The income and wealth gap in this country and many others continues to expand. Take the necessary steps to make sure that you and your family are on the right side of the chasm.

Three Steps Toward Financial Freedom

Marc Lichtenfeld | Thursday, April 04, 2013

 
I was at a school function and had every reason to be depressed…
 
With kids in elementary and middle school, I was getting an earful from a teacher about everything that’s wrong with education in the school district.
 
Emphasis on standardized tests, teachers whose work and skill are given no respect and, most shocking of all, the administration insisting to this particular teacher that a nine out of 50 on his history exam is a passing grade (despite his vigorous protests). In other words, a kid who filled out A for every answer of this multiple choice test would pass the course.
 
This is going on all over the country. We’re failing our kids, graduating young men and women who are not prepared for the real world.
 
But just as I was feeling pretty awful about the situation, I turned and walked into the exhibit hall. There, several hundred high school kids were up against each other in a robotics competition. These kids were smart. They were motivated. They were boys, girls, black, white, Hispanic and every other race and ethnicity you can think of. They were competing hard against one another, but having a party with each other at the same time.
 
Massachusetts Institute of Technology (MIT) was in the hall recruiting. So were Washington University in St. Louis and the U.S. Army. The army wasn’t there looking for infantry. It was hoping to nab some of the country’s brightest young engineers and technologists.
 
Seeing so many intelligent ambitious kids made me optimistic about the future — but it also got me thinking about differences in “the haves” and “the have-nots.”
 
In terms of education, these kids were clearly the haves. Not because they came from great schools — some of them didn’t. They were the haves because either a parent or teacher pushed them to grab the opportunities in front of them, or because they were self-motivated. Likely, a combination of the two.
 
Financially, in the United States, the gap between the haves and have-nots has widened significantly over the years.
 
According to the Spectrem Group, there are 8.99 million households in the United States worth at least $1 million, up 300,000 in 2012 due mostly to the stock market.
 
Unfortunately, Americans receiving food stamp assistance is at record levels at 47.8 million.
 
Former Florida Governor Jeb Bush recently told MSNBC, “We’re no longer socially mobile as a country,” and “You have people that are born poor and there’s a higher and higher probability that they’re going to stay poor. And you have people that are born rich and there’s a greater probability that they’ll stay rich.”
 
Life isn’t always fair. Sometimes you don’t get that deserved promotion, or an injury or accident hurts your ability to generate income. But if you’re motivated, there are still ways you can ensure your family is among the haves. And you don’t need a ton of money to start.
 
Here are three simple steps to get you underway:

1. Live below your means and start early
Pretty obvious advice here, but by God it works.

And don’t tell me it’s impossible. When I graduated college, I lived in Manhattan while making $18,000 a year and saved money from every paycheck. While friends of mine were living in high-rises with doormen, I shared a room with a friend in a nasty walk-up apartment. I contributed to a 401(k), had enough for pizza and beer (admittedly, it was bad, cheap beer) and put a few bucks away that I invested and turned into a few more bucks.

Saving and investing money for the past few decades has created a portfolio larger than anything I could have imagined when I was fighting off roaches the size of dachshunds in my New York apartment.

2. Make the right investments
My favorite is dividend stocks. But not just stocks with high yields. I’m more concerned with dividend growth. Here’s a perfect example of why:

This week, Barron’s reported that from 2007 to 2012, the dividends of the S&P 500 grew 14% while inflation totaled 12%. In other words, today, you need $1.12 to buy $1′s worth of 2007 goods. If you received $1′s worth of dividends from S&P 500 stocks in 2007, today you’d get $1.14, so you’re ahead of the game.

Owning Perpetual Dividend Raisers (companies that raise their dividends every year) is the best way, in my opinion, to increase your buying power over time. Whether you take the income today or are saving for decades from now, these stocks ensure you’ll have more money in your pocket that you need to keep up with inflation.

3. Learn as much as you can
There are so many good books and resources out there for investors.

If you’re new to the markets, my favorite book is Understanding Wall Street by Jeffrey Little. This book goes into the basics of what a stock, bond, option and ETF are. If you’re new to investing, I can’t recommend it highly enough.

The Little Book that Beats the Market by Joel Greenblatt is a terrific resource on value investing.

If you like the dividend growth method I mentioned above, Get Rich With Dividends is for you. Written by an author with one of the most insightful investing minds of the past 100 years (OK, it’s me), Get Rich With Dividends shows you exactly how you can generate significant income or wealth by investing in these conservative dividend-paying stocks.

Even if you’re behind, it’s not too late to ensure that in the future you’re a “have” instead of a “have-not.” The income and wealth gap in this country and many others continues to expand. Take the necessary steps to make sure that you and your family are on the right side of the chasm.

Marc Lichtenfeld is a senior analyst at Investment U.

- See more at: http://www.hcplive.com/physicians-money-digest/personal-finance/three-steps-toward-financial-freedom-iu/P-2#sthash.PKnShqWS.dpuf

How to be Frugal

Laura Joszt | Monday, May 20, 2013

Warren Buffett may be one of the richest people in the world, but he still lives an incredibly frugal life. And Oscar-winner Jennifer Lawrence may be a young Hollywood “it girl,” but she is also careful with her recent millions and surprisingly prudent with her money.

If even the people who have money to spend are thrifty, then why shouldn’t the rest of us be as well? In fact, it is by being so frugal that some people actually become rich. By maximizing your income and living below your means, you’re enabling yourself to live a fuller, financially independent life.

