Strength Your Weakness

"Concentrate your strengths against your competitor's relative weaknesses."

By Bruce Henderson, The founder of the Boston Consulting Group (BCG)

Rational or Irrational

"Human are irrational, markets are made up of humans so Markets are irrational"

By Unknown Investor

Root of Evil

"Money is the fruit of evil, as often as the root of it."

By Henry Fielding, An English novelist and dramatist known for his rich earthy humour

The Conclusion of The Crisis

By September 7, 2008 – The Treasury committed to invest as much as $200 billion in preferred stock and extend credit through 2009 to keep the GSEs solvent and operating. The combined of two giant Government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac losses of $14.9 billion and market concerns about their ability to raise capital and debt threatened to disrupt the U.S. housing financial market. The two GSEs have outstanding more than $5 trillion in mortgage-backed securities and debt; the debt alone is $1.6 trillion. The conservatorship action has been described as "one of the most sweeping government interventions in private financial markets in decades".

S&P 500 Index from 2000-2008

LIBOR Time Frame

By September 15, 2008 – the 158 year-old Lehman Brothers holding company filed for bankruptcy with intent to liquidate its assets, leaving its financially sound subsidiaries operational and outside of the bankruptcy filing after the Federal Reserve Bank declined to participate in creating a financial support facility for Lehman Brothers. At the same day; The 94 year-old Merrill Lynch accepted a purchase offer by Bank of America for approximately US$ 50 billion, a big drop from a year-earlier market valuation of about US$ 100 billion. A credit rating downgrade of the large insurer American International Group (AIG) led to a September 16, 2008 rescue agreement with the Federal Reserve Bank for $85 billion dollar secured loan facility, in exchange for a warrant for 79.9% of the equity of AIG.

Why Fed help AIG not Lehman Brothers? Because AIG is in much scarier situation than Lehman; AIG has asset of $1 trillion, more than 70 million customers and intimate back-and-forth dealing with many of the world’s biggest and most important financial firms – Fed have no choice but to intervene.

On September 16 – the Reserve Primary Fund, a large money market mutual fund, lowered its share price below $1 because of exposure to Lehman debt securities. This resulted in demands from investors to return their funds as the financial crisis mounted. By the morning of September 18, money market sell orders from institutional investors totaled of $0.5 trillion, out of a total market capitalization of $4 trillion, but a $105 billion liquidity injection from the Federal Reserve averted an immediate collapse.

On September 19 – the U.S. Treasury offered temporary insurance (similar to FDIC insurance of bank accounts) to money market funds. Toward the end of the week, short selling of financial stocks was suspended by the Financial Services Authority in the United Kingdom and by the Securities and Exchange Commission in the United States. Similar measures were taken by authorities in other countries. Some restoration of market confidence occurred with the publicity surrounding efforts of the Treasury and the Securities Exchange Commission.

Emergency Economic Stabilization Act of 2008 – At the same day, Consultations between the Secretary of the Treasury, the Chairman of the Federal Reserve, and the Chairman of the U.S. Securities and Exchange Commission, Congressional leaders and the President of the United States moved forward plans to advance a comprehensive solution to the problems created by illiquid mortgage-backed securities. At the close of the week the Secretary of the Treasury and President Bush announced a proposal for the federal government to buy up to $700 billion of illiquid mortgage backed securities with the intent to increase the liquidity of the secondary mortgage markets and reduce potential losses encountered by financial institutions owning the securities. The draft proposal of the plan was received favorably by investors in the stock market.

On September 21 – Although Goldman Sachs and Morgan Stanley are only two giant U.S. investment banks not to collapse like Lehman, Bear Stearns or Merrill Lynch, their stock also down by 70%. The two remaining investment banks, Goldman Sachs and Morgan Stanley, with the approval of the Federal Reserve, converted to bank holding companies, a status subject to more regulation, but with readier access to capital. On Thursday evening Washington Mutual, the nation's largest savings and loan, was seized by the Federal Deposit Insurance Corporation (FDIC) and most of its assets transferred to JPMorgan Chase. Wachovia, one of the 4th largest US banks, was to be acquired by Citigroup and Wells Fargo.

Stock Market Crash in 1929 - The Black Monday

Panic, Chaos and Depression - As the history parallels, the real cause of the U.S. depression (after stock market crashed in 1929) wasn’t the stock-market crash but a contraction of credit due to an epidemic of bank failures. The bail-out will eventually pass but the world may still be heading for a severe downturn since emerging market like Brazil, Russia, India and China seem relatively close to U.S. economy. The death cycle also spread through Japan, Europe and Asian regions. The U.S. government is doing what it can to avoid 2nd depression. Although Bailout may be just a short-term fix, a short-term fix is better than no fix.

