Alistair Darling unveils 50 per cent tax rate in Budget 2009
A new 50 per cent top rate of income tax has been announced in the Budget by Alistair Darling, the Chancellor.
By Jon Swaine and Angela Monaghan
Last Updated: 1:43PM BST 22 Apr 2009
The rate will apply to earnings above £150,000 and will replace the 45 per cent rate unveiled in the pre-Budget Report last November. It will take effect from next April - a year earlier than had been planned for the 45p rate.
Personal allowances will also be fully withdrawn for those with incomes over £100,000 from next April.
Tax relief will be reduced on pensions earnings above £150,000, Mr Darling added. However, the basic state pension and the Winter fuel allowance will both continue to rise.
The decisions came as Mr Darling announced the most important budget for a generation, aimed at tackling the worst recession since the Second World War.
Outlining the scale of the problem, Mr Darling announced that he expects that the economy will contract by about 1.6 per cent during the first quarter of this year, and that GDP growth will be about -3.5 per cent for the year.
The recession has forced the Chancellor to rip up his economic forecasts made in the Pre-Budget Report in November, in which the economy was expected to contract by just 1.25 per cent.
In contrast to more pessmistic forecasts from the City, Mr Darling said that he expected the economy to start growing again towards the end of this year, before growing by about 1.25 per cent in 2010 and 3.5 per cent in 2011.
The Chancellor also admitted that Government borrowing will soar to £175bn in the current financial year, or 12 per cent of the country's gross domestic product. The recession has torn a hole through Britain's public finances as tax receipts collapse and spending on benefits such as unemployment rise.
Inflation is expected to continue falling sharply, Mr Darling said, reaching about 1 per cent on the Government's preferred measure by the end of this year. Deflation will continue to be shown on the RPI measure, he added. It is set to fall to about -3 per cent by September, before moving back above zero next year.
A widely-trailed car scrappage scheme will be implemented next month to provide motorists with a £2,000 discount on new vehicles bought when they trade in cars over 10 years old, Mr Darling announced. The scheme will end in March 2010.
Mr Darling also announced a blitz of measures to stop UK unemployment spiralling higher as the recession bites. An additional £1.7bn was pledged to support the unemployed.
From January everyone under the age of 25 who has been jobless for 12 months will be offered a job or a place in training with additional money on top of benefits for those in training.
The "stamp duty holiday" on properties sold for less than £175,000 is to be extended until the end of the year, Mr Darling announced.
http://www.telegraph.co.uk/finance/financetopics/budget/5200435/Alistair-Darling-unveils-50-per-cent-tax-rate-in-Budget-2009.html
Wednesday, 22 April 2009
Britain and US at odds over further bank bail-outs
Britain and US at odds over further bank bail-outs
Gordon Brown and Alistair Darling are growing increasingly concerned over America's failure to clean up the "toxic" debts of many of its major banks despite repeated attempts to do so.
By Robert Winnett and James Quinn
Last Updated: 11:15AM BST 22 Apr 2009
Although President Barack Obama announced a plan last month to offer fund managers and private investors the equivalent of cheap US government loans to buy up $1 trillion (£681bn) of toxic debts from big American banks, the plan has yet to swing into action with many details still unknown.
There are now growing fears in Westminster that President Obama's proposed "public-private" partnership will fail to solve the problem as there is not sufficient appetite among the investment community to buy up the dubious loans. Mr Darling is understood to believe that President Obama will have to announce a new state package of assistance for American banks. In Britain the Treasury has agreed to underwrite 90pc of losses from questionable loans incurred by banks including the Royal Bank of Scotland.
The Treasury is now concerned that unless a new American package is announced imminently, British attempts to tackle the recession may be hindered. "America will have to announce a new package to help its banks, this needs to be sorted before we can move forward," said one well-placed source.
The growing signs of tension between Westminster and Washington DC – the first between the Brown and Obama administrations – come as the US Treasury completes a series of financial "stress tests" designed to measure the capital requirements of 19 of America's largest financial institutions.
Publication of the test results are scheduled for May 4, and it is thought highly unlikely that the Obama administration will make any move to shore-up the banking system before then.
One source close to the US Treasury expressed surprise that Mr Darling would think the US is not doing enough, given that the public-private partnership to buy toxic loans is just one of a number of programmes launched by the Obama administration to rescue the financial system.
Those programmes include the Federal Reserve's $1 trillion Term Asset-Backed Securities Loan Facility designed to fund new bank lending through buying up existing securities, and efforts to resuscitate the ailing US housing market.
Under President Bush, the US initially apportioned $700bn to rescue its banking system, choosing first to inject money straight into bank's balance sheets, but it has also since been used to help the car industry.
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5196478/Britain-and-US-at-odds-over-further-bank-bail-outs.html
Related Articles
Geithner calms fears over US bank capital
Gordon Brown and Alistair Darling are growing increasingly concerned over America's failure to clean up the "toxic" debts of many of its major banks despite repeated attempts to do so.
By Robert Winnett and James Quinn
Last Updated: 11:15AM BST 22 Apr 2009
Although President Barack Obama announced a plan last month to offer fund managers and private investors the equivalent of cheap US government loans to buy up $1 trillion (£681bn) of toxic debts from big American banks, the plan has yet to swing into action with many details still unknown.
There are now growing fears in Westminster that President Obama's proposed "public-private" partnership will fail to solve the problem as there is not sufficient appetite among the investment community to buy up the dubious loans. Mr Darling is understood to believe that President Obama will have to announce a new state package of assistance for American banks. In Britain the Treasury has agreed to underwrite 90pc of losses from questionable loans incurred by banks including the Royal Bank of Scotland.
The Treasury is now concerned that unless a new American package is announced imminently, British attempts to tackle the recession may be hindered. "America will have to announce a new package to help its banks, this needs to be sorted before we can move forward," said one well-placed source.
The growing signs of tension between Westminster and Washington DC – the first between the Brown and Obama administrations – come as the US Treasury completes a series of financial "stress tests" designed to measure the capital requirements of 19 of America's largest financial institutions.
Publication of the test results are scheduled for May 4, and it is thought highly unlikely that the Obama administration will make any move to shore-up the banking system before then.
One source close to the US Treasury expressed surprise that Mr Darling would think the US is not doing enough, given that the public-private partnership to buy toxic loans is just one of a number of programmes launched by the Obama administration to rescue the financial system.
Those programmes include the Federal Reserve's $1 trillion Term Asset-Backed Securities Loan Facility designed to fund new bank lending through buying up existing securities, and efforts to resuscitate the ailing US housing market.
Under President Bush, the US initially apportioned $700bn to rescue its banking system, choosing first to inject money straight into bank's balance sheets, but it has also since been used to help the car industry.
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5196478/Britain-and-US-at-odds-over-further-bank-bail-outs.html
Related Articles
Geithner calms fears over US bank capital
Goldman Sachs turns bullish on Chinese economy
Goldman Sachs turns bullish on Chinese economy
Goldman Sachs has dramatically raised its forecasts for the Chinese economy and is now predicting 8.3pc growth for this year, above the Communist Party's own target.
By Malcolm Moore in Shanghai
Last Updated: 9:36AM BST 22 Apr 2009
The reversal came after a raft of strong economic data in March convinced pundits that green shoots are starting to reappear in the Chinese economy, which could shortly overtake Japan as the world's second-largest.
Previously Goldman Sachs forecast that China would only grow by 6pc in 2009. Other economists have predicted growth to be as low as 5pc; strong compared to the rest of the world, but lower than the magic 8pc threshold that China believes is essential to maintain calm.
The Communist Party says that growth under 8pc will not produce enough jobs to keep unemployment at a manageable level and to avoid unrest.
After exports fell by nearly 20pc in the first quarter, the government has poured money into the economy to keep it running. As well as a 4 trillion yuan (£400bn) fiscal stimulus package, Chinese banks have made 4.8 trillion yuan in new loans so far this year.
In order to finance the sudden increase in credit, the Chinese central bank has started printing huge quantities of money. In March, the increase in M2 money supply was 25.5pc, the highest it has been since the Asian financial crisis.
Goldman Sachs is predicting that consumer price inflation will be negative, at -0.3pc, this year, allowing for further cuts in interest rates and the issuing of more new money.
"We are fully confident that we will overcome difficulties and challenges and we have the ability to do so," said Wen Jiabao, the Chinese prime minister, at the National People's Congress in March, as he underlined the government's determination to keep GDP growth at 8pc.
"Since the announcement of the fiscal stimulus package last November [...] the pace of implementation of new infrastructure investment and the scale of domestic credit expansion have been unprecedented," said Helen Qiao, an economist at Goldman Sachs. She added that growth next year would be 10.9pc.
Economic growth was just 6.1pc in the first quarter of this year, the lowest on record. However, commentators suggested that the figure was the bottom of the cycle, and that increases in industrial production, retail sales and fixed asset investment would soon buoy the Chinese economy.
However, Stephen Green, an economist at Standard Chartered in Shanghai, expressed some skepticism that there was a full-blown recovery underway. He said growth had accelerated from the end of last year, but cautioned that "there is a huge amount of volatility in the numbers and a chunk of salt is needed."
He added that while the fiscal stimulus package is likely to boost investment by companies in the short-term, in the long run China needs to increase the incomes of its workers and complete a social welfare system. He kept his forecast at 6.8pc for the year.
http://www.telegraph.co.uk/finance/financetopics/recession/5198966/Goldman-Sachs-turns-bullish-on-Chinese-economy.html
Goldman Sachs has dramatically raised its forecasts for the Chinese economy and is now predicting 8.3pc growth for this year, above the Communist Party's own target.
By Malcolm Moore in Shanghai
Last Updated: 9:36AM BST 22 Apr 2009
The reversal came after a raft of strong economic data in March convinced pundits that green shoots are starting to reappear in the Chinese economy, which could shortly overtake Japan as the world's second-largest.
Previously Goldman Sachs forecast that China would only grow by 6pc in 2009. Other economists have predicted growth to be as low as 5pc; strong compared to the rest of the world, but lower than the magic 8pc threshold that China believes is essential to maintain calm.
The Communist Party says that growth under 8pc will not produce enough jobs to keep unemployment at a manageable level and to avoid unrest.
After exports fell by nearly 20pc in the first quarter, the government has poured money into the economy to keep it running. As well as a 4 trillion yuan (£400bn) fiscal stimulus package, Chinese banks have made 4.8 trillion yuan in new loans so far this year.
In order to finance the sudden increase in credit, the Chinese central bank has started printing huge quantities of money. In March, the increase in M2 money supply was 25.5pc, the highest it has been since the Asian financial crisis.
Goldman Sachs is predicting that consumer price inflation will be negative, at -0.3pc, this year, allowing for further cuts in interest rates and the issuing of more new money.
