe. In fact, what you can buy with a million Zimbabwean dollars right now might cost you twice as much by the time you finish reading this article. The country's inflation rate is estimated (conservatively, according to some) to be around 230 million percent.
You might buy a loaf of bread with a bill that sports 12 zeros on it. A month later, you'd need to add several more zeros. People are having trouble keeping up. It's causing chaos. And it's not a good environment for investors, either.
Fortunately, we don't have it bad like that. Inflation in America has generally been between 2% and 4% per year. In 1979 and 1980, though, it was around 13%, and it was around 9% in the years before and after that. Let's take 10% as an approximation of how bad we might expect it to get in America for a number of years, and see what that looks like, shall we? Let's start with a $5 sandwich in 2008 and see how the price grows at 10% over a decade:
Year..Price
2009 $5.50
2010 $6.05
2011 $6.66
2012 $7.32
2013 $8.05
2014 $8.86
2015 $9.74
2016 $10.72
2017 $11.79
2018 $12.97
Wow -- the price doubled after only eight years. A $20,000 car in 2008 would cost you nearly $52,000 in 2018! That's a big difference.
Are we in imminent danger of 10% inflation rates? I don't think so -- though inflation rates did recently spike when gas prices were soaring, along with many food prices. These days some are worrying about deflation, although it's not all bad.
Still, a big increase in inflation is often a concern to many, and even now some worry that it might be in our future.
Dangers of inflation
If inflation starts rising, many companies will suffer, and we investors will therefore be affected. We'll be affected as consumers, too. Journalist Robert Samuelson recently described 1979's inflation environment, noting that as prices rose quickly, people couldn't predict costs of everyday items and were concerned that their wages wouldn't keep up. As he put it, "Americans were horrified. ... People couldn't plan; their savings were at risk."
There are signs that prices will stop growing so rapidly in the coming year. Food commodity prices have already fallen. Assuming they keep falling, we'll eventually see prices fall for many grocery items from companies such as Kraft (NYSE: KFT), General Mills (NYSE: GIS), and ConAgra (NYSE: CAG), as well as institutional food services from companies like Sysco (NYSE: SYY). Of course, as the costs of their supplies fall, we shouldn't expect these companies to immediately slash prices. They'll likely amble slowly in their price-cutting, benefiting temporarily from heftier profit margins.
Meanwhile, if gas prices rise again, which isn't unthinkable, that will pressure the entire economy, as it will affect transportation costs for supplies and finished goods. And of course, the transportation companies themselves, such as FedEx (NYSE: FDX), United Parcel Service (NYSE: UPS), and Southwest Airlines (NYSE: LUV), will take a hit.
One way to fight inflation while investing is to seek out dividend-paying companies, which will keep paying you while the economy sorts itself out. Sticking with stocks in inflationary times can protect your retirement.
By Selena Maranjian January 7, 2009 Comments (1)
Do you know what hyperinflation is? It's what you get when inflation gets way, way out of hand. It's happening in Zimbabwe. In fact, what you can buy with a million Zimbabwean dollars right now might cost you twice as much by the time you finish reading this article. The country's inflation rate is estimated (conservatively, according to some) to be around 230 million percent.
You might buy a loaf of bread with a bill that sports 12 zeros on it. A month later, you'd need to add several more zeros. People are having trouble keeping up. It's causing chaos. And it's not a good environment for investors, either.
Fortunately, we don't have it bad like that. Inflation in America has generally been between 2% and 4% per year. In 1979 and 1980, though, it was around 13%, and it was around 9% in the years before and after that. Let's take 10% as an approximation of how bad we might expect it to get in America for a number of years, and see what that looks like, shall we? Let's start with a $5 sandwich in 2008 and see how the price grows at 10% over a decade:
Year..Price
2009 $5.50
2010 $6.05
2011 $6.66
2012 $7.32
2013 $8.05
2014 $8.86
2015 $9.74
2016 $10.72
2017 $11.79
2018 $12.97
Wow -- the price doubled after only eight years. A $20,000 car in 2008 would cost you nearly $52,000 in 2018! That's a big difference.
Are we in imminent danger of 10% inflation rates? I don't think so -- though inflation rates did recently spike when gas prices were soaring, along with many food prices. These days some are worrying about deflation, although it's not all bad.
Still, a big increase in inflation is often a concern to many, and even now some worry that it might be in our future.
Dangers of inflation
If inflation starts rising, many companies will suffer, and we investors will therefore be affected. We'll be affected as consumers, too. Journalist Robert Samuelson recently described 1979's inflation environment, noting that as prices rose quickly, people couldn't predict costs of everyday items and were concerned that their wages wouldn't keep up. As he put it, "Americans were horrified. ... People couldn't plan; their savings were at risk."
There are signs that prices will stop growing so rapidly in the coming year. Food commodity prices have already fallen. Assuming they keep falling, we'll eventually see prices fall for many grocery items from companies such as Kraft (NYSE: KFT), General Mills (NYSE: GIS), and ConAgra (NYSE: CAG), as well as institutional food services from companies like Sysco (NYSE: SYY). Of course, as the costs of their supplies fall, we shouldn't expect these companies to immediately slash prices. They'll likely amble slowly in their price-cutting, benefiting temporarily from heftier profit margins.
Meanwhile, if gas prices rise again, which isn't unthinkable, that will pressure the entire economy, as it will affect transportation costs for supplies and finished goods. And of course, the transportation companies themselves, such as FedEx (NYSE: FDX), United Parcel Service (NYSE: UPS), and Southwest Airlines (NYSE: LUV), will take a hit.
One way to fight inflation while investing is to seek out dividend-paying companies, which will keep paying you while the economy sorts itself out. Sticking with stocks in inflationary times can protect your retirement.
http://www.fool.com/investing/dividends-income/2009/01/07/hyperinflation-is-ugly.aspx
Thursday, 8 January 2009
Thriving In Every Market
Thriving In Every Market
Value Investing Made Easy (Janet Lowe):
Value Investing Made Easy (Janet Lowe):
- THRIVING IN EVERY MARKET
- MR. MARKET
- SUITABLE SECURITIES AT SUITABLE PRICES
- PAYING RESPECT TO THE MARKET
- TIMING VERSUS PRICING
- BELIEVING A BULL MARKET
- THE PAUSE AT THE TOP OF THE ROLLER COASTER
- MAKING FRIENDS WITH A BEAR
- BARGAINS AT THE BOTTOM
- SIGNS AT THE BOTTOM
- BUYING TIME
- IF YOU ABSOLUTELY MUST PLAY THE HORSES
IF YOU ABSOLUTELY MUST PLAY THE HORSES
IF YOU ABSOLUTELY MUST PLAY THE HORSES
Though Ben Graham in no way recommended trying it, he did say that there is a way to combine market timing and value investing principles. This method was originally developed by Roger Babson, a contemporary of Graham’s who provided financial services and investment counsel. However, Graham noted, the method makes heavy demands on human fortitude, and it can keep an investor out of long stretches of a booming market. It sounds simple. Yet for those who realize how difficult it is to follow, this strategy can diminish the risk of trading on market movements.
Here is the way it works:
1. Select a diversified list of common stocks. (The investor can even create an index fund by buying the DJIA, or better yet, deciding which stocks are undervalued in the DJIA and buying only those.)
2. Determine a normal value for each stock (choose any multiplier of earnings that seems appropriate, using 7- to 10-year average earnings.
3. Buy the stocks when shares can be bought at a substantial discount – say, two-thirds of what the investor has established as normal value. As an alternative to buying at one target price, the investor can start buying as the stock declines, beginning at 80 percent of normal value.
4. Sell the stocks when the price has risen substantially above normal value – say 20 percent to 50 percent higher.
The investor thus would buy in a market decline and sell in a rising market.
THRIVING IN EVERY MARKET
Value Investing Made Easy (Janet Lowe):
Though Ben Graham in no way recommended trying it, he did say that there is a way to combine market timing and value investing principles. This method was originally developed by Roger Babson, a contemporary of Graham’s who provided financial services and investment counsel. However, Graham noted, the method makes heavy demands on human fortitude, and it can keep an investor out of long stretches of a booming market. It sounds simple. Yet for those who realize how difficult it is to follow, this strategy can diminish the risk of trading on market movements.
Here is the way it works:
1. Select a diversified list of common stocks. (The investor can even create an index fund by buying the DJIA, or better yet, deciding which stocks are undervalued in the DJIA and buying only those.)
2. Determine a normal value for each stock (choose any multiplier of earnings that seems appropriate, using 7- to 10-year average earnings.
3. Buy the stocks when shares can be bought at a substantial discount – say, two-thirds of what the investor has established as normal value. As an alternative to buying at one target price, the investor can start buying as the stock declines, beginning at 80 percent of normal value.
4. Sell the stocks when the price has risen substantially above normal value – say 20 percent to 50 percent higher.
The investor thus would buy in a market decline and sell in a rising market.
