Saturday, 28 July 2007
The Straits Times Index was down 87.03 points at 3,492.70, its lowest finish since June 8.
Overall volume was 4.11 billion shares worth S$4.11 billion, with losers leading gainers 933 to 139 and 491 stocks remaining unchanged.
US shares plunged Thursday by more than 300 points, with investors gripped by anxiety over the housing market.
Those losses, coupled with lacklustre local corporate results from DBS Group Holdings and Chartered Semiconductor, prompted investors to dump shares, dealers said.
CIMB-GK Research said a technical analysis of global equity markets showed signs of an impending major correction.
"Stock markets in Europe and the US have started to correct and weekly indicators have turned negative," CIMB-GK said in a research note. "Asia (excluding Japan) still looks strong, but may not be able to buck the trend if US and Europe continue consolidating in the coming weeks."
DBS Group Holdings, Southeast Asia's biggest bank, fell S$0.30 to S$22.40, after saying its second-quarter net profit dipped 7.0 percent year-on-year to S$560 million.
Shares in other financial institutions fell in turn, with United Overseas Bank shedding S$0.80 to S$21.70 and Oversea-Chinese Banking Corp down S$0.15 to S$9.05.
Property stocks extended their falls, with CapitaLand off S$0.15 at S$7.05.
Chartered Semiconductor lost S$0.05 to S$1.20 after the company reported a net loss of US$24.7 million in the second quarter. - AFP/ir
To get a sense of why I am pulling in my horns a bit, let's look at a few of the "gathering clouds."
THE 40-WEEK CYCLE FLIPS TO THE BEARISH PHASE
As many Optionetics and ProfitStrategies students know, the 40-week cycle – which I first wrote about in Stock & Commodities magazine in 2003 - just ended a bullish phase as of the close on 7/20/07. As you can see in Chart 1, the market rallied nicely between the start (3/2/07) and end of this latest bullish cycle, all in all registering almost a +10% gain in about four and a half months.
Chart 1 – Bullish 20-weeks of latest 40-week cycle
(Click here for larger view.)
Chart 2 displays the growth of $1,000 invested in the Dow only during each 20-week bullish phase since 1967. This equity curve advanced to a new all-time high.
Chart 2 – Growth of $1,000 invested in Dow Industrial only during each 20-week bullish phase since 1967
(Click here for larger view.)
On the more sobering side, the next "bearish" phase (which would more accurately be described as the "non-bullish" phase since sometimes it is up and sometimes it is down) will last until 12/7/07. As you can see in Chart 3, this phase has no real predictive value other than the fact that it has been down a total of -29% overall since 1967.
Chart 3 – Growth of $1,000 invested in Dow Industrial only during each 20-week bearish phase since 1967
Nevertheless, the fact that we are now in the "bearish" phase does not automatically mean that a bear market is imminent. It simply means that the boost that the market typically gets during the bullish phase has now passed.
SEPTEMBER THROUGH NOVEMBER OF PRE-ELECTION YEAR
Dovetailing with the 40-week cycle is something I wrote about in an article dated June 27, 2007 and titled "These Are the Good Old Days." In that article I pointed out the fact that while pre-election years tend to be quite bullish (there hasn't been a down pre-election year since 1931), the September/October/November time frame during pre-election years typically witnesses some difficult market action.
Chart 4 displays the growth of $1,000 invested only during the September through November timeframe of each pre-election year since 1935. While some years are up and some years are down, the net result is decline of over –55%. So this is another piece of information that in no way should be taken to imply that a bear market decline is imminent – only that a bit of caution may be in order.
Chart 4 – Decline of $1,000 invested only during September, October and November of each pre-election year since 1935.
UTILITY/TRANSPORT BELLWETHER SYSTEM
Another analysis tool that I have written about in the past (November 1st, 2006) is the Utility/Transport Bellwether System (UTBS). In a nutshell, it turns out that it is a bullish sign for the market overall if the Dow Transport and the Dow Utilities are outperforming the Dow Industrials. Specifically, the percentage return for the Dow Transports over the past 100 trading days is compared to the performance of the Dow Industrials over the same timeframe. If the Transports have outperformed the Industrials that is considered bullish. The same comparison is also made between the Dow Utilities and the Dow Industrials. Here too if the Utilities have outperformed the Industrials it is considered bullish.
Chart 5 displays the decline in the value of $1,000 invested in the Dow Industrials only when both measures are bearish since 1986. As you can see, extended rallies in the face of a bearish reading here are the exception rather than the rule.
Chart 5 – Growth of $1,000 invested in the Dow Industrials when the Industrial have outperformed both the Dow Transports and the Dow Utilities over the past 100 trading days (since 1986)
To further illustrate the usefulness of these measures, Chart 6 displays the growth of $1,000 invested in the Dow Industrials only when both readings are bullish (since 1986 also). As you can clearly see, the stock market has a strong tendency to advance when the Transports and Utilities are both outperforming the Industrials.
Chart 6 – Growth of $1,000 invested in the Dow Industrials when the Dow Transports and the Dow Utilities have outperformed the Industrials over the past 100 trading days (since 1986)
In recent weeks, the performance of the Transports and the Utilities has tailed off thus presently leaving this indicator in unfavorable territory. While this does not by itself portend a meaningful market decline, it is another piece of a growingly worrisome body of evidence.
So, as you can see, little by little a number of historically reliable indicators are beginning to flash warnings signs. Does this mean that it is time to "sell everything" and brace ourselves for a stock market meltdown? Not necessarily. Am I "calling the top"? Would it matter if I did? Not likely. As always, the market will do whatever it's going to do. What we need to do as traders and investors is try as best we can to be aggressive when the weight of the evidence is bullish and to exercise a bit of caution when the clouds darken. The evidence I am looking at and have detailed herein suggests that the days of endless sunshine may soon be drawing to a close.
Staff Writer and Trading Strategist
Optionetics.com ~ Your Options Education Site
A number of factors have driven the M&A market to record levels. Here's what might turn off the flow of deals.
By Grace Wong, CNNMoney.com staff writer
LONDON (CNNMoney.com) -- A swell of private equity buyers, solid corporate profits, the availability of cheap debt and robust liquidity have all helped propel the boom in mergers and acquisitions.
U.S. merger volume has risen to $1.2 trillion so far this year, according to deal tracker Dealogic. By comparison, deals in the U.S. totaled $1.5 trillion for all of 2006.
While many in the industry agree that activity has peaked, they also say the fundamentals underpinning this activity remain strong. In short, barring some external shock, few expect the boom to go bust.
At the same time, the factors keeping the deals flowing are strongly linked, which means that a problem that crops up in one area could trigger a chain reaction of difficulties for the market. Here's a look at what analysts are watching for.
Economic growth. Solid economic growth has translated into strong corporate profits, as well as record high stock prices. That, in turn, has boosted deal values and contributed to overall optimism in the deal market.
But corporate profit growth in the U.S. is losing momentum. Second-quarter earnings for the S&P 500 are expected to grow just 5.5 percent, according to Thomson Financial, compared with growth of 16.3 percent in the quarter a year ago. Plus, there are concerns that problems in the subprime mortgage market could spread and further dampen earnings.
But several companies, including Coca-Cola (Charts, Fortune 500) and Johnson & Johnson (Charts, Fortune 500), are enjoying a boost from growing demand from international markets. As the global economy keeps chugging along, many companies are well positioned to keep doing deals, analysts say.
"There's pent up demand among [corporate buyers]. They're ready, willing and able to do deals," said Steve Krouskos, partner in transaction advisory services at Ernst & Young.
Debt markets. Corporate buyers haven't been the only ones hungry for deals. Private equity firms, aided by cheap debt and loose lending terms, have been a major force in the M&A market.
But there have been recent shudders in the credit markets, where investors have been pushing back on risky debt offerings. If big deals like the Chrysler leveraged buyout aren't able to secure financing, that may cast a chill on future private equity deals, many market watchers say.
"[Financing problems] could really slow down the pace of larger deals - and the inability of big deals to go through would certainly slow down what is the best year for M&A transactions," said Brett Barragate, a commercial finance lawyer at Jones Day.
Still, some say private equity firms are strong enough to withstand a downturn in the credit markets. Buyout firms have more money in their coffers than ever before, and it will take more than a tightening of loan terms to crimp their activity, they say.
Liquidity. The outlook for private equity deals also depends on the willingness of banks to back these deals, which is becoming a bit more difficult for them.
"The liquid debt market is the key driver [behind M&A] right now," according to Steven Bernard, director of M&A market analysis at R.W. Baird and Co.
Banks are still putting up money for M&A, but they're running into trouble when it comes to spreading out the risk of these loans to other investors, who have curbed their appetite for this kind of debt.
If banks are left holding too much of this debt, they may suddenly turn their backs on buyout deals, which could spark a broader credit crunch.
"Banks could shut the lending window quickly, which would shut down liquidity to the market and have a ripple effect," Bernard said. But he added that so far, it doesn't look like the jitters in the credit markets are bad enough to have a dramatic effect on the deal environment.
