"Make it your mission to understand & invest wisely. Everyone has the potential to succeed in their search for true wealth & happiness & everyone can be successful in their pursuit of financial freedom." Contrarian Invest

Saturday, 16 November 2013

The advantage of Rand Cost Averaging

Time IN the market, rather than trying to time the market, is key. Stock markets are very difficult to predict, so if you are constantly buying and selling, you can expose yourself to greater risk.

Here's a wonderful strategy that i personally implement. Its called Rand cost averaging. How it works is you budget a fixed amount of money to invest at regular intervals. This way you take advantage of market fluctuations – without worrying about timing your transactions. By implementing this strategy, I buy more units when prices are low and fewer when prices are high, generally resulting in a lower average cost per unit. It's one of the reasons i do not panic sell when prices fall, infact i get happier when they do. As you can see from the table below (Recurring investment in a falling market) the fund price only has to go from R7 to R13.53 in order for me to break even instead of it reaching a fixed purchase price of R24.

I have a very disciplined approach to investing. I following a long term approach by remaining invested in the markets because i know the market goes through cycles which will impact my performance & ultimately my investment returns. It’s not when, but if you invest that counts so don't let falling prices put you off investing when infact that is the best time to be buying. Anytime is a good time to start investing. All you need to do is stay committed and patient and you will reap the financial rewards.

Sunday, 30 June 2013

The Cost Of Mining Gold [INFOGRAPHIC]

The market price of gold has been tumbling. And logic and economics dictate that if the price of gold falls below the cost of mining gold, then miners will stop mining for gold.

If miners stop mining and buyers keep buying, then supplies will be strained and prices should rise. This is the thesis of the remaining gold bulls.

However, the cost of mining gold varies greatly from mine to mine. And as such it is difficult to determine at what price gold needs to fall so that supply-demand dynamics become strained.

Tuesday, 18 June 2013

Hedging the Rand

Rand-hedge shares are shares that will generally benefit from a weakening in the Rand exchange rate, mostly the R/$. We saw the Rand continuing to weaken this year. Looking at a three year chart the Rand strengthened against the Dollar to R6.60 by mid 2011. After a sharp weakening to R8.25 in the second half of 2011 following the Greek crises, the trend continued in 2012 and reached new 4 year highs in 2013 of R9.20.

Although the Rand is currently weaker than its Purchasing Power Parity of about R8.60, it is my view that the Rand can weaken further. The main reasons are:
  • Political instability, especially towards businesses and foreign investment.
  • Labour unrest and policy uncertainty, especially in the mining industry.
  • Fixed Direct Foreign Investment already showed a decline of 40% by the middle of last year.
  • Our twin deficits are a problem for foreign investors:
    • The budget deficit is still more than 5% of GDP after running surpluses before the 2008 financial crises.
    • The deficit on the Current Account of the Balance of payments (which includes the Trade Deficit) is unacceptably high at more than 6% of GDP. This deficit must be financed by foreign capital inflows, mostly into our Bond and Equity markets as portfolio inflows. These inflows are starting to show signs weakness. Without capital inflows the Rand must take the full blow as our Reserves are too small to support the currency. Previous attempts to support the currency with our paltry Reserves in 1998 lead to a loss of R130bn and the currency never recovered.
    • Foreigners already own between 30% and 40% of our Bonds and listed equities on the JSE. At some point they may not want to own too big a share. Without continued positive capital inflows to finance the current account deficit the Rand will fall.
Government is making South Africa a very unfriendly place for foreign investors at a time we are sitting on a bomb ready to explode in the form of our huge Current Account Deficit. Foreign investors are already showing losses on their investments here because of the weakening Rand. At some stage they will decide to cut their losses and run.
Rand-hedge Shares
In this environment it may be prudent to structure a portfolio of shares with a big Rand-hedge component. There are two types of Rand-hedge shares:
  • Companies listed on the JSE but with most of their income and earnings derived from operations overseas. Richemont is an example of a company that derives almost all their profits outside South Africa.
  • All our major exporters will benefit from a weakening Rand. The prices of commodities are fixed in Dollars. Thus, any weakening of the Rand will lead to an immediate increase in the Rand price of the commodity, thereby increasing earnings and the share price.
  • Did you know that SASOL (JSE:SOL) gains R861 million in operating profit for every 10 cents the Rand weakens against the US Dollar. For every $1 increase in the price of a barrel of oil, Sasol gains R621 million profit. Since SASOL gets paid in Dollars so it benefits when the Rand weakens and oil prices rise.
A recent research study showed the following companies as the biggest benefactors of a declining Rand.
  • A 10% depreciation in the Rand against the Dollar will lead to an increase of more than 50% in the full year earnings of Anglo Platinum, Lonmin, Harmony, Aquarius, Royal Bafokeng and Northam Platinum.
  • Sappi and African Rainbow Minerals will receive a 30% boost to full year earnings and
  • Impala Plats, Assore, Sasol and Gold Fields will see full year earnings increase by more than 20%.
Companies importing goods will obviously be hurt by a depreciating Rand. Local retail shares that stand to lose the most are Imperial, Barlow World, Clicks and Foschini. These shares enjoyed big share price gains last year and look expensive in any case. In times like I stock up on as much SASOL shares as i possibly can buy.

