Question: What is the impact of the currency movements on the stock market?
This simple article is of interest to those investing in overseas stock markets.
24-10.08
http://biz.thestar.com.my/business/exchange.asp
Units of Malaysian ringgit per unit of foreign currency:
1 US DOLLAR = 3.6070
1 AUSTRALIAN DOLLAR = 2.4250
1 BRUNEI DOLLAR = 2.4040
1 CANADIAN DOLLAR = 2.8860
1 EURO = 4.6510
1 NEW ZEALAND DOLLAR = 2.1580
1 PAPUA N GUINEA KINA =1.4810
1 SINGAPORE DOLLAR = 2.4035
1 STERLING POUND = 5.8310
A possible impact could be that when the local currency is on the rise, foreign investors will want to sell their shares to realise their gains (shares realise value and exchange rate profit).
Similarly, when the local currency is falling, foreign investors may have the tendency to buy local shares since the cost is relatively cheap, provided the stock market is still bullish.
Scenario 1
MR rises ---> means that foreign investors will
---> sell shares,
---> change back into their own currency for capital gains
Scenario 2
MR falls ---> means that foreign investors will
---> retain local currency
---> buy Malaysian shares as the latter are relatively cheap
Ref: Making Mistakes in the Stock Market by Wong Yee
Friday, 24 October 2008
What causes investors to buy or sell shares?
Question: What causes investors to buy or sell shares?
Always remember that in every trade, there is a buyer and there is a seller.
Generally, the buy and sell actions can be said to be governed by two basic elemets - "HOPE" and "FEAR".
People buy shares because they "hope" to make money. Similarly, people sell shares because they "fear" that their share prices will tumble.
"Hope" is normally centred around a country's economic performance. When there is "hope" of an economic expansion, share prices will rise in anticipation of the said economic upturn. Perhaps, the reason being, during an economic upturn, companies will make or are expected to make more money.
"Fear", on the other hand, is associated with unpleasantness in situations such as recessions, political crisis or social unrest. All these tend to create a sense of fear among market players thereby causing them to sell their shares. The fear of inflation or high interest rates have made market players rather jittery. The latest global financial and economic meltdown have similarly caused a worldwide selling in the stock markets.
Mind of the Market Player
Economy good? Bonus issue? ====> BUY
Recession? Political uncertainty? Riot, inflation, higher interest rate? ====> SELL
Reference: Making Mistakes in the Stock Market by Wong Yee
Always remember that in every trade, there is a buyer and there is a seller.
Generally, the buy and sell actions can be said to be governed by two basic elemets - "HOPE" and "FEAR".
People buy shares because they "hope" to make money. Similarly, people sell shares because they "fear" that their share prices will tumble.
"Hope" is normally centred around a country's economic performance. When there is "hope" of an economic expansion, share prices will rise in anticipation of the said economic upturn. Perhaps, the reason being, during an economic upturn, companies will make or are expected to make more money.
"Fear", on the other hand, is associated with unpleasantness in situations such as recessions, political crisis or social unrest. All these tend to create a sense of fear among market players thereby causing them to sell their shares. The fear of inflation or high interest rates have made market players rather jittery. The latest global financial and economic meltdown have similarly caused a worldwide selling in the stock markets.
Mind of the Market Player
Economy good? Bonus issue? ====> BUY
Recession? Political uncertainty? Riot, inflation, higher interest rate? ====> SELL
Reference: Making Mistakes in the Stock Market by Wong Yee
Thursday, 23 October 2008
Major overseas market falls sharply, should we sell our shares?
Question: When a major overseas market falls sharply, should we sell our shares (in panic)?
The crux of the issue is to always bear in mind that generally each stock market has its own trend. The problems and environment defer from country to country.
Thus, the peculiarity of the stock market may not necessarily affect the other.
Instead, the rise or fall of a stock market tends to depend on how investors perceive the particular situation say, in 6 months to 1 year. That is the future prospect of the country.
However, some may argue that the above view is erroneous.
Take for example, the October 1987 Wall Street Crash which rocked the stock markets of the world. To this, one needs to understand that the Oct 1987 crisis was due to a fear of a worldwide recession due to the insurmountable trade deficit in the US.
On the contrary, the even that caused the Hong Kong Hang Seng to plunge 633.85 points in 3 days on 11.3.93, 12.3.93 and 15.3.93 was attributed to the political issue between Hong Kong and China over the handling over of Hong Kong to China in 1997. Despite the drastic fall of the Hong Kong Hang Seng Index, the ST Industrial Index of Singapore remained firm. Therefore, if you had panicked and sold off your stocks, you would stand to lose out.
Each country has its own problems, economic or political.
Therefore, each country's stock market trend defers one from the other.
EXCEPTION: Worldwide fear could have a down effect.
Ref: Making Mistakes in the Stock Market by Wong Yee
Comments:
What about the present crisis?
How will this play out?
My opinion is the financial markets are not decoupled.
But what of the individual economies? Likewise too.
But let us not despair.
History has shown that after each crisis, the world rebounded back to higher levels of growth.
It is only a matter of when this crisis will be over.
You should have invested in a manner to be in a position to take advantage of the crisis.
For others, surviving the crisis unscathed maybe challenging.
Ref: Consequences must dominate Probabilities
The crux of the issue is to always bear in mind that generally each stock market has its own trend. The problems and environment defer from country to country.
Thus, the peculiarity of the stock market may not necessarily affect the other.
Instead, the rise or fall of a stock market tends to depend on how investors perceive the particular situation say, in 6 months to 1 year. That is the future prospect of the country.
However, some may argue that the above view is erroneous.
Take for example, the October 1987 Wall Street Crash which rocked the stock markets of the world. To this, one needs to understand that the Oct 1987 crisis was due to a fear of a worldwide recession due to the insurmountable trade deficit in the US.
On the contrary, the even that caused the Hong Kong Hang Seng to plunge 633.85 points in 3 days on 11.3.93, 12.3.93 and 15.3.93 was attributed to the political issue between Hong Kong and China over the handling over of Hong Kong to China in 1997. Despite the drastic fall of the Hong Kong Hang Seng Index, the ST Industrial Index of Singapore remained firm. Therefore, if you had panicked and sold off your stocks, you would stand to lose out.