Inflation. A rise in inflation could trigger an increase in interest rates. Higher rates would increase the burden on private equity buyers, who already are dealing with tougher bond and loan terms.
"A dramatic rise in interest rates could harm deal flow. Private equity firms build a lot of their transactions around interest rate expense," said Barragate from Jones Day.
A rise in rates could also send stock prices lower, which would diminish the buying power of corporations who use shares to finance deals.
Central bankers around the world have been raising interest rates in an effort to keep inflation at bay, but so far it looks like the Federal Reserve will keep holding rates steady in the U.S.Inflation fears flared earlier this summer, but appear to have eased since then. The yield on the benchmark 10-year Treasury note, which is influenced by inflation expectations, has fallen to 4.91 percent after going as high as 5.3 percent last month.
Fortune's Shawn Tully says these stocks offer an appealing combination of juicy yields and growth potential - plus they're cheap!
By Shawn Tully, Fortune editor-at-large
(Fortune Magazine) -- Wouldn't it be great if you could find the ideal blend - an investment that combined the cozy security of government bonds with the double-digit returns investors expect from stocks? That seems like a pipe dream in a world where ten-year Treasuries yield 5 percent and equities sell at premium prices that augur a dim future.
But this ideal investment exists, and believe it or not, it's called a bank stock. Hold that yawn. Bank stocks offer a sterling array of qualities right now. They pay huge dividends, approaching 5 percent, that are bound to keep rising. They're incredibly cheap. And their prospects for growth are surprisingly sprightly.
Three giant banks with beaten-down share prices and fat dividend yields are excellent choices right now: Bank of America (Charts, Fortune 500), Citigroup (Charts, Fortune 500) and Wachovia (Charts, Fortune 500). To grasp what makes them good buys, it's important to understand their voluptuous profitability. These banks need to invest less than a quarter of their immense earnings in new branches, deposit systems and trading programs to sustain their modest but highly consistent growth. They return the vast bulk of their profits to shareholders via dividends and stock buybacks. Today BofA yields 4.5 percent, while Citi and Wachovia pay around 4.3 percent. After the 15 percent tax on dividends, investors pocket more than they do from ten-year Treasuries, which yield 5 percent but face a 35 percent top federal levy.
It gets better. Dividends are likely to keep growing. BofA, for example, is expected to raise its payout about 11 percent in July, bringing the yield to an extraordinary 5.1 percent. Look for the other banks to announce major hikes this year to close in on the 5 percent mark.
How do you get from that yield to the holy grail, a total return of more than 10 percent? The extra juice comes from earnings growth. Over the long term, the banks figure to raise earnings an average of at least 6 percent a year. They are also buying back around 2 percent of their shares annually.
In 2006 and 2007, BofA is expected to spend around $8 billion on buybacks; at Wachovia the figure tops $5 billion. Hence, earnings per share should grow, on average, about 8 percent annually. If P/E multiples don't drop, share prices should jog forward at around that rate, bringing total returns - stock gain plus dividends - to a sumptuous 12 percent to 13 percent.
Sounds too good to be true - and that's what the market thinks, which is why the stocks are cheap. But this is a case where the market seems to be wrong. "Investors fear a credit meltdown because of the woes in subprime," says Betsy Graseck, an analyst with Morgan Stanley. "That's making the market far too pessimistic about bank stocks." Not one of these banks has troubling exposure to subprime credit, since they sell almost all such loans to institutional investors.
Right now the outlook for profits at the three banks runs the gamut from robust to sluggish. None of them face the outright stagnation the market fears. Surprisingly, the fastest grower is now Citi. After years of struggling with regulatory issues, America's biggest financial institution is finally investing heavily in its principal asset: its huge global franchise. It's also pledging to cut its bloated overhead $4.6 billion a year by 2009. "Citi's expected growth is unusually high because it's on an efficiency drive," says Graseck. Result: Citi's earnings per share are on track to rise about 7 percent in 2007 and post a double-digit gain in 2008.
Wachovia has shrewdly invested in fast-growing sectors, notably brokerage, through its joint venture with Prudential and pending $6.8 billion acquisition of A.G. Edwards. Right now its growth is hurt by a slowdown in originations at its Golden West subsidiary in California. This year earnings per share are expected to rise only around 6 percent. But Graseck projects 8 percent gains starting in 2008 as Wachovia capitalizes on its growing footprint in California and the Southwest.
Bank of America, which boasts the biggest U.S. consumer franchise, with almost 6,000 branches, is suffering most from the flat yield curve that prevents banks from making big, easy profits the old-fashioned way, by borrowing at low short-term rates and lending on fixed mortgages and student loans at far higher rates. The market also fears that CEO Ken Lewis will make an expensive overseas acquisition. That's a real concern. But with its strong nationwide brand and power in the fast-growing Hispanic markets, BofA packs far more earnings power than the market projects.Best of all, the banks boast mouthwatering P/E multiples, giving value investors what they prize most: plenty of margin for error. Today Citi, Wachovia and BofA trade for an average of just 11 times the previous 12 months' earnings. That's far below the S&P 500's P/E of 18.3, and the mid to high teens for big dividend payers like drugmakers and telecoms. The risk that their P/Es will fall is minuscule. It's far more likely that they'll rise as investors gain new confidence in their enduring earnings power. At these prices the boring become beautiful.
Stop worrying and stay invested. Research shows that fear of a loss feels worse than the actual loss itself.
(Money Magazine) -- Have you ever been snoozing on an airplane and been jolted awake by a crunch of turbulence? Your heart pounds, you clutch the arms of your seat, and you jump when the captain comes on the p.a.
That's what the stock market has felt like lately. After a 19% gain in 2006 lulled us to sleep, the Dow Jones industrial average dropped 416 points on Feb. 27 and another 243 on March 13.t's at times like these that your own behavior feels hard to forecast because everything seems uncertain. What if you sit tight and the market drops further? What if you bail out and the market goes up?
If this is how you feel, you're not alone. But you have less to fear than you think.
Research shows that the regrets you expect tend to be more painful than the ones you experience.
And doing nothing - exactly what you should do when the market falls - will leave you feeling better than selling in a panic.
The Investing Immune SystemA team of psychologists led by Timothy Wilson of the University of Virginia and Daniel Gilbert of Harvard recently had people take a simple gamble: Each person got $5, then faced a coin toss. Those who called it right won another $5; those who got it wrong lost $3 out of the original $5.
Before the coin flip, the gamblers predicted how they would feel about the outcome immediately afterward and 10 minutes later. After the coin toss, they rated their feelings again.
Participants predicted that winning would make them happy and that losing would make them miserable - and that both moods would stick. The winners turned out to be right. But the losers were nowhere near as glum as they had forecast; they rationalized missing out on the $5 gain by focusing on the $2 they still had left.
What Wilson and Gilbert call the "psychological immune system" makes us imagine that negative events will feel worse than they actually do. It's a useful defense that keeps us from taking wild risks. But it can make us jittery investors.
None of this means that market dives don't hurt. But it does mean that the hurt you'll feel soon after won't be so bad. That's provided you don't sell at the first pang you feel.
Doing so, in fact, will quickly make you feel worse. Studies show that you are much more likely to regret an act of commission (something you did that you shouldn't have) than an act of omission (something you did not do that you should have).
In the short run, you'll kick yourself harder for taking a rash action than for doing nothing.
And in the long run, you'll get over it. Dozens of studies have shown that we are more resilient than we realize; we adapt surprisingly quickly to setbacks ranging from divorce or job loss to paralysis or the death of a loved one.
So how do you minimize your future regrets? Impose rules on yourself now and stick to them.
STAY WITH STOCKS. Your panic in a decline is likely to pass soon, so set a target for how much of your portfolio you want in stocks and stick to it. If you're below that, buy more until you get there.
WAIT FOR THE BELL. If the market is open, your portfolio should be closed. Later you can be more objective.
KEEP A DIARY. Track your portfolio, and your feelings, in a journal. The last time you panicked, how did the market do over the next year? If you were happy when stocks were priced higher than today, shouldn't you be happier now that they are cheaper to buy?
TUNE OUT THE NEWS. Buzzing red stock tickers and words like "crash" trigger your brain's alarm system, making you expect more declines.LOOK IN THE MIRROR. Stare at yourself in a mirror literally as you think about the market going down. If you see real panic in your eyes, maybe you should sell. Otherwise, you can handle it, and you should.
Losing money never feels good. But keep things in perspective and you can boost long-term returns.
NEW YORK (CNNMoney.com) -- You have to admit: Stocks have risen to mighty heights mighty fast. The Dow has hit three milestones in nine months - crossing 12,000 in October, 13,000 in April, and just last week, 14,000.
That was Dr. Jekyll Dow talking. But Mr. Hyde Dow was always lurking.
On Thursday, the leading stock index closed down 311 points, or more than 2 percent, the second biggest point drop this year. The biggest came Feb. 27, when the Dow fell 416 points, or 3.3 percent.
What to make of this? Stocks are volatile. Or more to the point, investors' emotions are.