Sunday, 5 May 2013

A beginners guide to profitable investing

The following financial ratios offer terrific insights into the financial health of a company - and the prospects for a rise in its share price.

1. Ploughback and reserves
After deduction of all expenses, including taxes, the net profits of a company are split into two parts -- dividends and ploughback.

Dividend is that portion of a company's profits which is distributed to its shareholders, whereas ploughback is the portion that the company retains and gets added to its reserves.
The figures for ploughback and reserves of any company can be obtained by a cursory glance at its balance sheet and profit and loss account.

Ploughback is important because it not only increases the reserves of a company but also provides the company with funds required for its growth and expansion. All growth companies maintain a high level of ploughback. So if you are looking for a growth company to invest in, you should examine its ploughback figures.

Companies that have no intention of expanding are unlikely to plough back a large portion of their profits.

Reserves constitute the accumulated retained profits of a company. It is important to compare the size of a company's reserves with the size of its equity capital. This will indicate whether the company is in a position to issue bonus shares.
As a rule-of-thumb, a company whose reserves are double that of its equity capital should be in a position to make a liberal bonus issue.

Retained profits also belong to the shareholders. This is why reserves are often referred to as shareholders' funds. Therefore, any addition to the reserves of a company will normally lead to a corresponding an increase in the price of your shares.

The higher the reserves, the greater will be the value of your shareholding. Retained profits (ploughback) may not come to you in the form of cash, but they benefit you by pushing up the price of your shares.

2. Book value per share
You will come across this term very often in investment discussions. Book value per share indicates what each share of a company is worth according to the company's books of accounts.

The company's books of account maintain a record of what the company owns (assets), and what it owes to its creditors (liabilities). If you subtract the total liabilities of a company from its total assets, then what is left belongs to the shareholders, called the shareholders' funds.
If you divide shareholders' funds by the total number of equity shares issued by the company, the figure that you get will be the book value per share.

Book Value per share = Shareholders' funds / Total number of equity shares issued
The figure for shareholders' funds can also be obtained by adding the equity capital and reserves of the company.

Book value is a historical record based on the original prices at which assets of the company were originally purchased. It doesn't reflect the current market value of the company's assets.

Therefore, book value per share has limited usage as a tool for evaluating the market value or price of a company's shares. It can, at best, give you a rough idea of what a company's shares should at least be worth.

The market prices of shares are generally much higher than what their book values indicate. Therefore, if you come across a share whose market price is around its book value, the chances are that it is under-priced. This is one way in which the book value per share ratio can prove useful to you while assessing whether a particular share is over- or under-priced.

3. Earnings per share (EPS)
EPS is a well-known and widely used investment ratio. It is calculated as:
Earnings Per Share (EPS) = Profit After Tax / Total number of equity shares issued
This ratio gives the earnings of a company on a per share basis. In order to get a clear idea of what this ratio signifies, let us assume that you possess 100 shares with a face value of R 10 each in XYZ Ltd. Suppose the earnings per share of XYZ Ltd. is R 6 per share and the dividend declared by it is 20 per cent, or R 2 per share. This means that each share of XYZ Ltd. earns R 6 every year, even though you receive only R 2 out of it as dividend.

