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Managing A Portfolio Of Mutual Funds
After youve built your portfolio of mutual funds, you need to know how to maintain it. This week, we talk about how to manage a mutual-fund portfolio by walking through four common strategies:
The Wing-It Strategy
This is the most common mutual-fund strategy. Basically, if your portfolio does not have a plan or a structure, then it is likely that you are employing a wing-it strategy. If you are adding money to your portfolio today, how do you decide what to invest in? Are you one that searches for a new investment because you do not like the ones you already have? A little of this and a little of that? If you already have a plan or structure, then adding money to the portfolio should be really easy. Most experts would agree that this strategy will have the least success because there is little to no consistency.
Market-Timing Strategy
The market timing strategy implies the ability to get into and out of sectors or assets or markets at the right time. The ability to market time means that you will forever buy low and sell high. Unfortunately few investors buy low and sell high because investor behavior is usually driven by emotions instead of logic. The reality is most investors tend to do exactly the opposite – buy high and sell low. This leads many to believe that market timing does not work in practice. No one can accurately predict the future with any consistency.
Buy-and-Hold Strategy
This is by far the most commonly preached investment strategy . The reason for this is that statistical probabilities are on your side. Markets generally go up 75% of the time and down 25% of the time. If you employ a buy-and-hold strategy and weather through the ups and downs of the market, you will make money 75% of the time. If you are to be more successful with other strategies to manage your portfolio, you must be right more than 75% of the time to be ahead. The other issue that makes this strategy most popular is it is easy to employ. This does not make it better or worse. It is just easy to buy and hold.
Performance-Weigthing Strategy
This is somewhat of a middle ground between market timing and buy and hold. With this strategy, you will revisit your portfolio mix from time to time and make some adjustments. Lets walk through an oversimplified example using real performance figures.
Lets say that at the end of 1996, you started with an equity portfolio of four mutual funds and split the portfolio into equal weightings of 25% each.
After the first year of investing, the portfolio is no longer an equal 25% weighting because some funds performed better than others.
The reality is that after the first year, most investors are inclined to dump the loser (Fund D) for more of the winner (Fund A). However, the right strategy is to do the opposite to practice sell high, buy low. Performance weighting simply means that you sell some of the funds that did the best to buy some of the funds that did the worst. Your heart will go against this logic but it is the right thing to do because the one constant in investing is that everything goes in cycles.
In year four, Fund A has become the loser and Fund D has become the winner.
Performance weighting this portfolio year after year means that you would have taken the profit when Fund A was doing well to buy Fund D when it was down. In fact, if you had re-balanced this portfolio at the end of every year for five years, you would be further ahead as a result of performance weighting.
Its all about discipline.
The key to portfolio management is to have a discipline that you adhere to. The most successful money managers in the world are successful because they have a discipline to manage money and they have a plan. Warren Buffet said it best: To invest successfully over a lifetime does not require a stratospheric I.Q., unusual business insight or inside information. What is needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.
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Why Being A Copycat Investor Can Get You Hurt
While some investors are trailblazers and do their own research, many investors attempt to mimic the portfolios of well-known investors, such as Warren Buffett of Berkshire Hathaway, in the hope of being able to cash in on those investors world-class returns. But copying anotherinvestors portfolio, particularly an institutional investors portfolio, can actually be quite dangerous. So, before you jump on the copycat bandwagon, get to know the pitfalls of this approach to investing.
An Inability to Adequately Diversify Holdings
It is not uncommon for a major institutional investor, such as a mutual fund, to own more than 100 stocks in a given portfolio. Even Berkshire Hathaway (Warren Buffetts investment vehicle), which has a tendency to invest in fewer stocks as opposed to more, owns shares in some 38 (as of June 30, 2008) different public companies! (Read Build A Baby Berkshire and Warren Buffetts Best Buys to learn more about investing like Warren Buffett.)
Institutional investors like Warren Buffett are able to spread their risk over a number of companies so that if one particular company, sector, industry, or even country hits a rough patch, there are other investment holdings that may pick up the slack. Unfortunately, most individual investors have neither the funds, nor the financial wherewithal to ever achieve such diversification. (See what can happen when diversification goes too far in The Dangers Of Over-Diversification
So what do investors do when they realize that they cannot maintain as many positions as an institutional investor?
Usually, the individual investor will copy or mimic a small portion of the institutions holdings (that is, heavily invest in some holdings and ignore others entirely). Unfortunately, this is where trouble can occur – especially if one or more of those core holdings heads south.
An individual investors inability to adequately mimic an institutions diversification profile and mitigate risk is a major reason why many individuals fail to outperform major mutual funds - even if they maintain similar holdings. (To find out more about institutional sponsorship as a gauge of stock quality, read Institutional Investors And Fundamentals: Whats The Link?)
Different Investment Horizons
Many people like to refer to themselves as longer-term investors, but when it comes down to it, most investors want to see results in the first 12 to 24 months that they own a particular stock.
In fact, according to an often-cited November 2001 study by Gavin Quill (a senior vice president and director of research studies at Financial Research Corporation, a financial services research and consulting firm), mutual fund holding periodsin 2000 were only about three years! That is well shy of the more than 30 years that Berkshire Hathaway has owned shares of Washington Post Company. In other words, on average, institutions seem to have much more patience than their individual-investor counterparts do. (Read more about how investing for the long haul can benefit you in Long-Term Investing: Hot Or Not?)
In short, even if individual investors achieve diversification similar to the institutions they are looking to mimic, they might not be able afford or have the patience to sit on a given investment for five or 10 years, as they may need to tap into the funds to buy a home, to pay for school, to have children or to take care of an emergency situation, and doing so may adversely impact their investment performance .
Ostrich Approach To Investing A Bird-Brained Idea
Of the different investment strategies and behaviors that an investor or fund manager can adopt, some notable ones include active investing , passive investing and the ostrich effect.
• Active investing involves the constant buying and selling of securities in order to profit from short-term changes in the stock market. This strategy is often very beneficial when the market is doing particularly well.
• Passive investing is just the opposite of active investing: it employs a buy-and-hold strategy to profit from long-term trends in the stock market and is used by investors who want to avoid risks.
• Both active and passive investors may exhibit the ostrich effect, or a tendency to ignore bad news in the market.
While there are similarities between passive investing and the ostrich effect, such as the risk-averse nature of the investors who practice them, there are also major differences. These differences, and the dangers of ignoring market news, will be explored here.
What Is Passive Investing?
Passive investing is a long-term strategy that involves restricted buying and selling of securities. A passive investor buys securities in order to hold them for a long period of time, because he or she believes that stocks will go up in the long run.
An investor who invests passively does not seek to beat the market; he or she just wants to match the markets returns. In order to accomplish this, passive investors often invest in index funds and exchange-traded funds (ETF) that mirror market indexes. This is why passive investing is sometimes referred to as index investing. (Get to know the most important market indexes and the pros and cons of investing in them in Index Investing.)
Advantages of Passive Investing
Some advantages of passive investing include the following:
• Lower costs and higher profits: Investing in index funds usually incurs lower management fees, because a passively traded portfolio requires fewer resources and less time to manage than an actively traded portfolio. If an actively traded portfolio yields the same returns as a passively traded portfolio, the passive investor is going to receive a higher return, because when investors sell a security, the amount of profit they receive is equal to the sell price less the buy price, minus management fees and trading commissions. (Learn how you can save on fees and commissions in Settling Wrap Fees.)
• Automatic gains from market upswings: Since passive portfolios are constructed to closely follow the performance of market benchmarks like the S
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The Benefits Of An Investment Club
Most mutual fund investors would be hard pressed to name more than one or two of the top holdings within their favorite funds. This is because fund investors tend to compare mutual funds on the basis of their performance, without giving much thought to the specific stocks, bonds and other financial instruments held within the fund. By their nature, mutual funds are a passive form of investment: we trust that the mutual fund manager has the expertise to choose the right investments that will provide the best returns in our portfolios.
As individual investors, we rarely have a large enough portfolio to make individual equity or bond selections on our own. As a result, the average retail portfolio is usually insufficiently diversified with individual stock picks, and we mutual fund holders are subjected to undue risk from one or two bad choices forming a large percentage of our total holdings. For these reasons, retail investors who are dissatisfied with the passive approach of mutual funds and want to take a more active role in choosing equities would do well to join an investment club. (Find out more in Benefit From A Winning Investment Club.)
The Benefits of an Investment Club
You can think of an investment club as a small-scale mutual fund where decisions are made by a committee of non-professionals. In fact, an investment club can be established as a legal entity, either as a legal partnership or as a limited liability corporation, making its framework similar in principle to that of a mutual fund. Best of all, an investment club avoids the often burdensome management fees that all mutual funds levy on their unit holders - fees that can have a significant impact on the overall return provided by mutual funds.
But the benefits of an investment club come with a major caveat: the returns (or losses) that the club realizes entirely depend on club members and their abilities to choose the right investments for their pooled funds. When we purchase mutual funds from the major fund companies, we are effectively purchasing the education, experience, skills and discipline of the mutual fund managers entrusted with our money. When we join an investment club, we are attempting to replicate (and improve upon) some of those management attributes, but in a non-professional setting.
A typical investment club will meet on a regular basis (usually every month) to review its existing portfolio and to take suggestions from club members regarding new investment opportunities. The monthly meeting is an open floor, where each club member is able to voice his or her opinion about the suitability of new investments and other concerns regarding the performance of the pooled funds. Unlike any mutual fund, the investment club is a true democracy: here, the collective wisdom of the club members, combined with information theyve gathered through intensive research, serves (in theory) to produce the best investment decisions.
Principles of a Successful Investment Club
The National Association of Investors Corporation (NAIC) is the pre-eminent advocate of collaborative investing. It maintains extensive archives of information for starting and maintaining investment clubs. The NAIC advocates four simple principles which apply as much to making excellent individual investment decisions as they do to making democratic decisions in a club setting:
• Invest regularly.
• Reinvest dividends and capital gains.
• Discover and own leadership growth companies.
• Prudently diversify by company size and industry.
These principles are very much in keeping with a buy-and-hold strategy, characterized by low portfolio turnover rates. The average holding period for equities within NAIC-advocated portfolios is more than six years. The NAICs principles and strategies have enabled it to claim that on average, the long-term performance of NAIC members has generally outperformed market benchmarks. The NAIC boasts a large membership consisting of both individual investors and investment clubs, and it offers services for introducing individuals to clubs in their area. (Learn more about investment clubs in Investment Clubs Pool Assets, Expertise and 4 Tips For Joining An Investment Club.)
Conclusion
You dont need to belong to the National Association of Investors Corporation to see the value in its overarching principles of discipline, diversification, reinvestment and careful selection of top companies. Indeed, you dont even need to belong to an investment club to adopt these principles as part of your individual investment strategy.
But there are clear benefits to the discipline and decision-making typical of investment clubs. By maintaining a strict regimen of regular meetings, investment clubs force individual investors to adopt an active investment style, in which portfolio review is ongoing and investment decisions - whether to buy, sell or hold - are constantly made.
Furthermore, the decision-making power of the investment club resides in its democracy. Each member brings his or her own education, experience and skills to the group, all of which are used to their fullest when evaluating and debating a decision. The power of the mutual fund comes from professional management that may be able to beat average market returns. The power of the investment club comes from the collective talents of numerous individual members.
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Five Things To Know About Asset Allocation
With literally thousands of stocks, bonds and mutual funds to choose from, picking the right investments can confuse even the most seasoned investor. However, starting to build a portfolio with stock picking might be the wrong approach. Instead, you should start by deciding what mix of stocks, bonds and mutual funds you want to hold - this is referred to as your asset allocation.
