Kenyantykoon's Blog
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A real life warrant trade explained
Posted: July 23, 2010, 10:57 am by kt
I have done a few posts on warrants like warrants defined and how warrants work. I was reading through financial websites and I found a few press releases on companies offering warrants to investors. In the press releases, they use the terms used in the warrant markets to I figured that I should do a post walking through what they mean. This is because one of the major reasons for the existence of this website is to make investment lingo easy to understand and implement.
As I have said before, warrants give the holder the right to buy (call warrant) or sell(put warrant) a financial asset, that ranges from a stock to crude oil to third world currency, before or on a certain time(expiry sate) at a given price(strike price or exercise)
Knowing the above, let’s dig in.
In this linked market watch article, the US treasury says that it will sell warrants to buy the First Financial Bancorp common stock(this means that the warrants being issued are call warrants). The strike price that an investor is required to buy each warrant is $12.9. Now the price of this common stock(or also called the underlying) is $14.41 meaning that this particular call warrant is defined as in-the-money because the strike price is lower than the market price of the involved stock.
So an investor can buy the buy this $14.41 stock at $12.9 and either hold on to it and wait for a higher stock price and thus higher profits or sell it immediately making a pure profit of (14.41-12.9)=$1.51. The warrant investors can only exercise the warrant before the given expiry date after which the warrant becomes useless to him.
Another term commonly used in the warrant markets is “gearing“. This is dividing the price of the underlying(in this case 14.41) by the price of the warrant(in this case 12.9). The bigger this number, the bigger the chance for big profits (like in our call warrant case) or big losses (in the case of put warrants)
Also the conversion ratio for the above example if 1:1 meaning that you need one warrant to buy one common stock. Sometimes the ratio can be 12:1 meaning 12 warrants for 1 share or whatever the suits in the offices decide.
After reading the above, this ‘’The Independent” article one examples of issued warrants should be pretty straight forward.
Finally there is this press release of an ongoing warrant that you would like to read through so as to internalize the warrant concept. . It is also very straight forward and it seems these warrant holders are in a win-win situation. Truth be told, I wish I was a ProUroCare Medical warrant holder because the company seems to pass some of my criteria for me to invest in it; in my light analysis anyways.
I think that warrants are just a way of eating your cake and having it because technically you cannot lose more that you have put in. For instance in the first example, you cannot lose more than the $12.9 you put in even of the stock price goes from 14.41 to zero. While the said stockholders would get their faces ripped off, at least you as the warrant holder would suffer less loss is such a catastrophe happened.
Those are warrants for you. Even if I am not for derivatives as such, because of their complexity, I must say that I am warming up to these warrants.
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Rolling stock; definition and special uses
Posted: July 22, 2010, 10:45 am by kt
When I first came across this term in an investing manual, my first thought was that it was some type of security or stock market investment but the thing is that my definition did not fit in with what the book was talking about. So I did a little research and this is what I found out about rolling stock.
Basically it is the wheeled assets that a transport company like a rail road has like the freight cars, passenger coaches and any other of the company’s wheeled assets. It is supposed to be the just those wheeled vehicles that do not have engines but the term is used collectively for both propelled and self-propelled cars. Wordiq.com has further this interesting article on the various divisions of rolling stock.
Other terms are running stock or motive power.
Apart from the fact that it is used to transport people and this from point A to point B, rolling stock has many other uses for a company. A transport company can easily use it as collateral for a loan because of the fact that it is easy to ascertain its value and life span. It is also relatively easy to insure against damage and loss unlike other things that are used to get loans like home equity, whose value fluctuates from time to time.
Another more nifty use of the rolling stock by transport companies is to make a form of funded debt called equipment obligations. Sometimes a transport company, say a rail road company wants to expand its operations. In most cases it will do a bond offering if the stock offering does not bring enough funds. Now, something that you should know is that this funded debt is insured against the company’s assets or earning power so that in case the company cannot meet its interest payment obligations i.e. in a default, the assets can be liquidated and the proceeds used to pay the investors. It works in theory anyways. To still get more money from the investing public, the company can make a special debt obligation called an equipment obligation. This special bond is backed by a particular asset like the rolling stock or a very important part of the railway. It provides better protection against loss of principal because even in the event of a default, their interest payments have to go on because the hub of the business is still functioning and thus still making some cash meaning that the debt attached to it can still be serviced. In most cases the equipment obligations that have been insured by the most important parts of a freight business have been serviced even when times were bleak.
So there is rolling stock and its uses for you. So next time you are in a passenger car or see an oil tank car, you should see that its uses in the company run deeper than just the visible function. Also if I am to invest in any bond offering, I would look for special obligations like the one fore-mentioned because of the advantage of safety of principal.
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Collateral trust bonds; functions and uses explained
Posted: July 21, 2010, 10:45 am by kt
It has been a long time since I did a bond post. This is mainly that my fascination is mostly in the stock markets and not in the bond markets. Also another thing that is deterring me from really getting very much involved in the bond markets is the complication. I find the stock markets easier to navigate and the jargon easier to understand than those in the bond markets. Maybe I am just not interested in it or those bond people are intentionally making everything hard to understand so that we stay out of it? There’s something to think about.
