Wall Street High Speed Trading: Flash Boys and Michael Lewis

Michael Lewis wrote an article for April 2015 Vanity Fair, 'Wall Street's Flash Mob', which I found to be reflection of the changing times that we live in. Those with better trading platforms, faster technology and more advanced trading algorithms along with more money to pay to certain stock exchanges, profit at the expense of ordinary investors. High frequency trades(HFT) have been a problem in the U.S and also in Australia.

You may have heard of Michael Lewis, he is the author of Moneyball. Moneyball created a sensation in the baseball community. His book 'Flash Boys: A Wall Street Revolt' created a storm in the U.S stock broking industry. Unfair trading leads to erosion of investor confidence and allows one party to benefit at the expense of others. HFT has enabled unfair trades to be executed according to Michael Lewis, Brad Katsuyama and Eric Scott Hunsader. 

Advancement in technology has brought sweeping changes to the investment industry. Not only can you trade from home 24/7 across any stocks on any stock exchange due to the availability of internet and online trading platforms, you can pretty much buy and sell anything you want 24/7 globally. Electronic trading enables some companies to acquire market information milliseconds faster than competitors which gives them an advantage of millions of dollars.

The trading market has changed significantly since I also first traded. There is significantly more volatility across global markets and this is attributable to trades being automated and executed by algorithms and in widespread significant quantities. Those with faster access to data and trade executions profit at our expense. Other problems include flooding the market with automated orders causing crashes, layering, wash trades and spoofing.

Brad Katsuyama was a 35 year old trader at the Royal Bank of Canada who spilled the beans on the industry along with a few others. The complexity of the financial markets due to regulations meant that financial intermediaries stood to benefit more than the investors and corporations (the ultimate stakeholders of a stock exchange). Katsuyama founded the IEX trading platform along with other venture capitalists and asset managers to level the playing field. IEX has a 350 microsecond delay before executing trades. Goldman Sachs is also using IEX for their trades now. Eric Scott Hunsader, a gifted programmer says that the data indicates that IEX has the highest percentage of trades filled at the midpoint between the bid and ask of any exchange and this resulted in fairness.***

High frequency trades were being executed with computer algorithms at fast speed across roughly 60 private and public stock exchanges in the United States. Lewis writes:

"The Financial Industry Regulatory Authority announced it had opened 170 cases into "abusive algorithms" and also filed a complaint against a brokerage firm called Wedbush Securities for allowing its high-frequency-trading customers from January 2008 through August 2013 "to flood U.S exchanges with thousands of potentially manipulative wash trades(trader acting as buyer and seller of a stock to create the illusion of volume) and other potentially manipulative trades, including manipulative layering and spoofing." Layering and spoofing are off-market orders designed to trick the rest of the market into thinking there are buyers or sellers of a stock waiting in the wings, in an attempt to nudge the stock price one way or the other."

Athena Capital Research was fined for manipulating "the closing prices of thousands of NASDAQ listed stocks over a six month period". Lewis writes about banks creating secret orders for high frequency traders to enable exploitation of investors inside private dark pools. After an investor class action suit against some banks, some banks closed their high frequency trading operations and some closed their dark pools. 

The problems resulted from various stock exchanges selling retail stock market orders to high frequency traders. Also, high frequency traders were sold faster images of the stock market than the images that investors received. 

In Australia, the cost of high frequency trading is approximately one basis point, resulting in $110 million to $180 million in revenue across 12 months to March 2015** Dark pools account for about 25 to 30 percent of activity in Australian trading markets and exist to facilitate large trades. ASIC has been reviewing the industries due to concerns over conflicts of interest between how clients were being managed.

Definitions:

Dark Pool - Private exchanges for trading securities which are not accessible by the investing public. It is non-exchange trading, dedicated to large investors. 

High Frequency Trading- Powerful PCs transacting large orders using a trading platform at high speeds. Algorithmic trading with complex formulas.

Source:

* Vanity Fair April 2015, Michael Lewis 'Flash Boys: A Wall Street Revolt'

** Financial Review October 2015, 'High frequency traders shift to futures markets'

*** www.marketwatch.com, 17th February 2016, 'This man wants to upend the world of high frequency trading'

Medallion Signature Guarantee and our Apple Stock Saga

No wonder people buy foreign stocks and leave it under the custody of their financial institution or broker. Computershare lodged all the Apple stocks in our names incorrectly and it has been a long saga trying to correct the mistake. 

We are still receiving correspondence from the U.S. by post. Snail mail, in this technological world. I contact our broker, our broker contacts Computershare in the U.S. and then we wait four to eight weeks before we get our documents in Sydney. It's a long protracted and torturous process. It would be easy to leave it under the custody of our broker but then having to read sixty pages of fine print from the broker is also a long and arduous process of due diligence.

I thought it was prudent to register the Apple stocks that we bought under our direct name rather than custody of the financial brokerage institution after the financial crises of 2008 resulted in many banks and brokers collapsing. Those who had margin loans collateralised to their stock portfolio in Australia, meant that they lost all their stocks including the ones that were fully owned when the brokerage company collapsed. It's really important that everyone reads the fine print and the terms and conditions.

To transfer the stock to different owners, we needed to 
1. Complete the transfer request form and have the signatures authorised with a Medallion Signature Guarantee
2. Complete the Form W-9 for tax certification(to prevent backup withholding tax)
3. Post the documents to Computershare in the U.S.

What is a Medallion Signature Guarantee?

Computershare's definition is, 'A Medallion Signature Guarantee is a special stamp provided by a bank, broker or credit union (guarantor institutions) that indicates that the individual signing a form is legally authorised to conduct the requested transaction. The guarantor institution should verify the medallion stamp is sufficient to cover the value of assets being transacted upon.'

The Medallion Signature Guarantee can be provided by a qualified financial institution such as a 'commercial bank, savings bank, savings and loan, US stockbroker and security dealer, or credit union, that is participating in an approved Medallion Signature Guarantee Program'. 

Residents of the United States who own less than $10,000 in total account value can utilise the Medallion Waiver option. For us, those waiver options are not applicable. 

What is the purpose of the Medallion Signature Guarantee?

It's designed to protect shareholders by making it difficult for people to take assets by signature forgery on security certificates for related transfers or sales documents.

Who can provide a Medallion Signature Guarantee in Australia?

Good question >.< After researching on the net, I know plenty of institutions DON'T provide the Medallion Signature Guarantee in Sydney. From the US Embassy in Canberra, 'U.S. Consular Officers are not authorised to provide signature guarantee/medallion stamp guarantee service. Only a financial institution participating in the SEC (Securities Exchange Commission) medallion signature guarantee program is authorised to affix a medallion imprint.'

Computershare Australia supposedly offers the Medallion Signature Guarantee service but currently I don't know because I have rang their contact line twice only to be greeted with an automated voice service which diverted my call only to disconnect my call twice. A poster on the AussieStockForum posted that Computershare Australia offers the service for a small admin fee. 

