November 23rd, 2009
11:48 AM GMT
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We’ve all heard the old tale that if you invested $10,000 in Microsoft when the company went public in 1986, today you’d be a multi-millionaire. We think back to when oil was trading at $30 a barrel, and ask ourselves why we didn’t get into the action. Or, look at the price of gold. Why didn’t I invest a bit just a few weeks back? We kick ourselves.

But actually making these investments is of course easier said than done. Because when we’re faced with investment decisions, it’s not that simple. People are comfortable with different levels of risk. And finding out where you stand within that spectrum can be challenging.

On this week’s Biz Clinic, we sampled a series of these tests designed to gauge your stomach for risk.

The following are some from a test put together by professor at Rutgers University:

In general, how would your best friend describe you as a risk taker?

  1. A real gambler
  2. Willing to take risks after completing adequate research
  3. Cautious
  4. A real risk avoider

You are on a TV game show and can choose one of the following. Which would you take?

  1. $1,000 in cash
  2. A 50% chance at winning $5,000
  3. A 25% chance at winning $10,000
  4. A 5% chance at winning $100,000

When you think of the word "risk" which of the following words comes to mind first?

  1. Loss
  2. Uncertainty
  3. Opportunity
  4. Thrill.

Take the full test if you want to get a clear picture of your appetite for risk.

While I was skeptical, the tests can be helpful. One independent consumer survey broke down a possible investment strategy for me. Another suggested a mix of aggressive mutual funds, with bonds. I was told I had a “moderate risk tolerance.”

They helped put my level of risk in perspective. And they got me thinking of another question you might ponder:

A Harvard-dropout has started a relatively new company that could revolutionize the way people use personal computers. You could make millions in the long run. But right now, he needs $10,000. Would you fork over the cash?

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Filed under: Biz ClinicFinancial markets


November 17th, 2009
03:00 AM GMT
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How do you find the right financial advice? First find the right financial adviser. CNN's Andrew Steven's reports.

In an special Web exclusive, an extended chat with John Gannon of the Financial Industry Regulatory Authority on sussing out the best financial adviser.

Filed under: Biz ClinicBusinessFinancial marketsInvestment


November 2nd, 2009
01:44 PM GMT
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We've all heard financial experts talk about "shorting" the market, and the role that "short-selling" arguably played in the global financial collapse. But is it really such an awful financial tool? And are U.S. regulators correct in cracking down on the industry?

And in a Web exclusive, Stephen Figlewski of New York University take a long look at the world of short-selling.

Filed under: Biz ClinicFinancial marketsInvestment


October 26th, 2009
03:15 PM GMT
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Hong Kong, China - As long as there are free markets and humans remain emotional creatures, there will always be financial crises.

So says renowned British historian Niall Ferguson. The Harvard University professor and I had a chance to meet in Hong Kong at a recent investors' conference. He shared his observations on the current economic crisis.

CNN: Is there anything unique about this recession?

Ferguson: This isn't a recession is the first point to make. It's a near depression. In fact, I am calling it the Slight Depression to distinguish it from the Great Depression of 1929 to 1933. And the unique thing is that we nearly repeated history. In other words we nearly repeated the Great Depression, but we avoided it with massive monetary and fiscal stimulus. So we are in new territory.

CNN: When does government intervention work?

Ferguson: We need to be very careful when we talk about government intervention. That covers a multitude of sins. There was a lot of government intervention in the Soviet Union and we know how that story ended. So we are talking very specifically here about two policies: one is the use of central bank money creating power to avoid a liquidity crisis that crunches the entire banking system. So intervention by the (U.S.) Federal Reserve beginning in 2007 and escalating in September of 2008 was primarily designed to avoid massive bank failures of the sort that made the Depression so serious in the early 1930s. And I think there is no question that we have learned from history and Ben Bernanke, as chairman of the Fed, has learned from history, that it's a good idea to avoid a generalized collapse of the banking system.

CNN: When does government intervention not work?

Ferguson: The other kind of government intervention, which is slightly more problematic, is the sort in which the government runs a large deficit in order to stimulate the economy by building roads and building bridges in order to get people back to work in the hope that in doing that, it will generate a recovery. This is the model developed by John Maynard Keynes back in the 1930s and it's been used by countries around the world to varying degrees. And to some extent, this has been effective. But the problem is, in the United States, you are adding a stimulus on top of an already huge structural deficit in the public finances, and the prospect of a trillion dollars of new borrowing every year for the decade ahead, that scares me and it should scare everybody.

