Reading an Annual Report

Reading an Annual Report

Every company must publish an annual report to its shareholders as a matter of corporate law. The primary purpose of this report is to inform shareholders of the company's performance. As a legal requirement, the report usually contains a profit and loss account, a balance sheet, a cash-flow statement, a directors' report, and an auditors' report.

Many companies also provide a lot of other non-statutory information on their affairs, in the interests of general communication. In some cases, this may be little more than gloss, contrived to illustrate the company's wonderful achievement while remaining strangely silent on negative features.

What guarantee is there that an annual reprot is a true picture of a company's performance and not just propaganda put out by directors?

All annual reprots have to include a report from the auditors, independent accountants charged with investigating a company's financial affairs to ensure that the published figures give a true and fair view of performance. Their investigation cannot extend to examining every single transaction (impossible in a company of any size), so they use statistical sampling and other risk-based testing procedures to assess the quality of the company's systems as a basis for producing the annual report. They are not infallible, but they stand between the shareholders and the directors as a way of trying to ensure probity in the running of the company.

Understanding the main contents of an annual report.

Standard sections in annual reports can vary from country to country, but the following is the contents list of a medium-sized UK public company - let's call it X plc.

X world
Chairman's statement
Chief executive's view
Financial review
X in the community
Environment, health, and safety
Board of directors
Directors' report
Board reprot on remuneration
Director's responsibilities
Report of the auditors
Financial statements
Five-year record
Shareholder information.

Financial statements - are the main purpose of the annual report. In the example of X plc, these consist of:

• Consolidated profit and loss account. The profit and loss account of all the group as one.
• Consolidated and company balance sheets. The former is the group balance sheet and the latter shows the parent company alone.
• Consolidated cash-flow statement. A guide to how the money flowing in and out of the company was utilised.
• Notes to the accounts. These amplify numerous points contained in the figures and are usually critical for anyone wishing to study the accounts in detail.

Five-year record - shows a very abbreviated set of profit and loss and balance sheet figures for the current and previous four years. Some companies provide a ten-year record.

Choosing the right order in which to read the report

1. Start with the auditors' report.

Remember that this thin grey line of accountants is all that stands between the outside shareholder and the directors. To speed up matters, look at the final paragraph, their opinion. Does that statement give a true and fair view? If so, fine. If not, then it is said to be 'qualified'. Qualifications vary in depth from the disastrous, meaning that the company has got something seriously wrong, to perhaps a difference of opinion between the auditors and the board over some accounting matter. Most auditors' reports are unqualified, but, if there is a qualification present, you will have to judge how much the accounts can be relied upon as a measure of the company's performance.

2. Next, turn to the five/ten-year review

This is where you build up a mental picture of the company's financial history. Look at EPS - is it increasing, decreasing, fluctuating wildly? This gives you an idea of how it has been doing over the period. Look at dividend, if any, and consider their patern. Do they follow EPS or, as is likely, are they showing a smoother picture? Look at company debt, if the information is there, and compare it with shareholders' funds. How is it changing over the years?

Generally try to build up a view as to whether the company is doing better, worse, or perhaps has no particular pattern over the period. Depending on your reasons for reading the report, a set of prejudices will have begun to develop from this historical picture. If it shows a declining financial situation, this could be a good thing from some points of view - if you wish to acquire the company, for example. If you are an employee though, it would not be very encouraging. So, reading reports depends to some extent upon which angle you are coming from.

3. Now read the chairman's and directors' comments

These will give a deeper feel for the company's business, over and above the raw numerical data. Try to exercise a degree of scepticism in some areas, because it is natural for directors to attempt to play up the good points and play down the less good ones.

4. Get to the heart of the matter (the financial statements and the huge number of notes that accompany them)

The kernel of the report comprises the financial sttements and the huge number of notes that accompany them. A lot of it is in highly technical accounting terminology, but it gives you the intimate financial detail on the year. Never ignore the notes - they are critical. In fact some investment analysis read the report from the back, because the notes are so important.

Notes have increased dramatically over the years as new legal and accounting standards have been introduced, primarily to enforce standardisation so that accounts are more comparable, but also to avoid 'creative accounting', whereby some companies have tried to conceal (legitimately) financial undesirables.

5. Relax with the glossy stuff

Having absorbed all that really matters, settle back and read the glossy bits that tell you how wonderful the company is. Just remember to exercise a mild degree of cynicism here - this is the least important, though no doubt the most visually attractive, part of the annual reprot. The real picture of the company is the numbers, not the photo of the bloke in the hard hat standing on an oil rig!

COMMON MISTAKES

Paying too much attention to pretty pictures and directors' comments and too little to the accounting data.

This can give a false view of how well, or badly, the company is doing. Understandably, a large number of people have difficulty in comprehending the figures. But if you want to appreciate annual reports properly, then learning to read accounts is essential.

Some cynics among investment analysts have even expressed the view that there is an adverse relationship between the number of glossy pages in an annual report and the company's actual performance. Maybe that's a little harsh but ... there might be something in it.

Also read:

• Reading a Cash-flow Statement
• Reading a Profit and Loss Account
• Reading a Balance Sheet
• Reading an Annual Report
• Yield and price/earnings ratio (P/E)

Yield and price/earnings ratio (P/E)

Yield and price/earnings ratio (P/E)

Yield represents the historical annual dividend income paid by the share as a percentage of its current price. P/E shows how many years of current earnings are represented in the current price. Both of these ratios will therefore fluctuate with the price of the share - P/E in direct proportion and yield in inverse proportion.

These are the two most common ratios used by investors and market commentators in evaluating a share as a potential investment, both on its own merits and as a comparison with other shares. For this reason they are widely quoted in the press and almost every serious newspaper will show these figures alongside the price of each share in the listings.


COMMON MISTAKES

1. Believing that share price alone is an indication of the value fo the share

It seems logical to believe that shares for company A, with a share price of $200, are twice as expensive as those of company B, with a share price of $100. This is completely incorrect. The share price alone tells you almost nothing about the share, which is why P/E is so critically important.

Suppose in the above example, A has a P/E of 12 and B a P/E of 24. Now you can see that in fact B is twice as dear as A, even though it has half the share price. It means that collectively, investors have decided that it is worth paying 24 years' earnings for B but only 12 years' earnings for A. This does not mean that the collective market view is right or wrong, in that a higher P/E is better or worse than a lower one. That is a matter for the individual to decide for him- or herself.

What we are doing when using P/E is relating the price to some other fact about the company, in this case to earnings. Similarly, yield relates the price to the annual dividends paid. There are several other measures that relate the price to something about the share, examples, being assets (P/B) and sales (P/S). It is really only by reference to these that one share can be compared with another to ascertain which is cheaper or dearer.

2. Thinking that the yield will apply in future

In most cases, the yield figures shown in papers are historical. The exact method varies between papers, but generally it is based on taking the last year's dividends paid, dividing by the share price, and expressing the result as a percentage. But it must be borne in mind that no company is obliged to pay dividends at all.