"We are fully confident that we will overcome difficulties and challenges and we have the ability to do so," said Wen Jiabao, the Chinese prime minister, at the National People's Congress in March, as he underlined the government's determination to keep GDP growth at 8pc.
"Since the announcement of the fiscal stimulus package last November [...] the pace of implementation of new infrastructure investment and the scale of domestic credit expansion have been unprecedented," said Helen Qiao, an economist at Goldman Sachs. She added that growth next year would be 10.9pc.
Economic growth was just 6.1pc in the first quarter of this year, the lowest on record. However, commentators suggested that the figure was the bottom of the cycle, and that increases in industrial production, retail sales and fixed asset investment would soon buoy the Chinese economy.
However, Stephen Green, an economist at Standard Chartered in Shanghai, expressed some skepticism that there was a full-blown recovery underway. He said growth had accelerated from the end of last year, but cautioned that "there is a huge amount of volatility in the numbers and a chunk of salt is needed."
He added that while the fiscal stimulus package is likely to boost investment by companies in the short-term, in the long run China needs to increase the incomes of its workers and complete a social welfare system. He kept his forecast at 6.8pc for the year.
http://www.telegraph.co.uk/finance/financetopics/recession/5198966/Goldman-Sachs-turns-bullish-on-Chinese-economy.html
What should you do? The market has lost more than half of its value.
It's Time to Sell and Walk Away
By John Rosevear (TMF Marlowe) March 5, 2009 Comments (40)
There's no escaping this truth: The market has lost more than half of its value since it peaked in October 2007.
It could go even lower -- and it probably will.
Things are getting worse. If you have any home equity left, it's still shrinking. General Motors inches closer to Chapter 11 every day -- and General Electric (NYSE: GE) is confronting some mighty problems of its own.
Our entire banking system seems on the ragged edge of collapse, as nervous investors wonder who AIG's counterparties are and fret about the true financial condition of institutions such as Bank of America (NYSE: BAC) and Goldman Sachs (NYSE: GS). Layoffs continue at a torrid pace, as companies such as General Dynamics (NYSE: GD) and Tyco Electronics (NYSE: TEL) join the very long list of companies adjusting to new economic expectations.
It's going to get worse before it gets better -- if it gets better. Some folks are saying there's no way out -- a huge collapse might be in the cards. At best, they say, we're looking at a decade or more of high unemployment and stock market misery.
This is the time when you look at your decimated portfolio and wonder how much more you can take. This is the time when many pundits remind you that the "buy and hold myth" has been "debunked," and that the "smart money" is already in cash, waiting for the bottom. This is the time when the temptation to join them is overwhelming.
This is the time when you sell it all and walk away,
There's just one catch
But if you act while you still have something left to get rid of, answer this: What do you do after that?
I mean, great, you sold. Congratulations. Now what?
You can leave what's left in a money market fund that earns a whopping 1%. You can buy gold, though that seems more and more to me like buying tech stocks in 1999. You could buy bonds issued by a blue-chip company such as Johnson & Johnson (NYSE: JNJ) or Procter & Gamble (NYSE: PG) -- yet that still leaves you exposed to an economic cataclysm.
You could … geez, I don't know what else. There isn't much available that looks like a great long-term investment strategy once you're out of the market. Picassos? Vintage Ferraris? Rental condos in Scottsdale? The Ferrari would be fun, but it's not really a retirement plan.
Of course, when people talk about selling, they're not thinking about an alternative long-term strategy. They're thinking they'll wait for the bottom and then buy back in.
Is that what you're thinking?
You sure that's a good idea? Waiting for the bottom and jumping back in would be market timing. That's the practice of using something -- technical analysis, macroeconomic factors, seasonal indicators, astrology -- to buy when markets are about to rise and sell when they're about to fall.
Market timing, the academics say, doesn't work. But there were academic theories that said our current mess couldn't happen. Are they wrong about this, too?
As Foolish retirement guru Robert Brokamp notes in the new issue of the Fool's Rule Your Retirement newsletter, available online at 4 p.m. Eastern time today, some timing indicators seem to work more often than not. For example, when dividend yields go up and price-to-earnings ratios go down, prospects for stocks in general have usually been good. No-brainer, eh? But some notions are more nuanced -- for instance, statistically speaking, the stock market does best between November and April.
Ouch. Given how the market's done since last November, let's hope that last one doesn't hold this year. But that makes for a good point -- tendencies and trends and "more often than not" isn't reliable enough to bet your retirement fund on. Consider: Will the next sharp upward spike in the markets be yet another bear-market rally -- or the birth of a new bull? One thing history tells us about bull markets: They start sooner than most folks think they will. We'll only know for sure in retrospect.
Likewise, we'll all know what the bottom was -- a year or two later. But how will you know it when it's here? Can you say for sure that we haven't already seen it? The bottom happens, we all know, at "the point of maximum pessimism." I don’t see very many optimists around today.
Wall Street chest-thumping aside, there's only one good answer to that: I don't know.
So what should you do?
The short answer is to "invest well and hang on." Successfully timing the markets involves an extraordinary combination of luck, skill, knowledge, and more luck -- and even the best market timers regularly miss the mark.
A better answer?
Well, we can't predict the future -- but as Robert notes in his article, there are reasons to believe that the remainder of this bear market will unfold along certain lines. And there are strategies you can use to mitigate downside risk in the meantime -- strategies that don't involve selling everything and sitting in cash.
These aren't esoteric strategies, either -- they're approaches you can use in any portfolio, even a 401(k).
Fool contributor John Rosevear has no position in the companies mentioned. Johnson & Johnson is a Motley Fool Income Investor selection. Tyco Electronics is a Motley Fool Inside Value pick. The Fool owns shares of Procter & Gamble.
http://www.fool.com/retirement/general/2009/03/05/its-time-to-sell-and-walk-away.aspx
Tuesday, 21 April 2009
Learn to be an above-average investor. Few can ever hope to be a great investor.
http://www.manualofideas.com/files/sellers.pdf
So You Want To Be The Next Warren Buffett? How.s Your Writing?
By Mark Sellers
First of all, I want to thank Daniel Goldberg for asking me to be here today and all of you for actually showing up. I haven.t been to Boston in a while but I did live here for a short time in 1991 & 1992 when I attended Berklee School of Music. I was studying to be a jazz piano player but dropped out after a couple semesters to move to Los Angeles and join a band. I was so broke when I lived here that I didn.t take advantage of all the things there are to do in Boston, and I didn.t have a car to explore New England. I mostly spent 10-12 hours a day holed up in a practice room playing the piano. So whenever I come back to visit Boston, it.s like a new city to me.
One thing I will tell you right off the bat: I.m not here to teach you how to be a great investor. On the contrary, I.m here to tell you why very few of you can ever hope to achieve this status.
If you spend enough time studying investors like Charlie Munger, Warren Buffett, Bruce Berkowitz, Bill Miller, Eddie Lampert, Bill Ackman, and people who have been similarly successful in the investment world, you will understand what I mean.
I know that everyone in this room is exceedingly intelligent and you.ve all worked hard to get where you are. You are the brightest of the bright. And yet, there.s one thing you should remember if you remember nothing else from my talk: You have almost no chance of being a great investor. You have a really, really low probability, like 2% or less. And I.m adjusting for the fact that you all have high IQs and are hard workers and will have an MBA from one of the top business schools in the country soon. If this audience was just a random sample of the population at large, the likelihood of anyone here becoming a great investor later on would be even less, like 1/50th of 1% or something. You all have a lot of advantages over Joe Investor, and yet you have almost no chance of standing out from the crowd over a long period of time.
And the reason is that it doesn.t much matter what your IQ is, or how many books or magazines or newspapers you have read, or how much experience you have, or will have later in your career. These are things that many people have and yet almost none of them end up compounding at 20% or 25% over their careers.
I know this is a controversial thing to say and I don.t want to offend anyone in the audience. I.m not pointing out anyone specifically and saying .You have almost no chance to be great.. There are probably one or two people in this room who will end up compounding money at 20% for their career, but it.s hard to tell in advance who those will be without knowing each of you personally.
On the bright side, although most of you will not be able to compound money at 20% for your entire career, a lot of you will turn out to be good, above average investors because you are a skewed sample, the Harvard MBAs. A person can learn to be an above-average investor. You can learn to do well enough, if you.re smart and hard working and educated, to keep a good, high-paying job in the investment business for your entire career. You can make millions without being a great investor. You can learn to outperform the averages by a couple points a year through hard work and an aboveaverage IQ and a lot of study. So there is no reason to be discouraged by what I.m saying today. You can have a really successful, lucrative career even if you.re not the next Warren Buffett.
But you can.t compound money at 20% forever unless you have that hard-wired into your brain from the age of 10 or 11 or 12. I.m not sure if it.s nature or nurture, but by the time you.re a teenager, if you don.t already have it, you can.t get it. By the time your brain is developed, you either have the ability to run circles around other investors or you don.t. Going to Harvard won.t change that and reading every book ever written on investing won.t either. Neither will years of experience. All of these things are necessary if you want to become a great investor, but in and of themselves aren.t enough because all of them can be duplicated by competitors.
As an analogy, think about competitive strategy in the corporate world. I.m sure all of you have had, or will have, a strategy course while you.re here. Maybe you.ll study Michael Porter.s research and his books, which is what I did on my own before I entered business school. I learned a lot from reading his books and still use it all the time when analyzing companies.
Now, as a CEO of a company, what are the types of advantages that help protect you from the competition? How do you get to the point where you have a wide .economic moat., as Buffett calls it?
Well one thing that isn.t a source of a moat is technology because that can be duplicated and always will be, eventually, if that.s the only advantage you have. Your best hope in a situation like this is to be acquired or go public and sell all your shares before investors realize you don.t have a sustainable advantage. Technology is one type of advantage that.s short-lived. There are others, such as a good management team or a catchy advertising campaign or a hot fashion trend. These things produce temporary advantages but they change over time, or can be duplicated by competitors.
An economic moat is a structural thing. It.s like Southwest Airlines in the 1990s . it was so deeply ingrained in the company culture, in every employee, that no one could copy it, even though everyone kind of knew how Southwest was doing it. If your competitors know your secret and yet still can.t copy it, that.s a structural advantage. That.s a moat.
The way I see it, there are really only four sources of economic moats that are hard to duplicate, and thus, long-lasting.
So You Want To Be The Next Warren Buffett? How.s Your Writing?
By Mark Sellers
First of all, I want to thank Daniel Goldberg for asking me to be here today and all of you for actually showing up. I haven.t been to Boston in a while but I did live here for a short time in 1991 & 1992 when I attended Berklee School of Music. I was studying to be a jazz piano player but dropped out after a couple semesters to move to Los Angeles and join a band. I was so broke when I lived here that I didn.t take advantage of all the things there are to do in Boston, and I didn.t have a car to explore New England. I mostly spent 10-12 hours a day holed up in a practice room playing the piano. So whenever I come back to visit Boston, it.s like a new city to me.
