What is Risk?

Risk  is incorporated  into  so many  different disciplines from insurance to
engineering  to  portfolio  theory  that it should  come as no surprise that it is defined  in
different ways by each one. It is worth looking at some of the distinctions:

a. Risk versus Probability: While some definitions of risk focus only on the probability
of an  event occurring, more comprehensive definitions incorporate both  the
probability  of the event occurring and  the consequences of the event. Thus, the
probability  of a severe earthquake may  be very small but the consequences are so
catastrophic that it would be categorized as a high-risk event.

b. Risk versus Threat: In some disciplines, a contrast is drawn between risk and a threat.
A threat is a low probability  event with very  large negative consequences, where
analysts may be unable to assess the probability. A risk, on the other hand, is defined
to  be a higher probability  event, where there is enough  information  to  make
assessments of both the probability and the consequences.

c. All outcomes versus Negative outcomes: Some definitions of risk tend to focus only
on  the downside scenarios, whereas others are more expansive and  consider all
variability as risk. The engineering definition of risk is defined as the product of the                                               

probability of an event occurring, that is viewed as undesirable, and an assessment of
the expected harm from the event occurring.

Risk = Probability of an accident * Consequence in lost money/deaths

In contrast, risk in finance is defined in terms of variability of actual returns on an
investment around  an  expected return, even  when  those returns represent positive
outcomes.



Risk and Reward
The “no free lunch” mantra has a logical extension. Those who desire large
rewards have to be willing to expose themselves to considerable risk. The link between
risk and return is most visible when making investment choices; stocks are riskier than 
bonds, but generate higher returns over long  periods. It is less visible but just as
important when making career choices; a job in sales and trading at an investment bank

may be more lucrative than a corporate finance job at a corporation but it does come with
a greater likelihood that you will be laid off if you don’t produce results.

Not surprisingly, therefore, the decisions on how much risk to take and what type
of risks to take are critical to the success of a business. A business that decides to protect
itself against all risk is unlikely to generate much upside for its owners, but a business
that exposes itself to the wrong types of risk may be even worse off, though, since it is
more likely to be damaged than helped by the risk exposure. In short, the essence of good
management is making the right choices when it comes to dealing with different risks.






http://people.stern.nyu.edu/adamodar/pdfiles/valrisk/ch1.pdf

Returns are the reward you receive for taking investment risk.

While most evident when markets are falling, threat is ever-present. However, it’s not something you want to avoid totally because without risk, you won’t be able to grow your wealth sufficiently over the long term to achieve your “financial goals”. And if returns are the reward you receive for taking investment risk, logic follows that the higher long-term returns usually come from investments with more risk (eg stocks).

http://nsestocktips.in/why-do-i-need-to-take-investment-risk/

Note: 

Over the long term, cash/term deposits are really risky.  The buying power of these decline due to inflation.

The dictum, you need to take higher risks to get higher returns is generally true.  However, the smarter investors also realise there are occasions when an investment is available at low risk with a potential of high return, especially when a good company is being sold at low prices not due to any fundamental reasons.

Maybank raises Nestle Malaysia to 'hold'

KUALA LUMPUR, June 20  

Maybank Research raised its call on food manufacturer Nestle Malaysia Bhd to 'hold' from 'sell' on the back of a stronger earnings and exports outlook.

"Nestle's ongoing heavy capex is supporting the group's earnings momentum, particularly with an upcoming plant which should provide additional capacity," Maybank said in a note.

Maybank raised its 2013-2014 earnings forecast by 2-3 per cent due to stronger export projections and after Nestle reported a 10 per cent export sales growth in the first quarter of 2012.

"While more than 50 per cent of Nestle's exports are to ASEAN countries, there is still much potential outside ASEAN given that Nestle Malaysia is being positioned as the halal food hub for the Nestle group," Maybank said, referring to the Association of Southeast Asian Nations.

Maybank also revised its target price upwards to 54.20 ringgit per share from 52.40 ringgit earlier. As of 0125 GMT, Nestle shares rose 0.32 per cent against the Malaysian benchmark stock index's 0.06 per cent gain. — Reuters

Tesco should review U.S. strategy: CtW Investment

Reuters – Fri, Jun 15, 2012 5:12 AM EDT

LONDON (Reuters) - British group Tesco (TSCO.L), the world's third-biggest retailer, should reassess the strategy for its loss-making U.S. chain Fresh & Easy, a group that works with pensions and benefit funds sponsored by trade unions said.

