myinvestingnotes.blogspot.my (Bullbear Buffett Stock Investing Notes)

Keep INVESTING Simple and Safe (KISS) ****Investment Philosophy, Strategy and various Valuation Methods**** The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.

Friday, 2 January 2009

Advice or a Novice Investor

Advice for a Novice Investor

Main Points:

Educate through reading
Learn through experience
Learn from mistakes
Keep mistakes small
Join investment clubs
Hire investment manager or advisor
Befriend a successful and experienced investor as Mentor
Remember always you are the boss

-----

Question: I am completely new to investing and want to know how to get started. I recently inherited quite a large sum of money and I would like to be able to live comfortably for the rest of my life. All I know about investing is that you can lose your shirt.

Answer: Well, I would say the one thing you know about investing is very accurate, so you are off to a good start! I think there are two parts to your question.

First, how do you educate yourself?
Second, how you set yourself up to live comfortably ever after?

To become informed, you can talk to savvy investors, you can read books and articles and watch video and live presentations. To really learn (which is not the same as merely being informed), you need experience. Try some things, and along the way you will undoubtedly make mistakes from which you can learn. The secret is to keep those mistakes small.
You can learn a lesson just as well from losing $500 as from losing $50,000. But you would be surprised how many people plunge ahead as if they couldn�t possibly make a mistake. They might spend weeks researching a new car purchase yet make an investing decision involving ten times as much money after only a few minutes.
To educate yourself, start by doing some reading. An excellent place to start is Investing for Dummies by Eric Tyson. This covers a wide range of alternatives and teaches you how to protect yourself from many of the biggest mistakes investors make. I would also call your attention to two good books by John C. Bogle: Bogle on Mutual Funds: New Perspectives for the Intelligent Investor, and Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor.
Quite soon you will find that there�s an overwhelming amount of investment information available free on the Internet. Some of it is valuable and some of it is essentially uninformed opinion. Some of it is simply incorrect and masquerades as the truth. It can be hard to sort all this out.
Take a class at a local community college, but be aware that the teacher may be a broker or financial planner who is looking for clients to whom to sell commissioned products. The whole class may be subtly arranged with that objective in mind.
Consider joining the American Association of Individual Investors (http://www.aaii.org/), a non-profit organization that offers lots of educational materials. Local chapters in most large cities hold seminars on various investment topics.
Now, the second part of your question: How to live comfortably ever after. I don�t know your age or your objectives, or the amount of money you have inherited. So I can speak only in general terms.
Your question suggests to me that you are at relatively high risk to be taken advantage of: a novice investor with a lot of money. Therefore I would urge you to proceed with great caution.
At the moment you are at a fork in the road and you have to make a basic decision: Will you do this yourself? Or will you hire an investment manager or advisor? Perhaps you will want to hire a manager while you learn, then gradually take more and more control over the management of your money as you gain confidence.
If you take the do-it-yourself route, go slowly and cautiously. Start by making sure your legal affairs are in order, that is, you have a will and you have protected yourself from liability through appropriate insurance. Next make sure you set aside money for an emergency fund, money you can access quickly without fouling up an investment plan.
Then invest half or more of your money in bond funds. Start with a short-term bond fund like those offered at Janus, Fidelity, Vanguard or T. Rowe Price. Invest the rest in a couple of conservative no-load equity funds. Four that come to mind are T. Rowe Price Spectrum Growth (PRSGX), the Fidelity Fund (FFIDX), Vanguard Total Stock Market Index (VTSMX), and Vanguard Tax-Managed Capital Appreciation (VMCAX).
As you learn more, you will probably want to diversify. Do this gradually and cautiously, and be patient. Expect to make mistakes along the way, and do your best to learn from them.
If you find a successful and experienced investor who is willing to be your mentor, consider entering that sort of relationship. But always use your common sense and remember that you, not anybody else, are the boss.
If you want to hire an investment manager or advisor, choose carefully. Seek references from friends and relatives. Ask for references from lawyers and accountants.
Here�s a parting thought, an excellent rule of thumb: Never invest in anything that you don�t understand.
If you do all these things, you will be well on your way to living comfortably ever after.
Paul Merriman is founder and president of Merriman Capital Management, a Registered Investment Advisory firm, and co-portfolio manager of the Merriman Mutual Funds. He manages over $280 million for his clients, has a weekly radio show which can be seen and heard at soundinvesting.com, and is the publisher and editor of FundAdvice.com.

http://finance.yahoo.com/education/begin_investing/article/101181/Advice_for_a_Novice

Random Walks Down Wall Street

Random Walks Down Wall Street

In the 1960s, Eugene Fama developed a new theory about the market called the Efficient Market Hypothesis. Fama determined that, at any given time, the prices of all securities fully reflect all available information about those securities.
While that doesn't sound so radical, most people who buy and sell stocks do so with the assumption that the stocks they are buying are undervalued and therefore worth more than the purchase price. When you haggle with a car dealer over the price of a new car, you're aiming for a price that's less than retail. When you buy a stock, you're also hoping that other investors have overlooked that stock for some reason, in effect giving you the opportunity to buy for "less than retail."
However, under the Efficient Market Hypothesis, any time you buy and sell securities, you're engaging in a game of chance, not skill. If markets are efficient and current prices always reflect all information, there's no way you'll ever be able to buy a stock at a bargain price.
Fama also asserted that the price movements of a particular stock will not follow any patterns or trends at all. Past price movements cannot be used to predict future price movements. He called this the Random Walk Theory -- stock prices move in an entirely random fashion, and there's no way to ever profit from "inefficiencies" in the price of a stock.
The end results of the Efficient Market Hypothesis and Random Walk Theory are controversial. If you can't predict stock prices, and picking stocks is really a matter of luck, how are we supposed to invest? And what are all those people on Wall Street doing, anyway?
Once you've resigned yourself to never beating the market, the Random Walkers say, you can be satisfied with matching the returns of the overall market. Instead of picking stocks or individual mutual funds, you should invest in the entire stock market. You can do this by investing in index funds, special mutual funds that are designed to allow you to match the returns of the overall market.

