The only reason you should EVER BUY a stock is that you think the business is worth more than it's selling for - not because you think a greater fool will pay more for the shares a few months down the road.
The best way to MITIGATE YOUR INVESTING RISK is to pay careful attention to valuation. If the market's expectations are low, there's a much greater chance that the company you purchase will exceed them.
Buying a stock on the expectation of POSITIVE NEWS FLOW or STRONG RELATIVE STRENGTH is asking for trouble.
This one came back to haunt many people over the past few years. Although it's certainly possible that another investor will pay you 50 times earnings down the road for the company you just bought for 30 times earnings, that's a VERY RISK BET to make. Sure, you could have made a ton of money in CMGI or Yahoo! during the Internet bubble, but ONLY IF YOU HAD GOTTEN OUT IN TIME. Can you honestly say to yourself that you would have?
Sunday 3 January 2010
Saturday 2 January 2010
Using Yield-based measures to value stocks: Say Yes to Yield
Say Yes to Yield
1. Earnings yield
Earnings yield
= Earnings/Price
The nice thing about yields , as opposed to P/Es, is that we can compare them with alternative investments, such as bonds, to see what kind of a return we can expect from each investment. (The difference is that earnings generally grow over time, whereas bond payments are fixed.)
For example:
In late-2003:
Risk-free return from 10-year treasury bond: 4.5%
Earnings yield of Stock with P/E of 20 = 5% (This is a bit better than treasuries, but not much considering the additional risk taken.)
Earnings yield of stock with P/E of 12 = 1/12 = 8.3% (This is much better than the treasury bond. The investor might be induced to take the additional risk.)
2. Cash return
Cash return
= Free Cash Flow/Enterprise Value
= FCF/(Market capitalization + long term debt – cash)
However the best yield-based valuation measure is a relatively little-known metric called cash return. In many ways, it’s actually a more useful tool than the P/E.
To calculate a cash return, divide free cash flow (FCF) by enterprise value. (Enterprise value is simply a stock’s market capitalization plus its long-term debt minus its cash.)
The goal of the cash return is to measure how efficiently the business is using its capital – both equity and debt – to generate free cash flow.
Essentially, cash return tells you how much free cash flow a company generates as a percentage of how much it would cost an investor to buy the whole company, including the debt burden. An investor buying the whole company would not only need to buy all the shares at market value, but also would be taking on the burden of any debt (net of cash) the company has.
An example of how to use cash return to find reasonably valued investments:
Company A’s
In late 2003,
Market cap = $9.8 billion
Long-term debt = $495 million
Cash in balance sheet = $172 million
Enterprise value = $9,800 + $495 - $172 = $10,100 million or $10.1 billion.
Review its FCF over the past decade
In 2003, FCF = about $600 million
Therefore,
Cash return of Company A = $600/$10,100 = 5.9%
In late 2003:
Yield of 10-year treasuries = 4.5%
Yield on corporate bonds = 4.9% (This is higher but still relatively paltry.)
Cash return of Company A = 5.9% (Looks pretty good. Moreover, this FCF is likely to grow over time, whereas those bond payments are fixed. Thus, Company A starts to look like a pretty solid value.)
Cash return is a great first step to finding cash cows trading at reasonable prices, but don’t use cash return for financials or foreign stocks.
• Cash flow isn’t terribly meaningful for banks and other firms that earn money via their balance sheets.
• A foreign stock that looks cheap based on its cash return may simply be defining cash flow more liberally, as the definitions of cash flow can vary widely in other countries.
----
Free Cashflow to Capital
FCF/Capital
=FCF/ Total Capital Employed
= FCF/TOCE
= FCF / (Total shareholders equity + Debt)
The Stock Performance Guide published by Dynaquest Sdn. Bhd. gives data on Free Cashflow (FCF) to Capital. FCF is the amount of nett cashflow left after paying for re-investment in fixed and current assets. FCF measures the ability of a firm to pay out dividend.
FCF/Capital compares the FCF of a firm with the total capital employed (defined as total shareholders equity & debt). The higher is this ratio, the more efficiently is the firm using its capital.
Cash cows are those companies with FCF/Capital of > 10%.
FCF/Capital is not the same as Cash Return discussed above.
1. Earnings yield
Earnings yield
= Earnings/Price
The nice thing about yields , as opposed to P/Es, is that we can compare them with alternative investments, such as bonds, to see what kind of a return we can expect from each investment. (The difference is that earnings generally grow over time, whereas bond payments are fixed.)
For example:
In late-2003:
Risk-free return from 10-year treasury bond: 4.5%
Earnings yield of Stock with P/E of 20 = 5% (This is a bit better than treasuries, but not much considering the additional risk taken.)
Earnings yield of stock with P/E of 12 = 1/12 = 8.3% (This is much better than the treasury bond. The investor might be induced to take the additional risk.)
2. Cash return
Cash return
= Free Cash Flow/Enterprise Value
= FCF/(Market capitalization + long term debt – cash)
However the best yield-based valuation measure is a relatively little-known metric called cash return. In many ways, it’s actually a more useful tool than the P/E.
To calculate a cash return, divide free cash flow (FCF) by enterprise value. (Enterprise value is simply a stock’s market capitalization plus its long-term debt minus its cash.)
The goal of the cash return is to measure how efficiently the business is using its capital – both equity and debt – to generate free cash flow.
Essentially, cash return tells you how much free cash flow a company generates as a percentage of how much it would cost an investor to buy the whole company, including the debt burden. An investor buying the whole company would not only need to buy all the shares at market value, but also would be taking on the burden of any debt (net of cash) the company has.
An example of how to use cash return to find reasonably valued investments:
Company A’s
In late 2003,
Market cap = $9.8 billion
Long-term debt = $495 million
Cash in balance sheet = $172 million
Enterprise value = $9,800 + $495 - $172 = $10,100 million or $10.1 billion.
Review its FCF over the past decade
In 2003, FCF = about $600 million
Therefore,
Cash return of Company A = $600/$10,100 = 5.9%
In late 2003:
Yield of 10-year treasuries = 4.5%
Yield on corporate bonds = 4.9% (This is higher but still relatively paltry.)
Cash return of Company A = 5.9% (Looks pretty good. Moreover, this FCF is likely to grow over time, whereas those bond payments are fixed. Thus, Company A starts to look like a pretty solid value.)
Cash return is a great first step to finding cash cows trading at reasonable prices, but don’t use cash return for financials or foreign stocks.
• Cash flow isn’t terribly meaningful for banks and other firms that earn money via their balance sheets.
• A foreign stock that looks cheap based on its cash return may simply be defining cash flow more liberally, as the definitions of cash flow can vary widely in other countries.
----
Free Cashflow to Capital
FCF/Capital
=FCF/ Total Capital Employed
= FCF/TOCE
= FCF / (Total shareholders equity + Debt)
The Stock Performance Guide published by Dynaquest Sdn. Bhd. gives data on Free Cashflow (FCF) to Capital. FCF is the amount of nett cashflow left after paying for re-investment in fixed and current assets. FCF measures the ability of a firm to pay out dividend.
FCF/Capital compares the FCF of a firm with the total capital employed (defined as total shareholders equity & debt). The higher is this ratio, the more efficiently is the firm using its capital.
Cash cows are those companies with FCF/Capital of > 10%.
FCF/Capital is not the same as Cash Return discussed above.
Stock Market Operators: Do they exist?
I believe that most of us have heard of stock market operators. They are known by many different names and they are constantly the blame for our financial losses. In some parts of the world, they are known as sharks, syndicates, big bosses, speculators, liars, cheaters or stock market manipulators. Some of us cheer their existence and their operations while some cursed them as if they are the culprits to our financial ruins. Are they our friends or foes? As the famous saying goes, know thy foes and you will have the upper hand in battle. In this post, I will challenge and dare you to swim with the sharks and eat from the crumbs of their feeds and not to be their feed. Here I would like to bring out some of my personal thoughts on this question that most newbie has.
