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Posted: 30 January 2010 - 1 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]

 

Mahmoud Atauya:  Have a nice day and God Bless. Anticipating your communication. Mobile +23327658971
 
tickertalk: This is wonderful news! I am eager to help you. However my bank has blocked me drawing  my money because I have an outstanding loan of R150,000 that has to be paid off by March 1. If you can help me pay off my loan I will be delighted to help you in return. This is a very tiny sum compared to the $35,000,000 at stake. If you do me this favour, I will agree to let you keep 75% of the $35m, instead of the 50% you proposed.
 
Mahmoud Atauya: So what next?
 
tickertalk: Please make out a cheque for R150,000 in my name and once the loan is paid off we proceed from there.

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Posted: 14 April 2010 - 1 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]

Thinking Economically is a 10-part series produced by the Texas Public Policy Foundation designed to provide a basic economic education for policymakers, the media, and the general public. In this way, the Thinking Economically series highlights the intersection of economics and public policy, and the importance of "thinking economically" when making policy decisions. This project has been made possible with the assistance of Dr. Art Laffer.

 

 

ThinkingEconomically-Lesson1.pdf

ThinkingEconomically-Lesson2.pdf

ThinkingEconomically-Lesson3.pdf

ThinkingEconomically-Lesson4.pdf

ThinkingEconomically-Lesson5.pdf

ThinkingEconomically-Lesson6.pdf

ThinkingEconomically-Lesson7.pdf

ThinkingEconomically-Lesson8.pdf

ThinkingEconomically-Lesson9.pdf

ThinkingEconomically-Lesson10.pdf


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Posted: 22 September 2010 - 2 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]

The inimatable Michel Pireu wrote an article this morning which is worth reflecting upon ...

 

StreetDogs: Sad to say, your brain is the main reason you are not rich

“In theory,” he says, “the more we learn about our investments, and the harder we work at understanding them, the more money we will make.

 

IN HIS book, Your Money and Your Brain, Jason Zweig claims the latest findings in neuroeconomics reveal that much of what we’ve been told about investing is wrong.

 

 

“In theory,” he says, “the more we learn about our investments, and the harder we work at understanding them, the more money we will make. In practice, however, these assumptions often turn out to be dead wrong.”

 

 

Zweig sites several examples:

 

 

 

 

Theory: You have clear and consistent financial goals.

 

Reality: You’re not sure what your goals are. Last time you thought you knew, you had to change them.

 

 

 

 

Theory: You carefully calculate the odds of success and failure.

 

Reality: That stock your cousin recommended was “a sure thing” until it went to zero.

 

 

 

 

Theory: You know how much risk you’re comfortable with.

 

Reality: While the market was going up, you thought you had a high tolerance for risk.

 

When it went down, you realised you didn’t.

 

 

 

 

Theory: You efficiently process all the available information.

 

Reality: You can’t be bothered to read the fine print in the financial statements (who does?)

 

 

 

 

Theory: the smarter you are the more money you’ll make.

 

Reality: In 1720, Sir Isaac Newton was wiped out in a stock market crash, blazing a trail of financial failure that geniuses have been following ever since.

 

 

 

 

Theory: the more closely you follow your investments, the more money you’ll make.

 

Reality: Those who keep a close watch on their stocks often earn lower returns than those who don’t. “Like dieters lurching from Pritikin to Atkins to South Beach and ending up at least as heavy as they started,” says Zweig, “investors are their own worst enemies …”

 

 

 

 

 

 

Theory: the more work you put into investing, the more money you’ll make.

 

 

 

Reality: Professionals, on average, don’t outperform amateurs.

 

 

 

- Everyone knows they should buy low and sell high — yet often buy high and sell low.

 

- Everyone knows that beating the market is nearly impossible — but just about everyone thinks they can do it.

 

- Everyone knows that it’s impossible to predict what the market is about to do — but still hang on to every word from the pundits on TV.

 

- Everyone knows that chasing hot stocks is a sure way to get burnt — yet they flock back to the flame every year.

 

 

But, as Zweig says: “None of that makes us irrational. It simply makes us human. Emotional circuits deep in our brains make us instinctively crave whatever feels likely to be rewarding — and shun whatever seems liable to be risky. To counteract these impulses … we have only a thin veneer of relatively modern analytical circuits that are no match for the blunt emotional power of the most ancient part of our brain.”

 

Which is why knowing what to do often turns out so different from what we actually do.


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Posted: 27 September 2010 - 0 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]

5 Lies About Index Funds

Truth lies

Image via Wikipedia

 

Financial incentives encourage advisors to talk trash about indexing.

The truth about index investing must be told over and over again because lies are constantly being told around it. Many of those telling lies are financial advisors whose income depends on their client’s use of high-cost active management strategies.  They view simple, low-cost passive strategies through index funds as bad for their business.

I started out about 22 years ago as an investment professional monitoring and evaluating active managers. As a result of this experience, by the mid-1990s, I became an avid believer in what John Bogle, Charley Ellis, Burton Malkeil and many others had been saying for a long time. The fees in active funds are too high, the talent too scarce, and competition too intense for active managers to outperform indexing in the long-term. Ellis cleverly described the entire process as a loser’s game.

My upcoming book, The Power of Passive Investing, provides summaries of exhaustive academic studies covering the active versus passive debate going back many decades. Every study in the book ends with the same conclusion; while a handful of active managers beat their benchmarks due to skill, it wasn’t by much, and most didn’t sustain that benchmark-beating performance for long. In addition, it’s not possible to determine luck from skill or to pick skilled managers in advance. To make matters worse for investors, the success rate for a portfolio of funds drops precipitously as more active funds are added to the portfolio.

With the evidence overwhelmingly in favor of passive investing for the long-term, why won’t more advisors admit these facts and shift their focus to advising clients on the benefits of index investing rather than making believe they’re market gurus or trying to pick those who are? One reason – there’s a lot more money to be made by keeping the lie alive. The fees and commissions earned through active investing are considerably higher than what should be earned by telling the truth about passive investing and charging a fair fee for this advice. Even those advisors who have switched can’t bring it upon themselves to lower their own fee. See my recent article on High-Fee Passive Advisor Hypocrisy.