3. Assuming that yield figures will always be sustainable

If you look through the tables, you can occasionally discover shares that appear to give enormous yields like 20% - which, on the face of it, seems to be a fantastic investment. But if you look behind the figures at announcements from the company, you will very likely find that it is going through a bad time and will probably cut, or eliminate, its dividend in the future. The huge historical yield appears only becasue the share price has collapsed following the bad news, and a falling share price drives up the yield in inverse proportion. so do not make the mistake of assuming that the yeild figures are always sustainable in the future, particularly those that appear astronomically high in relation to the rest of the market.

Also read:
Reading a Cash-flow Statement
Reading a Profit and Loss Account
Reading a Balance Sheet
Reading an Annual Report
Yield and price/earnings ratio (P/E)

Reading a Cash-flow Statement

Reading a Cash-flow Statement

The purpose of the cash-flow statement is to explain the movement in cash balances or bank overdrafts held by the business from one accounting period to the next.

What is a cash-flow statement?

Over an accounting period, the money held by a business at the bank (or its overdrafts) will have changed. The purpose of the cash-flow statement is to show the reasons for this change. The cash flow statement is the link between profit and cash balance movements. It takes you down the path from profit to cash. The figures are derived from those published in the annual accounts, and notes will explain how this derivation is arrived at.

What does a cash-flow statement not show?

In the same way that a profit and loss account does not show the cash made by the business, a cash-flow staetement does not show the profit. It is entirely possible for a loss-making business to show an increase in cash, and the other way round too.

Learn to interpret the figures

The cash-flow statement is a 'derived schedule', meaning that the figures are pulled from the profit and loss account and balance sheet statements, linking the two.

Its purpose is to analyse the reasons why the company's cash position changed over an accounting period. For example, a sharp increase in borrowings could have several explanations - such as a high level of capital expenditure, poor trading, an increase in the time taken by debtors to pay, and so on. The cash-flow statement will alert management to the reasons for this, in a way that may not be obvious merely from the profit and loss account and balance sheet.

The generally desirable situation is for the net position before financing to be positive. Even the best-run businesses will sometimes have an outflow in a period (for example in a year of high capital expenditure), but positive is usually good. This become more apparent when comparing figures over a period of time. A repeated outflow of funds over several years is usally an indication of trouble. To cover this, the company must raise new finance and/or sell off assets, which will tend to compound the problem, in the worst cases leading to failure.

Cash is critical to every business, so the management must understand where its cash is coming from and going to. The cash-flow statement gives us this information in an abbreviated form. You could argue that the whole purpose of a business is to start with one sum of money and, by applying some sort of process to it, arrive at another and higher sum, continually repeating this cycle.

COMMON MISTAKES

Confusing 'cash' and 'profit'

As mentioned previously, the most common mistake with cash-flow statements is the potential confusion between profit and cash. They are not the same!

Not understanding the terminology

It is clearly fundamental to an understanding of cash flow statements that the reader is familiar with terms like 'debtors', 'creditors', 'dividends', and so on. But more than appreciating the meaning fo the word 'debtor', it is quite easy to misunderstand the concept that, for example, an increase in debtors is a cash outflow, and equally that an increase in creditors represents an inflow of cash to the business.

Also read:
Reading a Cash-flow Statement
Reading a Profit and Loss Account
Reading a Balance Sheet
Reading an Annual Report
Yield and price/earnings ratio (P/E)

Reading a Profit and Loss Account

Reading a Profit and Loss Account

A profit and loss (P&L) account is a statement of the income and expenditure of a business over the period stated, drawn up in order to ascertain how much profit the business made. 'Income" and "expenditure' here mean only those amounts directly attributable to earning the profit and thus would exclude capital expenditure, for example.

Importantly, the figures are adjusted to match the income and expenses to the time period in which they were incurred - not necessarily the same as that in which the cash changed hands.

What is a profit and loss account?

A profit and loss account is an accountant's view of the figures that show how much profit or loss a business has made over a period. To arrive at this, it is necessary to allocate the various elements of income and expenditure to the time period concerned, not on the basis of when cash was received or spent, but on when the income was earned or the liability to pay a supplier or employees was incurred. While capital expenditures are excluded, depreciation of property and equipment is included as a non-cash expense.

Thus if you sell goods on credit, you will be paid later but the sale takes place upon the contract to sell them. Equally if you buy goods and services on credit, the purchase takes palce when you contract to buy them, not when you actually settle the invoice.

What does a profit and loss account not show?

Most importantly, a P&L account is not an explanation of the cash coming into and going out of a business.

MAKING IT HAPPEN

The presence of stock and purchases indicates that the business is trading or manufacturing goods of some kind, rather than selling services.

Where a business holds stock, the purchases figure has to be adjusted for the opening and closing values in order to reach the right income and expenditure amounts for that period only. Goods for resale bought in the period may not have been used purely for that period but may be lying in stock at the end of it, ready for sale in the next. Similarly, goods used for resale in this period will consist parly of items already held in stock at the beginning of it. So take the amounts purchased, add the opening stock, and deduct the closing stock. The resulting adjusted purchase figure is known as 'cost of sales'.

In some businesses there may be other direct costs apart from purchases included in cost of sales. For example, a manufacturer may include some wages if they are of a direct nature (wages of employees directly involved in the manufacturing process, as distinct from office staff, say). Or a building contractor would include plant hire in direct costs, as well as purchses of materials.


How to interpret the figures

A lot of accounting analysis is valid only when comparing the figures, usually with similar figures for earlier periods, projected future figures, or other companies in the same business.

On its own, a P&L account tells you only a limited story, though there are some standalone facts that can be derived from it.

• Was this business successful in the period concerned?
• Was it able to make a profit, and not a loss?
• Was it able to pay dividends to shareholders out of that profit?

These are crucial pieces of information.

However, it is in comparisons that such figures start to have real meaning.

• The gross profit margin of X% was an important statistic in measuring business performance.
• The net profit margin before tax was Y%.
• You can calculate the net profit after tax (the bottom line).
• You could take the margin idea further and calculate the net profit after tax ratio to sales.
• Or you could calculate the ratio of any expense to sales. E.g. the wages to sales ratio.

If you then looked at similar margin figures for the preceding accounting period, you would learn something about this business.

Say the gross margin was 45% last year compared with 46% this year - there has been some improvement in the profit made before deducting overheads. But then suppose that the net profit margin of 8.8% this year was 9.8% last year. This would tell you that, despite improvement in profit at the gross level, the overheads have increased disproportionately. You could then check on the ratio of each item of the overheeads to sales to see where this arose and find out why. Advertising spending could have shot up, for example, or perhaps the company moved to new premises, incurring a higher rent. Maybe something could be tightened up.

Another commonly-used ratio

Another ratio often used in business analysis is return on capital employed. Here we combine the profit and loss account with the balance sheet by dividing the net profit (either before or after tax as required) by shareholders' funds. This tells you how much the company is making proportionate to money invested in it by the shareholders - a similar idea to how much you might get in interest on a bank deposit account. It's a useful way of comparing different companies in a particular industry, where the more efficient ones are likely to derive a higher return on capital employed.

COMMON MISTAKES

Assuming that the bottom line represents cash profit from trading

It does not! There are a few examples where this is the case: a simple cash trader might buy something for one price, then sell it for more; his profit then equals the increase in cash. But a business that buys and sells on credit, spends money on items that are held for the longer term, such as property or machinery, has tax to pay at a later date, and so on, will make a profit that is not represented by a mere increase in cash balances held. Indeed, the cash balance could quite easily decrease druing a period when a profit was made.