The remaining amount, R 4 per share, constitutes the ploughback or retained earnings. If you had bought these shares at par, it would mean a 60 per cent return on your investment, out of which you would receive 20 per cent as dividend and 40 per cent would be the ploughback. This ploughback of 40 per cent would benefit you by pushing up the market price of your shares. Ideally speaking, your shares should appreciate by 40 per cent from R 10 to R 14 per share.

This illustration serves to drive home a basic investment lesson. You should evaluate your investment returns not on the basis of the dividend you receive, but on the basis of the earnings per share. Earnings per share is the true indicator of the returns on your share investments.

Suppose you had bought shares in XYZ Ltd at double their face value, i.e. at R 20 per share. Then an EPS of R 6 per share would mean a 30 per cent return on your investment, of which 10 per cent (R 2 per share) is dividend, and 20 per cent (R 4 per share) the ploughback.
Under ideal conditions, ploughback should push up the price of your shares by 20 per cent, i.e. from R 20 to 24 per share. Therefore, irrespective of what price you buy a particular company's shares at its EPS will provide you with an invaluable tool for calculating the returns on your investment.

4. Price earnings ratio (P/E)
The price earnings ratio (P/E) expresses the relationship between the market price of a company's share and its earnings per share:
Price/Earnings Ratio (P/E) = Price of the share / Earnings per share
This ratio indicates the extent to which earnings of a share are covered by its price. If P/E is 5, it means that the price of a share is 5 times its earnings. In other words, the company's EPS remaining constant, it will take you approximately five years through dividends plus capital appreciation to recover the cost of buying the share. The lower the P/E, lesser the time it will take for you to recover your investment.

P/E ratio is a reflection of the market's opinion of the earnings capacity and future business prospects of a company. Companies which enjoy the confidence of investors and have a higher market standing usually command high P/E ratios.

For example, blue chip companies often have P/E ratios that are as high as 20 to 60. 
On the face of it, it would seem that companies with low P/E ratios would offer the most attractive investment opportunities. This is not always true. Companies with high current earnings but dim future prospects often have low P/E ratios.

Obviously such companies are not good investments, notwithstanding their P/E ratios. As an investor your primary concern is with the future prospects of a company and not so much with its present performance. This is the main reason why companies with low current earnings but bright future prospects usually command high P/E ratios.

To a great extent, the present price of a share, discounts, i.e. anticipates, its future earnings.
All this may seem very perplexing to you because it leaves the basic question unanswered: How does one use the P/E ratio for making sound investment decisions?
The answer lies in utilising the P/E ratio in conjunction with your assessment of the future earnings and growth prospects of a company. You have to judge the extent to which its P/E ratio reflects the company's future prospects.

If it is low compared to the future prospects of a company, then the company's shares are good for investment. Therefore, even if you come across a company with a high P/E ratio of 25 or 30 don't summarily reject it because even this level of P/E ratio may actually be low if the company is poised for meteoric future growth. On the other hand, a low P/E ratio of 4 or 5 may actually be high if your assessment of the company's future indicates sharply declining sales and large losses.

5. Dividend and yield
There are many investors who buy shares with the objective of earning a regular income from their investment. Their primary concern is with the amount that a company gives as dividends -- capital appreciation being only a secondary consideration. For such investors, dividends obviously play a crucial role in their investment calculations.
It is illogical to draw a distinction between capital appreciation and dividends. Money is money -- it doesn't really matter whether it comes from capital appreciation or from dividends.

A wise investor is primarily concerned with the total returns on his investment -- he doesn't really care whether these returns come from capital appreciation or dividends, or through varying combinations of both. In fact, investors in high tax brackets prefer to get most of their returns through long-term capital appreciation because of tax considerations.
Companies that give high dividends not only have a poor growth record but often also poor future growth prospects. If a company distributes the bulk of its earnings in the form of dividends, there will not be enough ploughback for financing future growth.

On the other hand, high growth companies generally have a poor dividend record. This is because such companies use only a relatively small proportion of their earnings to pay dividends. In the long run, however, high growth companies not only offer steep capital appreciation but also end up paying higher dividends.

