High Frequency Trading (HFT): Wall Street's Latest Scam

High Frequency Trading (HFT): Wall Street's Latest Scam

Goldman Sachs and friends are hanging us out to dry with HFT


"It appears exchanges are conspiring with a privileged group of high-frequency traders in a massive fraud," Fund Manager Whitney Tilson.

Wall St, New York, USA, 17 August 2009. The new cream-skimming trick in Wall Street's playbook is called High Frequency Trading, or HFT.


It works like this: big trading banks invest in super-computers that can process information at every faster speeds, splitting nano-seconds into smaller and smaller units. These super-computers can process instructions faster than regular computers, and much faster than humans. Next, they place these super-computers in the exchanges themselves. This gives direct access to the exchange, cutting out the latency of connections from remote locations. By trading faster than smaller investors, profits can be constantly churned.

Institutional investors will often divide large purchases up into many small blocks that will be bought or sold within specified price ranges. HFT players seek to determine the price range by sending out quotes that are issued and almost immediately cancelled. They can execute thousands of such trades in a second. If they hit on a price in the acceptable price range, they can fulfil the order and then sell it on to the investor microseconds later for a tiny profit. Do this long enough and you can rack up impressive profits.




This is not an obscure phenomenon. Estimates say that 50 per cent to 70 per cent of traded volume on the NYSE is carried out by High Frequency Traders, or HFTs. That's right; high-speed gouging of retail investors and large institutions now makes up the bulk of trading. It has directly led to Goldman Sachs pulling in record profits, and recording 46 '$100 million' trading days, when the economy is dead and corporate M&A activity is at record lows. If you wondered how they pulled that one off, here's how. It has become the very heart of investment banking, which explains the vigour with which Goldman's pursued a former employee who tried to create a new business using HFT computing code that he had developed. He has been arrested for theft.

We would argue that Goldman Sachs is guilty of much worse crimes. True it is legal, but Democratic Senator Charles Schumer and the London Stock Exchange are looking to change the rules to stop at least some HFT practices.

High Frequency Traders, or HFTs, come in a number of guises. Academic research published in the paper "Toxic equity trading order flow on Wall Street" lists the following types of plays, which it says are more responsible for market volatility than the financial crisis:

Liquidity rebate traders - Exchanges (at least some of them) offer rebates of about 0.25 cents per share to large brokers who bring in liquidity. They can re-offer shares at exactly the same price and still make a profit. Of course if they can offer the shares at a marginally higher price they will make more profit, as will the exchanges. Tilson said the exchanges are complicit because of these rebates, and the additional access they offer.

Predatory algorithmic traders - By placing small buy orders that are withdrawn, they fool institutional traders by bidding up the price of the stock, which is bought at higher prices as the series of small orders are executed to fulfil the big transaction. Later in the process the "predatory algo" shorts the stock at the higher price it has reached. The institutions then cover the short at the higher price.

Automated market makers - This HFT play involves"pinging" stocks with probe orders that are almost immediately cancelled, as described earlier. When a price is discovered, the shares are bought elsewhere and sold-on to the institution.

Program traders - By buying large numbers of stocks at the same time, they can trick institutional trading programs by triggering large buy orders that are tied to price moves. Once the institutions bite they can sell the stocks for a profit, leaving the traders as the 'patsy'. Flash traders - In this HFT scam, flash traders give an order to only one exchange. They execute it when - and only when - the order can go through without triggering "best price" procedure intended to give sellers on all exchanges a chance at meeting the best price. The Nasdaq will close the flash trading loophole on the 1st September 2009, and the SEC says it will ban this technique.

Nobel Economist Paul Krugman has been analyzing these traders and finds no economic value in what is being done; in fact he believes that if anything they are destroying value. "The stock market is supposed to allocate capital to its most productive uses, such as by helping companies with good ideas raise money. It's hard to see, however, how traders who place their orders one-thirtieth of a second faster than anyone else do anything productive," said Mr Krugman. "There is a good case that such activities are actually harmful. HFT probably degrades the stock market's function, because it's a kind of tax on investors who lack access to super computers and at-exchange connectivity - which means that the money Goldman spends on those computers actually has a negative effect on national wealth. As economist Kenneth Arrow said in 1973, speculation based on private information imposes a 'double social loss', by using up resources and undermining markets."

Not satisfied with milking the taxpayer, Goldman and friends have also escalated the profiteering arms race and are looking to skim everyone in the trading arena - partners, clients and each other. Can regulators keep up with the speed of their innovation and put in place sensible restrictions to protect the rest of us?

Juan Abdel Nasser, EconomyWatch.com


http://bx.businessweek.com/investment-banking/view?url=http%3A%2F%2Fwww.economywatch.com%2Feconomy-business-and-finance-news%2Fhigh-frequency-trading-hft-wall-streets-latest-scam-18-08.html

2010 Investment Outlook

2010 Investment Outlook
Advice for next year: Go global
By Peter Coy

December 28, 2009

After a long, hard day of conquering the world, Chinese industrialists toast deals with Scotch whisky. This is an opportunity for London-based Diageo (DEO), the world's largest distiller. In 2007 it introduced Johnnie Walker Blue Label George V Edition at $600 per crystal decanter. Sales in Asia were so strong that Diageo topped itself this year with The John Walker at a suggested retail price of $3,000. It's "performing very well," the company says.

Investors looking ahead to 2010 can learn from Diageo. Figure out where wealth is being produced in the world and grab a piece of it, whether that's in China or Brazil or the U.S. Don't count on a robust economic recovery to lift the stocks of run-of-the-mill companies, because most economists expect a weakish rebound.

We predicted in this space one year ago, when blood was running in the streets, that investors would "do well by buying what's out of favor," such as high-yield bonds. Did they ever: Through November in the global markets, junk bonds returned 58%, followed by commodities (36%), gold (34%), stocks (29%), and investment-grade corporate bonds (23%). Bringing up the rear in returns was the safe choice, government debt (8%). But the easy money from amping up risk is over. Now it's time to choose safer plays in stocks, bonds, and commodities that will thrive even as the U.S. economy continues its struggle to get back to good health.

In that light, going global is a good, sensible theme for 2010. It's one of the few things that passive and active investors can agree on, even though they have opposite reasons. Passive investors believe that you can't beat the market, so they favor a little-bit-of-everything approach to reduce the risk from any one investment going bad. By their philosophy, the maximum diversification comes from spreading your bets all over the globe, not just in your home country. Ideally, the passive investing camp says, Americans' investment in U.S. stocks should be no higher than U.S. stocks' share of global market capitalization. That share has fallen from 70% in 1970 to 48% in 2009, according to MSCI Barra (MXB), which calculates market indexes.

You can even argue that Americans should underweight U.S. stocks to offset their heavy exposure to the U.S. through the homes they own on American soil. Not many Americans are that internationally diversified. A typical 401(k) in the U.S. has about five times as much invested in U.S. stocks as in foreign stocks, according to a survey by Hewitt Associates (HEW).

Active investors are also exploring investments abroad, but not just for diversification. In contrast to index-fund investors, they believe you can beat the market—and many happen to think that some of the best bargains for 2010 lie outside the U.S., in markets that have been less picked over by professionals. An investor who miraculously managed to select the top 10 stocks in the world in each market sector each year for the eight years through December 2008 would have had a cumulative return of almost 7,000%, says MFS Investment Management, the Boston-based fund manager. In contrast, MFS adds, an equally foresighted investor who was restricted to the top-performing stocks in the Standard & Poor's 500-stock index would have had a cumulative return of just under 1,500%. In other words, if you have any faith in your stockpicking, you will want to roam the world for candidates.

Whatever their motivation, many Americans are likely to intensify their search for investments abroad in the coming year. An online investors' survey for Bloomberg BusinessWeek in early December found that 40% of American investors plan to increase their exposure to international stocks over the next five years, up from 22% a year ago.

The survey included 770 Americans as well as 158 international investors who had been recruited to participate in periodic online polls by Bloomberg BusinessWeek Research Services. Some things don't change quickly, though: Asked which stock market would produce the best returns over the next year, Americans were still more likely to pick the U.S. than any other country. Among foreign investors surveyed, the U.S. came in fourth after China, India, and Brazil.

Those non-U.S. investors may be on to something. In comparison with the outlook in the recuperating U.S., prospects for growth are much stronger in Asia and in resource-rich nations such as Brazil, Canada, and Australia, where business confidence recently reached its highest level in seven years. "The U.S. economy, with all due respect, is not such a dominant part of the global economy as it used to be. We're going to have decoupling" of other countries from the U.S. in terms of economic performance, says Oded Shenkar, a professor at Ohio State University's Fisher College of Business. The case for going global is even stronger if you believe that the dollar will sink in 2010. Returns on foreign stocks and bonds are worth more to Americans when the dollar falls against other currencies. The Federal Reserve has vowed to keep short-term interest rates extremely low until the U.S. economy gains strength, which may not be until summer or later. Low U.S. rates put downward pressure on the currency.

Buying multinationals is an easy way to bet on global growth without mucking about in names you've never heard of. Not just any multinational will do, though. Makers of consumer staples that serve the growing markets of Asia and Latin America are a good bet for 2010, says Rajiv Jain, head of international equities for Vontobel Asset Management in New York. Diageo is one, of course. Others include Coca-Cola (KO), Nestlé, McDonald's (MCD), and BAT (BTI) (if owning a tobacco company doesn't bother you). Many of these companies have handsome dividend yields as well as price-earnings multiples that are historically low in comparison with those of growth stocks, Jain says.

If you want even more exposure to growth in the developing world, try a company like Nestlé India—not a multinational, of course—which has had 11 consecutive quarters of strong revenue growth. "If you look at their numbers, you would never know there was a recession," says Jain.

In contrast, this is not the best year to go all-in on an industrial renaissance. There is still massive overcapacity in manufacturing in the U.S. despite plant shutdowns and layoffs. China made its own excess of productive capacity worse when it staved off an economic slump by building plants, equipment, infrastructure, and housing.

The tech sector should do somewhat better than general manufacturing because it enjoys shorter product cycles: If customers have any money at all, they tend to replace their computers and communications gear when the stuff becomes obsolete. Worldwide semiconductor sales rebounded more than 50% from their February 2009 lows through October, notes economist Edward Yardeni of Yardeni Research in Great Neck, N.Y. But tech stocks have risen a lot from their nadirs, so they're no great bargains at current prices.

Banks and other financial companies don't look like good deals, either. They continue to be weighed down by weak loans and investments that were made during the go-go years. And the off-balance-sheet financing they once used to juice up their returns is now pretty much off limits, says Wasif Latif, an equity portfolio manager and a member of the asset allocation team of USAA, the San Antonio-based financial-services firm for the armed forces and veterans. Plus, financial stocks have risen a lot from their priced-for-Armageddon lows.

It's been a crazy year. Somewhere out there is a hapless investor who stayed fully invested all through the crash, then finally capitulated and sold in early March, only to watch from the sidelines in horror as the Standard & Poor's 500 rebounded 65% through mid-December. To make sure that's not you in 2010, think hard about your investment choices so you can have the courage of your convictions. Make an investing plan and stick to it, advises Eileen Rominger, chief investment officer of Goldman Sachs Asset Management (GS) in New York, which oversees about $850 billion of investments. "You need a solid foundation of knowing what you own and why you own it," Rominger says. "In this volatile environment, the temptation for investors to do the wrong thing at exactly the wrong point in time is tremendous."

That's especially good advice if you're venturing for the first time into unfamiliar territory such as foreign stocks and bonds. It's a big world, with lots of opportunities. Don't let the strangeness frighten you away.

Coy is BusinessWeek's Economics editor.



http://www.businessweek.com/magazine/content/09_52/b4161045147139.htm

8 Tips For Starting Your Own Business

Be Your Own Boss

Wouldn't it be great to be able to quit your job, be your own boss and earn a paycheck from the comfort of your own home? The good news is that with a little planning and some startup money, it is possible! Here we'll examine some important steps to follow when starting your own business.
 
Do You Have What It Takes?

Not everyone is cut out for the challenge of starting their own business. There are several personality traits that are common among successful entrepreneurs, including discipline, frugality, self-confidence, good communication skills, humility, honesty and integrity, superb record-keeping skills, motivation, good health, optimism and more. For more on these characteristics, read Are You An Entrepreneur?

Creating The Concept

Before you quit your job to become an entrepreneur, you must first think of a concept, product or service that will generate a steady stream of income. This may sound easy, but for most people, this is actually the hardest part. You should conceive a plan that puts your knowledge, experience and expertise to use in the most profitable way possible. Once you settle on an idea, research the marketplace to see how similar businesses have fared.

Smart Tip: Start with areas you already have a great deal of interest in, and equipment and materials for. This will help cut down startup costs.
 
Make Sure You Have Support

If you're married and/or have kids, you should also be asking your family how they feel about your working from home, as your decision will affect them both financially and psychologically. If the response is negative, spend time addressing any concerns and decide whether your goal is worth continuing against their wishes if you are unable to change their minds.
 
Develop A Work Space

If you are considering a home-based business, remember that your home's primary function is to serve as a dwelling for you and your family - not as a warehouse or meeting place for your business and its clients. If you're considering a computer-based business, make sure you have the technology necessary to give your idea a fighting chance.

Smart Tip: Make sure you have a dedicated, private area to work. This area should be free of noise and distraction.
 
Create A Business Plan

Numerous studies have shown that one of the major reasons new businesses fail is poor planning. If you are planning on starting up a business, you must have a business plan. This will serve as a road map to guide you, and communicate with your bank and/or investors what you're doing and why they should invest in you. It should include a mission statement, executive summary, product or service offerings, target market, marketing plan, industry and competitive analysis, pro-forma financials, resumes for the company's principals, your offering, and an appendix with any other pertinent information.

Find The Right Funding


Most businesses require startup income. Ideally, this investment will help you break even after a year, but keep in mind that even successful businesses can remain in debt for the first few years. Potential sources of funding include a small-business loan from your local bank, tapping into your savings, money from other investments, borrowing from family/friends and, as a last resort, credit cards.

Smart Tip: Try to avoid racking up costly credit card debt that could cost 20% or more in yearly interest fees. You should also avoid borrowing against your 401(k) or other similar plans as this could adversely affect your retirement.
 
Plan Your Company Budget


Without a budget, a business runs the risk of spending more money than it is taking in, or not spending enough money to grow the business and compete. There are a number of ways you can plan your budget. These include researching industry standards, giving yourself a cushion, reviewing the budget periodically, and shopping around for services and suppliers. For more, read Six Steps To A Better Business Budget.

Smart Tip: While many firms draft a budget yearly, small business owners should do so more often. In fact, many find themselves planning just a month or two ahead when unexpected expenses throw off revenue assumptions.
 
Get All The Help You Can Find


A number of resources are available to help entrepreneurial hopefuls get off to a great start. Free information and assistance is available from your local Small Business Development Center (SBDC) and SCORE offices. Both are associated with the U.S. Small Business Administration (SBA). The IRS can even provide free assistance, including accounting and record-keeping, through the Small Business Tax Education Program.
 
http://www.investopedia.com/slide-show/tips-start-your-own-small-business/default.aspx

8 Signs Of A Doomed Stock

Are Your Stocks Doomed?
Few people seem to spot the early signs of a company in distress. Remember WorldCom and Enron? Not so long ago, these companies were worth hundreds of billions of dollars. Today, they no longer exist. Their collapses came as a surprise to most of the world, including their investors. Even large shareholders, many of them with an inside track, were caught off guard. So is there any way to know that your stock may be on a crash course to nowhere? The answer is yes. Read on to find out how.

1. Negative Cash Flows
Cash flow is a company's lifeline; investors who keep an eye on it can protect themselves from ending up with a worthless share certificate. When a company's cash payments exceed its cash receipts, the company's cash flow is negative. If this occurs over a sustained period, it's a sign that the company's cash in the bank may be getting dangerously low. Without fresh injections of capital from shareholders or lenders, a company in this situation can quickly find itself insolvent.

2. High Debt-Equity Ratio
Interest repayments place pressure on cash flow, and this pressure is likely to be exacerbated for distressed companies. Because they have a higher risk of default, struggling companies must pay a higher interest rate to borrow money. As a result, debt tends to shrink their returns. The total debt-to-equity (D/E) ratio is a useful measure of bankruptcy risk. It compares a company's combined long- and short-term debt to shareholders' equity or book value. Companies with D/E ratios of 0.5 and above deserve a closer look.

3. Interest Coverage Ratio
The debt/equity (D/E) ratio doesn't always say much on its own. It should be accompanied by an examination of the debt interest coverage ratio. For example, suppose that a company has a D/E ratio of 0.75, which signals a low bankruptcy risk, but that it also has an interest coverage ratio of 0.5. An interest coverage ratio below 1 means that the company is not able to meet all of its debt obligations with the period's earnings before interest and tax (operating income). It's also a sign that a company is having difficulty meeting its debt obligations.

4. Share Price Decline
Savvy investor should also watch out for unusual share price declines. Almost all corporate collapses are preceded by a sustained share price decline. Enron's share price started falling 16 months before it went bust. That said, while a big share price decline might signal trouble ahead, it may also signal a valuable opportunity to buy an out-of-favor business with solid fundamentals. Before deciding whether the stock is a buy or sell, be sure to examine the additional factors we discuss next.

5. Profit Warnings
Investors should take profit warnings very, very seriously. While market reaction to a profit warning may appear swift and brutal, there is growing academic evidence to suggest that the market systematically underreacts to bad news. As a result, a profit warning is often followed by a gradual share price decline.

6. Insider Trading
Companies are required to report, by way of company announcement, purchases and sales of shares by substantial shareholders and company directors (also known as insiders). Executives and directors have the most up-to-date information on their company's prospects, so heavy selling by one or both groups can be a sign of trouble ahead. Admittedly, insiders don't always sell simply because they think their shares are about to sink in value, but insider selling should give investors pause.


7. Resignations
The sudden departure of key executives (or directors), and/or auditors can also signal bad news. While these resignations may be completely innocent, they demand closer inspection. Auditor replacement can also mean a deteriorating relationship between the auditor and the client company, and perhaps more fundamental difficulties within the client company's business. Warning bells should ring the loudest when the individual concerned has a reputation as a successful manager or a strong, independent director.

8. SEC Investigations
Formal investigations by the Securities and Exchange Commission (SEC) normally precede corporate collapses. That's not surprising; many companies guilty of breaking SEC and accounting rules do so because they are facing financial difficulties. While many SEC investigations turn out to be unfounded, they still give investors good reason to pay closer attention to the financial situations of companies that are targeted by the SEC.

http://www.investopedia.com/slide-show/signs-doomed-stock/default.aspx

Give the Gift of Smart Investing

Received an email commercial in my post today.

Stocks have history running in their favor, averaging 11-12% a year, and they outperform just about every type of investment. The trade-off is that stocks come with greater risk. Average market returns are no comfort if you buy at the market peak and sell during the graveyard. Still investing in stocks is no longer as mysterious or as elite an activity as it used to be. Armed with the desire to learn, you can make stocks a powerful source of returns in your portfolio.

Financial success requires an understanding of the investment process and the various factors affecting stocks, bonds, & other financial securities. The Forbes Stock Market Course compiles the information you need to increase your wealth over time.

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Comment:

The course content includes all the standard topics essential for those interested in investing. These topics are also dealt with by most investing books.

It is unlikely that one can get enough information by attending a half day session to learn investing. At most you can only have a glimpse of this wide field. Interestingly, a recent course by a blogger widely advertised before the talk was deafly silent post-course! Just wondering.


Merry Xmas folks.

Good Personal Finance Resource

http://in.reuters.com/money/personalFinance

Evaluating your property investment

Evaluating your property investment
Mon Dec 14, 2009 9:12am


Investing requires discipline - one can’t blindly invest money without knowing what one is getting into. Investing into Real Estate is no different. Here is a checklist that you should use when evaluating your property investment.

1. Desirability of the location: This is the single most important criterion to value real estate.

2. Reputation of the builder and quality of construction: Properties by some developers are worth a lot more than others because of quality. Don’t always go for the lower price because there could be huge execution risk with less reputed builders

3. Payment terms: Time-linked or construction linked payment plan, and cash vs. cheque component. This will affect your cashflow in other aspects of your personal finances. (Click here to know more)

4. Project approvals and licenses: This might affect your ability to get a home loan if project approvals have not come through yet.

5. Contractual guarantees: For assured return schemes get a written guarantee from the builder and post-dated cheques in your name. Understand the delivery date of your project

6. Demand and supply: Over or under-supply will affect both the capital appreciation potential and the rental yield you might expect.

7. Floor space index and carpet area: Local rules on the built up area and the available square footage (carpet area) might reduce the usable area. Recognize that what you pay for might not be what you get


Tips on the process of Real Estate Investing

When it comes to the process of making a property investment and exiting from it, there are a few things that you must keep in mind.


1. Transaction costs: When you buy or sell property, there are many transaction costs associated with these activities. You might have to pay a brokerage fee to the intermediary. If you have made a gain on the sale, there will also likely be a resulting capital gains tax liability.

You will also face some expenses related to the stamp duty at the time of the transfer and registration costs of the property. All these costs can add a material amount to the purchase or sale price of your investment.


2. Liquidity: Unlike stocks that you can sell readily and convert into money in the hand within a couple of days, buying and selling property takes time. Your ability to convert your investment into cash in hand is quite restricted.

Its not uncommon for deals to take up to one year, and still fall through at the last minute. So if you feel that you can sell your property to pay for your child’s education abroad once he/she gets admission, you might be in for a shock. To have easy access to this money, you might be better off putting it into a financial asset that you can access at a short notice (e.g., fixed deposit, or liquid fund).


3. Cash: Property investments are not always the cleanest when it comes to cash versus cheque component of paying for deals. Unlike mutual funds where KYC norms require that the investment be made in cheque and the PAN card details be shared, real estate investments can have a huge cash component to them. This might not suit everyone.

http://in.reuters.com/article/personalFinance/idINIndia-43604720091214?sp=true

How to construct a stock portfolio – do’s & don’ts

How to construct a stock portfolio – do’s & don’ts
Thu Jun 4, 2009 1:33pm

 

Constructing and managing a stock portfolio is hard. Just ask any professional fund manager. So, what should retail investors keep in mind when it comes to their stock portfolio?

First of all, retail investors must recognize that they are competing against the pros. Therefore, you should not do this if you do not have the time or resources to match the research and analytics done by the pros.

Secondly, you must have an investing philosophy that guides you irrespective of the prevailing market conditions. Recognize whether

• you are a day trader, punting on every rumour that you come across, or
• if you are a value investor who buys and holds for at least a minimum of 4-5 years.

If you stick to your investment philosophy then you will be disciplined to look at investment opportunities in a consistent way.

Thirdly, understand your risk profile. Are you risk averse? Or are you willing to take on extra risk in order to earn higher returns? High returns aren’t possible without taking on additional risk, and you might not be comfortable with too much risk. Your portfolio should match your risk profile.

Finally, what are you doing towards risk management? This is where the pros really stand out because they understand that managing a portfolio is all about risk management on a daily basis.

• When the price moves higher or lower than your expectation, do you buy more or do you start selling?
• Do you recognize that your exposure to one sector or stock might have gone up or down a lot due to market price changes?

Here are some steps that retail investors must take when constructing a stock portfolio?

1) Diversify: Just buying stocks in 1 or 2 companies is not enough. You could be taking on too much risk through a concentrated portfolio, akin to putting all your eggs in one basket. Ideally, your portfolio should have no more than 20-25 names. However, this also does not mean that you can have just say 5 shares of one company and 2 shares of another, because that is all you can afford because you can’t create wealth through just purchasing a handful of shares in a company.

2) Review Your Exposure Frequently: While one investment strategy is to buy and hold, that does not imply that you do not manage your exposure by ignoring your portfolio. Market prices move, sometimes dramatically. As a result, you might have too much or too little exposure to one sector or stock. Get into the discipline of reviewing your exposure regularly, especially during dramatic market movements.

3) Create your own set of rules to guide you: Formulate your own rules for when to buy or sell a stock. Don’t just follow the herd or come under peer pressure. What is good for others might not be suitable for you or your portfolio because your risk, investment criteria, tax situation and entry price might be different.

4)Keep some cash available: Again this is one area where the pros stand out. They recognize that good investment opportunities come unannounced, but in order to take advantage of them they need to have cash available to make these investments. So make sure that you keep some cash available in your portfolio to pounce on these ideas.

If the above sounds challenging and tough for you to follow, then a do-it-yourself portfolio management is not recommended. As an alternative you might be better off investing in the markets through mutual funds, where you can take advantage of the resources and risk management skills of the pros, rather than compete against them.

http://in.reuters.com/article/personalFinance/idINIndia-40066820090604?sp=true

How do professionals invest?

How do professionals invest?
Mon Nov 9, 2009 12:33pm


Ask any professional and they will tell you that they never make an investing decision without the discipline of following a framework.

Here we suggest some criteria that all investors must use when making an investment, to help you avoid getting into investments you don’t understand or losing money in the long run.

- Risk taking capacity: Suitability of the investment for your unique situation

- Financial goals: What do you need to generate returns for

- Time horizon: By when do you want to exit the investment

- Liquidity: How quickly you want to convert your investment into ready cash

- Capital growth or regular income: Whether it provides you adequate protection against inflation

- Taxability: What kind of tax liability do you create

Professionals recognize that not all investments are suited for them. Just like not all medicines are suited to all patients, you must also realize that not all investments are suitable for you.

A common question that newcomers ask is “tell me the best investment for my money” and immediately expect a one sentence answer. It’s like a patient asking the doctor for the best medicine.

Before the doctor prescribes a medicine or the relevant dosage a thorough investigation of the symptoms, allergies and pre-existing condition has to be conducted.

You wouldn’t feel confident with a doctor who blindly prescribes medication to you.

It is similar when it comes to investing. You need to do a through analysis of your unique situation before you or any advisor can choose the “best investment”.

Its for this reason that an investment made by those around you might not be the right investment for you, because you might be at a different stage of your life, with a different risk profile and financial assets and liabilities.

http://in.reuters.com/article/personalFinance/idINIndia-43714520091109?sp=true

Mistakes to avoid in the next stock market rally

Mistakes to avoid in the next stock market rally
Mon Jun 8, 2009 9:48am


So many of us made investing mistakes and suffered over the last 18 months.

Everyone makes mistakes….but really smart people learn from their own mistakes and those that other people make. If this is indeed the start of a new upcycle, then now is the best time to review what went wrong the last time so that we do not repeat the same mistakes again.


Read more and get smarter….


1. Don’t be unrealistically optimistic: Markets can come down as well – don’t believe the cheerleaders who only give you the positive picture of markets going up.

Be very suspicious of the so-called experts on TV who are “confident” that a stock or the market will go up. If they are such geniuses, why did they not warn you 18 months ago that the market would go down by about 60%?

Be cautious about any predictions you hear from so-called “Gurus” on the direction of the market, don’t blindly trust what they say. Most “Gurus” have a poor track record.


2. Understand your risk appetite – you cannot get high rewards without taking on high risk: Not all investments are suitable for you, because they might be too risky for your risk profile. There are no get rich quick schemes – the stock market is not a casino, it takes patience, skill and experience to achieve superior returns. If someone promises to double your money in 3 years, be very suspicious.

If you lost money in the last few quarters and were emotional about it, recognize that some of it was your own fault for investing in instruments that were too risky for you to handle. Avoid these in the future, even if the market is racing to the top.


3. There is no substitute for quality: Invest in good quality stocks or mutual funds. Don’t speculate. In a bear market, the speculative names are the ones that fall the fastest. Build your portfolio on a strong foundation. The newest NFOs might not be the safest things for you to invest in, because they are untried and untested.

Its best to be safe and to invest in high quality names. Don’t take a punt on some random tip on a company that has no track record or history of quality performance.


4. Don’t invest blindly – invest towards meeting your financial goals: Don’t just believe what your friends or neighbours are telling you about their investments, these investments might not be suitable for you. Invest because you have a certain goal in mind such as planning for your retirement, or buying a house, saving for your daughter’s wedding or son’s overseas education. This will help you match the right investment product with the right goal.

Everyone wants a return on their investments, but that is not the reason to invest. You invest because you want to do something with the money – marry your daughter, buy a house, plan your retirement. Ensure your investments are allowing you to meet these goals.


5. You cannot successfully time the market: If you believe that you can sell at the top and buy at the bottom, we hate to break this to you but you are not a genius. Its never been done successfully by even the world’s leading investors, so don’t try this strategy at home!

No “Guru” predicted that the market would go up in May 2009 by close to 30%, and not many people were able to time this rise successfully, just like not many people were able to exit the market successfully when the markets first started correcting. Invest regularly but don’t try to pick bottoms and tops.

http://in.reuters.com/article/personalFinance/idINIndia-40003320090608?sp=true

How to manage a stock portfolio

How to manage a stock portfolio
Thu Jul 30, 2009 1:15pm

Retails investors often trade in stocks without understanding the deeper implications of their buy or sell decisions. When you invest in stocks, you implicitly are building a stock portfolio.

Here is a set of actionable steps that you must keep in mind to help you with building your stock portfolio.


1. Diversify: Just buying stocks in 1 or 2 companies is not enough. You could be taking on too much risk through a concentrated portfolio, akin to putting all your eggs in one basket. Ideally, your portfolio should have no more than 20-25 names to give you the benefits of diversification.

However, this also does not mean that you can have just say 5 shares of one company and 2 shares of another, because that is all you can afford because you can’t create wealth through just purchasing a handful of shares in a company.

Good stockpicking is about knowing how to allocate your capital efficiently across your best ideas in a diverse portfolio.


2. Review Your Exposure Frequently: While one investment strategy is to buy and hold, that does not imply that you do not manage your exposure by ignoring your portfolio. Market prices move, sometimes dramatically.

As a result, you might have too much or too little exposure to one sector or stock. Avoid this by being disciplined about setting aside some time to review your exposure. This will help you understand if you need to trim or add to the exposure to a certain sector or stock in your portfolio and take care of risk management.


3. Create your own set of rules to guide you: Formulate your own rules for when to buy or sell a stock based on an investment philosophy that you can be disciplined about. Don’t just follow the herd or come under peer pressure.

What is good for others might not be suitable for you or your portfolio because your risk, investment criteria, tax situation and entry price might be different. If a stock has met your price target, have some rules that guide you whether you will take money off the table or stay invested.

If a stock is a constant underperformer, will you continue holding on to it because psychologically you are unwilling to admit that you made a poor decision, or will you be unemotional and make the rational decision to cut your losses and sell?


4. Keep some cash available: This is one area where the professional investors stand out. They recognize that good investment opportunities come unannounced, but in order to take advantage of them they need to have cash available to make these investments.

So make sure that you keep some cash available in your portfolio to pounce on these ideas. If you are fully invested, you might miss good opportunities due to lack of liquidity.

If the above sounds challenging and tough for you to follow, then a do-it-yourself portfolio management is not recommended. As an alternative you might be better off investing in the markets through mutual funds, where you can take advantage of the resources and risk management skills of the pros, rather than compete against them.

http://in.reuters.com/article/personalFinance/idINIndia-41405020090730?pageNumber=2&virtualBrandChannel=0&sp=true

Pinewood Shepperton gets Malaysia film studio deal

Pinewood Shepperton gets Malaysia film studio deal

Wed Dec 16, 2009 1:13pm IST

* To get consultancy and brand licence fees

* 2010 fees to be offset by infrastructure set-up

* 2009 trading remains in line with mkt view


Dec 16 (Reuters) - Film studios Pinewood Shepperton Plc (PWS.L: Quote, Profile, Research) said it had entered into an agreement for the development of a new studio facility in southern Malaysia and that its trading for 2009 remained in line with market expectations.

The British firm said it would get consultancy and brand licence fees for sales and marketing services as part of its agreement with Khazanah Nasional Berhad, the investment holding arm of the Government of Malaysia.

The company, whose facilities in south east England were used for the production of Oscar winner Slumdog Millionaire and the Harry Potter films, said the fees due in 2010 would be largely offset by setting up the sales and marketing infrastructure.

Pinewood Shepperton had recently concluded a long-term sales and marketing agreement with Pinewood Toronto Studios. "Following our deal for Pinewood Toronto and now Pinewood Malaysia, we are exploring further opportunities in this new and growing market," the company said in a statement. The company's shares closed at 131.50 pence on Tuesday on the London Stock Exchange. (Reporting by Purwa Naveen Raman in Bangalore; Editing by Deepak Kannan)

Glove sector on heat today!

Top Gainers


HAIO
1750 7.490 0.300 4.17%

ADVENTA
64836 2.910 0.230 8.58%

HLFG
5638 7.790 0.220 2.91%

LATEXX-WA
3440 2.330 0.160 7.37%

KOSSAN
4593 5.160 0.160 3.20%

TOPGLOV
13096 9.650 0.150 1.58%

EONCAP
10089 6.540 0.140 2.19%

LATEXX
24384 2.850 0.120 4.40%

AIRPORT
1194 3.920 0.120 3.16%

AFG
31268 2.750 0.120 4.56%

Bracing for sea-change in taxation

Bracing for sea-change in taxation

Tags: Chew Theam Hock | CIMB | Deloitte Malaysia | Dewan Rakyat | goods and services tax | GST | GST Bill 2009 | Income Tax Act 1967 | Khoo Chin Guan | KPMG Tax Services Sdn Bhd | Lee Heng Guie | OSK Research | Tan Eng Yew | Tan Theng Hooi

Written by Ellina Badri & Isabelle Francis
Wednesday, 16 December 2009 22:46

KUALA LUMPUR: Professional consultancies have cautioned about "grey areas" in the implementation of the government's proposed 4% goods and services tax (GST), while other corresponding measures, such as lowering of income tax, may need to be taken.

They also said companies must prepare for the new tax regime early to estimate its potential impact on their businesses and how they could manage it.

Deloitte Malaysia country managing partner Tan Theng Hooi said GST would help the government address the drop in tax revenue in line with lower revenue from petroleum as well as broadening the tax base.

"However, there must be sufficient time given for businesses and the general public to get ready for the system rollout," Tan told The Edge Financial Daily today.

"The level of acceptance by businesses and the public on the implementation of the GST will be higher if there is a corresponding decrease in the income tax rates."

The government tabled the GST Bill 2009 for the first reading in the Dewan Rakyat today, projecting implementation in mid-2011. Though not specified in the bill, the government has said the rate would be fixed at 4%.

Based on the bill, the tax would be charged and levied on any supply of goods or services made in Malaysia, including anything treated as a supply under the act, and any importation of goods into Malaysia.

Businesses that are taxable include any trade, commerce, profession, vocation, or any other similar activity, whether or not it is for a pecuniary profit.

Businesses to be taxed under the GST were liable to register at the end of any month, and those who failed to register would be liable to a fine not exceeding RM50,000 or to an imprisonment for a term not exceeding three years, or both.

Tan said while there would be price increases in some items, there could also be lower prices for others, where savings from taxes on intermediate inputs would be passed by producers to the consumers.

He said under the GST, the tax would be collected at value-added points from production to the final point of sales, as opposed to the current system where the sales tax was only collected at the point of import, or when the local manufacturer sold the goods for the first time, while the service tax was only imposed on taxable services.

"The tax imposes additional compliance costs for businesses. These come in the form of additional work to account for the tax, tracking of input taxes paid, undertaking reconciliations and filings of GST returns.

"There is also a need to review and change the IT systems to accommodate the implementation of the GST," Tan said.

In a statement, KPMG Tax Services Sdn Bhd executive director Khoo Chin Guan said businesses would need to be pro-active in ensuring their transition to the new system was smooth and successful.

"The GST rate is lower than the existing service tax rate (5%) and significantly lower than the existing sales tax rate (10%). However, the impact on the revenue collection of the government of the drop in rates should be offset by the wider footprint of GST as well as its collection along the supply chain as opposed to only at the manufacturing or importation stage," Khoo said.

Chew Theam Hock, also an ED at KPMG, said the GST Bill followed the approach of tax rates adopted by a number of other countries, although overseas experience had shown there could be grounds for dispute where the provision of combined services fell in a "grey area", whether it was zero-rated, exempt, standard rated or a combination of those rates.

He said with the revenue floor at RM500,000, a number of small businesses would be outside the scope of the GST, although those businesses could voluntarily register for it to claim input tax credits, and they could also be compelled to be licensed by their business customers who wanted to ensure input credits along the supply chain were fully reclaimed.

KPMG's other ED Tan Eng Yew said businesses had to start reviewing their operations at a strategic and functional level so decisions could be made, while additional obligations imposed by law could be dealt with in order for the business to be GST-compliant.

"Although there is expected to be an 18 month-window before the GST becomes chargeable, businesses must address the additional challenges imposed by GST now.

"For example, where businesses make both taxable and non-taxable supplies (also known as mixed supplies), this is an opportune time to identify potential GST costs and how the supply chain should be structured in the light of the GST Bill," he said.

Khoo added that with the GST viewed internationally as a self-policing tax system, given the claim for input tax credits required registration and compliance through the submission of GST returns, the registration and compliance requirements could in turn lead to increased compliance with obligations under the Income Tax Act 1967.

As for the impact of the GST on consumers, CIMB chief economist Lee Heng Guie had in a recent note said the proposed rate of 4%, which was lower than the current SST of between 5% and 10%, was deemed appropriate to avoid dampening consumer spending and its impact on inflation.

"There will never be a good time to implement a new tax reform. When the economic environment is more conducive with stable revenue growth, we can have a virtually neutral and relatively low-rate GST introduction. More critically, there must be a strong political will to implement the unpopular consumption-based tax," he said.

He said it could result in higher private consumption expenditure initially, as households brought forward consumption expenditure prior to the tax's implementation, although this would be followed by a significant unwinding immediately following its rollout.

He added the resulting increase in inflation would likely be small in the medium term, causing a one-time price "blip".

"Businesses can expect GST implications for each transaction they make, regardless of the profits or losses. However, a better management of GST processes can improve cashflow of businesses, which in turn can translate to cost savings," he said.

He also said a comprehensive tax reform must be accompanied by lower personal and corporate income taxes, a stronger household safety net and other targeted assistance programmes for the need groups.

"Stated simply, create a simpler, fairer and more efficient tax system to facilitate greater private sector initiatives as well as drive higher economic growth and foreign investments," he said.

Meanwhile, OSK Research wrote recently that while some essential items and services were GST-exempt and despite the rate being lower than those in other Asia, it believed the tax would dampen consumer purchasing power to a certain extent.

It said based on its simple calculations from the Household Expenditure Survey 2005 data, the most affected group of consumers comprised the hardcore poor with monthly income of below RM430, poor households with monthly income below RM720 and the vulnerable poor with monthly income below RM1,500 in Peninsular Malaysia.

It added these groups could see a significant increase in their cost of living should the government impose the tax in the usage of utilities, basic communication consumption and clothing and footwear, given the possibility of inefficient delivery of new subsidy schemes for those groups.

Today's tabling of the tax bill showed that its exemptions included paddy, vegetables, rice, sugar, flour, cooking oil and meats.

"Apart from consumers, businessmen and retailers may also encounter some difficulties in the short-term, considering that these groups will act as tax collectors of the new tax on behalf of the government.

"Needless to say, the businesses would need to revamp their accounting systems accordingly and submit the collection to the related government agencies on time," OSK also said. It added those still using traditional accounting or payment systems would be forced to upgrade and attend training.

"Nonetheless, retailers of luxury goods, such as luxury cars and jewellery, or privileged services would probably be hardest hit in the short-term as the 4% GST would result in a price increase for the end-user," it said.

http://www.theedgemalaysia.com/business-news/155865-bracing-for-sea-change-in-taxation.html

Wall Street Struggles After Fed Statement

Wall Street Struggles After Fed Statement

By THE ASSOCIATED PRESS
Published: December 16, 2009

Shares struggled Wednesday — ending the day mixed — after the Federal Reserve reminded investors that it would end several of its extraordinary supports for the economy in the coming year.

Investors had anticipated that several programs would be wound down as expected next year, but policy makers had not confirmed the precise timing.

The Fed said it would leave interest rates near zero, as the market had expected, but policy makers also noted that weakness in the job market is “abating.” Fed governors made the assessment in a statement following a two-day meeting to discuss interest rate policy.

Investors parse those statements closely to see how the Fed is viewing the state of the economy and for clues about when it might raise interest above their historic lows. .Ultra-low borrowing costs have been a factor behind a massive rally in stocks this year, as well as a weakening of the dollar against other currencies.


Money managers are seeking any and all clues about when the Fed may feel the economy is strong enough to tolerate higher interest rates, which will help keep inflation in check.

Stocks had been higher ahead of the Fed’s announcement after a benign reading on consumer price inflation eased concerns that the Fed would be forced to raise interest rates any time soon. The statement from the central bank reinforced that notion. Policymakers repeated that inflation is likely to remain under control and that interest rates would remain low for “an extended period.”

Earlier Wednesday the government reported that consumer prices excluding food and energy were flat in November, signaling that inflation isn’t working its way into the economy. It was the first time that “core” inflation was unchanged after 10 monthly increases.

On Tuesday, stocks fell for the first time in five days and Treasurys slipped after a jump in wholesale prices led to speculation that the Fed would have to raise interest rates sooner than expected.

At the close, the Dow Jones industrial average was down 10.88 points, or 0.10 percent, at 10,441.12.

The broader Standard & Poor’s 500-stock index rose 1.25 points, to 1,109.18, and the Nasdaq rose 5.86 points, or 0.27 percent, to 2,206.91.

Bond prices mostly fell, pushing yields higher, following the Fed’s more upbeat assessment of the economy. The yield on the benchmark 10-year Treasury note rose to 3.61 percent from 3.60 percent late Tuesday. Prices had been higher ahead of the Fed’s announcement.

A drop in the dollar from a two-month high boosted commodity prices. Gold climbed, while crude oil rose $2.45 to $73.14 per barrel on the New York Mercantile Exchange.


http://www.nytimes.com/2009/12/17/business/17markets.html?ref=business