About Edward

Edward has been a member since July 16th 2010, and has created 1231 posts from scratch.

Edward's Bio

Hi, My name is Edward Forsythe, I have a passion for helping people achieve enough passive income through investing in the right vehicles to secure their financial future. I will be sharing with you several financial facts to help you make better decisions investment.

Edward's Websites

This Author's Website is http://prophetmaxprofits.com

Edward's Recent Articles

Your Questions About Investment Returns Definition

Donna asks…

Can someone clarify the term “Alpha” when referring to investment mangagers?

I would like to see if someone could give me a clear and concise definition of the finance term “Alpha”, and its relation to Beta.

Edward answers:

Alpha is the return of a fund or investment over and above a benchmark, such as an index like the S&P 500.

Beta is a measure of risk of an investment. It measures the volatility of an investments returns compared to the returns of a benchmark index, such as the S&P 500. The larger the volatility, the beta, of the returns of the investment compared to the benchmark the higher the expected return, according to the Capital Asset Pricing Model.

Lizzie asks…

What is the difference between a holdings company and a private equity firm?

I mean blackstone buys over companies and they are considered a private equity firm. But BerkshireHathaway also buys over companies but they are considered a holdings company.

Edward answers:

Very simply put, a holding company is a co. Which owns 51% or more in the equity of another co. (called its subsidiary). Holding companies are usually for the long haul, and can exist for decades (think Coca Cola).
Private equity firms invest in non-public companies and typically hold their investments with the intent of realizing a return within 3 to 7 years. Generally, investments are realized through an initial public offering, sale, merger, or recapitalization. Private equity groups tend to focus on more mature businesses, often contributing both equity and debt (or some hybrid) to the transaction. The firms were commonly called leveraged buyout firms (LBO) in the 1980s.

As you can see from the following definition of consolidation in the context of private equity firms, they can form holding companies to achieve their purpose. Thus, a private equity firm can be a holding co. The 2 are not mutually exclusive.

Consolidation : Also called a leveraged rollup, this is an investment strategy in which an LBO firm acquires a series of companies in the same or complementary fields, with the goal of becoming a dominant regional or nationwide player in that industry. In some cases, a holding company will be created, into which the various acquisitions will be folded. In other cases, an initial acquisitions may serve as the platform through which the other acquisitions will be made.

The following articles may help you understand this better.

John asks…

How do I search for/identify an ad agency to help me build a brand for my startup company?

Looking for a small to midsize firm that will be focussed on my needs yet be reasonably priced and prepared to handle additional needs as we grow. Immediate needs include branding, logo design, messaging, collateral, and web design. With so many options how do I narrow my search?

Edward answers:

Don’t.

In my experience and opinion an advertising agency will not provide the best return on your investment.

This is based on more than 10 years working on marketing for small to mid-sized companies (1-12 million in annual revenue). Creative houses and advertising agencies charge more for the end product than you can get elsewhere and most importantly they generally do NOT craft your marketing positioning. Advertising agencies can create very visually appealing collateral and can match the image that you define for them, but the typical advertising agency will not take the time to learn your specific business and as such can not adequately recommend the image you should project to the market.

Look for an independent. As someone stated in an earlier response, find them by browsing local company sites and identifying the ones you like the best and feel are the most compelling. Then call those companies, get in touch with the person responsible for their site and be direct with them. Ask them who produced the site, but even more important in my opinion ask them who crafted the message, wrote the copy, and determined the corporate identity. (Important – start by telling them why you are calling them – i.e. That you found their site to be the most impressive and give them specific reasons.) This or these, are the people you want to get in contact with. If it is a single person (and the company is not too large) and that person is employed by the company ask the person you are speaking to point blank if it would create any complication for you to solicit off hours temporary contract work from that person. You will be surprised, especially if the person you are talking to is this individuals direct boss, they generally will be glad to help their people find additional outside work. As director of marketing and communication I LIKED my people doing outside work. It kept them sharp and helped keep them from getting stuck in a creative rut developing the same content over and over again for our company.

I want to make this point very clearly, because I have seen so many companies make this mistake: You MUST define your target image first before engaging in any branding. Your target image must be based on a clear and thoughtful understanding of your target audience and business sector as well as your marketing strategy, product offering and key distinguishing value propositions. It can NOT be emotional or subjectively biased – i.e. “You just like the way this or that looks”.

Does you business sell to other businesses or to consumers? If your company sells services or products to other businesses your marketing message is far more critical than your graphic identity. Even if you are a B2C company Marketing comes before branding. You need to identify the following:

Who is your target audience?
Why do they want your product?
Why would they not buy someone else’s product instead of yours?
What do they value most? (Creativity, stability, customer service, convenience, turn-key solutions, ease of use etc)
What are their pain-points and how does your product overcome them?
What distinguishes your product or service from the rest of the competition?

The answers to these questions should identify the image you want to create. Go out on the web and find companies that are successful in your exact business model or in a similar sector. Review their image and branding strategies. Benchmark them as the beginning foundation for your corporate identity, then modify from there based on your company’s key distinguishers.

