FINANCIAL THEORY 101 AND RISK

here's an article from Marcus Padley. It's about risk. Maybe you kids ought to learn this NOW, not when you are old. read the last few lines anyway. It might put life into perspective!
Finacial risk 101
(101 usually means the first class in the subject at Uni.)
"Many people get lost when it comes to risk. What is risk? It's actually quite simple. But before you go off and plot everything with a return against how risky it is, i urge you to consider this.There is a natural assumption in almost every aspect of life, from playing a cricket shot to investing in the stock market, that there is a trade off between risk and return.

Nice concept but many people get lost when it comes to risk. What is risk? It's actually quite simple. In the financial world it is the difference between an investment whose returns fluctuate wildly and one that doesn't.

Risky business

Take two stocks. Both return an average of 5% a year. But one stock's annual return deviates from the average by 2% a year (so it can return 3% to 7% in any given year) and the other one deviates by as much as 10% a year (so it returns anywhere from minus 5% to plus 15%). Clearly the first one is pretty predictable and the second one is jumping around all over the place. It is much more risky. It is called standard deviation. But you can't tell that from the average return alone how risky something is. That's why, to judge the suitability of an investment, you need to calculate standard deviation as well. It is a measure of the volatility of returns or in common parlance, risk. It is a measure of how reliable your returns are.

Now back to risk and reward. If you can measure the average return (the reward) and compare that to the standard deviation (risk) and do that for every possible investment in the world and plot them on a chart of expected return compared to standard deviation (risk) then you start to get a picture of what you should and shouldn't be investing in.

Risk & reward

In a perfect world, a world that matched risk to returns without error there would be a straight line from the bottom left hand corner of the chart (low risk low return) to the top right hand corner (high risk high return). We have been trained by hitting cricket balls and by betting with bookies to expect this. Bookies after all derive the odds, or expected returns, straight from the level of risk. Bookies are a pure example of an efficient risk reward realtionship.

But before you go off and plot everything with a return against how risky it is let me just finish the lesson with one final addition to the chart. There is a base line all financial investments have to compare to. It's called the risk free rate. It's a simple thing. It's the return you can earn without any risk at all.

Traditionally in the investment markets this is represented by the return on Government Bonds. The 5 year bond yield is currently 5.3% and the 10 year 5.5%. So theoretically you can draw a straight line across your chart at a return of around 5.3% to 5.5% and any investment whose expected return is less than that that isn't risk free can be instantly discarded. Why invest in a risky investment that returns less than a riskless investment. Pointless.

Tax, fees & inflation

Where this gets interesting of course is when something plots above or below the lines. When the expected return does not match the risk. When an investment turns up as high return low risk, or low return high risk. They would stand out on the chart and be invested in immediately or discarded as stupidity.

So lets look at a few investments before tax, fees and inflation:

The stock market: Expected return of 9.38% (5.88% plus 3.5% from dividends). Risk 7 out of 10.
Bonds: Ten year return of 5.52%. Risk zero.
Borrowing money to invest in the market: Expected return of 9.38% less interest of 9.75% (tax deductible) = minus 0.37%. Risk 7 out of 10.
Paying off the mortgage: Pretax return of 7.81% (Standard variable rate) which grosses up to 10.6% pretax. Risk zero.
Marriage: Expected average return of one extra income, zero to four kids, two possible inheritances, a free life coach even if you don't need one, onerous school fees and a dog. Risk: Long term love, fulfillment and satisfaction.
Divorce: Expected return of minus 50%. Risks as yet unknown.

Now all you have to do now is work out how much risk you are prepared to take out of 10 and the investments you make in life will pick themselves.


Marcus Padley is a stockbroker with Patersons Securities and the author of the daily stockmarket newsletter Marcus Today. For a free trial of the newsletter, go to http://www.marcustoday.com.au/

Marcus Padley Stockmarket Secrets is a book for the current financial climate. With global markets crumbling, and many of the world’s leading markets entering into depression – the likes of which we’ve never experienced before – the time is ripe for a straight-shooting approach to money, wealth and investment.