The posters in that forum wrote in 2014 that they tried asking U.S. branches of credit unions and banks to no avail. 

Further research led to P&G shareholders requiring Medallion Signature Guarantees and they were advised to seek a local financial institution that has a correspondent replationship with a U.S. Medallion Program member with whom the investor has a business relationship as that firm may be a source of a Medallion Signature Guarantee

If Medallion Signature Guarantees Can't be Obtained

If Medallion Guarantees couldn't be obtained, Computershare was also accepting signature guarantees from:

* The U.S. Consulate
* A Non-U.S. Bank when it has one of the following:
 - A New York Correspondent bank referenced in the foreign bank's guarantee stamp
 - An overseas branch of a United States Bank or a member firm of the New York Stock Exchange referenced in the foreign bank's guarantee stamp
 - A correspondent branch in the United States, which is referenced in the foreign bank's guarantee stamp
* A Computershare office located in either the UK or Australia accompanying the appropriate Computershare transfer form and a valid passport as long as the value of the transaction is less than $100,000 USD

Seeing as it has been a drama, I hope this helps some poor soul in Australia from having to go through the same process of having to research the web only to find a smattering of the above same information scattered across several web pages and assorted links. I have now compiled it all in one post for you.

How To Calculate Return On Investments (ROI)On International Stocks

Lately I've been keeping track of the Australian dollar for a few reasons. Not because I'm going on a holiday overseas but for more mundane reasons such as investing. We bought Apple shares a few weeks back and have yet to add Google stocks into our portfolio. Travelling overseas more frequently would be nice, of course =)

I've been checking out a site that has a few popular currencies readily converted. As an example, let us use today's AUD foreign currency exchange rate, 1 AUD buys $0.71 USD.

Calculating the return on investment (ROI) on foreign owned stock involves:
1. Calculating the ROI on the actual stock
2. Calculating the ROI on the stock taking into account, the stock price movement and the currency conversion movement

Bear with me as I dislike rounding up or down when doing my calculations. It's a bit confusing to explain because, firstly it involves working out returns as per usual, and then converting the return to your local currency. Let us ignore brokerage fees as it will just complicate this, however note that brokerage fee will reduce your ROI.

1)Calculating your foreign stock purchase:
Buying the foreign stocks:
If you have $10,000 AUD to buy Apple stocks at yesterdays closing price of $115.21 USD, AUD to USD exchange rate is 1 AUD buys $0.71 USD

$10,000 AUD*$0.71= $7,100 USD
$7,100 USD/$115.21 = 61 Apple (AAPL) stocks, rounded down

Total cost of AAPL portfolio is precisely 61*$115.21 USD = $7,027.81 USD
Total cost of $7,027.81 USD = $9,898.32 AUD

So if you have $10,000 AUD to buy AAPL stocks at $115.21 USD, you can afford to buy 61 stocks at $115.21 USD and it will cost you $9,898.32 AUD

A)Calculating the ROI on the actual stock:

If for example next week, AAPL's price appreciated to $120 USD and $1 AUD depreciated to buying only $0.69 USD, let's calculate the ROI:

ROI on AAPL stock without currency movement is 4.157%:

$120 USD-$115.21 USD = $4.79 USD increase per stock
$120 / $115.21 = 4.157% return

B) Calculating the ROI on the stock taking into account, the stock price movement and the currency movement:

So if AAPL price went up to $120 USD and the AUD depreciated to $1 AUD=$0.69 USD, the ROI is 7.176%

Your portfolio in AUD is now worth $10,608.69:

(61 AAPL * $120 USD)= $7,320 USD
$7,320 USD/ $0.69 = $10,608.69 AUD
$10,608.69AUD / $9,898.32 AUD = 7.176% ROI

So the total return on investment after accounting for stock and currency movement is 7.176% 

Be Fearful When Others Are Greedy and Greedy When Others Are Fearful

"Be Fearful When Others Are Greedy and Greedy When Others Are Fearful" is Warren Buffet's famous quote. 

The market is really taking a dive currently due to the woes in China. Mr SMG and I have been accumulating stocks over many years now. I'm rather impervious to the ups and downs of the market emotionally. When it's taking a dive like right now, I just want to buy more stocks. I've been blogging publicly for six years now and all my investing strategies, thoughts and opinion has been there for the public to read and critique. So far, so good, really good.

The huge volatility that we see in the stock market over recent years have been in part due to economic reasons, swing traders, technology such as online trading, the ability to short stocks instantaneously and the average and ordinary Mum and Dad investors out there reacting out of fear. Margin loans and activated stop losses further compound the volatility. 

Central Banks, politicians and investors tend to turn the other way when it comes to acknowledging the intrinsic problems such as the US federal deficit and the Japanese deficit ballooning as opposed to shrinking or that most nations are struggling with growth, however, people get richer so there's simply more and more money out there being ploughed into investments.

Over the duration of the GFC subprime crisis I picked up a lot of stocks at ridiculously cheap prices. I haven't had time to follow the news intensely these last two years, so I'm not as well versed this time around in terms of forecasting how long the downturn will be for and when the recovery is expected, however Buffet's adage has worked perfectly to our benefit in the past and I fail to see why it wouldn't apply over the next hundred years. Warren Buffet is the investment version of the economist Adam Smith. 

Jessica Irvine published an article in the Sydney Morning Herald where she quoted Roger Montgomery, the private fund manager of $800 million worth of funds. "We've been a net buyer...we purchased some additional shares in Challenger and iSentia. Globally, we purchased some more Apple...When they're on sale, you get a bit more excited. Although you have to be selective- the outlook has deteriorated."

Montgomery is quoted as a follower of the value investor, Benjamin Graham who is famously quoted saying, "choose (sic: stocks) them the way you would buy groceries, not the way you would buy perfume...Individuals who cannot master their emotions are ill-suited to profit from the investment process." That is, don't be driven by emotion but be driven by values and the business/stock fundamentals.

Personally, I really dislike the whole doom and gloom mentality and those who constantly spruik that the sky is falling. If you keep banging on about the crash, doom and gloom happening, eventually you will be right. But meanwhile, miss out on the gains. If you had waited for property to crash 40% like how some economists were forecasting during the GFC, you would have sat on the sidelines while property has been appreciating in value. The Sydney median property price was approximately around $600k during the GFC and now the Sydney median property price is over $1m. 

What 40% crash? Short of pulling out that $400k from your back pocket, you could now be renting for life.

Another doom and gloomer quoted by Irvine is Damian McBride, former adviser to British Prime Minister Gordon Brown, "Get hard cash in a safe place now-don't assume banks and cash points will be open, or bank cards will work...do you have enough bottled water, tinned goods and other essentials at home to live a month indoors? If not, get shopping." McBride appears to be watching too many seasons of The Walking Dead. One month only? Is there some sort of miraculous recovery after one month? Life goes back to normal after one month? All you'll end up doing is sitting on your boring old cash on the sidelines and when the market bounces up again eventually, you'll end up missing the entry points and back to where you started, over paying for stocks just to enter the market again. 