Each country has its own problems, economic or political.
Therefore, each country's stock market trend defers one from the other.
EXCEPTION: Worldwide fear could have a down effect.
Ref: Making Mistakes in the Stock Market by Wong Yee
Comments:
What about the present crisis?
How will this play out?
My opinion is the financial markets are not decoupled.
But what of the individual economies? Likewise too.
But let us not despair.
History has shown that after each crisis, the world rebounded back to higher levels of growth.
It is only a matter of when this crisis will be over.
You should have invested in a manner to be in a position to take advantage of the crisis.
For others, surviving the crisis unscathed maybe challenging.
Ref: Consequences must dominate Probabilities
Fundamental analysis useful in bear market
Question: When should we use fundamental analysis?
Fundamental analysis is a good tool to engage at all times. It is particularly useful during a bear phase of the stock market.
When prices have fallen sharply to an unrealistic level, you could reap a handsome profit in future by using fundamental analysis to guide you in buying shares.
Fundamental analysis is a good tool to engage at all times. It is particularly useful during a bear phase of the stock market.
When prices have fallen sharply to an unrealistic level, you could reap a handsome profit in future by using fundamental analysis to guide you in buying shares.
- First, ascertain whether stock market is in a bull or bear phase.
- If it is a Big Bear, then use Fundamental Analysis.
Ref: Making Mistakes in the Stock Market by Wong Yee
What is a bear rally? What should I do?
Question: What is a bear rally? What should I do?
During a bear phase - a situation whereby share prices keep on falling to a new low after each rebound - share prices will, at a certain level, stage a steep upturn all of a sudden.
The buying power is so real that it appears as if a new bull market has been born.
Nevertheless, such a bear rally is often short-lived with a retraceable estimate of either 1/3, 1/2, 2/3 or even 100% of the fall.
(Note the recent 1000 points rise in 1 day of the Dow index and today's new low in Dow index)
During such a scenario, an investor should exercise caution when buying shares.
BEAR MARKET
Prices falling from point A -----> lower ----> to new low at point B ----
----------------------> Bear Rally (?% up 1/3, 1/2, 2/3 or 100% of AB)
Ref: Making Mistakes in the Stock Market by Wong Yee
During a bear phase - a situation whereby share prices keep on falling to a new low after each rebound - share prices will, at a certain level, stage a steep upturn all of a sudden.
The buying power is so real that it appears as if a new bull market has been born.
Nevertheless, such a bear rally is often short-lived with a retraceable estimate of either 1/3, 1/2, 2/3 or even 100% of the fall.
(Note the recent 1000 points rise in 1 day of the Dow index and today's new low in Dow index)
During such a scenario, an investor should exercise caution when buying shares.
BEAR MARKET
Prices falling from point A -----> lower ----> to new low at point B ----
----------------------> Bear Rally (?% up 1/3, 1/2, 2/3 or 100% of AB)
Ref: Making Mistakes in the Stock Market by Wong Yee
Wednesday, 22 October 2008
Effects of good news on share price
Question: Is the statement "When a company declares good profits the share price must rise" correct?
In most instances, the above-mentioned may be the case provided
In most instances, the above-mentioned may be the case provided
- the good news have not been discounted by the market yet and
- that the prevailing market sentiment is still bullish.
After all, in a bull market, all good news are regarded as bullish news.
On the contrary, in a bear market, good news may not necessarily cause the share price to rise.
In a bullish market
If good news:
- share price will rise
- if good news already discounted, share price will not rise.
In a bearish market
If good news:
- share price may fall
Ref: Making Mistakes in the Stock Market by Wong Yee
Historical Earnings
Question: Is it advisable to buy shares based on historical earnings?
One of the fundamental errors of market player is to make decisions based on historical earnings. Such a decision can be a costly affair.
Reasons being, economic situation always keep changing. In addition, each industry also has its own cycles.
It is thus more advantageous to do your own research to try and forecast the profits of a particular company.
If the profits forecast is better than the historical earnings, then it is worth investing in the said company shares.
Points:
Historical Data is just a guide
Do not base your decision on historical profits.
If possible, do both present and future forecasts.
Ref: Making Mistakes in the Stock Market by Wong Yee
One of the fundamental errors of market player is to make decisions based on historical earnings. Such a decision can be a costly affair.
Reasons being, economic situation always keep changing. In addition, each industry also has its own cycles.
It is thus more advantageous to do your own research to try and forecast the profits of a particular company.
If the profits forecast is better than the historical earnings, then it is worth investing in the said company shares.
Points:
Historical Data is just a guide
Do not base your decision on historical profits.
If possible, do both present and future forecasts.
Ref: Making Mistakes in the Stock Market by Wong Yee
What should I do in a bear market situation?
The best strategy is to go for a holiday and let the market cool off.
When things have settled down, you may commence to do some bargain hunting.
Ref: Making Mistakes in the Stock Market by Wong Yee
When things have settled down, you may commence to do some bargain hunting.
Ref: Making Mistakes in the Stock Market by Wong Yee
What is a bear market?
It is a situation whereby share prices keep on falling lower and lower.
Although at a certain point in time share prices will head for a rebound, the rebound normally will not be sustained.
Thus, the downward escalation of share prices resumes as bad news keeps surfacing one after another.
Investors and speculators become jittery and sell their shares at a loss.
Bad debts become the order of the day and lawyers are busy issuing demand letters.
Suddenly, those smiling faces are replaced with sadness and a solemn mood.
Brokers also find themselves in trouble when clients fail to settle debts.
STOCK MARKET INDEX ----> falling -----> Low ------> New Lows----->
Scenario:
Bad news abound
Forced selling by brokers
Bad debts to be collected
Sad faces around
Although at a certain point in time share prices will head for a rebound, the rebound normally will not be sustained.
Thus, the downward escalation of share prices resumes as bad news keeps surfacing one after another.
Investors and speculators become jittery and sell their shares at a loss.
Bad debts become the order of the day and lawyers are busy issuing demand letters.
