The Bay Bridge by Night

Martin Whitman

Profile:

Martin Whitman is Founder and Portfolio Manager of the Third Avenue Value Fund (TAVFX). From inception in November 1990 through October 2007, his fund has returned an annualized average of 16.83%. In the same period, the S&P 500 index returned an average 12.33% annually.

Investing Philosophy:

Whitman is a "buy and hold" value investor. He buys stock in companies when he thinks that the company has strong finances, competent management, and the business is understandable. Also the company's stock must be cheap, meaning it trades at a significant discount to intrinsic value. The market price must lie substantially below a conservative valuation of the business as a private entity, or as a takeover candidate. He generally sells an investment only when there has been a fundamental change in the business or capital structure of the company that significantly affects the investment's inherent value, or when he believes that the market value of an investment is overpriced relative to its intrinsic value.

A Value Approach to Investing

Since the founding in 1986, Third Avenue Management has utilized a disciplined fundamental, bottom-up approach to identify appropriate investments with the sole objective of delivering superior returns with limited investment risk, over the long term.

Martin Whitman is guided by one proven value philosophy, which focuses on the strength of a company's balance sheet and the discounted price of its securities. The belief is that a strong, well-managed company can survive difficult environments, and the price of its securities will eventually reflect its true intrinsic value.

Third Avenue Management's research approach is opportunistic and not constrained by market capitalization, industry sector, or geographic location.

What He Looks For

One proven value philosophy guides each of the investments. He seeks to invest in safe companies that are cheaply priced. Key criteria are as follows:

Safe Companies

• Strong finances
• Competent management
• Understandable business

Cheaply Priced

• Significant discount to intrinsic value

Martin Whitman analyzes companies from the bottom up, reviewing all public documents, speaking with outside experts and contacts, identifying value and risk drivers and interviewing management before making an investment decision.

He analyzes the quality and quantity of resources existing in a business, rather than its projected future revenues and earnings. He thinks that the current balance sheet is the best, albeit not the only, measure of a company's value. Predictions based on future operating earnings do not capture the possible impact of corporate events such as mergers and acquisitions, changes of control, management buyouts, share repurchases, refinancing, reorganizations, asset sales, spin-offs, investments in new ventures and corporate liquidations.

His stringent research gives him conviction in his best ideas, allowing him to establish concentrated positions.

He invests only in companies that he believes to have the potential to create value for his clients over the long term, withstanding cyclical downturns and evolving as leaders among their competition. His long-term focus is to minimize portfolio turnover and enhances the tax efficiency of his funds and private portfolios.

Skyscraper

Snowy Winter

Emerald Lake

Hedging with Options

Scenario:

Let’s say a fund manager achieved returns of 15% on his portfolio over the last 10 months compared to a market return of 10%. The portfolio is a close approximation of the KLSE Composite Index. The fund manager is concerned that there is a strong chance of the market moving down over the next two months. He seeks to preserve the majority of the returns.

Solution:

One possible solution is to use a put option on the KLCI. Assume the following data as at 30 April:

Fund size:	RM 10 million
Portfolio beta:	1.0
Current Composite Index:	1130
Current June KLCI Futures:	1140

KLCI Options	Premium
1075 put	20.00
1100 put	28.00
1125 put	38.00

Number of contracts to be purchased	=
	=
	=	87 contracts

The fund manager decides to use at-the-money puts for downward protection. He subsequently purchases 87 June 1125 puts at 38 points, an outlay of RM 330,600 (87 × 38 × 100).

Profit Pay-off Diagram

As can be seen, the hedged position has removed the risk of loss from a fall in the market. The trade-off for this reduced risk is the outlay of RM 330,600 (3.3% of the portfolio). Since the fund has a 5% buffer between the portfolio performance and the benchmark index, the fund remains ahead of the measure. The fund also has the prospect of significant outperformance if the fund manager’s view of the market proves to be correct.

The Look Out

Courage Vs Wealth

Mr. Benjamin paid all of his children's tuition. His daughter and sons all attended private elementary and high schools, prestigious private colleges, medical colleges and graduate schools. Mr. Benjamin paid for all of it - room, board, tuition, books and related expenses. Who is this man who demonstrated the ability to fund these enormous tuition bills - a highly paid physician or perhaps CEO of a major public corporation?

 

Before he retired, Mr. Benjamin was a school-bus driver who generated enough income to send his children to private colleges, medical school, and graduate school. He was frugal but being frugal is not enough to pay six-figure tuition bills.

 

When they were young, Mr. Benjamin realized that his children were extremely bright. He realized that each would greatly benefit from a top-quality education. So he constantly worried about funding that education with his low-paying job. Consequently, Mr. Benjamin began a 'self improvement' reading program. The central topic of it was investing.

 

Being a bus driver had one side benefit. It gave Mr. Benjamin several hours of free time each day. His fellow drivers often used this time for snoozing, reading newspapers and magazines, drinking coffee or chatting. Mr. Benjamin used his downtime more wisely. He read about various types of investments. Early in his self-study program, he discovered the truth about the long-run returns generated by corporate bonds, passbook savings accounts, treasury bills, municipal bonds, CDs, stocks, precious metals and real estate.

 

Mr. Benjamin concluded that after adjusting for inflation and taxes, only stocks paid a real return on one's investment dollars. However, his mother had always told him never to invest in the stock market. She was around during the stock market crash in 1929. But the 1929 downturn was included in Mr. Benjamin's calculations and he knew that in spite of the crash, the stocks outperformed all other investment alternatives in the long run.

