The difference between Simple Average Returns and Compound Returns

Below is an illustration of the difference between simple average returns and compound returns, as well as the impact of losses no matter when they occur. Each Manager (A through F) had a different investment approach and therefore, performed differently in each of the three years. The table represents the different returns year-after-year over a three-year period for six separate managers.

	Client A	Client B	Client C	Client D	Client E	Client F
Year 1	10.0%	6.0%	16.0%	30.0%	45.0%	55.0%
Year 2	10.0%	10.0%	10.0%	-20.0%	-30.0%	-35.0%
Year 3	10.0%	14.0%	4.0%	20.0%	15.0%	10.0%
Simple Average	10.0%	10.0%	10.0%	10.0%	10.0%	10.0%
Compound Returns	10.00%	9.95%	9.89%	7.66%	5.29%	3.49%
Ending Value of $1 Million Invested	$1,331,000	$1,329,240	$1,327,040	$1,248,000	$1,167,250	$1,108,250

In each case, the simple return over the three years is 10%, whereas the compounded return (the amount of gain you have realized) fluctuates between a high of 10% and a dismal 3.49%. Despite the larger returns in some years, the investment is more severely impacted by the loss. Interestingly, as the size of the loss increases, a greater percentage gain is required to restore the account back to breakeven. In short, it is important to understand that managers can brag about simple averages but you can only spend compound returns. Our goal is to execute investment strategies that capture the most of bull markets while preserving gains in bear markets to provide superior long-term compound returns.

*While our rule of thumb for investing is "don't lose money", investments have the potential for negative returns over both the short and long term. Our goal, however, is to limit the downside through security selection, asset allocation, diversification, and the use of active risk management, including the use of options and contra-funds.

http://traderwm.com/DLM/

Compound returns are the most precise and accurate reflection of your portfolio's bottom line and thus, they are of utmost concern for you.

Compound returns are a reference to the cumulative impact of gains or losses on your portfolio, they are a reflection of your ability in your investing and they are indications of how much money is in your account. Simple returns, on the other hand, are the returns that occur each day, month or year and are only a snapshot look at an investment's performance without regard to its history. 


For example, if a portfolio is down 10% one year and up 10% the next, the simple return on this portfolio is 0% and the manager can report a "break-even" performance over these two years if he refers to his simple returns. However, when it comes to compound returns, which reflect the net effect to your account, the portfolio is actually down 1%. The loss in year one reduced the amount of capital invested for the following year and therefore, a higher performance was needed simply to return the investment to breakeven. It would take an 11% gain to make up for a 10% loss, regardless of the order of the gain/loss.

Malaysia’s rich spend mostly on cars, yachts and planes

By Clara Chooi

October 14, 2011

KUALA LUMPUR, Oct 14 — When they have some extra cash to blow, Malaysia’s rich prefer splurging on a fancy new set of wheels, luxurious yachts or private jets, the Asia-Pacific Wealth Report 2011 has revealed.

These big spenders see less glitter or glamour in jewellery or swanky watches, unlike their rich Southeast Asian counterparts in Singapore, who prefer burning bucks on these sparkling adornments.

Last year, 46 per cent of Malaysia’s rich invested their ringgit in luxury collectibles like cars, boats and jets, the highest percentage of any country within the Asia-Pacific region.

In 2010, 46 per cent of Malaysia’s rich invested their ringgit in luxury collectibles like cars, boats and jets, the highest percentage of any country within the Asia-Pacific region. — Reuters file pic

The region’s average topped at just 30 per cent, with Malaysia leading the list and followed by Taiwan at 38 per cent, Indonesia 36 per cent, China 35 per cent, Japan and Australia tied at 30 per cent, South Korea 28 per cent, Hong Kong 23 per cent, India 21 per cent and Singapore, merely six per cent.

Twenty-four per cent of Malaysia’s rich chose jewellery over gleaming sports rims while 16 per cent took a fancy to acquiring rare collectibles like special wines or old coins.

A small 10 per cent thronged art galleries to spruce up their collections while others invested in their favourite sports teams and other miscellaneous “investments of passion”.

