Hi,
I am busy right now so no posting till november...........
Tuesday, October 28, 2008
Wednesday, October 22, 2008
Crude oil should remain between $50- $70 in Long run
World economy can not afford higher oil price in long run. Since as oil price goes up inflation or one could say commodities prices bound to go up whether it is due to increase in cost of production, transportation or shortage in agri commodity due to shift of crop cultivation towards corn or sugarcane in hunt for cheaper source of energy. As inflation goes up all around the world then to curb the inflation all central bank would adopt tighter monetary policy. That will triger slow down of economy and will cause lower demand for oil and pull down the price of oil according to fundamental law of economics demand and supply.
Another argument can be given that if cartel of oil producing country try to push up the oil price artificially then same pheomenon will happen as described above and another thing as inflation will go up all over world due to excess increase in price of the oil. Then the cost for the goods that oil exporeter country import will go up, therby it erodes the profit of higher crude oil. Also the excess money that these OPEC country get where they will invest? The real value of their currency will come down as world economy slow down. As commodity price peaked up that will triger the stock prices to bottom out and these petrodollers will not find a safe heaven for investment. Hence any speculation or forced increase in crude oil price will not going to sustained in long run. So friends whenever you find price goes beyond the reasonable level sell short crude. :)
Ravi Ranjan, rranjan27@gmail.com
Another argument can be given that if cartel of oil producing country try to push up the oil price artificially then same pheomenon will happen as described above and another thing as inflation will go up all over world due to excess increase in price of the oil. Then the cost for the goods that oil exporeter country import will go up, therby it erodes the profit of higher crude oil. Also the excess money that these OPEC country get where they will invest? The real value of their currency will come down as world economy slow down. As commodity price peaked up that will triger the stock prices to bottom out and these petrodollers will not find a safe heaven for investment. Hence any speculation or forced increase in crude oil price will not going to sustained in long run. So friends whenever you find price goes beyond the reasonable level sell short crude. :)
Ravi Ranjan, rranjan27@gmail.com
Monday, October 20, 2008
kingfisher has owes the most to oil marketing firm
Airline industry is bleeding, I am posting here news item from BS about kingfisher airlines liability to pay oil markating company. Feel the crack in aviation industry and guess about future of airline stocks..............
The airline, which recently merged itself with budget carrier Deccan Aviation, has to pay Rs 100 crore as outstanding to Indian Oil Corporation (IOC), which includes Rs 40 crore as payment for interest after the credit period.
Normally, OMCs supply aviation turbine fuel (ATF) at 30-60 days credit period to private airlines. The merged entity has an outstanding of Rs 450 crore with Hindustan Petroleum Corporation (HPCL) and Rs 289 crore with Bharat Petroleum Corporation (BPCL).
Sources said the OMCs, which themselves are working on borrowed funds, are putting pressure on these airlines to clear dues. The combined debt of IOC, BPCL and HPCL is estimated in excess of 1,10,000 crore as on September 2008 because of selling petroleum products below the production cost.
“We are pressurising them to pay up at the earliest and companies such as IOC has sent notices to some of the airlines that it would stop fuel supplies unless the dues are cleared,” said a source, who did not want to be identified. An IOC spokesperson declined to comment.
“We are surviving on borrowed funds and such outstanding and payment defaults are a cause of concern for us,” said S Radhakrishnan, director (marketing) of BPCL. “We are in discussions with the aviation companies for clearing the dues, which are outstanding beyond the normal credit period, so that ATF supplies are not affected in the immediate future,” he added.
The airline, which recently merged itself with budget carrier Deccan Aviation, has to pay Rs 100 crore as outstanding to Indian Oil Corporation (IOC), which includes Rs 40 crore as payment for interest after the credit period.
Normally, OMCs supply aviation turbine fuel (ATF) at 30-60 days credit period to private airlines. The merged entity has an outstanding of Rs 450 crore with Hindustan Petroleum Corporation (HPCL) and Rs 289 crore with Bharat Petroleum Corporation (BPCL).
Sources said the OMCs, which themselves are working on borrowed funds, are putting pressure on these airlines to clear dues. The combined debt of IOC, BPCL and HPCL is estimated in excess of 1,10,000 crore as on September 2008 because of selling petroleum products below the production cost.
“We are pressurising them to pay up at the earliest and companies such as IOC has sent notices to some of the airlines that it would stop fuel supplies unless the dues are cleared,” said a source, who did not want to be identified. An IOC spokesperson declined to comment.
“We are surviving on borrowed funds and such outstanding and payment defaults are a cause of concern for us,” said S Radhakrishnan, director (marketing) of BPCL. “We are in discussions with the aviation companies for clearing the dues, which are outstanding beyond the normal credit period, so that ATF supplies are not affected in the immediate future,” he added.
damodaran on dividends...
video by damodaran on dividends.............. what a beautiful way of teaching fundoo........
Friday, October 17, 2008
Technical Analysis- A financial sucide!!!!!!
I come across an article about technical analysis, here writer of the article discusses his personal view on technical analysis. I agry with his view due to one crucial reason no technical analyst on the forbes 400 list (rich person) ..........simple na........plz post your comment what do you think.......
Chris Rowe calls it the Squiggly-Line Theory. Most people refer to it as basic "Technical Analysis" - the art of looking at a chart or two and deciding whether or not to buy a stock.It seems that almost every investor, whether professional or not, starts investing by using technical analysis. I'm no different: I spent the first two years of my career trying to predict the direction of stock prices by reading charts.It’s clear now in hindsight to see why I, as most others, start that way: learning technical analysis is easy. In fact, that's why most people get into it. I can’t tell you how many new investors I've met in my career who are fascinated by the visual appeal of a graph with squiggly lines and arrows.And when you see how much you could have made had you bought at one of the past “buy points” on the chart then it almost seems foolproof. Who in their right mind wouldn’t want to make what looks like easy money by reading something as simple as a chart? But lets look at the cold hard facts. Investing is about making money. And the way investors "keep score" is by how much money they make investing. Thus it was disturbing when, two years into it my career, I realized that there isn’t one technical stock analyst on the Forbes 400 list. Not one. I know it';s hard to believe, but it's true: even William O'Neil, owner of Investors Business Daily and the biggest proponent of the craft, is nowhere to be found. Neither are any of his most famous "students" that he mentions in his book.Perhaps even more disturbing when you really think about it, is that technical analysts propose using pricing and volume to determine whether you should buy a stock. If a stock breaks out to a higher price on heavy volume, it often means that you should purchase it. If a stock drops in price. it means you should sell it. This is the height of absurdity to me. Let me explain. When you purchase stock you are buying shares of an actual business not a floating piece of paper. And technical analysts believe it is better to buy a piece of a business at a higher price than it is at a lower price!Imagine you took that approach to buying a new house or a car or a watch.Would you run out a buy a new home just because its price was 20% higher today than it was yesterday? Would you avoid your dream home just because its price was 20% lower today than it was yesterday?No wonder they're not on the Forbes 400 list: the art of financial suicide doesn’t pay over the long-term. I prefer to buy my assets cheap.
Chris Rowe calls it the Squiggly-Line Theory. Most people refer to it as basic "Technical Analysis" - the art of looking at a chart or two and deciding whether or not to buy a stock.It seems that almost every investor, whether professional or not, starts investing by using technical analysis. I'm no different: I spent the first two years of my career trying to predict the direction of stock prices by reading charts.It’s clear now in hindsight to see why I, as most others, start that way: learning technical analysis is easy. In fact, that's why most people get into it. I can’t tell you how many new investors I've met in my career who are fascinated by the visual appeal of a graph with squiggly lines and arrows.And when you see how much you could have made had you bought at one of the past “buy points” on the chart then it almost seems foolproof. Who in their right mind wouldn’t want to make what looks like easy money by reading something as simple as a chart? But lets look at the cold hard facts. Investing is about making money. And the way investors "keep score" is by how much money they make investing. Thus it was disturbing when, two years into it my career, I realized that there isn’t one technical stock analyst on the Forbes 400 list. Not one. I know it';s hard to believe, but it's true: even William O'Neil, owner of Investors Business Daily and the biggest proponent of the craft, is nowhere to be found. Neither are any of his most famous "students" that he mentions in his book.Perhaps even more disturbing when you really think about it, is that technical analysts propose using pricing and volume to determine whether you should buy a stock. If a stock breaks out to a higher price on heavy volume, it often means that you should purchase it. If a stock drops in price. it means you should sell it. This is the height of absurdity to me. Let me explain. When you purchase stock you are buying shares of an actual business not a floating piece of paper. And technical analysts believe it is better to buy a piece of a business at a higher price than it is at a lower price!Imagine you took that approach to buying a new house or a car or a watch.Would you run out a buy a new home just because its price was 20% higher today than it was yesterday? Would you avoid your dream home just because its price was 20% lower today than it was yesterday?No wonder they're not on the Forbes 400 list: the art of financial suicide doesn’t pay over the long-term. I prefer to buy my assets cheap.
Thursday, October 16, 2008
CREDIT CRUNCH---The patient writhing on the floor
If the panic that has choked the arteries of credit across the globe is not calmed soon, the danger will increase that output in rich economies will not simply shrink, but collapse. The same could happen in many emerging markets, especially those that rely on foreign capital. No country or industry would be spared from the equivalent of a global financial heart attack.
Stockmarkets are in a funk. But the main problem remains the credit markets. In the interbank market the prices banks pay to borrow money from each other are still near record highs. Meanwhile corporate borrowers have found it hard to issue commercial paper, as money-market funds have fled from all but the safest assets. In emerging markets bond spreads have soared and local currencies plunged. And whole countries have begun to get into trouble. The government of Iceland has had to nationalise two of its biggest banks and is frantically seeking a lifeline loan from Russia. Robert Zoellick, president of the World Bank, says there could be balance-of-payments problems in up to 30 developing countries.