What is Asset Allocation?
Asset allocation is an investment portfolio technique that aims to balance risk and create diversification by dividing assets among major categories such as cash, bonds, stocks, real estate and derivatives. Each asset class has different levels of return and risk, so each will behave differently over time. For instance, while one asset category increases in value, another may be decreasing or not increasing as much. Some critics see this balance as a settlement for mediocrity, but for most investors its the best protection against major loss should things ever go amiss in one investment class or sub-class.
The consensus among most financial professionals is that asset allocation is one of the most important decisions that investors make. In other words, your selection of stocks or bonds is secondary to the way you allocate your assets to high and low-risk stocks, to short and long-term bonds, and to cash on the sidelines.
We must emphasize that there is no simple formula that can find the right asset allocation for every individual - if there were, we certainly wouldnt be able to explain it in one article. We can, however, outline five points that we feel are important when thinking about asset allocation:
Risk vs. Return
The risk-return tradeoff is at the core of what asset allocation is all about. Its easy for everyone to say that they want the highest possible return, but simply choosing the assets with the highest potential (stocks and derivatives) isnt the answer. The crashes of 1929, 1981, 1987, and the more recent declines of 2000-2002 are all examples of times when investing in only stocks with the highest potential return was not the most prudent plan of action. Its time to face the truth: every year your returns are going to be beaten by another investor, mutual fund, pension plan, etc. What separates greedy and return-hungry investors from successful ones is the ability to weigh the difference between risk and return. Yes, investors with a higher risk tolerance should allocate more money into stocks. But if you cant keep invested through the short-term fluctuations of a bear market, you should cut your exposure to equities. (To learn more about bond investing , see Bond Basics Tutorial.
Dont Rely Solely on Financial Software or Planner Sheets
Financial planning software and survey sheets designed by financial advisors or investment firms can be beneficial, but never rely solely on software or some pre-determined plan. For example, one rule of thumb that many advisors use to determine the proportion a person should allocate to stocks is to subtract the persons age from 100. In other words, if youre 35, you should put 65% of your money into stock and the remaining 35% into bonds, real estate and cash.
But standard worksheets sometimes dont take into account other important information such as whether or not you are a parent, retiree or spouse. Other times, these worksheets are based on a set of simple questions that dont capture your financial goals. Remember, financial institutions love to peg you into a standard plan not because its best for you, but because its easy for them. Rules of thumb and planner sheets can give people a rough guideline, but dont get boxed into what they tell you.
Determine your Long and Short-Term Goals
We all have our goals. Whether you aspire to own a yacht or vacation home, to pay for your childs education, or simply to save up for a new car , you should consider it in your asset allocation plan. All of these goals need to be considered when determining the right mix.
For example, if youre planning to own a retirement condo on the beach in 20 years, you need not worry about short-term fluctuations in the stock market . But if you have a child who will be entering college in five to six years, you may need to tilt your asset allocation to safer fixed-income investments.
Time is your Best Friend
The U.S. Department of Labor has said that for every 10 years you delay saving for retirement (or some other long-term goal), you will have to save three times as much each month to catch up. Having time not only allows you to take advantage of compounding and the time value of money, it also means you can put more of your portfolio into higher risk/return investments, namely stocks. A bad couple of years in the stock market will likely show up as nothing more than an insignificant blip 30 years from now.
Just Do It!
Once youve determined the right mix of stocks, bonds and other investments, its time to implement it. The first step is to find out how your current portfolio breaks down. Its fairly straightforward to see the percentage of assets in stocks vs. bonds, but dont forget to categorize what type of stocks you own (small, mid, or large cap). You should also categorize your bonds according to their maturity (short, mid, long-term). Mutual funds can be more problematic. Fund names dont always tell the entire story. You have to dig deeper in the prospectus to figure out where fund assets are invested.
There is no one standardized solution for allocating your assets. Individual investors require individual solutions. Furthermore, if a long-term horizon is something you dont have, dont worry. Its never too late to get started. Its also never too late to give your existing portfolio a face-lift: asset allocation is not a one-time event, its a life-long process of progression and fine-tuning.
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Great Investors Not Named Buffett
Sometimes it feels as though the name Warren Buffett is morphing into something like the legend of Bloody Mary - say his name three times in a column about investing and readers suddenly appear. It is very much worth mentioning, though, that Warren Buffett is simply one example of a successful investor and businessman. Granted, Mr. Buffett is an excellent example of a successful investor, but readers might be interested in considering the approaches and track records of other investors that have enjoyed considerable professional success, but do not necessarily get the same publicity as Warren Buffett. (This esteemed investor rarely changes his long-term investing strategy, no matter what the market does. See Warren Buffetts Bear Market Maneuvers.)
George Soros
Perhaps it would have seemed impossible to imagine as he was living through World War II, but George Soros became one of the most successful investors in history. With a current net worth north of $14 billion, Soros is largely retired as an active investor. However, he established a remarkable record while running the Quantum Group of hedge funds.
Soros is mostly known for his successes in making large bets in the currency and commodity markets. The most famous success story of his career is most likely Britains Black Wednesday currency crisis, where Soros correctly surmised that the country would have to devalue the pound and reportedly made around $1 billion on his positions.
Whereas Buffett is famous for carefully evaluating individual companies and holding those positions for years, Soros was much more inclined to base his investment decisions on what would be considered macroeconomic factors. Whats more, investments in the currency and commodity markets do not lend themselves to multi-decade (or even multi-month) commitments, so Soros was a much more active investor. (George Soros spent decades as one of the worlds elite investors, and even he didnt always come out on top. But when he did, it was spectacular. Check out George Soros: The Philosophy Of An Elite Investor.)
Ronald Perelman
Some will question whether Perelman is properly called an investor. Though no one will dispute that a net worth of approximately $12 billion entitles him to be seen as a significant success in business, Pererlmans activities have centered on acquiring businesses outright, refocusing them on core competencies (often through spin-offs) and then either selling the companies later at a profit or holding onto them for the cashflow they produce. In that latter regard, though, Perelman is not so unlike Buffett - much of Buffetts success can be tied to the prudent acquisition of value-creating businesses within Berkshire Hathaway.
While Perelman has frequently faced criticism for his acquisition tactics and management decisions, he has nevertheless had many successful transactions, including his involvement in Marvel, New World Communications and several thrifts, savings and loans and banks.
John Paulson
With about $16 billion in net worth, John Paulson is arguably the most successful hedge fund investor today. What makes that even more impressive is that he founded Paulson
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Variety A Bitter Spice For Investors
Customer confusion is a phenomenon that has emerged relatively recently and is normally considered in terms of conventional marketing. For instance, if you go into a big box store, you will be confronted with dozens of models of various products, which, to the average person, may look pretty much the same. This can be confusing and problematic for both customers and firms.
The same thing often occurs in the investment market, but the effects are even more substantial and the consequences for consumers may be far more serious than for other goods and services. If youve ever felt overwhelmed by the array of financial products in the market, read on for some tips on how to simplify your portfolio.
Customer Confusion
A number of studies reveal that while customers may initially be attracted to a wide choice of products, many eventually give up in despair or make the wrong decisions. For instance, Frank Pillar and his colleagues investigated the consequences of mass confusion and the burden of choice in the online world (Journal of Computer-Mediated Communication, 2005). I also looked at the confusion phenomenon from a broader marketing perspective in Choice That Sends Out Wrong Buying Signals (Daily Telegraph, 2005).
What these studies suggest is that being spoiled for choice has serious implications, not just for the successful marketing of investment products , but on the gains or losses for investors. In the investment sector, the main victims are those that are financially inexperienced and rely on brokers and advisors to recommend products.
Too Many Choices
For instance, investment magazines and the financial sections of many newspapers display a remarkable array of products, categories, sub-categories and statistics. This often confuses consumers.
Take theThe Wall Street Journal Europe, which has a section on international investment funds. In August 2007, the total fund listing for Alliance Bernstein, which is just one organization, contained more than 60 funds: five conservative funds, seven balanced and various permutations of growth funds, value funds and so on. For less experienced investors in particular, choosing which fund or combination of funds will work best for them can be very difficult.
Too Much Complexity
Some products such as (certain types of) certificates, options and derivatives are notoriously complex and each constitutes its own esoteric world. An article from the highly-regarded Swiss Neue Zuercher Zeitung entitled Confusion Over Complex Financial Products (July 2007), makes this exact point. Referring to the collateralized debt obligation (CDO) market, the article points out that because of the high level of complexity, these products are difficult to evaluate and rate.
Furthermore, the markets for all investments are in constant flux. This means that even if you have clarity at one point in time, confusion can arise later as a result of ongoing developments relating to interest rates, market sentiment, economic data and many other factors.
The Dangers of Confusion
With the truly overwhelming selection of assets in the financial markets, many investors find it nearly impossible to make efficient and effective purchasing decisions based on the right criteria. In fact, they are often totally unable to figure out what they really need or even understand what they are being offered. When investing becomes a stressful ordeal, customers minds tend to shut down in protest. Their wallets either go back into their pockets or their money ends up in the wrong place.
In addition, inexperienced investors are particularly vulnerable to misselling. As a result, cases abound in which people put large sums of money into the hands of a broker, having no idea how their money will be handled. In a worst-case scenario, the money is plugged into products that are totally unsuited to the unwitting investor.
The growing number of choices in the market can mean that even experienced brokers may not be able to cope with the changing array of funds in the market and, as a result, may limit themselves to a very narrow range. In other words, brokers may sell specific products either because they are genuinely good, or simply because they are familiar. The latter reduces confusion - even for brokers - but can be financially dangerous for their clients. Unscrupulous brokers may also stick to the products that bring in the highest commission. This truly unethical behavior is also facilitated by consumer confusion.
Coping with Confusion
There is a right and a wrong way to cope with confusion about which products belong in your portfolio. The wrong way is to cop out and put everything in cash or in one product or asset class. This leads to a poorly constructed and inadequately diversified portfolio. Conversely, some investors have a hodgepodge of all kinds of assets that do not fit together at all. This is also poor asset allocation and it too can prevent an investor from realizing appropriate returns.
Find A Trustworthy Advisor
Learning enough to make good investments or finding people you can rely on and trust are good ways of working through the customer confusion problem. Some effort is essential in order to avoid falling into the classic investment traps. That is, you need to make sure you either knowhow to invest well, or you need to know that you are relying on people who merit your trust.
However, given the extraordinary complexity of the investment world, it is necessary to accept some limitations to the above. In this business, even an expert does not know everything. For example, a bond specialist may not be the best person to turn to for guidance on equity investments or foreign products. In order to get the best financial advice , you need to consider where peoples expertise lies and where it ends.
Keep It Simple
Even if you have good advisors, dont let your portfolio get too busy. Limit your portfolio to a variety of asset classes and items that both you and your broker understand. For example, the conventional wisdom is that if you have a portfolio of individual stocks, 10-15 stocks is about all that you can cope with without becoming overwhelmed. It simply is not possible to keep tabs too many bits and pieces in a portfolio.
For this reason, despite what they often promise, funds with 40 or more holdings tend to track the market as a whole. That is, individuals or fund managers with overloaded and excessively complex portfolios tend not to manage them actively and effectively. As a result, a market indexfund that is designed to move with the market may be more effective - not to mention much less confusing.
In the same vein, if you have 30 different funds, it is likely to be very difficult to manage, monitor and control them all effectively. For some investors, a mixed fund that does all this for you might be the best way to avoid confusion. Such funds contain a combination of asset classes such as stocks, bonds and alternative assets and they do all the monitoring and rebalancing. If they do it well, it is probably the simplest and least confusing way to invest for those with limited time or little inclination to manage their own money.
