http://biz.thestar.com.my/news/story.asp?file=/2008/10/22/business/2335258&sec=business
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By OOI KOK HWA" name=AUTHOR>
Wednesday October 22, 2008
Great Depression versus now
Personal Investing
By OOI KOK HWA
As much as there are similarities between the two crises, the damage caused by the current turmoil is likely to be less severe given the swift actions of central banks.
AS a result of the recent financial tsunami, some experts have started to ponder whether we are headed for a depression.
The current credit crunch and the meltdown in some financial institutions were quite similar to what happened during the Great Depression in the 1930s.
In this article we will analyse the reasons behind the 1929 Wall St crash, which kickstarted the Great Depression and compare it to the current situation to identify any signs that a depression is approaching.
Milton Friedman, the leading advocate of monetarism, argued that every great depression had been accompanied or preceded by a monetary collapse.
According to Ben Bernanke, the US Fed chairman, the main reason behind the Great Crash of 1929 was due to the tight monetary policies adopted during that period.
He said the high interest rates back then caused the US economy to fall into a recession that led to the great market crash in October 1929.
As the US dollar was backed by gold, the acute selling of dollars for gold resulted in a run on the dollar.
The Fed continued to increase interest rates in an effort to preserve the value of US dollar.
As a result, high interest rates caused bankruptcies for many companies.
At the peak of the Great Depression, the US unemployment rate hit 25%
To rub salt into the wound, massive withdrawals of cash by panicky depositors were the last straw that brought about the total collapse of financial institutions.
In that period, bank deposits were uninsured and the collapse of the banks caused depositors to lose their savings.
And due to the economic uncertainties, the surviving banks were reluctant to give out new loans.
Another culprit in the 1929 crash was margin financing which caused excessive speculation in the stock market.
Investors needed only to put up 10% capital and borrow the rest from the bank to invest in the stock market.
The collapse of stock prices led to margin calls and further selldowns.
Coming back to the 2008 crash, the banking and credit-market crisis was mainly due to the property boom and subprime bust.
The collapse of subprime loans sparked the credit crunch, which dragged some financial institutions into trouble.
As a result of the securitisation and the creation of innovative financial products like collateralised-debt obligations and credit-default swaps, the collapse of one financial institution had a domino effect, leading to the collapse of other financial institutions.
Now, the pertinent question is whether we are in a long bear market and heading for a depression.
We believe a depression like the one in 1929 may not happen exactly the way it did before.
Given the fast actions taken by central banks around the world, the damage caused by this crisis will be less severe than the one in 1929.
Central banks around the world have been putting in concerted efforts to make sure the global economy will not fall into a depression.
The rescue packages being implemented throughout the world will help stabilise the financial system.
We believe the reduction of interest rates and the increase in money supply will help cushion the impact of the credit crunch.
Besides, deposits placed with most financial institutions are guaranteed by central banks.
Even though the US unemployment rate may rise to 10% from 6.1% currently, it is still far below the peak of 25% hit during the Great Depression.
In the 1929 crash, the Dow Jones Industrial Average took about three years to reach bottom in July 1932 from its peak in September 1929.
From the peak to the trough the Dow lost about 90%.
The Great Depression in the US started in August 1929 and ended only in March 1933.
The stock market started to recover eight months before the US economy ended its depression.
At present, the Dow has already dropped for a year from its peak in October 2007, currently down about 37.5% against its peak of 14,164 points on Oct 9, 2007.
In view of the possible economic recession in most developed countries, we think the Dow will drop further from current levels.
Nevertheless, we believe it will recover much faster and the magnitude of the fall will be far less severe than the one in 1929.
Lastly, we believe the stock market will eventually recover.
At this point, to be more prudent, we may take a “wait and see” approach until things stabilise.
> Ooi Kok Hwa is an investment adviser licensed by Securities Commission and the managing partner of MRR Consulting
© 1995-2008 Star Publications (Malaysia) Bhd (Co No 10894-D)
Wednesday 22 October 2008
Protect your savings against inflation
Inflation eating into retirement nest-egg of Malaysians
By Jeeva Arulampalamjeeva@nstp.com.my
FOUR out of 10 Malaysians feel the need to continue working after their mandatory retirement age, driven by the fear that they will not be able to support themselves based on current retirement savings.
A survey by life insurer Prudential Assurance Malaysia Bhd in August 2008, called the Prudential Retire-Meter 2008, found that 36 per cent of people approaching retirement age were less confident about their retirement from a year ago."
About 81 per cent of these individuals said that inflation had gone up and had an effect on their lifestyles," Prudential Assurance Malaysia chief executive officer Bill Lisle said at a media briefing in Kuala Lumpur yesterday to release the survey findings.
While close to 72 per cent of the respondents said they saved, about 77 per cent of those who saved invest in low-yielding savings vehicles such as fixed deposits and savings accounts."
About 41 per cent said they don't know how much to save to meet their retirement needs and 64 per cent said they did not separate their retirement savings from their other savings," said Lisle.
Lisle said the lack of awareness for retirement savings needed to be addressed since Malaysians should ensure that their retirement plans are inflation and recession proof.
He added that Prudential will continue with its retirement education programme in November, under the "What's your number" campaign that seeks to identify and revise one's estimated retirement savings on an annual basis.
Global research agency Research International was commissioned to conduct the Prudential Retire-Meter 2008 survey which covered key urban centres in Peninsular Malaysia, Sabah and Sarawak.
A total of 1,024 Malaysians with a monthly household income of RM3,000 and higher were interviewed for the survey.
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http://www.btimes.com.my/Monday/OurPick/20081022004144/Article
Tuesday 21 October 2008
Outyielding Blue Chips
Browsing the business section of the local paper enabled one to pick up stocks with dividend yields of 4.0% or greater.
No intelligent investor, no matter how starved for yield, would ever buy a stock for its dividend income alone; the company and its businesses must be solid, and its stock price must be reasonable.
But, thanks to the bear market that began the last few months, some leading stocks (blue chips) are now outyielding FDs.
So, even the most defensive investor should realize that selectively adding stocks to an all-bond or mostly-bond portfolio can increase its income yield - and raise its potential returns.
Ref: modified version based on Intelligent Investor by Benjamin Graham
No intelligent investor, no matter how starved for yield, would ever buy a stock for its dividend income alone; the company and its businesses must be solid, and its stock price must be reasonable.
But, thanks to the bear market that began the last few months, some leading stocks (blue chips) are now outyielding FDs.
So, even the most defensive investor should realize that selectively adding stocks to an all-bond or mostly-bond portfolio can increase its income yield - and raise its potential returns.
Ref: modified version based on Intelligent Investor by Benjamin Graham
Developing world has been caught up big time in the global credit squeeze
New York Times
October 20, 2008
Editorial
Collateral Damage
Developing countries have sparked their share of international financial crises over the years. But this time it is not their fault.
As the world’s richest nations spend trillions to rescue their own financial systems from the maelstrom caused by years of excess, they must also be prepared to provide billions to poorer countries that did not cause this crisis but are nevertheless its victims.
The developing world has been caught up big time in the global credit squeeze, as beleaguered foreign banks have cut their credit lines and panicked foreign investors have pulled their money out. Private capital flows to emerging markets are expected to plummet 30 percent this year.
Exports are suffering as rich economies slow and commodity prices retreat. Remittances from migrant workers — a core source of earnings for many developing countries — are falling fast.
Eastern and Central Europe, where much of the banking system is controlled by Western banks, is in particularly dire straits. Ukraine asked the International Monetary Fund for $14 billion to prop up its financial system as money flees. Hungary got 5 billion euros from the European Central Bank.
Pakistan — America’s hoped-for ally in the fight against Al Qaeda that also has nuclear weapons — is said to need $3 billion to $4 billion to finance a gaping trade deficit.
Even robust economies with strong budgets and ample reserves have been walloped by the capital crunch. Two weeks ago, the Mexican peso suffered its steepest drop since the peso crisis of December 1994. The Brazilian real and the Korean won have plunged by a quarter against the dollar.
Given the depth of the crisis here, it might be tempting to ignore the plight of developing economies. But it is in the clear economic interest of wealthy nations to help. The I.M.F. expects these countries to be the only engine of global growth in the next year or so.
Fortunately, some people are thinking ahead. The International Finance Corporation, an arm of the World Bank, is mulling a $3 billion fund to help recapitalize shaky banking systems in the world’s poorest countries. The Inter-American Development Bank said it would increase its lending and announced a $6 billion facility to help companies in smaller Latin American countries that lose access to funding.
The I.M.F. said it is flush with cash —$200 billion plus an additional $50 billion in standing credit arrangements with donor countries — to mobilize if needed. For that it will need the go-ahead from the United States and other big contributors. The I.M.F. must also be ready to relax — within reason — the battery of preconditions it usually attaches to its help.
The world’s richest countries have exhibited enormous myopia throughout this crisis — originally scurrying for ad hoc individual “solutions” that worsened the collective mess. Less than two weeks ago, Washington and Brussels allowed Iceland to go bust.
As the world’s financial powers struggle to contain the disaster, they should not lose sight of its effect on other countries. Every economy for itself makes no sense — and could prove highly dangerous — in today’s interconnected world.
http://www.nytimes.com/2008/10/20/opinion/20mon1.html?_r=1&hp&oref=slogin
October 20, 2008
Editorial
Collateral Damage
Developing countries have sparked their share of international financial crises over the years. But this time it is not their fault.
As the world’s richest nations spend trillions to rescue their own financial systems from the maelstrom caused by years of excess, they must also be prepared to provide billions to poorer countries that did not cause this crisis but are nevertheless its victims.
The developing world has been caught up big time in the global credit squeeze, as beleaguered foreign banks have cut their credit lines and panicked foreign investors have pulled their money out. Private capital flows to emerging markets are expected to plummet 30 percent this year.
Exports are suffering as rich economies slow and commodity prices retreat. Remittances from migrant workers — a core source of earnings for many developing countries — are falling fast.
Eastern and Central Europe, where much of the banking system is controlled by Western banks, is in particularly dire straits. Ukraine asked the International Monetary Fund for $14 billion to prop up its financial system as money flees. Hungary got 5 billion euros from the European Central Bank.