Also read:
Reading a Cash-flow Statement
Reading a Profit and Loss Account
Reading a Balance Sheet
Reading an Annual Report
Yield and price/earnings ratio (P/E)

Reading a Balance Sheet

Reading a Balance Sheet

A balance sheet will tell us something about the financial strength of a business on the day that the balance sheet is drawn up.

This action list gives an overview of a balance sheet and looks at a brief selection of the more interesting figures that help with interpretation. It is important to remember that a lot of these figures do not tell you that much in isolation; it is in trend analysis or comparisons between businesses that they talk more lucidly.

What is a balance sheet?

A balance sheet is an accountant's view, the book value of the assets and liabilities of a business at a specific date and on that date alone. By balancing the assets and liabilities and showing how the balance lies, it gives us an idea of the financial health of the business.

What does a balance sheet not do?

A balance sheet is not designed to represent market value of the business. For example, property in the balance asset may be worth a lot more than its book value. Plant and machinery is shown at cost less depreciation, but that may well be different from market value. Stock may turn out to be worth less than its balance sheet value, and so on.

Also, there may be hidden assets, such as goodwill or valuable brands, that do not appear on the balance sheet at all. These would all enhance the value of the business in a sale situation, yet are invisible on a normal balance sheet.

Learn to interpret the balance sheet

Note that the balance sheets differ between one industy and another as regards the range and type of assets and liabilities that exist. For example, a retailer will have little in the way of trade debtors because it sells for cash, while a manufacturer is likely to have a far larger investment in plant than a service business like an advertising agency. So the interpretation must be seen in the light of the actual trade of the business.

Reading a balance sheet can be quite subjective - accountancy is an art, not a science and, although the method of producing a balance sheet is standardized, there may be some items in it that are subjective rather than factual. The way people interprete some of the figures will also vary, depending on what they wish to achieve and how they see certain things as being good or bad.

Look first at the net assets/shareholders' funds

Positive or negative? Positive is good.

If it had negative assets (same thing as net liabilities, this might mean that the business is heading for difficulty unless it is being supported by some party such as a parent company, bank, or other investor. When reading a balance sheet with negative assets, consider where the support will be coming from.

Then examine net current assets

Positive or negative? Positive net current assets (NCA) mean that, theoretically, it should not have any trouble settling short-term liabilities because it has more than enough current assets to do so. Negative net current assets suggest that there possibly could be a problem in settling short-term liabilities.

You can also look at NCA as a ratio of current assets/current liabilities. Here, a figure over one is equivalent to the NCA having a positive absolute figure. The ratio version is more useful in analysing trends of balance sheets over successive periods or comparing two businesses.

A cut-down version of NCA considers only (debtors + cash)/(creditors) thus excluding stock (Quick Ratio). The reasoning here is that this looks at the most liquid of the net current asset constituents. Again a figure over one is the most desirable. This is also a ratio that is more meaningful in trends or comparisons.

Understand the significance of trade debtor payments...

Within current assets, we have trade debtors. It can be useful to consider how many days' worth of sales are tied up in debtors - given by (debtors x 365)/annual sales. This provides an idea of how long the company is waiting to get paid. Too long and it might be something requiring investigation. However, this figure can be misleading where sales do not take place evenly throughout the year. A construction company might be an example of such a business: one big debtor incurred near the year end would skew the ratio.

...and trade creditor payments.

Similar to the above, this looks at (trade creditors x 365)/annual purchases, indicating how long the company is taking in general to pay its suppliers. This is not so easy to calculate, because the purchases for this purpose include not only goods for resale but all the overheads as well.


Recognise what debt means

Important to most businesses, this figure is the total of long and short-term loans. Too much debt might indicate that the company would have trouble, in a downturn, in paying the interest. It's difficult to give an optimum level of debt because there are so many different situations, depending on a huge range of circumstances.

Often, instead of an absolute figure, debt is expressed as a percentage of shareholder's funds and known as 'gearing' or 'leverage'. In a public company, gearing of 100% might be considered pretty high, whereas debt of under 30% may be seen as on the low side.

COMMON MISTAKES

Believing that balance sheet figures represent market value

Don't assume that a balance sheet is a valuation of the business. Its primary purpose is that it forms part of the range of accounting reports used for measuring business performance - along with the other common financial reports like profit and loss accounts and cash-flow statements. Management, shareholders, and others such as banks will use the entire range to assess the health of the business.

Forgetting that the balance sheet is valid only for the date at which it is produced

A short while after a balance sheet is produced, things could be quite different. In practice there frequently may not be any radical changes between the date of the balance sheet and the date when it is being read, but it is entirely possible that something could have happended to the business that would not show. For example, a major debtor could have defaulted unexpectedly. So remember that balance sheet figures are valid only as at the date shown, and are not a permanent picture of the business.

Confusion over whether in fact all assets and liabilities are shown in the balance sheet

Some businesses may have hidden assets, as suggested above. This could be the value of certain brands or trademarks, for example, for which money may not have ever been paid. Yet these could be worth a great deal. Conversely, there may be some substantial legal action pending which could cost the company a lot, yet is not shown fully in the balance sheet.


Also read:
Reading a Cash-flow Statement
Reading a Profit and Loss Account
Reading a Balance Sheet
Reading an Annual Report
Yield and price/earnings ratio (P/E)

**** Valuation: How much is a share of stock really worth?

How much is a share of stock really worth?
http://www.moneychimp.com/articles/valuation/stockvalue.htm

Not just in terms of analysts' opinions, but logically, based on facts?
In theory, the answer is simple: a company is worth the total amount of cash it will generate over its lifetime, discounted to its present value. (And don't panic if you don't really understand that last sentence, because the next page explains it. You do not need any background to read this article.)

This article presents a simple discounted cash flows calculator, along with some popular variations and shortcuts, to make stock valuation make sense.


Valuation Intro
A Little Theory
DCF Calculator
P/E Ratio
P/S Ratio
PEG Ratio
Graham Formula
Dividend Discount
Buffett Formula (?)
CAPM Calculator
Books & Links

The Importance of Financial Education

3 Types of Education

Academic

Professional

Financial

Financial education is crucial and is seldom emphasized.

To be successful today, we need all 3.