The Bottom Line
If confusion is to be avoided, you need to keep your portfolio simple and sensible, but at the same time, sufficiently diversified. Take the time to find this balance, and avoid becoming overwhelmed by new products. Investing neednt be complicated, and if you avoid confusion, your portfolio will reward you for it.
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ADRs: Invest Offshore Without Leaving Home
It was April 1927. Calvin Coolidge was president, and noteworthy events that die-hard historians or baseball fans may recall include the Italian anarchists Saccho and Vanzetti receiving their death sentences and Babe Ruth hitting the first of his 60 home runs, - a single-season record at the time. For investors, a third event in April 1927 has proved equally important and far more profitable: the debut of American depositary receipts (ADRs). (Read What Are Depositary Receipts? for background reading on this common type of security.)
An ADR represents ownership of shares in a foreign company, but it can be bought and sold just like any U.S. stock, allowing investors to diversify their portfolios with foreign assets, but skip the hassle of a foreign brokerage account. Sound intriguing? Find out how these securities work and what they can add to your portfolio.
History of the ADR and Current Stats
John Piermont Morgan (yes, that J.P. Morgan), launched the first ADR for the U.K.s Selfridges Provincial Stores Limited, the famous retailer now known as Selfridges Plc. Even the audacious J.P. Morgan probably had no idea of the trend he was touching off. As of mid-2008, there were more than 2,250 depositary programs representing more than 1,800 companies from over 70 countries listed on global stock exchanges. According to the Bank of New York Mellon, in the first half of 2008, 52 billion shares of ADRs changed hands, representing a value of $2.07 trillion.
Benefits of ADR Investing
Some benefits of ADR investing are clear. First, many international markets, especially emerging markets, have higher GDP growth rates than the United States or Europe. While the American stocks in your portfolio may be stagnating, holding a few ADRs has the potential to provide you with solid returns during downturns in domestic markets. Your broker and the financial media are always advocating diversification; ADRs represent a great avenue to diversify yourportfolio. (Read Going International to learn about this and other ways to diversify your portfolio with foreign stocks.)
Another benefit investors can realize through ADR investing is favorable currency conversions for dividends and other cash distributions. For example, if you own shares of a European ADR and the euro is strong against the dollar, a dividend increase will be that much more rewarding because the dividend payment has to be converted to dollars. (Read more in The Impact Of Currency Conversions.)
The most obvious benefit of ADRs is that they make international companies that investors would normally have to pay a premium for (or perhaps be unable to buy at all) more accessible. If you want to buy 100 shares of Petrobras, the Brazilian oil giant, all you need to do is call your broker or log onto your online brokerage account. Theres no need to find a distant relative living in Brazil to execute the trade for you.
Perils and Pitfalls
As buyers of ADRs, we treat them as we would any other securities purchase: we want to profit. However, there are issues that can arise with ADRs that arent always germane to domestic stocks. Lets use a 2008 geopolitical conflict to highlight a potential peril. Say you own some shares of a Russian oil ADR, and neighboring country Georgias military is able to knock out a couple hundred miles of pipeline. As far-flung as it seems, this scenario could come to bear, especially in a developing nation. The same goes for political unrest. Its probably best to identify dictators and not invest in companies based in nations that are ruled by these leaders, as these countries are more prone to political strife. (Due diligence is key to not getting burned by an unfamiliar investment. Read Due Diligence In 10 Easy Steps to learn what to look for.)
Of course your ADR investments are subject to some of the same risks as your domestic investments, including credit, currency and inflation risk. These should be taken into account, regardless of the state of the market. There are some markets, such as Australia and Canada, where the local currencies are tied directly to commodity prices. If gold or oil is going up, this contributes to a rise in those currencies. Of course, when those commodities fall, the currencies fall in tandem. This is just one more factor an investor needs to take into account. (Read Investing Beyond Your Borders for more risks associated with investing overseas.)
There are levels of ADRs on U.S. markets. For example, a Level I ADR trades over the counter and as such, is highly speculative. Those shares probably arent liquid and, whats worse, information on the company is scant. Keep in mind that many countries dont require their public companies to report results quarterly like the U.S. does. For better or worse, Level I issues are the fastest-growing segment of the ADR market, according to the Bank of New York Mellon.
Thinking of buying that Chinese solar company that trades 20,000 shares a day at $1.50? Its probably best to wait for it to graduate to the Nasdaq or NYSE. Level II and III ADRs are where investors want to be. These are the ADRs that trade on major U.S. exchanges and must uphold the same general reporting rules and SEC regulations as American-based corporations. (IFRS are poised to change some aspects of international reporting. Read International Reporting Standards Gain Global Recognition to learn more.)
Tax Treatment of ADRs
Tax treatment of ADRs by the IRS is generally the same as for domestic investments. Investors are subject to the same capital gains and dividend taxes at the same rates. There is a little twist, however: many countries will withhold taxes on dividends paid. While the American investor must still pay U.S. income tax on the net dividend, the amount of the foreign tax may be claimed by the investor as a deduction against income or claimed against U.S. income tax. Investors are encouraged to consult a professional tax or investment advisor to make sure they are recording (and paying taxes on) their ADR investments properly. (Read more about capital gains and dividend taxation in Dividend Facts You May Not Know.)
Conclusion
Investors should look beyond the confines of the U.S. borders in an effort to diversify and maximize returns. Many investors ignore the foreign-equity asset class entirely, and this is not beneficial to their portfolios. ADRs are one way to diversify your portfolio and help you achieve better returns when the U.S. market is in a slump.
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Bailout Acronyms 101
The government has been launching stimulus programs, financial entities and other programs designed to lead us out of recession nearly as fast as lawmakers and bureaucrats can come up with acronyms. As soon as the media begins to tout a new one, theres another on its heels. (For a comprehensive review of the current crisis, refer to The 2007-2008 Financial Crisis In Review.)
From TAF to PPPIP
It all began in December of 2007, when the United States Federal Reserve, the Bank of Canada, the Bank of England, the European Central Bank (ECB) and the Swiss National Bank took coordinated action to address the developing credit crisis. More than two years later, the bailout efforts continue. The primary flavors of the alphabet soup in the United States include:
• TAF
The Term Auction Facility was launched on December 12, 2007. It permitted banks to use securities as collateral to take short-term loans from the federal government for periods of either 28 or 84 days. In the Feds words, TAF is a credit facility that allows a depository institution to place a bid for an advance from its local Federal Reserve Bank at an interest rate that is determined as the result of an auction. The first auction took place on December 17.
• TSLF
The Term Securities Lending Facility was launched on March 11, 2008. Like TAF, which made credit available to depository institutions, TSFL made $200 billion in credit available to other financial institutions (brokerage firms and other entities such as Fannie Mae, Freddie Mac, Citigroup, Countrywide Financial) for 28-day periods as opposed to the traditional overnight loans. These entities use securities as collateral to borrow money. Weekly auctions began on March 27, 2008.
• PDCF
On March 17, 2008, the Federal Reserve announced the creation of the Primary Dealer Credit Facility. Unlike TAF and TSLF, which were designed to address long-term funding needs, PDCF provides daily access to cash to the same entities that borrow from TAF and TSLF. The institutions pay an interest rate equal to the Feds primary credit rate for short-term (overnight) loans. (Learn more in Top 6 U.S. Government Financial Bailouts.)
• AMLF
In September, 2008, the Federal Reserve Board announced the creation of the Asset-Backed Commercial Paper Money Market Fund Liquidity Facility, which loans money to banks and bank holding companies to help them meet redemptions in money market funds. They do this by lending funds to borrowers to purchase eligible ABCPs from the money market fund. Because the market for commercial paper dried up, the government feared that investors would be unable to redeem their assets from money-market funds. This could have been a major financial meltdown, as money-market funds have been touted as cash-like, safe investments.
• TARP
While previous programs were designed to thaw the frozen credit markets, the serious attempts at economic salvation really started with the Troubled Assets Relief Program. TARP, also known as the bailout, entered the world on October 3, 2008. It was $700 billion program conceived in response to financial institutions struggling under the weight of sub-prime loan defaults. The greed-driven lenders gave money to foolish borrowers that were obviously unable to repay it, so the government agreed to use tax-payer money to take the bad loans off of the lenders books in order to thaw the credit markets.
• TALF
TALF came next. In March of 2009, the Term Asset-Backed Securities Lending Facility, or bailout number two, tossed $200 billion more into the bailout pool by printing new money. The government launched TALF after the asset-backed securities (ABS) market froze over in October, causing consumers and small business owners to be unable to access credit.
TALF was supposed to help market participants meet the credit needs of households and small businesses by supporting the issuance of ABS collateralized by student loans, auto loans, credit card loans , and loans guaranteed by the Small Business Administration (SBA). This effort also wasnt enough.
• FSP
Bailout number three, the Financial Stabilization Plan, grew TALF to a trillion dollars. It also permits commercial-mortgage backed securities (CMBS) to be used as collateral.
• CPFF
The Commercial Paper Funding Facility came along in October of 2008, as commercial paper fell victim to illiquid credit markets. It was designed to provide a market for commercial paper by purchasing commercial paper from eligible issuers. The facility would use a special purpose vehicle (SPV) to buy and hold these commercial paper to maturity and use the proceeds at maturity to repay the funds they borrowed from the Fed.
• PPIP
The Public-Private Investment Program , rolled out in March 2009, was created to buy bad assets in order to get them off of banks books. It was funded with a combination of TARP money and money from private investors. The programs main purpose was to provide price discovery in the market for toxic assets and to remove these assets from the balance sheets of financial institutions.
When Will the Madness End?
The long, complicated saga can be summarized as the result of a consumption-crazed society willing to borrow more than it can afford to repay from lenders that were all too willing to dole out the cash in the name of ever-increasing profits. After the loans were made, they were packed into structured products and sold to investors who didnt understand what they were buying and didnt want to as long as the investments generated hefty returns. When the borrowers failed to repay the loans, the fancy investments fell apart, leaving the taxpayers to fund the cleanup.
The increasingly complex array of structured products form an alphabet soup of their own:
• mortgage-backed securities (MBS)
• collateralized mortgage-backed obligations (CMBO)
• collateralized debt obligation (CDO)
• collateralized bond obligation (CBO)
• collateralized loan obligation (CLO)
Lessons Learned
While the alphabet soup of investments and programs designed to clean up after them is a deep and messy brew, the lessons from the debacle are far clearer and apply to lenders, borrowers, businesses and individuals alike, include those that created the mess and those that got caught up in it. First, dont lend or borrow more that you can afford to repay, and second, dont buy or sell anything that you dont understand.
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Get A Hold On Mishandled Accounts
Investors often look to professionals to help them navigate the markets and provide a certain level of service, but there are times when they may feel that an account is being mishandled. As tempting as it may be to find someone to blame for monetary losses, they are often the result of market conditions and investors must be prepared for such risks. However, arbitration or other avenues may be warranted if evidence suggests that a broker recommended an unsuitable investment, committed fraud, or charged excessive commissions by churning the account. In this article, well help you to decide whether your account has been mishandled and if you do need to act on the complaint. (To learn more, see Paying Your Investment Advisor - Fees Or Commissions?)
Your First Steps
If you feel that your broker has not acted in your best interest, try to exhaust all possible remedies with the investment company. After quantifying the loss, schedule a meeting with the primary contact at the investment firm to have an extensive discussion, and listen to the brokers side of the story. If this process does not yield adequate information, escalate the complaint to the next level of management until some type of resolution is reached. This may include various outcomes, including simply waiting for the markets to improve to ending all discussions and proceeding with legal action.
