After the historic presidential and congressional elections last fall it was obvious that U.S. trade policy would change. The question then was how it would change, and while we still don't have all the answers, some things are becoming clear.
One is that despite the rhetoric on the campaign trail, the Obama administration and the Democratic majority in Congress have recognized that remaining open to international trade is vital part to the effort to restore the health of the U.S. economy. But another thing that has become evident is that this openness has a price, and that price is enforcement.
It should be noted that enforcement -- ensuring that U.S. rights under bilateral and multilateral trade agreements, as well as U.S. trade laws and regulations, are upheld -- is not a partisan issue. It had become associated with Democrats as they railed against a Bush administration trade policy that they believed focused more on negotiating new trade pacts than policing existing ones.
In fact a number of Republicans are also of the view that the U.S. has not sufficiently stood up to its competitors. The ongoing economic recession, which -- rightfully or not -- is seen in some quarters as having been exacerbated by open market and free trade policies, has only magnified these concerns.
Administration and congressional officials have also been careful to emphasize that enforcement is not the same as protectionism; it is not a tool for erecting more barriers. Instead, it is aimed at helping restore the support for open trade that has waned in recent years.
While according to one senior law maker the "consensus to advance international trade is frayed" and "our faith in the international trading system is badly shaken," it is critical to ensure that rules are being respected. Countries should be able to do so without being accused of "protectionism," which one member of the House who oversees trade issues argued is associated with measures like tariffs, quotas and non-tariff barriers to imports and exports.
Ensuring that the rights of threatened industries are upheld, on the other hand, can help speed an economic recovery and thus help reestablish popular support for global commerce.
Because U.S. trade agreements, laws and regulations are so broad in scope, efforts to enforce them will be as well. Businesses are therefore finding themselves in an environment where their global supply chains are being scrutinized like never before on everything from product safety to cargo container security to environmental practices.
With this in mind, let's take a look at some of the issues where enforcement efforts are likely to be especially targeted in the months ahead.
China -- Intellectual property rights, industrial policies and market access for agriculture and services will continue to be major issues and the threat of action at the World Trade Organization will never be far from the surface. The alleged undervaluation of China's currency, however, is not the focal point it has been in recent years.
Trade Data -- Ensuring the quality and timeliness of the import and export data submitted to U.S. Customs and Border Protection to aid supply chain security and revenue collection efforts will be a top priority. CBP will look to ensure compliance with its new 10+2 rule requiring additional shipment information, while lawmakers have indicated concern with product misclassification.
Intellectual Property Rights -- IPR enforcement is high on the to-do list for both the administration and Congress, not only because infringement can cost businesses hundreds of millions of dollars a year in direct losses and significantly hamstring their competitiveness but also because the widespread counterfeiting of consumer and industrial goods is a major public health and safety concern. Policymakers are examining a number of additional ways to improve prevention, detection and interdiction efforts.
Remedies for Unfair Trade -- Expect to see an increase in complaints that foreign manufacturers are dumping below-cost and unfairly subsidized goods in the U.S. market. New limits on governmental actions that could be seen as weakening trade remedy laws are on the horizon.
Trade Agreements -- Much more attention will be given to ensuring U.S. rights as a member of the World Trade Organization and as a party to various bilateral and regional free trade agreements are respected. Although administration officials have said they should not be judged by the number of new cases filed, an increase is well within the realm of possibility. Compliance with established criteria by countries that receive duty-free benefits when exporting to the U.S. market will also be closely scrutinized.
Import Safety -- Implementation of the many provisions of the Consumer Product Safety Improvement Act of 2008 will be a primary focus, but Congress is already moving ahead with similar legislation addressing food, drugs, cosmetics and medical devices. Additional initiatives to improve the targeting and identification of violative goods and the foreign firms that supply and transport them are under consideration.
Just as there are a wide range of issues to be included in enforcement efforts, those efforts will take a variety of forms. Staff within agencies like CBP, the Department of Commerce, the International Trade Commission and the U.S. Trade Representative's office will be devoting more time to ensuring compliance with applicable rules and regulations.
New financial and personnel resources are flowing to these agencies to make sure they can sufficiently perform these functions. And comprehensive trade enforcement legislation is likely to pass in Congress.
Already a bill has been introduced in the House that supporters are hoping to move sooner rather than later, which includes provisions to accelerate actions against foreign trade barriers, create or strengthen enforcement-related posts within the executive and legislative branches and bolster unfair trade remedies. In the Senate, key Democratic and Republican leaders are working together on what is expected to be a similarly broad measure.
Source from: thestreet.com
2009-04-29
The 5 Best Countries to Invest
Could you list the country that offered the best stock returns over the past year? What about any members of the top five? It's harder than you might think, because they're not the countries you'd expect.
You call that a market?
Given our dismal performance this year, you might guess that the U.S. is not on the list ... and you’d be right. In fact, the S&P 500 is down almost 40% over the past year. That's abysmal ... and it’s particularly abysmal when compared with some other global markets.
Without further ado, the top five performers:
You call that a market?
Given our dismal performance this year, you might guess that the U.S. is not on the list ... and you’d be right. In fact, the S&P 500 is down almost 40% over the past year. That's abysmal ... and it’s particularly abysmal when compared with some other global markets.
Without further ado, the top five performers:
This list is incredible to me for a couple of reasons. First, it's been such a bad year that there is just one market in the entire world with positive returns. Hopefully, that makes you feel a little better about your own returns. Second, the list of countries here is unexpected. Venezuela? Tunisia?
We can learn a few things from this. First, if you're an American investor, it's absolutely crucial to be invested abroad. The returns of individual markets can offer needed diversification and the opportunity to improve your overall returns even in down years.
Second, the best returns can come from obscure places -- not from the countries we read about every day in the papers.
Finally, there is some risk involved in investing internationally. For example, because of the threat of dictatorship and nationalization, Venezuela probably isn't a place you want to be keeping your money.
Buy what others don't
But the main lesson here is old hat: To get the best returns, you need to be willing (and able) to look where other investors don't look.
See, huge numbers of investors and analysts watch large companies and popular markets. Hewlett-Packard (NYSE: HPQ) and Oracle (Nasdaq: ORCL), for example. In other words, they're probably pretty efficiently priced.
You'll get the best returns, however, by finding market inefficiencies. And while another 2,000 investors cover Target (NYSE: TGT) and Merck (NYSE: MRK) in CAPS, there aren’t as many choices when it comes to the five countries mentioned above -- and those choices generally aren’t as well-known.
That's where your opportunity lies. And if you do your homework, you don't necessarily have to assume that much risk to find promising international investments.
What’s the opportunity in Swine Flu health crisis?
What are the reactions of the investing community to the Swine Flu? These days some vaccine or medical stocks played a good performance in some market like China. And some will try to convince you to pile into vaccine names like GlaxoSmithKline (NYSE: GSK), or companies like Netflix (Nasdaq: NFLX), for which a simplistic, "stay-at-home" argument can be made. This is simply rank trend speculation.
How to really profit
If you really want to find opportunities relating to the swine flu story, I suggest you do the opposite of what most people are advocating. For instance, consider inverting one particularly brazen and short-sighted call that was reported by Bloomberg this morning: UBS downgrades Mexican stocks from "top pick" to "underweight" because of the swine flu.
Really? An entire country's strongest businesses will be permanently impaired because of this health crisis? Would you write off entire segments of the U.S. economy if the illness got worse here? Would you sell Procter & Gamble (NYSE: PG)? Ditch Home Depot (NYSE: HD)?
Sure, the Mexican economy is generally more fragile than ours, but most of the big-name firms trading on our exchanges are anything but weak. Beverage and minimart king FEMSA will likely sell fewer soft drinks and beers over the coming weeks. Will Gruma sell fewer tortillas, Industrias Bachoco fewer chicken chunks? Probably.
Will this matter for the long term?
If you are investing in strong names for the long term -- and that's how you should be investing -- these are the times when you should be more interested in buying stocks, not less. Flu epidemics are terrible, but they're also normal. So are economic cycles and (in Mexico) the occasional currency panic.
Buying good companies when the headline news is bad is the hardest thing to do (psychologically), but it's the simplest way to buy low. And buying low makes it a lot easier to sell high.
That's the takeaway from the two wealthiest investors in the world -- Warren Buffett and Carlos Slim, who made their fortunes buying companies with competitive advantages on the cheap, often during times of uncertainty. Despite recessions, oil shocks, currency convulsions, SARS, and bird flu, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), Telmex, and America Movil (NYSE: AMX) have made them very wealthy.
At times like this, these Mexican stocks may be more attractive: Grupo Aeroportuario del Sur and Grupo Aeroportuario del Pacifico. As monopoly airport operators with high fixed costs, both would see turbulence due to a temporary dip in air travel (one they're already getting thanks to the economy). So unless you think Mexico is forever on the wane, it's time to look at buying these stocks, not selling them.
How to really profit
If you really want to find opportunities relating to the swine flu story, I suggest you do the opposite of what most people are advocating. For instance, consider inverting one particularly brazen and short-sighted call that was reported by Bloomberg this morning: UBS downgrades Mexican stocks from "top pick" to "underweight" because of the swine flu.
Really? An entire country's strongest businesses will be permanently impaired because of this health crisis? Would you write off entire segments of the U.S. economy if the illness got worse here? Would you sell Procter & Gamble (NYSE: PG)? Ditch Home Depot (NYSE: HD)?
Sure, the Mexican economy is generally more fragile than ours, but most of the big-name firms trading on our exchanges are anything but weak. Beverage and minimart king FEMSA will likely sell fewer soft drinks and beers over the coming weeks. Will Gruma sell fewer tortillas, Industrias Bachoco fewer chicken chunks? Probably.
Will this matter for the long term?
If you are investing in strong names for the long term -- and that's how you should be investing -- these are the times when you should be more interested in buying stocks, not less. Flu epidemics are terrible, but they're also normal. So are economic cycles and (in Mexico) the occasional currency panic.
Buying good companies when the headline news is bad is the hardest thing to do (psychologically), but it's the simplest way to buy low. And buying low makes it a lot easier to sell high.
That's the takeaway from the two wealthiest investors in the world -- Warren Buffett and Carlos Slim, who made their fortunes buying companies with competitive advantages on the cheap, often during times of uncertainty. Despite recessions, oil shocks, currency convulsions, SARS, and bird flu, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), Telmex, and America Movil (NYSE: AMX) have made them very wealthy.
At times like this, these Mexican stocks may be more attractive: Grupo Aeroportuario del Sur and Grupo Aeroportuario del Pacifico. As monopoly airport operators with high fixed costs, both would see turbulence due to a temporary dip in air travel (one they're already getting thanks to the economy). So unless you think Mexico is forever on the wane, it's time to look at buying these stocks, not selling them.
2009-04-28
How to avoid five costs and save money in common life
Sometimes people just focus on finding ways to make money, but forget that there are some common expenses creeping into their budgets.. If you notice the following five costs, you can save not a little money.
Traffic tickets: When you're in a rush, you're likely to drive too fast or miss a "no parking" sign. Next thing you know, a police officer is writing you a $200 ticket or your car is being towed.
Besides the fines you're charged, tickets can cause your car insurance rates to rise, raising your expenses long-term. Driving fast also wastes gas and raises your accident risk.
Bank fees: Whether through overdraft penalties or automatic teller machine fees, banks charge customers in many ways. Avoiding these fees requires people to simply pay more attention.
Leave a small cushion in your bank account to prevent overdrafts. Look for banks that offer free checking and savings accounts or better yet, ones that would pay interest on your balances. And try to avoid ATM fees by anticipating your cash needs in advance so you're not forced to turn to the closest machine if you find yourself in a rush and low on money.
Late payments: It's easy to forget a bill. But your bad memory or poor organization skills will cost you through late fees and higher interest rates.
Avoid late payments by paying all your bills together on a specific day each month. You can also arrange for your bank to automatically pay your bills as soon as they arrive.
Automatically renewed memberships and subscriptions: Many people sign up for memberships and subscriptions that automatically renew each month with the best intentions. In reality, they don't end up using them and they continue to be charged.
Review all your memberships and subscriptions and ask yourself if you're using them. If you aren't, it's time to cancel them.
Untapped discounts or negotiation opportunities: While haggling isn't as common in the U.S. as it is in other countries, there are certain situations in which negotiating a price is not only acceptable, it's expected. Buying a car is a good example. Still, some people would rather pay the listed price instead of making a lower offer.
People often qualify for discounts because they're members of clubs like trade organizations or AAA. But they might be too embarrassed to ask about them at the register. If you're one of these people, find a less shy friend to help you.
Traffic tickets: When you're in a rush, you're likely to drive too fast or miss a "no parking" sign. Next thing you know, a police officer is writing you a $200 ticket or your car is being towed.
Besides the fines you're charged, tickets can cause your car insurance rates to rise, raising your expenses long-term. Driving fast also wastes gas and raises your accident risk.
Bank fees: Whether through overdraft penalties or automatic teller machine fees, banks charge customers in many ways. Avoiding these fees requires people to simply pay more attention.
Leave a small cushion in your bank account to prevent overdrafts. Look for banks that offer free checking and savings accounts or better yet, ones that would pay interest on your balances. And try to avoid ATM fees by anticipating your cash needs in advance so you're not forced to turn to the closest machine if you find yourself in a rush and low on money.
Late payments: It's easy to forget a bill. But your bad memory or poor organization skills will cost you through late fees and higher interest rates.
Avoid late payments by paying all your bills together on a specific day each month. You can also arrange for your bank to automatically pay your bills as soon as they arrive.
Automatically renewed memberships and subscriptions: Many people sign up for memberships and subscriptions that automatically renew each month with the best intentions. In reality, they don't end up using them and they continue to be charged.
Review all your memberships and subscriptions and ask yourself if you're using them. If you aren't, it's time to cancel them.
Untapped discounts or negotiation opportunities: While haggling isn't as common in the U.S. as it is in other countries, there are certain situations in which negotiating a price is not only acceptable, it's expected. Buying a car is a good example. Still, some people would rather pay the listed price instead of making a lower offer.
People often qualify for discounts because they're members of clubs like trade organizations or AAA. But they might be too embarrassed to ask about them at the register. If you're one of these people, find a less shy friend to help you.
2009-04-27
Are you dare to buy stocks under $5?
Are you dare to buy stocks under $5? There remains a slew of higher profile companies that trade under $5 a share although the market seems to have rebounded from its lows. This can be a major concern for these companies because many analysts and institutions are often hesitant to get involved by recommending or buying the shares of companies that trade below the $5 mark.
Sometimes there is opportunity to be had with an under $5 stock. When a company's share price moves above $5 it often catches the attention of analysts and institutions and the shares can move higher. The other big benefit of a low-priced stock is that a retail investor can generally purchase more shares, and if the stock price goes up, it can turn into a significant gain.
With all that in mind I recently ran a screen for sub $5 stocks that also trade under book value and under 10 times the current year estimate. The resulting list could be a good starting point for further research.
Apollo Investment Corporation
The New York based closed end investment company has seen its shares decline more than 70% over the last 52 weeks. Of course, it's not the only company that's taking such a beating, but at under $5 a share I think the stock looks pretty compelling.
