investment infomation sharing

Waste Management----You Should Own Stocks Like This One

2009-05-12T20:02:00.000-07:00

Last year has been brutal for dividend-focused investors. Companies that not long ago were considered bastions of dividend fortitude -- Morgan Stanley (NYSE: MS), SunTrust Banks (NYSE: STI), New York Times (NYSE: NYT), for example -- are slashing payouts left and right. Far more companies cut their dividends in April alone than in all of 2007 (76-44, for the curious).

There's plenty of reason to be sore about those dividend cuts: Mind-blowingly thorough research from Wharton professor Jeremy Siegel shows that dividends are a crucial driver of long-term market outperformance.

But rather than spend the rest of this recession hiding under a rock, we dividend-loving investors can profit. Yes, many companies are cutting their dividends, but there are plenty of stocks not only maintaining their dividends, but growing them -- 59 in April alone!

Spotting the long-haul winners
As we've seen, cuts happen. But fortunately, identifying dividend payers with sustainable, growing payouts isn't exactly rocket science -- you just need to know what you're looking for.

Companies with long, uninterrupted histories of dishing out dividends typically share these three traits.

1. They rake in cash.
Healthy dividends are funded with free cash flow, which means that prodigious cash generation and dividend safety go hand in hand. Dividend-dealing PepsiCo, for example, converts a sticky 9% of its revenue into free cash.

2. They aren't cyclical.
During boom times, profits in a cyclical industry flow like a Saudi oil well, often leading management teams to overcommit to high dividends and significant expansion. When a cyclical industry tightens up (and such industries always do), cash profits follow suit, and once-high dividend payouts quickly find themselves on the chopping block. U.S. Steel (NYSE: X), anyone?

3. They are conservatively capitalized.
Even well-run companies that aren't in cyclical industries can occasionally find themselves on the outs. Look for companies that consistently produce operating profits well in excess of their debt obligations.

By looking out for companies that demonstrate these qualities, you're setting yourself up to find the next great dividend winner.

A company that recently caught my eye -- and that demonstrates these three qualities -- is Income Investor Buy First recommendation Waste Management, the largest player in the trash game.

Trash and cash
Waste Management operates in a pretty mundane industry. But your trash is Waste Management's cash. The company turns a solid 9% of its revenue into free cash flow and pulls in operating profits nearly five times that of its interest expense.

And while declines in industrial trash collection have slowed growth, as those of us who routinely lug our trash to the curb can attest, demand for residential trash collection is extremely consistent.

Owning shares of Waste Management is a bit like having a stake in a collection of small near-monopolies. Building a landfill requires a lot of cash, involves miles of red tape, and faces intense blowback from the locals. These challenges keep competition at bay and have helped lead to consolidation and better pricing in the industry.

It gets better
For starters, there's no real chance that technological obsolescence will undercut Waste Management's service offering. In other words, Waste Management won't play the Yahoo! (Nasdaq: YHOO) to anyone's Google (Nasdaq: GOOG). Another plus: Waste Management doesn't have to spend gobs of cash on research and development every year simply to maintain its competitive position. Waste hauling is as static a business as it is boring -- and that's a good thing.

And unlike with oil, gasoline, and other high value-to-weight commodities, it doesn't make economic sense to haul trash over long distances. That means you don't have to worry about distant competition threatening your localized pricing, as it often does in other industries -- picture local newspapers' classified rates before and after eBay (Nasdaq: EBAY).

Now, take the ability to set local prices with minimal competition, combine it with the rational pricing of this consolidating industry, and it's little wonder that Waste Management and the other major waste haulers are able to push around their customers, consistently raising prices on their largely captive customer base.

Dumping it all together
There's a lot to love about such sturdy, growing dividend payers -- just ask one of the company's largest investors, Bill Gates. Waste Management is typical of most Income Investor recommendations: strong, well-managed, and boasting healthy cash flows and a sustainable dividend.

On the surface, there isn't much pizzazz to dividend-focused investing, but as Jeremy Siegel's research and Income Investor's results have shown, the strategy is a proven winner.

Be Careful About The Index Hugger

2009-05-12T02:38:00.000-07:00

Don't be fooled by the warm and fuzzy name - index huggers are arguably the most vile, misleading vehicles in the investment market. These funds, sometimes called "closet trackers" or "pseudo trackers", are mutual funds or portfolios of equities that are marketed as actively managed, but in fact keep so close to the relevant index, that one might as well have purchased a real tracker.

Let's look at a little analogy:
Imagine that you are sick - dying. You go to the hospital because the hospital promises to care for its patients, to give specialized treatment. You check in and pay the hefty fees, but instead of the personalized care you expect, the staff simply leave you in bed, letting nature run its course - for better or worse. This is the kind of care you get when you accidentally buy into a closet tracker. You'd have been better off taking your chances at home. You'd save money and wouldn't have any false assumptions.

These funds exploit investor ignorance, tricking people into paying for a service and a market-beating return that they won't receive. This article will explore the closet tracking phenomenon and show how you can avoid being the latest unsuspecting victim.

Closet Trackers Abound
Research conducted in the Edinburgh, Scotland, by market research firm The WM Company found that almost 75% of "active funds" deviate only marginally from their benchmark index.

The study covered data from 1980 to 2000, and found that 40% of supposedly active funds deviate by between 0-3%, and a further 34% by 3-6% per cent. The study also found that roughly three-quarters (127 out of 168) of funds simply do not beat the index.

Many Buy Into These Misleading Funds
The above statistics have alarming consequences, particularly for inexperienced investors who do not know how the investment industry works. These investors expect something very different from what they often receive.

Anyone who is aware of business cycles and market crashes would logically expect fund managers to ensure that their portfolios perform reasonably well in all market situations. They would expect each stock purchase to be carefully considered, any changes in the market or with respect to the individual companies to be reflected in immediate sales and purchases and so on. For such individuals, the realization that their money is in a closet tracker can be a rude awakening.

This is surely the real danger of closet trackers. People believe their investments are being managed in such a way as to minimize potential losses. They feel safe leaving their money in the stock market, secure in the knowledge that their money is being looked after. Yet, a closet tracker will go up and down with the market, fully exposed to stock market cycles.

If the S&P index goes up (or down) by 5%, most American funds will go up (or down) by about the same amount. This is a fundamental reality of the investment industry, but the buyers of closet trackers are usually unaware of this reality - until the market takes a dive.

Why They Exist
These funds have little, if anything, to offer investors; however, for the fund company, closet trackers are great. They are cheap, easy to run and fees are paid for a non-existent service. Accordingly, closet trackers enable large brokerage houses to run - not manage - hundreds or even thousands of portfolios with a passive one-size-fits-all approach. It suits them just as much as it does not suit the investor.

Unfortunately, regulatory measures have not caught up with investor distress so far. If somewhere in the prospectus the fund mentions that it will attempt to mirror or track an index, then unfortunately it is a case of "buyer beware". The investor might think he or she is getting something tailor-made but the fine print says it's strictly off the rack

Spotting a Closet Tracker
If you want a tracker, you're much better off buying a real one - you will pay much less in fees and will know what you are getting. However, if you want active management, you'll need to find a fund or broker that can outperform consistently in different market situations or one who does not even attempt to beat a benchmark. You may, for instance, prefer a small portfolio of 5-15 stocks, each genuinely actively managed with its own stop (buying or selling limits), ongoing monitoring and control and so on.

Index huggers are simply not "managed" in the true sense of the word. Unless a fund manager can, in some way, do better than the market itself in terms of returns, you do not need him or her. For a broker or fund manager, being a nice guy is not enough. No matter how charming the fund company of a closet tracker is, and irrespective of how glossy and impressive the brochures or internet sites are, these are bad investments in financial terms.

You can spot these funds by asking the right questions. These include:
What features do you offer that I can't get from a tracker (personalized information, communication, tailor-made portfolio)?
How exactly does your active management operate, and how does it help?
Do you benchmark with an index and if so, which one?
Do you beat it consistently and if so, by how much?

Understand the Pitfalls of Both Styles Before You Buy
Active management - It is not easy to find a consistently outperforming fund or broker. Getting reliable information on performance is time consuming, can be complex, and may not always be possible. Past performance simply cannot be extrapolated into the future. In short, you may prefer not to bother with the hassle of active management.

Index Trackers - There are different indexes and differently composed trackers. So, some homework or reliance on the seller is still needed. Either way, it is not all safe sailing. However, the fact remains that trackers are cheaper and, at least on a relative scale, you do really know what you are getting. There is no doubt that the tracker route is more transparent and straightforward.

Conclusion
Unfortunately, closet trackers will probably always exist. Closet trackers are just too cheap, easy to run and profitable, and there are just too many naive investors out there, for such funds to disappear. But, informed investors can identify and avoid them.

For the market as a whole, regulation and investor education are the solutions. Regulators need to ensure that firms and individuals are not allowed to sell funds that promise something they don't deliver - otherwise, the old "buyer beware" principle prevails, and many buyers are not and will never be aware of this problem.

Knowing Five Things About Asset Allocation

2009-05-11T02:52:00.000-07:00

With literally thousands of stocks, bonds and mutual funds to choose from, picking the right investments can confuse even the most seasoned investor. However, starting to build a portfolio with stock picking might be the wrong approach. Instead, you should start by deciding what mix of stocks, bonds and mutual funds you want to hold - this is referred to as your asset allocation.

What is Asset Allocation?
Asset allocation is an investment portfolio technique that aims to balance risk and create diversification by dividing assets among major categories such as cash, bonds, stocks, real estate and derivatives. Each asset class has different levels of return and risk, so each will behave differently over time. For instance, while one asset category increases in value, another may be decreasing or not increasing as much. Some critics see this balance as a settlement for mediocrity, but for most investors it's the best protection against major loss should things ever go amiss in one investment class or sub-class.

The consensus among most financial professionals is that asset allocation is one of the most important decisions that investors make. In other words, your selection of stocks or bonds is secondary to the way you allocate your assets to high and low-risk stocks, to short and long-term bonds, and to cash on the sidelines.

We must emphasize that there is no simple formula that can find the right asset allocation for every individual - if there were, we certainly wouldn't be able to explain it in one article. We can, however, outline five points that we feel are important when thinking about asset allocation:

Risk vs. Return
The risk-return tradeoff is at the core of what asset allocation is all about. It's easy for everyone to say that they want the highest possible return, but simply choosing the assets with the highest "potential" (stocks and derivatives) isn't the answer. The crashes of 1929, 1981, 1987, and the more recent declines of 2000-2002 are all examples of times when investing in only stocks with the highest potential return was not the most prudent plan of action. It's time to face the truth: every year your returns are going to be beaten by another investor, mutual fund, pension plan, etc. What separates greedy and return-hungry investors from successful ones is the ability to weigh the difference between risk and return. Yes, investors with a higher risk tolerance should allocate more money into stocks. But if you can't keep invested through the short-term fluctuations of a bear market, you should cut your exposure to equities.

Don't Rely Solely on Financial Software or Planner Sheets
Financial planning software and survey sheets designed by financial advisors or investment firms can be beneficial, but never rely solely on software or some pre-determined plan. For example, one rule of thumb that many advisors use to determine the proportion a person should allocate to stocks is to subtract the person's age from 100. In other words, if you're 35, you should put 65% of your money into stock and the remaining 35% into bonds, real estate and cash.

But standard worksheets sometimes don't take into account other important information such as whether or not you are a parent, retiree or spouse. Other times, these worksheets are based on a set of simple questions that don't capture your financial goals. Remember, financial institutions love to peg you into a standard plan not because it's best for you, but because it's easy for them. Rules of thumb and planner sheets can give people a rough guideline, but don't get boxed into what they tell you.

Determine your Long and Short-Term Goals
We all have our goals. Whether you aspire to own a yacht or vacation home, to pay for your child's education, or simply to save up for a new car, you should consider it in your asset allocation plan. All of these goals need to be considered when determining the right mix.

For example, if you're planning to own a retirement condo on the beach in 20 years, you need not worry about short-term fluctuations in the stock market. But if you have a child who will be entering college in five to six years, you may need to tilt your asset allocation to safer fixed-income investments.

Time is your Best Friend The U.S. Department of Labor has said that for every 10 years you delay saving for retirement (or some other long-term goal), you will have to save three times as much each month to catch up. Having time not only allows you to take advantage of compounding and the time value of money, it also means you can put more of your portfolio into higher risk/return investments, namely stocks. A bad couple of years in the stock market will likely show up as nothing more than an insignificant blip 30 years from now.

Just Do It!
Once you've determined the right mix of stocks, bonds and other investments, it's time to implement it. The first step is to find out how your current portfolio breaks down. It's fairly straightforward to see the percentage of assets in stocks vs. bonds, but don't forget to categorize what type of stocks you own (small, mid, or large cap). You should also categorize your bonds according to their maturity (short, mid, long-term). Mutual funds can be more problematic. Fund names don't always tell the entire story. You have to dig deeper in the prospectus to figure out where fund assets are invested.

There is no one standardized solution for allocating your assets. Individual investors require individual solutions. Furthermore, if a long-term horizon is something you don't have, don't worry. It's never too late to get started. It's also never too late to give your existing portfolio a face-lift: asset allocation is not a one-time event, it's a life-long process of progression and fine-tuning.

Don't Trust the Rally in Financials

2009-05-11T02:31:00.000-07:00

It's been a very interesting start to 2009. Four months into the year, we've seen a tale of two halves: The worst performers from the first two months of the year performed best in March and April.

The worst performers? Financials -- the stocks making the news -- continued their upward streak in April, appreciating 22.2%, but they remain down for the year. Financials and utilities remain the only double-digit decliners so far in 2009, which is not all that bad given the remarkable thud with which we started the year.

It is curious to note that things in April developed very similarly to the way they did in March:
Source: Standard & Poor's.

Provided that the S&P 500 had fallen more than 20% for the year in early March, finishing April down only 3.4% for the year is a heroic achievement. One big concern, though, is that this rally is led by the worst stocks -- a characteristic of bear market rallies, as I noted in March's performance wrap-up.

Still, even if this is a bear market rally, that does not mean you should necessarily fight it. As legendary trader Jesse Livermore said long ago, "There is only one side of the market, and it is not the bull side or the bear side, but the right side." With that in mind, let's try to make sense of the numbers.

False dawn for the banks?
While it appears that there's been a short squeeze in the financial sector, fundamentals drive the share price performance in the long term. Large short positions act like lighter fluid poured on wet wood. Yes, the fire burns spectacularly for a short while, but in the end, all you get is smoke.

Mike Mayo, the star banking analyst at Calyon Securities, believes that bank losses will be much larger than those during the Great Depression, leveling off between 3.5% and 5.5% of total loans made.

During the Depression, the loan loss high-water mark hit 3.4%. We haven't reached that point yet, but as I recently read in a Goldman Sachs (NYSE: GS) research report, there's at least another year of climbing bank losses, given our current point in the recession, and the three-year cycles such situations typically follow.

In that light, it is easy to see the recent sharp rise in bank stocks as a massive short squeeze. So to those chasing Citigroup (NYSE: C) and the like because they are "cheap," I say think twice, and instead study company fundamentals. You're better off sticking with well-run banks like JPMorgan (NYSE: JPM) and Wells Fargo (NYSE: WFC).

Three out of 10
Three out of 10 sectors in the S&P 500 are up for the year: technology (16.5%), materials (11.9%), and consumer discretionary (8.3%). I've written before about the merits of tech stocks -- with their low debt burdens and strong cash positions -- so this is no surprise to me. I'm more intrigued about the action in the other two economic sectors.

Materials seem to be rallying on the hope that "less bad" economic numbers mean the worst is over for the U.S. economy. Then there's the Chinese stimulus package, which could mean increased commodity demand. I'm a believer in commodities, but investors shouldn't expect a return to the feverish world economic growth rate we saw in 2003-2007. (At least, not soon.)

The consumer discretionary sector -- a classic sector that leads the market at the end of a recession -- is now in the black for the year. While it seems unlikely that consumers will spend vigorously in times of rising unemployment, stocks usually bottom before the fundamental picture turns, so this is undoubtedly a positive sign.

Target (NYSE: TGT) is one consumer discretionary stock I like -- in fact, back in March, I wrote about how I liked Target better than Wal-Mart (NYSE: WMT).
The key to Target's performance is the recovery of the U.S. consumer. While consumer spending may be less than what it's been in recent years, when the economic shock of late 2008 wears out, Target is well-positioned. Given the strong advance in Target's share price in recent weeks, investors would do well to practice patience and look for pullbacks.

After a monstrous seven-week run, I am starting to wonder if one should not look for a pullback in the broad market, too. This year "sell in May and go away" isn't sounding so bad.

There Is A Cheaper Way to Lock In Profits

2009-05-10T21:01:00.001-07:00

The rally in stocks since March has brought some much-needed relief to shellshocked investors who saw so much of their net worth go up in smoke during 2008. And if you're looking to take advantage of a strategy that could help you preserve most of the money you've recovered in the past two months, there's more good news: It's a lot less expensive to protect yourself than it was earlier this year.

One simple way you can guard against your stocks falling sharply in value is by buying put options. These options essentially guarantee that no matter how much your shares drop, you have the right to sell them at a price you determine within a certain period of time.

As you might expect, put options got expensive during both the November panic and the ensuing plunge in March. But now that a measure of calm has descended upon the market, you can buy puts much more reasonably.

The VIX and you
The volatility index, or VIX, is one measure that follows the relative cost of options. Because options pricing depends on volatility -- the more volatile a stock is, the more expensive the associated options will be -- looking at the VIX will give you a sense of how much you'll pay to protect yourself against market fluctuations.

After hitting historic highs last October and November, the VIX has turned downward. Many pointed to those lower levels as evidence that the March decline wasn't the true low for the bear market. Whatever the reason, current volatility levels haven't been this low since shortly before Lehman's bankruptcy in mid-September.

Grabbing your gains
If you want to hedge against giving up some of the gains you've seen in your portfolio over the last two months, you can probably now do so without spending quite as much. The VIX tracks options on the broad S&P 500 index, so some individual stocks may not have seen their volatility levels fall -- but it's likely that many have.

Puts on many stocks offer reasonable prices right now. Here's a sample of current put costs on some commonly traded stocks and ETFs.

Which option you should buy depends on how much protection you want. The May options listed for Microsoft and Wynn will only protect you for the next week and a half, but you can spend more to get an option that will last longer, if that's more in line with your investing strategy.

Speculating on security
Like most options strategies, buying puts involves substantial risk. If shares rise or even stay flat, you would lose your entire investment on most of the options listed above. In fact, if your option's strike price is below the stock's current value, you could actually see your shares drop and still suffer a complete loss on your put option.

You can look at put options the same way you do an insurance policy, though. If your stocks drop in the near future, paying around 3% or so of the current share price to limit your losses may well be worth the cost.

Still, the cost of long-term puts makes it expensive to get extended protection. As you can see from the SPDR put listed above, you'd pay almost 13% of the current stock price to limit your losses to $1.56 per share -- and even that option only lasts for seven months.

So don't expect to cover your downside forever using put options. But if temporary protection makes you more confident about taking advantage of still-attractive valuations on stocks, your future gains could easily dwarf what you spend on puts.

Companies We Should Buy Now

2009-05-09T21:09:00.000-07:00

The stock market is realy different from what it was a decade ago. The Internet, frankly, changed everything.

We take it for granted now, but the Web democratized the buying and selling of stocks in an unprecedented way.

Party at the moon towerEquities, for one, have become more accessible in two ways:

1.Internet-based discount brokerages provide a dirt cheap alternative to buying stocks through very costly full-service brokerages. Not only are investors saving money on commissions in general, but we're also able to buy shares in small lots and still keep commissions to less than 2% of our investment.

2.The volume of information on stocks and funds is arresting. Anyone with a computer can now access the same information and tools as professional investors.

That's not just theoretical, either. According to a study by the Investment Company Institute, of the millions of households that own shares in mutual funds, "the Internet has become central to many shareholders' management of their finances. About eight in 10 shareholders with Internet access go online for financial purposes, such as to check their bank or investment accounts, obtain investment information, or buy or sell investments."