The Bail-out – the Fed step in and roll out bailout plan; however some credit market already seized up, including auction-rate securities. On September 29, the first attempt in congress vote for bailout plan failed after the vote being held in the House of Representatives, 205 for the plan, 228 against. Meanwhile US stock markets suffered steep declines 7 straight days. Death spiral last until October 13, 2008 before the Fed successfully pass $700 billion bailout plan. The United States Senate's version of the $700 billion bailout plan modified to expand bank deposit guarantees to $250,000 and to include $100 billion in tax breaks for businesses and alternative energy.

Doldrums Rhythm – How long could this recession last? In the past, whenever markets have faltered, American shoppers have come to rescue, spreading around prodigious amount of cash so that businesses can grow and hire again. Consumer spending accounts for 3/4 of the $14 trillion U.S. economy. But not this time, since their homes are still falling in value; stock market volatility has set everyone on edge; no cash-out refinancing; credit from other sources will soon dry up and personal debt 100% of annual GDP.

A recent study and survey about recession around the globe, the IMF says that the combination of housing bust, stock market bust and credit contraction could extend economic recession up to 3 years, compared with less than 1 year for typical recession. Some economists predicted that U.S. economy will have short recovery after recession. From Wall Street to Main Street, expect 12 – 18 months prolong period for all the pain will come to Main street (Our daily life) – banks will cut back on their lending to household and businesses; mortgages and car loans will become harder to get; that’s turn to stifle consumer spending and crimp investment in companies, leading to production cut and job losses. In its latest economy outlook, published on October 8, 2008; the IMF predicted that the U.S. economy will grow just 0.1% next year.

Mr. Bull or Mother Bear

What’s Next – Sooner or later, the hundreds of billions or trillions of dollars that Fed and other central banks are throwing into the markets will stabilize things. Housing prices will stop falling because no financial trend continues forever. We can’t tell when but we better to stay in market as it still in accumulation phase so we won’t miss next bull market as economic start to recover again. As old say that “no one can’t time market”; It’s a smart way to stay in market as it still have a lot of opportunity to buy first-rate companies when they dip on negative news such as an earnings miss. Some very solid industrial companies are paying decent dividends and still look cheap. Smart investors always make money when others panic.

Read More Think A Lot

"90% of the people in the stock market, professionals and amateurs alike, simply haven't done enough homework."

By William J. O'neil, An American entrepreneur, stockbroker and writer, who founded the business newspaper Investor's Business Daily

SPARTAN Criteria

These 20-Points Fundamental Criteria will screen you value-oriented companies with Low Debt, High Expected Return at Reasonable price or Undervalued. The most score stocks expect to be superior investment opportunity in long run.

1. Current Price Less than its Book Value
2. Dividend Yield > 4.5 %
3. Dividend Yield > 7.5 %
4. P/B Less than Industry Average P/B
5. P/B Less than 1
6. P/B Less than 1.6 (S&P Average)
7. P/E Less than Industry Average P/E
8. P/E Less than 7
9. P/E Less than 14 (S&P Average)
10. P/F Less than Industry Average P/F
11. D/E Less than Industry Average D/E
12. D/E Less than 50%
13. D/E Less than 10%
14. ROE > Industry Average ROE
15. ROE > 20%
16. Profit Margin > Industry Average Profit Margin
17. Profit Margin > 20%
18. Next Year Growth Rate > 20%
19. Long term Growth Rate > 20%
20. Earning Growth Last 5 Years > 20%

We need stock with financially-sound balance sheet with good earning. Always, Screen stocks with good fundamental ratio and buy when a technical chart show a momentum because sometimes stock has excellent fundamental but the rest of the world just don't see the same way as you.

Rebalancing the Way to Succeed

It's a essential to rebalance your portfolio every 6 months or at least once a year because some of your asset may be overvalued and some may be undervalued. In the other words, Rebalancing your portfolio will force you to sell high (overpriced assets) and buy low (underpriced assets) automatically.

You can use a risk-management or time-management approach depend on your style. If your portfolio have low-cost commission; you might consider to rebalance often as your asset allocation change. For instance, if your portfolio mix of 75/25 in stock and bond whenever stock portion eat up your portfolio more than 75%, you need to sell some of those stock and buy some bond to bring back to 72/25 ratio.

