Sunday, July 31, 2011
Copyright 2006 Geoff Gannon Whenever a large investment has been made in a particular area, whenever there is a lot capital, people, and ego tied up with some operation, the transition away from that operation is apt to be far slower than what an objective observer would have expected. As an investor, it’s easy to look at a corporation from afar and see the business the way a rational capital allocator would see it. But, very few people within the organization are able to take such a farsighted view. They are not able to asses the matter dispassionately. There are jobs at stake. There is the admission of defeat. And there is the question of identity. Just as importantly, these problems hang over the managers every day. Staying too long in a dying business is rarely the result of one major misstep – rather, it is the result of a series of seemingly innocent steps that merely serve to delay the inevitable. Recognizing the terrible importance of the inflexibility of an enterprise that is tied to a particular line of business, mode of production, or labor force is a difficult task. Many value investors have been caught in this trap. Some business appears to offer excellent value today; but, if it should cling too long to its old ways, that value will be destroyed. It’s tempting to think that managers will see the obvious danger, act to remedy the problem, and forever change the organization, before the inevitable occurs. But, that kind of thinking requires a leap of faith. It is too easy for the investor to believe what he wants to believe – to assume that somehow tomorrow will take care of itself. Even Warren Buffett, a man who has been ever vigilant in his efforts to avoid prolonged entanglements in businesses with poor economics, has suffered from delusions of an easy transition. There are probably three good examples of such delusions from Buffett’s career. Discussing only two will be sufficient (the third would be Baltimore department store Hochschild-Kohn). Buffett suffered from his most recent delusion in late 1993. That’s when Berkshire Hathaway acquired Dexter Shoe. Buffett now realizes that deal was a mistake. In the 2001 annual letter to shareholders he wrote: “I've made three decisions relating to Dexter that have hurt you in a major way: (1) buying it in the first place; (2) paying for it with stock and (3) procrastinating when the need for changes in its operations was obvious…Dexter, prior to our purchase - and indeed for a few years after - prospered despite low-cost foreign competition that was brutal. I concluded that Dexter could continue to cope with that problem, and I was wrong.” Buffett lists three separate decisions. I don’t think the way he presents the Dexter Shoe debacle is simply a thoughtless arrangement. Buffett is admitting he shouldn’t have bought Dexter Shoe at all. He shouldn’t have bought it with stock or cash. His purchase was based on a false premise. It wasn’t simply a matter of overpaying (by using stock). It’s also interesting to note the third decision he describes: “procrastinating when the need for changes in its operations was obvious”. That’s a pretty harsh admission. Buffett refers to procrastinating as a decision. No doubt it was a daily decision, not a one-time choice between two separate paths; nevertheless, it was a costly decision. Excusing inaction as being somehow a lesser offense than an incorrect action is a common occurrence in business; but, it is not a productive way to learn from one’s own mistakes. Especially in investing, inaction must be judged just as harshly as action. The most interesting part of all this is the fact that Buffett separates the purchase itself from his failure to push for change at Dexter Shoe. He does not suggest that buying the business and then trying to change it would have worked well. Buffett seems to be saying the best course would have been not to buy the business in the first place. I think he’s right. The risks involved in purchasing an inflexible business are difficult to quantify. However, they are real. These risks are frequently large enough to destroy any apparent value that comes in the form of a bargain price relative to high current earnings (or cash flow). A business that is purchased because it can throw off cash can quickly become a money pit. Often, the buyer is well aware of this possibility. However, he manages to convince himself that the necessary transition will be made with the speed demanded by a rational assessment of the facts and a desire to put capital to its best possible use. Operating managers rarely see things so clearly. Even when the road ahead is clear, the will is often lacking. It is easy to rationalize decisions that seem to offer a middle course. A gradual transition is always a tempting possibility. Who wouldn’t want to convince themself that a retreat is really a fighting withdrawal? In the 1985 annual letter to shareholders, Buffett gave Berkshire’s reasons for remaining in the textile business as long as it did: “(1) Our textile businesses are very important employers in their communities, (2) management has been straightforward in reporting on problems and energetic in attacking them, (3) labor has been cooperative and understanding in facing our common problems, and (4) the business should average modest cash returns relative to investment.” “It turned out I was very wrong about (4)…I won’t close down a business of sub-normal profitability merely to add a fraction of a point to out corporate rate of return. However, I also feel it is inappropriate for even an exceptionally profitable company to fund an operation once it appears to have unending losses in prospect.” The delusion Buffett suffered under was only in regard to his fourth reason for remaining in the textile business. The belief that modest returns will be realized from a sub-par business is an attractive one. A rational assessment of the facts would have lead to the opposing conclusion. Past experience demonstrated that apparent possibilities of future profitability based on greater efficiencies and improved conditions within the industry rarely lead to any actual profits. There was always hope. But, there was rarely any proof that such hope was justified. “Over the years, we had the option of making large capital expenditures in the textile operation that would have allowed us to somewhat reduce variable costs. Each proposal to do so looked like an immediate winner. Measured by standard return-on-investment tests, in fact, these proposals usually promised greater economic benefits than would have resulted from comparable expenditures in our highly-profitable candy and newspaper businesses…But the promised benefits from these textile investments were illusory.” An objective observer would have seen the flaw in the arguments offered in support of such investments. The industry was plagued by an overabundance of capacity. In the past, there had been a terrible misinvestment of capital that diverted a great flood of money into a seemingly attractive industry. Unfortunately, that capital did not go into easy to recoup investments. It went into massive expenditures that saddled the owners with high fixed costs. A factory that produces nothing is worse less than nothing. It’s a money pit. The owner has only two choices: exit the business or attempt to obtain the most favorable variable costs by any means necessary. If enough players opt for the latter the game is no fun for anyone. “Many of our competitors, both domestic and foreign, were stepping up to the same kind of expenditures and, once enough companies did so, their reduced costs became the baseline for reduced prices industrywide. Viewed individually, each company’s capital investment decision appeared cost-effective and rational; viewed collectively, the decisions neutralized each other and were irrational (just as happens when each person watching a parade decides he can see a little better if he stands on tiptoes). After each round of investment, all the players had more money in the game and returns remained anemic.” The image of a crowd of parade watchers on tiptoes is a good one for investors to keep in mind. This is what a bad business looks like. This is the kind of investment you want to avoid. A corporation rarely exits a business on economically beneficial terms. It does so in its own time – long after the unending decline becomes obvious. An inflexible enterprise is one that is tied to a particular line of business, mode of production, or labor force. Most businesses are not as closely tied to these things as you might think. A few are. Xerox and Kodak (EK) are two examples from the recent past. General Motors (GM) is still tied to a labor force from a bygone era. GM is an example of a business that is so inflexible it is tied not only to a particular industry but to a particular position within the industry. The company was not structured in a way that allowed it to slim down in the event of a loss of market share. For some businesses, a shift in the structure of their market can be as disastrous as a shift in technology. The consequences of such shifts can be dire. The good news is that it is not difficult to see which companies are exposed to these future threats. General Motors was a huge, unionized enterprise. It held a very large share of the U.S. market. It obviously had to maintain its market share. That may not have on the mind of investors a few decades ago, because the idea that GM would lose market share might have seemed absurd. But, if they had considered the matter, they would have seen that GM’s survival was largely dependent upon maintaining a very large share of the U.S. market. Likewise, if Intel (INTC) or Microsoft (MSFT) lost much market share, they’d have to make huge changes very quickly. The current structure of those companies can’t be supported by a small share of the market. Of course, it would be much easier for these businesses to shed tens of thousands of employees than it is for General Motors. At the same time, no sane investor is buying shares of Intel or Microsoft unless he expects them to maintain roughly the same share of the market for their products that they currently control. Future market share is a key consideration at both these firms, because the weight of the expenses they have taken on would crush any company that is not the biggest player in the industry. The companies literally employ small armies. In fact, the combined workforce of these two companies is no less than the number of U.S. troops in Iraq. So, clearly both companies have made rather large commitments predicated upon their continued dominance. Without that dominance, these commitments would become crushing burdens. You need to give some thought to the flexibility of any business you invest in. The greatest risk facing a large enterprise is a decrease in revenues that can not (or will not) be offset by a similar decrease in expenses. The “will not” part is important, because I’ve learned that it is easy to put too much faith in management. No one likes to make tough decisions. The fact that a problem is obvious does not mean those who understand the problem will necessarily seek to solve it. I have no doubt that many in Congress recognize that the national debt is a problem. I also have no doubt that they recognize it is not in their interest to address the problem. They would like to see someone else address it at a later date. Everyone would. It is too easy to rationalize a thousand small steps. Then, you never have to admit your one big mistake. It may be that no one consciously chooses to tie a business to an inflexible and potentially perilous position. Likewise, it may be that no one consciously chooses to continue down that path. But, that is often precisely what happens. If the problem is not addressed until it must be addressed, it is too late for the owners. The losses in both time and money are already too great. Therefore, it may be best to look for businesses where managers will not be required to make tough decisions. An investment based upon the belief that managers will make tough decisions is always a risky investment – regardless of the fundamentals.
