Felda Global Ventures, Sime Darby, IOI Corp and Genting Plantations

IOI Corp's business profile stronger: Moody's 

BY RUPA DAMODARAN - 21 NOVEMBER 2016 

KUALA LUMPUR: Felda Global Ventures Holdings Bhd may be the leader in the palm oil sector by size but IOI Corporation Bhd has a stronger business profile, says Moody's. 

It said IOI’s highly efficient upstream operations and integrated business model supports financial stability. 

“We believe an integrated company is less exposed to CPO price cyclicality and has more stable, albeit much lower profit margins. IOI's leverage ratios exhibit more stability, helped by resilient profit margins. "

We expect Felda will maintain its production leadership position as Sime Darby's -- Malaysia's second-largest producer -- efforts to increase its CPO production through improving harvesting yields and productivity will likely be realised after 12 months," says Jacintha Poh, a Moody's Vice-President and Senior Analyst. 

Felda's annual crude palm oil (CPO) production was more than three million metric tons over its last three fiscal years, a lead of more than 500,000 MT over Sime Darby Berhad and more than four times the outputs of IOI and Genting Plantations. 

IOI's upstream operations are most efficient, with it consistently generating the highest fresh fruit bunch (FFB) yield among all four companies and in fiscal 2015, it achieved FFB yield of around 24 MT, versus Malaysia's industry average of around 18 MT-19 MT, added Poh. 

However, Moody's expects all four companies to generate lower FFB yields over the next 6 to 12 months due to poor weather conditions.

Read More : http://www.nst.com.my/news/2016/11/190582/ioi-corps-business-profile-stronger-moodys

Mergers and Acquisitions: Types of Mergers

Most mergers fall into three categories:

• Horizontal Merger
• Vertical Merger 
• Conglomerate Merger

Horizontal Merger

This occurs between two companies in the same industry.

For example, two oil companies decide to merge.

They believe they can create efficiencies within the company and thus eliminate costs and improve profitability.

This inevitably causes valuation to increase because profitability is a key driver of valuation.

In doing so, the two companies have achieved some synergy and this type of horizontal merger makes sense.


Vertical Merger

This occurs between two companies involved in different stages of production.

For example, two companies in a media industry decide to merge.

One produces content, and the other owns a network with vast distribution capabilities.

This result in a perfect formula for a successful vertical merger, with content and delivery now offered by one company.

Ultimately, the different stages of production delivery combine to create more efficiency, more productivity, more profitability and of course, more value.


Conglomerate Merger

This occurs between companies in often unrelated industries that seek to create a diversified portfolio of companies intended to hedge against risk.

This type of merger can create some operating efficiencies resulting from the combination of redundant departments.

Merger and Acquisition

M&A continues to be a driving force behind the global economy.

Corporations seeking to fuel growth, boost profits and increase shareholder value are constantly on the lookout for merger opportunities.

Despite the flurry of multi-billion dollar mergers that dominate business headlines these days, we still face the reality that many of those mergers fail to return what was promised to investors.

The Different Methods For Measuring Overall Portfolio Returns

Ever wonder why your brokers profit and loss statements don’t always add up with your calculations? This normally due to the different methods of measuring overall portfolio returns.

In this article we are going to discuss two of the most commonly used methods which you can apply to your portfolio holdings, that of the money-weighted rate of return and that of the time weighted rate of return. Both methods are officially recognised by the CFA charter.

Let’s start with the money-weighted rate of return. This method takes into account all cash inflows and outflows of a portfolio and gives a defined measure of the internal rate of return (IRR). Any money added at the beginning of the account is considered a money inflow, and all money withdrawn from the account as well as the remaining balance at the end of the period are considered outflows.measuring overall portfolio returns

We can use a basic model to illustrate what this means. Suppose an investors buys 1000 stocks of Vertu Motors at the beginning of the period for 30p each. After 1 year the investor still likes the stock and decides to buy another 1000, only this time the price is now 35p a share. At the end of year two the investor sell all 2000 of the stocks for 45p a share, additionally at the end of each period Vertu paid a 3p dividend on each stock.measuring overall portfolio returns

So
At T=0 1000 shares were bought at 30p a share, meaning a cash inflow of +£300
At T=1 another 1000 shares were purchase for 35p a share, however a £30 dividend was also paid, meaning a cash inflow of (1000 x 0.35) – 30 = +£320
At T=2 they sold all their shares for 40p a share, and received a 3p dividend on the 2000 shares, meaning (2000 x 0.4) + (2000 x 0.03) = -£860
From this we have our cash flow time series
CF0 = +£300
CF1 = +£320
CF2 = -£860

The formula for working out the final return does look a little scary:
£300 + (£320/(1+r)) = (860/(1+r)²)
Fortunately we live in a world where there are plenty of online resources that will work this out for us. I personally like to use a financial calulator to input cash flows from a time series to work out the IRR. The answer to this formula is
24.18% overall return

Now let’s see what happens when we use the time weighted rate of return to measure the portfolio’s actual return. Time weighted method has the benefit of measuring compound growth.

To do this we need to measure each individual holding periods growth. In the above example we have 2 holdings periods, year 1 and year 2.

Holding period 1: Beginning value = £300
Dividends paid = £30
End Value = £350 (1000 shares x 35p)
HPR1 = ((£350 + £30) / £300) – 1 = 26.66%

Holding period 2: Beginning value = £700 (2000 x 35p)
Dividends paid = £60
End Value = £800 (2000 shares x 40p)
HPR2 = ((£800 + £60) / £700) – 1 = 22.86%

Now that we have both these figures we need to find the total compounded annual growth rate that would have produced the total return that equals the return over the 2 holding periods. The formula for this is:
(1+ time-weighted rate of return)² = (1.2666)(1.2286)
We can rearrange this to get:
time-weighted rate of return = √((1.2666)(1.2286)) – 1
= 24.47% overall return

As we can see both methods are considered correct, yet they yield different results. Although the difference is negligible, this was only demonstrated across a small sample portfolio. The larger the cash flows, the wider the differences in measurements will be.

