Are Americans Obsessed With Rate Cuts?

Barely a week after US Federal Reserve slashed interest rates by a massive 75 basis point, Americans are again with high expectations expecting US Fed to further reduce rates at today's FOMC meeting, as if the 75 basis point was not enough. So the world is now waiting anxiously for the outcome of this meeting and whether interest rates will be further reduced. A reduction in rates will most likely provide an immediate (albeit short-term) boost to Wall Street and the rest of the world.

First and foremost, last week's rate reduction was surely a panic sign by the Fed to rescue US ailing economy to say the least. Surely, the problems in US economy could be worse than what it appears to be. Looking back, the last time US Fed had made such a massive reduction was in 1982.

So, with barely a week passed, is it justifiable for US to reduce rates further? After all, any monetary policy measures will generally take 3 to 6 months to see the effect. Moreover, the Fed had repeated emphasized in the past about the real threat of inflation. Inflationary pressure will surely increases with such aggressive interest rates cut!

On the other hand, US currency, which has depreciated significantly against other major currencies, may further weaken. With US being a major importer of consumer goods, a weak dollar may further fan the flames of inflation! In addition, prices of commodities denominated in US Dollar, such as crude oil, may rise further.

I can understand why Americans in general would like to see more rate cuts. None other than related to housing. Lower rates will increase American's affordability to secure a loan for housing purchase, thus improve housing transactions and possibly stablize or increase prices in the longer term. After all, housing is the root of the problems in US and is also closest to most Americans' hearts.

However, we all need to look at the big picture and weigh the pros and cons of any measures or desires. Panic and overkill solutions (without letting the dust to settle first) may not be the best long term solution, I am afraid.

What's your view on this? Should US Fed reduce interest rates further right now? Do leave me your comment on this.

Value investing vs Growth Investing: Which Is Better?

Value investing vs Growth Investing? Let's first explore the history of these two investment principles.

Value investing refers to an idea of investment that originated from Benjamin Graham & David Dodd in 1934. It simply refers to a method of buying a stock whose value is underpriced, due to fundamental reasons such as low price-to-earnings ratio (PER), low price-to-book ratio or price trading below Net Tangible Assets (NTA) per share. On the other hand, growth investing is investing in companies with above average or high growth potential. Often, investment is considered worthy even if the share price appears expensive in terms of metrics such as price-to-earning or price-to-book ratios.

As such, the term "growth investing" contrasts with the strategy adopted in "value investing". Failure to pay attention to any risk factors may result in unintended losses. So, which one provides better return, growth or value investing?

Choosing between growth and value investing is always a tough decision. Value investing is concerned with the current price level and fair price of a stock, while growth investing is more focused on the potential earnings growth of the company.

Proponents of value investors, such as Warren Buffett, has emphasized that the essence of value investing is buying stocks at less than their intrinsic value. The discount of the market price to the intrinsic value is what Benjamin Graham called the "margin of safety". The intrinsic value is therefore the discounted value of all future distributions.

Value investing
When using the PER method, a low PER is preferred, as investors believe the current low price level may be due to an overly pessimistic assessment of the company’s future prospects. Investors believe that the PER will eventually revert to its fair market level when other investors realized the "value" of the company's performance.

As a result, they rely on the movement in stock price rather than the earnings. They will search for companies with low PERs, as they expect the ratios to increase to their fair levels with or without an increase in earnings. However, value investors face the risk of misinterpreting an undervalue signal when the market’s concerns about the stock may indeed be appropriate.

Growth investing
With growth investing, its focus will be on the potential growth in earnings of a company, which has not yet been reflected in the current stock price. So, an investor may often invest even the share price has already reached a premium. Due to the high expectation, the key risk here is the growth may turn out to be lower than expectation. In some cases, growth investors may be entirely vindicated in their judgment of the quality of the underlying business, but the stock still performed badly because it was so overly priced at the time of purchase.

