Ride Your Winners, Dump Your Losers
www.mastersuniverse.net
Assume that you have invested into two stocks - Stock A and Stock B. You made 50% on Stock A and lost 50% on Stock B. If you need to liquidate one stock to get some cash, which stock would you sell? It is human nature for people to take profits on Stock A and keep the losing trade until Stock B rebounds. Chances are Stock A is so wonderful that it will keep going up after you sold, and Stock B will keep going down and your loss becomes bigger. The bigger your loss, the more reluctant you are to sell and eventually you will end up with a bunch of losers.
Ride Your Winners
Momentum Trading
According to the “Ride Your Winners, Dump Your Losers” theory, if you manage to fight off your human nature and keep the winners instead of the losers, you will make money. This seems to fit in well with the theory of momentum trading – buy the strongest stocks with the highest momentum, i.e. the stocks that are increasing quickly on higher volume than the market. Disciplined momentum traders would buy with the flow of the market, if a trade goes against them, they would sell without hesitation. They follow the market trend with no question ask.
As the theory goes, you should not be emotionally attached to your trade. If you have invested in a dud, you should just admit your mistake and cut the loss. This theory sounds credible and sensible.
Value Investing
This theory may make sense for a short-term momentum trader, but it certainly does not make sense for a long-term value investor. Assuming that you have done your homework and the two stocks were the same valuation at the time of investment, the fact that Stock A has gone up and Stock B has gone down means that Stock A is now far more expensive than Stock B. A prudent value investor would switch out of the expensive Stock A and switch into the much better valued Stock B, provided the fundamentals of the two stocks have not changed.
Instead of blindly selling the losers until all you have are winners, you should really look at whether the fundamentals have changed for the stocks. There may indeed be a good reason for the relative underperformance of Stock B – e.g. poor management or grim industry outlook. However if nothing has changed and you thought Stock B was good value when you first bought it, it must be an absolute bargain after dropping an extra 50%! Shouldn’t you be buying more instead of selling?
Winners Always Outperform Losers?
The key question in deciding whether this is a valid theory is whether winners are more likely to outperform the losers? If that is the case, the same group of winners should always dominate the world economy. Taking the component stocks of the Dow Jones Industrial as examples, which are the winners of the winners. Do these blue chip winners always outperform the market? Looking at the original dozen component stocks of the Dow in 1896:
American Sugar Now Domino Foods, Inc., part of Sweden’s Assa Abloy
American Cotton Oil Now Bestfoods, part of Unilever
North American Company Electric company broken up in the 1940s
Chicago Gas
Now a subsidiary of Integrys Energy Group, Inc
Laclede Gas Still in operation as The Laclede Group
National Lead Now NL Industries
Tennessee Coal & Iron Swallowed by U.S. Steel
American Tobacco Broken up into Fortune Brands and R.J. Reynolds
Distilling & Cattle Feeding Predecessor of Millennium Chemical, part of LyondellBasell
U.S. Leather Liquidated in 1952
U.S. Rubber Company Merged with B.F. Goodrich, now part of Michelin
General Electric Only one that is still around
The only company that you may still recognize is General Electric (even General Electric has been dropped from the Dow for 9 years). The rests have either been taken over or wound up. Had your great great grandpa set up a family trust to invest in these winners 100 years ago, there would probably not be a lot inheritance left for you.
In fact, some academics have noticed the opposite effect - “the small stock anomaly”. For example, Rolf W. Banz has shown that smaller companies (which tend to include a lot of “losers”) from 1926 to 1980 outperformed the larger companies.
The Winner Takes It All
It Really Comes Down to Your Trading Style
Ultimately it really depends on your trading style. If you are a momentum trader that trade purely on the basis of a surge in price and high trading volume, it is wise to scramble for the exit when the stock loses its momentum. However if you have picked the stock on the basis of its valuation, the fact that it drops more means it is even better value – time to buy more instead of sell. Obviously if the fundamentals (future prospects and changing sector conditions) of the company have deteriorated, you may need to admit your mistake and sell.
This theory sounds more credible than it really is in countering the human tendency to keep the losers. The fact that it identifies a stock as a winner or loser on the basis of the entry price already introduces an element of subjectivity. An emotion free investor would only look objectively at the fundamentals and the valuation of the stock, instead of getting hung up on the entry price.
