Investment Made Easy

Investment Legends: Benjamin Graham

2007-03-18T13:44:00.000+03:00

Honoring Benjamin Graham The Father Of Value Investing

by Albert L. Auxier, Ph.D.
Associate Professor of Finance
University of Tennessee, Knoxville

Few Wall Streeters have been more observant nor more influential than Benjamin Graham. Perhaps the greatest tribute to Ben Graham comes from legendary Omaha investor and businessman, Warren E. Buffett. According to Forbes magazine's latest tally, Buffett, our richest American and arguably the world's greatest investor, is worth $8.3 billion. Buffett, says Forbes, credits his father, a stock broker and former congressman, with influencing him most, and next he credits Benjamin Graham. As a young man, Buffett was Ben Graham's student at Columbia University, and he was so impressed by Graham that he offered to work for him for nothing. But the great man turned him down! Which suggests that investment genius isn't always apparent at an early age. Buffett later did work for Graham, and he developed a tremendous respect for him.

Benjamin Graham was born in London in 1894 of jewish parents, and his family emigrated to America when he was a year old. When he was nine years old, his father died. The father's death was apparently not only an emotional loss for the family but caused financial hardship as well, and this scarring experience at a young, impressionable age surely left a lasting imprint on him. Graham was attracted to beautiful women, and they to him. One can only surmise whether this mutual attraction was the source of much pain and sorrow or much happiness. Graham died in 1976, but had he lived he would have been 100 years old on May 9th. Moreover, 1994 year is the 60th anniversary of the publication of his great work, Security Analysis: Principles and Technique, of which he was the lead author and which was coauthored by David L. Dodd.

(McGraw-Hill published the 5th and latest edition of this work in 1988 with new authors Sidney Cottle, Roger F. Murray, and Frank E. Block, and with the collaboration of Martin L. Leibowitz.) Graham and Dodd was the "bible" for serious students of investments for decades--and for many it still is.

Ben began his career on Wall Street in June, 1914, and near the end of his life, when he published the fourth revision of his investment philosophy in The Intelligent Investor: A Book of Practical Counsel, he had completed 57 years' experience on Wall Street. (Harper & Row, the publisher of The Intelligent Investor, has reissued this work with a new Preface and Appendix by Warren Buffett.) Ben Graham taught investments for 28 years at Columbia University, and perhaps his success as a professional investor is matched by his success as an academic, which is most unusual--most finance academicians are not noted investors. His published works have instructed many thousands of students and, indeed, his strength as an academic is derived from his many years experience on Wall Street.

We celebrate Benjamin Graham's 100th birthday--and the 60th anniversary of the publication of Security Analysis--by examining his investment philosophy. For this purpose, we rely heavily on The Intelligent Investor, which he considered more useful than Security Analysis to a young security analyst.

Father of Value Investing

Ben Graham is the Father of Value Investing. The essence of value investing is that any investment should be worth substantially more than an investor has to pay for it. This investment philosophy may seem like common sense, but strangely enough--as Ben might have put it--many investors are not careful to see that they receive good value for their money. Ben wasn't the first value investor. Bernard Baruch and other value investors predate him. In fact, the first value investor probably was a cave person. But Graham, among early Wall Streeters, did the most to invent a systemized body of investment knowledge. He built this body of knowledge through research and practice, and he disseminated it through his teaching and writings. Whereas, Ben Graham is considered the Father of Value Investing, he actually fathered the modern study of investments.

Margin of Safety Concept

Graham was most insistent that any security purchased should represent good value. He felt stocks should be bought like groceries, not like perfume, and he distilled his investment philosophy down to just three words, "MARGIN OF SAFETY".1 By margin of safety, he meant that any stock bought should be worth considerably more than it costs. He sometimes suggested at least 50 percent more. Stocks bought with a margin of safety give some assurance that one has invested wisely. And stocks bought with a margin of safety should be low risk, high return investments--the kind we all want.

How do you find stocks with a margin of safety? In part, they are found by avoiding stocks which are unlikely to possess this margin. Popular stocks are avoided since they are likely to be fully priced, and growth stocks are avoided since they tend to be popular and since they tend to perform poorly in bad markets. And you follow rules pertaining to low price/earnings ratios, low price/book value ratios, etc., which are designed to exclude stocks without a margin of safety.

Graham's advice to avoid growth stocks may be surprising. The reason is that great wealth is seldom achieved without growth stock investment, and Graham himself apparently amassed much of his fortune, while considerably enhancing his reputation, from a single growth stock. However, when Graham and his investment partners violated this principle, they controlled the firm and thus possessed inside knowledge of its affairs. Graham and partners held on to this stocks, too, because it had become "family business."2 In this case, they also violated Graham's often-stated admonition to be well diversified; 20 percent of their funds initially went into this one stock. Still, Graham's disdain for growth stocks--because they are often popular, tend to become overpriced in good markets, and tend to perform poorly in bad markets--is well founded.

Investment Performance Depends on Intelligent Effort

Graham disagreed with the usual postulated risk-return relationship, that is, to earn a higher return an investor must accept higher risk. To the contrary, he felt that the more intelligent effort one put into investing, the better the bargains bought. And the better the bargains, the lower the risk. Thus intelligent investing provides high yields and low risk. Finance academicians often fail to appreciate this point.

Investment Versus Speculation

The distinction between investment and speculation is central to Graham's investment philosophy. He defined these terms thusly: "An investment operation is one which, upon thorough analysis promises safety of principal and adequate return. Operations not meeting these requirements are speculative."3 Based on this distinction, a speculator is either taking substantial risk or is not knowledgeable. While "speculation is always fascinating," Graham believed that for most speculators it is not "fattening to the pocketbook."4 Speculation is akin to gambling, and Graham warned that one must be vigilant so as not to unconsciously slip into this mode.

Defensive Versus Enterprising Investors

Another distinction Graham makes is the difference between a defensive and an enterprising (aggressive) investor. A defensive investor is one who hasn't the time, knowledge or temperament to realistically seek superior investment returns. Since most investors do not possess these requirements, it is logical that most investors should be defensive investors. The defensive investor should follow simple, mechanistic rules, such as selecting a diversified portfolio of low price/earnings ratio stocks which are designed to produce a conservative portfolio with average or a little better performance. Conversely, the enterprising investor has a great deal of time and knowledge to devote to investing, and he or she possesses the requisite temperament.

The enterprising investor is seeking superior performance, although Graham emphasized that it is difficult for even professionals to achieve superior results. The enterprising investor seeks superior performance through the application of rules similar to those applied by the defensive investor, but with greater flexibility in their application, through applying greater effort and knowledge, and perhaps through being more venturesome.

Bond Versus Stock Investment

Graham believed that the division of one's portfolio between stock and bonds is a basic policy decision. He advised the defensive investor always to have at least 25 percent of his or her assets in bonds and at least 25 percent in stock. But he obviously felt it preferable for defensive investors to shoot for a fifty-fifty split of their assets between high grade stock and high grade bonds.

Why always some stock and some bonds? Graham believed that stock cannot always offer better value than bonds. Especially when the stock market is dangerously high, bonds will offer better value than stock. Conversely, bonds cannot always offer better value than stock. In particular, Graham believed that stock offers better inflation protection than bonds. Implicit in these recommendations is Graham's belief that investors really don't have good ability at any given time to tell whether stocks or bonds are the better investment. So the intelligent thing to do is to be well represented in both types of investments.

Suppose that an investor wishes to add to bonds and reduce stocks as the stock market becomes overpriced, and to reverse these operations as the market becomes underpriced. As one consideration in making these decisions, Graham cautiously suggested comparing the earnings/price ratio for stock with the interest yield on high grade bonds. For example, if the earnings/price ratio for stock is about the same as the yield for bonds, then the stock market is probably high, and the enterprising investor might consider selling some stock and buying some bonds. But any investor should be cautious thinking he or she knows the market is high or low.

How long should the bond maturities be? Graham felt that this decision is largely a personal one. Longer maturity bonds tend to yield more than shorter maturity bonds. But if an investor does not wish the value of his or her bond portfolio to fluctuate much with interest rate changes, then he or she should select bonds with a maturity of seven years or less.

Famous Mr. Market Parable

Stocks will fluctuate substantially in value. For a true investor, the only significant meaning of price fluctuations is that they offer ". . . an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal."

Using his famous Mr. Market parable, Graham suggests the attitude one should adopt toward fluctuations in prices. Imagine owning a $1,000 interest in a business along with a partner, Mr. Market. Every day the accommodating Mr. Market offers either to buy your interest or to sell you a larger interest. Sometimes his price is ridiculously high, allowing you a good opportunity to sell. At other times his price is ridiculously low, allowing you a good opportunity to buy. Still at other times, his quotes are roughly justified by the business outlook, and you can ignore them.

The point is that the market is there for your convenience and profit. And market valuations are often wrong. Price fluctuations, Graham believes ". . . bear no relationship to underlying conditions and values."6 It is a mistake, he argued, to let the market determine what stocks are worth. "In an astonishingly large proportion of the trading in common stocks," Graham stated, "those engaged therein don't appear to know--in polite terms--one part of their anatomy from another." Generally an investor will be wiser to form independent stock valuations, and then to exploit divergences between those valuations and the market's prices.

Graham's Mr. Market parable is related to his view of technical analysis. According to Graham, nearly all of technical analysis is based on buying stock when prices have risen and selling when they have fallen. Based on over 50 years' experience, he had ". . . not known a single person who had consistently or lastingly made money by thus 'following the market.'" This approach, he declared, ". . . is as fallacious as it is popular."

Graham Declines to Predict Earnings

In The Intelligent Investor, Graham evaluated the investment merit of several stocks, but not once did he predict earnings for those stocks. (On other occasions, however, he did venture to predict earnings.) For instance, at the conclusion of his analyses of ELTRA and Emhart stocks, he concluded, "We make no predictions about the future earnings performance. . ."

That Graham, an eminent security analyst, should decline to predict earnings is intriguing. He obviously did not have much confidence in his ability to predict earnings--nor in others' predictions, especially long-term predictions. Sophisticated investors have always been aware of this difficulty. For instance, John Maynard Keynes, the brilliant British economist, more than a half-century ago emphasized the great difficulty involved in forecasting investment returns. In regard to this difficulty,
Keynes said:

The outstanding fact is the extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made. Our knowledge of the factors which will govern the yield of an investment some years hence is usually very slight and often negligible. If we speak frankly, we have to admit that our basis of knowledge for estimating the yield ten years hence of a railway, a copper mine, a textile factory, the goodwill of a patent medicine, an Atlantic liner, a building in the City of London amounts to little and sometimes to nothing; or even five years hence. In fact, those who seriously attempt to make such estimates are often so much in the minority that their behavior does not govern the market.

Graham apparently felt that earnings forecasting is too inaccurate to be useful, given that the market already incorporates the consensus estimate. There also is danger of double counting for good earnings prospects. When this occurs, the market price allows for the good prospects but the investor counts them again.

Apparently because of such problems, Graham believed that the security valuation process is not very reliable. After discussing some problems valuing ALCOA, Graham said, "ALCOA is surely a representative industrial company of huge size. . .[it] supports to some degree, the doubts we expressed [earlier] as to the dependability of the appraisal process when applied to the typical industrial company." Because the appraisal process is unreliable, it is prudent to diversify one's investments. Perhaps it is enough, Graham thought, for an investor to be assured that he or she is getting good value, even if an accurate valuation is impossible.

Finally, the inherent inaccuracy of this valuation process may explain Graham's observation that he had never ". . . seen dependable calculations made about common-stock values . . . that went beyond simple arithmetic or the most elementary algebra." In valuing stock, crude, simple calculations often are as good as you can do.