In addition, this method assumes a constant PER. If the PER declines for some unforeseen circumstances, investors will incur losses as a result of lower stock prices despite a higher growth in earnings.

To sum it up:
Value investing = Buy low, sell high
Growth investing = buy high, sell higher!

Value investors are always the early buyers. They buy based on the belief that the market has misread the real value of the company. At that moment, the future prospects of the company may still be uncertain; there may or may not be an increase in earnings. Thus, on top of PER, value investors will often use other measures such as dividend yield or price-to-book ratio, to support their purchase decisions.

In contrast, growth investors will come in at the early recovery stages of a company’s fundamentals. At that point in time, the stock’s price will have already moved higher from its recent low. Value investors will usually start to feel uncomfortable with the price level and sell the stock even though the company’s fundamentals have recovered, while growth investors will buy the stock in the belief that they can sell even higher even though they are buying high.
Growth investors believe that it is safer to buy stocks when the fundamentals have shown definite signs of recovery.

Hence, both value and growth investing have their respective strengths and weaknesses. Failure to pay attention to their risk factors may result in unintended losses. There is no one better method than the other. It will depend largely on one's risk appetite and timing.

In Managing Finance, Keep Courage Under Fire...

The USD150billion fiscal stimulus plan proposed by President Bush of United States to boost the economy of the ailing nation appeared to be not well received by public due the perception of poor timing and simply not good enough to lift the looming recession threat. This is followed by global market's massive knee-jerk reaction to this negative perception that US is indeed headed for a recession...European markets had a bad day last night but what is to follow is an even bigger storm brewing in Asia, with major Asian markets such as China and Hong Kong falling by a massive average of 8%! Basically, panic selling is the order of the day! Expect worst to come tonight as Wall Street resumes trading after Monday's Martin Luther King Day holiday!

In the midst of the gloom and doom, I came across this interesting article written by Robert Daniel, who is based in Tel Aviv and is Dow Jones MarketWatch's Middle East bureau chief, which I would like to share with you. He offers a view for small American investors on what they could do given the current stormy circumstances.

Robert's suggestion includes resisting the urge to sell into the tidal wave, continue funding 401(k) accounts, and paying down credit-card debt. His reason being simply, "volatility is part of the stock market investment arena, for one to invest in stocks, this kind of volatility comes with the territory". His advice is therefore, don't follow the market into the tank!

Unfortunately, the way the human psychology works is that people want to buy when everyone else is buying, and vice-versa! Better known as the herd's mentality!

"Embrace the volatility, which means continue these contributions. This volatility means you're getting better value with this contribution than you did the previous payday. You're buying more shares with the same amount of money. Compounded over 20 or 30 years, that could mean a significant difference in return. Now is not the time to head for the hills.", quoted Robert.

Robert's other suggestions include:

1. if investors have additional cash available, and they qualify based on income level, they should also take out a Roth IRA account.
2. If one has got a tax refund for 2007 coming, hurry and file and you'll get it quick. Take that extra cash and put it into a Roth IRA. One does not get a tax deduction when the money goes into the account, but at retirement, the money is 100% is tax free. For those under 50, one can put a maximum of $4,000 into a Roth IRA this year; if one is over 50, the maximum is $5,000
3. Reallocate one's portfolio by switching from growth stocks to value stocks, given that performance of growth stocks have outpaced value stocks for the past couple of years;
4. Pay off credit card debts due to its high interest rates. Moreover, credit card interest is non-deductible.
   
5. For those employed, take out a home-equity line of credit. This funding is to be drawn on only in emergencies. Bear in mind this credit is only available when a person is employed, so make sure you keep your job!
6. Last but not least, continue to have faith! Markets have their cycles and we're going through one. This is not the beginning of the end!

Do give me your views on the above article and suggestions.

For the full article, click this link.