ThE SPARTAN FUND by Vikran

Superb Performance Accuracy Rapidity Totally Anticipation

This fund is built to provide a medium/long-term investment strategy (1-3 years) by picking good companies with strong balance sheets because we don't know when a bull market will come back again.

We need to be Trend Follower Investor.

We will focus our concentration on value stocks on small and medium companies with market cap less than 1 Billion US and avoid volatility stocks like GOOG, AAPL and RIMM. If so; What criteria should we consider ?

Let's me explain some more in details. We will consider on both fundamental and technical approach as below:

Fundamental Criteria (Which stocks to Buy)

1. Focus on Alternative energy, Biotech, Finance, Technology and Basic material sector because Obama administrator will support it. Moreover, beating-up tech stocks should come back quickly in middle bull. Also, Financial companies should recovery fast on late bear. Of course, Basic material such as steel, aluminum or lead will gain their ground when economy improve.
2. Concentrate on Small-Medium Cap stocks with Market Cap less than 1 billion except Large Cap stocks, allow up to 10 billion.
3. Price not too expensive (below 20$) since we have a limited capital.
4. Strong balance sheet, low debt unless it’s a normal part of the business (debt/equity less than 40%).
5. Strong free cash flow (FCF) after dividends and capital expenditures.
6. Companies have High barriers to entry or Doubling their earning in 5 years.
7. Undervalued when compare with its industry peers; look at P/E, P/S, P/B and PEG. For example, P/E and P/B is lower than competitors in same industry.

Technical Analysis (When to Buy)

1. Followed market trend. If overall market is Uptrend, Stock should make Higher High & Higher Low; conversely Lower High & Lower Low in Downtrend.
2. Major Pivot points both Support & Resistance are important.
3. If we need to look at a channel, its channel must be formed at least 3 months.
4. Fibonacci level at 38.2% and 61.8% are critical level. If Uptrend, draw from lowest to highest. If Downtrend, draw from highest to lowest.

Think Rich

"In this world it is not what we take up, but what we give up, that makes us rich."

By Henry Ward Beecher, A prominent, Congregationalist clergyman, social reformer, abolitionist, and speaker in the mid to late 19th century

Knowing Know

"The world does not pay for what a person knows, but it pays for what a person does with what he knows."

By Laurence Lee

2008 : A Year of Destruction

Use Smarty

"When you hire people that are smarter than you are, you prove you are smarter than they are."

By R. H. Grant

Debt is the worst poverty

"Some people use one half their ingenuity to get into debt, and the other half to avoid paying it."

By George D. Prentice, The editor of the Louisville Journal

Madness of Crowds

The psychology of speculation is a veritable theater of the absurd. Although the castle-in-the-air theory can well explain such speculative binges, outguessing the reactions of a fickle crowd is a most dangerous game. Unsustainable prices may persist for years, but eventually they reverse themselves.

Act I - The Tulip-Bulb Craze

1. In the early 17th century, tulip became a popular but expensive item in Dutch gardens. Many flowers succumbed to a nonfatal virus known as mosaic. It was this mosaic that helped to trigger the wild speculation in tulip bulbs. The virus caused the tulip petals to develop contrasting colored stripes or “flames”. The Dutch valued highly these infected bulbs, called bizarres. In a short time, popular taste dictated that the more bizarre a bulb, the greater the cost of owning it.
2. Slowly, tulipmania set in. At first, bulb merchants simply tried to predict the most popular variegated style for the coming year. Then they would buy an extra large stockpile to anticipate a rise in rice. Tulip bulb prices began to rise wildly. The more expensive the bulbs became, the more people viewed them as smart investments.
3. People who said the prices could not possibly go higher watched with chagrin as their friends and relatives made enormous profits. The temptation to join them was hard to resist; few Dutchmen did. In the last years of the tulip spree, which lasted approximately from 1634 to early 1637, people started to barter their personal belongings, such as land, jewels, and furniture, to obtain the bulbs that would make them even wealthier. Bulb prices reached astronomical levels.
4. The tulip bulb prices during January of 1637 increased 20 fold. But they declined more than that in February. Apparently, as happens in all speculative crazes, prices eventually got so high that some people decided they would be prudent and sell their bulbs. Soon others followed suit. Like a snowball rolling downhill, bulb deflation grew at an increasingly rapid pace, and in no time at all panic reigned.