Suddenly, those smiling faces are replaced with sadness and a solemn mood.
Brokers also find themselves in trouble when clients fail to settle debts.
STOCK MARKET INDEX ----> falling -----> Low ------> New Lows----->
Scenario:
Bad news abound
Forced selling by brokers
Bad debts to be collected
Sad faces around
What should I do in a bull market situation?
As share prices will be rising since speculators are chasing after the shares, the best strategy to adopt is to buy during a correction.
In case the share price should drop after buying, you need to do some averaging.
However, remember to keep on selling once you have profits.
SHARE PRICE -------> Rising --------> Correction or consolidation ===> Buy!
Always buy downwards and buy to average i.e. lowering your cost.
Ref: Making Mistakes in the Stock Market by Wong Yee
In case the share price should drop after buying, you need to do some averaging.
However, remember to keep on selling once you have profits.
SHARE PRICE -------> Rising --------> Correction or consolidation ===> Buy!
Always buy downwards and buy to average i.e. lowering your cost.
Ref: Making Mistakes in the Stock Market by Wong Yee
What is a bull market?
Simply put, a bull market is a situation where share prices are rising higher and higher giving the impression that this upward movement will continue indefinitely - with little pockets of correction along the way.
Everyone seems to be making money. Good news is in abundance and bad news does not seem to exist.
Smiling faces can be seen everywhere and restaurants are often fully booked. Conversations on buying new cars or expensive watches never seem to end.
STOCK MARKET INDEX reaches a ------> Peak -------->correction or consolidation ------
--------> Higher Peak ----------> Correction or consolidation --------> Higher Peak
Everyone seems to be making money. Good news is in abundance and bad news does not seem to exist.
Smiling faces can be seen everywhere and restaurants are often fully booked. Conversations on buying new cars or expensive watches never seem to end.
STOCK MARKET INDEX reaches a ------> Peak -------->correction or consolidation ------
--------> Higher Peak ----------> Correction or consolidation --------> Higher Peak
Great Depression versus Now
http://biz.thestar.com.my/news/story.asp?file=/2008/10/22/business/2335258&sec=business
The Star Online > Business
By OOI KOK HWA" name=AUTHOR>
Wednesday October 22, 2008
Great Depression versus now
Personal Investing
By OOI KOK HWA
As much as there are similarities between the two crises, the damage caused by the current turmoil is likely to be less severe given the swift actions of central banks.
AS a result of the recent financial tsunami, some experts have started to ponder whether we are headed for a depression.
The current credit crunch and the meltdown in some financial institutions were quite similar to what happened during the Great Depression in the 1930s.
In this article we will analyse the reasons behind the 1929 Wall St crash, which kickstarted the Great Depression and compare it to the current situation to identify any signs that a depression is approaching.
Milton Friedman, the leading advocate of monetarism, argued that every great depression had been accompanied or preceded by a monetary collapse.
According to Ben Bernanke, the US Fed chairman, the main reason behind the Great Crash of 1929 was due to the tight monetary policies adopted during that period.
He said the high interest rates back then caused the US economy to fall into a recession that led to the great market crash in October 1929.
As the US dollar was backed by gold, the acute selling of dollars for gold resulted in a run on the dollar.
The Fed continued to increase interest rates in an effort to preserve the value of US dollar.
As a result, high interest rates caused bankruptcies for many companies.
At the peak of the Great Depression, the US unemployment rate hit 25%
To rub salt into the wound, massive withdrawals of cash by panicky depositors were the last straw that brought about the total collapse of financial institutions.
In that period, bank deposits were uninsured and the collapse of the banks caused depositors to lose their savings.
And due to the economic uncertainties, the surviving banks were reluctant to give out new loans.
Another culprit in the 1929 crash was margin financing which caused excessive speculation in the stock market.
Investors needed only to put up 10% capital and borrow the rest from the bank to invest in the stock market.
The collapse of stock prices led to margin calls and further selldowns.
Coming back to the 2008 crash, the banking and credit-market crisis was mainly due to the property boom and subprime bust.
The collapse of subprime loans sparked the credit crunch, which dragged some financial institutions into trouble.
As a result of the securitisation and the creation of innovative financial products like collateralised-debt obligations and credit-default swaps, the collapse of one financial institution had a domino effect, leading to the collapse of other financial institutions.
Now, the pertinent question is whether we are in a long bear market and heading for a depression.
We believe a depression like the one in 1929 may not happen exactly the way it did before.
Given the fast actions taken by central banks around the world, the damage caused by this crisis will be less severe than the one in 1929.
Central banks around the world have been putting in concerted efforts to make sure the global economy will not fall into a depression.
The rescue packages being implemented throughout the world will help stabilise the financial system.
We believe the reduction of interest rates and the increase in money supply will help cushion the impact of the credit crunch.
Besides, deposits placed with most financial institutions are guaranteed by central banks.
Even though the US unemployment rate may rise to 10% from 6.1% currently, it is still far below the peak of 25% hit during the Great Depression.
In the 1929 crash, the Dow Jones Industrial Average took about three years to reach bottom in July 1932 from its peak in September 1929.
From the peak to the trough the Dow lost about 90%.
The Great Depression in the US started in August 1929 and ended only in March 1933.
The stock market started to recover eight months before the US economy ended its depression.
At present, the Dow has already dropped for a year from its peak in October 2007, currently down about 37.5% against its peak of 14,164 points on Oct 9, 2007.
In view of the possible economic recession in most developed countries, we think the Dow will drop further from current levels.
Nevertheless, we believe it will recover much faster and the magnitude of the fall will be far less severe than the one in 1929.
Lastly, we believe the stock market will eventually recover.
At this point, to be more prudent, we may take a “wait and see” approach until things stabilise.
> Ooi Kok Hwa is an investment adviser licensed by Securities Commission and the managing partner of MRR Consulting
© 1995-2008 Star Publications (Malaysia) Bhd (Co No 10894-D)
The Star Online > Business
By OOI KOK HWA" name=AUTHOR>
Wednesday October 22, 2008
Great Depression versus now
Personal Investing
By OOI KOK HWA
As much as there are similarities between the two crises, the damage caused by the current turmoil is likely to be less severe given the swift actions of central banks.
