Back in 1999, Robert G. Hagstrom wrote a book about the legendary investor Warren Buffett, entitled "The Warren Buffett Portfolio". What's so great about the book, and what makes it different from the countless other books and articles written about the "Oracle of Omaha" is that it offers the reader valuable insight into how Buffett actually thinks about investments. In other words, the book delves into the psychological mindset that has made Buffett so fabulously wealthy.
Although investors could benefit from reading the entire book, we've selected a bite-sized sampling of the tips and suggestions regarding the investor mindset and ways that an investor can improve their stock selection that will help you get inside Buffett's head.
1. Think of Stocks as a Business
Many investors think of stocks and the stock market in general as nothing more than little pieces of paper being traded back and forth among investors, which might help prevent investors from becoming too emotional over a given position but it doesn't necessarily allow them to make the best possible investment decisions.
That's why Buffett has stated he believes stockholders should think of themselves as "part owners" of the business in which they are investing. By thinking that way, both Hagstrom and Buffett argue that investors will tend to avoid making off-the-cuff investment decisions, and become more focused on the longer term. Furthermore, longer-term "owners" also tend to analyze situations in greater detail and then put a great eal of thought into buy and sell decisions. Hagstrom says this increased thought and analysis tends to lead to improved investment returns. (To read more about Buffett's ideologies, check out Warren Buffett: How He Does It and What Is Warren Buffett's Investing Style?)
2. Increase the Size of Your Investment
While it rarely - if ever - makes sense for investors to "put all of their eggs in one basket," putting all your eggs in too many baskets may not be a good thing either. Buffett contends that over-diversification can hamper returns as much as a lack of diversification. That's why he doesn't invest in mutual funds. It's also why he prefers to make significant investments in just a handful of companies. (To learn more about diversification, read Introduction To Diversification, The Importance Of Diversification and The Dangers Of Over-Diversification.)
Buffett is a firm believer that an investor must first do his or her homework before investing in any security. But after that due diligence process is completed, an investor should feel comfortable enough to dedicate a sizable portion of assets to that stock. They should also feel comfortable in winnowing down their overall investment portfolio to a handful of good companies with excellent growth prospects.
Buffett's stance on taking time to properly allocate your funds is furthered with his comment that it's not just about the best company, but how you feel about the company. If the best business you own presents the least financial risk and has the most favorable long-term prospects, why would you put money into your 20th favorite business rather than add money to the top choices?
3. Reduce Portfolio Turnover
Rapidly trading in and out of stocks can potentially make an individual a lot of money, but according to Buffett this trader is actually hampering his or her investment returns. That's because portfolio turnover increases the amount of taxes that must be paid on capital gains and boosts the total amount of commission dollars that must be paid in a given year.
The "Oracle" contends that what makes sense in business also makes sense in stocks: An investor should ordinarily hold a small piece of an outstanding business with the same tenacity that an owner would exhibit if he owned all of that business.
Investors must think long term. By having that mindset, they can avoid paying huge commission fees and lofty short-term capital gains taxes. They'll also be more apt to ride out any short-term fluctuations in the business, and to ultimately reap the rewards of increased earnings and/or dividends over time.
4. Develop Alternative Benchmarks
While stock prices may be the ultimate barometer of the success or failure of a given investment choice, Buffett does not focus on this metric. Instead, he analyzes and pores over the underlying economics of a given business or group of businesses. If a company is doing what it takes to grow itself on a profitable basis, then the share price will ultimately take care of itself.
Successful investors must look at the companies they own and study their true earnings potential. If the fundamentals are solid and the company is enhancing shareholder value by generating consistent bottom-line growth, the share price, in the long term, should reflect that. (To learn how to judge fundamentals on your own, see What Are Fundamentals?)
5. Learn to Think in Probabilities
Bridge is a card game in which the most successful players are able to judge mathematical probabilities to beat their opponents. Perhaps not surprisingly, Buffett loves and actively plays the game, and he takes the strategies beyond the game into the investing world.
Buffett suggests that investors focus on the economics of the companies they own (in other words the underlying businesses), and then try to weigh the probability that certain events will or will not transpire, much like a Bridge player checking the probabilities of his opponents' hands. He adds that by focusing on the economic aspect of the equation and not the stock price, an investor will be more accurate in his or her ability to judge probability.
Thinking in probabilities has its advantages. For example, an investor that ponders the probability that a company will report a certain rate of earnings growth over a period of five or 10 years is much more apt to ride out short-term fluctuations in the share price. By extension, this means that his investment returns are likely to be superior and that he will also realize fewer transaction and/or capital gains costs.
6. Recognize the Psychological Aspects of Investing
Very simply, this means that individuals must understand that there is a psychological mindset that the successful investor tends to have. More specifically, the successful investor will focus on probabilities and economic issues and let decisions be ruled by rational, as opposed to emotional, thinking.
More than anything, investors' own emotions can be their worst enemy. Buffett contends that the key to overcoming emotions is being able to "retain your belief in the real fundamentals of the business and to not get too concerned about the stock market."
Investors should realize that there is a certain psychological mindset that they should have if they want to be successful and try to implement that mindset. (To learn more about investor behaviors, read Understanding Investor Behavior, When Fear And Greed Take Over and Master Your Trading Mindtraps.)
7. Ignore Market Forecasts
There is an old saying that the Dow "climbs a wall of worry". In other words, in spite of the negativity in the marketplace, and those who perpetually contend that a recession is "just around the corner", the markets have fared quite well over time. Therefore, doomsayers should be ignored.
On the other side of the coin, there are just as many eternal optimists who argue that the stock market is headed perpetually higher. These should be ignored as well.
In all this confusion, Buffett suggests that investors should focus their efforts of isolating and investing in shares that are not currently being accurately valued by the market. The logic here is that as the stock market begins to realize the company's intrinsic value (through higher prices and greater demand), the investor will stand to make a lot of money.
8. Wait for the Fat Pitch
Hagstrom's book uses the model of legendary baseball player Ted Williams as an example of a wise investor. Williams would wait for a specific pitch (in an area of the plate where he knew he had a high probability of making contact with the ball) before swinging. It is said that this discipline enabled Williams to have a higher lifetime batting average than the average player.
Buffett, in the same way, suggests that all investors act as if they owned a lifetime decision card with only 20 investment choice punches in it. The logic is that this should prevent them from making mediocre investment choices and hopefully, by extension, enhance the overall returns of their respective portfolios.
Bottom Line
"The Warren Buffett Portfolio" is a timeless book that offers valuable insight into the psychological mindset of the legendary investor Warren Buffett. Of course, if learning how to invest like Warren Buffett were as easy as reading a book, everyone would be rich! But if you take that time and effort to implement some of Buffett's proven strategies, you could be on your way to better stock selection and greater returns.
Wednesday, January 7, 2009
Warren Buffett: How He Does I
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? In this article, we'll introduce you to some of the most important tenets of Buffett's investment philosophy.
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."(see What Is Warren Buffett's Investing Style?)
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. ROE is calculated as follows:
= Net Income / Shareholder's Equity
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. The debt/equity ratio is calculated as follows:
= Total Liabilities / Shareholders' Equity
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. (To learn more about the value investing strategy of selecting stocks, check out our Guide To Stock-Picking Strategies.)
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 2004, he holds the title of the second-richest man in the world, with a net worth of more $40 billion (Forbes 2004). Do note that the most difficult thing for any value investor, including Buffett, is in accurately determining a company's intrinsic value.
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."(see What Is Warren Buffett's Investing Style?)
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. ROE is calculated as follows:
= Net Income / Shareholder's Equity
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. The debt/equity ratio is calculated as follows:
= Total Liabilities / Shareholders' Equity
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. (To learn more about the value investing strategy of selecting stocks, check out our Guide To Stock-Picking Strategies.)
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 2004, he holds the title of the second-richest man in the world, with a net worth of more $40 billion (Forbes 2004). Do note that the most difficult thing for any value investor, including Buffett, is in accurately determining a company's intrinsic value.
3 Popular Strategies For Stock combine with Options
Covered Call
What Does Covered Call Mean?
An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset in an attempt to generate increased income from the asset. This is often employed when an investor has a short-term neutral view on the asset and for this reason hold the asset long and simultaneously have a short position via the option to generate income from the option premium.
This is also known as a "buy-write".
Investopedia explains Covered Call...
