Friday, August 29, 2008

Dollar Cost averaging in today's market

Dear readers and investors,

People often ask me a few things which pertains to investing. One of them being , when is the bottom due or how do you know that it is not going to go down further. Variations of such questions pop up time after time as i am in the wealth management industry. The truth is i really don't know where the bottom and honestly i don't care. All i know is prices are dropping. Things ain't looking that great but it is a great time to pick up bargains.

To try to answer that question, let us look at something simple and logical. Dollar cost averaging. Takes time to make an impact on your portfolio but it sure makes heck of a lot of sense to me especially for investors who are used to committing huge lump sums of cash. Well firstly that's ridiculous because once markets dip, that lump sum falls in value. But dollar cost averaging involves reducing the average cost per unit. This strategy reduces your average cost and helps one to ride out volatility in the portfolio. In an up cycle, the reduced unit cost will work in one's favour.

Financial advisers are often money mis-managers just to quote Chieftain Capital's Mr Greenberg. They are solely driven by commissions and are judged by the amount of revenue they bring to the bank or financial institution. It is a pity that they are not judged by the quality of financial advice that they give and no financial adviser in his right frame of mind will tell you to dollar cost average. Let me paint you an example. John convinces you to buy 100,000 of unit trust/mutual funds instead of putting it into a dollar cost averaging program. A 100,000 dollars worth of unit trust sold would give him 5000 revenue dollars/points for him. Typically he has got to hit a 100000 revenue points in order to get some form of commission. And just to add this chap is running against a time frame of 3 months to hit his targets, sometimes depending on the institution, they have one month to hit their targets. Their job is to far exceed that target for commission is tiered and goes up exponentially at different tiers. So as you can see, when you as a customer tells him that you have 100,000 dollars to invest, no financial advisor in the right frame of mind is going to tell you to invest $5000/$1000 every time the markets dips by 5% or monthly. It just does not make sense for him and that's the problem with the financial industry anywhere around the world. It's ultimately his pocket that he is looking after and not yours. Now, just a comparison, if he did invest $5000 for you over the next 3 months, that would work out to 750 revenue points for him, a tiny drop in a pool of a 100,000 revenue points. Hope that you now see the drastic difference and this post is really meant to answer some of the questions that you folks post to me as readers.

Hence, one thing to learn would be, do not trust your financial adviser more than you trust yourself because the financial services industry is often more incompetent that you think it is. Do your own research and participate in an index fund if you will with a dollar cost averaging strategy to make your money work for you. This is my valued advice for all who are thinking of investing.

Better and better,

Let's profit from this recession

Dear readers,

its been a long hiatus for me and i apologise for that. These past few months has seen tumultuous times for global markets all around the world with the early ripples starting from the US and the subprime crisis. And honestly, i don't know or can tell how long or deep this probable recession is going to last and neither do the experts on cnbc no matter how opinionated they may seem. One thing is for sure, compared to 2 months ago, there are probably a lot more bargains around. Questions spinning in one's head include, how long, when is the trough or when should i buy all seem to try to do something impossible to achieve and that is to time the market. But dear investors, it is impossible to time the market. Let me give you an example of a company named washington post. Warren Buffet bought it when it was trading around a PER of 4X and it went lower after that. But Buffet took the opportunity to buy more. Great companies are available onsales right now and that has been evident with the dow at 11715 from a high of 14000. But still the down trend might have some way to go before it stabilises.

Now, reading some reports, it is said that an average span of recession from peak to trough actually last some 10 months while the longest span of recession can last 16months. If all is well, the down trending markets could end in 16 months. This is my interpretation of data compiled by the US Bureau of economic research. Correct me if i am wrong also but if it last beyond 16 months, it should be considered a depression. See below.

Now, if a recession lasts 16 months according to historical data from 1945, then any recession lasting more than 16 months would mean a depression. A depression would mean a period of low book values and declining activity within an economy. Are we heading towards a possible depression? Well, there could be a chance considering the deleveraging that is taking place in today's markets could depress values towards a level not seen in a long time. Well, i am not going to speculate at whether it is going to be a depression or not but what i am trying to do is to highlight the seriousness of today's falling markets with one advice. Let's face it. How many of us are Buffet like and have the ability to estimate accurately the range of intrinsic values of a company. Not many isn't it. Hence, let's all try to look at Ben Graham's approach, finding cash bargains and net-nets trading below two thirds of net current asset value cause we know that such companies thrived during the depression. After all, it is better to err on the side of caution. If you can't wait to get your hands on some of these stocks such as Wells Fargo, well do some bearing in mind that markets being irrationale as they are could beat the stocks down further. But if you do, do try to embark on a dollar cost averaging approach for cash is your number one weapon in today's markets. For more information or advise do email me regarding the nature of your portfolio and i will see how i can actually help.

Hence two takeways today:
1) Buy into tangible asset values
2) Perfom dollar cost averaging

Stay well. Stay Prudent and look out for great bargains.

Better and better,