May 2008 – Page 2

Penny Stocks

The name penny stock can be somewhat misleading to those who arenâ€™t familiar with the stock market. The name tends to express that there isnâ€™t very much money involved. This is true because they often trade at less than $5, but they are very high risk investments.

That means you donâ€™t have very good odds in your favor of earning any return on them. These types of stocks are best left for those who have money they can afford to lose. Many people do invest in them though because should they get a return on them it is usually quite substantial.

It is very important to understand that the information out there about penny stocks can be manipulated. They are often involved with fraud, false reports, and information that show them to be liquid in nature when they really arenâ€™t. There are less shareholders and so there isnâ€™t going to be the liquidity with penny stocks as you will find with many other types of investments.

In fact, that is often the case so new investors should steer clear of them. Even those with a great deal of expertise in the market canâ€™t predict what will happen with them most of the time. It is important to carefully consider the pros and cons of penny stocks before you move forward with investing in them.

Repo and Reverse Repo

Repurchase agreements are commonly referred to in the market as repos. This type of agreement involves someone owning a security that hasnâ€™t yet matured. They can still use that security though as a type of collateral with a lender. They will be able to get the money they need now. They also agree to buy that security back at the cost of it plus interest. The rate of interest is variable and so it will depend on the market at that time.

This same concept is often referred to as a reverse repo when you are talking about the involvement of the entity that offers the funds. These are the lenders who willfully agree to buy them at this time and then resell them for face value plus interest at a later date. The terms are the same but a repo is from the view of the borrower while the reverse repo is from the view of the lender involved in the same transaction.

A repo and reverse repo are often associated with a type of secured loan. They are basically a way to have collateral that the lender can access should the recipient default as to the terms of the loan agreement. It significantly reduces the amount of risk that the lender has to carry. As a result they are often more willing to provide the borrower with the funds that they have requested.

Buffetâ€™s words of Wisdom – Three primary causes of terrible returns for investors

Every year Warren Buffet writes a letter to his shareholders in which he discusses the year gone by and his views and opinions about the businesses they are in, economy and investing as a whole. This letter contains pearls of wisdom from the great investor.

In the 2004 letter, Buffet briefly touched upon three primary causes because of which investors make mediocre returns from investing in the stock markets.

Buffet starts by saying that over the past 35 years American business has delivered terrific results and an investorâ€™s return from owning the S & P Index would have been 11.2% compounded annually. To put this growth into perspective $100 invested in 1960 would have translated into $4,108 at the end of 35 years at this CAGR.

So all an investor needed to do was to buy the S & P index fund and sit back and enjoy. However this has not been the case and most investors have experiences which are nightmarish.

Buffet attributes the following three reasons for this experience:

1.High Costs. Trading frequently and getting in and out of stocks increase the brokerage costs for investors and eats into their profits. Another reason for high costs is paying excessive amounts for investment management.

2.Portfolio decisions based on tips. Many investors have the habit of investing into the markets based on tips rather than thoughtful analysis. This leads to buying stocks because of fads and getting into businesses that investors do not really understand. Very often investors do not do any analysis of the profits and revenues of the company and jump into stocks based on tips. These tips fizzle out quickly and turn into losses more frequently than is good for any investorâ€™s health.

3.Start and stop approach to investing. This means not investing consistently and timing an entry or exit into the market which investors usually get wrong.

So investors end up buying stocks long after they have already advanced quite a bit. And in the same manner end up selling stocks long after a decline has already taken place or long period of stagnation has existed.

Buffet cautions that investors should keep in mind that excitement and expenses are enemies of investors and if an investor wants to time the market then they should try to be fearful when others are greedy and greedy only when others are fearful.