For example, let's say that you own shares of the TSJ Sports Conglomerate and like its long-term prospects as well as its share price but feel in the shorter term the stock will likely trade relatively flat, perhaps within a few dollars of its current price of, say, $25. If you sell a call option on TSJ for $26, you earn the premium from the option sale but cap your upside. One of three scenarios is going to play out:
a) TSJ shares trade flat (below the $26 strike price) - the option will expire worthless and you keep the premium from the option. In this case, by using the buy-write strategy you have successfully outperformed the stock.
b) TSJ shares fall - the option expires worthless, you keep the premium, and again you outperform the stock.
c) TSJ shares rise above $26 - the option is exercised, and your upside is capped at $26, plus the option premium. In this case, if the stock price goes higher than $26, plus the premium, your buy-write strategy has underperformed the TSJ shares.
Synthetic Call
What Does Synthetic Call Mean?
An investment strategy that mimics the payoff of a call option. A synthetic call is created by purchasing the underlying asset, selling a bond and purchasing a put option. The strike price on the put option is equal to the face value of the bond, which serves as the exercise price of the synthetic call.
Investopedia explains Synthetic Call...
A synthetic call produces the same overall payoff as a call option. The synthetic call will finish in the money when the price of the underlying asset is greater than the face value of the sold bond at the time of expiration. It will be out-of-the-money when the value of the bond is greater than that of the underlying asset. When the synthetic call is in the money, the profit is the difference between the price of the underlying asset and the face value of the bond. If the call finishes out of the money, the put option absorbs the loss from the underlying asset, with the exercise price of the put paying for the bond.
Collar
What Does Collar Mean?
1. A protective options strategy that is implemented after a long position in a stock has experienced substantial gains. It is created by purchasing an out of the money put option while simultaneously writing an out of the money call option.
Also known as "hedge wrapper".
2. A general restriction on market activities.
Investopedia Says Icon
1. The purchase of an out-of-the money put option is what protects the underlying shares from a large downward move and locks in the profit. The price paid to buy the puts is lowered by amount of premium that is collect by selling the out of the money call. The ultimate goal of this position is that the underlying stock continues to rise until the written strike is reached.
2. An example is a circuit breaker which is meant to prevent extreme losses (or gains) once an index reaches a certain level.
Collars can protect you against massive losses, but they also prevent massive gains.
What Does Covered Call Mean?
An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset in an attempt to generate increased income from the asset. This is often employed when an investor has a short-term neutral view on the asset and for this reason hold the asset long and simultaneously have a short position via the option to generate income from the option premium.
This is also known as a "buy-write".
Investopedia explains Covered Call...
For example, let's say that you own shares of the TSJ Sports Conglomerate and like its long-term prospects as well as its share price but feel in the shorter term the stock will likely trade relatively flat, perhaps within a few dollars of its current price of, say, $25. If you sell a call option on TSJ for $26, you earn the premium from the option sale but cap your upside. One of three scenarios is going to play out:
a) TSJ shares trade flat (below the $26 strike price) - the option will expire worthless and you keep the premium from the option. In this case, by using the buy-write strategy you have successfully outperformed the stock.
b) TSJ shares fall - the option expires worthless, you keep the premium, and again you outperform the stock.
c) TSJ shares rise above $26 - the option is exercised, and your upside is capped at $26, plus the option premium. In this case, if the stock price goes higher than $26, plus the premium, your buy-write strategy has underperformed the TSJ shares.
Synthetic Call
What Does Synthetic Call Mean?
An investment strategy that mimics the payoff of a call option. A synthetic call is created by purchasing the underlying asset, selling a bond and purchasing a put option. The strike price on the put option is equal to the face value of the bond, which serves as the exercise price of the synthetic call.
Investopedia explains Synthetic Call...
A synthetic call produces the same overall payoff as a call option. The synthetic call will finish in the money when the price of the underlying asset is greater than the face value of the sold bond at the time of expiration. It will be out-of-the-money when the value of the bond is greater than that of the underlying asset. When the synthetic call is in the money, the profit is the difference between the price of the underlying asset and the face value of the bond. If the call finishes out of the money, the put option absorbs the loss from the underlying asset, with the exercise price of the put paying for the bond.
Collar
What Does Collar Mean?
1. A protective options strategy that is implemented after a long position in a stock has experienced substantial gains. It is created by purchasing an out of the money put option while simultaneously writing an out of the money call option.
Also known as "hedge wrapper".
2. A general restriction on market activities.
Investopedia Says Icon
1. The purchase of an out-of-the money put option is what protects the underlying shares from a large downward move and locks in the profit. The price paid to buy the puts is lowered by amount of premium that is collect by selling the out of the money call. The ultimate goal of this position is that the underlying stock continues to rise until the written strike is reached.
2. An example is a circuit breaker which is meant to prevent extreme losses (or gains) once an index reaches a certain level.
Collars can protect you against massive losses, but they also prevent massive gains.
Wednesday, December 24, 2008
Mutual Fund Hedge Fund Target Risk Fund Fund Of Funds
What Does Mutual Fund Mean?
An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.
Investopedia explains Mutual Fund...
One of the main advantages of mutual funds is that they give small investors access to professionally managed, diversified portfolios of equities, bonds and other securities, which would be quite difficult (if not impossible) to create with a small amount of capital. Each shareholder participates proportionally in the gain or loss of the fund. Mutual fund units, or shares, are issued and can typically be purchased or redeemed as needed at the fund's current net asset value (NAV) per share, which is sometimes expressed as NAVPS.
What Does Hedge Fund Mean?
An aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).
Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year.
Investopedia explains Hedge Fund...
For the most part, hedge funds (unlike mutual funds) are unregulated because they cater to sophisticated investors. In the U.S., laws require that the majority of investors in the fund be accredited. That is, they must earn a minimum amount of money annually and have a net worth of more than $1 million, along with a significant amount of investment knowledge. You can think of hedge funds as mutual funds for the super rich. They are similar to mutual funds in that investments are pooled and professionally managed, but differ in that the fund has far more flexibility in its investment strategies.
It is important to note that hedging is actually the practice of attempting to reduce risk, but the goal of most hedge funds is to maximize return on investment. The name is mostly historical, as the first hedge funds tried to hedge against the downside risk of a bear market by shorting the market (mutual funds generally can't enter into short positions as one of their primary goals). Nowadays, hedge funds use dozens of different strategies, so it isn't accurate to say that hedge funds just "hedge risk". In fact, because hedge fund managers make speculative investments, these funds can carry more risk than the overall market.
What Does Target Risk Fund Mean?
A fund that attempts to expose its investors to a specified amount of risk. The fund manager of a target risk fund is responsible for overseeing all the securities owned within the fund, to ensure that the level of risk isn’t greater or less than the fund's target amount of risk exposure.
Investopedia explains Target Risk Fund...
Target risk funds typically label themselves as "conservative", "moderate risk" or "aggressive" in terms of their risk exposure. Regardless of the label applied, the intent is to offer a relatively constant level of risk exposure to investors.
This allows investors who are considered highly risk averse to identify and select a fund of funds that has a conservative risk exposure target, and once invested in the fund, remain confident that their level of risk exposure will not change substantially.
The manager of a target risk fund is responsible for ensuring that the fund's level of risk exposure is on target, and the fee’s charged for operating the fund (on top of the fees charged by mutual funds owned within the target risk fund) is compensation for the value-added service.
What Does Fund Of Funds Mean?
A mutual fund that invests in other mutual funds.
This method is sometimes known as "multi-management".
Investopedia explains Fund Of Funds...
A fund of funds allows investors to achieve a broad diversification and an appropriate asset allocation with investments in a variety of fund categories that are all wrapped up into one fund. However, if the fund of funds carries an operating expense, investors are essentially paying double for an expense that is already included in the expense figures of the underlying funds.
Historically, a fund of funds showed an expense figure that didn't always include the fees of the underlying funds. As of January 2007, the SEC began requiring that these fees be disclosed in a line called "Acquired Fund Fees and Expenses" (AFFE).
An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.
Investopedia explains Mutual Fund...
One of the main advantages of mutual funds is that they give small investors access to professionally managed, diversified portfolios of equities, bonds and other securities, which would be quite difficult (if not impossible) to create with a small amount of capital. Each shareholder participates proportionally in the gain or loss of the fund. Mutual fund units, or shares, are issued and can typically be purchased or redeemed as needed at the fund's current net asset value (NAV) per share, which is sometimes expressed as NAVPS.
What Does Hedge Fund Mean?
An aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).
Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year.