AS a result of the recent financial tsunami, some experts have started to ponder whether we are headed for a depression.
The current credit crunch and the meltdown in some financial institutions were quite similar to what happened during the Great Depression in the 1930s.
In this article we will analyse the reasons behind the 1929 Wall St crash, which kickstarted the Great Depression and compare it to the current situation to identify any signs that a depression is approaching.
Milton Friedman, the leading advocate of monetarism, argued that every great depression had been accompanied or preceded by a monetary collapse.
According to Ben Bernanke, the US Fed chairman, the main reason behind the Great Crash of 1929 was due to the tight monetary policies adopted during that period.
He said the high interest rates back then caused the US economy to fall into a recession that led to the great market crash in October 1929.
As the US dollar was backed by gold, the acute selling of dollars for gold resulted in a run on the dollar.
The Fed continued to increase interest rates in an effort to preserve the value of US dollar.
As a result, high interest rates caused bankruptcies for many companies.
At the peak of the Great Depression, the US unemployment rate hit 25%
To rub salt into the wound, massive withdrawals of cash by panicky depositors were the last straw that brought about the total collapse of financial institutions.
In that period, bank deposits were uninsured and the collapse of the banks caused depositors to lose their savings.
And due to the economic uncertainties, the surviving banks were reluctant to give out new loans.
Another culprit in the 1929 crash was margin financing which caused excessive speculation in the stock market.
Investors needed only to put up 10% capital and borrow the rest from the bank to invest in the stock market.
The collapse of stock prices led to margin calls and further selldowns.
Coming back to the 2008 crash, the banking and credit-market crisis was mainly due to the property boom and subprime bust.
The collapse of subprime loans sparked the credit crunch, which dragged some financial institutions into trouble.
As a result of the securitisation and the creation of innovative financial products like collateralised-debt obligations and credit-default swaps, the collapse of one financial institution had a domino effect, leading to the collapse of other financial institutions.
Now, the pertinent question is whether we are in a long bear market and heading for a depression.
We believe a depression like the one in 1929 may not happen exactly the way it did before.
Given the fast actions taken by central banks around the world, the damage caused by this crisis will be less severe than the one in 1929.
Central banks around the world have been putting in concerted efforts to make sure the global economy will not fall into a depression.
The rescue packages being implemented throughout the world will help stabilise the financial system.
We believe the reduction of interest rates and the increase in money supply will help cushion the impact of the credit crunch.
Besides, deposits placed with most financial institutions are guaranteed by central banks.
Even though the US unemployment rate may rise to 10% from 6.1% currently, it is still far below the peak of 25% hit during the Great Depression.
In the 1929 crash, the Dow Jones Industrial Average took about three years to reach bottom in July 1932 from its peak in September 1929.
From the peak to the trough the Dow lost about 90%.
The Great Depression in the US started in August 1929 and ended only in March 1933.
The stock market started to recover eight months before the US economy ended its depression.
At present, the Dow has already dropped for a year from its peak in October 2007, currently down about 37.5% against its peak of 14,164 points on Oct 9, 2007.
In view of the possible economic recession in most developed countries, we think the Dow will drop further from current levels.
Nevertheless, we believe it will recover much faster and the magnitude of the fall will be far less severe than the one in 1929.
Lastly, we believe the stock market will eventually recover.
At this point, to be more prudent, we may take a “wait and see” approach until things stabilise.
> Ooi Kok Hwa is an investment adviser licensed by Securities Commission and the managing partner of MRR Consulting
© 1995-2008 Star Publications (Malaysia) Bhd (Co No 10894-D)
Protect your savings against inflation
Inflation eating into retirement nest-egg of Malaysians
By Jeeva Arulampalamjeeva@nstp.com.my
FOUR out of 10 Malaysians feel the need to continue working after their mandatory retirement age, driven by the fear that they will not be able to support themselves based on current retirement savings.
A survey by life insurer Prudential Assurance Malaysia Bhd in August 2008, called the Prudential Retire-Meter 2008, found that 36 per cent of people approaching retirement age were less confident about their retirement from a year ago."
About 81 per cent of these individuals said that inflation had gone up and had an effect on their lifestyles," Prudential Assurance Malaysia chief executive officer Bill Lisle said at a media briefing in Kuala Lumpur yesterday to release the survey findings.
While close to 72 per cent of the respondents said they saved, about 77 per cent of those who saved invest in low-yielding savings vehicles such as fixed deposits and savings accounts."
About 41 per cent said they don't know how much to save to meet their retirement needs and 64 per cent said they did not separate their retirement savings from their other savings," said Lisle.
Lisle said the lack of awareness for retirement savings needed to be addressed since Malaysians should ensure that their retirement plans are inflation and recession proof.
He added that Prudential will continue with its retirement education programme in November, under the "What's your number" campaign that seeks to identify and revise one's estimated retirement savings on an annual basis.
Global research agency Research International was commissioned to conduct the Prudential Retire-Meter 2008 survey which covered key urban centres in Peninsular Malaysia, Sabah and Sarawak.
A total of 1,024 Malaysians with a monthly household income of RM3,000 and higher were interviewed for the survey.
Mail webheads for site related feedback and questions. Write to the editor or contact sales for other kind of help. Copyright © The New Straits Times Press (Malaysia) Berhad, Balai Berita 31, Jalan Riong, 59100 Kuala Lumpur, Malaysia.
http://www.btimes.com.my/Monday/OurPick/20081022004144/Article
Tuesday, 21 October 2008
Outyielding Blue Chips
Browsing the business section of the local paper enabled one to pick up stocks with dividend yields of 4.0% or greater.
No intelligent investor, no matter how starved for yield, would ever buy a stock for its dividend income alone; the company and its businesses must be solid, and its stock price must be reasonable.
But, thanks to the bear market that began the last few months, some leading stocks (blue chips) are now outyielding FDs.
So, even the most defensive investor should realize that selectively adding stocks to an all-bond or mostly-bond portfolio can increase its income yield - and raise its potential returns.
