Cyprus Capital-Controls Q&A

Following the deal between Cyprus and its international creditors on a bailout, there are just as many questions as answers, particularly surrounding the imposition of capital controls. Here our reporters address some of the most pressing issues:

By Matina Stevis and Joe Parkinson

Q: What actions does Cyprus need to take to enforce the capital controls adopted with last week’s legislation?

A: The Cypriot parliament passed enabling legislation last week, giving the central-bank governor and the finance minister the power to take measures to stem capital outflows. The legislation is quite generic and allows the country’s top finance and monetary officials to impose measures ranging from daily ATM withdrawals to freezing domestic interbank lending, suspending direct-debit orders and converting checking accounts into time deposits. The law allows the finance minister or, when relevant, the central-bank governor, to “take whichever restrictive measure [they] consider necessary under the circumstances, for reasons of public order and/or public security.” A decree enacting this bill and laying out the specific details of the capital controls is yet to be issued.

Q: What capital controls are already being enforced (e.g. border checks, ATM limits)

A: Customs officials said border guards at the counrtry’s air and sea ports have been instructed to check baggage and monitor whether travelers are taking more than €10,000 (about $13,000) out of the country. Any amount above that €10,000 threshold can be confiscated. Daily ATM limits vary: at Popular Bank of Cyprus (Laiki), cash-machine withdrawals have been capped at €100 euros; at Bank of Cyprus, the limit is €120. Other ATMs are operating normally.

Q: Can people bypass controls and ATM withdrawal limits by crossing over to Northern Cyprus?

A: At present, border guards at the main pedestrian crossing point on Ledra Street aren’t searching people unless they have intelligence indicating that someone is carrying a large amount of cash. That could change.

Q: How are the ATM limits and bank closures affecting businesses, such as hotels?

A: Many businesses are struggling to understand how the capital-control measures will affect their day-to-day operations, such as their access to cash, meeting payroll and other obligations, as well as the longer-term impact of the financial crisis on their businesses. “In two-three days we need to pay our employees. Will we be able to do that? What happens with the workers who get paid via Laiki?” asks Michalis Pilikos, the president OEB, Cyprus’s national business association. “For many this will be a major wound, we’ll see immediate mass layoffs and closures.” In the meantime, many small businesses are refusing to accept credit-card transactions of electronic transfers out of uncertainty over when banks will reopen and concern they may not be able to recoup the funds. Some larger businesses, like Nicosia’s Hilton Hotel, still accept credit cards but not bank transfers.

Q: When are banks likely to reopen? What will happen when banks reopen? Will even small depositors have access to their deposits?

A: On Monday, March 25, banks were officially closed for a national holiday in commemoration of Greece’s Independence Day. They have been closed since March 16. The Cyprus Central Bank said that all banks, including Bank of Cyprus and Cyprus Popular Bank, will reopen on Thursday at 8:00 a.m. Officials are expected to have the capital-control measures in place before then.

http://blogs.wsj.com/eurocrisis/2013/03/25/cyprus-bailout-qa/

Related:   Cyprus crisis: What are capital controls and why does it need them?

Singapore Medical Insurance Programme - MediShield

Reforming MediShield to be truly national ― Jeremy Lim

MARCH 27, 2013

MARCH 27 ― Every now and then, Singaporeans come across a media report of a medical bill in the hundreds of thousands of dollars, and everyone seems to know someone struggling financially after a prolonged illness.

In fact, the late Dr Balaji Sadasivan, previously a junior minister in the Health Ministry, while undergoing treatment for cancer commented: “Cancer treatment can be very, very expensive. This is something our health system will have to deal with. It is not surprising if some patients have to sell their house (sic).”

In dealing with the financials of catastrophic illness, Singaporeans are likely most concerned about two issues: The uncertainty of illness severity with an attendant massive hospital bill, and their share of the bill.

On the former, Health Minister Gan Kim Yong has correctly identified that expanding risk pooling is fundamental.

It does not make sense for every Singaporean to try and save for a hospitalisation episode that may never materialise (half of all heart-related deaths are sudden); and besides, most Singaporeans will never be able to save enough to pay fully for a complex and long-drawn illness.

MediShield is the bedrock insurance programme intended to protect against the financial consequences of medical catastrophes. It is the only health insurance scheme created by an Act of Parliament and must be national.

However, MediShield has three limitations that prevent it from being truly national: Exclusion of pre-existing conditions from coverage, non-eligibility upon reaching 90 years of age; and sharp premium increases with age.