Investopedia explains Hedge Fund...
For the most part, hedge funds (unlike mutual funds) are unregulated because they cater to sophisticated investors. In the U.S., laws require that the majority of investors in the fund be accredited. That is, they must earn a minimum amount of money annually and have a net worth of more than $1 million, along with a significant amount of investment knowledge. You can think of hedge funds as mutual funds for the super rich. They are similar to mutual funds in that investments are pooled and professionally managed, but differ in that the fund has far more flexibility in its investment strategies.
It is important to note that hedging is actually the practice of attempting to reduce risk, but the goal of most hedge funds is to maximize return on investment. The name is mostly historical, as the first hedge funds tried to hedge against the downside risk of a bear market by shorting the market (mutual funds generally can't enter into short positions as one of their primary goals). Nowadays, hedge funds use dozens of different strategies, so it isn't accurate to say that hedge funds just "hedge risk". In fact, because hedge fund managers make speculative investments, these funds can carry more risk than the overall market.
What Does Target Risk Fund Mean?
A fund that attempts to expose its investors to a specified amount of risk. The fund manager of a target risk fund is responsible for overseeing all the securities owned within the fund, to ensure that the level of risk isn’t greater or less than the fund's target amount of risk exposure.
Investopedia explains Target Risk Fund...
Target risk funds typically label themselves as "conservative", "moderate risk" or "aggressive" in terms of their risk exposure. Regardless of the label applied, the intent is to offer a relatively constant level of risk exposure to investors.
This allows investors who are considered highly risk averse to identify and select a fund of funds that has a conservative risk exposure target, and once invested in the fund, remain confident that their level of risk exposure will not change substantially.
The manager of a target risk fund is responsible for ensuring that the fund's level of risk exposure is on target, and the fee’s charged for operating the fund (on top of the fees charged by mutual funds owned within the target risk fund) is compensation for the value-added service.
What Does Fund Of Funds Mean?
A mutual fund that invests in other mutual funds.
This method is sometimes known as "multi-management".
Investopedia explains Fund Of Funds...
A fund of funds allows investors to achieve a broad diversification and an appropriate asset allocation with investments in a variety of fund categories that are all wrapped up into one fund. However, if the fund of funds carries an operating expense, investors are essentially paying double for an expense that is already included in the expense figures of the underlying funds.
Historically, a fund of funds showed an expense figure that didn't always include the fees of the underlying funds. As of January 2007, the SEC began requiring that these fees be disclosed in a line called "Acquired Fund Fees and Expenses" (AFFE).
Thursday, December 18, 2008
HOW TO SAVE IN BAD TIMES
HOW TO SAVE IN BAD TIMES
Bad times are likely to bring deflation, and deflation can make you poorer, even drive you into bankruptcy. Or it can make you significantly richer. The choice is yours. One thing you can do that will make the biggest difference is saving! If you can’t save, deflation could hurt you. If you can save, deflation will help you reap some very nice benefits:
Benefit 1. Your savings will go a long way. When you do spend, you will get more for less.
Benefit 2. At the right time, you will be able to buy great investment bargains. The investment world will be like one giant clearance sale at a major department store.
Benefit 3. Income! Right now, interest rates are low. But even low interest rates are better than a high-interest expense. Moreover, if you wait for a time when bond markets have fallen and their yields have risen, you could lock in a relatively high rate for many years to come.
Benefit 4. Even if there is no deflation, you will sleep better at night knowing that you have a good cushion to fall back on in case of any unexpected event. And even if inflation heats up again, you can largely keep up with the inflation by keeping your savings in a money market mutual fund—your interest income is likely to go up more or less in synch with the inflation.
To reap these benefits, follow these steps:
Step 1. Figure out how much you can comfortably save each month. Many people aim too high, fail, and then give up. Better to aim low and then stick with it religiously.
Step 2. If at all possible, make sure that money is saved automatically. Your employer, your credit union, or your bank will provide additional information on how to set it up. However, make sure it is a safe institution. For a rating on almost any bank, visit www.weissratings.com; for a rating on a credit union, visit www.veribanc.com.
Step 3. If you cannot set up an auto-savings program, resolve to never spend a dime until after your monthly savings have been set aside. There is absolutely no expenditure (except basic necessities, of course), which is more important than savings. This has always been true. In bad or deflationary times, it’s not even an option. Unless you already have a substantial nest egg, you almost invariably have to do it.
Step 4. Let time work for you. You will be absolutely amazed at how much money you can accumulate just by putting the same small, comfortable amount away month after month. And that’s even without any interest. Once you add the interest, plus the interest on the interest, you will be even more amazed.
Bad times are likely to bring deflation, and deflation can make you poorer, even drive you into bankruptcy. Or it can make you significantly richer. The choice is yours. One thing you can do that will make the biggest difference is saving! If you can’t save, deflation could hurt you. If you can save, deflation will help you reap some very nice benefits:
Benefit 1. Your savings will go a long way. When you do spend, you will get more for less.
Benefit 2. At the right time, you will be able to buy great investment bargains. The investment world will be like one giant clearance sale at a major department store.
Benefit 3. Income! Right now, interest rates are low. But even low interest rates are better than a high-interest expense. Moreover, if you wait for a time when bond markets have fallen and their yields have risen, you could lock in a relatively high rate for many years to come.
Benefit 4. Even if there is no deflation, you will sleep better at night knowing that you have a good cushion to fall back on in case of any unexpected event. And even if inflation heats up again, you can largely keep up with the inflation by keeping your savings in a money market mutual fund—your interest income is likely to go up more or less in synch with the inflation.
To reap these benefits, follow these steps:
Step 1. Figure out how much you can comfortably save each month. Many people aim too high, fail, and then give up. Better to aim low and then stick with it religiously.
Step 2. If at all possible, make sure that money is saved automatically. Your employer, your credit union, or your bank will provide additional information on how to set it up. However, make sure it is a safe institution. For a rating on almost any bank, visit www.weissratings.com; for a rating on a credit union, visit www.veribanc.com.
Step 3. If you cannot set up an auto-savings program, resolve to never spend a dime until after your monthly savings have been set aside. There is absolutely no expenditure (except basic necessities, of course), which is more important than savings. This has always been true. In bad or deflationary times, it’s not even an option. Unless you already have a substantial nest egg, you almost invariably have to do it.
Step 4. Let time work for you. You will be absolutely amazed at how much money you can accumulate just by putting the same small, comfortable amount away month after month. And that’s even without any interest. Once you add the interest, plus the interest on the interest, you will be even more amazed.
HOW TO PROTECT YOUR JOB IN BAD TIMES
HOW TO PROTECT YOUR JOB IN BAD TIMES
The job cuts of 2002 were unusual for two reasons: (1) they took place when the economy was supposedly “recovering” and (2) they affected almost everyone in equal proportion—regardless of ethnic group, origin, gender, profession, job status,or income level. The same will probably be true in the future as well. To protect your job, follow these steps:
Step 1. Check the financial prospects of your company. If its shares are listed on a stock exchange, you can get a rating on the stock by checking with an independent rating agency. If you feel you can’t afford to spend a few dollars for the rating, you can also get a free risk rating from Risk Metrics (212-981-7475 or www.riskgrades.com).
Step 2. If your employer does not have shares listed on an exchange, ask for the latest financial statement. If your employer says it is confidential, you can acquire an independent report from Dun & Bradstreet (www.dnb.com).
Step 3. If your company has a weak risk rating or a poor report from Dun & Bradstreet, it’s not a good sign. It might do OK in good times, but your job—and possibly the entire company—may be vulnerable in bad times.
Step 4. Needless to say, to secure your income, there are two strategies you can follow:
Strategy A. Do your utmost to make yourself a valuable employee. Seek company-sponsored opportunities for learning new job skills. And even if none are available,
allocate at least an hour per day of your spare time to learn skills of value to the firm. With the Internet, you’d be amazed at how much you can learn for free or at
a very low cost. And if you do not have access to the Internet from home, free access is available at most public libraries. The librarian should be able to give you some excellent tips on the latest, best sites.
Strategy B. Do your utmost to continually stay on top of the job market. Visit www.monster.com and similar sites to take advantage of a wealth of free information on the most marketable job skills, tips on how to get a job, and updates on what’s going on in various industries. Also use these sites to keep your résumé posted on the Web as much as possible.
