25 Best Warren Buffett Quotes on His Strategies, Investments, and Cheap Suits
Posted by Admin in KLSE Talk on 09 16th, 2009
He's called the Oracle of Omaha, and for good reason: not only is he one of the best investors of all time, but hes also a witty communicator.
Here are twenty-five awesome quotes from the man himself. I find these quotes to be especially comforting when youre financially depressed after all, he views a market slump as a good thing!so I hope these can remind everyone that we just need to do the basics, and well be OK. Be a consistent net saver, buy the market through ups and downs, be a decent human being, and rest easy.
On Investing
- Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.
- Its far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
- Only buy something that youd be perfectly happy to hold if the market shut down for 10 years.
- We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.
- Why not invest your assets in the companies you really like? As Mae West said, Too much of a good thing can be wonderful.
On Success
- Of the billionaires I have known, money just brings out the basic traits in them. If they were jerks before they had money, they are simply jerks with a billion dollars.
- The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.
- You do things when the opportunities come along. Ive had periods in my life when Ive had a bundle of ideas come along, and Ive had long dry spells. If I get an idea next week, Ill do something. If not, I wont do a damn thing.
- Can you really explain to a fish what its like to walk on land? One day on land is worth a thousand years of talking about it, and one day running a business has exactly the same kind of value.
- You only have to do a very few things right in your life so long as you dont do too many things wrong.
On Helping Others
- If youre in the luckiest 1 per cent of humanity, you owe it to the rest of humanity to think about the other 99 per cent.
- It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, youll do things differently.
- I dont have a problem with guilt about money. The way I see it is that my money represents an enormous number of claim checks on society. Its like I have these little pieces of paper that I can turn into consumption. 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 GNP 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. I dont do that though. I dont use very many of those claim checks. Theres nothing material I want very much. And Im going to give virtually all of those claim checks to charity when my wife and I die.
- Its class warfare, my class is winning, but they shouldnt be.
- My family wont receive huge amounts of my net worth. That doesnt mean theyll get nothing. My children have already received some money from me and Susie and will receive more. I still believe in the philosophy – FORTUNE quoted me saying this 20 years ago – that a very rich person should leave his kids enough to do anything but not enough to do nothing.
On Life
- Chains of habit are too light to be felt until they are too heavy to be broken.
- We enjoy the process far more than the proceeds.
- You only find out who is swimming naked when the tide goes out.
- Someones sitting in the shade today because someone planted a tree a long time ago.
- A public-opinion poll is no substitute for thought.
Funny Ones
- A girl in a convertible is worth five in the phonebook.
- When they open that envelope, the first instruction is to take my pulse again.
- We believe that according the name investors to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a romantic.
- When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.
- In the insurance business, there is no statute of limitation on stupidity.
http://klse.talkmalaysia.com/2009/09/25-best-warren-buffett-quotes-on-his-strategies-investments-and-cheap-suits/
Wednesday 16 September 2009
Tong Herr to set up a RM632m JV steel billet plant in Vietnam
Tong Herr to set up a RM632m JV steel billet plant in Vietnam
Written by Financial Daily
Tuesday, 25 August 2009 10:21
KUALA LUMPUR: TONG HERR RESOURCES BHD [] is teaming up with four individuals of a Taiwanese family to set up a steel billet manufacturing plant in Vietnam with an investment cost of US$180 million (RM631.8 million).
Tong Herr said yesterday it had entered into a shareholders’ agreement with Tsai Ching-Tung, Tsai Min Ti, Tsai Hung-Chuan and Tsai Yi Ting for the proposed joint venture (JV) in Fuco International Ltd.
The parties had earlier agreed to cooperate in the establishment of the steel billet manufacturing business in Vietnam through Fuco Steel Corporation Ltd.
It said Fuco Steel was granted an investment approval on April 2, 2007 by the BaRia VungTau Industrial Zone Authority to produce steel billets in Vietnam.
Subsequently, Fuco Steel had on March 18, 2008 entered into a land sub-leasing contract, amended on April 20, 2009, with the Ministry of CONSTRUCTION [], Vietnam Urban and Industrial Zone Development Investment Corporation to sublease a land measuring about 304,067 square metres at Phu My II Industrial Zone, Tan Thanh District, BaRia VungTau Province for the proposed plant. The duration of the land sublease is until June 29, 2055.
Fuco International’s current shareholders are the Tsai family members. Pursuant to the agreement, Tong Herr would subscribe for a 37.04% stake comprising 18,518 shares for a total of US$19.99 million cash.
Tong Herr said the JV parties would make a total cash investment of US$54 million via the subscription of new shares of US$1,080 each in Fuco International, which in turn will be injected into Fuco Steel, while Tong Hwei Investment Ltd will invest US$6 million cash in Fuco Steel.
It said the balance of US$120 million would be financed by Fuco Steel via borrowings from financial institutions.
Fuco International will have a 90% stake in Fuco Steel, while Tong Hwei will hold the balance 10%. Tong Herr expects the plant to be operational by 2011.
Tong Herr said it would finance its obligations of US$19.99 million from internal funds.
It said the proposed JV was consistent with its objective of seeking various strategic alliances and joint venture for synergistic benefits to enable it to expand into the steel billet manufacturing industry and enter into new overseas market.
“The proposed JV also represents a good opportunity for the group to further expand its revenue in terms of going upstream in the steel industry and hence, to further broaden its earnings base,” it said.
Tong Herr said the investment certificate offered tax incentives such as corporate income tax exemption for the first four years. Fuco Steel was liable to pay corporate income tax, an annual corporate income tax of 5%, instead 10%, for the following nine years, representing a 50% discount from the annual corporate income tax of 10%, tax of 10% for the following two years and 28% annual corporate income tax for the following years as well as other investment incentives.
This article appeared in The Edge Financial Daily, August 25, 2009.
Written by Financial Daily
Tuesday, 25 August 2009 10:21
KUALA LUMPUR: TONG HERR RESOURCES BHD [] is teaming up with four individuals of a Taiwanese family to set up a steel billet manufacturing plant in Vietnam with an investment cost of US$180 million (RM631.8 million).