I'd like to be optimistic but I'm not.

HI,
As long as you can read and write, and move and see, you can learn.
You need to learn so you will be able to survive and make sense of this world.

I want to be able to say something optimistic, but I can't.

I think it's time to sell off and cash in all profits. asap

If you go to www.google.com/finance, and search the S&P200, do a technical KDJ analysis, it showed on the J, on friday about 1pm, that the
A ords is oversold. it was above the 80. It's a sign to sell and not buy. Just
one of many signs.

(google finance is a great free tool for using technical analysis. Learn by doing there, but go via internet explorer. Mozilla somehow doesn't allow you to do the technical analysis, neither does Yahoo finance. )

I think the Global economy is in serious trouble.
I hope I'm wrong, I really hope so

The A ords closed at 4875 on Friday 28.1.11 with a drop of 34 points, all
markets dropped.(the asx S&P200 dropped too. its about 100 points less.

I don't think you can dismiss these drops as a correction after 8 weeks of aus
rises. I don't think you can blame the riots in Egypt, or the closure of
more banks in the USA this week.

My thoughts are it is a reflection of pessimism and the revelations that
arose from the GFC this week that the regulators and
top management do not actually know what caused the GFC or how to fix, or
even how to avoid it in future.

google recent GFC investigations 24.1.2011
http://www.nytimes.com/2011/01/28/business/economy/28inquiry.html

and see 1929 data below.


US market in Review: World market Crashed due to the Political unrest in
Egypt
29 January 2011 ref
http://galaxystocks.com/4595/sector-summary/us-market-in-review-world-market-crashed-due-to-the-political-unrest-in-egypt/

S&P 500 had it's biggest decline in the history of since August, US economy
faced the challenging among the trade due to the political uncertainty in
Egypt and huge fell of Ford motor and Amazon shares.

Three major NASDAQ, S&P 500 and Dow Jones indices were attempted to stable
the market but failed to perform well and lost the investor confidence
because investor are looking for safety for their investment. Even no single
indices were closed above the trend line during last session of trade.

Dow Jones Industrial Average declined -1.39% or -166.13 points to 11,823.70
however it exhibited a positive quarterly performance of +248.16 points or
2.14% which continued to remain up for half year with +1325.82 points or
12.63% and YTD performance firmed at +246.19 points or 2.13%.

S&P 500 INDEX, RTH declined -1.79% or -23.20 points to 1,276.34 however it
exhibited a positive quarterly performance of +17.83 points or 1.42% which
continued to remain up for half year with +170.21 points or 15.39% and YTD
performance firmed at +18.7 points or 1.49%.

NASDAQ Composite declined -2.48% or -68.39 points to 2,686.89 however it
exhibited a positive quarterly performance of +179.52 points or 7.16% which
continued to remain up for half year with +422.33points or 18.65% and YTD
performance firmed at +34.02 points or 1.28%.


so what can you do?
Make your own MOPI - MY own personal Indicator.

I/we started trading just before the Global financial crisis (GFC) in August
2007.

The A Ord was at 6830. (you can find the historical figures on the
www.asx.com.au)

I think of the scale like stairs, 1 - 9 NINE BEING the top without a
landing. step 5 is good, steps 6 - 7 excellent. 8-9 it may be about to
burst. But steps 3-4 require more research and much caution.

In 2007 we were going up fast toward a bust, it was rising too sharply and
too high.

In January 2008 there were huge unexpected problems in the USA, and in July
2009 it fell to 3111.

It has been up and down since. Halfway between both extremes is my midpoint.

You may not agree with this time frame so make your own YOPI - (Your own
personal indicator.. (MOPI =My Own personal Indicator.)

To calculate your own YOPI take the period you think is a good reflection of
the global market then the record the highest daily result less the lowest.
divide by 2 and add the result to the lowest. Note the historical figures
will change so you need to re do your YOPI every 3-6 months.

My Mopi.

Since 1.07.2007 The highest UPPER was 6853. The LOWEST 3111. 1871 on top of
the lowest of 3111= 4982

Right now it is BELOW at 4800 .

