The China Renminbi (RMB)

While everyone is celebrating the news that the Chinese government has decided to let its currency to revalue I'm still skeptical about it.

Since 2005, China has been under tremendous pressure from the US to revalue its currency as the US blamed China for causing the US high current account deficit with cheap influx of the Chinese goods. Hence, in July 2005, the RMB was revalued to 8.11 per US dollar, which was a mere 2% increment (Prior to that the Yuan was pegged to the US dollar at 8.27 from 1997 to 2005). Since 2005 the Chinese yuan was unpegged and allowed to float within a narrow band of 0.3% - 0.5%. However, in 2008 due to the financial crisis around the world, the Chinese Central Bank has manipulated their yuan to the dollar of around 6.90. Until recently, the Central Bank of China has announced to further revalue their currency through a more flexible exchange rate policy, how 'flexible' we do not know as there was not much information given.

According to the Big Mac Index, Renminbi was undervalued for nearly 50%! Hence I really doubt the China is going to let its currency to reflect its true value, the most I would predict is another 5% appreciation, no more! Why? As it makes no sense for the Chinese yuan to be so strong for the following reasons:

1. Chinese Exports
According to BBC, Chinese exports value has reached US$1.2 trillion which make China to be probably the no.1 exporter in the world. They export mostly electrical goods, textiles, and many low-valued daily products like tooth brush and under garments. These products are the driver for the economic growth in China, for the past decade, it has recorded tremendous growth of 6% to 13%, it will soon overtake Japan to be the Asia largest economy.

2. Job opportunity
Due to the cheap goods demanded by the whole world including you and me, it has contributed to their income and employment, improved their standard of living, and most importantly the influx of foreign direct investment (FDI) into China.

3. Foreign Direct Investment
Since 1980, the FDI has been increasing by an exponential rate, which can be seen from the graph. In the beginning when China first open its door to the world, it was the Taiwanese and Hong Kong factories went over there to set up their operating plants. Later when China joined the World Trade Organisation WTO more capital from all over the world came to capitalise on the China's cheap labour. These valuable foreign direct investments and exports has turned China to be the second largest economy in Asia.

Value of Yuan
The value of a currency is usually reflected based on a country's economic performance, which is reflected on its Balance of Payment. Over the years, while many western countries like US and EU countries are experiencing deficits in their balance of payments, China has surpluses year after year. Hence, by right we should be seeing depreciation of those western countries currency (which is happening now) and an appreciation of the yuan. But yuan has been relatively constant at around 7-8 per US dollar over the years! Clearly, the yuan has been artificially kept low by their Central Bank.

So, what's the big deal? If it's not a big deal then why should US kept barking on the China to appreciate their currency?

Let me explain further. First when Chinese yuan suppose to reflect its true value but it didn't then we will continue to see China exports continue to sell at low price to its trading partners like US, make them keep buying the Chinese goods and worsen the US deficits further! Hence, if the yuan is stronger, the US will import less Chinese goods and thus their balance of payment shall improve.

The currency war between the US and China has been long, and it will continue to stay if the yuan continues to be undervalue against the greenback.

Happy investing,
Pauline Yong

British Pounds

For those who has been keeping track of the British pounds will notice the recent rapid depreciation of the currency. Over a period of two years, the pound has fallen almost 30% against the ringgit. How nice if I could delay paying my MBA tuition fees!

There are many factors affecting the British pounds. The following are some of them:


1. Current account deficit

Since 1997, UK's current account has been in bad shape. Having a current account deficit means that the country is spending beyond their means, or they are importing more than what they are exporting. This will increase the supply of British pounds that subsequently reduce the value of the currency.


2. Fiscal policy

Over the years, the British government has been proposing a national budget that is bigger than before. The 2009 public spending on welfare and social security stood at 650 billion pounds which was equivalent to about 46% of the UK GDP. The unprecedented size of the UK budget deficit has in fact balked by many economists as that means more public debt to finance the budget deficit. As such, many believe that the sterling pounds will remain weak and it may eventually reach parity with the euro.


3. The Greece effect

As UK is located in the Euro zone not far from Greece who also has great appetite for debt. Many people suggested that UK will be the next Greece. However, that's not the case. Although UK is highly debt ridden with a debt of 60% of its GDP, but compare to Greece, this is much better as Greece's debt is recorded at 130% of its GDP!


Overall, the above are the economic reasons for the weak pounds, however there are other factors such as political scandals, the purchase of AIG by Prudential and so on that will definitely aggrevate the problem.


Anyway I told my students if the pounds really hit parity with the euro, I will convert all my savings into pounds... Just kidding!



Happy investing,
Pauline Yong

Think Like Warren Buffett

Think Like Warren Buffett
by Glenn Curtis

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.

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.

Buffett is a firm believer that an investor must first do his or her homework before investing in any security. But after that due deligence 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.

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.

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.

Hence, "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.