Tong Herr said yesterday it had entered into a shareholders’ agreement with Tsai Ching-Tung, Tsai Min Ti, Tsai Hung-Chuan and Tsai Yi Ting for the proposed joint venture (JV) in Fuco International Ltd.
The parties had earlier agreed to cooperate in the establishment of the steel billet manufacturing business in Vietnam through Fuco Steel Corporation Ltd.
It said Fuco Steel was granted an investment approval on April 2, 2007 by the BaRia VungTau Industrial Zone Authority to produce steel billets in Vietnam.
Subsequently, Fuco Steel had on March 18, 2008 entered into a land sub-leasing contract, amended on April 20, 2009, with the Ministry of CONSTRUCTION [], Vietnam Urban and Industrial Zone Development Investment Corporation to sublease a land measuring about 304,067 square metres at Phu My II Industrial Zone, Tan Thanh District, BaRia VungTau Province for the proposed plant. The duration of the land sublease is until June 29, 2055.
Fuco International’s current shareholders are the Tsai family members. Pursuant to the agreement, Tong Herr would subscribe for a 37.04% stake comprising 18,518 shares for a total of US$19.99 million cash.
Tong Herr said the JV parties would make a total cash investment of US$54 million via the subscription of new shares of US$1,080 each in Fuco International, which in turn will be injected into Fuco Steel, while Tong Hwei Investment Ltd will invest US$6 million cash in Fuco Steel.
It said the balance of US$120 million would be financed by Fuco Steel via borrowings from financial institutions.
Fuco International will have a 90% stake in Fuco Steel, while Tong Hwei will hold the balance 10%. Tong Herr expects the plant to be operational by 2011.
Tong Herr said it would finance its obligations of US$19.99 million from internal funds.
It said the proposed JV was consistent with its objective of seeking various strategic alliances and joint venture for synergistic benefits to enable it to expand into the steel billet manufacturing industry and enter into new overseas market.
“The proposed JV also represents a good opportunity for the group to further expand its revenue in terms of going upstream in the steel industry and hence, to further broaden its earnings base,” it said.
Tong Herr said the investment certificate offered tax incentives such as corporate income tax exemption for the first four years. Fuco Steel was liable to pay corporate income tax, an annual corporate income tax of 5%, instead 10%, for the following nine years, representing a 50% discount from the annual corporate income tax of 10%, tax of 10% for the following two years and 28% annual corporate income tax for the following years as well as other investment incentives.
This article appeared in The Edge Financial Daily, August 25, 2009.
Monday 14 September 2009
*****Warren Buffett's commonsense approach to valuing the stock market
Warren Buffett does not possess a magic formula for determining when the stock market is grossly overvalued or undervalued. By all accounts, his decisions to plunge into or escape from the market are based on several commonsense factors.
1. The relationship between stock yields and bond yields.
2. The rate of climb in the world.
3. Earnings multiples.
4. The state of the economy.
5. The big picture.
----
1. The relationship between stock yields and bond yields.
EY = 1/PE
Bond yields = Coupon rate
- Buffett covets stocks that offer earnings yields that can surpass bond yields over time. (EY of stock > Bond yields)
- When bond yields are rising and threaten to overtake stock yields, the market is generally overvalued. (Bond yields > EY of stock)
- When stocks fall to the point where their earnings yields are above bond yields, they are most attractive. (EY of stock > Bond yields)
2. The rate of climb in the market.
History tells us that the stock market cannot outperform the economy for very long. That is, you shouldn't expect corporate sales, earnings, or share prices to rise at rates in excess of economic output.
- If stock prices are rising at, say, four times the rate the economy is expanding, the market is primed for a fall at some point.
- Conversely, if stock prices are falling while the economy is surging, an undervalued condition may be opening up.
3. Earnings multiples.
In 1982, the PE ratio for the S&P 500 index was just 7 (Americans were willing to pay just $7 for every $1 corporations earned on their behalf).
By mid-1999, Americans were willing to pay $34 for every $1 of earnings generated by these same companies.
What explained the disparity?
- Falling interest rates accounted for some of the increase in PE ratios. Declining rates make every $1 of earnings worth more to an investor.
- Improved profitability also accounted for some of the increase in PE. By the late 1990s, corporate returns on equity and assets had reached 70-year highs. It stood to reason that $1 of earnings carried more value because corporations could reinvest earnings at high rates.
- Yet the majority of the climb in stock prices can be attributed to emotion - the sheer willingness of investors to pay higher and higher prices without regard to value.
4. The state of the economy.
When the economy is running full throttle and there seems to be little chance of it sustaining present growth rates, investors should ponder whether to decrease their exposure to the stock market and find alternatives.
Likewise, during tough economic times, stocks usually fall to bargain levels and offer high rate-of-return potential. Using Buffett's 15% rule, you can quickly gauge whether stocks are worthy of holding.
The general rule is to buy during a recession (when PE ratios are at their lowest) and to sell when the economy can't get any stronger (and PE ratios are their highest).
5. The big picture
Because Buffett endeavors to hold a stock for several years or more, he must take a more holistic view of companies, industries, and the entire market before buying.
Buffett won't buy or sell a stock in response to near-term changes in a company's profitability, nor will he pin his hopes on a sector "catching fire" on Wall Street to sell at a higher price.
Instead, he assesses longer-term fundamentals in the economy and the market and examines whether those fundamentals can support higher stock prices. If a stock doesn't offer the potential rate of return he seeks, he is likely to sell the security or avoid buying.
http://spreadsheets.google.com/pub?key=t7u4BYlpDKstozulNims5Hw&output=html
From the above spreadsheet, Buffett prefers to play an economic cycle to the fullest, whenever possible.
- During a recession, when nearly all US industries are experiencing a downturn, Buffett is apt to load up on numerous stocks, knowing that several consecutive years of improved profitability lie ahead.
