STI Movement (Jul - Dec 07)

STI Movement In Dec 07

US Home Loan and Default

According to an article on the Associated Press, mortgage insurers reported higher defaults in November 2007. As a result, the mortgage insurance companies are reporting hefty losses and share prices plunged.

The article gave a light on what we meant by “default” in US home mortgage. A default take place when a borrower failed to pay the loan for more than 60 days.

The home buyers are required to pay 20% of the house value. Otherwise, they need to take up an insurance. If a buyer missed a payment, the insurance payout will be triggered. A way get around it is to obtain another mortgage to pay for that 20%. It’s a mortgage over mortgage. With higher default risk, the financial companies are less willing to provide this second mortgage and therefore, more business for the insurance companies. With more default, these insurance companies will suffer.

Recap on 2007

Forbes Market Briefing

Happy New Year ... We Hope

Steve Schaefer, 12.31.07, 5:05 PM ET

With the calendar set to turn the page on 2007, Wall Street closes the book on a tumultuous year.

The year started off on the right foot: private equity was still booming, financial firms were raking in cash from advisory fees and other operations, and investors were expecting a record-setting performance on the Street. Then the subprime mortgage meltdown hit and the stock market, and the U.S. economy, did an about-face. What looked like a record-setting year early on turned sour, limping to the finish, and the dreaded "R" word was on economists' tongues by the time fall turned to winter.

Three whacks at interest rates by the Federal Reserve was not enough to stem the tide of the credit crunch, as the collapse of the mortgage and housing markets pressured investors and consumers alike. To make matters worse, most recent inflation indicators have come in higher than expected, suggesting the Fed may have put itself between a rock and a hard place, having run out of room to take interest rates lower, and pushed the country to the brink of recession. (See: "Fed Trims Rates")

Despite the pressures on the economy and the bloodletting in the financial sector over the past two quarters, many remain optimistic. The Dow Jones industrial average still managed to post a 6.4% gain for the year, despite a 4.6% drop in the fourth quarter, and the tech-fueled Nasdaq finished with a strong 7.9% increase.

One of the Nasdaq's most high-profile success stories in 2007 was Apple (nasdaq: AAPL - news - people ). The consumer tech company rode the success of the iPhone and incredible demand for all its products to a 133% gain for the year, and shares finished the year just below the $200 threshold, at $198.08.

On the Dow, Citigroup (nyse: C - news - people ) may have been the biggest story of the year, as the financial giant was brought to its knees by massive writedowns related to subprime mortgages, resulting in the exit of former CEO Chuck Prince. Shares of the bank plunged 47% in 2007. (See: "Another Wall Street Chief Falls")

In the mortgage sector, the largest U.S. home lender, Countrywide Financial (nyse: CFC - news - people ), was hammered by the subprime meltdown, losing nearly 80% of its market value.

Meanwhile, big caps outpaced small caps, as the Standard & Poor's 500 posted a 3.5% gain to beat out the Russell 2000 index, which fell 2.8% for the year.

Crude oil is poised to finish off 2007 with its greatest yearly gain in nearly a decade. Down two cents Monday to settle at $95.98 a barrel, crude still posted its biggest jump since 1999 in what has been an extremely volatile year for energy prices.

Exxon Mobil (nyse: XOM - news - people ) posted a 22% gain for the year, following oil and gasoline prices on their wild ride higher. With crude near $96 a barrel and gasoline over $3 a gallon, oil companies are likely to continue reaping the benefits in 2008. (See: "Sneak Peak 2008: Energy")

After 2007 came in with a roar and went out with a whimper, investors will be hoping for a rebound in 2008, while monitoring several trends.

Chief among those trends will be the continuing flow of foreign capital into pillars of the U.S. financial community. Citigroup, Bear Stearns (nyse: BSC - news - people ), Morgan Stanley (nyse: MS - news - people ) and Merrill Lynch (nyse: MER - news - people ), among many others, have all sold stakes to sovereign wealth funds in the Middle East or Asia. (See: "Merrill Still Shopping")

Look for some semblance of a bottom for the financial sector to emerge early in 2008, as the major Wall Street players utilize their newfound foreign capital to rebound from the ill effects of the subprime crisis.

Many analysts are predicting continued growth in the stock market for 2008 despite a prolonged housing slump and overall economic slowdown. The Fed bears watching as it attempts to boost liquidity in financial markets while limiting inflation, particularly if credit continues to be tight.

