How Will the Next Economic Crisis Affect Forex Trading?

Just when you start thinking you’re safe, the economy comes right back to bite your leg. We got over the Great Depression; so, we finally got our things in order, and we started making the money and bringing progress into our future.

But as the laws of Murphy seem to remind us, if things seem to be going right, then something is bound to go wrong. The economic crisis is upon us, and the first thing that will receive a hit will most likely be the Forex trading.

What Is Forex Trading

Foreign exchange, or in short, Forex, is an international market where people buy and sell currencies. The concept is close to the stock exchange, where shares of companies are traded among themselves.

Also, like within stock markets, you don’t gain ownership of that money. You simply profit from changing the value of said currency; you benefit from the exchange rate. And the Forex market is actually the one that sets the value of that exchange rate.

The Causes of Economic Crisis

We don’t just run out of money without a reason. We run out of money because we do it to ourselves. Take the Great Depression, for instance; we never even saw it coming.

One day, we all had roofs over our heads and threw money everywhere we could. The next day, banks collapsed, we were jobless, and half of us lost our investments. And we’re the ones that caused it.

The sad thing is that it’s happening all over again, and it’s making an impact on the Forex system as well. Here are the main causes of the next economic crisis and how it will eventually affect the Forex trading system:

 

  • Political Events

 

Every nation has elections; they’re so common, we don’t even think twice about them. Still, an election can also have a great impact on the economy of a nation. Think about the money that goes into the election campaign. For one, that’s money that goes down the drain, just to attract the voters.

Secondly, traders see elections as an isolated case of probable uncertainty and political instability. In most cases, a Forex participant will keep a close eye on the election pool and try to predict the outcome. If the government changes, chances are that the ideology will also change. They may take a different approach to fiscal policy, which will eventually affect the value of the currency – and ultimately, the exchange rate.

  • Natural Catastrophes

A natural disaster can leave a great hole in the economy of a country. If said nation experiences a massive earthquake, flood or tornado, many things will be lost: lives, morale, and also infrastructure.

As a result, a lot of the nation’s money will go into trying to repair the infrastructure. The higher-ups will have to tap into the country’s resources to clean and rebuild. Therefore, instead of pushing that money into a more advantageous venture for the economy, they are burying it into patching up breaks in the chain of value.

Consequently, the economy will also be weakened, and the exchange rate will go down. A disaster-stricken country will avoid spending as much money, to prevent making the hole even bigger. Suffice to say, a natural catastrophe will definitely mean the fall of the economy’s currency.

  • War

War, like elections, is also something that we do to ourselves – only to a larger scale. The impact of physical war on foreign exchange is never pretty. That’s because, just like natural disasters, it leaves behind a broken infrastructure that will ask for a lot of money to fix.

Citizens will most likely have to borrow from other countries in order to get back on their feet, and their efforts will most likely have to be financed by cheap, low-interest rates. This will eventually lower the currency value – and there you have another situation where Forex will be affected by the economic crisis.

All we can do right now is hope that countries won’t start aiming rockets at one another; however, since humanity is territorial and wants power, it will eventually happen – regardless if it’s ten or fifty years from now.

Final Thoughts

The more we dig holes into the economy of our country, the more the exchange rate will go down. All we can hope for is that Forex participants will see these changes coming and come up with solutions. Even you can learn more about trading and sharpen your skills by setting an online virtual trading account.

An Introduction to Financial Instruments

What are financial instruments, and how are they used in the world of finance? These are the kinds of questions you might be asking yourself as a newcomer to the market. You will certainly need to know what they are, and how you can make the most out of such assets.

These financial instruments are simply the types of assets which can be bought and sold. Such financial instruments are often also regarded as capital packages which are up for trade. The majority of financial instruments will keep a very useful stream of capital which fuels investors all over the world and their various activities in the market.

Making the Most out of your Means

Such assets come in various forms, including as cash, or in some cases as a right stipulated by a contract that the delivery of receiving of cash must be adhered to. They can also be a piece of evidence that one is entitled to ownership of a particular entity.

Financial documents are generally broken down into two forms, virtual or real documents which connote a tangible agreement made regarding any kind of monetary amount. Those financial instruments which are equity-based will provide proof of ownership for a particular asset.

A financial instrument based on debt will obviously be for things like loans which were formed by investors for the sake of asset owners.

More Interesting and Valuable Forms

Then there are the financial instruments that fall under a third and very unique category, that of foreign exchange instruments. Such a division is broken down further into other subcategories, such as common share equity and preferred share equity.