So anyways collateral trust bonds/collateral trust certificates/collateral trust notes are more or less what the name implies. It is a type of corporate bond that is backed up by the company’s financial assets, like stocks, other bonds, notes etc. They are usually issued by holding companies and they use the financial assets of its subsidiaries. These bonds that are used as security are kept in a trust so that in the event of default due to bad financial times, these kept bonds are transferred to the collateral bond holders. It normally increases the bondholder’s safety because holding companies by function hold stock in various companies in different industries so in the event of default, the stock of one of its subsidiaries would still remain valuable meaning that the collateral bond investor does not lose his cash since these valuable stocks are transferred to him.
With these bonds, the holder had the primary interest in the market value of the financial assets backing it up. These bonds are almost always well protected even when other normal stockholders and bond holders are having their eyes scratched out by adverse financial times. They are just another option for an investor to protect his principal when investing in a company. If this option is available in a company’s bond offering, pay more attention to it because of the above advantage.
Something that has to be added is that they are usually short term debt securities so do not expect to see maturities in the decades like some government bonds I saw with a maturity of 2 centuries!
As these bonds are backed by intangible assets, you can say that they are the opposite to bonds that are backed by physical assets like mortgage bonds and equipment obligations.
Each and every deal has its own unique set of advantage and disadvantages so you must read the terms of each offering before jumping in. Sometimes the issuing companies try and find ways of eschewing their responsibility if paying up in the event of a default. For instance, a company can say (in the indenture) that the assets will only be transferred to the collateral bond holders only if the subsidiary company has declared a profit over a certain amount. In the event that the profits declared is less than stipulated the bonds will not be transferred to you the collateral bond holder. This hypothetical example serves to drive the point home that you should read the fine print in each deal because no two offerings are similar.
That is basically the collateral trust bond for you future bond investors. A deal like this can make me invest in bonds but other than that, I think I will stay in the stock markets.
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The types of stock markets
Posted: July 20, 2010, 10:45 am by kt
This site mainly looks at investments in the stock markets like stocks, bonds, warrants and the like. There are very few times that I have done a post describing for instance what a stock market is, the types of stock markets available, the different stock markets available in different parts of the world etc
In this article, I will look into the types of stock markets, dividing it into the two major divisions; the primary stock market and the secondary stock market.
The primary stock market or the new issue market is the one that few investors are familiar with as it deals with the issue of new securities or Initial Public Offerings. Something that you have to understand is that a company goes public to get funding for its business by selling off part of the business in form of the shares. When a company wants to go public, it has to go through an underwriter- just a fancy name for investment bank- a kind of middleman that handles the intricacies of the deal like the number of shares to be floated, the starting price of each share, which institutional investors get first dip and the like. So in a sense floating the shares is a way of the company to get long term funding from the capital markets. While the underwriters handle the details mentioned above, it is the company that receives the cash from the investors and in turn gives out the stock/bond certificates. This is the only time that a business will receive cash from the capital markets or investors in exchange for part of the business (or the financial assets) and this is why the deal is done in the primary markets.
Another way of defining the primary stock market is if the funds go directly from the investors (or the buyer of the shares) to the issuer (or the company going public).
The stock from this kind of deal is called primary stock. It is mainly stock from small to medium sized companies because they are floating shares to the funding to expand business operations. Finally freedictionary.com brings out another feature of primary stock market that the investor buying this stock is does not pay brokerage fees because these fees are already built into the price you are paying. After this is over and done with all other subsequent trades will happen in the secondary stock markets.
The secondary stock market or the after-market is the one that most are familiar with because of all the media attention. This is where the stocks and bonds are traded after the IPO is over and done with. This is where brokerage firms, stockbrokers, stock investors interact all the time as they buy this stock and sell that bond and the like. Also there is a greater variety of investments that are derivatives for previously issued shares like stock options, warrants, the older stocks and bonds, repackaged mortgages, etc You as the stock investor does not have to deal with the issuing company to get the stock as you would have to do when in the primary stock markets. When you want any stock, you get them through a broker or another investor willing to sell them to you. The secondary markets are the ones that you know of like the London Stock Exchange, Nairobi Stock Exchange, New York Stock Exchange etc. This is where all the complicated things go on.
That is basically another facet of the jungle that is the stock market. It gets more complicated the longer you deal here and it is better you start getting to know as much as you can about the stock market and investments contained therein. It is another way of exercising due diligence in your investing career.
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GREED IS GOOD!- or is it??
Posted: July 19, 2010, 11:31 am by kt
The above is a very popular Wall Street motto. Personally I came to hear of this phrase through Gekko (for those that do not know of this character, he is basically the personification of corporate greed; the doing what you have to do to maximize your profits even if it means stabbing your friends family and anyone around you in the chest)
Let us look into this for phrase that most money people live by. Greed is good- for whom?