How can we revamp MediShield to assure that it is truly inclusive or national and covers every Singaporean?

Three changes are worth exploring. Firstly, expand MediShield to include all Singaporeans regardless of age or pre-existing illnesses.

This is a monumental decision and truly fundamental as it reframes MediShield from being a scheme run on commercial principles (albeit as a non-profit scheme), to one that is founded on social principles.

The current premium calculations are in age bands, excluding Singaporeans with pre-existing illnesses. For a national programme, it is preferable to spread risk across all age groups and all risk groups.

This would result in younger and healthier policy holders paying more, but would prevent premiums for the elderly (who have healthcare bills four times larger than their younger counterparts) from skyrocketing — and, just as importantly, enabling those with prior cancer, heart disease and the like to have affordable insurance.

Secondly, ensure all Singaporeans can afford to pay the premiums. Premiums may still be higher for the very elderly or those with substantial pre-existing illnesses, and government funding for those who cannot afford to pay their own premiums has to come in.

Thirdly, limit the individual’s risk of medical bankruptcy by imposing a cap on what patients have to pay as their share of the total bill. How this quantum is worked out needs to be transparent, though.

The cap will need to be means-tested in keeping with the government’s philosophy of targeting subsidies, but patients need to know before the fact how the cap is determined and what they are expected to pay.

A point to note: Setting caps on what patients pay does not remove the financial risks in and of themselves. It just means someone else — in this case, the government — has to bear the risk. This will have downstream consequences: The government assuming the risks really means taxpayers carry the can.

Social activists advocating for “peace of mind” for all are really asking for the government to do more AND for taxpayers to fund these measures. Is this a price Singaporeans are prepared to pay for a better Singapore? I certainly hope so.

Minister Gan also highlighted the risks of over-servicing and over-consumption. These are genuine concerns. It would be naive to depend on the “nobility” of individual healthcare professionals who are paid at least in part on a “fee-for-service” model, and equally naive to expect patients to deliberately constrain themselves for the good of society.

What can be done then? Some suggestions build on self-regulation as a professional community, a privilege society extends to doctors.

The Singapore Medical Council is the watchdog for professional misconduct and egregious ethical breaches but what about overall clinical standards of practice? Singapore has a College of Family Physicians for general practitioners and family physicians, and an Academy of Medicine for specialists. These professional bodies can step up to the plate.

Developing clinical practice guidelines and coupling rigorous auditing processes to them to identify errant over-servicing doctors would be a good start.

The government’s electronic medical records system has been in the works for almost a decade now and when fully mature, can enable audits and recognition of negative outliers.

Public hospitals already have departmental structures where doctors in the same speciality peer-review each other’s cases, appropriateness of treatment and outcomes.

These could be built upon by government mandate enabling the college and academy to take these governance practices nationally.

Robust audits will be necessary to assure the government that risks of abuse of insurance schemes can be mitigated, and these can be built up progressively.

The challenges are formidable but the reward, a truly national MediShield makes it worthwhile.

On a trip to Taiwan last year, a young Taiwanese remarked to me: “The NHI (Taiwan’s National Health Insurance) makes me proud to be Taiwanese!” Years from now, what will Singaporeans say? ― Today

* Jeremy Lim has held senior executive positions in both the public and private healthcare sectors. He is writing a book on the Singapore health system.

http://www.themalaysianinsider.com/sideviews/article/reforming-medishield-to-be-truly-national-jeremy-lim/

Graham’s basic principles of value investing

Value investing

Value investing is a much used phrase and means, in general terms, buying something for less than it is worth. It can apply to just about anything. You can value invest in shares, in bonds, in property, in postage stamps, in vintage cars. The difficulty is in calculating the value of the thing in which you are investing. In many things (postage stamps, collectible cars etc), the only way that value can be determined at any given time is the price that someone is prepared to pay for the item at at that time. The investor in that asset is, as a result, subject to the opinion of others.

Benjamin Graham proposed a method of calculating the value of a stock and Warren Buffett has both applied and enhanced Graham’s approach.

Benjamin Graham: the ‘father of value investing’

It was Benjamin Graham who applied to the theory of investing the concept ofintrinsic value. According to Graham, if you can determine the intrinsic value of a share, then you can ascribe to that share a real value that is not dependent upon the opinion of others (the whims of Mr Market). If you can then buy that share at a price less than its intrinsic value, giving yourself a satisfactory margin of safety, you have made a prudent and rational investment. An investor who holds a diverse portfolio of stocks acquired by this process should, over time, finish ahead.

