Investment World

Reuters via Tacloban Times – News today that local born Wilson Justo, currently residing and operating out of Australia, completed the first stage of a major new housing development in the bustling port of Pinamopoan, on the northern coast of Leyte Island in the Philippines.

His plan is said to include a number of luxurious villa style mansions, to be built overlooking the ocean. As is often the case with big property magnates, to promote the development, he has taken the title on the first building himself to use as a residence for local members of the Justo clan.

On the strength of this first property, he is currently seeking funding to convert more of the older style residences in the area to modern dwellings. Sources close to the project say the aim is to turn the town in to a Monaco of the East, with a casino and resort style hotel on cards if sales go well.

GFC

Welcome everyone to the new 21 Wilson Street!

Over the past year, our world has been shattered by the Global Financial Crisis or better know as the “GFC”. It has been considered the most severe crisis since the Great Depression. Everyone has felt the slash of the GFC whether you are the US Government, an individual living in the remote country of Africa or a business operating in Asia or Europe!

However, there are a lot of things that we have learned out of the GFC! Can you think of any? I have listed below few things on top of my head. Feel free to add anything in the comments.

Things I learned from the GFC:

1. The higher the risk, the higher the losses and forget about the return!

The basic premise of investing is that “the higher the risk, the higher the return”. During the GFC the priority of investors is to get out from deals immediately to limit losses or prevent bankruptcy! Numerous companies didn’t survive. Lehman Brothers and Merrill Lynch to name a few.

2. Savings is important

Saving for rainy days is not enough. You should save for the storm. Some jobs have disappeared and unemployment around the world has risen to near all time high. Workers who have been fired can’t easily get new job. Savings of equivalent to one year of salary is ideal as they say but sounds unattainable.

3. Loyalty to employers is an illusion!

I have heard from friends that some people in their companies who were really hardcore and technically the best in their profession were still sacked. At the end of the day business is still business, they will do everything to survive even firing good people. Thus, during boom time employees should not be blamed from jumping to another company when it offers higher pay and good career options!

4. Regulators sucks!

The main cause of the GFC is the subprime mortgage lending issues in the US and some complex financial transactions that regulators fail to regulate. Most brilliant people work in the private companies and they would design things to escape regulations! But when bad things happen, they are ready to make bailout which means paying for their dumbness!

5. Cash can be a risky investment

In the investment world, cash is cash and it has no risk. But if you keep your cash in bank you may still end up losing it with most banks in the past year asking bailouts others didn’t survive. Most governments offered deposit guarantee to certain amount.

6. Keep it Simple

Warren Buffet said don’t enter into a business that you don’t understand. Most people and businesses that have gone bust were inexperienced in the deals that they have entered into.

7. AAA credit rating is unsafe

Who would imagine US and British governments are in the brink of defaulting on their treasuries? How much more other governments?

Previously, I posted a topic about whether the United States would adopt the international accounting standards (IFRS) since there have been numerous problems surrounding these issues. Just this week, the US SEC has approved for public comments its proposed “roadmap” for conversion to IFRS for public companies in the US. The proposal suggests US public companies begin reporting IFRS in 2014 (still six years from now), with full conversion to occur by 2016!

This decision of the US SEC is vital in the state of global economy at the moment. It is important for financial reporting language to be consistent all around the world to benefit investors and promote market efficiency as IFRS encourage more transparency. This will also increase comparability of companies from one country to the other.

It is interesting to note however that the US SEC approves this conversion in the middle of the credit crisis. Is this one of the responses of the US government to the recession?

Recession is associated to a weak economy where the demands for goods and services decline resulting to lower prices. Drop in the stock market and increase in unemployment rate are among the few indicators of recession. 

The ongoing failure of the US Subprime Lending market is threatening the US and the global economy as a whole to collapse. Subprime lending generally involves extending loans to borrowers with poor credit history at a higher interest rate than the market rate. The increases in the interest rates increased the default rates of the subprime loans causing subprime lenders to file bankruptcy. The securitisation of subprime loans into marketable securities such as mortgage backed securities (MBS) has magnified the impact of the subprime mortgage crisis to the investors of MBS’s not only in the US but also in the whole world market triggering recession of the world economy.

Invesment strategy during recession is a tough challenge. The following are the few investments generally acceptable in a falling economy:
1. Gold – Generally a good protection against inflation and the effect of the credit crisis. However, price of gold at the moment is very high so the return might not be that great.
2. Money market instruments – The traditional term deposit accounts with highly established financial institutions at least guarantee a fixed return of investment. In Australia, you can get as high as 8.5% interest from BankWest!
3. Government bonds – This is another area where an investor is guaranteed a cash flow return. However, if the recession extends for a long period of time the possible increase in interest rates will decrease the value of the bonds realising a huge capital loss!
4. Stock market – This should be the last option to consider in investing during recession! Extra care must be exercised in selecting stocks that are non-cyclical, meaning those companies that are not heavily impacted by the weakening economy.  In general, invest in companies whose products are necessities that people keep on buying such as consumer goods (e.g. food items and groceries) and utilities (e.g. oil and gas). Short selling of cyclical stocks (e.g. real estate, banking) is also a good investment strategy.