The damage to the real economy is becoming apparent. In America consumer credit is now shrinking, and around 159,000 Americans lost their jobs in September, the most since 2003. Some industries are hurting badly: car sales are at their lowest level in 16 years as would-be buyers are unable to get credit. General Motors has temporarily shut some of its factories in Europe. Across the globe forward-looking indicators, such as surveys of purchasing managers, are horribly gloomy.
If the odds of a rich-world recession have risen towards a near certainty, the emerging world as a whole is slowing rather than slumping. China still seems fairly resilient. Taken as a whole, though, growth in the world economy seems likely to slow below 3% next year—a pace that many count as recessionary. So the prospects are grim enough, but a continuing credit drought would make this much worse. ----courtsey the Economist
Stockmarkets are in a funk. But the main problem remains the credit markets. In the interbank market the prices banks pay to borrow money from each other are still near record highs. Meanwhile corporate borrowers have found it hard to issue commercial paper, as money-market funds have fled from all but the safest assets. In emerging markets bond spreads have soared and local currencies plunged. And whole countries have begun to get into trouble. The government of Iceland has had to nationalise two of its biggest banks and is frantically seeking a lifeline loan from Russia. Robert Zoellick, president of the World Bank, says there could be balance-of-payments problems in up to 30 developing countries.
The damage to the real economy is becoming apparent. In America consumer credit is now shrinking, and around 159,000 Americans lost their jobs in September, the most since 2003. Some industries are hurting badly: car sales are at their lowest level in 16 years as would-be buyers are unable to get credit. General Motors has temporarily shut some of its factories in Europe. Across the globe forward-looking indicators, such as surveys of purchasing managers, are horribly gloomy.
If the odds of a rich-world recession have risen towards a near certainty, the emerging world as a whole is slowing rather than slumping. China still seems fairly resilient. Taken as a whole, though, growth in the world economy seems likely to slow below 3% next year—a pace that many count as recessionary. So the prospects are grim enough, but a continuing credit drought would make this much worse. ----courtsey the Economist
Monday, October 13, 2008
ICICI books fine, RBI inspection shows
Here is the link of the story.............
http://www.business-standard.com/india/storypage.php?autono=337166
http://www.business-standard.com/india/storypage.php?autono=337166
Moody Reaffirms ICICI bank ( UK ) Rating
Credit rating agencies came forward and make the statement about credit rating of ICICI bank UK arm. Initially it was S&P now Moody too came with statement and restated the sound credit rating. In an interview with NDTV profit bank MD Mr. kamath blamed short seller for hammering the stock price of ICICI bank. He also said that they doubly attacked the bank`s share price by spreading rumour about financial health of ICICI bank.
In my view, though UK subsdiary of the bank will or can report losses but what about its indian operation? If ICICI bank is going to burst here in india then why not other bank? All commercial bank follow the same RBI regulation yes ICICI bank is more aggressive so also it got rewarded by claiming 2nd largest bank of the country in such a short span of time. Leave the bank what about the valuation of its other business leader in insurance (pvt) big AMC, no.1 online trading platform ICICI Securities...Are they worthless? forget about the banking business!!!!!! I think by demise of meryll lynch, Lehman, goldman ICICI bank will get benifited in long run in India by providing core Investment banking services to indian companies....As Its competitor of underwriting buisness now eliminated. short seller`s of ICICI bank.....Good Luck...
In my view, though UK subsdiary of the bank will or can report losses but what about its indian operation? If ICICI bank is going to burst here in india then why not other bank? All commercial bank follow the same RBI regulation yes ICICI bank is more aggressive so also it got rewarded by claiming 2nd largest bank of the country in such a short span of time. Leave the bank what about the valuation of its other business leader in insurance (pvt) big AMC, no.1 online trading platform ICICI Securities...Are they worthless? forget about the banking business!!!!!! I think by demise of meryll lynch, Lehman, goldman ICICI bank will get benifited in long run in India by providing core Investment banking services to indian companies....As Its competitor of underwriting buisness now eliminated. short seller`s of ICICI bank.....Good Luck...
Golden Rule Of Investing in Stock Market
Investing is not something very difficult or needs exceptional intelligence to make money in the markets. Yet there are only few successful investors while most end up losing money in the markets. I have tried to compile some of the common mistakes we make which leads us to make losses in the markets eventually. These things might look very simple but are difficult to follow.
1) Preservation of Capital : The first goal for the investor should not be making big profits in a matter of few days but preservation of Capital. For this the stock selection has to be done after immense personal research. Stocks like ITC Ltd. are at almost same levels now as it was when the Sensex was at 21000. One should always lookout for such solid stocks to make up the portfolio.
2)Patience : This is a very important factor as far as being sucessful in investing is concerned. There are so many times when one invest in a stock and sells it off in 3-6 months as the stock is hardly making any moves. But suddenly the stock spurts up. If you have done good research in selecting a stock then be patient with it. Dont expect stocks to give 100% returns annually always. One is so patient with 3-5 year fixed deposits which yield 12% return annually then why cant one stay with good stocks for this time frame. Try it and you will get big returns for sure.
3)Following the Crowd: One usually invest in sectors where everyone is investing and every analyst is talking about. But thats the biggest mistake one can make. When such a big crowd is already pumping money in the stocks of any sector then the stocks are already overbought. It makes much more sense to invest in a sector which is good but has been neglected for the moment. That is where you will find real undervalued stocks. Also trust in your own sense of things and dont follow analyst. Remember the best investment opportunities are seen first by common man then analyst.
4)Since the stock price has fallen let me average out: This thing is done by a lot of investors and at times it works. But whenever the stock price falls drastically you first need to investigate why the prices are falling. If any unusual things in earnings is observed or the company management is not what people expected it to be then its better to exit on losses then to average out and finally find the stock price falling even more. So always be investigative.
5)Diversify risk by buying many different stocks: As one of the famous investors said "risk is not knowing what you are doing" , so if you want to diversify risk the best method is to be fully informed and aware of what you are doing and why. Hardly few people will be able to explain the business model and investment rationale of the company they invest in. This kind of investing will not give good results anyday. But maybe 6-12 stocks but know well about each company and each business. All great investors in the world have small portfolios.
6) Try to time the markets: Many investors try to predict the markets and base their investment decisions on that.However, through experience everyone learns that it is impossible to time the markets. So when you are investing think just of the stock (undervalued or overvalued) and make the investment in that business for long term. If you pay too much attention to day to day stock market fluctuations then things will surely not work out. A good company will always make you rich in the long term.
7) Always sit on cash of at least 15% of your portfolio;- This will provide you cushion for any mkt. meltdown and you will get an opportunity to buy some good stock at bargain.
8) Never use leverage or the money which you will need of near term...
LAST but not the least know your risk...............
1) Preservation of Capital : The first goal for the investor should not be making big profits in a matter of few days but preservation of Capital. For this the stock selection has to be done after immense personal research. Stocks like ITC Ltd. are at almost same levels now as it was when the Sensex was at 21000. One should always lookout for such solid stocks to make up the portfolio.
2)Patience : This is a very important factor as far as being sucessful in investing is concerned. There are so many times when one invest in a stock and sells it off in 3-6 months as the stock is hardly making any moves. But suddenly the stock spurts up. If you have done good research in selecting a stock then be patient with it. Dont expect stocks to give 100% returns annually always. One is so patient with 3-5 year fixed deposits which yield 12% return annually then why cant one stay with good stocks for this time frame. Try it and you will get big returns for sure.
3)Following the Crowd: One usually invest in sectors where everyone is investing and every analyst is talking about. But thats the biggest mistake one can make. When such a big crowd is already pumping money in the stocks of any sector then the stocks are already overbought. It makes much more sense to invest in a sector which is good but has been neglected for the moment. That is where you will find real undervalued stocks. Also trust in your own sense of things and dont follow analyst. Remember the best investment opportunities are seen first by common man then analyst.
4)Since the stock price has fallen let me average out: This thing is done by a lot of investors and at times it works. But whenever the stock price falls drastically you first need to investigate why the prices are falling. If any unusual things in earnings is observed or the company management is not what people expected it to be then its better to exit on losses then to average out and finally find the stock price falling even more. So always be investigative.
5)Diversify risk by buying many different stocks: As one of the famous investors said "risk is not knowing what you are doing" , so if you want to diversify risk the best method is to be fully informed and aware of what you are doing and why. Hardly few people will be able to explain the business model and investment rationale of the company they invest in. This kind of investing will not give good results anyday. But maybe 6-12 stocks but know well about each company and each business. All great investors in the world have small portfolios.
6) Try to time the markets: Many investors try to predict the markets and base their investment decisions on that.However, through experience everyone learns that it is impossible to time the markets. So when you are investing think just of the stock (undervalued or overvalued) and make the investment in that business for long term. If you pay too much attention to day to day stock market fluctuations then things will surely not work out. A good company will always make you rich in the long term.
7) Always sit on cash of at least 15% of your portfolio;- This will provide you cushion for any mkt. meltdown and you will get an opportunity to buy some good stock at bargain.
8) Never use leverage or the money which you will need of near term...
LAST but not the least know your risk...............
icici bank overseas loan safe..............!!!!!!
The statement from ICICI bank mangement side published in ET............
ICICI Bank has no defaulting customers in its foreign operations, said joint MD Chanda Kochhar. She said the bank's foreign arm has lent to subsidieries of strong Indian companies like Reliance Industries, L&T, and Birla group companies. Therefore, she said the bank will not feel any impact of global meltdown. Also, all the loans are fully secured by assets. She said most of the assets taken as securities by the bank have cash flow and it has also taken shares of promoters as securities to safeguard loans. She added that the foreign operations have no negative bearing on the parent ICICI Bank. The UK subsidiary has a capital adequacy ratio of 17%. It has a cash balance of Rs 12,000 crore. So, ICICI Bank UK is not dependent on its parent ICICI Bank to meet its obligation. She said due to good credit profiles of its subsidiaries, the credit rating agencies like Moody's and S&P's have assigned stable outlook in their ratings. Total business of the UK subsidiary is $9 billion and and that of Canadian one is $4.5 billion. She said foreign subsidiaries are well capitalised and in good shape. She further assured the depositors that their money is safe with the bank. Kochhar said the bank has enough liquidity to meet its requirements. As the new reduced cash reserve ratio will be implemented from Monday, the bank will have an additional liquidity of Rs 2,500 crore. On rumour that the bank's insurance business partner UK-based Prudential PLC is withdrawing, she said it is baseless. Meanwhile, Prudential CEO Mark Tucker issued a statement denying any such move and termed the rumour as "absolutely unfounded". "India is one of the cornerstones of our Asian growth strategy. Our JV with ICICI Bank is highly productive and value enhancing. We are in India for the long term. Our commitment to India and our partner remains immense," Tucker said in a statement.
