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In just over a decade, the credit default swap (CDS) emerged on the scene, grew exponentially, found fame and fortune, and then crashed to the depths of public opinion — to the point that it is today blamed for the current financial crisis. The tarnished CDS is even accused as “the monster that ate Wall Street”. It was created to cover asset losses if a default happened, similar to taking out home insurance to protect against losses from fire and theft. Except that it did not. The CDS was traded from investor to investor with no oversight, ensuring that the “insurer” had the ability to cover the losses if the asset defaulted. However, recently, the Malaysian Rating Corp Bhd indicated that CDS should be introduced in the local financial market to spur bond trading. With the CDS being in an infant stage in Malaysia, this could be a sound move, as we may be able to avoid the pitfalls encountered by the early adopters and trade it as an enhanced and rehabilitated product. In doing s...

Isaac Newton was one of the smartest people to ever live. But being a smart physicist is not necessarily the same thing as being a smart investor. And, unfortunately for him, Newton learned that the hard way. In an updated and annotated text of Benjamin Graham’s classic “The Intelligent Investor,” WSJ’s Jason Zweig included an anecdote about Newton’s adventures investing the South Sea Company: Advertentie “Back in the spring of 1720, Sir Isaac Newton owned shares in the South Sea Company, the hottest stock in England. Sensing that the market was getting out of hand, the great physicist muttered that he ‘could calculate the motions of the heavenly bodies, but not the madness of the people.’ Newton dumped his South Sea shares, pocketing a 100% profit totaling £7,000. But just months later, swept up in the wild enthusiasm of the market, Newton jumped back in at a much higher price – and lost £20,000 (or more than $3 million in [2002-2003’s] money. For the rest of his life, ...

In the 16th century, japan didn’t have predefined currency for trading. People used to exchange commodities. Every person working was to give rice as a tax in Japan. At the port, Feudal Lords set up a store for the storage of rice collected. Rice receipt was used as a medium of conducting the sale and buy transactions. Additional receipts were generated for being people to transact with, they would be paid from the other harvests in future. Those receipts were referred as “Empty Rice Contracts” since there was no physical ownership of rice. It was the beginning of one day trading in the world. Japanese Rice Trading japan-rice-trading In the late 17th century a rice trader in Japan known as Mr. Homma Munehisa conducted a very deep study of all aspects concerning the future of rice. The study involved the fundamental and entire market psychology for the rice. Following his study, he became a very successful rice trader in Osaka at Ojima Rice Market. It was reported that Mr. H...

Here is something the legendary investor Howard Marks wrote in his book The Most Important Thing… The oldest rule in investing is also the simplest: “Buy low; sell high.” Seems blindingly obvious: Who would want to do anything else? But what does that rule actually mean? …it means that you should buy something at a low price and sell it at a high price. But what, in turn, does that mean? What’s high, and what’s low? On a superficial level, you can take it to mean that the goal is to buy something for less than you sell it for. But since your sale will take place well down the road, that’s not much help in figuring out the proper price at which to buy today. There has to be some objective standard for “high” and “low,” and most usefully that standard is the asset’s intrinsic value. Now the meaning of the saying becomes clear: buy at a price below intrinsic value, and sell at a higher price. Of course, to do that, you’d better have a good idea what intrinsic value is. No...

The concept of “margin of safety” — which originates from Benjamin Graham’s earliest teachings — is a core tenet of value investing. As Graham wrote in the very last chapter of The Intelligent Investor (Chapter 20:“Margin of Safety” as the Central Concept of Investment): Confronted with a challenge to distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY. The beauty of “margin of safety” lies in both the concept’s simplicity and in its effectiveness in protecting investors from making big mistakes. Graham really was a pioneer in behavioral finance before behavioral finance was even a thing, and the margin of safety concept was one of the first tools that allowed investors to overcome their own biases, creating a protection against the “unknown unknowns” of an investment. SO WHAT IS MARGIN OF SAFETY? Margin of safety is a very easy concept to understand. As Ben Graham points out, “all experienced investors recognise that the m...

Value investing is the term used to describe the general investing philosophy of Warren Buffett and his mentor Benjamin Graham – it seeks solely to find companies whose stocks are undervalued compared to the strength of the company itself. I envisioned this book to be a lighter, easier to read version of Benjamin Graham’s classic The Intelligent Investor (which I’m currently rereading for a future review on The Simple Dollar), a book which Warren Buffett himself describes as “by far the best book on investing ever written.” Does The Little Book of Value Investing really live up to its potential? Is it a good book for the average investor to read, or should they just read The Intelligent Investor instead? Let’s dig in and find out. A Little Look At The Little Book of Value Investing Chapter 1 – Buy Stocks Like Steaks … On Sale The Little Book of Value Investing opens with the idea that buying stocks is often analogous to shopping in the supermarket. Some investors buy the ...

Even though most of us know that the stock market follows cycles, there is still a lot of mystery why one is unable to spot it. It is important that one has to understand this market dynamics to be able to benefit from it. The length of each cycle is different- Every market cycle is of a different length. Sometimes the cycle could last only for a year and other times for decades. Valuations are not constant- Valuation or the price to earnings ratio keeps changing and they differ from one cycle to other. So what may be expensive in this cycle may not be expensive in the next. There is thus no set value when you know that if say the P/E is 50 then the market is overvalued or when P/E is 10 then the market is undervalued There could be one cycle within another- The stock market cycle is defined in a set But it can happen that there is a cycle within a cycle. The individual sectors could have their own cycles and small cycles would affect different stocks etc. These actually ge...