IT'S NOT ABOVE MY MID POINT. THE MARKET is still shaky.

My current MOPI is 4970. That is my worry line. That's a Decision time.

I take in all the indications on the chart and finally look at the market
points, and deduct my MOPI. If the result is above my 4962 points, I'm
happy. Right now its not.





Here's some sobering thoughts . ref
http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929

" Anyone who bought stocks in mid-1929 and held onto them saw most of his or
her adult life pass by before getting back to even. "

-Richard M. Salsman[3]

The Roaring Twenties, the decade that led up to the Crash,[4] was a time of
wealth and excess. Despite caution of the dangers of speculation, many
believed that the market could sustain high price levels. Shortly before the
crash, economist Irving Fisher famously proclaimed, "Stock prices have
reached what looks like a permanently high plateau."[5] However, the
optimism and financial gains of the great bull market were shattered on
"Black Tuesday", October 29, 1929, when share prices on the New York Stock
Exchange (NYSE) collapsed. Stock prices plummeted on that day, and continued
to fall at an unprecedented rate for a full month.[6]





The October 1929 crash came during a period of declining real estate values
in the United States (which peaked in 1925)[citation needed] near the
beginning of a chain of events that led to the Great Depression, a period of
economic decline in the industrialized nations.

The October 1929 crash came during a period of declining real estate values
in the United States (which peaked in 1925)[citation needed] near the
beginning of a chain of events that led to the Great Depression, a period of
economic decline in the industrialized nations.

In the days leading up to "Black Thursday" (called "Black Friday" in Europe
due to the time difference) and "Black Tuesday" the following week, the
market was severely unstable. Periods of selling and high volumes of trading
were interspersed with brief periods of rising prices and recovery.
Economist and author Jude Wanniski later correlated these swings with the
prospects for passage of the Smoot-Hawley Tariff Act, which was then being
debated in Congress.[7] After the crash, the Dow Jones Industrial Average
(DJIA) partially recovered in November-December 1929 and early 1930, only to
reverse and crash again, reaching a low point of the great bear market in
1932. On July 8, 1932, the Dow reached its lowest level of the 20th century
and did not return to pre-1929 levels until November 1954.[8][9]

Meg

so you want to make a million dollars?

We bought some AXT shares AT .002 (1/5 OF A CENT) LAST SEPTEMBER 09, AND THEY ARE NOW .065C (6 AND A HALF CENTS). UP 209%.. but OF COURSE WE DIDN'T INVEST ENOUGH MONEY TO MAKE A MILLION. (we didn't want to take such a risk) AND WE DON'T KNOW IF THIS COMPANY IS LIKELY TO CONTINUE RISING. That's the risk.
Share trading is full of risk. So why not put your money into one of the top 100 companies? becasue you're not likely to get such a rise in your investment. you might get a 10% increase in a solid company.. maybe 20%.. but even that won't make a million.
I agree with Marcus (see below) you need to start a business, learn about tax and accounting, invest your spare cash and TRY to gradually build a million.
you can join other traders in forums like http://crazyjimsmith.blogspot.com
and get good advice.It's worth the investment.