Act II - The South Sea Bubble

1. The South Sea Company had been formed in 1711 to restore faith in the government’s ability to meet its obligations. The company took on a government IOU ( I owe you: debt) of almost 10 million pounds. As a reward, it was given a monopoly over all trade to the South Seas. The public believed immense riches were to be made in such trade, and regarded the stock with distinct favor.
2. In 1720, the directors decided to capitalize on their reputation by offering to fund the entire national debt, amounting to 31 million pounds. This was boldness indeed, and the public loved it. When a bill to that was introduced in Parliament, the stock promptly rose from ￡130 to ￡300.
3. On April 12, 1720, five days after the bill became law, the South Sea Company sold a new issue of stock at ￡300. The issue could be bought on the installment plan - ￡60 down and the rest in eight easy payments. Even the king could not resist; he subscribed for stock totaling ￡100,000. Fights broke out among other investors surging to buy. The price had to go up. It advanced to ￡340 within a few days. The ease the public appetite, the company announced another new issue – this one at ￡400. But the public was ravenous. Within a month the stock was ￡550, and it was still rising. Eventually, the price rose to ￡1,000.
4. Not even the South See was capable of handling the demands of all the fools who wanted to be parted from their money. Investors looked for the next South Sea. As the days passed, new financing proposals ranged from ingenious to absurd. Like bubbles, they popped quickly. The public, it seemed, would buy anything.
5. In the “greater fool” theory, most investors considered their actions the height of rationality as, at least for a while; they could sell their shares at a premium in the “after market”, that is, the trading market in the shares after their initial issue.
6. Realizing that the price of the shares in the market bore no relationship to the real prospects of the company, directors and officers of the South Sea sold out in the summer. The news leaked and the stock fell. Soon the price of the shares collapsed and panic reigned. Big losers in the South Sea Bubble included Isaac Newton, who exclaimed, “I can calculate the motions of heavenly bodies, but no the madness of people.”

Act III - Wall street lays an egg

1. From early March 1928 through early September 1929, the market’s percentage increase equaled that of the entire period from 1923 through early 1928.
2. Price manipulation by “investment pools”: The pool manager accumulated a large block of stock through inconspicuous buying over a period of weeks. Next he tried to enlist the stock’s specialist on the exchange floor as an ally. Through “wash-sales” (buy-sell-buy-sell between manager’s allies), the manager created the impression that something big was afoot. Now, tip-sheet writers and market commentators under the control of the pool manager would tell of exciting developments in the offing. The pool manager also tried to ensure that the flow of news from the company’s management was increasingly favorable – assuming the company management was involved in the operation. The combination of tape activity and managed news would bring the public in. once the public came in, the free-for-all started and it was time discreetly to “pull the plug”. Because the public was doing the buying, the pool did the selling. The pool manager began feeding stock into the market, first slowly and then in larger and larger blocks before the public could collect its senses. At the end of the roller-coaster ride the pool members had netted large profits and the public was left holding the suddenly deflated stock.
3. On September 3, 1929, the market averages reached a peak that was not to be surpassed for a quarter of a century. The “endless chain of prosperity” was soon to break. On Oct 24 (“Black Thursday”), the market volume reached almost 13 million shares. Prices sometimes fell $5 and $10 on each trade. Tuesday, Oct 29, 1929, was among the most catastrophic days in the history of the NYSE. More than 16.4 million shares were traded on that day. Prices fell almost perpendicularly.
4. History teaches us that very sharp increases in stock prices are seldom followed by a gradual return to relative price stability.
5. It is not hard to make money in the market. What is hard to avoid is the alluring temptation to throw your money away on short, get-rich-quick speculative binges.

Pouring Money in the Pool

This is the first blog we create for Investment & Education purpose. It will focus on Fundamental and Technical Analysis using Value Investing style. We are a believer of Warren Buffet, Benjamin Graham and Mr. Market. We do believe in Effective Business Model, Global Economy and Enterprenuership. Our Blog will have 8 different columns covered from Economy, Investing and Business as shown below:

1. Stock Picker of The Month - Pick undervalued but excellent companies that under radar to analyze thier current and future stand points.
2. Innovative Company and Tech - Hip and Inspiration companies that change our life plus some cool gadgets around the globe.
3. Commodity Insight - Talk about global commodity market: Oil, Gas, Gold, Metal
4. Business and Economy - Update situation in the business world and share interesting topics with readers.
5. Global Meltdown & Recession - Article about the Crisis in each era; 1900-Present.
6. Spartan Portfolio - An update and deep details in our flagship fund deliver monthly.
7. Educated Yourself - Column about Investing, Finance Terminology, Fundamental and Technical Analysis, Asset Allocation Theory.
8. Quotes of the Week - Excellent quotes from famous financial guru.