http://finance.yahoo.com/education/begin_investing/article/101173/Random_Walks_Down_Wall_Street

Modern Portfolio Theory Made Easy

Modern Portfolio Theory Made Easy

You can divide the history of investing in the United States into two periods: before and after 1952. That was the year that an economics student at the University of Chicago named Harry Markowitz published his doctoral thesis. His work was the beginning of what is now known as Modern Portfolio Theory. How important was Markowitz's paper? He received a Nobel Prize in economics in 1990 because of his research and its long-lasting effect on how investors approach investing today.
Markowitz starts out with the assumption that all investors would like to avoid risk whenever possible. He defines risk as a standard deviation of expected returns.
Rather than look at risk on an individual security level, Markowitz proposes that you measure the risk of an entire portfolio. When considering a security for your portfolio, don't base your decision on the amount of risk that carries with it. Instead, consider how that security contributes to the overall risk of your portfolio.
Markowitz then considers how all the investments in a portfolio can be expected to move together in price under the same circumstances. This is called "correlation," and it measures how much you can expect different securities or asset classes to change in price relative to each other.
For instance, high fuel prices might be good for oil companies, but bad for airlines who need to buy the fuel. As a result, you might expect that the stocks of companies in these two industries would often move in opposite directions. These two industries have a negative (or low) correlation. You'll get better diversification in your portfolio if you own one airline and one oil company, rather than two oil companies.
When you put all this together, it's entirely possible to build a portfolio that has much higher average return than the level of risk it contains. So when you build a diversified portfolio and spread out your investments by asset class, you're really just managing risk and return.

http://finance.yahoo.com/education/begin_investing/article/101172/Modern_Portfolio_Theory_Made_Easy

Risk may be unavoidable, it is manageable.

Risk and Return

Sure, you'd like to make a fortune in the markets -- who wouldn't? The first thing you need to understand, before you commit even a dollar to a portfolio or begin surfing investing Websites, is that it's impossible to realize a return on any investment without facing a certain degree of risk.
According to Webster's, risk is the "possibility of loss or injury." In investing, risk is the chance you take that the returns on a particular investment may vary. That's another way of saying that there are no sure things when you're investing.
No matter what you decide to do with your savings and investments, your money will always face some risk. You could stash your dollars under your mattress or in a cookie jar, but then you'd face the risk of losing it all if your house burned possibly less dollars in real terms than when you started. Investing in stocks, bonds, or mutual funds carries risks of varying degrees.
The second fact you need to face is that in order to receive an increased return from your investment portfolio, you need to accept an increased amount of risk. Keeping your money in a savings account reduces your risk, but it also reduces your potential reward.
While risk in your portfolio may be unavoidable, it is manageable. The riddle of controlling risk and return is that you need to maximize the returns and minimize the risk. When you do this, you ensure that you'll make enough on your investments, with an acceptable amount of risk.

So, what constitutes acceptable risk?
It's different for every person. A good rule of thumb followed by many investors is that you shouldn't wake up in the middle of the night worrying about your portfolio. If your investments are causing you too much anxiety, it's time to reconsider how you're investing, and bail out of those securities that are giving you insomnia in favor of investments that are a little less painful. When you find your own comfort zone, you'll know your personal risk tolerance -- the amount of risk you are willing to tolerate in order to achieve your financial goals.
When it comes to your long-term financial future though, the biggest risk of all may simply be to do nothing. If you don't invest for retirement, or for the college education of your children, or to help meet your personal financial goals, then you're most likely guaranteed a future of just scraping by.

http://finance.yahoo.com/education/begin_investing/article/101171/Risk_and_Return

Learn the Basics of Investing

Learn the Basics of Investing
Overview
Types of Investments
Basic Investment Concepts & Strategies
Investment Tips
Overview
Getting Started in InvestingWorldlyinvestor.com
Advice for a NoviceWorldlyinvestor.com Back to Top
Types of Investments
Saving with Savings AccountsInvestorama.com
CDs: Low Risk, Low ReturnSmartMoney.com
What is a Stock Anyway?Investorama.com
What is a Mutual Fund?Investorama.com
Money Market Funds: Stash Your CashInvestorama.com
What is a Bond?SmartMoney.com
Savings Bonds: The Old ReliablesInvestorama.com Back to Top
Basic Investment Concepts & Strategies
Risk and ReturnInvestorama.com
Defense is the Best Offense: Basic Investing StrategiesSmartMoney.com
The Importance of DiversificationInvestorama.com
Understanding Asset AllocationInvestorama.com
Dollar Cost Averaging: Put Your Investing on Auto-PilotInvestorama.com
Modern Portfolio Theory Made EasyInvestorama.com
Random Walks Down Wall StreetInvestorama.com Back to Top
Investment Tips
Investment Record Keeping: Don't Drown in PaperInvestorama.com
Choosing a Financial AdvisorInvestorama.com
Beware the TelemarketerInvestorama.com
Don't Be a Victim of Fraud

Source: http://finance.yahoo.com/education/begin_investing

Thursday, 1 January 2009

Markets Cheer Calls to Overhaul Global Finance

Markets Cheer Calls to Overhaul Global Finance
By Bruce Crumley / Paris Monday, Oct. 20, 2008

In normal times, a French President's call for an overhaul of the world's financial system would cause eye-rolling and dyspepsia among the world's free market purists. But these are not normal times: on the weekend, U.S. President George W. Bush echoed Nicolas Sarkozy's push for an international summit to that end, and on Monday world markets seemed to endorse the initiative with a positive fillip. Though the specific goals, attendees, and even exact date and venue of such a meeting have yet to be determined, the mere agreement by U.S. and European leaders to update the Bretton Woods system — which has overseen international finance for the past 64 years — reaffirmed hopes that a collective, long-term approach to the worst economic crisis since the Great Depression was on the way.

