KPJ Healthcare targets RM2b revenue in 2012
Published: 2009/12/22
KPJ Healthcare Bhd (5878), the largest operator of private hospitals in Malaysia, has target its annual revenue to reach RM2 billion in 2012 through the continued expansion of operations throughout the country.
According to its chairman Tan Sri Muhammad Ali Hashim, the company will expand operations in the country either organically, by takeovers or building new hospitals.
"Through this continuous expansion of operations,we are confident of achieving an annual revenue of RM2 billion in 2012," he told reporters after the company's Extraordinary General Meeting (EGM) in Johor Baru yesterday.
He said the company had allocated RM150 million for capital expenditure this year and a similar amount would be spent next year for the same purpose.
The company's performance for the first nine months until September 30 2009 showed it had achieved revenue of RM1.07 billion and a net profit of RM80.57 million, compared to RM944.8 million and RM67 million for the same period last year.
KPJ, a subsidiary of the Johor Corporation owns 19 hospitals in Malaysia and two in Indonesia.
Muhammad Ali said the company had increased its network of hospitals with the JPJ Penang Specialist Hospital which began operations in August, while the Tawakal Hospital Kuala Lumpur which is moving to a new building, is expected to open in the first quarter of next year.
He also said that KPJ is building a new hospital in Klang, Selangor, which is expected to be open for operations in 15 months.
He said on December 16, the company had announced its move to take over the Maharani Specialist Hospital costing RM22 million in Muar, with another RM30 million being spent to develop it.
On its overseas operations, he said, the company's board of directors will re-evaluate investments in Bangladesh and Saudi Arabia following the current international financial crisis.
KPJ owns two hospitals in Indonesia, the RS Medika Permata Hijau and RS Bumi Serpong Damai. Both are located in Jakarta.
The company also operates a hospital in Padang, the Rumah Sakit Selasih, which was badly damaged by the recent earthquake which hit the region.
Earlier at its EGM, KPJ received approval from its shareholders to proceed with its proposed share split, bonus and warrant issue.
The proposed exercise involves the sub-division of one ordinary share of RM1.00 each in KPJ into two ordinary shares of RM0.50 each in KPJ, followed by a 1-for-4 bonus issue and a subsequent 1-for4-free warrant issue. - Bernama
Tuesday, 22 December 2009
Will 2010 be a good year for stock investors?
Will 2010 be a good year for stock investors?
The world markets have just recovered from a rather long and severe bear market. The recession has been severe. During this period, economic growth stalled and unemployment rose. Many companies and individuals went bankrupt. Many restructured, cutting cost, reducing excess capacity, conserve cash, sacked staffs, and so on, to remain and to survive. This phase has resulted in many surviving firms reporting a turnaround in their profits. This is reflected in the rise in stock markets. Going forward, these companies will consolidate and strategies for growth will be implemented. It is anticipated that the world economy will grow by 3% next year.
The interest rates of US, Japan and Europe are anticipated to remain low next year. Though their economies are anticipated to grow, these low rates will remain so as not to stifle their initial growths. As for the other countries, some have already raised their interest rates due to their improving economies.
The early rise in interest rate in these countries should be welcomed. The improving economies have enabled these governments to remove the stimulus ("medicine") needed to revive their economies the previous two years. Investors need not fear as equities have done well during these early periods of rising interest rates. Later rises in the interest rates should be viewed more cautiously as they probably are implemented to control rising inflation.
The interest yield curve is the difference between the interest rate of the 10 year treasury note and the 2 year treasury note. It is steepening. Some countries will deliberately keep interest rate low and their currency values competitive to stimulate their economy. The major economies using this policy will see their currencies used for carry trades round the world.
Due to the low interest rate policies and large liquidities the last two years, there is real fear of bubbles created in various asset classes, particularly in properties in certain countries. These countries will need to tackle these lest these lead to future problems. Bursting of bubbles will always be a risk to their economies. (Look at Dubai.)
The market has given good returns to investors since March 2009. The stock market has gone up substantially but it is neither frothy nor bubbly. Though a correction will be welcomed by many, long term investors continue to find values even in the present market. Buying a good stock at a bargain or a fair price requires due diligent and hard work. Good luck for 2010.
The world markets have just recovered from a rather long and severe bear market. The recession has been severe. During this period, economic growth stalled and unemployment rose. Many companies and individuals went bankrupt. Many restructured, cutting cost, reducing excess capacity, conserve cash, sacked staffs, and so on, to remain and to survive. This phase has resulted in many surviving firms reporting a turnaround in their profits. This is reflected in the rise in stock markets. Going forward, these companies will consolidate and strategies for growth will be implemented. It is anticipated that the world economy will grow by 3% next year.
The interest rates of US, Japan and Europe are anticipated to remain low next year. Though their economies are anticipated to grow, these low rates will remain so as not to stifle their initial growths. As for the other countries, some have already raised their interest rates due to their improving economies.
The early rise in interest rate in these countries should be welcomed. The improving economies have enabled these governments to remove the stimulus ("medicine") needed to revive their economies the previous two years. Investors need not fear as equities have done well during these early periods of rising interest rates. Later rises in the interest rates should be viewed more cautiously as they probably are implemented to control rising inflation.
The interest yield curve is the difference between the interest rate of the 10 year treasury note and the 2 year treasury note. It is steepening. Some countries will deliberately keep interest rate low and their currency values competitive to stimulate their economy. The major economies using this policy will see their currencies used for carry trades round the world.
Due to the low interest rate policies and large liquidities the last two years, there is real fear of bubbles created in various asset classes, particularly in properties in certain countries. These countries will need to tackle these lest these lead to future problems. Bursting of bubbles will always be a risk to their economies. (Look at Dubai.)
The market has given good returns to investors since March 2009. The stock market has gone up substantially but it is neither frothy nor bubbly. Though a correction will be welcomed by many, long term investors continue to find values even in the present market. Buying a good stock at a bargain or a fair price requires due diligent and hard work. Good luck for 2010.
Monday, 21 December 2009
Maybank has little exposure to Dubai, says Wahid
Maybank has little exposure to Dubai, says Wahid
Tags: An Binh Bank | Dubai | Maybank
Written by Siti Sakinah Abd Latif & Max Koh
Thursday, 17 December 2009 21:13
KUALA LUMPUR: MALAYAN BANKING BHD [] will not be affected by Dubai's debt crisis given its exposure there of less than 0.2% of the banking group's total assets, said its CEO Datuk Seri Abdul Wahid Omar. (Comment: Total assets of Maybank as at Sept 30, 2009 was RM 317,041 mil. The 0.2% of this was RM 634.082 million).
Wahid said the bank's exposure in Dubai was being monitored by its branches in Bahrain and London.
"We are hopeful that the issue in Dubai will be resolved. Abu Dhabi has lent US$10 billion [RM34.2 billion] to enable Nakheel to repay its bond debt, which is a positive development," Wahid told reporters on Dec 17 after a signing ceremony between Maybank and MoneyTree (M) Sdn Bhd for the sponsorship of a year-long financial-literacy programme for youngsters.
He said the development in Dubai would bring back significant confidence and stability to financial markets.
It had been reported that Abu Dhabi recently provided the amount to Dubai to help Dubai World, the state-owned holding company, avoid defaulting on a US$4.1 billion Nakheel bond payment.
On another matter, Abdul Wahid said Maybank had received the final approval from the Vietnamese authorities to increase its stake in An Binh Bank from 15% to 20%.
When Maybank bought its 15% stake in An Binh in March 2008, it was given the option to increase the stake to 20%, which is the highest stake that a foreign company is allowed to hold in Vietnam.
"We are now in the process of finalising the agreement," Wahid said.
On the bank's outlook for next year, Wahid said Maybank was bullish about 2010's economic prospects, adding that its in-house economist had forecast 4.5% growth.
"I think as we recover, obviously, we expect the financial industry to perform well as well," he said.
He said the country's asset policy would continue to create a conducive environment for business.
Tags: An Binh Bank | Dubai | Maybank
Written by Siti Sakinah Abd Latif & Max Koh
Thursday, 17 December 2009 21:13
KUALA LUMPUR: MALAYAN BANKING BHD [] will not be affected by Dubai's debt crisis given its exposure there of less than 0.2% of the banking group's total assets, said its CEO Datuk Seri Abdul Wahid Omar. (Comment: Total assets of Maybank as at Sept 30, 2009 was RM 317,041 mil. The 0.2% of this was RM 634.082 million).
Wahid said the bank's exposure in Dubai was being monitored by its branches in Bahrain and London.
"We are hopeful that the issue in Dubai will be resolved. Abu Dhabi has lent US$10 billion [RM34.2 billion] to enable Nakheel to repay its bond debt, which is a positive development," Wahid told reporters on Dec 17 after a signing ceremony between Maybank and MoneyTree (M) Sdn Bhd for the sponsorship of a year-long financial-literacy programme for youngsters.
He said the development in Dubai would bring back significant confidence and stability to financial markets.
It had been reported that Abu Dhabi recently provided the amount to Dubai to help Dubai World, the state-owned holding company, avoid defaulting on a US$4.1 billion Nakheel bond payment.
On another matter, Abdul Wahid said Maybank had received the final approval from the Vietnamese authorities to increase its stake in An Binh Bank from 15% to 20%.
When Maybank bought its 15% stake in An Binh in March 2008, it was given the option to increase the stake to 20%, which is the highest stake that a foreign company is allowed to hold in Vietnam.
"We are now in the process of finalising the agreement," Wahid said.
On the bank's outlook for next year, Wahid said Maybank was bullish about 2010's economic prospects, adding that its in-house economist had forecast 4.5% growth.
"I think as we recover, obviously, we expect the financial industry to perform well as well," he said.
He said the country's asset policy would continue to create a conducive environment for business.
Adventa rises on higher earnings outlook
Adventa rises on higher earnings outlook
Tags: Adventa | earnings | OSK Research | Top Glove
Written by Joseph Chin
Monday, 21 December 2009 11:39
KUALA LUMPUR: Shares of Adventa rose in morning trade on Monday, Dec 21 on expectations of higher earnings for its fourth quarter results (4QFY09) to be released on Tuesday and after OSK Investment Research raised the target price from RM1.87 to RM3.58.
At 11.30am, the share price had risen six sen to RM2.94. There were 1.408 million shares done at prices ranging from RM2.89 and RM2.94.
OSK Research said it expected the earnings to be slightly better on-quarter, judging from the solid performance earlier of its peer, Top Glove.
"Also, we understand that this would be the last quarter for recognition of the company's foreign exchange losses which should still amount to approximately RM4 million. Moving into FY10, Adventa is looking to capacity expansion again.
"We are upgrading our FY10 earnings by 42% in line with the improved numbers sans forex loss. Maintain Buy with a higher target price of RM3.58 (previously RM1.87)," it said.
Tags: Adventa | earnings | OSK Research | Top Glove
Written by Joseph Chin
Monday, 21 December 2009 11:39
KUALA LUMPUR: Shares of Adventa rose in morning trade on Monday, Dec 21 on expectations of higher earnings for its fourth quarter results (4QFY09) to be released on Tuesday and after OSK Investment Research raised the target price from RM1.87 to RM3.58.
At 11.30am, the share price had risen six sen to RM2.94. There were 1.408 million shares done at prices ranging from RM2.89 and RM2.94.
OSK Research said it expected the earnings to be slightly better on-quarter, judging from the solid performance earlier of its peer, Top Glove.
"Also, we understand that this would be the last quarter for recognition of the company's foreign exchange losses which should still amount to approximately RM4 million. Moving into FY10, Adventa is looking to capacity expansion again.
"We are upgrading our FY10 earnings by 42% in line with the improved numbers sans forex loss. Maintain Buy with a higher target price of RM3.58 (previously RM1.87)," it said.
A general guide to investing:
As a general guide to investing:
Every 5 years, one can expect 4 good years and 1 bad year.
For every 5 stocks selected and bought, 1 will perform poorly, 3 will be average and 1 will outperform.
The aim of diversification is ensuring wins are more than enough to cover the losses.
Remember to sell the losers and let the winners ride.
Aim for a return of portfolio investment of 15% or more per annum.
Every 5 years, one can expect 4 good years and 1 bad year.
For every 5 stocks selected and bought, 1 will perform poorly, 3 will be average and 1 will outperform.
The aim of diversification is ensuring wins are more than enough to cover the losses.
Remember to sell the losers and let the winners ride.
Aim for a return of portfolio investment of 15% or more per annum.
CHEAH CHENG HYE, 'Warren Buffett of the East'
December 21, 2009
CHEAH CHENG HYE, 'Warren Buffett of the East'
http://mystockfolio.blogspot.com/2009/12/cheah-cheng-hye-warren-buffett-of-east.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MyMalaysiaStockfolio+%28My+Malaysia+Stockfolio%29
CHEAH CHENG HYE, 'Warren Buffett of the East'
- “We are far from infallible. I’ve done a study of our decision-making process going back to 1993 and found that one third of the time, we made mistakes. One third were good moves and one third were neutral.”
- But in equity investing, it is stellar performance if you make lots of money on the decisions that turned out fine and lost not too much on those that went sour.
- In terms of client categories, about 82 per cent of all the assets under management came from institutions such as insurance companies, banks and conglomerates.
- The sparkling performance numbers: Value Partners has delivered a 16 per cent per annum compounded gain to its clients since 1993 when it was founded.
- In the last 10 years, including the disastrous 2008, the gain was 20.3 per cent a year compounded.
- On a yearly basis, Value Partners Classic Fund has made money in 12 out of the last 16 years of its existence.
- Last year was one of those four terrible years. The fund lost 47.9 per cent net – and that’s after selling down some stocks ahead of the crisis turning full blown.
- Last year aside, why is that intense analysis of reams of financial statements, lots of visits to companies and interviews with management can still lead an investor like Value Partners to make wrong conclusions about some stocks?
- In Mr Cheah’s words: corporate governance. “If you isolate the mistakes of Value Partners, the single largest reason we find is our poor judgment of management’s integrity and quality. We thought the guy was honest but he turned out to be a crook.”
- He agreed to a suggestion that there’s randomness in the market, adding: “Yes, and the bad guys also come up with new ways to fool you!”
- The corporate governance challenge is not absent but is far less pressing when it comes to investing in China companies listed in Hong Kong. “It is a well regulated market. People have learnt the hard way that it makes no sense to ‘play a fool’ with Hong Kong regulators, as they will come down hard on you,” said Mr Cheah.
- “The average investor should only put a proportion of his money into equities. I believe that the potential risk-versus-opportunity situation today does not encourage an all-equity approach,” said Mr Cheah.
- “For myself, I would want to have a spread of money in cash, tangible assets like gold, and equities spread across different classes and geographic regions. No one can predict with any certainty what the world will be like two to three years from now.”
- I believe it should be in China-related stocks. I look at the map of the world and I’m unable to find any other major equity market that excites me or fills me with hope. This is a market I know very well: I have devoted 20 years of my life to it.”
- And among the important things that he is sure of, it is that the renminbi is going to resume its rise.