At the moment, we have a diversify and well-balanced investment portfolio called "Spartan Fund." Starting capital we recieved from our investment partners. As we realized, global economy now are all in bad shape; it's just some expectation which generate an upside momentum on Wall Street but Main street is still unstable.

Hopefully, everything will get back on track at the start of 2010. Since the ending of 2008, we invest in several sectors including transportation, mining, consumer staples and manufacturing. We concentrated on a new U.S. Government Policy and undervalued stocks; however some on distress stocks which have an opportunity to recover.

Source of Fund: Investment Partner Group 1

Starting Capital: USD 11,600

Mr. WW $10,250

Mr. PL $1,350

Round 999,999

"Bulls make money. Bears make money. Pigs get slaughtered."

By Anonymous

Way To Success

"You cannot have the success without the failures."

By H. G. Hasler, A distinguished Royal Marines officer in World War II

Your Allocation Your Responsibility

Asset Allocation is the critical part in Modern Portfolio Theory (MPT); it will keep you in check all the time and bring your portfolio to proper portion. If you still young assuming 20-30, you need more return and you can take more risk therefore you should aggressively invest equity market. As you age between 40-60, your percentage in fixed income should be increasing every year until your retirement.

John Bogle, founder of the Vanguard group of funds, suggest that you should allocate your Bond allocation according to your age. For example, If you are 36 years old now; you should have 36% of Bond in your portfolio. I do believe that retirees should have at least 70% of their total portfolio in fixed income class like Treasury, Bond or CD instead of riskier securities like stock, futures, derivatives or options.

Asset Allocation: The idea that you minimize risk and increase a return by diversifying your money in several asset classes which uncorrelated to each others. Asset Classes available nowadays are

• Equity: Stock, FOREX, Options or Futures
• Fixed Income: Bond, CD, US Treasury like TIP (Treasury Inflation Protection)
• Commodity: Gold, Oil, Corn, Sugar, Precious metal like silver, lithium and etc.
• Real Estate: House or REIT (Real Estate Investment Trust)
• Cash: Reserved money when emergency situations approach

Those are major asset class that mainly uncorrelated !!! what does it mean ? It mean when some goes up; some will go down and vice versa. Bond normally have a reverse relationship with inflation. If inflation rate is low (below 2%), Bond price stay in high value and value tend to be lower as inflation rise. As we know, every governments in the world more likely to fight inflation from their boom economy because inflation will make living expensive plus high borrowing and lending rate.

For example, US government always try to keep inflation below 5%. However, Inflation is not that bad because it help stimulate small and large business; we just need to keep it in check often. A good number for inflation is approximately 2-3% a year.

If you wonder that your average return will keep up with inflation or not ? You need to subtract annual return with inflation. Let's say "You need a return 8% a year" so you need to make at least 11% on your portfolio because inflation will reduce your return by 3% every year. In you have broker account in US, you can hedge inflation using TIP (stand for Treasury Inflation Protected). This TIP will earn you the same rate as normal Treasury but it already absorb an inflation into account; it like you get pure 5% yield after inflation.

REIT (Real Estate Investment Trust) is also an excellent alternative investment for anti-inflation hedge because most of the time it uncorrelated with stock market.

Benjamin Graham suggested that a perfectly diversified portfolio carried a position in stocks, bonds, cash, and real estate. Here is Recommended Asset Allocation during Life-Cycle period.

Age 20-35: Style - Young and Aggressive

Stock 65%, Bond 20%, Real Estate 10%, Cash 5%

Age 36-45: Style - Consistency Return with average risk

Stock 55%, Bond 30%, Real Estate 10%, Cash 5%

Age 46-55: Style - Minimize risk with steady return

Stock 50%, Bond 35%, Real Estate 10%, Cash 5%

Age 56-65: Style - Conservative and Stream of Income

Stock 45%, Bond 37.5%, Real Estate 12.5%, Cash 5%

Age 65-80: Style - Safe Heaven before dust

Stock 25%, Bond 50%, Real Estate 15%, Cash 10%

As a general rule, you should know that with every 10 percent of exposure to equities/stocks, your portfolio will also carry a volatility of 1 percent. For example, a portfolio comprised of 50 percent stocks and 50 percent bonds should have a volatility of 5 percent greater than a portfolio that carries nothing but bonds.

World, Hands and Mouths

"The most important benefit of population size and growth is the increase it brings to the stock of useful knowledge. Minds matter economically as much as, or more than, hands or mouths."

