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Growth of Emerging Markets

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Emerging markets are arguably a force to be reckoned with and something to pay attention to if you are interested in diversifying your risk and potential gains.

The biggies out there are the BRIC; aka Brazil, Russia, India and China. Together they comprise over 40% of the global population and have experienced rapid economic growth in recent years.
As infrastructures are developed and consumer spending increases, emerging economies often expand faster than already developed nations. For example, in 2008 GDP of China and Brazil grew more than 7% compared with only 1.1% in the US.

Given the steep gains to be had in emerging markets, impressive stock returns have driven stocks up 36% between January and mid-June 2009. Given what we know has been the reality here in the domestic market, this is certainly stark contrast. However, previous to that, in 2008, investors fled the market and it tanked by more than 54%.

Of course with great potential gains come the flip side of potential risks. The main volatility comes from countries having less stable political, legal and financial systems, low liquidity, and currency swings.

For what its worth, we’ve been putting more of our money into companies that have exposure to emerging markets. For example, last week we picked up an additional 500 shares of the Finnish Cell Phone giant Nokia. The company has been taking a beating, but is better placed to sell mobile devices in the developing world that its US rivals.

Readers: What is your take on emerging markets and whether or not you are invested or interested in doing so.

Miel

Technical Analysis

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In a post earlier this week I talked about Fundamental Analysis and some of its basic tools. The counter to Fundamental Analysis is Technical Analysis.

Technical Analysis involves finding patterns and trends in market data, and using those trends to build an investment strategy. Technical Analysts believe that all relevant information regarding a security is contained within the current price of that security, so their focus is primarily on the internals of the price, rather than external factors such as company announcements or activity in the greater market. This is the primary reason why Fundamental Analysis and Technical Analysis are so different; from a Technical Analysis point of view, Fundamental Analysis is pointless because the effect of those fundamental indicators that I described in my Fundamental Analysis post has already been taken into account with the current price of the stock. Believing this, a Technical Analyst can then focus solely on the price of the security, and study how it has trended over time.

To illustrate the application of Technical Analysis, I’m going to look at Google’s (GOOG) chart over the past year, using Yahoo! Finance’s tools.

As you can see from the chart, I have the original price data, with a number of overlays and indicators. I will explain each of them and why I chose to use them, but it should be noted that they represent just a subset of the indicators and chart overlays that can be used, and the parameters can and should be adjusted. The analysis is for example purposes only.

My dataset is the two year price chart for Google (GOOG). With that price chart I have included two overlays:

  • Moving Average – Moving Averages are a commonly used tool in statistical analysis, particularly in the analysis of time-series data (i.e. a dataset that contains data at a sequence of time intervals, which are often uniform), so it is a perfect fit for stock price analysis. Moving Averages are used to smooth out the data, meaning short-term fluctuations are minimized so that the long-term trends can be more easily identified.

  • Exponential Moving Average – EMAs are a modification of the standard Moving Average. It introduces the idea of “weights”, in this case, meaning that older data points have a smaller impact on the average value than more recent data points. EMAs have the same purpose as standard Moving Averages, except that by weighting the data points based on time, they hopefully do a better job of illuminating trends and eliminating noise.

In addition to the two overlays, I have included the following four indicators:

  • MACD – MACD stands for “Moving Average Convergence/Divergence”; it is used to identify trend changes by generating three types of signals: when the MACD line crosses the signal (i.e. price) line, when MACD crosses zero and the divergence between the MACD line and the stock price line. MACD is a lagging indicator, and many Technical Analysts use more modern, computer-based, computational analysis tools. However, it still has use as a price movement monitoring tool.

  • ROC – ROC stands for Rate of Change, and all it does is show the percentage difference between the current price of a security and the price of the same security a certain number of periods ago. ROC is most commonly used as a way of indicating momentum.

  • RSI – RSI stands for Relative Strength Indicator, and it compares up and down close to close movements in an attempt to measure how fast a security’s price is moving either up and down and at what magnitude it is doing so, in other words, the momentum of the stock’s price.