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Truth be told, i have always been fascinated by the Wall Street crowd, they seem so much more intelligent than the rest of us, they seem to have a very impressive work ethic (ever heard of wall street closing for any public holiday?) and most of these people are educated in some of the best universities in the world. Finally most, no all are the chest thumping testosterone filled males that most of us dream of being. I read through the book Liar’s Poker by Michael Lewis (and did a review). The book really brought the life of a stock broker to life. I mean these guys are so driven to make as much money as they possibly can within the shortest time possible. And therein lies the application of this wildly popular phrase -greed is good. It is good for the individual and everyone else can pretty much go to hell.I stock broker is one that has no loyalty to you the customer or any other investment firm apart from the firm he works in and ultimately his end year bonus. He will sell you an investment, be it a stock, bond, warrant that is so toxic that he even winces every time he thinks of it. At that time he will praise it telling you and several other potential buyers that this is the best deal that he has ever seen. The stock broker will use his (normally very high) intelligence and pick the most ignorant and greedy-for-quick-profits customers so as to pitch the investment to. Reason being if he does a very good job of exciting you, then you will not even bother to analyze the financial documents and all other factors before investing your money. He will do this because the more investments he sells for his firm, the higher the bonus will be. Granted he might lose some sleep but that check at the end of the year will justify all the wrong he has done; at least in his eyes anyways.
Security analysis and the intelligent investor both warn against trusting the advice that investment firms give to their customers. This is because they will give you information that is biased to suite the securities that they are selling. After you see that such and such a stock is good, you will call up the firm that gave you that info and buy through them. This will mean that they can subtly modify things to lead you to them. Anything for a bigger bonus.
PS; want to know what these guys do with the gargantuan bonuses. Watch this interesting documentary on the lifestyles of the wall street brokers. Ask any of these brokers if greed is good and do a poll on what they say.
In my opinion, the best thing that you can do for yourself and avoid your ignorance and greed being exploited by anyone is to be as well informed about whatever you want to invest in as possible. Another thing that you have to do is control that greed that you may have for short term profits. This is because if you are greedy, you will end up doing something stupid because you will be clouded with thoughts of early retirement or making it big.
The bible also warns us against these two vices. Case and point 1 timothy 6:11 but you man of God flee these things(love of money) and pursue righteousness, faith, love and piece. Another bible verse that helps you combat the vice that is ignorance is proverbs 13:18 he who ignores discipline(as in not being able to control yourself) will come to poverty and shame but whoever heeds correction is honored. This is very true in investing in the financial markets. If you cannot control yourself, the bloodthirsty money men will be able to smell this from a mile off and will fleece you out of house and home with absolutely no remorse.
Finally, I would like to put forward my thoughts on this that greed is only good for the money or success hungry and will generally lead to a lot of people that are not this “ambitious” into a lot of trouble.
I have never ever met a Christian wall street money man. If I do, I think you guys will be the first to know, followed by some kind of book
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Liar’s poker by Michael lewis- personal book review
Posted: July 16, 2010, 12:20 pm by kt
This is a book that came out many years ago but I just recently got my hands on a copy of one. You don’t normally review a book that has been in circulation for so long but after the experience I had with reading it, I decided to write a quick review on it.The book is some kind of biography of the author because it starts just when he is out of grad school and looking for a job. He finds one in Wall Street working for (the now infamous) Salomon Brothers as a bond salesman.
It is basically a somewhat detailed story of his experiences of his time in the firm; from being a green trainee to being one of the senior people in the firm. It also exposes the lies, self-interest and greed of the brokers in Wall Street straight from the horse’s mouth.
The title Liar’s poker was from a game the traders used to play on the trading floor with the same name. It was a game that basically encompassed what they did all day long; making bets with large sums of money, making a lot of it or loosing all of it all with the twinkling of an eye. It was a game that one had to have a very sharp mind and a very good ability to control his emotions, doing calculations in his head at the same time trying to predict what his opponent was going to do next and try to outthink him. A person who could handle the pressure of the game and win made a very good trader.
After getting employment after some sort of unpleasant run around, he gets in to the trainee program where all the other potential employees are shown the ropes of what they will be doing. Here he gets to meet many of the senior people in the firm giving the reader very detailed and somewhat satirical descriptions of them. He also explains how the trainees arranged themselves during the program and what this sitting arrangement said of each of them. For instance, the guys that sat at the back were very unruly, noisy and rowdy but at the same time most had the mental framework to make it big in the firm; they acted the way they did because they were confident in their ability to succeed.
The book does a good job to detail what happens day after day in Wall Street through the eyes of one of their own. For instance it explains that investment banking is now what the rest of us perceive it to be. There are classes some of which are more respected than others. For instance corporate finance, while still under investment banking was not respected at all. Even the traders regarded them as wimps because they never took any risk- they just sat in offices with secretaries and went to meetings with captains of industry. Descriptions like this are found all over the book making working in a Wall Street firm come alive.
The book also does a good job in detailing what happened in the levels in a firm after government legislation was changed eg what happened when the bond interest rates were set free and the like. Most of us in non-finance professions do not really see the results of some finance bill being passed but in the book we see what happens when a favorable or unfavorable one is passed.
Salomon brothers, where Michael Lewis worked, was one of the major players in the bond market meaning that it knew most about bond trading than most firms. This is where the mortgage bonds were created with a guy called Ranieri. It describes how he came to be in the bond department, how he took control and how he made this market more efficient and as gargantuan as it is. In the midst of this, he also describes the peculiar habits that these mortgage bond traders had after they became the most profitable department in Wall Street like the wanton greed(for food and money) they displayed.