The Prevalent Approach to Investing Often Does Not Work

The prevalent approach to investing is first to choose the best industry, and then to invest in the best company in that industry, regardless of the stock's price. Graham did not think well of this approach because he believed it was too unreliable. Good business does not always translate into good investment returns, and even the experts have difficulty selecting and concentrating on those issues which will become winners. Finally, the application of this method may place an investor in popular, overvalued stocks.

Select Low Price/Book Value Stocks

Graham felt rather strongly that an investor should not pay much more than book value for a stock. In his word, "Strangely enough we shall suggest as one of our chief requirements . . . that our readers limit themselves to issues selling not far above their tangible-asset value." He advised conservative (defensive) investors not to pay above one-third more than book value, and aggressive (enterprising) investors not to pay above 20 percent more than book value.

Graham's bias against high price-to-book value stocks is simply explained: These stocks tend to be popular, speculative, overpriced and more risky. Often, popular growth stocks fall into this category and should be avoided. It is paradoxical, Graham thought, that our most successful companies should be avoided for investment purposes.

Selecting Unpopular Stocks

If an investor is to do better than average, Graham argued that his or her investment policies should not be popular. He believed that most Wall Street professionals tend to seek out stocks with the best growth prospects and to ignore other stocks. This bias causes unpopular stocks to become undervalued and good buys. "It would be rather strange", Graham suggested, "if--with all the brains at work professionally in the stock market--there could be approaches which are both sound and relatively unpopular. Yet our career and reputation have been based on this unlikely fact." An investor who follows the crowd is unlikely to experience even average results, if for no other reason because of transactions costs.

Still, profiting by buying an unpopular or neglected stock, or selling short a popular, overvalued stock is no easy road to riches.16 "Buying a neglected and therefore undervalued issue for profit," Graham cautioned, "generally proves a protracted and patience-trying experience. And selling (short) a too popular and therefore overvalued issue is apt to be a test not only of one's courage and stamina but also of the depth of one's pocketbook." Graham's thoughts here are reminiscent of the famed Gerald Loeb's view that "Successful investment is a battle for financial survival."

Investment in Secondary Stocks

Investors have a distinct preference for the more successful, large (primary) firm stocks. Therefore, Graham reasoned, bargains are more likely to be discovered among the comparatively unpopular, neglected smaller (secondary) firm stocks. Today, a rather arbitrary dividing line between large and small firms is $400 million of outstanding common stock value. Often the large company stocks are referred to as large capitalization ("cap" for short) stocks and the small company stocks as small cap stocks. A carefully selected, diversified portfolio of secondary stocks is safe enough for an aggressive (enterprising) investor, but Graham suggested that these stocks are too risky for the conservative (defensive) investor. Graham's rationale can be summarized as follows: secondary stocks sell for less than primary stocks except during the later stages of a bull market. If bought at a bargain price, they often later can be sold at or near their full market value.

Net Current Asset Bargain Stocks

Net current assets as defined by Graham are current assets less all the firm's debt (both long-term and short-term) divided by the number of shares outstanding. This net current asset figure assumes zero value to long-term assets (plant and equipment, etc.) and goodwill, such as valuable brand names.

No sensible business owner would sell his or her business so cheaply, Graham declared, and yet historically these investments were plentiful. Graham's experience with these investments was almost universally good. "Can one really make money in (these issues) without taking a serious risk?", Graham asked. "Yes indeed", he replied, "if you can find enough of them to make a diversified group, and if you don't lose patience if they fail to advance soon after you buy them." While Graham prized a diversified group of these investments, the patience required can be considerable, he warned, in one case for him taking three and one-half years to work well. Furthermore, in modern markets, apparently only in the lower reaches of a protracted bear market can enough of these investments be found for proper diversification.

Did Graham Insist on a Sure Thing?

It is too strong to say that Graham insisted on a sure thing, but he clearly wasn't much of a risk taker. In his own words, "From the first we wanted to make sure that we were getting ample value for our money in concrete, demonstrable terms. We were unwilling to accept the prospects and promises of the future as compensation for a lack of sufficient value in hand." Graham is proof that successful investment need not be risky investment

Enthusiasm on Wall Street Is Dangerous

Graham warned ". . . that while enthusiasm may be necessary for great accomplishments elsewhere, in Wall Street it almost invariable leads to disaster."21 He didn't explain his rationale for this view, but enthusiasm destroys our critical faculties and leads us to believe we have a "sure thing". Coupled with greed, thinking an investment is a sure thing is most dangerous. We tend to bet heavily on the stock, forgetting the legendary Bernard Baruch's warning that every investment is something of a gamble.22 Moreover, enthusiasm leads a person into speculation, which Graham greatly deplored.

Investment Experience and Stock Market History Are Important

Ben Graham's 57 years on Wall Street were most instructive, and he expressed his appreciation to them when he alluded to his "old ally, experience". To an important extent, you learn to invest by investing. Too often we have to make the same mistake as others before the lesson is instructive. All of us, it seems, must learn through the school of hard knocks. We would do better to learn from the likes of Ben Graham.

Graham was a careful student of stock market history, and he placed great emphasis on it. He thought that "No statement is more true and better applicable to Wall Street than the famous warning of Santayana: `Those who do not remember the past are condemned to repeat it.'" Graham could ridicule investors grasp of stock market history, referring to their "proverbial short memories".

It was Graham's knowledge of the long sweep of stock market history that prompted his view that ". . . the investor may as well resign himself. . .to the probability . . . that most of his holdings will advance, say, 50% or more from their low point and decline the equivalent one-third or more from their high point at various periods in the next 5 years." Historical insight is critical to successful investing. It is only through knowledge of the past that we can tell anything about the future.

Using an Investment Advisor

A great majority of investors are amateurs, and naturally many of these investors turn to professionals for advice. Yet there is something naive, Graham cautioned, about asking others how to make money. Unless an investor has an intimate and favorable knowledge of the advisor, Graham suggested the investor limit his or her investments to "conservative and even unimaginative forms". The main benefit of a professional advisor, Graham argued, is to protect the investor from costly mistakes, not to beat the averages.

Wall street historically has prospered from speculation, according to Graham, but he believed that speculators themselves on the whole lose money. "Hence," he stated, "it has been logically impossible for brokerage houses to operate on a thoroughly professional basis." What is in the best interests of brokers--that is, maximizing commissions--is not in the best interests of investors.

Mutual Fund Investment

Despite mutual funds on average not performing as well as the popular stock indices, Ben Graham believed most individuals who have invested in mutual funds have fared better than they otherwise would have fared. If an investor does not opt for a mutual fund, Graham thought that "untoward influences" often incline him or her in the direction of speculation.

For those interested in mutual funds, Graham recommended buying a group of closed-end investment company shares selling at a discount to their net asset values. These funds, he argued, have an advantage over even no-load funds because the investor purchases them for less than what the funds' underlying stock is worth in the market.

But bonds should be bought directly and not through a fund, according to Graham. Presumably he felt that most investors can obtain satisfactory bond diversification without paying a fee to the mutual fund management firm. Furthermore, diversification, while still important, may be less critical in the case of high grade bonds, which is the type he generally recommended. Nevertheless, many financial advisors will argue that for less knowledgeable, smaller investors, no-load, low-fee high grade bond funds offer sound diversification for a reasonable fee.

Sampling Ben Graham's Writing

Ben Graham wrote well. The following quotes are suggestive of his writing and further reveal his investment philosophy.

In regard to market fluctuations: "Everyone knows that speculative stock movements are carried too far in both directions, frequently in the general market and at all times in at least some of the individual issues."

Why bargains occur: "The market is fond of making mountains of molehills and exaggerating ordinary vicissitudes into major setbacks. Even a mere lack of interest or enthusiasm may impel a price decline to absurdly low levels."

On stock market forecasts: "(I)t is absurd to think that the general public can ever make money out of market forecasts."

A classic definition of a shrewd investor: "(O)ne who bought in a bear market when everyone else was selling and sold out in a bull market when everyone else was buying."

The powerful pull of the crowd: "(E)ven the intelligent investor is likely to need considerable willpower to keep from following the crowd.:

Difficulty predicting security price movements: "If it is virtually impossible to make worthwhile predictions about the price movements of stocks, it is completely impossible to do so for bonds."

The rationale for diversification: "It appears to be almost impossible to distinguish in advance between those individual [stock] forecasts which can be relied upon and those which are subject to a large chance of error. At bottom, this is the reason for . . . diversification . . ."

Long-term forecasts are unreliable: "No one really knows anything about what will happen in the distant future, but analysts and investors have strong feelings on the subject just the same."

Difficulty evaluating management: "Until objective, quantifiable, and reasonably reliable tests of managerial competence are devised and applied, this factor will continue to be looked at through a fog."

Money managers promising miracles: "Bright, energetic people--usually quite young--have promised to perform miracles with 'other people's money' since time immemorial . . . they have inevitably brought losses to their public in the end."

Safety with a security residing in earnings--not collateral: "Experience has shown that in most cases safety resides in the earning power, and if this is deficient the assets lose most of their reputed value."

Will Graham Make You Rich?

Few investors--except in old age--will get rich adhering strictly to Graham's investment philosophy. His conservative, diversified approach for most practitioners is likely to yield investment results only a little better than average. His aim is to assist investors to obtain good value for their money- -not to make them rich quick. Graham believed that this is the only legitimate function for an investment advisor. Most investors would do well to achieve such results because professional investors on average do not fare so well. Still, it would be good to remember Graham`s caution that:

(A)ny approach to moneymaking in the stock market which can be easily described and followed by a lot of people is by its terms too simple and too easy to last. Spinoza`s concluding remark applies to Wall Street as well as to philosophy: "All things excellent are as difficult as they are rare."

Ben Graham offers a keen insight into moneymaking and a wise philosophy. The investment principles he enunciated are timeless. The seeker of investment truth will discover in the old sage a gold mine of wisdom, one who creditably promises a "fattening of the pocketbook", and a fine companion as well. We would do well before we make our next commitment to think his motto, MARGIN OF SAFETY.

Investment Legends: Philip Fisher

2007-03-17T12:40:00.000+03:00

The late Phil Fisher was one of the great investors of all time and the author of the classic book Common Stocks and Uncommon Profits. Fisher started his money management firm, Fisher & Co., in 1931 and over the next seven decades made tremendous amounts of money for his clients. For example, he was an early investor in semiconductor giant Texas Instruments TXN, whose market capitalization recently stood at well over $40 billion. Fisher also purchased Motorola MOT in 1955, and in a testament to long-term investing, held the stock until his death in 2004.

Fisher's Investment Philosophy

Fisher's investment philosophy can be summarized in a single sentence: Purchase and hold for the long term a concentrated portfolio of outstanding companies with compelling growth prospects that you understand very well. This sentence is clear on its face, but let us parse it carefully to understand the advantages of Fisher's approach. The question that every investor faces is, of course, what to buy? Fisher's answer is to purchase the shares of superbly managed growth companies, and he devoted an entire chapter in Common Stocks and Uncommon Profits to this topic. The chapter begins with a comparison of "statistical bargains," or stocks that appear cheap based solely on accounting figures, and growth stocks, or stocks with excellent growth prospects based on an intelligent appraisal of the underlying business's characteristics.

The problem with statistical bargains, Fisher noted, is that while there may be some genuine bargains to be found, in many cases the businesses face daunting headwinds that cannot be discerned from accounting figures, such that in a few years the current "bargain" prices will have proved to be very high. Furthermore, Fisher stated that over a period of many years, a well-selected growth stock will substantially outperform a statistical bargain. The reason for this disparity, Fisher wrote, is that a growth stock, whose intrinsic value grows steadily over time, will tend to appreciate "hundreds of per cent each decade," while it is unusual for a statistical bargain to be "as much as 50 per cent undervalued."

