If the recession has already ended as evidence suggests, then the next six to twelve months may offer an opportunity for investors.
Stocks were higher both six and twelve months after the end of nine out of the ten recessions („49, „54, „58, „61, „70, „75, „80, „82, „91, „01). The exception was 2001. However, the slope of the S&P 500‟s 200-day moving average never turned positive in 2001, which is not the case in 2009. Commodities historically have performed well following recessions.
http://ciovaccocapital.com/CCM%20ASD%20AUG%202009%20PDF.pdf
Monday 14 September 2009
Sunday 13 September 2009
*****Buffett's shrinking portfolio of the 1980s (2)
http://spreadsheets.google.com/pub?key=t7u4BYlpDKstozulNims5Hw&output=html
The above table shows, Buffett entered the 1980s energetic, ready to dive into a market he saw as woefully underappraised. As the market rose in value without pause, Buffett's conservatism got the better of him. By 1987, he was holding large stakes in just three stocks. When the decade began, Buffett had amassed large positions in 18 different companies.
Warren Buffett does not possess a magic formula for determining when the stock market is grossly overvalued or undervalued. By all accounts, his decisons to plunge into or escape from the marekt are based on several commonsense factors, namely:
1. The relationship between stock yields and bond yields.
2. The rate of climb in the market.
3. Earnings multiples.
4. The state of the economy.
5. The big picture (holistic view of companies, industries, and the entire market).
The above table shows, Buffett entered the 1980s energetic, ready to dive into a market he saw as woefully underappraised. As the market rose in value without pause, Buffett's conservatism got the better of him. By 1987, he was holding large stakes in just three stocks. When the decade began, Buffett had amassed large positions in 18 different companies.
Warren Buffett does not possess a magic formula for determining when the stock market is grossly overvalued or undervalued. By all accounts, his decisons to plunge into or escape from the marekt are based on several commonsense factors, namely:
1. The relationship between stock yields and bond yields.
2. The rate of climb in the market.
3. Earnings multiples.
4. The state of the economy.
5. The big picture (holistic view of companies, industries, and the entire market).
*****Buffett's Shrinking Portfolio of the 1980s (1)
http://spreadsheets.google.com/pub?key=t7u4BYlpDKstozulNims5Hw&output=html
Market Call by Buffett: Seeing the opportunities that would open up in the 1980s
By 1979, the Dow Jones Industrial Average traded no higher than it did in 1964 - 15 years without a single point gain!
Pessimism hit extreme levels. The public had gradually shifted their portfolios into bonds, real estate, and precious metals, and brokers found it difficult to peddle even stocks with 15 percent dividend yields.
Leading market strategists of the day, predicting more of the same financial morass, implored investors to buy bonds and avoid stocks. Buffett saw things differently. From his perspective, quality blue-chip stocks were being given away; some sold for less than their book values, despite the fact that econmic prospects for the United States still appeared bright.
Corporate returns on equity remained healthy, blue-chip earnings were advancing at double-digit rtes, and the speculative frenzy that had destroyed the integrity of the late-1960s markets had finally been removed from the equation.
"Stocks now sell at levels that should produce long-term returns superior to bonds," he told shareholders. "Yet pension managers, usually encouraged by corporate sponsors that must necessarily please, are pouring funds in record proportion into bonds. Meanwhile, orders for stocks are being placed with eyedropper." How right Buffett was.
As Tilson pointed out, the stock market has returned an annualised 17.2 percent since Buffett penned those words. Bonds returned 9.6%.
Market Call by Buffett: Avoiding the 1987 Crash
By the mid-1980s, Buffett's buy-and-hold philosophy had been carved in stone. He maintained large stakes in his three favorite companies - GEICO, Washington Post Co., and Capital Cities/ABC (which later merged with Walt Disney) - and pledged to hold these "inevitables", as he called them, forever. He didn't share the same convictions about the rest of the stock market.
At the Berkshire Hathaway annual meeting in 1986, Buffett lamented that he could not find suitable companies trading at low prices. Rather than dilute his portfolio with short-term stock investments, and given the fact that Buffett's stock holdings had already provided him tens of millions of dollars in gains, Buffett opted to take profits and shrink his portfolio.
"I still can't find any bargains in today's market," he told shareholders. "We don't currently own any equities to speak of." Just 5 months before the 1987 crash, he told shareholders of his inability to find any large-cap stocks offering a high rate-of-return potential: "There's nothing that we could see buying even if it went down 10 percent."
In retrospect, Buffett's comments about a 10 percent decline ultimately proved conservative. Five months after telling shareholders of his dilemma, the stock market lost 30 percent within a matter of days.
His decision to whittle away his portfolio slowly before the crash undoubtedly kept Berkshire's stock portfolio from imparting too big a negative influence on book value.
Market Call by Buffett: Seeing the opportunities that would open up in the 1980s
By 1979, the Dow Jones Industrial Average traded no higher than it did in 1964 - 15 years without a single point gain!
Pessimism hit extreme levels. The public had gradually shifted their portfolios into bonds, real estate, and precious metals, and brokers found it difficult to peddle even stocks with 15 percent dividend yields.
Leading market strategists of the day, predicting more of the same financial morass, implored investors to buy bonds and avoid stocks. Buffett saw things differently. From his perspective, quality blue-chip stocks were being given away; some sold for less than their book values, despite the fact that econmic prospects for the United States still appeared bright.
Corporate returns on equity remained healthy, blue-chip earnings were advancing at double-digit rtes, and the speculative frenzy that had destroyed the integrity of the late-1960s markets had finally been removed from the equation.
"Stocks now sell at levels that should produce long-term returns superior to bonds," he told shareholders. "Yet pension managers, usually encouraged by corporate sponsors that must necessarily please, are pouring funds in record proportion into bonds. Meanwhile, orders for stocks are being placed with eyedropper." How right Buffett was.
As Tilson pointed out, the stock market has returned an annualised 17.2 percent since Buffett penned those words. Bonds returned 9.6%.
Market Call by Buffett: Avoiding the 1987 Crash
By the mid-1980s, Buffett's buy-and-hold philosophy had been carved in stone. He maintained large stakes in his three favorite companies - GEICO, Washington Post Co., and Capital Cities/ABC (which later merged with Walt Disney) - and pledged to hold these "inevitables", as he called them, forever. He didn't share the same convictions about the rest of the stock market.
At the Berkshire Hathaway annual meeting in 1986, Buffett lamented that he could not find suitable companies trading at low prices. Rather than dilute his portfolio with short-term stock investments, and given the fact that Buffett's stock holdings had already provided him tens of millions of dollars in gains, Buffett opted to take profits and shrink his portfolio.
"I still can't find any bargains in today's market," he told shareholders. "We don't currently own any equities to speak of." Just 5 months before the 1987 crash, he told shareholders of his inability to find any large-cap stocks offering a high rate-of-return potential: "There's nothing that we could see buying even if it went down 10 percent."
In retrospect, Buffett's comments about a 10 percent decline ultimately proved conservative. Five months after telling shareholders of his dilemma, the stock market lost 30 percent within a matter of days.
His decision to whittle away his portfolio slowly before the crash undoubtedly kept Berkshire's stock portfolio from imparting too big a negative influence on book value.
Focus on how Buffett best avoids losses
List Your Top 5 Rules for Success in Investing
If I polled 1,000 investors and asked them to list their top 5 rules for success, their answers would differ from Buffett's. Here is what they would probably say:
Rule 1: Take a long term perspective.
Rule 2: Keep adding money to the market and let the magic of compounding work for you.
Rule 3: Don't try to time the market.
Rule 4: Stick to companies you understand.
Rule 5: Diversify.
Few investors would think to mention Buffett's cardinal "don't lose money" rule.
Why?
1. Avoiding losses is probably the most important tool for long-term success in investing. No investor, even Buffett, can avoid periodic losses on individual stocks. Even, if you resigned yourself to buying only at incredibly cheap prices, occasional mistakes will still occur. What differentiates Buffett from nearly all other investors is his ability to avoid yearly losses in his entire portfolio.
