The ONLY Place Where There’s ALWAYS a Bull Market
Currencies like the dollar, the euro, the British pound, and the Japanese yen are always rising and falling against each other — and when one currency is falling in value, it means by definition that another currency is rising in value.
That means no matter how frightening things get on Wall Street, THERE IS ALWAYS A BULL MARKET TO BE FOUND IN CURRENCIES!
And now, thanks to simple exchange traded funds (ETFs), you can harness the money-making power of currencies with investments that are as easy to buy or sell as a share of stock in IBM or Microsoft! All thanks to new ETFs dedicated to foreign currencies that ANY investor can buy in a regular brokerage account!
And the profits can be substantial ...
* If you bet against the British pound last August — three and one-half months ago — you could have grabbed the equivalent of a 52% annualized gain.
* Also last August, if you bet against the euro, you could have grabbed the equivalent of an 81% annualized gain.
* And at the same time, you could have bet against the Australian dollar and grabbed the equivalent of a 68% annualized gain!
You can’t go back to grab those returns, and neither can I, but imagine what would happen if you could make trades like that over and over again.
I call my currency ETF trading strategy “The Secret of Speed Profits” — and if you’ll give me just two minutes per trading day — a mere ten minutes per week — it can work for you beginning right now.
Some more advantages ...
You don’t have to be an expert investor — everyday people are doing this right now ...
You don’t need to be a millionaire — you can get started with as little as $100 ...
You don’t have to know which stocks will sink or soar — or even dip so much as your pinky toe into the death-defying stock or commodity markets ...
You won’t need any kind of fancy-schmancy commodity or forex trading account; your current brokerage account is just fine ...
You won’t be asked to accept a single risk that makes you uncomfortable — you will always know precisely what you stand to gain or lose to the very penny ...
Put simply ...
All you need is an Internet connectionand the desire to add thousands of dollarsto your portfolio.
Nine HUGE Advantages of Currency ETFs.
Advantage #1 — Currency ETFs are unrelated to any stock or bond market: Currency ETFs invest exclusively in the currency itself — CASH MONEY. You NEVER own a single share of stock or any kind of bond.
Advantage #2 — They shield you from failing institutions: Since you never invest in a stock or bond of a corporation that could default, currency ETFs are far removed from the debt crisis. The debt crisis can even help drive some currencies HIGHER — another OPPORTUNITY to PROFIT from the crisis.
Advantage #3 — Your investment pays you interest: Since most currency ETFs put your money in cash, they often pay interest ON TOP of any profit you earn as the currency rises. In fact, with some currency ETFs, the interest yield is higher than what you can make in a typical money market.
Advantage #4 — You can profit from moves in EVERY major currency: You can buy an ETF devoted to the U.S. dollar, the euro, the British pound, the Swiss Franc, the Japanese yen, the Australian and Canadian dollars and many more.
Plus, because there are also INVERSE currency ETFs, you can also make money when key currencies are falling!
Advantage #5 — Low minimum investment: Because currency ETFs are simply shares traded on the exchange, you can start with just a single share for as little as $25.
So, with a couple of thousand dollars you can buy a whole range of different ETFs across several different currencies. Or you can give our strategy a try with a tiny stake.
Advantage #6 — They’re cheap to own, too: With currency ETFs, you also avoid the big loads (sales charges) that some mutual funds require. When you buy and sell, you do have to pay a broker commission, of course. But if you use a discount or online broker, your commission costs can be slashed to the bone.
Advantage #7 — No trading limits to slow us down: Most mutual fund families discourage frequent switching. If you jump too soon too often, they may send you a warning to restrict your trading. With ETFs, aside from the tiny commissions you pay, switching is not an issue.
Plus, unlike mutual funds, ETFs are priced continually throughout the trading day: You can buy or sell whenever you want to.
Advantage #8 — They’re the soul of simplicity to buy and sell: Since currency ETFs are traded on the exchange much like stocks, you can use stops-loss orders to help protect your profits or cut a loss.
Plus you have the opportunity to buy and sell at better prices by using limits — orders to your broker that specify the minimum or maximum price you’ll accept.
Advantage #9 — NEW: Some currency ETFs are now available with DOUBLE leverage! With these just-released ETFs, your investment moves 20% for every 10% move in the currency. That gives you the potential to transform what could already be a relatively large move in the currency into a GIANT move in your portfolio.
http://images.moneyandmarkets.com/1195/88357.html
Comment: Posting this here for my further exploration and understanding.
Tuesday 23 December 2008
The Coming Bubble in U.S. Generics
The Coming Bubble in U.S. Generics
Despite significant positive catalysts, record patent expirations end in 2012.
By Brian Laegeler, CPA 12-22-08 06:00 AM
Despite significant positive catalysts, record patent expirations end in 2012.
By Brian Laegeler, CPA 12-22-08 06:00 AM
No one can deny the significant positive catalysts ahead for the U.S. generic drug industry during Barack Obama's first term. The president-elect favors:
- significant increases in insurance coverage
- increased generic drug utilization in the name of cost containment
- greater Food and Drug Administration resources to speed along generic drug applications
- a new legislative pathway for generic biologics
- other pro-generic industry reforms, such as the reduction of authorized generics and state carve-outs.
In addition, a historic $19 billion of branded drug sales per year are slated to lose patent protection between 2009 and 2012.
Despite this positive outlook, it could be game over in 2013, when the average year's pipeline is halved from $20 billion to $10 billion. Halving the pipeline would cut off oxygen to an industry that, because of price erosion in the existing business, requires new product launches for growth. Under this scenario, a major price war could crush margins and growth.
Although the generic drug industry is typically hypercompetitive, price wars can occur in any year that there isn't enough growth to go around. Small players have to cut prices to an irrational level to gain share, and larger players end up having to match the price of their most desperate competitors.
The last price war that we recall at the manufacturer's level occurred in late 2004 to the first half of 2005. Despite record patent expirations, the industry had matured to the point where smaller players became desperate. In our view, pricing only became rational again because of significant catalysts, such as Medicare Part D in 2006, unprecedented industry consolidation in 2007 and 2008, and a 50% increase in annual patent expirations from 2005 to 2006.
Mitigating Factors
Several factors could mitigate the possibility of a major price war in 2013.
Emerging Markets Exposure
Generic drug markets in Eastern Europe, India, and Latin America have significantly higher growth rates than their U.S. counterpart. Several Western European markets, such as Spain, also remain relatively underpenetrated by generics. Major players, including Teva and Mylan, are less exposed to a U.S. slowdown as only a third of their generics business is U.S.-based. Pure domestic players, such as Watson and Par are at the greatest risk of seeing their margins destroyed. Emerging markets have slowed because of the credit crisis, and the patent situation in Western Europe is similar to the U.S. However, we still view international exposure as a positive in this context.
Generic Biologics
Industry executives argue that generic biologics will usher in a new era of growth based upon the billions of dollars of branded biologics that have yet to face generic competition. Even if a U.S. legislative pathway is approved in 2009, the first major round of generic biologics won't launch until 2013 at the earliest because of a characterization process, limited clinical trials, and application review. Upon approval, they will not take 90% market share upon launch like small molecule generics. Large molecules need to be sold directly to physicians. Plus, we believe big pharma and biopharma could capture at least 50% of this new generics market as they already have the manufacturing, salesforce, and clinical trial expertise.
Cartel Behavior
Perhaps generic drug companies hope to consolidate to the point that pricing will remain rational among a handful of top players. We don't believe the industry will ever be concentrated enough for this to happen. Barriers to entry are too low on a drug-by-drug basis. There are some benefits of being a one-stop shop, but for key drugs, the biggest players will always have to match the craziest price.
Branded Drugs
The largest generic drug companies have a branded drug component, which could counterbalance a price war in U.S. generics. The branded pipelines will have to be evaluated on a company-by-company basis closer to 2012.
Branded Sales Growth
The nominal branded sales at risk in 2013 and beyond will continue to increase during the next five years. However, growth will become harder to come by in this economic environment. The differential between 2012 and 2013 will not change much as both figures continue to increase.
Looking Ahead
We're still at least 24 months in front of the peak of this potential bubble. The size of the peak will depend on the significance of Obama's health-care policy, the effectiveness of industry consolidation, and the rate of recovery of global markets. The timing and depth of any decline will depend on how early the market recognizes the Obama catalysts, how soon the market recognizes the upcoming patent expiration problem, and the extent of which market participants are willing to admit that generic biologics are potentially a major disappointment. Even though we're unsure ourselves what exactly will happen, these are the factors and scenarios we'll consider in the years ahead.
Before you decide on any of the securities mentioned in this article, become a Morningstar.com Premium Member and read our in-depth Analyst Reports on them. As a Premium Member, you'll gain complete access to our investment research--including our Fund Analyst Picks and Highest-Rated Stocks lists--conducted by more than 130 Morningstar analysts, as well as our award-winning suite of portfolio management tools, such as Portfolio X-Ray.
http://news.morningstar.com/articlenet/article.aspx?id=268234
Investing Books
Investing Books for the Stockings
by Vitaliy KatsenelsonThursday, December 18, 2008
provided by Forget about hot stock tips. Stuff a few stockings this holiday season with these books about investing.
In crazy times like today, all one could and actually should ask for is sanity. Yes, sanity--a clear mind free of noise to deal with the insanity that is thrust upon us by a volatile and noise-making machine also known as the stock market. We find ourselves glued to the computer screens or CNBC waiting to find out what the Dow's next tick is going to be. Unfortunately, we are left with only a headache and wasted time. OK, what's next?
More from Forbes.com: • In Pictures: Best Books on Investing• In Pictures: 8 Things You Didn't Know About Warren Buffett • In Pictures: How Would a Billionaire Invest $100,000 Today?
Here is my advice--read. Read books that will bring you sanity, the ones that will snap you back into the shell of investor and out of the sorry shell of nervous observer of the daily stock market melodrama. The following books are excellent choices and will come with plenty of sanity and sage advice.
Selling
I'll start with It's When You Sell That Counts 3rd Ed by Donald Cassidy. Selling is usually as popular as candy the day after Halloween. During secular bull markets selling is frowned upon as buy and hold turns into investing religion. And since sell violates the "hold" covenant of that religion, the investor who buys and sells is labeled as a nonbeliever, or even worse, trader (if you say 'trader' fast enough it sounds like 'traitor').
In secular bull markets, on average, sell decisions are not as rewarding as hold decisions, as market valuations are expanding and even second caliber dogs (stocks) start looking like pedigreed cocker spaniels. Every investor is now a "long-term" investor and sell becomes a four letter word. But being a long-term investor is not about longevity of your hold decisions but it is an attitude. Holding a stock because you bought it is a fallacy; you should only hold a stock if future risk adjusted return warrants it.
Warren Buffett has been mistakenly promoted (though, I'd argue demoted) into the god status of this buy and hold temple. Let's correct this mistake. Warren Buffett became a buy and hold investor when his portfolio and positions became big enough, pushing $60 billion, when selling became a difficult undertaking. In his early career, before "Oracle of Omaha" became his middle name, he was a buy and sell investor. Being on the board of some of his biggest holdings (like Coke and Washington Post) made selling even more difficult.
One doesn't need the benefit of hindsight to know that at 55 times earnings Coke was tremendously overvalued in 1999. Coke, like the majority of his top public holdings (WPO, PG, JNJ and many others), did not go anywhere in a decade.
I dare you to take a look at his top public holdings and tell me if he would have done a lot better if he sold them when they became fully valued (or slightly overvalued). In most cases it would have been a decade ago.
Emotions pour from different directions when we face a sell decision: If it is a losing investment we want to wait to break even. This is the wrong attitude. Our purchase prices and sell decision should not be related (the only exception I can think of is tax selling). Or when it comes to selling a winner--we want to sell only at the top. Again this is the wrong attitude: the top is only apparent in hindsight, when it is usually too late.
We should sell the stock when it reaches our price or valuation target, determined at the time of purchase. We (our emotions and false goals to be exact) are our biggest enemy when it comes to investing and especially selling. This wonderful book has been written to fix this. Its objective is to recalibrate your mind and free you from imprisonment of past decisions, break you free from the buy and hold state of mind and turn you into a buy and sell investor.
OK, this is a bit of a long introduction to this book, but this is a terrific and a very important book. A proper sell discipline will decide between great or mediocre returns for even the best-crafted buy decisions. Pros may want to skip a few chapters, but it is an important read for everyone, especially in today's environment.
Behave and Think Like an Investor
These books should help you to think like an investor, forcing you to think beyond stock tickers and focus on what is under the hood--the businesses and the people who run them.
The first one is The Essays of Warren Buffett: Lessons for Corporate America. It's a compilation of Warren Buffett's letters to shareholders from annual reports dating back to the 1970s. Before this book came out (or at least before I was aware of its existence) I had my students read Buffett's annual reports, which as you may expect were very repetitious. His wisdom doesn't vary that much from year to year. This book organizes main concepts and removes annoying redundancy.
Another book is The Entrepreneurial Investor: The Art, Science, and Business of Value Investing, written by my friends at West Coast Asset Management. It accomplishes many objectives of Buffett's essays plus has plenty of cultural references, humor and common sense. All of these things make it a fun and enjoyable read. I made this book suggested reading in my graduate investment class.
The Super Analysts by Andrew Leeming is a book I think few people have heard of. The author interviews successful investors (not academics), and they discuss their approach to investing and analysis of common stocks and some specific industries.
You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits by Joel Greenblatt is one of those books that should be read more than once. Joel shares very unique approaches of how to find undervalued stocks. On top of being a very good investor, he has a healthy sense of humor.
Joel also has written The Little Book That Beats the Market (Little Books. Big Profits). I plan to read this book with my son when he gets older as it is a great introduction to investing. At the end of the book Joel offers a "magic formula," a screen that has beaten the market over a long period of time.
The magic screen is very simple: buy low price to earnings stocks that have high return on capital. Low P/E is an indication of cheapness, high return on capital is an indication of competitive advantage (at least in the past) and possibility to grow earnings at high rates. Here is the book's Web site, which provides a weekly list of stocks that score high on both measures.
Behavioral Investing
The right temperament is crucial in investing. Being a critical thinker and knowing how to value stocks is important, but it is all a waste if your emotions get the better of you. The following books will help you to recognize the shortcomings of your hard-wiring and help you to devise strategies to deal with it.
Psychology of Investing (3rd Edition) by John R. Nofsinger is short and to the point. You'll become an expert on behavioral investing in about an hour. Well, not quite, but close.
Why Smart People Make Big Money Mistakes And How To Correct Them: Lessons From The New Science of Behavioral Economics by Gary Belsky and Thomas Gilovich is a fun and easy read. It also addresses how shortcomings in our wiring impact other parts of money decisions, like buying cars and stereos.
Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich by Jason Zweig is another selection. I have to admit that the first two books cover many topics in this book (though offers new angles and insights) and are likely to be a more exciting reads, but Chapter 10 is what makes this book a must read--it addresses happiness--yes happiness.
Though as most of us know money doesn't buy happiness (unless you are starving or living on the street), money spent on acquisitions--things--brings a bust of happiness that quickly fades away. Think of your level of happiness when you bought the car of your dreams. Money spent on experiences--being--brings a higher utility of happiness. Recollecting experience brings happiness. I plan to re-read this chapter at least a couple of times a year. Zweig also provides a list of things you can do that will make you happy, and none of them require you to spend a penny, which is a big positive in today's economy.