Ref: modified version based on Intelligent Investor by Benjamin Graham
No intelligent investor, no matter how starved for yield, would ever buy a stock for its dividend income alone; the company and its businesses must be solid, and its stock price must be reasonable.
But, thanks to the bear market that began the last few months, some leading stocks (blue chips) are now outyielding FDs.
So, even the most defensive investor should realize that selectively adding stocks to an all-bond or mostly-bond portfolio can increase its income yield - and raise its potential returns.
Ref: modified version based on Intelligent Investor by Benjamin Graham
Developing world has been caught up big time in the global credit squeeze
New York Times
October 20, 2008
Editorial
Collateral Damage
Developing countries have sparked their share of international financial crises over the years. But this time it is not their fault.
As the world’s richest nations spend trillions to rescue their own financial systems from the maelstrom caused by years of excess, they must also be prepared to provide billions to poorer countries that did not cause this crisis but are nevertheless its victims.
The developing world has been caught up big time in the global credit squeeze, as beleaguered foreign banks have cut their credit lines and panicked foreign investors have pulled their money out. Private capital flows to emerging markets are expected to plummet 30 percent this year.
Exports are suffering as rich economies slow and commodity prices retreat. Remittances from migrant workers — a core source of earnings for many developing countries — are falling fast.
Eastern and Central Europe, where much of the banking system is controlled by Western banks, is in particularly dire straits. Ukraine asked the International Monetary Fund for $14 billion to prop up its financial system as money flees. Hungary got 5 billion euros from the European Central Bank.
Pakistan — America’s hoped-for ally in the fight against Al Qaeda that also has nuclear weapons — is said to need $3 billion to $4 billion to finance a gaping trade deficit.
Even robust economies with strong budgets and ample reserves have been walloped by the capital crunch. Two weeks ago, the Mexican peso suffered its steepest drop since the peso crisis of December 1994. The Brazilian real and the Korean won have plunged by a quarter against the dollar.
Given the depth of the crisis here, it might be tempting to ignore the plight of developing economies. But it is in the clear economic interest of wealthy nations to help. The I.M.F. expects these countries to be the only engine of global growth in the next year or so.
Fortunately, some people are thinking ahead. The International Finance Corporation, an arm of the World Bank, is mulling a $3 billion fund to help recapitalize shaky banking systems in the world’s poorest countries. The Inter-American Development Bank said it would increase its lending and announced a $6 billion facility to help companies in smaller Latin American countries that lose access to funding.
The I.M.F. said it is flush with cash —$200 billion plus an additional $50 billion in standing credit arrangements with donor countries — to mobilize if needed. For that it will need the go-ahead from the United States and other big contributors. The I.M.F. must also be ready to relax — within reason — the battery of preconditions it usually attaches to its help.
The world’s richest countries have exhibited enormous myopia throughout this crisis — originally scurrying for ad hoc individual “solutions” that worsened the collective mess. Less than two weeks ago, Washington and Brussels allowed Iceland to go bust.
As the world’s financial powers struggle to contain the disaster, they should not lose sight of its effect on other countries. Every economy for itself makes no sense — and could prove highly dangerous — in today’s interconnected world.
http://www.nytimes.com/2008/10/20/opinion/20mon1.html?_r=1&hp&oref=slogin
October 20, 2008
Editorial
Collateral Damage
Developing countries have sparked their share of international financial crises over the years. But this time it is not their fault.
As the world’s richest nations spend trillions to rescue their own financial systems from the maelstrom caused by years of excess, they must also be prepared to provide billions to poorer countries that did not cause this crisis but are nevertheless its victims.
The developing world has been caught up big time in the global credit squeeze, as beleaguered foreign banks have cut their credit lines and panicked foreign investors have pulled their money out. Private capital flows to emerging markets are expected to plummet 30 percent this year.
Exports are suffering as rich economies slow and commodity prices retreat. Remittances from migrant workers — a core source of earnings for many developing countries — are falling fast.
Eastern and Central Europe, where much of the banking system is controlled by Western banks, is in particularly dire straits. Ukraine asked the International Monetary Fund for $14 billion to prop up its financial system as money flees. Hungary got 5 billion euros from the European Central Bank.
Pakistan — America’s hoped-for ally in the fight against Al Qaeda that also has nuclear weapons — is said to need $3 billion to $4 billion to finance a gaping trade deficit.
Even robust economies with strong budgets and ample reserves have been walloped by the capital crunch. Two weeks ago, the Mexican peso suffered its steepest drop since the peso crisis of December 1994. The Brazilian real and the Korean won have plunged by a quarter against the dollar.
Given the depth of the crisis here, it might be tempting to ignore the plight of developing economies. But it is in the clear economic interest of wealthy nations to help. The I.M.F. expects these countries to be the only engine of global growth in the next year or so.
Fortunately, some people are thinking ahead. The International Finance Corporation, an arm of the World Bank, is mulling a $3 billion fund to help recapitalize shaky banking systems in the world’s poorest countries. The Inter-American Development Bank said it would increase its lending and announced a $6 billion facility to help companies in smaller Latin American countries that lose access to funding.
The I.M.F. said it is flush with cash —$200 billion plus an additional $50 billion in standing credit arrangements with donor countries — to mobilize if needed. For that it will need the go-ahead from the United States and other big contributors. The I.M.F. must also be ready to relax — within reason — the battery of preconditions it usually attaches to its help.
The world’s richest countries have exhibited enormous myopia throughout this crisis — originally scurrying for ad hoc individual “solutions” that worsened the collective mess. Less than two weeks ago, Washington and Brussels allowed Iceland to go bust.
As the world’s financial powers struggle to contain the disaster, they should not lose sight of its effect on other countries. Every economy for itself makes no sense — and could prove highly dangerous — in today’s interconnected world.
http://www.nytimes.com/2008/10/20/opinion/20mon1.html?_r=1&hp&oref=slogin
Monday, 20 October 2008
Consequences must dominate Probabilities
In making decisions under conditions of uncertainty, the consequences must dominate the probabilities. We never know the future.
The intelligent investor must focus not just on getting the analysis right. You must also ensure against loss if your analysis turns out to be wrong - as even the best analyses will be at least some of the time.
