Investor's Checklist: Industrial Materials

This is a very traditional Old Economy sector, with many hard assets and high fixed costs.

Industrial materials are divided into commodity producers (steel, chemicals) and producers of noncommodity value-added goods and services (machinery, some specialty chemicals).

Buyers of commodities choose their produce on price - otherwise, commodities are the same product, regardless of who makes them.

The sales and profits of companies in this sector are very sensitive to the business cycle.

Very few industrial materials companies have any competitive advantages; the exceptions are those in concentrated industries (e.g., defense), those with a specialized niche product (e.g., Alcoa, some chemicals makers), and, above all, those that can produce their goods at the lowest cost (e.g., Nucor).

Only the most efficient producers will survive the downturn:  The best bet is to be the low-cost producer and owe little debt.

Asset turnover (total asset turnover [TATO] and fixed asset turnover [FATO] measure a manufacturing firm's efficiency.

Watch out for industrial firms with too much debt, large underfunded pension plans, and big acquisitions that distract management.


Ref:  The Five Rules for Successful Stock Investing by Pat Dorsey



Read also:
Investor's Checklist: A Guided Tour of the Market...

Investor's Checklist: Energy

The profitability of the energy sector is highly dependent on commodity prices.  Commodity prices are cyclical, as are the sector's profits.  It's better to buy when prices are at a cyclical low than when they're high and hitting the headlines.

Even though the sector is largely cyclical, many energy companies keep their bottom lines black during the troughs.  Look for this characteristic in your energy investments.

OPEC is a highly beneficial force in the energy sector because it keeps commodity prices above its costs.  It is worth keeping tabs on the cartel's strength.

Because of OPEC, we view exploration and production as a much more attractive area than refining and marketing.

Working in a commodity market, economies of scale are just about the only way to achieve a competitive advantage.  As such, bigger is generally better because firms with greater heft tend to be more profitable.

Keep an eye on reserves and reserve growth because these are the hard assets the company will mine for future revenue.

Companies with strong balance sheets will weather cyclical lows better than those burdened with debt.  Look for companies that don't need to take on additional debt to invest in new projects while also paying dividends or repurchasing shares.


Ref:  The Five Rules for Successful Stock Investing by Pat Dorsey



Read also:
Investor's Checklist: A Guided Tour of the Market...

Investor's Checklist: Utilities

Utilities are no longer the safe havens they once were.  Treat them with an appropriate amount of caution.

The competitive structure utilities must operate under is largely set at the state level.  Some states have gone far along the deregulation path; others have utilities that are fully regulated.  Keeping track of changing regulations in different states can be maddening, but it is necessary to understand the sector.

Regulated utilities tend to have wide economic moats because they operate as monopolies, but it is important to keep in mind regulation does not allow these firms to parlay this advantage into excess returns.  In addition, regulation can (and often does) change.

Another risk all utilities face - deregulated or not - is environmental risk.  Most power plants generate pollution of some kind.  Should environmental regulation tighten, costs could go up.

Utilities have a great deal of leverage, both operational and financial.  This is not so important for regulated firms, but it exponentially raises risk for companies facing increasing competition.

If you buy a utility for its dividend, make sure the firm has the financial wherewithal to keep paying it.

Utilities that operate in stable regulatory environments with relatively strong balance sheets while staying focused on their core businesses are the best bets in the sector.  

Ref:  The Five Rules for Successful Stock Investing by Pat Dorsey

Warren Buffett quotes

Is It Better To Be Book Smart Or Street Smart?

June 20, 2012

If you ask most people this question, you're likely to get answers that go down party lines. Those without advanced education will likely say that they've done just fine without spending a lot of time in the classroom, while people with a lot of formal academic knowledge would say that success is largely the result of education. This is more than a trivial debate. Recent statistics from the Federal Reverse show that the American middle class has seen its net income drop 40% from 2007-2010. What was an average net worth of $126,400 shrunk to $77,300 in 2010. Even worse, the Pew Charitable Trusts' Economic Mobility Project found that 42% of people whose father was in the bottom fifth of the earning curve remained in the same earning bracket for life. Only 30% of Britons and 25% of Danes and Swedes were destined to the same fate. This has led some people to believe that America isn't the land of opportunity it once was. Americans in the now-popular 99% are not only upset that the divide between rich and poor continues to widen, they want to know how they can assure a better life for themselves and their families. Is a
better paying job impossible without a formal education, or is there hope for the non-college educated?