Friday, 21 August 2009
Flip the losers, let the winners run
Thursday, April 2, 2009
Sell the losers, let the winners run
Why selling is a common problem
Published: 2009/02/04
Most investors tend to agree that the decision to sell a stock is one of the most difficult to make. Sometimes it is more difficult to decide when and what to sell than to buy. Ever wondered why?
* People tend to sell winners too soon and hold on to losers too long
You will find that regardless of whether the market is running hot or is coming down, there are still a lot of people out there who either sell their stocks too early only to realize that the prices continue to soar, or hold on to losers for too long only to see them continue to bleed further.
From a behavioural finance standpoint, this phenomenon is held by Hersh Shefrin and Meir Statman (1985) as the "disposition effect". This was discovered from their research entitled, "The disposition to sell winners too early and ride losers too long: theory and evidence".
Based on research, individual investors are more likely to sell stocks that have gone up in value, rather than those that have gone down. By not selling, they are hoping that the price of the losers will eventually go back to their purchase price or even higher, saving them from experiencing a painful loss.
In the end, most investors will end up selling good quality stocks the minute the prices move up and hold on to those poor fundamental stocks for the long term, while the performances of these stocks continue to deteriorate.
* People tend to forget their original objectives
In stock market investment, there are two types of investment activities, trading versus investing. Trading means "buy and sell" while investing means "buy and hold". The stock selection criteria for these two types of activities are entirely different.
Most of the time those involved in trading will choose stocks based on factors which will affect the price movement in short term, paying less attention to the companies' fundamentals whereas those involved in investment will go for good quality stocks which are more suitable for long-term holding.
However, you will find that many people get their objectives mixed up in the process. They get distracted by external factors so much so that some panic when the market goes in the direction that is not in line with their expectation, and as a result, end up selling the stocks that they find too expensive to buy back later.
On the other hand, some force themselves to change the status of the stocks that were originally meant for short-term trading into long-term investment as they are unable to face the harsh fact that they have to sell the stocks at a loss, even though they know that the stocks are not good fundamental stocks that can appreciate in value.
So, when to sell then?
There are few different schools of thoughts on this. Based on the advice from the investments gurus, like Benjamin Graham, Warren Buffet and Philip Fisher, when you buy a stock, you need to make sure that you understand the companies that you are buying, and these are good fundamental stocks, which will provide good income and appreciate in value in long term.
Therefore, you will be treating your stock purchase as a business you bought, which is meant for long term. You should not be affected by any temporary price movement due to overall market volatility.
You will only consider selling the company if the growth of the company's intrinsic value falls below "satisfactory" level or you find out that a mistake was made in the original analysis as you grow more familiar to the business or industry.
However, if you find that your investment portfolio is highly concentrated on one single company, then you might want to consider diversifying your portfolio and lowering your risk.
Any single investment that is more than 10 per cent to 15 per cent of your portfolio value should be reconsidered no matter how solid the company performance or prospect is, suggested Pat Dorsey of Morningstar.
Last but not least, if you find that by selling the stock, you can invest the money in a better option, then that is a good reason to sell.
In summary, successful investing is highly dependent on your self-discipline, taking away the emotional factors and not going with the crowd. It should always be backed by sound investment principles.
Always remember there is no short cut in investment, only hard work and patience.
Securities Industry Development Corp, the leading capital markets education, training and information resource provider in Asean, is the training and development arm of the Securities Commission. It was established in 1994 and incorporated in 2007.
http://www.btimes.com.my/Current_News/BTIMES/articles/SIDC2/Article/index_html
Sell the losers, let the winners run
Why selling is a common problem
Published: 2009/02/04
Most investors tend to agree that the decision to sell a stock is one of the most difficult to make. Sometimes it is more difficult to decide when and what to sell than to buy. Ever wondered why?
* People tend to sell winners too soon and hold on to losers too long
You will find that regardless of whether the market is running hot or is coming down, there are still a lot of people out there who either sell their stocks too early only to realize that the prices continue to soar, or hold on to losers for too long only to see them continue to bleed further.
From a behavioural finance standpoint, this phenomenon is held by Hersh Shefrin and Meir Statman (1985) as the "disposition effect". This was discovered from their research entitled, "The disposition to sell winners too early and ride losers too long: theory and evidence".