Fisher divided the universe of growth stocks into large and small companies. On one end of the spectrum are large financially strong companies with solid growth prospects. At the time, these included IBM IBM, Dow Chemical DOW, and DuPont DD, all of which increased fivefold in the 10-year period from 1946 to 1956.

Although such returns are quite satisfactory, the real home runs are to be found in "small and frequently young companies… [with] products that might bring a sensational future." Of these companies, Fisher wrote, "the young growth stock offers by far the greatest possibility of gain. Sometimes this can mount up to several thousand per cent in a decade." Fisher's answer to the question of what to buy is clear: All else equal, investors with the time and inclination should concentrate their efforts on uncovering young companies with outstanding growth prospects.

Fisher's 15 Points

All good principles are timeless, and Fisher's famous "Fifteen Points to Look for in a Common Stock" from Common Stocks and Uncommon Profits remain as relevant today as when they were first published. The 15 points are a qualitative guide to finding superbly managed companies with excellent growth prospects. According to Fisher, a company must qualify on most of these 15 points to be considered a worthwhile investment:

Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years? A company seeking a sustained period of spectacular growth must have products that address large and expanding markets.
Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited? All markets eventually mature, and to maintain above-average growth over a period of decades, a company must continually develop new products to either expand existing markets or enter new ones.
How effective are the company's research-and-development efforts in relation to its size? To develop new products, a company's research-and-development (R&D) effort must be both efficient and effective.
Does the company have an above-average sales organization? Fisher wrote that in a competitive environment, few products or services are so compelling that they will sell to their maximum potential without expert merchandising.
Does the company have a worthwhile profit margin? Berkshire Hathaway's BRK.B vice-chairman Charlie Munger is fond of saying that if something is not worth doing, it is not worth doing well. Similarly, a company can show tremendous growth, but the growth must bring worthwhile profits to reward investors.
What is the company doing to maintain or improve profit margins? Fisher stated, "It is not the profit margin of the past but those of the future that are basically important to the investor." Because inflation increases a company's expenses and competitors will pressure profit margins, you should pay attention to a company's strategy for reducing costs and improving profit margins over the long haul. This is where the moat framework we've spoken about throughout the Investing Classroom series can be a big help.
Does the company have outstanding labor and personnel relations? According to Fisher, a company with good labor relations tends to be more profitable than one with mediocre relations because happy employees are likely to be more productive. There is no single yardstick to measure the state of a company's labor relations, but there are a few items investors should investigate. First, companies with good labor relations usually make every effort to settle employee grievances quickly. In addition, a company that makes above-average profits, even while paying above-average wages to its employees is likely to have good labor relations. Finally, investors should pay attention to the attitude of top management toward employees.
Does the company have outstanding executive relations? Just as having good employee relations is important, a company must also cultivate the right atmosphere in its executive suite. Fisher noted that in companies where the founding family retains control, family members should not be promoted ahead of more able executives. In addition, executive salaries should be at least in line with industry norms. Salaries should also be reviewed regularly so that merited pay increases are given without having to be demanded.
Does the company have depth to its management? As a company continues to grow over a span of decades, it is vital that a deep pool of management talent be properly developed. Fisher warned investors to avoid companies where top management is reluctant to delegate significant authority to lower-level managers.
How good are the company's cost analysis and accounting controls? A company cannot deliver outstanding results over the long term if it is unable to closely track costs in each step of its operations. Fisher stated that getting a precise handle on a company's cost analysis is difficult, but an investor can discern which companies are exceptionally deficient--these are the companies to avoid.
Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition? Fisher described this point as a catch-all because the "important clues" will vary widely among industries. The skill with which a retailer, like Wal-Mart WMT or Costco COST, handles its merchandising and inventory is of paramount importance. However, in an industry such as insurance, a completely different set of business factors is important. It is critical for an investor to understand which industry factors determine the success of a company and how that company stacks up in relation to its rivals.
Does the company have a short-range or long-range outlook in regard to profits? Fisher argued that investors should take a long-range view, and thus should favor companies that take a long-range view on profits. In addition, companies focused on meeting Wall Street's quarterly earnings estimates may forgo beneficial long-term actions if they cause a short-term hit to earnings. Even worse, management may be tempted to make aggressive accounting assumptions in order to report an acceptable quarterly profit number.
In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders' benefit from this anticipated growth? As an investor, you should seek companies with sufficient cash or borrowing capacity to fund growth without diluting the interests of its current owners with follow-on equity offerings.
Does management talk freely to investors about its affairs when things are going well but "clam up" when troubles and disappointments occur? Every business, no matter how wonderful, will occasionally face disappointments. Investors should seek out management that reports candidly to shareholders all aspects of the business, good or bad.
Does the company have a management of unquestionable integrity? The accounting scandals that led to the bankruptcies of Enron and WorldCom should highlight the importance of investing only with management teams of unquestionable integrity. Investors will be well-served by following Fisher's warning that regardless of how highly a company rates on the other 14 points, "If there is a serious question of the lack of a strong management sense of trusteeship for shareholders, the investor should never seriously consider participating in such an enterprise."

Important Don'ts for Investors

In investing, the actions you don't take are as important as the actions you do take. Here is some of Fisher's advice on what you should not do.

1. Don't overstress diversification.
Investment advisors and the financial media constantly expound the virtues of diversification with the help of a catchy cliche: "Don't put all your eggs in one basket." However, as Fisher noted, once you start putting your eggs in a multitude of baskets, not all of them end up in attractive places, and it becomes difficult to keep track of all your eggs.

Fisher, who owned at most only 30 stocks at any point in his career, had a better solution. Spend time thoroughly researching and understanding a company, and if it clearly meets the 15 points he set forth, you should make a meaningful investment. Fisher would agree with Mark Twain when he said, "Put all your eggs in one basket, and watch that basket!"

2. Don't follow the crowd.
Following the crowds into investment fads, such as the "Nifty Fifty" in the early 1970s or tech stocks in the late 1990s, can be dangerous to your financial health. On the flip side, searching in areas the crowd has left behind can be extremely profitable. Sir Isaac Newton once lamented that he could calculate the motion of heavenly bodies, but not the madness of crowds. Fisher would heartily agree.

3. Don't quibble over eighths and quarters.
After extensive research, you've found a company that you think will prosper in the decades ahead, and the stock is currently selling at a reasonable price. Should you delay or forgo your investment to wait for a price a few pennies below the current price?

Fisher told the story of a skilled investor who wanted to purchase shares in a particular company whose stock closed that day at $35.50 per share. However, the investor refused to pay more than $35. The stock never again sold at $35 and over the next 25 years, increased in value to more than $500 per share. The investor missed out on a tremendous gain in a vain attempt to save 50 cents per share.

Even Warren Buffett is prone to this type of mental error. Buffett began purchasing Wal-Mart many years ago, but stopped buying when the price moved up a little. Buffett admits that this mistake cost Berkshire Hathaway shareholders about $10 billion. Even the Oracle of Omaha could have benefited from Fisher's advice not to quibble over eighths and quarters.

The Bottom Line

Philip Fisher compiled a sterling record during his seven-decade career by investing in young companies with bright growth prospects. By applying Fisher's methods, you, too, can uncover tomorrow's dominant companies.

How I Reduce My Investment Risk

2007-03-12T23:47:00.000+03:00

How I Reduce My Investment Risk by Jim Pretin

Ideally, investors try to buy a stock when the price has reached a support level (a level at which the price is as low as it will go) and sell the stock when it hits a resistance level (a level at which the price is as high as it will go). This is easier said than done. Most investors end up missing out on a continual rise by waiting for a stock to plummet first, or sell way to early by underestimating how high the price will go. In this article, we will focus on the two most popular strategies that you can use to invest without having to worry about market timing.

Dollar cost averaging (DCA) is an investing technique intended to reduce exposure to risk associated with making a single large purchase. According to this technique, shares of stock are purchased in a specific amount on a specified periodic basis (often monthly), regardless of current performance. The theory is that this will lead to greater returns overall, since smaller numbers of shares will be bought when the cost is high, while larger number of shares will be bought while the cost is low.

An example of DCA would be as follows: If I want to buy 1,200 shares of IBM stock using DCA, then I might decide to purchase 400 shares of IBM per month over the course of the next three months. Hypothetically, during month one, the price of IBM may be $105 per share, and then it might drop to $95 per share during month two, and then rise to $100 during month three. If I bought all 1,200 shares during month one, I would have cost me $105 per share. But, by spreading the purchase over a three month period, I managed to buy IBM at an average price of $100 per share.

The primary drawback of using DCA is that you may not be maximizing your overall return. If there is an indication that a certain stock is currently undervalued and might shoot up in price, you would actually make less money using DCA than if you had bought all the shares in the beginning before the price skyrocketed. So, it is not always a winning strategy to spread your purchases over a period of time.

Value averaging, also known as dollar value averaging (DVA), is a technique of adding to an investment portfolio to provide greater return than similar methods such as dollar cost averaging and random investment. With the method, investors contribute to their portfolios in such a way that the portfolio balance increases by a set amount, regardless of market fluctuations. As a result, in periods of market declines, the investor contributes more money, while in periods of market climbs, the investor contributes less.

Here is an example of DVA: I want to invest in Yahoo using DVA. For the sake of argument, we will say that Yahoo is currently $10 per share. I determine that the value of the amount I am going to invest over the course of 1 year will rise, on average, $1,000 each quarter as I make additional investments. If I use DVA, I invest $1,000 to start. If, at the end of the first quarter, the share price has risen to $15 per share, that means that the value of my investment is now $1,500, which means I will only have to invest $500 at the start of the second quarter in order to bring the total amount of my investment for the first and second quarter to $2,000. So, I am investing less as the stock price increases.

Dollar value averaging usually works better than cost averaging because value averaging results in less money being invested as the stock price goes up, whereas with cost averaging you continue to invest the same number of dollars regardless of the share price. But, neither of these strategies are necessarily full-proof. Make sure you know something about the company you are going to invest in before you go forward.

Jim Pretin is the owner of http://www.forms4free.com, a service that helps programmers create a free HTML form with the code to email the HTML form responses.

Article Source: Free Article Depot

The Four WORST Things You Can Do As An Investor

2007-03-08T21:23:00.000+03:00

The Four WORST Things You Can Do As An Investor - By: Joe Harris

Number one: don’t stop reading. Too many investors see these common failures and simply brush past them, thinking "How could I possibly fall into the category of the average investor? I'm smarter than all of this; I can't be subject to these kinds of
mistakes..."

...WRONG

More investments go sour from these different 'mistakes' than any other obstacle you'll face in your investing career. So please, do yourself a favor and keep reading. And keep an open mind too.

Number two is fear. There are two ends to the spectrum here so you have to find a middle ground. The most common is being afraid of cutting your losses. Don't stay in simply hoping it will get better, or you'll dig yourself a much deeper hole. What's worse is being afraid to make any mistakes at all. This has kept many of us from jumping into a sound investment. Just keep in mind that you won't be able to win if you're not even playing the game.

The second half of this is not fearing anything. Having that little voice of reason in your head can keep you from throwing away a lot of money. If this sounds like you, you're cure is risk management. Take the necessary precautions to set explicit limits as to when you get out of any investment, no matter the outcome. Follow the rules you set for yourself to keep your investing safe.

Next on the list: ignorance. I can’t believe how eager people are to jump into the system and try to start making money without learning the game. You need to have a passion for learning everything in the market. By studying what you’re up against and becoming knowledgeable about what you’re doing specifically you’ll have a far greater advantage than any other trader.

The big step: figure out what you do and don’t know. It’s harder than it sounds but by doing so you’ll give yourself an honest approach to making yourself better.

Finally we come down to an investor’s greatest enemy: greed. People are gullible...YOU are gullible. Too many people get sucked into the “miracle investment” that promises the amazing returns while hiding the major risks. Do your homework. If you take care of your professional ignorance above, greed should never get the best of you.