ICICI Bank has no defaulting customers in its foreign operations, said joint MD Chanda Kochhar. She said the bank's foreign arm has lent to subsidieries of strong Indian companies like Reliance Industries, L&T, and Birla group companies. Therefore, she said the bank will not feel any impact of global meltdown. Also, all the loans are fully secured by assets. She said most of the assets taken as securities by the bank have cash flow and it has also taken shares of promoters as securities to safeguard loans. She added that the foreign operations have no negative bearing on the parent ICICI Bank. The UK subsidiary has a capital adequacy ratio of 17%. It has a cash balance of Rs 12,000 crore. So, ICICI Bank UK is not dependent on its parent ICICI Bank to meet its obligation. She said due to good credit profiles of its subsidiaries, the credit rating agencies like Moody's and S&P's have assigned stable outlook in their ratings. Total business of the UK subsidiary is $9 billion and and that of Canadian one is $4.5 billion. She said foreign subsidiaries are well capitalised and in good shape. She further assured the depositors that their money is safe with the bank. Kochhar said the bank has enough liquidity to meet its requirements. As the new reduced cash reserve ratio will be implemented from Monday, the bank will have an additional liquidity of Rs 2,500 crore. On rumour that the bank's insurance business partner UK-based Prudential PLC is withdrawing, she said it is baseless. Meanwhile, Prudential CEO Mark Tucker issued a statement denying any such move and termed the rumour as "absolutely unfounded". "India is one of the cornerstones of our Asian growth strategy. Our JV with ICICI Bank is highly productive and value enhancing. We are in India for the long term. Our commitment to India and our partner remains immense," Tucker said in a statement.
Interest rate and stock price
this is from book the new buffetology...................... Fundoo na!!!!!!
Warren believes that investments compete against each other for investors' dollars. He also believes that a business is worth what it can earn for investors during the time that it is owned. The comparison of available investment returns between various investments will determine the selling price for a given company. The value of a company's earnings is dependent on interest rates. If interest rates drop, investors generally have more choice of stocks with superior earnings potential to that of bonds (all other things equal). For this reason, when interest rates decline, stocks prices generally rise and when interest rates rise, stock prices decline.One situation where interest rate movements may not have much affect on stock prices is during a bubble situation where the market has succumbed to momentum trading. In these situations, the market may need to see a slowing down of the economy before it makes any stock price adjustments, which at that time can be very dramatic
Warren believes that investments compete against each other for investors' dollars. He also believes that a business is worth what it can earn for investors during the time that it is owned. The comparison of available investment returns between various investments will determine the selling price for a given company. The value of a company's earnings is dependent on interest rates. If interest rates drop, investors generally have more choice of stocks with superior earnings potential to that of bonds (all other things equal). For this reason, when interest rates decline, stocks prices generally rise and when interest rates rise, stock prices decline.One situation where interest rate movements may not have much affect on stock prices is during a bubble situation where the market has succumbed to momentum trading. In these situations, the market may need to see a slowing down of the economy before it makes any stock price adjustments, which at that time can be very dramatic
Sunday, October 12, 2008
ICICI Bank files complaint against some brokers
The news published in ET...............
Country's largest private sector lender ICICI Bank on Sunday filed a complaint against some brokers and websites that were creating panic among depositors and shareholders by spreading rumours about the financial health of the bank. The complaint which was also filed before Coimbatore Police said that "a broker/sub-broker (of major securities broker based in Mumbai) had been the origin of various sms" spreading wrong information about the financial health of the bank.
One of the sms listed in the complaint read, "kindly withdraw all your deposits and cash in account with ICICI Bank as ICICI bank already rushed to RBI for insolvency."
The accused are trying to spread false, baseless and malicious rumours about the financial status of the bank that contain knowingly false, baseless and incorrect statements against the bank that can lead a lay public astray, it said.
Saturday, October 11, 2008
One scary news for ICICI bank shareholder
The news item which is most scary for icici bank shareholder is the premium demanded by credit default swap writer has gone up by 130 basis point. this is insurance premium demanded if you want to cover your investment in icici bond overseas... i am qouting the news below published in bloomberg..
The cost of default protection on ICICI rose to a record, credit-default swaps show.
Five-year contracts on the bank's debt were quoted 130 basis points higher at 900, Barclays Capital prices show. The swaps, which rise as perceptions of credit quality deteriorate, are equivalent to $900,000 annually to protect a $10 million investment in the notes.
The cost of default protection on ICICI rose to a record, credit-default swaps show.
Five-year contracts on the bank's debt were quoted 130 basis points higher at 900, Barclays Capital prices show. The swaps, which rise as perceptions of credit quality deteriorate, are equivalent to $900,000 annually to protect a $10 million investment in the notes.
Friday, October 10, 2008
Are you an investor - or a gambler?
huh, this is damn true many of investor end up behaving like gambler...............Again Fundoo article..............
According to psychologists who study gambling behavior, it's all too easy for an innocent investing habit to swell into a gambling problem if a person is so disposed. Both investing and gambling let you wager big money and win or lose huge sums within minutes. Indeed, it can be difficult for even a professional to know at what point a sincere interest in investing edges over the line and becomes something darker and more compulsive.
What ultimately distinguishes gamblers from investors, says Dr. Marvin Steinberg, executive director of the Connecticut Council on Problem Gambling, is a lack of control. Smart investors may decide to occasionally make big bets on a stock. But they can also go for months without buying a stock or even shuffling their portfolio.
"With any kind of compulsive behavior, you wind up being out of control," says Steinberg. "So if you tell yourself that you're going to do one thing and you wind up doing more, you have a problem. An alcoholic says he'll just have one drink and winds up having 12, a problem gambler goes to the casino with $100 in his wallet and winds up spending $3,000 on his credit card. In the same way, if you put more money into risky investments than you can afford to lose, that's a sign you have a problem."
Other symptoms include an inability to stop trading stocks, even while on vacation, using lots of borrowed money, and indulging in superstitious behavior, such as buying a stock because the symbol reminds you of your dog's name. Steinberg estimates that as many as 5% of investors have a mild to serious gambling problem. "There are Gamblers Anonymous meetings in New York and Chicago that are attended almost exclusively by stock market gamblers," he says. "It's a problem that needs to be taken seriously, but it's not well understood. Brokers don't want their clients to think of the markets as a place where you could become a problem gambler."
According to psychologists who study gambling behavior, it's all too easy for an innocent investing habit to swell into a gambling problem if a person is so disposed. Both investing and gambling let you wager big money and win or lose huge sums within minutes. Indeed, it can be difficult for even a professional to know at what point a sincere interest in investing edges over the line and becomes something darker and more compulsive.
What ultimately distinguishes gamblers from investors, says Dr. Marvin Steinberg, executive director of the Connecticut Council on Problem Gambling, is a lack of control. Smart investors may decide to occasionally make big bets on a stock. But they can also go for months without buying a stock or even shuffling their portfolio.
"With any kind of compulsive behavior, you wind up being out of control," says Steinberg. "So if you tell yourself that you're going to do one thing and you wind up doing more, you have a problem. An alcoholic says he'll just have one drink and winds up having 12, a problem gambler goes to the casino with $100 in his wallet and winds up spending $3,000 on his credit card. In the same way, if you put more money into risky investments than you can afford to lose, that's a sign you have a problem."
Other symptoms include an inability to stop trading stocks, even while on vacation, using lots of borrowed money, and indulging in superstitious behavior, such as buying a stock because the symbol reminds you of your dog's name. Steinberg estimates that as many as 5% of investors have a mild to serious gambling problem. "There are Gamblers Anonymous meetings in New York and Chicago that are attended almost exclusively by stock market gamblers," he says. "It's a problem that needs to be taken seriously, but it's not well understood. Brokers don't want their clients to think of the markets as a place where you could become a problem gambler."
Wednesday, October 8, 2008
Buffett says financial crisis is an 'economic Pearl Harbor' that needs immediate counterattack
Billionaire investor Warren Buffett said the nation has been hit with an "economic Pearl Harbor," and the government must respond quickly. This really is an economic Pearl Harbor," Buffett said. "That sounds melodramatic, but I've never used that phrase before. And this really is one.
Buffett compared the U.S. economy to a top athlete who has suffered a sudden and severe heart attack. He said the proper response to such a heart attack is to use a defibrillator as soon as possible, not argue about the precise placement of the paddles or argue about whether the athlete should have taken blood pressure medication beforehand.
Buffett compared the U.S. economy to a top athlete who has suffered a sudden and severe heart attack. He said the proper response to such a heart attack is to use a defibrillator as soon as possible, not argue about the precise placement of the paddles or argue about whether the athlete should have taken blood pressure medication beforehand.
Who are Value Investors?
The primary characteristic of a value investor is that he/she loves finding good deals. It might be best to think of them as shoppers who scour through the Sunday newspaper for coupons. This is exactly what they do, but instead of looking through the paper for good deals, they look through the universe of businesses. Value Investors are extremely unwilling to be part of the "herd" mentality, and so may often receive great criticism from market "pundits" for their investment decisions.
A value investor is only willing to buy a company when it's down and out, provided the price is right. At any point in time, there are dozens of companies whose share prices are depressed. There are many reasons for this to happen, such as disappointing quarterly results, unexpected charges, changes in leadership, boring products, etc. A value investor will weigh the drop in price with the news that caused it. If it appears to the investor that the market overreacted (as it almost always does), then he or she might pick up some of the shares at a discount and wait it out.