THRIVING IN EVERY MARKET
Value Investing Made Easy (Janet Lowe):
- THRIVING IN EVERY MARKET
- MR. MARKET
- SUITABLE SECURITIES AT SUITABLE PRICES
- PAYING RESPECT TO THE MARKET
- TIMING VERSUS PRICING
- BELIEVING A BULL MARKET
- THE PAUSE AT THE TOP OF THE ROLLER COASTER
- MAKING FRIENDS WITH A BEAR
- BARGAINS AT THE BOTTOM
- SIGNS AT THE BOTTOM
- BUYING TIME
- IF YOU ABSOLUTELY MUST PLAY THE HORSES
BUYING TIME
BUYING TIME
When the market hits its low, true value investors feel that harvest time has arrived. “The most beneficial time to be a vluae investor is when the market is falling,” says investment manager Seth Klarman. There are plenty of companies ripe for the picking. In the summer of 1973, when the stock market had plunged 20 percent in value in less than 2 months, Warren Buffett told a friend, “You know, some days I get up and I want to tap dance.”
Unfortunately, this is the time when investors are feeling most beat up by the markets. Fear and negative thinking prevail, and anyone who has faced down a bear knows how paralyzing fear can be. This, at the depths of a bear market, is the time to buy as many stocks as are affordable. “Value bargains aren’t found in strong markets,” writes money manager Charles Brandes. “A good rule is to examine stock markets that have reacted adversely for a year or so.”
Undervalued stocks quite often lie dormant for months – many months – on end. The only way to anticipate and catch the surge is to identify the undervalued situation, then take a position, and wait, Graham said.
-----
Buying a neglected and therefore undervalued issue for profit generally proves a protracted and patience-trying experience.
-----
THRIVING IN EVERY MARKET
Value Investing Made Easy (Janet Lowe):
- THRIVING IN EVERY MARKET
- MR. MARKET
- SUITABLE SECURITIES AT SUITABLE PRICES
- PAYING RESPECT TO THE MARKET
- TIMING VERSUS PRICING
- BELIEVING A BULL MARKET
- THE PAUSE AT THE TOP OF THE ROLLER COASTER
- MAKING FRIENDS WITH A BEAR
- BARGAINS AT THE BOTTOM
- SIGNS AT THE BOTTOM
- BUYING TIME
- IF YOU ABSOLUTELY MUST PLAY THE HORSES
SIGNS AT THE BOTTOM
SIGNS AT THE BOTTOM
The bottom – or near enough the bottom – of a market cycle theoretically should be easier to call than the top or near top. The evidence is found in the corporate balance sheets, income statements, PE ratios, dividend yields, and other quantitative measures. It is likewise reflected in low ratios for the market as a whole. The quantitative factors speak for themselves.
The dividend yield on the Dow Jones Industrial Average, for example, usually cycles between a high yield of 6 percent at the market’s bottom and a low yield of 3 percent at the top. The Dow’s average dividend yield sometimes stretches beyond these boundaries, but historically this is a trustworthy parameter of undervalue and overvalue.
THRIVING IN EVERY MARKET
Value Investing Made Easy (Janet Lowe):
The bottom – or near enough the bottom – of a market cycle theoretically should be easier to call than the top or near top. The evidence is found in the corporate balance sheets, income statements, PE ratios, dividend yields, and other quantitative measures. It is likewise reflected in low ratios for the market as a whole. The quantitative factors speak for themselves.
The dividend yield on the Dow Jones Industrial Average, for example, usually cycles between a high yield of 6 percent at the market’s bottom and a low yield of 3 percent at the top. The Dow’s average dividend yield sometimes stretches beyond these boundaries, but historically this is a trustworthy parameter of undervalue and overvalue.
THRIVING IN EVERY MARKET
Value Investing Made Easy (Janet Lowe):
- THRIVING IN EVERY MARKET
- MR. MARKET
- SUITABLE SECURITIES AT SUITABLE PRICES
- PAYING RESPECT TO THE MARKET
- TIMING VERSUS PRICING
- BELIEVING A BULL MARKET
- THE PAUSE AT THE TOP OF THE ROLLER COASTER
- MAKING FRIENDS WITH A BEAR
- BARGAINS AT THE BOTTOM
- SIGNS AT THE BOTTOM
- BUYING TIME
- IF YOU ABSOLUTELY MUST PLAY THE HORSES
BARGAINS AT THE BOTTOM
BARGAINS AT THE BOTTOM
In 1932 Graham was 38 years old and had already made and lost millions of dollars. To survive the Great Depression he taught at several universities, testified as an expert witness in securities cases, wrote freelance pieces for the financial press, and with his partner, Jerome Newman, bought and liquidated defunct companies.
In June 1942, Forbes published the first in a series of articles written by Graham alerting investors that the shares of many companies were selling at prices below the value of the actual cash held in the company vaults. The series was called “Is American Business Worth More Dead Than Alive?”
Graham pointed out that 30 percent of the companies listed on the NYSE were selling at less than their net working capital, with some going for less than their cash assets. In other words, if an investor bought all the shares of a company, then sold off its assets, he would reap considerable profits. That series of articles was widely read. It gave dispirited investors the courage to return to the stock market and spurred a long, sustained recovery.
Graham’s wisdom inspired investors again in 1974, when the stock market was in a deep depression. He addressed the annual meeting of the Institute of Chartered Financial Analysts (which he helped found), the predecessor to the Association for Investment Management and Research (AIMR). In a speech entitled “A Renaissance of Value,” Graham pointed out that once more, stocks were selling at deep discounts to their intrinsic value. “How long will such “fire-sale stocks” continue to be given away?” he asked. Graham encouraged the investment managers to buy as many bargain issues as possible while prices were low. The Dow, at the time, had receded to 600.
Again, Graham sounded the wake-up call that led to a market revival. By 1976 the DJIA topped 900.
THRIVING IN EVERY MARKET
Value Investing Made Easy (Janet Lowe):
In 1932 Graham was 38 years old and had already made and lost millions of dollars. To survive the Great Depression he taught at several universities, testified as an expert witness in securities cases, wrote freelance pieces for the financial press, and with his partner, Jerome Newman, bought and liquidated defunct companies.
In June 1942, Forbes published the first in a series of articles written by Graham alerting investors that the shares of many companies were selling at prices below the value of the actual cash held in the company vaults. The series was called “Is American Business Worth More Dead Than Alive?”
Graham pointed out that 30 percent of the companies listed on the NYSE were selling at less than their net working capital, with some going for less than their cash assets. In other words, if an investor bought all the shares of a company, then sold off its assets, he would reap considerable profits. That series of articles was widely read. It gave dispirited investors the courage to return to the stock market and spurred a long, sustained recovery.
Graham’s wisdom inspired investors again in 1974, when the stock market was in a deep depression. He addressed the annual meeting of the Institute of Chartered Financial Analysts (which he helped found), the predecessor to the Association for Investment Management and Research (AIMR). In a speech entitled “A Renaissance of Value,” Graham pointed out that once more, stocks were selling at deep discounts to their intrinsic value. “How long will such “fire-sale stocks” continue to be given away?” he asked. Graham encouraged the investment managers to buy as many bargain issues as possible while prices were low. The Dow, at the time, had receded to 600.
Again, Graham sounded the wake-up call that led to a market revival. By 1976 the DJIA topped 900.
THRIVING IN EVERY MARKET
Value Investing Made Easy (Janet Lowe):
- THRIVING IN EVERY MARKET
- MR. MARKET
- SUITABLE SECURITIES AT SUITABLE PRICES
- PAYING RESPECT TO THE MARKET
- TIMING VERSUS PRICING
- BELIEVING A BULL MARKET
- THE PAUSE AT THE TOP OF THE ROLLER COASTER
- MAKING FRIENDS WITH A BEAR
- BARGAINS AT THE BOTTOM
- SIGNS AT THE BOTTOM
- BUYING TIME
- IF YOU ABSOLUTELY MUST PLAY THE HORSES
MAKING FRIENDS WITH A BEAR
MAKING FRIENDS WITH A BEAR
When corrections come quickly, the question always arises: Is this a repeat of 1929? Will brokers be jumping out of windows? Is this the start of another Great Depression? Certainly Graham knew about such experiences.
Though he realized the 1929 stock market was on dangerously high ground, he’d chosen his investments carefully and hedged his accounts. Graham believed he’d protected his accounts, yet he’d failed to fully execute all his hedges and he’d overused margin. His accounts were badly damaged by the crash. Nevertheless, he hung in, rebuilt his portfolio, and soon afterward triggered a market recovery by telling the world that the time to resume buying had arrived.
THRIVING IN EVERY MARKET
Value Investing Made Easy (Janet Lowe):
When corrections come quickly, the question always arises: Is this a repeat of 1929? Will brokers be jumping out of windows? Is this the start of another Great Depression? Certainly Graham knew about such experiences.