The International Accounting Standards has outlined financial instruments to be any binding contract which will provide financial assets to one party, while to another it will provide a liability which possesses an equity or financial liability.

The Variety in Financial Instruments

There are two main kinds of financial instruments: Derivative instruments and cash instruments. Such cash values will be influenced directly and stipulated by the current markets. The relevant securities need to be easily transferable.

One can also use cash instruments in the form of deposits, as well as loans which were appropriately set up between a lender and a borrower.

The attached characteristics and values seen in derivative instruments will generally be based on what the underlying vehicle factors happen to be, such as indices, interest rates, and of course assets.

The Classes of Assets

There is indeed what is known as an asset class when we look at financial instruments. Such classification will depend on an asset’s formation as an equity-based or debt-based asset. In terms of financial instruments that are short-term and based on debt, you can expect a lifetime of around a year or less.

You need to ensure that you know how this classification system works, especially with the assets you are most likely to encounter the most, depending on the main sectors of the market you may be entering.

How to Start a Forex trading business

Forex trading can be very profitable if you know the rules of the game. Many Forex traders lose money in the beginning but it can prove to be highly lucrative once you get familiar with the arena. It can be a challenging task but putting in your efforts will surely pay you off.

In order to be a successful Forex trader, you need to continuously learn about it. Even if you become a pro, revisit the basics as one of the biggest secrets in your Forex success lies in the fundamentals.

In forex trading, some people make millions while some lose millions, but one thing is for sure, you will learn a lot. The key to success in forex trading is that treat it as a business. Do not rely on luck and get rid of impulsive approaches. You will need the proper knowledge of how things are done. Hone your skills continuously by learning new things in the field. Devise your own forex trading techniques and slowly you will beat the market. Nevertheless, here are some tips to get started in forex trading business:

  • Gain experience

 

The Internet is full of ideas to teach you on how to get better in forex trading but the experience is the best teacher. Understand the basic forex terminology. Get knowledge on the type of currency you will spend. Get aware of terms like quote currency, long position, short position, ask price and the spread. Make predictions about the economy and be political in your approach. Go through economic reports to make well-informed decisions.

  • Initiate

 

You can even start your forex trading business venture from your computer but make sure that there is a proper Internet connection set up because you don’t want to lose on great trading opportunities.

Whatever trading ways you begin with, make sure you are partnering with quality ones. You don’t want to be part of scams and lose a great deal of money. Nobody guarantees anything in this field so you are responsible for yourself. Stick to popular online trading platforms that have good proven track records and has a wide-spread company network.

  • Hone your skills

 

Forex trading is a combination of different skills. Make sure you polish them constantly as you progress in your business. Learn how to calculate profits and analyze the market. Analyze the market technically, fundamentally and sentimentally to get different perspectives of how the field operates. Keep a track of your profits and losses.

Forex trading is all about control. Keep yourself grounded and trust the basics. It is like other businesses. Do not get excited when you get an opportunity before you. Make relevant evaluations and assessments before taking any step further. Losing money is very common in forex but it is part of the game. Hone your self-control and risk management skills to excel the game of forex.

Be patient and persistence if you are interested in forex trading. The most important thing you must do is to learn from your mistakes and progress forwards. Keep in mind that only progressive mindsets reach the pinnacles of success in forex.

Blockchain’s Impact On Online Casinos

Ever since the introduction of the Internet to the pubic in the 1990s, the gambling industry has been able to capitalize on the technological advancements by expanding and reaching into different markets. Despite the numerous heavy and strict legislation that has been placed on online gambling, online gambling casinos have appeared to stay in compliance while managing their companies.

Payment systems connected to these online casinos have also become more advanced as well. As a result, online players have more options to make and receive payments, and this has lured more players to these online casinos.

What Is Bitcoin?

Bitcoin, along with Blockchain, was invented in 2009. Over the past several years, Bitcoin has grown from a few cents to having a current worth of $1600 USD per Bitcoin. Bitcoin is an open source online payment system that utilizes peer-to-peer technology so payment exchanges.

Bitcoins can be divided into smaller parts as well. For example, if you wanted to send someone $200 USD, that would be equivalent to sending them 0.12 Bitcoins.

This online payment system also can bypass many global gambling restrictions, and this is the primary reason why it has the potential of being the go-to betting tool not only for online casinos, but for online gamblers as well.

