Riots in Russia

OR WERE THERE?

Investors rely on news about companies, politics and economics to make informed investment decisions; it is therefore essential to obtain accurate news.

An easy way to seek truth in reporting is to compare stories from several different sources.  By “several different sources,” I don’t mean several news sources from the US, which all use the same news wires to get their information.  I mean getting news from the West’s traditional enemies as well as its allies, since the truth is usually found somewhere in the middle.

On December 7th, 2011, several US news stations carried footage of anti-government protests in Russia.

Some stations showed Russian protesters marching with flags.  Another station showed protesters waving flags and burning red flares.  Yet, Fox News had amazing clips showing protesters throwing Molotov cocktails, lighting bonfires, smashing windows, and fighting with police in riot gear.

The reason that Fox News had such exciting footage is because although they were describing protests in Moscow, they were actually showing footage of riots in Athens Greece!

Russian news agency Pravda - itself not known for the quality of its reporting - noted that the Moscow protests “appeared to be too boring and ordinary for Fox News producers.  They wanted some action, which was obviously missing in the video reports from Moscow.”

Pravda later drolly added that “it is quite possible that American and European TV viewers will soon have a chance to see drunken Cossacks riding bears, playing balalaikas and terrorizing peaceful demonstrators in the streets of Russian cities somewhere in Egypt.”

Awesome!

When the truth is boring, why not just make it up?

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Note: The original Fox News link to this broadcast (Protester's Express Outrage Over Russian Elections) has been taken down.

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"There's absolutely no truth in this malicious rumor that I starting running mad cow disease stories simply because Angus Black, the great British beef baron, lost ten thousand pounds against me in a game of poker and refused to pay up.”

“Elliot Carver,” evil news baron in the James Bond film, Tomorrow Never Dies

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The Sick Man of Asia II

Back in June of this year, I wrote about the proliferation of US-listed Chinese firms with shady characteristics (The Sick Man of Asia).  At the time, many of these companies appeared to be great bargains, so I hope the article saved many Frost Report readers from suffering unnecessary losses!

Those of us who have been investing for a while remember the good old days of Enron-style accounting fraud – with stories of ambitious CEOs resigning to spend time with their families, CFOs quitting because of “health issues,” and of course the famous mobile shredding trucks.

I have pasted below a letter from the Chairman of Advanced Battery Technologies (ABAT), a company whose stock has plummeted more than 70% this year after failing to comply with Nasdaq listing requirements (such as providing banking and accounting information).

I should mention that this letter is for illustrative purposes only.  ABAT could very well be a respectable, well-run company with no major problems – though I’m personally not putting investment dollars on that conviction!

I invite you to read the Chairman's letter and make your own conclusions:

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NEW YORK, Nov 28, 2011 (GlobeNewswire via COMTEX) -- Zhiguo Fu, Chairman of Advanced Battery Technologies, Inc. /quotes/zigman/7539795/quotes/nls/abat ABAT -99.80% , today issued the following letter to the shareholders of ABAT:

"Fellow Shareholders:

"Since March 2011 ABAT has been afflicted by the concerted actions of a group of short sellers. After establishing short positions on our shares, they published a series of articles making allegations of misconduct by ABAT's management that were fabrications and distortions. The result was a great loss of value to the majority of ABAT's shareholders, which was compounded when the class action bar filed lawsuits against us based again on the same sophistic allegations. Unfortunately, NASDAQ chose to abet this conduct by initiating an investigation based on the short seller allegations. When NASDAQ inquired regarding the allegations, we provided complete detailed rebuttals, and NASDAQ has not made further inquiry regarding any of the short seller allegations.

"At the end of the summer, however, as stories circulated regarding collusion between a small number of Chinese companies and their bankers, NASDAQ decided that, solely because we are Chinese, we should be required to provide an extraordinary level of confirmation from our banks. Despite the lack of any evidence of wrong-doing on our part, NASDAQ insisted that we approach our banks, inform them that our U.S. regulators consider them untrustworthy, and ask them to permit our auditors to "look over their shoulders," as it were, while they prepare bank confirmations. Initially NASDAQ insisted that this degrading procedure be conducted at the highest level of the bank. After we obtained written refusals from each of our banks, NASDAQ agreed to have the process carried out at our local bank branches.

"Unfortunately, on the same day that NASDAQ made this concession, our Chief Financial Officer, who had headed our accounting and finance operations since we formed the company in 2002, resigned. The pressure brought by the short sellers, class actions and regulators caused her to decide she should devote her time to ailing members of her family. Her resignation was immediately followed by that of our Controller. I myself have had to seek medical assistance for the effects on my health of this assault on our integrity and our efforts at being good U.S. corporate citizens. And so we have been unable to satisfy NASDAQ's demands.