Ok, here is the short answer. Yes, you are right. They existed and their operations are hidden from most people especially the newbie in these financial markets. I believe if we know them and how they operate, we could actually move along with them. In fact, the whole purpose of technical analysis is to determine the balance of demand and supply and the stock market operators are some of the powerful and rich individuals or groups with much buying and selling power. If we are able to track their movement, we will be able to profit from their operations. However, if we are ignorant of their existence, we could be their next meal.
Basic facts of stock market operators are listed below for your reference.
They work individually or in a group.
They rely on the market trends to help them in their mission.
The general publics are their big customers.
They together work with the public listed company owners or insiders.
They have a main mission objective to accomplish.
The bulk of their operation revolved around the accumulation and the distribution of stocks from / to the general publics.
They are rich and powerful figures but they are also humans that have emotions like all of us.
They have extensive credit facilities and lower transaction costs than the retail investors.
They do make mistakes like any one of us. Their mistake costs millions in dollars.
Market news, stock market analyst, corporate announcements, word of mouth advertising, price bidding and order queues are some of their tricks and tools that they used to achieve their main objective.
They don?t try to pick the bottom or the top like most retail investors do. Again, some of them try to do this and it costs them much sorrow and dismay.
They do attempt to manipulate the chart to trick the chartist whether you like it or not.
They are both the buyer and seller in the queue order at any given time.
They are not doing charity work. They existed to make your money. It is important to understand them well as they are big volume buyers and sellers. They can tilt the balance of demand and supply. Understanding the above traits of stock market operators will help to clear some of the myths that we have of them. Remember, they are humans like us. Some of the above points deserved to be elaborated further to bring out the secrets of trading methodologies that we will employ in our technical analysis.
Primary market trends are very important to their success and failures. If they judge wrongly on this, they could go bust easily as the power of leveraging will work against them. Remember this, they cannot fight against the trends and they don?t have the strength to do so. Don?t ever think that they can swim against the tides.
If their mission objective is to acquire stocks, they might push down the prices to cause temporary market panics to squeeze out the stocks out from the speculators and investors and this is especially true in certain countries where short-selling is not allowed. The success of this technique will depends on what sort of people that are holding the stocks. This will get rid of the intraday and short term traders. However, they will try to maintain the prices around a certain range as to keep the sellers motivated. Usually the public listed company owners and insider will work in tandem to collect the shares from the general public. After they exhausted the fearful speculators and investors, they will then turn their eyes to the stronger speculators and investors by pushing up the prices higher to catch their interests.
If their mission is to distribute stocks, they will push up the stock prices to catch the attention of speculators and investors. They will work with market analyst to create beautiful pictures of the company prospects. They will work with the public listed company owners and insiders to create scarcity of stocks. At this moment of time, they will also announce all the good news while pushing up the stock prices. They will queue up as buyers and sellers in the order queue. They will buy their own stocks to create volume to entice the crowd to follow. As they bid up and down the prices, stocks were distributed without the awareness of the general public.
I believe that this write-up will increase our trading knowledge and make us a wiser trader. I will continue to write of how we can profit from their operation in future posts whenever I managed to get my time organized.
http://stockmarket.tailou.com/viewtopic.php?f=23&t=3807&p=26266
Ok, here is the short answer. Yes, you are right. They existed and their operations are hidden from most people especially the newbie in these financial markets. I believe if we know them and how they operate, we could actually move along with them. In fact, the whole purpose of technical analysis is to determine the balance of demand and supply and the stock market operators are some of the powerful and rich individuals or groups with much buying and selling power. If we are able to track their movement, we will be able to profit from their operations. However, if we are ignorant of their existence, we could be their next meal.
Basic facts of stock market operators are listed below for your reference.
They work individually or in a group.
They rely on the market trends to help them in their mission.
The general publics are their big customers.
They together work with the public listed company owners or insiders.
They have a main mission objective to accomplish.
The bulk of their operation revolved around the accumulation and the distribution of stocks from / to the general publics.
They are rich and powerful figures but they are also humans that have emotions like all of us.
They have extensive credit facilities and lower transaction costs than the retail investors.
They do make mistakes like any one of us. Their mistake costs millions in dollars.
Market news, stock market analyst, corporate announcements, word of mouth advertising, price bidding and order queues are some of their tricks and tools that they used to achieve their main objective.
They don?t try to pick the bottom or the top like most retail investors do. Again, some of them try to do this and it costs them much sorrow and dismay.
They do attempt to manipulate the chart to trick the chartist whether you like it or not.
They are both the buyer and seller in the queue order at any given time.
They are not doing charity work. They existed to make your money. It is important to understand them well as they are big volume buyers and sellers. They can tilt the balance of demand and supply. Understanding the above traits of stock market operators will help to clear some of the myths that we have of them. Remember, they are humans like us. Some of the above points deserved to be elaborated further to bring out the secrets of trading methodologies that we will employ in our technical analysis.
Primary market trends are very important to their success and failures. If they judge wrongly on this, they could go bust easily as the power of leveraging will work against them. Remember this, they cannot fight against the trends and they don?t have the strength to do so. Don?t ever think that they can swim against the tides.
If their mission objective is to acquire stocks, they might push down the prices to cause temporary market panics to squeeze out the stocks out from the speculators and investors and this is especially true in certain countries where short-selling is not allowed. The success of this technique will depends on what sort of people that are holding the stocks. This will get rid of the intraday and short term traders. However, they will try to maintain the prices around a certain range as to keep the sellers motivated. Usually the public listed company owners and insider will work in tandem to collect the shares from the general public. After they exhausted the fearful speculators and investors, they will then turn their eyes to the stronger speculators and investors by pushing up the prices higher to catch their interests.
If their mission is to distribute stocks, they will push up the stock prices to catch the attention of speculators and investors. They will work with market analyst to create beautiful pictures of the company prospects. They will work with the public listed company owners and insiders to create scarcity of stocks. At this moment of time, they will also announce all the good news while pushing up the stock prices. They will queue up as buyers and sellers in the order queue. They will buy their own stocks to create volume to entice the crowd to follow. As they bid up and down the prices, stocks were distributed without the awareness of the general public.
I believe that this write-up will increase our trading knowledge and make us a wiser trader. I will continue to write of how we can profit from their operation in future posts whenever I managed to get my time organized.
http://stockmarket.tailou.com/viewtopic.php?f=23&t=3807&p=26266
Friday 1 January 2010
Trying to Time the Market
Market timing is one of the all-time great myths of investing. There is no strategy that consistently tells you when to be in the market and when to be out of it, and anyone who says otherwise usually has a market-timing service to sell you.
Here is an interesting study in the February 2001 issue of Financial Analysts Journal, which looked at the difference between buy-and-hold and market-timing strategies from 1926 through 1999 using a very elegant method.
About 1/3 of the possible monthly market-timing combinations beat the buy-and-hold strategy. You may be thinking, "I have a 1 in 3 chance of beating the market if I try to time it. I'll take those odds!"
But, consider these three issues:
That is pretty powerful evidence that market timing is not a viable strategy because running a mutual fund is a very profitable business - if someone had figured out a way to reliably time the market, you can bet your life they'd have started a fund to do so.
Ref: The Five Rules for Successful Stock Investing by Pat Dorsey
Here is an interesting study in the February 2001 issue of Financial Analysts Journal, which looked at the difference between buy-and-hold and market-timing strategies from 1926 through 1999 using a very elegant method.
