Archives for September 2011

Finally Measures Being Taken By the Government to Revitalize Ethanol Production

petroleumBrazil’s government revealed new financing and other incentives for sugar cane ethanol production, declaring that it will work closely with the private sector to improve production in an industry that has struggled of late despite its enormous promise.

Recently the government of Brazil announced that it would offer to the private sector funds in the range of 30 billion to 35 billion Real to finance expansion in the sugar cane sector through 2014, a major bet equivalent to almost two-thirds of the industry’s annual output.

Haroldo Lima, who is the head of Brazil’s ANP energy regulatory agency, told a major investor conference the best way for the government to thwart regular shortages in the sugar cane-based bio-fuel was to make available the thriving conditions so that investment could get a boost “not in the medium term, but in the short term.”

The enthusiastic, business-friendly communication from Lima and other officials as well as Energy Minister Edison Lobao came as a surprise, given that Brazil’s government was understood to behind the regulatory control of ethanol earlier this year. Some investors in the sector dread a stronger government intervention, such as the setting of production targets.

Mr. Lobao believes that is imperative to consider that the sector is going through a new phase of challenges; hence, according to him these challenges are faced with everyone (government, business men) so this will have to be “overcome together”

Lobao said the government is putting in efforts with private-sector representatives to devise a regular 10-year investment plan — a period that is anticipated to see demand for ethanol roughly double in tandem with Brazil’s flourishing economy.

Meanwhile, the producers at the conference said some kind of incentive was badly needed. Despite high prices for the bio-fuel and a huge expansion in the domestic fleet of cars that use it, Brazil’s approximately 30bn a year sugar cane industry has struggled with sluggish investment and inadequate supply.

Earlier, officials from President Dilma Rousseff’s government have criticized ethanol producers for what they explain as a disappointing and failed investment and planning from private players that failed to thwart cyclical ethanol shortages that provoked a near-revolt among consumers at the pump earlier this year.

Producers, on the other hand say that their efficiency is restricted by the regulatory uncertainty, patchy tax laws and huge financial wreckage from the 2008-09 global crises. After rising at an annual average rate of 10% since 2000, cane production in Brazil rose by no more than average 4%.

 

Brazil Poultry Industry is All Set to Be Leading Player of the World

eggAccording to the Food and Agriculture Organization (FAO) of United Nations, Brazil is all set to become, for the first time ever, as the world’s leading exporter of chicken, with a third of global trade, according to the latest statistics, surpassing the current biggest exporter–the United States.

However, Brazilian supremacy in agriculture is not only limited to chicken or sugarcane. The statics from FAO also show that US agriculture thirty year exports dominance is also being challenged by Brazil in other fields such as soybeans, beef, corn and even rice, with considerable advances in global trade share.

Even though the report looked optimistic on Brazil’s agriculture prowess, it sounded little cautious on two fronts. The report believes that Brazil will have to overcome certain hurdles for the sake of sustainable growth. Firstly, the country needs to in general boost its infrastructure to continue expanding its export capacity. Secondly, one more big issue which will have to be addressed is the sustained domestic costs that are spiraling upwards.

At present, in the meats Brazil is already the world’s second producer and has more than compensated the constant stagnation of Argentina, and concerning the meat exports, Brazil is ranked first with 1.5 million tons annually.

The FAO report foresees that an only depressing factor for beef export expansion is Russia, as has happened, which has unexpectedly and significantly cut Brazilian imports, however exports are estimated to grow in 2011, after preceding three years in which the home market was also flat.

For 2011 FAO anticipates a plunge in US chicken exports which will help Brazil become the top exporter of the world with over four million tons equivalent to a third of the international market.

Concerning soy beans the Brazilian crop is poised to reach 76.9 million tons this year compared to 61 million tons only a couple of years ago. The US crop is 100 million tons; nonetheless, the gap with Brazil is closing. FAO anticipates this year’s world harvest of soy beans to reach a record 464 million tons.

Meanwhile, the corn crop in 2011 will reach a record 60 million tons including 12 million tons exported.