The report, released yesterday by Merrill Lynch Global Wealth Management and Capgemini, surmised that such “investments of passion” would continue to hold appeal to all “high net worth individuals” or HNWIs within the Asia-Pacific market as the ranks of the wealthy in the region continue to grow at a brisk pace.

HNWIs are defined as those having investable assets of US$1 million (RM3.13 million) or more, excluding primary residence, collectibles, consumables, and consumer durables.

“Investments of passion hold appeal for all HNWIs, both for their aesthetic appeal and their potential to gain in value. Asia-Pacific HNWIs’ appetite for investments of passion increased in 2010, especially in emerging markets that suffered less than developed economies in the global downturn,” the report said.

The report also said last year’s spending pattern revealed that a majority of HNWIs in Asia-Pacific remained most heavily invested in real estate and equities.

An estimated 30 per cent of the financial assets of Malaysia’s rich is in real estate, followed by 28 per cent in equities, 26 per cent in fixed income, 10 per cent in cash or deposits and six per cent in other alternative investments.

A majority of the HNWIs’ holdings also stayed within their respective home regions, the report added.

“Malaysia, China, and India, the allocations to home-region investments remained high at around 85 per cent,” it said.

When compared to its neighbours in the region, however, the report said Malaysian HNWIs assets were the least diversified with 86 per cent in home-region investments.

The report surmised that the Asia-Pacific HNW segment had “thrived” last year but was expected to face a slump this year and in 2012.

“The number of HNWIs in the region grew to 3.3 million in 2010, from 3.0 million in 2009, making the HNWI population 18.3 per cent larger than in 2007.

“As a result of that growth, the Asia-Pacific HNWI population also became the second-largest in the world, overtaking Europe (which had 3.1 million HNWIs in 2010), and nearing that of North America (3.4 million),” the report said.

Economic expansion in the region was likely to “abate slightly”, however, this year and in 2012, as economies absorb the withdrawal of fiscal and monetary stimulus, rising inflation, constrained capacity, and the macroeconomic imbalances prompted by large foreign-capital inflows.

“As a result, GDP growth in Asia-Pacific excluding Japan is expected to slow to 6.9 per cent in 2011, and 6.8 per cent in 2012 (down from 8.3 per cent last year),” it said.

http://www.themalaysianinsider.com/malaysia/article/malaysias-rich-spend-their-money-mostly-on-cars-yachts-and-planes/

Don’t Lose Money!

The hardest thing in investing is recovering from a loss. It takes a 100% gain to recover from a 50% loss. So don’t lose money!

How to Never Lose Money in the Stock Market

Now that’s a pretty controversial heading, isn’t it?  It reminds you of Will Rogers’ line:  “I’m more interested in the return of my money than the return on my money.”

Losing money seems to be as big of a part of stock market investing as wealth building.  Losses and their devastating results certainly draw more attention.  In fact, the U.S. Securities and Exchange Commission, as well as other stock market watchdog agencies, require a warning to investors that losses are possible.

So how can I get away with that heading?  Simple:  Because it’s true!  A man named Benjamin Graham first wrote about the system in the ‘50s.  Warren Buffett and his Berkshire Hathaway company followed these rules and became the most successful stock market investor of all times.  These are their rules, and their system.  And here it’s presented in easy-to-follow terminology.

You must have a hook, and the acronym I use for this system is this: D.A.B.L.  (Don’t dabble in the markets, DABL instead). Each letter of the acronym stands for a part of investing; a rule if you will.  Follow these four rules and you will never lose money in the market.  Break even once, and you’re gambling.  There’s an old time Brooklyn comedian, named Myron Cohen, who said this about gambling:

“Here’s how you come out ahead in Las Vegas:  When you get off the plane, walk into the propeller!” So don’t walk into the propeller, follow the D.A.B.L. and build your wealth as sure as sunrise.