It’s your money we’re talking about here. You should be able to look at each investment objectively to ensure your financial safety. Armed with these easy techniques you’ll be able to become a major player in the world of investing in no time.

Number one: don’t stop reading. Too many investors see these common failures and simply brush past them. More investments go sour from these different 'mistakes' than any other obstacle you'll face in your investing career. So take the time to guarantee that you don't suffer from them too...

Joe Harris provides all the proven stock market investing tools you need to succeed today, including investments in the gold market. Keep looking around the site to find everything you need to boost your investing career!

Making Riskier Investments: Know The Options

2007-03-05T02:26:00.000+03:00

Making Riskier Investments: Know The Options
By Edward Smithers

Commercial forestry holdings

The advantage of this investment is that it is free of income and capital gains taxes and, if held for at least two years, is excluded from your assets for inheritance tax purposes.

The disadvantage is extreme illiquidity and volatility in value.

Investing in commodities

Anyone can buy a commodity, whether it be a metal, farm produce such as grain or coffee, or even wine. The objective is to hold the commodity in the expectation that it will increase in value. There is extra expense because of storage, insurance and perhaps shipping costs.

A more risky way of investing in commodities is to buy or sell futures or options in commodities. A less risky way is to invest in companies or investment or unit trusts which deal in commodities or commodity companies.

Buying convertibles

These are bonds or shares issued by companies, earning fixed interest or dividends, which are subsequently convertible into equity, i.e. ordinary shares. They are usually redeemable before conversion.

Conversion can take place after a specified date in the future at a set price which is usually in excess of the ordinary share price when the convertible is issued. The conversion premium is the amount by which the equity share price must rise to make conversion worthwhile; it can be a negative amount.

Initially, market price is controlled by current interest rates. As the conversion date nears, the equity share price has increasing influence.

Convertibles can be very valuable if the share price goes up but meanwhile should be judged on the fixed return.

Understanding EISs and VCTs

EISs are enterprise investment schemes, where the investment is in one company. VCTs are venture capital trusts, which are pooled investments. In both cases, they are investments in new companies.

Investments for at least fiv6 years (three years for new issues after 6 April 2000) in new qualifying schemes receive tax relief at 20% at the time of investment. The annual limits are high £100,000 in each case.

Capital gains are tax free and, in the case of VCTs, so are dividends. Furthermore, CW liability on any investment realised to make the investment can be deferred till the new investment is realised.

Losses on disposal of unquoted shares in an EIS investment can be set off against income. Also the allowances on EIS investments remain even if listing of the shares is sought within the initial period.

But these investments are risky because they are in new companies very risky in the case of EISs, where all the money is put into one company, less so for VCTs where the risk is spread.

Backing films

This is very risky as few ventures succeed.

There is a tax advantage - production costs receive 100% relief from income tax provided they are less than £15 million and are at least 70% insured in the UK.

Becoming a Lloyd's name

Lloyd's of London is an insurance organisation. Members (called names) who put up capital as underwriting collateral get 100% relief from inhefitance tax provided they have been members for at least two years.

However, you first need to have large sums to invest and your liability is unlimited so, although it can be very profitable, it is extremely risky.

Using offshore funds

You can invest in investment trusts and unit trusts. based outside mainland UK, in tax havens such as the Channel Islands.

If you are resident in the UK, both income and capital gains are taxable in the UK and there is no indexation or taper relief for gains, but income in certain funds is 'rolled up', i.e. left in, and is not subject to tax until disposal of the investment.

On disposal the total gain is treated as income but this might be advantageous to you if you are going abroad to live before then or if your income after retirement is such that you have a lower marginal tax rate. Not many people fall into either category.

Charges can be much higher than in the UK. Also investment protection is lower than in the UK and in some places is non existent.

Buying penny shares

Shares with a low unit value (though not necessarily a penny) are known as penny shares. The official definition is where the bid/offer spread exceeds 10% of the share price and the market capitalisation of the company is below £100 million. Often they are companies which have been in trouble and the share price has fallen to a very low level.

There is a proliferation of penny share tipsters and enormous profits can be made but also enormous losses. Penny shares are very risky because:

the wide bid/offer spread needs a high percentage increase to cover it;
they tend to be highly volatile;
they can be difficult to sell because there is a small market.

Buying warrants

A warrant is a right (but not an obligation) to subscribe for shares, or another form of security, at a set price on or during a set future period. They are usually issued as part of an issue of new shares, particularly by new investment trusts, but once issued they have their own market value.

Warrants are only different from call options (see above) in that they are issued by the company itself, most often by new investment trusts. They have all the same qualities as options high gearing and therefore high volatility and a risk of losing all the investment if the underlying share never reaches the option price.

They are freely traded on the Stock Exchange.

Unit trusts specialising in warrants are available; because they invest in a number of warrants, the risk is spread and so reduced.

----
If you need to borrow money, http://www.homeloansonline.org.uk provides a quick and easy application form. Get all the options clearly explained to you and then choose. Ideal for people looking for a cheap secured loan

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Making Riskier Investments: Betting On Financial Spreads

2007-03-05T02:24:00.000+03:00

Making Riskier Investments: Betting On Financial Spreads
By Edward Smithers

Spread betting is really gambling rather than investing and is very risky. You bet on increases or decreases in the price of an individual share (or an index, interest rates, currency movements, commodities, futures and options or property values).

You are quoted the spread (buying and selling price) of a share three and six months ahead and you buy (an up bet) or sell (a down bet) at the appropriate price, depending on whether you are gambling on a rising or falling market. Your bet will be at so much a point, usually a minimum of £5 (these amounts are called units).

If you get it right, you collect the movement times the price per point but if you get it wrong you pay it. For example, if the spread on the FTSE 100 index is 6,000 to 6,100, you bet on an increase at £10 a point and the spread goes up 100 points to 6,100 to 6,200, you gain 100 x £10 = £1,000. However, if it goes down to 5,900 to 6,000, you lose the same amount.

So profits and losses are unlimited, but you can close out at any time (even outside normal stock exchange trading hours, as it is a 24 hour market) in order to lock in your profits or limit your losses.

As it is gambling, no tax is payable on any gain you make but of course any losses cannot be set against any other taxable gains. Betting tax is included in the spreads, which are wider than on the underlying shares.

Flotations

One important area for spread betting is flotations (such as where a new company comes to the market) because usually only institutions can subscribe; private investors must wait till the first day of trading, when the big price increases frequently associated with flotations have already taken place.

In this case, spread betting offers the opportunity to participate, because spread betting companies operate a grey' market based on what they expect will be the first day's closing spread.

Selling short

Selling the spread is a suitable substitute for 'selling short' - selling shares you do not have because you expect the price to fall, so that you make a profit when you buy back at the lower price - a process which is difficult in the UK stock market itself.

You can also hedge your investments protect them against a fall in prices without selling the shares. Instead you sell the spread, for an individual share or for your whole portfolio (by choosing the most appropriate index). This way you avoid brokerage fees and stamp duty as well as capital gains tax.

Similarly, you can buy spreads to lock in an expected future rise in prices of shares you have had to sell or have not yet got the cash to buy.

It is therefore an alternative to hedging via CFD trading and options, which are taxable and for which you do have to put up cash to buy them.

Article Source: http://EzineArticles.com/?expert=Edward_Smithers
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Making Riskier Investments: How Split Funds Work

2007-03-05T02:22:00.000+03:00

Making Riskier Investments: How Split Funds Work
By Edward Smithers

Split funds are investment trusts with a fixed life, where the shares are divided into more than one category. The simplest form is a split between capital shares and income shares, where the income shares receive all the income and the capital shares all the capital growth.

Capital shares are more risky because at the end of the investment period the income shares are paid back at, usually, the original investment amount and the capital shares receive the balance. They may be of particular interest to higher rate taxpayers as there is no income tax to pay, only capital gains tax at the end.

Income shares are less risky and may be of more interest to those needing income, such as pensioners.

There are other variations:

Zero dividend preference, shares (zeros), which receive no income during the investment period. Instead they are repaid at a fixed amount on redemption, which is taxed as a capital gain rather than as income, so the yield is known at the outset. They have first claim on the assets at redemption.

There is a slight risk with zeros, as there could be insufficient assets to meet the final commitment and for this reason the yield tends to be over 7%, but in fact there has never been a failure so far. Comparative risk is measured by the 'hurdle rate', which is the annual amount by which the asset value can fall before the redemption value is cut back. It is expressed as a negative percentage of the asset value.

Zeros could be good for investing for school fees, for example.

Highly geared shares, which receive income plus growth, there being no capital shares, the other part of the split usually being zeros.

Participating income shares, which receive some of the capital growth as well as all the income.

Stepped preference shares, which receive dividends increasing in steps over the period of investment.

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Making Riskier Investments: Investing In Futures & Options

2007-03-05T02:21:00.000+03:00

Making Riskier Investments: Investing In Futures & Options
By Edward Smithers

Futures are a commitment to buy (a call) or sell (a put) at a set price (the strike price) on a future date An option is similar but is a right rather than an obligation. Both are known by the collective term derivatives, because they derive from something else, such as a share in an individual company.

Because the price is only a fraction of the underlying share price, they are in effect highly geared and very risky. If you think about trying futures or options (or any other form of risky investing), do some experimental dealing (paper trading) first, to see how successful you might be.

Universal stock futures (USFs) widen the availability of futures and options contracts to major US and European shares as well as UK shares.

Futures

In the case of futures, the cost of failure can be very high, unlimited in the case of a put (selling forward a share you do not have, which you will have to buy to deliver on the relevant date) because there is no limit to how high the share price can rise.

Investing in futures is not recommended unless you really know the market in that share.

Options

Options are less risky because there is no commitment and the most you can lose is the cost of the option. Options can be of two kinds traditional, where no further action can be taken until the relevant date, and traded, where the option can be bought or sold throughout its life. Dealings are in units of 1,000 shares.

In addition to individual large company shares, options are available for the FTSE 100 index. Then there are other areas, such as commodities (see above).

Options have an intrinsic value and a time value. The intrinsic value compares the option price with the current share price. The option is 'in the money' when the option price is the lower and 'out of the money' when it is higher than the share price.

The time value depends on the length of time the option has to run till the final exercise date.

Investing in options requires good knowledge of the market and a means of following the prices during the day, as urgent action may be needed.

Options can, however, be protective of your investments. if you think the market is going to fall, rather than sell all your shares you can sell options. If the market falls you make a profit on the options to set off against your share losses. If not then you let them lapse.

Similarly, if you expect to have money to invest at a later date, or you have to sell shares to raise some urgently needed cash and you think the market is going to rise, you can buy options.

These hedging techniques are protective of your investments, at a price. However, there are alternatives: combination strategies such as straddles, where you both buy and sell options at the outset, and other more sophisticated techniques, are available.

Article Source: http://EzineArticles.com/?expert=Edward_Smithers
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Specialised Investing: Collecting

2007-03-05T02:09:00.000+03:00

Collecting refers to the purchase of assets which it is hoped will increase in value, such as antique furniture and paintings.

The disadvantage of 'collectibles', as they are sometimes called, is that they produce no income all the return is in the potential increase in value and that value is usually subject to fashion and whims.

On the other hand, it can be argued that they give pleasure that is the return.

Collectibles can be damaged or stblen, so they must be insured at current replacement value, which means getting regular valuations: these can cost around 1% of value each time. It is also a good idea to keep coloured photographs and written descriptions.

In the event of a dispute about value, you can get help from the appropriate trade association.

Buying and selling at auctions involves the payment of high commissions (buyers 15%, perhaps, and sellers 10%).

Buying in a shop avoids commission, but how far can you trust them to buy and sell at accurate values?