Shameless Spider-Man reference aheadWith great power, though, comes great responsibility. And data shows that such empowerment sometimes backfires.

As Fool co-founder David Gardner has said time and again, "The market is so short-term." The real-time streaming quotes, daily news stories, frequent analyst upgrades and downgrades, and quarterly earnings reports program investors into a certain mind-set, where minute-to-minute information becomes more significant than it needs to be. Investors, in short, outsmart themselves.

That's a conclusion from the work of professors Brad Barber and Terrance Odean, who studied the investing habits of 60,000-plus individual investors in the 1990s. They found that investors moved in and out of stocks far too frequently, thereby suffocating returns and generating excess tax and trading costs to boot. Put more simply, they concluded that "trading is hazardous to your wealth."

Why, then, do investors trade so frequently? In the words of Barber and Odean, "We believe that these high levels of trading can be at least partly explained by a simple behavioral bias: People are overconfident, and overconfidence leads to too much trading."

See, information breeds confidence. Many investors today -- pros and amateurs alike -- believe that they can know more than their fellow investors. But here's something we pretty much take as gospel these days: If you discovered a "trading signal" on the Internet, hundreds of thousands of other people did, too.

Get out of that mind-setThe recent market nosedive, and the subsequent doom-and-gloom news headlines, have been stressful. We've received a ton of email from folks wondering the same thing: What should our next move be? As we see it, the rules of the game haven't changed -- if you're seeking long-term wealth from the market, live by three rules:

1.Buy great companies ...
2.at good prices ...
3.and be patient.

The first point is paramount. "Buying companies" is much, much different from "trading stocks." It's also a lot easier and a lot more reliable. So if you want to make serious money in stocks, start with great companies.

Easier said than done
What makes a great company? That's the rub. There are many ways to measure greatness. Costco (Nasdaq: COST), for example, has a high net promoter score. American Express (NYSE: AXP) and Tiffany (NYSE: TIF) have nearly unmatched brand and marketing savvy. Kimberly-Clark (NYSE: KMB) and 3M (NYSE: MMM) have long histories of innovation and devote significant resources to R&D. Google (Nasdaq: GOOG) and salesforce.com (NYSE: CRM) have unique corporate cultures and are among Fortune's "100 Best Companies to Work For."

We're not advocating that you go out and buy those specific companies, but they are the kinds of companies you should be buying (not trading!) right now -- and holding for the long term.

How to Do When the Dow Hits 7,500

2009-05-09T21:07:00.000-07:00

Talk about ironic ... I originally submitted this article to my editor on Aug. 29, after the Dow had fallen "all the way" to 11,500 -- but it never got published.

The plan was to take you back to 1996 -- when the Dow crossed the 6,000 mark for the first time ever -- to a Charlie Rose roundtable that included Jim Cramer and Motley Fool co-founders David and Tom Gardner.

Another crazy call by Cramer Back then, Cramer argued that the Dow would soar all the way to 7,500 -- despite the fact that it had already more than doubled in just over five years, and that even shares of behemoths like Procter & Gamble (NYSE: PG) and Coca-Cola (NYSE: KO) had risen more than 100% from their 1991 lows.

Meanwhile, David and Tom took a much different approach, telling viewers, "We don't care where the market is headed." They explained that they were focused on finding the best eight or nine stocks to grow your wealth over the long haul. Basically, they searched for stocks that:

Were underfollowed on Wall Street.
Had a net profit margin of at least 10%.
Had earnings and sales growth greater than 25%.
Had insider holdings of 15% or more.

I went on to show how, early on, this approach led them to America Online and Amazon.com (Nasdaq: AMZN), among others -- not to mention that it landed them on the covers of magazines from Fortune to Newsweek. But I also thought it fair to point out that it was hard not to get rich in that market.

After all, Cramer had been right on the money. The Dow soared to well over 9,000 in 1998 and reached a whopping 11,500 less than two years after that -- which is exactly where it stood on Aug. 29, 2008, when I submitted my article.

Could my timing be any worse? Sure, we were in the middle of a fierce bear market -- but I pointed out that of the 24 stocks that David and Tom recommended to their Stock Advisor subscribers during the last bear market ...

Twenty-three were (or had been sold) in positive territory.
Eleven had more than doubled.
Five were up more than 400%.

I even added, "I bring this up merely to illustrate that despite what all the talking heads on TV are telling you, you absolutely should be buying great companies right now -- while they are still selling at massive discounts."

I'd almost jokingly insinuated that the Dow could drop to 7,500 ... and then, within six weeks, we were a mere 200 points from seeing it do just that.

And here we are now -- thrilled to finally be above 8,000 again! But even after the recent rally, I’m still sitting on sizable losses in Apple (Nasdaq: AAPL) and AT&T (NYSE: T). And I'm left with the same questions that you probably have, like "have we finally seen the market bottom?" and "should I just sell everything and move on?"

After having been so thoroughly humbled by this market, I won't go so far as to suggest that you follow Buffett's lead to be greedy when others are fearful. And I won't even preach what my fellow Fools and I are practicing.

Instead, I'll simply share the advice that Tom Gardner recently gave us at our company-wide "huddle" ...

How you can turn losses into a huge win Tom pointed out that when things are going well, most of us spend all of our time high-fiving and celebrating, whereas when things go sour, we turn to sulking, worrying, and even panicking.

Meanwhile, when the going gets tough for the toughest, smartest, and most successful people out there, they do something drastically different ... they learn from it. And that's what sets them apart.

Take Benjamin Graham, for example ... He went bankrupt three separate times as an investor. But each time, he documented and studied his failures, and he was eventually able to impart this investment wisdom to countless others -- including Warren Buffett, who in turn learned from his own mistakes and failures.

Early in Buffett's career, he mistakenly believed he could save a failing textile mill. After being forced to liquidate its textile operations, Buffett learned to pay up for quality and turned that company into a $140 billion legend.

Another great example is Pixar's John Lasseter. After he graduated from college, Disney (NYSE: DIS) hired him to captain its Jungle Cruise ride at Disneyland. Later, the company gave him a shot at being an animator, and he quickly recognized the ability of new computer technologies to revolutionize animation.

But Disney was so unimpressed with his first feature that they fired him on the spot. So Lasseter literally went back to the drawing board. After fine-tuning his process, he moved on to the company that would become Pixar, where he's won two Academy Awards and churned out a string of blockbuster hits that included Toy Story, A Bug's Life, and Cars.

Oh, and let's not forget -- he and Steve Jobs later sold Pixar to Disney for a cool $7.4 billion.

Now it's your turn At the end of August, I never would have imagined that we would see the Dow hit 7,500 -- much less almost hit 6,500. But now I know that anything is possible. And I think that rather than celebrating the market’s recent run-up, the best thing we can do is focus on learning from our past mistakes so we can make better investments going forward.

I've already learned that companies like Clearwire -- which bleed cash quarter after quarter and are years away from profitability -- may not be the best places for my money, no matter how intriguing their stories are.

I've also learned that I should avoid investing in companies with business models that are a bit too complex for me to fully understand. That's why I recently sold my shares of NYSE Euronext and Goldman Sachs, and why I probably won't be buying shares of JPMorgan (NYSE: JPM), HSBC, or Fannie Mae anytime soon -- no matter how cheap they get.

Profiting From a Bankrupt GM

2009-05-09T21:01:00.000-07:00

Chrysler's taken the plunge. General Motors (NYSE: GM) has mounted the diving board. And the question now is, who's best placed to profit from a GM bankruptcy -- or more generally, the seismic changes taking place in the auto market?

The usual suspects
Some would suggest it's the Big Three Japanese automakers who will thrive from Detroit's demise. Toyota (NYSE: TM) has already won the title of "world's biggest automaker." Meanwhile, Nissan (Nasdaq: NSANY) and Honda (NYSE: HMC) should both benefit from weaker U.S. competition.

From my point of view, though, "none of the above" is the biggest potential profiteer from Detroit's implosion. To find the real winner, you need to train your binoculars not east, but north. To Canada. To Magna International (NYSE: MGA).

And now, for something completely different
Nearly four years ago, I laid out a roadmap for how North America's car industry might rise from the ashes of Detroit. Key to the plan was the arising of a "new" automaker -- one unburdened by the exorbitant legacy costs of the old Big Three automakers, having vast experience in the auto industry, capable of building its own cars, and most important of all, possessing that rarest of auto industry skills: Earning a profit.

GM? No, MM. Magna Motors
All of which fits Magna International to a "T." Over more than a century in business, Magna has proven itself arguably the best auto parts company on the planet. It sells parts to all of the automakers named above, and a few dozen more that aren't. And when I say "auto parts," I'm not even doing Magna justice. This company goes beyond churning out brake pads and steering wheels, folks. It builds whole cars.

In March, we learned that Ford (NYSE: F) has hired Magna to build the guts for its first-ever electric car -- a Focus spinoff that will travel 100 miles without drinking a drop of petrol, expected to hit dealer lots in 2011. Nor is Ford the only "carmaker" outsourcing its primary function to Magna.

Magna's Chief Technical Officer for the Americas, Ted Robertson, says the Focus's guts are: "a generic system we were designing so it could be put into anybody's vehicle." (Much like how Microsoft (Nasdaq: MSFT) puts its Sync system in Fords today, but has the right to sell it also to other companies any time they're ready.) Thus, Magna threatens to turn the rest of the industry into essentially a big marketing and distribution shop, while Magna makes the actual cars -- and much of the profits.

And that's just the start
Two years ago, Magna tried to become a "carmaker" in its own right, when it "lost" the bidding war for Chrysler (is there such a thing as a Pyrrhic loss?) Last month, we learned that Magna hasn't given up the dream, either. It's trying again, this time bidding -- whether with or against Fiat is still in question -- to take a stake in GM's European Opel division.

So to sum up, the global auto industry has been turned on its head, with Chrysler bankrupt and soon to be owned by its own union, GM en route to becoming "Government Motors," and now even the Japanese automakers are posting losses. With everyone else now in full-scale rout, here comes Magna International, hitting the accelerator and driving to disrupt the industry even further.

But is the price right?
The opportunity for Magna to thrive is clearly present. But... what about the price tag? I mean, the stock sells for almost a 60 P/E. Is this really something you can afford to invest in?

While that P/E may be off-putting at first, other measures of valuation suggest the stock could indeed present a compelling bargain. The value of its assets, for example. Magna's tangible book value amounts to $54.61 per share. That makes the $37 per share price look like pretty quite a sweet discount from sticker price.

Or the scale of its profits. In one of the worst markets for selling cars -- and car parts -- imaginable, Magna generated $315 million in free cash flow last year. Over the five years before that, the company generated more than $3.34 billion -- an average of $668 million per year.

Clearly, this is one car company that knows how to make a buck. And speaking of bucks, Magna's balance sheet shows nearly $2.8 billion in cash, and almost $200 million more in long-term investments. Long term debt amounts to a piddling $143 million, while pension obligations -- that hobgoblin of carmakers south of the (U.S.-Canada) border -- come to just under a modest $300 million.

At today's price, Magna's stock alone sells for just under 13 times trailing free cash flows. For a company that most analysts think will grow at 11.65% annually over the next five years, that seems reasonable. For a company as cash-heavy as Magna is, it's downright cheap.

While Detroit flounders, and even Tokyo shows itself capable of losing money, Canadian Magna continues to motor on.So it looks like Magna shareholders could be in for one very profitable ride.

It Will Make You a Dumber Investor

2009-05-07T17:58:00.000-07:00

It' may be a Minnesota, Lake Wobegon-wanna-be humility thing, but I'm no fan of Twitter, the social networking microblog that lets users send each other 140-character messages on the fly. In an age of epic narcissism, where people already measure their worth by collecting Facebook "friends" and LinkedIn contacts like so many Alf pogs or Beanie Babies, I don't think we really need another avenue for mass navel-gazing. In fact, I think this trend could be harmful to your nest egg.

Here's my major malfunction Over the past few weeks, as Twitter has become for many a must-have doo-dad, I'm detecting some disturbing trends in Twit finance that I think will lead you to make bad investing decisions. It came to a head for me this week when I noticed a SmartMoney article based on the premise that following its favorite dozen economic/market bloggers can help make you "make smarter money moves."

That's an unproven assertion, to put it kindly.

To put it more truthfully, it's absolute garbage.

When more and more quickly isn't better Following Wall Street traders, stock pickers, and up-to-the-second news feeds is already a full-time job for some. Think you can analyze data faster than the trading desks at Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), or hundreds of hedge funds, who have massive computer systems and special data pipes so they can stay ahead of the competition on the latest micro-movements in the market? No way.

Nor would following SmartMoney's advice to keep tabs on smart macro prognosticators like Roubini and Krugman have helped. Had you paid much attention to recent, rank economic news, you might have missed out on a big market rally that sent consumer-facing stocks like Home Depot (NYSE: HD) and Chipotle (NYSE: CMG) up 30% or more.

The fact is, Twitter can't make you nimbler than anyone else. And even if it could, it would be no guaranteed money maker. Remember, even if you knew everything first, you still wouldn't know which way the markets (or individual stocks) might move after that information. A single example: Logitech (Nasdaq: LOGI) recently reported a horrendous Q4, far worse than analysts guessed, yet the stock is up more than 15% since then. Had you known before the release what those numbers were, I'm sure you would have guessed (as I did) that the stock would have dropped like a rock. And despite having better than up-to-the-minute information, you would have been wrong. Had you loaded up on bearish options, you could be nicely toasted by now.

When more and more quickly is worse More information, more quickly, is clearly not better, but it can't hurt, right?

Unfortunately, it can -- big time.

The problem centers on the way your brain relegates decision making to two separate systems (a scenario described in recent books such as Nassim Nicholas Taleb's Black Swan, Jonah Lehrer's How We Decide, and Jason Zweig's Your Money and Your Brain.) Briefly put, one part of your brain uses shortcuts, based on emotions and other fleeting stimuli, to come to conclusions quickly, often before you're even aware a decision has been made. The other decision-maker, which operates in a different part of the brain, is slower, more reasoned, and more balanced. Making things worse, decisions involving money (especially random ones, the kind generated by the stock market) are already shown to engage the emotional part of the brain, eliciting responses and behavior similar to addicts looking for a fix.

Alas, just when it matters most, you're most likely to route an important decision to the most fast-acting but ill-informed, brevity-worshipping part of your brain. I think I'll call it your Inner Twit.

And if you think you're too smart or self-aware to fall victim to your Inner Twit, think again. You don't get much of a choice about where to send these decisions.

There is hope The surest way to avoid being tripped up by your Inner Twit is to make no snap investing decisions at all. Sleep on it. Put it on your to-do list for next week. And if you aren't going to act on the worthless, up-to-the-second noise craved by your Inner Twit, it's a safe bet that you can ignore it altogether. That's why I've been advising investors for years to ignore the ridiculous, rotating headlines on Yahoo! Finance, the seizure-inducing ticker-crawls on CNBC, and the frenzied hand-waving on stock message boards.

Twitter is only the latest, and most banal, extension of a culture that has a hard time recognizing the difference between information and knowledge, between timely and useful, between price and value. And make no mistake, your time is valuable. Any time you waste on Twits is time you could be spending on more important things: Read that latest proxy statement, call your spouse and say "hi," or throw a tennis ball for your dog.

One example As co-advisor at Motley Fool Hidden Gems, information overload and a false sense of urgency are two of the biggest challenges I face. Sure, I like to stay up-to-date on what's happening to our holdings, yet I need to remain aware of how my Inner Twit twists the information I receive, and step back and breathe before making decisions. For instance, shortly after I recommended Autoliv (NYSE: ALV) to members, the company announced an equity and debt offering that sent shares plunging. Couple that with a constant stream of news about bankruptcies at big customers like Ford (NYSE: F) and General Motors (NYSE: GM), and it had many people screaming for us to dump it. My Inner Twit was shouting the same thing. The last thing I needed was a greater supply of 140-word snippets about the state of the auto industry. So, I stepped back to think.

A more sober analysis convinced me that this was not a catastrophe. Only a few weeks later, this recommendation is now up 66% for us, nearly 50 percentage points better than the wider market. (Full disclosure: We've got our share of laggards, too.)

Foolish final thought Most often, in investing, the last thing we need is more information. We have a hard enough time handling the flood we've already got. Step away from the Twitter and concentrate on what matters: the price you're paying for a stock, the business fundamentals, stewardship of capital, returns on investment.

Not Listening to Buffett Cost Me Thousands

2009-05-05T07:25:00.000-07:00

Forbes recently ranked Berkshire Hathaway Chairman Warren Buffett as the second-richest man in the world, with an estimated net worth of $37 billion. Although his net worth has dropped by a cool $25 billion over the past 12 months, it's still an impressive haul.

Although some people have recently questioned his judgment, Buffett is still almost universally accepted as one of the world's greatest stock market investors. When he talks, it pays to listen.

The Oracle is commonly considered a value investor, but he seems just as focused on growth. Either way, he has proved that he's an intelligent investor. As Buffett's sidekick Charlie Munger once said, "All intelligent investing is value investing."

Google as a value stock
Buffett focuses on companies with favorable long-term economics and strong competitive advantages -- companies such as Coca-Cola, Wells Fargo (NYSE: WFC), and American Express (NYSE: AXP), all of which are current Berkshire investments, either through common stock holdings or fixed-income securities.
One Wall Street analyst called Coca-Cola "very expensive" around the time Buffett started buying it. It wasn't a typical value stock. But as Buffett once said: "If you gave me $100 billion and said, 'Take away the soft-drink leadership of Coca-Cola in the world,' I'd give it back to you and say it can't be done."

Now that's a competitive advantage.

See, value investing is not all about buying stocks with low price-to-earnings, price-to-book, or price-to-sales ratios. Far from it.

For example, Google would have been a great value stock at its IPO in August 2004, despite selling, at the time, for more than 100 times earnings.

A value stock trading for more than 100 times earnings? Yep. Google was growing rapidly, continuing to take market share, and building sustainable competitive advantages in its enterprising culture, superior advertising platform, and brand loyalty. Given its growth rate ever since, and its powerful business model, it was underpriced back then.

Investing shock: Buffett was wrong
Buffett didn't buy Google. Sadly, neither did I -- a decision that has cost me thousands.

I held off on buying Google shares because they seemed expensive. I knew it owned the vast majority of the search-market share and had both a great corporate culture and innovative leaders. But I couldn't get past that lofty P/E ratio.

Instead, I was concentrating on buying poor companies on the cheap. These "trash stocks," as I call them, have a nasty habit of getting even cheaper -- and sometimes even going bust.

At least I'm not alone in buying trash stocks. In his 1989 letter to Berkshire Hathaway shareholders, Buffett himself admitted to similar crimes. In a section of the letter called "Mistakes of the First Twenty-Five Years (A Condensed Version)," Buffett says he never should have bought control of the textile company Berkshire Hathaway.

Why? Even though he knew that the textile-manufacturing business Berkshire operated was in a declining industry, he was enticed to buy because the price looked cheap. The Berkshire of today wouldn't exist without that original purchase, but Buffett reluctantly closed the textile business in 1985.
And that brings to mind a timeless Buffett-ism: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

Value investing for suckers
I'm a great fan of Warren Buffett and like to think of myself as a value investor. But too often I've been guilty of buying those "trash stocks" -- cheap stocks with mediocre (or worse) businesses.

Although I've never owned them, over the years, I've come close to buying shares in Palm (Nasdaq: PALM), Ford (NYSE: F), Abercrombie & Fitch (NYSE: ANF), Motorola (NYSE: MOT), and even Las Vegas Sands (NYSE: LVS) -- all of which appear relatively cheap but operate in intensely competitive industries and/or carry plenty of debt.

Twenty years have passed since that famous 1989 letter to Berkshire Hathaway investors. As I review my portfolio today, I see fewer and fewer "trash stocks."

Through a combination of expensive errors, experience, and a commitment to continued investing education, I've slowly come to realize that the best long-term investments are in companies in growing industries that possess long-term, sustainable competitive advantages.

Do you have a very best stock to Own？

2009-05-03T22:03:00.000-07:00

That is to say. A stock that brings you closer to retirement year in and year out? One like Kraft, formerly American Dairy Products, which -- as tracked back by Dr. Jeremy Siegel -- turned $1,000 into more than $2 million over 53 years, with dividend reinvestment?