Understanding Blockchain

This is the technology that is used to help Bitcoins not only move from one location to the next, but is also used to verify Bitcoins. This technology works similar to the Internet.

When you attempt to go on a website, your device sends a request to your Internet Service Provider (ISP). The ISP sends your request to the server that hosts the website. The data is then sent back to the ISP and then to your device so you can view the website. The server can repeat this process to millions of ISPs and electronic devices. This is referred to as a distributed system.

Blockchain technology is a distributed system as well. This system has a ledger that is always updated and is also resistant to hacking and tampering.

Why Has Bitcoin Been So Popular In The Online Gambling Industry?

There are several reasons why Bitcoin, Blockchain technology and other types of cryptocurrencies are quickly gaining popularity in the online gaming world. These reasons are:

•    Easy access
•    Affordable
•    Legal

It is obvious that the advantages outweigh the potential disadvantages. However, the biggest advantage that Bitcoin offers users is anonymity.

Online gamblers do not need to create an account or provide a copy of their identification to the casino in order to cash out with Bitcoins. Withdrawals are almost instant, and cashing out using Bitcoin does not require any additional fees.

Regulation will continue to play a significant role in cryptocurrency advancement. Online gamblers in the United States are not allowed to use bank processed payments to pay for online bets. This has resulted in more online gambling entrepreneurs creating Bitcoin-only gaming websites.

However, it is important to remember that as with all technology, during the preliminary stages of the use of Blockchain technology on online gambling websites, continuous changes will occur in the betting markets.

How Finance Is Being Taken Over By Tech

There are very few areas of our lives which tech has not had a profound impact upon and in the main, technology and its advancements have completely radicalized the way in which we live our lives. As with any advancements in technology, there is a great deal of fear over what is to come and whilst technology does most certainly improve our lives, there is always a certain trepidation that comes with it.

This fear is something that is currently gripping the finance industry as more technology is introduced with the aim of making things easier for both customers and businesses within the financial landscape. Despite the preoccupations of some at the financial market technology news which regularly announces new ideas and advancements, the majority of invested people are embracing the change and here are just some of the examples of how tech is very much taking over the finance sector.

Digital Payments

One of the hottest topics in the financial technology industry is the incredible success of digital payment services. A prime example of the rise digital payments can be found when you look at the e-commerce giants Alibaba whose digital payments section, Ant Financial, have more than 500 million customers, almost 10 times the amount of customers of any other bank on the planet.  Not only would banks kill to have this level of custom, they would also love to have the amount of data that comes with it but traditional financial institutions have no way of ever competing with the digital platform unless they embrace it.

Digital Currency

Digital or cryptocurrency such as Bitcoin look set to completely change the way that we think about money altogether and this has created a cross roads for many banks and financial organizations. Digital currency was once dismissed by industry experts as short lived fad but banks are now beginning to realize that they must invest if they want to survive. Recent research suggest that 8 of the 10 major banks will be looking to blockchain technology, the data system which Bitcoin relies upon, to help them to save millions in the coming years.

Prediction and Data

Owing to the sheer power of the technology which is available to the finance industry, it has never been easier to predict outcomes and data check decisions. This will no doubt have a profound effect on the stock markets, the way in which banks invest and the way in which they give credit.

Job Loss

As with many advancements in technology, the arrival of automated systems and high powered computers to do our bidding, will cause job losses throughout the financial sector and this is something which has already begun. Over the course of the next decade, it is estimated that around 1.7 million jobs will be lost in the industry as technology takes the place of humans. With this being said, it will be highly interesting how well the banks and financial organizations adapt to a world which offers the very best technology, but at the same time attempts to offer excellent customer service.

Technology will continue to revolutionize banking and in 20 years time it is likely that the sector will be unrecognizable compared to what we have at the moment, the question is, will the big players be able to keep up?

A Quiz To Help You Understand Insurance Product Better

We know life insurance is important, but many of us struggle to understand the different terms and specifications. With this informative quiz, you’ll discover what you need to know about life insurance policies, so you can feel confident selecting the policy that suits the needs of you and your family.

One part of the quiz will help you understand the difference between term life insurance and whole life insurance, the most important benefits of whole life insurance, what happens to a term life policy if it expires while you’re still alive, and which of the policies has lower monthly costs.

You’ll also learn the best time to buy a life insurance policy, who gets the policy benefits when you pass away, what lifestyle factors contribute to higher premiums, who should get a guaranteed-issue life insurance policy, why medical exams are sometimes required for policies, how to confirm the stability of your insurance carrier, and why you might not want to get a life insurance policy from your employer.