Saturday, July 30, 2011
In light of Toshiba’s recent proposed acquisition of Westinghouse Electric from the government-owned British Nuclear Fuels (BNFL), historians may be reminded of former Westinghouse Chairman Robert Kirby’s litigious international outcry and prolonged battle over secretive and illegal price manipulation by a global uranium cartel. In the 1970s, Westinghouse, determined to capture the world market of building nuclear reactors, offered dirt-cheap nuclear fuel as part of its incentive to get sales from utility companies. The company’s 27 utility customers had locked in agreements with Westinghouse to provide them with 65 million pounds of U3O8 over the next twenty years, well into the 1990s. Those contracts set off one of the most curious legal battles of the 1970’s, ultimately reducing Westinghouse to a shell of the powerhouse it once was. In recent weeks, Toshiba (London Stock Exchange: TOS; Tokyo Stock Exchange Ticker Code: 6502) has been strongly criticized for the Westinghouse acquisition, and may sell as much as 49 percent of the deal to two other Japanese firms and a smaller stake to an American firm. Toshiba’s CFO, Sadazumi Ryu said the company would pay for some of its acquisition costs within three years out of current cash flow plus float debt to about 115 percent of equity. Will Toshiba repeat the mistakes made by Westinghouse in the mid 1970s during the last uranium bull market? Today, Toshiba aims its sights on the lucrative Chinese nuclear energy market, which on the surface appears more ambitious than the U.S. civilian nuclear program of the 1970’s. Toshiba wants to be a major beneficiary of China’s aggressive plans to expand the country’s nuclear energy program. And why not? Uranium prices have soared the past few years. Spot uranium rocketed in 2005 at an even faster degree than in 1975. That was the year when Westinghouse’s Robert Kirby was told by his doctor to not even bother giving up his chain-smoking habit. Things at Westinghouse had gotten that bad. The head of the Pittsburgh-based conglomerate failed to grasp what was behind the escalating uranium price during the 1970s. His Westinghouse incentive plan sounded great when spot uranium sold for $6/pound. However, at $40/pound, Westinghouse got stuck with potential liabilities of more than $2 billion (1970s dollars) because of his offer to provide the utilities with cheap fuel. By July 1975, Kirby began blaming the world’s uranium cartel, which he believed manipulated the spot price higher to piggyback his company’s development plans. Across from Kirby’s offices in Pittsburgh’s Golden Triangle were the offices of Gulf Oil, a uranium supplier, whom he believed to be a member of the uranium cartel. By September 1975, Westinghouse announced a shortfall of 25,000 metric tons of uranium, and claimed “commercial impracticability” in honoring its nuclear fuel commitments to the 27 utilities. And the lawsuits began. According to a special report in the Pittsburgh Post-Gazette, Kirby’s “suspicions heightened when, in late 1976, he received copies of documents suggesting Gulf and 28 other suppliers had conspired to form a cartel to keep Westinghouse out of the uranium business.” The documents were the minutes of a private meeting of uranium suppliers held in Australia. In a bizarre twist of fate, the whistleblower came in the form of Friends of the Earth, which offered Westinghouse additional documents if the nuclear power plant manufacturer would help the environmental group release jailed members in the Philippines. Kirby ran with what he had, ignoring their request, and began a course of intense litigation. The lawsuits were eventually consolidated and heard in a federal district court in Virginia. During the course of the litigation, Westinghouse took its grievances to London’s House of Lords, setting international case law about the discovery process in litigations. What really happened in the 1970’s? Kirby and Westinghouse were caught up in an international trade dispute, during a world revival of the uranium market. Uranium prices had collapsed in December 1959 when the U.S. government placed an embargo on the purchase of foreign uranium for domestic purposes. The embargo came after the nuclear weapons build-up of the 1950s had peaked. In 1959 alone, the U.S. bought 20,000 metric tonnes of uranium for the country’s weapon procurement program, about 61 percent from Canada. Within a week after the embargo, global uranium prices fell by 75 percent. Twenty-four out of the 28 Canadian uranium producers and processors left the business. Two Canadian crown corporations remained with viable uranium assets to mine and sell. Eldorado Mining and Refining Ltd had stakes in mines at Port Radium, Key Lake and Rabbit Lake. The provincially owned Saskatchewan Mining Development Corporation owned had stakes in Key Lake, Cluff Lake and Down Lake. Before 1942, Eldorado Mining (later re-named El Dorado Nuclear Ltd) had been a privately owned radium company, which in that year was taken over by the Canadian government and made into a crown corporation. During World War II and for the next decade, the company’s raison d’etre was to produce uranium for the U.S. and U.K. nuclear weapons programs. By 1956, both countries looked elsewhere for their uranium. By 1965, Canada’s production plummeted to 3,000 tonnes from a peak of 12, 000 tonnes annum in 1959. Canada’s uranium exploration came to a standstill, and only three mines remained operational. Boom town Elliot Lake became a ghost town. Lacking buyers, a self-serving Canadian Prime Minister Lester Pearson announced in 1965 that Canada’s exported uranium would only “be used for peaceful purposes only.” Nearly a year earlier, the U.S. government had banned the enrichment of foreign uranium for domestic use, pre-empting any newsworthy value to Pearson’s announcement. Between 1964 and 1967, more than sixty nuclear reactors were ordered for the U.S. civilian nuclear energy program. Westinghouse’s newly designed light-water reactor created excitement within the industry. During that time, Canadian uranium exploration was taken out of mothballs and production resumed. Hardball shenanigans in Washington kept the uranium ban intact, and global uranium prices reached an all-time nadir of $4/pound. Canada was shut out of the U.S. nuclear fuel cycle market, and Ottawa was forced to stockpile a reported $100 million of uranium during the Nixon presidential administration. By late 1971, Prime Minister Trudeau’s cabinet had reached the end of their rope failing at every step to remove the ban by diplomatic means. News reports suggest a number of uranium-heavy countries held an initial meeting in Paris in February 1972 to establish a uranium-producer’s alliance, in essence a de facto uranium cartel. Others suggest it was formed in April 1972, after the Canadian government reportedly gave its blessing. Canadian author Gordon Edwards (Canada’s Nuclear History) bluntly wrote, “The purpose of the cartel was to secretly manipulate world uranium prices using a phony bidding system. Hidden quotas were established by representatives from Canada, France, Australia, South Africa and Rio Tinto Zinc (London Stock Exchange: RIO).” Namibia and Niger were also included in the alliance, as was Gulf Oil, at least according to Robert Kirby of Westinghouse. When the U.S. government re-affirmed its trade embargo in March of that year, a subsequent uranium cartel meeting took place in Johannesburg, South Africa in May 1972. At an Ottawa conference on May 28, 1972, it was reported that Jack Austin, then deputy minister of energy, voiced his concern the cartel could be considered illegal under Canadian law. Nonetheless, the politicians gave the uranium cartel a green light. The alleged price manipulation was paying off. In 1973, the spot uranium price doubled. By 1976, it doubled again and stayed above $40/pound for nearly four years. It was around that time the alleged cartel disbanded to avoid international anti-trust laws, which Westinghouse was arguing after unleashing a tsunami of litigation. Westinghouse was desperate to escape its liability over the promise of cheap uranium to utilities. In March 1976, the U.S. Department of Justice began investigating possible infringements of U.S. anti-trust laws by the alliance of uranium producers. By mid 1977, a federal grand jury had been formed to pursue the investigations and possibly initiate criminal proceedings. In a letter dated July 12, 1977, the U.S. Attorney-General wrote to the U.S. District Attorney for the Eastern District of Virginia, explaining the quandary this international episode had caused and discussed invoking immunity to obtain witnesses who would talk about the alleged conspiracy: “These persons are not likely to come within the personal jurisdiction of the United States courts so long as the Department of Justice continues a sitting grand jury investigation of the international uranium industry; (3) These persons are British subjects and we have determined that it is highly unlikely that their testimony could be obtained through existing arrangements for law enforcement co-operation between the United States and the United Kingdom; (4) The Department of Justice has been largely unable to obtain information from these foreign persons about the subject matter of this investigation…” By mid 1978, Westinghouse Electric’s complaint against Rio Tinto Zinc in the United Kingdom floundered in that country’s court system. Obtaining evidence in England was markedly different from the U.S. style of depositions. Conclusion During this litigious period, Westinghouse settled with several utilities, but continued to pursue the lawsuits. By 1979, Judge Merhige in the U.S. District Court for the Eastern District of Virginia, Richmond Division, ordered Westinghouse and the utilities to equitably resolve their differences. Westinghouse agreed to concessions that ultimately cost the company nearly $1 billion, but locked up the utilities as long-term customers by providing parts and engineering services for up to 25 years. In quiet out-of-court settlements, the uranium suppliers paid Westinghouse nearly $100 million and supplied the company with uranium. Besides, there was another cartel in the 1970’s, which posed a far greater risk to the developed nations. From the oil embargo, which began 1973 and throughout the decade, the OPEC oil cartel overshadowed the tiny uranium cartel. Saudi King Faisal’s “oil sword” had a far greater impact on the energy climate, Gross Domestic Product, inflation and quality of lifestyles, than an anxious alliance of uranium producers trying to meet production costs and peddle stockpiled inventory at higher prices. Not only was the oil crisis a more serious affair, but another un-related episode tanked the price of uranium. Just as the decade was coming to a close, on March 28, 1979, a water pump broke down at the Three Mile Island nuclear plant, about ten miles southeast of the Pennsylvania state capital. It was an unexpected event, heightened Hollywood-style, as the accident coincided with the opening of a new movie called The China Syndrome, starring Jane Fonda, Michael Douglas and Jack Lemmon. In short order, many Americans were persuaded that events within the movie were somehow related to the Three Mile Island event. This was a Hollywood PR man’s dream. Fanning the media flames to capture a larger box office gross, a basically nothing episode (in terms of loss of human life, since no one died from the reactor accident) was transformed into an earth-shattering campaign against the entire nuclear energy industry. Ironically, more died in the movie (one, Jack Lemmon’s character) than as a direct result of the Three Mile Island accident (0 reportedly died). Hysterical commentary from that era bespoke of a nuclear accident, which would melt down to the earth’s core, as one character in the movie suggested. Unable to distinguish what was movie fiction from scientific reality, the movie’s message left a horrifying memory in the collective minds of the general populace. A general panic followed, and nuclear energy was badly tainted by the accident. As the momentum for building U.S. nuclear power plants came to a grinding halt, overflowing inventories for the raw material to fuel those power plants had once again nullified the uranium exploration and mining sector. It took more than two decades to draw down those built-up uranium inventories, about as long as it has taken for the public to once again accept nuclear energy as a safer, cleaner alternative to fossil-fuel powered electricity. Why is today’s uranium bull market different? Is the current and spectacular rise in spot uranium prices different today than it was in the early to mid 1970’s, when an alleged uranium cartel reportedly bid up prices to an artificial level? Is that same factor occurring during the current steep rise in the spot price of uranium? Will Toshiba sink into the same quicksand, during the balance of this decade, as Westinghouse Electric once did? (To Be Continued)
Friday, July 29, 2011