Step 5. Use the following guidelines to decide which strategy to pursue:
■ If the economy is strong and your company is low risk: Pursue Strategy A almost exclusively but continue to stay in touch with what’s going on in the job market. If
the economy is weak but the company seems to be low risk, pursue both strategies with equal energy.
■ If the economy is strong but the company is high risk, pursue both strategies with equal energy.
■ If the economy is weak and the risk is high, make Strategy B your first priority but do not neglect Strategy A, especially with respect to job skills. If you do change jobs, you will still need those as well. Don’t be afraid of what your employer might think or say about any job-search activities. Make it clear that you
always stay in touch with the job market no matter what,and if you have no intention of leaving, say so.
The job cuts of 2002 were unusual for two reasons: (1) they took place when the economy was supposedly “recovering” and (2) they affected almost everyone in equal proportion—regardless of ethnic group, origin, gender, profession, job status,or income level. The same will probably be true in the future as well. To protect your job, follow these steps:
Step 1. Check the financial prospects of your company. If its shares are listed on a stock exchange, you can get a rating on the stock by checking with an independent rating agency. If you feel you can’t afford to spend a few dollars for the rating, you can also get a free risk rating from Risk Metrics (212-981-7475 or www.riskgrades.com).
Step 2. If your employer does not have shares listed on an exchange, ask for the latest financial statement. If your employer says it is confidential, you can acquire an independent report from Dun & Bradstreet (www.dnb.com).
Step 3. If your company has a weak risk rating or a poor report from Dun & Bradstreet, it’s not a good sign. It might do OK in good times, but your job—and possibly the entire company—may be vulnerable in bad times.
Step 4. Needless to say, to secure your income, there are two strategies you can follow:
Strategy A. Do your utmost to make yourself a valuable employee. Seek company-sponsored opportunities for learning new job skills. And even if none are available,
allocate at least an hour per day of your spare time to learn skills of value to the firm. With the Internet, you’d be amazed at how much you can learn for free or at
a very low cost. And if you do not have access to the Internet from home, free access is available at most public libraries. The librarian should be able to give you some excellent tips on the latest, best sites.
Strategy B. Do your utmost to continually stay on top of the job market. Visit www.monster.com and similar sites to take advantage of a wealth of free information on the most marketable job skills, tips on how to get a job, and updates on what’s going on in various industries. Also use these sites to keep your résumé posted on the Web as much as possible.
Step 5. Use the following guidelines to decide which strategy to pursue:
■ If the economy is strong and your company is low risk: Pursue Strategy A almost exclusively but continue to stay in touch with what’s going on in the job market. If
the economy is weak but the company seems to be low risk, pursue both strategies with equal energy.
■ If the economy is strong but the company is high risk, pursue both strategies with equal energy.
■ If the economy is weak and the risk is high, make Strategy B your first priority but do not neglect Strategy A, especially with respect to job skills. If you do change jobs, you will still need those as well. Don’t be afraid of what your employer might think or say about any job-search activities. Make it clear that you
always stay in touch with the job market no matter what,and if you have no intention of leaving, say so.
HOW TO REDUCE DEBTS IN BAD TIMES
HOW TO REDUCE DEBTS IN BAD TIMES
Not all debt is bad. But it’s well known that debt can be a financial drug that is highly addictive. Yet banks mail tens of millions of unsolicited credit cards to American households every year, effectively putting free samples of this potential
narcotic into the hands of nearly everyone except the homeless. Mortgage companies make millions of unsolicited phone calls offering their “low-rate” mortgages. And even the Federal Reserve chairman himself, in testimony before Congress, urged Americans to spend and borrow more. The consequences are mind-boggling: The most personal bankruptcies in history. Countless divorces attributed to, or aggravated by, debt troubles. Many suicides. And that’s in relatively good times! In bad times, it’s worse. If your debt is already feeling burdensome, any loss in income that you may suffer can push you over the brink. And even if you feel your debt is currently manageable, a decline in the economy can suddenly make any debts loom far larger. Deflation (falling prices and incomes) can be especially painful: It makes all debts much harder to pay. If bad times or deflation strike your household, you may find yourself making only minimum payments on your credit card. You may notice that the balance of your checking account is running low—or running down completely—before the end of each month, and you’re drawing into savings to cover the shortfall. You could find yourself filling out applications for extra loans (more debt!) or borrowing from your retirement fund or life insurance policy. Act quickly to prevent these problems. If they are already happening, act even more quickly!If you have significant debts right now, you could be sleepwalking toward bankruptcy.Is bankruptcy an easy way out? No. It can be a lot tougher than you think. And if bankruptcy reform laws are enacted, tougher still. So if there ever was a time to eliminate your debt, this is it. Follow these steps:
Step 1: Declare your own personal war on debt. If debt has the potential to disrupt your life and cause your family serious grief, we assure you it is not your friend.
Focus your mental energy on reducing it.
Step 2: Attack your credit cards first. Get a pair of scissors. Put the scissors on your dining room table. Collect all credit cards in the household, including your own, your spouse’s, and those of anyone else for whom you’re financially responsible. Put them on the table too. Next, delight in that crisp “snip-snip-snip” sound as you cut them all in half. Enjoy the satisfaction of gathering them all together with one, clean sweeping motion of the hand. Watch with glee as they tumble neatly into the wastebasket.
Step 3: Attack your credit card statements next. Gather every last statement you have. If you don’t have all of them, don’t fret. You certainly will by the end of the
month. On the statement, find the annual percentage rate (APR). At the top of each statement, write down the APR in large numbers. Then, sort the statements with the largest APR at the top, the lowest at the bottom.
Step 4: Add up your minimum monthly payments. Let’s say it comes to $200. Isn’t it enough to just pay the minimum? No! Credit card companies deliberately require
very, very low minimum payments. Their agenda is to let you pile up as much debt as possible so they can earn as much interest as possible. How long would it take you to
pay off a credit card with minimum monthly payments alone? It’s a joke. Even with all your credit cards now in the trash, if you owe $2,000 on a 17 percent card, it could take you 24 years and cost you $979 in interest alone (on top of the $1,000 principal). So minimum payments are definitely not the way to go.
Step 5: Figure out how much you can pay over and above the total of all the minimum payments. Try to pay at least triple your minimum. So if your total is $200, that means your goal should be to squeeze at least another $600 out of your budget each month.
Step 6: Pay off the worst ones first! Use 100 percent of the extra $600 to pay off the credit card with the highest interest rate. If two or more cards have the same or
almost the same interest rate, send the extra $600 to the one that has the highest balance.
Step 7: Consider using your savings to get out of debt. The rate you’re paying is probably close to 10 times higher than the rate you’re earning! Not exactly a good deal.
Step 8: Avoid new credit cards. Period. Once you’ve kicked the credit card habit, don’t go back. If you need the convenience of a card, get a debit card. But ask your
bank to give you a true, pure debit card—not one that comes with a built-in credit card feature. If new ones come in the mail, trash them immediately.
Step 9: Start paying down any other personal loans you may have. If you’ve been able to get along with $600 less per month in spending money until now, and if your
circumstances don’t change, you should be able to stick with it. Use it to pay down any other personal loans you may have.
Step 10: Pay down your mortgage. Most people don’t realize that all you have to do is to write a larger check than normal, put it in the business reply envelope, and
send it to the mortgage company. They will automatically deduct the extra amount from your principal. So, continuing with the earlier example, if your regular mortgage payment is $1,000, write the mortgage company a check for $1,600 every month. You’d be surprised how much more quickly your mortgage will be paid off.
Not all debt is bad. But it’s well known that debt can be a financial drug that is highly addictive. Yet banks mail tens of millions of unsolicited credit cards to American households every year, effectively putting free samples of this potential
narcotic into the hands of nearly everyone except the homeless. Mortgage companies make millions of unsolicited phone calls offering their “low-rate” mortgages. And even the Federal Reserve chairman himself, in testimony before Congress, urged Americans to spend and borrow more. The consequences are mind-boggling: The most personal bankruptcies in history. Countless divorces attributed to, or aggravated by, debt troubles. Many suicides. And that’s in relatively good times! In bad times, it’s worse. If your debt is already feeling burdensome, any loss in income that you may suffer can push you over the brink. And even if you feel your debt is currently manageable, a decline in the economy can suddenly make any debts loom far larger. Deflation (falling prices and incomes) can be especially painful: It makes all debts much harder to pay. If bad times or deflation strike your household, you may find yourself making only minimum payments on your credit card. You may notice that the balance of your checking account is running low—or running down completely—before the end of each month, and you’re drawing into savings to cover the shortfall. You could find yourself filling out applications for extra loans (more debt!) or borrowing from your retirement fund or life insurance policy. Act quickly to prevent these problems. If they are already happening, act even more quickly!If you have significant debts right now, you could be sleepwalking toward bankruptcy.Is bankruptcy an easy way out? No. It can be a lot tougher than you think. And if bankruptcy reform laws are enacted, tougher still. So if there ever was a time to eliminate your debt, this is it. Follow these steps:
Step 1: Declare your own personal war on debt. If debt has the potential to disrupt your life and cause your family serious grief, we assure you it is not your friend.