The quiz will only take you a few minutes to complete, yet the information you’ll learn from it is invaluable. Along the way you can see how many other people got the questions right and cheer them on. When you finish, you can even share your score on Facebook and get extra reading materials to answer any other questions you have.

If you’re confused about life insurance policies, take this quiz today and discover everything you need to know about the different policies available.

3 Financial Tips Worthy Of Father’s Day

According to the Angus Reid Forum, Canadians expect to spend $136 while celebrating Father’s Day this year. While the price tag of June’s holiday is nowhere near what we typically spend on mom (we up our budgets by $50 on Mother’s Day), June 18 can still end up being too expensive. Many of us can’t afford to spend over $100 on dad, even if he deserves much more for putting up with our antics as kids.

If you can’t pull out all of the stops for dad this Father’s Day, don’t let the guilt sink in yet. Your dad’s an understanding guy, and he would rather you spend your money wisely than waste it on a novelty tie, #1 dad mug, or equally cheesy (aka terrible) gift popular around Father’s Day. That’s why in honour of the big day, we’re sharing our 3 favourite money saving tricks our frugal fathers have taught us.

  1. Budget: A financial plan is the only way you’ll know how much of your cash is leftover once you pay for all of the necessities. Taking the time to table a budget in detail can help you prepare for the future, as you’ll see your spending habits (good or bad) in no-nonsense black and white. Once you can account for every loonie in and out of hands, you’ll be able to identify where you’re overspending.

Take a look over your bank statements starting from 6 months ago, so you can get a good understanding of your variable costs in addition to recurring purchases like rent, insurance, and utilities. Cut out any unhealthy spending habits or impulse buys that waste your money with little to no payoff.

  1. Invest: Once you cut the fat off of your budget, you’ll start to see your account balance go up. While it’s tempting to spend all of this extra cash on an all-inclusive trip this summer or finally trading in your beat up Android for a brand new Pixel XL, these purchases aren’t exactly dad approved. Financial experts suggest roughly 10–20% of your income should go into savings, so you can prepare for your future. Look into your options, including GICs, Tax-Free Savings Accounts, RRSPs, and Mutual Funds, to see how you can start building a nest egg for a rainy day, retirement, or an unlucky emergency.
  2. Borrow: No one goes through life anymore without a little bit of debt — and that includes your dad. Until your careful budgeting builds up savings, you’ll need a little help to cover everything from mortgage payments and car leases to unexpected bills and household repairs.

While conventional lenders can provide secured loans for life’s larger purchases, payday lenders can help you cover small bills and repairs. In Canada payday loans come from companies like GoDay that offer up to $500 for first time borrowers. Though they’re small, they provide just the right amount of cash to help pay for surprise, non-recurring expenses that threaten to bust your budget.

All dad asks is you make your choice of payday loan responsibly, and these financial products can be a practical solution to your cash shortages. Along with budgeting and investing, borrowing the right way can be a financially wise tactic regardless of your goals. But these aren’t the only financial tricks and tips up his sleeve. Just like his seemingly never-ending supply of puns, financial advice is something he’s willing to share this Father’s Day.

How the Gambling and Gaming World are Becoming More Social in 2017

Gambling and gaming are big industries with some of the most significant year-on-year growth of any sector. Combine this with the advent of social media to the point of dominance over all of our lives, it is clear to see why social gaming has gathered such a cult following in a relavtively short period of time.

Candy Crush emerged from Facebook, as did the much maligned but highly-played Farmville. These games are all about playing through social media integration and sharing with your friends. So, while you can say the start of “social gaming” emerged from ways to share fun applications with your friends list on social media, this was just the start of things. As technology advances and the social experience becomes more augmented, players want more than just mere fun games to share with their followers and friends’ lists.

Value Added Games

Online gaming met social with the advent of Slotomania and even the ubiquitous household name that is World Series of Poker. These are games that took the social integration aspects to the next level and really became sophisticated “adult” and skill-based (especially with the poker tournaments). But one crucial element was missing…and that was real jackpots that were comprised of real money…

Real Cash Prizes Make Winning Seem Worth It

The fact of the matter is that we all love to win, no matter what we are winning. Whether it is levels of Candy Crush or items for the farm, this all gives us a sense of achievement. But the best type of winning, is winning real cash prizes. Although social games on platforms like Facebook reward winners with cute animated GIFs, nothing feels more like winning than good old fashioned money. A game like Betomania is different because it brings together the world of social gaming with the world of real money prizes.