You might have guessed General Electric or maybe Exxon-Mobil (NYSE: XOM) with their respective traditions of long-term success, but in terms of returns, Kraft has been among the very best stocks of the past half-century.

I pay special attention to this stuff: My job is to find companies with the same magic that's made Kraft such a dynamite stock.

A repeatable fortune
What's the secret of Kraft's phenomenal digits? Well-branded products that a lot of people use, for starters. While that may be the bulk of it, those products aren't its only source of juju. The rest comes from two magic words: dividend reinvestment.

Don't think these words are powerful? Take a ho-hum stock -- or at least one that appears that way -- paying 5% in dividends yearly and racking up a modest 5% in capital appreciation. Start with $1,000 and reinvest those dividends. After 30 years, you'll have amassed a whopping $18,700!

The other side of the coin is that you could get those returns -- or better -- from a strong growth stock, but the dividend stock above gives you the flexibility to switch from reinvestment to an income strategy. In that example, you'd get almost $900 a year. Besides, which one do you think is the safer bet?

A few ideas for you
Paying dividends to shareholders also forces companies to exercise fiscal discipline. That's great, because being flush with cash tempts managers -- let's face it, they tend to have big egos -- to bungle their loads.

And even if they don't slip up, they tend to hoard that cash away from shareholders without putting it to any use. That's why Microsoft's long-anticipated one-time $3-per-share dividend payout meant so much to shareholders, and why cash hoarders such as Cisco (Nasdaq: CSCO) -- which has $30 billion in cash -- are under-serving their owners. It's time to share the wealth, guys.

In a way, dividends encourage responsibility -- something that strikes a personal nerve with me. As the co-advisor of The Motley Fool's dividend stock newsletter, Income Investor, I'm always on the lookout for corporations paying solid dividends, like the stocks I'll share with you now.

Like Kraft, Walt Disney (Nasdaq: DIS) has an enormous portfolio of highly recognizable brands. In addition to the obvious Mickey Mouse names, Disney also owns high value properties like ABC/ESPN, Touchstone Pictures, and Internet properties like movies.com, in addition to many more. While the media/entertainment industry is rife with competition from the likes of CBS (NYSE: CBS) and Time Warner (NYSE: TWX) and others, Disney's strong array of premium products allows it to thrive throughout the years. The company has a solid 1.7% yield in addition to decent long-term growth opportunities.

But you needn't limit yourself to the world of the well known if you're thirsty for some action. Examine Cellcom Israel, a big name in the Israeli cellular market. Sporting a $2.2 billion market cap, the company certainly does not operate on the same scale as a Verizon (NYSE: VZ). But with a 12.1% annual dividend yield, you can really afford to wait while this company continues to grow.

Finally, check out the world's steel businesses as a place for solid dividend income. The steel industry is a mature cash-rich business that should see some decent growth in the future, despite short-term headwinds. Examine names like Arcelor Mittal with a 2.8% yield and South Korean firm POSCO, a stock that yields 2% in addition to tremendous potential for capital appreciation. You can also examine the more stodgy American firm Nucor (NYSE: NUE) which yields a solid 3.6%.

Conclution
These companies aren't perfect for everyone; they're ideas to jump-start your research. The best stock for you might not be the best for another reader. The bottom line is that in seeking great stocks for your portfolio, I invite you to give a close look to dividend stocks. They're appropriate for just about everybody. They're closet performers, and they tend to do their jobs more safely than others.

Compliance to New International Trade Rules

2009-04-29T07:32:00.000-07:00

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

The 5 Best Countries to Invest

2009-04-29T05:52:00.000-07:00

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:

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?

2009-04-29T05:50:00.000-07:00

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 avoid five costs and save money in common life

2009-04-28T20:48:00.000-07:00

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.

Are you dare to buy stocks under $5?

2009-04-27T20:41:00.001-07:00

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.

Outstanding Investment TIPS for 2009

2009-04-27T17:49:00.000-07:00

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.

Don't rely on Familiar Stocks

2009-04-26T07:43:00.000-07:00

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.

Investment story sharing: How I Lost $100,000 Without Even Trying!

2009-04-26T07:39:00.000-07:00

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

Add high-quality Dividend Stocks to your portfolio

2009-04-25T21:31:00.000-07:00

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 :

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

2009-04-25T20:20:00.000-07:00

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.

Find excellent Opportunities That Others Don't See

2009-04-25T08:15:00.000-07:00

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.

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.

Baidu involved in another accuse

2009-04-24T06:36:00.000-07:00

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.

The Myth Of Profit/Loss Ratios

2009-04-23T20:45:00.000-07:00

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.

Source from:investopedia.com

How to Trade Forex

2009-04-23T07:03:00.000-07:00

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.

How To Open A Forex Account

2009-04-23T06:56:00.000-07:00

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.

Technical analysis in Forex Trading

2009-04-18T04:37:00.000-07:00

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.

Fundamental analysis in Forex Trading

2009-04-18T04:14:00.000-07:00

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.

5 Ways to Managing The Risk Of Forex Trading

2009-04-17T07:12:00.000-07:00

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.

What’s The Risk Of Forex Trading

2009-04-17T06:40:00.000-07:00

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.

What makes Forex more attractive than Equities

2009-04-16T07:07:00.000-07:00

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.

Getting Stronger in a Recession?

2009-04-15T07:41:00.000-07:00

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.

How to Use a Blog to Promote Business

2009-04-15T07:03:00.000-07:00

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.

India Is No China

2009-04-14T07:06:00.000-07:00

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:

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

2009-04-14T07:00:00.001-07:00

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:

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.

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.

Players of the Forex Market

2009-04-13T07:39:00.000-07:00

Unlike the equity market - where investors often only trade with institutional investors (such as mutual funds) or other individual investors - there are additional participants that trade on the forex market for entirely different reasons than those on the equity market. Therefore, it is important to identify and understand the roles and motivations of the main players of the forex market.

Governments and Central Banks
Arguably, some of the most influential participants involved with currency exchange are the central banks and federal governments. In most countries, the central bank is an extension of the government and conducts its policy in tandem with the government. However, some governments feel that a more independent central bank would be more effective in balancing the goals of curbing inflation and keeping interest rates low, which tends to increase economic growth. Regardless of the degree of independence that a central bank possesses, government representatives typically have regular consultations with central bank representatives to discuss monetary policy. Thus, central banks and governments are usually on the same page when it comes to monetary policy.

Central banks are often involved in manipulating reserve volumes in order to meet certain economic goals. For example, ever since pegging its currency (the yuan) to the U.S. dollar, China has been buying up millions of dollars worth of U.S. treasury bills in order to keep the yuan at its target exchange rate. Central banks use the foreign exchange market to adjust their reserve volumes. With extremely deep pockets, they yield significant influence on the currency markets.

Banks and Other Financial Institutions
In addition to central banks and governments, some of the largest participants involved with forex transactions are banks. Most individuals who need foreign currency for small-scale transactions deal with neighborhood banks. However, individual transactions pale in comparison to the volumes that are traded in the interbank market.

The interbank market is the market through which large banks transact with each other and determine the currency price that individual traders see on their trading platforms. These banks transact with each other on electronic brokering systems that are based upon credit. Only banks that have credit relationships with each other can engage in transactions. The larger the bank, the more credit relationships it has and the better the pricing it can access for its customers. The smaller the bank, the less credit relationships it has and the lower the priority it has on the pricing scale.

Banks, in general, act as dealers in the sense that they are willing to buy/sell a currency at the bid/ask price. One way that banks make money on the forex market is by exchanging currency at a premium to the price they paid to obtain it. Since the forex market is a decentralized market, it is common to see different banks with slightly different exchange rates for the same currency.

Hedgers
Some of the biggest clients of these banks are businesses that deal with international transactions. Whether a business is selling to an international client or buying from an international supplier, it will need to deal with the volatility of fluctuating currencies.

If there is one thing that management (and shareholders) detest, it is uncertainty. Having to deal with foreign-exchange risk is a big problem for many multinationals. For example, suppose that a German company orders some equipment from a Japanese manufacturer to be paid in yen one year from now. Since the exchange rate can fluctuate wildly over an entire year, the German company has no way of knowing whether it will end up paying more euros at the time of delivery.

One choice that a business can make to reduce the uncertainty of foreign-exchange risk is to go into the spot market and make an immediate transaction for the foreign currency that they need.

Unfortunately, businesses may not have enough cash on hand to make spot transactions or may not want to hold massive amounts of foreign currency for long periods of time. Therefore, businesses quite frequently employ hedging strategies in order to lock in a specific exchange rate for the future or to remove all sources of exchange-rate risk for that transaction.

For example, if a European company wants to import steel from the U.S., it would have to pay in U.S. dollars. If the price of the euro falls against the dollar before payment is made, the European company will realize a financial loss. As such, it could enter into a contract that locked in the current exchange rate to eliminate the risk of dealing in U.S. dollars. These contracts could be either forwards or futures contracts.

Speculators
Another class of market participants involved with foreign exchange-related transactions is speculators. Rather than hedging against movement in exchange rates or exchanging currency to fund international transactions, speculators attempt to make money by taking advantage of fluctuating exchange-rate levels.

The most famous of all currency speculators is probably George Soros. The billionaire hedge fund manager is most famous for speculating on the decline of the British pound, a move that earned $1.1 billion in less than a month. On the other hand, Nick Leeson, a derivatives trader with England’s Barings Bank, took speculative positions on futures contracts in yen that resulted in losses amounting to more than $1.4 billion, which led to the collapse of the company.

Some of the largest and most controversial speculators on the forex market are hedge funds, which are essentially unregulated funds that employ unconventional investment strategies in order to reap large returns. Think of them as mutual funds on steroids. Hedge funds are the favorite whipping boys of many a central banker. Given that they can place such massive bets, they can have a major effect on a country’s currency and economy. Some critics blamed hedge funds for the Asian currency crisis of the late 1990s, but others have pointed out that the real problem was the ineptness of Asian central bankers. Either way, speculators can have a big sway on the currency markets, particularly big ones.

Biggest Market In The World --- Forex Trading Market

2009-04-13T06:23:00.000-07:00

What’s the biggest market in the world? That’s the forex market. In order to conduct foreign trade and business, currencies need to be exchanged. A French tourist in Egypt can't pay in euros to see the pyramids because it's not the locally accepted currency. As such, the tourist has to exchange the euros for the local currency.

The need to exchange currencies is the primary reason why the forex market is the largest, most liquid financial market in the world. It dwarfs other markets in size, even the stock market, with an average traded value of around U.S. $2,000 billion per day. (The total volume changes all the time, but as of April 2004, the Bank for International Settlements (BIS) reported that the forex market traded U.S. $1,900 billion per day.)

The Forex market is a non-stop cash market where currencies of nations are traded, typically via brokers. Foreign currencies are constantly and simultaneously bought and sold across local and global markets and traders' investments increase or decrease in value based upon currency movements. Foreign exchange market conditions can change at any time in response to real-time events.

The main enticements of currency trading to private investors and attractions for short-term Forex trading are:

§ 24-hour trading, 5 and a half days a week with non-stop access to global Forex dealers. When the trading day in the U.S. ends, the forex market begins anew in Tokyo and Hong Kong. The forex market can be extremely active any time of the day, with price quotes changing constantly.
§ An enormous liquid market making it easy to trade most currencies. Currency trading is conducted electronically over-the-counter (OTC), which means that all transactions occur via computer networks between traders around the world, rather than on one centralized exchange.
§ Volatile markets offering profit opportunities.
§ Standard instruments for controlling risk exposure.
§ The ability to profit in rising or falling markets.
§ Leveraged trading with low margin requirements.
§ Many options for zero commission trading.

Spot Market and the Forwards and Futures Markets
There are actually three ways that institutions, corporations and individuals trade forex: the spot market, the forwards market and the futures market. The forex trading in the spot market always has been the largest market because it is the "underlying" real asset that the forwards and futures markets are based on. In the past, the futures market was the most popular venue for traders because it was available to individual investors for a longer period of time. However, with the advent of electronic trading, the spot market has witnessed a huge surge in activity and now surpasses the futures market as the preferred trading market for individual investors and speculators. When people refer to the forex market, they usually are referring to the spot market. The forwards and futures markets tend to be more popular with companies that need to hedge their foreign exchange risks out to a specific date in the future.

What is the spot market?
More specifically, the spot market is where currencies are bought and sold according to the current price. That price, determined by supply and demand, is a reflection of many things, including current interest rates, economic performance, sentiment towards ongoing political situations (both locally and internationally), as well as the perception of the future performance of one currency against another. When a deal is finalized, this is known as a "spot deal". It is a bilateral transaction by which one party delivers an agreed-upon currency amount to the counter party and receives a specified amount of another currency at the agreed-upon exchange rate value. After a position is closed, the settlement is in cash. Although the spot market is commonly known as one that deals with transactions in the present (rather than the future), these trades actually take two days for settlement.

What are the forwards and futures markets?
Unlike the spot market, the forwards and futures markets do not trade actual currencies. Instead they deal in contracts that represent claims to a certain currency type, a specific price per unit and a future date for settlement.

In the forwards market, contracts are bought and sold OTC between two parties, who determine the terms of the agreement between themselves.

In the futures market, futures contracts are bought and sold based upon a standard size and settlement date on public commodities markets, such as the Chicago Mercantile Exchange. In the U.S., the National Futures Association regulates the futures market. Futures contracts have specific details, including the number of units being traded, delivery and settlement dates, and minimum price increments that cannot be customized. The exchange acts as a counterpart to the trader, providing clearance and settlement.

Both types of contracts are binding and are typically settled for cash for the exchange in question upon expiry, although contracts can also be bought and sold before they expire. The forwards and futures markets can offer protection against risk when trading currencies. Usually, big international corporations use these markets in order to hedge against future exchange rate fluctuations, but speculators take part in these markets as well.

Note that you'll see the terms: FX, forex, foreign-exchange market and currency market. These terms are synonymous and all refer to the forex market.

What’s Hedge Funds (2)—Higher Costs and Risks for Higher Potential Returns

2009-04-12T06:33:00.000-07:00

There are two basic reasons for investing in a hedge fund: to seek higher net returns (net of management and performance fees) and/or to seek diversification.

Potential for Higher Returns, Especially in a Bear Market
Higher returns are hardly guaranteed. As discussed in Part I, most hedge funds invest in the same securities available to mutual funds and individual investors. You can therefore only reasonably expect higher returns if you select a superior manager or pick a timely strategy. Many experts argue that selecting a talented manager is the only thing that really matters. This helps to explain why hedge fund strategies are not scalable, meaning bigger is not better. With mutual funds, an investment process can be replicated and taught to new managers, but many hedge funds are built around individual "stars", and genius is difficult to clone. For this reason, some of the better funds are likely to be small.

A timely strategy is also critical. The often cited statistics from CSFB/Tremont in regard to hedge fund performance during the 1990s are revealing. From January 1994 to September 2000 - a raging bull market by any definition - the passive S&P 500 index outperformed every major hedge fund strategy by a whopping 6% in annualized return. But particular strategies performed very differently. For example, dedicated short strategies suffered badly, but market neutral strategies outperformed the S&P 500 index in risk-adjusted terms (i.e. underperformed in annualized return but incurred less than one-fourth the risk). If your market outlook is bullish, you will need a specific reason to expect a hedge fund to beat the index. Conversely, if your outlook is bearish, hedge funds should be an attractive asset class compared to buy-and-hold or long-only mutual funds.

Diversification BenefitsMany institutions invest in hedge funds for the diversification benefits. If you have a portfolio of investments, adding uncorrelated (and positive-returning) assets will reduce total portfolio risk. Hedge funds - because they employ derivatives, short sales or non-equity investments - tend to be uncorrelated with broad stock market indices. But again, correlation varies by strategy. Historical correlation data (e.g. over the 1990s) remains somewhat consistent, and here is a reasonable hierarchy:

Fat Tails Are the Problem
Hedge fund investors are exposed to multiple risks, and each strategy has its own unique risks. For example, long/short funds are exposed to the short-squeeze.

The traditional measure of risk is volatility, that is, the annualized standard deviation of returns. Surprisingly, most academic studies demonstrate that hedge funds, on average, are less volatile than the market. For example, over the bull market period we referred to earlier, volatility of the S&P 500 was about 14% while volatility of the aggregated hedge funds was only about 10%. That is, about two-thirds of the time, we might have expected returns to be within 10% of the average return. In risk-adjusted terms, as measured by the Sharpe ratio (unit of excess return per unit of risk), some strategies outperformed the S&P 500 index over the bull market period mentioned earlier.

The problem is that hedge fund returns do not follow the symmetrical return paths implied by traditional volatility. Instead, hedge fund returns tend to be skewed. Specifically, they tend to be negatively skewed, which means they bear the dreaded "fat tails", which are mostly characterized by positive returns but a few cases of extreme losses. For this reason, measures of downside risk can be more useful than volatility or Sharpe ratio. Downside risk measures, such as value at risk (VaR), focus only on the left side of the return distribution curve where losses occur. They answer questions such as, "What are the odds that I lose 15% of the principal in one year?"

What are Funds of Hedge Funds
Because investing in a single hedge fund requires time-consuming due diligence and concentrates risk, funds of hedge funds have become popular. These are pooled funds that allocate their capital among several hedge funds, usually in the neighborhood of 15 to 25 different hedge funds. Unlike the underlying hedge funds, these vehicles are often registered with the SEC and promoted to individual investors. Sometimes called a "retail" fund of funds, the net worth and income tests may be lower than usual.
The advantages of funds of hedge funds include automatic diversification, monitoring efficiency and selection expertise. Because these funds are invested in a minimum of around eight funds, the failure or underperformance of one hedge fund will not ruin the whole. As the funds of funds are supposed to monitor and conduct due diligence on their holdings, their investors should in theory be exposed only to reputable hedge funds. Finally, these funds of hedge funds are often good at sourcing talented or undiscovered managers who may be "under the radar" of the broader investment community. In fact, the business model of the fund of funds hinges on identifying talented managers and pruning the portfolio of underperforming managers.

The biggest disadvantage is cost, because these funds create a double-fee structure. Typically, you pay a management fee (and maybe even a performance fee) to the fund manager in addition to fees normally paid to the underlying hedge funds. Arrangements vary, but you might pay a 1% management fee to both the fund of funds and the underlying hedge funds. In regards to performance fees, the underlying hedge funds may charge 20% of their profits, and it is not unusual for the fund of funds to charge an additional 10%. Under this typical arrangement, you would pay 2% annually plus 30% of the gains. This makes cost a serious issue, even though the 2% management fee by itself is only about 50 basis points higher than the average small cap mutual fund (i.e. about 1.5%).

Another important and underestimated risk is the potential for over-diversification. A fund of hedge funds needs to coordinate its holdings or it will not add value: if it is not careful, it may inadvertently collect a group of hedge funds that duplicates its various holdings or - even worse - ends up constituting a representative sample of the entire market. Too many single hedge fund holdings (with the aim of diversification) are likely to erode the benefits of active management, while incurring the double-fee structure in the meantime! Various studies have been conducted, but the "sweet spot" seems to be around eight to 15 hedge funds.

Questions to Ask Before investing
After reading this introductory series to hedge funds, you are no doubt aware that there are important questions to ask before investing in a hedge fund or a fund of hedge funds. Look before you leap and make sure you do your research.

Here is a list of questions to consider as you get started:
*Who are the founders and the principals? What are their backgrounds and credentials? How long before the founders/principals expect to retire?
*How long has the fund been in business? What is the ownership structure? (e.g. Is it a limited liability company? Who are the managing members? Are classes of shares issued?)
*What is the fee structure and how are principals/employees compensated?
*What is the basic investment strategy (must be more specific than proprietary)?
*How often is valuation performed and how often are reports produced for investors (or limited partners)?
*What are the liquidity provisions? (e.g. What is the lock-out period?)
*How does the fund measure and assess risk (e.g. VaR)? What is the track record in regard to risk?
*Who are the references?