One thing I will tell you right off the bat: I.m not here to teach you how to be a great investor. On the contrary, I.m here to tell you why very few of you can ever hope to achieve this status.
If you spend enough time studying investors like Charlie Munger, Warren Buffett, Bruce Berkowitz, Bill Miller, Eddie Lampert, Bill Ackman, and people who have been similarly successful in the investment world, you will understand what I mean.
I know that everyone in this room is exceedingly intelligent and you.ve all worked hard to get where you are. You are the brightest of the bright. And yet, there.s one thing you should remember if you remember nothing else from my talk: You have almost no chance of being a great investor. You have a really, really low probability, like 2% or less. And I.m adjusting for the fact that you all have high IQs and are hard workers and will have an MBA from one of the top business schools in the country soon. If this audience was just a random sample of the population at large, the likelihood of anyone here becoming a great investor later on would be even less, like 1/50th of 1% or something. You all have a lot of advantages over Joe Investor, and yet you have almost no chance of standing out from the crowd over a long period of time.
And the reason is that it doesn.t much matter what your IQ is, or how many books or magazines or newspapers you have read, or how much experience you have, or will have later in your career. These are things that many people have and yet almost none of them end up compounding at 20% or 25% over their careers.
I know this is a controversial thing to say and I don.t want to offend anyone in the audience. I.m not pointing out anyone specifically and saying .You have almost no chance to be great.. There are probably one or two people in this room who will end up compounding money at 20% for their career, but it.s hard to tell in advance who those will be without knowing each of you personally.
On the bright side, although most of you will not be able to compound money at 20% for your entire career, a lot of you will turn out to be good, above average investors because you are a skewed sample, the Harvard MBAs. A person can learn to be an above-average investor. You can learn to do well enough, if you.re smart and hard working and educated, to keep a good, high-paying job in the investment business for your entire career. You can make millions without being a great investor. You can learn to outperform the averages by a couple points a year through hard work and an aboveaverage IQ and a lot of study. So there is no reason to be discouraged by what I.m saying today. You can have a really successful, lucrative career even if you.re not the next Warren Buffett.
But you can.t compound money at 20% forever unless you have that hard-wired into your brain from the age of 10 or 11 or 12. I.m not sure if it.s nature or nurture, but by the time you.re a teenager, if you don.t already have it, you can.t get it. By the time your brain is developed, you either have the ability to run circles around other investors or you don.t. Going to Harvard won.t change that and reading every book ever written on investing won.t either. Neither will years of experience. All of these things are necessary if you want to become a great investor, but in and of themselves aren.t enough because all of them can be duplicated by competitors.
As an analogy, think about competitive strategy in the corporate world. I.m sure all of you have had, or will have, a strategy course while you.re here. Maybe you.ll study Michael Porter.s research and his books, which is what I did on my own before I entered business school. I learned a lot from reading his books and still use it all the time when analyzing companies.
Now, as a CEO of a company, what are the types of advantages that help protect you from the competition? How do you get to the point where you have a wide .economic moat., as Buffett calls it?
Well one thing that isn.t a source of a moat is technology because that can be duplicated and always will be, eventually, if that.s the only advantage you have. Your best hope in a situation like this is to be acquired or go public and sell all your shares before investors realize you don.t have a sustainable advantage. Technology is one type of advantage that.s short-lived. There are others, such as a good management team or a catchy advertising campaign or a hot fashion trend. These things produce temporary advantages but they change over time, or can be duplicated by competitors.
An economic moat is a structural thing. It.s like Southwest Airlines in the 1990s . it was so deeply ingrained in the company culture, in every employee, that no one could copy it, even though everyone kind of knew how Southwest was doing it. If your competitors know your secret and yet still can.t copy it, that.s a structural advantage. That.s a moat.
The way I see it, there are really only four sources of economic moats that are hard to duplicate, and thus, long-lasting.
- One source would be economies of scale and scope. Wal-Mart is an example of this, as is Cintas in the uniform rental business or Procter & Gamble or Home Depot and Lowe.s.
- Another source is the network affect, ala eBay or Mastercard or Visa or American Express.
- A third would be intellectual property rights, such as patents, trademarks, regulatory approvals, or customer goodwill. Disney, Nike, or Genentech would be good examples here.
- A fourth and final type of moat would be high customer switching costs. Paychex and Microsoft are great examples of companies that benefit from high customer switching costs.
These are the only four types of competitive advantages that are durable, because they are very difficult for competitors to duplicate. And just like a company needs to develop a moat or suffer from mediocrity, an investor needs some sort of edge over the competition or he.ll suffer from mediocrity.
There are 8,000 hedge funds and 10,000 mutual funds and millions of individuals trying to play the stock market every day. How can you get an advantage over all these people? What are the sources of the moat?
Well, one thing that is not a source is reading a lot of books and magazines and
newspapers. Anyone can read a book. Reading is incredibly important, but it won.t give you a big advantage over others. It will just allow you to keep up. Everyone reads a lot in this business. Some read more than others, but I don.t necessarily think there.s a correlation between investment performance and number of books read. Once you reach a certain point in your knowledge base, there are diminishing returns to reading more. And in fact, reading too much news can actually be detrimental to performance because you start to believe all the crap the journalists pump out to sell more papers.
Another thing that won.t make you a great investor is an MBA from a top school or a CFA or PhD or CPA or MS or any of the other dozens of possible degrees and designations you can obtain. Harvard can.t teach you to be a great investor. Neither can my alma mater, Northwestern University, or Chicago, or Wharton, or Stanford. I like to say that an MBA is the best way to learn how to exactly, precisely, equal the market return. You can reduce your tracking error dramatically by getting an MBA. This often results in a big paycheck even though it.s the antithesis of what a great investor does. You can.t buy or study your way to being a great investor. These things won.t give you a moat. They are simply things that make it easier to get invited into the poker game.
Experience is another over-rated thing. I mean, it.s incredibly important, but it.s not a source of competitive advantage. It.s another thing that is just required for admission. At some point the value of experience reaches the point of diminishing returns. If that wasn.t true, all the great money managers would have their best years in their 60s and 70s and 80s, and we know that.s not true. So some level of experience is necessary to play the game, but at some point, it doesn.t help any more and in any event, it.s not a source of an economic moat for an investor. Charlie Munger talks about this when he says you can recognize when someone .gets it. right away, and sometimes it.s someone who has almost no investing experience.
So what are the sources of competitive advantage for an investor? Just as with a company or an industry, the moats for investors are structural. They have to do with psychology, and psychology is hard wired into your brain. It.s a part of you. You can.t do much to change it even if you read a lot of books on the subject.
The way I see it, there are at least seven traits great investors share that are true sources of advantage because they can.t be learned once a person reaches adulthood. In fact, some of them can.t be learned at all; you.re either born with them or you aren.t.
Trait #1 is the ability to buy stocks while others are panicking and sell stocks while others are euphoric. Everyone thinks they can do this, but then when October 19, 1987 comes around and the market is crashing all around you, almost no one has the stomach to buy. When the year 1999 comes around and the market is going up almost every day, you can.t bring yourself to sell because if you do, you may fall behind your peers. The vast majority of the people who manage money have MBAs and high IQs and have read a lot of books. By late 1999, all these people knew with great certainty that stocks were overvalued, and yet they couldn.t bring themselves to take money off the table because of the .institutional imperative,. as Buffett calls it.
The second character trait of a great investor is that he is obsessive about playing the game and wanting to win. These people don’t just enjoy investing; they live it. They wake up in the morning and the first thing they think about, while they.re still half asleep, is a stock they have been researching, or one of the stocks they are thinking about selling, or what the greatest risk to their portfolio is and how they.re going to neutralize that risk. They often have a hard time with personal relationships because, though they may truly enjoy other people, they don.t always give them much time. Their head is always in the clouds, dreaming about stocks. Unfortunately, you can.t learn to be obsessive about something. You either are, or you aren.t. And if you aren.t, you can.t be the next Bruce Berkowitz.
A third trait is the willingness to learn from past mistakes. The thing that is so hard for people and what sets some investors apart is an intense desire to learn from their own mistakes so they can avoid repeating them. Most people would much rather just move on and ignore the dumb things they.ve done in the past. I believe the term for this is .repression.. But if you ignore mistakes without fully analyzing them, you will undoubtedly make a similar mistake later in your career. And in fact, even if you do analyze them it.s tough to avoid repeating the same mistakes.
A fourth trait is an inherent sense of risk based on common sense. Most people know the story of Long Term Capital Management, where a team of 60 or 70 PhDs with sophisticated risk models failed to realize what, in retrospect, seemed obvious: they were dramatically overleveraged. They never stepped back and said to themselves, .Hey, even though the computer says this is ok, does it really make sense in real life?. The ability to do this is not as prevalent among human beings as you might think. I believe the greatest risk control is common sense, but people fall into the habit of sleeping well at night because the computer says they should. They ignore common sense, a mistake I see repeated over and over in the investment world.
Trait #5: Great investors have confidence in their own convictions and stick with them, even when facing criticism. Buffett never get into the dot-com mania thought he was being criticized publicly for ignoring technology stocks. He stuck to his guns when everyone else was abandoning the value investing ship and Barron.s was publishing a picture of him on the cover with the headline .What.s Wrong, Warren?. Of course, it worked out brilliantly for him and made Barron.s look like a perfect contrary indicator. Personally, I.m amazed at how little conviction most investors have in the stocks they buy. Instead of putting 20% of their portfolio into a stock, as the Kelly Formula might say to do, they.ll put 2% into it. Mathematically, using the Kelly Formula, it can be shown that a 2% position is the equivalent of betting on a stock has only a 51% chance of going up, and a 49% chance of going down. Why would you waste your time even making that bet? These guys are getting paid $1 million a year to identify stocks with a 51% chance of going up? It.s insane.
Sixth, it.s important to have both sides of your brain working, not just the left side (the side that.s good at math and organization.) In business school, I met a lot of people who were incredibly smart. But those who were majoring in finance couldn.t write worth a damn and had a hard time coming up with inventive ways to look at a problem. I was a little shocked at this. I later learned that some really smart people have only one side of their brains working, and that is enough to do very well in the world but not enough to be an entrepreneurial investor who thinks differently from the masses. On the other hand, if the right side of your brain is dominant, you probably loath math and therefore you don.t often find these people in the world of finance to begin with. So finance people tend to be very left-brain oriented and I think that.s a problem. I believe a great investor needs to have both sides turned on. As an investor, you need to perform calculations and have a logical investment thesis. This is your left brain working. But you also need to be able to do things such as judging a management team from subtle cues they give off. You need to be able to step back and take a big picture view of certain situations rather than analyzing them to death. You need to have a sense of humor and humility and common sense. And most important, I believe you need to be a good writer. Look at Buffett; he.s one of the best writers ever in the business world. It.s not a coincidence that he.s also one of the best investors of all time. If you can.t write clearly, it is my opinion that you don.t think very clearly. And if you don.t think clearly, you.re in trouble. There are a lot of people who have genius IQs who can.t think clearly, though they can figure out bond or option pricing in their heads.