Towards 2008

So that's it for 2007, we have come to an end. Taking stock, this is a very good year, a very bullish year in fact. STI continue to set new record to nearly 4,000 points. This is something we never seen before. During previous decades, the highest point STI can go was just slightly above 2,500. But today, we make history again and again. However, in July 2007, US subprime problem triggered a correction and subsequently, market became very volatile. We have, unfortunately, to live with it even in 2008. And in case you asked how I fare this year in stock investment, I did quite well. My uncompounded absolute returns is above 20%. This is simply using the money I won over the initial investment. Existing portfolio gain/loss is not considered. My portfolio actually suffers a 8% losses when SGX closed for the year. Even if we use "holding periods return" to measure, my gain is still well above 10%.

I wish to take this opportunity to wish all my friends and readers Happy New Year, good health and "show us the money!!!".

Seven Traits Of Great Investors

My all time favourite analyst, BT senior correspondence, CFA Charterholder Ms Teh Hooi Ling wrote another good article analysing traits of investment gurus. The article is so good that I ready have to paste it wholesale on my blog to share with you. In her article, Ms Teh listed down seven traits of greater investors which I share the same opinion. I had either previously in my article or through discussion with friends, highlighted about the same thing. For those who know me or had followed my blog should know what I mean. Quickly, I’ll summarise these seven traits and input my remarks.

1) Overcome greed and fear. I learned this from Warren Buffett and have emphasised over and over again in my blog.

2) Passion for investment. I often have friends/colleagues asking me why I am not tired of reading and analyzing stock (almost) everyday. Why I never breakdown? My answer is simply – by asking back “why didn’t you breakdown when you watch World Cup every midnight and then reporting to work in the morning?”

3) We must learn from our mistakes and make sure that we do not make the same mistake again. I didn’t emphasise this but I thought that is rather commonsense!

4) Commonsense is the least common human attribute. I pick up this quote from my ACCA lecturer Mr. Fred Keer, a very knowledgeable lecturer. And I use it many times in my blog. Let me illustrate how I use commonsense. A few years ago, there was a hot stock dealing with mobile phone repair. The company kept reporting profit growth and the share price kept moving up. I posted questions to my coursemate – “how come that company can continue to report profit growth when its trade (mobile phone repair) is simple and can be easily duplicated or has no barriers to entry? How come it can earn lucrative margin when it is purely an outsource company? Why didn’t its major client (Nokia) squeeze its margin?” My questions were basically a result of commonsense. What happen to the company later? I leave it to you to find out (or you can write to me for answer).

5) Believe in your study, analysis and philosophy. Do not compromise your principle. Do not follow the crowd. They always make mistake.

6) Good in math will not make you a successful investor. In every book written on Warren Buffet, you will find large portion on qualitative analysis.

7) And the most important one, which has always been a topic of discussion – can Warren Buffet be duplicated? I discussed it with my CFA coursemates before and we concluded that it couldn’t be duplicated. You can learn everything about ratio analysis, options, Black-scholes model, forward and futures etc. But there is one thing that you cannot learn – GUT FEEL.

Enjoy the article.

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Business Times - 17 Nov 2007

Reading this won't make you great

Mark Sellers, founder of a Chicago-based hedge fund, argues that the best investors are born with particular psychological traits that others can never learn

By TEH HOOI LING
SENIOR CORRESPONDENT

WHAT makes someone a great investor? It's something you have to be born with, said Mark Sellers, founder and managing member of Sellers Capital LLC, a long/short equity hedge fund based in Chicago.

Apparently, it's not about your IQ, the education you've had, the books you've read, or the experience you've accumulated. 'If it's experience, then all the great money managers would have their best years in their 60s and 70s and 80s, and we know that's not true,' he said in a speech to a class of Harvard MBA students.

Intelligence and learning are obviously necessary too, and are sources of competitive advantage for an investor, but there are structural assets some possess that cannot be copied or learnt by others. 'They have to do with psychology and psychology is hard wired into your brain. It's part of you. You can't do much to change it even if you read a lot of books on the subject,' said Mr Sellers.

He said that there are seven traits great investors share that are true sources of advantage because they cannot be learned. You are either born with them or you aren't.

The seven traits are:

One, the ability to buy stocks while others are panicking, and the ability to sell at a time when other investors are euphoric. 'Everyone thinks they can do this, but then when October 19, 1987, comes around and the market is crashing all around you, almost no one has the stomach to buy,' Mr Sellers said.

'When the year 1999 comes around and the market is going up almost every day, you can't bring yourself to sell, because if you do, you may fall behind your peers.

'The vast majority of the people who manage money have MBAs and high IQs and have read a lot of books. By late 1999, all these people knew with great certainty that stocks were overvalued, and yet they couldn't bring themselves to take money off the table because of the 'institutional imperative', as Buffett calls it.'

Two, the great investor has to be obsessive about playing the game and wanting to win. 'These people don't just enjoy investing; they live it. They wake up in the morning and the first thing they think about, while they're still half asleep, is a stock they have been researching, or one of the stocks they are thinking about selling, or what the greatest risk to their portfolio is and how they're going to neutralise that risk.