Trading at Low Book Value
First and foremost, let's look at valuation. Data indicates that the company trades at .47 times book value. Though trading at a low multiple of book value is no guarantee of success, I like to think that this could mean that the downside may be somewhat limited. Also, the data indicates it trades at a little bit over three times the current year estimate. In fact, data shows that the company is expected to earn $1.47 a share in the current year (ending March 2009) and $1.40 per share in the year ending March 2010. That is also a head turner given that the shares trade south of $5. (For more, see Investment Valuation Ratios.)
Promising Outlook
I think that if the company hits expectations when it releases its Q4 numbers, investors may take notice and send the shares higher. If that happens, I think we will also start to see the sell side warm to the story.
It's also important to note that data indicates that three different insiders bought a total of 40,000 shares (combined) since the latter part of last year. I don't think that the execs would have made these types of purchases unless they thought the shares had some decent upside.
I am hoping that upbeat earnings from other big name financial names could buoy the stock. Note that Goldman Sachs (NYSE:GS) was out with better-than-expected first-quarter earnings after the close on April 13. Hopefully, this could boost interest in financial type companies across the board.
Bottom Line
Just because a stock is trading south of $5 doesn't mean it'll be stuck there forever. One stock under $5 that I think deserves a look is AINV. When examining its valuation and outlook, I think this company is worthy of investor attention.
Sometimes there is opportunity to be had with an under $5 stock. When a company's share price moves above $5 it often catches the attention of analysts and institutions and the shares can move higher. The other big benefit of a low-priced stock is that a retail investor can generally purchase more shares, and if the stock price goes up, it can turn into a significant gain.
With all that in mind I recently ran a screen for sub $5 stocks that also trade under book value and under 10 times the current year estimate. The resulting list could be a good starting point for further research.
Apollo Investment CorporationThe New York based closed end investment company has seen its shares decline more than 70% over the last 52 weeks. Of course, it's not the only company that's taking such a beating, but at under $5 a share I think the stock looks pretty compelling.
Trading at Low Book Value
First and foremost, let's look at valuation. Data indicates that the company trades at .47 times book value. Though trading at a low multiple of book value is no guarantee of success, I like to think that this could mean that the downside may be somewhat limited. Also, the data indicates it trades at a little bit over three times the current year estimate. In fact, data shows that the company is expected to earn $1.47 a share in the current year (ending March 2009) and $1.40 per share in the year ending March 2010. That is also a head turner given that the shares trade south of $5. (For more, see Investment Valuation Ratios.)
Promising Outlook
I think that if the company hits expectations when it releases its Q4 numbers, investors may take notice and send the shares higher. If that happens, I think we will also start to see the sell side warm to the story.
It's also important to note that data indicates that three different insiders bought a total of 40,000 shares (combined) since the latter part of last year. I don't think that the execs would have made these types of purchases unless they thought the shares had some decent upside.
I am hoping that upbeat earnings from other big name financial names could buoy the stock. Note that Goldman Sachs (NYSE:GS) was out with better-than-expected first-quarter earnings after the close on April 13. Hopefully, this could boost interest in financial type companies across the board.
Bottom Line
Just because a stock is trading south of $5 doesn't mean it'll be stuck there forever. One stock under $5 that I think deserves a look is AINV. When examining its valuation and outlook, I think this company is worthy of investor attention.
Outstanding Investment TIPS for 2009
What’s TIPS? Treasury Inflation-Protected Securities.
In January, Bill Gross recommended the purchase of Treasury Inflation-Protected Securities, or TIPS, in a note to clients. As the co-chief investment officer of bond giant PIMCO, Bill Gross oversees the management of more than $800 billion in fixed-income securities. Bill knows bonds.
Wait! Now, before you move on because I'm talking about bonds, I assure you there is a lesson here for all investors who wish to protect their assets -- even those who consider themselves purely stock investors.
In a recent interview, David Swensen, who manages Yale's $23 billion endowment, mentioned TIPS as an investment he likes. His take? "They promise reasonable returns, and protection against inflation is really important." (Swensen has achieved a 16% annualized return for Yale over the 10-year period ended last June -- a remarkable achievement.)
TIPS do exactly what they say on the box. They are U.S. Treasury bonds designed specifically to protect investors against inflation. To do that, both the interest and the principal payments are indexed against the Consumer Price Index. So the yield quoted on a TIPS is a "real" return -- that is, an incremental return over the rate of inflation.
When comparing a TIPS and an ordinary Treasury bond (T-bond) of the same maturity, it's possible to assess which one is the more attractive investment by comparing the difference in their yields and deriving the "breakeven inflation rate" -- the rate for which the total return on the TIPS will be equal to that of the T-bond. If the breakeven inflation rate is lower than the actual inflation rate during the period to the bond's maturity, the TIPS will provide a higher overall return than the ordinary T-Bond.
Will the next 10 years be deflationary?
At the moment, the yield on the 10-year TIPS is 1.32% versus 2.78% for a T-bond, implying a break-even inflation rate of just 1.46% annually over the next 10 years. Is that scenario possible? Absolutely. In fact, rolling-10-year average inflation rates were lower than this in every month from July 1928 through March 1942.
Still, I think it's pretty unlikely (it has only reoccurred in 41 months since World War II, in the years 1961 to 1964). While we could witness deflation this year and the next, it's difficult to imagine that prices 10 years from now will be a mere 15% higher than they are today. If that is the case, the new administration will have been unsuccessful in its efforts to reinflate the economy with its "bridge-to-the-moon" fiscal stimulus package.
Of course, part of the discrepancy is because of the tremendous overvaluation in Treasury bonds that I highlighted in "A Slam-Dunk Trade for 2009." The surest way to take advantage of the mispricing would be to go long TIPS and sell short same-maturity Treasury bonds -- although I wouldn't necessarily recommend such a strategy for retail investors.
The equity version of TIPS
If you're entirely committed to stocks, there is a segment of the stock market that could be thought of as the equity version of TIPS: high-quality dividend stocks. A well-run dividend payer should be able to increase its dividend at a rate that matches or exceeds inflation, and as the following table demonstrates, there are superb companies currently paying yields that exceed those on Treasury bonds:
(By the way, if you think that the comparison between stocks and Treasury bonds is absurd, you should know that Warren Buffett has been known to analyze stocks by treating them as "disguised bonds.")
All dividend stocks aren't created equal
Of course, there is a fundamental difference between investing in TIPS and stocks -- with the latter, neither your principal nor your dividend is guaranteed. It is therefore essential to focus on the highest-quality names and buy only when you can do so with a margin of safety.
In January, Bill Gross recommended the purchase of Treasury Inflation-Protected Securities, or TIPS, in a note to clients. As the co-chief investment officer of bond giant PIMCO, Bill Gross oversees the management of more than $800 billion in fixed-income securities. Bill knows bonds.
Wait! Now, before you move on because I'm talking about bonds, I assure you there is a lesson here for all investors who wish to protect their assets -- even those who consider themselves purely stock investors.
In a recent interview, David Swensen, who manages Yale's $23 billion endowment, mentioned TIPS as an investment he likes. His take? "They promise reasonable returns, and protection against inflation is really important." (Swensen has achieved a 16% annualized return for Yale over the 10-year period ended last June -- a remarkable achievement.)
TIPS do exactly what they say on the box. They are U.S. Treasury bonds designed specifically to protect investors against inflation. To do that, both the interest and the principal payments are indexed against the Consumer Price Index. So the yield quoted on a TIPS is a "real" return -- that is, an incremental return over the rate of inflation.
When comparing a TIPS and an ordinary Treasury bond (T-bond) of the same maturity, it's possible to assess which one is the more attractive investment by comparing the difference in their yields and deriving the "breakeven inflation rate" -- the rate for which the total return on the TIPS will be equal to that of the T-bond. If the breakeven inflation rate is lower than the actual inflation rate during the period to the bond's maturity, the TIPS will provide a higher overall return than the ordinary T-Bond.
Will the next 10 years be deflationary?
At the moment, the yield on the 10-year TIPS is 1.32% versus 2.78% for a T-bond, implying a break-even inflation rate of just 1.46% annually over the next 10 years. Is that scenario possible? Absolutely. In fact, rolling-10-year average inflation rates were lower than this in every month from July 1928 through March 1942.
Still, I think it's pretty unlikely (it has only reoccurred in 41 months since World War II, in the years 1961 to 1964). While we could witness deflation this year and the next, it's difficult to imagine that prices 10 years from now will be a mere 15% higher than they are today. If that is the case, the new administration will have been unsuccessful in its efforts to reinflate the economy with its "bridge-to-the-moon" fiscal stimulus package.
Of course, part of the discrepancy is because of the tremendous overvaluation in Treasury bonds that I highlighted in "A Slam-Dunk Trade for 2009." The surest way to take advantage of the mispricing would be to go long TIPS and sell short same-maturity Treasury bonds -- although I wouldn't necessarily recommend such a strategy for retail investors.
The equity version of TIPS
If you're entirely committed to stocks, there is a segment of the stock market that could be thought of as the equity version of TIPS: high-quality dividend stocks. A well-run dividend payer should be able to increase its dividend at a rate that matches or exceeds inflation, and as the following table demonstrates, there are superb companies currently paying yields that exceed those on Treasury bonds:
(By the way, if you think that the comparison between stocks and Treasury bonds is absurd, you should know that Warren Buffett has been known to analyze stocks by treating them as "disguised bonds.")All dividend stocks aren't created equal
Of course, there is a fundamental difference between investing in TIPS and stocks -- with the latter, neither your principal nor your dividend is guaranteed. It is therefore essential to focus on the highest-quality names and buy only when you can do so with a margin of safety.
2009-04-26
Don't rely on Familiar Stocks
The old saying goes, familiarity breeds contempt .But in investing, it often breeds something else: a false sense of security that can devastate your returns.
Familiarity bias in action
Familiarity bias is most commonly seen when employees put all of their 401(k) contributions into shares of their employer. After all, what business could investors know better than the one for which they work? Perhaps none, but our comfort level with an employer can blind us to the risks of our having investment dollars and regular income all dependent on that single company's success.
For a spectacular example, look no further than Enron. Many of its employees parked a majority of their retirement savings in its stock before the company collapsed. But this sort of thing happens all the time on a smaller scale. Here are a few names whose familiarity makes shares appear tempting -- despite their dangers.
Big brand names get us every time
I suspect that many investors who purchased Bank of America (NYSE: BAC) or Morgan Stanley (NYSE: MS) when they first looked cheap, and National City before it was swallowed by PNC Financial Services Group (NYSE: PNC), did so because of their familiarity with the company's brands and historical results.
Because we see their brands advertised all the time, and because their offices dot the landscape, these companies become easily recognizable and familiar in our minds. So it's easy to forget that these are also very complex firms with multiple business units and hundreds of competitors. Meanwhile, small, less recognizable community banks such as Suffolk Bancorp and Danvers Bancorp (Nasdaq: DNBK) often don't get a second glance, despite their sturdy capitalization and growing loan books.
The danger of familiar industries
As the economy contracts, we're drawn to falling prices as a sign of value and potentially large future returns. As an investor who's constantly screening for bargains, I readily admit that I fall into this camp. Since most of us are familiar with retail brands, single-digit P/Es on Guess? (NYSE: GES) and Limited Brands (NYSE: LTD) look mighty attractive on the surface. But that's true only if the margins and earnings from the past 12 months even vaguely represent what the businesses will experience in the next three years.
In his annual letter to shareholders, legendary value investor Seth Klarman noted that because of rising unemployment, consumer spending might be experiencing "semi-permanent" changes, rather than a cyclical decline. Data from Bloomberg, showing that the savings rate is rising as consumers cut back on mortgage and credit card debt for the first time since 1952 (at least), supports Klarman's claim about shifting consumer habits.
That doesn't mean all retail should be avoided, but it does mean thinking carefully about a retailer's offerings, and what gives it an advantage over the competition.
The cost of ignoring unfamiliar places
Many U.S. investors pass over international markets, because they don't want to add the uncertainty of foreign politics and currencies to their portfolios. That's understandable on the surface, but it becomes a bit absurd when you consider that studies show that European and Japanese investors have the same bias toward investing in foreign securities.
In normal times, this bias might mean missing an opportunity in Brazil-based energy giant Petrobras (NYSE: PBR) when its shares are attractive. But at a time when uncertainty surrounds the dollar and the U.S. economy alike, ignoring international markets makes even less sense. PIMCO's master investor Mohamed El-Erian seems to think so, too. In a recent Kiplinger interview, El-Erian noted that international markets are one of the few areas likely to deliver sustainable growth over the next few years, while the U.S. recovers from its debt hangover.
How you can battle familiarity
In his book Your Money and Your Brain, Jason Zweig highlights at least two ways we can help combat familiarity bias. First, diversify -- both within your portfolio and between the portfolio and the income you earn from working. Second, write down your reasons for purchasing an investment immediately after making the purchase. This creates a record of your thought process, forces you to confront your reason for owning a stock, and can help you avoid falling into the trap of familiarity.
Familiarity bias in action
Familiarity bias is most commonly seen when employees put all of their 401(k) contributions into shares of their employer. After all, what business could investors know better than the one for which they work? Perhaps none, but our comfort level with an employer can blind us to the risks of our having investment dollars and regular income all dependent on that single company's success.
For a spectacular example, look no further than Enron. Many of its employees parked a majority of their retirement savings in its stock before the company collapsed. But this sort of thing happens all the time on a smaller scale. Here are a few names whose familiarity makes shares appear tempting -- despite their dangers.
Big brand names get us every time
I suspect that many investors who purchased Bank of America (NYSE: BAC) or Morgan Stanley (NYSE: MS) when they first looked cheap, and National City before it was swallowed by PNC Financial Services Group (NYSE: PNC), did so because of their familiarity with the company's brands and historical results.
Because we see their brands advertised all the time, and because their offices dot the landscape, these companies become easily recognizable and familiar in our minds. So it's easy to forget that these are also very complex firms with multiple business units and hundreds of competitors. Meanwhile, small, less recognizable community banks such as Suffolk Bancorp and Danvers Bancorp (Nasdaq: DNBK) often don't get a second glance, despite their sturdy capitalization and growing loan books.
The danger of familiar industries
As the economy contracts, we're drawn to falling prices as a sign of value and potentially large future returns. As an investor who's constantly screening for bargains, I readily admit that I fall into this camp. Since most of us are familiar with retail brands, single-digit P/Es on Guess? (NYSE: GES) and Limited Brands (NYSE: LTD) look mighty attractive on the surface. But that's true only if the margins and earnings from the past 12 months even vaguely represent what the businesses will experience in the next three years.
In his annual letter to shareholders, legendary value investor Seth Klarman noted that because of rising unemployment, consumer spending might be experiencing "semi-permanent" changes, rather than a cyclical decline. Data from Bloomberg, showing that the savings rate is rising as consumers cut back on mortgage and credit card debt for the first time since 1952 (at least), supports Klarman's claim about shifting consumer habits.
