I found the article Using ETF's to Reduce Volatility on Bloomberg.com. It highlights the risks of investing a majority of your money in in the same industry as you work, leaving your livlihood and savings riding on the same thing. ETF issuers are hoping to capitalize on this by creating low volatility ETFs. Powershares launched one in May with Ishares, Russell and EGShares jumping on the bandwagon too.
The article claims the ETFs have achieved their goal.
" Standard & Poor’s back-tested the performance of its S&P 500 Low Volatility Index, which the PowerShares ETF tracks, to Jan. 1, 1991, and found that it was 24 percent less volatile than the S&P 500 and delivered a 9.6 percent annualized return through 2011. That beat the S&P 500’s 7.6 percent return."
I thought risky meant better returns?A 2007 study may help explain this seeming contradiction suggesting that money managers tend to overlook low volatility stocks and focus on stocks that perform well in bull markets. The attention drives these high volatility stocks up in price leaving the low volatility stocks underpriced.
But don't run out and pour all your money into these ETFs just yet, as with anything there are risks. The article mentions the likelihood of lower returns in a bull market, and oddly for people hoping to diversify, the sector concentration seen in these ETFs. For example the Powershares ETF is 31% utility stocks and 29% in consumer staples.

Six indicators for why investing in U.S. Treasuries is a guaranteed losing strategy

In an article from the website Seeking Alpha (found here), the author lays out six compelling reasons why he feels as though investing in U.S. Treasuries is an almost guaranteed losing strategy.

Between the Fed's insistence on keeping interest rates at extremely low levels for the near future, investors' demand for higher yields, and the six macroeconomic factors mentioned below, the author explains why investors should avoid this unattractive investment (especially longer-term bonds), and why prices will drop significantly in the near future:

1) The U.S. economy is growing faster than expected: with unemployment, consumer spending, housing starts, and other indicators improving, this negates one of the reasons for the Fed's continuing to pump up the money supply.

2) Rising demand for mortgages: as real estate activity trends up, mortgage rates will be driven up and attract investors away from Treasury bonds and into real estate products.

3) Rising overall inflation rates: as bad debts are paid off, the surplus in the money supply will increase spending and drive up prices and demand for goods.

4) The situation in Europe improving, staying the same, or simply not getting much worse: those investors who were fearful of the situation in Europe have already moved their money into U.S. Treasuries; and any sign that the situation is improving will cause many of these same investors to pull their money out of U.S. bonds and back into European bonds and other assets.

5) The Chinese currency appreciating against the U.S. dollar at a faster speed: if there is any indication that Chinese currency will appreciate against the dollar and will be allowed to be exchanged more freely, capital will flow at a rapid rate out of U.S. bonds and into Chinese assets.

6) The Fed running out of bullets: After the Fed is unable to continue its "operation twist" (or the policy is no longer justifiable), the number of daily bids for long-term U.S. Treasuries will decrease, lowering the demand for these securities.

In conclusion, the only scenario that the author sees in which Treasuries will increase in price is if there is a complete collapse in Europe and capital comes pouring in as more investors seek a safe haven.

Berkshire Hathaway annual report

81-year-old Buffett wrote Saturday in his annual letter to the shareholders of Berkshire Hathaway that the board of the company has selected candidate to be a successor of him as CEO, but the names are unveil. This is the biggest news in the annual report. Who will be his successor is still remain unknown. But hopefully the next Warren Buffet will lead the company back to success since the previous performance is not good as expected. 

Also, he talked about the investing. “The riskiness of an investment is not measured by beta, but rather by the probability--the reasoned probability--of that investment causing its owner a loss of purchasing-power over his contemplated holding period.”

I agree with him. In reality, when the beta is zero, it is still very risky. So beta is not a good measurement for risk.

Buffett divides the investing world into three categories. The first is fixed income securities, so-called “safe” assets. The second investment category is assets that don’t produce anything, like gold. The third category is investment in productive assets, such as businesses, farms, and real estate.

“I do not like currency- based investments.” They primarily hold U.S. Treasury bills, which might be the safest way for investing in this time. 

Think You're a Smart Investor? Check Your DNA

I ran across an interesting video in the Wall Street Journal's SmartMoney which talked about a recent Swedish study that showed that a person's investing decisions are influenced by their DNA. Jason Sweig, talks about the research which studied thousands of people and analyzed common investing mistakes. The results of the study showed that variation in the genetic make-up influenced around 25%-50% of a person's financial behavior. Sweig goes on to say that years of discipline may help individuals overcome any genetic predisposition of bad investing decisions and that ultimately it is really important to manage emotions while taking investing decisions.

http://www.smartmoney.com/video/asset/think-youre-a-smart-investor-check-your-dna/53EE673E-752E-491C-B307-720E7758B303/?link=SM_hp_middle_optStory

Using Leveraged Loans to Boost Yield in Muni Bond Fund

I found a short but interesting article on how JP Morgan uses the duration statistic when setting the strategy for their Tax Aware High Income Fund (article found here).