2. Diversification alone can't prevent losses. All diversification can do is minimise the chances that a few stocks implode (non-market risk or stock specific risk) and drag the performance of the portfolio with them. Even if you hold 100 stocks, you are forever vulnerable to "market risk," the risk that a declining market causes nearly all stocks to drop together.
3. Most investors use the market as their mechanism for avoiding losses. What does this mean? They simply sell when a stock falls below its break-even point, no matter the fundamentals. One highly touted strategy of the 1990s, espoused by Investor's Business Daily, implores investors to sell any issue that falls more than 8% below its purchase price, irrespective of events. Market timers rely on similar strategies. They make short-term bets on the direction of individual stocks and are prepared to exit quickly if the market turns against them.
4. These strategies ultimately degrade into a form of gambling, where the odds of success shrink because the investors' holding period is too short. Other investos avoid losses by continuing to hold poor-performing stocks, sometimes for years, until they rally back above their original cost. To profit from this strategy, you must pin your hopes on the market's ultimately validating your decision.
How Warren Buffett avoids yearly losses in his entire portfolio?
Warren Buffett would rather not place his faith in the hands of investors and traders. The methods he uses to lock in yearly gains take the market out of the equation.
He reckons that if he can guarantee himself returns, even in poor markets, he will ultimately be way ahead of the game.
To learn more, we should focus on how Buffett best avoids losses.
These include:
Timing the market. He is not concerned about the day-to-day fluctuations in the stock market. However, Buffett - whether by accident or calculation - must be recognized as one of the most astute market timers in history.
Convertibles. Some of Buffett's most lucrative investments in the late 1980s and early 1990s involved convertibles, which are hybrid securities that possess features of a stock and an income-producing security such as a bond or preferred stock.
Options. On a number of occsions, Buffett has expressed his disdain for derivative securities such as futures and options contracts. Because these securities are bets on shorter-term price movements within a market, they fall under the definition of "gambling" rather than of "investing." If Warren Buffett does dabble in options, and few doubt he could dabble successfully, he does so quietly. He once acknowledged writing put options on Coca-Cola's stock; at the time he was thinking of adding to his stake in the soft-drink company.
#Arbitrage. Not only did Buffett continue to beat the major market averages, but he suffered few single-year declines along the way. That second accomplishment is, by far, the more remarkable. Buffett's scorecard shows that he has increased the book value of Berkshire Hathaway's stock 35 consecutive years. In only 4 years, did the S&P 500 Index beat the growth of Berkshire's equity. Right from the start of his investment management career, Buffett resorted extensively to takeover arbitrage (the trading of securities involved in mergers) to keep his portfolio results positive. In poor market years, arbitrage activities have greatly enhanced Buffett's performance and keep returns positive. In strong markets, Buffett has exploited the profit opportunities of mergers to exceed the returns of the indexes. Benjamin Graham, Buffett's mentor, had made arbitrage one of the keystones of his teachings and money management activities at Graham-Newman between 1926 and 1956. Graham's clients were informed that some of their money would be deployed in shorter term situations to exploit irrational price discrepancies. These situations included reorganizations, liquidations, hedges involving convertible bonds and preferred stocks, and takeovers.
----
There are only 3 ways an investor can attain a long-term, loss-free track record:
1. Buy short-term Treasury bills and bonds and hold them to maturity, thereby locking in 4 to 6 percent average annual gains.
2. Concentrate on private-market investments by buying properties that consistently generate higher profits and that can sell for greater prices each year.
3. Own publicly traded securities and minimise your exposure to price fluctuations by devoiting some of the portfolio to unconventional "sure things.# "
If I polled 1,000 investors and asked them to list their top 5 rules for success, their answers would differ from Buffett's. Here is what they would probably say:
Rule 1: Take a long term perspective.
Rule 2: Keep adding money to the market and let the magic of compounding work for you.
Rule 3: Don't try to time the market.
Rule 4: Stick to companies you understand.
Rule 5: Diversify.
Few investors would think to mention Buffett's cardinal "don't lose money" rule.
Why?
- Some investors, sadly, refuse to believe that losses can occur, so accustomed are they to the unprecedented rally in the major indexes since 1987.
- Surveys done by mutual fund companies during the past few years indicate that a high percentage of individual investors still don't believe that mutual funds can lose money or that the market is capable of dropping more than 10% anymore.
- Other investors see losses as temporary setbacks or as opportunities to add to their positions.
- Still others, acting out a psychological defense mechanism, try to avoid losses by violating their own rules. They let the ticker tape infect decision making and trade in and out of winners and losers to avoid the psychological trauma of having to report a loss.
1. Avoiding losses is probably the most important tool for long-term success in investing. No investor, even Buffett, can avoid periodic losses on individual stocks. Even, if you resigned yourself to buying only at incredibly cheap prices, occasional mistakes will still occur. What differentiates Buffett from nearly all other investors is his ability to avoid yearly losses in his entire portfolio.
2. Diversification alone can't prevent losses. All diversification can do is minimise the chances that a few stocks implode (non-market risk or stock specific risk) and drag the performance of the portfolio with them. Even if you hold 100 stocks, you are forever vulnerable to "market risk," the risk that a declining market causes nearly all stocks to drop together.
3. Most investors use the market as their mechanism for avoiding losses. What does this mean? They simply sell when a stock falls below its break-even point, no matter the fundamentals. One highly touted strategy of the 1990s, espoused by Investor's Business Daily, implores investors to sell any issue that falls more than 8% below its purchase price, irrespective of events. Market timers rely on similar strategies. They make short-term bets on the direction of individual stocks and are prepared to exit quickly if the market turns against them.
4. These strategies ultimately degrade into a form of gambling, where the odds of success shrink because the investors' holding period is too short. Other investos avoid losses by continuing to hold poor-performing stocks, sometimes for years, until they rally back above their original cost. To profit from this strategy, you must pin your hopes on the market's ultimately validating your decision.
How Warren Buffett avoids yearly losses in his entire portfolio?
Warren Buffett would rather not place his faith in the hands of investors and traders. The methods he uses to lock in yearly gains take the market out of the equation.
He reckons that if he can guarantee himself returns, even in poor markets, he will ultimately be way ahead of the game.
To learn more, we should focus on how Buffett best avoids losses.
These include:
Timing the market. He is not concerned about the day-to-day fluctuations in the stock market. However, Buffett - whether by accident or calculation - must be recognized as one of the most astute market timers in history.
Convertibles. Some of Buffett's most lucrative investments in the late 1980s and early 1990s involved convertibles, which are hybrid securities that possess features of a stock and an income-producing security such as a bond or preferred stock.
Options. On a number of occsions, Buffett has expressed his disdain for derivative securities such as futures and options contracts. Because these securities are bets on shorter-term price movements within a market, they fall under the definition of "gambling" rather than of "investing." If Warren Buffett does dabble in options, and few doubt he could dabble successfully, he does so quietly. He once acknowledged writing put options on Coca-Cola's stock; at the time he was thinking of adding to his stake in the soft-drink company.
#Arbitrage. Not only did Buffett continue to beat the major market averages, but he suffered few single-year declines along the way. That second accomplishment is, by far, the more remarkable. Buffett's scorecard shows that he has increased the book value of Berkshire Hathaway's stock 35 consecutive years. In only 4 years, did the S&P 500 Index beat the growth of Berkshire's equity. Right from the start of his investment management career, Buffett resorted extensively to takeover arbitrage (the trading of securities involved in mergers) to keep his portfolio results positive. In poor market years, arbitrage activities have greatly enhanced Buffett's performance and keep returns positive. In strong markets, Buffett has exploited the profit opportunities of mergers to exceed the returns of the indexes. Benjamin Graham, Buffett's mentor, had made arbitrage one of the keystones of his teachings and money management activities at Graham-Newman between 1926 and 1956. Graham's clients were informed that some of their money would be deployed in shorter term situations to exploit irrational price discrepancies. These situations included reorganizations, liquidations, hedges involving convertible bonds and preferred stocks, and takeovers.