That doesn't mean all retail should be avoided, but it does mean thinking carefully about a retailer's offerings, and what gives it an advantage over the competition.
The cost of ignoring unfamiliar places
Many U.S. investors pass over international markets, because they don't want to add the uncertainty of foreign politics and currencies to their portfolios. That's understandable on the surface, but it becomes a bit absurd when you consider that studies show that European and Japanese investors have the same bias toward investing in foreign securities.
In normal times, this bias might mean missing an opportunity in Brazil-based energy giant Petrobras (NYSE: PBR) when its shares are attractive. But at a time when uncertainty surrounds the dollar and the U.S. economy alike, ignoring international markets makes even less sense. PIMCO's master investor Mohamed El-Erian seems to think so, too. In a recent Kiplinger interview, El-Erian noted that international markets are one of the few areas likely to deliver sustainable growth over the next few years, while the U.S. recovers from its debt hangover.
How you can battle familiarity
In his book Your Money and Your Brain, Jason Zweig highlights at least two ways we can help combat familiarity bias. First, diversify -- both within your portfolio and between the portfolio and the income you earn from working. Second, write down your reasons for purchasing an investment immediately after making the purchase. This creates a record of your thought process, forces you to confront your reason for owning a stock, and can help you avoid falling into the trap of familiarity.
Investment story sharing: How I Lost $100,000 Without Even Trying!
Today I found an article about a unsuccessful investment story, which may give us some tips. The following:
At the time, I thought I had overpaid ... but "the time" was 2001 -- much nearer the start of the housing boom (that's recently turned bust) than its end. Fast forward a few years, and I sat down to my trusty computer, pulled up Zillow.com for a "Zestimate," and was informed that my little brick box was worth more than $500,000. Amazing news? Sure. Gratifying? You bet. Zillow was telling me that my house had more than doubled in value in just five short years.
Sadly, Zillow was on crack.
Welcome to the other side of the looking glass
About a year after receiving the good news from Zillow, I sold the house for far less than the site had told me it was worth. A 25% drop -- $100,000 -- from the top, in fact. Or, if you're a glass-half-full kind of a Fool, a 60% profit beyond what I paid for it.
The real truth, though, is that the house was worth neither what I paid for it, nor what I could have sold it for in 2006 -- nor even what I ultimately pocketed from the whole transaction. The real worth of the house was something unknowable, something that could only be guessed at: its intrinsic value.
"Price is what you pay. Value is what you get."
Leave it to Warren Buffett to sum up the dilemma in a single pithy dichotomy. The world's greatest investor reminds us that the value of an asset -- whether a car, a house, or a stock -- does not necessarily have any relation to the price we pay to own it. Far be it from me to criticize the Oracle's wisdom, but Buffett's observation still leaves us with one crucial question: How exactly do we know the value of the asset?
Benjamin Graham's classic non-answer stated that an asset is worth at least its book value, so you're safe if you pay less than that. There's also a logically impeccable but not very helpful adage that "an asset is worth whatever someone will pay for it." And Professor Aswath Damodaran offers this math-intensive solution: "The value of equity is obtained by discounting expected [residual] cash flows."
A more honest answer, though, is that we simply never know how much anything is worth. Not exactly, at least.
Hunting stocks with an axe
Yet in real life, we don't allow the lack of an exact answer to stop us from buying. Humans need shelter, so we buy a house when the price seems fair. We need cars, so we work from sticker prices and the Kelly Blue Book to pick an acceptable price for those, too.
The same goes for stocks. We shouldn't "measure with a micrometer, mark it off with chalk, then cut it with an axe." We make our best guess at a fair price. We try to buy for significantly less than our estimation. If we guess right more often than wrong, we make money. But where do we start?
Start with common sense
Look in places where you're more likely than not to find bargains:
Low prices: Stocks hitting the new 52-week-lows list may be "down for a reason." Still, a stock selling cheaper today than it's sold any time for the past year is more likely a good bargain than a stock selling for more than it's ever fetched before. Last month, I noted five stocks that had fallen to their 52-week lows. While the S&P trades 12% higher today, all five of those stocks have risen anywhere from 22% (Marvel Entertainment (NYSE: MVL)) to 184% (Republic Airways).
Read the paper: Newspaper headlines offer another superb place to seek bargains. Remember how oil was selling for $150 a barrel last July? Remember how a few months later, it sold for less than $40? How much do you want to bet that the intrinsic values of oil majors such as ExxonMobil (NYSE: XOM) or Chevron (NYSE: CVX) tracked those movements exactly? (Hint: They didn't.) Somewhere between $40 and $150, there was value to be had in the oil majors.
Cheap valuations: Another great way to scan for bargains is to run a stock screener every once in a while. I like to look for stocks that trade for low price-to-free cash flow multiples, exhibit strong growth, and have low debt. In recent weeks, this method has yielded me such unexpected bargains as NetEase.com (Nasdaq: NTES), priceline.com (Nasdaq: PCLN), and eBay (Nasdaq: EBAY).
Conclution
The key point I want you to take away from all this is simple: Trust your instincts.
When Zillow tells you your house has doubled in value, treat that "Zestimate" with some skepticism. When Suntech Power (NYSE: STP) doubles in price on announcements of industry subsidies from China, be wary. On the other hand, when stocks that have little to do with the financial crisis drop 50% in the space of a year, when stock prices don't match the news they're supposed to reflect, or when you stumble across a stock with a price that looks cheap, you might just have found a bargain.
Source from: fool.com
At the time, I thought I had overpaid ... but "the time" was 2001 -- much nearer the start of the housing boom (that's recently turned bust) than its end. Fast forward a few years, and I sat down to my trusty computer, pulled up Zillow.com for a "Zestimate," and was informed that my little brick box was worth more than $500,000. Amazing news? Sure. Gratifying? You bet. Zillow was telling me that my house had more than doubled in value in just five short years.
Sadly, Zillow was on crack.
Welcome to the other side of the looking glass
About a year after receiving the good news from Zillow, I sold the house for far less than the site had told me it was worth. A 25% drop -- $100,000 -- from the top, in fact. Or, if you're a glass-half-full kind of a Fool, a 60% profit beyond what I paid for it.
The real truth, though, is that the house was worth neither what I paid for it, nor what I could have sold it for in 2006 -- nor even what I ultimately pocketed from the whole transaction. The real worth of the house was something unknowable, something that could only be guessed at: its intrinsic value.
"Price is what you pay. Value is what you get."
Leave it to Warren Buffett to sum up the dilemma in a single pithy dichotomy. The world's greatest investor reminds us that the value of an asset -- whether a car, a house, or a stock -- does not necessarily have any relation to the price we pay to own it. Far be it from me to criticize the Oracle's wisdom, but Buffett's observation still leaves us with one crucial question: How exactly do we know the value of the asset?
Benjamin Graham's classic non-answer stated that an asset is worth at least its book value, so you're safe if you pay less than that. There's also a logically impeccable but not very helpful adage that "an asset is worth whatever someone will pay for it." And Professor Aswath Damodaran offers this math-intensive solution: "The value of equity is obtained by discounting expected [residual] cash flows."
A more honest answer, though, is that we simply never know how much anything is worth. Not exactly, at least.
Hunting stocks with an axe
Yet in real life, we don't allow the lack of an exact answer to stop us from buying. Humans need shelter, so we buy a house when the price seems fair. We need cars, so we work from sticker prices and the Kelly Blue Book to pick an acceptable price for those, too.
The same goes for stocks. We shouldn't "measure with a micrometer, mark it off with chalk, then cut it with an axe." We make our best guess at a fair price. We try to buy for significantly less than our estimation. If we guess right more often than wrong, we make money. But where do we start?
Start with common sense
Look in places where you're more likely than not to find bargains:
Low prices: Stocks hitting the new 52-week-lows list may be "down for a reason." Still, a stock selling cheaper today than it's sold any time for the past year is more likely a good bargain than a stock selling for more than it's ever fetched before. Last month, I noted five stocks that had fallen to their 52-week lows. While the S&P trades 12% higher today, all five of those stocks have risen anywhere from 22% (Marvel Entertainment (NYSE: MVL)) to 184% (Republic Airways).
Read the paper: Newspaper headlines offer another superb place to seek bargains. Remember how oil was selling for $150 a barrel last July? Remember how a few months later, it sold for less than $40? How much do you want to bet that the intrinsic values of oil majors such as ExxonMobil (NYSE: XOM) or Chevron (NYSE: CVX) tracked those movements exactly? (Hint: They didn't.) Somewhere between $40 and $150, there was value to be had in the oil majors.
Cheap valuations: Another great way to scan for bargains is to run a stock screener every once in a while. I like to look for stocks that trade for low price-to-free cash flow multiples, exhibit strong growth, and have low debt. In recent weeks, this method has yielded me such unexpected bargains as NetEase.com (Nasdaq: NTES), priceline.com (Nasdaq: PCLN), and eBay (Nasdaq: EBAY).
Conclution
The key point I want you to take away from all this is simple: Trust your instincts.
When Zillow tells you your house has doubled in value, treat that "Zestimate" with some skepticism. When Suntech Power (NYSE: STP) doubles in price on announcements of industry subsidies from China, be wary. On the other hand, when stocks that have little to do with the financial crisis drop 50% in the space of a year, when stock prices don't match the news they're supposed to reflect, or when you stumble across a stock with a price that looks cheap, you might just have found a bargain.
Source from: fool.com
2009-04-25
Add high-quality Dividend Stocks to your portfolio
Dividend Stocks may sound like a boring option to investors. But in times of economic turmoil they may prove useful after all. According to Gabriel Yap, senior dealing director of brokerage firm DMG & Partners Securities, dividend stocks tend to pay higher dividends relative to the market. “If you're talking about Asia for example, the dividend yield is usually about three, three-and-a-half per cent. So any stocks that basically pay higher than that benchmark will tend to be considered as higher dividend yield stocks," says Mr Yap.
Build the next investing dynasty
These long-haul outperformers can help you build your fortune, as studies from investing gurus such as Jeremy Siegel have shown time and time again. At the same time, they can provide a solid defense against crazy market conditions.
Enterprise Products Partners (NYSE: EPD), for example, has beaten the S&P 500 by 37 points since March 2006, and it is currently rewarding investors with a 7.8% yield. Or consider VF Corp (NYSE: VFC), which has topped the S&P by 41 points since June 2006, atop a current 3.4% yield. While these stocks happen to be Income Investor recommendations, you don't need to be a subscriber to get these great gains.
Search for the best dividend-paying stocks around
Here are several dividend picks :
Build the next investing dynasty
These long-haul outperformers can help you build your fortune, as studies from investing gurus such as Jeremy Siegel have shown time and time again. At the same time, they can provide a solid defense against crazy market conditions.
Enterprise Products Partners (NYSE: EPD), for example, has beaten the S&P 500 by 37 points since March 2006, and it is currently rewarding investors with a 7.8% yield. Or consider VF Corp (NYSE: VFC), which has topped the S&P by 41 points since June 2006, atop a current 3.4% yield. While these stocks happen to be Income Investor recommendations, you don't need to be a subscriber to get these great gains.
Search for the best dividend-paying stocks around
Here are several dividend picks :
If you like what you see, but want more, you can run this screen for yourself. While these are not formal recommendations, they're a great place to kick off further research and potentially add some dividend excellence to your portfolio. In fact, I'll even kick you off with some thoughts on Illinois Tool Works.
Does my dividend have a glass jaw?
The last thing we want in a dividend paying company is the risk that the company will fall off a cliff and have to pull back its dividend. This usually ends up being a double whammy because not only do you lose your dividend payout, but many of the dividend-loving investors that own the stock will run for the hills, causing the stock price to fall.
With that in mind, there are three places that I immediately tune into when kicking the tires of a dividend payer -- dividend history, balance sheet strength, and cash flow.
The dividend history for Illinois Tool Works definitely starts us off on the right foot. Not only has the company been consistently been paying dividends for a couple of decades, it has been consistently raising its dividend for a couple of decades. Over the ten years ending in 2008, ITW jacked up its annual payout from $0.27 per share to $1.18 per share, for average annual growth of about 16%.
The company's balance sheet, which has a debt-to-equity ratio just over 50% and above $1 billion in cash and equivalents, is pretty middle of the road, but certainly not concerning. Its cash flow, on the other hand, looks great, with free cash flow production well above the dividend commitment.
What the bulls say
Thanks to a $90 million non-cash write-down to goodwill and related intangibles, Illinois Tool Works' first quarter didn't look too hot. It also has avoided providing guidance past the next quarter given the uncertainties of the current economy. But the company's second quarter is expected to be better than the first, and even with the loss showing on the income statement, ITW still managed to produce over $350 million of free cash flow during the quarter.
It's little wonder that ITW's stock has had a good reception on CAPS, even if it isn't quite at five-star status. CAPS member Quicksilver121 outlined last month why the company is able to prosper despite its large number of different business units:
[Illinois Tool Works] is a large company that allows their business units to manage their future. ITW supports the units with guidance (80/20 philosophy) and capital not bureaucracy. This allows their units to stay focused on what they need to do to grow their business. This along with strategic acquisitions will allow ITW to outperform in the future.
Get into the action
You can check out who else has been bullish on these stocks, as well as chime in with your own thoughts. You may also want to check out a few of the other top rated dividend payers above while you're there.
Dividend stocks could help you transform your portfolio from the Bad News Bears to the Dream Team. And really, could you argue with having Michael Jordan, Magic Johnson, and Sir Charles Barkley help your portfolio chalk up wins?
Investing in Green Mutual Funds to make rich
Recent years, Climate change has become a popular investment theme, giving rise to green stocks and mutual funds that focus on issues such as global warming and alternative energy. According to a survey conducted by Allianz Global Investors earlier this year, Americans believe that changing government policies and other factors will welcome a "golden age" for environmentally friendly investing. Additionally, 78% of investors surveyed think that green technologies have the potential to be the "next great American industry."
Among the larger mutual funds out there are the Winslow Green Growth(WGGFX Quote), Guinness Atkinson Alternative Energy (GAAEX Quote) and the DWS Climate Change(WRMSX Quote) portfolios.
As the chart shows, these funds have lost about half of their value in the past year, more than doubling the 22% decline of the S&P 500 index. These funds serve as proxies for alternative energy and are prone to wide swings. They've gained at least 26% since March 9, keeping pace with the broader market's rally. The Winslow Green fund led the pack, rising 34%.
The poor relative performance of the past year is no reason to give up on the strategy. Most of the stocks in the green space are those of industrial or technology companies. While those sectors lose more value than most industries during slowdowns, they can lead economic expansions. In some ways, it's reassuring that the shares have acted predictably in the past year.
Winslow Green has the most interesting portfolio. It covers the bases of solar and green technology, but its largest holding is WaterFurnace Renewable Energy(WFFIF Quote), a geothermal stock. WaterFurnace shares have lost 5.6% in the past year, outperforming the S&P 500.
DWS Climate Change's portfolio is a bit of a disappointment. At year-end, its top holdings included General Electric(GE Quote), United Technologies(UTX Quote) and Siemens(SI Quote). All three are active in the space, but their alternative energy divisions are too small to move the needle for any of them.