Brokers in particularly are deeply set against index fund investing because they believe it’s very bad for their revenue stream. Their efforts to sell costly actively-managed mutual funds have generated a lot of trash talk about low-cost index funds. The following is a list of 5 common lies spun by advisors who are dead-set against indexing.

  1. Active US stock funds beat the market over the past decade.  Less than 50 percent of surviving US stock funds beat the S&P 500 since 2000, and this number would be much lower if closed and merged funds were included. But that’s not the problem with this argument. The primarily large cap S&P 500 is not a good benchmark for many actively managed US equity funds because they have a small cap or mid cap focus. Using appropriate size benchmarks brings the percentage of winning funds down considerably.
  2. Index funds will always achieve below average returns. Index funds will achieve returns that are much closer to the market averages than the active funds your advisor is pushing, and that’s what matters. On average, mutual funds underperform by the fees they charge. Index funds have much lower fees than active funds. This makes low-cost index fund investing an above average portfolio strategy. 
  3. Indexing doesn’t work in inefficient markets such as small cap or international. You can count on every active fund advocate to use poorly constructed or inappropriate indexes to make the argument that active returns are better than they are. For example, the Russell 2000 is a common benchmark for US small cap stocks, but it has known annual reconstruction flaws that reduce its annual return by up to 2 percent. The MSCI EAFE is a common international equity benchmark, but it doesn’t include popular emerging markets stocks or Canadian stocks. Proper benchmarking makes active management far less attractive.
  4. Active managers perform better in bear markets. The evidence surrounding this often heard statement is inconclusive. The data does show that active funds tend to hold more cash in a bear market due to greater fund redemptions, and this can create the impression of lower risk, but there’s no evidence supporting the idea that active funds have lower volatility or that fund managers have market timing skill.
  5. Warren Buffett has beaten the market and this proves indexing doesn’t work. Wrong. This only proves that Warren Buffett, chairman of Berkshire Hathaway (Ticker: BRK), has the Midas touch. It doesn’t prove that the advisor you’re using has Buffett-like talent. Your portfolio may beat the market due to luck, but let’s not be naive and call advisor luck as skill. Even Buffett repeatedly recommends that individual investors buy index funds that charge minimal fees. As an aside, I find it ironic that most advisors who use the Buffett argument typically don’t own BRK in their client’s portfolios.

Indexing works because active investing can’t work. The fees are too high, the opportunities too few, and the talent too scarce. Ignore the lies told by those people who earn a fat living selling the dream of market beating returns. You’ll earn more money over your lifetime by creating and maintaining a low-cost, low-tax, low-turnover portfolio of index funds.


Total votes: 0
Average(Out of 5): 0
Posted: 27 September 2010 - 0 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]

5 Lies About Index Funds

Truth lies

Image via Wikipedia

 

Financial incentives encourage advisors to talk trash about indexing.

The truth about index investing must be told over and over again because lies are constantly being told around it. Many of those telling lies are financial advisors whose income depends on their client’s use of high-cost active management strategies.  They view simple, low-cost passive strategies through index funds as bad for their business.

I started out about 22 years ago as an investment professional monitoring and evaluating active managers. As a result of this experience, by the mid-1990s, I became an avid believer in what John Bogle, Charley Ellis, Burton Malkeil and many others had been saying for a long time. The fees in active funds are too high, the talent too scarce, and competition too intense for active managers to outperform indexing in the long-term. Ellis cleverly described the entire process as a loser’s game.

My upcoming book, The Power of Passive Investing, provides summaries of exhaustive academic studies covering the active versus passive debate going back many decades. Every study in the book ends with the same conclusion; while a handful of active managers beat their benchmarks due to skill, it wasn’t by much, and most didn’t sustain that benchmark-beating performance for long. In addition, it’s not possible to determine luck from skill or to pick skilled managers in advance. To make matters worse for investors, the success rate for a portfolio of funds drops precipitously as more active funds are added to the portfolio.

With the evidence overwhelmingly in favor of passive investing for the long-term, why won’t more advisors admit these facts and shift their focus to advising clients on the benefits of index investing rather than making believe they’re market gurus or trying to pick those who are? One reason – there’s a lot more money to be made by keeping the lie alive. The fees and commissions earned through active investing are considerably higher than what should be earned by telling the truth about passive investing and charging a fair fee for this advice. Even those advisors who have switched can’t bring it upon themselves to lower their own fee. See my recent article on High-Fee Passive Advisor Hypocrisy.

Brokers in particularly are deeply set against index fund investing because they believe it’s very bad for their revenue stream. Their efforts to sell costly actively-managed mutual funds have generated a lot of trash talk about low-cost index funds. The following is a list of 5 common lies spun by advisors who are dead-set against indexing.

  1. Active US stock funds beat the market over the past decade.  Less than 50 percent of surviving US stock funds beat the S&P 500 since 2000, and this number would be much lower if closed and merged funds were included. But that’s not the problem with this argument. The primarily large cap S&P 500 is not a good benchmark for many actively managed US equity funds because they have a small cap or mid cap focus. Using appropriate size benchmarks brings the percentage of winning funds down considerably.
  2. Index funds will always achieve below average returns. Index funds will achieve returns that are much closer to the market averages than the active funds your advisor is pushing, and that’s what matters. On average, mutual funds underperform by the fees they charge. Index funds have much lower fees than active funds. This makes low-cost index fund investing an above average portfolio strategy. 
  3. Indexing doesn’t work in inefficient markets such as small cap or international. You can count on every active fund advocate to use poorly constructed or inappropriate indexes to make the argument that active returns are better than they are. For example, the Russell 2000 is a common benchmark for US small cap stocks, but it has known annual reconstruction flaws that reduce its annual return by up to 2 percent. The MSCI EAFE is a common international equity benchmark, but it doesn’t include popular emerging markets stocks or Canadian stocks. Proper benchmarking makes active management far less attractive.
  4. Active managers perform better in bear markets. The evidence surrounding this often heard statement is inconclusive. The data does show that active funds tend to hold more cash in a bear market due to greater fund redemptions, and this can create the impression of lower risk, but there’s no evidence supporting the idea that active funds have lower volatility or that fund managers have market timing skill.
  5. Warren Buffett has beaten the market and this proves indexing doesn’t work. Wrong. This only proves that Warren Buffett, chairman of Berkshire Hathaway (Ticker: BRK), has the Midas touch. It doesn’t prove that the advisor you’re using has Buffett-like talent. Your portfolio may beat the market due to luck, but let’s not be naive and call advisor luck as skill. Even Buffett repeatedly recommends that individual investors buy index funds that charge minimal fees. As an aside, I find it ironic that most advisors who use the Buffett argument typically don’t own BRK in their client’s portfolios.