Focus your mental energy on reducing it.
Step 2: Attack your credit cards first. Get a pair of scissors. Put the scissors on your dining room table. Collect all credit cards in the household, including your own, your spouse’s, and those of anyone else for whom you’re financially responsible. Put them on the table too. Next, delight in that crisp “snip-snip-snip” sound as you cut them all in half. Enjoy the satisfaction of gathering them all together with one, clean sweeping motion of the hand. Watch with glee as they tumble neatly into the wastebasket.
Step 3: Attack your credit card statements next. Gather every last statement you have. If you don’t have all of them, don’t fret. You certainly will by the end of the
month. On the statement, find the annual percentage rate (APR). At the top of each statement, write down the APR in large numbers. Then, sort the statements with the largest APR at the top, the lowest at the bottom.
Step 4: Add up your minimum monthly payments. Let’s say it comes to $200. Isn’t it enough to just pay the minimum? No! Credit card companies deliberately require
very, very low minimum payments. Their agenda is to let you pile up as much debt as possible so they can earn as much interest as possible. How long would it take you to
pay off a credit card with minimum monthly payments alone? It’s a joke. Even with all your credit cards now in the trash, if you owe $2,000 on a 17 percent card, it could take you 24 years and cost you $979 in interest alone (on top of the $1,000 principal). So minimum payments are definitely not the way to go.
Step 5: Figure out how much you can pay over and above the total of all the minimum payments. Try to pay at least triple your minimum. So if your total is $200, that means your goal should be to squeeze at least another $600 out of your budget each month.
Step 6: Pay off the worst ones first! Use 100 percent of the extra $600 to pay off the credit card with the highest interest rate. If two or more cards have the same or
almost the same interest rate, send the extra $600 to the one that has the highest balance.
Step 7: Consider using your savings to get out of debt. The rate you’re paying is probably close to 10 times higher than the rate you’re earning! Not exactly a good deal.
Step 8: Avoid new credit cards. Period. Once you’ve kicked the credit card habit, don’t go back. If you need the convenience of a card, get a debit card. But ask your
bank to give you a true, pure debit card—not one that comes with a built-in credit card feature. If new ones come in the mail, trash them immediately.
Step 9: Start paying down any other personal loans you may have. If you’ve been able to get along with $600 less per month in spending money until now, and if your
circumstances don’t change, you should be able to stick with it. Use it to pay down any other personal loans you may have.
Step 10: Pay down your mortgage. Most people don’t realize that all you have to do is to write a larger check than normal, put it in the business reply envelope, and
send it to the mortgage company. They will automatically deduct the extra amount from your principal. So, continuing with the earlier example, if your regular mortgage payment is $1,000, write the mortgage company a check for $1,600 every month. You’d be surprised how much more quickly your mortgage will be paid off.
Monday, December 15, 2008
9 Predictions For '09 In The Markets
Predictions: 9 For '09 In The Markets
Posted By:Patti Domm
Last year at this time, we happily said goodbye to 2007 with a naive hopefulness that 2008 would be better. The credit crisis would end, the economy would show its resilience, and stocks, well stocks, were supposed to go up. Instead, the credit crunch worsened, the government rescued (or didn't rescue) a series of financial institutions and stocks hit an 11-year low.
So much for year-end prognostications. It only makes sense to turn up the gloom factor on 2009 predictions, and hope for the best.
1. Manic Markets
Volatility in the stock market continues to be the norm as the New Year starts. But stocks could slip into a protracted, quiet period before ultimately moving slightly higher later in the year. Credit markets begin to heal but not before more market calamity and dislocations.
2. 'R' Word
Last year, nobody wanted to say it but it's now clear, the economy could be in full-blown recession for most of the year. Third quarter will hopefully be a turning point.
3. Jobs
Unemployment numbers get pretty bad. Look for a high of close to 10 percent by the end of the year, or greater depending on how the next fiscal stimulus package is dispersed.
4. Financial Institutions
More fail, more merge, and the government has a new group it helps in the first quarter. But by year end, look for some institutions try to shake loose their new government shareholder. Other will have the government riding along for a long time to come.
5. Housing
It's the starting point and end of the financial meltdown and unfortunately, it doesn't get better any time soon. By year end, it may start to seem like there's a faint light at the end of the tunnel, not a train. The first part of the year could be just ugly.
6. Washington
The government continues to find creative ways to jump into the inner workings of the financial markets and to save companies from themselves. By the spring, everyone agrees it's now a bad idea and there's been enough interference. In the first quarter, the government's role as shareholder starts to take shape, and we see just how much meddling regulators will do with the companies they oversee.
7. Foreign Affairs
Economic recovery and the functioning of the international banking system are dependant on the cooperation of world leaders and central banks. So far, there's been an unprecedented, far reaching level of cooperation. The challenge in 2009 will be how these forced allegiances perform under pressure. But because each country knows its survival depends on the whole planet thriving, they continue to work on a global solution.
8. Currency
The dollar holds its gains against the euro and other currencies. Risk aversion fades, pushing the yen higher.
9. Uncharted Territory
We hear that about a million and a half times when those who give out advice and make forecasts tell us they could not have predicted what the markets and economy would do next.
Posted By:Patti Domm
Last year at this time, we happily said goodbye to 2007 with a naive hopefulness that 2008 would be better. The credit crisis would end, the economy would show its resilience, and stocks, well stocks, were supposed to go up. Instead, the credit crunch worsened, the government rescued (or didn't rescue) a series of financial institutions and stocks hit an 11-year low.
So much for year-end prognostications. It only makes sense to turn up the gloom factor on 2009 predictions, and hope for the best.
1. Manic Markets
Volatility in the stock market continues to be the norm as the New Year starts. But stocks could slip into a protracted, quiet period before ultimately moving slightly higher later in the year. Credit markets begin to heal but not before more market calamity and dislocations.
2. 'R' Word
Last year, nobody wanted to say it but it's now clear, the economy could be in full-blown recession for most of the year. Third quarter will hopefully be a turning point.
3. Jobs
Unemployment numbers get pretty bad. Look for a high of close to 10 percent by the end of the year, or greater depending on how the next fiscal stimulus package is dispersed.
4. Financial Institutions
More fail, more merge, and the government has a new group it helps in the first quarter. But by year end, look for some institutions try to shake loose their new government shareholder. Other will have the government riding along for a long time to come.
5. Housing
It's the starting point and end of the financial meltdown and unfortunately, it doesn't get better any time soon. By year end, it may start to seem like there's a faint light at the end of the tunnel, not a train. The first part of the year could be just ugly.
6. Washington
The government continues to find creative ways to jump into the inner workings of the financial markets and to save companies from themselves. By the spring, everyone agrees it's now a bad idea and there's been enough interference. In the first quarter, the government's role as shareholder starts to take shape, and we see just how much meddling regulators will do with the companies they oversee.
7. Foreign Affairs
Economic recovery and the functioning of the international banking system are dependant on the cooperation of world leaders and central banks. So far, there's been an unprecedented, far reaching level of cooperation. The challenge in 2009 will be how these forced allegiances perform under pressure. But because each country knows its survival depends on the whole planet thriving, they continue to work on a global solution.
8. Currency
The dollar holds its gains against the euro and other currencies. Risk aversion fades, pushing the yen higher.
9. Uncharted Territory
We hear that about a million and a half times when those who give out advice and make forecasts tell us they could not have predicted what the markets and economy would do next.
Tuesday, December 9, 2008
Why Buffett's Buying Today
In the midst of economic chaos, Warren Buffett recently made a bold prediction. He said that now is the time to buy American stocks.
Of course, this call seems utterly insane. Banks are failing, the credit markets are deadlocked, unemployment is skyrocketing, and there's likely to be terrible news for months.
On the other hand, this is Warren Buffett, and he's made these sorts of predictions before.