Introduction: We talked with Sprott Asset Management Research Analyst Eric Nuttall about the natural gas situation in Canada and the fate of many CBM gas producers and developers. Since our last conversation spot natural gas prices have dropped by 15 percent. Natural gas storage levels are about 2.5 trillion cubic feet, some 423 billion cubic feet higher than a year ago. Eric Nuttall told us, “Nearly all small-cap natural gas producers have taken it in the teeth this year. The price decreases in their stocks have been absolutely brutal. There are now companies whose stocks are down 40 percent year-to-date, and yet are still strongly growing production on an adjusted share basis.” How will the CBM and natural gas sector pan out through the end of this year? He believes the gas storage surplus will correct itself. StockInterview: How are the lower natural gas prices impacting Coalbed Methane producers? Eric Nuttall: For many CBM or shallow gas producers, this means their current drilling program is likely uneconomic, suggesting deferrals in drilling programs until natural gas prices strengthen. It is this very supply response that we need to balance storage levels, so it should not come as a complete surprise. StockInterview: What, then, should investors do while storage levels are rebalancing? Eric Nuttall: I would view this period as an opportunity for medium to long-term minded individuals to start building positions in not just unconventional gas producers, but conventional ones as well. The long-term fundamentals are still extremely bullish for natural gas. Many quality names are down 20 to 40 percent year-to-date. StockInterview: How do you view the long-term fundamentals for gas? Eric Nuttall: North American natural gas production has been in decline for several years. Most incremental production is coming from smaller, more expensive-to-drill, thinner economic, higher decline pools and reservoirs. Over the past five years first-year decline rates on natural gas wells have doubled to 50 percent. The base decline rate has also doubled to approximately 25 to 30 percent. Pool size has also decreased materially over that time frame. The Western Canadian Sedimentary Basin and much of the US producing basins are mature. Consequently, higher and higher natural gas prices are required to create incentive for producers to drill increasingly marginal wells. StockInterview: And you expect a continuation of declining natural gas production? And that is that your premise for higher natural gas pricing? Eric Nuttall: Conventional gas production has been in decline for many years, and the growth areas have largely been unconventional, such as the Piceance Basin (tight gas), the Barnett Shale (shale gas), and the Jonah Field (tight, deep gas). Also, many of the growth assets, such as the Barnett Shale, are already a few years into development, and because the wells have such a steep decline rate in the first few years, it is only adding to the depleting base that we have to make up. It is unlikely that over the next three years, the increase in unconventional gas can offset the decline in conventional, because the depleting base is so much larger. The major natural gas basins in North America are mature. Decline rates are increasing. Pool size is decreasing. Rig count is increasing yet production is at best flat. Until LNG imports increase in a material way, which is not expected for at least four or five more years, I think the case for healthy natural gas prices is intact. StockInterview: Earlier, you noted drilling was more expensive. Eric Nuttall: Over the past year, onshore drillings costs are up over 15 percent while operating costs are up over 10 percent. A recent Wall Street Journal article commented on how rig rates for the Gulf of Mexico, on very deep drilling platforms, are as high as $520,000 per day, up from $185,000 a few years ago. And the drilling platforms are still leaving the Gulf of Mexico! Although many are leaving the Gulf of Mexico to go to more prospective areas such as the West African Coast, the current rig situation is still somewhat tight in the Gulf. We have only begun to see signs of moderating rig rate pricing. StockInterview: How would bad weather, such as a hurricane, impact natural gas prices? Eric Nuttall: Short term, you would see both natural gas and related stocks surge. If a hurricane strikes the producing area of the Gulf, and we almost need one to – to correct the surplus supply situation. Initially, you’ll have an emotional upward response. Only after assessing the status of production platforms and sub-sea infrastructure would we know the longer-term impact. StockInterview: Should investors be watching the Weather Channel and ready to phone their stockbrokers? Eric Nuttall: Timing on any natural gas investment right now is tricky. You need to have a medium- to longer-term focus. We probably have another two months of volatility. There are two camps right now on natural gas. One camp is saying that due to bloated storage levels companies are going to increasingly lay down their drilling rigs, cut production guidance, and stress their balance sheets. Then in the fall, when companies set their 2007 budgets, they will be using low gas prices and presenting moderating production growth profiles to their investors. StockInterview: What does the other camp say? Eric Nuttall: Another camp says that the current natural gas strip already discounts the present and forecasted storage levels. Also, stocks are cheap on a price-to-cash flow and price-to-net asset value ratios, and now is the time to load up on the stocks. I lean towards this viewpoint. But I am also admitting that until the fall, barring a severe hurricane, it is likely that the stocks are going to trade sideways, as opposed to in any clear direction. StockInterview: One equities strategist, whom we interviewed, suggested some time in August we might start to see the natural gas stocks moving higher. Eric Nuttall: There is the potential that we might endure another month or two of flat trading in small cap natural gas stocks. By the end of August, it is likely that we will have had both a supply and demand response – worries of massive laying down of rigs, forced well shut-in’s, and overleveraged balance sheets should have subsided. Investors will begin to focus on the natural gas strip rather than spot prices, which currently are around $9.00 for the upcoming winter and $8.00 for next summer. StockInterview: And until then? Eric Nuttall: Until that time comes, I think it likely, as a group, the large caps will outperform. They are more weighted towards oil, and have recently been catching a bid on the heel of a huge $22 billion all-cash takeover by Anadarko of Western Gas and Kerr-McGee. Importantly for unconventional gas investors, Anadarko paid around $2.00 for 3P (Possible) Mcf, which is very healthy (Western Gas was predominantly tight gas in Wyoming and coalbed methane in the Powder River Basin). It speaks to Anadarko’s view of strong long-term natural gas fundamentals. These all-cash transactions likely set the bottom in the large caps. StockInterview: How do you feel about the smaller, lesser known gas companies? Eric Nuttall: Nearly all small-cap natural gas producers have taken it in the teeth this year. The price decreases in their stocks have been absolutely brutal. There are now companies whose stocks are down 40 percent year-to-date. They are still strongly growing production on an adjusted share basis. Yet, they are trading as low as 2.5 time 2007 cash flow. Many stocks have gotten incredibly cheap. Although the market might still be a bit sloppy for a few months, I think there are some great bargains to be had for the patient investor. StockInterview: How do you sum up the natural gas equities market, right now? Eric Nuttall: Currently, there are many very cheap natural gas weighted companies. Companies with active drilling programs, who are adequately financed and sitting on highly prospective acreage, are trading under three times 2007 cash flow. If the stock prices don’t improve for the juniors, I would expect many seniors and trusts will jump at the opportunity to acquire existing production below what current finding and development costs would require through exploration or development drilling. StockInterview: Let’s review some of the more speculative companies we talked about this past spring, such as Crew Energy, Rockyview Energy and Canadian Spirit. How do you feel about them now? Eric Nuttall: Crew (TSX: CR) is a very well run natural gas focused company. They are set to grow production per share over 40% this year and next, have a very active drilling program for the second half of the year. Canadian Spirit Resources (TSX: SPI) has been chopped in half from its peak, yet nothing but the price of natural gas has changed. We’re still quite bullish on Canadian Spirit. Their play is in early stages, and production and economic risks are still there, but if they can repeat their previous rates, I think they could have a very large and economic project. Rockyview (TSX: RVE) recently cut their drilling capex by 67% taking a bit of momentum out of the story short-term. With a recovery in natural gas, the stock should rebound along with the rest of the group. StockInterview: What unconventional companies are you following? Eric Nuttall: We are keenly following the drilling progress of EnCana (NYSE: ECA; Toronto: ECA) in the Columbia River Basin in Washington State. For an investor looking for a lower risk, relatively lower rate of return, EnCana is a great way for an investor to gain exposure to natural gas. They have around 95 percent of their 2007 natural gas hedged at slightly over $7 per mcf, so are protected from today’s brutalized spot price. Another is Calfrac (TSX: CFW), which is down 45 percent from its peak, and is now 10X 2007 earnings estimates. They are heavily exposed to CBM, and with a recovery in natural gas prices, the stock should recovery nicely. StockInterview: And some of the others we talked about, such as Ember, Real Resources and Pacific Asia China Energy. Do you have any updates? Eric Nuttall: Ember Resources (TSX: EBR) has gotten absolutely crushed. They have an active drilling program for the second half of the year. To fund it, they will likely need to seek further equity financing. This has created an overhang on the stock. Until they are able to execute some form of a financing, the stock might stay weak in the short-term. Real Resources (TSX: RER) has been executing well on their drilling program. Once a pipeline is completed in the next month, production should jump 37 percent to 16,500 Boe/d. The company sits on 450,000 net undeveloped acres, prospective for a variety of targets including Devonian Nisku, 190 Bakken light oil locations, and up to 1.1Tcf of recoverable CBM as assigned by Sproule. When trading at 3.5X 2007 cashflow, the stock presents a good opportunity. Pacific China Asia Energy (TSX: PCE) recently released data on three core holes revealing pretty good gas contents and seam thicknesses, as expected. The question still remains whether wells will produce at an economic rate, which you only know by drilling test wells. I think that’s scheduled for later this year or early next. They sit on what appears to be a very prospective land spread, and simply need the time to drill, and attempt to achieve economic rates across their acreage. StockInterview: What do you see for the near-term? Eric Nuttall: Many people have been hoping that warm weather or hurricanes would assist in working off the excess supply, but Mother Nature hasn’t been terribly helpful so far this summer. It appears that we will exit the natural gas injection season at least 10% over last year. Barring any incredible heat waves or significant hurricanes, natural gas prices are likely to remain sub-$6.50 until the fall. Unless we have a serious hot spell or a significant hurricane, it is likely that natural gas stocks will be very volatile without clear direction over the summer into the fall. I would think not until the fall, probably September – October, when people begin to focus not on natural gas spot prices, but on the strip pricing for the winter, which is still over C$10. Until that time comes, I wouldn’t see any clear direction in the stocks. The market is now providing opportunities to buy companies with high quality management for below-average multiples, commonly measured on a price-to-cash flow metric. StockInterview: Have you given up on the CBM sector or is it coming back? Eric Nuttall: There is zero doubt in my mind that natural gas is an excellent long-term investment. We’ve peaked in our ability to increase production meaningfully, just as we have with light oil. I think for there to be an increase in long-term natural gas supply, you have to provide incentive to producers to go drill wells that increasingly have lower economic rates of return. And to do that, you need higher natural gas prices. One of the few remaining growth prospects in Canada for natural gas production is coalbed methane. At current gas prices, the economics are very challenging. So to get a supply response from coalbed methane producers, you again need higher gas prices. The current surplus in gas storage will correct itself, and investors should position themselves ahead of natural gas stocks reacting to this inevitability.