Indexing works because active investing can’t work. The fees are too high, the opportunities too few, and the talent too scarce. Ignore the lies told by those people who earn a fat living selling the dream of market beating returns. You’ll earn more money over your lifetime by creating and maintaining a low-cost, low-tax, low-turnover portfolio of index funds.


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Posted: 18 December 2010 - 0 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]

Buffett...

 

on active trading:

 

We believe that according the name 'investors' to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a 'romantic.'

 

on activity:

 

One of the ironies of the stock market is the emphasis on activity. Brokers, using terms such as "marketability" and "liquidity," sing the praises of companies with high share turnover... but investors should understand that what is good for the croupier is not good for the customer. A hyperactive stock market is the pick pocket of enterprise

 

on management:

 

When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.

 

on diversification:

 

Wide diversification is only required when investors do not understand what they are doing.

 

on Business Schools:


The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.

 

on intrinsic value:

 

Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life. The calculation of intrinsic value, though, is not so simple. As our definition suggests, intrinsic value is an estimate rather than a precise figure, and it is additionally an estimate that must be changed if interest rates move or forecasts of future cash flows are revised.

 

 

 

 


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Posted: 2 December 2009 - 0 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]

Active Portfolio Management 

Is it possible to outperform the market?

 

This is one of the most important questions any investor should ask.

 

If your answer is no, if you believe the market is efficient, then passive investing or indexing - buying diversified portfolios of all the securities in an asset class - is probably the way to go. The arguments for such an approach include reduced costs, tax efficiency and the fact that, historically, passive funds have outperformed the majority of active funds (see MARKET EFFICIENCY and INDEXING).

 

But if your answer is yes, it is possible to beat the market, then you should pursue active portfolio management. Among the arguments for this approach are the possibility that there are a variety of anomalies in securities markets that can be exploited to outperform passive investments (see INVESTOR PSYCHOLOGY), the likelihood that some companies can be pressured by investors to improve their performance (see CORPORATE GOVERNANCE), and the fact that many investors and managers have outperformed passive investing for long periods of time.

 

But the active investor must still face the challenge of outperforming a passive strategy. Essentially, there are two sets of decisions. The first is asset allocation, where you carve up your portfolio into different proportions of equities, bonds and other instruments (see GLOBAL INVESTING and INVESTMENT POLICY). These decisions, often referred to as market timing as investors try to reallocate between equities and bonds (see FIXED INCOME) in response to their expectations of better relative returns in the two markets, tend to require macro forecasts of broad-based market movements (see ECONOMIC FORECASTING and POLITICS AND INVESTING). Then there is security selection - picking particular stocks or bonds. These decisions require micro forecasts of individual securities underpriced by the market and hence offering the opportunity for better than average returns.

 

Active investing involves being 'overweight' in securities and sectors that you believe to be undervalued and 'underweight' in assets you believe to be overvalued. Buying a stock, for example, is effectively an active investment that can be measured against the performance of the overall market (see PERFORMANCE MEASUREMENT). Compared to passive investing in a stock index, buying an individual stock combines an asset allocation to stocks and an active investment in that stock in the belief that it will outperform the stock index.

 

In both market timing and security selection decisions, investors may use either technical or fundamental analysis (see TECHNICAL ANALYSIS, VALUE INVESTING and GROWTH INVESTING). And you can be right in your asset allocation and wrong in your active security selection and vice versa. It is still possible that an investor who makes a mistake in asset allocation, perhaps by being light in equities in a bull market, can still do well by picking a few great stocks.

 

There are arguments for both active and passive investing though it is probably the case that a larger percentage of institutional investors invest passively than do individual investors. Of course, the active versus passive decision does not have to be a strictly either/or choice. One common investment strategy is to invest passively in markets you consider to be efficient and actively in markets you consider less efficient. Investors can also combine the two by investing part of a portfolio passively and another part actively.

 

Guru of active portfolio management: Bill Miller

It is hard to be the best performing manager for the past five years out of a field of more than five hundred. Not just that it is so difficult to be there - and it is - but also difficult to maintain one's mental balance. The temptation is to be too cocky and believe the publicity one receives. Or one could become too concerned with the inevitable stumble that lies ahead: old Bill has just lost it, some will say.

One way Bill Miller of Legg Mason's Value Trust keeps his head is to stress the intellectual side of investment. And he concentrates his investment attention so that extraneous contemporary PR does not distract him. His job is to outperform and every instinct he has is brought to bear on that objective. Over and over, he can repeat his lessons from profits and losses. His shareholders' glories and pains are his own. He takes the lessons, structures them into principles and keeps improving.

Miller is rather liberal in defining the details of his tactics when it suits him. He is not bothered by people who say that Czech bonds, for example, or go-go tech stocks trading at sky-high price-to-earnings ratios are not value investments: if they go up, they were and that is what counts. The definitional straitjackets of others are their problems, not his.

