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Carl Richards

Carl Richards is a certified financial planner in Park City, Utah, and is the director of investor education at BAM Advisor Services. his book, “The Behavior Gap,” was published earlier this year. his sketches are archived here on the Bucks blog.

Based on the e-mails I’m getting, I guess that the stock market is getting scary (again). will someone please remind me why we’re surprised when the market has periods — sometimes long periods — of turbulence and even decline?

We have a word for this: risk. Sometimes, we swap it out with the word volatility. you hear people complain that the market sure seems volatile lately, or they use the market’s ups and downs as a reason (or excuse) for putting all of their money in cash until things “clear up.”

But here’s the deal: the reason that stocks are likely to return more over time than bonds, and bonds more than cash, is precisely because they are more volatile (risky).

When it comes to investing, risk and reward are related. It’s as close as we get to a fundamental law in finance. if you want or need a greater expected return, you’ll have to accept more risk. the times I’ve tried to skirt this law, it’s been painful.

So if we believe that risk and reward are related, then investing becomes a pretty simple exercise. you buy good things and hold on to them for a long time.

Buying good things is easier than it’s ever been. Diversified, low-cost investments, like index funds, are good things and seem to be available on every online street corner. Also, figuring out how much to put into stocks versus bonds or international versus United States investments has been made easier by the introduction of target retirement date funds that use low-cost index funds like the ones at Vanguard.

A great place to start would be using the Vanguard fund that matches your retirement goal, like the 2045 fund. Then there’s the option of taking your age and putting that percentage of your portfolio in a bond index fund or taking 100 minus your age and putting that percentage in a global stock index fund.

Like Vanguard’s founder, John Bogle, said, you could find advice that was better than this, but the amount of advice that was worse was infinite. if you need more specific help, find an adviser you trust who uses index or other passive investment funds to make more customized portfolios.

Now, just because buying good things has become simple and easy doesn’t mean long-term success is guaranteed. you can design the best portfolio in the world, make one behaviorial mistake and blow the whole thing up. This natural tendency to react to the endless stream of useless news we get from the financial pornography networks is hard to overcome.

Of course, we want to do something (anything!) when the world is coming to an end. the problem is that it seems like the world is coming to an end — a different end — every week. if it wasn’t, what would they talk about on CNBC?

So that is where this second part of my little plan comes in: after you have bought good things, hold on to them for a long time.

If you’re invested in the stock market, I’m assuming you believe that risk and reward are related. if you don’t believe that, or if you think that it used to be true but now the game is rigged, get out and stay out. you can’t have it both ways. if risk and reward are no longer related then there is no reason to invest in stocks.

So much of what we think of as investing would be recognized as little more than a fantasy of market timing when viewed in this light:

• The idea that you can be in the market when it goes up and out when it goes down: Fantasy.
• The idea that you can pick stocks that will go up when the market goes down: Fantasy.
• The idea that your buddy from college who worked on a trading desk for years and has now started a hedge fund that uses a proprietary trading algorithm that can get the same return as the market with less risk: Fantasy.

The tricky thing about all these fantasies is that someone is always successful just often enough, for just long enough, to get a spot on television or to make the cover of a magazine. At that point, we’re enticed into believing we can get in on the action. Then, just about the time you think you have found investing Shangri-La, it disappears, right after you commit your capital to it.

Because we can’t have it both ways, if someone promises you higher returns, you need to ask the question: What’s the corresponding risk? if you can’t identify it, don’t be fooled into thinking it isn’t there. it is, and it’s likely to show up when you least expect it.

If you still believe that risk and reward are related, buy good things and hold on to them for a long time. if you no longer believe, then get out and stay out. the thing to remember is that either choice is O.K., but trying to do both is a very bad idea.

As long as there have been markets, I am sure that investors have used screens to find good investments. It was Ben Graham, however, who systematized the process in his books on investing, by laying out the ten criteria (screens) that could be used to find cheap stocks.

1. An earnings to price yield > Twice the AAA bond rate (At the AAA bond rate of about 3.6% today, that would work out to an earnings to price ratio > 7.2% or a PE< 14)
2. PE ratio today < 40% of the highest PE ratio for the stock over the previous 5 years
3. Dividend yield > 2/3 or the AAA bond yield (At today’s AAA rate, yield >2.4%)
4. Stock price < 2/3 (Tangible book value of equity per share), where tangible book value of equity = Total book value of equity – Book value of intangible assets
5. Stock price < 2/3 (Net Current Asset Value), where Net Current Asset value = Current Assets – (Total Liabilities + Preferred Stock)
6. Total debt < Book value of equity
7. Current ratio > 2, where current ratio = Current Assets/ Current liabilities
8. Total Debt < 2 (Net Current Asset Value)
9. Earnings growth in prior 10 years < 7%
10. No more that two years in the prior ten, where earnings declined more than 5%.