 

Mr. Benjamin eventually became a serious investor in the stock market. Every extra dollar he and his wife would muster was earmarked for stocks but not just any stocks. Mr. Benjamin spent much of his free time studying specific corporations and their stock offerings. Over the years, he became an expert in his chosen vocation.

 

The result of Mr. Benjamin's self-improvement reading and investing program was that when he recently retired, the former bus driver had a net worth in excess of $ 3 million. That is $ 3 million after sending his children to the finest, most expensive schools in the country.

 

What is the point? Mr. Benjamin became financially independent because he had courage. It takes courage to invest in the stock market. The market guarantees nothing. It goes up and down! Often, people get in the market late and get out early and they lose a lot of money. Mr. Benjamin was always a long-term investor. He never let fear outweigh the knowledge he obtained from his reading program. When he bought a stock, he rarely sold it within ten years of his initial investment. In good times and bad, he held on to his picks. He frequently had some fears and concerns but dealing with fear in a positive manner is a foundation stone of becoming wealthy.

 

It takes courage to invest in public corporation as well as in one's own business enterprise. However, it takes even more courage to hold on to one's investments when the public mood is full of fear and panic. Without courage Mr. Benjamin's children would not be doctors today.

(Adapted from The Millionaire Mind)

Windows 7: Future is Yours

The Successor to Windows Vista

Windows 7

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Windows 7: Upgrade Your Life

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Buffett’s Investing Style vs Malaysian Stock Market

World famous stock market guru, Warren Buffett, made headlines when he bought substantial stakes in technology and services giant General Electric Co (GE) and financial heavyweight Goldman Sachs Group.

Just when everyone else was pulling out their investments from Wall Street, Buffett stepped in to inject some US$8bil in these two companies via his investment company Berkshire Hathaway Inc.

“Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well,” he once said.

But is Buffett’s value investing style suitable for the Malaysian equity market and investors?

“Yes, it provides great opportunities to buy now if you are buying for long-term,” said Aberdeen Asset Management Sdn Bhd managing director Gerald Ambrose, adding that the current stock pricing “is irrational” due to the heavy selldown by foreign funds.

He said investors should hold good stocks for “as long as possible” as stock investment was about investing in a company’s management and market strategy.

Jupiter Securities Sdn Bhd executive director of operations Tan Chee Siong said Buffet was very careful with his investments and rarely found stocks that met his requirements.

The five main criteria Buffett uses for stock selection are earnings versus growth, high return on equity, minimal debts, strength of management and simple business model.

Buffett’s strategy was more of a “concentration of a few solid stocks” in a few industries that he could understand, Tan noted.

However, he cautioned that the local bourse, as an emerging market, could be more volatile and that market sentiment could easily be influenced by many external factors.

“We must remember that if we talk about investment in the local equity market, the duration should be shorter and we need to take profit whenever there are signs of big changes in market trend and our economic performance,” he said.

Meanwhile, Aseambankers head of research Vincent Khoo said investors should generally hold on to three principles — “be long-term oriented, only buy what you can afford and be focused in what you buy.”He said investors should hold on to good stocks for as long as possible.

“Blue chip stocks, for example, can ride through bad times and will recover over time,” he said. Being among the most successful and trusted investors’, Buffett’s investment in GE and Goldman Sachs restored some investor confidence on Wall Street.

Buffett, who is also known as “The Oracle of Omaha”, is an astute long-term investor and has always investigated the underlying fundamentals of a company, rather than market sentiment.

He has always determined the intrinsic value of a business and paid a good price for it. He believes price is what you pay, value is what you get.

Being prudent, Buffett is said to never invest in any business that he could not understand, a principle that paid off when he escaped the dotcom market crash. His investment principle is simple — always analyse a company’s annual reports to check its fundamentals and know what you are investing in.

Buffett, who is chairman of Berkshire Hathaway, the most expensive stock on Wall Street, said in a letter to shareholders last year that Berkshire was seeking to invest in companies with favourable long-term prospects and competitive advantage in a stable industry.

To him, “if a business does well, the stock eventually follows.” One of his most successful investments was PetroChina. Buffett bought a stake in the Chinese oil and gas firm for an initial sum of US$500 million and later sold it for US$3.5 billion. He has also made successful investments in companies such as Coca-Cola, American Express and Gillette.

John Paulson

John Paulson Made Billions on Drop in Housing Values

Born in the lower middle-class New York borough of Queens, John Paulson is the biggest-earning man in the world's top-earning industry. He took home $3.7bn (about £2bn) last year, putting him top of Alpha magazine's ranking of hedge fund managers.

He made this fortune by outsmarting Wall Street's top financial institutions. Unlike Citigroup, Bear Stearns, Lehman Brothers and Merrill Lynch, he predicted that the sub-prime mortgage industry would collapse - and he placed a huge bet on a downturn in home loans. Paulson's success from others' misfortune has drawn comparisons with George Soros, who made millions from the Bank of England's woes in 1992 by betting against the pound on Black Wednesday.

One group representing homeowners struggling to keep their properties dubbed Paulson's profits "obscene". Paulson has responded by donating $15m to a charity aiding people who are fighting foreclosure.

Paulson, 52, is married with two daughters. He enjoys skiing and running. He studied science at New York University, has an MBA from Harvard and set up his fund, Paulson & Co, in 1994. He never gives interviews and is guarded about his methods - he even embeds hi-tech software in his emails to prevent them being forwarded. He is now the President of Paulson & Co., Inc., New York.