"Since coming to the U.S. in 2004, ABAT and I have consistently complied with all U.S. laws and regulations. We have worked with great enthusiasm to try to reward our shareholders for their loyalty to our company. Today, unfortunately, I have lost confidence in the integrity of the U.S. capital markets, as I see how the reckless actions of a few persons have negated all of our good efforts.

"But I remain committed to our shareholders. I believe that their faith in our company should be rewarded. So I write this letter to promise our shareholders that in the coming months I will take the actions that I believe are necessary to reward the loyalty of our shareholders."

Zhiguo Fu

This news release was distributed by GlobeNewswire, www.globenewswire.com
SOURCE: Advanced Battery Technologies, Inc.

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Regular readers of The Frost Report know that the Chinese meltdown party has just begun.  Guilty or not, there will be many more press releases like the above in the days and months to come.

Be wary.

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"Only when the tide goes out do you discover who's been swimming naked."

Warren Buffett

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S&P Notices Something Wrong with Europe

An exclusive interview with fictitious Standard and Poor's representative Hank Terwilliger.

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In a stunning move today, Standard and Poor's put almost every Eurozone country on alert for a credit downgrade, prompted by a "belief that systemic stresses in the Eurozone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the Eurozone as a whole."

Standard and Poor's representative Hank Terwilliger explains what led to this decision.

"I was walking down Wall Street," says Hank, "and I heard all these people talking about Europe and about some kind of credit crisis over there.  Then I saw stories about it on the front pages of newspapers as I was walking to the convenience store.  I thought, 'what happened?  How could we have missed this?'   I immediately went back to the office and told my boss we should downgrade Europe."

Hank's superiors didn't believe his wild story at first, but after Hank showed them endless Internet stories about it from the previous weeks, they became convinced.  "My boss looked at me and said, 'F**k it.  We downgraded the banks last week.  Let's just downgrade the whole damn continent!'  So we did."

"Our job at Standard and Poor's" explains Hank, "is to tell you what you already think, and make a big deal of it."  After a moment's hesitation, he added, "And we don't even have to be right."

Hank clearly loves the power and prestige his useless job wields.

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"The agency's decision is uncontroversial."

Robert Preston, BBC, regarding Standard and Poor's downgrade alert for Europe.

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The S&P Bank Downgrade

Today, just a day after I wrote an article supporting the purchase of US banks (see below), Standard and Poor's downgraded several of America's largest financial institutions, including Citigroup, Goldman Sachs, Morgan Stanley and Wells Fargo.

At first I was taken aback by the move, and even - just for a minute - slightly concerned.  Standard and Poor's said it had changed its ratings system ("with new criteria") for banks, resulting in the sweeping downgrades.

I thought, "Standard and Poor's changed its rating system, and downgraded the US banks?  What if their ratings system is actually correct now?  That's not good."

Then I read that Standard and Poor's had actually upgraded its rating for the crappy China Construction Bank - an overextended lender in a grossly overpriced market.  My concerns melted away.

Generic formulas still can't rate risk.

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"If merely looking up forward financial data would tell you what the future holds, the Forbes 400 [richest people list] would consist of librarians."

Warren Buffett

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See also:
Forget Greece and Italy


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Dick Bove's Apology

On CNBC this Monday, Nov. 28th, analyst Dick Bove apologized for the failure of his foremost recommendation of the year: US bank stocks.

The official apology ran like this: “I failed to understand that the fears in the market concerning banking were so great that the fundamental improvements in the economy, the industry, and companies like Bank of American and Citigroup would simply be ignored.”

In other words, Bove's "apology" consisted of telling investors that they are foolishly selling excellent stocks that are a great value, simply out of fear.  He didn't quite call them idiots, but pretty close.

The reason I mention all this is because I agree with him.

Back in March (US Banks to Rumble), and again in August (Buffett and the Beautiful Banks) and I'm sure a few times in between, The Frost Report has recommended buying US bank stocks.  But after a short-lived pop, bank stocks kept dropping.  And dropping some more.  And a bit more yet.  So what have I been doing?

Why, buying more bank stocks, of course!  Instead of trying to guess which particular bank will fare the best, I have been purchasing the KBW and XLF bank index funds.  Every time the market has a 2-4% correction I buy more, since each "correction" misprices them just a little bit more.