If you don’t feel qualified to do this yourself find someone who is and can. Your message and your identity are the source of everything else produced for your company. If you don’t have that definition in place then the best creative design work will not help you.

I have seen organizations with hideous, and I do mean hideous graphic design and corporate branding doing 9 million annually with fortune 500 clients based solely on the strength of their marketing message. (I’m talking about datasheets literally created and printed directly from PowerPoint here.) I have likewise seen companies with incredibly slick designs selling absolutely nothing because the copy on their website and in their marketing collaterals simply does not communicate any value, continuity, or even demonstrate an understanding of their target audiences needs.

I am a very strong proponent of professionally designed branding and image, but without the marketing message as the seed for this branding, and as the legs to carry it to a sale, it is worthless.

Graphic design work: corporate logo (and branding), datasheets and product slicks, websites, business cards and more can be outsourced to independent freelance designers. Specify in detail the image you are trying to convey and they can produce it, at a fraction of the cost if sourced through a creative house.

A logo can be accomplished for $500.00 or less.
A datasheet (if you write the copy) can be accomplished for less than $1,500.00.
Webpage templates (and you need maybe 4 templates for a startup website) can be sourced for as little as $500.00 per template. Then adding pages to the site should be a matter of sourcing a couple new images and dropping in content. If outsourced to an independent new pages from templates could cost in the area of $100 – $200 and less if no new graphics are required.

Compare those costs to what a creative or advertising agency quotes.

The most critical talent for you to find early on is someone who understands your product and its unique value in the industry and can clearly bear that out through product positioning and solid copy. Everything else can be outsourced, but this talent needs a strong and long term relationship with your company.
It takes time to learn your product and more time to craft and hone the message.

Best Regards

Linda asks…

How do you tell the diference between short term and long term investments?

Some people like Warren Buffet invest there money in stocks that will make them money in like 10 or 20 years. Other people will invest there money in stocks that will make them money in like less than 2 years. when buying stocks how can you tell if that stock will make you money years from now or make you money sooner than that

Edward answers:

No Ali

From an accounting standpoing, the only difference between a short term and long term investment is a short-term investment is held for less than a year. Long-term investments are held longer than a year.

From a trading standpoint, it depends on how you specifically define short-term. For you it could be 1 month, but for me it could be 1 week. For day traders, it could be 30 minutes for short-term and several hours for long-term (I know a daytrader that classifies his investments like this, and he’s wrong more than 50% of the time for fwiw). Warren Buffet, on the other hand will usually stick to the accounting definition as he uses a more suffistocated form of portfolio management

The idea about holding period versus future returns are kind of worthless. In 2001, you could have said you expect to earn at least 5% per year on coupons in treasuries, but we know now that’s far less.

Chris asks…

How long do you think until humans live in outter space and where would they go?

Eventually sometime we are going to have to get off of planet earth. The sun will eventually explode and pretty much clear out this universe. Where and when would humans go? Sometimes i feel like that game borderlands will end up being how life is lived on earth when most of the humans retreat. I know sounds crazy but its the crazy ideas that no one thinks of/believes that end up happening. # #Oh and a BONUS# #…. What is with all this zombie hype/obsession?

Edward answers:

The death of the Sun won’t be for five billion years, the average time for a species from first appearance to extinction is ten million years and humanity is about two million years old. It is unlikely to expect humans to still exist in five billion years and whatever would exist would hardly be considered human by any definition we have today. You don’t really have to plan for the death of our Sun. Other global disasters do occur but are of such low probability that it isn’t reasonable to plan for them as well. Colonizing outside of Earth is the only sure solution against global disaster but it would not be the motivation for colonization.

When America was colonized, it was because it was possible to invest in ventures that paid a suitable return on investments in beaver pelts and Mayan gold. It is pure economics that will dive colonization. We do not have an economic model that works yet, space based solar power is estimated at $23 per kwh and asteroid mining breaks even at $518 million per ounce. These numbers will change eventually and colonization will occur.

Moon bases and colonies on Mars will happen because they can be small and hence inexpensive but both have low gravity. Adults can mitigate the degenerative effects of low gravity with exercise and medication but children would develop with serious deformities. Neither the Moon nor Mars are good permanent colonies but they are good sources for materials and resources.

It would be far better to colonize O’Neill Cylinders, Bernal Spheres and Stanford Torus’s. Full simulated 1-g gravity can be achieved with rotation and gardening a cityscale biosphere would be far easier than terra-forming a moon or planet. Large structures are easily built in space where weight need not be supported till the structure is complete and materials are available from asteroids, comets and moons. There are also no planetary gravity well or atmospheric re-entry and solar power is plentiful.

Also, a self sustaining space habitat with nuclear power and propulsion is in fact an interstellar generation ship. Given the travel times to nearby stars, there is simply no return on investment in an interstellar spaceship but with space habitats, you would have them by default.

It’s only a planetary bias and a lack of imagination that we only think of terra-forming and colonizing only planets and moons. Colonizing space itself brings far more options.