There are many instances where the mind of a Wall Street money man is shown; make as much money as you can for your firm and yourself even if you have to cheat the customer out of house and home. This happened many times in the book where brokers sold bad bonds to customers after lying to them that they were the best deals around, so that the firm would not have to lose that cash. They basically exploited the customer’s ignorance and greed for profit, all without remorse.
I could go on and one writing the bits that stuck in my mind but I would not scratch the surface. The book is written for those that are interested in knowing a lot about investing and those that just want a general knowledge of it. Michael Lewis did a good job in catering for his reader’s preferences. If you are even vaguely interested in knowing about investing in investments like stocks and bonds without really getting into the nitty gritty of it, read this book.
Incidently after reading this book, I came across a forbes article about the investing career of Warren Buffett and Salomon Brothers was featured here. This was because there was a time, near the demise of this firm that Warren Buffett came in. Needless to say, it made the book come alive for me.
This is the first finance book that I have read and not skipped any pages. It is also the first time that I read a finance book and understood most of what was being said because of the jokes and side stories that are peppered all over the book.
Even if the book came out years ago, get yourself a copy and read through it; you will understand some most of the things that happened very recently like the subprime mortgage crisis because the same characters mentioned in this book are the same ones responsible for that debacle. It is the securities created during the time that this book was being written that played a major role in the recent market crash.
I am currently reading the big short, also by Michael lewis and it is also as thrilling as liar’s poker. Other people who have read the two say that it is better to first read through Liar’s poker because the big short is somewhat a continuation and I tend to agree with them.
TO BUY THE BOOK, USE THE BANNER IMAGE AT THE TOP OF THE POST
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is this really success??
Posted: July 14, 2010, 1:10 pm by kt
For the longest time, i have liked reading other people’s financial success stories. It gives me a warm fuzzy feeling inside when i read of a person coming from a poor to middle class family, dropping out of school for various reasons and going on to make mind boggling fortunes. Stories like these are everywhere; especially on the internet where there is always an ad saying that so and so made so much money after struggling for so long with poverty and personal issues.
Case and point;
Warren Buffett: This guy wasn’t born with a platinum spoon in his mouth. Infact he was born right in the middle of the worst economic times in recent history; the great depression of 1930 . I was reading a forbes article about him saying that he had to really work at convincing the initial investors into letting him manage their money because he had no cred. Well he succeeded at this investing thing and at the moment, he is one of the richest men in the world and also hugely beloved by investors and frugal people alike.
Same thing with Carl Icahn; I read that at a certain point in time, he was so broke that he had to sell his car so that he could find a way to feed himself. At the moment, he is a multi billionaire.
Another billionaire that was born in the great depression and did not let his environs hold him back is George Soros.
I could go on and on but i am sure that you have a list of people whose rags to riches stories you have heard a million times. The lessons are also very valuable.
Like for instance, you could say that like warren Buffett, you must not diversify your investments so much but concentrate on a fewer bunch of investments that you know very well and thus in a position to profit from them very well. With a smaller list of investments in your watchlist, you can analyse the financial documents with greater detail, look at all the factors needed before investing etc This will also help you in becoming an expert in one area of investing thus increasing your likelihood to make a truckload of money.
You could also learn that you must do as much works as you can to avoid risk at the same time maximising your profits because in the definition of value investing, safety of invested principal plays a vital role.
Another thing that i have come to see that these financially successful people share in common is the ability to control their emotions. This ability to shut the noise out really works for you beucase you will not be influenced with what other investors around you are doing. This level headedness will make you make better desicions that are not clouded by fear, greed and all manner of destructive human emotions. It works out to your favor if you can separate yourself from the herd mentality that most investors have and make your own decisions
There are so many things to pick from the so many success stories around but my question is why is it that most people that succeed never seem to mention God as the source of their success?
As a christian i read that “in all your ways acknowledge God and he will direct your paths” This will evidently mean that when you do succeed in anything, you must give the glory back to God and thank him for giving you the victory. But i have seen very few people doing this. Most just start talking about how they succeeded when everyone else was failing or how they made it when the whole world was against them and so much hullabaloo.
As a christian i think more of us should thank God for our victories and give the glory back to him instead of boasting about them. The more we do this (the saying that we ourselves are responsible for our success) the more it angers God because he sees this as pride; which might lead to a very ashaming downfall for you.
This is one of the reasons why i am not such a fan of motivational books- they tell the readers that they are responsible for their own success and thus leave no room for God in the hustle to move up in the world. They are all like “so-and-so made it so can you” or ”the potential to succeed is inside you; just read this book and tap into the fortunes that await you”" bla bla bla!
I am not telling you not to read them; by all means please do. But do not forget that you will succeed if God wants you to and if you do, make sure you thank him and acknowledge him as the source of your success. Pleasing God will always work out to your favor in the long run.
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When and how to ask for help in your investing
Posted: July 12, 2010, 8:22 pm by kt
I am getting the opinion that high octane active securities investing is not for everyone. Not everyone is suited pitting large amounts if their money against the mentally unstable stock market. There are those who can and those who plainly cannot. If you cannot, just ask for help from a reputable person or firm. But the thing with this seemingly simple advice is that
Investing has long being a man dominated industry and that is where the problems come in.