Thursday, July 28, 2011
The INDI Trading Company Limited Investing Indian recipes www.visatorsgalore.com The INDI is an international company dedicated to making a financial difference to people's lives. For so long the rich have become richer and the poor have been struggling to survive. We at INDI believe that a person's financial status is directly equal to the knowledge he/she possesses, and the opportunities a person makes use of in his/her lifetime. With INDI you don't have to know much to change your financial status, but need to trust that we can help make a difference to your life, and your loved ones' future. HOW DO WE DO THAT? To participate in our investments you must become a shareholder in The INDI Trading Company Limited. Shares in the Company are available at a cost of R1 each. After purchasing a share, you may lend the Company any amount you choose. The INDI Trading Company Ltd of South Africa buys and sells All Share Index (ALSI) Futures Contracts listed on the South African Futures Exchange, using your money as well as additional money. We also make trades in FOREX and S&P Futures contracts. The best part of it all is that you don't have to do a thing, we do it all for you! We trade to the best of our ability and we do not charge our investors any transaction fees. In return for investing your money with INDI, we offer you a variety of investment packages to suite your needs with very handsome returns that range from a guaranteed fixed return of 1 ½ % to 2 ½ % per month for our No Risk Investment Products to approximately ±5% per month for our High Risk High Return Investment Product. Be aware that The High Risk High Return Account does have a fluctuating return on a monthly basis. This means some months you can gain and some months you can lose. The other currencies we deal in is US Dollars, GDP, Euro's Each account or product does have certain criteria involved, like notice periods to withdraw your funds as well as minimum investment amounts. So please read through our investment products to see which option will suit your needs best. You can choose to withdraw or reinvest all or part of your trading profit or interest. This can be a very convenient way to supplement your monthly income with the funds you have set aside. The INDI Trading Company Limited offers to buy and sell All Share Index (ALSI) Futures Contracts, listed on the South African Futures Exchange, using your and other money. We also make Forex trades. We shall trade, to the best of our ability, and charge you a quarter of daily realised profits, for our services. Trading losses are possible, but the Company guarantees these will not exceed R4500 per contract under the worst possible circumstances. You may withdraw part or all of the end-of-day credit balance on your account at any time at 14 days' notice. Expect, but regrettably we cannot guarantee, an average return of 5% per month, after taking occasional setbacks into account. Please note that we do have a variety of investment products available, visit our products page for more information (Please note: The INDI Trading Company Limited levies no administrative charges whatsoever. That means free enquiries and monthly statements by post, on www.indi.co.za. There is also a newsletter to view which is updated on a monthly basis.) Why You Should Invest Investing has become increasingly important over the years, as the future of social security benefits becomes unknown. People want to insure their futures, and they know that if they are depending on Social Security benefits, and in some cases retirement plans, that they may be in for a rude awakening when they no longer have the ability to earn a steady income. Investing is the answer to the unknowns of the future. You may have been saving money in a low interest savings account over the years. Now, you want to see that money grow at a faster pace. Perhaps you've inherited money or realized some other type of windfall, and you need a way to make that money grow. Again, investing is the answer. Investing is also a way of attaining the things that you want, such as a new home, a college education for your children, or expensive 'toys.' Of course, your financial goals will determine what type of investing you do. If you want or need to make a lot of money fast, you would be more interested in higher risk investing, which will give you a larger return in a shorter amount of time. If you are saving for something in the far off future, such as retirement, you would want to make safer investments that grow over a longer period of time. The overall purpose in investing is to create wealth and security, over a period of time. It is important to remember that you will not always be able to earn an income. you will eventually want to retire. You also cannot count on the social security system to do what you expect it to do. As we have seen with Enron, you also cannot necessarily depend on your company's retirement plan either. So, again, investing is the key to insuring your own financial future, but you must make smart investments! Along the way, you may make a few investing mistakes, however there are big mistakes that you absolutely must avoid if you are to be a successful investor. For instance, the biggest investing mistake that you could ever make is to not invest at all, or to put off investing until later. Make your money work for you - even if all you can spare is $20 a week to invest! The best 100 money tips ever! Take these tips to heart and you’ll have a solid foundation for future financial well-being. 1. Save 10 cents from every R1 you earn. If you put away at least 10 percent of your income as part of a long-term savings plan, there is a good chance that you will have a financially secure future and be able to attain your financial goals. 2. Put 10 percent of every pay increase towards savings, particularly long-term savings such as a retirement plan. If you are employed and belong to a retirement fund, your contributions will increase automatically in proportion to your pay rises. This will help ensure that you stay well ahead of inflation. 3. Use the “Can I sleep?” judgment when making investments. An investment is too risky if you are going to lie awake at night worrying about it. 4. Diversify your investments. Never invest more than five percent of your assets in a narrow investment (for example, a specialist unit trust fund such as an emerging company one) or in an unregulated investment. Diversifying your investments will ensure you don’t lose everything if one investment bombs out. Many people who invested all their assets in major scams such as Master bond lost everything, and the same thing can happen in the regulated market if you put all your money into one sector ... just consider how the information technology bubble burst in 2000. 5. Be extremely cautious if the returns promised on an investment exceed what is generally available. If they sound too good to be true, they probably are. It usually means the investment is too ambitious in its claims, too risky, or simply a scam. 6. Know the difference between effective and nominal interest rates. Normally, banks will quote you a nominal interest rate when lending you money, but a higher, effective interest rate when you invest money. The nominal interest rate is the simple rate. The effective rate is calculated by compounding the interest earned or charged. 7. Check whether the interest you are being paid is credited monthly, quarterly or annually. Say you invest R10 000 for 10 years. If you receive interest at 10 percent credited annually, you will get a total return of R25 937. If it is credited monthly, you will receive R27 070. 8. How do you decide whether you should invest directly in shares? Simple. If you haven’t got the time to learn about stock markets, to follow the progress of companies or to track your portfolio, rather invest in unit trust funds and/or life assurance endowment policies that have shares as their underlying investments. 9. If you do invest directly in shares, your two most important considerations should be ensuring that you have a properly diversified selection of shares across the stock market sectors to reduce risk, and regularly rebalancing your portfolio. When a share rises in price, you should consider selling some, but not all, of these shares, so that you make a profit, but your overall portfolio remains proportionally the same as it was when you started. By doing this, you’ll be able to reap further profits if the share price continues to rise. 10. If an investment product is too complicated to understand, avoid it. It does not mean you are stupid. It simply means that the product provider and/or financial adviser are trying to baffle you. 11. Always check the costs of any investment product. Some products are prohibitively expensive. You should be given a breakdown of the costs in three ways: as a percentage of your investment; as a fixed amount; and as the amount by which the costs will reduce your investment at maturity date. Be very careful if the costs are more than six percent at entry and more than two percent a year thereafter. 12. Always check how much commission is being paid to your financial adviser. Some financial products – particularly those offered by so-called linked investment product providers – come with particularly high costs and commissions. High commissions can be a perverse incentive for advisers to miss-sell. 13. A product offering a range of underlying investment product choices, such as a wide collection of unit trust funds, is often not in your best interests and may come at additional cost. Be very cautious if anyone recommends that you invest in a linked investment product with a wide selection of underlying investment choices. Remember that linked investment products come in many forms and are also offered by life assurance companies. The simpler and cheaper solution may be to invest in a properly diversified unit trust fund, such as an asset allocation fund that offers underlying investments in all the main asset classes, such as cash, bonds and shares. 14. Don’t be afraid to negotiate commissions/fees for financial advice. Most financial products allow you to do this. After all, it is your money. 15. If you have a choice, should you pay a fee or commission for financial advice? As a general rule, a fee is better for large amounts of money and a commission for smaller amounts. 16. If you are a true investor, you invest for the long term and you don’t panic when markets fall. If you want to invest for the short term, you should use a bank term deposit or a money market account rather than an investment in the equity markets. 17. It is time in the market and not timing the market that counts. Don’t try to time markets or sectors of markets. Few people have got rich from doing this and most have lost money. The best way to get rich is to take time to select an investment product that has properly diversified underlying investments, and then to stick with it for the long term. Most people make the fundamental error of buying into an investment when it is at the peak of its performance and then selling out when its value has dropped. 18. Always check that an investment product and/or company is registered with the Financial Services Board (FSB) before investing. If it is not registered and things go wrong, you will have little recourse, so be extremely wary. You can telephone the FSB on 0800 110 443 or 0800 202 087 to check. 19. Charges on life assurance investments (endowments) are proportionally higher on lower amounts. Check the structure of costs in relation to premiums. You might find that paying just a few rand more every month costs you proportionally less. This will give you a better return. 20. Investing on a regular basis is a good strategy in volatile markets. If markets rise, your investment improves in value. If markets fall, you get more for your money, and you’ll benefit when markets go up again. This is known as rand-cost averaging. 21. If you are investing a large lump sum, put the money in a money market account to start with and phase it into pre-selected investments over a period of time. This is particularly important with equity markets: don’t invest all your money when prices are high and lose out later, when they come down. 22. Don’t be taken in by labels. Some investment products style themselves as fulfilling certain needs (for example, “a savings plan for your child”). Banks often offer need-branded products. Always check the underlying investment proposal. There might well be a more suitable generic product with a better-performing underlying investment, such as a life assurance managed portfolio or a unit trust asset allocation fund, which has a low-risk structure but the potential for much better returns. 