----
There are only 3 ways an investor can attain a long-term, loss-free track record:
1. Buy short-term Treasury bills and bonds and hold them to maturity, thereby locking in 4 to 6 percent average annual gains.
2. Concentrate on private-market investments by buying properties that consistently generate higher profits and that can sell for greater prices each year.
3. Own publicly traded securities and minimise your exposure to price fluctuations by devoiting some of the portfolio to unconventional "sure things.# "
Why Buffett is top in the financial world of investing?
If you understand the rules of the loser's games, you have taken a critical first step toward success in investments.
Warren Buffett sits atop the financial world because he made the fewest mistakes over his 40-year career. His most common mistakes, he admits, are "sins of omission," in which he
They are simply lost opportunities.
Avoiding losses is probably the most important tool for long-term success in investing. No investor, even Buffett, can avoid periodic losses on individual stocks.
What differentiates Buffett from nearly all other investors is his ability to avoid yearly losses in his entire portfolio.
Warren Buffett sits atop the financial world because he made the fewest mistakes over his 40-year career. His most common mistakes, he admits, are "sins of omission," in which he
- failed to buy a stock that rallied, or
- sold a stock too soon.
They are simply lost opportunities.
Avoiding losses is probably the most important tool for long-term success in investing. No investor, even Buffett, can avoid periodic losses on individual stocks.
What differentiates Buffett from nearly all other investors is his ability to avoid yearly losses in his entire portfolio.
The Benefits of Avoiding Mistakes
1. A typical investor who spreads his or her money over a basket of stocks can expect to achieve 10 to 12 percent annualized gains over great periods.
2. The same investor who focuses on the types of stocks Buffett owns - Coca-Cola, Gillette, Capital Cities, Wells Fargo, etc. - could expect to gain perhaps a few percentage points more each year. These stocks have shown a tendency to outperform the market over long periods because they exhibited growth rates greater than the average US corporation.
3. A shrewd, full time investor who focussed on Buffett-like stocks and made sure to buy them at wonderfully cheap prices could add a couple of extra percentage points of gain a year.
But the combined effects of these strategies still don't come close to producing the 33 percent compounded annual gain Buffett attained between the mid-1950s and the late 1990s.
Peter Lynch's managed the Magellan Fund. He bought and sold common stocks like the rest of us, including many of the same types of stocks you probably placed in your own portfolio.
Why, then, did Lynch and Buffett attain vastly superior results? There's got to be more to the story.
We tend to overlook the fact that the success of investors such as Lynch and Buffett derived from thousands of critical decisions they made over the course of decades, many of which were made on the fly; but the majority of which were correct.
In our quest to find shortcut answers to how they did it, we tend to look at only the beginning - that Buffett started with $100 - and at the end - his $30 billion fortune and dismiss the daily rituals that got him from point A to point B. Those rituals, however, are what pushed Buffett's returns well above those of the crowd.
"If everybody had seen what he had seen, he wouldn't have made huge gains from his visions," Forbes magazine once wrote.
2. The same investor who focuses on the types of stocks Buffett owns - Coca-Cola, Gillette, Capital Cities, Wells Fargo, etc. - could expect to gain perhaps a few percentage points more each year. These stocks have shown a tendency to outperform the market over long periods because they exhibited growth rates greater than the average US corporation.
3. A shrewd, full time investor who focussed on Buffett-like stocks and made sure to buy them at wonderfully cheap prices could add a couple of extra percentage points of gain a year.
But the combined effects of these strategies still don't come close to producing the 33 percent compounded annual gain Buffett attained between the mid-1950s and the late 1990s.
Peter Lynch's managed the Magellan Fund. He bought and sold common stocks like the rest of us, including many of the same types of stocks you probably placed in your own portfolio.
Why, then, did Lynch and Buffett attain vastly superior results? There's got to be more to the story.
We tend to overlook the fact that the success of investors such as Lynch and Buffett derived from thousands of critical decisions they made over the course of decades, many of which were made on the fly; but the majority of which were correct.
In our quest to find shortcut answers to how they did it, we tend to look at only the beginning - that Buffett started with $100 - and at the end - his $30 billion fortune and dismiss the daily rituals that got him from point A to point B. Those rituals, however, are what pushed Buffett's returns well above those of the crowd.
"If everybody had seen what he had seen, he wouldn't have made huge gains from his visions," Forbes magazine once wrote.
The Power of Avoiding Losses
Losses occur for three primary reasons:
1. You took bigger risks and exposed yourself to a higher probability of loss.
2. You invested in an instrument that failed to keep pace with inflation and interest rates (e.g. CDs).
3. You didn't hold the instrument long enough to let its true intrinsic value be realized.
There aren't many ways an investor can avoid periodic losses. The best way is to invest all of your assets in bonds and hold them to maturity. You would, of course, experience an erosion in the value of the bond due to inflation. If interest rates rise during your holding period, the intrinsic value of the bond would fall and the yearly coupon wouldn't compensate you for inflationary pressures.
To reduce the chance of losses, you must minimise mistakes. The fewer errors made over your investing career, the better your long-term returns.
We've seen the advantage of adding extra points of gain to your yearly returns. Earnings an extra 2% points a year on your portfolio compounds into tremendous amounts. Beating the market's presumed 11% yearly return by 2% points would translate into hundreds of thousands of dollars of extra profits over time.
The same holds true if you can avoid a loss. When you lose money, even if for just a year, you greatly erode the terminal value of your portfolio.
1. You took bigger risks and exposed yourself to a higher probability of loss.
2. You invested in an instrument that failed to keep pace with inflation and interest rates (e.g. CDs).
3. You didn't hold the instrument long enough to let its true intrinsic value be realized.
There aren't many ways an investor can avoid periodic losses. The best way is to invest all of your assets in bonds and hold them to maturity. You would, of course, experience an erosion in the value of the bond due to inflation. If interest rates rise during your holding period, the intrinsic value of the bond would fall and the yearly coupon wouldn't compensate you for inflationary pressures.
To reduce the chance of losses, you must minimise mistakes. The fewer errors made over your investing career, the better your long-term returns.
We've seen the advantage of adding extra points of gain to your yearly returns. Earnings an extra 2% points a year on your portfolio compounds into tremendous amounts. Beating the market's presumed 11% yearly return by 2% points would translate into hundreds of thousands of dollars of extra profits over time.
The same holds true if you can avoid a loss. When you lose money, even if for just a year, you greatly erode the terminal value of your portfolio.
- You consume precious resources that must be replaced.
- In addition, you waste precious time trying to make up lost ground.
- Losses also reduce the positive effects of compounding.
The effects of avoiding losses can be studied by considering 3 portfolios, A, B, and C, each of which normally gains 10% a year for 30 years. Portfolio B, obtains zero gains (0%) in years 10, 20, and 30. Portfolio C suffers a 10% loss in years 10, 20 and 30.
- A $10,000 investment in portfolio A would return $174,490 by the 30th year.
- Portfolio B would return considerably less - $131,100 - because of three break-even years. The portfolio never actually lost money, but will forever lag far behind porfolio A by virtue of having three mediocre years. Historically speaking, portfolio B's returns aren't all that bad, for the investor managed to avoid losses every year.
- Portfolio C, by contrast, loses 10% in years 10, 20, and 30. It's return of $95,572 was considerably lower. The effects of those three not-so-unreasonable years is to lop nearly $79,000 off the final value of the portfolio. That's what compounding can do. The actual loss in the 10th year was only $2,357. The loss in the 20th year was just $5,004; the final year loss was $10,619. But the power of compounding turned $17,980 in total yearly losses into $79,000 of lost opportunities.
Buffett once summarized the essence of successful investing in a simple quip:
Rule number 1: Don't lose money
Rule number 2: Don't forget rule number 1
The dollar carry-trade
Cheap dollars are sowing the seeds of the next world crisis
After years of selling cheap goods to debt-fuelled Western consumers, China now has $2 trillion dollars of foreign exchange reserves. That's 2,000 billion – a reserve haul no less 25 times bigger than that of the UK.