Among the larger mutual funds out there are the Winslow Green Growth(WGGFX Quote), Guinness Atkinson Alternative Energy (GAAEX Quote) and the DWS Climate Change(WRMSX Quote) portfolios.
As the chart shows, these funds have lost about half of their value in the past year, more than doubling the 22% decline of the S&P 500 index. These funds serve as proxies for alternative energy and are prone to wide swings. They've gained at least 26% since March 9, keeping pace with the broader market's rally. The Winslow Green fund led the pack, rising 34%.
The poor relative performance of the past year is no reason to give up on the strategy. Most of the stocks in the green space are those of industrial or technology companies. While those sectors lose more value than most industries during slowdowns, they can lead economic expansions. In some ways, it's reassuring that the shares have acted predictably in the past year.
Winslow Green has the most interesting portfolio. It covers the bases of solar and green technology, but its largest holding is WaterFurnace Renewable Energy(WFFIF Quote), a geothermal stock. WaterFurnace shares have lost 5.6% in the past year, outperforming the S&P 500.
DWS Climate Change's portfolio is a bit of a disappointment. At year-end, its top holdings included General Electric(GE Quote), United Technologies(UTX Quote) and Siemens(SI Quote). All three are active in the space, but their alternative energy divisions are too small to move the needle for any of them.
Find excellent Opportunities That Others Don't See
When asked about his contrarian business style, Las Vegas Sands (NYSE: LVS) CEO Sheldon Adelson, who was once one of the world's 10 richest people, smiled and said, "Everyone has always told me I'm nuts when making investment decisions, but when you can look at something differently than other people, you can find opportunity."
No matter how well a company manages its business, it's bound to encounter bumps in the road. Some of the world's greatest investors, including Warren Buffett, Peter Lynch, Eddie Lampert, and Mohnish Pabrai, have made incredible sums of money by investing in good companies that come across short-term problems. Investors who have the courage to swim against the current when good companies encounter scandals, lawsuits, and other gut-wrenching events can make out quite well once the storm passes and the company returns to business as usual.
Making investment decisions seems pretty easy when everyone agrees with you. Getting a vote of confidence from high-profile analysts, top fund managers, and overconfident CNBC guests can give you a feeling of investment invincibility. But this comes at a price.
The problem with making those easy decisions is, so is everyone else. It's unlikely you'll find much opportunity when stocks have a rosy consensus; the premium prices you'll pay can already reflect any positive developments and leave investors wondering what happened to their road to riches.
Digging for gold where others see fear
Thankfully, just as quickly as investors pile into popular stocks, they can run for the exits en masse when news tarnishing the profile of their once-beloved company develops, giving Foolish investors opportunity where others only see fear. Achieving stellar investment results doesn't come from following the herd: It requires investors to stick their necks out once in a while and accept that the crowd isn't always right.
Now, don't get me wrong, a lot of news truly is bad ... and should scare you. Enron and WorldCom are good examples of once-popular stocks that bit the dust because of jaw-dropping corporate greed and management fraud.
Thus, just because a stock falls on negative news doesn't automatically make it an attractive investment candidate. It's important to realize when a company is undergoing an event that will fundamentally change its business model or cause it to shut down altogether. For instance, whether AIG (NYSE: AIG) survives or fails, it's unlikely to go back to making the highly leveraged bets that caused its problems in the first place.
The types of events that can hurt stocks and lead to profitable opportunities are those frightening -- even profit-losing -- developments that will have a short-term impact but won't affect a company's long-term prospects.
No matter how well a company manages its business, it's bound to encounter bumps in the road. Some of the world's greatest investors, including Warren Buffett, Peter Lynch, Eddie Lampert, and Mohnish Pabrai, have made incredible sums of money by investing in good companies that come across short-term problems. Investors who have the courage to swim against the current when good companies encounter scandals, lawsuits, and other gut-wrenching events can make out quite well once the storm passes and the company returns to business as usual.
Making investment decisions seems pretty easy when everyone agrees with you. Getting a vote of confidence from high-profile analysts, top fund managers, and overconfident CNBC guests can give you a feeling of investment invincibility. But this comes at a price.
The problem with making those easy decisions is, so is everyone else. It's unlikely you'll find much opportunity when stocks have a rosy consensus; the premium prices you'll pay can already reflect any positive developments and leave investors wondering what happened to their road to riches.
Digging for gold where others see fear
Thankfully, just as quickly as investors pile into popular stocks, they can run for the exits en masse when news tarnishing the profile of their once-beloved company develops, giving Foolish investors opportunity where others only see fear. Achieving stellar investment results doesn't come from following the herd: It requires investors to stick their necks out once in a while and accept that the crowd isn't always right.
Now, don't get me wrong, a lot of news truly is bad ... and should scare you. Enron and WorldCom are good examples of once-popular stocks that bit the dust because of jaw-dropping corporate greed and management fraud.
Thus, just because a stock falls on negative news doesn't automatically make it an attractive investment candidate. It's important to realize when a company is undergoing an event that will fundamentally change its business model or cause it to shut down altogether. For instance, whether AIG (NYSE: AIG) survives or fails, it's unlikely to go back to making the highly leveraged bets that caused its problems in the first place.
The types of events that can hurt stocks and lead to profitable opportunities are those frightening -- even profit-losing -- developments that will have a short-term impact but won't affect a company's long-term prospects.
This, too, shall pass
As we've seen, there is a serious nearsightedness problem in the market when it comes to making investment decisions: Even if the consensus is that a company is facing a problem that will only last a short period of time, many often sell anyway, in hopes of buying it back once the future becomes more certain. Investors who are patient and ignore the short-term pessimistic views Mr. Market serves up can be rewarded handsomely in the face of others' fear.
Warren Buffett has achieved incredible investing success buying good companies at bargain prices when they encountered short-term negative events. When describing his 1974 investment in Washington Post, Buffett was quoted as saying, "In the case of the Washington Post, the whole of the company was selling for $80 million. Most analysts would have agreed that the intrinsic value of the assets was around $400 to $500 million. But you could buy little pieces of the business for much less." Buffett was able to profit from the fact that the rest of the market wanted to wait until short-term events had panned out before buying back into the company. When it did, the stock price returned to more reasonable valuations, producing great returns on Buffett's original $10 million investment.
The market is here to serve you, not to guide you
Looking at the big picture while having a reasonable indication of what you think a company is worth is the first step in developing a successful investing mind-set. Don't get too caught up in the noise surrounding a company regarding events that will likely pass in due time.
When good companies encounter painful events, ask yourself some basic questions: Will this hurt the company this year? Probably. Will it affect it next year? Probably not. Is the stock price reflecting next year's potential? Or the next five years? If the answer is no, you might have an opportunity to bypass short-term pessimism and invest in good companies at bargain prices.
As we've seen, there is a serious nearsightedness problem in the market when it comes to making investment decisions: Even if the consensus is that a company is facing a problem that will only last a short period of time, many often sell anyway, in hopes of buying it back once the future becomes more certain. Investors who are patient and ignore the short-term pessimistic views Mr. Market serves up can be rewarded handsomely in the face of others' fear.
Warren Buffett has achieved incredible investing success buying good companies at bargain prices when they encountered short-term negative events. When describing his 1974 investment in Washington Post, Buffett was quoted as saying, "In the case of the Washington Post, the whole of the company was selling for $80 million. Most analysts would have agreed that the intrinsic value of the assets was around $400 to $500 million. But you could buy little pieces of the business for much less." Buffett was able to profit from the fact that the rest of the market wanted to wait until short-term events had panned out before buying back into the company. When it did, the stock price returned to more reasonable valuations, producing great returns on Buffett's original $10 million investment.
The market is here to serve you, not to guide you
Looking at the big picture while having a reasonable indication of what you think a company is worth is the first step in developing a successful investing mind-set. Don't get too caught up in the noise surrounding a company regarding events that will likely pass in due time.
When good companies encounter painful events, ask yourself some basic questions: Will this hurt the company this year? Probably. Will it affect it next year? Probably not. Is the stock price reflecting next year's potential? Or the next five years? If the answer is no, you might have an opportunity to bypass short-term pessimism and invest in good companies at bargain prices.
2009-04-24
Baidu involved in another accuse
The competition between Baidu and Google in China is strong. Recently, Baidu (Nasdaq: BIDU) is in the doghouse again. One of its advertisers is taking China's leading search engine to court, accusing Baidu of blackballing the site after it dramatically lowered its marketing spend.
Renren Information Services is suing Baidu for the equivalent of $161,000 in damages in Beijing. That may not seem like a whole lot of money to a cash-rich company like Baidu, but there's clearly more at stake than simply a judicial verdict.
"Renren told the court the number of visits to its website dropped sharply after it reduced its spending with Baidu," reads the report out of Reuters.
Before Baidu bulls point out that this validates the usefulness of advertising on Baidu, let's get to the real ammo in Renren's quiver. According to the disgruntled advertiser, a search for the company's sponsored subsidiary yields just four pages on Baidu. A similar query on Google (Nasdaq: GOOG) supposedly spits back 6,690 pages.
This doesn't reflect well on Baidu, under any circumstances. If Baidu's site was populated with more organic references to Renren pages before the reduced marketing spend, it's a convincing argument that payola is alive and well at Baidu. Even if it's not, it exposes Baidu as an inferior search engine if it doesn't scour the Web as effectively as its distant rival Google.
**In the end, this is just another accusation of black-hat practices at a company that should know better if it wants to protect its $7 billion market valuation.
**In November, Baidu's rep took a hit when a television show exposed how the search engine was accepting ads from unlicensed medical companies. Baidu has since cleaned up its act.
Baidu, along with smaller engines like Sohu.com's (Nasdaq: SOHU) Sogou, were sued last year for linking to pirated music tracks. The Chinese engines have held up well in the past, but Yahoo! (Nasdaq: YHOO) did lose its case.
Like a cat, Baidu has landed on its feet in the past. It scored a pair of analyst upgrades last month, as users apparently began to flock back to the site following a few rocky months since the November expose.
Renren's case isn't the first time that "pay for organic performance" accusations have crept up on Baidu, but the company has to make sure that it's one of the last. Would it really be all that humbling to do things the Google way?
So far, it seems, Google is taking an unbiased view towards cataloging the Web in China. Instead of deep-linking to pirated MP3s, it teamed up with a site to offer ad-based music downloads. Baidu commands roughly double Google's audience in China, so it certainly would seem to have access to the techies, hungry record labels, and other resources to skirt around any ethical gray areas.
If Baidu keeps allowing its credibility to get smacked around, it may not have the same kind of flexibility to get things right the next time. Market-share pole position doesn't necessarily last forever, but doing the right thing sooner will help it keep its enviable distance from the huffing and puffing rivals donning white hats.
Renren Information Services is suing Baidu for the equivalent of $161,000 in damages in Beijing. That may not seem like a whole lot of money to a cash-rich company like Baidu, but there's clearly more at stake than simply a judicial verdict.
"Renren told the court the number of visits to its website dropped sharply after it reduced its spending with Baidu," reads the report out of Reuters.
Before Baidu bulls point out that this validates the usefulness of advertising on Baidu, let's get to the real ammo in Renren's quiver. According to the disgruntled advertiser, a search for the company's sponsored subsidiary yields just four pages on Baidu. A similar query on Google (Nasdaq: GOOG) supposedly spits back 6,690 pages.
This doesn't reflect well on Baidu, under any circumstances. If Baidu's site was populated with more organic references to Renren pages before the reduced marketing spend, it's a convincing argument that payola is alive and well at Baidu. Even if it's not, it exposes Baidu as an inferior search engine if it doesn't scour the Web as effectively as its distant rival Google.
**In the end, this is just another accusation of black-hat practices at a company that should know better if it wants to protect its $7 billion market valuation.
**In November, Baidu's rep took a hit when a television show exposed how the search engine was accepting ads from unlicensed medical companies. Baidu has since cleaned up its act.
Baidu, along with smaller engines like Sohu.com's (Nasdaq: SOHU) Sogou, were sued last year for linking to pirated music tracks. The Chinese engines have held up well in the past, but Yahoo! (Nasdaq: YHOO) did lose its case.
Like a cat, Baidu has landed on its feet in the past. It scored a pair of analyst upgrades last month, as users apparently began to flock back to the site following a few rocky months since the November expose.
Renren's case isn't the first time that "pay for organic performance" accusations have crept up on Baidu, but the company has to make sure that it's one of the last. Would it really be all that humbling to do things the Google way?
So far, it seems, Google is taking an unbiased view towards cataloging the Web in China. Instead of deep-linking to pirated MP3s, it teamed up with a site to offer ad-based music downloads. Baidu commands roughly double Google's audience in China, so it certainly would seem to have access to the techies, hungry record labels, and other resources to skirt around any ethical gray areas.
If Baidu keeps allowing its credibility to get smacked around, it may not have the same kind of flexibility to get things right the next time. Market-share pole position doesn't necessarily last forever, but doing the right thing sooner will help it keep its enviable distance from the huffing and puffing rivals donning white hats.
2009-04-23
The Myth Of Profit/Loss Ratios
When trading the forex market or other markets, we are often told of a common money management strategy that requires that the average profit be more than the average loss per trade. It's easy to assume that something that has been so widely advised must be a good thing. However, if we take a deeper look at the relationship between profit and loss, it is clear that the "old," commonly-held ideas may need to be adjusted.
What’s Profit/Loss Ratio
A profit/loss ratio refers to the size of the average profit compared to the size of the average loss per trade. For example, if your expected profit is $900 and your expected loss is $300 for a particular trade, your profit/loss ratio is 3:1 - which is $900 divided by $300.
Many trading books and "gurus" advocate a profit/loss ratio of at least 2:1 or 3:1, which means that for every $200 or $300 you make per trade, your potential loss should be capped at $100.
At first glance, most people would agree with this recommendation. After all, shouldn't any potential loss be kept as small as possible and any potential profit be as much as possible? The answer is: not always. In fact, this common piece of advice can be misleading, and can cause harm to your trading account.
The blanket advice of having a profit/loss ratio of at least 2:1 or 3:1 per trade is over-simplistic because it does not take into account the practical realities of the forex market (or any other markets), the individual's trading style and the individual's average profitability per trade (APPT) factor, which is also referred to as statistical expectancy.
APPT is Key to Profitability
Average profitability per trade basically refers to the average amount you can expect to win or lose per trade. Most people are so focused on either balancing their profit/loss ratios or on the accuracy of their trading approach that they are unaware that a bigger picture exists: Your trading performance depends largely on your APPT.
This is the formula for average profitability per trade:
Average Profitability Per Trade = (Probability of Win x Average Win) - (Probability of Loss x Average Loss)
Let's explore the APPT of the following hypothetical scenarios:
Scenario A:
Let's say that out of 10 trades you place, you profit on three of them and you realize a loss on seven. Your probability of a win is thus 30% or 0.3, while your probability of loss is 70% or 0.7. Your average winning trade makes $600 and your average loss is $300.
In this scenario, the APPT is:
(0.3 x $600) – (0.7 x $300) = - $30
As you can see, the APPT is a negative number, meaning that for every trade you place, you are likely to lose $30. That's a losing proposition!