here's an article on the subject by Marcus Padley.ref marcus padley 23.03.2010
someone wrote
"I have $10,000 and want to turn it into a million dollars. How do I do it?" Marcus Padley (respected share trader) demonstrates how you can achieve this goal by taking advantage of the stockmarket.
I got an email this week. I ask for Stupid Questions in my newsletter and I get them. "I have $10,000 and want to turn it into a million dollars. How do I do it?"
You're thinking "How Stupid" but it's actually a really good question. So let's try and answer it.
First thing to do is to accept that you will not achieve this goal without being prepared to lose all your money. You will not achieve it in the bank, in cash, in property or in managed funds. There is no "average" return in any asset class that will suit you. You need to win Tatts Lotto or place and win some long odds bet at the bookies.
Outside that you have two options. Build a business, the most sensible option and the real answer to the question, or the stockmarket. The stockmarket appears to be less effort so let's look at that.
If you try to achieve this goal in the stockmarket you will not do it through diversification. A "portfolio" is not for you. You will only achieve it through two techniques. The first is to find one stock, one fantastic "Rocket under a Rock" and ride it to a million. Or two, get a lot of stocks right consistently over a long period of time, in other words you need to develop a trading system and build the capital by consistently successful trading over a long long period of time.
If you are going to build a trading system you have a lot of work to do. You'll have to get your head in the trading game. That means getting an education in how to trade and buying the software to do it.
If you are going to do it in one stock then here are a few numbers. To turn $10,000 into $1,000,000 you need a stock that goes up 100 fold. That's a 10,000% return. In the All Ords at this very moment (about 500 stocks) there are exactly 60 stocks that have in their trading histories, if you timed it perfectly from all time low to all time high, returned more than 10,000 percent. That's a lot better odds than you might imagine. That's 12% of stocks. Here are some of the highlights:
Biggest and fastest rises in history:

Fortescue Metals. Turned $10,000 into $73,166,166 between September 1990 and June 2008. 17.8 years. This is the biggest single return of any stock over any period in the All Ords.
UXC Limited. The fastest of all. Turned $10,000 into $6,000,000 between June 1998 and March 2000 in the Tech boom (it was called Davnet at the time). 1.8 years.
Paladin. Turned $10,000 into $13,500,000 between April 2003 and April 2007. 4.0 years. Third biggest return and the third fastest.

Other stocks have done remarkable things with $10,000 include News Corp. which turned it into $26,692,393 in 25.4 years. BHP into $2,543,468 in 42.2 years. QBE $12,165,775 in 32.7 years. Others that have achieved it include ANZ, RIO, Woodside, Origin, Santos, Leighton Holdings. Coca-Cola Amatil, Lend Lease. The list goes on.
Bottom line, it is possible. But it will not be easy and it could take 42 years. And I ask, how on earth are you going to stop yourself selling when you have doubled your money to $20,000. And what are you going to do when it falls on day one. And the big one....which stock do I start with?
I have written before about how pitiful the real average return from the stockmarket actually is post tax, inflation, transaction costs, management costs and the index fudge and because of that the stockmarket is not about averages and diversification, it is about timing and buying stocks that go up.
The pursuit of $1,000,000 with $10,000, as unrealistic as it is, is the essence of what this game and the advice game is all about. It's not about pretending to be fund manager, hiding in the average and relying on the long term. There are no free lunches. It's about finding stocks that go up and avoiding stocks that go down. It's about thinking it's possible and applying yourself to the task. Even if you come up 9900% short, you've still doubled your money. "

REMEMBER: This is not financial advice. YOU TRADE AT YOUR OWN RISK. you are responsible for your own decisions. I/We could be wrong.. no one can see into the future.. not even you..

It's September and there is some confidence showing

After nearly 18months of bad share trading, ( a BEAR market) confidence seems to be returning and the market is rising again. (the BEAR is turning into a BULL and we hope there is a stampede by the herd which will push prices up.)This confidence is because America seems to be improving and although their unemployment rate is still high, people are buying houses again. (but can they afford the sure- to- rise interest rates?) Right now there are still many cheap shares under ten cents.

I recovered all the losses last month, and we made over 5000.00 profit on the shares I recommended. they were ABY.AX (bought at 11 cents and sold at 1.oo)
and MCW.AX bought at 17 cents and sold at 63 cents.
many of the under ten cents shares are rising slowly. so the message is:
if you invest $500.00 and a 1 cent share doubles, then you double your money and make another $500.00 plus get your investment back.
But of course you have to buy the right shares.. so what "sector" is likely to rise? energy, mining, food , banks, etc?? and what can we afford to buy with 500.00? That is the question.