If we colonize the solar system in space habitats to the point where our population in the habitats far outnumber that of Earth, then it becomes possible to evacuate all of humanity from the solar system should it ever become necessary to do so. The space habitats don’t even need to find habitable planets, they could comfortably exist with asteroids and comets for resources, they could even exist between the stars.

Those who remain on Earth would be the ones who wish to live with limited resources, to live sustainably. They would try to live in agrarian societies. I would imagine it to be more like the mortals of ancient Greece compared with the gods of Olympus as one group embraces the heavens while the other embraces the Earth. There is no indication that it would be the anarchy of a point and shoot game.

The zombie obsession has to do with media, the ease of making point and shoot zombie games and the currently running zombie mini-series on TV. It also has to do with the attraction of being a survivalist when society breaks down.

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Your Questions About Investing For Income 2009

Robert asks…

what is in the 2009 Stimulus Bill.Breakdown.?

Edward answers:

United States Congress

The American Recovery and Reinvestment Act of 2009

Creating Jobs, Supporting the States and Investing in Our Country’s Future

The United States is facing its deepest economic crisis since the Great Depression, one that calls for swift, bold action. The goals of this legislation are the same as they have been from day one: to strengthen the economy now and invest in our country’s future.

This legislation will create and save jobs; help state and local governments with their budget shortfalls to prevent deep cuts in basic services such as health, education, and law enforcement; cut taxes for working families and invest in the long-term health of our economy. We do all of this with unprecedented accountability, oversight and transparency so the American people know their money is being invested responsibly.

To accomplish these goals, The American Recovery and Reinvestment Act provides $311 billion in appropriations, including the following critical investments:

* Investments in Infrastructure and Science – $120 billion

* Investments in Health – $14.2 billion

* Investments in Education and Training – $105.9 billion

* Investments in Energy, including over $30 billion in infrastructure – $37.5 billion

* Helping Americans Hit Hardest by the Economic Crisis – $24.3 billion

* Law Enforcement, Oversight, Other Programs – $7.8 billion

Investments in Infrastructure and Science include:

Infrastructure Improvements

- $7.2 billion for Broadband to increase broadband access and usage in unserved and underserved areas of the Nation, which will better position the U.S. For economic growth, innovation, and job creation.

- $2.75 billion for the Department of Homeland Security to secure the homeland and promote economic activity, including $1 billion for airport baggage and checkpoint security, $430 million for construction of border points of entry, $210 million for construction of fire stations, $300 million for port, transit, and rail security, $280 million for border security technology and communication, and $240 million for the Coast Guard.

- $4.6 billion in funding for the Corps of Engineers.

- $1.2 billion for VA hospital and medical facility construction and improvements, long-term care facilities for veterans, and improvements at VA national cemeteries.

- $3.1 billion for repair, restoration and improvement of public facilities at on public and tribal lands.

- $4.2 billion for Facilities Sustainment, Restoration and Modernization to be used to invest in energy efficiency projects and to improve the repair and modernization of Department of Defense facilities to include Defense Health facilities.

- $2.33 billion for Department of Defense Facilities including quality of life and family-friendly military improvement projects such as family housing, hospitals, and child care centers.

- $2.25 billion through HOME and the Low Income Housing Tax Credit program to fill financing gaps caused by the credit freeze and get stalled housing development projects moving.

- $1 billion for the Community Development Block Grant program for community and economic development projects including housing and services for those hit hard by tough economic times.

- $1 billion for the Bureau of Reclamation to provide clean, reliable drinking water to rural areas and to ensure adequate water supply to western localities impacted by drought.

Transportation

- $27.5 billion is included for highway investments

- $8.4 billion for investments in public transportation.

- $1.5 billion for competitive grants to state and local governments for transportation investments.

- $1.3 billion for investments in our air transportation system.

- $9.3 billion for investments in rail transportation, including Amtrak, High Speed and Intercity Rail.

Public Housing

- $4 billion to the public housing capital fund to enable local public housing agencies to address a $32 billion backlog in capital needs — especially those improving energy efficiency in aging buildings.

- $2 billion for full-year payments to owners receiving Section 8 project-based rental assistance.

- $2 billion for the redevelopment of abandoned and foreclosed homes.

- $1.5 billion for homeless prevention activities, which will be sent out to states, cities and local governments through the emergency shelter grant formula.

- $250 million is included for energy retrofitting and green investments in HUD-assisted housing projects.

Environmental Clean-Up/Clean Water

- $6 billion is directed towards environmental cleanup of former weapon production and energy research sites.

- $6 billion for local clean and drinking water infrastructure improvements.

- $1.2 billion for EPA’s nationwide environmental cleanup programs, including Superfund.

- $1.28 billion to support $3.8 billion in loans and grants for needed water and waste disposal facilities in rural areas.

Science

Jenny asks…

what caused the 2008-2009 recession? Who caused this? Why?

Its a homework assignment… can anyone help? i know it had to do with our banking system and other things investing companies but im not all the way sure what really happened.