On the whole, therefore, you are likely to get much higher total returns on your investment if you invest for capital appreciation rather than for dividends. In short, it all boils down to whether you are prepared to sacrifice a part of your immediate dividend income in the expectation of greater capital appreciation and higher dividends in the years to come and the whole issue is basically a trade-off between capital appreciation and income.

Investors are not really interested in dividends but in the relationship that dividends bear to the market price of the company's shares. This relationship is best expressed by the ratio called yield or dividend yield:
Yield = (Dividend per share / market price per share) x 100
Yield indicates the percentage of return that you can expect by way of dividends on your investment made at the prevailing market price. 

The concept of yield is best clarified by the following illustration.
Let us suppose you have invested R 2,000 in buying 100 shares of XYZ Ltd at R 20 per share with a face value of R 10 each.
If XYZ announces a dividend of 20 per cent (R 2 per share), then you stand to get a total dividend of R 200. Since you bought these shares at R 20 per share, the yield on your investment is 10 per cent (Yield = 2/20 x 100). Thus, while the dividend was 20 per cent; but your yield is actually 10 per cent.

The concept of yield is of far greater practical utility than dividends. It gives you an idea of what you are earning through dividends on the current market price of your shares.

6. Return on Capital Employed (ROCE), and
7. Return on Net Worth (RONW)
While analysing a company, the most important thing you would like to know is whether the company is efficiently using the capital (shareholders' funds plus borrowed funds) entrusted to it.

While valuing the efficiency and worth of companies, we need to know the return that a company is able to earn on its capital, namely its equity plus debt. A company that earns a higher return on the capital it employs is more valuable than one which earns a lower return on its capital.

The tools for measuring these returns are:
1. Return on Capital Employed (ROCE), and
2. Return on Net Worth (RONW).
Return on Capital Employed and Return on Net Worth (shareholders funds) are valuable financial ratios for evaluating a company's efficiency and the quality of its management. The figures for these ratios are commonly available in business magazines, annual reports and economic newspapers and financial Web sites.

Return on capital employed
Return on capital employed (ROCE) is best defined as operating profit divided by capital employed (net worth plus debt).

The figure for operating profit is arrived at after adding back taxes paid, depreciation, extraordinary one-time expenses, and deducting extraordinary one-time income and other income (income not earned through mainline operations), to the net profit figure.
The operating profit of a company is a better indicator of the profits earned by it than is the net profit.

ROCE thus reflects the overall earnings performance and operational efficiency of a company's business. It is an important basic ratio that permits an investor to make inter-company comparisons.

Return on net worth
Return on net worth (RONW) is defined as net profit divided by net worth. It is a basic ratio that tells a shareholder what he is getting out of his investment in the company.
ROCE is a better measure to get an idea of the overall profitability of the company's operations, while RONW is a better measure for judging the returns that a shareholder gets on his investment.

The use of both these ratios will give you a broad picture of a company's efficiency, financial viability and its ability to earn returns on shareholders' funds and capital employed.

8. PEG ratio
PEG is an important and widely used ratio for forming an estimate of the intrinsic value of a share. It tells you whether the share that you are interested in buying or selling is under-priced, fully priced or over-priced.

For this you need to link the P/E ratio discussed earlier to the future growth rate of the company. This is based on the assumption that the higher the expected growth rate of the company, the higher will be the P/E ratio that the company's share commands in the market.

The reverse is equally true. The P/E ratio cannot be viewed in isolation. It has to be viewed in the context of the company's future growth rate. The PEG is calculated by dividing the P/E by the forecasted growth rate in the EPS (earnings per share) of the company.
As a broad rule of the thumb, a PEG value below 0.5 indicates a very attractive buying opportunity, whereas a selling opportunity emerges when the PEG crosses 1.5, or even 2 for that matter.
The catch here is to accurately calculate the future growth rate of earnings (EPS) of the company. Wide and intensive reading of investment and business news and analysis, combined with experience will certainly help you to make more accurate forecasts of company earnings.

Monday, 29 April 2013

10 reasons to invest in a Retirement Annuity (RA)

It is clear that South Africans need to make additional provisions for retirement if they are to enjoy a standard of living that they have become accustomed to during their working years. 