1974: Stagflation
The years 1973 and 1974 were two very bad ones for the market. OPEC had started flexing its muscles, causing oil to quadruple. This resulted in a long recession, with inflation spiking to 12.3% in 1974, while real GDP growth fell by 0.5%. America experienced stagflation -- the ugly combination of a recession and high inflation rates -- and people were terrified. The situation was even worse in the United Kingdom, where the government was bailing out banks after real estate crashed. Over those two years, the S&P 500 plunged by 42%.
It was then, on Nov. 1, 1974, at the height of the pessimism, that Buffett made his first well-publicized bullish market call. He noted that he was well aware that the world was in a mess, but that stocks were simply too cheap. "If you're only worried about corporate profits, panic or depression, these things don't bother me at these prices."
To be totally clear, Buffett made one of the most direct predictions of his entire career: "Now is the time to invest and get rich." Buffett himself was buying shares of The Washington Post (NYSE: WPO) and advertising agency Interpublic (NYSE: IPG).
It worked out pretty well for him. The market jumped 32% in 1975, and another 19% the next year. Even today, the Dow Jones Industrial Average's 38% gain in 1975 stands up as its biggest increase since 1955.
1979: An oil crisis
That excellent performance was followed by two poor years. Once again, we were experiencing double-digit inflation and falling GDP growth. Again, we were going through an oil crisis, this one coming in the wake of the Iranian Revolution. As a result, when Buffett made his next call on Aug. 6, 1979, the Dow Jones Average was actually trading lower than it was at the end of 1975.
This time, Buffett noted that stocks were far more attractive than bonds. He believed that pension managers, who were piling into bonds yielding 9.5%, were investing using the rearview mirror. They were avoiding the equities that had recently lost them money. But Buffett recognized that the underlying businesses were actually performing well. A combination of falling stock prices and improving business fundamentals made stocks an attractive investment.
Buffett figured that stocks were probably offering long-term returns of 13% or better. He bought oil producer Hess (NYSE: HES), GEICO, and General Foods, which later became part of Kraft (NYSE: KFT).
This time, Buffett's timing wasn't perfect -- the S&P 500 fell a bit more over the next few months. But his long-term prediction was spot-on. During the 1980s, the S&P 500 rose 13% annually before dividends.
1999: The Internet bubble
In November 1999, during the height of the Internet bubble, Buffett made his only bearish call. At the time, the market was in a speculative fervor, with Internet stocks showing huge price increases seemingly every day. In the five years between 1995 and 1999, the S&P 500 tripled, with compound annual returns of 26%. Many considered Buffett a relic for refusing to buy into the technology boom.
Buffett, however, noted that, because of a combination of cheap initial valuations and falling interest rates, stocks had achieved unprecedented annual returns of 19% over a 17-year period. These results made investors unreasonably optimistic. New investors were expecting 10-year annual returns of 22.6%, while even experienced investors predicted 12.9%. But the huge boom was only supported by modest GDP growth, and therefore wasn't sustainable. So, Buffett expected about 4% real returns.
He continued to hold Coca-Cola (NYSE: KO), Wells Fargo (NYSE: WFC), and M&T Bank (NYSE: MTB), though he noted in the 2004 annual report that he should have sold some of Berkshire Hathaway's overvalued holdings.
Buffett's bearish prediction proved optimistic. The market continued to rise for a few months, with the S&P 500 topping out 9% above where it was when Buffett made the call. But that was followed by a crash. Since his call, the S&P 500 has dropped by 39%, for average annual losses of about 5%, well below Buffett's estimates.
The Foolish bottom line
The common theme of all these predictions is that Buffett didn't care about short-term fears. He wasn't worried about stagflation in the 1970s, and he didn't buy into the unrealistic optimism of the late 1990s. Instead, he rationally valued stocks, and made the right long-term calls. His biggest mistake was the 4% number he threw out in 1999 -- long-term returns have been much worse than his bearish prediction.
But that prediction was too optimistic partly because stocks are so unreasonably cheap right now. And that's why Buffett's buying today.
Of course, this call seems utterly insane. Banks are failing, the credit markets are deadlocked, unemployment is skyrocketing, and there's likely to be terrible news for months.
On the other hand, this is Warren Buffett, and he's made these sorts of predictions before.
1974: Stagflation
The years 1973 and 1974 were two very bad ones for the market. OPEC had started flexing its muscles, causing oil to quadruple. This resulted in a long recession, with inflation spiking to 12.3% in 1974, while real GDP growth fell by 0.5%. America experienced stagflation -- the ugly combination of a recession and high inflation rates -- and people were terrified. The situation was even worse in the United Kingdom, where the government was bailing out banks after real estate crashed. Over those two years, the S&P 500 plunged by 42%.
It was then, on Nov. 1, 1974, at the height of the pessimism, that Buffett made his first well-publicized bullish market call. He noted that he was well aware that the world was in a mess, but that stocks were simply too cheap. "If you're only worried about corporate profits, panic or depression, these things don't bother me at these prices."
To be totally clear, Buffett made one of the most direct predictions of his entire career: "Now is the time to invest and get rich." Buffett himself was buying shares of The Washington Post (NYSE: WPO) and advertising agency Interpublic (NYSE: IPG).
It worked out pretty well for him. The market jumped 32% in 1975, and another 19% the next year. Even today, the Dow Jones Industrial Average's 38% gain in 1975 stands up as its biggest increase since 1955.
1979: An oil crisis
That excellent performance was followed by two poor years. Once again, we were experiencing double-digit inflation and falling GDP growth. Again, we were going through an oil crisis, this one coming in the wake of the Iranian Revolution. As a result, when Buffett made his next call on Aug. 6, 1979, the Dow Jones Average was actually trading lower than it was at the end of 1975.
This time, Buffett noted that stocks were far more attractive than bonds. He believed that pension managers, who were piling into bonds yielding 9.5%, were investing using the rearview mirror. They were avoiding the equities that had recently lost them money. But Buffett recognized that the underlying businesses were actually performing well. A combination of falling stock prices and improving business fundamentals made stocks an attractive investment.
Buffett figured that stocks were probably offering long-term returns of 13% or better. He bought oil producer Hess (NYSE: HES), GEICO, and General Foods, which later became part of Kraft (NYSE: KFT).
This time, Buffett's timing wasn't perfect -- the S&P 500 fell a bit more over the next few months. But his long-term prediction was spot-on. During the 1980s, the S&P 500 rose 13% annually before dividends.
1999: The Internet bubble
In November 1999, during the height of the Internet bubble, Buffett made his only bearish call. At the time, the market was in a speculative fervor, with Internet stocks showing huge price increases seemingly every day. In the five years between 1995 and 1999, the S&P 500 tripled, with compound annual returns of 26%. Many considered Buffett a relic for refusing to buy into the technology boom.
Buffett, however, noted that, because of a combination of cheap initial valuations and falling interest rates, stocks had achieved unprecedented annual returns of 19% over a 17-year period. These results made investors unreasonably optimistic. New investors were expecting 10-year annual returns of 22.6%, while even experienced investors predicted 12.9%. But the huge boom was only supported by modest GDP growth, and therefore wasn't sustainable. So, Buffett expected about 4% real returns.
He continued to hold Coca-Cola (NYSE: KO), Wells Fargo (NYSE: WFC), and M&T Bank (NYSE: MTB), though he noted in the 2004 annual report that he should have sold some of Berkshire Hathaway's overvalued holdings.
Buffett's bearish prediction proved optimistic. The market continued to rise for a few months, with the S&P 500 topping out 9% above where it was when Buffett made the call. But that was followed by a crash. Since his call, the S&P 500 has dropped by 39%, for average annual losses of about 5%, well below Buffett's estimates.
The Foolish bottom line
The common theme of all these predictions is that Buffett didn't care about short-term fears. He wasn't worried about stagflation in the 1970s, and he didn't buy into the unrealistic optimism of the late 1990s. Instead, he rationally valued stocks, and made the right long-term calls. His biggest mistake was the 4% number he threw out in 1999 -- long-term returns have been much worse than his bearish prediction.
But that prediction was too optimistic partly because stocks are so unreasonably cheap right now. And that's why Buffett's buying today.
Saturday, December 6, 2008
7 product that are getting cheaper
Your financial ship is taking on water from all sides: a plunging stock market, alarming spikes in food costs and a home value that's headed in the wrong direction. Now, Congress is enlisting your help to bail out Wall Street as well.