As a rule the time weighed rate of return is considered superior as money weighted returns can be influenced by timing. Measuring money weighted returns before a period of relatively high returns will return a higher figure and can therefore be ‘massaged’.


http://articles.roburir.com/different-methods-measuring-overall-portfolio-returns/

Buffett Talks His Early Career in Finance and Advice for Young Investors

Indian Prime Minister Modi's Demonetization of Rs 500 and Rs 1,000 currency

Demonetization of Rs 500 and Rs 1,000 currency, a boon to common Indian citizen


The move to demonetize Rs 500 and Rs 1,000 currency tenders by the union government of India on last Tuesday, was a laudable and historic effort to clean up the decades long corruption and black money. As Indian citizens, we all should be proud of the fact that we elected a government, which was capable of taking such brave decision for the long-term betterment of the country’s economy. Nevertheless, there’s a high possibility that a certain percentage of people might interpret this decision negatively in view of the fact that short-lived challenges are to be seen, which might have a profound negative impact and dethrone ruling party in the coming elections; not everyone happens to be cognizant of the decision’s long-term benefits. If unaccounted or black money isn’t obliterated, it would make the rich richer and the poor poorer. According to SBI, “ Banks received deposits worth Rs 53,000 crore since the government put out of circulation, high-value banknotes in a bid to drain illegal wealth. Nearly 14 lakh crore are held in Rs 500 and Rs 1000 notes now – nearly 86% of the total value of currencies of all denominations in circulation” [1]. Ultimately, government will possess an adequate amount of money to invest in infrastructure, education, agriculture, and all other sectors to build India economically stronger.

How would we benefit from demonetization?
Above all, every honest taxpayer should hail this decision. In the present economical situation, black money has inflated prices in real estate, gold and a few other sectors, making it a challenge for a common Indian citizen to invest. However the government’s attempt to curb black money will significantly lower the prices in such sectors. According to Finance ministry’s report in 2012, “real-estate accounts for more than 50 per cent of the current black money market” [2]. Demonetization would not only repair internal economic issues, but also tackles funding to terrorism. Counterfeit money is one of the main sources of funding for activities related to terrorism [3]. Also, corrupted government officials and politicians who have earned in illegal ways will have no other option to put that money into usage.

Why there is “hue and cry” in the society over demonetization?
As the saying goes “no pain no gain’”. In the same way short-term constraints will be associated with long-term benefits in this process, such as all of sudden endeavor to convert currency, limitation of new tenders throughout the network for a certain period of time. An Inspiration story of a taxi driver, who sacrificed his share of money for a passenger carrying only Rs 500 notes, has set an example for fellow citizens. Furthermore he said “Even if I earn a little less money, it’ll slightly difficult to manage but that’s the case with everyone. I’ll consider this as my contribution to the country’s growth” [4]. Addressing the nation, Prime Minister of India provided assurance to the citizens, he quoted, “I want to tell the people again and again that the government will do everything to protect the honest” [5].

Why shouldn't we deposit money given by others, even if a share is given?
Firstly, it is illegal. However, if we still wish to pursue this option, chances are high to wind up in a tax fraud situation. According to revenue secretary Hashmukh Adhia, “Penalty of 200 percent of the tax payable would be levied if the cash deposited in bank accounts doesn't match with income declared” [6]. Also, it is unethical to exploit economically challenged people for individual’s benefit. On the other hand, currently certain agencies exist in the society, which converts unaccounted money into white for a mere profit up to 30%; one such route being used by them is: depositing money in the name of farmers as agricultural income, which will be non-taxed in India.

What the government still needs to work on?
The introduction of Rs 2000 note has been controversial in consideration of government’s efforts to suppress black money by eliminating bigger denomination currency, what might be the strategy? It still seems to be a missing part in a puzzle. The present demonetization process has laid trap for smaller rats; it has potential to break all illegal transactions in real estate, gold, and a few other sectors where circulation of unaccounted money has reached saturation point. However the dinosaurs are safeguarding their money overseas; recovering it should be the primary focus of the government. According to Wikipedia, “In February 2012, the director of India’s Central Bureau of Investigation said that Indians have US$500 billion of illegal funds in foreign tax havens, more than any other country [7]. Moreover, certain percentage of unaccounted money stocked in the form of valuable commodities such as gold has been secured in the vaults by certain section of people.


References:
1. http://www.hindustantimes.com/india-news/rs-53-000-crore-received-in-deposits-after-demonetisation-move-sbi/story-VVhqIw0tz6kag77t1F0anK.html
2. http://indianexpress.com/article/india/india-news-india/the-un-real-estate-demonetisation-process-100-500-rupee-note-narendra-modi-black-money-4372286/
3. http://www.newindianexpress.com/nation/2016/nov/08/fake-currencies-black-money-and-terrorism-modis-ban-on-rs-500-rs-1000-can-stop-them-all-1536461.html
4. http://www.thebetterindia.com/74549/delhi-cab-driver-helps-passenger-with-500-notes/
5. http://www.newindianexpress.com/nation/2016/nov/13/modi-warns-of-further-action-against-black-money-1537929--1.html
6. http://www.newindianexpress.com/business/2016/nov/10/deposits-over-rs-25-lakh-to-attract-penalty-on-mismatch-govt-1537017.html
7. https://en.wikipedia.org/wiki/Indian_black_money


This is a comunity article contributed by Varshith J R
14 November 2016

https://yourstory.com/2016/11/db417a21cd-demonetization-of-rs-500-and-rs-1-000-currency-a-boon-to-common-indian-citizen/

M'sia's aerospace manufacturing sector flying high with expected 20% growth this year

BY BILQIS BAHARI - 15 NOVEMBER 2016 

KUALA LUMPUR: 

Malaysia’s aerospace manufacturing sector is expected to see a 20 per cent rise in turnover this year, compared to last year's RM6.8 billion. 

"Industry players are bullish on the aero-manufacturing sector and we are hoping to see a double-digit increase this year," International Trade and Industry (MITI) Minister Datuk Seri Mustapa Mohamed said in a press conference during the National Aerospace Event here today. 