- When the economy peaks and odds favour an eventual slowdown, selling is the prudent course.
- When stocks fall to the point where their earnings yields (1/PE) are above bond yields, they are most attractive. (EY of stock > Bond yield)
Buffett's success in gauging market conditions and profiting from them
Buffett - whether by accident or calculation - must be recognized as one of the most astute market timers in history.
His ability to sense great perils in the market or see great opportunity when others see peril sets him apart from even the legendary market timers such as George Soros or Michael Steinhardt. It is also a chief reason he rarely suffers a yearly loss in his portfolio. His ability to find bargain stocks is well documented. Less known is his success in gauging market conditions and profiting from them. When Buffett begins talking up or down the market, it pays to listen.
His form of market timing is similar to Wayne Gretzsky's approach to hockey - don't go where the puck is, go where it's going to be. The great investors of the twentieth century all seemed to have a penchant for discovering undervalued securities, but they also were forward looking.
When a recession was under way, they didn't brood. They looked for signs that a recovery was at hand. And when the economy was strong, they stayed mindful of the risk of a slowdown and planned accordingly. When playing the market, they looked for catalysts that could propel an industry ahead, even when Wall Street had turned negative on the sector. Conversely, they wouldn't wait for boom times to end but would sell ahead of others.
Click: http://spreadsheets.google.com/pub?key=t7u4BYlpDKstozulNims5Hw&output=html
Warren Buffett owes his success through the years as much to what he didn't buy as to what he did. Likewise, what he sold - and when he sold it - played just as prominent a role in his returns as did decisions to buy and hold Coca-Cola, GEICO, or Gillette. Whitney Tilson of Tilson Capital Partners in New York, a frequent columnist to The Motley Fool website, reminds us that Buffett made no fewer than four distinct market-timing calls in his career, each of which proved correct and highly profitable.
MARKET CALL 1: SELLING OUT BEFORE THE EARLY 1970s BEAR MARKET.
MARKET CALL 2: GOING LONG IN 1974
MARKET CALL 3: SEEING THE OPPORTUNITIES THAT WOULD OPEN UP IN THE 1980s
MARKET CALL 4: AVOIDING THE 1987 CRASH
Again and again, Warren Buffett will tell you that he is not concerned about day-to-day fluctuations in the stock market. It doesn't matter to him whether the Dow Industrials rises 300 points in a single day or falls by the same amount. He doesn't care whether the interest rates rose or fell for the day, or whether his portfolio declined $200 million in value (a frequent occurrence in 1999, by the way). "The market is there only as a reference point to see if anybody is offering to do anything foolish," he was quoted saying in 1988, "When we invest in stocks, we invest in buisinesses."
His ability to sense great perils in the market or see great opportunity when others see peril sets him apart from even the legendary market timers such as George Soros or Michael Steinhardt. It is also a chief reason he rarely suffers a yearly loss in his portfolio. His ability to find bargain stocks is well documented. Less known is his success in gauging market conditions and profiting from them. When Buffett begins talking up or down the market, it pays to listen.
His form of market timing is similar to Wayne Gretzsky's approach to hockey - don't go where the puck is, go where it's going to be. The great investors of the twentieth century all seemed to have a penchant for discovering undervalued securities, but they also were forward looking.
When a recession was under way, they didn't brood. They looked for signs that a recovery was at hand. And when the economy was strong, they stayed mindful of the risk of a slowdown and planned accordingly. When playing the market, they looked for catalysts that could propel an industry ahead, even when Wall Street had turned negative on the sector. Conversely, they wouldn't wait for boom times to end but would sell ahead of others.
Click: http://spreadsheets.google.com/pub?key=t7u4BYlpDKstozulNims5Hw&output=html
Warren Buffett owes his success through the years as much to what he didn't buy as to what he did. Likewise, what he sold - and when he sold it - played just as prominent a role in his returns as did decisions to buy and hold Coca-Cola, GEICO, or Gillette. Whitney Tilson of Tilson Capital Partners in New York, a frequent columnist to The Motley Fool website, reminds us that Buffett made no fewer than four distinct market-timing calls in his career, each of which proved correct and highly profitable.
MARKET CALL 1: SELLING OUT BEFORE THE EARLY 1970s BEAR MARKET.
MARKET CALL 2: GOING LONG IN 1974
MARKET CALL 3: SEEING THE OPPORTUNITIES THAT WOULD OPEN UP IN THE 1980s
MARKET CALL 4: AVOIDING THE 1987 CRASH
Again and again, Warren Buffett will tell you that he is not concerned about day-to-day fluctuations in the stock market. It doesn't matter to him whether the Dow Industrials rises 300 points in a single day or falls by the same amount. He doesn't care whether the interest rates rose or fell for the day, or whether his portfolio declined $200 million in value (a frequent occurrence in 1999, by the way). "The market is there only as a reference point to see if anybody is offering to do anything foolish," he was quoted saying in 1988, "When we invest in stocks, we invest in buisinesses."
Buffett: Keeping abreast of market conditions
Market Call 1: Selling Out Before the Early 1970s bear market
Beginning in 1968: Buffett began to express sincere worries over stock prices. Writing near the peak of the go-go market of the 1960s, Buffett seemed to sense imminent danger to investors.
1969: Unable to find enough quality stocks at reasonable prices, he folded his investment partnership in 1969, acknowledging that his form of diligent, research-intensive stock-picking couldn't compete in a momentum-fed, short-term oriented market. "Spectacular amounts of money are being made by those participating in the chain-letter type stock-promotion vogue," he wrote his clients. "The game is being played by the gullible, the self-hypnotized, and the cynical."
"I believed the odds are good that, when the stock market and business history of this period is being written, this phenomenon regarded as of major importance, and perhaps characterized as a mania." Frustrated by the lack of sensible pricing and the inability of value-oriented managers to make headway amid a sea of momentum value fund managers, Buffett liquidated clients' accounts, put most of his personal wealth into Berkshire Hathaway stock, and stayed mostly out of the money-management business for almost 5 years. He stayed on the sidelines while Americans experienced the most brutal bear market since the crash of 1929 to 1933.