- In the longer-term, China has to reinvent is economy from being export-dependent to being underpinned by domestic demand. The country’s policy direction is pushing China banks to lend out more money, which could sow the seeds of bad loans in two or three years from now, according to Mr Cheah.
- “In the last couple of years, we have done about 2,000 company visits a year – excluding phone calls. We have done this in good and bad times. We have 18 full-time professionals, whose average age is in the early 30s. As far as I know, we do more company visits than any China team in the world.”
- Value Partners deems itself to be a value investor seeking stocks with low price-earnings ratios and high dividend yields of at least five per cent. Whichever industry it finds such stocks, it will buy them.
- “We don’t limit our stock picks to any industry. Our job is to buy the 3Rs – the right business run by the right people and selling at the right price. At the moment we are finding the 3Rs in a broad spectrum of businesses across China.”
- “As a former journalist, I had an advantage over people who were purely financial people. I learnt to put events in a historical, political and social context. Many people with CFAs or MBAs are narrow in that they tend to interpret reality through quantitative and statistical analysis.”
- If there’s one area he hasn’t quite succeeded in, it’s learning Mandarin. “My Mandarin is no good. I have a vocabulary of probably only 2,000 words. I took tuition but have seldom stayed more four or six months in any particular class before dropping out.
- For his part, Mr Cheah said that unlike most people who sought to make as much money as possible, he “had always come from the opposite angle - that you must be passionate about what you do and be very good in it. The money will come naturally.”
http://mystockfolio.blogspot.com/2009/12/cheah-cheng-hye-warren-buffett-of-east.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MyMalaysiaStockfolio+%28My+Malaysia+Stockfolio%29
Does Everyone Lose in a Crash?
Does Everyone Lose in a Crash?
It’s quite common to hear someone grumbling about how much money they lost on a stock, but did you ever stop to think where that money went?
Contrary to popular opinion, that money is far from lost. In fact, that money was won by a professional trader who profited from the stock’s decline! Sophisticated traders such as these are called the “smart money” because they profit regardless if the market is crashing or booming. The smart money wins most of the money lost by the “dumb money”, or the “average joe” amateur investor. By learning how to trade like the smart money, you can profit tremendously in any type of market. Let’s learn the differences between the two types of traders:
According to the National American Securities Administrators Association, more than 70% of traders will lose nearly all their money! This is solid proof that the majority of traders and investors are dumb money.
What is the Dumb Money Doing Wrong?
First and foremost, the dumb money act as a herd or mob. This group exhibits very little individual decision making. This is exemplified by how the herd follows the financial news so religiously. The financial news is a severe lagging indicator. This is because reporters only report after the fact. It is so silly that people actually think they will gain knowledge that will allow them to have “the edge” in the markets. This isn’t possible because millions of other competing investors are watching the same news! The news is notoriously bullish right before a bear market and bearish right before the market starts soaring.
http://www.stock-market-crash.net/zero-sum.htm
It’s quite common to hear someone grumbling about how much money they lost on a stock, but did you ever stop to think where that money went?
Contrary to popular opinion, that money is far from lost. In fact, that money was won by a professional trader who profited from the stock’s decline! Sophisticated traders such as these are called the “smart money” because they profit regardless if the market is crashing or booming. The smart money wins most of the money lost by the “dumb money”, or the “average joe” amateur investor. By learning how to trade like the smart money, you can profit tremendously in any type of market. Let’s learn the differences between the two types of traders:
According to the National American Securities Administrators Association, more than 70% of traders will lose nearly all their money! This is solid proof that the majority of traders and investors are dumb money.
What is the Dumb Money Doing Wrong?
First and foremost, the dumb money act as a herd or mob. This group exhibits very little individual decision making. This is exemplified by how the herd follows the financial news so religiously. The financial news is a severe lagging indicator. This is because reporters only report after the fact. It is so silly that people actually think they will gain knowledge that will allow them to have “the edge” in the markets. This isn’t possible because millions of other competing investors are watching the same news! The news is notoriously bullish right before a bear market and bearish right before the market starts soaring.
http://www.stock-market-crash.net/zero-sum.htm
The Nikkei Bubble: Can a bear market last for 14 straight years?
The Nikkei Bubble
Can a bear market last for 14 straight years? Well, this is exactly what occurred in Japan, starting in 1991.
After World War II, Japan was devastated-several of its major cities were obliterated and its economy was virtually nonexistent. Due to much effort and hard work, the Japanese economy slowly began to stabilize and recover. Additionally, the United States helped Japan rebuild, and provided capital and military protection, as well. The value of military protection should not be overlooked, as this is usually the highest expense of any government. This benefit allowed the Japanese economy and government run more freely and efficiently.
Factories were quickly built and peasants became factory workers. Middle and upper class men became white collar workers, called salarymen. Salarymen and factory workers were offered lifetime employment. This caused salarymen to have fierce loyalty towards their employers. Most Japanese workers at the time were highly frugal, saving much of what they earned. Many companies merged together to become large industrial and banking conglomerates, called zaibatsu.
The zaibatsu gained their competitive edge by copying and improving Western products and selling them for much cheaper. The cheaper products won Western customers and started to hurt US companies. Tremendous economic growth occurred allowing the zaibatsu to evolve into even larger business alliances, called keiretsu. The keiretsu philosophy was one of cooperation, where all facets of business and government worked hand in hand. As the Japanese stock market soared, the keiretsu purchased each other’s shares.
http://www.stock-market-crash.net/nikkei.htm
Can a bear market last for 14 straight years? Well, this is exactly what occurred in Japan, starting in 1991.
After World War II, Japan was devastated-several of its major cities were obliterated and its economy was virtually nonexistent. Due to much effort and hard work, the Japanese economy slowly began to stabilize and recover. Additionally, the United States helped Japan rebuild, and provided capital and military protection, as well. The value of military protection should not be overlooked, as this is usually the highest expense of any government. This benefit allowed the Japanese economy and government run more freely and efficiently.
Factories were quickly built and peasants became factory workers. Middle and upper class men became white collar workers, called salarymen. Salarymen and factory workers were offered lifetime employment. This caused salarymen to have fierce loyalty towards their employers. Most Japanese workers at the time were highly frugal, saving much of what they earned. Many companies merged together to become large industrial and banking conglomerates, called zaibatsu.
The zaibatsu gained their competitive edge by copying and improving Western products and selling them for much cheaper. The cheaper products won Western customers and started to hurt US companies. Tremendous economic growth occurred allowing the zaibatsu to evolve into even larger business alliances, called keiretsu. The keiretsu philosophy was one of cooperation, where all facets of business and government worked hand in hand. As the Japanese stock market soared, the keiretsu purchased each other’s shares.
http://www.stock-market-crash.net/nikkei.htm
Meaningful Position Sizing
Meaningful Position Sizing
‘Risk no more than you can afford to lose and also risk enough so that a win is meaningful.’
Don't carry large positions which you cannot afford. Sell down until you can sleep better.
It is sensible not to put all your eggs in one basket. The reverse is also true: as a general rule, you should not diversify too much either. Keep your position sizes meaningful.
Sticking to fewer stocks and spending more time on the selection process will increase your discipline and your focus. Some of the advantages are:
- You don’t lose focus.
- The fewer positions force you to be disciplined and do your homework.
- You are forced to focus on the better fundamental stocks with potentials.
- You have no excuses for monitoring your stocks.
- If there are two stocks you could choose from go with the better one.
Debt and Leverage: Financial weapon of mass destruction
When Genius Failed
By Roger Lowenstein
When Genius Failed, by Roger Lowenstein, is the detailed history of the rise and tragic fall of Long-Term Capital Management (LTCM).LTCM was a hedge fund that brought the financial world to its knees when it lost $4 billion trading exotic derivatives.
In its heyday, LTCM was run almost entirely by PhD’s and other extremely high level academics-the best and brightest on Wall Street. Several of its members were Nobel economists- Myron Scholes and Robert Merton. These academics relied heavily upon statistical modeling to discover how markets behave. At first, these models performed beautifully and the fund was up over 30% each year for several years.
Many Wall Street banks became investors as they considered Long-Term to be making riskless profits! Of course this is foolhardy, but blind faith was bestowed upon LTCM because of the pedigree of its creators.
Roger Lowenstein explains how Long-Term became arrogant due to its success and eventually leveraged $4 billion into $100 billion in assets. This $100 billion became collateral for $1.2 trillion in derivatives exposure! With this kind of financial leverage even the most minute market move against you can wipe you out several times over. Talk about financial weapons of mass destruction! This risk did not deter Long-Term, though.
Finally in 1998, Russia defaulted on its bonds- many of which Long-Term owned. This default stirred up the world’s financial markets in a way that caused many additional losing trades for Long-Term.
By the spring of 1998, LTCM was losing several hundred million dollars per day. What did LTCM’s brilliant financial models say about all of this? The models recommended waiting out the storm.
By August 1998, LTCM had burned through almost all of its $4 billion in capital. At this point LTCM tried to exit its trades, but found it impossible, as traders all over the world were trying to exit as well.
With $1.2 trillion dollars at risk, the economy could have been devastated if LTCM’s losses continued to run its course. After much discussion, the Federal Reserve and Wall Street’s largest investment banks decided to rescue Long-Term. The banks ended up losing several hundred million dollars each.
What became of Long-Terms founders? Were they jailed or banned from the financial world? No. They went on to start another hedge fund!
http://www.stock-market-crash.net/book/genius.htm
Also read:
http://practical-ta.blogspot.com/?expref=next-blog
http://findarticles.com/p/articles/mi_m1316/is_9_32/ai_65160621/
By Roger Lowenstein
In its heyday, LTCM was run almost entirely by PhD’s and other extremely high level academics-the best and brightest on Wall Street. Several of its members were Nobel economists- Myron Scholes and Robert Merton. These academics relied heavily upon statistical modeling to discover how markets behave. At first, these models performed beautifully and the fund was up over 30% each year for several years.
Many Wall Street banks became investors as they considered Long-Term to be making riskless profits! Of course this is foolhardy, but blind faith was bestowed upon LTCM because of the pedigree of its creators.
Roger Lowenstein explains how Long-Term became arrogant due to its success and eventually leveraged $4 billion into $100 billion in assets. This $100 billion became collateral for $1.2 trillion in derivatives exposure! With this kind of financial leverage even the most minute market move against you can wipe you out several times over. Talk about financial weapons of mass destruction! This risk did not deter Long-Term, though.
Finally in 1998, Russia defaulted on its bonds- many of which Long-Term owned. This default stirred up the world’s financial markets in a way that caused many additional losing trades for Long-Term.
By the spring of 1998, LTCM was losing several hundred million dollars per day. What did LTCM’s brilliant financial models say about all of this? The models recommended waiting out the storm.
By August 1998, LTCM had burned through almost all of its $4 billion in capital. At this point LTCM tried to exit its trades, but found it impossible, as traders all over the world were trying to exit as well.
With $1.2 trillion dollars at risk, the economy could have been devastated if LTCM’s losses continued to run its course. After much discussion, the Federal Reserve and Wall Street’s largest investment banks decided to rescue Long-Term. The banks ended up losing several hundred million dollars each.
What became of Long-Terms founders? Were they jailed or banned from the financial world? No. They went on to start another hedge fund!
http://www.stock-market-crash.net/book/genius.htm
Also read:
http://practical-ta.blogspot.com/?expref=next-blog
http://findarticles.com/p/articles/mi_m1316/is_9_32/ai_65160621/
Sunday, 20 December 2009
Why shares beat property
Why shares beat property
How many realise that shares remain ahead of property over the past quarter century?
Ian Cowie
Published: 7:42AM GMT 18 Dec 2009
Short of a miraculous surge in the stock market, the end of this month will mark the close of a dismal decade for shares.
Most investors know that the FTSE 100 has never revisited the peak of 6,930 it briefly hit on December 30 1999. But how many realise that shares remain ahead of property over the past quarter century?
Yes, you may very well stretch your eyes. I did, too, when Andrew Bell, head of research at Rensburg Sheppards Investment Managers, first told me.
I was almost as surprised when his graceful consultant, Jain Castiau, talked me into taking a dawn dip with her in the near-freezing waters of the Serpentine this week. At least it wasn't snowing at the time but, hey, that's another story.
Back to the statistics. The comparison, as you can see from the graph on this page, is based on the Halifax house price index and the FTSE 100 total returns index; both being the best-known benchmarks for their respective assets.
Or nearly. Because, as sharp-eyed readers will already have noticed, this version of the Footsie is the "total returns" version. In other words, it includes dividend income.
That is an important difference from the most widely quoted form of the Footsie which, for the purposes of simplicity, only measures changes in capital value or share prices, excluding dividends.
That goes a long way toward explaining why so many people underestimate the value of shares and share-based funds as a means of storing wealth.
Dividends are an important part of the total returns from most shares, but they are completely excluded from the simple snapshots of changes in capital values that form the basis of most television and tabloid stock market analysis.
No wonder the figures look so bad because they are so wrong.
Even after this year's splendid stock market rally, the Footsie is still yielding a shade under 3.4pc. That is, dividends expressed as a percentage of share prices averaged across the 100 stocks in this benchmark index.
So, for example, even if share prices remained frozen for 20 years, you would double your money in less than that time simply by reinvesting dividend income.
Bear in mind that income paid by equities is quoted net of basic rate tax – so most investors would need gross returns of 4.25pc and high earners would need 5.6pc to match the yield on the Footsie.
Few bank or building society deposits pay that much income – although, unlike shares, they do provide a capital guarantee. Bonds and bond funds often pay more – although, unlike shares, fixed interest securities are very vulnerable to inflation.
All things considered, it is daft to ignore dividend income when measuring returns from shares. For starters, the full picture demolishes the cliche of a ''lost decade for shareholders''.
What's that I hear you say? When comparing housing and shares it would be totally unfair to include income from one asset, but not the other. Too true. Mr Bell was scrupulously fair and has factored into his calculation a 5pc rental yield on property, less 1pc maintenance costs.
That's even fairer to bricks and mortar than it sounds because the Investment Property Databank UK Residential Index is currently yielding only 3.2pc gross and, of course, it is much easier to reinvest relatively small sums of income in shares than it is to buy tiny bits of houses.
Needless to say, the total returns from any asset would be much lower if you failed to promptly reinvest income because the compounding effect, so marked over long periods of time, would be absent.
Against all that, it just doesn't feel right to say shares have proved a better bet than bricks and mortar over the past quarter century.
Most shareholders are also homeowners and, while equities have delivered higher returns than most media coverage would suggest, I would hazard the guess that bricks and mortar have contributed more to the total wealth of the majority of homeowners than equities did.
The explanation is gearing. Until recently, almost anyone could fill in a few forms and borrow 100pc of their investment in housing. Such easy credit has never been available for shares.
And, of course, stock-market profits are generally subject to capital gains tax – unless you obtain them via an individual savings account or pension – whereas gains on your home are always CGT-free.
Even so, Mr Bell's comparison remains surprising and encouraging at a time when so much analysis of the stock market is merely depressing.