CNN: There's been a backlash against the financial world, especially Wall Street. Have we seen the same level of fury after past crises and where does that vitriol lead?

Ferguson: It's not, by any means, the first time that people have felt furious of what they have seen going on in Wall Street: a financial speculative bubble that bursts and causes a recession which drives other people, ordinary folks out of jobs. The question is just how far this populous backlash is going to go in the United States and indeed around the world now. My suspicion is that it's got a ways to go. Each time an American loses his or her job, not surprisingly, he or she looks around and asks who's to blame for this. And when they see on Wall Street, the banks paying out million-dollar bonuses with what appears to be, and in some cases is, taxpayer money from the TARP fund, I am not at all surprised that people feel mad. And when they feel mad, they turn around and they say, 'How can I express this anger? Who can I vote for who is going to articulate my feelings of frustration?' And I wouldn't be at all surprised to see, as we approach the mid-term elections, more and more politicians, particularly Republicans, trying to articulate that sense of popular grievance.

What lessons have you learned from the current economic crisis? Tell us what your experiences are.



October 19th, 2009
05:11 AM GMT
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Sometimes I think if you want to be a serious investor, you shouldn't become a business journalist. Sure, you learn a lot about various industries and get insightful advice from experts at the top of their game. On the other hand, you know all too well how everything can go terribly awry.

Jim Rogers, the famed commodities investor and author of new book "A Gift to My Children: A Father's Lessons for Life and Investing," admitted to me that he is a horrible short-term investor.  However, he says you don't need to be a good trader to make money.

Here are his tips for anyone looking to invest in the current economic crisis:

1) Buy what you know. "You should only buy things that you yourself know a lot about - whether it's cars, sports, hairdressing, fashion, or whatever it is," he told me.  "Do some research, do some homework, and if you see something really dramatic changing that is cheap, buy it.  You are going to know about it long before I am, long before a broker on Wall Street is, and that is how you are going to make a lot of money. "

2) Don't be cocky. "Being overactive is usually a mistake," Rogers mused.  "It always leads to problems.  People don't like it.  They want to jump around all the time.  That's not the way to succeed as an investor."

3) Buy low, sell high. "It's as simple as that," he said.  "Nobody likes to hear it.  Now that is so simple and so easy, but you cannot believe how difficult it is to buy low and sell high.  That is the hard part."

So what is Rogers doing with his money?

He wouldn't buy stocks today - not even in emerging markets.  He is selling the U.S. dollar because "it's a flawed currency."  Today, he would put new investments into commodities or what he thinks are "sound" currencies such as the Canadian dollar and the Japanese yen.  And one of his favorites - farmland.  With food prices rising, he believes farmland "may be one of the best investments a person can make in 2010."  But get to know the farmer and the industry first, he reminded me.

In other words, be sure to do your homework.



October 12th, 2009
04:13 AM GMT
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The first thing that took me by surprise about my interview with Madhu Kannan, the CEO of the Bombay Stock Exchange (BSE) was the timing of our chat. “Can you be here by 8.25 am?” he asked. Sure, I replied and cameraman, Sanjiv, and I reached his plush office right on time.

 

It had taken around 3 months and an endless number of emails and phone calls to the BSE’s press office to confirm a date and time for our interview. It was frustrating to keep chasing them – I put it down to Indian bureaucracy and poor time management, unfortunately still typical of many large Indian companies.

“That’s one thing I am trying to change,” said Kannan when we interviewed him. “I want to start meetings on time and change the culture so no one’s late for meetings.”

It’s just one of the many, many challenges Kannan has ahead of him.

His big task: To revamp the BSE and make it relevant again.

At 37, he’s the youngest CEO of Asia’s oldest stock exchange. It’s an exchange that needs help.

While it had a virtual monopoly over stock trading in India, the entry of a rival exchange – the National Stock Exchange in the early 1990’s – changed that. The BSE now handles only a fraction of all trading done in India. To compete more efficiently, it needs to invest in better technology, says Kannan, who also has plans to make the BSE a one-stop shop for investors looking to trade across multiple platforms.

Sure, Kannan may get the BSE back on its feet. However, the real challenge for any stock exchange in India – be it the BSE or the NSE  – is to get more people to invest in stocks. Only a tiny fraction –two percent of India’s billion strong population – dabbles in the share market. Those in rural areas still prefer to invest in tangible assets like gold.