The probability of making at least one mistake at some point in your investing lifetime is virtually 100%, and those odds are entirely out of your control. However, you do have control over the consequences of being wrong.
Many "investors" put essentially all of their money into dot-com stocks in 1999; an online survey of 1,338 Americans by Money Magazine in 1999 found that nearly one-tenth of them had at least 85% of their money in Internet stocks. By ignoring Graham's call for a margin of safety, these people took the wrong side of Pascal's wager. Certain that they knew the probabilities of being right, they did nothing to protect themselves against the consequences of being wrong.
Simply by keeping your holdings permanently diversified, and refusing to fling money at Mr. Market's latest, craziest fashions, you can ensure that the consequences of your mistakes will never be catastrophic. No matter what Mr. Market throws at you, you will always be able to say, with a quiet confidence, "This, too, shall pass away."
Ref:
The Intelligent Investor by Benjamin Graham
Pascal's Wager
http://www.infidels.org/library/modern/theism/wager.html
The intelligent investor must focus not just on getting the analysis right. You must also ensure against loss if your analysis turns out to be wrong - as even the best analyses will be at least some of the time.
The probability of making at least one mistake at some point in your investing lifetime is virtually 100%, and those odds are entirely out of your control. However, you do have control over the consequences of being wrong.
Many "investors" put essentially all of their money into dot-com stocks in 1999; an online survey of 1,338 Americans by Money Magazine in 1999 found that nearly one-tenth of them had at least 85% of their money in Internet stocks. By ignoring Graham's call for a margin of safety, these people took the wrong side of Pascal's wager. Certain that they knew the probabilities of being right, they did nothing to protect themselves against the consequences of being wrong.
Simply by keeping your holdings permanently diversified, and refusing to fling money at Mr. Market's latest, craziest fashions, you can ensure that the consequences of your mistakes will never be catastrophic. No matter what Mr. Market throws at you, you will always be able to say, with a quiet confidence, "This, too, shall pass away."
Ref:
The Intelligent Investor by Benjamin Graham
Pascal's Wager
http://www.infidels.org/library/modern/theism/wager.html
The risk is not in our stocks, but in ourselves
Risk exists in another dimension: inside you.
If you want to know what risk really is, go to the nearest bathroom and step up to the mirror. That's risk, gazing back at your from the glass.
If you overestimate how well you really understand an investment, or overstate your ability to ride out a temporary plunge in prices, it doesn't matter what you own or how the market does.
Ultimately, financial risk resides not in what kinds of investments you have, but in what kind of investor you are.
The Nobel-prize-winning psychologist Daniel Kahneman explains two factors that characterize good decisions:
1. Do I understand this investment as well as I think I do? ("Well-calibrated confidence")
2. How will I regret if my analysis turns out to be wrong? ("Correctly-anticipated regret")
To find out whether your confidence is well-calibrated, look in the mirror and ask yourself: "What is the likelihood that my analysis is right?" Think carefully through these questions:
Next, look in the mirror to find out whether you are the kind of person who correctly anticipates your regret. Start by asking: "Do I fully understand the consequences if my analysis turns out to be wrong?" Answer that question by considering these points:
"Risk is brewed from an equal dose of two ingredients - probabilities and consequences."
Before you invest, you must ensure that you have realistically assessed
If you want to know what risk really is, go to the nearest bathroom and step up to the mirror. That's risk, gazing back at your from the glass.
If you overestimate how well you really understand an investment, or overstate your ability to ride out a temporary plunge in prices, it doesn't matter what you own or how the market does.
Ultimately, financial risk resides not in what kinds of investments you have, but in what kind of investor you are.
The Nobel-prize-winning psychologist Daniel Kahneman explains two factors that characterize good decisions:
1. Do I understand this investment as well as I think I do? ("Well-calibrated confidence")
2. How will I regret if my analysis turns out to be wrong? ("Correctly-anticipated regret")
To find out whether your confidence is well-calibrated, look in the mirror and ask yourself: "What is the likelihood that my analysis is right?" Think carefully through these questions:
- How much experience do I have? What is my track record with similar decisions in the past?
- What is the typical track record of other people who have tried this in the past?
- If I am buying, someone else is selling. How likely is it that I know something that this other person (or company) does not know?
- If I am selling, someone else is buying. How likely is it that I know something that this other person (or company) does not know?
- Have I calculated how much this investment needs to go up for me to break even after my taxes and costs of trading?
Next, look in the mirror to find out whether you are the kind of person who correctly anticipates your regret. Start by asking: "Do I fully understand the consequences if my analysis turns out to be wrong?" Answer that question by considering these points:
- If I'm right, I could make a lot of money. But what if I'm wrong? Based on the historical performance of similar investments, how much could I lose?
- Do I have other investments that will tide me over if this decision turns out to be wrong? Do I already hold stocks, bonds, or funds with a proven record of going up when the kind of investment I'm considering goes down? Am I putting too much of my capital at risk with the new investment?
- When I tell myself, "You have a high tolerance for risk," how do I know? Have I ever lost a lot of money on an investment? How did it feel? Did I buy more, or did I bail out?
- Am I relying on my willpower alone to prevent me from panicking at the wrong time? Or have I controlled my own behaviour in advance by deversifying, signing an investment contract, and dollar-cost averaging?
"Risk is brewed from an equal dose of two ingredients - probabilities and consequences."
Before you invest, you must ensure that you have realistically assessed
- your probability of being right and
- how you will react to the consequences of being wrong.
What is risk? First, don't lose
What is risk? You will get different answers depending on whom, and when, you ask.
In 1999, risk didn't mean losing money; it meant making less money than someone else! What many people feared was bumping into somebody at a barbecue who was getting even richer even quicker by day trading dot-com stocks than they were.
Then, quite suddenly, by 2003 risk had come to mean that the stock market might keep dropping until it wiped out whatever traces of wealth you still had left.
While its meaning may seem nearly as fickle and fluctuating as the financial markets themselves, risk has some profound and permanent attributes. The people who take the biggest gambles and makes the biggest gains in a bull market are almost always the ones that get hurt the worst in the bear market that inevitably follows. (Being "right" makes speculators even more eager to take extra risk, as their confidence catches fire.)