  • Fast Stoch – Fast Stoch refers to the Fast Stochastics indicator, which is used to find the relation between a stock’s current price and its highest and lowest point over a period of time. Fast Stoch’s tend to be very sensitive to price changes, an as such, the Slow Stochastic indicator has been introduced, and it uses Moving Averages to smooth out the Fast Stochastic values.

As I mentioned, those are just a number of the different analysis tools that you can use (others include MFI, Slow Stoch, and a variety of Volume analysis tools). I am not much of a Technical Analyst; I see value in it but right now I only use it to give me a little more information and some perspective on stocks that I’m interested in (although I’d certainly like to learn more). So if any readers have any books they’d like to suggest, I’d love to hear about them. The book I’ve used is entitled “Select Winning Stocks Using Technical Analysis” by Clifford Pistolese. From a technical standpoint, it doesn’t have a lot of the details that some might be interested in, but it has an excellent overview of a variety of topics and I’ve found it very useful. Let me know what you use and what you think of Technical Analysis in general!

-Michael
Twitter: @Michael_Dink

Paying Off $123,000 in Debt in Less Than 5 Years

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CNN.com had a video today about a family with $123,000 worth of debt and how they managed to wipe it out in about four and a half years. The video can be found here. This family had just let their spending get out of control, and found themselves staring at six figures worth of debt and decided to do the best they could to pay it off. And they were successful.

How did they do it? A couple points stuck out to me:

* First and foremost, they took responsibility for the situation they had put themselves in and they were determined to correct it. They talked about giving it their best shot and going for it. The husband mentioned the shame he felt in letting his debt get to that point. That shame and embarrassment motivated him to do what it took to get the job done.

* They cut down on their budget. It can be easy to dismiss cutting out the little things, such as name-brand food and entertainment expenses because their unit price is often low, so mentally, the impact of eliminating them feels small. But they can certainly add up. This family was able to save a lot of money each month by savings a little bit of money in a lot of different places.

* They worked with an accredited credit counseling service. They had 11 credit cards at one point in time. Managing those accounts is in and of itself a lot of work, so they turned to an organization that would help them manage their debt. If you’re in over your head, it’s not a bad idea to seek advice from professionals. Just be wary of shady businesses.

* The husband got a second job. Working full time (as a chemist, no less) is tough enough as it is. But to then take on an additional part time job? The husband spoke of being so tired that he didn’t know if he was going to be able to make it, but he knew he had to give it his best shot. He did what he had to do to achieve his family’s goal.

Obviously they made huge sacrifices, and I have no doubt that it was a very stressful time for the whole family (especially with three kids) but they were able to achieve their goals. And in the process, it seems like they grew closer as a family (the wife talked about family dinners and how much they enjoy eating as a family now). I thought this was a very inspiring story. It’s nice to hear of people facing incredible challenges and making it through successfully.

-Michael
Twitter: @michael_dink

Is It Ethical To Market To The Poor?

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I was recently listening to The Kojo Nnamdi Show and he had a segment on menthol cigarettes and the urban poor, and it got me thinking. We all know that companies target certain demographics, and part of that targeting is designing their products and tailoring their marketing to appeal to specific groups of people. For example, boxing’s heir apparent, Mixed Martial Arts, features unapologetic violence, visually appealing women and aggressive personalities, obviously targeting as their main audience young males. And it has worked; UFC Pay-Per-View events have recently drawn well over a half of a million buys in addition to packed arenas. A more long-standing example is that of food advertising directed at children. Ronald McDonald isn’t going to convince me to get a Big Mac, but a happy, playful clown offering a meal and a toy might get a young, non-coulrophobic kid to talk to Mommy and Daddy about picking up some fast food for dinner.

Additionally, there has been a precedent set for marketing limitations, most prominently with alcohol and tobacco products. The Federal Trade Commission (FTC) in the U.S. has set a variety of standards for limiting the advertisement of alcoholic beverages. While beer is less heavily regulated (tune in to any sporting event and you’ll see that is in fact the case), spirits have sharp limitations. The current standard is that at least approximately 70% of the individuals potentially viewing the ad must be of legal drinking age, and ads are monitored to ensure that they don’t encourage or glorify risky behavior. Also, you may notice that in the liquor ads you do see (and the beer ads, from what I’ve been able to tell), you won’t see the actors actually consuming the alcohol.