Government, on the other hand, normally interferes to combat the effect of recession. Tax cuts, increases in goverment spending and lowering of the interest rates by the Central Bank are among the common responses of the government. Finally, the benefit of diversification should still not to be understated during recession.

Last week I went to Melbourne for a 3-day business trip. I consider myself lucky as the day after I flew, Qantas Engineers had a strike causing massive delays of all Qantas flights and stranding thousands of passengers all around Australia. I will be flying again next week to Sydney and there’s a rumour that another strike will strike again. Fingers crossed that this won’t happen as I don’t want to be delayed and also there are a lot of people travelling to Sydney for the World Youth Day who will be affected.

In general, strikes are costly to both the companies and workers as they represent lost of income to both parties. The longer the strike, the more costly to both parties. This occurs because negotiations do not always run so smoothly. There is also an element of misunderstanding between the interest of both parties. Unions might believe that the company does not appreciate their effort and value to the firm. Management might believe that unions do not appreciate the willingness of the owners to earn high profits.

There’s a debate between economists whether unions are good or bad for the economy as a whole. Unions are a solution to the market power of the firms that hire workers. In the absence of unions, companies use its market power to pay lower wages and offer worse working conditions. In this case, a union balances the firm’s market power and protection to workers from being at the mercy of the owners.

On the other hand, if the wages demanded by unions rise above the competitive market level, companies would limit hiring workers causing some workers to be unemployed. This also results to decrease in wages in the rest of the economy and decrease in the business activities resulting to lower output. In some companies, successful unions benefits only union members at the expense of non-union members and other employees in other companies.

In the end, is there really a consensus whether unions are good or bad for the economy? I just don’t care as long as my flight next week will fly as high as this Qantas 747-476 plane on time!

Superannuation is a pension system in Australia that requires employers to pay a compulsory 9% of its employees salaries and wages into a Superannuation Fund. The investment cannot be withdrawn by an employee and can only be accessed when the employee retires.

An employee has the option to increase its contribution from 9% and such additional contribution will not be taxed as a government’s way of encouraging the people to save more. A lot of people take advantage of this in order to pay less tax and obviously to have more money upon retirement.

I just saw a news today that most superannuation funds earned negative returns during the year due to the weakening financial markets. And the worse thing is that my superannuation fund earned a depressing negative 5%! I looked at the breakdown of the return and 1% of this is the ongoing fees charged by the fund.

In general, employees have no control over the way their superannuation contribution is invested by superfunds. I remember when I signed up for the superannuation account, the only involvement I had is to choose from 3 options which are conservative, moderate and agressive. The difference between these three alternatives lie upon the risks being taken by superfund in investing the contribution. Conservative invests more on money market and cash instruments and Agressive invests on equities, a more risky but with higher expected return investments.

With a slowing down financial markets, employees can’t do anything but to accept negative returns on their superannuation investment. With this fact, maybe the least employees can do is to reduce their contribution to the minimum 9% required by the government as the benefit of paying less tax is not sufficient to compensate for the negative returns and paying fees to superfunds for managing the investments. It is also normal to still pay fees charged by superfunds even your investment incurs losses.

In 2005, the government allowed each employee to choose which fund their contributions are paid into which is a good move to give employees more control on their money. In this way, employees can switch over their investments if their superfund is not doing well to another superfund that’s earning good returns! I am thinking of doing this one at the moment but I’m not sure about the cost of doing this. The new superfund might charge employees for transfer cost or other fees which may not make the transfer valuable.

There is a special type of superannuation fund called Do-It-Yourself Superannuation Fund which is a fund established for small number of individuals only. I think this is also a good way of having more control on your superannuation money. However, the negative side of this one is that it requires more involvement and investment skills from the employees themselves which is only suitable for people who have exceptional abilities in the investment world like yours truly!

Enron’s multibillion dollar collapse in 2001 is considered the greatest corporate scandal in history. In the accounting world, it has been set to become the weapon that the International Accounting Standards setters have been looking for in its battle to convince US to adopt International Financial Reporting Standards (IFRSs).

IASB board members have indicated that Enron’s collapse could not have happened under existing UK or IAS during that time (note that the UK GAAP is closest to IFRS). Enron had a massive investments in off balance sheet special purpose vehicles whose negative positions were only discovered later when the losses could hardly be hidden anymore. IASB says IFRS would probably have got them on the balance sheet as it’s very tough.

The convergence of IFRS and US GAAP would be very helpful to Companies that are reporting both in their local country and in the US. This would save them the cost of reconciling local reporting to US reporting. However, US being the world economic leader is sometimes politically arrogant in terms of world issues and policies. They may not just accept the IFRS as they are claiming that the current US GAAP is more superior than IFRS. There’s even a rumour that it’s IFRS that’s going to adopt US GAAP! Is it for real?

“Buy Low, Sell High”, this is the norm of a profitable investing activity.