What’s Hedge Funds (1)—Higher Costs and Risks for Higher Potential Returns

2009-04-12T06:30:00.000-07:00

Hedge funds are growing in both number and total assets under management. What are they? What’s the difference between Hedge funds and mutual funds?

There is no exact definition of the term "hedge fund" in federal or state securities laws. Hedge funds are basically private investment pools for wealthy, financially sophisticated investors. Traditionally, they have been organized as partnerships, with the general partner (or managing member) managing the fund's portfolio, making investment decisions, and normally having a significant personal investment in the fund.

Hedge funds are like mutual funds in two respects: (1) they are pooled investment vehicles (i.e. several investors entrust their money to a manager) and (2) they invest in publicly traded securities. But there are important differences between a hedge fund and a mutual fund. These stem from and are best understood in light of the hedge fund's charter: investors give hedge funds the freedom to pursue absolute return strategies.

Mutual Funds Seek Relative Returns
Most mutual funds invest in a predefined style, such as "small cap value", or into a particular sector, such as the Internet sector. To measure performance, the mutual fund's returns are compared to a style-specific index or benchmark. For example, if you buy into a "small cap value" fund, the managers of that fund may try to outperform the S&P Small Cap 600 Index. Less active managers might construct the portfolio by following the index and then applying stock-picking skills to increase (over-weigh) favored stocks and decrease (under-weigh) less appealing stocks.

A mutual fund's goal is to beat the index or "beat the bogey", even if only modestly. If the index is down 10% while the mutual fund is down only 7%, the fund's performance would be called a success. On the passive-active spectrum, on which pure index investing is the passive extreme, mutual funds lie somewhere in the middle as they semi-actively aim to generate returns that are favorable compared to a benchmark.

Hedge Funds Actively Seek Absolute Returns
Hedge funds lie at the active end of the investing spectrum as they seek positive absolute returns, regardless of the performance of an index or sector benchmark. Unlike mutual funds, which are "long-only" (make only buy-sell decisions), a hedge fund engages in more aggressive strategies and positions, such as short selling, trading in derivative instruments like options and using leverage (borrowing) to enhance the risk/reward profile of their bets.

This activeness of hedge funds explains their popularity in bear markets. In a bull market, hedge funds may not perform as well as mutual funds, but in a bear market - taken as a group or asset class - they should do better than mutual funds because they hold short positions and hedges. The absolute return goals of hedge funds vary, but a goal might be stated as something like "6 to 9% annualized return regardless of the market conditions".

Investors, however, need to understand that the hedge-fund promise of pursuing absolute returns means hedge funds are "liberated" with respect to registration, investment positions, liquidity and fee structure. First, hedge funds in general are not registered with the SEC. They have been able to avoid registration by limiting the number of investors and requiring that their investors be accredited, which means they meet an income or net worth standard. Furthermore, hedge funds are prohibited from soliciting or advertising to a general audience, a prohibition that lends to their mystique.

In hedge funds, liquidity is a key concern for investors. Liquidity provisions vary, but invested funds may be difficult to withdraw "at will". For example, many funds have a lock-out period, which is an initial period of time during which investors cannot remove their money.

Lastly, hedge funds are more expensive even though a portion of the fees are performance-based. Typically, they charge an annual fee equal to 1% of assets managed (sometimes up to 2%), plus they receive a share - usually 20% - of the investment gains. The managers of many funds, however, invest their own money along with the other investors of the fund and, as such, may be said to "eat their own cooking".

Many hedge fund Strategies
To get positive investment performance, hedge fund managers use sophisticated investment strategies and techniques that may include, among other techniques:
· short selling (sale of a security you do not own)
· arbitrage (simultaneous buying and selling of a security in different markets to profit from the difference between the prices)
· hedging (buying a security to offset a potential loss on an investment)
· leverage (borrowing money for investment purposes)
· concentrating positions in securities of a single issuer or market
· investing in distressed or bankrupt companies
· investing in derivatives, such as options and futures contracts
· investing in volatile international markets
· investing in privately issued securities

Managers are paid based on the fund's performance. Performance fees of 20% of profits are common, along with a fixed annual asset-based fee of 1 to 2%.

Because they are usually only open to limited numbers of wealthy, financially sophisticated investors and do not advertise or publicly offer their securities, private hedge funds are usually not required to register with the SEC. As a result, unregistered private hedge funds do not provide many of the investor protections that apply to registered investment products, such as mutual funds. For example, hedge funds generally are not subject to numerous mutual fund rules, such as regulations:
· requiring a certain degree of liquidity
· limiting how much can be invested in any one investment
· requiring that fund shares be redeemable
· protecting against conflicts of interests
· assuring fairness in pricing of the fund shares
· requiring disclosure of information about a fund's management, holdings, fees and expenses, and performance
· limiting the use of leverage

The general prohibitions against securities fraud do apply.

A bounce sign of U.S. stock funds market

2009-04-11T02:56:00.000-07:00

Cash invested in U.S. stock funds spiked last week, according to a report released yesterday by TrimTabs Investment Research.

Equity mutual funds posted inflows of $11.9 billion for the week ended April 8, the Sausalito, Calif.-based research firm found. The funds saw inflows of $3 billion the previous week.

Funds that invest primarily in domestic stocks took in the lion’s share of the cash, with net inflows of $11.1 billion.

Funds focused largely on non-U.S. stocks posted inflows of $844 million, the firm reported.

Bond funds also had positive sales with inflows of $1.7 billion for the week, though that was down from $6.8 billion the previous week.

Hybrid funds, which invest in both stocks and bonds, had inflows of $361 million for the most recent week, compared with $409 million the previous week.

Exchange traded funds that invest in U.S. stocks, on the other hand, posted their second consecutive week of net outflows, shedding $1.4 billion.

At the same time, ETFs that invest in non-U.S. stocks had inflows of $1.9 billion for the week, up from $502 million during the previous week.

Make the riskiest wager on Troubled Stocks

2009-04-10T22:33:00.000-07:00

Betting on distressed companies -- whether they are nearly bankrupt or just enduring a long financial decline -- can be lucrative.

It's the riskiest wager an investor can make. In bankruptcies, equity shareholders can lose everything. Companies that don't file Chapter 11 can see their shares bump along at low prices for a long period of time. But recently investors who dared to snap up shares of troubled firms at single-digit prices have seen some handsome returns.

Shares of outfits in the troubled casino, airline, and auto sectors, banks, and other cash-strapped companies have surged in recent weeks on hopes that an economic recovery this year could save the stock market from a wave of bankruptcies.

The danger is real. According to BankruptcyData.com, 64 public companies have filed for bankruptcy in the first three months of 2009, including Lyondell Chemical, Nortel Networks, and casino firm Trump Entertainment Resorts. The total assets of these 2009 bankruptcies was $100.1 billion. By contrast, in the first quarter of 2007, the market had seen just 16 public company bankruptcies valued at $1.1 billion.

Airline Sell-Off Overdone?
A share price below 5 is a commonly recognized sign of bankruptcy danger to equity investors. In many hard-hit industries, it's now a common sight.

With a stock so close to zero, it's fair to say stocks are moving based on their chances of survival, not other fundamental measures of value. "You see stocks trading not on expected earnings, but on whether they're going to live or die," says independent market strategist Doug Peta.

As a result, the rewards for escaping bankruptcy can be substantial.

Among the recent buyers of these risky stocks has been Robert Bacarella, portfolio manager of the Monetta Mutual Funds (MONTX). He is investing a small portion of his portfolio in casinos, airlines, and banks despite the risk embedded in their single-digit stock prices.

In many cases, "[Wall] Street is telling you this company is going bankrupt," he says. But Bacarella expects an economic recovery this year, which could save many of those troubled firms. The sell-off in airline stocks, for example, was "way overdone," he says.

Some apparently agree. Airlines like Delta (DAL), United parent UAL Corp. (UAUA), American parent AMR Corp. (AMR), and U.S. Airways (LCC) are up 12% to 22% since the start of April, though all four still trade below 7 per share. Delta, UAL, and U.S. Airways have each endured bankruptcy proceedings in the past decade.

MGM's Roller-Coaster
The recent rally has been even stronger in industries harder hit by the recession.

In just two trading sessions, the battered shares of casino operator MGM Mirage (MGM) surged 76% as investors hoped that bankruptcy could be avoided through some asset sales.

MGM Mirage traded above 100 per share 18 months ago, but these days Morningstar (MORN) analyst Jeremy Glaser gives the casino operators' shares a fair value estimate of zero. "We think [bankruptcy] is the most likely outcome," he says, citing MGM's heavy debt load and overly ambitious expansion plans.

"There are certainly scenarios in which MGM is worth quite a bit more than [zero]," Glaser says. But, "with credit markets so seized up, it seems unlikely the common shareholders are going to come out with anything."

MGM shares rallied until Apr. 7, when Janney Montgomery Scott analyst Brian McGill downgraded the stock to "sell," warning asset sales would be difficult. MGM shares fell 20% on Apr. 7 to 4.45 per share.

Another large casino operator suffering from a high debt load is Las Vegas Sands (LVS). Its shares were up 74% in the five days before Apr. 7, when the stock dropped 19% to close at 4.03.

Still another prominent casino operator already went under. Trump Entertainment Resorts filed for bankruptcy reorganization on Feb. 17.

Varied Views
The prospects that a company can avoid bankruptcy vary wildly depending on the state of its industry and its balance sheet. And analysts and investors can strongly disagree.

Vaughn Cordle, chief analyst at Airline Forecasts Investment Strategy & Research, believes the economy will recover and save major airlines from bankruptcy.

First-quarter results will be "ugly -- no doubt about it," he says. But airlines have cut costs -- domestic capacity was down 11.5% last quarter -- and they could save almost $20 billion in fuel costs this year, Plus, he says, "We're going to have a recovery. The recovery will be mild and weak, but it's a recovery nonetheless."

Jesup & Lamont (JLI) transportation analyst Helane Becker says airlines, though heavily in debt, have enough cash to make it through 2009. However, she says, bankruptcy "is a 2010 risk if nothing improves in the economy and credit markets."

For automakers, the worry is far more short-term. General Motors (GM) shareholders face two prospects, neither attractive, says Standard & Poor's equity analyst Efraim Levy: GM could file for bankruptcy, thus making shares "essentially worthless." Or, the automaker could issue billions of dollars in new shares, which would dilute current shareholders' stakes.

For Ford (F), which has more cash, the risk of bankruptcy is lower, Levy says. "If they can make it through this downturn, then the risk of bankruptcy is mitigated," Levy says. "The key is getting through the next 12 months or so, until demand starts to come back" and cost-cutting pays off. [Levy, as an equity analyst, has no involvement with credit ratings at S&P, which like BusinessWeek is a unit of The McGraw-Hill Cos. (MHP).]

This month, Ford shares are up 33%, closing Apr. 7 at 3.49. GM shares are essentially flat, closing at 2 on Apr. 7.

"Free-Enterprise Darwinism"
Troubled firms essentially face two problems. In the short term, they must try to meet debt payments, raise cash, and negotiate with creditors. But their long-term challenges are no easier: They must adapt to an economic climate that could be quite different from just a couple years ago.

For casinos, for example, "investors have to think about, 'What's the future of the Las Vegas market?'" Glaser says. "Are people still going to be willing to take very discretionary trips out to Las Vegas?"

Airlines have slashed fares, which seems to be luring leisure travelers into the airport, Becker says. But business travel spending remains depressed.

Gary Wolfer, chief economist at Univest Wealth Management (UVSP), expects a wave of bankruptcies in the next year or two. Even if firms survive the recession, the recovery will be too subdued to keep weak companies afloat, particularly in the consumer discretionary sector. "Sooner or later, the walking dead start to fall," Wolfer says.

If bankruptcies accelerate, shareholders could lose big. But some could benefit.

It's "free-enterprise Darwinism," Wolfer says, in which the strong survive and benefit from their rivals' collapse.

"The problem here is you have to decide which companies will be able to survive the downcycle to benefit from the upcycle," Levy says.

Given massive levels of uncertainty about the economy and credit markets, that's a difficult decision to make. Especially when a bankruptcy can render shares worthless.

Source from: msn.com

Find the right Way to Invest in China

2009-04-10T04:52:00.000-07:00

Today, we have a handful of outstanding Chinese blue chip stocks that are finally easy to buy for Americans. They’re solid companies trading at cheap valuations. And investors are finally realizing that China is a place where they need to be invested.

According to Morningstar, the iShares FTSE/Xinhua China 25 Index ETF (FXI) is not only one of the 25 most popular exchange-traded funds on the market today, it's also the most-traded China-focused ETF. Despite the volatile Chinese market, this ETF attracted a net $3 billion of inflows in 2008.

This’s great!! But meanwhile, investors need to find to right way to invest in Chia. Just as we talked in the previous articles, each market has its own rules.

Seriously red tape
Some investors confuse FXI with a proper way to invest in the Chinese growth story. That just isn't the case, for a variety of reasons.

By investing in FXI, you're not sufficiently tapping into the entrepreneurial spirit of the Chinese people. See, FXI tracks a FTSE/Xinhua index mainly comprising state-owned enterprises (SOEs). In fact, of the top 10 holdings of the exchange-traded fund, 10 are SOEs (or are subsidiaries of SOEs, which for my purposes are one and the same).

In terms of past performance, that hasn't been so bad. Despite the recent plunge in the Chinese markets, which has sent names like PetroChina and China Mobile down considerably, the iShares FTSE/Xinhua China 25 ETF has averaged returns of 8% per year over the past three years, versus the S&P 500 -- tethered to our own mega caps like ConocoPhillips (NYSE: COP) and Verizon (NYSE: VZ) -- which has lost 12% a year over the same period.

But while FXI holdings like China Life Insurance (NYSE: LFC) and Sinopec have outpaced American counterparts like Lincoln National (NYSE: LNC) and XTO Energy (NYSE: XTO) since April 2006, looking to the future, FXI isn't the right train on which to hitch your China investment dreams.

Chinese SOEs background
SOEs have traditionally been the dominant players in the Chinese economy. In 1958, during the days of Chairman Mao, more than 97% of the Chinese economy was under the control of the government (PRC) through the use of SOEs.

Granted, things have changed over the past 50 years, following the economic reforms of Deng Xiaoping in the late 1970s and '80s. Today there are far fewer SOEs, but they still make up a significant chunk of China's gross domestic product and are mostly found in the energy, telecommunications, and financial sectors. The government keeps many of them alive by infusing them with capital, and one of the ways it does this is by -- wait for it -- taking them public.

The Chinese government has certainly reduced its ownership of some SOEs, but given the size of those companies and the size of the government's remaining ownership, it could be a long time before those SOEs are fully privatized. Just imagine if the PRC decided to suddenly dump its huge stake in China Life Insurance into the public markets. It would be an utter disaster for those shares.

The bottom line is that, despite the loosening of the PRC's grip, SOEs still do not put shareholder interests first. Their motivation is still at least partly political, so you're better off looking for Chinese companies that have your interests at heart.

This one will go to the hares
While the SOEs join the free markets at a tortoise's pace, non-SOE Chinese companies like Sohu.com (Nasdaq: SOHU), Mindray Medical (NYSE: MR), and New Oriental Education are flying by them in terms of innovation and ability to react to global economic movements. Moreover, these Chinese companies are led by entrepreneurs who represent the Chinese growth story. These, and not the SOEs, are the types of companies that may turn out to be some of the best stocks of the next 10 years.

How To Pick The Right Mutual Fund

2009-04-10T00:19:00.000-07:00

The finance market is ever-changing. It’s impossible to pick the winning or the best mutual funds. But follow some guidelines on funds selection, just as taking a careful look at a variety of positive fund characteristics - the quality of the fund company, style consistency, long-term management tenure, low expenses, low portfolio turnover and appropriate asset size, we are capable to make an informed selection of a managed mutual fund based on our needs.

Identifying Goals and Risk Tolerance
Before acquiring shares in any fund, an investor must first identify his or her goals and desires for the money being invested. Are long-term capital gains desired, or is a current income preferred? Will the money be used to pay for college expenses, or to supplement a retirement that is decades away? Identifying a goal is important because it will enable you to dramatically whittle down the list of the more than 8,000 mutual funds in the public domain.

In addition, investors must also consider the issue of risk tolerance. Is the investor able to afford and mentally accept dramatic swings in portfolio value? Or, is a more conservative investment warranted? Identifying risk tolerance is as important as identifying a goal. After all, what good is an investment if the investor has trouble sleeping at night?

Finally, the issue of time horizon must be addressed. Investors must think about how long they can afford to tie up their money, or if they anticipate any liquidity concerns in the near future. This is because mutual funds have sales charges, that can take a big bite out of an investor's return over short periods of time. Ideally, mutual fund holders should have an investment horizon with at least five years or more.

Style and Fund Type
If the investor intends to use the money in the fund for a longer term need and is willing to assume a fair amount of risk and volatility, then the style/objective he or she may be suited for is a long-term capital appreciation fund. These types of funds typically hold a high percentage of their assets in common stocks, and are therefore considered to be volatile in nature. They also carry the potential for a large reward over time.

Conversely, if the investor is in need of current income, he or she should acquire shares in an income fund. Government and corporate debt are the two of the more common holdings in an income fund.

Of course, there are times when an investor has a longer term need, but is unwilling or unable to assume substantial risk. In this case, a balanced fund, which invests in both stocks and bonds, may be the best alternative.

Charges and Fees
Mutual funds make their money by charging fees to the investor. It is important to gain an understanding of the different types of fees that you may face when purchasing an investment.

Some funds charge a sales fee known as a load fee, which will either be charged upon initial investment or upon sale of the investment. A front-end load/fee is paid out of the initial investment made by the investor while a back-end load/fee is charged when an investor sells his or her investment, usually prior to a set time period, such as seven years from purchase.

Both front- and back-end loaded funds typically charge 3-6% of the total amount invested or distributed, but this number can be as much as 8.5% by law. Its purpose is to discourage turnover and to cover any administrative charges associated with the investment. Depending on the mutual fund, the fees may go to a broker for selling the mutual fund or to the fund itself, which may result in lower administration fees later on.

To avoid these sales fees, look for no-load funds, which don't charge a front- or back-end load/fee. However, be aware of the other fees in a no-load fund, such as the management expense ratio and other administration fees, as they may be very high.

Still other funds charge 12b-1 fees, which are baked into the share price and are used by the fund for promotions, sales and other activities related to the distribution of fund shares. These fees come right off of the reported share price at a predetermined point in time. As a result, investors may not be aware of the fee at all. 12b-1 fees can, by law, be as much as 0.75% of a fund's average assets per year.

One final tip when perusing mutual fund sales literature: The investor should look for the management expense ratio. In fact, that one number can help clear up any and all confusion as it relates to sales charges. The ratio is simply the total percentage of fund assets that are being charged to cover fund expenses. The higher the ratio, the lower the investor's return will be at the end of the year.

Evaluating Managers/Past Results
As with all investments, investors should research a fund's past results. To that end, the following is a list of questions that perspective investors should ask themselves when reviewing the historical record:

Did the fund manager deliver results that were consistent with general market returns?
Was the fund more volatile than the big indexes (meaning did its returns vary dramatically throughout the year)?
Was there an unusually high turnover (which can result in larger tax liabilities for the investor)?
This information is important because it will give the investor insight into how the portfolio manager performs under certain conditions, as well as what historically has been the trend in terms of turnover and return.

With that in mind, past performance is no guarantee of future results. For this reason, prior to buying into a fund, it makes sense to review the investment company's literature to look for information about anticipated trends in the market in the years ahead. In most cases, a candid fund manager will give the investor some sense of the prospects for the fund and/or its holdings in the year(s) ahead as well as discuss general industry trends which may be helpful.

Size of the Fund
Typically, the size of a fund does not hinder its ability to meet its investment objectives. However, there are times when a fund can get too big. A perfect example is Fidelity's Magellan Fund. Back in 1999 the fund topped $100 billion in assets, and for the first time, it was forced to change its investment process to accommodate the large daily (money) inflows. Instead of being nimble and buying small and mid cap stocks, it shifted its focus primarily toward larger capitalization growth stocks. As a result, its performance has suffered.