Edward answers:

Mortgages became too easy to get for irresponsible people. These people were approved for mortgages without any proof of their income, and were given adjustable-rate mortgages (you should look up what this means if you don’t know) and told that they could refinance into a fixed rate later after their property value went up some more. The problem is, the real estate market always goes up and down (like the stock market does), so when enough people decided that houses had become too over-valued, the demand for houses fell. Due to supply-and-demand, that meant there were a lot more houses available than buyers, so prices of homes had to fall. Since the home values fell, people couldn’t refinance their adjustable rate mortgages, so when their rates adjusted, they couldn’t afford their new increased payments. They started getting foreclosed on, which meant even *more* houses for sale available. Well, that turned into a vicious cycle that fed on itself for a while. And since there were too many houses available, that meant that construction of new houses stopped, so construction workers were out of work. And as more people lost work and homes, things kept getting worse.

Investors had been buying up mortgage bundles (that’s they way they sell mortgages as investments in the stock market) while housing prices were going up, but once those mortgage bundles lost value after houses lost value, companies that insured those bundles had to start paying investors for those bad investments. Well, since a lot of bundles went bad, those insurance companies went bankrupt. That also hurt the stock market.

I’m sure there is more to it than that, but that’s the best abbreviation I can give you. Hope that helps.

Add: Oh, I forgot to mention – the reason so many irresponsible people were getting mortgages was that the govt starting forcing lenders to give loans to “high risk” people. That basically means poor/irresponsible people who can’t afford a mortgage because they don’t have the income or willpower to do so. It started with the Community Reinvestment Act under Carter, and then Clinton and GW Bush added to it. It’s not entirely one party’s fault, both had their hand in it.

Joseph asks…

non filing income tax return?

Non filing of return for assesment year 2009-10, 10-11, 11-12?I am living in join family we are farmer.I dont have any taxable income. I m getting some income from farming (agri income)since year 2001 I have invested some amount in share market, now today i got a notice for filing of return for the year 2009 – 10, 10-11,11-12, I dont have any proof of income which i had invested, i only have proof of farmer.. no agri income bills. Please guide me what sh

Edward answers:

You should reply to notice saying that as your total income was below taxable limit you were not required to file It return.
Along with the notice there will also be attached a format for replying to that notice. Reply in that format.

Maria asks…

How should I invest now?

How should I invest?
I have
47k in cash (Savings/Checking)
25.5k in a MIP Class III fidelity fund (401k).
Total assets about $73,500.
No debt.I rent and I move from time to time.

I am 28 year old. How should I invest. I can withstand about 10-15% volatility. I don’t want the 2008 stock market wild ride.

Edward answers:

To illustrate the dilemma you are facing, please take a look at the following chart, which compares the performance of the Vanguard Retirement Income fund (VTINX) with the S&P 500 stock index since October, 2007. You will see that VTINX managed to limit its losses during the stock market crash to a little over 20% as of March 2009 compared with around 60% for the S&P 500.

But you say you can’t withstand more than 10%-15% volatility, and VTINX lost more than this during the crash. In order to get your worst case scenario losses down to 10%, you would have to put about half of your investments into a money market fund or CDs and put the other half into an extremely conservative mutual fund like VTINX. To get 15% volatility would require roughly 30% in cash and 70% in VTINX or something similar.

So your target volatility is definitely achievable, but requires you to invest like an extremely conservative senior citizen. Depending on your exact financial circumstances, it may also put your retirement goals out of reach. You would be sacrificing most of your potential profits until you reach retirement age in about four decades in exchange for safety of principal. Only you can decide if this safety makes sense, given your financial goals and risk tolerance.

The alternative is to accept the fact that it may be impossible to completely shield yourself from the effects of a major crash and tolerate a worst case volatility of more than 15%. Good luck with your investments, whatever you decide.

Betty asks…

Financial Accounting question.?

Landon Corporation was organized on January 2, 2008, with the investment of $100,000 by each of its two stockholders. Net income for its first year of business was $85,200. Net income increased during 2009 to $125,320 and to $145,480 during 2010. Landon paid $20,000 in dividends to each of the two stockholders in each of the three years.

Prepare a statement of retained earnings for the year ended December 31, 2010.

Retained Earnings, January 2010-
Net Income- 145,480
Dividends- 40,000
Ending Retained Earnings 2010-

I only need the beginning and ending retained earnings. I have tried this so many times and I keep getting 330,520 for beginning, which the computer says is wrong, but for the life of me I do not see how.

Edward answers:

Net income – 2008 85,200
Dividends – 2008 (40,000)
Net income – 2009 125,320
Dividends – 2009 (40,000)

Retained earnings – December 31, 2009 130,520

The 200,000 invested by the stockholders was recorded in the Common Stock account.

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Your Questions About Assume That The Risk-free Rate Is 6

Sandy asks…

Help with Financial forwards and Futures?

The S&P index spot price is 1100, the risk-free rate is 5%, and the continuous dividend yield on the index is 2%:

A) Suppose you observe a 6-month forward price of 1120. What arbitrage would you undertake?

B) Suppose you observe a 6-month forward price of 1110. What arbitrage would you undertake?
I would be happy to post the answer. When and if I find out. Thanks for your hard work!

Edward answers:

Arbitrage is the riskless self financing buying and selling of similar securities for a sure profit. I don’t see how we can ensure a profit with info given.