Paulson & Co.’s merger arbitrage/event-driven focus derived from Mr. Paulson’s early experience as an investment banker. After a first job with Odyssey Partners, his career went into high gear when he joined the mergers and acquisition practice at Bear Stearns Cos. Inc. Prior to founding Paulson & Co. in 1995, he was a general partner of Gruss Partners LP, a merger arbitrage specialist. In the course of his career, Mr. Paulson has dealt with a wide range of company transactions, including both friendly and hostile tender offers, mergers, divestitures, recapitalizations and other company reorganizations and financings.

What induced you to move into money management?

When I in was in M&A at Bear Stearns, one of our clients was Marty Gruss. He ran a very successful risk arbitrage firm, Gruss Partners. … It was a small partnership and very profitable. Bears Stearns also was a partnership at the time and also very profitable. But it didn’t really compare to the type of profits that could be made in principal investing, investing your own money and earning the returns, rather than earning fees. I realized that there’s a limitation on what you can earn from fees and that the highest rewards would come from investing your own money, where there are no limitations on your earnings. That’s when I decided to move from investment banking to money management, and I became a general partner of Gruss Partners.

Describe your investment philosophy.

I really picked up my investment philosophy from Marty and his father, Joseph Gruss. He had two sayings that guided me going forward.

The first was: Watch the downside, the upside will take care of itself. That’s been a very important guiding philosophy for me. Our goal is to preserve principal, not to lose money. Our investors will forgive us if our returns don’t beat the S&P in a given year, but we are not forgiven if we have significant drawdowns.

The other saying really drives the same point from a different angle: Risk arbitrage is not about making money, it’s about not losing money. If you can minimize the downside, you get to keep all your earnings and that helps performance.

Would you say that your investment style is concentrated?

Yes and no. No, when you look at most activist funds, they tend to have five or 10 positions and that’s 100% of their portfolio. Some have only five positions. We’re much more diversified; our average position size is just 2.5%. However, when we do feel strongly about a position, we will take that up to 12% in our merger fund and 10% in our event fund. That is (higher) than some funds. We feel it’s important to have the flexibility to go to 10% because in order to outperform, you have to be able to allocate a sizable position to what you think could be a high-return investment. It’s only when you have a substantial allocation to a high-return (security) that you can influence the overall portfolio.

Are you tired of talking about subprime mortgages yet?

No, I’m still excited about it. I think we’ve got a winner with this. It’s been a very profitable investment for us, but we think we have only realized 25% of the (potential) that we expect to make in this area. The investment is very much consistent with our overall philosophy that if you watch the downside, the upside will take care of itself.

What attracted us to this particular position is that overall, we feel that we are in a credit bubble. We feel that there is too much risk going long (in) credit instruments since spreads are so tight. So we concluded that the best opportunities were on the short side.

The beauty of shorting a bond is that the maximum you can lose is the spread over the benchmark; yet if the bond defaults, you can potentially make more. So it’s an asymmetrical risk-return tradeoff. In the case of subprime securities, we targeted the triple-B bonds, which are the lowest tranches in the subprime securitization.

In a typical securitization, you have 18 to 20 different tranches with the lowest … taking the first loss. The triple-B bond has about 5% subordination, meaning that if the loss is greater than 5%, the bond will be impaired. And if it’s more than 6%, the bond will be extinguished. The yield was only 1% over LIBOR (the London interbank offered rate) so by shorting this particular bond, if I was wrong, I could lose 1%, but if I was right, I could make 100%. The downside was very limited but it had very substantial upside, and we like those types of investments.

We felt the exuberance in the credit markets and the massive liquidity was severely mispricing these securities. The more we analyzed the underlying quality of these loans, we thought it was highly probable that the losses in these pools would be more than 5%, that the bonds would be impaired and in many instances, extinguished. We thought it was a terrific risk-return tradeoff where you can risk 1% and make 100%.

We decided to put that investment either as a hedge or an absolute-return investment in all of our funds with the amount and the specific security depending on the nature of the funds. But generally, in our merger funds we agreed to spend about 1.5% on the short position and then we set up separate credit funds where we took a more concentrated position for investors who wanted that.

Ultimately in 2007, initially in January, but then in February, the market re-evaluated the risk of these securities. People paid more attention to the underlying credit quality of these securities and the potential losses that could occur. That caused the securities to fall materially in value and for the spreads to widen resulting in margin calls on these funds.

Are you still committed to subprime?

Yes. The performance of these pools will not be decided over one month or two months. They will be decided over the next three years. Our investment (commitment is not based on) looking at what these bonds trade at today or tomorrow, but what the losses in these pools will be two or three years from now. Our estimates are that the losses will be well in excess of 6% or 7% and that as time goes on and these losses are realized, the bonds will be downgraded and they will fall much further.

Have you considered going public?

For us, we don’t really need to. I think it would be premature (at this point) in our evolution to consider selling the firm or a piece of it. Our goal is to continue to focus on performance and building our capabilities, building … the investment platform. I’d like the firm to exist without me and (that requires) a developed infrastructure. So at some point in the future, going public or selling part of the firm will be issues we will have to think about. But it’s not on our radar screen now.

Divining Rod

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Peter Lynch

Background

Peter Lynch was born in 1944 and graduated from Boston College in 1965 with a degree in finance. He served two years in the military before attending and graduating from the Wharton School at the University of Pennsylvania with a Master of Business Administration in 1968.

He went to work for Fidelity Investments as an investment analyst, eventually becoming the firm's director of research, a position he held from 1974 to 1977. Lynch was named manager of the little known Magellan Fund in 1977 and achieved historic portfolio results in the ensuing years until his retirement in 1990.

