(faceme)

It’s tempting to study and learn more about bull markets – the how’s and why’s of booming investment success. The investor’s goal of course is to implement what he learns into his own portfolio. Until recently, however, far less attention has been paid to bear markets. The recession has inspired more people to look for the lessons behind the wreckage, perhaps to better fortify themselves against future downturns. So today, we will turn our attention to 10 lessons any consumer or investor can absorb from the current and maddeningly long bear market.

Take the Predictions of Journalists With a Grain of Salt

By this point, most everyone has seen the confrontation between Daily Show host Jon Stewart and disgraced Mad Money host Jim Cramer. For those who have not, suffice it to say that Stewart took Cramer to task for brazenly encouraging viewers to keep sinking their 401ks and savings into questionable Wall Street investments in the years prior to the recession. Cramer is hardly the only guru at fault, though. While it’s hard to top the insanity of telling us to leave our money in Bear Stearns as late as March 2008, plenty of other TV personalities have been shown to be less than prophetic about the financial future. Ask yourself whether the media (whose quest for ratings often contradicts your quest for sound returns) is best suited to shape your investment decisions before assuming their advice is infallibly correct.

What Goes up Must Come Down

(pinksherbet)

Business and the stock market are cyclical. They always have been and likely always will be. Unfortunately, there is an all-too-human tendency to read permanency into events, such as concluding that a booming market will continue to boom and perhaps boom even more. This attitude played a large role in the subprime mess, as Harvard MBA John T. Reed discusses in his penetrating article on the financial meltdown:

“They [subprime borrowers] were speculating that homes would continue to go up in value and they would get rich from the appreciation as a result—all before the foreclosure happened.”

Reed demonstrates many sub-prime borrowers knew full well that they could not afford their homes under normal market conditions, but nevertheless “gambled” that housing prices would keep rising and let them cash out before anyone was the wiser. Even in perfectly honest cases, it is easy for investors to assume a certain stock (or the whole market) will keep going up, and keep plowing money in. Don’t fall victim to this mindset. Speculate if you must, but realize that what goes up must always come down.

Separate “Play Money” From Core Investments

(roblee)

Another sensible bit of advice involves separating “play money” – money you speculatively invest into stocks you hope will pan out – from core investments such as those expected to fund your retirement or kid’s college education. There is nothing wrong with speculative investing as such. Many investors fondly recall stories of stock market gambles that paid off. The problem occurs when speculation (those which many sub-prime borrowers engaged in) overlaps with serious life goals like home ownership, and thus leave them stranded when their gamble turns out to be a bust. By limiting such investing to only discretionary money, you will be insulating yourself somewhat from the fallout of bear markets.

Inspect Your Investments Before Automating Them

(joebeone)

Today’s investors live in the age of automation – index funds, mutual funds, and other investment vehicles that operate more or less on autopilot from the start. This is fine as far as it goes, but every investor needs to do some inspecting before pushing the automate button. A Dallas News story reports on various index and mutual funds that were “down 50 percent to 60 percent before the bear released his grip.” While the individual investor is powerless to prevent entire market downturns, they can at least ensure that their own investments form an appropriate match for the market they are investing in. The same Dallas News piece advises, “…nimble small- to mid-cap funds, which generally lead a recovery” for investors in today’s – and presumably any – recession.

An Old, Conservative Investment Fund is Not Immune to Losses

(epicharmus)

Wall Street is desperate to spread the notion that investors cannot go wrong if they invest in old, conservative, broad-based index or mutual funds. “You come out alright unless the entire market tanks” is the typical defense of these investment vehicles. But sometimes the entire market does crash, as it has been doing since late 2008. When this happens, index funds and mutual funds that are pegged to the performance of an entire stock market can and do suffer losses – sometimes substantial losses. If you have a long time horizon – that is, if you are young – you can afford to sit tight while your holdings in these funds rebound. But if not, simply being invested in an index fund does not immunize you from stock market losses. They are just as real as if you had recklessly dumped every penny you own into one losing stock.

It’s Not Over ‘Till it’s Over

(laffy4k)

Recessions happen for a reason. One explanation, as discussed earlier, is the cyclical nature of stock markets. This recession was arguably caused by too much borrowing, too much credit and not enough discretion regarding who was being lent money. High unemployment and lagging stock prices are symptoms of that, not the cause itself. It took years (and in some cases decades) of wrong decisions mounting up to produce the painful problems we are now experiencing. For this reason, it makes little sense to expect rapid recovery – either in making our own investment decisions, or in evaluating the promises of political leaders or journalists. As the old saying goes, it’s not over ’till it’s over. No one can “stimulate” the economy in any enduring sense without the underlying problems being resolved.

It’s About Earnings, Not The Stock Price

(yomanimus)

Most people lack the time or inclination to do a lot of research into companies they invest in. This is what makes index funds and mutual funds a good idea for these people. Warren Buffet takes a different approach, as a Motley Fool article discusses. Rather than focusing on the quick, easy read on company performance – the stock price – Buffet focuses on the business itself and its earnings.

“That’s why he didn’t sell Coca-Cola (NYSE: KO) even though the share price flat-lined for more than two years in the early 1990s, just a few years after he bought it in 1988. But while the stock stalled, net income and free cash flow continued to climb. Only belatedly did the market realize what the business was doing, and the stock soared some 300% before sputtering again in 1998. Just staying with that business has led to a 600% gain overall for him, even including the recent fall.”

Many companies with perfectly healthy cash flow and profits saw their stock prices fall last year based on little more than fear and paranoia. Buffet’s advice to bear market investors is to ignore these emotions in favor of cold data on the company’s true viability.

A Bad Overall Economy Does Not Mean All Investments Are Losers

(epicharmus)

Politicians and journalists tend to discuss recessions in broad, sweeping, general terms. The notion most people come away from these sources with is that bear markets mean the whole economy is in shambles. The correct approach is to think more about the specific circumstances facing specific companies or industries. Motley Fool offers the following as an example:

“..if you’re interested in a miner, look to see that it can extract the metal out of the ground more cheaply than its competitors by controlling costs, is not unduly leveraged, and can make a profit over a reasonable range of metal prices.”

Assuming these criteria are met, it is unlikely that “the economy being bad” will doom this investment to failure. Always remember that “the economy” or “the market” is nothing more than individuals and institutions interacting with one another. It is not not an independent mechanism of its own.

Invest According to Your Time Horizon

(dominicspics)

In light of the constant negativity discussed above, it is tempting to unload poorly performing investments regardless of your own situation. However, this is not always best. The advice to “cut your losses” might apply to a sixty year old man with five or six years remaining until he needs to liquidate his investments to retire. But is it appropriate for a 25 year old who has at least forty years of investing time left? In this case, it might be best to simply let your index fund or mutual fund rebound, as history suggests it will given such a long time frame. The point is to be mindful of your time horizon when making investment decisions in a bear market, rather than cutting your losses in knee-jerk fashion.

Bad News Comes in Bunches

(basykes)

The market is rarely caught completely by surprise. Behind every collapse, one usually finds a trickle of of bad news, followed by still worse news until the trickle became the tsunami that plunged on the Dow Jones. This is true even within specific companies, some of whom are so big as to trigger a market-wide downturn when they fail. The Times UK illustrates this principle in its timeline charting the fall of Bear Stearns. Following the timeline reveals bad news emanating from the company going back as far as mid-2007, in the form of diminishing profits and questionable loans to bail out hedge funds hit by the housing bust. Indeed, some investors apparently did forsee trouble at Bear Stearns, but were not in the majority. The point is that bad news often foreshadows bad things still to come, so be careful.

Tim Brauhn

Diamonds are one of the world’s most sought-after natural resources. Used to signify wedding vows, fuel guerrilla revolutions and awe all in their presence, diamonds have been cherished and esteemed by mankind for centuries. It’s not surprising then to learn that diamonds have been competitively traded on the world market for centuries. How then did this most lucrative of business’s actually begin?

Early Diamond Trade

Most historians now believe organized trade of diamonds dates back about 1,000 years, to India, which possessed the entire world’s known supply until early in the eighteenth century. Traditionally, diamonds would be transported across Arabia and traded to Jewish merchants, who, in turn, resold the diamonds in major European cities of the time such as Frankfurt and Venice. As the amount of diamonds in circulation increased, these precious gems came to be used as collateral for loans and payment for high-value items.

India’s diamond supply was largely exhausted by the early eighteenth century, however, moving the diamond trade to Brazil until 1725, and then later to Southern Africa in the early nineteenth century. Early diamond trading followed the same general course; with sellers inhabiting a given area until supplies ran out, causing miners and speculators to move on to greener pastures. All the while, the demand for and value of diamonds continually increased.

The Prominence of Jewish Families in Diamond Trading

Celeste H

The diamond market was never truly decentralized in the way a typical commodity market is (and in fact, the significant variations in diamond grade and quality mean that they are not, technically, a commodity.) Rather, the prominence of Jewish merchants in the sale and transportation of diamonds placed the market under control of an informal network of Jewish families that sprung up during the 1800’s. The numerous jewelers and diamond trading firms were typically linked by family relation, forming a bond so tight that for centuries, diamonds were almost entirely a Jewish business. Presently, the city of Antwerp, Belgium is known as the ‘World’s Diamond Capital’, and the diamond trade is largely dominated by the city’s large Hasidic Jewish population — as it has been since around World War II.

The Rise of De Beers

Joe Beone

The diamond industry witnessed a marked change in the later part of the nineteenth century, when entrepreneur (and southern African politician) Cecil Rhodes started De Beers. Rhodes was the mastermind of what became a monopoly of diamond mining and sales. He first laid the groundwork for De Beers’ dominance during the southern African diamond rush of 1871, by renting out water pumps to the influx of miners in South Africa. Rather than simply harvesting the profits from this lucrative venture, Rhodes systematically plowed them into shrewd acquisitions of small mining operations in the area, consolidating them under De Beers Consolidated Mines in 1888 according to New York University. A short year later, Rhodes owned and controlled all mining operations in South Africa, placing him in firm command of the market. This enabled De Beers to cut a lucrative deal with London’s Diamond Syndicate obligating the latter to buy fixed quantities of diamonds at set prices, according to Edward Jay Epstein’s Rise and Fall of Diamonds .

Prospering through several trade slumps and competitive threats, De Beers continued expanding its cartel under Rhodes’ leadership, culminating in its biggest competitor (Cullinan Mines) folding into De Beers control during World War 1. De Beers was estimated to have controlled a staggering 90% of the world’s diamond production by the time of Rhodes’ 1902 death. While De Beers only controls about 40%-50% of that market today, they still, in effect, control the prices of rough diamond paid by world consumers.

Diamond Production and Marketing Today

Benketaro

The largest producer of diamonds today is the South African nation of Botswana, where De Beers harvests and markets diamonds as part of a joint venture with the government of that country. Operating under the name Debswana, the company was formed in 1969 and unearths diamonds from four mines: Orapa (opened in 1971), Letlhakane (opened in 1975), Jwaneng (opened in 1982), and Damtshaa (opened in 2002.) All mining activity takes place through the Debswana joint venture, as no private mining exists in the country. Some 30 million carrats, or 6,000 kg, are exported from Botswana each year, representing a quarter of the world’s total annual diamond production.

Today’s diamond market is also divided into two main segments. One is the gemstone segment, encompassing diamond rings, necklaces, stones, and other precious jewelery. Roughly 80% of these diamonds are cut in Antwerp. The other major aspect of today’s diamond market is the industrial grade sub-industry — consisting of diamonds cut for heat conduction, electricity insulation, semiconductors, drill tips, saw blades, and similar uses. It has been estimated that 80% of mined diamonds, being unsuited for use as gemstones, eventually become used in industrial applications such as these, according to USGS’s “Industrial Diamonds Statistics & Information” report.

Biggest Diamond Consumers

Swamibu

The world’s largest diamond consumer is the United States, accounting for 35% of world diamond sales. Following the US is Hong Kong with 26%. Belgium clocks in at 15%, while Japan buys 6% of all diamonds and Israel 4%. It is worth noting, however, that the seemingly low percentages for Antwerp and Israel are misleading in that they fail to reflect diamonds that pass through those countries in worldwide trade. Today’s diamond market remains concentrated in the hands of a few major players, and looks to remain so for the foreseeable future.

Controversy

Wikimedia Commons

The diamond industry is not without its share of controversy, however. The most severe issue is that of ‘blood diamonds’. As the name suggests, blood diamonds are those harvested (often by forced labor) amongst conflict, and used to finance further conflict including, civil warring, and insurgencies. In most situations, violence enacted on those harvesting diamonds and surrounding civilian populations is particularly violent – as conflicting groups attack the civilian base of it’s opposition – this was especially the case during the Sierra Leone Civil War, during which this phenomenon first came to the attention of Western, diamond-importing countries. As such, the name is a derivation of the old phrase, “there’s blood on one’s hands”. Other nations in which blood diamonds are known to have been harvested include: Angola, Liberia, The Republic of the Congo, The Democratic Republic of the Congo, Côte d’Ivoire, and Zimbabwe. While legislation has been introduced in order to curb the distribution of blood diamonds, most notably with the Kimberly Process Certification Scheme (2003), these are self-governing and have had limited success.

]]> http://www.mint.com/blog/investing/the-history-of-the-diamond-trade/feed/ 8 http://www.mint.com/blog/investing/investing-in-gold-without-getting-scammed/ http://www.mint.com/blog/investing/investing-in-gold-without-getting-scammed/#comments Mon, 31 Aug 2009 23:23:32 +0000 Ana Gonzalez Ribeiro http://www.mint.com/blog/?p=5425 ]]>

Photo: EssG

Investing in gold and other precious metals is one of the best ways to maintain your footing in an otherwise unstable economy. But while gold, silver, platinum (and their lesser known cousins ruthenium, rhodium, palladium, osmium, and iridium) have maintained their status as solid investments, you need to be wary of unscrupulous dealers and the many scams they perpetrate on unsuspecting investors.

What glitter isn’t always gold

Scams include anything from selling gold plated jewelry to polished hunks of metal that are made to look like gold bars. Selling bullion ETF’s and making customers believe they are buying real gold or silver when in fact this is not the case is another scam. Some companies are not even legally registered to sell precious metals. Last year, the Iowa Insurance Division (IID) issued a cease and desist order against a NJ based company called National Bullion Investors, LLC. The company was not legally registered and the investor who bought from them lost $5000. IID also took action against a Florida based company called Barron Trading Group for similar reasons.

If you are buying precious metals in the form of commodity futures or option contracts, the United States Commodity Futures Trading Commission (CFTC) recommends investors be careful of companies selling these financial instruments with promises of big gains and little or no risk attached. This is considered misrepresentation by the offending company and requires legal action. Companies selling these and other varieties of metal investments reach prospective investors through radio, television, newspaper ads or websites. Some even make cold calls to customer pushing for the purchase of gold, silver or platinum. According to the CFTC (cftc.gov), these companies will ask for various forms of fees such as commissions, interest charges, loan origination or storage and shipping fees that are not disclosed up front.

The sales pitches businesses use are not a problem, the problem starts when they overstate their ability to predict where the prices of precious metals will go and how little the customer is at risk of losing. When a company approaches you with an elevated sales pitch, talks down risk exposure and does not disclose fees from the start, these are all red flags.

Also, a big giveaway is the storage location of the metal. If the company refuses to clearly state where the metal is stored or gives you a runaround when you ask about it, there might be a problem. If the company you want to buy from does not say you are buying on “margin” or that you will have to send them additional funds if the price drops, start looking elsewhere.

Always search a company’s background in the Better Business Bureau (bbb.com). Here you can find out how reliable the company is, whether it has performed well in delivering services and products to customers and what complaints, if any, have been filed against them. The North American Securities Administrators Association (NASAA) can also assist your research. It is an international organization whose goal it is to protect the investor. For investors who have any issues regarding a scam, who want to look for information or wish to locate their state regulator and contact them directly, visit nasaa.org. You can also contact the National Association of Attorneys General through naag.org for updates in laws or issues that might affect your investments or for questions and concerns regarding scams. Questions about futures compliance could be addressed to the National Futures Association and to find out if your broker or firm is registered with the Commodity Futures Trading Commission (CFTC), go to nfa.futures.org/basicnet/.

If you are looking to buy coins, you are better off buying from a legitimate source like the US Department of the Treasury through usmint.gov. Gold bars can be purchased through a number of accredited manufacturers, for more information, go to Gold Bars Worldwide. Gold Bars Worldwide is sponsored by the global gold advocate World Gold Council gold.org that also gives research and statistical information on gold.

Amerigold is a known seller of gold, silver or platinum. The Better Business Bureau rated Amerigold with its highest grade of A+ for operating in a trustworthy manner and making good faith on resolving customer concerns. Silverseek.com and platinumguild.org are also reliable websites to look for information or retailers on silver and platinum.

Diversifying your portfolio with precious metals is a good option, but it has to done cautiously and after thorough research. Time of course is essential. As Paul Mladjenovic, the author of Precious Metals Investing for Dummies put it, “In a world of precious metals, the longer the term, the better your chances become for building wealth.”

Other resources to look into:

Investing in Gold: Invest.gold.org

Marketwatch.com

Minerals.usgs.gov

National Mining Association: nma.org

International Monetary Fund: imf.org

Gold Anti-Trust Action Committee: GATA.org

Silverstrategies.com

Photo: Ron Conway

Downturn:

Since the start of the new year, many people have asked me if I am going to reduce the number of investments during the down economy. I intend to do just the opposite. I feel there has never been a better time to be investing in or starting a company than the current environment. For entrepreneurs, a downturn often represents one of the best times to start a new business. Great people are often more available, there is generally less competition from other start-ups, and vendors are often open to negotiate better prices.

During these times, I’m looking to get even more active than I have been in the past. I plan to make 40-50 investments in the next 12 to 18 months. I will continue to focus on capital efficient, consumer Internet start-ups and the latest sector I’m most excited about is the “Real-time Web.”

Real-time Web:

It feels as if there is a major shift occurring in the web today. A number of factors are responsible for this: increased capabilities of location-aware smart phones, a shift of users’ behavior around sharing information online, enhanced connection to broadband networks, improved mobile camera and video devices. These factors among others are all contribute to this shift.

Platforms with explosive growth like Facebook and Twitter have built the networks and infrastructure to allow individuals to share and publish vast amounts of new information to the web. These platforms along with numerous others, and their millions of users, are responsible for creating a new corpus of content, information, and entertainment. I’m calling this new information real-time data. Others call it, the now web, or the real-time stream, but regardless I believe it is a multi-billion dollar opportunity and innovation in this sector is set to explode. I plan to spend a lot of time on this sector with my new investing entity called SV Angel LLC.

The Users:

Crowd sourced collective wisdom data from global users’ contributions created and consumed by the “always-connected” devices provide massive streams of content that have never before been available up until now. The structure of these networks allows anyone to create and share information and content that can be re-syndicated and re-shared by millions. This new corpus of spontaneously created content represents only a tiny amount of data on the web today, but will explode to over 15-20% in the next few years in my opinion.

I feel that over the next two to four years this trend will represent an increasingly large amount of data to be consumed by users on the web. With any new technology, user behavior, and fundamental shift dozens of supporting technologies will spurn the creation of hundreds of new companies.

The Opportunity:

New forms of search technologies, media discovery, advertising, analytics and photo and video sharing applications are just some of the existing technologies that will emerge, but in a new form, in a new company, with new founders to capture and shape the landscape of the next version of the web.

Innovation happens all the time. The web will have cycles of innovation. History will repeat itself and new business models will emerge. I’m excited to see evolutions of known models to support this new ecosystem, as well as totally new innovations that can happen now only because of where the web is headed.

Ron Conway is a Silicon Valley-based angel investor who was an early stage investor in Google, Ask Jeeves and PayPal.

Soybean futures

Photo (Quezi)

As the basis of both soybean oil and soybean food products, soybeans are one of the most competitively traded commodities of all. According to About.com’s Soybean Futures Profile, soybeans trade at a contract size of 5,000 bushels spanning the months of January, March, May, July, August, September, and November. While 5,000 bushels sounds like a lot (and it is), a single soybean futures contract can be purchased for $12.50, or 1/4 of a cent per bushel.

Trading and prices are most volatile during summer months, rising on sunny skies and falling – sometimes plummeting – due to floods or droughts. Monthly crop reports are another major mover of soybean future prices, and About.com warns that, “…emotions can control the markets” at all of times of the year. (The same is generally true of other commodity markets).

Rubber

Photo (TK Yeoh)

Rubber is used in all walks of life, and its versatility has made it a hot commodity on the world markets. Grown from trees like those shown above, rubber (also known as natural latex) is produced primarily in countries like India, Thailand, Indonesia, Malaysia, and China, according to CRNIndia.com. Companies and investors wishing to trade in rubber futures typically do so on the Tokyo Commodity Exchange, the Singapore Commodity Exchange, or Bangkok’s Agriculture Futures Exchange. The physical purchase and acquisition of rubber as a commodity, however, usually occurs in New York, Kula Lampur, and London, according to CommodityOnline.com.

Pork bellies

Photo (Tokyo FoodCast)

One of the most volatile (and perhaps comical) commodities traded on the world market are pork bellies. As the name suggests, pork bellies literally come from the underside of hogs, which are cut into sections and flash frozen. Since pork serves as the basis for bacon products, pork belly futures are traded in a competitive world market and have been since 1961, when they debuted on the Chicago Mercantile Exchange. Trading pork bellies is not for the poor, or faint of heart however, as the smallest amount one can trade and take possession of at any given time is currently twenty tons.

Pork belly futures are known to rise or fall (sometimes suddenly and dramatically) in response to higher or lower demand for bacon. The volatile nature of pork belly futures are a common business joke. Regarding Robert Kiyosaki’s statement that his net worth is “$50-$100 million depending on the day”, Harvard MBA John T. Reed quipped, “what’s he invested in, pork belly futures?” Historically however, pork belly futures have risen in value the most during cold winter months when bacon is consumed most.

Palm oil

Photo (Nick Hobgood)

While not as newsworthy as crude oil (another commodity), palm oil is the world’s second most widely produced edible oil in the world. Over the years it has become an essential ingredient in such basic household products as margarine and soap, and has even been used as a biofuel in recent years. Recently, The Commonwealth Scientific and Industrial Research Organization found that using palm oil as a biofuel could reduce greenhouse gas emissions (though this claim has been somewhat controversial.)

All of these uses contribute to making palm oil – which BusinessStandard.com “expects to remain volatile this year” – a hotly traded commodity on the world markets.

Wool

Photo (Tambako)

Wool has been of immense value to society since the first farmer learned to shear a sheep’s coat. Used to make everything from clothing to blankets to noise absorbers, this valuable commodity is produced mainly in Australia and available for mass purchase on the Australian Wool Exchange in Sydney, Melbourne, Fremantle and Newcastle. Roughly 80 agents facilitate the trade of wool through the exchange, while those looking to purchase wool futures contracts must turn to the Tokyo Commodity Exchange.

Cocoa

Photo (Moonlight Bulb)

Vital to coffee brewers and chocolate makers, cocoa has a well-deserved reputation as what SeekingAlpha.com calls “a fickle plant.” As they elaborate in their article “Cocoa – The Last Commodity Standing”:

“Cocoa only grows within specific latitudes no greater than 10 degrees north and south of the equator; the top two cocoa countries are Ivory Coast and Ghana. Even in these perfect climates, however, cocoa is fickle: Extended dry spells can ruin the crop, and too much water breeds disease and lower yields. The worst culprit is something called black pod disease, which can lead to crop losses between 30 and 90%.”

Such unpredictable forces have the ability to send cocoa prices soaring, a major boon for those already possessing it via futures contracts. Starbucks and other coffee houses have been known to employ such contracts, which entail purchasing multiple metric tons, as hedges against cocoa price can cause occasional spikes.

Live cattle

Photo (John Morgan)

As the foundation of much of the world’s beef supply, live cattle find themselves traded daily and feverishly on the world markets. Live cattle (as opposed to feeder cattle, the other kind traded) is any cattle from calf to about 600-800 pounds. Raised mostly in California, Colorado, Kansas, Arizona, Nebraska and Texas, live cattle are then traded from 10:05AM-2:00PM in contract sizes of 40,000 pounds during February, April, June, August, October and December.

Major traders of this commodity include meat manufacturers, grocery chains, and certain restaurant chains, all of whom are affected significantly by rises or falls in the prices of beef.

Lean hogs

Photo (Dok)

Like live cattle, lean hogs are traded in contract sizes of 40,000 pounds and during the same months. Produced mostly in the Midwest (specifically Iowa, Minessota, North Carolina and Illinois), the average hog is raised for six months to roughly 250 pounds before being slaughtered and made available on the world markets according to TradeMeats.com, who also notes that the cost of hog feed greatly influences the supply of pork.

Traders are advised to follow the movements of day to day hog trading via the Hogs and Pigs Report, released quarterly, and the CMA Lean Hog Index, a two day average of prices. The United States is currently the world’s largest exporter of pork.

Sugar no. 11

Photo (Clif1066)

Sugar no. 11 is simply a distinction used by traders to denote raw cane sugar in its pure, unprocessed form (shown above.) Traded in contract sizes 0f fifty tons at roughly $11.20 per contract, Sucrose.com reports that sugarcane in this form is responsible for nearly 3/4 of all world sugar production, making it a commodity of tremendous importance to any business or industry dependent on sugar. In addition to the risk of poor harvests that confront all agricultural commodities, sugar trading has also become subject to political risks, like India’s recent banning of new futures contract trading.

Brazil is the world leader in sugar production at present, producing over fourteen million tons per year and exporting six million annually. Australia chips in with 5.5 million tons produced and 4.7 million exported.

For more on commodities, visit our commodities investing center.

Photo: Pingu1963

Money is the most common medium of exchange, representing and functioning as legal tender. But how did man develop a world in which currencies are traded speculatively, where some are pegged against others, where others float – and where money can be exchanged without money being exchanged? Surely this was a gradual process, from cavemen trading saber-toothed tiger pelts to investing in weighted baskets of currencies in real time, the development of modern money contains many interesting steps along the way. The following is what we would humorously refer to as ‘the annotated history of money’.

Money as a Commodity

Before money was paper and coin-based, it was itself a commodity, or something of intrinsic value. If a clan or tribe had an affinity for a specific bead, shell or jewel, these communities would attribute a value to these objects. This might be due to usefulness, scarcity, or aesthetic appeal. Presumably, the more rare objects carried a greater value to their admirers. In the earliest cases, commodity-based monies were traded (effectively bartered) for other things of similar value. In that sense, early monies were convertible – but only in the most basic sense. For instance, what was accepted as currency in one corner of the world, might either be extremely banal or without any worth elsewhere.

Over time, in most places, precious metals became the foremost commodity-based forms of payment. Various metals would have different prescribed levels of importance: copper would have its own value, as would silver and gold. These forms of currency both had an intrinsic value, as well as a market value. Meaning copper, for example, received for payment could be melted down and made into something else (which could presumably be traded later), or held onto and used for future payment of something else.

Early Monetary Systems

In the West, the use of precious metals as currency led to the production of coinage (coins made from the precious metals). Used as trading devices, and units of measure, coins emerged in Mediterranean societies in the 6th Century BC. The Lydians, located in modern Turkey are credited as having produced the first stamped coins in 650 BC, and experts suggest that contemporary Ionians and Greeks used similar types of coins.

The Babylonians are credited as having developed the precursor to the modern-day economic system. The Ancient text, The Code of Hammurabi (17th century BC) standardized the currency system. It also established laws regarding money, including legal fines and interest rates. In effect, this was an attempt to arbitrate commerce.

Representative Currency

The institution of coinage led to the development of representative currencies, in the form of notes. A representative currency is one which value of an exchange of goods or services is represented on a note. So, instead of paying for a new horse with a bucket of silver and gold coins, a note could be exchanged and the transaction completed. These ‘bank notes’ or ‘promissory notes’ were typically slips that proved a deposit into a bank, and could be signed over to other parties, much in the way a check is used today. The most famous form of representative currency is the British Pound Sterling. Formally developed in the late 17th century, Pounds were traded as currency, and backed by a promise to the carrier they were redeemable for gold upon the bearer’s request. A one-pound note, was therefore redeemable for one Troy ounce of gold. This was also the beginning of the gold standard incidentally, which lasted until the nineteenth century in the UK, and elsewhere through the mid-twentieth century. During this time, the notes in circulation did not exceed the gold in reserves – the strength of the currency relied on the fact that notes could be exchanged at a bank by the bearer, or that they were, as the saying goes..as good as gold.

Fiat Money

As mentioned above, representative currencies lasted until the mid-twentieth century, and since then the global economy has consisted of a number of fiat monies. A fiat currency is one declared by a government to be legal tender – and is accepted as such. Latin for “let it be”, fiat currencies are not backed by a standard – they are simply money because the powers that be say it is to be accepted as currency. Its strength lies solely in faith in the currency, and trust that the government will not induce hyper-inflation by printing money to pay off debts. Following the basic rule of supply and demand, if there is a surplus of anything, it is less dear and thus of lesser worth. So if a country decides to print more money for its own reasons, each existing note already in circulation theoretically becomes less valuable.

Because fiat money has no backing, it cannot be exchanged for gold or silver. Historically, governments have switched to fiat, either due to recession, a war-induced strain on reserves, or by ‘running the presses’ – which meant printing additional money to cover deficits and debts. In 1971, with the fiscal strain of the Vietnam War, the US declared the dollars in circulation exceeded the amount of gold in reserves, and therefore the US would no longer be backed by silver/gold standard. This would mark the end of the post-war Bretton Woods System wherein the world’s currencies were pegged at against the US dollar, which was fixed vis-a-vis silver and gold. In that sense, other currencies were of a fixed price as well (with a +/- 1% variation based on demand). Because the dollar was and remains not only the most widely-circulated currency and the currency against which other nations valued their own, all of the world’s currencies in effect became fiat-based.

Today, all currencies are fiat-based. Many economists have expressed concern over the sustainability of such a system based on trust in a hegemonic currency, the US Dollar. The rise of an increasingly global economy, with the strength of the European Union and China at the fore, combined with the recent US-led recession has caused foreign reserve banks to trade in their Dollars for other currencies. In doing so, the Dollar has lost ground to most of the world’s currencies. While many economists believe depressing a currency by increasing circulation is a way out of recession, recent events suggest that the caveats of fiat currencies are being painfully realized.
]]> http://www.mint.com/blog/investing/the-history-of-money/feed/ 7 http://www.mint.com/blog/investing/roth-ira-conversions/ http://www.mint.com/blog/investing/roth-ira-conversions/#comments Thu, 06 Aug 2009 23:42:18 +0000 Michael B. Rubin http://www.mint.com/blog/?p=2883 ]]>

Photo: oskay

The opportunity to convert an existing regular IRA to a Roth IRA may be the single biggest upside to the stock market’s extended slide. The younger you are and the more aggressive your investment strategy, the more likely it is that a conversion to a Roth IRA will make sense for you.

You may already be aware of the key difference between a regular IRA and a Roth IRA.  At a very high level, a regular IRA provides for tax-deferred growth whereas a Roth IRA gives you tax-free growth. All else equal, we’d all prefer tax-free growth, of course. Here’s everything you need to know about Roth Conversions

Contributions to a Roth IRA are limited and are not deductible

Trouble is, income limitations prevent everyone from being eligible to contribute to a Roth IRA. During 2009, if you’re single and make more than $120,000 ($176,000 combined with your spouse, if you’re married), you can’t contribute a dollar to a Roth IRA. Furthermore, those who can make a Roth IRA contribution can’t deduct it – that’s your key upfront sacrifice for the many future years of tax-free growth.

A Roth Conversion allows everyone access to a Roth IRA

Let’s first define what a Roth conversion is: the transformation of your retirement account from tax-deferred to tax-free status. You effectively move money from an existing regular IRA or former employer’s 401k account into your Roth IRA. The cost to do this conversion is the payment of regular income tax on virtually the entire amount you convert.  (You’ll pay tax on 100% of the converted amount unless you previously made non-deductible contributions).

Roth Conversion restrictions are going away

Through the end of 2009, conversions are only available to those people who earn less than $100,000 and have filing statuses other than married, filing separately. However, both of those restrictions are eliminated at the end of the year. As a result, anyone who wishes to contribute to a Roth IRA but whose income level is too high can make a 2009 contribution to his/her regular IRA and simply convert part of their account in 2010.

Why converting your Roth IRA could make sense today

If you’re confident your 2009 adjusted gross income will be less than $100,000, you don’t have to wait until 2010 to convert.  Furthermore, you can take advantage of market downturn, as I referenced earlier.  Here’s a simple example:

Say you invest in stock and you accumulated 300 shares of Johnson & Johnson stock (JNJ) over the years. If you converted your shares during April of 2008, when JNJ was trading at about $67 per share, you’d have converted $20,100 of stock. Assuming you were in the 25% tax bracket, you would have owed about $5,000 in taxes on the conversion.

In April 2009, JNJ was trading at about $51 per share. If you converted the stock then, you would have converting $15,300. If you were in the same 25% tax bracket, you’d owe just over $3,800 in tax, not $5,000, for a permanent tax savings of $1,200. In either conversion, you retain ownership in the long-term potential price appreciate of JNJ, yet in the latter case you’ve successfully timed the market from a tax perspective.

It’s certainly possible that stock prices could go lower from here and that a further delayed conversion could be even more lucrative from a tax perspective.  Nonetheless, a conversion could make more sense for you today than at any time previously.

Take advantage of your youth

The big upside of voluntarily paying taxes (since you don’t have to convert), is the tax-free appreciation of your converted investments.  The longer the amount of time you have until you plan on taking your money out (ideally retirement), the greater the odds that a Roth IRA conversion will make sense.

In addition, the better your investment performance between now and retirement, the greater the upside of converting to a Roth IRA. Still, it makes sense to run the numbers.  Importantly, it seldom makes sense to convert to a Roth IRA if you don’t have the money available to pay the tax on conversion.   Using money from your IRA to pay the tax almost never makes financial sense.

Keep in mind that it’s not an all-or-nothing proposition. If you want to convert your retirement account but just don’t have the funds set aside to pay all the taxes, consider converting some of your account.  You can always do some more next year.

Michael B. Rubin is the author of Beyond Paycheck to Paycheck and the blog of the same name. He is the President of Total Candor, a financial planning education company.

Photo: (clagnut)

Famous diamonds like the Hope from India, the Yellow Tiffany from South Africa, and the Williamson Fancy Pink inspire the imagination and are so valuable they seem almost like fictional objects of desire. Their size can leave you in awe and you can practically go blind from their beauty when in their presence. But diamonds can also be a practical investment. In markets where inflation rates have soared; investors have sought out diamonds as a way to put a hold on the value of their currency. The wealthy have used their diamonds to get them through tough economic times such as during WWII and the Asian economic crisis of 1997. In our current economy, investing in diamonds is paying off for many.

A Rich Man’s Game

According to the international diamond wholesaler Ajediam, prices for diamonds have increased on average 15% each year since 1949. However, investing in diamonds comes easier to those deep-pocketed individuals with the extra money to spare. Capital requirements for diamond investing is high and most new investors are already millionaires. The price of a premium cut 1-carat diamond can range from $14,000 to $25,000 depending on the quality. Diafon.net and Ajediam.com have graphs and current prices on diamonds.

Determining Value

The value of a diamond is based on the 4 C’s (Cut, Clarity, Color, Carats). Cut refers to the way a diamond has been shaped, its faceting pattern and its polish or surface finish. Clarity or purity is a diamonds’ ability to let light in and reflect its brilliance. For example a diamond with a clarity grade of LC/ IF has no internal or external spots so it is valued higher than a stone with minimal flaws. Color is also a factor. Most diamonds are white or colorless but the most rare and priciest diamonds are the naturally colored or “fancy” stones. Carat is the weight of the stone. In contrast to the 1-carat mentioned earlier, a 3-carat stone could be priced at $40,000 or more depending on its distinct characteristics.

Whether or not man-made diamonds like cubic zirconia and moissanite have a negative affect on the value of natural diamonds is debatable. These synthetic look-a-likes can be created at much lower costs than a real diamond and although fakes are of increasing quality and size, the inherent value of a true diamond would be difficult to surpass. Diamonds are the hardest natural substance known. They are not only used for jewelry but also in manufacturing. Some examples include their use in lasers, x-ray machines, and to enhance the sound of those fancy speakers you just splashed out on.

Diamonds as an Investment

It may sound contradictory but a big part of the allure of diamonds for investors comes not from their romantic symbolism but from their practicality. Diamonds are easy to carry. An investor can easily carry thousands or even millions of dollars worth of diamonds in a small pouch (we’d suggest they also travel with an armed guard). Also, their value is not directly linked to the stock market, making them an ideal financial instrument that holds its value in times of recession and increases in value during inflation. In this way a diamond investment is very similar to a commodities investment.

According to Pastor-Genève, a worldwide wholesale dealer of high end colored diamonds, the key to making a worthwhile investment is to buy the most rare and largest diamond you can find. Naturally colored yellow, pink, sapphire blue and green diamonds occur as a result of a chemical reaction with other natural substances in the earth and are more difficult to come across. Due to their rarity, these are considered the most valuable, even more so than white diamonds.

Diamond investing, for all its appeal is not without its drawbacks. Diamonds are easy to buy but not easy to sell. Large-scale frauds and scams have made jewelers apprehensive and the most rare and high caliber diamonds have a better chance of being purchased. Not to say your 1-carat diamond will not be purchased, it’ll just take longer. Selling your diamond at a profit also will take time. A rare blue diamond can take at least five years to double in price and a yellow diamond can take eight to 10 years. In addition, supply and demand play a key factor on selling power. According to Pastor – Genève, the ration of white to colored stones is 10,000 to 1, so if you have a white stone, chances are it will be more difficult to find a buyer for it.

Tips

When shopping for diamonds always buy them at wholesale or near wholesale prices. If the price of the diamond is five to 10 percent more than the cost, keep looking for a better deal. Go to a reputable dealer who sells GIA certified diamonds. GIA is the Gemological Institute of America, a non-profit institute considered a foremost authority in gemology. Diamonds certified by EGL USA Group, the world’s premier independent gemological laboratory is another option.

Diamond Funds

Funds that capitalize on the long term value and appreciation of diamonds are another way of investing in these precious stones but you’ll still need a lot of money to get in the game. KPR Diamond Fund requires a minimum investment of US$ 250,000 and the minimum investment required to participate in the Diamond Circle Capital Fund is $1 million per individual stone. Like the KPR Fund, the London based Diamond Circle Capital PLC’s goal is to produce long-term appreciation of its portfolio of diamonds. To create this appreciation, the company invests in large white and rare polished, high quality diamonds.

Diamonds have proved their worth as a stable commodity that maintains its value in the worst of economic times. While, there’s a bit of a catch 22 here in that you need to be fairly wealthy to begin with in order to invest in diamonds, you can get started for just a few thousand dollars and rest assured that, in the long run, that investment has a very good chance of paying off.

The Early Days of Exchange

Stock markets did not begin as the super-sophisticated, simultaneous, worldwide trading exchanges of today. It was not until 1531 when the first institution roughly approximating a stock market emerged, in Antwerp, Belgium. However, as Investopedia notes, this was, “…the first stock market, sans stock.” Rather than buying and selling shares of companies (which did not yet exist), brokers and lenders congregated there to “deal in business, government and even individual debt issues.”

This changed in the 1600’s, when Britain, France, and the Netherlands all chartered voyages to the East Indies. Realizing that few explorers could afford conducting an overseas trade voyage, limited liability companies were formed to raise money from investors, who received a share of profits commensurate with their investment.

(Wikimedia Commons)

This form of business organization was also necessitated by risk management. As India’s Imperial Gazetteer reports, the earliest British voyages to the Indian Ocean were unsuccessful, resulting in lost ships and the financier’s personal fortunes being seized by creditors. This led a group of London merchants to form a corporation in September of 1599 which would limit each member’s liability to the amount they personally invested. If the voyage failed, nothing more than this amount could be lawfully seized. The Queen granted the merchants a fifteen year charter in 1600, dubbing their corporation the “Governor and Company of Merchants of London trading with the East Indies” (or simply, “The East India Company.”) The limited liability formula proved successful, leading King James I to grant charters to more trading companies by 1609 and triggering business growth in other ocean-bordering European countries.

The Dutch East India company was actually the first to allow outside investors to purchase shares entitling them to a fixed percentage of the company’s profits. They were also the first company to issue stocks and bonds to the general public, doing so via the Amsterdam Stock Exchange in 1602 according to Britannica.

]]> http://www.mint.com/blog/investing/the-history-of-the-stock-market/feed/ 6 http://www.mint.com/blog/finance-core/understanding-financial-statements/ http://www.mint.com/blog/finance-core/understanding-financial-statements/#comments Wed, 01 Jul 2009 00:59:31 +0000 Ana Gonzalez Ribeiro http://www.mint.com/blog/?p=2893 investments, do you ever wonder how the value of the companies you've put your money in is determined? What factors decide how well a company is really doing? What's the source of the company's financing? Will it meet or exceed this quarter's projections? While some consider the stock market to be little more than a house of cards, subject to the whims of individual investors, there are, in fact, some very real and measurable things that can help you to diagnose the financial health of a company. ]]>
micamica

When looking over your investments, do you ever wonder how the value of the companies you’ve put your money in is determined? What factors decide how well a company is really doing? What’s the source of the company’s financing? Will it meet or exceed this quarter’s projections? While some consider the stock market to be little more than a house of cards, subject to the whims of individual investors, there are, in fact, some very real and measurable things that can help you to diagnose the financial health of a company.

Take a statement

It’s not an interrogation but you’ll want to ask the hard questions before you invest. Only by examining and drawing conclusions from a financial statement, will you truly know how well a company is doing. At first glance, you will see that a financial statement is made up of three main sections, the balance sheet, the income statement and the cash flow statement. Each statement depicts a different aspect of the overall financial picture of a business. The balance sheet details companies’ current assets such as cash and prepaid expenses. It shows the financial position at a particular date. This statement tells you what the current liabilities or existing debt the company has, that has to be paid within that year. Examples of debt include accounts payable, salaries payable or income taxes payable. The amount of current assets over current liabilities determines the amount of working capital or leftover cash the company has to cover other operating expenses. Whether or not there is enough money left over after the current debt is paid off, tells you whether the company is on solid financial ground or might be headed for destruction.

The income statement is a summary of the profits a business has earned for a specified period of time. This is where you would see the amount of revenue or profits obtained for a companies’ products or services and the expenses incurred for salaries, supplies or income taxes. The difference between the revenue and expenses gives you the net income, which when compared over a period of say two years shows you how the net income is rising or falling, a fairly good indicator of how profitable the business is. Basically, this statement tells you if the company has revenue coming in.

The cash flow statement is particularly important when considering new ventures such as an internet startup. The ability to balance cash flow now is a sign that the business has a long and profitable future ahead of it. This reports the cash going out and coming in from operating, investing and financing activities. In this statement, changes in the net cash flow indicate the company’s ability to meet its debt obligations and pay dividends, how much external financing the company is using and its ability to generate cash flow in the future. Operating cash flow can be described as the cash effects from revenue and expense transactions. Investing cash activities comes from the purchasing and selling of properties or assets and financing cash activities shows how owners of the company have used loans from creditors to finance their business.

Know the facts

Investing should never be based on emotion. While you might be tempted to invest in a company because you like its products or because you’ve just read a favorable article about it in a magazine or newspaper, you should make sure you’ve done your research before ponying up your hard earned cash. Think of the financial statement as a kind of scorecard that helps you determine which company is the one you should invest in. What you’ll find is a hard look at the financial structure of a business that shows you what it’s really made of. Ask yourself a few questions and see if the statements help answer them. Does the revenue exceed expenses in the income statement? Does the amount of assets exceed liabilities on the balance sheet?

Notes often accompany financial statements. Read these notes carefully as they disclose information that can help you interpret the financial information on the statements. The notes reveal any changes that could have an impact on the company’s finances. It can provide some startling insights such as what type of debt the company purchased, for how long and for what purpose. For example, the notes might state that company A entered into a two year term note of which the proceeds were used to purchase the company’s out of state manufacturing facility and headquarters. Essentially, the notes are a complement to the statement providing more details. If you’re a shareholder, it’s your company. So you’ll want to make sure you know as much as you can about it.