While we can debate the efficacy of these screens (I, for one, find that the fixation on net current asset value is too restrictive), it is quite clear what Graham was looking for: cheap companies with low leverage & stable and growing earnings, with liquid assets acting as a backstop and providing a margin of safety for investors.

Do screens work?

Graham had three pricing screens among his ten criteria: PE ratios, a modified version of price to book ratios and dividend yields. in the decades since, studies (many from academics but quite a few from practitioners as well) have found  that at least two of these screens seem to work, at least on paper. Stocks that trade at low PE ratios and low PBV ratios deliver returns that beat the market, on a risk adjusted basis.

Let’s start by reviewing the evidence. Rather than quote from studies that are at different points in time, I used the raw data (maintained very generously by Ken French at Dartmouth) to compute the differential returns that stocks, in the lowest and highest deciles of PE, PBV ratio and the  dividend yield, earned on an annual basis between 1952 and 2010, relative to the overall market:

Note that low (high) PE and low (high) PBV stocks have beaten (under performed) the market by healthy margins, before adjusting for risk, over time but that there is no discernible pattern with dividend yields. in fact, over the period, non-dividend paying stocks beat both the highest dividend yield and lowest dividend yield deciles in terms of returns earned. you can find more on past studies by going to my paper on value investing.

So, what’s the catch?

When it looks like you can make money easily, there is always a catch. here are the three caveats on the “excess returns” that a low PE, low PBV strategy seems to deliver.

1. Time horizon matters: the returns are in the long term (five years and longer) and there are time periods (some lasting for years) where the strategies under perform the market. For instance, looking across the entire period, for instance, it looks like while low PE stocks dominate high PE stocks over long periods, the latter group outperforms during periods of low economic growth (where growth becomes scarce).
2. A proxy for risk? While I did not adjust for risk in my computation for excess returns, most of the studies that have looked at these screens have controlled for risk, using conventional risk and return measures (betas, Sharpe ratio etc.). It is possible that there are other risks in buying these stocks that may not be full reflected in these risk measures. For instance, some stocks that trade at low price to book value ratios have high debt burdens and run a higher risk of default/distress.
3. Transactions costs & taxes: a lot of strategies that make money on paper perform badly in practice because they expose investors to higher transactions costs and taxes. For instance, many of the stocks in the lowest PE ratio decile are lightly traded companies, with high bid-ask spreads and potential for price impact. Similarly, investing in high dividend yield stocks may expose investors to higher taxes.

In a testimonial to how difficult it is to convert paper profits to real profits, it is worth noting that the James Rea’s attempts to put Graham’s principles into practice in an investment fund that he ran from 1982 to the late 1990s was an abject failure, with the fund ranking in the bottom 20% of the fund universe in performance. in a similar vein, value Line’s attempts to convert its screens (that also worked exceptionally well on paper) into a mutual fund also failed.

Incorporating screens into investing

If you do buy into the effectiveness of screens at finding cheap stocks, there are two ways to incorporate screens into your investing.

a. Bludgeon Screening: in this approach, all of the work in picking stocks is done by your screens. Thus, you start with a large universe of stocks and screen your way (using either more screens or tighter screens) down to a portfolio size (in terms of number of companies) that you are comfortable with.

b. Screening plus: you use the screens to narrow the universe of stocks (which may contain thousands of stocks) to a more manageable number, but you then follow up using one of these approaches:

• Screening plus intrinsic valuation: you value each of the screened stocks using an intrinsic valuation model (a discounted cash flow model, excess return model or your own variant) and invest in the most under valued companies. you can also incorporate a margin of safety into this approach by only investing in stocks that trade at 30%,40% or 50% discounts on your intrinsic value.
• Screening plus qualitative analysis: Once you have the screened list, you may be able to apply qualitative criteria that you think separate winners from losers (moats, good management etc.) to find the stocks for your portfolio.

A blueprint for screening

In Graham’s day, screening was an arduous process, with limited access to the financial statements of companies and no computing power. Today, screening has become easy with many sites offering stock screeners for all, sometimes at no cost: Yahoo! Finance, Google Finance and MarketWatch all offer simple screening tools. in fact, it has become so easy that investors sometimes get carried away, piling on redundant screens on top of each other and sometimes undercutting their effectiveness by doing so.

Before you start, be clear about your objective

You want to find a mismatched company, i.e, a company that is priced low, with none of the reasons for being priced low (high risk, low growth, low quality of growth). in other words, you want a stock trading at a low multiple, with low risk, high growth rates and high quality growth. What chance do you have of finding such a bargain? It may be low, but there is no harm looking.