Even if Kannan is able to win back customers who’ve switched to the NSE, convincing newcomers to try their hand at trading shares, say observers, could be key to the BSE’s success. Given the robust year the Indian stock market has had, it could well attract a bunch of new investors.

Kannan has already started the process of repositioning the BSE. He’s in the process of buying a technology firm, has cut transaction fees, and – oh yes – he starts all his meetings on time.

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Filed under: AsiaBiz ClinicIndiaInvestment


October 4th, 2009
09:01 PM GMT
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Forgive me for gearing this blog to a selected group of people, but if you are anything like me (which I am convinced most of you are), you procrastinate doing your taxes until days before the filing deadline.

Many Americans I know are befuddled by the new and seemingly urgent demands of the U.S. Internal Revenue Service to declare all foreign accounts.  They must do so by October 15.  Sure, filing the TDF 90-22.1 form isn't a new requirement.  However, because of the crackdown on tax evaders by governments worldwide, including the United States, the IRS is tightening its rules on offshore accounts.

Here is a little quiz that I hope is helpful:

1) Is this you?

a) An American expatriate

b) A U.S. green card holder living overseas

c) A foreigner residing in the U.S.

(If the answer is YES to any of the above, keep reading.)

2) Do you have any account with the following in a country outside of the U.S.?

a) Banks

b) Brokerages

c) Mutual funds

d) Unit trusts

e) Pre-paid credit cards

f)  Business account where you sign the checks (even if the account is not in your name)

g) Any other financial account

(If the answer is YES, keep going...)

3) Look at all your account statements and find the highest balance for the calendar year for every account.  Add up the balances from all the accounts for a grand total.  How much do you get?

a) More than US$10,000

b) Less than US$10,000

(If you chose A, this blog is for you.)

So what now?  The IRS wants you to declare all your accounts.  You need to write on the form the most money you had in every account to the dollar.  (No more ranges.)  And you have to file for past years, too.  Evan Blanco, partner with Deloitte in Hong Kong, told me filers should make a good faith effort to "go back over the past six years and look at any accounts that they had anything to do with."

The penalty?  A hefty fine or, if it is deemed you willfully hid money, prison time.

So better get cracking.



September 28th, 2009
06:14 AM GMT
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“My accountant says I did this at a very bad time. My stocks are down. I'm cash poor or something. I got no cash flow. I'm not liquid, something's not flowing.” - Isaac Davis in Woody Allen’s “Manhattan.”

There are a number of metaphors that can be used to describe liquidity in the financial markets. One is to think of every object of value – cash, stocks, houses, art – as pieces of ice, frozen in value. Its liquidity can be measured by its ability to melt and reconstitute itself in value while changing hands.

Cash is highly liquid, because there is little change in value when sold or exchanged – so it melts and freezes quite nicely. Rare objects of art are among the most illiquid – they are auctioned and transferred back into cash once every few decades.

A way I prefer to think of liquidity as is oil. What caused the global economy to sputter last year was the commercial paper market, a financial tool as mundane as the motor oil that sits in the engine pan of every automobile. Imagine, however, the oil in every car in the world suddenly drying up below manufacturer specifications – poorly maintained cars start choking, creating traffic jams worldwide. Even Ferraris begin to ping and rattle.

The commercial paper market keeps companies running day-to-day because a going concern’s accounts receivable rarely matches its accounts payable. Large companies regularly borrow millions for one-day, low-interest loans so they can, for example, make payroll while waiting for clients and customers’ checks to clear. When Lehman Brothers went bankrupt, however, the Reserve Money Fund – the market’s oldest money fund that is fed daily by the commercial paper – “broke the buck”. For the first time ever every dollar invested in the fund was worth only 97 cents.

When you hear about “the collapse of the world financial system,” this is the ground zero event. Investors in the traditionally safe fund suddenly run for cover, exacerbating the crisis. Well-run, profitable businesses with no connection to the subprime mortgage debacle suddenly face a liquidity crunch.

Like Isaac Davis in “Manhattan,” the world banking system found “something’s not flowing.” And many of the efforts of governments around the world are to keep the spigot going.



September 21st, 2009
05:05 AM GMT
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Is it the bloodbath in your retirement savings, or the lost equity in your home that’s got you thinking?   Or is it the seemingly constant news about investment professionals behaving badly (say, hosting lavish parties at foreclosed properties), or outright robbing their clients of billions of dollars (think, Bernard Madoff), that has you wondering how to protect what’s left of your nest egg?

