Enterprising Investor Forum

Investment Styles Tuesday, January 27, 2009

In his book ‘Traders Guns & Money’ Satyajit Das takes readers through the knowns and unknowns in the world of derivatives.  He offers a very cynical and witty account of life in the financial markets and especially in the trading rooms, where wealth is transfered everyday risking other people’s money!

He also offers an insightful explanation of ‘Fund Managers Investment Styles’, that we thought you might find interesting:

• Index Funds = The fund manager invests to match some index like the S&P500 > The fund manager has given up trying to beat the market.

• Active Management = The fund manager tries to pick stocks that will do better than the market > The triumph of hope over experience. You, the investor, are paying for the experiment.

• Momentum Investing = The fund manager chases whatever is going up > The lemming or crowd theory of investing; the investment equivalent of a Finnish proverb: ‘Shit must be good, millions of flies can’t be wrong.’

• Value Investing = The fund manager invests in undervalued gems that he has uncovered through research > Pure luck or you hope that the fund manger has inside information.

• Yield Enhancement = The fund manager invest to generate above market income > You are taking on a whole lot of risk. You will be lucky to get your money back intact.

• Portfolio Insurance = The fund manager guarantees that you investment, at least 90%, is safe > Hang on, wasn’t a return of principal the least you are entitled to?

• Structured Investment = the fund manager will specifically design investment  strategies to fit your exact risk and return parameters using sophisticated investment tools and financial products > A pure con job to charge you more fees.

• Alternative Investment Strategies = the fund manager will invest in hitherto unknown assets – weather derivatives, catastrophe bonds, art, stamps, etc > You are an investment pioneer, good luck!

We will review his book shortly.

2009 Outlook Monday, January 5, 2009

As discussed in our previous post, we are still of the opinion that 2009 will be a volatile year as things settle and as the markets try and pave the way for a recovery. Again, we feel 2009 will be a very difficult year for the real economy as the world will continue to slip deeper into recession.

In terms of investing opportunities, this will probably mean that:

• defensive equities will remain the favored investment
• high quality corporate bonds will warrant the risk of default
• emerging markets and commodities will continue to be very vulnerable and volatile

Two sectors that will likely remain weak for most of the year but that we keep on following are Real Estate and Private Equity. Both sectors will continue to suffer in the current economic crisis and higher financing cost will continue to eat into their earning and punish them.

However, having said this, we feel that the 2008 bottoms , when retested, could be an interesting occasion to reconsider selected opportunities. Both industries have been punished as a whole without much consideration for the few solid players that are going to come out of this crisis incredible strong… the Enterprising Investor will keep on following these sectors and find the right opportunities.

Please read our disclaimer.

Investing in 2009 Friday, January 2, 2009

Many feel that we saw the worst of it in 2008 and that 2009 will be better but we somehow feel uneasy about this confidence…

We are still of the opinion that 2009 will be a volatile year as things settle and as the markets try and pave the way for a recovery. If 2008 was a year filled with horrible financial news, we think that 2009 will be a year filled with horrible economic news – the pain and suffering will shift to the real economy.

How are investors supposed to deal with this and how should they tackle their investments in 2009? Well, as we having be saying, with extreme prudence. We are not sure about the timing  but we are fairly confident that we will see the markets rally and fall 20-30% but have no idea on what the sequence will be!

In the midst of all this uncertainty the need to have a long-term plan and a well balanced portfolio is crucial. Naturally, all depends on your own objectives and financial condition but this could really be the time to pick-up some bargain stocks and construct the portfolio of a lifetime! Be sure to have your shopping list ready and use what will probably be violent market swings to open positions not only in tradition value blue chip companies but also in small caps, gaining exposure to emerging markets and commodities. Remember, you need to have a plan and be ready to execute your planned strategy without fearing market moods – just stick to your plan!

More on this in the coming days…

Forex Resources Monday, December 22, 2008

Following our recent post on the US Dollar slide, we had a few readers asking about Forex information and resources. Again, we are not experts but here are the sites we look at:

• Forex Factory for a quick and easy overview of news affecting the Forex markets -> link.
• FX Street for overall commentary, fundamental and technical analysis -> link.

You might also consider:

• Action Forex which is similar to Forex Street -> link.