That doesn’t mean you can’t splurge every once in a while, but the great thing is that living frugally means a splurge won’t break the bank and won’t put you into debt.

So to help you start on the very difficult path of being economical, H&R Block turned to some experts in the area: budgeting and personal finance bloggers.

Large purchase
Stephanie Halligan (The Empowered Dollar) and David Ning (Money Ning) took two different approaches to saving for something like a vacation. Halligan approached saving for the large purchase by curbing impulses, while Ning took a more structured financial approach.

Halligan suggests creating very visible and daily reminders of what exactly you are saving up for to help prevent unnecessary purchases. She wrote to H&R Block:

“For example, when I was saving up for a trip to Vietnam, I wrapped a note around my debit card that said, ‘Every $1 you spend today is one less bowl of Vietnamese Noodle Soup tomorrow.’”

Ning recommends charting the progress by tying saving goals to a date of when the money should be saved up. If you know you need $2,000 by September 1 and it’s January 1, you can start by saving $223 a month, putting away the money each first of the month.

As you go along, you can adjust the monthly savings. So if you can sock away $275 on May 1, then you only need to save $203.25 on the first of the next two months. Or if May is a tough month where the dog gets sick or the car is towed and you can only put away $110, then you know that you need to be careful the next four months and save $249.5 if you want to reach your goal.

Income stream
David Weliver from Money Under 30 suggests creating a designated income stream that can help supplement your savings. For instance, you might take on side work for the weekend. Physicians can find a way to do this as well by using their skills to create programs, become speakers, etc.

Of course, you could always increase income by getting rid of some old belongings by selling them on eBay.

Your turn
So pick the method that works best for you and stick with it. If you know you’ve got some extra marketable skills and a little more free time (perhaps you’re working locum tenens?) then Weliver’s path might be for you. For those more structured people, Ning’s might be easier to stick with. But if you know you need to continuous reminder to keep you on track, you’d do well to heed Halligan’s advice.

http://www.hcplive.com/physicians-money-digest/personal-finance/How-to-be-Frugal-LBJ

Berkshire Hathaway's Acquisition Criteria: Telling it like it is.

Berkshire Hathaway's Acquisition Criteria: Telling it like it is

Take a look at the following set of "acquisition criteria," straight from the 2006 Berkshire Hathaway Annual report. Straight, clear, to the point - and never before have we seen anything like this - including the commentary - in a shareholder report.

ACQUISITION CRITERIA

We are eager to hear from principals or their representatives about businesses that meet all of the following criteria:

1. Large purchases (at least $75 million of pre-tax earnings unless the business will fit into one of our existing units).
2. Demonstrated consistent earning power (future projections are of no interest to us, nor are "turnaround" situations).
3. Businesses earning good returns on equity while employing little or no debt.
4. Management in place (we can't supply it).
5. Simple businesses (if there's lots of technology, we won't understand it).
6. An offering price (we don't want to waste our time or that of the seller by talking, even preliminary, about a transaction when price is unknown).

The larger the company, the greater will be our interest. We would like to make an acquisition in the $5-20 billion range. We are not interested, however, in receiving suggestions about purchases we may make in the general stock market.

We will not engage in unfriendly takeovers. We can promise complete confidentiality and a very fast answer - customarily within five minutes - as to whether we're interested. We prefer to buy for cash, but will consider issuing stock when we receive as much in intrinsic business value as we give. We don't participate in auctions.

Deterioration on those key fundamentals may lead you to sell, but do you also sell on valuation?

Kinnel: On the sell-side, deterioration on those key fundamentals may lead you to sell, but do you also sell on valuation?

Akre: So, in response to your first observation, deterioration to any one of those three will certainly cause us to re-evaluate it. It won't automatically cause us to sell, but it will certainly cause us to re-evaluate it. Our notion is that if we don't get those three legs right where there develop differently in the future than they have in the past, theoretically our loss is the time value of money that it hasn't always been the case. But the deterioration of one of those legs or more than one of those legs diminishes the value of that compounding and, indeed, is likely to cause us to change our view. That's number one.

Number two, the issue of selling on valuation is way more difficult for us. And what we've said is that from a matter of life experience, if I have a stock that's at $40 and I think it's way too richly valued and I sell it with a goal of buying it back at $25, my life experience is it trades to $25.01 or trades through $25 and back up and it trades 200 shares there.   The next time I look at it, it's $300, and I've missed the opportunity. It's my way of saying that the really good ones are too hard to find.  

If I have one of these great compounders, I'm likely to continue to own it through thick and thin knowing that periodically, it's likely to be undervalued and periodically likely to be overvalued. The things that cause us to sell when one or more of the legs of the stool deteriorates. Occasionally, on a valuation basis, maybe we'll take some money off the table.

Lastly, if we're trying to continue to maintain a very focused portfolio, if we run across things that we think are simply better choices, then we maymake changes based on that. 