Economics
Politicians, God rest their souls, always try to appeal to the lowest common denominator. They try to "protect" us from evil doers by insisting on minimum wage laws or rent controls, or threatening windfall taxes on oil companies. They sound like heroes fighting for the little guy against the evil doers. However, all they are doing is feeding on the economic illiteracy of the Average Joe.
This is why the following two books should be a required reading in high schools and colleges: Basic Economics 3rd Ed: A Common Sense Guide to the Economy by Thomas Sowell and A World of Wealth: How Capitalism Turns Profits into Progress by Thomas G. Donlan.
You may think Alan Greenspan has had a hand in today's crisis. I know I do. He took interest rates down to incredibly low levels and kept them there for too long, causing the real estate bubble. He also did not think Wall Street needed regulation. But this doesn't make his book, Age of Turbulence, any less of an excellent read. It is not written in Fed-speak. It seems that Sir Alan, after he left the Fed, learned how to use English in a very clear and engaging way. This is not just another biography, either. The book goes far beyond that. It covers the workings of the Fed, lessons on macro economy and history and perspective on American politics from an insider who served under or worked with the last eight presidents.
Stock Market History
I've really enjoyed reading Stocks for the Long Run, 4th Edition: The Definitive Guide to Financial Market Returns and Long Term Investment Strategies by Jeremy Siegel, but it took me a while to recognize how dangerous this book is.
It is well written and provides a very good overview of the performance of different asset classes over last two centuries. But the book needs a different title, maybe something like Stocks for the Really, Really… Really, Long Run. This way, it would not lure investors into false sense of security when it comes to stocks. It preaches that stocks (stock market as a whole) are always a buy, no matter what valuations as they do better than other asset classes in the long-run, and that a 7% real rate of return is a birthright for stock investors no matter if the stock market is extremely cheap or ridiculously expensive.
This is very true if your time horizon is 30 years or you plan to live forever. It is also true if you can tolerate seeing your portfolio go nowhere for a decade or longer. Unfortunately, most of us don't have this time horizon. We need to send kids to school, pay for weddings, boats, etc. I don't know anyone who has the patience to see their portfolio of stocks do nothing for decades.
This is why this book should only be read with the following antidote: Unexpected Returns: Understanding Secular Stock Market Cycles, which is a truly terrific book by Ed Easterling.
Unlike Siegel, Easterling shows that despite stocks being a great investment for the (really, really) long-run, they have periods when their returns are unspectacular. Ed calls these periods bear markets. I call them range-bound markets, which is a difference in just semantics. Those bear (range-bound) markets take place after secular bull markets.
The Appropriate Way to Look at Risk
The following two books, Fooled by Randomness and Black Swan are written by Nassim Taleb. These books address risk and rare events (the Black Swans).
Fooled by Randomness is my favorite nonfiction book, period. I've read it at least five times. This book turns the way we are taught to look at risk upside down. Nassim rebels against the current establishment of finance that measures risk with elegant formulas that receive Nobel Prizes but lack common sense. Any model that solely focuses on past observations and dismisses outcomes that lie outside of what happened in the past is worthless and more importantly dangerous.
One way of understanding how randomness works is by studying alternative historical paths. This means more than just focusing on what took place in the past--the definite (since it already happened), observed history, but one that beforehand was actually still just one of many possible random outcomes. One should focus on what could have taken place, what alternative paths may have existed. This allows us to think creatively about what could have happened and with that added insight then to predict and prepare for what may happen in the future.
More from Yahoo! Finance: • In Lean Times, Online Coupons Catching On• Million-Dollar Giveaways: A Trend of the Times• Stave Off the Ever-Circling Credit Crunch
Visit the Banking & Budgeting Center
Let's take the current crisis: Wall Street and rating agencies dismissed a possibility that housing prices may decline nationwide--this hadn't happened since World War II--well, then it will not happen in the future. Therefore, Wall Street took sub-prime (risky) mortgages originated in different parts of the country, put them together in mortgaged backed securities and--voila!--the risk had been diversified away. Junk was turned to gold. Since rating agencies used the same underlying assumption--housing never declines nationwide--they announced to the world that the junk is AAA and should be bought in truck loads and they were. We know how this story played out.
The Black Swan is a follow up to Fooled by Randomness. Nassim takes a lot of the concepts discussed in Fooled by Randomness and explains them in greater detail, providing new unexpected insights. I have to warn you that The Black Swan is not easy. This book has more insight per page than most, but it is not a beach read.
Books for the Soul
What would you do and what would you share with others if you only had months to live? This is the theme of the following two books: Tuesdays with Morrie: An Old Man, a Young Man, and Life's Greatest Lesson by Mitch Albom and The Last Lecture by Randy Pausch and Jeffrey Zaslow. In both cases terminally ill teachers share their life lessons with readers.
Another book I'll add to this category is The Snowball: Warren Buffett and the Business of Life by Alice Schroeder. This is an authorized biography of Warren Buffett. I am not sure this is the best book to read if you want to learn to invest like Mr. Buffett, but it gives a very different and interesting view into his life.
There are many great lessons we can learn from Mr. Buffett that go far beyond investing, like about honesty and treasuring one's reputation. But I thought this book was important for a very different reason in that it shows that Warren Buffett is not a perfect human being and we can learn from the maestro but in a different way: by not repeating his mistakes. He achieved his unparalleled success in his business life at the expense of his personal life, unfortunately.
Especially in today's environment I find myself wanting to work 24/7 (and I probably do). This is truly a stock picker's market. There are a lot of cheap stocks, but a lot of them are deceptively cheap and there are so many risks lurking from so many directions that semi normal working hours are not enough.
I bring my laptop home, read The Wall Street Journal at the dinner table, and my work life starts pushing out my personal life. This book made me realize that no professional success is worth regretting 20 years down the road that you didn't spend enough time with your kids. Unfortunately, Buffett has that regret.
Copyrighted, Forbes.com. All rights reserved.
http://finance.yahoo.com/banking-budgeting/article/106332/Investing-Books-For-The-Stockings
by Vitaliy KatsenelsonThursday, December 18, 2008
provided by Forget about hot stock tips. Stuff a few stockings this holiday season with these books about investing.
In crazy times like today, all one could and actually should ask for is sanity. Yes, sanity--a clear mind free of noise to deal with the insanity that is thrust upon us by a volatile and noise-making machine also known as the stock market. We find ourselves glued to the computer screens or CNBC waiting to find out what the Dow's next tick is going to be. Unfortunately, we are left with only a headache and wasted time. OK, what's next?
More from Forbes.com: • In Pictures: Best Books on Investing• In Pictures: 8 Things You Didn't Know About Warren Buffett • In Pictures: How Would a Billionaire Invest $100,000 Today?
Here is my advice--read. Read books that will bring you sanity, the ones that will snap you back into the shell of investor and out of the sorry shell of nervous observer of the daily stock market melodrama. The following books are excellent choices and will come with plenty of sanity and sage advice.
Selling
I'll start with It's When You Sell That Counts 3rd Ed by Donald Cassidy. Selling is usually as popular as candy the day after Halloween. During secular bull markets selling is frowned upon as buy and hold turns into investing religion. And since sell violates the "hold" covenant of that religion, the investor who buys and sells is labeled as a nonbeliever, or even worse, trader (if you say 'trader' fast enough it sounds like 'traitor').
In secular bull markets, on average, sell decisions are not as rewarding as hold decisions, as market valuations are expanding and even second caliber dogs (stocks) start looking like pedigreed cocker spaniels. Every investor is now a "long-term" investor and sell becomes a four letter word. But being a long-term investor is not about longevity of your hold decisions but it is an attitude. Holding a stock because you bought it is a fallacy; you should only hold a stock if future risk adjusted return warrants it.
Warren Buffett has been mistakenly promoted (though, I'd argue demoted) into the god status of this buy and hold temple. Let's correct this mistake. Warren Buffett became a buy and hold investor when his portfolio and positions became big enough, pushing $60 billion, when selling became a difficult undertaking. In his early career, before "Oracle of Omaha" became his middle name, he was a buy and sell investor. Being on the board of some of his biggest holdings (like Coke and Washington Post) made selling even more difficult.
One doesn't need the benefit of hindsight to know that at 55 times earnings Coke was tremendously overvalued in 1999. Coke, like the majority of his top public holdings (WPO, PG, JNJ and many others), did not go anywhere in a decade.
I dare you to take a look at his top public holdings and tell me if he would have done a lot better if he sold them when they became fully valued (or slightly overvalued). In most cases it would have been a decade ago.
Emotions pour from different directions when we face a sell decision: If it is a losing investment we want to wait to break even. This is the wrong attitude. Our purchase prices and sell decision should not be related (the only exception I can think of is tax selling). Or when it comes to selling a winner--we want to sell only at the top. Again this is the wrong attitude: the top is only apparent in hindsight, when it is usually too late.
We should sell the stock when it reaches our price or valuation target, determined at the time of purchase. We (our emotions and false goals to be exact) are our biggest enemy when it comes to investing and especially selling. This wonderful book has been written to fix this. Its objective is to recalibrate your mind and free you from imprisonment of past decisions, break you free from the buy and hold state of mind and turn you into a buy and sell investor.
OK, this is a bit of a long introduction to this book, but this is a terrific and a very important book. A proper sell discipline will decide between great or mediocre returns for even the best-crafted buy decisions. Pros may want to skip a few chapters, but it is an important read for everyone, especially in today's environment.
Behave and Think Like an Investor
These books should help you to think like an investor, forcing you to think beyond stock tickers and focus on what is under the hood--the businesses and the people who run them.
The first one is The Essays of Warren Buffett: Lessons for Corporate America. It's a compilation of Warren Buffett's letters to shareholders from annual reports dating back to the 1970s. Before this book came out (or at least before I was aware of its existence) I had my students read Buffett's annual reports, which as you may expect were very repetitious. His wisdom doesn't vary that much from year to year. This book organizes main concepts and removes annoying redundancy.
Another book is The Entrepreneurial Investor: The Art, Science, and Business of Value Investing, written by my friends at West Coast Asset Management. It accomplishes many objectives of Buffett's essays plus has plenty of cultural references, humor and common sense. All of these things make it a fun and enjoyable read. I made this book suggested reading in my graduate investment class.
The Super Analysts by Andrew Leeming is a book I think few people have heard of. The author interviews successful investors (not academics), and they discuss their approach to investing and analysis of common stocks and some specific industries.
You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits by Joel Greenblatt is one of those books that should be read more than once. Joel shares very unique approaches of how to find undervalued stocks. On top of being a very good investor, he has a healthy sense of humor.
Joel also has written The Little Book That Beats the Market (Little Books. Big Profits). I plan to read this book with my son when he gets older as it is a great introduction to investing. At the end of the book Joel offers a "magic formula," a screen that has beaten the market over a long period of time.
The magic screen is very simple: buy low price to earnings stocks that have high return on capital. Low P/E is an indication of cheapness, high return on capital is an indication of competitive advantage (at least in the past) and possibility to grow earnings at high rates. Here is the book's Web site, which provides a weekly list of stocks that score high on both measures.
Behavioral Investing
The right temperament is crucial in investing. Being a critical thinker and knowing how to value stocks is important, but it is all a waste if your emotions get the better of you. The following books will help you to recognize the shortcomings of your hard-wiring and help you to devise strategies to deal with it.
Psychology of Investing (3rd Edition) by John R. Nofsinger is short and to the point. You'll become an expert on behavioral investing in about an hour. Well, not quite, but close.
Why Smart People Make Big Money Mistakes And How To Correct Them: Lessons From The New Science of Behavioral Economics by Gary Belsky and Thomas Gilovich is a fun and easy read. It also addresses how shortcomings in our wiring impact other parts of money decisions, like buying cars and stereos.
Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich by Jason Zweig is another selection. I have to admit that the first two books cover many topics in this book (though offers new angles and insights) and are likely to be a more exciting reads, but Chapter 10 is what makes this book a must read--it addresses happiness--yes happiness.
Though as most of us know money doesn't buy happiness (unless you are starving or living on the street), money spent on acquisitions--things--brings a bust of happiness that quickly fades away. Think of your level of happiness when you bought the car of your dreams. Money spent on experiences--being--brings a higher utility of happiness. Recollecting experience brings happiness. I plan to re-read this chapter at least a couple of times a year. Zweig also provides a list of things you can do that will make you happy, and none of them require you to spend a penny, which is a big positive in today's economy.
Economics
Politicians, God rest their souls, always try to appeal to the lowest common denominator. They try to "protect" us from evil doers by insisting on minimum wage laws or rent controls, or threatening windfall taxes on oil companies. They sound like heroes fighting for the little guy against the evil doers. However, all they are doing is feeding on the economic illiteracy of the Average Joe.
This is why the following two books should be a required reading in high schools and colleges: Basic Economics 3rd Ed: A Common Sense Guide to the Economy by Thomas Sowell and A World of Wealth: How Capitalism Turns Profits into Progress by Thomas G. Donlan.
You may think Alan Greenspan has had a hand in today's crisis. I know I do. He took interest rates down to incredibly low levels and kept them there for too long, causing the real estate bubble. He also did not think Wall Street needed regulation. But this doesn't make his book, Age of Turbulence, any less of an excellent read. It is not written in Fed-speak. It seems that Sir Alan, after he left the Fed, learned how to use English in a very clear and engaging way. This is not just another biography, either. The book goes far beyond that. It covers the workings of the Fed, lessons on macro economy and history and perspective on American politics from an insider who served under or worked with the last eight presidents.
Stock Market History
I've really enjoyed reading Stocks for the Long Run, 4th Edition: The Definitive Guide to Financial Market Returns and Long Term Investment Strategies by Jeremy Siegel, but it took me a while to recognize how dangerous this book is.
It is well written and provides a very good overview of the performance of different asset classes over last two centuries. But the book needs a different title, maybe something like Stocks for the Really, Really… Really, Long Run. This way, it would not lure investors into false sense of security when it comes to stocks. It preaches that stocks (stock market as a whole) are always a buy, no matter what valuations as they do better than other asset classes in the long-run, and that a 7% real rate of return is a birthright for stock investors no matter if the stock market is extremely cheap or ridiculously expensive.
This is very true if your time horizon is 30 years or you plan to live forever. It is also true if you can tolerate seeing your portfolio go nowhere for a decade or longer. Unfortunately, most of us don't have this time horizon. We need to send kids to school, pay for weddings, boats, etc. I don't know anyone who has the patience to see their portfolio of stocks do nothing for decades.
This is why this book should only be read with the following antidote: Unexpected Returns: Understanding Secular Stock Market Cycles, which is a truly terrific book by Ed Easterling.
Unlike Siegel, Easterling shows that despite stocks being a great investment for the (really, really) long-run, they have periods when their returns are unspectacular. Ed calls these periods bear markets. I call them range-bound markets, which is a difference in just semantics. Those bear (range-bound) markets take place after secular bull markets.
The Appropriate Way to Look at Risk
The following two books, Fooled by Randomness and Black Swan are written by Nassim Taleb. These books address risk and rare events (the Black Swans).