By Julian Simon, A professor of business administration at the University of Maryland

0.25 A TICK

"Every few seconds it changes - up an eighth, down an eighth - it's like playing a slot machine. I lose $20 million, I gain $20 million."

By Ted Turner, An American media mogul, philanthropist and a founder of the cable television network CNN

Buffet Lesson

“The first rule is not to lose money. The second rule is not to forget the first rule.”

By Warren Buffet, one of the world's most respected investors

Wizard of Oz

"Today is a... digital incarnation of Oz - the Internet - we are a motley group of fools from lions to scarecrows, learning from each other, making and taking responsibility for our decisions, and having fun as we skip down the yellow brick road of investing together!"

By Lydia Vorsteveld

Rich Man Mind

"I am indeed rich, since my income is superior to my expense, and my expense is equal to my wishes."

By Edward Gibbon, An English historian and Member of Parliament

Some Thoughts About Distribution in Economics

"Much of the real world is controlled as much by the tails of distributions as by means or averages: by the exceptional, not the mean; by the catastrophe, not the steady drip; by the very rich, not the middle class. We need to free ourselves from average thinking."

By Phillips Anderson, A Nobel Prize recipients in Physics

Financial Meltdown 2008 Rescue Please ....

What Happened in Collapse of 2008-2009 ?

The Housing Bubble Bursts – U.S. Bank like Countrywide and Washington Mutual continue to give housing loan to low-income household (sub-prime family) from 2000 – 2007 because housing market boom. Housing values fall as supply overwhelms demand. Many sub-prime borrowers find their house worth less than their mortgages, and they can’t afford to pay monthly payment as its interest adjustable. Defaults rate rise because borrowers don’t pay and foreclosure come in, which sends housing prices lower. The downward spiral begins.

CDOs Festival – Investors particularly foreign investors seeking higher yields (return on investment), then the new innovation kicked in. Government backed-up private organizations like Freddie Mac and Fannie May buys mortgages on the secondary market, combined them, and sells them as mortgage-backed securities to Investment Bank; then Investment Bank sell to investors on the stock market. Banks and investors all over the world bought these CDOs because it’s rated AAA so they assumed it must be safe.

Leverage Loves Greed Company – Investment Bank or Financial firms like Lehman Brothers, Merrill Lynch and Bear Stearns leverage their money 30 times to load up on CDOs as much as they could to sell to investors so they can make a gigantic profit out of nothing. This mean they bought $300 billion CDOs by using ONLY $10 billion money.

AIG vs. CDS – How come insurance company involve in this turmoil? Answer is Credit-Default Swap (CDS). Yes!! AIG sells Credit-Default Swap for those CDOs to the most of Banks and financial firms in order to insure their money in case of CDOs default.

The Mortgage Collapse – Borrowers whose is low-income family begin to late on payment, and then default on loans rise to maximum 9% this year. Lender like Countrywide and Washington Mutual take a hit first and finally collapse.

Finance institutions is Next Victim – Rising delinquencies in home loan mean that CDOs lose value. Nobody wants to buy CDOs anymore and everyone wants to liquidate it. The investment banks must take write-downs (bad debt on balance sheet). To compensate, they must raise new capital (money), probably by selling their bond or accepting external fund, to maintain balance ratio between their asset and capital. However, they have no way out to raise enough capital because they already leverage too much.

CDS Ripple Hit AIG – Many CDS were sold as insurance to cover those exotic financial instruments (CDO) that created and spread the subprime housing crisis, details of which are covered here:

As those mortgage-backed securities and collateralized debt obligations became nearly worthless, suddenly that default was happening daily. The banks and hedge funds selling CDSs were no longer taking in free cash; they had to pay out insured money. However, most banks were not all that bad off, because they were simultaneously on both sides of the CDS trade. Most banks and hedge funds would buy CDS protection on the one hand and then sell CDS protection to someone else at the same time. When a bond default; the banks might have to pay some money out but they'd also be getting money back in. Everyone, except for AIG do that.

AIG was on one side of these trades only. They sold CDS. They never bought. Once CDO bonds started defaulting, they had to pay out and nobody was paying them. AIG seems to have thought CDS were just an extension of the insurance business. But they're not. When you insure homes or cars or lives, you can expect steady, actuarially predictable trends. If you sell enough and price things right, you know that you'll always have more premiums coming in than payments going out. That's because there is low correlation between insurance trigger events. My death doesn't, generally, hasten your death. My house burning down doesn't increase the likelihood of your house burning down.