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Alongside European Commission President José Manuel Barroso, Bush and Sarkozy called world leaders to join them at a monumental summit meeting in a U.S. city — probably at the United Nations in New York — shortly after the Nov. 4 U.S. presidential election. Following their huddle at Camp David Saturday, the trio issued a statement saying the extraordinary international congress would "review progress being made to address the current crisis and to seek agreement on principles of reform needed to avoid a repetition and assure global prosperity in the future."

That language scarcely matches the drama of the world financial crisis, but it did at least contribute to the modest optimism with which markets have attacked a new week of trading. Japan's Nikkei index climbed 3.6%, Hong Kong's Hang Seng rose 5.3%, and South Korea's Kospi jumped for the first time in a week: a 2.3% hike inspired in part by a $130 billion government assistance plan for banks announced in Seoul on Sunday.

Europe's leading bourses also began stronger, with London's FTSE 100 1.67% higher nearing mid-day Monday, while Paris CAC 40 gained 1.46% and Frankfurt's DAX up .8%. Futures trading in the U.S. similarly pointed to 2.4% opening advance Monday on Wall Street, though that early action could change as a series of company earnings figures are released, giving investors a better idea of how quickly U.S. economic growth has slowed.

Fears of a serious economic decline or even recession in the U.S. and world-wide explain the deep losses markets experienced last week after initially reacting with euphoria to the rash of government efforts to prevent finance and banking systems from imploding. As the week closed out, the global outlook was simply confused, as European indices generally finished higher, the Dow slumped 1.4%, and Asia's national markets featured both gains and losses.

Despite Monday's mostly rosier mood, there were developments that could have given markets as much to choke on than cheer about. Over the weekend the heads of French savings bank Caisses d'Epargne were forced to resign following revelations that unauthorized derivatives trading last week produced a $810 million loss. On Sunday, meanwhile, the Netherlands said it would inject a further $13.5 billion into troubled finance company ING — another indication that European banks may not yet have entirely accounted for all the toxic debt they assumed.

Still, markets were more inclined to take heart in the international summit agreement Sarkozy had obtained from Bush. Despite that advance, questions remain how much the U.S. and its free-market fans will the more invasive regulatory approach that Europe seems to favor. Even as they face dire economic crisis, Americans are quicker than Continentals to distrust perceived market "socialism." Indeed, even Bush and Sarkozy seemed to clash Saturday in how each weighed the virtues of regulation against the liberty of markets.

Not that it seemed to matter. "The fact that these are two conservative politicians that business leaders feel they can trust had a lot of impact," says French economist Bernard Maris, who also thinks markets were comforted by the decision to hold the conference in the U.S. — with an eye to historical continuity with the 1944 conference in Bretton Woods, NH, that established the International Monetary Fund. But Maris also notes those same markets — whose boom years relied largely on minimalist regulation — should logically be freaking out at Sarkozy's calls to "moralize" finance and limit pay to the world's biggest earners. So why the calm?

"For now, markets are getting into life boats on the short-term imperative of saving their lives, and will work to restore 'good old days' rules once the economy is back on solid ground," Maris says. "There is a school of thought that the best way of doing nothing at all is to demand everything be changed — and what we've been hearing from Sarkozy and Bush has been totally counter to what they'd constantly maintained before." Perhaps for that reason, the new tone hasn't struck fear into the markets, but there are still plenty of grounds for volatility as further details are worked out.

http://www.time.com/time/business/article/0,8599,1851963,00.html?xid=rss-business

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A Brief History of Bretton Woods System

Delegates attend the Bretton Woods conference in July of 1944 at the Mt. Washington Hotel in Bretton Woods, New Hampshire
Alfred Eisenstaedt / Time & Life Pictures / Getty

A Brief History of
Bretton Woods System
By M.J. Stephey Tuesday, Oct. 21, 2008

time:http://www.time.com/time/business/article/0,8599,1852254,00.html

Since the end of World War II, the U.S. dollar has enjoyed a unique and powerful position in international trade. But perhaps no more.

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Before boarding a plane on Saturday to meet President George W. Bush, French President Nicolas Sarkozy proclaimed, "Europe wants it. Europe demands it. Europe will get it." The "it" here is global financial reform, and evidently Sarkozy won't have to wait long. Just hours after their closed-door meeting had finished, Bush and Sarkozy, along with European Commission President Jose Manuel Barroso, issued a joint statement announcing that a summit would be held next month to devise what Barroso calls a "new global financial order."

The old global financial order is, well, old. Established in 1944 and named after the New Hampshire town where the agreements were drawn up, the Bretton Woods system created an international basis for exchanging one currency for another. It also led to the creation of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development, now known as the World Bank.

The former was designed to monitor exchange rates and lend reserve currencies to nations with trade deficits, the latter to provide underdeveloped nations with needed capital — although each institution's role has changed over time. Each of the 44 nations who joined the discussions contributed a membership fee, of sorts, to fund these institutions; the amount of each contribution designated a country's economic ability and dictated its number of votes.

In an effort to free international trade and fund postwar reconstruction, the member states agreed to fix their exchange rates by tying their currencies to the U.S. dollar. American politicians, meanwhile, assured the rest of the world that its currency was dependable by linking the U.S. dollar to gold; $1 equaled 35 oz. of bullion. Nations also agreed to buy and sell U.S. dollars to keep their currencies within 1% of the fixed rate. And thus the golden age of the U.S. dollar began.

For his part, legendary British economist John Maynard Keynes, who drafted much of the plan, called it "the exact opposite of the gold standard," saying the negotiated monetary system would be whatever the controlling nations wished to make of it. Keynes had even gone so far as to propose a single, global currency that wouldn't be tied to either gold or politics. (He lost that argument).

Though it came on the heels of the Great Depression and the beginning of the end of World War II, the Bretton Woods system addressed global ills that began as early as the first World War, when governments (including the U.S.) began controlling imports and exports to offset wartime blockades. This, in turn, led to the manipulation of currencies to shape foreign trade. Currency warfare and restrictive market practices helped spark the devaluation, deflation and depression that defined the economy of the 1930s.