Malaysia is currently the single source of specific composites parts for Airbus SA and Boeing. Mustapa said more than 50 per cent of composite wing parts for the Airbus A320 and the Boeing B737 are supplied by Malaysia. 

Global aero-manufacturing companies which invest in Malaysia include Spirit AeroSystems, Safran Landing Systems and Honeywell Aerospace Avionics.

Read More : http://www.nst.com.my/news/2016/11/188836/msias-aerospace-manufacturing-sector-flying-high-expected-20-growth-year

Weak ringgit to impact 5 sectors

Weak ringgit to impact 5 sectors

BY INTAN FARHANA ZAINUL

Clearer picture: A money changer worker counts US dollar notes for a customer in Kuala Lumpur. CIMB Research expects the ringgit’s volatility to contrinue until there is greater clarity on the new US administration’s economic and trade policies

PETALING JAYA: Exporters are back on investors’ radars, following the recent steep decline in the value of the ringgit against the greenback after the United States presidential election last week.

However, there is no rush yet to pick up bargain stocks on Bursa Malaysia.

The FBM KLCI took another big hit yesterday after falling by more than 1% for the second consecutive day amid heavy foreign sell-off.

“Fundamentally, we think markets may be overreacting to the ‘Trump risk’ in the near term, as speculative positioning takes hold,” said CIMB Research in a note to clients

On the volatility of the ringgit, it expects the trend to remain until there is greater clarity on the new US administration’s economic and trade policies.

The ringgit strengthened marginally yesterday to 4.33 against the US dollar.

CIMB Research said HeveaBoard Bhd, Top Glove Corp Bhd and Evergreen Fibreboard Bhd are among the companies that would gain the most from the weak ringgit in terms of earnings.

“Share prices of YTL Power International Bhd, Genting Plantations Bhd and Inari Amertron Bhd fell 1%-3% last Friday despite being beneficiaries of a weak ringgit. We have ‘add’ calls on these stocks and the selldown could present buying opportunities for investors,” it added.

The banking sector was also among the beneficiaries of the weaker ringgit on the back of overseas operations, CIMB Research said.

Among the banks that are set to benefit are Malayan Banking Bhd, RHB Bank Bhd, Hong Leong Bank Bhd and Public Bank Bhd.

On the other hand, CIMB Research reckoned that companies that have exposure to the automotive and airline industries, namely, Tan Chong Motor Holdings Bhd, Bermaz Auto Bhd, UMW Holdings Bhd, AirAsia Bhd and AirAsia X Bhd, would be negatively impacted from the stronger US dollar and yen.

“AirAsia will be impacted by the weaker ringgit, although this is buffered to some extent by the low oil prices. About 60%-70% of AirAsia’s costs are US dollar-denominated,” it added.

On the contrary, although many research houses are bullish on the export counters to benefit from the weak ringgit, Hong Leong Investment Bank (HLIB) Research said that the sector is vulnerable from president-elect Trump’s anti-trade views.

“While the market may continue to react to the strong US dollar, we caution that export stocks may still be affected by Trump’s anti-trade sentiment.

“The technology sector is more vulnerable to any trade policy change compared to resource-based sectors,” it said.

HLIB Research said the strong US dollar would be positive for sectors such as rubber product manufacturers, the gaming industry as well as technology companies.

It is negative for sectors such as automotive, aviation, telecommunications, consumer and power.

While the cheaper ringgit does not necessarily translate to higher exports for Malaysian products, companies such as rubber glove makers, semiconductors and furniture-related companies are expected to benefit from the weaker ringgit, according to analysts.

“Naturally, beneficiaries of the strong US dollar are exporters and companies with significant US-dollar assets,” said UOB KayHian in a report yesterday.

The research house prefers the electric and electronic manufacturers such as Inari, VS Industry Bhd and EG Industries Bhd on the back of revenue growth and margin improvement as compared to exporters.

“We are less enthusiastic on the loftily-valued rubber glove manufacturers, as the supply-demand dynamics for nitrile glove remain unfavourable.

“Hence, continuing downward pressure on the US dollar pricing of nitrile gloves could mostly offset the positive US dollar effect,” it said.

UOB KayHian reckoned that the stronger ringgit would not have a huge impact on exporters compared to in 2015.

“Since a strong US dollar is now a consensus view (unlike in 2015), buyers have actively squeezed down the US dollar pricing on Malaysian exporters, which reduces the quantum of the exporters’ windfall margins and hence the exporters’ ability to positively surprise on earnings,” it said.

http://www.thestar.com.my/business/business-news/2016/11/15/weak-ringgit-to-impact-5-sectors/

Ringgit more steady, but volatility to persist

Tuesday, 15 November 2016

Ringgit more steady, but volatility to persist

Sunway University business school professor of economics Yeah Kim Leng(pic) said the spike showed that there was strong demand for hedging against expectations of a continued weakness in the ringgit, ahead of expectations of an increase in the US interest rate.

PETALING JAYA: The ringgit traded in calmer waters against the US dollar, with the difference in the price of the currency in the official and speculative markets narrowing.

But indications are that the volatility of the local unit will persist in the next few weeks, analysts said.

The ringgit appreciated by 0.26% to RM4.33 against the US dollar yesterday in the spot market.

The spread between the onshore US dollar-ringgit exchange rate and the rate offer in the offshore market, also known as the ringgit non-deliverable forward (NDF) market, also narrowed.

At the time of writing, the one-month US dollar-ringgit exchange rate in the NDF market, which is not recognised by Bank Negara and deemed as speculative, was trading at RM4.38, which is not far off the onshore rate of RM4.33.

“The ringgit appreciated against the US dollar as there was enough supply of the greenback in the system, unlike last Friday,” said a trader.

Last Friday, banks did not go into any US dollar-ringgit transactions upon the behest of Bank Negara, as the rates were too volatile for the local banking system to price the US dollar appropriately. On Sunday, Bank Negara assured that there would be adequate supply of the US dollar, which contributed largely to the calm trading environment yesterday.

However, the one-month forward yield of the US dollar-ringgit trade in the NDF market spiked up to 17% in early trade. The forward yield was closer to 10% after 5pm.