Pakistan — America’s hoped-for ally in the fight against Al Qaeda that also has nuclear weapons — is said to need $3 billion to $4 billion to finance a gaping trade deficit.
Even robust economies with strong budgets and ample reserves have been walloped by the capital crunch. Two weeks ago, the Mexican peso suffered its steepest drop since the peso crisis of December 1994. The Brazilian real and the Korean won have plunged by a quarter against the dollar.
Given the depth of the crisis here, it might be tempting to ignore the plight of developing economies. But it is in the clear economic interest of wealthy nations to help. The I.M.F. expects these countries to be the only engine of global growth in the next year or so.
Fortunately, some people are thinking ahead. The International Finance Corporation, an arm of the World Bank, is mulling a $3 billion fund to help recapitalize shaky banking systems in the world’s poorest countries. The Inter-American Development Bank said it would increase its lending and announced a $6 billion facility to help companies in smaller Latin American countries that lose access to funding.
The I.M.F. said it is flush with cash —$200 billion plus an additional $50 billion in standing credit arrangements with donor countries — to mobilize if needed. For that it will need the go-ahead from the United States and other big contributors. The I.M.F. must also be ready to relax — within reason — the battery of preconditions it usually attaches to its help.
The world’s richest countries have exhibited enormous myopia throughout this crisis — originally scurrying for ad hoc individual “solutions” that worsened the collective mess. Less than two weeks ago, Washington and Brussels allowed Iceland to go bust.
As the world’s financial powers struggle to contain the disaster, they should not lose sight of its effect on other countries. Every economy for itself makes no sense — and could prove highly dangerous — in today’s interconnected world.
http://www.nytimes.com/2008/10/20/opinion/20mon1.html?_r=1&hp&oref=slogin
Monday 20 October 2008
Consequences must dominate Probabilities
In making decisions under conditions of uncertainty, the consequences must dominate the probabilities. We never know the future.
The intelligent investor must focus not just on getting the analysis right. You must also ensure against loss if your analysis turns out to be wrong - as even the best analyses will be at least some of the time.
The probability of making at least one mistake at some point in your investing lifetime is virtually 100%, and those odds are entirely out of your control. However, you do have control over the consequences of being wrong.
Many "investors" put essentially all of their money into dot-com stocks in 1999; an online survey of 1,338 Americans by Money Magazine in 1999 found that nearly one-tenth of them had at least 85% of their money in Internet stocks. By ignoring Graham's call for a margin of safety, these people took the wrong side of Pascal's wager. Certain that they knew the probabilities of being right, they did nothing to protect themselves against the consequences of being wrong.
Simply by keeping your holdings permanently diversified, and refusing to fling money at Mr. Market's latest, craziest fashions, you can ensure that the consequences of your mistakes will never be catastrophic. No matter what Mr. Market throws at you, you will always be able to say, with a quiet confidence, "This, too, shall pass away."
Ref:
The Intelligent Investor by Benjamin Graham
Pascal's Wager
http://www.infidels.org/library/modern/theism/wager.html
The intelligent investor must focus not just on getting the analysis right. You must also ensure against loss if your analysis turns out to be wrong - as even the best analyses will be at least some of the time.
The probability of making at least one mistake at some point in your investing lifetime is virtually 100%, and those odds are entirely out of your control. However, you do have control over the consequences of being wrong.
Many "investors" put essentially all of their money into dot-com stocks in 1999; an online survey of 1,338 Americans by Money Magazine in 1999 found that nearly one-tenth of them had at least 85% of their money in Internet stocks. By ignoring Graham's call for a margin of safety, these people took the wrong side of Pascal's wager. Certain that they knew the probabilities of being right, they did nothing to protect themselves against the consequences of being wrong.
Simply by keeping your holdings permanently diversified, and refusing to fling money at Mr. Market's latest, craziest fashions, you can ensure that the consequences of your mistakes will never be catastrophic. No matter what Mr. Market throws at you, you will always be able to say, with a quiet confidence, "This, too, shall pass away."
Ref:
The Intelligent Investor by Benjamin Graham
Pascal's Wager
http://www.infidels.org/library/modern/theism/wager.html
The risk is not in our stocks, but in ourselves
Risk exists in another dimension: inside you.
If you want to know what risk really is, go to the nearest bathroom and step up to the mirror. That's risk, gazing back at your from the glass.
If you overestimate how well you really understand an investment, or overstate your ability to ride out a temporary plunge in prices, it doesn't matter what you own or how the market does.
Ultimately, financial risk resides not in what kinds of investments you have, but in what kind of investor you are.
The Nobel-prize-winning psychologist Daniel Kahneman explains two factors that characterize good decisions:
1. Do I understand this investment as well as I think I do? ("Well-calibrated confidence")
2. How will I regret if my analysis turns out to be wrong? ("Correctly-anticipated regret")
To find out whether your confidence is well-calibrated, look in the mirror and ask yourself: "What is the likelihood that my analysis is right?" Think carefully through these questions:
Next, look in the mirror to find out whether you are the kind of person who correctly anticipates your regret. Start by asking: "Do I fully understand the consequences if my analysis turns out to be wrong?" Answer that question by considering these points:
"Risk is brewed from an equal dose of two ingredients - probabilities and consequences."
Before you invest, you must ensure that you have realistically assessed
If you want to know what risk really is, go to the nearest bathroom and step up to the mirror. That's risk, gazing back at your from the glass.
If you overestimate how well you really understand an investment, or overstate your ability to ride out a temporary plunge in prices, it doesn't matter what you own or how the market does.
Ultimately, financial risk resides not in what kinds of investments you have, but in what kind of investor you are.
The Nobel-prize-winning psychologist Daniel Kahneman explains two factors that characterize good decisions:
1. Do I understand this investment as well as I think I do? ("Well-calibrated confidence")
2. How will I regret if my analysis turns out to be wrong? ("Correctly-anticipated regret")
To find out whether your confidence is well-calibrated, look in the mirror and ask yourself: "What is the likelihood that my analysis is right?" Think carefully through these questions:
- How much experience do I have? What is my track record with similar decisions in the past?
- What is the typical track record of other people who have tried this in the past?
- If I am buying, someone else is selling. How likely is it that I know something that this other person (or company) does not know?
- If I am selling, someone else is buying. How likely is it that I know something that this other person (or company) does not know?
- Have I calculated how much this investment needs to go up for me to break even after my taxes and costs of trading?
Next, look in the mirror to find out whether you are the kind of person who correctly anticipates your regret. Start by asking: "Do I fully understand the consequences if my analysis turns out to be wrong?" Answer that question by considering these points:
- If I'm right, I could make a lot of money. But what if I'm wrong? Based on the historical performance of similar investments, how much could I lose?
- Do I have other investments that will tide me over if this decision turns out to be wrong? Do I already hold stocks, bonds, or funds with a proven record of going up when the kind of investment I'm considering goes down? Am I putting too much of my capital at risk with the new investment?
- When I tell myself, "You have a high tolerance for risk," how do I know? Have I ever lost a lot of money on an investment? How did it feel? Did I buy more, or did I bail out?
- Am I relying on my willpower alone to prevent me from panicking at the wrong time? Or have I controlled my own behaviour in advance by deversifying, signing an investment contract, and dollar-cost averaging?
"Risk is brewed from an equal dose of two ingredients - probabilities and consequences."
Before you invest, you must ensure that you have realistically assessed
- your probability of being right and
- how you will react to the consequences of being wrong.
What is risk? First, don't lose
What is risk? You will get different answers depending on whom, and when, you ask.
In 1999, risk didn't mean losing money; it meant making less money than someone else! What many people feared was bumping into somebody at a barbecue who was getting even richer even quicker by day trading dot-com stocks than they were.
Then, quite suddenly, by 2003 risk had come to mean that the stock market might keep dropping until it wiped out whatever traces of wealth you still had left.
While its meaning may seem nearly as fickle and fluctuating as the financial markets themselves, risk has some profound and permanent attributes. The people who take the biggest gambles and makes the biggest gains in a bull market are almost always the ones that get hurt the worst in the bear market that inevitably follows. (Being "right" makes speculators even more eager to take extra risk, as their confidence catches fire.)
And once you lose big money, you then have to gamble even harder just to get back to where you were, like a race-track or casino gambler who desperately doubles up after every bad bet. Unless you are phenomenally lucky, that's a recipe for disaster.
First, don't lose
No wonder, when he was asked to sum up everything he had learned in his long career about how to get rich, the legendary financier J.K. Klingenstein of Wertheim & Co. answered simply: "Don't lose."
Losing some money is an inevitable part of investing, and there's nothing you can do to prevent it. But, to be an intelligent investor, you must take responsibility for ensuring that you never lose most or all of your money.
For the intelligent investor, Graham's "margin of safety" performs an important function. By refusing to pay too much for an investment, you minimize the chances that your wealth will ever disappear or suddenly be destroyed.
"Imagine that you find a stock that you think can grow at 10% a year even if the market only grows 5% annually. Unfortunately, you are so enthusiastic that you pay too high a price, and the stock loses 50% of its value the first year. Even if the stock then generates double the market's return, it will take you more than 16 years to overtake the market - simply because you paid too much, and lost too much, at the outset."
Ref: Intelligent Investor by Benjamin Graham
In 1999, risk didn't mean losing money; it meant making less money than someone else! What many people feared was bumping into somebody at a barbecue who was getting even richer even quicker by day trading dot-com stocks than they were.
Then, quite suddenly, by 2003 risk had come to mean that the stock market might keep dropping until it wiped out whatever traces of wealth you still had left.
While its meaning may seem nearly as fickle and fluctuating as the financial markets themselves, risk has some profound and permanent attributes. The people who take the biggest gambles and makes the biggest gains in a bull market are almost always the ones that get hurt the worst in the bear market that inevitably follows. (Being "right" makes speculators even more eager to take extra risk, as their confidence catches fire.)
And once you lose big money, you then have to gamble even harder just to get back to where you were, like a race-track or casino gambler who desperately doubles up after every bad bet. Unless you are phenomenally lucky, that's a recipe for disaster.
First, don't lose
No wonder, when he was asked to sum up everything he had learned in his long career about how to get rich, the legendary financier J.K. Klingenstein of Wertheim & Co. answered simply: "Don't lose."