“D” Stands for Diversification.  To be properly diversified you need thousands of stocks encompassing all descriptions.  Large Caps, Mid-Caps, Small Caps, International, Growth, Value, Growth and Income, etc.  When you have a widely diversified portfolio, individual stock losses are swallowed by individual gains.  The “Enrons” will be offset by the “Microsofts” and “Exxons.”  In our practice, we use 54 mutual funds to achieve this.  Each fund owns hundreds and thousands of stocks.  Diversification upon diversification.  Now you might ask, “But what if I’d bought Microsoft and Exxon 20 years ago? Wouldn’t I have made much more?”  Yes you would have.  But what if you’d bought Enron?  Before it crashed and burned, Wall Street analysts wouldn’t shut up about what a great buy Enron was. You’d have lost everything, and it wouldn’t have recovered the same as the rest of the market when times got better.   In short, diversification removes the gambling aspect of stock market investing.

“A” Stands for Asset Allocation.  This goes hand in hand with diversification.  This is simply allocating investments in varied sectors of the economy to minimize market downturns and profit on the inevitable upswings.  Here’s a conservative asset allocation for all seasons:

Small Cap Growth funds               5%

Mid Cap Growth funds                 5%

Large Cap Growth funds               5%

Small Cap Value funds                 10%

Mid Cap Value funds                   10%

Large Cap Value funds                 10%

Value Blend funds                        10%

Aggressive Growth funds             10%

High Yield Bonds fund                   5%

Investment Grade Bonds                5%

International Global Bonds             5%

Global Emerging Markets               5%

International Growth                       5%

International Value                        10%

The word “cap” refers to Capitalization – the size of the stocks the fund purchases.  “Blend” means the fund invests across all styles and sizes in its area.  International usually means outside the U.S., while global includes U.S. investments.  This allocation uses strictly mutual funds.  Software like Morningstar places each fund in the “style boxes” described in this allocation.  If you don’t have enough assets to buy all those funds, start with “value” and “growth,” and leave “aggressive” and “emerging” markets for last.  If you’re investing in your 401(k) and don’t have all those options, do the best you can to duplicate this allocation with emphasis on “value.”

“B” Stands for Buy and Hold.  Buy and hold works, as proven repeatedly by the likes of Benjamin Graham and Warren Buffett.  Buying and selling securities results in losses or minimum gains for most investors.  It does generate lots of commissions, which is why the brokerage industry hates that one fact.  However they’re coming around with fee-wrapped account, tacitly encouraging buy-and-hold.

“L” Stands for Long Term Goals.  The minimum holding period is five to seven years.  Diversified buy-and-hold investments have achieved this goal in every seven-year period since 1969.  Stock market investments should always be held for the long term.  Anything else is gambling.

Now here’s a question that always comes up:  “I will be retiring next year.  Shouldn’t I be invested mostly in safe investments like treasury bonds and CDs?”

Well that depends on how much money you have for retirement.  The D.A.B.L. system is strictly to make money grow – make the pie bigger.  Most retirees have enough funds to leave a certain amount alone for seven years.  That’s the amount that should be invested for growth.  It’s going to vary for everyone.  There’s no pat answer – you’ve got to analyze your own situation.  Remember, this system is for growth, and every retirement portfolio needs growth – a certain amount of money targeted to get much larger in a given number of years to offset the ravages of inflation.

So go ahead, D.A.B.L – just don’t dabble.

By Patrick Astre

http://www.myarticlearchive.com/articles/8/224.htm

Message:  If you do not diversify, do not asset allocate, do not buy and hold, and do not keep your stocks for 5 to 7 years ... you are NOT investing but gambling. 

3 Ways to Not Lose Money in the Stock Market

People ask me all the time how I haven’t lost hoards of money like most others. How I do I pick winners every time?

Well the truth is that I don’t always pick winners. In fact, I’m sure the percentage of winners to losers is somewhere around 50-50%; however, I am able to keep my losses to a minimum because of my strict entry and exit plans before taking part of any stock.

If you have ever read any of my free stock recommendations, then you realize that I am a big user of technical analysis and for every stock I keep an entry, stop, and exit point. These three items I believe are an absolute must have before throwing your money into the market.

I’ll briefly go over each one so you understand what I am talking about.

Entry

Before entering any stock you should have a predetermined price at where you want to enter the stock. Basically you want to choose a price that symbolizes the stock has broke out or gained momentum.

Although my stock winners and losers percentage is 50-50%, my entries allow me to avoid stocks that are not right. If the stock never hits my price, than move on. There are so many things you can invest in. Don’t get caught up with any one stock.