Steve Jobs, co-founder of Apple, is widely regarded as one of the best business men of his day. He didn't have a college degree and neither did Steve Wozniak, the other founder of Apple. Other successful businessmen without college degrees include Dell Computer founder Michael Dell, Microsoft founder Bill Gates and Virgin Brands founder Richard Branson. People all over the world have found success without a college degree, but is that the rule or the exception? Unemployment data shows that more than 8% of the population looking for a job can't find one. However, for those with a bachelor's degree, the unemployment rate is only 3.9%. The unemployment rate is 13% for people without a high school diploma. A college degree doesn't guarantee success, but BLS unemployment statistics show book smarts more than double your chances of finding a job.


Who Works Harder?
One side believes that book smarts allows you to get a higher-earning job and work less, while poorer Americans remain poor because they are forced to work more hours for less money. A paper by Orazio Attanasio, Erik Hurst and Luigi Pistaferri found that higher-educated people work more hours than poorer income groups. Although income inequality is growing, leisure inequality is growing, too. While higher earners are earning more, they're losing more leisure time in order to do it. Lower-educated men had 35.2 hours of weekly leisure time (socializing, gaming, watching TV, etc.) compared to 35 hours when the study was last conducted. Higher-earning men had 33.2 hours compared to 34.4 hours previously. Less educated women saw their leisure time grow to 35.2 hours from 35 hours. Higher-educated women went down to 30.3 hours compared to the previously reported 32.2 hours. The study mentions that some of the increase in hours at the lower income levels comes from increased unemployment, but only half of the increase could be attributed to that.


The Bottom Line
Some consumer finance experts believe that becoming more financially prosperous is as much a function of cost control as it is advanced degrees and higher-paying jobs. Statistics seem to indicate that more education dramatically increases a person's chances of achieving financial prosperity, but one basic rule remains largely uncontested: a college degree may help to open doors to a better paying job, but hard work and responsible choices is the best path to career and financial success.

by Tim Parker

http://www.investopedia.com/financial-edge/0612/Is-It-Better-To-Be-Book-Smart-Or-Street-Smart.aspx#axzz1yNRqRlmR

Risk-Return Tradeoff

Definition of 'Risk-Return Tradeoff'

The principle that potential return rises with an increase in risk. 

• Low levels of uncertainty (low risk) are associated with low potential returns, whereas high levels of uncertainty (high risk) are associated with high potential returns. 
• According to the risk-return tradeoff, invested money can render higher profits only if it is subject to the possibility of being lost. 

Investopedia explains 'Risk-Return Tradeoff'

Because of the risk-return tradeoff, you must be aware of your personal risk tolerance when choosing investments for your portfolio. 

• Taking on some risk is the price of achieving returns; therefore, if you want to make money, you can't cut out all risk. 
• The goal instead is to find an appropriate balance - one that generates some profit, but still allows you to sleep at night.

Read more: http://www.investopedia.com/terms/r/riskreturntradeoff.asp#ixzz1yNTT4zyp

Reinvestment Risk

Definition of 'Reinvestment Risk'

The risk that future coupons from a bond will not be reinvested at the prevailing interest rate when the bond was initially purchased.

• Reinvestment risk is more likely when interest rates are declining.
• Reinvestment risk affects the yield-to-maturity of a bond, which is calculated on the premise that all future coupon payments will be reinvested at the interest rate in effect when the bond was first purchased. 
• Zero coupon bonds are the only fixed-income instruments to have no reinvestment risk, since they have no interim coupon payments.  

Investopedia explains 'Reinvestment Risk'

Two factors that have a bearing on the degree of reinvestment risk are:

• Maturity of the bond - The longer the maturity of the bond, the higher the likelihood that interest rates will be lower than they were at the time of the bond purchase.
• Interest rate on the bond - The higher the interest rate, the bigger the coupon payments that have to be reinvested, and consequently the reinvestment risk.

Read more: http://www.investopedia.com/terms/r/reinvestmentrisk.asp#ixzz1yNSI15fi

The Risks of Bond Investing: Understanding Dangers in Fixed-Income Investing

There's no such thing as a sure thing, even in the bond world

From Paul Conley, former About.com Guide

Bonds are among the safest investments in the world. But that hardly means that they’re risk free. Here’s a look at some of the dangers inherent in fixed-income investing.