Ready for some good news?
Preposterous though it may seem, we have identified seven islands of relief in this dark sea of economic uncertainty.
That's right -- seven categories of consumer goods and services in which prices have actually declined over the past decade.
The good news comes from the Bureau of Labor Statistics' Consumer Price Index, or CPI. The Federal Trade Commission coordinates with the Bureau of Labor Statistics, or BLS, to make sure the CPI reflects an apples-to-apples value comparison before adjusting for inflation.
An improvement in the quality of a product over time is an important factor in this calculation.
"When they examine, they try to correct for differences in the quality of products," says Tom Kelly, who used to work for the FTC and is now director of the Center for Business and Economic Research at Baylor University in Waco, Texas.
"So when you make comparisons, you're comparing two similar-quality products. If the price remains the same and the quality goes up, that effectively reduces the price."
Following are seven categories of goods and services that are comparatively cheaper today than they were 10 years ago. All figures are based on a BLS comparison of like products and services from August 1998 and August 2008.
Items That Have Grown Cheaper
1. Phone bargains: Can you hear me now?
Motormouths rejoice: The price of wireless telephone services dropped 31.6 percent during the past decade, while the price of long-distance telephone calls fell 23.1 percent.
Why the cell phone bargains?
"Cellular telephone service was a relatively new item 10 years ago," says Dan Ginsburg, BLS supervisory economist for the CPI services section. "Usually, items that come in with new technology start off higher priced, but as sophistication in delivering the service becomes greater and competing companies develop more high-tech solutions, the costs keep coming down. Competition helps keep the prices low."
You can thank competition for the long-distance savings, too.
Ginsburg credits the 1983 deregulation of telephone services that resulted in the "Baby Bells" for reducing the cost of long-distance calls.
"As competition crept into the market, it became much less expensive with newer technology to make long-distance calls, so the prices just came way down," he says. "Suddenly, the Sprints and MCIs and other companies were eligible for long-distance service. It worked the way they thought it would."
2. Electronics: Applause, applause
It's hardly news that the prices of personal electronics have dropped to what would have been garage-sale prices a decade ago. This is true of televisions (down 77.9 percent); computers (down 88.3 percent); audio equipment (down 39.3 percent); and videocassettes, video discs and other media, including rentals (down 20.4 percent).
"Televisions and audio equipment have benefited from technological change," Ginsburg says. "It became much less expensive to manufacture TV sets. With the advent of high-definition TV in more recent years, older televisions that couldn't capture high-definition TV became less valuable and the prices dropped, even though they were still being manufactured."
Increased competition and cheaper labor costs associated with overseas outsourcing played a big role in price declines. These factors, combined with new technology, helped lower the prices of other recreational electronics, including photography (down 19.3 percent) and musical instruments (down 4.1 percent).
"The switch from conventional film to electronic capturing of pictures, moving into an electronic rather than a chemical-based methodology, apparently had big savings," Ginsburg says.
What about those bargain-basement Fender Stratocasters?
"That's been affected a lot by competition," Kelly says. "Particularly, you're getting more standardized products like guitars, which are made in China and other countries."
3. Footwear: These boots were made for savings
The recent "Sex and the City" movie would have us think that every woman's closet is stuffed to overflowing with Manolo Blahnik and Jimmy Choo shoes.
Not so, says BLS apparel economist Nicole Shepler.
"I don't have any hard-and-fast data on that, but that is a very small part of what we price overall," she says. "So, I think that doesn't have much of an impact."
In fact, shoe prices have declined by 3.9 percent, thanks in large part to lower-cost foreign imports and the growth of discount outlets and big-box stores.
"You still have $200 Nikes," Shepler admits. "But I would hypothesize that that may be one of the reasons why footwear has not declined as much as some of the other clothing areas."
4. New vehicles: More features, fewer buyers
Kelly isn't afraid to state the obvious: "People are not buying cars."
Reduced demand tends to lower prices, as witnessed by the 6.6 percent drop in the price of new cars and trucks over the past decade.
Ginsburg says the automotive industry has tried to hedge consumer disinterest by using less expensive materials and boosting the features: cup holders, seat warmers, DVD players, backup cameras and the like.
Because the Consumer Price Index takes functionality into consideration, the CPI's decline in the price of new cars and trucks may in part reflect that increase in features and options.
"Motor vehicles are a relatively mature industry," Ginsburg says. "As technology improvements are brought out, we usually quality-adjust for those because they have certain value for the consumer.
"If you look at the actual price-page of the vehicle today versus 10 years ago, today's Chevy Impala is probably quite a bit more expensive but it also has quite a bit more safety features and enhancements that are deemed desirable by motorists. If you remove those quality aspects, the price difference falls quite a bit."
5. Toys: Not all fun and games
The good news for parents is that the price of toys has declined 44.4 percent over the past decade.
The bad news? In some cases, quality may have been sacrificed for profit, as witnessed by recent lead-based toy scandals.
"Most of your toys have been outsourced to other countries where labor costs are lower," Kelly says.
On the bright side, Ginsburg says the declining cost of electronics has helped drive down the price of playthings.
"Toys, games, hobbies and playground equipment are down," Ginsburg says. "I would think that's due to outsourcing and moving toward electronic devices that have become very inexpensive to produce."
6. Apparel: Dress for less
We may be struggling to fill the gas tank or feed the family, but we can take some solace in the fact that the cost to clothe the family has dropped 11 percent during the past decade.
Shepler theorizes that as a society, we have shifted our measure of fashion away from clothing and toward more ostentatious displays of bling, such as plasma TVs and iPhones.
"In a sense, electronics has replaced clothing as the fashionable item," she says. "It's about having the latest iPod or toy instead of apparel as reflecting status.
"The demand for clothing has certainly fallen as more and more shoppers are looking to electronics as being the fashionable item."
Lower-cost foreign imports and volume buying by discount and big-box stores have helped lower price tags. This is particularly true for the cost of boys and girls clothing, which has dropped 23.3 percent and 18.6 percent in 10 years, respectively.
"Children's apparel certainly declined a bit more, likely due to more shoppers going to discounters," Shepler says. "Outlet and big-box stores didn't exist to this extent 10 years ago."
But Ginsburg warns that the quality of those garments may not measure up.
"The length of life of a garment may be a quality factor, but it's not measurable without being able to have someone wear the garment for six months, then wear an American-made equivalent for six months and see the differences between how they wear," he says.
7. Watches: Time to save big
You may not be able to buy time as easily in a slowing economy, but you certainly can tell time for less. The cost of a timepiece fell 6.2 percent in the last decade.
Shepler says for every Rolex, there are hundreds of thousands of Timex watches that account for the Consumer Price Index figure.
"Watches are an item where you do get a little bit of the high-end goods but it's more going to focus on what shoppers are actually buying, which is going to be more of the less-expensive items, and those are going to be bought more at discounters," she says.
In fact, the price of watches, especially with the widespread adoption of digital inner workings, has declined to such a degree that many of us consider them disposable.
"Rolexes haven't really caught on with everybody; they're still buying the throwaway watches -- planned obsolescence," she says. "We would have some of those higher-end watches, but it's certainly not going to make up the bulk of our sample."
The Downside
Kelly says these seven relative bargains may actually exceed their CPI-estimated savings due to the recent bumpy ride of the U.S. dollar.
"If you look at the dollar, for a long time it was falling fairly rapidly, causing some of these prices to hold up a little," he says. "Now, the dollar is stabilizing in terms of its rate of decreasing. If the dollar goes up in value, it makes foreign-made goods cheaper; in other words, it lowers the price of foreign currency so importers can buy those items cheaper."
However, there's a downside to falling prices as well, Kelly says.
"When prices are falling, people will postpone buying," he says. "So you don't necessarily want deflation; you want disinflation.
"If you start having prices going down -- as in the housing market right now where housing prices are collapsing -- people say, 'Why should I buy a house now? It's obviously a buyer's market, I'll just wait a few more months and get something even better.'"
Such prudence will likely characterize consumer behavior as the economy slows, world markets struggle to stabilize and the effects of the Wall Street bailout on Main Street become clearer, Kelly says.
"You'll find that even more of those people who have money to spend are going to sit back and wait on the big-ticket items," he says. "Those are durable items that they've already got in hand but maybe don't have the latest high-def, 52-inch version of.
They're going to live with the one they have for six more months to get something better."
Copyrighted, Bankrate.com. All rights reserved.
Taken From finance.yahoo.com
Ready for some good news?