Though he realized the 1929 stock market was on dangerously high ground, he’d chosen his investments carefully and hedged his accounts. Graham believed he’d protected his accounts, yet he’d failed to fully execute all his hedges and he’d overused margin. His accounts were badly damaged by the crash. Nevertheless, he hung in, rebuilt his portfolio, and soon afterward triggered a market recovery by telling the world that the time to resume buying had arrived.
THRIVING IN EVERY MARKET
Value Investing Made Easy (Janet Lowe):
- THRIVING IN EVERY MARKET
- MR. MARKET
- SUITABLE SECURITIES AT SUITABLE PRICES
- PAYING RESPECT TO THE MARKET
- TIMING VERSUS PRICING
- BELIEVING A BULL MARKET
- THE PAUSE AT THE TOP OF THE ROLLER COASTER
- MAKING FRIENDS WITH A BEAR
- BARGAINS AT THE BOTTOM
- SIGNS AT THE BOTTOM
- BUYING TIME
- IF YOU ABSOLUTELY MUST PLAY THE HORSES
THE PAUSE AT THE TOP OF THE ROLLER COASTER
THE PAUSE AT THE TOP OF THE ROLLER COASTER
There is only one strategy that works for value investors when the market is high – patience. The investor can do one of two things, both of which require steady nerves.
· Sell all stocks in a portfolio, take profits, and wait for the market to decline. At that time, many good values will present themselves. This may sound easy, but it pains many investors to sell a stock when its price is still rising.
· Stick with those stocks in a portfolio that have long-term potential. Sell only those that are clearly overvalued, and once more wait for the market to decline. At this time, value stocks may be appreciating at slow pace compared with the frisky growth stocks, but not always.
But come the correction, be it sudden or slow, the well-chosen value stocks have a better chance of holding their price.
The portfolio of one value investor shows what can happen when markets stumble off a cliff. In early September 1987, Walter Schloss’s portfolio was up 53%. The market as a whole had risen 42%, after a DJIA peak of 2722.42. Then in October the market fell off the mountain and the Dow lost 504 points in a single day. The market struggled back and Schloss finished 1987 with a 26% gain while the overall market made only a 5% advance. Schloss followed one of the first rules of investing – don’t lose money. Making up for lost ground puts an investor at a serious disadvantage when calculating long-term average returns.
Schloss is an experienced investor, and not all value investors will do as well in a rising market. It takes patience, “At a guess I’d say that (the value investor) should do a good 20% better than the market over a long period – although not during the most dynamic period of a bull market – if he is rigorous about applying the method,” says author John Train.
As for the hot stocks, when they take a hard hit the investor is cornered. If the stock is sold, the loss becomes permanent. The lost money cannot grow. If the investor hangs on to the deflated stock, the long trail back to the original purchase price will deeply erode the overall return.
THRIVING IN EVERY MARKET
Value Investing Made Easy (Janet Lowe):
There is only one strategy that works for value investors when the market is high – patience. The investor can do one of two things, both of which require steady nerves.
· Sell all stocks in a portfolio, take profits, and wait for the market to decline. At that time, many good values will present themselves. This may sound easy, but it pains many investors to sell a stock when its price is still rising.
· Stick with those stocks in a portfolio that have long-term potential. Sell only those that are clearly overvalued, and once more wait for the market to decline. At this time, value stocks may be appreciating at slow pace compared with the frisky growth stocks, but not always.
But come the correction, be it sudden or slow, the well-chosen value stocks have a better chance of holding their price.
The portfolio of one value investor shows what can happen when markets stumble off a cliff. In early September 1987, Walter Schloss’s portfolio was up 53%. The market as a whole had risen 42%, after a DJIA peak of 2722.42. Then in October the market fell off the mountain and the Dow lost 504 points in a single day. The market struggled back and Schloss finished 1987 with a 26% gain while the overall market made only a 5% advance. Schloss followed one of the first rules of investing – don’t lose money. Making up for lost ground puts an investor at a serious disadvantage when calculating long-term average returns.
Schloss is an experienced investor, and not all value investors will do as well in a rising market. It takes patience, “At a guess I’d say that (the value investor) should do a good 20% better than the market over a long period – although not during the most dynamic period of a bull market – if he is rigorous about applying the method,” says author John Train.
As for the hot stocks, when they take a hard hit the investor is cornered. If the stock is sold, the loss becomes permanent. The lost money cannot grow. If the investor hangs on to the deflated stock, the long trail back to the original purchase price will deeply erode the overall return.
THRIVING IN EVERY MARKET
Value Investing Made Easy (Janet Lowe):
- THRIVING IN EVERY MARKET
- MR. MARKET
- SUITABLE SECURITIES AT SUITABLE PRICES
- PAYING RESPECT TO THE MARKET
- TIMING VERSUS PRICING
- BELIEVING A BULL MARKET
- THE PAUSE AT THE TOP OF THE ROLLER COASTER
- MAKING FRIENDS WITH A BEAR
- BARGAINS AT THE BOTTOM
- SIGNS AT THE BOTTOM
- BUYING TIME
- IF YOU ABSOLUTELY MUST PLAY THE HORSES
BELIEVING A BULL MARKET
BELIEVING A BULL MARKET
When markets are rapidly rising, value investing invariably falls out of favor with the investing public. In an upward racing market, value stocks appear dull and stodgy as the more speculative issues rush toward new market highs. But come the correction, it all looks different. Stable value stocks seem like trusted friends.
Most bull markets have well-defined characteristics. These include:
When markets are rapidly rising, value investing invariably falls out of favor with the investing public. In an upward racing market, value stocks appear dull and stodgy as the more speculative issues rush toward new market highs. But come the correction, it all looks different. Stable value stocks seem like trusted friends.
Most bull markets have well-defined characteristics. These include:
- Price levels are historically high.
- Price to earnings ratios are high.
- Dividend yields are low compared with bond yields (or compared with a stock’s particular dividend yield pattern).
- Margin buying becomes excessive as investors are driven to borrow to buy more of the high-priced stocks that look attractive to them.
- There is a swarm of new stock offerings, especially initial public offerings (IPOs) of questionable quality. This bull market is what investment bankers and stock promoters call the “window of opportunity.” Because IPOs so often occur when Wall Street is primed to pay top dollar, seasoned investors joke that IPO stands for “it’s probably overpriced.”
THRIVING IN EVERY MARKET
Value Investing Made Easy (Janet Lowe):
- THRIVING IN EVERY MARKET
- MR. MARKET
- SUITABLE SECURITIES AT SUITABLE PRICES
- PAYING RESPECT TO THE MARKET
- TIMING VERSUS PRICING
- BELIEVING A BULL MARKET
- THE PAUSE AT THE TOP OF THE ROLLER COASTER
- MAKING FRIENDS WITH A BEAR
- BARGAINS AT THE BOTTOM
- SIGNS AT THE BOTTOM
- BUYING TIME
- IF YOU ABSOLUTELY MUST PLAY THE HORSES
TIMING VERSUS PRICING
TIMING VERSUS PRICING
Since market cycles obviously do exist, wise value investors will make the best of them. There are two possible ways of taking advantage of the swings, Graham says:
· Timing
· Pricing
Research tends to confirm Graham’s belief that market timing, or anticipating the swings in advance, simply does not hold up. A 1995 study of market timing newsletter recommendations found that 75 percent did not do as well as a basic buy-and-hold strategy based on Standard & Poor’s 500 stock index. In cases where a newsletter beat the market for 2 years in a row, the newsletter had a less than 50 percent chance of doing so for a third year.
Since timing is well-nigh impossible, Graham suggested the pricing approach. By buying and selling on the basis of price, an investor will not have bought or sold in anticipation of a bull or bear market, but only after the fact. The investor buys after she knows that prices have declined and securities are undervalued. She sells when a bull market has pushed prices beyond the intrinsic value of the stock or bond.
By selling overvalued securities at the market’s zenith and resolutely holding cash, the investor will have the reserve funds to buy bargain issues when the market is at its nadir. Though market swings cannot be reliably and consistently predicted, they can be exploited once they occur.
THRIVING IN EVERY MARKET
Value Investing Made Easy (Janet Lowe):
Since market cycles obviously do exist, wise value investors will make the best of them. There are two possible ways of taking advantage of the swings, Graham says:
· Timing
· Pricing
Research tends to confirm Graham’s belief that market timing, or anticipating the swings in advance, simply does not hold up. A 1995 study of market timing newsletter recommendations found that 75 percent did not do as well as a basic buy-and-hold strategy based on Standard & Poor’s 500 stock index. In cases where a newsletter beat the market for 2 years in a row, the newsletter had a less than 50 percent chance of doing so for a third year.
Since timing is well-nigh impossible, Graham suggested the pricing approach. By buying and selling on the basis of price, an investor will not have bought or sold in anticipation of a bull or bear market, but only after the fact. The investor buys after she knows that prices have declined and securities are undervalued. She sells when a bull market has pushed prices beyond the intrinsic value of the stock or bond.