By Liam Halligan
Published: 6:05PM BST 12 Sep 2009
Comments 25 Comment on this article
In a world of systemic instability, reserves mean power. Reserves mean you can defend your currency, stabilise your banking system and boost your economy without resorting to yet more borrowing – or, worse still, the printing press.
More than half of China's reserves are denominated in dollars. So when the dollar falls, China loses serious money. When you're talking about a dollar-reserve number involving 12 zeros, even a modest weakening of the greenback sees China's wealth takes a mighty hit.
In recent years, America has run massive budget and trade deficits, both of which put downward pressure on the dollar – so devaluing China's reserves. Beijing has remained tight-lipped, worried less about diplomatic niceties than the financial implications of voicing its concerns. If the markets thought China would buy less dollar-denominated debt going forward, the US currency would weaken further, compounding Beijing's wealth-loss.
American leaders have relied on this Catch-22 for some time, guffawing that China is in so deep it has no choice but to carry on "sucking-up" US debt. But Beijing's Communist hierarchy is now so worried about America's wildly expansionary monetary policy that it is speaking out, despite the damage that does to the value of China's reserves.
Last weekend, Cheng Siwei, a leading Chinese policy maker, said that his country's leaders were "dismayed" by America's recourse to quantitative easing. "If they keep printing money to buy bonds, it will lead to inflation," he said. "So we'll diversify incremental reserves into euros, yen and other currencies".
This is hugely significant. China is now more worried about America inflating away its debts than about those debts being exposed to currency risk. Economists at Western banks making money from QE still say deflation is more likely than inflation. As this column has long argued, they are talking self-serving tosh.
The entire non-Western world rightly sees serious inflationary pressures down the track in the US, UK and other nations where political cowardice has resulted in irresponsible money printing.
Following Mr Cheng's comments, the dollar fell throughout last week, hitting a 12-month low against the euro. As the dollar's "safe haven" status was questioned, gold surged above $1,000 an ounce to an 18-month high.
The US currency could well keep falling. America's trade deficit grew in July at the fastest rate in almost a decade. Imports exceeded exports by $32bn last month – a gap 16pc wider than the month before. One reason was that as oil prices strengthened, so did the cost of US crude imports.
Oil touched $72 a barrel last week. If the greenback weakens further, prices will keep going up. That's because crude is priced in dollars and global investors will increasingly use commodities as an anti-inflation hedge.
These forces could combine to send the dollar into freefall. US inflation would then soar and interest rates would have to be jacked up. Even if a fast-collapsing dollar is avoided, Fed rates may have to rise quickly if China is serious about dollar-divesting and the US has to sell its debt elsewhere. Under both scenarios, the world's largest economy could get caught in the stagflation trap – recession and high inflation.
Beijing doesn't want the US to stagnate. China has too much to lose. But even if China and US work together to avoid a meltdown, the currency markets could provide one anyway.
The dollar is now being used as a "carry" currency. Traders are using low Fed rates to take out cheap dollar loans, then converting the money into currencies generating higher yields.
"Carrying" credit in this way is currently the source of huge gains. No one knows the true scale, but the world has, of course, been flooded with cheap dollars.
This presents serious systemic danger. A dollar weighed down by Chinese divestment, then suppressed further by carry-trading, could easily spring back. Those who had borrowed in dollars would owe more, while their dollar-funded investments would be worth less. This "unwinding" could send financial shock around the globe.
This is what happened in 1998, when yen carry-trades went wrong, causing the collapse of Long-Term Capital Management and sparking a global slowdown.
So even if the Western world manages to fix its banking system, the Fed's money printing could well be stoking up the next financial crisis. The dollar carry-trade. You heard it here first.
Liam Halligan is chief economist at Prosperity Capital Management
http://www.telegraph.co.uk/finance/comment/liamhalligan/6179482/Cheap-dollars-are-sowing-the-seeds-of-the-next-world-crisis.html
After years of selling cheap goods to debt-fuelled Western consumers, China now has $2 trillion dollars of foreign exchange reserves. That's 2,000 billion – a reserve haul no less 25 times bigger than that of the UK.
By Liam Halligan
Published: 6:05PM BST 12 Sep 2009
Comments 25 Comment on this article
In a world of systemic instability, reserves mean power. Reserves mean you can defend your currency, stabilise your banking system and boost your economy without resorting to yet more borrowing – or, worse still, the printing press.
More than half of China's reserves are denominated in dollars. So when the dollar falls, China loses serious money. When you're talking about a dollar-reserve number involving 12 zeros, even a modest weakening of the greenback sees China's wealth takes a mighty hit.
In recent years, America has run massive budget and trade deficits, both of which put downward pressure on the dollar – so devaluing China's reserves. Beijing has remained tight-lipped, worried less about diplomatic niceties than the financial implications of voicing its concerns. If the markets thought China would buy less dollar-denominated debt going forward, the US currency would weaken further, compounding Beijing's wealth-loss.
American leaders have relied on this Catch-22 for some time, guffawing that China is in so deep it has no choice but to carry on "sucking-up" US debt. But Beijing's Communist hierarchy is now so worried about America's wildly expansionary monetary policy that it is speaking out, despite the damage that does to the value of China's reserves.
Last weekend, Cheng Siwei, a leading Chinese policy maker, said that his country's leaders were "dismayed" by America's recourse to quantitative easing. "If they keep printing money to buy bonds, it will lead to inflation," he said. "So we'll diversify incremental reserves into euros, yen and other currencies".
This is hugely significant. China is now more worried about America inflating away its debts than about those debts being exposed to currency risk. Economists at Western banks making money from QE still say deflation is more likely than inflation. As this column has long argued, they are talking self-serving tosh.
The entire non-Western world rightly sees serious inflationary pressures down the track in the US, UK and other nations where political cowardice has resulted in irresponsible money printing.
Following Mr Cheng's comments, the dollar fell throughout last week, hitting a 12-month low against the euro. As the dollar's "safe haven" status was questioned, gold surged above $1,000 an ounce to an 18-month high.
The US currency could well keep falling. America's trade deficit grew in July at the fastest rate in almost a decade. Imports exceeded exports by $32bn last month – a gap 16pc wider than the month before. One reason was that as oil prices strengthened, so did the cost of US crude imports.
Oil touched $72 a barrel last week. If the greenback weakens further, prices will keep going up. That's because crude is priced in dollars and global investors will increasingly use commodities as an anti-inflation hedge.
These forces could combine to send the dollar into freefall. US inflation would then soar and interest rates would have to be jacked up. Even if a fast-collapsing dollar is avoided, Fed rates may have to rise quickly if China is serious about dollar-divesting and the US has to sell its debt elsewhere. Under both scenarios, the world's largest economy could get caught in the stagflation trap – recession and high inflation.
Beijing doesn't want the US to stagnate. China has too much to lose. But even if China and US work together to avoid a meltdown, the currency markets could provide one anyway.
The dollar is now being used as a "carry" currency. Traders are using low Fed rates to take out cheap dollar loans, then converting the money into currencies generating higher yields.
"Carrying" credit in this way is currently the source of huge gains. No one knows the true scale, but the world has, of course, been flooded with cheap dollars.
This presents serious systemic danger. A dollar weighed down by Chinese divestment, then suppressed further by carry-trading, could easily spring back. Those who had borrowed in dollars would owe more, while their dollar-funded investments would be worth less. This "unwinding" could send financial shock around the globe.
This is what happened in 1998, when yen carry-trades went wrong, causing the collapse of Long-Term Capital Management and sparking a global slowdown.
So even if the Western world manages to fix its banking system, the Fed's money printing could well be stoking up the next financial crisis. The dollar carry-trade. You heard it here first.
Liam Halligan is chief economist at Prosperity Capital Management
http://www.telegraph.co.uk/finance/comment/liamhalligan/6179482/Cheap-dollars-are-sowing-the-seeds-of-the-next-world-crisis.html
Vietnam is a clever way to play Asia
Vietnam is a clever way to play Asia
Imagine the amount of money you would have made if you had started investing in China 10 years before the hot money started to flow. Your profits would have been absolutely phenomenal – even after the correction over the last two years.