The forward yield indicates the level of interest by speculators taking an arbitrage position between the onshore and offshore US dollar-ringgit exchange rate. The yields are normally at about 3%.

Yesterday saw an abnormal spike in the one-month forward yield of the US dollar-ringgt trade in the NDF market.

Sunway University business school professor of economics Yeah Kim Leng said the spike showed that there was strong demand for hedging against expectations of a continued weakness in the ringgit, ahead of expectations of an increase in the US interest rate.

“There is a lot of speculation that the interest rate hike will come steeper and faster, given the new US president’s inclination towards greater fiscal spending to boost the economy and the corporate sector.

“Hence, what’s happening is an outflow of foreign funds from emerging markets back to the US by investors seeking higher returns there.”

Yeah said that until there is more clarity on what the new president’s exact policies are, there would be continued volatility across the markets.

Meanwhile, a senior technical analyst who tracks both the stock and currency markets told StarBiz that although the ringgit strengthened against the dollar, the charts indicate weakness of the local currency in the next few weeks.

According to the technicals, the US dollar/ringgit daily chart showed that the greenback had reached the overbought levels, suggesting that the ringgit may appreciate over the next few days.

On the stock market, he said the 14-day relative strength index was oversold, indicating that there could be a technical recovery in the short term.

“However, the upside potential is likely to be capped,” he said.

He added that important support was pegged at the 1,600-point psychological level, while the immediate resistance is expected at the 1,640-point barrier.

Another economist when contacted said that “what seems to be happening is that there is selling pressure on the FBM KLCI and bonds in the onshore market, as the prospect of higher US bond yields are weighing negatively on the emerging-market space such as Malaysia. That has added pressure on the ringgit.”

Traders have also taken cognisance of Bank Negara’s warning on Sunday that it would not tolerate any transactions that facilitated trade on the NDF market. The NDF, which is an instrument for investors to trade forward rates for the ringgit, is settled in US dollars and is not recognised by Bank Negara.

Meanwhile, CIMB Investment Bank Bhd said the ringgit could touch between RM4.50 and RM4.80 against the US dollar within the next three to six months premised on the lack of clarity of the new US administration’s policies.

“Since the election, the US yield curve has steepened to reflect the market’s expectation of an inflationary impact of (president-elect Donald) Trump’s campaign promises.

“This narrowed the premium of emerging-market yields over the US and resulted in the unwinding of carry trades funded in US dollar.

“The ringgit has fallen in line with this trend and the weakness was further compounded by the relatively high foreign holdings of Malaysian government bonds,” it said in a report yesterday.

According to MIDF Equities Research, foreign funds were net sellers on Bursa Malaysia in the week ended last Friday at RM800.4mil, although the amount was lower than the RM948.1mil offloaded in the previous week.

“Still, it was the seventh-highest weekly outflow this year, estimated based on transactions in the open market which excluded off-market deals,” it said in its report.

The benchmark FBM KLCI ended at 1,616.64 points, 17.55 points lower than Friday’s closing.

http://www.thestar.com.my/business/business-news/2016/11/15/ringgit-more-steady/

Recency Bias or the Party Effect

Recency Bias or the Party Effect
Overview

The Party Effect or Recency Bias is where stock market participants evaluate their portfolio performance based on recent results or on their perspective of recent results and make incorrect conclusions that ultimately lead to incorrect decisions about how the stock market behaves. This is a very important concept to understand. Let’s set the stage for an illustration of how this happens.

Examples

A Party Tale

“You’re Right”

One of my favorite life lessons centers around President Franklin Delano Roosevelt, also known as FDR. FDR had many strengths but I think his greatest was his ability to recognize that things are not always black and white. I think his ability to see the big picture as well as discern the subtleties of a situation is what made him such an effective leader and brought out the best in others.

In one well known FDR story, he asks one of his trusted advisors what he thinks about a particular situation and after he listens to the advisor, FDR replies “You’re Right.” Not long after FDR asks another of his trusted advisors for his opinion on the same matter and this advisor gives the exact opposite recommendation from the first advisor to which FDR once again replies “You’re Right.”

At hearing FDR’s reply to the second advisor one of FDR’s closest advisors that had listened to FDR’s response to both advisors, points out the obvious contradiction to which FDR replies “You’re Also Right.”

Much can be learned from what at first appears to be FDR’s flippant and contradictory remarks to his advisors. However, FDR was far wiser. FDR understood that all three advisors were in fact right. They were just right from their perspective. But they didn’t have a view of the big picture. The contrast between FDR’s perspective of the entire situation compared to the trusted advisor’s perspective of a narrow part of the situation is what creates the dichotomy. The stock market works much the same way.

A different example would be the poem about the six blind men and the elephant. Each of the six blind men is asked to describe an elephant. Their perceptions lead to misinterpretation because they each describe the elephant differently depending on which part of the elephant they touch. One touches the side and describes the elephant like a wall. The other the tusk and describes the elephant as a spear. The next touches the trunk and describes a snake. The next the knee and describes a tree. The next an ear and describes a fan. Finally the last touches the tail and describes the elephant like a rope.

This tale is about the stock market and how investors relate to the stock market.The stock market can be viewed as FDR or the elephant while investors or participants in the stock market can be viewed as the advisors or the blind men.When describing the stock market each participant sees their portfolio’s performance from their perspective only and thus they are always “right” which leads to what I call The Party Effect or what Financial Behaviorist call the Recency Bias.

Imagine that you attended a party hosted by your investment advisor and that in addition to you, also in attendance were several other clients. As you go around the room and meet people you learn that everyone at the party owns the exact same S&P 500 index mutual fund. I use the S&P 500 for this tale because by many measures it has historically produce an average rate of return of about 12% and as many people know, and now you know as well, it represents what many investors call “the stock market.” The question then is would everyone have the same rate of return at this party? Of course the answer is, no they would not. If they started at the same time they would but since people invest or come into the life of the investment advisor at different times, the answer is no.