Chat to Get to Know Your Opponent

The real cash prizes offered by Betomania results in a very much more sophisticated game that relies on knowing your competitor as much as knowing the game itself. This is because the game encourages you to chat and interact with thousands of players around the world through the game’s chat function. This way, you can get to know the tactics and playing techniques of your opponents and enhance your playbook, while also making buddies!

Social Media Will Have a Huge Impact on Both Industries

Similarly, the social aspect of online gaming and gambling sites will have a tremendous impact on both industries, both of which are huge on a global level. The reason why Betomania is so pertinent is that it is one totally exhilarating new gaming platform that is the best of both worlds – the juxtaposition of gaming and gambling with a bit of real-time trading thrown into the mix.

Of course, trading is seen by many as a gamble because you are wagering whether or not the stock or other commodity you are investing in will move as you predict, but that crosses over into the world of finance. What a great way to learn how to invest quickly and wisely! Imagine playing a social game in which players bet on the live asset movements and the winner takes the jackpot!

Finally – Both Industries Are Going Mobile

Also, a site like Betomania offers mobile apps so that like real traders in the real world and in real time users can keep up with markets. Covering both iOS and Android devices, an app can keep the game going in a virtual mobile environment. Remember, the markets don’t stop simply because you are on a train for work or are on your way to Singapore for a meeting with a foreign investor. The horses won’t wait at the gate at the upcoming Grand National because you can’t get to your bookmaker on time. Mobile apps are not only enabling more gamers and gamblers to make that wager 24/7 but they are making it convenient for them to do so.

In 2017, look for technology to be a game changer for both the gambling and gaming industries – and at the heart of that – mobile technology is going to be a key player.

What’s going on with my appraisals

Changes in mortgage rules for home buyers and insurers certainly have had an impact on the housing market, and those changes have impacted property appraisals as well. Conventional mortgages – up to 80% of the value of the property – historically, were required to have a full appraisal. Now, in many areas of the country, an appraisal may also be required on insured mortgages — 80 to 95% loan-to value.

The decision to approve a conventional mortgage, after all other lending criteria have been satisfied, is made on a property’s fair market value. This is defined as the market value of an interest in land at the highest price reasonably expected, when sold by a willing seller to a willing buyer, after an adequate amount of time and exposure to the market.

So who determines the value of that property? One could argue that the market itself determines the value, which is true, but from a lender’s perspective that number must come from an independent third-party – the appraiser. An appraiser, who is specifically trained and has sufficient experience, will be asked to offer an impartial, written opinion of the property’s value.

Realtors normally use a comparative market analysis (CMA) to evaluate a property’s value based on local market data. Agents analyze listing and sales data for comparable properties in the area to recommend a price to list or to offer. However a CMA is not an appraisal. Although appraisers use the CMA approach, they use it in combination with other factors to determine the value of a property.

The major difference is that appraisals are done for a specific client — the lender. Because real estate is the major security for mortgages, the market value estimate needs to be as accurate as possible. Appraisers use ‘sold’ properties information only and compare similar property types, in close proximity, that have sold within a relatively short period of time – usually 90 days.

Not all residential properties are subject to a traditional appraisal. If the property is in an established area with similar properties then sometimes the price can be validated electronically. This model of appraising property, called automated valuation model (AVM), has become quite popular in the last 10 years.

However, given the nature of the housing market these days, mortgage lenders have moved away, in many areas, from AVMs for conventional mortgages, and for some high-ratio mortgages as well, and are asking for live, full on-site appraisals.

At the end of the day, an appraisal must reflect a property’s realistic true market value and needs to be backed up with accurate data.

So why does an appraisal come in lower than expected?

With the introduction of bidding wars, where, in some areas, prices may be artificially inflated, appraisers are still tasked with coming up with a property’s fair market value. Rapidly changing markets can be very challenging for an appraiser to properly evaluate a home’s worth.

Appraisers will try to get to the purchase price when evaluating a property. However, sometimes the sale is a few weeks ahead of the market. If prices are increasing, it may not show up in their analysis yet and the appraisal will reflect a lower value.

At the end of the day, the appraisal has to be a realistic evaluation of a property’s true market value and be backed up with data.