By selling overvalued securities at the market’s zenith and resolutely holding cash, the investor will have the reserve funds to buy bargain issues when the market is at its nadir. Though market swings cannot be reliably and consistently predicted, they can be exploited once they occur.
THRIVING IN EVERY MARKET
Value Investing Made Easy (Janet Lowe):
- THRIVING IN EVERY MARKET
- MR. MARKET
- SUITABLE SECURITIES AT SUITABLE PRICES
- PAYING RESPECT TO THE MARKET
- TIMING VERSUS PRICING
- BELIEVING A BULL MARKET
- THE PAUSE AT THE TOP OF THE ROLLER COASTER
- MAKING FRIENDS WITH A BEAR
- BARGAINS AT THE BOTTOM
- SIGNS AT THE BOTTOM
- BUYING TIME
- IF YOU ABSOLUTELY MUST PLAY THE HORSES
PAYING RESPECT TO THE MARKET
PAYING RESPECT TO THE MARKET
Though timing purchases and sales of stocks to coincide with market lows and highs often proves fruitless, value investors share two assumptions with the market timer:
· The market is frequently out of alignment with true value.
· There is a tendency for the market to correct itself.
Furthermore, both market timers and value investors intuitively and empirically know that market movements and fundamental value are related. Somehow, the price of a company eventually rises (and sometimes crashes) to realign with its actual value. Changing conditions, new information, or perhaps the awakening of investors to existing circumstances draws the market as surely as the moon draws the sea.
THRIVING IN EVERY MARKET
Value Investing Made Easy (Janet Lowe):
Though timing purchases and sales of stocks to coincide with market lows and highs often proves fruitless, value investors share two assumptions with the market timer:
· The market is frequently out of alignment with true value.
· There is a tendency for the market to correct itself.
Furthermore, both market timers and value investors intuitively and empirically know that market movements and fundamental value are related. Somehow, the price of a company eventually rises (and sometimes crashes) to realign with its actual value. Changing conditions, new information, or perhaps the awakening of investors to existing circumstances draws the market as surely as the moon draws the sea.
THRIVING IN EVERY MARKET
Value Investing Made Easy (Janet Lowe):
- THRIVING IN EVERY MARKET
- MR. MARKET
- SUITABLE SECURITIES AT SUITABLE PRICES
- PAYING RESPECT TO THE MARKET
- TIMING VERSUS PRICING
- BELIEVING A BULL MARKET
- THE PAUSE AT THE TOP OF THE ROLLER COASTER
- MAKING FRIENDS WITH A BEAR
- BARGAINS AT THE BOTTOM
- SIGNS AT THE BOTTOM
- BUYING TIME
- IF YOU ABSOLUTELY MUST PLAY THE HORSES
SUITABLE SECURITIES AT SUITABLE PRICES
SUITABLE SECURITIES AT SUITABLE PRICES
--------------
The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices. Market movements are important to him in a practical sense, because they alternately create low price levels at which he would be wise to buy and high price levels at which he certainly should refrain from buying and probably would be wise to sell.
--------------
Though market conditions are easy to see in hindsight; they are, according to Security Analysis, almost impossible to predict in the near or distant future:
---------------
In a sense, the market and the future present the same kind of difficulties. Neither can be predicted or controlled by the analyst, yet his success is largely dependent on both of them.
---------------
THRIVING IN EVERY MARKET
Value Investing Made Easy (Janet Lowe):
--------------
The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices. Market movements are important to him in a practical sense, because they alternately create low price levels at which he would be wise to buy and high price levels at which he certainly should refrain from buying and probably would be wise to sell.
--------------
Though market conditions are easy to see in hindsight; they are, according to Security Analysis, almost impossible to predict in the near or distant future:
---------------
In a sense, the market and the future present the same kind of difficulties. Neither can be predicted or controlled by the analyst, yet his success is largely dependent on both of them.
---------------
THRIVING IN EVERY MARKET
Value Investing Made Easy (Janet Lowe):
- THRIVING IN EVERY MARKET
- MR. MARKET
- SUITABLE SECURITIES AT SUITABLE PRICES
- PAYING RESPECT TO THE MARKET
- TIMING VERSUS PRICING
- BELIEVING A BULL MARKET
- THE PAUSE AT THE TOP OF THE ROLLER COASTER
- MAKING FRIENDS WITH A BEAR
- BARGAINS AT THE BOTTOM
- SIGNS AT THE BOTTOM
- BUYING TIME
- IF YOU ABSOLUTELY MUST PLAY THE HORSES
MR. MARKET
MR. MARKET
Mr. Market is an emotional wreck! His hair is unkempt. His nails are chewed to the quick. He endlessly taps his fingers on the desktop. He rushes from one crisis to the next, and if he has to sit for any length of time, his knee twitches compulsively. How does he keep his job on Wall Street? He is Wall Street.
Think of Mr. Market as a confused and changeable business partner, Graham told his students. Warren Buffett described Mr. Market’s business tactics. “Even though the business that the two of you own may have economic characteristics that are stable,” wrote Buffett, “Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems.”
Mr. Market is compulsive. He shows up every day and makes an offer for your part of the business. If you ignore him he is neither offended nor deterred. He will be there again the next day, and the next, and the next.
Also manic depressive, Mr. Market sometimes becomes euphoric. During these spells he can see only blue skies ahead and endless climbing profits. During those times he rushes in and offers an unrealistically high price for your shares. At the slightest negative news, Mr. Market’s spirits dive. His price then is ridiculously low.
But pay no attention to the mood swings. “Mr. Market is there to serve you, not to guide you,” Buffet explained.
If his offer meets your needs as an investor, you can accept it. If it does not, you may ignore it. If you take advantage of him, Mr. Market never remembers. Crazy as he is, Mr. Market is a convenient business partner.
THRIVING IN EVERY MARKET
Value Investing Made Easy (Janet Lowe):
Mr. Market is an emotional wreck! His hair is unkempt. His nails are chewed to the quick. He endlessly taps his fingers on the desktop. He rushes from one crisis to the next, and if he has to sit for any length of time, his knee twitches compulsively. How does he keep his job on Wall Street? He is Wall Street.
Think of Mr. Market as a confused and changeable business partner, Graham told his students. Warren Buffett described Mr. Market’s business tactics. “Even though the business that the two of you own may have economic characteristics that are stable,” wrote Buffett, “Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems.”
Mr. Market is compulsive. He shows up every day and makes an offer for your part of the business. If you ignore him he is neither offended nor deterred. He will be there again the next day, and the next, and the next.
Also manic depressive, Mr. Market sometimes becomes euphoric. During these spells he can see only blue skies ahead and endless climbing profits. During those times he rushes in and offers an unrealistically high price for your shares. At the slightest negative news, Mr. Market’s spirits dive. His price then is ridiculously low.
But pay no attention to the mood swings. “Mr. Market is there to serve you, not to guide you,” Buffet explained.
If his offer meets your needs as an investor, you can accept it. If it does not, you may ignore it. If you take advantage of him, Mr. Market never remembers. Crazy as he is, Mr. Market is a convenient business partner.
THRIVING IN EVERY MARKET
Value Investing Made Easy (Janet Lowe):
- THRIVING IN EVERY MARKET
- MR. MARKET
- SUITABLE SECURITIES AT SUITABLE PRICES
- PAYING RESPECT TO THE MARKET
- TIMING VERSUS PRICING
- BELIEVING A BULL MARKET
- THE PAUSE AT THE TOP OF THE ROLLER COASTER
- MAKING FRIENDS WITH A BEAR
- BARGAINS AT THE BOTTOM
- SIGNS AT THE BOTTOM
- BUYING TIME
- IF YOU ABSOLUTELY MUST PLAY THE HORSES
THRIVING IN EVERY MARKET
THRIVING IN EVERY MARKET
In almost every other walk of life, people buy more at lower prices; in the stock and bond market they seem to buy more at higher prices. (James Grant)
The October 1987 crash was a learning lab for all serious investors. As a result, investors came to understand that markets are never cured of their propensity to overheat and then to overcorrect. Markets may be continually in search of intrinsic value, but they do it the way a hunting dog searches for a scent. They rush madly back and forth across the clue, sniffing everywhere. The process can appear quite frenetic, even when the dog is on the track.
“Disregarding for the moment whether the prevailing level of stock prices on January 1, 1987, was logical, we are certain that the value of American industry in the aggregate had not increased by 44 percent as of August 25. Similarly, it is highly unlikely that the value of American industry declined by 23 percent on a single day, October 19,” wrote William Ruane and Richard Cunniff in the Sequoia Fund 1987 third-quarter report.
When a stock is undervalued, the stage is set for reversal. On that April 1995 day when Kirk Kerkorian and Lee Iacocca made a takeover move on Chrysler, did the actual value of the stock rocket from $39 per share to $55 per share overnight? Probably not. By most analytical standards, with a price-to-earnings ratio of 4, Chrysler was undervalued at $39. The takeover bid alerted investors to Chrysler’s situation, and at the beginning of September 1995, nearly 4 months afterward, the shares were still trading at around $55; even then the PE was only 8.