Not with CDO. Once some CDO bonds start defaulting, other bonds are more likely to default. The risk increases exponentially. Credit default swaps written by AIG cover more than $440 billion in CDO bonds. AIG has nowhere near enough money to cover all of those. Their customers-those banks and hedge funds buying CDSs – started getting nervous. So did government regulators. They started to wonder if AIG has enough money to pay out all the CDS claims it will likely owe. Just when AIG is in trouble for being on the hook for all those CDS debts, along comes this credit-rating problem that will force it to pay even more money. AIG didn't have more money. The company started selling things it owned-like its aircraft-leasing division.

All of this has pushed AIG's stock price down dramatically. That makes it even harder for AIG to convince companies to give it money to pitch in. So, it's asking the government to help out because the global economy could, possibly, come to a halt. Banks all over the world bought CDS protection from AIG. If AIG is not able to make good on that promise of payment, then every one of those banks has lost that protection. Overnight, the banks have to buy replacement coverage at much higher rates, because the risks now are much worse than they were when AIG sold most of these CDS contracts. In short, banks all over the world are instantly worth less money. The numbers seem to be quite huge-possibly in the hundreds of billions. To cover that instantaneous loss, banks will lend out less money. That means other banks can't borrow to pay this new cost, and weaker banks might not have enough; they'll collapse. That will further shrink the global pool of money.

Soros on Soros

"Looked at markets as a casino where people act as gamblers and where their behavior can be understood by studying gamblers. He regularly made small amounts of money trading on that theory. There was a flaw in his approach, however. If there is a ... tide ... he can be seriously hurt because he doesn't have a proper fail-safe mechanism."

By George Soros, A Hungarian-American currency speculator, stock investor, businessman, philanthropist, and political activist

Active or Passive Strategy

You know that Active Investment is kind of market timing strategy while Passive counterpart is buy and hold strategy (some called lazy portfolio ^_^) so which one more suitable for you ? A number of years ago, John Bogle, founder of the Vanguard group of funds, wanted to find out if active management of a mutual fund provided returns greater than the index that they competed against. He discovered a significant underperformance by active managers as compared to their benchmark. He then set out to provide investors with a low-cost alternative to investing in the indices—the same ones that were beating the managers handily.

Vanguard’s mantra of low expense ratios, low turnover, and a passive management style turned the industry on its head. A few years later, Bogle’s mutual fund company grew into one of the largest fund companies employed by individuals and institutional advisors. This was primarily due to a clear understanding that there should be no “hiding” of the fund’s true investment policy and that, above all, it was essential to put the investor first.

Additional, we know historically that stock market will bullish 2/3 of the time and bearish one-third. If you are market timer, you better stay in the market when it bull and move out when it bear but how accurate you are ? A study show that if you miss early bull session, you will miss about 50% of a good return. As a reminder, stock market tend to be bullish about 24-36 months and bearish for 12-18 months on average.

Most famous Passive Fund I know is DFA (Dimension Fund), their total US market fund, which comprise of large, medium and small cap companies (value and growth) but focusing on value companies with average P/B of 0.6, have 23.7% return over past 50 years while at Vanguard, their total market counterpart has only 15.3% return; not because of poor management but because they have different approach in picking companies; with Vanguard the average P/B of value companies is 1.4; higher than DFA. And what we know is lower P/B ratio companies tend to produce better return than higher one in long run.

Financial Ratio

Important Financial Ratio



EARNINGS PER SHARE (EPS)

This ratio is perhaps the most widely used by analysts because it reveals how much profit was gained on a per share basis. On its own, EPS is not particularly useful. When sizing up the value of a company’s stock using the EPS ratio, you must compare the current figure to that from the previous quarter or year. When doing so, you can properly determine the rate of growth for a company’s earnings.

P/E RATIO

P/E is short for the ratio of a company's share price to its per-share earnings. As the name implies, to calculate the P/E, you simply take the current stock price of a company and divide by its earnings per share (EPS)

Although the EPS figure in the P/E is usually based on earnings from the last four quarters, the P/E is more than a measure of a company's past performance. It also takes into account market expectations for a company's growth. Remember, stock prices reflect what investors think a company will be worth. Future growth is already accounted for in the stock price. As a result, a better way of interpreting the P/E ratio is as a reflection of the market's optimism concerning a company's growth prospects.

If a company has a P/E higher than the market or industry average, this means that the market is expecting big things over the next few months or years. A company with a high P/E ratio will eventually have to live up to the high rating by substantially increasing its earnings, or the stock price will need to drop.

S&P 500 P/E

Is This Company P/E Cheap or Expensive ?

