Archive for March, 2010

The market is still a good place to be

March 22nd, 2010

The guys with the money are going to make more
Peter Lynch, the legendary investor says that the past 20 years, so-called to investors as the “lost decade”, has not shaken belief that the stock market will continue to offer great returns.

Has there been change?
In a recent interview, Lynch gave his view of the recent crisis and its consequences for the markets. He had no hesitation in sounding optimistic about the next hundred years for the stock market. We asked the obvious question: has there been substantial change in the economy and the markets leading to the “lost decade”?

The Past Decade
“The past decade is one decade out of a hundred years in which we have known the markets,” Lynch says, “We started it at an extraordinary peak in the stock market as a result of the sharp rises in 1999, but in a sense the past decade was the lost decade on the stock market mainly because stocks were overvalued.”

Should we quit the market?
“We’ve had 11 recessions since World War 2, and this is the twelfth and the biggest that we have experienced in the US. But remember that only 2 or 3 years ago, the market was at an all-time high. Now the question is how we will emerge from this recession, and whether we will return to the growth patterns at the rate we saw before it.”

Stocks are best
Lynch expounds his stock market theory, and explains why he thinks stocks are the best investment. “Since World War II company profits in the US have grown at 6-7% a year. If we add to that the dividend yield, which is 2% a year, that is approximately the average annual return on stocks,” he explains. Lynch avoids making explicit stock recommendations, but he does not stint with examples. “Look at companies like IBM, Procter & Gamble, Coca Cola, Pepsico, Walgreen, or Exxon Mobile. I estimate that they will make more money in ten years’ time than they make today, so that their share prices will rise to reflect that growth. Not all of them will do that, but there is a close connection between the share’s behavior and the profits that the company produces.”

Rising profits
“In general, stock market companies have succeeded in growing their profitability and that’s the reason to buy shares,” Lynch sums up. “When you buy shares in a company, if it manages to produce profits, you are a partner in those profits. On the other hand, if you buy an IBM bond, after 20 years, the company will repay you the money and say ‘thank you very much’. It will pay you the interest, but it will not be loyal to you, and you certainly will not enjoy the fruits of its success. That’s the big difference between bonds and stocks.”

You cannot know the entire market
“All you need is 3 or 4 good stocks.”

Posted in Economy, Finance | No Comments »

Where was Dad when I was 0 years old?

March 22nd, 2010

Compound interest is still a great invention
Let’s say you start investing today at the rate of $100 a month for your newborn who arrived at some ungodly hour this morning, and who, when he grows up, takes over and continues that same investment until he reaches the age of 50, it will be worth how much?

Average return
Well, if in these miserable and chaotic financial times, you can achieve an average return of just 6% per year, the money you invest each month will accumulate into a cool $360,000 in 50 years. If you can manage to squeeze a 10% annual return, as you could have in the years before today, that $100 a month will turn into a staggering $1.4 million. This morning’s baby, now a grey-haired, middle aged man will bless his wise old father. May you still be there and be at the celebration! Not bad for $100 a month! A sum like that would make your retirement – and mine- a lot brighter!

What’s happening to returns?
Interest on invested money seems to drop all the time. Is this how things are going to be for the next generation? Is interest on money saved in the bank a thing of the past, something that future generations will only read about in those email fact sheets that keep buzzing around?

Stock market returns
What about stock market returns? They may be lower than they have been in the past but they may be the best one can do in the next 50 years. The reason, it is explained, is that “all wealth is created by business, and all other assets that people might use for investments have to be paid for from the proceeds of business, all returns from bank accounts come from the proceeds of businesses that borrow money, etc.”

The norm
If the norm used to be 12 percent, then 6 percent is probably realistic for our savings exercise above and hopefully one will be able to achieve that. But it’s clear that everything has changed and our children will not be living in the same world as their parents.

You can never tell
When I was a young engineer in the 60’s, two architects opened a practice in an adjoining office. On the first day they pledged to invest 10 percent of all fees they earned in one ounce gold coins, which were then selling at about $30 each. I moved away and forgot all about them. Years later their names came up in a conversation and I remembered the gold coin promise. I inquired and learned that they were now retired and living in villas they had bought in Spain back in the seventies. The price of gold soared in the 70’s reaching almost $700 an ounce! If these clever architects had kept on buying gold coins, they are now wealthy men.

Payday Loans
I, on the other hand, discovered Payday Loans and I manage to stay retired that way.

Posted in Economy, Finance | No Comments »

Thinking about quitting your job? Read this first

March 21st, 2010

Don’t resign unless you really want to leave
Employees should be quite sure that, when they resign from their job, they really want to leave. According to case law it may not always be possible to change your mind and withdraw your resignation. In a well publicized case, K. Masondo v Foschini, the Commission for Conciliation, Mediation and Arbitration (CCMA), an independent dispute resolution body, addressed the questions of whether an employee could unilaterally withdraw a letter of resignation.

Employer’s refusal
CCMA also looked at whether an employer’s refusal to accept this and unwillingness to allow the employee to resume her duties, constituted an unfair dismissal. The facts of the case were, in the main, common cause, which means they were not in dispute.

Read this story
The employee had an altercation with her manager in a store and then she submitted a letter of resignation. She gave her employer 24 hours’ notice that “I will be resigning”.
The employee was required to give two weeks’ notice, but had in fact given the employer only 24 hours’ notice in her letter. However, the employee then reconsidered her position and withdrew her resignation stating that her letter of resignation had not been officially accepted by the employer, and that it had never been her intention to resign. The employer did not accept the employee’s retraction of her resignation.

Unfair dismissal
Then the employee referred a claim of unfair dismissal to the CCMA by virtue of the fact that the employer would not permit her to resume her duties after withdrawing her resignation. The employee referred the matter to the CCMA on two grounds:
1) She had withdrawn her resignation within her notice period when she was still an employee; and 2) That the employer was obliged to formally accept or reject her resignation, and because the employer had not done so, she was entitled to withdraw such notice. The commissioner held that the employee was not unfairly dismissed and that the employer was indeed entitled to accept or decline the employee’s withdrawal of her resignation.

Employment contract
With specific reference to an employment contract, the commissioner held that “either party to a contract may resign from the contract” and that “withdrawal from a contract by one party is a unilateral action which does not require the consent of the other party”. As such, the employer was not required to accept the employee’s resignation in order for the resignation to be or remain valid. Or, as the commissioner noted further: “The employer is not required to confirm whether in fact it accepts the employee’s notice of termination.”The notice itself is a fait accompli. It does not, in my view, require acceptance.”

Recalling resignation
The employee’s revocation of her written resignation was held, therefore, not to have been binding on the employer. It follows that the employer’s refusal to permit the employee to resume her duties after withdrawing her resignation did not constitute a dismissal, let alone an unfair dismissal.

Posted in Economy, Employment | No Comments »

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