Let’s tighten up the party attendee list and invite only 30 guests. For simplicity, let’s assume that Guest 1 purchased the fund 30 months ago, that Guest 2 purchased it 29 months ago, that Guest 3 purchased it 28 months ago, etc. What would the guests discuss? What would be their perspectives of the stock market?


In order to determine what the guests would discuss and how they would evaluate their performance we need to have some data in the form of monthly rates of return. So we need to develop a monthly rate of return for 30 months to see what they see. Again, for simplicity, assume that for the first 18 months the fund goes up 3% per month and for the next 12 months it goes down 2% per month. Please note that I didn’t pick this sequence of numbers randomly. I have a purpose to this. This particular sequence approximates how the stock market moves in terms of bull and bear market duration and after 30 months returns approximately 12%; 12.28% to be exact. This sequence of numbers is a good sequence to illustrate The Party Effect or Recency Bias. We can characterize the first 18 months as the bull market phase of the 30-month cycle and the last 12 months as the bear market phase of the 30-month cycle.

To illustrate The Party Effect lets focus on 4 guests and see how they describe the stock market. Remember the FDR and elephant example from the start of this tale. Let’s look at guests 1, 10, 19 and 25. I picked these 4 because readers of this tale can relate in some form or another to one of these 4.

- Guest 1 started 30 months ago, at the beginning of the bull market phase, and his rate of return is 12.28% for the entire 30-month cycle. He enjoyed the ride up for 18 months and now the ride down for the last 12.

-  Guest 10 started 21 months ago, halfway through the bull market phase, and his rate of return is 1.36%    for the 21-month period he has been invested.

-  Guest 19 started 12 months ago, at the beginning of the bear market phase, and his rate of return is  -21.53% for the 12-month period he has been invested.

-  Finally, Guest 25 started 6 months ago, halfway through the bear market phase, and his rate of return is  –11.42 for the 6-month period he has been invested.

These 4 guests experienced entirely different rate of return outcomes and view their portfolios and thus the stock market completely different. All 4 are correct. All 4 are right and yet they couldn’t possibly have more divergent outcomes. If they don’t have a complete picture of the stock market, like the elephant, they can get themselves in trouble. The difference between the best performing portfolio that is up 12.28% and the worst performing portfolio that is down 21.53% is an astounding 33.81%. Is this too obvious? You may say, of course they have different outcomes, they started at different times but that is not the point. The point is that stock market investing will always produce different outcomes. One guest started at the worst time possible. Another guest started at the best possible time. How they look at the past determines how they see the present. Most importantly, it will determine how they will act going forward.

The Party Effect simply states that stock market participants evaluate their portfolio performance based on their perspective and their perspective only. They do not see the market as it is but as they are. Without an expert understanding of how the stock market works, this leads to incorrect conclusions that ultimately lead to incorrect decisions. The field of Behavioral Finance (BF) has shown time and time again that people have variable risk profiles. BF demonstrates that fear is a stronger emotion than greed. This means that in our simple 4 guest example, Guests 3 and 4 are more likely to exit the stock market at just the wrong time since their recent, thus Recency Bias, experience is one of losing money. It means that Guest 1 and 2 are more likely to stay invested, thus catching the next wave up that is likely to follow. All 4 have intellectual access to the events of the last 30 months. All 4 can educate themselves on the stock market. However, their particular situation is so biased by recent events that the facts are unimportant. They behave irrationally. I have witnessed this irrational behavior throughout my career. No one is immune, even advisors.

There are ways to combat The Party Effect trap but it is the deadliest of all the stock market traps that I know. Few can overcome it. The only sure way to overcome it is to become an expert on the stock market yourself, learn to manage your emotions, and then either manage your own money or hire competent managers that you recognize are expert in their chosen investment discipline. However, if you hire an expert on the stock market you have not solved the problem if you do not have expertise. Let me repeat this sentence and highlight it. If you hire an expert on the stock market you have not solved The Party Effect trap if you do not have expertise yourself. When you hire an expert on the stock market without being an expert yourself all you have done is added complexity to a complex problem. You have inserted another variable between you and the stock market. You now have three variables to worry about, the stock market, your advisor and yourself. Without expertise you have no way of knowing if your advisor is an expert. You are in an endless loop. You are in a recursive situation. Just like we ask, what came first the chicken or the egg? The Party Effect asks, how do I hire an expert without being an expert myself?

If you are unwilling to become an expert on the stock market you must find a way to solve The Party Effect trap? How do you do it? As a first step I suggest you read An Expert Tale to make sure the person you hire is in fact an expert and then hire them. The original intent of my Financial Tales project was to educate my kids and others I love. With that as a backdrop, this means I highly recommend you avoid dealing with any advisor that does not have a fiduciary relationship with you the client. Why, because you are adding a 4th variable to an already complex situation. You are adding the ever present conflict of interest that every non-fiduciary advisor has with their client. This 4th variable makes a successful outcome all but impossible. I recognize that these words are harsh but I believe your odds of success drop dramatically once you introduce the non-fiduciary variable. I don’t know what the future holds, but today you must avoid conflicted advisors at firms such as Merrill Lynch, Smith Barney, Morgan Stanley, etc. I expect that the non-fiduciary model of providing people with investment advice based on the size of the advertising budget will go the way of the dinosaur, but for as long as it exists, you must avoid this ilk of advisors.

What is the second step to avoiding The Party Effect trap? There is no second step. You either develop investment expertise or you learn to recognize experts and hire them. You can’t avoid or abdicate this charge. You must embrace your responsibility or you will suffer or those you love will suffer. It behooves the reader to invest their time in what is one of the most important decisions they will ever make and must make every day.



http://www.wikinvest.com/wiki/Recency_bias

Warren Buffett: How the Average People Can Invest

• Benjamin Graham distinguishes investors into Defensive or Aggressive Investors
• If you are an active investor, look at as many things as possible
• You will find some bargains within them.
• When you find a bargain, you need to act.
• Start turning pages.  Moody's 10,000 pages, twice!
• You need to find these bargains yourself.  
• The world is not going to tell you about a great deal.
• This will take a bit of time.
• Those unwilling or are passive investors, should invest in index funds consistently over time.
• The worst investment in the world is cash.
• Cash is going to be worth less overtime, unlike good businesses.
• Good businesses are going to be worth more over time.
• You do not want to pay too much for them, so you must maintain some discipline on how much you pay for them.
• Find good businesses and stick with them.
• Keep enough cash to feel comfortable and to sleep well; so no one can determine your future.
• Cash is a bad investment over time.
• Financial panic is behind us.  The economic pain is still with us.
• It will end and won't go on forever.  It may end next month or next year.
• It won't go on forever; don't try to pick the bottom.  
• The bottom hasn't come in unemployment, in business but has come in stock.
• Don't pass out on something you find attractive today because you hope to find something way more attractive tomorrow.

Currency speculation takes on a life of its own in a floating exchange system.

A floating exchange rate system is based on the notion that market forces, as opposed to government policy, determine currency exchange.

Buyers and sellers of a currency determine the price.

Buyers and sellers can include

• traders, 
• fund managers, 
• banks, 
• multinational corporations and 
• governments.

Although a floating system leaves the process of determining exchange rates to market forces, those forces can force a currency to collapse.

If a major fund assumes a short position in a particular currency, it can push that currency, and in turn the underlying economy, to the verge of collapse.

It does this through a series of large trades distributed over several days.

Other traders sense economic doom on the horizon as they witness these trades and decide that they too must unload positions in that currency.

The currency drops 1%, 3%, 5%, ...

The businesses in this country are forced to contend with decreased buying power as a result of the declining currency.  

The goods and services, they are buying from their trading counterparts overseas (e.g. U.S.) became a lot more expensive thanks to the currency speculators.

The currency drop continues and soon everyone is panicking.

Before long, major corporations and individuals must cut spending as foreign-produced items are more expensive than before.

This can prove disruptive and in extreme cases disastrous.

Such examples are far from regular occurrences.

Government imposed exchange limits will prevent complete currency collapse caused by speculation.

The above illustrates what could happen when currency speculation takes on a life of its own in a floating system.

Calculating Real Estate Returns: Cash on Cash Return on Property Investment and Total Return on Property Investment

1.   CASH ON CASH RETURN ON PROPERTY INVESTMENT


Cash on cash returns assess the return on investment on the basis of the amount of cash invested to purchase the property.

           FORMULA:   Cash on cash ROI = pretax cash flow/cash investment

Pretax cash flow in real estate can be based on Net Operating Income (NOI) minus the mortgage payment.

The cash invested is the amount of cash invested to purchase the property (not including the amount financed).




Price of Property  $1,000,000
Cash Investment     $200,000
Mortgage               $800,000


Annual Net Operating Income (NOI) = $135,000
[NOI = EBIT = Property's Income before Interest and Tax]

Annual Mortgage Payment (Principal and Interest)  $40,000
[# depending on duration, monthly payments and interest rates]

Pretax Cash Flow = $135,000 - $40,000 = $95,000

Cash on Cash Return on Investment (ROI) = $95,000/$200,000 = 47.5%.






2.   TOTAL RETURN ON PROPERTY INVESTMENT

FORMULA:  

Total Return on Investment 
= (Pretax cash flow + Sales Proceed - Initial Cash Investment)/Initial Cash Investment


3 years after the above property was bought:
It is sold for $1,200,000.
Mortgage balance $762,000
Selling expenses including taxes and broker fees = 8% of sales price or $96,000


Net Sales Proceeds
= Sales Price - Mortgage Balance - Selling Expenses
= $1,200,000 - $762,000 - $96,000
= $342,000

Pretax cash flow per year = $95,000
Total pretax cash flow for 3 years = $95,000 x 3 = $285,000

Total ROI  (over 3 years)
= (Pretax Cash Flow + Sales Proceeds - Initial Investment)/Initial Investment
= ($285,000 + $342,000 - $200,000) / $200,000
= $427,000 / $ 200,000
= 213.5%.


Comments:

Several aspects of this deal proved favourable.
1.  The appreciation over 3 years was substantial
2.  The NOI was relatively stable
3.  The cost of financing was low.

This proved to be a lucrative deal and the type that most real estate investors dream of.

The reality, however, is that any number of factors can hurt the Total ROI.



Mortgage Calculators:

http://www.money-zine.com/calculators/mortgage-calculators/simple-monthly-mortgage-calculator/

http://www.money-zine.com/calculators/mortgage-calculators/mortgage-apr-calculator/





Another example.

Price of Property $400,000
Cash Paid $100,000
Mortgage  $300,000

Rental received $2,000 per month.
Annual net operating income = 10 months of rental.
Annual net operating Income (Property Income before interest and Tax) = $20,000 per year.

Mortgage Paid  = $1,800 per month or $21,600 per year.

Pretax cash flow = $20,000 - $21,600 = - $1,600 per year

Cash on cash return per year = -$1,600/$100,000 = - 1.6%

Simple Monthly Mortgage Calculator

Total Home Loan Amount $300,000

Annual Interest Rate 6.00%

Term of the Loan (Years)  30

Calculator Results

Monthly Payment ($/Month)  $ 1,798.65

Total Payments $647,514.57

Total Interest Paid $347,514.57

Currency Trading

Currency can be traded much like securities or as derivatives.

The purposes for trading vary but generally can be distilled down to either:

• speculation or 
• hedging.

Currency Speculation

Currency speculation can be a lucrative pursuit for skilled traders.

By analyzing macroeconomic variables such as inflation, interest rates, income levels, and governmental policies, currency traders can place bets on a currency with the hope of profiting from them.

Currency speculation can be complicated by the combination of market forces, the outcome of which can be difficult to predict.

Currency trading is complicated.   

[For example:

• A trader decides he wants to bet on the euro because he believes the European Central Bank will raise interest rates.
• At the same time, countries across the European Union are reporting substantial increases in inflation.
• This trader learns that one of the largest currency hedge funds is selling its position in the euro.]

There is no foolproof algorithm for predicting what will happen to a particular currency as a result of movements in influential variables.

No one can predict the direction currency will take 100 percent of the time.

Currency Hedging

Currency hedging is a practice that can be employed 

• by anyone taking a relatively large speculative position in a currency or 
• by a business seeking to manage risk.

Here are several protective hedging strategies:

• Options
• Forwards
• Futures

[Suppose Company X starts buying parts from a supplier in Europe.

Part payments are made in euros and are due 30 days after receipt of the parts

The euro seems to be rising against the dollar, which leaves Company X rather vulnerable.

In fact, if the euro rises significantly by the time payment is due, it could wipe out a good portion of Company X's expected profits.

What can the company do?

Here are several protective hedging strategies:

1.  Options.  

Buy calls on euros.

If the euro rises, the call becomes worth more, offsetting the increased payment amount owed to the supplier.

The downside of this strategy is that calls come at a price.

2.  Forwards

Company X can structure a forward contract to lock in a specific exchange rte, thus hedging from any exchange rate fluctuations.

The forward rate would be the specified exchange rate at which the currency will be exchanged.

3.  Futures

Company X can purchase a currency future requiring a standard amount of currency to be exchanged at a specific exchange rate on a specific settlement date.

Company X could purchase the future on an exchange, enabling the company to sell the future if rates hold or reverse. ]

[Now, suppose Company X sells its products in Europe and payments are made in euros.

The company stopped buying parts from Europe and now merely exports its products to Europe.

Sales are often credit-based, leaving the company with hefty accounts receivable.

What happens if these credit payments are owed 30 days after the customer takes possession?

If the euro fell against the dollar, the company would see its profits erode.

Hedging strategies can be employed by using the tools mentioned previously:

1.   Options

Buy puts on euros.

If the euro falls, the puts become worth more, offsetting the decreased payment amount owed to the company by its customers.

2.  Forwards

Just as before, Company x could create a forward contract to lock in the rate received from its customers.

3.  Futures

Company X could purchase dollar futures.  

If the euro declines against the dollar, the dollar future will increase, off-setting any loss of value on the receivable.]

Currency Arbitrage

Arbitrage allows an investor or trader to capitalize on pricing discrepancies.  

Arbitrage is used widely in the currency markets and usually takes on the following forms.

Locational Arbitrage

Locational arbitrage is based on the idea that one can buy currency at one location and sell it immediately at another location, instantaneously locking in a profit.  

A pricing discrepancy in the market allows for this.  

Arbitrage opportunities are generally short-lived, so you have to act fast, and usually the market corrects itself quickly.

Triangular Arbitrage

What if you could buy dollars with pounds, exchange the dollars for euros, and then exchange the euros back to dollars, earning a tidy profit during this round trip?

To determine whether a triangular arbitrage opportunity exists, you first would determine the cross exchange rate for dividing the USD to euro rate by the USE to GBP rate.

This would give you a cross exchange rate, GBP to euro.

This tells you that the bank is offering too many euros for pounds, which means the arbitrage opportunity does indeed exist.

You earned a profit because the bank overstated the cross exchange rate.

You were able to capitalize on this and earned a profit in the process.

The Biggest Problem in Currency Trading

The BIGGEST PROBLEM currency market players face is not understanding why currency exchange rates move in a particular direction when the factors affecting currency indicate something else

Unfortunately, the driving forces behind currency do not always indicate a definitive outcome; that is why currency trading is not for the faint of heart.

How to manage currency fluctuations and how to profit from them?

Nearly identical products sold in different countries can have major price differences when currency exchange is factored into the equation.

Directional shifts in currency exchange rates could allow one to hedge against or even profit from those shifts.

In a global economy, currency plays a pivotal role in the way transactions are structured.

From investment banking to corporate management, currency is involved in nearly all international financial decisions.

As the global economy becomes more complex, currency issues will continue to evolve.



Currency Exchange Rates

With the advantages of selling to the world come the challenges of managing global finance.

Currency plays a prominent role in the way businesses conduct their business and to whom they sell.

Financial managers must develop currency strategies to manage their receivables and payables.


For example, if the US dollar drops against the Malaysian Ringgit, it could hurt a Malaysian exporting company whose receivables are denominated in US dollar.

If the Malaysian Ringgit increases in value against the US dollar, it could raise the Malaysian foreign  owned company's manufacturing costs and perhaps cause management to consider moving its manufacturing facilities abroad.

Shifts in currency exchange rates can affect how much a company ultimately earns; therefore, a solid understanding of currency will allow management to craft an effective strategy to address unexpected shifts.



Determining the Exchange Rate

The exchange rate of any currency is its price.

It indicates how much of one currency is needed to buy one unit of another currency.

Suppose it takes 1 US dollar to purchase MR 3.50.  The value of 1 US dollar would be MR 3.50.

The value of 1 MR in US dollars therefore would be 0.2857 US dollar (1 US dollar/ MR 3.50).



How is this value determined?

What causes that 1 US dollar to equal MR 3.50 and 1 MR to equal 0.2857 US dollar?

Currency is no different from anything that is bought or sold, and therefore, economic principles determine its price.

A currency price is based on the price at which demand for that currency equals supply of that currency.  This is known as the equilibrium exchange rate.

Changes in supply and demand affect the exchange rate.



Currency Supply and Demand Curve:  

The supply curve for the currency is upward-sloping.  The supply of the currency increases when the value of the currency is strong.

The demand curve for the currency is downward-sloping.  The buyers tend to demand more of something when its price is lower.

For example, Americans would be more likely to exchange their dollars for yen when the value of the yen is lower.  This enables American consumers and corporations to buy more Japanese products at lower price.

When the value of yen is higher, demand for yen will be lower as Americans are less likely to exchange their dollars for yen as Japanese products are now more expensive.


Factors That Affect Currency Exchange Rates

The following factors have a direct impact on exchange rates.

Relative Inflation

If the US experiences higher inflation relative to Japan, U.S. goods become more costly than Japanese goods.

As a result, American consumers will demand Japanese substitutes.

This will increase the demand for Japanese yen needed to purchase Japanese products.

At the same time, the supply of yen for sale probably will decrease as Japanese holders of yen are less likely to buy American products, which are now more expensive.

The increased demand for yen and the decreased supply of yen will push the price of yen higher.


Interest Rates

If U.S. interest rates rise relative to Japanese interest rates, the supply of yen for sale will increase as more holders of yen will want to purchase dollars to earn more interest in dollars.

As a result, the value of yen will decrease.

Furthermore, the demand for yen should decrease because investors would rather deposit their money in American banks and therefore will demand dollars more than yen.

The decrease in demand combined with the increase in supply will cause a drop in the value of yen as a result of rising interest rates in the United States.


Income

If income levels in the United States increase while income levels in Japan remain unchanged, demand for Japanese goods should increase along with yen.

The shift in relative income is not likely to affect the supply of yen as a change in U.S. income levels will do little to incentivize Japanese yen holders to exchange more yen for dollars.

The increase in demand therefore should raise the exchange rate as American consumers probably will buy more Japanese products overall.

Speculation

Speculators can cause dramatic movements in currency prices.

They may base their trades on economic predictions or in some cases on expectations of what other high-volume traders will do next.

As more market participants move in tandem, currency values are often driven less by economic fundamentals and more by momentum traders.


Government

By imposing trade barriers and foreign exchange barriers, governments can affect currency values indirectly.

They do this by making it more difficult for foreign businesses to engage in import and export activity, which in turn will affect supply and demand for currency.

At the same time, a government can buy or sell its country's currency, which will affect its supply and ultimately its value.

Government policy changes, however, may not achieve the desired outcome when it pertains to currency .... or anything else for that matter.


Interaction of Factors

Any combination of these factors can affect currency in unpredictable ways.

If you could predict precisely how a combination of factors will affect currency values, you would be busy trading currency from your private island!

Understanding the turmoil in Syria.

Stocks and Bonds

The balance sheet helps us understand the overall financial health of a company.

A major factor in determining financial health is the company's underlying capital structure.

What is the best way to capitalize a company?  Is it equity or debt?  The answer is that it depends, as both debt and equity have their advantages.


Debt

Debt offers the following advantages.

1.   Lenders have no direct claim on future earnings.  Debt can be issued without worries about a claim on earnings.  As long as the interest is paid, the company is fine.

2.  Interest paid on debt can be deducted for tax purposes.

3.  Most payments, whether they are interest or principal payments, are usually predictable, and so a company can plan ahead and budget for them.

4.  Debt does not dilute the owner's interest, and so an owner can issue debt and not worry about a reduced equity stake.

5.  Interest rates are usually lower than the expected return.  If they are not, a change in management can be expected soon.



Debt securities can take a number of different forms, the most common being bonds.

Bonds are obligations secured by a mortgage on company property

Bonds tend to be safer from the investors' standpoint and therefore pay lower interest.

Debentures, in contrast, are unsecured and are issued on the strength of the company's reputation, projected earnings, or growth potential.

Debentures, being far riskier, tend to pay more interest than do their more secure counterparts.




Equity

Equity has the following advantages:

1.  Equity does not raise a company's break-even point.  A company can issue equity and not have to worry about achieving performance benchmarks to fund the equity.

2.  Equity does not increase the risk of insolvency, and so a company can issue equity and not have to worry about any subsequent payments to service that equity.  Equity is essentially capital with unlimited life and so a company can issue equity and not have to worry about when it comes due.

3.  There is no need to pledge assets or offer by personal guarantees when equity is issued.



Equity can take a number of different forms.

A simple form of equity is common stock.

This type of stock offers no limits on the rate of return and can continue to rise in price indefinitely.

There are no fixed terms; the stock is issued and the holder bears the stock.

Preferred stock entitles the holders to receive dividends at a fixed or adjustable rate of return and ranks higher than common stock in a liquidation.

Preferred stock may have anti-dilution rights so that in a subsequent stock offering, preferred stockholders may maintain the same equity stake.

Convertible securities are highly structured in nature and are based on certain parameters.  As the word convertible indicates, they may convert into other securities.

Among the most common are warrants and options.

Warrants and options stand for the right to buy a stated number of shares of common or preferred stock at a specified time for a specified price.

There are also convertible notes and preferred stock, which refer to the right to convert these notes to some common stock when the conversion price is more favourable than the current rate of return.

Valuation

To get ahead, be creative.

No matter what a client desired, a good banker could always tweak the numbers a bit and could produce the numbers:

• a higher selling price,
• a lower purchase price, 
• stronger margins,
• lower capital costs.

Valuation Basics

Time Value of Money

Present Value   

Methods of Valuation

Valuation is far more of an art than a science.

"The value of that work is $1 million, because that is what the buyer and seller agreed on."

With detailed valuation models, the key factors that drove a company in the past, along with those which will continue to drive it in the future, can be examined.

Both sides are able to form a better picture of the potential as well as the risks associated with this company.

Through this process of dialogue, they hope to be able to build a consensus.  With a little luck, they just might close a sale.

There are numerous uses for valuation.   

A few of the more common ones are:

• Venture capital
• Initial public offerings
• Mergers and acquisitions
• Leveraged buyouts
• Estate and tax settlements
• Divorce settlements
• Capital raising.
• Partnerships
• Restructuring
• Real estates
• Joint ventures
• Project finance.

Even if you have no dealings in these types of transactions and more specifically, no interest in them, it is important to have at least a basic understanding of the underlying principles and techniques of valuation.

Why?   Because so much of what we do and so much of what governs out personal lives is driven by these principles.

• The simple decision to lease or buy a care is driven by valuation.
• The decision to own or rent an apartment is driven by valuation.
• Changes in the stock market that might affect your job are a function of valuation.

It is important that each one of us understand the basics of valuation because we no longer can rely on the experts on Wall Street, in corporate America, and at the big accounting firms.

Ultimately, we all bear some responsibility because we were the ones who failed to educate ourselves.

Various Methods of Valuation

• Replacement Method
• Capitalization of Earnings
• Excess Earnings Method
• Discounted Cash Flow Valuation
• Comparable Multiple Valuation
• Net Present Value
• Internal Rate of Return

Putin's comments on Trump and the US Election