Sell the Losers and Let the Winners Run

"Sell the Losers and Let the Winners Run"

"Cut your losses and let your profits run." (Daniel Drew, 1800)

The concept is sound. In fact, it is one of the most important understandings an investor can have about the stock market.

It is prudent for an investor to sell stocks that are losing money, stocks that could continue to drop in price and value. It makes equally good sense to stay with stocks that show significant gains, as long as they remain fundamentally strong.

But just what is a loser?

• Is it any price drop from the high?
• Is a stock a loser ony if the investor is actually in a loss position - that is, when the current price is below the original purchase price?

Any price drop is a losing situation. Price drops cost the investor money. They are a loss of profits. In some circumstances, the investor should sell, but in other situations the investor should take a closer look before reaching a sell decision.

The determination of whether a stock is still a winner depends on the cause of the price correction. If a price drop occurs because of a weakness in the overall market situatio or is the result of a "normal" daily fluctuation of the stock price, the stock can still be a winner.

If however, the cause of the drop has long-term implications, it could be time to take the loss and move on to another stock. Long-term implications could be any of the following:

• Declining sales
• Tax difficulties
• Legal problems
• An emerging bear market
• Higher interest rates
• Negative impacts on future earnings.

Any event that has a negative impact on the long-term picture of earnings or earnings growth can quickly turn a stock into a loser. Many long- and short-term investors will sell out their positions and move on to a potential winner.

Asian Financial Crisis 2?

In the Asian Financial Crisis of 1997, the IMF Packages (US$) to bail out:

Korea was US$ 57bn (Dec 3, 1997)
Thailand was US$ 17.2 bn (Aug 20, 1997)
Indonesia was US$ 43.0 bn (Oct 31, 1997)

The present financial crisis that started in 2007 in US is spreading globally. It is so much bigger. It has spread to Europe. Will Asia be affected too? Will we be revisited by another financial crisis?

Could it happen again?

The possibility of having another 1997-type crisis continues to create concern among policy-makers. The reason is no other than the disruptive effects of capital flows, especially in the emerging markets.

Statistics will show why such fear still exists. During the Asian Financial Crisis, a crude estimate of private capital that flowed into the five troubled countries of South Korea, Thailand, Indonesia, Malaysia and the Philippines was almost US$ 100 billion in 1996, which was one third of worldwide flows into the emerging markets (estimated at over US$ 295 billion). That was a five-fold increase over the 1990-1993 average.

When it suddenly reversed to an outflow of US$ 12 billion the following year, it had a devastating effect on these economies. Recent statistics from the Institute of International Finance reveal a staggering fact: net private capital flows was at a high of US$ 502 billion in 2006 after a record US$ 509 billion in 2005. The amount in 2007 might be slightly lower, but still well above the level of the heady days of 1990s.

Net portfolio of equity which recorded an outflow of nearly US$5 billion in 2002 reversed to inflows of US$ 39.1 billion in 2004 and to US$69.7 billion in 2006. Imagine what this amount of flows can do to emerging economies if it were to reverse and flow out.

What was seen in 1996-97 in Asian markets was an extraordinary change in confidence, what John Maynard Keynes termed as the "animal spirit". Such reversals in sentiment are quite common, even in developed economies, but the magnitude of such incidents is greater in emerging economies because foreign investors tend to lump them together without differentiating each country.

Even when investors are able to differentiate between the fundamentals, they do not think it is logical not to follow the herd mentality as they may still incur huge losses if they do not do so.

Because of the volatility of foreign capital flows, manoeuvring macroeconomic policies becomes a difficult task for emerging economies. Excess liquidity created by huge inflows tends to cause an increase in interest rates, which in turn attracts more capital into the country.

Another policy-makers' concern over capital flows is related to the devastating socioeconomic and political effects of the Asian Financial Crisis. Economic malaise then caused a rapid increase in suffering and poverty level as millions of people were thrown on the streets without a job.

The current global economic and financial conditions are similar to the situation in the heyday of the late 1990s. Because of massive liquidity induced by extremely low interest rates in some developed countries like Japan and US, particularly during the 2001 recession, global equity and bond markets boomed.

There are of course other reasons. Some countries which are preventing their currencies from excessive appreciation find themselves saddled with huge foreign reserves following huge surpluses in their current accounts.

While some countries try to avoid a build-up in liquidity, some only exercise partial sterilisation through issuance of bonds. As a result, the massive liquidty makes its way into the stock and property markets, causing an asset bubble. Not surprisingly, stock market indices in the US, China and many countries in Southeast Asia hit new historical highs last year. Valuations were rich and in a country like China, and its price-earnings multiples look horrendous.

At the same time, mounting reserves from China and Japan ended up in the US treasury market, causing yields to drop significantly.


Ref:

Malaysian Business July 16, 2007

http://fusioninvestor.blogspot.com/2008/10/usd-596004000000000.html
US$ 600 trillion

Industries That Thrive On Recession

Industries That Thrive On Recession
by Andrew Beattie (Contact Author Biography)

Recessions are hard on everyone - aren't they? Actually, just as wars have their war babies (companies that perform well during war and suffer during peace), recessions have their tough offspring as well. In this article we'll take a look at the industries that flourish in the adversity of a recession and why they do so well when everyone else is struggling to make ends meet. (For related reading, see Recession: What Does It Mean To Investors? and War's Influence On Wall Street.)