So how big is too big? There are no benchmarks that are set in stone, but that $100 billion mark certainly makes it difficult for a fund manager to acquire a position in a stock and dispose of it without running up the stock dramatically on the way up, and depressing it on the way down. It also makes the process of buying and selling stocks with any kind of anonymity almost impossible.

Bottom Line
Selecting a mutual fund may seem like a daunting task, but knowing your objectives and risk tolerance is half the battle. If you follow this bit of due diligence before selecting a fund, you will increase your chances of success.

Get to Know Mutual Funds in Different Countries

2009-04-09T09:12:00.000-07:00

How well are you knowing about mutual funds? You may know the basic knowledge, picking strategy, and related theories of mutual funds. But what about funds in other countries? Have you paid attention to these investment opportunities? Surly there is something common, but each country has its own rules and "tastes" for how a mutual fund is constructed, and it's important to understand how these regulations shape the funds from each country. This article will give a quick tour of mutual funds and their regulators around the world.

The Basics of a Mutual Fund
A mutual fund is a vehicle for individuals to invest their money in the stock or bond market. It is ideal for the individual investor with limited funds, as they can gain access to diversification benefits even though they may have a modest amount to invest. Like an frozen dinner, it is expensive and inconvenient to buy all the ingredients separately for a full meal, Convenience and cost savings are why both mutual funds and frozen dinners exist. Investors don't have to make decisions about which individual stock to buy; they simply decide what portfolio suits them best.

Can You Buy a Fund from Another Country?
If you are an investor in the U.S., you can only buy funds that have registered with the Securities and Exchange Commission (SEC). This acts as a protection for U.S. investors, as a fund that is registered with the SEC is regulated according to U.S. securities law. Likewise, if you are a Hong Kong resident looking to invest for your retirement, your choice of funds would be limited to those regulated by Hong Kong's Mandatory Provident Funds Authority.

A mutual fund from another country is not the same as a global fund or international fund. A global fund invests in assets from around the world, including the investor's home country, meanwhile an international fund includes the entire world except the investor's home country. Both these funds still have to be registered with the SEC before U.S. investors could buy them.

Common Traits Of All Mutual Funds
Before we can delve into the differences, it important to first describe some basic mutual fund truths. All mutual funds pool the many smaller deposits of individual investors so they can make large purchases in stocks or bonds. Most mutual funds are available to both the retail clients (individual investors) and institutional clients (large companies, foundations, etc.). There is usually a wide selection of funds, both by company and style in each country including a good variety of stock, bond, money market and balanced funds (blends of stocks and bonds in the same fund).

Another commonality among mutual funds throughout the world is that every major economy has specific rules pertaining to the registration, marketing and sale of funds. The mutual fund industry is a highly regulated space, but those regulations differ by country or region. These regulations are in place to protect the consumer. This helps to ensure that the asset manager is keeping the interests of the investor above their own and that the investor does not get taken advantage of. It is very important that the investor feels confident that the proper authority is monitoring the industry as a whole so they will entrust their savings in a mutual fund. If investors lacked confidence, the industry would likely falter.

Differences Around the Globe
The mutual funds that are available for investment differ depending on where the investor is domiciled. Let's look at some of the regulators and the regulations to see how the rules shape the funds.

The U.S. Market
All mutual funds marketed to U.S. retail investors must be registered with the SEC and must abide by the rules set forth under the Investment Company Act of 1940, commonly referred to as the "'40s Act". Some of the rules under the '40s Act deal with diversification issues. Specifically, section 12 limits the amount of fund assets that can be invested in other investment companies. In other words, the rule prohibits a mutual fund from concentrating too many of its holdings in the stock of an investment company, such as a publicly traded broker.

Another rule, 35d-1, commonly referred to as the "name test", makes sure that most (80%) of the mutual fund's holdings are reflective of the fund's name and prospectus. So, if a funds calls itself an "International Equity Fund", 80% of its holdings should be equities, and they need to beinternational equities. For rules lovers or punishment gluttons, the full text of the '40s Act can be found on The University of Cincinnati's Securities Lawyer's Deskbook.

The European Union
Mutual funds authorized for sale in Europe are governed by regulations from the Undertakings for Collective Investment in Transferable Securities (UCITS). The most recent iteration of the rules is UCITS III, which differs from the previous rules by paying more attention to the risk monitoring of derivative positions. The rules cover many areas, but like the '40s Act some deal with making sure the fund does not concentrate its holdings to ensure diversification.

To market your fund across all member countries of the European Union, you need only register your fund in one EU country under the authority of that country's financial regulator. For example, in Ireland it is the Irish Financial Services Regulatory Authority (IFSRA). In turn, the IFSRA is part of the Committee of European Securities Regulators, which is in charge of coordinating the securities regulators of all the EU countries.

The Hong Kong Market
Hong Kong's rules are the most restrictive. There are two fund governing bodies in the Hong Kong market: the Securities and Futures Commission (SFC) and the Mandatory Provident Funds Authority (MPFA). The SFC's rules are broader and not as specific or restrictive as the rules set forth by the MPFA. They apply to all funds marketed in Hong Kong, no matter what type of mutual fund they are. In contrast, MPFA only governs funds that are marketed for use in the retirement accounts of its residents. This means that funds suitable for investment in retirement accounts have two regulatory bodies to worry about - they must abide by both the SFC and MPFA rules. However, as the MPFA rules are more restrictive than the SFC rules, fund managers can usually concentrate on the MPFA rules, knowing that compliance with these rules will usually ensure compliance with the broader rules as well.

The MPFA's rules are more restrictive partly because the authority wants to make sure that the nest eggs of its residents are protected and not invested in funds of a speculative nature. The MPFA takes compliance with their rules very seriously. Some of the more restrictive rules deal with unrated or below-investment grade securities, and unlisted securities. The MPFA requires that bond mutual funds sell bonds that have been downgraded below investment grade, even if they were investment grade at time of purchase. The rules also place emphasis on approved exchanges. The MPFA provides its own list of approved stock exchanges. No more than 10% of a mutual fund's securities may be allocated to contain stocks not listed on one of these approved exchanges.

Other Markets
Markets other than the three mentioned above, have their own structure and regulations. In Canada for example, mutual funds are subject to provincial securities laws as well as national rules known as "NI 81-102". The NI stands for "National Instrument". For example, dealers who sell mutual funds must be registered with the securities regulator of their province, while the mutual fund asset manager must ensure that the fund they manage abides by the NI 81-102 rules.

Another market that is currently opening up to outside fund managers is the Taiwan market. In Taiwan the regulator is the Financial Supervisory Committee (FSC). There are only about 20 rules specific to mutual funds marketed in Taiwan, but this is still an evolving market.

Importance of the Rules
Understanding the differences among the financial regulators is very important for a mutual fund manager. A manager may have different funds registered amongst these different regulatory environments, and they need to make sure that they understand what they can and can not do in each of the countries. Breaching a rule - especially a major one - can give a fund and its manager a bad reputation, a fine, or both.

How many mutual funds is optimal for your portfolio?

2009-04-08T06:33:00.000-07:00

How many mutual funds are enough both for profitableness and safety requirements? The common consensus is that a well-balanced portfolio with approximately 20 to 30 stocks diversifies away the maximum amount of unsystematic risk. Because a single mutual fund often contains five times that number of stocks, does that mean that one fund is enough? Some people would say, "Yes." Here we'll show you both sides of the debate and help you determine how many mutual funds is optimal for your portfolio.

Proponents of the "Yes" theory suggest that equity investors buy a broad index fund, such as the Vanguard Total Stock Market Fund, and let time do its work. Even investors seeking exposure to both stocks and bonds can get their desired asset allocation through the purchase of a single balanced fund.

Others would say "No, you definitely need more than one fund." On the equity side, they would note that a single fund would fail to provide adequate exposure to international investments. The argument here is that a global fund provides a little bit of everything, but not enough of anything. From there, the argument goes that a large-cap domestic fund and a small-cap domestic fund cover the bases on the home front. An international fund, perhaps two at most, cover the international front. Two-fund proponents select one fund from the developed foreign markets, like Europe, and the second in emerging markets such as the Pacific Rim or Latin America. If fixed-income exposure is desired, a domestic bond fund is added to the mix, bringing the count to six funds.

What about the style box?
The traditional mutual-fund style box consists of nine investment categories representing domestic equities. Those categories are based on market capitalization (micro, small, mid, large, etc.) and investment style (value, mixed, growth). The bond style box, in similar fashion, has three maturity categories (short-term, intermediate and long-term) and three categories of credit quality (high, medium, and low). An investor does not need a fund in all the stock and bond categories. A few funds can be chosen that best fit an investor's asset-allocation and risk-return requirements.

The Downside of Diversification
While mutual funds are popular and attractive investments because they provide exposure to a number of stocks in a single investment vehicle, too much of a good thing can be a bad idea.

The addition of an increasing number of funds simply creates an expensive index fund. This notion is based on the fact that having too many funds negates the impact that any single fund can have on performance, while the expense ratios of multiple funds generally add up to a number that is greater than average. The end result is that expense ratios rise while performance is often mediocre.

No Magic Number
Although there are hundreds of mutual fund providers offering thousands of funds, there's no magic number for the "right" number of mutual funds in a portfolio. Despite the lack of agreement among the professionals regarding how many funds are enough, nearly everyone agrees that there is no need for dozens of holdings. In fact, even many mutual fund companies are now promoting life-cycle funds, which consist of a mutual fund that invests in multiple underlying funds The concept is simple: pick one life-cycle fund, put all of your money into it, and forget about it until your reach retirement age. These funds, also referred to as "age-based funds" or "target-date funds," have an intrinsic appeal that's hard to beat.

Building Your Own Portfolio
If you prefer to build a portfolio rather than buy an all-in-one solution, there are simple steps you can take to limit the number of funds in your portfolio while still feeling comfortable with your holdings. It begins by considering your objectives. If income is your primary goal, that international fund may not be necessary. If capital preservation is your objective, a small-cap fund may not be needed either.

Once you've determined the mix of funds that you wish to consider, compare their underlying holdings. If two or more funds have significant overlap in holdings, some of those funds can be eliminated. There's simply no point in having multiple funds that hold the same underlying stocks.

Next, look at the expense ratios. When two funds have similar holdings, go with the less expensive choice and eliminate the other fund. Every penny saved on fees is one more penny working for you. If you are working with an existing portfolio rather than building one from scratch, eliminate funds that have balances that are too small to make an impact on overall portfolio performance. If you've got three large-cap funds, move the money to a single fund. The amount spent on management-related expenses is likely to decrease and your level of diversification will remain the same.

Mutual Funds Strategy in a Recession

2009-04-08T01:49:00.000-07:00

While in a recession, stock prices are dropping. Fears of further declines and mounting losses chase investors out of stock funds and push them toward bond funds in a flight to safety. It's an effective tactic for investors who are seeking to avoid risk and are smart or lucky enough to sell while their portfolios are still on the positive side - but it's not the only strategy available to combat tough times. Here we list what you can do with mutual funds in the face of a recession.

What Bond Funds Have to Offer
There are several types of bond funds that are particularly popular with risk-averse investors. Funds made up of U.S. Treasury bonds lead the pack, as they are considered to be one of the safest. Investors face no credit risk, as the government's ability to levy taxes and print money eliminates the risk of default and provides principal protection.

Bond funds that invest in mortgages securitized by the Government National Mortgage Association (Ginnie Mae) are also backed by the full faith and credit of the U.S. government. Most of the mortgages (typically mortgages for first-time home buyers and low-income borrowers) securitized as Ginnie Mae mortgage-backed securities (MBS) are those guaranteed by the Federal Housing Administration (FHA), Veterans Affairs, or other federal housing agencies.

Next on the list are municipal bond funds. Issued by state and local governments, these investments leverage local taxing authority to provide a high degree of safety and security to investors. They carry a greater risk than funds that invest in securities backed by the federal government, but are still considered to be relatively safe.

Taxable bond funds issued by corporations are also a consideration. They offer higher yields than government-backed issues, but carry significantly more risk. Choosing a fund that invests in high-quality bond issues will help lower your risk.

While corporate bond funds are riskier than funds that only hold government issued bonds, they are still less risky than stock funds.

Beyond Bonds
When it comes to avoiding recessions, bonds are certainly popular, but they aren't the only game in town. Ultra-conservative investors and unsophisticated investors often stash their cash in money market funds. While these funds do provide a high degree of safety, they should only be used only for short-term investments.

Contrary to popular belief, seeking shelter during tough times doesn't necessarily mean abandoning the stock market altogether. While investors stereotypically think of the stock market as a vehicle for growth, share price appreciation isn't the only game in town when it comes to making money in the stock market. For example, mutual funds that focus on dividends can provide strong returns with less volatility than funds that focus strictly on growth.

Utilities-based mutual funds and funds that invest in consumer staples are less aggressive stock fund strategies that tend to focus on investing in companies that pay predictable dividends.

Traditionally, funds that invest in large-cap stocks tend to be less vulnerable than those that invest in small-cap stocks, as larger companies are generally better positioned to endure tough times. Shifting assets from funds that invest in smaller, more aggressive companies to those that bet on blue chips provides a way to cushion your portfolio against market declines without fleeing the stock market altogether.

More Aggressive Strategies
For wealthier individuals, investing a portion of your portfolio in hedge funds is one idea. Hedge funds are designed to make money regardless of market conditions. Investing in a foul weather fund is another idea, as these funds are specifically designed to make money when the markets are in decline.

In both cases, these funds should only represent a small percentage of your total holdings. In the case of hedge funds, "hedging" is actually the practice of attempting to reduce risk, but the actual goal of most hedge funds today is to maximize return on investment. The name is mostly historical, as the first hedge funds tried to hedge against the downside risk of a bear market by shorting the market (mutual funds generally can't enter into short positions as one of their primary goals). Hedge funds typically use dozens of different strategies, so it isn't accurate to say that hedge funds just "hedge risk." In fact, because hedge fund managers make speculative investments, these funds can carry more risk than the overall market. In the case of foul weather funds, your portfolio may not fare well when times are good.

Diversification: A Strategy for Any Market
While bond funds and similarly conservative investments have shown their value as safe havens during tough times, investing like a lemming isn't the right strategy for investors seeking long-term growth. Trying to time the market by selling your stock funds before they lose money and using the proceeds to buy bonds funds or other conservative investments and then doing the reverse just in time to capture the profits when the stock market rises is a risky game to play. The odds of making the right move are stacked against you. Even if you achieve success once, the odds of repeating that win over and over again throughout a lifetime of investing simply aren't in your favor.

A far better strategy is to build a diversified mutual fund portfolio. A properly constructed portfolio, including a mix of both stock and bonds funds, provides an opportunity to participate in stock market growth and cushions your portfolio when the stock market is in decline. Such a portfolio can be constructed by purchasing individual funds in proportions that match your desired asset allocation or you can do the entire job with a single fund by purchasing a mutual fund that has "growth and income" or "balanced" in its name.

Conclusion
Regardless of where you put your money, if you have a long-term time frame, look at a down market as an opportunity to buy. Instead of selling when the price is low, look at is an opportunity to build your portfolio at a discount. When retirement becomes a near-term possibility, make a permanent move in a conservative direction. Do it because you have enough money to meet your needs and want to remove some of the risk from your portfolio for good, not because you plan to jump back in when you think the markets will rise again.

When Is The Best Time To Sell A Mutual Fund

2009-04-07T06:06:00.000-07:00

Many financial advisors and academics do not recommend selling stocks and mutual funds when prices are tumbling during bear markets. If you can just hold on through thick and thin, they argue, you are likely to enjoy returns better than any other asset class over the long run: an average annual yield of 6.5-7% after inflation, according to Professor Jeremy Siegel's, "Stocks for the Long Run" (1994).

However, there are occasions when selling a mutual fund might be warranted. Buy and hold is not forever. Here we look at the top eight reasons for selling a mutual fund.

1. Portfolio Rebalancing
Over time, trends in financial markets might cause asset allocations to diverge from desired settings. In other words, some mutual funds can grow to a large proportion of the portfolio while others shrink to a smaller proportion, exposing you to a different level of risk.

To avoid this outcome, the portfolio can be rebalanced periodically by selling units in funds that have relatively large weights and transferring the proceeds to funds that have relatively small weights. Under this rule, the time to sell equity mutual funds is when they have enjoyed good gains over an extended bull market and the percentage allocated to them has drifted up too high.

2. Mutual Fund Changes or Mismanagement
Mutual funds might change in a number of ways that can be at odds with your original reasons for buying. For example, a star portfolio manager could jump ship and be replaced by someone lacking the same capabilities. Or there may be style drift, which arises when a manager gradually alters his or her investing approach over time.

Other signals to move on include an upward trend in annual management expense ratios (MERs) or a fund that has grown large relative to the market. If the fund has grown large compared to the market, managers could have difficulty differentiating their portfolios from the market in order to earn above-market returns.

3. Investor Growth
As you gain experience and acquire more wealth, you may outgrow mutual funds. With greater wealth comes the ability to buy enough individual stocks to achieve adequate diversification and avoid MERs. And with greater knowledge comes the confidence to do it yourself, whether it is actively picking stocks or buying and holding market indexes through exchange-traded funds (ETFs).

4. Life Cycle Changes
Although stocks historically have been the best investments to own over the long run, their volatility makes them unreliable vehicles in the short term. When retirement, children's post-secondary educations, or some other funding requirements approach, a good idea is to shift out of stock-market funds into assets that have more certain returns, such as bonds or term deposits, whose maturities coincide with the time that the funds will be needed.

5. Mistakes
Sometimes, investors' due diligence is incomplete and they end up owning funds they otherwise would have not purchased. For example, the investor might discover that the fund is too volatile for their tastes, a closet-index fund with a high MER, or invested in undesirable securities.

Portfolio errors might also have been committed by the investor. A common mistake is over-diversifying with too many funds, which can be difficult to keep tabs on and can tend to average out to market performance (less fund fees).

Another common misstep is to confuse owning a large number of funds with diversification. A large number of funds will not smooth out fluctuations if they tend to move in the same direction. What's needed is a collection of funds, of which some can be expected to be up when others are down.

6. Valuation
Shift out of mutual funds to rebalance your fixed portfolio allocations by using a flexible or opportunistic approach. A common valuation yardstick is the price-earnings ratio (P/E ratio); for U.S. stocks, it has averaged 14 to 15 over time, so if it rises to 24 to 26, valuations are overextended and the risk of a downturn is elevated.

7. Something Better Comes Along
Investing legend Sir John Templeton advised selling whenever something better came along. In the mutual fund realm, some funds can come onto the market with innovations that are better at doing what your fund is doing. Or, over time, it may become apparent other portfolio managers are performing better against the same benchmarks.

8. Tax Reduction
Mutual funds held in taxable accounts might be down substantially from their purchase price. They can be sold to realize capital losses that are used to offset taxable capital gains and thus lower taxes.

If the sale was solely to realize a capital loss for taxation purposes, the investor will want to re-establish the position after the 30-day period required to avoid the superficial-loss rule. The investor might take a chance that the price will be the same, lower or might choose to hold a proxy for the fund's price movement.

Tax-loss selling tends to occur during August to late December. That's also the period when many funds have estimated the capital gains and income they will be distributing to investors at year end. These amounts are taxable in the hands of the investor, so an additional reason to sell a losing fund from the tax point of view may be to avoid a large year-end distribution that would require paying additional taxes.

Conclusion
Although these eight reasons should compel you to consider getting rid of your fund, remember to keep the impact of deferred sales charges, short-term trading fees and taxes in mind whenever you sell. If these other factors don't fall in your favor, it may not be the best time to get out.

The right way to invest in biotech stocks

2009-04-06T03:13:00.000-07:00

Persuading you to invest in biotechs should be easy. Persuading you not to use what seems like a less-risky strategy might be harder.But I'm willing to give it a shot.

Explosive growth
Here's the easy part -- sometimes numbers speak louder than words:

Sure, I cherry-picked some of the best five-year periods, but that's exactly the point: To get the triple-digit annual percentage gains, you've got to find drug companies before they launch a new product or two. You need to find the companies before they become the next Celgene or Amgen.

