GDP Growth and Market Return

Economic Growth: Great for Everyone but Investors?

While it may be intuitive to presume strong economic growth translates into strong stock market performance, the evidence suggests otherwise.

By Alex Bryan | 12-19-12

By 2050 the world's population is projected to reach 9 billion, up from 7 billion today. Nearly all of that growth will come from emerging markets, where living standards are rapidly improving. Although these markets have experienced large capital inflows, they still have a long way to go to match developed countries' levels of capital and wages. Consequently, emerging markets will likely continue to grow faster than developed markets for the foreseeable future. While this growth may lift hundreds of millions out of poverty and spur investment and innovation, evidence suggests investors may be left behind.

About the Author

Alex Bryan is a fund analyst with Morningstar.

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Jay Ritter, a professor at the University of Florida, documented a negative relationship between economic growth and stock market returns in his seminal research paper, "Economic Growth and Equity Returns," published in 2005. Ritter's findings are no fluke. Using real gross domestic product data from the Penn World Tables and stock market returns, as proxied by the total return version of each market's MSCI country index, I found a weak negative correlation between GDP growth and stock market returns for 41 countries from 1988 to 2010. This relationship is plotted in the chart below. However, excluding China (the outlier at the bottom right of the chart) brings the correlation close to zero.

While the strength of these relationships is sensitive to the start and end dates of the sample period, the general findings are fairly robust over long time horizons. It's clear that higher economic growth does not necessarily translate into superior stock market returns over the long run.

Reasonable Assumptions?

This result should not be surprising given the strong assumptions that would be required to make the jump from GDP growth to stock market returns. In order for this relationship to hold, corporate profits as a share of GDP and valuation ratios would need to remain stable over time. Second, current shareholders' ownership stake of total corporate profits would also need to remain constant. In other words, there should be no dilution from new share issuance, private and public companies would need to grow at the same rate, and there could be no new enterprises or initial public offerings. All existing publicly listed companies would also need to generate substantially all of their revenue and profits from the domestic economy.

The Link Between Economic Growth and Profitability

In a closed economy, it would be reasonable to expect that total corporate profits would grow at a similar rate as the economy in the long run. Although the share of corporate profits relative to GDP fluctuates over time, it tends to revert to the mean. Profits cannot persistently grow faster than the economy because they would crowd out all other economic activity and attract new competitors. Similarly, total corporate profits should not grow slower than the economy in the long run, as firms exit unprofitable businesses, allowing those remaining to preserve margins. Of course, it is inappropriate to assume that any country United States investors have access to is closed. The largest companies listed in most countries tend to be multinational firms that generate a large portion of revenue and income outside their host country. For instance, the constituents of the S&P 500 generate close to 40% of their profits outside the U.S. This international exposure means that profits can grow at a different rate than the domestic economy, even in the long run.

Even if aggregate corporate profits grow in sync with GDP, dilution can prevent shareholders from enjoying the benefits of growth. Creative destruction is essential to economic growth. In aggregate all companies that are publicly listed today will grow slower than the economy because new entrants drive much of that growth. Between the time these new companies are launched and publicly listed, their growth dilutes most investors' ownership interest in the economy. Flagrant dilution of corporate earnings through employee stock grants and seasoned offerings is also a very real risk, particularly in developing countries with a tradition of poor corporate governance. Additionally, earnings growth can only create value if it allows firms to generate returns that exceed their cost of capital. High reinvestment rates may enhance both corporate and domestic economic growth but destroy shareholders' wealth through inefficient capital allocation.

Is Growth Already Priced In?

Growth expectations influence stock market valuations. Valuations are rich when investors expect strong growth. However, as developing economies mature, their growth rates slow and valuations tend to decline. Consequently, even when countries realize their expected growth rates, their stock markets may not keep pace.

The impact of lofty growth expectations on valuations can create a treadmill effect, whereby fast-growing economies must realize high growth in order to generate a competitive rate of return. For example, in the mid-1980s the so-called Asian tigers had experienced two decades of rapid growth and investors had high expectations for future growth. In contrast, several countries in Latin America were facing severe inflation, a debt crisis, and low expectations for future growth. As a result, according to research published by Peter Blair Henry and Prakash Kannan in "Growth and Returns in Emerging Markets," in 1986 Latin American stock markets were trading at 3.5 times earnings, while the Asian markets were trading at 18.3 times earnings. Over the next two decades, Latin American stock markets posted more than twice the annualized returns as the Asian markets, despite experiencing lower GDP growth over that horizon. This was because Latin American countries implemented economic reforms that allowed them to exceed investors' low expectations. Conversely, the Asian markets performed in line with investors' high expectations, which were already priced in.

What's an Investor to Do?

In order to benefit from economic growth, investors must identify markets that have the potential to exceed expectations. Russia may fit the bill. The Russian equity market, as proxied by  Market Vectors Russia ETF (RSX), is trading at a paltry 5.6 times forward earnings, making it the cheapest of any major emerging market. Corruption and a taxing regulatory environment have stunted the country's growth and depressed valuations. However, if (and this is a big if) Russia adopts structural reforms similar to those undertaken in Latin America over the past two decades, it could offer investors rich rewards--albeit with high risk.