There is substantial difference between the market volatility during the GFC and the market volatility right now triggered by the Chinese stock market and their trading conditions. In the US, the GFC sub prime crisis was triggered by many shifty and dodgy practices such as junk bonds being rated AAA, collapse of investment banks holding these sub prime, poorly rated AAA bonds, pension funds collapsing due to investing in sup prime loans, the ability of US mortgage home owners able to walk away from their mortgages without future repercussions like how the banks in Australia can pursue mortgage debts. 

Approximately 1% of Chinese stocks are being held by foreigners. The global economy is affected if the Chinese economy is depressed due to the negative wealth effect on the Chinese population(if people have lost money in the stock market, this will negatively affect consumption which will affect economic growth which will affect the stock prices). If China reduces their demand for raw, mined resources, this will affect the world. However, this will be a gradual process and not instantaneously like investment banks in the US having their portfolio revalued during the sub prime.

Having illustrated all that, does McBride expect banks around the world to collapse simply because Chinese shareholders have lost money? Or that Chinese consumers will spend less? China is a net exporter (unless things have changed since I have been out for these last two years) and thus, their economic growth and GDP is still hugely influenced by worldwide consumption of nations such as the US. 

There are so many rich and wealthy investors out there. Can you really see them parking their stash of millions and billions in term deposits and cash for the next decade? They have so much money that ultimately it will find its way back into property and shares. 

That's SMG's take on this Chinese stock market crisis. The outlook isn't exactly rosy but it's not at McBride's doom and gloom level either where anyone should be liquidating their stake in everything and pulling their funds out of the bank. His sort of 'advice' is what compounds problems and create liquidity crises and the collapse of banks by creating run on deposits.

We Bought Apple Stocks: Apple Inc Nasdaq: AAPL

We bought a few thousand dollars worth of Apple stocks (Nasdaq: AAPL) on 23rd July this year. (Sorry have had to edit some figures out due to privacy issues, ironic given this is a public blog =) )

My first direct international stock purchase and what an experience. The amount of paperwork that I had to complete just to get to that stage. 

I won't even mention that I wanted to buy Google Class A stocks but due to the broker stuffing up, I didn't get my order executed before their price kicked up after reporting positive results. Sigh. $16k worth of profits and gains down the drain.

Why did we buy Apple and want to buy Google? Those two stocks have always been on my to-do and to-buy list for years and years! If we had bought them years ago, we would have been multi-millionaires from just holding two stocks. This guy I once knew(let's call him Mr Cantankerous because he really is cranky and a cantankerous type of guy) shared his opinion with me, saying that he believes Apple Inc has had its heydays and the glory days are pretty much over.

My opinion is that this is still early days yet for technology. Apple and Google are well placed for future technological development and they both have such good business models for producing revenues and future growth potential from innovations. They create their own market simply due to their mammoth size and the free marketing they both receive. I could launch into the technicalities but let's leave that for another day before this post is too long.

Apple is the largest capitalised stock in the world at $655 billion. With over 200 billion dollars in cash savings. Cash savings! Ridiculously good savings. Now if only shareholders can all unite and request a special dividend...

Being an international stock for us, there are two market forces at play affecting returns. 
1) The stocks' price volatility (AAPL stock prices swinging up and down)
2) The foreign currency volatility (AUD weakening and strengthening against the USD)

I'm not one to be concerned about any of these short term fluctuations. In the long run, Apple is innovative just like Google, the history of these two companies having split their stock several times over the years is ample evidence. A pessimist would be at this point saying that history is not indicative of future performance, that is certainly true. However, after having regretted not buying either Apple nor Google over these years on multiple occasions, I am over regrets and will roll the dice on buying these two stocks this year.

Seriously $200 billion in cash savings which exceeds the GDP of Peru and the Czech Republic, it exceeds the total net worth of Bill Gates, Mark Zuckerberg, Jack Ma and Warren Buffet combined (cnbc.com 2015). I'll be happy to sit on our Apple stocks for the long run and see where it takes us. I've never been the type to dwell on short term volatility in stocks or the property market if I'm not day trading or in the business of trading properties. I am all about the long run and the next 30 years. This strategy has worked very well for us across both asset classes over the past few years. 

Currently AAPL'S chart is not looking illustrious(see above price chart) =) but it's a long term holding for us that we have added to our portfolio. I'll keep readers posted on its performance and how it is going for SMG with the two market forces at play. 

The United States is heading into a monetary policy tightening cycle (raising rates) so the AUD will be crumbling further as investors switch back to the greenback. There will be interesting days ahead =) 

The dividend yield for AAPL is rather low, however we are pursuing capital gains and not dividend yield. That's the goal with this AAPL acquisition =)

Classic Advice On Stock Investing

Have been going through some Spring cleaning otherwise known as Spring dumping and found an old investment magazine from 1997, 'Personal Investment: Shares, Your Next Move'. Good, solid financial advice is always going to remain current.

Here is one old, but good sixteen year old advice from the magazine:

"The market in 1987 proved that if you hang on it will come good. And if you can buy some good  blue-chip shares paying 5 to 7 percent dividends, that is still 1 to 3 percent more than cash management trusts. And if it's fully franked, it's a great alternative."

There are dividend yields for quality stocks roughly at that level again. The cash rate is roughly 1 to 3 percent below the dividend yields. It's as if sixteen years haven't passed.

Like most advice about trading, technical analysis on what to buy and sell, that stuff is not fundamental and has aged. The best strategy with regards to stock investing (if you are not that experienced) is just to buy the solid, blue chip companies that manufacture the everyday products that you use or the companies that provide the services that you use every single year.

Buy the ones that pay dividend so that you'll have income. Buying trendy growth stocks is highly risky, particularly when the company isn't profitable. I thoroughly dislike investing into IPOs for exploratory mining companies.

Liquidating stocks during financial crisis due to fear isn't the best strategy, especially if you've sold your stocks, ended up sitting on cash and didn't buy back into the market because you were waiting for the 'bottom'.

Bought A House And My Portfolio Is Up 20%

Finally, Mr SMG and I have bought a house. If you've been visiting my progress bars on my homepage then you will have noticed that last year in June, I reached my goal for a house deposit and have since then, been house hunting madly. It's either dump the funds into another asset or leave it earning a pitiful amount of bank interest that becomes bugger all after tax.

After checking out almost seventy open house inspections, making a few multiple re-visits, reading property contracts after contracts, I can definitely say that I'm much more of a walking encyclopaedia when it relates to property structures, easements, covenants, location, aspects and layouts.

It's significantly tougher looking for a house to live in than buying an investment property(IP).