Fooled by Randomness is my favorite nonfiction book, period. I've read it at least five times. This book turns the way we are taught to look at risk upside down. Nassim rebels against the current establishment of finance that measures risk with elegant formulas that receive Nobel Prizes but lack common sense. Any model that solely focuses on past observations and dismisses outcomes that lie outside of what happened in the past is worthless and more importantly dangerous.
One way of understanding how randomness works is by studying alternative historical paths. This means more than just focusing on what took place in the past--the definite (since it already happened), observed history, but one that beforehand was actually still just one of many possible random outcomes. One should focus on what could have taken place, what alternative paths may have existed. This allows us to think creatively about what could have happened and with that added insight then to predict and prepare for what may happen in the future.
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Let's take the current crisis: Wall Street and rating agencies dismissed a possibility that housing prices may decline nationwide--this hadn't happened since World War II--well, then it will not happen in the future. Therefore, Wall Street took sub-prime (risky) mortgages originated in different parts of the country, put them together in mortgaged backed securities and--voila!--the risk had been diversified away. Junk was turned to gold. Since rating agencies used the same underlying assumption--housing never declines nationwide--they announced to the world that the junk is AAA and should be bought in truck loads and they were. We know how this story played out.
The Black Swan is a follow up to Fooled by Randomness. Nassim takes a lot of the concepts discussed in Fooled by Randomness and explains them in greater detail, providing new unexpected insights. I have to warn you that The Black Swan is not easy. This book has more insight per page than most, but it is not a beach read.
Books for the Soul
What would you do and what would you share with others if you only had months to live? This is the theme of the following two books: Tuesdays with Morrie: An Old Man, a Young Man, and Life's Greatest Lesson by Mitch Albom and The Last Lecture by Randy Pausch and Jeffrey Zaslow. In both cases terminally ill teachers share their life lessons with readers.
Another book I'll add to this category is The Snowball: Warren Buffett and the Business of Life by Alice Schroeder. This is an authorized biography of Warren Buffett. I am not sure this is the best book to read if you want to learn to invest like Mr. Buffett, but it gives a very different and interesting view into his life.
There are many great lessons we can learn from Mr. Buffett that go far beyond investing, like about honesty and treasuring one's reputation. But I thought this book was important for a very different reason in that it shows that Warren Buffett is not a perfect human being and we can learn from the maestro but in a different way: by not repeating his mistakes. He achieved his unparalleled success in his business life at the expense of his personal life, unfortunately.
Especially in today's environment I find myself wanting to work 24/7 (and I probably do). This is truly a stock picker's market. There are a lot of cheap stocks, but a lot of them are deceptively cheap and there are so many risks lurking from so many directions that semi normal working hours are not enough.
I bring my laptop home, read The Wall Street Journal at the dinner table, and my work life starts pushing out my personal life. This book made me realize that no professional success is worth regretting 20 years down the road that you didn't spend enough time with your kids. Unfortunately, Buffett has that regret.
Copyrighted, Forbes.com. All rights reserved.
http://finance.yahoo.com/banking-budgeting/article/106332/Investing-Books-For-The-Stockings
**Averaging Down: Good Idea Or Big Mistake?
Investopedia
Averaging Down: Good Idea Or Big Mistake?
Friday December 19, 12:38 pm ET Elvis Picardo
The strategy of "averaging down", as the term implies, involves investing additional amounts in a financial instrument or asset if it declines significantly in price after the original investment is made. It's true that this action brings down the average cost of the instrument or asset, but will it lead to great returns or just to a larger share of a losing investment? Read on to find out.
Conflicting Opinions
There is radical difference of opinion among investors and traders about the viability of the averaging down strategy. Proponents of the strategy view averaging down as a cost-effective approach to wealth accumulation; opponents view it as a recipe for disaster.
The strategy is often favored by investors who have a long-term investment horizon and a contrarian approach to investing. A contrarian approach refers to a style of investing that is against, or contrary, to the prevailing investment trend.
For example, suppose that a long-term investor holds Widget Co. stock in his or her portfolio and believes that the outlook for Widget Co. is positive. This investor may be inclined to view a sharp decline in the stock as a buying opportunity, and probably also has the contrarian view that others are being unduly pessimistic about Widget Co.'s long-term prospects. Such investors justify their bargain-hunting by viewing a stock that has declined in price as being available at a discount to its intrinsic or fundamental value. "If you liked the stock at $50, you should love it at $40" is a mantra often quoted by these investors.
On the other side of the coin are the investors and traders who generally have shorter term investment horizons and view a stock decline as a portent of things to come. These investors are also likely to espouse trading in the direction of the prevailing trend, rather than against it. They may view buying into a stock decline as akin to trying to "catch a falling knife." Such investors and traders are more likely to rely on technical indicators, such as price momentum, to justify their investing actions. Using the example of Widget Co., a short-term trader who initially bought the stock at $50 may have a stop-loss on this trade at $45. If the stock trades below $45, the trader will sell the position in Widget Co. and crystallize the loss. Short-term traders generally do not believe in averaging their positions down, as they see this as throwing good money after bad.
Advantages of Averaging Down
The main advantage of averaging down is that an investor can bring down the average cost of a stock holding quite substantially. Assuming the stock turns around, this ensures a lower breakeven point for the stock position, and higher gains in dollar terms than would have been the case if the position was not averaged down.
In the previous example of Widget Co., by averaging down through the purchase of an additional 100 shares at $40, the investor brings down the breakeven point (or average price) of the position to $45. If Widget Co. stock trades at $49 in another six months, the investor now has a potential gain of $800 (despite the fact that the stock is still trading below the initial entry price of $50).
If Widget Co. continues to rise and advances to $55, the potential gains would be $2,000. By averaging down, the investor has effectively "doubled up" the Widget Co. position. Had the investor not averaged down when the stock declined to $40, the potential gain on the position (when the stock is at $55) would amount to only $500.
Disadvantages
Averaging down or doubling up works well when the stock eventually rebounds because it has the effect of magnifying gains, but if the stock continues to decline, losses are also magnified. In such cases, the investor may rue the decision to average down rather than either exiting the position or not adding to the initial holding.
Investors must therefore take the utmost care to correctly assess the risk profile of the stock being averaged down. While this is no easy feat at the best of times, it becomes an even more difficult task during frenzied bear markets such as that of 2008, when household names such as Fannie Mae, Freddie Mac, AIG and Lehman Brothers lost most of their market capitalization in a matter of months.
Another drawback of averaging down is that it may result in a higher-than-desired weighting of a stock or sector in an investment portfolio. As an example, consider the case of an investor who had a 25% weighting of U.S. bank stocks in a portfolio at the beginning of 2008. If the investor averaged down his or her bank holdings after the precipitous decline in most bank stocks that year so that these stocks made up 35% of the investor's total portfolio. This proportion may represent a higher degree of exposure to bank stocks than that desired, putting the investor at much higher risk.
Practical Applications
Some of the world's most astute investors, including Warren Buffett, have successfully used the averaging down strategy over the years. While the pockets of the average investor are nowhere near as deep as deep as Buffett's, averaging down can still be a viable strategy, albeit with a few caveats:
Averaging down should be done on a selective basis for specific stocks, rather than as a catch-all strategy for every stock in a portfolio. This strategy is best restricted to high-quality, blue-chip stocks where the risk of corporate bankruptcy is low. Blue chips that satisfy stringent criteria - which include a long-term track record, strong competitive position, very low or no debt, stable business, solid cash flows, and sound management - may be suitable candidates for averaging down.
Before averaging down a position, the company's fundamentals should be thoroughly assessed. The investor should ascertain whether a significant decline in a stock is only a temporary phenomenon, or a symptom of a deeper malaise. At a minimum, factors that need to be assessed are the company's competitive position, long-term earnings outlook, business stability and capital structure.
The strategy may be particularly suited to times when there is an inordinate amount of fear and panic in the markets, because panic liquidation may result in high-quality stocks being available at compelling valuations. For example, some of the biggest technology stocks were trading at bargain-basement levels in the summer of 2002, while U.S. and international bank stocks were on sale in the second half of 2008. The key, of course, is exercising prudent judgment in picking the stocks that are best positioned to survive the shakeout.
Conclusion
Averaging down is a viable investment strategy for stocks, mutual funds and exchange-traded funds. However, due care must be exercised in deciding which positions to average down. The strategy is best restricted to blue chips that satisfy stringent selection criteria such as a long-term track record, minimal debt and solid cash flows.
http://biz.yahoo.com/investopedia/081219/4101.html
Averaging Down: Good Idea Or Big Mistake?
Friday December 19, 12:38 pm ET Elvis Picardo
The strategy of "averaging down", as the term implies, involves investing additional amounts in a financial instrument or asset if it declines significantly in price after the original investment is made. It's true that this action brings down the average cost of the instrument or asset, but will it lead to great returns or just to a larger share of a losing investment? Read on to find out.
Conflicting Opinions
There is radical difference of opinion among investors and traders about the viability of the averaging down strategy. Proponents of the strategy view averaging down as a cost-effective approach to wealth accumulation; opponents view it as a recipe for disaster.
The strategy is often favored by investors who have a long-term investment horizon and a contrarian approach to investing. A contrarian approach refers to a style of investing that is against, or contrary, to the prevailing investment trend.
For example, suppose that a long-term investor holds Widget Co. stock in his or her portfolio and believes that the outlook for Widget Co. is positive. This investor may be inclined to view a sharp decline in the stock as a buying opportunity, and probably also has the contrarian view that others are being unduly pessimistic about Widget Co.'s long-term prospects. Such investors justify their bargain-hunting by viewing a stock that has declined in price as being available at a discount to its intrinsic or fundamental value. "If you liked the stock at $50, you should love it at $40" is a mantra often quoted by these investors.
On the other side of the coin are the investors and traders who generally have shorter term investment horizons and view a stock decline as a portent of things to come. These investors are also likely to espouse trading in the direction of the prevailing trend, rather than against it. They may view buying into a stock decline as akin to trying to "catch a falling knife." Such investors and traders are more likely to rely on technical indicators, such as price momentum, to justify their investing actions. Using the example of Widget Co., a short-term trader who initially bought the stock at $50 may have a stop-loss on this trade at $45. If the stock trades below $45, the trader will sell the position in Widget Co. and crystallize the loss. Short-term traders generally do not believe in averaging their positions down, as they see this as throwing good money after bad.
Advantages of Averaging Down
The main advantage of averaging down is that an investor can bring down the average cost of a stock holding quite substantially. Assuming the stock turns around, this ensures a lower breakeven point for the stock position, and higher gains in dollar terms than would have been the case if the position was not averaged down.
In the previous example of Widget Co., by averaging down through the purchase of an additional 100 shares at $40, the investor brings down the breakeven point (or average price) of the position to $45. If Widget Co. stock trades at $49 in another six months, the investor now has a potential gain of $800 (despite the fact that the stock is still trading below the initial entry price of $50).
If Widget Co. continues to rise and advances to $55, the potential gains would be $2,000. By averaging down, the investor has effectively "doubled up" the Widget Co. position. Had the investor not averaged down when the stock declined to $40, the potential gain on the position (when the stock is at $55) would amount to only $500.
Disadvantages
Averaging down or doubling up works well when the stock eventually rebounds because it has the effect of magnifying gains, but if the stock continues to decline, losses are also magnified. In such cases, the investor may rue the decision to average down rather than either exiting the position or not adding to the initial holding.
Investors must therefore take the utmost care to correctly assess the risk profile of the stock being averaged down. While this is no easy feat at the best of times, it becomes an even more difficult task during frenzied bear markets such as that of 2008, when household names such as Fannie Mae, Freddie Mac, AIG and Lehman Brothers lost most of their market capitalization in a matter of months.
Another drawback of averaging down is that it may result in a higher-than-desired weighting of a stock or sector in an investment portfolio. As an example, consider the case of an investor who had a 25% weighting of U.S. bank stocks in a portfolio at the beginning of 2008. If the investor averaged down his or her bank holdings after the precipitous decline in most bank stocks that year so that these stocks made up 35% of the investor's total portfolio. This proportion may represent a higher degree of exposure to bank stocks than that desired, putting the investor at much higher risk.
Practical Applications
Some of the world's most astute investors, including Warren Buffett, have successfully used the averaging down strategy over the years. While the pockets of the average investor are nowhere near as deep as deep as Buffett's, averaging down can still be a viable strategy, albeit with a few caveats:
Averaging down should be done on a selective basis for specific stocks, rather than as a catch-all strategy for every stock in a portfolio. This strategy is best restricted to high-quality, blue-chip stocks where the risk of corporate bankruptcy is low. Blue chips that satisfy stringent criteria - which include a long-term track record, strong competitive position, very low or no debt, stable business, solid cash flows, and sound management - may be suitable candidates for averaging down.
Before averaging down a position, the company's fundamentals should be thoroughly assessed. The investor should ascertain whether a significant decline in a stock is only a temporary phenomenon, or a symptom of a deeper malaise. At a minimum, factors that need to be assessed are the company's competitive position, long-term earnings outlook, business stability and capital structure.
The strategy may be particularly suited to times when there is an inordinate amount of fear and panic in the markets, because panic liquidation may result in high-quality stocks being available at compelling valuations. For example, some of the biggest technology stocks were trading at bargain-basement levels in the summer of 2002, while U.S. and international bank stocks were on sale in the second half of 2008. The key, of course, is exercising prudent judgment in picking the stocks that are best positioned to survive the shakeout.
Conclusion
Averaging down is a viable investment strategy for stocks, mutual funds and exchange-traded funds. However, due care must be exercised in deciding which positions to average down. The strategy is best restricted to blue chips that satisfy stringent selection criteria such as a long-term track record, minimal debt and solid cash flows.
http://biz.yahoo.com/investopedia/081219/4101.html
Lessons from a Very Bad Year
Lessons from a Very Bad Year
by Ben Stein
Posted on Monday, December 22, 2008, 12:00AM
At last, this horrible year is almost behind us. Let's hope we never see another one like it.
If someone had told me that the market -- adjusted for inflation -- would be down by more than it was in the Great Depression while most Americans still basically had high prosperity, I wouldn't have believed it possible. It goes to show what stupendously bad Treasury stewardship can do.
If someone had told me Treasury and the Fed would allow the fourth- or fifth-biggest investment bank in America to fail, I would've scoffed. But they did it, and we got a stock market crash, a severe recession, and national fear as the result. The night Paulson and Bernanke let Lehman fail was the night they drove old American investors down.
Theoretical Failings
Meanwhile, we look to the future. And we try to learn from the past. What have we learned?
1. Efficient market theory is extremely limited as a market predictor in times like these. Efficient market theory says that at any given moment, the market price of all stocks reflects all that is known about them -- the price at any given moment is the best estimate of future price.
This is true as far as it goes. And, again, in most times, it goes very far. But in times when what is not known lurks below the waterline like the bottom of an iceberg, dwarfing what lies above and can be seen, efficient market theory is not only limited in effectiveness but downright dangerous.
It turned out that what lay waiting unknown to most of us -- and to the market -- was a wild miscalculation about the true liabilities associated with credit in this country. The true liability on subprime included staggering amounts of derivatives, a high multiple of subprime itself. Ditto for credit card debt, and now, as we're seeing, ditto for commercial mortgage debt.
Not only was that debt questionable, but players had added super-sized bets so big that the markets simply couldn't adjust to them without a serious correction.
