finance
The Ultimate Guide to 2010 Investment Predicitons and Outlooks
I have recently come across this guide which I find to be very useful as TPC has compiled a comprehensive list. They have included reports from analysts, gurus, hedge fund managers, and investors. Enjoy at your own risk.
Wall Street Banks
Hedge Funds & Investment Gurus
Actionable Ideas, Alternative Assets & Potential Potholes
The Outlook Abroad
You can find more information about TPC here.
Religion is about Risk
Before I begin, I would like to make it clear that I am not trying to be controversial by discussing a sensitive subject such as religion. I want to share with you my findings in my quest to understand risk and more importantly, how to manage it effectively.
It was 1:57 am. I was desperately trying to find a means to put my thoughts to rest. After all, it was late and I needed to either sleep or be productive. I chose to immerse myself in my search and found it to be ironic that religion found it’s way into the equation.
It all started on June 19, 1623 in one of France’s oldest cities Clermont-Ferrand, when baby Blaise Pascal was brought into this world. Pascal was a child prodigy and is a celebrated mathematician, physicist, and religious philosopher. [1] He was also the first to develop the idea probability and more importantly Pascal’s Gambit, which is the area of this topic’s focus.
Peter Bernstein describes Pascal’s Gambit very eloquently by saying:
Pascal spent half his time leading an unsavory life and half the time being very ascetic. In the end, he came to the conclusion that he must give up the sinful life and retire to a monastery. While in the monastery, he asked himself the following question: ‘‘God is, or God is not?’’ He said that reason cannot answer this question—an important statement to come from a mathematician. He said belief in God is not a decision. I cannot wake up one day and say, ‘‘Today I will believe in God,’’ or ‘‘Today I will not believe in God.’’ It does not work like that. The answer to Pascal’s question comes from within, but you can decide how you will live your life. You can act as though there is a God, or you can act as though there is not a God. This is your choice. If you act as though there is a God, you lead a life of virtue. If you die and you find out that there is no God, well, you gave up a few things but you lived a good life. Look at it from the other point of view. Suppose you act as though there is not a God and lead a life of sin and lust, and then you die and discover there is a God; you are in big trouble. Thus, Pascal argued that the better bet, the better wager, is to behave as though there is a God. So, in many instances, the consequences of decisions must outweigh the probabilities. Even outcomes with small probabilities may have big consequences. [2]
What does this all mean in trying to understand risk?
- It is those events that have low probabilistic outcomes but catastrophic consequences that cripple companies [Credit Crisis]
- We should always be reminded of these risks and formulate our investment thesis accordingly and if possible hedge or mitigate these risks
- Believing in a GOD is the better wager.
Sources
[1] Wikipedia
[2] Peter L. Bernstein. Risk: The Hottest Four-Letter Word in Finance. The CFA Institute Risk Symposium. New York City. 22–23 February 2006.
The Rule of 72
There are many lessons to be learned in this world. Some of them taught in classrooms, others in life. The best ones are those that carry substance yet are simple to understand. One of the most useful lessons I have learned is what is known as The Rule of 72. It is a simple and effective way to easily understand some of the financial jargon many salesman like to throw around these days. It is also a great way to break down what seems to be complex financial calculations into understandable math.
The Rule of 72 is a mechanism of measuring how many years or return per year [%] it would take to double an investment. I will illustrate with a few examples.
Using Number of Years:
Initial investment: KD 100
Investment Horizon: 10 Years
Annual rate of return [ROR]: Unknown
In this case you are presented with an investment whereby you have been told that the investment would require KD 100 and you would leave the investment for 10 years without touching it.
What would be the annual rate of return needed in order to double the initial investment to KD 200 by the end of 10 years?
Simply divide 72 by the number of years to get the answer: 72/10 years = 7.2% annual ROR. That means that if the investment returned greater than 7.2% on an annual basis you would expect to double your initial investment of KD 100 earlier than 10 years.
Using Rate of Return:
Initial Investment: KD 100
Investment Horizon: Unknown
Annual Rate of Return: 20%
In this example we assume that you are able to achieve an annualized return of 20% on your initial investment. The Rule of 72 will enable you to quickly calculate how many years it would take for the investment to double. Please note that the annual rate of return is also interchangeable with the IRR [Internal Rate of Return] that many salesmen in finance like to throw around.
How many years would it take to double the initial investment of KD 100 if the 20% IRR is maintained?
Again, we take 72 and divide it by 20% [do not use decimals] to get the answer. Therefore, it would be 72/20 = 3.6 Years. In other words it would take 3 years and approximately 7 months to end up with KD 200.
To my knowledge 72 is the only number that possesses this magical financial prowess. It is a rule that has served me well in my finance career. I urge you to embrace it and I guarantee your financial world will be that much simpler.