In 2007, Peter Lynch served as vice-chairman of Fidelity's investment adviser, Fidelity Management & Research Co. Since his retirement, he has been an active participant in a variety of philanthropic endeavors.

Peter Lynch is one of the most famous mutual fund manager.  He started to manage the Fidelity Magellan Fund in 1978.  When he started, the fund had assets of US$ 20 million dollars.  When he retired in 1990, the Fidelity Fund had assets of US$ 14 billion.  Today the fund has assets of over US$ 50 billion dollars.

Investment Terminology

Lynch coined some of the best known mantras of modern individual investing strategies. His most famous investment principle is simply, "Invest in what you know," popularizing the economic concept of "local knowledge". This simple principle resonates well with average non-professional investors who don't have time to learn complicated quantitative stock measures or read lengthy financial reports. Since most people tend to become expert in certain fields, applying this basic "invest in what you know" principle helps individual investors find good undervalued stocks.

Lynch uses this principle as a starting point for investors. He has also often said that the individual investor is more capable of making money from stocks than a fund manager, because they are able to spot good investments in their day-to-day lives before Wall Street. Throughout his two classic investment primers, he has outlined many of the investments he found when not in his office - he found them when he was out with his family, driving around or making a purchase at the mall. Lynch believes the individual investor is able to do this, too.

Lynch did consistently apply a set of eight fundamental principles to his stock selection process. According to an article by Kaushal Majmudar, a CFA at The Ridgewood Group, Lynch shares his checklist with the audience at an investment conference in New York in 2005:

• Know what you own.
• It's futile to predict the economy and interest rates.
• You have plenty of time to identify and recognize exceptional companies.
• Avoid long shots.
• Good management is very important - buy good businesses.
• Be flexible and humble, and learn from mistakes.
• Before you make a purchase, you should be able to explain why you're buying.
• There's always something to worry about.

In picking stocks (good companies), Peter Lynch stuck to what he knew and/or could easily understand. That was a core position for him. He also dedicated himself to a level of due diligence and stock research that left few stones unturned. He shut out market noise and concentrated on a company's fundamentals, using a bottom-up approach. He only invested for the long run and paid little attention to short-term market fluctuations.

After Peter retired he wrote two books on stock selection, “One Up on Wall Street” in 1989 and “Beating the Street” in 1994. Both of which are considered essential reading for any serious investor. Peter has found many of his big investments when not in his office - instead found them when out with his family, driving around or shopping at the mall. Peter believes the individual investor is able to do this too.

[More superinvestors...]

Peter Lynch Quotes

Go for a business that any idiot can run – because sooner or later, any idiot is probably going to run it.

If you stay half-alert, you can pick the spectacular performers right from your place of business or out of the neighborhood shopping mall, and long before Wall Street discovers them.

Investing without research is like playing stud poker and never looking at the cards.

Absent a lot of surprises, stocks are relatively predictable over twenty years. As to whether they're going to be higher or lower in two to three years, you might as well flip a coin to decide.

If you spend more than 13 minutes analyzing economic and market forecasts, you've wasted 10 minutes.

The person that turns over the most rocks wins the game. And that's always been my philosophy.

The key to making money in stocks is not to get scared out of them.

I think you have to learn that there's a company behind every stock, and that there's only one real reason why stocks go up. Companies go from doing poorly to doing well or small companies grow to large companies.

In this business if you're good, you're right six times out of ten. You're never going to be right nine times out of ten.

You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets.

When stocks are attractive, you buy them. Sure, they can go lower. I've bought stocks at $12 that went to $2, but then they later went to $30. You just don't know when you can find the bottom.

I've found that when the market's going down and you buy funds wisely, at some point in the future you will be happy. You won't get there by reading 'Now is the time to buy.'

There are substantial rewards for adopting a regular routine of investing and following it no matter what, and additional rewards for buying more shares when most investors are scared into selling.

If you're prepared to invest in a company, then you ought to be able to explain why in simple language that a fifth grader could understand, and quickly enough so the fifth grader won't get bored.

In stocks as in romance, ease of divorce is not a sound basis for commitment.

There's no shame in losing money on a stock. Everybody does it. What is shameful is to hold on to a stock, or, worse, to buy more of it, when the fundamentals are deteriorating.

Stock picking can't be reduced to a simple formula or a recipe that guarantees success if strictly adhered to.

A person infatuated with measurement, who has his head stuck in the sand of the balance sheets, is not likely to succeed.

In business, competition is never as healthy as total domination.

Investing is fun, exciting, and dangerous if you don't do any work.

Your investor's edge is not something you get from Wall Street experts. It's something you already have. You can outperform the experts if you use your edge by investing in companies or industries you already understand.

Vivid Imagination

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Blue Illusion

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BMW

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Technical Vs Fundamental Analysis (By Farouk)

Through the years I had spent years investing my money in different asset classes around the world, I always met people who were either technical analysts or fundamental analysts, and even though these people have nothing in common, one thing was always common, technical analysts were always losing money and fundamentalists were always making money. Out of every 10 technical analysts I met one fundamental analyst, and to my surprise the only one smiling there on the trading floor was the fundamental analyst.

Fundamental analysis is based on researching the stock you are going to buy, knowing its financial position and estimating a value for it. Technical analysis is based on charting, where the only reason to buy a stock is finding a good signal in its curve.

Technical analysts

Technical analysts claim that human behavior can be easily predicted from charts, and while part of what they are saying is true, as a human behavior expert I can confidently say that charts are useless. Yes you can expect a stock price to go up because it broke through a strong resistance in the chart but you didn’t take into account that a new piece of information that is released the next day may have the power to reverse this signal.