Stops

There are various forms of stops, and different times to use them. A stop is a price point where you will exit the stock. Depending on your savvy, stops can be a changing variable. Typically you want your first stop at a point where you would consider the trade a failure. So if you buy at $15, then you might create a stop at $14.80.Listening to this stop is very critical because these are where most people incur the most losses.

The easiest way to avoid losses is to cut them. Trim the fat. If something is not working, then why should you still hold on to it? The more you lose the longer it takes to recover, and now your money is tied up.

If you are fortunate enough to see gains, then move your stops up. So if the stock goes to $16, then maybe your move the stop to $15.80. There are many different ways to determine a stop, but ultimately it depends on what you want.

Exits

Lastly, no trade is complete unless you cash out. The worst thing you can do is blindly go into any stock and not have some sort of price target. You will notice in my charts that I find potential price targets. This is one of the hardest things to do, but don’t get caught up with trying to squeeze every penny out. Any profit is better than no profit.

Once that price target is reached, then its okay to play with house money, but make sure to take some profit off the table or at least move your stop up.

When implementing these three items it is very important to stay discipline. Don’t change anything on a hunch.Unless there is some strong evidence to change your initial stance, then don’t do it. Ultimately that is how you keep your losses to a minimum and profits to a max.

You can learn more about techincal analysis through Chart Pattern Analysis.

April 22nd, 2009 

http://thewildinvestor.com/3-ways-to-not-lose-money-in-the-stock-market/

Blend of both value and growth investing ensures stable returns

Blend of both value and growth investing ensures stable returns

13 OCT, 2011, 05.21AM IST, AMAR RANU,

Every fund manager's style of picking stocks and managing portfolios is different. While one group selects assets based on intrinsic values, the other favours companies with growth potential. These two widely followed strategies all over the world are known as value and growth investing. 

However, with the kind of volatility in the equity markets globally and domestically, fund managers often mix the two strategies to safeguard their 'style' and deliver decent returns over a period of time. 

But with individual investors, the situation is grim. Historical studies and the general consensus say that 75-90% of people who have invested in stock markets cannot explain why they own a particular stock. Their investment style is simple - if the share price is ascending and everyone is buying the stock, they will also buy. Similarly, they will sell it if it falls below a level. So, typically, investors have the 'herd instinct', a term coined in behavioural finance. 

Growth and Value investing 

Managers who seek value are also known as defensive managers who focus on the inherent strengths/weaknesses of individual companies and, as such, macro-level changes and market gyrations do not affect their style of investing. They look for stocks based on Benjamin Graham's tactics, like those with low price-earnings (P/E) or low price-book value (P/BV) ratios. 

The other ratios used are dividend yield, return on capital employed (RoCE), return on equity (RoE), enterprise value (EV), EBIDTA, etc. In a nutshell, they would invest in a stock which is at a significant discount to its intrinsic value. Globally, Warren Buffet is a wide follower of value investing who understands the management, competition and the business model, including the various ratios, in determining the actual value of a company.

Growth managers, on the other hand, target stocks that have above average earnings growth rate, low dividend yield, high price-earnings (P/E) ratio, etc. They place greater emphasis on the growth opportunities for a company and may not mind paying a price for it. So, they look for fast growing companies or those in sunrise sectors hoping to become the next Infosys or Reliance. The growth strategy is a risky strategy as the downside risk is relatively higher. 

The value-growth enigma 

Everything that appears cheap may not be a good bargain. Sometimes, the fall in stock prices happen due to a change in the dynamics of the industry concerned that are not captured in its current financials. Investors or managers buying such stocks thinking them to be value picks may end up with a dud. 

Value investing generates comparatively low, albeit stable, returns over a longer period. It causes less volatility as the fall in the inherent value of the stocks is less. Some investors associate value investing with contrarian investing, which it is not in the real sense. A contrarian transacts, ie, buys or sells a stock when a majority of the investors are behaving the other way. Such investment opportunities can happen in a rising or falling market. 

However, in an era of economic growth, growth investing strategy usually delivers higher returns over a shorter period. If there is a high growth opportunity in an industry within an economy, it will attract new investors who would invest more capital to set up new locations. As a result, over a period of time, the industry is more likely to lose its competitive edge leading to a setback to its mean growth rate. 