How To Measure Investment Returns Vs Risks

In general, investment involves the commitment of funds to assets that will be held over a period of time. Investors (as opposed to speculators) would normally have time horizons that extend beyond a period of six months or a year. In making the decision to commit their funds for such a long period of time, they would wish to derive a reasonable return on their investments. The return that they can earn from investing in the various types of assets including stocks, bonds, derivative securities, property and others, is known as the Rate of Return. This return must compensate investors for:

1. opportunity costs of time, or time value of money;
2. expected inflation (which erodes purchasing power), and
3. the risk associated with the investment

Why do people invest? The simple answer to that is to make more money and to make money grow in value of course. In order to realize higher returns, investors must bear higher levels of risk. Therefore, underlying all investment decisions is the tradeoff between risk and return - the higher the risk, the higher the return.

How to calculate rate of return on investment? Consider the following scenario:
Beginning of year investment at cost = $1,000
End of year investment at market = $1,300
Holding Period Return (HPR) = Market / Cost = 1300/1000 = 1.3
Holding Period Yield (HPY) = 1.3 - 1 = 0.3 or 30%

To derive the return over the holding period, just take the HPR to the power of (1/n), where n being the number of years. Say if investment period is 18 months, n will be 1.5 year. Hence annualized HPR = 1.3 power of (1/1.5) = 1.19
annualized HPY = 1.19-1 = 0.19 or 19%

What then for a portfolio of stocks? Consider this scenario where there are three stocks in the portfolio:

Stock	No. of shares	Price (start)	Market Value (start)	Price (End)	Market Value (End)	HPR	HPY (%)	Market Weight	Weighted HPY
X	10,000	1	10,000	1.2	12,000	1.2	20%	5%	0.01
Y	20,000	2	40,000	2.1	42,000	1.05	5%	19%	0.01
Z	50,000	3	150,000	3.3	165,000	1.1	10%	75%	0.075
Total			200,000		219,000				0.095

From the above, we gather that the overall rate of return for this portfolio is therefore 9.5%.

For the less patient ones, the easier way to calculate this is by taking (219,000 minus 200,000) divided by 200,000 and one will get the same percentage return.

The above example is useful in calculating the realized rates of return on a portfolio of stocks, so that they can be compared to alternative investments. Nevertheles, in order to select investments for your portfolio requires you to predict the expected rate of return. This is not always so easy as it involves taking into account, factors such as the level of risk one is prepared to assume in undertaking the investments.

Let's proceed to compute the expected rate of return by taking the following scenario:
Based on one's prediction, supposed there is a 50% chance of hitting a 10% return, 30% chance of hitting a 20% return and a 20% of hitting a 50% return, the expected rate of return will be

(0.5*10%)+(0.3*20%)+(0.2*50%) = 21%

Now comes the more complicated part but important for risk measurement. We will now derive the variance which is a measure of the dispersion of the expected returns.
Variance = (0.5*0.1^2)+(0.3*0.2^2)+(0.2*0.5^2)-0.21^2 = 0.0229

The larger the variance, the higher the dispersion of expected returns, implies higher volatility for the investment.

Next, we compute the Standard Deviation (SD) which represents the degree of risk of the investment:
Standard Deviation = Square root of Variance = 0.0229^(1/2) = 0.15132746 Once again, the higher the standard deviation, the greater the risk of investment.

In some cases the variance or standard deviation, which is unadjusted, may be misleading – the Coefficient of Variation (CV) is designed to overcome this problem. It is a relative measure – the CV is derived by relating the standard deviation to the expected return, and thus indicates the risk per unit of expected return.

Consider the following scenario:
Stock A: SD = 0.01, ER (Expected Return) = 10%
Stock B: SD = 0.02, ER = 15%

The computation of the CV will be as follows: SD divided by ER
Stock A = 0.01 / 0.1 = 0.10
Stock B = 0.02 / 0.15 = 0.133

Hence, stock B has a higher risk per unit of expected return. Therefore for investors with lower risk appetite, Stock A appears to be a better choice of investment.