Do you understand your retirement money management?

http://www.howtofinancemoney.com/2012/03/how-to-define-wealth.html

Consumer Stocks on my radar screen

Carlsberg
Guinness
Nestle
Dutch Lady
Hup Seng Industries
Padini
Zhulian


Carlsberg

ROE 64.08%
EPS CAGR 5 Yrs 19.5%
DY High 5.2% - Low 3.6%
D/E 0.02
Revenues Growing last 3 Years
Earnings Growing last 3 Years
LFY Revenues 1584.78 m
LFY Earnings 191.63 m
Gross Margin 36.26%
Market Cap RM  4353.85 m
Shares (m) 305.75
Per Share price RM  14.24
P/E 22.7
DCA Strong


Guinness

ROE 54.62%
EPS CAGR 5 Yrs 13%
DY High 7.1% - Low 4.1%
D/E 0.53
Revenues Growing last 3 Years
Earnings Growing last 3 Years
LFY Revenues  1623.69 m
LFY Earnings 207.40 m
Gross Margin 33.70%
Market Cap  RM 5437.76 m
Shares (m) 302.10
Per Share price RM 18.00
P/E  26.2
DCA Strong


Nestle

ROE 67.27%
EPS CAGR 5 Yrs 11.6%
DY High 4.0% - Low 3.1%
D/E 0.13
Revenues Growing last 3 Years
Earnings Growing last 3 Years
LFY Revenues 4556.42  m
LFY Earnings  505.35 m
Gross Margin 34.09%
Market Cap  RM 14,252.91 m
Shares (m)  234.50
Per Share price RM  60.78
P/E 28.2
DCA Strong


Dutch Lady

ROE 57.08%
EPS CAGR 5 Yrs 21.2%
DY High 6.3% - Low 3.6%
D/E 0.00
Revenues Growing last 3 Years
Earnings Growing last 3 Years
LFY Revenues  882.18 m
LFY Earnings 123.38  m
Gross Margin 58.18%
Market Cap  RM 3101.44 m
Shares (m)  64
Per Share price RM  48.46
P/E 25.1
DCA Strong


Hup Seng Industries

ROE 21.24%
EPS CAGR 5 Yrs 46.9%
DY High 11.0% - Low 7.3%
D/E 0.00
Revenues Growing last 3 Years
Earnings Growing last 3 Years
LFY Revenues 247.82  m
LFY Earnings 32.54  m
Gross Margin 35.47%
Market Cap RM  414.00 m
Shares (m)  120.00
Per Share price RM  3.45
P/E  12.7


Padini

ROE 28.23%
EPS CAGR 5 Yrs 25%
DY High 4.9% - Low 2.9%
D/E 0.15
Revenues Growing last 3 Years
Earnings Growing last 3 Years
LFY Revenues  723.41 m
LFY Earnings  96.00 m
Gross Margin 48.19%
Market Cap RM 1236.87 m
Shares (m) 657.91
Per Share price RM 1.88
P/E 12.9


Zhulian

ROE 25.91%
EPS CAGR 5 Yrs 14.7%
DY High 8.7% - Low 5.4%
D/E 0.00
Revenues Growing last 3 Years
Earnings Growing last 3 Years
LFY Revenues  450.43 m
LFY Earnings 117.09  m
Gross Margin 72.51%
Market Cap RM 1334.00 m
Shares (m) 460.00
Per Share price RM  2.90
P/E 11.4


DCA = durable competitive advantage

Buy-and-Hold is Dead .... Long Live Buy-and-Hold

To be an iconoclast is the quick route to raise one's profile. Devise a novel theory, toss in a few data-mined graphs to support a point and then stand back and watch accolades flow in.   

 In recent years, buy-and-hold has suffered its share of slings and arrows by those with novel theories. Just cobble together the right array of market-timing indicators and any investor can put buy-and-hold to shame, so the detractors sneer. 

As an income investor, I bristle at the impertinence, because timing the market is far, far more difficult than the data-mined graphs lead you to believe. Sure, if you could go back in time, you could time your purchases and sells to perfection.

Unfortunately, the same luxury doesn't exist going forward - never has and never will. 

I'm an income investor. I'm also a buy-and-hold investor. My focus is to buy and then hold aninvestment over time – measured in years, in most cases.  I approach an investment as an investment. And an investment, like a garden, requires time to bear fruit. 

Don't misunderstand. I'm not denigrating market-timing traders; they serve a worthwhile function, not the least of which is as liquidity providers. It's just that trading isn't my bailiwick. I prefer to build wealth over time by investing in cash-generating assets. It's no coincidence, therefore, that theHigh Yield Wealth portfolio is a low-turnover portfolio. 

 Buy-and-hold might be antiquated, but it's hardly inferior. Buy-and-hold instills a number of advantages, especially for income investors. 

Taxes are an obvious advantage. Hold an investment longer than a year and the tax rate on a subsequent sale drops to the capital gains rate of 15% for most investors. Sell within a year and gains are taxed at the higher marginal income tax rate. 

Qualified dividends – those paid by most corporations – are also taxed at the 15% rate for most investors. But there’s a catch: You must hold the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. Trade within that period and you'll incur a higher tax liability.  

That said, the potential to compound wealth is the most appealing aspect of buy-and-hold. 

I've written frequently on the wonders of dividend-growth investing. But to maximize the wonders, you have to extend your holding period to years, if not decades. 

 Altria (MO) , the maker of Marlboro cigarettes, is underscores the power of buy-and-hold when combined with dividend growth.

Altria has paid a dividend for decades, and has raised that dividend faithfully and annually for the past 45 years. Rising dividends, in turn, have reliably powered Altria's share price higher. 

 In 2005, Wharton School finance professor Jeremy Siegel wrote an insightful essay titled “Ben Bernanke's Favorite Stock.” That stock was Altria.  Siegel wrote that from 1957 - when the S&P 500 Index was founded - to 2005, Altria produced an average 20% return annually, handily beating the other 499 members of the index.

The record continues to this day, and I can bear witness firsthand. Since Altria was added to theHigh Yield Wealth portfolio in March 2012, it has produced a 43% total return, which runs well ahead of the 20% historically average annual return Siegel refers to. 