The view that bank stocks are a great bargain is clearly an unpopular one.  Every time someone recommends bank stocks (like Dick Bove), their article is overwhelmed with comments calling them a loser/screwball/dope/idiot, or ranting about bank bailouts and world domination.  Fortunately, my goal is to make money, not to make popular decisions.

Bank stocks will recover because they are highly profitable, and an economic necessity for which there is no replacement (contary to popular sentiment, credit unions are not equipped to handle large-scale multi-national banking).

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See also:
Bill Miller vs Instant Gratification
Bank Debt is Near Record Low

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Disclosure

Do not buy stocks, or take this or any other financial advice without doing your own analysis; including, but not limited to: reviewing business models, financial statements, management style and philosophy, recent developments, market macroeconomic analysis, and chart analysis. If you do not know how to do these things, you shouldn't be buying stocks in the first place. Seek the advice of professionals, as appropriate.

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Are Hedge Funds Safe?

Many people now regard hedge funds as an alternative to mutual funds.  Marketed as the “rich man’s mutual fund,” hedge funds are supposed to be safer than mutual funds but with higher returns.  Is it true?

In the past, most hedge funds hedged.  That is, hedge funds positioned themselves so that whether the markets went up or down, they would make small but consistent returns.  One strategy, for example, was to buy stocks, but also buy put options on those stocks in case the market dropped (put options go up in value if stocks drop).  The end result would be a slightly lower return than the general market in boom times, but also a small return in panic times – overall, a small return that is more reliable and steadier than the market.  But that is the past.

These days, virtually all hedge funds make money from extreme leverage – investing with borrowed money.  Using borrowed money and derivatives increases (not decreases) risk, which can lead to both spectacular gains and spectacular losses.

The average life span of a hedge fund is approximately 5 years.  By the five-year point, most hedge funds have either failed (lost most or all of their money), or closed down.

Hedge funds tend to fail most often within the first 30 months of their existence.  After 30 months they are less likely to fail, but more likely to shut down due to mediocre returns.  As a hedge fund investor, you are screwed either way.  If you invest in new hedge funds you risk losing everything; if you invest in an established fund you probably won’t get the returns you are looking for.  Some say that the way to avoid this minor inconvenience is to invest in a "fund of funds": a single fund composed of a number of hedge funds to reduce risk.

The expected annual return on a “fund of funds” is about 7-8% per year (a 9% return on the funds, minus 1-2% management fees), vastly lower than most investors imagine.  For comparison, a typical balanced mutual fund also returns between 7-8% per year.  Some longstanding balanced mutual funds - such as the Fidelity Balanced Fund, available since 1986 - have returned more than 9% annually.

In 2008, Protégé Partners bet Warren Buffett - the most famous investor of all - that hedge funds would outperform the S&P 500 over a 10-year period, as Buffet himself has done.  In the first year of the bet hedge funds vastly outperformed the S&P (dropping only 24% compared the market drop of 37%).  In the following two years the S&P outperformed the hedge funds.  Time will tell the final result.

If you are looking for safe and steady returns, my advice is to forget about hedge funds. Take the easier route: create a balanced portfolio or buy a balanced mutual fund consisting of about 30-40% quality bonds and 60-70% stocks – the time honored strategy for consistent returns with lowered volatility.

If your primary purpose is to show off that you are rich and have money to burn, invest in a hedge fund and tell all your friends.

If you are keen to risk everything to get rick quick, try poker.

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"We conclude that hedge funds are far riskier and provide much lower returns than is commonly supposed."

Burton Malkiel and Atanu Saha

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See also:
Hedge Funds: Risk and Return (the pdf presentation)

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Bill Miller vs. Instant Gratification

From 1991 to 2005, value investor Bill Miller headed one of the most successful investment funds in the world, beating the S&P 500 (“the market”) for 15 consecutive years.  On November 17 2011, however, Bill Miller stepped down as superstar manager for the fund he made famous.

It is said that Bill Miller has lost his touch.

During 2008 and 2009, Bill bought “horrible” companies like U.S. financials.  Many of these picks lost large amounts after his purchases (some up to ¾ of their value), and are still now languishing as losers.

Phil Pearlman said this of Bill Miller and of mutual funds in general: “Mutual funds remind me of AOL dial-up (Internet service): a dwindling collection of old people who don’t know better, contributing monthly to a comically inferior product.”

What many consider to be the new and superior product is the Hedge Fund.

Hedge Funds assets have grown dramatically, from just $38 billion in 1990 to more than $1600 billion in assets today.  Hedge funds are hip, cool, young, exciting, and promise to make you more money with less risk - even if they have higher fees (see the next Frost Report article for more about this).