Losing some money is an inevitable part of investing, and there's nothing you can do to prevent it. But, to be an intelligent investor, you must take responsibility for ensuring that you never lose most or all of your money.
For the intelligent investor, Graham's "margin of safety" performs an important function. By refusing to pay too much for an investment, you minimize the chances that your wealth will ever disappear or suddenly be destroyed.
"Imagine that you find a stock that you think can grow at 10% a year even if the market only grows 5% annually. Unfortunately, you are so enthusiastic that you pay too high a price, and the stock loses 50% of its value the first year. Even if the stock then generates double the market's return, it will take you more than 16 years to overtake the market - simply because you paid too much, and lost too much, at the outset."
Ref: Intelligent Investor by Benjamin Graham
Value above Price
Clear-cut undervaluations of leading common stocks (blue chip stocks) tend to occur only during bear markets. The intervals between successive market bottoms have been much longer, so that this type of opportunity must now be considered as infrequent.
In the secondary field (non-blue chip stocks), by contrast, undervaluations may be found at all times except when a bull market is well advanced. Thus the investor or analyst who is strongly interested in the undervaluation approach will find what he is looking for, more continuously or consistently, among the secondary issues.
Ref: Security Analysis by Benjamin Graham
[Bear markets occur infrequently. As a guide, perhaps, for every 4 bulls, one expects to meet 1 bear. Very severe bear markets were uncommon. This occured about 1 in 10 years, namely 1987 and 1997.]
In the secondary field (non-blue chip stocks), by contrast, undervaluations may be found at all times except when a bull market is well advanced. Thus the investor or analyst who is strongly interested in the undervaluation approach will find what he is looking for, more continuously or consistently, among the secondary issues.
Ref: Security Analysis by Benjamin Graham
[Bear markets occur infrequently. As a guide, perhaps, for every 4 bulls, one expects to meet 1 bear. Very severe bear markets were uncommon. This occured about 1 in 10 years, namely 1987 and 1997.]
3 exceptions to sell the losers rule
Value, in terms of growth potential, is based on earnings and earnings growth.
Analysis of earnngs and news about a company can give some insight into the quality of earnings.
If management has increased earnings by firing half the company's personnel, or the increase is derived from closing several facilities, the quality of the increase is not as valuable as it would be if it reflected improved sales and other revenues.
Slash-and-burn strategies can lead to a further decline in productivity, resulting in additional weakness in earnings and eventually lower prices for the stock.
On the positive side, drastic cuts can force companies to become more efficient, thereby increasing the quality of earnings, which may lead to higher stock prices.
The investor must analyse the company's growth and observe the stock price in action. From the analysis, the investor can determine whether the value of a stock is more likely to:
The analysis can be difficult at times because a winner can temporarily take on the appearance of a loser.
Three situations:
Exception 1: Daily Price Fluctuations
Stock prices fluctuate up or down in day-to-day trading. A glance at any daily price chart will show what may be considered normal daily fluctuations for any individual stock. Stock prices also move from one trading range to another.
For example, a stock price could have a daily fluctuation of $30 to $35 but could occasionally move to $40 and then drop back to the $30 to $35 range. The trading range would be considered $30 to $40. When the stock moves up and begins fluctuating between $40 and $55, it is trading in a new, higher range.
The trading ranges and daily fluctuations can be readily observed on a price pattern cahrt. The investor should take the time to become familiar with these trading ranges and fluctuations from the preceding few months.
Familiarity with price movements will help the investor differentiate between a normal fluctuation and a breakout to a new trading range.
If a lower stock price is within the normal range, it may still be a winner, even if the investor is experiencing a small loss - assuming that the initial analysis showed the stock to be a winner in earnings and growth. Therefore, the kind of weakness seen in a normal fluctuation does not indicate that the time to sell out and take a loss has arrived.
Exception 2: Market Decline
A significant drop in the overall stock market can force the price of a winner to lower levels. All stocks can eventually look like losers, and some will become losers.
Most often these severe market corrections are a time for concern, but not panic.
As we have seen in recent years, the stock market can drop 100, 200, or more than 500 points and recover quickly. Stocks that were winners before the correction will likely be winners agains when the market recovers.
In October 1987, the Dow Industrials dropped more than 508 points (22.6%). Looking back in 2004, that is still the largest percentage drop in one day. Merck & Company had already been showing some weakness, but on the sharp correction on October 19, it dropped from $11.00 to $8.50, a significant $1.50. This correction was an overall market reaction. For Merck, the weakness of the market in late 1987 was an excellent buying opportunity. It began a quick recovery, and by April 1988, after prices were adjusted for a stock split, Merck was trading above $9.00 a share.
In a Continuing Decline
If the market correction is sudden and appears to stabilize in just a few days, it may be best to hold a position and even consider buying more shares of the same stock. Many investors recognized the severe correction in 1987, for example, as a buying opportunity. Although the Dow remained volatile, it reached new highs in early 1989.
Unless they are severe and extend over a few weeks and months, market corrections do not necessarily turn winners into losers.
If a market decline continues, however, the investor should consider selling and moving the funds to the sideline. Extended market corrections are bear markets where stock prices decline and interest rates rise.
Exception 3: Price Advance Followed by a Weakness
A significant upward move to a new trading range, followed by some price weakness, is a fairly normal occurrence. As a stock price makes a major upward movement, many investors will begin to take profits.
Although there is nothing wrong with taking profits, the upward price movement might have only just started. Even so, it is inevitable that some profit taking will occur, and the stock price that has risen to new highs will show some downward price correction.
A signal is given if a stock begins to fall lower than its daily trading range and the overall market is unchanged or advancing.
If a stock price that normally trades between $45 and $50 a share drops to $43 and then to $40, it is time to be concerned. The signal is even stronger if the stocks of comparable companies are not showing a similar weakness.
It is a signal to either sell the stock or find out the reason for the price decline.
Analysis of earnngs and news about a company can give some insight into the quality of earnings.
If management has increased earnings by firing half the company's personnel, or the increase is derived from closing several facilities, the quality of the increase is not as valuable as it would be if it reflected improved sales and other revenues.
Slash-and-burn strategies can lead to a further decline in productivity, resulting in additional weakness in earnings and eventually lower prices for the stock.
On the positive side, drastic cuts can force companies to become more efficient, thereby increasing the quality of earnings, which may lead to higher stock prices.
The investor must analyse the company's growth and observe the stock price in action. From the analysis, the investor can determine whether the value of a stock is more likely to:
- increase,
- remain flat, or
- begin to decline.
The analysis can be difficult at times because a winner can temporarily take on the appearance of a loser.
Three situations:
- daily price fluctuations,
- market declines, and
- price advances followed by weaknesses
can make a winner appear to look weak, but they are not necessarily a signal to begin selling. These are usually temporary situations and are therefore exceptions to the sell-the-losers rule.
Exception 1: Daily Price Fluctuations
Stock prices fluctuate up or down in day-to-day trading. A glance at any daily price chart will show what may be considered normal daily fluctuations for any individual stock. Stock prices also move from one trading range to another.
For example, a stock price could have a daily fluctuation of $30 to $35 but could occasionally move to $40 and then drop back to the $30 to $35 range. The trading range would be considered $30 to $40. When the stock moves up and begins fluctuating between $40 and $55, it is trading in a new, higher range.
The trading ranges and daily fluctuations can be readily observed on a price pattern cahrt. The investor should take the time to become familiar with these trading ranges and fluctuations from the preceding few months.
Familiarity with price movements will help the investor differentiate between a normal fluctuation and a breakout to a new trading range.
If a lower stock price is within the normal range, it may still be a winner, even if the investor is experiencing a small loss - assuming that the initial analysis showed the stock to be a winner in earnings and growth. Therefore, the kind of weakness seen in a normal fluctuation does not indicate that the time to sell out and take a loss has arrived.
Exception 2: Market Decline
A significant drop in the overall stock market can force the price of a winner to lower levels. All stocks can eventually look like losers, and some will become losers.
Most often these severe market corrections are a time for concern, but not panic.
As we have seen in recent years, the stock market can drop 100, 200, or more than 500 points and recover quickly. Stocks that were winners before the correction will likely be winners agains when the market recovers.
In October 1987, the Dow Industrials dropped more than 508 points (22.6%). Looking back in 2004, that is still the largest percentage drop in one day. Merck & Company had already been showing some weakness, but on the sharp correction on October 19, it dropped from $11.00 to $8.50, a significant $1.50. This correction was an overall market reaction. For Merck, the weakness of the market in late 1987 was an excellent buying opportunity. It began a quick recovery, and by April 1988, after prices were adjusted for a stock split, Merck was trading above $9.00 a share.
In a Continuing Decline
If the market correction is sudden and appears to stabilize in just a few days, it may be best to hold a position and even consider buying more shares of the same stock. Many investors recognized the severe correction in 1987, for example, as a buying opportunity. Although the Dow remained volatile, it reached new highs in early 1989.
Unless they are severe and extend over a few weeks and months, market corrections do not necessarily turn winners into losers.
If a market decline continues, however, the investor should consider selling and moving the funds to the sideline. Extended market corrections are bear markets where stock prices decline and interest rates rise.
Exception 3: Price Advance Followed by a Weakness
A significant upward move to a new trading range, followed by some price weakness, is a fairly normal occurrence. As a stock price makes a major upward movement, many investors will begin to take profits.
Although there is nothing wrong with taking profits, the upward price movement might have only just started. Even so, it is inevitable that some profit taking will occur, and the stock price that has risen to new highs will show some downward price correction.
A signal is given if a stock begins to fall lower than its daily trading range and the overall market is unchanged or advancing.
If a stock price that normally trades between $45 and $50 a share drops to $43 and then to $40, it is time to be concerned. The signal is even stronger if the stocks of comparable companies are not showing a similar weakness.
It is a signal to either sell the stock or find out the reason for the price decline.
Sunday 19 October 2008
Sell the Losers and Let the Winners Run
"Sell the Losers and Let the Winners Run"
"Cut your losses and let your profits run." (Daniel Drew, 1800)
The concept is sound. In fact, it is one of the most important understandings an investor can have about the stock market.