Even if fast-growing emerging markets do not offer superior risk-adjusted stock market returns, they can provide significant diversification benefits. Over the past 20 years, the MSCI Emerging Markets Index and S&P 500 were only 0.73 correlated. Emerging-markets equities may also offer a long-term hedge against a weakening U.S. dollar.

http://news.morningstar.com/articlenet/article.aspx?id=578607

Several investment instruments can bring in steady returns for both young and old.

@ AsiaOne Seeking the Holy Grail of passive income Several investment instruments can bring in steady returns for both young and old. -ST  Aaron Low Tue, Oct 23, 2012 The Straits Times It is the Holy Grail of investing for many of us: Build a big enough nest egg, generate passive income from it and retire comfortably on the steady stream of dividends. Well, it is not just the Holy Grail for retirees these days; now investors young and old want the reassurance of a steady income after the battering our portfolios have taken in recent years. The benchmark Straits Times Index may be up 17 per cent since the start of the year, but not before a roller-coaster ride over the past 12 months that left many of us battered and bruised. Analysts warn that the road ahead looks bumpy, with market movements still likely to be influenced by events and news rather than financial fundamentals. Mr Kelvin Tay, regional chief investment officer at UBS Wealth Management, says many investors want the safe haven of stable returns in an uncertain market. "With interest rates so low, much more attention is being paid to what kinds of steady returns they can get in a market like this," he says. Ms Jane Leung, head of Asia-Pacific at iShares, a subsidiary of asset management firm BlackRock, says that fixed income assets form a valuable core component of diversified portfolios. "They're favoured for moderate volatility, low correlations with other asset classes and stable cash flows." These days investors are spoilt for choice when it comes to investing in income assets. Bonds Probably the simplest of all income instruments is the humble bond. In its most basic form, the bond is essentially a loan made by a lender to a borrower. The borrower pays a lender an interest rate and promises to pay back the money to the lender in full, after an agreed period of time. Bonds can be issued by companies or governments. For instance, you can buy Singapore government bonds or trade in bonds issued by the Land Transport Authority and the Housing and Development Board on the Singapore Exchange (SGX). Mr Brian Tan, director of wealth management at financial advisory firm Financial Alliance, says that if people want safety and a steady income stream, look no further than a bond. The problem is that most bond issues typically come in tranches of $250,000, which put them out of reach for most retail investors. Similar instruments that are listed on the Singapore Exchange include securities such as perpetual securities and preference shares. They also pay a fixed coupon rate every year but differ from bonds in that they have different company rights from bondholders. Companies such as Hyflux and the local banks have issued preference shares through the SGX that pay between 3.9 per cent and 6 per cent a year. Fixed income funds A big disadvantage of buying individual bonds is that the investor is exposed to the risk of the company failing. If the firm goes bankrupt, the investor could potentially lose all the money invested in its bonds. Buying fixed income mutual funds can help get around this problem. These funds are typically managed by fund managers, who use their expertise to select a basket of bonds that generate yield. For instance, JP Morgan's Emerging Market Local Currency Debt Fund invests in debt instruments of various emerging market governments, such as Poland, Turkey and Brazil. Its annualised yield is 7.27 per cent. Mr Tan believes that for retail investors, getting into a fund is probably the best way of getting exposure to bonds. "Most investors don't have $100,000 or $250,000 sitting around to invest in the bonds of just one company," he says. "So funds are a good way of getting exposure." But mutual funds are not perfect. They do suffer from underperformance, depending on the skill of the manager. The other issue is that they charge relatively high management costs, ranging between 0.5 per cent and 1.5 per cent a year, depending on the asset class and the type of fund. A fairly recent type of fund, however, drastically lowers the costs of investing with the fund and mostly eliminates underperformance. Called exchange-traded funds (ETFs), they track indexes, both equities and fixed income, directly. This means that ETFs do not underperform the overall market, but neither do they overperform. Last year, iShares listed four new fixed income ETFs on the SGX which directly tap the Asian fixed income market. One is the iShares Barclays Capital USD Asia High Yield Bond Index. Its yield is 7.55 per cent and it charges a management fee of 0.5 per cent. It has returned 17.02 per cent since last December. Mr Gary Dugan, private bank Coutts' chief investment officer for Asia and the Middle East, says that ETFs should be seriously looked at as an alternative to pure bonds as they are both low-cost and easy to access. But Financial Alliance's Mr Tan notes that fixed income ETFs are subject to the vagaries of the market as they can be traded freely like stocks and shares. Asset management firm Franklin Templeton's director of retail sales for Singapore and South-east Asia, Mr William Tan, says that index products lose the ability to benefit from an additional source of returns through currency management. "In an actively managed fund, portfolio managers are more nimble and able to react to changing market conditions and they can adjust the duration of a bond fund as necessary," he says. High dividend stocks While income tends to be associated with bonds and fixed income instruments, experts also point out that high-quality dividend stocks can also form part of an income portfolio. Mr Dugan says that stocks should form part of any portfolio, even if it is income-focused. This is because some stocks pay higher dividends than bonds, while allowing for potential capital gains. One such hot type of stock is real estate investment trusts (Reits), which have soared roughly 30 per cent since the start of the year. Singapore Reits typically pay anywhere between 5 per cent and 8 per cent in distributions a year. Analysts are mixed on whether Reits are still good buys. Mr Dugan and Financial Alliance's Mr Tan believe they are fairly priced, given the rally over the past 10 months, and they are cautious about buying them. But UBS' Mr Tay says that one should buy Reits based on what they offer and not so much whether prices have risen. "It's really about quality rather than how much prices have run up by," he says. Outside of Reits, JP Morgan Asset Management's global strategist Geoff Lewis says that it is a good time to diversify into solid dividend-paying stocks. "We don't think it's too late in the day to get into the theme of income investing. In the current environment of low interest rates, high yields have thrived even while default rates remain low," he says. "We like firms that can pay a good starting dividend but with the potential to grow both their business and ability to pay good dividends." aaronl@sph.com.sg Get a copy of The Straits Times or go to straitstimes.com for more stories.