• Inflation Risk: Because of their relative safety, bonds tend not to offer extraordinarily high returns. That makes them particularly vulnerable when inflation rises.
  Imagine, for example, that you buy a Treasury bond that pays interest of 3.32%. That’s about as safe an investment as you can find. As long as you hold the bond until maturity and the U.S. government doesn’t collapse, nothing can go wrong….unless inflation climbs. If the rate of inflation rises to, say, 4 percent, your investment is not “keeping up with inflation.” In fact, you’d be “losing” money because the value of the cash you invested in the bond is declining. You’ll get your principal back when the bond matures, but it will be worth less.
  Note: there are exceptions to this rule. For example, the Treasury Department also sells an investment vehicle called Treasury Inflation-Protected Securities.
• Interest rate risk: Bond prices have an inverse relationship to interest rates. When one rises, the other falls.
  If you have to sell a bond before it matures, the price you can fetch will be based on the interest rate environment at the time of the sale. In other words, if rates have risen since you “locked in” your return, the price of the security will fall.
  All bonds fluctuate with interest rates. Calculating the vulnerability of any individual bond to a rate shift involves an enormously complex concept called duration. But average investors need to know only two things about interest rate risk.
  First, if you hold a security until maturity, interest rate risk is not a factor. You’ll get back the entire principal upon maturity.
  Second, zero-coupon investments, which make all their interest payments when the bond matures, are the most vulnerable to interest rate swings.
• Default Risk: A bond is nothing more than a promise to repay the debt holder. And promises are made to be broken. Corporations go bankrupt. Cities and states default on muni bonds. Things happen...and default is the worst thing that can happen to a bondholder.
  There are two things to remember about default risk.
  First, you don’t need to weigh the risk yourself. Credit ratings agencies such as Moody’s do that. In fact, bond credit ratings are nothing more than a default scale. Junk bonds, which have the highest default risk, are at the bottom of the scale. Aaa rated corporate debt, where default is seen as extremely unlikely, is at the top.
  Second, if you’re buying U.S. government debt, your default risk is nonexistent. The debt issues sold by the Treasury Department are guaranteed by the full faith and credit of the federal government. It’s inconceivable that the folks who actually print the money will default on their debt.
• Downgrade Risk: Sometimes you buy a bond with a high rating, only to find that Wall Street later sours on the issue. That’s downgrade risk.
  If the credit rating agencies such as Standard & Poor’s and Moody’s lower their ratings on a bond, the price of those bonds will fall. That can hurt an investor who has to sell a bond before maturity. And downgrade risk is complicated by the next item on the list, liquidity risk.
• Liquidity risk: The market for bonds is considerable thinner than for stock. The simple truth is that when a bond is sold on the secondary market, there’s not always a buyer. Liquidity risk describes the danger that when you need to sell a bond, you won’t be able to.
  Liquidity risk is nonexistent for government debt. And shares in a bond fund can always be sold.
  But if you hold any other type of debt, you may find it difficult to sell.
• Reinvestment Risk: Many corporate bonds are callable. What that means is that the bond issuer reserves the right to “call” the bond before maturity and pay off the debt. That can lead to reinvestment risk.
  Issuers tend to call bonds when interest rates fall. That can be a disaster for an investor who thought he had locked in an interest rate and a level of safety.
  For example, suppose you had a nice, safe Aaa-rated corporate bond that paid you 4% a year. Then rates fall to $2%. Your bond gets called. You’ll get back your principal, but you won’t be able to find a new, comparable bond in which to invest that principal. If rates have fallen to 2%, you’re not going to get 4% with a nice, safe new Aaa-rated bond.
• Rip-off Risk: Finally, in the bond market there’s always the risk of getting ripped off. Unlike the stock market, where prices and transactions are transparent, most of the bond market remains a dark hole.
  There are exceptions. And average investors should stick to doing business in those areas. For example, the bond fund world is pretty transparent. It only takes a tiny bit of research to determine if there is a load (sales commission) on a fund. And it only takes another few seconds to determine if that load is something you’re willing to pay.
  Buying government debt is a low-risk activity as long as you deal with the government itself or some other reputable institution. Even buying new issues of corporate or muni debt isn’t all that bad.
  But the secondary market for individual bonds is no place for smaller investors. Things are better than they once were. The TRACE (Trade Reporting and Compliance Engine) system has done wonders to provide individual bond investors with the information they need to make informed investing decisions.
  But you’d be hard-pressed to find any scrupulous financial advisor who would recommend that your average investor venture in to the secondary market on his own.
  