Mr. Market Gets It Wrong
So efficient market theory is sunk. The problem is that we have nothing else to replace it except the predictions of many different analysts. Some are right and some are wrong, and they're usually not even close to being as helpful as Mr. Market.
But as my pal Jim Grant notes in his masterful new book, "Mr. Market Miscalculates: The Bubble Years and Beyond," the market is far from infallible and can lead the investor to disaster. Efficient market theory is highly fallible, but it may still be better than anything else.
Bye-Bye, Buy and Hold?
Another lesson to be drawn from this year:
2. Buy and hold as a strategy is very questionable, as my pal Robert Lobban says. It's worked in the past, but in times of severe market stress it just doesn't work. We've now gone 10 years -- many of which were banner years for profits -- without a gain in the broad indices. In some areas, such as REITs and commodities and energy and autos, the losses have been breathtaking.
But trading doesn't work well for most investors either. Even for the best hedge fund geniuses (and actually I don't consider them geniuses at all), trading has often been a catastrophe in the last 15 months.
So, what's the solution? Ben Graham, a real genius who mentored Warren Buffett, concluded near the end of his life that stocks were simply too risky and investors should only be in Treasury bonds.
My pal, Phil DeMuth, along with many others, has long said that investors should have half in bonds. He's right, but even bonds, except for Treasuries, have been whacked this year. But his approach is definitely the right one. Ray Lucia, a super-smart investment guru, says you should have seven years of expenses in cash or near-cash to ride out events like this if you're retired or close to retirement. This turns out to be a simply brilliant suggestion. Ray has a lot of them.
What we're left with is maybe that buy and hold is far from perfect, but if we have enough cash to get us through the bad times we might yet see it work. If not, one hardly knows what to suggest.
Historical Ignorance
The final lesson from 2008:
3. We can't count on the people who rule us to have learned a darned thing from past history. "Those who do not know the past are condemned to repeat it," said the famous Harvard philosopher George Santayana.
Of course, that's a cliche by now and has been for decades. But it is true of Henry Paulson, our pitiful Secretary of the Treasury and, very, very sadly, of Ben Bernanke, our Fed chairman.
Paulson is simply an ignorant, bullying fraud. I never expected much from him. But Bernanke is a scholar, or so I thought, and should've known better than to destroy confidence by allowing Lehman to fail. That was a mistake that no real student of the Great Depression, as Bernanke is, should've made. I would never have thought it could happen, but it did.
It makes me wonder what other mistakes and foolishness our rulers have in mind, and it scares me plenty.
Only Human
In the meantime, please don't blame yourself for your losses. We all make mistakes, yours truly especially. My hat is off to those like Doug Kass who saw it all coming. My hat is not off to those who claimed afterward to have seen it coming. I have met so many people who tell me they sold out in October 2007 that I think I must be the only person left in this country with any stock. (That would make me by far the richest man on the planet, and I guarantee that I'm not.)
We're just human beings with human failings. Efficient market theory fooled us. Buy and hold fooled us. Trust in government fooled us. My own failings fooled me. Something else will fool us next time. As my grandmother used to say when her children made a mistake, "Don't worry, you'll do it again." If we learn even a little from what's happened, we're far ahead of Henry Paulson.
In that spirit, have a Merry Christmas, Happy Hanukkah, and Happy New Year.
http://finance.yahoo.com/expert/article/yourlife/130751;_ylt=AgK_TOlH.RnkvqbqB2UHhnO7YWsA
by Ben Stein
Posted on Monday, December 22, 2008, 12:00AM
At last, this horrible year is almost behind us. Let's hope we never see another one like it.
If someone had told me that the market -- adjusted for inflation -- would be down by more than it was in the Great Depression while most Americans still basically had high prosperity, I wouldn't have believed it possible. It goes to show what stupendously bad Treasury stewardship can do.
If someone had told me Treasury and the Fed would allow the fourth- or fifth-biggest investment bank in America to fail, I would've scoffed. But they did it, and we got a stock market crash, a severe recession, and national fear as the result. The night Paulson and Bernanke let Lehman fail was the night they drove old American investors down.
Theoretical Failings
Meanwhile, we look to the future. And we try to learn from the past. What have we learned?
1. Efficient market theory is extremely limited as a market predictor in times like these. Efficient market theory says that at any given moment, the market price of all stocks reflects all that is known about them -- the price at any given moment is the best estimate of future price.
This is true as far as it goes. And, again, in most times, it goes very far. But in times when what is not known lurks below the waterline like the bottom of an iceberg, dwarfing what lies above and can be seen, efficient market theory is not only limited in effectiveness but downright dangerous.
It turned out that what lay waiting unknown to most of us -- and to the market -- was a wild miscalculation about the true liabilities associated with credit in this country. The true liability on subprime included staggering amounts of derivatives, a high multiple of subprime itself. Ditto for credit card debt, and now, as we're seeing, ditto for commercial mortgage debt.
Not only was that debt questionable, but players had added super-sized bets so big that the markets simply couldn't adjust to them without a serious correction.
Mr. Market Gets It Wrong
So efficient market theory is sunk. The problem is that we have nothing else to replace it except the predictions of many different analysts. Some are right and some are wrong, and they're usually not even close to being as helpful as Mr. Market.
But as my pal Jim Grant notes in his masterful new book, "Mr. Market Miscalculates: The Bubble Years and Beyond," the market is far from infallible and can lead the investor to disaster. Efficient market theory is highly fallible, but it may still be better than anything else.
Bye-Bye, Buy and Hold?
Another lesson to be drawn from this year:
2. Buy and hold as a strategy is very questionable, as my pal Robert Lobban says. It's worked in the past, but in times of severe market stress it just doesn't work. We've now gone 10 years -- many of which were banner years for profits -- without a gain in the broad indices. In some areas, such as REITs and commodities and energy and autos, the losses have been breathtaking.
But trading doesn't work well for most investors either. Even for the best hedge fund geniuses (and actually I don't consider them geniuses at all), trading has often been a catastrophe in the last 15 months.
So, what's the solution? Ben Graham, a real genius who mentored Warren Buffett, concluded near the end of his life that stocks were simply too risky and investors should only be in Treasury bonds.
My pal, Phil DeMuth, along with many others, has long said that investors should have half in bonds. He's right, but even bonds, except for Treasuries, have been whacked this year. But his approach is definitely the right one. Ray Lucia, a super-smart investment guru, says you should have seven years of expenses in cash or near-cash to ride out events like this if you're retired or close to retirement. This turns out to be a simply brilliant suggestion. Ray has a lot of them.
What we're left with is maybe that buy and hold is far from perfect, but if we have enough cash to get us through the bad times we might yet see it work. If not, one hardly knows what to suggest.
Historical Ignorance
The final lesson from 2008:
3. We can't count on the people who rule us to have learned a darned thing from past history. "Those who do not know the past are condemned to repeat it," said the famous Harvard philosopher George Santayana.
Of course, that's a cliche by now and has been for decades. But it is true of Henry Paulson, our pitiful Secretary of the Treasury and, very, very sadly, of Ben Bernanke, our Fed chairman.
Paulson is simply an ignorant, bullying fraud. I never expected much from him. But Bernanke is a scholar, or so I thought, and should've known better than to destroy confidence by allowing Lehman to fail. That was a mistake that no real student of the Great Depression, as Bernanke is, should've made. I would never have thought it could happen, but it did.
It makes me wonder what other mistakes and foolishness our rulers have in mind, and it scares me plenty.
Only Human
In the meantime, please don't blame yourself for your losses. We all make mistakes, yours truly especially. My hat is off to those like Doug Kass who saw it all coming. My hat is not off to those who claimed afterward to have seen it coming. I have met so many people who tell me they sold out in October 2007 that I think I must be the only person left in this country with any stock. (That would make me by far the richest man on the planet, and I guarantee that I'm not.)
We're just human beings with human failings. Efficient market theory fooled us. Buy and hold fooled us. Trust in government fooled us. My own failings fooled me. Something else will fool us next time. As my grandmother used to say when her children made a mistake, "Don't worry, you'll do it again." If we learn even a little from what's happened, we're far ahead of Henry Paulson.
In that spirit, have a Merry Christmas, Happy Hanukkah, and Happy New Year.
http://finance.yahoo.com/expert/article/yourlife/130751;_ylt=AgK_TOlH.RnkvqbqB2UHhnO7YWsA
We explain why deflation (falling prices) could wreak havoc with your finances
From The Times
December 18, 2008
The party's over if deflation grips the economy
We explain why falling prices could wreak havoc with your finances
Inflation is tumbling and fears are growing that deflation, where prices actually start falling, may become a feature of the economy next year.
This week the Office for National Statistics reported that the consumer prices index (CPI), a key measure of inflation, fell to 4.1 per cent last month, down from a high of 5.2 per cent in September. Jonathan Loynes, chief European economist at Capital Economics, the consultancy, says: “November's CPI figures are another step along the path that is likely to lead to the first bout of deflation in the UK for almost half a century.”
While falling prices may sound great, deflation is actually considered bad for the economy. When prices fall, consumers defer purchases on the assumption that they will be able to buy the same goods cheaper at a later date. This damages demand which can undermine company profits, trigger unemployment and entrench a destructive economic cycle.
Here we explain what falling prices might also mean for your savings, investments, pension, house price and mortgage - and how to guard against the worst effects.
Related Links
Q&A: deflation
Spending power down in 70% of households
Savings
To some extent, deflation is good news for savers because it increases the size of deposits relative to prices, making them more valuable in real terms. However, the downside is that the rates on savings accounts are likely to tumble if deflation takes hold because the Bank of England would reduce the base rate to 0 per cent or close to it. Savings rates are already falling fast. At the start of October, when the base rate was at 5 per cent, you could lock in to accounts paying an impressive 7 per cent. But now, with the base rate at 2 per cent, the most you can earn is about 5.5 per cent.
Returns in Japan, which suffered a decade of deflation, are close to non-existant. Simon Somerville, of Jupiter Asset Management, says: “The most you can earn from a Japanese bank account is about 0.4 per cent, but most pay nothing in interest. It is no wonder that many Japanese savers have abandoned banks and put their cash in safes or under the mattress.”
Savers in the UK may not end up quite so badly off, but only because our banks desperately need to bolster their finances. Some may continue to offer decent rates, as it is one of the easiest ways for them to raise money. So the pitiful state of the UK's banking system could yet offer a silver lining for savers.
Kevin Mountford, of the comparison website moneysupermarket.com, says that the best way for savers to guard against falling returns is to lock in to a long-term fixed-rate account. He says: “The best one-year fixed rate is from Anglo Irish Bank, at 5 per cent, but be quick as such rates could disappear soon. It is probably safe to lock up savings for up to two years, but any longer and there is a risk that the base rate - and savings rates - will start moving higher again. Nationwide is offering a two-year Isa bond paying 4 per cent.”
Pensions
Deflation could wreak havoc with retirement plans, especially if the problem persists for years. As prices fall, so will corporate profits and stock market investments. Given that many individuals and companies rely on shares to fund pension growth, many savers will have their retirement plans cast into doubt. Tumbling share prices have already wiped nearly a quarter off the average personal pension fund in the past year.
Even investors in final-salary plans, which guarantee a pension based on income, could hit the skids. As companies struggle to finance their pensions, the remaining final-salary schemes could close en masse. Even the Government, which backs the biggest final-salary scheme of all for public sector workers, may be forced to take drastic action, perhaps closing it to new entrants.
Tom McPhail, of Hargreaves Lansdown, the independent financial adviser, says that anyone approaching retirement should consider locking into an annuity sooner rather than later. He says: “As long as your pension fund has not been decimated by the recent stock market turmoil now might be a good time to buy a retirement income because annuity rates could well fall over the coming year or so. If you can afford to do so, deferring your state pension could also help. Provided that you are prepared to take the longevity and political risk - by which I mean that you don't think that you will die any time soon and you trust the Government to meet its promises - then you can boost retirement income by 10.4 per cent for every year you defer taking your pension.”
Those who are already retired could be among the few winners. Benefits, including the state pension, are linked to the retail prices index and can't be cut if inflation goes negative. The worst that can happen is that benefits remain unchanged. Many pensioners have fixed incomes, so inflation erodes their spending power. If prices drop, they will be able to buy more with their pensions.
House prices and mortgages
Homeowners are already experiencing deflation, with the average house price having fallen by almost 15 per cent over the past year, according to the Halifax.
Deflation in the wider economy would be a further blow because mortgage debt would increase in real terms, by becoming more expensive relative to prices. Fionnuala Earley, Nationwide's chief economist, explains: “Inflation tends to be good for borrowers, as it shrinks the real size of debt. In inflationary periods, wages also tend to rise, making it easier to meet mortgage payments. If there were deflation, debt would hang around longer and even grow in real terms, as wages would not be increasing and prices in the shops would be falling.”
Sadly, there is little that borrowers can do to mitigate the effects of deflation. Melanie Bien, of Savills Private Finance, the mortgage broker, says: “The first step is to keep up with your repayments. The mortgage should be your priority; everything else should be paid after that. You can also help by reducing your mortgage by overpaying. If you are lucky enough to have a tracker mortgage, you could overpay by the amount you are saving from lower interest rates.”
Most lenders will let you overpay by up to 10 per cent of your mortgage each year without penalty.
Ms Bien adds: “If you have an interest-only deal, it is worth considering switching to a repayment mortgage to ensure that the capital is paid off by the end of the mortgage term. This will mean significantly higher monthly payments, but it will be worth it in the long run. Speak to your lender about switching - it is very straightforward and can usually be arranged over the phone.”
Recent housing market history gives no indication whether residential property would be viewed as an attractive investment during a sustained period of deflation. Mortgages would continue to be available but the miserable experience of overextended borrowers could result in widespread aversion to debt, particularly among members of the younger generation.
At the same time, the lack of any meaningful returns from savings might persuade some people with spare cash to put it into property because bricks and mortar would be a tangible asset in an unfamiliar and insecure environment.
Additional reporting by David Budworth
Japan still licking its wounds
The most recent guide to what deflation might mean for UK investors is to look at what happened in Japan in the 1990s, writes Mark Atherton.
When Japan's property and stock market bubble burst with a vengeance in the early 1990s, the country experienced a prolonged period of deflation.
With consumers reluctant to spend because of falling prices, the economy stagnated, company profits fell and the stock market tumbled. The Nikkei index stood at nearly 39,000 at the start of the 1990s but now stands at a lowly 8,500, even though deflation has been eradicated for the time being.
John Hatherly, of Seven Investment Management, says: “What happened was that everyone started to draw in their horns and conserve their cash, rather than put it into assets that were falling in value. Investors deserted shares and property for safer havens.”
One of these safe havens was government bonds. Mick Gilligan, of Killik & Co, the stockbroker, says: “Investors reckoned, correctly, that the Japanese Government would not go bust and that government bonds were a safe bet, even though the interest they paid was small.”
Corporate bonds, on the other hand, tend not to fare so well in deflationary times because, with profits falling, there is less money to cover the bond interest payments and there is always the possibility of defaults on the payments or a collapse in the value of the bond itself if the company goes bust.
http://www.timesonline.co.uk/tol/money/consumer_affairs/article5366383.ece
December 18, 2008
The party's over if deflation grips the economy
We explain why falling prices could wreak havoc with your finances
Inflation is tumbling and fears are growing that deflation, where prices actually start falling, may become a feature of the economy next year.
