Book review: Rogue Trader

Rogue Trader was written by Nick Leeson who is the main character in the book. It is sort of a exaggerated autobiography.

Nick Leeson was an employee at Barings Bank, London's oldest bank and he was a good employee indeed. So good that he went to Asia to head the banks trading division. However, when shit hits the fan, he used deceptive ways to cover his mistakes and keep digging his hole larger.

Finally it tells how he bankrupted Barings Bank single-handedly. It goes to show how a person's psychological aspect affect the actions taken and cause undesirable results.

I would recommend reading and making a self analysis of whether you would do the same once put in Nick's shoes.

Penny wise Pound foolish

Some times it is good to pay the extra to save your money. Do you think you have been in such a situation and regret not paying that little extra?

For instance, when renting a car, always buy the insurance for you might not know when it will be gold to have bought it. The extra few dollars a day can save you the hassle and worry.

Stock split and its misperception

A stock split is when a company decides to split its shares from a smaller number to a larger number. It does not dilute the share in any sense. For instance a split of 2 for 1 would mean that for every 1 share held, you will have 2 after the split. And if a share holder owns 1 share at $100, after the split it becomes 2 shares at $50.

It is wrongly perceived that the shareholder will gain because of many reasons such as the shareholder has more units of the share or since the price has been reduced, it is bound to keep rising again. These examples are definitely not the case because even though there is a split, the change in price of the share ultimately depends on the performance of the share and not a gimmick like this.

So please beware when your advisor tells you that the share is going to have a stock split, therefore buy buy buy. In that case, leave the advisor for he/she does not know what he/she is talking about

Ratio : P/E

Ratios are important in evaluating whether a stock is a good buy or not.

So what is the P/E ratio? It is the ratio of the price divided by the earnings. So you take your stock price (this can be obtained from the stock exchange price quote of the share) and divide it by the company's earnings for the year (this can be obtained from the financial statement - income statement to be precise). 

It is better to have a lower value as it means that the earnings is high relative to the price. This would mean that you have bought a winner. Also before buying, it is also good to buy a company that does not have an extremely high number like 100 as that would be mean that the company needs a hundred years of earnings to get to its own price.

However, bear in mind that P/E can be calculated differently. For instance, using a future forecast of earnings instead of current year earnings. Or there might be other problems. So it is good to calculate the P/E yourself using the share price and maybe an average of 3 years of previous earnings. It would give you a better reading of the P/E

Economies of Scale : Groupon

When anything is bought in bulk, the price is naturally cheaper. This is because the costs associated with the product is spread within the large quantity. 

This is what the website Groupon or Scoopon(Australia) has done. They have negotiated with any producer to sell their products through the groupon/scoopon website at a discount because there is quantity in the purchase. The only catch to these websites is if the minimum quantity is not purchased. Then the money would be returned to the consumers.

This is a great business idea as it is helping others get a cheaper price and getting a small cut out of it.

Easy money

Suncorp Bank in Australia is now giving out AUD50 for any new customers who opens and deposits AUD2,000 into any of their transaction accounts. It is really an easy 2.5% for a 6 week time frame they promised that the money be deposited into your account.

So to those in Australia, to take advantage of it you must meet these requirements:
1) Have a spare AUD2,000 you aren't going to use anytime soon or save up that money within a 4 month period.
2) Go and open the account and leave the money in the account for 6 weeks until the AUD50 is deposited. (It is for new customers only so if you are an existing customer, sorry for you)

That is all and you would have a some extra pocket. And if you really don't like them, I did not see any catch stating you have got to have the account with them for any minimum period of time, terminate the account.

Monetary Policy : Quantitative Easing

Quantitative easing is an unconventional monetary policy used by governments to stimulate the economy when they have run out of ideas of what to do. In the past, Japan has used it and after seeing the results, deemed it as an ineffective policy. However, today many governments are using the this policy to stimulate their economy. Does it make any sense? Perhap they have some additional policies to back it up.

Why would quantitative easing be bad for the economy? Firstly, we have understand that the policy is effectively printing money and adding it to the system. However, it is not a direct infusion of money to the system but by buying back financial assets from banks and other private sector businesses.

This would devalue the currency of the country. Because there is more supply than before and it will not add value, instead it will make every unit of currency less valuable, hence able to buy less than before. This will effectively be inflation and it would hit the consumers harder than before. This is because a lot of people have already lost value in the 2008 crash and are barely making ends meet, some even jobless.

The extra money will once again cause new bubbles (like the housing bubble) to be created. And the governments that use this policy would make it more expensive for them to borrow in the future as their currency is not as desirable as before.

So the big question is whether the biggest economy America would suffer the same consequence as Japan by using this policy?