By Garry White
Published: 5:41PM BST 12 Sep 2009
VinaCapital Vietnam Opportunities Fund
$1.71 +0.01
Questor says BUY
For investors keen on getting in ahead of the crowd, Vietnam could offer you a similar opportunity today.
For the 10 years before the credit crunch hit, Vietnam was Asia's second-fastest growing economy after China. The country tabled an average growth in GDP of 7.5pc a year. This year's government target is 5pc.
The country was hit hard by the financial crisis, but it has now started to recover – and a return to stellar growth in the next few years is very likely. Questor urges investors to buy into Vietnam now, while it is still cheap.
The country certainly has a lot going for it. It has one of the highest literacy rates in Asia, at 90pc, and the workforce is young, hard-working and optimistic.
Almost two-thirds of Vietnam's 85m people are under the age of 35 – and this should support economic growth over the medium term. A young population implies significant population growth in the future, which should stimulate demand further.
Significantly, labour in the country is even cheaper than in China, which should underpin investment in areas such as manufacturing.
A good example of the attractiveness of Vietnam was seen last week when Coca-Cola said it planned to double its investment in the country to $400m over the next three years. The company did not didn't send a minor representative to make this announcement; Muhtar Kent, Coke's chairman and chief executive, went to the country personally.
Arguably, Vietnam is now in the same position as China was a decade ago, but there are limited ways that a UK investor can invest in this fledgling economy.
The Vietnam Opportunity Fund (LSE: VOF), which is managed by country specialist VinaCapital, is one of the easiest ways for UK investors to play growth in the Asian nation.
The shares peaked at $4.78 in 2007, but the sharp risk aversion that gripped the markets means the shares have plunged significantly. They hit a low of 65 cents in December last year, but have since more than doubled to the current level.
The fund's mandate is to invest at least 70pc of its cash in Vietnam, with the remaining 30pc in China, Cambodia and Laos.
Its managers target medium to long-term capital gains with some recurring income and short-term profit taking – which appears to be a sensible strategy. The fund will invest in private companies, not just listed entities, as well as taking part in any privatisations the government proposes.
The largest portfolio constituent of this open-ended investment trust, at 7.6pc, is financial group Eximbank. It also has major holdings in HPG, a steel manufacturer, dairy group VNM, real estate group DI and fertiliser group DPM.
As of August 31, Vietnam Opportunity Fund's net asset value per share was $2.44 – up 12.2pc in just one month.
The shares can be bought as normal through your broker and the investment trust is priced in dollars. For investors seeking substantial long-term capital growth, Questor recommends an investment in this Asian market, as it is not fully recovered from the recent plunge and should return to significant growth soon. Shares in the Vietnam Opportunity Fund are a buy.
Catlin
332.8p +2.60
Questor says BUY
Lloyd's of London insurers had a good first half of the year and Catlin, the largest syndicate in the market, was no exception. The group posted a record half-year profit of $240m (£143m) as investment returns more than tripled.
In February, Questor recommended buying the shares, despite the insurer falling into the red. The group was one of many that needed a rights issue – and £200m was raised at a hefty 47pc discount. The cash call was sensible, as the company could invest in its business.
Insurance premiums had started to rise, as underwriters tried to rebuild their balance sheets following an active hurricane season in 2008 and heavy investment losses.
Since this time, market conditions have continued to improve and insurers including Amlin, Chaucer and Hiscox have benefited as returns from hedge funds and equities begin to improve. With a market capitalisation of more than £1bn, Catlin was always going to be well positioned to seize these fertile market conditions.
The company now covers about 30 different types of risks and has an international network in 17 countries across five continents.
Although short-term risks hang over the Lloyd's market – including the onset of the Atlantic hurricane season – Questor believes Catlin shares are worth buying for their impressive yield, despite the shares being 10pc below their recommendation price.
The shares are currently yielding 7.2pc and the stance remains buy.
Cisco Systems
$23.12 +0.03
Questor says TAKE PROFITS
Shares in networking group Cisco were recommended in January at $16.91. Questor argued that the group's earnings would be supported by the US stimulus package, which aimed to connect many US schools to the internet.
The recent market rally means that the shares have risen by 36pc since that time. Questor thinks that the shares are now looking fully valued and are likely to mark time from here.
After this year's recovery, they are trading on a July 2010 earnings multiple of 17.5 times which, given the fragility of the recovery, looks like a fair rating.
Although global stock markets have rallied significantly, unemployment remains a major problem in Western economies. This means that the recovery could easily be derailed.
Indeed, the gold price crossed the $1,000 barrier last week, which is potentially a warning sign of a return of risk aversion, although it could just be a function of the weakening dollar.
Nevertheless, gold tends to outperform at times of crisis, so the latest popularity of the metal is a sign of investor concern that the market has risen too far too fast.
Investors do not go broke taking profits and, with worries over dollar weakness starting to gather pace, Questor thinks now is a good time to take profits in Cisco and sell.
http://www.telegraph.co.uk/finance/markets/questor/6179041/Vietnam-is-a-clever-way-to-play-Asia.html
Imagine the amount of money you would have made if you had started investing in China 10 years before the hot money started to flow. Your profits would have been absolutely phenomenal – even after the correction over the last two years.
By Garry White
Published: 5:41PM BST 12 Sep 2009
VinaCapital Vietnam Opportunities Fund
$1.71 +0.01
Questor says BUY
For investors keen on getting in ahead of the crowd, Vietnam could offer you a similar opportunity today.
For the 10 years before the credit crunch hit, Vietnam was Asia's second-fastest growing economy after China. The country tabled an average growth in GDP of 7.5pc a year. This year's government target is 5pc.
The country was hit hard by the financial crisis, but it has now started to recover – and a return to stellar growth in the next few years is very likely. Questor urges investors to buy into Vietnam now, while it is still cheap.
The country certainly has a lot going for it. It has one of the highest literacy rates in Asia, at 90pc, and the workforce is young, hard-working and optimistic.
Almost two-thirds of Vietnam's 85m people are under the age of 35 – and this should support economic growth over the medium term. A young population implies significant population growth in the future, which should stimulate demand further.
Significantly, labour in the country is even cheaper than in China, which should underpin investment in areas such as manufacturing.
A good example of the attractiveness of Vietnam was seen last week when Coca-Cola said it planned to double its investment in the country to $400m over the next three years. The company did not didn't send a minor representative to make this announcement; Muhtar Kent, Coke's chairman and chief executive, went to the country personally.
Arguably, Vietnam is now in the same position as China was a decade ago, but there are limited ways that a UK investor can invest in this fledgling economy.
The Vietnam Opportunity Fund (LSE: VOF), which is managed by country specialist VinaCapital, is one of the easiest ways for UK investors to play growth in the Asian nation.
The shares peaked at $4.78 in 2007, but the sharp risk aversion that gripped the markets means the shares have plunged significantly. They hit a low of 65 cents in December last year, but have since more than doubled to the current level.
The fund's mandate is to invest at least 70pc of its cash in Vietnam, with the remaining 30pc in China, Cambodia and Laos.
Its managers target medium to long-term capital gains with some recurring income and short-term profit taking – which appears to be a sensible strategy. The fund will invest in private companies, not just listed entities, as well as taking part in any privatisations the government proposes.
The largest portfolio constituent of this open-ended investment trust, at 7.6pc, is financial group Eximbank. It also has major holdings in HPG, a steel manufacturer, dairy group VNM, real estate group DI and fertiliser group DPM.
As of August 31, Vietnam Opportunity Fund's net asset value per share was $2.44 – up 12.2pc in just one month.
The shares can be bought as normal through your broker and the investment trust is priced in dollars. For investors seeking substantial long-term capital growth, Questor recommends an investment in this Asian market, as it is not fully recovered from the recent plunge and should return to significant growth soon. Shares in the Vietnam Opportunity Fund are a buy.