And it is always true – as I recalled while splashing through the gelid lake in Hyde Park this week – that the more you look, the more you see.
http://www.telegraph.co.uk/finance/personalfinance/comment/iancowie/6836526/Why-shares-beat-property.html
How many realise that shares remain ahead of property over the past quarter century?
Ian Cowie
Published: 7:42AM GMT 18 Dec 2009
Short of a miraculous surge in the stock market, the end of this month will mark the close of a dismal decade for shares.
Most investors know that the FTSE 100 has never revisited the peak of 6,930 it briefly hit on December 30 1999. But how many realise that shares remain ahead of property over the past quarter century?
Yes, you may very well stretch your eyes. I did, too, when Andrew Bell, head of research at Rensburg Sheppards Investment Managers, first told me.
I was almost as surprised when his graceful consultant, Jain Castiau, talked me into taking a dawn dip with her in the near-freezing waters of the Serpentine this week. At least it wasn't snowing at the time but, hey, that's another story.
Back to the statistics. The comparison, as you can see from the graph on this page, is based on the Halifax house price index and the FTSE 100 total returns index; both being the best-known benchmarks for their respective assets.
Or nearly. Because, as sharp-eyed readers will already have noticed, this version of the Footsie is the "total returns" version. In other words, it includes dividend income.
That is an important difference from the most widely quoted form of the Footsie which, for the purposes of simplicity, only measures changes in capital value or share prices, excluding dividends.
That goes a long way toward explaining why so many people underestimate the value of shares and share-based funds as a means of storing wealth.
Dividends are an important part of the total returns from most shares, but they are completely excluded from the simple snapshots of changes in capital values that form the basis of most television and tabloid stock market analysis.
No wonder the figures look so bad because they are so wrong.
Even after this year's splendid stock market rally, the Footsie is still yielding a shade under 3.4pc. That is, dividends expressed as a percentage of share prices averaged across the 100 stocks in this benchmark index.
So, for example, even if share prices remained frozen for 20 years, you would double your money in less than that time simply by reinvesting dividend income.
Bear in mind that income paid by equities is quoted net of basic rate tax – so most investors would need gross returns of 4.25pc and high earners would need 5.6pc to match the yield on the Footsie.
Few bank or building society deposits pay that much income – although, unlike shares, they do provide a capital guarantee. Bonds and bond funds often pay more – although, unlike shares, fixed interest securities are very vulnerable to inflation.
All things considered, it is daft to ignore dividend income when measuring returns from shares. For starters, the full picture demolishes the cliche of a ''lost decade for shareholders''.
What's that I hear you say? When comparing housing and shares it would be totally unfair to include income from one asset, but not the other. Too true. Mr Bell was scrupulously fair and has factored into his calculation a 5pc rental yield on property, less 1pc maintenance costs.
That's even fairer to bricks and mortar than it sounds because the Investment Property Databank UK Residential Index is currently yielding only 3.2pc gross and, of course, it is much easier to reinvest relatively small sums of income in shares than it is to buy tiny bits of houses.
Needless to say, the total returns from any asset would be much lower if you failed to promptly reinvest income because the compounding effect, so marked over long periods of time, would be absent.
Against all that, it just doesn't feel right to say shares have proved a better bet than bricks and mortar over the past quarter century.
Most shareholders are also homeowners and, while equities have delivered higher returns than most media coverage would suggest, I would hazard the guess that bricks and mortar have contributed more to the total wealth of the majority of homeowners than equities did.
The explanation is gearing. Until recently, almost anyone could fill in a few forms and borrow 100pc of their investment in housing. Such easy credit has never been available for shares.
And, of course, stock-market profits are generally subject to capital gains tax – unless you obtain them via an individual savings account or pension – whereas gains on your home are always CGT-free.
Even so, Mr Bell's comparison remains surprising and encouraging at a time when so much analysis of the stock market is merely depressing.
And it is always true – as I recalled while splashing through the gelid lake in Hyde Park this week – that the more you look, the more you see.
http://www.telegraph.co.uk/finance/personalfinance/comment/iancowie/6836526/Why-shares-beat-property.html
Volatility in Markets
Dollar carry trade, Dubai World or capital controls?
Tue Dec 1, 2009
By Nipun Mehta
In my last article on Dollar carry trade (on which innumerable interesting reader responses were received – Thank you), we concluded that the carry trade was unlikely to reverse in a hurry unless the USD suddenly appreciated against the rupee or various major currencies, or interest rates in USA started rising fast.
In the interim Dubai World happened and once again there are concerns all round, partly justified. What if there are capital controls imposed by some Governments? How do all these contribute to global currency flows or create uncertainty in say the Indian equity markets?
It is important to reiterate here that it is these external factors which are creating sharp volatility in emerging markets or specifically the Indian capital markets.
This is because fundamentally all these economies, particularly India, are internally strong enough to sustain reasonable growth through domestic consumption growth.
Firstly, events like the carry trade and Dubai World create sharp currency volatility which can actually leave global businesses vulnerable.
Secondly, if a large industry like the Dubai real estate can collapse, it can have its repercussions on the Paint industry, the Cement industry, the tile industry, on Indian and global turnkey project companies who had the Dubai exposure and who could face working capital pressures, and of course on raising unemployment there.
Thirdly, local Banks in Dubai can lose credibility since in recent times many of them had been issuing Bonds at high interest rates and may just end up in serious payment delays/ defaults. Any leverage created against such Bonds will start facing Margin calls, another bad memory of the 2008 days when leveraged Bond investments were sold at huge losses due to investor inability to pay margin calls. Surely there will be some Banks who could face some losses on such lending.
What about capital controls? Central Banks in the past have imposed capital controls on entry or exit of foreign capital, particularly hot money flows. Is that a possibility today?
Well not in India where forex reserves appear to be reasonably comfortable though they will get affected by potentially lower flows from NRIs in Gulf States. However such a possibility cannot be ruled out for fundamentally weaker economies with more vulnerable forex reserves.
Some European Governments have been known to impose restrictions on local funded Banks for lending to domestic auto majors for their expansion plans in other countries.
Can all this have a material impact on Indian corporates? For one, some Indian companies and Banks do have a marginal exposure to Dubai. It will give them a reason to make provisions for the December and March quarter.
Earnings of select companies in industries listed above could settle for some write offs. The ripple effect could be there, the fallout, minimal.
Effectively, neither of the above yet appears to be an immediate serious threat to any specific emerging market or to the Indian equity markets. What they will surely create is greater unpredictability, instability and volatility. Equity markets going forward may not be for the weak hearted, but were they ever supposed to be?
http://in.reuters.com/article/economicNews/idINIndia-44370620091201?sp=true
Tue Dec 1, 2009
By Nipun Mehta
In my last article on Dollar carry trade (on which innumerable interesting reader responses were received – Thank you), we concluded that the carry trade was unlikely to reverse in a hurry unless the USD suddenly appreciated against the rupee or various major currencies, or interest rates in USA started rising fast.
In the interim Dubai World happened and once again there are concerns all round, partly justified. What if there are capital controls imposed by some Governments? How do all these contribute to global currency flows or create uncertainty in say the Indian equity markets?
It is important to reiterate here that it is these external factors which are creating sharp volatility in emerging markets or specifically the Indian capital markets.
This is because fundamentally all these economies, particularly India, are internally strong enough to sustain reasonable growth through domestic consumption growth.
Firstly, events like the carry trade and Dubai World create sharp currency volatility which can actually leave global businesses vulnerable.
Secondly, if a large industry like the Dubai real estate can collapse, it can have its repercussions on the Paint industry, the Cement industry, the tile industry, on Indian and global turnkey project companies who had the Dubai exposure and who could face working capital pressures, and of course on raising unemployment there.
Thirdly, local Banks in Dubai can lose credibility since in recent times many of them had been issuing Bonds at high interest rates and may just end up in serious payment delays/ defaults. Any leverage created against such Bonds will start facing Margin calls, another bad memory of the 2008 days when leveraged Bond investments were sold at huge losses due to investor inability to pay margin calls. Surely there will be some Banks who could face some losses on such lending.
What about capital controls? Central Banks in the past have imposed capital controls on entry or exit of foreign capital, particularly hot money flows. Is that a possibility today?
Well not in India where forex reserves appear to be reasonably comfortable though they will get affected by potentially lower flows from NRIs in Gulf States. However such a possibility cannot be ruled out for fundamentally weaker economies with more vulnerable forex reserves.
Some European Governments have been known to impose restrictions on local funded Banks for lending to domestic auto majors for their expansion plans in other countries.
Can all this have a material impact on Indian corporates? For one, some Indian companies and Banks do have a marginal exposure to Dubai. It will give them a reason to make provisions for the December and March quarter.
Earnings of select companies in industries listed above could settle for some write offs. The ripple effect could be there, the fallout, minimal.
Effectively, neither of the above yet appears to be an immediate serious threat to any specific emerging market or to the Indian equity markets. What they will surely create is greater unpredictability, instability and volatility. Equity markets going forward may not be for the weak hearted, but were they ever supposed to be?
http://in.reuters.com/article/economicNews/idINIndia-44370620091201?sp=true
Saturday, 19 December 2009
Will Bad Money Drive Out Good in Chinese Private Equity?
Will Bad Money Drive Out Good in Chinese Private Equity?
November 30th, 2009
The financial rule first postulated by Sir Thomas Gresham 500 years ago famously holds that “bad money drives out good”. In other words, if two different currencies are circulating together, the “bad” one will be used more frequently. By “bad”, what Gresham meant was a currency of equal face value but lower real value than its competitor. A simple way to understand it: if you had two $100 bills in your wallet, and suspected one is counterfeit and the other genuine, you’d likely try to spend the counterfeit $100 bill first, hoping you can pass it off at its nominal value.
While it’s a bit of a stretch from Sir Thomas’s original precept, it’s possible to see a modified version of Gresham’s Law beginning to emerge in the private equity industry in China. How so? Money from some of “bad” PE investors may drive out money from “good” PE investors. If this happens, it could result in companies growing less strongly, less solidly and, ultimately, having less successful IPOs.
Good money belongs to the PE investors who have the experience, temperament, patience, connections, managerial knowledge and financial techniques to help a company after it receives investment. Bad money, on the other hand, comes from private equity and other investment firms that either cannot or will not do much to help the companies it invests in. Instead, it pushes for the earliest possible IPO.
Good money can be transformational for a company, putting it on a better pathway financially, operationally and strategically. We see it all the time in our work: a good PE investor will usually lift a company’s performance, and help implement long-term improvements. They do it by having operational experience of their own, running companies, and also knowing who to bring in to tighten up things like financial controls and inventory management.
You only need to look at some of China’s most successful private businesses, before and after they received pre-IPO PE finance, to see how effective this “good money” can be. Baidu, Suntech, Focus Media, Belle and a host of the other most successful fully-private companies on the stock market had pre-IPO PE investment. After the PE firms invested, up to the time of IPO, these companies showed significant improvements in operating and financial performance.
The problem the “good money” PEs face in China is that they are being squeezed out by other investors who will invest at higher valuations, more quickly and with less time and money spent on due diligence. All money spends the same, of course. So, from the perspective of many company bosses, these firms offering “bad money” have a lot going for them. They pay more, intrude less, demand little. Sure, they don’t have the experience or inclination to get involved improving a company’s operations. But, many bosses see that also as a plus. They are usually, rightly or wrongly, pretty sure of themselves and the direction they are moving. The “good money” PE firms can be seen as nosy and meddlesome. The “bad money” guys as trusting and fully-supportive.
Every week, new private equity companies are being formed to invest in China – with billions of renminbi in capital from government departments, banks, state-owned companies, rich individuals. “Stampede” isn’t too strong a word. The reason is simple: investing in private Chinese companies, ahead of their eventual IPOs, can be a very good way to make money. It also looks (deceptively) easy: you find a decent company, buy their shares at ten times this year’s earnings, hold for a few years while profits increase, and then sell your shares in an IPO on the Shanghai or Shenzhen stock markets for thirty times earnings.
The management of these firms often have very different backgrounds (and pay structures) than the partners at the global PE firms. Many are former stockbrokers or accountants, have never run companies, nor do they know what to do to turn around an investment that goes wrong. They do know how to ride a favorable wave – and that wave is China’s booming domestic economy, and high profit growth at lots of private Chinese companies.
Having both served on boards and run companies with outside directors and investors, I am a big believer in their importance. Having a smart, experienced, active, hands-on minority investor is often a real boon. In the best cases, the minority investors can more than make up for any value they extract (by driving a hard bargain when buying the shares) by introducing more rigorous financial controls, strategic planning and corporate governance. The best proof of this: private companies with pre-IPO investment from a “good money” PE firm tend to get higher valuations, and better underwriters, at the time of their initial public offering.
But, the precise dollar value of “good money” investment is hard to measure. It’s easy enough for a “bad money” PE firm to claim it’s very knowledgeable about the best way to structure the company ahead of an IPO. So, then it comes back to: who is willing to pay the highest price, act the quickest, do the most perfunctory due diligence and attach the fewest punitive terms (no ratchets or anti-dilution measures) in their investment contracts. In PE in China, bad money drives out the good, because it drives faster and looser.
http://bx.businessweek.com/investment-banking/view?url=http%3A%2F%2Fwww.chinafirstcapital.com%2Fblog%2F%3Fp%3D537
November 30th, 2009
The financial rule first postulated by Sir Thomas Gresham 500 years ago famously holds that “bad money drives out good”. In other words, if two different currencies are circulating together, the “bad” one will be used more frequently. By “bad”, what Gresham meant was a currency of equal face value but lower real value than its competitor. A simple way to understand it: if you had two $100 bills in your wallet, and suspected one is counterfeit and the other genuine, you’d likely try to spend the counterfeit $100 bill first, hoping you can pass it off at its nominal value.
While it’s a bit of a stretch from Sir Thomas’s original precept, it’s possible to see a modified version of Gresham’s Law beginning to emerge in the private equity industry in China. How so? Money from some of “bad” PE investors may drive out money from “good” PE investors. If this happens, it could result in companies growing less strongly, less solidly and, ultimately, having less successful IPOs.
Good money belongs to the PE investors who have the experience, temperament, patience, connections, managerial knowledge and financial techniques to help a company after it receives investment. Bad money, on the other hand, comes from private equity and other investment firms that either cannot or will not do much to help the companies it invests in. Instead, it pushes for the earliest possible IPO.
Good money can be transformational for a company, putting it on a better pathway financially, operationally and strategically. We see it all the time in our work: a good PE investor will usually lift a company’s performance, and help implement long-term improvements. They do it by having operational experience of their own, running companies, and also knowing who to bring in to tighten up things like financial controls and inventory management.
You only need to look at some of China’s most successful private businesses, before and after they received pre-IPO PE finance, to see how effective this “good money” can be. Baidu, Suntech, Focus Media, Belle and a host of the other most successful fully-private companies on the stock market had pre-IPO PE investment. After the PE firms invested, up to the time of IPO, these companies showed significant improvements in operating and financial performance.