And finally the most important, and rarest, trait of all: The ability to live through volatility without changing your investment thought process. This is almost impossible for most people to do; when the chips are down they have a terrible time not selling their stocks at a loss. They have a really hard time getting themselves to average down or to put any money into stocks at all when the market is going down. People don.t like shortterm pain even if it would result in better long-term results. Very few investors can handle the volatility required for high portfolio returns. They equate short-term volatility with risk. This is irrational; risk means that if you are wrong about a bet you make, you lose money. A swing up or down over a relatively short time period is not a loss and therefore not risk, unless you are prone to panicking at the bottom and locking in the loss. But most people just can.t see it that way; their brains won.t let them. Their panic instinct steps in and shuts down the normal brain function.
I would argue that none of these traits can be learned once a person reaches adulthood. By that time, your potential to be an outstanding investor later in life has already been determined. It can be honed, but not developed from scratch because it mostly has to do with the way your brain is wired and experiences you have as a child. That doesn’t mean financial education and reading and investing experience aren’t important. Those are critical just to get into the game and keep playing. But those things can be copied by anyone. The seven traits above can’t be.
Ok, I know that.s a lot of information and I want to leave time for questions so I.ll stop there.
Copyright, Mark Sellers, 2007
Also read:
Mark Sellers: So You Want To Be The Next Warren Buffett?
http://whereiszemoola.blogspot.com/2009/04/mark-sellers-so-you-want-to-be-next.html
****Stock selection for long term investors
Overview of the the market and stock selection for long term investors
The Market
There is much volatility in the market. This is due to trading activities. The majority of trades are short term trading. Trading has increased in the market due to various factors:
• Increase turnover rates of mutual funds, hedge funds, off shore funds and pension funds.
• Decrease cost of trading.
• Speed of trading facilitated by technology innovations.
• Investing institution and managers are acting more as agents rather than as investors on behave of their clients.
A minority invests based on fundamentals.
Trading can be in derivatives. The nature of derivative securities is based on price or action of another security. Trading in derivatives has too increased.
Is trading a good thing? It does increase liquidity to the market and this is good. However too much trading and speculation has its downsides. This is akin to breathing 21% Oxygen (life-sustaining) versus breathing 100% Oxygen (too much oxygen has the associated danger of spontaneous combustion).
In this market downturn, questions we have been hearing the most recently are:
The questions long term investors should ask are:
Strategies for selecting stock for the long term investor
Benjamin Graham: "Investment is best when it is business like. "
However, long term investing is not the only way to make money, there are other ways too.
These 4 strategies should aid one’s investment into equities:
1. Select the business that is long term profitable and giving good return on total capital (ROTC).
2. The business should have managers with talent and integrity in equal measures.
3. Understand the business reinvestment dynamics.
4. Pay a fair price for the business.
1. The business to invest in must make money over time.
2. Look for managers with a good balance of talent and integrity.
3. Is the company able to reinvest its money or capital at a better rate over time?
Basically, be conscious of the reinvestment dynamic of the company.
(a) There are companies giving good return on total capital and able to reinvest their capital at better incremenetal rates over time.
4. Determining the fair price to pay for the ownership of the business is important.
What about other factors?
The economy, interest rates, fuel prices, commodity prices, foreign exchange, price of gold and geopolitical situations; should not these influence your investing?
Yes, these are hugely important factors. However, they are not predictable and largely out of our control. They are not knowable in advance. It is better to distance oneself from thinking about them when assessing the business to invest in.
Therefore, the approach adopted should generally not be a top-down macroeconomic one, but a bottom-up microeconomic one. “The implication is with the passage of time, a good business over a long period of time produce results to the investor over time.”
Summary
Identify the company that is in a profitable business giving good return on total capital (ROTC).
The managers should be talented and honest, and have the interest of the shareholders.
The business should be able to reinvest capital at higher incremental rates of returns and with discipline. (Reinvestment compounding).
Also, acquire the company at fair price to ensure a fair return. Avoid paying too much for the current prospect of the company, look long term.
-----
-----
Effectively the above is the same as the QVM approach.
Quality: A good quality company has consistent and/or increasing revenue, profit, eps, and high ROE or ROC.
Value: This is dependent on the price paid to acquire the business. Using earnings yield or PE enables one to determine the fair price to pay for this business.
Management: Look for businesses where the managers have these 2 qualities in the right balance - talent and integrity.
Search out for companies with high ROE or ROTC and low PE or high earnings yield (indicating "cheapness"). Relate the ROE or ROTC to the PE or earnings yield of the business.
A fair price to pay for the business will be the price that guarantees at least a return equivalent to the returns generated by the business you invest in.
Owning a good quality company with talented and honest managers at a good price (fair or bargain price) incorporates all the elements of investing preached by Benjamin Graham, namely the safety of capital considerations, reward/risk ratio considerations and the margin of safety considerations.
Also read: ROE versus ROTC
The Market
There is much volatility in the market. This is due to trading activities. The majority of trades are short term trading. Trading has increased in the market due to various factors:
• Increase turnover rates of mutual funds, hedge funds, off shore funds and pension funds.
• Decrease cost of trading.
• Speed of trading facilitated by technology innovations.
• Investing institution and managers are acting more as agents rather than as investors on behave of their clients.
A minority invests based on fundamentals.
Trading can be in derivatives. The nature of derivative securities is based on price or action of another security. Trading in derivatives has too increased.
Is trading a good thing? It does increase liquidity to the market and this is good. However too much trading and speculation has its downsides. This is akin to breathing 21% Oxygen (life-sustaining) versus breathing 100% Oxygen (too much oxygen has the associated danger of spontaneous combustion).
In this market downturn, questions we have been hearing the most recently are:
- Is it different this time?
- How long will it last?
- Have we seen the bottom yet?
The questions long term investors should ask are:
- Are you investing in an easy to understand, wide moat and well run business?
- Does that business generate consistent cash flows and has a clean balance sheet?
- Finally, are you buying at a large discount to what the business is worth?
Strategies for selecting stock for the long term investor
Benjamin Graham: "Investment is best when it is business like. "
However, long term investing is not the only way to make money, there are other ways too.
These 4 strategies should aid one’s investment into equities:
1. Select the business that is long term profitable and giving good return on total capital (ROTC).
2. The business should have managers with talent and integrity in equal measures.
3. Understand the business reinvestment dynamics.
4. Pay a fair price for the business.
1. The business to invest in must make money over time.
- Examine how its revenues and profits are generated.
- How do its products or services contribute to the value of its business?
- What are its costs?
- Look for a business that gives good RETURN ON TOTAL CAPITAL (ROTC), not just those with high ROE.
- Be aware that high ROE can be due to taking on too much debt.
- Avoid IPOs, start-ups and venture capitals.
2. Look for managers with a good balance of talent and integrity.
- Those with integrity but lack talent are nice people to have as friends, but they may not be able to deliver good results for the business.
- Those with talent but lack integrity will harm your business and longer term investment objectives.
3. Is the company able to reinvest its money or capital at a better rate over time?
Basically, be conscious of the reinvestment dynamic of the company.
(a) There are companies giving good return on total capital and able to reinvest their capital at better incremenetal rates over time.
- Invest in these companies as they are effectively compounding your money year after year.
- This is the powerful concept of REINVESTMENT COMPOUNDING seen in some companies, best illustrated by Berkshire Hathaway. (Reinvestment Compounding)
- For example, a restaurant business may be dependent on the personal touch of the owner.
- Expanding the business to another restaurant may not generate the same return on capital.
- In such cases, the worse approach is to grow the business of the restaurant. This is unlike McDonald.
- Those investing into such businesses should understand that their RETURNS ARE FROM DIVIDENDS and from RETURN OF TOTAL CAPITAL.
- An example of this is the airline industry. AVOID such investments.
4. Determining the fair price to pay for the ownership of the business is important.
- For the outside shareholder, the investment should earn the same returns as the company’s business returns.
- If the company earns 10% or 12% or 15% per year for 5 years, the outside shareholders should likewise aim to earn a return of 10% or 12% or 15% per year for 5 years by paying a fair price.
- Paying a PE of 40 for this company may mean not earning such return as the price paid was too high.
- On the other hand, paying a PE of 10 – 15 gives the investor a better odd of getting this fair return.
- Paying a fair price for owning a business is important. The company earnings maybe as expected but then your returns failed to match these as you have paid too much to own the business.
What about other factors?
The economy, interest rates, fuel prices, commodity prices, foreign exchange, price of gold and geopolitical situations; should not these influence your investing?
Yes, these are hugely important factors. However, they are not predictable and largely out of our control. They are not knowable in advance. It is better to distance oneself from thinking about them when assessing the business to invest in.
Therefore, the approach adopted should generally not be a top-down macroeconomic one, but a bottom-up microeconomic one. “The implication is with the passage of time, a good business over a long period of time produce results to the investor over time.”
Summary
Identify the company that is in a profitable business giving good return on total capital (ROTC).
The managers should be talented and honest, and have the interest of the shareholders.
The business should be able to reinvest capital at higher incremental rates of returns and with discipline. (Reinvestment compounding).
Also, acquire the company at fair price to ensure a fair return. Avoid paying too much for the current prospect of the company, look long term.
-----
-----
Effectively the above is the same as the QVM approach.
Quality: A good quality company has consistent and/or increasing revenue, profit, eps, and high ROE or ROC.
Value: This is dependent on the price paid to acquire the business. Using earnings yield or PE enables one to determine the fair price to pay for this business.
Management: Look for businesses where the managers have these 2 qualities in the right balance - talent and integrity.
Search out for companies with high ROE or ROTC and low PE or high earnings yield (indicating "cheapness"). Relate the ROE or ROTC to the PE or earnings yield of the business.
A fair price to pay for the business will be the price that guarantees at least a return equivalent to the returns generated by the business you invest in.
Owning a good quality company with talented and honest managers at a good price (fair or bargain price) incorporates all the elements of investing preached by Benjamin Graham, namely the safety of capital considerations, reward/risk ratio considerations and the margin of safety considerations.
Also read: ROE versus ROTC
Monday, 20 April 2009
Intelligent Investor Chapter 20: Margin of Safety as the Central Concept of Investment
Chapter 20: Margin of Safety as the Central Concept of Investment
Graham distills the secret of successful investment into building a “Margin of Safety” into each and every investment.
What is a margin of safety?
It is coming up with a valuation of the underlying business, and then paying less! Warren Buffett describes this as building a bridge that can carry 30,000 pounds, and then only driving 10,000 pound trucks across it. Know the value, then pay less, and don’t cut it close!
