Why value value?--Defending against crises

I thought this was pretty good short article by McKinsey on Value, Bubbles, the Financial Crisis, Leverage, the Equity and Credit markets and fundamental flaws by governments, managers, and investors.

Solution - It is to get back to the basics of adding value - increasing cash flows. It is not financial manipulations or engineering.

I think there has been and continues to be a misallocation of capital into the financial markets. The financial markets are not what they should be. It is now a casino. For example, Goldman is making its money by trading. That by definition, does not add value to the economy.

Why value value?--defending against crises - McKinsey Quarterly - Corporate Finance - Valuation

Traders are Losers

Journal of Finance study concluded "Trading is hazardous to your wealth." 

http://faculty.haas.berkeley.edu/odean/papers/returns/Individual_Investor_Performance_Final.pdf

Rates of trades return were about 6.5% less than the overall market.  This is due to transaction cost, higher risk, poor money management, stop losses, and position sizing.  Furthermore, individuals compete against large investment bankers, and other investors.  One stat that is often quoted is that 90% of traders lose. In addition, they are spending lots of time and effort on an unrewarding venture.      


There is a better way.   



Jim Roger, has been successful on investing, and here is what he says you should do to be successful:

Take your money, put it in Treasury bills or a money-market fund. Just sit back, go to the beach, go to the movies, play checkers, do whatever you want to.

Then something will come along where you know it's right. Take all your money out of the money-market fund, put it in whatever it happens to be and stay with it for three or four or five or 10 years, whatever it is.

You'll know when to sell again, because you'll know more about it than anybody else. Take your money out, put it back in the money-market fund, and wait for the next thing to come along. When it does, you'll make a whole lot of money.

Another successful investor is Warren Buffett. What does he say?

Your default position should always be short-term instruments. And whenever you see anything intelligent to do, you should do it.

It is well known that Buffett follows his own advise and that in Berkshire Hathaway they are sitting on cash and equivalents of more than $46 billion, which is about 27% of the company's current market value. 

Now the issue is being patient, waiting for the right opportunity, recognizing it and then acting on it, and again being patient.  Like what Buffett has said, you should be investing base on buying a business. 

Couple of Good Investment Points

• One of the most important lessons from investment history is to Not buy stocks trading at peak multiples of peak earnings, in particular those coming from cost reduction programs
• Earnings that are driven by cost cutting, rather than revenue growth is not substainable.
• Investors should pay high P/E multiples only for stocks that have growth potential - higher revenues and cash flow - not increased earnings due to cost reductions.

Jim Rogers: Diversification a Scam

Diversification is something that stock brokers came up with to protect themselves, so they wouldn't get sued for making bad investment choices for clients, says commodities bull Jim Rogers.

"Henry Ford never diversified, Bill Gates didn't diversify," Rogers told Business Week.

"The way to get rich is to put your eggs in one basket, but watch that basket very carefully. And make sure you have the right basket."

Rogers notes that many diversified investors have lost huge sums of money over the past couple of years and advises investors to stick with what they know and forget about competing with Warren Buffet.

Here's a One-Week Trade Good for 25%

By Jeff Clark in Growth Stock Wire:
It is a different market today than it was six weeks ago.

Back then, I warned short sellers they were about to get wiped out. Since that essay, the S&P 500 has rallied 20%. The Dow is up over 1,000 points. And investors are breathing a sigh of relief that the worst is over. Indeed, the strength of the recent rally seems to have just about everyone thinking we've entered a new bull market.

While I'd love to join the ever-expanding chorus of cheerleaders yelling out, "Give me a B... Give me a U... Give me an L – L," we'd have to add four more letters to express my true thoughts. The rally has been nice, but it's not the start of a brand new bull market. Stocks will be lower later this year.

Jim Rogers: How He's Investing After the Crisis

From Business Week....Jim Rogers

As the global investor and adventurer offers lessons to his daughters in a new book, he still favors commodities and scorns diversification.

Jim Rogers says...we're in trouble

In an interview with Bloomberg TV, aired Tuesday, Rogers says the US risks sending the world into a depression as its bailouts of failed companies rob healthy businesses of capital, and urges Washing to let AIG - which notched up the biggest Q4 loss in corporate history - go bankrupt:

“The US is taking assets from competent people and giving them to incompetent people,” said Rogers, chairman of Singapore-based Rogers Holdings and author of books including Investment Biker and Adventure Capitalist. “That’s bad economics”.

In other cheery remarks, there were lots of dire warnings but not many solutions in Rogers’ predictions that the US is repeating the mistakes made by Japan in the 1990s and risks creating “zombie banks” by rescuing failed financial services companies that should have been allowed to go under.

His most useful point is possibly that we should all be buying farms and agricultural producers.

And in a characteristically counter-intuitive tack, Rogers warns that oil prices (now floundering around $47 a barrel after last year’s highs of more than $147), may rise to record levels due to waning reserves and a lack of major field discoveries: “Reserves of oil are going down all over the world…The price of oil has to go much, much higher. I don’t know if the oil price will go up to record level in three years or five years. I don’t know when but I know it is.”

Finally, the spectre of inflation also disturbs Rogers - although he owns gold and silver, he adds, calls to return to the gold standard are “not going to solve our problems”:

“People should be prepared for inflation as governments worldwide are printing money to prop up economies at a time when commodities supply is under pressure…We’re going to have serious, serious inflation down the road… I wish I knew when.”

Thanks, Jim.

And here are Rogers’ other main points, courtesy of FirstAdopter:
- This is a bear market rally that can last days, weeks, even months
- He is worried about government debt market. In a few months, they have quintupled government debt
- Massive short squeeze on the U.S. dollar from forced liquidation. It’s an artificial rally
- He owns the yen and the dollar, not sure where to put the money. Maybe real assets
- The only asset class that has fundamentals improving are raw materials and commodities
- He owns some gold, but thinks there is more money to be made in agriculture and silver. IMF is trying to sell their gold, which may hurt it for a while
- Central bank is trying to keep interest rates down, but eventually it will backfire and rate will go through the roof
- If you write-off everything in sight, sure you can show a profit [talking about C, BAC, and JPM saying they are profitable in January and February 2009]
- He is short JPMorgan and covered his Citigroup. He thinks they have gigantic derivatives and off balance sheet exposure, also large credit card division which will be bad
- No position in insurance companies
- Best economic sector in the world next 10-20 years is agriculture and farming. Low inventories and tons of shortages

Is it Inflation or Deflation / Depression?

Is it Inflation or Deflation / Depression??
Your call
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Hans-Werner Sinn, president of the German Ifo Institute, said Japanese-style deflation with surging government debt is the “true danger” the world is facing and inflation fears due to central banks’ liquidity provisions are unfounded.

Relax ....we are looked after...if.....

Relaxing investing
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From now on if you listen obediently to the commandments that I am commanding you today, love God, your God, and serve him with everything you have within you, he'll take charge of sending the rain at the right time .... Deuteronomy 11:13-14 (MSG)

Melt Down is Coming....no...it is Happening

The markets continue the melt down today, after yesterday 12 year lows which saw the Down drop by 4%. Today the Dow dropped again with the after hours market dropping another 100 points!

Since Feb 10th, when the technical indicators all lined up for a sell, the Dow has dropped almost 20%!

Extreme caution in going long in these markets.

Investors have lost confidence; lost confidence in the banks, in business and the government. The market will not climb when there is no confidence.

I have been hoping for a rally, but continue to be disappointed. Hoping is not the way to invest.

On the next rally, whenever it does occur, raise cash. This thing is far from being over.

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Simple.....how did I ever miss it?