Preposterous though it may seem, we have identified seven islands of relief in this dark sea of economic uncertainty.
That's right -- seven categories of consumer goods and services in which prices have actually declined over the past decade.
The good news comes from the Bureau of Labor Statistics' Consumer Price Index, or CPI. The Federal Trade Commission coordinates with the Bureau of Labor Statistics, or BLS, to make sure the CPI reflects an apples-to-apples value comparison before adjusting for inflation.
An improvement in the quality of a product over time is an important factor in this calculation.
"When they examine, they try to correct for differences in the quality of products," says Tom Kelly, who used to work for the FTC and is now director of the Center for Business and Economic Research at Baylor University in Waco, Texas.
"So when you make comparisons, you're comparing two similar-quality products. If the price remains the same and the quality goes up, that effectively reduces the price."
Following are seven categories of goods and services that are comparatively cheaper today than they were 10 years ago. All figures are based on a BLS comparison of like products and services from August 1998 and August 2008.
Items That Have Grown Cheaper
1. Phone bargains: Can you hear me now?
Motormouths rejoice: The price of wireless telephone services dropped 31.6 percent during the past decade, while the price of long-distance telephone calls fell 23.1 percent.
Why the cell phone bargains?
"Cellular telephone service was a relatively new item 10 years ago," says Dan Ginsburg, BLS supervisory economist for the CPI services section. "Usually, items that come in with new technology start off higher priced, but as sophistication in delivering the service becomes greater and competing companies develop more high-tech solutions, the costs keep coming down. Competition helps keep the prices low."
You can thank competition for the long-distance savings, too.
Ginsburg credits the 1983 deregulation of telephone services that resulted in the "Baby Bells" for reducing the cost of long-distance calls.
"As competition crept into the market, it became much less expensive with newer technology to make long-distance calls, so the prices just came way down," he says. "Suddenly, the Sprints and MCIs and other companies were eligible for long-distance service. It worked the way they thought it would."
2. Electronics: Applause, applause
It's hardly news that the prices of personal electronics have dropped to what would have been garage-sale prices a decade ago. This is true of televisions (down 77.9 percent); computers (down 88.3 percent); audio equipment (down 39.3 percent); and videocassettes, video discs and other media, including rentals (down 20.4 percent).
"Televisions and audio equipment have benefited from technological change," Ginsburg says. "It became much less expensive to manufacture TV sets. With the advent of high-definition TV in more recent years, older televisions that couldn't capture high-definition TV became less valuable and the prices dropped, even though they were still being manufactured."
Increased competition and cheaper labor costs associated with overseas outsourcing played a big role in price declines. These factors, combined with new technology, helped lower the prices of other recreational electronics, including photography (down 19.3 percent) and musical instruments (down 4.1 percent).
"The switch from conventional film to electronic capturing of pictures, moving into an electronic rather than a chemical-based methodology, apparently had big savings," Ginsburg says.
What about those bargain-basement Fender Stratocasters?
"That's been affected a lot by competition," Kelly says. "Particularly, you're getting more standardized products like guitars, which are made in China and other countries."
3. Footwear: These boots were made for savings
The recent "Sex and the City" movie would have us think that every woman's closet is stuffed to overflowing with Manolo Blahnik and Jimmy Choo shoes.
Not so, says BLS apparel economist Nicole Shepler.
"I don't have any hard-and-fast data on that, but that is a very small part of what we price overall," she says. "So, I think that doesn't have much of an impact."
In fact, shoe prices have declined by 3.9 percent, thanks in large part to lower-cost foreign imports and the growth of discount outlets and big-box stores.
"You still have $200 Nikes," Shepler admits. "But I would hypothesize that that may be one of the reasons why footwear has not declined as much as some of the other clothing areas."
4. New vehicles: More features, fewer buyers
Kelly isn't afraid to state the obvious: "People are not buying cars."
Reduced demand tends to lower prices, as witnessed by the 6.6 percent drop in the price of new cars and trucks over the past decade.
Ginsburg says the automotive industry has tried to hedge consumer disinterest by using less expensive materials and boosting the features: cup holders, seat warmers, DVD players, backup cameras and the like.
Because the Consumer Price Index takes functionality into consideration, the CPI's decline in the price of new cars and trucks may in part reflect that increase in features and options.
"Motor vehicles are a relatively mature industry," Ginsburg says. "As technology improvements are brought out, we usually quality-adjust for those because they have certain value for the consumer.
"If you look at the actual price-page of the vehicle today versus 10 years ago, today's Chevy Impala is probably quite a bit more expensive but it also has quite a bit more safety features and enhancements that are deemed desirable by motorists. If you remove those quality aspects, the price difference falls quite a bit."
5. Toys: Not all fun and games
The good news for parents is that the price of toys has declined 44.4 percent over the past decade.
The bad news? In some cases, quality may have been sacrificed for profit, as witnessed by recent lead-based toy scandals.
"Most of your toys have been outsourced to other countries where labor costs are lower," Kelly says.
On the bright side, Ginsburg says the declining cost of electronics has helped drive down the price of playthings.
"Toys, games, hobbies and playground equipment are down," Ginsburg says. "I would think that's due to outsourcing and moving toward electronic devices that have become very inexpensive to produce."
6. Apparel: Dress for less
We may be struggling to fill the gas tank or feed the family, but we can take some solace in the fact that the cost to clothe the family has dropped 11 percent during the past decade.
Shepler theorizes that as a society, we have shifted our measure of fashion away from clothing and toward more ostentatious displays of bling, such as plasma TVs and iPhones.
"In a sense, electronics has replaced clothing as the fashionable item," she says. "It's about having the latest iPod or toy instead of apparel as reflecting status.
"The demand for clothing has certainly fallen as more and more shoppers are looking to electronics as being the fashionable item."
Lower-cost foreign imports and volume buying by discount and big-box stores have helped lower price tags. This is particularly true for the cost of boys and girls clothing, which has dropped 23.3 percent and 18.6 percent in 10 years, respectively.
"Children's apparel certainly declined a bit more, likely due to more shoppers going to discounters," Shepler says. "Outlet and big-box stores didn't exist to this extent 10 years ago."
But Ginsburg warns that the quality of those garments may not measure up.
"The length of life of a garment may be a quality factor, but it's not measurable without being able to have someone wear the garment for six months, then wear an American-made equivalent for six months and see the differences between how they wear," he says.
7. Watches: Time to save big
You may not be able to buy time as easily in a slowing economy, but you certainly can tell time for less. The cost of a timepiece fell 6.2 percent in the last decade.
Shepler says for every Rolex, there are hundreds of thousands of Timex watches that account for the Consumer Price Index figure.
"Watches are an item where you do get a little bit of the high-end goods but it's more going to focus on what shoppers are actually buying, which is going to be more of the less-expensive items, and those are going to be bought more at discounters," she says.
In fact, the price of watches, especially with the widespread adoption of digital inner workings, has declined to such a degree that many of us consider them disposable.
"Rolexes haven't really caught on with everybody; they're still buying the throwaway watches -- planned obsolescence," she says. "We would have some of those higher-end watches, but it's certainly not going to make up the bulk of our sample."
The Downside
Kelly says these seven relative bargains may actually exceed their CPI-estimated savings due to the recent bumpy ride of the U.S. dollar.
"If you look at the dollar, for a long time it was falling fairly rapidly, causing some of these prices to hold up a little," he says. "Now, the dollar is stabilizing in terms of its rate of decreasing. If the dollar goes up in value, it makes foreign-made goods cheaper; in other words, it lowers the price of foreign currency so importers can buy those items cheaper."
However, there's a downside to falling prices as well, Kelly says.
"When prices are falling, people will postpone buying," he says. "So you don't necessarily want deflation; you want disinflation.
"If you start having prices going down -- as in the housing market right now where housing prices are collapsing -- people say, 'Why should I buy a house now? It's obviously a buyer's market, I'll just wait a few more months and get something even better.'"
Such prudence will likely characterize consumer behavior as the economy slows, world markets struggle to stabilize and the effects of the Wall Street bailout on Main Street become clearer, Kelly says.
"You'll find that even more of those people who have money to spend are going to sit back and wait on the big-ticket items," he says. "Those are durable items that they've already got in hand but maybe don't have the latest high-def, 52-inch version of.
They're going to live with the one they have for six more months to get something better."
Copyrighted, Bankrate.com. All rights reserved.
Taken From finance.yahoo.com
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