How does one do this?
Graham distills the secret of successful investment into building a “Margin of Safety” into each and every investment.
What is a margin of safety?
It is coming up with a valuation of the underlying business, and then paying less! Warren Buffett describes this as building a bridge that can carry 30,000 pounds, and then only driving 10,000 pound trucks across it. Know the value, then pay less, and don’t cut it close!
How does one do this?
Here are some key points:
- Not overpaying for a security just because it is the latest market darling
- Buying good companies that are undervalued
- Diversifying across multiple companies and industries
- Having a portfolio that is both bonds and stocks and reviewing the allocation at regular intervals (not every time the market seems to be throwing a fit)
- Having the courage to buy even when the market is saying something else.
- Having the courage to ignore the daily market fluctuations and hold on to the investment until the underlying fundamentals change Recognizing that it is better to be safe and careful than to take risks in an effort to earn above-average returns
Intelligent Investor Chapter 8: The Investor and Market Fluctuations
Chapter 8: The Investor and Market Fluctuations
An investor must prepare both financially and psychologically for the fluctuations certain to occur in the market.
There are two ways an investor tries to profit from fluctuations:
1. Timing: Buy when you think the price will go up, and then sell once it goes up.
2. Pricing: Buy when the price is below fair value and sell once it reaches or exceeds fair value.
Consistent market timing is exceptionally difficult, as is evident by the countless market predictions and forecasts by industry professionals that differ from actual events by a wide margin. The variety of these predictions is great enough that an investor can make any move he chooses and find a prediction that supports this move.
Graham goes so far as to say it is absurd to think that the general public can ever make money out of market forecasting. There is no basis in logic or history to believe otherwise.
With regard to the pricing approach, Graham says that this is also extremely difficult to properly execute. Cycles often last for 5 years or more which causes people to lose their nerve and act irrationally. For example, in a prolonged bull market, people may fear being left behind, so they buy at the slightest indication of a bear market, feel vindicated as the prices escalate further, and then lose when the real bear market returns.
Also, any signals identified by experts to help determine whether this is a bear or bull market have been shown to be inconsistent in successfully identifying the position in the market cycle.
Conclusion: If you are banking on market fluctuations, you will not consistently perform well. Market fluctuations are not sound portfolio policy!
The intelligent investor uses a formulaic approach to determine whether stock prices have risen too high and he should sell, or prices have dropped significantly, and he should buy. Or, in other words, if he should alter the allocation of stocks to bonds in his portfolio (as per the tactical asset allocation policy that Graham discusses in previous chapters). The ideal approach is the rebalancing approach discussed in previous chapters (varying from 50-50 allocation to up to 75-25, and reviewing at set intervals throughout the year).
Business Valuation and Stock-Market Valuation
The stock market is paradoxical in that the highest grade stocks are often the most speculative because they gain great premiums over book value and are based more on the changing moods of the market and its confidence in the premium valuation it had put on the company in the first place. Thus, for conservative investors, they would be best to focus on companies with relatively low premiums placed upon them - a market rate no more than 1/3 above the net tangible-asset value.
However, a stock does not become sound because it can be bought close to asset value. The intelligent investor must also demand a satisfactory price-earnings ratio, sufficiently strong financial position, and the prospect of earnings being maintained over the years.
Intelligent Investors with portfolios close to the net tangible asset valuation of the underlying companies need worry less about stock market fluctuations than those who paid high multiples of earnings and assets. The intelligent investor should disregard the market price and not allow the mistakes that the market will make in its valuation to affect his feelings about the business. Do not let the market’s madness fool you into selling your shares at a loss - such a move requires reasoned judgment independent of the market price.
It is in this chapter that Graham creates the oft-cited Parable of Mr. Market. Essentially, you area private business owner. You own a share that you purchased for $1,000. Your partner is Mr. Market. Every day, Mr. Market quotes you a price for your interest and also offers to sell you his interest for the same price. Sometimes the quote is rationally connected with the business. On other days, it is clear that Mr. Market’s enthusiasm or fear has gotten to him, and the value he has placed is irrational. Graham says the Intelligent Investor would only let Mr. Market’s daily quote affect him if the Intelligent Investor agrees with the price (due to his own analysis of the value of the company), or he wants to buy from or sell to Mr. Market. Unless you want to transact with Mr. Market, you would be wiser to make your own analysis of the value of the company. If you want to transact, then you must compare Mr. Market’s value to the value you reached independently. This parable reflects the way a stock market investor should treat his relationship with the stock market.
An investor must prepare both financially and psychologically for the fluctuations certain to occur in the market.
There are two ways an investor tries to profit from fluctuations:
1. Timing: Buy when you think the price will go up, and then sell once it goes up.
2. Pricing: Buy when the price is below fair value and sell once it reaches or exceeds fair value.
Consistent market timing is exceptionally difficult, as is evident by the countless market predictions and forecasts by industry professionals that differ from actual events by a wide margin. The variety of these predictions is great enough that an investor can make any move he chooses and find a prediction that supports this move.
Graham goes so far as to say it is absurd to think that the general public can ever make money out of market forecasting. There is no basis in logic or history to believe otherwise.
With regard to the pricing approach, Graham says that this is also extremely difficult to properly execute. Cycles often last for 5 years or more which causes people to lose their nerve and act irrationally. For example, in a prolonged bull market, people may fear being left behind, so they buy at the slightest indication of a bear market, feel vindicated as the prices escalate further, and then lose when the real bear market returns.
Also, any signals identified by experts to help determine whether this is a bear or bull market have been shown to be inconsistent in successfully identifying the position in the market cycle.
Conclusion: If you are banking on market fluctuations, you will not consistently perform well. Market fluctuations are not sound portfolio policy!
The intelligent investor uses a formulaic approach to determine whether stock prices have risen too high and he should sell, or prices have dropped significantly, and he should buy. Or, in other words, if he should alter the allocation of stocks to bonds in his portfolio (as per the tactical asset allocation policy that Graham discusses in previous chapters). The ideal approach is the rebalancing approach discussed in previous chapters (varying from 50-50 allocation to up to 75-25, and reviewing at set intervals throughout the year).
Business Valuation and Stock-Market Valuation
The stock market is paradoxical in that the highest grade stocks are often the most speculative because they gain great premiums over book value and are based more on the changing moods of the market and its confidence in the premium valuation it had put on the company in the first place. Thus, for conservative investors, they would be best to focus on companies with relatively low premiums placed upon them - a market rate no more than 1/3 above the net tangible-asset value.
However, a stock does not become sound because it can be bought close to asset value. The intelligent investor must also demand a satisfactory price-earnings ratio, sufficiently strong financial position, and the prospect of earnings being maintained over the years.
Intelligent Investors with portfolios close to the net tangible asset valuation of the underlying companies need worry less about stock market fluctuations than those who paid high multiples of earnings and assets. The intelligent investor should disregard the market price and not allow the mistakes that the market will make in its valuation to affect his feelings about the business. Do not let the market’s madness fool you into selling your shares at a loss - such a move requires reasoned judgment independent of the market price.
It is in this chapter that Graham creates the oft-cited Parable of Mr. Market. Essentially, you area private business owner. You own a share that you purchased for $1,000. Your partner is Mr. Market. Every day, Mr. Market quotes you a price for your interest and also offers to sell you his interest for the same price. Sometimes the quote is rationally connected with the business. On other days, it is clear that Mr. Market’s enthusiasm or fear has gotten to him, and the value he has placed is irrational. Graham says the Intelligent Investor would only let Mr. Market’s daily quote affect him if the Intelligent Investor agrees with the price (due to his own analysis of the value of the company), or he wants to buy from or sell to Mr. Market. Unless you want to transact with Mr. Market, you would be wiser to make your own analysis of the value of the company. If you want to transact, then you must compare Mr. Market’s value to the value you reached independently. This parable reflects the way a stock market investor should treat his relationship with the stock market.
Sunday, 19 April 2009
What will it take to become a multi-millionaire?
What will it take to become a millionaire?
Interesting calculator to help set one's goal.
http://partners.leadfusion.com/tools/motleyfool/savings01/tool.fcs
INPUT
Current age
Desired age to be a millionaire
Amount you have invested
$
Amount you can save monthly
$
Your savings rate
%
Your federal tax rate
%
Your state tax rate
%
Inflation rate
%
RESULTS
If you invest $50,000 now and $500 monthly at 6.00%, you'll be a millionaire in 44 years at age 81.
To be a millionaire at age 65, you'll need to:
Increase the amount you invest now to $218,691 , or
Increase your monthly investment to $1,344 , or
Achieve a rate of return of 11.17%.
When adjusted for inflation, $1 million in 44 years would be equivalent to $277,174 today.
GRAPHS
Interesting calculator to help set one's goal.
http://partners.leadfusion.com/tools/motleyfool/savings01/tool.fcs
INPUT
Current age
Desired age to be a millionaire
Amount you have invested
$
Amount you can save monthly
$
Your savings rate
%
Your federal tax rate
%
Your state tax rate
%
Inflation rate
%
RESULTS
If you invest $50,000 now and $500 monthly at 6.00%, you'll be a millionaire in 44 years at age 81.
To be a millionaire at age 65, you'll need to:
Increase the amount you invest now to $218,691 , or
Increase your monthly investment to $1,344 , or
Achieve a rate of return of 11.17%.
When adjusted for inflation, $1 million in 44 years would be equivalent to $277,174 today.
GRAPHS
Alice Schroeder, author of "The Snowball: Warren Buffett and the Business of Life".
Value Investing Conference 2008 #5
Keynote: Alice Schroeder, author of "The Snowball: Warren Buffett and the Business of Life". Introductory remarks by John Macfarlane.
Fear Is Your Friend
Fear Is Your Friend
By Andrew Sullivan, CFA April 17, 2009 Comments (1)
Warren Buffett said back in October that he was buying U.S. stocks. In his widely publicized editorial in the New York Times, he didn't seem all that concerned about our ailing economy. And in times past, he's been right. But since October:
- The U.S. consumer confidence index hit three consecutive all-time lows.
- Trade activity has collapsed, with shipping rates from Asia to Europe hitting zero for the first time ever.
- Citigroup (NYSE: C) was brought to its knees -- its shares falling 75% since Buffett's article.
- The weak economy pummeled energy prices along with bellwethers like ExxonMobil (NYSE: XOM).
That's scary news, but I'd imagine Mr. Buffett is aware of all of the above. Yet the world's smartest investor is probably still buying. What the heck is he thinking? Isn't he concerned about the ongoing banking crisis, trillion-dollar bailouts, and skyrocketing unemployment? How could he see opportunity in a time like this?