For thousands of Americans, investment clubs are the answer.  I’d been wondering how the clubs have been doing in this downturn, and how average investors have been faring against the big professionals, you know, the ones with beach properties now up for sale to pay for their crimes.  So I visited an Atlanta-area club called “Mutual Investors of Atlanta,” to see what they’ve been up to.

This is a long way from the lavish boardrooms and offices of Wall Street.  This group meets in the back room of a local grocery store once a month.  Larry Reno, 62, started the club more than a quarter century ago.  At the height of the financial crisis, the club’s portfolio was down by 50 percent.  It slowly climbed with the market, and Reno now claims the group is ahead of big, professionally managed mutual funds.   The club’s $100,000 portfolio is now down just a little more than 2 percent.   Each club member expressed optimism about the future, and claimed they weren’t really terrified when things got bad.  They had each other.   I’m skeptical, but I’m also thinking, well, it’s better than the rest of us who were just afraid to look at our statements for six months!

The group is aggressively buying technology stocks and health services companies.  This year’s run-up on the NASDAQ has been kind to their portfolio. At the meeting I attended, they opted to purchase more PetMeds stock.  Most members are amateurs, but there are a couple of experienced investors on the team.  They help the other members understand PE ratios, work software to track stocks, and keep emphasizing the need to buy solid companies, dump the losers without looking back, and look for solid business fundamentals, not the latest media darling.

The meeting was professionally run, with the minutes recorded and read, and with each investor reporting on an assigned stock-- indicating whether they believed, based on the research, that the stock was a buy, sell or hold.   When one member drew a blank on “upside/downside ratios,” another club member was only too happy to explain what it meant (a ratio greater than 1 means more stocks are increasing in price than dropping). Does your broker do THAT?  Or does she send you running for Investopedia.com to figure it out for yourself?

“Mutual Investors of Atlanta” is part of the Better Investing group, a national organization that sponsors educational programs, conferences, and promotes the idea that managing money as a group of equals, equals great results.  Check them out at www.betterinvesting.org.  If you like the idea of individual accountability, strength in numbers, and if you have a strong stomach to stay the course, this might be an investment approach for you.



September 14th, 2009
04:18 AM GMT
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MUMBAI, India (CNN) – Whenever my mother was unsure about what to gift someone for a birthday, wedding, anniversary or festival, my grandmother would say to her, “give gold.”

“It will last a life time and everyone appreciates it,” she would say.

Even today, my parents often gift gold on a special occasion. It’s part and parcel of Indian culture. Indians love wearing gold, giving gold, receiving gold.

Turns out we love hoarding it too. At least 20 to 25 thousand tons of gold is stored in households across India. With gold prices currently around $1005 an ounce that means around $807.7 billion is stashed away deep inside cupboards, under mattresses and at the back of safes in India.

India is the world’s largest consumer of gold and also a net importer of the precious metal. Problem is, once gold enters India, there is no transparent, standardized market for the resale of gold back into bullion. Gold sellers are at the mercy of middlemen: Anyone wanting to sell gold have to take a necklace or chain to a scrap jeweler. He would check it, weigh it and come up with a price for it. He’d charge a hefty commission, take it to a refinery and melt it.

Anjani Sinha is asking gold sellers to ignore the middlemen and follow him instead. He runs the National Spot Exchange – which has created the first transparent, standardized platform for gold trade in India.

Under this system, anyone with gold to sell can go directly to an approved refinery where gold is melted into bars or coins of an international standard. The seller can either take the bar home or leave it in a vault. He is given a receipt, which he can sell via an approved broker. The idea is to make trading in gold as easy as trading in stocks and shares.

If sellers start bringing some of their gold out from under mattresses and into the spot trading market, it has the potential to revolutionize the gold market – and make a massive impact on the Indian economy.

Si Kannan of Kotak Commodity Services walks us through some of the numbers: At current prices, even if 1% of India’s household gold enters the market, it would mean an extra $24 billion circulating through the domestic economy.

This would reduce India’s dependence on imports, pave the way for investment in domestic refineries, and increase employment opportunities.

The biggest challenge now though is convincing people to go to a refiner, not a scrap jeweler, when they want to sell gold. To be honest, I can’t see anyone from my grandmother’s generation going to a refiner instead of a family jeweler she has known for ages. Some habits are hard to break.



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