If the dispute is with a broker, you probably already agreed to settle through arbitration when you began working with the firm. In this case, the Financial Industry Regulatory Authority (FINRA), formerly the National Association of Securities Dealers (NASD), would handle the arbitration process from start to finish. The groups dispute resolution forum helps resolve matters between investors and securities firms, as well as industry-related issues between individual registered representatives and their firms. (To learn more, see Broker Gone Bad? What To Do If You Have A Complaint and When A Dispute With Your Broker Calls For Arbitration.)
If You Need Legal Representation
As with any potentially lucrative legal proceeding, many legal advisors offer free consultations. Consulting an attorney opens up an outside perspective and can help confirm the appropriate forum for resolving a dispute. This is a good time to begin building a short list of potential litigators, should the need arise. If an arbitration path is appropriate, the list will shrink, as more attorneys handle court cases than arbitration.
While the entire process is simplified in order for any one who has a grievance to file a claim and proceed, the majority of customers pursue their claims in conjunction with a legal team that includes at least one attorney and an expert witness. It is also a good time to set reasonable expectations with potential outcomes and time frames. Do not count on large settlements that include punitive damages, as such generous judgments are rarely rendered. Be prepared to wait months or even years before the arbitration date is set. Depending on the size of the claim and the legal participants, anticipate that arbitration that is not completed in the originally scheduled time frame may be postponed to accommodate participant and panel members schedules.
The Arbitration Process
The table below presents the number of cases handled by FINRA on an annual basis. Typically, the caseload increases in years following volatile financial markets where investors have suffered losses. Caseloads hit historically high levels in 2003, approximately two years after what the tech bubble burst and the stock market plunged.
Year Cases
2002 7,704
2003 8,945
2004 8,201
2005 6,074
2006 4,614
2007 3,238
If arbitration appears to be the best course of action, visit the FINRA website and search pending cases with the investment firm or registered representative in question. The listing will provide a summary and itemization of any pending or closed cases against the firm and its representative or advisor. It will not, however, include every issue or any cases that expunged the record as part of the settlement.
If the search is for a registered investment advisor (RIA) rather than someone who works for a brokerage firm, you will be redirected to the Securities And Exchange Commission (SEC) website, or possibly to a state-sponsored site if the advisor is state licensed. If the search is for a registered representative or a brokerage firm, FINRAs BrokerCheck program will search data from the Central Registration Depository (CRD) registration and licensing database, which gathers data reported on industry registration and licensing forms. BrokerCheck reports professional background information on currently registered brokers, registered securities firms and previously registered parties. One section provides vital information regarding events reported at the CRD, which is required by the securities industry registration and licensing process. Any number of financial disclosures can be listed here, including bankruptcies or unpaid liens. The listing might also contain formal investigations, customer disputes, disciplinary actions and criminal charges or convictions.
Filing a Complaint
If you determine that the portfolio was mishandled, the next step is to file a complaint. FINRA suggests doing so as soon as possible to avoid a delay in arbitration or mediation. Mediation, which can serve as a supplement or replacement for arbitration depending on the outcome, is a voluntary process in which both parties can settle their disputes in a non-binding format. For most claims under $25,000, the process is resolved primarily through written statements filed by each party to FINRA. At any point the claimant, respondent, or arbitrator may request a hearing. These smaller cases can be assigned to a single arbitrator and may settle fairly quickly.
Claim amounts greater than $25,000 are usually assigned to a three-person arbitration panel. Because they typically settle in-person and involve more formalities, they tend to take longer. FINRA offers a complete online claim filing process, and this is where most investors get bogged down. While FINRA has streamlined the process for the layman to follow, it is still a legal proceeding with required documents such as the statement of claim. Many frustrated investors will pursue the services of an attorney at this point.
Evaluate Your Progress
This stage of the process is a good time to step back, evaluate your progress, and set time frames and expectations. Keep in mind, however, that the relationship between you and the representative or advisor has changed. While customers sometimes stay with the company against which they have filed claims, most do not. Depending on the claim or loss, they have probably moved to another firm, liquidated their holdings or made other arrangements. The process from this point on becomes a legal proceeding, although it is slightly less formal than a typical court proceeding; you should view this process as a resolution-in-progress.
Conclusion
FINRA provides a framework for licensing, registration, education, monitoring and policing of the brokerage community to ensure the public receives the best service. While the vast majority of financial service professionals provide excellent service, some accounts are mishandled and FINRA has the process available for anyone to pursue what he or she believes is a valid claim. It is important to remember that all decisions made by either the sole arbitrator or the combined panel are binding and that the judgments are enforceable, as they would be in a court. Finally, consider that while the investor has every right to pursue a claim, doing so carries costs such as filing fees, arbitration and/or mediation fees, and if the panel decides a case is frivolous, legal and other costs will apply.
10 Books Every Investor Should Read
When it comes to learning about investment, the internet is one of the fastest, most up-to-date ways to make your way through the jungle of information out there. But if youre looking for a historical perspective on investing or a more detailed analysis of a certain topic, there are several classic books on investing that make for great reading. Here we give you a brief overview of our favorite investing books of all time and set you on the path to investing enlightenment. (To find more recommended books, see Investing Books It Pays To Read.)
The Intelligent Investor (1949) by Benjamin Graham
Benjamin Graham is undisputedly the father of value investing. His ideas about security analysis laid the foundation for a generation of investors, including his most famous student, Warren Buffett. Published in 1949, The Intelligent Investor is much more readable than Grahams 1934 work entitled Security Analysis, which is probably the most quoted, but least read, investing book. The Intelligent Investor wont tell you how to pick stocks, but it does teach sound, time-tested principles that every investor can use. Plus, its worth a read based solely on Warren Buffetts testimonial: By far the best book on investing ever written.
Common Stocks And Uncommon Profits (1958) by Philip Fisher
Another pioneer in the world of financial analysis , Philip Fisher has had a major influence on modern investment theory. The basic idea of analyzing a stock based on growth potential is largely attributed to Fisher. Common Stocks And Uncommon Profits teaches investors to analyze the quality of a business and its ability to produce profits. First published in the 1950s, Fishers lessons are just as applicable half a century later.
Stocks For The Long Run (1994) by Jeremy Siegel
A professor at the Wharton School of Business, Jeremy Siegel makes the case for - you guessed it - investing in stocks over the long run. He draws on extensive research over the past two centuries to argue not only that equities surpass all other financial assets when it comes to returns, but also that stock returns are safer and more predictable in the face of the effects of inflation.
Learn To Earn (1995), One Up On Wall Street (1989) or Beating The Street (1994) by Peter Lynch
Peter Lynch came into prominence in the 1980s as the manager of the spectacularly performing Fidelity Magellan Fund. Learn To Earn is aimed at a younger audience and explains many business basics, One Up On Wall Street makes the case for the benefits of self-directed investing, and Beating The Street focuses on how Peter Lynch went about choosing winning stocks (or how he missed them) while running the famed Magellan Fund. All three of Lynchs books follow his common sense approach, which insists that individual investors, if they take the time to do their homework, can perform just as well or even better than the experts.
A Random Walk Down Wall Street (1973) by Burton G. Malkiel
This book popularized the ideas that the stock market is efficient and that its prices follow a random walk. Essentially, this means that you cant beat the market. Thats right - according to Malkiel, no amount of research, whether fundamental or technical, will help you in the least. Like any good academic, Malkiel backs up his argument with piles of research and statistics. It would be an understatement to say that these ideas are controversial, and many consider them just short of blasphemy. But whether you agree with Malkiels ideas or not, it is not a bad idea to take a look at how he arrives at his theories. (For further reading, see What Is Market Efficiency?)
The Essays Of Warren Buffett: Lessons For Corporate America (2001) by Warren Buffett and Lawrence Cunningham
Although Buffett seldom comments on his current holdings, he loves to discuss the principles behind his investments . This book is actually a collection of letters that Buffett wrote to shareholders over the past few decades. Its the definitive work summarizing the techniques of the worlds greatest investor. Another great Buffett book is The Warren Buffett Way by Robert Hagstrom. (For further reading, see Warren Buffett: How He Does It and What Is Warren Buffetts Investing Style?)
How To Make Money In Stocks (2003, 3rd ed.) by William J. ONeil
Bill ONeil is the founder of Investors Business Daily, a national business of financial daily newspapers, and the creator of the CANSLIM system. If you are interested in stock picking, this is a great place to start. Many other books are big on generalities with little substance, but How To Make Money In Stocks doesnt make the same mistake. Reading this book will provide you with a tangible system that you can implement right away in your research.
Rich Dad Poor Dad (1997) by Robert T. Kiyosaki
This book is all about the lessons the rich teach their kids about money, which, according to the author, poor and middle-class parents neglect. Robert Kiyosakis message is simple, but it holds an important financial lesson that may motivate you to start investing : the poor make money by working for it, while the rich make money by having their assets work for them. We cant think of a better financial book to buy for your kids.
Common Sense On Mutual Funds (1999) by John Bogle
John Bogle, founder of the Vanguard Group, is a driving force behind the case for index funds and against actively-managed mutual funds. In this book, he begins with a primer on investment strategy before blasting the mutual fund industry for the exorbitant fees it charges investors. If you own mutual funds, you should read this book. (To learn more, see The Truth Behind Mutual Fund Returns.)
Irrational Exuberance (2000) by Robert J. Shiller
Named after Alan Greenspans infamous 1996 comment on the absurdity of stock market valuations, Shillers book, released in Mar 2000, gives a chilling warning of the dotcom bubbles impending burst. The Yale economist dispels the myth that the market is rational and instead explains it in terms of emotion, herd behavior and speculation. In an ironic twist, Irrational Exuberance was released almost exactly at the peak of the market. (To learn more on this topic, see Understanding Investor Behavior.)
The more you know, the more youll be able to incorporate the advice of some of these experts into your own investment strategy . This reading list will get you started, but it is only a fraction of all the great resources available. Do you have a favorite investing book that weve missed? If so, let us know.
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Evaluating A Companys Capital Structure
For stock investors that favor companies with good fundamentals, a strong balance sheet is an important consideration for investing in a companys stock. The strength of a companys balance sheet can be evaluated by three broad categories of investment-quality measurements: working capital adequacy, asset performance and capital structure. In this article, well look at evaluating balance sheet strength based on the composition of a companys capital structure.
A companys capitalization (not to be confused with market capitalization) describes the composition of a companys permanent or long-term capital, which consists of a combination of debt and equity. A healthy proportion of equity capital, as opposed to debt capital, in a companys capital structure is an indication of financial fitness.
Clarifying Capital Structure Related Terminology
The equity part of the debt-equity relationship is the easiest to define. In a companys capital structure, equity consists of a companys common and preferred stock plus retained earnings, which are summed up in the shareholders equity account on a balance sheet. This invested capital and debt, generally of the long-term variety, comprises a companys capitalization, i.e. a permanent type of funding to support a companys growth and related assets.
A discussion of debt is less straightforward. Investment literature often equates a companys debt with its liabilities. Investors should understand that there is a difference between operational and debt liabilities - it is the latter that forms the debt component of a companys capitalization - but thats not the end of the debt story.
Among financial analysts and investment research services, there is no universal agreement as to what constitutes a debt liability. For many analysts, the debt component in a companys capitalization is simply a balance sheets long-term debt. This definition is too simplistic. Investors should stick to a stricter interpretation of debt where the debt component of a companys capitalization should consist of the following: short-term borrowings (notes payable), the current portion of long-term debt, long-term debt, two-thirds (rule of thumb) of the principal amount of operating leases and redeemable preferred stock. Using a comprehensive total debt figure is a prudent analytical tool for stock investors.