Therefore, I don’t see any true arbitrage opportunities here based on that definition.

Anyhow, here is what I would do…

In either case you could short the index and buy a 6m T-bill. Earn 2.44% (1.05^180/365). I would enter the long forward to hedge the risk of being squeezed on the short position. In six months I’d buy to cover with the T-Bill proceeds.

So if the index value goes beyond 1110 or 1120 I use the proceeds from the T-bill (i.e. 2.44%) and the right to buy from the long forward to buy the index at 1110 or 1120 and cover my short. I earn nothing if the index is above 2.44%. If the index is below 1110 or 1120 I use the proceeds from the T-bill to buy to cover the short and keep the difference between the T-bill and the lower Index Value.

There is no sure profit as far as I can tell. So my example is more of a hedged trade not arbitrage. Also, I assume it cost me nothing to enter the forward and their are no other transaction costs.

I’d be curious to know the answer to this problem, if there is one.

George asks…

Is the call option price of a stock a good indicator of future value?

Is the price of a call option a good indicator of future value of a stock? If all the strike prices
“out of the money” are all nearly worthless (< $.06), is this a good indicator that option buyers are not expecting the price of the stock to increase?

Additionally, would this not be a good stock to purchase since they are not expecting the price of this stock to rise?

Edward answers:

<<>>

It is not a good indicator of the direction the stock price will move in the future.

It is a good indicator of how volatile the stock price is expected to be in the future.

<<<If all the strike prices "out of the money" are all nearly worthless (< $.06), is this a good indicator that option buyers are not expecting the price of the stock to increase?

Assuming there is a strike price relatively close the stock price (measured as a percentage of the stock price) and there is a a reasonable amount of time before expiration, it is a good indicator that option traders to not expect the price of the stock to move much, either up or down, prior to expiration.

<<>>

It would not be a good stock to buy if you wanted a stock that was likely to have a big change in its price. It would be a good stock to buy if you wanted a stock that was likely to have a more stable price. The price of the option does not indicate if the price is likely to rise of fall.

—–

The price of a call option is calculated from
(1) the stock price
(2) the strike price
(3) the amount of time until expiration
(4) the “risk free” interest rate
(5) the implied volatility and
(6) (sometimes) the amount expected to paid in dividends prior to expiration.

With the exception of implied volatility, you can easily look up all of these values. Implied volatility is the amount of volatility option traders expect in the stock price prior to expiration. By looking up the other values and plugging them into the price formula, to can determine the implied volatility from the price of the option. The higher the price of the options, the more volatility expected.

—–

You should also understand that professional options traders, as well as quite a few amateurs, would be just as happy to buy a put option as a call option if they expect the price of the stock to go up. A person buying a put option and the underlying stock has the same risk-reward profile as a person buying a call option. Similarly, he would be just as happy to buy a call option as a put option if he thinks the stock is going down. A person buying a call option and selling the underlying stock short has the same risk-reward profile as a person buying a put option. Consequently option prices are worthless for predicting the direction a stock price is going to go.

—–

The value of the put call ratio in predicting the direction the price will move is debatable. Some people trade spreads which can skew the number of calls or puts outstanding. For example, if I bought 100 calls with a strike price of $40 and sold 100 calls with a strike price of $35 I would be bearish of the stock price but I probably would have increased number of calls outstanding. I have seen some people I respect indicate it is a valid indicator, and I have seen other people I respect say it is worthless as an indicator. I will remain neutral and avoid taking a position.

Betty asks…

Is it wise to buy stocks in this economy?

Such as Washington Mutual stocks, a few days ago it was at .03 cents a share. I think about 12-15 months ago it was at $45 a share, prior to the fall of the market. Is it wise to buy these stocks now, and let them sit to earn money. I know the market will eventually rise. However, with Obama desiring to nationalize some banks, is it worth it to buy bank stock?

Edward answers:

This is a complex question…

Lets break it down..

1st – what is the company? MAMU is not a bank as such, its a mortgage house. The state of its stock is a demonstration of its lack of balance sheet cover. Meanwhile you can see even proper banks (i.e. Those who gain deposits from investors and then lend out at a different rate) are also getting destroyed in the market.

2nd- What’s its beta? – i.e. What its correlation to the rest of the market? Like I say you see lots of more ‘healthy’ organisations getting killed so we might ‘assume its a high beta stock’ – i.e. It moves faster in the direction of the market than others. This is too simplistic, but within the limitations of this site lets just move on..

3rd – The implication you make is that the $45 price was correct, or at least closer to correct than the $0.03 price. On what basis do you make this? Housing was is a systematic credit bubble, the previous price is as irrelevant as the current price (when we’re in a systematic liquidity hole).

4th – The ‘market’ will likely rise again… But is WAMU a real part of the ‘market’, or an enigma of a bubble which has no place in the new world order? You can plot a staight line of house prices over a long enough period but meanwhile can u afford to hold the stock in negative carry during a potential 10 yr recession? More the the point….