The Bretton Woods system itself collapsed in 1971, when President Richard Nixon severed the link between the dollar and gold — a decision made to prevent a run on Fort Knox, which contained only a third of the gold bullion necessary to cover the amount of dollars in foreign hands. By 1973, most major world economies had allowed their currencies to float freely against the dollar. It was a rocky transition, characterized by plummeting stock prices, skyrocketing oil prices, bank failures and inflation.
It seems the East Coast might yet again be the backdrop for a massive overhaul of the world's financial playbook.

U.N. Secretary-General Ban Ki-moon publicly backed calls for a summit before the new year, saying the agency's headquarters in New York — the very "symbol of multilateralism" — should play host. Sarkozy concurred, but for different reasons: "Insofar as the crisis began in New York," he said, "then the global solution must be found to this crisis in New York."

http://www.time.com/time/business/article/0,8599,1852254,00.html?xid=rss-business

**Consumer Confidence: A Killer Statistic

Consumer Confidence: A Killer Statistic
by Investopedia Staff, (Investopedia.com) (Contact Author Biography)
Story Tools

Consumer spending is the one key to any market economy. On the airwaves, there's never a shortage of data, analysis and cable commentary regarding consumer behavior. So what are the key fundamental consumption indicators in a good economy? How about in a bad economy? The following article will recap the vital economic indicators of overall consumption, outlining what trends to look for and when to look for them.

There is no doubt that consumer spending is the most vital component of any economy.
Why? Depending on the economy's sheer breadth, consumer spending can range anywhere from 50-75% of GDP. In the U.S. and most highly industrialized nations, this percentage is about 65% of total spending.

The first part of measuring total consumption is measuring consumer sentiment, which is derived completely from a consumer's standpoint.

Consumer Sentiment

The two numbers expressing consumers' feelings about the economy and their subsequent plans to make purchases are the Consumer Confidence Index, prepared by the Conference Board, and the Consumer Sentiment Index, prepared by the University of Michigan. Both indexes are based on a household survey and reported on a monthly basis. In analyzing any consumer sentiment index, it is most important to determine the trend of the index over several months. Simply put, the trend graphed out over four or five months is critical. Keeping this in mind, one needs to remain astute and block out news bits such as "the index is at 80 so things look gloomy" or "the level of consumer sentiment is up slightly from last month". The trend over several months - not a comparison of this month to the same month last year- is the undeniable benchmark. Commentary that focuses only on the single monthly figures, without looking at the developing trend, is misleading.

For many, the importance of the trends of consumer sentiment rests in the fact that the consumer sentiment indices originated in the middle of the 20th century, when it was safer to assume that the concept of the "typical" consumer was more homogeneous. Acknowledging this historical fact, as well as potential sampling bias and possible subjectivity across regions, the safe bet is to focus on trends forming some sort of linear progression, whether upwards or downwards, (or the progression can hit a general plateau, which sometimes happens when the economy shifts from stages in the business cycle).

Business Spending: A Leading Indicator

Though not as powerful an indicator as consumer spending, business capital spending can be a killer statistic - since things can get ugly in a hurry when overall business investment precipitously cuts back: the impact on the economy can be felt at an even faster pace than as if the cut occurred purely along consumer lines. The rationale is that today's sophisticated and large inventory-lean corporations often can gauge future demand before policy makers can implement changes, which often take months to kick in due to embedded policy lags.

Corporate spending is therefore very similar today to the role the stock market has played in most recoveries: improvements can be foreseen as a leading indicator for things to come. On the flip-side, cutbacks in corporate capital spending are indeed an ominous indicator.

The PMI, or Purchasing Managers Index, is a representation of the progress in corporate spending. For analyzing consumer spending, ascertainable trends are more telling than actual figures. The opposite is true for analyzing corporate spending through the PMI: there is a concrete threshold level for analyzing corporate investment spending and subsequent production. A PMI below 50 designates a contracting manufacturing sector, while above 50 highlights expansion across corporate spending and investment. Obviously, clear awareness of the current trend analysis is always better than a stand-alone result; nevertheless, the 50 threshold can be utilized as a simple benchmark to assess corporate activity.

In good times, the index is roaring in the high 50s, while in slow times the index can fall towards the low 40s.

Other Spending Items

There are other spending indicators, such as purchases of durable goods orders and overall auto sales; however, in terms of aggregating the data, these metrics are narrowly defined extensions of overall individual consumption. Trends across personal consumption will usually be reflected and correlated across these two metrics as well as others.

For instance, during the end of 2001, while the world economy was suffering on many fronts, steady consumer spending helped fuel auto sales that originated from generous no-financing from Detroit. This stimulus ultimately helped erode the three-quarter recession that had developed from the beginning of the year. Awareness of these symbols of consumption can give you more insight into exactly why and how consumption is impacting the economy. This awareness will help you judge the sustainability of these trends.

From a pure corporate standpoint, auxiliary spending, besides durable orders and big-ticket items such as auto purchases, can often indicate a great deal about overall corporate sentiment. Recall from above that the PMI for corporate spending is a definite quantitative measure, and the consumer sentiment index is a qualitative metric. In the eyes of large corporations and from a sheer qualitative standpoint, auxiliary spending on services such as advertising, consulting and information technology may reveal information about attitude and sentiment, just like the consumer sentiment indices reveal information about personal and individual consumption.

Just as a murky outlook will depress consumer sentiment, a weak forecast for the demand for goods and services will sidetrack corporate spending on auxiliary measures that can be budgeted away if necessary. The end-victims are advertising/marketing, media campaigns, consulting fees and information technology overhauls.

When the headlines indicate that layoffs and slowdowns are rampant in any of these fields, it can be safe to bet that corporate appetite for auxiliary spending is weak. Because the performance of these industries is largely tied to the level of corporate sentiment, a savvy investor should keep an eye out for companies within these industries and how they are performing.