Because of people's demand for higher yields, they have lost their sensitivity to liquidity, opting to take higher duration and credit risk using longer-term municipal bonds. However, with rates poised to rise in the next few years, JP Morgan uses leveraged loans in the portfolio in order to offset some of this duration and credit risk. Leveraged loans have much shorter durations and use floating rates, so JP Morgan might allocate up to 20% of the portfolio to these assets. This helps to add a bit of yield without adding too much risk.

This article showed how investors chase yield and how managers meet that demand and use duration to construct a portfolio. Duration may be outdated as a measurement of risk due to modern technology, but this is a great example of how it is still a very useful tool for strategy.

I found an article at a site named, fittingly enough, www.investmentnews.com. The article talks about the now ideal conditions for stocks but investors pushing money into bonds.

Conditions are almost ideal for equity investors relative to all other investments,”

says CIO Keith Wirtz who laments that savers are not being rewarded.

The big takeaway from the article for me is this excerpt:

"Cash Return

Investors who kept money as cash have missed out. A balance of $10,000 would have earned $184.60 in interest since December 2008, based on the average monthly savings rate compiled by Bankrate.com. For Treasuries, the return was $1,644. U.S. equities generated $5,690 including dividends."

wow!

Mortgage bonds

Bonds Backed by Mortgages Regain Allure

http://dealbook.nytimes.com/2012/02/18/bonds-backed-by-mortgages-regain-allure/?hp

State and federal authorities have reached a $26 billion settlement with the big banks that is expected to provide some mortgage relief. And the Federal Reserve Bank of New York has been able to auction off billions of dollars of mortgage securities that it acquired as part of the financial crisis bailouts.

The annual default rate is about 7 percent, and of the homes sold out of foreclosure, investors take a 54 percent hit, according to data from Bloomberg. On average, about 5 percent of the homeowners refinanced their mortgages before they were due over the last 12 months.

That bond recently traded at nearly 70 cents on the dollar.

At that price, even if defaults and the losses increase, an investor can still make more than 5.4 percent, an analysis shows. In a rosier prediction, where defaults drop slightly and the losses on the sale of foreclosed homes stay flat, the bond returns nearly 8.7 percent.

With long-term interest rates close to zero, such returns are hard to resist — even for investors who were punished in the housing bust. The American International Group, whose mortgage securities were acquired by the New York Fed in its more than $100 billion bailout in 2008, has been buying back some of those bonds. And a former mortgage team from Lehman Brothers, which went bankrupt in 2008, formed One William Street, a hedge fund that manages more than $3 billion in assets.

Investing in Short Duration Bonds

In this video, Adam Bold founder of the Mutual Fund Store talks about the investing strategies in bonds which he thinks are the best for this times. Interest rates have been in historic lows and there appears to be no downside for them anymore. Due to this, it is expected that they will in the future go up. When interest rates go up, prices of existing bonds go down. As Adam explains, the purchase price for a CD that was bought with a 6% interest rate will be bought with a discount if the interest rate goes up to 8%. The impact of the discount is more significant with the amount of time left on that investment. Adam explains that in mutual funds there is a characteristic that should be the one investors view which is Duration. Duration takes into account the average maturity of bonds and the calls that are available for those bonds. He recommends investing in funds that have low duration, from 0 to 5 years. The value of this funds will fall less than high duration funds of 20 to 30 years, if interest rates go up.

Letter from Warren Buffet: Why Stocks are Safest in the Long Run

In a recent adaptation of a letter to his shareholders (found here), Warren Buffet explains why, in the long run, stocks should provide the best return while also having less risk.

He first gives his definition for the measurement of risk: the probability that an investment causes the investor a loss of purchasing power (rather than measuring risk using beta). He also restates what we talked about in class last week--that the riskiness of an asset is determined by the holding period of the investor. In other words, investments that are volatile in price fluctuations can be relatively safe if they provide an increase in purchasing power over the holding period, and conversely, nonfluctuating assets can be extremely risky.

His argument begins by giving reasons why he is against investing in fixed income, what he calls "currency-based" investments. He says even though they are marketed as "safe", they are actually the riskiest of assets. Because of their exposure to government policy and systemic risk (particularly the effects of inflation), he argues that the price of these investments is not worth the purchasing power risk that one must assume. He does say that there could be short-term opportunities to make gains based on market conditions, but for the most part, he only invests in short-term treasuries in order to provide liquidity.

Secondly, he argues against investing in "non-productive" assets (primarily gold). He says that in order to make a gain, the price must be driven up by an increased pool of buyers; but this demand is fueled not by the productivity of the asset, but rather by the fact that those people believe the demand will continue to grow. In the case of gold, people's fear of other assets has artificially increased the price. These bubbles must all burst, though.

