5 years and a few days ago, Lehman brothers collapsed and so did the world stock markets short afterwards. This anniversary brings back bad memory to most of us, expect to fund managers ! Why? Simply because fund managers typically show 5 years of performance in their sales prospectus. So mutual funds no longer need to remind you that they lost huge amounts in the 2008 financial crash. The crash happened 5 years so it is now too old to show !

To show you how data from graphs can easily be presented in a misleading way, we had a look at public data from the Index S&P500, which by the way already outperforms most fund managers (read article HERE). When you look at the picture below you see a 5-years graph of the S&P 500 on Google finance. The graph shows a very clear upward trend in the index, with the exception of what happened exactly 5 years ago. But still, this graph already shows a fantastic return on investment if you had invested in the Stock Markets on Sept 26 2008.

Now let us take some perspective and look at a second graph, showing 10-year historic for the same index price. The new graph shows a completely different story: there was a massive downturn in 2008, and it took 6 years for the stock markets to recover from it !

The Chicago Board Options Exchange Market Volatility Index (aka VIX) is the most popular measure of the risk level. The reason is that it shows the current risk level perceived by the world biggest banks and investment companies, and these firms have thousands of highly-paid full-time analysts working on this so they should know what they are talking about.

Here is a little about the theory around this index: the S&P 500 volatility measures  the price variations the prices of the 500 biggest US companies over time. Not going too much into details, we can say that the option prices on the S&P500 index increase due to the stock volatility according to the famous “Black-Scholes” formula. The VIX index is calculated by looking at the current market prices of S&P500 listed options, and by applying the “Black-Scholes” formula you deduct the theoretical volatility of the market as perceived by the world’s biggest option market makers. This is what is called the Implied Volatility.

It is very interesting because it tells you how afraid the World’s biggest investors actually are right now, which is why the VIX is often called “the Fear Index”.  Actually VIX is a much better indication of the risks in the markets than the media since the journalists, after all, are not large market investors and the press have a tendency to magnify some issues so it becomes difficult to put things into perspective when you simply inform yourself by reading the news..

As a rule of thumb the market acknowledges that there very little risk if the VIX is below 20%. Between 20% and 30% people start to worry and safe havens, such as gold and silver, become the preferred investments. Above 40%, there is a panic going on.

The graph below is taken from a public site (Yahoo finance). It tells us very simply that the VIX is now a little than 15%, which is extremely low. The "Fear Index" is pretty much at the lowest levels since one year before the Lehman crash.

The conclusion is very simple: the biggest market investors are now feeling very safe of the prices in the market. Actually today is as safe as can be for people to invest in the S&P 500!

I am a big fan of fund manager and Insead Professor Theo Vermaelen. In this article he scrutinizes the Social Responsibleinvestment, and explains you how socially responsible funds differ from the rest of the asset management industry. It talks about risk-adjusted returns and other good things, a must read if you are concerned about the environment and your investments.

Check here for the link to The Vermaelen's article.

Today's markets are being very chaotic. Lots of ups and downs. (see the Nikkei or $APPL if you are unsure). So the market is giving mitigated signals and nobdoy really knows if it is going up or down in the short term. Those who are say that they sure about how things will look like in 3-4 months from now are either fools or liars, actually it is a very good indicator to recognize charlatans!

In times like this it is good to re-read the classics. Chapters 8 and 20 from the Intelligent Investors are exceptional to give you an insight about how to plan your investments to buy only from growth companies and only if the price in the market is adequate for the value you get, these are a great course to make you understand that the quoted price in the market has nothing to do with the real value of your stocks. When you stick to the principles defined in those chapters actually, you do not care too much about the market ups & downs. 

It takes only 30min to read and it is a must read ! Or re-read!

For more info, click on the picture of the image, or go HERE.

A must see if you ever want to invest in stocks! 

If you studied economics, you probably remember your first course about "efficient markets". And then other courses where your teachers tell you that markets are pretty efficient and that so many investors are out there so that the price in the market is always the correct price based all informations available. Well this is wrong. Actually it is not only wrong, it is a BIG LIE. Many of the most profitable fund investors are actually living purely on exploiting market anomalies. Today we will talk about one specific corporate action and what the consequences of this event are for share prices: Share Repurchase.

When a company decides to distribute money to its investors it usually pays out dividends, but not always. An alternative to paying out a dividend is to actually repurchase some shares that are in the market. With a share repurchase the investors are turning in those shares for money distributed by the company. The effect of share repurchases is that the number of shares in circulation diminishes, so it can be interesting to do when the management wants to reshuffle the control structure in a company especially when they think that their company is undervalued by the market. Shareholders that do not sell their shares hold after the repurchase a larger percentage of the shares in the company, so the shareholders who keep their shares get a bigger decision power in a company which they think is undervalued.

What is interesting for us with shares repurchases is that the company does make a public offering about the tender price at which it will buy the shares. So you do know beforehand the price at which the shares can be sold on a future date. But it is funny enough that not all shares will be repurchased. In short the market overreacts to the repurchase offer and they always go too high in value just a few days before the repurchase. The shares then stay overpriced for a few days, leaving you the opportunity to sell them and earn a nice little gain. This pattern occurs every time when a share repurchase occur so you can exploit this mispricing and trade with nearly 100% guarantee that your deal will be in the money ! This is called an arbitrage opportunity. 

Two finance professors from INSEAD have actually defined a trading rule around this, and one of them, Theo Vermaelen, has been fairly successful as an investor using this strategy to trade in the market. 