The Change to Win Investment Group, which works with the pension plans of four major U.S. unions, said Tesco should set up a committee of non-executive directors to review its strategy for Fresh & Easy, which does not recognize unions.

It wants this committee to issue a report "that discloses the metrics and timeframe" the Tesco board will use to evaluate the division's future performance.

It has submitted amendments to this effect to Tesco's report and accounts ahead of the company's annual meeting in Cardiff on June 29 and said if the board rejected its proposals it would advise shareholders to vote against the resolution to receive the report and accounts.

"This proposal is union-motivated and follows several years of union opposition in the U.S. Change to Win is not a shareholder, and does not speak for shareholders," a Tesco spokeswoman said.

"Fresh & Easy continues to grow and innovate and is showing positive sales momentum. We are confident the business is moving in the right direction."

Earlier this year, Tesco chief executive Philip Clarke rejected shareholder calls to pull the plug on Fresh & Easy.

He said at the time he did not expect the chain to break even until its 2013/14 year, compared with the end of 2012/13 previously.

On Monday, Tesco reported underlying sales growth at Fresh & Easy slowed to 3.6 percent in its first quarter from 12.3 percent in the fourth quarter.

Tesco shares were down 0.1 percent at 305 pence at 0850 GMT.

(Reporting by James Davey; Editing by Dan Lalor)

LONDON (Reuters) - Britain fell deeper into recession than first thought in the first quarter of this year after a sharp drop in construction output, raising the likelihood the Bank of England will need to inject more stimulus to protect the economy from the raging euro zone debt crisis.

Britain is in its second recession since the 2007-2008 financial crisis, and the prospects for a recovery are cloudy as leaders in the euro zone, Britain's biggest trading partner, are still far from resolving their debt woes.

The Bank of England has indicated it is ready to pump more money into the economy, having paused its 325 billion pound quantitative easing programme earlier this month, amid growing worries about a break-up of the currency union.

"The economy is not recovering properly and with the uncertainty over Europe hanging over the outlook as well, our suspicion is the MPC will sanction further QE at some point later on this year," said Philip Shaw, economist at Investec.

The Office for National Statistics said the economy shrank by 0.3 percent in the first quarter of this year, a downward revision from an initial estimate of a 0.2 percent decline, and confounding analysts' forecasts for an unchanged reading.

Year-on-year, the economy contracted by 0.1 percent, the first annual decline since Q4 2009.

The figures will make uncomfortable reading for British finance minister George Osborne, who has vowed to press ahead with harsh austerity measures to curb Britain's debts and has argued that the private sector can fill the gap in public spending.

Britain's economy has expanded by just 0.3 percent since the Conservative/Liberal Democrat government came to power in 2010, and Thursday's figures showed government spending made the biggest contribution to the economy between January and March.

DOWNWARD REVISION

The ONS said the downward revision to the Q1 data was the result of a sharp drop in construction output, which fell by 4.8 percent on the quarter, its steepest decline since Q1 2009.

New data on expenditure suggested the decline in overall GDP would have been steeper were it not for a 1.6 percent quarterly rise in government spending, which was the biggest increase in four years and contributed 0.4 percentage points to GDP.

Household spending, meanwhile, rose by only 0.1 percent, its smallest rise in six months and suggesting that a consumer-led recovery is not on the cards.

The figures showed that exports also suffered. The trade deficit increased to 4.4 billion pounds, with net trade shaving off 0.1 percentage point from GDP.

But separate preliminary data showed business investment posted its biggest quarterly rise in almost a year, and its largest annual increase in almost seven years.

The International Monetary Fund this week warned about the risks facing Britain and urged policymakers to boost growth by whatever means necessary.

It suggested the BoE could cut rates further from their record-low 0.5 percent and start buying private-sector assets.

And it recommended that the government should find money to invest in infrastructure and do more to boost the flow of credit to companies. The IMF said Britain may even need to consider a temporary tax cut to bolster demand.

Although the BoE is concerned that official data might be understating the strength of the economy, recent surveys have indicated that activity is tailing off, while an extra public holiday in June is also likely to depress growth in the second quarter.

In a further sign of weakness in the economy, figures published by the British Bankers' Association showed net mortgage lending rose by 715 million pounds in April, around half the increase recorded a year ago, though the number of mortgage approvals was up slightly on the year.

