Japan’s Banking Empire: Changing Strategies to Retain World Lender Leadership

Not one Japanese Bank was listed among the world’s top five banks in 1980. But by 1988 the top 12 banks were all japanese (ranked by deposits). The largest Japanese banks grew not only domestically but internationally, opening branches in United States, in Europe, and throughout Asia. Now winds of change are blowing, and Japanese banks are facing an end to their expansionist day.

Japanese banks were able to expand during the 1980s because the country’s economy was growing rapidly, financed by a hight rate of domestic savings and a low rate of interest (which was deliberately kept low by the goverment to fuel industrial development). Japanese banks were so pofitable that they invest heavily in domestic and foreign real estate and in the securities of Japanese corporations, which also own large amounts of real estate. Moreover, their high-flying success allowed them to persue a long term strategy of gaining market share in foreign markets. This was particularly true in the United States, where interest charged on commercial loans was much higher and, therfore, less competitive than the rates offered by Japanese banks.

But the 1980s came to an end, and so did the easy profits for Japanese banks. Early 1990 brought a wave a changes that are still sweeping across the Japanese banking industry:

- A dramatic devaluation of Japanese securities and the beginning of what appears to be a long

term slide in domestic real estate

- A drop in value of foreign real estate holdings held by Japanese banks.

- A gradual deregulation of both the Japanese Banking and Japanese interest rate

- A requirements for all Japanese banks to have enough capital on hand to cover 8 percent of

risk-adjusted assets.

Because of such market and regulatory changes, the profits of Japanese banks are being squeezed by falling asset values, corporate clients who are finding competitive loan rates overseas, retail clients who are saving less than in the past, and increased reserve requirements. Thus, Japanese banks have changed their business strategies from gaining long term market share and asset growth to a shorter-term concern for profit. And this shift has caused the Japanese banking industry to undergo its own consolidation.

The rest of the world’s banking community is wary, even when it might be expected to rejoice: Larger Japanese banks will likely be even more fear some competitors. An eye-opening example came in late 1989, when the largest bank merger in history was announced. Mitsui and Tiyo Kobe banks agreed to create a second largest bank in the world, with $348 billion in assets, $9.02 billion in capital, and 611 branches worldwide.

Resource:

Business Today

Online Investing Part I: The Growth of Online Investing

Online investing’s popularity continues to growth at rapid pace. About more than 25 million households manage over $1 trillion in assets online. It’s easy to see why online investing attracts new investor: The internet makes buying and selling securities convinient, relatively simple, inexpensive, and fast. In today’s rapidly changing stock markets, it provides the most current information, update continuously. Even if you prefer to use a human broker, the internet provides an abundance of resources to help you become a more informed investor.

To successfully navigate the cyberinvesting universe, open your web browser and explore the multitude of investing sites. These sites typically include a combination of resources for novice and sophiscated investors alike. For example, look at the brokerage firm TD Waterhouse’s homepage (www.tdwaterhouse.com) With a few mouse click you can learn about TD Waterhouse’s services, open an account, and begin trading. In addition you will find the day’s and week’s market activity, price quotes, news, analysts’s research reports, and more. You can learn about various aspects of investing, including products, and make banking transaction thought the TD Waterhouse Bank.

Investment Education Sites

The internet offers many tutorials, online classes, and articles to educate the novice investors. Even experienced investors will find sites that expand their investing knowledge. Althought most investing oriented websites and financial portals include many educational resources, here are a few good sites that feature investing fundamentals:

1. Investing Online Resource

Is and educational site that provides a wealth of information for those getting started online as well as those already investing online. In includes an investment simulator that creates an online interactive learning experience that allows the user to “test drive” online trading

2. Investor Guide.com (www.investorguide.com)

Is a free educational site offering Investor Guide University, which is collection of educational articles about investing and personal finance.

3. The Motley Fool (www.fool.com)

Has section on investing basics, mutual fund investing, choosing a broker, and investment strategies and styles, as well as lively discussion boards and more.

4. Investopedia (www.investopedia.com)

Is an educational site featuring tutorials on numerous basic and advance investing and personal finance topics, a glossary of investing terms, and other useful investments aids.

5. WSJ.com (www.wsj.com)

A free site from the Wall Street Journal, is an excellent starting place to learn what the internet can offer investors.