1973 - 1974: The market declined more than 60% during the crash of 1973 to 1974.
Market Call 2: Going Long in 1974
1968: Market peaked.
1973-1974: Five years after the market had peaked, most Americans had turned disillusioned by the stock market. The average portfolio had dropped 40% or more in value. Investors holding the great blue chips of the day - Xerox, Walt Disney, IBM, General Motors, and Sears Roebuck, for example - saw their portfolios decline more than 60% during the crash of 1973 - 1974.
To investors caught in the middle, it seemed like there was no end to the panic selling. Some individuals tried holding their stocks, waiting for a rebound that never took place. Exhausted, they gave in and sold after watching their portfolios lose 50% of their value. The rest took their cues from the market itself. Daily declines reinforced a selling mentality: Selling begat selling, and an orderly market turned into a vicious cylce of losses.
1974: At the bottom, in 1974, few investors could be coaxed to reenter the arena. But Buffett, refreshed from a 5-year hiatus and sitting on plenty of cash, dove headlong into the same stocks the market could no longer tolerate. Like a boy in a candy store, Buffett found more values than he could possibly digest. An investor who plunged into the market at the 1974 low made a 74% return within 2 years.
Comment:
Buffett has a good understanding of market conditions. He has the ability to value stocks and know when stocks and market are overpriced. His action in completely getting out of the market was interesting. His patience in staying on the sideline was remarkable too. How many could stay in the sideline without reentering at the slightest correction? How remarkable it was too that he chose the depth of the market in 1974 to reenter. Superb ability indeed!
Beginning in 1968: Buffett began to express sincere worries over stock prices. Writing near the peak of the go-go market of the 1960s, Buffett seemed to sense imminent danger to investors.
1969: Unable to find enough quality stocks at reasonable prices, he folded his investment partnership in 1969, acknowledging that his form of diligent, research-intensive stock-picking couldn't compete in a momentum-fed, short-term oriented market. "Spectacular amounts of money are being made by those participating in the chain-letter type stock-promotion vogue," he wrote his clients. "The game is being played by the gullible, the self-hypnotized, and the cynical."
"I believed the odds are good that, when the stock market and business history of this period is being written, this phenomenon regarded as of major importance, and perhaps characterized as a mania." Frustrated by the lack of sensible pricing and the inability of value-oriented managers to make headway amid a sea of momentum value fund managers, Buffett liquidated clients' accounts, put most of his personal wealth into Berkshire Hathaway stock, and stayed mostly out of the money-management business for almost 5 years. He stayed on the sidelines while Americans experienced the most brutal bear market since the crash of 1929 to 1933.
1973 - 1974: The market declined more than 60% during the crash of 1973 to 1974.
Market Call 2: Going Long in 1974
1968: Market peaked.
1973-1974: Five years after the market had peaked, most Americans had turned disillusioned by the stock market. The average portfolio had dropped 40% or more in value. Investors holding the great blue chips of the day - Xerox, Walt Disney, IBM, General Motors, and Sears Roebuck, for example - saw their portfolios decline more than 60% during the crash of 1973 - 1974.
To investors caught in the middle, it seemed like there was no end to the panic selling. Some individuals tried holding their stocks, waiting for a rebound that never took place. Exhausted, they gave in and sold after watching their portfolios lose 50% of their value. The rest took their cues from the market itself. Daily declines reinforced a selling mentality: Selling begat selling, and an orderly market turned into a vicious cylce of losses.
1974: At the bottom, in 1974, few investors could be coaxed to reenter the arena. But Buffett, refreshed from a 5-year hiatus and sitting on plenty of cash, dove headlong into the same stocks the market could no longer tolerate. Like a boy in a candy store, Buffett found more values than he could possibly digest. An investor who plunged into the market at the 1974 low made a 74% return within 2 years.
Comment:
Buffett has a good understanding of market conditions. He has the ability to value stocks and know when stocks and market are overpriced. His action in completely getting out of the market was interesting. His patience in staying on the sideline was remarkable too. How many could stay in the sideline without reentering at the slightest correction? How remarkable it was too that he chose the depth of the market in 1974 to reenter. Superb ability indeed!
Three most important questions about the stock market
Following are the three most important questions to answer about the stock market:
Is the Stock Market too expensive?
Is the Fed (government) in the way?
Is the Market going up?
The answers to these questions cover nearly all of the bases that affect the markets.
http://books.google.com/books?id=aydxD_IkJBMC&pg=PA65&lpg=PA65&dq=understanding+stock+market+conditions&source=bl&ots=9Q0jwhuGQj&sig=6XdEIyPTZUFI-v1kOHQXKFyF460&hl=en&ei=2MGtSuyINtSBkQX618CVBg&sa=X&oi=book_result&ct=result&resnum=8#v=onepage&q=understanding%20stock%20market%20conditions&f=false
Safe Strategies for Financial Freedom
By Van K. Tharp, Doyle Rayburn Barton, Steve Sjuggerud
Is the Stock Market too expensive?
Is the Fed (government) in the way?
Is the Market going up?
The answers to these questions cover nearly all of the bases that affect the markets.
http://books.google.com/books?id=aydxD_IkJBMC&pg=PA65&lpg=PA65&dq=understanding+stock+market+conditions&source=bl&ots=9Q0jwhuGQj&sig=6XdEIyPTZUFI-v1kOHQXKFyF460&hl=en&ei=2MGtSuyINtSBkQX618CVBg&sa=X&oi=book_result&ct=result&resnum=8#v=onepage&q=understanding%20stock%20market%20conditions&f=false
Safe Strategies for Financial Freedom
By Van K. Tharp, Doyle Rayburn Barton, Steve Sjuggerud
Stock Market Sectors Classification
Stock Market Sectors Classification
There are many ways in which stocks can be classified. One of the most preferred ones is by the sector in which the particular business that issues the stocks falls. This classification, which includes the grouping together of companies from the same sector, is done for the purposes of facilitating comparisons between the companies' stocks.