In many ways, Bill Miller is the latest victim of a worldwide phenomenon – lack of patience and the desire to get rich quick.

The very word “investing” implies buying an undervalued company, then waiting for the company to improve and grow and the stock price to improve along with it.  Virtually no one does this anymore.  People want instant gratification.  They think that if a stock doesn’t rise in 6 months or a year (or, god forbid - that it drops even more), the stock pick must have been “wrong.”  Others believe that the market is so rigged against them there is no point investing at all.

For value investors of the world, the societal shift from value investing to stock trading and hedge fund purchasing is a blessing.  The fewer the number of people who believe in value investing (picking great, out of favor companies and holding them for years), the more successful the strategy is.

Bill Miller was ruined not because his value picks were bad, but because they didn’t bounce back fast enough to prove the quality of his convictions; and, his investors didn't have the patience to find out.

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"The market does reflect the available information, as the professors tell us. But just as the funhouse mirrors don't always accurately reflect your weight, the markets don't always accurately reflect that information. Usually they are too pessimistic when it's bad, and too optimistic when it's good."

Bill Miller

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Forget Greece and Italy

Greece and Italy have been stealing economic headlines these days.

The media has been so focused on Greece and its pint-sized economy, that they have completely missed what should really be headlining world economic news…the slowdown of the world’s second-largest economy.

China’s government-induced GDP growth and red-hot housing market have both stalled.  Ironically, the government itself caused the slowdown, as it introduced prudent anti-bubble measures throughout the year.  Such measures were an unfortunate necessity: without them, inflation was turning rampant.  But now the slowdown may turn out to be just as devastating.  And, it seems that the largest companies in the world are well aware of what is coming.

Last week, Goldman Sachs sold $1.1 billion worth of its shares in Industrial and Commercial Bank of China (1398.HK).  This week, Bank of America announced it was selling the remainder of its shares in China Construction Bank (0939.HK) – $6.6 billion worth.

Today, the International Monetary Fund announced that Chinese banks could suffer “huge losses” on the very extreme case that credit shock, currency shock, and yield curve shocks were to occur together.  Interestingly, this “slim and rare occurrence” appears to already be starting.

The IMF's Jonathan Fiechter stated rather bluntly stated (as far as economist-speak goes) that "while the existing structure fosters high savings and high levels of liquidity, it also creates the risk of capital misallocation and formation of bubbles, especially in real estate." In other words, the current government’s financial policies force people to invest in real estate (since buying other asset classes in China is considered too risky), and, banks are lending too much to capital projects with no economic future (again based on government direction).

One could say that the Chinese economy is a centrally-controlled “our government knows better” economic marvel mess.

It is my advice - stated on several occasions previously - that you follow the lead of Morgan Stanley, Goldman Sachs, and Bank of America; that is, sell all but your very best Chinese holdings.

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See also:

China faces grim foreign trade outlook

China's property cost curbs to remain despite home price drop

China’s CCB Plays Down BofA Share Sale Impact

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Chinese Con Companies – A Warning

REVERSE MERGER RULES TO TIGHTEN

Back in June, The Frost Report wrote about the sorry state of Chinese companies listed on North American exchanges.  Namely, that many such companies are rife with fraud (The Sick Man of Asia).  This week, both Canadian and American securities regulators began exacting their revenge.

The best way to understand this story is from the perspective of a Chinese con-artist/short-term entrepreneur, whom the new rules are designed to thwart.  And so, both the initial problem and the solutions are presented here in letter form:

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Dear North American Securities Regulators,

A few years ago, I had it made.  Through reverse mergers (buying out American companies listed on stock exchanges), I had a quick and easy way to become rich - fast!

Merely by listing on a North American exchange, putting together an impressive website, and manufacturing some nice accounting numbers, it was easy to get investors excited.  Most of them thought that because my company was listed on a North American exchange, it must be legitimate - the idiots!  Ha ha.  It was easy money.

Then the problems started. 

Savvy North American investors started questioning things - like my receipts and accounts that don't match, the ridiculously spectacular sales numbers, and the head office that doesn't exist (I didn't think anyone would go to Central China to check)!  And, I certainly didn't think anyone would check my resume to see that I actually did graduate from business school.  In China, buying a degree is no big deal: everyone does it - it only costs a few bucks for a degree from Harvard.

So now, it's all going to hell.

This week in the US, the Securities and Exchange Commission (SEC) announced stricter requirements for foreign companies that become listed on American stock exchanges through reverse mergers (buying out listed American companies).  Under the new rules, foreign companies like mine will be traded on the “over-the-counter” (highly risky, restricted) market for a full year before being allowed to trade on a larger exchange.  How am I supposed to make my fortune?  I need to have investors trust me immediately.  I need to take my cash and buy an overpriced house in Vancouver or Sydney right away, before I get arrested.  One year is too long.

