Archive for September, 2009

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How to invest stocks: investing basics

Tuesday, September 29th, 2009

Investment is a science. Anyone thinking they can come into the market without knowing the investing basics and  start investing and make money is someone who is going to be broke very quickly. It is important that an investor knows about basics about investing such as earnings per share, the price/earning ratio and book value so that they can know what they are getting into and what kind of return they are going to get.
Earnings per Share

The earnings per share are the earnings that you will receive on your initial investment. Companies are required in the United States to report the earnings per share on their income statement.
It is possible to determine the earnings per share quite easily using some simple calculations.

For the basic formula, use this:
Earnings per Share =  Profit/Weighted Average Common Shares
For the net income formula, use this:
Earnings per Share =  Net Income/Weighted Average Common Shares
For the continuing operations formula, use this:
Earnings per Share = Income from Continuing Operations/ Weighted Average Common Shares

Book Value
The book value, or carrying value as it is sometimes called, is the value of an asset according to its balance sheet. With assets, the value is based on the original cost of the asset, minus the deprecation, as well as the amortization costs against it. To determine the book value of a company, you need to take its total assets and subtract its intangible assets and liabilities. In the stock market, book value is used as a value metric that determines the lowest point for a stock price if it were in a worst-case scenario. This is because when a business is completely liquidated, the book value is what is remaining after all debts and other payments have been paid. Investors will also use the book value per share to determine earnings when the reconciliation of the opening value and closing value has been done.

Price/Earning Ratio

The price/earnings ratio of a stock determines the price paid per share, in relation to the net income or profit earned by the company per share. If a company has a high price/earning ratio, this means that the stock is more expensive because investors pay more for each unit of net income. The price/earnings ratio will show the investor demand for a company share, allowing individuals to see where the company’s value may go, and whether or not it is a good investment.

It is important to remember that shares in a company are determined by several factors including the market supply and demand, the company’s future performance, the company’s recent performance, the risk in the company and the prospects for companies of this type in that sector. In order to determine the price/earnings ratio, an investor will divide the price of one share in the company by the profits earned by the company per share. This means that if the stock rises in value, but the earnings stay the same or go down, then the price/earnings ratio will go up.

Investing is something that can help you build up your savings and help you live a retirement that you can really enjoy. However, it is important that all new investors take the time to learn how to get the most out of their investments, and to ensure they invest safely. By knowing the concepts of book value, earnings per share and price/earnings ratio, you can ensure your investing is safe and planned out.
Further Readings:

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Warrent Buffet’s secret revealed

Tuesday, September 29th, 2009
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Warren Buffett does not readily disclose the investments he makes on behalf of himself or Berkshire Hathaway. He does, every year, report on the substantial holdings of his company in other corporations. These provide only tiny clues however to why, when and where he invests.

Stock investments should be looked at in the same way as buying a business. The stock investor is really buying a tiny share or partnership and should apply the same principles that they would in buying a business. According to Warren Buffett, the below are the principles for sound investments strategies.

  1. Do not follow the crowd. Ignore the market, the crowd, and its fashions.
  2. Have fixed investment principles.
  3. Do not put your eggs in many baskets. Put all your eggs in one basket  and proceed to watch that basket.
  4. Do not rely on outside analysis. Do your own research and do it thoroughly.
  5. Do not often act on a hunch. Always have sound, well-argued, well-researched reasons for your investments.
  6. Do not place small amounts in each basket. Only buy if you are prepared to put at least 10% of your net worth into the stock.
  7. Do not watch the market intently. Do not switch holdings frequently. Expect to hold your investments for ever. Do not avoid holding cash.

Additionally, the references could be made to below mentioned principles.

  1. The company should be soundly managed. Tests of good management include:
    • Share buybacks
    • Good use of retained earnings
    • Sticking to what you know
  2. The company has demonstrated earning capacity with a likelihood that this will continue. Tests of earning capacity include:
    • Company growth
    • Dealing with inflation
    • Capital expenditure
    • Look through earnings
    • Brand names
  3. The company should have consistently high returns. Warren Buffett would look at both:
    • Returns on equity
    • Returns on capital
  4. The company should have a prudent approach to debt.
  5. The businesses of the company should be simple and the investor should have an understanding of the company.
  6. Assuming that all these thresholds are satisfied, the investment should only be made at a reasonable price, with a margin of safety. This is always a matter for independent judgment by the investor but it is relevant to consider:
    • Price/earnings ratios
    • Earnings and Dividend yields
    • Book value
    • Comparative rates of return
  7. Investors need to take a long term approach.

