The Worst Is Over? Listen To What the Two Richest Men Have To Say

Capitalism is still alive and well, say the world's two richest men, despite lingering shocks from the longest, deepest recession since the Great Depression.

During a live interview in an auditorium filled with nearly 1,000 people at a CNBC-sponsored event at Columbia University in New York, Warren Buffett, the CEO of Berkshire Hathaway, and Microsoft founder Bill Gates fielded questions from Columbia Business School students on the recession and investing.

Most notably, Warren Buffett said that the financial crisis is behind us, and the bottom has come in stocks, therefore do not pass on something that's attractive today!

Both Buffett and Gates also agreed that although mistakes were made, the fundamentals of the American system and a marketplace-driven system where American invest in education and innovation, coupled with a great long term infrastructure, will continue and augurs well for the future of U.S."

To watch the video of Warren and Gates interview, click this link.

For the full article, visit Yahoo News

For Buffett's latest view on investment, click this link.

Money-printing Caused Market Rally?

What has caused the recent stock market rally across the globe? Too fast, too soon, as there are hardly sufficient evidence to fundamentally support a market euphoria? Here's another theory by the well-known commodity investor, Jim Rogers.

According to Rogers, the recent market rally is flooded with "artificial" liquidity as a result of the various printing money (technically known as Quantitative Easing) initiatives taken by central banks of certain developed countries, particularly U.S. As such, Rogers believe that the next financial meltdown will be in the currency markets.

Rogers claimed that he has bought the Yen because he expects the Japanese currency to withstand future problems, but he does not have short positions in any currency and is currently not buying the yen any more. However, Rogers has not shorted the U.S. dollar at the moment, although it may be at the peak.

Nevertheless, Rogers also believe that for the moment, currencies may look safer than anything else in the markets, as stocks may face a new bottom since they were artificially lifted by the amount of money created by central banks, but there are pitfalls ahead.

Rogers's view seem to coincide with the views of other legendary investors such as Warren Buffett....

Beware of the potential next currency crisis, particularly if you have exposure to multiple foreign currencies!

Options Trading For Beginners

Due to the current financial and economic crisis in U.S., I have started evaluating some stocks in the U.S. Before 2008, trading in U.S. stocks would certainly require deep pockets, particularly for myself due to my country's unfavourable exchange rates ($1 to RM3.5 on average). Never in my life could I imagine stocks in U.S. could one day be trading at such low prices! eg., financial giant like Citigroup trading below $1? GE trading below $6? There are many other examples, such as General Motors and AIG. Then of course, these stocks were trading at such low levels due to their own respective unprecedented crisis!

So I started putting some money into U.S. stocks and thankfully, i made some decent gains in a short period of time. Having a solid trading plan knowing when to enter and exit was the critical success factor. By the way, adopting buy and hold strategy no longer works these days in my opinion, due to the volatile nature of markets and frankly, no one knows for sure whether the markets have bottomed. So why take on the risk of hitting the unknown?

Precisely. But here's a problem. Investing in U.S. stocks means that I will still need to pump in a sizeable amount of money to trade (bearing in mind my unfavourable exchange rate)! There comes to my mind options trading which I had heard so many times before but have very little knowledge of. Options trading utilises the power of leveraging on stocks and is a very powerful form of derivative instrument. So powerful that even Mr. Warren Buffett is fearful of (as he recently criticised as one of the major cause of stock market crash).

As I recalled, I had contemplated to learn options trading in June last year but I dropped the notion because I was not ready then (Please refer to my archived post entitled "Do I Need Options"). Now I believe I am ready to explore this new frontier (new, at least for me...) and to uncover it's perceived power of leveraging and to unlock the myth of successful options trading.

Haven't attended numerous previews of Options Trading learning courses in the past and feedback from numerous ex-students and friends who ventured into options trading, I was certainly skeptical on which Options Trading trainer or course would actually deliver the goods. My attempted research through the internet was of little benefit too as no website content would reveal satisfactory practical knowledge on options trading. Finally, I had little choice but to take a calculated gamble by learning from a fee-based course.

Next I shall reveal which course I have selected and my ground up review.