5th- check the credit markets; which USUALLY tend to be slighly less frenetic and more analytical than the shouty equity mkts…. WAMU is priced as defaulting at low recovery. If the Fed let Lehman go… U think they give a sht about WAMU?… Default is imminent, and the nature if a capital structure is debt gets paid off first, not equity; if the market pays out 5% recovery on the debt.. You camn guarantee as a share holder you get zip/

6th – the States is a very conservative country , economically and politically. Nationalisation is currently a very hard topic in currently socialist-led countries like Britain and France, do you seriously think in a country where Liberal is a bad word and they’ve already let Lehman go that WAMU is going to get nationalised? Freddie and Fannie are red herrings. They are government organisations that didnt know it. I cant see any private finance getting pulled national.

7th – even if they do get nationalised, how does that help exacly? Look at RBS in the UK… 70% owned by the UK Gov. I see the share price tanking still even when the toxic debt is underwritten by a AAA gov (what we used to call ‘risk-free’)… Why so? Well… Maybe the major economies aren’t AAA anymore… Write down toxic assets worth more than the GDP of all these nations onto the country’s balance sheet and see how quickly the currency fails, then how people stop buying Treasuries. In short, getting bought buy a bankrupt country and getting run by some random politicians doesnt help.

I’m sure there are more many more points… I hope people will fill in the gaps….

But.. DO NOT BUY

please!!

Mary asks…

What are the factors considered when determining the cost of capital?

Edward answers:

The cost of capital used in discounting cash flows for projects is the “Weighted Average Cost of Capital”.

WACC = (Ke * E/V) + (Kd * D/V * (1 – t) ).

The V is the value of the firm – that is, the value of all the equity plus the value of all the debt. E is the amount of equity; D is the amount of debt.

Ke is the cost of equity. This is equal to the equity beta times the market risk premium, plus the risk-free rate. If you assume that the stock market returns 11% per year and the risk-free rate is 5%, the equity risk premium is (11 – 5) = 6%. If the company you’re looking at has an equity beta of, say, 1.5, you find their cost of equity = risk-free rate + (beta * market risk premium) = 5% + (1.5 * 6%) = 14% cost of equity.

Kd, the cost of debt, is found by looking at the coupon rate that the company is paying on their bonds. If the company has no debt, like Microsoft, the cost of debt is 0% of course.

T is the tax rate, normally assumed to be 35% or 40%. The reason you multiply the cost of debt by the tax rate is that the interest payments are tax deductible, and present a “tax shield” to the company.

So, to do an example, say you’ve got a company financed with $500 million in equity and $500 million in debt. It has an equity beta of 1.5 (therefore, a cost of equity of 14% as computed earlier) and a cost of debt of 10%, and faces a tax rate of 40%.

WACC = (14% * 500/1000) + (10% * 500/1000 * (1 – 40%) )
WACC = (7%) + (5% * 0.6)
WACC = 7% + 3%
WACC = 10%

I hope this is what you were actually asking! :-)

James asks…

How to calculate Default Risk Premium ?

10 year bonds are currently yielding a return of 6.85 percent. Expected Inflation premium is 1.25 percent annually and the real interest rate is expected to be 2.20 percent annually over the next 10 years. The liquidity risk premium is 0.35 percent. The maturity risk premium is .20 percent on 4 year securities and increases by .08 percent for each additional year to maturity.

What is the default risk premium on the 10 year bond?

Edward answers:

It’s a bad question with poor wording and too much information. Bonds are spread products meaning you get a spread over the risk-free rate or the yield on the US govt bond.

To solve for the 10-year risk free rate, you take the inflation premium of 1.25% and the real interest rate of 2.20% for a total of 3.45%. This is why it’s a bad question, we don’t know what the yield is on the risk free bond so I will assume the 3.45% is correct risk free rate.

To me, the default risk premium is the difference between the 6.85% yield and the 3.45% “risk free” yield or 3.40% or 340 basis points. However, since they also gave you the liquidity risk premium of 0.35% or 35 basis points and that the maturity risk premium is 0.20% or 20 basis points plus 0.08% or 8 basis points per annum (for a 10-year security, the maturity risk premium must be 0.68% or 68 basis points due to 0.20% + 6*.08%). Therefore, I will back out or deduct the 0.35% and the 0.68% from 3.40% to get 2.37% or 237 basis points as the answer.

In summary,
(A) you start with 6.85%
(B) you subtract the inflation and real interest rate to get a defacto risk free rate meaning, you would subtract 3.45% (1.25% + 2.20%) leaving 3.40% in yield premium that is unaccounted for.
(C) you subtract 0.35% for liquidity risk and that get you to 3.05%
(D) you then subtract 0.68% for maturity risk to get 2.37% for default risk.

I believe this is a really bad question because maturity risk is part of default risk as well as the fact we don’t know what the 10-year risk free rate!!

Good luck.

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Your Questions About Day Trading Software

Susan asks…

Question about Day Trading software?

I’ve started to study day trading and I was wondering, am I going to need regular trading software as well as day trading software?
or will the day trading software probably come with everything I need?
Well, Im looking for software that can give me charts and graphs n such that are updated in real time.