Step 1 – Screen for price

The first step is to screen for low . With stocks, this will almost always require that you scale the market price to a common variable (revenues, earnings, book value etc.) to estimate a multiple. here are your choices:

In making these choices, you have to be consistent. If your numerator is an equity value (market capitalization, stock price), your denominator should also be an equity value (net income, earnings per share, book value of equity). If your numerator is an enterprise or overall business value (enterprise value, value of firm), your denominator should be an overall firm number (operating income, EBITDA, revenues, book value of invested capital). should you use an equity multiple or an enterprise value multiple? in some sectors, such as financial services, you have no choice but to use equity, since defining debt is close to impossible. in others, you have a choice, and here is my simple rule. If financial leverage varies widely across the sector (some firms have more debt than others), I would go with an enterprise value multiple. For comparisons across the entire market, enterprise value multiples tend to be more robust.

Once you have picked a multiple, you then have to choose your screening thresholds. in practical terms, you have to decide how low does a stock’s pricing multiple has to be to qualify for your cheap list. there are three ways to find this threshold.

a. you can use the rules of thumb that seem to be so widely prevalent: an EV/EBITDA less than 6 is cheap, a PE ratio in the single digits is low etc. while these rules of thumb may have made sense when first devised, it is doubtful that they make sense today.

b. you can derive the “cheap” threshold from intrinsic valuation models. To illustrate, the PE ratio for a firm that pays its entire earnings out as dividends and has no growth should be as follows:

Intrinsic “cheap” PE threshold = 1/ Cost of equity

In June 2012, when the cost of equity was computed to be about 8%, the threshold for a “cheap” company would be 12.5 (=1/.08).

c. you can derive the threshold by looking at the distribution of the values of the multiple across your sample, using the lowest decile (or lowest quartile) as your cutoff for “low”. the table below lists the deciles for key multiples for US companies in January 2012:

Thus, looking for stocks with a PE less than 5 would give you stocks in the lowest decile whereas using a cut off of 10 for the PE would give you stocks in the top quartile, at least in early 2012.

Step 2 – Screen for risk

Companies that are very risky can look cheap, without being cheap. To screen for risk, consider first a breakdown of risk into three categories:

(a) Operating risk, reflecting the risk that your revenues and costs can shift over time, as the market and the sector evolve.

(b) Financial risk, coming from the use of debt, leases and other fixed commitments that can make your residual stake as the equity investor much more volatile.

(c) Liquidity risk, that you face as as investor when trading on the stock, manifested as trading costs (bid ask spreads, price impact) and inability to trade at the extreme.

The screens for risk can broadly be categorized as follows:

1. Price based screens: while many value investors express disdain for betas, there are other price based screens that are based upon prices (standard deviation, volatility in the stock price) that they may still be willing to use as measures of composite risk. in fact, you can use screen for liquidity risk, using market data, by looking at the bid-ask spread or the trading volume/float in a stock.
2. Accounting based screens: Accounting statements can provide snapshots of risk, though they are stronger in measuring some types of risk than others. you can measure exposure to financial risk fairly well, using ratios that measure the capacity to make interest or debt payments (interest coverage, fixed charge coverage ratios), operating risk less well (variability in earnings over time) and liquidity risk not at all.
3. Risk proxies: while this may be applying a broad brush, you may use the sector a firm is in as a proxy for risk; thus technology companies may be viewed as risky companies and utilities as safe companies. Alternatively, you may believe that large companies (measured in market capitalization or revenues) are safer than small companies.
4. Sector specific screens: If you are screening for cheap stocks within a sector, you may use measures of risk that are specific to the sector. among bank stocks, for instance, you may look at regulatory capital ratios or exposure to problem assets/businesses; banks with lower regulatory capital or greater exposure to toxic assets are riskier.

As with the multiples, you can see the quartiles of the distribution for these variables for US stocks in January 2012 in the table below:

Step 3- Screen for growth

If you are a value investor who views growth as icing on the cake, you may not look for  high expected earnings growth but you may still want to screen for companies with moderate growth prospects or at least try to avoid companies with negative earnings growth. in screening for growth, you should stay true to the consistency principle, focusing on growth in equity earnings, if you are using an equity multiple (like PE) or growth in operating earnings, if you are using an enterprise value multiple and you would rather be forward looking in your growth estimates (using expected future growth, if available) rather than backward looking (historical growth). the quartiles of growth measures for US stocks in January 2012 is in the table below:

Step 4 – Screen for quality of growth 

If you are employing a growth screen, you also want to ensure that the firm is not spending too much to deliver that growth. To screen for quality of growth, you can employ one of two approaches:

a. Accounting return measures: Dividing the accounting earnings by accounting book value gives you a measure of accounting returns:

Return on equity = Net Income/ Book value of equityReturn on invested capital = Operating income/ (Book value of equity + debt – cash)

While they are aggregate measures for the whole firm and accounting earnings/ book value are susceptible to accounting manipulation, you want firms that are able to earn high returns on their growth investments in your portfolio. At the minimum, the returns should exceed the costs (the cost of equity, if ROE, and the cost of capital, if ROIC).

b. Sector specific measures: you can also measure efficiency of growth using sector specific measures, such as profit margins (net or operating) in retail, capital invested per subscriber (in cable or other subscriber-based businesses) or capital invested per kWh of power produced (for power companies).