Worst Ever Results For Berkshire: Warren Buffett

Berkshire Hathaway Inc. posted its worst results ever in 2008! Billionaire Warren Buffett said the economy “has fallen off a cliff” and that efforts to stimulate recovery may lead to inflation higher than the 1970s. Berkshire’s shares have lost almost half their value in the past year as the bear market dragged down financial assets and the recession put pressure on profit from the company’s more than 70 operating businesses. Berkshire’s fourth-quarter net income fell 96 percent to $117 million. Book value per share, slipped 9.6 percent for all of 2008, on the declining value of derivatives and the company’s stock portfolio.

He believes the bailouts of the banking system and “quasi-banks” such as AIG were necessary, even if everyone dislikes what’s been done to salvage the New York-based insurer. He favored insuring all bank deposits, and in response to a question about nationalizing lenders, Buffett said he doesn’t see any moral hazard in the U.S. seizing an institution when shareholders are already almost wiped out.

He also believes the root cause of the current crisis was that companies used too much leverage and “played games” such as creating special investment vehicles to keep producing earnings growth. The U.S. economy was not a "house of cards" over the past ten years, but mistakes were made when it came to borrowing money.

Other keynotes include the following:
- The American public is fearful, confused and changing their buying habits,
- The economy turnaround won't happen fast.
- Five years from now, the economy will be running fine. The strength of the American system will pull it through, just as it has many times in the past.
- Most banks are in "pretty good shape" and can "earn their way out" of the current problems given the low cost of funds. Banks, however, "need to get back to banking.";

- It is extremely important that the government make clear depositors won't lose their money if banks fail;

- Buffett wishes he had written the New York Times "Buy American" a few months later, but stands by the basic argument that one will do better over a ten-year period with stocks that one will with Treasuries. He said in the article he wasn't calling the bottom of the stock market, and he still isn't;

- Buffett says derivatives are not "evil" and to be avoided at all costs, but they are "dangerous" and should be used very carefully. He still expects to make money on the long-term "put option" equity derivative contracts Berkshire has written;

- Housing market could work through, or "sop up," its excess supply in as little as three years if new construction is reduced to a level below natural population growth;

- Mark-to-market accounting should be retained, but regulators shouldn't use it so much to require institutions to increase their reserves.

Here are the full videos of Warren Buffett's interview with CNBC. It's quite a long interview but well worth the time listening.

US Economy has fallen off the cliff


Q&A


Fear Affects Everyone


Banks should go back to basics


Crooks & Investment Advice


Investment Regrets


Automotive Bailouts


Deals and Opportunities


Finding the right solution


Advice for Obama


The rich to subsidize the poor


Final Thoughts

Warren Buffett's Words of Wisdom for 2009

Here's a special message from the one of the wealthiest man on earth and is worth your time reading and taking notes....It's simple yet powerful and meaningful.

"We begin this New Year with dampened enthusiasm and dented optimism. Our happiness is diluted and our peace is threatened by the financial illness that has infected our families, organisations and nations. Everyone is desperate to find a remedy that will cure their financial illness and help them recover their financial health.

They expect the financial experts to provide them with remedies, forgetting the fact that it is these experts who created this financial mess.

Every new year, I adopt a couple of old maxims as my beacons to guide my future. This self-prescribed therapy has ensured that with each passing year, I grow wiser and not older. This year, I invite you to tap into the financial wisdom of our elders along with me, and become financially wiser.

Spending: If you buy things you don't need, you'll soon sell things you need.

Savings: Don't save what is left after spending; spend what is left after saving.

Hard work: All hard work brings profit; but mere talk leads only to poverty.

Laziness: A sleeping lobster is carried away by the water current.

Earnings: Never depend on a single source of income.

Borrowings: The borrower becomes the lender's slave.

Accounting: It's no use carrying an umbrella, if your shoes are leaking.

Auditing: Beware of little expenses; a small leak can sink a large ship.

Risk-taking: Never test the depth of the river with both feet.

Investment: Don't put all your eggs in one basket.

I'm certain that those who have already been practicing these principles remain financially healthy.

I'm equally confident that those who resolve to start practicing these principles will quickly regain their financial health.

Let us become wiser and lead a happy, healthy, prosperous and peaceful life."

- Warren Buffet

Start Buying Now, Seriously?