Guy Ward is a Mortgage Broker in Calgary, Alberta with TMG (The Mortgage Group Alberta) and can be contacted at www.guythemortgageguy.com

21 Questions with Value Investor Steve Nyvik

‘Risk management, when done poorly or not at all, can cost you a fortune’ – Steve Nyvik

My interview with P.J. Pahygiannis of GuruFocus.com

1. What is the best investment advice you have ever been given?

Risk management, when done poorly or not at all, can cost you a fortune. In other words, “Don’t put all your eggs in one basket.”  You should diversify away, to the extent reasonable, non-systematic risk (this being company-specific or industry risk).

So for common stocks, we limit the amount of company risk and the amount of industry risk through buying enough stocks which we diversify well by industry (that are not highly correlated to each other).

For example, if we invest the same dollar amount into each of 40 stocks, our risk is that if one company disappears, we’ve lost 2.5% of the value of our stocks. We want them diversified by industry as stocks within the same industry tend to move up and down to a similar degree (i.e., in other words, stocks in the same industry tend to be correlated to each other). This will help us to build a stock portfolio that becomes more stable.


2. What level of math is needed in order to understand the entirety of finance and investing?

If I can define the question in terms of “what knowledge one needs to be successful with investing,” the answer depends on the type of investing one is considering.

For example, if one is going to stick with large-cap market exchange traded funds, like the iShares S&P 500 ETF (IVV), one really doesn’t need a high level of math. An alternative to making a big lump sum purchase is when you establish an equity target between cash and the stock ETF, and you stick to that target over time.

If the stock market goes down, by sticking to the target, you are guided to top up equities to your target. Similarly, if the stock market goes up, you are guided to trim equities to bring your portfolio back down to your target. So in summary, by sticking to your target, you are buying stocks when they go down and selling when they go up. This technique helps you to make rational buying and selling decisions with the potential result of better risk-adjusted returns.

One will need to be mindful of commissions as well as managing foreign exchange costs. For small additions to equities each month, to manage commissions, you might choose a no-load diversified large-cap U.S. stock fund with a low MER that attempts to mimic the returns of the Standard & Poor’s 500 Index.

You might also allow some level of fluctuation so you are not trading all the time and find your profits go toward commissions. For example, if your equity target is 75%, then you might not rebalance and buy until equities drop to 70% of your portfolio value or you might not sell until equities rise to 80%.

If you are going to move beyond indexes to individual stocks, there is an opportunity for you to avoid the expensive stocks and the crappy businesses within the stock market index. And you can possibly generate even better risk-adjusted returns through equal weighting your stocks as opposed to market-cap weighting which normally occurs in market indexes.

As soon as you stray away from buying stock market indexes, you have to be mindful as to how to control non-systematic (e.g., company and industry) risk, and you need to be disciplined as to how you buy and sell stocks. For example, you should use a strategy to help you select stocks where there is a direct cause and effect relationship between the strategy variables and a stock’s price, and the stock variables you are using to select stocks should be statistically significant. This will help you to make more rational selections as opposed to being lured into buying sexy overpriced risky stocks.

But we’ve digressed a bit here. With selecting stocks, it is helpful to have an appreciation of statistics as well as grade 10 math (e.g., one should develop a comfort with financial ratios as to relative price attractiveness, profitability, liquidity, debt and efficiency. If you are going to attempt to try to calculate a company’s intrinsic value (which many investors don’t do), then you need to understand present value and some corporate finance to figure out a reasonable discount rate.

Your education should go well beyond that to also include business strategy and competitive advantage, economics with respect to economies of scale, industry structure and life cycles and the impact of interest rates, inflation and business cycles. You might also spend some time reading stuff on Warren Buffett and Benjamin Graham to develop an appreciation of value investing.


3. Is “value investing” (Buffett and Graham approach) a good investment strategy for long-term goals like investing for retirement?

To answer this question, one needs to have an understanding of the Buffett approach. My understanding is that Buffett seeks ownership in quality companies capable of generating earnings that are on sale, but he is not looking for just any type of company. He needs to be able to understand the business to model its cash flow and arrive at its intrinsic value. My understanding is that he limits companies for consideration to those where

  • The company has performed well in terms of return on shareholder equity (ROE) (net income/shareholder’s equity) relative to other companies in the same industry, that the company has consistently done so for at least the last five to 10 years.
  • The company does not carry an excessive amount of debt. For example, Buffett seeks companies with a low debt/equity ratio (total liabilities/shareholders’ equity).
  • The company has high profit margins (even better if they are increasing) and should be consistently high for at least the last five years.
  • The company has been public for at least 10 years. If it has not been around for at least that long, one may have less confidence in attempting to determine future cash flows or future dividends for discounting to arrive at its intrinsic value.
  • The company possesses some competitive advantages as opposed to being a commodity-type business where its products are indistinguishable from those of competitors’ products.  Any characteristic that is hard to replicate is what Buffett calls a company’s economic moat or competitive advantage. The wider the moat, the tougher it is for a competitor to gain market share.
  • The stock is selling at a discount of at least 25% compared to its intrinsic value.