First of it is very hard for a man to ask for help even when he is visibly getting pummeled in the market. It hurts when you have failed in an area that men are supposed to succeed. I don’t know about other men but I would hate to have to ask for help from other people in an area where my peers seem to be making a killing from all sides. They have a term for it; it is called EGO.
But is the end justifies the means the end being a good financial base where you can retire in peace and relative comfort, then it is of utmost importance that a person asks for help when it is required.
When to ask for help
In my opinion, an individual investor should ask for help in these situations;
Major losses within a very short time. This means that you just don’t have that ability to judge the market accurately and thus to keep yourself from losing your house, livelihood and everything else, ask for help.
Another reason to ask for help is if you have too many financial obligations and you seem to be struggling in allocation of the available finances in a way that everything is catered for. It makes no sense to live in an extremely tight budget just so that you can have more money to put in the stock market. That feels like a person addicted to gambling in casinos looking for a fix. Investing is not a gamble; it is meant to give you security in future. If you feel that you cannot do this by yourself, ask for help.
Another possible reason that you may have to ask for help is if you don’t seem to be good enough at asset allocation and your portfolio looks like a bomb went off there. A way to gauge this is if your stocks, bonds, funds, etc seem to be performing the same no matter how the market is performing. A good portfolio is supposed to be hegded in that when some securities are performing badly, others are performing well to counteract losses incurred in the badly performing ones and possibly get a little profit. If you cannot seem to do this well, just ask for people skilled in asset allocation.
Another problem that stems from above is where to ask for help.
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First of you could try your stock brokerage house but I am a little skeptical about the accuracy of the information that they give. Sometimes they may give you (doctored) data that makes the securities that they are selling look deceptively attractive. Also in my country, stock brokers have a very bad reputation. It is not once that they have used investor’s money to make gambles in the market, lost it all and then gone under, never to be heard from again. Sometimes entire brokerages have been guilty of this, causing investors untold losses and a compete loss in faith in the stock market. But on the other hand, there are some reputable stock brokerages that can actually give you accurate information.
You could try investment bankers. These guys have nothing to gain from an individual investor because their work is to underwrite and sell IPOs to institutional investors and other very large investors. So their advice can be better than the brokers’. The problem here is that the information they give you can be a little on the complicated side but the upside is that it is in most cases not misleading.
You could try using the free financial services like personal finance and investing blogs on the internet to improve your financial savvy. This works but you have to have good judgment and independence in thinking because most of these sites are the opinion of the writer. We finance writers are by no means absolute authorities so one must read these, see different perspectives of the same thing and then make his decisions in his investing.
But I still maintain that active investing is not for everyone; if you feel that you are just not cut out of the same cloth as Warren Buffett or John Paulson, just get a few good passive investments like index funds, good mutual funds and a few good quality bluechips and let the portfolio run in autopilot.
It is better to have peace of mind when it comes to important things like financial matters.
Where else so you get your advice and information when making your investment decisions?
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dollar cost averaging and the college grad
Posted: July 9, 2010, 3:57 pm by kt
(the title sounds like i got it from a movie right?- like harry potter and the goblet of fire ) It is the first thing that came to mind.
Now that we are through with campus and out in the world, how do we deal with our finances? When still under our parents wings, some of us did not really have to think so deeply about investment, financial security and the like because when we were broke a mere phone call to the parents was enough to get some cash in our pockets..(signs)…the good old days. Now we have a paycheck and suddenly there is need to budget. The more financially prudent of us have started thinking about investment and long term financial security. How do you invest in anything like a stock, bond, hedge fund etc when the paycheck is not that big? You do not have to have a large amount of money lying around to invest; this is where dollar cost averaging comes in.
I learnt about this investing formula some time back and instantly got interested in the simplicity behind its reasoning and effectiveness (after all they do say that simplicity is genius).
Dollar cost averaging is a time and tested formula that many attest works for someone not interested in complicated portfolio management and asset allocation. Basically this is what it is and how it works.
Dollar cost averaging is where an investor invests a fixed amount of cash in securities (they may be mutual funds stocks, bonds treasury bills or whatever investments that the investor fancies) after a fixed amount of time. This time can be monthly annually, every three months etc. The idea behind this concept is that during bull markets when share prices are in the sky, the fixed amount to be invested means that the investor has to buy less of the overvalued securities. Conversely when the share prices are very low, in a bear market, the investor can buy more securities with the fixed amount he has to invest. This is something that the investor has to do without fail whether the market is good or bad.
Assuming that you are blessed enough to have a something like $200 left from your paycheck. It is very easy to use that regular $200 to build a good investment portfolio instead of saying that you will save up to a million and then put it all in a stock market investment. The little amount will also mean that you will be more careful with what you invest. You will be inclined to better picked stocks than just speculating on bad IPOs.