This is a recent interesting article that i would like to share with my readers. The author claims that it is now the right timing to re-enter equity markets.

Warren Buffett proclaimed that it is now time to buy American stocks, and he certainly led by example. Bear in mind given that Warren is the top 2 richest man on earth, his words are definitely not to be taken lightly.

However, there are also many doomsayers who claim that the worst is yet to come. At the same time, many so-called investment gurus were criticising Warren. They said he was irrelevant to the new economy in 1999, when he refused to buy technology shares. They say he didn’t understand the situation when he said that financial derivatives were “financial weapons of mass destruction” back in 2002. And now they say that he is simply trying to talk up his own investments, when he said recently to “Buy America”. These things they say of the world’s most successful investor. Nobody remembers these “they”, but Warren Buffet continues to make loads of money from his investments.

The reasons in favour of things will get worse include:
1) This time is different, because this is an unprecedented global economic slowdown!
For this reason, the author argued that of course it's always different. After all, if it wasn’t different, no one would panic, and no one would sell their shares, and stock markets wouldn’t fall. However, he also argued that human race has always been able to find solutions to these problems and emerge stronger. This is one of the reasons world stock markets grow over the long term!

Point taken!

2) There's no clear sign that the recovery is in sight!
For this reason, the author argued that if we had clear signs, the stock markets would have gone up a lot, and you would have missed the opportunity to make profits. Stock markets always anticipate economic recoveries. By the time the analysts are able to report clear signs, we would be more than halfway to the top. The author also claim that some of the "clear signs" could well be the fiscal and monetary policy actions undertaken recently by various governments of different countries.

Valid point again!

3) The recession will last for another 3 quarters!
For this reason, the author argues that assuming this is true, three quarters means the last quarter of 08 and the first two quarters of 09. Let’s budget another quarter and say it goes on till the end of 3Q 09. Stock markets always recover before the economy does. So if stock investors all thought that the global economy would recover by end of 3Q 09, we ain't that far away....

Lastly, the author points to the "I wish I had bought" syndrome. Many investors surely have experienced this before and regretted not buying when the market was heavily trashed! The author's reasons for optimism include Malaysia's current low market Price Earnings (PE) valuation, supported with growing population and successful regionalization of many local businesses, which means many businesses are less dependent on one country's economy alone.

Nevertheless, the author further advised that make sure one invests with money one can set aside for at least three years, so that one will not be caught short having to sell at the wrong time, as market needs time to realise its potential!

Here you are. Do you agree now is the time to re-enter equity investment?

The above article was written by Moh Hon Meng, the co-founder and executive director of iFAST Corporation.

For the full article, click here.

It's Time To Be Greedy When Others Are Fearful?

The Master of value investing has to be no other than Warren Buffett himself. A couple of days ago, he made a personal call to suggest that now is the time to invest in the banished equity market. For the faithful fans of Warren Buffett, his statement carries a lot of weight and influence. Below is an extract of Warren's statement.

The financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts. |

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities."

For the original article, please visit this link.

In the past, there were at least 2 similar calls made by Warren. Following his first call in year 1974, the Dow Jones Industrial Average and the S&P 500 soared by 86% and 70%, respectively, over the next two years. His second call came in 1979 and two year after that, the S&P achieved an annualized return of 17.3%, nearly twice the average 9.6% return for bonds.

Is It Important To Time The Market?

For a long term type of investor such as Warren Buffett, timing the market does not appear to hold much degree of significance. After all, this type of investor believes that an undervalued company (coupled with solid fundamentals, management, etc) will find its feet ultimately and investors will "recognize" its value one day. This group of investors are generally seen as the minority group, as most of the others generally prefer to go for short-term or medium-term type of investment. For this majority, they will most likely argue that timing the market is of utmost significance. After all, catching a falling knife is likely to hurt one, badly!

So, who is right, who is wrong?

Most long term investors will argue that volatility in equity prices is an inherent part of investing. It takes courage, discipline and foresight to remain invested in the market, especially when the urge to avoid financial pain is strong. Investors may be prone to sell in a volatile market because they think they can wait until the market settles lower and go back in when the market starts to recover. This strategy seems to make common sense". However, the problem with this strategy is that they may miss their chances of missing the major market movements that signal the start of a longer recovery. Many of these major upside moves can happen quickly, often in just a few days.