Buying a company just because its chart looks good is way far from investing, it better fits under the act of speculating. If you don’t believe this now, then go invest your money using technical analysis only and when you lose your money come back and read about fundamental analysis.

Fundamental analysis

Fundamental analysis requires you to know the stock’s financial position, its sales, its net profit and lots of other figures that are directly related to financial performance. I guess you now know why technical analysis is very popular compared to fundamental analysis, simply because fundamental analysis requires more effort.

Buying a company because you know about its current financial position and its growth prospects is more likely to make you realize profits than buying a company that you know nothing about just because its chart looks interesting.

Technical and fundamental analysis together

You might think that I am against technical analysis but this is not true, the best way to invest your money in the stock market is not to use technical analysis only or fundamental analysis only but its to use them together.

You should first use fundamental analysis to determine which stock you are going to buy and after determining what to buy, you should then use technical analysis and charts to pick the right timing to buy it so that you can maximize your profits.

Linux KDE

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JAS 39 Gripen Fighter

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X-47 Unmanned Combat Aerial System

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X-47 Unmanned Combat Aerial System

Billionaire Carl Icahn Leverages Yahoo Options

Carl Icahn has been establishing a big stock position in Yahoo shares using options. Icahn's position of 59 million shares of Yahoo stock was created by using only 9.9 million actual shares. The question now is how can Mr. Icahn hold the rest without actually owning them?

The answer comes from a strategy that might be new to most people, but to options traders it's old hat. Icahn simply created 49 million shares of synthetic stock by buying 490,000 million call options on Yahoo stock and selling 490,000 million put options.

Synthetic positions are how investors and traders can replicate the performance and returns of stock without owning any actual stock. Buying a call and selling a put, usually of the same exercise price and expiration, is equivalent to being long the underlying stock. In other words, since he sold the right for someone else to be short the stock, if the long put holder decides to exercise their right, he will have to buy the stock at the strike price.

Another interesting thing about this trade is that Icahn bought American-style call options, which can be exercised anytime before expiration, and he sold European-style put options, which can only be exercised, and force him to buy the stock, at expiration. Icahn reportedly sold puts with a strike price of $19.50 and an expiration date of November 5th, 2010. Last year, Icahn used billions of dollars worth of options on Motorola stock to gain a significant position and win board seats in the tech company.

Brian Marber

Brian Marber can make a fair claim to be the most widely experienced technical analyst in the world, having been one since 1963.

A Fellow of the Society of Technical Analysts, he has been a blue button (stockbroker's clerk), stock market dealer, member of two UK stock exchanges, and managing partner of the London office of one of the largest regional broking houses.

At IOS and then at NM Rothschild & Sons, totally eschewing the fundamental approach, he was the first fund manager in the UK to manage large funds using only technical analysis.

Between 1976 and 1981, as a stockbroker, Brian Marber was voted by institutional investors No.1 technical analyst in the City for six successive years, a unique record.

When he started managing FX accounts in the 1990s, he was given exemption from the SFA Exams because of his ‘long and distinguished career in the investment industry.’

In 1980, in a survey conducted by the Treasurer of the Singer Company, Brian Marber had the best FX forecasting record in the world. For 15 years he wrote monthly for Euromoney Currency Report, and more recently for the Financial Times.

In the 1980s, Brian Marber was a Member of the Visiting Faculty of IMI (Geneva), the oldest established business school in Europe. In 1981, he founded a company which, with clients in 20 countries, became the world’s largest independent FX consultancy.

As a lecturer and teacher, Brian Marber has spoken at six Financial Times World Gold conferences, three Australian Gold Conferences, Johannesburg 100, Comex, and the Washington Gold & Silver Institute, and has also conducted seminars and teach-ins in Australia, Hong Kong, Singapore, Abu Dhabi, South Africa, Israel, Italy, UK, Eire, France, Germany, Denmark, Norway, Belgium, Holland, Switzerland and Luxembourg.

A one-time member of the Investment Panel of The Observer and regular broadcaster on TV and radio, Brian Marber is still an FX Consultant to banks, large corporations, hedge fund companies (including Europe’s oldest, Odey Asset Management), and private clients.

F14-Tomcat

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Index Options

Stock index options are based on a stock index rather than on specific stocks. The value of index calls increase as the index increases, and the value of index puts increases as the underlying index decreases. These options are similar to stock options, but with some important differences.

Because these options are based on indexes, there is greater diversification, and usually less volatility than with specific stocks. An index is never going to drop to zero, and it will never increase as dramatically as some specific stocks can, especially within a short period of time. Therefore, the risk is more limited, but so is the profit potential. Also, contract adjustments are rarely needed for a stock index. For instance, stock splits of stocks within the index do not affect the index, and thus, no adjustments on the contracts are needed.

The strike price is based on an index value multiplied by the multiplier of the contract, which is usually $100 (USD). These options are settled by the exchange of cash, not securities, which, for obvious reasons, is called a cash settlement. The option writer who is assigned an exercise pays cash to the holder who exercised the option.

Many index options are American-style options that can be exercised for a short time right before expiration. However, this makes little difference for options that are settled in cash, because the option holder can always sell the option on the exchanges for cash at any time before expiration. In fact, Kuala Lumpur Composite Index (KLCI) options are European-style options. They can only be exercised on the last day of trading.

The cash that is paid upon exercise depends on the index, which depends on the component prices of the index. Some contracts have AM settlement and some have PM settlement. In AM settlement, the cash settlement value is calculated using the opening component prices on the day of expiration. In PM settlement, closing prices on the day of expiration are used to determine the cash settlement value of the contract.