Conclusion

Consumption is ultimately the stimulant behind almost every fundamental aspect of the worldwide economy. In sophisticated economies, the impact of consumption may be less than in emerging economies that are largely import-export driven, but the consumption magnitude is even more pronounced due to both a greater wealth effect and standard of living that enable individuals to spend more freely with disposable income.

The data for analyzing overall consumption contains many underlying factors. To scrutinize the daily volumes of indicators, focus on the indicators according to the above ranking system. This will help you capture the main elements and the interaction between the various areas of spending.

by Investopedia Staff, (Contact Author Biography)Investopedia.com believes that individuals can excel at managing their financial affairs. As such, we strive to provide free educational content and tools to empower individual investors, including more than 1,200 original and objective articles and tutorials on a wide variety of financial topics.

http://www.investopedia.com/articles/fundamental/103002.asp

How do government issued stimulus checks improve the economy?

Investment Question
How do government issued stimulus checks improve the economy?

Stimulus checks are payments given to individuals by the government based on taxes paid in the previous year. The hope is that the recipients of these checks will increase spending, thus stimulating the economy.

So how does it improve the economy?

A slow economy will have less flow of capital. This means less people spend, less businesses get money and therefore the businesses can not pay wages. Some businesses might even layoff workers. This creates a bad cycle and a slower economy.

A good economy will have a higher flow of capital; residents spend more, businesses make money, and employ more people who spend more.

Of course economies are much more complex with factors, such as inflation, international sales and standard of living. (To learn more check out Economic Basics and Macroeconomic Analysis.)By infusing money into an economy the government is attempting to increase the spending habits of individuals and general consumer confidence.

Ideally they will go out and spend the money which will help businesses maintain adequate cash flows to pay their bills and employ their workers. If placed into a savings account the banks will be able to lend out more money to more spenders. If used to pay debts the stimulus check could reduce the risks of defaulting on loans. It is a short run solution, primarily used in a lagging economy.

(To read more on consumer confidence and how it affects the economy, read Consumer Confidence: A Killer Statistic.)

http://www.investopedia.com/ask/answers/08/stimulus-checks-economy.asp?ad=feat_fincrisis

Recession-Proof Your Portfolio

Recession-Proof Your Portfolio
by Eric Petroff (Contact Author Biography)

While it would be utopian to have the economy grow at a stable rate, economic recessions are a fact of life and are as unavoidable as the setting of the sun. Like the sun, the economy goes through periods of rising (growth and expansion) and periods of setting (decline and recession).

In this article, we will look at how to properly invest as the economy moves through the setting phase - recession.

What is a Recession?

A recession can be defined as an extended period of significant decline in economic activity including negative gross domestic product (GDP) growth, faltering confidence on the part of consumers and businesses, weakening employment, falling real incomes, and weakening sales and production. This is not exactly the environment that would lead to higher stock prices or a sunny outlook on stocks.

Other aspects of recessionary environments as they relate to investments include a heightened risk aversion on the part of investors and a subsequent flight to safety. However, on the bright side, recessions do eventually lead to recoveries and follow a relatively predictable pattern of behavior along the way. (To read more about this, check out Recession: What Does It Mean To Investors?)

Keep an Eye on the Horizon

The real key to investing before, during and after a recession is to keep an eye on the big picture, as opposed to trying to time your way in and out of various market sectors, niches and individual stocks. Even though there is a lot of historical evidence of the cyclicality of certain investments throughout recessions, the fact of the matter is that this sort of investment acumen is beyond the scope of the ordinary investor. That said, there's no need to be discouraged because there are many ways an ordinary person can invest to protect and profit during these economic cycles. (To learn more about investing in cycles, read Understanding Cycles - The Key To Market Timing.)

To begin with, consider the macroeconomic issues of a recession and how they affect capital markets. When a recession hits, companies slow down business investment, consumers slow down their spending, and people's perceptions shift from being optimistic and expecting a continuation of recent good times to becoming pessimistic and uncertain about the future. As such, people get understandably frightened, become worried about prospective investment returns and rationally scale back risk in their portfolios. The results of these psychological factors manifest themselves in a few broad capital market trends.

Within equity markets, the results are pretty obvious. As people become uncertain about prospective earnings, they perceive a greater amount of risk in their investments, which broadly leads investors to require a higher potential rate of return for holding equities. Of course, for expected returns to go higher, current prices need to drop, which occurs as investors sell their higher risk investments and move into safer securities including government debt. This is why equity markets tend to fall, often precipitously, prior to recessions as investors shift their investments.

Recessions and Specific Investments

In fact, history shows us that equity markets have an uncanny ability to serve as a leading indicator for recessions. For example, the markets started a steep decline in mid-2000 before the economic recessionary period between March 2001 and November 2001. But even in a decline, there are pockets of relative outperformance to be found in equity markets.

Stocks

When investing in stocks during recessionary periods, the relatively safest places to invest are in high-quality companies with long business histories, as these should be companies that can handle prolonged periods of weakness in the market.

For example, companies with strong balance sheets, including those with little debt and strong cash flows, tend to do much better than companies with significant operating leverage (or debt) and poor cash flows. A company with a strong balance sheet/cash flow is better able to handle an economic downturn and should still be able to fund its operations as it moves through the weak economic times. In contrast, a company with a lot of debt may be damaged if it can't handle its debt payments and the costs associated with its continuing operations. (To learn how to read these documents, see What Is A Cash Flow Statement? and Breaking Down The Balance Sheet.)

Also, traditionally, one of the safe places in the equity market is consumer staples. These are typically the last products to be removed from a budget. In contrast, electronic retailers and other consumer discretionary companies can suffer as consumers hold off on these higher end purchases. (To learn more, read Cyclical Versus Non-Cyclical Stocks.)

Fixed Income

Fixed-income markets are no exception to this line of reasoning. Again, as investors become more concerned about risk, they tend to shy away from it. Practically speaking, this means investors steer clear of credit risk, meaning all corporate bonds (especially high-yield bond) and mortgage-backed securities because these investments have higher default rates than government securities.