It is prudent for an investor to sell stocks that are losing money, stocks that could continue to drop in price and value. It makes equally good sense to stay with stocks that show significant gains, as long as they remain fundamentally strong.
But just what is a loser?
Any price drop is a losing situation. Price drops cost the investor money. They are a loss of profits. In some circumstances, the investor should sell, but in other situations the investor should take a closer look before reaching a sell decision.
The determination of whether a stock is still a winner depends on the cause of the price correction. If a price drop occurs because of a weakness in the overall market situatio or is the result of a "normal" daily fluctuation of the stock price, the stock can still be a winner.
If however, the cause of the drop has long-term implications, it could be time to take the loss and move on to another stock. Long-term implications could be any of the following:
Any event that has a negative impact on the long-term picture of earnings or earnings growth can quickly turn a stock into a loser. Many long- and short-term investors will sell out their positions and move on to a potential winner.
"Cut your losses and let your profits run." (Daniel Drew, 1800)
The concept is sound. In fact, it is one of the most important understandings an investor can have about the stock market.
It is prudent for an investor to sell stocks that are losing money, stocks that could continue to drop in price and value. It makes equally good sense to stay with stocks that show significant gains, as long as they remain fundamentally strong.
But just what is a loser?
- Is it any price drop from the high?
- Is a stock a loser ony if the investor is actually in a loss position - that is, when the current price is below the original purchase price?
Any price drop is a losing situation. Price drops cost the investor money. They are a loss of profits. In some circumstances, the investor should sell, but in other situations the investor should take a closer look before reaching a sell decision.
The determination of whether a stock is still a winner depends on the cause of the price correction. If a price drop occurs because of a weakness in the overall market situatio or is the result of a "normal" daily fluctuation of the stock price, the stock can still be a winner.
If however, the cause of the drop has long-term implications, it could be time to take the loss and move on to another stock. Long-term implications could be any of the following:
- Declining sales
- Tax difficulties
- Legal problems
- An emerging bear market
- Higher interest rates
- Negative impacts on future earnings.
Any event that has a negative impact on the long-term picture of earnings or earnings growth can quickly turn a stock into a loser. Many long- and short-term investors will sell out their positions and move on to a potential winner.
Asian Financial Crisis 2?
In the Asian Financial Crisis of 1997, the IMF Packages (US$) to bail out:
Korea was US$ 57bn (Dec 3, 1997)
Thailand was US$ 17.2 bn (Aug 20, 1997)
Indonesia was US$ 43.0 bn (Oct 31, 1997)
The present financial crisis that started in 2007 in US is spreading globally. It is so much bigger. It has spread to Europe. Will Asia be affected too? Will we be revisited by another financial crisis?
Could it happen again?
The possibility of having another 1997-type crisis continues to create concern among policy-makers. The reason is no other than the disruptive effects of capital flows, especially in the emerging markets.
Statistics will show why such fear still exists. During the Asian Financial Crisis, a crude estimate of private capital that flowed into the five troubled countries of South Korea, Thailand, Indonesia, Malaysia and the Philippines was almost US$ 100 billion in 1996, which was one third of worldwide flows into the emerging markets (estimated at over US$ 295 billion). That was a five-fold increase over the 1990-1993 average.
When it suddenly reversed to an outflow of US$ 12 billion the following year, it had a devastating effect on these economies. Recent statistics from the Institute of International Finance reveal a staggering fact: net private capital flows was at a high of US$ 502 billion in 2006 after a record US$ 509 billion in 2005. The amount in 2007 might be slightly lower, but still well above the level of the heady days of 1990s.
Net portfolio of equity which recorded an outflow of nearly US$5 billion in 2002 reversed to inflows of US$ 39.1 billion in 2004 and to US$69.7 billion in 2006. Imagine what this amount of flows can do to emerging economies if it were to reverse and flow out.
What was seen in 1996-97 in Asian markets was an extraordinary change in confidence, what John Maynard Keynes termed as the "animal spirit". Such reversals in sentiment are quite common, even in developed economies, but the magnitude of such incidents is greater in emerging economies because foreign investors tend to lump them together without differentiating each country.
Even when investors are able to differentiate between the fundamentals, they do not think it is logical not to follow the herd mentality as they may still incur huge losses if they do not do so.
Because of the volatility of foreign capital flows, manoeuvring macroeconomic policies becomes a difficult task for emerging economies. Excess liquidity created by huge inflows tends to cause an increase in interest rates, which in turn attracts more capital into the country.
Another policy-makers' concern over capital flows is related to the devastating socioeconomic and political effects of the Asian Financial Crisis. Economic malaise then caused a rapid increase in suffering and poverty level as millions of people were thrown on the streets without a job.
The current global economic and financial conditions are similar to the situation in the heyday of the late 1990s. Because of massive liquidity induced by extremely low interest rates in some developed countries like Japan and US, particularly during the 2001 recession, global equity and bond markets boomed.
There are of course other reasons. Some countries which are preventing their currencies from excessive appreciation find themselves saddled with huge foreign reserves following huge surpluses in their current accounts.
While some countries try to avoid a build-up in liquidity, some only exercise partial sterilisation through issuance of bonds. As a result, the massive liquidty makes its way into the stock and property markets, causing an asset bubble. Not surprisingly, stock market indices in the US, China and many countries in Southeast Asia hit new historical highs last year. Valuations were rich and in a country like China, and its price-earnings multiples look horrendous.
At the same time, mounting reserves from China and Japan ended up in the US treasury market, causing yields to drop significantly.
Ref:
Malaysian Business July 16, 2007
http://fusioninvestor.blogspot.com/2008/10/usd-596004000000000.html
US$ 600 trillion
Korea was US$ 57bn (Dec 3, 1997)
Thailand was US$ 17.2 bn (Aug 20, 1997)
Indonesia was US$ 43.0 bn (Oct 31, 1997)
The present financial crisis that started in 2007 in US is spreading globally. It is so much bigger. It has spread to Europe. Will Asia be affected too? Will we be revisited by another financial crisis?
Could it happen again?
The possibility of having another 1997-type crisis continues to create concern among policy-makers. The reason is no other than the disruptive effects of capital flows, especially in the emerging markets.
Statistics will show why such fear still exists. During the Asian Financial Crisis, a crude estimate of private capital that flowed into the five troubled countries of South Korea, Thailand, Indonesia, Malaysia and the Philippines was almost US$ 100 billion in 1996, which was one third of worldwide flows into the emerging markets (estimated at over US$ 295 billion). That was a five-fold increase over the 1990-1993 average.
When it suddenly reversed to an outflow of US$ 12 billion the following year, it had a devastating effect on these economies. Recent statistics from the Institute of International Finance reveal a staggering fact: net private capital flows was at a high of US$ 502 billion in 2006 after a record US$ 509 billion in 2005. The amount in 2007 might be slightly lower, but still well above the level of the heady days of 1990s.
Net portfolio of equity which recorded an outflow of nearly US$5 billion in 2002 reversed to inflows of US$ 39.1 billion in 2004 and to US$69.7 billion in 2006. Imagine what this amount of flows can do to emerging economies if it were to reverse and flow out.
What was seen in 1996-97 in Asian markets was an extraordinary change in confidence, what John Maynard Keynes termed as the "animal spirit". Such reversals in sentiment are quite common, even in developed economies, but the magnitude of such incidents is greater in emerging economies because foreign investors tend to lump them together without differentiating each country.
Even when investors are able to differentiate between the fundamentals, they do not think it is logical not to follow the herd mentality as they may still incur huge losses if they do not do so.
Because of the volatility of foreign capital flows, manoeuvring macroeconomic policies becomes a difficult task for emerging economies. Excess liquidity created by huge inflows tends to cause an increase in interest rates, which in turn attracts more capital into the country.
Another policy-makers' concern over capital flows is related to the devastating socioeconomic and political effects of the Asian Financial Crisis. Economic malaise then caused a rapid increase in suffering and poverty level as millions of people were thrown on the streets without a job.
The current global economic and financial conditions are similar to the situation in the heyday of the late 1990s. Because of massive liquidity induced by extremely low interest rates in some developed countries like Japan and US, particularly during the 2001 recession, global equity and bond markets boomed.
There are of course other reasons. Some countries which are preventing their currencies from excessive appreciation find themselves saddled with huge foreign reserves following huge surpluses in their current accounts.
While some countries try to avoid a build-up in liquidity, some only exercise partial sterilisation through issuance of bonds. As a result, the massive liquidty makes its way into the stock and property markets, causing an asset bubble. Not surprisingly, stock market indices in the US, China and many countries in Southeast Asia hit new historical highs last year. Valuations were rich and in a country like China, and its price-earnings multiples look horrendous.
At the same time, mounting reserves from China and Japan ended up in the US treasury market, causing yields to drop significantly.
Ref:
Malaysian Business July 16, 2007
http://fusioninvestor.blogspot.com/2008/10/usd-596004000000000.html
US$ 600 trillion
Industries That Thrive On Recession
Industries That Thrive On Recession
by Andrew Beattie (Contact Author Biography)
Recessions are hard on everyone - aren't they? Actually, just as wars have their war babies (companies that perform well during war and suffer during peace), recessions have their tough offspring as well. In this article we'll take a look at the industries that flourish in the adversity of a recession and why they do so well when everyone else is struggling to make ends meet. (For related reading, see Recession: What Does It Mean To Investors? and War's Influence On Wall Street.)
Discount Retailers
It makes sense that, as budgets feel the strain of an economic downturn, people turn to the stores that offer the most for the least. Discount retailers like Wal-Mart may appear to do well at any time, but this is not entirely true. They often suffer in good times as people flush with money buy higher-quality goods at competing outlets. To remain competitive, they are forced to upgrade their product lines and change the focus of their business from thrift to quality. Their profits suffer from either lost sales or less margin on the goods they sell. In hard times, however, these retailers excel by going back to core products and using vast economies of scale to give cheap goods to consumers. Designers and producers of lower-end products also see an upswing as more people jump from brand names to make their paychecks go further. People may not like discount retailers, but in a recession most people end up shopping there. (Learn one way these companies make their money in What Are Economies Of Scale?)