The cash settlement amount is determined by multiplying the absolute difference between the index and the strike price of the option times $100. For instance, SXY KO-E (2006 Nov 1375.00 Call) is based on the S&P 500 index. If the index should close at 1400 on expiration day, then a call holder would receive (1400 - 1375) x 100 = $2,500, and the assigned call writer would have to pay that much.

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Investing Is Not What Most People Think

Many people think that investing is this exciting process where there is a lot of drama. They think investing involves a lot of risk, luck, timing and hot tips. Some realize that they know very little about this mysterious subject. So they entrust their faith and money to someone they hope knows more than they do. Many other so-called investors want to prove that they can outsmart the market. Actually, this is not investing. This is more like gambling or should be described as guessing.

"Investing is a plan, often a dull, boring and almost mechanical process of getting rich."

Robert Kiyosaki

So according to Robert Kiyosaki, the correct definition or attitude towards investing should be something stated above. Investing is simply a plan, made up of formulas and strategies or a system that will almost guaranteed for getting rich. Of course, there are always some systematic risks that are unavoidable. Thus, investing does not have to be risky, dangerous and exciting.

So it is just common sense for anyone wishes to achieve financial freedom to find a plan or recipe to be rich and follow it. Why try to make your own unproven recipe when someone else has already shown you the way?

In fact, following a simple plan to become rich is boring. Also, human beings are quickly get bored and want to find something more exciting and amusing. That's why very few people ever become rich. They start following a plan and soon they are bored. So they stop following the first plan and look for a magic way to get rich quick. Soon after, they are trapped and fall prey to the "Get Rich Quick Scheme".

Most people cannot stand the boredom of following a simple and uncomplicated plan. They repeat the process of boredom, amusement and boredom again for the rest of their lives. They think that if investing is not complicated, it cannot be a good plan. In fact when it comes to investing, simple is better than complex.

As an example, most of us have played Monopoly as children. The formula and strategy involved is simply buy four green houses and then exchange them for a red hotel. Believe it of not, playing Monopoly in real life were what some of the successful entrepreneurs were doing. Once they learnt the formula, the process became automatic. They could do it even when they were sleeping and without much thinking.

So just find one simple formula and follow it. Nobody needs to be a rocket scientist to be rich. All one needs to do is simply know what is wanted, have a plan and stick to the plan. In other words, all it takes is a little discipline.

Different Categories of Investors

What kind of investor do you want to be?

This may be the question bothering everyone who has the goal of achieving financial independence. However, are you mentally prepared to become an investor? Have you done your analysis and research before you get in the market?

In fact, a true investor is prepared for whatever happens. A gambler tries to predict what and when things happen. If you are prepared, there is a deal of a lifetime being presented to you everyday of your life! The following explains the different categories of investors exist in the market. Let's review them one by one:

The Accredited Investor

The accredited investor is someone with high income or high net worth. A long-term investor who has chosen for security and comfort may very well qualify as an accredited investor. Many highly paid employees or self-employed persons fit in this category of investor.

Individuals with the following amount of money can be classified as accredited investors:

• $200,000 or more annual income for an individual
• $300,000 or more for a couple
• $1 million net worth

The Qualified Investor

The qualified investor can be defined as the person who has money as well as some knowledge of investing. Qualified investors include most professional stock traders who are accredited investors and has invested in financial education. They have learned and understand the difference between fundamental and technical investing.

A fundamental investor searches for value and growth of a company by looking at the financial statement. The most important consideration for selecting good stock for investment is the future earnings potential of the company. Warren Buffet has been acknowledged as one of the best fundamental investors.

On the other hand, a well-trained technical investor invests on the emotions of the market and invests with insurance to hedge against catastrophic loss. The most important consideration for selecting a good stock is based on the supply and demand for the stock of a company. George Soros is often recognized as one of the best technical investor.

The Sophisticated Investor

The sophisticated investors know as much as the qualified investors but has also studied the advantages available through the legal system. They are familiar with the following specialties of law:

• Tax law
• Corporate law
• Securities law

While not a lawyer, the sophisticated investor relies his or her investment strategy on the law as well as the financial products in determining the potential returns. They often gains higher returns with very low risk by using the different disciplines in law.

The Inside Investor

Although an important distinction of the inside investor is the aspect of control over management of a company, the most imperative point is that one does not need to have a lot of income or net worth to become an inside investor. An officer, director or owner of 10% or more shares of the company is an inside investor.

Actually someone with the financial education but not the financial resources can still become an inside investor. This is where many people enter the world of investing today. By building their own companies, inside investors are building assets that they can run, sell or take public.

The Ultimate Investor

The ultimate investor is a person like Bill Gates or Warren Buffett. These investors build giant companies that other investors want to invest in. The ultimate investor is a person who creates assets that become very valuable that it is worth literally billions of dollars to millions of people.

Both Gates and Buffett became rich not because of their high salaries but because they built great companies and took them public. While it is not likely that everyone of us will ever build a Microsoft or Berkshire Hathaway, we all have the possibility of building smaller businesses and becoming wealthy by selling it privately or publicly.

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Oei Hong Leong

Singapore tycoon Mr. Oei Hong Leong bought one million American International Group (AIG) shares on Tuesday (16 Sep 2008) when the stock was in freefall and many investors were bailing out of the giant insurer.

Mr Oei bought in on the upswing and landed his average cost of purchasing at US$1.80. The stock price closed at US$3.75 at the end of the trading. He had looked hard at the unfolding AIG crisis and calculated that the firm was just too big and important to be allowed to fail.