Even though the profit/loss ratio is 2:1, this trading approach produces winning trades only 30% of the time, which negates the supposed benefit of having a 2:1 profit/loss ratio.
Scenario B:
Now let's explore the APPT of a trading approach that has a profit/loss ratio of 1:3, but has more winning trades than losing ones. Let's say out of the 10 trades you place, you make profit on eight of them, and you realize a loss on two trades.
Here is the APPT:
(0.8 x $100) – (0.2 x $300) = $20
In this case, even though this trading approach has a profit/loss ratio of 1:3, the APPT is positive, which means you can be profitable over time.
Many Ways of Becoming Profitable
When trading the forex market, there is no one-size-fits-all money management or trading approach. Traditional advice, such as making sure your profit is more than your loss per absolute trade, does not have much substantial value in the real trading world unless you have a high probability of realizing a winning trade. What matters is that your APPT comes up positive and that your overall profits are more than your overall losses.
What’s Profit/Loss Ratio
A profit/loss ratio refers to the size of the average profit compared to the size of the average loss per trade. For example, if your expected profit is $900 and your expected loss is $300 for a particular trade, your profit/loss ratio is 3:1 - which is $900 divided by $300.
Many trading books and "gurus" advocate a profit/loss ratio of at least 2:1 or 3:1, which means that for every $200 or $300 you make per trade, your potential loss should be capped at $100.
At first glance, most people would agree with this recommendation. After all, shouldn't any potential loss be kept as small as possible and any potential profit be as much as possible? The answer is: not always. In fact, this common piece of advice can be misleading, and can cause harm to your trading account.
The blanket advice of having a profit/loss ratio of at least 2:1 or 3:1 per trade is over-simplistic because it does not take into account the practical realities of the forex market (or any other markets), the individual's trading style and the individual's average profitability per trade (APPT) factor, which is also referred to as statistical expectancy.
APPT is Key to Profitability
Average profitability per trade basically refers to the average amount you can expect to win or lose per trade. Most people are so focused on either balancing their profit/loss ratios or on the accuracy of their trading approach that they are unaware that a bigger picture exists: Your trading performance depends largely on your APPT.
This is the formula for average profitability per trade:
Average Profitability Per Trade = (Probability of Win x Average Win) - (Probability of Loss x Average Loss)
Let's explore the APPT of the following hypothetical scenarios:
Scenario A:
Let's say that out of 10 trades you place, you profit on three of them and you realize a loss on seven. Your probability of a win is thus 30% or 0.3, while your probability of loss is 70% or 0.7. Your average winning trade makes $600 and your average loss is $300.
In this scenario, the APPT is:
(0.3 x $600) – (0.7 x $300) = - $30
As you can see, the APPT is a negative number, meaning that for every trade you place, you are likely to lose $30. That's a losing proposition!
Even though the profit/loss ratio is 2:1, this trading approach produces winning trades only 30% of the time, which negates the supposed benefit of having a 2:1 profit/loss ratio.
Scenario B:
Now let's explore the APPT of a trading approach that has a profit/loss ratio of 1:3, but has more winning trades than losing ones. Let's say out of the 10 trades you place, you make profit on eight of them, and you realize a loss on two trades.
Here is the APPT:
(0.8 x $100) – (0.2 x $300) = $20
In this case, even though this trading approach has a profit/loss ratio of 1:3, the APPT is positive, which means you can be profitable over time.
Many Ways of Becoming Profitable
When trading the forex market, there is no one-size-fits-all money management or trading approach. Traditional advice, such as making sure your profit is more than your loss per absolute trade, does not have much substantial value in the real trading world unless you have a high probability of realizing a winning trade. What matters is that your APPT comes up positive and that your overall profits are more than your overall losses.
Source from:investopedia.com
How to Trade Forex
After opening a forex account, what exactly we can trade within that account?
Of course, we use the account to trade Forex. The two main ways to trade in the foreign currency market is the simple buying and selling of currency pairs, where you go long one currency and short another. The second way is through the purchasing of derivatives that track the movements of a specific currency pair. Both of these techniques are highly similar to techniques in the equities market. The most common way is to simply buy and sell currency pairs, much in the same way most individuals buy and sell stocks. In this case, you are hoping the value of the pair itself changes in a favorable manner. If you go long a currency pair, you are hoping that the value of the pair increases. For example, let's say that you took a long position in the USD/CAD pair - you will make money if the value of this pair goes up, and lose money if it falls. This pair rises when the U.S. dollar increases in value against the Canadian dollar, so it is a bet on the U.S. dollar.
The other option is to use derivative products, such as options and futures, to profit from changes in the value of currencies. If you buy an option on a currency pair, you are gaining the right to purchase a currency pair at a set rate before a set point in time. A futures contract, on the other hand, creates the obligation to buy the currency at a set point in time. Both of these trading techniques are usually only used by more advanced traders, but it is important to at least be familiar with them.
Types of Orders In Forex Market
A trader looking to open a new position will likely use either a market order or a limit order. The incorporation of these order types remains the same as when they are used in the equity markets. A market order gives a forex trader the ability to obtain the currency at whatever exchange rate it is currently trading at in the market, while a limit order allows the trader to specify a certain entry price.
Forex traders who already hold an open position may want to consider using a take-profit order to lock in a profit. Say, for example, that a trader is confident that the GBP/USD rate will reach 1.7800, but is not as sure that the rate could climb any higher. A trader could use a take-profit order, which would automatically close his or her position when the rate reaches 1.7800, locking in their profits.
Another tool that can be used when traders hold open positions is the stop-loss order. This order allows traders to determine how much the rate can decline before the position is closed and further losses are accumulated. Therefore, if the GBP/USD rate begins to drop, an investor can place a stop-loss that will close the position (for example at 1.7787), in order to prevent any further losses.
As you can see, the type of orders that you can enter in your forex trading account are similar to those found in equity accounts. Having a good understanding of these orders is critical before placing your first trade.
Of course, we use the account to trade Forex. The two main ways to trade in the foreign currency market is the simple buying and selling of currency pairs, where you go long one currency and short another. The second way is through the purchasing of derivatives that track the movements of a specific currency pair. Both of these techniques are highly similar to techniques in the equities market. The most common way is to simply buy and sell currency pairs, much in the same way most individuals buy and sell stocks. In this case, you are hoping the value of the pair itself changes in a favorable manner. If you go long a currency pair, you are hoping that the value of the pair increases. For example, let's say that you took a long position in the USD/CAD pair - you will make money if the value of this pair goes up, and lose money if it falls. This pair rises when the U.S. dollar increases in value against the Canadian dollar, so it is a bet on the U.S. dollar.
The other option is to use derivative products, such as options and futures, to profit from changes in the value of currencies. If you buy an option on a currency pair, you are gaining the right to purchase a currency pair at a set rate before a set point in time. A futures contract, on the other hand, creates the obligation to buy the currency at a set point in time. Both of these trading techniques are usually only used by more advanced traders, but it is important to at least be familiar with them.
Types of Orders In Forex Market
A trader looking to open a new position will likely use either a market order or a limit order. The incorporation of these order types remains the same as when they are used in the equity markets. A market order gives a forex trader the ability to obtain the currency at whatever exchange rate it is currently trading at in the market, while a limit order allows the trader to specify a certain entry price.
Forex traders who already hold an open position may want to consider using a take-profit order to lock in a profit. Say, for example, that a trader is confident that the GBP/USD rate will reach 1.7800, but is not as sure that the rate could climb any higher. A trader could use a take-profit order, which would automatically close his or her position when the rate reaches 1.7800, locking in their profits.
Another tool that can be used when traders hold open positions is the stop-loss order. This order allows traders to determine how much the rate can decline before the position is closed and further losses are accumulated. Therefore, if the GBP/USD rate begins to drop, an investor can place a stop-loss that will close the position (for example at 1.7787), in order to prevent any further losses.
As you can see, the type of orders that you can enter in your forex trading account are similar to those found in equity accounts. Having a good understanding of these orders is critical before placing your first trade.
How To Open A Forex Account
Similar to the equity market, you have to open a forex account before stare trading currencies. Each forex account and the services it provides differ, so it is important that you find the right one. Below we will talk about some of the factors that should be considered when selecting a forex account.
Leverage
Leverage is basically the ability to control large amounts of capital, using very little of your own capital; the higher the leverage, the higher the level of risk. The amount of leverage on an account differs depending on the account itself, but most use a factor of at least 50:1, with some being as high as 250:1. A leverage factor of 50:1 means that for every dollar you have in your account you control up to $50. For example, if a trader has $1,000 in his or her account, the broker will lend that person $50,000 to trade in the market. This leverage also makes your margin, or the amount you have to have in the account to trade a certain amount, very low. In equities, margin is usually at least 50%, while the leverage of 50:1 is equivalent to 2%.
Leverage is seen as a major benefit of forex trading, as it allows you to make large gains with a small investment. However, leverage can also be an extreme negative if a trade moves against you because your losses also are amplified by the leverage. With this kind of leverage, there is the real possibility that you can lose more than you invested - although most firms have protective stops preventing an account from going negative. For this reason, it is vital that you remember this when opening an account and that when you determine your desired leverage you understand the risks involved.
Commissions and Fees
Another major benefit of forex accounts is that trading within them is done on a commission-free basis. This is unlike equity accounts, in which you pay the broker a fee for each trade. The reason for this is that you are dealing directly with market makers and do not have to go through other parties like brokers.
This may sound too good to be true, but rest assured that market makers are still making money each time you trade. Remember the bid and ask from the previous section? Each time a trade is made, it is the market makers that capture the spread between these two. Therefore, if the bid/ask for a foreign currency is 1.5200/50, the market maker captures the difference (50 basis points).
If you are planning on opening a forex account, it is important to know that each firm has different spreads on foreign currency pairs traded through them. While they will often differ by only a few pips (0.0001), this can be meaningful if you trade a lot over time. So when opening an account make sure to find out the pip spread that it has on foreign currency pairs you are looking to trade.
Other Factors
There are a lot of differences between each forex firm and the accounts they offer, so it is important to review each before making a commitment. Each company will offer different levels of services and programs along with fees above and beyond actual trading costs. Also, due to the less regulated nature of the forex market, it is important to go with a reputable company.
Leverage
Leverage is basically the ability to control large amounts of capital, using very little of your own capital; the higher the leverage, the higher the level of risk. The amount of leverage on an account differs depending on the account itself, but most use a factor of at least 50:1, with some being as high as 250:1. A leverage factor of 50:1 means that for every dollar you have in your account you control up to $50. For example, if a trader has $1,000 in his or her account, the broker will lend that person $50,000 to trade in the market. This leverage also makes your margin, or the amount you have to have in the account to trade a certain amount, very low. In equities, margin is usually at least 50%, while the leverage of 50:1 is equivalent to 2%.
Leverage is seen as a major benefit of forex trading, as it allows you to make large gains with a small investment. However, leverage can also be an extreme negative if a trade moves against you because your losses also are amplified by the leverage. With this kind of leverage, there is the real possibility that you can lose more than you invested - although most firms have protective stops preventing an account from going negative. For this reason, it is vital that you remember this when opening an account and that when you determine your desired leverage you understand the risks involved.
Commissions and Fees
Another major benefit of forex accounts is that trading within them is done on a commission-free basis. This is unlike equity accounts, in which you pay the broker a fee for each trade. The reason for this is that you are dealing directly with market makers and do not have to go through other parties like brokers.
This may sound too good to be true, but rest assured that market makers are still making money each time you trade. Remember the bid and ask from the previous section? Each time a trade is made, it is the market makers that capture the spread between these two. Therefore, if the bid/ask for a foreign currency is 1.5200/50, the market maker captures the difference (50 basis points).
If you are planning on opening a forex account, it is important to know that each firm has different spreads on foreign currency pairs traded through them. While they will often differ by only a few pips (0.0001), this can be meaningful if you trade a lot over time. So when opening an account make sure to find out the pip spread that it has on foreign currency pairs you are looking to trade.
Other Factors
There are a lot of differences between each forex firm and the accounts they offer, so it is important to review each before making a commitment. Each company will offer different levels of services and programs along with fees above and beyond actual trading costs. Also, due to the less regulated nature of the forex market, it is important to go with a reputable company.
2009-04-18
Technical analysis in Forex Trading
Besides Fundamental analysis, Technical Analysis is also common used in forex trading. In fact, a combined of Fundamental and Technical analysis is always encourage to get the optimum plots on your investment plan.
Comparing with Fundamental, Technical Analysis, is a completely different story. Instead of reviewing on the fundamental issues, traders from the technical side take an effort to forecast price movements by analyzing market data such as historical price trends, volumes, open interest, etc. Technical analysis is conducted based on the principal of 'history repeats itself', it does not result in absolute predictions about the future.
Instead, indicators generated by technical analysis will help investors anticipate what is "likely" to happen to prices over time.
Technical Indicators in Forex
Unlike fundamentals, technical trading relies heavily on graphs and charts. Practically, a technical trader will need at least one charting software to read and plot the related charts for his own references. Ever heard of Japanese candle stick? Fibonacci numbers? Relative Strength Index? Moving averages? Pivot points? Elliot Wave? These are some of the charting method that FX traders like to use during trades.
List of major technical indicators in trading.
· Simple Moving Average (SMA)
· Relative Strength Index (RSI)
· Moving Average Convergence/Divergemce (MACD)
· Parabolic SAR
· Fibonacci Numbers
Limitations on Technical Tradings
Technical analysis looks secure with proven tracks in the past times, however, trading Forex purely based on Technical Indicators would be extremely unsafe as we all knew thatt 'future does not equal to the past'.
A lot of unexpected variables are not considered in Technical Analysis: change of country leaders, change of government, natural disasters, change of bank policies, investor’s mood, war, or even terrorism attacks migh affect the currency value dramatically. These incidents are most likely not happening in the past thus Technical Analysis is not effective enough to predict the price movement.
Comparing with Fundamental, Technical Analysis, is a completely different story. Instead of reviewing on the fundamental issues, traders from the technical side take an effort to forecast price movements by analyzing market data such as historical price trends, volumes, open interest, etc. Technical analysis is conducted based on the principal of 'history repeats itself', it does not result in absolute predictions about the future.
Instead, indicators generated by technical analysis will help investors anticipate what is "likely" to happen to prices over time.
Technical Indicators in Forex
Unlike fundamentals, technical trading relies heavily on graphs and charts. Practically, a technical trader will need at least one charting software to read and plot the related charts for his own references. Ever heard of Japanese candle stick? Fibonacci numbers? Relative Strength Index? Moving averages? Pivot points? Elliot Wave? These are some of the charting method that FX traders like to use during trades.
List of major technical indicators in trading.
· Simple Moving Average (SMA)
· Relative Strength Index (RSI)
· Moving Average Convergence/Divergemce (MACD)
· Parabolic SAR
· Fibonacci Numbers
Limitations on Technical Tradings
Technical analysis looks secure with proven tracks in the past times, however, trading Forex purely based on Technical Indicators would be extremely unsafe as we all knew thatt 'future does not equal to the past'.