Catlin
332.8p +2.60
Questor says BUY
Lloyd's of London insurers had a good first half of the year and Catlin, the largest syndicate in the market, was no exception. The group posted a record half-year profit of $240m (£143m) as investment returns more than tripled.
In February, Questor recommended buying the shares, despite the insurer falling into the red. The group was one of many that needed a rights issue – and £200m was raised at a hefty 47pc discount. The cash call was sensible, as the company could invest in its business.
Insurance premiums had started to rise, as underwriters tried to rebuild their balance sheets following an active hurricane season in 2008 and heavy investment losses.
Since this time, market conditions have continued to improve and insurers including Amlin, Chaucer and Hiscox have benefited as returns from hedge funds and equities begin to improve. With a market capitalisation of more than £1bn, Catlin was always going to be well positioned to seize these fertile market conditions.
The company now covers about 30 different types of risks and has an international network in 17 countries across five continents.
Although short-term risks hang over the Lloyd's market – including the onset of the Atlantic hurricane season – Questor believes Catlin shares are worth buying for their impressive yield, despite the shares being 10pc below their recommendation price.
The shares are currently yielding 7.2pc and the stance remains buy.
Cisco Systems
$23.12 +0.03
Questor says TAKE PROFITS
Shares in networking group Cisco were recommended in January at $16.91. Questor argued that the group's earnings would be supported by the US stimulus package, which aimed to connect many US schools to the internet.
The recent market rally means that the shares have risen by 36pc since that time. Questor thinks that the shares are now looking fully valued and are likely to mark time from here.
After this year's recovery, they are trading on a July 2010 earnings multiple of 17.5 times which, given the fragility of the recovery, looks like a fair rating.
Although global stock markets have rallied significantly, unemployment remains a major problem in Western economies. This means that the recovery could easily be derailed.
Indeed, the gold price crossed the $1,000 barrier last week, which is potentially a warning sign of a return of risk aversion, although it could just be a function of the weakening dollar.
Nevertheless, gold tends to outperform at times of crisis, so the latest popularity of the metal is a sign of investor concern that the market has risen too far too fast.
Investors do not go broke taking profits and, with worries over dollar weakness starting to gather pace, Questor thinks now is a good time to take profits in Cisco and sell.
http://www.telegraph.co.uk/finance/markets/questor/6179041/Vietnam-is-a-clever-way-to-play-Asia.html
8600% gains with a buy and hold strategy
Maximising gains with a buy and hold strategy
Buffett is so confident in his stock-picking ability that he is incline to continue holding an investment perpetually. Rather than lull himself into believing he can win by continually darting in and out of the market.
Buffett believes he can earn and retain more money picking a few choice companies and letting them grow over time.
"All you do is buy shares in a great business for less than the business is intrinsically worth, with managers of the highest integrity and ability. Then you hold those shares forever," he told a Forbes reporter in 1990.
To make the point, Buffett's porfolio is concentrated in a small number of companies he has owned for years.
Such patience has paid off.
Few investors can brag of attaining an 8,600 percent return on one investment because so few will hold a stock long enough to maximise the stock's potential.
Even thought the past few years has provided several stocks that surged 8,000 percent within a few years, such as Dell Computer, Qualcom, or America Online, it's doubtful that many investors reaped the full gain.
These stocks rallied so prodigiously because investors flipped them so rapidly. Turnover caused most of the gains. The majority fo investors tripped themselves up playing the market's short-term lottery.
Buffett is so confident in his stock-picking ability that he is incline to continue holding an investment perpetually. Rather than lull himself into believing he can win by continually darting in and out of the market.
Buffett believes he can earn and retain more money picking a few choice companies and letting them grow over time.
"All you do is buy shares in a great business for less than the business is intrinsically worth, with managers of the highest integrity and ability. Then you hold those shares forever," he told a Forbes reporter in 1990.
To make the point, Buffett's porfolio is concentrated in a small number of companies he has owned for years.
- - He began accumulating stock in The Washington Post in the mid-1970s until he owned 1,869,000 shares. In 1985, he sold about 10% of his holdings but has kept the remaining 1.727,765 to this day.
- - He continues to hold all 96,000,000 million shares of Gillette bought in 1989. He originally bought a preferred stock that converted into 12,000,000 shares; there have been three splits since.
- - He vows never to sell his 200,000,000 shares of Coca-Cola despite the recent slump in revenues and earnings.
- - Buffett began studying and buying shares of GEICO at the age of 21. He reportedly made a nearly 50 % gain on his first GEICO investment in a single year. Later, when Wall Street belived GEICO was on the verge of bankruptcy, Buffett began accumulating large stakes in the insurer. By 1983, he owned 6.8 million shares, which turned into more than 34 million shares - 51% of the company - by virtue of a 5 for 1 split. In August 1995, he announced he would buy the remaining 49% of GEICO and bring the company under Berkshire's umbrella.
Such patience has paid off.
- - His $45 million investment in GEICO in the 1970s became worth $2.4 billion (a 54-fold increase in 20 years) when Buffett announced he was buying the rest of the company.
- - He has held shares in The Washington Post for 27 years, over which time his $10.6 million investment grew to $930 million by the end of 1999, an 86-fold increase. During a period in which Wall Street's brokerages alternately told investors numerous times to buy and sell The Washington Post, Buffett held on for the maximum gain. Buffett has not paid a dime of capital gains taxes on The Washington Post since he sold a portion of his position in 1985.
Few investors can brag of attaining an 8,600 percent return on one investment because so few will hold a stock long enough to maximise the stock's potential.
Even thought the past few years has provided several stocks that surged 8,000 percent within a few years, such as Dell Computer, Qualcom, or America Online, it's doubtful that many investors reaped the full gain.
These stocks rallied so prodigiously because investors flipped them so rapidly. Turnover caused most of the gains. The majority fo investors tripped themselves up playing the market's short-term lottery.
Understanding Buffett's frugal convictions
Warren Buffett once joked that he spent 6% of his net worth buying his wife Susie an engagement ring, thus depriving himself of immeasurable millions in future gains.
Indeed, Buffett once was seen picking up a penny on an elevator on his way to the office and remarked to the stunned witnesses, "the beginning of the next billion."
To Warren, a $100 bill lying on a sidewalk should not be valued on its present-day worth or on the present-day efforts needed to accumulate it, but on the future value of the greenback. Suppose, for example, that Buffett could compound $100 at 25% annual rates. In 10 years, his $100 discovery would be worth $931. After 30 years, it would be worth $80,779, unadjusted for inflation.
To understand Buffett's frugal convictions, one must view them from the point of view of mathematics and by using the types of calculation just shown. To Buffett, every dollar not accumulated now or spent needlessly could have productively been turned into numerous dollars later.
Thus, everything you buy or do not buy has the potential to greatly increase or decrease your net worth, depending on the rate of return you can obtain on investments. This principle applies whether you spend money on a poorly chosen investment or on an unnecessary personal expense or luxury item.
Buffett has to make such choices because of his high opportunity costs. In contrast, a household that has no opportunity costs, that is, it doesn't invest or derives no returns from investments, may be just as well off making the various types of purchases.
A household with zero oppoortunity costs can be a net consumer with no detrimental impact to its long-term fortune, but, to Buffett, money saved is money compounded. He has been known buy 50 12-packs of Coca-Cola at once from the grocery store to get a volume discount. Each year, the money he saves buying cases of pop will ultimately increase his net worth by thousands of dollars.
Indeed, Buffett once was seen picking up a penny on an elevator on his way to the office and remarked to the stunned witnesses, "the beginning of the next billion."
To Warren, a $100 bill lying on a sidewalk should not be valued on its present-day worth or on the present-day efforts needed to accumulate it, but on the future value of the greenback. Suppose, for example, that Buffett could compound $100 at 25% annual rates. In 10 years, his $100 discovery would be worth $931. After 30 years, it would be worth $80,779, unadjusted for inflation.
To understand Buffett's frugal convictions, one must view them from the point of view of mathematics and by using the types of calculation just shown. To Buffett, every dollar not accumulated now or spent needlessly could have productively been turned into numerous dollars later.
