Individual Investors

Many individual investors decide for themselves which specific stocks to own. Whether the buying decision is based on sound research into the fundamentals, including a thorough reading of the various financial reports issued by the company, or whether price history charts are studied in an effort to perform a thorough technical analysis, or whether an investment decision is based on a tip received from a stockbroker, bartender, chat room, or a talking head on CNBC or Wall Street Week, investors seldom consider their entire portfolio when making a new purchase. The buying decision is often based on investors’ belief (hope) that some information has been uncovered—information not yet known to other investors—that will soon make the price of the newly purchased stock soar.

Some investors make investment decisions alone, shunning the advice of others. Some rely on the camaraderie of an investment club. Some listen to the advice of professionals before making the final decisions themselves.

Some blindly follow the advice of a stock market advisory newsletter while others do everything their stockbrokers suggest. Regardless of the source of an investment idea, most individual investors never think twice about whether the new investment is suitable or whether it helps them achieve their overall investment goals. In fact, many have no overall objectives in mind and simply make new purchases to produce a portfolio based on chaos. Some investors are happy with their results, while others are not. Modern portfolio theory (MPT) teaches us that this is a poor way to invest. With so many investors accumulating stocks and building a portfolio in this haphazard manner, it’s important to know: Are individual investors generally successful?

Investing in Mutual Funds
Many millions of other investors don’t want to take the time or make the effort to choose their own stocks. Instead, they rely on financial professionals to make investment decisions for them. Some of these investors follow the advice of a guru who sells stock market advice for a fee (e.g., newsletters and advisory services), while others accept the investment advice of financial planners or stockbrokers. But the vast majority of these investors buy shares of mutual funds.

Mutual funds serve a great purpose. They allow investors to quickly own a diversified portfolio of stocks without being required to buy shares in each of the individual companies. This is especially important for small
investors who lack the funds to own a properly diversified portfolio of stocks. It has been known for a long time that proper diversification is a strategy that reduces the risk of investing in the stock market. It’s one of the cornerstones of MPT.

Having decided to buy shares of mutual funds, investors must rely on the ability of fund managers to make intelligent investment decisions and earn a good return on investor capital. Some investors make a careful study of mutual funds before selecting which to buy. They study how well mutual funds have performed in the past; they check out Morningstar’s1 rating on the funds, or they accept the advice of a stockbroker.2 Some investors go further and choose funds that invest in the type of stocks they want to own.

For example, some funds only buy stocks of large companies; others specialize by investing in smaller, growing companies. Some funds buy stocks for income (dividends); others buy stock for long-term growth. Some funds specialize in the companies in one specific industry (sector funds); others are more diversified. Some buy stocks in American companies; others invest in businesses from around the world. There are many mutual funds in existence, each with its own investment strategy, and the public investor can choose any of them.

Some who buy shares of mutual funds invest their money, close their eyes, and, placing their trust in the fund’s managers, hope for the best. Others take the opposite approach and constantly monitor the performance of their funds and hop from one fund to another, chasing those with the best recent performance.

Most of those who invest in mutual funds would be better served if they had an understanding of how to construct a safer and better-performing investment portfolio on their own. Our goal is to show you, the individual investor, how to do just that.

Some investors are sophisticated enough to know how to avoid paying a sales commission (load) when buying funds; others pay that load, not knowing there is any alternative. The bottom line for the vast majority of mutual fund investors is that once the decision to buy a fund is made, no further thought goes into the process. They leave it to the fund management team to produce superior returns on their money. Over the years, most investors have been satisfied with this methodology, especially since the trend of the American stock market has been bullish over the long term. With so many Americans relying on mutual funds to meet their investment objectives, two important questions must be considered: Are mutual fund investors generally successful? Are they well served by the managers of those funds?


This review is from: Create Your Own Hedge Fund: Increase Profits and Reduce Risks with ETFs and Options


The best two skills I gained from this book were: How to build a portfolio and how to make money using one rather simple strategy. This book gave me the necessary confidence to take control of my own finances and provided compelling reasons for doing so. I learned that ETFs (exchange traded funds) are much less expensive to own than what Wolfinger calls 'traditional mutual funds' ...and, on average, make more money. 

READ MORE - Individual Investors

Investors Continue Muni Fund Exodus

NEW YORK (TheStreet) -- The municipal bond sell-off continued last
week, with investors pulling $5.75 billion out of such funds,
according to data released on Wednesday.

The Investment Company Institute, which tracks flows in long-term
mutual funds, said that investors put a net $4 billion into the market
during the week ended Jan. 19. $4.6 billion of that went toward
stocks, $3.6 billion went toward taxable bonds and $1.6 billion went
into hybrid bond-and-equity funds.