For all collectibles, you do need to be aware of value and you should not buy for investment unless you have a lot of knowledge of your chosen category.

Art and antiques

A London art dealer recently said that art has not kept pace with conventional investment over the last 20 years. Sothebys have an art index which shows changes in value over 1, 2, 5 and 10 years, by category (paintings, ceramics, furniture, silver).

Classic or vintage cars

Classic cars are post 1939, over 20 years old. Vintage cars are pre 1939. As on all cars, capital gains are not taxable and compared with ordinary cars there should be no depreciation.

Insurance may be difficult and you probably need to be a mechanic as repairs are expensive.

It might be possible to earn some income by hiring out, for example for weddings.

Stamps

Most serious collectors specialise. A good collection can be assembled for £2,000.

Low value stamps tend to stay low in value only expensive ones appreciate.

British sets currently issued are valued at only 80% of face value so are not a good investment.

If you are selling a collection of stamps, perhaps inherited, and they are muddled, do not try to sort them out first as they are more exciting to an enthusiast in their mixed up state and so of more value.

Wine

The most established markets are vintage ports and Burgundy and Bordeaux wines.

You can start with as little as £500, which will buy three cases (12 bottles to a case) at around £150 each, but you must be prepared to keep them for a long time. Better to start by using a dealer rather than bidding at an auction.

You can of course make a larger investment to start with, intending to drink some, sell some and buy some more, but try to drink your loss items rather than the profitable ones!

Value is greater if bought and kept 'in bond' as duty and VAT are not paid. Storage costs about £5 a year for each case.

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Chasing The Market and How To Not Put Money In The Bank

2007-02-21T09:21:00.000+03:00

Chasing the market is another common fear. You see a share you were thinking of buying go up in price. Your plan says you buy cheap at your price. Your fear of missing out takes over and you jump into the market.

Inevitably, you buy on a price peak and the price of the share starts coming down. Why? Because all of the people like you, suffering from fear of missing out syndrome have bought their shares and there is no one left to buy. With no buyers around the share price must come down.

You can practice jumping into the market all you want and see how far it gets you. After a while you will see the losses you are making as a result of indulging this human emotion.

You will see that this is losing behaviour when you review your own investments and will illuminate it from your repertoire. Result : your rate of return will increase.

Think about it.You only ever make money when you sell a share. Not when you buy it. When you own a share its price varies all the time and so any unrealised profit you may have is academic and of little real value until you sell it.

How many times have you already seen unrealised profit vaporise into an unrealised loss. Once sold and the profit realised, no one can take it away from you.

You can’t pay for a new car or go on an overseas trip with shares. It is the money that you make after you sell the shares that buys you what you want.

If you never sell a share you will die with shares in your estate. That is great if you objective is to pass you wealth over to your survivors. But if you are inclined to get value from your share investments whilst you are still living, then you will have to sell to achieve that.

Practice buying and selling shares that are going up in price. Shares never go up or down in a straight line, there are price dips and peaks along the way.
Practice selling on a price peak when the share price is high, only to buy it back when the share price is cheaper.
Practice selling the share to get the money but also continue to participate in the growth of the share. That gives you the best of both worlds.

Is It Possible To Insure An HYIP Investment

2007-02-20T16:14:00.000+03:00

Is It Possible To Insure An HYIP Investment
By Billy Middleton

As everyone knows, HYIP investments are risky. To the uninformed its the equivalent of throwing a pound in a wishing well, and expecting 2 or 3 to splash back out. In truth, despite the mass of information on the Internet, there simply isn't a definitive yes/now answer for the inexperienced. Some time ago, I theorised that it would be possible to insure investments against scams. Although by some the idea was ridiculed, I was and still am convinced that the concept is good. Read on, and I will explain all the pros's and cons, you're free do decide yourself the merits of the service.

Lets take by way of example a typical Internet user that decides to try HYIP investments, lured by the promise of high returns in a short time frame. This person knows nothing of these sites, has no regularly updated information to look through and even if they did the site could turn sour the second hard earned money is invested.

So what happens when they try to withdraw the apparent win-fall? In a nutshell, nothing. They receive no payment and have no-one to contact. It is possible to report the incident to a merchant provider but this invariably will not result in the return of spent dollars. Another victim is created with no hope of ever seeing their cash again.

Now consider the difference that a definitive result would make after requesting an insurance policy. If the HYIP to be covered is on the insurance blacklist, or has been reported by other investors as a scam, the policy will simply be denied. From this point on, anyone foolish enough to make an initial spend with the site has only themselves to blame.

The other possibility is that the quote is accepted. Only two possible outcomes can remain. a) The investment is successful and the policy holder gets paid as promised, or b) The site fails to pay out and the policy holder becomes a victim with a difference. They will get their initial spend returned. In this case, the claim results in the HYIP being blacklisted, thus preventing further victims.

To some this seems too good to be true, but lets break it down into component parts and assess it more closely.

Hyip's (High yield investment programs) promise seriously high returns in a very short period of time, often hours or days. Even the best forex traders couldn't promise these types of profits indefinitely. Its possible that they will succeed in the short-term, but its unlikely to be sustainable and so the program fails.

The HYIP insurance is somewhat different, with the policy costing 25% of the intended investment amount. It still means that the premium must be multiplied more than 4 times to cover any possible claim made. However, for the system to be fair both in terms of the investor and the site owner, it will take a few days to be sure that no response is forthcoming from the site following a payment failure. The insured investor then has to make a claim, provide evidence of the investment and all attempts to resolve the situation amicably. The insurance provider also will make reasonable attempts to contact the site owner and merchant provider. At which point it is possible to grant or deny the claim based on the results. This is a considerably longer period of time, over which the premium cost has been invested wisely resulting in the ability to process the claim and return the lost investment amount. Winning investments provide the insurance service with the necessary profits to be viable since the same investments were made while the policy was valid.

So you see, the fundamental difference is time. Realistic time frames, compensating for the unrealistic but highly attractive profits. My advice is to keep your money safe, insure your investments. If you're lucky you'll win, if you're not at least you won't make a loss.

Billy Middleton is the creator of the Safepay Verified the new poundpyramid system where you earn a FIXED return of £25000 per share which also contains the Pyramads banner promotions system. Now featuring the unique HYIP insurance service

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The Onset of Any Investment

2007-02-17T14:37:00.000+03:00

If you want to be serious in trading, you must look at trading as a business. Before you set up any business, planning is essential. Although tempting, before you pour your hard-earned savings into this venture, the first step is to establish your investment goals and objectives. It is best to have this written down because there will be moments that you will forget your goals and purpose of investing.

Keep your "mission statement" of this business as simple as possible. Each time you feel that you are losing your discipline; this is the time to refer to your goals that you have set.

As a guideline, decide on what you would like to achieve financially. Develop a plan, tactic or method to achieve your goals. The method that you choose or develop must have a proven track record for you to eventually arrive at your destination.

Your mission statement should contain, but not limited, to the below:

What is your Target Net Worth (set a realistic goal)?
What is your target Monthly Residual Income?
What is your initial investment capital?
How much would you allocate a month from your savings in this new venture?
How much time will you allow for this investment to mature?
How much time per day would you allocate to achieve the above goals?
What type of investment vehicle would you specialize in?

When setting your target net worth, set a goal that is achievable. Of course, it is always in many of our dreams to be a multi-millionaire. Set an initial achievable goal as a stepping stone. Periodically, you can always review and revise your goal. For example, if you currently are starting out with $10,000, you may want to be realistic by setting an initial 3 year goal of $50,000, which would represent a 500% return on investment. After the initial goal has been accomplished, you may then set a bigger goal. If you arrive at this goal before the 3 years is up, you can always review and re-set a new goal. Setting achievable goals will keep you motivated to strive further with your investments.

Investing can be risky no matter how safe it looks. Always use only risk capital for all your investments. Risk capital is money that you can lose without affecting your lifestyle. If you need these funds for your next meal, your kids education, or to pay your house rent (you get the idea), then please refrain yourself from investing. Risk capital should only be a small percentage of your monthly savings. For example, if you currently save $1000 per month, you may want to allocate 20-30% of your monthly savings for investment purpose. It is prudent to be conservative while taking risk. You do not want any bad investment to ruin your current lifestyle.

Establishing the "big picture" before you start trading or investing will provide you a roadmap as a reminder of why you even bother putting your hard-earned money at risk.

For more information, please visit www.cashflowavenue.com

Comparing A Money Market and a Certificate of Deposit

2007-02-17T13:06:00.001+03:00

Comparing A Money Market and a Certificate of Deposit By Gabriel J. Adams

As investors, we all face common problems. Where can I find the best rate of return? What is a good stock to invest in? What do I do with my money in between investments? With the first two questions, limitless answers can apply. However, with the last question, there are two popular alternatives. A CD or money market account are both viable choices that should be investigated. But which one will give you the most bang for your buck?

CD’s or certificates of deposit are basically like you giving the bank a loan. You give the bank a certain amount of money and they give you a certain amount of interest. The interest rate that you get is proportionate to how long the investment is. Before you ever deposit your money into a CD, you decide on how long the money will be invested. The longer you invest, the higher your interest rate will be. This is why older people are notorious for having many CD’s because they simply want to keep the money they have at a reasonable interest rate.

CD’s can range in time frames from a few weeks to years. It all depends on the investor. The bad thing about CD’s is that you don’t have access to your money. If you decide that you need to get your money out of a CD before it matures, you will probably have to pay a fine. So if you get a CD, your money is officially tied up.

The other popular choice is a money market account. This is basically like an investor’s checking account. Whichever investment firm you have will take the balance from your money market account and invest it into mutual funds and other securities. With this form of investment, the rate of return is directly proportionate to how much money you have in the account. It is not linked to a certain time period as with a CD. This means that if you don’t have very much money, you won’t make any interest. The main benefit with these accounts is that you have access to the money at any time. Most financial institutions will give you a checkbook that you can use like you normally would. The bad thing is, many people will treat it as an actual checkbook instead of their investment money.

Whichever form of investment you choose, make sure it’s the right one for you. They both have positives and negatives that you should consider, before making a choice.

Find the best CD Rates at http://www.gotalkmoney.com/

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Rate Yourself - A 20-Question Scorecard for Stock Investors

2007-02-17T12:58:00.000+03:00

Rate Yourself - A 20-Question Scorecard for Stock Investors By David Van Knapp

Are you a good stock investor?

This Stock Investing Scorecard will help you understand what you do well, plus it will suggest areas where you might pay the most attention to improving your investment practices.

Score yourself from 0 (worst) to 5 (best) on each of the following. Then check your total score at the end to see where you stand.

1. I believe that the market is rational over the long term and rewards sensible, intelligent investing. I also recognize that the market is essentially unpredictable over very short periods such as a day or a week.

2. I always maintain a fiduciary duty to myself. I never forget Buffett’s Rule #1: Don’t lose money.

3. I know my investment goals and have clear strategies to reach them. I have written them out, and I review them at least once per year. I adjust or amend them when appropriate.

4. I only invest in excellent companies with sound business models that I understand. I must comprehend how a company makes money before I will invest in it. I will not fall for the next Enron.

5. I always determine a rational price for any stock. I only buy at a fair or advantageous price.

6. I know that a 50% loss on a stock followed by a 100% gain equals zero. Therefore, I am very careful to avoid a large loss on even a single stock.

7. I manage my portfolio intelligently and consistently. This does not mean that I trade a lot, but it does mean that I pay attention. I keep track of the results of each individual stock investment, and I make strategic decisions about what to keep and what to sell. My goal is to let my winners run and to sell my losers.

8. I know that any investment in the stock market carries risk. I actively manage that risk. I am willing to tolerate some short-term variability in my wealth in order to gain the long-term benefit of beating inflation through stocks. I am not willing to tolerate significant losses.