Such is the scatterbrained behavior of someone Benjamin Graham called “Mr. Market.”
To say that a value investor does not “play the market” is not to say that market cycles don’t exist and that they do not play an important role in the work of investing. One needs only to examine a chart of the movement of the DJIA over a long period of time – 10, 20 years or more – to see that there are wavelike advances and retreats in aggregate stock prices. Value investors realize that they cannot predict how low or how high a market indicator will move, or when a reversal will come. Market ebbs and flows are, admits Graham, an essential part of successful investing.
THRIVING IN EVERY MARKET
Value Investing Made Easy (Janet Lowe):
In almost every other walk of life, people buy more at lower prices; in the stock and bond market they seem to buy more at higher prices. (James Grant)
The October 1987 crash was a learning lab for all serious investors. As a result, investors came to understand that markets are never cured of their propensity to overheat and then to overcorrect. Markets may be continually in search of intrinsic value, but they do it the way a hunting dog searches for a scent. They rush madly back and forth across the clue, sniffing everywhere. The process can appear quite frenetic, even when the dog is on the track.
“Disregarding for the moment whether the prevailing level of stock prices on January 1, 1987, was logical, we are certain that the value of American industry in the aggregate had not increased by 44 percent as of August 25. Similarly, it is highly unlikely that the value of American industry declined by 23 percent on a single day, October 19,” wrote William Ruane and Richard Cunniff in the Sequoia Fund 1987 third-quarter report.
When a stock is undervalued, the stage is set for reversal. On that April 1995 day when Kirk Kerkorian and Lee Iacocca made a takeover move on Chrysler, did the actual value of the stock rocket from $39 per share to $55 per share overnight? Probably not. By most analytical standards, with a price-to-earnings ratio of 4, Chrysler was undervalued at $39. The takeover bid alerted investors to Chrysler’s situation, and at the beginning of September 1995, nearly 4 months afterward, the shares were still trading at around $55; even then the PE was only 8.
Such is the scatterbrained behavior of someone Benjamin Graham called “Mr. Market.”
To say that a value investor does not “play the market” is not to say that market cycles don’t exist and that they do not play an important role in the work of investing. One needs only to examine a chart of the movement of the DJIA over a long period of time – 10, 20 years or more – to see that there are wavelike advances and retreats in aggregate stock prices. Value investors realize that they cannot predict how low or how high a market indicator will move, or when a reversal will come. Market ebbs and flows are, admits Graham, an essential part of successful investing.
THRIVING IN EVERY MARKET
Value Investing Made Easy (Janet Lowe):
- THRIVING IN EVERY MARKET
- MR. MARKET
- SUITABLE SECURITIES AT SUITABLE PRICES
- PAYING RESPECT TO THE MARKET
- TIMING VERSUS PRICING
- BELIEVING A BULL MARKET
- THE PAUSE AT THE TOP OF THE ROLLER COASTER
- MAKING FRIENDS WITH A BEAR
- BARGAINS AT THE BOTTOM
- SIGNS AT THE BOTTOM
- BUYING TIME
- IF YOU ABSOLUTELY MUST PLAY THE HORSES
2009 presents a once-in-a-lifetime opportunity for the long-term investor
Financial investment predictions for 2009
By Anthony Keane January 05, 2009 12:01am
New year, new tips ... experts say 2009 presents a once-in-a-lifetime opportunity for the long-term investor.
Optimistic outlook for investors
Opportunities in stocks, real estate
Blue-chip bargains
MAKING investment predictions is a risky business, especially after the world's worst financial year in decades.
In January, 2008, nobody forecast the severity of the global financial crisis.
A year later, the resources boom is over, official interest rates have been cut by 3 percentage points and boring government bonds have delivered the best returns.
Here we are in January, 2009, and the financial predictions are flowing again, with Westpac, BHP Billiton and QBE Insurance some of the expert's stock picks for the new year.
After the stock market rout of 2008, most experts are forecasting a rebound in shares this year - as many quality companies now appear undervalued.
Related Links
Crisis: Boomers making it worse
Rough '08?: 11,000BC was worse
Research group and fund manager Lincoln Indicators says large-capitalisation companies will lead the market recovery "due to increased investor confidence and perceived safety in these stocks".
Lincoln's list of possible outperformers includes Westpac, CSL, QBE Insurance, BHP Billiton and Leighton Holdings.
"Despite the fact that global markets are unlikely to recover to their pre-credit crunch position in the near future, we expect the market to rally in 2009 as the stock market presents a once-in-a-lifetime opportunity for the long-term investor," Lincoln chief executive Elio A'Amato said.
The Federal Government's stimulus plan would inject cash into the economy and underpin new infrastructure projects, giving a boost to engineering and construction companies, said Mr A'Amato.
PKF partner Tony Simmons said Australian shares and international shares were likely to be the best investment vehicles in 2009.
"Property may also be a good bet, provided you are not currently geared too highly.
"With lower interest rates and depressed property prices, it could well be a good time to get into the property market or to increase your holdings." Prescott Securities financial adviser David Middleton said 2009 was likely to be a sluggish year for world economies, with a recovery not expected until later in the year. "The good news is the coming year is unlikely to be as difficult as 2008, but then few years ever will be," he said. Those who invest for the long term and resist selling shares will be rewarded, he said.
"Any potential recession seems well and truly reflected in current prices, and this is not a time to be selling unless you have to." Maintaining liquidity and not becoming a forced seller is key, he said.
Prescott's recommends focusing on top-shelf industrial shares such as QBE Insurance and Toll Holdings, construction companies such as Leighton Holdings and Lend Lease, and healthcare companies such as Sonic Healthcare and Ramsay Healthcare.
http://www.news.com.au/dailytelegraph/money/story/0,26860,24871845-5015799,00.html
By Anthony Keane January 05, 2009 12:01am
New year, new tips ... experts say 2009 presents a once-in-a-lifetime opportunity for the long-term investor.
Optimistic outlook for investors
Opportunities in stocks, real estate
Blue-chip bargains
MAKING investment predictions is a risky business, especially after the world's worst financial year in decades.
In January, 2008, nobody forecast the severity of the global financial crisis.
A year later, the resources boom is over, official interest rates have been cut by 3 percentage points and boring government bonds have delivered the best returns.
Here we are in January, 2009, and the financial predictions are flowing again, with Westpac, BHP Billiton and QBE Insurance some of the expert's stock picks for the new year.
After the stock market rout of 2008, most experts are forecasting a rebound in shares this year - as many quality companies now appear undervalued.
Related Links
Crisis: Boomers making it worse
Rough '08?: 11,000BC was worse
Research group and fund manager Lincoln Indicators says large-capitalisation companies will lead the market recovery "due to increased investor confidence and perceived safety in these stocks".
Lincoln's list of possible outperformers includes Westpac, CSL, QBE Insurance, BHP Billiton and Leighton Holdings.
"Despite the fact that global markets are unlikely to recover to their pre-credit crunch position in the near future, we expect the market to rally in 2009 as the stock market presents a once-in-a-lifetime opportunity for the long-term investor," Lincoln chief executive Elio A'Amato said.
The Federal Government's stimulus plan would inject cash into the economy and underpin new infrastructure projects, giving a boost to engineering and construction companies, said Mr A'Amato.
PKF partner Tony Simmons said Australian shares and international shares were likely to be the best investment vehicles in 2009.
"Property may also be a good bet, provided you are not currently geared too highly.
"With lower interest rates and depressed property prices, it could well be a good time to get into the property market or to increase your holdings." Prescott Securities financial adviser David Middleton said 2009 was likely to be a sluggish year for world economies, with a recovery not expected until later in the year. "The good news is the coming year is unlikely to be as difficult as 2008, but then few years ever will be," he said. Those who invest for the long term and resist selling shares will be rewarded, he said.
"Any potential recession seems well and truly reflected in current prices, and this is not a time to be selling unless you have to." Maintaining liquidity and not becoming a forced seller is key, he said.
Prescott's recommends focusing on top-shelf industrial shares such as QBE Insurance and Toll Holdings, construction companies such as Leighton Holdings and Lend Lease, and healthcare companies such as Sonic Healthcare and Ramsay Healthcare.
http://www.news.com.au/dailytelegraph/money/story/0,26860,24871845-5015799,00.html
Averaging Down: Good Idea Or Big Mistake?
The strategy of "averaging down", as the term implies, involves investing additional amounts in a financial instrument or asset if it declines significantly in price after the original investment is made. It's true that this action brings down the average cost of the instrument or asset, but will it lead to great returns or just to a larger share of a losing investment?