Read:
Robert Kiyosaki
Rich Dad Website
Click the video http://www.richdad.com/

Rich Dad transformation
Knowledge - the new money. Its all about financial education. ESBI.
3 Types of Education
Academic, Professional, and Financial. Our school system does not teach us much about money. The lack of financial education is the reason for the big gap between the rich and the poor. You are responsible for your own financial education. 4 green houses = 1 red hotel = Monopoly game.
The CASHFLOW Quadrant
4 types of people in the world of business or money. E=Employee, S=Small business, Self Employed, B= Big Business or Enterpreneur, I= Investor. "Go to school and get a job." = Employee. "Doctor, specialist, small business person" = Small business or Self employed. You can get rich in all 4 quadrants. Rich Dad aims to teach you to move from the E and S to B and I.
Savers are Losers
More important to be an investor. E.g. invest in oil, gold, rental real estate and learn to be an enterpreneur or an investor.
Assets and Liabilities.
An asset has positive cashflow (Income > Expenses). Liability has negative cashflow and takes money from your pocket. A house can both be an asset or liability depending on the cashflow it generates. Therefore a house may not be an asset. A car is a liability. Don't call a liability an asset. Acquire asset, not liability.
Good Debt vs. Bad Debt
Debt is a 4 letter word. "Get out of debt." Good debt makes you rich and bad debt makes you poor. Mortgage = engage until death. To be rich, improve your financial IQ, engage good debt. Good debt used to acquire assets that generate positive cashflows. Bad debt used to acquire liability with negative cashflows.
Live Above Your Means
Live below your means, your spirit dies, especially if you are poor. Most people has a job and can only work so hard. Our goal is to increase Asset to increase Income or cashflow. The way to get rich is to buy asset first and liability later. Invest in an asset and the money from that investment pays off your liability. After completing this payment, one still has a positive cashflow generating asset.
3 Types of Income
Earned, Portfolio and Passive. Earned income = job. Portfolio income = Capital Gain. Passive income comes in on a regular basis, from interests, dividends, real estates and businesses. Taxes are your highest expense and is highest in earned incomes. Those in the E or I segment have earned income. Portfolio and passive income are taxed less. Work hard for Portfolio and Passive Income. Learn to be a B or I.
Investing Isn't Risky
What is risky is lack of financial intelligence or education (still your best asset). For sophisticated investors (whether fundamental or technical), risk is reduced through using insurance (put, stop, etc.) to counter the risk of volatility. Taking advice from those with no investing knowledge is risky.
Life's 4 Quarters
10 years quarters from age 25 years to 65 years. 1st Quarter = age 25 to 35 years. 2nd Quarter = age 36 to 45 years. Age 45 - half time. 3rd Quarter = age 46 to 55 years. 4th Quarter = age 56 to 65 years. At 65 - Overtime. After that - Out -of- time. Aim to retire in the 2nd Quarter!!!!! At which age will you win the game of money? Some are lucky, they were born rich. Work hard, save money, invest in mutual funds and 401-K may not be enough to retire early. You will have to work hard all your life. Why not retire young and enjoy life? Why retire old and continue to work overtime and out-of-time?
The CASHFLOW Game
2 tracks - the rat race and the fast track. Most people are stuck in the rat race. Get out of the rat race and get onto the fast track. Get the money to work for you. There are 4 levels of investing played in the game: small deals, big deals, fast track and sophisticated investing (or Cash Flow 202). You have to be a rich person to invest in the fast track. To invest in the fast track, one has to be rich and financially educated. The other part of this CASHFLOW Game is a financial statement. A financial statement is very important aspect of your education. Your banker never ask you for your report card, but your financial statement. This game puts investing and accounting together. Have fun, learn from mistakes through the game. Teach other people. The more you teach, the more you learn. Make mistakes, take risk, have fun and get rich. The "poor dad" is poor because he is terrified of making mistakes.
The Cone of Learning
Could the CASHFLOW Game enhance the knowledge of finance and business? Passive learning (reading, lecture) vs Active learning (doing the real thing, just do it, play games). Best way to learn is to do the real thing. 2nd best way is to stimulate the real experience. CASHFLOW Games 101 and 202 fulfill the active learning role. Beware, most financial advisors are sales people. Play the game over and over again before going into the real thing.


IT'S TIME TO GET OUT OF THE RAT RACE
http://www.richdad.com/store/ProductDetail.aspx?id=1
http://cashflow.vo.llnwd.net/o16/cashflow3.swf
CashFlow 101 the E-Game: Intorduction 1
http://www.youtube.com/watch?v=4ug483UeEXs&feature=related
Cashflow Game 101
http://www.youtube.com/watch?v=uqZayPhdUJc&feature=related
Cashflow 202, Introduction
http://www.youtube.com/watch?v=-zGqzbfEvug&feature=related
Robert Kiyosaki : Cashflow Game 202, Overview!
http://www.youtube.com/watch?v=BUbODHeQd1g&feature=related
Cashflow Board Game - Rich Dad Poor Dad Game
http://www.youtube.com/watch?v=X4WcGWhjUS0&feature=related
Cashflow 101 take 1
http://www.youtube.com/watch?v=KresjGfPIW8&feature=related
Cashflow 101 take 2
http://www.youtube.com/watch?v=MHxOSr_jqqg&feature=related
Cashflow 202 take 1
http://www.youtube.com/watch?v=ZnrWo3LDi9E&feature=related
Cashflow 202 take 2
http://www.youtube.com/watch?v=RCFyxC7dQQM&feature=related
Robert Kiyosaki in Israel October 2007
http://www.youtube.com/watch?v=SMLjNjXojmc&feature=related

7 Levels of Investors

7 Levels of Investors according to Kiyosaki

Level 0: Those with nothing to Invest
50% of adult population

Level 1: Borrowers
Pay up to 24% interest
Anything owned of value is financed with debt

Level 2: Savers
Earn 3-5% on savings
Save to consume rather than to invest

Level 3: "Smart" Investors
"Head in Sand"
"Cynics" (fear + ignorance = arrogance)
"Gamblers" (faking it)

Level 4: Long-Term Investors
Earn 8-12% Compounded
Periodic, tax-advantaged, diversified

Level 5: Sophisticated Investors
Earn 25% and up
Focused, not diversified

Level 6: Capitalists
Earn 100% and up
Create investments to sell to the market

From Level 5 to Level 6, the investor assumes more responsibility.

http://www.theinvestorsparadigm.com/invest/Cash-Flow-Investment-Strategies.php?refid=325745514fd2a1b68a99288f9e8d37cc

The Stages Of Industry Growth

The Stages Of Industry Growth
by Jason Van Bergen (Contact Author Biography)

It is no accident that companies within a particular industry move in lock-step with one another. Companies in a single industry are forever bound by the type of product or service that they provide, and they are constantly competing with one another for market share, consumer acceptance, as well as technological leadership in their particular sub-sector. These competitive and consumer forces shape an industry's corporations and determine the status of the industry as a whole. These forces have followed roughly the same patterns over time, providing a very clean model for the of an industry, the various stages of growth (and decline) experienced by its companies. Here we take a look at these stages and how they determine what kind of investments these companies are.