With IPs, you can literally overlook annoying little things like the ceiling being an average standard height or the bedrooms are smaller than usual. But oh my...when looking for a house to actually live in, the hunt is tougher because of minor things like some rooms not receiving sufficient sunlight(installing skylights being impractical or impossible due to the house being double storey), the kitchen pantry is too small, the ceilings aren't high enough, there is scruffy or dingy carpet that has to be pulled off and wooden floorboards installed, the master bedroom is too small, no built ins, the stove isn't gas but electric, the house isn't double brick, three bedrooms and one bathroom aren't big enough, it's strata or community titled and not free standing...so on and so forth.

I have absolutely no qualms about renovating but at this stage of my life, I don't have time to sniff paint, rip carpets off, drill and rebuild. Theoretically, ripping up the carpets, installing polished wooden floorboards, adding skylights, building outdoor alfresco dining areas, fresh paint, building built ins, renovating kitchens and bathrooms all add value to property than buying one that already has all those features in place(thus building equity to enable refinancing for further acquisitions) . However, like mentioned, I simply haven't got the time to do those things in the near future...perhaps with the next property in the coming years.

All these fussy complaints would have been overlooked if we were just buying another IP. If it was just another investment property, I'd have no issues with buying a single brick, fibro, cladding or whatever type of property as long as it met the simple requisites of location, transport, shops and possibly schools (it depends on which type of tenants you wish to target).

With our latest acquisition, my finances have become merged somewhat with Mr SMG's finances so it is getting rather difficult to break down the performance of my investment portfolio. The only thing that hasn't been merged or intermingled is my stock portfolio, which I'm happy to say actually grew by 20% over the past year. If you have read previous posts of mine, then you'll know which stocks I hold across the various sectors (mining, agricultural, retail and financial).

The power of compounding is nothing to be sneezed at. Every single dollar has been working hard over these years and it's amazing how much capital growth and passive income there have been from investing and reinvesting the income from those investments back into obtaining additional assets.

So far, so good.

Baby Steps: Distribution In Specie of Metminco Shares

Say what?

Because life is all about baby steps. When you first don't quite understand something, the initial reaction for some may be to recoil and take a step back in order to avoid the unknown, while some like to tackle the unknown head on.

Thought I'd tackle one of the popular investing terms, made even more popular these recent few years due to the fall out from subprime credit crisis.

Distribution In-Specie.

Indeed, if you skimmed that phrase fast enough it would appear as if alien species are being distributed or perhaps Sigourney Weaver gave birth to some more odd critters.

Alas, it's not distributing alien species, it is distributing a physical asset such as company stocks or properties instead of distributing cash. Companies short on cash during dividend payout periods may choose to distribute company stocks in-specie instead of paying a cash dividend.

Someone I know, let's call him Mr ABC, received a brochure from Takoradi Limited recently outlining the Board of Directors' intentions: "Distribution In Speci of Metminco Shares".

If you're an existing Takoradi shareholder(or a confused reader) wondering what the heck that means, it's rather simple:

a) Takoradi Limited owns 152 million Metminco shares and it wishes to distribute 107 million to its shareholders to own directly

b) You own some Takoradi Limited shares

c) Owning 1 Takoradi Ltd share will entitle you to 1.5 Metminco shares

d) So if you own 100 Takoradi shares, you will be given 150 Metminco shares

e) 'Distribution In Speci of Metminco Shares' means that they instead of distributing cash to shareholders in the form of capital return, they will distribute Metminco shares to you instead 'in specie'(as a substitute)

f) This is proposed by the Board of Directors, of course shareholders are entitled to vote and reject that

g) If the proposal is passed, then every Takoradi shareholders will become direct shareholders of Metminco (and get dumped with heaps of paperwork from Metminco directly in future)

Implications:

a) If this gets voted through, then existing shareholders will own Metminco shares and be a direct shareholder, instead of owning indirectly through Takoradi Limited

b) Takoradi Limited is effectively partaking in a capital reduction, so the market capitalisation value of Takoradi Limited will theoretically fall by approximately $19.26 million (ie 107 million Metminco shares x $0.18/share)

c) Takoradi's share price and market value should drop commeasurately in an efficient market but as we all know the market is inefficient, unpredictable and suffers from insider trading. So distributing $19.26m worth of capital in the form of Metminco shares could mean Takoradi's value dropping by less than or greater than $19.26m when logically and theoretically it should only drop $19.26m

d) You get more paperwork to fill out come dividend time, tax time and filing time now that you own another stock

e) Is that a good deal or a bad deal? You'll need to analyse Metminco and decide for yourself whether they're worth holding onto or sell. If you've got an online brokerage account, you'll probably have to fill out more paperwork to link those new Metminco stocks to your brokerage account enabling you to trade

In-Specie Is A Useful Word To Learn

In Specie is commonly used in the investment sphere. During the credit crunch, companies were short on cash. Infact, previously illustrious companies such as ABC Childcare and Babcock Brown couldn't even roll their loans over due to the liquidity crisis and have since, collapsed.

If you owned stocks in the last few years then there's a good chance that you would have received paperwork offering you the choice to accept dividends in cash or accept a similar amount in heavily discounted company stocks instead (in-specie).

Transferring of 'In-specie' contributions to SMSF have also been huge in the recent years since Howard and Costello changed the super tax laws and made it supremely favourable for retirees and their pension funds.

From the ATO:

"'In-specie' contributions

Generally, trustees of SMSFs are prohibited from acquiring assets from related parties - such as fund members, their family, and partners, related companies and trusts. However, there are some exceptions.

Therefore, if you're a member of a SMSF you should not contribute your own assets or assets of your associates unless the asset is:

business real property (used exclusively for the running of a business), for example a warehouse you conduct your business from a listed security (such as shares in companies listed on the stock exchange), or an in-house asset, for example an investment in a related party. The market value of in-house assets cannot exceed 5% of the total market value of assets held by the fund.

You can also generally contribute an investment in a managed fund, provided it is a widely held unit trust. If the managed fund is a normal public offer fund with a range of investors it should meet the definition. Smaller vehicles such as some property syndicates may not. You can check this with your managed fund.

Each of the assets must be acquired by the SMSF at market value.

You cannot transfer a residential investment property to your SMSF. It is not covered by the above exceptions.

The transfer of an asset 'in-specie' is a CGT event as the transfer is a disposal. You may make a capital gain or loss from the CGT event according to the usual CGT provisions that apply to that asset.

If you make an 'in-specie' transfer, CGT may still be payable as you may be taken to have received the market value of the asset at the time of the CGT event.

Depending on the situation, a market valuation may be undertaken by either a qualified valuer or a person without formal qualifications. In any case, the person who conducts the valuation must base their valuation on reasonably objective and supportable data.

Use of a qualified valuer should be considered where the value of the asset represents a significant proportion of the fund's value or where the nature of the asset indicates that the valuation is likely to be complex or difficult."

Greece: Are we in for another financial crisis?

When the GFC crisis started in 2007, I thought we were all doomed. Fortunately Australia scraped through relatively unharmed. Our equity market was hammered but employment wise, we weren't losing 500,000 jobs per month like the U.S during the peak of their crisis.

Lately, I've been thinking about the domestic and international economy and the more I think about the situation and read the statistics, the more concerned I get.

