Markets and the US Dollar Turn Higher Sign in to Recommend

Markets and the Dollar Turn Higher Sign in to Recommend

By DAVID JOLLY
Published: December 4, 2009

Stocks and the dollar rose Friday and bonds fell after the release of a much-better-than-expected jobs report in the United States.

The Dow Jones industrial average reached a high for the year, gaining 95 points, or 0.9 percent, in late morning trading. The Standard & Poor’s 500-stock index rose 1.1 percent, and the Nasdaq 1.5 percent.

On the year, the Dow is up 19 percent while the S.&P. 500 is 23 pecent.

The Labor Department said in Washington that the United States lost 11,000 jobs in November, less than a tenth of the roughly 125,000 job losses economists had been expecting. The unemployment rate improved to 10 percent from 10.2 percent in October.

While companies are still shedding workers, the pace was the best since the recession began in December 2007, and suggested to some analysts that the economy is headed toward recovery.

Jeffrey Saut, chief investment strategist for Raymond James, characterized the November job-loss number as “an outlier.”

“There’s no doubt the recession is in the rear-view mirror,” he said, “but I wouldn’t be surprised to see the jobless rate ticking up again in the months ahead.”

Unemployment, he added, is a lagging indicator, so investors who wait for the labor market to turn around have historically missed out on major market gains.

Lawrence Glazer, managing partner at Mayflower Advisors in Boston, said would-be stock buyers remained somewhat cautious, despite the surprising data.

“Investors are still seeing a divergence between Wall Street’s gains and Main Street’s malaise,” he said. “The market has been anticipating better data all along. The question hasn’t been ‘is the market pricing in a recovery,’ but ‘is the market pricing in too big of a recovery.’ ”

Mr. Glazer said institutional investors had already begun to close positions and did not want to be reshuffling portfolios toward the end of the year, damping the effect of the positive surprise.

In other economic news, the Commerce Department reported that orders to American factories unexpectedly rose 0.6 percent in October, which was better than the flat reading that economists had expected.

In Europe, the Dow Jones Euro Stoxx 50 index of euro zone heavyweights was trading 1.4 percent higher after the data, while the FTSE-100 index in London was up 0.7 percent. In Asian trading, the Tokyo benchmark Nikkei 225 stock average rose 0.5 percent. European markets had been down before the American jobs report was released.

The yield on the benchmark 10-year Treasury rose one-tenth of a percentage point to 3.5 percent.

The dollar rose against other major currencies. The euro fell to $1.4911 from $1.5053 Thursday, and the British pound fell to $1.6572 from $1.6540. The dollar rose to 89.81 yen from 88.26 yen.

Spot gold fell 2.3 percent to $1,180.20 an ounce.

http://www.nytimes.com/2009/12/05/business/05markets.html?_r=1&ref=business

Malaysia's economy stagnant, needs reform

By Agence France-Presse, Updated: 12/1/2009

 

Malaysia's economy stagnant, needs reform: finance minister
Malaysia's economy has been stagnating for the past decade and is now trailing badly behind its neighbours, a senior minister said Tuesday, calling for "urgent" and wide-ranging reforms.

 

Malaysia's economy has been stagnating for the past decade and is now trailing badly behind its neighbours, a senior minister said Tuesday, calling for "urgent" and wide-ranging reforms.

 

Malaysia's export-dependent economy has been hit hard by the global recession, contracting by a forecast 3.0 percent this year and jeopardising its ambitions of becoming a developed nation by 2020.

 

"Malaysia is trapped in a low-value-added, low-wage and low-productivity structure," Second Finance Minister Ahmad Husni Hanadzlah told an economic outlook conference.

 

Among its peers China, India, Vietnam, Indonesia, Philippines and Thailand, Malaysia's economic growth over the past three years was second-lowest, he said.

 

"Our economy has been stagnating in the last decade. We have lost our competitive edge to remain as the leader of the pack in many sectors of the economy. Our private investment has been steadily in decline."

 

"While Singapore and Korea's nominal per capita GDP grew within the last three decades by 9 and 12 times respectively, ours grew only by a factor of four."

 

In a withering assessment, Ahmad Husni said

• the services sector is underdeveloped,
• private investment is half the levels before the 1997-98 Asian crisis, and
• the manufacturing sector is suffering from lack of investment.

 

"The (need for) transformation is particularly urgent when we take the external environment into account," he said.

 

"The global environment is changing. We can no longer rely on our traditional trading partners and we need to address the competitive pressure from other emerging markets on our existing exports."

 

He called for sweeping measures including an emphasis on meritocracy and ensuring all Malaysians are given "equal opportunity to participate in the economy".

 

Malaysia has for decades practiced a system of positive discrimination for Muslim Malays who dominate the population, but critics say the policy is fuelling corruption and is hurting the nation's competitiveness.

 

"We must also consider the gradual dismantling of our open-ended protection of specific sectors and industries which have introduced a climate of complacency and artificial levels of supply," the minister said.

 

"The long-term success of the nation's economy must take precedence over the short term interests of a few protected groups."

 

Prime Minister Najib Razak -- who is also finance minister -- came to power in April with plans to tackle graft which is endemic in the ruling party and society at large.

An anaemic recovery should be welcomed, not feared.

Bill Mott: 'An anaemic recovery should be welcomed, not feared'

Fundamentalist view: our series in which an expert at making money grow analyses the financial world and gives his advice to savers and investors.

By Bill Mott
Published: 12:05PM GMT 26 Nov 2009


Bill Mott: 'This autumn 2009 rally cannot continue much longer' Any fans of late Fifties and early Sixties American music will know the Drifters song Save the Last Dance for Me. The plaintive boyfriend tells his girlfriend that she can enjoy the party without any cares, but ultimately her price for this enjoyment is to ''save the last dance for him''.

As a fund manager, I am watching the party become increasingly boisterous as market momentum powers ahead. I would like to be well on my way home with my portfolio positioned away from areas of excess optimism before the last dance is played. Looking at the British economy, it seems there are three possible scenarios from here.

Scenario one is a long period of anaemic growth during which the economy gradually rebalances, avoiding "Armageddon'', but does not rally very strongly. I believe this outcome has a 75pc probability.

Scenario two is a ''double dip'' – or W-shaped – recovery in which the market and the economy experience a further downturn as recovery fails to take hold, and has a 15pc chance.

Scenario three is a V-shaped recovery, namely a continuation of the current near-euphoric, liquidity-driven rally and has a 10pc probability of occurring.

As it became clear, at the end of last year and during the first quarter of 2009, that Britain and the global economy were on the brink of meltdown, authorities worldwide began co-ordinated action to stabilise the economy. Generally, a ''kitchen sink'' liquidity policy was introduced. In effect, policy-makers were telling us that long-term economic policy was being suspended to tackle immediate economic dangers.

As a result, the current early signs of economic stability or recovery are dependent on the largesse of governments and central banks. Investors have responded aggressively to these government actions, fuelling a robust asset price reflation in all types of asset across the spectrum from equities to commodities to bonds. This rise in asset prices is itself supporting the economic recovery. The Deputy Governor of the Bank of England recently suggested that one of the expected consequences of quantitative easing – printing money to buy back government gilts – was to raise asset prices.

Clearly a rise in asset prices from March 2009 lows was desirable to improve confidence, but when does a ''helpful rise'' in asset prices evolve to the beginning of a new ''asset bubble'' and where are we in this process?