 The return generated by Altria in High Yield Wealth isn't predicated on reinvesting dividends, though Siegel's example is.

 By reinvesting Altria's dividends into shares, investors have been able to generate exceptional return over the years, due in large part to those times when Altria came under government attack or new regulation, which invariable lowered the share price. Altria investors were the beneficiary of a continually rising dividend, which could then be used to purchase lower-priced shares, which always recovered.

 Altria's extraordinary long-term wealth creation simply couldn't have been replicated in a trading strategy. An investor had to have bought and then held through thick and thin over many years. 

So don't believe the detractors. Buy-and-hold isn't dead. It's alive and well, and benefiting many investors with the patience and skill to employ it. I know, because I'm one of them.

More From Wyatt Investment Research 

• Stocks Slow, but IPO Market Chugs Along
• Double Your Income on the World's Best Dividend Stocks
• When to sell a dividend stock

Price target - this information is helpful for getting a sense of what others are thinking about the stock's price.

Price target is a share price analysts say the stock will achieve at some future date.

Analysts often attach a period to the price, such as a one-year price target of $ 18.

The information is more suggestive than quantifiable.

It is helpful for getting a sense of what others are thinking about the stock's price.

Alternative to Discounted Cash Flow Method

What do you use if you don't want to or can't use the discounted cash flow (DCF) method of valuing a stock?  

There are other methods for valuing a stock (not valuing the company).  The most popular alternative uses various multiples to compare the price of one stock to a comparable stock.

The price earnings ratio (P/E) is the most popular multiple for these comparisons.

You can use the P/E formula to find the price based on comparable stocks.

For example, three stocks in a particular industry had an average P/E of say 18.5.  If another stock ABC in the same industry had earnings of $2.50 per share, you could calculate a stock price of $46.25 per share (= 2.5 x 18.5).  This is just an approximation, but it should put stock ABC on a comparable basis with the other three stocks in the same industry.



This strategy has several flaws.

1.  The P/E is not always the most reliable of value gauges.
2.  The process depends on the three comparables being priced correctly and there is no guarantee of that.
3.   Its biggest flaw is that the process tells you nothing of the future value of the company or the stock.

If you use this method, and many investors do, you will need to watch the stock more closely and continually measure it against comparables.  However, it does not require you to estimate anything or consider multiple variables, which is why it is so popular.

This method is best used for a quick decision on whether the stock is under-priced or over-priced.
Although you can arrive at a stock price based on the P/E formula, it is not nearly as accurate as the DCF method.



You can also use other key ratios in valuation.

These include the followings:
1.  Price/Book - Value market places on book value.
2.  Price/Sales - Value market places on sales.
3.  Price/Cash Flow - Value market places on cash flow.
4.  Dividend Yield - Shareholder yield from dividends.



So, which method should you use - DCF or multiples?

In the end, you will have to decide which method is for you.

There is no rule against using both.

Whether you calculate your own DCFs or use the estimates from others, reputable websites or analysts estimates, make sure you have the best guess available on the variables the formula needs.

Either way, make a conscious decision to buy a stock based on the valuation method of your choice and not a "feeling" for the stock.

iCAP is well invested in CASH as revealed in its latest quarterly report

Tuesday July 2, 2013 MYT 5:48:46 PM

iCapital.biz earnings jumps to RM47mil

iCapital.biz Bhd’s net profit for its fourth quarter jumped to RM47.12mil from RM1.7mil a year ago due to profit on disposal of securities and higher revenue.

Its revenue increased to RM49mil from RM4.5mil a year ago. Earnings per share were 33.66 sen compared to 1.22 sen a year ago.

For its full year, the group posted a net profit of RM56.8mil from RM15.7mil a year ago. Its full year’s revenue stood at RM65.9mil compared to RM24.8mil a year ago.

“As the company is a closed-end fund, a better indication of its performance would be the movement of its Net Assets Value (NAV). The NAV per share as at May 31, 2013 was RM2.99, compared with NAV per share of RM2.86 as at May 31, 2012,” it said.

http://www.thestar.com.my/Business/Business-News/2013/07/02/icapital.aspx

31.5.2013

Fees
Fund management fees $3.090 million
(31.5.2012:  RM 2.895 million)

Revenue 
Interest  4.163 million
Dividend Income  12.665 million
Gains on Disposal of Securities 49.126 million
Total Revenue  65.954 million

Operating expenses 6.977 million
Profit from operations before tax 58.977 million
Taxation 2.163 million
Profit for the period 56.814 million

NAV
31.5.2013  RM 2.99
31.5.2012  RM 2.86
y-o-y change + 4.5%

Retained Profits
31.5.2013  178.848 million
31.5.2012  122.034 million
y-o-y change 56.814 million

Fair-value adjustment reserve
31.5.2013  100.071 million
31.5.2012  137.725 million
y-o-y change - 37.654 million

Total equity
31.5.2013  418.919 million
31.5.2012  399.759 million
y-o-y change 19.16 million (+ 4.79%)

Short term deposits 
31.5.2013  207.034 million
31.5.2012  133.571 million

Investments
31.5.2013  209.700 million
31.5.2012  262.658 million

Cash level
In the latest quarterly report, the cash level of iCap has risen above RM 200 million or about RM 1.43 per share.