Some Books Recommended by Warren Buffet for investment

There are books that tell you in-depth about strategies developed by Warren Buffet. Then there are those books that are recommended by the man, Warren Buffet himself. Here are some of those: Take on the Street: by Arthur Levitt Levitt. He served as the Securities and Exchange Commissions chairman for the longest term. Levitt tells you about the tactics developed by the Wall Street money hoarders in simple and direct language, then tells you how to make your way through them. The Little Book of Common Sense Investing: by John C. Bogle. He has filled all the pages of the book with deep insights and practical advice. The book tells you investment is not easy, as it requires discipline and patience, at the same time it’s all about common sense.

Buffett, whose investment strategies and techniques are still regarded by most as the best and most successful ever, was not spared from the recent global financial crisis. Weighed down by losses from investments and derivative bets, his investment arm Berkshire Hathaway posted a net loss of US$1.53bil (RM5.43bil)  its worst loss in at least two decades  for the quarter to March 31, compared with a profit of US$940mil in the same period a year ago. But the company returned to the black with a second-quarter profit of US$3.29bil on improved stock markets and credit derivative gains.

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Is Investing in Dollar a smart decision?

Tuesday, September 29th, 2009
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Is Gold A Safe Haven Even At $1,000 Per Ounce?

Is Investing in Dollar a smart decision? There is a lot of speculation that the dominant currency of the 20th century, the American Dollar, is doomed. As its value falls when compared with stronger currencies like the Yuan and Euro, many investors are looking for a safer investment than the dollar. One such investment seems to be gold. Even at $1,000 an ounce, it seems gold is the investment of choice for investors who want to play it safe.

The Declining View of the American Dollar

In the heyday of the dollar in the 20th century, you could take American money anywhere in the world and gladly meet someone who would change currencies. For investors, the dollar was a safe bet as an investment because it always seemed to gain value over the other currencies of the world. The dollar in short, was the currency of choice for the world‘s investment markets. However, things have changed recently.

For the past 60 years, governments of the world measured how strong their economies were based on how many dollars were in their central-bank. Everything from oil to coffee beans was denominated in dollars. The dollar was the medium of exchange around the world because it was backed by the largest economy on the planet; The United States of America.

Things have changed though. In 2008, early in the year, the dollar‘s weakening value was the main factor in the rising cost of energy, commodities and food. Investing in the dollar has also gone down. Many prominent economists also feel that there is a good chance of an abrupt fall in the dollar. In 2009, a comment by the U.S. Treasury Secretary Tim Geithnr, where he stated he was open to changing the international currency from the dollar, sent the dollar falling 1.3 percent in value in only ten minutes.

While a change in the top currency for the planet, from the dollar is not likely, that doesn‘t mean the dollar isn‘t losing money. From 2005 to 2008, the number of global currency reserves held in dollars fell from 67 to 64 percent.

World leaders and economists all agree that the dollar is going to continue to deteriorate in value as other nations like China and India begin to gain more wealth and more economic influence around the world. The U.S. will see its once strong economy losing preeminence and the dollar will lose its position as the world currency. Some economists believe that the dollar will fall from the top within the next 15 years, while the Euro is the most likely to take its place. The dollar is no longer a safe haven for investing, so what is?

Gold: The Way to Go?

On Sept. 8, 2009, the dollar hit its low for the year, while something else passed $1,000 an ounce in value. That something was gold, and gold has become a barometer for the strength of the dollar. On that day, the dollar fell in value to 77.10, when compared with a compilation of the six major world currencies that were the Yen, Euro, Franc, Krona, Canadian Dollar and the British Pound. Gold on the other hand shot past $1,000. The reason for this is that gold is used as a hedge against inflation and a weak dollar. Put simply, the lower the dollar goes, the higher gold goes.