Do leave me a comment on your thoughts of using this method to evaluating investment risks vs return.

Wine, anyone?

How acquainted are you with the idea of wine as a fine commodity / investment? Given its ability to enhance a simple meal with merits extending its pleasurable consumption, wine could be regarded as the most fascinating beverage. In fact, wine can be rated as the beverage with the highest desirability and market value, simply because wine commands a strong global and consumer following.

For some, investment-graded wines are widely acknowledged for their remarkable returns on investment (less than 1% of all the wines in the world are of investment grade). Wines such as Bordeaux are highly exclusive , finite in production quantity and often improve in quality over time.

With high global demand from wine connoisseurs, collectors and investors, these wines could escalate in value as their availability diminishes. When the prices and profitability of a certain wine vintage increases, producers would not be able to release supplies at their will to the market.

On the other hand, the chances of a 'crash' in investment values are also minimized. The only time a wine investment would depreciate would probably be in a global depression. Some studies have indicated that "blue-chip" wines have not depreciated by 1% in the last 25 years. Some experts in fact quoted that wine investment is able to generate 12% to 30% average returns per annum!

One example is Asia's Premium Liquid Assets who provides the most comprehensive wine investment service in the region. They even provide exit strategies for clients who wish to sell their wines using our contacts and distribution channels. Generally, investors would get to see returns over a three-year holding period.

Clients can be assigned a portfolio manager to provide updates and valuation reports on their wine portfolio.

Most wine connoisseurs across Asia fall within 30 to 50 years age group. They tend not to be driven by brand but are price conscious. The perceived health benefits of red wine should continue to drive wine consumption.

Many investors from Singapore, Malaysia, and Thailand are looking seriously into wine investment and expects the trend to catch up in Europe within the next two to three years.

For more information on wine investment, you may find out more from this FAQ website. It contains all information you need to know such as:

• Why wine go up in value?
• What are the advantages of investing in wine?
• What are the risks involved?
• What sort of wines should I invest in?
  
  
  
  
  

Investment Ideas for 2008 (From a Malaysian Perspective)

For the past 1.5 years, both Oil & Gas and Construction Sectors have served me really well in my equity stock portfolio. For those who invested in the oil & gas sector in particular (say in 2006), it's not uncommon to see triple digit returns by now (for those hold mid to long term players like me). Just run through any of the oil & gas counters and you sure know what i mean. Star performers are definitely the likes of KNM, Muhibbah Engineering and Kencana Petroleum.
As for the Construction Sector, last year's star performers include MMC, Muhibbah, WCT Engineering and Gamuda.

I wouldn't do myself any justice by not also mentioning the Plantation Sector. The performances of the likes of IOI Corp, Sime Darby and KLK were absolutely stunning, given the record hitting CPO prices!

So in 2008, what is likely to be hot and what's not? I won't mention any counters here (since I am not licensed to do so!) but i shall state some of my likely catalysts for the year.

1. Government's continuous pump-priming of the economy via 9th Malaysia Plan - more Government contracts/projects will be rolled out during the year. Prime beneficiary is again the construction sector! Booming construction sector implies great demand for steel related products. Moreover, steel prices are expected to rise further, given China's escalating demand and measures to flush out non-value add local steel producers.
   
2. Generally, Malaysian properties should continue to do well here.....however, i am afraid the limelight will still be at the high end sector! The liberalisation of EPF withdrawal will help to boost the mid to low end sector but my take is that it will not be sufficient to lift the gloom of the overhang situation in these sector.
   
3. Continous flow of Petro-money (from the middle east) particularly) will provides lots of funds flowing into Malaysia and the rest of Asia, seeking high return value assets. High-end Property is again one the major beneficiary.
   
4. Oil and Gas sector will continue to do well, and more downstream players will on board too. High demand from major emerging markets such as China an India will continue to happen in 2008 and beyond. However, crude oil price may eventually dip or stabilize later in the year.
   