Value Investing: Keep Emotions Out of It

As you evolve your value investing style, keep this in your mind always.


Keep Emotions Out of It


    

The wisdom shared is about avoiding emotional attachments to stocks and the businesses they represent.

If you LOVE Dutch Lady#   , don't invest in it until you like the numbers.  And if the numbers look good and you invest, but they start to look bad later, be able to recognize that.  

Value investors continuously look for the good and the bad and keep their RATIONAL wits about them as they decide to buy and keep their investments.  The purpose of an investment is to achieve a greater financial goal and not to become a "member of the family".

DON'T HESITATE TO ADMIT YOUR MISTAKES.  Value investors admit their mistakes and learn from them.  They take the time to understand what changed (or was overlooked in the first place), and they move on.  

They have a RATIONAL "sell" model and aren't afraid to sell a business when underlying reasons to own it have changed or if the price is way out of line with value.  



# Dutch Lady is a stock in the KLSE.

Ten Signs of Value

Here are ten "core" signs of value to guide your value investing process.  When all or most signs are present, the business is on the right track.

1. Steady or Increasing Return on Equity (ROE)
2. Strong and Growing Profitability
3. Improving Productivity
4. Producer, NOT Consumer of Capital
5. The Right Valuation Ratios
6. A Franchise
7. Price Control
8. Market Leadership
9. Candid Management
10. Customer Care

Let's look at reasons to invest in warrants and how to go about it.

Why invest in warrants?

Gearing effect
A hedging tool


As with any instrument, money can be made and lost when trading warrants.

Mr. X, 37, would know. Three weeks ago, he lost about $25,000 in just two weeks after trading in some Straits Times Index warrants.  'Greed made me lose a lot. I was hoping my initial losses could be recovered, but this didn't happen,' he said.

Investors should also be disciplined about taking profits and cutting losses. Investors are advised to monitor their positions closely as warrants tend to move in greater percentage terms than shares.

Mr. P, 32, started trading warrants this year with a principal sum of $15,000.  He made a 25 per cent return in just three days, after he bought DBS Group Holdings and CapitaLand warrants in September. But he lost about $20,000 in two weeks when the stock market nosedived recently. 'I wasn't careful, so I didn't cut my losses fast enough,' he said.


You also need to factor in the timeframe - and be confident that the underlying asset price is set to reach your price target at the same time that the warrant matures.

'If you believe the market is going to have a sharp correction soon, you should choose a short-term out-of-the- money put warrant.'

'If you expect a stock to move up gradually in one to two months' time, you should choose a mid-term at-the- money or a 1 to 5 per cent out-of-the- money call warrant.'


What are the five variables and how do they affect an option's value or premium?

Options values or premiums on puts and calls are function of five variables.  The five variables are:
1.  the underlying asset value,
2.  the risk-free rate,
3.  the standard deviation of the return of the asset,
4.  the option's time to maturity, and
5.  the option's exercise price.

A call option's value will increase with increases in the underlying asset value, risk-free rate, time to maturity, and standard deviation of returns.  However, a call's premium will decrease as the striking price increases.

A put's value will increase with increases in the exercise price, the time to maturity and standard deviation of returns, and decrease with increases in the underlying asset value and risk-free rate.

If dividends are considered, a call's value will decrease with dividends while a put's value will increase.

