Articles Archive for March 2008
The stock market expert and speculator André Kostolany once said that it´s better to study psychology than economics if you want to make money on the wall street. To explain what Mr. Kosolany meant with this assertion I want to show you a little example.
Imagine we trow a coin nine times, the first time we do that we receive the array of numbers (N) and heads (H) of N-N-H-N-H-H-N-H-N . The second try returns the sequence N-N-N-N-N-N-N-N-N.
So the question is which array is more probable? And if we look at the sequences most people would say that the first one is more plausible, the answer however is that they are stochastic equal. But what has this to do with investing? Well this little example tells us much about how people think. We are trying to see pattern where no patterns are, there are many people who have the same way of thinking by picking their stocks they try to see patterns. This is called representativeness heuristic and is one of the basics of behavioral finance.
The psychologist Daniel Kahneman got the Nobel price in 2002 for proving that irrational behavior in investment decisions can be attributed to special parts of our brain. In his experiments he lay probates in a MRI and asked them different questions about money. For example he asked if you would prefer to have 100 Dollar now or 110 in 4 month? The results of the tests were impressing, always the probands decided for getting the money immediately especially the hind brain was activated. When the probands decided for getting more money later the cerebrum made this decision. In the end Mr. Kahneman could prove that a large part of of investment decisions was controlled by mechanisms which originate from a time of eating and being eaten. Fight, attack and escaping are behavioral patterns which influence us till today. So our brain is thinkable improper for investment decisions, we build on the same mechanisms which also reptiles use for their daily life. But if you realize that you can really benefit from the manners of the others.
This article is definitively not about trading or here to animate you to buy risky stocks. But I want you to become aware of the great opportunities you can come across in the actual crisis. Just take a look at Bear Stearns. After it dropped to $5 something, it recovered in a few days to $10 something. That’s 100% in 5 days for buying the stock, not considered buying options or something. I admit, that’s a very risky example, but I wanted to show how fast it can go. Usually it takes some time for a turnaround. Additionally, I think you have to be a trader to recognize such a chance like Bear Stearns and actually buy in. But we are real long-term investors here and do only buy if the story, earnings etc. are going to change in the next years.
It’s a crash! Hurray!
Stocks just got cheaper on one single day, let’s celebrate! No seriously, OK, you lost some money, and I am sure you lost some because I assume that you are fully or partly invested, but that’s not the end of the world. We are long term investors and sell when the market is hot and buy when everybody sees apocalyptica coming. Over a long-term period of 10 years you surely will see market declines a few times, so do not be shocked. Crises and recessions also kill weak companies which cleans up the market and could be considered as good for investors. However, do also never ever try to predict crashes, that’s just not possible, nobody can predict the market. But you have to be prepared.
Good companies at a cheap price
Good companies at a cheap price, that’s what we are looking for. But when it’s the best time to buy such companies? Surely not when the stock market is totally hot and the p/e ratio is 30 or more. In this case you have to wait for a market decline, so you can get a good price. Super-investors like Warren Buffet just wait for such opportunities to come (there is a reason why he had this billions in cash). Also, investors from the Middle-east and Asia bought shares of big companies in the US and Europe. The pros do it and so can you.
You should always have excellent companies on your watch-list that you want to buy, but the price is to high. If the story didn’t change, crises can make this stocks cheap because of panic on the stock markets and you can profit from it. You buy cheap and sell high in a few years after the market recovers and the stock price is again much higher than the real value of the company.
But remember: Always be careful and do not try to catch a falling knife! You have to know what you do, so do proper research first.
The Intelligent Investor by Benjamin Graham, is a book which characterized the way many people think about the stock markets like no other book ever did before. Warren Buffett once called it “The best book for investors which has ever been written”. Probably this book also shows his point of view and perhaps without it he wouldn´t be that rich today. The author Benjamin Graham was Buffett’s teacher on Columbia University and the things he though and wrote down have remained valid until today, which nearly resembles a little wonder in the permanent changing economic world.
But what is it that makes this book so unique, that even the richest man of the world calls it his favorite book? First of all we can say that the author was a really brilliant man who together with David Dodd. He discovered that markets are irrational and you can profit of it. Today this is also known as value investing and can, if you adopt it correctly, make you very rich.
The book is structured in 20 chapters, which respond to nearly everything you need to know to become a professional “intelligent” investor. Especially the difference between an investor and a speculator is one of the central points of the book. Other emphases are the margin of safety, and things which train you to make your own decisions and to build up the self-discipline you need for that. The only disadvantage of the book is that there isn´t said much about techniques of the share analysis, but for this area Benjamin wrote another book with the name “Security Analysis”.
So, I really suggest you to read this book, because it´s probably the best one which has ever been written about investing. Seriously.
Before buying stocks, you should ask yourself a very important question first: Do I own a house or apartment?
Investing in an own house is never a bad idea and you do not have to be a pro to buy a good one. It is the one good investment that almost everybody manages to make and should make. Millions of real estate amateurs have invested brilliantly in their houses and so can you.
A house is an investment just like a stock, but there are some heavy differences. An obvious one is, that a house usually does not go bankrupt or brings you big loses like stocks. OK, a house can burn down, but what are insurances for? In real estate there are no daily fluctuations like in the stock market, so you will usually not wake up one day and face a decline of 20%. And even if it happens, you still have that nice roof over your head, right?