And once you lose big money, you then have to gamble even harder just to get back to where you were, like a race-track or casino gambler who desperately doubles up after every bad bet. Unless you are phenomenally lucky, that's a recipe for disaster.
First, don't lose
No wonder, when he was asked to sum up everything he had learned in his long career about how to get rich, the legendary financier J.K. Klingenstein of Wertheim & Co. answered simply: "Don't lose."
Losing some money is an inevitable part of investing, and there's nothing you can do to prevent it. But, to be an intelligent investor, you must take responsibility for ensuring that you never lose most or all of your money.
For the intelligent investor, Graham's "margin of safety" performs an important function. By refusing to pay too much for an investment, you minimize the chances that your wealth will ever disappear or suddenly be destroyed.
"Imagine that you find a stock that you think can grow at 10% a year even if the market only grows 5% annually. Unfortunately, you are so enthusiastic that you pay too high a price, and the stock loses 50% of its value the first year. Even if the stock then generates double the market's return, it will take you more than 16 years to overtake the market - simply because you paid too much, and lost too much, at the outset."
Ref: Intelligent Investor by Benjamin Graham
In 1999, risk didn't mean losing money; it meant making less money than someone else! What many people feared was bumping into somebody at a barbecue who was getting even richer even quicker by day trading dot-com stocks than they were.
Then, quite suddenly, by 2003 risk had come to mean that the stock market might keep dropping until it wiped out whatever traces of wealth you still had left.
While its meaning may seem nearly as fickle and fluctuating as the financial markets themselves, risk has some profound and permanent attributes. The people who take the biggest gambles and makes the biggest gains in a bull market are almost always the ones that get hurt the worst in the bear market that inevitably follows. (Being "right" makes speculators even more eager to take extra risk, as their confidence catches fire.)
And once you lose big money, you then have to gamble even harder just to get back to where you were, like a race-track or casino gambler who desperately doubles up after every bad bet. Unless you are phenomenally lucky, that's a recipe for disaster.
First, don't lose
No wonder, when he was asked to sum up everything he had learned in his long career about how to get rich, the legendary financier J.K. Klingenstein of Wertheim & Co. answered simply: "Don't lose."
Losing some money is an inevitable part of investing, and there's nothing you can do to prevent it. But, to be an intelligent investor, you must take responsibility for ensuring that you never lose most or all of your money.
For the intelligent investor, Graham's "margin of safety" performs an important function. By refusing to pay too much for an investment, you minimize the chances that your wealth will ever disappear or suddenly be destroyed.
"Imagine that you find a stock that you think can grow at 10% a year even if the market only grows 5% annually. Unfortunately, you are so enthusiastic that you pay too high a price, and the stock loses 50% of its value the first year. Even if the stock then generates double the market's return, it will take you more than 16 years to overtake the market - simply because you paid too much, and lost too much, at the outset."
Ref: Intelligent Investor by Benjamin Graham
Value above Price
Clear-cut undervaluations of leading common stocks (blue chip stocks) tend to occur only during bear markets. The intervals between successive market bottoms have been much longer, so that this type of opportunity must now be considered as infrequent.
In the secondary field (non-blue chip stocks), by contrast, undervaluations may be found at all times except when a bull market is well advanced. Thus the investor or analyst who is strongly interested in the undervaluation approach will find what he is looking for, more continuously or consistently, among the secondary issues.
Ref: Security Analysis by Benjamin Graham
[Bear markets occur infrequently. As a guide, perhaps, for every 4 bulls, one expects to meet 1 bear. Very severe bear markets were uncommon. This occured about 1 in 10 years, namely 1987 and 1997.]
In the secondary field (non-blue chip stocks), by contrast, undervaluations may be found at all times except when a bull market is well advanced. Thus the investor or analyst who is strongly interested in the undervaluation approach will find what he is looking for, more continuously or consistently, among the secondary issues.
Ref: Security Analysis by Benjamin Graham
[Bear markets occur infrequently. As a guide, perhaps, for every 4 bulls, one expects to meet 1 bear. Very severe bear markets were uncommon. This occured about 1 in 10 years, namely 1987 and 1997.]
3 exceptions to sell the losers rule
Value, in terms of growth potential, is based on earnings and earnings growth.
Analysis of earnngs and news about a company can give some insight into the quality of earnings.
If management has increased earnings by firing half the company's personnel, or the increase is derived from closing several facilities, the quality of the increase is not as valuable as it would be if it reflected improved sales and other revenues.
Slash-and-burn strategies can lead to a further decline in productivity, resulting in additional weakness in earnings and eventually lower prices for the stock.
On the positive side, drastic cuts can force companies to become more efficient, thereby increasing the quality of earnings, which may lead to higher stock prices.
The investor must analyse the company's growth and observe the stock price in action. From the analysis, the investor can determine whether the value of a stock is more likely to:
The analysis can be difficult at times because a winner can temporarily take on the appearance of a loser.
Three situations:
Exception 1: Daily Price Fluctuations
Stock prices fluctuate up or down in day-to-day trading. A glance at any daily price chart will show what may be considered normal daily fluctuations for any individual stock. Stock prices also move from one trading range to another.
For example, a stock price could have a daily fluctuation of $30 to $35 but could occasionally move to $40 and then drop back to the $30 to $35 range. The trading range would be considered $30 to $40. When the stock moves up and begins fluctuating between $40 and $55, it is trading in a new, higher range.
The trading ranges and daily fluctuations can be readily observed on a price pattern cahrt. The investor should take the time to become familiar with these trading ranges and fluctuations from the preceding few months.
Familiarity with price movements will help the investor differentiate between a normal fluctuation and a breakout to a new trading range.
If a lower stock price is within the normal range, it may still be a winner, even if the investor is experiencing a small loss - assuming that the initial analysis showed the stock to be a winner in earnings and growth. Therefore, the kind of weakness seen in a normal fluctuation does not indicate that the time to sell out and take a loss has arrived.
Exception 2: Market Decline
A significant drop in the overall stock market can force the price of a winner to lower levels. All stocks can eventually look like losers, and some will become losers.