Edward answers:

Any real brokerage firm will allow you to day trade.
No special software needed.
Just go to their website and day trade.
Are you getting conned into buying special software for this? – simply not needed.

Mandy asks…

why are good forex trading softwares?

Edward answers:

Hi Iman,

For trading soft wares were created to facilitate trading from anywhere in the world, where a trader has access to the Internet.
A trading software will allow you to have quick access to Forex markets from the privacy of your own home.
If you are referring to Expert Advisors, they have been created to automate a trading strategy.
For example, you perfected your trading plan and you are following a strict strategy of risk management.
Instead of sitting in from of the computer all day, placing the same trades over and over again, now you can program a robot(application) to do that for you, depending on your trading strategy.
Before launching your robot to trade automatically on your behalf on your live account, you will have to setup all the requirements for entering/exiting a trade, to setup all the parameters of the trade(lot size, type of order etc.) and to test its performance on a demo account.

Best Regards,
FXCC Representative

Helen asks…

Why is Scottrade not preferred for short term trading?

Day trading/Active trading.

Edward answers:

Scottrade is slightly on the cheap side of trading. A lot of the other brokers rant that a person can basically use their software and then trade successfully. Scottrade just says you get $7 trade and they claim to have a ticker display. Scottrade is good enough for Day trading/Active trading. It’s probably not preferred by people who want help and don’t think that much about $7 trades. Some Day trading/Active trading have accounts starting at $250,000 and want more from a broker. For example, some broker will mail you statements, reinvest dividends etc. You might be able to improve a stock, since the issuing company has no reinvest program or DRIP, a stock broker may create one in your account. This is one service Scottrade doesn’t offer. Technically Scottrade has 505 offices and I don’t really know if Day trading/Active trading do not prefer them, but their are reasons why they are not preferred by all traders

Ruth asks…

Day Trading Seminars/Workshops?

I am in search for a good day trading workshop / seminar i can attend, Nothing web based, I would prefer a small class size also. Can anyone make any recommendations?

I know day trading is risky, I am very well capitalized and only plan on putting 10% of my portfolio into play, dont worry its enought.

Thanks!

Edward answers:

I have been to two teaser seminars, one because it was right down the street and the other because I needed to a vacation anyway. It was on O’ahu. *vacation not a big thing I live on the Big Island*

One was going to teach me to day trade with charts and statistics and graphs and Ouija boards and a gypsy with a crystal ball.

The other promoted a software that would pick stocks ready to break out.

The problem with the first is you would spend all your time charting and mapping and whatever. Trading happens second by second. You don’t have time to chart anything.

The other might be fine for investing. But a trader doesn’t need to know a stock is ready to break out. A trader needs to know the instant it is going to happen and no software will tell you that.

I do trade. Most of my trades are in DOW stocks. On any giving day,most have a nice daily spread of about a buck and a half. Sometimes it will be much more.

In trading the DOW, I have a very good indicator of where to be. Now I will not get rich doing what I do. But by trading blue chips I minimize my potential for loss. I can always move a good stock into my true investing account, knowing it really will come back

The market travels up and down more because of emotion and greed than it does true financial data.

With brokerage fees being so low you can trade on a twenty-five cent rise. 500 share up .25 is $125. You can do it several times a day. I traded the same stock Monday three times, put the money in the bank and was on the beach by 9AM…. Market opens early in Hawaii :)

I don’t believe anyone can teach you to trade. Your best bet is to try it with play money for a long time before you put up real cash. There are many virtual sites around.

When you do decide to trade, make sure your brokerage firm has level 2 NASDAQ quotes and then learn to use them.

As to forums, I have never had much luck with them. I use Scottrade, with there Total View they have active trader alerts. I had a good look over several days and decided it might be good for them for me to trade their picks but would not do me much good.

Also if you are an active trade you will get marked as a pattern day trade, make sure you keep enough in the account. You also should have another account for investments.

Good Luck and Good Trading

Carol asks…

Day trading software.?

Hi there,

Just recently began trading.

Just a quick question, I use a online broker to make deals and what not. But I don’t find their web based software to conventional.

So my question, is there any trading software out there that I could use to analyse the market, watch real time share prices and see charts to watch how the shares were doing previously?

I have a Mac.

Also I am not looking to open up a account with another broker. I am very happy with my current brokers.

I just want software which I can pay for (free would be better) and see how markets are doing!

Thanks.
@Steve2 Don’t be (Well I know I ain’t) put off by other people’s bad experiences. Learn from them and you’ll be driving that Aston Martin in 3 years !!!!

Edward answers:

You are starting down the road of learning to be a loser. What you want to do is called gambling. Unless you are a genius with great analytic skills and ability to make 7 figures or more, you will lose it all if you persist. Have you ever hear of plain ole stodgy build your retirement accounts with buy and hold low-cost no-load mutual funds? It’s called the tortoise and the hare. You are about to become the hare that is embarrassed 10-15 years from now. You might want to stop, count to 100 and rethink your plan. It is not fun to lose big-time. If you persist, in a few decades you will be flirting with the idea of eating dogfood while the tortoise you can’t stand the idea of being will be eating fillet and drinking fine wine. The choice is yours. How do I know this? I did it, but changed my mind after a number of years of losing my shirt and finally having a change of heart. I have seen this over and over again. Unless you can get a 7 figure job on Wall Street with your brilliant ideas, you should reconsider what you are about to do to your financial future.