Because of the shortfalls from the previous two categories, Buffet says that his preference is to invest long term in equities, or what he calls "productive assets" (farms, real estate, and businesses). He says that these assets are resistant to inflationary risks and require little new capital investment in order to remain productive. He says that because people will always exchange what they earn for what other people produce, no matter what the currency is based on, Berkshire Hathaway will continue to increase its ownership in productive businesses and real estate for long-term growth.

The New Bond Market

Last Class we discussed the bond market and how there are different components of bonds that can impact their value. There was an article in the Wall Street Journal last week which talked about the changes in the bond market and how investors are now playing it. Corporate bonds have been a much steadier investment option during the past years so investors who are looking for safety have been loading up on them. But according to this article, corporate bonds are getting less safe each day.

There has been a change in the way corporate bonds are trading which lead to ambiguous prices, more volatility and less differentiation between bonds. Due to this it is important that investors understand how the market is changing so they can make better investments.

One of the major changes in the markets is the declining role of banks which have historically been big corporate bond dealers. Due to new regulations, banks are being more selective about the bonds they hold. This has led to mutual funds and ETF´s to fill this void. Without the steady influence of banks the bond market is more vulnerable to swings due to investors buying or selling bonds. This leads to a bigger volatility in prices which means that gains can be high but losses can be really low.

Another factor that has impacted the market is the ambiguous high prices of bonds, which went up due to the recent round of Treasury purchases made by the Fed´s. One way to value investments is by looking at the difference between bond yields and treasury yields. With the artificially low rates of Treasury bonds right now, these comparisons may lead to misleading results.

The article has two recommendations for individual investors:

1. For those who can, stick to individual bonds: In this case, they recommend buying in blocks to avoid getting hit by commissions. They recommend getting them from different issuers for diversification. If they plan on holding on them until maturity they can buy cheaper illiquid bonds that fund managers avoid.
2. If investor’s can´t afford individual bonds: Funds and ETF´s are the only alternative. Here they most make the decision between more liquidity or less and more cash and less.

Source: http://online.wsj.com/article/SB10001424052970203315804577211103761796724.html

Treasuries Vs Preferred Stock

This article compares the yields of certain preferred stocks to treasuries, CD's and money markets. The verdict. according to the author and the various money managers she interviewed is that preferred stocks can give investors healthy returns compared to the anemic no risk options.

The money managers give a few examples of great returns for preferred stocks, for instance AMW-PB has a face value of $25 with a rate of 8% and was priced at $26.16 at the time of the articles writing, a yield of about 7.5% compared to a five year treasury yield of 0.8%.

So why doesn't everyone get some? Well, while the dividends are very likely to materialize in this environment of low interest rates the market price of the preferred shares is likely to decline with interest rate increases.
This article warns investors to be wary of preferred stocks naming, the non guaranteed dividend and various restrictions on preferred stock from company to company. This author recommends bonds as they are far less complicated.

Ying Wu

Update: This case had been brought back to the court yesterday.

A business woman Ying Wu, who was named China’s sixth richest woman in 2006, charged with financial fraud of 384 million Yuan (US$56 million) and sentenced to death on January 18, 2012 by Zhejiang Higher People’s Court. The court said Wu "brought huge losses to the nation and people, and should be severely punished."

The money was used for Wu's personal consumption and in paying back the loans and operation costs of her company, said the court.

Born and bred in a family of peasants in Dongyang city, Zhejiang, Wu started from scratch by opening a beauty salon in 1997 after dropping out of local vocational school. By 2006, she had become known around the nation for her Bense Group, which was worth 3.8 billion RMB (US$ 543 million). Her business empire included hotels, spas, real estates and investments.

How she became so rich was a secret. Ying raised capital through loan sharks and other "private" investors on the promise of high returns between May 2005 and February 2007, according to the Intermediate People's Court of Jinhua city.

She was first arrested in March 2007, charged with “illegal fundraising” of RMB 770 million (approximately USD 122 million). In December 18, 2009, the charge was changed to “financial fraud”,
This is not the first high profile financial fraud case that results in death penalty. The former vice mayors of Suzhou and Hangzhou were convicted of bribery, embezzlement and abuse of power and sentenced to death. However, the Chinese government has taken steps to reduce the number of crimes punishable by death.

Here is a link to Chinese Entrepreneur.  It has a detailed and deep article realted to this case.
http://en.iceo.com.cn/tts/?p=23

SEC Money Market Reform

The SEC is planning to unveil a two-part plan in an effort to protect money market funds in the event of future financial crises. The plan is supposed to prevent these funds from "breaking the buck" in case there is a similar run on investor money as there was after the Lehman collapse in 2008. It is important to stabilize these funds because many investors turn to the money market to provide a lower risk investment and liquidity. The volume of the current money market is about $2.7 trillion.

