The secrets of loss-proof investing

It is interesting how our concept of what is safe changes.

During a stock market top, everyone thinks they can tolerate huge allocations to stocks and see no problem being invested 100 per cent in equity.

After the crash, their tolerance for stocks is much, much lower. A lot of what we distinguish as being safe is really situational.

After equity falls, a lot of people think gold is safe. It becomes the latest sector fad, and yet gold is extremely volatile.

It's a very concentrated sector and although it is a fact that it has done well recently, that does not mean that it's safe.

How, then, does one go about investing safely? In creating your safe investment portfolio, consider using a mix of the following investments. The allocation to each area is determined by your overall financial plan.

Government securities (Treasury bills) have a very low risk in terms of losing principal.

They are wonderful for shorter-term goals and liquidity.

Virtually any type of investor could use these for shorter-term goals or to satisfy the need to have some funds that are safe and liquid.

Bank deposits are very low risk in terms of preserving principal. They are low cost and straightforward to buy.

Bank FDs can have a place for most people in terms of meeting shorter-term goals or the need to have some very safe investments.

If we only concentrate on the risk of losing principal, bank FDs, savings accounts, and treasury bills score very well, but these investments all score high on the risk of losing purchasing power.

If you put your money in an FD or in a savings account, you will receive interest periodically.

But, when you take the money out, keep in mind that chances are the money is not going to buy as much.

Bonds can be a great for dampening volatility.

Most investors will benefit from holding short to intermediate term, high quality bonds or bond funds in a portfolio.

But if you're looking for protection of purchasing power, then bonds do a very poor job.

If you buy a bond for Rs. 10,000 and it pays 5 percent a year in interest, you get Rs 500 annually each year until it matures.

But every year that Rs 500 buys less and, when you receive your Rs. 0,000 at maturity, the proceeds will buy less.

So even though you feel good because you invested Rs 10,000 and you got back Rs 10,000, you have actually lost money in terms of real rupees.

With all fixed income investment, you are a lender.

Your deal is made when you purchase the FD, bond, or fixed annuity.

The government entity or company uses your funds and promises to pay you as defined in the agreement, contract, or indenture.

It doesn't matter how well the county or the corporation or the bank or the insurance company does (as long as they stay solvent).

Your return is governed by the terms of your investment agreement.

With stocks, on the other hand, you are an owner and, therefore, assume the risks and benefits of ownership. There are no guarantees.

You must be willing to take on the uncertainty of principal fluctuation to obtain the generally better long-term returns provided by equity investments.

Stocks are great for goals that are out five years or longer. In terms of principal risk, big companies actually have a high level of risk. Individual stocks have extreme volatility.

It's not unusual for what we consider to be blue-chip stocks to trade in a range that varies 50 per cent from high to low in a given period.

The range of fluctuation is very wide for these vehicles.

So, for goals that you must meet in a short or intermediate time frame, they are not appropriate.

However, a basket of blue chips does have a good record of generating gains and preserving purchasing power over time.

While you do take on the risk of principal fluctuation, you're protecting yourself against running out of money down the road.

Small and mid-cap stocks should also be included in the portfolio, operating in a somewhat different cycle than large company stocks.

Mutual funds offer the least volatile way to invest in this area.

In allocating the equity portion of the portfolio, distribute over large and small companies, over growth, core, and value companies, and over foreign and domestic companies.

In addition, real estate and natural resource funds may be included to provide asset classes with modest correlation to the general market.

Holding a single stock or just a few stocks is not an attractive investment strategy because of the huge potential volatility it carries.

When we invest in any stock, we take on market risk.

The big market moves are macro in nature and are forces over which we have no ability to prevail. Really great companies can also take huge hits in market value.

In holding a single stock, you not only take on market risk but the risks of that particular company as well.

You're bearing two levels of risk. The strategy of owning a handful of individual stocks is rarely appropriate.

Using mutual funds for all asset classes can be an excellent way to get effective diversification and minimize volatility.

Look for funds with low expenses, both in transaction costs and in annual operating costs.

In effect, stocks are the engine of a portfolio and bonds are the airbag.

Stocks ultimately drive the portfolio and provide potential for higher returns.

Bonds will never deliver stellar returns and only occasionally will achieve significant appreciation (when you buy bonds at the peak of high interest rates and hold them as rates fall).

However, bonds can provide a comfortable cushion - certainly the experience over the last couple of years.

The mix of stocks and bonds that is right for you depends on how far you have to go and how fast you need to get there.

Such a mix is the ultimate secret of loss-proof investing.

How momentum helps you trade profitably

Momentum indicators are the building blocks of a trading system as they help us firm up trading strategies and entry and exit points from a trade. Here, master trader Ashwani Gujral outlines how you can use to make money in trading.

The classical chart patterns of technical analysis help us in identifying ongoing trends, trend reversals, and consolidation phases of the market.

Once you develop your visual inspection skills, you can easily identify the major trends by seeing the price charts.

However, you will often find it difficult to identify the smaller trends in this manner.

Let's take the example of a car traveling at some speed.

As an observer, you can make out that the car is moving with speed using your visual faculty.

But if the car slows down, say to avoid a pot-hole or to negotiate a bump, you will not be able to see it slowing down until its speed is noticeably slower.

On the other hand, a passenger sitting inside the car will be able to feel the car slow down.

Thus, when you are watching from the outside you can notice just the speed of the car but can't feel it slowing down.

The person sitting inside the car, however, feels both the car's speed and also the car slowing down.

For you, it's akin to seeing the price pattern on charts but not the momentum; a passenger sitting inside the car sees both - the price pattern and momentum.

In technical analysis, momentum and rate of change (ROC) are two of the most commonly used terms.

They can be simply defined as technical indicators that show the difference between today's closing price and the close a certain number of days ago.

Momentum, thus, is simply the price difference (change) over a given time span.

How you can use momentum in conjunction with chart patterns

Momentum can be defined as the strength, or sustainability, of a market move as measured by both volume and price.

A most commonly used, though not a very well understood, word in the trading world, momentum is the velocity of a trend or a price move.

As a technical analyst, our first task is to determine the ongoing trend.

Once the trend is known, we should then be able to successfully trade the trend in order to make money. This is the first use of indicators.

Another use of indicators is to try and determine when the trend may change, based on watching a combination of volume, price, and other indicators.

Obviously, this cannot always be accurately achieved because the trend can change according to the mood of the market but being aware of market statistics, positions of other traders, or any other significant change in the markets is always of benefit.

Momentum can be measured with the help of many indicators, such as rate of change (ROC), relative strength indicator (RSI), stochastic, and moving average convergence divergence (MACD).

Interpretation of these momentum indicators is very important since all of them have some common characteristics but differ from one another in other aspects.

These indicators are typically plotted below the price chart and a first comparison can be made just by visual inspection.

It is always advisable to plot two or more indicators together in order to compare different momentum indicators on different time frames.

Different markets, different indicators

Momentum indicators can broadly be classified as:

• Trend following indicators, also known as lagging indicators, and
• Oscillators, also known as leading indicators.

Consolidating and trending markets are two different types of markets and require the use of different indicators:

• Trend following indicators, such as moving averages and MACD, are used in trending markets, whether up or down.
• They are also known as lagging indicators as they follow price movements and have lesser predictive ability.

Since lagging indicators tend to focus more on the trend, they therefore produce fewer buy and sell signals.

This allows traders to capture more of the trend and remain in the trend by riding the big moves in trending markets instead of being forced out of their positions based on the more volatile nature of leading indicators.

A consolidating market is a sideways moving market that generally moves in a defined range with no particular bias whether up or down.

Oscillators, such as stochastic and RSI, confirmed with overbought and oversold levels are best suited for such markets.

Oscillators go up and down - they oscillate and are used to measure the momentum of a market or stock.

These oscillators are also known as leading indicators as they typically move ahead of the price and have some predictive qualities.

They tell you ahead of time what might happen to prices. Oscillators are plotted within a bounded range and fluctuate into overbought and oversold conditions based on set levels for each particular oscillator.

Leading indicators create numerous buy and sell signals and are most suited for trading choppy (range bound) markets.

You should not use consolidating market oscillators in a trending market - or vice versa.

The choice of indicators to use should thus be made after assessing the nature of the market (up trend, down trend, or sideways), which you can do with the help of ADX.

You can also understand the difference between leading and lagging momentum indicators by considering the example of different Indian batsmen.

All our batsmen share one common attribute, i.e. each one has his own characteristics.

Of course, they all score runs (mostly!) but some take time to settle down (like VVS Laxman), while others start scoring the moment they reach the crease (like Sachin, Sehwag, Yuvraj, Dhoni and, occasionally, Ganguly), yet others build up their innings slowly and steadily (like Rahul Dravid), while some lag behind the others even more.

Sehwag and company can be clubbed in the leading indicator category while Dravid and others can be clubbed as lagging indicators.

There are some batsmen who are useful for the 20-20 format others are more suited for one-day cricket while yet others for test cricket.

"Leading" batsmen are useful for 20-20 and one-day cricket (sideways markets or non-trending trading ranges) where quick scoring is required, while "lagging" batsman are most useful in test cricket (trending markets) which requires a slow build up of the innings with persistence and perseverance.

And just as a higher number of runs overall are scored in test cricket, similarly most of the big money is made during trending markets.

Leading indicators are akin to a live telecast where you can see the action in real time, feel the pulse of the game, its emotion, and the crowd behavior while lagging indicators are like watching a repeat telecast after the game is over, i.e. the indicator equivalent of hindsight.

How momentum indicators provide profitable buy and sell signals

Indicators are used to develop buy and sell signals through:

• Crossovers,
• Oversold and overbought conditions, and
• Divergence.

A crossover is said to occur either when an indicator moves through an important level, or when one moving average crosses another moving average.

A crossover usually signals that the ongoing trend is shifting and this trend shift may lead to a certain movement in the price of the underlying stock or index as the case may be.

Divergence occurs when the direction of the price trend and the direction of an indicator's trend move in opposite directions.

This signals that the direction of the price trend may be weakening due to a change in the underlying momentum.

Momentum indicators are not used in isolation. Rather, they are used in conjunction with other tools of technical analysis, such as volume, chart patterns, candlesticks, etc.

Just as cricket requires teamwork -- it's only when a majority of the players play well (are in agreement) that Team India wins -- so, too, when a majority of the indicators are in agreement we can safely say that a trend has reversed, resumed, or is confirmed as the case may be.

As is well-known, trends can also be classified as short term (3-6 weeks), intermediate (6-40 weeks), and long term (usually more than a year).

Thus, they can be likened to 20-over, 50-over and test match cricket, respectively.

Just as fortunes can turn very quickly either way in a short 20-over cricket match, in the markets, short term trend reversals similarly take much less time than is the case with long term trend reversals.

How to read momentum indicators

Indicators, as the name implies, indicate. Any analysis of an indicator should be taken with the price action in mind.

What is the indicator saying about the price action of a security? Is the price action getting stronger? Or, weaker?

Momentum indicators are not infallible. Even though the buy and sell signals generated by the indicators may seem clear and obvious, such signals should be interpreted in confirmation with other technical analysis tools.

Momentum typically reverses along with the price - though the latter may do so with a small time lag.

It should not be taken for granted that just because oscillators have reversed, the price will also necessarily follow suit.

Just because Sachin Tendulkar has scored a century in a match does not mean that India will necessarily win the match. Others also have to pitch in to create a win.

Similarly, other technical tools should be used for confirming the signals given by indicators.

Momentum indicators, such as moving averages, MACD, RSI, and stochastic, are the building blocks of a trading system.

There is no single magic indicator; they all have their advantages and disadvantages.

It is important to be aware of both because we can then combine several indicators into a system to take advantage of their strengths, while their disadvantages cancel each other out.

Google opens e-book store in challenge to Amazon

In this screen shot the Google books website is shown

Google Inc. is making the leap from digital librarian to merchant in a challenge to Amazon.com Inc. and its Kindle electronic reader.

The long-awaited Internet book store, which opened Monday in the U.S., draws upon a portion of the 15 million printed books that Google has scanned into its computers during the past six years.

About 4,000 publishers, including CBS Corp.’s Simon & Schuster Inc., Random House Inc. and Pearson PLC’s Penguin Group, are also allowing Google to carry many of their recently released books in the new store.

Those publishing deals will ensure that most of the current best sellers are among the 3 million e-books initially available in Google’s store, said Amanda Edmonds, who oversaw the company’s partnerships. Millions more out-of-print titles will appear in Google’s store, called eBooks, if the company can gain federal court approval of a proposed class-action settlement with U.S. publishers and authors.

The $125 million settlement has been under review for more than two years. It faces stiff opposition from rivals, consumer watchdogs, academic experts, literary agents and even foreign governments, which worry that Google would get too much power to control prices in the still-nascent market for electronic books. Amazon.com, which started its business as a seller of books over the Internet, is among the competitors trying to squelch the settlement. The U.S. Justice Department has advised the judge overseeing the case that the settlement probably would violate antitrust and copyright laws.

Books bought from Google’s store can be read on any machine with a Web browser. There are also free applications that can be installed on Apple Inc.’s iPad and iPhone, as well as other devices powered by Google’s own mobile operating system, Android.

But Google’s eBooks can’t be loaded on to the Kindle.

Electronic books are expected to generate nearly $1 billion in U.S. sales this year and climb to $1.7 billion by 2012 as more people buy electronic readers and computer tablets such as the iPad, according to Forrester Research. The research group expects a total of 15 million e-readers and tablets to have been sold in the U.S. by the end of the year.

Google believes it’s already offering the broadest selection of digital titles in the world, and it plans to keep adding to the inventory if it can gain the necessary copyright clearances. The company, based in Mountain View, California, believes it eventually will be able to make electronic copies of the estimated 130 million books in the world. It’s also planning to start selling books outside the U.S. next year.

Google’s eBooks store, originally to be called Editions, has been in the works for more than a year. The company already had been showing books no longer protected under copyright in their entirety and displaying snippets of other titles through its widely used search engine.

The company is trying to position its new sales outlet as an ally to publishers, merchants and consumers looking for alternatives to Amazon’s electronic book store, which feeds Amazon’s hot-selling Kindle, but not other e-readers, including Barnes & Noble Inc.’s Nook.

Google’s e-books will work on the Nook, Sony Corp.’s Reader devices and practically every other e-reading device except the Kindle. Google achieves this with the help of Adobe Inc.’s copy-protection system for e-books. That system is already used by public libraries and smaller online bookstores, but hasn’t seen much interest from the major players. Amazon.com, Barnes & Noble and Apple all have their own copy-protection systems.

Google plans to offer sharp discounts on many of its e-books but it will still pay publishers 52 percent of the list price for sales made on its site, unless another arrangement has been negotiated with an outside agency. The formula means that even if Google elects to sell a book with a $10 list price for $6, the publisher would still be entitled to $5.20.

Forrester Research analyst James McQuivey described Google’s latest effort as a “game expander” rather than a game changer.

The growing embrace of digital sales by the publishing industry is expected to result in the closure of hundreds more book stores during the next few years, adding to a media mortuary of music and video merchants killed by electronic distribution.

Google’s announcement comes on the same day that activist investor William Ackman, who owns a 37 percent stake in Borders Group Inc., offered to finance a Borders-led takeover bid for rival bookseller Barnes & Noble Inc. If successful, it could ultimately lead to closures of overlapping stores.

In a move that could delay closures of other retailers, Google is allowing independent book stores to sell its inventory through their own sites. More than 100 book retailers in 36 states already have agreed to team up with Google. They include Powell’s in the Portland, Oregon, area and online-only merchant Alibris.com.

Opening the door to book merchants who can’t afford to invest heavily in technology could help some of them survive the digital transition, McQuivey said. “At least this gives them a fighting chance.”

Although Google expects the lion’s share of its eBooks revenue to be funneled to its partners, its portion of the sales could help the company develop another way to make money besides the Internet ads that bring most of its income. The availability of eBooks also could help boost advertising sales by giving people another reason to come to Google’s website.

Google shares edged up $5.36, or nearly 1 percent, to close Monday at $578.36.

To allay concerns that it will exploit the dominance of its Internet search engine to spur e-book sales on its own site, Google plans to include links to several other places where people can buy a book mentioned in a search request. And when visitors come to the book section on Google’s website, they will be asked if they are interested in buying or just doing general research.

World's 20 largest producers of cars

1. China: 13,790,994 units

China is the largest vehicle producer of the world.

In November 2009, China became the largest automobile market on earth. In 2009, China manufactured 13,790,994 units of various types of cars, including sedans, sport utility vehicles, multi-purpose vehicles, small cars, buses, trucks, etc.

Close to half of all the vehicles produced in China are by domestic companies like BYD, Geely, Chery, Roewe, Martin Motors, Lifan, etc.

The rest are produced by joint ventures that local firms have with foreign car companies like General Motors, Hyundai, Nissan, Volkswagen, Honda, Toyota, etc.

2. Japan: 7,934,516 units

The Japanese automotive industry is the second largest in the world. The nation produced 7,934,516 units of automobiles in 2009.

However, the country was the world's leading car maker till China overtook it in 2009.

Japan is home to auto giants like Suzuki, Toyota, Honda, Nissan, Mazda, Mitsubishi, Subaru, Isuzu, Kawasaki, etc.

3. United States: 5,711,823 units

In 2009, 5,711,823 automobiles were manufactured in the United States of America, making it the world's third largest car producer, behind China and Japan.

America's automobile production is dominated by General Motors, Chrysler and Ford Motor, collectively called the Big Three.

The largest foreign car makers in the United States market are Toyota and Honda.

4. Germany: 5,209,857 units

Germany, with a 2009 car production of 5,209,857 units, is the world's fourth largest car maker.

Home to great car firms like Mercedes Benz, Daimler, and BMW, German cars have for long blazed a trail when it comes to quality and build of cars. The extraordinary German auto engineering prowess has wowed the entire world and continues to be the darling of car enthusiasts globally.

5. South Korea: 3,512,916 units

With a production volume of 3,512,916 units in 2009, the automobile industry of South Korea is the fifth largest in the world.

Home to Hyundai, Kia and other auto makers, South Korea produces some of the best cars in the world.

6. Brazil: 3,182,617 units

Brazil is the world's 6th largest producers of cars. It produced 3,182,617 cars in 2009.

Car majors like Toyota, GM, Ford, Fiat, Mercedes Benz et cetera began to produce cars in Brazil a long time ago. This has led to foreign companies grabbing the lion's share in the Brazilian auto market, with only Brazilian auto maker Troller making some name for itself.

7. India: 2,632,694 units

With an annual production of about 2,632,694 cars in 2009, India is now the seventh largest vehicle producing nation in the world. It is a milestone the country achieved six years ahead of the set target.

The Indian automobile sector is also one of the fastest growing markets globally. India aims to become the small car hub of the world by dethroning Japan, the biggest maker of compact cars, a majority of which is consumed domestically.

Last year, India pipped Brazil to become the second-largest producer of small cars.

India also aims to be among the top five vehicle producers by 2020.

According to Wikipedia, India was home to 40 million passenger vehicles by the end of 2009, with auto sales of over 1.5 million cars. This rapid pace of growth has made India the world's second fastest growing automobile market.

India is projected to have the largest number of cars in the world -- 611 million to be precise -- by 2050. According to the third BRIC (Brazil, Russia, India, China) report by investment banking firm Goldman Sachs.

8. Spain: 2,170,078 units

Spain is the world's 8th largest producer of automobiles. In 2009, it produced 2,170,078 cars, accounting for almost 4 per cent of the nation's GDP.

The auto sector in Spain also provides employment to over 9 per cent of the working population, according to Wikipedia.

Some of the Spanish car makers include Abadal, Authi Car Company, Barreiros, Biscuter, Elizalde, Empresa Nacional de Autocamiones S.A., Eucort, Hispano-Suiza, etc. Apart from these, most other top global brands too have a big market in the country.

9. France: 2,049,762 units

France produced 2,049,762 cars in 2009. It is the world's 9th largest car maker.

France's car market is dominated by domestic brands like Renault, Peugeot and Citroen which account for over 60 per cent of the total automobile sales in the country.

France, however, does not have the variety in terms of number of manufacturers like other European nations like German or Spain.

10. Mexico: 1,557,290 units

Mexico, with a production of 1,557,290 cars in 2009, is the 10th largest car maker in the world.

Mexico, a huge car market, has been an attractive investment destination for many global car companies, including BMW, Volkswagen, Chrysler, Fiat, Ford, GM, Jaguar Land Rover, Peugeot Renault, Nissan, Suzuki, Toyota, Honda, Volvo, etc.

11. Canada: 1,489,651 units

Canada, with an annual car production of close to a million and a half, is the world's 11th largest automobile maker. In 2009, it produced 1,489,651 cars.

Till a few years ago, Canada was the 7th largest maker of cars, but the extraordinary rise of the automobile market in India, Brazil, etc, has seen the country cede ground to the emerging markets.

12. Iran: 1,395,421 units

In Iran, after oil and gas, the automobile industry is the most vibrant. Iran is the world's 12th largest producer of cars. In 2009, it manufactured 1,395,421 units of cars.

The country has many car firms, namely Iran Khodro, Saipa, Bahman Group, Kerman Motors, Kish Khodro, Raniran, Traktorsazi, Shahab Khodro, etc.

13. The United Kingdom: 1,090,139 units

The United Kingdom is the 13th largest automobile producer in the world. Predominantly export-oriented, the British automotive sector employs close to a million people.

In 2009, the country produced 1,090,139 cars.

The biggest car makers in Britain include Land Rover, MINI, Nissan, Toyota and Honda.

14. Czech Republic:  974,569 units

The Czech Republic, with an automobile production of almost a million units in 2009, is the 14th largest car maker in the world. In 2009, it produced 974,569 automobiles.

Some of Czech Republic's car majors are household names, like Skoda, Daewoo Avia, and Tatra. Praga is another Czech brand that is quite popular. Apart from these, the nation has Ford, Volkswagen, Renault, Hyundai, Kia, Fiat, Toyota, BMW, Chevrolet, Tatra, Volvo, Audi, etc all vying for the market.

15. Thailand: 968,305 units

Thailand produced 968,305 cars in the year 2009. That feat makes it the world's 15th largest manufacturer of cars.

16. Poland: 879,186 units

The automotive industry in Poland produced 879,186 cars in 2009 making it the world's 16th largest car maker.

Poland is also among the world's top nations offering the best localisation conditions for automotive components makers. The country's skilled labour, low costs, etc attract many a foreign investor to this sector.

Car majors like: Toyota, Isuzu, Volkswagen, MAN, Volvo, General Motors, Fiat, etc have a big base in Poland.

The country is a huge manufacturer of auto components that are used by Mercedes, Nissan, Porsche, Citroen, Honda, Peugeot, Volvo, BMW, Rolls-Royce, Lamborghini and Ferrari, etc.

17. Turkey: 869,605 units

Turkey is home to many a global car major like Fiat, GM, etc.

The country, with a 2009 automobile production of 869,605 cars, is now the world's 17th largest car maker.

18. Italy: 843,239 units

Italy, one of the global powerhouses of automobiles, is actually the world's 18th largest producer of cars.

It is home to legendary auto companies like Fiat, Alfa Romeo, Maserati, Ferrari, Lamborghini, etc.

In the year 2009, Italy produced 843,239 cars.

19. Russia: 722,431 units

In 2009, Russia produced 722,431 cars, making it the world's 19th largest producer of automobiles.

However, Russia's home grown car companies like Avtovaz, Gaz, Lada Kalina, Pobeda, Kamaz, ZIL, etc are under huge pressure from foreign carmakers.

Foreign cars now sell more in Russia than domestic brands do.

20. Belgium: 522,810 units

Belgium produced 522,810 automobiles in 2009, making it the world's 20th largest maker of cars.

Belgium's car sales have seen a steady rise over the last few months. Having first been buffeted by the recessionary winds, the Belgian market, like that in France, Italy and Spain, has shown encouraging signs of robust growth.