Warrants trading: What you need to know

Cheap investment tools were virtually non-existent in Singapore a few years ago, but a recent growth spurt has sent their popularity soaring.  Gabriel Chen Sun, Dec 02, 2007 The Sunday Times These cheap investment tools were virtually non-existent in Singapore a few years ago, but a recent growth spurt has sent their popularity soaring. Let's look at reasons to invest in warrants and how to go about it. IF THE experts are right, the current boom in this investment tool is far from petering out. They say more and more market traders are jumping in, as well as investors looking beyond stocks and bonds to bolster their portfolios. To get an idea of just how popular they have become, consider this: Warrants turnover on the Singapore Exchange has grown from zero in 2003 to about $3 billion a month now. The number of active warrant accounts has also shot up more than tenfold, to 20,154 this June from 12 months earlier. A key attraction of warrants is that they are cheap. Warrants trade around 20 cents to 30 cents, so the minimum investment for one lot - 1,000 shares - could be as low as $200 to $300. As with any instrument, money can be made and lost when trading warrants. For example, say an investor bought a call warrant on stock X for 30 cents with an exercise price of $5. Also, assume the conversion ratio is one to one, which means one warrant can be converted into one share. The current share price is $5.25. If the investor holds the warrant to maturity and exercises it, he is effectively paying $5.30 apiece for the shares (30 cents warrant cost plus $5 exercise price). If the price of stock X stays at $5.25, he will get back 25 cents, so effectively, he will lose five cents ($5.30 minus $5.25). If the share price falls to $5 or below, he will lose just his investment capital of 30 cents, but no more, even if the share price falls drastically. On the other hand, if the stock's market price shoots up to $5.35, converting the warrant into a share would mean a five cent profit. Consultant Peter Ang, 32, started trading warrants this year with a principal sum of $15,000. He made a 25 per cent return in just three days, after he bought DBS Group Holdings and CapitaLand warrants in September. But he lost about $20,000 in two weeks when the stock market nosedived recently. 'I wasn't careful, so I didn't cut my losses fast enough,' he said. Despite the spectacular growth in the Singapore warrants market, Hong Kong is still well ahead because of a flood of China listings there. Previous attempts to launch warrants trading here in 1995, and again in 1999, tanked for various reasons - including overly stringent listing rules and inadequate investor education. But three years ago, warrant issuers - some of the biggest players include Deutsche Bank, Macquarie Bank, Societe Generale and BNP Paribas - started to double as market makers. This means these banks provided buy and sell prices on warrants to ensure that investors had the chance to enter or exit the market. They also embarked on investor education seminars and dedicated websites featuring trading tools. How to pick a suitable warrant? Directional view Without getting bogged down in technical terms such as 'implied volatility', you should consider one factor when picking a warrant: whether you think the underlying asset is likely to go up or down in value. Your view will determine whether you select a call warrant or a put warrant. For example, suppose the Government has announced a new project and the likelihood of CapitaLand securing the project is high. If you think this is good news for CapitaLand, you could consider buying call warrants on the stock - since you would expect the stock price to rise. But if you think CapitaLand's share price is more likely to fall, you might want to buy a put warrant. 'Theoretically, if one has a neutral view on a stock, it would not be advisable to invest in warrants,' Deutsche vice-president Sandra Lee cautioned. Timing You also need to factor in the timeframe - and be confident that the underlying asset price is set to reach your price target at the same time that the warrant matures. Take a call warrant, for example. The longer the time to expiry, the more time there is for the underlying asset to appreciate, which in turn will increase the price of the call warrant. A call warrant that is far 'out-of-the money' with very little time to expiry is considered highly risky. This is because it has an exercise price that is much higher than its underlying price and yet has little time to appreciate. In contrast, when the call warrant's exercise price is lower than its underlying price, the warrant is regarded as 'in-the-money'. For both call warrants and put warrants, if the exercise price is equal to the underlying price, the warrants are said to be 'at-the-money'. 'If you believe the market is going to have a sharp correction soon, you should choose a short-term out-of-the- money put warrant,' said Mr Simon Yung, BNP's head of retail listed products sales for Singapore and Hong Kong. 'If you expect a stock to move up gradually in one to two months' time, you should choose a mid-term at-the- money or a 1 to 5 per cent out-of-the- money call warrant.' Why invest in warrants? Gearing effect The biggest advantage warrants trading has over stocks trading is the gearing effect, which means that you can make huge gains from a modest investment outlay. For example, it can cost nearly $20,000 to buy one lot of DBS shares (assuming a market price of $20 a share). An increase of 1 per cent in the DBS share price will give you a return of $200. But if you buy a DBS warrant with an effective gearing of 10 times, it should roughly return the same profit of $200. The effective gearing indicates roughly how many per cent a warrant price will move if the underlying stock changes by 1 per cent. In this case, trading in the DBS warrant costs just $2,000 but reaps the same $200 return. 'If the share price moves in your favour, you will get higher returns with a higher level of gearing. But if you get your view wrong, losses will also be greater,' said Mr Barnaby Matthews, Macquarie's head of warrants sales. Since warrants are typically cheaper than underlying shares, this potentially frees up investors' cash for other purposes. A hedging tool Buying a put warrant - which gives you the right to sell the underlying asset later - is like buying an insurance policy for your portfolio, as it protects you from falls in the market. 'If the underlying asset declines, then put warrants will appreciate in price to offset losses suffered by the underlying asset,' said Mr Ooi Lid Seng, Societe Generale's vice-president of structured products for Asia ex-Japan. For example, one can hold OCBC Bank shares and buy OCBC put warrants. If the OCBC share price keeps falling, losses will be partially offset by the gain in the put warrant price. As warrants can be used to capture both the upside (call warrants) and the downside (put warrants), they can be used as a tool for risk management in a stock portfolio. Mr Yung said that warrants can be a perfect instrument for balancing a portfolio's risk profile. 'A portfolio with only bonds, property and stock may not be able to optimise the risk-taking capability of the investor,' he said. Tips on investing FIRST, investors should never invest all their investment capital in warrants. 'Generally, we do not advise them to invest more than 10 per cent of their total investment capital in warrants due to the high-risk and high-return nature of warrants,' Mr Ooi said. Retirees should also not use retirement funds needed to maintain their lifestyle to invest in warrants, as they generally have a lower risk tolerance, he added. Investors should also be disciplined about taking profits and cutting losses. Mr Matthews advised investors to monitor their positions closely as warrants tend to move in greater percentage terms than shares. Customer service manager Jason Kua, 37, would know. Three weeks ago, he lost about $25,000 in just two weeks after trading in some Straits Times Index warrants. 'Greed made me lose a lot. I was hoping my initial losses could be recovered, but this didn't happen,' he said. Finally, investors should attend a seminar or do some reading to ensure that they understand the product before investing. 'Asking the expert before you invest is always a good idea,' Mr Yung said. -------------------------------------------------------------------------------- What is a warrant? WARRANTS are 'derivative' investment products - that is, they derive their value from an underlying asset such as a stock or a market index such as the Straits Times Index. They give the investor the right to buy or sell the underlying asset from the issuer by paying a specific 'strike' or exercise price within a certain timeframe. A call warrant gives the holder the option to buy, while a put warrant gives the option to sell. Take a Keppel Corp call warrant for example. If the price of the underlying Keppel stock rises above the exercise price before the expiry of the warrant, it will clearly be to your advantage to exercise the right to buy Keppel shares. If you plan to exercise the Keppel warrant - that is, convert it into a Keppel share - you must do so before the expiration date. Of course, if Keppel's price stays below the exercise price, the warrants will expire worthless. But investors often do not have to hold warrants to maturity. Normally, they simply buy and sell warrants on the stock market as they move in line with movements in the underlying share price. 'Warrants, unlike shares, have a finite lifespan,' said Deutsche Bank vice-president Sandra Lee. 'For each day the investor holds on to the warrant, the warrant loses some time value.' Warrants usually have three- to six-month expiry dates.