23. Don’t become emotionally attached to shares. If a particular share bombs out for good reason, such as bad management or failure to adapt to new markets, get out. But if the share value is falling as part of a general sector downgrade, there is little reason to sell. 24. If you are trading shares for short-term gain, you are not an investor, you’re a gambler. Don’t be surprised when you make a loss. 25. Avoid investing in unlisted companies. These companies are not properly regulated and are the favorite vehicle of scam artists. If you decide to invest in an unlisted company, make sure you do your homework first and understand all the risks. 26. Never invest in anything where the underlying investments are shrouded in secrecy. Your money is likely to be secreted away too, never to be seen again. A good example was Jack Milne’s PSC Guaranteed Growth investment scam. Milne refused to divulge the underlying investments, claiming it would show his competitors how he was getting exceptional returns. 27. Being a contrary investor can make all the difference. As investment market guru Sir John Templeton says: “The time of maximum pessimism in the stock market is the time to buy; the time of maximum optimism is the time to sell.” 28. Never invest on an ad hoc basis. You should have an overall financial plan designed to meet all your financial needs, taking into account your investment goals and life assurance needs. Investing in something simply because someone (and that includes your neighbor or hairdresser) recommends it, is unlikely to help you achieve your financial targets. 29. When you are advised to invest in something, always do a bit of research of your own. Get a second opinion and use the internet. 30. Use comparatively safe investments – such as life assurance smoothed-bonus policies and unit trust prudential or flexible asset allocation funds – as core investments. They may not give you spectacular performance, but they will provide you with a measure of security. 31. Investing in a low-cost index fund may not give you top performance, but at least it will not give you bottom performance. Local and international research has repeatedly shown that very few active fund managers consistently out-perform the markets. With an index fund, you are likely to do better than the average fund manager – and at lower cost. Index investments come in many different forms, from unit trusts to exchange-traded funds, which are listed on stock exchanges. You need to understand them before you invest. 32. As a general rule, only invest when you have no debt. The tax-free return you receive from paying off debt is likely to be greater than any returns (which are likely to be taxed) you receive from an investment. There are exceptions, such as paying into a retirement fund while you have a home loan. 33. Be prepared to pay for good advice, as you would for any expertise. But make sure you deal with an adequately qualified adviser – preferably one who is a Certified Financial Planner accredited by the Financial Planning Institute. Good advice is worth its weight in gold. You would not go to a barber to have your teeth checked, so why go to someone for financial advice if that person is not properly qualified? 34. Always have an emergency cash fund. Ideally, the fund should be equal to three months’ income. This way you will not have to cash in investments at an inopportune time or take out a high-interest loan if you are suddenly landed with a major expense. 35. An investment in a unit trust fund that is always in the top 25 percent of performers, even if it has never come first, is preferable to one that has been ranked first once and languishes in the lower realms of the tables for the rest of the time. Check the consistency of performance tables published every three months in Personal Finance to help you find funds that perform well consistently. 36. If you are a member of a defined benefit or defined contribution retirement fund, or you contribute to a retirement annuity, you can deduct your contributions (limited to pre-determined levels) from your taxable income and defer tax until your retirement years. This way you get to earn investment returns on money that would otherwise have gone to the Receiver of Revenue. 37. Money paid into a retirement fund or retirement annuity is not counted as being part of your estate, so your creditors cannot claim this money if you go bankrupt. This is very useful if you are involved in a small business or you have provided personal security for a loan to a business. 38. At retirement you should consider exercising your option to take as cash up to one-third of your retirement savings from a defined benefit or defined contribution retirement fund or a retirement annuity. There are two reasons for doing this: • In the case of retirement funds, you are entitled to either R120 000 or R4 500 a year multiplied by the number of years you belonged to the fund (whichever is the greater) as a tax-free amount. With retirement annuities, you are entitled to R4 500 multiplied by the number of years of membership, tax-free. • The remaining amount will be taxed at your average rate of tax for the year of your retirement and the previous year, instead of at your higher marginal rate of taxation. Invest the tax-free amount where it will attract the lowest rate of tax and earn the best risk-adjusted returns. 39. The earlier you start a retirement annuity, the greater your tax-free benefit at retirement. This is because the tax-free portion is R4 500 multiplied by the number of years of membership of the fund. You should avoid having too many retirement annuity plans as you could undermine your ability to get the maximum tax-free allowance at retirement. 40. Mind the gap. Very few retirement funds provide enough money to ensure a financially secure retirement, particularly now that most companies are reducing or discontinuing medical scheme subsidies to retirees. This means you need to have other investments to top up your retirement fund savings. Make sure you check up on how you are managing to fill “the gap” by regularly having a financial needs analysis with a properly qualified financial adviser. 41. Start planning your retirement at least three to five years before the date on which you are due to retire, so that you understand all your options and are not rushed into any last-minute decisions. 42. Be careful when buying an annuity (pension) with (at least) two-thirds of your retirement fund savings, as you are required to do by law. Living annuities have been widely miss-sold because of their potential to earn higher profits for the companies selling them and higher commissions for advisers. With a living annuity, you take the investment risks; with a traditional guaranteed annuity, you don’t, the life assuror does. 43. If you are investing in a living annuity to buy a pension and you need to draw more than the minimum five percent of the annual value, you could be exposing yourself to the risk of not having sufficient money to provide you with a financially secure income until you die. 44. Most living annuity providers allow you to draw your pension from different parts of the underlying investments. This enables you to structure the annuity so you have an income-generating portion and a capital growth portion. You should use this facility to invest mainly in interest-generating investments for the income portion. This will significantly reduce the risk of undermining your capital. 45. If you use a living annuity to buy a pension, do not invest all the money in equities or equity unit trusts. At the absolute maximum, you should have no more than 75 percent invested in equities. The balance should be in more stable interest-earning investments. 46. Always pay the full amount owing on your credit card. If you do not, you will be charged a punishing rate of interest from the date of purchase. The so-called budget account on your credit card is a misnomer, as you pay a high rate of interest. 47. Use a credit card to get 55 days’ interest-free credit by buying at the start of the buy-and-pay cycle and repaying the debt in full by the due date. This option does not apply to cash withdrawals and petrol purchases, on which you pay punitive interest rates from the date of the transaction. 48. Don’t leave large amounts of money sitting in a low-interest bank savings or current account. Rather put the money into a money market account or into your mortgage bond. 49. Pay yourself first. Set up debit orders that channel money into investments as soon after pay day as possible so that you will not “miss” the money. 50. Never use debt on which you have to pay interest to buy products you consume. You are in effect making the items far more expensive, and will be able to save less and buy less in the long term. 51. Borrowing to buy reasonably priced property is a good thing because you can expect the property to improve in value. 52. You should not, as a rule, borrow to invest, particularly not in volatile markets, such as share markets. The exception is property that you intend to hold for at least five years and in which you live. 53. Keep a good credit record. It could save you thousands of rands, particularly when you want to borrow money for big-ticket items such as a home or a vehicle, because the better your credit record, the lower the interest rate you can expect to pay. 54. The best investment you can make is to repay debt. Interest rates in South Africa are high. By paying off debt, you get one of the best returns available, tax-free. 55. Borrow wisely. Expensive debt is a quick way to lose money. For example, borrowing against a credit card is far more expensive than borrowing against a home loan. The difference can be more than 10 percentage points. 56. If you have a problem meeting your debts, don’t try to hide away. Go and speak to your creditors, particularly your bank, to find a way out of your problem. Don’t use debt consolidators/administrators. They will charge you far more interest and make your problem worse. 57. Beware of plastic. Store cards and credit cards may be convenient, but they are also an easy way of running up debt. 58. Don’t fly now, pay later. It is very depressing to be still paying for a holiday (or any other luxury) five years later, when you want another. 59. If you take out life assurance or short-term insurance to cover debt or an asset financed with debt, always pay the premiums as they become due to avoid paying interest on the premiums as well. 60. Try to repay more on your home loan than the minimum. For example, on a home loan of R100 000 at a mortgage bond rate of 15 percent over 20 years, your normal repayments will be R1 316.79. Increase the repayments by R100 and you will reduce your repayment period to 14 years and five months, and you will save R88 224.93 in interest repayments. 61. Always negotiate your interest rates. Shop around. A one-percent difference can have a significant effect. On a R100 000 mortgage bond over 20 years at 15 percent, you will repay R316 029 in total. At 14 percent, you will repay R298 444 – a saving of R17 584. 62. When mortgage bond interest rates come down, keep your repayments at the same level. You will pay off your bond quicker and save yourself a whack in interest repayments. Repayments will also not be so difficult to contend with if interest rates rise again. 63. If you take out a home loan when interest rates are low, always ask yourself whether you will be able to afford the repayments if interest rates go up. If you are in doubt, take out a smaller loan. 64. Most mortgage bonds enable you to repay more than your set repayments and to borrow against what you have paid. This is useful not only to borrow money for other things at short notice, but also to use as a savings account. The effective interest you receive is much greater and there are no additional costs. Say, for instance, you need to put away money to pay school fees or provisional tax. “Save” the money in your mortgage bond until you need it, rather than in a low-interest bank savings account. 65. Get a pre-approval agreement on a mortgage bond before you start looking for a home. This will give you the advantage of being able to shop around for the best rate while you’re not under pressure and the buyer will be more willing to sell to you knowing that the money is available. 66. Always have a lawyer check a property deed of sale before you sign up. Also make a deed of sale subject to conditions such as a proper inspection being done, if you suspect building faults, and to raising a mortgage bond, if you need one. 67. A bank valuation of a property is not a guarantee that the building is structurally sound. If you suspect a problem, get a full structural survey before you enter any contractual agreement. 