However, many classifications by sectors can be found. One of them divides the market into eleven sectors, where two of them are referred to as defensive, whereas the other nine are referred to as cyclical.
Let's now turn our attention to these two classifications and examine them at a closer look.
Cyclical Stocks
Stocks from the cyclical classification tend to be sensitive to the market conditions, especially to its cycles, as their name implies. The good news is that if one sector is down, another sector may experience an upward trend.
This classification includes nine of the sectors that fall in the sector division. They are as follows:
1.Capital Goods
2.Energy
3.Technology
4.Health care
5.Communications
6.Transportation
7.Basic materials
8.Consumer cyclical
9.Financial
As it can be seen from the list above, investors will not find any difficulty in recognizing whether a particular business belongs to one cyclical sector or another.
Defensive Stocks
This classification includes two of the sectors that fall in the sector division. They are as follows:
1.Utilities
2.Consumer staples
These sectors are less susceptible to market cycles since no matter what the market conditions are people will not stop consume food or electricity. Stocks from these sectors are used as a balancing and protection mechanism by many investors in their portfolios in case the market starts to go down.
However, the advantage of defensive stocks can be their drawback as well. This is so, since no matter what the conditions of the market are people will probably not start to consume more energy or food, so when the market is up, the prices of defensive stocks may not go up as well.
Stock Sectors Purpose
The main purpose of stocks sectors is to facilitate investors' comparison of different stocks. Moreover, comparison of stocks within a particular sector can be very useful if you want to see how your sectors are performing relative to stocks within the same sector.
However, try to use the classifications of various sources, since different sources use different set of sectors.
Final Piece of Advice
Use stock sectors to make effective and reliable comparisons between your stocks and the other from the same sector. This is recommended in order to see whether there are any drastic differences in the performance and if there are such to regulate the disparities.
For knowledge we can highly recommend you subscribe to the The Wall Street Journal.
http://www.stock-market-investors.com/stock-investing-basics/stock-market-sectors-classification.html
There are many ways in which stocks can be classified. One of the most preferred ones is by the sector in which the particular business that issues the stocks falls. This classification, which includes the grouping together of companies from the same sector, is done for the purposes of facilitating comparisons between the companies' stocks.
However, many classifications by sectors can be found. One of them divides the market into eleven sectors, where two of them are referred to as defensive, whereas the other nine are referred to as cyclical.
Let's now turn our attention to these two classifications and examine them at a closer look.
Cyclical Stocks
Stocks from the cyclical classification tend to be sensitive to the market conditions, especially to its cycles, as their name implies. The good news is that if one sector is down, another sector may experience an upward trend.
This classification includes nine of the sectors that fall in the sector division. They are as follows:
1.Capital Goods
2.Energy
3.Technology
4.Health care
5.Communications
6.Transportation
7.Basic materials
8.Consumer cyclical
9.Financial
As it can be seen from the list above, investors will not find any difficulty in recognizing whether a particular business belongs to one cyclical sector or another.
Defensive Stocks
This classification includes two of the sectors that fall in the sector division. They are as follows:
1.Utilities
2.Consumer staples
These sectors are less susceptible to market cycles since no matter what the market conditions are people will not stop consume food or electricity. Stocks from these sectors are used as a balancing and protection mechanism by many investors in their portfolios in case the market starts to go down.
However, the advantage of defensive stocks can be their drawback as well. This is so, since no matter what the conditions of the market are people will probably not start to consume more energy or food, so when the market is up, the prices of defensive stocks may not go up as well.
Stock Sectors Purpose
The main purpose of stocks sectors is to facilitate investors' comparison of different stocks. Moreover, comparison of stocks within a particular sector can be very useful if you want to see how your sectors are performing relative to stocks within the same sector.
However, try to use the classifications of various sources, since different sources use different set of sectors.
Final Piece of Advice
Use stock sectors to make effective and reliable comparisons between your stocks and the other from the same sector. This is recommended in order to see whether there are any drastic differences in the performance and if there are such to regulate the disparities.
For knowledge we can highly recommend you subscribe to the The Wall Street Journal.
http://www.stock-market-investors.com/stock-investing-basics/stock-market-sectors-classification.html
Find a Stock Investing Strategy that Works for You
Find a Stock Investing Strategy that Works for You
By Ken Little, About.com
Investing in stocks can be as simple or as complicated as you want to make it. The important part of that sentence is the personal pronoun “you.”
Too often investors are led to believe that investing in stocks must be a complicated, deeply analytical process involving hours of pouring over financial statements, analysts’ reports, spreadsheets and market analysis before making a decision.
For some investors, this is the only way they feel comfortable investing and they enjoy the digging for information as much as the actual return on investing.
What Works
The complicated analytical approach to investing works for them, but that doesn’t mean it is the only way to successful investing or that it works for every investor.
You may not have the time or educational background to do the complicated financial analysis of every stock you make buy. Does that mean you will be less successful?
Not necessarily, some investors who do tons of research still get it wrong. Still, what can you do to improve your chances for investing success if you aren’t the analytical type and don’t have a lot of time to devote to research?
•Keep the number of targets small. Set your parameters tight to limit your universe. For example, say you’re interested in the health care industry. Pick out a sector in that industry and focus on the leaders (market leaders, not price leaders).
•If your objective is growth, invest in growth industries. This may seem obvious, but it is easy for investors to get side tracked. You will probably do better with a so-so company in a growth industry than a great company in an industry that’s going nowhere. If you want growth, invest in technology or one of the other growth industries and don’t waste your time on utilities alone.
•Invest in market leader wherever you find them if they are overpriced. Market leaders are companies that dominate their corner of the industry and the ones you are looking for are so entrenched it will be hard to dislodge them. Microsoft is the obvious example of a market leader. I’m not suggesting investing in Microsoft, that’s your decision, but they are in no danger of losing their position of market dominance. Of course, you would have said the same thing about GM 10 or 15 years ago.