- The authors essentially mapped all of the possible market-timing variations between 1926 and 1999 with different switching frequencies.
- They assumed that for any given month, an investor could be either in T-bills or in stocks and then calculated the returns that would have resulted from all of hte possible combinations of those switches. (There are 2^12 - or 4,096 - possible combinations between two assets over 12 months.)
- Then they compared the results of a buy-and-hold strategy with all of the possible market-timing strategies to see what percentage of the timing combinations produced a return greater than simply buying and holding.
About 1/3 of the possible monthly market-timing combinations beat the buy-and-hold strategy. You may be thinking, "I have a 1 in 3 chance of beating the market if I try to time it. I'll take those odds!"
But, consider these three issues:
- The result in the paper cited previously overstate the benefits of timing because they looked at each year as a discrete period - which means they ignore the benefits of compounding (as long as you assume that the market will generally rise over long periods of time, that is).
- Stock market returns are highly skewed - that is, the bulk of the returns (postive and negative) from any given year comes from relatively few days in that year. This means that the risk of NOT being in the market is high for anyone looking to build wealth over a long period of time.
- Morningstar has tracked thousand of funds over the past two decades. Not a single one of these has been able to CONSISTENTLY time the market. Sure, some funds have made the occasional great call, but none have posted any kind of superior track record by jumping frequently in and out of the market based on the signals generated by a quantitative model.
That is pretty powerful evidence that market timing is not a viable strategy because running a mutual fund is a very profitable business - if someone had figured out a way to reliably time the market, you can bet your life they'd have started a fund to do so.
Ref: The Five Rules for Successful Stock Investing by Pat Dorsey
Avoiding Mistakes is the Most Profitable Strategy of All
Learn the seven easily avoidable mistakes that many investors frequently make. If you steer clear of these, you will start out ahead of the pack. Resisting these temptations is the first step to reaching your financial goals:
1. Swinging for the fences
Don't try to shoot for big gains by finding the next Microsoft. Instead focus on finding solid companies with shares selling at low valuations.
2. Believing that it's different this time
Understanding the market 's history can help you avoid repeated pitfalls. If people try to convince you that "it really is different this time," ignore them.
3. Falling in love with products
Don't fall into the all-too-frequent trap of assuming that a great product translates into a high-quality company. Before you get swept away by exciting new technology or a nifty product, make sure you've checked out the company's business model.
4. Panicking when the market is down
Don't be afraid to use fear to your advantage. The best time to buy is when everyone else is running away from a given asset class.
5. Trying to time the market
Attempting to time the market is a fool's game. There's ample evidence that the market can't be timed.
6. Ignoring valuation
The best way to reduce your investment risk is to pay careful attention to valuation. Don't make the mistake of hoping that other investors will keep paying higher prices, even if you're buying shares in a great company.
7. Relying on earnings for the whole story
Cash flow is the true measure of a company's financial performance, not reported earnings per share.
1. Swinging for the fences
Don't try to shoot for big gains by finding the next Microsoft. Instead focus on finding solid companies with shares selling at low valuations.
2. Believing that it's different this time
Understanding the market 's history can help you avoid repeated pitfalls. If people try to convince you that "it really is different this time," ignore them.
3. Falling in love with products
Don't fall into the all-too-frequent trap of assuming that a great product translates into a high-quality company. Before you get swept away by exciting new technology or a nifty product, make sure you've checked out the company's business model.
4. Panicking when the market is down
Don't be afraid to use fear to your advantage. The best time to buy is when everyone else is running away from a given asset class.
5. Trying to time the market
Attempting to time the market is a fool's game. There's ample evidence that the market can't be timed.
6. Ignoring valuation
The best way to reduce your investment risk is to pay careful attention to valuation. Don't make the mistake of hoping that other investors will keep paying higher prices, even if you're buying shares in a great company.
7. Relying on earnings for the whole story
Cash flow is the true measure of a company's financial performance, not reported earnings per share.
FBM KLCI closes year up 45%
For the year, the FBM KLCI gained a total of 396 points or 45.2% after rising from 876.8 at the start of the year and ending at 1,272.8. At its lowest point, the index fell to 838 in March.
While the gains were slightly less than most regional bourses, it should be noted that the local stock market and domestic economy was also relatively more resilient during the crisis.
As a comparison, key market indices in China, India, Taiwan and Indonesia surged 78% to 87% for the year. Hong Kong was up 52%, South Korea rose 50% and Singapore was up 64%, but Japan lagged the region with only a 19% gain.
http://www.theedgemalaysia.com/business-news/156638-fbm-klci-closes-year-up-45-.html
While the gains were slightly less than most regional bourses, it should be noted that the local stock market and domestic economy was also relatively more resilient during the crisis.
As a comparison, key market indices in China, India, Taiwan and Indonesia surged 78% to 87% for the year. Hong Kong was up 52%, South Korea rose 50% and Singapore was up 64%, but Japan lagged the region with only a 19% gain.
http://www.theedgemalaysia.com/business-news/156638-fbm-klci-closes-year-up-45-.html
Public Bank issues RM50m debt notes
Public Bank issues RM50m debt notes
Tags: Public Bank | subordinated notes
Written by Joseph Chin
Thursday, 31 December 2009 18:01
KUALA LUMPUR: PUBLIC BANK BHD [] has issued the fourth tranche of its subordinated notes amounting to RM50 million, which is due on Dec 31, 2019 and callable on Dec 31, 2014.
The bank said on Thursday, Dec 31, the issuance of the RM50 million notes was part of the RM5 billion nominal value subordinated medium term note programme.
"The proceeds raised from the issuance of the fourth tranche of subordinated notes under the subordinated MTN programme shall be used to finance the working capital, general banking and other corporate purposes of Public bank," it said.
Public Bank said the interest payable on each subordinated note issued under the fourth tranche is 4.60% per annum from Dec 31, 2009 up to Dec 31, 2014. Thereafter, the interest on each subordinated note is 5.60% per annum from Dec 31, 2014.
It added the subordinated notes are eligible to be included as Tier 2 capital of the bank.
http://www.theedgemalaysia.com/business-news/156643-public-bank-issues-rm50m-debt-notes.html
Tags: Public Bank | subordinated notes
Written by Joseph Chin
Thursday, 31 December 2009 18:01
KUALA LUMPUR: PUBLIC BANK BHD [] has issued the fourth tranche of its subordinated notes amounting to RM50 million, which is due on Dec 31, 2019 and callable on Dec 31, 2014.
The bank said on Thursday, Dec 31, the issuance of the RM50 million notes was part of the RM5 billion nominal value subordinated medium term note programme.
"The proceeds raised from the issuance of the fourth tranche of subordinated notes under the subordinated MTN programme shall be used to finance the working capital, general banking and other corporate purposes of Public bank," it said.
Public Bank said the interest payable on each subordinated note issued under the fourth tranche is 4.60% per annum from Dec 31, 2009 up to Dec 31, 2014. Thereafter, the interest on each subordinated note is 5.60% per annum from Dec 31, 2014.
It added the subordinated notes are eligible to be included as Tier 2 capital of the bank.
http://www.theedgemalaysia.com/business-news/156643-public-bank-issues-rm50m-debt-notes.html
Thursday 31 December 2009
Year to Date KLSE Performance (31.12.2009)
KLSE 1 Year Chart
http://finance.yahoo.com/echarts?s=%5EKLSE#chart1:symbol=^klse;range=1y;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined
Important lessons learned from the last 2 years.