http://www.asiaone.com/Business/My%2BMoney/Building%2BYour%2BNest%2BEgg/Investments%2BAnd%2BSavings/Story/A1Story20071205-39670.html

http://forum.lowyat.net/topic/1039913/all  (Good notes on warrants)

Warrants Basics

A

At-the-money (ATM) 
A warrant whose strike is near or equal to the underlying security's price.

B

Break-even point
That implies the price level at which the investor will break-even on warrant expiry; for instant, the investor will make profit if the closing price is higher than strike price.

Broad Lot
The minimum number of warrants that can be traded on the Singapore Stock Exchange.

C

Call
A call warrant provides the holder with a right, but not an obligation, to buy a stock/index at a pre-determined strike price on maturity date. However, currently most of the warrants are cash settled.

Conversion ratio
It indicates the number of warrants related to one share of the underlying that the holder is entitled to buy or sell.

D

Delta
Delta measures "how much the warrant price will move for a one dollar move in the underlying security". The delta of a call warrant has an upper bound of 1.00 (decimal format) or 100% (percent format) and a lower bound of zero. A call warrant with a delta of 1.00 will move up or down one full point for each full point move up or down in the price of the underlying security. A call warrant with a delta of zero should move negligibly, even if the underlying security makes a relatively large move. Warrants that are at-the-money have a delta of approximately 0.50.

For put warrants, the delta lies between -1.00 (or -100%) and zero. A rise in the underlying security will bring about a drop in the price of a put warrant.

E

Effective Gearing
A warrant's effective gearing is the relative percent change in a warrant's value for a given percent change in the price of the underlying security. A warrant's effective gearing is not constant and is higher for warrants which are out-of-the-money and/or close to expiry.

Expressed mathematically:

Effective gearing = gearing x delta

G

Gamma*
It is the rate of change of the portfolio's delta with respect to the price of the underlying asset.

Gearing
The ratio of the share price to the warrant price (multiplied by the conversion ratio, if applicable).

Gearing =	___________share price__________
	warrant price x conversion ratio

H

Hedging
A trade designed to reduce risk, for instance, a put warrant may act as hedge for a current holding in the underlying asset.

I

Implied Volatility
Implied volatility is the volatility anticipated by the financial markets. The higher the implied volatility, the higher the value of the warrant.