Municipal bonds was the only category from which investors withdrew
money. Investors have removed $30.5 billion from municipal-bond mutual
funds since the start of November, when concerns about local budgets
started gaining traction.


The sell-off has been attributed to comments by well-known financial
analyst Meredith Whitney after she predicted in September that dozens
of municipalities would default on hundreds of billions of outstanding
bonds this year.


Whitney isn't alone. As municipal budget issues have piled up - and
speculation over states' creditworthiness has increased - *JPMorgan
Chase* (JPM) CEO Jamie Dimon also warned investors to be "very, very
careful" dabbling in muni bonds. George Soros said on _CNBC_ this week
that municipalities' budgets will be the "drama of the next year." And
months ago, *Berkshire Hathaway's* (BRK-B) CEO Warren Buffett also
warned of a "terrible problem" for municipal bonds over the long
term.


But not everyone agrees that the muni-bond market is a mess. Prominent
bond fund managers, including PIMCO's Bill Gross, have disputed
Whitney's analysis.


A blogger known as Bond Girl picked apart Whitney's analysis on
Wednesday, pointing out, for instance, that the 100 largest county and
city issuers don't have even $100 billion in debt outstanding. The
trade publication _Bond Buyer_ notes that as retail investors flee the
muni-bond market, other "smart money" buyers are seeing opportunities
in top-quality bonds with impressive yields.


Nonetheless, equities have been a clear winner over the past six
months as the retail masses flocked from one investment to another.

While the *iShares S&P AMT-Free Municipal Bond Fund* (MUB) and *SPDR
Nuveen Barclays Capital Municipal Bond ETF* (TFI) have lost 6% to 9%
over the past six months, the S&P 500 Index has climbed more than 16%.
The *Dow Jones Industrial Average* broke through 12,000 for the first
time since 2008 on Wednesday.


TheStreet Mobile Edition

TheStreet Ratings updates stock ratings daily. However, if no
rating change occurs, the data on this page does not update. The data
does update after 90 days if no rating change occurs within that time
period.

IDC calculates the Market Cap for the basic symbol to include common
shares only. Year-to-date mutual fund returns are calculated on a
monthly basis by Value Line and posted mid-month.
*Oil Data in Market Overview is Brent Crude Pricing
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');

Source: Thestreet.com

READ MORE - Investors Continue Muni Fund Exodus

Investors refuse to back some buyout firms -study

Mon Jan 17, 2011 7:01pm EST
**EMBARGOED UNTIL 0001 GMT 18 Jan
LONDON Jan 18 (Reuters) - Investors are refusing to
reinvest with private equity firms they previously backed, as
they look to reshape their portfolios and weed out
underperforming groups, a new study found.

Some 91 percent of the European investors surveyed have
refused to reinvest with managers they previously backed over
the past 12 months, up from 63 percent in the winter of 2008-09,
when it was last measured, said private equity firm Coller
Capital in its Global Private Equity Barometer.

Investors in the Asia-Pacific region were also more
selective. Some 70 pct have declined to invest with firms again,
compared with 52 percent in 2008-2009.

"A lot of investors' portfolios were shaped for a world that
has changed very significantly since the bubble," said Coller
chief investment officer Jeremy Coller in a telephone interview.
"There will be performance issues as well. What people have
discovered is which (firms) are really skilled," Coller said.

While some private equity firms with good track records are
raising more money quickly, mediocre performers are finding the
process difficult and slow and some are likely to struggle to
raise any capital in the future.

U.S. investors have more experience of investing in private
equity and have been more consistent in not reinvesting. Some 84
percent refused to back new funds in the last 12 months, the
study found.
(Reporting by Simon Meads; Editing by Jane Merriman)
Source: Reuters.Com

READ MORE - Investors refuse to back some buyout firms -study

Shaw Communications Intrigues Investors (SJR, RCI, TU, VZ, T, BCE)

*Acquisition Costs Dampen Earnings*Shaw Communications Inc.,
headquartered in Calgary, Alberta, Canada, has operations including
broadcast, broadband cable, high-speed internet, and satellite TV, as
well as telephone. It has 3.4 million customers, with 1.8 million
internet customers and one million digital phone customers. Shaw has
a market cap of $8.7 billion. The company reported C$1.08 billion in
revenue this quarter, a 19% increase from C$905 million in last year's
first quarter. Revenue was up 7% in its cable division, 3% in
satellite, and 8% in media.