Again, as the economy weakens, businesses have a more difficult time generating revenues and earnings, which can make debt repayment more difficult and could lead to bankruptcy as a worst case scenario.

Moreover, as investors sell these assets, they seek safety and move into U.S. Treasury bonds. In other words, the prices of risky bonds go down as people sell (or the yields increase) and the prices on Treasury bonds go up (or the yields decrease).

Commodities

Another area of investing you want to consider in the context of a recession is commodity markets. The general rule to understand about these investments is to keep in mind that growing economies need inputs, or natural resources. As economies grow, the need for natural resources grows, and the prices for those resources rise. Conversely, as economies slow, the demand slows and prices go down. So, if investors believe a recession is forthcoming, they will sell commodities, driving prices lower.

However, commodities are traded on a global basis, and U.S. economic activity is not the sole driver of demand for resources such as oil, gas, steel, etc. So don't necessarily expect a recession in the U.S. to have a direct impact on commodity prices, at least not as strong of an effect as we have seen in the past. At some point in time, the world's various economies will separate from the U.S., creating a demand for resources that is increasingly less sensitive to U.S. growth in GDP.

If you expect a recession, positioning your portfolio is quite simple. Shift assets away from equities, especially the riskiest equities like small stocks. You should also move away from credit risk in fixed-income markets and into Treasuries.

Investments and Recovery

So, what to do during a recovery? It sounds too simple, but investing for an economic recovery entails doing the exact opposite of what was described earlier.

Why?

Again, keep an eye ton the macroeconomic factors. For example, one of the most often used tools to reduce the impact of a recession is monetary policy that leads to a reduction in interest rates with the purpose of increasing the money supply, discouraging people from saving and encouraging spending. This helps to increase economic activity.

One of the side effects of low interest rates is they tend to creates demand for higher return, higher risk investments. So, as recessionary expectations bottom out, pessimism fades away and optimism works its way back into people's minds. Moreover, investors re-examine opportunities for riskier investments in the context of what is usually a low interest rate environment. They also embrace risk.

As a result, equity markets tend to do very well during economic recovery. Within equity markets, some of the best performing stocks are those that use operating leverage as part of their ongoing business activities, especially as these are often extremely undervalued after being beat up during the market downturn. Remember, leverage works great during good times, and these firms tend to grow earning faster than companies without leverage, but they also face real risks during weakening times. Moreover, growth stocks and small stocks tend to do well as investors embrace risk during an economic recovery. (To learn more about operating leverage, read Operating Leverage Captures Relationships.)

Similarly, within fixed-income markets, increased demand for risk manifests itself in a higher demand for credit risk, meaning the corporate debt of all grades and mortgage-backed debt tends to attract investors, driving prices up and yields down. Logically, U.S. Treasuries tend to go down in value as investors shift out of these assets and yields go back up.

The same logic holds for commodity markets in that faster economic growth means higher demand for materials, driving prices up. However, remember that commodities are traded on a global basis, and U.S. economic activity is not the sole driver of demand for resources.

Will the Sun Come Out Tomorrow?

To conclude, the best advice to investing during recessionary environments is to focus on the horizon and manage your exposures. It is important to minimize the risk in your portfolio and maintain your capital to invest in the recovery. Of course, you're never going to time the beginning or end of a recession to the day or the quarter, but seeing a recession far enough in advance isn't as hard as you might think. The real trick here is to simply have the discipline to step away from the crowd and shift away from risky, high-returning investments during times of extreme optimism, wait out the oncoming storm, and have an equal discipline to embrace risk at a time when people are shying away from it to get ahead of the cycle.

To keep reading about market recessions, check out Panic Selling - Capitulation Or Crash? and The Greatest Market Crashes.

by Eric Petroff, (Contact Author Biography)Eric Petroff is the director of research of Wurts & Associates, an institutional consulting firm advising nearly $40 billion in client assets. Before joining Wurts & Associates, Petroff spent eight years at Hammond Associates in St. Louis, another institutional consulting firm, where he was a senior consultant and shareholder. Prior to Hammond Associates, he spent five years in the brokerage industry advising retail clientele and even served as an equity and options trader for three of those years. He speaks often at conferences and has published dozens of articles for Investopedia.com and the New Zealand Investor Magazine.

http://www.investopedia.com/articles/08/recession.asp

Inflation: some insight into inflation and its effects.

Inflation: some insight into inflation and its effects.

For starters, you now know that inflation isn't intrinsically good or bad. Like so many things in life, the impact of inflation depends on your personal situation.

Some points to remember:

Inflation is a sustained increase in the general level of prices for goods and services.
When inflation goes up, there is a decline in the purchasing power of money.
Variations on inflation include deflation, hyperinflation and stagflation.
Two theories as to the cause of inflation are demand-pull inflation and cost-push inflation.
When there is unanticipated inflation, creditors lose, people on a fixed-income lose, "menu costs" go up, uncertainty reduces spending and exporters aren't as competitive.
Lack of inflation (or deflation) is not necessarily a good thing.
Inflation is measured with a price index.
The two main groups of price indexes that measure inflation are the Consumer Price Index and the Producer Price Indexes.
Interest rates are decided in the U.S. by the Federal Reserve. Inflation plays a large role in the Fed's decisions regarding interest rates.
In the long term, stocks are good protection against inflation.
Inflation is a serious problem for fixed income investors. It's important to understand the difference between nominal interest rates and real interest rates.
Inflation-indexed securities offer protection against inflation but offer low returns.

Also read:
Table of Contents
1) Inflation: Introduction
2) Inflation: What Is Inflation?
3) Inflation: How Is It Measured?
4) Inflation: Inflation And Interest Rates
5) Inflation: Inflation And Investments
6) Inflation: Conclusion

What is GDP and why is it so important?

Investment Question
What is GDP and why is it so important?

The gross domestic product (GDP) is one the primary indicators used to gauge the health of a country's economy.

It represents the total dollar value of all goods and services produced over a specific time period - you can think of it as the size of the economy. Usually, GDP is expressed as a comparison to the previous quarter or year. For example, if the year-to-year GDP is up 3%, this is thought to mean that the economy has grown by 3% over the last year.