Brazil also has difficulty with storage capacity that does not match up to a world top league farm exports country, yet. For instance sugar: in 2011 the yield is 39 million tons, growth of 4.6% over 2010, but exports are estimated to fall 1.5% owing to storage problems.

World’s Top Investors- Ralph Wanger

Ralph WangerIn the final article, we will focus on the investment philosophy of Ralph Wanger.

Ralph Wanger

Ralph Wanger was lead manager for Arcorn fund, which was one of the most top performing “small cap” growth funds in America between 1970 and 1988. In 1977 he became the portfolio manger as well as the president until he retired in 2003. Ralph has been highly successful fund manager; whereas the S&P 500 index rose by 12.1% during the period of 1977 and 2003, the Arcorn fund grew at an annulized rate of 16.3%.

Investment philosophy

Wanger always followed simple, tried and tested methods in investments. His idea for investment was always look for long term investment and be holder of smaller companies, which are financially strong, and have entrepreneurial managers. He believed that investors should invest only in those businesses that are understandable and will benefit from macroeconomic trends. He had a unique way known as “theme investing”. That means, if there is discovery of large land reach in metals and big companies are rushing in to extract metals then you are not investing in mineral companies rather you would buy stocks of small companies that are providing metal companies’ labor force with shovel, gloves, helmets and other protective equipments. Ralph was very particular about investment information. Like many prominent investors, Ralph also has several parameters to invest in a company.

  • He believed stocks should belong to a company which has a growing market base for its products and services.
  • Before investing, you should look at the historical figures to find out whether company has had a dominant market share.
  • A potentially strong business is futile if the management is not professional. A outstanding and strong leadership makes difference between winners and losers.
  • An understandable business: if you do not understand the business model of a company or company is unresponsive to macroeconomic trends then you should stay away.
  • Apart from strong management qualities and nature of business, investors should also focus on company’s marketing skills.
  • A high level of customer service is also desirable from companies where you are investing. Indeed, with increasing competition and rapid globalization, only those companies will survive who will put lot of emphasis on customer relationship management and will create reliable, better and stronger brands.
  • Financial statements should be properly evaluated before investing. A strong balance sheet is very vital for the future growth potential of the company.
  • A company should also provide an opportunity to investors to take a larger stake in the company.

World’s Top Investors- Warren Buffett

BerkshireIntroduction

We all like to make money in stock markets; but not all investors are always successful. Investing in stock market needs sound financial market knowledge, business acumen, and analytical skills, lots of patience and of course luck. Our aim is always to build a portfolio that can beat the market rate of returns. And if we are lucky and knowledgeable we can do that but most of the times investors are always in search of that magic combination of portfolio which can deliver more than average market return. Historically, average market return has been solid 12%.  But markets have also seen some great investors who have beat this rate of return and earned more-consistently. These great investors have innovative and new ways to analyze investments potential.

In this article, we will study about world’s best ever investors. We will learn about their investment strategies and philosophies. We will try to find out what qualities set them apart.

Warren Buffet                                                                                

Warren Buffet born in 1930 is probably world’s most successful investor today. Buffest has made a multibillion dollars fortune through investing in stocks and buying companies through Hathaway Berkshire.  His success in investment world can be gauge from this fact: if an investor had invested $ 10000 in Hathaway Berkshire in 1965 then today his/her investment would have valued $50 million.

Investment philosophy

Buffet’s investment philosophy is made up of patience, discipline, and simplicity. These strong qualities have helped him to outperform the market. His idea behind investment is that the business world is made up of two kinds of investment opportunities. One world comprises of small “wonderful” businesses which are worthy enough to be invested. The other world comprises of large number of mediocre businesses and bad companies which are not worthy enough for investments for a long term.  Buffet’s other investment philosophy is that most of the businesses command much higher price or valuation when they are selling, but there are numerous occasions when they are sold very cheaply. In such situations we should act boldly and buy. There is no need to pay attention whether economic scenario is gloomy or stock market forecasts are gloomy.