Initial Growth / Emerging Industries

All companies have to start their business somewhere, and it takes only a single company or small group of companies to jumpstart an entire industry. Looking back in time, we see that it was not even a company but an individual by the name of Alexander Graham Bell who, with the invention of the telephone, started the entire industry of telecommunications. More recently, companies like Texas Instruments and Fairchild Semiconductor Corporation pioneered the semiconductor industry with the invention of the microchip, the central component of all computers and most high-tech electronics gear. Companies involved in establishing emerging industries are generally participating in perilous business, as their primary concerns are raising sufficient funds to engage in early-stage research and development. In their developmental stages, which may last months or even years, these companies are likely operating on a shoestring budget, while at the same time presenting to the world a product or service that is yet to be accepted. These pioneering companies might face bankruptcy, development failure and poor consumer acceptance. Companies in emerging industries are typically recommended to investors with a very high risk tolerance. An adage often used in relation to an initial growth investment is "If you cannot afford to lose your investment in this company, do not make the investment in the first place!" Individual investors are likely to have access to initial growth companies through private investments, sometimes called "friends-and-family capital". At such an early stage, investors often know the company founders personally. And they can only hope to make a profit on their investment in the distant future, when the company offers its shares on a secondary trading market, or when the investor can find somebody else to purchase his or her ownership at a premium (which would take place, for example, if another company were to purchase all of the outstanding shares of the company). Companies in emerging industries are occasionally quoted on major stock exchanges or traded over the counter, and should always be considered in terms of the significant risk they pose. These companies will often be unprofitable, and the large initial start-up costs may result in ongoing negative cash flows. As such, traditional fundamental analysis is often not applicable in emerging industries, and investors must be sophisticated enough to learn or even develop entirely different means of analyzing these stocks. Investing in emerging industries is not for the faint of heart.

Rapid Growth Industries

Companies in industries that are benefiting from rapid growth have sales and earnings that are expanding at a faster rate than firms in other industries. As such, these companies should display an above average rate of earnings on invested capital for an extended period of time, probably years. Prospects for rapid growth companies should also appear bright for continued sales and earnings growth in ensuing years. During this period of rapid growth, companies will eventually begin to lower prices in response to competitive pressures and the decline of costs of production, which is often referred to as economies of scale. But costs decrease at a higher rate than prices, so companies entrenched in growth industries often experience growth in profits as their product or service becomes fully accepted in the marketplace. The consumer electronics industry, for example, is characterized by much research and development, followed by significant economies of scale in production. Prices in home electronics inevitably fall, but the costs of production fall faster, thereby ensuring increasing profitability. Publicly traded companies involved in rapid growth industries, often referred to as growth stocks, are some of the most potentially lucrative investments due to their ability to sustain growth in revenues and profits over long periods of time. Microsoft is an excellent example of a company that became very large in a growth industry (software) over a period of years, increasing its earnings all the while and, most importantly, maintaining its expectations for continued future growth.

Mature Industries

Once an industry has exhausted its period of rapid growth in revenues and earnings, it moves into maturity. Growth in the companies in mature industries closely resembles the overall rate of growth of the economy (the GDP). Earnings and cash flow are still likely positive for these companies, but their products and services have become less distinguishable from those of their competitors. Price competition becomes more vicious, taking profit margins along with it, and companies begin to explore other areas for products or services with potentially higher margins. Many of our economy’s most closely watched industries, such as airlines, insurance and utilities can be categorized as mature industries. Despite their rather staid position in mature industries, investments in these companies' stock can remain very attractive for many years. Share prices within mature industries tend to grow at a relatively stable rate that can often be predicted with some degree of accuracy based on sustainable growth prospects from historical trends. Perhaps even more importantly, companies in mature industries are able to withstand economic downturns and recessions better than growth companies, thanks to their strong financial resources. In troubled times, mature companies can draw from retained earnings for sustenance, and even concentrate on product development in order to capitalize on the economy’s eventual return to growth. Investors in mature industries are those who want to enjoy the potential for growth but also avoid extreme highs and lows.

Declining Industries

Industries that are unable to match even the basic barometer of economic growth are in a stage of decline. Some factors that could contribute to a declining industry are consumers decreasing their demand for the industry’s product or service, technology that supplants legacy products with new and better ones, or companies in the industry failing to be competitive in pricing. An industry that exemplifies all the tendencies of a declining market is the railroad industry, which has experienced decreased demand - largely due to newer and faster means of transporting goods (primarily air transport) - and has failed to remain competitive in pricing, at least in relation to the benefits of faster and more efficient transportation provided by airlines and trucking services. We should note that declining industries may experience periods of stable or even increasing growth from time to time, even if their overall prospects are on the way down. For example, railroad transport is still very much an active industry sector, as the non-competitive firms have been weeded out. Declining industries tend to be poor places to seek investment opportunities, although individual companies within these industries may still have investment merit. Even in the industries where prospects look bleakest, there are always companies that are able to buck the trend and generate growing revenues and profits while those around them falter. But investors who are not inclined to search for such companies are better advised to look for investments in industries that are in the younger stages.

Conclusion

Classifying industries according to their stage of growth can be extremely useful for the purposes of finding companies that match your investment objectives. Have a look at a graph above outlining the stages we discussed:

Conservative-minded investors who are looking for a bit of stability in the equity portion of their portfolios will first want to check out mature industries, where there is the best selection of blue-chip stocks that are widely traded, having extreme trading liquidity.

Investors with a taste for risk may want to take advantage of the higher potential for return that growth industries can provide.

And investors who like to live their lives on the razor edge between success and failure may consider investments in emerging industries, even though such investments tend to be geared toward private companies.

The only constant when it comes to considering investments in various industries is that it may be best to avoid industries in decline.

by Jason Van Bergen, (Contact Author Biography)

http://www.investopedia.com/articles/basics/04/030504.asp?partner=TOD5

Investing in a Bear Market

Investing in a Bear Market
How does one think about investing in a bear market?


Rules for Investing discipline
Many people think that the best way to invest is to fill it, shut it and forget it - and they are reinforced by the dramatic successes of people who found Reliance shares in their grandfather's trunk or bought L&T in the last bull run and held on for dear life.


Featured Comment: What is a rights issue?
Sujit asks:


Wednesday, September 05, 2007
Sensex overvalued? A Walk Down History Lane
Morgan Stanley thinks the Sensex is about 11% above fair value.


Wednesday, August 01, 2007
How To Handle A Sinking Market
The mayhem is here. Nifty is down 183 points to 4345 and Sensex is down 615 points to 14935. A 4% drop in a single day of trade. Every single index is in the red, and nearly 90% of stocks are down today. Is it time for the bears? Is it time to exit? To go home and forget about stocks for a while?