From Annual Report of 2012
As of 12.9.2012, the stocks in its investment portfolio are (no. of shares):
1.   Boustead 7,197,850
2.   F& N 2,114,000
3.   Integrax 4,884,500
4.   MSC  2,902,000
5.   Padini  22,700,000
6.   Parkson  9,180,900
7.   Petdag  2,400,000
8.   PIE 3,407,200
9.   Suria Capital 9,344,400
10.  Tong Herr  3,479,300
11.  Pharmaniaga  125,180

Your Biggest Risk - The Traps of Trading. What are the 2 most dangerous words in investing?

Professional traders use highly sophisticated trading techniques driven by computer programs that analyze huge volumes of data almost instantly.  You are competing with them when you attempt to play the trading game, and you will probably lose.  Professional traders have a name for amateurs who believe they can win:  "dumb money."  With all of their technology and huge bankrolls behind them, not even all professional traders are successful for an extended period.

MARKET TIMING may be the two most dangerous words in investing, especially when practiced by beginners.  Market timing is the strategy of attempting to predict future price movements through use of various fundamental and technical analysis tools.  At its best, market timing is a risky business for professional investors.

The real danger exists for beginners who are tempted by what looks like easy money.  All you have to do is buy a stock today and sell it tomorrow for a "gut feeling it was going up."  Yes, this happens every once in a while, but somebody has to win the lottery, too (here's a hint:  it won't be you or me).

Having Reasonable Expectations in Your Investing

Unreasonable expectations of how your portfolio should perform can lead to poor decisions, such as taking more risk to make up the difference  between your expectations and reality.

What is an unreasonable expectation?

1.  Expecting to gain 25 percent per year when the broader market is returning 8% is unreasonable.

2.  Expecting your portfolio to not fall when the market is down 35% is unreasonable.

3.  When investors fall behind in reaching financial goals, the temptation is to become more aggressive, which leads to unreasonable expectations.  If you choose more risky stocks (young technology companies, for example), you may have some winners that will help make up lost ground, but the odds are higher that you will simply fall farther behind.  The stock market and the economy don't care about your goals or investment choices.  They move due to a variety of actors and will go up or down with no regard to your plans.


What is a reasonable expectation of portfolio performance?

It depends.

1.  If your stocks are more heavily weighted toward growth, it is not unreasonable to expect to do better than an index of the broader market that is more heavily weighted toward growth.

2.  When the market is rising, your portfolio should also rise (and perhaps a little faster) and when the market falls, your portfolio should not drop as far or as fast.  That's the best you can hope for and if you hit, it, you are ahead of the game.

The relationship of risk and potential reward in stock investing is often misunderstood in shaping an investment strategy.

There is no investing in stocks without risk and there is no return without risk.

If you are adverse to the idea of taking any amount of risk, then stocks are not for you.

It will be more difficult (but not impossible) for you to reach your financial goals without investing in stocks.


Understanding Risk

Risk is the potential for your investment to lose money, for a variety of reasons - meaning your stock's price will fall below what you paid for it.

No one wants to lose money on an investment, but there's a good chance you will if you invest in stocks.

The rule of thumb is "the higher the risk, the higher the potential return, and the less likely it will achieve the higher return."

Buying a stock that is risky doesn't mean you will lose money and it doesn't mean it will achieve a 25% gain in one year. However, both outcomes are possible.

How do you know what the risk is and how do you determine what the potential reward (stock price gain) should be?


Measuring risk against reward

When you evaluate stocks as potential investment candidates, you should come up with an idea of what the risks are and how much of a potential price gain would make the risks acceptable.

Calculating risk and potential reward is as much an art as it is a science.

You need to understand the principle of risk and reward to make an educated investment as opposed to a guess.

The most common type of risk is the danger your investment will lose money.

You can make investments that guarantee you won't lose money, but you will give up most of the opportunity to earn a return in exchange.

When you calculate the effects of inflation and the taxes you pay on the earnings, your investment may return very little in real growth.


Will I achieve my financial goals?

If you can't accept much risk in your investments, then you will earn a lower return.

To compensate for the lower anticipated return, you must increase the amount invested and the length of time it is invested.

Many investors find that a modest amount of risk in their portfolio is an acceptable way to increase the potential of achieving their financial goals.

By diversifying their portfolio with investments of various degrees of risk, they hope to take advantage of a rising market and protect themselves from dramatic losses in a down market.

The elements that determine whether you can achieve your investment goals are the following:
1. Amount invested
2. Length of time invested.
3. Rate of return or growth
4. Fewer fees, taxes, and inflation.


Minimize risk - Maximize reward

The MOST SUCCESSFUL INVESTMENT is one that gives you the most return for the least amount of risk.

Every investor needs to find his or her comfort level with risk and construct an investment strategy around that level.

A portfolio that carries a significant degree of risk may have the potential for outstanding returns, but it also may fail dramatically.

Your comfort level with risk should pass the "good night's sleep" test, which means you should not worry about the amount of risk in your portfolio so much as to lose sleep over it.

There is no "right or wrong" amount of risk - it is a very personal decision for each investor.

However, young investors can afford higher risk than older investors can because young investors have more time to recover if disaster strikes.

If you are 5 years away from retirement, you don't want to be taking extraordinary risks with your nest-egg, because you will have little time left to recover from a significant loss.

Of course, a too-conservative approach may mean you don't achieve your financial goals.

Intrinsic Value using Discounted Cash Flows

The most common method of arriving at the intrinsic value of a stock is using the discounted cash flows (DCF) method.

DCF models are used to price a number of different assets.

The model that most stock analysts use is the DCF method.


Understanding the reasoning behind using this process.

The DCF method for valuing stocks rests on the principle of a stock is worth the sum of its future discounted cash flows.

The DCF model uses projections and estimates to arrive at a fair market value for the stock.

This is the method preferred by most stock analysts.

DCF is the favoured method of most stock investors.


The weakness of DCF model.

The weakness of the DCF model is you (and me).

The model only works if you have realistic estimates to include on future cash flows, estimated future revenues, how much risk is involved, industry analysis, and so on.

The outcome is only as good as the data you enter.

The outcomes will be tainted by the estimates you enter.

It is possible to find estimates for many of the variables on the internet; however, it is not always possible to verify how the author arrived at these conclusions.

Among industry professionals there are often wide differences in estimates and risk factors.


The strengths of the DCF model.

The model produces actionable numbers if the inputs are from professional analysts who study the market and study the stock you are researching.

The intrinsic value is still subjective because of the estimates, and other professional analysts may see the company differently.

However, your best bet for finding a reliable estimate of a stock's intrinsic value is from an expert.

[If a commentator is touting a stock, he or she should disclose if they have any financial interest in the stock or stand to gain if the price rises.]

The higher the risk, the higher the potential return, and the LESS LIKELY it will achieve the higher return

UNDERSTANDING RISK

The rule of thumb is "the higher the risk, the higher the potential return," but you need to consider an addition to the rule so that it states the relationship more clearly:  the higher the risk, the higher the potential return, and the less likely it will achieve the higher return.

Buying a stock that is risky doesn't mean you will lose money and it doesn't mean it will achieve a 25% gain in one year.  However, both outcomes are possible.

How do you know what the risk is and how do you determine what the potential reward (stock price gain) should be?

There are times when you should use other products besides stocks. When to avoid stocks?

Investing in stocks is not always the best answer for a financial goal.  There are times when you should use other products beside stocks.

Investing in stocks to meet short-term goals is usually not a good idea.  Do not use stocks for any goal that is fewer than five years from completion.  Any financial goal you need to achieve in fewer than five years is exposed to a risk that the stock market will swing to the downside just when you need the money.  The best plans can be sabotaged by a volatile stock market over the short term.

As you approach retirement, you will want to dial back your exposure to stocks and move into safer alternatives.

Done well, value investing is a successful, safe way to invest.

Be prudent and don't take the market at face value

Done well, value investing is a successful, safe way to invest. The logic of the approach - buying an asset for less than its underlying value - is irrefutable.

Here are five of the best mistakes prevalent in investing.

• Focusing only on the numbers One of the most common investing mistakes is to concentrate only on a stock's financial data. The big four banks, for example, all carry forecast dividend yields of about 6 per cent, and price-earnings ratios of about 14-15. Based on numbers, they're closely matched. When you consider the risks entailed in ANZ's Asian expansion and National Australia Bank's aggressive push for market share, however, the numbers suddenly don't seem to tell the whole story. These qualitative factors are why we favour Commonwealth Bank and Westpac over ANZ and NAB.
• Mistaking permanent declines for temporary ones When businesses hit rough patches, it can be a great time to buy. We've had positive recommendations on Aristocrat Leisure over the past few years for this reason. While a poor product line-up and the strong Aussie dollar were all hurting Aristocrat in the short term, we expected this business to perform well in the long run. If profits stayed permanently depressed, we'd have overpaid for Aristocrat. However, things are slowly turning around.
• Buying low-quality businesses Unfortunately, high-quality businesses are seldom cheap. Value investors therefore often end up with portfolios full of cheap but low-quality stocks, entailing greater risk. It's better to fill your portfolio with high-quality businesses, especially if you're patient and buy opportunistically.
• Neglecting economic considerations ''If you spend more than 13 minutes analysing economic and market forecasts, you've wasted 10 minutes.'' Ever since uttering that sentence, fund manager Peter Lynch gave value investors a free pass to ignore the economy. Or so they thought. You can't completely ignore the economy, but the success of your investments should never rely on specific, short-term forecasts. An investment in Rio Tinto, for example, hinges largely on the continued strength of China's economy. That's an economic forecast we're not willing to gamble on at current prices. An appreciation of cycles should underpin your stock purchases and disposals.
• Ignoring the market A healthy scepticism of the market's wisdom is vital. When you're right, the rewards can be enormous. The market wrote down RHG Group from $0.95 to $0.05 before Intelligent Investor Share Advisor's positive recommendations were vindicated. But when you're wrong, it can be bad. Backing ourselves explains why we were too late in pulling the pin on Timbercorp. Share-price movements should never influence your analysis. But they can offer a timely prompt to reconsider your thinking. When you're going against the grain, make sure you know why you disagree with the market.

This article contains general investment advice only (under AFSL 282288).

Nathan Bell is the research director at Intelligent Investor Share Advisor. Money readers can get a free trial and a special end of financial year offer

Read more: http://www.smh.com.au/money/investing/be-prudent-and-dont-take-the-market-at-face-value-20130618-2oex5.html#ixzz2XGzdK7Zd

Soaring bond yields across the world threaten trillion of dollars in losses for investors and a fresh financial crisis.

BIS fears fresh bank crisis from global bond spike

Soaring bond yields across the world threaten trillion of dollars in losses for investors and a fresh financial crisis unless banks are braced for the shock, the Bank for International Settlements has warned.

By Ambrose Evans-Pritchard

8:02PM BST 23 Jun 2013

The Swiss-based institution said losses on US Treasury securities alone will reach $1 trillion if average yields rise by 300 basis points, with even greater damage in a string of other countries. The loss could range from 15pc to 35pc of GDP in France, Italy, Japan, and the UK. “Such a big upward move can happen relatively fast,” said the BIS in its annual report, citing the 1994 bond crash.