9. Before making any move in the market, I do everything I can to stack the odds in my favor. I know that the best results come when I have an edge. The edge can be better information, better analysis, an advantageous price, better risk management, or a combination of all of them.

10. I read, analyze, and do my own thinking. I am always striving to improve my investment practices. I never buy a stock solely on a tip.

11. Whenever I am interested in a company, I write out its “story” in a few sentences. This includes the company’s business model, its strategies, its prospects for sustainable profits, and (especially) its competitive advantages. If I can’t understand the company's business enough to do that, I don’t invest in it.

12. I only purchase a stock when it is showing strength. I want each of my investments to get off to a good start.

13. I always look for companies with the best prospects for long-term earnings growth. I know that over the long term, stock prices follow corporate earnings.

14. I invest only in dominant companies. They have competitive advantages that will enable them to sustain earnings growth.

15. I never trust management which has demonstrated a lack of integrity.

16. I have fun investing. I don’t overextend myself, and I never put money into companies that make or do anything I don’t admire.

17. I am wary of companies with excessive debt, because I know that it is as hard for them to handle as it would be for me. The mere fact that other companies in the same industry also carry lots of debt is no excuse, because I know that every company chooses its capital structure. No solid company needs to be over its head in debt.

18. Although I do not demand that a company pay dividends, I do consider the regular payment and raising of dividends to be a big plus factor.

19. I run my investments like a business. I am dispassionate when making buy, hold, or sell decisions. I never fall in love with a stock. If it is a loser, I let it go. I do not over-hold any stock just waiting (hoping) for it to get back to even.

20. If I cannot find good investment opportunities, I am never afraid to have some of my ''stock money'' in cash. I do not feel the need to be ''fully invested'' at all times.

How did you do? The maximum score is 100. If your score is high, congratulations! You are following a sound approach to investment success.

If your total score is below 80, that raises a serious question whether you should be investing in stocks at all. The good news is that you can improve your knowledge and practices in every area considered.

Focus on any low-scoring areas. If you gave yourself 0, 1, or 2 on any question, that is definitely a red flag. Concentrate on improving your practices in that area. My experience is that improving in any one area can have a significant impact on your overall success in the stock market.

Of course, the best investors are good across the board. That should be your ultimate goal. Investors sometimes go wrong by skipping essential steps. They make “one-time” exceptions. Don’t do that. Follow best practices, and adhere to your own written strategies and tactics, all of the time.

Dave Van Knapp is the author of ''Sensible Stock Investing: How to Pick, Value, and Manage Stocks'' as well as numerous articles on stock investing. Learn more about his step-by-step guide for individual investors at http://www.SensibleStocks.com . Or go directly to Amazon.com, where the book has a perfect 5-star reader rating: http://www.amazon.com/gp/product/059539342X/sr=1-1/qid=1155381420/ref=sr_1_1/002-5852738-5260830?ie=UTF8&s=books.

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Mental Aspect Of Investing

2007-02-15T22:01:00.000+03:00

Mental Aspect Of Investing By Sum Edward

Regardless of your current experience level in trading, everyone had to start at the beginning. I think that the emotions starting out were pretty much identical for all traders early in their development. And since then, hopefully each trade has gotten easier as your confidence has grown. That is what a learning curve is. There are two basis concepts that should help any trader as he moves forward and continues to grow. First, master the internal ego. And second, defend the external ego.

The first idea is that you must recognize what is keeping you from taking your trading success to the next level. The vast majority of the time, it is probably your ego get in the your way of your self-education. This is not the arrogant or over-confident type of ego. Instead, it is more along the lines of a defensive, protective ego - the "I do not need any help" ego. The problem is that kind of self-shielding ego is what prevents real learning. Think about this, we are all human, and being human, we do not want to admit that we are wrong about our trades sometimes. The ego wants to uphold an ideal version of us that allows for only successes and not failures. Your goal should be to trade without ego, or without personal judgment of your self worth. Trading is a business, and the businessmen who do the best at it are the ones who treat as such. It is not a reflection of them personally.

What does it mean to defend the external ego? While the amateur trader will often tell friends, neighbors, and total strangers about trades he may have entered, it is all too often a setup for disaster. Call it whatever Law if you want, but one of the 'sure-fire' trades you just entered and told your neighbor about will turn against you soon. And like clockwork, the neighbor will ask how it panned out. You have one of two options at that point: tell the truth, or lie. You could lie to the neighbor and say the trade went fine. However, even though the neighbor may not know any better, the damage to our own ego is still a reality. How? Being forced to deceive also forces us to acknowledge that we may have inferior skills. Instead of just accepting a losing position, we are forced to conceal the trade to protect other's perception of us. The irony is that the lie can cause even more damage to our confidence than just accepting the loss. Speaking psychologically, our subconscious minds can rationalize some incredible stuff that does not necessarily have to be true, so do not give it an opportunity to rationalize your decision to stop trading. You are better off not saying anything than saying something you know to be untrue.

So the bottom line is that the more you can move toward treating your trading as strictly a business and not have emotions get in the way, the better trader you will become. There is no reason that you cannot be excited about good trades, but never let that excitement get out of hand. Keep focused on the goal of being the best trader that you can be.

For more articles , Please visit www.options-diary.blogspot.com

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10 investing tips to balance fear and greed

2007-02-15T21:42:00.000+03:00

Pay attention, but don't listen to the wrong people. Study the stock, but don't overanalyze. Most of all, stay disciplined. By Harry Domash These are tempting times for investors.

It seems that every few days, the Dow Jones Industrial Average ($INDU) hits a new all-time high. Analysts are predicting 20% profit growth this year in the technology sector. And the gadget makers -- Apple (AAPL, news, msgs), Nintendo (NTDOY, news, msgs), etc. -- are churning out must-have electronic devices with impressive regularity.

So it's beginning to feel a lot like the late 1990s, when there was a lot of money to be made by picking the right stock. Then again, it feels a bit like the early 2000s, too, when those right stocks suddenly turned very wrong.

To help you deal with your conflicting feelings of greed and fear, and -- more to the point -- to help you make money, I've come up with a 10-point investing survival checklist. It will help you identify which stocks to buy, which to avoid and when to protect your winnings.

1. Never buy or sell based on anyone's (including your own) market predictions.

Turn on CNBC and, almost without fail, some guy who predicted the last market crash, bull market or whatever is telling you that the market is getting ready to (a) soar, (b) crash or (c) remain in a trading range. Same thing for interest rates, value of the dollar, oil prices, gold prices, you name it. If these guys really knew, the last thing they'd do is tell us.

Instead of predicting the market, focus on the individual stocks that you're following. Their profit margins, sales forecasts and stock-price gyrations contain important clues about what lies ahead for them -- and probably their entire industry.

2. Stick with uptrending stocks.

A stock's price action tells you what the market thinks about its outlook. Stocks move up in price when most players see good things ahead, and down when they don't.

It's tempting to think you're smarter than the market. Especially when you've done your homework and scrutinized a firm's fundamentals. But all too often stocks move because insiders are acting on information that hasn't yet hit the news.

How do you know if your stock is moving up or down?

Strong stocks are trading above their moving averages, and weak stocks below. Stick with stocks trading above their 50-day and 200-day moving averages. The 50-day reflects relatively short-term price action, and the 200-day gauges longer trends. You can see both moving averages as well as the current share price on MSN Money's Company Report pages.

3. Never buy stocks in danger of filing for or actually in bankruptcy.

It's tempting! Stocks fetching $25, $50 or even $100 a few months ago can be had for pennies. Surely, they'll be worth more when the firm exits bankruptcy. Alas, most often, the stock ends up worthless.

Most bankruptcies happen when a firm's debt and other liabilities exceed its assets. That means that there's not enough cash to pay off the creditors. Usually the company continues to operate, is eventually reorganized and comes out of bankruptcy. However, in the process, the old shares are wiped out. The creditors get new shares in the reorganized firm and the old shareholders get experience.

4. Never average down.

Averaging down means buying more shares after a stock you bought went down instead of up. Say you buy 100 shares of a stock for $20 per share. Then it drops to $10. To get back to break-even, the stock would have to double.

By averaging down, which in this case means buying 100 more shares at $10, you can break even if the stock pops back up to $15, instead of $20.

Bad idea! The stock dropped because something went wrong. Chances are, the stock will drop even further.

5. Always sell when management cuts sales or earnings forecasts.

Top executives tend to be an optimistic lot. Thus, when they're forced to cut sales or earnings forecasts, they typically portray the causes as short-term fixable problems. Don't believe them! Bad news usually leads to more bad news. As painful as it seems at the time, your first loss is usually your best loss. Sell at the first sign of faltering growth.

If you're lucky, a competitor will sound the alarm and take the hit before your company does. When that happens, your stock's execs will say that the competitor's problems are company specific and don't apply. Since everybody in the same sector faces the same problems, take advantage of your good fortune and sell before your company issues similar bad news.

6. Only buy stocks with real sales and real earnings.

It's easy to fall for a great story, a sure-fire new concept that's about to come to market. But somehow, they often don't happen. In the end, earnings propel stock prices, so your best bets are stocks with already strong but growing earnings.

But you can't have earnings without sales, so start there. Require at least $10 million sales in the last quarter. Next, make sure that sales are growing from year to year and are translating into positive and rising earnings. It's easy enough to find out. MSN's financial highlights report page displays quarterly sales and earnings going back three years.

7. Always diversify between industries.

You might find it hard to believe now, but a year or so ago, it would have been tempting to load up on home builder and energy stocks, the hot industries of the moment. If you're like me, by the time you realize an industry is hot, everyone is piling in and you might be closer to the end than the beginning.

There still could be money to be made, but don't go overboard. Don't put more than 5% of your funds into any single industry, e.g. semiconductors, oil drillers, clothing retailers, etc.

8. Don't buy stocks just because they've gone up.

It's tempting to jump on the bandwagon when all your friends are talking about how much money they've made on a stock. But, oftentimes a stock's price momentum attracts investors who jump in without doing much research.

Without strong fundamentals to back up the price action, such stocks always crash and burn. Do your homework before you jump on that hot stock.

9. Never sell a stock because an analyst proclaims it is overvalued.

Part of the fallout from the tech bubble is that analysts, instead of just guessing, must now have a defendable approach for coming up with their "buy" or "sell" ratings.

They satisfy that requirement by calculating the "fair value" of the stocks they cover. They advise buying stocks trading below fair value. But when a stock price surpasses fair value, they deem it overvalued and advise selling.

While that sounds reasonable, the fair-value formulas require making assumptions about acceptable return rates that have no basis in fact. By manipulating those assumptions, you can come up with just about any fair value you want.

In my experience, analyst downgrades based solely on valuation are excellent buying opportunities.

10. Always look for companies with new ideas, new styles or new products.

The best stocks are those that have something new to offer. It doesn't have to be high tech. For instance, in the early 1990s, Chico's (CHS, news, msgs) broke new ground when it started a chain of retail apparel stores targeting middle-aged women. Investors who bought Chico's stock when it went public in early 1993 and held on would have enjoyed a 4,500% return on their investment.

My 10 rules are a start, not the final answer. As you gain experience, you'll add your own rules and modify or delete mine. That's OK, as long as you follow them. Successful investing is more about discipline than fancy analysis.

Stock Index Funds - What Is An Index Fund?

2007-02-12T23:58:00.000+03:00

Stock Index Funds - What Is An Index Fund? By Mike Singh

You may have heard of the term before, financial indexes, but just what exactly are they. Indexes, also known as stock market indexes, are the listings of stocks and any statistics that show a full of value of any given stock in the index. These indexes are generally used to show the character of all the stocks taken together. These characteristics can include trading on the same market, belonging to the same industry or even market capitalizations that are the same or similar. Very often these stock market measurements are used as benchmarks in portfolios known as mutual funds. There are funds out there that contain the securities that are part of a given index. Not surprisingly, these funds are called index funds.