Tobacco companies have harsher restrictions. Whereas cigarettes were a stable of 1950’s and 60’s television ads, restrictions have been put into place over the last 3 decades to severely reduce the number of ads you see. In 1970, Congress passed the Public Health Cigarette Smoking Act, which banned the cigarette companies from advertising their products on television or radio, beginning January 1st, 1971. Smokeless tobacco ads were banned in 1986, and later, all tobacco products were required to display a health warning from the Surgeon General on all print ads. Furthermore, in 2003 tobacco companies and magazine publishers agreed to cease advertising cigarettes and other tobacco products in magazines that have a high appeal to children, such as Sports Illustrated.

With that being the case, a precedent has been set for limiting advertisements for ethical reasons. Marketing to the poor is obviously a different idea, but it shares many of the same properties of the above examples. Large corporations spend an extremely large sum of money for customer analysis and targeted marketing. If their customer analysis yields data suggesting that the vast majority of their customer base consists of consumers living below the poverty line (or who are otherwise struggling financially), is it morally right for them to use that data to specifically target that group? Are there really no morals in business, and if so, does the government have the right to impose advertising restrictions, much in the same way that they’ve restricted the tobacco advertisements that may be appealing towards children? I certainly hesitate to impose any sort of a moral code on anyone, but it’s an interesting question.

Turn in to any late-night television show and you’ll see ads for title loans, payday loans, etc… While those types of loans have their own storied past and I could probably devote a whole series of posts to them, they have their own role in the marketing to the poor topic. They are clearly targeted to those who have fallen on hard times, and at first glance, they may appear to be a good idea for those people who need money in a pinch. However, a closer look will reveal a much different reality than what is portrayed in the commercials. Governments on the state and federal level have already been working to corral the business practices of those institutions. But should they also limit advertising?

Advertising affects everyone. Even if you claim to be independent from their influence, you’re not (unless you don’t watch TV, don’t listen to the radio, don’t read magazines or the newspaper, don’t browse the internet…); if you ingest it, it does affect you (to what degree is a different issue). With that being the case, to what extent should ethics in advertising be enforced?

-Michael
Twitter: @michael_dink

Fundamentals Analysis

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The New York Stock exchange contains over 2,750 listings. NASDAQ has over 3,800. If you’re interested in investing in purchasing a share in an individual company, as opposed to a mutual fund or index fund, that’s a lot of stocks to sift through to find the handful of ones worth investing in. And that’s even ignoring the other major stock exchanges in the U.S. and abroad. So we’re presented with a problem: how are we to find, in the midst of all of these companies, the stocks that are going to perform how we want them to?

Ignoring the “but I have a good feeling about this one” approach (not a good one, in my experience by the way), we need to have a way of analytically evaluating companies. Doing so will hopefully eliminate companies that won’t give us what we want, and will identify red flags. We’re also looking for a way to better quantify our risk/reward ratio. The more we know, the better we’re (hopefully) off.

There are two main approaches that most people take when evaluating a stock: Fundamental Analysis and Technical Analysis. Technical Analysis is based on the principle that all relevant information regarding a security is reflected by the current price of that security. Technical Analysis ignores attempts to place a value on a stock; rather, trends are the main attraction.

Fundamental Analysis on the other hand is predicated on the idea that markets by nature misprice a certain subset of securities, but eventually the market will correct itself and a security will be offered at the correct price. Adhering to Fundamental Analysis principles means attempting to recognize undervalued companies and investing in them before the market corrects its mistake.

Finding bargain securities is more than just finding ones that are cheap. You have to analyze the current state of the economy, the current state of the industry within which the security you’re interested in is contained, and then finally, you have to analyze that company’s financial profile.