Then I heard that in Canada, the Ontario Securities Commission (OSC) accused Zungui Haixi Corp and two of its executives of failing to cooperate with their special investigation.  The company’s auditor, Ernst & Young LLP, suspended audit of the company’s financial statements just because of a few “inconsistencies” in bank documents, assets and invoices.  How dare they!

Now, the OSC is saying it will be unveiling “a number of cases” in the coming months.  My friends are all worried that this is the end of the easy life.

So, I am asking you - the employees of the securities exchanges - to please back off.  If you do, there is a nice fat red envelope full of cash waiting for you in locker number 6 at the local train station.

Sincerely,
"Entrepreneur"

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Certainly, the vast majority of Chinese companies are legitimate business enterprises.

However, small-cap Chinese companies must be investigated fiercely before being bought as investments - fantastic sales numbers and low debt levels don’t mean much if the numbers are simply fabricated.  For the majority of investors, your best bet is to simply stay away.

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Time Machine - 1111 and the US National Debt

INVESTOR PSYCHOLOGY

Recency Bias is the tendency for people to remember recent events more than past events, and to believe that the most recent situation has always been so.  Put another way, people tend to frame their memories based on recent events, and to remember what they want - and likewise, to forget what they want.

I mention all this because it seems like lifetimes ago that the US national debt was not only in control, but people were actually talking about paying it off.  That moment was 11 years, 1 month, and 1 day ago today.

Bill Clinton had just finished his term in the White House, stained by political scandal (ie. the Monika Lewinsky affair).  Many viewed Clinton as a very unpresidential, even embarassing president.  Yet, no one could deny the positive economics of his term.  At the end of the Clinton presidency, the National Debt stood at 5.73 trillion dollars - a relatively small sum for the massive US economy.  After three straight years of budget surpluses, economists were estimating how long it would take to pay off the National Debt completely.

Presidential hopeful Al Gore, for example, outlined an economic plan that would eliminate the National Debt by the year 2012.  When candidate George W. Bush was asked if he had a similar plan, he said that although he agreed with paying off the debt in principal, he would not commit to a specific date.

Soon thereafter, Bush was elected as President.  He immediately began a series of tax cuts for high-income families, which he (and his economic advisors) believed would stimulate the economy so much that the end result would be an overall increase in tax revenues (known as "trickle-down economics."); unfortunately, it didn't work .  Tax revenues declined drastically with each cut.

Bush ran a budget deficit (increasing the national debt) in 7 of his 8 years in office.  In 2003,  he set a record for the largest annual debt increase in US history.  Due to a combination of tax cuts and expensive foreign interventions, by the end of the Bush term the US National Debt had nearly doubled - from $5.73 to $10.69 trillion.

People now talk about the National Debt as if it was meant to be, always was, and always will be.  Many cannot remember the time - not so long ago - when there was talk of the United States of America having no debt at all.

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"I've abandoned free market principles to save the free market system."

George W. Bush, 2008

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Canada's next Gold Rush

Vancouver is home to many of North America's newest and brightest mining companies, and at last  weekend's Stocks 2011 Conference, mining companies were well represented.

Talk to anyone about mining in Canada, and inevitably the conversation will turn toward the excitement about Canada's Yukon territory, which some say will spark the next great gold rush.

The Yukon Territory is, many believe, the location of a massive Carlin-type gold discovery.  Traditionally, hard-rock miners looked for veins of quartz or minerals that can indicate the presence of gold.  In contrast, a carlin-type deposit is composed of extremely fine-grained particles of gold, stuck to other minerals (such as pyrite) and spread deeply throughout a large area.  Carlin-type gold can be mined cheaply by large open-pit mines.

Kaminak Gold (TSX: KAM), for example, has hit upon a large area of mineralization (trendily dubbed the "coffee project") with mind-blowing numbers, ranging from 1.08 to 17.1 grammes per tonne over an area 14 kilometres long.

Companies like Kaminak Gold, Northern Tiger, Golden Predator, ATAC, and Ryan Gold are all generating excitement, sitting within the Carlin-zone.  This December to January, soil sample results from last summer's prospecting will start rolling in.  If results are as good as expected, the whole area (and all the junior miners in it) could be caught in a speculative frenzy.

Make no mistake - junior gold investments are really educated gambles.  But, when the risk-reward ratio is in your favor, gambling is sensible.  As always with speculative investing, risk not a penny more than you can comfortably afford to lose.