We hope this helps!

Cramer: Obama Good for Markets Tuesday, December 2, 2008

It’s been a while since we posted something from Cramer.. here he argues that the President-elect’s stimulus plan creates a more confident market by acknowledging the issues America faces and by putting in place a team to tackle these issues:

Enjoy!

Stock Market Returns: Democrats vs. Republicans Tuesday, November 4, 2008

One of the topics that seems to be all over the news is what Presidency will be best for the stock markets.

At fist sight, one would tend to think that the markets would react more positively to a Republican victory:

• Generally big money and big businesses in the market tends to be Republican
• Republicans are all about capital accumulation and low taxes
• Republicans tend to favor growth through economic policy, free markets
• Etc….

But it appears that the above is not true… apart from the fact that there is a trend for a more pronounced bounce after a Republican victory, history shows us that the Democrats are better for the markets.

The New York Times has published a really interesting chart/study showing that under a Democratic Presidency the average yearly return is better and that a $10,000 investment in the S&P in 1929 would have grown to $11,733 if invested under Republican presidents only and to $300,671 at a compound rate of 8.9% under Democratic Presidents:

Porsche Corners VW Friday, October 31, 2008

Some of you may have been following the Porsche/VW saga these past weeks or you may have simple heard about what was going on. Here is a very quick & simplistic summary of what happened:

• Hedge funds and other investors where heavily shorting VW stock
• Porsche revealed a 74% stake in VW and options to buy more instead of a presumed 40 something % stake
• Practically no float for the shorts to cover with (state of Saxony is a major shareholder)
• VW shares rocketed to over €1,000 from €210
• It appears the shorts could have lost a as much as €30bn
• Authorities had to step in…
• We have probably witnesses the biggest short squeeze of all times!

DealBook has just published a really interesting article on this event which we feel is required reading for anyone interested in what recently happened and/or about cornering stocks.

Read the article on the DealBook site by clicking: here.

Carlos Slim: still on the sidelines Thursday, October 30, 2008

Carlos Slim, Mexican telecoms tycoon and the second richest man in the world is still sitting on the sidelines but will be slowly entering the market, increasing equity investments.

Interestingly enough, he is still quite bearish and critical of recent events. He is known to step up to the plate and be greedy when others are fearful but he is still very concerned about the current turmoil and what the possible ramifications of this crisis will be.

His funds are still hording cash and are still waiting for the right moment to step up the equity allocation. As the CNBC commentator say, he is a bit of a market timer but we agree with his view that it is still to early to truly understand what the long-term impacts of the current crisis will be and what the ramifications will be – the economy remains a serious concern.

Enjoy!

Jim Rogers’ quarrel with CNBC Tuesday, October 28, 2008

Here we have some classic Jim Rogers, spiced up by a little quarrel with the CNBC commentators:

• Deflation of the stock market
• Inflation will come
• The sell-off is just temporary, the world is not going to end
• Long commodities!
• Paulson and Bernake should resign and abolish the federal reserve
• Let people who make mistakes collapse!
• US has to avoid being another Japan…

An interesting and entertaining interview…

Markets: global sell-off Monday, October 27, 2008

As the street seems resigned to the idea of a deep and severe recession, markets around the world are not offering any comfort – as Barron’s says, there is nowhere left to hide in equities.

As we have been saying in the past, things will probably get worse before they get better but how bad can they get? Despite being cautions about the current situation, it does look like we have probably seen most of the sell-off… we should be about 80% done, don’t you think?

Investors should remember that despite the fact that we are in unchartered territory, the world is not going to end. Sooner or later people will have managed to get their finances back on track and and they will start to buy clothes, laptops, go on holiday and maybe even go out and buy a car! Naturally, this is not going to happen overnight but some of the equity prices out there seem to suggest just that it will never happen….

Having said this, we would like to add a world of caution. We feel that there will be very interesting investment opportunities out there but it will be extremely important to do your homework on the companies you plan to invest in. The recent turmoil has changed so many assumptions, forecasts and business realities whilst sparking a negative domino effect that very few people truly comprehend … understanding what impact these events will have on future company/industry prospects will be crucial.

Make sure you do your homework before getting back in!