The blogger, 'My-Wealth-Builder' wrote a recent post encapsulating his worries and they are similar to my concerns, which is why you are now reading a post about it. In terms of equity, I'm not heavily invested into equity right now and won't be for the foreseeable future. If Greece defaults, the equity markets will be hammered. If anyone thought the GFC crisis was bad, this could be worse because Greece has borrowed off several European banks and defaulting on those bonds may trigger a European financial crises.

Problematic areas:

• Looming potential default by Greece
• Struggling nations with huge debts such as Portugal, Ireland, Iceland and Greece, will they require further bail outs too? Are we looking at dominos lined up for a collapse?
• The U.S deficit, trillion dollar debts and woeful economy that is not recovering anytime soon. When will the U.S deal with their debts instead of printing off more money to band aid this problem?
• Australia's own flat housing and construction market, call centre and manufacturing jobs lost to cheap labour in Asian nations
• Japan, the second largest economy in the world is struggling with no end in sight to the struggle
• China, one of the largest economy in the world, heavily reliant on U.S citizens and their appetite for consumption will be affected if the U.S falters. There are also rumours about their property bubble but we'll never know for sure how accurate those rumours are. If the U.S falters, China's demands for Australia's commodities will drop

Right now, like 'My-Wealth-Builder' I also prefer to ere on the side of caution and am not increasing my equity holdings. I am also not buying any property this year and the goal is to buy one next year but again, need to review the economic situation around the world again next year not to mention our own domestic property market.

My most recent move was transferring some online savings to a term deposit that is earning 6.15% compounded monthly and 100% risk free. I do have equity holdings which I'm not going to liquidate. They're set on DRP (dividend reinvesting plans) and are held with a long term intention since I've got several decades to go before I reach my sixties so there's no harm in riding out the market with what I've currently got in equity.

Is technical or fundamental analysis a load of bull or bear crap?

One of the blog that I read occasionally recently wrote a post lambasting stock market technical analysis as a "load of bull crap and bear crap".

Just because someone hasn't found a trading technique that's satisfying them in making them thousands or millions of dollars in profit or whatever they're seeking to gain, doesn't mean they should just write something off as crap. Just because a technique hasn't worked for you doesn't mean it's a bunch of crap.

Have you ever heard of the phrase self fulfilling prophecy?

This is an important concept and can be applied to your own personal life and also to your investment life. In Wikipedia, self fulfilling prophecy is defined as,

A self-fulfilling prophecy is a prediction that directly or indirectly causes itself to become true, by the very terms of the prophecy itself, due to positive feedback between belief and behavior.

If you tell a child that they are smart and will grow up to be successful, there's a greater possibility that the child will grow up into your expectations of them. If however, you tell them every day that they're dumb, stupid, useless and will amount to nothing, then there's a higher chance that they will grow into that type of person (unless their character is defiant enough to prove your wrong).

How does self fulfilling prophecies affect technical or fundamental analysis (known as TA and FA)?

Stock prices aren't insular, as such, technical or fundamental analysis does not work perfectly in pricing a stock. You can churn out all the financial ratios, analyse everything you want, and or apply technical analysis and find out the support and resistance points blah blah blah - then you draw a fully informed conclusion that the stock that you want to trade or invest in is worth $X but the market doesn't price the stock at $X just because technically the stock should be valued at $X.

Instead, the stock could spike beyond $X, exceeding your expectations or they can drop below $X, disappointing you. Why? Because the market moves as a result of several thousands or millions of investors out there with different expectations at what $X should be. Also, when a group of bearish investors outnumber a group of bullish investors, the the market will generally swing towards the bearish end. Investors and traders expectations change from day to day. This is why there's stock market volatility.

FA is good for determining what the value of the stock should be. TA is commonly used by traders to predict roughly how the stock is trending, whether up, down or sideways.

If you perform your FA due diligence and then trade using TA, why does the stock that you're analysing differ from your expectations that it should be $X?

Because that stock isn't insulated from the market. If FA and TA points to the stock being priced at $X but then tomorrow, President Barack Obama makes a sudden announcement that the US has been incorrectly accounting for the deficit. That instead of a $11 trillion dollar national deficit, the national deficit is actually $20 trillion, then expectations of the whole market in the US and everywhere around the world will turn bearish. Because of negative expectations, people behave negatively, they cut their spending, then businesses cut staff hours, then the government collects less tax revenue and cuts back on infrastructure and budgetary spending, which sees government employees made redundant and so on and so on. The stockmarket crashes and the negative expectation becomes a self fulfilling prophecy. It works conversely as well.

For example, if I decided to trade in CCL shares at $11.82 cents each and the stock market had a bearish month, causing CCL to drop to $10, does that mean that fundamental analysis is a load of crap? No. does that mean technical analysis is a load of crap? No.

Both FA and TA have evolved over the decades as a measure of valuing the price of a stock. TA evolved as a method in predicting price movements, particular for support or resistance. If enough people believe in those methods, then those methods will be influential on the stock market. If there are a lot of stock market traders who use TA thinks that CCL will find support at $10, they'll submit buy orders at $10 and then the moment that CCL drops to $10, traders activate their buy orders creating a floor. Large buy orders will indicate demand and CCL's price doesn't drop below $10. Again - a self fulfilling prophecy.

All stock prices are affected by several factors. With FA, you can identify a good stock that can survive recessions and any difficulties so that once the economy picks up again, they'll be back into a growing, profitable business again. TA is good as a general guildline to trade with but does not help in identifying which stock to buy and hold for the long term.

TA is superficial. If there's enough traders around using TA, then the stock price will behave roughly in line with expectations.

Basic technical analysis in action:

Technical analysis is also known as charting. Why? Because you use a bunch of charts and statistics to draw conclusions and trend directions for stock price.

Chartists use such measures as: Simple/exponential/weighted moving averages, Bollinger bands, volume analysis, stochastics, MACD, prices from open/high/low/close, line charts, candle charts, percentage change etc

You can have a perfect TA trading technique that makes you money regularly but if suddenly September 911 happened again and the stock market crashes - does that mean TA is rubbish? No.

TA is a rough guide, no matter what chartists' insist. Remember, share prices are not insular. They react to the entire market and if you just pay attention to your charts in performing TA without paying attention to the stockmarket (nationally and internationally) as a whole along with the general mood/behaviour of the population then you'll never know what hit you when your technical analysis fails.

Following on with the CCL example:

I've got a screenshot of CCL and drew in some rough support and resistance lines. This has some classic TA evident on the graph. This graph here demonstrates that chartists are around. CCL was $10.67 at its lowest point in June. In December, as the CCL stock price dropped, there would have been a bunch of buyers with buy orders to be excuted when CCL price reaches $10.67 or thereabouts. This creates a floor for CCL, meaning that in future, provided CCL doesn't get banned from sellling their drinks in China or India or where ever, then if CCL drops down again due to general market bearish behaviour, it's likely that once again, there will be a bunch of buyers waiting to buy around $10.67 again.