Sticky: Shenoy's Investment Fundas
This post contains an organised series of links to my blog posts about investing.
Why Invest?
Are you Investing or just Saving?
How to go about investing
Creating an Investment Game Plan
The Value Cost Averaging Strategy
Stocks
Opening a brokerage account in India (21/5/07)
Investing in Stock Markets: A roundup of posts
Introduction to Shares, IPOs and Stock Markets
IPOs: What's important in an offer document
What are EPS and P/E ratios?
How to choose stocks in a downturn
Mutual Funds
Introduction to Mutual Funds
Mutual Fund FAQs
Dividend option or Growth option?
Difference between shares and mutual funds.
Choosing Funds: The Dividend Yield Strategy
Closed Ended Funds: Misleading name and High costs.
Myth: Is a lower NAV better for you?
Mutual Fund Dividends: Playing with your own money
How Entry and Exit loads affect you
Exchange Traded Funds (ETFs)
What are ETFs?
Insurance
What is Insurance?
How much Insurance do you need?
Unit Linked Insurance Plans (ULIPs)
How ULIPs can loot you: A real exampleTerm Plans + MFs are better than ULIPs: With data!ULIPs' lower management fees must be matched by performanceULIPs: A Good Investment?
ULIP Net Asset Values: Where to find them.
Comparing ULIP returns to Mutual Funds
Term Plan Premiums
Real Estate
Rent vs. Buy: Should you buy or rent?
The Real Estate Cash Flow Calculator
Taxation
Filling out IT return forms (ITR-1) for 2006-07 *NEW*
How can FMPs save you tax? Capital Gains Tax: A primer
Fundas: Long Term Capital Gains
Bonus Shares: A Tax Saving Scheme?
Can I really save Rs. 33,660 in tax?
Futures and Options
What are Employee Stock Options (ESOPs)?
An Introduction to Futures & Options
Become a Smarter Investor
Liquid funds are better than Fixed Deposits
The cost of IPO funding
Capital Guarantee Plus Appreciation: Possible?
How much money do you need for retirement?
SIPs are not necessarily less risky
Don't believe media headlines; do your own research
Beware of Dividend pushers
Timing the market: A good thing
Commentary
DLF IPO Analysis *NEW*
Buffet on Risking what you should not*NEW*
Small number are not really small.
FIIs are not the source of all problems
Budget 2007 Analysis: A compendium of posts
NFO: Benchmark Gold ETF
Is the Nifty Overvalued? (Feb 7, 2007)
The lack of irrational exuberance (Jan 26, 2007)
Can I save Rs. 33,660 in tax? (Jan 21, 2007)
Your savings may be taxed next year (Dec 4, 2006)
The stock market is all about percentages
Links
Blogs talking about Indian Investments
GlossaryGlossary of Investment Terms, Part 1.
Linkfests: 1, 2, 3, 4, 5, 6, 7


Sunday, October 29, 2006
Bonus shares: A tax saving scheme?
Lots of Indian companies offer "bonus" shares: a 1:1 bonus means that for every share you own, you get one "free" share. Now given that the company's fundamentals don't change, the number of outstanding shares doubles but the net profit remains the same. Meaning, to retain the same P/E, the share price must come down by half.


Monday, January 30, 2006
Two Great posts for investors
Charu Majumdar has two very good posts on investing:
Ten Steps to Wealth Creation (talks about how you can invest and grow your money)
Personal Investment Questions answered: Describes thought processes a lay investor would have. Makes for some very good reading. Charu also reconfirms my view that term insurance is the only insurance that makes any sense.


Friday, January 20, 2006
Insurance: A primer
Everyone's talking about Insurance nowadays. What is it? And why should you, a regular salaried employee buy it? Why should the business owner buy it? Why should ANYONE buy it?

The story of Uncle Chua

How did Uncle Chua accumulate so much wealth in his portfolio?

Uncle Chua's Portfolio & Dividend Income
Here is Uncle Chua's portfolio & dividend income, reproduced here as accurately as was depicted in the book:
Uncle Chua's portfolio
http://spreadsheets.google.com/pub?key=r5DhwS2nWTiIAK0pDCIPD-Q

All the shares he dealt in were ALL blue chip stocks.

In mid-1997, when the Asian Financial Crisis started sweeping across regional markets, Uncle Chua didn't sell a single share. Instead, he started buying shares - again ALL blue chips and ONLY blue chips. He bought bit by bit as the STI index broke one low after another. This was unlike others who began panicking and dumping their shares to preserve what they had left.

Pretty soon, the index was somewhere in the 800-plus region, almost the lowest level then. But many were still convinced that the market could fall further. After all, there was blood on the streets and panic and pessimism everywhere. All news that was coming out was never assuring and very demoralizing.

Uncle Chua's gutsiness and calmness in such a chaotic situation was very puzzling.

However, Uncle Chua's portfolio statement comprised stocks of astronomical value. The most unbelievable part was that his entire portfolio consisted of nothing else but blue chip stocks. There was not even a single junk stock in the list. How did he pick those stocks?

Uncle Chua explained: "I bought some of them as early as in the 60s. I was then in my 50s and retired. I reckoned that I needed to have some sort of passive income and so I made a simple comparison between bank fixed deposits and stock dividends. I decided that the latter offered a better return, and so based on this very simple reasoning, I looked through the Chinese newspapers to select and buy into companies which paid good dividends that would maintain my family."

"Of course, I also made sure that the management team of the companies I bought was committed and acted in favour of shareholder intersts. That's why I asked you today, to tell me what the management said in this annual report about its future palans to steer the company and how much dividends they are proposing this year."


"Those stocks that I have bought also often issued bonus shares. Some even did stock splits, and with the dividends accrued, I reinvested everything back into those stocks I owned. That's how my portfolio grew to this size, but it certainly took me many years..."

Uncle Chua was a rare example of a successful invetor whose winning strategy was simple, direct, clear-cut, straightforward and hassle-free.

Reference: Why am I always Lo$ing in the Stock Market? Publisher: Heritt & Company


Related readings:

Uncle Chua's Portfolio and Dividend Income
http://myinvestingnotes.blogspot.com/2009/05/uncle-chuas-portfolio-dividend-income.html

Investing Philosophy and Strategy:  Keep It Simple and Safe (KISS)
http://myinvestingnotes.blogspot.com/p/keep-investing-simple-and-safe-kiss.html

Best Way to Minimize Risk of Your Portfolio:  Asset Allocation
http://myinvestingnotes.blogspot.com/2011/01/asset-allocation-best-way-to-minimize.html

Economists' letter spells out what went wrong

Economists' letter spells out what went wrong

Last Updated: 7:13PM BST 11 May 2009

Comments 3 Comment on this article

Dear Sir,

The prevailing view amongst the commentariat (reflected in the recent deliberations of the G20) that the financial crash of 2008 was caused by market failure is both wrong and dangerous. Government failure had a leading role in creating the conditions that led to the crash.

Central banks created a monetary bubble that fed an asset price boom and distorted the pricing of risk.

US government policy encouraged high-risk lending through support for Fannie Mae and Freddie Mac (which had explicit government targets of providing over 50pc of mortgage finance to poor households) and through the Community Reinvestment Act and related regulations.
Regulators and central bankers failed to use their considerable powers to stop risks building up in the financial system and an extension of regulation will not make a future crash less likely.

Much existing banking regulation exacerbated the crisis and reduced the effectiveness of market monitoring of banks. The FSA, in the UK, has failed in its statutory duty to “maintain market confidence”.

The tax and regulatory systems encourage complex and opaque methods of increasing gearing in the financial system.

Financial institutions that have made mistakes have lost the majority of their value. On the other hand, regulators are being rewarded for failure by an extension of their size and powers.
Evidence suggests that serious systemic problems have not arisen amongst unregulated institutions.

As such, no significant changes are needed to the regulatory environment surrounding hedge funds, short-selling, offshore banks, private equity or tax havens.

A revolution in financial regulation is needed. The proposals of the G20 governments and the EU are wholly misconceived. Specific and targeted laws and regulations could restore market discipline. These should include:

• Making bank depositors prior creditors. This will provide better incentives for prudent behaviour and make a call on deposit insurance funds less likely.
  
• Provisions to ensure an orderly winding up, recapitalisation or sale of systemic financial institutions in difficulty. Banks must be allowed to fail.
  
• Enhancing market disclosure by ensuring that banks report relevant information to shareholders.
  