Benjamin Graham did not apply the term value investment to this investment approach; that has been done by others. He did however called this intelligent investing, indeed the only real form of investing. Buying shares on the basis of value is investing. Buying shares on other bases such as the belief that the market will rise generally, or that a particular industry is good, or that others will bid the price up, is not investment but speculation.

Graham’s basic principles of value investing

In The Intelligent Investor, Graham sets out his strategies for making investments based on value for various types of investor – passive and active, defensive and enterprising – but each approach rests on these basic principles:

• When you buy a stock, you are buying a share in a business.
• The market price of a stock is only an opinion of the value of the stock and does not necessarily reflect the real value of that stock.
• The future value of a stock is a reflection of its current price.
• An investor must always build a margin of safety into the decision to buy a stock.
• Intelligent investing requires a detached and long term approach, based on careful research and reason, and not on the opinions of others or the prospects of short term gains.

Warren Buffett and value investing

The fact that Graham suggested different strategies for what he called defensive investors and enterprising (and more enterprising) investors does not mean that value investments and growth investments are mutually exclusive. Warren Buffett has shown that you can value invest in shares that grow over time. He has always acknowledged that his investment style is based on Benjamin Graham’s principles and he cannot understand why all investors don’t do the same thing. In March 2012, Buffett told a group of MBA  students that:

The principles of value investing have not changed from the teachings of Ben Graham until now.

Buffett identified for the MBA students the two factors that mark the value investor: a long term perspective and the patience to not seek to get rich overnight: value investors are not concerned with getting rich tomorrow but over a ten year period instead.

There is nothing wrong with getting rich slowly.

But Buffett has added his own riders to Graham’s tenets and to some extent introduced a subjective element to the objectivity of Graham, particularly in his preference for businesses with a competitive advantage.

He gave the MBA students his (and our) favorite example  - Coca Cola. He explained that people will go on drinking Coke because they like it; possible loss of markets in the Western world because of health concerns or competition is more than made up by new customers in other countries; the company has been doing the same thing for many years; it sticks to its core business; and if it decides to add a cent or two to the sale price of a Coke to adjust for inflation or to cover any loss of margins, nobody is going to stop drinking it.

At various times, Buffett has decided that Coke has fallen below its intrinsic value and stepped in and bought shares – that is value investing.

Buffett sums up value investing

When Buffett was asked to explain his investment strategy, the words that he used essentially reflect the essence of value investing: look at a stock, assess its value, work out a price that you can pay for it with a minimum of risk, wait patiently for that price and then buy in when you can. Buffett said:

Invest in equities slowly over time … And look to buy companies that will go on forever like Coca Cola … but the key is to buy equities slowly over time and don’t try to time the market. For the more serious investor, buy equities strategically, opportunistically.

10 Points on Warren Buffett's Investing

1. Warren only invests in stuff that he understands.
2. He doesn’t trade, he invests!
3. His main decision making source are Annual Reports
4. He only buys at a “good price”.
5. He only buys things with the intention to hold them forever (no rule without exception).
6. He holds 8% of Coca-Cola and is absolutely certain that the value of Coca-Cola will increase substantially over the next 20 years, i.e. there is no reason to sell.
7. He only invests in simple business models (beverages, sweets, chewing gums, insurance).  If he doesn’t understand the industry, he doesn’t invest.  E.g. he doesn’t invest into technology/internet companies.
8. He can make a purchase decision in 5 – 10 minutes.  He doesn’t overanalyze companies.  He doesn’t negotiate very much.  When the price that is offered to him is okay, he buys immediately.  When he offers a price, it’s often non-negotiable and he expects very fast decisions.
9. He recommends not to listen to stock recommendation.  If you do that, you’re playing and not investing.
10. He still lives in the same house he bought as a 25 year old. 

Conclusion:

I will definitely read and listen to more stuff of and about Warren!  There are some very important lessons to learn!

Warren Buffett MBA-Talk

http://www.docstoc.com/docs/1024971/Warren-Buffett-MBA-Talk

Humbling Lessons from Parties Past by Burton G. Malkiel

HUMBLING LESSONS FROM PARTIES PAST
By BURTON G. MALKIEL

•The ‘Elec-tronic” boom of 60s, the Nifty 50s boom of 70s, the Biotech boom of 80s and the Technology Bubble of 90s.

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•BENJAMIN GRAHAM, co-author of "Security Analysis," the 1934 bible of value investing, long ago put his finger on the most dangerous words in an investor's vocabulary: "This time is different."

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•Pricing in the stock market today suggests that things really are different.

•Growth stocks,  especially those associated with the information revolution, have soared to dizzying heights  while the stocks of companies associated with the older economy have tended to languish.

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•Well over half the stocks on the New York Stock Exchange and Nasdaq are selling at lower prices today than they did on Jan. 1, 1999.

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•It is not unusual today for new Internet issues to begin trading at substantial multiples of their offering prices.

•And after the initial public offerings, day traders rapidly exchange Internet shares as if they were Pokémon cards for adults.

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•As we enter the new millennium, how can we account for the unusual structure of stock prices?

•Does history provide any clues to sensible strategies for today's investors?

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•To be sure, we are living through an information revolution that is at least as important as the Industrial Revolution of the late 19th century.

•And much of the current performance in the stock market can be traced to the optimism associated with "new economy" companies - those that stand to benefit most from the Internet.

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•The information revolution will profoundly change the way we learn, shop and communicate.

•But the rules of valuation have not changed.

•Stocks are only worth the present value of the cash flows they are able to generate for the benefit of their shareholders.

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•It is well to remember that investments in transforming technologies have not always rewarded investors.

•Electric power companies, railroads, airlines and television and radio manufacturers transformed our country, but most of the early investors lost their shirts.

•Similarly, many early automakers ended up as road kill, even if the future of that industry was brilliant.

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•Warren E. Buffett, chief executive of Berkshire Hathaway and a disciple of Graham, has sensibly pointed out that the key to investing is not how much an industry will change society, but rather the nature of a company's competitive advantage, "and above all the durability of that advantage."

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•Yet the Internet must rely for its success on razor-thin margins, and it will continue to be characterized by ease of entry.

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•A drug company can develop a new medication and be given a 17-year patent that can be exploited to produce above-average profits.

•No such sustainable advantage will adhere to the dot-com universe of companies.

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•Moreover, the "old economy" companies may not be nearly as geriatric as is commonly supposed.

•We still need trucks to transport the goods of e-commerce, as well as steel to build the trucks, gasoline to make them run and warehouses to store the goods.

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•Precedents of recent decades offer many valuable lessons to today's investors.

•Consider the "tronics boom" of 1960-61, a so-called new era in which the stocks of electronics companies making products like transistors and optical scanners soared.

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•It was called the tronics boom because stock offerings often included some garbled version of the word "electronics" in their titles, just as "'dot-com" adorns the names of today's favorites.

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•More new issues were offered than at any previous time in history.

•But the tronics boom came down to earth in 1962, and many of the stocks quickly lost 90 percent of their value.

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•Another parallel to today's market was seen in the 1970's, when just 50 large-capitalization growth stocks, known as the Nifty 50, drew almost all the attention of individual and institutional investors.

•They were called "one decision" stocks because the only decision necessary was whether to buy; like family heirlooms, they were never to be sold.

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•In the early part of that decade, price-to-earnings multiples of Nifty 50 stocks like I.B.M., Polaroid and Hewlett Packard rose to 65 or more while the overall market's multiple was 17.

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•The Nifty 50 craze ended like all others; investors eventually made a second decision -- to sell -- and some premier growth stocks fell from favor for the next 20 years.

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•The biotechnology boom of the early 1980's was an almost perfect replica of the microelectronics boom of the 1960's.

•Hungry investors gobbled up new issues to get into the industry on the ground floor.

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•P/E ratios gave way to price-to-sales ratios, then to ratios of potential sales for products that were only a glint in some scientist's eye.

•Stock prices surged.

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•Again, as sanity returned to the market and more realistic estimates of potential profits were made, many biotechnology companies lost almost all of their value by the early 1990's.

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•The lessons here are clear. Occasionally, groups of stocks associated with new technologies get caught in a speculative bubble, and it appears that the sky is the limit.

•But in each case, the laws of financial gravity prevail and market prices eventually correct.

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•The same is likely to be true of the dazzling stocks in today's market.

•Few of the Internet darlings will ever justify their current valuations, and many investors will find their expectations unfulfilled.

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•Even supposedly conservative index-fund investors may be surprised to know that very significant shares of their portfolios are invested in information technology companies whose P/E and price-to-sales ratios vastly exceed even the sky-high multiples reached during those past periods of market speculation.

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•At the very least, investors might well start the year by examining their portfolios, to see if their asset allocations are appropriate for their stage in life and their tolerance for risk.

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•Burton G. Malkiel is an economics professor at Princeton University and the author of “A Random Walk Down Wall Street" (W.W. Norton).

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•http://www.alphashares.com/OpEd_Humbling_Lessons.pdf

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Benjamin Graham's Writings over time

Year 1934 1st Edition Security Analysis

Year 1940 2nd Edition Security Analysis

Year 1949 1st Edition The Intelligent Investor

Year 1951 3rd Edition Security Analysis

Year 1954 2nd Edition The Intelligent Investor

Year 1959 3rd Edition The Intelligent Investor

Year 1962 4th Edition Security Analysis

Year 1973  4th Edition The Intelligent Investor

Benjamin Graham's Intelligent Investor - The Defensive Investor is best served by purchasing common stocks and bonds to protect against inflation.

Inflation

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•Fixed income investments fare worse during inflationary periods than do common stocks. 

•During inflationary periods, firms can increase prices, profits, and dividends causing their share price to increase and offsetting declines in purchasing power.

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•In 1970, the most probable average future rate of inflation was 3%. 

•The investor can not count on more than a 10% return above the net tangible assets of the DJIA. 

•This is consistent with the suggestion that the average investor may earn a dividend return of 3.6% on their market value and 4% on reinvested profits. 

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•There is no underlying connection between inflation and the movement of common stock earnings and prices. 

•Appreciation does not result from inflation, but rather from the re-investment of profits. 

•The only way for inflation to increase common stock values is to raise the rate of earnings on capital investment, which it has not done historically.

•

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•Economic prosperity usually is accompanied by slight inflation, which does not affect returns. 

•Offsetting factors include rising wage rates that exceed productivity gains and additional capital needs that cause interest rates to increase.  

•The investor has no reason to believe that he can achieve average annual returns better than 8% on DJIA type investments. 

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•Graham describes alternatives to common stocks as a hedge against inflation. 

•These alternatives range from gold and diamonds to rare paintings, stamps, and coins. 

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•Gold has performed poorly, far worse than returns from savings in a bank account. 

•The latter categories, such as paying thousands of dollars for a rare coin, can not qualify as an “investment operation.” 

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•

•Real Estate is still another alternative; however, its value fluctuates widely, and serious errors may be made when purchasing individual locations. 

•Again, the defensive investor is best served by purchasing a portfolio of carefully chosen common stocks and bonds.

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Benjamin Graham's Intelligent Investor - What stocks to buy for the Defensive Investor

The Defensive Investor and Common Stock

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•Common Stocks offer protection against inflation and provide a better than average return to investors. 

•This higher return results from a combination of the dividend yield and the reinvestment of earnings (undistributed profits), which increases value. 

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•However, these benefits are lost when the investor pays too high a price. 

•One should recall that prices did not recover again to their 1929 highs for another 25 years. 

•However, the defensive investor can not do without a common stock component.

•4 Rules for the Defensive Investor Accumulating Common Stock

•4 Rules for the Defensive Investor Accumulating Common Stock:

1.      There should be adequate, although not excessive, diversification; that is, between 10 and thirty stocks.

2.      Each stock should be large, prominent, and conservatively financed.  Conservatively financed means a debt to capital ratio no greater than 30%.  Large and prominent means that the firm, in 1972 dollars, has at least $50 million in assets and annual sales, and it should at least in the top third of its industry group.  Each of the 30 DJIA firms met this criteria in 1972.

3.      Each firm should have a long record of continuous dividend payments.

4.      Each stock should cost no more than 25 times the average of the last 7 years of earnings, and no more than 20 times the last 12 months earnings.

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•This last rule virtually bans all growth and other “in-favor” stocks. 

•Due to the fact that these issues sell at high price, they necessarily possess a speculative element. 

•A “growth stock” should at least double its earnings per share every 10 years for a minimum compounded rate of return of 7.1%. 

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•The best of the growth stocks, IBM, lost 50% of its value during the declines of 1961 and 1962. 

•Texas Instruments went from $5 to $256 (a 50x increase) in six years without a dividend payment as its earnings rose from $0.40 to $3.94 (a 10x increase); 2 years later TI’s earnings fell 50% while its stock price fell 80% to $50.

•

•

•The temptations here are great, as growth stocks chosen at the correct prices provide enormous results. 

•However boring, large firms that are unpopular will invariably perform better for the defensive investor.

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•Dollar Cost Averaging (“DCA”) often is popular during rising markets. 

•If DCA is adhered to over many years, then this formula should work. 

•The difficulty is that few people are so situated that they can invest the same amount each year. 

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•

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•Economic downturns often constrain one’s ability to invest just when stocks are trading at their lowest valuations. 

•Furthermore, when prosperity for the average investor returns, so too do high valuations.

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•Most people fall into the “defensive investor” category. 

•Graham provides examples such as a widow who cannot afford unnecessary risks, a physician who cannot devote the time for proper analysis, and a young man whose small investment will not return enough gain to justify the extra effort.  

•The beginning investor should not try to beat the market

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•The beginning investor should not try to beat the market.

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•The investor only realizes a loss in value through the sale of the asset or the significant deterioration of the firm’s underlying value. 

•Careful selection and diversification helps to avoid these risks. 

•

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•A more common and difficult problem is overpaying for securities; that is, paying more for a security than its intrinsic value warrants.

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Benjamin Graham's Intelligent Investor: The investments the Defensive Investor's should buy and should avoid.

The Defensive Investor’s Portfolio Policy

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•Those who can not afford to take risks should be content with a relatively low return.  

•The rate of return is dependent upon the amount of effort put forth by an investor. 

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•As previously stated, the defensive investor’s portfolio should consist of no less than 25% high grade bonds and no less than 25% large stocks.

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•Yet these maxims are difficult to follow, because like the herd of Wall Street, when the market has been advancing, the temptation is strong to bet heavily on stocks.

•This is the same facet of human nature that produces bear markets.  

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•The time to invest in the stock market is after it has suffered a large loss.

•

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•A 50% ratio of stocks and bonds was a prudent choice except during periods of excessive increases or decreases in stock value. 

•This simple formula guards against the mistakes caused by human nature even if it does not provide for the best returns. 

•Again, Safety of Principal is Graham’s chief concern.

•

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•Bonds  

•The decision between purchasing taxable and tax-free bonds depends mainly on the difference in income to the investor after taxes. 

•Those in a higher bracket have a greater incentive to closely examine this issue. 

•For example, in 1972, an investor may have lost 30% of his income from investing in municipal issues (“munis”) as opposed to taxable issues. 

          

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•Bonds come in many types, a description of which follows.

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• US Savings Bonds are a great choice.  In 1972, they came in two series:  E and H.  The Series H Bond paid semi-annual interest.  Series E Bonds did not pay interest, but rather sold at a discount to their coupon rate.  In 1972, Series E bonds provided the right to defer income tax payments until the bond was redeemed, which in some cases increased the value by as much as one-third.  Both E and H Series Bonds are redeemable at any time providing bondholders protection from shrinkage of principal during periods of rising interest rates (or rather, the ability to benefit from rising rates).  Both series paid in or around 5% in 1972.  Federal, but not state, income tax was payable on both series.  Graham recommends US Bonds due to their assurance of transferability, coupon rate, and security. 

•

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•Other US Bonds come in many varieties. 

•Federal taxes, but not state taxes, are charged on other US Bonds.  Some of these issues are discounted heavily. 

•Others bonds are guaranteed, but not issued, by the US government.  As of 1972, the US government had fully honored its commitments under all guarantee obligations.  Federal guarantees, in essence, permit additional spending by various federal agencies outside of their formal budgets.

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•State and Municipal Bonds are exempt from federal and state tax in the State of their issue. 

•However, not all of these bonds possess sufficient protection to be considered worthy of investment.  

•To be worthy of investment, a bond should possess a minimum rating of “A”.   

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•Corporate Bonds are taxable and offer higher yields than all types of government issues bonds. 

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•Junk Bonds are those that are less than investment grade.  Their title is aptly given.  The investor should steer clear of these issues.  The additional yield that junk bonds provide is rarely worth their risk.

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•Savings and Money Market Accounts are a viable substitute for US Bonds.  They usually pay interest rates close to rates paid on short-term USbonds. 

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•Preferred Stocks should be avoided. 

•Not only does the preferred holder lack the legal claim of a bondholder (as a creditor), but also he lacks the profit possibilities of the common stock holder (as a partner).  

•The only time to purchase preferred stock, if ever, is when its price is unduly depressed during times of temporary adversity.

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•Early redemption of bonds by issuers was commonplace before 1970, and resulted in an unfair advantage for the issuer by not allowing the investor to participate in significant upside values if interest rates fell. 

•However, this practice largely stopped.  

•The investor should sacrifice a small amount of yield to ensure that his bonds are not callable.

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•