“Someone must ultimately hold the interest rate risk. As foreign and domestic banks would be among those experiencing the losses, interest rate increases pose risks to the stability of the financial system if not executed with great care.”

The warning comes after US Federal Reserve set off the most dramatic spike in US borrowing costs for over a decade last week with talk of early exit from quantitative easing (QE), sending tremors through the global system.

The yield on 10-year Treasuries has jumped 80 basis points since the Fed began to talk tough two months ago, closing at 2.51pc on Friday.

The side-effect has been a run on emerging markets, a reversal of hot-money inflows into China, and fresh debt jitters in Portugal, Spain, and Italy. Nomura said the US yield spike threatens to “expose the cracks in Europe once again” and short-circuit the US housing recovery.

Related Articles

• QE taper: Is the bond bubble about to burst? 
  21 Jun 2013
• Global markets plunge as Fed pulls plug on QE 
  20 Jun 2013
• Equities and gold tumble as Fed 'ends' QE 
  20 Jun 2013
• BIS and IMF attacks on QE 'deeply misguided' 
  19 May 2013
• Business news and markets: as it happened, June 20 
  20 Jun 2013
• Emerging markets hit by double squeeze 
  20 Jun 2013

The BIS, the lair of central bankers, said authorities must press ahead with monetary tightening regardless of bond worries, warning that QE and zero rates are already doing more harm than good. The longer they go on, the greater the dangers.

“Central banks cannot do more without compounding the risks they have already created,” it said in what amounts to an full assault on the credibility of ultra-stimulus policies.

Describing monetary policy as “very accommodative globally” , it warned that the “cost-benefit balance is inexorably becoming less and less favourable.”

The BIS appeared call for combined monetary and fiscal tightening, prompting angry warnings from economists around the world that this risks a second leg of the crisis and perhaps a slide into depression.

“It is a resurgence of extreme 1930s liquidationism. If applied this would do grave damage to the world economy,” he said.

Marcus Nunes from the Fundação Getúlio Vargas in São Paulo said the report “reeks of Austrianism”, referring to the hard-line view of the Austrian School that debt busts lead to `creative destruction’ and should be allowed to run their course.

Prof Nunes fears a repeat of 1937 when premature tightening aborted recovery from the depression. “What is implicitly proposed is a degree of fiscal and monetary contraction that would make 1937 feel like a ‘walk in the park on a sunny day’.

The BIS said monetary stimulus has created a host of problems, including “aggressive risk-taking”, “the build-up of financial imbalances”, and further “misallocation of capital”.

It said the central bank mantra of doing “whatever it takes” to boost growth has outlived its usefulness, and has left the Fed, the Bank of England, and others, stuck with $10 trillion in bonds. “Central banks cannot repair the balance sheets of households and financial institutions. Central banks cannot ensure the sustainability of fiscal finances,” it said.

The emergencies policies have bought time for governments to put their budgets in order and tackle the deeper crisis of falling productivity, but this has been squandered. The BIS said leaders have put off the reforms needed to clear out dead wood and unleash fresh energy. Productivity growth in the rich states has dropped from 1.8pc between 1980-2000, to 1.3pc from 2001-2007, to just 0.7pc from 2010-2012. It has turned negative in Britain and Italy.

“Extending monetary stimulus is taking the pressure off those who need to act. In the end, only a forceful programme of repair and reform will return economies to strong and sustainable real growth,” it said.

Piling on the pressure, the BIS said to call for draconian fiscal tightening to avert a future debt crisis across the big industrial economies, with Britain needing to slash its `primary budget’ by up to 13pc of GDP to meet ageing costs.

“Public debt in most advanced economies has reached unprecedented levels in peacetime. Even worse, official debt statistics understate the true scale of fiscal problems. The belief that governments do not face a solvency constraint is a dangerous illusion. Bond investors can and do punish governments hard and fast.”

“Governments must redouble their efforts to ensure that their fiscal trajectories are sustainable. Growth will simply not be high enough on its own. Postponing the pain carries the risk of forcing consolidation under stress – which is the current situation in a number of countries in southern Europe.”

The call for double-barrelled fiscal and monetary contraction is remarkable, challenging the widely-held view that easy money is crucial to smooth the way for budget cuts and deep reform.

The BIS is in stark conflict with the International Monetary Fund and most Anglo-Saxon, French, and many Asian economists, as well as the team of premier Shinzo Abe in Japan. What is emerging is a bitter dispute over the thrust of global economic policy at a crucial moment.

Critics say the BIS is discrediting monetary remedies before it is clear whether the West is safely out of the woods. It may now be much harder to push through fresh QE if it turns out that the Fed has jumped the gun with talk of early bond tapering.

Scott Sumner from Bentley University said the BIS is wrong to argue that delaying exit from QE and zero rates is itself dangerous. The historical record from the US in 1937, Japan in 2000, and other cases, is that acting too soon can lead to a serious economic relapse. When the US did delay in 1951, the damage was minor and easily contained.

Prof Sumner warned that Europe risks following Japan into a deflationary slump if it takes the advice of the BIS and persists with its current contraction policies.

WATCH: Chris Bowie tells Emma Wall "the bond crisis could have already begun"

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/10138033/BIS-fears-fresh-bank-crisis-from-global-bond-spike.html

How low can the Aussie dollar go?

There are five key influences on the Australian dollar and each offers a clue as to how low the dollar might fall.