Which 'style' delivers more - Value or Growth? 

Across markets, the value strategy has delivered and outper formed other investment styles over a longer period of time. A study of the performance of MSCI Developed Market World Indices shows that value investing has generated significantly more returns than with the growth style over the last 25 years. Even in the MSCI Emerging Market Indices, value investing has outscored other investment styles over the last 10 years. The modern day value investor, Warren Buffet, has taken value investing to another level. 


http://economictimes.indiatimes.com/personal-finance/savings-centre/analysis/blend-of-both-value-and-growth-investing-ensures-stable-returns/articleshow/10334439.cms

Buffett’s Son Defends Occupy Wall Street

Buffett’s Son Defends Occupy Wall Street

By Andrew Frye and Alan Bjerga - Oct 13, 2011 12:00 PM GMT+0800

Howard Buffett, the Berkshire Hathaway Inc. (BRK/A) director and son of Chairman Warren Buffett, said Wall Street protesters were provoked by abuses from corporations amid a widening disparity between rich and poor.

“I think it takes that to make things happen sometimes,” Howard Buffett, 56, said of the demonstrations in an interview yesterday in Des Moines, Iowa. Over the past 15 years, “we saw large corporations really screw people.”

Occupy Wall Street has drawn out protesters from New York to Seattle and gained empathizers among the top executives at Citigroup Inc. (C)and Blackrock Inc. Warren Buffett, the world’s third-richest person, has said he is concerned about inequity in the U.S. The younger Buffett, a farmer and philanthropist, said obtaining enough food has become more difficult for more people.

“There has never been a larger gap between earnings in this country,” said Howard Buffett, who was in Des Moines to deliver a speech at the World Food Prize conference. “There has never been a time in my lifetime when the government is going to cut an incredible amount of programs that support poor people and feed them.”

Protesters criticized the government for propping up financial firms including Citigroup and Bank of America Corp. (BAC) in 2008 while individuals struggled with unemployment, depressed wages, foreclosures and reduced retirement savings. Republican lawmakers oppose raising taxes to reduce the U.S. deficit and have pushed for cuts to government programs.

‘Class Warfare’

Mitt Romney, the former Massachusetts governor and a candidate for the Republican presidential nomination, said protesters are targeting “a scapegoat” and are wrong to divide the country. President Barack Obama, who joined Warren Buffett in a push to raise taxes on the wealthy, is guilty of “class warfare,” Romney has said.

“There has been class warfare going on,” Buffett, 81, said in a Sept. 30 interview with Charlie Rose on PBS. “It’s just that my class is winning. And my class isn’t just winning, I mean we’re killing them.”

Howard Buffett, a Berkshire director since 1993, said hunger is rising in the U.S. as well as in poorer nations. A record 45.3 million Americans received food stamps in July and almost one in six live in poverty, the government said. Buffett is president of the Howard G. Buffett Foundation, which advances agriculture in developing nations.

Buffett’s Wagers

Warren Buffett has backed some of the biggest financial firms while chiding bankers for excesses in risk-taking and compensation. Omaha, Nebraska-based Berkshire invested $700 million in Salomon Inc. in 1987, $5 billion in Goldman Sachs Group Inc. in 2008 and $5 billion in Bank of America this year. Buffett, the father, has compared Wall Street to “a church that’s running raffles on the weekend.”

Wall Street “does a lot of good things and then it has this casino,” Buffett said in October 2010. “One of the problems we still have is we have unbalanced incentives for managers of huge financial institutions.”

Blackrock Chief Executive Officer Laurence D. Fink and Jim Chanos of hedge fund Kynikos Associates said this month they understand the anger directed at financial companies. Bill Gross, who runs the biggest bond fund at Pacific Investment Management Co., said in a Twitter post that wage earners are fighting back after three decades of class warfare in which they were “being shot at.” Citigroup CEO Vikram Pandit said yesterday he’d be happy to talk with protesters.

http://www.bloomberg.com/news/2011-10-13/howard-buffett-defends-occupy-wall-street-protests-to-make-things-happen-.html