Ask yourself, what has sold well before and dropped in the recession.? what was the previous high and low for the year (or check for two years). what has risen recently? so who knows what? why are people buying this particular stock?
go to the www.asx.com.au , check in the market statistics for volume each day. (after 4.30pm) see what rose and write down the companies that were cheap. then go to company research and look at their graph. Then go to www.yahoo.com. and type into the finance section the code plus .ax, example aby.ax and see the information quoted. you could also goto google to see how much money the company has.. it really needs to have a few million in the bank. say 50 mill. that is called capitalisation. too low and they might go broke, and you will lose all your money..
to learn more you can visit the pages at www.asx.com.au for heaps of free learning.
Making money on the share market is a JOB. you earn your money because you do research.
you do take risks, but you spread your risk by not putting all your eggs in one basket.

best of luck .Mega

Hows the shares going?

Over the last 12 months, "Your" stocks and our portfolio had a hammering in the biggest global meltdown in 75 years.
The whole portfolio fell as much as 89% !!!OUCH!! Gosh-Darn- Blankety-Heck!
It has recovered to only about a overall loss of 38%. BUT there have been some big gains which offset some big losses, and total wipeouts like ABC Learning.(they went bankrupt) Tax wise,these are called unrealised profits/losses and can be claimed and can reduce tax paid in your job (when you get one) so learn about tax.

Lesson 1. learn to read, write and add up. then learn about tax law.
lesson 2. Learn about managment and managing teams and people. learn to give a win-win result. Learn to be a good coach. Then when you have a business you will be able to get the best out of your team.

The Australian market is rising and it seems that the recovery is on its way, however the American unemployment figures (or Australias) may not be as good as they seem. Therefore the result may not be as rosy as suggested.
They may be counting part timers and casuals as "real jobs".
There may be more pain to come. BUT if you/we buy wisely now, you should make money in the longer term.
Another thing to consider is inflation. as soon as the real estate starts rising, inflation will push up prices and interest rates.. what is cheap today may be expensive tomorrow, especially money owed and interest payments.

I bought ABY for 12 cents in April and now they are about 79 cents. Their price 12 months ago was 2.30.
I also purchased MCW for 17 cents and they are now around 56 cents. NWT is rising and at 7 cents should give a good profit in the next 12 months. There are heaps of others. it's just a matter of being able to buy and hold, without using a margin loan.
But it might be a rough and scary ride , so don't invest all your eggs in one basket and only buy minimal amounts.And Dont forget htere are plenty of Crooks in the share market. Takeovers, consolidations, and even compulsory buying back of your shares.

and Remember..I could be wrong. so do your own homework. make your own decisions. as the great guru, WarrenBuffet says, "eat your own cooking"

The best way to learn about the sharemarket is to pretend to have a portfolio. you can make a watch list in yahoo or on the www.asx.com.au and watch your shares rise /fall . there are even educational sections to teach you. I wish I'd learnt all this when I was young, but I had no idea the sharemarket even existed. That's why I write this blog.

Mega





Remember we are not financial advisors.. Sampson management Services (SMS) educate and inform only...We are Assett Management Consultants- we teach you about risk and how to measure that risk according to the international standards on Quality, Environment, OHS, and Risk management in an integrated approach. Ref standards: AS/NZS/ISO 9001, AS/NZS/ISO 14001, AS/NZS/ISO 4804, AS/NZS/ISO 4360.

well kids, your shares are still down

Your shares dropped as much as 79% in this huge global crash .. but I think the market has turned.. on 19.2.09 and is on the way to recovery..
It will take a while, but in the meantime ignore all the negative talk and start saving...

Rich kids feel poor

I thought with the last year (2008) sharemarket crash, that the grandkids would be sworn off their shares.. I mentioned casually, "well, I would've given you all more shares for your birthday or Christmas, but I guessed that you wouldnt be interested."

Three teenagers put up their hands. "Yes please we're interested".
Lloyd asked.. "but weren't they all worthless?"
His mother interjected, "yes, they fell but we havent sold and now they are rising.. the sharemarket is in recovery."

So capitalism is still alive and well, and hope still sparkes!

That's good, because it means they realise that you have to continue to look to the future, and what happened yesterday, does not always predict what might happen tomorrow.