(Reporting by Fiona Shaikh and Olesya Dmitracova)

UK recession deepens as euro zone woes mount

Marks & Spencer posts first profit fall in 3 years

LONDON (Reuters) - Bellwether British retailer Marks & Spencer (MKS.L) posted a 1.2 percent fall in full-year underlying profit, its first decline in three years, as even its relatively older and more affluent customers were touched by the economic downturn.

Britain's biggest clothing retailer, which also sells homewares and upmarket foods, said on Tuesday it made a profit before tax and one-off items of 705.9 million pounds in the year to March 31.

That was down from the 714 million pounds made in 2010/11 and compares with analyst forecasts in a range of 675-706 million pounds, according to a company poll which put the consensus number at 694 million pounds.

Last month M&S missed fourth-quarter sales forecasts after running out of best-selling women's knitwear and footwear lines but said it would meet year profit expectations having made further cost savings.

Full-year sales at the 128-year-old group, which serves about 21 million Britons a week from over 730 stores, rose 2 percent to 9.9 billion pounds, with sales at UK stores open over a year up 0.3 percent.

The firm said it would pay a maintained dividend of 17.0 pence.

"M&S performed well in a challenging economic environment ... holding market share. We also made good progress with our strategic plans," said Chief Executive Marc Bolland.

He said the firm's UK pilot stores had delivered good results, giving it confidence to roll-out the programme.

Bolland said M&S was also on track to become a truly international multi-channel retailer.

"By the end of this year we will be transacting from 10 websites worldwide and opening around 100 international stores per year," he said.

M&S did not comment on current trading, saying it would update on the first quarter on July 10.

Many UK retailers are struggling as shoppers grapple with higher prices, particularly for fuel, muted wage growth and government austerity measures, and worry about job security, shaky housing markets and fallout from the euro zone debt crisis.

A survey on Monday said Briton's household finances worsened at their fastest rate in four months in May, while earlier this month cards and gifts chain Clinton Cards (CLCA.L) collapsed into administration, a form of protection from creditors.

M&S said last month it had enjoyed a good start to its spring/summer clothing launch, backed by an advertising campaign featuring Take That star Gary Barlow singing The Beatles classic "Here Comes The Sun".

The campaign is designed to capture the celebratory mood -- and boost trade -- that M&S hopes will be generated by Queen Elizabeth II's Diamond Jubilee, Euro 2012 soccer and the London Olympics.

However, after M&S updated on April 17 Britain endured a further month of torrential rain that is particularly unhelpful for fashion sales. Better weather is forecast for the next two weeks.

Shares in M&S, which prior to Tuesday's update had lost 14 percent of their value over the last year, closed at 337 pence on Monday, valuing the business at 5.41 billion pounds.

(Reporting by James Davey; Editing by Paul Hoskins and Hans-Juergen Peters)

Link

Marks & Spencer posts first profit fall in 3 years

Tesco CEO turns down $590,000 bonus

LONDON (Reuters) - Tesco (LSE:TSCO.L - News) boss Philip Clarke has opted not to take an annual bonus of about 372,000 pounds ($588,000) following a poor performance by the world's third-biggest retailer in its main British market.

Shares in Tesco, which issued a shock profit warning in January, have lost almost a quarter of their value this year and the company is now investing about 1 billion pounds in a bid to stem a declining market share in Britain.

A statement on Tesco's website on Tuesday, to coincide with the publication of the retailer's annual report, said its top 5,000 managers would receive a reduced annual bonus representing 16.9 percent of their maximum entitlement.

Executive directors will receive 13.5 percent of the maximum.

"I decided at the beginning of the year that I would decline my annual bonus for 2012," Clarke said in a statement emailed to Reuters.

"I wasn't satisfied with the performance in the UK and I won't take the bonus. I'm confident that we're tackling the right issues."

Clarke, a former Tesco shelf stacker, would have been entitled to a payout of about 372,000 pounds had he taken the 13.5 percent being paid to other executive directors.

The Tesco chief executive's decision comes amidst a round of high profile shareholder revolts over remuneration at companies like Barclays (BARC.L), Inmarsat (ISA.L) and Prudential (PRU.L) in a phenomenon dubbed the "shareholder spring".

Increasing investor resistance to executive pay rises at underperforming firms has also led Aviva (AV.L) boss Andrew Moss, and Sly Bailey, head of newspaper group Trinity Mirror (TNI.L), to quit this month.

In March, Clarke jettisoned the head of Tesco's UK operation, assumed his duties and is now directly in the firing line if his plans fail to halt a slide in sales.