A value investor is only willing to buy a company when it's down and out, provided the price is right. At any point in time, there are dozens of companies whose share prices are depressed. There are many reasons for this to happen, such as disappointing quarterly results, unexpected charges, changes in leadership, boring products, etc. A value investor will weigh the drop in price with the news that caused it. If it appears to the investor that the market overreacted (as it almost always does), then he or she might pick up some of the shares at a discount and wait it out.
Pros and Cons of value investing
Pros
Reduces long-term risk of losing money by choosing investments which have a built in margin of safety
“Hot” stock tips, hype, and mass hysteria do not affect the decisions a value investor makes
Can produce steady, consistent gains that regularly outperform most benchmarks (e.g. S&P 500, DJIA, etc..
Cons
Value investing is extremely taxing to the average person, as significant analysis must be done prior to investing, and it requires an unusual level of confidence, as investments are made with an infinite time-horizon.
Value Investors must be willing to remain within their circle of competence and invest only in businesses they fully understand. As you can probably see, value investing places great significance on being a savvy businessperson in addition to having an in-depth understanding of securities and markets.
Reduces long-term risk of losing money by choosing investments which have a built in margin of safety
“Hot” stock tips, hype, and mass hysteria do not affect the decisions a value investor makes
Can produce steady, consistent gains that regularly outperform most benchmarks (e.g. S&P 500, DJIA, etc..
Cons
Value investing is extremely taxing to the average person, as significant analysis must be done prior to investing, and it requires an unusual level of confidence, as investments are made with an infinite time-horizon.
Value Investors must be willing to remain within their circle of competence and invest only in businesses they fully understand. As you can probably see, value investing places great significance on being a savvy businessperson in addition to having an in-depth understanding of securities and markets.
Tuesday, October 7, 2008
buffett on GE & bailout
Find Video here................
http://www.cnbc.com/id/15840232?video=874482325
http://www.cnbc.com/id/15840232?video=874482325
credit Panic
Fundoo article...................herd behaviour of human!!!!!!!!
Banks have practically stopped lending to one another. Risky assets are so toxic that the 10-year bonds of U.S. financial institutions are currently pricing in almost a 70 percent chance of default, a rate that is an order of magnitude higher than anything that has happened in the past 40 years. Investors are flooding to the exits, and taking whatever prices they can get if the reward is liquid cash.
There is little in recorded history about panics of this magnitude. Perhaps the closest analogue is the Panic of 1907, which economic historians believe was set off by massive losses associated with the San Francisco earthquake a year earlier.
Because this is a once-in-a-century event, policy makers have proceeded in an ad hoc and often confusing manner. Investors and traders haven't been able to guess the U.S. government's next move, and that has exacerbated the stampede.
The rush to search for historical comparisons has inevitably pushed analysts to the Great Depression, which Federal Reserve Chairman Ben S. Bernanke has studied extensively. Others see parallels with the Panic of 1907 or even the Panic of 1837, in which almost a quarter of chartered U.S. banks disappeared.
Searching for lessons from those lost passages of history is a painful stretch. So much has changed.
Moreover, the reliance solely on past financial panics as a guide for optimal policy is myopic. While we have very little experience with such events, we have all too much experience with panics in general. The fact is, we already know how to stop them.
We know the playbook, but we are not following it..
Banks have practically stopped lending to one another. Risky assets are so toxic that the 10-year bonds of U.S. financial institutions are currently pricing in almost a 70 percent chance of default, a rate that is an order of magnitude higher than anything that has happened in the past 40 years. Investors are flooding to the exits, and taking whatever prices they can get if the reward is liquid cash.
There is little in recorded history about panics of this magnitude. Perhaps the closest analogue is the Panic of 1907, which economic historians believe was set off by massive losses associated with the San Francisco earthquake a year earlier.
Because this is a once-in-a-century event, policy makers have proceeded in an ad hoc and often confusing manner. Investors and traders haven't been able to guess the U.S. government's next move, and that has exacerbated the stampede.
The rush to search for historical comparisons has inevitably pushed analysts to the Great Depression, which Federal Reserve Chairman Ben S. Bernanke has studied extensively. Others see parallels with the Panic of 1907 or even the Panic of 1837, in which almost a quarter of chartered U.S. banks disappeared.
Searching for lessons from those lost passages of history is a painful stretch. So much has changed.
Moreover, the reliance solely on past financial panics as a guide for optimal policy is myopic. While we have very little experience with such events, we have all too much experience with panics in general. The fact is, we already know how to stop them.
We know the playbook, but we are not following it..
Is This a Replay of 1929?
The Great Depression that followed the stock market's collapse in October 1929 was a different beast. By the low point in July 1932, stocks had dropped almost 90 percent from their peak. The accompanying devastation—bankruptcies, foreclosures, bread lines—lasted a decade. Even in 1940, unemployment was almost 15 percent. Unlike postwar recessions, the Depression submitted neither to self-correcting market mechanisms nor government policies. Why?
Capitalism's inherent instabilities were blamed—fairly, up to a point. Over borrowing, overinvestment and speculation chronically govern business cycles. Herbert Hoover was also blamed for being too timid—less fairly. In fact, Hoover initially expanded public works to combat the slump. The real culprit was the Federal Reserve. Depression scholarship changed forever in 1963 when economists Milton Friedman and Anna Schwartz argued, in a highly detailed account, that the Fed had unwittingly transformed an ordinary, if harsh, recession into a calamity by permitting a banking collapse and a disastrous drop in the money supply.
From 1929 to 1933, two fifths of the nation's banks failed; depositor runs were endemic; the money supply (basically, cash plus bank deposits) declined by more than a third. People lost bank accounts; credit for companies and consumers shriveled. The process of economic retrenchment fed on itself and overwhelmed the normal channels of recovery. These mechanisms included surplus inventories being sold so companies could reorder; strong companies expanding as weak competitors disappeared; high debts being repaid so borrowers could resume normal spending
Capitalism's inherent instabilities were blamed—fairly, up to a point. Over borrowing, overinvestment and speculation chronically govern business cycles. Herbert Hoover was also blamed for being too timid—less fairly. In fact, Hoover initially expanded public works to combat the slump. The real culprit was the Federal Reserve. Depression scholarship changed forever in 1963 when economists Milton Friedman and Anna Schwartz argued, in a highly detailed account, that the Fed had unwittingly transformed an ordinary, if harsh, recession into a calamity by permitting a banking collapse and a disastrous drop in the money supply.
From 1929 to 1933, two fifths of the nation's banks failed; depositor runs were endemic; the money supply (basically, cash plus bank deposits) declined by more than a third. People lost bank accounts; credit for companies and consumers shriveled. The process of economic retrenchment fed on itself and overwhelmed the normal channels of recovery. These mechanisms included surplus inventories being sold so companies could reorder; strong companies expanding as weak competitors disappeared; high debts being repaid so borrowers could resume normal spending
Monday, October 6, 2008
How Good Are Analyst Prediction
Investors feel much more comfortable buying stocks when they believe that others are also piling in. This herd mentality is well documented outside the investing world, but has been discussed many times over within the investment world as well (examples include discussions on the topic from both Ben Graham and Stephen Jarislowsky). To that end, investors often rely on analysts, who are expected to be "experts" in guiding investors on stock selection.But just how good are analysts at predicting the directions of stocks? A decent paper (though dated) is available here which discusses the difficulties in truly evaluating analysts. However, at the very least, if analysts were at all useful, they can at the very least tell the difference between a company that has value and one that is going under. Yet these two very different realities in a company's status continue to baffle these "experts".Consider the latest examples of this: Fannie Mae and Freddie Mac. Before going down (where shareholders lost pretty much everything) two days ago, they each had 13 analysts following them. A full 40% of analysts rated these two companies as either "Strong Buy" or "Buy", compared to just 30% on the sell side. If we can't trust analysts to tell the difference between a company worth something and a company worth nothing, what can they be used for? What do you think many "analysts" said about Bear Sterns right before it went down?In fairness to analysts (and conversely in unfairness to investors), analysts are often confronted with conflicts of interest that may be preventing them from extolling their true opinions of a stock. So analysts might actually be better at stock prediction than we think. However, this makes them no more useful for investors, who should put little stock in what analysts say, and should instead do their own homework, in the same way as they would for any investment outside of the stock market! Why should stocks be treated any differently as an investment than a house, or a private business? You wouldn't let an appraiser pick your house would you?
Sunday, October 5, 2008
Fear of Regret
the "fear of regret." People tend to feel sorrow and grief after having made an error in judgement. Investors deciding whether to sell a security are typically emotionally affected by whether the security was bought for more or less than the current price. One theory is that investors avoid selling stocks that have gone down in order to avoid the pain and regret of having made a bad investment. The embarrassment of having to report the loss to the IRS, accountants, and others may also contribute to the tendency not to sell losing investments. Some researchers theorize that investors follow the crowd and conventional wisdom to avoid the possibility of feeling regret in the event that their decisions prove to be incorrect. Many investors find it easier to buy a popular stock and rationalize it going down since everyone else owned it and thought so highly of it. Buying a stock with a bad image is harder to rationalize if it goes down. Additionally, many believe that money managers and advisors favor well known and popular companies because they are less likely to be fired if they underperform
Friday, October 3, 2008
Wall Street Crash of 1929
Cause: In the late 1920s, hundreds of thousands of investors contributed to a speculative bubble in the stock market. Many went into debt to purchase stock, resulting in more than $8.5 billion in debt throughout the nation—more money than was in circulation at the time.
When the market turned bearish on October 24, 1929, investors panicked, causing a massive selloff that tanked the stock markets and contributed to the Great Depression of the 1930s.
To demonstrate confidence in the market, the Rockefeller family and the heads of major banks bought large quantities of stock. This move didn’t stop the panic. During the week of October 24, the market lost a total of $30 billion, more than the United States had spent on World War I.