Biotechs, by their very nature, are risky, because they depend on binary events like clinical trials and Food and Drug Administration approvals. But even the most conservative of portfolios can afford to take a swing at the fences for gains like those.

One way to invest in biotech
If you're convinced that returns like those would be great, but the riskiness of biotech scares the living daylights out of you -- don't worry, you're not alone.

From the very beginning of our investing careers, we all learn that the way to mitigate risk is to increase the number of companies we're invested in. A concentrated portfolio has little defense, should things go wrong. So maybe investing in the entire biotech sector through an exchange-traded fund (ETF) is the answer.

Wrong!

Unfortunately, the set-it-and-forget-it ETF strategy doesn't work as well for investing in biotech companies as it does for other industries.

Like many ETFs that follow industries, the iShares Nasdaq Biotechnology Index Fund is dominated by a handful of large companies.But in biotech, even more than in other industries, the small up-and-coming companies will drive returns. And in an all-industry ETF, their power is muted by companies that long ago had their day in the sun.

A shining example
Don't get me wrong; industry-focused ETFs are fine for some sectors. Investing in an ETF guarantees that you'll get the average return of many of the companies in the industry. If you don't have the time or knowledge to figure out which ones will outshine, taking the average is a good alternative.

But the average return in biotech isn't all that special, because the skyrocket returns that make investing in that industry worthwhile get lost in the crowd. In this field, regression to the mean isn't all that impressive.

Consider the results from the top performers of the current holdings of these two SPDR ETFs in 2007, the last year they had positive returns:

The energy sector fund, for example, is dominated by larger companies such as ExxonMobil (NYSE: XOM) and ConocoPhillips (NYSE: COP). Investing in the ETF, instead of in rising-star companies, would have reduced your returns somewhat -- but look at the difference between the biotech industry performance and its highfliers.

A better way
Rather than trying to diffuse risk by buying the whole industry, you can do so by tracking a small, hand-selected group of drug developers and watching their pipeline developments closely. That way you can find the next Amgen or Celgene -- before they're five-or-more baggers.

A biotech with a strong pipeline mitigates some of the risk inherent in biotechs, because if one of the drugs fails in clinical trials, there's another to replace it. And during bear markets, when secondary offerings are a bad idea, the pipeline can provide some much-needed cash through licensing deals with pharmaceutical companies.

While it's ideal for a company to have multiple compounds in the pipeline, it's also possible for a biotech to see one compound grow into multiple treatment areas. For instance, Onyx Pharmaceuticals was able to post those stellar returns in 2007 by expanding the use of its cancer drug Nexavar from kidney cancer into liver cancer.

Positive clinical trials and FDA approvals bring big rewards for investors -- which is why it's worth your time to track the up-and-comers.

Build your own ETF
Rather than buying shares of an ETF, build your own by investing in a basket of biotech stocks. You'll be more interested in following the companies, and you'll have control over selling should the risk-reward ratio start tipping the wrong direction.

What’s on Your mutual fund shopping list

2009-04-05T09:04:00.000-07:00

For most investors, beating the market is the holy grail of investing. So few people manage to do it that those who do are elevated to the status of legends by the investment community. How else could you explain the popularity of such stock-picking wizards as Warren Buffett, Peter Lynch, Bill Miller, and Marty Whitman? Those who manage to accomplish this difficult feat are generously rewarded over time.

Yes, each and every year there are some mutual funds that beat the overall market, and there are even years when the majority of mutual funds beat the market. But trying to pick a mutual fund ahead of time that will beat the market is extraordinarily difficult. When "mutual fund experts" are asked to pick mutual funds that they think will beat the market, they almost always fail, typically with disastrous results. In 1998, ten mutual fund experts were asked by USA Today to pick two mutual funds for the year. None, none, were able to pick a fund that beat the market. Studies show that picking mutual funds on the basis of past performance does not work, and saints preserve anyone who picks mutual funds on the basis of screaming magazine headlines.

So, can we imagine a time when one would willingly choose to put his hard-earned money into a mutual fund?

Imagine one walking down the street, innocently minding his own business, thinking only of ways to educate, amuse, or otherwise enrich some of his fellow men. Imagine that the one, lost in his thoughts, doesn't notice that the street he is on is Wall Street, and that suddenly he is cornered by an extremely well-dressed gun-toting thug who starts screaming, "We measure success one actively managed mutual fund sold at a time! Pick one now, or I'll blow your head off!"

Seem improbable? It should. It really should. We know Wall Street is full of a lot of irrational people, but we really don't think any of them would do this. We hope not anyway. Time will tell.

But, in reality, many people are confronted with the necessity of picking mutual funds from of a selection in their 401(k) plans when an index fund is not one of the options. If you remember what we have described so far in the previous sections, you'll have no problem going about picking a fund. If you skipped some of those articles, fell asleep, got distracted by the television, have short-term memory problems, or just can't get enough reviews of things you've already read once, here are the salient points set forth again.

Your mutual fund shopping list should read:

1. No sales charges (front loads, contingent deferred sales loads, level loads)
2. A low expense ratio (below 1.00%)
3. Low turnover, no higher than 50% a year, and preferably closer to 20%
4. Full investment policy. Cash reserves of nearly 0%.

Studies show that over time, virtually all of the difference in return between managed funds and index funds is attributable to the higher costs imposed by actively managed funds. These costs come in the form of loads and expense ratios.

You want to make sure that you are not paying any sales charges. Sales charges come in various stripes, also known as loads or commissions. There might be a charge for buying into the fund (a front-end load) or selling the fund (back-end load, deferred sales charge, or redemption fee). Avoid all of these. Some funds have back-end loads that are reduced the longer you hold the fund. Best to avoid these as well. If you have to buy an actively managed fund, buy the fund with no sales charges at all. Funds that normally have sales charges sometimes waive them or have reduced sales charges for large 401(k) accounts.

Expense ratios represent the annual fees charged by all funds, including the management fee, the administrative costs, 12b-1 distribution fees, and other operating expenses. You want to make sure that the fees are as low as possible. Index funds typically charge about 0.20% of the assets, and actively managed funds currently average about 1.5% per year. The average fee, by the way, has actually been climbing in recent years. Any fund that has fees above 1% per year can be expected to underperform the total returns offered by an index fund.

Turnover measures how long a fund holds on to the stocks it buys. The longer a mutual fund holds on to a stock and the less trading the fund does, the lower the turnover will be. Since a fund incurs costs every time it buys and sells stocks (just like you do), the lower the turnover, the lower the transaction costs incurred by the fund -- and the lower the capital gains taxes. Ideally, Fools like to see funds that practice the "buy and hold" method of investing -- those funds are the most index-like. Funds that have a turnover of 100% are essentially buying a completely new set of companies every year. Turnover should ideally be substantially lower than the mutual fund average of about 80%. Index funds have turnover as low as 5%.

A mutual fund that has an established track record is less important than you would think. Studies show that measuring performance over two decades or longer, 99% of funds that outperform the market in one decade revert to the mean in the next decade. Past performance really isn’t an indication of future results. If a fund has outperformed the S&P 500 recently, determine how it does against similar Morningstar style box funds.

Make sure to check out the consistency of the fund's returns. You are looking for funds that not only have shown good returns on the whole, but ones that do so on a consistent basis, rather than having great runs followed by lousy ones. Most funds that claim to have outperformed the market over a ten-year period really had most or all of their truly good performance when they were young and small. Once the fund has attracted a couple of billion extra dollars, the fund usually starts performing more in line with the market.

Keep the fees low and select from low turnover funds and you'll generally outperform most mutual funds. An even briefer summary would be, "Just buy an index fund."

Managing a superior risk-adjusted portfolio on a knife's edge

2009-04-04T20:08:00.000-07:00

Today I read an article on investmentnews.com . It’s saying the point, so I would like to share it here.

The economy is engaged in a tug of war pitting the debilitating effects of deflation against the colossal re-inflationary efforts of governments around the globe.

Until the outcome of that struggle becomes more certain, we think that the environment for equities is likely to remain challenging.

Deleveraging in the developed regions of the world, and many emerging areas as well, will be the new buzzword for years to come as consumers rebuild their balance sheets by saving more and paying off debt.

Unfortunately, a scenario like this tends to prolong a slowdown.

Fortunately, governments are filling that spending void with massive fiscal stimulus plans. Private-sector debt is being replaced by public-sector debt.

It is our view that the unprecedented re-inflationary efforts under way will win out over the long term, though when that will occur is anyone's guess.

The investment industry is seeing a significant shift toward retirement income as more high-net-worth baby boomers move away from accumulating assets to generating income from their portfolios.

But financial advisers and individual investors are wondering how they will be able to meet income goals as the equity markets experience virtually unprecedented volatility.

Although the global economy is in a perilous state, there are several favorable developments:

• Valuations for almost every global equity market are at or are close to lows that haven't been seen for years.

• Although tight by historical standards, global credit market conditions have eased.

• The enormous easing in monetary policy should allow the global economy to gain traction, eventually.

• In the short term, inflation should go much lower, thanks to the significant decline in food and energy prices — especially in the price of oil — in recent months.

So how should advisers and their clients position their portfolios in this uncertain environment?

We have always thought that diversification and active management should be the hallmarks of a retirement portfolio, and we see no reason to change that approach right now.

Nobody can accurately predict which asset class will be the first to re-emerge when markets recover, and which others will follow suit.

But when this does happen, a portfolio diversified across a range of asset classes, investment styles and geographies should leave investors well-positioned.

In particular, a multi-asset-class strategy that takes a global ap-proach and includes non-traditional asset classes, such as global real estate and currencies, can strength-en a diversified approach.

One way to execute such a strategy is through a fund of funds vehicle, where the manager invests with other managers specializing in a particular geography, investment style or asset class to potentially build a superior risk-adjusted portfolio.

BUY-AND-HOLD IS NO MORE

Equally important is managing the portfolio in an active fashion, taking advantage of market trends and market movements in an attempt to position the portfolio more advantageously.

With the end of the long bull market, many investors are questioning the buy-and-hold strategy that by definition takes a passive approach to asset allocation.

That may work when most markets are rising; however, right now we think that the ability to manage risk within a portfolio is critical.

Within a multi-asset-class strategy, the active manager has the flexibility, for example, to add cash or fixed-income securities to an all-equity portfolio, reducing the equity component accordingly.

This doesn't imply the wholesale replacement of one asset class by another, but rather the ability to fine-tune exposure, especially in a broadly diversified portfolio, adding value over time.

The active manager may over- or under-weight exposure to geographical regions, investment styles and market-capitalization categories.

Despite continued market uncertainty, we think that advisers and their clients still recognize the value of diversification and active management, and that the fund of funds model, drawing from a global opportunity set, can help create a superior risk-adjusted portfolio.

Get to know funds: Different Types of Funds

2009-04-02T22:39:00.000-07:00

No matter what type of investor you are, there is bound to be a mutual fund that fits your style.

Each fund has a predetermined investment objective that tailors the fund's assets, regions of investments and investment strategies. At the fundamental level, there are three varieties of mutual funds:

1) Equity funds (stocks)
2) Fixed-income funds (bonds)
3) 3) Money market funds

All mutual funds are variations of these three asset classes. For example, while equity funds that invest in fast-growing companies are known as growth funds, equity funds that invest only in companies of the same sector or region are known as specialty funds.

Let's go over the many different flavors of funds. We'll start with the safest and then work through to the more risky.

Money Market Funds
The money market consists of short-term debt instruments, mostly Treasury bills. This is a safe place to park your money. You won't get great returns, but you won't have to worry about losing your principal. A typical return is twice the amount you would earn in a regular checking/savings account and a little less than the average certificate of deposit (CD).

Bond/Income Funds
Income funds are named appropriately: their purpose is to provide current income on a steady basis. When referring to mutual funds, the terms "fixed-income," "bond," and "income" are synonymous. These terms denote funds that invest primarily in government and corporate debt. While fund holdings may appreciate in value, the primary objective of these funds is to provide a steady cashflow to investors. As such, the audience for these funds consists of conservative investors and retirees.

Bond funds are likely to pay higher returns than certificates of deposit and money market investments, but bond funds aren't without risk. Because there are many different types of bonds, bond funds can vary dramatically depending on where they invest. For example, a fund specializing in high-yield junk bonds is much more risky than a fund that invests in government securities. Furthermore, nearly all bond funds are subject to interest rate risk, which means that if rates go up the value of the fund goes down.

Balanced Funds
The objective of these funds is to provide a balanced mixture of safety, income and capital appreciation. The strategy of balanced funds is to invest in a combination of fixed income and equities. A typical balanced fund might have a weighting of 60% equity and 40% fixed income. The weighting might also be restricted to a specified maximum or minimum for each asset class.

A similar type of fund is known as an asset allocation fund. Objectives are similar to those of a balanced fund, but these kinds of funds typically do not have to hold a specified percentage of any asset class. The portfolio manager is therefore given freedom to switch the ratio of asset classes as the economy moves through the business cycle.

Equity Funds
Funds that invest in stocks represent the largest category of mutual funds. Generally, the investment objective of this class of funds is long-term capital growth with some income. There are, however, many different types of equity funds because there are many different types of equities. A great way to understand the universe of equity funds is to use a style box, an example of which is below.

The idea is to classify funds based on both the size of the companies invested in and the investment style of the manager. The term value refers to a style of investing that looks for high quality companies that are out of favor with the market. These companies are characterized by low P/E and price-to-book ratios and high dividend yields. The opposite of value is growth, which refers to companies that have had (and are expected to continue to have) strong growth in earnings, sales and cash flow. A compromise between value and growth is blend, which simply refers to companies that are neither value nor growth stocks and are classified as being somewhere in the middle.

For example, a mutual fund that invests in large-cap companies that are in strong financial shape but have recently seen their share prices fall would be placed in the upper left quadrant of the style box (large and value). The opposite of this would be a fund that invests in startup technology companies with excellent growth prospects. Such a mutual fund would reside in the bottom right quadrant (small and growth).

Global/International Funds
An international fund (or foreign fund) invests only outside your home country. Global funds invest anywhere around the world, including your home country.

It's tough to classify these funds as either riskier or safer than domestic investments. They do tend to be more volatile and have unique country and/or political risks. But, on the flip side, they can, as part of a well-balanced portfolio, actually reduce risk by increasing diversification. Although the world's economies are becoming more inter-related, it is likely that another economy somewhere is outperforming the economy of your home country.

Specialty Funds
This classification of mutual funds is more of an all-encompassing category that consists of funds that have proved to be popular but don't necessarily belong to the categories we've described so far. This type of mutual fund forgoes broad diversification to concentrate on a certain segment of the economy.

Sector funds are targeted at specific sectors of the economy such as financial, technology, health, etc. Sector funds are extremely volatile. There is a greater possibility of big gains, but you have to accept that your sector may tank.

Regional funds make it easier to focus on a specific area of the world. This may mean focusing on a region (say Latin America) or an individual country (for example, only Brazil). An advantage of these funds is that they make it easier to buy stock in foreign countries, which is otherwise difficult and expensive. Just like for sector funds, you have to accept the high risk of loss, which occurs if the region goes into a bad recession.

Socially-responsible funds (or ethical funds) invest only in companies that meet the criteria of certain guidelines or beliefs. Most socially responsible funds don't invest in industries such as tobacco, alcoholic beverages, weapons or nuclear power. The idea is to get a competitive performance while still maintaining a healthy conscience.

Index Funds
The last but certainly not the least important are index funds. This type of mutual fund replicates the performance of a broad market index such as the S&P 500 or Dow Jones Industrial Average (DJIA). An investor in an index fund figures that most managers can't beat the market. An index fund merely replicates the market return and benefits investors in the form of low fees.

It's important to understand that each mutual fund has different risks and rewards. In general, the higher the potential return, the higher the risk of loss. Although some funds are less risky than others, all funds have some level of risk - it's never possible to diversify away all risk. This is a fact for all investments.

4 Secrets of Million-Dollar Stocks

2009-04-02T04:16:00.001-07:00

Stocks have turned thousands of investors just like you into millionaires. But how can you tell the companies that will make you rich from those that will just tread water for years -- or worse?

Given enough time, you don't have to find the perfect stock in order to build up an impressive portfolio. Although it's easy to forget after the big losses over the past year and a half, even broad market indexes have given investors strong returns over the long run -- solid returns that, when compounded over the years, can multiply your savings slowly but steadily.

Some investors, though, aren't that patient -- or want to shoot higher. Just look at what these top-tier stocks have done for their early investors:

Sure, these stocks have extraordinary stories. But that's the point: You want to find the companies of tomorrow that will tell similar stories down the road. Here are four secrets to tracking down these millionaire-makers.

1. You've probably never heard of them.
With the benefit of hindsight, the stocks that have paid off the most for investors seem obvious. Whether it's a dominant computer operating system or a ubiquitous retail chain, you might kick yourself for having passed up the opportunity to buy shares early in those companies' histories.

But with most millionaire-making stocks, by the time you've heard of them, you've already missed out on some of their most dramatic gains. For instance, just a year after Microsoft went public, it had already nearly tripled from its IPO price.

So you can't afford to wait until mainstream media sources tell you about a hot stock. By then, it's too late -- and those who'll see modest investments turn to millions have already bought their shares.

2. You have to hold onto them.
Even once you find the stock that could make you a millionaire, your job is far from over. To realize the full potential of your investment, you have to stay the distance -- and overcome the temptation to take profits all along the way.

For many investors, holding onto a winner is a lot harder than you might think. Along the way, you'll have plenty of chances to sell out, having seen your original investment double, triple, or even multiply tenfold. Plenty of people felt like geniuses selling their winning stocks after big gains -- until they kept going higher for years after they sold out.

3. They don't last forever.
Still, although a buy-and-hold philosophy is crucial to milking a millionaire-making stock for all that it's worth, that doesn't mean a buy-and-hold-forever strategy will keep you rich. During the dot-com boom, plenty of brand-new millionaires failed to heed warning signs and implement simple strategies that could have preserved their newfound wealth for years to come. More recently, many failed to see that former highfliers like Washington Mutual and Citigroup (NYSE: C) would come crashing down.

Yes, it's hard to tell a temporary setback from a permanent slowing of a company's prospects. You'll make mistakes trying to balance your fear and greed. But after staying with a stock all the way up, you don't want to ride it all the way back down.

4. They're not for the meek.
Stocks that have the biggest growth potential also bear huge risks. For every company like Microsoft, there are hundreds of similar start-ups that never get off the ground and cost investors every penny of what they put in.

But obviously, you don't have to pick a whole stable of millionaire-makers to get rich. With modest initial investments, all it takes is one or two to set you for life.
source from:fool.com

China Mobile (NYSE: CHL) to Upgrade to five stars

2009-04-01T05:12:00.000-07:00

China Mobile is a leading mobile operator in China and has the world' s largest subscriber. Will wireless newcomer China Telecom live up to its billing as the nemesis of market leader China Mobile? Investors and some analysts seem to think so. But have you notice that enough top-performing CAPS members have turned bullish on China Mobile (NYSE: CHL) recently to upgrade the four-star rank which it has held for months to a more formidable five stars. Many have given their opinion on the telecom services provider, with many of them offering analysis and commentary explaining the recent optimism.

While the global economy has slowed dramatically, China Mobile's 2008 profit still managed to jump nearly 30%, as revenue grew 15.5% to $60 billion. The company added more than 7.3 million subscribers per month last year, reaching 457 million customers. It enjoys a 70% share of China's wireless market, and its sheer size dwarfs domestic rivals, including domestic competitor China Telecom's (NYSE: CHA) 28 million wireless subscribers.

China Mobile even outsizes its international peers, serving more than five times the number of customers of AT&T (NYSE: T), Sprint Nextel (NYSE: S) or Verizon Wireless -- a joint venture of Verizon Communications (NYSE: VZ) and Vodafone (NYSE: VOD). The company also expects to benefit from China's stimulus spending.

While new competition coming from industry restructuring has some investors concerned, China Mobile barrels ahead with advanced services to differentiate it from new rivals. Nokia Siemens – a joint venture between Nokia (NYSE: NOK) and Siemens -- recently said it completed the second phase of China Mobile's 3G rollout ahead of schedule and many CAPS members think China Mobile will continue to be the clear leader.