Measuring GDP is complicated (which is why we leave it to the economists), but at its most basic, the calculation can be done in one of two ways: either

by adding up what everyone earned in a year (income approach), or
by adding up what everyone spent (expenditure method).

Logically, both measures should arrive at roughly the same total.

The income approach, which is sometimes referred to as GDP(I), is calculated by adding up total compensation to employees, gross profits for incorporated and non incorporated firms, and taxes less any subsidies.

The expenditure method is the more common approach and is calculated by adding total consumption, investment, government spending and net exports.

As one can imagine, economic production and growth, what GDP represents, has a large impact on nearly everyone within that economy. For example, when the economy is healthy, you will typically see low unemployment and wage increases as businesses demand labor to meet the growing economy.

A significant change in GDP, whether up or down, usually has a significant effect on the stock market. It's not hard to understand why: a bad economy usually means lower profits for companies, which in turn means lower stock prices. Investors really worry about negative GDP growth, which is one of the factors economists use to determine whether an economy is in a recession.

For more on this topic, see this section of our Economic Indicators tutorial and the article Macroeconomic Analysis.

http://www.investopedia.com/ask/answers/199.asp?ad=feat_fincrisis

What causes a recession?

Investment Question
What causes a recession?
According to the National Bureau of Economic Research (NBER), recession is defined as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in

real gross domestic product (GDP),
real income,
employment,
industrial production and
wholesale-retail sales".

More specifically, recession is defined as when businesses cease to expand, the GDP diminishes for two consecutive quarters, the rate of unemployment rises and housing prices decline.

Many factors contribute to an economy's fall into a recession, but the major cause is inflation. Inflation refers to a general rise in the prices of goods and services over a period of time. The higher the rate of inflation, the smaller the percentage of goods and services that can be purchased with the same amount of money. Inflation can happen for reasons as varied as

increased production costs,
higher energy costs and
national debt.

(For more on this topic, see All About Inflation.)

In an inflationary environment, people tend to cut out leisure spending, reduce overall spending and begin to save more. But as individuals and businesses curtail expenditures in an effort to trim costs, this causes GDP to decline. Unemployment rates rise because companies lay off workers to cut costs. It is these combined factors that cause the economy to fall into a recession.

For further reading, see
Recession-Proof Your Portfolio and
Recession: What Does It Mean To Investors.

This question was answered by Chizoba Morah.

http://www.investopedia.com/ask/answers/08/cause-of-recession.asp?ad=feat_fincrisis

How do central banks inject money into the economy?

Investment Question
How do central banks inject money into the economy?

Central banks use several different methods to increase (or decrease) the amount of money in the banking system. These actions are referred to as monetary policy. While the Federal Reserve Board (the Fed) could print paper currency at its discretion in an effort to increase the amount of money in the economy, this is not the measure used.

Here are three methods the Fed uses in order to inject (or withdraw) money from the economy:

The Fed can influence the money supply by modifying reserve requirements, which is the amount of funds banks must hold against deposits in bank accounts. By lowering the reserve requirements, banks are able loan more money, which increases the overall supply of money in the economy. Conversely, by raising the banks' reserve requirements, the Fed is able to decrease the size of the money supply.
The Fed can also alter the money supply by changing short-term interest rates. By lowering (or raising) the discount rate that banks pay on short-term loans from the Federal Reserve Bank, the Fed is able to effectively increase (or decrease) the liquidity of money. Lower rates increase the money supply and boost economic activity; however, decreases in interest rates fuel inflation, so the Fed must be careful not to lower interest rates too much for too long.
Finally, the Fed can affect the money supply by conducting open market operations, which affects the federal funds rate. In open operations, the Fed buys and sells government securities in the open market. If the Fed wants to increase the money supply, it buys government bonds. This supplies the securities dealers who sell the bonds with cash, increasing the overall money supply. Conversely, if the Fed wants to decrease the money supply, it sells bonds from its account, thus taking in cash and removing money from the economic system.

To learn more about central banks and their role in monetary policy, check out Formulating Monetary Policy.

http://www.investopedia.com/ask/answers/07/central-banks.asp?ad=feat_fincrisis

Where do investors tend to put their money in a bear market?

Investment Question
Where do investors tend to put their money in a bear market?
A bearish market is traditionally defined as a period of negative returns in the broader market to the magnitude of between 15-20% or more. During this type of market, most stocks see their share prices fall, often substantially. There are several strategies that are used when investors believe that this market is about to occur or is occurring, which depend on an the investor's risk tolerance, investment time horizon and objectives. (For related reading, see Surviving Bear Country.)

One of the safest strategies, and the most extreme, is to sell all of your investments and either hold cash or invest the proceeds into much more stable financial instruments, such as short-term government bonds. By doing this, an investor can reduce his or her exposure to the stock market and minimize the effects of a bear market.

For investors looking to maintain positions in the stock market, a defensive strategy is usually taken. This type of strategy involves investing in larger companies with strong balance sheets and a long operational history, which are considered to be defensive stocks. The reason for this is that these larger more stable companies tend to be less affected by an overall downturn in the economy or stock market, making their share prices less susceptible to a larger fall. With strong financial positions, including a large cash position to meet ongoing operational expenses, these companies are more likely to survive downturns. These also include companies that service the needs of businesses and consumers, such as food businesses (people still eat even when the economy is in a downturn). On the other hand, it is the riskier companies, such as small growth companies, that are typically avoided because they are less likely to have the financial security that is required to survive downturns.