The stock market crashed caused businesses to close, mass layoffs, and a rash of bankruptcies. An international run on the dollar resulted in increased interest rates, driving out around 4,000 lenders.Action: After an investigation, Congress passed the Glass-Steagall Act of 1933 (now repealed), mandating a separation between investment and commercial banks. They believed this would avert another dramatic panic sale. It didn’t—the Dow fell 22.6% in 1987—but, to date, the Great Depression that followed the 1929 crash hasn’t been repeated.
Moral of the story: Don’t panic. Many scholars now say that the 1929 crash didn’t cause the Great Depression, but certainly contributed to its severity. Public panic only makes situations worse than they already are
When the market turned bearish on October 24, 1929, investors panicked, causing a massive selloff that tanked the stock markets and contributed to the Great Depression of the 1930s.
To demonstrate confidence in the market, the Rockefeller family and the heads of major banks bought large quantities of stock. This move didn’t stop the panic. During the week of October 24, the market lost a total of $30 billion, more than the United States had spent on World War I.
The stock market crashed caused businesses to close, mass layoffs, and a rash of bankruptcies. An international run on the dollar resulted in increased interest rates, driving out around 4,000 lenders.Action: After an investigation, Congress passed the Glass-Steagall Act of 1933 (now repealed), mandating a separation between investment and commercial banks. They believed this would avert another dramatic panic sale. It didn’t—the Dow fell 22.6% in 1987—but, to date, the Great Depression that followed the 1929 crash hasn’t been repeated.
Moral of the story: Don’t panic. Many scholars now say that the 1929 crash didn’t cause the Great Depression, but certainly contributed to its severity. Public panic only makes situations worse than they already are
Buffett's Ferocious Focus
For more than half a century Warren Buffett has shown impeccable timing. So perhaps it should come as no surprise that the first biography he has authorized was published in late September as news of the financial crisis that he had warned about dominated the front pages and just days after he had agreed to inject $5 billion into Goldman Sachs (GS).
Much of the legendary investor's story has been told, notably in Roger Lowenstein's masterful Buffett: The Making of an American Capitalist. But in The Snowball: Warren Buffett and the Business of Life, former Morgan Stanley (MS) insurance analyst Alice Schroeder provides a much more penetrating and personal look at the Oracle of Omaha.
Schroeder's portrait is the product of five years of research that included unprecedented access. She describes an obsessive man emotionally damaged by his mother's rages who nevertheless knew what he wanted and how to get there from an early age. Here readers will again encounter the burger-eating, Cherry Coke-swilling, aphorism-spouting outsider familiar from previous accounts. But The Snowball (to succeed, find wet snow and a really long hill, advises Buffett) is more perceptive than other works, getting deeply inside the head of the man who achieved such amazing long-term investment returns that some academics believe them to be a fluke.
Buffett himself has attributed his success to "focus." Schroeder writes: "He ruled out paying attention to almost anything but business—art, literature, science, travel, architecture—so that he could focus on his passion." As a child, Schroeder relates, Warren carried around a coin-changer as his prized possession, and when his dad offered him a trip at age 10, he asked to go to the New York Stock Exchange (NYX). Not long after, Buffett read a book called One Thousand Ways to Make $1,000 and announced to a friend that he was going to be a millionaire by the time he was 35. "That was an audacious, almost silly-sounding statement for a child to make in the depressed world of 1941," Schroeder writes. "But…he was sure he could do it."
And, of course, he did, and then some. After college, rejected from Harvard B-school, Buffett went to Columbia instead, where he studied under the legendary Benjamin Graham, author of The Intelligent Investor and the father of value investing. Buffett learned from Graham the perils of Mr. Market and how to know what companies were worth regardless of what the market claimed on a given day.
He started out buying "cigar butts," run-down companies with one puff left, and he ended up buying stock in some of the greatest brands in U.S. business, including Coca-Cola (KO) and Gillette (G), as well as private outfits such as the Nebraska Furniture Mart and See's Candies. At the core of Buffett's investing vehicle, Berkshire Hathaway (BRKA)—and the reason for Schroeder's first contact with him—are insurance operations, which have included GEICO and General Re. Highly profitable, these threw off more money for Buffett to invest.
Buffett's method, as learned from Graham and developed further on his own, was simple: Estimate the investment's value, handicap its risk, keep a margin of safety, and then let compounding do the real work. Through the go-go era of the '60s and the Internet bubble of the '90s, as others got caught up in mania, Buffett's philosophy didn't change. He bought only stocks that he could understand and value, and he wanted them cheap. "Anyone could understand these simple ideas," Schroeder writes, "but few could execute them."
Much of the legendary investor's story has been told, notably in Roger Lowenstein's masterful Buffett: The Making of an American Capitalist. But in The Snowball: Warren Buffett and the Business of Life, former Morgan Stanley (MS) insurance analyst Alice Schroeder provides a much more penetrating and personal look at the Oracle of Omaha.
Schroeder's portrait is the product of five years of research that included unprecedented access. She describes an obsessive man emotionally damaged by his mother's rages who nevertheless knew what he wanted and how to get there from an early age. Here readers will again encounter the burger-eating, Cherry Coke-swilling, aphorism-spouting outsider familiar from previous accounts. But The Snowball (to succeed, find wet snow and a really long hill, advises Buffett) is more perceptive than other works, getting deeply inside the head of the man who achieved such amazing long-term investment returns that some academics believe them to be a fluke.
Buffett himself has attributed his success to "focus." Schroeder writes: "He ruled out paying attention to almost anything but business—art, literature, science, travel, architecture—so that he could focus on his passion." As a child, Schroeder relates, Warren carried around a coin-changer as his prized possession, and when his dad offered him a trip at age 10, he asked to go to the New York Stock Exchange (NYX). Not long after, Buffett read a book called One Thousand Ways to Make $1,000 and announced to a friend that he was going to be a millionaire by the time he was 35. "That was an audacious, almost silly-sounding statement for a child to make in the depressed world of 1941," Schroeder writes. "But…he was sure he could do it."
And, of course, he did, and then some. After college, rejected from Harvard B-school, Buffett went to Columbia instead, where he studied under the legendary Benjamin Graham, author of The Intelligent Investor and the father of value investing. Buffett learned from Graham the perils of Mr. Market and how to know what companies were worth regardless of what the market claimed on a given day.
He started out buying "cigar butts," run-down companies with one puff left, and he ended up buying stock in some of the greatest brands in U.S. business, including Coca-Cola (KO) and Gillette (G), as well as private outfits such as the Nebraska Furniture Mart and See's Candies. At the core of Buffett's investing vehicle, Berkshire Hathaway (BRKA)—and the reason for Schroeder's first contact with him—are insurance operations, which have included GEICO and General Re. Highly profitable, these threw off more money for Buffett to invest.
Buffett's method, as learned from Graham and developed further on his own, was simple: Estimate the investment's value, handicap its risk, keep a margin of safety, and then let compounding do the real work. Through the go-go era of the '60s and the Internet bubble of the '90s, as others got caught up in mania, Buffett's philosophy didn't change. He bought only stocks that he could understand and value, and he wanted them cheap. "Anyone could understand these simple ideas," Schroeder writes, "but few could execute them."
When All Stocks Are Value Stocks - Think QDI (quality, diversification, income)
Article upon value stocks by Steve Selengut writer of "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", Enjoy the article it is really a fundoo one.....................
Value stocks are those that tend to trade at lower prices relative to their fundamental characteristics than their more speculative cousins, the growth stocks; they have higher than usual dividend yields and lower P/E and P/B ratios. So when all stock prices are down significantly, have they all become value stocks? Or, based on the panicky fear that tends to overwhelm media and financial experts alike, haven't they all taken on the speculative characteristics of growth stocks?
Well, to a certain extent they have, because the lower value stock prices go, the more likely it is that they will eventually experience the 15% ROE that typifies the classic growth stock. Interestingly, by definition, growth stocks are expected to be associated with profitable companies, a fact that speculators often lose site of. There are three features that separate value stocks from growth stocks and two that separate Investment Grade Value (IGV) stocks from the average, run-of-the-mill, variety.
Value stocks pay dividends, and have lower ratios than growth stocks. IGV stock companies also have long-term histories of profitability and an S & P rating of B+ or higher. Would you be surprised to learn that neither the DJIA nor the S & P 500 contains particularly high numbers of IGV stocks? Still, since 1982, value stocks have outperformed growth stocks 62% of the time. So when an ugly correction has a makeover, it's likely that all value stocks transform themselves into growth stocks, at least temporarily.
Will Rogers summed up the stock selection quandary nicely with: "Only buy stocks that go up. If they aren't going to go up, don't buy them." Many have misunderstood this tongue-in-cheek observation and joined the buy-anything-high investment club. You need dig no further than the current lists (June '08) of "most advancing issues" to see how investors are buying commodity companies and financial futures at the highest prices in the history of mankind.
This while they are shunning IGVSI (Investment Grade Value Stock Index) companies that have plummeted to their most attractive price levels in three to five years. Many of the very best multinational companies in the world are at historically low prices. Wall Street smiles knowingly (and greedily) as Main Street hucksters tout gold, currencies, and oil futures as retirement plan safety nets. Regulatory agencies look the other way as speculations worm their way into qualified plans of all varieties. Surely those markets will be regulated some day--- after the next Bazooka-pink, gooey mess becomes history.
How much financial bloodshed is necessary before we realize that there is no safe and easy shortcut to investment success? When do we learn that most of our mistakes involve greed, fear, or unrealistic expectations about what we own? Eventually, successful investors begin to allocate assets in a goal directed manner by adopting a more realistic investment strategy--- one with security selection guidelines and realistic performance definitions and expectations.
If you are thinking of trying a strategy for a year to see if it works, you're being too short-term sighted--- the investment markets operate in cycles. If you insist on comparing your performance with indices and averages, you'll rarely be satisfied. A viable investment strategy will be a three-dimensional decision model, and all three decisions are equally important. Few strategies include a targeted profit taking discipline--- dimension two. The first dimension involves the selection of securities. The third?