Technical analysis : Head and shoulders and current affairs

This chart shows the Dow Jones Index March 2007 to July 2008. This is the time where the market peaked during its bull run and was on the decline. A pattern in the technical analysis is noticeable in there. As you can see mid-July 2007 and mid-December 2007 was the shoulders to the head. And somewhere in the middle of October it was the head. This pattern in technical analysis indicates that the market is going to drop and it did so.

However, I am bought by value investing and do not believe that past patterns are a projection of future prices, hence we should all just notice the pattern and take it in as part of a more wholesome analysis when investing.

In the current affairs today, there are mixed views of whether there would be a double dip in the economy as a whole. Some analyst like Richard Koo, who worked in the New York Federal Reserves during the time when Japan was trying to fix its budget deficit in the 1980s, states that the world governments are doing the exact mistakes done by Japan during that time. And others like J.P. Morgan's U.S. chief equities strategist states that there is only a one in three chance of another recession and even if it happens it would be for a short duration.

I believe that the recession would happen as there is still a lot of disagreements between some of the power houses, the way the market has bounced so much so quickly, some fatal mistakes like bailing big banks while letting others like the automotive industry fail and some other factors.

Book review: The Intelligent Investor"

I would highly recommend "The Intelligent Investor", by Benjamin Graham, as part of any investor's reading list. Benjamin Graham was one of Warren Buffett's major influence and he is rightly so for he has all the logical and proven methods for realizing the true value of a company.

This book entails how an investor should invest with his own fundamental analysis of the financial statements of the targeted company and psychological training. He termed his trading method as "value investing".

For any serious investor, it is a definite MUST.

And to those who don't have it yet, read this : http://chooyang.blogspot.com/2011/08/purchasing-book.html

Buffettology

Warren Buffett, the greatest investor of our generation should be in everyone's list of finance idols. Although the Oracle of Omaha is worth at least USD50 billion, he has pledged 99% of his net worth to philanthropic causes. He is also well known to have strong ethics - having owned many companies but only making the decision for mass layoffs once during his first years of investing. He also does his own tax returns every year. Buffettology is the teachings of this great finance mind.

He recently quoted "There is not comparison between fear and greed. Fear is instant, pervasive and intense. Greed is slower. Fear hits." and this is in relation to his classical rule "Be fearful when others are greedy, and be greedy when others are fearful".

There is two parts to this. Firstly his advice is to buy when others are selling. This is obviously after you have done your research such as reading the financial statements of the company and knowing their products are what is going to sell in the long run. And also all other considerations to take into account, which would take too long for me to explain in this reading. With that philosophy, you are getting your stocks at a bargain of what it is selling for.

The next is about your emotions when buying or selling. So when the market does not look so good, people will always panic and sell without rationalizing. This will definitely cause loses one way or another. For instance, you would be selling at a discount or you will be paying fees for selling and again for buying into it once the scare has subsided.

Hopefully these will get you thinking of what would you do when faced with both situations.

Basic interest calculator

I have created a basic interest calculator in excel to calculate. However, blogspot does not allow us to upload an excel file.

So, I have added it to a file-sharing site. You can download it and test it out.

http://www.box.net/shared/yfbdfrr11zrm7qr5r95l

Forex

Forex, short for the foreign exchange market or currency market, is the world's largest financial market trading the different currencies of the world. At a volume of USD4 trillion a day, it is massive as compared to the NYSE trading USD25billion a day.

Forex is usually traded in pairs. For instance, the United States of America's dollars and the Australian dollar. This would be quoted using its unique currency symbols as USD/AUD.

The most basic of trading the forex is having the long and short position when buying and just waiting for the price change to give you a gain in your trade. So what is a long position and short position? These are important terms because it gets used a lot in the forex.

Long position is a position in a pair in which the base currency is bought. It is beneficial when the price rises. And vice versa, a short position is a position in a pair in which the base currency is sold. The gain arises when the price falls.

Habits of highly ineffective people

People who are unable to grow wealth have many habits that put them in the situation they are in.

One of the habit I have identified is gambling. Gambling is putting money or something of financial value at risk on an event with an uncertain outcome. The primary goal of the gambler is to make a profit from the gamble. Usually a gamble takes little time to know the outcome of the gamble.

So why is gambling such a big problem. Firstly, the gambles pays out big sums to the winners. This huge sums are enough to cloud the average person's logical mind. However, the gambling operators fail to tell the gamblers the odds which are stacked against the gambler.

The next reason would be people being over-optimistic. People tend to exaggerate their abilities. The gambler would think he is better than the rest and can beat the operators at their game. However, there is only one infamous MIT Blackjack Team to date.

Studies have shown that even though you gamble as a form recreation, it can still cause addiction. Even with consecutive losses, it reinforces the gambler to persist.

So it is good to identify it and get help if needed.

Mutual Funds

A friend of mine recently stated that she thinks the market is affordable, however she does not have money to invest in the equities market. This I believe is a problem easily solved with mutual funds.