Sin Industries
In bad times, the bad do well. Although it seems a little counterintuitive, people patronize the sin industry more during a recession. In good times, these same people might have bought new shoes, a new stereo or other, bigger-ticket items. In bad times, however, the desire for comforts doesn't leave, it simply scales down. People will pass on the stereo, but a nightly glass of wine, a pack of cigarettes or a chocolate bar are small expenditures that help hold back the general malaise that comes with being tight on cash. Be warned, though - not all sin businesses prosper in a recession. Gambling, with the exception of the truly troubled gamblers, becomes an extravagance and generally declines during recessions. In fact, casinos do their best trade when the economy is roaring and everyone feels lucky. The most prosperous businesses in this industry are the purveyors of small pleasures that can be bought at a gas station or convenience store. (To find out if it pays pick your portfolio based on ethics, read Socially Responsible Investing Vs. Sin Stocks and Socially (Ir)responsible Mutual Funds.)
Selected Services
Expect a downturn in the service industry as a whole, as companies and families are willing to do more themselves to save money. A certain class of service providers will see an upswing during hard times though. Companies that specialize in upgrading and maintaining existing equipment and products see their business increase as more clients focus on working with what they have now rather than buying a newer model. (Read Less Trash For More Cash to learn how eco-friendly practices can be good for your wallet as well as the planet.)In the real estate industry, they say renovators hire as builders fire, and this holds true for many other industries as well.
The Statics
In a recession, simply carrying on with business as usual can be an achievement. Pharmaceuticals, healthcare companies, tax service companies, gravediggers, waste disposal companies and many others are in a category that, while not jumping ahead during a recession, can plod along while other companies suffer. This is simply because people get sick, get taxed and die (not always in that order) no matter what the economy is like. Sometimes the most boring businesses offer the most consistent and, in context, exciting returns. (Read A Checklist For Successful Medical Technology Investment and Build Your Portfolio With Infrastructure Investments to learn more about putting your money into these stable industries.)
The Benefits Of Recession
The biggest benefit of hard times is that companies get hurt for inefficiencies that they laughed off in better times. A recession means general fat trimming for companies, from which they should emerge stronger, and that's good news for investors. One of the best signs is a company in a hard-hit industry that is expanding anyway. For example, McDonald's continued to grow in the 1970s downturn even though restaurants generally suffered as people cooked rather than going out to eat. Similarly, Toyota was opening new American plants in the 1990s downturn when the Big Three were closing theirs due to falling sales for new cars. (Read more about the 1970s economy in Stagflation, 1970s Style.)A recession can be a blessing for investors, as it is much easier to spot a strong company without the white noise of a strong economy. (Read how certain strategies can help you cut through market noise in Trading Without Noise.)
Waiting It Out
Although it is good to know which companies excel in a recession, investing according to economic cycles can be difficult. If you do invest in these industries during a recession, you have pay careful attention to your investment so you can readjust your portfolio before the economy rebounds, stemming the advances the recession-proof industries have made. (Read more about how to take advantage of market fluctuations in The Ups And Downs Of Investing In Cyclical Stocks.)Some of the companies performing well in a recession will also perform well in a recovery, and more will change their business to take advantage of it, but many will be passed by their toughened-up brethren that race ahead in bull markets – financials, technology firms and other faster-moving industries. With the proper timing, however, these industries can provide a buffer within your portfolio while you wait for your high fliers to take off again. For further reading, see Four Tips For Buying Stocks In A Recession and Recession-Proof Your Portfolio.
by Andrew Beattie, (Contact Author Biography)Andrew Beattie is a freelance writer and self-educated investor. He worked for Investopedia as an editor and staff writer before moving to Japan in 2003. Andrew still lives in Japan with his wife, Rie. Since leaving Investopedia, he has continued to study and write about the financial world's tics and charms. Although his interests have been necessarily broad while learning and writing at the same time, perennial favorites include economic history, index funds, Warren Buffett and personal finance. He may also be the only financial writer who can claim to have read "The Encyclopedia of Business and Finance" cover to cover.
http://www.investopedia.com/articles/stocks/08/industries-thrive-on-recession.asp?viewall=1
by Andrew Beattie (Contact Author Biography)
Recessions are hard on everyone - aren't they? Actually, just as wars have their war babies (companies that perform well during war and suffer during peace), recessions have their tough offspring as well. In this article we'll take a look at the industries that flourish in the adversity of a recession and why they do so well when everyone else is struggling to make ends meet. (For related reading, see Recession: What Does It Mean To Investors? and War's Influence On Wall Street.)
Discount Retailers
It makes sense that, as budgets feel the strain of an economic downturn, people turn to the stores that offer the most for the least. Discount retailers like Wal-Mart may appear to do well at any time, but this is not entirely true. They often suffer in good times as people flush with money buy higher-quality goods at competing outlets. To remain competitive, they are forced to upgrade their product lines and change the focus of their business from thrift to quality. Their profits suffer from either lost sales or less margin on the goods they sell. In hard times, however, these retailers excel by going back to core products and using vast economies of scale to give cheap goods to consumers. Designers and producers of lower-end products also see an upswing as more people jump from brand names to make their paychecks go further. People may not like discount retailers, but in a recession most people end up shopping there. (Learn one way these companies make their money in What Are Economies Of Scale?)
Sin Industries
In bad times, the bad do well. Although it seems a little counterintuitive, people patronize the sin industry more during a recession. In good times, these same people might have bought new shoes, a new stereo or other, bigger-ticket items. In bad times, however, the desire for comforts doesn't leave, it simply scales down. People will pass on the stereo, but a nightly glass of wine, a pack of cigarettes or a chocolate bar are small expenditures that help hold back the general malaise that comes with being tight on cash. Be warned, though - not all sin businesses prosper in a recession. Gambling, with the exception of the truly troubled gamblers, becomes an extravagance and generally declines during recessions. In fact, casinos do their best trade when the economy is roaring and everyone feels lucky. The most prosperous businesses in this industry are the purveyors of small pleasures that can be bought at a gas station or convenience store. (To find out if it pays pick your portfolio based on ethics, read Socially Responsible Investing Vs. Sin Stocks and Socially (Ir)responsible Mutual Funds.)
Selected Services
Expect a downturn in the service industry as a whole, as companies and families are willing to do more themselves to save money. A certain class of service providers will see an upswing during hard times though. Companies that specialize in upgrading and maintaining existing equipment and products see their business increase as more clients focus on working with what they have now rather than buying a newer model. (Read Less Trash For More Cash to learn how eco-friendly practices can be good for your wallet as well as the planet.)In the real estate industry, they say renovators hire as builders fire, and this holds true for many other industries as well.
The Statics
In a recession, simply carrying on with business as usual can be an achievement. Pharmaceuticals, healthcare companies, tax service companies, gravediggers, waste disposal companies and many others are in a category that, while not jumping ahead during a recession, can plod along while other companies suffer. This is simply because people get sick, get taxed and die (not always in that order) no matter what the economy is like. Sometimes the most boring businesses offer the most consistent and, in context, exciting returns. (Read A Checklist For Successful Medical Technology Investment and Build Your Portfolio With Infrastructure Investments to learn more about putting your money into these stable industries.)
The Benefits Of Recession
The biggest benefit of hard times is that companies get hurt for inefficiencies that they laughed off in better times. A recession means general fat trimming for companies, from which they should emerge stronger, and that's good news for investors. One of the best signs is a company in a hard-hit industry that is expanding anyway. For example, McDonald's continued to grow in the 1970s downturn even though restaurants generally suffered as people cooked rather than going out to eat. Similarly, Toyota was opening new American plants in the 1990s downturn when the Big Three were closing theirs due to falling sales for new cars. (Read more about the 1970s economy in Stagflation, 1970s Style.)A recession can be a blessing for investors, as it is much easier to spot a strong company without the white noise of a strong economy. (Read how certain strategies can help you cut through market noise in Trading Without Noise.)
Waiting It Out
Although it is good to know which companies excel in a recession, investing according to economic cycles can be difficult. If you do invest in these industries during a recession, you have pay careful attention to your investment so you can readjust your portfolio before the economy rebounds, stemming the advances the recession-proof industries have made. (Read more about how to take advantage of market fluctuations in The Ups And Downs Of Investing In Cyclical Stocks.)Some of the companies performing well in a recession will also perform well in a recovery, and more will change their business to take advantage of it, but many will be passed by their toughened-up brethren that race ahead in bull markets – financials, technology firms and other faster-moving industries. With the proper timing, however, these industries can provide a buffer within your portfolio while you wait for your high fliers to take off again. For further reading, see Four Tips For Buying Stocks In A Recession and Recession-Proof Your Portfolio.
by Andrew Beattie, (Contact Author Biography)Andrew Beattie is a freelance writer and self-educated investor. He worked for Investopedia as an editor and staff writer before moving to Japan in 2003. Andrew still lives in Japan with his wife, Rie. Since leaving Investopedia, he has continued to study and write about the financial world's tics and charms. Although his interests have been necessarily broad while learning and writing at the same time, perennial favorites include economic history, index funds, Warren Buffett and personal finance. He may also be the only financial writer who can claim to have read "The Encyclopedia of Business and Finance" cover to cover.
http://www.investopedia.com/articles/stocks/08/industries-thrive-on-recession.asp?viewall=1
Recession: What Does It Mean To Investors?
Recession: What Does It Mean To Investors? by Investopedia Staff, (Investopedia.com)
When the economy heads into a tailspin, you may hear news reports of dropping housing starts, increased jobless claims and shrinking economic output. How does this affect us as investors? What do house building and shrinking output have to do with your portfolio? As you'll discover, these indicators are part of a larger picture, which determines the strength of the economy and whether we are in a period of recession or expansion.
The Phases of the Business Cycle
In order to determine the current state of the economy, we first need to take a good look at the business cycle as a whole. Generally, the business cycle is made up of four different periods of activity extended over several years. These phases can differ substantially in duration, but are all closely intertwined in the overall economy.
Peak - This is not the beginning of the business cycle, but this is where we'll start. At its peak, the economy is running at full steam. Employment is at or near maximum levels, gross domestic product (GDP) output is at its upper limit (implying that there is very little waste occurring) and income levels are increasing. In this period, prices tend to increase due to inflation; however, most businesses and investors are having an enjoyable and prosperous time.