The P/E ratio is a much better indicator of the value of a stock than the market price alone. For example, all things being equal, a $10 stock with a P/E of 75 is much more "expensive" than a $100 stock with a P/E of 20. That being said, there are limits to this form of analysis - you can't just compare the P/Es of two different companies to determine which is a better value.

It's difficult to determine whether a particular P/E is high or low without taking into account two main factors:

1. Company growth rates - How fast has the company been growing in the past, and are these rates expected to increase, or at least continue, in the future? Something isn't right if a company has only grown at 5% in the past and still has a stratospheric P/E. If projected growth rates don't justify the P/E, then a stock might be overpriced. In this situation, all you have to do is calculate the P/E using projected EPS.
2. Industry - It is only useful to compare companies if they are in the same industry. For example, utilities typically have low multiples because they are low growth, stable industries. In contrast, the technology industry is characterized by phenomenal growth rates and constant change. Comparing a tech company to a utility is useless. You should only compare high-growth companies to others in the same industry, or to the industry average. You can find P/E ratios by industry on Yahoo! Finance.

For the Market, An increasing P/E ratio between 15 and 30 is considered bullish, while a P/E ratio above 30 or a declining P/E ratio is considered bearish.

PEG RATIO

The calculation: price/earnings (P/E) ratio divided by expected per-share earnings growth over the next year. More than likely, a result that is less than one tells us that we may have a good investment that is undervalued for the time being. On the other hand, a result of more than one is usually a sign that the position is valued higher than it should be.

This ratio represents a hybrid application of the P/E ratio (the price to earnings ratio) and a company’s annual growth rate. If a stock’s PEG falls below a value of one, it is typically considered underpriced. If it jumps much higher than one, it is considered overpriced. It should be noted that when applied on its own, the accuracy of this formula has been questioned by many reputable economists.

Small- to mid-cap stocks are well suited to utilize the PEG Ratio as the initial screening tool since they usually pay little or no dividends. In effect, it is a good tool for some stocks that are usually more difficult to value using traditional methods. Just as it is true that the ratio is beneficial for smaller stocks, larger stocks should have an additional requirement to help create a more useable and appropriate valuation tool. By simply adding an overlay of dividend yield along with the earnings a much better outcome can be crafted for large-cap stocks.

PEG ratios are considered less useful in assessing cyclical stocks and those in the banking, oil, or real estate industries, where assets are more accurate indicators of relative value. With these stocks, the growth rates are low and the company’s assets are a much better indicator of stock value.

SHORT RATIO (SHORT INTEREST RATIO)

Number of shares of a security that investors have sold short divided by average daily volume of the security (measured over 30 days or 90 days). There are various interpretations of this ratio. When people short, it is usually (but not always) because they are pessimistic about the security's future performance. Shorting involves buying at at some point however. Hence, some would interpret a high short ratio as an indicator that there will be some buying pressure on the security that would increase its price.

SHARPE RATIO

A portfolio performance measure used to evaluate the return of a fund with respect to risk. The calculation is the return of the fund minus the “risk-free” rate divided by the fund’s standard deviation. The Sharpe Ratio provides you with a return for unit of risk measure.

For example, assume Equity Fund 1 returned 20 percent over the past five years with a standard deviation of 2 percent. The risk-free rate is generally the interest rate on a government security. Further assume that the average return of a risk-free government bond fund over this period was 6 percent.

The Sharpe Ratio would be:

(Return of the Portfolio minus Risk-Free Rate)/Standard Deviation of the Portfolio

In the case of Equity Fund 1, the Sharpe Ratio is (20% minus 6%) ÷ 2%, which equals 7%. Therefore, for each unit of risk, the fund returned 7% over the risk-free rate.

The Use of Knowledge in Society

"We must show how a solution is produced by interactions of people each of whom possesses only partial knowledge. To assume all the knowledge to be given to a single mind in the same manner in which we assume it to be given to us as the explaining economists is to assume the problem away and to disregard everything that is important and significant in the real world."

By Freidrich Hayek, An Austrian and British economist and philosopher

The Origin of Species

"It is not the strongest of the species that survives, nor the most intelligent, but the most responsive to change."

By Charles Darwin,an English naturalist who realised that all species of life have evolved over time from common ancestors

Bill Know Well

"I think the multiples of technology stocks should be quite a bit lower than stocks like Coke and Gillette, because we are subject to complete changes in the rules. I know very well that in the next ten years, if Microsoft is still a leader, we will have had to weather at least three crisis."

By Bill Gates, A billionaire and founder of Microsoft