Its worth noting here that both international and U.S. financial accounting standards boards are proposing rule changes that would treat operating leases and pension projected-benefits as balance sheet liabilities. The new proposed rules certainly alert investors to the true nature of these off-balance sheet obligations that have all the earmarks of debt.
Is There an Optimal Debt-Equity Relationship?
In financial terms, debt is a good example of the proverbial two-edged sword. Astute use of leverage (debt) increases the amount of financial resources available to a company for growth and expansion. The assumption is that management can earn more on borrowed funds than it pays in interest expense and fees on these funds. However, as successful as this formula may seem, it does require that a company maintain a solid record of complying with its various borrowing commitments.
A company considered too highly leveraged (too much debt versus equity) may find its freedom of action restricted by its creditors and/or may have its profitability hurt as a result of paying high interest costs. Of course, the worst-case scenario would be having trouble meeting operating and debt liabilities during periods of adverse economic conditions. Lastly, a company in a highly competitive business, if hobbled by high debt, may find its competitors taking advantage of its problems to grab more market share .
Unfortunately, there is no magic proportion of debt that a company can take on. The debt-equity relationship varies according to industries involved, a companys line of business and its stage of development. However, because investors are better off putting their money into companies with strong balance sheets, common sense tells us that these companies should have, generally speaking, lower debt and higher equity levels.
Capital Ratios and Indicators
In general, analysts use three different ratios to assess the financial strength of a companys capitalization structure. The first two, the so-called debt and debt/equity ratios, are popular measurements; however, its the capitalization ratio that delivers the key insights to evaluating a companys capital position.
The debt ratio compares total liabilities to total assets . Obviously, more of the former means less equity and, therefore, indicates a more leveraged position. The problem with this measurement is that it is too broad in scope, which, as a consequence, gives equal weight to operational and debt liabilities. The same criticism can be applied to the debt/equity ratio, which compares total liabilities to total shareholders equity. Current and non-current operational liabilities, particularly the latter, represent obligations that will be with the company forever. Also, unlike debt, there are no fixed payments of principal or interest attached to operational liabilities.
The capitalization ratio (total debt/total capitalization) compares the debt component of a companys capital structure (the sum of obligations categorized as debt total shareholders equity) to the equity component. Expressed as a percentage, a low number is indicative of a healthy equity cushion, which is always more desirable than a high percentage of debt.
Additional Evaluative Debt-Equity Considerations
Companies in an aggressive acquisition mode can rack up a large amount of purchased goodwill in their balance sheets. Investors need to be alert to the impact of intangibles on the equity component of a companys capitalization. A material amount of intangible assets need to be considered carefully for its potential negative effect as a deduction (or impairment) of equity, which, as a consequence, will adversely affect the capitalization ratio.
Funded debt is the technical term applied to the portion of a companys long-term debt that is made up of bonds and other similar long-term, fixed-maturity types of borrowings. No matter how problematic a companys financial condition may be, the holders of these obligations cannot demand payment as long the company pays the interest on its funded debt. In contrast, bank debt is usually subject to acceleration clauses and/or covenants that allow the lender to call its loan. From the investors perspective, the greater the percentage of funded debt to total debt disclosed in the debt note in the notes to financial statements, the better. Funded debt gives a company more wiggle room.
Lastly, credit ratings are formal risk evaluations by credit-rating agencies - Moodys, Standard
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7 Common Investor Mistakes
Of the mistakes made by investors, seven of them are repeat offenses. In fact, investors have been making these same mistakes since the dawn of modern markets, and will likely be repeating them for years to come. You can significantly boost your chances of investment success by becoming aware of these typical errors and taking steps to avoid them. (To read about market histories, see The Stock Market: A Look Back, The Bond Market: A Look Back and The Money Market: A Look Back.)
TUTORIAL: Investing 101 For Beginner Investors
1. No Plan
As the old saying goes, if you dont know where youre going, any road will take you there. Solution?
Have a personal investment plan or policy that addresses the following:
• Goals and objectives - Find out what youre trying to accomplish. Accumulating $100,000 for a childs college education or $2 million for retirement at age 60 are appropriate goals. Beating the market is not a goal.
• Risks - What risks are relevant to you or your portfolio? If you are a 30-year-old saving for retirement, volatility isnt (or shouldnt be) a meaningful risk. On the other hand, inflation - which erodes any long-term portfolio - is a significant risk. (To see more on risk, read Determining Risk And The Risk Pyramid and Personalizing Risk Tolerance.)
• Appropriate benchmarks - How will you measure the success of your portfolio, its asset classes and individual funds or managers? (Keep reading about benchmarks in Benchmark Your Returns With Indexes.)
• Asset allocation - What percentage of your total portfolio will you allocate to U.S. equities, international stocks, U.S. bonds, high-yield bonds, etc. Your asset allocation should accomplish your goals while addressing relevant risks.
• Diversification - Allocating to different asset classes is the initial layer of diversification. You then need to diversify within each asset class. In U.S. stocks, for example, this means exposure to large-, mid- and small-cap stocks. (Find out more about allocation and diversification in Five Things To Know About Asset Allocation, Choose Your Own Asset Allocation Adventure and A Guide To Portfolio Construction.)
Your written plans guidelines will help you adhere to a sound long-term policy, even when current market conditions are unsettling. Having a good plan and sticking to it is not nearly as exciting or as much fun as trying to time the markets, but it will likely be more profitable in the long term. (To find out how to make your investment plan, see Having A Plan: The Basis Of Success, Ten Steps to Building A Winning Trading Plan and Tailoring Your Investment Plan.)
2. Too Short of a Time Horizon
If you are saving for retirement 30 years hence, what the stock market does this year or next shouldnt be the biggest concern. Even if you are just entering retirement at age 70, your life expectancy is likely 15 to 20 years. If you expect to leave some assets to your heirs, then your time horizon is even longer. Of course, if you are saving for your daughters college education and shes a junior in high school, then your time horizon is appropriately short and your asset allocation should reflect that fact. Most investors are too focused on the short term.
3. Too Much Attention Given to Financial Media
There is almost nothing on financial news shows that can help you achieve your goals. Turn them off. There are few newsletters that can provide you with anything of value. Even if there were, how do you identify them in advance?
Think about it - if anyone really had profitable stock tips, trading advice or a secret formula to make big bucks, would they blab it on TV or sell it to you for $49 per month? No - theyd keep their mouth shut, make their millions and not have to sell a newsletter to make a living. (To learn more, see Mad Money ... Mad Market? and The Madness Of Crowds.)
Solution? Spend less time watching financial shows on TV and reading newsletters. Spend more time creating - and sticking to - your investment plan.
4. Not Rebalancing
Rebalancing is the process of returning your portfolio to its target asset allocation as outlined in your investment plan. Rebalancing is difficult because it forces you to sell the asset class that is performing well and buy more of your worst performing asset classes. This contrarian action is very difficult for many investors.
In addition, rebalancing is unprofitable right up to that point where it pays off spectacularly (think U.S. equities in the late 1990s), and the underperforming assets start to take off. (Keep reading about this subject in Equity Premiums: Looking Back And Looking Ahead.)
However, a portfolio allowed to drift with market returns guarantees that asset classes will be overweighted at market peaks and underweighted at market lows - a formula for poor performance. The solution? Rebalance religiously and reap the long-term rewards. (Find out how to put this tip to use in Rebalance Your Portfolio To Stay On Track, When Fear And Greed Take Over and Master Your Trading Mindtraps.)
5. Overconfidence in the Ability of Managers
From numerous studies, including Burton Malkiels 1995 study entitled, Returns From Investing In Equity Mutual Funds, we know that most managers will underperform their benchmarks. We also know that theres no consistent way to select - in advance - those managers that willoutperform. We also know that very, very few individuals can profitably time the market over the long term. So why are so many investors confident of their abilities to time the market and select outperforming managers?
Fidelity guru Peter Lynch once observed, There are no market timers in the Forbes 400. Investors misplaced overconfidence in their ability to market-time and select outperforming managers leads directly to our next common investment mistake. (For more insight, see Pick Stocks Like Peter Lynch.)
6. Not Enough Indexing
There is not enough time to recite many of the studies that prove that most managers and mutual funds underperform their benchmarks. Over the long-term, low-cost index funds are typically upper second-quartile performers, or better than 65-75% of actively managed funds.
Despite all the evidence in favor of indexing, the desire to invest with active managers remains strong. John Bogle, the founder of Vanguard, says its because, Hope springs eternal. Indexing is sort of dull. It flies in the face of the American way [that] I can do better.
Index all or a large portion (70-80%) of all your traditional asset classes. If you cant resist the excitement of pursuing the next great performer, set aside a portion (20-30%) of each asset class to allocate to active managers. This may satisfy your desire to pursue outperformance without devastating your portfolio.
7. Chasing Performance
Many investors select asset classes, strategies, managers and funds based on recent strong performance. The feeling that Im missing out on great returns has probably led to more bad investment decisions than any other single factor. If a particular asset class, strategy or fund has done extremely well for three or four years, we know one thing with certainty: We should have invested three or four years ago. Now, however, the particular cycle that led to this great performance may be nearing its end. The smart money is moving out, and the dumb money is pouring in. Stick with your investment plan and rebalance, which is the polar opposite of chasing performance.
Conclusion
Investors who recognize and avoid these seven common mistakes give themselves a great advantage in meeting their investment goals. Most of the solutions above are not exciting, and they dont make great cocktail party conversation. However, they are likely to be profitable. And isnt that why we really invest?
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When To Sell A Mutual Fund
If your mutual fund is yielding a lower return than you anticipated, you may be tempted to cash in your fund units and invest your money elsewhere. The rate of return of other funds may look enticing, but be careful; there are both pros and cons to the redemption of your mutual fund shares. Lets examine the circumstances in which liquidation of your fund units would be most optimal and when it may have negative consequences.
Mutual Funds Are Not Stocks
The first thing you need to understand is that mutual funds are not synonymous with stocks. So, a decline in the stock market does not necessarily mean that it is time to sell the fund. Stocks are single entities with rates of return associated with what the market will bear. Stocks are driven by the buy low, sell high rationale, which explains why, in a falling stock market, many investors panic and quickly dump all of their stock-oriented assets.
Mutual funds are not singular entities; they are portfolios of financial instruments, such as stocks and bonds, chosen by a portfolio or fund manager in accordance with the funds strategy. An advantage of this portfolio of assets is diversification. There are many types of mutual funds, and their degrees of diversification vary. Sector funds, for instance, will have the least diversification, while balanced funds will have the most. Within all mutual funds, however, the decline of one or a few of the stocks can be offset by other assets within the portfolio that are either holding steady or increasing in value.
Because mutual funds are diverse portfolios rather than single entities, relying only on market timing to sell your fund may be a useless strategy since a funds portfolio may represent different kinds of markets. Also, because mutual funds are geared toward long-term returns, a rate of return that is lower than anticipated during the first year is not necessarily a sign to sell.
When Selling Your Fund
When you are cashing-in your mutual fund units, there are a couple of factors to consider that may affect your return:
• Back-end loads - If you are an investor who holds a fund that charges a back-end load, the total you receive when redeeming your units will be affected. Front-end loads, on the other hand, are sales fees charged when you first invest your money into the fund. So, if you had a front-end sales charge of 2%, your initial investment would have been reduced by 2%. If your fund has a back-end load, charges will be deducted from your total redemption value. For many funds, back-end loads tend to be higher when you liquidate your units earlier rather than later, so you need to determine if liquidating your units now is optimal.
• Tax consequences - If your mutual fund has realized significant capital gains in the past, you may be subject to capital gains taxes if the fund is held within a taxable account. When you redeem units of a fund that has a value greater than the total cost, you will have a taxable gain. The IRS has more detailed information on capital gains and their calculations in Publication 564: Mutual Fund Distributions.