How should an investor determine what stocks to buy, and when to buy them? We've discussed the features of value and growth stocks and seen how any number of companies can qualify as either dependent upon where we are in terms of the market cycle or where they are in terms of their own industry, sector, or business cycles. Value stocks (and the debt securities of value stock companies) tend to be safer than growth stocks. But IGVSI stocks are super-screened by a unique rating system that is based on company survival statistics--- very important stuff.
In the late 90's, it was rumored that a well-known value fund manager was asked why he wasn't buying dot-coms, IPOs, etc. When he said that they didn't qualify as value stocks, he was told to change his definition--- or else. IGV stocks include a quality element that minimizes the risk of loss and normally smoothes the angles in the market cycle. The market value highs are typically not as high, but the market value lows are most often not as low as they are with either growth or Wall Street definition value stocks. They work best in conjunction with portfolios that have an income allocation of at least 30%--- you need to know why.
How do we create a confidence building IGV stock selection universe without getting bogged down in endless research? Here are five filters you can use to come up with a listing of higher quality companies: (1) An S & P rating of B+ or better. Standard & Poor's combines many fundamental and qualitative factors into a letter ranking that speaks only to the financial viability of the companies. Anything rated lower adds more risk to your portfolio.
(2) A history of profitability. Although it should seem obvious, buying stock in a company that has a history of profitable operations is inherently less risky. Profitable operations adapt more readily to changes in markets, economies, and business growth opportunities. (3) A history of regular, even increasing, dividend payments. Companies will go to great lengths, and endure great hardships, before electing either to cut or to omit a dividend. Dividend changes are important, absolute size is not.
(4) A Reasonable Price Range. Most Investment Grade stocks are priced above $10 per share and only a few trade at levels above $100. An unusually high price may be caused by higher sector or company-specific speculation while an inordinately low price may be a good warning signal. (5) An NYSE listing--- just because it's easier.
Your selection universe will become the backbone of your equity asset allocation, so there is no room for creative adjustments to the rules and guidelines you've established--- no matter how strongly you feel about recent news or rumor. There are approximately 450 IGV stocks to choose from--- and you'll find the name recognition comforting. Additionally, as these companies gyrate above and below your purchase price (as they absolutely will), you can be more confident that it is merely the nature of the stock market and not an imminent financial disaster.
The QDI? Quality, diversification, and income.
Value stocks are those that tend to trade at lower prices relative to their fundamental characteristics than their more speculative cousins, the growth stocks; they have higher than usual dividend yields and lower P/E and P/B ratios. So when all stock prices are down significantly, have they all become value stocks? Or, based on the panicky fear that tends to overwhelm media and financial experts alike, haven't they all taken on the speculative characteristics of growth stocks?
Well, to a certain extent they have, because the lower value stock prices go, the more likely it is that they will eventually experience the 15% ROE that typifies the classic growth stock. Interestingly, by definition, growth stocks are expected to be associated with profitable companies, a fact that speculators often lose site of. There are three features that separate value stocks from growth stocks and two that separate Investment Grade Value (IGV) stocks from the average, run-of-the-mill, variety.
Value stocks pay dividends, and have lower ratios than growth stocks. IGV stock companies also have long-term histories of profitability and an S & P rating of B+ or higher. Would you be surprised to learn that neither the DJIA nor the S & P 500 contains particularly high numbers of IGV stocks? Still, since 1982, value stocks have outperformed growth stocks 62% of the time. So when an ugly correction has a makeover, it's likely that all value stocks transform themselves into growth stocks, at least temporarily.
Will Rogers summed up the stock selection quandary nicely with: "Only buy stocks that go up. If they aren't going to go up, don't buy them." Many have misunderstood this tongue-in-cheek observation and joined the buy-anything-high investment club. You need dig no further than the current lists (June '08) of "most advancing issues" to see how investors are buying commodity companies and financial futures at the highest prices in the history of mankind.
This while they are shunning IGVSI (Investment Grade Value Stock Index) companies that have plummeted to their most attractive price levels in three to five years. Many of the very best multinational companies in the world are at historically low prices. Wall Street smiles knowingly (and greedily) as Main Street hucksters tout gold, currencies, and oil futures as retirement plan safety nets. Regulatory agencies look the other way as speculations worm their way into qualified plans of all varieties. Surely those markets will be regulated some day--- after the next Bazooka-pink, gooey mess becomes history.
How much financial bloodshed is necessary before we realize that there is no safe and easy shortcut to investment success? When do we learn that most of our mistakes involve greed, fear, or unrealistic expectations about what we own? Eventually, successful investors begin to allocate assets in a goal directed manner by adopting a more realistic investment strategy--- one with security selection guidelines and realistic performance definitions and expectations.
If you are thinking of trying a strategy for a year to see if it works, you're being too short-term sighted--- the investment markets operate in cycles. If you insist on comparing your performance with indices and averages, you'll rarely be satisfied. A viable investment strategy will be a three-dimensional decision model, and all three decisions are equally important. Few strategies include a targeted profit taking discipline--- dimension two. The first dimension involves the selection of securities. The third?
How should an investor determine what stocks to buy, and when to buy them? We've discussed the features of value and growth stocks and seen how any number of companies can qualify as either dependent upon where we are in terms of the market cycle or where they are in terms of their own industry, sector, or business cycles. Value stocks (and the debt securities of value stock companies) tend to be safer than growth stocks. But IGVSI stocks are super-screened by a unique rating system that is based on company survival statistics--- very important stuff.
In the late 90's, it was rumored that a well-known value fund manager was asked why he wasn't buying dot-coms, IPOs, etc. When he said that they didn't qualify as value stocks, he was told to change his definition--- or else. IGV stocks include a quality element that minimizes the risk of loss and normally smoothes the angles in the market cycle. The market value highs are typically not as high, but the market value lows are most often not as low as they are with either growth or Wall Street definition value stocks. They work best in conjunction with portfolios that have an income allocation of at least 30%--- you need to know why.
How do we create a confidence building IGV stock selection universe without getting bogged down in endless research? Here are five filters you can use to come up with a listing of higher quality companies: (1) An S & P rating of B+ or better. Standard & Poor's combines many fundamental and qualitative factors into a letter ranking that speaks only to the financial viability of the companies. Anything rated lower adds more risk to your portfolio.
(2) A history of profitability. Although it should seem obvious, buying stock in a company that has a history of profitable operations is inherently less risky. Profitable operations adapt more readily to changes in markets, economies, and business growth opportunities. (3) A history of regular, even increasing, dividend payments. Companies will go to great lengths, and endure great hardships, before electing either to cut or to omit a dividend. Dividend changes are important, absolute size is not.
(4) A Reasonable Price Range. Most Investment Grade stocks are priced above $10 per share and only a few trade at levels above $100. An unusually high price may be caused by higher sector or company-specific speculation while an inordinately low price may be a good warning signal. (5) An NYSE listing--- just because it's easier.
Your selection universe will become the backbone of your equity asset allocation, so there is no room for creative adjustments to the rules and guidelines you've established--- no matter how strongly you feel about recent news or rumor. There are approximately 450 IGV stocks to choose from--- and you'll find the name recognition comforting. Additionally, as these companies gyrate above and below your purchase price (as they absolutely will), you can be more confident that it is merely the nature of the stock market and not an imminent financial disaster.
The QDI? Quality, diversification, and income.
Monday, September 22, 2008
One should fearful in the market, It pays
nifty is almost 40% down from the high and dont ask about the sector specific stock like realty sector It is down about 70%!!! I know now a days who all are remain invested since the peak of market dont want to look into their portfolio......... Out of sight out of mind this simple psychology works here...
But the main point is when market started cracking we should have behaved like a fearful person. At least by acting fearfully and getting out of the market on the first run had saved our hard earned money.
Imagine If you are in the jungle alone with no arms to defend youself and suddenly you have the feeling that there might be a predator here what you will do ----- will you wait for the predator to come out from the bush when you get confirmed yes he is there then you run away? certainly not you wont wait for a moment to confirm that you will on run for your life without confirming about the predator. After all cost of runing even there is no predator is less then that of you only run when yo got confirmed he is there is very less.
So on the line of this natural fearful human behaviour we should have get out of the market when it was started slipping without waiting for the confirmation that yes certainly there is something wrong with the economy.....................
But the main point is when market started cracking we should have behaved like a fearful person. At least by acting fearfully and getting out of the market on the first run had saved our hard earned money.
Imagine If you are in the jungle alone with no arms to defend youself and suddenly you have the feeling that there might be a predator here what you will do ----- will you wait for the predator to come out from the bush when you get confirmed yes he is there then you run away? certainly not you wont wait for a moment to confirm that you will on run for your life without confirming about the predator. After all cost of runing even there is no predator is less then that of you only run when yo got confirmed he is there is very less.
So on the line of this natural fearful human behaviour we should have get out of the market when it was started slipping without waiting for the confirmation that yes certainly there is something wrong with the economy.....................
Sunday, September 21, 2008
Are You Lazy Thinker
A very good article It has enlighten my thought process....... superb......................
Few things make more of a difference in investing than thought process. Unlike most competitions, the primary battleground for investing is the mind. Investors must deal with an obstacle course of emotions, psychology, temperament, and other forces acting to overwhelm rational thought...................
Investing incentives are such that everyone plays the game with the intention of maximizing his or her wealth. Thus when people ask how to become a better investor, I often wonder how they feel about improving their thought process.
Without conscious effort our mind drifts towards weak thinking. Rarely do we, in good faith, see the opposing side of an argument. Of course we see the flaws in the argument.
If someone tells me that that Buffett was not the best investor over the last 40 years my initial reaction is what the heck are you smoking? Immediately my mind jumps to the flaws in his argument rather than trying to actually understand the opposing argument. I have prejudged this argument in my mind.