These are just two of the more common strategies and there is a wide range of other strategies tailored to a bear market. The most important thing is to understand that a bear market is a very difficult one for long investors because most stocks fall over the period, and most strategies can only limit the amount of downside exposure, not eliminate it.

http://www.investopedia.com/ask/answers/06/investduringbearmarket.asp?ad=feat_fincrisis

Most Popular Questions
http://www.investopedia.com/features/financial-credit-crisis.aspx?partner=NTU
Are all bank accounts insured by the FDIC?
Can a creditor seize my retirement savings?
Where do investors tend to put their money in a bear market?
How do central banks inject money into the economy?
What causes a recession?
If my mortgage lender goes bankrupt, do I still have to pay my mortgage?
How do government issued stimulus checks improve the economy?
Is there a form of insurance on my investments?
How does a credit crunch occur?
What is GDP and why is it so important?

My 18 points guide to Successfully compounding your money in Stocks

Be a good stock picker.
Think as a business owner.
Always look at value rather than the price. Do the homework.
Buy and hold is alright for selected stocks.
Compounding is your friend, get this to work its magic.
Mr. Market is there to be taken advantage of. Do not be the sucker instead. BFS;STS.
Always buy a lot when the price is low.
Never buy when the stock is overpriced.
It is alright to buy when the selected stock is at a fair price.
Phasing in or dollar cost averaging is safe for such stocks during a downtrend, unless the price is still obviously too high.
Do not time the market for such or any stocks.
By keeping to the above strategy, the returns will be delivered through the growth of the company's business.
So, when do you sell the stock? Almost never, as long as the fundamentals remain sound and the future prospects intact.
The downside risk is protected through only buying when the price is low or fairly priced.
Tactical dynamic asset allocation or rebalancing based on valuation can be employed but this sounds easier than is practical, except in extreme market situations.
Sell urgently when the company business fundamental has deteriorated irreversibly.
You may also wish to sell should the growth of the company has obviously slowed and you can reinvest into another company with greater growth potential of similar quality. However, unlike point 16, you can do so leisurely.
In conclusion, a critical key to successful investing is in your stock picking ability.

http://myinvestingnotes.blogspot.com/2012/07/my-18-points-guide-to-successfully.html

11 Lessons From Peter Lynch

Peter Lynch taught me:

1. Behind every stock is a company. Find out what it’s doing.
2. Never invest in any idea you can’t illustrate with a crayon.
3. Over the short term, there may be no correlation between the success of a company’s operations and the success of its stock. Over the long term, there’s a 100% correlation.
4. Buying stocks without studying the companies is the same as playing poker – and never looking at your cards.
5. Time is on your side when you own shares of superior companies.
6. Owning stock is like having children. Don’t get involved with more than you can handle.
7. When the insiders are buying, it’s a good sign.
8. Unless you’re a short seller, it never pays to be pessimistic.
9. A stock market decline is as predictable as a January blizzard in Colorado. If you’re prepared, it can’t hurt you.
10. Everyone has the brainpower to make money in stocks. Not everyone has the stomach.
11. Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested.

Lynch’s advice had a profound effect on my stock market approach. He taught me that investment success isn’t the result of developing the right macro-economic view or deciding when to jump in or out of the market. Success is about researching companies to identify those that are likely to report positive surprises.

Capital Expenditure

A great company with a Durable Competitive Advantage will have a ratio of Capital Expenditures to Net Income of less than 25%. Less is better.

Capital Expenditures are expenses on:
- fixed assets such as equipment, property, or industrial buildings
- fixing problems with an asset
- preparing an asset to be used in business
- restoring property
- starting new businesses

A good company will have a ratio of Capital Expenditures to Net Income of less than 50%.

A great company with a Durable Competitive Advantage will have a ratio of less than 25%.

Less is better.

Benjamin Graham's 113 Wise Words

The true investor scarcely ever is forced to sell his shares, and at all times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgement."

Philip Fisher's Wise Words

"The refusal to sell at a loss, while completely natural and normal, is probably one of the most dangerous in which we can indulge ourselves in the entire investment process.

More money has probably been lost by investors holding a stock they really did not want until they could 'at least come out even' than from any other single reason. If to these actual losses are added the profits that might have been made through the proper reinvestment of these funds if such reinvestment had been made when the mistake was first realized, the cost of self-indulgence becomes truly tremendous."

(Common Stocks and Uncommon Profits)

The Ultimate Hold-versus-Sell Test

Here is the overriding primary test, followed by observations on why it is so critically important:

Knowing all that you now know and expect about the company and its stock (not what you originally believed or hoped at time of purchase), and assuming that you had available capital, and assuming that it would not cause a portfolio imbalance to do so, would you buy this stock today, at today's price?

No equivocation. Yes or no?

Answers such as maybe or probably are not acceptable since they are ways of dodging the issue. No investor probably buys a stock; they either place an order or do not.

Here is the implication of your answer to that critical test: if you did not answer with a clear affirmative, you should sell; only if you said a strong yes, are you justified to hold.

Some thoughts on Analysing Stocks (KISS)

Ideally a stock you plan to purchase should have all of the following charateristics:

• A rising trend of earnings dividends and book value per share.
• A balance sheet with less debt than other companies in its particular industry.
• A P/E ratio no higher than average.
• A dividend yield that suits your particular needs.
• A below-average dividend pay-out ratio.
• A history of earnings and dividends not pockmarked by erratic ups and downs.
• Companies whose ROE is 15 or better.
• A ratio of price to cash flow (P/CF) that is not too high when compared to other stocks in the same industry.

Margin of Safety Concept: Stocks should be bought like groceries, not like perfume

The high CAGR in the early years of the investing period, due to buying at a discount, tended to decline and approach that of the intrinsic EPS GR of the companies over a longer investment time-frame.

Chapter 20 - “Margin of Safety” as the Central Concept of Investment

A single quote by Graham on page 516 struck me:

Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions.

Basically, Graham is saying that most stock investors lose money because they invest in companies that seem good at a particular point in time, but are lacking the fundamentals of a long-lasting stable company.

This seems obvious on the surface, but it’s actually a great argument for thinking more carefully about your individual stock investments. If most of your losses come from buying companies that seem healthy but really aren’t, isn’t that a profound argument for carefully studying any company you might invest in?

myinvestingnotes.blogspot.my (Bullbear Buffett Stock Investing Notes)

Friday, 2 January 2009

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