When Your Fund Changes
Do keep in mind that even if your fund is geared to yielding long-term rates of returns, that does not mean you have to hold onto the fund through thick and thin. The purpose of a mutual fund is to increase your investment over time, not to demonstrate your loyalty to a particular sector or group of assets or a specific fund manager. To paraphrase Kenny Rogers, the key to successful mutual fund investing is knowing when to hold em and knowing when to fold em.
The following four situations are not necessarily indications that you should fold, but they are situations that should raise a red flag:
Change in a Funds Manager
When you put your money into a fund, you are putting a certain amount of trust into the fund managers expertise and knowledge, which you hope will lead to an outstanding return on an investment that suits your investment goals. If your quarterly or annual report indicates that your fund has a new manager, pay attention. If the fund mimics a certain index or benchmark, it may be less of a worry as these funds tend to be less actively managed. For other funds, the prospectus should indicate the reason for the change in manager. If the prospectus states that the funds goal will remain the same, it may be a good idea to watch the funds returns over the next year. For further peace of mind, you could also research the new managers previous experience and performance.
Change in Strategy
If you researched your fund before investing in it, you most likely invested in a fund that accurately reflects your financial goals. If your fund manager suddenly starts to invest in financial instruments that do not reflect the mutual funds original goals, you may want to re-evaluate the fund you are holding. For example, if your small-cap fund starts investing in a few medium or large-cap stocks, the risk and direction of the fund may change. Note that funds are typically required to notify shareholders of any changes to the original prospectus.
Additionally, some funds may change their names to attract more customers, and when a mutual fund changes its name, sometimes its strategies also change. Remember, you should be comfortable with the direction of the fund, so if changes bother you, get rid of it.
Consistent Underperformance
This can be tricky since the definition of underperformance differs from investor to investor. If the mutual fund returns have been poor over a period of less than a year, liquidating your holdings in the portfolio may not be the best idea since the mutual fund may simply be experiencing some short-term fluctuations. However, if you have noticed significantly poor performance over the last two or more years, it may be time to cut your losses and move on. To help your decision, compare the funds performance to a suitable benchmark or to similar funds. Exceptionally poor comparative performance should be a signal to sell the fund.
The Fund Becomes Too Big
In many cases a funds quick growth can hinder performance. The bigger the fund, the harder it is for a portfolio to move assets effectively. Note that fund size usually becomes more of an issue for focused funds or small-cap funds, which either deal with a smaller number of shares or invest in stock that has low volume and liquidity.
When Your Personal Investment Portfolio Changes
Besides changes in the mutual fund itself, other changes in your personal portfolio may require you to redeem your mutual fund units and transfer your money into a more suitable portfolio. Here are two reasons which might prompt you to liquidate your mutual fund units:
• The need to rebalance your portfolio - If you have a set asset allocation model to which you would like to adhere, you may need to rebalance your holdings at the end of the year in order to return your portfolio back to its original state. In these cases, you may need to sell or even purchase more of a fund within your portfolio to bring your portfolio back to its original equilibrium. You may also have to think about rebalancing if your investment goals change. For instance, if you decide to change your growth strategy to one that provides steady income, your current holdings in growth funds may no longer be appropriate.
• Need a tax break - If your fund has suffered significant capital losses and you need a tax break to offset realized capital gains of your other investments, you may want to redeem your mutual fund units in order to apply the capital loss to your capital gains.
The Bottom Line
Selling a mutual fund isnt something you do impulsively, without a great deal of thought and consideration. Remember that you originally invested in your mutual fund because you were confident in it, so make sure you are clear on your reasons for letting it go. However, if you have carefully considered all the pros and cons of your funds performance and you still think you should sell it, do it and dont look back.
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A Beginners Guide To Hedging
Although it sounds like your neighbors hobby whos obsessed with his topiary garden full of tall bushes shaped like giraffes and dinosaurs, hedging is a practice every investor should know about. There is no arguing that portfolio protection is often just as important as portfolio appreciation. Like your neighbors obsession, however, hedging is talked about more than it is explained, making it seem as though it belongs only to the most esoteric financial realms. Well, even if you are a beginner, you can learn what hedging is, how it works and what hedging techniques investors and companies use to protect themselves.
What Is Hedging?
The best way to understand hedging is to think of it as insurance. When people decide to hedge, they are insuring themselves against a negative event. This doesnt prevent a negative event from happening, but if it does happen and youre properly hedged, the impact of the event is reduced. So, hedging occurs almost everywhere, and we see it everyday. For example, if you buy house insurance, you are hedging yourself against fires, break-ins or other unforeseen disasters.
Portfolio managers, individual investors and corporations use hedging techniques to reduce their exposure to various risks. In financial markets, however, hedging becomes more complicated than simply paying an insurance company a fee every year. Hedging against investment risk means strategically using instruments in the market to offset the risk of any adverse price movements. In other words, investors hedge one investment by making another.
Technically, to hedge you would invest in two securities with negative correlations. Of course, nothing in this world is free, so you still have to pay for this type of insurance in one form or another.
Although some of us may fantasize about a world where profit potentials are limitless but also risk free, hedging cant help us escape the hard reality of the risk-return tradeoff. A reduction in risk will always mean a reduction in potential profits. So, hedging, for the most part, is a technique not by which you will make money but by which you can reduce potential loss. If the investment you are hedging against makes money, you will have typically reduced the profit that you could have made, and if the investment loses money, your hedge, if successful, will reduce that loss.
How Do Investors Hedge?
Hedging techniques generally involve the use of complicated financial instruments known as derivatives, the two most common of which are options and futures. Were not going to get into the nitty-gritty of describing how these instruments work, but for now just keep in mind that with these instruments you can develop trading strategies where a loss in one investment is offset by a gain in a derivative.
Lets see how this works with an example. Say you own shares of Corys Tequila Corporation (Ticker: CTC). Although you believe in this company for the long run, you are a little worried about some short-term losses in the tequila industry. To protect yourself from a fall in CTC you can buy a put option (a derivative) on the company, which gives you the right to sell CTC at a specific price (strike price). This strategy is known as a married put. If your stock price tumbles below the strike price, these losses will be offset by gains in the put option. (For more information, see this article on married puts or this options basics tutorial.)
The other classic hedging example involves a company that depends on a certain commodity. Lets say Corys Tequila Corporation is worried about the volatility in the price of agave, the plant used to make tequila. The company would be in deep trouble if the price of agave were to skyrocket, which would severelyeat into profit margins. To protect (hedge) against the uncertainty of agave prices, CTC can enter into a futures contract (or its less regulated cousin, the forward contract), which allows the company to buy the agave at a specific price at a set date in the future. Now CTC can budget without worrying about the fluctuating commodity.
If the agave skyrockets above that price specified by the futures contract, the hedge will have paid off because CTC will save money by paying the lower price. However, if the price goes down, CTC is still obligated to pay the price in the contract and actually would have been better off not hedging.
Keep in mind that because there are so many different types of options and futures contracts an investor can hedge against nearly anything, whether a stock, commodity price, interest rate and currency - investors can even hedge against the weather.
The Downside
Every hedge has a cost, so before you decide to use hedging, you must ask yourself if the benefits received from it justify the expense. Remember, the goal of hedging isnt to make money but to protect from losses. The cost of the hedge - whether it is the cost of an option or lost profits from being on the wrong side of a futures contract - cannot be avoided. This is the price you have to pay to avoid uncertainty.
Weve been comparing hedging versus insurance, but we should emphasize that insurance is far more precise than hedging. With insurance, you are completely compensated for your loss (usually minus a deductible). Hedging a portfolio isnt a perfect science and things can go wrong. Although risk managers are always aiming for the perfect hedge, it is difficult to achieve in practice.
What Hedging Means to You
The majority of investors will never trade a derivative contract in their life. In fact most buy-and-hold investors ignore short-term fluctuation altogether. For these investors there is little point in engaging in hedging because they let their investments grow with the overall market. So why learn about hedging?
Even if you never hedge for your own portfolio you should understand how it works because many big companies and investment funds will hedge in some form. Oil companies, for example, might hedge against the price of oil while an international mutual fund might hedge against fluctuations in foreign exchange rates. An understanding of hedging will help you to comprehend and analyze these investments.
Conclusion
Risk is an essential yet precarious element of investing. Regardless of what kind of investor one aims to be, having a basic knowledge of hedging strategies will lead to better awareness of how investors and companies work to protect themselves. Whether or not you decide to start practicing the intricate uses of derivatives, learning about how hedging works will help advance your understanding of the market, which will always help you be a better investor.
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How To Efficiently Read An Annual Report
A companys annual report is the single most important way for it to convey itself to potential investors. As such, it should come as no surprise that an annual report serves to present the company in best light possible without violating any Securities and Exchange Commission (SEC) regulations. Unfortunately, many investors read annual reports but fail to read them effectively. In other words, while annual reports are clearly prepared without any intent to deceive or reflect dishonesty about the business, investors should always read them with a sense of skepticism. In other words, learn how to read between the lines and decipher the actual condition of the company. Annual Report Vs. 10-K Filing
Typically, a company will file both an annual report and 10-K report to the SEC. An annual report is the shorter version that often comes with pictures, nice glossy color pages, a letter from the Chairman/CEO and an overview of the financials.
The 10-K is the black and white, no color pictures document that is submitted to the SEC. Very often, a business will simply file the 10-K as its annual report since that document is mandatory for every public company. So guess which one carries more significance to the investor - the longer and more boring 10-K filing. Think of the glossy annual report as informative marketing material. If a company does file both reports, use the annual report as a great first look at a business before tackling the 10-K filing. Very often, the annual report and 10-K are merged into one document, with the annual report at the beginning to provide an overview of the years results.
The Components of an Annual Filing
If you are interested in investing in a public company you can not avoid examining and reading the 10-K filing, which I will now refer to as the annual report.
The 10-Ks begin with a detailed description of the business, followed by risk factors, a rundown of any legal issues, and, finally, the numbers and financial notes in the back. Oftentimes, the most essential components of the annual filing are the following items:
• Item 1: Business - a description of the companys operation
• Item 1A: Risk Factors
• Item 3: Legal Proceedings
• Item 6: Selected Financial Data
• Item 7: Managements Discussion and Analysis of Financial Condition
How to Tackle
People read annual reports in different ways. Some investors even prefer to start at the back and work their way to the beginning. It makes no difference how you read them, as long you absorb the essential points of the business and its financial condition. However, there is a good way to tackle these reports that is both most efficient and most effective.
Without question, you should first read Item 1, which is the business description. You cant possibly go any further in your research without knowing what the company does! Also, by getting to know the business first, you can then determine if you need to go any further. That determination is simple. Just ask yourself if you understand what the company does, who its customers are, and the industry it operates in. If you answer no, youre done. Move on to the next business.
Next, you should jump to Items 6 and 7 and examine and analyze the financial data . How has the company performed over a period of years? Has the balance sheet gotten stronger or weaker over time? Look over the cash flow statement and see if the business has been a generator of cash or a user of cash. Its possible for businesses to report net income while at the same time remaining cash flow negative. Compare the income statement with the cash flow statement for any red flags. If you like what you see, move on and if not, move on to the next company.
Afterwards its time to determine if any hidden surprises may lurk beneath the surface. So you must now go back and read the risk factors section and the legal proceedings section, if any legal matters exist. Because this is a filing to the SEC, the risk factors will be very detailed and include risks like our industry is highly fragmented with lots of competitors or our stock price may experience periods of volatility. While these are important risks to consider, they should not significantly reduce the desirability of the business.