The problem the “good money” PEs face in China is that they are being squeezed out by other investors who will invest at higher valuations, more quickly and with less time and money spent on due diligence. All money spends the same, of course. So, from the perspective of many company bosses, these firms offering “bad money” have a lot going for them. They pay more, intrude less, demand little. Sure, they don’t have the experience or inclination to get involved improving a company’s operations. But, many bosses see that also as a plus. They are usually, rightly or wrongly, pretty sure of themselves and the direction they are moving. The “good money” PE firms can be seen as nosy and meddlesome. The “bad money” guys as trusting and fully-supportive.
Every week, new private equity companies are being formed to invest in China – with billions of renminbi in capital from government departments, banks, state-owned companies, rich individuals. “Stampede” isn’t too strong a word. The reason is simple: investing in private Chinese companies, ahead of their eventual IPOs, can be a very good way to make money. It also looks (deceptively) easy: you find a decent company, buy their shares at ten times this year’s earnings, hold for a few years while profits increase, and then sell your shares in an IPO on the Shanghai or Shenzhen stock markets for thirty times earnings.
The management of these firms often have very different backgrounds (and pay structures) than the partners at the global PE firms. Many are former stockbrokers or accountants, have never run companies, nor do they know what to do to turn around an investment that goes wrong. They do know how to ride a favorable wave – and that wave is China’s booming domestic economy, and high profit growth at lots of private Chinese companies.
Having both served on boards and run companies with outside directors and investors, I am a big believer in their importance. Having a smart, experienced, active, hands-on minority investor is often a real boon. In the best cases, the minority investors can more than make up for any value they extract (by driving a hard bargain when buying the shares) by introducing more rigorous financial controls, strategic planning and corporate governance. The best proof of this: private companies with pre-IPO investment from a “good money” PE firm tend to get higher valuations, and better underwriters, at the time of their initial public offering.
But, the precise dollar value of “good money” investment is hard to measure. It’s easy enough for a “bad money” PE firm to claim it’s very knowledgeable about the best way to structure the company ahead of an IPO. So, then it comes back to: who is willing to pay the highest price, act the quickest, do the most perfunctory due diligence and attach the fewest punitive terms (no ratchets or anti-dilution measures) in their investment contracts. In PE in China, bad money drives out the good, because it drives faster and looser.
http://bx.businessweek.com/investment-banking/view?url=http%3A%2F%2Fwww.chinafirstcapital.com%2Fblog%2F%3Fp%3D537
Case Studies on Chinese SME Companies Damaged By Greed, Deception and Crooked Investment Banking
Built to Fail – Case Studies on Chinese SME Companies Damaged By Greed, Deception and Crooked Investment Banking
May 26th, 2009 Leave a comment Go to comments
My last post dealt with the often-unprincipled conduct of the advisors, bankers and lawyers who created many of the disaster stories among Chinese SME companies seeking a stock-market listing. It’s not a topic that will win me a lot of friends and admirers among the many advisors, lawyers, and investment banker-types still active, sadly, sponsoring OTCBB and reverse merger deals in China. In my experience, they tend to put the blame elsewhere, most often on Chinese bosses who (in their view) were blinded by the prospect of quick riches and so readily agreed to these often-horrible transactions.
There’s some truth to this, of course. But, it’s a little like a burglar blaming his victim for leaving a second-story window unlocked. Culpability – legal and moral – rests with those who are profiting most from these bad IPO deals. That’s the advisers, bankers and lawyers. They are the ones getting rich on these deals that, too often, leave the Chinese company broken beyond repair.
The bad IPO deals are numerous, and depressingly similar. I don’t make any effort to keep tabs on this activity. I usually only learn specifics if I happen to meet a Chinese SME boss who has had his company crippled by doing an OTCBB listing or reverse merger, or an SME that is in the process of doing a deal like this.
Here are a few “case studies” from among the companies I’ve met. They make for depressing reading. I’m omitting the names of the companies and their advisers. The investment bankers on these deals deserve to be publicly shamed (if not flogged) for what they’ve done. But, the stories here are typical of many more involving crooked investment bankers and advisers working with Chinese SME. The story lines are sadly, very familiar.
COMPANY 1
A Guangdong electrical appliance company, with 1,500 employees, had 2008 revenues of $52mn, and net profit of $4mn, did a “reverse merger” in 2007 and then listed its shares on the OTCBB. Despite the company’s good performance (revenues and profits grew following the IPO), the share price fell by 90% from $4.75 to under 5 cents. At the IPO, the “investment advisors” sold their shares. The company also raised some cash, about $8mn in all. But, quickly, the share price started to fall, and the market capitalization fell from high of $300mn to under $4mn. The company’s management didn’t have a clue how to manage a US publicly-traded company (none spoke English, for one thing), and so started making regulatory mistakes and had other problems with filing SEC documents. The company’s management, still with much of the $8mn raised in the IPO in its corporate bank account, then started selling personal assets at wildly inflated prices to the company, and so used these related party transactions to take most of the remaining cash from the business into their pockets. No surprise, the company’s auditors discovered problems during its annual SEC audit, and then resigned.
The company’s share price is so low it triggered the “penny stock” rules in the US, which limit the number of investors who are allowed to buy the shares.
COMPANY 2
An agricultural products company with $73 million in 2008 revenues chose to do a “reverse merger” in the US, to complete a fast IPO early in 2009. The company got the idea for this reverse merge from an investment adviser in China who promised to raise $10 million of new capital as part of the reverse merger. The agricultural products company believed the promise, and spent over $1 million to buy the listed US shell company, including high fees to US lawyers, accountants and advisers.
After buying the shell and spending the money, the company learned that the advisor had failed to raise any new capital. The company now has the worst possible situation: a listing on the OTCBB, with no new capital to expand its business, a steadily falling share price, and annual costs of being listed on the OTCBB of over $500,000 a year. At this point, no new investor is likely to invest in the company, because it already has a public listing, and a very low share price.
Because of this reverse merger, the company’s financial situation is now much worse than it was in 2008, and the company’s founder effectively now has no options to finance the expansion of his business which, up until the time of this reverse merger, was thriving.
COMPANY 3
In 2008, an outstanding Guangdong SME manufacturing company signed an agreement with a Guangdong “investment advisor” and a small US securities company that specializes in doing “Form 10 Listings” of Chinese SME on the OTCBB. They told the company’s boss they were a “Private Equity firm”. The investment advisor and the US securities company were working in concert to take as much money from this company as possible. Their contract with the company gave them payments of over $1.5 million in cash for raising $6mn for the company, a fee of 17%, and warrants equal to over 20% of the company’s shares. The $6mn would come from the securities company itself, so it could claw back a decent chunk of that in capital-raising fees, and also grab a huge slug of the equity through warrants.
The securities company quickly scheduled a “Form 10” IPO for summer of 2008, and arranged it so the shares to be sold would be the warrants owned by this securities company and the Chinese investment advisor. So, according to this scheme, the Chinese SME would have received no money from the IPO, and all the money (approximately $10 million) would have gone direct to the securities company and the advisor.
The securities company deliberately misled the SME founder into thinking his shares would IPO on NASDAQ. Further, they gave the founder false information about the post-IPO performance of the other Chinese SME they had listed through “Form 10 Listings” on the OTCBB. Most had immediately tanked after IPO.
In this case, the worst did not happen. I had met the boss a few months earlier, through a local bank in Shenzhen, and liked him immediately. Before the IPO process got underway, I offered him my help to get out of this potentially terrible transaction. This was before I’d set up China First Capital, so the offer really was one of friendship, not to earn a buck. I promised him if he could get out of the IPO plan, I’d raise him money at a much higher valuation from one of the best PE firms in China.
The boss was able to cancel the IPO plan, and I started China First Capital with the first goal of fulfilling my promise to this boss. CFC quickly raised the company $10mn in private equity from one of the top PE companies , and the valuation was over twice the planned IPO valuation from the “investment advisor” and the securities company. This SME used the $10mn in pre-IPO capital to build a new factory to fill customer orders. 2009 profits will double from 2008. The company is on path to an IPO in 2011, and at that time, the valuation of the company will likely be over $300mn, +7X higher than at the time of PE investment.
http://bx.businessweek.com/investment-banking/view?url=http%3A%2F%2Fwww.chinafirstcapital.com%2Fblog%2F%3Fp%3D537
May 26th, 2009 Leave a comment Go to comments
My last post dealt with the often-unprincipled conduct of the advisors, bankers and lawyers who created many of the disaster stories among Chinese SME companies seeking a stock-market listing. It’s not a topic that will win me a lot of friends and admirers among the many advisors, lawyers, and investment banker-types still active, sadly, sponsoring OTCBB and reverse merger deals in China. In my experience, they tend to put the blame elsewhere, most often on Chinese bosses who (in their view) were blinded by the prospect of quick riches and so readily agreed to these often-horrible transactions.
There’s some truth to this, of course. But, it’s a little like a burglar blaming his victim for leaving a second-story window unlocked. Culpability – legal and moral – rests with those who are profiting most from these bad IPO deals. That’s the advisers, bankers and lawyers. They are the ones getting rich on these deals that, too often, leave the Chinese company broken beyond repair.
The bad IPO deals are numerous, and depressingly similar. I don’t make any effort to keep tabs on this activity. I usually only learn specifics if I happen to meet a Chinese SME boss who has had his company crippled by doing an OTCBB listing or reverse merger, or an SME that is in the process of doing a deal like this.
Here are a few “case studies” from among the companies I’ve met. They make for depressing reading. I’m omitting the names of the companies and their advisers. The investment bankers on these deals deserve to be publicly shamed (if not flogged) for what they’ve done. But, the stories here are typical of many more involving crooked investment bankers and advisers working with Chinese SME. The story lines are sadly, very familiar.
COMPANY 1
A Guangdong electrical appliance company, with 1,500 employees, had 2008 revenues of $52mn, and net profit of $4mn, did a “reverse merger” in 2007 and then listed its shares on the OTCBB. Despite the company’s good performance (revenues and profits grew following the IPO), the share price fell by 90% from $4.75 to under 5 cents. At the IPO, the “investment advisors” sold their shares. The company also raised some cash, about $8mn in all. But, quickly, the share price started to fall, and the market capitalization fell from high of $300mn to under $4mn. The company’s management didn’t have a clue how to manage a US publicly-traded company (none spoke English, for one thing), and so started making regulatory mistakes and had other problems with filing SEC documents. The company’s management, still with much of the $8mn raised in the IPO in its corporate bank account, then started selling personal assets at wildly inflated prices to the company, and so used these related party transactions to take most of the remaining cash from the business into their pockets. No surprise, the company’s auditors discovered problems during its annual SEC audit, and then resigned.
The company’s share price is so low it triggered the “penny stock” rules in the US, which limit the number of investors who are allowed to buy the shares.
COMPANY 2
An agricultural products company with $73 million in 2008 revenues chose to do a “reverse merger” in the US, to complete a fast IPO early in 2009. The company got the idea for this reverse merge from an investment adviser in China who promised to raise $10 million of new capital as part of the reverse merger. The agricultural products company believed the promise, and spent over $1 million to buy the listed US shell company, including high fees to US lawyers, accountants and advisers.
After buying the shell and spending the money, the company learned that the advisor had failed to raise any new capital. The company now has the worst possible situation: a listing on the OTCBB, with no new capital to expand its business, a steadily falling share price, and annual costs of being listed on the OTCBB of over $500,000 a year. At this point, no new investor is likely to invest in the company, because it already has a public listing, and a very low share price.
Because of this reverse merger, the company’s financial situation is now much worse than it was in 2008, and the company’s founder effectively now has no options to finance the expansion of his business which, up until the time of this reverse merger, was thriving.
COMPANY 3
In 2008, an outstanding Guangdong SME manufacturing company signed an agreement with a Guangdong “investment advisor” and a small US securities company that specializes in doing “Form 10 Listings” of Chinese SME on the OTCBB. They told the company’s boss they were a “Private Equity firm”. The investment advisor and the US securities company were working in concert to take as much money from this company as possible. Their contract with the company gave them payments of over $1.5 million in cash for raising $6mn for the company, a fee of 17%, and warrants equal to over 20% of the company’s shares. The $6mn would come from the securities company itself, so it could claw back a decent chunk of that in capital-raising fees, and also grab a huge slug of the equity through warrants.
The securities company quickly scheduled a “Form 10” IPO for summer of 2008, and arranged it so the shares to be sold would be the warrants owned by this securities company and the Chinese investment advisor. So, according to this scheme, the Chinese SME would have received no money from the IPO, and all the money (approximately $10 million) would have gone direct to the securities company and the advisor.
The securities company deliberately misled the SME founder into thinking his shares would IPO on NASDAQ. Further, they gave the founder false information about the post-IPO performance of the other Chinese SME they had listed through “Form 10 Listings” on the OTCBB. Most had immediately tanked after IPO.
In this case, the worst did not happen. I had met the boss a few months earlier, through a local bank in Shenzhen, and liked him immediately. Before the IPO process got underway, I offered him my help to get out of this potentially terrible transaction. This was before I’d set up China First Capital, so the offer really was one of friendship, not to earn a buck. I promised him if he could get out of the IPO plan, I’d raise him money at a much higher valuation from one of the best PE firms in China.
The boss was able to cancel the IPO plan, and I started China First Capital with the first goal of fulfilling my promise to this boss. CFC quickly raised the company $10mn in private equity from one of the top PE companies , and the valuation was over twice the planned IPO valuation from the “investment advisor” and the securities company. This SME used the $10mn in pre-IPO capital to build a new factory to fill customer orders. 2009 profits will double from 2008. The company is on path to an IPO in 2011, and at that time, the valuation of the company will likely be over $300mn, +7X higher than at the time of PE investment.
http://bx.businessweek.com/investment-banking/view?url=http%3A%2F%2Fwww.chinafirstcapital.com%2Fblog%2F%3Fp%3D537
Are We Headed for a Third Bubble?
Published May 12, 2009
Are We Headed for a Third Bubble?
Laughter causes mirth, not the other way around, theorized psychologist William James (brother of novelist Henry) some 125 years ago. Today, practitioners of laughter therapy feign chuckling to induce happiness. Professor Charles Schaefer of Farleigh Dickinson University in Teaneck, N.J., made a study of the matter in 2002. Students he asked to “laugh hilariously for one minute” reported sharp improvements in mood, while those who smiled were less affected and those who howled like wolves were unmoved.
Could U.S. stocks be engaged in a version of laughter therapy at the moment? Monday’s decline notwithstanding, they’ve soared in recent weeks, erasing a 25% drop suffered earlier in the year, even while good news is scarce. The economy is shrinking and its number of unemployed is swelling, if at a slower pace than in prior months. Plenty of companies have beaten earnings forecasts but few have beaten on sales, suggesting slashed costs, not growth.
A bull would say stocks often rise before economic measures improve, since traders are quicker than government statisticians. A bear would point to the several false rallies of the Great Depression, when stocks rose more than 20% only to plunge afterward to new lows. But perhaps this rally is a fake one on its way to becoming real, if not enduring, growth. After all, an unwarranted rise in share prices, if it lasts long enough, puffs up investors’ buying power and sends them to stores. Companies cash in and the economy expands.