Mutual fund is a professionally managed investment for a pool of investors by investing in many different types of investments. The investments can be equities, bonds and others. The investor buys a unit or share of the fund and gets a profit proportional to the amount the investor holds as compared to the whole fund.

It is good to start off investing in a mutual fund as there is diversification. It is good to read the fund's prospectus to understand what is purchased and whether it fits the objective desired by the investor. Also the investor should know the risks involved and whether the fund would suit the goals of the investor.

Next would be the fees involved in the funds (implicit and explicit - it is always good to ask the person selling the fund what the underlying costs are) and minimum buy in. The fees can be when buying the fund, administrative cost throughout the holding of the fund and when selling the fund.

Mutual funds (open-ended fund) can be redeemed at its net asset value (NAV). Hence it is similar to stocks in the sense that it is a market decided price.

Remember to shop around for the best suited fund and have fun with it.

Analysis of the AUD against the USD

The graph above is the movement of the Australian Dollar(AUD) against the US Dollar(USD) for a one year period. And there is some indicators there that shows that the next few days would see a drop in the AUD.

Also AUD having hit its historical high is bound to fall as the currency is not bound to continue rising forever. However, I believe the AUD is able to make a short lived comeback in the near future and then falling off after. There are many factors to take into consideration such as the interest rates of both countries, the economy of both countries and many more.

My advice is that if you have some spare AUD, invest it in some other currency as I believe the long term AUD seems bearish and the AUD is bound to fall further breaking the parity resistance and falling lower.

Purchasing book

Part of finance is getting things at the right price. And also it is good to increase your knowledge in finance by reading more books.

So I would highly recommend buying books from (http://www.bookdepository.com/) as they have honest prices with free shipping.

The multi billion dollars selling frenzy

As you all know, the financial markets has been tumbling in the past few days. Every major indices have shed a lot in the past 2 days.

It looks as though the markets are going to be very unpredictable in the next few months to come.

How should the lay person react to this situation?

It is good to know your position in the market at the current stage. If you are comfortable with the amount in the market and you will be happy to keep it and just get dividends, then by all means keep holding and don't let the market get the better of you. However, if you are short on cash and you are using the financial markets to make money, then it is a good time to think of your strategies and new ways of playing with the equities market. Look into things like shorts and futures as you are able to bet on the market going down.

And keep in mind that it is always a zero sum game. May the best investor get the better of the market.

Australia and the gumtree

In this era where everything is done online, there seems to be a lot of places where you can purchase items. One of the places Australians frequent to purchase some items, be it brand new or second hand, is gumtree.com.au.

I would only recommend this site to people who knows what they want to get and know the prices and knowledge of the product before browsing on the website.

There is a few things also to watch out for before you buy anything on the website. Here are the few things you can do to protect yourself from scams.

1) Don't give out personal details on the website. Try to get to meet the seller in person with the product
2) Do some research before buying the product and test the product before making the transaction
3) Don't go on impulse buy as it would increase the likelihood of getting scammed
4) Find alternative prices to bargain if you know it is above even the original price in stores

Hopefully it would make your shopping experience a little better

Risk

Risk is the probability of a loss from an activity. It is involved in your everyday life and also in your finances.

It is good to understand your risk threshold as it would help with your investment decisions.

To start off, it is good to ask yourself these questions to understand yourself better:

1. What is your age - the closer to retirement, it is better to have a good savings
2. What is your current employment situation - without work you need to have a savings that gives you enough returns to survive  
3. What is your net worth - with $10,000 it would be good to keep them in cash for it is liquid as compared to $1,000,000 where some should be invested to give you a better return
4. How much are you invested in equities - with a lot in equities, once again it is about liquidity and having some spare cash enough for a rainy day
5. How would you feel if your investments lose half its value today - some people have a higher risk threshold than others, where they can survive on only $5,000 in the bank while having $200,000 in equities. This person perhaps does not have a lot of other commitments such as a home mortgage and so on.

These are just a few questions of a lot more and it is good to understand your financial standing before investing.

3 main statements

The most important statements in fundamental analysis would be the 3 main statements, which are the income statement, balance sheet and statement of cash flows.

Income statement is the profitability over a period of time. It shows the revenue and expenses for that period.

Balance sheet is the financial position of a firm a a point in time. The balancing of the assets, liabilities and owners' equity is done on this financial statement. An important formula to use would be:

Assets - Liabilities = Owners' Equity

A comparison of two years is usually presented for analysis to be done.

Statement of cash flows, as the name states, is the cash inflow and cash outflow of a firm over a period of time. It can be divided into 3 types: operation, investing and financing. I would rate the statement of cash flows highly relevant as there is little element of doubt as compared to the other two as the cash is already banked in and is harder to be manipulated with.

It is good to master these 3 statements for your analysis of a company.