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"It is in men, as in soils, where sometimes there is a vein of gold which the owner knows not of, and in your nature, there lies hidden rich mines of thought and purpose awaiting your development."

Jonathan Swift

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See also:
http://www.kaminak.com/

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Disclosure

Do not buy stocks, or take this or any other financial advice without doing your own analysis; including, but not limited to: reviewing business models, financial statements, management style and philosophy, recent developments, market macroeconomic analysis, and chart analysis. If you do not know how to do these things, you shouldn't be buying stocks in the first place. Seek the advice of professionals, as appropriate.

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Occupy Vancouver – No Party

While attending the Stocks 2011 Conference in Vancouver, Canada (more on that later), I decided to stop by “Occupy Vancouver,” an offshoot of the Occupy Wall Street protests occurring in NY and elsewhere.  I expected to see a party.

From what I can tell, “Occupy Vancouver” is basically a large collection of dirty tents and cardboard huts resembling a refugee camp.

When I first showed up at 10:30 am, no one was awake yet.  When I came back several hours later, I didn’t see unemployed accountants or disenfranchised schoolteachers; instead, I saw a small group of professional protestors – the same raggedy-looking, unshaven youth who show up at G7 meetings and WTO summits.  I also didn’t see any protests.  The few people who ventured outside their tents were clasping cups of soup with both hands, attempting to keep warm in Vancouver's cold and wet winter weather.

A security guard on site told me that he believes “Occupy Vancouver” will soon fade because the protestors are not having fun anymore - many look tired, and more still are developing colds and coughs from walking around barefoot on muddy ground.

When I told the security guard that the protest site looks like a garbage dump, he replied, “When rats come, of course that’s what it looks like.”

No agenda, no demands, no conclusion…how long can this last?

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“Welfare's purpose should be to eliminate, as far as possible, the need for its own existence.”

Ronald Reagan

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How to Invest if you are Worried about Losing Money

These days, many are tired of the crazy gyrations of the stock market, and worried about losing their savings.  How do you invest your money and still sleep at night?

This article gives the most common options for investing hard earned but frightened dollars, ranked from worst to best.

5.  High-Interest Savings Accounts

Worried investors love the idea of savings accounts because they are guaranteed by the government (up to limits), because the money can be taken out anytime, and because you don’t have to make any future decisions – just leave the money there.  However, savings accounts always pay far less than the rate of inflation – usually 3% less.  For example, if the rate of your high-interest savings account is 1.5%, the inflation rate for the same period is probably 4.5%.  So, you are actually losing 3% of your purchasing power for every year you keep your money in the account.

If you invest $50,000 in a savings account and keep it there for 2 years, you appear to have $51,511.  But in fact, the purchasing power of your money is now worth only $47,045.

No one should leave money in a savings account unless it is for a few weeks or less.

4.  Guaranteed Mutual Funds

Guaranteed mutual funds are a relatively new concept.  You buy a mutual fund today that has a “maturity date” of, say, 10 years later.  As long as you hold the mutual fund until the maturity date, your principle is guaranteed!  Even if the market crashes you can’t lose your principle.  Sounds great, except that the issuer (typically a bank) can change the nature of the fund at any time.

Say, for example, you buy a guaranteed fund full of stocks and then the market drops.  The bank can remove all risk for itself by changing the holdings of the fund from stocks to safe but low-paying government bonds.  After the change, there is no hope for you to make any substantial amount of money.  You can hold this now ultra-safe fund for 10 years and get your principle back, or sell it and lose money.

In short, guaranteed funds tend to charge higher fees for their “protection, ” then screw their investors anyway.

3.  GICs

Guaranteed Investment Certificates are extremely popular because they pay more than savings accounts and feature two beautiful words – “guaranteed” and “investment.”  Some people love rate shopping for GICs, and pride themselves on getting the best rate.  Professionals consider people who buy GICs as long-term investments foolish.  That’s because GICs are designed to give rates close to the rate of inflation but not exceeding it (see option 1, Savings accounts).  So, the only thing that is guaranteed is that you will slowly lose money.

GICs are excellent for elderly clients who are unable or unwilling to understand any other type of investment.

2.  Index-Linked GICs

The best way to explain an index-linked GIC is to give an example.  Say you buy a 5-year S&P 500 index-linked GIC.  Over 5 years, the return of your GIC will be half that of the stock market, as measured by the S&P 500 (500 large US companies).   So, if the stock market goes up 25% in five years, you will get 12.5%.  If the stock market goes up 80%, you will get 40% and so on.  If the market drops, you will get your principle back.