Most often these severe market corrections are a time for concern, but not panic.
As we have seen in recent years, the stock market can drop 100, 200, or more than 500 points and recover quickly. Stocks that were winners before the correction will likely be winners agains when the market recovers.
In October 1987, the Dow Industrials dropped more than 508 points (22.6%). Looking back in 2004, that is still the largest percentage drop in one day. Merck & Company had already been showing some weakness, but on the sharp correction on October 19, it dropped from $11.00 to $8.50, a significant $1.50. This correction was an overall market reaction. For Merck, the weakness of the market in late 1987 was an excellent buying opportunity. It began a quick recovery, and by April 1988, after prices were adjusted for a stock split, Merck was trading above $9.00 a share.
In a Continuing Decline
If the market correction is sudden and appears to stabilize in just a few days, it may be best to hold a position and even consider buying more shares of the same stock. Many investors recognized the severe correction in 1987, for example, as a buying opportunity. Although the Dow remained volatile, it reached new highs in early 1989.
Unless they are severe and extend over a few weeks and months, market corrections do not necessarily turn winners into losers.
If a market decline continues, however, the investor should consider selling and moving the funds to the sideline. Extended market corrections are bear markets where stock prices decline and interest rates rise.
Exception 3: Price Advance Followed by a Weakness
A significant upward move to a new trading range, followed by some price weakness, is a fairly normal occurrence. As a stock price makes a major upward movement, many investors will begin to take profits.
Although there is nothing wrong with taking profits, the upward price movement might have only just started. Even so, it is inevitable that some profit taking will occur, and the stock price that has risen to new highs will show some downward price correction.
A signal is given if a stock begins to fall lower than its daily trading range and the overall market is unchanged or advancing.
If a stock price that normally trades between $45 and $50 a share drops to $43 and then to $40, it is time to be concerned. The signal is even stronger if the stocks of comparable companies are not showing a similar weakness.
It is a signal to either sell the stock or find out the reason for the price decline.
Analysis of earnngs and news about a company can give some insight into the quality of earnings.
If management has increased earnings by firing half the company's personnel, or the increase is derived from closing several facilities, the quality of the increase is not as valuable as it would be if it reflected improved sales and other revenues.
Slash-and-burn strategies can lead to a further decline in productivity, resulting in additional weakness in earnings and eventually lower prices for the stock.
On the positive side, drastic cuts can force companies to become more efficient, thereby increasing the quality of earnings, which may lead to higher stock prices.
The investor must analyse the company's growth and observe the stock price in action. From the analysis, the investor can determine whether the value of a stock is more likely to:
- increase,
- remain flat, or
- begin to decline.
The analysis can be difficult at times because a winner can temporarily take on the appearance of a loser.
Three situations:
- daily price fluctuations,
- market declines, and
- price advances followed by weaknesses
can make a winner appear to look weak, but they are not necessarily a signal to begin selling. These are usually temporary situations and are therefore exceptions to the sell-the-losers rule.
Exception 1: Daily Price Fluctuations
Stock prices fluctuate up or down in day-to-day trading. A glance at any daily price chart will show what may be considered normal daily fluctuations for any individual stock. Stock prices also move from one trading range to another.
For example, a stock price could have a daily fluctuation of $30 to $35 but could occasionally move to $40 and then drop back to the $30 to $35 range. The trading range would be considered $30 to $40. When the stock moves up and begins fluctuating between $40 and $55, it is trading in a new, higher range.
The trading ranges and daily fluctuations can be readily observed on a price pattern cahrt. The investor should take the time to become familiar with these trading ranges and fluctuations from the preceding few months.
Familiarity with price movements will help the investor differentiate between a normal fluctuation and a breakout to a new trading range.
If a lower stock price is within the normal range, it may still be a winner, even if the investor is experiencing a small loss - assuming that the initial analysis showed the stock to be a winner in earnings and growth. Therefore, the kind of weakness seen in a normal fluctuation does not indicate that the time to sell out and take a loss has arrived.
Exception 2: Market Decline
A significant drop in the overall stock market can force the price of a winner to lower levels. All stocks can eventually look like losers, and some will become losers.
Most often these severe market corrections are a time for concern, but not panic.
As we have seen in recent years, the stock market can drop 100, 200, or more than 500 points and recover quickly. Stocks that were winners before the correction will likely be winners agains when the market recovers.
In October 1987, the Dow Industrials dropped more than 508 points (22.6%). Looking back in 2004, that is still the largest percentage drop in one day. Merck & Company had already been showing some weakness, but on the sharp correction on October 19, it dropped from $11.00 to $8.50, a significant $1.50. This correction was an overall market reaction. For Merck, the weakness of the market in late 1987 was an excellent buying opportunity. It began a quick recovery, and by April 1988, after prices were adjusted for a stock split, Merck was trading above $9.00 a share.
In a Continuing Decline
If the market correction is sudden and appears to stabilize in just a few days, it may be best to hold a position and even consider buying more shares of the same stock. Many investors recognized the severe correction in 1987, for example, as a buying opportunity. Although the Dow remained volatile, it reached new highs in early 1989.
Unless they are severe and extend over a few weeks and months, market corrections do not necessarily turn winners into losers.
If a market decline continues, however, the investor should consider selling and moving the funds to the sideline. Extended market corrections are bear markets where stock prices decline and interest rates rise.
Exception 3: Price Advance Followed by a Weakness
A significant upward move to a new trading range, followed by some price weakness, is a fairly normal occurrence. As a stock price makes a major upward movement, many investors will begin to take profits.
Although there is nothing wrong with taking profits, the upward price movement might have only just started. Even so, it is inevitable that some profit taking will occur, and the stock price that has risen to new highs will show some downward price correction.
A signal is given if a stock begins to fall lower than its daily trading range and the overall market is unchanged or advancing.
If a stock price that normally trades between $45 and $50 a share drops to $43 and then to $40, it is time to be concerned. The signal is even stronger if the stocks of comparable companies are not showing a similar weakness.
It is a signal to either sell the stock or find out the reason for the price decline.
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