For 2009, analysts polled by Thomson Reuters estimate China Mobile will earn $4.23 per share, up just 5%. China Mobile shareholders have been hoping for a boost in dividends, similar to what many U.S. and European phone companies have doled out.

But China Mobile says it plans to keep dividends near their current level, disappointing shareholders. China Telecom said it also plans to maintain dividend levels as is.

Chinese consumers are cutting back on wireless usage, analysts say. China Mobile's 2008 revenue rose 15.5% to $60.4 billion. But analysts estimate that revenue will grow less than 10% this year.

Learn from Buffett's error --- Don't focus on charts and Technical analysis!!

2009-03-30T07:40:00.000-07:00

There's one stock-picking strategy many people have tried. In fact, Warren Buffett spent eight years working with it before discarding it as worthless. What investment strategy is that? Technical analysis.

Invest like a lemming
Technical analysis is the practice of predicting where stocks will trade based on charts of historical pricing and volume information. Technical analysts look at the past charts of prices and different indicators to make inferences about the future movement of a stock's price. It is the polar opposite of fundamental analysis, and there's a certain logic to it. Stocks trade based on supply and demand, which is greatly influenced by investors' attitudes about the stocks. The charts should reflect those attitudes and might predict where the individual stocks will go.

It's an attractive idea. Clorox (NYSE: CLX) has bounced between $55 and $65 quite a few times in the past few years. Why not buy at the low, and sell at the high? Or look at Green Mountain Coffee Roasters' (Nasdaq: GMCR) chart. Clearly, investors love the stock. Its rise from $24 to $48 seems unstoppable. Why not jump aboard and profit?

Technical analysis is a simple yet compelling strategy. You can see why Buffett spent years early in his career trying to master it.

An expensive mistake
But Buffett discovered one small problem. Technical analysis didn't work. He explained, "I realized that technical analysis didn't work when I turned the chart upside down and didn't get a different answer."

After eight years of trying, he concluded that it was the wrong way to invest. Then he focused on the teachings of Ben Graham, which stressed business fundamentals, finding a strategy that both made sense and, more importantly, worked.

Three simple rules
The billionaire discussed that strategy at the 2008 Berkshire Hathaway (NYSE: BRK-A) general meeting. When he was asked how to avoid the crowd mind-set, he said he simply followed Graham's three most important lessons:

1. Buy stocks with a margin of safety.
2. A stock is part of a business.
3. The market is there to serve you, not instruct you.

The first lesson usually makes the headlines. It means that you should buy stocks for less than they're worth. But when Buffett talks about the second and third lessons, he's basically admitting that he wasted eight years of his investing life.

Buying a business
After all, thinking about a stock as part of a business is the opposite of what technical analysis is all about. Technical analysis focuses on trading securities. It doesn't matter whether the security is a share of Suncor Energy (NYSE: SU), with its oil sands, natural gas, energy marketing, and refining segments; or whether that security is a derivative promising the delivery of three tons of Italian meatballs. It's all the same because technical analysis doesn't care about the business -- or the fundamentals.

In Graham's second lesson, stocks are far more than just pieces of paper or lines on graphs, and to understand them, you need to understand the business. If you're looking at Under Armour (NYSE: UA), ignore whether the stock has been up three days in a row, and focus instead on how the company plans to address its inventory management issues.

Ways to serve man and woman
Similarly, when Buffett says the market isn't there to instruct, he's saying the movements in the market aren't telling you how to invest.

When Wells Fargo (NYSE: WFC) fell under $2 per share in 1990 (adjusted for splits and dividends), the market was saying that poor-performing California residential loans would sink the company.

When McDonald's hit $13 in 2003, the market was announcing that the Big Mac would end up in the Museum of Neat Ideas Gone Wrong, alongside the tapeworm diet, land wars in Asia, and Paris Hilton's home videos.

But in both cases, the market was wrong.

So, instead of listening to the market, Buffett seeks to take advantage of it. Sometimes, the market will offer to buy a stock for far more than it's actually worth. Other times, it'll offer you the chance to buy shares of a great company for far less than its fair value. An investor who understands the true value of a business will be able to profit when the market offers great companies on sale.

The Foolish bottom line
You can learn from Buffett's error -- don't focus on charts. Instead, understand businesses and seek excellent stocks that the market offers at low prices. These days, the market is particularly treacherous. Some stocks that seem cheap will turn out to be very expensive. Others that are simply beaten down by negativity will post amazing returns.

Technology and Emerging markets: The biggest losers would be the best buys

2009-03-29T03:32:00.000-07:00

Wall Street is not in the spiritual realm, but it does cherish at least one verse from the book of Matthew: "So the last shall be first, and the first last."
The market's biggest losers habitually return in the role of top dog. That's happening right now to two of last year's most beaten-down groups, technology and emerging markets. And both seem likely to continue to outpace other stocks, both because they have good prospects and because they're still relatively cheap.

"You always look at two sides -- not only the (investment) concept but the price of buying that concept reasonably," says Lew Alfest, president and chief investment officer of LJ Altfest & Co. in Manhattan.

The technology sector and developing nations have little in common except that they both are unusually risky. Last year, when risk was punished without mercy, both groups declined much more than broader markets. The average tech-sector fund lost 43.5% of its value, according to Morningstar, while the S&P 500 Index ($INX) declined 37%. Emerging markets funds tumbled 54.4%, while developed foreign markets sank 43.1%.

This year those relationships have been reversed. Tech funds are actually up 2%, as of March 19, while domestic large-cap funds are down 11.5%. Emerging markets funds are down 3.7%, compared with the 13.7% decline of foreign large-cap funds.

Technology: Flush with cash
Technology companies are benefiting currently because they are displaying relatively high resistance to the troubled financial sector.

"Balance sheets for large-capitalization technology companies are phenomenal," says Robert Stimpson, manager of Black Oak Emerging Technology Fund (BOGSX). "They don't have a lot of debt, and they don't have big working-capital needs."

Rather, technology firms have held on to relatively high cash flows, which furnishes their working capital. Last week, IBM (IBM, news, msgs) showed its financial strength by bidding to acquire Sun Microsystems (JAVA, news, msgs), the developer of high-end computer servers.

"Within large-cap technology, there is a persistent characteristic that during times of economic distress, the strong get stronger," Stimpson says. Technology also continues to provide productivity improvements to its customers, enabling them to do more with less. And it continues to innovate, enabling successive waves of new business creation.

Technology was one of the first sectors for which mutual funds were designed, and there are hundreds of them. Among the best are Ivy Science & Technology (WSTAX), Seligman Communications & Information (SLMCX) and T. Rowe Price Global Technology (PRGTX).

Emerging markets: Growing, while the developed world shrinks
Emerging markets, too, are benefiting from partial immunity to the financial crisis.

"Emerging market financial companies have generally not had the exposure to toxic assets like they have in developed markets," notes Craig Shaw, manager of Harding Loevner Emerging Markets Fund (HLEMX).

And while growth has turned negative in developed economies, many developing nations continue to enjoy growth, albeit at a slower rate than last year. Gross domestic product is expected to fall 2.2% this year in the United States, 2.4% in the euro zone and 5.3% in Japan. In China, however, it is forecast to grow 6%, and in India 5%. In Russia it is expected to ebb only 2%, and in Brazil a slender 0.4%.

But after last year's huge losses, stock prices in emerging markets are lower than in developed-nation stock markets. "They're trading at a price-earnings multiple of roughly 10," Shaw says. The comparable numbers in developing nations are 12 to 14. "So you're getting a big discount on a number of really good companies out there with good long-term growth prospects and strong financials."

In addition to the Loevner portfolio, outstanding emerging-markets mutual funds include Acadian Emerging Markets (AEMGX) and Oppenheimer Developing Markets (ODMAX).

Calling a bottom
The recovery in these two groups could presage a stronger market overall, says Jeff Mortimer, chief investment officer of Charles Schwab Investment Management.

"During bear markets, the baby does get thrown out with the bath water, especially toward the end," he says. "And as things start to turn green, what typically happens is the risky stuff will do relatively better. The junk runs first."
Mortimer believes things started to turn green on March 9, when the S&P 500 ($INX) plunged to 656.73, its lowest level in more than 12 years. It immediately rallied sharply, and closed at 823 on Monday.

"It seems to me (March 9) was very significant," he says. "There was incredible pessimism, a sell-at-any-price mentality. Markets make emotional lows, and that to me was a severely emotional day."

Mortimer expects stocks to "meander down here for awhile" rather than continue to rally hugely. But he also expects the March 9 low to hold, meaning the bear is out of ammunition and it's safe to venture back into equities.

Of course, if the last truly shall be first, that means the financial sector should shoot up like a beach ball held underwater. And indeed financial sector funds were the No. 1 performer during the month ended March 19, sprinting ahead 8.8%, compared with the 6.7% gain of technology and the 6.5% advance of emerging markets. So do you feel lucky? After all, the book of Matthew is gospel.

Source from:By Tim Middleton MSN Money

What Are Mutual Funds

2009-03-29T01:47:00.000-07:00

As you probably know, mutual funds have become extremely popular over the last 20 years. What was once just another obscure financial instrument is now a part of our daily lives. More than 80 million people, or one half of the households in America, invest in mutual funds. That means that, in the United States alone, trillions of dollars are invested in mutual funds.

In fact, to many people, investing means buying mutual funds. After all, it's common knowledge that investing in mutual funds is (or at least should be) better than simply letting your cash waste away in a savings account, but, for most people, that's where the understanding of funds ends. It doesn't help that mutual fund salespeople speak a strange language that is interspersed with jargon that many investors don't understand.

Originally, mutual funds were heralded as a way for the little guy to get a piece of the market. Instead of spending all your free time buried in the financial pages of the Wall Street Journal, all you had to do was buy a mutual fund and you'd be set on your way to financial freedom. As you might have guessed, it's not that easy. Mutual funds are an excellent idea in theory, but, in reality, they haven't always delivered. Not all mutual funds are created equal, and investing in mutuals isn't as easy as throwing your money at the first salesperson who solicits your business.

The Definition of mutual funds
A mutual fund is nothing more than a collection of stocks and/or bonds. You can think of a mutual fund as a company that brings together a group of people and invests their money in stocks, bonds, and other securities. Each investor owns shares, which represent a portion of the holdings of the fund.

You can make money from a mutual fund in three ways:
1) Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all of the income it receives over the year to fund owners in the form of a distribution.
2) If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution.
3) If fund holdings increase in price but are not sold by the fund manager, the fund's shares increase in price. You can then sell your mutual fund shares for a profit.

Funds will also usually give you a choice either to receive a check for distributions or to reinvest the earnings and get more shares.

Advantages of Mutual Funds:
• Professional Management - The primary advantage of funds (at least theoretically) is the professional management of your money. Investors purchase funds because they do not have the time or the expertise to manage their own portfolios. A mutual fund is a relatively inexpensive way for a small investor to get a full-time manager to make and monitor investments.

• Diversification - By owning shares in a mutual fund instead of owning individual stocks or bonds, your risk is spread out. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gains in others. In other words, the more stocks and bonds you own, the less any one of them can hurt you (think about Enron). Large mutual funds typically own hundreds of different stocks in many different industries. It wouldn't be possible for an investor to build this kind of a portfolio with a small amount of money.

• Economies of Scale - Because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are lower than what an individual would pay for securities transactions.

• Liquidity - Just like an individual stock, a mutual fund allows you to request that your shares be converted into cash at any time.

• Simplicity - Buying a mutual fund is easy! Pretty well any bank has its own line of mutual funds, and the minimum investment is small. Most companies also have automatic purchase plans whereby as little as $100 can be invested on a monthly basis.

Disadvantages of Mutual Funds:
• Professional Management - Did you notice how we qualified the advantage of professional management with the word "theoretically"? Many investors debate whether or not the so-called professionals are any better than you or I at picking stocks. Management is by no means infallible, and, even if the fund loses money, the manager still takes his/her cut. We'll talk about this in detail in a later section.

• Costs - Mutual funds don't exist solely to make your life easier - all funds are in it for a profit. The mutual fund industry is masterful at burying costs under layers of jargon. These costs are so complicated that in this tutorial we have devoted an entire section to the subject.

• Dilution - It's possible to have too much diversification. Because funds have small holdings in so many different companies, high returns from a few investments often don't make much difference on the overall return. Dilution is also the result of a successful fund getting too big. When money pours into funds that have had strong success, the manager often has trouble finding a good investment for all the new money.

• Taxes - When making decisions about your money, fund managers don't consider your personal tax situation. For example, when a fund manager sells a security, a capital-gains tax is triggered, which affects how profitable the individual is from the sale. It might have been more advantageous for the individual to defer the capital gains liability.

Great opportunities of Investing in Smartphone Market

2009-03-27T05:57:00.000-07:00

A freshly issued market analysis from mobile ad vendor AdMob raises some interesting questions about how the burgeoning smartphone sector is evolving, both here and around the world.

AdMob serves advertising to more than 6,000 websites, and it collects statistics about every mobile device that serves up one of its banners. While this measurement method isn't perfect, overweighting certain geographical regions, it should give a reasonably accurate picture of how people are using those fancy everything-plus-the-kitchen-sink smartphones to access the Internet today.

According to this data, Nokia (NYSE: NOK) is the undisputed king of mobile Internet usage, with a 30.2% global market share. You don't think of Nokia as a smartphone giant? Maybe that's because the Finnish company holds a mere 3% of the U.S. market. Here, Apple (Nasdaq: AAPL) is the unsurprising champion; its devices claim 27.1% of all domestic mobile ad views. Investing in Apple makes good sense because of it's platform, vison, and corporate strength.

The Android smartphone platform, blessed by Google (Nasdaq: GOOG), grabbed a 5% traffic share in the first three months of its young public life. It is among the top Web-using devices on Deutsche Telekom's (NYSE: DT) T-Mobile network. The trickle of Android models is poised to turn into a torrent of Samsung, Motorola (NYSE: MOT), and LG Electronics offerings, which should expand the Android's market clout considerably.

The Research In Motion (Nasdaq: RIMM) BlackBerry line is another American overachiever. A 22% U.S. traffic share translates into a 10% slice of the global cake, leaving lots of room for improvement. One bright note for RIM shareholders is that BlackBerry users seem to buy new phones on a regular basis -- 97% of their ad requests come from very modern versions of the BlackBerry operating system (v. 4.2 or higher).

By contrast, 12% of Microsoft's (Nasdaq: MSFT) Windows Mobile users are stuck with the nearly four-year-old 5.0 version, which was really aimed at the Pocket PCs that ruled mobile computing back then. Version 5 will lose its "mainstream support" status next year.

It's hard to tell from AdMob's data whether the varying phones just offer a more user-friendly online experience than their competitors, or if they simply outsold the competition. But if it ain't broke, don't fix it. What works for mobile data surfers today should be an indication of what they might want tomorrow. Based on this report, I'd take a long, hard look at Nokia for its foreign strengths, at Apple for its domestic dominance, and at companies with a finger in the Android pie, like Google.

The smartphone market ain't dead. In fact, it's still a mere toddler. There's plenty of growth ahead. Explore and make good use of the opportunity.

Is Warren Buffett AIG-Proof?

2009-03-26T06:32:00.000-07:00

Who needs six degrees of Kevin Bacon when you can play six degrees of AIG (NYSE: AIG) instead?

Since the witch hunt continues for anyone linked to the maligned insurer's money, isn't it really just a matter of time before public scrutiny begins to rain down on the companies that benefited the most from the $170 billion that AIG has received?

Here is where even Warren Buffett himself risks becoming an accidental tourist. Berkshire Hathaway's (NYSE: BRK-A) (NYSE: BRK-B) hands are completely clean, but his company's investment in Goldman Sachs (NYSE: GS) late last year places Buffett just two degrees of separation from the AIG fiasco.

AIG didn't just receive $170 billion in bailout money. The government lodged explosive dye packs into the stash, and now it's starting to blow up in the pockets of everyone who's holding it.

If retention bonus recipients are being vilified for being handed $165 million of the bailout funds in contractual back pats, how much longer will it be before the hounds start sniffing around Goldman Sachs? After all, AIG handed over nearly $13 billion of the now tainted bailout proceeds to Goldman Sachs to settle a score.

Yes, Goldman Sachs is loaded. It probably didn't need the $10 billion in TARP proceeds that it was talked into swallowing down back in October. It also probably didn't need the $5 billion it scored a month earlier in selling high-yielding preferred stock to Berkshire Hathaway a month earlier.

In fact, yesterday's New York Times is reporting that Goldman Sachs is now considering paying back its $10 billion in TARP funds within the next month. After watching companies like Citigroup (NYSE: C) and now JPMorgan Chase (NYSE: JPM) get crucified over corporate jet orders, and nearly every TARP recipient being scolded for executive compensation practices, one can't blame Goldman Sachs for getting out of dodge while the stagecoaches are still running.

However, Goldman's clearly not going to return the nearly $13 billion it got from AIG. It's money that rightfully belongs to Goldman Sachs, though one has to wonder how much of that it would have seen if the government had let AIG collapse under its own weight last year before deeming it too big to fail.

If no one sees that that is where the public anger is going to next, I'll draw you a map.

So, let's go back to Buffett. Berkshire Hathaway's investment in Goldman Sachs was practically bulletproof. Collecting 10% on "perpetual" preferred stock seems like a risk-free bet, as long as Goldman Sachs is still in business. However, it also scored warrants in the deal to snap up $5 billion of Goldman Sachs at $115 over the next few years. Goldman Sachs has to not only survive -- but thrive -- for that to be valuable.

So, Buffett is positioned to likely laugh all the way to the bank on this one, but Berkshire Hathaway will clearly have more money to lug to said bank if Goldman Sachs can keep the bloodthirsty mob away.

They're inching closer, though, so watch out.

Source from:http://www.fool.com/investing/general/2009/03/24/is-warren-buffett-aig-proof.aspx

How to pick stocks: GARP Investing strategy

2009-03-25T06:07:00.001-07:00

Do you feel that you now have a firm grasp of the principles of both value and growth investing? If you're comfortable with these two stock-picking methodologies, then you're ready to learn about a newer, hybrid system of stock selection. Here we take a look at growth at a reasonable price, or GARP.

What Is GARP?
The GARP strategy is a combination of both value and growth investing: it looks for companies that are somewhat undervalued and have solid sustainable growth potential. The criteria which GARPers look for in a company fall right in between those sought by the value and growth investors. Below is a diagram illustrating how the GARP-preferred levels of price and growth compare to the levels sought by value and growth investors:
What GARP Is NOT
Because GARP borrows principles from both value and growth investing, some misconceptions about the style persist. Critics of GARP claim it is a wishy-washy, fence-sitting method that fails to establish meaningful standards for distinguishing good stock picks. However, GARP doesn't deem just any stock a worthy investment. Like most respectable methodologies, it aims to identify companies that display very specific characteristics.

Another misconception is that GARP investors simply hold a portfolio with equal amounts of both value and growth stocks. Again, this is not the case: because each of their stock picks must meet a set of strict criteria, GARPers identify stocks on an individual basis, selecting stocks that have neither purely value nor purely growth characteristics, but a combination of the two.

Who Uses GARP?
One of the biggest supporters of GARP is Peter Lynch, who has written several popular books, including "One Up on Wall Street" and "Learn to Earn", and in the late 1990s and early 2000 he starred in the Fidelity Investment commercials. Many consider Lynch the world's best fund manager, partly due to his 29% average annual return over a 13-year stretch from 1977-1990.

The Hybrid Characteristics
Like growth investors, GARP investors are concerned with the growth prospects of a company: they like to see positive earnings numbers for the past few years, coupled with positive earnings projections for upcoming years. But unlike their growth-investing cousins, GARP investors are skeptical of extremely high growth estimations, such as those in the 25-50% range. Companies within this range carry too much risk and unpredictability for GARPers. To them, a safer and more realistic earnings growth rate lies somewhere between 10-20%.

Something else that GARPers and growth investors share is their attention to the ROE figure. For both investing types, a high and increasing ROE relative to the industry average is an indication of a superior company.