Looking into the future
Buffett is buying because he can see the future. He can see the future not because he secretly spent a billion dollars to construct H. G. Wells' time machine in his basement. Nor did he hire Google to build an algorithm that can predict the future. His smarts are based on a simple way of viewing the markets and valuing businesses that anyone can grasp.
Buffett realizes that you buy stocks for the future, not the present. When you buy a share, you should do so with thoughts of owning that business for decades, not just the next few years. He also knows that the driving impulse of a capitalist society is to grow. Armed with this knowledge, he bought stocks like PetroChina (NYSE: PTR), Coca Cola (NYSE: KO), and The Washington Post when no one wanted them, and made quite a killing at it -- with his Berkshire Hathaway-fueled personal fortune worth $62 billion dollars at last count.
Buffett really does see the future.
And the future he sees now is drastically different from what the pundits would have you believe. Buffett sees a future in which banks function on their own, in which the U.S. innovates, in which the economy grows, and in which stocks are valued based on normal growth prospects.
Fear is your friend
When you take this sort of long-term view, the horrific market indicators above are actually your friends because they lower prices of the stocks you are interested in. Fear is your buddy. Doom and gloom are close pals. Economic devastation is your friend. In fact, you should want the market to freak out because there is no other easy way to get a fantastic price for a business. Of course, I'm speaking in an investing sense -- obviously a recession is no fun on a day-to-day basis. But fortunes are built in times like these.
Why should you care about a few years of poor results if someone is willing to sell you that business for a song? In two or three years, you could be sitting pretty while the seller will be left with only remorse.
But of course, we want to be choosy with our investments in these turbulent times, so we suggest you focus on:
- Companies with good track records (earnings per share growth, return on equity)
- Companies with strong balance sheets (low debt-to-equity ratios)
- Companies highly rated by the Motley Fool CAPS community (four stars or better, out of five)
- I fired up the handy CAPS screening tool and found 86 companies with at least a $5 billion market cap, long-term debt-to-equity under 50%, an EPS growth rate of 10%, and return on equity above 20%.
Here are three results I find interesting:
Company Name
CAPS Rating (out of 5)
Market Capitalization ($B)
LT Debt-to-Equity Ratio
EPS Growth Rate (last 3 Yrs)
Return on Equity (TTM)
Becton, Dickinson & Company (NYSE: BDX)
*****
16.3
16%
16%
25%
ITT (NYSE: ITT)
*****
7.6
15%
31%
26%
Abbott Laboratories (NYSE: ABT)
****
67.6
50%
20%
28%
At our Motley Fool Inside Value service, we spend every day ignoring the market panic and searching for the stocks that nobody wants, but that offer significant upside potential. We constantly evaluate businesses based on their future prospects in a normal world rather than in the scary present.
Andrew Sullivan has no financial interest in any of the stocks mentioned in this article. The Motley Fool has a disclosure policy. Coca-Cola is a Motley Fool Inside Value and a Motley Fool Income Investor selection. ITT is a Motley Fool Inside Value pick.
http://www.fool.com/investing/value/2009/04/17/fear-is-your-friend.aspx
Mary Buffett - Warren Buffett and Long-Term Investing
She has written a few simple books. Well worth buying.
****Value Investing Conference (Videos)
Value Investing Conference 2008
"Introduction to Value Investing"
"Developments in the Investments Industry" - Panelists discuss the current financial crisis, its implications for investors, for value investing, and for the future of the hedge fund industry.
"Navigator of the Year" Award
"The Psychology of Human Misjudgement and Our Best Idea
Keynote: Alice Schroeder, author of "The Snowball: Warren Buffett and the Business of Life". Introductory remarks by John Macfarlane.
"How To Get Fired As a Pension Fund Manager" - Prominent money managers discuss where they find value and why these underexplored areas are often less popular with institutional investors.
"A Casual Talk with Two Guys from Richmond" - The interplay and overlap between the worlds of investing in business and managing businesses from the perspective of two areas that have demonstrated ...
"A Funnel of International Value" - From the global mega cap companies to the regional mid cap companies to the national smaller cap companies, these global investors take you on an international q...
"Hidden Values" - From a macro and micro perspective, three industry leaders examine how to capitalize on variant perceptions via portfolio bets.
"Groundhog Day +1" - The subprime crisis has occured, what's next and how that impacts a value portfolio.
Closing Remarks & presentation: "Does the Implosion of the Shadow Banking System Give Classic Investing a Second Wind?"
"Introduction to Value Investing"
"Developments in the Investments Industry" - Panelists discuss the current financial crisis, its implications for investors, for value investing, and for the future of the hedge fund industry.
"Navigator of the Year" Award
"The Psychology of Human Misjudgement and Our Best Idea
Keynote: Alice Schroeder, author of "The Snowball: Warren Buffett and the Business of Life". Introductory remarks by John Macfarlane.
"How To Get Fired As a Pension Fund Manager" - Prominent money managers discuss where they find value and why these underexplored areas are often less popular with institutional investors.
"A Casual Talk with Two Guys from Richmond" - The interplay and overlap between the worlds of investing in business and managing businesses from the perspective of two areas that have demonstrated ...
"A Funnel of International Value" - From the global mega cap companies to the regional mid cap companies to the national smaller cap companies, these global investors take you on an international q...
"Hidden Values" - From a macro and micro perspective, three industry leaders examine how to capitalize on variant perceptions via portfolio bets.
"Groundhog Day +1" - The subprime crisis has occured, what's next and how that impacts a value portfolio.
Closing Remarks & presentation: "Does the Implosion of the Shadow Banking System Give Classic Investing a Second Wind?"
Citigroup Q1 results top Wall Street forecasts
Citigroup Q1 results top Wall Street forecasts
By Madlen Read, AP Business Writer
NEW YORK — Citigroup's(C) problems are far from over, but Friday it reported its smallest quarterly loss since 2007.
The bank released first-quarter results Friday that were buoyed largely by strong revenues from bond trading, but that burst of activity is not expected to continue. And Citigroup also said it's still facing loan losses that are expected to increase throughout this year.
Citigroup became the fourth bank in a week with earnings news that pointed toward a recovery in the banking industry after the devastation caused by the mortgage and credit crisis and the recession. But the outlook for the industry is still difficult because the global recession is causing defaults in mortgages, credit cards and commercial real estate loans
Chief Financial Officer Ned Kelly said in a conference call with investors that certain consumer delinquency rates have been moderated, but he still expects loan losses to worsen before they improve.
"The elephant hasn't made its way through the python," Kelly said.
The bank posted a first-quarter loss to common shareholders of $966 million after massive loan losses and dividends to preferred stockholders. However, before paying those dividends, which were tied to the government's investment in Citigroup, the bank earned $1.6 billion.
Citigroup's results topped analyst forecasts. The company reported a loss per share of 18 cents, which was narrower than the 34 cents analysts predicted, according to Thomson Reuters. A year ago, Citigroup suffered a loss of more than $5 billion, or $1.03 a share.
Separately, Citigroup said Friday it is delaying the government's exchange of billions of dollars worth of preferred shares into common shares until the government completes its "stress test." The government has been gauging the health of U.S. banks, and the results are expected in early May.
Citigroup's revenue doubled in the first quarter from a year ago to $24.8 billion thanks to strong trading activity in its investment bank. Its credit costs were high, though — at $10 billion — due to $7.3 billion in loan losses and a $2.7 billion increase in reserves for future loan losses.
Citigroup has been the weakest of the large U.S. banks, posting quarterly losses since the fourth quarter of 2007. But in March, CEO Vikram Pandit triggered a stock market rally after he said that January and February had been profitable for Citigroup.
Citigroup's better-than-expected report on Friday came after surprisingly solid earnings from JPMorgan Chase, Goldman Sachs Group, and Wells Fargo over the past several days. While recent results from these healthier banks have brought some relief to investors, many have been waiting to see how more troubled banks such as Citigroup have fared.
Pandit said in a statement Friday that he was "pleased" with Citigroup's performance.
"While we and the industry face challenges in the coming quarters as we work through the weak economy, we will remain focused on strengthening the Citi franchise," he said.
One concern among investors is that the strong trading activity seen by banks in the first quarter was a one-time event — the first quarter saw a surge in corporate bond issuance as the credit markets started thawing from 2008's frozen fourth quarter. Even JPMorgan CEO Jamie Dimon acknowledged Thursday that trading activity is unlikely to remain so robust.
The question is whether banks like Citigroup can find other ways to offset loan losses, which nearly all economists and bankers agree will keep rising throughout the year as the unemployment rate ticks higher. The global recession is causing defaults in mortgages, credit cards and commercial real estate loans — and Citigroup is heavily exposed to all of these.
In early March, Citigroup stock hit an all-time low of 97 cents per share. It has since quadrupled, but remains down 40% for 2009. And at $4.01 a share Thursday, Citigroup stock was down 93% from its late 2006 peak.
Since late 2007, Citigroup has gotten a new CEO, a new chairman, and a new structure that splits its traditional retail and investment banking business from its consumer finance units, asset management, and risky mortgage-related assets. It's also been downsizing by selling off businesses and laying off a fifth of its employees. And it's gotten $45 billion in government funding and a federal backstop on roughly $300 billion in assets.
http://www.usatoday.com/money/companies/earnings/2009-04-17-citi_N.htm
By Madlen Read, AP Business Writer
NEW YORK — Citigroup's(C) problems are far from over, but Friday it reported its smallest quarterly loss since 2007.
The bank released first-quarter results Friday that were buoyed largely by strong revenues from bond trading, but that burst of activity is not expected to continue. And Citigroup also said it's still facing loan losses that are expected to increase throughout this year.
Citigroup became the fourth bank in a week with earnings news that pointed toward a recovery in the banking industry after the devastation caused by the mortgage and credit crisis and the recession. But the outlook for the industry is still difficult because the global recession is causing defaults in mortgages, credit cards and commercial real estate loans
Chief Financial Officer Ned Kelly said in a conference call with investors that certain consumer delinquency rates have been moderated, but he still expects loan losses to worsen before they improve.
"The elephant hasn't made its way through the python," Kelly said.
The bank posted a first-quarter loss to common shareholders of $966 million after massive loan losses and dividends to preferred stockholders. However, before paying those dividends, which were tied to the government's investment in Citigroup, the bank earned $1.6 billion.
Citigroup's results topped analyst forecasts. The company reported a loss per share of 18 cents, which was narrower than the 34 cents analysts predicted, according to Thomson Reuters. A year ago, Citigroup suffered a loss of more than $5 billion, or $1.03 a share.
Separately, Citigroup said Friday it is delaying the government's exchange of billions of dollars worth of preferred shares into common shares until the government completes its "stress test." The government has been gauging the health of U.S. banks, and the results are expected in early May.
Citigroup's revenue doubled in the first quarter from a year ago to $24.8 billion thanks to strong trading activity in its investment bank. Its credit costs were high, though — at $10 billion — due to $7.3 billion in loan losses and a $2.7 billion increase in reserves for future loan losses.