PUBLIC LECTURE by Dr Jomo Kwame Sundaram

Details of the lecture are as follows:

Title: When will we ever learn? Has Malaysia learnt the correct lessons from past crises?
Date: Wednesday, 16 December 2009
Time: 7.30pm
Venue: Hotel Singgahsana, Persiaran Barat, off Jalan Sultan, 46760 Petaling Jaya (next to Taman Jaya LRT Station)
Admission: FREE

The Topic
The world is still struggling to emerge from the longest and deepest financial crisis in six decades. For every piece of optimistic news about recovery there are stories of setbacks and worsening downturns. Asia has been here before. A decade ago, the Asian financial crisis swept across the region. It not only prompted some rethinking of how to 'manage' financial crises but also stimulated some serious rethinking about the character of the development model in Asia. Lessons were learnt and new policy and institutional frameworks were put into place. But the severity of the current crisis begs a question: did politicians and policymakers really learn the right lessons from ten years ago? This is the burning question that is addressed in Jomo's important public talk.

The Speaker
Jomo is one of the world's leading thinkers on questions of development -- not just development economics but also the policy commitments and institutional frameworks for international cooperation that are necessary to deliver both reform and sustainability. From his position at the United Nations he is able to shape debates and influence their outcomes. At the same time, he remains profoundly committed to building longstanding solutions to the most pressing problems that face the world today - environmental degradation and climate change, financial disorder and continuing uneven development. Come and listen to him offer important reflections on what has gone wrong and what might be done to advance a progressive agenda.

Book Fair at Danga City Mall

There will be a book sharing session at the following book fair:

• Venue: Danga City Mall Johor Bahru
• Date: 28-11-2009
• Time: 5:30pm - 6:30pm
• As usual, I'll be sharing with my readers some usefull investment tips. So see you there!
  

How Happy Are You?


If I were to ask you a question: How happy are you? To answer this question, you will start to look around your friends and neighbours what they have in order to judge how happy you are with what you have. This is known as "anchoring" which means we like to make decisions based on some reference points. To illustrate this concept further, there was an experiment done by a famous behavioural economist, Dan Aeriel based on an actual ad from the Economist.


There were three offers in the ad: an Internet-only subscription for $59, a print-only subscription for $125, and a combined print and Internet subscription, also for $125. When Dan gave these options to a group of students, 16% chose the internet-only subscription, none took the print-only subscription, and 84% opted for the combined subscription. Sounds reasonable ? But in his second round of experiment, he took out option 2 since no one selected it and offer the Internet-only and combined subscription options to another group of students. The results? 68% of students selected the Internet-only option and only 32% chose the combined offer.


What is wrong here? Nothing wrong, its just marketing gimmicks to take advantage of people's emotional weakness that often use the wrong things for comparisons. The above example showed that when given the price of print-only subscription is the same as the combined subscription, the latter looks like a great deal!

In stocks, we like to compare the historical prices when we make decisions. For example, we did not buy a stock at RM5 because we originally looked into it and did not buy at RM3. Buying at RM5 will make you regret more as you were making the comparisons.

With investment, we have to be rational and objective. We should try to put the past prices behind and focus on the current value and future prospects of the stock that we are buying. If we keep thinking about the lows that we've missed in March this year, we may be ended missing the whole boat altogether.

Happy investing,

Pauline Yong

What If Jeremy Grantham is Right?

Jeremy Grantham, president of investment management firm GMO LLC, has been getting a lot of press lately.

At the market's top, he warned of an impending bear market. At the bottom in March, he forecast a historic rally. Today, he says the market is 25% overvalued. Should you be worried? Perhaps not.

Let's start with Grantham's track record. He's made a couple of good calls lately. But does he get it right all the time? Of course not. No one does.

But even if he's right, it wouldn't necessarily be negative. It all depends on your time horizon.

Here's why...

How Long-Term Investors Can Benefit From A Bear Market

If you own stocks on margin, call options, or LEAP options, a market downturn could be devastating. A 50% decline in the value of a fully margined account would erase your equity. Your options could expire worthless.
Who benefits from a bear market? The obvious answer is short sellers and put options buyers.
But others benefit, too. Primarily long-term investors.

A new study by T. Rowe Price shows that those who began systematically investing in equities in severe bear markets made out "significantly better" than investors who began in bull markets.

Take 1929, for example, the year that kicked off the Great Depression...

From 1929 to 1938 - one of the worst 10-year periods in history - the S&P 500 returned minus 0.9% annually.

Yet if you began investing $500 a month in 1929 and kept it up for 30 years, your total return was 960%.

If you did the same thing starting in 1970 - the start of one of the other worst decades in market history - you'd have fared even better: up 1,753%.

These investors did more than twice as well as those who invested the same way at the beginning of the go-go 1980s and 1990s.

What can we take from this?

The Buffett Approach

Bear markets are no friend of short-term traders with an optimistic bent. But they're the great ally of long-term investors.

Warren Buffett put it this way in one of Berkshire Hathaway's annual reports:
"A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you're going to buy a car from time to time, but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.

If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the hamburgers they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices."

This makes perfect sense for young investors, but how about those approaching retirement?

What to Do If You're An Older Investor

They might welcome this development, too. A man or woman in good health retiring at 65 today faces the very real prospect of spending nearly three decades in retirement. In short, you need growth as well as income.

And retirees?
For them, it's a different story.
Retirees stand to lose the most. The closer you are to cheating the actuarial table, the less your portfolio should be invested in stocks.

But for everyone else, Grantham's prediction - if true - could well be a blessing in disguise. Even if it almost never feels like it.

Good investing,
Alexander Green

Chief Investment Strategist