68. Don’t fall prey to what is called a mortgage bond-linked endowment. With these products, you are encouraged to take out a home loan, repay only the interest, and invest the amount that would have repaid the capital. The theory is that, at the end of the period, the investment should be worth more than the capital. With high interest rates and poor investment returns, these are high-risk products. 69. If you take out life assurance, always declare any health problem or habit or hobby that might affect your insurability. You may have to pay more in premiums, but at least your dependants will receive the money if and when a claim is made. If you lie, either by omission or commission, your dependants may be left with nothing. The life assurance company is legally entitled to repudiate any claim when incorrect information is provided, even if it is not associated with the cause of death or disability. 70. Never buy too much life assurance against death or disability. The purpose of life assurance is to ensure you and your dependants maintain a standard of living, not to enrich dependants in the future. Too much life assurance merely means you are paying out more in premiums and costs, and you have to accept a lower standard of living now. 71. Always avoid cashing in an investment (endowment/universal) policy before its maturity date. Cashing in is costly. Not only could you receive less money than you have paid into the investment, but if there is life assurance cover attached to the policy, you may not be able to replace the cover in the future, particularly if you are less healthy. 72. When taking out life assurance cover against dying or being disabled, always establish whether the premiums are guaranteed – and for how long. It is preferable to get a longer term guarantee on your premiums. 73. If you have no option but to surrender a life assurance investment policy, always see if you cannot get more than the surrender value offered by the life assurance company by trading the policy on the secondhand market. 74. Rather than surrendering a policy, consider other options, such as making it paid-up so you can stop paying premiums. You may also be able to take a loan against the policy, but check the interest rate; sometimes it is higher than it would be if you used the policy as security to get a bank loan. 75. If you are concerned about volatile markets, one of the best investment products you can get is a life assurance smoothed bonus policy that guarantees your capital and smoothes out the market returns. 76. If you intend the benefits of a life assurance policy to go to someone in particular, have this on record with the life company by naming the person as the beneficiary of the policy. This has two advantages: You do not pay executor’s fees of up to 3.75 percent with VAT on the amount; and the beneficiary receives the money almost immediately, without it being tied up for months or even years while your estate is finalized. More often than not, your dependants will need the money immediately after your death. 77. If you can afford a hamburger and Coke every day, you can afford life assurance. Life assurance is essential for anyone who has dependants. 78. If you plan to stay single with no dependants, you do not need life assurance against dying, but you do need disability assurance in case you become ill or are injured in an accident. 79. It is not saving if you put money away at the start of the month but withdraw it before the end of the month. Life assurance investments are useful for people who find it difficult to save, because they commit you to a contract for at least five years and cost you dearly if you break the contract. 80. Do not take out a life assurance investment contract for more than 10 years. You don’t know how your financial position could change. At the end of the period you can always extend the contract, but if you have to cut it short, there are penalties involved that could see you getting back less money than you paid in. The main reason life assurance sales people attempt to get you to take out longer-term policies is because they receive more commission. 81. If you have dependants, life assurance is more important than investments. Investments take longer to accumulate to the level that may be required by your dependants, whereas life assurance benefits can immediately meet those needs if required. 82. As a general rule, you should keep your risk life assurance against death and disability separate from your investments, particularly if the risk assurance is for a long period. The main reason for this is that, if you land up in financial difficulties, you do not want to lose the risk cover because you have had to stop paying the investment portion. This strategy also gives you more flexibility with your investments. 83. Life assurance against dying or being disabled may only be required for short periods. For example, you may need cover to provide for the education of children for 10 years or until you have built up sufficient savings. You do not need a 20-year contract. 84. Consider joint life assurance if you have a partner. It is often cheaper. It comes with the options of paying when the first of the two dies, or when the last partner dies, or fully on the death of each partner. Obviously, the premium will be determined by the option you choose. 85. Be very wary of credit life assurance. Although it can be essential to ensure debts are paid when you die, it is also open to abuse. Often, when you finance, for example, a motor vehicle, you will be sold life assurance to cover the debt. But many sales people sell you assurance that runs for a longer term than the debt and credit life assurance has an investment element included. Commission, not your financial well-being, motivates sales people. 86. You need to do some estate planning, particularly if you are wealthy. Any amount above R1.5 million that is not left to your spouse is subject to estate duty at a rate of 20 percent, and any capital gain that is not exempt is subject to capital gains tax, as death is considered a capital gains event. (The first R50 000 is exempt when you die.) If you do not have readily available cash to cover these taxes, you need life assurance to ensure there will be no need for a fire sale of other assets. 87. Apart from when you have a home loan, you cannot be forced to take out short-term insurance with any particular company when you receive a loan on a fixed or moveable asset. You can be forced to take out insurance, but you can and should shop around for the cheapest premium. 88. You can reduce the amount you pay in short-term insurance by increasing the excess (the first portion of any claim, which you pay). A higher excess will mean lower premiums. However, you should keep the excess within affordable limits. Better still, build up savings equivalent to any excess you may be required to pay and earn interest on them. 89. When you change address, check whether your short-term insurance premiums could be reduced. Where you live can effect the level of your short-term insurance premiums. 90. Most short-term insurance policies have a number of exclusions. For example, on motor vehicle insurance, you are required to maintain the vehicle properly. For example, if your tires are smooth, your claim will be rejected no matter what the cause of the accident. Be aware of the exclusions, so that you don’t have a claim refused unexpectedly. 91. Check the value of your motor vehicle. One racket perpetrated by insurance companies is to increase premiums annually, when they should be decreased to take account of the declining value of your vehicle. When you claim, you will only be paid the actual value, not the insured value. 92. When making a short-term insurance claim, first find out what effect the claim will have on your no- claim bonus. If the claim (after payment of the excess) is relatively small, it may be better not to claim and keep your no-claim bonus intact. A no-claim bonus can equal as much as a 60 percent reduction on premiums after five years. 93. Use the R10 000 exemption from capital gains tax. Every year you are entitled to claim an exemption of R10 000 against any capital gain. Say, for example, you want to cash in an investment with a capital gain of R20 000 in November. Instead, cash in half in November and half after March 1, the start of the new tax year. 94. Interest-bearing investments become far more attractive when you don’t have to pay tax. For the current tax year, the first R10 000 in interest income is tax exempt if you are under the age of 65, and R15 000 if you are over the age of 65. 95. If you are investing for an income and have exceeded your tax-free interest exemption, consider cashing in investment capital that you can offset against your R10 000 capital gains tax exemption. 96. Never make a tax decision first when investing. Consider the tax implication last. Many people make the tax decision first and reject what could have been a good investment. 97. If your spouse is on a lower marginal income tax rate than you, it is best to transfer interest-earning assets to him/her. Also, remember that each spouse is entitled to the tax-free amount of R10 000 under the age of 65 and R15 000 over the age of 65. 98. To qualify for the R1 million capital gains tax exemption on your primary residence, you actually have to live in that property. If you rent out the property for even part of the time, you will have to deduct the period proportionally from the exemption. 99. The benefits of a life assurance policy are not subject to income tax or capital gains tax in your hands. Tax is paid on your behalf by the life assurance company at rates of 30 percent on interest, net rental and foreign dividends, and an effective 7.5 percent on capital gains. So, if your marginal tax rate is greater than 30 percent, you are receiving a tax advantage by investing in a life assurance policy as opposed to a unit trust investment with similar underlying investments. 100. Assets can be transferred between spouses without attracting donations tax. So it can pay to transfer assets on which capital gains tax may become due, to take advantage of lower marginal tax rates and the R10 000 exemption. Remember, 25 percent of a capital gain (which is not exempt) is included as income for tax purposes. So, the lower your marginal rate, the lower your capital gains tax will be. Some sayings about money "Money for me has only one sound: liberty." --Gabrielle Chanel "Lack of money is the root of all evil." --George Bernard Shaw "A little, justly gained, is better than thousands secured by stealth, or at the expense of another's rights and interests." --from Money for the Millions "It is an elementary and vital courtesy when you are using people's own money against them that you do it with some grace." --Richard Neely WV Supreme Court "More people are bribed by their own money than anybody else's." --Jonathan Daniels "Experience, however, shows that neither a state nor a bank ever have [sic] had the unrestricted power of issuing paper money without abusing that power; in all states, therefore, the issue of paper money ought to be under some check and control; and none seems so proper for that purpose as that of subjecting the issuers of paper money to the obligation of paying their notes either in gold coin or bullion." --David Ricardo "We have rights, as individuals, to give as much of our own money as we please to charity; but as members of Congress we have no right so to appropriate a dollar of public money." --David Crockett, Member of Congress, 1827-31, 1832-35 "The way to get things done is to stimulate competition. I do not mean in a sordid, money-getting way, but in the desire to excel." --Charles Schwab "Money is power, & you ought to be reasonably ambitious to have it." --Russell H. Conwell, Temple Univ, 1877 "For the folk-community does not exist on the fictitious value of money but on the results of productive labour, which is what gives money its value." --Adolf Hitler to Reichstag, 30 Jan 1937, as translated by Norman H. Baynes "God gave me my money. I believe the power to make money is a gift from God . . . to be developed & used to the best of our ability for the good of mankind. Having been endowed with the gift I possess, I believe it is my duty to make money & still more money & to use the money I make for the good of my fellow man according to the dictates of my conscience." --John D. Rockefeller, 1905 "He who tampers with the currency robs labor of its bread." --Daniel Webster, 15 Mar 1837 "At least 25% of the money Americans spend on health care is wasted." --Joseph A. Califano, "Billions Blown on Health", New York Times, 12 Apr 1989 "Money is like muck, not good except it be spread." --Francis Bacon, The Essays or Counsels "All progress