In 1980, gold was valued at $850 per ounce. During the 1980s, inflation was a major concern for the world�s markets, but since many investors saw inflation as something that never go away; they did not hedge in gold. As a result, gold fell in value from 1980 to 2001. In 1999, it reached bottom but after 2001, something amazing happened. Gold began to rebound as the worlds markets suffered due to the collapse of the tech stock bubble. While many gold investors thought that gold would stop rising, it didn‘t. The dollar continued to fall and gold continued to, and continues to rise. This shows gold investors two things. The first is that there is a fear of a rise in inflation as investors see the value of the dollar fall, and two, there is a great fear over the devaluing of the American dollar. The American dollar is falling in value, the markets are in turmoil and the one safe haven you can count on seems to be gold.

The dollar has been falling in value for years, and as the UN pushes to replace it as the world‘s currency, it is expected the dollar will continue to fall, along with Americas economic influence. With China, the European Union and India becoming the economic powers of the 21st century, there seems nowhere for the dollar to go but down. While the dollar goes down, its counterpart in all things it seems, gold, goes up. It can be expected that gold will continue to rise above $1,000 an ounce and serve as a safe haven for investors who want to get out of currency investing in the dollar, and choose gold investing instead.

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Merrill Lynch is all set to acquire new brokers

Tuesday, September 29th, 2009
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Merrill Lynch was founded in 1914 by Charles E. Merrill and later joined by Edmund C. Lynch. Owned by Bank of America, Merrill Lynch is an international financial services company. It was taken over by the Bank of America during the global financial meltdown of 2008. The headquarters of the company is located in New York City and is known for having made successful investment decisions even in its early years.
Today, Merrill Lynch is aggressively eyeing young and relatively inexperienced brokers as well as top veteran financial advisers as declared by the firms hiring chief Don Geisler. Currently, Merrill is apparently offering an upfront bonus of 140% of the broker’s previous year’s income for them whose minimum annual fees and commissions of $800,000. This is because Merrill is giving recognition to the fact that there are phenomenal brokers whose numbers are off because of the market. Also, with the historic collapse and the credit crisis that wiped out a number of storied investment firms, Merrill clearly has lost its foothold as the biggest retail-brokerage firm on the street.
Merrill Says It’s Not Desperate
Merrill disputes the notion of desperation, saying it’s always interested in adding top-quality brokers to the thundering herd. The aggressive posture comes at a time of turmoil for Merrill. Since BofA acquired it in January, the financial advisory unit’s management has been in flux. Its ranks of brokers thinned from 18,000 before the merger to 15,000 at the end of June. Some top producers have jumped to rivals and the company has encouraged lower-producing advisers to move on. In addition to the reps generating $800,000 or more in fees and commissions, Merrill is targeting brokers who range from the first to the third quintile,  or the top 20% to 60%, in production.

The Competitors are Not Behind Either

Merrill’s main competitor in the financial advisory business, Morgan Stanley Smith Barney, had also increased its signing bonus to lure online brokers, said the recruiter. Its upfront offer is 160 per cent of the previous year’s production, with a similar production-based payment three to five years later.
Earlier this year, Morgan Stanley reduced its upfront signing offer to 100 per cent of the previous year’s production, and about two times annual production on the back end.
Because the lower upfront payment was not deemed successful, says the recruiter, Morgan Stanley recently increased the upfront component to 160 per cent of the previous year’s production, with a comparable amount on the back end.
The total pay-out of Merrill’s package is harder to achieve, so it is difficult to determine whether it or Morgan Stanley is the highest payer.
Just last week, Bank of America CEO Kenneth Lewis tapped Ms. Krawcheck to replace Dan Sontag and run the bank’s global wealth and investment management sector.
Morgan Stanley declined to comment on its recruitment terms, other than to say the package was competitive with Merrill’s.Citigroup  Traditionally, Merrill has been seen as market leader and has not had to recruit aggressively, preferring to nurture homegrown talent. The financial crisis, merger and resulting upheaval have changed that.
Merrill’s offers are also noteworthy because its parent company is trying to pay back $45bn in taxpayer funds from the troubled asset relief programme.
Two Merrill leaders have left since the BofA merger. Most recently Dan Sontag quit after Sallie Krawcheck, former Smith Barney chief, was brought in above him as head of global wealth and investment management.
Ken Lewis, BofA chief executive, said last year that Merrill’s unparalleled network of financial advisors was the driving force behind his desire to acquire the investment bank.
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