Saturday, 12 September 2009
How to Invest in Today's Turbulent Stock Market
How to Invest in Today's Turbulent Stock Market
Location: BlogsAsk Doug!
Posted by: Doug Gerlach 10/1/2008 1:25 PM
With all of the uncertainty in today's markets, it can be a confusing time to be an investor.
On Monday, September 29, 2008, investors saw the largest point drop in the Dow Jones Industrial Average in its 102-year history.
On Tuesday, two-thirds of that loss was recovered.
On Wednesday, who knows what could happen?
But looking back at the stock market over time, it's clear that it's seen worse and has always recovered. There's no reason to believe that the market won't come back around -- given time, that is. Those investors who put their confidence in the resiliency of the U.S. stock markets will be rewarded, as long as they maintain the proper perspective. In five years, investments made at today's bargain basement stock prices will quite possibly be seen as smart moves.
Here are a few points to consider as you plan your moves in the weeks and months ahead:
1. Remember that the market always operates in cycles, expanding and contracting over time, but on a completely unpredictable schedule. Investing regularly throughout the peaks and valleys is key to a successful long-term investing approach. In fact, wealth is often created in greater scale as the result of investing during down markets. Of course, this requires courage and the conviction that the markets and your holdings will rebound.
2. Most certainly, don't stop investing in the stock market. Many stocks that you study will be offered at or near historically low valuations, and if you try to wait for the market to reach its absolute low, or if you wait for a "clear sign" that the market is rebounding, you'll miss plenty of opportunities. I've been increasing the monthly contributions that I make to both of my investment clubs, and expect to reap the rewards from the regular investments that my clubs will continue to make in the coming months.
3. Focus on quality companies, now more than ever. It's likely that the interest rates will rise and access to debt will tighten, so companies that are highly dependent on borrowed capital to finance growth or operations may struggle. Companies with low credit ratings should be avoided. Consider the trend of a company's debt-to-equity ratio over the past few years, as in Section 2C of Toolkit 6's Stock Study form. Look to the Complete Roster of Quality Companies on StockCentral for ideas to study.
4. Consider carefully before investing or continuing to hold financial companies. There's no doubt that the regulatory climate will change in the coming months and years, with big changes in government oversight of financial markets and the structure of financial companies. I expect continuing consolidation of financial companies, with mega-firms swallowing up smaller concerns, leading to a general state of uncertainty about the financial sector. With so much being stirred up at present, it may be some time before the dust settles and the winners in the sector become apparent.
5. Re-evaluate existing holdings in light of their exposure to the credit markets, the housing market, and their levels of debt. Companies that don't pass muster are prime candidates for replacement. With the high number of bargains available now in the market, chances are good that you can find stocks with higher quality and higher total return prospects than your questionable current holdings. Don't lose sleep over stocks that don't inspire confidence -- upgrade your portfolio by swapping out these stocks with better prospects.
As you invest in your personal or investment club portfolio in the next few months, always remember your long-term focus. ICLUBcentral's tools are designed to help you build wealth in the stock market over a five-year and longer horizon. Patience and confidence go hand in hand with successful investing.
http://www.stockcentral.com/learn/blog/tabid/159/EntryID/43/language/en-US/Default.aspx
Location: BlogsAsk Doug!
Posted by: Doug Gerlach 10/1/2008 1:25 PM
With all of the uncertainty in today's markets, it can be a confusing time to be an investor.
On Monday, September 29, 2008, investors saw the largest point drop in the Dow Jones Industrial Average in its 102-year history.
On Tuesday, two-thirds of that loss was recovered.
On Wednesday, who knows what could happen?
But looking back at the stock market over time, it's clear that it's seen worse and has always recovered. There's no reason to believe that the market won't come back around -- given time, that is. Those investors who put their confidence in the resiliency of the U.S. stock markets will be rewarded, as long as they maintain the proper perspective. In five years, investments made at today's bargain basement stock prices will quite possibly be seen as smart moves.
Here are a few points to consider as you plan your moves in the weeks and months ahead:
1. Remember that the market always operates in cycles, expanding and contracting over time, but on a completely unpredictable schedule. Investing regularly throughout the peaks and valleys is key to a successful long-term investing approach. In fact, wealth is often created in greater scale as the result of investing during down markets. Of course, this requires courage and the conviction that the markets and your holdings will rebound.
2. Most certainly, don't stop investing in the stock market. Many stocks that you study will be offered at or near historically low valuations, and if you try to wait for the market to reach its absolute low, or if you wait for a "clear sign" that the market is rebounding, you'll miss plenty of opportunities. I've been increasing the monthly contributions that I make to both of my investment clubs, and expect to reap the rewards from the regular investments that my clubs will continue to make in the coming months.
3. Focus on quality companies, now more than ever. It's likely that the interest rates will rise and access to debt will tighten, so companies that are highly dependent on borrowed capital to finance growth or operations may struggle. Companies with low credit ratings should be avoided. Consider the trend of a company's debt-to-equity ratio over the past few years, as in Section 2C of Toolkit 6's Stock Study form. Look to the Complete Roster of Quality Companies on StockCentral for ideas to study.
4. Consider carefully before investing or continuing to hold financial companies. There's no doubt that the regulatory climate will change in the coming months and years, with big changes in government oversight of financial markets and the structure of financial companies. I expect continuing consolidation of financial companies, with mega-firms swallowing up smaller concerns, leading to a general state of uncertainty about the financial sector. With so much being stirred up at present, it may be some time before the dust settles and the winners in the sector become apparent.
5. Re-evaluate existing holdings in light of their exposure to the credit markets, the housing market, and their levels of debt. Companies that don't pass muster are prime candidates for replacement. With the high number of bargains available now in the market, chances are good that you can find stocks with higher quality and higher total return prospects than your questionable current holdings. Don't lose sleep over stocks that don't inspire confidence -- upgrade your portfolio by swapping out these stocks with better prospects.
As you invest in your personal or investment club portfolio in the next few months, always remember your long-term focus. ICLUBcentral's tools are designed to help you build wealth in the stock market over a five-year and longer horizon. Patience and confidence go hand in hand with successful investing.
http://www.stockcentral.com/learn/blog/tabid/159/EntryID/43/language/en-US/Default.aspx
Friday, 11 September 2009
Buffett dwells on book value
Over long periods, a stock will move in tandem with company's performance. In the short term, there may be no correlation between the two.
Stock price movements are so fickle. You cannot and should not measure a CEO's performance based on how much the stock has gained from year to year.
Earnings are pliable and a CEO can manipulate them in dozens of ways to inflate a company's bottom line fro several years. Using restructuring charges, asset sales, write-offs, employee layoffs, or "asset impairment" charges, corporations can generously, and legally, cook their books and give the impression they are functioning on all cyclinders, when, in fact, they could be throwing their profits down the drain.
For all the reasons above, Buffett dwells on book value. Understanding changes in book value is key to assessing whether a company is truly worth owning, in Buffett's view.
Stock price movements are so fickle. You cannot and should not measure a CEO's performance based on how much the stock has gained from year to year.
Earnings are pliable and a CEO can manipulate them in dozens of ways to inflate a company's bottom line fro several years. Using restructuring charges, asset sales, write-offs, employee layoffs, or "asset impairment" charges, corporations can generously, and legally, cook their books and give the impression they are functioning on all cyclinders, when, in fact, they could be throwing their profits down the drain.
For all the reasons above, Buffett dwells on book value. Understanding changes in book value is key to assessing whether a company is truly worth owning, in Buffett's view.
Did you sell when the stocks were in stratosphere?
Following my previous posting on "Did you buy when the stocks were on sale?", I thought it would be interesting to write something related.
The severe bear markets of October 1987, the Asian Financial Crisis of 1997, the SARS crisis, and the recent severe bear market were preceded by bull markets. Did you sell at the peak of these bull markets? Did you get out of stocks before the onset of the bear?
In 1987, I was not in the stock market. In the 1997 bullmarket, I continued to hold stocks in my portfolio. When the Asian Financial Crisis started, I did not sell these stocks. What were the consequences?
One counter went "kaput" - 100% loss. The prices of the other stocks were beaten down badly. Many remained lowly priced for multiple years. However, gradually the prices recovered. From then to now, this portfolio registered a reasonable gain. What saved or protected this portfolio from loss?
There are many factors. Firstly, investing for the long term is safe. The risk is in misjudging the business prospects of the companies you have in your portfolio. The risk is not in the price volatility. Secondly, by buying good quality stocks regularly at a fair or bargain price (a form of cost averaging). Thirdly, a gutsy move to add stocks to your portfolio in a bear market. I bought some stocks when the index was 600, only to see these stocks decimated when the index fell towards 300. Finally, by not selling during the depth of the bear market. To be able to do so, one need to know the difference between price and value and the conviction and ability to hold.
The present bear market started in 2007. This was preceded by a strong bull market when the KLCI reached a high of 1500. Did you sell during at the height of the bull market? What did you do then when the bear took hold? What lessons have you learned from your actions?
Selling is often a more difficult decision than buying. A stock with deteriorating fundamentals should be sold, sometimes urgently. For others, a relative reason for selling would be if the price of the stock has risen too high (overpriced) not in keeping with its underlying fundamentals.
The severe bear markets of October 1987, the Asian Financial Crisis of 1997, the SARS crisis, and the recent severe bear market were preceded by bull markets. Did you sell at the peak of these bull markets? Did you get out of stocks before the onset of the bear?
In 1987, I was not in the stock market. In the 1997 bullmarket, I continued to hold stocks in my portfolio. When the Asian Financial Crisis started, I did not sell these stocks. What were the consequences?
One counter went "kaput" - 100% loss. The prices of the other stocks were beaten down badly. Many remained lowly priced for multiple years. However, gradually the prices recovered. From then to now, this portfolio registered a reasonable gain. What saved or protected this portfolio from loss?
There are many factors. Firstly, investing for the long term is safe. The risk is in misjudging the business prospects of the companies you have in your portfolio. The risk is not in the price volatility. Secondly, by buying good quality stocks regularly at a fair or bargain price (a form of cost averaging). Thirdly, a gutsy move to add stocks to your portfolio in a bear market. I bought some stocks when the index was 600, only to see these stocks decimated when the index fell towards 300. Finally, by not selling during the depth of the bear market. To be able to do so, one need to know the difference between price and value and the conviction and ability to hold.
The present bear market started in 2007. This was preceded by a strong bull market when the KLCI reached a high of 1500. Did you sell during at the height of the bull market? What did you do then when the bear took hold? What lessons have you learned from your actions?
Selling is often a more difficult decision than buying. A stock with deteriorating fundamentals should be sold, sometimes urgently. For others, a relative reason for selling would be if the price of the stock has risen too high (overpriced) not in keeping with its underlying fundamentals.
Peter Lim is 7th on S'pore rich list
This remarkable chap made his money from investing in stocks. To emulate him:
1. You would need to have accumulated a large capital to invest.
2. You would need to have the opportunity to invest a large amount into Wilmar or a similar vehicle at the opportune time.
3. You would need to stay invested in the stock long term to savour the gains.
----
7. Peter Lim
(Up) US$1.5 billion INVESTMENTS
56. Married, 2 children
Former stockbroker, now full-time investor gets bulk of fortune from stake in Wilmar, started by former client Kuok Khoon Hong (No 3). Other stakes in fashion retailer FJ Benjamin, brewery restaurant Brewerkz.
http://www.theedgemalaysia.com/business-news/149108-update-robert-kuoks-nephew-3rd-on-spore-rich-list.html
1. You would need to have accumulated a large capital to invest.
2. You would need to have the opportunity to invest a large amount into Wilmar or a similar vehicle at the opportune time.
3. You would need to stay invested in the stock long term to savour the gains.
----
7. Peter Lim
(Up) US$1.5 billion INVESTMENTS
56. Married, 2 children
Former stockbroker, now full-time investor gets bulk of fortune from stake in Wilmar, started by former client Kuok Khoon Hong (No 3). Other stakes in fashion retailer FJ Benjamin, brewery restaurant Brewerkz.
http://www.theedgemalaysia.com/business-news/149108-update-robert-kuoks-nephew-3rd-on-spore-rich-list.html
Thursday, 10 September 2009
Did you buy when the stocks were on sale?
Did you take advantage of the best investing periods Mr. Market offered the last 20 years? Did you take advantage of Mr. Market or did you fall victim to Mr. Market during these times?
My first recollection was 1987. It would have been wonderful to have invested then, but my priorities were elsewhere and not in stocks then. I recalled the big fall in October 1987. Those invested in the stock market were stunned by the rapidity of its fall in a day. Many predicted the collapse of brokers and investment bankers. But the recovery was quick. Those who sold would have lost. Those who held or bought more were better off.
The next period was in 1997. It was the Asian Financial Crisis. It started with the Thai Baht being sold down. In its initial phase, it was thought that this could be contained to Thailand. Soon it spread to Indonesian rupee, and very soon after, Malaysian ringgit. The tremendous bull run of the decade had created a huge bubble which popped. The shares in many companies were trading at ridiculously high valuations at the peak of the bull market prior to the crisis. By 1998, the stock market had lost by a huge amount. The index plummeted to a low of just above 300. There were panic sellings by big investors, above all, the foreign funds. What did you do as an investor during this period?
Another fantastic period was in 2001. This was when the SARS epidemic hit Singapore. The broad market was sold down. Those who bought during this period would have profited.
This brings us to the present period. The best prices were seen during the October 2008 to March 2009 following the post-Lehman crash. By then, the bear market has been in place for more than a year and a half. Many stocks were already lowly priced and the post-Lehman crash led to even lower prices of these stocks. What did you do during this investing period?
These were the 4 periods from 1987 to 2009 when the market sold off by a huge amount. Many stocks were priced at low valuations. What did you do during these markets?
Did you buy?
Did you sell?
Did you hold?
Buffett is right. "Be greedy when everyone is fearful and be fearful when everyone is greedy."
What further lessons can you learn from these four periods?
My first recollection was 1987. It would have been wonderful to have invested then, but my priorities were elsewhere and not in stocks then. I recalled the big fall in October 1987. Those invested in the stock market were stunned by the rapidity of its fall in a day. Many predicted the collapse of brokers and investment bankers. But the recovery was quick. Those who sold would have lost. Those who held or bought more were better off.
The next period was in 1997. It was the Asian Financial Crisis. It started with the Thai Baht being sold down. In its initial phase, it was thought that this could be contained to Thailand. Soon it spread to Indonesian rupee, and very soon after, Malaysian ringgit. The tremendous bull run of the decade had created a huge bubble which popped. The shares in many companies were trading at ridiculously high valuations at the peak of the bull market prior to the crisis. By 1998, the stock market had lost by a huge amount. The index plummeted to a low of just above 300. There were panic sellings by big investors, above all, the foreign funds. What did you do as an investor during this period?
Another fantastic period was in 2001. This was when the SARS epidemic hit Singapore. The broad market was sold down. Those who bought during this period would have profited.
This brings us to the present period. The best prices were seen during the October 2008 to March 2009 following the post-Lehman crash. By then, the bear market has been in place for more than a year and a half. Many stocks were already lowly priced and the post-Lehman crash led to even lower prices of these stocks. What did you do during this investing period?
These were the 4 periods from 1987 to 2009 when the market sold off by a huge amount. Many stocks were priced at low valuations. What did you do during these markets?
Did you buy?
Did you sell?
Did you hold?
Buffett is right. "Be greedy when everyone is fearful and be fearful when everyone is greedy."
What further lessons can you learn from these four periods?
How to screen overseas stocks
Wednesday August 12, 2009
How to screen overseas stocks
Personal Investing - By ooi Kok Hwa
Four criteria to look at when choosing counters that are suitable for long-term investment
LATELY, interest has grown in overseas stock investment. Given the foreign markets’ relatively high volatility of returns compared with the local market, a lot of retail investors find it more exciting to invest in overseas stocks.
However, a common problem most investors face is how to filter, from among all the listed companies in the respective markets, the right stocks that are suitable for long-term investment.
Market capitalisation
One of the most important selection criteria is buying stocks with big market capitalisation. The market cap of a listed company can be computed by multiplying the number of its outstanding shares with the current share price.
In general, we should buy stocks with big market cap because they are normally well-established blue-chip stocks with higher turnover and widely-accepted products and services.
Even though some academic research shows that buying into small market cap stocks can provide higher returns compared with big market cap companies, unless we are quite familiar with the stocks available in those overseas markets, it is safer to put our money into bigger market cap stocks.
It is not difficult to find out which companies have the largest market cap in any stock exchange.
Such information is available in most major newspapers in that particular country or the stock exchanges themselves.
For example, if we intend to buy some Singapore stocks, we should pay attention to companies that are ranked in the top 30 in terms of market cap. One can get the rankings by market cap for the Singapore Exchange in StarBiz monthly.
Price/earnings ratio
Once we have filtered out the blue-chip stocks, the next selection criteria is the price/earnings ratio (PER), which should be lower than the overall market PER. This is computed by dividing the current stock price by the earnings per share (EPS) of the company. It represents the number of years that we need to get back our money, assuming the company maintains identical earnings throughout the period.
Even though some published PER may use historical audited EPS compared with forecast EPS, given that our key objective is to do stock screening, the PER testing will provide us with a quick check on the top 30 companies – whether they are profitable and selling at reasonable PER compared with the overall market PER.
If we cannot get access to the overall market PER, we may want to consider Benjamin Graham’s suggestion of buying stocks with PER of lower than 15 times.
Dividend yield
A good company should pay dividends. We strongly believe that this is one of the most important ways for the investors to get any returns from the companies that they invest in.
Our rule of thumb is that a good company should have a dividend yield that at least equals or is higher than the risk-free return, which is usually based on the fixed deposit rates.
The dividend yield is computed by dividing the dividend per share by the current share price. In general, most blue-chip stocks do have a fixed dividend payout policy and reward investors with a consistent and growing dividend returns.
Based on our observation, most smaller companies may not be able to pay good dividends as they may need the capital for future expansion programmes.
Price-to-book ratio
Most investors would like to invest at a market price lower than the owners’ costs in the company. The book value of a company represents the owners’ costs invested in it.
In a normal business environment, unless the company has some problems that the general public may not be aware of, it is quite difficult to find stocks selling at a price lower than the book value of the company.
As a result, we may need to purchase at a market price higher than the book value. According to Graham, the maximum price one should pay for any stock is the price which gives a price-to-book ratio no greater than 1.5 times. This means that we should not pay more than 1.5 times the owners’ costs invested in the company.
Lastly, the above four selection criteria are merely a preliminary quick stock screening process. Even though investors may be able to find stocks that fit the criteria, we suggest investors check further the fundamentals of the company, such as the balance sheet strength, its gearing, future business prospects and the quality of the management before deciding to invest.
● Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.
http://biz.thestar.com.my/news/story.asp?file=/2009/8/12/business/4499990&sec=business
How to screen overseas stocks
Personal Investing - By ooi Kok Hwa
Four criteria to look at when choosing counters that are suitable for long-term investment
LATELY, interest has grown in overseas stock investment. Given the foreign markets’ relatively high volatility of returns compared with the local market, a lot of retail investors find it more exciting to invest in overseas stocks.
However, a common problem most investors face is how to filter, from among all the listed companies in the respective markets, the right stocks that are suitable for long-term investment.
Market capitalisation
One of the most important selection criteria is buying stocks with big market capitalisation. The market cap of a listed company can be computed by multiplying the number of its outstanding shares with the current share price.
In general, we should buy stocks with big market cap because they are normally well-established blue-chip stocks with higher turnover and widely-accepted products and services.
Even though some academic research shows that buying into small market cap stocks can provide higher returns compared with big market cap companies, unless we are quite familiar with the stocks available in those overseas markets, it is safer to put our money into bigger market cap stocks.
It is not difficult to find out which companies have the largest market cap in any stock exchange.
Such information is available in most major newspapers in that particular country or the stock exchanges themselves.
For example, if we intend to buy some Singapore stocks, we should pay attention to companies that are ranked in the top 30 in terms of market cap. One can get the rankings by market cap for the Singapore Exchange in StarBiz monthly.
Price/earnings ratio
Once we have filtered out the blue-chip stocks, the next selection criteria is the price/earnings ratio (PER), which should be lower than the overall market PER. This is computed by dividing the current stock price by the earnings per share (EPS) of the company. It represents the number of years that we need to get back our money, assuming the company maintains identical earnings throughout the period.
Even though some published PER may use historical audited EPS compared with forecast EPS, given that our key objective is to do stock screening, the PER testing will provide us with a quick check on the top 30 companies – whether they are profitable and selling at reasonable PER compared with the overall market PER.
If we cannot get access to the overall market PER, we may want to consider Benjamin Graham’s suggestion of buying stocks with PER of lower than 15 times.
Dividend yield
A good company should pay dividends. We strongly believe that this is one of the most important ways for the investors to get any returns from the companies that they invest in.
Our rule of thumb is that a good company should have a dividend yield that at least equals or is higher than the risk-free return, which is usually based on the fixed deposit rates.
The dividend yield is computed by dividing the dividend per share by the current share price. In general, most blue-chip stocks do have a fixed dividend payout policy and reward investors with a consistent and growing dividend returns.
Based on our observation, most smaller companies may not be able to pay good dividends as they may need the capital for future expansion programmes.
Price-to-book ratio
Most investors would like to invest at a market price lower than the owners’ costs in the company. The book value of a company represents the owners’ costs invested in it.
In a normal business environment, unless the company has some problems that the general public may not be aware of, it is quite difficult to find stocks selling at a price lower than the book value of the company.
As a result, we may need to purchase at a market price higher than the book value. According to Graham, the maximum price one should pay for any stock is the price which gives a price-to-book ratio no greater than 1.5 times. This means that we should not pay more than 1.5 times the owners’ costs invested in the company.
Lastly, the above four selection criteria are merely a preliminary quick stock screening process. Even though investors may be able to find stocks that fit the criteria, we suggest investors check further the fundamentals of the company, such as the balance sheet strength, its gearing, future business prospects and the quality of the management before deciding to invest.
● Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.
http://biz.thestar.com.my/news/story.asp?file=/2009/8/12/business/4499990&sec=business
Keep it Simple and … Smart
Keep it Simple and … Smart
By Benny Lee, Chief Market Strategist, NextView Investors Education Group
You would be surprised find that many successful traders do not have advanced knowledge or a PHD in analyzing charts to make trading decisions. Many traders who have acquired professional certificates or degrees in finance and investing may be good analysts but failed when they start to trade. Many are engrossed in techniques and ideas and have forgotten the bottom line – making money from trading.
The objective of every trader (including investors) is to make money on a consistent basis. Many traders still think that their trading decisions should be correct all the time. Of course, not every trade or trading day or even trading month is going to be profitable. This is simply the nature of trading. There is no one successful trader who has not lost any money before in their trades. Keeping it simple can go a long way toward changing the traders’ mindsets about trading so that they can start to trade successfully and make money consistently.
A trader can make hundreds of possible trades during the course of a trading day or week. However, how many of these are your setups. A setup is a set of rule or rules to make the trading decision. How many of these setups have you traded in the past and how many are you intimately familiar with? Getting familiar with the set ups means that you know the characteristics of the set up, i.e. its advantages and disadvantages.
Your set up should be easy to understand and not complicated. Many traders think that putting in more rules and advanced ideas makes a better setup. Most of the time, it leads to confusion. Have simple trading rules in your setup, as long as the rules are able to minimize your trading decision risk by getting a clear picture of what the market is telling you.
Trade only a few setups, 1 to 3 is plenty. You cannot possibly trade every setup or even identify them in a real-time environment, unless you have programmed your setups in automated trading systems. Even that said, you may not have the money to trade all the setups. Furthermore, many setups can also be in opposing directions leading to even greater confusion.
Choose a few setups that you are most comfortable with and profitable (with the highest reward to risk ratio and low drawdowns). Stick with those and ignore all the others. Trade the setups that provide clear and obvious visual recognition. When choosing the setups that you want to trade, select the ones that can easily be identified visually.
Become intimately familiar with your setups. Reducing the number of setups of your trade will allow you to understand how they act, when they are likely to set up and when they are likely to fail. You will have an idea of the expected outcome whenever you make that trading decision. A good trader knows why he lose a trade.
Many traders often let their emotions take over their trading decisions. I have experienced losing a trade and then wanting to take revenge by trying to trade using my instinct. Of course, that will eventually lead to more losing trades. If you do not have a setup, wait. If your setup does not trigger, wait for the next one, even if it takes hours, days or even weeks, depending on the setup that you have. Exercise patience and discipline while waiting for your setup to trigger.
Losses often occur not because of a poor entry, but because the trader did not have the confidence of what he or she saw and allowed a small volatility in the market to take him or her out or, even worse, refused to take the stop loss that the trader had set because of a failed setup.
By trading fewer setups and becoming comfortable with them, you will be able to plan the trade ahead of time and develop much greater confidence in your trading.
The Advantages to Keeping It Simple… and Smart
First, good entries become profitable trades because the trader has confidence in the setup and will not be shaken out at the first bit of market noise. The trader understands the consequences of making that trading decision and would expect how the trade will react to these market noises because of the previous experience.
Second, the trader has become familiar with the setups so that the trader can quickly and easily identify when the setup has failed, exit and limit losses. The trader is able to accept losses because he or she knows that this is part of the plan and if he or she continues to follow the plan using the set ups, he or she will eventually make money from the market after a period of time.
Third, with this newfound trust and confidence that comes with following fewer setups, the trader is less inclined to chase setups that he or she is not familiar with and does not fully understand because the trader knows “his” or “her” setups will be profitable.
The Bottom Line for Your Trading
If your trading method is complicated or requires too much evaluation in real time, you will hesitate before entering and not trust it while in the trade. In the end, you will not follow your own method, which is equivalent to having no trading method at all.
Do not analyze during the market. Sometimes when a setup is triggered, the trader starts to analyze further using other indicators or setups because he or she just do not have enough confidence and do not want to lose on that trade.
Simple strategies work best because they allow you to trade with confidence, and, if you trade with confidence, you are one step closer to eliminating the emotion of fear in your trading.
Benny Lee is a trainer, trader and practitioner of technical analysis. He conducts Technical Analysis workshops, seminars and courses for private and professional investors, traders, remisiers and fund managers in Malaysia, Singapore and Thailand. For more of his articles, please visit: Benny Lee's column )
http://investasiaonline.com/forum/view_topic.php?id=64
Comments: Any investing system should be simple and easy to follow and implement. The system should be applied consistently and can be shown to be productive over a long period. The above article has so many ifs and buts.
By Benny Lee, Chief Market Strategist, NextView Investors Education Group
You would be surprised find that many successful traders do not have advanced knowledge or a PHD in analyzing charts to make trading decisions. Many traders who have acquired professional certificates or degrees in finance and investing may be good analysts but failed when they start to trade. Many are engrossed in techniques and ideas and have forgotten the bottom line – making money from trading.
The objective of every trader (including investors) is to make money on a consistent basis. Many traders still think that their trading decisions should be correct all the time. Of course, not every trade or trading day or even trading month is going to be profitable. This is simply the nature of trading. There is no one successful trader who has not lost any money before in their trades. Keeping it simple can go a long way toward changing the traders’ mindsets about trading so that they can start to trade successfully and make money consistently.
A trader can make hundreds of possible trades during the course of a trading day or week. However, how many of these are your setups. A setup is a set of rule or rules to make the trading decision. How many of these setups have you traded in the past and how many are you intimately familiar with? Getting familiar with the set ups means that you know the characteristics of the set up, i.e. its advantages and disadvantages.
Your set up should be easy to understand and not complicated. Many traders think that putting in more rules and advanced ideas makes a better setup. Most of the time, it leads to confusion. Have simple trading rules in your setup, as long as the rules are able to minimize your trading decision risk by getting a clear picture of what the market is telling you.
Trade only a few setups, 1 to 3 is plenty. You cannot possibly trade every setup or even identify them in a real-time environment, unless you have programmed your setups in automated trading systems. Even that said, you may not have the money to trade all the setups. Furthermore, many setups can also be in opposing directions leading to even greater confusion.
Choose a few setups that you are most comfortable with and profitable (with the highest reward to risk ratio and low drawdowns). Stick with those and ignore all the others. Trade the setups that provide clear and obvious visual recognition. When choosing the setups that you want to trade, select the ones that can easily be identified visually.
Become intimately familiar with your setups. Reducing the number of setups of your trade will allow you to understand how they act, when they are likely to set up and when they are likely to fail. You will have an idea of the expected outcome whenever you make that trading decision. A good trader knows why he lose a trade.
Many traders often let their emotions take over their trading decisions. I have experienced losing a trade and then wanting to take revenge by trying to trade using my instinct. Of course, that will eventually lead to more losing trades. If you do not have a setup, wait. If your setup does not trigger, wait for the next one, even if it takes hours, days or even weeks, depending on the setup that you have. Exercise patience and discipline while waiting for your setup to trigger.
Losses often occur not because of a poor entry, but because the trader did not have the confidence of what he or she saw and allowed a small volatility in the market to take him or her out or, even worse, refused to take the stop loss that the trader had set because of a failed setup.
By trading fewer setups and becoming comfortable with them, you will be able to plan the trade ahead of time and develop much greater confidence in your trading.
The Advantages to Keeping It Simple… and Smart
First, good entries become profitable trades because the trader has confidence in the setup and will not be shaken out at the first bit of market noise. The trader understands the consequences of making that trading decision and would expect how the trade will react to these market noises because of the previous experience.
Second, the trader has become familiar with the setups so that the trader can quickly and easily identify when the setup has failed, exit and limit losses. The trader is able to accept losses because he or she knows that this is part of the plan and if he or she continues to follow the plan using the set ups, he or she will eventually make money from the market after a period of time.
Third, with this newfound trust and confidence that comes with following fewer setups, the trader is less inclined to chase setups that he or she is not familiar with and does not fully understand because the trader knows “his” or “her” setups will be profitable.
The Bottom Line for Your Trading
If your trading method is complicated or requires too much evaluation in real time, you will hesitate before entering and not trust it while in the trade. In the end, you will not follow your own method, which is equivalent to having no trading method at all.
Do not analyze during the market. Sometimes when a setup is triggered, the trader starts to analyze further using other indicators or setups because he or she just do not have enough confidence and do not want to lose on that trade.
Simple strategies work best because they allow you to trade with confidence, and, if you trade with confidence, you are one step closer to eliminating the emotion of fear in your trading.
Benny Lee is a trainer, trader and practitioner of technical analysis. He conducts Technical Analysis workshops, seminars and courses for private and professional investors, traders, remisiers and fund managers in Malaysia, Singapore and Thailand. For more of his articles, please visit: Benny Lee's column )
http://investasiaonline.com/forum/view_topic.php?id=64
Comments: Any investing system should be simple and easy to follow and implement. The system should be applied consistently and can be shown to be productive over a long period. The above article has so many ifs and buts.
Wednesday, 9 September 2009
China alarmed by US money printing
China alarmed by US money printing
The US Federal Reserve's policy of printing money to buy Treasury debt threatens to set off a serious decline of the dollar and compel China to redesign its foreign reserve policy, according to a top member of the Communist hierarchy.
By Ambrose Evans-Pritchard, in Cernobbio, Italy
Published: 9:06PM BST 06 Sep 2009
Cheng Siwei, former vice-chairman of the Standing Committee and now head of China's green energy drive, said Beijing was dismayed by the Fed's recourse to "credit easing".
"We hope there will be a change in monetary policy as soon as they have positive growth again," he said at the Ambrosetti Workshop, a policy gathering on Lake Como.
"If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies," he said.
China's reserves are more than – $2 trillion, the world's largest.
"Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets," he added.
The comments suggest that China has become the driving force in the gold market and can be counted on to buy whenever there is a price dip, putting a floor under any correction.
Mr Cheng said the Fed's loose monetary policy was stoking an unstable asset boom in China. "If we raise interest rates, we will be flooded with hot money. We have to wait for them. If they raise, we raise.
"Credit in China is too loose. We have a bubble in the housing market and in stocks so we have to be very careful, because this could fall down."
Mr Cheng said China had learned from the West that it is a mistake for central banks to target retail price inflation and take their eye off assets.
"This is where Greenspan went wrong from 2000 to 2004," he said. "He thought everything was alright because inflation was low, but assets absorbed the liquidity."
Mr Cheng said China had lost 20m jobs as a result of the crisis and advised the West not to over-estimate the role that his country can play in global recovery.
China's task is to switch from export dependency to internal consumption, but that requires a "change in the ideology of the Chinese people" to discourage excess saving. "This is very difficult".
Mr Cheng said the root cause of global imbalances is spending patterns in US (and UK) and China.
"The US spends tomorrow's money today," he said. "We Chinese spend today's money tomorrow. That's why we have this financial crisis."
Yet the consequences are not symmetric.
"He who goes borrowing, goes sorrowing," said Mr Cheng.
It was a quote from US founding father Benjamin Franklin.
http://www.telegraph.co.uk/finance/economics/6146957/China-alarmed-by-US-money-printing.html
The US Federal Reserve's policy of printing money to buy Treasury debt threatens to set off a serious decline of the dollar and compel China to redesign its foreign reserve policy, according to a top member of the Communist hierarchy.
By Ambrose Evans-Pritchard, in Cernobbio, Italy
Published: 9:06PM BST 06 Sep 2009
Cheng Siwei, former vice-chairman of the Standing Committee and now head of China's green energy drive, said Beijing was dismayed by the Fed's recourse to "credit easing".
"We hope there will be a change in monetary policy as soon as they have positive growth again," he said at the Ambrosetti Workshop, a policy gathering on Lake Como.
"If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies," he said.
China's reserves are more than – $2 trillion, the world's largest.
"Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets," he added.
The comments suggest that China has become the driving force in the gold market and can be counted on to buy whenever there is a price dip, putting a floor under any correction.
Mr Cheng said the Fed's loose monetary policy was stoking an unstable asset boom in China. "If we raise interest rates, we will be flooded with hot money. We have to wait for them. If they raise, we raise.
"Credit in China is too loose. We have a bubble in the housing market and in stocks so we have to be very careful, because this could fall down."
Mr Cheng said China had learned from the West that it is a mistake for central banks to target retail price inflation and take their eye off assets.
"This is where Greenspan went wrong from 2000 to 2004," he said. "He thought everything was alright because inflation was low, but assets absorbed the liquidity."
Mr Cheng said China had lost 20m jobs as a result of the crisis and advised the West not to over-estimate the role that his country can play in global recovery.
China's task is to switch from export dependency to internal consumption, but that requires a "change in the ideology of the Chinese people" to discourage excess saving. "This is very difficult".
Mr Cheng said the root cause of global imbalances is spending patterns in US (and UK) and China.
"The US spends tomorrow's money today," he said. "We Chinese spend today's money tomorrow. That's why we have this financial crisis."
Yet the consequences are not symmetric.
"He who goes borrowing, goes sorrowing," said Mr Cheng.
It was a quote from US founding father Benjamin Franklin.
http://www.telegraph.co.uk/finance/economics/6146957/China-alarmed-by-US-money-printing.html
FTSE 100 hits 5,000 level for first time since October
FTSE 100 hits 5,000 level for first time since October
The FTSE 100 has touched the 5,000 level for the first time since the height of the banking crisis last October as investors seize on better news from the economy.
Published: 3:17PM BST 09 Sep 2009
The index of blue-chip companies has rallied more than 40pc since slumping to its low for the year in early March. The move to 5,000, a level last touched on October 3, comes as a new survey from Nationwide showed that British consumers are feeling more confident than at any point in the past 12 months.
Home Retail Group, the owner of Argos, was up 1pc, and Tesco, Britain's biggest supermarket, also added 1pc. Beyond retailing, BG Group was one of the biggest risers after telling shareholders that it had discovered a deepwater field off the coast of Brazil that contains between 1 billion and 2 billion barrels of oil.
"Difficult as it is to buy up here, the bulls will be taking confidence from the lack (just yet) of a reaction pull back," said Simon Denham, managing director of Capital Spreads. "The big hope is that all this spending does not just build a short term bubble."
Stock markets around the world have recovered from their lows as investors anticipate a recovery in the global economy. However, given the scale of the rally some analysts question whether the momentum can be sustained.
The six-month rally has driven the price-to-earnings ratio on the FTSE 100 to 70.9, the most expensive level in seven years, according to Bloomberg.
http://www.telegraph.co.uk/finance/markets/6162632/FTSE-100-hits-5000-level-for-first-time-since-October.html
The FTSE 100 has touched the 5,000 level for the first time since the height of the banking crisis last October as investors seize on better news from the economy.
Published: 3:17PM BST 09 Sep 2009
The index of blue-chip companies has rallied more than 40pc since slumping to its low for the year in early March. The move to 5,000, a level last touched on October 3, comes as a new survey from Nationwide showed that British consumers are feeling more confident than at any point in the past 12 months.
Home Retail Group, the owner of Argos, was up 1pc, and Tesco, Britain's biggest supermarket, also added 1pc. Beyond retailing, BG Group was one of the biggest risers after telling shareholders that it had discovered a deepwater field off the coast of Brazil that contains between 1 billion and 2 billion barrels of oil.
"Difficult as it is to buy up here, the bulls will be taking confidence from the lack (just yet) of a reaction pull back," said Simon Denham, managing director of Capital Spreads. "The big hope is that all this spending does not just build a short term bubble."
Stock markets around the world have recovered from their lows as investors anticipate a recovery in the global economy. However, given the scale of the rally some analysts question whether the momentum can be sustained.
The six-month rally has driven the price-to-earnings ratio on the FTSE 100 to 70.9, the most expensive level in seven years, according to Bloomberg.
http://www.telegraph.co.uk/finance/markets/6162632/FTSE-100-hits-5000-level-for-first-time-since-October.html
UK: 40pc chance of a rate cut? Really?
A 40pc chance of a rate cut? Really?
By Edmund Conway Economics Last updated: September 9th, 2009
2 Comments Comment on this article
About a month ago, in a throw-away comment at an economic conference, Charles Goodhart, a former member of the Bank of England’s Monetary Policy Committee unwittingly caused a stir in the money markets. As I wrote at the time, he raised the idea of the Bank imposing a negative interest rate, in other words charging a fee, on the cash Britain’s leading banks keep in store at the BoE itself.
The idea has snowballed, to the extent that in the run up to tomorrow’s MPC meeting, the odds on the Bank cutting its rate are, according to market participants, about 40pc. So might tomorrow mark the onset of negative interest rates for the first time in the UK? I am sceptical.
First, let’s examine the problem. The Bank is trying to get the economy going by pumping £175bn into it through quantitative easing. What this actually means is creating money (yes, printing it - electronically) and using this to buy bonds - almost exclusively government bonds (gilts) - off private investors. The upshot is that as that money goes into the system it finds its way pretty quickly to banks’ balance sheets (either because they sell the Bank the gilts or because pension funds pocket the proceeds and put them in their bank accounts).
Banks tend to keep a good deal of their cash in their own equivalent of a current account - reserves at the Bank of
England. So the upshot of quantitative easing has been to lift the amount sitting in reserves at the Bank to unprecedented highs - up from below £10bn to £142bn at the last count, in August. At the moment, the Bank pays banks a 0.5pc interest rate on this “current account” cash - the same as the BoE bank rate.
The problem is that much of this money is sitting dormant in the banks’ reserves rather than being used to lend to businesses, where it will actually help fertilise UK economic growth. This is the problem the Japanese faced in the 1990s and early 2000s when they first experimented with QE.
Anyway, Prof Goodhart’s suggestion was that the Bank should charge banks to keep this cash with them, rather than giving them 0.5pc interest. This is something the Riksbank in Sweden is experimenting with. The result would not necessarily be that reserves would fall throughout the system as a whole, but the cash would at least be sloshed around the system a little more (velocity is the technical term here) in the form of lending to businesses and companies.
It was an interesting suggestion - interesting enough for BoE Governor Mervyn King to say this at the Inflation Report press conference last month:
It is certainly true that it would be useful to think about ways to encourage banks individually to try to convert some of their reserves into say shorter term gilt holdings or purchases of other assets which would then reinforce the transmission mechanism of the direct assets purchases that we make. And in normal circumstances you might expect that to have some impact. And there is no doubt that the interest rate that we pay on reserves does affect the incentives which banks face to turn those reserves bank by bank individually into other assets. And it’s an idea we will certainly be looking at to see whether in fact the effectiveness of our asset purchases could be increased by reducing the rate at which we remunerate reserves.
Hence the fact that the market is all of a flutter about the prospects that the Bank would do so at this month’s meeting. However, there are some things people have overlooked. The first is that cutting the rate paid on reserves to banks from, say, 0.5pc to 0pc, would be an overall interest rate cut in all but name. It would push down the overnight rate in money markets to close to zero, which in turn would cut borrowing costs across the wider economy (though it wouldn’t affect tracker mortgages etc). So if you’re cutting the rate paid on reserves, why not cut the Bank rate? It is a prospect that is not beyond the realms of possibility tomorrow, though the Bank did make it pretty clear back in March that it viewed 0.5pc as “effective zero” for rates: below that level weird and not so wonderful things would happen in financial markets; certain businesses could malfunction. Think of it as the “millennium bug” effect for financial markets.
Should the Bank be unwilling effectively to cut Bank rate, it could still charge a fee to banks on a proportion of their reserves, allowing them to keep a certain amount (say, in comparison with the size of their balance sheet) but levying a penalty on any extra cash in their coffers. This is pretty close to what Goodhart was suggesting and is a feasible option tomorrow. But I wouldn’t put a 40pc chance on it.
My scepticism stems from a couple of key points. First, there are some early signs that QE is working even without such assistance. The amount of cash flowing around the wider economy - beyond reserves - is starting to pick up. Second, such a move would effectively amount to a tax on the banking sector as a whole. Third, it would also mean tearing up the complex set of rules and regulations that frame Britain’s monetary system once again.
Fourth, and perhaps most importantly, people seem to have forgotten that at the last MPC meeting something unusual happened: Mervyn King was outvoted. The Governor wanted the QE total to reach £200bn rather than the £175bn the MPC eventually opted for. In other occasions when he was outvoted, King usually attempts to get his way in a subsequent meeting. So might it not be more likely that the Bank will opt for a little more in the way of QE?
Perhaps, perhaps not. The fact is that market participants, having been surprised by the Bank’s decisions again and again in recent months, are suffering a slight degree of paranoia these days. Having been burnt more than once, they are putting greater odds on a surprise decision than they really ought to be. This is a tougher meeting to call than last month’s (to my mind at least, though the markets misjudged that one). And that’s for good reason: the economy is showing at least some signs of recovery - though this does not rule out a further relapse next year, something I’ve written about a number of times. This may well be one of those meetings when the MPC judges it best simply to do as little as possible. A boring MPC meeting? Never thought I’d see the day that one of those would be the exception rather than the norm.
http://www.telegraph.co.uk/?source=refresh
By Edmund Conway Economics Last updated: September 9th, 2009
2 Comments Comment on this article
About a month ago, in a throw-away comment at an economic conference, Charles Goodhart, a former member of the Bank of England’s Monetary Policy Committee unwittingly caused a stir in the money markets. As I wrote at the time, he raised the idea of the Bank imposing a negative interest rate, in other words charging a fee, on the cash Britain’s leading banks keep in store at the BoE itself.
The idea has snowballed, to the extent that in the run up to tomorrow’s MPC meeting, the odds on the Bank cutting its rate are, according to market participants, about 40pc. So might tomorrow mark the onset of negative interest rates for the first time in the UK? I am sceptical.
First, let’s examine the problem. The Bank is trying to get the economy going by pumping £175bn into it through quantitative easing. What this actually means is creating money (yes, printing it - electronically) and using this to buy bonds - almost exclusively government bonds (gilts) - off private investors. The upshot is that as that money goes into the system it finds its way pretty quickly to banks’ balance sheets (either because they sell the Bank the gilts or because pension funds pocket the proceeds and put them in their bank accounts).
Banks tend to keep a good deal of their cash in their own equivalent of a current account - reserves at the Bank of
England. So the upshot of quantitative easing has been to lift the amount sitting in reserves at the Bank to unprecedented highs - up from below £10bn to £142bn at the last count, in August. At the moment, the Bank pays banks a 0.5pc interest rate on this “current account” cash - the same as the BoE bank rate.
The problem is that much of this money is sitting dormant in the banks’ reserves rather than being used to lend to businesses, where it will actually help fertilise UK economic growth. This is the problem the Japanese faced in the 1990s and early 2000s when they first experimented with QE.
Anyway, Prof Goodhart’s suggestion was that the Bank should charge banks to keep this cash with them, rather than giving them 0.5pc interest. This is something the Riksbank in Sweden is experimenting with. The result would not necessarily be that reserves would fall throughout the system as a whole, but the cash would at least be sloshed around the system a little more (velocity is the technical term here) in the form of lending to businesses and companies.
It was an interesting suggestion - interesting enough for BoE Governor Mervyn King to say this at the Inflation Report press conference last month:
It is certainly true that it would be useful to think about ways to encourage banks individually to try to convert some of their reserves into say shorter term gilt holdings or purchases of other assets which would then reinforce the transmission mechanism of the direct assets purchases that we make. And in normal circumstances you might expect that to have some impact. And there is no doubt that the interest rate that we pay on reserves does affect the incentives which banks face to turn those reserves bank by bank individually into other assets. And it’s an idea we will certainly be looking at to see whether in fact the effectiveness of our asset purchases could be increased by reducing the rate at which we remunerate reserves.
Hence the fact that the market is all of a flutter about the prospects that the Bank would do so at this month’s meeting. However, there are some things people have overlooked. The first is that cutting the rate paid on reserves to banks from, say, 0.5pc to 0pc, would be an overall interest rate cut in all but name. It would push down the overnight rate in money markets to close to zero, which in turn would cut borrowing costs across the wider economy (though it wouldn’t affect tracker mortgages etc). So if you’re cutting the rate paid on reserves, why not cut the Bank rate? It is a prospect that is not beyond the realms of possibility tomorrow, though the Bank did make it pretty clear back in March that it viewed 0.5pc as “effective zero” for rates: below that level weird and not so wonderful things would happen in financial markets; certain businesses could malfunction. Think of it as the “millennium bug” effect for financial markets.
Should the Bank be unwilling effectively to cut Bank rate, it could still charge a fee to banks on a proportion of their reserves, allowing them to keep a certain amount (say, in comparison with the size of their balance sheet) but levying a penalty on any extra cash in their coffers. This is pretty close to what Goodhart was suggesting and is a feasible option tomorrow. But I wouldn’t put a 40pc chance on it.
My scepticism stems from a couple of key points. First, there are some early signs that QE is working even without such assistance. The amount of cash flowing around the wider economy - beyond reserves - is starting to pick up. Second, such a move would effectively amount to a tax on the banking sector as a whole. Third, it would also mean tearing up the complex set of rules and regulations that frame Britain’s monetary system once again.
Fourth, and perhaps most importantly, people seem to have forgotten that at the last MPC meeting something unusual happened: Mervyn King was outvoted. The Governor wanted the QE total to reach £200bn rather than the £175bn the MPC eventually opted for. In other occasions when he was outvoted, King usually attempts to get his way in a subsequent meeting. So might it not be more likely that the Bank will opt for a little more in the way of QE?