This week the Office for National Statistics reported that the consumer prices index (CPI), a key measure of inflation, fell to 4.1 per cent last month, down from a high of 5.2 per cent in September. Jonathan Loynes, chief European economist at Capital Economics, the consultancy, says: “November's CPI figures are another step along the path that is likely to lead to the first bout of deflation in the UK for almost half a century.”
While falling prices may sound great, deflation is actually considered bad for the economy. When prices fall, consumers defer purchases on the assumption that they will be able to buy the same goods cheaper at a later date. This damages demand which can undermine company profits, trigger unemployment and entrench a destructive economic cycle.
Here we explain what falling prices might also mean for your savings, investments, pension, house price and mortgage - and how to guard against the worst effects.
Related Links
Q&A: deflation
Spending power down in 70% of households
Savings
To some extent, deflation is good news for savers because it increases the size of deposits relative to prices, making them more valuable in real terms. However, the downside is that the rates on savings accounts are likely to tumble if deflation takes hold because the Bank of England would reduce the base rate to 0 per cent or close to it. Savings rates are already falling fast. At the start of October, when the base rate was at 5 per cent, you could lock in to accounts paying an impressive 7 per cent. But now, with the base rate at 2 per cent, the most you can earn is about 5.5 per cent.
Returns in Japan, which suffered a decade of deflation, are close to non-existant. Simon Somerville, of Jupiter Asset Management, says: “The most you can earn from a Japanese bank account is about 0.4 per cent, but most pay nothing in interest. It is no wonder that many Japanese savers have abandoned banks and put their cash in safes or under the mattress.”
Savers in the UK may not end up quite so badly off, but only because our banks desperately need to bolster their finances. Some may continue to offer decent rates, as it is one of the easiest ways for them to raise money. So the pitiful state of the UK's banking system could yet offer a silver lining for savers.
Kevin Mountford, of the comparison website moneysupermarket.com, says that the best way for savers to guard against falling returns is to lock in to a long-term fixed-rate account. He says: “The best one-year fixed rate is from Anglo Irish Bank, at 5 per cent, but be quick as such rates could disappear soon. It is probably safe to lock up savings for up to two years, but any longer and there is a risk that the base rate - and savings rates - will start moving higher again. Nationwide is offering a two-year Isa bond paying 4 per cent.”
Pensions
Deflation could wreak havoc with retirement plans, especially if the problem persists for years. As prices fall, so will corporate profits and stock market investments. Given that many individuals and companies rely on shares to fund pension growth, many savers will have their retirement plans cast into doubt. Tumbling share prices have already wiped nearly a quarter off the average personal pension fund in the past year.
Even investors in final-salary plans, which guarantee a pension based on income, could hit the skids. As companies struggle to finance their pensions, the remaining final-salary schemes could close en masse. Even the Government, which backs the biggest final-salary scheme of all for public sector workers, may be forced to take drastic action, perhaps closing it to new entrants.
Tom McPhail, of Hargreaves Lansdown, the independent financial adviser, says that anyone approaching retirement should consider locking into an annuity sooner rather than later. He says: “As long as your pension fund has not been decimated by the recent stock market turmoil now might be a good time to buy a retirement income because annuity rates could well fall over the coming year or so. If you can afford to do so, deferring your state pension could also help. Provided that you are prepared to take the longevity and political risk - by which I mean that you don't think that you will die any time soon and you trust the Government to meet its promises - then you can boost retirement income by 10.4 per cent for every year you defer taking your pension.”
Those who are already retired could be among the few winners. Benefits, including the state pension, are linked to the retail prices index and can't be cut if inflation goes negative. The worst that can happen is that benefits remain unchanged. Many pensioners have fixed incomes, so inflation erodes their spending power. If prices drop, they will be able to buy more with their pensions.
House prices and mortgages
Homeowners are already experiencing deflation, with the average house price having fallen by almost 15 per cent over the past year, according to the Halifax.
Deflation in the wider economy would be a further blow because mortgage debt would increase in real terms, by becoming more expensive relative to prices. Fionnuala Earley, Nationwide's chief economist, explains: “Inflation tends to be good for borrowers, as it shrinks the real size of debt. In inflationary periods, wages also tend to rise, making it easier to meet mortgage payments. If there were deflation, debt would hang around longer and even grow in real terms, as wages would not be increasing and prices in the shops would be falling.”
Sadly, there is little that borrowers can do to mitigate the effects of deflation. Melanie Bien, of Savills Private Finance, the mortgage broker, says: “The first step is to keep up with your repayments. The mortgage should be your priority; everything else should be paid after that. You can also help by reducing your mortgage by overpaying. If you are lucky enough to have a tracker mortgage, you could overpay by the amount you are saving from lower interest rates.”
Most lenders will let you overpay by up to 10 per cent of your mortgage each year without penalty.
Ms Bien adds: “If you have an interest-only deal, it is worth considering switching to a repayment mortgage to ensure that the capital is paid off by the end of the mortgage term. This will mean significantly higher monthly payments, but it will be worth it in the long run. Speak to your lender about switching - it is very straightforward and can usually be arranged over the phone.”
Recent housing market history gives no indication whether residential property would be viewed as an attractive investment during a sustained period of deflation. Mortgages would continue to be available but the miserable experience of overextended borrowers could result in widespread aversion to debt, particularly among members of the younger generation.
At the same time, the lack of any meaningful returns from savings might persuade some people with spare cash to put it into property because bricks and mortar would be a tangible asset in an unfamiliar and insecure environment.
Additional reporting by David Budworth
Japan still licking its wounds
The most recent guide to what deflation might mean for UK investors is to look at what happened in Japan in the 1990s, writes Mark Atherton.
When Japan's property and stock market bubble burst with a vengeance in the early 1990s, the country experienced a prolonged period of deflation.
With consumers reluctant to spend because of falling prices, the economy stagnated, company profits fell and the stock market tumbled. The Nikkei index stood at nearly 39,000 at the start of the 1990s but now stands at a lowly 8,500, even though deflation has been eradicated for the time being.
John Hatherly, of Seven Investment Management, says: “What happened was that everyone started to draw in their horns and conserve their cash, rather than put it into assets that were falling in value. Investors deserted shares and property for safer havens.”
One of these safe havens was government bonds. Mick Gilligan, of Killik & Co, the stockbroker, says: “Investors reckoned, correctly, that the Japanese Government would not go bust and that government bonds were a safe bet, even though the interest they paid was small.”
Corporate bonds, on the other hand, tend not to fare so well in deflationary times because, with profits falling, there is less money to cover the bond interest payments and there is always the possibility of defaults on the payments or a collapse in the value of the bond itself if the company goes bust.
http://www.timesonline.co.uk/tol/money/consumer_affairs/article5366383.ece
Monday 22 December 2008
'Savers are going to have to step up to the risk plate at some stage'
'Savers are going to have to step up to the risk plate at some stage'
The real prospect that rates will fall to zero is a nightmare scenario for those that rely on savings income to bolster their day-to-day living expenses.
By Paul FarrowLast Updated: 7:31AM GMT 11 Dec 2008
Comments 2 Comment on this article
It is hard to imagine savings rates at nil - but it happened in Japan, where savers had no choice but to deal with the harsh reality of not getting a return on their money.
Take a look at this excerpt from the newswires in July 2006 when the Bank of Japan decided to raise rates for the first time in six years from zero to 0.25pc.
"Mizuho Financial, Japan's second largest bank, said last week it would raise interest rates on six-month time deposits for the first occasion in almost six years. It raised the rate for six months to 0.1pc from 0.02pc and the rate for three month accounts to 0.06pc from 0.02pc from July 10. Smaller Sumitomo Mitsui Financial also raised rates on time deposits on Monday.''
Apathetic savers are already getting a pittance on their cash - many of Halifax's savings accounts pay 0.5pc or less already.
For the proactive saver, as Emma Simon reports on page 1, there are ways to get a return on your money over and above 2pc. But you will have to get your skates on to grab a decent deal.
As one commentator remarked last week, savers are going to have to take on a little more risk if they are to get their just rewards. With rates around 6pc, the decision to hoard cash in savings accounts made perfect sense, but the landscape is changing.
As I mentioned a fortnight ago, corporate bond funds offer a decent yield as do many equity income funds. They are by no means a substitute for cash but, if rates languish at such low levels for too long, savers are going to have little choice but to step up to the risk plate at some stage.
It is a different ball game for borrowers, however. When interest rates reached 15pc in 1990, I was green with envy of my bosses at Coutts. The longest standing managers at the Queen's bank were fortunate to have fixed rate mortgages of just 2pc. A perk if ever there was one.
It seemed inconceivable at the time that I or anyone else could pay a miserly 2pc on a home loan - until this week, that is. True, many borrowers won't be paying anything like 2pc. For starters, around half of mortgages are fixed-rate, while more 10pc of home owners are on their lender's standard variable rates and they range between 4pc and 7pc.
However, some lucky borrowers will be paying less than 1pc. C&G, for instance, was offering a two-year tracker discounting base rate by 1.01pc. One can only assume that these borrowers now paying 0.99pc will pay zilch interest if rates tumble to zero. Many lenders were predictably slow to react, or did react but failed to pass on the full one percentage point cut.
But it made a welcome change to see a lender put its customers first for once. Nationwide decided not enforce its collar on tracker mortgages. A collar allows lenders not to pass on interest rate reductions once base rate falls below a certain level - in Nationwide's case, it was 2.75pc. Mind you, I'm fortunate enough to have a two-year tracker from the building society at 0.03pc above base rate. I'll leave it to you to do the maths.
http://www.telegraph.co.uk/finance/personalfinance/comment/paulfarrow/3690421/Savers-are-going-to-have-to-step-up-to-the-risk-plate-at-some-stage.html
The real prospect that rates will fall to zero is a nightmare scenario for those that rely on savings income to bolster their day-to-day living expenses.
By Paul FarrowLast Updated: 7:31AM GMT 11 Dec 2008
Comments 2 Comment on this article
It is hard to imagine savings rates at nil - but it happened in Japan, where savers had no choice but to deal with the harsh reality of not getting a return on their money.
Take a look at this excerpt from the newswires in July 2006 when the Bank of Japan decided to raise rates for the first time in six years from zero to 0.25pc.
"Mizuho Financial, Japan's second largest bank, said last week it would raise interest rates on six-month time deposits for the first occasion in almost six years. It raised the rate for six months to 0.1pc from 0.02pc and the rate for three month accounts to 0.06pc from 0.02pc from July 10. Smaller Sumitomo Mitsui Financial also raised rates on time deposits on Monday.''
Apathetic savers are already getting a pittance on their cash - many of Halifax's savings accounts pay 0.5pc or less already.
For the proactive saver, as Emma Simon reports on page 1, there are ways to get a return on your money over and above 2pc. But you will have to get your skates on to grab a decent deal.
As one commentator remarked last week, savers are going to have to take on a little more risk if they are to get their just rewards. With rates around 6pc, the decision to hoard cash in savings accounts made perfect sense, but the landscape is changing.
As I mentioned a fortnight ago, corporate bond funds offer a decent yield as do many equity income funds. They are by no means a substitute for cash but, if rates languish at such low levels for too long, savers are going to have little choice but to step up to the risk plate at some stage.
It is a different ball game for borrowers, however. When interest rates reached 15pc in 1990, I was green with envy of my bosses at Coutts. The longest standing managers at the Queen's bank were fortunate to have fixed rate mortgages of just 2pc. A perk if ever there was one.
It seemed inconceivable at the time that I or anyone else could pay a miserly 2pc on a home loan - until this week, that is. True, many borrowers won't be paying anything like 2pc. For starters, around half of mortgages are fixed-rate, while more 10pc of home owners are on their lender's standard variable rates and they range between 4pc and 7pc.
However, some lucky borrowers will be paying less than 1pc. C&G, for instance, was offering a two-year tracker discounting base rate by 1.01pc. One can only assume that these borrowers now paying 0.99pc will pay zilch interest if rates tumble to zero. Many lenders were predictably slow to react, or did react but failed to pass on the full one percentage point cut.
But it made a welcome change to see a lender put its customers first for once. Nationwide decided not enforce its collar on tracker mortgages. A collar allows lenders not to pass on interest rate reductions once base rate falls below a certain level - in Nationwide's case, it was 2.75pc. Mind you, I'm fortunate enough to have a two-year tracker from the building society at 0.03pc above base rate. I'll leave it to you to do the maths.
http://www.telegraph.co.uk/finance/personalfinance/comment/paulfarrow/3690421/Savers-are-going-to-have-to-step-up-to-the-risk-plate-at-some-stage.html
House prices to crash 30 per cent, Barclays chief executive John Varley warns
House prices to crash 30 per cent, Barclays chief executive John Varley warns
House prices will crash a further 15 per cent next year, the boss of high street bank Barclays has admitted.
By Myra Butterworth, Personal Finance Correspondent Last Updated: 8:52AM GMT 15 Dec 2008
John Varley of Barclays Photo: Daniel Jones
In a remarkably candid interview, John Varley, the group chief executive of Barclays, warned that Britain is only mid way through the house price slump - meaning the total fall could be as much as 30 per cent.
He described as "madness" the previous lending policies' of banks, in which 100 per cent mortgages and beyond were approved.
Mr Varley admitted that banks were partly to blame for the current recession, saying it was time they showed "humility" and said "sorry" to customers for their role in the sharp economic downturn.
He said banks needed "to take their share of responsibility".
It is the first time that the chief executive of a major bank has spoken so openly in the current climate about the role lenders have played in the sharp turnaround in home owners' fortunes.
The admission comes on the back of the Government giving banks billions of pounds of financial support following the worst banking crisis since 1929. Barclays did not receive government funding.
Mr Varley's comments, made to Jeff Randall, the Daily Telegraph's editor-at-large and to be shown on Sky News this evening, are a dire warning to families across Britain who have already seen the value of their savings and homes plummet amid the credit crisis. They could dissuade potential buyers from seeking loans or moving home. Jonathan Cornell, of mortgage brokers Hamptons Mortgages, said Mr Varley's comments could aggravate the situation further.
The average home in Britain has already dropped £36,000 in value since August last year, according to the country's biggest lenders Halifax. Its latest figures show the average value is now just £163,605.
A further 15 per cent fall would see the average value of a home crash by an additional £25,000 to less than £140,000 based on these figures.
Mr Varley said: "Our view was that from the top to the bottom, you would see a fall of something like 25 to 30 per cent. I suspect we're about halfway through that at the moment. I mean that slowdown, the negative house price inflation started in 2007, it's accelerated in 2008.
"We're probably about halfway through that period, so in other words we've got another 10 to 15 per cent to fall between now and the end of next year. That would be our assessment."
The house price crash has already left many homeowners in negative equity, where the value of their home is worth less than their mortgage.
In the early 1990s, when house prices fell by 10.6 per cent over a prolonged period, 1.8 million home owners had to stay put or face losing thousands when they sold up.
The borrowers who are most vulnerable are those who bought a home with a loan of at least 100 per cent of the value of their property.
At the height of the property boom, when banks were more willing to lend, loans were available at 125 per cent of the value of a property.