There are a few different ways to categorize financial indexes. They can be known as broad-base indexes for example. This generally is a reflection of the entire stock market and is a reflection of the investors sentiment about the economy. A lot of the common indexes mentioned are broad-based indexes. These include but are not limited to the American Dow Jones Industrial Average and S&P 500 Index.

On the other hand there are many others that are considered specialized indexes. The difference is that the specialized ones only track certain segments of the market. Examples of these types of financials include the Morgan Stanley Biotech Index or the Linux Weekly News. These can track different aspects such as companies of a certain size or with certain types of management. The Linux Weekly News tracks companies that use or sell products or even services that have their basis in the Linux operating system. Morgan Stanley Biotech (MVB) as the name suggests tracks a group of companies from the biotech sector. Another type of index there is the price-weighted index. This includes ones such as the Dow Jones Industrial Average and NYSE ARCA Tech 100 Index. These kinds are based on the price that is considered in the determination of the value of the overall stack. This makes each individual stock in these types of financials extremely dependent on one another. There are a few sub-categories when it comes to these types. They include market value weighted or capitalization weighted indexes, which are determined by the size of the company. As you can see, learning of the basics of financial indexes can be exhausting. Yet knowing details about them can greatly improve how you do in the market. Once you have a general understanding of the indexes themselves and how they are determined, you are well on your way to doing a lot better than you could imagine. Check out http://www.commodities-trading.org for more articles on comodities trading and trading crude oil.

Article Source: http://EzineArticles.com/?expert=Mike_Singh http://EzineArticles.com/?Stock-Index-Funds---What-Is-An-Index-Fund?&id=438184

Spread Your Risk: The Golden Rule of Investing

2007-02-12T20:29:00.000+03:00

Spread Your Risk: The Golden Rule of Investing By Sarah Belle

Ask anyone in the finance industry what they think is the No.1 most important rule for a winning investment strategy? I bet they’ll all say “DIVERSIFY!” In other words, spread your risk.

“Don’t put all your eggs in one basket” is another way of summing it up. Leave all your money invested in the one place and you are headed for disaster. A diverse investment portfolio will bring you (a) higher returns, and (b) protection against volatile markets – in other words, if one of your investments is doing badly, you’ll still have lots of other investments to balance it out. So how do you spread your risk? The first important step is to spread your money across different investment types, such as Shares, Property and Cash. The next step is to Spread Your Risk within each of these categories. For example, if you invest in Shares you would invest in various companies and various industries rather than putting all your money into one company. Even though that one company might seem like a “sure thing”, even the most well-known and seemingly profitable businesses can go broke. Even an industry that seems fail-safe, could be badly affected by new taxes, mismanagement, supply issues or the occasional wrath of mother nature. Let’s take another example. If you are lucky enough to be buying your second investment property, would you buy in the same suburb as your first property? Imagine your first property was a Unit in Brisbane and you’ve made good money on the investment. You would be tempted to buy in Brisbane again and make the same money, right? But the market has changed, perhaps you bought at a good time? Perhaps the property was a bargain? Regardless of all this, you should be thinking about spreading your risk. Buy a property in a different State. Do some research and find out what areas are experiencing huge growth (try to focus on Capital Cities – which are almost always the safest investment). Also consider switching from a Unit to a Townhouse or free-standing house. This is spreading your risk. The same principle applies when you look at Managed Funds. Consider investing with more than one Fund Manager and spreading your money across different funds, e.g. International Shares Fund (very high risk – possibility of very high returns), Australian Shares Fund (high risk – possibility of high returns), Growth Fund (Low/Medium Risk – possibility of average returns). Look closely at the Product Disclosure Statement (PDS) before you make any decisions and if you are dealing with broker or a representative of the Fund Manager, don’t allow them to sign you up on the spot. Take the PDS home and read it thoroughly. Take the time to compare various funds before you make a decision. Just don’t leave it too long – the worst investment mistake anyone can make is to do nothing. Sarah Belle is the webmaster of SmartPiggy, providing free and unbaised tips on money management. The site is designed especially for young people, with easy-to-follow guides and articles to expand your knowledge of financial matters and help you save more, invest smarter and achieve wealth.

http://www.clik.to/smartpiggy

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Financial Leverage And Return On Equity-What is Leverage?

2007-02-12T20:24:00.000+03:00

Financial Leverage And Return On Equity-What is Leverage? By Mike Singh

You've probably heard the term before, leverage, but what exactly does it mean? Another term is gearing. So when you use this, you are also doing what can be called gearing. In essence means using the resources that are available to magnify the positive or negative aspect in the final product or result.

Usually when you do this type of dealing in business or finance, it is similar or synonymous with borrowing. This greatly involves ROA (return on assets) and ROE (return on equity). The main point is to make ROE higher than the ROA. If it is not, leverage or borrowing can be used.

Some of the basics of how this leverage works include reinvesting a previous loan. When you reinvest the loan you are borrowing or using leverage to get a better ROE on your loan. This type of leverage can involve a lot of risk, but to many it is very much worth it. This is because leverage can give you better returns and greater potential as well.

There is also a theory called the Modigliani-Miller theorem that involves leverage. This theory has to do with a company's equity versus their debt. For example, one that has none actually is known as an all equity firm. While one that has leverage is one that has both equity and debt. The value of the ratio between the two is how much leverage the company has available to them.

There is yet another form of leverage that involves the use of options. Usually something called a call option is purchased. This gives the investor an advantage because they are able to purchase these options at what is called the underlying security at any time. The value of the actual security will rise more sharply then the underlying one. This gives the investor a lot of ability to earn more money if value increases. There is of course a risk in this as well, but the leverage that can be gained from it is invaluable.

In general when you use leverage, you will be taking some risks. In the end, a lot of people will find that the benefits of using this technique far outweigh these risks. This is because a lot can be gained if leverage is used in the right time and in the right place. Make sure you carefully weigh the pros and cons before you decide to use leverage for yourself. But if you should decide to do so, you may be glad you did.

Check out http://www.commodities-trading.org for more articles on trading soybean commodities and commodity goods.

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Reading Commodity Prices - Is There An Easy Way To Read These Prices?

2007-02-12T02:11:00.000+03:00

Reading Commodity Prices - Is There An Easy Way To Read These Prices? By Mike Singh

When you first enter the world of commodities, you may find that reading prices can be a challenge. You may not know what to consider when it comes to these types of prices and which prices you should even be reading in the first place. A lot of the trades involve buying and selling future contracts and make reading prices even a little more difficult for you to understand. Let's take a look at some basic and beginner stocks and their reading prices to get a little better acquainted.

The reading prices of the first type of commodity are fairly straightforward and easy to understand. Gold and reading prices of it usually are a rather smooth process. Reading prices of gold you must take into consideration that there is usually a minimum set by different exchanges that exchange this commodity. You will have to determine ahead of time just what this minimum is, in order for you to take into account. Just a quick remark on reading prices in general, they will usually be quoted or displayed with no dollar sign and once and a while, the decimal point may be left out. So keep this in mind when you are reading.

Another common commodity, especially for beginners is natural gas. When reading prices in natural gas, keep in mind that prices are quoted in dollars per million metric British Thermal Units or BTU's. The standard BTU used is a thousand mm BTU. This measurement is of how much energy is produced by the burning of the natural gas.

Still another common commodity you may want to know about reading on is a live cattle. What you need to remember in prices for live cattle is how that is measured. Reading prices on cattle involves prices that quote in cents per hundredweight. The average or standard used is 40,000 hundredweight. Keeping this standard in your mind will help you when it comes to reading prices of live cattle.

Coffee and corn are similar when it comes to reading prices for these two commodities. Reading prices for coffee for example, will involve you knowing that the standard covers 37,500 pounds while corn's standard covers five thousand bushels. You must keep each individual one in mind when it comes to commodity prices on these.

Once you have got the basics of reading prices, you will become more familiar and be more comfortable doing so. It is very important and being able to do so properly can save you a lot of time and money in the long run. Once you know how to read prices in the correct way, you can start making money.

Check out http://www.commodities-trading.org for more articles on commodity mutual funds and New York commodities exchange.

Article Source: http://EzineArticles.com/?expert=Mike_Singh http://EzineArticles.com/?Reading-Commodity-Prices---Is-There-An-Easy-Way-To-Read-These-Prices?&id=446711

Setting Investment Goals

2007-02-11T01:05:00.000+03:00

Setting Investment Goals By Sarah Freeland

The first step towards financial independence is setting investment goals. The process of setting goals should start by identifying what type of investments you are interested in. For example, do you want to generate income that you can use right now, do you want to invest your money for your retirement, or do you want to make investments that will improve your net worth?

After you have set your investment goals your next step will be to identify investment products that will help you reach your investment goals. To do this you can use investment research tools like calculators, case studies, tables and lists. You can find these tools online.

As you investigate investment products you will want to start selecting investments that you are interested in. When you have four or five investment products that you are interested in you can start researching these products. To investigate these products you can review their performance history, you can talk to the company that offers the product, and you can read through the product’s promotional material.

The final step in setting investment goals is to talk to an investment professional. They will be able to tell you what investment products are best for achieving your investment goals. They will also be able to tell you how viable the investment products you have selected are. Before you visit with your financial professional make sure that you create a list of investment goals that you have, as well as a list of questions that you have about the investment products that you have researched.

Richard Surber - News, press releases, investment information and updates for Richard Surber - Nexia Holdings, Landis Salon, Black Chandelier Nexia Holdings - (OTCBB: NEXH), headquartered in Salt Lake City, Utah, is a diversified holdings company with operations in real estate, health & beauty, and fashion retail. Visit our seo friendly directory for more information and resources.

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An Introduction To Breakout Trading

2007-02-11T00:48:00.000+03:00

An Introduction To Breakout Trading By Harvey Walsh

Breakouts are one of the easiest technical patterns to spot. They occur in all instruments and in all time frames, so it doesn't matter if you're swing trading a currency, or day trading a futures contract, breakouts are a pattern you can trade.

What Is A Breakout?

Before we look at trading breakouts in more detail, we should first answer the question, what is a breakout? To understand breakouts, first it's necessary to understand support and resistance

- The basis of all technical analysis.

Put simply, support is the point at which enough buyers come into a market to arrest a drop in price. Conversely, resistance is the point at which enough sellers enter a market that the price stops rising.

If buyers enter a market at a certain price, stopping the fall, and the price rises then subsequently falls, the price will once again reach the point of previous support. At this moment, the support is said to be being 'tested'. If the buyers re-enter the market at (or close to) the same price as before, thus pushing the price back up again, we can say that support has held. The support price point now has more strength than before, because it has been tested twice.

If the price bounces from the support point repeatedly, that support becomes stronger and stronger. In a sort of 'self fulfilling prophecy', new buyers will often come into the market near previous support in the hope that the price will once again bounce and rise, thus making the support hold again.

Eventually however, the support will fail and the price will drop through. This is a breakout - so-called because the price has broken out of the range in which it was trapped, between support and resistance.

When a breakout occurs, it will often do so with such force that the price will carry on dropping (or rising, it the breakout was to the upside - that is a break of resistance). To understand why, consider all those buyers who were buying at the support line. Eventually there are not enough of them left to prop up the price, and so it falls below support (in other words, it breaks out). Some buyers who had bought at that price point will immediately cut their losses and sell. This pushes the price down further. As the price drops, more and more buyers who had purchased at support will hit their stops, triggering yet more selling.

This vicious circle of selling causes 'momentum' and the price spirals downwards.

After all, if we sold when the price broke-out to the downside, or bought when it broke-out to the upside, we could just sit back and enjoy the ride, right? Well, not quite...