Interestingly, a study conducted by a local asset management group on Malaysia's equity market (KLCI) has the following analysis.

• Missing five of the best trading days results in negative returns of 17.39%.
• Missing the 10 best trading days and the loss almost triples to 49.13%.
• Missing the 30 best trading days and the loss soars to 83.07%. This represents just 30 days out of approximately 3,807 trading days in total, or merely 0.79% of the total trading days
• An investor who remained invested throughout the last 15 years enjoyed returns of 82.25 per cent.

Nevertheless, how about if we assume an investor manages to avoid the worst trading days? The results of the study reveals the following:

• Remaining invested through- out the last 15 years gives returns of 82.25 %.
• Avoiding just the five worst trading days results in positive returns of 260.15%.
• Avoid the 10 worst trading days and the gain jumps to 413.62%.
• Avoid the 50 worst trading days and the returns are a phenomenal 3,266.59 %.

The results are far better than than the first scenario. However, the most fundamental question is whether the investor is able to have the foresight and timing to perfection to avoid those worst trading days? Quite likely, the answer is No, likewise no one is able to aim buying at the cheapest price!

Does this mean that investors should never attempt to time the market at all and buy at whatever time, even if the market is expected to sink further?

Certainly not.

In my view, first and foremost, we need to understand that timing the market does not equate to trying to mark an entry at the best possible pricing. It just means a way to minimize one's risk or what we call risk management. The best way of gauging the timing of the entry is by using tools such as technical analysis, i.e., enter the market only when there is an appropriate buying signal. Sceptics will argue that technical analysis is no crystal ball. It may be true somewhat but the key here is risk management. By using technical analysis, one can reduce the risk of getting it wrong. Why invest when the market has shown little sign of recovery or a sustainable recovery? Catching a falling knife can hurt the most! The current global crisis is the best case of example. Cheap stock prices and undervalued companies are aplenty, but when sentiment is against you, no fundamental holds as fear factor will over power any positive mindset!

In addition, it may also take years before the market recovers. For instance, the Dot Com burst in Year 2001 took around 2 to 3 years for full market recovery.

While it may appear sensible for investors with plenty of cash to just ignore the timing, buy and then put aside without ever looking at if for several years, many investors are simply not in the same league financially. The fact is many investors also do not possess the right emotional state to handle large amount of paper losses.

As such, the "safest" route for many, is still timing.

"Its not about being right or wrong, rather, its about how much money you make when you're right and how much you don't lose when you're wrong" - Quote by George Soros

However, for those who are not active investors, perhaps leaving it to the professionals may be the better option. However, be prepared to see your investment values erode as market will most likely not recover so soon.

For more details on the study, please click this link.

Saving Private Investment Bankers

Shortly after the AIG bailout, US Federal Reserve came up with another strategic move by allowing both struggling investment bankers Goldman Sachs and Morgan Stanley to convert to commercial bank holding companies. The move allows both companies broader access to borrow federal money and the ability to build a stable base of banking deposits.

However, they will now be scrutinized under Federal Reserve, which imposes a much tighter regulation, compared to the present Securities and Exchange Commission.

The move is to prevent further financial crisis experienced by the collapsed former investment bankers Bear Stearns, Merrill Lynch and Lehman Brothers.

Shortly after the event, savvy investment guru Warren Buffett's Bershire Hathaway is investing USD5billion in Goldman Sachs.

Time to follow the footstep of Warren Buffett?

Happy With A Savvy Investment Return!

This year has been a very challenging year in terms of the global investment climate...it has been series of negative events followed by another, don 't you agree? Same old concerns keep popping up, from sub-prime to credit crunch, escalating crude oil prices, inflation, etc! So the key question is how fast and how far the bugs are going to spread? God knows, really!

Some experts say 2009 will be the end of the boom cycle. To me, it appears more like 2008! Light at the end of tunnel? Well, may be traces of light at best but still dim, i should say!

Malaysia of course is no exception, although the country has not been hit so badly by credit crunch. However, the current political uncertainties have indeed thrown a large spanner, where speculations constantly alive that the leading opposition party may overturn the Government within the next few months! It does not help the fact that no opposition party has ever led the country to become the Governor. So i could understand the jitters everywhere, especially from abroad!