A lot of unexpected variables are not considered in Technical Analysis: change of country leaders, change of government, natural disasters, change of bank policies, investor’s mood, war, or even terrorism attacks migh affect the currency value dramatically. These incidents are most likely not happening in the past thus Technical Analysis is not effective enough to predict the price movement.
Fundamental analysis in Forex Trading
What’s Fundamental Analysis in Forex market
Fundamental Analysis refers to the study of the core underlying elements that influence the movement of currencies. As in Forex trading, government policies, economic announcements, bank policies, natural disasters, and speculators mood are some of the fundamentals considered to predict the currency market trends.
Just like fundamental analysis in stock market, investors measure a company's true value and base investments upon this type of calculation. Fundamental FOREX traders will evaluate a country's currency base on these fundamental elements and respond accordingly.
Economy Indicators
To gain max, fundamentalists often apply precise method to convert study's results into accurate entry/exit price indicator. Fundamental analysis involve a lot of analysis on the macroeconomic situation.
Thus, economy indicators of the country such as GDP growth rates, unemployment rates, retail sales, and interest rate are used heavily in when valuating a country's currency. Some of the frequent used economy indicators in Forex trading are as below (Click in each for detail explanations):
· The Gross Domestic Product (GDP)
· Retail Sales
· Interest Rates
· Unemployment Rate
Besides those listed above, other fundamental factors used to analysis the currency strength include Industrial Production Reports, Consumer Price Index (CPI), Manufacturing PMI-ISM, and Manufacturing Production. We will cover each of these indicators from time to time.
How are indicators used in Forex fundamentals trading?
A country's economic situation refelects directly onto the currecny trading world. Hence, it is important for a Forex traders to keep an close eye on the financial clalender release by it country itself or private sectors. It is important to keep in mind, however, that the indicators discussed above are not the only things that affect a currency's price. There are third-party reports, technical factors, and many other things that also can drastically affect a currency's valuation.
Also, it is recommended to study the fundamental aspects of several country whenever trading in the forex market. For those countries that have strong political/economical connection, currencies value flux hand-in-hand. Thus researching a few countru in a trade is necessary.
Some useful tips when implementing fundamentals analysis in Forex trading are:*
· Economic calendar: When and where. Currency values response sharply to certain release of economy indicators. Keep a close eyes on the currency price trend whenver there is a release on related economy indicators.
· Be informed about the economic indicators that are capturing most of the market's attention at any given time. Such indicators are catalysts for the largest price and volume movements. For example, when the U.S. dollar is weak, inflation is often one of the most watched indicators.
· Know the market expectations for the data, and then pay attention to whether or not the expectations are met. That is far more important than the data itself. Occasionally, there is a drastic difference between the expectations and actual results and, if there is, be aware of the possible justifications for this difference.
Fundamental Analysis refers to the study of the core underlying elements that influence the movement of currencies. As in Forex trading, government policies, economic announcements, bank policies, natural disasters, and speculators mood are some of the fundamentals considered to predict the currency market trends.
Just like fundamental analysis in stock market, investors measure a company's true value and base investments upon this type of calculation. Fundamental FOREX traders will evaluate a country's currency base on these fundamental elements and respond accordingly.
Economy Indicators
To gain max, fundamentalists often apply precise method to convert study's results into accurate entry/exit price indicator. Fundamental analysis involve a lot of analysis on the macroeconomic situation.
Thus, economy indicators of the country such as GDP growth rates, unemployment rates, retail sales, and interest rate are used heavily in when valuating a country's currency. Some of the frequent used economy indicators in Forex trading are as below (Click in each for detail explanations):
· The Gross Domestic Product (GDP)
· Retail Sales
· Interest Rates
· Unemployment Rate
Besides those listed above, other fundamental factors used to analysis the currency strength include Industrial Production Reports, Consumer Price Index (CPI), Manufacturing PMI-ISM, and Manufacturing Production. We will cover each of these indicators from time to time.
How are indicators used in Forex fundamentals trading?
A country's economic situation refelects directly onto the currecny trading world. Hence, it is important for a Forex traders to keep an close eye on the financial clalender release by it country itself or private sectors. It is important to keep in mind, however, that the indicators discussed above are not the only things that affect a currency's price. There are third-party reports, technical factors, and many other things that also can drastically affect a currency's valuation.
Also, it is recommended to study the fundamental aspects of several country whenever trading in the forex market. For those countries that have strong political/economical connection, currencies value flux hand-in-hand. Thus researching a few countru in a trade is necessary.
Some useful tips when implementing fundamentals analysis in Forex trading are:*
· Economic calendar: When and where. Currency values response sharply to certain release of economy indicators. Keep a close eyes on the currency price trend whenver there is a release on related economy indicators.
· Be informed about the economic indicators that are capturing most of the market's attention at any given time. Such indicators are catalysts for the largest price and volume movements. For example, when the U.S. dollar is weak, inflation is often one of the most watched indicators.
· Know the market expectations for the data, and then pay attention to whether or not the expectations are met. That is far more important than the data itself. Occasionally, there is a drastic difference between the expectations and actual results and, if there is, be aware of the possible justifications for this difference.
2009-04-17
5 Ways to Managing The Risk Of Forex Trading
We mentioned the risk of forex trading in the previous article. Generally speaking, there are risks in all kinds of investment. Instead of being terrified and, we can find ways to manage the risk and protect our benefit.
1. Picking up the right Forex dealer
Seek advice from an independent financial advisor when you have any doubts. But pick the right ones, not the fraud dealer.
Forex is a special trading business with no centralized market. Thus, unlike regulated futures exchanges, there is no central market place for Forex buyers or sellers therefore the price offered by different Forex dealers may vary a lot. When you are trading in Forex market, you are totally relying on the dealer’s integrity for a fair deal.
Further more, you need to select a right Forex dealer to avoid scams. There may be Forex dealers that are not regulated legally and there maybe investment scams, especially on the Internet. Be very careful on who you are dealing with in Forex and always check cautiously on the investment offer.
2. Stop loss order
The Forex market could move against you. No one can predict with certainty which way exchange rates will go, and the Forex market is volatile. Fluctuations in the foreign exchange rate between the time you place the trade and the time you attempt to liquidate it will affect the price of your Forex contract and the potential profit and losses relating to it. To avoid losing all of your investment capital, you should have a pre-arrangement on your risk profile. A solid risk profile will limit the Forex dealer not to overtake risk that you cannot handle. For example, if you have 100,000 to invest, you can say that you are willing to risk 10,000 of that capital with the potential to gain another 100,000. This can be easily implemented by a fund manager, so your losses can be limited to 10% or 5% of invested capital.
3. Avoid too high margin trade
Another way to manage your risks well in Forex market is to trade without overleveraged. Forex dealers want you to trade with high leverage values as this means more spread income for them. Also, trading in high leverage may increase your profit or your losing. There are high possibilities that one lose money more than he or she can afford in margin trading.
Forex can be extraordinarily beneficial to a variety of people. It gives huge leverage rates, it gives incompatible liquidity to your money, it gives convenience to trade on the Internet, and it can definitely give you a lot of money if you trade smartly. Like any other trading business, if you are new to it, best advice you can get is to learn and practice more before you test your ‘wings’. Seminars, eBooks, Internet, papers, video courses – all these are handy to get yourself ready. You can also try out your skill on the demo account provided free. After all, Forex trades 24hours a day and there is always money to make in the market, so why not be patience until you are fully ready for it?
4. Diversification in Forex trading
Diversification is another way to manage risks in Forex market. Trading one currency pair will generate few entry signals. If you wish to lower your risk in Forex market, it would be better to diversify your trades between several currencies.
Try simultaneously trade on different pair of currency. Say you have capital of $1,000, instead of putting all your money to long EUR/USD, you can split the money half to long EUR/USD and GBD/USD ($500 each) as these two currencies are highly correlated and tends to move in the same directions.
5. Educate yourself
Needless to say, knowledge is another key of handling your risks well. Before you get into Forex market, the best thing you should do is educate yourself. What drives currency price movement? How to read analysis data? How to read chart indicators? Learn detail about how currency price move and how to trade foreign currency exchange in order to avoid unnecessary risks.
1. Picking up the right Forex dealer
Seek advice from an independent financial advisor when you have any doubts. But pick the right ones, not the fraud dealer.
Forex is a special trading business with no centralized market. Thus, unlike regulated futures exchanges, there is no central market place for Forex buyers or sellers therefore the price offered by different Forex dealers may vary a lot. When you are trading in Forex market, you are totally relying on the dealer’s integrity for a fair deal.
Further more, you need to select a right Forex dealer to avoid scams. There may be Forex dealers that are not regulated legally and there maybe investment scams, especially on the Internet. Be very careful on who you are dealing with in Forex and always check cautiously on the investment offer.
2. Stop loss order
The Forex market could move against you. No one can predict with certainty which way exchange rates will go, and the Forex market is volatile. Fluctuations in the foreign exchange rate between the time you place the trade and the time you attempt to liquidate it will affect the price of your Forex contract and the potential profit and losses relating to it. To avoid losing all of your investment capital, you should have a pre-arrangement on your risk profile. A solid risk profile will limit the Forex dealer not to overtake risk that you cannot handle. For example, if you have 100,000 to invest, you can say that you are willing to risk 10,000 of that capital with the potential to gain another 100,000. This can be easily implemented by a fund manager, so your losses can be limited to 10% or 5% of invested capital.
3. Avoid too high margin trade
Another way to manage your risks well in Forex market is to trade without overleveraged. Forex dealers want you to trade with high leverage values as this means more spread income for them. Also, trading in high leverage may increase your profit or your losing. There are high possibilities that one lose money more than he or she can afford in margin trading.
Forex can be extraordinarily beneficial to a variety of people. It gives huge leverage rates, it gives incompatible liquidity to your money, it gives convenience to trade on the Internet, and it can definitely give you a lot of money if you trade smartly. Like any other trading business, if you are new to it, best advice you can get is to learn and practice more before you test your ‘wings’. Seminars, eBooks, Internet, papers, video courses – all these are handy to get yourself ready. You can also try out your skill on the demo account provided free. After all, Forex trades 24hours a day and there is always money to make in the market, so why not be patience until you are fully ready for it?
4. Diversification in Forex trading
Diversification is another way to manage risks in Forex market. Trading one currency pair will generate few entry signals. If you wish to lower your risk in Forex market, it would be better to diversify your trades between several currencies.
Try simultaneously trade on different pair of currency. Say you have capital of $1,000, instead of putting all your money to long EUR/USD, you can split the money half to long EUR/USD and GBD/USD ($500 each) as these two currencies are highly correlated and tends to move in the same directions.
5. Educate yourself
Needless to say, knowledge is another key of handling your risks well. Before you get into Forex market, the best thing you should do is educate yourself. What drives currency price movement? How to read analysis data? How to read chart indicators? Learn detail about how currency price move and how to trade foreign currency exchange in order to avoid unnecessary risks.
What’s The Risk Of Forex Trading
Factors such as the size, volatility as well as global structure of the foreign exchange market all contribute to its rapid success. But while the forex market may offer more excitement to the investor, the risks are also higher in comparison to trading equities. The ultra-high leverage of the forex market means that huge gains can quickly turn to damaging losses and can wipe out the majority of your account in a matter of minutes. This is important for all new traders to understand, considering the risks involved in the forex market before diving in.
In the forex market, due to the large amount of money involved and the number of players - traders will react quickly to information released into the market, leading to sharp moves in the price of the currency pair.
Though currencies don't tend to move as sharply as equities on a percentage basis (where a company's stock can lose a large portion of its value in a matter of minutes after a bad announcement), it is the leverage in the spot market that creates the volatility. For example, if you are using 100:1 leverage on $1,000 invested, you control $100,000 in capital. If you put $100,000 into a currency and the currency's price moves 1% against you, the value of the capital will have decreased to $99,000 - a loss of $1,000, or all of your invested capital, representing a 100% loss. In the equities market, most traders do not use leverage, therefore a 1% loss in the stock's value on a $1,000 investment, would only mean a loss of $10. Therefore, it is important to take into account the risks involved in the forex market before diving in.
In the forex market, due to the large amount of money involved and the number of players - traders will react quickly to information released into the market, leading to sharp moves in the price of the currency pair.
Though currencies don't tend to move as sharply as equities on a percentage basis (where a company's stock can lose a large portion of its value in a matter of minutes after a bad announcement), it is the leverage in the spot market that creates the volatility. For example, if you are using 100:1 leverage on $1,000 invested, you control $100,000 in capital. If you put $100,000 into a currency and the currency's price moves 1% against you, the value of the capital will have decreased to $99,000 - a loss of $1,000, or all of your invested capital, representing a 100% loss. In the equities market, most traders do not use leverage, therefore a 1% loss in the stock's value on a $1,000 investment, would only mean a loss of $10. Therefore, it is important to take into account the risks involved in the forex market before diving in.
2009-04-16
What makes Forex more attractive than Equities
Forex and equities markets are both indispensable for many experienced investors. Here we come to the topic of difference between Forex and equities, comparing Forex with equities market.
A major difference between the forex and equities markets is the number of traded instruments: The forex market has very few traded instruments in contrast to the thousands that are found in equities market. The majority of forex traders focus their efforts on seven different currency pairs: the four majors, which include (EUR/USD, USD/JPY, GBP/USD, USD/CHF); and the three commodity pairs (USD/CAD, AUD/USD, NZD/USD). All other pairs are just different combinations of the same currencies, otherwise known as cross currencies. This makes currency trading easier to follow because rather than having to cherry-pick between 10,000 stocks to find the best value, all that FX traders need to do is “keep up” on the economic and political news of eight countries.
The equity markets often can hit a lull, resulting in shrinking volumes and activity. As a result, it may be hard to open and close positions when desired. Furthermore, in a declining market, it is only with extreme ingenuity that an equities investor can make a profit. It is difficult to short-sell in the U.S. equities market because of strict rules and regulations regarding the process. On the other hand, forex offers the opportunity to profit in both rising and declining markets because with each trade, you are buying and selling simultaneously, and short-selling is, therefore, inherent in every transaction. In addition, since the forex market is so liquid, traders are not required to wait for an uptick before they are allowed to enter into a short position - as they are in the equities market.
Due to the extreme liquidity of the forex market, margins are low and leverage is high. It just is not possible to find such low margin rates in the equities markets; most margin traders in the equities markets need at least 50% of the value of the investment available as margin, whereas forex traders need as little as 1%.
Furthermore, investors who want to profit from Forex trading need more professional knowledge and techniques. Around 85% of all Forex trading is investment or speculative in nature and movements in the market frequently overshoot before correcting themselves. Unlike equity markets, the difference between high and low prices of a currency pair in a given day is usually significant, particularly with high leveraging, and strong trends develop. Investors skilled in studying price movements and predicting patterns and trends may be able to identify these breakouts and profit from them.
In addition, commissions in the equities market are much higher than in the forex market. Traditional brokers ask for commission fees on top of the spread, plus the fees that have to be paid to the exchange. Spot forex brokers take only the spread as their fee for the transaction.