Retirement annuities remain a popular investment vehicle with many South Africans for good reason. 
A retirement annuity is a long-term savings vehicle aimed primarily at people providing for their retirement. To prevent people from relying on the government to provide for them in their old age, there are legal restrictions on withdrawing funds from RAs. But there are also tax advantages to offset the lack of access to funds. Tax benefits are just one of the ten reasons that you should consider a retirement annuity:

1. Preparing for retirement
An RA helps you to build up capital during your working years so that you have enough income to
enjoy the same standard of living when you retire.

2. Ensuring sufficient savings
The rule of thumb is that if you save 15% of your salary over 35 years, you will receive 75% of your salary as a pension, given reasonable returns.
The problem is that your pensionable salary (the amount that your 15% pension contributions are calculated on) is usually about only 70% of your total salary benefits which include, for example, a bonus, car allowance, medical aid and other benefits. This means that you could retire on 75% of 70% of your salary!
It is important to save for these ‘extras’ as they do help us meet our current living expenses.
For example: if your monthly package is R20 000, you would need to retire on the equivalent of R15 000 (75%). But your pensionable salary is significantly less at R10 500 (75% X R20 000 X 70%). By investing 15% of your non-pensionable income into a retirement annuity, you can make up the savings gap. A starting point is to always invest 15% of your bonus tax-free into an RA.

3. Tax benefits
You can invest up to 15% of your total income (less any amount that may be used for other pension fund contributions) tax-free. Not only can you invest with before-tax money, but you do not have to pay capital gains tax or income tax on your retirement investment. Your investment growth will be higher over the long-term as the growth remains in the policy and will usually offer you a better after-tax return than other types of saving.
When you retire, you can take one-third of your investment as a lump sum. Of this the first R300 000 is tax-free with a favourable tax-rate for higher amounts. The remaining two-thirds of the retirement annuity is invested in an annuity to provide you with income during your retirement.

You can reduce your income tax by contributing towards an RA before the end of the tax year in February. For those who have started planning ahead and have a Retirement Annuity (RA) in place,you may have been entitled to a tax deductible top up on your RA, as an opportunity to enhance your savings. To illustrate, using an example of a professional earning R600 000 p.a. in the top tax bracket of 40%. 

He does not contribute to a pension scheme but can contribute towards a Retirement Annuity.
Exercising his right to top up on his RA could see him save R36 000 in taxes and allows him to increase future retirement earnings. This year is the last year to take advantage of the uncapped tax deductions from retirement savings as the government plans to cap tax deductions from March 2014. 

 4. The power of compound growth
Because you are saving over a long period, your money starts to work for you as you earn interest on the interest. If you save consistently over 30 years, less than 35 cents of each Rand of income you receive will come from the contribution you paid in. The balance will come from the growth earned on your contributions and savings in retirement.

5. Disciplined savings
You do not have access to your retirement annuity savings until the age of 55. This may sound like a disadvantage but it removes the temptation to dip into or deplete your savings while you are working. A 25-year old needs about 15% of his/her salary through their working lifetime to secure an adequate pension. If they cashed in their savings at 35, they would need to save 25% to get to the same benefit. Starting from a zero base at 45 requires an incredible 47%! The only remedy here would be to retire later.

6. Long-term growth
As markets fluctuate during different economic cycles, your consistent contributions will average out this variability. You also draw your pension over a (hopefully) prolonged period. Therefore, what happens in a turbulent investment market is of less concern to you. The average investment manager has delivered returns which are 11% above inflation over the last 5 years, despite the recent global economic crisis.

7. Supporting your dependants
If your dependents are left to cope without you, your retirement annuity can provide a source of income for those you leave behind, especially if you buy death cover on your policy. The cash benefit from a retirement annuity falls outside your estate, so if you die and are insolvent, your benefit is paid to your family rather than your creditors.

8. Room to grow your savings
While pension funds generally require a contribution that is a fixed percentage of your salary, RAs offer more flexibility. Many people recognise the need to save but struggle in the short term to meet financial obligations.
A retirement annuity allows you to slowly increase your contributions over time. For example, you could take 3% from each of your next five years’ salary increases to get to the full 15% contribution.
You can also invest a portion of your bonus each year as a lump sum contribution.