Conclusion
The point is that you should find an investing strategy that works for you. If it is complicated and data heavy or simple and more intuitive, make it yours and don’t be bullied into adopting another’s strategy.
By Ken Little, About.com
Investing in stocks can be as simple or as complicated as you want to make it. The important part of that sentence is the personal pronoun “you.”
Too often investors are led to believe that investing in stocks must be a complicated, deeply analytical process involving hours of pouring over financial statements, analysts’ reports, spreadsheets and market analysis before making a decision.
For some investors, this is the only way they feel comfortable investing and they enjoy the digging for information as much as the actual return on investing.
What Works
The complicated analytical approach to investing works for them, but that doesn’t mean it is the only way to successful investing or that it works for every investor.
You may not have the time or educational background to do the complicated financial analysis of every stock you make buy. Does that mean you will be less successful?
Not necessarily, some investors who do tons of research still get it wrong. Still, what can you do to improve your chances for investing success if you aren’t the analytical type and don’t have a lot of time to devote to research?
•Keep the number of targets small. Set your parameters tight to limit your universe. For example, say you’re interested in the health care industry. Pick out a sector in that industry and focus on the leaders (market leaders, not price leaders).
•If your objective is growth, invest in growth industries. This may seem obvious, but it is easy for investors to get side tracked. You will probably do better with a so-so company in a growth industry than a great company in an industry that’s going nowhere. If you want growth, invest in technology or one of the other growth industries and don’t waste your time on utilities alone.
•Invest in market leader wherever you find them if they are overpriced. Market leaders are companies that dominate their corner of the industry and the ones you are looking for are so entrenched it will be hard to dislodge them. Microsoft is the obvious example of a market leader. I’m not suggesting investing in Microsoft, that’s your decision, but they are in no danger of losing their position of market dominance. Of course, you would have said the same thing about GM 10 or 15 years ago.
Conclusion
The point is that you should find an investing strategy that works for you. If it is complicated and data heavy or simple and more intuitive, make it yours and don’t be bullied into adopting another’s strategy.
Normal Stock Guidance Doesn’t Apply
Normal Stock Guidance Doesn’t Apply
Extreme Conditions May Distort Normal Market Evaluations
By Ken Little, About.com
In a normal market, I would (and have) advised that investors look for bargains in stocks that have fallen into the value category.
A value stock is one that has been under-priced by the market. Value investors look for these stocks and buy them at a discount to their intrinsic value.
When the market corrects the price of the stock - meaning others have discovered this under-priced gem and are buying the shares - the value investor pockets a nice profit.
One of the keys to this strategy is the phrase “normal market.”
The market of late is anything but normal, in case you hadn’t noticed.
If you are confused about what to do in this market, don’t feel like you’re alone.
Experts are confused and frustrated by market conditions that don’t fit the typical models.
With large swings from low to high and back again, the long-term investor may be better off doing nothing.
If you are invested in good companies, you are probably better off sitting tight and waiting for the current crisis to work its way out.
This is not a rule, but a suggestion. If you are so concerned about your investments that you can’t sleep, then take whatever steps you need to protect you mental and emotional health.
No one can tell you with certainty what is the proper course of action.
Normal markets will return one day, but there is no way to know how long that will take.
In the meantime, if you spot a good buy in a stock, consider whether you are willing to hold it through more turbulent times that are surely to come.
http://stocks.about.com/od/evaluatingstocks/a/092208Marrisk.htm
Extreme Conditions May Distort Normal Market Evaluations
By Ken Little, About.com
In a normal market, I would (and have) advised that investors look for bargains in stocks that have fallen into the value category.
A value stock is one that has been under-priced by the market. Value investors look for these stocks and buy them at a discount to their intrinsic value.
When the market corrects the price of the stock - meaning others have discovered this under-priced gem and are buying the shares - the value investor pockets a nice profit.
One of the keys to this strategy is the phrase “normal market.”
The market of late is anything but normal, in case you hadn’t noticed.
If you are confused about what to do in this market, don’t feel like you’re alone.
Experts are confused and frustrated by market conditions that don’t fit the typical models.
With large swings from low to high and back again, the long-term investor may be better off doing nothing.
If you are invested in good companies, you are probably better off sitting tight and waiting for the current crisis to work its way out.
This is not a rule, but a suggestion. If you are so concerned about your investments that you can’t sleep, then take whatever steps you need to protect you mental and emotional health.
No one can tell you with certainty what is the proper course of action.
Normal markets will return one day, but there is no way to know how long that will take.
In the meantime, if you spot a good buy in a stock, consider whether you are willing to hold it through more turbulent times that are surely to come.
http://stocks.about.com/od/evaluatingstocks/a/092208Marrisk.htm
How to Boost Your Earning Power in a Recession
How to Boost Your Earning Power in a Recession
While some people see the current economic recession as a time of worry, a small but growing group is actually taking advantage of current conditions to boost their long term earnings power.
These people are using the slowdown and the resulting changes in government and corporate priorities to ensure that they are better positioned than the competition to get and keep the best jobs in the coming years.
And they are doing it by getting an online degree.
Experts have long known that the higher the level of your degree the more you will earn throughout your life. In fact, compared to a high school degree, an employee with:
an associate degree will earn an average of $5,600 more per year
a bachelor's degree will earn an average of $21,100 more per year
a master's degrees will earn an average of $33,900 more per year
Why now?
What is it about our current economic climate that makes the right degree so much more important and, above all, achievable:
Firstly, the recession has made companies' future profits very uncertain. As a result they are being far more selective in whom they hire. Today, having a relevant degree on your resume often means the difference between being considered for a position and being passed over completely.
Secondly, the economy is changing. Traditional industries are fading, while new industries such as health care, information services, and homeland security are growing. These generally pay well, but require workers with specific technical skills. These skills are typically not learned in standard 4 year degrees, but can easily be obtained through shorter associate degrees in specific vocational fields.