5. weak US economy implies further reduction of US interest rates, which will continue to weaken US dollars. More funds will flow into Asia and Malaysia is definitely one of the beneficiary. However, beware of companies with high export market denominated in USD!
6. China funds - flushed with so much liquidity that they need to invest elsewhere! Other than the obvious choices of Hong Kong and Singapore, Malaysia can be one of the beneficiary.
7. Respectable double digit teen earnings growth for corporate Malaysia - coupled with reasonable Price Earnings implies potential room for growth in stock prices!
8. Continuous reform of Government Linked Corporations - Most of them were doing fairly well in 2007, except for Telekom, Maybank, Tenaga and Proton. These companies look set to perform far better this year. Not forgetting, these companies have heavy weightage on the composite index.
   
9. Plantation sector still likely to be hot! The high CPO price will continue to be supported by demand for biodiesel (as long as crude oil prices remain high)
   
10. Last but not least, the General Election! Some Government or politically linked stocks are likely to fly towards the run up to election, judging by past history! I don't foresee any exception this time either!

This leaves the final jigsaw puzzle....stock picking! Good luck and all the best in your investment undertaking!

Investment Ideas for 2008 (From An American Perspective)

I recently came across this article written by Peter Coy of Business Week and i found it quite entertaining and well written, about his thoughts for 2008. He started off by saying this..."Choosing investments for 2008 is like trying to find a decent Christmas tree in a nearly empty lot. Stocks? Not with earnings expected to fall. Bonds? The safe ones are overpriced. Real estate? You gotta be kidding. With a credit crunch in full bloom, housing still on the skids, and a recession threatening, this is a singularly bad time to be hunting for assets that you can brag about owning a year hence."

True indeed, judging by what has happened so far in the sub-prime mortgage crisis that has taken the world, in particular US, by storm! It's a $23 trillion asset class (housing) that is in a deflation mode, is how he quoted. However, Peter did offer several rays of light, in tandem with several defensive strategies that focus on preserving wealth in trying times. Here's what he thinks:

- Invest in companies that have strong balance sheets and are relatively insulated from the woes of the American consumer. Good examples are health care and technology sector. The former thrives on whatever economic condition while the latter does extremely well from overseas markets, particularly Asia, which is expected to still experience roughly 8% growth this year!

- In fixed income, steer clear of structured products that may or may not be exposed to toxic subprime debt. Buy ultra-safe Treasuries or take just a smidgen of risk on municipal bonds, whose yields are more attractive for taxable accounts.

- Invest globally. Advisers have been saying for years that most Americans are overexposed to the ups and downs of the U.S. market because they keep almost all of their money at home.
That mistake looms larger now that the dollar is sliding, the U.S. economy is soft, and global growth is robust. This is the time to bone up on foreign securities and reallocate that 401(k). Also: Stash money in Treasury inflation-protected securities in case inflation accelerates.

- focus on companies with abundant free cash flow. Seek stocks whose prices are justified by solid, ongoing businesses rather than market speculation about riches to come.

- Watch out for Asian markets such as Singapore, South Korea, Malaysia, and Japan that do business with booming China and India but have lower PE's than those of the twin giants (China and India).

Meanwhile, the Federal Reserve will probably cut rates further if the U.S. economy continues to weaken, which could give stocks a shot in the arm, at least for the short term.

There could be more fiscal stimulus, too, if the White House tries to amp up growth ahead of the 2008 Presidential election. According to Stock Trader's Almanac 2008, the Standard & Poor's 500-stock index has risen in the final seven months of every election year since 1950 except one.

For the risk takers or the Contrarian, consider buying beaten-down banking stocks, which offer attractive dividend yields at current prices. The trick, however, is figuring out which banks have already come clean on their loan losses and which ones haven't.

So here you have it, some great investment ideas for 2008!

For the complete article, click this link now.