It is our view that the UK market rally has gone too far, too quickly. Many investors, lamenting that the ''train has left the station'' without them, are playing catch-up. The trouble with this approach, as in all bubble situations, is that continuing to buy overvalued assets now requires you to believe that, although the drivers of the market are not sustainable, you will be able to sell before the inflection point at the peak.

This autumn 2009 rally cannot continue much longer, simply because very low interest rates were not the sole cure that helped us recover from the last bust. So while we have avoided globally a Thirties-style Depression, we need to implement a partial exit strategy to avoid another asset bubble and more financial turbulence. Ideally, we must have an anaemic global recovery (Scenario one) so global imbalances can be slowly corrected without too much dislocation. The dilemma is that tightening policy through tax increases and interest rate rises could result in a double-dip recession, but if loose policy continues, with no action taken, then an asset bubble is more likely.

An anaemic recovery should be welcomed, not feared. Monetary policy must not neglect asset-price movements. If premature tightening of policy causes a mild double-dip recession, this would be better than another asset bubble.

We have avoided the very worst and if the price of us all not dying from pneumonia is a blocked nose for a few years, then it will not have been a bad price to pay.

We have positioned the PSigma Income fund as a hybrid between defensive UK equities with limited economic sensitivity and UK equities that we believe can grow faster than average in a ''bracing but not impossible'' global economy. Putting quantitative easing on hold would be a good first step and would signal that the authorities are determined not to let another asset bubble develop.

As any West Ham United football fan will tell you, liquidity-driven bubbles are not forever…

Bill Mott manages the PSigma Income fund.

http://www.telegraph.co.uk/finance/personalfinance/investing/shares/6636435/Bill-Mott-An-anaemic-recovery-should-be-welcomed-not-feared.html

Diary of a Private Investor: 'I'm licking my wounds'

Diary of a Private Investor: 'I'm licking my wounds'
I am going through a bad patch and I am still licking my wounds over the demise of Aero Inventory

By James Bartholomew
Published: 4:36PM GMT 02 Dec 2009

What decides which way stock markets go? Most brokers and pundits focus on things like profits, charts, historical precedents and so on. But I am coming to the view that there is something even more important for short-term movements that is hardly mentioned: the Government. Actually not so much the Government itself, but the Bank of England monetary policy committee.

I submit that the major reason for the rally since March has been the so-called quantitative easing or, in ordinary parlance, printing of cash. The Bank has bought up government bonds and corporate bonds, putting cash into the hands of investors who have then bought other corporate bonds or shares.

The ultra-low interest rates – also decided by the committee – have made it sensible for people like me with Bank Rate-based mortgages to go on borrowing the money and keep it invested, again helping share prices.

So this has been, I suggest, a government-made rally. I am grateful to Tim Congdon of International Monetary Research for helping me see the importance of this early in the year and thus emboldening me to take part in the rise. But this is a point to remember for the future: for the short-term direction of the stock market, see what the Government is doing to the supply of money.

Right now, it is not as positive as previously. The Bank of England is continuing with quantitative easing, but more slowly. This suggests the market might continue to chug along, but is unlikely to make another major surge in the short term.

As for my portfolio, I am going through a bad patch. I am still licking my wounds over the demise of Aero Inventory, which held aircraft parts, in which I had a big stake. Since then, Harvey Nash, a recruitment and outsourcing company, has had disappointing results and the shares have fallen. Telecom Plus has come out with lower half-year figures. I have sold a few shares in both. After the Aero Inventory disaster, I am nervous about big stakes in individual companies.

Meanwhile, my three aggressive plays on recovery are performing badly. Enterprise Inns, a pub group, Tullett Prebon, a broker and Barratt, a house builder, have been through weak patches.

But I am certainly not selling any Barratt. Banks are much more willing to lend than earlier in the year and therefore house prices are likely to continue to rise. The number of mortgage deals available to those offering only a 10pc deposit has doubled since August. Barratt should benefit from stronger house prices.

Incidentally, despite all the technology about – much of it free – I still have not managed to find a website that tracks my portfolio satisfactorily. I use no fewer than four websites to follow my shares. I look at ADVFN, but since I decline to pay for the service, I never know when it is going to log me out. The service is live and in real time and it includes shares in other markets such as Hong Kong, America and so on.

But it has a way of deciding on the share price that I can't fathom. Sometimes it is neither the latest price dealt nor the middle between the buy and sell price. I also use Morningstar, which has the advantage of always showing the mid-price so I know I am comparing like with like, but the prices are a quarter of an hour out of date and not live.

If I want the latest price, I go to Hemscott where I do pay for the company's premium service to get access to brokers' forecasts and details of recent trades. But Hemscott does not show my whole portfolio in real time, which is a disadvantage.

Recently, I have also found the Yahoo portfolio service. This is free and live and it also includes Hong Kong shares. But it does not show the mid-market price and, of course, it does not include detailed broker forecasts. So none of these sites are perfect. I hope I have not been unfair to any of them. If readers know of a better way to follow a portfolio, I would be glad to hear of it.

http://www.telegraph.co.uk/finance/personalfinance/investing/6711000/Diary-of-a-Private-Investor-Im-licking-my-wounds.html

****A good value is something you can buy for less than it is actually worth.

 

A good value is something you can buy for less than it is actually worth. While that shouldn’t be possible in the theoretical world of “rational” investors, recent experience suggests investors aren’t always rational. They sometimes overpay for a stock (recall any one of the many tragic Internet or tech stories), and sometimes don’t understand value when they see it. (Vincent van Gogh couldn’t sell his work during his lifetime.)

 

Then, how can an investor assess the relative merits of the candidates on his or her list?

A good place to start is to remember that each share of stock represents ownership of a piece of a business. This suggests that two things should be very important to a stock buyer:

 

• How good is the business I am buying?
• How big a piece do I get for my money?

 

To make the point, imagine you’ve been offered a chance to buy into an ideal vacation property in a great location with all the amenities you could ask for. Although you couldn’t afford this on your own, by sharing the cost and use with others, the price comes to about your annual vacation budget. It looks like the perfect investment for you until you find out that, because of the number of total partners, your turn amounts to 1 hour and 20 minutes every March 6 from 3 to 4.20 a.m.! This otherwise great buy is a terrible deal because it costs too much for the piece you’re getting.

 

Many stock “values” have the same kind of problem. If a stock costs just $5 per share, but you’re only getting a penny’s worth of profit value, it’s not a good deal - even if the business is thriving.

 

One measure investors use in their search for value is a stock’s price relative to its 52-week high and low. The thinking is that a stock that traded at $70 per share at its 52-week high and now trades at just $40 per share at or near its 52-week low is a value. While this may be a useful flag for identifying possible values, it could have some serious drawbacks if used alone in your security selection. The stock may cost less today because:

• it’s actually worth less, or
• maybe it was never really worth $70 in the first place, and investors are finally waking up to that fact.

 

 

Doing Your Homework: Finding the up to date Information for every Stock on Your List

Doing Your Homework: Finding the up to date Information for every Stock on Your List

 

Knowing the list of key information critical to stock selection isn’t enough for success. You have to actually find that information for every stock on your list. And, because the information is constantly changing, you also have to keep your analysis up to date - preferably quarterly.

 

How much time your research effort will take depends on how you do it.

 

Library:  Visiting the library and writing or calling for annual reports will certainly work, but you’ll spend a lot of time gathering data. If you’re able to automatically download the information you want directly into a spreadsheet or database, that part of your research can happen in minutes every day - while you’re sleeping.