Instead, focus on any unusual risk factors, such as if the company generates a substantial portion of its revenues for one or two customers. In addition, the Legal Proceedings section will alert you if any significant lawsuits are in the works. Again, dont ignore any legal liabilities, but if youre looking at a billion dollar company and it has a pending lawsuit against it for damages of $10 million, thats not uncommon. Pfizer, one of the largest drug companies in the world, will also have patent lawsuits and drug liability claims that may exceed hundreds of millions of dollars. But thats part of the normal course of business for any major pharmaceutical company, and a drop in the bucket for Pfizer when you see that the company has over $50 billion in cash and short-term investments on the balance sheet.
Focus on What You Know
We all have different ways of deciphering and storing information. Feel free to read the annual report in a way that works for you. But learn to concentrate on the most important aspects of a companys 10-K filing. By doing so, you will avoid wasting unnecessary time on companies that do not meet your investment suitability. But always remember that just because you arent investing in that particular business that you have wasted your time. Investing is a discipline that rewards those who are continuously learning.
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Everything Investors Need To Know About Earnings
You cant get far in the stock market without understanding earnings. Everybody from CEOs to research analysts is infatuated with this often-quoted number. But what exactly do earnings represent? Why do they attract so much attention? Well answer these questions and more in this primer on earnings.
What Are Earnings?
A companys earnings are, quite simply, its profits. Take a companys revenue from selling something, subtract all the costs to produce that product, and, voila, you have earnings! Of course, the details of accounting get a lot more complicated, but underneath all the financial jargon what is really being measured is how much money a company makes.
Part of the confusion associated with earnings is caused by its many synonyms. The terms profit, net income, bottom line and earnings all refer to the same thing.
Earnings Per Share
To compare the earnings of different companies, investors and analysts often use the ratio earnings per share (EPS). To calculate EPS you take the earnings left over for shareholders and divide by the number of shares outstanding. You can think of EPS as a per-capita way of describing earnings. Because every company has a different number of shares owned by the public, comparing only companies earnings figures does not indicate how much money each company made for each of its shares, so we need EPS to make valid comparisons.
For example, take two companies: ABC Corp. and XYZ Corp. They both have earnings of $1 million but ABC Corp has 1 million shares outstanding while XYZ Corp. only has 100,000 shares outstanding. ABC Corp. has EPS of $1 per share ($1 million/1 million shares) while XYZ Corp. has EPS of $10 per share ($1 million/100,000 shares).
Earnings Season
Earnings season is Wall Streets equivalent to a school report card. It happens four times per year; publicly traded companies in the U.S. are required by law to report their financial results on a quarterly basis. Most companies follow the calendar year for reporting, but they do have the option of reporting based on their own fiscal calendars.
Although it is important to remember that investors look at all financial results, you might have guessed that earnings (or EPS) is the most important number released during earnings season, attracting the most attention and media coverage. Before earnings reports come out, stock analysts issue earnings estimates - what they think earnings will come in at. These forecasts are then compiled by research firms into the consensus earnings estimate.
When a company beats this estimate its called an earnings surprise, and the stock usually moves higher. If a company releases earnings below these estimates it is said to disappoint, and the price typically moves lower. All this makes it hard to try to guess how a stock will move during earnings season: its really all about expectations. (For more on this phenonmenon, see Surprising Earnings Results.)
Why Do Investors Care About Earnings?
Investors care about earnings because they ultimately drive stock prices . Strong earnings generally result in the stock price moving up (and vice versa). Sometimes a company with a rocketing stock price might not be making much money, but the rising price means that investors are hoping that the company will be profitable in the future - of course, there are no guarantees that the company will fulfill investors current expectations.
The dotcom boom and bust is a perfect example of company earnings coming in significantly short of the numbers investors imagined. When the boom started, everybody got excited about the prospects for any company involved in the internet, and stock prices soared. Over time, it became clear that the dotcoms werent going to make nearly as much money as many had predicted. It simply wasnt possible for the market to support these companies high valuations without any earnings; as a result, the stock prices of these companies collapsed.
When a company is making money it has two options. First, it can improve its products and develop new ones. Second, it can pass the money onto shareholders in the form of a dividend or a share buyback (see The Lowdown on Stock Buybacks). It really is this simple!
In the first case, you trust the management to re-invest profits in the hope of making more profits. In the second case, you get your money right away. Typically, smaller companies attempt to create shareholder value by reinvesting profits, while more mature companies pay out dividends. Neither method is necessarily better, but both rely on the same idea: in the long run, earnings provide a return on shareholders investments .
Summary
Earnings means profit; its the money a company makes. It is often evaluated in terms of earnings per share (EPS) - this is the most important indicator of a companys financial health. Earnings reports are released four times per year and are followed very closely by Wall Street. In the end, growing earnings are a good indication that a company is on the right path to providing a solid return for investors.
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$FTWS..This one could be a zip code changer IMO>>>>>> Flitways Technology, Inc. (OTC Pink: FTWS), 310% Growth, Acquisition Candidate for Uber or Lyft
Source: InvestorsHub NewsWire
Flitways Technology, Inc. (OTC Pink: FTWS), 310% Growth, Acquisition Candidate for Uber or Lyft
Miami, FL-(InvestorsHub NewsWire June 27, 2017) EmergingGrowth.com, a leading independent small cap media portal with an extensive history of providing unparalleled content for the Emerging Growth markets and companies, reports on Flitways Technology, Inc. (OTC Pink: FTWS).
FTWS may not be at these levels much longer.
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Flitways Technology, Inc. (OTC Pink: FTWS), has working relationships with some of the worlds most recognizable companies, including Pokemon, Amazon.com, Inc. (NASDAQ: AMZN), Samsung Electronics Co., Ltd. (OTC Pink: SSNLF), Xerox Corp (NYSE: XRX), Rolls Royce, and more.
As of June 2017, Flitways maintains operations across more than 170 cities, 400 airports, and manages a fleet of nearly 20,000 vehicles worldwide. Furthermore, management expects to expand operations to an additional 70-100 cities by the end of 2017.
Flitways is a Los Angeles, California-based travel technology and services company which focuses on two large and under-served markets and has two important and valuable assets. Flitways business segments are: (i) a novel solution for enterprises looking to create a more seamless, easy to view, and cost-saving ground transportation solution for its employees; and (ii) a robust global network of car services and drivers that provides a source of additional (ancillary) revenue and integrated booking and itineraries for travel providers (e.g., airlines) and travel distributors (e.g., Kayak)
Flitways services are delivered through a fully integrated and customizable enterprise software suite, which allows any business to easily manage its ground transportation needs through both its administrator website and simple to use IOS and android apps.
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One of the first concerns that some may have is whether Flitways will be in direct competition with Uber and Lyft.
The right question to ask oneself is, will it be Uber or Lyft that acquires Flitways in order to round out their ecosphere and technology base.
Uber and Lyft provide taxi-like service primarily to the consumer market, but also are commonly used by business travelers. Although these two companies have rolled out varying classes of vehicles that can provide rides to even high-end and business markets, they do not provide billing, compliance, third party dispatch management, or seamless itinerary services that are the core of Flitways offering
As of June 2017, Flitways has a market cap of only $2.34 million. The travel technology company has 150 million authorized shares, 58.53 million shares outstanding, and a float consisting of only 15 million shares as of May 2017. During the first quarter 2017, the company reported total revenue of $203,000 (equating to sales growth of 230% compared to the first quarter 2016).
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Callable CDs: Check The Fine Print
If youre looking for bigger yields with limited risk, callable certificates of deposit (CD ) might be right for you. They promise higher returns than regular CDs and are FDIC insured. However, there are a few things in the fine print that you should be aware of before you turn your money over to the bank or brokerage firm, otherwise, you could end up very disappointed.
Just like a regular CD, a callable CD is a certificate of deposit that pays a fixed interest rate over its lifetime. The feature that differentiates a callable CD from a traditional CD is that the issuer owns a call option on the CD and can redeem, or call, your CD from you for the full amount before it matures. In this article, we will provide you with some important terms to watch for in the fine print of your callable CDs , should you decide to invest.
Important Terms
Callable CDs are similar in many ways to callable bonds.
Callable Date
This is the date that the issuer can call your certificate of deposit . Lets say, for example, that the call date is six months. This means that six months after you buy the CD, the bank can decide whether it wants to take back your CD and return your money with interest. Every six months after the call date, the bank will have that same option again. Well get to why the bank would want to call back the certificate shortly.
Maturity Date
The maturity date is how long the issuer can keep your money. The farther in the future the maturity date, the higher the interest rate you should expect to receive. Make sure you dont confuse maturity date with the call date. For instance, a two-year callable CD does not necessarily mature in two years. The two years refers to the period of time you have before the bank can call the CD away from you. The actual amount of time you must commit your money could be much longer. Its common to find callable CDs with maturities in the range of 15 to 20 years.
To Call, or Not to Call
A change in prevailing interest rates is the main reason the bank or brokerage firm will recall your CD on the callable date. Basically, the bank will ask itself if its getting the best deal possible based on the current interest rate environment. (To learn how interest rate changes affect other investments , see How Interest Rates Affect The Stock Market and Its In Your Interest.)
Interest Rates Decline
If interest rates fall, the issuer might be able to borrow money for less than its paying you. This means the bank will likely call back the CD and force you to find a new vehicle to invest your money in.
Example - Callable CD When Rates Decline
Suppose you have a $10,000 one-year callable CD that pays 5% with a five-year maturity. As the one-year call date approaches, prevailing interest rates drop to 4%. The bank has therefore dropped its rates too, and is only paying 4% on its newly issued one-year callable CDs.
Why should I pay you 5%, when I can borrow the same $10,000 for 4%?, your banker is going ask. Heres your principal back plus any interest we owe you. Thank you very much for your business.
The good news is that you got a higher CD rate for one year. But what do you do with the $10,000 now? Youve run into the problem of reinvestment risk.
Perhaps you were counting on the $500 per year interest ($10,000 x 5% = $500) to help pay for your annual vacation. Now youre stuck with just $400 ($10,000 x 4% = $400) if you buy another one-year callable CD. Your other choice is to try to find a place to put your money that pays 5% such as by purchasing a corporate bond - but that might involve more risk than you wanted for this $10,000 . (For more on the risks of these bonds, see Corporate Bonds: An Introduction To Credit Risk.)
Interest Rates Rise
If prevailing interest rates increase, your bank probably wont call your CD. Why would it? It would cost more to borrow elsewhere.
Example - Callable CD When Rates Rise
Lets look at your $10,000 one-year callable CD again. Its paying you 5%. This time, assume that prevailing rates have jumped to 6% by the time the callable date hits. Youll continue to get your $500 per year, even though newly issued callable CDs earn more. But what if youd like to get your money out and reinvest at the new, higher rates?
Sorry, your banker says, only we can decide if youll get your money early.
Unlike the bank, you cant call the CD and get your principal back - at least not without penalties called early surrender charges. As a result, youre stuck with the lower rate. If rates continue to climb while you own the callable CD, the bank will probably keep your money until the CD matures.
What to Watch For
Whos Selling
Anyone can be a deposit broker to sell CDs. There are no licensing or certification requirements. This means you should always check with your states securities regulator to see whether your broker or your brokers company has any history of complaints or fraud.
Early Withdrawal
If you want to get your money before the maturity date, there is a possibility youll run into surrender charges. These fees cover the maintenance costs of the CD and are put in place to discourage you from trying to withdraw your money early. You wont always have to pay these fees; if you have held the certificate for a long enough period of time these fees will often be waived.