9. Diversified portfolio
You have access to different asset classes in a retirement annuity. You can invest 25% of your savings offshore without needing Reserve Bank clearance. You can also invest in other types of portfolios through your RA, such as direct property, private equity and fund of funds.

10. Freedom of choice
With many retirement annuities, you can choose your underlying investment giving you some flexibility in how your contributions are invested and therefore how they grow.

If you would like more information regarding Retirement Annuities or any other investment products kindly contact MOJAFF FINANCIAL SERVICES on the contact details below: 

Tel:  (021) 638 7786
Fax: (021) 638 3399
Cell: (082) 824 4400
Website: www.mojaff.co.za
Authorised Financial Services Provider FSB#3650

Sunday, 21 April 2013

The pot of Gold at the end of the rainbow...my perspective.

Simply put, the Gold sell off recently in the markets was pure Panic. Fear has clearly taken the driver’s seat, pushing greed completely aside for some of the nonsensical reasons given by most analysts. I see bear markets as buyers’ markets. I’ve long said that the best time to buy is when there’s blood in the streets, and that’s what its shaping up to be.

The dramatic plunge in gold prices over the last few days does not mean the bull market is over, but this may be a long-awaited mid-cycle correction. In my view, the fundamentals are still very positive for gold .

There’s still a very strong physical demand. Physical demand for gold will start to pick up after the recent price decline…it’s inevitable…trust me.

It’s possible we have already seen the low.  It’s hard to see how gold sentiment can deteriorate any further. Should gold fall further, I see some support at $1,225-$1,250 and very strong support just above $1,000. 
If we do go that low, I don’t see how it can be for long. Here’s why.
The average all-in cost to produce gold – ie the cost per ounce of finding, developing and building a mine as well as actual production – is widely believed to be somewhere in the $1,200-$1,400 range. On this basis, some 15% of gold producers would now be underwater on an all-in cost basis. With all the mining strikes after the past couple months hindering gold mining production has haltered supply. With less supply and rising direct costs to produce Gold, you can be guaranteed that Gold prices WILL rise in the future.

In 2012, the average price for the sale of mined gold was $1,650. With Gold trading below $1400 per ounce,  companies would, at $1,650 per ounce, have their gold now sell below $1,400 at major losses!
Companies can’t afford price Gold to fall below productions costs. There is only so long it can trade at a price below its annual cost of production.

Fear has clearly taken the driver’s seat, pushing greed completely aside... at least for now. Why? The reasons given by most analysts are nonsensical:
  • Gold is selling off because those ever-so-ethical and smart guys at Goldman Sachs say it’s heading lower. That this is patently silly hasn’t stopped it from becoming a self-fulfilling prophecy, for a time.
  • Gold is selling off because some technical analysts says that’s what should happen when certain support levels are breached. To the degree people believed this, regarding $1550, 0r $1450.

  • Gold is selling off with broader markets because surprisingly weak retail sales and consumer confidence numbers from the US, as well as weaker-than-expected numbers from China, have whacked stocks and commodities alike – but that should have been bullish for the safe-haven metal. That some economic data coming in weaker than expected is given as a reason for gold to drop just shows how few people understand gold at all.
  • Gold is selling off because of the now-denied news about Cyprus selling gold holdings to help bail itself out. Even if this were true, it would have no bearing on the fundamentals of the gold market.
  • Gold is selling off because of manipulation. If that were so, it would not change the underlying realities and would eventually have to be unwound.
  • Gold is selling because more and more people fear the peak was $1,900 in 2011, and it’s all downhill from here. That – again – is momentum.
        What this is all saying is that gold is selling off for the wrong reasons, mostly amounting to speculative momentum-chasing. Simply put: this is panic.
I’ve yet to see any convincing argument as to why gold had to drop or should go lower. I’ve yet to be convinced that the governments of the world have cured what ails the global economy with their virtual printing presses, and the next boom is a done deal.

The current drop may not be the bottom yet, but a very significant near term gain for those that see it as a buyers market. I see bear markets as buyers markets. Expect Kruger Rand demand to increase dramatically and an increase in prices to follow.