Conclution
There are a number of differences between Forex trading and Equities trading. And the following may be the ones make Forex an attractive addition to an investor’s portfolio:
• Potential profit in falling markets
• No commissions or exchange fees
• Your money works harder with up to 100 to 1 leverage
• News which is bad for equities may be good for Forex
• Diversification of currencies not offered by other market investments
• Perfect for technical traders
• Investment is in countries, not in corporations
• Forex can be traded 24 hours a day, 5 days a week
• Protection from market manipulation
While it is true that the forex market offers more excitement to traders, the risks are also higher in comparison to trading equities. In the next section, we'll discuss about the risk of the forex market.
A major difference between the forex and equities markets is the number of traded instruments: The forex market has very few traded instruments in contrast to the thousands that are found in equities market. The majority of forex traders focus their efforts on seven different currency pairs: the four majors, which include (EUR/USD, USD/JPY, GBP/USD, USD/CHF); and the three commodity pairs (USD/CAD, AUD/USD, NZD/USD). All other pairs are just different combinations of the same currencies, otherwise known as cross currencies. This makes currency trading easier to follow because rather than having to cherry-pick between 10,000 stocks to find the best value, all that FX traders need to do is “keep up” on the economic and political news of eight countries.
The equity markets often can hit a lull, resulting in shrinking volumes and activity. As a result, it may be hard to open and close positions when desired. Furthermore, in a declining market, it is only with extreme ingenuity that an equities investor can make a profit. It is difficult to short-sell in the U.S. equities market because of strict rules and regulations regarding the process. On the other hand, forex offers the opportunity to profit in both rising and declining markets because with each trade, you are buying and selling simultaneously, and short-selling is, therefore, inherent in every transaction. In addition, since the forex market is so liquid, traders are not required to wait for an uptick before they are allowed to enter into a short position - as they are in the equities market.
Due to the extreme liquidity of the forex market, margins are low and leverage is high. It just is not possible to find such low margin rates in the equities markets; most margin traders in the equities markets need at least 50% of the value of the investment available as margin, whereas forex traders need as little as 1%.
Furthermore, investors who want to profit from Forex trading need more professional knowledge and techniques. Around 85% of all Forex trading is investment or speculative in nature and movements in the market frequently overshoot before correcting themselves. Unlike equity markets, the difference between high and low prices of a currency pair in a given day is usually significant, particularly with high leveraging, and strong trends develop. Investors skilled in studying price movements and predicting patterns and trends may be able to identify these breakouts and profit from them.
In addition, commissions in the equities market are much higher than in the forex market. Traditional brokers ask for commission fees on top of the spread, plus the fees that have to be paid to the exchange. Spot forex brokers take only the spread as their fee for the transaction.
Conclution
There are a number of differences between Forex trading and Equities trading. And the following may be the ones make Forex an attractive addition to an investor’s portfolio:
• Potential profit in falling markets
• No commissions or exchange fees
• Your money works harder with up to 100 to 1 leverage
• News which is bad for equities may be good for Forex
• Diversification of currencies not offered by other market investments
• Perfect for technical traders
• Investment is in countries, not in corporations
• Forex can be traded 24 hours a day, 5 days a week
• Protection from market manipulation
While it is true that the forex market offers more excitement to traders, the risks are also higher in comparison to trading equities. In the next section, we'll discuss about the risk of the forex market.
2009-04-15
Getting Stronger in a Recession?
While most of us suffering huge loss a recession brought, there’re indeed some companies enjoy the rare opportunity in the recession.
They turn a recession to its advantage, increasing the value of their franchises considerably. Who are they? The ones that are leaders in their industries -- companies with strong brands, higher margins, and prudent levels of debt. For these companies, a recession may end up being one of the best things that could happen.
How do they do it? Three ways:
**Competitors go out of business.
**Companies increase their earnings per share through share repurchases or acquisitions at bargain prices.
**Continued internal investment leads to increased market share and productivity gains.
1) Becoming king of the world
The most direct way a company can benefit from a recession is pretty simple: Competitors go bust. Best Buy will probably benefit from Circuit City's liquidation just like Toyota Motor would benefit if General Motors went under -- because removal of that supply from the market would increase demand for competitors' cars.
2) Buying up value
Share repurchases and acquisitions are another way value can be created. In a recession, asset values typically fall to historically low levels. A company with a strong cash position can scoop up its own shares or make acquisitions for very low prices.
This is beneficial because buying shares at low prices reduces shares outstanding. The same earnings over fewer shares equal higher earnings per share -- and, theoretically, a higher stock price.
For example, The Washington Post generated a mind-boggling amount of value for its shareholders in the 1970s when it (at Warren Buffett's suggestion) repurchased vast quantities of its shares at prices well below what it was worth. Similarly, buying a business at a depressed price can add to a company's earnings per share, and the lower prices mean there is more cash for shareholders -- and all of that means benefits down the road.
That's what MidAmerican Energy was trying to do when it agreed to buy Constellation Energy when the latter was having liquidity issues. MidAmerican agreed to buy the whole company for the bargain price of $4.7 billion, but the deal fell through when Constellation found someone willing to pay $4.5 billion for half of its nuclear power business.
Even though it didn't end up acquiring a quality asset on the cheap, MidAmerican stands to earn more than $1 billion on the $1 billion it initially lent to Constellation.
Having the flexibility to invest in one's own shares and those of distressed companies can give a company quite an edge.
3) Internal investment
All businesses need to continually invest in themselves in order to improve. This is because investments in areas like research and development and productivity initiatives should lead to higher sales, lower costs, and hence, higher margins.
Yet in a downturn, less-well-off companies are forced to put off these expenditures because the more pressing need is to keep the business profitable. But companies with high operating margins and strong cash flows can continue to invest in themselves when times are bad, and therefore have opportunities to gain over their weaker competitors.
You can see this in the automotive industry. From 2002 to 2006, Toyota's operating margin ranged from 7% to 10%, whereas both Ford's and General Motors' ranged from negative 5% to 3%. Toyota's margins were higher because it invested heavily in automated production systems and lean manufacturing initiatives over many years and, as a result, was much better positioned to weather the current crisis than its American competitors.
Investing in yourself -- especially when your competitors can't -- usually leads to a payoff down the road.
Follow the best
So for investors, It’s important to identify now the companies that will likely enjoy these advantages going forward. A large cash balance is one sign of a potential winning investment in an uncertain world, because it can protect the company against unforeseen difficulties or allow the company to play offense by buying back shares or acquiring competitors.
They turn a recession to its advantage, increasing the value of their franchises considerably. Who are they? The ones that are leaders in their industries -- companies with strong brands, higher margins, and prudent levels of debt. For these companies, a recession may end up being one of the best things that could happen.
How do they do it? Three ways:
**Competitors go out of business.
**Companies increase their earnings per share through share repurchases or acquisitions at bargain prices.
**Continued internal investment leads to increased market share and productivity gains.
1) Becoming king of the world
The most direct way a company can benefit from a recession is pretty simple: Competitors go bust. Best Buy will probably benefit from Circuit City's liquidation just like Toyota Motor would benefit if General Motors went under -- because removal of that supply from the market would increase demand for competitors' cars.
2) Buying up value
Share repurchases and acquisitions are another way value can be created. In a recession, asset values typically fall to historically low levels. A company with a strong cash position can scoop up its own shares or make acquisitions for very low prices.
This is beneficial because buying shares at low prices reduces shares outstanding. The same earnings over fewer shares equal higher earnings per share -- and, theoretically, a higher stock price.
For example, The Washington Post generated a mind-boggling amount of value for its shareholders in the 1970s when it (at Warren Buffett's suggestion) repurchased vast quantities of its shares at prices well below what it was worth. Similarly, buying a business at a depressed price can add to a company's earnings per share, and the lower prices mean there is more cash for shareholders -- and all of that means benefits down the road.
That's what MidAmerican Energy was trying to do when it agreed to buy Constellation Energy when the latter was having liquidity issues. MidAmerican agreed to buy the whole company for the bargain price of $4.7 billion, but the deal fell through when Constellation found someone willing to pay $4.5 billion for half of its nuclear power business.
Even though it didn't end up acquiring a quality asset on the cheap, MidAmerican stands to earn more than $1 billion on the $1 billion it initially lent to Constellation.
Having the flexibility to invest in one's own shares and those of distressed companies can give a company quite an edge.
3) Internal investment
All businesses need to continually invest in themselves in order to improve. This is because investments in areas like research and development and productivity initiatives should lead to higher sales, lower costs, and hence, higher margins.
Yet in a downturn, less-well-off companies are forced to put off these expenditures because the more pressing need is to keep the business profitable. But companies with high operating margins and strong cash flows can continue to invest in themselves when times are bad, and therefore have opportunities to gain over their weaker competitors.
You can see this in the automotive industry. From 2002 to 2006, Toyota's operating margin ranged from 7% to 10%, whereas both Ford's and General Motors' ranged from negative 5% to 3%. Toyota's margins were higher because it invested heavily in automated production systems and lean manufacturing initiatives over many years and, as a result, was much better positioned to weather the current crisis than its American competitors.
Investing in yourself -- especially when your competitors can't -- usually leads to a payoff down the road.
Follow the best
So for investors, It’s important to identify now the companies that will likely enjoy these advantages going forward. A large cash balance is one sign of a potential winning investment in an uncertain world, because it can protect the company against unforeseen difficulties or allow the company to play offense by buying back shares or acquiring competitors.
How to Use a Blog to Promote Business
What’s a blog? It’s a place to share expertise, information, ideas and content. There’re blogs about cars, health,food, traveling and so on. Not only people get information from blogs, but also many of them make money from blogs by publishing ads or something else. Actually, if done correctly, a blog can attract a dedicated audience to boost awareness of your company and brand. Here are four ways one can use to promote business:
1. Build a tight connection with customers. Promote a company, product or service by creating a blog that features how-to advice, news and other information of interest to customers. Through the blog, visitors can post testimonials, feedback, questions and comments, plus participate in surveys.
By taking an informal, non-sales approach, a company can interact with customers, gain useful feedback and build an online audience that can ultimately be directed to the company's main website or retail store.
2. Provide exceptional customer support. Supplement a company's existing technical support and customer service with an online forum for customers to openly post questions. While employees can update and maintain this type of blog, users feed it with comments and also tap the knowledge of other users by reading past questions and interacting on the forum.
If done correctly, this type of blogging can dramatically cust the cost of personalized technical support and customer service. Check the comments section for frequent users who can be recruited as bloggers to further increase your blog's content. They can also be asked to "host" certain threads or wikis to encourage dialogue on topics that need a little TLC.
3. Increase your credibility. A blog is an ideal tool to position yourself as an expert in your field by sharing your thoughts, knowledge, experience and insight. Obtaining expert status can increase your earning potential, make it easier to land a new job or promotion, and help attract new customers.
4. Gain more exposure. Ask independent bloggers to write reviews and articles about your company. Having your information published on different blogs builds your legitimacy and exposure. Also, it's often faster and easier for a business to get blog content (as opposed to traditional Web site content) listed with the major internet search engines.
Two More Keys to Blogging Success
Before investing the time and money, clearly define your potential blog's goals and objectives, and then determine your exact target audience. Figure out what you'll offer that's unique or that will set your blog apart, and make sure you have enough potential content to keep your blog continuously updated and fresh.
Next, figure out how you'll drive a steady flow of traffic to your blog and build its audience. Properly and creatively promoting a blog on an ongoing basis is essential for building an audience. For many bloggers, this often proves to be their biggest challenge. Having unrealistic expectations about how quickly and easily you'll be able to drive traffic to a new blog is one of the biggest reasons why bloggers fail.
1. Build a tight connection with customers. Promote a company, product or service by creating a blog that features how-to advice, news and other information of interest to customers. Through the blog, visitors can post testimonials, feedback, questions and comments, plus participate in surveys.
By taking an informal, non-sales approach, a company can interact with customers, gain useful feedback and build an online audience that can ultimately be directed to the company's main website or retail store.
2. Provide exceptional customer support. Supplement a company's existing technical support and customer service with an online forum for customers to openly post questions. While employees can update and maintain this type of blog, users feed it with comments and also tap the knowledge of other users by reading past questions and interacting on the forum.
If done correctly, this type of blogging can dramatically cust the cost of personalized technical support and customer service. Check the comments section for frequent users who can be recruited as bloggers to further increase your blog's content. They can also be asked to "host" certain threads or wikis to encourage dialogue on topics that need a little TLC.
3. Increase your credibility. A blog is an ideal tool to position yourself as an expert in your field by sharing your thoughts, knowledge, experience and insight. Obtaining expert status can increase your earning potential, make it easier to land a new job or promotion, and help attract new customers.
4. Gain more exposure. Ask independent bloggers to write reviews and articles about your company. Having your information published on different blogs builds your legitimacy and exposure. Also, it's often faster and easier for a business to get blog content (as opposed to traditional Web site content) listed with the major internet search engines.
Two More Keys to Blogging Success
Before investing the time and money, clearly define your potential blog's goals and objectives, and then determine your exact target audience. Figure out what you'll offer that's unique or that will set your blog apart, and make sure you have enough potential content to keep your blog continuously updated and fresh.
Next, figure out how you'll drive a steady flow of traffic to your blog and build its audience. Properly and creatively promoting a blog on an ongoing basis is essential for building an audience. For many bloggers, this often proves to be their biggest challenge. Having unrealistic expectations about how quickly and easily you'll be able to drive traffic to a new blog is one of the biggest reasons why bloggers fail.
2009-04-14
India Is No China
For a long time, people often compare India with China. They’re both emerging countries. But India is no China, and Brazil's no Russia.
They've never been all that similar, really. In fact, Standard & Poor's recently questioned "whether the BRIC [Brazil, Russia, India, China] countries ever shared much in common, other than scale and high portfolio inflows."
Well, of course they didn't. If you fall for the idea that countries are interchangeable while investing, you'll get burned.
What’s the common
As investors, we like to group things together. It simplifies complex information and gives us a way to make complicated decisions. And when it comes to international investing, it's convention to lump countries into one of two categories: developed markets vs. emerging markets.
The exact distinction is hazy. Former Secretary-General of the U.N. Kofi Annan defines a developed market as "one that allows all its citizens to enjoy a free and healthy life in a safe environment." Political scientist Ian Bremmer defines an emerging market as "a country where politics matters at least as much as economics to the markets."
Basically, to be considered developed, a country needs a high standard of living that isn't continually threatened by political crisis. Besides the United States, think of countries such as Japan, France, and Australia.
The emerging markets are then split into the BRIC countries -- a term coined less than a decade ago by Goldman Sachs, because it was sexy to bundle together the four emerging-market countries that combined size with tremendous growth prospects -- and everyone else (countries such as Peru, Turkey, Egypt, and Thailand).
The difference!
All of that splitting and grouping gives investors the false sense that the BRIC countries are essentially interchangeable: emerging, large, poised for growth.
Even basic country data demonstrates just how large this fallacy is:
They've never been all that similar, really. In fact, Standard & Poor's recently questioned "whether the BRIC [Brazil, Russia, India, China] countries ever shared much in common, other than scale and high portfolio inflows."