Discount Retailers

It makes sense that, as budgets feel the strain of an economic downturn, people turn to the stores that offer the most for the least. Discount retailers like Wal-Mart may appear to do well at any time, but this is not entirely true. They often suffer in good times as people flush with money buy higher-quality goods at competing outlets. To remain competitive, they are forced to upgrade their product lines and change the focus of their business from thrift to quality. Their profits suffer from either lost sales or less margin on the goods they sell. In hard times, however, these retailers excel by going back to core products and using vast economies of scale to give cheap goods to consumers. Designers and producers of lower-end products also see an upswing as more people jump from brand names to make their paychecks go further. People may not like discount retailers, but in a recession most people end up shopping there. (Learn one way these companies make their money in What Are Economies Of Scale?)

Sin Industries

In bad times, the bad do well. Although it seems a little counterintuitive, people patronize the sin industry more during a recession. In good times, these same people might have bought new shoes, a new stereo or other, bigger-ticket items. In bad times, however, the desire for comforts doesn't leave, it simply scales down. People will pass on the stereo, but a nightly glass of wine, a pack of cigarettes or a chocolate bar are small expenditures that help hold back the general malaise that comes with being tight on cash. Be warned, though - not all sin businesses prosper in a recession. Gambling, with the exception of the truly troubled gamblers, becomes an extravagance and generally declines during recessions. In fact, casinos do their best trade when the economy is roaring and everyone feels lucky. The most prosperous businesses in this industry are the purveyors of small pleasures that can be bought at a gas station or convenience store. (To find out if it pays pick your portfolio based on ethics, read Socially Responsible Investing Vs. Sin Stocks and Socially (Ir)responsible Mutual Funds.)

Selected Services

Expect a downturn in the service industry as a whole, as companies and families are willing to do more themselves to save money. A certain class of service providers will see an upswing during hard times though. Companies that specialize in upgrading and maintaining existing equipment and products see their business increase as more clients focus on working with what they have now rather than buying a newer model. (Read Less Trash For More Cash to learn how eco-friendly practices can be good for your wallet as well as the planet.)In the real estate industry, they say renovators hire as builders fire, and this holds true for many other industries as well.

The Statics

In a recession, simply carrying on with business as usual can be an achievement. Pharmaceuticals, healthcare companies, tax service companies, gravediggers, waste disposal companies and many others are in a category that, while not jumping ahead during a recession, can plod along while other companies suffer. This is simply because people get sick, get taxed and die (not always in that order) no matter what the economy is like. Sometimes the most boring businesses offer the most consistent and, in context, exciting returns. (Read A Checklist For Successful Medical Technology Investment and Build Your Portfolio With Infrastructure Investments to learn more about putting your money into these stable industries.)

The Benefits Of Recession

The biggest benefit of hard times is that companies get hurt for inefficiencies that they laughed off in better times. A recession means general fat trimming for companies, from which they should emerge stronger, and that's good news for investors. One of the best signs is a company in a hard-hit industry that is expanding anyway. For example, McDonald's continued to grow in the 1970s downturn even though restaurants generally suffered as people cooked rather than going out to eat. Similarly, Toyota was opening new American plants in the 1990s downturn when the Big Three were closing theirs due to falling sales for new cars. (Read more about the 1970s economy in Stagflation, 1970s Style.)A recession can be a blessing for investors, as it is much easier to spot a strong company without the white noise of a strong economy. (Read how certain strategies can help you cut through market noise in Trading Without Noise.)

Waiting It Out

Although it is good to know which companies excel in a recession, investing according to economic cycles can be difficult. If you do invest in these industries during a recession, you have pay careful attention to your investment so you can readjust your portfolio before the economy rebounds, stemming the advances the recession-proof industries have made. (Read more about how to take advantage of market fluctuations in The Ups And Downs Of Investing In Cyclical Stocks.)Some of the companies performing well in a recession will also perform well in a recovery, and more will change their business to take advantage of it, but many will be passed by their toughened-up brethren that race ahead in bull markets – financials, technology firms and other faster-moving industries. With the proper timing, however, these industries can provide a buffer within your portfolio while you wait for your high fliers to take off again. For further reading, see Four Tips For Buying Stocks In A Recession and Recession-Proof Your Portfolio.

by Andrew Beattie, (Contact Author Biography)Andrew Beattie is a freelance writer and self-educated investor. He worked for Investopedia as an editor and staff writer before moving to Japan in 2003. Andrew still lives in Japan with his wife, Rie. Since leaving Investopedia, he has continued to study and write about the financial world's tics and charms. Although his interests have been necessarily broad while learning and writing at the same time, perennial favorites include economic history, index funds, Warren Buffett and personal finance. He may also be the only financial writer who can claim to have read "The Encyclopedia of Business and Finance" cover to cover.

http://www.investopedia.com/articles/stocks/08/industries-thrive-on-recession.asp?viewall=1

Recession: What Does It Mean To Investors?

Recession: What Does It Mean To Investors? by Investopedia Staff, (Investopedia.com)

When the economy heads into a tailspin, you may hear news reports of dropping housing starts, increased jobless claims and shrinking economic output. How does this affect us as investors? What do house building and shrinking output have to do with your portfolio? As you'll discover, these indicators are part of a larger picture, which determines the strength of the economy and whether we are in a period of recession or expansion.

The Phases of the Business Cycle

In order to determine the current state of the economy, we first need to take a good look at the business cycle as a whole. Generally, the business cycle is made up of four different periods of activity extended over several years. These phases can differ substantially in duration, but are all closely intertwined in the overall economy.

Peak - This is not the beginning of the business cycle, but this is where we'll start. At its peak, the economy is running at full steam. Employment is at or near maximum levels, gross domestic product (GDP) output is at its upper limit (implying that there is very little waste occurring) and income levels are increasing. In this period, prices tend to increase due to inflation; however, most businesses and investors are having an enjoyable and prosperous time.

Recession - The old adage "what goes up must come down" applies perfectly here. After experiencing a great deal of growth and success, income and employment begin to decline. As our wages and the prices of goods in the economy are inflexible to change, they will most likely remain near the same level as in the peak period unless the recession is prolonged. The result of these factors is negative growth in the economy.