Tesco shares were broadly flat at 5:35 a.m. EDT (0935 GMT) at 309.85 pence.

(Reporting by Paul Hoskins and Neil Maidment; Editing by Paul Sandle and Mark Potter)

Reuter

Link

Tesco pays Aeon to rid itself of Japan business

By Ritsuko Shimizu and James Davey

TOKYO/LONDON (Reuters) - Tesco (TSCO.L), the world's No.3 retailer, has ended a nine-year attempt to crack Japan's tough retail market by effectively paying Aeon Corp <8267.T>, the country's No.2 general retailer, to take its loss-making business there off its hands.

The deal, which will allow Tesco to focus on fixing its main British business after a shock profit warning in January, will inevitably re-heat speculation over the group's long-term commitment to its much larger loss-making Fresh & Easy business in the United States.

Many foreign retailers have struggled in Japan, hampered by fickle consumer tastes, a super-competitive landscape and prolonged, profit-sapping deflation. France's Carrefour (CA.PA) and Britain's Boots (ABAQUO.UL) are among the firms to have pulled out over the past decade.

The move is also the latest in a series by store groups exiting weaker markets as they struggle with sluggish demand in many developed economies. Carrefour announced a deal on Friday to pull out of Greece.

Tesco, which trails Carrefour and U.S. industry leader Wal-Mart (WMT.N) by annual sales, put the Japanese business up for sale last August, hiring Goldman Sachs (GS) to find a buyer.

Japan is the smallest of Tesco's 13 international businesses, consisting of 117 stores in greater Tokyo.

TWO STAGE EXIT

The deal with Aeon, first reported by Reuters, will see Tesco exit Japan in two stages.

In the first phase, it will sell 50 percent of its shares in Tesco Japan to Aeon for a nominal sum. This will result in the formation of a joint venture with Aeon.

Tesco will then invest 40 million pounds ($63 million) as a joint venture partner to finance restructuring, after which it will have no further financial exposure to the Japanese business.

"Given ongoing trading losses of about 30 million pounds after approaching a decade in the market, Tesco appears to our minds to have taken the correct approach with funded withdrawal," said Shore Capital analyst Clive Black.

He said it showed chief executive Philip Clarke is bringing greater focus and capital discipline to Tesco.

The deal will help Aeon, which trails Japan general retailer Seven & I Holdings (TYO:3382) in terms of market value, expand its reach in its home market as it tries to drive growth.

Prior to the Tesco purchase, Aeon had spent more than $775 million over the last five years, according to Thomson Reuters data, including taking stakes in Japanese supermarket chains Maruetsu and Marunaka.

Tesco's shares were up 0.5 percent at 302.65 pence at 0625 EDT, slightly outperforming the STOXX Europe 600 retail index (.SXRP). Aeon shares closed up 0.63 pence at 961 yen before the announcement.

FOCUS ON UK TURNAROUND

After a surprise profit warning in January, Tesco is focusing on turning around its British business, which accounts for over 70 percent of its trading profit. Last week the firm posted a drop in underlying first-quarter British sales as its recovery plan struggles to gain traction.

In April, Clarke rejected shareholder calls to pull the plug on Fresh & Easy but said he did not expect the chain to break even until its 2013/14 year, compared with the end of 2012/13 previously.

Last week Tesco reported underlying sales growth at Fresh & Easy slowed to 3.6 percent in its first quarter from 12.3 percent in the fourth quarter, prompting renewed calls for management to reassess its strategy for the U.S. business.

(Additional reporting by James Topham in Tokyo; Editing by Richard Pullin and Mark Potter)

Link:

Tesco pays Aeon to rid itself of Japan business

The Impact of Reinvesting Dividends

The chart shows the value over time of a $100 investment made in the S&P 500 in 1925 with dividends reinvested vs. dividends not reinvested.  It appears in the book pretty much as shown below.

It makes the difference between reinvesting dividends (the top line) and not reinvesting dividends (the bottom line) look pretty impresive, but it also makes it look like there isn't much difference until 50 years or so after the initial investment.  That's because the vertical scale is linear.

A more typical way to show compound growth such as this would be to use a semi-log chart, as shown next.  (A somewhat less serious problem with the chart above is that the horizontal scale distorts the amount of time at the beginning and end of the data.)

1. All that's really going on here is the difference between about 10.5% compound annualized growth (dividends reinvested, on the top line) and 5.7% compound annualized growth (dividends not reinvested, on the bottom line). 
 