He bought the shares when AIG shares price was dropping due to the rumor that AIG encountered short-term shortages of cash flows and grabbed one million shares of AIG.

Mr. Oei then sold the shares on Monday (22 Sep 2008) at US$5.00. The selling price rose more than double compared to the bidding price.

He donated the shares which have already shot up in value (about S$ 890 million) as promised to LKY School to mark Minister Mentor Lee Kuan Yew's 85th birthday, which fell on Tuesday. In other words, the school will receive about US$ 5 million from the shrewd investor.

Mr. Oei actually had donated S$ 1 million to LKY school 5 years ago felicitating Lee's 80th birthday.

Brief Biography

Mr. Oei Hong Leong estranged from his father, Eka Tjipta Widjaja who was one of the richest men in Indonesia. This Singapore citizen is now considered as a savvy investor with stakes in steel, coffee, real estate and health care industries. He committed to invest $10 million in waste-management firm Citiraya whose stock hasn't traded in over a year following a corporate scandal.

He was ranked number tenth in the Singapore's 40 Richest Men by Forbes Magazine. He is now 58 years old and has a net worth of about US$ 475 million.

Beautiful Morning

*Note: Click on the image above to view in full size.

Carl Icahn

Carl Celian Icahn (born February 16, 1936) is an American billionaire financier, corporate raider, and private equity investor. His net worth is US$14 billion as of 2008, making him the 46th richest man in the world.

He grew up in NYC's Queens and studied philosophy at Princeton. Then went to Wall Street with $4,000 in poker winnings.

He gained reputation for buying into troubled companies, forcing management to improve, restructure, and buy back stock. Once considered the world's most dangerous shareholder activist, he is now having trouble effecting vast management changes.

Icahn made an attempted run as a major shareholder of Time Warner owning about 3.3% of the company valued at billions of dollars. He has been actively attempting to influence the direction of Time Warner, often in conflict with its former Chief Executive, Richard Parsons. Although Time Warner recently sold 5% of its AOL division, Icahn has been pressing for additional action to increase shareholder value.

On February 7, 2006, a group led by Icahn and Lazard Frères CEO Bruce Wasserstein unveiled a 343-page proposal calling for the breakup of Time Warner into four companies and stock buybacks totaling approximately $20 billion.

On February 17, 2006, the Icahn-led group agreed with Time Warner to not contest the re-election of TW's slate of board members at the 2006 shareholders meeting. In exchange for the Icahn group's cooperation, Time Warner will buy back up $20 billion of stock, nominate more independent members to the board of directors, cut $1 billion of costs by 2007, and continue discussions with the Icahn group over their proposal, particularly on the future of Time Warner Cable.

Recently, Icahn was shown to be interested in the takeover of Yahoo! and the ousting of Jerry Yang from his current position as CEO to allow Microsoft to purchase the web company.

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A Lesson to Ferrari Driver

Warren Buffett Quotes

In my adult business life I have never had to make a choice of trading between professional and personal. I tap-dance to work, and when I get there it’s tremendous fun.

I have simple pleasures. I play bridge online for 12 hours a week. Bill and I play, he’s “chalengr” and I’m “tbone”.

I just naturally want to do things that make sense. In my personal life too, I don’t care what other rich people are doing. I don’t want a 405 foot boat just because someone else has a 400 foot boat.

I want to be able to explain my mistakes. This means I do only the things I completely understand.

The best way to own common stocks is through an index fund.

I was lucky to have the right heroes. Tell me who your heroes are and I’ll tell you how you’ll turn out to be. The qualities of the one you admire are the traits that you, with a little practice, can make your own, and that, if practiced, will become habit-forming.

If you’re doing something you love, you’re more likely to put your all into it, and that generally equates to making money.

A public-opinion poll is no substitute for thought.

Chains of habit are too light to be felt until they are too heavy to be broken.

I always knew I was going to be rich. I don’t think I ever doubted it for a minute.

I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.

It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.

It’s better to hang out with people better than you. Pick out associates whose behavior is better than yours and you’ll drift in that direction.

Let blockheads read what blockheads wrote.

Of the billionaires I have known, money just brings out the basic traits in them. If they were jerks before they had money, they are simply jerks with a billion dollars.

Risk is a part of God’s game, alike for men and nations.

Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.

Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.

The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.

There seems to be some perverse human characteristic that likes to make easy things difficult.

Price is what you pay, value is what you get.

We enjoy the process far more than the proceeds.

Why not invest your assets in the companies you really like? As Mae West said, “Too much of a good thing can be wonderful”.

You do things when the opportunities come along. I’ve had periods in my life when I’ve had a bundle of ideas come along, and I’ve had long dry spells. If I get an idea next week, I’ll do something. If not, I won’t do a damn thing.

Forest? Reflection? Imagination?

*Note: Click on the image above to view in full size.

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Warren Buffett: How He Does It

Did you know that a $10,000 investment in Berkshire Hathaway in 1965, the year Warren Buffett took control of it, would grow to be worth nearly $30 million by 2005? By comparison, $10,000 in the S&P 500 would have grown to only about $500,000. Whether you like him or not, Buffett's investment strategy is arguably the most successful ever. With a sustained compound return this high for this long, it's no wonder Buffett's legend has swelled to mythical proportions. But how the heck did he do it?