is based upon a universal innate desire on the part of every organism to live beyond its income." --Samuel Butler "It has beeen said that the love of money is the root of all evil. The want of money is so quite as truly." --Samuel Butler "I was part of that strange race of people aptly described as spending their lives doing things they detest to make money they don't want to buy things they don't need to impress people they dislike." --Emile Henry Gauvreay "I believe that sex is one of the most beautiful, natural, wholesome things that money can buy." --Steve Martin "Money can't buy friends. But you can afford a better class of enemy." --Lord Mancroft "When a fellow says it ain't the money but the principle of the thing, it's the money." --Kin Hubbard "All I ask is a chance to prove that money can't make me happy." "While money can't buy happiness, it certainly lets you choose your own form of misery." "While money doesn't buy love, it puts you in a great bargaining position." "Money's only important when you don't have any." --Sting "Money isn't everything. It's just most everything." --Nica Clark "In societies of low civilization, there is no money." --Herbert Spencer money can prolong one's life It's the key to power "Money is the sign of liberty. To curse money is to curse liberty--to curse life, which is nothing, if it be not free." --de Gourmont Wealth may be an excellent thing, for it means power, and it means leisure, it means liberty. If you would be wealthy, think of saving as well as getting. The Truth… When it’s time for you to go. Don’t leave your family with nothing but bills, and bad debts. Give them something to remember you by. Like an investment. First you work hard for your money, and then you let your money work hard for you. Trust me it’s the key to financial freedom. Don’t be moneys slave for ever. Learn to spot opportunities, create your own solutions. Never say “I can’t afford it,” rather say “How can I afford it. I would rather ask a million people for R1.00, than asking one person for R1 000 000.00. Because Everybody can afford R1.00, but not every body can afford R1 000 000.00. Plant your money in good soil. And give it as much water as you can, by adding to your seed. And your seed will grow and grow. And after some time, depending on how much water your gave your seed. It will multiply itself. Then you start enjoying the seeds of your work. You can judge a tree by the fruits it bears, good soil is hard to find. Don’t let the Indi Trading Company slip you by. The rich teaches their kids about money, the poor don’t. Invest in yourself, invest in you children, invest in your happiness and in financial freedom. ... to freedom FOREX Daily Outlook by Easy-Forex.com US Existing Home Sales fails to support New Home Sales figure. Japanese CPI give an early indication for inflationary pressures. CURRENCY TRADING SUMMARY – 28 MAY 2007 (00:30GMT) • U.S. Dollar Trading (USD) remained relatively unchanged against a basket of currencies despite Existing Home Sales disappointing on the back of positive New Home Sales seen the previous session. With markets expecting a figure of 6.14 mio for the month of April, the actual figure was released at 5.99 mio, yet its effect was limited due to an upward revision of the previous month to 6.15 mio. The USD initially lost ground against other majors before investors chose to square positions ahead of the long weekend. In US share markets the NASDAQ rebounded to gain by 19.27 points (+0.76%) whilst the Dow Jones also gained by 66.15 points (0.49%). Crude oil continued to rise over growing uncertainty in Nigeria and Iran. Oil rose by US$0.93 a barrel to US$65.11. Looking ahead, a slow beginning to the week is expected with U.S. markets closed for Memorial Day. • The Euro (EUR) gained moderately on the back of a positive reading in Gfk consumer confidence. The figure for the month of June was expected to come in at 6 yet surprised many with a release of 7.3. Overall the EURUSD traded with a low of 1.3411 and a high of 1.3473 before closing the day at 1.3449 in the New York session. A slow start is also expected out of the EZ with many markets closed for trading. • The Japanese Yen (JPY) was the biggest mover on Friday as CPI data matched expectations for the month of April, released at -0.1%. Up from the March’s decline of -0.3% giving indications that inflationary pressures are slowly returning. Although the USDJPY experienced early losses on the back of inflationary data, the pair moved higher to end the day. Overall, the USDJPY traded with a range of a low 120.85 and a high of 121.77 before closing near day highs at 121.72 in the New York session. • The Sterling (GBP) was unchanged against the USD on Friday despite GDP data being released slightly higher than expectations. Although GDP (Q1) q/q came in on consensus at 0.7%, the y/y figure was up to 2.9% (Forecast: 2.8%). Overall the GBPUSD traded with a range of a low 1.9835 and a high of 1.9880 before closing 1.9846 in the New York session. Looking ahead UK will have a market holiday to begin the week on Monday • The Australian Dollar (AUD) traded in a defined range once again on Friday, largely attributed to data absence. Overall the AUDUSD traded with a range of a low 0.8176 and a high of 0.8218 before closing the day at 0.8218 in the New York session. • The Canadian Dollar (CAD) reached a fresh 29 ½ year high against the greenback due to higher oil prices and expectations for a hawkish statement from the Bank of Canada next week. Overall the USDCAD traded with a range of a low 1.0778 and a high of 1.0870 before closing the day at 1.0804 in the New York session. • Gold (XAU) rebounded on Friday following the previous session’s sharp decline. Gold rose US$2.00 an ounce to US$655.30 TECHNICAL COMMENTARY Currency Sup 2 Sup 1 Spot Res 1 Res 2 EUR/USD 1.3368 1.3371 1.3450 1.3545 1.3612 USD/JPY 120.15 120.64 121.75 122.20 122.38 GBP/USD 1.9659 1.9677 1.9840 1.9959 2.0000 AUD/USD 0.8150 0.8170 0.8185 0.8273 0.8354 XAU/USD 646.20 652.01 655.90 665.40 675.05 • Euro 1.3450 Initial support at 1.3371 (38.2% retracement of the 1.2865 to 1.3683 advance) followed by 1.3368 (Former resistance from Dec 4). Initial resistance is now located at 1.3545 (May 17 high) followed by 1.3612 (May 16 high) • Yen 121.75 Initial support is located at 120.64 (May 16 low) followed by 120.15 (May 16 low). Initial resistance is now at 122.20 (Jan 29 reaction high) followed by 122.38 (61.8% ret 135.18 to 101.67) • Pound – 1.9840 Initial support at 1.9677 (May 21 low) followed by 1.9659 ((50% retracement of the 1.9184 to 2.0134 advance)). Initial resistance is now at 1.9959 (61.8% retracement of the 2.0134 to 1.9677 decline) followed by 2.0000 (May 9 high) • Australian Dollar – 0.8185 Initial support a 0.8170 (May 4 reaction low) followed by 0.8150 (Apr 9 low). Initial resistance is now at 0.8273 (May 17 high) followed by 0.8354 (May 14 high) • Gold – 655.90 Initial support at 655.00 (May 17 low) followed by 652.01 (Mar 24 low). Initial resistance is now at 665.40 (May 22 high) followed by 675.05 (May 14 high) Forex trading involves substantial risk of loss, and may not be suitable for everyone._ Our Newsletter Dear Investor 5 March2007 FIXED - INTEREST ACCOUNTS Our main activity continues to be All Share Index Futures trading which has yielded the following nett returns for investors over the past 12 months Dow Average is at last showing signs of weakness, following a frustrating multi-month up-trend. HIGH RISK - HIGH RETURN NO. 2 ACCOUNTS We believe the international gold price passed an important peak of $725 (based on London PM Fixes) on 12 May 2006, and is now on its way down. We have been waiting many months for this new development, so we feel much more confident now about our investment performance for the period ahead. Our investments supporting interest payments on these accounts are linked to both gold price trading and movements in the Dow Jones Industrial Average. Mar 2006 3% May 2006 7% June 2006 4% July 2006 Nil Aug 2006 6% After a five month "down" period from 19 November 2004 to 12 April 2005, a fresh "up" period is in full swing. At this stage, we expect it to continue indefinitely. We encourage you, the investor, to spread your money equally between the so-called High Risk - High Return No.2 Accounts and Fixed Interest No. 1 Accounts, for optimum performance. Yours sincerely, The INDI Trading Company Limited Our products • NO RISK – GOOD RETURN 1 (ONE) WEEK’S NOTICE TO WITHDRAW o 1.5 % interest compounded monthly(provided the interest stays in the account) You can also withdraw all or part of your interest each month if you want to. The minimum amount for this account is R 1 000.00 CAPITAL AND INTEREST FULLY GUARANTEED • NO RISK – GOOD RETURN 3 (THREE) WEEK’S NOTICE TO WITHDRAW o 2 % interest compounded monthly(provided the interest stays in the account) You can also withdraw all or part of your interest each month if you want to. The minimum amount for this account is R 1 000.00CAPITAL AND INTEREST FULLY GUARANTEED • NO RISK – GOOD RETURN 6 (SIX) MONTHS NOTICE TO WITHDRAW o 2.5 % interest compounded monthly(provided the interest stays in the account) You can also withdraw all or part of your interest each month if you want to. The minimum amount for this account is R 1 000.00 CAPITAL AND INTEREST FULLY GUARANTEED *( I RECOMMEND THIS ACCOUNT) • NO RISK – GOOD RETURN 6 (SIX) MONTHS NOTICE TO WITHDRAW o ± 5 % interest compounded monthly(provided the interest stays in the account) You can also withdraw all or part of your interest each month if you want to. The minimum amount for this account is R 5 000 .00 MOST OF CAPITAL AT RISK This account does not have a specific interest rate, the interest can be nothing for one month but 3 or 5 or more the next. In other words it fluctuates • NO RISK – GOOD RETURN 9 (NINE) WEEK’S NOTICE TO WITHDRAW o 2.75 % interest compounded monthly(provided the interest stays in the account) You can also withdraw all or part of your interest each month if you want to. The minimum amount for this account is R 500 000 CAPITAL AND INTEREST FULLY GUARANTEED • NO RISK – GOOD RETURN 12 (TWELVE) MONTHS NOTICE TO WITHDRAW o 3 % interest compounded monthly(provided the interest stays in the account) You can also withdraw all or part of your interest each month if you want to. The minimum amount for this account is R800 000 CAPITAL AND INTEREST FULLY GUARANTEED There are no maximum amount for these accounts. Free Promotional Investment From the four products we have available the capital and growth arrangements are only valid for the investments indicated as no risk. The high risk investment does not carry those guarantees. We hereby guarantee that the investment capital amount will under all circumstances remain at an equal to or above the amount as indicated on the client’s statement at the end of each month. If you are still uncertain about an investment let us help you by opening a free promotional account for you. We’ll sponsor you R20.00 to open an account. And you can watch how your money grows, you can withdraw your money at anytime or invest any amount whenever you like. When you do decide to withdraw there is a six months notice period. You’ll receive 2.5 % compounded interest every month guaranteed. To open your free promotional account click the block in the middle of the page and fill out form and one account will be opened for you automatically once you have submitted it. HOW DO I OPEN AN ACCOUNT? Step 1: Go to our website http://www.indiplan.com Step 2: Choose one or more INVESTMENT PRODUCTS which will suit your needs Step 3 : Click on the "APPLY NOW" button at the bottom of the product Step 4: Complete the APPLICATION FORM. Once you have done this, click on the “Submit” button. Step 5: Download the relevant form, fill in your details and fax it to : +2711 955-6648 Step 6: Please contact us for our banking details. Do the financial transfer into our bank account with reference: Monument and your chosen account name. Step 7: Fax the deposit slip or proof of payment to : +2711 955-6648 Step 8: Please inform us if you would like us to debit your bank account on a monthly basis to add to your initial investment. This is an optional benefit. DOWNLOAD THE DEBIT ORDER FORM, fill in your details, and fax to : +2711 955-6648 Step 9: On receipt of your transfer, we shall sign the form mentioned in step 4, and fax it back to you as confirmation that your account has been opened. Please note that you will receive an INDI account number. Please indicate if you would like to receive your statement via ordinary mail or whether internet access alone is sufficient. Agents “The company” pays a standard commission fee to clients based on the following notice periods and Interest rates. 1 (One) month notice to withdraw, pays 1.5% compounded interest monthly, commission at 2% for all new investments and money. 