2. The semi-log chart (with time properly represented on the horizontal scale) makes it clear that there is constant percentage growth in the value of the investment regardless of whether or not dividends are reinvested.  That's because the lines are straight (remember that straight lines on the semi-log chart indicate consistent compound growth).         
3. It also shows more clearly that reinvestment of dividends 

• affects the investment value right from the beginning and
  •  
• provides a consistently increasing benefit as more and more time passes.

What Is a Quality Growth Company? Just What Do We Mean by Growth?

What Is a Quality Growth Company?
To invest only in high quality growth companies, you will have to prospect for good candidates and then analyze and evaluate each.


Invest Only in Good Quality Growth Companies
Depending upon the size or maturity of the company, you should look for companies whose "monotonous excellence" produces consistent annual earnings growth of anywhere from 7% to as much as 20% compounded annually. As these companies grow, their share prices will ultimately follow, and your portfolio will reap the returns.

"Total Return" (the combination of both capital appreciation and divi-dend yield) is, certainly, the name of the game, but it‘s best to invest in companies whose growth, rather than dividend income, is going to provide the bulk of the return.

But it‘s not enough to simply invest in growing businesses. You should also set high standards of quality for the companies in which you invest. Companies of quality will outperform their peers, perform better in economic downturns, and/or see their share prices take large tumbles during the occasional stumble.


Just What Do We Mean by Growth?
As can be seen in the diagram above, a successful company will pass through several phases of growth:

• The startup phase when earnings are predictably below the break-even point. 
• A period of explosive growth when the percentage increase in sales and earnings can be spectacular.

• The mature growth period when revenue becomes so large that it is difficult to maintain a consistent increase in the percentage of growth.
• The period of stabilization, or decline for companies that do not continue to rejuvenate their product mix or expand their target markets.

You should invest only in companies that have a track record as a public company for at least five years and for which the data is readily available. We are therefore interested in investing in companies that are at least five years into their explosive growth periods but that have not gone past their primes. Obviously, the longer the company has had a successful track record—provided its management copes successfully with maturity—the more stable and risk-free it is apt to be.

Depending upon the size of the company, fundamental investors should expect growth rates that vary from a low of about 7% to a high of around 20%. 

• Hence, if the company is an established one with sales over the $5 billion mark, a growth rate of as little as 7% might be acceptable. (The Total Return of such a company should have a substantial dividend yield component.)
• At the other end of the spectrum, the newer company in its explosive growth period should show double digit growth. While we know that growth rates above 20% cannot be sustained forever, we look for higher growth rates as compensation for the increased associated risk.

The chart below provides a rough guideline for the kinds of growth rates that concept suggests. Anything in the light area is acceptable for companies whose revenues (sales) match the scale on the left side.



For example,

• if a company‘s sales for the current year are in the neighborhood of $300 million, we would look for a growth rate of better than 12%. 
• For a company with $1 billion in sales, we would want at least 8%. 

These are the standards of growth that we will seek for investment. Higher risk situations involving companies early in their life cycles are speculative and not of investment quality.

When and Why to sell. "Rules" for Selling a Stock

When and Why to sell
There is really no "time" to sell; however, there are certainly reasons to do so. Most investors, less successful than you will be, believe that you should watch for the price to rise "high enough" — whatever that means—and then sell it to take your profit. Successful fundamental investors know that "profit taking is often profit-losing."

"Rules" for Selling a Stock
The first rule for selling is . . . don‘t! . . . unless:
1) The company has had an adverse management change.
2) Profit margins are declining or the financial structure is deteriorating.
3) Direct or indirect competition stands to affect the company‘s long-term prosperity.
4) A company‘s success is too dependent upon a single product whose cycle is running out.
5) The company is in a cyclical industry and the cycle is about to start down.
6) You must, in order to maintain adequate diversification.
7) An issue of equal or greater quality offers more gain prospects on the upside and less risk on the downside.
8) The stock is way overpriced (at least 150% of the five-year Av-erage P/E) and the company‘s earnings are growing at 12% or less. Even then, you might consider holding-or selling only some of it.

Note that, of the eight reasons for selling listed above, only the eighth suggests that you might sell to take a profit-and then only if: a) the price is way above average; and b) the company is growing relatively slowly.

• The first five of the rules call for chucking losers.  (Defensive strategy)
• The sixth suggests "weeding and feeding" in order not to be grossly over weighted in any particular industry or market sector. 
• The seventh and eighth call for replacing a stock with a low potential only when you can find one as good or better with a greater possible return.   (Offensive strategy)

If some degree of mis-pricing exists in the stock market, it does not persist for long.