Buffett's Philosophy

Warren Buffett descends from the Benjamin Graham school of value investing. Value investors look for securities with prices that are unjustifiably low based on their intrinsic worth. When discussing stocks, determining intrinsic value can be a bit tricky as there is no universally accepted way to obtain this figure. Most often intrinsic worth is estimated by analyzing a company's fundamentals. Like bargain hunters, value investors seek products that are beneficial and of high quality but underpriced. In other words, the value investor searches for stocks that he or she believes are undervalued by the market. Like the bargain hunter, the value investor tries to find those items that are valuable but not recognized as such by the majority of other buyers.

Warren Buffett takes this value investing approach to another level. Many value investors aren't supporters of the efficient market hypothesis, but they do trust that the market will eventually start to favor those quality stocks that were, for a time, undervalued. Buffett, however, doesn't think in these terms. He isn't concerned with the supply and demand intricacies of the stock market. In fact, he's not really concerned with the activities of the stock market at all. This is the implication this paraphrase of his famous quote : "In the short term the market is a popularity contest; in the long term it is a weighing machine."

He chooses stocks solely on the basis of their overall potential as a company - he looks at each as a whole. Holding these stocks as a long-term play, Buffett seeks not capital gain but ownership in quality companies extremely capable of generating earnings. When Buffett invests in a company, he isn't concerned with whether the market will eventually recognize its worth; he is concerned with how well that company can make money as a business.

Buffett's Methodology

Here we look at how Buffett finds low-priced value by asking himself some questions when he evaluates the relationship between a stock's level of excellence and its price. Keep in mind that these are not the only things he analyzes but rather a brief summary of what Buffett looks for:

1. Has the company consistently performed well?

Sometimes return on equity (ROE) is referred to as "stockholder's return on investment". It reveals the rate at which shareholders are earning income on their shares. Buffett always looks at ROE to see whether or not a company has consistently performed well in comparison to other companies in the same industry.

Looking at the ROE in just the last year isn't enough. The investor should view the ROE from the past five to 10 years to get a good idea of historical performance.

2. Has the company avoided excess debt?

The debt/equity ratio is another key characteristic Buffett considers carefully. Buffett prefers to see a small amount of debt so that earnings growth is being generated from shareholders' equity as opposed to borrowed money.

This ratio shows the proportion of equity and debt the company is using to finance its assets, and the higher the ratio, the more debt - rather than equity - is financing the company. A high level of debt compared to equity can result in volatile earnings and large interest expenses. For a more stringent test, investors sometimes use only long-term debt instead of total liabilities in the calculation above.

3. Are profit margins high? Are they increasing?

The profitability of a company depends not only on having a good profit margin but also on consistently increasing this profit margin. This margin is calculated by dividing net income by net sales. To get a good indication of historical profit margins, investors should look back at least five years. A high profit margin indicates the company is executing its business well, but increasing margins means management has been extremely efficient and successful at controlling expenses.

4. How long has the company been public?

Buffett typically considers only companies that have been around for at least 10 years. As a result, most of the technology companies that have had their initial public offerings (IPOs) in the past decade wouldn't get on Buffett's radar (not to mention the fact that Buffett will invest only in a business that he fully understands, and he admittedly does not understand what a lot of today's technology companies actually do). It makes sense that one of Buffet's criteria is longevity: value investing means looking at companies that have stood the test of time but are currently undervalued.

Never underestimate the value of historical performance, which demonstrates the company's ability (or inability) to increase shareholder value. Do keep in mind, however, that the past performance of a stock does not guarantee future performance - the job of the value investor is to determine how well the company can perform as well as it did in the past. Determining this is inherently tricky, but evidently Buffett is very good at it.

5. Do the company's products rely on a commodity?

Initially you might think of this question as a radical approach to narrowing down a company. Buffett, however, sees this question as an important one. He tends to shy away (but not always) from companies whose products are indistinguishable from those of competitors, and those that rely solely on a commodity such as oil and gas. If the company does not offer anything different than another firm within the same industry, Buffett sees little that sets the company apart. Any characteristic that is hard to replicate is what Buffett calls a company's economic moat, or competitive advantage. The wider the moat, the tougher it is for a competitor to gain market share.

6. Is the stock selling at a 25% discount to its real value?

This is the kicker. Finding companies that meet the other five criteria is one thing, but determining whether they are undervalued is the most difficult part of value investing, and Buffett's most important skill. To check this, an investor must determine the intrinsic value of a company by analyzing a number of business fundamentals, including earnings, revenues and assets. And a company's intrinsic value is usually higher (and more complicated) than its liquidation value - what a company would be worth if it were broken up and sold today. The liquidation value doesn't include intangibles such as the value of a brand name, which is not directly stated on the financial statements.

Once Buffett determines the intrinsic value of the company as a whole, he compares it to its current market capitalization - the current total worth (price). If his measurement of intrinsic value is at least 25% higher than the company's market capitalization, Buffett sees the company as one that has value. Sounds easy, doesn't it? Well, Buffett's success, however, depends on his unmatched skill in accurately determining this intrinsic value. While we can outline some of his criteria, we have no way of knowing exactly how he gained such precise mastery of calculating value.

Conclusion

As you have probably noticed, Buffett's investing style, like the shopping style of a bargain hunter, reflects a practical, down-to-earth attitude. Buffett maintains this attitude in other areas of his life: he doesn't live in a huge house, he doesn't collect cars and he doesn't take a limousine to work. The value-investing style is not without its critics, but whether you support Buffett or not, the proof is in the pudding. As of 2008, he holds the title of the richest man in the world, with a net worth of more US$62 billion (Forbes 2008). Do note that the most difficult thing for any value investor, including Buffett, is in accurately determining a company's intrinsic value.

[More about Warren Buffett...]