Net income was C$20 million or Cfour cents per share, compared to
C$114 or C26 cents per share. This was due in large part to a C$139
charge for the discounted value of a C$180 million pension benefit
obligation from the company's acquisition of Shaw Media, along with
other restructuring charges. On a comparable basis, excluding
non-operating charges from both this year's first quarter and last
year's, net income would have been C$159 million in this year's
quarter compared to C$180 million in last year's.

*A Growing Telecom*Shaw acquired Canwest Global Communications, known
as Canwest Media, at a cost of around C$2 billion in 2010 and
completed the transaction this year. Shaw expects enhanced revenue
growth this year, with projected free cash flow of C$550 million for
2011. It generated C$145 million in free cash flow in the first
quarter.

Prior to the dividend hike, Shaw yielded 4.2% , comparable to
competitors *Rogers* *Communication* (NYSE:RCI), which yields 3.8
percent and *Telus* (NYSE:TU), which yields 4.8%. Earnings are
expected to reach C$1.47 per share in 2011 and C$1.56 in 2012. While
this earnings growth may seem modest, it's comparable or better than
projections for telecom giants *Verizon* (NYSE:VZ) and *AT&T*
(NYSE:T). The stock, which hasn't done much in the last year, trades
at an attractive forward multiple of just over 14, compared to more
than 17 for the industry.

*Wireless*Shaw has been late to wireless, but is gearing up its
rollout. The company expects to invest C$150 million to C$200 million
in its new wireless services in 2011, which should hit the market
early 2012.While Shaw had a setback as wireless executive Laurence
Cooke, formerly *BCE* (NYSE:BCE) Bell Mobility's chief operating
officer, left the company recently, Shaw's opportunity in wireless is
nevertheless substantial.

Though Shaw has lagged its competitors BCE, Rogers and Telus, which
are already in place in the wireless business, Shaw is expected to
bring both scale and its package of bundled offerings to the wireless
space. This should help Shaw make up ground from its late start in
wireless and become highly competitive.

*The Bottom Line*Shaw and other Canadian telecoms present an
interesting group of stocks for investors to consider. While many U.S.
investors might focus on Verizon or AT&T, Shaw and some of the other
Canadian telecoms are attractive, somewhat overlooked stocks. Shaw
historically has strong revenue, earnings and cash generation
performance. Even with the earnings bump this quarter due to charges,
it should still have a good year. Shaw is set to grow. Its potential
growth in wireless and smartphones makes this company even more
attractive long term.

Use the Investopedia Stock Simulator to trade the stocks mentioned in
this stock analysis, *risk free!*
Source: Investopedia.Com

READ MORE - Shaw Communications Intrigues Investors (SJR, RCI, TU, VZ, T, BCE)

7 Market Anomalies Investors Should Know

It is generally a given that there are no free rides or free lunches
on Wall Street. With hundreds of investors constantly on the hunt for
even a fraction of a percent of extra performance, there should be no
easy ways to beat the market. Nevertheless, there are certain tradable
anomalies that seem to persist in the stock market, and those
understandably tend to fascinate many investors.

While these anomalies are worth exploration, investors should keep
this warning in mind – anomalies can appear, disappear, and
re-appear with almost no warning. Consequently, mechanically following
any sort of trading strategy can be very risky.

*TUTORIAL: Detecting Market Strength*
*Small Firms Outperform*The first stock market anomaly is that smaller
firms (that is, smaller capitalization) tend to outperform larger
companies. As anomalies go, the small firm effect makes rather a lot
of sense. A company's economic growth is ultimately the driving force
behind the performance of its stock and smaller companies have much
longer runways for growth than larger companies. A company like
*Microsoft* (NYSE:MSFT) might need to find an extra $6 billion in
sales to grow 10%, while a smaller company might needs only an extra
$70 million in sales for the same growth rate. Accordingly, smaller
firms typically are able to grow much faster than larger companies and
the stocks reflect this.

*January Effect*The January Effect is a rather well-known anomaly.
Here, the idea is that stocks that underperformed in the fourth
quarter of the prior year tend to outperform the markets in the month
of January. The reason for the January Effect is so logical that it is
almost hard to call it an anomaly. Investors will often look to
jettison underperforming stocks late in the year if they have a loss
in them so that they can use those losses to offset capital gains
taxes (or to take the small deduction that the IRS allows if there is
a net capital loss for the year).

As this selling pressure is sometimes independent of the actual
fundamentals or valuation of the company, this "tax selling" can push
these stocks to levels where the stocks become attractive to buyers in
January. Likewise, investors will often avoid buying underperforming
stocks in the fourth quarter and wait until January, so as to avoid
getting caught up in this tax-loss selling. As a result, there is
excess selling pressure before January and excess buying pressure
after January 1, leading to this effect.