Market valuations rest on both logical and psychological factors.

The theory of valuation depends on the projection of a long-term stream of dividends whose growth rate is extraordinarily difficult to estimate.  Thus, fundamental value is never a definite number.  It is a fuzzy band of possible values, and prices can move sharply within this band whenever there is increased uncertainty or confusion.  Moreover, the appropriate risk premiums for common equities are changeable and far from obvious either to investors or to financial economists.  Thus, there is room for the hopes, fears, and favorite fashions of market participants to play a role in the valuation process.  

History provides extraordinary examples of markets in which psychology seemed to dominate the pricing process, as in the tulip-bulb mania in seventeenth century Holland and the Internet bubble at the turn of the twenty-first century.  It is doubtful that the current array of market prices ALWAYS represents the best estimate available of appropriate discounted value.

Nevertheless, the evidence suggest that stock prices display a remarkable degree of efficiency.  Prices adjust so well to important information.  Information contained in past prices or any publicly available fundamental information is rapidly assimilated into market prices.  If some degree of mis-pricing exists, it does not persist for long.

"True value will always out" in the stock market.  To paraphrase Benjamin Graham, ultimately the market is a weighing mechanism, not a voting mechanism.  

Stocks with Low PE Multiples Outperform those with High Multiples. Investors are warned repeatedly about the dangers of very high-multiple stocks that are currently fashionable.

In 1934, Dodd and Graham argued that "value" wins over time for investors.  To find value, investors should look for stocks with low PE ratios and low prices relative to book value, P/BV.  Value is based on current realities rather than on projections of future growth.  This is consistent with the views that investors tend to be overconfident in their ability to project high earnings growth and thus overpay for "growth" stocks.

Stocks with Low PE Multiples Outperform those with High Multiples
One approach of stock selection is to look for companies with good growth prospects that have yet to be discovered by the stock market and thus are selling at relatively low earnings multiple.  This approach is often described as GARP, growth at a reasonable price.  

Earnings growth is so hard to forecast, it's far better to be in low-multiple stocks; if growth does materialize, both the earnings and the earnings multiple will likely increase, giving the investor a double benefit.  Buying a high-multiple stock whose earnings growth fails to materialize subjects investors to a double whammy.  Both the earnings and the multiple can fall.  Therefore investors are warned repeatedly about the dangers of very high-multiple stocks that are currently fashionable.

There is some evidence that a portfolio of stocks with relatively low earnings multiples (as well as low multiples of cash flow and of sales) produces above-average rates of return even after adjustment for risk.  This strategy was tested and had been confirmed by several researchers who showed that as the PE of a group of stocks increased, the return decreased.

This "PE effect," however, appears to vary over time - it is not dependable over every investment period.  And even if it does persist on average over a long period of time, one can never be sure whether the excess returns are due to increased risk or to market abnormalities.

And low PEs are often justified.  Companies on the verge of some financial disaster will frequently sell at very low multiples of reported earnings.  The low multiples might reflect not value but a profound concern about the viability of the companies.  

6 Dangerous Moves For First-Time Investors

Thanks to online discount brokerages, anyone with an Internet connection and a bank account can be up and trading stocks within a week. This ease of access is great because it encourages more people to explore investing for themselves, rather than depending on mutual fundsor money managers. However, there are some common mistakes that first time investors have to be aware of before they try picking stocks like Buffett or shorting like Soros. (To learn more, see Billionaire Portfolios: What Are They Hiding?)


Jumping In Head First
The basics of investing are quite simple in theory – buy low and sell high. In practice, however, you have to know what is low and what is high in a market where everything hinges on different readings of a variety of ratios and metrics. What is high to the seller is considered low (enough) to the buyer in any transaction, so you can see how different conclusions can be drawn from the same market information. Because of the relative nature of the market, it is important to study up a bit before jumping in. (To learn more, see Stochastics: An Accurate Buy And Sell Indicator.)

At the very least, know the basic metrics such as book value, dividend yield, price-earnings ratio (P/E) and so on, and understand how they are calculated and where their major weaknesses lie. While you are learning, you can see how your conclusions work out by using virtual money in a stock simulator. Most likely, you'll find that the market is much more complex than a few ratios can express, but learning those and testing them on a demo account can help lead you to the next level of study. (Watching metrics like book value and P/E are crucial to value investing. Get acquainted with 5 Must-Have Metrics for Value Investing.)