Like I always emphasize, it's good to diversify one's investment portfolio, instead of putting all in one basket! For the Warren Buffet fans, of course you would say otherwise?

Real estate property is definitely one of the most defensive and stable asset class of investment. Arguably the best hedge against inflation, and generally stands good against time. Of course there are some exceptions, particularly for places where huge price increase occurs and bubble formed. In the not so distant past, we have witnessed that happened for Hong Kong, followed by recently US residential market and Vietnam! Well, the good thing was at least they had a good run once upon a time!

Recently i manage to dispose off one of my real estate property for a decent 45% gain (gross) within 4 years! Not bad indeed! Not to mention the positive cash flows that I had been earning from rental income for the past 4 years too! My gross rental yield averaged 11% to 13% per annum! I have decided to cash out due to receiving an excellent offer at a time when the economic climate is going through rocky roads. I believe i could certainly keep the spare cash for the next better opportunity out there, especially during times of crisis!

Market timing – fool’s gold?

THERE are those who believe you cannot possibly time the market in terms of entry and exit. Fair enough.

The random walk theory lies in the fact that you cannot beat the market over the long term. But we also have the proliferation of hedge funds where managers get a lucrative 20% of profits kicker annually on gains. If the random walk theory is correct, then the “hedgies” would be a terrible business to be in.

The out performance relative to the benchmark is called the alpha. Hence the name of the popular website Seeking Alpha.

Out performance can be gained via market timing strategy and/or superior stock selection strategy, to simplify matters.

For this article, I am only looking at market timing.

If we could really predict the market's moves, market timing would be great.

The problem is that there is evidence to show that market timers do not do well.

An annual study by DALBAR, a research firm, showed that the average investor in equity funds has averaged only 4.3% per year in returns over the most recent 20-year period in which the S&P500 averaged 11.8% per year – and DALBAR finds that most of this under-performance of the basic market index is due to attempts to time the market.

There are a host of other studies that show that market timing leads to returns that substantially lag the market.

Even if there were a few funds out of the thousands that have proven to market time successfully and outperform consistently over a 5 or ten-year period, would it be smart to give them your money?

Essentially, you have to bet on these funds' ability to maintain their track record or on the long-term evidence pointing to the low success rate of market timing.

There is a large body of research, which concludes that actively-managed funds that beat the market in some period are not likely to continue to out-perform over any extended period.

In 1975, William Sharpe published a seminal article on this topic: “Likely Gains from Market Timing”.

In this article Sharpe demonstrated statistically that in order to benefit from a market timing strategy you had to guess right 74% of the time. Hence it is possible, but very arduous indeed.

Alpha is a definition only; it may or may not exist. For people to get alpha, they need to be better at market timing and price timing.

Warren Buffett obviously does not believe in market timing or price timing. He sees them as businesses, and for the right price he will buy the business regardless of sentiment.

He may even suffer short-term weakness or short-term losses holding these businesses, but he does not market time or price time his purchases. To him, if the price is cheap relative to future value, then it's good enough.

If market timing and price timing works for only 5% (1 person in 20 is about right) of participants (or even just 1%), all studies would reveal that market timing and price timing does not work as the results are not substantiated – hence the random walk theory.

Suffice to say that even if the 5% or 1% do make it work (which is what I strongly believe), it's just that much harder.

When things are that much harder, many will opt for easier routes such as buy at good price and hold, or buy the business and forget the volatility.

I am not saying I can do this well. I am not saying anyone can do this well. I am suggesting that one can do market timing and price timing well provided they get two things right – the big picture and the catalysts.

People like Buffett and Lynch are big picture guys, but you still need to get the catalysts right for market timing to work properly.

For example, Buffett has been short on USD since 2000 but he only made money over the last two years and lost some in the first 3 years. As for Soros, he is trying to be both. When he shorted the British pound and made billions, he got both right.

But even Soros cannot get both right all the time.

Getting the big picture right is the easy part. Determining the catalyst(s) for a dramatic change or trend swing is a lot harder.