I've drawn in four resistance lines. They're all suppose to be green but I was too lazy to fix it up. For technical traders, they get twitchy when the stock price approaches any price resistance levels so they set their "sell" order at or just before those price resistance levels.

The current price is $11.80 If you bought today, provided there aren't any dramatic worldwide events or CCL didn't get banned from selling Coke in China, you would be looking at the following scenarios based on TA:

i) Buy at $11.80
ii) Market is bearish, potential loss is $11.80- $10.67 (floor price) per unit
iii) Market is bullish, potential sell order can be placed anywhere near any of the top three green resistance lines. Although the middle two green resistance lines have been reached a lot more frequently so as a TA, you would likely place a sell order close to those prices.
iv)CCL shares however has been generally trending sideways over the past 12 months. They're a blue chip stock though and if you're expecting capital gains like the ones investors got from Apple, VM Ware and Google then you're better off looking for a chart with good FA and an upward trajectory.

Along with those simplistic TA conclusions, TA will also look at volume and various other charts to analyse market demand. I personally prefer to start off all investments or trades with FA and then use TA, particularly the candlestick charts with the high/low/open/close prices on them or the simple line chart above. I also like to look at the 365 day price list with open/high/low/close prices. For intraday trades, buy and sell volumes are really useful. Although the biggest determinant of stock price movement is the general enconomy and the population's expectations.

The stock market reacts to future positive or negative expectations. All the FA and TA in the world won't predict the stock prices accurately which is why all the large investment banks, trading firms and hedge funds have economists to try and predict the general behaviour of the country. Or else they have contacts inside government organisations so that they know whether the Federal Reserves' Ben Bernanke or the RBA's Glen Steven will be raising or decreasing interest rates. Changing interest rates change consumer behaviours and as a result, that changes consumers' discretionary spending and this is what ultimately affects companies' bottom line, which affects their profits/expenses and ratios in the future and thus, their share price.



A question from one of the comments on that blog:

There is no one in the world who can perfectly predict how the stockmarket will react unless they're Barack Obama or Ben Bernanke for example (only because they control monetary policy which wields a lot of power and influence). Anyway, this is what someone wrote:

I have spoke (sic:spoken) to many people that claim they are millionaires from the stock market without disclosing how they did it. If you have made millions from the stock market please share your tactics here. What stocks would you recommend, what investment company (e-trade)? Do not answer if you haven't made millions in the stock market!

*The traders or investors who made millions from trading the stockmarket probably had just as much capital to start off with.
*Typically the millionaires from trading are the hedge funds and traders working for the investment banks, not the small investors who started off with $20,000 or whatever
*To amass capital gains of a few millions from just a few thousand dollars would mean trading frequently and as such, impossible to simply just "share" without including pages and pages of buy/sell history
*Why would millionaire traders "disclose" their entire strategy to you for free? What would they gain from you?
*They could recommend a great stock for you to buy today but that will be valid for today and today's environment. If you bought that 'great' stock today and then next week, Obama states that unemployment in the US has gone up to 15% and the sharemarket crash - who will you blame for the advice?? Will you tell them that it was poor advice?

In the long run, I've worked out that a simple buy and hold strategy works just as well as trading, if not better! Because of the 50% CGT tax deductions from holding a stock beyond 12 months and also holding the stock through interim and annual dividend periods means that I also get franking credits (although these are only applicable in Australia - I mention this because there are a several readers from America on this blog and I don't want to mislead you).

Related posts to stockmarket investing:
* Calculating break even for stock investing or trading
* Stock investing fundamentals and a slice of my portfolio
* Quiz to determine your risk profile
* Breakdown of my retirement asset
* Picking low hanging fruits first

What is break even analysis? How you can use the concept in analysing share trades

What does "break even" mean?

For a company -> When total revenue or sales equals total expenses

In general -> When you haven't made a profit and you haven't made a loss

If you haven't got any overheads, fixed costs or transactional costs then break even is very simple - if you sell the item at whatever it cost you to buy that item in the first place then that's considered as breaking even. If you sell the item at a price more than what it cost you then that's a profit.

Once you have overheads, fixed or transactional costs, then it gets a bit more complex to calculate the price that you need to sell your items or goods at to break even and not incur losses.

Examples to illustrate

1) If you buy an iphone for $800 and then sell it to someone else for $900, then you've made a profit of $100. To break even, you need to sell the iphone for at least $800

2) What if you rented a market stall for $30, bought the iphone for $800? Then you need to sell the iphone for at least $830 to breakeven

3) What if you rented a market stall for $30, bought 45 iphones at $800 each then what is your break even? You would need to sell the iphones for at least $800.67 each to break even. The maths: [(45* $800)+30]/45 = $800.67 per unit to break even. If you can sell the iphones at a price greater than $800.67 then you'll be making a profit.

It's so simple, not widely understood but yet so relevant in all applications - whether you run a business, whether you invest or trade in stocks or anything that involves buying and selling to earn a profit.

How do I apply the concept of break even in share trading as a practical scenario?

To buy or sell my stocks, it costs me $19.95 each time. So if I were trading in stocks, it would cost me $39.90 (the maths: $19.95*2=$39.90) to buy and sell. $39.90 is what I consider my fixed costs and what I use to calculate for my break even analysis.

Break even formula for trading stocks:

Break even price to sell each stock at = (quantity bought * buy price per unit) + total buy and sell costs

                                                                 quantity bought

Example 1:

i) I buy 2000 units of Coca Cola Amatil Ltd (ASX:CCL) at $11.83/unit = $23,660

ii) My transactional costs to buy and sell is $19.95 each way, therefore a total of $39.90

iii) Calculating my break even costs:

($23,660+$39.90)/2000 = $11.85/unit

iv) Therefore I MUST sell my CCL stocks for at least $11.85/unit to break even.

If I sell for anything greater than $11.85/unit then I've made a profit, which is known as capital gains.

Although if you're going to engage in trading stocks, then you also need to work out the opportunity costs and weigh whether trading gains will exceed the other uses of your funds - this concept however will not be explored in this post because it deserves a post of its own.

Before I invest or trade in any stocks, I ALWAYS use the above calculation to see what potential profits or returns are there. With fixed transaction costs, such as $39.90 used in the example above, then the more stocks you buy, the lower your break even costs. Let me illustrate using the above example to compare. This next example will see me buying 1000 CCL stocks instead of 2000 CCL stocks.

Example 2:

i) I buy 1000 units of Coca Cola Amatil Ltd (ASX:CCL) at $11.83/unit = $11,830

ii) My transactional costs to buy and sell is $19.95 each way, therefore a total of $39.90

iii) Calculating my break even costs: ($11,830+$39.90)/1000 = $11.87/unit

iv) Therefore I MUST sell my CCL stocks for at least $11.87/unit to break even.