Playing Penny Stocks
At first glance, penny stocks seem like a great idea. With as little as $100, you can get a lot more shares in a penny stock than a blue chip that might cost $50 a share. And, if the two blue chip shares you bought went up $1 you'd only make $2, whereas if 100 shares of a $1 stock went up a $1 you would double your money. Unfortunately, what penny stocks offer in position size and potential profitability has to measure against the volatility that they face. Penny stocks can shoot up. It happens all the time - but they can also crash in moments, and are exceptionally vulnerable to manipulation and illiquidity. Getting solid information on penny stocks can also be difficult, making them a poor choice for an investor who is still learning. (To learn more, read The Lowdown On Penny Stocks.)

Going All In with One Investment
Investing 100% of your capital in a specific market, whether it is the stock market, commodity futures, forex or even bonds is not a good move. Although you may eventually decide to throw diversification to the wind and put all your available capital into these markets once you are familiar with them, it is better to risk a little bit of capital at a time. This way, the lessons learned along the way are less costly, but still valuable. (Diversification entails calculating correlation, learn more about it by reading Diversification: Protecting Portfolios From Mass Destruction.) 

Leveraging Up
Leveraging your money by using a margin is similar to going all in, but much more damaging. Using leverage magnifies both the gains and the losses on a given investment. Some forms of leverage, such as options, have a limited downside or can be controlled by using specific market orders, as in forex. Learning to control the amount of capital at risk comes with practice, and until an investor learns that control, leverage is best taken in small doses (if at all). (Read more with Leverage's "Double-Edged Sword" Need Not Cut Deep.)

Investing Cash Reserves
Studies have shown that cash put into the market in bulk rather than incrementally has a better overall return, but this doesn't mean you should invest to the point of illiquidity. Investing is a long-term business whether you are a buy-and-hold investor or a trader, and staying in business requires having cash on the sidelines for emergencies and opportunities. Sure, cash on the sidelines doesn't earn any returns, but having all your cash in the market is a risk that even professional investors won't take. If you only have enough cash to invest or have an emergency cash reserve, then you're not in a position financially where investing makes sense. (To learn more about liquidity's importance, read Understanding Financial Liquidity.)

Chasing News
Trying to guess what will be the next "Apple," a revolutionary produce or a rumor of earth shaking earnings, investing on news is a terrible move for first time investors. The best case scenario is that you get lucky, and then keep doing it until your luck fails. The worst case scenario is that you get stuck jumping in late (or investing on the wrong rumor) time and time again before you give up on investing. Rather than following rumors, the ideal first investments are in companies you understand and have a personal experience dealing with. This connection makes it easier to stomach the time and research that investing demands. (For more on the psychology of trading, read How The Power Of The Masses Drives The Market.)

The Bottom LineWhen you are starting to invest, it is best to start small and take the risks with money you are prepared to lose. As you gain confidence and become more adept at evaluating stocks and reading the market sentiment, you can start making bigger investments. None of these investments are bad in and of themselves, but they do tend to be very unforgiving towards rookie mistakes. Leverage, penny stocks, news trading, etc. can all become part of your investing strategy as you learn, should you choose it. The trick is learning to invest in more stable markets before you jump into the wilder areas.

Read more: http://www.investopedia.com/articles/basics/11/dangerous-moves-first-time-investors.asp#ixzz1xvf9bm2F

Why should I invest?

Why should I invest?


One of the most compelling reasons for you to invest is the prospect of not having to work your entire life! Bottom line, there are only two ways to make money: by working and/or by having your assets work for you. 

If you keep your money in your back pocket instead of investing it, your money doesn't work for you and you will never have more money than what you save. By investing your money, you are getting your money to generate more money by earning interest on what you put away or by buying and selling assets that increase in value. 

It really doesn't matter how you do it. Whether you invest in stocks, bonds, mutual funds, options and futures, precious metals, real estate, your own small business, or any combination thereof, the objective is the same: to make investments that will generate more cash for you in the future. As they say, "Money isn't everything, but happiness alone can't keep out the rain." 

Whether your goal is to send your kids to college or to retire on a yacht in the Mediterranean, investing is essential to getting you where you want to be. 

Read more: http://www.investopedia.com/ask/answers/153.asp?ad=feat_invest101#ixzz1xvOolCKE


How does a person gain from an investment?
There are two main ways in which a person gains from an investment. The first is by capital gains, the difference between the purchase price and the sale price of an investment. The second is investment income, the money paid to the holder of the investment by the issuer of the investment. Depending on the type of investment, the source or mix of the total gain will differ. And in some cases, these different sources are taxed at different rates, so it is important to be aware of each. 