This should be reinforced with central bank action to ensure that:

• Proper use is made of lender-of-last-resort facilities to deal with illiquid banks.
  
• The growth of broad money is monitored together with the build-up of wider inflationary risks.

Yours faithfully,

Dr James Alexander, Head of Equity Research, M&G; Prof Michael Beenstock, Professor of Economics, Hebrew University of Jerusalem; Prof Philip Booth, Professor of Insurance and Risk Management, Cass Business School; Dr Eamonn Butler, Director, Adam Smith Institute; Prof Tim Congdon, Founder, Lombard Street Research; Prof Laurence Copeland, Professor of Finance, Cardiff Business School; Prof Kevin Dowd, Professor of Financial Risk Management, Nottingham University Business School; Dr John Greenwood, Chief Economist, Invesco; Dr Samuel Gregg, Research Director, Acton Institute; Prof John Kay, St John’s College, Oxford; Prof David Llewellyn, Professor of Money and Banking, Loughborough University; Prof Alan Morrison, Professor of Finance, University of Oxford; Prof D R Myddelton, Emeritus Professor of Finance and Accounting, Cranfield University; Prof Geoffrey Wood, Professor of Economics, Cass Business School.

http://www.telegraph.co.uk/finance/financetopics/recession/5309591/Economists-letter-spells-out-what-went-wrong.html

Asian shares fall from seven-month high

Asian shares fall from seven-month high


Stock markets across Asia dropped from their highest level in seven months as investors took the opportunity to take profits fon the recent rally.

By Telegraph staff
Last Updated: 8:20AM BST 12 May 2009

In Tokyo, Mitsubishi UFJ Financial fell almost 4pc after soaring 26pc in the past three days. Sony was also on the backfoot, slipping 3pc, as the yen climbed against a weaker dollar.

Meanwhile, in Sydney, Fortescue Metals Group, Australia’s third-largest iron ore producer, was down 6.2pc after analysts at JP Morgan Chase slashed their recommendation on the shares.

Jim Rogers, who co-founded the Quantum Fund with George Soros, told Bloomberg News that "of course its time for a correction, that’s the way markets work.”I don’t see the stock market as a great place to be for the next two to three years, maybe for the next decade.”

Overall, the MSCI Asia Pacific Index fell 1.1pc to 97.44 in Tokyo. The pullback comes after six days of advance fulled by hopes that the global economy is recovering. Japan’s Nikkei 225 Stock Average retreated 1.4pc to 9,315.67.

http://www.telegraph.co.uk/finance/markets/5311098/Asian-shares-fall-from-seven-month-high.html

Are B-Schools To Blame?

Serchuk David, Forbes.com 05/08/09 13:00:06 GMT

Are B-Schools To Blame?

Field Marshall Arthur Wellesley, better known as the first Duke of Wellington (1769-1852), stands astride British history like a colossus. A two-time prime minister, Wellington remains best remembered for his defeat of Napoleon at the Battle of Waterloo in 1815.

This stirring victory also birthed Wellington's most famous quote: "The battle of Waterloo was won on the playing fields of Eton." Except Wellington didn't actually say it: As discovered by the seventh Duke of Wellington, this quote didn't circulate until three years after the first duke's death. As for Eton, the seventh duke told Time magazine in 1951: "He had no particular affection for the place." More galling, he didn't care for organized sports all that much, either. What Wellington did say about his most famed victory is appropriately more world-weary: "Nothing except a battle lost can be half so melancholy as a battle won."

Yet despite this debunking the former quote lives on in the public's imagination. And it's easy to see why, as education is such a formative experience in many of our lives. If that is the case, than what sort of leaders are the playing fields of Wharton, Harvard and Stanford business schools turning out? Judging by the most recent financial crisis, it's easy to say that today's business schools are making far more in the way of subprime rib than Beef Wellington.

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According to Jeffrey Pfeffer, of the Graduate School of Business at Stanford University, the leadership skills imparted in business fail to measure up in many obvious ways. His 2009 paper "Leadership Development in Business Schools: An Agenda for Change" shows that although one-third of all chief executives hold M.B.A. degrees, their success is, at best, mixed. For starters, having an M.B.A. didn't result in higher compensation. Another shocker: having an MBA from a ranking school did not correlate to higher performance at the firm level versus having such a degree from a lower-ranked school. Pfeffer also quotes evidence showing that firms lead by CEOs lacking either M.B.A.s or law degrees "had slightly better risk-adjusted market performance."

Why? One possible reason is because graduate-level business schools inculcate values incompatible with long-term firm performance. As noted by the Aspen Institute in 2001, during their two years in typical business school M.B.A. programs, students place more and more emphasis on shareholder returns and less on product quality, employees and customers. As the institute updated the study in 2008, they also found that students cared less about having a positive impact on society the longer they were in MB.A. programs.

But perhaps the most troubling studies reveal that M.B.A. students are more likely to cheat than other students. As found by Donald McCabe, a professor of finance at Rutgers University, and Linda Trevino, a Cook Fellow of business ethics at the Smeal College of Business at Penn State University, 56% of M.B.A. students admitted that they cheated in class, versus 47% of non-business students. McCabe and Trevino compiled data from 2002 through 2004, studying 5,331 students, and published the results in "Academic Dishonesty in Graduate Business Programs: Prevalence, Causes & Proposed Action."

But what can be done? Pfeffer says that business schools can improve their quality by taking their eyes off their rankings, which have become like the sword of Damocles for many. The problem with this, he says, is that the rankings are poor indicators of school quality. Also, schools often rate their faculty by how often and where they publish their academic work, which is again a poor indicator of actual quality of scholarship, let alone what is taught in the classroom. Also, schools need to account for how well their grads do over the lifetimes of their careers, versus the present focus on starting salaries.

But not everyone accepts the idea that business schools are to blame. Anant Sundaram, a professor of finance at Dartmouth University's Tuck School of Business, says that in his classes and the school, real, useful fundamentals are not only taught but emphasized. "What we witnessed in the capital markets violates Finance 101 ideas," he says. "Things like value comes from real assets, not shuffling pieces of paper. If you think arbitrage opportunities are to be had, think again. We teach a lot of skepticism."

If this is so, how can Sundaram account for the spectacular failure of so many former B-school grads? He says that once they graduate, students often get sucked into the murky world of Wall Street, where risk and reward are divorced, and no one cares about anything as long as assets rise. "This is a Wall Street crisis," he says. "It's not chief financial officers that have caused this crisis, this is a small group of paper shufflers." Of course this fails to address the issue of where these paper shufflers came from.

The Forbes Investor Team is also skeptical that business schools are all that much to blame. While noting that recent B-school grads are more arrogant and self-absorbed, Vince Farrell, chief investment officer for Soleil Securities, adds "I don't know if it's the job of B-schools to be responsible for America." As for ways to correct this arrogant mindset, Farrell recommends that M.B.A. grads should do hard volunteer work and also read The Rise and Fall of the Third Reich, in order to understand how powerful empires crumble.

Bernie McSherry, senior vice president at Cuttone & Co., says that he doesn't particularly blame business schools, as ethical breaches are tolerated at the business level all the time. He also doubts that a couple of years in grad school will correct whatever ethical problems a student would have.