It’s now almost 30 years since the float of the Australian dollar and rarely has it been stronger than in the past few years.

Only now are investors, surprised at the rapidity of the recent drop, waking up to this fact. The economy is starting to feel it too, with Ford closing down local operations, local tourism struggling as Australians head overseas and now Holden giving an ultimatum to staff: accept pay cuts or risk losing your job.

Many people explain away this strength with the phrase ‘‘commodities boom’’, but it’s more complex than that.

There are five key influences on the Australian dollar and each in its own way offers a clue as to how low the dollar might fall.

Advertisement

1. Interest rates

If you can borrow at 0.25 per cent in Europe, the US or Japan and can invest it in Australian bonds, assets or bank accounts paying 3-4 per cent, plus capital gains, why wouldn’t you?

National Australia Bank recently estimated that the upward pressure on the local currency as a result of the US Federal Reserve’s zero interest rate and their quantitative easing program could be worth as much as 20 cents in the Aussie.

And of course, those global investors could look at the Reserve Bank and feel pretty safe that if it were to reduce rates, it would do so cautiously and gradually.

For the last few years, Australia has been a giant post box for international hot money. Right now, that reputation is under pressure.

2. Global and Australian growth

In addition to relatively high rates, global investors flocked to Australia after 2009 due to the resilience of the Australian economy, assisted by local and Chinese stimulus.

We didn’t have a housing crash and we didn’t follow the US and UK economies into deep recession, which is why we became a safe harbour.

3. The US dollar

The US dollar is the most under-appreciated driver of the Aussie dollar.

Traders and investors talk about growth, interest rates, the mining boom, the budget position and household debt, but on the other side of the AUD/USD currency pair the same questions are asked of the US as an input into the Aussie.

The perceived value of the US dollar is an important factor in the relative price of the Aussie and, after a long period of weakness, it’s likely to grow in strength.

4. Investor sentiment

When we see a convergence of major drivers like this, investor sentiment itself becomes a fourth driver. Here, we enter the currency expectations market.

Since 2009 large speculators – hedge funds and the like – have been supporters of the Aussie dollar for all but a brief period of market instability in the middle of last year when the euro teetered.

Generally, global speculators have been supporters of the Australian dollar since the global financial crisis. That is now on the verge of a reversal.

5. Technicals

The Aussie has had strong technical chart since the GFC: every new move led to a new high and every dip was followed by a rebound. Even as volatility reached extreme levels in the past few years, the chart for the Aussie remained indomitable. Its safe-harbour status was never breached in a technical sense. That encouraged speculators and investors to buy the dips whenever global trouble loomed.

That’s how we got to where we are. To see where we might go, let’s examine these five key drivers from the other angle.

Australian interest rates are falling much further than most forecasters anticipated. The main cause is that Chinese growth is slowing faster than many expected (although not us), pushing down the key export prices that drove Australia’s commodity boom. As a result, mining projects have been cancelled en masse. Yet the boom ran long enough for mining companies to believe it would last.

Even with the cancelled projects, lots of new supply is on the way, just as China slows. This will drive commodity prices down further still.

The likelihood is that Chinese and Australian growth, and Australian interest rates, will fall further. So although the carry trade into the dollar is still positive, with declining yields and an increased risk of capital loss, it now faces more headwinds.

To make matters more difficult for the Aussie, the US housing market is recovering. Although fiscal challenges loom and monetary policy is still very loose, markets are beginning to price in stabilisation to the former and a tightening in the latter.

In the passing beauty parade of foreign exchange, the US dollar is being viewed as the least ugly. As the US dollar index rises it is hitting a variety of asset classes, including gold and the Aussie dollar.

Sentiment among hedge funds and speculative traders – see recent comments by George Soros and Stanley Druckenmiller – has turned against our currency.

As recently as April this year, the Aussie was trading above $US1.05 before the recent fall took it to around $US0.92. That’s a fall of about 12 per cent.

So, how low can it go?

NAB recently suggested the $A could fall to 87 US cents by December 2014. But let’s remember that for all the extreme recent calls about the crash in the Aussie and the impending doom facing it, the reality is that it is simply back at the bottom of what might be considered a wide 10-15 cent range it has been in since breaking up through 94 US cents in mid-2010.

This sell-off is not all that shocking and the forecasters of doom forget this.

A fall below 94 cents would signal a different and lower scenario. Our assessment is that this is likely, especially if the economy weakens due to the withdrawal of mining investment, assuming consumption doesn’t fill the gap.

That may necessitate rate cuts to 2 per cent or just below.

Despite the recent highs, the Aussie dollar’s average remains steadfastly around 75 US cents. It may not revert to the mean but after 22 years without a recession, you wouldn’t want to bet on it.

What might happen if Australia did have a recession?

The answer was offered during the GFC low when global investors believed that was about to happen. Back then it fell to $US0.5960. There’s your answer.

To protect your portfolio against that possibility, and to hedge against falling interest rates, Intelligent Investor Share Advisor has recommended allocating a portion of your portfolio to overseas markets. Each of its model portfolios has an allocation to businesses that stand to benefit from a falling Aussie dollar.

This article contains general investment advice only (under AFSL 282288).

By Greg McKenna and David Llewellyn-Smith of MacroBusiness, in conjunction with Intelligent Investor Share Advisor, shares.intelligentinvestor.com.au.

Read more: http://www.smh.com.au/business/how-low-can-the-aussie-dollar-go-20130624-2osff.html#ixzz2XB3rOnK3