1. Always buy good quality stocks.
2. Do not over-diversify.
3. Monitor the business.
4. Do not be influenced by the market price.
5. Do not follow or be influenced by the crowd. The crowd is often wrong.
6. Volatility in the market is a friend, take advantage of it.
7. Always buy at bargain price. Always buy with a margin of safety, at a discount to the fundamental intrinsic value.
8. Do not lose your capital. Even in March 2009, the portfolio still showed a gain.
9. Develop a good investing philosophy and strategy. Stick to them.
10. Invest for the long term.
11. Understand your emotions to greed and fear. Challenge them before reacting. Are these rational or appropriate given the facts?
12. It is often alright to do nothing.
Happy New Year to all.
http://finance.yahoo.com/echarts?s=%5EKLSE#chart1:symbol=^klse;range=1y;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined
Important lessons learned from the last 2 years.
1. Always buy good quality stocks.
2. Do not over-diversify.
3. Monitor the business.
4. Do not be influenced by the market price.
5. Do not follow or be influenced by the crowd. The crowd is often wrong.
6. Volatility in the market is a friend, take advantage of it.
7. Always buy at bargain price. Always buy with a margin of safety, at a discount to the fundamental intrinsic value.
8. Do not lose your capital. Even in March 2009, the portfolio still showed a gain.
9. Develop a good investing philosophy and strategy. Stick to them.
10. Invest for the long term.
11. Understand your emotions to greed and fear. Challenge them before reacting. Are these rational or appropriate given the facts?
12. It is often alright to do nothing.
Happy New Year to all.
Wednesday 30 December 2009
Stock markets flirt with full bubble territory
Stock markets flirt with full bubble territory
With the FTSE 100 back at levels last seen before the collapse of Lehman Brothers, Martin Hutchinson asks whether there is a bubble brewing in asset prices.
Published: 11:36AM GMT 29 Dec 2009
Rapid increases in the prices of financial assets can be a healthy sign. Markets are doing their job when prices jump because of sudden economic strength or a disruption of supply. But when the causes are more monetary than real, a market bubble is forming. Are markets healthy or unhealthy now?
Observers from the Bank of International Settlements to the Hong Kong central bank are asking the question. And quite right, too. The MSCI World stock price index is up 70pc since March and many commodity prices are rocketing. The Reuters-CRB Metals Index is up 74pc over the past year.
Some portion of those increases is probably healthy. Prices were lowest when the financial and economic worlds were undergoing a near-death experience. Banking systems and the economy are not exactly up and running, but the trends are more positive.
Still, some markets seem to have moved past recovery into excess. The jump in commodities, probably the most "financialised" markets in the world, comes despite ample current inventories and limited recovery in demand.
Global stock markets are in danger of hitting full bubble territory. Analysts expect global market earnings to increase by 30pc in 2010, and investors are already paying a fairly generous 14 times those expected earnings, according to Societe Generale calculations.
The case for a bubble is supported by day-to-day market behaviour -- prices often fall on good economic news. Investors seem to care less about the prospect of stronger demand than about the possibility that the authorities will tighten up financial conditions.
If past practice is any guide, the tightening will be slow in coming. Central bankers have not yet fully cast off their long-established belief that asset prices aren't relevant to their task of keeping inflation at bay, while governments find it hard to abandon the many pleasures of deficit spending.
Recent experience should teach another lesson. Financial excess leads to destabilising market crashes. More distant history suggests that monetary excess frequently leads to retail price inflation. Tighter money might make the recovery less robust over the next year or two, but would make the world safer for the next decade.
http://www.telegraph.co.uk/finance/markets/6905092/Stock-markets-flirt-with-full-bubble-territory.html
With the FTSE 100 back at levels last seen before the collapse of Lehman Brothers, Martin Hutchinson asks whether there is a bubble brewing in asset prices.
Published: 11:36AM GMT 29 Dec 2009
Rapid increases in the prices of financial assets can be a healthy sign. Markets are doing their job when prices jump because of sudden economic strength or a disruption of supply. But when the causes are more monetary than real, a market bubble is forming. Are markets healthy or unhealthy now?
Observers from the Bank of International Settlements to the Hong Kong central bank are asking the question. And quite right, too. The MSCI World stock price index is up 70pc since March and many commodity prices are rocketing. The Reuters-CRB Metals Index is up 74pc over the past year.
Some portion of those increases is probably healthy. Prices were lowest when the financial and economic worlds were undergoing a near-death experience. Banking systems and the economy are not exactly up and running, but the trends are more positive.
Still, some markets seem to have moved past recovery into excess. The jump in commodities, probably the most "financialised" markets in the world, comes despite ample current inventories and limited recovery in demand.
Global stock markets are in danger of hitting full bubble territory. Analysts expect global market earnings to increase by 30pc in 2010, and investors are already paying a fairly generous 14 times those expected earnings, according to Societe Generale calculations.
The case for a bubble is supported by day-to-day market behaviour -- prices often fall on good economic news. Investors seem to care less about the prospect of stronger demand than about the possibility that the authorities will tighten up financial conditions.
If past practice is any guide, the tightening will be slow in coming. Central bankers have not yet fully cast off their long-established belief that asset prices aren't relevant to their task of keeping inflation at bay, while governments find it hard to abandon the many pleasures of deficit spending.
Recent experience should teach another lesson. Financial excess leads to destabilising market crashes. More distant history suggests that monetary excess frequently leads to retail price inflation. Tighter money might make the recovery less robust over the next year or two, but would make the world safer for the next decade.
http://www.telegraph.co.uk/finance/markets/6905092/Stock-markets-flirt-with-full-bubble-territory.html
Why shares beat property
Why shares beat property
How many realise that shares remain ahead of property over the past quarter century?
By Ian Cowie
Published: 7:42AM GMT 18 Dec 2009
Short of a miraculous surge in the stock market, the end of this month will mark the close of a dismal decade for shares.
Most investors know that the FTSE 100 has never revisited the peak of 6,930 it briefly hit on December 30 1999. But how many realise that shares remain ahead of property over the past quarter century?
Yes, you may very well stretch your eyes. I did, too, when Andrew Bell, head of research at Rensburg Sheppards Investment Managers, first told me.
I was almost as surprised when his graceful consultant, Jain Castiau, talked me into taking a dawn dip with her in the near-freezing waters of the Serpentine this week. At least it wasn't snowing at the time but, hey, that's another story.
Back to the statistics. The comparison, as you can see from the graph on this page, is based on the Halifax house price index and the FTSE 100 total returns index; both being the best-known benchmarks for their respective assets.
Or nearly. Because, as sharp-eyed readers will already have noticed, this version of the Footsie is the "total returns" version. In other words, it includes dividend income.
That is an important difference from the most widely quoted form of the Footsie which, for the purposes of simplicity, only measures changes in capital value or share prices, excluding dividends.
That goes a long way toward explaining why so many people underestimate the value of shares and share-based funds as a means of storing wealth.
Dividends are an important part of the total returns from most shares, but they are completely excluded from the simple snapshots of changes in capital values that form the basis of most television and tabloid stock market analysis.
No wonder the figures look so bad because they are so wrong.
Even after this year's splendid stock market rally, the Footsie is still yielding a shade under 3.4pc. That is, dividends expressed as a percentage of share prices averaged across the 100 stocks in this benchmark index.
So, for example, even if share prices remained frozen for 20 years, you would double your money in less than that time simply by reinvesting dividend income.
Bear in mind that income paid by equities is quoted net of basic rate tax – so most investors would need gross returns of 4.25pc and high earners would need 5.6pc to match the yield on the Footsie.
Few bank or building society deposits pay that much income – although, unlike shares, they do provide a capital guarantee. Bonds and bond funds often pay more – although, unlike shares, fixed interest securities are very vulnerable to inflation.
All things considered, it is daft to ignore dividend income when measuring returns from shares. For starters, the full picture demolishes the cliche of a ''lost decade for shareholders''.
What's that I hear you say? When comparing housing and shares it would be totally unfair to include income from one asset, but not the other. Too true. Mr Bell was scrupulously fair and has factored into his calculation a 5pc rental yield on property, less 1pc maintenance costs.
That's even fairer to bricks and mortar than it sounds because the Investment Property Databank UK Residential Index is currently yielding only 3.2pc gross and, of course, it is much easier to reinvest relatively small sums of income in shares than it is to buy tiny bits of houses.
Needless to say, the total returns from any asset would be much lower if you failed to promptly reinvest income because the compounding effect, so marked over long periods of time, would be absent.
Against all that, it just doesn't feel right to say shares have proved a better bet than bricks and mortar over the past quarter century.
Most shareholders are also homeowners and, while equities have delivered higher returns than most media coverage would suggest, I would hazard the guess that bricks and mortar have contributed more to the total wealth of the majority of homeowners than equities did.
The explanation is gearing. Until recently, almost anyone could fill in a few forms and borrow 100pc of their investment in housing. Such easy credit has never been available for shares.
And, of course, stock-market profits are generally subject to capital gains tax – unless you obtain them via an individual savings account or pension – whereas gains on your home are always CGT-free.
Even so, Mr Bell's comparison remains surprising and encouraging at a time when so much analysis of the stock market is merely depressing.
And it is always true – as I recalled while splashing through the gelid lake in Hyde Park this week – that the more you look, the more you see.
http://www.telegraph.co.uk/finance/personalfinance/comment/iancowie/6836526/Why-shares-beat-property.html
How many realise that shares remain ahead of property over the past quarter century?
By Ian Cowie
Published: 7:42AM GMT 18 Dec 2009
Short of a miraculous surge in the stock market, the end of this month will mark the close of a dismal decade for shares.
Most investors know that the FTSE 100 has never revisited the peak of 6,930 it briefly hit on December 30 1999. But how many realise that shares remain ahead of property over the past quarter century?
Yes, you may very well stretch your eyes. I did, too, when Andrew Bell, head of research at Rensburg Sheppards Investment Managers, first told me.
I was almost as surprised when his graceful consultant, Jain Castiau, talked me into taking a dawn dip with her in the near-freezing waters of the Serpentine this week. At least it wasn't snowing at the time but, hey, that's another story.
Back to the statistics. The comparison, as you can see from the graph on this page, is based on the Halifax house price index and the FTSE 100 total returns index; both being the best-known benchmarks for their respective assets.
Or nearly. Because, as sharp-eyed readers will already have noticed, this version of the Footsie is the "total returns" version. In other words, it includes dividend income.
That is an important difference from the most widely quoted form of the Footsie which, for the purposes of simplicity, only measures changes in capital value or share prices, excluding dividends.
That goes a long way toward explaining why so many people underestimate the value of shares and share-based funds as a means of storing wealth.
Dividends are an important part of the total returns from most shares, but they are completely excluded from the simple snapshots of changes in capital values that form the basis of most television and tabloid stock market analysis.
No wonder the figures look so bad because they are so wrong.
Even after this year's splendid stock market rally, the Footsie is still yielding a shade under 3.4pc. That is, dividends expressed as a percentage of share prices averaged across the 100 stocks in this benchmark index.
So, for example, even if share prices remained frozen for 20 years, you would double your money in less than that time simply by reinvesting dividend income.
Bear in mind that income paid by equities is quoted net of basic rate tax – so most investors would need gross returns of 4.25pc and high earners would need 5.6pc to match the yield on the Footsie.
Few bank or building society deposits pay that much income – although, unlike shares, they do provide a capital guarantee. Bonds and bond funds often pay more – although, unlike shares, fixed interest securities are very vulnerable to inflation.
All things considered, it is daft to ignore dividend income when measuring returns from shares. For starters, the full picture demolishes the cliche of a ''lost decade for shareholders''.
What's that I hear you say? When comparing housing and shares it would be totally unfair to include income from one asset, but not the other. Too true. Mr Bell was scrupulously fair and has factored into his calculation a 5pc rental yield on property, less 1pc maintenance costs.
That's even fairer to bricks and mortar than it sounds because the Investment Property Databank UK Residential Index is currently yielding only 3.2pc gross and, of course, it is much easier to reinvest relatively small sums of income in shares than it is to buy tiny bits of houses.
Needless to say, the total returns from any asset would be much lower if you failed to promptly reinvest income because the compounding effect, so marked over long periods of time, would be absent.
Against all that, it just doesn't feel right to say shares have proved a better bet than bricks and mortar over the past quarter century.
Most shareholders are also homeowners and, while equities have delivered higher returns than most media coverage would suggest, I would hazard the guess that bricks and mortar have contributed more to the total wealth of the majority of homeowners than equities did.
The explanation is gearing. Until recently, almost anyone could fill in a few forms and borrow 100pc of their investment in housing. Such easy credit has never been available for shares.
And, of course, stock-market profits are generally subject to capital gains tax – unless you obtain them via an individual savings account or pension – whereas gains on your home are always CGT-free.
Even so, Mr Bell's comparison remains surprising and encouraging at a time when so much analysis of the stock market is merely depressing.
And it is always true – as I recalled while splashing through the gelid lake in Hyde Park this week – that the more you look, the more you see.
http://www.telegraph.co.uk/finance/personalfinance/comment/iancowie/6836526/Why-shares-beat-property.html
Lessons to be learned from the decade that shocked the stock market
Lessons to be learned from the decade that shocked the stock market
It has been a decade that many investors would rather forget.
On December 31, 1999 the FTSE100 closed at 6,930 and 10 years on it still has some distance to go before it regains this peak, sitting at around just 5,300 last week.
By Emma Simon
Published: 7:00AM GMT 28 Dec 2009
1. A guarantee is only as good as the guarantor
Structured products may have been guaranteed by Wall Street investment banks. But once Lehman's went bust, people realised that many of their guaranteed investments weren't as guaranteed as they thought.
2. Don't buy something you don't understand
Financial advisers often point out that many people drive a car without fully understanding how the internal combustion engines works. But those who got lost money in split-capital trusts and precipice bonds will no doubt now think twice before being reassured by such twaddle. If a car breaks down there is always the AA; there isn't any equivalent rescue service when it's your life savings.
3. Higher returns come with higher risks
If you want to better returns than a building society account you need to take more risk with your money. This almost always means you could lose capital.
4. Don't pay more than you have to
The advent of the internet and price comparison sites mean people can now shop around for financial deals and compare prices and products more effectively.
5. Long-term investments don't always mean long-term gains
Just because an investment should be held for a minimum if five years, doesn't mean you will get a positive return at the end of this period, as the "lost decade" for equities demonstrates.
6. Ask how your adviser earns his money
Commission skews judgements; it pays to inquire why comparable products aren't being recommended.
7. Read the small print
What will you be charged if you exceed your overdraft limit? What penalties will be applied if you cash the investment in early? When can the insurer turn down your claim? Such vital information is almost always in the small print.
8. Don't rely on easy credit
Many assumed cheap loans, remortgages and interest-free credit cards would bail them out of any financial difficulty. But these credit lines disappear when times get tough.
9. Don't rely on others to provide a pension
If you want a decent retirement, start saving. Employers have watered down pension schemes while the value of the state pension has declined. Even generous public sector pension look under threat.
10. What goes up also comes down
Shares prices can plummet, house price can fall, and interest rates can tumble – as well as rise sharply too. It's best to plan for such eventualities. They almost always happen.
http://www.telegraph.co.uk/finance/personalfinance/investing/6867372/Lessons-to-be-learned-from-the-decade-that-shocked-the-stock-market.html
It has been a decade that many investors would rather forget.
On December 31, 1999 the FTSE100 closed at 6,930 and 10 years on it still has some distance to go before it regains this peak, sitting at around just 5,300 last week.
By Emma Simon
Published: 7:00AM GMT 28 Dec 2009
1. A guarantee is only as good as the guarantor
Structured products may have been guaranteed by Wall Street investment banks. But once Lehman's went bust, people realised that many of their guaranteed investments weren't as guaranteed as they thought.
2. Don't buy something you don't understand
Financial advisers often point out that many people drive a car without fully understanding how the internal combustion engines works. But those who got lost money in split-capital trusts and precipice bonds will no doubt now think twice before being reassured by such twaddle. If a car breaks down there is always the AA; there isn't any equivalent rescue service when it's your life savings.
3. Higher returns come with higher risks
If you want to better returns than a building society account you need to take more risk with your money. This almost always means you could lose capital.
4. Don't pay more than you have to
The advent of the internet and price comparison sites mean people can now shop around for financial deals and compare prices and products more effectively.
5. Long-term investments don't always mean long-term gains
Just because an investment should be held for a minimum if five years, doesn't mean you will get a positive return at the end of this period, as the "lost decade" for equities demonstrates.
6. Ask how your adviser earns his money
Commission skews judgements; it pays to inquire why comparable products aren't being recommended.
7. Read the small print
What will you be charged if you exceed your overdraft limit? What penalties will be applied if you cash the investment in early? When can the insurer turn down your claim? Such vital information is almost always in the small print.
8. Don't rely on easy credit
Many assumed cheap loans, remortgages and interest-free credit cards would bail them out of any financial difficulty. But these credit lines disappear when times get tough.
9. Don't rely on others to provide a pension
If you want a decent retirement, start saving. Employers have watered down pension schemes while the value of the state pension has declined. Even generous public sector pension look under threat.
10. What goes up also comes down
Shares prices can plummet, house price can fall, and interest rates can tumble – as well as rise sharply too. It's best to plan for such eventualities. They almost always happen.
http://www.telegraph.co.uk/finance/personalfinance/investing/6867372/Lessons-to-be-learned-from-the-decade-that-shocked-the-stock-market.html
Window dressing aka dressing up a portfolio
Definition
The deceptive practice of some mutual funds, in which recently weak stocks are sold and recently strong stocks are bought just before the fund's holdings are made public, in order to give the appearance that they've been holding good stocks all along. also called window-dressing.
The deceptive practice of some mutual funds, in which recently weak stocks are sold and recently strong stocks are bought just before the fund's holdings are made public, in order to give the appearance that they've been holding good stocks all along. also called window-dressing.
Stock market crash is triggered by drastic change in sentiment of market players
A stock market boom can be described as a bubble if there is high probability of a large scale fall in share prices.
Stock market crash is not triggered
Instead, it happens because of
This is why the necessary and sufficient conditions for the bursting of a given asset price bubble, applicable in practice, cannot be provided with the tools of mathematical economics.
A market crash will ensue with a high likelihood if noise trading becomes dominant, the signals of which are to be found in the following stochastic factors:
• Increasing effect of leverage.
• Increasing activity on part of the economic policy.
• Increasing number of corporate scandals, fraud and corruption.
• Fundamentally unjustifiable co-movement of share prices.
http://myinvestingnotes.blogspot.com/2009/11/how-to-distinguish-stock-market-bubbles.html
- by fundamental news or
- by a certain level of share overvaluation.
Instead, it happens because of
- a drastic change in the behavior of market players.
A Decade of Bubbles 2000-2009
"S&P 500 has fallen 23% from 1469.25 in 2000 to its current 1,126.20"
Published: Wednesday December 30, 2009 MYT 10:46:00 AM
String of investment bubbles marked 2000-09
NEW YORK (AP): A string of exploding investment bubbles that started with the dot-coms and ended with mortgages and oil dominated the years from 2000 to 2009. And it looks like the next decade will be no different.
It doesn't seem to matter to many hedge fund traders and other professional investors that the Standard & Poor's 500 index has turned in its first losing performance over the course of a decade, having fallen 23 percent from 1,469.25 at the start of 2000 to its current 1,126.20.
Or that they or other investors helped create and then destroy the bubbles that left stocks worth $2.5 trillion less today than when the decade began - and that's before adding in the effects of inflation.
A mix of investor hubris, ignorance and piles of easy money created the bubbles.
New ideas about where to invest seemed foolproof and greed crowded out doubts.
Many investors looking for the best returns failed to see the potential problems with an Internet business that had no sales plan, or that thousands of expensive homes bought with no down payment might end up in foreclosure.
Now, these investors who fled the last blowups risk running smack into others. The Federal Reserve is keeping borrowing costs low to help revive the economy, and that means there's still plenty of easy money around, helping traders to inflate the price of everything from stocks to commodities such as gold.
"They've put out the biggest punch bowl in U.S. history and people are guzzling from it," said Haag Sherman, chief investment officer at Salient Partners in Houston. It begs several questions: What will be the next bubble? Or is it already here? And, how do individual investors protect their savings?
Some analysts have already been asking if the stock market formed a bubble with its huge rebound this year. The S&P 500 is up 68.9 percent from the 12-year trading low of 666.79, its best performance since the 1930s.
Gold is also suspect. It's above $1,098 an ounce and up 24 percent in 2009. Other possible sources of bubbles include stocks in emerging markets such as China, where the Shanghai index is up 76.4 percent this year.
Analysts say it's in the DNA of markets to let ambition cloud good judgment and that even when investors learn or relearn a lesson about excess, many still forget it.
Moreover, investors still have $3.2 trillion in money market mutual funds that's waiting to be invested, according to iMoneyNet Inc. With so much cash available and investors hankering after big returns, analysts warn that bubbles may be inevitable.
The signs of effervescence can be hard to spot.
"Pets.com was going to have a market cap larger than Exxon Mobil," said David Darst, chief investment strategist for Morgan Stanley Smith Barney in New York, referring to the Web site that collapsed in November 2000, nine months after raising $82.5 million from investors.
He says investors will keep getting tripped up as they find new ways to invest. "Human nature doesn't change," Darst said. "Market mechanisms change but human fear, human greed will be like this decades and centuries hence."
The numbers from this decade tell a stunning story:
>The Nasdaq composite index, powered by the dot-com buying that began in the late 1990s, went all the way up to 5,048.62 in March 2000, then crashed down to 1,114.11 at the depths of the 2002 bear market. It rose as high as 2,859.12 in October 2007, but no one expects it to return to its loftiest levels.
And the indexes don't reflect inflation, taxes and fees, which take the value of an investment down further. Thornburg Investment Management, which analyzed the value of investments beyond the decade, said $100 invested in 1978 would have been worth only $376 thirty years later after accounting for inflation, expenses and taxes.
>Crude oil, sparked by a weaker dollar and worries that oil producers would soon be unable to meet global demand, rose 71 percent in just six months to a high of $147.27 in July 2008. Prices then crashed down to $33.87 in just five months. The plunge was so precipitous that it destroyed several hedge funds that had bet oil would just keep soaring.
>Low borrowing rates and insatiable demand for mortgage debt by investors made it easy to get loans. That helped prop up housing prices and fuel speculation on securities based on those risky mortgages. The peak came in April 2006; after that, home prices fell 31.9 percent to a low in May 2009, according to the S&P/Case-Shiller 20-city index. Along the way, two investment banks that bought mortgage-backed securities collapsed and the government spent hundreds of billions of dollars to prop up many commercial banks.
>Prices for soybeans and corn hit record levels in the summer of 2008 as floods swept the Midwest and damaged key growing regions. In the first six months of the year, corn shot up more than 60 percent and soybeans rose more than 30 percent. The jump in prices was a boon to many traders, but led to food riots in Africa, Asia and the West Indies. By December of last year, both grains had lost half their value.
Analysts say the best way to avoid being caught by other bubbles is to remain vigilant about diversifying, the practice of investing in a variety of assets. It could also mean shedding some of the stronger performers to avoid some of the risks that the winners will falter.
"When something grows too big in the portfolio you have to force yourself to scale it back a little bit," Darst said. "There's no substitute for doing your homework, there's no substitute for asking questions."
By spreading their holdings around and saving more, investors can buffer against what many analysts worry will be the fallout from the low interest rates and easy money that are being used to help revive the economy.
Policymakers also have concerns. Fed Chairman Ben Bernanke said last month a policy favoring cheap borrowing risked setting more traps for investors. He said he didn't see any signs that a bubble is emerging but also acknowledged that it is "extraordinarily difficult" to detect one forming.
Some analysts see bubbles right now. Quincy Krosby, market strategist for Prudential Financial is skeptical of gold's recent surge.
It's easy to see why gold could be in a bubble. Many investors who have bought gold are speculating that inflation will start rising because of all of the money coursing through the financial system. One of gold's greatest appeals is as a hedge against inflation.
"It will move up, but the music always stops," Krosby said of gold.
Simon Laing, a director at Newton Investment Management Ltd. in London, notes that investors are using money borrowed at low rates in the U.S. and Europe to buy stocks in other markets - raising the prospect of new bubbles.
This comes as causes of past bubbles still present obstacles.
"I don't think we've taken the medicine yet," he said. "We've had a decade of bubbles and I still think we're in the same scenario."
Krosby said individuals shouldn't be fooled into thinking that regulators have been able to curtail risk-taking in the past two years since the collapse of the market for securities based on iffy mortgages.
"They're playing in a world where professional traders dominate even though we think we've gone through this tremendous regulatory revolution," she said.
http://biz.thestar.com.my/news/story.asp?file=/2009/12/30/business/20091230104944&sec=business
Published: Wednesday December 30, 2009 MYT 10:46:00 AM
String of investment bubbles marked 2000-09
NEW YORK (AP): A string of exploding investment bubbles that started with the dot-coms and ended with mortgages and oil dominated the years from 2000 to 2009. And it looks like the next decade will be no different.
It doesn't seem to matter to many hedge fund traders and other professional investors that the Standard & Poor's 500 index has turned in its first losing performance over the course of a decade, having fallen 23 percent from 1,469.25 at the start of 2000 to its current 1,126.20.
Or that they or other investors helped create and then destroy the bubbles that left stocks worth $2.5 trillion less today than when the decade began - and that's before adding in the effects of inflation.
A mix of investor hubris, ignorance and piles of easy money created the bubbles.
New ideas about where to invest seemed foolproof and greed crowded out doubts.
Many investors looking for the best returns failed to see the potential problems with an Internet business that had no sales plan, or that thousands of expensive homes bought with no down payment might end up in foreclosure.
Now, these investors who fled the last blowups risk running smack into others. The Federal Reserve is keeping borrowing costs low to help revive the economy, and that means there's still plenty of easy money around, helping traders to inflate the price of everything from stocks to commodities such as gold.
"They've put out the biggest punch bowl in U.S. history and people are guzzling from it," said Haag Sherman, chief investment officer at Salient Partners in Houston. It begs several questions: What will be the next bubble? Or is it already here? And, how do individual investors protect their savings?
Some analysts have already been asking if the stock market formed a bubble with its huge rebound this year. The S&P 500 is up 68.9 percent from the 12-year trading low of 666.79, its best performance since the 1930s.
Gold is also suspect. It's above $1,098 an ounce and up 24 percent in 2009. Other possible sources of bubbles include stocks in emerging markets such as China, where the Shanghai index is up 76.4 percent this year.
Analysts say it's in the DNA of markets to let ambition cloud good judgment and that even when investors learn or relearn a lesson about excess, many still forget it.
Moreover, investors still have $3.2 trillion in money market mutual funds that's waiting to be invested, according to iMoneyNet Inc. With so much cash available and investors hankering after big returns, analysts warn that bubbles may be inevitable.
The signs of effervescence can be hard to spot.
"Pets.com was going to have a market cap larger than Exxon Mobil," said David Darst, chief investment strategist for Morgan Stanley Smith Barney in New York, referring to the Web site that collapsed in November 2000, nine months after raising $82.5 million from investors.
He says investors will keep getting tripped up as they find new ways to invest. "Human nature doesn't change," Darst said. "Market mechanisms change but human fear, human greed will be like this decades and centuries hence."
The numbers from this decade tell a stunning story:
>The Nasdaq composite index, powered by the dot-com buying that began in the late 1990s, went all the way up to 5,048.62 in March 2000, then crashed down to 1,114.11 at the depths of the 2002 bear market. It rose as high as 2,859.12 in October 2007, but no one expects it to return to its loftiest levels.
And the indexes don't reflect inflation, taxes and fees, which take the value of an investment down further. Thornburg Investment Management, which analyzed the value of investments beyond the decade, said $100 invested in 1978 would have been worth only $376 thirty years later after accounting for inflation, expenses and taxes.
>Crude oil, sparked by a weaker dollar and worries that oil producers would soon be unable to meet global demand, rose 71 percent in just six months to a high of $147.27 in July 2008. Prices then crashed down to $33.87 in just five months. The plunge was so precipitous that it destroyed several hedge funds that had bet oil would just keep soaring.
>Low borrowing rates and insatiable demand for mortgage debt by investors made it easy to get loans. That helped prop up housing prices and fuel speculation on securities based on those risky mortgages. The peak came in April 2006; after that, home prices fell 31.9 percent to a low in May 2009, according to the S&P/Case-Shiller 20-city index. Along the way, two investment banks that bought mortgage-backed securities collapsed and the government spent hundreds of billions of dollars to prop up many commercial banks.
>Prices for soybeans and corn hit record levels in the summer of 2008 as floods swept the Midwest and damaged key growing regions. In the first six months of the year, corn shot up more than 60 percent and soybeans rose more than 30 percent. The jump in prices was a boon to many traders, but led to food riots in Africa, Asia and the West Indies. By December of last year, both grains had lost half their value.
Analysts say the best way to avoid being caught by other bubbles is to remain vigilant about diversifying, the practice of investing in a variety of assets. It could also mean shedding some of the stronger performers to avoid some of the risks that the winners will falter.
"When something grows too big in the portfolio you have to force yourself to scale it back a little bit," Darst said. "There's no substitute for doing your homework, there's no substitute for asking questions."
By spreading their holdings around and saving more, investors can buffer against what many analysts worry will be the fallout from the low interest rates and easy money that are being used to help revive the economy.
Policymakers also have concerns. Fed Chairman Ben Bernanke said last month a policy favoring cheap borrowing risked setting more traps for investors. He said he didn't see any signs that a bubble is emerging but also acknowledged that it is "extraordinarily difficult" to detect one forming.
Some analysts see bubbles right now. Quincy Krosby, market strategist for Prudential Financial is skeptical of gold's recent surge.
It's easy to see why gold could be in a bubble. Many investors who have bought gold are speculating that inflation will start rising because of all of the money coursing through the financial system. One of gold's greatest appeals is as a hedge against inflation.
"It will move up, but the music always stops," Krosby said of gold.
Simon Laing, a director at Newton Investment Management Ltd. in London, notes that investors are using money borrowed at low rates in the U.S. and Europe to buy stocks in other markets - raising the prospect of new bubbles.
This comes as causes of past bubbles still present obstacles.
"I don't think we've taken the medicine yet," he said. "We've had a decade of bubbles and I still think we're in the same scenario."
Krosby said individuals shouldn't be fooled into thinking that regulators have been able to curtail risk-taking in the past two years since the collapse of the market for securities based on iffy mortgages.
"They're playing in a world where professional traders dominate even though we think we've gone through this tremendous regulatory revolution," she said.
http://biz.thestar.com.my/news/story.asp?file=/2009/12/30/business/20091230104944&sec=business
Favor modest valuations and big, safe dividends.
The recent rally has favored economically sensitive companies—ones whose profits rise quickly as the economy grows. Investors who expect the rally to fizzle ought to swap these for shares of companies whose products sell steadily no matter what. Favor modest valuations and big, safe dividends. Both are still abundant, fortunately. Also, keep ready a generous stash of cash.
http://bx.businessweek.com/investment-banking/view?url=http%3A%2F%2Fwww.smartmoney.com%2Finvesting%2Fstocks%2Fare-we-headed-for-a-third-bubble%2F%3Fcid%3D1122
http://bx.businessweek.com/investment-banking/view?url=http%3A%2F%2Fwww.smartmoney.com%2Finvesting%2Fstocks%2Fare-we-headed-for-a-third-bubble%2F%3Fcid%3D1122
BELIEVING A BULL MARKET
We are in the midst of a bull market. The market fell off the cliff in 2008. Its nadir was in March 2009. Many stocks were trading below their intrinsic value: intrinsic P/E and intrinsic P/B were much higher than the market P/E and market P/B then.
When market confidence and sentiment turned, the investors rushed in and picked up huge bargains. Many stocks were trading at huge discounts to their intrinsic values. The initial price rise from March to June 2009 was particularly fast and steep. Those who stayed invested throughout the deep recession and/or invested in the early phase of the steep rise are sitting on big gains. Since June/July 2009, many stocks are trading at fair values. Accordingly, these stocks are trading at higher prices within a narrow range.
Still many "glamour" stocks' prices continue the climb. These are the "growth" stocks. At a certain price, these stocks are fairly valued. As the prices climb, beware that the market price may be expensive compared to their fundamentally derived intrinsic values. Momentum trading and various market strategies used by 'investors' in the market tend to create bubbles. Valuation is a skill and is also subjective. Those without this skill (and this would be the majority) may not be anchored on the intrinsic value of the stock as their guide.
The present bull market is about 9 months old. Driven the poor yield from fixed income investments (FDs), the liquidity due to the low interest rates and the low market prices in March 2009, the index has risen fast. The KLSE has risen from the low of around 800 to the present of 1250. Those who rode the rise would have in general obtained an average of 40% to 50% gain since March 2009. During the last bull run in 2007, the KLSE peaked around 1350. From 1250 to 1350, this 100 point rise will translate to a gain of about 8%. It is unlikely for the market to go down to the low of March 2009. However, there hasn't been any significant correction in the present bull run. Some investors would welcome a significant correction to to consolidate the market for the next phase. A correction of 10% to 20% maybe welcomed by various players in the market.
Though the market has risen, particularly the index-linked stocks, opportunities exist for the value stock pickers still. The year is ending on a good note, it is also a good time to rebalance one's portfolio.
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http://myinvestingnotes.blogspot.com/2009/01/believing-bull-market.html
BELIEVING A BULL MARKET
When markets are rapidly rising, value investing invariably falls out of favor with the investing public. In an upward racing market, value stocks appear dull and stodgy as the more speculative issues rush toward new market highs. But come the correction, it all looks different. Stable value stocks seem like trusted friends.
Most bull markets have well-defined characteristics. These include:
Though the market has risen, particularly the index-linked stocks, opportunities exist for the value stock pickers still. The year is ending on a good note, it is also a good time to rebalance one's portfolio.
BELIEVING A BULL MARKET
- Price levels are historically high.
- Price to earnings ratios are high.
- Dividend yields are low compared with bond yields (or compared with a stock’s particular dividend yield pattern).
- Margin buying becomes excessive as investors are driven to borrow to buy more of the high-priced stocks that look attractive to them.
- There is a swarm of new stock offerings, especially initial public offerings (IPOs) of questionable quality. This bull market is what investment bankers and stock promoters call the “window of opportunity.” Because IPOs so often occur when Wall Street is primed to pay top dollar, seasoned investors joke that IPO stands for “it’s probably overpriced.”
Be patient: Wait for opportunities during correction or panic during a bull market
Great Opportunities to buy companies with durable competitive advantage
a) Correction or panic during a bull market:
Any company with a durable competitive advantage will eventually recover after a market correction or panic during a bull market.
b) Bubble-bursting situation:
But beware. In a bubble-bursting situation,during which stock prices trade in excess of 40 times earnings and then fall to single-digit PEs, it may take years for them to fully recover.
After the crash of 1997, it took until 2007 to match the 1990s bull market highs. There are still companies trading today at below their last decade high price. On the other hand, if you bought during the crash, as Warren Buffett often did, it didn't take you long to make a fortune.
http://myinvestingnotes.blogspot.com/2009/10/opportunities-to-buy-companies-with.html
a) Correction or panic during a bull market:
Any company with a durable competitive advantage will eventually recover after a market correction or panic during a bull market.
b) Bubble-bursting situation:
But beware. In a bubble-bursting situation,during which stock prices trade in excess of 40 times earnings and then fall to single-digit PEs, it may take years for them to fully recover.
After the crash of 1997, it took until 2007 to match the 1990s bull market highs. There are still companies trading today at below their last decade high price. On the other hand, if you bought during the crash, as Warren Buffett often did, it didn't take you long to make a fortune.
http://myinvestingnotes.blogspot.com/2009/10/opportunities-to-buy-companies-with.html
In the aftermath of the bursting of the bubble
The Aftermath
In the aftermath of the bursting of the bubble, you initially find investors in complete denial. In fact, one of the amazing features of post-bubble markets is the difficulty of finding investors who lost money in the bubble. Investors either claim that they were one of the prudent ones who never invested in the bubble in the first place or that they were one of the smart ones who saw the correction coming and got out in time.
As time passes and the investment losses from the bursting of the bubble become too large to ignore, the search for scapegoats begins. Investors point fingers at brokers, investment banks and the intellectuals who nurtured the bubble, arguing that they were mislead.
Finally, investors draw lessons that they swear they will adhere to from this point on. �I will never invest in a tulip bulb again� or �I will never invest in a dot.com company again� becomes the refrain you hear. Given these resolutions, you may wonder why price bubbles show up over and over. The reason is simple. No two bubbles look alike. Thus, investors, wary about repeating past mistakes, make new ones, which in turn create new bubbles in new asset classes.
http://myinvestingnotes.blogspot.com/search/label/phases%20of%20bubble
In the aftermath of the bursting of the bubble, you initially find investors in complete denial. In fact, one of the amazing features of post-bubble markets is the difficulty of finding investors who lost money in the bubble. Investors either claim that they were one of the prudent ones who never invested in the bubble in the first place or that they were one of the smart ones who saw the correction coming and got out in time.
As time passes and the investment losses from the bursting of the bubble become too large to ignore, the search for scapegoats begins. Investors point fingers at brokers, investment banks and the intellectuals who nurtured the bubble, arguing that they were mislead.
Finally, investors draw lessons that they swear they will adhere to from this point on. �I will never invest in a tulip bulb again� or �I will never invest in a dot.com company again� becomes the refrain you hear. Given these resolutions, you may wonder why price bubbles show up over and over. The reason is simple. No two bubbles look alike. Thus, investors, wary about repeating past mistakes, make new ones, which in turn create new bubbles in new asset classes.
http://myinvestingnotes.blogspot.com/search/label/phases%20of%20bubble
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