 

Internet:  It’s hard to imagine anything that has done more to ease the burden of securities research for the individual investor than the development of the Internet. The amount and quality of information you can easily access from the comfort of your own home truly boggles the mind.

• Need an annual report? Click.
• Access to government fillings? Click.
• Prices, charts, analysis, commentary? Just click again.

Information that once took vast amounts of time and dedication to assemble now rushes to your fingertips down the information superhighway.

 

Technology can certainly help you cast a wider net in your search for winning stocks, but your ultimate success as an investor will most likely be determined by how you use the information you find, rather than how you find it.

 

There are three fundamental ways in which the information you’re looking for will vary:

 

1. Cost

• A surprising amount of information is available for free, either directly from companies themselves, from government agencies like the Securities and Exchange Commission (SEC), or certain Web sites.
• Brokerage firms often make some form of research available to their customers.
• Subscription services vary dramatically in price, from the cost of a daily newspaper to thousands of dollars per month for comprehensive data and analysis services.

 

 

2. Format
Information is available in print or electronic format.

• Newspapers, magazines, and annual reports are familiar in print.
• Electronic versions of all these items are commonly available, as are a host of software applications and Web sites.

 

3. Content

• Financial statements, balance sheets, and company reports provide a rich source of data items, but you will probably still have to compute the ratios yourself.
• Many third party information services provide exactly this kind of processed information already calculated for you.
• Key financial ratios, earnings trends, and per share data are commonly listed, along with analysis and commentary, including rating services and lists of specific security recommendations.
• The amount of information is usually commensurate with its cost.

 

The cost, format and content of all kinds of information sources are rapidly evolving, and any attempt at a comprehensive listing would be almost instantly obsolete. By pointing out a few alternatives across the spectrum of choices, we hope to show you a sample of the kind of information that’s available. How you choose to proceed will depend on your level of interest, resources, preferences, and expertise with computers.

 

----

 

Printed Materials:

• Newspapers (business sections)
• A company’s annual report
• Stock rating publications: Value Line Investment Survey, Standard & Poor’s Stock Reports, Morningstar Stock Analyst Reports

 

Internet Sources

• Most recent annual and quarterly reports
• Recent news releases and access to a news release archive
• A calendar of events, including planned shareholder meetings.
• Notes and commentary from recent analysts meetings, speeches, or other presentations.

 

Software and Data Services

• These are software programs and data providers that deliver an almost unimaginable amount of detailed financial data on virtually every publicly traded stock.
• They include powerful analysis tools and forecasting models, charting capabilities, and interfaces with spreadsheets and other software programs.
• They are also expensive.

 

Once you find the right source of information for you, it’s time to use your data to define the universe of stocks you will be tracking.

Slow Grower versus Fast Grower

Rather than focus on price alone, we prefer to use measures of value that relate the price of a stock to some measure of how the company is performing as a business. There are many to choose from, but we recommend two tried and true favorites:

• The price-to-earnings ratio (P/E) and 
• The price-to-sales ratio (P/S).

These ratios measure a stock’s price relative to its earnings or its sales. In the simplest terms, they show a prospective investor how many years’ worth of one share’s earnings (or sales) it would cost to buy a single share of a company’s stock.

Example:

http://spreadsheets.google.com/pub?key=tACdu4SdYelgtyWJpKMMkjQ&output=html

If a stock had a price of $10 and earnings of $1, it would have a P/E of 10. An investor would have to pay 10 years’ worth of a share’s earnings to buy a share of stock in this company. A $10 stock with a P/E of 20 is only earning 50 cents per share, and by this measure, would be twice as expensive as the other $10 stock, since it would cost the investor 20 years’ worth of earnings to buy it.

The lower the P/E, the cheaper the stock - not necessarily in dollar terms, but in terms of this measure of their value. How could such a large difference in value exist?

A P/E ratios are based on the current price and current earnings. (Analysts use either the last year’s earnings or a forecast of next year’s earnings in the calculation.) If a company’s earnings are expected to grow quickly over the years, then this higher expected future earnings stream is considered by buyers to be worth a higher price up-front (i.e. higher P/E).

The table shows the implied future price of two $10 stocks with differing earnings growth rates, assuming they continue to sell at whatever price keeps their P/E ratios unchanged (at 10 for the slower grower, and at 20 for the fast grower). The “expensive” $10 fast grower could look pretty cheap 10 years from now compared to the slow grower, even if it costs twice as much relative to earnings today.

Notice that even though the fast grower’s earnings don’t actually catch up to the slow grower’s earnings until year 15, by then the stock is worth twice as much. The fast growth rate and the expected effect on future prices are driving the price, not the actual level of earnings.

The problem, of course, is that the expected future often has a way of being very different from the future that actually happens. If the lofty expectations priced into a high P/E stock aren’t met, the price tends to take a bigger hit than if expectations were more modest.

One of the advantages of the P/E ratio (or multiple) is that it is very easy to find. Many newspapers publish this number daily, right alongside the price.

Doing Your Homework: Rule of thumb

Basic Financial Metrics

Sales per share
Rule of thumb: The higher the better.


Dividends per share
Rule of thumb: The higher the better.


Cash Flow per share
Rule of thumb: The higher the better.


Yield
Rule of thumb:  The higher the better.

Quick Ratio:
Rule of thumb:  Greater than 1 and the higher the quick ratio the better.  If the ratio is less than 1, you would want to assure yourself that the company is generating enough cash flow from operations to cover both its normal expenses and any short-term debt obligations that come due.

Valuation Ratios

Price-to-Sales ratio: 
Rule of thumb:  ratios less than 2 indicate good value

Price to Earnings ratio (P/E):
Rule of thumb:  Historically, stocks are a good value when the ratio or multiple is around 14.  We will consider stocks that have a P/E of less than 20 a decent value based on this ratio - the lower the ratio the better.

Dividend Ratios

Dividend Coverage ratio: 
Rule of thumb:  Minimum of 120%

Dividend Payout ratio:
Rule of thumb:  The higher the better, so long as the ratio does not exceed 100%.   By maintaining a conservative payout ratio of 30%, this allows management to consider increasing dividends as earnings increase.

Growth Ratios

One-year revenue growth rate:
Rule of thumb:  greater than 10% increase in revenue

One-year earnings growth rate:
Rule of thumb:  greater than 10% increase in earnings


Trend Analysis

All preceding ratios
Rule of thumb:  Look for positive trend with an increasing growth in sales, earnings, cash flow, and dividends per share.  The quick, leverage, value and dividend ratios are all positive or well within acceptable ranges.



Caution:  A parting word about a standard rule of thumb
Although convenient, rules of thumb should not be adhered to in isolation. 

For example, electric utilities normally have current liabilities that exceed their current assets, yielding a quick ratio of less than 1.  However, investors are not concerned because utilities have strong cash flow from operations and their accounts receivables are from electricity users who must pay their bills if they want to continue to receive electricity.  If your rule of thumb were rigid, a low quick ratio would be a signal for you to avoid the company and discard promising stocks individually or even across an entire industry.

Ultimately, by integrating these ratios into a single analysis for any given company, you should be able to confidently select dividend-paying stocks that will help you to accomplish your investment goals and to build your wealth slowly over time through compounding dividends and price appreciation.