Thus, everything you buy or do not buy has the potential to greatly increase or decrease your net worth, depending on the rate of return you can obtain on investments. This principle applies whether you spend money on a poorly chosen investment or on an unnecessary personal expense or luxury item.
Buffett has to make such choices because of his high opportunity costs. In contrast, a household that has no opportunity costs, that is, it doesn't invest or derives no returns from investments, may be just as well off making the various types of purchases.
A household with zero oppoortunity costs can be a net consumer with no detrimental impact to its long-term fortune, but, to Buffett, money saved is money compounded. He has been known buy 50 12-packs of Coca-Cola at once from the grocery store to get a volume discount. Each year, the money he saves buying cases of pop will ultimately increase his net worth by thousands of dollars.
Opportunity costs of our investments
Every dollar spent on a single item is a dollar unavailable for other items. That dollar must provide a suitable return - measured against what you could have earned on tha dollar somewhere else.
Investors should look at their investments similarly.
Because the market tempts us with thousands of potential investments each day, we tend to screen our stock choices until we find those that meet our risk and return characteristics. Likewise, we've learned to benchmark our investments by comparing their performance against the S&P 500 index or some other proxy.
If your portfolio rose just 8% in a year in which the S&P 500 index rose 20%, the opportunity cost on your money was great - you lost the chance at an extra 12 percent a year because the investments you chose did poorly.
Investors should look at their investments similarly.
Because the market tempts us with thousands of potential investments each day, we tend to screen our stock choices until we find those that meet our risk and return characteristics. Likewise, we've learned to benchmark our investments by comparing their performance against the S&P 500 index or some other proxy.
If your portfolio rose just 8% in a year in which the S&P 500 index rose 20%, the opportunity cost on your money was great - you lost the chance at an extra 12 percent a year because the investments you chose did poorly.
Look at all spending decisions as opportunities - won or lost
Most individuals these days are astute enough to understand the power of time and understand the need to fund their own retirement rather than to rely on government programs whose long-term viability don't seem guaranteed anymore.
However, compounding works two ways.
An investment that compounds at, say, 20% annual rates, will swell into a tremendous amount after 30 years.
Conversely, a missed opportunity that could have compounded at 20% a year has the opposite effect on your portfolio. A poorly chosen stock tha rises just 5% a year ultimately costs you tens of thousands of dollars in lost opportunities.
Money that is misspent today and not invested can have the same injurious effect on your future net worth.
At any given moment, you have tens of thousands of investment opportunities worldwide from which to choose. You may decide to put your available cash into shares of Intel or into a home remodeliing project. You may decide to spend $50 at a restaurant, or on a new pair of slacks, or on a new golf putter. You may be faced with the choice of buying a new automobile or funding a college account for a chld. No matter how you choose, every possible use of your money must bring a return - tangible or intangible - or else you should not spend the money. When making the choice of buying, say, shares of Intel or new carpeting, you must think about the opportunity costs of the money spent.
As an investor, you must also look at all spending decisions as opportunities - won or lost. Every dollar spent on a single item is a dollar unavailable for other items. That dollar must provide a suitable return - measured against what you could have earned on that dollar somewhere else.
However, compounding works two ways.
An investment that compounds at, say, 20% annual rates, will swell into a tremendous amount after 30 years.
Conversely, a missed opportunity that could have compounded at 20% a year has the opposite effect on your portfolio. A poorly chosen stock tha rises just 5% a year ultimately costs you tens of thousands of dollars in lost opportunities.
Money that is misspent today and not invested can have the same injurious effect on your future net worth.
At any given moment, you have tens of thousands of investment opportunities worldwide from which to choose. You may decide to put your available cash into shares of Intel or into a home remodeliing project. You may decide to spend $50 at a restaurant, or on a new pair of slacks, or on a new golf putter. You may be faced with the choice of buying a new automobile or funding a college account for a chld. No matter how you choose, every possible use of your money must bring a return - tangible or intangible - or else you should not spend the money. When making the choice of buying, say, shares of Intel or new carpeting, you must think about the opportunity costs of the money spent.
As an investor, you must also look at all spending decisions as opportunities - won or lost. Every dollar spent on a single item is a dollar unavailable for other items. That dollar must provide a suitable return - measured against what you could have earned on that dollar somewhere else.
Virtually anyone can evolve into a millionaire
Mathematics also shows us that virtually anyone can evolve into a millionaire through patient, diligent investing.
An individual who socks away a few thousand dollars every year starting at the age of 21 can easily amass $1 million by retirement. The power of time and the power of compounding ensure that any individual who can save money consistently can attain a decent degree of wealth by the age of 65 or 70.
If that same individual can manage to save an extra few thousand dollars more each year, the pile of assets attained at retirement would be much larger.
If that individual manages to earn a few extra percentage points of gain each year, either through good stock-picking or wise account management, the amount of money earned at the end is many times greater.
An individual who socks away a few thousand dollars every year starting at the age of 21 can easily amass $1 million by retirement. The power of time and the power of compounding ensure that any individual who can save money consistently can attain a decent degree of wealth by the age of 65 or 70.
If that same individual can manage to save an extra few thousand dollars more each year, the pile of assets attained at retirement would be much larger.
If that individual manages to earn a few extra percentage points of gain each year, either through good stock-picking or wise account management, the amount of money earned at the end is many times greater.
Columbus's four voyages to the Caribbean
The Joys of Compounding
In Buffett's annual report to partners for the year ending in 1962, he broke cadence from his routine review of the market to discuss "The Joys of Compounding." Anyone reading this passage, even four decades after Buffett penned it, could see the raw-boned logic behind the 32-year-old Buffett's stubborn frugality. As he saw it, every dollar put to productive use magnifies the benefit to society by virtue of compounding. Wasting that dollar had serious long-term ramifications - for him, his partners, even for society at large. What if, Buffett mused in his letter, Spain had decided not to finance Christopher Columbus? The results would be staggering.
In financial terms, Columbus's four voyages to the Caribbean yielded very little for the crown, except to pave the way for generations of future navigators. Think how that $30,000 (cost of the voyage Isabella originally underwrote for Columbus), if spent more judiciously by Spain in the late 15th century, could have greatly increased the wealth of the Spanish people. By 1999, 37 years after Buffett made the analogy, Isabella's $30,000 expenditure could have compounded into more than $8 trillion, nearly the total annual economic output of the United States. Spain would be a world economic powerhouse today.
On this topic, Buffett is behaving as any rational CEO would. If a company generates a high return on its assets, it should withhold dividends to investors and plow as much money as it can each year back into the business. Only when it can no longer generate a strong internal return should a company think about returning money to shareholders.
It's very doubtful that recipients of his wealth could have compounded their largesse at the rate Buffett did. Isn't it better, Buffett believes, to forego conspicuous consumption today if it means leaving even larger amounts for society tomorrow?
"My money represents an enormous number of claims checks on society. It's like I have these little pieces of paper that I can turn into consumption," Buffett told Esquire magazine in 1988. "If I wanted to, I could hire 10,000 people to do nothing but paint my picture every day for the rest of my life. And the (Gross Domestic Product) would go up. But the utility of the product would be zilch, and I would be keeping those 10,000 people from doing AIDS research, or teaching or nursing."
In Buffett's annual report to partners for the year ending in 1962, he broke cadence from his routine review of the market to discuss "The Joys of Compounding." Anyone reading this passage, even four decades after Buffett penned it, could see the raw-boned logic behind the 32-year-old Buffett's stubborn frugality. As he saw it, every dollar put to productive use magnifies the benefit to society by virtue of compounding. Wasting that dollar had serious long-term ramifications - for him, his partners, even for society at large. What if, Buffett mused in his letter, Spain had decided not to finance Christopher Columbus? The results would be staggering.