Thirdly, the rapid expansion of high speed Internet has made it possible for universities to offer online degrees that are highly respected by employers. This makes it far easier for people that are currently employed, or have family responsibilities to obtain their degree.
Lastly, as a result of the recession, the government has stepped in to help subsidize individuals' efforts to return to school to get better trained - and these subsidies are available for online education degrees as well.
Where to start?
If you're interested in maximizing your value to employers and your earnings power, the first thing to do is identify the best degree based on your preferences, job experience, and education. Next, determine which schools offer the right courses. Then investigate financing options that can help pay for all or some of the degree.
Fortunately, there are some great free online services that will quickly help you navigate through available options and find the programs that are exactly right for you.
One of the best is a service called BuildACareer.net. They work with dozens of universities offering associate, bachelor's and master's degrees along with financial aid.
If you want to be one of those people that comes out of this recession in a stronger position, BuildACareer.net may be the place to start.
http://howlifeworks.com/career/boost_earnings/?cid=8088kf_finance_rm
While some people see the current economic recession as a time of worry, a small but growing group is actually taking advantage of current conditions to boost their long term earnings power.
These people are using the slowdown and the resulting changes in government and corporate priorities to ensure that they are better positioned than the competition to get and keep the best jobs in the coming years.
And they are doing it by getting an online degree.
Experts have long known that the higher the level of your degree the more you will earn throughout your life. In fact, compared to a high school degree, an employee with:
an associate degree will earn an average of $5,600 more per year
a bachelor's degree will earn an average of $21,100 more per year
a master's degrees will earn an average of $33,900 more per year
Why now?
What is it about our current economic climate that makes the right degree so much more important and, above all, achievable:
Firstly, the recession has made companies' future profits very uncertain. As a result they are being far more selective in whom they hire. Today, having a relevant degree on your resume often means the difference between being considered for a position and being passed over completely.
Secondly, the economy is changing. Traditional industries are fading, while new industries such as health care, information services, and homeland security are growing. These generally pay well, but require workers with specific technical skills. These skills are typically not learned in standard 4 year degrees, but can easily be obtained through shorter associate degrees in specific vocational fields.
Thirdly, the rapid expansion of high speed Internet has made it possible for universities to offer online degrees that are highly respected by employers. This makes it far easier for people that are currently employed, or have family responsibilities to obtain their degree.
Lastly, as a result of the recession, the government has stepped in to help subsidize individuals' efforts to return to school to get better trained - and these subsidies are available for online education degrees as well.
Where to start?
If you're interested in maximizing your value to employers and your earnings power, the first thing to do is identify the best degree based on your preferences, job experience, and education. Next, determine which schools offer the right courses. Then investigate financing options that can help pay for all or some of the degree.
Fortunately, there are some great free online services that will quickly help you navigate through available options and find the programs that are exactly right for you.
One of the best is a service called BuildACareer.net. They work with dozens of universities offering associate, bachelor's and master's degrees along with financial aid.
If you want to be one of those people that comes out of this recession in a stronger position, BuildACareer.net may be the place to start.
http://howlifeworks.com/career/boost_earnings/?cid=8088kf_finance_rm
The Buy and Hold Strategy And Your Long Term Investment Horizon
The consequences of the buy and hold investment strategy.
http://www.thedigeratilife.com/blog/index.php/2009/03/20/buy-and-hold-strategy-long-term-investment-horizon/
http://www.thedigeratilife.com/blog/index.php/2009/03/20/buy-and-hold-strategy-long-term-investment-horizon/
My Long Term Experience With An Investment Newsletter
My Long Term Experience With An Investment Newsletter
by Silicon Valley Blogger on November 12, 2007
http://www.thedigeratilife.com/blog/index.php/2007/11/12/my-long-term-experience-with-an-investment-newsletter/
by Silicon Valley Blogger on November 12, 2007
http://www.thedigeratilife.com/blog/index.php/2007/11/12/my-long-term-experience-with-an-investment-newsletter/
Bullish Trends and Significant Corrections
- Bullish Trends and Significant Corrections
June 19, 2009 - Non-Client Version
We were recently asked by a client, "If you see signs of a possible new bull market, why are we still sitting on so much cash?" It can be answered by using a fence analogy. We have been taking some smaller positions while maintaining a relatively high cash position in order to play both sides of the fence:
The Far Side Of The Fence: If stocks move lower,
- Our smaller positions reduce risk during a correction, and we have cash on hand to invest during/after a correction. If the bear market resumes (anything is possible), we have less exposure to losses with some cash on hand.
- Numerous asset classes have had significant moves off the March 2009 lows.
- Even markets which have a positive trend, correct from time to time.
- Corrections, within the context of an uptrend, can be significant.
- If a correction is orderly, we can use cash to enter markets at lower levels.
- If the correction is not orderly and a resumption of the bear looks more likely, cash and smaller positions enable us to better manage risk. If your investments lose 12%, but you have 50% of your account in cash, the loss to your account is 6%.
- As our strategy dictates, we gradually make the transition from a bear market portfolio to a bull market portfolio, and remain aware we could be wrong about bullish outcomes. If we are wrong, we stop the transition and reverse course gradually.
The Near Side Of The Fence: If stocks continue to move higher,
- We have an opportunity to participate.
- In the 2007-2009 bear market, markets came down rapidly with little in the way of countertrend moves, which means it is possible a similar situation may occur on the way back up – a rapid climb with little in the way of significant countertrend moves (which is what has happened so far during this rally). It is possible those who wait for a significant correction, will only get that opportunity from much higher levels. A significant correction is coming - the question is from what levels (now or later).
- In early June, numerous asset classes “broke out” above resistance levels which can offer a lower risk entry point since what was resistance becomes support.
http://www.ciovaccocapital.com/sys-tmpl/fencesitting/
2009-2010: Evidence of Cyclical Bull and Reflation
2009-2010: Evidence of New Cyclical Bull Markets
At CCM, we do not believe in making investment decisions based exclusively on financial market forecasting. We instead look for fundamental and technical alignment to support and confirm forecasts. The transition from a bear market to a bull market takes time. Long-term investors can migrate from bear market allocations to bull market allocations as evidence of a primary trend change unfolds over several months.