Truth is, there is no known classes on catalysts like what is significant, what is not, the cumulative effect of several catalysts, catalysts for differing economic environment, how sentiment relates to catalysts and so forth.

If you see a bubble forming in an asset, say property, you can fairly judge the probable steps ahead for the market in coming to terms with the bubble: you project that prices will rise, there will be over-exuberance, followed by resistance to bearish calls, rising rates to counter inflation, prices stubbornly refusing to come down, start of some foreclosures, some concerns among banks, some leveraged property companies failing, rising foreclosures, a crisis being discussed by the media, and so on...

These are the natural chain of events, which make up catalysts in bringing to fruition changes to trends.

I do think that if someone learns to follow cycles and chain of events closely, they will be able to better time the market.

Someone who calls the Shanghai index overvalued at 4,500 on the way up would be a good read but a poor strategist. The index hit 6,500 before moving down to 4,000 six months later.

The pro is correct but if he made any money, he probably lost on the upside and if he kept short all the way from 4,500, he would have lost even more on a net basis.

One should have stayed invested as bull runs tend to overshoot, but stay alert to trade out on warning signs.

The listing of Petrochina on Shanghai was a “high” – how to recognise that as a critical catalyst? Experience, predicting capital flows and most importantly, predicting or anticipating the behaviour of investors.

Here are some recent examples:

·Subprime mess – Big picture calls were loud by mid-2007 but markets were still resilient. There were plenty of catalysts, but deciphering which one will break the camel's back is the hard part.

Sometimes, few cumulative catalysts are needed before the water overflows. I regard the second plunge of Countrywide to be a major catalyst, which prompted Bank of America to average down dramatically.

The other major catalyst was the Citigroup's write down, not of the CDOs holdings but because of the significant provisions made for future “problems with consumer debt”.

Thanks to CNBC and Bloomberg news, there is an overload of information. To be able to stand back and pick the real catalysts is nirvana, for want of a better word.

The key is getting the big picture right first. Then assess the catalysts accurately, but it can be an arduous task. If we still cannot market time or price time, then at least we know why we are not good at it.

To do well in market timing is like climbing the Everest. There are those who will make it to the top (very few, that is). Most will die trying halfway. Some will give up after a few inclines. Others will opt for hills instead.

(The above article is written by S. Dali, an ex-analyst/fund manager and active blogger on Malaysia finance matters.)

Are you a believer in timing the market? Do give me your views.

Should I Diversify My Investment?

Depending on which particular school of thought you belong to, the answer hinges on individual's perception on risks. Most people including savvy investors and financial planners claim you need to diversify to reduce your investment risk. If you don’t, they say, you could lose money. However, investment gurus like Warren Buffett (one of the richest billionaire on planet earth) said that when intelligent investors diversify, they WILL lose money. Therefore, if you can truly recognize a good investment, diversifying is not a good idea.

"We think diversification, as practiced generally, makes very little sense for anyone who knows what they’re doing. Diversification serves as protection against ignorance."
-Warren Buffett, as quoted by Sandman at Berkshire’s 1996 Annual Meeting

Peter Lynch, another investment guru, on the other hand, says that if you are afraid of losing money, then you obviously don’t know what you’re doing. And, if you don’t know what you’re doing– why are you investing in the first place?

"Buying what you know about is a very sophisticated strategy that many professionals have neglected to put into practice."
–Peter Lynch

By this same argument, Warren Buffett reasons that you should wait until you understand and analyze all of the information to make a potential investment. But when you do, you should jump in with both feet.

These sounded complete common sense to me, but however, does everyone has the same acute vision and analytical ability as well as these gurus are? Quite clearly, the answer is no. The probability of making mistakes or misjudgement of a particular asset's potential does even apply to many of the most savvy fund manager or investment gurus out there. While believing in own self does not always equate to correct judgement, this is the reason why we should all diversify in our investment portfolio in order to protect ourselves from the probability of making false judgement.

Putting all your eggs in one basket could potentially backfire, unless you absolutely know what you are doing. However, even so, mistakes, unforeseen or uncontrollable circumstances do happen!

On the other hand, i don't suggest anyone to overstretch the diversification too far until there is absolutely no weightage on any particular assets or investments. It may just shows that there is a genuine lack of confidence in what one is doing or simply, not done enough homework to be self-confident!