Citigroup has been the weakest of the large U.S. banks, posting quarterly losses since the fourth quarter of 2007. But in March, CEO Vikram Pandit triggered a stock market rally after he said that January and February had been profitable for Citigroup.
Citigroup's better-than-expected report on Friday came after surprisingly solid earnings from JPMorgan Chase, Goldman Sachs Group, and Wells Fargo over the past several days. While recent results from these healthier banks have brought some relief to investors, many have been waiting to see how more troubled banks such as Citigroup have fared.
Pandit said in a statement Friday that he was "pleased" with Citigroup's performance.
"While we and the industry face challenges in the coming quarters as we work through the weak economy, we will remain focused on strengthening the Citi franchise," he said.
One concern among investors is that the strong trading activity seen by banks in the first quarter was a one-time event — the first quarter saw a surge in corporate bond issuance as the credit markets started thawing from 2008's frozen fourth quarter. Even JPMorgan CEO Jamie Dimon acknowledged Thursday that trading activity is unlikely to remain so robust.
The question is whether banks like Citigroup can find other ways to offset loan losses, which nearly all economists and bankers agree will keep rising throughout the year as the unemployment rate ticks higher. The global recession is causing defaults in mortgages, credit cards and commercial real estate loans — and Citigroup is heavily exposed to all of these.
In early March, Citigroup stock hit an all-time low of 97 cents per share. It has since quadrupled, but remains down 40% for 2009. And at $4.01 a share Thursday, Citigroup stock was down 93% from its late 2006 peak.
Since late 2007, Citigroup has gotten a new CEO, a new chairman, and a new structure that splits its traditional retail and investment banking business from its consumer finance units, asset management, and risky mortgage-related assets. It's also been downsizing by selling off businesses and laying off a fifth of its employees. And it's gotten $45 billion in government funding and a federal backstop on roughly $300 billion in assets.
http://www.usatoday.com/money/companies/earnings/2009-04-17-citi_N.htm
Ireland's pain begins
Ireland's pain begins
Once the 'best place to live in the world', Ireland is haunted by the spectre of bread queues as public services are slashed
Mary Fitzgerald guardian.co.uk, Friday 10 April 2009 11.30 BST
For a country that was enjoying roaring growth just a few years ago, the outlook for Ireland is now shockingly bleak. The number of unemployed is expected to reach 450,000 by the end of the year, which, in a country of only 4 million, is staggering. Privately, financial experts say that Taoiseach Brian Cowen's prediction of a 10% drop in living standards is "a dream" – the reality is likely to be closer to 30%. Of those still in jobs, nine out of 10 have taken pay cuts to keep them. It's all beginning to look "quite 1930s", as one friend observed: dole queues have quadrupled and April saw the first bread queues in Dublin for more than 20 years.
Just as in Britain and the US, there is outrage at the bonuses paid to the chairmen of banks bailed out by the government. Unlike anywhere else, though, the government seems to be blaming its own citizens for the crisis, and punishing them for it. Tapping into old Catholic traditions of guilt and penance, it's pushing a message of "collective guilt". Society has overindulged and must now pay the price, or so the logic goes, and so finance minister Brian Lenihan framed his emergency budget earlier this week as "a call to patriotic action".
What it is, in reality, is a cynical cutback on vital public services – at a time when they are more likely to be needed than ever. In an attempt to balance its books, the government aims to shed €6.6bn from the public purse by 2011, including some €725m earmarked for badly needed road projects, €81m from the education budget and €62m from the Department of Health's budget. Even services that, in a recession, will be relied upon more than ever, face cuts.
Peter McVerry, who runs a Dublin-based trust for homeless people, says that the government's kneejerk reaction of "indiscriminate, slash and burn cutbacks" amounts to little more than an outright attack on the poor. The decision to halve jobseeker's allowance for the under-20s was particularly brutal, as McVerry points out, given the rampant inflation of the past decade, a young homeless person "just cannot survive on just €100 a week".
The government is making a big show of practising the austerity that it preaches, culling the number of junior cabinet ministers and announcing pay cuts for those remaining. Yet, despite the protests from some quarters against "taxation with a vengeance", the truth is that Lenihan's budget increases taxes on the rich only marginally. In short, those who did well from the boom are not being made to pay for its consequences.
"The real pain of political self-interest, incompetence, negligence and laziness will be kept clear of those who have left the Irish economy so unprepared for the severe global slowdown that is forecast in 2009," predicts Michael Hennigan, founder and editor of Finfacts.ie.
Worse still, the government has squandered many of the opportunities afforded during the good years to reinvest in the country. Although average incomes have risen, little has been done to pull the generational poor out of poverty. Just minutes from the sleek new Smithfield development in north Dublin, with its organic shops and crisp new apartments, lies the Devaney housing project, where many windows and doors are boarded up and shops are Portakabins with bars on their windows and doors. Some of the apartment blocks have been demolished and local authorities have been promising for years to redevelop the estate, but there is as yet no sign of this, and families still live in appalling conditions. Scenes like these, familiar in all of Ireland's cities, stand at sharp odds with the official brand image of a country judged by The Economist in 2004 to be the "best place to live in the world".
Unlike in previous generations, the Irish cannot blame their problems on anyone else now: this is their own mess – and they will have to fix it. They could start by electing a new government.
http://www.guardian.co.uk/commentisfree/2009/apr/09/globalrecession-banking
Once the 'best place to live in the world', Ireland is haunted by the spectre of bread queues as public services are slashed
Mary Fitzgerald guardian.co.uk, Friday 10 April 2009 11.30 BST
For a country that was enjoying roaring growth just a few years ago, the outlook for Ireland is now shockingly bleak. The number of unemployed is expected to reach 450,000 by the end of the year, which, in a country of only 4 million, is staggering. Privately, financial experts say that Taoiseach Brian Cowen's prediction of a 10% drop in living standards is "a dream" – the reality is likely to be closer to 30%. Of those still in jobs, nine out of 10 have taken pay cuts to keep them. It's all beginning to look "quite 1930s", as one friend observed: dole queues have quadrupled and April saw the first bread queues in Dublin for more than 20 years.
Just as in Britain and the US, there is outrage at the bonuses paid to the chairmen of banks bailed out by the government. Unlike anywhere else, though, the government seems to be blaming its own citizens for the crisis, and punishing them for it. Tapping into old Catholic traditions of guilt and penance, it's pushing a message of "collective guilt". Society has overindulged and must now pay the price, or so the logic goes, and so finance minister Brian Lenihan framed his emergency budget earlier this week as "a call to patriotic action".
What it is, in reality, is a cynical cutback on vital public services – at a time when they are more likely to be needed than ever. In an attempt to balance its books, the government aims to shed €6.6bn from the public purse by 2011, including some €725m earmarked for badly needed road projects, €81m from the education budget and €62m from the Department of Health's budget. Even services that, in a recession, will be relied upon more than ever, face cuts.
Peter McVerry, who runs a Dublin-based trust for homeless people, says that the government's kneejerk reaction of "indiscriminate, slash and burn cutbacks" amounts to little more than an outright attack on the poor. The decision to halve jobseeker's allowance for the under-20s was particularly brutal, as McVerry points out, given the rampant inflation of the past decade, a young homeless person "just cannot survive on just €100 a week".
The government is making a big show of practising the austerity that it preaches, culling the number of junior cabinet ministers and announcing pay cuts for those remaining. Yet, despite the protests from some quarters against "taxation with a vengeance", the truth is that Lenihan's budget increases taxes on the rich only marginally. In short, those who did well from the boom are not being made to pay for its consequences.
"The real pain of political self-interest, incompetence, negligence and laziness will be kept clear of those who have left the Irish economy so unprepared for the severe global slowdown that is forecast in 2009," predicts Michael Hennigan, founder and editor of Finfacts.ie.
Worse still, the government has squandered many of the opportunities afforded during the good years to reinvest in the country. Although average incomes have risen, little has been done to pull the generational poor out of poverty. Just minutes from the sleek new Smithfield development in north Dublin, with its organic shops and crisp new apartments, lies the Devaney housing project, where many windows and doors are boarded up and shops are Portakabins with bars on their windows and doors. Some of the apartment blocks have been demolished and local authorities have been promising for years to redevelop the estate, but there is as yet no sign of this, and families still live in appalling conditions. Scenes like these, familiar in all of Ireland's cities, stand at sharp odds with the official brand image of a country judged by The Economist in 2004 to be the "best place to live in the world".
Unlike in previous generations, the Irish cannot blame their problems on anyone else now: this is their own mess – and they will have to fix it. They could start by electing a new government.
http://www.guardian.co.uk/commentisfree/2009/apr/09/globalrecession-banking
Divorce is a financial catastrophe
How to prevent 'I do' turning into 'I don't'
Divorce is a financial catastrophe and some couples are more at risk than others. A leading lawyer explains why 'pre-nups' may have a role to play.
By Jane Keir
Last Updated: 3:26PM BST 18 Apr 2009
The Office for National Statistics (ONS) tells us that in 2007 the average age of those divorcing in England and Wales was nearly 44 for men and just over 41 for women. What really catches the eye, however, is that, of those divorces, one in five had a previous marriage end in divorce – a proportion that has doubled since 1980.
So why are second marriages more vulnerable? The answer may lie in trying to align emotional and romantic expectations for one another, while at the same time recognising the financial needs, responsibilities and priorities with regard to the children of each previous relationship.
Children who may already have experienced the seismic upheaval of the separation and divorce of their parents may now dread and therefore oppose, consciously or otherwise, the refocusing of the attention and love of one or both of their parents on a newcomer.
Parents will usually strive to ensure that the development of a new relationship moves at a pace with which the children can cope, but they often overlook the financial consequences of remarriage.
EXAMPLES OF POTENTIAL COMPLICATIONS
1. When a father is committed to funding the full cost of private education for his children in circumstances where they may still have several years to go before the end of secondary education and whose second wife-to-be has similar aspirations, but not the financial means, for her children who are living with them.
2. When a couple, whose children are older and no longer living at home, both have their own properties and she invites him to move in with her, sell his property and live off of the sale proceeds.
The prospects arising from the situations above may be enough to put the brakes on remarriage or lead to very substantial reluctance perhaps to even live together, unless there is good – and even brave – communication between them so they can talk through their concerns.
Family law is not all about divorce and separation. Many solicitors are spending an increasing amount of time looking at premarital contracts (more commonly known as ''pre-nups'') which are often given a hard time in the media as being "unromantic'' and viewed as some sort of self-fulfilling prophecy.
The reality is that the preparation of such a contract requires a couple to sit down and take a long, hard look at what they have in the way of financial resources and how they should organise them. For those marrying for a second time such an exercise – not necessarily negotiating a premarital contract, but talking together about what they both have and what they want to achieve – may take away a lot of the heartache, angst and even mistrust that builds up where there is a problem, but no willingness or even ability to talk about it.