Some other investment strategies of Buffet’s include:

Always invest in those companies which provide high rate of returns; typically these companies do not have large amount of debts. The businesses in which you want to invest should be understandable. On most of the occasions before investing we only look at the revenues or net profits; but according to Mr. Buffet investors should look at the profits on cash flow. Besides, good companies have similar characteristics; their earnings are predictable and the management is owner oriented.

World’s Top Investors- Peter Lynch

PeterFrom bond markets, we now turn our attention back to stock markets. In this article, we will look at investment philosophy of Peter Lynch, one of the most successfully equity fund managers.

Peter Lynch

Peter Lynched managed the popular fund called Fidelity Magellan fund between 1977 and 1990; during this period the fund assets grew from $20 million to $ 14 billion. Interestingly, Lynch during that period of 13 years consistently beat the S&P 500 index on market returns-as his fund gave annual return of 29%.

Investment philosophy

Lynch was described as “chameleon” which means he was very flexible and adopted those investment styles that suited at a particular time or period. A thorough professional and extremely hard worker, Lynch worked almost 24*7. He networked a lot and used to have detailed conversations with companies’ executives, investment managers, industry experts and market analysts.

His stock selection process was strictly based on 8 guidelines or rules.

Know what you own: Many times investors are blindly following other investors in investing without knowing anything about the company. They are clueless about company’s long term strategies, sometimes they are not even sure whether company in which they have invested has sound management board, or some strategic decisions taken are consistent with company’s philosophy.

It is futile to predict the state of the economy and interest rates: According to Lynch, investors should concentrate on company’s fundamentals, its long term potential rather than worrying about economy or interest rate.

You have plenty of time to identify and recognize exceptional companies: Do not rush to invest. Always give yourself sufficient time to do the homework, research and analysis of any company before investing.

Avoid Long shots: Do not pay any heed to market speculation and noises and concentrate on company’s fundamentals.

Be flexible and humble and learn from own mistakes: We all are humans and making mistakes for humans is natural. But learning from mistakes is what sets good investors apart from bad investors. When you go wrong; analyze what went wrong. This is also time when you should define your objectives whether you need stability from investments or more risks. Always define your risk tolerance limit. That is, if you take a hit in the market and you lose money to some level, then you should know at what level you are saying goodbye to the market. Flexibility provides more choices. So, if your portfolio does not provide desired market returns then look out for some other choices-don’t be rigid.

Good management is very important-buy good business: investors are often preoccupied with companies’ management but they fail to realize that apart from strong management your investment returns also depends upon good businesses which has strong growth potential rather than those industries which are stagnating.

 Before you are buying you should know why you are buying: Investors should invest rationally. Do not follow the market blindly.

There’s always something to worry about: While picking stocks you show belief in that particular company. Every company has several areas and issues to look upon; sometimes there are possibilities that some areas or issues are not given attention by company’s management which may barring on the long term. Investors should always be on toes and raise important issues with the management if they are worried about some decisions or issues.

World’s Top Investors- Philip Fisher

FisherIn the previous article, we looked at the investment philosophy of perhaps the world’s most famous investor, Warren Buffett. We will now look at another great investor, Philip Fisher.

Philip Fisher     

One of the most influential investor the world has even seen, Philip Fisher, is known as pioneer in “growth investment Strategies”. As we have learned before, growth investing strategy means identifying those stocks which promises exponential growth in the future. Born in 1907, Mr. Fisher started his career in 1928.

Investment philosophy

Although there was no culture of technology stocks and Silicon Valley was not well known back; Fisher was well known for his investments in innovative companies that paid lot of attention towards research and development. He too like Buffett believed in the long term investment strategy.  He always looked to buy great companies at reasonable prices.

Fisher in his 70 years investment management career achieved great results by investing in properly managed companies with immense opportunity to growth. For instance, Fisher purchased Motorola shares in 1955 and didn’t sell it until 2004-when he died.

For investors, Fisher charted out a 15 points guide that they must look before investing. This guide is broadly divided into categories: quality of management and businesses’ characteristics. Some of the important aspects when looking at management qualities include management’s integrity, conservative accounting standards, no rigidity but lot of flexibility and openness to change, long term view of the company, excellent management control and financial systems and encouraging personnel policy.