Based on research, individual investors are more likely to sell stocks that have gone up in value, rather than those that have gone down. By not selling, they are hoping that the price of the losers will eventually go back to their purchase price or even higher, saving them from experiencing a painful loss.
In the end, most investors will end up selling good quality stocks the minute the prices move up and hold on to those poor fundamental stocks for the long term, while the performances of these stocks continue to deteriorate.
* People tend to forget their original objectives
In stock market investment, there are two types of investment activities, trading versus investing. Trading means "buy and sell" while investing means "buy and hold". The stock selection criteria for these two types of activities are entirely different.
Most of the time those involved in trading will choose stocks based on factors which will affect the price movement in short term, paying less attention to the companies' fundamentals whereas those involved in investment will go for good quality stocks which are more suitable for long-term holding.
However, you will find that many people get their objectives mixed up in the process. They get distracted by external factors so much so that some panic when the market goes in the direction that is not in line with their expectation, and as a result, end up selling the stocks that they find too expensive to buy back later.
On the other hand, some force themselves to change the status of the stocks that were originally meant for short-term trading into long-term investment as they are unable to face the harsh fact that they have to sell the stocks at a loss, even though they know that the stocks are not good fundamental stocks that can appreciate in value.
So, when to sell then?
There are few different schools of thoughts on this. Based on the advice from the investments gurus, like Benjamin Graham, Warren Buffet and Philip Fisher, when you buy a stock, you need to make sure that you understand the companies that you are buying, and these are good fundamental stocks, which will provide good income and appreciate in value in long term.
Therefore, you will be treating your stock purchase as a business you bought, which is meant for long term. You should not be affected by any temporary price movement due to overall market volatility.
You will only consider selling the company if the growth of the company's intrinsic value falls below "satisfactory" level or you find out that a mistake was made in the original analysis as you grow more familiar to the business or industry.
However, if you find that your investment portfolio is highly concentrated on one single company, then you might want to consider diversifying your portfolio and lowering your risk.
Any single investment that is more than 10 per cent to 15 per cent of your portfolio value should be reconsidered no matter how solid the company performance or prospect is, suggested Pat Dorsey of Morningstar.
Last but not least, if you find that by selling the stock, you can invest the money in a better option, then that is a good reason to sell.
In summary, successful investing is highly dependent on your self-discipline, taking away the emotional factors and not going with the crowd. It should always be backed by sound investment principles.
Always remember there is no short cut in investment, only hard work and patience.
Securities Industry Development Corp, the leading capital markets education, training and information resource provider in Asean, is the training and development arm of the Securities Commission. It was established in 1994 and incorporated in 2007.
http://www.btimes.com.my/Current_News/BTIMES/articles/SIDC2/Article/index_html
Thursday, 20 August 2009
Trading Versus Investing
Trading Versus Investing
Not only is technical analysis more short term in nature than fundamental analysis, but the goals of a purchase (or sale) of a stock are usually different for each approach.
In general, technical analysis is used for a trade, whereas fundamental analysis is used to make an investment.
Investors buy assets they believe can increase in value, while traders buy assets they believe they can sell to somebody else at a greater price.
The line between a trade and an investment can be blurry, but it does characterize a difference between the two schools.
http://www.investopedia.com/university/technical/techanalysis2.asp
Not only is technical analysis more short term in nature than fundamental analysis, but the goals of a purchase (or sale) of a stock are usually different for each approach.
In general, technical analysis is used for a trade, whereas fundamental analysis is used to make an investment.
Investors buy assets they believe can increase in value, while traders buy assets they believe they can sell to somebody else at a greater price.
The line between a trade and an investment can be blurry, but it does characterize a difference between the two schools.
http://www.investopedia.com/university/technical/techanalysis2.asp
Chinese shares tip into a bear market
Chinese shares tip into a bear market
The Shanghai stock exchange suffered another major fall on Wednesday, closing down 4.3pc to bring the declines over the past two weeks to around 20pc, a technical bear market.
By Malcolm Moore in Shanghai
Published: 11:10AM BST 19 Aug 2009
A Chinese investor monitors screens showing stock indexes at a trading house in Shanghai on August 19, 2009. Photo: AFP
Until this month, Shanghai had been the world's best-performing stock exchange, recording a rise of 89pc as money poured into the market from China's fiscal stimulus policies.