Practical Applications
Some of the world's most astute investors, including Warren Buffett, have successfully used the averaging down strategy over the years. While the pockets of the average investor are nowhere near as deep as deep as Buffett's, averaging down can still be a viable strategy, albeit with a few caveats:
Averaging down should be done on a selective basis for specific stocks, rather than as a catch-all strategy for every stock in a portfolio. This strategy is best restricted to high-quality, blue-chip stocks where the risk of corporate bankruptcy is low. Blue chips that satisfy stringent criteria - which include a long-term track record, strong competitive position, very low or no debt, stable business, solid cash flows, and sound management - may be suitable candidates for averaging down.
Before averaging down a position, the company's fundamentals should be thoroughly assessed. The investor should ascertain whether a significant decline in a stock is only a temporary phenomenon, or a symptom of a deeper malaise. At a minimum, factors that need to be assessed are the company's competitive position, long-term earnings outlook, business stability and capital structure.
The strategy may be particularly suited to times when there is an inordinate amount of fear and panic in the markets, because panic liquidation may result in high-quality stocks being available at compelling valuations. For example, some of the biggest technology stocks were trading at bargain-basement levels in the summer of 2002, while U.S. and international bank stocks were on sale in the second half of 2008. The key, of course, is exercising prudent judgment in picking the stocks that are best positioned to survive the shakeout.
http://www.investopedia.com/articles/stocks/08/average-down-dollar-cost-average.asp?partner=NTU
Comment:
In a poker game, when would you put more money onto the table? Putting money on the table may results in a bigger loss or a bigger gain. Averaging down in buying stocks shares similar conotations. However, there are situations as listed above, when averaging down may be a strategy you can employ selectively.
Practical Applications
Some of the world's most astute investors, including Warren Buffett, have successfully used the averaging down strategy over the years. While the pockets of the average investor are nowhere near as deep as deep as Buffett's, averaging down can still be a viable strategy, albeit with a few caveats:
Averaging down should be done on a selective basis for specific stocks, rather than as a catch-all strategy for every stock in a portfolio. This strategy is best restricted to high-quality, blue-chip stocks where the risk of corporate bankruptcy is low. Blue chips that satisfy stringent criteria - which include a long-term track record, strong competitive position, very low or no debt, stable business, solid cash flows, and sound management - may be suitable candidates for averaging down.
Before averaging down a position, the company's fundamentals should be thoroughly assessed. The investor should ascertain whether a significant decline in a stock is only a temporary phenomenon, or a symptom of a deeper malaise. At a minimum, factors that need to be assessed are the company's competitive position, long-term earnings outlook, business stability and capital structure.
The strategy may be particularly suited to times when there is an inordinate amount of fear and panic in the markets, because panic liquidation may result in high-quality stocks being available at compelling valuations. For example, some of the biggest technology stocks were trading at bargain-basement levels in the summer of 2002, while U.S. and international bank stocks were on sale in the second half of 2008. The key, of course, is exercising prudent judgment in picking the stocks that are best positioned to survive the shakeout.
http://www.investopedia.com/articles/stocks/08/average-down-dollar-cost-average.asp?partner=NTU
Comment:
In a poker game, when would you put more money onto the table? Putting money on the table may results in a bigger loss or a bigger gain. Averaging down in buying stocks shares similar conotations. However, there are situations as listed above, when averaging down may be a strategy you can employ selectively.
Wednesday, 7 January 2009
Willem Buiter warns of massive dollar collapse
Willem Buiter warns of massive dollar collapse
Americans must prepare themselves for a massive collapse in the dollar as investors around the world dump their US assets, a former Bank of England policymaker has warned.
By Edmund Conway, Economics EditorLast Updated: 3:05PM GMT 06 Jan 2009
MPC founder member Willem Buiter. Photo: CHRISTOPHER COX
The long-held assumption that US assets - particularly government bonds - are a safe haven will soon be overturned as investors lose their patience with the world's biggest economy, according to Willem Buiter.
Professor Buiter, a former Monetary Policy Committee member who is now at the London School of Economics, said this increasing disenchantment would result in an exodus of foreign cash from the US.
The warning comes despite the dollar having strengthened significantly against other major currencies, including sterling and the euro, after hitting historic lows last year. It will reignite fears about the currency's prospects, as well as sparking fears about the sustainability of President-Elect Barack Obama's mooted plans for a Keynesian-style increase in public spending to pull the US out of recession.
Writing on his blog , Prof Buiter said: "There will, before long (my best guess is between two and five years from now) be a global dumping of US dollar assets, including US government assets. Old habits die hard. The US dollar and US Treasury bills and bonds are still viewed as a safe haven by many. But learning takes place."
He said that the dollar had been kept elevated in recent years by what some called "dark matter" or "American alpha" - an assumption that the US could earn more on its overseas investments than foreign investors could make on their American assets. However, this notion had been gradually dismantled in recent years, before being dealt a fatal blow by the current financial crisis, he said.
"The past eight years of imperial overstretch, hubris and domestic and international abuse of power on the part of the Bush administration has left the US materially weakened financially, economically, politically and morally," he said. "Even the most hard-nosed, Guantanamo Bay-indifferent potential foreign investor in the US must recognise that its financial system has collapsed."
He said investors would, rightly, suspect that the US would have to generate major inflation to whittle away its debt and this dollar collapse means that the US has less leeway for major spending plans than politicians realise.
http://www.telegraph.co.uk/finance/4125947/Willem-Buiter-warns-of-massive-dollar-collapse.html
Americans must prepare themselves for a massive collapse in the dollar as investors around the world dump their US assets, a former Bank of England policymaker has warned.
By Edmund Conway, Economics EditorLast Updated: 3:05PM GMT 06 Jan 2009
MPC founder member Willem Buiter. Photo: CHRISTOPHER COX
The long-held assumption that US assets - particularly government bonds - are a safe haven will soon be overturned as investors lose their patience with the world's biggest economy, according to Willem Buiter.
Professor Buiter, a former Monetary Policy Committee member who is now at the London School of Economics, said this increasing disenchantment would result in an exodus of foreign cash from the US.
The warning comes despite the dollar having strengthened significantly against other major currencies, including sterling and the euro, after hitting historic lows last year. It will reignite fears about the currency's prospects, as well as sparking fears about the sustainability of President-Elect Barack Obama's mooted plans for a Keynesian-style increase in public spending to pull the US out of recession.
Writing on his blog , Prof Buiter said: "There will, before long (my best guess is between two and five years from now) be a global dumping of US dollar assets, including US government assets. Old habits die hard. The US dollar and US Treasury bills and bonds are still viewed as a safe haven by many. But learning takes place."
He said that the dollar had been kept elevated in recent years by what some called "dark matter" or "American alpha" - an assumption that the US could earn more on its overseas investments than foreign investors could make on their American assets. However, this notion had been gradually dismantled in recent years, before being dealt a fatal blow by the current financial crisis, he said.
"The past eight years of imperial overstretch, hubris and domestic and international abuse of power on the part of the Bush administration has left the US materially weakened financially, economically, politically and morally," he said. "Even the most hard-nosed, Guantanamo Bay-indifferent potential foreign investor in the US must recognise that its financial system has collapsed."
He said investors would, rightly, suspect that the US would have to generate major inflation to whittle away its debt and this dollar collapse means that the US has less leeway for major spending plans than politicians realise.
http://www.telegraph.co.uk/finance/4125947/Willem-Buiter-warns-of-massive-dollar-collapse.html
Tuesday, 6 January 2009
WSJ to Warren Buffett: "Time to Get a New Crystal Ball"
Monday, 27 Oct 2008
WSJ to Warren Buffett: "Time to Get a New Crystal Ball"
Posted By: Alex Crippen
Topics:Derivatives Investment Strategy Stock Market Warren Buffett
Companies:Berkshire Hathaway Inc.
MORE DOUBTS ABOUT THE ORACLE
........... there's are other Buffett-doubters out there, especially when it comes to his public call to buy U.S. stocks now.
A common theme is that as a billionaire, Buffett can afford to put his money down now and wait for the profits, which could be years away. The rest of us have more pressing problems.
In the Times of London, Jennifer Hill argues that Buffett Is Wrong: The Market Madness Is Still Far From Over.
In Canada, the National Post's Diane Francis echoes the sentiment with Buffett Is Wrong: Avoid Stocks and Buffett Is Wrong: Part II.
On Seeking Alpha, Brian Keith Anderson lists 5 Reasons to Ignore Buffett and C.S. Jefferson asks "What If Warren Buffett Is Wrong About the Markets?"
There are also defenders, of course, including the often pessimistic Doug Kass, who made a profitable short-term bet against Berkshire Hathaway's stock price this year.
The key question, as it often is when talking about Warren Buffett and his famously long-term view of things, is whether an investor sees enough future pleasure to overcome pain in the present.
Buffett's investing record suggests we should be looking very carefully.
http://www.cnbc.com/id/27400058/
WSJ to Warren Buffett: "Time to Get a New Crystal Ball"
Posted By: Alex Crippen
Topics:Derivatives Investment Strategy Stock Market Warren Buffett
Companies:Berkshire Hathaway Inc.