Some important business characteristics should include inclination towards growth, strong profit margins, healthy return on capital, a culture of strong research and development, strong sales organization.

Fisher always did lot of homework, research and analysis before investing. He used to seek lot of industry information and company information through simple tool called “business grapevine”. Although Fisher was very private person, he was brilliant in networking with people when he needed some information on specific company. He always believed in diversifying stocks to cut risks and volatility in valuations.

World’s Top Investors- Bill Gross

In the previous articles, we looked at two of the greatest investors in stock market. Now, we will turn our attention to bond markets and one of the greatest bond investors, Bill Gross.

Bill Gross      

Known as king of bonds, Bill Gross is world’s leading bond fund manager. He is the founder as well as managing director of PIMCO family bond funds. PIMCO comprises of Gross himself and his team of leading professionals who manage more than $600 billion in fixed-income assets.

Gross is well known for his ability to change his direction in business according to the changes in the market.  It is not surprising that his views are closely followed by bond investors around the world.

For Gross, successful investing strategies (both bonds and equities) are based on strong foundations, essentially supported by two pillars. The first one is the investor’s ability to formulate and articulate a long term investment outlook. The second principle is to keep a correct structural composition in one’s portfolio. These foundations are based on long term forecasts-generally three years. So, it is essential for investors to avoid acting with emotional sentiments or greed or fear when they have invested for the long term. According to Gross, emotional responses can make investors and management to act exactly opposite and take wrong decisions during irrational period in the market.

He also firmly believes that those investors who fail to practice sound investment techniques like following investments equations: diversification, risk return measurements, investing costs lose out to more astute investors who follow investment techniques.

Gross is not just one of the greatest bond investors, but also a much respected market commentators. His predictions and insights on global financial markets are followed widely by the investment community. His views on global markets regularly appear in top business journals.

World’s Biggest Market Crashes- Part 5

Market crashAll the market crashes that we have discussed above point out that stock market volatility, bursts are result of our own faults and greed. We are responsible in creating risks in market by inflating prices of assets without justifying the reason behind this enthusiasm. Inflation in the asset prices is not a wrong if this inflation is backed by economically rationale principles. The sudden appreciation of assets should be justified by the intrinsic potential of the underlying company.

Another conclusion is financial regulators around the world also need to formulate financial reforms at regular intervals so that any advantage taken by unprincipled bankers or traders do not result in systemic risk.

We should also not fall prey to “herd mentality” where investors blindly invests in booming stock market bubbles because “others” are also investing. Besides, human greed and unreasonable belief in getting quickly rich also backfires as people get burned by stock market crashes. These events also suggest us that timing between two stock market crashes has narrowed. Earlier stock market crash use to occur after decades but now it might happen within few years. As an investor we should make sure that we are well educated, rationale, analytical and well informed.

Regardless of any measures taken by governments, financial regulators, crisis will emerge from time to time but it’s up to the investor where he should use his brains, commonsense and knowledge so that he does commit the same mistakes and fall prey to stock market crash.

All market crashes have a lot of similarity even if they may occur in different markets or regions. Their causes are similar and the signals they give of an imminent crash are also similar. Crashes will always happen in the market. However, if you are prepared to learn from the past market crashes, you can definitely preserve your capital during a crash or even profit from one.

World’s biggest Market Crashes- Part 4

Housing BubbleTill sometime back, the impact of market crashes was only felt in the region where they occurred. In majority of the crashes, be I in Latin America, Russia, Asia or the U.S., there was never the risk of a contagion. However, that has changed in the era of financial globalization as we saw in the most recent market crash in the housing market and its subsequent impact on the global economy.

The housing market crash and the credit crisis

Impact:

Between the period of October 2007 and March 2009, the S&P 500 declined from its peak of 1576 to 676, a drop of57%. The global economy slipped it into a recession, with some parts still making a gradual recovery.