Perhaps, perhaps not. The fact is that market participants, having been surprised by the Bank’s decisions again and again in recent months, are suffering a slight degree of paranoia these days. Having been burnt more than once, they are putting greater odds on a surprise decision than they really ought to be. This is a tougher meeting to call than last month’s (to my mind at least, though the markets misjudged that one). And that’s for good reason: the economy is showing at least some signs of recovery - though this does not rule out a further relapse next year, something I’ve written about a number of times. This may well be one of those meetings when the MPC judges it best simply to do as little as possible. A boring MPC meeting? Never thought I’d see the day that one of those would be the exception rather than the norm.
http://www.telegraph.co.uk/?source=refresh
Building a Financial Plan
Sales forecast
Two to three years
Detailed assumptions
http://w4.stern.nyu.edu/berkley/docs/Glenn_Okun.ppt#19
Two to three years
Detailed assumptions
- Sales per customer
- Number of customers
- Sales growth rate
Cost forecast
Costs of operating and costs per sale
Income statement and balance sheet
a/r, a/p
Cash flow forecast
Summary statement of sources & uses of cash
http://w4.stern.nyu.edu/berkley/docs/Glenn_Okun.ppt#19
Cash Flow Calculations
Net income
+ depreciation
working capital from operations
- net increase in current assets
+ net increase in current liabilities
cash flow from operations
- net increase in gross fixed assets
+ net increase in debt & equity invested
- dividends paid
net cash flow
+ beginning cash balance
- required ending cash balance
net cash surplus or borrowing required
http://w4.stern.nyu.edu/berkley/docs/Glenn_Okun.ppt#19
Business Model Analysis
+ depreciation
working capital from operations
- net increase in current assets
+ net increase in current liabilities
cash flow from operations
- net increase in gross fixed assets
+ net increase in debt & equity invested
- dividends paid
net cash flow
+ beginning cash balance
- required ending cash balance
net cash surplus or borrowing required
http://w4.stern.nyu.edu/berkley/docs/Glenn_Okun.ppt#19
Business Model Analysis
Tuesday, 8 September 2009
The Importance of Cash Flow Management
Personal Dividends AboutSite/Privacy PoliciesContact UsAdvertiseWrite for UsHomeMoney Lifestyle Culture and Arts News Opinions
The Importance of Cash Flow Management
By Miranda on August 27th, 2009
One of the things that can make you or break you financially is your skill at cash flow management. For the purposes of personal finances and individual wealth management, your cash flow is the way money moves through your own small financial system. It’s the way your income flows into your bank accounts and then flows out to expenses and investments. And what is left over. Figuring out how your cash moves through your personal financial system is vital if you want to turn your money to better use, and if you want to be financially successful.
Figuring your cash flow
You will want to know whether your cash flow is positive, negative or zero. With a positive cash flow, you will have a surplus at the end of the month. With a negative cash flow, it will appear that you are overrunning your income — leading to excess debt and additional costs due to interest. And, finally, zero cash flow means that your inflows and outflows are balanced. (If you are into the zero-based budget, your goal is to reach zero cash flows.) One of the easiest ways to figure your cash flow is to use a calculator.
However, you can also do it on your own. First, add up your monthly income from all sources, including what you get from dividends or other income investing. Pay attention to where you are getting your money from. Next, add up all of your expenses. This includes money that you put into savings, retirements accounts and other investments, and money that you give to charity or your church. Catalog where your money is going. There are many tools available in the market, some even online, that can help you understand and plan your income, expenses, debt and savings.
I like to take it a step further, and look at when I receive income and when expenses are due. In cash flow management, when matters. I found this out the hard way a couple of years ago. Excited about a new client, I wrote a bunch of checks for bills, even though some of them weren’t due until the end of the month. What I forgot to figure was that my mortgage payment came out automatically on the 15th. And my mid-month income didn’t come until that day — and it takes three to four business days to get it from PayPal into my bank account. As you might imagine, overdraft charges ensued (no bounced checks, though). $300 in bank charges taught me to schedule bill payments in a manner that matches up with when I am paid.
Tweaking your cash flow
After you have an idea of where you are at (a calculator or personal finance software can provide it for you in all it’s color-coded glory), it’s time to tweak the way money moves through your personal financial system. Look at your expenses. As much as possible, they should be focused on things that will pay you back some how. Examine your priorities to see what provides you a benefit. If you enjoy eating out, but you aren’t that into watching TV, perhaps you should shift some of your resources toward eating out, and cut your cable package.
You should also examine where you can put more money into items that will pay you back down the road. Being able to increase money outflows into investments are likely to repay you, justifying the expense. Charitable giving provides intangible benefits such as a feeling of satisfaction from helping others or spiritual benefits (for believers). And besides, there’s a tax benefit.
Thoughtfully arranging your spending so that you make the most of the money you have coming in can help you in the future. Understanding how money moves through your personal financial system right now can help you cut back on waste, and help you create a realistic financial plan that can help you walk the path to financial freedom.
http://personaldividends.com/money/miranda/the-importance-of-cash-flow-management
The Importance of Cash Flow Management
By Miranda on August 27th, 2009
One of the things that can make you or break you financially is your skill at cash flow management. For the purposes of personal finances and individual wealth management, your cash flow is the way money moves through your own small financial system. It’s the way your income flows into your bank accounts and then flows out to expenses and investments. And what is left over. Figuring out how your cash moves through your personal financial system is vital if you want to turn your money to better use, and if you want to be financially successful.
Figuring your cash flow
You will want to know whether your cash flow is positive, negative or zero. With a positive cash flow, you will have a surplus at the end of the month. With a negative cash flow, it will appear that you are overrunning your income — leading to excess debt and additional costs due to interest. And, finally, zero cash flow means that your inflows and outflows are balanced. (If you are into the zero-based budget, your goal is to reach zero cash flows.) One of the easiest ways to figure your cash flow is to use a calculator.
However, you can also do it on your own. First, add up your monthly income from all sources, including what you get from dividends or other income investing. Pay attention to where you are getting your money from. Next, add up all of your expenses. This includes money that you put into savings, retirements accounts and other investments, and money that you give to charity or your church. Catalog where your money is going. There are many tools available in the market, some even online, that can help you understand and plan your income, expenses, debt and savings.
I like to take it a step further, and look at when I receive income and when expenses are due. In cash flow management, when matters. I found this out the hard way a couple of years ago. Excited about a new client, I wrote a bunch of checks for bills, even though some of them weren’t due until the end of the month. What I forgot to figure was that my mortgage payment came out automatically on the 15th. And my mid-month income didn’t come until that day — and it takes three to four business days to get it from PayPal into my bank account. As you might imagine, overdraft charges ensued (no bounced checks, though). $300 in bank charges taught me to schedule bill payments in a manner that matches up with when I am paid.
Tweaking your cash flow
After you have an idea of where you are at (a calculator or personal finance software can provide it for you in all it’s color-coded glory), it’s time to tweak the way money moves through your personal financial system. Look at your expenses. As much as possible, they should be focused on things that will pay you back some how. Examine your priorities to see what provides you a benefit. If you enjoy eating out, but you aren’t that into watching TV, perhaps you should shift some of your resources toward eating out, and cut your cable package.
You should also examine where you can put more money into items that will pay you back down the road. Being able to increase money outflows into investments are likely to repay you, justifying the expense. Charitable giving provides intangible benefits such as a feeling of satisfaction from helping others or spiritual benefits (for believers). And besides, there’s a tax benefit.
Thoughtfully arranging your spending so that you make the most of the money you have coming in can help you in the future. Understanding how money moves through your personal financial system right now can help you cut back on waste, and help you create a realistic financial plan that can help you walk the path to financial freedom.
http://personaldividends.com/money/miranda/the-importance-of-cash-flow-management
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