To me, these look like very reasonable criteria in which to search for businesses.


4. What should I know before I start value investing?

Here is my brief checklist.

  • If you have debt, your first investment goal should be to pay it off as quickly as possible.
  • Once your debt is paid off, establish an “emergency fund.”
  • If not retired, you need to save every month and know the amount you are saving is enough so you can afford to retire.
  • Set and stick to an equity target (a percentage of your portfolio that will be invested in common shares).
  • Don’t put all your eggs in one basket.
  • When you invest, seek cash flow (dividend and interest income) – otherwise you are gambling.
  • For stocks, stick with large blue-chip dividend payers.
  • The best opportunity for outperforming is to buy when a quality investment (that is not impaired as to its future ability to generate earnings) is substantially down.
  • Patience.
  • If you can’t do it yourself, hire someone with experience who can.


5. How should one invest in a bear market?

A bear market is when investments go on sale. It is the time to be buying. Use your equity target to give you guidance as to how much to buy. For your living needs within three years, those funds should not be invested in common stocks. You want to avoid the pressure of having to sell when investments are down which can create permanent losses.

During a bear market, you might stick with the highest quality large-cap stocks that pay a good dividend (so you are paid to wait). These types of large companies are supported by their dividend yield and tend not to drop as much. They are much less risky but are also more likely to recover when the market recovers. Smaller companies, emerging market securities, cyclical companies and commodities are much more volatile and can drop to levels that you might not think possible.

Be mindful not to put too much into any one stock so you manage company risk.

6. What are examples of sustainable competitive advantages?

Competitive advantage may exist where a business is able to provide a customer with a product at a lower cost than competitors or provide better value to the customer at a comparable cost. When a company can sustain such advantages through time, this can result in the business generating a high level of return.

One would typically examine the competitive forces that determine industry profitability including: the bargaining power of suppliers, threat of new entrants, bargaining power of buyers, threat of substitute products or services and the rivalry among existing firms.

For example, for entry barriers, we might consider economies of scale, proprietary product differences, brand identity, switching costs, capital requirements, access to distribution, absolute cost advantages, proprietary learning curve, access to necessary inputs, proprietary low-cost product design, government policy and expected retaliation.

In Canada, the banking industry operates in an oligopoly market structure with the six big banks dominating over 90% of the banking business. As such, these banks don’t have to compete as intensively and can generate excess returns through time. Their returns through time have generally been better than the S&P/TSX Composite Index.


7. What are the absolute best, most crucial tips/ideas to succeed in long-term investing?

We should seek to own a portfolio of investments that generate enough income to meet our living needs without having to rely on those investments going up in price.


8. What are the essentials of due diligence when investing?

  • To know your clients – including their personal and family backgrounds, financial situations, financial goals, cash needs through time, liquidity requirements, investment experiences and risk tolerances.
  • To know your product – to understand the investment, to make sure that investments are suitable, that the percentage of investment is reasonable and that risk is controlled.


9. What kind of stocks would you rather avoid holding because they are riskier than others?

As most of my clients are retired or near retirement, capital preservation and the development of stable dependable cash flow from their portfolios to meet their needs are typically key objectives.

For common stocks, I focus on high quality income-generating businesses that:

  • Produce goods and services needed for our economy in good or bad times (like banking, insurance, pipelines, energy, electricity, telephone and television [telecom], food, etc.).
  • Are dominant where they operate.
  • Are profitable.
  • Don’t employ an excessive level of debt.
  • Produce a good dividend yield where the company income is more than sufficient to cover the dividends.

Stocks that don’t possess these attributes are those I tend to avoid. These include:

  • Small-cap companies.
  • High growth companies with high price-earnings (P/E) multiples.
  • Stocks that don’t pay dividends.
  • Stocks with very high levels of debt.
  • Poor businesses.


10. What are some investment lessons you learned in 2016?

In 2016, I had no exposure to materials and very little exposure to energy which were industry sectors that performed extremely well. Generally these sectors tend to be more volatile than the market, don’t typically pay decent dividend yields, and their earnings tend to be cyclical and vary from one year to the next.