Banks loaned more than £700bn in the first half of the year, and analysts believe a sizeable proportion of that cash flowed directly into speculation. Even after the latest reversal, Shanghai is up some 53pc this year.
State-owned behemoths led the declines, with Baoshan Steel dropping 7.18pc to 7.11 yuan and Angang Steel falling 6.23pc to 13.25 yuan.
PetroChina, China's largest oil producer, fell 2.33pc to close at 12.99 yuan.
China's enormous banks are also reporting interim results this year, and analysts believe their revenues will be down because of lower interest payments.
Property shares were also hit by fears that the housing bubble may also pop. Vanke, the country's largest developer, fell 5.58pc to 11 yuan.
Investors, who maintain a firm belief that the Chinese government will intervene to prop up the market, took flight when no such relief appeared. The only sign of government aid came in the form of editorials in three influential newspapers, talking up the benefits of buying shares.
"Investors are disappointed that regulators failed to take any concrete steps to support the market," said Chen Huiqin, at Huatai Securities.
Chinese institutional investors are also cashing out, in the hope of finding better returns elsewhere after Shanghai's phenomenal rise, according to Zhang Suyu, a strategist at Dongxing Securities.
Other analysts said the falls in the market did not reflect the health of the broader Chinese economy. "Rocketing and slumping has always been a characteristic of the market. It took only one year for the index to rise from 1,664 to 6,124 points and vice versa," said Dong Dengxin, a professor at Wuhan Science University.
The Shanghai exchange is all but closed to foreign investors, while Chinese investors have few other options to place their money, since they cannot buy overseas shares. Consequently, the exchange remains extremely volatile, according to local brokers.
The Shanghai stock exchange suffered another major fall on Wednesday, closing down 4.3pc to bring the declines over the past two weeks to around 20pc, a technical bear market.
By Malcolm Moore in Shanghai
Published: 11:10AM BST 19 Aug 2009
A Chinese investor monitors screens showing stock indexes at a trading house in Shanghai on August 19, 2009. Photo: AFP
Until this month, Shanghai had been the world's best-performing stock exchange, recording a rise of 89pc as money poured into the market from China's fiscal stimulus policies.
Banks loaned more than £700bn in the first half of the year, and analysts believe a sizeable proportion of that cash flowed directly into speculation. Even after the latest reversal, Shanghai is up some 53pc this year.
State-owned behemoths led the declines, with Baoshan Steel dropping 7.18pc to 7.11 yuan and Angang Steel falling 6.23pc to 13.25 yuan.
PetroChina, China's largest oil producer, fell 2.33pc to close at 12.99 yuan.
China's enormous banks are also reporting interim results this year, and analysts believe their revenues will be down because of lower interest payments.
Property shares were also hit by fears that the housing bubble may also pop. Vanke, the country's largest developer, fell 5.58pc to 11 yuan.
Investors, who maintain a firm belief that the Chinese government will intervene to prop up the market, took flight when no such relief appeared. The only sign of government aid came in the form of editorials in three influential newspapers, talking up the benefits of buying shares.
"Investors are disappointed that regulators failed to take any concrete steps to support the market," said Chen Huiqin, at Huatai Securities.
Chinese institutional investors are also cashing out, in the hope of finding better returns elsewhere after Shanghai's phenomenal rise, according to Zhang Suyu, a strategist at Dongxing Securities.
Other analysts said the falls in the market did not reflect the health of the broader Chinese economy. "Rocketing and slumping has always been a characteristic of the market. It took only one year for the index to rise from 1,664 to 6,124 points and vice versa," said Dong Dengxin, a professor at Wuhan Science University.
The Shanghai exchange is all but closed to foreign investors, while Chinese investors have few other options to place their money, since they cannot buy overseas shares. Consequently, the exchange remains extremely volatile, according to local brokers.
Follow Graham: profit from folly rather than participate in it.
If you follow the behavioural and business principles that Graham advocates - and if you pay special attention to the invaluable advice in Chapters 8 and 20 - you will not get a poor result from your investments. (That represents more of a accomplishment than you might think.)
Whether you achieve outstanding results will depend on the effort and intellect you apply to your investments, as well as on the amplitudes of stock-market folly that prevail during your investing career.
The sillier the market's behaviour, the greater the opportunity for the business-like investor.