In financial terms, Columbus's four voyages to the Caribbean yielded very little for the crown, except to pave the way for generations of future navigators. Think how that $30,000 (cost of the voyage Isabella originally underwrote for Columbus), if spent more judiciously by Spain in the late 15th century, could have greatly increased the wealth of the Spanish people. By 1999, 37 years after Buffett made the analogy, Isabella's $30,000 expenditure could have compounded into more than $8 trillion, nearly the total annual economic output of the United States. Spain would be a world economic powerhouse today.
On this topic, Buffett is behaving as any rational CEO would. If a company generates a high return on its assets, it should withhold dividends to investors and plow as much money as it can each year back into the business. Only when it can no longer generate a strong internal return should a company think about returning money to shareholders.
It's very doubtful that recipients of his wealth could have compounded their largesse at the rate Buffett did. Isn't it better, Buffett believes, to forego conspicuous consumption today if it means leaving even larger amounts for society tomorrow?
"My money represents an enormous number of claims checks on society. It's like I have these little pieces of paper that I can turn into consumption," Buffett told Esquire magazine in 1988. "If I wanted to, I could hire 10,000 people to do nothing but paint my picture every day for the rest of my life. And the (Gross Domestic Product) would go up. But the utility of the product would be zilch, and I would be keeping those 10,000 people from doing AIDS research, or teaching or nursing."
Letting money compound productively creates an enormous economic benefit.
Postulating the value of assets into the future holds meaning for investors who, if they're fortunate, can live many decades. Letting money compound productively creates an enormous economic benefit, not only to investors but also to their benefactors and to society at large.
Buffett is occasionally criticized for not donating more of his wealth to foundations and charities, as many other tycoons have. Buffett's reasoning, however, is perfectly consistent with his investing philosophy. As long as he can continue to compound money at great rates, society would be better off if he didn't give away money now.
He told Ted Koppel in a 1999 Nighline interview, for example, that if he had donated most of his money 20 years ago, society would have been $100 million richer. Because he chose not to donate, society will one day receive more than $30 billion.
Had he given away $100 million in the 1970s, it's very doubtful that recipients could ahve produced $30 billion in economic benefits for society becasue few people alive can compound money as Buffett can.
One day, the value of Buffett's foundation grants will certainly surpass $100 billion and then $200 billion, which would make Buffett's fortune the largest ever donated to charity.
Buffett is occasionally criticized for not donating more of his wealth to foundations and charities, as many other tycoons have. Buffett's reasoning, however, is perfectly consistent with his investing philosophy. As long as he can continue to compound money at great rates, society would be better off if he didn't give away money now.
He told Ted Koppel in a 1999 Nighline interview, for example, that if he had donated most of his money 20 years ago, society would have been $100 million richer. Because he chose not to donate, society will one day receive more than $30 billion.
Had he given away $100 million in the 1970s, it's very doubtful that recipients could ahve produced $30 billion in economic benefits for society becasue few people alive can compound money as Buffett can.
One day, the value of Buffett's foundation grants will certainly surpass $100 billion and then $200 billion, which would make Buffett's fortune the largest ever donated to charity.
Let time work to your advantage
Choosing good companies at fair prices seldom has produced losses for investors willing to wait patiently for the stock price to track the growth of the company.
"Time is the friend of the good business, the enemy of the poor," Buffett has said many times.
Strong enterprises see their intrinsic value rise consistently, lifting the stock every step of the way. Over a period of 5 years or more, there should be a very close correlation between the change in the value of the company and the change in the stock. Watching great companies increase their sales and earnings consistently is a dream come true for an investor.
The power of compounding begins working its magic as the years progress and allows your net worth to gather momentum and increase (in dollar value) by greater and greater amounts.
What happens to money that is allowed to sit and grow at different rates? Two principles should be readily apparent:
1. Time has a tremendous effect on terminal wealth. The longer that money can compound, the larger the sum will be.
2. The rate of return attained acts as a lever that magnifies or minimises your ultimate wealth. Adding just a few extra percentage points a year to your overall returns can have unfathomable consequences to your wealth. An investor who compounds $1 at 6 percent annual rates has $5.74 in his pocket at the end of 30 years. The same investor who can find ways to obtain higher returns (the purpose of posting all these materials here :-) ) walks away with much more. If you can obtain a 10 percent annual return, your $1 compounds into $17.45 in 30 years. Compounding $1 at 20 percent annual rates compounds into $237.
The mathematics of compounding excited Buffett in his earliest years, and stories abound of how he memorised compounding and annuity tables to help him calculate an investment's merit and to keep his personal portfolio on a straight upward track.
"Time is the friend of the good business, the enemy of the poor," Buffett has said many times.
Strong enterprises see their intrinsic value rise consistently, lifting the stock every step of the way. Over a period of 5 years or more, there should be a very close correlation between the change in the value of the company and the change in the stock. Watching great companies increase their sales and earnings consistently is a dream come true for an investor.
The power of compounding begins working its magic as the years progress and allows your net worth to gather momentum and increase (in dollar value) by greater and greater amounts.
What happens to money that is allowed to sit and grow at different rates? Two principles should be readily apparent:
1. Time has a tremendous effect on terminal wealth. The longer that money can compound, the larger the sum will be.
2. The rate of return attained acts as a lever that magnifies or minimises your ultimate wealth. Adding just a few extra percentage points a year to your overall returns can have unfathomable consequences to your wealth. An investor who compounds $1 at 6 percent annual rates has $5.74 in his pocket at the end of 30 years. The same investor who can find ways to obtain higher returns (the purpose of posting all these materials here :-) ) walks away with much more. If you can obtain a 10 percent annual return, your $1 compounds into $17.45 in 30 years. Compounding $1 at 20 percent annual rates compounds into $237.
The mathematics of compounding excited Buffett in his earliest years, and stories abound of how he memorised compounding and annuity tables to help him calculate an investment's merit and to keep his personal portfolio on a straight upward track.
If the Indians wanted to buy back Manhattan
There's the story that, if the Indians wanted to buy back Manhattan, they would have had to pay more than $2.5 trillion by January 1, 2000. That's what the $24 sale price in 1626 would have compounded into at 7 percent annual rates. And the clock keeps ticking.
Next year, Manhattan's theoretical value jumps by $175 billion (7 percent of $2.5 trillion). The following year, another $187 billion is added. The year after that, $200 billion, and so on.
Letting wealth accumulate and compound unfettered and, if possible, untaxed is a potent formula individuals should use to increase their standard of living.
It goes without saying that to an investor, the power of compounding is paramount.
Next year, Manhattan's theoretical value jumps by $175 billion (7 percent of $2.5 trillion). The following year, another $187 billion is added. The year after that, $200 billion, and so on.
Letting wealth accumulate and compound unfettered and, if possible, untaxed is a potent formula individuals should use to increase their standard of living.
It goes without saying that to an investor, the power of compounding is paramount.
The Power of Compounding
No force exerts more influence on your portfolio than time. Time takes a bigger toll on your terminal wealth than do taxes, inflation and poor stock-picking combined. Time magnifies the effects of these critical issues.
A poorly chosen stock may cost you only $2,000 in losses today, but over time that one suspect decision could cost $50,000 in lost opportunities.
Trading frequently for short-term gains may net you strong gains periodically, but the overall result, validated by time, is to create an enormous tax burden that could have been avoided.
Likewise, persistent inflation exacts a weighty toll on your portfolio becasue it destroys value at increasing rates.
Means and end should not be confused. Buffett once wrote to his partners, "The end is to come away with the largest after-tax rate of compound."
A poorly chosen stock may cost you only $2,000 in losses today, but over time that one suspect decision could cost $50,000 in lost opportunities.
Trading frequently for short-term gains may net you strong gains periodically, but the overall result, validated by time, is to create an enormous tax burden that could have been avoided.
Likewise, persistent inflation exacts a weighty toll on your portfolio becasue it destroys value at increasing rates.
Means and end should not be confused. Buffett once wrote to his partners, "The end is to come away with the largest after-tax rate of compound."
Lost Opportunities
A poorly chosen stock may cost you only $2,000 in losses today, but over time that one suspect decision could cost $50,000 in lost opportunities.
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