The above picture is from Google Finance’s page for Google. From it, you can see basic information about Google’s fundamentals, including the price per share, EPS, P/E and Volume, along with other popular indicators. It’s been my personal experience that Google Finance and Yahoo! Finance are the two best (free) sources of information on companies. If you’re looking to incorporate more Fundamental Analysis principles in your investing, here are some indicators to look for:

  • Assests

Assets are anything that has value or can be converted to or sold for cash. This includes investments, manufacturing equipment, copyrights and the like. When examining a company’s assets, you’re looking to see if they have increased their assets since the last year, and if they haven’t if it’s because they’ve written off an asset (like banks have done with these mortgage-backed securities) or sold a previously held asset.

  • Liabilities

Liabilities include anything that the company owes to another organization. This includes both long-term and short-term debt. A red flag when examining a company’s liabilities would be, for example, if the growth rate of a company’s liabilities is outpacing that of their assets. Recently, more companies have gotten to the point where they’re more willing to accept debt in exchange for potential growth. When the bottom fell out of the economy, these companies were left with crippling debt and stagnant asset growth. While it’s true that you have to spend money to make money, it has to be manageable. When I invest, the first thing I look at is a company’s total liability.

  • Equity

Equity is essentially the net worth of a company. It’s what’s left over when you subtract a company’s liabilities from their assets. What you’re looking for here is steady equity growth of 5-15%.

  • Sales

It’s pretty clear what sales are referring to, and obviously, sales are the lifeblood of a company, and a strong indicator of future growth. Again, you’re looking for a number here of around 10% increase in sales per year. Sharp increases in sales can garner a lot of attention, but probably aren’t sustainable, and single-digit increases don’t instill a lot of confidence in the future of a company, with regards to overall growth.

  • Earnings

Earnings are the bottom line; the buck stops at earnings when looking at a company’s income statement. Earnings can be sliced many different ways (Overall Earnings, Earnings from Operations, etc…) but at the end of the day, is the company increasing their earnings from year to year? An answer of “no” to that question is a strong indicator that you need to look elsewhere.

  • Expenses

Expenses can be thought of as the operating cost of running that specific company. What you’re looking for here is stability; expense growth that keeps reasonable pace with the growth of the company overall. Unusual expenses or spikes in expenses are red flags. If a company is too large and bloated, you’ll see huge expenses cutting into their profits (Profit = Sales – Expenses).

  • Price-to-Earnings Ratio (P/E)

I could write an entire blog post on P/E alone. P/E is one of the most widely regarded and used ratios in Fundamental Analysis. This ratio is important because it describes the relationship between the company’s earnings and the share price (The value can be found by dividing the current stock price by the EPS). But using P/E is all about context. That’s why it’s important to look at both the Trailing P/E (evaluated over the last 12 months) and the Forward P/E (evaluated using projections over the next 12 months). Low P/E’s are desirable, but again, it’s all about context. You need to compare a company’s P/E to both the industry and the general market, and then determine why the ratio is what it is. Is the P/E high because investors anticipate higher earnings in the future, or because earnings have plummeted? Is the P/E low because earnings have increased, or is the share price unreasonably inflated? If a company doesn’t have a P/E, that’s bad. That indicates that the company has no earnings, and outside of speculating (a.k.a gambling), it’s usually not a great idea to invest in a company with no earnings.

  • Price-to-Sales Ratio (PSR)

PSR is the company’s stock price divided by its sales. PSR doesn’t give the complete picture, but it can help grant more perspective on a company. Company’s are also notorious for manipulating their financials to cover up bad news, but sales are much harder to manipulate than earnings, which gives PSR some value. Generally speaking, a stock that has a PSR of less than one is considered a potential bargain.

  • Book Value

Book Value is a way of looking at a company from a purely accounting standpoint in an attempt to compare its market value to its intrinsic value. If a company has a market value that is more than its book value, that could indicate that the stock is overpriced, and should be avoided. Again, Book Value is a useful tool, but should just be considered part of the overall picture.

Of course, all of those indicators should be viewed in relation to both that company’s market sector and the overall economy. For example (purely hypothetical) if a company has, over the last 5 years, a yearly sales growth rate of 20%, that might look really good. But if the sector average is 30% per year, then that number doesn’t look so great. Also, like in these recent economic times, a company might only eek out a equity growth rate that’s barely in the black. But compared to the rest of the economy, that’s really good for right now.