Cause:

After the dotcom burst and the subsequent recession, the U.S. Federal Reserve kept an extended period of low interest rate. The idea was to push business borrowings and consumer spending so that the US economy could come out of the recession. Meanwhile, the period of loose monetary policy in US was coincided by global savings glut primarily China and other south Asian export oriented economies. As the period saw great demand in commodities, commodities exporting countries accumulated huge dollar reserves. This excess savings by developing countries were invested which helped the global economy to keep low interest rates. Again, large scale currency intervention (China) was the source of financial distortions that ensued and haunted the global economy. The glut of savings from emerging markets especially china has been a key factor in the decline in US real long term interests rates, despite the parallel decline in US savings.

Lower interest rates in turn enabled American households to increase consumption level and worsened imbalance between savings and investments. And because foreign savings were predominantly channeled through government (or central government) hands into safe assets such as treasuries, private investors turned elsewhere to look for higher yields. Upset with low returns investors started to look for some other options which could yield them more returns; hence they started to look towards more risk. This lead to a re pricing of financial risks and unleashed financial engineering which created financial products for the low interest rate world, such as securitized debt instruments. This is not to say that reserve accumulation was the only cause for the current crisis.

core issue remained the Chinese willingness to fund America’s consumption and borrowing habit. Without this support, interest rates in US would have been much higher, which would have prevented the US burrowers to borrow money without any second thought, even though their income was not increasing at the same pace as their mortgage loans. As a result mortgage loans on homes started to default. This prompted mortgage backed securities to plummet inflicting massive losses for banks and financial institutions. Subsequently, large scale losses of banks’ resulted out of housing market collapse spread to other asset classes. As a result, market became very volatile worldwide where stock markets around the world witnessed massive erosion of their wealth. The housing bubble crash and subsequent credit crisis is going to haunt investors for many years. Still global economy has not been able to recover and most of the businesses (especially in the US and Europe) are very cautious on increasing their production level.

Consumers are highly indebted especially in majority of the western economies. As consumers restructure their finances their purchasing and spending habits has also got subdued affecting demand for consumer goods. The matter has become worse with major industrial nations facing huge fiscal deficit prompting governments to start austerity measures. Widespread structural imbalances in the developed economies will take years to get rectified. The housing bubble crisis has not only seen property market collapsing but it has also created severe dent on banks’ finances. The crisis has also directly or indirectly has wiped out thousands of jobs and companies’ production level.

World’s biggest Market Crashes- Part 3

TradingIn the previous articles, we have looked at three market crashes that occurred in different time periods in different regions of the world. In this article we will look at another relatively recent market crash, the dotcom bubble burst of 2000.

The Dotcom bubble burst      

Technology has changed the way the world works. In the late 90s, it also changed the way stock markets worked. During the dotcom boom, dotcom companies that had not registered a single dollar in revenue were trading at P/E multiple of 200X, 300X. Some investors like Warren Buffett had predicted a crash well in advance. And finally in 2000, the crash did happen, wiping out billions of dollar in investors’ wealth.

Impact: 

Between the period of March 11 2000 and October 2002 the NASDAQ composite index lost 78% of its market capitalization.

Cause: 

By 1995 internet usage was increasing in the US at a brisk pace. With massive rise and huge potential to grow from untapped market, commercial internet usage was catching every investors’, internet related companies imagination. People, speculators, investors thought that this internet age will create dawn of “new economy” or “knowledge economy”. E-commerce, internet, consumer-driven-navigation became the buzzwords. This over hype of internet usage led to big numbers of IPO’s cashing on the euphoria. This period saw small start- up tech companies, which were funded initially by venture capitalists, launching their IPO’s. Even the investors were blinded by this euphoria; they invested heavily on such stocks without looking at their business models, which were in most cases-unsustainable. Unsurprisingly, the news of dotcom companies making losses started emerging and some companies even folded their operations within few months after their inception.

During the peak of dotcom boom (1999) there were 457 IPOs, most of which belonged to internet and technology related companies. 117 IPO’s of those 457 doubled in value during the first day of trading. On the other hand after the dotcom crash, 2001 saw only 76 IPO’s where not a single IPO doubled in value during the first day of trading.