Trough - Also sometimes referred to as a depression, depending upon the duration of the trough, this is the section of the business cycle when output and employment bottom out and remain in waiting for the next phase of the cycle to begin.

Expansion/Recovery - In a recovery, the economy is growing once again and moving away from the bottoms experienced at the trough. Employment, production and income all undergo a period of growth and the overall economic climate is good.

Notice in the above diagram that the peak and trough are merely flat points on the business cycle at which there is no movement. They represent the maximum and minimum levels of economic strength. Recession and recovery are the areas of the business cycle that are more important to investors because they tell us the direction of the economy.

To further complicate matters, not all business cycles go through these four steps sequentially. For instance, during a double dip recession, the economy goes through a recession followed by a short recovery and another recession without ever peaking.

Recession Versus Expansion

Recession is loosely defined as two consecutive quarters of decline in GDP output. This definition can lead to situations where there are frequent switches between a recession and expansion and, as such, many different variations of this principle have been used in the hope of creating a universal method for calculation. The National Bureau of Economic Research (NBER) is an organization that is seen as having the final word in determining whether the United States is in recession. It has a more extensive definition of recession, which deems the following four main factors as the most important for determining the state of the economy:

Employment
Personal income
Sales volume in manufacturing and retail sectors
Industrial production>

By looking at these four indicators, economists at the NBER hope to gauge the overall health of the market and decide whether the economy is in recession or expansion. The tricky part about trying to determine the state of the economy is that most indicators are either lagging or coincidental rather than leading. When an indicator is "lagging" it means that the indicator changes only after the fact. That is, a lagging indicator can confirm that an economy is in recession, but it doesn't help much in predicting what will happen in the future. (Learn more about this in Economic Indicators To Know.)

What Does this Mean for Investors?

Understanding the business cycle doesn't matter much unless it improves portfolio returns.

What's an investor to do during recession?

Unfortunately, there is no easy answer. It really depends on your situation and what type of investor you are. (For some ideas, see Recession-Proof Your Portfolio.)

First, remember that a bear market does not mean there are no ways to make money.

Some investors take advantage of falling markets by short selling stocks. Essentially, an investor who sells short profits when a stock declines in value. Problem is, this technique has many unique pitfalls and should be used only by more experienced investors. (If you want to learn more, see the tutorial Short Selling.)

Another breed of investor uses recession much like a sale at the local department store. Referred to as value investing, this technique involves looking at a fallen stock not as a failure, but as a bargain waiting to be scooped up. Knowing that better times will eventually return in the economy, value investors use bear markets as buying sprees, picking up high-quality companies that are selling for cheap.

There is yet another type of investor who barely flinches during recession. A follower of the long-term, buy-and-hold strategy knows that short-term problems will barely be a blip on the chart when taking a 20-30 year horizon. This investor merely continues dollar-cost averaging in a bad market the same way as he or she would in a good one.

Of course, many of us don't have the luxury of a 20-year horizon. At the same time, many investors don't have the stomach for riskier techniques like short selling or the time to analyze stocks like a value investor does. The key is to understand your situation and then pick a style that works for you.

For example, if you are close to retirement, the long-term approach definitely is not for you. Instead of being at the mercy of the stock market, diversify into other assets such as bonds, the money market, real estate, etc.

Conclusion

The financial media often takes on a "sky is falling" mentality when it comes to recession. But the bottom line is that recession is a normal part of the business cycle. We can't say what the best course is for you - that's a personal decision. However, understanding both the business cycle and your individual investment style is key to surviving a recession.

by Investopedia Staff, (Contact Author Biography)

http://www.investopedia.com/articles/02/100402.asp

Why is the price falling?

Question: After buying some shares, the price keep on falling. The company is doing well - there is no bad news. "Why is the price falling?"


Basically, share price movement depends on demand and supply.

When demand exceeds supply, the price will rise.

When supply exceeds demand, the price will fall.

The price movement is thus determined by all the investors and speculators in the market. The instantaneous action of the aforesaid will propel the price of the shares in a particular direction - up or down.


Movement of share price = Demand vs Supply

Demand > Supply = Share price rises

Supply < Demand = Share price falls

Thus when share price falls, it means there are more sellers than buyers.


Ref: Making Mistakes in the Stock Market by Wong Yee

Singapore coping with recession

The Star Online > Focus
Saturday October 18, 2008

Rainbow at the end of the crisis

INSIGHT DOWN SOUTH
By SEAH CHIANG NEE

Singapore is confident that it can emerge from the current world financial crisis along with several others, including Hong Kong, Tokyo, Dubai and Shanghai, to form a new global financial bloc.

HOW do Singaporeans who have lived a sheltered life cope with the current recession and global dislocation? Answer: Surprisingly well!

Judging by the sentiments expressed both in the new and old media, this new generation appears to show a sharp awareness of the potential trouble.

If anything, the worries sometimes border on the exaggerated as though the end of world order is nigh, but most of the time Singapo­reans are well-informed and realistic.

A Singaporean Web surfer sums up the preparatory mood when he says: “I will repeat, I will reduce and reuse, I will recycle and I will repair.”

“I will not buy on impulse, always buy one item less and save that extra dollar,” he adds.

“We are in very severe times. All are suffering.”

Another surfer says: “The downturn will come in waves and will last at least three years. Deflation may be on the card.”

The biggest victims so far are investors who have rapidly lost billions of dollars in stock and property trading and even on structured bank papers.

There are good reasons for Singapo­reans’ preparedness. The SARS-induced crisis, for one, serves as a good teacher.

Another could be the frank, open reporting €“ and discussions of the bad news €“ by Cabinet ministers and the mainstream media, which surprisingly pulled few punches.