It takes nerves of steel to shake off a big stock drop. But the world's best investors not only shake them off - they thrive on them.
They know sell-offs are common, perfectly normal, and even healthy. When stocks go way up in a hurry, their prices become unsustainably high. Only by falling occasionally (and even sharply) in the short run can stocks continue to rise in the long run. Without the agony of today's drop, the ecstasy of tomorrow's good returns becomes impossible.
Consider the terrible slide of 1973-74, when the S&P 500 index lost 48 percent of its value. Richard Nixon had resigned the Presidency, oil prices had quadrupled, Cleveland and New York City were on the verge of bankruptcy, and inflation had flared up to 12 percent.
If ever there's been a good time to panic, that had to be it. But as the old saying goes, things are darkest before the dawn. If you'd sold out of stocks at the end of 1974, you would have missed 1975's 37.2 percent return and 1976's 23.8 percent gain - two very strong years for the stock market.
Even after the Dow's wrenching plunge in October 1987, remember that the index actually ended up rising 2 percent in value that year. And it took only 15 months (until January 1989) for the Dow to make its way back above 2246.73, the closing price on the last trading day before Black Monday.
In fact, there's such a thing as paying too much attention to your money. In the late 1980s, Paul Andreassen, a psychologist then at Harvard University, conducted a series of laboratory experiments to determine how investors respond to financial news.
He found that people who pay close attention to news updates actually earn lower returns than people who seldom follow the news.
When you think about this a little more, it actually makes good sense. News coverage tends to make market movements seem even bigger than they are - and to make them seem likely to persist just when they are most likely to reverse.
Fortunately, there are several simple and effective steps you can take to turn a stock market crash to your advantage.
Amp up your 401(k). Since a down market can be a great time to buy solid investments at bargain prices, contribute as much to your 401(k) as you can, because you'll be picking up more shares for the money, which will pay off when the market rebounds.
If you can't contribute the maximum your plan allows, at the very least contribute as much as is required to receive the company match. Typically, companies match 50 cents on every dollar you contribute, up to 6 percent of your compensation.
That means for each dollar you invest up to 6 percent, your employer adds another 50 cents, instantly transforming your investment into $1.50. This will not only help cushion any fall in stock prices, but it will amplify your gains once the market recovers.
Adjust your risk. A market sell-off is a good time for a gut check. Did the mutual funds you own take too much risk and fall much more than their respective indexes?
Obviously you would have wished you'd known before this decline. But at least you'll know which funds you want to ride into the next one. For a good selection of mutual funds with good risk profiles, see the Money 70, Money Magazine's selection of best funds.
It's also a good time to make sure you have the right mix of stocks and bonds, which can add ballast to a portfolio during downdrafts. Even if you have a lot of years to go, a decent dose of bonds - say 10 to 20 percent - is a good idea: you'll still get a lot of the growth stocks offer without as much volatility.
Determine your deadlines. Ask yourself when you will need the money you've invested. For example, if you have a newborn child, it's a good idea to invest some money to pay college tuition down the road - and you can put most of it in stocks, since 18 years should be long enough for the market to recover from a crash.
But if you're about to make a down payment on your dream house, that money should go in a safer bucket, where a stock market crash can't hurt it; there, you want to hold mainly cash and bonds. Tuesday's drop was relatively small and you can still make those adjustments.
Spread your bets. If all you owned was U.S. stocks or stock funds, the crash has just reminded you that being diversified is the best offensive - and defensive - weapon in any investor's arsenal. Even if you're young and like to take risks, you should have some cash, some bonds, and some foreign stocks, which, over the long run, will combine with your U.S. stocks to lower your risks without crimping your returns.
Wednesday, 25 July 2007
Working in M&A is sooo yesterday, says William D. Cohan, author and former MD at JPMorgan and VP at Lazard.
With US$5 trillion worth of transactions likely this year, the global M&A market is booming and on track to have its best year ever by a wide margin. But does that news bode well for those aspiring to a career as a Wall Street M&A advisor? The answer, alas, is "not really".
While Wall Street managers – overpaid and over-promoted bankers themselves – have never been particularly savvy at matching hiring needs to the flow of deals, they are at least clever enough not to bulk up their M&A departments this late into a market expansion that's close to four years old. Much of the M&A hiring occurring now seems to be at the managing director level, replacing those experienced industry experts that jump to rivals or – more and more – who leave investment banking altogether for the holy land of private equity or hedge funds. And while it is certainly true that investment banks are still madly wooing recent college and MBA grads to come to Wall Street to work impossibly long hours making the sausage down in the basement, the likelihood that many of these youngsters will have a meaningful and fulfilling career as M&A advisors on Wall Street is very remote.
Indeed, the life of an M&A banker has never been worse. Impossibly busy flying around the world to attend ponderous yet 'essential' meetings, their advice is taken less and less often as CEOs rely more and more on their growing – and far cheaper – in-house M&A departments. Also, since a third of this year's M&A volume is comprised of deals involving private equity firms such as Blackstone or KKR – whose principals are one-time M&A bankers – the action in investment banking these days seems to be in arranging the financing for these increasingly massive buyouts or in figuring out which clients to take to the Wimbledon finals. This, for sure, is a far cry from the glory days of the 1980s when M&A advisors such as Felix Rohatyn, Steve Rattner, Bruce Wasserstein and Bob Greenhill were akin to rock stars for their ability to devise creative strategies to help their clients clinch industry-transforming deals. When was the last time headlines were made because of some innovative M&A tactic?
Furthermore, the second-quarter financial results across Wall Street reveal with increasingly clarity just how irrelevant M&A departments have become to the big firms' bottom lines. At Goldman Sachs, M&A revenue represented just 6.8% of the firm's revenue in the second quarter; at Lehman, M&A revenue was even less important, equal to just 4.9% of overall revenue for the quarter. Wall Street is increasingly focused on proprietary trading, derivatives, CLOs and private equity.
And when the inevitable downturn in the M&A business comes – probably sooner rather than later – that's when the real skills of investment-banking managers shine. In order to preserve their own multi-million dollar jobs, you can bank on your compensation being slashed dramatically unless of course you are fired outright. Tell me, does this ever get mentioned during those glorious on-campus recruiting cocktail parties? Cheers, mate.
• The writer, a former M&A banker at Lazard, Merrill Lynch and JPMorganChase, is the author of The Last Tycoons: The Secret History of Lazard Frères & Co(Doubleday, 2007)
Some people scour jobs boards, others network like there's no tomorrow. Whatever your job-search strategy, here's five tips to help you stand out from the pack.
"You never want to get caught behind changes in the marketplace," says Dawn Fay, New York-based regional vice president of Robert Half International. "When the market changes, it's often subtle, so stay ahead of the game." That means reading as much as you can in professional and generic publications and Web sites and constantly nurturing your network to keep the pulse of the hiring climate. "There's always an ebb and flow of demand for certain skills and positions. Stay focused on the big picture," Fay says. "Keep an inventory of your skills and network going and really think things through."
Request informational interviews
"Don't be afraid to contact senior managers and ask for informational interviews. It may sound simple but it's seldom done. Everyone goes to Web sites," says Diane Albergo, director of career services and human resources for Financial Executives International, a membership organization of senior-level finance professionals headquartered in Florham Park, N.J. "Explore your network and ask for that time."
One caveat: You can't just call senior people at firms you'd like to work for and ask for an hour of their day. You have to network your way in. "Don't just pick up the phone and say, 'Hey, give me five job leads,'" says Jon Alpert, CFO of New York-based beverage company Apple & Eve. "I'm open to providing an industry overview if the person networked in from a reliable source."
When asked whether he grants informational interviews, Andreas Rothe, senior vice president and global controller of PB, an infrastructure services firm headquartered in New York, says, "If it's a person connected to somebody I know, yes." Rothe recommends registering with www.linkedin.com and similar sites "to connect with people at the companies you're targeting. I know obviously my network. What I don't know is whom they know." By utilizing networking sites, he says, "within two to three degrees of separation, you have access to over one million people."
A second caveat is you must do your homework before you even touch the phone. "You need to prepare. I'm busy and I'm lazy. If you want me to help you, tell me how to help you," Alpert says. "Say, 'This is the information and help I think you can provide.' The art of that is that if you make it easy for me, I'm willing to help you."
Use Visual Aids
"Going through the door and interviewing, you want to wow them as much as you can. Research the company through and through. Bring a presentation - a Powerpoint, for example, or a binder or portfolio - about what you can do for the company, especially for senior-level positions," Diane Albergo says.
"Present alternatives and solutions" that highlight the particular expertise you bring to issues the company faces, she adds. However, she warns against using video. "I don't think it's advisable because it takes a natural acting talent financial people don't have. They come across better in person," Alpert says.
Stand Out From the Competition
"Creativity - not cuteness or cleverness - is important," Albergo says. She suggests creating an addendum to your resume that lists your professional accomplishments and extras, like community service work, for example.
Some people might be inclined to send little gifts to hiring managers, interviewers or people they've met through networking. Albergo mentions sending a book you might have talked about. But while Alpert thinks sending a sleeve of golf balls might be appropriate in some situations, he says it's more beneficial to "send useful follow-up information."
Don't Burn Bridges
Networking is supposed to be a mutually beneficial process. Information is supposed to flow two ways. You never know when you might want to contact someone again. However, Alpert says, "98 percent of the people who network into me never finish the process. I never hear from these guys when they've landed. Stay in touch. Finish the circle. Tell me what you're going to be doing, so I can see if I want you in my network."
I got into a fistfight in a bar the other day. There was blood everywhere. I got glass splinters in my face. The other guy might still be in a coma. I'm still wearing the white bracelet they put on me when they checked me in for "observation."
This is how I feel every day when I battle the bears who participate with me on an email list made up of investors and traders. The wall of worry is huge and seemingly insurmountable. But here are a few bricks for the wall of hope.
1. Private equity. There's roughly a trillion dollars sloshing around in the private-equity world, including the money that banks would lend to close any major purchases. With Blackstone buying Hilton at 16 times cash flows and the average purchase now coming in around 11 to 13 times cash flows, it opens up an entire universe of stocks that can be takeover targets. Possible candidates include Macy's and Wyndham.
2. Retail investing. The retail investor still has not gotten back into the game. The cover story in the latest edition of Barron's highlights that fact and offers various statistics that retail investors are showing nowhere near the level of interest they exhibited at the top of the bull market in 1999 to 2000. Until that happens, I don't think we're anywhere near a blowoff top. As the retail investor comes back, interesting ways to play that include E*Trade and Charles Schwab. E*Trade in particular has a price-to-earnings ratio right now of 14.9 and a forward P/E of 11; any additional investor interest likely will send that forward P/E down into the single digits, making it even a potential buyout candidate by a larger bank.
3. Buybacks. It's in the news every day so you would think this is just completely baked into the market, but it isn't. There are currently about $600 billion in buybacks under way right now. Cigna, IBM and EMC are all companies that could benefit. Check out the "Mad Money" Buybacks portfolio on Stockpickr to see companies that are purchasing their shares and actually reducing shares outstanding.4. Low-P/E oils and financials. There's only so low the market can go when 50% of the companies that make up the S&P 500 are trading at single-digit multiples of enterprise value over EBITDA. (Enterprise value equals market cap plus net debt and represents a fairer assessment of what a buyer has to pay to buy the whole company. And EBITDA is earnings before interest, taxes, depreciation and amortization.) For instance, Goldman Sachs, the best investment bank ever, has a P/E of 9. Exxon Mobil, the mega oil company, trades at six times EBITDA. Heck, even recent IPO Blackstone trades at nine times EBITDA.
5. Global economy boom. Eastern Europe, India and almost every part of the third world are building and rebuilding their cities, flushing out their infrastructure and beginning to participate in the global economy. Let's not forget that 40% of the revenues of S&P 500 companies are foreign sales. Not to mention that many of the companies that are building out the global infrastructure -- in particular General Electric -- trade on the U.S. markets.
6. China. This deserves its own category. No matter how you slice it -- increasing numbers of Internet users, increasing demand for oil, increasing demand for steel and cement, increasing demand for financial services -- companies doing business in China are going to boom over the next 20 years. Whether you like Baidu.com as an Internet play, Korean steel producer Posco as a Warren Buffett play or PetroChina as an oil company, China is a strong market. And that doesn't necessarily mean buying Asian stocks. Even plays like railroad company Burlington Northern, which ultimately ships commodities from the Midwest to California so they can be sent to China, benefit from the China boom.
7. Tech upgrade cycle. Every aspect of technology is going to go through an upgrade in the next two to five years, and not just corporations upgrading their computers to handle Microsoft's Vista operating system -- although that will happen. Individuals will move from analog to digital TV -- Best Buy likely will benefit -- and consumers will buy phones that can handle Web access much like the Apple iPhone, and there's the entire alternative-energy tech boom, of which chipmaker Applied Materials will be a prime beneficiary.
It's not every day you get to see the world's second richest man lose.
But the shareholders of Berkshire Hathaway Inc., Warren Buffett's holding company, got to see it twice during the first weekend in May at the Berkshire Hathaway 2007 Annual Shareholders Meeting in Omaha, Neb.First Buffett, whose net worth Forbes magazine lists at $52 billion, took on friend and Cleveland Cavaliers basketball star LeBron James in a game of "horse." Then he challenged an 11-year-old table tennis champion.
Suffice to say, Buffett probably ought to stick to investing.
Much of the weekend was filled with light-hearted fun. Shareholders who made the pilgrimage to Omaha this year got a chance to shop the merchandise of Berkshire's many subsidiaries, watch a company video of Buffett playing James and capture many Kodak moments of Bill Gates and Warren Buffett playing table tennis at the local mall.
Of course, the real reason people flocked to Omaha, had nothing to do with a desire to see Buffett's athleticism. People came to hear the Oracle of Omaha's comments on a range of issues affecting their lives.
Saturday, May 5, The annual meeting
The annual meeting, which attracted some 27,000 shareholders this year, is anything but a stuffy investors meeting. Beginning like a concert, singer Jimmy Buffett, introduced as "Mr. Buffett," performed a special version of "Margaritaville" -- "Wasting Away in Berkshire Hathawayville," which featured new lyrics about Berkshire and its directors.
The shorts-clad songster introduced the headliners of the event: Warren Buffett and Berkshire Vice Chairman Charlie Munger. The investing pair then sat down for a six-hour question-and-answer session with shareholders, who brought up topics ranging from global warming to Buffett's successor.
Some questions highlighted consumer finance and investing issues worth repeating here. We present some of his thoughts on various financial questions raised by shareholders and members of the press during separate question and answer sessions.
Gems about investing
He added that when you think about buying shares in a company, think about why you might buy the whole business. If you couldn't write an essay about it, then you shouldn't buy any shares.
Risk is tied to the type of business and ignorance of the investor. One investor from Los Angeles asked about using volatility as a measurement of an investment's risk. "Volatility does not determine the risk of investing," Buffett said, adding that risk comes with certain kinds of businesses and not knowing what you're doing. A better approach would be to understand the economics of the business you're investing in, he said.
Protect a portfolio from inflation. "The best protection against inflation is your own earning power," Buffett says, in response to a question about protecting a portfolio from the erosion of inflation. He says the next best thing is owning a wonderful business, adding that owning Coca-Cola or any name that people will always plunk money down to keep getting and that has low capital investment requirements is the best investment you can have.
What can be done about shorting stocks? "I have no problem with shorts," says Buffett. He added that he didn't think shorting stocks poses any threat to the world. He would be fine with it if someone wanted to short Berkshire stock.
Are managed futures funds a bad idea? In response to a question about his stance on managed futures funds, Buffett said, "It's a mistake to shrink the universe of possibilities," and that funds devoted to a limited segment are at a disadvantage. "There's no form that produces investment results."
Munger added that if you averaged out the annual returns of managed futures funds per dollar per year, they would be somewhere between lousy and negative.
How do you judge the right margin of safety to use when investing? We favor businesses where we think we know the answer, Buffett said. "If we can't come up with a figure, we move on to something we can understand." He also added that the margin of safety doesn't need to be huge, likening a great business to a fat person. It might be hard to tell whether the person weighs 300 or 325 pounds, he says, but you still would say the person is fat.
Munger chimed in saying that margin of safety comes down to getting more value than what you're paying.
Buffett and Munger on other consumer issues
The fun of gambling aside, the Oracle had harsh words for the industry, saying, "Gambling is a tax on ignorance." He said it's revolting that the government takes advantage of its citizens' weaknesses rather than protecting them.
Will the subprime market meltdown affect the general economy? Buffett said his guess would be if unemployment rates and interest rates don't go up dramatically then it will be a big problem for those involved. He referred to subprime loans as dumb borrowing and dumb lending, since people who can only pay below-average payments will not be able to pay huge payments down the road. He added that he doesn't think the meltdown will result in any huge crisis in the economy. Real estate will take a couple of years to recover.
Highlights from a press conference
Asked later why he didn't take his own advice on index funds, he said he thought Berkshire could beat the S&P by a couple of percentage points, "just not a whole lot better."
When Munger asked him if he would support raising the threshold to $2 million, Buffett said he "didn't have a problem with the structure of it" but would support a progressive tax. He went on to say that he didn't believe in a "lucky sperm club" and that the estate tax helps redistribute some of that wealth. "Other than that, I have no opinion," he said.
Investing advice from Warren Buffett
As for excess liquidity, he warned that "we can easily have an event that changes everyone's perspective in a hurry. And we will have such an event."
Traditional concepts of finance are built upon the idea of efficient markets. In that world, investors are rational, unbiased, logical, and risk-averse. When investors act in accord with these qualities, a stock's price equals its value, and no trading strategy should beat the market.
But those of us who invested in the stock market in the late 1990s suspect that might not always be the case--and we may have even been guilty of a little "irrational exuberance" ourselves.
We're Consistently Irrational
For decades, psychologists have been studying human decision-making and discovered that we are systematically irrational. We tend to consistently act in an irrational manner in certain situations and when making certain decisions. When this discovery was later applied to investing, the field of behavioral finance was born.
Though this field of study has been around for some time, it gained fresh attention following the technology bubble. Investors and economists looking for an explanation for the bubble latched onto many of the tenets of behavioral finance. Princeton University psychology professor Daniel Kahneman, a pioneer in the field of behavioral finance, won a Nobel Prize for Economics in 2002. His work merging psychology and economics led to the development of a more-nuanced understanding of how stocks perform.
Behavioral finance shows that investors are, in reality, emotional, biased, overconfident, and myopic, with a distorted concept of their needs. And this behavior (when practiced en masse) sometimes creates bubbles (technology, real estate) and seasonal swings (such as the so-called January effect, which predicts that stocks rise during that month).
Some investors have been able to profit from investor misbehavior. All-star investors such as Warren Buffett, George Soros, and Bill Miller have consistently outperformed the market. And hedge funds, in aggregate, produce better returns than index-based mutual funds, which merely track the broad market or parts of the market.
But if you're not an all-star money manager, recognizing and correcting these five most-common behavioral mistakes can help you make and keep more money.
1. Investors are biased toward what they know.
They over-allocate to company stock and under-allocate to international investments. According to human-resources consulting firm Hewitt Associates, company stock is the single largest holding for the average 401(k) investor, accounting for almost a quarter of the average portfolio, while international investments make up only about 7% of the mix. Considering that about 50% of the "investable" stock market is outside the U.S., investors are missing out on potential gains and the benefits of diversification, which can reduce the risk in a portfolio.
2. Emotion trumps rational judgment.
People hate to lose more than they like to win. This fear of regret causes investors to hold on to losers too long and sell winners too early. Investors tend to hold on to losing investments hoping that they will come back, rather than taking advantage of tax breaks. The contrary is true with winning stocks. Fearing a downturn and wanting to lock in profits, investors will sell stocks or funds too early and miss out on future gains.
3. Investors have big heads.
The majority of people (though men are more guilty of this than women) think they are better than average at a variety of tasks, such as driving and investing. But by definition, a majority of people can't be above average. This unrealistic assessment of one's own investing prowess causes investors to overtrade and pay the resulting higher fees and taxes.
4. Myopia causes misallocation.
Investors tend to view each investment and each account--401(k), IRA, college-savings account, etc.--in isolation rather than in aggregate. Trying to make every investment a winner can throw off the overarching asset allocation. It can also lead an investor to chase hot stocks, trade excessively, and sell at the wrong time. If all of an investor's accounts and individual investments are up at the same time, they should be alarmed rather than proud. It's a sign that they may be under-diversified and taking on too much risk.
5. More, more, more.
We Americans spend what we earn. In fact, we spend more. The United States, for the first time since the Great Depression, has a negative savings rate. But it doesn't have to be that way. Professors Richard Thaler of the University of Chicago and Shlomo Benartzi of UCLA developed a behavioral finance program called Save More Tomorrow, or SMarT. Under the SMarT program, workers allow automatic deferral increases to their retirement plans each year at raise time. In a test run at one company, 78% of those who were offered the plan joined, and 80% of those stayed in the program. Even more striking, the average savings rates for people in the SMarT program climbed from 3.5% to 13.6% in fewer than four years. So when workers didn't see the decrease in their paychecks, they didn't miss the money.
Using the Information
Simply recognizing the bad behavior can lead to success. To fight familiarity bias, invest more of your money internationally and hedge against company stock if you can't sell it (e.g., buy mutual funds that don't invest much in your industry). Additionally, tools such as Morningstar.com's Portfolio X-Ray can help identify unintended areas of concentration in your portfolio and avoid overlap among your fund and stock holdings. (X-Ray is available only to Morningstar Premium Members, but non-Members can take a free trial.)
Develop a trading strategy and stick with it to take emotion out of the equation. Or, better yet, take a long-term approach to your investments and don't look at them more than once or twice a year.
Remember that most people have average investing skills, so buy and hold a diversified portfolio of investments and control what you can. You can't control the returns from your investments, but you can affect the amount you pay in fees and taxes.
Don't look at your investments individually, but rather take your portfolio as a whole. Web tools such as Morningstar.com's Portfolio Manager can help you organize and categorize your investments. Or consult a financial planner.
And finally, consistently put money away for retirement. The best thing you can do for your portfolio is give it time to grow.
It Gets Easier
Right now some of you may be thinking that this sounds like a lot of work. But your financial life can actually become much easier. Most people's primary savings vehicle is a 401(k) account. The majority of these plans today offer some form of "outsourced decision making" like managed accounts (where your portfolio is managed by a professional, third-party money manager), funds of funds (e.g., target maturity, lifecycle, lifestyle, or balanced funds), and opt-out programs where you are automatically enrolled and assigned an appropriate portfolio and savings rate. Investors who are their own worst enemy or who are stricken with investing inertia may benefit from these offerings by taking themselves out of the equation.
Roger Ibbotson, Ph.D., is founder of Ibbotson Associates and a professor of finance at the Yale School of Management. Morningstar acquired Ibbotson Associates in March 2006, and Professor Ibbotson now acts in a management advisory role for Morningstar.
U.S. stocks are at record levels. Earnings season is under way, with many expecting a modest rise in corporate profits. Unemployment is very low. So far problems with housing haven't infected the rest of the economy, which seems poised to bounce back from slow growth in the first quarter.
So what is there to worry about? Plenty. No matter how wonderful things look, the good times won't last forever. Even as most market observers remain bullish, we asked them what could derail this bull market. Stocks could keep setting records for months or even years, but it pays for investors to know what dangers are lurking out there. This Five for the Money lists the five biggest threats to the stock market rally.
Will any stocks and sectors step up to the plate to push the market even higher? Investors are closely watching corporate earnings for clues.
Earnings season began this month and so far it's not clear whether corporate profits will keep pace with expectations. Expect a lot of volatility in the market as big players surprise investors with good or bad news. David Scott, chief investment officer of the Chase Large Cap Growth Fund, expects less support for the rally from financial and health-care stocks. So he's watching tech stocks closely. "They're a large enough part of the market that they can provide solid leadership," Scott says. Disappointments from big tech firms or key players in other sectors could scare the bulls in a big way.
2. Consumer spending
Consumers drive the U.S. economy, and so far they've held up well despite housing problems and high gas prices. Perhaps that's because unemployment is low -- at 4.5% in June.
What are the risks for consumer spending? Charles Dumas of Lombard Street Research believes the U.S. economy is growing much more slowly than many on Wall Street think. One reason is weakening consumer spending. "Gas prices are really knocking the stuffing out of people's buying power," he says.
Some think Americans, who save very little and borrow a lot, are about to be hit by the realization that they need to cut up the credit cards. "We've been addicted to spending and borrowing, and we need to stop that," says Peter Schiff, president of Euro Pacific Capital.
Watch closely for data later this summer on the back-to-school season, which is an important time for retailers. "If this back-to-school season is bad, it could really highlight some weakness in the consumer," says Neil Cataldi of Susquehanna Financial Group. High energy prices might also catch up to consumers later this year, if heating costs rise as the weather turns colder.
"Inflation is still a concern out there," says Sam Stovall, chief investment strategist at Standard & Poor's. Several factors could push inflation higher, including rapid global growth, the tightness in the job market, or higher commodity prices. For example, S&P forecasts oil, now about $75 per barrel, could be headed above $80.
Why are rising prices such a big deal? "The Fed has said, 'We will stop at nothing to defeat inflation,'" says Richard Sparks of Schaeffer's Investment Research. The faster prices rise, the more likely that Federal Reserve policymakers could decide to hike interest rates later this year. That would cool off the economy. The biggest worry is that the Fed is forced to raise rates while the economy is still growing only slowly, forcing the economy into a recession.
4. Subprime and housing
O.K., here's the really scary one. Many on Wall Street believe the problem with subprime mortgages is limited and under control. They may be right, but it's impossible for anyone to predict how many debtors will ultimately default on their obligations. Many home buyers used creative financing to buy expensive houses in the years of booming home prices. "It's a tough one to get a handle on because we're not really sure what's truly at risk," Scott says. "It could spring on us suddenly."
What other forms of risky credit threaten debt markets beyond subprime? Bill Larkin, portfolio manager of fixed income at Cabot Money Management, believes he's already seeing signs that subprime worries are spreading, rocking other areas of the credit market. He sees a "flight to quality," with many bond investors fleeing not just subprime but anything with a hint of risk.
If the trend accelerates, it becomes even tougher for home buyers to get mortgages, pushing home prices lower. It also becomes more expensive for companies and hedge funds to borrow. That could cut off the flow of money into stock buybacks, mergers, and acquisitions, especially the private equity buyouts that have fueled the bull market. "Just like raising rates, this acts as an economic brake," Larkin says.
"People are starting to get nervous," Larkin adds, but it takes a while for these trends to show up. "It doesn't just -- boom -- happen." Are there lots of other forms of bad debt out there? Are lenders -- as Larkin jokes, "using their garage door as collateral?" No one knows. "That's where the risk is," he says. "There's not a lot of transparency here."
Pimco bond guru Bill Gross has warned investors not to think subprime is only a problem for a few hedge funds or investment banks. The problem affects millions of home buyers who financed their houses with cheap money but are now seeing mortgage payments rise along with defaults. Gross wrote in his July investment outlook, "This problem -- aided and abetted by Wall Street -- ultimately resides in America's heartland, with millions and millions of overpriced homes and asset-backed collateral with a different address -- Main Street."
5. Shiny happy investors
As markets rise, the bulls' success may be their biggest weakness. Too much optimism can derail a rally as quickly as too much gloom and doom.
It's a cliche on Wall Street that markets like to climb a "wall of worry." The more doubts about a rally, the more headwinds it faces on the way up, the more likely a bull market has a firm foundation. "We like to see some pessimism in the market," Schaeffer's Sparks says. Concerns about interest rates, terrorism, gas prices, or inflation? "Those are the bricks in the wall of worry."
Despite the index's record-breaking pace recently, experts like Sparks still see signs of skepticism. To gauge this, investors can look at the amount of short-selling -- trades betting stock prices will fall -- or ratios between puts and calls.
Sparks also keeps an eye on the media, including articles like this. Be on the lookout for articles proclaiming "happy days are here again," Sparks says. If the media is sounding too positive about stocks, it may be a sign that retail investors are jumping into the market. And if the average investor is buying again, you can bet the "smart money" is selling, and stock prices are near peak levels.
As volatility increases, it may be a good time for investors to take a closer look at investments that hold up well when the market is challenged.
LONDON (CNNMoney.com) -- With stocks hitting new peaks, it may seem counterintuitive to focus attention on more conservative investments.
But safe-haven investments are growing more appealing to some analysts, who say the market has gotten ahead of itself and is due for a correction.A lot of people have been "taking profit off the table and paring back their exposure to high-risk areas," including emerging markets like China and Latin America, said Tom Roseen, a senior research analyst at mutual fund research firm Lipper.
Volatility, as measured by the Chicago Board Options Exchange Volatility Index, has also been rising - which means sharper movements in the market are likely.
Investors shouldn't overhaul their portfolio in an attempt to time market swings. The key to success with any portfolio is keeping it diversified through asset allocation, analysts say.
But given the uncertain outlook for the economy and interest rates, investors may want to reconsider investments that traditionally hold up well when the stock market is challenged.
"Investors are going to start to price risk as they have in the past, and as risk gets more appropriately priced, you want to own the safest assets," said Mark Coffelt, president and chief investment officer of Empiric Funds.
Here's what to consider.
It's impossible to know when the market will pull back, but investors can protect themselves for when it happens by staying away from riskier stocks.
While small and midcaps have performed well over the last several years, larger cap companies tend to be more stable in times of uncertainty, said Scott Neuendorf, an equity analyst with Hester Capital Management.
Coffelt from Empiric Funds likes large cap companies with a presence overseas. These firms not only benefit from the global growth, they also are well positioned to benefit from the falling dollar, he said.
"They produce earnings and profits in other currencies and so as a U.S. investor, you're essentially betting the dollar will be stable or continue to be weak - and that's been a pretty good bet," he said.
The dollar has fallen against a broad basket of currencies and is currently at a record low against the euro and a 26-year low versus the British pound. Many currency strategists are forecasting more weakness for the greenback.
Coffelt's picks include Coca-Cola FEMSA (Charts), the Coke bottler for Mexico and South America. He also likes beer bottler and producer Compania Cervecerias Unidas (Charts) and French insurer AXA (Charts).
Short of stuffing your money under the mattress, there isn't a much safer investment than Treasury bonds - one of the reasons why they're usually the first place investors turn when they want to flee risk.
For instance, when Fed Chairman Ben Bernanke warned about housing and inflation on Wednesday, Treasury prices jumped as his comments rattled investors who then sought refuge in bonds.
One of the easiest ways to invest in Treasurys is through mutual funds or exchange-traded funds, since they're easy to buy and don't require the lump sum you would need to go out and buy the security directly, according to Tom Roseen, a senior research analyst at mutual fund research firm Lipper.
For some of the best mutual funds you can buy, check Money Magazine's list of recommended funds.
Investors are better off sticking to short- or intermediate-term bonds for now, Roseen said. "Longer maturities are more volatile, especially with everyone expecting inflation to rise," he said. Inflation erodes the value of fixed-interest paying investments like bonds.
The stock market isn't going to crash, but the next few years will likely be difficult, said Paul Nolte, director of investments at Hinsdale Associates, a money management firm.
"The combination of still historically high valuations, rising interest rates and rising energy prices is a formula that provides for below average rates of return for stocks over the next three to five years," he said.
As a result, he's been building up his cash position to 5 to 10 percent over the last year. That's up from the 1 to 2 percent position he usually prefers to hold.
With the fed funds rate at 5.25 percent, it's fairly easy to find a high-yield savings account paying 5 percent, according to Peter Crane, president of Crane Data, a firm that tracks money market mutual funds and other cash investments. The fed funds rate is an overnight bank lending rate that influences other rates.
Besides offering a pretty attractive yield, cash is easy to access and offers investors flexibility during times of uncertainty.Nolte's holding his cash mainly in short-term Treasury bills, but everyday investors looking to beef up their cash reserves will probably want to opt for money market mutual funds or bank savings accounts.
Friday, 20 July 2007
For Frustrated Achievers, More Is Lessby Laura Rowley
Economist Carol Graham studies globalization, market reforms, income mobility, and growth in developing societies. A senior fellow at the Brookings Institution and a professor at the University of Maryland, Graham doesn't think of herself as a happiness researcher.
But then she discovered that something funny was happening on the way up the economic ladder.
Success Is Relative
While studying economic progress in
Graham conducted an analysis based on comparable data for Russia, and discovered an even higher percentage of what she now calls "frustrated achievers." Other surveys have identified a similar pattern in urban China, she notes.
"By objective terms, they performed well in the labor market," says Graham, who presented her research on frustrated achievers at a conference at Italy's Siena University last month. "But their perception was that everyone has more than they do. They were concerned about relative income differences."
Mobility Changes Everything
Asked to rank themselves on a theoretical nine-step economic ladder, frustrated achievers placed themselves on a lower rung than their actual incomes would justify. And despite their successful climb out of poverty, they had a higher fear of unemployment than people below them on the ladder.
Graham speculated that economic volatility might be cause. Mobility was indeed unstable; in the period studied, 11 percent of middle-class Peruvians tumbled all the way back into extreme poverty. But such reversals of fortune weren't a problem for the frustrated achievers, who had less income volatility as a group.
So why were these up-and-comers unhappy? Graham suggests that their problems stemmed from "aspirations and reference norms" -- or, to use the vernacular, they couldn't help comparing themselves to the Joneses.
"Even though their income goes up by 20 to 25 percent, people's perception of where they are on the economic ladder matters even more to their happiness," she says. "We all assume mobility is a good thing -- but everything changes with your mobility, including your aspirations."
Not Keeping Up with the Joneses
The frustrated achievers studied tended to live in urban areas, where they were more likely to encounter "big visible winners in an unequal society at times of rapidly changing economics," says Graham.
In a separate study of 18,000 people across, Graham looked at their exposure to media -- where they got their news and how often. "People who had higher scores on the media index were much more likely to think that distribution of income in their country was unfavorable," she says. "The more you know, the more relatively deprived you feel."
The importance placed on relative income and reference groups can lead to an ever-rising bar of perceived needs, explains Graham.
That's because, like the frustrated achievers in developing countries, frustrated achievers here at home don't look at the global picture. They look at the neighbors.
Harvard researcher Erzo F.P. Luttmer examined geographic areas of roughly 15,000 people. All other things being equal, such as satisfaction with one's health and marital status, Americans who earned less than their neighbors were more likely to be unhappy, according to his paper published in the Quarterly Journal of Economics.
Moreover, researchers Andrew Oswald of England's Warwick University and David Blanchflower of
Author Alain de Botton described the tyranny of comparison in his 2004 book "Status Anxiety": "If we are made to live in a draughty, insalubrious cottage and bend to the harsh rule of an aristocrat occupying a large and well-heated castle, and yet we observe that our equals all live exactly as we do, then our conditions will seem normal ... If however, we have a pleasant home and a comfortable job and learn through ill-advised attendance at a school reunion that some of our old friends ... now reside in houses grander than ours, bought on salaries they are paid in more enticing occupations than our own, we are likely to return home nursing a violent sense of misfortune."
Or, asobserved in the 19th century, "Men do not desire to be rich, but to be richer than other men."
Not Everyone Can Be
The biggest difference between frustrated achievers in developing countries and those in the
"Inequality matters to people because of what it signals," says Graham. "In
That's despite data suggesting there's less mobility in the United States than you might expect. Studies show that U.S. mobility is roughly on par with that of. The newly formed Economic Mobility Project, a collaborative effort by both liberal and conservative think tanks, finds that U.S. incomes are stagnating, and the current generation of 30-something men has fallen behind their fathers' .
Nevertheless, Americans don't focus on inequality largely because they tend to have enormous faith in their prospects. Consider a study byeconomist Roland Benabou: He found that more than half of Americans think they'll be above the median income in the future (even though, obviously, that's mathematically impossible).
Keep on the Sunny Side
Before trying to slap some collective sense into the nation's cheerfully deluded optimists, it's worth noting that happy people actually do better economically.
Graham, for instance, studied the happiness effect among Russians. "Happier people earned more money and were healthier five years later," she says. "One criticism of this approach is that all we are seeing is people's ability to predict the future -- they are happier in 1995 because they predict they would be wealthier in 2000." But the turmoil in Russia's economy makes it the perfect case study, says Graham: "How many Russians could predict how they would be doing in the year 2000?"
Separate studies find the same effect with happy Americans, who have more positive outcomes with work, relationships, and health, according to a bulletin published by the American Psychological Association.
Bottom line: To avoid being a frustrated achiever, don't compare your income to anything except your own goals. And look on the bright side. Otherwise, a negative attitude may eventually create a sour economic reality.
Thursday, 19 July 2007
"Stocks always rise in the long term.Don't try and time the market; what you need is time IN the market! Just buy and hold."
You have no doubt had the experience of being urged like this by your stockbroker or someone else with a vested interest in you owning shares. Or it might have simply been a well-meaning friend. "You can't pick the bottom, just like you can't pick the top. So just buy stocks, and even if they fall in value in the short term they will always rise to a new high later on."
So, is it true? Do shares always rise in the long term?
That depends on what you mean by long term.
Ignoring dividends, if you had bought the Dow Jones index in 1965/66, do you know how long you would have had to wait to get your money back? Nearly seventeen years! That's right. The Dow first touched 1,000 points in January 1966 and then fell back. It never got back to 1,000 points until October 1982.
If you had bought near the top in 1929, do you know how long you would have had to wait for stock prices to get back to pre-crash levels? Twenty-five years! Yep, it was 1954 before the Dow put in a new high.
Apparently in the previous century there was a 43-year period during which Wall Street failed to reach a new peak.
More recently, in Australia, if you bought shares before the October 1987 correction, you would have had to hold them for a whole decade before they reached their pre-crash level again (apart from one fleeting touch in February 1994).
If you bought the Japanese Nikkei index before its peak in December 1989, you would still be down 50%, seventeen years later!
Wall Street's NASDAQ index is still about half what it was more than 7 years ago.
Does that answer the question?
Yes, shares will always rise in the long term. But you need to understand what is meant by "long term." Most who parrot the mantra never give it a thought.
A lot of financial planning focuses on important decisions that have to be made about 'financial planning strategy' (eg salary sacrifice contributions to superannuation) and 'investment selection' (eg index funds vs actively managed funds vs direct shares). Perhaps not enough focuses on the simple disciplines that lead to a person becoming wealthy over time. Outlined is a 5 step guide to how you can become wealthy over a life time - a 'get rich slow' recipe. We are starting to see in the media that the Henry Kaye style 'get rich quick' property seminars and the 'get rich quick' share trading programs don't work. The power of this get rich slow recipe is that it has worked for many people, and it will work for many more.
1/ Spend less than you earn. As simple as this sounds, clearly many people don't get past this first rule. Statistics on the level of debt that we have in Australian show that it is reaching record levels, no longer measured in billions of dollars, it is now measured in trillions.
Most of us face an average tax rate of about 25%. That means that we are working the first 25% of the year - 3 months - just to pay our tax bill. The last thing anyone should be doing is taking on consumer debt, so that part of our future income is promised away in the form of repayments to finance companies as well as the tax office!
2/ Invest the surplus in growth assets (Australian shares, international shares, listed property trusts). All these asset classes have expected returns of about 7% above inflation - say 10% in the current 3% inflation environment. This is better than the expected return from cash, which is about 3% above inflation (6% total). Earning a long term rate about 7% above inflation increases the purchasing power of your investments over the long term.
Investing in a portfolio made up of all three growth asset classes helps smooth the overall volatility of the portfolio. If one investment asset class has a terrible year, the returns can be smoothed by the returns from the other investment classes. Sure, some years they will all have bad returns, accept that as part of investing. Some years - such as in recent years - they will all have great returns, accept that as part of investing as well.
3/ Do this over a long period of time. Make this a habit.
Investing additional money regularly over time is very powerful. As markets go up you can say, 'great, my investment returns are strong and are creating wealth for me'. As markets go down you can say, 'great, here is an opportunity to invest more money at lower prices'. When markets turn and go up again - and they will - you will be in great shape.
Regular investing lets you benefit when markets rise or fall. You simply can't go wrong.
4/ Accept that part of the strategy is investing in growth assets is that while they have a higher expected return than investing low risk cash investments, they also have a greater volatility: that is there will be periods of ups and downs. Don't try and outguess these ups and downs, just accept that they are the reason you will get a higher overall return, and accept that there will be volatility. This is the biggest mistake that people make - trying to pick and choose when to buy and sell in and out of asset classes. There is overwhelming evidence that professionals can't do this. If the professionals can't, then we should not be so arrogant as to try.
Dalbar, a US research company, track the actual returns that investors get from US managed funds against the overall market return. For the 25 year period to the end of last year they found that they average US share investor made 4% a year, while the market return was 11%. This was because investors' panicked and sold investments when they went down in value, and got excited and bought more when they went up in value. Don't try this and get left with these terrible returns. Accept the ups and downs as part of the strategy, and don't let this distract you.
Don't dismiss the importance of this rule. Trying to 'time' markets is the number 1 mistake investors make. Don't make this yourself.
5/ Remember that compound interest is a very powerful force. However you won't see the real benefits of compound interest for some time - don't expect too much too soon, or you will be disappointed. (Compound interest is the effect where as your investment earnings increase, these investment earnings will return their own investment earnings, and these earnings will have more investment earnings and so on. It is very powerful effect in a portfolio; however it takes quite a few years to really see it happen.)
I often wonder how often investors read or hear about the power of compound interest, get very excited about the examples offered, but never actually realise that the power of compound interest happens at the back end of an investment strategy. Compound interest is exciting, it is powerful, however it takes a while for the effect of investment earnings on investment earnings on investment earnings to kick in and be visible. So don't be discouraged when you don't see this happening in the first 5 or 7 years - stick with the plan over time.
So there you have it. You now know how to become wealthy. It's not that hard and you can start today.
You probably already know that Warren Buffett is the world’s greatest investor of all time. Starting with only $ 100, Buffett made an unprecedented journey in creating a personal fortune of $ 48 billon. A truly unprecedented accomplishment, especially when you consider he never started a company of his own and never invested a single penny in technology stocks. His complete fortune comes from investing in the stock market!And, as a matter of fact, Buffett’s investment strategy isn’t that complicated: buy shares of quality companies when they are ‘on sale’. That’s all there is! With this straightforward strategy Buffett earned his billions of dollars. But, as we take a deeper look at Buffett’s returns over time something stands out…
The outperformance of Buffett compared with the S&P 500 diminishes over time. Between 1957 and 1966 Buffett outperformed the S&P 500 by a massive 14.5 times. In the most recent decade his outperformance has been diminished to ‘only’ 2.2 times the S&P 500. Of course, Buffett still shows that he is able to beat the indexes. But, now only at a fraction of the outperformance he achieved in earlier decades.
So, what’s the reason for this? Has Buffett’s system of buying quality companies on sale stopped working? Or has Buffett lost his ‘Magic Touch’? Twice the answer is negative.
The explanation behind the diminishing returns
The real explanation for the diminishing (relative) returns is actually quite simple. Nowadays, Buffett has to invest large amounts of money. Even investments of a few hundred million dollars aren’t worth the trouble anymore. Just, calculate along with me…
Buffett’s total investments currently have a value of approximately 110 billion dollar. So, should an investment still have some effect on the performance of the total investment portfolio this investment has to be at least 2 billion dollar. And that’s the problem.
As Buffett’s doesn’t want to influence a stock price too much (buying in large quantities drives the price of a stock up…) and wants to remain somewhat flexible, normally it isn’t possible to buy (or sell) more than 10% of the shares in a certain public company.
And, as the 2 billion equals 10% of the market capitalisation, we are speaking of companies with market capitalisations of at least 20 billion dollar. And, simply put, there aren’t that many companies with market capitalisations of over 20 billion!
And, besides the fact that there simply aren’t that many companies with market capitalisations that big, these companies are much more followed and researched by investment analysts and all kinds of investment professionals.
Because of this these companies are priced less inefficient. And voila`, here we have the second reason for the diminishing outperformance of Buffett.
Maybe you didn’t realize it, but as a consequence of this you have actually a considerably advantage over Buffett (unless you are Bill Gates…). After all, you aren’t limited to invest only in these giant, more efficiently priced companies. You can choose from a much, much greater supply of more inefficiently priced companies!
Buffett agrees with this reasoning:
"I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that."
–Warren Buffett, Businessweek, 25 th of June, 1999.
Also the returns of a couple of hedge fund managers show that it is an enormous advantage NOT to have too much money to invest. We will look at two of them: Joel Greenblatt and Mohnish Pabrai. Both of these top investors can be considered as Buffett copycats.
A few years ago, Greenblatt became known to a wider public as author of ‘The Little Book That Beats The Market’. In this book Greenblatt outlines a strategy in line with Buffett’s investment strategy. Greenblatt’s desire for stocks with high returns on invested capital accompanied by high earnings yields is essentially the same as Buffett’s desire for ‘quality companies on sale’.
Greenblatt’s hedge fund earned annual returns of over 40% for over twenty years. In his first ten years he even achieved annual returns of over 50%. And, like Buffett, Greenblatt got the same problem as Buffett: too much money to invest. And that’s why Greenblatt choose to buy out all the external investors in his hedge fund and to continue investing only with his own, private money!
An example of a recent investment of Joel Greenblatt is his purchase of shares of Aeropostale, a highly profitable clothing retailer. Within only a few months shares of Aeropostale had appreciated over 40%. Greenblatt sold his shares already. With a market cap of around 1 billion dollar at the time of Greenblatt’s purchase, such a transaction would be unthinkable for Buffett.
Pabrai, like Greenblatt, can be considered as a Buffett follower:
‘M r. Buffett deserves all the credit. I am just a shameless cloner .’ – Mohnish Pabrai
In 1999, Pabrai started his investment fund with only 1 million dollar to invest. Now, only eight years later, Pabrai manages over 500 million dollar. Of course, Pabrai’s performance justifies this enormous growth: an annualized return of over 28% (after all fees and expenses).
An example of a recent transaction of Pabrai is his purchase of shares of Cryptologic, a software supplier for casinos on the internet. Total market capitalisation of Cryptologic at the time of Pabrai’s first investment: less then 250 million dollar. Pabrai, meanwhile, has seen this investment increase in value over 50% in less than 6 months. Again, this would be totally unthinkable for Warren Buffett.
But, like Buffett, both Greenblatt and Pabrai will be confronted with the laws of financial gravity. Also their relative returns will diminish over time. For sure, some will claim that Greenblatt and Pabrai just had some good fortune and claim that Buffett’s investments strategy doesn’t work anymore.
But also in the future new Buffett’s will arise. And they will demonstrate the sceptic, once again, that it’s still possible to outperform the market. Simply by buying shares of quality companies when they are on sale!
Sunday, 15 July 2007
ByCliff Mason, TheStreet.com Staff Reporter
Every day I read personal finance articles with bad advice that is recycled endlessly. Ordinarily I keep my mouth shut about them, but recently Jonathan Clements over at The Wall Street Journal devoted one of his columns to advice for people in their 20s, and that's my turf. You can read it
I started foaming at the mouth when Clements suggested that investors in their 20s should put 60% of their money in stocks and 40% in bonds. I got a tic in my right eye when he pooh-poohed the idea of investing heavily in growth stocks while you're young, and I had to spend 15 minutes punching a pillow while I calmed down. This is exactly the kind of one-size-fits-all advice that might make sense for a 50-year-old, but doesn't do squat for anyone under 30.
Those of you who read my earlier columns might be surprised that I'm taking any kind of position on investing. I believe that saving money is at best nonessential for the under-30 cohort, and that people my age will generally get more from spending their money than from buying stocks or bonds. That said, there's a right way to invest in your 20s, and there's a wrong way to invest in your 20s. Clements is firmly in the wrong-way camp.
What's right, and where do I get off even having an opinion here let alone expressing it?
I've never made any money in the market. I haven't even been allowed to own stocks for the last two years because I've been writing for "Mad Money" with Jim Cramer on CNBC, and now I'm doubly locked out of the market because TheStreet.com forbids its editorial staff from owning stocks, excluding shares of the Mother Ship. (You would think that as Jim's nephew I could've gotten in on the IPO way back when, but my dad works at a hedge fund so we were all excluded as friends and family.)
Before I started working at "Mad Money" two years ago, I didn't know jack. I'm no expert now, but you don't spend two years working for a guy like Cramer without learning a ridiculous amount about investing and developing some strong opinions.
Being an investor in your 20s is totally optional, but if it's something you want to do, as opposed to something you believe you ought to do, then take my advice. Unless you actually have a pretty large amount of money that you're interested in preserving, you should take on as much risk as possible. Buy small-cap stocks that trade under $10, have little analyst coverage and a reason to go higher. In a word: Speculate.
You should be prepared to lose everything more than once so don't use any money to buy stocks that you need for the necessities. If you're trying to earn a respectable 10% return without taking too much risk, you might as well stop wasting your time. That's a fine approach to take when you're older and already have some money.
If you're just starting out, then you want to turn a little money into a lot of money. You'll never do that by keeping 40% of your portfolio in bonds. You're young. You've got your entire life to earn back everything you lose. You can afford to take risks.
If you're looking for ideas, you're smart enough to know that I'm not your man. I'm surrounded by people who are much better at picking stocks than I am, and if any of you are like me, it pays to know that about yourself.
Take a look over at the
To be clear, if you're buying stocks in your 20s, you shouldn't be investing to gradually build up your "nest egg," a phrase that for some reason grates on me like the sound of fingernails scraping across a chalk board. This is the typical route followed by most personal finance gurus, and as far as I'm concerned, it's a dead-end.
With maybe $2,000 to invest a year, you won't make serious money in the market unless you take enormous risks. It's much more likely that you'll get wiped out, but since you won't have a lot of money on the line, it's a worthwhile risk.
In fact, if you're in your 20s and don't have much money to invest, I don't see any point to anything other than speculation.
Let's say you have $2,000, and you're taking a more conservative approach. You set up a diversified portfolio of five stocks from different sectors, and you follow Jim Cramer's advice, spending one hour a week on the necessary homework for each stock, or five hours of homework total each week. (I've spent too long working for Jim on "Mad Money" to believe that you can skimp on the homework and not get torn to pieces by the market.)
Doing that five hours of homework each week, you're going to have to invest 260 hours a year to do the minimum amount of work. In a good year, you might be up 20%, which is just $400 if you start with $2,000. It's not worth the effort. Even if you start with $5,000 you'd only be up $1,000 for the year, meaning you earned $3.85 for every hour of homework you put into your responsible, diversified portfolio. Start with $10,000, and you just barely do better than the minimum wage.
This is why we have to throw the rules away and take our chances speculating, and my example gives you a much better return than you would be likely to get following the strategy that Clements advocates.
If you keep 40% of your portfolio in bonds and you still manage to produce a 20% return consistently, you ought to be a professional. That advice is good for someone who's middle-aged and has some money in the bank. But this strategy is totally counterproductive for anyone under 30 and hoping to turn a little into a lot.
Clements says your first priority should be diversification. I say don't worry about diversification. Jim Cramer, my boss at "Mad Money," will probably make me cry for saying that. If you're thinking of writing me an email to tell me what an idiot I am, know that Jim's already got that covered.
Diversification is essential when you've got enough money to put together a real portfolio. But until you have at least $10,000 in the market, I believe that it's a waste of time. You diversify your holdings because you don't want every stock in your portfolio to get wiped out at the same time. It's the key to capital preservation, but you probably don't have enough dough in your 20s to be worried about capital preservation.
I'm not alone in recommending that young people speculate. Cramer advocates speculation because it's fun. It keeps you interested, and as long as you're interested, you'll do the necessary homework that Cramer suggests for every stock.
But Cramer still has to be the voice of age and responsibility. If he comes out and tells everybody under the age of 25 to put all the money they have invested into speculative stocks, he'll get crucified.
I've got nothing to lose, so I'll tell you what Jim is too responsible to say: In your twenties you should speculate with way more than 20% of the money you're putting into the market. Think more along the lines of 100%.
If you have the time, the money and the inclination, then stop pretending you're 50 years old and investing responsibly to prepare for your retirement. You're not. You're in your 20s. You probably aren't earning that much money. Whatever you can afford to put into stocks is going to be pretty paltry. If you're going to invest you have a responsibility to yourself to take a few chances.
This approach is made out to be a lot more dangerous than it actually is. Clements, for example, says that even though growth stocks, which are far more reliable than the speculative ones I'm advocating, can produce great short-term returns, they don't work as well as value stocks over a longer time frame.
This is a guy who believes in buying stocks and holding them through hell or high water. Yeah, if you buy a bunch of high-risk speculative stocks and then sit on them for a decade, you're being the worst kind of idiot. So don't do that.
Buy and hold is suicide for speculators, so you'll have to manage your money a bit more actively. I don't believe that's a problem, since most people want to invest precisely because they believe buying and selling stocks is fun. As long as you only have a little money to play with, it's not worth doing if it's not fun.
As a hobby, speculation is much less expensive, irresponsible and downright dangerous than the other forms of thrill-seeking available legally and extralegally these days, and some of the time you even end up making money.