False Breakouts (Fakeouts)

Not all breakouts follow through. Sometimes the price will dip below support (or pop through resistance) only to turn around and go back within the previous trading range. This is more prone to happening with certain instruments where market makers or big players can control price to a certain degree.

For example, let's imagine a market maker wanting to buy a large quantity of stock. Naturally, he wants to get it at the best price he can. The stock is currently trading within a range. The market maker already has a chunk of stock, and he sells this off, his relatively large selling forcing the price through the support level. As the price of the stock drops, a number of short-sellers enter the market, selling on the breakout expecting momentum to carry the price further down. The market maker starts buying up all this stock that the shorts are selling, getting it for a bargain price. As the sellers run dry, the price is forced back up, and as it does so, the short sellers stops start getting hit and they are forced to cover their positions by buying back stock. All this buying activity pushes the price even higher!

When a breakout is manipulated in this way, it is usually referred to as a 'fakeout'.

Safe Breakout Trading

So if a trader can't be sure if a breakout is going to follow through or not, should they even attempt to trade them? How can we take advantage of this seemingly simple, but deceptively devious, trading pattern?

One way is to carefully choose the instrument we trade. Forex for example, is less prone to fakeouts because the market is so huge that it is almost impossible for any individual or institution to manipulate false breakouts.

Another way is to use advanced trading tools like Level 2, which gives complete market transparency and therefore lets the trader see what's really driving price.

But perhaps the most effective way is simply to become a student of 'momentum', or tape reading. If you can learn to read the tape (the Time & Sales screen, which reports trades in real time), you can quickly learn to spot true momentum and real breakouts.

Conclusion

Breakout trading is a relatively high probability low risk way to trade. As with any trading pattern, breakouts will work some of the time, and will fail other times. With practice, and by learning to read momentum, a skilled trader can quickly learn to spot the best breakout opportunities.

Harvey Walsh is a full time day trader and part time trading coach. He has helped students from around the world to break free from the day job and start a successful and profitable career, day trading from their own homes. You can find out more about Harvey, and learn some of his most profitable trading strategies, at his website http://www.daytradingfreedom.com

Article Source: http://EzineArticles.com/?expert=Harvey_Walsh http://EzineArticles.com/?An-Introduction-To-Breakout-Trading&id=444328

Buy-And-Hold? It Works If You Have 40 Years Or So

2007-02-11T00:38:00.000+03:00

Buy-And-Hold? It Works If You Have 40 Years Or So By Frank Kollar

In business schools, the buy-and-hold strategy is still viewed by the majority as the most viable investing strategy for the financial markets. It is hard to change old beliefs. I often wonder if those who teach such strategies have their own money invested according to their teachings.

"Buy-And-Hold" In The 90s

Most people invested using the buy-and-hold strategy in the 1990s, and as we all know, they lost a bundle when the dot-com bubble burst and we entered the 2000-2002 bear market with losses of 50% to 80%.

Many investment professionals now admit that stock prices are based on the beliefs of the masses. Assets of a company may play a role in the stock price, but the bulk of the price is influenced by popular opinion.

It's hard for many new market timers to accept the idea that prices are based on beliefs of the masses and little more. But in the acceptance of this truth lies the path to profits.

"Buy-And-Hold" In The 70s

Have you ever talked to people who traded stocks in the 1970s? Many will tell you, "I learned my lesson a long time ago. I put my money in the markets and lost it. Never again."

In the 1970s, just about all investors used a buy-and-hold strategy. They searched for "undervalued" stocks, purchased shares, held them, and waited for them to increase in value.

Sometimes it worked, but many times it didn't. And even when it did work, profits weren't anything near what an active, market timer or trader can make.

The buy-and-hold strategy misleads investors. The markets don't go in one direction forever, whether the trend is bullish or bearish. Only by trading the ups and downs of the market can you make significant profits. If you are striving to become a profitable market timer, it is vital that you cast aside the buy-and-hold mindset of the long-term investor, and learn to "think" like a market timer.

The "Trading Edge"

Without a crystal ball, you can't know the future direction of stock prices with any amount of certainty, regardless of whether you use fundamental or technical analysis. However, once you recognize the market prices are the result of thousands of investors who "believe" they know the direction prices are going to take, you have the "key" to beating the markets. Knowing that prices are based on the beliefs of the masses is your "trading edge."

If you look at any long term chart of the financial markets, you will see that "most" of the time, the markets are moving up or down in trends that last many months, and sometimes years.

These "trends" reflect the "beliefs" of all those investors. And those "beliefs" are controlled by the "emotions" of fear and greed. While prices are rising, the majority of investors "believe" they will "continue" to rise. While prices are "falling" the majority of investors "believe" they will "continue" to fall. Because emotions are involved, you will see more investors buying near tops and pushing prices higher than anyone expected they would go. And of course, because emotions are involved, you will also see more investors selling near bottoms, pushing prices lower than anyone expected they would go. This has been going on since the beginning of free market trading.

Conclusion

FibTimer uses that "trading edge." We know that the "masses" will push the financial markets in big up and down moves. Not all the time, but most of the time. That "trading edge" is our key to profits.

FibTimer does not try to "predict" where the market is going. We trade market "trends." Those very same trends that are created by the masses of investors who are buying into rallies and selling into declines.

We also know that trends will last longer than most expect and that is why we stay "with" the trend all the way. Over time, the "knowledge" that the masses will push the markets up and down in huge trends, and trading those trends, results in huge profits.

Article Source: http://EzineArticles.com/?expert=Frank_Kollar http://EzineArticles.com/?Buy-And-Hold?-It-Works-If-You-Have-40-Years-Or-So&id=449051

Should You Join Or Start An Investment Club?

2007-02-10T00:01:00.000+03:00

By Alvin Toh

Investment club is formed by a group of people who pool their money for joint investments. Although investment clubs have been around for decades, they have only become popular in recent years. If you are new to investing and are not sure how to get started, joining or starting an investment club can be a great way to learn the ropes of investing. The primary goal of an investment club is to educate investors. Many novice investors are afraid to start or have limited funds to invest. Investment clubs allow members to pool their money for investment so you don't need to have massive capital to begin investing.

If you are not a member of any investment club, should you join or start one?

Let's consider the advantages of joining an investment club. It cannot be stressed enough how important it is to diversify your investments. You are most likely to have heard the saying, "don't put all your eggs into one basket". It simply means not to invest all of your funds in a single stock. If the company fails, you can potentially lose all the money you've invested. Many new investors have limited funds to invest in a portfolio of stock. Investment clubs enable investors to pool their money for investment in different stocks and diversify their risks.

Another advantage of joining a stock investment club is the opportunity for education. Most individual investors haven't had much in the way of formal education or training regarding the selection of stocks and how to invest properly. Members of investment clubs meet regularly to explore new ideas, study and discuss what stocks to invest. Each member can leverage on other members' expertise and knowledge.

It is not always possible to find a suitable investment club in your area. You may not agree to the investing philosophies of the present investment clubs. Some clubs only accept new members by invitation. You may not get along with other members. The monthly contribution could be too high for you.

If you find yourself in one of these situations, don't fret. You can easily start an investment club by gathering friends, colleagues and family members who are interested in investing. You want to keep the club size to a manageable number, about 10 to 15 members. Too small a group and you may not be able to pool enough funds to invest in a diverse portfolio. Too big a group and you may have problem of disagreement and finding a meeting place.

Investment clubs are not only for novice, but also experienced investors who don't have time to study many companies. Although you may already be investing on your own, joining or starting an investment club is an excellent opportunity to meet other experienced investors to exchange ideas and learn from each other. Ultimately, what you learn at investment clubs will help you in your personal investing.

Investment clubs may not be for everyone. To help you make an informed decision about joining or starting an investment club, get daily updated resources on investment clubs at http://www.aboutinvestmentclub.com/sya-join2

Article Source: http://EzineArticles.com/?expert=Alvin_Toh http://EzineArticles.com/?Should-You-Join-Or-Start-An-Investment-Club?&id=439411

Currency Exchange Basics

2007-02-09T20:37:00.000+03:00

The blunt truth about the politics of climate change is that no country will want to sacrifice its economy in order to meet this challenge, but all economies know that the only sensible long term way of developing is to do it on a sustainable basis." -Tony Blair Investing in an exchange currency market is a hot new trend that has become extremely popular in the last two years. Many people are confused about what is actually being traded in the currency exchange markets. The truth is nothing is physically being exchanged. Currency exchange markets are a place for speculators to come and play. It can be extremely popular but just as risky. All trades made in a currency exchange market happen through a computer system. No actual currency is ever exchanged which means you do not have to have Yen when you exchange it for the Australian dollars or any other currency. Currency exchange traders swap one form of money for another for a profit. The faster you can trade between currencies the more profit you will be able to make. Trading occurs daily and profits can be made quickly. Most of the current currency exchange market is dominated by large financial corporations, hedge fund managers, and speculative individuals who feel they understand the nature of the global economy. Currencies are traded in pairs where the original currency is considered short and the exchanged currency is considered long. For example, a trader might trade Euros for Dollars. Euros are considered short and dollars are considered long. For example, if you went into a shoe store and purchased a pair of shoes for a $100 dollars. The store would be long $100 dollars but short one pair of shoes. This theory is the same theory which applied in currency exchange markets. Remember that in this type of market only numbers are being exchanged and not physical items. Money is made by taking advantage of the difference in value between the two forms of currency. Currency exchange is a fun but complicated trading market. If you are interested in trading currency contact a financial advisor who can help inform you on the basics of currency exchange. Commonly Exchanged Currencies. There are a number of currencies which are exchanged and they include the Euro, American Dollar, Japanese Yen, British Pound, Swiss Franc, Australian Dollar, Canadian Dollar, and the New Zealand Dollar. One of the most popular currency exchange market is Forex. Forex offers online currency trading as well as a huge resource of research and background information. They also allow new investors to set up practice accounts which allow them to buy and sell currency in demo mode. This allows new investors to be able to get their feet wet in the currency markets without losing any money.

Common Investing Mistakes and How to Avoid Them

2007-02-09T16:26:00.000+03:00

One of the first mistakes that a lot of investors make is not diversifying their investment portfolio. By selecting only a few companies to invest in or by investing in only one industry investors are basically putting all of their eggs in one basic. If that industry fails then all of the investments made by the investor will suffer. To avoid this problem it is recommended that you invest in at least 10 different industries and that you invest in at least 20 different companies. If you invest in bonds you may want to stagger their maturity dates. If you don’t want to try and diversify your portfolio on your own you can enlist the help of an investment professional or you can diversify your investment portfolio by investing in mutual funds.

Another mistake that many investors make is trying to time the market. One of the biggest timing mistakes that people make is to invest in popular stocks after their stock price has increased significantly. Another timing mistake is selling a stock when you think it is about to drop in value. Few laypeople can judge when a stock will drop in value, and fewer can judge when they should reinvest. Because of this you can loose out on investment gains your investment would have received had you just let your investment ride. While trying to time the market doesn’t always lead to losses, you can improve your chances of correctly timing the market by relying on the guidance of a professional financial advisor or investment specialist.

The third mistake that a lot of investors make is not reinvesting their money after they make a sale. Many investors, in fact, keep their assets in cash after they make a sale. They do this because they are intimidated by the investment process or because they simply don’t know what other investments they should try. Again to avoid this problem you should turn to your investment specialist. They will be able to help you set up investment goals and they will be able to help you invest and reinvest your money in products that will help you to reach your financial goals.

Richard Surber - News, press releases, investment information and updates for Richard Surber - Nexia Holdings, Landis Salon, Black Chandelier Nexia Holdings - (OTCBB: NEXH), headquartered in Salt Lake City, Utah, is a diversified holdings company with operations in real estate, health & beauty, and fashion retail. Visit our seo friendly directory for more information and resources.

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