The inability to change your mind, destroy your ideas, or learn new mental-models will ensure that you are not constant winner in investing. Unable to discern the difference between a logical and illogical argument you will fall victim to sophists. According to Wikipedia, a sophism is a confusing or illogical argument used for deceiving someone. This means, in a sense, you will fall victim to arguments regardless of whether there are obvious flaws in the thinking behind them.
Strong thinkers, on the other hand, tend to be open-minded. Despite the natural desire to ignore opposing viewpoints, they seek to understand the arguments of others. It’s impossible to make informed decisions without a complete understanding of the opposing point of view. Understanding your opponents viewpoint better than him, according to Charlie Munger, ensures you make informed decisions.
Intellectual humility ensures you know what you do not. In investing circles, this is often referred to as circle of competence. Are you aware of all of your own false beliefs, prejudices, illusions, myths? Do you know how your mind goes about self-deception? Admitting your lack of knowledge in an area is very humbling. It helps ensure that beliefs can no longer be cemented in your head, but rather held only until contrary information appears. This all sounds very simple and it is. But, as Buffett teaches us, simple does not mean easy.
How often have you watched the news and made up your mind about some suspected criminal? I can’t count the number of times I have heard the tale of a graphic murder or rape and thought horrible things about the person held in custody. Yet this person is a suspect, convicted of nothing. Overcome by the graphic and often egregious nature of the crimes, my mind has rushed to form a judgment without any evidence. Only after taking a step back do i realize the error in my thinking.
Making snap-judgments without understanding the other side of an argument is weak thinking. Unfortunate as it may be, this thought process is easily rationalized and further cemented in our head. For example, in the case mentioned above, suppose the suspect turns out to be guilty – now the next time I come across a similar pattern in life I can easily recall the last time I made a snap judgment in a similar situation and I was right. This leads to overconfidence.
According to Richard W. Paul and Linda Elder, authors of Critical Thinking: Tools for Taking Charge of Your Professional and Personal Life, the opposite of confidence in reason is intellectual distrust of reason, given by the threat that reasoning and rational analysis pose to the undisciplined thinker. Often volatility in stock markets is an emotional reaction from people who are not, at the time, using their strong thinking skills. Being prone toward emotional reactions that validate present thinking, people often express little confidence in reason.
A great example of how this can be used to manipulate us is by creating a culture where it’s difficult to argue with a point of view for emotional reasons. Consider the war in Iraq. If you denounce it you are no longer a patriot. If you question it you are no longer a patriot. The fear or war and terrorism plays with your head and you no longer think rationally and emotions take over. Consider our post on where the US spends money. It is infinitely more likely as an American you will die because of (presumably curable) cancer than a terrorist attack. Yet the government spends pennies on cancer while allocating trillions toward war efforts. Politics aside, is that rational?
In order to become a stronger thinker you have to challenge your existing beliefs. Or, inverted, in order to become a weaker thinker you must never challenge any of your beliefs. Sounds harsh doesn’t it? Can you identify one belief that you hold that might be wrong or questionable at best? It might be something simple like Starbucks has the best coffee. Buddhism is the best religion.
Are you willing to hold a different opinion in the face of adversity? The Asch conformity experiments suggest that this might be more difficult than we think. Peer pressure (social influence) plays a large role in how we behave and make decisions.
A new book, The opposable mind, suggests that rather than focusing on what successful leaders do we need to emulate and understand how they think. The author, Roger Martin, argues that integrative thinking is necessary. Martin describes this as creatively resolving the tension in opposing models by forming entirely new and superior ones. I see this as being able to hold opposing views in your mind at the same time.
Think to the last board meeting you attended at work. Remember that project being presented? When the presenter was light up with questions at the end did she distort the questioner’s point of view? Try reading a split decision handed down from the Supreme Court. ( Canadian and American Supreme Court decisions).Can you follow both opposing sides of the arguments? Or do you tend to agree with one side and discount the other side of the argument? What about a stock? Can you identify and understand both the bull and the bear case for a particular company? Can you follow both sides of an argument and yet, still have no opinion?
I used to identify flaws in corporate presentations and think to myself “wow, I’d never say that!” or “he really didn’t think that problem through”. Then I realized that I make all of these mistakes as well. You could call my behavior intellectual hypocrisy. As we noted in our presentation it’s relatively easy to think up the correct models, however implementing them is the challenge. (Checklists help. Imagine a pilot without a checklist!).
In a similar way, my lazy thinking was ensuring I didn’t act according to my beliefs. This can, and will, easily destroy your credibility. I find myself questioning certain policies that reward people for the right outcome rather than thought process, yet I am guilty of the same error on occasion. ( As I have learned, there is a huge difference between being right for the right reasons and right for the wrong reasons. Being right for the wrong reasons and having this behavior rewarded will eventually lead to horrible outcomes for horrible reasons. Try explaining those to your shareholders).
Do you see hypocrisy in your friends or a group you are a member of? Can you identify any instance where you don’t practice what you preach? Often I advise others that they should do what they love; yet I find it incredibly difficult to do that myself. I always have an easy rationalization to grasp onto should someone ask my why I’m not a full time business analyst (on that note, if anyone has a business analyst job open where I can telecommute please let me know!)
Are you a lazy thinker? It’s so easy for me to come up with examples of how lazy am in thinking that I’m embarrassed. One example is university physics. Bombarded with formulas that were both complex and frustrating I looked for an easy way out and found one. Another example, one where several of these weak thinking traps aggregated into an irritating experience, is attempting to read through a modern finance book. Not only does my mind, naturally want to not believe most of the information in the book, it finds the formulas needlessly complex. My eyes start to gloss over and my mind gets lazy – very lazy. I rationalize this behavior because I think, if these textbook authors are so smart, why are they writing textbooks! Then I realize that I need to understand the opposing viewpoint as frustrating and time consuming as that may be. Intellectual perseverance is often a good thing (and occasionally not!).
Can you stand alone in your thinking? Buffett puts it another way, ‘You’re neither right nor wrong because other people agree with you. You’re right because your facts are right and your reasoning is right - that’s the only thing that makes you right. And if your facts and reasoning are right, you don’t have to worry about anybody else.’ Having the intellectual ability to lack dependence on others for thinking or reasoning is an enormous advantage that can, if used correctly, lead to outperforming markets and, more importantly, increase the quality of your life.
I can say with a reasonably amount of certainty that at some point or another we all fall victim to the intellectual traps mentioned above. The traits of weak thinking are merely dimensions of our mind at work. It would be just as easy for me to give examples of where following these weak thinking practices paid off in spades for me (these are not habits I want reinforced).
On the surface, setting out to improve your thinking is a laudable goal that seems easy. Mentioning some of the above traits of weak thinking was also relatively easy – consciously attempting to change your thinking habits, recognizing your limitations, and knowing when you are deceiving yourself is rather difficult. Finding great thinkers and learning more about how they make decisions is one of my goals for 2008. Just yesterday, I caught myself in a meeting, wondering what Charlie Munger would say to a presentation like this and spontaneously chuckled out loud just a little.
Few things make more of a difference in investing than thought process. Unlike most competitions, the primary battleground for investing is the mind. Investors must deal with an obstacle course of emotions, psychology, temperament, and other forces acting to overwhelm rational thought...................
Investing incentives are such that everyone plays the game with the intention of maximizing his or her wealth. Thus when people ask how to become a better investor, I often wonder how they feel about improving their thought process.
Without conscious effort our mind drifts towards weak thinking. Rarely do we, in good faith, see the opposing side of an argument. Of course we see the flaws in the argument.
If someone tells me that that Buffett was not the best investor over the last 40 years my initial reaction is what the heck are you smoking? Immediately my mind jumps to the flaws in his argument rather than trying to actually understand the opposing argument. I have prejudged this argument in my mind.
The inability to change your mind, destroy your ideas, or learn new mental-models will ensure that you are not constant winner in investing. Unable to discern the difference between a logical and illogical argument you will fall victim to sophists. According to Wikipedia, a sophism is a confusing or illogical argument used for deceiving someone. This means, in a sense, you will fall victim to arguments regardless of whether there are obvious flaws in the thinking behind them.
Strong thinkers, on the other hand, tend to be open-minded. Despite the natural desire to ignore opposing viewpoints, they seek to understand the arguments of others. It’s impossible to make informed decisions without a complete understanding of the opposing point of view. Understanding your opponents viewpoint better than him, according to Charlie Munger, ensures you make informed decisions.
Intellectual humility ensures you know what you do not. In investing circles, this is often referred to as circle of competence. Are you aware of all of your own false beliefs, prejudices, illusions, myths? Do you know how your mind goes about self-deception? Admitting your lack of knowledge in an area is very humbling. It helps ensure that beliefs can no longer be cemented in your head, but rather held only until contrary information appears. This all sounds very simple and it is. But, as Buffett teaches us, simple does not mean easy.
How often have you watched the news and made up your mind about some suspected criminal? I can’t count the number of times I have heard the tale of a graphic murder or rape and thought horrible things about the person held in custody. Yet this person is a suspect, convicted of nothing. Overcome by the graphic and often egregious nature of the crimes, my mind has rushed to form a judgment without any evidence. Only after taking a step back do i realize the error in my thinking.
Making snap-judgments without understanding the other side of an argument is weak thinking. Unfortunate as it may be, this thought process is easily rationalized and further cemented in our head. For example, in the case mentioned above, suppose the suspect turns out to be guilty – now the next time I come across a similar pattern in life I can easily recall the last time I made a snap judgment in a similar situation and I was right. This leads to overconfidence.
According to Richard W. Paul and Linda Elder, authors of Critical Thinking: Tools for Taking Charge of Your Professional and Personal Life, the opposite of confidence in reason is intellectual distrust of reason, given by the threat that reasoning and rational analysis pose to the undisciplined thinker. Often volatility in stock markets is an emotional reaction from people who are not, at the time, using their strong thinking skills. Being prone toward emotional reactions that validate present thinking, people often express little confidence in reason.