  
  http://bonds.about.com/od/bonds101/a/bondrisk.htm

Liquidity Risk

Understanding Liquidity Risk and Your Investments

By Joshua Kennon, About.com Guide

As a new investor, you are going to come across the term "liquidity risk". It is important you understand what liquidity risk is and why it is important because it could pose a significant threat to your financial well-being unless you protect against it. Although I've explained how some investors strive to pay off their home mortgage debt early but find themselves bankrupt due to the liquidity crunch they created for their household, I wanted to stop to talk about the specifics of how liquidity risk can attack you in other, unexpected ways.

Liquidity Risk - The Short Version

In the simplest terms, liquidity risk refers to the risk that an investment won't have an active buyer or seller when you are ready to buy or sell it. This means you will be stuck holding the investment at a time when you need cash. In extreme cases, liquidity risk can cause you to take huge losses because you have to mark down your property at fire sale prices to attract buyers.

One of the reasons for the losses suffered by financial firms during the Great Recession was the fact that these companies owned illiquid securities. When they found themselves without enough cash to pay the day-to-day bills, they went to sell these assets but discovered that the market had dried up completely. As a result, they had to sell at any price they could get - sometimes as low as pennies on the dollar!

The most famous case is Lehman Brothers, which was financed with too much short-term money. The management foolishly used this short-term money to buy long-term investments that weren't liquid - or rather, assets thst became illiquid after the meltdown. When the short-term money was withdrawn, the firm couldn't come up with the cash because they couldn't sell the long-term, illiquid securities fast enough to meet obligations. The stockholders were nearly wiped out despite the fact that Lehman was profitable and had a multi-billion dollar net worth.

On the upside, there is opportunity with liquidity risk because other companies and investors that were flush with cash were able to buy distressed assets. Some of these "vulture" investors made a killing because they had balance sheets that could support holding non-liquid investments for long periods of time.

To compensate for liquidity risks, investors often demand a higher rate of return on money invested in illiquid assets. That is, a small business can't be easily sold in most cases so investors are likely to demand a higher rate of return for investing in shares of it than they would a highly liquid blue chip stock. Likewise, investors require a much smaller return for parking money in the bank.

Liquidity Risk - The Long Version

There are several different types of liquidity risk but I'm only going to teach you about the three major ones that are likely to afflict regular investors.

• Liquidity Risk #1 - Bid/Offer Spread Widening - When an emergency hits the market or an individual investment, you may see the bid and ask spread blow apart so that the market maker has a difficult time matching up buyers and sellers. That is, your shares of Company XYZ stock may have a current market price of $20 but the bid may have fallen to $14 so you can't actually get the $20 you want! You often see very large ask / big spreads in thinly traded stocks and bonds, whereas huge, liquid blue chip stocks often have spreads as low as a penny or two.
• Liquidity Risk #2 - Inability to Meet Cash Obligations When Payment Is Due - This is the investment equivalent of defaulting on a debt. If a company has $100 million in bonds that reach maturity, it is expected to pay off the entire $100 million balance by the maturity date. Most of the time, businesses refinance this debt. But what happens if the debt markets aren't working, like during the Great Recession when the credit crunch made it impossible to borrow money? In that case, if the company couldn't come up with the whole $100 million, it could be hurled directly into bankruptcy court even if it is highly profitable. You would find yourself locked into what could be years of court workouts due to the firm mismanaging its liquidity risk.
• Liquidity Risk #3 - Inability to Meet Funding Needs at an Affordable Price - This is when it is impossible for a company or other investment to raise enough money to function properly and meet its needs at a price that is economical. Wal-Mart Stores, Inc., for example, is one of the biggest and most profitable companies on the planet. It has tens of billions of dollars in debt in order to optimize the company's capitalization structure. If the markets went haywire tomorrow and Wal-Mart could no longer borrow at 6% and investors instead demanded 30%, it would make no sense for the company to issue bonds. In effect, the market's liquidity would have dried up completely and the stockholders of Wal-Mart would have to worry about the company coming up with enough cash to wipe out all of its debt.