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get these books on value investing and dollar cost averaging; they are worth the investment
I’m no fortuneteller: so, don’t ask me where the markets are heading tomorrow. What I do know: dollar-cost averaging doesn’t require a crystal ball.(TOTAL RETURN): An article from: Black EnterpriseSecurity Analysis: Sixth Edition, Foreword by Warren Buffett (Security Analysis Prior Editions)
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According to investorwords.com it is called constant dollar plan. It is also worth saying that it does not only have to be the dollar as the main currency but an investor can change it to suite the currency he invests in, shillings, Euros, pesos,…. You get the drift.
The reasoning behind why this works is that an investor is not supposed to buy shares when the prices are over their book values- (the real or calculated value of the share) and so with the fixed amount that he has, he buys less of this overvalued securities. Another thing is that investors prefer to buy securities when there is a protracted bear market when the prices are way below their book values because they will be bought at a discount and thus offering a possibility for profit in the next bull market when the prices rise above the book value (I will explain this concept of book value in the very near future).
Beyond the peace of mind that comes with not having to follow each minute change in share price so that you can profit from the fluctuations, there is also a form of financial discipline that one gets from consistent practice of this dollar cost averaging since an investor has to budget ahead of time to allocate a certain amount to be invested and what amount to live on.
Another reason that value investors like this formula is because it is long term in that one sees the effects after a long time. This is no short term investing thing that a speculator sees profits after a month or whatever.
This investing formula has better results than any other investing formula and any other market timing formula that has ever been brought up. I saw this thumbs up in the intelligent investor …“No one has yet discovered any other formula for investing
which can be used with so much confidence of ultimate success, regardless of what may happen to security prices as dollar cost averaging”. But this does not guarantee a profit in all the investing ventures because there is really no way of knowing what will happen in the future and one should be wary of any investing formula that promises to beat the market or predict the unpredictable future.
Dollar cost averaging also reduces the risk of investing a large amount of hard earned cash in a single or very few investments because one can easily loose that cash. Investing a little over given time intervals in different securities reduces this risk in that if he buys a share x this month he might not buy them next month because of market conditions disfavoring the purchase.
The biggest downside that I can see with this investing formula is that an investor has to make transactions very regularly and will mean that higher fees that will eat away at returns (this demerit makes them bear a similarity to mutual funds vis-à-vis fees.
This is a personal thought but I think that a person should not treat all this available cash in this way. I am for the opinion that one should dollar cost average some set amount and keep some aside for lump sum investing. This is because once in a while a very good deal comes along and the investor will want a larger amount to invest in the stock, bond etc than what is available in the dollar cost averaging plan.
This is partly how I will start building an investment portfolio; it makes better sense than buying gadgets and cars that will depreciate in value in a very short time. I want something beneficial out of my twenties and a good financial base would be nice.
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should you be concerned with market cycles?
Posted: July 8, 2010, 3:36 pm by kt
One of the most important aspects of investing in the stock market is the ability to control your emotions. The most financially successful investors have had this ability and for the most part, it has paid of in form of mega returns. I mean look at Warren Buffett and John Paulson the hedge fund manager.
The ability to control yourself in the face of life threatening crises is also important in other ways, like financial samurai showed with this post.
We all know that the stock market is one of the most unstable markets in the world. One minute, an IPO stock is flying high over its real value and the next it has lost 90% of its value for no apparent reason. Some times the price of a stock is so low that no one even wants to get caught thinking about buying into it and the next, the price has shot up to the stratosphere; again for no good reason.
An investor who decides to base his career following a visibly unstable stock market will probably have a very short career, if it does not end before it starts. Value investors claim that people that follow this mode of investing are not even worth of the title of investor; they should be called speculators because they visibly have no idea what in the blue blazes they are doing.
The ability to control yourself when lesser men are cowering and doing the chicken-little-sky-is-falling dance is something that the investor should have. And therein lies the problem. Isn’t the ability to keep calm under pressure something that one is born with?
I am for the opinion that there are some people that can keep calm when the sky really is falling and others that just do not have that ability. A good example is emergency room doctors. Patients with all manner of ailments and infections bombard them from all sides and they seem to take it all in their stride. Can you imagine having to deal with a patient with his insides hanging out, another with his half his head blown away, another with a skin eating infection and another with advanced STDs? All after lunch? Yet these people do it with a disturbing calmness. I cannot think of doing this all day every day.
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DO THIS SURVEY AND GET SOME CASH TO PAY THAT PHONE BILL
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My mum told me that medicine is a calling and not a profession; you can either do it or cannot. Somehow i am starting to think that the same applies to active securities investing. Imagine having the courage of watching 80% of your lifelong investments go down the drain and stay calm? Yet, this is something that the Benjamin Graham’s intelligent investor advocates.
For real life examples, we can start with Warren Buffett. He has this ability to keep market excitement separate when making his investing decisions and even goes on to say that ”be greedy when all others are fearful and be fearful when everyone else is greedy”. While this seems doable in paper it isn’t so easily done in the battle fields(read the stock markets). If it was, there would be more people with net worths of tens of billions of dollars. Another one is the hedge fund manager John Paulson who shorted securities in the housing crisis, betting that everybody else in the world was wrong and he was right; and guess what it worked and he made billions. I really think that these people are not like the average John Q public. You either got it or you don’t.
Sometimes, things happen and i see that i am not suited to active high stakes investing because i have a hard time controlling my emotions, particularly when hard earned money is involved.