Doing Your Homework: Trend Analysis

The information in the financial statements (BS, IS or RE statement), the basic (per-share) financial metrics and the various ratios are snapshots of the company's financial condition at a point in time, but there are trends in motion that need to be identified so you can understand if the company's position is improving or deteriorating.

For example: 

http://spreadsheets.google.com/pub?key=tdTJEsOwTqdvL-tOgwfeb9A&output=html

• Company ABC's year-over-year trend analysis indicates a generally positive trend with an increasing growth in sales, earnings, cash flow, and dividends per share. 
• The leverage, value, and dividend ratios are all positive or well within acceptable ranges, with the exception of the quick ratio. 
• Based on analysis, the dividend looks to be secure and Company ABC would be a good buy.

Doing Your Homework: Basic Financial Metrics and Ratios Analysis

Ratios Analysis

Ratios are widely used not only to evaluate a company, but to compare a company's financial position with other companies'.  The data used to calculate ratios are readily available in each company's annual and quarterly reports.  You can concentrate your analysis in the following two areas.


Building Block One:  Basic Financial Metrics

These are formulas that allow you to view any company's results on a per share basis.  Once financial data are reduced to the shareholder level you can easily compare companies that might be very different in size or in different industries.

For example, trying to compare the annual sales of General Motors with the annual sales of a much smaller car company like Porshe might not tell you much, but by comparing sales per share (divide each company's sales by the number of shares outstanding), you have a more meaningful measurement.  Generally, the company generating higher sales per share is going to be the better value. 

Some useful basic financial metrics you can use for your analysis are:

Sales per share
= Sales/Shares outstanding  (Source: IS; BS)

Earnings per share
=Earnings/Shares outstanding (Source: IS; BS)

Dividends per share
=Dividends/Shares outstanding (Source: RE; BS)

Cash flow per share
= (Net Income + Depreciation)/Shares (Source: IS, BS)

Yield
= Dividend per share/Price per share (Source: DPS; newspaper)



Building Block Two:  Ratio Analysis

Ratio analysis allow you to analyse a company's financial performance

• against other companies in the same industry,
• against all stocks in the market, or
• against industry standards, which are sometimes known as "rules of thumb." 

Although there are a great number of ratios that you can use to analyse a company, below is a short list of ratios that will give you the information you need to pick good dividend-paying stocks.

Liquidity Ratio
Quick Ratio
= (Current Assets - Inventory) / Current Liabilities (Source:  BS)

Debt Coverage Ratio
Short-term Debt Coverage Ratio
= Operating Income/Short-term debt (Current Liabilities)  (Source: IS; BS)

Valuation Ratios
Price-to-Sales ratio
 = Stock price/Sales per share (Source: Newspaper; Sales per share)
Price-to-Earnings ratio
= Stock price/Earnings per share (Source:  Newspaper; Earnings per share)

Dividend Ratios
Payout ratio =
Dividend per share/Earnings per share (Source:  Basic metric formulas)
Dividend coverage ratio =
Cash flow per share/Dividend per share (Source:  Basic metric formulas)

Growth Ratios:
Revenue growth rate ratio
= Year over Year percent change in revenues (Source: IS)
Earnings growth rate ratio
= Year over Year percent change in earnings (Source: IS)

Doing Your Homework: Analysing Financial Statements to pick Great Stocks

How do you pick great stocks?

If you don't have a crystal ball or inside information, then the best way you can tell a winning stock from a loser is by analysing a company's financial statements.

Before you dismiss this simple answer because you find financial statements confusing or boring, you should know that you don't have to become an accountant or financial analyst.  Just a nodding acquaintance with the fundamentals will allow you to make better decisions about

• which stocks you should investigate and
• which stocks you should own as part of your (e.g. dividend-focused or growth-focused) portfolio.

Financial statements are an important source of information regarding a company's profits or losses, assets and liabilities, and sources of funds used to operate its business.  You should concentrate on the basics: 

• the balance sheet,
• income statement, and
• statement of retained earnings.

The balance sheet
This gives you an overall picture of a company's assets, liabilities, and equity at the end of an accounting period (i.e. quarterly or year-end).

The Income statement and the statement of retained earnings
These tell you how much revenue, expense, and profit the firm generated over a specific period of time (e.g. its fiscal year).

Together, these statements provide you with all the financial data you need to perform a ratio analysis to determine if you would want to buy a stock.

Since financial transactions occur continuously, this information becomes rapidly dated.  Be sure you are looking at the most recent statements and continue to review the updated statements of those stocks you decide to hold.

Future expectations can be approached in two different ways: Qualitative or Quantitative approach

According to Benjamin Graham, the current price reflects both

• known facts and
• future expectations

was intended to emphasize the double basis for market valuations.

Corresponding with these two kinds of value elements are two basically different approaches to stock analysis. 

Every competent analyst looks forward to the future rather than backward to the past, and realizes that their work will prove good or bad depending on what will happen and not on what has happened.

The future expectation itself can be approached in two different ways, which may be called:

• 1.  the way of prediction (or projection) and
• 2.  the way of protection.

-----

1. The way of prediction (or projection)

Those who emphasize prediction will try to anticipate fairly accurately just what the company will accomplish in future years - in particular whether earnings will grow rapidly and consistently.  These conclusions may be based on a very careful study of such factors as

• supply and demand in the industry-
• or volume, price and costs -
• or else they may be derived from a rather naive extrapolation from past growth into the future. 

If these authorities are convinced that the fairly long-term prospects are unusually favourable, they will almost always recommend the stock for purchase without paying too much attention to its current price.

This first, or predictive approach, could also be called the qualitative approach, since it emphasizes prospects, management and other nonmeasurable, abeit highly important factors that go under the heading of quality.

--

2. The way of protection.

By contrast, those analyst who emphasize protection are always especially concerned with the price of the stocks at the time of study.  Their main effort is to assure themselves of a substantial margin of present value above the market price - a margin large enough to absorb any unfavourable developments in the future.  Generally speaking, therefore, it is not so necessary for them to be enthusiastic over the company's long-run prospects as it is to be reasonably confident that the enterprise will get along.

The second or protective approach may be called the quantitative or statistical approach, since it emphasizes the measurable relationships between selling price and earnings, assets, dividends and so forth. 

Incidentally, the quantitative method is really an extention into the field of common stocks of the viewpoint that security analysis has found to be sound in the selection of bonds and preferred stocks for investment.

----

Choosing the "best" stocks is a controversial one.

In Benjamin Graham's own attitude and professional work was always committed to the quantitative approach. 

• From the first he wanted to make sure that he was getting ample value for his money in concrete, demonstrable terms. 
• He was not willing to accept the prospects and promises of the future as compensation for a lack of sufficient value in hand.

This has by no means been the standard viewpoint among investment authorities; in fact, the majority would probably subscribe to the view that prospects, the quality of management, other tangibles, and the "human factor" far outweigh the past performance records, the balance sheet and all other cold figures.

Thus this matter of choosing the "best" stocks is a controversial one.

Buffett gambles £27bn on rail to get back on track

Buffett gambles £27bn on rail to get back on track
Warren Buffett has placed the largest single wager of his investing career, gambling on "the economic future of the United States" by taking control of the American rail giant Burlington Northern Santa Fe in a $44bn (£27bn) deal.

By James Quinn
Published: 8:53PM GMT 03 Nov 2009

Warren Buffett has bought Burlington Northern Santa Fe, the rail operator, in a $44bn deal. Burlington is America's largest railway by revenue, operating freight across large swathes of the west and mid-west. Its tracks are also used by a variety of passenger services.

Mr Buffett believes that Burlington will benefit as the US economy recovers.

The septuagenarian billionaire argues that railway operators cannot do well unless the businesses and consumers who use the products they transport are beginning to spend again. "It's an all-in wager on the economic future of the United States," said Mr Buffett. "I love these bets."

In typical Buffett style, the cash-and-shares deal was struck in a 15-minute conversation with Matthew Rose, Burlington's chief executive.

It is the largest single investment Mr Buffett has made since taking control of Berkshire Hathaway, the investment conglomerate he has run since 1965.

It contrasts with his more recent deals, which have been big bets on the financial services sector including multi-billion dollar gambles on the recovery of shares in General Electric and Goldman Sachs, both of which have repaid him handsomely.

However, not all of his financial gambles have paid off, with 2008 going down as Berkshire's worst financial year since Mr Buffett took the helm, following a 62pc fall in profits and a drop in net worth of 9.6pc.

Berkshire is offering $26bn for the 77.4pc of Burlington it did not already own, 40pc in shares and the balance – $16bn – in cash, drawn equally from existing reserves and a bank syndicate. Berkshire will still have $20bn of cash.

Including Berkshire's previous investment and the assumption of $10bn of debt, the deal is worth $44bn.


http://www.telegraph.co.uk/finance/businesslatestnews/6496667/Buffett-gambles-27bn-on-rail-to-get-back-on-track.html

US to reduce Quantitative Easing as rates kept low

US to reduce Quantitative Easing as rates kept low
The Federal Reserve reiterated its desire to keep American interest rates “exceptionally low” for an extended period, but gradually reduce some of its quantitative easing as the US economy begins to recover.

By James Quinn, US Business Editor
Published: 8:51PM GMT 04 Nov 2009

America’s central bank, holding interest rates in a range of 0 to 0.25pc, did not signal when borrowing rates might rise, as it remains wary of knocking the US’s nascent recovery off course just a week after productivity figures signalled the country emerged from recession in the third quarter.

The decision comes ahead of the results of the Bank of England’s Monetary Policy Committee meeting, which is due to report its views on interest rates and quantitative easing on Thursday.

In a more upbeat assessment of the state of the US economy, the Federal Open Markets Committee (FOMC) said that it would begin to pull back on some of the extraordinary capital injections it made into the US economy during the crisis.

The Fed has completed its $300bn (£181bn) US Treasuries purchase programme, and reduced the fund for buying agency debt through the first quarter of next year from $200bn to $175bn. But it will continue with its $1.25 trillion purchase programme of agency mortgage-backed securities.

The FOMC’s unanimous decision to hold rates came as it noted that “activity in the housing sector has increased over recent months” and that businesses are beginning to slow the rate of cutbacks.

New data from the FOMC included the latest ADP payroll survey, which showed that the US private sector lost 203,000 jobs last month, ahead of tomorrow’s government unemployment figures, which could show the US unemployment rate hit 10pc in October.

Dividend incomes do not depend on the kindness of strangers

The vast majority of stock transactions are simply investors selling the same stocks back and forth among themselves.  Prices change as their opinions change about what each share is worth to them.  They rise as a buyer tries to entice an owner to sell, and they fall as sellers try to attract a buyer.

Assuming that your stock has risen in price since the day you bought it, how do you benefit from this increase in your wealth? 

• You could borrow against your shares, but then you're really using someone else's money, and the stock is just collateral.  You still have to repay the loan, plus interest, somehow.
• If you ever want to spend the money, you have to sell the stock.  In order to sell your shares, you have to find someone to buy them.

Dividend incomes, on the other hand, does not depend on the kindness of strangers in the same way that appreciation does.  Dividends are driven primarily by the ability and willingness of the company to share its profits with its shareholder owners.  They are tied more closely to the business itself and are less subject to the emotional response of investors to world or market events. 

Investors holding stocks for the income they provide, on the other hand, enjoy an ongoing advantage that "pure growth" investors don't  - they get to keep their shares.  Obviously, once you've sold your shares, it's somebody else's stock.  You no longer have a stake in the fortunes of the company.  The benefits and profits that may follow - as well as the future appreciation in share price - are of no further value to you.  Of course, you don't necessarily have to sell all your stock at once and can therefore continue to enjoy some of the good fortune that may continue to visit the company whose shares you're selling. 

The simple fact remains, though, that as you sell your shares, you have less of an ownership interest than you did before.  By periodically liquidating your holdings, you are systematically reducing your ownership in the very thing that is your store of investment wealth.  Appreciation has its advantages too, and fortunately, dividend investors can enjoy the appreciation in the value of their shares while they continue to collect the ongoing income from their holdings.

When the time eventually comes to take income from your portfolio to support your lifestyle, either in retirement or to help defray major expenses such as education costs, the investments do not have to be sold to create cash flow.  The dividends are already flowing cash to you.  You simply have to adjust how much of it you're reinvesting and how much of it you can afford to spend.

What is Predictable? Market Cycles

You can count on Performance Bursts

Years
Percentage Change*---- Cycle

1901-1903 
-30.55%  Correction
1904-1905   
95.89% Burst
1906 -1907 
-38.93%  Correction
1908-1909
68.60%  Burst
1913-1914
-37.89%  Correction
1915
81.66%  Burst
1916-1917
-24.98%  Correction
1918-1919
44.17% Burst
1920
-32.98% Correction
1921-1922
37.22% Burst
1929-1932
-80.02%  Correction
1933-1936
200.18%  Burst
1937
-32.82%  Correction
1938
28.06%  Burst
1939-1941
-28.30%  Correction
1942-1945
73.86%  Burst
1973-1974
-39.59%  Correction
1975-1976
63.03%  Burst

*Year over year percent change in DJIA Index, excluding dividends.

What most investors don't know is that market cycles are fairly predicatable (see above).  This is good news! 

The above exhibit shows the powerful performance bursts that have followed each market decline of 20% or more as measured by the year over year change in the DJIA Index. It's as if the markets understand Newton's law of physics, that for every action there is an equal and opposite reaction. Over the past 100 years there have been 9 year over year market corrections of 20% or more and after each correction a performance burst has helped to salvage investors' fortunes.

In April of 2003, the markets had already started to reverse the bear trend.  Unfortunately, many investors are still sitting on the sidelines because they were burned by losses incurred in the Y2K bear market.  Most investors, retail and institutional alike, were surprised by the uptrend, but once again a good working knowledge of market history would have allowed them to anticipate a significant move to the upside.  After every major market decline, markets have snapped back with a performance burst to the upside.  These uptrends tend to be very powerful, lifting investors' account balances and spirits at the same time.  

****The most insidious risk of all - Investor Risk

Investors are justifiably wary of the various risks that can beset a portfolio.  In addition to the eroding effects of volatility, there's

• business risk,
• currency risk,
• market risk,
• interest rate risk, and
• inflation risk. 

Perhaps the most insidious risk of all, though, is the one that's the hardest to protect yourself from - investor risk.  Investor risk is the risk we face just by being human.

It is easy to understand the concept that to be successful as an investor you should buy low and sell high.  But if you invest over a long enough time period to see both rising and falling markets, you'll see just how hard it can be to actually bring yourself to do this. 

• Buying at highs and selling at lows is the opposite of success and can cause yur portfolio irreparable harm, but it's .  extraordinarily common
• Had you asked those investors who were rushing into Internet or other high-flying stocks in early 2000, after the Nasdaq had just jumped more than 85% in 1999, if they thought they were buying high, you probably would have heard all kinds of reasons why this time was different.  There was a "new paradigm"; the old rules of valuation no longer applied.  
• Had you asked many of these same investors in early 2003 if they felt they were selling low after three years of crushing stock market declines, you would likely have heard that the market was going to keep falling, the world had changed, and prospects looked bleak for as far as the eye could see.

Investors were once thought to be "rational," efficiently processing all known market data and making decisions on the basis of the logical pursuit of their own best interests.  A whole branch of study called behavioural finance has sprung up to study the question of how investors really behave, and the short answer is that it's rarely rational. 

• Nature has 'wired' us to react in certain ways so we can quickly process information, understand patterns (like those that occur in nature), and make good, quick survival decisions. 
• Unfortunately, many of the same ways of thinking that have proven so helpful to our survival as a species can get us killed as investors.

Emotional responses, uneven reactions to risk and reward, looking for patterns where none may exist, believing our recent experience will persist, and overconfidence in our initial judgements are just some of the natural tendencies that can lead us astray.  Rather than trying to overcome our nature - to overcome the thinking processes and habits that have been woven into our very beings for millennia - we can try to invest in such a way as to reduce this investor risk and increase our odds of financial survival.

The markets will continue to rise and fall, but if your account doesn't fall so much that it triggers your primal urge to sell, you'll still be invested for the rebound. 

• Even the most robust market recovery doesn't help the investor who has already sold everything before it starts. 
• To reap the long-term performance advantages of being an investor, you have to find a way to stay invested for the long term. 

To the extent a lower volatility, dividend-based portfolio provides you with an investment experience you can live with in all kinds of markets, your portfolio is more likely to evolve into a fortune - and less likely to face extinction.

The Performance Illusion: Higher returns have long been associated with higher risks.

Which would you rather have, a portfolio with an average annual return of almost 34%, or one with an average annual return of just 5%?  Let's llok at a couple of examples that show why sometimes less is more.

Exhihit 1
The  Performance Illusion:  High Average Return

Year 1
Starting Value $100,000  Return 100%  Gain or (Loss) $100,000
Ending Value $200,000

Year 2
Starting Value $200,000  Return -99.00%  Gain or (Loss) ($198,000)
Ending Value $2,000

Year 3
Starting Value $2,000  Return 100%  Gain or (Loss) $2,000
Ending Value $4,000

Average Annual Return: 33.67%
Change in Value: ($96,000)
Percentage of Initial Investment Gained or (Lost) after 3 years: -96%



Exhihit 2
The  Performance Illusion:  Low Average Return

Year 1
Starting Value $100,000  Return 15%  Gain or (Loss) $15,000
Ending Value $115,000

Year 2
Starting Value $200,000  Return -15%  Gain or (Loss) ($17,250)Ending Value $97,750

Year 3
Starting Value $97,750  Return 15%  Gain or (Loss) $14,662.50
Ending Value $112,412.50

Average Annual Return: 5%
Change in Value: $12,412.50
Percentage of Initial Investment Gained or (Lost) after 3 years: 12.41%


Which return would you rather have? Of course, to illustrate the dangers of a high-volatility approach to investing, these two examples include an extreme case. Surely no one would ever face the kind of volatility shown in the 100 percent up and 99 percent down example ... but they might come close.



Exhihit 3
Nasdaq Composite Index

Year 1999
Starting Index Value 2192.69; Return 85.59%; Point Gain or(Loss) 1876.62
Ending Value 4069.31

Year 2000
Starting Index Value 4069.31; Return -39.29%; Point Gain or(Loss)(1598.79)
Ending Index Value 2470.52

Year 2001
Starting Index Value 2470.52; Return -21.05%; Point Gain or(Loss)(520.12)
Ending Index Value 1950.40

Year 2002
Starting Index Value 1950.40; Return -31.53%; Point Gain or(Loss)(614.89)
Ending Index Value 1335.51

Year 2003
Starting Index Value 1335.51; Return 50.01%; Point Gain or(Loss)667.86
Ending Index Value 2003.37

Average Annual Return: 8.74%
Change in Index: -189.32
Percentage of Initial Investment Gained or (Lost) after 5 years: -8.63%


Exhibit 3 shows the actual results of the Nasdaq Composite Index (Nasdaq) over five years beginning in 1999 and ending on December 31, 2003.

The truly remarkable 86% return posted by the Nasdaq in 1999 was followed by a truly gruesome bear market mauling over the three years. From the start of 2000 to the end of 2002, the Nasdaq shed an amazing 2,733 points - more than 67% of its value. The year 2003 brought welcome relief, but even after a 50% rise, the Nasdaq was still more than 8.6% below where it had stood five years earlier.

An investor unlucky enough to have missed out on the gains over this time span - either by coming late to the party or bailing out before the rebound - would have suffered a massive financial setback. As of the end of 2003, the Nasdaq remains more than 3,000 points, or 60%, below its all time closing high.


Exhibit 4
The Y2K Bear Market

Nasdaq
Index Closing High 5048.62
Date Hit 03/10/2000
Index (On 12/31/2003) 2003.37
Decline -60.32%
Points from High 3045.25
Gain Needed to Recover 152.01%

S&P 500
Index Closing High 1527.45
Date Hit 03/24/2000
Index (On 12/31/2003) 1111.92
Decline -27.20%
Points from High 415.53
Gain Needed to Recover 37.37%

DJIA
Index Closing High 11722.98
Date Hit 01/14/2000
Index (On 12/31/2003) 10453.92
Decline -10.83%
Points from High 1269.06
Gain Needed to Recover 12.14%


The Exhibit 4 shows the damage the Y2K bear market has visited on three major U.S. stock market indexes. The S&P 500 and DJIA did not soar nearly as high as the Nasdaq during the technology/telecom/Internet boom of the 1990s, and they suffered much less damage during the bust that followed.

The scenarios above are to illustrate, that there are consequences to taking risks. The easy success of the late 1990s bull market lulled many investgors, including many professional investors, into believing risk had lost its bite. Why not shoot for a 30 percent return? If you don't get it, you'll probably just have to settle for 20%. But that's not how it works in the real world - at least not in the long run. The experience of the Nasdaq versus the DJIA during the Y2K Bear Market wasn't a fluke. Higher returns have long been associated with higher risks.

Dividend stocks for Growth Investors

Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. 

If it don't go up, don't by it. 

Will Rogers

For many investors, current income is not an important consideration in building their portfolios. They may have sufficient income from other sources, including employment. For them, building and growing the overall value of their portfolios may be the primary focus of their efforts. Should these “growth investors” concern themselves at all with a strategy built around investing in dividend paying securities?

One of the classic advantages of dividends is their large contribution to the long-term performance that has made stocks so attractive to investors. (About 50% of the returns of your stocks are contributed by dividends.) Reinvesting those dividends can compound the growth of a portfolio. The attraction dividend-paying stocks hold for investors looking for a steady and rising stream of income to support their lifestyles is pretty clear.

The goal of a growth investor, is to increase the overall size of the portfolio so that it will be large enough to meet a future need. That need may be a lump sum to pay for college expenses, or a much larger account from which to draw retirement income. In either case, the object of the game is to make the pot of money bigger in the time available. The key to winning the game lies in understanding that total return is what counts.

Total return is made up of two parts: price appreciation and income. A security that goes up in price by 5% and pays 5% in income adds as much to the financial pot as one that goes up by 10% in value, but pays no income. Still, like the customer who insists on having his pizza cut into 6 slices because he doesn’t think he can eat eight, some investors want their returns delivered only as appreciation.

Stocks that pay dividends do tend to be more mature companies, with characteristically slower growth rates. This is sometimes taken to mean they have low total-return prospects. More accurately, they offer a different path to total return, and that path can lead to an excellent outcome. Flashy price gains are exciting; steady and reliable income can seem boring by comparison. To the extend those flashy gains come at the expense of increased volatility in annual returns, chasing them could lead you down the road to disaster.

Dubai bites the bullet on debt

Dubai bites the bullet on debt
Dubai has finally entered a treatment facility voluntarily.

By Una Galani, Breakingviews.com
Published: 6:12AM GMT 26 Nov 2009

Dubai World, one of the emirate’s biggest holding companies, has shocked creditors by asking for a standstill on the $60bn of debt attached to its entire portfolio, which includes ports operator Dubai Ports World, investment vehicle Istithmar and Nakheel – the property developer responsible for one of the Gulf’s most iconic sights: a series of man-made palm islands. If the emirate’s request is granted that would amount to a technical default.

Though Dubai’s troubles had been widely heralded, investors had been expecting a timely repayment of bonds. Sheikh Mohammed bin Rashid al-Maktoum even recently told critics of the emirate’s ability to meet its financial commitments to “shut up”. No surprise then that the request for a standstill from Dubai World until May 2010 sent the price of Dubai’s five year credit default swaps leaping to 420 basis points – up 100 basis points. That is still less than half the high Dubai’s CDS reached in February when confidence in the emirate was at an all time low.

Dubai has been smart to prove that it can still raise money. At the same time as asking creditors for more time, Dubai announced it had raised a further $5 billion tranche of its $20 billion emergency support bond from two government-owned banks in Abu Dhabi. Two weeks ago, the emirate also placed $2 billion worth of Islamic sukuk bonds with private investors, although those proceeds were not raised for distressed entities.

So why isn’t Dubai putting its hand in its pocket to help Dubai World meet its most pressing maturity, namely Nakheel’s $3.5 billion sukuk due mid-December? One reason could be because Dubai World faces at least a further $2.2 billion of maturities in the coming six months and more after that. Deloitte’s Aidan Birkett, who will lead the restructuring effort, will be one of the first outsiders to see the true scale of the problem that lies within.

Creditors might not like having to grant concessions, but anyone with a long term interest in Dubai should be pleased that the emirate is biting the bullet. Authorities last week took the decision to remove some of the key architects of modern Dubai from their positions. Now the debt laden emirate appears to have finally realised that it can’t pay off all of its debts without a serious financial restructuring. The first step to a cure is admitting there’s a problem.

Dubai: what the immediate future holds

Dubai: what the immediate future holds
Until last Wednesday, most investors saw Dubai as an attractive tourist destination, a regional financial centre and an example of what bold and visionary leadership can achieve.

By Mohamed A El-Erian
Published: 12:23AM GMT 29 Nov 2009

Some worried that Dubai's impressive achievements came with a debt burden that would prove difficult to sustain after last year's financial crisis.

This weekend, investors around the world are united in wondering "what does Dubai mean for me?"

Dubai has triggered local, national, regional and global forces that will play out in the weeks ahead.

At the local level, the standstill is an explicit recognition that the Emirate's debt and leverage levels cannot be sustained in what, at PIMCO, we have called the "new normal". The question for Dubai is now two-fold: can an orderly extension of debt payments be achieved; and how will this impact the risk premium that is attached to other economic and financial activities in the Emirate?

The key issue at the national level is how Abu Dhabi, the largest and richest of the seven UAE Emirates, will react. Here, it is a question of willingness. The leaders of Abu Dhabi must strike that delicate balance between using enormous wealth to support Dubai and ensuring appropriate burden sharing among those that repeatedly failed to heed Abu Dhabi's past warnings about the excesses in Dubai.

The regional dimension is captured by a word familiar to investors in emerging markets: "contagion". The immediate reaction of almost all markets (and too many commentators) is to lump together countries in the region that have very different characteristics. Witness how market measures of risk have surged for all the oil exporters in the region even though they share none of Dubai's debt and leverage characteristics.

At the global level, the Dubai announcement serves as a catalyst to take the froth off expensive financial markets. For the last few months, massive injections of liquidity (primarily by the US), aimed at limiting the adverse impact of the financial crisis on employment, have turbo-charged financial market valuations rather than make their way to the real economy. While many have worried about the generalised over-extension of equity markets, most have hesitated to take money off the table as there did not appear to be a catalyst to break the general "trend is your friend" mentality. Dubai is that catalyst.

So, what next?

First, it will take time to sort out the Dubai situation. Inevitably, this is an uncertain and protracted process that involves both on- and off-balance sheet exposures. It will cast a cloud not only on companies in the Emirate itself but also on institutions that have large exposures there, especially in the banking and real estate sectors.

Second, the immediate indiscriminate sell-off in regional (and emerging market) names will, over time, give way to greater differentiation based on economic and financial realities. Those with strong fundamentals will recover (including Abu Dhabi, Brazil, Kuwait, Qatar and Saudi Arabia) while others, including countries with large deficits and debt burdens in eastern/central/southern Europe, may come under more pressure.

Finally, and most importantly, Dubai serves as a warning to those that were quick to find comfort in the sharp market rally of the last few months. Since the summer, the appreciation of risk assets has been driven predominantly by artificial liquidity injections rather than fundamentals. The Dubai announcement is a reminder that a flood of government-induced liquidity cannot mask all excesses, all the time.

Investors should treat last Wednesday's announcement as an illustration of the lagged financial effects of the global financial crisis. The Dubai situation is no different than that facing commercial real estate in the US and UK.

Let Dubai be a reminder to all: last year's financial crisis was a consequential phenomenon whose lagged impact is yet to play out fully in the economic, financial, institutional and political arenas.

Mohamed A El-Erian is CEO and co-CIO of PIMCO, the investment management firm

http://www.telegraph.co.uk/finance/economics/6678194/Dubai-what-the-immediate-future-holds.html

Dubai: an emirate in crisis

DUBAI facts

Ruled by Sheikh Mohammed bin Rashid Al-Maktoum (above), who has embraced the extravagance of his emirate

16bn  Ruler's personal wealth – world's fourth-richest royal

1.7m Population

240,000 Oil production per day

State company is Dubai World, a property-focused investment group with a $59bn debt problem

Government holding companies bought large stakes in HSBC, Deutsche Bank and US retailer Barneys

Key London assets include the Adelphi, on the Strand, and the Grand Buildings in Trafalgar Square

The ruler's slogan is "Leader, equestrian, poet"



ABU DHABI facts

Ruled by Sheikh Khalifa bin Zayed al-Nahy (above), who has taken a reserved and anonymous stance in his
oil-rich state

$21bn Ruler's personal wealth – world's second-richest royal

1.3m Population

2.7m Oil production per day

State company is the Abu Dhabi Investment Authority, the world's largest sovereign wealth fund with assets worth more than $250bn

The company bought 4.9pc of Citigroup for £7.5bn in 2007 and is thought to be the world's second-largest institutional investor behind Bank of Japan

Key London assets include the ExCel exhibition centre in the Royal Docks and No1 Knightsbridge Green, close to Harrods

Its flagship project is the Gulf version of the Peggy Guggenheim Museum, which is set to open in 2011

****The Investment Policy Statement

The purpose of the IPS is to put in writing exactly what you're trying to accomplish with your portfolio, how you plan to get the job done, and how you'll measure your progress along the way.  It should serve as the anchor that keeps you from drifting away from your plan to chase the latest hot tip or investment fad.  By helping you to stay focused on your long-term goals, it can also keep you from becoming so discouraged by the inevitable setbacks that you give up on investing altogether.  An IPS doesn't have to be a complex document, but it should include the following: 

• Your risk tolerance
• Your time horizon
• Your need for current income
• Your need for long-term growth
• Your plan of action
• Your schedule for measuring your progress

-----

Your risk tolerance

A great way to measure your risk tolerance is to decide what percentage you're prepared to lose in any given year without abandoning your strategy.  Be honest with yourself.