Without going too much into details the trading rule that involves you buying shares six days prior to the expiration of the repurchase offer if the stock price is at least 3% below the tender price. Then you should tender those share (and then make 3% profit) or sell the shares than cannot be tendered on the market after the expiration of the tender offer, and then you also make a profit !
 
You can see more details about this trading strategy in the research article from Theo Vermaelen and Urs Peyer following the link here.

The P/E or “Price to Earnings ratio” is one of the most commonly used metrics for company valuation, at least on the online financial sites. It is basically obtained by taking the market Price of one share and dividing it with the company’s reported earnings per share from last year.

For instance if a company’s stock price is $80 and its reported earnings per share for last year is $8, then it has a P/E  of $80/$8 = 10. One way to look at it is that every year the company earns 1/10 of its price so if you buy its stock it will be paid back in 10 years from now thanks to the company earnings.

People tell you that if you compare the P/E of the firm with its peers, it gives a good indicator of whether the company is over or undervalued. For instance if a company is a US insurer and has a P/E of 7 when all other US insurers have a P/E of 10 it should tell you that your company is undervalued and that you should buy. Or people also tell you that for most industries a cash-cow type of company should typically have a P/E of 7-11, a growth firm a P/E of 15-40 and a start-up a P/E of higher than this and that if prices are not in this ranges you should buy/sell accordingly. Well think twice before you draw these conclusions! We are going to show you that the P/E ratio is something that you should definitely not trust. Not at all.

First the P/E does not take into account the inflation or depreciation of inventory: raw materials, components, equipment to be replaced, and even the goods sold by the company usually tend to have an increasing cost because of inflation, and this inflation can be very high at times. The earnings are usually based on old figures with regards to costs. So the Earnings in the P/E would need to be inflation-adjusted. But they are not. For instance the price of corn doubled in the US between May 2010 and May 2011. Such a steep price increase is extremely relevant if you are valuing a firm buying a lot of corn, such as a cattle producer but this will not appear in the P/E.

Second the P/E looks at last year’s performance to evaluate the future: the E in the P/E ratio is the earnings from last year. And you probably have noticed that we live in a world that is changing very quickly: the average phone sold today has more computing power than most laptops had 5 years ago, China’s GDP was multiplied by 4 in the last 10 years, facebook is not even 10 year old and already claims 1 billion users per month…. The list goes on. In such environment not many firms can claim that their earnings will for sure remain stable over time, and last year’s earning are nice to have but not really relevant at telling you what the company is going to perform in the future. Having a view at the firm’s future products, relative position in its industry, and long-term strategy is more interesting. And therefore it is wrong to use P/E for company valuation in our quickly changing world.

Third, and probably the most import, the P/E is based on the declared earnings from the company’s annual report, which is a highly unreliable figure: if you have studied a little financial accounting you understand that the accounting rules such as the GAAP (General Accepted Accounting Principles) actually do change from country to country so the definition of Earnings for a multinational depends on where they decide to consolidate their accounts. Moreover the US regulations alone are still vague enough so that the CFOs of companies have plenty of freedom to twist the numbers and report the earnings they feel like, at least as long as the company is not bankrupt. For instance if the company had a very good year the management can decide to artificially reduce the company earnings in the annual report. The CFO lowers the earnings so he can also lower the company tax bill. For instance, a very commonly used trick is to tell in the annual report that some of the customers will probably not pay what they owe the company, so the company already takes this into account as a loss.  But of course customers do pay during the following year! And the company can then declare the earnings with one year delay. I am not talking about illegal practices or fraud. These are common practices done all the time by most companies out there and which purely and simply discredit the P/E as a valuable valuation metric.

So all in all the P/E is really not useful at telling you which company to invest in. And this can actually be reflected by the disparity of the P/Es that you can see in the market even within a similar industry. For instance as of today the French insurer Axa has a P/E of 7.72 while its German competitor Allianz has a P/E of 9,7 does that mean that Axa is a firm undervalued compared to Allianz ? Well, not at all.

1- Open an account
The best way to start, we feel, is to open an account with one of the main online brokers in the market. You do not want to go for the cheapest one. If you pay with peanuts all you get is monkeys. And you want to start with a site that has easy-to-use straightforward tools. Press here for our lite of brokerage sites

2- Learn the tools
Go to the brokerage site's tutorial to get familiar with their tools. Some sites will even call you to propose an online, over-the-phone, demo. All the help you can get is good help.

3- Credit you account
Wire a limited amount of money. Invest no more than you are ready to lose, but too little money is not interesting as the trading commisions migh hit your profits. Between $200 and $1000 is good to start. 

4- Your first investment should be safe
And when you place you first bet. But do not buy a specific stock ! Buy an Index Tracker Exchange Traded Fund (ETF), like an Index Tracker that follows the S&P500. It is actually bought the same way as buying a stock but it is a much safer investment as your money is invested in 500 companies instead of 1. 

3 very serious and large companies have set Exchange Traded Funds (ETFs) that follow the movements of the S&P500:

• iShares S&P 500 Index (ETF)
• SPDR &S&P 500 ETF Trust
• VANGUARD FUNDS PLC VANGUARD S&P 500 ETF

5- Then you can start stock picking
When you feel familiar with your site and start to understand how things work, then it might be good to start really doing some stock picking. But to be interesting you need more money than $1000. 


So you credit your account with more money in your account before starting to pick your companies yourself. The reason is that you should invest in at least 6-7 companies, so that your risk is split. More companies mean less risk for your investment.