Asked for his reaction to the practice, Mr Varley said: "Looking back on it, madness."
Mortgage experts said that lenders would need to offer a wider range of deals to borrowers before the property market showed any signs of recovery.
Melanie Bien, of mortgage brokers Savills Private Finance, said: "Those hoping that the bottom of the housing market had already been reached will have to wait a bit longer with around another 10 per cent drop in prices in 2009 forecast.
"It will then be a while before prices recover but once the bottom has been reached, potential buyers will once again show an interest in purchasing. All we need then is more choice of product at 90 per cent loan-to-value with better rates than are currently available to help first-time buyers in particular onto the housing ladder."
Home sellers have been forced to lower their asking prices dramatically in the past month to achieve a sale.
Around £5,000 was knocked off the average price of a home in the past month, according to property website Rightmove.
It said the average value of a home in Britain dropped from £222,979 in November to £217,808 this month, a fall of 2.3 per cent. House prices are now 10.2 per cent down from May this year.
The figures are higher than those produced by Halifax as they are based on asking prices rather than completions.
Rightmove forecasts that house prices will fall an extra 10 per cent by the end of next year. However, its survey also suggested that the sale prices actually being achieved by estate agents is already down 25 per cent since May.
http://www.telegraph.co.uk/finance/economics/houseprices/3759542/House-prices-to-crash-30-per-cent-Barclays-chief-executive-John-Varley-warns.html
House prices will crash a further 15 per cent next year, the boss of high street bank Barclays has admitted.
By Myra Butterworth, Personal Finance Correspondent Last Updated: 8:52AM GMT 15 Dec 2008
John Varley of Barclays Photo: Daniel Jones
In a remarkably candid interview, John Varley, the group chief executive of Barclays, warned that Britain is only mid way through the house price slump - meaning the total fall could be as much as 30 per cent.
He described as "madness" the previous lending policies' of banks, in which 100 per cent mortgages and beyond were approved.
Mr Varley admitted that banks were partly to blame for the current recession, saying it was time they showed "humility" and said "sorry" to customers for their role in the sharp economic downturn.
He said banks needed "to take their share of responsibility".
It is the first time that the chief executive of a major bank has spoken so openly in the current climate about the role lenders have played in the sharp turnaround in home owners' fortunes.
The admission comes on the back of the Government giving banks billions of pounds of financial support following the worst banking crisis since 1929. Barclays did not receive government funding.
Mr Varley's comments, made to Jeff Randall, the Daily Telegraph's editor-at-large and to be shown on Sky News this evening, are a dire warning to families across Britain who have already seen the value of their savings and homes plummet amid the credit crisis. They could dissuade potential buyers from seeking loans or moving home. Jonathan Cornell, of mortgage brokers Hamptons Mortgages, said Mr Varley's comments could aggravate the situation further.
The average home in Britain has already dropped £36,000 in value since August last year, according to the country's biggest lenders Halifax. Its latest figures show the average value is now just £163,605.
A further 15 per cent fall would see the average value of a home crash by an additional £25,000 to less than £140,000 based on these figures.
Mr Varley said: "Our view was that from the top to the bottom, you would see a fall of something like 25 to 30 per cent. I suspect we're about halfway through that at the moment. I mean that slowdown, the negative house price inflation started in 2007, it's accelerated in 2008.
"We're probably about halfway through that period, so in other words we've got another 10 to 15 per cent to fall between now and the end of next year. That would be our assessment."
The house price crash has already left many homeowners in negative equity, where the value of their home is worth less than their mortgage.
In the early 1990s, when house prices fell by 10.6 per cent over a prolonged period, 1.8 million home owners had to stay put or face losing thousands when they sold up.
The borrowers who are most vulnerable are those who bought a home with a loan of at least 100 per cent of the value of their property.
At the height of the property boom, when banks were more willing to lend, loans were available at 125 per cent of the value of a property.
Asked for his reaction to the practice, Mr Varley said: "Looking back on it, madness."
Mortgage experts said that lenders would need to offer a wider range of deals to borrowers before the property market showed any signs of recovery.
Melanie Bien, of mortgage brokers Savills Private Finance, said: "Those hoping that the bottom of the housing market had already been reached will have to wait a bit longer with around another 10 per cent drop in prices in 2009 forecast.
"It will then be a while before prices recover but once the bottom has been reached, potential buyers will once again show an interest in purchasing. All we need then is more choice of product at 90 per cent loan-to-value with better rates than are currently available to help first-time buyers in particular onto the housing ladder."
Home sellers have been forced to lower their asking prices dramatically in the past month to achieve a sale.
Around £5,000 was knocked off the average price of a home in the past month, according to property website Rightmove.
It said the average value of a home in Britain dropped from £222,979 in November to £217,808 this month, a fall of 2.3 per cent. House prices are now 10.2 per cent down from May this year.
The figures are higher than those produced by Halifax as they are based on asking prices rather than completions.
Rightmove forecasts that house prices will fall an extra 10 per cent by the end of next year. However, its survey also suggested that the sale prices actually being achieved by estate agents is already down 25 per cent since May.
http://www.telegraph.co.uk/finance/economics/houseprices/3759542/House-prices-to-crash-30-per-cent-Barclays-chief-executive-John-Varley-warns.html
£591 billion wiped off UK property market in 12 months
£591 billion wiped off UK property market in 12 months
Home owners in the UK have seen the equivalent of 85 per cent of their annual salary wiped off their property's value this year, according to valuation experts.
By Sarah Knapton Last Updated: 10:32AM GMT 22 Dec 2008
UK homes have lost more than £591 billion in value during 2008, the equivalent of every single British home dropping £22,083 since January, property website Zoopla found.
The research suggested the value of homes decreased by nearly 10 per cent, leaving 2.1 million homeowners owing more on their mortgages than their homes are currently worth.
It means the average homeowner has spent 85 per cent of their annual salary in 2008 simply offsetting the loss of their property's value.
Alex Chesterman, CEO of Zoopla said: "This year will be remembered as the year that marked the acceleration of the housing market correction.
"Values have been declining every month for the past 18 months and, with further job losses predicted, increased repossessions and the continued decline in the number of people buying and selling properties, the bottom is not yet in sight.
"The reality is that some homeowners will face a very tough decision next year whether to try and ride out further value declines and risk falling into further negative equity or cut their losses and sell before the price drops too far."
Hertfordshire was identified as the hardest hit county in 2008 with the average house price dropping by £31,280 since January, followed by Essex at £29,377 and Middlesex £28,978.
A recent survey by Knight Frank suggested the market for prime London property is in freefall, with prices now 14.1 per cent lower than last year.
In June 1990, at the height of the last slump, the annual fall amounted to just 10.6 per cent. Over the past three months prices in London have fallen by 9.3 per cent, with houses depreciating at a faster rate than flats.
http://www.telegraph.co.uk/finance/economics/houseprices/3899791/591-billion-wiped-off-UK-property-market-in-12-months.html
Home owners in the UK have seen the equivalent of 85 per cent of their annual salary wiped off their property's value this year, according to valuation experts.
By Sarah Knapton Last Updated: 10:32AM GMT 22 Dec 2008
UK homes have lost more than £591 billion in value during 2008, the equivalent of every single British home dropping £22,083 since January, property website Zoopla found.
The research suggested the value of homes decreased by nearly 10 per cent, leaving 2.1 million homeowners owing more on their mortgages than their homes are currently worth.
It means the average homeowner has spent 85 per cent of their annual salary in 2008 simply offsetting the loss of their property's value.
Alex Chesterman, CEO of Zoopla said: "This year will be remembered as the year that marked the acceleration of the housing market correction.
"Values have been declining every month for the past 18 months and, with further job losses predicted, increased repossessions and the continued decline in the number of people buying and selling properties, the bottom is not yet in sight.
"The reality is that some homeowners will face a very tough decision next year whether to try and ride out further value declines and risk falling into further negative equity or cut their losses and sell before the price drops too far."
Hertfordshire was identified as the hardest hit county in 2008 with the average house price dropping by £31,280 since January, followed by Essex at £29,377 and Middlesex £28,978.
A recent survey by Knight Frank suggested the market for prime London property is in freefall, with prices now 14.1 per cent lower than last year.
In June 1990, at the height of the last slump, the annual fall amounted to just 10.6 per cent. Over the past three months prices in London have fallen by 9.3 per cent, with houses depreciating at a faster rate than flats.
http://www.telegraph.co.uk/finance/economics/houseprices/3899791/591-billion-wiped-off-UK-property-market-in-12-months.html
Lehman UK sub-prime book about to go in knock-down sale
Lehman UK sub-prime book about to go in knock-down sale
The administrators to Lehman Brothers in the UK are close to selling a £900m portfolio of sub-prime mortgages, for a price of about 50p in the pound.
By Katherine Griffiths, Financial Services Editor Last Updated: 9:14PM GMT 21 Dec 2008
Lehman was one of the largest players in the high-risk end of the mortgage market in the UK.
PricewaterhouseCoopers, which is handling the administration of Lehman in London, set up an auction for one bundle of sub-prime loans as well as other assets including its Capstone servicing business, which employs 450 people.
Second round bids for the portfolio must be tabled before the end of January. Several private equity groups and vulture funds are understood to be interested, including America's Apollo and Blackstone.
The auction of mortgage assets is one of the largest in recent months. The outcome will have ramifications for the banking sector because, if the price is very low, it could put pressure on other lenders to take further mark downs on the value of their mortgage assets.
The British mortgages have been bundled together with Irish and Portuguese loans by PwC. A second tranche of mortgages originated in Latin America and eastern Europe and worth €2.5bn (£2.3bn) will be put up for auction in the new year.
The PwC partners leading the administration, Tony Lomas, Dan Schwarzmann, Steven Pearson and Mike Jervis, have predicted winding up Lehman will be "more complex" than Enron.
Some hedge funds and other parties have expressed frustration because their money is frozen in Lehman accounts.
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/3885723/Lehman-UK-sub-prime-book-about-to-go-in-knock-down-sale.html
The administrators to Lehman Brothers in the UK are close to selling a £900m portfolio of sub-prime mortgages, for a price of about 50p in the pound.
By Katherine Griffiths, Financial Services Editor Last Updated: 9:14PM GMT 21 Dec 2008
Lehman was one of the largest players in the high-risk end of the mortgage market in the UK.
PricewaterhouseCoopers, which is handling the administration of Lehman in London, set up an auction for one bundle of sub-prime loans as well as other assets including its Capstone servicing business, which employs 450 people.
Second round bids for the portfolio must be tabled before the end of January. Several private equity groups and vulture funds are understood to be interested, including America's Apollo and Blackstone.
The auction of mortgage assets is one of the largest in recent months. The outcome will have ramifications for the banking sector because, if the price is very low, it could put pressure on other lenders to take further mark downs on the value of their mortgage assets.
The British mortgages have been bundled together with Irish and Portuguese loans by PwC. A second tranche of mortgages originated in Latin America and eastern Europe and worth €2.5bn (£2.3bn) will be put up for auction in the new year.
The PwC partners leading the administration, Tony Lomas, Dan Schwarzmann, Steven Pearson and Mike Jervis, have predicted winding up Lehman will be "more complex" than Enron.
Some hedge funds and other parties have expressed frustration because their money is frozen in Lehman accounts.
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/3885723/Lehman-UK-sub-prime-book-about-to-go-in-knock-down-sale.html
Protectionist dominoes are beginning to tumble across the world
Protectionist dominoes are beginning to tumble across the world
The riots have begun. Civil protest is breaking out in cities across Russia, China, and beyond.
By Ambrose Evans-PritchardLast Updated: 10:30AM GMT 22 Dec 2008
Comments 61 Comment on this article
Greece has been in turmoil for 11 days. The mood seems to have turned "pre-insurrectionary" in parts of Athens - to borrow from the Marxist handbook.
This is a foretaste of what the world may face as the "crisis of capitalism" - another Marxist phase making a comeback - starts to turn two hundred million lives upside down.
We are advancing to the political stage of this global train wreck. Regimes are being tested. Those relying on perma-boom to mask a lack of democratic or ancestral legitimacy may try to gain time by the usual methods: trade barriers, sabre-rattling, and barbed wire.
Dominique Strauss-Kahn, the head of the International Monetary Fund, is worried enough to ditch a half-century of IMF orthodoxy, calling for a fiscal boost worth 2pc of world GDP to "prevent global depression".
"If we are not able to do that, then social unrest may happen in many countries, including advanced economies. We are facing an unprecedented decline in output. All around the planet, the people have reacted with feelings going from surprise to anger, and from anger to fear," he said.
Russia has begun to shut down trade as it adjusts to the shock of Urals oil below $40 a barrel. It has imposed import tariffs of 30pc on cars, 15pc on farm kit, and 95pc on poultry (above quota levels). "It is possible during the financial crisis to support domestic producers by raising customs duties," said Premier Vladimir Putin.
Russia is not alone. India and Vietnam have imposed steel tariffs. Indonesia is resorting to special "licences" to choke off imports.
The Kremlin is alarmed by a 13pc fall in industrial output over the last five months. There have been street protests in Moscow, St Petersburg, Kaliningrad, Vladivostok and Barnaul. Police crushed "Dissent Marchers" holding copies of Russia's constitution above their heads in Moscow's Triumfalnaya Square.
"Russia has not seen anything like these nationwide protests before," said Boris Kagarlitsky from Moscow's Globalization Institute.
The Duma is widening the treason law to catch most forms of political dissent, and unwelcome forms of journalism. Jury trials for state crimes are to be abolished.
Yevgeny Kiseloyov at the Moscow Times said it feels eerily like December 1 1934 when Stalin unveiled his "Enemies of the People" law, kicking off the Great Terror.
The omens are not good in China either. Taxis are being bugged by state police. The great unknown is how Beijing will respond as its state-directed export strategy hits a brick wall, leaving exposed a vast eyesore of concrete and excess plant.
Exports fell 2.2pc in November. Toy, textile, footwear, and furniture plants are being closed across Guangdong, now the riot hub of South China. Some 40m Chinese workers are expected to lose their jobs. Party officials have warned of "mass-scale social turmoil".
The Politburo is giving mixed signals. We don't yet know how much of the country's plan to boost domestic demand through a $586bn stimulus package is real, and how much is a wish-list sent to party bosses in the hinterland without funding.
Shortly after President Hu Jintao said China is "losing competitive edge in the world market", we saw a move towards export subsidies for the steel industry and a dip in the yuan peg - even though China already has the world's biggest reserves ($2 trillion) and the biggest trade surplus ($40bn a month).
So is the Communist Party mulling a 1930s "beggar-thy-neighbour" strategy of devaluation to export its way out of trouble? Such raw mercantilism can only draw a sharp retort from Washington and Brussels in this climate.
"During a global slowdown, you can't have countries trying to take advantage of others by manipulating their currencies," said Frank Vargo from the US National Association of Manufacturers.
It is a view shared entirely by President-elect Barack Obama. "China must change its currency practices. Because it pegs its currency at an artificially low rate, China is running massive current account surpluses. This is not good for American firms and workers, not good for the world," he said in October. The new intake of radical Democrats on Capitol Hill will hold him to it.