Miller is reaching out to complexity and the Santa Fe Institute, where he is a trustee and has a house, to teach him how to break today's investment bronco. Few others have the patience to deal with the ambiguities inherent in any emerging science. And it lets him contemplate the future of investment styles with a catholic perspective, a dogged determination to triumph and in the company of physicists ready to humble anyone wasting a good mind on one of the soft sciences, for money.

 

Counterpoint

Nobel Laureate Bill Sharpe makes a simple yet powerful case against active management in his article 'The Arithmetic of Active Management': 'If active and passive management styles are defined in sensible ways, it must be the case that: (1) before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar; and (2) after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar These assertions will hold for any time period. Moreover, they depend only on the laws of addition, subtraction, multiplication and division. Nothing else is required.'

 

Sharpe continues: 'This need not be taken as a counsel of despair. It is perfectly possible for some active managers to beat their passive brethren, even after costs. Such managers must, of course, manage a minority share of the actively managed dollars within the market in question. It is also possible for an investor (such as a pension fund) to choose a set of active managers that, collectively, provides a total return better than that of a passive alternative, even after costs. Not all the managers in the set have to beat their passive counterparts, only those managing a majority of the investor's actively managed funds.'

Rex Sinquefield of Dimensional Fund Advisors is more brutal. He says there are three classes of people who do not believe that markets work: the Cubans, the North Koreans and active managers.

 

Yet investment managers are competing hard to manage institutional and individual investors' money and it is not surprising that they make claims about their market-beating potential - usually using active strategies - and, where possible, their market-beating performance records. And social norms of prudence, investor anxiety and anticipation of regret over flawed decisions contribute strongly to the demand for supposed financial expertise. Of course, if you believe in active investing, it is best not to judge a manager by their past performance indicators but rather by the plans by which they expect to add value through outperformance.

 

Ambitious investors and investment managers almost all want to beat the market, but it is worth asking why should they want to beat it for you. Why should precious insights into the nature of the market be available for sale to the general public, either directly through a fund or indirectly, perhaps through a book advocating a particular investment technique as the route to outperformance? If an investment technique is so good, it would seem to make more sense to keep its secrets to yourself.

 

It does seem to be the case that an investor who tries to predict short-term changes in share prices has to be right about 70% of the time to beat the market. Peter Jeffreys of S&P Fund Research, a London fund-rating company, has screened 4,800 funds since 1982 to see if past winners repeat their success in the future. He finds that the probability of that comes down to 'almost pure random chance': using three year rolling average performance as a measure, it turns out that of funds that beat the average six years running, only just over a half did so the next year.

 

[Guru response, if any]

I think the on-line market is like the discount business--it just further segments the market; it doesn't replace traditional trading or brokerage. Sort of like TV to the movies, then VCR's etc. On-line traders are most like traditional discount customers, which is why Schwab is so successful at it. The do-it-yourself market is big and growing in a lot of industries, but it rarely if ever totally displaces those who want to pay for service and advice. This is different from, say, book retailing, where the best customers of Borders are the best potential customers of Amazon. The best brokerage customers, equity oriented wealthy families who use margin are not the profile of the E-trade customer, whose demographics are entirely different. They may merge in a generation or so, but by then only the most dim witted brokers will not have been able to adapt.

 

Where next?

The latest research in financial economics seems to confirm that markets are not strictly efficient and that there are 'pockets of predictability'. This offers some hope to 'disciplined' active managers if they can come up with innovative techniques to achieve superior long-term returns (see FINANCIAL ENGINEERING).

But it is very important for any investor to watch closely for changing market drivers. For example, the market drivers until late 1998 were easy credit, moderating inflation, lower interest rates, rising earnings and the wide publicity of a sixteen year bull market in equities - by some counts, a fifty year bull market. The 1990s have seen a 16% compounded rate of growth for equities versus 6% historically, so it is not surprising that strong momentum keeps everyone in the game.

But we are beginning to face a different set of market drivers and it is hard to tell where they will drive us. The kind of financial concerns we face are rather novel in all of our lifetimes. There is illiquidity; wealth has been destroyed in many parts of the world; and inflation has turned to disinflation, to lower inflation and now to deflation. Deflation is destructive, especially for debt, which has led to a quality preference on debt where only the highest quality can pass muster and the ability to borrow is probably the only thing that counts in analyzing securities (see VALUE INVESTING).

What about the impact of news on portfolio management decisions? It is worth noting that precisely the same evidence may be used to support a good market tone or a bad market tone - a bull market or a bear market. For example, the absence of rising prices could be good for continued growth and low unemployment, or it could be bad because deflationary forces are building up and, as the experience of Japan indicates, they are extremely destabilizing. Interest rates are attractive for borrowing and money is plentiful, which is very good for business; but it may well be bad because it means that a great deal of money is flowing in from overseas to the United States as the last fortress of capital.

Similarly, the public continues to buy IPOs (see INITIAL PUBLIC OFFERINGS), almost every single one. Is that good because it means confidence or bad because it means that there is such a strong psychological undertone to the market that when it cracks, nothing will bring it back? What is more, we have got the quality stocks doing much better for the last several years than the broad market averages. Good because it suggests leadership? Or bad, meaning that there really is a low level of confidence, and this is just speculation in well-known names?

Also, we have continued concerns about what will happen in the year 2000 with our computer systems. Good - if nothing happens - or bad - because the year 2000 is only months away? Finally, earnings are good, but on the other hand, the majority of the surprises are on the downside: there appears to be a deterioration in terms of buildup of disappointments. So the same news can be seen as good or bad.


 


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Posted: 6 December 2009 - 0 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]

Developing your investment strategy

 

  Investing vs. speculating alt

As many investors discover, mapping out an investment plan is the easy part. Sticking with that plan is what separates investors from speculators.
Learn more in "Timing the economy: A very dangerous game"

 

To make the most of your investment opportunities, allow your lifestyle — not stock market gyrations — to dictate your investment approach. Your goals are what count, so keep them firmly in mind when you make financial decisions.