Follow Graham and you will profit from folly rather than participate in it.
Ref: Intelligent Investor by Benjamin Graham
Whether you achieve outstanding results will depend on the effort and intellect you apply to your investments, as well as on the amplitudes of stock-market folly that prevail during your investing career.
The sillier the market's behaviour, the greater the opportunity for the business-like investor.
Follow Graham and you will profit from folly rather than participate in it.
Ref: Intelligent Investor by Benjamin Graham
Uncertainty = Investing
"Investors don't like uncertainty."
But investors have never liked uncertainty - and yet it is the most fundamental and enduring condition of the investing world. It always has been, and it always will be.
At heart, "uncertainty" and "investing" are synonyms.
In the real world, no one has ever been given the ability to see that any particular time is the best time to buy stocks.
Without a saving faith in the future, no one would ever invest at all. To be an investor, you must be a believer in a better tomorrow.
But investors have never liked uncertainty - and yet it is the most fundamental and enduring condition of the investing world. It always has been, and it always will be.
At heart, "uncertainty" and "investing" are synonyms.
In the real world, no one has ever been given the ability to see that any particular time is the best time to buy stocks.
Without a saving faith in the future, no one would ever invest at all. To be an investor, you must be a believer in a better tomorrow.
Wednesday, 19 August 2009
How To Make Your First $1 Million
The Three Ps
Persistence, patience and purpose are common traits that you'll find in every millionaire from John Jacob Astor to Bill Gates. Even though inflation has brought the value of $1 million down from its lofty perch, you still need these traits to reach it. Why isn't everyone a millionaire? Maybe because it is easier to spend now, buy big and put off saving and investing than it is to sacrifice to reach the goal of becoming a millionaire. Using the tips given here can help you on your way, but you have to be brave enough to take the steps - first, final and all the hard ones that lay in between.
http://investopedia.com/slide-show/millionaire-mindset/
http://investopedia.com/Slides/LastSlide.aspx
How To Make Your First $1 Million
Increase Your Income
There is nothing terribly romantic about becoming a millionaire while working a regular job, but it is probably the avenue available to most people. You don't need to start your own business to pull in a high income, and you don't even need to pull in a high income if your saving, spending and investing habits are sound. Asking for a raise, upgrading your skills or taking a second job will add that much more to your savings and investments and subtract that same amount from the countdown to your first million. If you are entrepreneurial at heart, starting a business on the side can actually decrease your overall tax bill, rather than putting you in a higher income tax bracket. (See Increase Your Disposable Income for more.)
How To Make Your First $1 Million
Reconsider Real Estate
Owning real estate provides equity and diversity to your investments. If you own your own home, then paying your rent builds up equity. If you invest in real estate, then someone else's rent builds up your equity. Real estate investing isn't for everyone, but it has built fortunes for many savvy people. Owning your own home, however, is usually a good idea regardless of your opinion on real estate bubbles. Peter Lynch, one of the greatest stock investors of all time, believed that you should own your first home before you buy your first stock. (If you feel ready, see Investing In Real Estate for more.)
How To Make Your First $1 Million
Dare To Diversify
If your portfolio is made up entirely of American companies or is even all held in stocks, then you may need to diversify. In the first case, more and more financial activity is out there in the wider world. This doesn't just mean investing in emerging economies like China and India that are producing huge gains, but recognizing that there are companies in Europe and Asia that are just as good (maybe better) as investments in the U.S.. Diversifying also means not putting all your money into one type of asset. Being a financial omnivore opens up that much more opportunity in times of growth and makes certain you won't go hungry when one source dries up. (See The Importance Of Diversification for more.)
How To Make Your First $1 Million
Incremental Investing
If you've got your retirement portfolios where you want them and are ready to start a pure income portfolio, then incremental investing is an excellent way to begin. You don't have to jump into the market with your life savings to make money. Even relatively small amounts can result in decent returns. The important thing to remember with your income portfolio is that capital gains taxes will be applied yearly to any income you pull out. Again, improving your tax awareness will help reduce the bite, but it takes time and knowledge to make one million solely from a taxable portfolio. Still, it has been done and will be done again. (See Investing 101 to get started.