Over to you, do you find it easy to control your emotions when investing with hard earned money? Do you, like me, think that active investing is not for anyone because not everyone has the right faculties or are you for the opinion that anyone can learn to be an active investor and control his/her emotions?
I appreciate your thoughts on this matter.
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Benjamin Graham’s The Intelligent Investor- personal review
Posted: July 7, 2010, 11:01 am by kt
I know that there are numerous reviews for this book in finance blogs and websites but I just wanted to have my take on this book.
This is the first book I have read on the intricacies of investing in the stock market in that it deals with how exactly to go about stock investing with real life examples; not like a self-help book that gives you vague advice like let your money work for you in the stock market. This one deals with the mentality an intelligent investor should have when going about his investing ventures.
PS; here is the link to buy this text book aptly named the intelligent investor
The book begins with a speech by Warren Buffett about how he read the book when in his late teens and how it revolutionized how he handled his investing from that point on. At some point he goes on to say that to successful investing does not really require a genius’ mind just a sound intellectual framework and a way to control your emotions when implementing that framework.
This book is in a way an investor’s motivational(self help) book because it will teach you more of the mentality you need when undertaking your investment ventures and a lot about the principals of investing. The real intricate details of investing are handled in security analysis.{ We are advised that before reading security analysis, you first read the intelligent investor because this book will set the mental framework needed to build a good value investor’s foundation- but I digress}
PS; here is the link to buy security analysis
Because history tends to repeat itself there is a lot of historical information in the book showing the readers the things that happened during major economic upheavals like the during the depression of the 1930s, what caused them, the investors’ attitudes at that time and mistakes and how the present time investor can avoid falling into the same trap because, as shown in the book(in remarkable detail I might add) the same things attitudes that occurred in the past occur in the present and will without a doubt occur in the future(talk about nothing being new under the sun)
If you are interested in building your investment portfolio and you want a part of it to be dedicated to stocks, bonds, mutual funds etc, this book is a must read even if you do not intend to actively invest in them. The reason the book gives for this is that a person who takes his investments like a business is bound to be more successful than a person who takes them as a gamble. A business person makes it his business to know all the areas of his business even if he is not actively involved in them. Another reason is that knowing how to handle your investments means that you are less susceptible to be fleeced by unscrupulous stock brokers taking advantage of your business. So do yourself a favour; buy the book here and read it through very slowly. The lessons that you get therein are invaluable.
It is a book meant for those inclined to value investing but those inclined to technical investing and day trading should also give it a read if for no other reason to improve the skill in their craft.
The book does a fabulous job in blowing myths like growth in a company does not necessarily translate to profits for investors even though most of us make growth and profits to be one in the same. Another myth it blows away is that market timing doesn’t necessarily work because what you are doing is trying to predict an unpredictable future- it may work the first few times but at some point in time it will blow up in your face leaving you with some major losses. Also it beats away at the opinion that the so called money experts are not as skilled as we would like them to be. At a certain point the book shows that it would be better for these money managers not to do a single trade because they never seem to beat the market even with the numerous trades they make. This means that for unskilled individual investors, the benefits of index funds are really amplified.
Another thing that the book handles is how an investor should handle the silent tax called inflation to minimize it eating away at your returns (to me this was not satisfactorily dealt with and the explanation left a few questions unanswered). Other things that the investor is taught how to handle are things like market fluctuations and how not to let each swing affect his investments. He is taught how to take a long term approach to his investing because his improved perspective will make him make better judgments without being clouded by things like market euphoria, quick profits and the like. Other things on how to deal with investment funds like mutual funds, hedge funds etc, are also handled in the book. It gives good guidelines on how to select a good fund that has your benefit in mind and not just the managers’.
It also goes into great detail on how a risk aversive investor should handle his portfolio so that to maximize his earnings while at the same time be able to sleep at night not worrying whether or not he will wake up poor in the morning. If you are such a person the book is a must read.
On the other hand, it also deals with how a person who wants higher return from his investments while still shouldering more risk should structure his portfolio ie how he should allocate the securities to suite his wants.
The best parts for me were the commentaries because the authors really put a lot of humor in to it. After reading a chapter full of things like per share earnings and how to deal with them a chapter taking a funny twist follows where things turn to a lighter note.
Things like comparing the stock market to a manic depressive and how an investor must not follow this every whim are talked about. He says that if you cannot follow the emotions of a real life mad man then why should you follow him in the stock market just because everybody else is? References to the big foot in pick ballet slippers in cocktail parties are included to drive the point home.
Lastly to keep the review short(ish), if you are even vaguely interested in investing in the stock market, you should seriously read this book. Most people taking their investing seriously have read this book and talked about how they have benefited from the advice given.
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what is home equity??
Posted: July 5, 2010, 8:10 pm by kt
I have heard of people using this home equity to pay off debts and the like but never really understood what is was and how they can be able to do things like this. I am currently reading a book that talks a lot about this so I decided to do a little research and throw up a short post on this.
Basically home equity or owner’s equity is the difference between the value of your home and what you owe on it. Like for instance let’s say that you have mortgage payments amounting to $100k and the current market value of that house is $120k; then the equity of the home is $20k(there is a little more to it that that but you get the idea). So increasing the equity of your home is something of an investment.