Are you an investor or a speculator?
Many investors use a consistent, long-term strategy to build a more secure financial future through steady purchases of well-diversified investments.

Speculators and market timers are usually less concerned about consistency. They may switch investment philosophies on an emotional whim, sometimes treating their investments more like play money than the serious money needed for their financial future.

Most people would probably say they are investors, but the question is not so easily answered. During a bull market, it can be relatively easy to be a long-term investor. However, when the stock market starts gyrating, investors' mettle can be tested — revealing many closet speculators.

The risks of market timing
Market timers follow a fairly predictable cycle. When prices seem low relative to historical norms, they buy. When an investment's value seems to peak, they sell. This cycle is repeated with the next "hot tip."

In theory, market timing seems fairly rational, but in practice it rarely works. Even the most sophisticated investors, with years of experience and the best analytical tools, cannot predict the whims of the financial markets. What's more, market timers are often misled by emotional factors such as greed or fear. Many end up buying at the tail end of a market rally or selling in a panic at a loss.

The difficulty of timing the markets is complicated by the fact that most market rallies occur in brief spurts. Market timers waiting for the right opportunity to buy or sell risk being out of the market during these sudden market changes.

To benefit from market timing, you must accurately predict the future, not once, but twice. First you must correctly determine when to sell. Second, you must accurately determine when to get back in. Because falling markets can rise steeply within days, your timing must be nearly perfect.
Making decisions like an investor
To avoid falling into the speculator's trap, focus on the term "individual" before making any investment decision. Your individual long-term goals and your individual financial circumstances — not the daily gyrations of the stock market — should govern your decision.

By focusing on your individual needs and sticking to your investment plan, you could actually benefit from the stock market's gyrations. For example, a good long-term investment strategy generally includes investing a set amount at regular intervals. If you maintain this schedule during a market dip, you may be purchasing some strong stocks at discount prices.

Of course, changing your investments during a gyrating market is not always speculating. It can be the mark of an astute investor if the reasons for your changes are consistent with your individual long-term goals.

Lifestyle timing: Making decisions based on your goals
Instead of market timing, try lifestyle timing. Look at your own investment portfolio and compare it to your long- and short-term goals.

Do you need to withdraw money within the next year or so to begin financing your retirement or to make some other lifestyle change? If so, you might want to rebalance your portfolio to a more conservative mix of assets.

What about your long-term goals? Short-term market gyrations will probably not significantly affect your long-term plans, and it may be wise to stick with your current strategy.

To make the most of your investment opportunities, use disciplined, systematic investing — like dollar cost averaging.

Dollar cost averaging
Dollar cost averaging is a policy by which the same dollar amount is placed in your investments at fixed, successive intervals, enabling you to average the purchase of your shares over time. Assuming that each investment is for the same number of dollars, a greater number of shares are purchased when the price is low and fewer when the price is high. So you may get a satisfactory average price, instead of buying all the shares at the high levels of the market.

Over the long run, dollar cost averaging helps market fluctuations work for you, not against you. Because you buy more shares when prices are lower, and fewer shares when prices are higher, the average cost of your total accumulated shares in an investment increasing in value over time is below the average market price for all of the shares you purchased.

Disciplined, systematic investing does not promise a profit or protect you from a loss, but it does reduce the odds of you putting too much money into an investment when prices are high, and it also removes the emotional factor from your investment strategy.


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Posted: 22 February 2010 - 0 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]

 

1.      How to post 

1. Select ‘Ticker’ – ‘create post’ – ‘compose new entry’
2. Choose the appropriate category from the choice presented
3. You will then see an edit screen that looks like ms-word.......
 
alt
 
 
Then either :
-type your content directly into the space as shown above
-copy and paste from other sources into this space.
 
Or
 

  

To post a picture: 

1.Select picture icon (   alt  insert/edit Image)
2.select upload tab
3. specify image
4. click upload
5.Select ‘Post Entry’
 
tip:  keep picture sizes down to 100k for rapid downloads
 
To post a document (pdf, doc, xls etc.) :

1.Select insert link icon ( alt insert/edit link)
2.select upload tab
3. specify document (on your computer)
4. click upload
5.Select ‘Post Entry’
 
Tip: post older versions of documents (eg. excel 97) to ensure most community members can download.

To post a video  (not just as a link....the actual video will be posted)

1. In youtubecopy 'embed' code just to the right of the youtube video.
2. Return to Ticker – ‘create post’ – ‘compose new entry’
2. select 'Source'  button (alt )
3. clear the code you see.   ‘<p>&#160;</p>’
4. paste 'embed' code
5.Select ‘Post Entry’

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Posted: 2 March 2010 - 0 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]

Start an Investment Club: How To, Rules and Reality Checks

by Darwin on May 20, 2009

A few years back some coworkers and I started an investment club.  We were an ambitious bunch (still are), but perhaps too much so for the realities we’d face in trying to run an investment club.  There was a group of five of us and our stated goal was to return 15% per year on a sustained basis.  Nevermind that the best minds in finance the world wide can’t achieve such returns and the ones that do are named “Madoff”, but we thought we had it all figured out.  We were going to use a hybrid approach to investing with each partner becoming a subject matter expert in various investment methods.  We had sector expert, the quant, the options expert, the value investor, etc.  While I learned a lot about investing, technical analysis, building financial models, utilizing complex options strategies and more, I also learned that successfully running an investment club was much more work and had many more surprises than I had anticipated.

Stock Investment Club Benefits

We started out with some strong drivers to form a private stock investment club.  Conceptually, the benefits seemed to outweigh the risks/downsides tremendously.  We viewed the following benefits as justification for formation of our private club:

  • Unregulated – we didn’t have to abide by the same rules a mutual fund manager or passive ETF would (obviously).  We could go short, we could use options, we could use any portion of cash we chose, we could use margin (bad idea!), we could even invest in real estate directly or other alternative assets now that we had formed a Limited Partnership and had some decent seed money to start with.
  • Economies of Scale – One of the gripes of individual investor/traders is the commission drain.  Trying to do a few trades a month with a typical online broker at the time was running about $12/trade, which adds up to several hundred dollars per year.  We figured that by splitting the trades across five members, we were now looking at a much diminished cost structure.
  • Tapping the wisdom of other members – Each of us had some trading experience, were getting into MBA programs, etc. and were doing independant research.  We figured we’d learn a lot from each other about various strategies, and we did.