Michael Ervolini, the head of Cabot Research, which looks at business through a behavioral lens, says that time developing self-awareness and introspection would be valuable for business-school grads, and even lead to better business decisions. Wellington would approve.

A Better B-School?

Forbes: Have business schools failed America? There seems to be a growing sense that B-schools are really passing on the whole moral aspect of business and teaching very little in the way of corporate governance, including the rights and responsibilities of boards.

OK, Deans Ervolini, McSherry and Farrell, what are some of the courses you would make mandatory in your B-schools? What are some things that need to be taught that just aren't being taught right now? What courses would you remove? Give me somewhat of a lesson plan, maybe even a syllabus of texts to read, and a few sample questions you would require your students to know before you allow them to graduate.

Bernie McSherry: Well, for starters, I would require all schools at the high-school level to teach a personal finance course. Too many of our young people are stepping into the world without knowledge of basic consumer finance, and we should recognize that it is in the interests of society that we teach folks the basics about money management and credit.

Michael Ervolini: I guess that I want to start by redirecting the question. We first might ask--how much of the responsibility belongs to the business schools and how much to the companies that hire these M.B.A.s, their boards of directors, and the market (all of us) as a whole? For that matter, where were the nation's journalists as overall debt spiraled out of control, bank leverage grew to great proportions and the credit markets became clogged with poor quality paper?

B-schools serve a purpose to provide talented employees that have received some minimum training for their career. You can not expect too much from a two-year stint, however, even at the most prestigious of programs. This is particularly the case with an average of only 18 months actually on campus.

What courses might help? Taking the behavioral perspective, it seems that some time spent developing self-awareness and introspection might help. Knowing what really motivates you and why you are doing what you are doing seems like a better choice than simply following the crowd. It might lead both to higher career satisfaction and better business decisions.

Vince Farrell: I don't know that it's the job of B-schools to be responsible for America. But over the years, I have found the B-school grads to be increasingly self-absorbed and ego driven. I think that down-in-the-dirt charity work would be a great elective. For the most part, the students are smart and have a history of success. Life will teach them the ups and downs, but some exposure to those less fortunate might be a good start.

I remember a lacrosse coach that made some defensemen practice without sticks. They were too reliant and had to learn how to be successful while at a disadvantage. B-schoolers have had a lot of advantages, and humility would be a good course. From humility could come some understanding and perspective.

Forbes: Where have B-schools fallen down? What do you think they need to do to correct that? What are some books every B-school student needs to read? By the way, these don't have to be business books. In fact, it might be more interesting where they not.

Farrell: They should all read The Rise and Fall of the Third Reich. How Nazi Germany grew in arrogance and self-importance and how it came close to destroying the world. And then almost any other history book that would deal with the rise and fall of people one time considered great. Match King is out now, and also House of Cards shows how blind arrogance destroyed Bear Stearns.

McSherry: Governance is becoming a hot topic in business schools. I am currently enrolled in a doctoral program at Pace University, and as part of the program I have recently taken a governance class taught by Professor Jack James. The course addressed most of the current issues in governance and presented a good overview of international corporate governance rules. Professor James is about to propose that Pace offer a major in governance. The school has been a leader in that area, and I hope that it creates that major. Other schools are likely to follow suit.

As far as complaints about ethics go, I am skeptical of the idea that ethics can be taught in school. I recognize that it may be useful to offer students an ethical framework to view the business world through and case studies could provoke some lively discussion, but I am doubtful that many students emerge from those classes with markedly improved ethical practices.

Ethics are most reliably taught in a home setting. Young people often absorb their view of the world from parents and family members, and attitudes regarding honesty and personal integrity tend to be developed during our formative years. Some are lucky to be inspired by a mentor or teacher and may develop better ethical ideals as a result, but most of us are fully formed in that regard long before entering B-school.

Farrell: Bernie, you are so right and what insight. We can't reach into people's homes, but a course should be entitled, "Character is what you do when no one is watching."

Forbes: Hi Mike, let's take this a step further. How should B-students develop self-awareness and introspection?

Ervolini: Developing self-awareness is, of course, a lifelong process. While in business school, students might consider any of the following: Emulate stars of integrity, find a couple of leaders whose approach fits your view of life and learn how they do what they do; read, there are lots of books and papers on the challenges of introspection and personal growth; test yourself, many schools have programs in experimental finance that might offer simulations to help you uncover your tendencies under varying circumstances; and, of course, participate in discussions on topics that challenge your thinking, not so much about facts, but about what decision is right for you.

McSherry: Personally, I don't think that B-schools are doing a particularly bad job. Sadly, ethical breaches are tolerated and, at times, even encouraged by many in the business world. It is hard to believe that taking a class or two in an M.B.A. program will improve people's ability to avoid temptation were they to land in one of those organizations.

Students should be made to understand that our current age is not so different from previous eras, both in good ways and bad. In fact, they may gain a better perspective knowing that some of the unsavory aspects of a free-market economy have long been with us. To that end, I would require that all students read two books:

The Gilded Age by Mark Twain and Charles Dudley Warner. Written in 1873, the novel satirizes a world beset by greed and political corruption that sounds like it could have been written today. And The Way We Live Now by Anthony Trollope, written in 1875. Also a satire, the novel presents us Augustus Melmotte, a mysterious financier whose schemes will bring Bernie Madoff to mind.

There is not much that is new under the sun.

Forbes: Interesting point. Guys, do you agree with Bernie that ethics are basically baked in by the time students enter B-school, or do you feel there is still time to change behavior for the hopefully better by that stage? If so, how? And what should be taught?

Ervolini: "Baked in" may be a little too strong, but a great deal of our personality is certainly formed well before graduate school. Also of importance is that many studies show that people do behave quite differently as their environment changes. Social norms and expectations are critical. Who are we celebrating, and who are we reprimanding? What stories get the most news coverage? Bernie's point about the family being the origin of ethics and morality is a good one. Similarly, what is expected or demanded of us in a particular environment will affect the choices we make.

See More Intelligent Investing Features.

http://news.my.msn.com/business/article.aspx?cp-documentid=3281323

Who is to blame for the economic crisis? The Ministers.

Ministers 'to blame' for financial crisis

Governments and central bankers must take the blame for the financial crisis - not bankers, investors and others in the market, according to a new study.

By Edmund ConwayLast Updated: 7:38AM BST 12 May 2009
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In a comprehensive analysis of the causes for the financial and economic crisis, the Institute of Economic Affairs (IEA) has concluded that the disaster was caused by authorities' mistakes rather than market failures. In an associated letter to The Daily Telegraph, the IEA, supported by a number of leading economists, including Tim Congdon and John Kay, said that despite these failures regulators were being rewarded with more responsibilities.

The study suggests that hedge funds and tax havens should not be unduly punished, and that in the future central banks and regulators should pay greater attention to imbalances building up in the economy. The detailed analysis, Verdict on the Crash, will come as a further blow for Gordon Brown, claiming that the system he created to monitor the financial and economic system was found entirely wanting and is in need of a major overhaul.

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http://www.telegraph.co.uk/finance/financetopics/recession/5309590/Ministers-to-blame-for-financial-crisis.html