How To Make Your First $1 Million
Ramp-Up Your Retirement Savings
Rather than letting your boss's contribution lessen your load, try to put a little extra into your retirement plan whenever you can. Automating your account contributions will make setting your money aside that much easier. That said, making extra contributions a priority will speed up your journey to $1 million and make your golden years that much more golden. You don't have to eat cat food to do this, just keep your retirement in mind when you've got extra cash on hand. (For more in this vein, see Playing Retirement Catch-Up.)
How To Make Your First $1 Million
Build Through Your Boss
If you're looking to save $1 million dollars for retirement, look no further than your boss. With matching contributions, your employer can be your best ally when it comes to building up retirement funds. If you think you need to squirrel away 20% of your income for retirement and your boss puts up 6% in matched contributions, then you're left with a much more manageable 14%. Even if you are your own boss, there are still options under SEPs. (For more on this see Making Salary Deferral Contributions.)
How To Make Your First $1 Million
Crafty Compounding
Time is on your side when you've got compounding working on your savings. The earlier you start saving and the earlier you get your savings into a financial instrument that compounds, the easier your path to $1 million will be. You may be thinking of tenbaggers or hot issues that return 10 times their value in a few weeks, but it is the boring, year-on-year compounding that builds fortune for most people. (To learn more, read Compound Your Way To Retirement.)
How To Make Your First $1 Million
Target Your Taxes
Another leaky hole you need to plug is the parasitic drain of big government. While you are expected to pay your taxes, it's the right of every taxpayer to try and reduce their tax bills to the absolute minimum allowed by law. Increasing your tax awareness means making taxes a quarterly chore rather than an annual scourge. Keeping abreast of allowable deductions, changes to your withholding and changes in tax limits will allow you to keep more of what you earn, so that you can put that money to work for you. (See 10 Steps To Tax Preparation for more.)
How To Make Your First $1 Million
Prune Your Purchases
When you do have to spend, try to get the most utility, not simply the most you can. The difference between great value and utility is a fine line. Buying too much house or too costly a car comes from confusing the two. If you shop for what you need and buy it cheaper than you'd planned, that's a great deal. By keeping the end use of large purchases in mind, you can avoid this drain on your cash. Before paying more than you can afford, remember that Warren Buffet, a man who constantly jockeys for richest person on earth, still lives in his humble Omaha abode. (For more on the value of frugality see Save Money The Scottish Way.)
How To Make Your First $1 Million
Stop Senseless Spending
It's easy to spend your way out of a fortune. Fortunately, the opposite is also true - you can save your way into your first million. Most people working in North America right now will earn well over $1 million during their working lives. The secret to saving $1 million lies in keeping more of what you earn. Just as extending your earnings offers a unique perspective, doing the same with your spending sheds a ghastly light on the waste. If you spend $5 every day of your working life on coffee, snacks, etc., you lose $73,000 of your lifetime earnings, making it that much harder to hit the $1 million mark in savings. (For more, see Squeeze A Greenback Out Of Your Latte.)
How To Make Your First $1 Million
The Millionaire's Mindset
When your grandparents lamented that a dollar just isn't a dollar anymore, they weren't just bellyaching. Inflation attacks the value of a dollar, reducing it as time goes by so you need more dollars as time goes on. That is one of the reasons that $1 million is often thrown around as a retirement goal. Back in 1900, a $1 million retirement would include a mansion and a bevy of servants, but now, it has become a benchmark for the average retirement portfolio. The upside is that it is easier to become a millionaire now than at any time before. While you won't be buying islands, it is still a goal worth shooting for. Read on for 10 ways to make your first million.
Tuesday, 18 August 2009
A Relevant Tale Of The Mouse, Frog And Hawk
A Relevant Tale Of The Mouse, Frog And Hawk
Jim Oberweis, Oberweis Report 08.06.09, 5:40 PM ET
If fable-teller Aesop sat down with China's President Hu Jintao and Federal Reserve Chairman Ben Bernanke, the meeting would begin with the story of the Mouse, the Frog and the Hawk:
"A mouse who always lived on the land, by an unlucky chance, formed an intimate acquaintance with a frog, who lived, for the most part, in the water. One day, the frog was intent on mischief. He tied the foot of the mouse tightly to his own. Thus joined together, the frog led his friend the mouse to the meadow where they usually searched for food. After this, he gradually led him toward the pond in which he lived. Upon reaching the banks of the water, he suddenly jumped in, dragging the mouse with him.