Investment Club Rules

We came up with a set of by-laws, or rules, which governed every conceivable outcome, grievance, oddball situation we could think of.  While it may seem plain and simple to just pool some money together and start investing, there are several scenarios you need to factor in to your by-laws and consider before starting up.  Here are several considerations and provisions you should build in:

  • Expectations around research, input for members
  • Meeting frequency
  • Positions for members (Treasurer, Trade Executor, Secretary, etc)
  • Investment club mission statement or philosophy
  • Which types of investments are allowed/disallowed (i.e. long options, naked shorts, stocks only, etc.)
  • How to handle tax issues (split evenly or based on % ownership)
  • Starting contributions, ongoing monthly contributions
  • How to handle departures from the club and new members
  • Risk Tolerance (ever use margin, ever do anything besides straight buy and hold?)

More Complex than Initially Thought

Aside from the common considerations above, there were a few scnarios that don’t initially come to mind that have to be considered in your investment club rules as well.  One of our members had been in a club about a decade prior and had shared some perspective in complexities we hadn’t considered initially.

Tax Consequences

The club ran for a long time, and was one of those investment groups you hear about that actually bought Microsoft for under $1 split-adjusted.  Well, that was good and bad.  For one, that portion of their club’s investment obviously had an outsized investment return.  The downside was that when the club dissolved, there was an outsized tax consequence as well.  The problem is that various members had joined and left along the way.  Say you had one guy who joined in 1991 and left in 2001.  You have another guy who joined in 2001 and left in 2003 when the club dissolved.  Well, say the MSFT shares weren’t executed until 2003.  The guy that left in 2001 got the benefit of his share of all the upside in Microsoft and didn’t pay a dime in tax liabilities.  The guy that joined in 2001 actually saw a loss in the MSFT portion and to add insult to injury, he was slammed with a humongous tax liability for his share of the club’s tax bill while all the guys who jetted earlier paid no taxes.  This holds true for other investment moves of course too, but this illustrates what can happen when you don’t have a plan for how to handle this.

Aside from how to handle tax issues amongst the team, there were the formal tax reporting requirements.  In the US, we had to employ an accountant at a cost of a few hundred dollars per year to manage some atypical tax forms.  Primarily, there was a K-1 form, which each of us had to reference on our individual returns each year.  We had to form a limited partnership to tie to the tax form.  Some of the benefits of running a club with the intent of saving money on commissions and scale were offset by fees and headaches like this.

Termination/Departure from Club

In addition to the tax consequences above, there are other factors at play.  What if one of your members just wants out?  What if someone’s moving and can no longer participate in a meaningful manner?  What if someone Dies?  How do you handle their portion of the club.  When should they reasonably be expected to recieve their disbursement?  If the club’s fully invested and you had to liquidate shares immediately, you might be selling at a bottom or acting against a strategy that required a set amount of liquidity/capital (i.e. if you had sold shares short or had naked credit spreads and you paid out, you might get a margin call).  We built in provisions for each, requiring a 6 month lead time between notice to the club and expectation of payout.

Investment Club Software

When we had started up, the only investing club software out there to track investments, ownership, etc. was provided by the National Association of Investors Corp (NAIC website here) which is a non-profit (but they charged for the software of course) and we found it to be completely inadequate for our purposes.  Perhaps they’ve improved it a bit in the past few years to account for some of the complexities I mentioned above, but at the time, it was pretty much useless.  I actually ended up developing an elaborate spreadsheet to calculate % ownership each month since we had different members auto-depositing different amounts of cash into the club each month.

Why Did our Investment Club Fail?

The reasons were numerous.  One thing was timing.  We started up in an up market and become overly optimistic.  Since our long positions were in stocks with a Beta of 2-3, it seemed great when we were returning 50% when the market was up 25% during the year ago period.  However, when the market turned, we were crushed accordingly.  We had tapped into margin, we were net long, we were using options, and we were creamed in particularly horrid fashion on a credit spread that went south.  As our returns started to diminish, so did our enthusiasm.

There are some online investment clubs out there, but given the complexities you’re dealing with with people you know and trust already, delving into an online relationship and trying to make it work is probably not going to be easy.

One of the most famous investment clubs was the Beardstown Ladies club, who claimed long-term returns of over 23% over a ten year period, which was unparalleled even by 99% of the professional hedge fund and mutual fund managers of the time.  This type of lore drew many investors into the fray and the urban legend still survives today.  The reality is that these ladies apparently were not very sophisticated in their tracking of real returns and actually included their cash investments IN as part of their claimed investment returns.  An audited assessment showed that they actually returned 5% less per annum than the S&P500 over that period! (source:wikipedia)

My advice is to be realistic about your expectations around net returns, time commitment, address the complexities up front and what you think you’ll get out of this experience before starting an investment club.  In retrospect, I look back fondly on the experience and I think I learned enough new investment strategies and analysis from my colleagues that it justified the time and financial losses.  However, based on the endless emails over tax returns, the less than stellar market returns and my complete lack of free time, I wouldn’t do it again!


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Posted: 25 May 2010 - 0 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]

  Shouldn't we apply this advice from a recent mckinsey 

  article

  to investing?

 

 

The familiarity test: Have we frequently experienced identical or similar situations?

Familiarity is important because our subconscious works on pattern recognition. If we have plenty of appropriate memories to scan, our judgment is likely to be sound; chess masters can make good chess moves in as few as six seconds. “Appropriate” is the key word here because many disastrous decisions have been based on experiences that turned out to be misleading—for instance, the decision General Matthew Broderick, an official of the US Department of Homeland Security, made on August 29, 2005, to delay initiating the Federal response following Hurricane Katrina.