Recession - The old adage "what goes up must come down" applies perfectly here. After experiencing a great deal of growth and success, income and employment begin to decline. As our wages and the prices of goods in the economy are inflexible to change, they will most likely remain near the same level as in the peak period unless the recession is prolonged. The result of these factors is negative growth in the economy.
Trough - Also sometimes referred to as a depression, depending upon the duration of the trough, this is the section of the business cycle when output and employment bottom out and remain in waiting for the next phase of the cycle to begin.
Expansion/Recovery - In a recovery, the economy is growing once again and moving away from the bottoms experienced at the trough. Employment, production and income all undergo a period of growth and the overall economic climate is good.
Notice in the above diagram that the peak and trough are merely flat points on the business cycle at which there is no movement. They represent the maximum and minimum levels of economic strength. Recession and recovery are the areas of the business cycle that are more important to investors because they tell us the direction of the economy.
To further complicate matters, not all business cycles go through these four steps sequentially. For instance, during a double dip recession, the economy goes through a recession followed by a short recovery and another recession without ever peaking.
Recession Versus Expansion
Recession is loosely defined as two consecutive quarters of decline in GDP output. This definition can lead to situations where there are frequent switches between a recession and expansion and, as such, many different variations of this principle have been used in the hope of creating a universal method for calculation. The National Bureau of Economic Research (NBER) is an organization that is seen as having the final word in determining whether the United States is in recession. It has a more extensive definition of recession, which deems the following four main factors as the most important for determining the state of the economy:
Employment
Personal income
Sales volume in manufacturing and retail sectors
Industrial production>
By looking at these four indicators, economists at the NBER hope to gauge the overall health of the market and decide whether the economy is in recession or expansion. The tricky part about trying to determine the state of the economy is that most indicators are either lagging or coincidental rather than leading. When an indicator is "lagging" it means that the indicator changes only after the fact. That is, a lagging indicator can confirm that an economy is in recession, but it doesn't help much in predicting what will happen in the future. (Learn more about this in Economic Indicators To Know.)
What Does this Mean for Investors?
Understanding the business cycle doesn't matter much unless it improves portfolio returns.
What's an investor to do during recession?
Unfortunately, there is no easy answer. It really depends on your situation and what type of investor you are. (For some ideas, see Recession-Proof Your Portfolio.)
First, remember that a bear market does not mean there are no ways to make money.
Some investors take advantage of falling markets by short selling stocks. Essentially, an investor who sells short profits when a stock declines in value. Problem is, this technique has many unique pitfalls and should be used only by more experienced investors. (If you want to learn more, see the tutorial Short Selling.)
Another breed of investor uses recession much like a sale at the local department store. Referred to as value investing, this technique involves looking at a fallen stock not as a failure, but as a bargain waiting to be scooped up. Knowing that better times will eventually return in the economy, value investors use bear markets as buying sprees, picking up high-quality companies that are selling for cheap.
There is yet another type of investor who barely flinches during recession. A follower of the long-term, buy-and-hold strategy knows that short-term problems will barely be a blip on the chart when taking a 20-30 year horizon. This investor merely continues dollar-cost averaging in a bad market the same way as he or she would in a good one.
Of course, many of us don't have the luxury of a 20-year horizon. At the same time, many investors don't have the stomach for riskier techniques like short selling or the time to analyze stocks like a value investor does. The key is to understand your situation and then pick a style that works for you.
For example, if you are close to retirement, the long-term approach definitely is not for you. Instead of being at the mercy of the stock market, diversify into other assets such as bonds, the money market, real estate, etc.
Conclusion
The financial media often takes on a "sky is falling" mentality when it comes to recession. But the bottom line is that recession is a normal part of the business cycle. We can't say what the best course is for you - that's a personal decision. However, understanding both the business cycle and your individual investment style is key to surviving a recession.
by Investopedia Staff, (Contact Author Biography)
http://www.investopedia.com/articles/02/100402.asp
Saturday 18 October 2008
Why is the price falling?
Question: After buying some shares, the price keep on falling. The company is doing well - there is no bad news. "Why is the price falling?"
Basically, share price movement depends on demand and supply.
When demand exceeds supply, the price will rise.
When supply exceeds demand, the price will fall.
The price movement is thus determined by all the investors and speculators in the market. The instantaneous action of the aforesaid will propel the price of the shares in a particular direction - up or down.
Movement of share price = Demand vs Supply
Demand > Supply = Share price rises
Supply < Demand = Share price falls
Thus when share price falls, it means there are more sellers than buyers.
Ref: Making Mistakes in the Stock Market by Wong Yee
Basically, share price movement depends on demand and supply.
When demand exceeds supply, the price will rise.
When supply exceeds demand, the price will fall.
The price movement is thus determined by all the investors and speculators in the market. The instantaneous action of the aforesaid will propel the price of the shares in a particular direction - up or down.
Movement of share price = Demand vs Supply
Demand > Supply = Share price rises
Supply < Demand = Share price falls
Thus when share price falls, it means there are more sellers than buyers.
Ref: Making Mistakes in the Stock Market by Wong Yee
Singapore coping with recession
The Star Online > Focus
Saturday October 18, 2008
Rainbow at the end of the crisis
INSIGHT DOWN SOUTH
By SEAH CHIANG NEE
Singapore is confident that it can emerge from the current world financial crisis along with several others, including Hong Kong, Tokyo, Dubai and Shanghai, to form a new global financial bloc.
HOW do Singaporeans who have lived a sheltered life cope with the current recession and global dislocation? Answer: Surprisingly well!
Judging by the sentiments expressed both in the new and old media, this new generation appears to show a sharp awareness of the potential trouble.
If anything, the worries sometimes border on the exaggerated as though the end of world order is nigh, but most of the time Singaporeans are well-informed and realistic.
A Singaporean Web surfer sums up the preparatory mood when he says: “I will repeat, I will reduce and reuse, I will recycle and I will repair.”
“I will not buy on impulse, always buy one item less and save that extra dollar,” he adds.
“We are in very severe times. All are suffering.”
Another surfer says: “The downturn will come in waves and will last at least three years. Deflation may be on the card.”
The biggest victims so far are investors who have rapidly lost billions of dollars in stock and property trading and even on structured bank papers.
There are good reasons for Singaporeans’ preparedness. The SARS-induced crisis, for one, serves as a good teacher.
Another could be the frank, open reporting €“ and discussions of the bad news €“ by Cabinet ministers and the mainstream media, which surprisingly pulled few punches.
Thirdly, Singapore became the first major economy to fall foul of recession (the United States, France and Germany followed days later), and it signalled businesses to put in place budget-freezing or cost-cutting measures.
The Internet plays a fast information role.
“Every time I read the news, I could feel my hands going cold,” said a retired teacher.
“It would only show my life savings dropping by a few thousand dollars, or my daily necessities €“ like transport or food or utilities €“ becoming more expensive,” he lamented.
The crisis is making its way in almost every part of the economy - from exports to shipping, from financial services to tourism, and a whole lot in between.
Even Singapore’s tycoons are not spared.
According to Business Times calculations, 13 of the island’s richest men (and women) have lost €“ at least in value €“ more than S$6.7bil (RM16bil) since the start of the year. The report said: “They aren’t living hand to mouth just yet, but it must feel like it.” Each has lost almost 55% on average.
Another high-profile casualty is sports. The building of the S$1.87bil (RM4.46bil), 35-hectare Kallang Sports Hub, the biggest sports project, has been postponed for two years until 2012. The government had earlier postponed several large billion-dollar projects.
Consumer spending, which was very high only months ago, is declining.
With tourism also down, retail shops and restaurants have reported sales declines of 10% to 20%, and expensive Orchard Road is the hardest hit (down by up to 50%). Nightclubs are also feeling the impact of austerity.
So far, there have been no big retrenchments or pay cuts, but new employment is relatively low. Jobs will be the biggest concern of middle class Singaporeans and foreign professionals here.
Management graduate Hanees Mohamad told a reporter that she had been sending out an average of 20 resumes daily since she graduated two months ago, so far hearing from only half of them.
“I’m getting frustrated. I didn’t think it would be this difficult,” said the 24-year-old.
Company hardship, if it exists, is low-level and takes form of things like cheaper wines or no-frills executive meals. Financial institutions are, of course, the worst hit.
Banks have started to reduce expat packages or do away with allowances for spouses. Other firms are letting go contract workers and reinstituting multi-task duties.
However, this time around, Singaporeans have a better cushion against job losses.
With the general election coming in 2010 or 2011, the government has assured its citizens that, in an emergency, foreigners will be the first to go, all else being equal.
Because of their long historical immersion into the work-force, Malaysians have rarely been regarded as “foreigners” like mainland Chinese or Indians. Many have been Permanent Residents for decades.
The uncertain global dimension of the crisis is making it hard for people to really tell how deep €“ or long lasting €“ the recession will last.
Trying to inject a more balanced sentiment into an excessively worried populace, Government of Singapore Investment Corporation deputy chairman Dr Tony Tan said:
“In these difficult times, I think one has to have a sense of perspective. This is not the end of the world. This is not the end of the US as an investment market, we believe, not only would the US eventually recover from the financial crisis.”
“We will all survive,’’ added Dr Tan.
Some analysts, in fact, see a rainbow at the end of it with Singapore playing a bigger banking role to the world financial €“ if it manages things well.
Last month, Singapore overtook Hong Kong to rank third in the world in global finance, behind London and New York. Now despite the republic’s troubles, it gained 26 points in the index €“ or more than any other top-20 centres.
While London and New York have lost some of their financial influence, Singapore €“ with its large reserves and strict banking governance €“ could benefit from the chaos.
It could even emerge along with several others €“ including Hong Kong, Tokyo, Dubai and Shanghai €“ to form a new global financial bloc.
The British, American and European banking capitals will continue to play major a global role, but some of their luring attractiveness could drift eastwards.