I plan to bid under market over the course of this week and get the best prices possible. Then I’ll wait and see what comes next. I encourage all contrarians with courage to join me in taking advantage of this opportunity.

Saturday, 20 April 2013

The basics of understanding Currency pairs

Forex trading is the simultaneous buying of one currency and the selling of another and is always done in currency pairs, such as GBP/USD or USD/CAD. A currency pair represents the exchange rate between the two currencies.

The first currency in a currency pair is always dominant and called the Base Currency. It is also the currency that remains constant when determining a currency pair's price. The Counter Currency or pricing currency is the second currency in a currency pair notation.
For example, a transaction of buying the EUR/USD at 1.3000 is actually buying the Euro and selling the Dollar at 1.3000 cent. If the Euro increases in value in relation to the dollar, the price will increase and the currency trader will make money on his transaction. 

Base and Counter Currency
How is forex quoted? 
Like equities, foreign exchange has a bid price and an ask price.  The bid price is where the market maker is willing to buy. The ask price, is where the market maker is willing to sell. For traders, the reverse is true. The bid price is where a trader can sell, while the ask price is where a trader can buy. The bid price is always less than the ask price. This makes logical sense, as a market maker, like any investor, wants to buy low and sell high. The spread between the bid and the ask price is called the bid/ask spread or dealing spread.
Like equities, foreign exchange has a bid price and an ask price.  The bid price is where the market maker is willing to buy. The ask price, is where the market maker is willing to sell. For traders, the reverse is true. The bid price is where a trader can sell, while the ask price is where a trader can buy. The bid price is always less than the ask price. This makes logical sense, as a market maker, like any investor, wants to buy low and sell high. The spread between the bid and the ask price is called the bid/ask spread or dealing spread. 

Dealing Spread

USDUnited States DollarBuck
GBPGreat Britain PoundCable
JPYJapanese YenYen
CADCanadian DollarLoonie
NZDNew Zealand DollarKiwi
AUDAustralian DollarAussie

Three main types of currency pairs are: 

  • The majors: EUR/USD, USD/JPY, USD/CHF and GBP/USD.
  • The commodity pairs: USD/CAD, AUD/USD and NZD/USD. 
  • The currency crosses: most popular are the EUR/GBP, EUR/JPY and EUR/CHF.

The "Major" currency pairs 
Currencies, like equities and bonds, have pairs that are very liquid and those that are not so liquid.  The liquid currencies can be characterized as those that are the most stable economically, and politically. They include the countries that form the Group of 7 or G7 - the United States, Japan, Great Britain, France, Germany, Italy, and Canada.
Often you will hear on CNBC or read in the financial press that the "dollar was stronger today".  When that is said, it usually implies that the dollar got stronger vs. the major currencies or what is often referred to as the“Majors”. Since the unification of the European currencies into the Euro, the currencies that are most liquid now include the US Dollar, the Japanese Yen, the British Pound, and the Euro, known as the “major pairs”. It is estimated that activity in these currencies comprises of more that 85% of the daily foreign exchange volume.
The following are examples of situations that might lead you to choose a particular currency pair to trade: 


Foreign currency symbols
Foreign Currencies like equities have their own symbols that distinguish one from another.  Since foreign currencies are quoted in terms of the value of one currency against the value of another, a currency pair includes the "name" for both currencies, separated by a "/".  The "name" is a three-letter acronym. The first two letters are in most cases reserved for identification of the country. The last letter is the first letter of the unit of currency for that country.     
• Dollar weakness drives EUR/USD higher • US recovery and strong influx of foreign demand will send EUR/USD lower 
   • Japanese government intervention to weaken their currency sends USD/JPY higher • Gains in Nikkei and demand for Japanese assets drive USD/JPY down.
• High yield and attractive growth in the UK drives GBP/USD higher • Speculation about UK adopting the euro will send the GBP/USD lower.
 • Global stability and global recovery will send USD/CHF higher • USD/CHF rallies on geopolitical instability.

Thursday, 11 April 2013

Bitcoin, Hype or Reality?

Is virtual currency THE currency of the future?