'They often have a hard time with personal relationships because, though they may truly enjoy other people, they don't always give them much time. Their head is always in the clouds, dreaming about stocks. Unfortunately, you can't learn to be obsessive about something. You either are, or you aren't. And if you aren't, you can't be the next Bruce Berkowitz.'

(Berkowitz was a managing director of Smith Barney and set up his fund Fairholme Capital Management in 1999. Since inception, Fairholme Fund has returned 18.7 per cent annually on average.)

The third trait of a great investor is the willingness to learn from past mistakes. 'The thing that is so hard for people and what sets some investors apart is an intense desire to learn from their own mistakes so they can avoid repeating them. Most people would much rather just move on and ignore the dumb things they've done in the past.

'I believe the term for this is 'repression'. But if you ignore mistakes without fully analysing them, you will undoubtedly make a similar mistake later in your career. And in fact, even if you do analyse them it's tough to avoid repeating the same mistakes.'

A fourth trait is an inherent sense of risk based on common sense. 'Most people know the story of Long Term Capital Management, where a team of 60 or 70 PhDs with sophisticated risk models failed to realise what, in retrospect, seemed obvious: they were dramatically overleveraged. They never stepped back and said to themselves, 'Hey, even though the computer says this is OK, does it really make sense in real life?'

'The ability to do this is not as prevalent among human beings as you might think. I believe the greatest risk control is common sense, but people fall into the habit of sleeping well at night because the computer says they should. They ignore common sense, a mistake I see repeated over and over in the investment world.'

Five, great investors have confidence in their own convictions and stick with them, even when facing criticism. 'Buffett never get into the dotcom mania, though he was being criticised publicly for ignoring technology stocks. He stuck to his guns when everyone else was abandoning the value investing ship and Barron's was publishing a picture of him on the cover with the headline 'What's Wrong, Warren?'. Of course, it worked out brilliantly for him and made Barron's look like a perfect contrary indicator.'

Mr Sellers said that he is amazed at how little conviction most investors have in the stocks they buy. 'Instead of putting 20 per cent of their portfolio into a stock, as the Kelly Formula might say to do, they'll put 2 per cent into it. Mathematically, using the Kelly Formula, it can be shown that a 2 per cent position is the equivalent of betting on a stock which has only a 51 per cent chance of going up, and a 49 per cent chance of going down. Why would you waste your time even making that bet?'

The Kelly Formula arose from the work of John Kelly at AT&T's Bell Labs in 1956. His original formulas dealt with the signal noise of long-distance telephone transmission. It was then adapted to calculate the optimal amount to bet on something in order to maximise the growth of one's money over the long term.

Six, it is important to have both sides of your brain working, not just the left side - the side that's good at maths and organisation. 'In business school, I met a lot of people who were incredibly smart. But those who were majoring in finance couldn't write worth a damn and had a hard time coming up with inventive ways to look at a problem,' said Mr Sellers.

'I was a little shocked at this. I later learned that some really smart people have only one side of their brains working, and that is enough to do very well in the world but not enough to be an entrepreneurial investor who thinks differently from the masses.

'On the other hand, if the right side of your brain is dominant, you probably loathe math and therefore you don't often find these people in the world of finance to begin with.'

So finance people tend to be very left-brain oriented - and Mr Sellers said that that is a problem. A great investor needs to have both sides turned on, he said. 'As an investor, you need to perform calculations and have a logical investment thesis. This is your left brain working. But you also need to be able to do things such as judging a management team from subtle cues they give off.

'You need to be able to step back and take a big picture view of certain situations rather than analysing them to death. You need to have a sense of humour and humility and common sense. And most important, I believe you need to be a good writer.'

He cited Warren Buffett as one of the best writers ever in the business world. 'It's not a coincidence that he's also one of the best investors of all time. If you can't write clearly, it is my opinion that you don't think very clearly,' Mr Sellers said.

And finally the most important, and rarest, trait of all: the ability to live through volatility without changing your investment thought process.

This, said Mr Sellers, is almost impossible for most people to do; when the chips are down they have a terrible time not selling their stocks at a loss. They have a really hard time getting themselves to average down or to put any money into stocks at all when the market is going down.

'People don't like short-term pain even if it would result in better long-term results, he said. Very few investors can handle the volatility required for high portfolio returns. They equate short-term volatility with risk.

'This is irrational; risk means that if you are wrong about a bet you make, you lose money. A swing up or down over a relatively short time period is not a loss and therefore not risk, unless you are prone to panicking at the bottom and locking in the loss.

'But most people just can't see it that way; their brains won't let them. Their panic instinct steps in and shuts down the normal brain function.'