Something else about equity is that the more you owe on the house to your mortgage company the less equity you have and vice versa. So this means that if you pay a larger down payment on your house and then make higher monthly payments then the higher the equity you have.
Also to make sure that you have the best chances of increasing your equity to the maximum, it is best to look for a house in a very secure place that many social amenities like schools, hospitals, malls and the like are more easily accessible. This coupled with the fact that you are making more than your required payments means that you will have a lot of equity on your house and hence the investment.
The reason that a person with a mortgage should go all out in increasing his equity is because he can use that equity to borrow more cash from the bank. Money that can be used to do other things like pay debts, invest or whatever you please. Sometimes in the course of time you may need some money and if you have equity, you can borrow using it (I personally see how this can be misused and the negative applications on how a home owner can be made to borrow more money from the financial institutions but I digress).
In some cases you can borrow up to 80% of your equity. Using the example above this would be 0.8*20000= $16000.
But something that you should not do is use your equity to borrow cash is the equity is a low amount. Use it as a last result; because you are deep in debt and you are all out of options because what you are doing is getting into more debt-which will just complicate your life. This is what I think even though you may argue that you are using this money to pay off other debts. It always pays to be careful.
There are wise ways to use up your equity and there are dumb ways to use it. Unwise ways is using the cash to get another car, going to an exotic holiday- you know blowing it on things that you have absolutely no need for.
It would be wise to use the cash to pay of some debt in that after the different debts are paid for, you only have this equity loan to pay for instead of 5 different ones.
Other good ways to use equity apart from using it to pay debts is like;
-to start a business. This will be an asset the cash flow from which you can use to pay up the equity loan among other things.
-invest in the stock market in things like index funds, bluechip stocks, rock solid mutualfunds and the like. Not to speculate on bad IPOs and some growth stocks
The point I am trying to make is use the equity on something that will speed your way to financial freedom or for dire emergencies and not make you sink deeper into the mire of debt. It is up to you to know what the reason for getting the equity loan is.
I have found this article that basically says what I have but in a different more detailed approach
That’s basically it about equity.
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starting a book review section
Posted: July 3, 2010, 1:30 pm by kt
I am going to start doing book reviews for all the finance and investing books that a person interesting in investing -or just wants to gain a little knowledge in the finance world- should read.
We should have started doing this much earlier (and i feel like kicking myself for this) but you know…
We will try to be as objective as possible but not without putting up personal critisms and the like; this is a blog and not a newspaper publication.
There are a few reviews of books in the archives so i might be recycling posts now and then.
have a nice weekend btw
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60 minute payday loan- personal review
Posted: July 2, 2010, 11:18 am by kt
In this post, i am going to explain what this type of loan is and in a some way how they work.
We all know that most loans are extended to individuals by big financial institutions like banks and the like but the thing is that some people cannot qualify for these loans because of the requirements asked of them like collateral that the bank will use to regain their money in the event you don’t pay up on time, a fixed amount of periodical income income and the like. Well this is where 60 minute payday loan and others like it come in.
When a person that cannot get a loan from a bank applies for a 60 minute payday loan, that person is connected to lenders that review the information submitted in the form and then give you a loan.
An option like this is only recommended when you really need money for an unplanned for emergency(some of these things come out of no where like an engine overhaul, medical expenses) but sometimes an applicant just needs some money to so something that is important to him and just cannot wait.
The thing is that some loans like these have gotten bad press because of the hidden charges that they will incur so it is always important to read the fine print in any payday loan that you want to apply. Also some payday loans are just scam artists out to get you and fleece you out of house and home. So you should do a little research on the payday loan that you want to use and check the internet for people complaining that they got scammed by them. I did this and found nothing incriminating about 60 minute payday loan. Also like any debt, it is important to have a way to pay it up because in the end you have to pay it up; it is not free money that you are been given but a way to get yourself out if a problem. The best way to know that you are dealing with a scam artist is if they are asking you to deposit some money in an account for whatever reason. Legitimate payday loans do not ask for this. The only thing they ask for is truthful information in the application that is then reviewed and then you get your cash.
Well 60 minute payday loan offers you cash up to $1500. When you apply for the loan your application is immediately reviewed and the terms and conditions of your loan are set up. If the information that you gave is truthful and can be verified, then you are contacted about the terms and conditions of your loan and if they are ok with you then you finish the third step of your application and you get the cash sent to you almost immediately.
Another reason that i can recommend 60 minute payday loan is that their affiliate program is on one of the best affiliate networks available like affiliate.com, neverblue, copeac etc. For an affiliate network to approve a program, it has to go through stringent approval process before getting included.
As with anything involving money, it is important to read the fine print before getting into them and 60 minute payday loan is one of them.
60 minute payday loan is for immediate cash issues- you know something that just crept up on you and you need money NOW. It will not cater for long term cash requirements like mortgages, car payments and the like. They will also cater for people with bad credit and those that earn a low income and thus don’t have much hope of getting cash from bigger financial institutions.
TRY US NOW!!
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Fish cakes
Alas a fish cake.
Yet more fish cakes
Guess what ... yeah ... fish cakes.
The end of the fish cakes