Check the Issuer
Each bank or thrift institution depositor is limited to $100,000 in FDIC insurance. There is a potential problem if your broker invests your CD money with an institution where you have other FDIC insured accounts. If the total is more than $100,000, you run the risk of exceeding your FDIC coverage. (To learn more, read Are Your Bank Deposits Insured?)
Wrap Up: Callable or Non-Callable?
With all of the extra hassle they involve, why would you bother to purchase a callable CD rather than a non-callable one? Ultimately, callable CDs shift the interest-rate risk to you, the investor. Because youre taking on this risk, youll tend to receive a higher return than youd find with a traditional CD with a similar maturity date.
Before you invest, you should compare the rates of the two products. Then, think about which direction you think interest rates are headed in the future. If you have concerns about reinvestment risk and prefer simplicity, callable CDs probably arent for you.
Use this checklist when you are shopping for callable CDs to help you keep track of the important information.
Callable CD Checklist
Traditional CD Callable CD #1 Callable CD #2
Callable Date N/A
Maturity Date
Seller Background
Surrender Fee
Issuer
Interest Rate
BarChart Technical Analysis NITE-LYNX $PSYC
http://www.barchart.com/technicals/stocks/PSYC
Understanding Financial Liquidity
Do you know how much easily accessible money you have in the form of cash and equivalents? This is a measure of your liquidity. As youll see, this concept plays a role in your financial and investing lives and those of the companies you buy and sell. Starting from a definition of liquidity with examples of different types, well move on to a discussion of how banks play a role in keeping liquidity available. Well then look at liquidity from an investors viewpoint in terms of the stock market. Finally, well end off with a brief look at a couple of financial ratios that can be used to evaluate a companys liquidity.
Tutorial: Basic Financial Concepts
What Is Liquidity?
Liquidity is the term used to describe how easy it is to convert assets to cash. The most liquid asset, and what everything else is compared to, is cash. This is because it can always be used easily and immediately.
Certificates of deposit are slightly less liquid, because there is usually a penalty for converting them to cash before their maturity date. Savings bonds are also quite liquid, since they can be sold at a bank fairly easily. Finally, shares of stock, bonds, options and commodities are considered fairly liquid, because they can usually be sold readily and you can receive the cash within a few days. Each of the above can be considered as cash or cash equivalents because they can be converted to cash with little effort, although sometimes with a slight penalty. (For related reading, see The Money Market.)
Moving down the scale, we run into assets that take a bit more effort or time before they can be realized as cash. One example would be preferred or restricted shares, which usually have covenants dictating how and when they might be sold. Other examples are items like coins, stamps, art and other collectibles. If you were to sell to another collector, you might get full value but it could take a while, even with the internet easing the way. If you go to a dealer instead, you could get cash more quickly, but you may receive less of it. (For further reading, see Contemplating Collectible Investments and A Primer On Preferred Stocks.)
The least liquid asset is usually considered to be real estate because that can take weeks or months to sell.
When we invest in any assets, we need to keep their liquidity levels in mind because it can be difficult or time consuming to convert certain assets back into cash.
Other than selling an asset, cash can be obtained by borrowing against it. While this may be done privately between two people, it is more often done through a bank. A bank has the cash from many depositors pooled together and can more easily meet the needs of any borrower.
Furthermore, if a depositor needs cash right away, that person can just withdraw it from the bank rather than going to the borrower and demanding payment of the entire note. Thus, banks act as financial intermediaries between lenders and borrowers, allowing for a smooth flow of money and meeting the needs of each side of a loan.
Liquidity and the Stock Market
In the market, liquidity has a slightly different meaning, although still tied to how easily assets, in this case shares of stock, can be converted to cash. The market for a stock is said to be liquid if the shares can be rapidly sold and the act of selling has little impact on the stocks price. Generally, this translates to where the shares are traded and the level of interest that investors have in the company. Company stock traded on the major exchanges can usually be considered liquid. Often, approximately 1% of the float trades hands daily, indicating a high degree of interest in the stock. On the other hand, company stock traded on the pink sheets or over the counter are often non-liquid, with very few, even zero, shares traded daily.
Another way to judge liquidity in a companys stock is to look at the bid/ask spread. For liquid stocks, such as Microsoft or General Electric, the spread is often just a few pennies - much less than 1% of the price. For illiquid stocks, the spread can be much larger, amounting to a few percent of the trading price. (For more insight, see Why The Bid-Ask Spread Is So Important.)
One thing to note as an investor when placing an order, is the liquidity of the stock. During normal market hours on the major exchanges, placing a limit order will get you the price you are looking for. This is particularly true for companies that are non-liquid, or during after-hours trading when fewer traders are active; at these times, it is better to place a limit order because the lower liquidity may lead to a price you would not be willing to pay. (To learn more, see The Basics Of Order Entry.)
Liquidity and Companies
One last understanding of liquidity is especially important for investors: the liquidity of companies that we may wish to invest in.
Cash is a companys lifeblood. In other words, a company can sell lots of widgets and have good net earnings, but if it cant collect the actual cash from its customers on a timely basis, it will soon fold up, unable to pay its own obligations. (To read more, check out The Essentials Of Cash Flow and Spotting Cash Cows.)
Several ratios look at how easily a company can meet its current obligations. One of these is the current ratio, which compares the level of current assets to current liabilities. Remember that in this context, current means collectible or payable within one year. Depending on the industry, companies with good liquidity will usually have a current ratio of more than two. This shows that a company has the resources on hand to meet its obligations and is less likely to borrow money or enter bankruptcy.
A more stringent measure is the quick ratio, sometimes called the acid test ratio. This uses current assets (excluding inventory) and compares them to current liabilities. Inventory is removed because, of the various current assets such as cash, short-term investments or accounts receivable, this is the most difficult to convert into cash. A value of greater than one is usually considered good from a liquidity viewpoint, but this is industry dependent. (To read more, see The Dynamic Current Ratio and Analyze Investments Quickly With Ratios.)
One last ratio of note is the debt/equity ratio, usually defined as total liabilities divided by stockholders equity. While this does not measure a companys liquidity directly, it is related. Generally, companies with a higher debt/equity ratio will be less liquid, as more of their available cash must be used to service and reduce the debt. This leaves less cash for other purposes.
Bottom Line
Liquidity is important for both individuals and companies. While a person may be rich in terms of total value of assets owned, that person may also end up in trouble if he or she is unable to convert those assets into cash. The same holds true for companies. Without cash coming in the door, they can quickly get into trouble with their creditors. Banks are important for both groups, providing financial intermediation between those who need cash and those who can offer it, thus keeping the cash flowing. An understanding of the liquidity of a companys stock within the market helps investors judge when to buy or sell shares. Finally, an understanding of a companys own liquidity helps investors avoid those that might run into trouble in the near future.
This link will help thou $SHKZ BarChart Technical Analysis NITE-LYNX
http://www.barchart.com/technicals/stocks/SHKZ
Dont Be Misled By Investment Advertising
In the world of investments , it is sadly common for sellers to make claims that are just not accurate, realistic or valid. They promise things that literally cannot be done or at any rate, wont be done effectively or usefully. Novice investors, and more experienced investors alike may be misled into thinking that just about anything is a good and well-managed investment . And one serious mistake can damage someones financial security. But how can you differentiate between hype and reality?
THE PROBLEMS:
Flashy Information
Glossy, attractive brochures (or internet sites) and striking photographs should be dismissed as irrelevant to the investment process. They really do not mean anything. Enjoy looking at them, but dont take them seriously. Focus on the real information and offerings.
Flashy bar and pie charts may be accurate and useful, or just the opposite. And it is not so easy to differentiate between the two. For instance, it is simply deceitful to attract investors into equities by showing a gently rising value line above a very flat and boring bond-performance line. This unfair comparison can easily mislead investors into thinking that the broker or firm in question has done a great job with equities and that they are an outstanding investment. An experienced investor will know that, over time, equities generally perform better than bonds but with far greater volatility and uncertainty. There are also long periods throughout history during which equities are more bother than they are worth. Accordingly, the proportion of a portfolio going into equities must be considered extremely carefully.
Product Complexity
Product complexity lends itself to misleading advertising. Structured products can be remarkably difficult to understand, but to market them simply and appealingly is not difficult. Inexperienced investors are particularly vulnerable.The seller has an obligation to ensure that complexity is not misused to mask risk. The conventional wisdom is not to buy what you cant understand. However, this advice cuts out a lot of potentially good investments. Make sure you get advice from someone you can really trust, preferably someone who does not stand to gain one cent from the transaction. (For more depth on what structured products are, refer to Understanding Structured Products.)
Simple, Yet Misleading
Historical returns are one of the most common problems. Just because something has done well in the past, doesnt mean it will continue to do so. It may even mean the opposite. The market in question may be peaking or perhaps too muchrisk has been taken (hence the high returns so far) and the crunch is coming. In short, projections into the future are, by their very nature, unreliable. What matters is the nature of the product, not what the crystal ball tells you.
Guarantees must be treated with a similarly healthy suspicion. Such phrases as risk-free, safe and protected may actually mean that you will earn next to nothing and might as well put your money in the bank. Or they may be just plain false. The protection may turn out to be inadequate or may not apply when you really need it.
Meaningless or Misleading Service Claims and Promises
Some firms exaggerate their competencies or the level of service they offer. For instance, a claim like we believe that investment success requires regular monitoring and attention to the smallest detail is great in principle. But many firms just do not do this, no matter what they imply. Likewise, promising to maintain a close relationship all year round is vague and often pretty meaningless.
Outright falsehood can also occur. For example, some brokers tell you how they predicted this or that crash or boom. A look at documents from the period in question may reveal that this is just not true. In the investment world, there is no shortage of such scandals. In his promotional material, one broker claimed that he had believed the bull market was in its expensive and speculative phase, and warned his clients accordingly at the time. A skeptical journalist did some digging around and found that the broker had actually claimed that the bear market was alive and well. (In addition to questionable advertising, read Understanding Dishonest Broker Tactics for other possible tricks you should be aware of.)
THE SOLUTIONS:
Regulation
In almost all countries - certainly America and Europe - investment advertising is regulated. In theory, this obliges firms to disclose a minimum level of information and to advertise fairly. Nonetheless, in practice, this does not ensure consistently that the advertising investors read tells them what they really need to know. Unfortunately, regulation is not all-encompassing, and does not provide anything close to full or adequate protection. (Learn more about regulation in our article Financial Regulation: Who They Are And What They Do.)
There are a number of fundamental issues you should be aware of before you buy. First, you need to know exactly what the investment entails – is it equities, bonds , real estate or what? Furthermore, each of these categories has its own subdivisions. Second, you need to know the level of risk and the costs of getting in and out (or of simply staying invested). It is important to understand why you should invest in this right now. True market timing is difficult or even impossible, but it is generally clear whether a particular asset class is a relatively good investment or not at a given point in time.
Do It Yourself
You can do a lot by keeping your wits about you. But, realistically, this only applies to those with a reasonable level of knowledge and experience. Reading articles like this one or getting advice from a trusted source can help ensure you know the score. The media, the regulators and associated consumer organizations can help in this respect. But for the initiated, do your homework. It may be a pain and an effort, but the pain of getting it wrong will be far worse.
The Bottom Line
The ugly reality is that a large number of firms and brokers promote their services with the main or even sole objective of attracting customers and their money. The tendency to diverge from the straight and narrow is always there. There are a number of classic methods of making very ordinary or even bad investments sound good and there are new tricks and new bad investments emerging all the time. Regulation is therefore one of the main mechanisms for protecting the public. The other challenge is to educate the public but this has always been and will remain difficult to do effectively, efficiently and comprehensively. For those fortunate enough to be already reasonably well informed, make sure that you sort out the gloss from the dross before you hand over your money.
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