That’s arguably what happened during the bubbly stock market of the late 1990s. A slashing of core interest rates earlier in the decade produced a brief spurt of economic growth in 1994, but it subsided the following year. Then stocks turned remarkably generous. Over five years ended 1999, S&P 500 returns ranged from 21% to 38% a year. As share prices rose, growth in consumer spending and gross domestic product accelerated. Stock gains begat growth, not the other way around.
Share prices plunged over the next three years, but consumers kept shopping as house prices jumped 35%, aided by policy makers again slashing core interest rates. Stock returns turned positive again in 2003 and a second bubble ensued, this one shared by stocks and houses. Corporate profits rose from 5.4% of gross domestic income in 2003 to 7% by 2006. Rising shares helped make companies more profitable, not the other way around.
In both cases stock prices eventually collapsed, and if this rally grows into a third bubble it will surely end badly, too. If the first two bubbles were brought on by low core interest rates, conditions for a new one are ideal. The core rate is almost zero, a record. But one difference between bubbles No. 1 and 2 suggests economic growth this time will stop well short of past peaks. During the late 1990s, Americans maintained a respectable level of personal savings. In the latest bubble, savings rates turned negative. If the first time around consumers spent stock profits and the last time they had to go well beyond profits to spend debt, a third bubble might depend on the ability of banks to finance it. With losses in commercial property loans and credit cards still likely to worsen, that seems unlikely.
The recent rally has favored economically sensitive companies—ones whose profits rise quickly as the economy grows. Investors who expect the rally to fizzle ought to swap these for shares of companies whose products sell steadily no matter what. Favor modest valuations and big, safe dividends. Both are still abundant, fortunately. Also, keep ready a generous stash of cash.
http://bx.businessweek.com/investment-banking/view?url=http%3A%2F%2Fwww.smartmoney.com%2Finvesting%2Fstocks%2Fare-we-headed-for-a-third-bubble%2F%3Fcid%3D1122
Are We Headed for a Third Bubble?
Laughter causes mirth, not the other way around, theorized psychologist William James (brother of novelist Henry) some 125 years ago. Today, practitioners of laughter therapy feign chuckling to induce happiness. Professor Charles Schaefer of Farleigh Dickinson University in Teaneck, N.J., made a study of the matter in 2002. Students he asked to “laugh hilariously for one minute” reported sharp improvements in mood, while those who smiled were less affected and those who howled like wolves were unmoved.
Could U.S. stocks be engaged in a version of laughter therapy at the moment? Monday’s decline notwithstanding, they’ve soared in recent weeks, erasing a 25% drop suffered earlier in the year, even while good news is scarce. The economy is shrinking and its number of unemployed is swelling, if at a slower pace than in prior months. Plenty of companies have beaten earnings forecasts but few have beaten on sales, suggesting slashed costs, not growth.
A bull would say stocks often rise before economic measures improve, since traders are quicker than government statisticians. A bear would point to the several false rallies of the Great Depression, when stocks rose more than 20% only to plunge afterward to new lows. But perhaps this rally is a fake one on its way to becoming real, if not enduring, growth. After all, an unwarranted rise in share prices, if it lasts long enough, puffs up investors’ buying power and sends them to stores. Companies cash in and the economy expands.
That’s arguably what happened during the bubbly stock market of the late 1990s. A slashing of core interest rates earlier in the decade produced a brief spurt of economic growth in 1994, but it subsided the following year. Then stocks turned remarkably generous. Over five years ended 1999, S&P 500 returns ranged from 21% to 38% a year. As share prices rose, growth in consumer spending and gross domestic product accelerated. Stock gains begat growth, not the other way around.
Share prices plunged over the next three years, but consumers kept shopping as house prices jumped 35%, aided by policy makers again slashing core interest rates. Stock returns turned positive again in 2003 and a second bubble ensued, this one shared by stocks and houses. Corporate profits rose from 5.4% of gross domestic income in 2003 to 7% by 2006. Rising shares helped make companies more profitable, not the other way around.
In both cases stock prices eventually collapsed, and if this rally grows into a third bubble it will surely end badly, too. If the first two bubbles were brought on by low core interest rates, conditions for a new one are ideal. The core rate is almost zero, a record. But one difference between bubbles No. 1 and 2 suggests economic growth this time will stop well short of past peaks. During the late 1990s, Americans maintained a respectable level of personal savings. In the latest bubble, savings rates turned negative. If the first time around consumers spent stock profits and the last time they had to go well beyond profits to spend debt, a third bubble might depend on the ability of banks to finance it. With losses in commercial property loans and credit cards still likely to worsen, that seems unlikely.
The recent rally has favored economically sensitive companies—ones whose profits rise quickly as the economy grows. Investors who expect the rally to fizzle ought to swap these for shares of companies whose products sell steadily no matter what. Favor modest valuations and big, safe dividends. Both are still abundant, fortunately. Also, keep ready a generous stash of cash.
http://bx.businessweek.com/investment-banking/view?url=http%3A%2F%2Fwww.smartmoney.com%2Finvesting%2Fstocks%2Fare-we-headed-for-a-third-bubble%2F%3Fcid%3D1122
High Frequency Trading (HFT): Wall Street's Latest Scam
High Frequency Trading (HFT): Wall Street's Latest Scam
Goldman Sachs and friends are hanging us out to dry with HFT
"It appears exchanges are conspiring with a privileged group of high-frequency traders in a massive fraud," Fund Manager Whitney Tilson.
Wall St, New York, USA, 17 August 2009. The new cream-skimming trick in Wall Street's playbook is called High Frequency Trading, or HFT.
It works like this: big trading banks invest in super-computers that can process information at every faster speeds, splitting nano-seconds into smaller and smaller units. These super-computers can process instructions faster than regular computers, and much faster than humans. Next, they place these super-computers in the exchanges themselves. This gives direct access to the exchange, cutting out the latency of connections from remote locations. By trading faster than smaller investors, profits can be constantly churned.
Institutional investors will often divide large purchases up into many small blocks that will be bought or sold within specified price ranges. HFT players seek to determine the price range by sending out quotes that are issued and almost immediately cancelled. They can execute thousands of such trades in a second. If they hit on a price in the acceptable price range, they can fulfil the order and then sell it on to the investor microseconds later for a tiny profit. Do this long enough and you can rack up impressive profits.
This is not an obscure phenomenon. Estimates say that 50 per cent to 70 per cent of traded volume on the NYSE is carried out by High Frequency Traders, or HFTs. That's right; high-speed gouging of retail investors and large institutions now makes up the bulk of trading. It has directly led to Goldman Sachs pulling in record profits, and recording 46 '$100 million' trading days, when the economy is dead and corporate M&A activity is at record lows. If you wondered how they pulled that one off, here's how. It has become the very heart of investment banking, which explains the vigour with which Goldman's pursued a former employee who tried to create a new business using HFT computing code that he had developed. He has been arrested for theft.
We would argue that Goldman Sachs is guilty of much worse crimes. True it is legal, but Democratic Senator Charles Schumer and the London Stock Exchange are looking to change the rules to stop at least some HFT practices.
High Frequency Traders, or HFTs, come in a number of guises. Academic research published in the paper "Toxic equity trading order flow on Wall Street" lists the following types of plays, which it says are more responsible for market volatility than the financial crisis:
Liquidity rebate traders - Exchanges (at least some of them) offer rebates of about 0.25 cents per share to large brokers who bring in liquidity. They can re-offer shares at exactly the same price and still make a profit. Of course if they can offer the shares at a marginally higher price they will make more profit, as will the exchanges. Tilson said the exchanges are complicit because of these rebates, and the additional access they offer.
Predatory algorithmic traders - By placing small buy orders that are withdrawn, they fool institutional traders by bidding up the price of the stock, which is bought at higher prices as the series of small orders are executed to fulfil the big transaction. Later in the process the "predatory algo" shorts the stock at the higher price it has reached. The institutions then cover the short at the higher price.
Automated market makers - This HFT play involves"pinging" stocks with probe orders that are almost immediately cancelled, as described earlier. When a price is discovered, the shares are bought elsewhere and sold-on to the institution.
Program traders - By buying large numbers of stocks at the same time, they can trick institutional trading programs by triggering large buy orders that are tied to price moves. Once the institutions bite they can sell the stocks for a profit, leaving the traders as the 'patsy'. Flash traders - In this HFT scam, flash traders give an order to only one exchange. They execute it when - and only when - the order can go through without triggering "best price" procedure intended to give sellers on all exchanges a chance at meeting the best price. The Nasdaq will close the flash trading loophole on the 1st September 2009, and the SEC says it will ban this technique.
Nobel Economist Paul Krugman has been analyzing these traders and finds no economic value in what is being done; in fact he believes that if anything they are destroying value. "The stock market is supposed to allocate capital to its most productive uses, such as by helping companies with good ideas raise money. It's hard to see, however, how traders who place their orders one-thirtieth of a second faster than anyone else do anything productive," said Mr Krugman. "There is a good case that such activities are actually harmful. HFT probably degrades the stock market's function, because it's a kind of tax on investors who lack access to super computers and at-exchange connectivity - which means that the money Goldman spends on those computers actually has a negative effect on national wealth. As economist Kenneth Arrow said in 1973, speculation based on private information imposes a 'double social loss', by using up resources and undermining markets."
Not satisfied with milking the taxpayer, Goldman and friends have also escalated the profiteering arms race and are looking to skim everyone in the trading arena - partners, clients and each other. Can regulators keep up with the speed of their innovation and put in place sensible restrictions to protect the rest of us?
Juan Abdel Nasser, EconomyWatch.com
http://bx.businessweek.com/investment-banking/view?url=http%3A%2F%2Fwww.economywatch.com%2Feconomy-business-and-finance-news%2Fhigh-frequency-trading-hft-wall-streets-latest-scam-18-08.html
Goldman Sachs and friends are hanging us out to dry with HFT
"It appears exchanges are conspiring with a privileged group of high-frequency traders in a massive fraud," Fund Manager Whitney Tilson.
Wall St, New York, USA, 17 August 2009. The new cream-skimming trick in Wall Street's playbook is called High Frequency Trading, or HFT.
It works like this: big trading banks invest in super-computers that can process information at every faster speeds, splitting nano-seconds into smaller and smaller units. These super-computers can process instructions faster than regular computers, and much faster than humans. Next, they place these super-computers in the exchanges themselves. This gives direct access to the exchange, cutting out the latency of connections from remote locations. By trading faster than smaller investors, profits can be constantly churned.
Institutional investors will often divide large purchases up into many small blocks that will be bought or sold within specified price ranges. HFT players seek to determine the price range by sending out quotes that are issued and almost immediately cancelled. They can execute thousands of such trades in a second. If they hit on a price in the acceptable price range, they can fulfil the order and then sell it on to the investor microseconds later for a tiny profit. Do this long enough and you can rack up impressive profits.
This is not an obscure phenomenon. Estimates say that 50 per cent to 70 per cent of traded volume on the NYSE is carried out by High Frequency Traders, or HFTs. That's right; high-speed gouging of retail investors and large institutions now makes up the bulk of trading. It has directly led to Goldman Sachs pulling in record profits, and recording 46 '$100 million' trading days, when the economy is dead and corporate M&A activity is at record lows. If you wondered how they pulled that one off, here's how. It has become the very heart of investment banking, which explains the vigour with which Goldman's pursued a former employee who tried to create a new business using HFT computing code that he had developed. He has been arrested for theft.
We would argue that Goldman Sachs is guilty of much worse crimes. True it is legal, but Democratic Senator Charles Schumer and the London Stock Exchange are looking to change the rules to stop at least some HFT practices.
High Frequency Traders, or HFTs, come in a number of guises. Academic research published in the paper "Toxic equity trading order flow on Wall Street" lists the following types of plays, which it says are more responsible for market volatility than the financial crisis:
Liquidity rebate traders - Exchanges (at least some of them) offer rebates of about 0.25 cents per share to large brokers who bring in liquidity. They can re-offer shares at exactly the same price and still make a profit. Of course if they can offer the shares at a marginally higher price they will make more profit, as will the exchanges. Tilson said the exchanges are complicit because of these rebates, and the additional access they offer.
Predatory algorithmic traders - By placing small buy orders that are withdrawn, they fool institutional traders by bidding up the price of the stock, which is bought at higher prices as the series of small orders are executed to fulfil the big transaction. Later in the process the "predatory algo" shorts the stock at the higher price it has reached. The institutions then cover the short at the higher price.
Automated market makers - This HFT play involves"pinging" stocks with probe orders that are almost immediately cancelled, as described earlier. When a price is discovered, the shares are bought elsewhere and sold-on to the institution.
Program traders - By buying large numbers of stocks at the same time, they can trick institutional trading programs by triggering large buy orders that are tied to price moves. Once the institutions bite they can sell the stocks for a profit, leaving the traders as the 'patsy'. Flash traders - In this HFT scam, flash traders give an order to only one exchange. They execute it when - and only when - the order can go through without triggering "best price" procedure intended to give sellers on all exchanges a chance at meeting the best price. The Nasdaq will close the flash trading loophole on the 1st September 2009, and the SEC says it will ban this technique.
Nobel Economist Paul Krugman has been analyzing these traders and finds no economic value in what is being done; in fact he believes that if anything they are destroying value. "The stock market is supposed to allocate capital to its most productive uses, such as by helping companies with good ideas raise money. It's hard to see, however, how traders who place their orders one-thirtieth of a second faster than anyone else do anything productive," said Mr Krugman. "There is a good case that such activities are actually harmful. HFT probably degrades the stock market's function, because it's a kind of tax on investors who lack access to super computers and at-exchange connectivity - which means that the money Goldman spends on those computers actually has a negative effect on national wealth. As economist Kenneth Arrow said in 1973, speculation based on private information imposes a 'double social loss', by using up resources and undermining markets."
Not satisfied with milking the taxpayer, Goldman and friends have also escalated the profiteering arms race and are looking to skim everyone in the trading arena - partners, clients and each other. Can regulators keep up with the speed of their innovation and put in place sensible restrictions to protect the rest of us?
Juan Abdel Nasser, EconomyWatch.com
http://bx.businessweek.com/investment-banking/view?url=http%3A%2F%2Fwww.economywatch.com%2Feconomy-business-and-finance-news%2Fhigh-frequency-trading-hft-wall-streets-latest-scam-18-08.html
2010 Investment Outlook
2010 Investment Outlook
Advice for next year: Go global
By Peter Coy
December 28, 2009
After a long, hard day of conquering the world, Chinese industrialists toast deals with Scotch whisky. This is an opportunity for London-based Diageo (DEO), the world's largest distiller. In 2007 it introduced Johnnie Walker Blue Label George V Edition at $600 per crystal decanter. Sales in Asia were so strong that Diageo topped itself this year with The John Walker at a suggested retail price of $3,000. It's "performing very well," the company says.
Investors looking ahead to 2010 can learn from Diageo. Figure out where wealth is being produced in the world and grab a piece of it, whether that's in China or Brazil or the U.S. Don't count on a robust economic recovery to lift the stocks of run-of-the-mill companies, because most economists expect a weakish rebound.
We predicted in this space one year ago, when blood was running in the streets, that investors would "do well by buying what's out of favor," such as high-yield bonds. Did they ever: Through November in the global markets, junk bonds returned 58%, followed by commodities (36%), gold (34%), stocks (29%), and investment-grade corporate bonds (23%). Bringing up the rear in returns was the safe choice, government debt (8%). But the easy money from amping up risk is over. Now it's time to choose safer plays in stocks, bonds, and commodities that will thrive even as the U.S. economy continues its struggle to get back to good health.
In that light, going global is a good, sensible theme for 2010. It's one of the few things that passive and active investors can agree on, even though they have opposite reasons. Passive investors believe that you can't beat the market, so they favor a little-bit-of-everything approach to reduce the risk from any one investment going bad. By their philosophy, the maximum diversification comes from spreading your bets all over the globe, not just in your home country. Ideally, the passive investing camp says, Americans' investment in U.S. stocks should be no higher than U.S. stocks' share of global market capitalization. That share has fallen from 70% in 1970 to 48% in 2009, according to MSCI Barra (MXB), which calculates market indexes.
You can even argue that Americans should underweight U.S. stocks to offset their heavy exposure to the U.S. through the homes they own on American soil. Not many Americans are that internationally diversified. A typical 401(k) in the U.S. has about five times as much invested in U.S. stocks as in foreign stocks, according to a survey by Hewitt Associates (HEW).
Active investors are also exploring investments abroad, but not just for diversification. In contrast to index-fund investors, they believe you can beat the market—and many happen to think that some of the best bargains for 2010 lie outside the U.S., in markets that have been less picked over by professionals. An investor who miraculously managed to select the top 10 stocks in the world in each market sector each year for the eight years through December 2008 would have had a cumulative return of almost 7,000%, says MFS Investment Management, the Boston-based fund manager. In contrast, MFS adds, an equally foresighted investor who was restricted to the top-performing stocks in the Standard & Poor's 500-stock index would have had a cumulative return of just under 1,500%. In other words, if you have any faith in your stockpicking, you will want to roam the world for candidates.
Whatever their motivation, many Americans are likely to intensify their search for investments abroad in the coming year. An online investors' survey for Bloomberg BusinessWeek in early December found that 40% of American investors plan to increase their exposure to international stocks over the next five years, up from 22% a year ago.
The survey included 770 Americans as well as 158 international investors who had been recruited to participate in periodic online polls by Bloomberg BusinessWeek Research Services. Some things don't change quickly, though: Asked which stock market would produce the best returns over the next year, Americans were still more likely to pick the U.S. than any other country. Among foreign investors surveyed, the U.S. came in fourth after China, India, and Brazil.
Those non-U.S. investors may be on to something. In comparison with the outlook in the recuperating U.S., prospects for growth are much stronger in Asia and in resource-rich nations such as Brazil, Canada, and Australia, where business confidence recently reached its highest level in seven years. "The U.S. economy, with all due respect, is not such a dominant part of the global economy as it used to be. We're going to have decoupling" of other countries from the U.S. in terms of economic performance, says Oded Shenkar, a professor at Ohio State University's Fisher College of Business. The case for going global is even stronger if you believe that the dollar will sink in 2010. Returns on foreign stocks and bonds are worth more to Americans when the dollar falls against other currencies. The Federal Reserve has vowed to keep short-term interest rates extremely low until the U.S. economy gains strength, which may not be until summer or later. Low U.S. rates put downward pressure on the currency.
Buying multinationals is an easy way to bet on global growth without mucking about in names you've never heard of. Not just any multinational will do, though. Makers of consumer staples that serve the growing markets of Asia and Latin America are a good bet for 2010, says Rajiv Jain, head of international equities for Vontobel Asset Management in New York. Diageo is one, of course. Others include Coca-Cola (KO), Nestlé, McDonald's (MCD), and BAT (BTI) (if owning a tobacco company doesn't bother you). Many of these companies have handsome dividend yields as well as price-earnings multiples that are historically low in comparison with those of growth stocks, Jain says.
If you want even more exposure to growth in the developing world, try a company like Nestlé India—not a multinational, of course—which has had 11 consecutive quarters of strong revenue growth. "If you look at their numbers, you would never know there was a recession," says Jain.
In contrast, this is not the best year to go all-in on an industrial renaissance. There is still massive overcapacity in manufacturing in the U.S. despite plant shutdowns and layoffs. China made its own excess of productive capacity worse when it staved off an economic slump by building plants, equipment, infrastructure, and housing.
The tech sector should do somewhat better than general manufacturing because it enjoys shorter product cycles: If customers have any money at all, they tend to replace their computers and communications gear when the stuff becomes obsolete. Worldwide semiconductor sales rebounded more than 50% from their February 2009 lows through October, notes economist Edward Yardeni of Yardeni Research in Great Neck, N.Y. But tech stocks have risen a lot from their nadirs, so they're no great bargains at current prices.
Banks and other financial companies don't look like good deals, either. They continue to be weighed down by weak loans and investments that were made during the go-go years. And the off-balance-sheet financing they once used to juice up their returns is now pretty much off limits, says Wasif Latif, an equity portfolio manager and a member of the asset allocation team of USAA, the San Antonio-based financial-services firm for the armed forces and veterans. Plus, financial stocks have risen a lot from their priced-for-Armageddon lows.
It's been a crazy year. Somewhere out there is a hapless investor who stayed fully invested all through the crash, then finally capitulated and sold in early March, only to watch from the sidelines in horror as the Standard & Poor's 500 rebounded 65% through mid-December. To make sure that's not you in 2010, think hard about your investment choices so you can have the courage of your convictions. Make an investing plan and stick to it, advises Eileen Rominger, chief investment officer of Goldman Sachs Asset Management (GS) in New York, which oversees about $850 billion of investments. "You need a solid foundation of knowing what you own and why you own it," Rominger says. "In this volatile environment, the temptation for investors to do the wrong thing at exactly the wrong point in time is tremendous."
That's especially good advice if you're venturing for the first time into unfamiliar territory such as foreign stocks and bonds. It's a big world, with lots of opportunities. Don't let the strangeness frighten you away.
Coy is BusinessWeek's Economics editor.
http://www.businessweek.com/magazine/content/09_52/b4161045147139.htm
Advice for next year: Go global
By Peter Coy
December 28, 2009
After a long, hard day of conquering the world, Chinese industrialists toast deals with Scotch whisky. This is an opportunity for London-based Diageo (DEO), the world's largest distiller. In 2007 it introduced Johnnie Walker Blue Label George V Edition at $600 per crystal decanter. Sales in Asia were so strong that Diageo topped itself this year with The John Walker at a suggested retail price of $3,000. It's "performing very well," the company says.
Investors looking ahead to 2010 can learn from Diageo. Figure out where wealth is being produced in the world and grab a piece of it, whether that's in China or Brazil or the U.S. Don't count on a robust economic recovery to lift the stocks of run-of-the-mill companies, because most economists expect a weakish rebound.
We predicted in this space one year ago, when blood was running in the streets, that investors would "do well by buying what's out of favor," such as high-yield bonds. Did they ever: Through November in the global markets, junk bonds returned 58%, followed by commodities (36%), gold (34%), stocks (29%), and investment-grade corporate bonds (23%). Bringing up the rear in returns was the safe choice, government debt (8%). But the easy money from amping up risk is over. Now it's time to choose safer plays in stocks, bonds, and commodities that will thrive even as the U.S. economy continues its struggle to get back to good health.
In that light, going global is a good, sensible theme for 2010. It's one of the few things that passive and active investors can agree on, even though they have opposite reasons. Passive investors believe that you can't beat the market, so they favor a little-bit-of-everything approach to reduce the risk from any one investment going bad. By their philosophy, the maximum diversification comes from spreading your bets all over the globe, not just in your home country. Ideally, the passive investing camp says, Americans' investment in U.S. stocks should be no higher than U.S. stocks' share of global market capitalization. That share has fallen from 70% in 1970 to 48% in 2009, according to MSCI Barra (MXB), which calculates market indexes.
You can even argue that Americans should underweight U.S. stocks to offset their heavy exposure to the U.S. through the homes they own on American soil. Not many Americans are that internationally diversified. A typical 401(k) in the U.S. has about five times as much invested in U.S. stocks as in foreign stocks, according to a survey by Hewitt Associates (HEW).
Active investors are also exploring investments abroad, but not just for diversification. In contrast to index-fund investors, they believe you can beat the market—and many happen to think that some of the best bargains for 2010 lie outside the U.S., in markets that have been less picked over by professionals. An investor who miraculously managed to select the top 10 stocks in the world in each market sector each year for the eight years through December 2008 would have had a cumulative return of almost 7,000%, says MFS Investment Management, the Boston-based fund manager. In contrast, MFS adds, an equally foresighted investor who was restricted to the top-performing stocks in the Standard & Poor's 500-stock index would have had a cumulative return of just under 1,500%. In other words, if you have any faith in your stockpicking, you will want to roam the world for candidates.
Whatever their motivation, many Americans are likely to intensify their search for investments abroad in the coming year. An online investors' survey for Bloomberg BusinessWeek in early December found that 40% of American investors plan to increase their exposure to international stocks over the next five years, up from 22% a year ago.
The survey included 770 Americans as well as 158 international investors who had been recruited to participate in periodic online polls by Bloomberg BusinessWeek Research Services. Some things don't change quickly, though: Asked which stock market would produce the best returns over the next year, Americans were still more likely to pick the U.S. than any other country. Among foreign investors surveyed, the U.S. came in fourth after China, India, and Brazil.
Those non-U.S. investors may be on to something. In comparison with the outlook in the recuperating U.S., prospects for growth are much stronger in Asia and in resource-rich nations such as Brazil, Canada, and Australia, where business confidence recently reached its highest level in seven years. "The U.S. economy, with all due respect, is not such a dominant part of the global economy as it used to be. We're going to have decoupling" of other countries from the U.S. in terms of economic performance, says Oded Shenkar, a professor at Ohio State University's Fisher College of Business. The case for going global is even stronger if you believe that the dollar will sink in 2010. Returns on foreign stocks and bonds are worth more to Americans when the dollar falls against other currencies. The Federal Reserve has vowed to keep short-term interest rates extremely low until the U.S. economy gains strength, which may not be until summer or later. Low U.S. rates put downward pressure on the currency.
Buying multinationals is an easy way to bet on global growth without mucking about in names you've never heard of. Not just any multinational will do, though. Makers of consumer staples that serve the growing markets of Asia and Latin America are a good bet for 2010, says Rajiv Jain, head of international equities for Vontobel Asset Management in New York. Diageo is one, of course. Others include Coca-Cola (KO), Nestlé, McDonald's (MCD), and BAT (BTI) (if owning a tobacco company doesn't bother you). Many of these companies have handsome dividend yields as well as price-earnings multiples that are historically low in comparison with those of growth stocks, Jain says.
If you want even more exposure to growth in the developing world, try a company like Nestlé India—not a multinational, of course—which has had 11 consecutive quarters of strong revenue growth. "If you look at their numbers, you would never know there was a recession," says Jain.
In contrast, this is not the best year to go all-in on an industrial renaissance. There is still massive overcapacity in manufacturing in the U.S. despite plant shutdowns and layoffs. China made its own excess of productive capacity worse when it staved off an economic slump by building plants, equipment, infrastructure, and housing.
The tech sector should do somewhat better than general manufacturing because it enjoys shorter product cycles: If customers have any money at all, they tend to replace their computers and communications gear when the stuff becomes obsolete. Worldwide semiconductor sales rebounded more than 50% from their February 2009 lows through October, notes economist Edward Yardeni of Yardeni Research in Great Neck, N.Y. But tech stocks have risen a lot from their nadirs, so they're no great bargains at current prices.
Banks and other financial companies don't look like good deals, either. They continue to be weighed down by weak loans and investments that were made during the go-go years. And the off-balance-sheet financing they once used to juice up their returns is now pretty much off limits, says Wasif Latif, an equity portfolio manager and a member of the asset allocation team of USAA, the San Antonio-based financial-services firm for the armed forces and veterans. Plus, financial stocks have risen a lot from their priced-for-Armageddon lows.
It's been a crazy year. Somewhere out there is a hapless investor who stayed fully invested all through the crash, then finally capitulated and sold in early March, only to watch from the sidelines in horror as the Standard & Poor's 500 rebounded 65% through mid-December. To make sure that's not you in 2010, think hard about your investment choices so you can have the courage of your convictions. Make an investing plan and stick to it, advises Eileen Rominger, chief investment officer of Goldman Sachs Asset Management (GS) in New York, which oversees about $850 billion of investments. "You need a solid foundation of knowing what you own and why you own it," Rominger says. "In this volatile environment, the temptation for investors to do the wrong thing at exactly the wrong point in time is tremendous."
That's especially good advice if you're venturing for the first time into unfamiliar territory such as foreign stocks and bonds. It's a big world, with lots of opportunities. Don't let the strangeness frighten you away.
Coy is BusinessWeek's Economics editor.
http://www.businessweek.com/magazine/content/09_52/b4161045147139.htm
8 Tips For Starting Your Own Business
Be Your Own Boss
Wouldn't it be great to be able to quit your job, be your own boss and earn a paycheck from the comfort of your own home? The good news is that with a little planning and some startup money, it is possible! Here we'll examine some important steps to follow when starting your own business.
Do You Have What It Takes?
Not everyone is cut out for the challenge of starting their own business. There are several personality traits that are common among successful entrepreneurs, including discipline, frugality, self-confidence, good communication skills, humility, honesty and integrity, superb record-keeping skills, motivation, good health, optimism and more. For more on these characteristics, read Are You An Entrepreneur?
Creating The Concept
Before you quit your job to become an entrepreneur, you must first think of a concept, product or service that will generate a steady stream of income. This may sound easy, but for most people, this is actually the hardest part. You should conceive a plan that puts your knowledge, experience and expertise to use in the most profitable way possible. Once you settle on an idea, research the marketplace to see how similar businesses have fared.
Smart Tip: Start with areas you already have a great deal of interest in, and equipment and materials for. This will help cut down startup costs.
Make Sure You Have Support
If you're married and/or have kids, you should also be asking your family how they feel about your working from home, as your decision will affect them both financially and psychologically. If the response is negative, spend time addressing any concerns and decide whether your goal is worth continuing against their wishes if you are unable to change their minds.
Develop A Work Space
If you are considering a home-based business, remember that your home's primary function is to serve as a dwelling for you and your family - not as a warehouse or meeting place for your business and its clients. If you're considering a computer-based business, make sure you have the technology necessary to give your idea a fighting chance.
Smart Tip: Make sure you have a dedicated, private area to work. This area should be free of noise and distraction.