--------------------------------------------------------------------------------
© 1995-2008 Star Publications (Malaysia) Bhd (Co No 10894-D)
http://thestar.com.my/news/story.asp?file=/2008/10/18/focus/2291167&sec=focus
Saturday October 18, 2008
Rainbow at the end of the crisis
INSIGHT DOWN SOUTH
By SEAH CHIANG NEE
Singapore is confident that it can emerge from the current world financial crisis along with several others, including Hong Kong, Tokyo, Dubai and Shanghai, to form a new global financial bloc.
HOW do Singaporeans who have lived a sheltered life cope with the current recession and global dislocation? Answer: Surprisingly well!
Judging by the sentiments expressed both in the new and old media, this new generation appears to show a sharp awareness of the potential trouble.
If anything, the worries sometimes border on the exaggerated as though the end of world order is nigh, but most of the time Singaporeans are well-informed and realistic.
A Singaporean Web surfer sums up the preparatory mood when he says: “I will repeat, I will reduce and reuse, I will recycle and I will repair.”
“I will not buy on impulse, always buy one item less and save that extra dollar,” he adds.
“We are in very severe times. All are suffering.”
Another surfer says: “The downturn will come in waves and will last at least three years. Deflation may be on the card.”
The biggest victims so far are investors who have rapidly lost billions of dollars in stock and property trading and even on structured bank papers.
There are good reasons for Singaporeans’ preparedness. The SARS-induced crisis, for one, serves as a good teacher.
Another could be the frank, open reporting €“ and discussions of the bad news €“ by Cabinet ministers and the mainstream media, which surprisingly pulled few punches.
Thirdly, Singapore became the first major economy to fall foul of recession (the United States, France and Germany followed days later), and it signalled businesses to put in place budget-freezing or cost-cutting measures.
The Internet plays a fast information role.
“Every time I read the news, I could feel my hands going cold,” said a retired teacher.
“It would only show my life savings dropping by a few thousand dollars, or my daily necessities €“ like transport or food or utilities €“ becoming more expensive,” he lamented.
The crisis is making its way in almost every part of the economy - from exports to shipping, from financial services to tourism, and a whole lot in between.
Even Singapore’s tycoons are not spared.
According to Business Times calculations, 13 of the island’s richest men (and women) have lost €“ at least in value €“ more than S$6.7bil (RM16bil) since the start of the year. The report said: “They aren’t living hand to mouth just yet, but it must feel like it.” Each has lost almost 55% on average.
Another high-profile casualty is sports. The building of the S$1.87bil (RM4.46bil), 35-hectare Kallang Sports Hub, the biggest sports project, has been postponed for two years until 2012. The government had earlier postponed several large billion-dollar projects.
Consumer spending, which was very high only months ago, is declining.
With tourism also down, retail shops and restaurants have reported sales declines of 10% to 20%, and expensive Orchard Road is the hardest hit (down by up to 50%). Nightclubs are also feeling the impact of austerity.
So far, there have been no big retrenchments or pay cuts, but new employment is relatively low. Jobs will be the biggest concern of middle class Singaporeans and foreign professionals here.
Management graduate Hanees Mohamad told a reporter that she had been sending out an average of 20 resumes daily since she graduated two months ago, so far hearing from only half of them.
“I’m getting frustrated. I didn’t think it would be this difficult,” said the 24-year-old.
Company hardship, if it exists, is low-level and takes form of things like cheaper wines or no-frills executive meals. Financial institutions are, of course, the worst hit.
Banks have started to reduce expat packages or do away with allowances for spouses. Other firms are letting go contract workers and reinstituting multi-task duties.
However, this time around, Singaporeans have a better cushion against job losses.
With the general election coming in 2010 or 2011, the government has assured its citizens that, in an emergency, foreigners will be the first to go, all else being equal.
Because of their long historical immersion into the work-force, Malaysians have rarely been regarded as “foreigners” like mainland Chinese or Indians. Many have been Permanent Residents for decades.
The uncertain global dimension of the crisis is making it hard for people to really tell how deep €“ or long lasting €“ the recession will last.
Trying to inject a more balanced sentiment into an excessively worried populace, Government of Singapore Investment Corporation deputy chairman Dr Tony Tan said:
“In these difficult times, I think one has to have a sense of perspective. This is not the end of the world. This is not the end of the US as an investment market, we believe, not only would the US eventually recover from the financial crisis.”
“We will all survive,’’ added Dr Tan.
Some analysts, in fact, see a rainbow at the end of it with Singapore playing a bigger banking role to the world financial €“ if it manages things well.
Last month, Singapore overtook Hong Kong to rank third in the world in global finance, behind London and New York. Now despite the republic’s troubles, it gained 26 points in the index €“ or more than any other top-20 centres.
While London and New York have lost some of their financial influence, Singapore €“ with its large reserves and strict banking governance €“ could benefit from the chaos.
It could even emerge along with several others €“ including Hong Kong, Tokyo, Dubai and Shanghai €“ to form a new global financial bloc.
The British, American and European banking capitals will continue to play major a global role, but some of their luring attractiveness could drift eastwards.
--------------------------------------------------------------------------------
© 1995-2008 Star Publications (Malaysia) Bhd (Co No 10894-D)
http://thestar.com.my/news/story.asp?file=/2008/10/18/focus/2291167&sec=focus
Singapore Hard Hit by US meltdown
The Star Online
Focus
Saturday September 20, 2008
Hard hit by U.S. meltdown
INSIGHT DOWN SOUTH
By SEAH CHIANG NEE
The turmoil is hitting Singapore like a tonne of bricks at a time when the financial centre is already in the midst of an economic slowdown and super-high inflation.
MY PARENTS have been affected by my failure - my heavy losses in the stock market during the past year. Every night I am having nightmares,” one trader recently wrote.
His S$30,000 (RM72,700) savings meant to be a deposit for a flat evaporated during the downturn, particularly in recent weeks when shares went into a tailspin.
Anxious crowd: Policyholders gathering at an AIA branch in Singapore on Thursday to check on their policies after hearing news that AIA’s US parent company AIG was facing bankruptcy. — AFP
“My loss is beyond my means, it is very painful and I don’t know what my future is,” said the lower-middle -class bachelor.
“I had to strive to rebuild my life or else I would have committed suicide.”
He is one of a growing number of people here who are hard hit by the current US banking meltdown, which has reached Singapore.
At the same time, hundreds of anxious insurance holders have been flocking to the head-office of .
They wanted to cancel their policies, even if it meant losing in investment and coverage. That the US government is providing US$85bil (RM295bil) bailout to AIG did not stop the crowd.
The Monetary Authority of Singapore has appealed for calm among holders of its two million policies.
It also acted to protect customers of another US institution, Lehman Brothers, which declared bankruptcy by curtailing its operations here. It cannot remit funds to third parties without approval.
These days being a world banking hub is beginning to look like a great idea turned sour for Singapore, particularly its investment in foreign banks, as the citizens are finding out.
The US meltdown is hitting this financial centre like a tonne of bricks at a time when it is already in the midst of an economic slowdown and super-high inflation.
To be sure, the years of excesses of Wall Street have not been allowed to intrude into the financial district in Shenton Way, which remains tightly-regulated. The impact, however, is touching the lives of many people.
“The trouble is it’s all imported; no Singaporean bank is a casualty,” said an official.
Some Singaporeans are, of course, hit worse than others, but collectively the damage is far more serious here than in other cities in the region.
Ironically, it is due to success in becoming a wealthy financial centre.
The world’s top banks and brokerages have set up their regional offices here. Now their future remains under a cloud.
And when world banking is in turmoil, Singapore’s economy is shaken up.
This sector will go through a general lull, if not decline, which will result in an exodus of foreign executives.
Lehman Brothers’ operations in Singapore came to a halt on Monday, a day after it went into bankruptcy. The jobs of its 270 staff members may disappear. This, and the bailout of AIG and other large US corporations, are sending shock waves throughout the financial industry.
The many professionals in Singapore €“ foreigners and Singaporeans €“ are deeply concerned about their jobs.
“It’s quite worrying,” one executive told a TV reporter.
“We don’t know who will be the next target.”
Any exodus of these highly-paid executives will aggravate an already poor property market, especially in office and residential rentals.
It may retard Singapore’s growth as a banking hub, at least until stability returns.
During the past 10 years, it has made financial services one of its four strategic pillars for growth.
Many of its global investments are in Western and Asian banks, which have set up operations here.
In addition, tens of billions of Temasek Holdings and GIC (Government Investment Corporation) money have gone into these investments.
They couldn’t have been worse timed. Their values have been decimated.
For Mr and Mrs Singapore, these are worrying times as the economic downturn begins to bite.
The worst appears to be the stock market, where many Singaporeans are invested. The index shares have fallen by 30% in the past year, but many other shares are down by as much as 50% to 60%.
Some life savings have been wiped out. Tens of thousands are groaning under the weight of large losses.
Other recent headlines, which are dealing fresh blows to Singaporeans, included the following:
> Government data confirms that high inflation is eating into wage gains; average real earnings have fallen by 4% between April and June;
> Private home sales slumped 81% in August compared to a year ago, dropping from 1,723 to 320 units (partly affected by the Chinese Hungry Ghost Festival);
> Retail sales fell for the first time in four months as car sales slumped (by 8%) and consumers bought fewer luxury goods, mobile phones and computers; and
> Despite the price of oil falling by a third, the government controversially raised buses and train fares by four cents (10 sen), adding to the high inflation.
The US crisis may trigger off a global recession, including Singapore.
However, the city has a protective shield: its large reserves of US$300bil (RM1tril) built up over the years and sound economic fundamentals.
If not for these, Singapore could be overwhelmed.
But the ordinary people are a different story. With their real salaries down, they are vulnerable to any sustained unemployment and the relentless price increases.
With half an eye on the 2011 election, the government is taking precautions. It will change the laws to allow it to dip into investment returns of the country’s reserves to offset rising costs of public services.
It’s seen as a positive move, but also one that serves as a warning that life can get worse for the people.
© 1995-2008 Star Publications (Malaysia) Bhd (Co No 10894-D)
http://thestar.com.my/news/story.asp?file=/2008/9/20/focus/2063923&sec=focus
Focus
Saturday September 20, 2008
Hard hit by U.S. meltdown
INSIGHT DOWN SOUTH
By SEAH CHIANG NEE
The turmoil is hitting Singapore like a tonne of bricks at a time when the financial centre is already in the midst of an economic slowdown and super-high inflation.