Those are just some of the main indicators used; obviously there’s a ton of information, and countless other ratios and indicators used, such as Profitability, Return on Assets/Equity, Total Cash, PEG Ratio and others. If interested, there are a ton of books out there on fundamental analysis and even more free resources available online.

http://www.google.com/finance
http://finance.yahoo.com/

-Michael
Twitter: @michael_DINK

Book Review: How to Get Rich

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Hi All,

In a sea of cruddy personal finance books, Felix Dennis’ How to Get Rich is a remarkable standout. The author Dennis is a multimillionaire and owner of Dennis Publishing, Inc. He’s known most famously in the U.S. for being the owner of Stuff and Maxim Magazines – young men’s publications famous for scantily clad models and electronic gadgets. More importantly for you, Dennis is really, really wealthy and he’s written about how he made his dough.

Over the past couple of months, we’ve worked through How To Get Rich and am happy to recommend it to you. Dennis has the authority of authorship of a self made millionaire with the quality of writing of a poet and magazine editor. Its an engrossing, pleasant and informative read.

What makes How to Get Rich different and better than most of the junk on building wealth out there, Dennis spends a lot of time trying to talk people out of getting rich. In reading his book, he makes several points that most other authors don’t. None of them are particularly pleasant.

First, its hard to get rich. Dennis writes about the UK and notes that only .000016 of 60 million British citizens are substantially rich. That means one’s chances of obtaining real wealth are something like 1 in a million. The odds are tremendously stacked against you.

Second, Dennis argues that the reality of wealth is less peachy that most people think. Having larger amounts of wealth means that tendencies to misbehave can be magnified. For example, rich people purchase big houses, servants, and spend excessive amounts of money frivolously on parties and interior decorating. Some wealthy people also fall victim to illicit substance abuse and use of sex workers. According to Dennis other downsides to becoming wealthy are the fact that its difficult to trust people, the wealthy have to worry about theft, and maintaining old friendships requires a surprising amount of work.

Third, Dennis’ method of getting rich requires time and effort. Felix is known primarily for owning and running publishing companies. This method requires a fair amount of work which not everyone has the skills or desire for this. Second, the process of generating wealth often means that family and friends get neglected. Also, Dennis argues there aren’t any quick fixes to building wealth – you can’t just cut back to on your expenses and save a little money at to become rich. Instead you’ll have to be starting and selling companies.

If you really want to get rich, and are willing to put in the effort, How to Get Rich argues there are 8 things you need to do:

1. Analyze your need. Desire is insufficient. Compulsion is mandatory.

2. Cut loose from negative influences. Never give in. Stay the course.

3. Ignore “great ideas”. Concentrate on great execution.

4. Focus. Keep your eye on the ball marked “The Money is Here”.

5. Hire talent smarter than you. Delegate. Share the annual pie.

6. Ownership is the real “secret”. Hold onto every percentage point you can.

7. Sell before you need to, or when bored. Empty your mind when negotiating.

8. Fear nothing and no one. Get rich. Remember to give it all away.

Dennis is somewhat controversial – at one point he admitted killing someone. Dennis is also a self reported cocaine user, but the book is worth reading regardless. How To Get Rich can be found online for 13 bucks. Click here to give it a read.

Thanks,

James

Should You Borrow From Family?

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With banks tightening their lending terms, more and more American are likely to consider turning to family for loans. While this might be the right solution for you, it is good to consider whether or not it makes sense for your situation.

First, can the lender afford to do so? If the answer is no, move on. It doesn’t make any sense to have one family member put themselves out there to support another if it means making their own situation more precarious.

Second, consider existing relations with this family member, or perhaps friend. If you’ve faced any conflicts in the past then adding money to the mix is only likely to make things worse and bring up old issues. At the same time, if you’ve had excellent relations with someone, now is not the time to start, and money can often be a difficult area to navigate.

Next, it must be made absolutely clear what the terms are. Just saying that it will be returned at some point puts everyone in a weak position. Spell it all out and put it in writing.

Keep in mind as well the reduced likelihood of being paid back. 14% of loans default when they are generated by family members, whereas only 3% default with standard consumer loans.