The quartiles for ROE, ROIC, net and operating margin for US companies in January 2012 are reported in the table below:

Step 5: Rinse and repeat

Once you run your screens, check the stocks that come through the screens for two potential problems. the first is sample size. If your screens return only a handful of stocks, your screens have been set too tight and you should consider relaxing one or more of your screens (settling for lower growth or higher risk). the second is sector concentration. If you end up with stocks that are in one or a couple of sectors, you may want to consider modifying or adding to your screens to get more diverse portfolios.

While you can screen for free at Yahoo! Finance and Google Finance, you get far more flexibility in defining your own screens if you have access to a database. For US companies, you can try Value Line or Morningstar, both of which provide real time data for the entire universe of traded stocks and are not unreasonably priced. For screening of stocks outside the US, you can use Capital IQ, Factset or Bloomberg, but the price tag gets higher. there are some innovative sites out there that are offering better screening tools and large databases, such as RobotDough, a site that combines an impressive database with powerful screening tools, AAII and Zacks(which has a combination of free and premium screens).

Odds of success

I have always believed that, as an investor, you need to bring something unique to the table to be able to take something away in terms of excess returns. in other words, just as  we look at competitive moats for successful businesses, you have to think about your competitive moats as an investor. With screening, consider the competitive advantages that Ben Graham saw for the intelligent investor in 1951, when he put together his classic screen list. the first was access. With limited access to financial statements and no easy-to-use tools, only a few tenacious investors could use these screens. the second was discipline. Investors had to stay away from distractions and fads and stay true to those stocks that made it through the screens. the third was patience. Investors had to hold the screened stocks in the long term to generate the promised returns. Today, with widespread access to data and analysis tools , the first advantage has dissipated, leaving behind patience and discipline as your potential advantages. It can be argued that an automated screening/investing process, with no human input, is less likely to succumb to emotion than the most disciplined, patient human being. put more bluntly, if all you have to offer as an active investor is screens, you are unlikely to beat a machine doing the same. With screening plus, whether you make money depends on the quality of what you do after you screen. If you are skilled at intrinsic valuation or qualitative assessment, you may generate excess returns, relative to the market.

In closing

To illustrate the screening process, I used Capital IQ data and used two sets of screens to arrive at a list of “cheap” stocks from a universe of 7542 publicly traded companies in the US.

Equity screen: low PE (<10.11, in bottom quartile), above-average expected EPS growth rate (>13.50%, above median), below-average book debt to equity ratios (<27.21%, in bottom quartile), high ROE (>13.60%,top quartile)    –> See the  19 stocks that made it through these screens

Enterprise value screen: low EV/EBITDA (<4.51, bottom quartile), above-average expected revenue growth (>7%, above median), below-average book debt equity ratio (<27.21%, below median), above-average ROIC (>9.41%, top quartile)   –> See the 13 stocks that made it through these screens

I would not be rushing out to buy all of the stocks on either list, but I think it is worth following through and doing intrinsic valuations of these companies. anyone up for it? If so, you are welcome to use my generic valuation spreadsheet.

Investing in loans to strangers has proved profitable for some in the six years since peer-to-peer lending was first introduced. the industry has passed out over $1 billion in loans, according to the blog Techcrunch.com in the post “Peer to peer lending crosses $1 billion in loans issued.”

Prosper and Lending Club are the two big peer-to-peer lending websites. Borrowers can apply for a loan in a way similar to applying for a credit card. Their credit is checked, and if they’re approved, they’ll get some rate and term options, and then they have to convince investors to fund their loan.

Investors get to decide who they would like to lend money to and how much. Then they sit back and watch the money roll in, theoretically. Estimated returns for both sites can be more than 10 percent.

Obviously, with higher returns come higher risks. That was explored in a Wall Street Journal story from April, “Would you lend money to these people?”

Both sites let lenders spread their investments around to multiple loans, which decreases the risk of losing money, but “institutions that have invested in the loans acknowledge that until the companies have built a longer track record, it is difficult to pinpoint how the loans should be used in a portfolio,” the Journal story reported.

Also, the Journal notes, liquidity is very low. once you’re in for a loan, you’re pretty much stuck.

Another consideration is the possibility of losing money. though borrowers are vetted for good credit scores, there are no guarantees.

Full disclosure, I’ve actually gotten loans from both Prosper and Lending Club but haven’t made any loans.

What do you think? while the advertised yields may be better than those elsewhere, there’s still an element of risk. Would you lend someone money?

Follow me on Twitter @SheynaSteiner.

by Andrés Cardenal – June 7, 2012 | Tickers: AAPL, BRK-B, BRK-A, FB, GS | 0 Comments

Andrés is a member of The Motley Fool Blog Network — entries represent the personal opinions of our bloggers and are not formally edited.

“The investor’s chief problem — and even his worst enemy — is likely to be himself.”