Comparing the above two examples with the only variable being the quantity of stock purchased:

i) Assuming buy and sell costs are the same at $19.95 each way, and $39.90 in total

ii) In example 1, if I  bought 2000 stocks @ $11.83/unit, break even would require me to sell my stocks at $11.85/unit

iii) In example 2, if I bought 1000 stocks @ $11.83/unit, break even would require me to sell my stocks at $11.87/unit

In example 1, it only requires an upward price movement of 2 cents/unit to break even whereas if I bought less as illustrated in example 2, then I would need an upward price movement of 4 cents/unit to breakeven.

You would need larger price volatility if your transaction costs is flat but you buy a smaller quantity of stock for trading. Larger price volatility always implies larger risks.

For those keen on the maths behind the typical break even analysis (screenshot from Wikipedia):

Using the official BE formula:

X =  TFC

     (P - V)

Where X= unit sales, TFC= total fixed costs, P=unit sale price, V=unit variable costs

Using the numbers from my example 2, from above: X=1000 units, TFC=$39.90 to buy and sell, P=unknown unit sell price, V=$11.83/unit of CCL stocks

Because our CCL (Coca Cola share price) break even sell price (P) is unknown the formula becomes:

i) 1000=   $39.90

             (P-$11.83)

ii) 1000(P-$11.83) = $39.90

iii) (P-$11.83) = $39.90

                          1000

iv) P = $39.90  + $11.83

            1000

v) P = 0.399 + $11.83

vi) P = $11.87 to break even

The break even analysis applied in a business context:

The break even formula or concept is commonly applied in a business context, although it can be used in any situation that requires you to work out the point at which you incur no loss. Let's apply this break even formula to the iphone example from above, where P is the break even price that you need to sell each iphone at:

i) X =  TFC

         (P - V)

ii) 45 iphones = $30 market stall rental

                       (P - $800 cost per unit)

iii) P =       $30         + $800

            45 iphones

iv) Break even selling price per iphone would have to be $800.67 minimum

Thefore you must sell each iphone @ $800.67 each minimum if you want to break even, and more than that price if you want to make a profit.

Anyway, you can also apply that same concept to any of your investment calculations.

Peform monthly or fortnightly financial health checks for optimum results

Everyone should perform a financial health check at least once a month, if not fortnightly.

The benefits are vast:

1) You can see what bills need to be paid, what you've paid, tally up any expenses if you track them and update accounting or financial management software if you use them
2) If you have a budget then you can see how your actual income and expenditure measures up against your budgeted ones
3) If you've got savings in high interest accounts, in term deposits or whatever, then you can have a quick hunt around to see if there are better rates on offer, negotiate for them with your existent bank or set up new accounts and transfer your funds into them
4) You can check to see if you've been meeting your liabilities and have been making payments against outstanding debts
5) If you've got funds in transactional accounts not earning any interest, then move them into a high interest account
6) If you've got debts or bills to pay, you can figure out how you're going to allocate your income to pay them, instead of waiting until the due date comes around and then panicking about how to pay them

Recently I just performed mine. It involves doing the following:

1) Checking the interest rates on my online saving accounts and ensuring that I'm receiving a competitive rate on my savings
2) Pay my bills, check for future bills that may be forthcoming, check my expenditure for the month, compare with previous month and if I can be bothered, compare with last years
3) Recurring bills such as insurances, checking to see other offers out there and requesting or changing to something more competitive if I can't get a better deal
3) Finding out the balance of my superannuation retirement funds, the balance of my HECS student debt, checking the market value of my portfolio of stocks (although the iphone Bloomberg app is fantastic for this - it will automatically update the prices whenever I'm on the WiFi)
4) Check the social events that are coming up and the gifts that I have to buy (birthdays, baby showers, special events) or give (most wedding gifts require money to be given as gift since most couples are already living together)

The results of my recent financial health check:

1) (good) Savings account were good, all up for 2011
2) (good) Interest and dividend incomes were good, also all up for 2011
3) (good) Stock portfolio was good (capital gains), up for 2011
4) (good) Superannuation retirement fund was good, also up for 2011
5) (good) Expenses for Jan/Feb 2011 was down from Jan/Feb 2010, which is good
6) (good) Investment loan liability balance for Feb 2011 is down from Feb 2010, which is good
7) (stable) My HECS student debt is pretty flat, have been contemplating making another lump sum payment in April. I had the plan to make an additional lump sum payment in April off my HECS / HELP debt to drop the balance to 30% (ie have 70% paid off)
8) (good) Net wealth balance is up comparing Feb 2010 versus Feb 2011, which is good

No Euro trip for 2011, bummer:

Unfortunately the Euro trip will have to be for 2012 instead. It turns out, I barely have any annual leave days left after burning through so many days in 2010. So as a result, the 2011 savings/funds will be utilised in four possible ways:

1) Lending some to my friend to buy the replacement car since it was my fault that we were in that region when the guy wrote off the car and the insurance payout is insufficient for buying a replacement
2) Spending some on a snow trip somewhere, either Australia or New Zealand
3) Buying the investment property or
4) Doing nothing and buying some(all) toys on my wish list

Note on Jan/Feb 2010 vs Jan/Feb 2011 - I had a lot of one off expenditures in Jan/Feb 2010 which I didn't fortunately have to incur for Jan/Feb 2011. Expenditures such as passport renewal, prepaying for tickets etc for our trip to Japan and Hong Kong, medical expenses. I got really gouged by medical expenses last year to the tune of $3,314 and wrote two post on medical bills:
* Navigating our health insurance
* Poor health can send you broke

Celtic Tigers losing their economic growl

It's become a worrying trend. Members of the EU are collapsing one by one. Ireland, also known as the Celtic Tigers because of their economic growth in the 90s, is another nation struggling for survival in today's global environment. The Irish were diving into property speculation, much like the British, Americans and us Australians. We've all been guilty of speculating in property and creating property bubbles.

As the Irish became more heavily leveraged in early 2000, housing and construction dominated the economy and almost 13% of the entire workforce was employed by the building and construction industry. Housing can be massive source of economic growth because there are so many associated industries that benefits. From real estate agents, banks, mortgage brokers, solicitors, government taxes and stamp duties to furniture, plumbing, electricians, housing whitegoods, department stores and associated retail stores as homeowners furnish their properties.

Proposed spending cuts by the Irish Government
* 10 billion euros worth of spending cuts
* 5 billion euros worth of taxes to be raised
* cutting minimum wage by 12%
* cut welfare payments by 3 billion euros
* cut 25,000 public servant jobs

Liz O'Hagan, an Australian working in Ireland was quoted saying,

Click on image to zoom in.

The vultures (ie: investors) sure are fast. With the crisis that Ireland has been mired in, buyers of bonds (investors financing the Irish government) have been quick to demand higher yields as compensation for the increased risk. According to Shawn Pogatchnik at Apnews.myway.com, the yield(interest rate) on 10-year Irish notes had increased to 8.18 percent. As it gets more expensive for the Irish government to finance their deficits, it also gets more expensive for private companies wishing to borrow to fund business because of the sovereign risk.