MY PARENTS have been affected by my failure - my heavy losses in the stock market during the past year. Every night I am having nightmares,” one trader recently wrote.
His S$30,000 (RM72,700) savings meant to be a deposit for a flat evaporated during the downturn, particularly in recent weeks when shares went into a tailspin.
Anxious crowd: Policyholders gathering at an AIA branch in Singapore on Thursday to check on their policies after hearing news that AIA’s US parent company AIG was facing bankruptcy. — AFP
“My loss is beyond my means, it is very painful and I don’t know what my future is,” said the lower-middle -class bachelor.
“I had to strive to rebuild my life or else I would have committed suicide.”
He is one of a growing number of people here who are hard hit by the current US banking meltdown, which has reached Singapore.
At the same time, hundreds of anxious insurance holders have been flocking to the head-office of .
They wanted to cancel their policies, even if it meant losing in investment and coverage. That the US government is providing US$85bil (RM295bil) bailout to AIG did not stop the crowd.
The Monetary Authority of Singapore has appealed for calm among holders of its two million policies.
It also acted to protect customers of another US institution, Lehman Brothers, which declared bankruptcy by curtailing its operations here. It cannot remit funds to third parties without approval.
These days being a world banking hub is beginning to look like a great idea turned sour for Singapore, particularly its investment in foreign banks, as the citizens are finding out.
The US meltdown is hitting this financial centre like a tonne of bricks at a time when it is already in the midst of an economic slowdown and super-high inflation.
To be sure, the years of excesses of Wall Street have not been allowed to intrude into the financial district in Shenton Way, which remains tightly-regulated. The impact, however, is touching the lives of many people.
“The trouble is it’s all imported; no Singaporean bank is a casualty,” said an official.
Some Singaporeans are, of course, hit worse than others, but collectively the damage is far more serious here than in other cities in the region.
Ironically, it is due to success in becoming a wealthy financial centre.
The world’s top banks and brokerages have set up their regional offices here. Now their future remains under a cloud.
And when world banking is in turmoil, Singapore’s economy is shaken up.
This sector will go through a general lull, if not decline, which will result in an exodus of foreign executives.
Lehman Brothers’ operations in Singapore came to a halt on Monday, a day after it went into bankruptcy. The jobs of its 270 staff members may disappear. This, and the bailout of AIG and other large US corporations, are sending shock waves throughout the financial industry.
The many professionals in Singapore €“ foreigners and Singaporeans €“ are deeply concerned about their jobs.
“It’s quite worrying,” one executive told a TV reporter.
“We don’t know who will be the next target.”
Any exodus of these highly-paid executives will aggravate an already poor property market, especially in office and residential rentals.
It may retard Singapore’s growth as a banking hub, at least until stability returns.
During the past 10 years, it has made financial services one of its four strategic pillars for growth.
Many of its global investments are in Western and Asian banks, which have set up operations here.
In addition, tens of billions of Temasek Holdings and GIC (Government Investment Corporation) money have gone into these investments.
They couldn’t have been worse timed. Their values have been decimated.
For Mr and Mrs Singapore, these are worrying times as the economic downturn begins to bite.
The worst appears to be the stock market, where many Singaporeans are invested. The index shares have fallen by 30% in the past year, but many other shares are down by as much as 50% to 60%.
Some life savings have been wiped out. Tens of thousands are groaning under the weight of large losses.
Other recent headlines, which are dealing fresh blows to Singaporeans, included the following:
> Government data confirms that high inflation is eating into wage gains; average real earnings have fallen by 4% between April and June;
> Private home sales slumped 81% in August compared to a year ago, dropping from 1,723 to 320 units (partly affected by the Chinese Hungry Ghost Festival);
> Retail sales fell for the first time in four months as car sales slumped (by 8%) and consumers bought fewer luxury goods, mobile phones and computers; and
> Despite the price of oil falling by a third, the government controversially raised buses and train fares by four cents (10 sen), adding to the high inflation.
The US crisis may trigger off a global recession, including Singapore.
However, the city has a protective shield: its large reserves of US$300bil (RM1tril) built up over the years and sound economic fundamentals.
If not for these, Singapore could be overwhelmed.
But the ordinary people are a different story. With their real salaries down, they are vulnerable to any sustained unemployment and the relentless price increases.
With half an eye on the 2011 election, the government is taking precautions. It will change the laws to allow it to dip into investment returns of the country’s reserves to offset rising costs of public services.
It’s seen as a positive move, but also one that serves as a warning that life can get worse for the people.
© 1995-2008 Star Publications (Malaysia) Bhd (Co No 10894-D)
http://thestar.com.my/news/story.asp?file=/2008/9/20/focus/2063923&sec=focus
Warren Buffett's Classic Approach
New York Times
October 17, 2008
Op-Ed Contributor
Buy American. I Am.
By WARREN E. BUFFETT
Omaha
THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.
So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.
Why?
A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.
Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.
A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.
Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.
You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.
Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.
Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”
I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.
Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.
http://www.nytimes.com/2008/10/17/opinion/17buffett.html?_r=1&oref=slogin
Friday 17 October 2008
Why do investors lose money in the stock market?
Basically, investors tend to lose money because of the twin evils - "greed' and "fear".
Therefore, a wise investor needs to control himself against greed. Perhaps by cultivating a sense of contentment, an investor would be able to overcome greed. After all, a contented person is able to tell himself, "Well, I have made some profits. Thus, I have made my money work for me. Now is the time for me to sell my shares and put my money in the bank."
Similarly, he also needs to be cool and not lose his nerves when the stock market tumbles. In such a situation, an investor must learn to tell himself, "At least, the buying opportunity has arrived. I have the money and I will buy some undervalued shares and lock them up until the next bull run."
With the aforesaid frame of mind, an investor would be on his way to emerging as a winner in the game of shares investment.
GREED
$2? I'll wait for $3
GREED
$3? I'll wait for $4
FEAR
Market may collapse. $1.50 now? Sell!
Ref:
Making Mistakes in the Stock Market by Wong Yee
http://tradingbursamalaysia.blogspot.com/2008/10/still-falling.html Where is the bottom? Ans: I don't know now but I will tell you when I see signs of bottoming.
Therefore, a wise investor needs to control himself against greed. Perhaps by cultivating a sense of contentment, an investor would be able to overcome greed. After all, a contented person is able to tell himself, "Well, I have made some profits. Thus, I have made my money work for me. Now is the time for me to sell my shares and put my money in the bank."
Similarly, he also needs to be cool and not lose his nerves when the stock market tumbles. In such a situation, an investor must learn to tell himself, "At least, the buying opportunity has arrived. I have the money and I will buy some undervalued shares and lock them up until the next bull run."
With the aforesaid frame of mind, an investor would be on his way to emerging as a winner in the game of shares investment.
GREED
$2? I'll wait for $3
GREED
$3? I'll wait for $4
FEAR
Market may collapse. $1.50 now? Sell!
Ref:
Making Mistakes in the Stock Market by Wong Yee
http://tradingbursamalaysia.blogspot.com/2008/10/still-falling.html Where is the bottom? Ans: I don't know now but I will tell you when I see signs of bottoming.
What is the best strategy for buying shares?
In general, most people have the tendency to buy shares upwards - perhaps due to greed. They feel that the price is rising and even ready to "take off" higher. Thus, they must buy more regardless of the fact that they are now buying these shares at a much higher price than they have previously bought.
Such a situation normally ends in losses because of the higher risks involved as the share price can fall suddenly. In the case of a market correction, the investor will then end up "carrying the baby". As such, the best way to buy shares is to buy downwards. (My comments: Do you agree?). But here again, it will take a lot of courage to buy downwards because it always appears that the more you buy, the more you seem to be losing.
Nevertheless, the name of the game is PATIENCE as share prices will eventually rise again - it is just a matter of time.
In short, the trick is, you need lots of money and guts to see you through. And, if you do - you will ultimately reap your profits when the stock market turn bullish again.
Best Strategy:
Such a situation normally ends in losses because of the higher risks involved as the share price can fall suddenly. In the case of a market correction, the investor will then end up "carrying the baby". As such, the best way to buy shares is to buy downwards. (My comments: Do you agree?). But here again, it will take a lot of courage to buy downwards because it always appears that the more you buy, the more you seem to be losing.
Nevertheless, the name of the game is PATIENCE as share prices will eventually rise again - it is just a matter of time.
In short, the trick is, you need lots of money and guts to see you through. And, if you do - you will ultimately reap your profits when the stock market turn bullish again.
Best Strategy:
- Money
- Guts
- Patience
- Confidence
Ref: Making Mistakes in the Stock Market by Wong Yee
Stock prices keep on falling almost every day
Question: Almost all my friends are not interested in the stock market as prices keep on falling almost every day. The share prices look cheap but most analysts expect further falls. What should I do?
Technically, you need to examine the extent and the depth of the fall of the stock market since its last peak.
If it had been falling over a few months already and the share prices are very much off their peak levels, then you should embark on bargain hunting.
Look for fundamentally sound shares of companies with a solid balance sheet and good earning prospect. Upon examining these factors and if the share price is at bargain levels, then you should buy the said shares but bear in mind only to buy downwards. (My comment: be careful, better to average upwards).
Given time, the price of your shares will appreciate and you will be able to reap your profits.
From peak to present share price:
1. How much has the price fallen from the peak?
2. Is the PE low enough?
3. Buy if you feel comfortable about the share price.
Ref: Making Mistakes in the Stock Market
Technically, you need to examine the extent and the depth of the fall of the stock market since its last peak.
If it had been falling over a few months already and the share prices are very much off their peak levels, then you should embark on bargain hunting.
Look for fundamentally sound shares of companies with a solid balance sheet and good earning prospect. Upon examining these factors and if the share price is at bargain levels, then you should buy the said shares but bear in mind only to buy downwards. (My comment: be careful, better to average upwards).
Given time, the price of your shares will appreciate and you will be able to reap your profits.
From peak to present share price:
1. How much has the price fallen from the peak?
2. Is the PE low enough?
3. Buy if you feel comfortable about the share price.
Ref: Making Mistakes in the Stock Market
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