Implied volatility is also the volatility implicit in the market price of the warrant. For warrants of similar terms, the higher the implied volatility, the more expensive a warrant is.

In-the-money (ITM)
A warrant with the strike below (for a call warrant) or above (for a put warrant) the price of the underlying security.

Intrinsic Value
For a call warrant, the amount that equals to the market value of the underlying security less the strike. For a put warrant, the amount that equals to the strike less the market value of the underlying security. The intrinsic value corresponds to the amount by which a warrant is in-the-money.

L

Last trading Day
The last trading day of a structured warrant is the fifth trading day prior to the maturity date. After the last trading day, investors will not be able to buy or sell the structured warrant in the market.

M

Maturity Date
It is the expiry date of a warrant.

O

Out-of-the-money (OTM)
A warrant with the strike above (for a call warrant) or below (for a put warrant) the price of the underlying security.

P

Premium
The percentage by which the underlying share price needs to have moved at maturity for the investor to break even.

Premium for a call warrant (%) = [strike + (warrant price x conversion ratio)] - share price x 100%                                           share price Premium for a put warrant (%) = share price - [(strike - (warrant price x conversion ratio)] x 100%                                           share price

Put
A put warrant provides the holder with a right, but not an obligation, to sell a stock/index at a pre-determined strike price on maturity date. However, currently most of the warrants are cash settled.

S

Strike Price
It is the price at which the warrant-holder to buy (a call) or to sell (a put) the underlying asset. However, currently most of the warrants are cash settled.

T

Theta*
It is the rate of change of the value of the portfolio with respect to the passage of time with all else remaining the same. Theta is sometimes referred to as the time decay of the portfolio.

Time Value
The portion of a warrant's price that is not accounted for by the intrinsic value.

U

Underlying Asset
The listed company or stock index that the warrant is issued on.

V

Vega*It is the rate of change of the value of the portfolio with respect to the volatility of the underlying asset.

Volatility*
A measure of the uncertainty of the return realized on an asset.

*Source: Options, Futures, and other derivatives (Fifth edition), John C. Hull

http://sg.warrants.com/singapore/home4/basic/glossary01.html

Are you amazed at what goes on without the public knowing?

Come and see ‘land grab’ plots, Tee Yong told

By Ida Lim

December 05, 2012

Chua was challenged to pursue reparations for Selangor if it can be shown that BN parties had profited from the 24 plots of land involved. — File pic

KUALA LUMPUR, Dec 5 ― DAP’s Tony Pua today invited MCA’s Datuk Chua Tee Yong to visit the 24 plots of land in Selangor that were allegedly sold to the Barisan Nasional (BN) coalition in a suspected multi-million land grab scandal.

http://themalaysianinsider.com/malaysia/article/come-and-see-land-grab-plots-tee-yong-told/

The Verdict on Market Timing

Many professional investors move money from cash to equities or to long term bonds on the basis of their forecasts of fundamental economic conditions.  This is one reason many brokers give to support their belief in professional money management.

John Bogle, founder of the Vanguard Group of Investment Companies said, "In 30 years in this business, I do not know anybody who has done it successfully and consistently, not anybody who knows anybody who has done it successfully and consistently.  Indeed, my impression is that trying to do market timing is likely, not only not to add value to your investment program, but to be counterproductive."

Over a fifty-four year period, the market has risen in 36 years, been even in 3 years and declined in only 15 years.  Thus, the odds of being successful when you are in cash rather than stocks are almost 3 to 1 against you.

An academic study by Professors Richard Woodward and Jess Chua of the University of Calgary shows that holding on to your stocks as long-term investments works better than market timing because your gains from being in stocks during bull markets far outweigh the losses in bear markets.  The professors conclude that a market timer would have to make correct decisions 70 percent of the time to outperform a buy-and-hold investor.  Have you met anyone who can bat 0.700 in calling market turns?


An examination of how mutual funds have varied their cash positions in response to their changing views about the relative attractiveness of equities.

Mutual fund managers have been incorrect in their allocation of assets into cash in essentially every recent market cycle.

Caution on the part of mutual-fund managers (as represented by a very high cash allocation) coincides almost perfectly with troughs in the stock market.

• Peaks in mutual funds' cash positions have coincided with market troughs during 1970, 1974, 1982, and the end of 1987 after the great stock-market crash. 
• Another peak in cash positions occurred in late 1990, just before the market rallied during 1991, and in 1994, just before the greatest six-year rise in stock prices in market history.
• Cash positions were also high in late 2002 and in March 2009, at the trough of the market.

Conversely, the allocation to cash of mutual-fund managers was almost invariably at a low during peak periods in the market.

• For example, the cash position of mutual funds was near an all-time low in March 2000, just before the market began its sharp decline.  

The ability of mutual-fund managers to time the market has been egregiously poor.  