Index-linked GICs are a great way to play the stock market for those who are too skittish to invest directly.

1.  Short-Term Bond Funds

When you buy a short-term bond fund, you are lending your money to large and reliable companies and the government, who in turn pay you interest.  Because the money is leant over a short period of time, there is little danger that a company’s fortunes will change, rendering them unable to pay you back.  And, because each bond fund holds so many companies, you don’t really need to worry even if a couple of companies do go bankrupt.  Since the bonds are short-term, you won’t lose money due to changes in interest rates (long-term bond prices go down when interest rates go up).   Finally (and importantly), short-term bond funds always beat the rate of inflation. 

For these reasons and more, short-term bond index funds are great investments.  Do not confuse short-term bond funds with more risky high-yield bond funds, long-term bond funds, or real estate bond funds.  Note that although short-term bond funds are very safe, they are not guaranteed by either the bank or the government – they are subject to the good credit of the companies in the fund.

Short-term bond funds include:

VCSH - Vanguard Short Corporate Bond Index ETF

SCPB - SPDR Barclays Capital Short Term Corporate Bond ETF

BSV – Vanguard Short-Term Bond ETF (mix of corporate and government)

So there you have it – five common ways to invest without losing your shirt, the final two of which I highly recommend.

Investing safely is a solid first step to investing, but far from the last.  To be a superior investor, you really shouldn’t be worried about money at all (something that is far easier said than done).  Ironically, the more worried you are about losing money, the more likely you are to do something silly and lose money.  For those who know they have not mastered their fear of loss, please note that I wrote a book specifically for the purpose: The Intelligent Investor’s Mind.  The link can be found at the top right of this page.

Good luck and happy investing!

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"The first rule of investing is don't lose money; the second rule is don't forget Rule #1."

Warren Buffett

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Donald Trump Says US a "Laughingstock"

I love the Donald!

Today on CNBC, Donald Trump asserted that the reason the US is not successful is because big bullies like China, India, OPEC and Columbia (huh?) are destroying the US economy.  And, unless these bullies are squashed, the US can “never be rich again.”  To give greater emphasis to this statement, the Donald added, “Never ever.”

Regarding stock market investing, the Donald enlightened us with this unique strategy: “I’m not a big stock guy, but I bought quite a bit of stock in different companies, and, you know, I think at some point it should go up.”

Words of wisdom, to be sure.

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See also:
Trump or Palin for President

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“You can have one man say [in a mouse-like voice], ‘We’re gonna tax you 25 percent,' and I can say ‘Listen you motherfuckers, we’re gonna tax you 25 percent.' You’ve said the same exact thing, but it’s a different message.”

Donald Trump, April 2011, explaining how to deal with the Chinese.

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The Chinese Economy - Quite a Grim Situation

As readers of The Frost Report know, it is my belief that the Chinese economy is a sinking ship bound with incredibly large anchors.

Due to crafty government intervention, the carnage has been delayed for a remarkably long time, and continues to defy gravity to an amazing extent.  Nevertheless, the craft is now sinking below the waterline.

What always amazes me about the Chinese government is that - completely unlike the cryptic Federal Reserve in the US – they are remarkably honest and straightforward regarding economic issues.  For example, they famously call the real estate market “the housing bubble.”  They say that the large volume of private loans (issued to businesses who couldn’t get loans from banks) is a “severe threat to the Chinese economy.”

This week added some new examples of brazen honesty.  The Chinese Ministry of Commerce said that China’s slowing exports and growing imports are “quite a grim situation.”  Imagine Ben Bernanke saying that!  In regard to real estate, several sources - including the National Bureau of Statistics - noted that housing prices are falling in many major cities, and that the situation will probably worsen since the homes are still largely unaffordable!

Whoever loses all their wealth in this debacle (and there will be many) cannot say they have not been warned - over and over.

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"We'll unswervingly stick to controlling the property market without changing the direction or loosening the policies."

Zhang Ping, head of the National Development and Reform Commission, Aug 2011

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See also:
August sees property prices fall in China

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Occupy Wall Street - Come Join Us!



Wall Street's famous bull - from a rare angle

If you ask the Occupation Wall Street protesters what they want (and many people have), you get a mixed bag of replies.

Some want changes to the educational system to improve “fairness” in America.  Others want oil companies to stop fracking (opening cracks in wells to improve oil flow, which may damage groundwater if done incorrectly).  Still others want an end to high-frequency trading and an alternative minimum tax for corporations (I agree with these two).  Many just want America to get “back to Jesus” or work together for a better tomorrow.