It’s not recessions, unscrupulous bankers or even nontransparent business practices what should concern investors the most. The biggest threat to your financial well being, my friend, is no other than yourself.

Fortunately, not only for their mistakes are investors responsible, the same goes for making the right decisions and choosing the best companies to invest in. Contrary to generalized opinion, I believe there has never been a more interesting time to be an investor. for better or for worse, investors have now much more possibilities and flexibility to implement their strategies.

Information has never been so abundant and easy to access as it is nowadays, education about personal finance and investing is widely available for those interested in the topic and willing to do the learning effort.  You can access financial statements, recommendations and all kind of relevant news about companies in almost no time and no cost.

The technological revolution has also created many companies which have a tremendous potential to reward investors in an extraordinary way over the long term. Apple (NASDAQ: AAPL) for example is the biggest company in the world, and last quarter the company reported a 88% unit sales increase in iPhone and 151% increase in sales of iPads, which produced a 94% growth in net income versus the same quarter of the previous year. if the Cupertino giant wasn´t such an innovative company making the best use of technological advancements, those kinds of growth rates would be impossible for companies of this size.

The other side of the equation regarding the effects of new technologies on our investments would be the danger of investing in companies like Facebook (NASDAQ: FB), but nobody was forced to do so. those who paid a stratospheric price for shares of a social network only because they knew it was popular made a huge mistake, but it was their own mistake. Who knows, maybe the company will find a more sustainable way to generate profits, and with more than 900 million users this could still be an opportunity in the future, especially if bought at much lower levels.

It´s not only about technology, of course, considering our current environment is quite shaky and uncertain regarding global economic conditions. Times have been much better in terms of economic growth in the past, and there are many structural problems in developed countries which need to be fixed. this will probably generate higher levels of volatility and uncertainty in the future, but that also brings opportunity.

 Warren Buffett has delivered extraordinary long term results for shareholders in Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) by capitalizing temporary price decreases to acquire wonderful companies at undervalued levels.  Economic fluctuations create excessive movements in stock prices, and that can be uncomfortable for investors, but at the same time it can be a very fertile source of investment opportunities. Companies like Berkshire will continue increasing positions when economic uncertainties create opportunities, and intelligent investors should do the same with their own money.

Many fellow investors complain about the unethical practices of companies like Goldman Sachs (NYSE: GS), in which high level management usually puts their own greed before the interest of their clients or shareholders. I am the first to agree on the fact that Wall Street needs to start working harder on ethical issues and transparency, but that doesn´t change the fact that investors should never avoid their own responsibilities when dealing with this kind of institutions.

You can make your own investment decisions using low cost brokers and following independent advice from an enormous variety of sources. Even if you are a client of Goldman Sachs, nobody is forcing you to buy the assets they are recommending, especially when those products are hard to understand like in the case of complex mortgage linked securities or assets involving combinations of derivatives.  Shares of high quality companies or diversified low cost ETFs will always be available as a convenient alternative for smart investors.

The bottom line is this: current times are extraordinarily dynamic in terms of technological advancement, economic change and Wall Street behavior. this provides enormous opportunities to make – or loose – money in the markets. Now more than ever, an investor´s worse enemy – and best friend – is his own behavior.

Twitter:@andrescardenal

SANTA MONICA, Calif. (MarketWatch) — there is great opportunity for huge rewards by investing in post-conflict zones. Besides making money, these investments can make the world a whole lot safer.

Post-conflict zones are places that have gone through war, revolution, or civil unrest — places where there is lingering political uncertainty and where the environment is fragile.

Reuters Pupils attend a school in the town of Small Sefoda in eastern Sierra Leone. The West African nation’s 11-year conflict from 1991-2002 left over 50,000 dead and became a byword for gratuitous violence. a decade later, the West African nation is peaceful, but among the world’s poorest.

Here’s why investing in such “difficult” areas is so important: “Economic development is a critical component of promoting stability and U.S. security interests, particularly in conflict and post-conflict zones,” the Council on Foreign Relations argued in a working paper on the issue released last month. “Reviving institutions and rebuilding an economic base are among the first priorities after fighting ends and reconstruction begins.”

according to the U.S. Agency for International Development, negative economic shocks of just 5% can increase the risk of a civil war by as much as 50%. The CFR noted that means donor assistance, which can account for 20% to as much as 97% of a country’s gross domestic product “is unsustainable in the long term.”

Far better, it says, is to build local business capacity and support home-grown entrepreneurs who can help curb this risk.

“Research from Iraq has found that labor-generating reconstruction programs can reduce violence during insurgencies, with a 10% increase in labor-related spending associated with a 10% decrease in violence,” the CFR says. It quotes Shari Berenbach, director of the Office of Microenterprise Development at USAID, as saying the development of “private enterprise is an important stabilizing force,” particularly for countries suffering from the political uncertainty and civil unrest that often characterizes the post-conflict period.

moreover, there is money to be made.

a report released this week by Wharton’s “Knowledge” publication says, “Whether investing through traditional mutual funds or aggressively deal-by-deal, global investors are increasingly seeing Africa as the next horizon of opportunity. six of the world’s 10 fastest growing economies over the past decade were in Africa. Africa’s middle class, already spending as much as US$680 billion annually, is projected to grow to 1.1 billion by 2060, up from 355 million in 2010. this year alone, Africa’s economy is expected to grow at a rate close to 6%. for global investors, Africa’s impressive growth has made it a necessary part of their portfolio.” Read more about Wharton’s report.

and that’s just Africa, never mind the Middle East and other post-conflict zones.

Last year, Wharton, the well-known business and finance school, also held a panel on “The Frontier of the Frontier: Investing and Building Businesses in Post-Conflict Countries” at its Africa Business Forum, which explored different ways investors can get involved in Africa’s growing frontier markets. The panel found that 158 pension and insurance funds, hedge funds, wealth managers and private banks said they would explore investment in Africa sometime within the next decade, and one third of investors surveyed said that they planned to put at least 5% of their fund value into Africa by 2016.

some investment managers are already entering the fray.

Take ManoCap. It is a private-equity fund manager that makes equity investments in small- to mid-cap enterprises in West Africa. ManoCap manages two funds: the Sierra Investment Fund and the ManoCap Soros Fund.

SIF is a multisector fund (excluding mining) that focuses on investing in Sierra Leone, Liberia and Ghana. The ManoCap Soros Fund invests in agribusiness and related services in Sierra Leone.

and make no mistake, these aren’t strictly do-good vehicles. “All things being equal, we will always prioritize a 70% IRR [internal rate of return] over a 20% IRR. Underlying the creation of our business is the belief that meeting development goals is impossible without investing in profitable businesses,” ManoCap states.

a quick look at Maplecroft’s Global Risk Atlas 2012 and it’s easy to spot the regions of extreme and high risk: they spread throughout Africa and spill into the Middle East, bleeding into Southeast Asia. See the Global Risk Atlas.

At one time this might have meant “stay away” but increasingly it’s cause for investment.

indeed, more investors in post-conflict zones might just keep them that way and prevent more wars from erupting.

(Ed Moisson is Head of UK and Cross-Border Research at Lipper. The views expressed are his own.)

By Ed Moisson

Our team at Lipper spent much of the first quarter handing out awards to fund managers round the world who have delivered exceptional performance to their investors. since then, I’ve had time to take a step back and assess just how good the wider European industry has been at outperforming over the longer term.

Active fund managers’ ability to out-perform their benchmarks sits near the heart of any discussion on the relative merits of active versus passive. In broad terms the argument against investing in an actively-managed fund is that one takes on the additional risk that the fund will significantly under-perform the index, a risk that is exacerbated over time by the additional costs associated with such a fund.

The argument against passive is that one not only misses out on the possibility of superior, but also that, in principle, one is guaranteed to under-perform the index.

Clearly the case for active fund management goes hand-in-hand with the case for prudent fund selection. Indeed an industry has grown up trying to deliver the latter for investors, with professional fund selectors choosing funds to invest in and packaging this up as a product of itself: funds of funds. Assets invested in funds of funds in Europe stand at around 360 billion euros – noticeably greater than the assets invested in passively managed funds.

The most straightforward means to assess actively managed funds’ success in beating their benchmarks is to look at their latest performance figures. To this end all actively managed equity funds’ performance relative to their benchmarks was assessed over 1, 3 and 10 years to the end of December 2011.

The proportion of funds that out-performed varied from 26.7 percent in 2011, 40.0 percent over 3 years and 34.9 percent over the past 10 years. Solely for managers of UK equity funds, the figures were 22.4 percent, 42.4 percent and 37.6 percent.     But the issue of survivorship bias also needs be grasped. To do this, funds’ rolling returns were assessed every year from 1992 to the end of 2011. For 1-year periods, the proportion of equity funds that out-performed has varied between 59.1 percent and 26.7 percent, coincidentally the first and last years in this analysis.

TOUGH MARKETS

The annual average proportion of out-performing funds is 42.8 percent, at the higher end of the spectrum found in the initial analysis above. this suggests that the difficult recent market conditions have indeed had a negative impact on the proportion of active managers that have been able to beat their benchmarks.

The wide variation in out-performance depending on classification of funds is highlighted in 1-year rolling returns. For example, funds investing in Asia Pacific (ex-Japan) ranged from 8.3 percent (in 2004) to 83.8 percent (in 1999) of funds out-performing their benchmarks, while for UK equities the range has been much narrower, between 23.1 percent (2011) and 64.5 percent (2000).

For long-term investors the fact that an active manager does not out-perform in every calendar year is likely to be less significant than whether he/she can out-perform over a longer time period. To examine this, the data was expanded to look at rolling 3-year and 10-year periods.