Ref: A Random Walk Down Wall Street by Burton G. Malkiel

Two ways to profit from the market swings: Timing or Pricing

Since common stocks, even of investment grade, are subject to recurrent and wide fluctuations in their prices, the intelligent investor should be interested in the possibilities of profiting from these pendulum swings. There are two possible ways by which  he may try to do this:

• the way of timing and 
• the way of  pricing.

By timing we mean the endeavour to anticipate the action of the stock market—

• to buy or hold when the future course is deemed to be upward, 
• to sell or refrain from buying when the course is downward. 

By pricing we mean the endeavour

• to buy stocks when they are quoted below their fair value and 
• to sell them when they rise above such value. 

A less ambitious form of pricing is  the simple effort

• to make sure that when you buy you do not  pay too much for your stocks. 
• This may suffice for the defensive investor, whose emphasis is on long-pull holding; but as  such it represents an essential minimum of attention to market levels.

We are convinced that the intelligent investor can derive satisfactory results from pricing of either type. 

We are equally sure that if he places his emphasis on timing, in the sense of forecasting, he will end up as a speculator and with a speculator’s financial results. 

8 Buffett Secrets for Investing in Banks

By Matt Koppenheffer
November 29, 2012

Berkshire Hathaway's (NYSE: BRK-A  ) (NYSE: BRK-B  ) Warren Buffett is seen by many as one of the best investors of our time. But he's also often seen as particularly insightful when it comes to investing in banks.

Certainly Berkshire shareholders should hope that the latter is the case as the company owns 8% of banking giant Wells Fargo  (NYSE: WFC  ) along with $5 billion in Goldman Sachs  (NYSE: GS  ) , nearly $2 billion of US Bancorp  (NYSE: USB  ) stock, and roughly another $1 billion between M&T Bank  (NYSE: MTB  ) and Bank of New York Mellon  (NYSE: BK  ) . Not to mention $5 billion in preferred shares of Bank of America (NYSE: BAC  ) .

So what does Warren know that makes him so prescient when it comes to banks?

1. Owning a bank can be a long-term endeavor.
The banking business is a cyclical one, but bank ownership for Buffett typically isn't. In 1969, Berkshire acquired Illinois National Bank and Trust Company and held onto it until it was forced by regulators to sell the bank in 1980. The company's ownership position in Wells Fargo goes back to 1989, while the stake in M&T Bank dates back to at least 1999.

2. Management matters.
We've seen from the financial crisis how reckless management can lead to outright disaster. When Buffett talks about the banks he's owned, he's generally taking time to praise management. Here's what he had to say in Berkshire's 1990 shareholder letter when praising Wells Fargo's management:

[The team at Wells Fargo pays] able people well, but abhor having a bigger head count than is needed... attack costs as vigorously when profits are at record levels as when they are under pressure. Finally, [they] stick with what they understand and let their abilities, not their egos, determine what they attempt.

3. Leverage kills.
Again from the 1990 shareholder letter:

When assets are twenty times equity-a common ratio in this industry-mistakes that involve only a small portion of assets can destroy a major portion of equity. ... Because leverage of 20:1 magnifies the effects of managerial strengths and weaknesses, we have no interest in purchasing shares of a poorly managed bank at a "cheap" price. Instead, our only interest is in buying into well-managed banks at fair prices.

4. Panic? Not a chance.
Rather than panic during banking downturns, Buffett has used them to build his ownership stakes. The original stake in Wells Fargo was purchased between late 1989 and early 1990 -- when banks were faltering during the previous banking crisis. During the latest meltdown, Buffett upped Berkshire's ownership in Wells Fargo and US Bancorp, maintained the company's position in M&T Bank, and famously provided preferred-share financing to Goldman. Just last year he sunk $5 billion into Bank of America when it was facing a market freak-out.

The fact that Wells Fargo's price fell after Berkshire initially bought didn't phase Buffett one bit:

Even though we had bought some shares at the prices prevailing before the fall, we welcomed the decline because it allowed us to pick up many more shares at the new, panic prices. Investors who expect to be ongoing buyers of investments throughout their lifetimes should adopt a similar attitude toward market fluctuations; instead many illogically become euphoric when stock prices rise and unhappy when they fall. 

In case you're wondering, yes, this is that classic Buffett "be greedy when others are fearful" sentiment.

5. Know where to look for performance.
As Marty Whitman puts it: "Rarely do more than three or four variables really count. Everything else is noise." 

Three things that Buffett has highlighted when it comes to evaluating a bank are: return on assets, risk (leverage ratio), and expenses (efficiency ratio).

6. Remember to own for a long time.
There's no reason to not mention this one twice, because it's an important one. To have a year where an attractive bank he owned made no profit "would not distress us." Instead, "at Berkshire we would love to acquire businesses or invest in capital projects that produced no return for a year, but that could then be expected to earn 20% on growing equity."

7. Pick your spots to go outside the box.
With all of this in mind (especially the risk part), Goldman Sachs may not seem like a very Buffett-esque bank to invest in. And it's really not. However, when we think about the investment banks that Berkshire could have invested in -- Bear Stearns, Lehman Brothers, Morgan Stanley  (NYSE: MS  ) , etc. -- Goldman stands out as head and shoulders above the rest.