"I sit here every day, taking calls, reading emails and fielding inquiries from people from all walks of life who are getting ready to get out of Ireland...they've lost a job or a family member has lost a job or they're about to lose their position and simply can't afford to live off their income anymore."

The Irish Government are poor at budgeting and saving for hard times
Professor Ferriter has studied Ireland and its history. She is quote in the SMH saying,

"There is the sad recognition that so much was squandered, that when you take the scale of the success of the Celtic Tiger and the scale of commercial activity then...there is such a feeling of regret that excess was not controlled and regulated. There were such opportunities for long-lasting security, now lost."

Times are hard in Ireland, with unemployment rates at 13%.

Future of Ireland
* Their banks need to recapitalise- the government is trying to rescue them but needs borrowed money to do this
* The Irish Government needs to borrow approximately 100 billion euros, which will increase their sovereign debt
* The funding may be coming from the European financial stability mechanism (A fund guaranteed by EU members)
* Funding from the IMF (this usually has strings attached)
* Other loans

Foreign exposure to Ireland by bank nationality @ 31st March 2010Total foreign bank exposure(including derivatives and other credit) is 583 billion euros and this consists of the following nation's financial involvement:
* 155 billion euros - Britain
* 143 billion euros - Germany
* 79 billion euros- US
* 64 billion euros- misc Euro nations
* 60 billion euros- France
* 39 billion euros- Rest of the world
* 20 billion euros- Italy
* 16 billion euros- Japan
* 11 billion euros- Spain

Some shocking statistics

Stock investing fundamentals and a slice of my portfolio

Getting excited about Agribusiness and Agriculture

It was interesting to read about fertiliser in the SMH Money back in October. It's always interesting to read about anything that covers my stocks and their industry. And yes, I have stocks in Incitec Pivot (ASX:IPL). They are Australia's largest supplier/manufacturer/producer of fertiliser. I bought the stocks at two separate intervals as you can see on my childish chart :)

There are a few emerging fields that have been of interest to me on the investment landscape. Uranium and nuclear energy, agriculture and agribusiness stocks. Just a warning that I'm not a purely ethical investor and my stocks may not necessarily be ethical stocks.

Food and water is something that is going to be a global issue. Fresh water supplies around the world are running low, if they're not polluted in the first place. Our inconsistent weather, droughts, cyclones and floods are damaging food crops. Arable farm land are being directed from food production into growing corn, sugar cane, manioc and potatoes to produce ethanol and fuel. The problem is that those farmlands were previously producing food for human consumption and instead they are now producing ethanol for fuel consumption.

The remaining arable land needs to be more productive and pushed to produce as much as they can. Hence, this is where fertiliser plays a role. Fertiliser can ruin rivers, dams and waterways but without fertiliser, land must be left to regenerate or else consecutive crops will deteriorate more and more. So by using fertiliser, farmers won't have to wait for natural land regeneration and they can plant their crops back to back on that same piece of land.

Wisdom from Australia's largest mining company

The world's biggest mining company BHP - an Australian company. Probably our one and only claim to having the world's biggest company in a singular industry. They provided some notes in their investor briefing:

• Increasing demand for food
• Decreasing arable land per capita
• Shift to higher- protein diets (my note on this - particularly the Chinese population and their changing diets)
• Need for more balanced fertilisation to maximise yields

Both BHP and Rio Tinto have expressed an interest in moving into the Potash busines. Potash is a key ingredient in the production of fertiliser. If you have the world's largest and second largest mining company directing their interest towards a field, it's worth having a look to see what their analysts and forecasters have been researching.

As an active investor (constantly buying and selling), if you see large companies starting to look at acquiring companies, your next move is to look for the companies that are prime takeover targets. Ideally find a good company to buy stocks in so that even if the company is never taken over, they are still great investments. If you're an investor, look for good, quality companies that you can happily hold for 3-5 years or longer.

What type of features should you look for?

These are some features that you should look out for. It's not an exhaustive list because this would have to be a text book to be an exhaustive list. But they are the main features that I personally use myself before investing in any particular stock.

Even if you start off with a great stock, the trading environment changes and you can find yourself with a dud stock. That's why you need to be investing in a handful of stocks and not just putting all your entire savings into a single stock or fund. If it was easy to get rich from trading or investing in stocks, almost everybody would be rich, however, this isn't the case.

• One that has growing revenues and Earnings per Share(EPS) growth - eg: increased sales, innovation, new products and developments, expansion into different markets or international markets, acquisition of competitors that will provide cost savings and economies of scale
• Check to ensure the PE ratios aren't too low(no potential) and aren't too high(overpriced) compared to their industry PE ratios
  
• Check who are on the board of directors and management - steer away from companies where directors/managers have been previously involved with bankrupt and insolvent companies
  
• Check to see their dividend payout ratio - beware of a company that has a high dividend payout ratio, they may not beable to sustain the dividends and this may artificially inflate yields
  
• Check to see if they have any franking credits - this means the company has already paid tax on their dividends and if your tax rate is 30% or less, you will receive a refund or the credits will reduce your tax payable
  
• Check to see if they have any contingent liabilities on the horizon - eg: a looming court case
• Check their financial statements, financial ratios, analyst commentary, recent and historical news articles and mentions of them in the press
  
• Check the cash flow and their cash holdings - be wary of companies with a lot of revolving debts and the ones requiring massive financing and loans that will require refinancing in this environment

If you're new to the game and you don't understand any of the above, it's probably best that you find a low cost ETF or Index Fund to plonk your money into. If you wish to dabble your toes into investing directly, open up an account with a broker (if you need human interaction) or an online trading account (if you're tech/net saavy) - and start off by buying a blue chip stock.

What are Blue Chip Stocks?

Good old trustworthy companies, with good trading history and stable revenues behind them. I've given a few examples below to start off with.

Blue Chip American Stocks: Apple, Coca Cola, Caterpillar, Google, Microsoft to name a few
Blue Chip Aussie Stocks: The big four banks (CBA/NAB/ANZ/WBC), the large mining stocks (BHP, RIO TINTO), the large retails stocks Woolworths (WOW), Coles and Wesfarmers etc

It's always unnerving to buy that first stock. When I got some free stocks from work, it was exciting but not as exciting as buying my first set of stocks. I remember when I bought my first few stocks, my heart was pounding ridiculously that it's pretty laughable to think about it now :) Once you own at least a stock in one company, you will find your knowledge and awareness increasing, watching out for the stock in the news, earning anouncements, price volatility and you will find your learning curve increasing exponentially in regards to stock investing.

You don't need to be a guru to start investing. Take that baby step of buying one stock to start you off on your learning curve. The younger you are, the more it will benefit you to learn as knowledge is rather powerful when acquired at a younger age. It means that you have many more years than someone older than you, to apply your knowledge and invest in an investment that will compound. I have my long term holdings on a DRP (dividend reinvestment plan) and they just keep growing and compounding every year.