MORE DOUBTS ABOUT THE ORACLE
........... there's are other Buffett-doubters out there, especially when it comes to his public call to buy U.S. stocks now.
A common theme is that as a billionaire, Buffett can afford to put his money down now and wait for the profits, which could be years away. The rest of us have more pressing problems.
In the Times of London, Jennifer Hill argues that Buffett Is Wrong: The Market Madness Is Still Far From Over.
In Canada, the National Post's Diane Francis echoes the sentiment with Buffett Is Wrong: Avoid Stocks and Buffett Is Wrong: Part II.
On Seeking Alpha, Brian Keith Anderson lists 5 Reasons to Ignore Buffett and C.S. Jefferson asks "What If Warren Buffett Is Wrong About the Markets?"
There are also defenders, of course, including the often pessimistic Doug Kass, who made a profitable short-term bet against Berkshire Hathaway's stock price this year.
The key question, as it often is when talking about Warren Buffett and his famously long-term view of things, is whether an investor sees enough future pleasure to overcome pain in the present.
Buffett's investing record suggests we should be looking very carefully.
http://www.cnbc.com/id/27400058/
Asian Stocks Hit 2-Month High as Risk Returns
Asian Stocks Hit 2-Month High as Risk Returns
Topics:South Korea Australia Stock Market Singapore Hang Seng Nikkei Shanghai Stock Exchange
By: CNBC.com 05 Jan 2009
Asian stocks hit a two-month high Monday, with investors betting the global economy will start to recover later this year by shedding some of their big holdings of safe-haven government bonds.
The Australian dollar pushed to a three-month high against the U.S. dollar as investors embraced higher-yielding currencies, taking heart from calmer financial markets and expectations for big government stimulus spending packages in coming weeks to revive growth.
The dollar edged up across the board, mainly getting a boost as the euro stumbled. Traders said the single currency's surge in December was due more to factors such as investors repatriating funds before year-end and was likely overdone. Commodity prices generally firmed, with oil prices climbing above $47 a barrel on increased tensions in the Middle East, Russia and Ukraine.
RELATED LINKS
Current DateTime: 03:26:11 05 Jan 2009LinksList Documentid: 28495804
Oil Settles Near $49 on Geopolitical Worries
Dollar Bolstered by Obama Stimulus, ECB Outlook
Futures Fall As Auto Sales Figures Loom
Telecoms, Energy Stocks Boost Euro Market
More Asia Pacific News
Japan's Nikkei 225 Average began 2009 on a strong note, closing 2.1 percent higher in a shortened session and hitting a two-month high on hopes this year will be better than last, the worst in the Nikkei's history. Honda Motor and other exporters climbed on a weaker yen.
Resource-linked firms such as trading houses surged as oil jumped more than 3 percent, after an Iranian military commander reportedly called on Islamic countries to cut oil exports to supporters of Israel over Israel's ground offensive in the Gaza Strip to stop Hamas rocket attacks.
Seoul shares gained 1.4 percent with banks including KB Financial rallying on expectations of a rate cut, while auto makers advanced on strengthening views their earnings may not be as bad as feared.
Australian stocks finished down 0.7 percent as banks gave up early gains, precious metal miners fell on lower gold prices and investors sold offshore earners likely to be hurt by a stronger Australian dollar.
More From CNBC.com
Get After-the-Bell Dow 30 Quotes
Credit Spreads and Libor Data
Futures and Pre-Market Data
Currency Data
Hong Kong shares rose 3.5 percent, with China Mobile rising for a second day on hopes that Chinese telecom operators will soon be issued licences to offer third generation (3G) services. China's Lenovo Group climbed after the Chinese magazine Caijing said the world's No.4 personal computer maker was set to announce a major restructuring plan on Jan. 8 including changes of its top management. Aluminum Corp of China jumped 9.5 percent, tracking similar gains in its Shanghai listed scrip on hopes that it would benefit from the government's infrastructure building plans.
Singapore's Straits Times Index rose 5.2 percent. Shares of plantation firms such as Golden Agri and Wilmar International rose on higher palm oil prices. Benchmark palm oil prices in Malaysia rose 1.5 percent after crude oil climbed on worries over supplies after an Iranian military commander reportedly called for an oil boycott.
China's Shanghai Composite Index rose 3.3 percent, with industrial metal producers leading the gains on hopes they would benefit from the government's infrastructure building plans. Coal producers also outperformed, partly because of a surge in global oil prices due to tensions in the Middle East. Shenhua Energy gained.
© 2009 CNBC.com
Topics:South Korea Australia Stock Market Singapore Hang Seng Nikkei Shanghai Stock Exchange
By: CNBC.com 05 Jan 2009
Asian stocks hit a two-month high Monday, with investors betting the global economy will start to recover later this year by shedding some of their big holdings of safe-haven government bonds.
The Australian dollar pushed to a three-month high against the U.S. dollar as investors embraced higher-yielding currencies, taking heart from calmer financial markets and expectations for big government stimulus spending packages in coming weeks to revive growth.
The dollar edged up across the board, mainly getting a boost as the euro stumbled. Traders said the single currency's surge in December was due more to factors such as investors repatriating funds before year-end and was likely overdone. Commodity prices generally firmed, with oil prices climbing above $47 a barrel on increased tensions in the Middle East, Russia and Ukraine.
RELATED LINKS
Current DateTime: 03:26:11 05 Jan 2009LinksList Documentid: 28495804
Oil Settles Near $49 on Geopolitical Worries
Dollar Bolstered by Obama Stimulus, ECB Outlook
Futures Fall As Auto Sales Figures Loom
Telecoms, Energy Stocks Boost Euro Market
More Asia Pacific News
Japan's Nikkei 225 Average began 2009 on a strong note, closing 2.1 percent higher in a shortened session and hitting a two-month high on hopes this year will be better than last, the worst in the Nikkei's history. Honda Motor and other exporters climbed on a weaker yen.
Resource-linked firms such as trading houses surged as oil jumped more than 3 percent, after an Iranian military commander reportedly called on Islamic countries to cut oil exports to supporters of Israel over Israel's ground offensive in the Gaza Strip to stop Hamas rocket attacks.
Seoul shares gained 1.4 percent with banks including KB Financial rallying on expectations of a rate cut, while auto makers advanced on strengthening views their earnings may not be as bad as feared.
Australian stocks finished down 0.7 percent as banks gave up early gains, precious metal miners fell on lower gold prices and investors sold offshore earners likely to be hurt by a stronger Australian dollar.
More From CNBC.com
Get After-the-Bell Dow 30 Quotes
Credit Spreads and Libor Data
Futures and Pre-Market Data
Currency Data
Hong Kong shares rose 3.5 percent, with China Mobile rising for a second day on hopes that Chinese telecom operators will soon be issued licences to offer third generation (3G) services. China's Lenovo Group climbed after the Chinese magazine Caijing said the world's No.4 personal computer maker was set to announce a major restructuring plan on Jan. 8 including changes of its top management. Aluminum Corp of China jumped 9.5 percent, tracking similar gains in its Shanghai listed scrip on hopes that it would benefit from the government's infrastructure building plans.
Singapore's Straits Times Index rose 5.2 percent. Shares of plantation firms such as Golden Agri and Wilmar International rose on higher palm oil prices. Benchmark palm oil prices in Malaysia rose 1.5 percent after crude oil climbed on worries over supplies after an Iranian military commander reportedly called for an oil boycott.
China's Shanghai Composite Index rose 3.3 percent, with industrial metal producers leading the gains on hopes they would benefit from the government's infrastructure building plans. Coal producers also outperformed, partly because of a surge in global oil prices due to tensions in the Middle East. Shenhua Energy gained.
© 2009 CNBC.com
Monday, 5 January 2009
Simon Woodroffe, the founder of Yo! Sushi has most of his £1.6m pension in cash
Simon Woodroffe, the founder of Yo! Sushi has most of his £1.6m pension in cash
Simon Woodroffe OBE, 56, is the millionaire founder of Yo! Sushi. Having sold a majority stake in his business in 2003, he sold his remaining 22pc in March. He lives with his 18-year-old daughter, Charlotte, on a £1m houseboat in Chelsea.
By Mark Anstead
Last Updated: 9:38AM GMT 12 Dec 2008
Simon Woodroffe on fame and fortune. Photo: ANTHONY JONES
Where did you put the money from selling your remaining Yo! Sushi stake?
I split it between three deposit accounts. I've always banked with NatWest for my personal account (since I was 16); my business account has always been with Barclays and I have a deposit account with a firm of financial advisers called Sterling Assurance, which I set up when I wanted to transfer money out of stocks and shares.
Are you very active as a stock market investor?
When I sold a stake in Yo! Sushi in 2003 I wanted to invest around £1m and I looked around to find an adviser. I've got a good accountant but I didn't have anyone to invest wisely for me. Eventually I put it into mutual funds with Sterling Assurance but then, when everything started to dive this year, I realised that wasn't working. I now see my dream of an ideal adviser doesn't exist – you have to take responsibility for your own decisions.