The first part of the proposal would require fund firms to maintain a certain level of reserve capital; the next part would restrict investors from taking out all of their money at once--a 30-day waiting period would be required before investors could withdraw the final 5% of their capital. These reforms would be put in place in order to protect investors from losses in a panic, but critics (mainly fund managers) say they limit the firms from being able to provide attractive returns.

The majority of investments made by these funds are short-term debt with relatively little risk; however, unlike regular bank deposits, money market funds are not guaranteed by the government. So with the looming crisis taking place in Europe, the SEC is taking major steps to mitigate risk as the degree of exposure to European banks could systemically affect the rest of the economy and cause another panic.

For more, read here and here

FE 823 Stock Picking Contest!

I thought it might be fun to do something a little different for my blog post this week.
A Challenge!!
I propose a contest- We're learning about investing, we're blogging about investing...we may as well see how good we are at investing too. FE 823 students, this is our chance to put into practice what we are learning. So let's go! Buy some facebook, sell some Google short Apple..or not, become the next virtual Warren Buffet
Hopefully everyone has already received the invite to the contest(I'm working on it), if not and you're interested just leave a comment with your email address and I'll add you to the fun.
The contest will be hosted at updown and hopefully we'll have some fun while making a ton of fake money!
The contest will run until April 24-Good Luck!

All about Starbucks and a song from Warren Buffett

http://online.wsj.com/article/SB10001424052970203920204577196831162473236.html?KEYWORDS=starbucks

Since the first Starbucks outlet on the Chinese mainland opened in Beijing 1999, Starbucks has become one of the most popular brands among Chinese white-collar workers aged between 25 and 40, surveys have shown.

Starbucks Corp's reported a quarterly profit that topped Wall Street's view after global economic worries failed to weaken demand for drinks and other products from the world's biggest coffee chain.    

Starbucks Fans in China Howl

Coffee Becomes a Status Item in Tea-Drinking Nation, but Price Increases Set Off a Storm

The Seattle-based coffee chain said that all coffee drinks prices would increase by two yuan, or about 32 U.S. cents. That bumps up the cost of a small latte—or "tall" latte, in Starbucks's lingo—to 27 yuan, or $4.20. A large mocha is now 34 yuan, or $5.40. The increases add to prices that are already higher than what similar coffee drinkers pay in the U.S.

China's coffee market, including fresh and instant, is booming. Sales climbed to 6.25 billion yuan in 2011, up 20% from a year earlier and 92% from 2006, according to market research firm Euromonitor International.

Starbucks in Beijing has maintained a solid annual sales growth. In Shanghai, the chain started to make a profit the second year after the first store opened in the city.

To be sure, coffee consumption in China is still tiny compared to other countries. On average, the Chinese consumer drinks three cups of coffee per year, according to data from Swiss food giant Nestlé SA.

Chairman Howard Schultz once said the country would soon become the firm's largest market outside of North America. Starbucks, which now has 550 stores in China, plans to have 1,500 by 2015.

P.S. China is expected to be a biggest potential market for Starbucks. As far as I can remember, when the first Starbucks opened in Beijing in 1999, hundreds of people rushed into the store basically just want to take a sip of Starbucks coffee. Chinese mostly drink tea. Part of those "Starbucks fan", which I thought, are fawn on Starbucks, not fans for coffee. 

Anyway, Happy Chinese New Year! Please listen to song --- From Warren Buffett

Investing in Emerging Markets

There are a high number of options for investing your money and they all vary highly, this makes it difficult to decide which option is the best. During my private equity class, I´ve heard a lot about PE firms investing in emerging markets and this week I came across an article which talked about investing in these markets. Emerging markets didn’t perform well last year; the MSCI which is an index of emerging market stocks was down 18%. However, this may represent an opportunity for investors to get into these markets since their prices are now down and the potential for an upside is higher. Investing in emerging markets can be attractive since they have had impressive long term growth on average. However, investors should be aware that these markets are highly volatile. One of the biggest reasons to invest in these markets is because even though the volatility is high, they bring diversity to portfolios. The prices in these investments tend to differ from the trends of more developed markets. These markets also tend to pay better dividends than other markets, which is also an incentive for investors. There are also differences between the different countries that make up the emerging markets. A sub-category of these investments are the frontier markets, such as Vietnam, Pakistan and Argentina. These markets are less developed than emerging markets. The risk in frontier markets is larger but the potential returns can also be greater. Ultimately it is up to investors to see how much risk they want to take in their portfolios, but investing in emerging and frontier markets appear to be a good alternative for investing. The article states that successful investment in these markets doesn’t tend to come from the long term, so it is very important to have good timing.

http://abcnews.go.com/Business/now-time-invest-emerging-markets/story?id=15488335#.TyxEi4GqGSp