Most investors earn money by buying stocks and taking a profit when the price rises. The most difficult part of this strategy is to identify which stocks to buy that are going to rise in value in the future. Because the higher the price will go up the higher would be your gain. This investment strategy though is only good if the market is going up. There are times when the sharemarket is going down. Are we still able to earn profit from a downward market? The answer is yes. The strategy is called “Short Selling”.

Some investors do precisely the opposite of buying stocks and taking a profit when the price rises. These investors deliberately identify stocks they think are about to fall. Then, they sell those stocks short. This means selling the stocks they don’t actually have!

The objective of short selling is to buy back the stock when the price falls, and in the future, buying the same stock at a much lower price than the price at which they sold!

This strategy can generate huge profits in a downward market. This is one of the most popular strategy used by hedge funds. Individual investors find this difficult to implement though because they normally need to be settled in a few days. However, keen individual investors can still proceed to invest by using the services of special firms that facilitate short selling. The way it goes is that the investor needs to borrow the stock they want to short sell from the facilitating company. The latter provide the required shares to be sold short.

However, you may incur unlimited loss from short selling though if your price expectation does not happen. For instance, if an investor short sell a stock for $100 expecting the price to fall, but they instead jumped to $110 and kept on rising, the loss will become unlimited!

I will be taking the CFA level 3 exams tomorrow (everyone wish me luck please) and I’m hoping not to experience what happened to these guys. These posts are from analystforum website, the discussion board for CFA candidates.

Once you read the first post you may think it’s not real. But the second post makes the first one appears credible! Please make sure you are not eating for this one, you may not stop laughing for a while.

POST Number 1

Author: ccooper55
Date: Thursday, August 12 @ 1:49 pm This year, level III, NYC

I am waiting for the bathroom in this massive line about 10 minutes before the start of the exam. There is this guy panicked out of his mind in line ahead of me who I noticed for the previous half hour had been rocking back and forth in the corner of the lobby murmering his notes back to himself from memory…a real whackjob. Anyway, As I am standing in line with this guy in front of me he starts to sweat profusely and I can litterally hear this guys stomach rumbling…this is where he really freaks out. He starts pounding on the stall doors ( there were only 2) and, of course, no one is coming out so this ass clown drops his pants, hops up on the sink, and blows SH**T all over the sink! The most disgusting thing was the backspray all over this guy! He was COVERED in his own Sh**t. I am laughing my ass off but this guy didnt miss a beat, he rinses off his pants, throws his shirt in the trash and walks into the test wearing only his windbreaker and wet pants. I could hardly stop laughing to myself a full half hour into the test…I knew then I was going to be alright because at least I didn’t just blow ass chunks all over the bathroom…priceless.

POST Number 2

Author: hughj
Date: Thursday, August 12 @ 2:29 pm

NYC this summer, I’ squirting lemon in my iced tea (for a little caffeine pick me up) right before I walk in to the exam center. Some of it squirts the wrong way, gets me in right in the eyes and I literally, can’t see a thing. I ask someone to help me get to the bathroom so I can rinse my eyes. I feel around for the sink, run the water and immerse my face in the sink, and to my horror, it’s full of sh**! I scramble to find a paper towel and the bin’s empty! At this point I go rummaging through the garbage in sheer hysterics to find anything to wipe my face, and to my relief I find a discarded shirt. I wipe my face as quickly as possible w/ the shirt, only to find I’m caking on more sh**, and now I can’t see again. I was totally confused until Cooper’s post put the pieces together for me. BTW I think I did ok in the morning session, afternoon was a little tough.

When we watch business news on the television we often encounter how various stock indices performed during the day from various stock markets locally and worldwide.  Among these various indices are US Dow Jones Industrial Average (DJIA 30) and US S&P 500 being the most widely watched indices. Have you ever wondered what it means when the news say DJIA dropped by 2% and S&P 500 increased by 3%? How did they arrive at these percentages?

The greatest difference between the indices worldwide lie in how the index components are weighted. Two common examples of these are the price weighted and value weighted calculations.

DJIA 30 is an example of a price weighted index that simply sums the share prices of the 30 largest and most widely held public companies in the US divided by the number of shares in the index. The number of shares are adjusted to account for the stock splits. DJIA was first published in 26 May 1896 at the index price of $40.94 with only twelve stocks in the index and fast forward to 30 May 2008, the index now stands at $12,638. Out of the original 12 companies only General Electric is currently part of the average.

S&P 500 is a value weighted index of 500 Large Cap Companies mostly Americans where each stock in the index is weighted according to its market capitalisation. The higher the market capitalisation of a Company, the bigger its weight in the calculation of the index. The S&P 500 was first published in 1957 with only 90 Companies called S&P 90. The index stood at $100.38 on 4 June 1968 and at $1,400.38 on 30 May 2008.

Another famous price weighted index other than DJIA 30 is the Nikkei 225 for Japanese equities. All other indices are mostly value weighted like FTSE 100 (FTSE pronounced as ‘footsie’) in London and DAX 30 in Germany. There are times when the direction of these two types of indices are different. The other might be going up and the other might be going down. So whenever you see these indices on the TV or in the internet from now on you may decide which one better represents the performance of the market or of your investment if you have any!