Yet, I believe the real reason the number of OWS protesters has swelled in recent days is because it is becoming the best party in 40 years.

Between protests, the OWS hipsters enjoy free haircuts, share melons and avocados, play bongos and accordions, have Micheal Jackson singalongs, trade hemp jewelry and eat discount delivery pizza.  Occupy Wall Street is now the biggest, hippest love-in since Woodstock.

If I were in downtown NY right now, I would definitely stop by.  I might even make a speech or two – something about giving your banker a hug, or that bankers need love too.  But alas, someone beat me to it.  In the live video feed, I saw one of Goldman Sachs’ traders hanging out in the crowd, drinking a beer.

Come join us on Wall Street!


PS - Watch out for the brown acid!

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See also:

"A "bad trip" is easily caused by an expectation or fear of ill effects, which may later be blamed on "bad acid". This legend was made famous at the 1969 Woodstock festival, when concert-goers were warned to stay away from "the brown acid", which was allegedly bad."

from Wikipedia

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An Ode to Steve Jobs

MASTER OF CREATIVITY

As you have no doubt heard by now, Steve Jobs of Apple Computer passed away this Wednesday.

Many obituaries have already been written about Jobs by writers far better than I.  So, this short ode is about one remarkable aspect of the man: his creativity.

Famously, Steve Jobs is a university dropout.  This fact has been used to insinuate that higher education is worthless, yet it really tells only half of the story .  Jobs didn't actually drop out of university: he created his own.

Tired of attending classes for which he had no interest, the young Steve Jobs dropped out of formal college and began attending classes he wasn't actually enrolled in.  Many of the courses - such as typefaces and calligraphy - were "useless" to him at the time, but would become fundamentally important later when designing the Apple Macintosh computer.

In North America, we have a tendency to disdain anything that is less than 100% and immediately useful.  Statistics is a useful course; philosophy is not.  Carpentry is a useful course; art history is not.  Steve Jobs understood the importance of "pure learning" and the way it expands the mind, enhances creativity, and almost invariably becomes useful at some point in the future.

Steve Jobs, we will miss your genius.

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How to Live before you Die: Steve Jobs




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Dear Workers of America

Actually, it IS your fault.

Barack Obama was raked over the coals this week (at least on Fox news) for suggesting that the US is not as competitive as it used to be, and that Americans are becoming complacent about their #1 position in the world.

What is interesting about Obama’s comment is that so many people agree that the US is not as competitive as it used to be, yet refuse to believe that they personally have anything to do with the situation.

I know many Chinese parents whose children are enrolled in soccer camp, take swimming lessons and piano lessons, have math tutoring, and yet still have time to meet their friends for several “playdates” per week – after finishing their homework, of course.  They have this much free time because they are only allowed to watch 2-3 hours of television per week, with another 1-2 hours per week to surf the Internet or play video games.  In contrast, I also know many American families whose children do almost nothing except watch television and play computer games.

The above is merely anecdotal evidence, of course, and doesn’t prove a thing.  But can we really call the average American family “motivated and driven to succeed?”

To find out if you are part of the problem or exempt from scorn, ask yourself the following questions:

1)      Do you watch 3 hours or more of television per day?  How about your children?

2)      How many books have you read in the last month?

3)      Do you currently have 3-6 months of emergency savings in cash, in case of injury, unemployment, or other unforeseen disasters?  If not, why not?

4)      Do you have trouble saving money?  If so, what have you recently done to drastically reduce your spending or increase your income (or both).  Or, do you just complain that bills are hard to pay but do nothing about it?

5)      During the last few years, have you purchased items like recreation vehicles, sports equipment, home decorations, electronics etc. on credit that you did not pay back at the end of the month?  Why?

6)      Have you been with your company for five years or longer?  If so, have you recently upgraded your skills/taken training courses etc on your own time?  Have you expanded your skill set to improve your employability outside your currently industry?

7)      Do you hate your job?    If so, what have you done to change careers or companies?  Have you updated your resume and practiced your interview skills?  How many jobs have you applied for?

In street interviews, website comments, and in social media, it is apparent that many Americans believe things will never get better: that they will always be unemployed, never get out of debt etc.   The more healthy reaction, of course, would be to say, “Wow, I was really stupid to rack up all that debt on my credit cards and house.  Now I’m going to have to study and train and work three times as hard.”

Of course, self-analysis is a difficult process and most people avoid it.  So, just continue to believe you are unemployed because of the President of the United States.


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People who are unable to motivate themselves must be content with mediocrity, no matter how impressive their other talents."

Andrew Carnegie

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see also: