New Video: E5. Introduction to Monetary Policy

We have uploaded a new video - the video provides a brief introduction to monetary policy - one of the main elements of economic policy.

New Video: E4. Economic Policy

Economic policy is an important factor that relates primarily to governments and central banks and their initiatives to affect growth, inflation, employment etc. This video introduces the subject, and introduces monetary and fiscal policy - two key elements of economic policy.

New Video: E3. Inflation

Inflation is not a complicated topic - this video briefly highlights what it is and why it is considered important to keep under control.

New Video: V8D. Earnings Yield

We have uploaded a new video that rounds out the valuation series entitled Earnings Yield. The earnings yield is often referred to in the context of comparing the valuation of stocks and bonds.

Valuation is probably not the most exciting topic on the saving and investing channel - and also to some extent affected by arguments in favour of market efficiency - nonetheless it is worth knowing what the terms refer to.

Best regards - Michael

New Video: V8. What is Yield?

We have uploaded a new video introducing the concept of yield which is so often spoken about. We hope you like it.

Learning about the Treasury

When it comes to knowledge, always better to go to the source - as far as the Treasury goes, they have a part of their site dedicated just to this.

http://www.treas.gov/education

and a section for kids.

http://www.treas.gov/education

Clearly they have expended some effort to set this up - very interesting - and straight from the source!

Government spending is the key to tax costs

There is a very interesting article this weekend in Barron's magazine (subscriber or purchase at newsstand) on tax cuts entitled 'When Is a Tax Cut Really a Tax Hike? Usually' by Gene Epstein which highlights how tax cuts are not really tax cuts if they are accompanied by a rise in inflation-adjusted spending (which is what we currently have) - that spending will have to be recaptured by the government at some point through higher taxes. In other words, although tax cuts at first glance might be popular, the ultimate tax burden might be rising at the same time because of the more fundamental driver: spending. Makes sense - but so important to bear in mind especially with populist tax cuts that can be proposed at a time when the US governments budget situation is poor - and spending is the real item to watch.

The Trickle-Down Effect

As the housing crisis becomes more pervasive in the US and UK, unfortunately it trickles through a large part of the economy. The banks have taken a big hit in their sub-prime investments, which in some cases have meant significant layoffs and certainly lower compensation. As homeowner equity declines, equity refinancing and desire to spend both decline affecting consumption. For homeowners that have high leverage, in some cases bankruptcy is the only option, meaning that it will take a while for their spending to come back - for those that decide to hang on and try to continue to make the mortgage payments, spending on other things declines. Less house purchases and less moving is bad for home retailers (as is less spending). These are some of the reasons why this might take a while as the overall issue trickles down through other parts of the economy.

UK: How to Beat the Credit Crunch

We thought you may be interested to know that TaxCafe has just published a brand new tax guide called How to Beat the Credit Crunch, by Toby Hone.

This new guide is packed with practical ideas and tips to help you survive and make money during the Credit Crunch. To learn more click on title of post or use link below.

www.taxcafebooks.co.uk/product.php?prodid=cru&id=11195

Overview

This unique new guide is packed with practical ideas and tips to help you survive and make money during the Credit Crunch.

Itís essential reading for ALL property investors and landlords.

The advice and strategies contained in this timely publication will help you drastically increase your rental income, slash your expenses and turn your property portfolio into a well-oiled cash generating machine!

The author also reveals his secrets for making lucrative new investments in the current climate.

What Information is Contained in the Guide

The guide contains numerous real-life examples from the authorís extensive experience in buying, selling, renovating, developing and managing a big portfolio of investment properties.

Subjects covered include:

Creative ways to boost your rental income by over 50%.
How to overcome the mortgage drought and find the best deals.
18 practical ways to slash ALL your property expenses.
...some of these tips will save you £100s, others will save you £1,000s!
How to tap into the fastest growing rental market with the highest rental yields.
6 ways you can seriously improve the health of your property portfolio.
How to protect yourself from rising interest rates.
How to improve your credit record and keep it squeaky clean.
The biggest threats to your property portfolio NOW and how to handle them.
Ways to boost your emergency cash reserves and shield yourself from the Credit Crunch.
How to virtually eliminate losses through effective deposit management.
How to avoid giving away up to 32% of your rental income without even knowing it.
Practical ways to eliminate void periods completely.
Ways to rent out problem properties quickly.
The outlook for the UK property market and a comparison with the US mark
The 1990s crash... will it be as bad this time round?
A detailed look at the benefits and drawbacks of selling property now.
How to source property at a 25% discount.
Innovative money-making strategies that work in the current climate.
... including buying below market value properties and
... creating potential goldmines within your portfolio.

About the Author

The Author of How to Beat the Credit Crunch is Toby Hone. Toby Hone is a professional property investor. Over the last 10 years he has built a portfolio of 30 properties worth around £3 million. He is also an active property developer, specializing in sourcing below market value properties, as well as properties requiring refurbishment and also development projects, and adding value to them using various techniques revealed in this book.

Realistic Expectations

There was a story on Barron's website last Friday by Randall Forsyth entitled 'Finance Has Become The Business of America' which was very interesting and thought provoking. An illustration of this would be that the financial sector as a percentage of the broad stock market indices has been rising over multiple decades. Furthermore, clearly the economy has been moving from a product and manufacturing one to a services (including financial services) one. That is a real risk of course when financial markets turn sour - and it makes a case for making sure that markets are functioning - sometimes at a high cost.

For us as savers and investors, what is important to remember is that saving and investing is a complement to working and making money (and not a replacement) - as ultimately it should provide a means of setting aside money, perhaps and ideally even tax free, and letting it grow. It is not about getting rich quickly in most cases - and taking on too much risk with this short-term goal in mind, as opposed to the facts about saving and investing definitely a bad idea with potentially very bad consequences, as market corrections like the one in housing right now can demonstrate.

38. Getting Started

If you have gone through the videos here, read the book and really delved into the subject and you understand risk, time horizon - what is sure and what is total gambling, and you have a long-term view and understand how investing works - then prudently beginning is the next step.

37. Transaction Costs

One of the things that can damage our returns is transaction costs - a brief video on this subject.

36. Following the Crowd and the Role of Expectations

Blindly following the crowd can lead to some of the worst investment decisions - something everyone is expecting in the future is also often already reflected today.
Often one can read headlines like 'this market is expected to rise strongly for the coming year' or 'this stock will perform strongly'. If everyone, or a very large percentage of the market participants expect the same thing, then often all of the future expectation is already priced in today.
Smart investors spend a lot of time trying to figure out things that might not be expected or priced in - that is also a reason why financial literacy and therefore not having to believe everything you hear are so important.

35. Diversification - savingandinvesting.com

Diversification - or not putting all your eggs in one basket - has a solid foundation in math. In fact there are some really good reasons to always bear them in mind.

34. Two Generic Types of Pension Plans

There have been some horror stories regarding pension plans - but not all pension plans are alike. Newer pension plans are typically significantly different in their approach than the older ones.

33. First Principles of Taxation

Saving and investing is incentivised in most western countries through tax benefits. Governments want to collect taxes to provide the services that they provide - but they also provide tax benefits for saving and investing because it is considered beneficial for individuals and society as a whole.

32. Taxes and Compounding - savingandinvesting.com

Compounding is one of the key forces when it comes to any saving and investing plan - but the reality is that paying, or not paying taxes, has a huge impact on what we compound to. And often we can save the taxes because governments want us to save for when we retire, or for when our incomes are low

31. Timing Investments and Dollar Cost Averaging

Timing investments is not straightforward, and there are ways of making the process pretty efficient.

30. The Impact of Time

The nature of the stock market means that our time horizon makes a big difference in determining which investments are more suitable.

29. Hedge Funds 5: Prime Brokers

Prime brokers perform a very important role in the hedge fund industry by providing much of the infrastructure backbone that allows hedge funds to hold securities, employ leverage and even by assisting in raising assets.

28. Hedge Funds 4: Funds of (Hedge) Funds

Because of the risk associated with investing in any single hedge fund - to diversify and lower volatility, a number of hedge funds are often combined into what is known as a fund of funds or fund of hedge funds.

*** New Video: V7C: The Risk-Free Rate

The rate used to discount future cash flows is based on the risk-free rate plus a premium for the risk of those particular cash flows. In effect, the risk-free rate is the lowest return, or the lowest rate of interest, that investors would be willing to accept (for a riskless investment).

This video goes into what the risk-free rate is and what benchmarks might be used to establish its value.

27. Hedge Funds 3: Different Strategies

Hedge Funds use many different strategies to make money although broadly speaking they are often put into 3 main categories. This video details the categories and what the means are.

26. Hedge Funds 2: What is Short-Selling?

Short-selling is often spoken about, particularly in the context of hedge funds - this brief video explains what this is.

25. Hedge Funds 1: What is a Hedge Fund?

An introductory summary of hedge funds. There is a lot more on this in the book because it is easier to convey in a written format than on tape - also at more info at savingandinvesting.com.

24. Index Funds and ETFs

Passively managed funds are index funds - funds that aim to hold securities in exactly the proportion that they are held in within an index and that typically have significantly lower fees that actively managed funds. These products offer market exposure at lower cost - so do ETFs.

22. Mutual Funds 3: Active and Passive Management

The terms active and passive management are often used when discussing mutual funds - what do the terms actually mean and what have some people concluded.

21. Mutual Funds 2: Types of Mutual Funds

There are many types of mutual funds - here is a summary of some and why they can exist.

20. Mutual Funds 1: What is a Mutual Fund?

Mutual Funds explained in simple terms.

19. Why do Financial Markets Exist?

Financial markets exist for a very important reason - one that has been around for a very long time. This is explained very simply.

*** 29. Prime Brokers

Prime brokers perform a very important role in the hedge fund industry by providing much of the infrastructure backbone that allows hedge funds to hold securities, employ leverage and even by assisting in raising assets.

*** New Video: V7B: Discounting

A number of the valuation methods refer to discounting - discounting cash flows - discounting dividends. This video looks at what discounting is - and how to some extent it is the inverse of compounding.

17. Who issues Bonds?

Equity - or public equity in the form of stocks is issued by companies. Not only companies can borrow - and not only companies can borrow through securitised debt.

16. Private Equity, IPO, Public Equity

Equity can either be private or public and these terms are often used in the press. In the transition from the former to the latter there is typically an IPO. Public equity is also known as stocks or shares.

15. The Capital Structure of a Company

This video highlights what is spoken about when we talk about the capital structure of a company - effectively the structure of that company's financing, which is very tied to the right side of that company's balance sheet - for the book values, as well as the market values of the items on the right side of the balance sheet.

14. What is a Bond?

Bonds are pieces of debt of companies or governments and this brief video details further what a bond is.

Everyone should know what a stock and a bond are - this video gives a quick intro to that. What stocks and bonds are has a lot to do with how providers of capital interact with users of capital (through equity (which includes stocks for many large companies)) and debt (which includes bonds for many large users of capital).

*** New Video: V4. The EV/EBITDA Ratio

In order to address some of the shortcoming of the P/E Ratio - or at a minimum, try to provide additional information, another ratio that is very commonly used used is the EV/EBITDA ratio. Like the P/E ratio, this ratio uses one year of data and tries to establish a relationship between the value of the company and some measure of profitability. In order to adjust for the fact the earnings are influenced by interest cost, tax charges, depreciation and amortization - none of of which is directly linked to the operations of the company, this ratio compares this to the Enterprise Value of the company, which is the Market Capitalization (the market value of the equity (P x number of shares)) plus the net debt (debt - cash).

This measure therefore compares a broader measure of the company's value - one which includes net debt which an acquirer would have to assume, and compares it to EBITDA - a measure of the operating earnings of the company, thereby neutralizing the effect of varying interest levels between companies and depreciation policies. The EBITDA measure is not perfect, but clearly one can argue that it 'cleans' the earnings to provide a number that is more reflective of the operating performance of the company.

The drawback that it only looks at one year's worth of data remains.

13. What is a Stock?

Everyone should know what a stock and a bond are - this video gives a quick intro to that. What stocks and bonds are has a lot to do with how providers of capital interact with users of capital (through equity (which includes stocks for many large companies) and debt (which includes bonds for many large users of capital).

12. Links between the Financial Statements

Each of the three financial statements captures different aspects of a companies financial situation - about operations as a going concern (Income Statement), about actual cash flows - also going beyond Operations to include Investing and Financing (Cash Flow Statement) and the assets and liabilities of the company (Balance Sheet).

Therefore it only makes sense that some links exist between all the three statements - income and cash flows for example, income over a year that is not paid out as dividends and change in assets etc.

Having an appreciation of these links is a clear indication that conceptually the 3 financial statement have become clear.

*** New Video: 15. The Capital Structure of a Company

This video highlights what is spoken about when we talk about the capital structure of a company - effectively the structure of that company's financing, which is very tied to the right side of that company's balance sheet - for the book values, as well as the market values of the items on the right side of the balance sheet.

11. The Cash Flow Statement

The cash flow statement is typcally the 3rd of the 3 financial statements found in an Annual Report. This video provides an overview.

10. What is a Balance Sheet

The Balance Sheet is one of the 3 main financial statements for companies, and it captures the assets, the equity and the debt at a certain point in time - like the end of the year. And it balances.

*** New Video: V2C. The P/E to Growth Ratio

One of the shortcomings of the P/E ration is that it does not reflect the fact that some companies have higher P/Es than others (in particular in the year that might be being looked at) than another, but might also have higher earnings growth. With higher earnings growth, a company with a high P/E on next year's earnings might have a much lower P/E on a future year's earnings given that the 'E' would have grown to be much higher then.

In order to incorporate, normalize and adjust for differences in earnings growth, the P/E to growth ratio is often used.

It adds information and is another commonly used ratio - it does not address all of the shortcomings of using P/Es.

9. What is an Income Statement

There are 3 main account statements for companies - the income statement, the balance sheet and the cash flow statement. This video in on the first of these - the income statement.

** New Video: 12. Links between the Financial Statements

We are happy to announce a new video, focusing on the following:

Each of the three financial statements captures different aspects of a companies financial situation - about operations as a going concern (Income Statement), about actual cash flows - also going beyond Operations to include Investing and Financing (Cash Flow Statement) and the assets and liabilities of the company (Balance Sheet).

Therefore it only makes sense that some links exist between all the three statements - income and cash flows for example, income over a year that is not paid out as dividends and change in assets etc.

8. Debt Consolidation - savingandinvesting.com

Some of the principles behind consolidating your debt explained in a simple manner - in general, consolidating debt is something one should consider as a tweak to lower interest payments. Racking up huge debts on credit cards or in general as a percentage of one's net wort is a terrible idea right from the start.

7. High Credit Card Interest Rates

There are reasons which make credit card interest rates so high. High credit card interest rates make having this kind of debt a bad idea especially if we let it compound to buy things that quickly lose their value.

6. Borrowing Money

A brief simple video on why certain interest rates are higher (for example credit card rates) and others that have collateral against them lower.

5. Principles of Leverage - savingandinvesting.com

A follow on from 'What is Leverage?' looking at some of the principles surrounding leverage.

4. What is Leverage? - savingandinvesting.com

Leverage explained in very simple terms - what it is and how it works.

3. Providers and Users of Capital: Equity and Debt

There a 2 main ways for providers and users of capital to interact - this video provides more information on this.

2. Providers and Users of Capital

It is the interaction between providers and users of capital that forms the basis of our financial system. It is that which allows our money to grow and for companies and governments to have access...

1. Compounding

This is the first video in the series - very important.

An introduction to what has been called the 8th wonder of the world - compounding. The principle that allows small sums to grow to large sums over time.

I7. 5 Popular Misconceptions Part 2

There are many misconceptions around saving and investing, and even how difficult it is (or is not). Here are some (Part 2).

I6. 5 Popular Misconceptions Part 1

Saving and investing seems to have more than its deserved share of negative connotations. That might be because of a few popular misconceptions - here are 5 that I think are out there and fairly significant.

I5. Starting with the Right Thing - savingandinvesting.com

When we start to think about saving and investing, the best place to start is with knowledge - certainly better to start with knowledge than to start by making decisions.

I4. Why the Subject is so Important!

Getting back to the series - after the announcement of an additional video (6. Borrowing Money) - this is the fourth of the introductory videos.

Best Regards,

Michael

6. Borrowing Money

A new video has been added on the Saving and Investing channel regarding borrowing money.

Best Regards,

Michael

I3. My Background

Some introductory information on my background and why this material is so important and I felt strongly about communicating some of this information.

SavingandInvesting.com

This month we are going to run a video a day on the savingandinvesting blog in a logical series because some of the newer ones actually fill in additional detail and give context to the earlier ones.

This is the second video (logically) in the series.

1. Introduction - by savingandinvesting.com

This is the first of two introductory videos - it was one of the first ones recorded and def. a bit different hopefully than the rest - nonetheless it gives an idea as to what this whole thing is supposed to be about. Thanks for watching.

New Video: V6: The Discounted Cash Flow (DCF) Method

In order to value an overall company, perhaps the single most rigorous method, is to look at all of the cash flows - over the life of the company and discounting them back to a value for these cash flows today. One can either look at the cash flows to the overall company (and subtract the value of the debt on the balance sheet to arrive at a value for the equity of the company), or one can start by looking at the cash flows to equityholders.

This method is rigorous in that it aims to capture a lot of information about the company, far into the future. These cash flows are inherently very difficult to predict, and also, they then need to be discounted at an appropiate discount rate which reflects their risk.

New Video: V5: The Dividend Discount Model (DDM)

As long as we hold a stock, the only cash flow that we receive is the dividend, that the company pays out of it earnings/net income (the remainder is retained earnings). This method of valuing stocks looks at the value of the stock as the value of the cash flows that we can expect to receive as dividends. Some companies don't pay dividends and one can has to make significant assumptions about dividends into the future (which clearly have a big impact on the calculated result) - so like all of the methods, it is not always applicable and certainly not without assumptions and disadvantages - but it does take mean looking and thinking about the real expected cash flows and is certainly a method often used and often spoken about.

New Video: V4. The P/Book Ratio

In this fourth video on valuation, the P/Book ratio is discussed. Like all of the valuation methods, it has advantages and limitations - and perhaps more importantly, times when it might be relevant and times when less so - more for companies that have tangible book values that can be determined and where the assets are more tangible and relevant to the companies productive capacity ultimately, less so for companies where the book value does not capture value such as goodwill or a brand that might also not be reflected in the balance sheet.

New Video: V3: The Price/Sales Ratio

Early stage companies often do not have earnings, or have negative earnings or they have earnings that at changing so much that they are not considered a useful measure. Furthermore, earnings can be affected by depreciation policy or even one-off extraordinary expenses or gains that might depress or inflate earnings.

In all of the above situations, the Price to Sales Ratio might be a more useful, or complemenetary valuation tool. The characteristics of the P/Sales ratio are discussed in this video.

New Video: V2. The P/E Ratio

The first valuation method is detailed in this video - the P/E ratio. Often referred to and spoken about - it is certainly worth knowing what this valuation method involves - in terms of both advantages and disadvantages.

New Video: V1B. Remarks on Valuation

Given the arguments for market efficiency, a few more remarks on valuation are worth making - particularly in light of the fact that valuation is important to understand, but not something that can be used to gain an extraordinary return if market efficiency arguments hold true.

New Video: Introduction to Valuation

This is the first in a series of videos that will discuss some of the most popular valuation methods that are often referred to.
The aim of this series is to highlight what the valuation methods involve - given arguments for market efficiency, the value of individual investors actually relying on publicly available information to make individual stock decisions is questionable - nonetheless knowing what the valuation methods involve and some of their characteristics and drawbacks is clearly useful.

New Video: Introduction to Diversification

Diversification is one of the most important concepts of saving and investing - it clearly has a lot to do with not putting all of one's eggs into one basket. In this introductory video on diversification, what diversification means and some important considerations are introduced.

New Video: Following the Crowd and the Role of Expectations

Blindly following the crowd can lead to some of the worst investment decisions - something everyone is expecting in the future is also often already reflected today.

Smart investors spend a lot of time trying to figure out things that might not be expected or priced in - that is also a reason why financial literacy and therefore not having to believe everything one hears is so important.

Often one can read headlines like 'this market is expected to rise strongly for the coming year' or 'this stock will perform strongly'. If everyone, or a very large percentage of the market participants, expect the same thing, then often that future expectation is already priced in today.

New Video on the Economy and how it can impact Earnings dramatically.

When the economy slows, company revenues often slow correspondingly. With costs that might be more or less fixed in the near term (approximation) the impact on earnings can be very dramatic as illustrated via a simple example. Basically a small percentage decline in revenues can lead to a major decline in earnings.

New Video on Earnings at the Saving and Investing Channel on YouTube

Earnings can be one input into the valuation of a company, but as a standalone indicator, and when used for example in a P/E ratio, this can lead to conclusions that are not that solid. This is partly because earnings are an accounting result, but also because they can be very volatile - particularly if revenues and/or costs change quickly.

New Videos at the Saving and Investing Channel on YouTube

Seven new videos have been uploaded and are available on the Saving and Investing Channel on YouTube. They fill-in against some of the other material that has been available for some time and discuss some pretty straight-forward concepts. The video subject titles are:

- Private Equity, IPO, Public Equity
- Who issues Bonds?
- Market Efficiency
- Index Funds and ETFs
- Hedge Funds 4: Fund of (Hedge) Funds
- First Principles of Taxation
- Two Generic Types of Pension Plans

Best Regards,

Michael