Thirdly, Singapore became the first major economy to fall foul of recession (the United States, France and Germany followed days later), and it signalled businesses to put in place budget-freezing or cost-cutting measures.

The Internet plays a fast information role.

“Every time I read the news, I could feel my hands going cold,” said a retired teacher.

“It would only show my life savings dropping by a few thousand dollars, or my daily necessities €“ like transport or food or utilities €“ becoming more expensive,” he lamented.

The crisis is making its way in almost every part of the economy - from exports to shipping, from financial services to tourism, and a whole lot in between.

Even Singapore’s tycoons are not spared.

According to Business Times calculations, 13 of the island’s richest men (and women) have lost €“ at least in value €“ more than S$6.7bil (RM16bil) since the start of the year. The report said: “They aren’t living hand to mouth just yet, but it must feel like it.” Each has lost almost 55% on average.

Another high-profile casualty is sports. The building of the S$1.87bil (RM4.46bil), 35-hectare Kallang Sports Hub, the biggest sports project, has been postponed for two years until 2012. The government had earlier postponed several large billion-dollar projects.

Consumer spending, which was very high only months ago, is declining.

With tourism also down, retail shops and restaurants have reported sales declines of 10% to 20%, and expensive Orchard Road is the hardest hit (down by up to 50%). Nightclubs are also feeling the impact of austerity.

So far, there have been no big retrenchments or pay cuts, but new employment is relatively low. Jobs will be the biggest concern of middle class Singaporeans and foreign professionals here.

Management graduate Hanees Mohamad told a reporter that she had been sending out an average of 20 resumes daily since she graduated two months ago, so far hearing from only half of them.

“I’m getting frustrated. I didn’t think it would be this difficult,” said the 24-year-old.

Company hardship, if it exists, is low-level and takes form of things like cheaper wines or no-frills executive meals. Financial institutions are, of course, the worst hit.

Banks have started to reduce expat packages or do away with allowances for spouses. Other firms are letting go contract workers and reinstituting multi-task duties.

However, this time around, Singa­poreans have a better cushion against job losses.

With the general election coming in 2010 or 2011, the government has assured its citizens that, in an emergency, foreigners will be the first to go, all else being equal.

Because of their long historical immersion into the work-force, Malaysians have rarely been regarded as “foreigners” like mainland Chinese or Indians. Many have been Permanent Residents for decades.

The uncertain global dimension of the crisis is making it hard for people to really tell how deep €“ or long lasting €“ the recession will last.

Trying to inject a more balanced sentiment into an excessively worried populace, Government of Singapore Investment Corporation deputy chairman Dr Tony Tan said:

“In these difficult times, I think one has to have a sense of perspective. This is not the end of the world. This is not the end of the US as an investment market, we believe, not only would the US eventually recover from the financial crisis.”

“We will all survive,’’ added Dr Tan.

Some analysts, in fact, see a rainbow at the end of it with Singapore playing a bigger banking role to the world financial €“ if it manages things well.

Last month, Singapore overtook Hong Kong to rank third in the world in global finance, behind London and New York. Now despite the republic’s troubles, it gained 26 points in the index €“ or more than any other top-20 centres.

While London and New York have lost some of their financial influence, Singapore €“ with its large reserves and strict banking governance €“ could benefit from the chaos.

It could even emerge along with several others €“ including Hong Kong, Tokyo, Dubai and Shanghai €“ to form a new global financial bloc.

The British, American and Euro­pean banking capitals will continue to play major a global role, but some of their luring attractiveness could drift eastwards.



--------------------------------------------------------------------------------
© 1995-2008 Star Publications (Malaysia) Bhd (Co No 10894-D)

http://thestar.com.my/news/story.asp?file=/2008/10/18/focus/2291167&sec=focus

Singapore Hard Hit by US meltdown

The Star Online
Focus
Saturday September 20, 2008

Hard hit by U.S. meltdown
INSIGHT DOWN SOUTH
By SEAH CHIANG NEE

The turmoil is hitting Singapore like a tonne of bricks at a time when the financial centre is already in the midst of an economic slowdown and super-high inflation.

MY PARENTS have been affected by my failure - my heavy losses in the stock market during the past year. Every night I am having nightmares,” one trader recently wrote.
His S$30,000 (RM72,700) savings meant to be a deposit for a flat evaporated during the downturn, particularly in recent weeks when shares went into a tailspin.

Anxious crowd: Policyholders gathering at an AIA branch in Singapore on Thursday to check on their policies after hearing news that AIA’s US parent company AIG was facing bankruptcy. — AFP

“My loss is beyond my means, it is very painful and I don’t know what my future is,” said the lower-middle -class bachelor.

“I had to strive to rebuild my life or else I would have committed suicide.”

He is one of a growing number of people here who are hard hit by the current US banking meltdown, which has reached Singapore.

At the same time, hundreds of anxious insurance holders have been flocking to the head-office of .

They wanted to cancel their policies, even if it meant losing in investment and coverage. That the US government is providing US$85bil (RM295bil) bailout to AIG did not stop the crowd.

The Monetary Authority of Singa­pore has appealed for calm among holders of its two million policies.

It also acted to protect customers of another US institution, Lehman Brothers, which declared bankruptcy by curtailing its operations here. It cannot remit funds to third parties without approval.

These days being a world banking hub is beginning to look like a great idea turned sour for Singapore, particularly its investment in foreign banks, as the citizens are finding out.

The US meltdown is hitting this financial centre like a tonne of bricks at a time when it is already in the midst of an economic slowdown and super-high inflation.

To be sure, the years of excesses of Wall Street have not been allowed to intrude into the financial district in Shenton Way, which remains tightly-regulated. The impact, however, is touching the lives of many people.