*Low Book Value*Extensive academic research has shown that stocks with
below-average price-to-book ratios tend to outperform the market.
Numerous test portfolios have shown that buying a collection of stocks
with low price/book ratios will deliver market-beating performance.
Although this anomaly makes sense to a point (unusually cheap stocks
should attract buyers' attention and revert to the mean), this is
unfortunately a relatively weak anomaly. Though it is true that low
price-to-book stocks outperform as a group, the individual performance
is very idiosyncratic and it takes very large portfolios of low
price-to-book stocks to see the benefits.

*Neglected Stocks*A close cousin of the "small firm anomaly",
so-called neglected stocks are also thought to outperform the broad
market averages. The neglected firm effect occurs on stocks that are
less liquid (lower trading volume) and tend to have minimal analyst
support. The idea here is that as these companies are "discovered" by
investors the stocks will outperform.

Research suggests that this anomaly actually is not true – once the
effects of the difference in market capitalization are removed, there
is no real outperformance. Consequently, companies that are neglected
_and_ small tend to outperform (because they are small), but larger
neglected stocks do not appear to perform any better than would
otherwise be expected. With that said, there is one slight benefit to
this anomaly – though the performance appears to be correlated with
size, neglected stocks do appear to have lower volatility.

*Reversals*There is some evidence that stocks at either end of the
performance spectrum over periods of time (generally a year) do tend
to reverse course in the following period – yesterday's top
performers become tomorrow's underperformers, and vice versa.
Not only is there statistical evidence to back this up, the anomaly
also makes some sense according to investment fundamentals. If a stock
is a top performer in the market, the odds are that the stock's
performance has made it expensive; likewise in reverse for the
under-performers. It would seem like common sense, then, to expect
that the over-priced stocks then underperform (bringing their
valuation back more in line) while the under-priced stocks outperform.
Reversals also likely work in part because people expect them to work.
If enough investors habitually sell last year's winners and buy last
year's losers, that will help to move the stocks in exactly the
expected directions, making it something of a self-fulfilling anomaly.

*Days of the Week*Efficient market supporters hate the Days of the
Week anomaly because it not only appears to be true, but it makes no
sense. Research has shown that stocks tend to move more on Fridays
than Mondays and that there is a bias towards positive market
performance on Fridays. It is not a huge discrepancy, but it is a
persistent one.

On a fundamental level, there is no particular reason that this should
be true. Some psychological factors could be at work here, though.
Perhaps there is an end-of-week optimism that permeates the market as
traders and investors look forward to the weekend. Alternatively,
perhaps the weekend gives investors a chance to catch up on their
reading, stew and fret about the market, and develop pessimism going
into Monday.

*Dogs of the Dow*The Dogs of the Dow is included as an example of the
dangers of trading anomalies. The idea behind this theory was
basically that investors could beat the market by selecting stocks in
the Dow Jones Industrial Average that had certain value attributes.
There were different versions of the approach, but the two most common
were to select the 10 highest-yielding Dow stocks or go a step further
and take the five stocks from that list that had the lowest absolute
stock price and hold them for a year.

It is unclear whether there was ever any basis in fact for this
approach, as some have suggested that it was a product of data mining.
Even if it had once worked, the effect would have been arbitraged away
- say, for instance, by those picking a day or week ahead of the first
of the year. Moreover, to some extent this is simply a modified
version of the reversal anomaly; the Dow stocks with the highest
yields probably were relative underperformers and would be expected to
outperform.

*Conclusions*Attempting to trade anomalies is a risky way to invest.
Not only are many anomalies not even real in the first place, they are
very unpredictable. What's more, they are often a product of
large-scale data analysis that looks at portfolios made up of hundreds
of stocks that deliver just a fractional performance advantage. Since
these analyses often exclude real-world effects like commissions,
taxes and bid-ask spreads, the supposed benefits often disappear in
the hands of real-world individual investors.

With that said, they can still be useful, to a certain extent. It
seems unwise to actively trade against the Day of the Week effect, for
instance, and investors are probably better off trying to do more
selling on Friday and more buying on Monday. Likewise, it would seem
to make sense to try to sell losing investments before tax-loss
selling really picks up and to hold off buying underperformers until
at least well into December.
All in all, though, it is probably no coincidence that many of the
anomalies that seem to work hearken back to basic principles of
investing. Small companies do better because they grow faster, and
undervalued companies tend to outperform because investors scour the
markets for them and push the stocks back up to more reasonable
levels. Ultimately, then, there is nothing really anomalous about that
at all – the notion of buying good companies at below-market
valuations is a tried and true investment philosophy that has held up
for generations.