Not to mention that Buffett was no stranger to Goldman. In Berkshire's 2003 shareholder letter, you can find Buffett singing the praises of -- believe it or not -- a Goldman Sachs investment banker:

I should add that Byron [Trott] has now been instrumental in three Berkshire acquisitions. He understands Berkshire far better than any investment banker with whom we have talked and – it hurts me to say this – earns his fee.

8. Don't get all mushy over the whole thing.
It's certainly possible to find great banks to invest in and Buffett has found his fair share for Berkshire. But banking ain't an easy slog, and even Buffett will admit he's not going out of his way for a bank unless it's really worthwhile. As he put it: "The banking business is no favorite of ours."

Buffett picks 'em, and you benefit

You can, of course, take the above points and use them to help you find great banks to invest in. Or, you could leave the picking to Warren and simply invest in Berkshire Hathaway. But is now the best time to be buying Berkshire?

http://www.fool.com/investing/general/2012/11/29/8-buffett-secrets-for-investing-in-banks.aspx

What are the risks in buying call warrants?

Wednesday August 11, 2010

Personal Investing - By Ooi Kok Hwa

Prices are influenced by intrinsic value and time value

Besides, a lot of investors have been complaining that they are unable to make money from the call warrants that they have bought.LATELY, we notice that there are growing numbers of call warrants getting listed on Bursa Malaysia. Even though there are many call warrants issued and traded in the market, the trading volumes of these call warrants are relatively low compared with the normal warrants.

Many investors cannot differentiate between a warrant and a call warrant.

A warrant is a transferable option certificate issued by a company which entitles the holder to buy a specific number of shares in that company at a specific price (or exercise price) at a specific time in the future. It is normally issued by a listed company.

A call warrant (like a call option) also gives investors a right to buy stocks in a company within a fixed period of time. However, warrants are issued by listed companies whereas call warrants are issued by investment banks.

An investor monitoring share prices at a private stock market gallery in Kuala Lumpur. Many investors have been complaining that they are unable to make money from the call warrants that they have bought.

If investors exercise the rights in warrants, they will receive the listed companies’ shares.

Meanwhile, upon maturity of call warrants, investment banks will only pay investors in cash if the closing price of the listed companies is higher than the exercise price of the call warrants. Investors will get nothing if the closing price of the listed companies is lower than the exercise price.

There are many risks in buying into call warrants. Call warrants have shorter maturity period as compared to warrants. Normally, warrants have maturity period of five years or more whereas call warrants have very short maturity period of less than a year.

In many instances, investors who have bought into these call warrants do not realise that their call warrants have expired. Nevertheless, call warrants will be automatically exercised upon the maturity date if the settlement price is higher than the exercise price.

As mentioned earlier, a lot of call warrants are not actively traded in the market. In fact, a majority of them do not have trading volume on a daily basis. We believe one of the possible reasons is that some of these call warrants are getting nearer to maturity date.

The prices of call warrants are influenced by their intrinsic value and time value.

If the call warrants are getting nearer to their maturity date, the time value will be closer to zero. In addition, if the mother price of the listed companies is being traded at a lower price than the exercise price plus the premium that the investors have paid for the call warrant, the market price of these call warrants will fall below their original issue price.

For those who have subscribed into these call warrants, rather than cutting losses and selling them into the market, they will likely hold on to the call warrants and hope that the mother price will recover one day. Unfortunately, in many instances, investors get nothing upon maturity of these call warrants.

Given that the gap between the buying and selling prices is quite big for some call warrants, many investors find it difficult to buy or sell the call warrants. Hence the fact that call warrants usually have low trading volume implies that this is an instrument with very high liquidity risks.

The main reason for a lot of investors to purchase call warrants is the hope of getting payments from investment banks. However, investors need to understand that the majority of the call warrants are European-styled, which means investors cannot exercise them before the maturity date.

The majority of call warrants are settled in cash for the difference between closing price and exercise price. The formula for cash settlement amount is equal to the number of call warrants x (closing price – exercise price) x 1/exercise ratio. Hence, investors need to pay attention to the exercise price, exercise ratio and premium that they have paid.

For example, the exercise price on Call Warrant Company A (Company A CA) is RM10, the exercise ratio is 10 Company A CA to 1 Company A share and the premium investors need to pay is 10 sen for each Company A CA. To the call warrant holders, in order to breakeven, the mother share price of Company A needs to go higher than RM11 or RM10 plus RM1 (10x10 sen, which is the total premium that they have paid).

Lastly, investors need to pay attention to the fundamentals of the mother companies and check the potential price appreciations for these companies.

Companies with good prospects will have higher possibilities of price appreciation and therefore lower risk of buying into the call warrants.

Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.

http://biz.thestar.com.my/news/story.asp?sec=business&file=/2010/8/11/business/6832498