There has been much talk lately of America's Smoot-Hawley Tariff Act, which set off the protectionist dominoes in 1930. It is usually invoked by free traders to make the wrong point. The relevant message of Smoot-Hawley is that America was then the big exporter, playing the China role. By resorting to tariffs, it set off retaliation, and was the biggest victim of its own folly.
Britain and the Dominions retreated into Imperial Preference. Other countries joined. This became the "growth bloc" of the 1930s, free from the deflation constraints of the Gold Standard. High tariffs stopped the stimulus leaking out.
It was a successful strategy - given the awful alternatives - and was the key reason why Britain's economy contracted by just 5pc during the Depression, against 15pc for France, and 30pc for the US.
Could we see such a closed "growth bloc" emerging now, this time led by the US, entailing a massive rupture of world's trading system? Perhaps.
This crisis has already brought us a monetary revolution as interest rates approach zero across the G10. It may overturn the "New World Order" as well, unless we move with great care in grim months ahead. This is where events turn dangerous.
The last great era of globalisation peaked just before 1914. You know the rest of the story.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3870089/Protectionist-dominoes-are-beginning-to-tumble-across-the-world.html
The riots have begun. Civil protest is breaking out in cities across Russia, China, and beyond.
By Ambrose Evans-PritchardLast Updated: 10:30AM GMT 22 Dec 2008
Comments 61 Comment on this article
Greece has been in turmoil for 11 days. The mood seems to have turned "pre-insurrectionary" in parts of Athens - to borrow from the Marxist handbook.
This is a foretaste of what the world may face as the "crisis of capitalism" - another Marxist phase making a comeback - starts to turn two hundred million lives upside down.
We are advancing to the political stage of this global train wreck. Regimes are being tested. Those relying on perma-boom to mask a lack of democratic or ancestral legitimacy may try to gain time by the usual methods: trade barriers, sabre-rattling, and barbed wire.
Dominique Strauss-Kahn, the head of the International Monetary Fund, is worried enough to ditch a half-century of IMF orthodoxy, calling for a fiscal boost worth 2pc of world GDP to "prevent global depression".
"If we are not able to do that, then social unrest may happen in many countries, including advanced economies. We are facing an unprecedented decline in output. All around the planet, the people have reacted with feelings going from surprise to anger, and from anger to fear," he said.
Russia has begun to shut down trade as it adjusts to the shock of Urals oil below $40 a barrel. It has imposed import tariffs of 30pc on cars, 15pc on farm kit, and 95pc on poultry (above quota levels). "It is possible during the financial crisis to support domestic producers by raising customs duties," said Premier Vladimir Putin.
Russia is not alone. India and Vietnam have imposed steel tariffs. Indonesia is resorting to special "licences" to choke off imports.
The Kremlin is alarmed by a 13pc fall in industrial output over the last five months. There have been street protests in Moscow, St Petersburg, Kaliningrad, Vladivostok and Barnaul. Police crushed "Dissent Marchers" holding copies of Russia's constitution above their heads in Moscow's Triumfalnaya Square.
"Russia has not seen anything like these nationwide protests before," said Boris Kagarlitsky from Moscow's Globalization Institute.
The Duma is widening the treason law to catch most forms of political dissent, and unwelcome forms of journalism. Jury trials for state crimes are to be abolished.
Yevgeny Kiseloyov at the Moscow Times said it feels eerily like December 1 1934 when Stalin unveiled his "Enemies of the People" law, kicking off the Great Terror.
The omens are not good in China either. Taxis are being bugged by state police. The great unknown is how Beijing will respond as its state-directed export strategy hits a brick wall, leaving exposed a vast eyesore of concrete and excess plant.
Exports fell 2.2pc in November. Toy, textile, footwear, and furniture plants are being closed across Guangdong, now the riot hub of South China. Some 40m Chinese workers are expected to lose their jobs. Party officials have warned of "mass-scale social turmoil".
The Politburo is giving mixed signals. We don't yet know how much of the country's plan to boost domestic demand through a $586bn stimulus package is real, and how much is a wish-list sent to party bosses in the hinterland without funding.
Shortly after President Hu Jintao said China is "losing competitive edge in the world market", we saw a move towards export subsidies for the steel industry and a dip in the yuan peg - even though China already has the world's biggest reserves ($2 trillion) and the biggest trade surplus ($40bn a month).
So is the Communist Party mulling a 1930s "beggar-thy-neighbour" strategy of devaluation to export its way out of trouble? Such raw mercantilism can only draw a sharp retort from Washington and Brussels in this climate.
"During a global slowdown, you can't have countries trying to take advantage of others by manipulating their currencies," said Frank Vargo from the US National Association of Manufacturers.
It is a view shared entirely by President-elect Barack Obama. "China must change its currency practices. Because it pegs its currency at an artificially low rate, China is running massive current account surpluses. This is not good for American firms and workers, not good for the world," he said in October. The new intake of radical Democrats on Capitol Hill will hold him to it.
There has been much talk lately of America's Smoot-Hawley Tariff Act, which set off the protectionist dominoes in 1930. It is usually invoked by free traders to make the wrong point. The relevant message of Smoot-Hawley is that America was then the big exporter, playing the China role. By resorting to tariffs, it set off retaliation, and was the biggest victim of its own folly.
Britain and the Dominions retreated into Imperial Preference. Other countries joined. This became the "growth bloc" of the 1930s, free from the deflation constraints of the Gold Standard. High tariffs stopped the stimulus leaking out.
It was a successful strategy - given the awful alternatives - and was the key reason why Britain's economy contracted by just 5pc during the Depression, against 15pc for France, and 30pc for the US.
Could we see such a closed "growth bloc" emerging now, this time led by the US, entailing a massive rupture of world's trading system? Perhaps.
This crisis has already brought us a monetary revolution as interest rates approach zero across the G10. It may overturn the "New World Order" as well, unless we move with great care in grim months ahead. This is where events turn dangerous.
The last great era of globalisation peaked just before 1914. You know the rest of the story.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3870089/Protectionist-dominoes-are-beginning-to-tumble-across-the-world.html
How to Steer Clear of Shady Advisers
How to Steer Clear of Shady Advisers
By MARY PILON
Bernard Madoff's alleged Ponzi scheme took a devastating toll on scores of victims. But any investor can draw important lessons from the tale of the disappearing $50 billion. Here's a guide to protecting yourself when you choose a financial adviser.
Be wary of guaranteed returns.
Mr. Madoff allegedly wooed many investors by promising consistent returns regardless of market activity. Also be wary about promises of speedy returns. If something sounds too good to be true, it most likely is.
Reputation and referrals aren't enough.
Mr. Madoff was a former Nasdaq Stock Market chairman and fixture on Wall Street -- it's understandable that people felt comfortable with him managing their money. Many investors are happy if they just have an adviser a friend recommends.
But don't make a decision based on the good things you hear.
Check credentials and verify certification with the Financial Industry Regulatory Authority (Finra), which issues licenses for financial advisers.
You should seek out other information, too.
The U.S. Securities and Exchange Commission (sec.gov) lets you search Investment Adviser Public Disclosure forms online, which give information about advisers' business affiliations and any disciplinary actions. Finra also has background information on approximately 660,000 currently registered brokers and 5,100 currently registered securities firms. The information on both the SEC and Finra sites are available at no cost to the public.
Demand transparency.
It's your money, so you have a right to know where it's being invested. Ask lots of questions about your allocation and your money manager's past performance. And set aside time to read through your brokerage statement -- most firms send one a month -- and make sure you're clear on everything documented in it.
Make sure you get a statement from your adviser's firm, not your adviser.
There are claims that Mr. Madoff cooked his books. A firm is less likely to do that, since it's accountable to more parties. Likewise, you should be wary about writing checks directly to your adviser. They should go to a registered investment company.
Get it in writing.
Make sure that both your investments and their explanations are spelled out in writing, for future reference. While you're at it, read the fine print -- and be extremely suspicious if there's no fine print to read.
If you've been a victim of fraud or are suspicious, report it. The SEC has a tip and complaint form on its Web site, sec.gov/complaint.shtml.
Write to Mary Pilon at mary.pilon@wsj.com
http://online.wsj.com/article/SB122981065261124223.html
By MARY PILON
Bernard Madoff's alleged Ponzi scheme took a devastating toll on scores of victims. But any investor can draw important lessons from the tale of the disappearing $50 billion. Here's a guide to protecting yourself when you choose a financial adviser.
Be wary of guaranteed returns.
Mr. Madoff allegedly wooed many investors by promising consistent returns regardless of market activity. Also be wary about promises of speedy returns. If something sounds too good to be true, it most likely is.
Reputation and referrals aren't enough.
Mr. Madoff was a former Nasdaq Stock Market chairman and fixture on Wall Street -- it's understandable that people felt comfortable with him managing their money. Many investors are happy if they just have an adviser a friend recommends.
But don't make a decision based on the good things you hear.
Check credentials and verify certification with the Financial Industry Regulatory Authority (Finra), which issues licenses for financial advisers.
You should seek out other information, too.
The U.S. Securities and Exchange Commission (sec.gov) lets you search Investment Adviser Public Disclosure forms online, which give information about advisers' business affiliations and any disciplinary actions. Finra also has background information on approximately 660,000 currently registered brokers and 5,100 currently registered securities firms. The information on both the SEC and Finra sites are available at no cost to the public.
Demand transparency.
It's your money, so you have a right to know where it's being invested. Ask lots of questions about your allocation and your money manager's past performance. And set aside time to read through your brokerage statement -- most firms send one a month -- and make sure you're clear on everything documented in it.
Make sure you get a statement from your adviser's firm, not your adviser.
There are claims that Mr. Madoff cooked his books. A firm is less likely to do that, since it's accountable to more parties. Likewise, you should be wary about writing checks directly to your adviser. They should go to a registered investment company.
Get it in writing.
Make sure that both your investments and their explanations are spelled out in writing, for future reference. While you're at it, read the fine print -- and be extremely suspicious if there's no fine print to read.
If you've been a victim of fraud or are suspicious, report it. The SEC has a tip and complaint form on its Web site, sec.gov/complaint.shtml.
Write to Mary Pilon at mary.pilon@wsj.com
http://online.wsj.com/article/SB122981065261124223.html
Sunday 21 December 2008
Why the Bank of England must fight the economic Blitz in a battle for Britain
From The Times
December 8, 2008
Why the Bank of England must fight the economic Blitz in a battle for Britain
Gary Duncan: Economic view
It is the 64-trillion-dollar question. As a fearful nation battens down the hatches, the question that everyone wants an answer to is: just how bad is this recession going to get?
After the Bank of England’s latest dose of economic “shock and awe” with last week’s landmark cut in interest rates to 2 per cent, a level last seen in 1951, a colleague asked me why so much commentary on the new recession harks back to Britain’s last one, in the early Nineties. Having closely tracked the misfortunes of business in that episode, his point was that this downturn already feels much worse.
You can see the point. As dire news piles up, it really does seem like the economy is going into freefall. And that feeling matters, as it saps sentiment and drains away confidence. None of us can be certain how fast, or how far, the economy will slide. So, in trying to weigh the true scale of the danger, it is worth peering back at the lessons of history. Sadly, there are plenty of recessions to ponder.
About 20 recessions in Britain since the mid-19th century and at least 255 across 17 developed economies since 1870 are examined in recent papers by Paul Ormerod, highlighted in research by David Owen, of Dresdner Kleinwort. The findings offer a little comfort – although mainly of the cold variety.
First, the good news. Most recessions have tended to be relatively short and afflicted economies have been able to bounce back quickly. Only 33 of the 255 recessions lasted more than two years and, while nine were calamitous, with GDP dropping by more than 30 per cent, three of those related to the First World War and six to the Second World War. The conclusion is that, with the exception of the two world wars and the Great Depression, developed economies have generally revived fairly rapidly from recessions.
That, though, is where the reassurance ends. Tellingly, wars aside, episodes of recession in Britain since the Seventies have been much more severe than in the 19th and early 20th centuries. Crucially, Professor Ormerod finds that the deeper and longer a recession is, the more feeble the recovery then is. As Mr Owen observes, this takes us straight back to the role of confidence. The faster and more viciously recession tightens its grip, the more confidence evaporates and the more elusive recovery becomes as what John Maynard Keynes called the economy’s “animal spirits” are killed off.
It is just this peril that, more and more clearly, confronts Britain. The new recession has taken hold with brutal speed and severity and the immediate, acute danger is that it will, indeed, prove to be markedly worse than that of the early Nineties. That is why the only thing wrong with last week’s drastic interest rate cut was that it was not drastic enough.
The Bank itself admits that “the downturn has gathered pace”, with “a weaker outlook for activity in the near-term”. It is worth remembering that it was already forecasting that the economy would shrink next year by 1.3 per cent or more – more or less matching the 1.4 per cent slump suffered in 1991, at the nadir of the last recession.
There are at least two powerful factors that leave us at grave risk of enduring something still harsher and which threaten to mean that the economy’s slump accelerates still farther.
The first is the global nature of this downturn, with all the leading Western economies now in a synchronised slump. This is bound to aggravate the toll from recession, with no big economy left immune and able to act as a locomotive to pull the others out of the mire. As Mr Owen notes, global trade is close to collapsing.
The second factor is the pivotal role of the banks, the bogeymen of this crisis, and their continuing failure to play their proper role in the economy and provide a steady flow of lending to businesses and households.
While the banks’ behaviour in curbing lending to safeguard their own financial strength is individually rational, it is collectively crazy and will mean a far deeper and more painful recession unless it is quickly reversed. Certainly, interest rate cuts will help to limit the toll from recession, but, as Philip Shaw, of Investec, observed last week, there is no point in having very cheap money if nobody will lend it to you. While the banks insist that they are keeping up the flow of lending, the data tells a different story.
Taken together, these aspects of the present crisis make Professor Ormerod’s conclusions compelling. The swifter, more radical and more aggressive the action taken now by the Bank and the Treasury to nip recession in the bud, the more the danger will diminish, the smaller the eventual toll will be and the bigger the chances of an eventual, potent return to growth.
The Bank has already taken two giant leaps with the successive 1.5 and 1 percentage point cuts in interest rates over the past four weeks. It can no longer be accused of timidity. Another step will take it into uncharted territory and rates to a level not seen seen in the Bank’s 316-year history. It should take this step soon and make it another big one.
Yet it must be bolder still and steel itself quickly to follow the US Federal Reserve in deploying more unorthodox weapons from the armoury of monetary policy, such as large-scale direct lending to the banks, the buying-up of credit products and other forms of so-called “quantitative easing”. It is vital that it acts now to jump-start stalled activity and to get the lifeblood of bank lending flowing once more.
The historical parallels remain resonant. The last time that rates were cut to 2 per cent was in 1939, a month after the outbreak of the Second World War. Now, as then, the country confronts an economic Blitz. It is time for the Bank to wage a battle for Britain.
December 8, 2008
Why the Bank of England must fight the economic Blitz in a battle for Britain
Gary Duncan: Economic view
It is the 64-trillion-dollar question. As a fearful nation battens down the hatches, the question that everyone wants an answer to is: just how bad is this recession going to get?
After the Bank of England’s latest dose of economic “shock and awe” with last week’s landmark cut in interest rates to 2 per cent, a level last seen in 1951, a colleague asked me why so much commentary on the new recession harks back to Britain’s last one, in the early Nineties. Having closely tracked the misfortunes of business in that episode, his point was that this downturn already feels much worse.