The way to judge appropriate familiarity is by examining the main uncertainties in a situation—do we have sufficient experience to make sound judgments about them? The main uncertainties facing Broderick were about whether the levees had been breached and how much danger people faced in New Orleans. Unfortunately, his previous experience with hurricanes was in cities above sea level. His learned response, of waiting for “ground truth,” proved disastrous.

Gary Klein’s premortem technique, a way of identifying why a project could fail, helps surface these uncertainties. But we can also just develop a list of uncertainties and assess whether we have sufficient experience to judge them well.

2.      The feedback test: Did we get reliable feedback in past situations?

Previous experience is useful to us only if we learned the right lessons. At the time we make a decision, our brains tag it with a positive emotion—recording it as a good judgment. Hence, without reliable feedback, our emotional tags can tell us that our past judgments were good, even though an objective assessment would record them as bad. For example, if we change jobs before the impact of a judgment is clear or if we have people filtering the information we receive and protecting us from bad news, we may not get the feedback we need. It is for this reason that “yes men” around leaders are so pernicious: they often eliminate the feedback process so important to the development of appropriate emotional tags.

3.      The measured-emotions test: Are the emotions we have experienced in similar or related situations measured?

All memories come with emotional tags, but some are more highly charged than others. If a situation brings to mind highly charged emotions, these can unbalance our judgment. Knowing from personal experience that dogs can bite is different from having a traumatic childhood experience with dogs. The first will help you interact with dogs. The second can make you afraid of even the friendliest dog.

A board chairman, for example, had personally lost a significant amount of money with a previous company when doing business in Russia. This traumatic experience made him wary of a proposal for a major Russian expansion in his new company. But he also realized that the experience could be biasing his judgment. He felt obliged to share his concerns but then asked the rest of the board to make the final decision.

4.      The independence test: Are we likely to be influenced by any inappropriate personal interests or attachments?

If we are trying to decide between two office locations for an organization, one of which is much more personally convenient, we should be cautious. Our subconscious will have more positive emotional tags for the more convenient location. It is for this reason that it is standard practice to ask board members with personal interests in a particular decision to leave the meeting or to refrain from voting. Also for this reason, we enjoy the quip “turkeys will not vote for Christmas.”

A similar logic applies to personal attachments. When auditors, for example, were asked to demonstrate to a Harvard professor that their professional training enabled them to be objective in arriving at an audit opinion, regardless of the nature of the relationship they had with a company, they demonstrated the opposite.


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Posted: 18 August 2010 - 1 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]

Allister Sparks has written a supurb article in this mornings Business Day which can be viewd HERE.

 

He highlights:

 

 Kumba also seized on Mittal’s lapse and applied for the conversion rights for itself -- only to find that a little-known company with no mining expertise, Imperial Crown Trading (ICT), had done likewise. And, hey presto, ICT was awarded the rights -- although the issue is the subject of what is likely to be a long legal battle.

Meanwhile, it just so happens that one of Zuma's sons, Duduzane, is a key figure in ICT along with the Gupta family, enormously wealthy immigrants from India who appear to have become the President's best friends and are on the point of publishing a new pro-ANC daily newspaper, New Age.

 

The chief executive of the Gupta family's investment arm, Jagdish Parekh, also has a substantial shareholding in ICT, while Duduzane Zuma's twin brother, Duduzile, is a business partner of the Guptas.

 

Sensing which way the wind was blowing in the conflict between Mittal and Kumba, Mittal has now moved to secure its supply of cheap ore from Sishen by offering ICT a cool R800-million for its rights plus R9-billion worth of shares in Mittal itself. All in the name of Black Economic Empowerment.

 

It's an outrageous steal -- “money for jam,” as one beneficiary brazenly put it -- and a grotesque abuse of BEE. That policy was introduced to benefit the disadvantaged people of this country, and there is nothing disadvantaged about the beneficiaries of this windfall. They are already among the stinking rich, politically connected fat cats.

 

Hardly had this shocker hit the news than another followed. The Department of Mineral Resources ordered Lonmin , an international mining company, to stop selling nickel, copper and chrome from a portion of one of its platinum mines, because it had awarded exploration rights for these minerals to an empowerment company called the HolGoun Group.

 

 

'handerso' had this to say:

  

By: handerso On: Aug 18 2010 9:27AM

 

“Seven social sins: politics without principles, wealth without work, pleasure without conscience, knowledge without character, commerce without morality, science without humanity, and worship without sacrifice.” Mahatma Gandhi (1869 - 1948)

 

 

Who agrees?


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Posted: 21 October 2010 - 0 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]

In the  New York Times today there is an article which can be viewed HERE where three approaches advisers are using are discussed:

 

 

1. THE CARING APPROACH

 

Advisers in this camp say they manage money as if it were their own.

 

2. THE TECHNICAL APPROACH

 

Advisers in this category say it is a way to talk about returns and expectations without dwelling on the numbers themselves. Doing that requires them to ask different questions.

 

3. RETIREMENT-FOCUSED

 

This approach educates clients about their portfolios and tries to persuade them to keep the long term in mind. By extension, this means trying to ignore the short-term peaks and valleys in their portfolios.

 

 


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Posted: 17 November 2010 - 0 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]

PHILADELPHIA - President Barack Obama's deficit reduction commission - an 18-person body with the unenviable task of developing a plan for balancing the US budget - released a draft report last week outlining proposals that would trim $4tn off the federal budget deficit between 2012 and 2020, reducing it to 2.2% of GDP (from 8.9%).

 

Test this against how you might do it using these tools:

 

debt clock

 

2004 and 2008 debt clocks

 

Interactive Budget Puzzle: You Fix the Budget


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Posted: 15 December 2010 - 0 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]

There is a very interesting discussion going on in the Learners Group about the costs of purchasing shares  HERE


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Posted: 19 December 2010 - 0 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]

There are no one-handed push-ups or headstands on the yoga mat for Gordon Murray anymore.