"The frog enjoyed the water amazingly, and swam croaking about, as if he had done a good deed. The unhappy mouse was soon sputtered and drowned in the water, and his poor dead body floating about on the surface. A hawk observed the floating mouse from the sky, and dove down and grabbed it with his talons, carrying it back to his nest. The frog, being still fastened to the leg of the mouse, was also carried off a prisoner, and was eaten by the hawk."
Ah, but who is the frog and who is the mouse? Is the mouse an allegorical depiction of the U.S., with the death of its manufacturing powerhouse catalyzed by the subsidies and currency manipulation of the Chinese frog? Or is China the mouse, whose export-based economy remains susceptible to the unsustainable and careless spending of the overleveraged western frog? In the latter scenario, the Chinese mouse's life (or at least savings) lay in the hands of the frog, steep in danger, an eventual victim to the hawk of Inflation.
Let us not forget that most unhappy final twist: the frog dies too, bound at the leg to the mouse. And so might the film roll, with an unhappy ending for the American frog. As the U.S. inflates away the burden of its debt (jargonized as "quantitative easing"), we may have fooled the Chinese this time, but future creditors will vanish, and the U.S.' ability to finance deficit spending on absurdly attractive terms will be relinquished for the foreseeable future.
It doesn't take an expert in game theory to realize that the mouse will try to untie itself before it gets dragged under water. In fact, China recently made waves with a proposal for alternatives to the U.S. dollar as a reserve currency. Bernanke, in fulfilling his patriotic cheerleading duties, recently sought to quell inflation worries with a promise to maintain harmony and balance throughout the universe: "I think that they are misguided in the sense that … the Federal Reserve is able to draw those reserves out and raise interest rates at an appropriate time to make sure that we don't have an inflation problem."
Borrowing a line I recently heard from a Harvard-educated economist, "That's bunk!" How popular will it be to raise rates and curtail economic growth just as the economy edges out of the worst recession since the Great Depression? More important, how will he do that as election season approaches and political pressure intensifies?
Besides the potential for intentional deception, one must also consider the chance for unwillful error, or being too late to the punch. In the same way that it is possible that an elephant guided by a troupe of chimpanzees might learn to ride a bicycle, it just isn't particularly likely. The Fed won't get the equilibrium just right. Bernanke has himself suggested it is better to err on the side of inflation rather than deflation, and it is inflation we expect to see, yet significant inflation is not yet imputed into bond prices, likely because the Fed itself is propping up prices for the moment by scooping up bonds to keep yields low. That sounds a bit like the mouse helplessly trying to stay afloat as the hawk lurks overhead.
Inflation is coming. In an inflationary world, stocks outperform bonds and long-term bonds fare particularly badly. Foreign stocks with undervalued currencies outperform stocks denominated in inflating currencies. For these reasons, equities will outpace fixed income for the decade to come (though not so in every year). Chinese equities will continue to offer their outsized gains over the next several years, even after its amazing run thus far in 2009.
That's not to say there won't be plenty of micro-cap stocks in the U.S. that have carved out growth opportunities, but don't ignore the low hanging fruit. Small-cap growth stocks in China--companies like Asia Info Holdings (ASIA), E-House (EJ), Baidu.com, Ctrip (CTRP), American Dairy (ADP), Perfect World (PFWD) and Rino (RINO)--as well as diversified China mutual funds, offer the benefits of foreign currency exposure and higher Chinese GDP growth to your aggressive growth portfolio.
So what's the moral of the story of The Mouse, the Frog and the Hawk? Be the hawk.
Jim Oberweis, CFA, is editor of the Oberweis Report and manager of several mutual funds focused on small-cap growth stocks and China.
http://www.forbes.com/2009/08/06/baidu-ctrip-asiainfo-personal-finance-investing-ideas-inflation-china_print.html
Jim Oberweis, Oberweis Report 08.06.09, 5:40 PM ET
If fable-teller Aesop sat down with China's President Hu Jintao and Federal Reserve Chairman Ben Bernanke, the meeting would begin with the story of the Mouse, the Frog and the Hawk:
"A mouse who always lived on the land, by an unlucky chance, formed an intimate acquaintance with a frog, who lived, for the most part, in the water. One day, the frog was intent on mischief. He tied the foot of the mouse tightly to his own. Thus joined together, the frog led his friend the mouse to the meadow where they usually searched for food. After this, he gradually led him toward the pond in which he lived. Upon reaching the banks of the water, he suddenly jumped in, dragging the mouse with him.