6. Nasdaq (www.nasdaq.com)

Has an education initiatives section that provides links to a number of investment education resources

Investment Tools

1. Planning

Online calculator and worksheets help you find answer to your financial planning and investing question

2. Screening

With screening tools, you can quickly sort through huge databases of stocks, bonds, and mutual funds to find those that have specific characteristic

3. Charting

Charting is a technique that plots the performance of stocks over a specified time period, from montths to decade and beyond.

4. Stock Quotes and Portfolio Tracking

Simply enter the stock synbol to get the price, either in real time or delayed several minutes. Once you create a portfolio of stocks in a portfolio tracker, the tracker automatically update your portfolio’s value everytime you check

The Internet as an Investment Tools

Online or of, the basic rules for smart investing are the same. Know what you are buying, from whom, and at what level of risk. Be skeptical. If it sounds too good to be true, it probably is! Always do your own research, don’t accept someone else’s word that a security is a good buy. Perform your own analysis before you buy.

Here is some additional advice:

1. Don’t let the speed and ease of making transaction blind you to realities of online trading

2.Dont’t beleive everything you read on the internet

3. If you get bitten by the online buying bug, don’t be tempted to use margin debt to increase your stock holdings

Resource:

Gitman & Joenk

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Bondholders: Some tips on tips...!!

Bondholders look at inflation like Superman looks at kryptonite. Superman weakens when faced with the dreaded substance and would die if exposed to it for long. Bondholders weaken when inflation heats up because it causes bond prices to buckle and fixed payments to lose their purchasing power. Some people have the mistaken impression that they can't lose money investing in treasury bonds. but they can because bond price fall in an inflationary environment. So that the investor can buy its bonds without fearing inflation, in 1997 Uncle Sam created TIPS, Treasury Inflation-Protected Securities.

Here’s how TIPS work: The government issues a 10-year bond with a $1,000 face value that pays, say, 3% interest-and that rate stays fixed for the life of the issues. But if the consumer price index rises, so does the face amount of the bond. For example, because the CPI rose 2.4% in 2002, the new face amount was adjusted up to $1,000 x 1.024 = $1,024. Therefore, in 2003, the annual interest payment was $30.72 (3% of 1,024). When the TIPS mature in 10 years the investor get the inflation-adjusted face value at that time, which could be as much as $2,000 if inflation really takes off. A lot can change over a decade, but inflation looks pretty tame these days. As one professional investor puts it, buying TIPS now is ike buying flood insurance during a drought. TIPS also protect you if deflation occurs. The bond’s value will not fall below its initial face value (of $1,000).

Unlike the case with conventional fixed income securities, the investor doesn’t have to worry about the Treasury bond’s value plummeting if inflation heats up. Take a lot of what happens to a conventional treasury bonds if inflation begins ti rise sharply. If the bonds coupan is, say 5%, investors get 5% per year, or $50. No matter what happens to the level of prices. In 10 years, that $1,000 principle will certainly have less purchasing power than it does today. It might be able to buy just $700 worth of goods. In addition, rising inflation generally means rising interest rates. In the market place, conventional bond prices fall when interest rates rise. Therefore, an investor who wishes to sell a conventional bond prior to maturity is likely to take a loss if interest rates are higher than when the bond purchase.

TIPS protect investors from such erosion in bond prices. TIPS are not so great, however, if inflation stays dormant, because the investors are getting only 3% on their money. (in fact, the coupon for the July 2003 10 year TIPS was just 1”7/8%, compared to 4.25% for a regular 10 year Treasury note issued in august 2003).

There’s a one other downside to TIPS: taxes, investor have to pay a tax on the increasing face vale of their bonds-$34 in the first year in the foregoing example. That may not seem like much, but the government doesn’t actually pay out the increase in the bond’s face value until maturity. Thus you end up paying taxes on income you’ve earned but don’t have in hand. For that reason, TIPS probably make the most sense for the Individual Retirement Accounts (IRAs). And other tax-differed retirement accounts. You can buy TIPS directly from the Usa Treasury using Treasury direct or from a broker. Several mutual funds companies now offer funds that buy only TIPS.

TIPS are also a good idea for investors who want to allocate a portion of their assets to income-generating securities and don’t want to worry that inflation will erode their value. But the trade off for that protection is significant: loss about half the income

Reference:

Gitman & Joenk

Investor psychology in Capital Market

DH review how psychological biases affect investor behavior and prices. Systematic mispricing probably causes substantial resource missallocation. DH argue that limited attention and overconfidence cause investor credulity about the strategic incentives of informed market participants. In financial economics, the most salient example is the efficient markets hypothesis. The efficient markets hypothesis reflects the important insight that securities prices are influenced by a powerful corrective force. If prices reflect public information poorly, then there is an opportunity for smart investors to trade profitably to exploit the mispricing.

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In recent years, some finance researchers have returned to such a broader conception of economics, and have denied market efficiency its presumption of innocence. This denial is based upon theoretical arguments that the arbitrage forces acting to improve informational efficiency are not omnipotent. 
 

Besides that, DH show how imperfect rationality affects trading, expectations and prices in capital market

1. Investor often do not participate in asset and security categories

A focus on what is salient may cause investors to invest only in stocks that are 'on their radar screens; Non-participation may also be related to familiarity or 'mere exposure's effects, e.g., a perception that what is familiar is more attractive and less risky

2. Investor use past performance as an indicator of future performance in mutual fund and stock purchase decision

3. Investor trade too aggressively

Volume is too large is hard to establish without benchmark rational level of volume. Rational dynamic hedging strategies, in principle, can generate enermous volume with moderate amount of news.

4. Investor do not always form efficient portfolios

Generally of course. Several experimental studies examined portfolio allocation when there are two risky assets and a risk-free asset and returns are distributed normally. People often invest in inefficient portfolios that violate two-fund separation, though trained MBA students do better :(

5. Certain classes of investor and their agents change their behaviors in parallel

This phenomenon, called herding, is consistent with rational responses to new information, agency problems or conformity biases. The tendency of analyst to follow the prevailing consensus is not stronger when that consensus proves to be correct than when it is wrong (Welch, 2000)

and many more...


Reference:
Daniel & Hirshleifer (DH)

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The Essence of Value Investing

Value investing is not a technique, it is a philosophy. It is a way of life. In fact, value investor approach what they do insider or outside the world of finance in the same way-taking certain criteria to make a decision, while demonstrating emotional discipline along the way. 

These patient thinkers tap all available resources to make a judgment call, but follow no one source. They do their own work. Value investor trust their abilities, their instincts, and their philosophy. Their investment style is an extension of their unwavering personalities.

The goal of value investor is quite simple: to buy solid businesses at exceptional price in order to achieve adequate after-tax returns over a long period. The mental model is as follows:

Good Business + Excellent Price = Adequate Return over Time

After investors do their homework on a company, an assessment of the firm’s value is done, and a reasonable price to pay for the business is determined. The key understanding here is that the most successful investors have  a framework and a way of approaching stocks. “It’s all simple,” says M. Price. “It’s not rocket science. It’s Wall Street that makes it complicated. What Max Heine and Warren Buffett (My Favorite Investor J ) did was to boil it all down to buying companies when their value was deeply discounted...” Price explains.

 -----

The keys to investing, based on simple rules such as purchasing companies at a discount, are easy to understand. They have worked for a wide range of value investors, such as catalyst-driven investor like M.Price of Mutual Series and J.Greenblatt of Gotham Capital, or patient owners such as Warren Buffett of Berkshire Hathaway and J.Rogers of Arial Capital Management. These approaches are well documented, and surprisingly, are not complicated. Implementation, however, is not so simple. The balance between the art of investing, assessing a management team or identifying a good business, and the science of investing, figuring out what price to pay based on what the company is worth, can be difficult for some.

 ------

Unfortunately, there seems to be many definitions of what comprises a “good” business, there are also numerous ways that investors can determine if ther are getting an excellent price for a company. Even among value investors, you will find difference in opinion on the relationship between business value and price. The objective is to make sure that your definitions of “good business” is consistent with your definition of an “excellent” price. 
 -----

The price paid is only meaningful if it is relative to the business’ value. Fair value is destination, price and time help value investors determine if it is worthwhile for them to take that journey. The rewards must justify the risks taken. In a rational market environment, price and value share a delicate balances, as one dictates the degree of the other. They should never be separated.