Another advantage (I assume) is that you always lived in a house or apartment, so you know what you want, what it should be like and certainly know when something is wrong. But most of all, it is a big decision and you have to plan the investment first. Amateur investors tend to buy a stock after considering it just for a few minutes. Big mistake. You surely will not buy a house unless you know everything about it, especially if your money is limited. You also can not sell your house as fast as you can sell stocks.
Of course, you need money first to buy a house. Again, buy a house first, after that buy stocks. Do not live on rent. After 10 years living on rent you have nothing. Nada. Instead save your money, move to a cheap apartment and try to buy a house as soon as you can. The banks let you acquire it for 20% and give you the wonderful power of leverage. Just assume the value of your house increases by 5% a year. This means, you are making a 25% return on your down payment, just think about it for a while. And do also not forget the taxes, I am not an expert, but you can surely save taxes too.
Finally, you can make a nice profit by buying and selling houses over your life. You usually start with a small house or apartment and pay it off. This will take some time and when it is payed off, you sell it and by the profit you can afford a new, bigger house. If you have the money, you do not sell the first house and make profit by renting it. This generates passive income to pay of your second real estate. Than eventually you buy your third real estate, a big house for your family and the children, for example. After 20 years, the children move out and the house is to big for you, so you sell it once again and buy yourself a house on the beach and enjoy your retirement. Isn’t that a wonderful scenario? It is!
Whats up with the commodities? For 8 months gold, oil and raw materials were running from one record to the next one. I think if somebody had told me that you will pay 100 $ for one barrel oil and 1000 $ for one ounce gold in 2008 I would have assumed him to be crazy. But now through the kindness of the weak dollar caused by the financial crisis we have achieved this values and especially gold seems to be the safest harbour against the crisis-ridden financial markets and inflationary threads. So I ask myself how long can we trigger this harbour ?
In 2006 the German Professor Dr. Max Otto anticipated a Gold-price of 2000 $ per ounce in his book “The crash comes”. First of all he mentioned that in 1980 we payed 852 USD for one ounce sounds less but if you allow for the inflation you get a price of 2200 USD which is 1200 Dollar more than the current stand. Another fact is that till now we just found 135000 tons of gold on our earth. This amount had place in a cube with a page length of 20 meters, and since 1942 there had been no year in which the gold-reserves were growing more than 5 %. So the thing is that the world´s current estimated gold demands amounts 4000 tons per year. However the production capacity just amounts 2500 tons so we actually got a deficit in supply of 1500 tons a year which boosts the price. Also has to be said that the Chinese population is allowed to buy gold since 2002 which wasn´t so before, this again requires extra 36 tons every year. The last reason is that in times of a crisis the gold price always exploded like in 1971-1974 or in 1977 -1980 when it quintupled even though analysts predicted gold would keep on falling in price.
Although these facts are very interesting the current situation at the gold market should be watched very carefully, the break away of the demand of the jewelry industry (the gold-imports of India recently felled of 90 %), and possible sales of the banks of issue could theoretically cause a downward movement.
Note: Normally markets fall faster than they rise and that and the risk that they do this grows everyday so watch your gold.
This article is a book review about the book The Richest Man in Babylon by George S. Clason. You can buy it on Amazon.com for $6.99 and we really recommend it, because it will teach you some important basics of personal finance and how to build financial wealth. In a nutshell, the book dispenses financial advice through a collection of parables set in ancient Babylon. Through their experiences in business and managing household finance, the characters in the parables learn simple lessons in financial wisdom. Nevertheless, modern people can easily understand and identify with the various situations and learn from the timeless wisdom about money, that is as relevant today as it was back then. Overall, this is a great book to learn how to deal with money and build wealth and how to bend streams of wealth flowing towards you. If you have an income, you can build wealth and get rich.
According to the book cover, more than two million copies have been sold.
Some lessons you will learn in the book:
- A part of all you earn is yours to keep. It should not be not less than tenth, no matter how little you earn.
- Counsel with wise men. Seek the advice of men whose daily work is handling money. Let them save you from such errors.
- Learn to make your treasure work for you, make it your slave. Make its children and its children’s children work for you.
- Opportunity is a haughty goddess who wastes no time with those who are unprepared.
There will be also some articles on WorldFinancialBlog.com about the lessons of this book soon, because in our opinion the book provides valuable lessons which are worth to learn. They worked for a lot of people, so why not for you too? We can adopt the philosophy of ancient Babylon one to one to our own lives today. The eons of time have crumbled but the wisdom of Babylon endures.
In times when every third 14 year old boy founds his own web-design, -programming or -optimization company, when 20 year old guys earn one million dollar by selling links on www.milliondollarhomepage.com, I ask myself, is it really possible that there appears another web bubble?
You think this two examples above are impressive? Look at Mark Zuckerberg, a 23 year old ex-Harvard student, who founded a community with the name Facebook, which estimated worth is 15 billion dollar. He is 23 and created this value within 4 years! Other examples are Myspace, Youtube or FEEDBurner, all sold for several hundred million dollar. But what is the difference of this companies to the dot-com companies of the year 2000? First of all, most dot-com companies where listed at the stock markets and had curious business concepts like selling vegetables via Internet. The companies of the Web 2.0 generation earn their money with ads.
So when you recognise that the world wide advertising market had been taxed with more than 400 billion dollar in 2007 this valuations could be plausible. But the problem is that these Internet platforms have no true customer loyalty and experts predict that these communities and platforms will be replaced by new ones during the next 5 to 10 years. So in my opinion we can definitely speak about a bubble cause these new Web 2.0 companies do not earn the money they should and probably won´t ever do.