"The frog enjoyed the water amazingly, and swam croaking about, as if he had done a good deed. The unhappy mouse was soon sputtered and drowned in the water, and his poor dead body floating about on the surface. A hawk observed the floating mouse from the sky, and dove down and grabbed it with his talons, carrying it back to his nest. The frog, being still fastened to the leg of the mouse, was also carried off a prisoner, and was eaten by the hawk."
Ah, but who is the frog and who is the mouse? Is the mouse an allegorical depiction of the U.S., with the death of its manufacturing powerhouse catalyzed by the subsidies and currency manipulation of the Chinese frog? Or is China the mouse, whose export-based economy remains susceptible to the unsustainable and careless spending of the overleveraged western frog? In the latter scenario, the Chinese mouse's life (or at least savings) lay in the hands of the frog, steep in danger, an eventual victim to the hawk of Inflation.
Let us not forget that most unhappy final twist: the frog dies too, bound at the leg to the mouse. And so might the film roll, with an unhappy ending for the American frog. As the U.S. inflates away the burden of its debt (jargonized as "quantitative easing"), we may have fooled the Chinese this time, but future creditors will vanish, and the U.S.' ability to finance deficit spending on absurdly attractive terms will be relinquished for the foreseeable future.
It doesn't take an expert in game theory to realize that the mouse will try to untie itself before it gets dragged under water. In fact, China recently made waves with a proposal for alternatives to the U.S. dollar as a reserve currency. Bernanke, in fulfilling his patriotic cheerleading duties, recently sought to quell inflation worries with a promise to maintain harmony and balance throughout the universe: "I think that they are misguided in the sense that … the Federal Reserve is able to draw those reserves out and raise interest rates at an appropriate time to make sure that we don't have an inflation problem."
Borrowing a line I recently heard from a Harvard-educated economist, "That's bunk!" How popular will it be to raise rates and curtail economic growth just as the economy edges out of the worst recession since the Great Depression? More important, how will he do that as election season approaches and political pressure intensifies?
Besides the potential for intentional deception, one must also consider the chance for unwillful error, or being too late to the punch. In the same way that it is possible that an elephant guided by a troupe of chimpanzees might learn to ride a bicycle, it just isn't particularly likely. The Fed won't get the equilibrium just right. Bernanke has himself suggested it is better to err on the side of inflation rather than deflation, and it is inflation we expect to see, yet significant inflation is not yet imputed into bond prices, likely because the Fed itself is propping up prices for the moment by scooping up bonds to keep yields low. That sounds a bit like the mouse helplessly trying to stay afloat as the hawk lurks overhead.
Inflation is coming. In an inflationary world, stocks outperform bonds and long-term bonds fare particularly badly. Foreign stocks with undervalued currencies outperform stocks denominated in inflating currencies. For these reasons, equities will outpace fixed income for the decade to come (though not so in every year). Chinese equities will continue to offer their outsized gains over the next several years, even after its amazing run thus far in 2009.
That's not to say there won't be plenty of micro-cap stocks in the U.S. that have carved out growth opportunities, but don't ignore the low hanging fruit. Small-cap growth stocks in China--companies like Asia Info Holdings (ASIA), E-House (EJ), Baidu.com, Ctrip (CTRP), American Dairy (ADP), Perfect World (PFWD) and Rino (RINO)--as well as diversified China mutual funds, offer the benefits of foreign currency exposure and higher Chinese GDP growth to your aggressive growth portfolio.
So what's the moral of the story of The Mouse, the Frog and the Hawk? Be the hawk.
Jim Oberweis, CFA, is editor of the Oberweis Report and manager of several mutual funds focused on small-cap growth stocks and China.
http://www.forbes.com/2009/08/06/baidu-ctrip-asiainfo-personal-finance-investing-ideas-inflation-china_print.html
Monday, 17 August 2009
Latexx
Price 2.10
latest eps 5.86
annualised eps 23.4
annualised PE = 8.9
Market cap 383.555 m
NAV 72 sen
latest eps 5.86
annualised eps 23.4
annualised PE = 8.9
Market cap 383.555 m
NAV 72 sen
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