For 3-year rolling periods the proportion outperforming is 41.4 percent and for 10-year rolling periods it is 39.7 percent. In other words, the proportion of funds out-performing over longer periods may have dropped very slightly, but it remains largely stable.

Over 3-year periods, a greater proportion of UK equity managers generally outperform than for other classifications. while the average proportion of Asia Pacific funds out-performing is slightly higher than that for the UK (48.9 percent compared to 47.6 percent), this is clearly the result of results posted over the first 10 years, while the more recent period has seen a significant fall for Asian fund managers.

For 10-year rolling periods among the largest classifications, UK equity managers impressively maintain their average proportion of out-performers (47.4 percent), while North American equities – already relatively poor cousins – worsen dramatically over this longer period, with an average of just 20.8 percent of funds out-performing their benchmarks.

These findings will clearly not settle the active versus passive debate one way or the other, but they do provide robust statistical research into funds’ relative performance. such insights can better inform this ongoing discussion.

William (Bill) Patalon III is the Executive Editor and Senior Research Analyst for Money Morning, and The Money Map Report. Before he moved into the investment-research business in December 2005, Patalon spent 22 years as a journalist, most of it covering financial news as a reporter, columnist, and editor that included stints with Gannett Co. Inc., and The Baltimore Sun.

Patalon has covered finance and investing, economics, manufacturing, the defense sector, biotechnology, and telecommunications. the companies he’s covered include Eastman Kodak, Xerox, Harley-Davidson, Caterpillar, Westinghouse Electric, Verizon, MedImmune, and Black & Decker.

His most-memorable interviews include: former President Richard M. Nixon, General Electric CEO John F. “Jack” Welch, Forbes magazine publisher and former Presidential candidate Steve Forbes, and business-turnaround specialist and helicopter-industry pioneer Stanley Hiller Jr.

It was Patalon’s work covering Eastman Kodak Co., during the last half of the 1990s that solidified his reputation as one of the nation’s top analytical business journalists. With his award-winning reports on Kodak’s competitive travails, he consistently scooped his competitors in the national business media. His chronicles of Kodak’s turnaround efforts took him to China, Japan, Silicon Valley, new York, Washington, D.C., and even Hollywood.

Patalon’s work has appeared in Kiplinger’s personal finance magazine, USA Today, and The South China Morning Post, among other publications. A winner of approximately two-dozen journalism awards – including top honors from the Associated Press and the prestigious Society of American Business Editors and Writers (SABEW). Patalon is also the co-author of the Prentice Hall book, Contrarian Investing: How to Buy and Sell when Others Won’t and Make Money doing it. Before taking over as managing editor of Money Morning, he served as the editor of The Rebound Report, an investment newsletter focusing on turnaround stocks.

Patalon has a BA in Print Journalism from Penn State University, and an MBA in finance from the Rochester Institute of Technology. he lives near Baltimore.

Purchasing real estate is actually a severe fiscal determination to make. it needs a long-term determination and labor as a way for it for being lucrative. but usually do not get discouraged by the “long” term labor as this enterprise will provide amazing advantages in your case as an investor! You will notice how lucrative it can be and also you will discover that it can satisfy your daily life with home and funds stream!

• When you might have your personal house and also you have it for renting, that is when your lifetime of wonderful abundance will begin. with each passing calendar year, the lease of home goes up and also the benefit in the home goes up. For that reason, annually your income goes up! You’ll be able to buy new attributes and have them for rental as well, and also you may have new more income! Success in real estate enterprise is dependent on preserving and getting new attributes. that is how productive individuals in real estate this kind of as Donald trump and Robert Kiyosaki achieved their fiscal success in genuine estates. They allow this enterprise generate profits for them!

• Real estate enterprise is actually a steady and strong enterprise. Your financial commitment attributes will carry on offering you income. by way of example. You purchased a single-family device residence and have it for rental, rest assured which the scenario will only improve. the lease will go up each year, the house benefit may even go up above the prolonged ter, not mentioning the month-to-month lease pay out which you are obtaining.

To make these all simple to understand, becoming require in the real estate enterprise will provide you with the possibility to make more in lesser time and with lesser hard work exerted! that is known as creating the money perform in your case and not allowing your self perform for cash. only one thing you ought to don’t forget: usually do not borrow cash to take a position in real estate. it is far better which you preserve up and pay out in funds the home which you wish to acquire and also you will likely be in your way

Thinking about background, as background does repeat alone, almost everything looks to operate in cycles and designs. Real-estate, like other investments this kind of as commodities and stocks, has its ups and downs. but a single thing has usually been specified: there’s large financial gain in real estate financial commitment attributes. that is what make this enterprise an great a single!

by Carl Delfeld, Investment U Senior AnalystThursday, June 7, 2012: Issue #1790

While Mexico’s challenges make headlines, its strengths are making money for investors.

I have noticed that many people go to great lengths to travel the world but inexplicably ignore sites in their own backyard. take me for example. I have lived in Colorado for about 12 years and have yet to visit the Grand Canyon.