Protecting Yourself Again Liquidity Risk

There are several ways you can help protect yourself from liquidity risk. These include:

• Never buy long-term investments that are illiquid unless you can afford to hold them through terrible recessions and job loss. If you might need cash in six months, don't buy 5-year certificate of deposits or an apartment building.
• Remember that your total debt is less important as the amount of excess cash you have after making your debt payments each month. Fixed payments of $5,000 per month are overwhelming to someone with $6,000 per month in take-home pay. The same payments are a rounding error to someone making $300,000 per month. All else being equal, the bigger the cushion between the cash you earn each month and the cash you pay out, the less the chance you get caught in a liquidity risk crisis.
• Avoid investing in companies that are facing potential liquidity risk. Is there any big debt refinancing plans that could risk the company's well-being? Does the company have a solid balance sheet with long-term funding sources, such as shareholder equity instead of short-term deposits? If you don't understand what this means, you should probably stick to low-cost, widely diversified index funds.

http://beginnersinvest.about.com/od/Risk-Management/a/Liquidity-Risk-101.htm

The 3 Types of Investment Risk

The 3 Types of Investment Risk
The Basics of Risk Management 
 By Joshua Kennon, About.com Guide

Smart investing includes risk management. For each stock, bond, mutual fund or other investment you purchase, there are three distinct risks you must guard against; they are business risk, valuation risk, and force of sale risk. In this article, we are going to examine each type and discover ways you can protect yourself from financial disaster.

Investment Risk #1: Business Risk

Business risk is, perhaps, the most familiar and easily understood. It is the potential for loss of value through competition, mismanagement, and financial insolvency. There are a number of industries that are predisposed to higher levels of business risk (think airlines, railroads, steel, etc).

The biggest defense against business risk is the presence of franchise value. Companies that possess franchise value are able to raise prices to adjust for increased labor, taxes or material costs. The stocks and bonds of commodity-type businessesdo not have this luxury and normally decline significantly when the economic environment turns south.

Investment Risk #2: Valuation Risk

Recently, I found a company I absolutely love (said company will remain nameless). The margins are excellent, growth is stellar, there is little or no debt on the balance sheet and the brand is expanding into a number of new markets. However, the business is trading at a price that is so far in excess of it's current and average earnings, I cannot possibly justify purchasing the stock.

Why? I'm not concerned about business risk. Instead, I am concerned about valuation risk. In order to justify the purchase of the stock at this sky-high price, I have to be absolutely certain that the future growth prospects will increase my earnings yield to a more attractive level than all of the other investments at my disposal.

The danger of investing in companies that appear overvalued is that there is normally little room for error. The business may indeed be wonderful, but if it experiences a significant sales decline in one quarter or does not open new locations as rapidly as it originally projected, the stock will decline significantly. This is a throw-back to our basic principle that an investor should never ask "Is company ABC a good investment"; instead, he should ask, "Is company ABC a good investment at this price."

Investment Risk #3: Force of Sale Risk

You've done everything right and found an excellent company that is selling far below what it is really worth, buying a good number of shares. It's January, and you plan on using the stock to pay your April tax bill.

By putting yourself in this position, you have bet onwhen your stock is going to appreciate. This is a financially fatal mistake. In the stock market, you can be relatively certain of what will happen, but not when. You have turned your basic advantage (the luxury of holding permanently and ignoring market quotations), into a disadvantage.

Consider the following: If you had purchased shares of great companies such as Coca-Cola, Berkshire Hathaway, Gillette and Washington Post at a decent price in 1987 yet had to sell the stock sometime later in the year, you would have been devastated by the crash that occurred in October. Your investment analysis may have been absolutely correct but because you imposed a time limit, you opened yourself up to a tremendous amount of risk.

Being forced to sell your investments is really something known as liquidity risk, which is important enough I wrote a separate article about it to help you understand why it poses such a threat to your net worth.

The Moral

There is always some degree present in every investment you purchase. At the same time, by avoiding or minimizing specific types of risk, you can keep temporary hiccups in the economy or financial markets from destroying your wealth.


http://beginnersinvest.about.com/cs/valueinvesting1/a/080103a.htm

Every Choice Comes with Risk

by Michele Cagan, CPA

In the investment world, you'll have to walk a delicate (and very personal) balance between risk and reward. The more uncertain the investment, the greater the risk that your investment won't perform as expected, or even that you'll lose your entire investment. Along with greater investment risk, though, comes an opportunity to earn greater investment returns. If you're uncomfortable with too much risk and seek to minimize it, your trade-off will be lower investment returns (which can be a form of risk in itself). Truthfully, you can't completely eliminate risk. If you don't take any risk at all, you won't be able to earn money through investing.