GARPers and growth investors share other metrics to determine growth potential. They do, however, have different ideas about what the ideal levels exhibited by the different metrics should be, and both types of investors have varying tastes in what they like to see in a company. An example of what many GARPers like to see is positive cash flow or, in some cases, positive earnings momentum.

Because a variety of additional criteria can be used to evaluate growth, GARP investors can customize their stock-picking system to their personal style. Exercising subjectivity is an inherent part of using GARP. So if you use this strategy, you must analyze companies in relation to their unique contexts (just as you would with growth investing). Since there is no magic formula for confirming growth prospects, investors must rely on their own interpretation of company performance and operating conditions.

It would be hard to discuss any stock-picking strategy without mentioning its use of the P/E ratio. Although they look for higher P/E ratios than value investors do, GARPers are wary of the high P/E ratios favored by growth investors. A growth investor may invest in a company trading at 50 or 60 times earnings, but the GARP investor sees this type of investing as paying too much money for too much uncertainty. The GARPer is more likely to pick companies with P/E ratios in the 15-25 range - however, this is a rough estimate, not an inflexible rule GARPers follow without any regard for a company's context.

In addition to a preference for a lower P/E ratio, the GARP investor shares the value investor's attraction to a low price-to-book ratio (P/B) ratio, specifically a P/B of below industry average. A low P/E and P/B are the two more prominent criteria with which GARPers in part mirror value investing. They may use other similar or differing criteria, but the main idea is that a GARP investor is concerned about present valuations.

By the Numbers
Now that we know what GARP investing is, let's delve into some of the numbers that GARPers look for in potential companies.

The PEG Ratio
The PEG ratio may very well be the most important metric to any GARP investor, as it basically gauges the balance between a stock's growth potential and its value.

GARP investors require a PEG no higher than 1 and, in most cases, closer to 0.5. A PEG of less than 1 implies that, at present, the stock's price is lower than it should be given its earnings growth. To the GARP investor, a PEG below 1 indicates that a stock is undervalued and warrants further analysis.

PEG at Work
Say the TSJ Sports Conglomerate, a fictional company, is trading at 19 times earnings (P/E = 19) and has earnings growing at 30%. From this you can calculate that the TSJ has a PEG of 0.63 (19/30=0.63), which is pretty good by GARP standards.

Now let's compare the TSJ to Cory's Tequila Co (CTC), which is trading at 11 times earnings (P/E = 11) and has earnings growth of 20%. Its PEG equals 0.55. The GARPer's interest would be aroused by the TSJ, but CTC would look even more attractive. Although it has slower growth compared to TSJ, CTC currently has a better price given its growth potential. In other words, CTC has slower growth, but TSJ's faster growth is more overpriced. As you can see, the GARP investor seeks solid growth, but also demands that this growth be valued at a reasonable price. Hey, the name does make sense!
GARP at Work
Because a GARP strategy employs principles from both value and growth investing, the returns that GARPers see during certain market phases are often different than the returns strictly value or growth investors would see at those times. For instance, in a raging bull market the returns from a growth strategy are often unbeatable: in the dotcom boom of the mid- to late-1990s, for example, neither the value investor nor the GARPer could compete. However, when the market does turn, a GARPer is less likely to suffer than the growth investor.

Therefore, the GARP strategy not only fuses growth and value stock-picking criteria, but also experiences a combination of their types of returns: a value investor will do better in bearish conditions; a growth investor will do exceptionally well in a raging bull market; and a GARPer will be rewarded with more consistent and predictable returns.

Conclusion
GARP might sound like the perfect strategy, but combining growth and value investing isn't as easy as it sounds. If you don't master both strategies, you could find yourself buying mediocre rather than good GARP stocks. But as many great investors such as Peter Lynch himself have proven, the returns are definitely worth the time it takes to learn the GARP techniques.

source from:http://www.investopedia.com/

Pick the Defense Stocks into Your Portfolio

2009-03-24T04:18:00.000-07:00

Has anyone else noticed that defense stocks are at multi-year lows, and that they're trading for ridiculous price-to-earnings ratios of around 8? Such as Boeing, (BA), Northrup Grumond, (NOC). Haliburton which is kind of a defense stock mostly sub contracting though was up over a buck (HAL). Northrup and Boeing are both decent dividend producing stocks too. Both were at new lows or near new lows but did a nice rebound recently. It’s wise to found some high-performing defense companies whose shares have been beaten down well below their true value.

You must be kidding
I’ll bet many people equate investing in a defense stock with arranging potpourri -- a mundane activity. The perception is that despite their cool products, defense firms are slow-growing and somewhat boring businesses. Indeed, defense companies are considered superstars if they can generate 10% annual revenue growth.

What’s worse (the bear argument goes) is that growth will be much harder to come by in the next decade than the last. The past 10 years were phenomenal for contractors, as the defense budget more than doubled from $292 billion in 1999 to an expected $611 billion next year. But there are now major pressures on spending, including possible withdrawal from Iraq and a financial crisis that requires large sums of government money.

Didn't you say you liked defense stocks?
As a member of the Motley Fool Inside Value team who has spent five years analyzing the defense and aerospace industries on Wall Street, I believe now is the time to get excited about defense stocks. You see, investors are so scared they have forgotten why defense is an excellent area to invest. Here are some reasons:

There are huge barriers to entry.
Long product lifecycles mean high visibility of earnings and cash flow.
Defense programs are hard to cut.
Defense is counter-cyclical to the economy.
Unfortunately, the world is not a safe place.

Entry denied
The defense industry has tremendous barriers to entry. It's a bit like the Augusta National Golf Club, which limits the number of members to about 300. It is almost unprecedented to start a new defense company from scratch. You can build a defense company up through acquisitions, like L-3 Communications (NYSE: LLL) did, but unlike Silicon Valley, for example, you won’t see random start-ups like Microsoft (Nasdaq: MSFT) or VMware (NYSE: VMW) taking the industry by storm.

Of course, there is competition amongst defense contractors, but it's usually limited within each market. There are only two makers of submarines, two main ship makers, three aircraft makers, and only one builder of aircraft carriers. Less competition is good for the existing players.

Boring is the new brilliant
Defense products have long lives, and this leads to high visibility of earnings and cash flow. Did you know that not only are Boeing’s (NYSE: BA) B-52 bombers still flying, but they are also projected to last until 2040, for a total of 80 years? Contrast this with salesforce.com (NYSE: CRM), which may be a great company, but is constantly forced to innovate just to maintain market share. Change destroys businesses, and thankfully, the rate of change in defense is relatively slow, often measured in decades, not years.

Defense programs are difficult to cut
Right now, valuations assume deep cuts to the defense budget. While the budget will face pressure, I don't believe it will fall as much as expected. First, defense programs are notoriously hard to cut because Congress must sign off, and contractors account for significant employment in many states. With the economy reeling, it is important to keep jobs in place. Also, even if programs are cancelled, contractors are entitled to termination fees.

No bailouts needed for these counter-cyclicals
Despite the recent market surge, the economy is expected to remain weak for some time, and defense companies tend to be counter-cyclical to the overall economy, which helps to insulate them from recessions. Even some of our strongest consumer brands like PepsiCo (NYSE: PEP) and Church & Dwight (NYSE: CHD) are not nearly as immune to the current economic environment.

Defense companies have risks such as underfunded pension plans, but on the whole, business results should be steady over the next few years. Indeed, one Wall Street analyst forecasts all of the "big five" defense contractors will increase their earnings in 2010 compared to 2009. I'll take that in this environment.

Are we safe?
Even though valuations have declined enormously, it's hard to argue the world is suddenly a much safer place that it was last year. Many significant threats to our security exist, and just one incident could increase the public's willingness to fund defense programs. Defense spending as a percentage of GDP is historically low at only 4.5%, compared to peaks of 6.2% in 1986 and 10% or so in the 1960s. And while it won't set any speed records, growth has been surprisingly strong -- defense spending has grown at a 5.4% annual clip over the past 50 years.

Excited yet?
It’s time to get excited about defense. Investors appear to be overlooking the many positives of this important industry and have pushed down the sector's valuation, making this a good time to get into an industry with a stable long-term outlook. Paying only 8 times forward earnings for that privilege appears very tempting.

How to pick stocks: Growth Investing

2009-03-23T06:16:00.000-07:00

In the late 1990s, when technology companies were flourishing, growth investing techniques yielded unprecedented returns for investors. But before any investor jumps onto the growth investing bandwagon, s/he should realize that this strategy comes with substantial risks and is not for everyone.

Value versus Growth
The best way to define growth investing is to contrast it to value investing. Value investors are strictly concerned with the here and now; they look for stocks that, at this moment, are trading for less than their apparent worth. Growth investors, on the other hand, focus on the future potential of a company, with much less emphasis on its present price. Unlike value investors, growth investors buy companies that are trading higher than their current intrinsic worth - but this is done with the belief that the companies' intrinsic worth will grow and therefore exceed their current valuations.

As the name suggests, growth stocks are companies that grow substantially faster than others. Growth investors are therefore primarily concerned with young companies. The theory is that growth in earnings and/or revenues will directly translate into an increase in the stock price. Typically a growth investor looks for investments in rapidly expanding industries especially those related to new technology. Profits are realized through capital gains and not dividends as nearly all growth companies reinvest their earnings and do not pay a dividend.

No Automatic Formula
Growth investors are concerned with a company's future growth potential, but there is no absolute formula for evaluating this potential. Every method of picking growth stocks (or any other type of stock) requires some individual interpretation and judgment. Growth investors use certain methods - or sets of guidelines or criteria - as a framework for their analysis, but these methods must be applied with a company's particular situation in mind. More specifically, the investor must consider the company in relation to its past performance and its industry's performance. The application of any one guideline or criterion may therefore change from company to company and from industry to industry.

The NAIC
The National Association of Investors Corporation (NAIC) is one of the best known organizations using and teaching the growth investing strategy. It is, as it says on its website, "one big investment club" whose goal is to teach investors how to invest wisely. The NAIC has developed some basic "universal" guidelines for finding possible growth companies - here's a look at some of the questions the NAIC suggests you should ask when considering stocks.

1. Strong Historical Earnings Growth?
According to the NAIC, the first question a growth investor should ask is whether the company, based on annual revenue, has been growing in the past. Below are rough guidelines for the rate of EPS growth an investor should look for in companies of differing sizes, which would indicate their growth investing potential:

Although the NAIC suggests that companies display this type of EPS growth in at least the last five years, a 10-year period of this growth is even more attractive. The basic idea is that if a company has displayed good growth (as defined by the above chart) over the last five- or 10-year period, it is likely to continue doing so in the next five to 10 years.

2. Strong Forward Earnings Growth?

The second criterion set out by the NAIC is a projected five-year growth rate of at least 10-12%, although 15% or more is ideal. These projections are made by analysts, the company or other credible sources.

The big problem with forward estimates is that they are estimates. When a growth investor sees an ideal growth projection, he or she, before trusting this projection, must evaluate its credibility. This requires knowledge of the typical growth rates for different sizes of companies. For example, an established large cap will not be able to grow as quickly as a younger small-cap tech company. Also, when evaluating analyst consensus estimates, an investor should learn about the company's industry - specifically, what its prospects are and what stage of growth it is at.

3. Is Management Controlling Costs and Revenues?
The third guideline set out by the NAIC focuses specifically on pre-tax profit margins. There are many examples of companies with astounding growth in sales but less than outstanding gains in earnings. High annual revenue growth is good, but if EPS has not increased proportionately, it's likely due to a decrease in profit margin.

By comparing a company's present profit margins to its past margins and its competition's profit margins, a growth investor is able to gauge fairly accurately whether or not management is controlling costs and revenues and maintaining margins. A good rule of thumb is that if company exceeds its previous five-year average of pre-tax profit margins as well as those of its industry, the company may be a good growth candidate.

4. Can Management Operate the Business Efficiently?
Efficiency can be quantified by using return on equity (ROE). Efficient use of assets should be reflected in a stable or increasing ROE. Again, analysis of this metric should be relative: a company's present ROE is best compared to the five-year average ROE of the company and the industry.

5. Can the Stock Price Double in Five Years?
If a stock cannot realistically double in five years, it's probably not a growth stock. That's the general consensus. This may seem like an overly high, unrealistic standard, but remember that with a growth rate of 10%, a stock's price would double in seven years. So the rate growth investors are seeking is 15% per annum, which yields a doubling in price in five years.

An Example
Now that we've outlined the NAIC's basic criteria for evaluating growth stocks, let's demonstrate how these criteria are used to analyze a company, using Microsoft's 2003 figures. For the sake of this demonstration, we'll discuss these numbers as though they were Microsoft's most current figures (that is, "today's figures").

1. Five-Year Earnings Figures

Both of these are strong figures. The annual EPS growth is well above the 5% standard the NAIC sets out for firms of Microsoft's size.

2. Strong Projected Earnings Growth

The projected growth figures are strong, but not exceptional.

3. Costs and Revenue Control

There are two ways to look at this. The trend is down 5.08% (50.88% - 45.80%) from the five-year average, which is negative. But notice that the industry's average margin is only 26.7%. So even though Microsoft's margins have dropped, they're still a great deal higher than those of its industry.

4. ROE

Again, it's a point of concern that the ROE figure is a little lower than the five-year average. However, like Microsoft's profit margin, the ROE is not drastically reduced - it's only down a few points and still well above the industry average.

5. Potential to Double in Five Years
The average analyst projections for Microsoft suggest that in five years the stock will not merely double in value, but it'll be worth 254.7% its current value.

Is Microsoft a Growth Stock?
On paper, Microsoft meets many NAIC's criteria for a growth stock. But it also falls short of others. If, for instance, we were to dismiss Microsoft because of its decreased margins and not compare them to the industry's margins, we would be ignoring the industry conditions within which Microsoft functions. On the other hand, when comparing Microsoft to its industry, we must still decide how telling it is that Microsoft has higher-than-average margins. Is Microsoft a good growth stock even though its industry may be maturing and facing declining margins? Can a company of its size find enough new markets to keep expanding?

Clearly there are arguments on both sides and there is no "right" answer. What these criteria do, however, is open up doorways of analysis through which we can dig deeper into a company's condition. Because no single set of criteria is infallible, the growth investor may want to adjust a set of guidelines by adding (or omitting) criteria. So, although we've provided five basic questions, it's important to note that the purpose of the example is to provide a starting point from which you can build your own growth screens.

Conclusion
It's not too complicated: growth investors are concerned with growth. The guiding principle of growth investing is to look for companies that keep reinvesting into themselves to produce new products and technology. Even though the stocks might be expensive in the present, growth investors believe that expanding top and bottom lines will ensure an investment pays off in the long run.

source from:http://www.investopedia.com/university/stockpicking/stockpicking4.asp

How to Spend Money In a Recession

2009-03-22T03:57:00.000-07:00

It's important to save where you can, but it's just as critical to spend where you should.

When times are tough, most people think they should spend less and save as much as possible. That's good advice in many situations, but there are exceptions. Maybe we can call it spend money on the right time at the right place. Here are seven of them:

Home improvements: A recession is a great time to do work on your home. Materials will be discounted, since demand will be low. Labor is plentiful and cheap. And if the work increases the value of the house, spending extra money to get them done when times are tough makes financial sense.

Your health: Your health is always important, but it is even more crucial during dour economic times. You can't afford to miss work for an extended period without placing your job at risk. Preventive measures, even if they cost extra, are important. In addition, you need to quickly address ailments so they don't turn into something major later on.

Quality food: Food tends to be one of the few budget items that can be juggled to save money here and there. The problem is that people often choose to buy poorer quality food, which isn't as healthy. The food you eat will determine your energy level and resistance to colds and illnesses. Also, learn the tricks of the coupon trade so you can get quality food and save money at the same time.

Retirement: If you have the money, now's the time to buy stocks and other investments, especially if your timeline for needing the money is decades away. While people feel more secure when the stock market is rising, that's when equities are more expensive. Stocks today are less than half of what they were at their peak -- a bargain.

Products that save you money: More than ever, it makes sense to spend money on appliances and gadgets that will save you money in the long run. Price tags and labor are cheaper, and the extra efficiency will pay off in the long run.

Costs to relax: When the economy turns sour, it brings on stress. Stress is not only bad for your health, it can ruin relationships, cause a decline in job performance and affect decision-making when it comes to finances. The key is to know what reduces stress and figure out a way to keep or increase that activity in your budget. For example, a gym membership may seem like a luxury when there isn't enough money to go around, but exercise is a known stress reliever. Perhaps painting is your stress relief. Whatever the activity may be, don't scrimp.

Repairs and maintenance: Lengthen the life of what you have and avoid spending money on brand-new equipment. The amount you spend may be a fraction of the replacement cost.

Source from: thestreet.com

China's Stimulus Package is getting to work

2009-03-20T08:39:00.000-07:00

We know that China has revealed its stimulus package and some relevant policy. This week, the Chinese stocks market gave people new hope, with rising 0.68 percent on Friday, led by nonferrous and petroleum shares. The benchmark Shanghai Composite Index added 0.68 percent, or 15.33 points, to 2,281.09. The Shenzhen Component Index rose 0.29 percent, or 25.04 points, to 8,647.51.

For years, the Chinese funded the U.S. debt fueled spending spree by heavily investing in our economy via U.S. Treasury bonds. On November 10, the tides turned when China announced it would be spending $586 billion to invest in its own country. The plan was warmly welcomed by the market and since the unveiling, the Shanghai Composite has risen some 20%.

But is Premier Wen Jiabao's stimulus package strong enough to lift China out of this global recession, achieve its target of 8% growth this year, and keep the Chinese market rally alive?

A promising plan
In contrast to the U.S. stimulus packages that have created much controversy, China's efforts look very promising. Sitting amid piles of cash, the country is fiscally strong enough to finance the anticipated expenditures. And as a country that is still in the middle of transforming itself into a more modern and industrialized nation, significant development is needed.

China's leaders wasted no time in getting down to business. In January and February of this year, they increased total fixed investment by 30% year over year. Railroad investment tripled in the same time frame. And Chinese banks lent more in the past three months than in the previous twelve.

Still, the real challenge still rests in the hands of the Chinese consumer. China is a production powerhouse economy, but its consumers are conservative spenders and the country leans on its exporting activity for growth. Consequently, the global financial crisis and consumption cutback from its major importers has left a deep hole in the economy. Filling this hole is necessary for the country to achieve economic recovery and to further decoupling from the rest of the world. In other words, China's leaders must transform the economy from an export-driven one into a more self-sustaining system.

Spend, China, spend
Premier Wen outlined a strategy targeting this notion earlier this month when he addressed the National People's Congress. His plan calls to raise the proportion of national income that goes to wages, and ultimately increase consumption in areas such as culture, recreation, tourism, and the Internet. This won't be an easy feat since the Chinese maintain a high personal savings rates and are notoriously reluctant to spend frivolously, even during prosperous booms.

However, we have reasons to believe that Wen's plan has potential to propel China out of the downturn. Explain now.

Threefold rationale
First, while China is on its way toward building a similar economic model as the United States, it currently doesn't operate with the same capitalistic structure that should theoretically limit government intervention. Secondly, the Chinese, like their government, are cash rich. In other words, China and its people actually have the means to spend and stimulate their economy. Lastly, while the U.S. government is busy plowing capital into ailing businesses like AIG (NYSE: AIG) and Citigroup (NYSE: C) that will likely never generate long term economic growth, the Chinese are making meaningful investments.

For example, nearly half of China's stimulus package is earmarked to build infrastructure and another 25% will be allotted to rebuilding parts of the Sichuan Province that was devastated by the earthquake in mid 2008. In comparison, just 5% of President Obama's plan will be invested in infrastructure.

The ultimate competitive advantage
Like many financially sound and vibrant domestic companies facing headwinds from the U.S. recession, China's great potential is being masked by the global downturn. In turn, stock valuations are selling at valuations extremely low in comparison to recent years.

However, the recent rally suggests that investors may be warming up to China again. Even Marc Faber – otherwise known as Dr. Doom – has a bullish outlook on China's market.

It is too soon to tell if the rise in China's market will hold in the near term. But with the help of the stimulus package, I believe that China is in the position to use this turbulent time to build a competitive advantage and emerge from this crisis stronger than ever

Source from: fool.com ,by Kristin Grahama