And while I have visited more than 30 countries around the globe, I have not even been to Mexico. When in San Diego with my family on multiple occasions, I took a pass being a bit spooked by all the headlines on border drug and gang violence.

This type of thinking is unfortunately keeping many investors away from Mexico – a big mistake.

As I have highlighted at Oxford Club investment summits over the past year, while Mexico’s challenges make headlines, its strengths are making money for investors.

And Mexico’s strength is that that it has emerged as a major manufacturing and industrial power.

U.S. industrial production is still at pre-2007 levels while Mexico got back to this level in early 2011. 80% of Mexico’s exports are manufactured goods and trade now represents 60% of GDP – a figure that has more than tripled since 1980. Mexican exports hit a record high in April of this year.

My view is that Mexico is on the way to replacing China as the premier global manufacturing platform for selling into North and South American markets.

China’s huge advantage in labor costs is evaporating. in 2000, Mexico’s manufacturing wages were 240% higher than in China. now they are only 12% higher and given all the logistical issues and transportation costs that come with shipping parts to China and then bringing the final product back you can easily see Mexico’s advantage.

Mexico’s competitive edge is supercharged by a weak peso policy that has pushed the peso down an incredible 1,500% against the dollar since 1987 (though the peso is beginning to trend upward).

This is why American, European, Japanese, South Korean and, yes, even China are falling over each other to invest in Mexican production facilities. One example is the recent opening of Italian tire maker Pirelli’s first ever plant in Mexico. this ties in with Mexican auto production which was up 20% in April year-over-year.

Always keep in mind Mexico’s geographical edge next to two huge markets and as a Pacific Rim country, ready access to Asia-Pacific markets.

Let’s take a moment and look at the big picture. While U.S. debt is approaching 90% of GDP, Mexico is at 27%. America’s budget deficit is 8.6% of GDP while Mexico is at 2.5%. in addition, inflation in Mexico is at a manageable 4.4% and, unlike Brazil, has no restrictions on capital inflows.

Mexico is open for business worldwide. get a piece of the action but remember that picking the right stock for a country on an upward trend is not an afterthought – it is the most important part. One of my favorite picks – Grupo Simec (NYSE: SIM) – is up 13.7% so far this year while emerging markets as a whole are down 6.2%.

Simec provides the finished steel that goes into manufacnuring plants being built hand over fist by global companies taking advantage of Mexico’s edge. in 2011 sales were up 19%, operating income was up 123% while Simec posted in the first quarter of 2012 a 24% increase in net sales and a 145% jump in operating earnings. Sales within Mexico were up 33% as the company exports about half of its production.

The stock is still trading below book value, at merely 65% of sales and at only 6.4 times trailing earnings.

And there’s more where that came from. in today’s Investment U Plus, I share another undervalued Mexican industrial company that is poised for incredible growth. It’s currently trading at just 75% of its book value and just 6.6 times trailing earnings.

Editor’s Note: To find out Carl’s exclusive Investment U plus pick for today along with our experts’ recommendations with each daily issue for pennies a day, click here.

…buying and selling stocks based on a reactive system…take advantage of that

Houston, TX (PRWEB) June 07, 2012

Jesse Webb graduated from the Davis Eccles School of Business at the University of Utah with a Bachelor of Science in Finance. he founded and became head trader at Orbis Advisors LLC as well as the VP and Head Trade Mentor at Vision Trading. Since 2004, he has mentored more than 2,000 students and his most recent venture is the Market Trend Signal TM trading system. from this, he became the developer of the redgreenstocks.com system which helps normal people learn “how to trade stocks profitably in any market.”

During Webb’s two appearances on The George Jarkesy Show he explained in detail how this system works as well as discussed his book ‘Trend following Stocks’. he describes that this book explains buying and selling stocks based on a “reactive system” where you discover trends and “take advantage of that.” Webb states that one of his goals is to “help people realize that they can do this.” through the book and his proprietary program at http://www.redgreenstocks.com Webb is giving novice investors “specific trend signals” and instructing them to “stay on [a] trend” “that [is] trending nicely.” he instructs investors to buy and sell stocks through an easy to use system; you sell when the trend is ‘red’ and buy when the trend is ‘green’.

For more information on this user-friendly trend following ideology of investment please visit http://www.redgreenstocks.com

To hear what Jesse Web has to say on The George Jarkesy show about investing or to see the Special Offer for show fans please visit the website.

About Jarkesy & Company George Jarkesy is a money manager and professional investor, respected financial and corporate adviser, and radio host of the nationally syndicated ‘The George Jarkesy Show’. he is a frequent market commentator and guest on FOX Business News, FOX & Friends, and CNBC. George started his career in the financial services industry with a New York Stock Exchange member. George also serves on the Finance Committee of the Republican National Committee (RNC) and is an active member of the National Investment Banking Association, The Jarkesy Foundation, Helping A Hero, and Chairman of The National Eagles and Angels Association