If you’ve both thought it through and it seems to make the most sense for you, then we wish you well in handling the process smoothly.

Readers: We’d love to hear if you have any experience with family loans.

Cheers,

Miel

Man Gets Credit Card Offer with 80% APR

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NBC San Diego is reporting that a local resident has received a credit card offer with a 79.9% APR. Yep, an 80% interest rate. The card was issued by South Dakota’s First Premier Bank.

Check the link here.

Folks, this is a blatant and horrific rip off. All I can say is: if you are reading this, please don’t apply for any products issued by this bank. Carrying this kind of interest rate will have highly negative impact on your bottom line and affect your ability to build your wealth.

Losing Money By Foreign ATM Fees

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Don’t you hate wasting money? I focus a lot of my energy on not buying things; resisting the temptation to go out and spend money if I don’t need something or if I haven’t spent time thinking the purchase through. Although, as you can tell from the graphic above, my finances do have a leaky faucet, and that is in my use of ATMs.

According to the Quicken report that I ran to generate that picture, I have paid, this year alone, $64 in foreign ATM fees. These are fees that my bank charges me to use an ATM that they don’t own (nice how they raised the fee from $2 to $2.50 in April, isn’t it?). That doesn’t include the fee that those ATMs charge me for accessing an account not associated with those ATMs. Let’s assume for the sake of simplicity that those fees are $2 each (although the average is almost certainly higher). That’s an additional total charge of $56; so in total, I’ve unnecessarily spent at least $120 this year when withdrawing money from ATMs. Ouch…

Most of my cash withdraws happened at the beginning of the year, when I had to have cash on hand for trips up to school when I had class or various meetings with the Dean or my advisor. Parking at my school costs me around $15 per stay; plus if I go in the District for a hockey game or to visit friends, it’s handy to have cash available in case I need a taxi or the parking lot doesn’t take credit cards. Because I like to use my credit card for as many of my purchases as possible (I get good rewards, it’s easier to track, etc…; obviously this is a heatedly debated within the personal finance community, but I’ll save my justifications for a later post) I don’t often have cash on hand. Which forces me to make another trip to the ATM, where I’ll get hit yet again with a double dose of ATM fees.

Why don’t I just use my bank’s ATMs? Well, my rationalization is that they don’t have ATMs in convenient areas, and I’m too often pressed for time and thus unable to spend the extra time hunting one done. However, I know this is a weak rationalization. There are ATMs from my bank around, and although they’re not directly on my way most of the time, they’re usually not too far. It appears laziness is the driving factor in this case. It can be easy to justify unnecessarily spending less than $5 in fees so that I don’t have to go out of my way (after all, it’s just $5, right?). However, that money adds up quite quickly, and the next thing I know, it’s the middle of October and I’ve burnt over $120 when I really didn’t need to.

Of course, there are a few things I can do going forward to mitigate this issue (and readers, I’d be interested to hear your suggestions).

The first, and most obvious, solution, would be to just take the time to find and go to an ATM operated by my bank. Although that won’t always be possible (especially if I’m traveling out of state, which I have to do at least once a month; my bank is regional, unfortunately), it is possible most of the time and doing so could greatly reduce that expense.

Secondly, I could budget better for my monthly cash expenses. It wouldn’t be too hard – I’d have to give myself some flex cash to account for unexpected expenses – and I could just make one trip to my bank to withdraw money per month. The danger with that is I would have to be disciplined about keeping that cash, and I would have to decide if I wanted to take on that added risk of carrying a reasonable amount of cash in my wallet, balanced with leaving it at home and not having it when I need it.

Third, I could switch banks. I could go to a more national bank, or one that doesn’t charge a fee for using a foreign ATM and maybe even repays (to a certain level) fees doled out by those foreign ATMs. However, switching banks can be a hassle, and it wouldn’t necessarily fix the problem.

I think what it comes down to is better planning and discipline. Regardless of what I do, I need to greatly reduce this figure. I can think of a whole host of things I’d rather spend $120 on than just giving it to a bank as punishment for using (or not using) their ATM!

-Michael
Twitter: @michael_dink

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