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Your Questions About Best Investments

Ruth asks…

Will this investment ever start making money?

I took out a single life ‘choice’ plan with Generali International almost four years ago and so far it is almost 11% down. It’s a plan that includes various funds and I was told that this was a ‘safe’ investment – or as safe as investments go. Will this ever make money or should I ditch it?

Edward answers:

There are many investors in the same situation, due mainly to the World financial crisis. Some plans do better/worse than others, according to the investment strategy of the Managers running them, and their expertise. If your plan is based on Stock Market investment, then there is a good chance that it will improve long term. Internet research is a way to gather information on investments, and compare them with others of the same type.

Joseph asks…

How to get more than 10 mortgages on investment properties?

We own 10 investments properties and have 10 mortgages (with Bank of America) on each one. The bank is saying that they can do only 10 mortgages per person. How or where can we go over that limit, with reasonable rates and closing cost.
Thanks for looking.

Edward answers:

You can still find a few conforming lenders willing to exceed the 10 property max. It’s only going to be lenders willing to hold onto the mortgages as opposed to sell them to Fannie Mae so they’re few and far between. You have really 3 options.
1. Look into purchasing in the name of an LLC or escorp or some such. Obviously this would be a commercial deal and they’d start looking at things like DCSR of the property so it may not be the way to go.
2. Look around and find a reputable mortgage broker who does this type of business. Ask them upfront if they have lenders that deal with more than 10 mortgages and compare a few offers.
3. Look into restructuring the mortgages. Depending on your equity situation you may be able to use some of the properties to pay off some of the other mortgage in full. This is typically the most expensive option as every mortgage you refinance to juggle equity has closing costs.
It can be done, for this type of loan I’d suggest looking at brokers as they tend to have more programs than any single bank. Even a big bank like BOA only offers a fraction of mortgage products available.

Helen asks…

Is there really only one good investment left?

Here’s the deal: Europe, Japan and the US are getting old, with Baby Boomers starting to retire in 2008 and cashing out their stocks – which, along with huge debt, will drag down all investments. What’s left? Emerging Markets!

Edward answers:

That’s a false assumption.1) What make the market are the Market Makers those big institutional investors, private wealth and corporation investing, not individual investors. 2) the US population is not ageing as a whole as it is being replace by younger workers and immigration. 3) If you truly believe ageing will affect investments then invest in what is affected by an ageing pouplation (vacation, cruise, hobbies company, healthcare….). 4) The entire rest of the world is investing in the US because of its liquidity, transparency and regulatory environment (which do not exist in EM). 5) large US corp are profitting and selling to those emerging economies. 6) Never underestimate the US markets and resiliency (remember in the 80 Japan was taking over the world and the US were good at nothing)
Any advise would be to have a fairy diversified portfolio with US, EU, EM, bonds, some edging tools like put and call options, FX futures, or commodities instruments. Even in a decreasing market there is $ to be made, just learn about all the investment tools.

William asks…

How long will it take 2 investments to be equal?

A lady invested $1000 at 8% compounded continuously. At the same time a man invested $1200 at 8% compounded daily. How long will it take for their investments to be equal in value? Assume there are 365 days in every year.

Edward answers:

Hint; Use A = P(1 + r/n)^(nt) to solve that problem. Let n = 365, r = 0.08 and P = 1200. Do the same for the lady, but use A = Pe^(rt) since she invested continuously.

Good luck!

Daniel asks…

How to land a job in the investment field ?

I have a bachelors in engineering and abour 4-5 years of experience in it. but now i want to go to the field of investments, I am doing my MBA and also just registered for CFA exmas for this december, so im busy with that. but i want to get an entry level job in investments, what would it be and where is possible to find it ?

Edward answers:

Lots of different ways . . .

O As already suggested, get a job in sales at a brokerage firm and get your Series 7

o Check out financial advisory firms if giving personal advice is more your preference than sales

o Check out bank trust departments — lots of potential jobs from sales to advisory to portfolio management (fixed income as well as equities). A good place to get some hands on investment experience.

O Financial subs of major companies. Jobs might involve raising funds via sale of short-term debt, cash management, equity and debt financing, etc.

O Check out major financial firms (primarily in NYC) that are involved in merger and acquisition activities (e.g., Morgan Stanley). If you’re really, really good and willing to commit your life to your job, you can make a lot of bucks in this area.

These are just a few of the alternatives. Also, keep in mind that you should be willing to take most any job to get your foot in the door. If you have the educational background, are really smart, have a lot of initiative, and show an affinity for the investment business, you can advance very rapidly. True invest pros have no (I repeat NO) tolerance for incompetence or lack of drive, but will overwhelm you with opportunity to be successful if you “show the right stuff.” The investment field is not a good choice for the average person or the timid.

By the way, your engineering degree implies strong quantitative abilities. This gives you a leg up on your competition and is something of substantial value in the investment arena.

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