Investment risk is directly tied to market volatility — the fluctuations in the financial markets that happen constantly over time. The sources of this volatility are many: interest-rate changes, inflation, political consequences, and economic trends can all create combustible market conditions with the power to change a portfolio's performance results in a hurry. Ironically, this volatility, by its very nature, creates the opportunities for economic benefit in our own portfolios, and that is how risk impacts your investments and your investment strategy.

There are many different types of risk, and some are more complicated than others. The 7 risk classifications you'll learn about here are those you'll likely take into consideration as you begin to design your portfolio.

Stock Specific Risk

Any single stock carries a specific amount of risk for the investor. You can minimize this risk by making sure your portfolio is diversified. An investor dabbling in one or two stocks can see his investment wiped out; although it is still possible, the chances of that happening in a well-diversified portfolio are much more slender. (One example would be the event of an overall bear market, as was seen in the early 1990s.) By adding a component of trend analysis to your decision-making process and by keeping an eye on the big picture (global economics and politics, for example), you are better equipped to prevent the kinds of devastating losses that come with an unexpected sharp turn in the markets.

Risk of Passivity and Inflation Rate Risk

People who don't trust the financial markets and who feel more comfortable sticking their money in a bank savings account could end up with less than they expect; that's the heart of passivity risk, losing out on substantial earnings because you did nothing with your money. Since the interest rates on savings accounts cannot keep up with the rate of inflation, they decrease the purchasing power of your investment over time — even if they meet your core investing principle of avoiding risk. For this somewhat paradoxical reason, savings accounts may not always be your safest choice. You may want to consider investments with at least slightly higher returns (like inflation-indexed U.S. Treasury bonds) to help you combat inflation without giving up your sense of security.

A close relative of passivity risk, inflation risk is based upon the expectation of lower purchasing power of each dollar down the road. Typically, stocks are the best investment when you're interested in outpacing inflation, and money-market funds are the least effective in combating inflation.

Market Risk

Market risk is pretty much what it sounds like. Every time you invest money in the financial markets, even via a conservative money-market mutual fund, you're subjecting your money to the risk that the markets will decline or even crash. With market risk, uncertainty due to changes in the overall stock market is caused by global, political, social, or economic events and even by the mood of the investing public. Perhaps the biggest investment risk of all, though, is not subjecting your money to market risk. If you don't put your money to work in the stock market, you won't be able to benefit from the stock market's growth over the years.

Credit Risk

Usually associated with bond investments, credit risk is the possibility that a company, agency, or municipality might not be able to make interest or principal payments on its notes or bonds. The greatest risk of default usually lies with corporate debt: Companies go out of business all the time. On the flip side, there's virtually no credit risk associated with U.S. Treasury-related securities, because they're backed by the full faith and credit of the U.S. government. To measure the financial health of bonds, credit rating agencies like Moody's and Standard & Poor's assign them investment grades. Bonds with an A rating are considered solid, while C-rated bonds are considered unstable.

Currency Risk

Although most commonly considered in international or emerging-market investing, currency risk can occur in any market at any time. This risk comes about due to currency fluctuations affecting the value of foreign investments or profits, or the holdings of U.S. companies with interests overseas. Currency risk necessarily increases in times of geopolitical instability, like those caused by the global threat of terrorism or war.

Interest Rate Risk

When bond interest rates rise, the price of the bonds falls (and vice versa). Fluctuating interest rates have a significant impact on stocks and bonds. Typically, the longer the maturity of the bond, the larger the impact of interest rate risk. But long-term bonds normally pay out higher yields to compensate for the greater risk.

Economic Risk

When the economy slows, corporate profits — and thus stocks — could be hurt. For example, political instability in the Middle East makes investing there a dicey deal at best. This is true even though much of the region is flush with oil, arguably the commodity in greatest demand all over the planet.

http://www.netplaces.com/investing/designing-your-personal-portfolio/every-choice-comes-with-risk.htm

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)

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Marks & Spencer posts first profit fall in 3 years