Create A Business Plan
Numerous studies have shown that one of the major reasons new businesses fail is poor planning. If you are planning on starting up a business, you must have a business plan. This will serve as a road map to guide you, and communicate with your bank and/or investors what you're doing and why they should invest in you. It should include a mission statement, executive summary, product or service offerings, target market, marketing plan, industry and competitive analysis, pro-forma financials, resumes for the company's principals, your offering, and an appendix with any other pertinent information.
Find The Right Funding
Most businesses require startup income. Ideally, this investment will help you break even after a year, but keep in mind that even successful businesses can remain in debt for the first few years. Potential sources of funding include a small-business loan from your local bank, tapping into your savings, money from other investments, borrowing from family/friends and, as a last resort, credit cards.
Smart Tip: Try to avoid racking up costly credit card debt that could cost 20% or more in yearly interest fees. You should also avoid borrowing against your 401(k) or other similar plans as this could adversely affect your retirement.
Plan Your Company Budget
Without a budget, a business runs the risk of spending more money than it is taking in, or not spending enough money to grow the business and compete. There are a number of ways you can plan your budget. These include researching industry standards, giving yourself a cushion, reviewing the budget periodically, and shopping around for services and suppliers. For more, read Six Steps To A Better Business Budget.
Smart Tip: While many firms draft a budget yearly, small business owners should do so more often. In fact, many find themselves planning just a month or two ahead when unexpected expenses throw off revenue assumptions.
Get All The Help You Can Find
A number of resources are available to help entrepreneurial hopefuls get off to a great start. Free information and assistance is available from your local Small Business Development Center (SBDC) and SCORE offices. Both are associated with the U.S. Small Business Administration (SBA). The IRS can even provide free assistance, including accounting and record-keeping, through the Small Business Tax Education Program.
http://www.investopedia.com/slide-show/tips-start-your-own-small-business/default.aspx
Wouldn't it be great to be able to quit your job, be your own boss and earn a paycheck from the comfort of your own home? The good news is that with a little planning and some startup money, it is possible! Here we'll examine some important steps to follow when starting your own business.
Do You Have What It Takes?
Not everyone is cut out for the challenge of starting their own business. There are several personality traits that are common among successful entrepreneurs, including discipline, frugality, self-confidence, good communication skills, humility, honesty and integrity, superb record-keeping skills, motivation, good health, optimism and more. For more on these characteristics, read Are You An Entrepreneur?
Creating The Concept
Before you quit your job to become an entrepreneur, you must first think of a concept, product or service that will generate a steady stream of income. This may sound easy, but for most people, this is actually the hardest part. You should conceive a plan that puts your knowledge, experience and expertise to use in the most profitable way possible. Once you settle on an idea, research the marketplace to see how similar businesses have fared.
Smart Tip: Start with areas you already have a great deal of interest in, and equipment and materials for. This will help cut down startup costs.
Make Sure You Have Support
If you're married and/or have kids, you should also be asking your family how they feel about your working from home, as your decision will affect them both financially and psychologically. If the response is negative, spend time addressing any concerns and decide whether your goal is worth continuing against their wishes if you are unable to change their minds.
Develop A Work Space
If you are considering a home-based business, remember that your home's primary function is to serve as a dwelling for you and your family - not as a warehouse or meeting place for your business and its clients. If you're considering a computer-based business, make sure you have the technology necessary to give your idea a fighting chance.
Smart Tip: Make sure you have a dedicated, private area to work. This area should be free of noise and distraction.
Create A Business Plan
Numerous studies have shown that one of the major reasons new businesses fail is poor planning. If you are planning on starting up a business, you must have a business plan. This will serve as a road map to guide you, and communicate with your bank and/or investors what you're doing and why they should invest in you. It should include a mission statement, executive summary, product or service offerings, target market, marketing plan, industry and competitive analysis, pro-forma financials, resumes for the company's principals, your offering, and an appendix with any other pertinent information.
Find The Right Funding
Most businesses require startup income. Ideally, this investment will help you break even after a year, but keep in mind that even successful businesses can remain in debt for the first few years. Potential sources of funding include a small-business loan from your local bank, tapping into your savings, money from other investments, borrowing from family/friends and, as a last resort, credit cards.
Smart Tip: Try to avoid racking up costly credit card debt that could cost 20% or more in yearly interest fees. You should also avoid borrowing against your 401(k) or other similar plans as this could adversely affect your retirement.
Plan Your Company Budget
Without a budget, a business runs the risk of spending more money than it is taking in, or not spending enough money to grow the business and compete. There are a number of ways you can plan your budget. These include researching industry standards, giving yourself a cushion, reviewing the budget periodically, and shopping around for services and suppliers. For more, read Six Steps To A Better Business Budget.
Smart Tip: While many firms draft a budget yearly, small business owners should do so more often. In fact, many find themselves planning just a month or two ahead when unexpected expenses throw off revenue assumptions.
Get All The Help You Can Find
A number of resources are available to help entrepreneurial hopefuls get off to a great start. Free information and assistance is available from your local Small Business Development Center (SBDC) and SCORE offices. Both are associated with the U.S. Small Business Administration (SBA). The IRS can even provide free assistance, including accounting and record-keeping, through the Small Business Tax Education Program.
http://www.investopedia.com/slide-show/tips-start-your-own-small-business/default.aspx
8 Signs Of A Doomed Stock
Are Your Stocks Doomed?
Few people seem to spot the early signs of a company in distress. Remember WorldCom and Enron? Not so long ago, these companies were worth hundreds of billions of dollars. Today, they no longer exist. Their collapses came as a surprise to most of the world, including their investors. Even large shareholders, many of them with an inside track, were caught off guard. So is there any way to know that your stock may be on a crash course to nowhere? The answer is yes. Read on to find out how.
1. Negative Cash Flows
Cash flow is a company's lifeline; investors who keep an eye on it can protect themselves from ending up with a worthless share certificate. When a company's cash payments exceed its cash receipts, the company's cash flow is negative. If this occurs over a sustained period, it's a sign that the company's cash in the bank may be getting dangerously low. Without fresh injections of capital from shareholders or lenders, a company in this situation can quickly find itself insolvent.
2. High Debt-Equity Ratio
Interest repayments place pressure on cash flow, and this pressure is likely to be exacerbated for distressed companies. Because they have a higher risk of default, struggling companies must pay a higher interest rate to borrow money. As a result, debt tends to shrink their returns. The total debt-to-equity (D/E) ratio is a useful measure of bankruptcy risk. It compares a company's combined long- and short-term debt to shareholders' equity or book value. Companies with D/E ratios of 0.5 and above deserve a closer look.
3. Interest Coverage Ratio
The debt/equity (D/E) ratio doesn't always say much on its own. It should be accompanied by an examination of the debt interest coverage ratio. For example, suppose that a company has a D/E ratio of 0.75, which signals a low bankruptcy risk, but that it also has an interest coverage ratio of 0.5. An interest coverage ratio below 1 means that the company is not able to meet all of its debt obligations with the period's earnings before interest and tax (operating income). It's also a sign that a company is having difficulty meeting its debt obligations.
4. Share Price Decline
Savvy investor should also watch out for unusual share price declines. Almost all corporate collapses are preceded by a sustained share price decline. Enron's share price started falling 16 months before it went bust. That said, while a big share price decline might signal trouble ahead, it may also signal a valuable opportunity to buy an out-of-favor business with solid fundamentals. Before deciding whether the stock is a buy or sell, be sure to examine the additional factors we discuss next.
5. Profit Warnings
Investors should take profit warnings very, very seriously. While market reaction to a profit warning may appear swift and brutal, there is growing academic evidence to suggest that the market systematically underreacts to bad news. As a result, a profit warning is often followed by a gradual share price decline.
6. Insider Trading
Companies are required to report, by way of company announcement, purchases and sales of shares by substantial shareholders and company directors (also known as insiders). Executives and directors have the most up-to-date information on their company's prospects, so heavy selling by one or both groups can be a sign of trouble ahead. Admittedly, insiders don't always sell simply because they think their shares are about to sink in value, but insider selling should give investors pause.
7. Resignations
The sudden departure of key executives (or directors), and/or auditors can also signal bad news. While these resignations may be completely innocent, they demand closer inspection. Auditor replacement can also mean a deteriorating relationship between the auditor and the client company, and perhaps more fundamental difficulties within the client company's business. Warning bells should ring the loudest when the individual concerned has a reputation as a successful manager or a strong, independent director.
8. SEC Investigations
Formal investigations by the Securities and Exchange Commission (SEC) normally precede corporate collapses. That's not surprising; many companies guilty of breaking SEC and accounting rules do so because they are facing financial difficulties. While many SEC investigations turn out to be unfounded, they still give investors good reason to pay closer attention to the financial situations of companies that are targeted by the SEC.
http://www.investopedia.com/slide-show/signs-doomed-stock/default.aspx
Few people seem to spot the early signs of a company in distress. Remember WorldCom and Enron? Not so long ago, these companies were worth hundreds of billions of dollars. Today, they no longer exist. Their collapses came as a surprise to most of the world, including their investors. Even large shareholders, many of them with an inside track, were caught off guard. So is there any way to know that your stock may be on a crash course to nowhere? The answer is yes. Read on to find out how.
1. Negative Cash Flows
Cash flow is a company's lifeline; investors who keep an eye on it can protect themselves from ending up with a worthless share certificate. When a company's cash payments exceed its cash receipts, the company's cash flow is negative. If this occurs over a sustained period, it's a sign that the company's cash in the bank may be getting dangerously low. Without fresh injections of capital from shareholders or lenders, a company in this situation can quickly find itself insolvent.
2. High Debt-Equity Ratio
Interest repayments place pressure on cash flow, and this pressure is likely to be exacerbated for distressed companies. Because they have a higher risk of default, struggling companies must pay a higher interest rate to borrow money. As a result, debt tends to shrink their returns. The total debt-to-equity (D/E) ratio is a useful measure of bankruptcy risk. It compares a company's combined long- and short-term debt to shareholders' equity or book value. Companies with D/E ratios of 0.5 and above deserve a closer look.
3. Interest Coverage Ratio
The debt/equity (D/E) ratio doesn't always say much on its own. It should be accompanied by an examination of the debt interest coverage ratio. For example, suppose that a company has a D/E ratio of 0.75, which signals a low bankruptcy risk, but that it also has an interest coverage ratio of 0.5. An interest coverage ratio below 1 means that the company is not able to meet all of its debt obligations with the period's earnings before interest and tax (operating income). It's also a sign that a company is having difficulty meeting its debt obligations.
4. Share Price Decline
Savvy investor should also watch out for unusual share price declines. Almost all corporate collapses are preceded by a sustained share price decline. Enron's share price started falling 16 months before it went bust. That said, while a big share price decline might signal trouble ahead, it may also signal a valuable opportunity to buy an out-of-favor business with solid fundamentals. Before deciding whether the stock is a buy or sell, be sure to examine the additional factors we discuss next.
5. Profit Warnings
Investors should take profit warnings very, very seriously. While market reaction to a profit warning may appear swift and brutal, there is growing academic evidence to suggest that the market systematically underreacts to bad news. As a result, a profit warning is often followed by a gradual share price decline.
6. Insider Trading
Companies are required to report, by way of company announcement, purchases and sales of shares by substantial shareholders and company directors (also known as insiders). Executives and directors have the most up-to-date information on their company's prospects, so heavy selling by one or both groups can be a sign of trouble ahead. Admittedly, insiders don't always sell simply because they think their shares are about to sink in value, but insider selling should give investors pause.
7. Resignations
The sudden departure of key executives (or directors), and/or auditors can also signal bad news. While these resignations may be completely innocent, they demand closer inspection. Auditor replacement can also mean a deteriorating relationship between the auditor and the client company, and perhaps more fundamental difficulties within the client company's business. Warning bells should ring the loudest when the individual concerned has a reputation as a successful manager or a strong, independent director.
8. SEC Investigations
Formal investigations by the Securities and Exchange Commission (SEC) normally precede corporate collapses. That's not surprising; many companies guilty of breaking SEC and accounting rules do so because they are facing financial difficulties. While many SEC investigations turn out to be unfounded, they still give investors good reason to pay closer attention to the financial situations of companies that are targeted by the SEC.
http://www.investopedia.com/slide-show/signs-doomed-stock/default.aspx
Give the Gift of Smart Investing
Received an email commercial in my post today.
Stocks have history running in their favor, averaging 11-12% a year, and they outperform just about every type of investment. The trade-off is that stocks come with greater risk. Average market returns are no comfort if you buy at the market peak and sell during the graveyard. Still investing in stocks is no longer as mysterious or as elite an activity as it used to be. Armed with the desire to learn, you can make stocks a powerful source of returns in your portfolio.
Financial success requires an understanding of the investment process and the various factors affecting stocks, bonds, & other financial securities. The Forbes Stock Market Course compiles the information you need to increase your wealth over time.
Since you are already a member of the Forbes family, we'd like to offer you a special deal. If you order the Forbes Stock Market Course today, you will get $50 off the regular price!
http://www.forbesinc.com/stockmarketcourse/FSMC-TOC.pdf
Comment:
The course content includes all the standard topics essential for those interested in investing. These topics are also dealt with by most investing books.
It is unlikely that one can get enough information by attending a half day session to learn investing. At most you can only have a glimpse of this wide field. Interestingly, a recent course by a blogger widely advertised before the talk was deafly silent post-course! Just wondering.
Merry Xmas folks.
Stocks have history running in their favor, averaging 11-12% a year, and they outperform just about every type of investment. The trade-off is that stocks come with greater risk. Average market returns are no comfort if you buy at the market peak and sell during the graveyard. Still investing in stocks is no longer as mysterious or as elite an activity as it used to be. Armed with the desire to learn, you can make stocks a powerful source of returns in your portfolio.
Financial success requires an understanding of the investment process and the various factors affecting stocks, bonds, & other financial securities. The Forbes Stock Market Course compiles the information you need to increase your wealth over time.
Since you are already a member of the Forbes family, we'd like to offer you a special deal. If you order the Forbes Stock Market Course today, you will get $50 off the regular price!
http://www.forbesinc.com/stockmarketcourse/FSMC-TOC.pdf
Comment:
The course content includes all the standard topics essential for those interested in investing. These topics are also dealt with by most investing books.
It is unlikely that one can get enough information by attending a half day session to learn investing. At most you can only have a glimpse of this wide field. Interestingly, a recent course by a blogger widely advertised before the talk was deafly silent post-course! Just wondering.
Merry Xmas folks.
Friday, 18 December 2009
Evaluating your property investment
Evaluating your property investment
Mon Dec 14, 2009 9:12am
Investing requires discipline - one can’t blindly invest money without knowing what one is getting into. Investing into Real Estate is no different. Here is a checklist that you should use when evaluating your property investment.
1. Desirability of the location: This is the single most important criterion to value real estate.
2. Reputation of the builder and quality of construction: Properties by some developers are worth a lot more than others because of quality. Don’t always go for the lower price because there could be huge execution risk with less reputed builders
3. Payment terms: Time-linked or construction linked payment plan, and cash vs. cheque component. This will affect your cashflow in other aspects of your personal finances. (Click here to know more)
4. Project approvals and licenses: This might affect your ability to get a home loan if project approvals have not come through yet.