Translate the percentage numbers into real dollar amounts.  It's one thing to tell yourself you can sit calmly through a 20 percent decline, and another to open an account statement that shows one out of every five dollars of your hard earned money seems to have disappeared.  Since the markets tend to spend about a quarter of the time falling, sometime during your lifetime as an investor it's virtually certain that you'll be facing losses in your account.

Big return targets, whether for growth or current income, tend to increase the likelihood of big dips in portfolio value.  Investors are infamous for selling at market lows in a panic, usually just before the market recovers.  The more harrowing the ride, the more likely you are to want to get off.  Be sure you don't put yourself on the path to surrender by choosing too dangerous a route.  If you're not prepared to accept any declines along the way, then you're not entitled to the superior gains that stocks have traditionally provided.  That's fine; just scale back your plans to match the steady but lower long-term returns you'll probably be able to get from fixed investments.

Your time horizon

Your time horizon is simply how long you plan to maintain your current investment strategy.  It's usually tied to some major expense or event, such as the arrival of college years for the kids or a planned retirement date.  For investors already in retirement, the time horizon for an income portfolio may be their life expectancy.  The shorter your time horizon, the more conservative your plan should be.  As we have just witnessed, markets can go down for several years in a row.  While they have always eventually recovered in the past, the markets may not follow your timetable, leaving you short of the necessary funds when it's time to write the check.  In general, money you absolutely need to spend within four or five years should not be a part of your investment portfolio.

Your need for current income

Your need for long-term growth


The total return your portfolio provides is made up of two parts:

• income and
• growth. 

If your portfolio is providing you with the cash you currently need to support your lifestyle, you need income.  We believe there are potential pitfalls in relying on the systematic liquidation of portfolio growth ("dollar lost averaging") to fund your current income needs and that these pitfalls are serious enough to offer a strong argument for basing your withdrawals on the cash income your investments can generate instead.

 

How much money do you need to take from your portfolio today?  How much will you need in the years ahead as the cost of living rises?  Is your portfolio big enough to produce that much cash?  An investor with an $800,000 portfolio can get $1,000 per month by taking cash at just a 1.5% annual rate, while someone with $150,000 invested needs to draw cash at an 8% rate to pocket $1,000 per month.  If prevailing rates are around 4% and you need to take 12% to make ends meet, you've got trouble.  Your choices are to cut your expenses or shop at the high yield end of the investment market where risks are greater.  As the spread between what's reasonable and what's necessary grows, so does the likelihood of depleting a portfolio.

Those investors who don't need to take current income from their investments, or who have more than enough invested to meet their needs, can focus on growing their portfolios.  You'll still need to know your required rate of return - the total return you'll need to achieve, on average, to take you from where you are right now to where you want to be.  Answering the following questions will help you to find your required rate of return. 

• How much will your future goals cost once inflation is taken into account?
• How much have you accumulated so far?
• Where is the rest going to come from in the time you have remaining?
• Is there a rate of return you can reasonably expect that will help you get the job done, and can you actually achieve that return while staying within your comfort level?

Without the pressure of monthly withdrawals, investment income can be reinvested to provide for future income goals, inflation protection, or generational wealth creation.  As part of your total return equation, the level of income you should be looking for can be matched to the distance in dollars you have to go to reach your goals, and risk you're prepared to assume to get there.

Your plan of action

The description of your plan of action can be as simple as "Invest primarily in dividend-paying stocks," or as comprehensive as a complete summary of the details of your investment process.  The key is to create a benchmark against which you can measure every investment decision you make to help you keep your plan on track. 

Your schedule for measuring your progress

Plan on reviewing your progress at predetermined intervals spaced at least one year apart.  This is not the same as the process of regularly monitoring your securities.  It's a chance to take a fresh look at your circumstances to see if there have been any material changes in your income needs, time horizon, or risk tolerance.  The purpose of this review is to make sure your plan of action still makes sense given any changes in your situation, and to help you keep your overall investment experience tied to the long-term context of what you hope to achieve.  This review is about you, not about the markets.  The investment environment is always changing, and your plan of action already takes that kind of change into account.  Be careful not to let what's going on right now in the investment markets alter your strategy.

Keep a historical perspective in mind.  Big bull market advances don't last forever, and neither do major bear market declines.  So long as your process is performing as you would expect under the circumstances and still meets your needs, your Investment Policy Statement should not require a major revision.

The concept and purpose of using Screen and Standards in Stocks Selection

As you begin the process of culling your universe of stocks down to a useful list, think about the qualities you find in your candidates in terms of screens and standards.

 

Screen

 

A screen is any element of a security that would eliminate it from further consideration, for example, the absence of a dividend.

 

The purpose of a screen is to limit your universe of stocks to a manageable list of candidates. 

The concept of using a screen to narrow our choices is a familiar part of daily life.  For example:

• people with food allergies can't eat certain dishes, no matter how delicious they are.
• we only read books written in languages we understand, and
• when we shop for clothing we start by looking for clothes that will fit.  After all, it doesn't matter how nice an item is if it's not the right size.

Screens help us discard all the possibilities that, no matter what else they may have to offer, just don't meet our needs.  Any stocks that fails to meet one of your screens simply won't be on your list of candidates.

 

 

Standards

 

Standards are those criteria by which you will compare one security to another when both of them pass your screening process in order to select your perferred choice. 

 

The purpose of standards is to help you decide which stocks on your list of candidates to invest in. 

 

Returning to our shopping example, once we narrow our choices to those items that are the right size we can try them on to see which ones fit the best.  There are other clothing standards in addition to fit such as color, style, quality, and price that we can use to compare our finalists when deciding which ones to buy.

 

The stocks that pass through your screens will be ranked according to a variety of investment standards to help you find those candidates on your list that appear to offer the most promising fit for your dividend portfolio.


Sometimes a measurement you use as a screen to shorten your list will also be used as a standard to rank your choices. 

The most obvious screen you'll be running your universe through is the size of the dividend yield.  If you've set your minimum dividend yield at 2.25%, then a stock with a yield of 3% and another stock with a yield of 4% would both pass the dividend screen you've set and be added to your list of candidates. 

Later, when ranking your candidates to decide which ones to buy, you can use the dividend yield measurement again - but this time as a standard.  On the basis of the dividend yield standard, the 4% stock would rank higher than the one with a yield of 3%.

How high the dividend yield should be to pass through your screen depends largely on

• how much income you need to take from your portfolio, and
• how much risk you're comfortable assuming. 

If you haven't stopped to address these two important factors, now would be a great time to do so.