In early September I decided to take my money out of funds and into a deposit account with Sterling. I was very late doing it and I lost about £200,000 on the value of my portfolio last year, but at least I got it out before the really big crash so I congratulated myself on not losing another 20pc. I think now the only way for me to make money in stocks is if I find out more about it. In the past I have always felt out of my depth.
Why are you going to try again?
Because I think it makes sense to spread my money across asset classes and the stock market must rise again. And, with interest rates coming down, the money I have on deposit won't keep pace with inflation. But, when I do it, I'll do it with enthusiasm, taking an interest and assuming responsibility.
I live to this motto – follow your fear to find your destiny. One of my fears is I don't understand the stock market properly, so I will face up to that and find out more about it. In my experience when you do that you find things are simpler than they appear.
Read more http://www.telegraph.co.uk/finance/personalfinance/fameandfortune/3722321/Simon-Woodroffe-the-founder-of-Yo-Sushi-has-most-of-his-1.6m-pension-in-cash.html
Simon Woodroffe OBE, 56, is the millionaire founder of Yo! Sushi. Having sold a majority stake in his business in 2003, he sold his remaining 22pc in March. He lives with his 18-year-old daughter, Charlotte, on a £1m houseboat in Chelsea.
By Mark Anstead
Last Updated: 9:38AM GMT 12 Dec 2008
Simon Woodroffe on fame and fortune. Photo: ANTHONY JONES
Where did you put the money from selling your remaining Yo! Sushi stake?
I split it between three deposit accounts. I've always banked with NatWest for my personal account (since I was 16); my business account has always been with Barclays and I have a deposit account with a firm of financial advisers called Sterling Assurance, which I set up when I wanted to transfer money out of stocks and shares.
Are you very active as a stock market investor?
When I sold a stake in Yo! Sushi in 2003 I wanted to invest around £1m and I looked around to find an adviser. I've got a good accountant but I didn't have anyone to invest wisely for me. Eventually I put it into mutual funds with Sterling Assurance but then, when everything started to dive this year, I realised that wasn't working. I now see my dream of an ideal adviser doesn't exist – you have to take responsibility for your own decisions.
In early September I decided to take my money out of funds and into a deposit account with Sterling. I was very late doing it and I lost about £200,000 on the value of my portfolio last year, but at least I got it out before the really big crash so I congratulated myself on not losing another 20pc. I think now the only way for me to make money in stocks is if I find out more about it. In the past I have always felt out of my depth.
Why are you going to try again?
Because I think it makes sense to spread my money across asset classes and the stock market must rise again. And, with interest rates coming down, the money I have on deposit won't keep pace with inflation. But, when I do it, I'll do it with enthusiasm, taking an interest and assuming responsibility.
I live to this motto – follow your fear to find your destiny. One of my fears is I don't understand the stock market properly, so I will face up to that and find out more about it. In my experience when you do that you find things are simpler than they appear.
Read more http://www.telegraph.co.uk/finance/personalfinance/fameandfortune/3722321/Simon-Woodroffe-the-founder-of-Yo-Sushi-has-most-of-his-1.6m-pension-in-cash.html
Saturday, 3 January 2009
These Stocks Will Burn You
These Stocks Will Burn You
By Rex Moore December 27, 2008 Comments (16)
In his article "The Market's 10 Best Stocks," my colleague Tim Hanson pointed out the benefits of searching for the next multibagger success stories among the smallest of companies.
And I agree with him: The best stocks of the next decade will not be huge companies. Why not? This chart should explain. Look how large each of these businesses would become if they increased just 10 times in value over the next decade.
Company
Current Market Cap (billions)....10-Bagger Market Cap (trillions)
General Electric (NYSE: GE)....$164....$1.6
Citigroup (NYSE: C)....$36....$0.4
Bank of America (NYSE: BAC)....$64....$0.6
Pfizer (NYSE: PFE)....$115....$1.2
Intel (Nasdaq: INTC)....$78....$0.8
Google (Nasdaq: GOOG)....$94....$0.9
Cisco Systems (Nasdaq: CSCO)....$95....$1.0
While it's certainly possible, we probably won't have a trillion-dollar company by 2018 -- much less see any of these large caps turn into 20- or 30-baggers. So we can count the giants in that chart out of the running for best performer of the next decade.
Instead, the greatest chance for the greatest gains comes from the smallest of companies, like the Tiny Gems that the Motley Fool Hidden Gems team follow. These half-pint companies are capitalized at less than $200 million, and there's plenty of room for them to grow before they run into the headwinds of large numbers and their prospects become more limited.
But before you take a free trial and jump headfirst into the micro-cap waters, listen up: This ride is not for everybody.
Buckle up
With great potential reward comes great risk. Just as a tiny company has the greatest chance at outlandish gains, it also has the best chance of going belly up. Bankrupt. Gone ... along with your money. And the volatility along the way to greatness or the graveyard may give you whiplash.
Thus, these Tiny Gems are best suited for risk-tolerant investors with a long-term outlook.
That said, two things can greatly reduce the chance that your portfolio will get torched by tanking Tinies:
1. Believe the balance sheet. This is where you can tell whether a company is in danger. Little cash and large amounts of debt are a big warning sign, especially for businesses not yet turning a profit. Go back through the past several balance sheets. Is the company burning through cash? How fast? My advice: Stick to profitable companies with cash-to-debt ratios of at least 1.5.
2. Buy a "basket" of these micro caps. In other words, allocate the amount of funds you normally would for one stock to several of the Tinies -- four or five, for example. That way, you're giving yourself more of a chance at finding at least one huge gainer, which will more than make up for it if one or two of the others lose most of their value.
Rex Moore helps the team pan for micro caps and is an analyst for Stock Advisor. He owns no companies mentioned in this article. The Motley Fool owns shares of Pfizer, as well as shares and covered calls of Intel. Bank of America and Pfizer are Motley Fool Income Investor recommendations. Pfizer and Intel are Motley Fool Inside Value recommendations. Google is a Rule Breakers selection. The Motley Fool is investors helping investors.
Read/Post Comments (16)
By Rex Moore December 27, 2008 Comments (16)
In his article "The Market's 10 Best Stocks," my colleague Tim Hanson pointed out the benefits of searching for the next multibagger success stories among the smallest of companies.
And I agree with him: The best stocks of the next decade will not be huge companies. Why not? This chart should explain. Look how large each of these businesses would become if they increased just 10 times in value over the next decade.
Company
Current Market Cap (billions)....10-Bagger Market Cap (trillions)
General Electric (NYSE: GE)....$164....$1.6
Citigroup (NYSE: C)....$36....$0.4
Bank of America (NYSE: BAC)....$64....$0.6
Pfizer (NYSE: PFE)....$115....$1.2
Intel (Nasdaq: INTC)....$78....$0.8
Google (Nasdaq: GOOG)....$94....$0.9
Cisco Systems (Nasdaq: CSCO)....$95....$1.0
While it's certainly possible, we probably won't have a trillion-dollar company by 2018 -- much less see any of these large caps turn into 20- or 30-baggers. So we can count the giants in that chart out of the running for best performer of the next decade.
Instead, the greatest chance for the greatest gains comes from the smallest of companies, like the Tiny Gems that the Motley Fool Hidden Gems team follow. These half-pint companies are capitalized at less than $200 million, and there's plenty of room for them to grow before they run into the headwinds of large numbers and their prospects become more limited.
But before you take a free trial and jump headfirst into the micro-cap waters, listen up: This ride is not for everybody.
Buckle up
With great potential reward comes great risk. Just as a tiny company has the greatest chance at outlandish gains, it also has the best chance of going belly up. Bankrupt. Gone ... along with your money. And the volatility along the way to greatness or the graveyard may give you whiplash.
Thus, these Tiny Gems are best suited for risk-tolerant investors with a long-term outlook.
That said, two things can greatly reduce the chance that your portfolio will get torched by tanking Tinies:
1. Believe the balance sheet. This is where you can tell whether a company is in danger. Little cash and large amounts of debt are a big warning sign, especially for businesses not yet turning a profit. Go back through the past several balance sheets. Is the company burning through cash? How fast? My advice: Stick to profitable companies with cash-to-debt ratios of at least 1.5.
2. Buy a "basket" of these micro caps. In other words, allocate the amount of funds you normally would for one stock to several of the Tinies -- four or five, for example. That way, you're giving yourself more of a chance at finding at least one huge gainer, which will more than make up for it if one or two of the others lose most of their value.
Rex Moore helps the team pan for micro caps and is an analyst for Stock Advisor. He owns no companies mentioned in this article. The Motley Fool owns shares of Pfizer, as well as shares and covered calls of Intel. Bank of America and Pfizer are Motley Fool Income Investor recommendations. Pfizer and Intel are Motley Fool Inside Value recommendations. Google is a Rule Breakers selection. The Motley Fool is investors helping investors.
Read/Post Comments (16)
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