Reference:

"The 5 keys to Value Investing" by J. Dennis Jean-Jacques

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4. Buffett Beyond Value: Why Warren Buffett Looks to Growth and Management When Investing

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Thematic Investment: Profiting from Disruption

What is Thematic Investing?

Thematic portfolios are structured to take advantage of the investment opportunities generated by investment themes. These are unifying ideas linking elements that might otherwise appaear unconnected, but which in time look set to become generally understood and accepted by investors, and so reflected in performance and valuations. Thematic investors seek to identify the winners and losers as themes disrupt established industry structures.

 

Most of themes are associated with long term patterns of change in broad-based areas that include technology, life sciences, economics, politics, demographics and the environment. Within these areas, managers select more narrowly defined trends whose economic implications are imperfectly understood by investor and therefore offer the opportunity for thematic portfolio investor to generate out-performance.

 

Some managers prefer to structure their portfolios in terms of broad business concept such as "innovation", "competitive advantage" or "restructuring", which they refer to as themes.

Does Thematic Investing Work?

In order to measure thematic returns - and compare them with those generated by traditional equity managers - we created an equally weighted composite performance stream for the largest multi-themed global thematic investment funds.

This type of analysis has certain limitations. By its very nature, it reflects the returns achieved by a wide range of different thematic management styles. The result are also affected by "survivorship bias", which arises when failed funds are either dropped from the analysis or not include initially, resulting in past returns being overestimated. 

 

What Drives Thematic Stock Selection?

Thematic investing can be effective mechanism for identifying stock opportunities because it uses a different frame of reference than that of most traditional equity services. all active portfolio managers set out to compare the attractiveness of a variety of investment opportunities. However, thematic portfolio managers look at markets from a different perspective and therefore may be able to uncover different alpha sources.

 

Next time i will continue sharing this topic, :)

Reference:

"Global Thematic Research" by Alliance Bernstein

Intrinsic Value & Capital Allocation

Understanding intrinsic value is as important for managers as it is for investors.  When managers are making capital allocation decisions - including decisions to repurchase shares - it's vital that they act in ways that increase per-share intrinsic value and avoid moves that decrease it.  This principle may seem obvious but we constantly see it violated.  And, when misallocations occur, shareholders are hurt.      
 ----

     For example, in contemplating business mergers and acquisitions, many managers tend to focus on whether the transaction is immediately dilutive or anti-dilutive to earnings per share (or, at financial institutions, to per-share book value).  An emphasis of this sort carries great dangers.  Going back to our college-education example, imagine that a 25-year-old first-year MBA student is considering merging his future economic interests with those of a 25-year-old day laborer.  The MBA student, a non-earner, would find that a "share-for-share" merger of his equity interest in himself with that of the day laborer would enhance his near-term earnings (in a big way!).  But what could be sillier for the student than a deal of this kind?

 ----

     In corporate transactions, it's equally silly for the would- be purchaser to focus on current earnings when the prospective acquiree has either different prospects, different amounts of non-operating assets, or a different capital structure.  At Berkshire,  Warren Buffett (The CEO) have rejected many merger and purchase opportunities that would have boosted current and near-term earnings but that would have reduced per-share intrinsic value.  His approach, rather, has been to follow Wayne Gretzky's advice:  "Go to where the puck is going to be, not to where it is."  As a result, our shareholders are now many billions of dollars richer than they would have been if we had used the standard catechism.

 ----

     The sad fact is that most major acquisitions display an egregious imbalance: They are a bonanza for the shareholders of the acquiree; they increase the income and status of the acquirer's management; and they are a honey pot for the investment bankers and other professionals on both sides.  They usually reduce the wealth of the acquirer's shareholders, often to a substantial extent.  That happens because the acquirer typically gives up more intrinsic value than it receives.  Do that enough, says John Medlin, the retired head of Wachovia Corp., and "you are running a chain letter in reverse."    Over time, the skill with which a company's managers allocate capital has an enormous impact on the enterprise's value.  Almost by definition, a really good business generates far more money (at least after its early years) than it can use internally.  The company could distribute the money to shareholders by way of dividends or share repurchases.  Often the CEO asks a strategic planning staff, consultants or investment bankers whether an acquisition or two might make sense.  That's like asking your interior decorator whether you need a $50,000 rug.

Reference:
From Berkshire' Letter for Shareholder