All stocks can generate a capital gain as the price of a stock is constantly changing in the market. This allows you to potentially sell for a higher price than what you bought the stock for originally. Some stocks also generate income gain through the payment of dividends paid out by a company from its earnings. For example, say that you bought a stock for $10 and the company pays off an annual dividend of $.50, and after two years of holding the stock you sell it for $15. Your capital gain is 50% ($5/$10) and your income gain is 10% ($1/$10) for a total gain of 60% ($6/$10).

Read more: http://www.investopedia.com/ask/answers/06/investmentgains.asp?ad=feat_invest101#ixzz1xvSiTT3n

20 Investments

Most people will find that their investment objectives change throughout their lives. Capital appreciation may be more important for the young investor, but once she enters her golden years, that same investor may place a greater emphasis on gaining income. Whatever your objective, knowing what investment options are out there is key.

Table of Contents

1. 20 Investments: Introduction
2. 20 Investments: American Depository Receipt (ADR)
3. 20 Investments: Annuity
4. 20 Investments: Closed-End Investment Fund
5. 20 Investments: Collectibles
6. 20 Investments: Common Stock
7. 20 Investments: Convertible Security
8. 20 Investments: Corporate Bond
9. 20 Investments: Futures Contract
10. 20 Investments: Life Insurance
11. 20 Investments: The Money Market
12. 20 Investments: Mortgage-Backed Securities
13. 20 Investments: Municipal Bonds
14. 20 Investments: Mutual Funds
15. 20 Investments: Options (Stocks)
16. 20 Investments: Preferred Stock
17. 20 Investments: Real Estate & Property
18. 20 Investments: Real Estate Investment Trusts (REITs)
19. 20 Investments: Treasuries
20. 20 Investments: Unit Investment Trusts (UITs)
21. 20 Investments: Zero-Coupon Securities
22. 20 Investments: Conclusion

Read more: http://www.investopedia.com/university/20_investments#ixzz1xvXipPW4

How Banks Create Money out of Thin Air

Things Just Got a Lot More Complicated in Europe

United they stand, divided they ____?

It's tough to say whether the eurozone as a whole is headed into recession, but I can't figure that the mixed results in the elections this weekend helped that cause. I've postulated before that prolonged recessions seem inevitable in Greece and Spain, and austerity measures designed to curb rapidly rising debt levels in France and Germany are likely to curb any economic strength. In short, the possibility of a Euro-recession is a real possibility.

The secret to survival over the next few months, until we get a better understanding of how these new governments will cooperate with one another, is to focus on strong cash flow businesses that tend to perform well even in stagnant times. This means telecom and health-care companies just might be your best shot at betting on a European recovery.

http://www.fool.com/investing/general/2012/05/07/things-just-got-a-lot-more-complicated-in-europe.aspx 

What does this mean for your money?

With many investors trading more on emotion than actual earnings results, it's likely we can expect more pressure on European-based businesses. The fallout in some companies can be, at least to some extent, justified as with large Spanish banks, Banco Santander (NYSE:STD  ) and Banco Bilbao Vizcaya Argentaria (NYSE: BBVA  ) . Both of these institutions are dealing with ridiculously high unemployment rates and commercial real estate portfolios littered with potential problem loans.

But we're also likely to see pressure on companies that won't be directly affected by austerity. Two such companies that may get lumped into the "guilty by association crowd" are France Telecom (NYSE: FTE  ) and U.K.-based oil services company BP (NYSE: BP  ) .

France Telecom has been on a steady downtrend over concerns that its mobile business may suffer as Europeans cut back on discretionary spending. What investors are failing to take notice of is France Telecom's strong international growth in Sub-Saharan Africa and even in troubled Spain.

As for BP, weakness in the stock makes little sense because so many of its oil assets are diversified throughout the world. There may be some give and take as emotional oil traders react to the unpleasant news out of Europe, but that's hardly a game-changer for a company that's putting its Gulf of Mexico PR nightmare in the rearview mirror.

Banco Bilbao Vizcaya Argentaria (NYSE: BBVA  ) .

 France Telecom (NYSE: FTE  )

 BP (NYSE: BP  ) .

It is interesting to review this old article 

December 10, 2010:    What Happened to Banco Santander?