 

No more playing bridge, either — he jokingly accuses his brain surgeon of robbing him of the gray matter that contained all the bidding strategy.

 

MORE

 

alt

 

 

A very profound perspective on investing.

 


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Posted: 29 March 2011 - 0 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]

THE BATTLE OF WATERLOO

As the wealth and power of the Rothschilds grew in size and influence so did their intelligence gathering network. They had their 'agents' strategically located in all the capitals and trading centers of Europe, gathering and developing various types of intelligence. Like most family exploits, it was based on a combination of very hard work and sheer cunning.

Their unique spy system started out when 'the boys' began sending messages to each other through a networh of couriers. Soon it developed into something much more elaborate, effective and far reaching. It was a spy network par excellence. Its stunning speed and effectiveness gave the Rothschilds a clear edge in all their dealings on an international level.

"Rothschild coaches careened down the highways; Rothschild boats set sail across the Channel; Rothschild agents were swift shadows along the streets. They carried cash, securities, letters and news. Above all, news -- the latest exclusive news to be vigorously processed at stock market and commodity bourse.

"And there was no news more precious than the outcome at Waterloo..." (The Rothschilds p. 94).

Upon the battle of Waterloo depended the future of the European continent. If the Grande Armee of Napoleon emerged victorious France would be undisputed master of all she surveyed on the European front. If Napoleon was crushed into submission England would hold the balance of power in Europe and would be in a position to greatly expand its sphere of influence.

Historian John Reeves, a Rothschild partisan, reveals in his book The Rothschilds, Financial Rulers of the Nations, 1887, page 167, that "one cause of his [Nathan's] success was the secrecy with which he shrouded, and the tortuous policy with which he misled those who watched him the keenest."

 

alt

Nathan Rothschild

 

There were vast fortunes to be made -- and lost -- on the outcome of the Battle of Waterloo. The Stock Exchange in London was at fever pitch as traders awaited news of the outcome of this battle of the giants. If Britain lost, English consuls would plummet to unprecedented depths. If Britain was victorioug, the value of the consul would leap to dizzying new heights.

alt
19 heures, la cavalerie écossaise charge, emmenée par Ponsomby.
Elle sera, malheureusement pour Napoléon, décisive.
http://www.ifrance.com/napoleonbonaparte/waterloo.htm

As the two huge armies closed in for their battle to the death, Nathan Rothschild had his agents working feverishly on both sides of the line to gather the most accurate possible information as the battle proceeded. Additional Rothschild agents were on hand to carry the intelligence bulletins to a Rothschild command post strategically located nearby.

Late on the afternoon of June 15, 1815, a Rothschild representative jumped on board a specially chartered boat and headed out into the channel in a hurried dash for the English coast. In his possession was a top secret report from Rothschild's secret service agents on the progress of the crucial battle. This intelligence data would prove indispensable to Nathan in making some vital decisions.

The special agent was met at Folkstone the following morning at dawn by Nathan Rothschild himself. After quickly scanning the highlights of the report Rothschild was on his way again, speeding towards London and the Stock Exchange.

-------------------------
COUP OF COUPS
-------------------------

Arriving at the Exchange amid frantic speculation on the outcome of the battle, Nathan took up his usual position beside the famous 'Rothschild Pillar.' Without a sign of emotion, without the slightest change of facial expression the stony-faced, flint eyed chief of the House of Rothschild gave a predetermined signal to his agents who were stationed nearby.

Rothschild agents immediately began to dump consuls on the market. As hundred of thousands of dollars worth of consuls poured onto the market their value started to slide. Then they began to plummet.

Nathan continued to lean against 'his' pillar, emotionless, expressionless. He continued to sell, and sell and sell. Consuls kept on falling. Word began to sweep through the Stock Exchange: "Rothschild knows." "Rothschild knows." "Wellington has lost at Waterloo."

 

An anonymous contemporary described Nathan Rothschild at the London Stock Exchange as "he leaned against the 'Rothschild Pillar' ... hung his heavy hands into his pockets, and began to release silent, motionless, implacable cunning":


"Eyes are usually called the windows of the soul. But in Rothschild's case you would conclude that the windows are false ones, or that there was no soul to look out of them. There comes not one pencil of light from the interior, neither is there one gleam of that which comes from without reflected in any direction. The whole puts you in mind of an empty skin, and you wonder why it stands upright without at least something in it. By and by another figure comes up to it. It then steps two paces aside, and the most inquisitive glance that you ever saw, and more inquisitive than you would ever have thought of, is drawn out of those fixed and leaden eyes, as if one were drawing a sword from a scabbard. The visiting figure, which has the appearance of coming by accident and not by design, stops just a second or two, in the course of which looks are exchanged which, though you cannot translate, you feel must be of most important meaning. After this, the eyes are sheathed up again, and the figure resumes its stony posture.
During the morning, numbers of visitors come, all of whom meet with a similar reception and vanish in a similar manner. Last of all the figure itself vanishes, leaving you utterly at a loss"

 

The selling turned into a panic as people rushed to unload their 'worthless' consuls or paper money for gold and silver in the hope of retaining at least part of their wealth. Consuls continued their nosedive towards oblivion. After several hours of feverish trading the consul lay in ruins. It was selling for about five cents on the dollar.

Nathan Rothschild, emotionless as ever, still leaned against his pillar. He continued to give subtle signals. But these signals were different. They were so bubtly different that only the highly trained Rothschild agents could detect the change. On the cue from their boss, dozens of Rothschild agents made their way to the order desks around the Exchange and bought every consul in sight for just a 'song'!

A short time later the 'official' news arrived in the British capital. England was now the master of the European scene.

Within seconds the consul skyrocketed to above its original value. As the significance of the British victory began to sink into the public consciousness, the value of consuls rose even higher.

Napoleon had 'met his Waterloo.'

Nathan had bought control of the British economy.

Overnight, his already vast fortune was multiplied twenty times over.


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