Virtual Currency has been the question on my mind of late. A few years ago a virtual currency called Bitcoin emerged. No surprise to me as currency in today's day and age is mostly just electronic ones and zeros. 

There's been alot of hype lately about the virtual currency called Bitcoin.  The past few days has seen the price of a single Bitcoin more than double and as speculators triggered a wave of inflated expectations, the price of Bitcoins soared at one point to a high of $266 each. Then yesterday it crashed from its peak & hit a low of $105! Is it just hype like the dotcom of the day? or is a further crash just looming around the corner? 

Is the value of Bitcoins just mere speculation?
My personal investing view is "If I don't understand the investment or how to value it, then I simply wont invest in it. Its just that simple. I don't follow the lemmings..."

So what is Bitcoin all about? If you’re new to Bitcoin, you’ve probably got a lot of questions. How does it work? Who controls it? Where do I buy Bitcoins? Is it safe?
Ive uploaded a short 3.5 minute video to explain all that. While the video doesn’t go into much detail on how to create Bitcoins through “mining” or how to store Bitcoins in a digital wallet, it at least offers a handy overview.

Monday, 8 April 2013

Commit to a good savings plan

The only way anyone really saves money is to spend less than you make. It’s a simple equation that many people have a difficult time following. Even when I began working and making money, I never changed my spending habits. I could afford to have bought a new car, yet I used that money to invest in businesses and the stock market. I continued to live as though I was on a tight budget – and along with this key rule, these are the other values I’ve kept to build and grow my wealth slowly. Follow these money rules and maybe 2013 will be your best financial year yet.
1. Educate yourself on proper Investing
* Have the right account: Never keep all of your money in a bank checking account that earns little or no interest. Check online for accounts offering a higher yield, as well as accounts that will not charge you ridiculous maintenance and other transaction fees. Many banks like Capitec  have low transaction fees and attractive saving interest rates compared to other banks.
 * Have a retirement account: The younger you start, the better. Make the initiative to learn the best option for you, and take it. If your company offers any kind of contribution match – I’d grab it! It’s free money!
 * Get automatic: Set up automatic transfers to a savings account earning high interest so that you can start effortlessly saving money.
 2. Learning where to put your money (and in what order)
* Always pay your debt as soon as possible. Follow the Debt Snowball Method so you slowly chip away at the debt you have. 
* Build an emergency fund. The rule of thumb is at least three months salary.
* Invest in the stock market. Look at cost effective ETFs like Satrix (www.satrix.co.za). Over the long term Satrix has provided better than average returns and outperformed other savings vehicles.
* Lastly fund your retirement and put the rest in a high interest saving or checking account.

3. Having a positive outlook on money
* Create goals: Figure out an amount you want to save and write it down. Once you have that goal, figure out how you are going to attain it. Cutting costs? Extra work? Selling some of your things? A book I really love that I’m reading now is Think and Grow Rich by Napoleon Hill. It’s the concept of knowing and believing that you will attain riches will help it to become a reality.
* Stay positive: Don’t get in the mindset that whatever your situation happens to be means that you will never be able to attain wealth. Maybe you lack formal education or you have a low paying job. You can’t continue to blame outside factors – it is in YOUR power to change your situation, and staying positive and knowing that you are capable of having the lifestyle you desire will attract that into your life.
This year, start taking control of your finances. Commit to a savings plan. Stop buying things you don’t need or can’t afford. Try to automate at least 15% of your salary to go into your savings account every month. I like to think of this as paying yourself first. If 15% sounds like too much, decide on a amount of each paycheck you can afford that can go into a savings account as soon as you earn it. This way, you won’t consider yourself having those funds to waste on unnecessary purchases.

Its very important to mentally condition your mindset to pay yourself first. So for example, you earn R10,000 in salary every month, and when payday comes around, have 15% (R1500) of your salary automatically transferred into a savings/investment account . Pretend like that money never exists. Thats a potential R18,000 stashed away per year with little or no effort. Now continue to live the rest of the month as though you're earning R8500 (R10,000 - R1,500). With annual increases in salary and inflation, simply repeat the same exercise. You’l find that over time you would have build up a significant nest egg just by simply automating your savings plan.  It's the easiest way to save money.

Warren Buffett Quotes

Leadership Quote of the Day