5. Contractual guarantees: For assured return schemes get a written guarantee from the builder and post-dated cheques in your name. Understand the delivery date of your project
6. Demand and supply: Over or under-supply will affect both the capital appreciation potential and the rental yield you might expect.
7. Floor space index and carpet area: Local rules on the built up area and the available square footage (carpet area) might reduce the usable area. Recognize that what you pay for might not be what you get
Tips on the process of Real Estate Investing
When it comes to the process of making a property investment and exiting from it, there are a few things that you must keep in mind.
1. Transaction costs: When you buy or sell property, there are many transaction costs associated with these activities. You might have to pay a brokerage fee to the intermediary. If you have made a gain on the sale, there will also likely be a resulting capital gains tax liability.
You will also face some expenses related to the stamp duty at the time of the transfer and registration costs of the property. All these costs can add a material amount to the purchase or sale price of your investment.
2. Liquidity: Unlike stocks that you can sell readily and convert into money in the hand within a couple of days, buying and selling property takes time. Your ability to convert your investment into cash in hand is quite restricted.
Its not uncommon for deals to take up to one year, and still fall through at the last minute. So if you feel that you can sell your property to pay for your child’s education abroad once he/she gets admission, you might be in for a shock. To have easy access to this money, you might be better off putting it into a financial asset that you can access at a short notice (e.g., fixed deposit, or liquid fund).
3. Cash: Property investments are not always the cleanest when it comes to cash versus cheque component of paying for deals. Unlike mutual funds where KYC norms require that the investment be made in cheque and the PAN card details be shared, real estate investments can have a huge cash component to them. This might not suit everyone.
http://in.reuters.com/article/personalFinance/idINIndia-43604720091214?sp=true
Mon Dec 14, 2009 9:12am
Investing requires discipline - one can’t blindly invest money without knowing what one is getting into. Investing into Real Estate is no different. Here is a checklist that you should use when evaluating your property investment.
1. Desirability of the location: This is the single most important criterion to value real estate.
2. Reputation of the builder and quality of construction: Properties by some developers are worth a lot more than others because of quality. Don’t always go for the lower price because there could be huge execution risk with less reputed builders
3. Payment terms: Time-linked or construction linked payment plan, and cash vs. cheque component. This will affect your cashflow in other aspects of your personal finances. (Click here to know more)
4. Project approvals and licenses: This might affect your ability to get a home loan if project approvals have not come through yet.
5. Contractual guarantees: For assured return schemes get a written guarantee from the builder and post-dated cheques in your name. Understand the delivery date of your project
6. Demand and supply: Over or under-supply will affect both the capital appreciation potential and the rental yield you might expect.
7. Floor space index and carpet area: Local rules on the built up area and the available square footage (carpet area) might reduce the usable area. Recognize that what you pay for might not be what you get
Tips on the process of Real Estate Investing
When it comes to the process of making a property investment and exiting from it, there are a few things that you must keep in mind.
1. Transaction costs: When you buy or sell property, there are many transaction costs associated with these activities. You might have to pay a brokerage fee to the intermediary. If you have made a gain on the sale, there will also likely be a resulting capital gains tax liability.
You will also face some expenses related to the stamp duty at the time of the transfer and registration costs of the property. All these costs can add a material amount to the purchase or sale price of your investment.
2. Liquidity: Unlike stocks that you can sell readily and convert into money in the hand within a couple of days, buying and selling property takes time. Your ability to convert your investment into cash in hand is quite restricted.
Its not uncommon for deals to take up to one year, and still fall through at the last minute. So if you feel that you can sell your property to pay for your child’s education abroad once he/she gets admission, you might be in for a shock. To have easy access to this money, you might be better off putting it into a financial asset that you can access at a short notice (e.g., fixed deposit, or liquid fund).
3. Cash: Property investments are not always the cleanest when it comes to cash versus cheque component of paying for deals. Unlike mutual funds where KYC norms require that the investment be made in cheque and the PAN card details be shared, real estate investments can have a huge cash component to them. This might not suit everyone.
http://in.reuters.com/article/personalFinance/idINIndia-43604720091214?sp=true
How to construct a stock portfolio – do’s & don’ts
How to construct a stock portfolio – do’s & don’ts
Thu Jun 4, 2009 1:33pm
Constructing and managing a stock portfolio is hard. Just ask any professional fund manager. So, what should retail investors keep in mind when it comes to their stock portfolio?
First of all, retail investors must recognize that they are competing against the pros. Therefore, you should not do this if you do not have the time or resources to match the research and analytics done by the pros.
Secondly, you must have an investing philosophy that guides you irrespective of the prevailing market conditions. Recognize whether
Thirdly, understand your risk profile. Are you risk averse? Or are you willing to take on extra risk in order to earn higher returns? High returns aren’t possible without taking on additional risk, and you might not be comfortable with too much risk. Your portfolio should match your risk profile.
Finally, what are you doing towards risk management? This is where the pros really stand out because they understand that managing a portfolio is all about risk management on a daily basis.
Here are some steps that retail investors must take when constructing a stock portfolio?
1) Diversify: Just buying stocks in 1 or 2 companies is not enough. You could be taking on too much risk through a concentrated portfolio, akin to putting all your eggs in one basket. Ideally, your portfolio should have no more than 20-25 names. However, this also does not mean that you can have just say 5 shares of one company and 2 shares of another, because that is all you can afford because you can’t create wealth through just purchasing a handful of shares in a company.
2) Review Your Exposure Frequently: While one investment strategy is to buy and hold, that does not imply that you do not manage your exposure by ignoring your portfolio. Market prices move, sometimes dramatically. As a result, you might have too much or too little exposure to one sector or stock. Get into the discipline of reviewing your exposure regularly, especially during dramatic market movements.
3) Create your own set of rules to guide you: Formulate your own rules for when to buy or sell a stock. Don’t just follow the herd or come under peer pressure. What is good for others might not be suitable for you or your portfolio because your risk, investment criteria, tax situation and entry price might be different.
4)Keep some cash available: Again this is one area where the pros stand out. They recognize that good investment opportunities come unannounced, but in order to take advantage of them they need to have cash available to make these investments. So make sure that you keep some cash available in your portfolio to pounce on these ideas.
If the above sounds challenging and tough for you to follow, then a do-it-yourself portfolio management is not recommended. As an alternative you might be better off investing in the markets through mutual funds, where you can take advantage of the resources and risk management skills of the pros, rather than compete against them.
http://in.reuters.com/article/personalFinance/idINIndia-40066820090604?sp=true
Thu Jun 4, 2009 1:33pm
- you are a day trader, punting on every rumour that you come across, or
- if you are a value investor who buys and holds for at least a minimum of 4-5 years.
- When the price moves higher or lower than your expectation, do you buy more or do you start selling?
- Do you recognize that your exposure to one sector or stock might have gone up or down a lot due to market price changes?
How do professionals invest?
How do professionals invest?
Mon Nov 9, 2009 12:33pm
Ask any professional and they will tell you that they never make an investing decision without the discipline of following a framework.
Here we suggest some criteria that all investors must use when making an investment, to help you avoid getting into investments you don’t understand or losing money in the long run.
- Risk taking capacity: Suitability of the investment for your unique situation
- Financial goals: What do you need to generate returns for
- Time horizon: By when do you want to exit the investment
- Liquidity: How quickly you want to convert your investment into ready cash
- Capital growth or regular income: Whether it provides you adequate protection against inflation
- Taxability: What kind of tax liability do you create
Professionals recognize that not all investments are suited for them. Just like not all medicines are suited to all patients, you must also realize that not all investments are suitable for you.
A common question that newcomers ask is “tell me the best investment for my money” and immediately expect a one sentence answer. It’s like a patient asking the doctor for the best medicine.
Before the doctor prescribes a medicine or the relevant dosage a thorough investigation of the symptoms, allergies and pre-existing condition has to be conducted.
You wouldn’t feel confident with a doctor who blindly prescribes medication to you.
It is similar when it comes to investing. You need to do a through analysis of your unique situation before you or any advisor can choose the “best investment”.
Its for this reason that an investment made by those around you might not be the right investment for you, because you might be at a different stage of your life, with a different risk profile and financial assets and liabilities.
http://in.reuters.com/article/personalFinance/idINIndia-43714520091109?sp=true
Mon Nov 9, 2009 12:33pm
Ask any professional and they will tell you that they never make an investing decision without the discipline of following a framework.
Here we suggest some criteria that all investors must use when making an investment, to help you avoid getting into investments you don’t understand or losing money in the long run.
- Risk taking capacity: Suitability of the investment for your unique situation
- Financial goals: What do you need to generate returns for
- Time horizon: By when do you want to exit the investment
- Liquidity: How quickly you want to convert your investment into ready cash
- Capital growth or regular income: Whether it provides you adequate protection against inflation
- Taxability: What kind of tax liability do you create
Professionals recognize that not all investments are suited for them. Just like not all medicines are suited to all patients, you must also realize that not all investments are suitable for you.
A common question that newcomers ask is “tell me the best investment for my money” and immediately expect a one sentence answer. It’s like a patient asking the doctor for the best medicine.
Before the doctor prescribes a medicine or the relevant dosage a thorough investigation of the symptoms, allergies and pre-existing condition has to be conducted.
You wouldn’t feel confident with a doctor who blindly prescribes medication to you.
It is similar when it comes to investing. You need to do a through analysis of your unique situation before you or any advisor can choose the “best investment”.
Its for this reason that an investment made by those around you might not be the right investment for you, because you might be at a different stage of your life, with a different risk profile and financial assets and liabilities.
http://in.reuters.com/article/personalFinance/idINIndia-43714520091109?sp=true
Mistakes to avoid in the next stock market rally
Mistakes to avoid in the next stock market rally
Mon Jun 8, 2009 9:48am
So many of us made investing mistakes and suffered over the last 18 months.
Everyone makes mistakes….but really smart people learn from their own mistakes and those that other people make. If this is indeed the start of a new upcycle, then now is the best time to review what went wrong the last time so that we do not repeat the same mistakes again.
Read more and get smarter….
1. Don’t be unrealistically optimistic: Markets can come down as well – don’t believe the cheerleaders who only give you the positive picture of markets going up.
Be very suspicious of the so-called experts on TV who are “confident” that a stock or the market will go up. If they are such geniuses, why did they not warn you 18 months ago that the market would go down by about 60%?
Be cautious about any predictions you hear from so-called “Gurus” on the direction of the market, don’t blindly trust what they say. Most “Gurus” have a poor track record.
2. Understand your risk appetite – you cannot get high rewards without taking on high risk: Not all investments are suitable for you, because they might be too risky for your risk profile. There are no get rich quick schemes – the stock market is not a casino, it takes patience, skill and experience to achieve superior returns. If someone promises to double your money in 3 years, be very suspicious.
If you lost money in the last few quarters and were emotional about it, recognize that some of it was your own fault for investing in instruments that were too risky for you to handle. Avoid these in the future, even if the market is racing to the top.
3. There is no substitute for quality: Invest in good quality stocks or mutual funds. Don’t speculate. In a bear market, the speculative names are the ones that fall the fastest. Build your portfolio on a strong foundation. The newest NFOs might not be the safest things for you to invest in, because they are untried and untested.
Its best to be safe and to invest in high quality names. Don’t take a punt on some random tip on a company that has no track record or history of quality performance.
4. Don’t invest blindly – invest towards meeting your financial goals: Don’t just believe what your friends or neighbours are telling you about their investments, these investments might not be suitable for you. Invest because you have a certain goal in mind such as planning for your retirement, or buying a house, saving for your daughter’s wedding or son’s overseas education. This will help you match the right investment product with the right goal.
Everyone wants a return on their investments, but that is not the reason to invest. You invest because you want to do something with the money – marry your daughter, buy a house, plan your retirement. Ensure your investments are allowing you to meet these goals.
5. You cannot successfully time the market: If you believe that you can sell at the top and buy at the bottom, we hate to break this to you but you are not a genius. Its never been done successfully by even the world’s leading investors, so don’t try this strategy at home!
No “Guru” predicted that the market would go up in May 2009 by close to 30%, and not many people were able to time this rise successfully, just like not many people were able to exit the market successfully when the markets first started correcting. Invest regularly but don’t try to pick bottoms and tops.
http://in.reuters.com/article/personalFinance/idINIndia-40003320090608?sp=true
Mon Jun 8, 2009 9:48am
So many of us made investing mistakes and suffered over the last 18 months.
Everyone makes mistakes….but really smart people learn from their own mistakes and those that other people make. If this is indeed the start of a new upcycle, then now is the best time to review what went wrong the last time so that we do not repeat the same mistakes again.
Read more and get smarter….
1. Don’t be unrealistically optimistic: Markets can come down as well – don’t believe the cheerleaders who only give you the positive picture of markets going up.
Be very suspicious of the so-called experts on TV who are “confident” that a stock or the market will go up. If they are such geniuses, why did they not warn you 18 months ago that the market would go down by about 60%?
Be cautious about any predictions you hear from so-called “Gurus” on the direction of the market, don’t blindly trust what they say. Most “Gurus” have a poor track record.
2. Understand your risk appetite – you cannot get high rewards without taking on high risk: Not all investments are suitable for you, because they might be too risky for your risk profile. There are no get rich quick schemes – the stock market is not a casino, it takes patience, skill and experience to achieve superior returns. If someone promises to double your money in 3 years, be very suspicious.
If you lost money in the last few quarters and were emotional about it, recognize that some of it was your own fault for investing in instruments that were too risky for you to handle. Avoid these in the future, even if the market is racing to the top.
3. There is no substitute for quality: Invest in good quality stocks or mutual funds. Don’t speculate. In a bear market, the speculative names are the ones that fall the fastest. Build your portfolio on a strong foundation. The newest NFOs might not be the safest things for you to invest in, because they are untried and untested.
Its best to be safe and to invest in high quality names. Don’t take a punt on some random tip on a company that has no track record or history of quality performance.
4. Don’t invest blindly – invest towards meeting your financial goals: Don’t just believe what your friends or neighbours are telling you about their investments, these investments might not be suitable for you. Invest because you have a certain goal in mind such as planning for your retirement, or buying a house, saving for your daughter’s wedding or son’s overseas education. This will help you match the right investment product with the right goal.
Everyone wants a return on their investments, but that is not the reason to invest. You invest because you want to do something with the money – marry your daughter, buy a house, plan your retirement. Ensure your investments are allowing you to meet these goals.
5. You cannot successfully time the market: If you believe that you can sell at the top and buy at the bottom, we hate to break this to you but you are not a genius. Its never been done successfully by even the world’s leading investors, so don’t try this strategy at home!
No “Guru” predicted that the market would go up in May 2009 by close to 30%, and not many people were able to time this rise successfully, just like not many people were able to exit the market successfully when the markets first started correcting. Invest regularly but don’t try to pick bottoms and tops.
http://in.reuters.com/article/personalFinance/idINIndia-40003320090608?sp=true
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