Take the father in example one who wishes to preserve a large part of his income to pay school fees. The couple might find out that, by combining their respective resources and running one household rather than two, that it is possible. They might also agree that, were he to die before the children finish school, then he will nominate some part of his death in service benefits to ensure that there is sufficient in the pot to enable the rest of the school fees to be paid. Thus, in the event of his early death, his second wife knows exactly where she stands and there is no danger of expensive and stressful litigation with the "first family''.
In example two, the couple may agree to transfer the wife's property into joint names after they marry (but not necessarily into equal shares if her property is worth considerably more than his) and to prepare new wills. The preparation of new wills not only addresses the question of who gets what upon death but also, like the work that goes into the preparation of a premarital contract, it requires both parties to take a considered look at their respective finances and to work out what they want to happen.
The added advantage to the process is that they may well discover that there are steps they can be taking now to maximise and protect their wealth, for example, by using their lifetime allowances and rebalancing the risk of both inheritance tax and capital gains tax (CGT) liabilities. Or they might agree to rent out his property, so that they can enjoy the income it generates (albeit that the rent is likely to be subject to income tax and possibly a charge to CGT if sold during his lifetime, so that they may still need to review whether she should give him a share in her property).
The preparation of new wills may also help to mollify older children concerned at the prospect of "their'' inheritance moving away from them to a new stepmother/father. Of course, children have no absolute right to inherit in England and Wales – in contrast to some other European jurisdictions – as apart from an obligation to provide for "dependants'' – that is, people financially dependant on a person at the time of his death – anyone may leave his estate to whomever or whatever he likes, or spend it all entirely in his lifetime.
Jane Keir is a partner and head of family law at Kingsley Napley
http://www.telegraph.co.uk/finance/personalfinance/consumertips/5178027/How-to-prevent-I-do-turning-into-I-dont.html
Related Articles
'Catastrophe cover' aims to quell fear of the big C
Nationalisation spooks Northern Rock shares
Beware the online lawyer - uncoupling in haste may mean repenting at leisure
How to survive a divorce
Pre-nuptial agreements on the rise
Divorce is a financial catastrophe and some couples are more at risk than others. A leading lawyer explains why 'pre-nups' may have a role to play.
By Jane Keir
Last Updated: 3:26PM BST 18 Apr 2009
The Office for National Statistics (ONS) tells us that in 2007 the average age of those divorcing in England and Wales was nearly 44 for men and just over 41 for women. What really catches the eye, however, is that, of those divorces, one in five had a previous marriage end in divorce – a proportion that has doubled since 1980.
So why are second marriages more vulnerable? The answer may lie in trying to align emotional and romantic expectations for one another, while at the same time recognising the financial needs, responsibilities and priorities with regard to the children of each previous relationship.
Children who may already have experienced the seismic upheaval of the separation and divorce of their parents may now dread and therefore oppose, consciously or otherwise, the refocusing of the attention and love of one or both of their parents on a newcomer.
Parents will usually strive to ensure that the development of a new relationship moves at a pace with which the children can cope, but they often overlook the financial consequences of remarriage.
EXAMPLES OF POTENTIAL COMPLICATIONS
1. When a father is committed to funding the full cost of private education for his children in circumstances where they may still have several years to go before the end of secondary education and whose second wife-to-be has similar aspirations, but not the financial means, for her children who are living with them.
2. When a couple, whose children are older and no longer living at home, both have their own properties and she invites him to move in with her, sell his property and live off of the sale proceeds.
The prospects arising from the situations above may be enough to put the brakes on remarriage or lead to very substantial reluctance perhaps to even live together, unless there is good – and even brave – communication between them so they can talk through their concerns.
Family law is not all about divorce and separation. Many solicitors are spending an increasing amount of time looking at premarital contracts (more commonly known as ''pre-nups'') which are often given a hard time in the media as being "unromantic'' and viewed as some sort of self-fulfilling prophecy.
The reality is that the preparation of such a contract requires a couple to sit down and take a long, hard look at what they have in the way of financial resources and how they should organise them. For those marrying for a second time such an exercise – not necessarily negotiating a premarital contract, but talking together about what they both have and what they want to achieve – may take away a lot of the heartache, angst and even mistrust that builds up where there is a problem, but no willingness or even ability to talk about it.
Take the father in example one who wishes to preserve a large part of his income to pay school fees. The couple might find out that, by combining their respective resources and running one household rather than two, that it is possible. They might also agree that, were he to die before the children finish school, then he will nominate some part of his death in service benefits to ensure that there is sufficient in the pot to enable the rest of the school fees to be paid. Thus, in the event of his early death, his second wife knows exactly where she stands and there is no danger of expensive and stressful litigation with the "first family''.
In example two, the couple may agree to transfer the wife's property into joint names after they marry (but not necessarily into equal shares if her property is worth considerably more than his) and to prepare new wills. The preparation of new wills not only addresses the question of who gets what upon death but also, like the work that goes into the preparation of a premarital contract, it requires both parties to take a considered look at their respective finances and to work out what they want to happen.
The added advantage to the process is that they may well discover that there are steps they can be taking now to maximise and protect their wealth, for example, by using their lifetime allowances and rebalancing the risk of both inheritance tax and capital gains tax (CGT) liabilities. Or they might agree to rent out his property, so that they can enjoy the income it generates (albeit that the rent is likely to be subject to income tax and possibly a charge to CGT if sold during his lifetime, so that they may still need to review whether she should give him a share in her property).
The preparation of new wills may also help to mollify older children concerned at the prospect of "their'' inheritance moving away from them to a new stepmother/father. Of course, children have no absolute right to inherit in England and Wales – in contrast to some other European jurisdictions – as apart from an obligation to provide for "dependants'' – that is, people financially dependant on a person at the time of his death – anyone may leave his estate to whomever or whatever he likes, or spend it all entirely in his lifetime.
Jane Keir is a partner and head of family law at Kingsley Napley
http://www.telegraph.co.uk/finance/personalfinance/consumertips/5178027/How-to-prevent-I-do-turning-into-I-dont.html
Related Articles
'Catastrophe cover' aims to quell fear of the big C
Nationalisation spooks Northern Rock shares
Beware the online lawyer - uncoupling in haste may mean repenting at leisure
How to survive a divorce
Pre-nuptial agreements on the rise
Warsaw alternative looks less risky than the Anglo-American model
Warsaw's solution to crisis could yet be a masterstroke
Poland is following the Korean road to recovery. Controlled government deficits and a big currency fall seem to be stabilising its fragile economy.
By Martin Hutchinson
Last Updated: 9:52PM BST 17 Apr 2009
The country isn't in desperate straits. It wants $20bn (£13.5bn) from the International Monetary Fund. The facility would be only a precautionary flexible credit line, similar to Mexico's. Such a line, granted to countries with policies that the IMF deems sound, provides a backstop to existing foreign exchange reserves.
When Korea and other east Asian countries lost foreign support in 1997, they responded with austerity plans. Sharp currency devaluations made life at home more expensive, but supported exports. Governments preferred spending cuts to exploding deficits. Within a couple of years, Seoul and the others were running balance-of-payments surpluses that enabled them to repay or refinance debt and resume economic growth.
The Polish economy was bound to suffer from the decline in world trade and the drying up of foreign investment, which had peaked in 2007 at 5pc of GDP. But the country had fairly low government expenditure, at 25pc of GDP, a modest fiscal deficit and a free-market economic structure. It also had the freedom to let the zloty fall, since it was not tied to the euro, unlike the Baltic states, Slovakia and Bulgaria. The currency has dropped 30pc against the euro. That has kept exports stable in zloty terms, while imports are slightly down. The effective devaluation has also lessened the risk of deflation. Polish inflation is around 3.6pc.
It's too early for final judgement on the Polish approach. After all, the current account deficit is still expected to be 5pc of GDP in 2009 – a sum that has to be financed by foreigners.
But the Warsaw alternative looks less risky than the Anglo-American model of large "stimulus" programmes, huge budget deficits and rapid monetary expansion. In a small economy, such policies would have been likely to lead to a zloty collapse and a government debt crisis. Poland is right to look to Asia.
http://www.telegraph.co.uk/finance/breakingviewscom/5173214/Warsaws-solution-to-crisis-could-yet-be-a-masterstroke.html
Related Articles
Crisis has seen power shift and the East emerge from West's shadow
Asian shares mostly higher but caution lingers
Singapore's economy contracts 20pc in first quarter
Swiss slide into deflation signals the next chapter of this global crisis
A world currency moves nearer after Tim Geithner's slip
Poland is following the Korean road to recovery. Controlled government deficits and a big currency fall seem to be stabilising its fragile economy.
By Martin Hutchinson
Last Updated: 9:52PM BST 17 Apr 2009
The country isn't in desperate straits. It wants $20bn (£13.5bn) from the International Monetary Fund. The facility would be only a precautionary flexible credit line, similar to Mexico's. Such a line, granted to countries with policies that the IMF deems sound, provides a backstop to existing foreign exchange reserves.
When Korea and other east Asian countries lost foreign support in 1997, they responded with austerity plans. Sharp currency devaluations made life at home more expensive, but supported exports. Governments preferred spending cuts to exploding deficits. Within a couple of years, Seoul and the others were running balance-of-payments surpluses that enabled them to repay or refinance debt and resume economic growth.
The Polish economy was bound to suffer from the decline in world trade and the drying up of foreign investment, which had peaked in 2007 at 5pc of GDP. But the country had fairly low government expenditure, at 25pc of GDP, a modest fiscal deficit and a free-market economic structure. It also had the freedom to let the zloty fall, since it was not tied to the euro, unlike the Baltic states, Slovakia and Bulgaria. The currency has dropped 30pc against the euro. That has kept exports stable in zloty terms, while imports are slightly down. The effective devaluation has also lessened the risk of deflation. Polish inflation is around 3.6pc.
It's too early for final judgement on the Polish approach. After all, the current account deficit is still expected to be 5pc of GDP in 2009 – a sum that has to be financed by foreigners.
But the Warsaw alternative looks less risky than the Anglo-American model of large "stimulus" programmes, huge budget deficits and rapid monetary expansion. In a small economy, such policies would have been likely to lead to a zloty collapse and a government debt crisis. Poland is right to look to Asia.
http://www.telegraph.co.uk/finance/breakingviewscom/5173214/Warsaws-solution-to-crisis-could-yet-be-a-masterstroke.html
Related Articles
Crisis has seen power shift and the East emerge from West's shadow
Asian shares mostly higher but caution lingers
Singapore's economy contracts 20pc in first quarter
Swiss slide into deflation signals the next chapter of this global crisis
A world currency moves nearer after Tim Geithner's slip
Subscribe to:
Posts (Atom)