You can see the point. As dire news piles up, it really does seem like the economy is going into freefall. And that feeling matters, as it saps sentiment and drains away confidence. None of us can be certain how fast, or how far, the economy will slide. So, in trying to weigh the true scale of the danger, it is worth peering back at the lessons of history. Sadly, there are plenty of recessions to ponder.
About 20 recessions in Britain since the mid-19th century and at least 255 across 17 developed economies since 1870 are examined in recent papers by Paul Ormerod, highlighted in research by David Owen, of Dresdner Kleinwort. The findings offer a little comfort – although mainly of the cold variety.
First, the good news. Most recessions have tended to be relatively short and afflicted economies have been able to bounce back quickly. Only 33 of the 255 recessions lasted more than two years and, while nine were calamitous, with GDP dropping by more than 30 per cent, three of those related to the First World War and six to the Second World War. The conclusion is that, with the exception of the two world wars and the Great Depression, developed economies have generally revived fairly rapidly from recessions.
That, though, is where the reassurance ends. Tellingly, wars aside, episodes of recession in Britain since the Seventies have been much more severe than in the 19th and early 20th centuries. Crucially, Professor Ormerod finds that the deeper and longer a recession is, the more feeble the recovery then is. As Mr Owen observes, this takes us straight back to the role of confidence. The faster and more viciously recession tightens its grip, the more confidence evaporates and the more elusive recovery becomes as what John Maynard Keynes called the economy’s “animal spirits” are killed off.
It is just this peril that, more and more clearly, confronts Britain. The new recession has taken hold with brutal speed and severity and the immediate, acute danger is that it will, indeed, prove to be markedly worse than that of the early Nineties. That is why the only thing wrong with last week’s drastic interest rate cut was that it was not drastic enough.
The Bank itself admits that “the downturn has gathered pace”, with “a weaker outlook for activity in the near-term”. It is worth remembering that it was already forecasting that the economy would shrink next year by 1.3 per cent or more – more or less matching the 1.4 per cent slump suffered in 1991, at the nadir of the last recession.
There are at least two powerful factors that leave us at grave risk of enduring something still harsher and which threaten to mean that the economy’s slump accelerates still farther.
The first is the global nature of this downturn, with all the leading Western economies now in a synchronised slump. This is bound to aggravate the toll from recession, with no big economy left immune and able to act as a locomotive to pull the others out of the mire. As Mr Owen notes, global trade is close to collapsing.
The second factor is the pivotal role of the banks, the bogeymen of this crisis, and their continuing failure to play their proper role in the economy and provide a steady flow of lending to businesses and households.
While the banks’ behaviour in curbing lending to safeguard their own financial strength is individually rational, it is collectively crazy and will mean a far deeper and more painful recession unless it is quickly reversed. Certainly, interest rate cuts will help to limit the toll from recession, but, as Philip Shaw, of Investec, observed last week, there is no point in having very cheap money if nobody will lend it to you. While the banks insist that they are keeping up the flow of lending, the data tells a different story.
Taken together, these aspects of the present crisis make Professor Ormerod’s conclusions compelling. The swifter, more radical and more aggressive the action taken now by the Bank and the Treasury to nip recession in the bud, the more the danger will diminish, the smaller the eventual toll will be and the bigger the chances of an eventual, potent return to growth.
The Bank has already taken two giant leaps with the successive 1.5 and 1 percentage point cuts in interest rates over the past four weeks. It can no longer be accused of timidity. Another step will take it into uncharted territory and rates to a level not seen seen in the Bank’s 316-year history. It should take this step soon and make it another big one.
Yet it must be bolder still and steel itself quickly to follow the US Federal Reserve in deploying more unorthodox weapons from the armoury of monetary policy, such as large-scale direct lending to the banks, the buying-up of credit products and other forms of so-called “quantitative easing”. It is vital that it acts now to jump-start stalled activity and to get the lifeblood of bank lending flowing once more.
The historical parallels remain resonant. The last time that rates were cut to 2 per cent was in 1939, a month after the outbreak of the Second World War. Now, as then, the country confronts an economic Blitz. It is time for the Bank to wage a battle for Britain.
What hope for investment recovery in 2009?
From The Times
December 11, 2008
What hope for investment recovery in 2009?
We ask the experts for their predictions as beleaguered investors say good riddance to 2008
Mark Atherton
Most people cannot wait to see the end of 2008. Whether you were a saver, a stock market investor or a property owner, the past 12 months has delivered some nasty shocks to the system.
The FTSE 100 index of leading UK shares is down 32 per cent this year and the US stock market has fallen by 34 per cent. Emerging markets such as Russia and China, once the darlings of UK investors, have fared even worse.
Even traditional safe havens, such as bricks and mortar, have proved no defence against this year's chill financial winds. UK house prices are down 17 per cent while commercial property has fallen by about 20 per cent.
One piece of good news is that the situation has grown so bad that experts are not expecting it to deteriorate much in 2009. Here are their predictions of what is in store.
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Q&A: New Star crisis
The UK stock market
With the UK economy now in recession, most experts are forecasting that shares will struggle to make headway in early 2009. But the green shoots of recovery could begin to show in the latter part of the year as the market starts to expect an improvement in the economy. UBS, the Swiss bank, reckons that the FTSE 100 could recover to 5,800 from its current level of about 4,300. Among the sectors it favours are food retailers, health equipment and household goods. Its preferred stocks include Tesco, Smith & Nephew and Next.
Brewin Dolphin, the stockbroker, also forecasts a recovery, albeit a more modest one. Mike Lenhoff, Brewin's chief strategist, says: “There will be more bad news, but the market is already discounting a great deal of it, so shares are now looking cheap. Governments are making huge efforts to respond to the impact of the credit crunch and next year we should start to see them take effect.”
Brewin Dolphin is looking for good performance from sectors such as general retailing and media stocks. Among the shares it likes are Marks & Spencer and Reed Elsevier.
Global stock markets
The general consensus is that the US, which led the world into recession, will also lead the world out of the downturn, triggering a recovery in the US stock market. Max King, strategist at Investec Asset Management, says: “The US trade deficit is falling and household debt is lower than in the UK. The ability of the US economy to bounce back should never be underestimated.”
Meanwhile, Morgan Stanley, the US investment bank, thinks that emerging markets as a whole could rise by more than 60 per cent in the next 12 months. This reflects the expectation that the economies of the industrial world will shrink by 0.9 per cent, while those of the developing world will rise by 4.3 per cent.
For those wishing to invest through funds, Rob Harley, of Bestinvest, the independent financial adviser (IFA), suggests Aberdeen Emerging Markets and Legg Mason US Smaller Companies.
Bonds
Many experts reckon that a lot of bonds are attractively priced after the recent heavy falls. These price falls mean that bonds are also on comparatively high yields, which is good news for investors seeking income. Darius McDermott, of Chelsea Financial Services, another IFA, says: “Falling interest rates and falling inflation will be good for bonds and are likely to send prices higher. It is possible that investors could benefit from a high yield and a rise in the capital value of their investments.”
Among the bond funds that Mr McDermott favours are M&G Optimal Income, which yields 6.5 per cent, and the Henderson Strategic Bond fund, yielding 7.5 per cent.
Alternative investments
Mick Gilligan, a partner at Killik & Co, the stockbroker, says that popular investments such as fine wines and vintage cars have fallen off the radar as prices have fallen.
Among more widely traded alternative investments, Mr Gilligan thinks that gold could have a strong run, especially when investors realise the enormity of the debt burden in the developed economies. He also thinks that oil, which was trading at about $40 a barrel recently, should be considerably higher this time next year.
Meanwhile, experts say that private equity funds, which rely heavily on borrowing, could struggle.
Commercial property
Bill Siegle, of Cluttons, the chartered surveyor, reckons that commercial property prices are likely to continue falling as we enter 2009. As the recession bites, more tenants, including some household names, are likely to default on rental payments.
“There is still a bit further to go before we hit the bottom, though this is likely to happen sometime next year,” Mr Siegle says.The areas that he thinks will prove most profitable when the market recovers are retail warehouses and some industrial parks.
Savers face a bleak 12 months
Prudent savers are finding it harder to obtain a decent return after the Bank of England cut the base rate to its lowest level for 57 years. And with economists predicting that the base rate could drop as low as 0 per cent next year, the prospect for savers is looking increasingly bleak, writes Lauren Thompson.
The rates on savings accounts have fallen fast as the base rate has dropped by three percentage points in the past three months to only 2 per cent. Michelle Slade, of Moneyfacts.co.uk, the financial website, says: “The 7 per cent deals that were available in October seem like a distant memory. The best accounts now pay about 5 per cent - and these will probably not be around for long.”
Capital Economics, the research consultancy, expects the base rate to fall to 1 per cent in the first quarter of next year. It thinks that it could drop to 0 per cent by the end of the year. The experience of Japan, where interest rates have been near zero for years, provides a worrying indication of what that could mean for savers.
Simon Somerville, of Jupiter Asset Management, says: “The most that you can earn from a Japanese bank account is 0.4 per cent, but most pay no interest. Many Japanese have abandoned banks and put their savings in safes or under the mattress.”
There are still some good deals available in the UK. Leeds Building Society is offering 5 per cent on its Fixed Rate Postal Access Bond until May. Those hoping to lock in for three years can get 4.75 per cent with Cheshire Building Society's Three-Year Fixed Rate Bond.
Some of the highest returns are from foreign banks, such as ICICI, the Indian-owned bank, which offers 4.75 per cent for 12 months on its HiSAVE Fixed Rate bond. Even though the bank is foreign owned, deposits of up to £50,000 are guaranteed by the Financial Services Compensation Scheme.
http://www.timesonline.co.uk/tol/money/investment/article5326730.ece
December 11, 2008
What hope for investment recovery in 2009?
We ask the experts for their predictions as beleaguered investors say good riddance to 2008
Mark Atherton
Most people cannot wait to see the end of 2008. Whether you were a saver, a stock market investor or a property owner, the past 12 months has delivered some nasty shocks to the system.
The FTSE 100 index of leading UK shares is down 32 per cent this year and the US stock market has fallen by 34 per cent. Emerging markets such as Russia and China, once the darlings of UK investors, have fared even worse.
Even traditional safe havens, such as bricks and mortar, have proved no defence against this year's chill financial winds. UK house prices are down 17 per cent while commercial property has fallen by about 20 per cent.
One piece of good news is that the situation has grown so bad that experts are not expecting it to deteriorate much in 2009. Here are their predictions of what is in store.
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Q&A: New Star crisis
The UK stock market
With the UK economy now in recession, most experts are forecasting that shares will struggle to make headway in early 2009. But the green shoots of recovery could begin to show in the latter part of the year as the market starts to expect an improvement in the economy. UBS, the Swiss bank, reckons that the FTSE 100 could recover to 5,800 from its current level of about 4,300. Among the sectors it favours are food retailers, health equipment and household goods. Its preferred stocks include Tesco, Smith & Nephew and Next.
Brewin Dolphin, the stockbroker, also forecasts a recovery, albeit a more modest one. Mike Lenhoff, Brewin's chief strategist, says: “There will be more bad news, but the market is already discounting a great deal of it, so shares are now looking cheap. Governments are making huge efforts to respond to the impact of the credit crunch and next year we should start to see them take effect.”
Brewin Dolphin is looking for good performance from sectors such as general retailing and media stocks. Among the shares it likes are Marks & Spencer and Reed Elsevier.
Global stock markets
The general consensus is that the US, which led the world into recession, will also lead the world out of the downturn, triggering a recovery in the US stock market. Max King, strategist at Investec Asset Management, says: “The US trade deficit is falling and household debt is lower than in the UK. The ability of the US economy to bounce back should never be underestimated.”
Meanwhile, Morgan Stanley, the US investment bank, thinks that emerging markets as a whole could rise by more than 60 per cent in the next 12 months. This reflects the expectation that the economies of the industrial world will shrink by 0.9 per cent, while those of the developing world will rise by 4.3 per cent.
For those wishing to invest through funds, Rob Harley, of Bestinvest, the independent financial adviser (IFA), suggests Aberdeen Emerging Markets and Legg Mason US Smaller Companies.
Bonds
Many experts reckon that a lot of bonds are attractively priced after the recent heavy falls. These price falls mean that bonds are also on comparatively high yields, which is good news for investors seeking income. Darius McDermott, of Chelsea Financial Services, another IFA, says: “Falling interest rates and falling inflation will be good for bonds and are likely to send prices higher. It is possible that investors could benefit from a high yield and a rise in the capital value of their investments.”
Among the bond funds that Mr McDermott favours are M&G Optimal Income, which yields 6.5 per cent, and the Henderson Strategic Bond fund, yielding 7.5 per cent.
Alternative investments
Mick Gilligan, a partner at Killik & Co, the stockbroker, says that popular investments such as fine wines and vintage cars have fallen off the radar as prices have fallen.
Among more widely traded alternative investments, Mr Gilligan thinks that gold could have a strong run, especially when investors realise the enormity of the debt burden in the developed economies. He also thinks that oil, which was trading at about $40 a barrel recently, should be considerably higher this time next year.
Meanwhile, experts say that private equity funds, which rely heavily on borrowing, could struggle.
Commercial property
Bill Siegle, of Cluttons, the chartered surveyor, reckons that commercial property prices are likely to continue falling as we enter 2009. As the recession bites, more tenants, including some household names, are likely to default on rental payments.
“There is still a bit further to go before we hit the bottom, though this is likely to happen sometime next year,” Mr Siegle says.The areas that he thinks will prove most profitable when the market recovers are retail warehouses and some industrial parks.
Savers face a bleak 12 months
Prudent savers are finding it harder to obtain a decent return after the Bank of England cut the base rate to its lowest level for 57 years. And with economists predicting that the base rate could drop as low as 0 per cent next year, the prospect for savers is looking increasingly bleak, writes Lauren Thompson.
The rates on savings accounts have fallen fast as the base rate has dropped by three percentage points in the past three months to only 2 per cent. Michelle Slade, of Moneyfacts.co.uk, the financial website, says: “The 7 per cent deals that were available in October seem like a distant memory. The best accounts now pay about 5 per cent - and these will probably not be around for long.”
Capital Economics, the research consultancy, expects the base rate to fall to 1 per cent in the first quarter of next year. It thinks that it could drop to 0 per cent by the end of the year. The experience of Japan, where interest rates have been near zero for years, provides a worrying indication of what that could mean for savers.
Simon Somerville, of Jupiter Asset Management, says: “The most that you can earn from a Japanese bank account is 0.4 per cent, but most pay no interest. Many Japanese have abandoned banks and put their savings in safes or under the mattress.”
There are still some good deals available in the UK. Leeds Building Society is offering 5 per cent on its Fixed Rate Postal Access Bond until May. Those hoping to lock in for three years can get 4.75 per cent with Cheshire Building Society's Three-Year Fixed Rate Bond.
Some of the highest returns are from foreign banks, such as ICICI, the Indian-owned bank, which offers 4.75 per cent for 12 months on its HiSAVE Fixed Rate bond. Even though the bank is foreign owned, deposits of up to £50,000 are guaranteed by the Financial Services Compensation Scheme.
http://www.timesonline.co.uk/tol/money/investment/article5326730.ece
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