In mid-April of 2009, the NASDAQ made an important new high, which may have signaled the first major step in the transition from a bear market to a bull market. The research below covers numerous observable events which point to the possibility of a new cyclical bull market taking shape in 2009. Cyclical bull markets can last from a few months to a few years, which is in contrast to a secular bull market which can last for 20 years or more. We do not believe all the elements are in place for a secular bull market, but we must respect that cyclical bull markets can last continue for years. For example, many believe the 2003-2007 bull market was of the cyclical variety. Cyclical or secular, the market went up for four years in the last bull market, which presented an opportunity for investors. Based on studies of post recession periods and periods after the S&P 500’s 200-day moving average turns up, it is reasonable to surmise stocks could rally into the early spring of 2010.
Corrections To Be Expected
A cyclical bull market does not mean the coming months will be easy for investors. The market never makes anything easy for anyone. Significant corrections coupled with periods of uneasiness and fear are to be expected in any bull market, secular or cyclical. With a recent successful retest of lows in the S&P 500 and many markets well above their 200-day moving averages, we can afford to give our investments a little more rope during the inevitable corrections in asset prices. As time goes on, stop-loss orders and risk management techniques should be able to take on a diminished role as we will err on the side of remaining invested into early 2010.
If conditions deteriorate and the markets migrate back toward a bearish stance, we will be willing to accept the possibility that the current bear has further to run. However, bullish evidence is not in short supply as we enter the second half of 2009. We will continue to monitor the markets and invest based on the observable evidence at hand. The observable evidence at hand remains bullish.
Focus Remains on Money Supply Expansion, Asia, and Commodities
Since we have economic data and technical evidence in hand that support further gains in asset prices, for the balance of 2009 and for a portion of 2010, we will focus on the three themes below and place a reduced empasis on the two themes that follow.
Primary Drivers Next 10-12 Months
Expansion of the money supply / fiat currency concerns / inflation
Commodities, clean energy, and water
Economic shift from United States to Asia
Secondary Drivers Next 10-12 Months
Infrastructure & government programs (slow implementation of some programs)
Baby boomers' transition from consumers to savers / consumer deleveraging (still important long-term)
http://www.ciovaccocapital.com/sys-tmpl/2009bullmarkets/
At CCM, we do not believe in making investment decisions based exclusively on financial market forecasting. We instead look for fundamental and technical alignment to support and confirm forecasts. The transition from a bear market to a bull market takes time. Long-term investors can migrate from bear market allocations to bull market allocations as evidence of a primary trend change unfolds over several months.
In mid-April of 2009, the NASDAQ made an important new high, which may have signaled the first major step in the transition from a bear market to a bull market. The research below covers numerous observable events which point to the possibility of a new cyclical bull market taking shape in 2009. Cyclical bull markets can last from a few months to a few years, which is in contrast to a secular bull market which can last for 20 years or more. We do not believe all the elements are in place for a secular bull market, but we must respect that cyclical bull markets can last continue for years. For example, many believe the 2003-2007 bull market was of the cyclical variety. Cyclical or secular, the market went up for four years in the last bull market, which presented an opportunity for investors. Based on studies of post recession periods and periods after the S&P 500’s 200-day moving average turns up, it is reasonable to surmise stocks could rally into the early spring of 2010.
Corrections To Be Expected
A cyclical bull market does not mean the coming months will be easy for investors. The market never makes anything easy for anyone. Significant corrections coupled with periods of uneasiness and fear are to be expected in any bull market, secular or cyclical. With a recent successful retest of lows in the S&P 500 and many markets well above their 200-day moving averages, we can afford to give our investments a little more rope during the inevitable corrections in asset prices. As time goes on, stop-loss orders and risk management techniques should be able to take on a diminished role as we will err on the side of remaining invested into early 2010.
If conditions deteriorate and the markets migrate back toward a bearish stance, we will be willing to accept the possibility that the current bear has further to run. However, bullish evidence is not in short supply as we enter the second half of 2009. We will continue to monitor the markets and invest based on the observable evidence at hand. The observable evidence at hand remains bullish.
Focus Remains on Money Supply Expansion, Asia, and Commodities
Since we have economic data and technical evidence in hand that support further gains in asset prices, for the balance of 2009 and for a portion of 2010, we will focus on the three themes below and place a reduced empasis on the two themes that follow.
Primary Drivers Next 10-12 Months
Expansion of the money supply / fiat currency concerns / inflation
Commodities, clean energy, and water
Economic shift from United States to Asia
Secondary Drivers Next 10-12 Months
Infrastructure & government programs (slow implementation of some programs)
Baby boomers' transition from consumers to savers / consumer deleveraging (still important long-term)
http://www.ciovaccocapital.com/sys-tmpl/2009bullmarkets/
Markets Make Significant Progress In Transitions From Bear Markets To Bull Markets
The transition from a bear market to a bull market is just that; a transition. Transitions take time and are not binary events like turning a light on or off. Transitions in any market can be frustrating and stressful, but if we continue to focus on the most important and telling indicators, the market should get us pointed in the right direction and aligned with the primary trends.
While there are numerous signs which can indicate the possible transition from a bear market to a bull market, the following two milestones are of uppermost importance:
- When the 50-day moving average crosses, and more importantly holds above, the 200-day moving average,
- When the slope of the 200-day moving average turns positive.
During an established bull market, a good way to eliminate less attractive markets or investment alternatives is to discard those that have a negatively sloped 200-day moving average. At the end of a bear market, it takes time for a market to send signals of the potential staying power of a rally via a positive change in the slope of a 200-day moving average. As shown in the chart below, even though stocks began to bottom in mass in March of this year, we only started to see positive changes in the slopes of 200-day moving averages in the last two weeks.
http://www.ciovaccocapital.com/sys-tmpl/200turnuppublic/
Stocks Perform Well After A Recession
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
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
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.
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