I learned that in sticking with my investment philosophy, it means there could be times when I could underperform. But straying can mean introducing added risk to clients which my experience has found over the years not to be worth it. Fortunately though in 2016, there were other industry sectors, like the financials, that performed very well so that we were still able to generate good returns.


11. What discount rate do you use in your valuation?

I rely on relative valuations in screening to find stocks of interest. I’ll then look at research reports as to their indicated intrinsic value (which might be called price target or fair value) as opposed to trying to calculate them myself. Ideally I would like the stocks for consideration to have a market price with a good discount to its intrinsic value. The amount of discount can vary – like today it is tough to find good businesses selling at significant discount.


12. Which is more useful, earnings yield or P/E ratio? Why?

Earnings yield (earnings per share divided by stock’s market price) is basically the inverse of the P/E ratio. The P/E ratio equals stock market price divided by earnings per share. So they are equally useful.


13. With just public information, how can you be confident that your valuation is correct while the market is wrong?

Your thesis in investing in a stock may be correct, but because of the human behavior of others, your identified stock price can remain under its fair value for years. There is no certainty when it comes to investing. For this reason we must buy enough stocks under a strategy in order to get the strategy returns.


14. What are the key attributes of a great investor?

A great investor is someone who

  • Has spent a lifetime building up educational and professional investing credentials.
  • Has gone through a period of articling or training with a seasoned financial adviser.
  • Has been investing for more than 10 years.
  • Uses one or more stock strategies to identify stocks for selection.
  • Understands your needs of cash from your portfolio through time.
  • Pays great attention to risk management.
  • You trust implicitly.
  • Provides advice that is always in your best interest.


15. What are the best books on investing?

Read “The Richest Man in Babylon” by George S. Classon.


16. What skills are needed to succeed in distressed debt/special situations investing?

By definition, distressed securities are experiencing financial or operational distress, default or are under bankruptcy. There is a very real possibility that any investment could result in a loss of most or all of your investment. For these reasons, I would likely not invest in this type of investment as it does not exhibit the risk and return profile I seek that would be suited to my clients.

The skills to succeed come down to spending enough time to really understand this type of product. But given the time commitment required, you might better use it toward investigating other types of investments.


17. What are the best books about special situations investing?

As I don’t have much interest in this high risk area as these investments likely aren’t suitable for my clients, I don’t know offhand any books on special situation investing to recommend.


18. What are the best web sites to follow for value investing-oriented investment ideas?

Morningstar, Value Line and Zacks might be good places where they write about stocks as well as provide you with resources to help you in stock selection.


19. Who are the best value investors in the U.S. with under $1 billion in capital?

I don’t typically use third-party managers. You might look at a Credit Suisse article called “On Streaks, Perception, Probability and Skill.” It discusses identifying skilled managers versus those that are just lucky.

You might also read an article by Ernst Gronblom called “Choosing Money Managers.”


20. What are the best mutual funds for value investors?

I don’t sell mutual funds. Mutual funds tend to be more expensive and more appropriate for retail investors.

With more money to invest – at least $100,000 to get in the door, but most will want at least $500,000 – you can hire a portfolio manager at a competitive cost who can help you through

  • Generating higher returns and/or lower risk by selecting the right asset mix, selecting good investments, sheltering income from taxation, controlling risk and setting aside funds for anticipated needs (so you are not forced to have to sell investments when they are down). An experienced investment professional may also help you avoid making costly emotional or irrational investment decisions.
  • Eliminating, reducing and deferring income taxes so you’ll have more money growing faster to meet your goals.
  • Protecting your family against devastating financial losses – like the death, disability or illness of the family breadwinner, property loss, theft or damage, and liability claims. Without such protection, your lifetime of savings could get wiped out.
  • Design an effective estate plan so your estate will be distributed according to your wishes, minimize tax and transfer costs, and protect your legacy from a variety of creditors. This not only gives you peace of mind but hopefully will ensure your life savings is there to take care of your loved ones throughout their lifetime.


21. For an individual relatively unsophisticated nonprofessional investor, what are the most undervalued asset classes today and what are the best funds or mechanisms to invest in them with a buy-and-hold mentality?

An unsophisticated nonprofessional investor should not buy individual stocks but rather stick with large-cap stock market index investments through either exchange traded funds or mutual funds formats. They should also not put all their money in the stock market. Take a look at iShares S&P 500 ETF with an MER of 0.04%.