“The trouble is it’s all imported; no Singaporean bank is a casualty,” said an official.

Some Singaporeans are, of course, hit worse than others, but collectively the damage is far more serious here than in other cities in the region.

Ironically, it is due to success in becoming a wealthy financial centre.

The world’s top banks and brokerages have set up their regional offices here. Now their future remains under a cloud.

And when world banking is in turmoil, Singapore’s economy is shaken up.

This sector will go through a general lull, if not decline, which will result in an exodus of foreign executives.

Lehman Brothers’ operations in Singapore came to a halt on Monday, a day after it went into bankruptcy. The jobs of its 270 staff members may disappear. This, and the bailout of AIG and other large US corporations, are sending shock waves throughout the financial industry.

The many professionals in Singa­pore €“ foreigners and Singaporeans €“ are deeply concerned about their jobs.

“It’s quite worrying,” one executive told a TV reporter.

“We don’t know who will be the next target.”

Any exodus of these highly-paid executives will aggravate an already poor property market, especially in office and residential rentals.

It may retard Singapore’s growth as a banking hub, at least until stability returns.
During the past 10 years, it has made financial services one of its four strategic pillars for growth.

Many of its global investments are in Western and Asian banks, which have set up operations here.

In addition, tens of billions of Temasek Holdings and GIC (Govern­ment Investment Corporation) money have gone into these investments.

They couldn’t have been worse timed. Their values have been decimated.

For Mr and Mrs Singapore, these are worrying times as the economic downturn begins to bite.

The worst appears to be the stock market, where many Singaporeans are invested. The index shares have fallen by 30% in the past year, but many other shares are down by as much as 50% to 60%.

Some life savings have been wiped out. Tens of thousands are groaning under the weight of large losses.

Other recent headlines, which are dealing fresh blows to Singaporeans, included the following:

> Government data confirms that high inflation is eating into wage gains; average real earnings have fallen by 4% between April and June;

> Private home sales slumped 81% in August compared to a year ago, dropping from 1,723 to 320 units (partly affected by the Chinese Hungry Ghost Festival);

> Retail sales fell for the first time in four months as car sales slumped (by 8%) and consumers bought fewer luxury goods, mobile phones and computers; and

> Despite the price of oil falling by a third, the government controversially raised buses and train fares by four cents (10 sen), adding to the high inflation.

The US crisis may trigger off a glo­bal recession, including Singapore.

However, the city has a protective shield: its large reserves of US$300bil (RM1tril) built up over the years and sound economic fundamentals.

If not for these, Singapore could be overwhelmed.

But the ordinary people are a different story. With their real salaries down, they are vulnerable to any sustained unemployment and the relentless price increases.

With half an eye on the 2011 election, the government is taking precautions. It will change the laws to allow it to dip into investment returns of the country’s reserves to offset rising costs of public services.

It’s seen as a positive move, but also one that serves as a warning that life can get worse for the people.

© 1995-2008 Star Publications (Malaysia) Bhd (Co No 10894-D)


http://thestar.com.my/news/story.asp?file=/2008/9/20/focus/2063923&sec=focus

Warren Buffett's Classic Approach

New York Times
October 17, 2008
Op-Ed Contributor

Buy American. I Am.
By WARREN E. BUFFETT

Omaha

THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.
Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.

Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.

http://www.nytimes.com/2008/10/17/opinion/17buffett.html?_r=1&oref=slogin

Why do investors lose money in the stock market?

Basically, investors tend to lose money because of the twin evils - "greed' and "fear".

Therefore, a wise investor needs to control himself against greed. Perhaps by cultivating a sense of contentment, an investor would be able to overcome greed. After all, a contented person is able to tell himself, "Well, I have made some profits. Thus, I have made my money work for me. Now is the time for me to sell my shares and put my money in the bank."

Similarly, he also needs to be cool and not lose his nerves when the stock market tumbles. In such a situation, an investor must learn to tell himself, "At least, the buying opportunity has arrived. I have the money and I will buy some undervalued shares and lock them up until the next bull run."

With the aforesaid frame of mind, an investor would be on his way to emerging as a winner in the game of shares investment.

GREED
$2? I'll wait for $3
GREED
$3? I'll wait for $4
FEAR
Market may collapse. $1.50 now? Sell!

Ref:

Making Mistakes in the Stock Market by Wong Yee

http://tradingbursamalaysia.blogspot.com/2008/10/still-falling.html Where is the bottom? Ans: I don't know now but I will tell you when I see signs of bottoming.

What is the best strategy for buying shares?

In general, most people have the tendency to buy shares upwards - perhaps due to greed. They feel that the price is rising and even ready to "take off" higher. Thus, they must buy more regardless of the fact that they are now buying these shares at a much higher price than they have previously bought.

Such a situation normally ends in losses because of the higher risks involved as the share price can fall suddenly. In the case of a market correction, the investor will then end up "carrying the baby". As such, the best way to buy shares is to buy downwards. (My comments: Do you agree?). But here again, it will take a lot of courage to buy downwards because it always appears that the more you buy, the more you seem to be losing.

Nevertheless, the name of the game is PATIENCE as share prices will eventually rise again - it is just a matter of time.

In short, the trick is, you need lots of money and guts to see you through. And, if you do - you will ultimately reap your profits when the stock market turn bullish again.

Best Strategy:

• Money
• Guts
• Patience
• Confidence

Ref: Making Mistakes in the Stock Market by Wong Yee

Stock prices keep on falling almost every day

Question: Almost all my friends are not interested in the stock market as prices keep on falling almost every day. The share prices look cheap but most analysts expect further falls. What should I do?

Technically, you need to examine the extent and the depth of the fall of the stock market since its last peak.

If it had been falling over a few months already and the share prices are very much off their peak levels, then you should embark on bargain hunting.

Look for fundamentally sound shares of companies with a solid balance sheet and good earning prospect. Upon examining these factors and if the share price is at bargain levels, then you should buy the said shares but bear in mind only to buy downwards. (My comment: be careful, better to average upwards).

Given time, the price of your shares will appreciate and you will be able to reap your profits.

From peak to present share price:

1. How much has the price fallen from the peak?
2. Is the PE low enough?
3. Buy if you feel comfortable about the share price.

Ref: Making Mistakes in the Stock Market

Impact of property prices on the stock market

In general, property prices tend to move hand in hand with share prices.

Therefore, when property prices have risen too fast and too high, a wise investor might want to be cautious about the stock market as a property market crash would dampen sentiment on the stock market.

We could learn a lesson from Japan in the 1980s.

After excessive speculation -----> Property prices collapse

Nikkei average 39,000 ---------> Nikkei average 14,000

Reason:

• When property prices sky rocket, investors mortgage or sell their properties to buy shares ----> share prices sky rocket.

• When property prices collapse, investors sell shares to cover the house mortgage loan

or

• When share prices collapse, investors sell their properties to cover shares margin call.

Ref: Making Mistakes in the Stock Market by Wong Yee

Why is oil price important?

What is the impact of oil price on the stock market?

Generally, most industrial-motor-related things need oil as a means to generate power. Thus, oil has been one of the most important commodities to most countries.

Any adverse impact on oil price could bring chaos to the world as fear of inflation would surface. In such an event, the world economies could be drawn to a standstill.

For example, the oil shock in 1973/74 and 1980/81 caused the world stock markets to tumble. Again in 1990, the Gulf Crisis also contributed to the collapse of the stock markets.

Such external shocks could happen again. Therefore, it would be helpful if an investor spent some time monitoring the oil price charts as well as any world events that could lead to another oil crisis.

Event
1973/74 oil shock
1980/81 oil shock
1990 Gulf Crisis
--------> sudden rise in oil price -> increase price of Brent crude
--------> World stock markets tumble.

To observe:

• Brent crude chart
• World events regarding oil prices

Ref: Making Mistakes in the Stock Market by Wong Yee

Share prices have fallen sharply in a Recession

Question: The recession is a year old now and share prices have fallen sharply. Most of my friends are so nervous that they have sold all their shares, some incurring heavy losses. Are my friends doing the right thing?

Generally speaking when a recession is already a year old one should seize the opportunity to monitor share prices closely. Often, genuine bargains are secured during the worst time.

For instance, some shares could have fallen below their net assets backing or the PE ratio could be hovering below 10. Under such circumstances, the downside risk could be minimum.

Thus a share investor should seize the opportunity to analyse the stock market barometer e.g. the ST Industrial Index (or KLCI Index) to ascertain whether it is bottoming and has a potential to rise.

After all, one of the basic fundamentals of a stock market trend analysis is that it tends to foretell the economic recovery well in advance. Therefore you will be able to reap quite a substantial profit if your analysis proves right.


During a recession

• Do not panic
• Look out for bargains instead of cutting losses
• Monitor the Stock Market Index for bottoming formation

Ref:

Making Mistakes in the Stock Market by Wong Yee

http://tradingbursamalaysia.blogspot.com/2008/10/still-falling.html Where is the bottom? Ans: I don't know now but I will tell you when I see signs of bottoming.

Leading economic indicators

To-date, all kinds of tools have been engaged by economists to forecast the economic cycle. However, the most applicable tool used so far is the "leading economic indicators" composite index.

Accordingly, if the said index rises for 3 consecutive months in a row during a recession period, it augurs that the economy will be heading for a recovery in 6 to 9 months' time.

Conversely, during an expansionary phase, should the "leading economic indicators" composite index record a fall for 3 consecutive months in a row, it is an indication that a slowdown in the economy is possible within the next 6 to 9 months' time.

US Leading Economic Indicators Composite Index comprises a wide range of components:

1. Prices for raw materials
2. The average work week
3. New orders for consumer goods
4. New orders for building permits
5. Stock prices
6. Orders for plant and equipment
7. Unemployment claims
8. Vendor performance
9. Money supply
10. Total liquid assets
11. Consumer expectations about the economy

Leading Economic Indicators Composite Index

UP -> 3 consecutive months -> economic growth
DOWN -> 3 consecutive months - > slow down/recession

Ref: Making Mistakes in the Stock Market by Wong Yee

My recollection of the 1997 Asian Financial Crisis

In 1997/98 Asian Financial Crisis, the Malaysian Stock Market dropped from 900 in 1997 to 200 in 1998, and the Ringgit dropped by about 40 percent in a year.

Let me attempt to recall the crisis from memory. There was a period of uncertainty from the start of the Asian Financial Crisis. Thailand was the first country affected. The Baht was shorted heavily. The Thai government supported its currency initially but subsequently was unable. The next country to be affected was Indonesia and its currency, the Rupee. Malaysia was initially not affected but not for long. In fact, Malaysia was able to help Thailand and Indonesia in the onset of the crisis by extending billion ringgit loans to help them support their currencies.

When the crisis affected Malaysia, there was also an initial period of great uncertainty. The Minister of Finance and the central government implemented various policies. Many of these were however unable to stabilise the crisis. The Malaysian Stock Market continued its free fall. When the market fell to 600, many thought the market was trading at a bargain at that level. Many good and fundamentally strong counters were also down with the market.

Subsequent falls in the market proved those who bought to be wrong for the short term. The market was not reacting to fundamentals for that period. Those using "fundamentals" to guide their purchases caught the "falling knife/knieves". The market got pushed down further, 500, 400, 300 and eventually capitulated to a low of 200+. On that faithful day before the implementation of drastic measures by the central government, everyone wanted to get out of the market, at any price! It would seem that there was little or even no value in any Malaysian assets on that memorable day. Panic was obvious.

I recalled the ringgit was MR 2.20 to US 1.00 before the crisis. The ringgit dropped drastically. It was soon MR 3 to US 1.00. Soon, it was MR 3.50, MR4 and even MR 4.50 (?). The falling Ringgit affected those Malaysians who were supporting their children's education overseas. Some had to stop their studies. Others suffered greatly, having lost money in the stock market and now paying almost double for the education fees in ringgit terms. These were sums in the tens or hundreds of thousand ringgits. The hardship was real and painful.

The local banks were deemed not safe to put your money. Soon there were large numbers of withdrawals from the local banks. Depositors withdrew from local banks when rumours were rampant might collapse. These same depositors parked their money into Singapore and other foreign banks. Some opened foreign currencies accounts in Singapore. A lot of money flowed out of the country too. For short and long term deposits, the interest was a high of >10% for that period of uncertainty.

Economy was down. The traders and the businesses were in deep trouble. It was difficult to get new loans or financing. The banks were tight of liquity and was unwilling to extend credit. One would be lucky not to have one's credit facility withdrawn. Those carrying large loans or debts were particularly suffering as interest rate was very high indeed. How to make money? Contracting economy, poor business sentiment and high cost of doing business translated into losses for many businesses.

On hindsight, what would you have done differently during the Asian Financial Crisis?

Are there lessons here to guide the investors on the present Global Financial Crisis?


Visit this post to learn how Malaysia got out of the Asian Financial Crisis.
http://profitmaking188.blogspot.com/ : Malaysia's Self-Prescribed Rescue Debated

The Worst of Time and the Best of Time

It has been such a volatile week. The market has sunk so much in 1 week. It certainly is alarming for those who are holding stocks. For many this may be the worst of time. What should they do with their stocks?

On the other hand, this may be the best of time for some investors. It maybe the better time to pick up bargains in those good stocks one is eyeing for so long.

Some are waiting for the capitulation to pick up stocks. Above all, do not be the one who capitulates.

Who can predict the bottom? I can't. It is just a gut feeling that the bottom maybe near. Also the dogmatic conviction that the market is still the place to park some of my investment, however fearful it may seem at present. This soon will pass too.


Ref:
Stock Sale Considerations (Part 2 of 5)
WHY ARE YOU CONSIDERING A SALE?

The Bad News that creates a Buying Situation - Stock Market Corrections and Panics

VIX Index

Volatility Index (VIX)

What it Is:

The Volatility Index (VIX) is a contrarian sentiment indicator that helps to determine when there is too much optimism or fear in the market. When sentiment reaches one extreme or the other, the market typically reverses course.

How it Works:

The VIX is based on data collected by the CBOE, or Chicago Board Options Exchange. Each day the CBOE calculates a figure for a "synthetic option" based on prices paid for puts and calls. The computation of the VIX was changed in 2003 and is based on the S&P 500 option series.

The key question the Volatility Index answers is "What is the 'implied,' or expected, volatility of the synthetic option on which the index is based?" We already know the following variables:
-- The market price of the S&P 500
-- The prevailing interest rate
-- The number of days to expiration of the option series
-- The strike prices of those options contracts

What the equation solves is the "implied," or expected, volatility.

What is volatility?

One definition describes volatility as "the rate and magnitude of changes in price." In simple English, volatility is how fast prices move.

When the market is calm and moving in a trading range or even has a mild upside bias, volatility is typically low. On these kinds of days, call option buying (a bet that the market will move higher) generally outnumbers put option buying (a bet that the market will go down). This kind of market typically reflects complacency, or a lack of fear.

Conversely, when the market sells off strongly, anxiety among investors tends to rise. Traders rush to buy puts, which in turn pushes the price of these options higher. This increased amount investors are willing to pay for put options shows up in higher readings on the VIX. High readings typically represent a fearful marketplace. Paradoxically, an oversold market that is filled with fear is apt to turn and head higher.

Why it Matters:

The Volatility Index works well in conjunction with other "overall market indicators." By studying its message, traders will have a better understanding of investor sentiment, and thus possible reversals in the market.

http://www.streetauthority.com/terms/v/vix2.asp


VIX values greater than 30 are generally associated with a large amount of volatility as a result of investor fear or uncertainty, while values below 20 generally correspond to less stressful, even complacent, times in the markets.

The index is often referred to as the "investor fear gauge".

LIBOR - London Interbank Offered Rate

What is LIBOR?

The London Interbank Offered Rate is the rate at which banks will lend unsecured funds to one another. Based on a survey of global banks, it's the most widely used benchmark for short-term interest rates.

When are LIBOR rates determined?

The British Bankers' Association publishes rates Monday to Friday at 11:00 a.m. London time of varying maturities.

How is LIBOR determined?

Each bank determines how much they will have to pay to borrow money from each other. The number of contributing banks vary depending on the currency.

U.S. dollar LIBOR is determined by 16 global banks, and the final published rate is the average of the middle eight rates.

LIBOR and U.S. interest rates

Historically, LIBOR tends to track the Federal Funds Target Rate. However, as economic uncertainty over the global credit crisis continued and the initial U.S. government-sponsored financial bailout failed, the spread between the two rates widened as LIBOR spiked, indicating a lack of confidence among banks.

LIBOR's relationship to consumers.

LIBOR ultimately determines interest rates on everything from adjustable-rate mortgages and car and student loans to small-business loans and credit cards.


Additional notes

http://www.investopedia.com/terms/l/libor.asp

LIBOR

An interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market. The LIBOR is fixed on a daily basis by the British Bankers' Association. The LIBOR is derived from a filtered average of the world's most creditworthy banks' interbank deposit rates for larger loans with maturities between overnight and one full year.

The LIBOR is the world's most widely used benchmark for short-term interest rates. It's important because it is the rate at which the world's most preferred borrowers are able to borrow money. It is also the rate upon which rates for less preferred borrowers are based. For example, a multinational corporation with a very good credit rating may be able to borrow money for one year at LIBOR plus four or five points. Countries that rely on the LIBOR for a reference rate include the United States, Canada, Switzerland and the U.K.


http://en.wikipedia.org/wiki/Federal_funds_rate

Federal funds rate comparison with LIBOR

Though the London Interbank Offered Rate (LIBOR) and the federal funds rate are concerned with the same action, i.e. interbank loans, they are distinct from one another, as following:

1. The federal funds rate is a target interest rate that is fixed by the FOMC for implementing U.S. monetary policies.

2. The federal funds rate is achieved through open market operations at the Domestic Trading Desk at the Federal Reserve Bank of New York which deals primarily in domestic securities (U.S. Treasury and federal agencies' securities).

3. LIBOR is calculated from prevailing interest rates between highly credit-worthy institutions.

4. LIBOR may or may not be used to derive business terms. It is not fixed beforehand and is not meant to have macroeconomic ramifications.

Federal Funds Rate and the Discount Rate

The discount rate, in contrast, is usually about a half to a full percentage point higher than the federal funds rate. The Federal Reserve does control that one. The discount rate is the interest rate the Federal Reserve charges other depository institutions for very short-term (usually overnight) loans.

The Bad News that creates a Buying Situation - Industry Recession

The second kind of situation that presents a buying opportunity is an industry-wide recession. In this case an entire industry suffers a financial setback. These situations vary in their intensity and depth. An industry recession can lead to serious losses or it can mean nothing more than mild reduction in per share earnings. Recovery time from this type of situation can be considerable, one to four years, but it does present excellent buying opportunities. In severe examples, a business may even end up in bankruptcy. Don't be fooled by too cheap a selling price. Stay with a well-capitalized leader, one that was very profitable before the recession.

Capital Cities/ABC Inc. fell victim to this weird manic-depressive stock market behaviour in 1990. Because of a business recession, avertising revenues started to drop, and Capital Cities reported that its net profit for 1990 would be approximately the same as in 1989. The stock market, used to Capital Cities growing its per share earnings at approximately 27% a year, reacted violently to this news and in the space of six months drove the price of its stock down from $63.30 a share to $38 a share. Thus, Capital Cities lost 40% of its per share price, all because it projected that things were going to be the same as they were last year. (In 1995, Capital Cities and the Walt Disney Company agreed to merge. This caused the market-revalued Capital Cities to upward of $125 a share. If you bought it in 1990 for $38 a share and sold it in 1995 for $125 a share, your pretax annual compounding rate of return would be approximately 26%, with a per share profit of $87.)

Warren Buffett used the banking industry recession in 1990 as the impetus for investing in Wells Fargo, an investment that brought him enormous rewards. Remember, in an industry-wide recession, everyone gets hurt. But the strong survive and the weak are removed from the economic landscape. Wells Fargo is one of the most conservative, well run, and financially strong of the key money center banks on the West Coast, and the seventh-largest bank in the nation.

Wells Fargo, in 1990 and 1991, responding to a nationwide recession in the real estate market, set aside for potential loan losses a little over $1.3 billion, or approximately $25 a share of its $55 a share in net worth. When a bank sets aside funds for potential losses it is merely designating part of its net worth as a reserve for potential future losses. It doesn't mean that losses have happened, nor does it mean they will happen. What it means is that there is potential for the losses to occur and that the bank is prepared to meet them.

This means that if Well Fargo lost every penny it had set aside for potential losses, $25 a share, it would still have $28 a share left in net worth. Losses did eventually occur, but they weren't as bad as Well Fargo prepared for. In 1991, they wiped out most of Wells Fargo's earnings. But the bank was still very solvent and still reported in 1991 a small net profit of $21 million, or $0.04 a share.

Wall Street reacted as if Wells Fargo was a regional savings and loan on the brink of insolvency, and in the space of four months hammered Wells Fargo's stock price from $86 a share to $41.30 a share. Wells Fargo lost 52% of its per share market price because it essentially was not going to make any money in 1991. Warren Buffett responded by buying 10% of the company - or 5 million shares - for an average price of $57.80 a share.

What Warren Buffett saw in Wells Fargo was one of the best managed and profitable money-center banks in the country, selling in the stock market for a price that was considerably less than what comparable banks were selling for in the private market. Although all banks compete with each other, as we said, money-center banks like Wells Fargo have a kind of toll brideg monopoly on financial transactions. If you are going to function in society, be it as an individual, a mom and pop business, or a billion-dollar corporation, you need a bank account, a business loan, a car loan, or a mortgage. And with every bank account, business loan, car loan, or mortgage comes the banker charging you fees for the myriad services he provides. California, by the way, has a lot of people, thousands of businesses, and a lot of small and medium size banks, and Wells Fargo is there to serve them all - for a fee.

The loan losses that Well Fargo anticipated never reached the magnitude expected, and nine years later, in 2000, if you wanted to buy a share of Wells Fargo you would have to have paid approximately $270 a share. Warren Buffett ended up with a pretax annual compounding rate of return of approximately 18.6% on his 1991 invetment. For Warren Buffett there is no business like the banking business.

In the cases of both Capital Cities and Wells Fargo, there was a dramatic drop in their share prices because of an industry-wide recession, which created the opportunity for Warren Buffett to make serious investments at bargain prices.