A great example of how this can be used to manipulate us is by creating a culture where it’s difficult to argue with a point of view for emotional reasons. Consider the war in Iraq. If you denounce it you are no longer a patriot. If you question it you are no longer a patriot. The fear or war and terrorism plays with your head and you no longer think rationally and emotions take over. Consider our post on where the US spends money. It is infinitely more likely as an American you will die because of (presumably curable) cancer than a terrorist attack. Yet the government spends pennies on cancer while allocating trillions toward war efforts. Politics aside, is that rational?
In order to become a stronger thinker you have to challenge your existing beliefs. Or, inverted, in order to become a weaker thinker you must never challenge any of your beliefs. Sounds harsh doesn’t it? Can you identify one belief that you hold that might be wrong or questionable at best? It might be something simple like Starbucks has the best coffee. Buddhism is the best religion.
Are you willing to hold a different opinion in the face of adversity? The Asch conformity experiments suggest that this might be more difficult than we think. Peer pressure (social influence) plays a large role in how we behave and make decisions.
A new book, The opposable mind, suggests that rather than focusing on what successful leaders do we need to emulate and understand how they think. The author, Roger Martin, argues that integrative thinking is necessary. Martin describes this as creatively resolving the tension in opposing models by forming entirely new and superior ones. I see this as being able to hold opposing views in your mind at the same time.
Think to the last board meeting you attended at work. Remember that project being presented? When the presenter was light up with questions at the end did she distort the questioner’s point of view? Try reading a split decision handed down from the Supreme Court. ( Canadian and American Supreme Court decisions).Can you follow both opposing sides of the arguments? Or do you tend to agree with one side and discount the other side of the argument? What about a stock? Can you identify and understand both the bull and the bear case for a particular company? Can you follow both sides of an argument and yet, still have no opinion?
I used to identify flaws in corporate presentations and think to myself “wow, I’d never say that!” or “he really didn’t think that problem through”. Then I realized that I make all of these mistakes as well. You could call my behavior intellectual hypocrisy. As we noted in our presentation it’s relatively easy to think up the correct models, however implementing them is the challenge. (Checklists help. Imagine a pilot without a checklist!).
In a similar way, my lazy thinking was ensuring I didn’t act according to my beliefs. This can, and will, easily destroy your credibility. I find myself questioning certain policies that reward people for the right outcome rather than thought process, yet I am guilty of the same error on occasion. ( As I have learned, there is a huge difference between being right for the right reasons and right for the wrong reasons. Being right for the wrong reasons and having this behavior rewarded will eventually lead to horrible outcomes for horrible reasons. Try explaining those to your shareholders).
Do you see hypocrisy in your friends or a group you are a member of? Can you identify any instance where you don’t practice what you preach? Often I advise others that they should do what they love; yet I find it incredibly difficult to do that myself. I always have an easy rationalization to grasp onto should someone ask my why I’m not a full time business analyst (on that note, if anyone has a business analyst job open where I can telecommute please let me know!)
Are you a lazy thinker? It’s so easy for me to come up with examples of how lazy am in thinking that I’m embarrassed. One example is university physics. Bombarded with formulas that were both complex and frustrating I looked for an easy way out and found one. Another example, one where several of these weak thinking traps aggregated into an irritating experience, is attempting to read through a modern finance book. Not only does my mind, naturally want to not believe most of the information in the book, it finds the formulas needlessly complex. My eyes start to gloss over and my mind gets lazy – very lazy. I rationalize this behavior because I think, if these textbook authors are so smart, why are they writing textbooks! Then I realize that I need to understand the opposing viewpoint as frustrating and time consuming as that may be. Intellectual perseverance is often a good thing (and occasionally not!).
Can you stand alone in your thinking? Buffett puts it another way, ‘You’re neither right nor wrong because other people agree with you. You’re right because your facts are right and your reasoning is right - that’s the only thing that makes you right. And if your facts and reasoning are right, you don’t have to worry about anybody else.’ Having the intellectual ability to lack dependence on others for thinking or reasoning is an enormous advantage that can, if used correctly, lead to outperforming markets and, more importantly, increase the quality of your life.
I can say with a reasonably amount of certainty that at some point or another we all fall victim to the intellectual traps mentioned above. The traits of weak thinking are merely dimensions of our mind at work. It would be just as easy for me to give examples of where following these weak thinking practices paid off in spades for me (these are not habits I want reinforced).
On the surface, setting out to improve your thinking is a laudable goal that seems easy. Mentioning some of the above traits of weak thinking was also relatively easy – consciously attempting to change your thinking habits, recognizing your limitations, and knowing when you are deceiving yourself is rather difficult. Finding great thinkers and learning more about how they make decisions is one of my goals for 2008. Just yesterday, I caught myself in a meeting, wondering what Charlie Munger would say to a presentation like this and spontaneously chuckled out loud just a little.
Beware Of Blind Contrarian
Many people when most of wall street financial stocks came down to mouth watering prices they bought them thinking like they are making wise decision or following the principle of contrarian investment style, but sadly they are not.. Here is the link of an article you should not be a blind contrarian on the street............enjoy the reading....
http://streetcapitalist.com/2008/04/07/beware-of-blind-contrarianism/
http://streetcapitalist.com/2008/04/07/beware-of-blind-contrarianism/
How Thinking Costs You
Behavioral Economics Shows That When It Comes to Investing, People Aren't That Smart
Article on behaviour finance, interesting...
http://www.washingtonpost.com/wp-dyn/content/article/2008/05/24/AR2008052400002.html
Article on behaviour finance, interesting...
http://www.washingtonpost.com/wp-dyn/content/article/2008/05/24/AR2008052400002.html
Friday, September 19, 2008
How can a bank like Lehman go down so fast
The Reason behind faliure of Lehman Brothers:-
It is overleveraged i.e loan and investment books are much bigger then the capital. Loans were of high risk nature.
.Lehman was buying loan from banks and then package them to sell as bond against the loan. suppose earning on the loan is 6% and bonds are sold at 4% then spread is the earning for investment bank. By selling these bonds it raises money and frees capital.
But when home buyers started defaulting these bonds lost there value. Suppose Lehman faces a redemption and has to repay another bank it has borrowed from.If it sells the mortgage-backed bonds, whose prices have fallen, it will not raise as much as was earlier expected.So, it sells some of the other good assets or bonds which may have nothing to do with mortgages.But since the bank starts dumping these assets, prices of these bonds also dip.This is when the crisis spreads from subprime to prime.
Lehman ws also writer of huge CDs ( credit default swaps). There are collateralised debt obligation (CDOs), credit default swaps (CDSs) and all kinds of derivatives. CDOs are asset (or loan)-backed securities, while CDSs are like a guarantee.Say Bank A lends to a corporate but is unwilling to take the full credit risk. So, Bank A enters into a CDS deal with Bank B; under this, Bank B promises to pay Bank A if the corporate defaults. The money that Bank B earns for this is the CDS premium, which is similar to an insurance premium.Now, if markets turn choppy, risks go up and so does the CDS premium. So, Bank B, which is earning a lower premium has to promote a mark-to-market loss against the CDS position. Here bank B is Lehman. When default on housing loan is mounting the Lehman were suffering huge losses. Because they have never thought that housing prices ever come down. strange!!!
It is overleveraged i.e loan and investment books are much bigger then the capital. Loans were of high risk nature.
.Lehman was buying loan from banks and then package them to sell as bond against the loan. suppose earning on the loan is 6% and bonds are sold at 4% then spread is the earning for investment bank. By selling these bonds it raises money and frees capital.
But when home buyers started defaulting these bonds lost there value. Suppose Lehman faces a redemption and has to repay another bank it has borrowed from.If it sells the mortgage-backed bonds, whose prices have fallen, it will not raise as much as was earlier expected.So, it sells some of the other good assets or bonds which may have nothing to do with mortgages.But since the bank starts dumping these assets, prices of these bonds also dip.This is when the crisis spreads from subprime to prime.
Lehman ws also writer of huge CDs ( credit default swaps). There are collateralised debt obligation (CDOs), credit default swaps (CDSs) and all kinds of derivatives. CDOs are asset (or loan)-backed securities, while CDSs are like a guarantee.Say Bank A lends to a corporate but is unwilling to take the full credit risk. So, Bank A enters into a CDS deal with Bank B; under this, Bank B promises to pay Bank A if the corporate defaults. The money that Bank B earns for this is the CDS premium, which is similar to an insurance premium.Now, if markets turn choppy, risks go up and so does the CDS premium. So, Bank B, which is earning a lower premium has to promote a mark-to-market loss against the CDS position. Here bank B is Lehman. When default on housing loan is mounting the Lehman were suffering huge losses. Because they have never thought that housing prices ever come down. strange!!!
Saturday, September 13, 2008
Quote of the week
“Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell.”- Warren E. Buffett
Quote From Warren Buffett
Rule No.1 is never lose money. Rule No.2 is never forget rule number one.
""Shares are not mere pieces of paper. They represent part ownership of a business. So, when contemplating an investment, think like a prospective owner.""
All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies."
"Look at market fluctuations as your friend rather than your enemy. Profit from folly rather than participate in it."
"If, when making a stock investment, you're not considering holding it at least ten years, don't waste more than ten minutes considering it."
""Shares are not mere pieces of paper. They represent part ownership of a business. So, when contemplating an investment, think like a prospective owner.""
All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies."
"Look at market fluctuations as your friend rather than your enemy. Profit from folly rather than participate in it."
"If, when making a stock investment, you're not considering holding it at least ten years, don't waste more than ten minutes considering it."
Wednesday, September 10, 2008
Today's call on fundamental basis
Buy HPCL, BPCL, IOC for 3-4 months crude oil is going to fall in coming month because higher crude price will not only harm the oil consumer but oil producing country too in a big way If you can link growth, inflation, consumption and currecy exchange rate of different countries with crude oil price....... Crude oil has to be stablized between 60-70 $/barrel in coming 4-6 months.......So we dont need rocket science to understand whic companies will get benifited......
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