What's your view? Do you believe in diversification?

(Certain quotes of this article are extracted from an article posted in this link)

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.

Why Everyone Should be Wealthy!

Just come across this article by a fellow Malaysian in which I thought was very well written. Better still he is only 21 years old! Below is an extract:

"A lot of people have chosen to better themselves and work on becoming wealthy not for the purpose of achieving the high-class status per se. Yes, they want to better their lifestyle, enjoying what the world has got to offer but I dare say that this is not their main objective. Look at Warren Buffett for example. For those who does not know who he is, well, he is arguably the most famous value investors of all time. Warren Buffett, being the second richest man on earth, is still living in a house he bought in 1958 for $31,500. He doesn’t own many luxury cars at all. He also does his own taxes. You see, it doesn’t mean that you can’t live a simple life when you’re rich. Being rich just gives you more options.

Another thing, philanthropic efforts. Being rich gives you the option of being more involved with charities and humanitarian efforts. Yes, you can still donate to charities when you earn an average salary, but imagine the magnitude of help that you can provide if you’re a billionaire. How much can you give if you earn $60,000 per year versus how much can you give if you earn $60,000 per month?Also, think about this situation:

“You’re a doctor and you decide to volunteer yourself and spend some time in Africa to help the poor. On average, you are able to help 100 people per day.”

That sounds great right? Consider this situation:

“You are a billionaire and you decide to help the needy in Africa. You then hire 100 doctors and send them to Africa. On average, one doctor can treat 100 patients per day. That means, you are helping 10,000 people per day!”

So, which one is better?

Back to Warren Buffett, he recently pledged 83% of his wealth to Bill and Melinda Gates Foundation. That’s about 30 billion dollars!

Being financially free also opens an opportunity to not have to enslave yourself with working from 9 to 5. You get to do what matters most to your life. You can spend more time with your family, you can spend more time getting closer to God, and etc. A rich-man can also be a family-man. Also, now, stress is no longer an issue. I regard working for people from Monday to Friday, from 9 to 5, for 30 years, as a stressful lifestyle. You worry about money, you worry about time, you worry losing your job, and etc.

Yes, sometimes, we also worry about getting robbed and etc., but hey, if you keep a low-profile and lead a “simple life”, it wouldn’t be much of a problem would it? Also, who says that an “average” person doesn’t pose the risk of getting robbed? Referring to the excerpt above, I think that person is just worried about somebody harming his family, that’s all. Nothing wrong with that. People also spend a lot of money installing burglary alarm system in their homes. Are they saying “Hey, I’ve got a lot of valuables in my house that I need to install an alarm” ? I doubt it. They just care about their personal safety.

Let’s look at an example that is closer to home. Does the name Tan Sri Syed Mokhtar Al-Bukhary ring a bell? He’s a billionaire but rarely can we see him on TVs and magazines. He only uses a Proton Perdana and I heard somewhere that if you actually meet him in person, you’d be shocked to learn that he’s actually a billionaire. Also, his philantrophic efforts, my goodness, no need to comment on this. All I can say is, if we have more people like him, the world would be a much better place to live.

One might also argue that when you’re rich, you become arrogant. Surprise surprise, there are also heaps of arrogant “average” people.

Another thing, most people would like to have kids. Being rich, your kids’ education in the future is pretty much guaranteed. No need to worry about scholarships, and study loans. Giving your kids a headstart really is a nice thing to do, no?

Another interesting fact, there’s this millionaire that I heard of. He invests his money somewhere and uses the profits to sponsor people to go for their Hajj.

If we adopt a just-enough-to-spend attitude, what happens if something bad happens to us? What happens if we were downsized? What happens if one day you lose your ability to work because of an accident? What happens if, assuming you’re the breadwinner, you die. What’s going to happen to your family? Something to ponder upon…

I guess at the end of the day, you make your own life choices. You can become rich or become “average”. If you do become rich, then you can choose to lead an extravagant life or lead a “simple-life” instead. It really is up to you.

Money is just a tool. It is a tool that can help you and others. Just that, one needs to learn to not get obsessed with money too much that it clouds your judgement."

For the full article, please click this link.