3 (Three) month notice to withdraw, pays 2.0% compounded interest monthly, commission at 2% for all new investments and money. 6 (Six) month notice to withdraw, pays 2.5% compounded interest monthly, commission at 2% for all new investments and money . 2 (Two) weeks notice period High Risk (no guarantee) 5% p/m possible return. Commission at 2% for all new investments and money • Group schemes also available. • Debit Order facilities • Direct accesses to network database • Your own website • Global investments in our international currencies • Global marketing solutions To become an agent you will need to invest a minimum of R20 000 in a 2.5% Account or in foreign currencies equivalent to US$5000. The agent will then be able to negotiate the commission witch will be paid to the affiliates out of the commission paid to the agent by The Indi Trading Company Limited on a monthly basis. Commission will be paid to the agent based on all new investments and not on replaced funds witch has been withdrawn and redeposited again. For example: The agent generates an investment of an R1000.00; the agent will be paid R 25.00 commission. Should the investor withdraw R300.00, and do a deposit of R300.00, no commission will be paid to the agent. But if the investor deposits R600.00 into the investment, commission on R300.00 will be paid to the agent. This means that commission will only be paid on new funds or money invested. Commission will be paid on the 20th of every month for the previous month. Reports need to be forwarded at the end of each month to email@example.com No other commission or fees except for those specified above will be paid Capital Growth Guarantees 1. The capital and growth guarantees are only valid for the investments indicated as no-risk. 2. The high risk investment does not carry any guarantee for capital growth. 3. The INDI Trading Company Limited hereby guarantees that the investment capital amount will under all circumstances remain at a level equal to or above the amount as indicated on the client’s statement at the end of each month. 4. The INDI Trading Company Limited hereby guarantees that the investment specific growth will under all circumstances be paid to the client or compounded monthly. 5. In the event that the growth amount is chosen to be compounded, the growth amount will be added to the capital amount at the end of each month. The new capital amount will then be guaranteed as in point #3 above. 6. Guarantees are made on the strength of the balance sheet of The INDI Trading Company Limited. 7. The INDI Trading Company Limited depends on profits in the market sectors in which it invests. In the event that sufficient profits are not achieved in any particular month or series of months, The INDI Trading Company Limited will pay the growth amount specific to each investment out of its own resources. (OUR INVESTORS SMILE ALL THE WAY TO THE BANK - First u work hard for money, then its up to u to let your money work for YOU !!!!!!!) For more information please contact Anton or Chantal via e-mail or by telephone on +27 11 955 6651. E-mail firstname.lastname@example.org or email@example.com. Your monthly statement serves as legal proof of funds due to you at any time. Should you feel uncertain about the procedure to open an account, please communicate with Anton or Chantal before making an investment All information on this article below was found on Wikipedia, the free encyclopedia Investment or investing] is a term with several closely-related meanings in business management, finance and economics, related to saving or deferring consumption. An asset is usually purchased, or equivalently a deposit is made in a bank, in hopes of getting a future return or interest from it. Literally, the word means the "action of putting something in to somewhere else" (perhaps originally related to a person's garment or 'vestment'). The term "investment" is used differently in economics and in finance. Economists refer to a real investment (such as a machine or a house), while financial economists refer to a financial asset, such as money that is put into a bank or the market, which may then be used to buy a real asset. In finance, investment is buying securities or other monetary or paper (financial) assets in the money markets or capital markets, or in fairly liquid real assets, such as gold, real estate, or collectibles. Valuation is the method for assessing whether a potential investment is worth its price. Types of financial investments include shares, other equity investment, and bonds (including bonds denominated in foreign currencies). These financial assets are then expected to provide income or positive future cash flows, and may increase or decrease in value giving the investor capital gains or losses. Trades in contingent claims or derivative securities do not necessarily have future positive expected cash flows, and so are not considered assets, or strictly speaking, securities or investments. Nevertheless, since their cash flows are closely related to (or derived from) those of specific securities, they are often studied as or treated as investments. Investments are often made indirectly through intermediaries, such as banks, mutual funds, pension funds, insurance companies, collective investment schemes, and investment clubs. Though their legal and procedural details differ, an intermediary generally makes an investment using money from many individuals, each of whom receives a claim on the intermediary. In finance, investment is buying securities or other monetary or paper (financial) assets in the money markets or capital markets, or in fairly liquid real assets, such as gold, real estate, or collectibles. Valuation is the method for assessing whether a potential investment is worth its price. Types of financial investments include shares, other equity investment, and bonds (including bonds denominated in foreign currencies). These financial assets are then expected to provide income or positive future cash flows, and may increase or decrease in value giving the investor capital gains or losses. Trades in contingent claims or derivative securities do not necessarily have future positive expected cash flows, and so are not considered assets, or strictly speaking, securities or investments. Nevertheless, since their cash flows are closely related to (or derived from) those of specific securities, they are often studied as or treated as investments. Investments are often made indirectly through intermediaries, such as banks, mutual funds, pension funds, insurance companies, collective investment schemes, and investment clubs. Though their legal and procedural details differ, an intermediary generally makes an investment using money from many individuals, each of whom receives a claim on the intermediary. Money is any good or tokens that functions as a medium of exchange that is socially and legally accepted in payment for goods and services and in settlement of debts. Money also serves as a standard of value for measuring the relative worth of different goods and services and as a store of value. Some authors explicitly require money to be a standard of deferred payment. Money is central to the study of economics and forms its most cogent link to finance. Money is not the same as real value; the latter being the basic element in economics and not money. In common usage, money refers more specifically to currency, particularly the many circulating currencies with legal tender status. The absence of money causes an economy to be inefficient because it requires a coincidence of wants between traders, and an agreement that these needs are of equal value, before a transaction can occur. The efficiency gains through the use of money are thought to encourage trade and the division of labour, in turn increasing productivity and wealth. Interest Interest is a fee paid on borrowed money. The fee is a compensation to the lender for foregoing other useful investments that could have been made with the loaned money. The amount lent is called the principal. The percentage of the principal which is paid as fee (the interest), over a certain period of time, is called the interest rate. Compound interest: Compound Interest is very similar to Simple Interest. The difference is that the principal changes with every time period, unlike simple interest, where the principal remains the same. The new principal at the end of every time period is essentially the simple interest on the principal at the beginning of the time period, added to the principal. For example, suppose p is the principal, and r and t have the same meanings as above. The principal at the end of the first period will be p*r (for t=1 period). Similarly, the principal at the end of the second period will be (r*r)*r. Thus we can land upon a general formula: CI = p * (r)t CA = r * ( 1 + r )t Where compound interest (CI) is the product of the principal (p), and the rate (r) in decimal form raised to the power of the number of terms (t); and the compound amount (CA) is the product of rate (r) and the quantity of the rate (r) plus one, raised to the power of the number of terms (t). A problem with compound interest is that the resulting obligation can be difficult to interpret. To simplify this problem, a common economics convention is to disclose the interest rate as though the term were one year, with annual compounding, yielding the effective interest rate. However, interest rates in lending are often quoted as nominal interest rates, i.e., compounding interest uncorrected for the frequency of compounding. The discussion at compound interest shows how to convert to and from the different measures of interest. Loans often include various non-interest charges and fees. One example are points on a mortgage loan in the United States. When such fees are present, lenders are regularly required to provide information on the 'true' cost of finance, often expressed as an annual percentage rate (APR). The APR attempts to expresses the total cost of a loan as an interest rate after including the additional fees and expenses, although details may vary by jurisdiction. Economic Characteristics Money is not generally considered to have the following characteristics, which are summed up in a rhyme found in older economics textbooks and a primer: "Money is a matter of functions four, a medium, a measure, a standard, a store." There have been many historical arguments regarding the combination of money's functions, some arguing that they need more separation and that a single unit is insufficient to deal with them all. 'Financial capital' is a more general and inclusive term for all liquid instruments, whether or not they are a uniformly recognized tender. Medium Of Exchange A medium of exchange is an intermediary used in trade. An effective medium of exchange should have the following characteristics: • It should also be recognizable as something of value. Person A should recognize the value of the item so that Person B can give it to A in exchange for goods or services. • It should be easily transportable; precious metals have a high value to weight ratio. This is why oil, coal, vermiculite, or water are not convenient in this regard. • It should be durable. Money is often left in pockets through the wash. Some countries (such as Australia, New Zealand, Mexico and Singapore) are making their bank notes out of plastic for increased durability. Gold coins are often mixed with copper to improve durability. Unit Of Account A unit of account is a standard numerical unit of measurement of the market value of goods, services, and other transactions. Also known as a "measure" or "standard" of relative worth and deferred payment, a unit of account is a necessary pre-requisite for the formulation of commercial agreements that involve debt. An effective unit of account should be: • Divisible into small units without destroying its value; precious metals can be coined from bars, or melted down into bars again. • Fungible: that is, one unit or piece must be exactly equivalent to another, which is why diamonds, works of art or real estate are not suitable as money. • A specific weight, or measure, or size to be verifiably countable. For instance, coins are often made with ridges around the edges, so that any removal of material from the coin (lowering its commodity value) will be easy to detect. ________________________________________ Store Of Value To act as a store of value, a commodity, a form of money, or financial capital must be able to be reliably saved, stored, and retrieved - and be predictably useful when it is so retrieved. Fiat currency like paper or electronic currency no longer backed by gold in most countries is not considered by some economists to be a s