Well, of course they didn't. If you fall for the idea that countries are interchangeable while investing, you'll get burned.
What’s the common
As investors, we like to group things together. It simplifies complex information and gives us a way to make complicated decisions. And when it comes to international investing, it's convention to lump countries into one of two categories: developed markets vs. emerging markets.
The exact distinction is hazy. Former Secretary-General of the U.N. Kofi Annan defines a developed market as "one that allows all its citizens to enjoy a free and healthy life in a safe environment." Political scientist Ian Bremmer defines an emerging market as "a country where politics matters at least as much as economics to the markets."
Basically, to be considered developed, a country needs a high standard of living that isn't continually threatened by political crisis. Besides the United States, think of countries such as Japan, France, and Australia.
The emerging markets are then split into the BRIC countries -- a term coined less than a decade ago by Goldman Sachs, because it was sexy to bundle together the four emerging-market countries that combined size with tremendous growth prospects -- and everyone else (countries such as Peru, Turkey, Egypt, and Thailand).
The difference!
All of that splitting and grouping gives investors the false sense that the BRIC countries are essentially interchangeable: emerging, large, poised for growth.
Even basic country data demonstrates just how large this fallacy is:
Gross domestic product (GDP) per person is one way to gauge the standard of living and productivity of a country -- and they demonstrate just how different these countries really are.
Yes, the emerging markets are quite different from the developed market -- the U.S.'s GDP per person is more than 40 times greater than India's -- but the chart also shows the great disparity among the BRIC countries. Russia is almost 12 times as prosperous as India, and even China is roughly three times so.
And this is just the economic disparity. You also have to factor in the country's political situation, overall economic stability, market conditions, cultural differences, and still more economic data such as national debt, balance of trade, inflation, savings rates, etc.
In other words, in international investing, country differences are at least as important as company differences -- because any potential that company has depends upon the context of its location.
For example, even though they're both companies that deal in global commodities, it could be argued that Vale (NYSE: RIO) is more closely linked to its fellow Brazilian Petroleo Brasileiro (NYSE: PBR) than it is to Aluminum Corp. of China (NYSE: ACH) -- aka Chinalco. In a more extreme example, Chinalco may be more closely linked to Chinese search engine Baidu (Nasdaq: BIDU) than it is to Vale.
Why? Because country-specific considerations frequently outweigh industry-specific considerations. Ask any company that has been subject to onerous regulation, excessive taxation, a devalued currency, or nationalization by its home country.
If this is true for a company like Vale, whose prices are dictated by global commodities demand, it's even more true for a company like Toyota (NYSE: TM), which relies on demand from its home country for more than half of its revenue.
What does this mean for investors?
**The substantial differences between countries -- not to mention between developed and emerging economies -- lead to three takeaways.
**Because of the addition of tricky country-specific dynamics, diversification may be even more important in international investing than it is in domestic investing.
**Emerging markets demand a greater risk premium than their developed brethren. In other words, you should demand a larger margin of safety (and lower earnings multiples) for companies in emerging markets.
**It isn't enough just to pore over the financial statements of a company and its competitors. Knowledge of a company's country is just as important as knowledge of the company itself.
Understanding Forex Quote, Bid and Ask Price, Spreads and Pips ,Currency Pairs in Forex Market
It’s kind of confused for those new to the forex market. There’re many professional concepts and words need to understand.
How to read a Quote
When a currency is quoted, it is done in relation to another currency, so that the value of one is reflected through the value of another. Therefore, if you are trying to determine the exchange rate between the U.S. dollar (USD) and the Japanese yen (JPY), the forex quote would look like this:
However, in order to sell this currency pair, or sell the base currency in exchange for the quoted currency, you would look at the bid price. It tells you that the market will buy US$1 base currency (you will be selling the market the base currency) for a price equivalent to 1.2000 Canadian dollars, which is the quoted currency.
Whichever currency is quoted first (the base currency) is always the one in which the transaction is being conducted. You either buy or sell the base currency. Depending on what currency you want to use to buy or sell the base with, you refer to the corresponding currency pair spot exchange rate to determine the price.
Spreads and Pips
The difference between the bid price and the ask price is called a spread. If we were to look at the following quote: EUR/USD = 1.2500/03, the spread would be 0.0003 or 3 pips, also known as points. Although these movements may seem insignificant, even the smallest point change can result in thousands of dollars being made or lost due to leverage. Again, this is one of the reasons that speculators are so attracted to the forex market; even the tiniest price movement can result in huge profit.
The pip is the smallest amount a price can move in any currency quote. In the case of the U.S. dollar, euro, British pound or Swiss franc, one pip would be 0.0001. With the Japanese yen, one pip would be 0.01, because this currency is quoted to two decimal places. So, in a forex quote of USD/CHF, the pip would be 0.0001 Swiss francs. Most currencies trade within a range of 100 to 150 pips a day.
Currency Pairs in the Forwards and Futures Markets
One of the key technical differences between the forex markets is the way currencies are quoted. In the forwards or futures markets, foreign exchange always is quoted against the U.S. dollar. This means that pricing is done in terms of how many U.S. dollars are needed to buy one unit of the other currency. Remember that in the spot market some currencies are quoted against the U.S. dollar, while for others, the U.S. dollar is being quoted against them. As such, the forwards/futures market and the spot market quotes will not always be parallel one another.
For example, in the spot market, the British pound is quoted against the U.S. dollar as GBP/USD. This is the same way it would be quoted in the forwards and futures markets. Thus, when the British pound strengthens against the U.S. dollar in the spot market, it will also rise in the forwards and futures markets.
On the other hand, when looking at the exchange rate for the U.S. dollar and the Japanese yen, the former is quoted against the latter. In the spot market, the quote would be 115 for example, which means that one U.S. dollar would buy 115 Japanese yen. In the futures market, it would be quoted as (1/115) or .0087, which means that 1 Japanese yen would buy .0087 U.S. dollars. As such, a rise in the USD/JPY spot rate would equate to a decline in the JPY futures rate because the U.S. dollar would have strengthened against the Japanese yen and therefore one Japanese yen would buy less U.S. dollars.
How to read a Quote
When a currency is quoted, it is done in relation to another currency, so that the value of one is reflected through the value of another. Therefore, if you are trying to determine the exchange rate between the U.S. dollar (USD) and the Japanese yen (JPY), the forex quote would look like this:
This is referred to as a currency pair. The currency to the left of the slash is the base currency, while the currency on the right is called the quote or counter currency. The base currency (in this case, the U.S. dollar) is always equal to one unit (in this case, US$1), and the quoted currency (in this case, the Japanese yen) is what that one base unit is equivalent to in the other currency. The quote means that US$1 = 119.50 Japanese yen. In other words, US$1 can buy 119.50 Japanese yen. The forex quote includes the currency abbreviations for the currencies in question.
Direct Currency Quote vs. Indirect Currency Quote
There are two ways to quote a currency pair, either directly or indirectly. A direct currencyquote is simply a currency pair in which the domestic currency is the base currency; while an indirect quote, is a currency pair where the domestic currency is the quoted currency. So if you were looking at the Canadian dollar as the domestic currency and U.S. dollar as the foreign currency, a direct quote would be CAD/USD, while an indirect quote would be USD/CAD. The direct quote varies the foreign currency, and the quoted, or domestic currency, remains fixed at one unit. In the indirect quote, on the other hand, the domestic currency is variable and the foreign currency is fixed at one unit.
For example, if Canada is the domestic currency, a direct quote would be 0.85 CAD/USD, which means with C$1, you can purchase US$0.85. The indirect quote for this would be the inverse (1/0.85), which is 1.18 USD/CAD and means that USD$1 will purchase C$1.18.
In the forex spot market, most currencies are traded against the U.S. dollar, and the U.S. dollar is frequently the base currency in the currency pair. In these cases, it is called a direct quote. This would apply to the above USD/JPY currency pair, which indicates that US$1 is equal to 119.50 Japanese yen.
However, not all currencies have the U.S. dollar as the base. The Queen's currencies - those currencies that historically have had a tie with Britain, such as the British pound, Australian Dollar and New Zealand dollar - are all quoted as the base currency against the U.S. dollar. The euro, which is relatively new, is quoted the same way as well. In these cases, the U.S. dollar is the counter currency, and the exchange rate is referred to as an indirect quote. This is why the EUR/USD quote is given as 1.25, for example, because it means that one euro is the equivalent of 1.25 U.S. dollars.
Most currency exchange rates are quoted out to four digits after the decimal place, with the exception of the Japanese yen (JPY), which is quoted out to two decimal places.
Cross Currency
When a currency quote is given without the U.S. dollar as one of its components, this is called a cross currency. The most common cross currency pairs are the EUR/GBP, EUR/CHF and EUR/JPY. These currency pairs expand the trading possibilities in the forex market, but it is important to note that they do not have as much of a following (for example, not as actively traded) as pairs that include the U.S. dollar, which also are called the majors.
What are Bid and Ask
As with most trading in the financial markets, when you are trading a currency pair there is a bid price (buy) and an ask price (sell). Again, these are in relation to the base currency. When buying a currency pair (going long), the ask price refers to the amount of quoted currency that has to be paid in order to buy one unit of the base currency, or how much the market will sell one unit of the base currency for in relation to the quoted currency.
The bid price is used when selling a currency pair (going short) and reflects how much of the quoted currency will be obtained when selling one unit of the base currency, or how much the market will pay for the quoted currency in relation to the base currency.
The quote before the slash is the bid price, and the two digits after the slash represent the ask price (only the last two digits of the full price are typically quoted). Note that the bid price is always smaller than the ask price. Let's look at an example:
If you want to buy this currency pair, this means that you intend to buy the base currency and are therefore looking at the ask price to see how much (in Canadian dollars) the market will charge for U.S. dollars. According to the ask price, you can buy one U.S. dollar with 1.2005 Canadian dollars.Direct Currency Quote vs. Indirect Currency Quote
There are two ways to quote a currency pair, either directly or indirectly. A direct currencyquote is simply a currency pair in which the domestic currency is the base currency; while an indirect quote, is a currency pair where the domestic currency is the quoted currency. So if you were looking at the Canadian dollar as the domestic currency and U.S. dollar as the foreign currency, a direct quote would be CAD/USD, while an indirect quote would be USD/CAD. The direct quote varies the foreign currency, and the quoted, or domestic currency, remains fixed at one unit. In the indirect quote, on the other hand, the domestic currency is variable and the foreign currency is fixed at one unit.
For example, if Canada is the domestic currency, a direct quote would be 0.85 CAD/USD, which means with C$1, you can purchase US$0.85. The indirect quote for this would be the inverse (1/0.85), which is 1.18 USD/CAD and means that USD$1 will purchase C$1.18.
In the forex spot market, most currencies are traded against the U.S. dollar, and the U.S. dollar is frequently the base currency in the currency pair. In these cases, it is called a direct quote. This would apply to the above USD/JPY currency pair, which indicates that US$1 is equal to 119.50 Japanese yen.
However, not all currencies have the U.S. dollar as the base. The Queen's currencies - those currencies that historically have had a tie with Britain, such as the British pound, Australian Dollar and New Zealand dollar - are all quoted as the base currency against the U.S. dollar. The euro, which is relatively new, is quoted the same way as well. In these cases, the U.S. dollar is the counter currency, and the exchange rate is referred to as an indirect quote. This is why the EUR/USD quote is given as 1.25, for example, because it means that one euro is the equivalent of 1.25 U.S. dollars.
Most currency exchange rates are quoted out to four digits after the decimal place, with the exception of the Japanese yen (JPY), which is quoted out to two decimal places.
Cross Currency
When a currency quote is given without the U.S. dollar as one of its components, this is called a cross currency. The most common cross currency pairs are the EUR/GBP, EUR/CHF and EUR/JPY. These currency pairs expand the trading possibilities in the forex market, but it is important to note that they do not have as much of a following (for example, not as actively traded) as pairs that include the U.S. dollar, which also are called the majors.
What are Bid and Ask
As with most trading in the financial markets, when you are trading a currency pair there is a bid price (buy) and an ask price (sell). Again, these are in relation to the base currency. When buying a currency pair (going long), the ask price refers to the amount of quoted currency that has to be paid in order to buy one unit of the base currency, or how much the market will sell one unit of the base currency for in relation to the quoted currency.
The bid price is used when selling a currency pair (going short) and reflects how much of the quoted currency will be obtained when selling one unit of the base currency, or how much the market will pay for the quoted currency in relation to the base currency.
The quote before the slash is the bid price, and the two digits after the slash represent the ask price (only the last two digits of the full price are typically quoted). Note that the bid price is always smaller than the ask price. Let's look at an example:
However, in order to sell this currency pair, or sell the base currency in exchange for the quoted currency, you would look at the bid price. It tells you that the market will buy US$1 base currency (you will be selling the market the base currency) for a price equivalent to 1.2000 Canadian dollars, which is the quoted currency.
Whichever currency is quoted first (the base currency) is always the one in which the transaction is being conducted. You either buy or sell the base currency. Depending on what currency you want to use to buy or sell the base with, you refer to the corresponding currency pair spot exchange rate to determine the price.
Spreads and Pips
The difference between the bid price and the ask price is called a spread. If we were to look at the following quote: EUR/USD = 1.2500/03, the spread would be 0.0003 or 3 pips, also known as points. Although these movements may seem insignificant, even the smallest point change can result in thousands of dollars being made or lost due to leverage. Again, this is one of the reasons that speculators are so attracted to the forex market; even the tiniest price movement can result in huge profit.
The pip is the smallest amount a price can move in any currency quote. In the case of the U.S. dollar, euro, British pound or Swiss franc, one pip would be 0.0001. With the Japanese yen, one pip would be 0.01, because this currency is quoted to two decimal places. So, in a forex quote of USD/CHF, the pip would be 0.0001 Swiss francs. Most currencies trade within a range of 100 to 150 pips a day.
Currency Pairs in the Forwards and Futures Markets
One of the key technical differences between the forex markets is the way currencies are quoted. In the forwards or futures markets, foreign exchange always is quoted against the U.S. dollar. This means that pricing is done in terms of how many U.S. dollars are needed to buy one unit of the other currency. Remember that in the spot market some currencies are quoted against the U.S. dollar, while for others, the U.S. dollar is being quoted against them. As such, the forwards/futures market and the spot market quotes will not always be parallel one another.
For example, in the spot market, the British pound is quoted against the U.S. dollar as GBP/USD. This is the same way it would be quoted in the forwards and futures markets. Thus, when the British pound strengthens against the U.S. dollar in the spot market, it will also rise in the forwards and futures markets.
On the other hand, when looking at the exchange rate for the U.S. dollar and the Japanese yen, the former is quoted against the latter. In the spot market, the quote would be 115 for example, which means that one U.S. dollar would buy 115 Japanese yen. In the futures market, it would be quoted as (1/115) or .0087, which means that 1 Japanese yen would buy .0087 U.S. dollars. As such, a rise in the USD/JPY spot rate would equate to a decline in the JPY futures rate because the U.S. dollar would have strengthened against the Japanese yen and therefore one Japanese yen would buy less U.S. dollars.
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