*by Stephen Simpson*,CFA
Stephen Simpson, CFA, is a freelance financial writer, investor, and
consultant. He has worked as an equity analyst for both sell-side and
buy-side investment companies in both equities and fixed income.
Stephen's consulting work has focused primarily upon the healthcare
sector, while he has also written extensively for publication on
topics pertaining to investments, security analysis, and healthcare.
Simpson operates the Kratisto Investing blog, and can be reached
there.
Source: Investopedia.Com

READ MORE - 7 Market Anomalies Investors Should Know

Weekend Investor: Three top 2010 sectors to own in 2011

By Jonathan Burton, MarketWatch
SAN FRANCISCO (MarketWatch) — "Buy high, sell higher" seems an
appropriate strategy only for the bravest investors, but buying
what's hot and letting these winners ride isn't as risky as it
sounds.


Stock market winners tend to repeat — over the short-term. Buying
the top three U.S. market sectors of one year and holding them through
the following year has solidly outperformed the benchmark Standard &
Poor's 500-stock index
/quotes/comstock/21z!i1:in\x
(SPX
*1,293*,
+9.48,
+0.74%)
 most of the time over the past two
decades, with only a bit more volatility, according to Standard &
Poor's Equity Research.


!! Day Trading Doesn't Pay !!
James Altucher says day trading will likely result in lost money
and bad habits. Dow Jones Wealth Adviser's Veronica Dagher reports.
This momentum-driven strategy, akin to the "hot hand" or "follow
the leader" theory, currently points to more gains for the
market's three most-popular sectors: consumer discretionary, up
25.1% this year through Dec. 8; industrials, up 20.3%, and materials,
with a 13.6% gain. The S&P 500 added 10.1% over the same period. All
returns exclude reinvested dividends.


Here's how you let your winners ride: Buy 2010's three best S&P
500 sectors before year-end and hold them until the end of 2011. Then
sell that group, buy whatever sectors do best next year, and own those
winners through 2012. Repeat the process each year.


The strategy has an impressive track record. The three sector winners
produced a 10.3% average annualized gain, excluding dividends, from
the end of 1990 through Dec. 8, S&P found. That beat a portfolio of
the three sector losers, which rose 8.9% annualized over the same
period. Meanwhile, the S&P 500 was up 8.6%. The sector winners carried
slightly more risk, but their extra return compensated for the bumps.

"You're much better off sticking with the winners than you are
with the losers on a one-year basis," said Sam Stovall, chief
investment strategist at S&P Equity Research. Indeed, "let your
winners ride" is the first pointer Stovall outlines in his book,
"The Seven Rules of Wall Street."


!! Follow The Herd!!
This long-only price momentum strategy isn't new, but it might make
you uncomfortable. Momentum investing flies in the face of the
long-term oriented advice that individual investors typically hear.

Conventional advice eviscerates hot-hand investing as little more than
gambling and market-timing, and to be sure, momentum strategies can
fail miserably. For example, the three best sectors of 1999 tumbled
26.5% in 2000 while the S&P 500 lost 10.1%, according to S&P.

Letting your winners ride also fell short in 2009, when the three 2008
winners gained 11.7% versus 23.5% for the S&P 500, according to S&P.
The winning sectors also trailed slightly in 2003 and 2004.


That's the painful, dark side of momentum investing: Nobody knows
when the music will end. So be careful. Letting your winners ride is a
short-term play — no more than 12 months — that requires a high
level of discipline and progressively higher stop-loss orders to
protect your gains.


Yet on a year-by-year basis, the odds favor momentum buyers. The
portfolio of the three top S&P 500 sectors has beaten the benchmark
70% of the time over the past two decades, S&P found, versus a 40%
success rate for the bottom three.


Advisers also warn against throwing money at what's hot. But in fact
you might not be too late to the party.

"Identifying the leading S&P sectors and expecting the ones that did
best over the previous period to continue to outperform has been a
profitable strategy," said Marvin Appel, editor of Systems &
Forecasts, an investing newsletter.


!!Everybody Loves A Winner!!
Those years when sector winners stumbled offer clues about when and
why momentum investing fails.

Momentum strategies need market sentiment to move in an upward
direction for an extended period. At such times, volatility is low
and, as another Wall Street maxim teaches, the trend is your friend.

Source: Marketwatch.Com

READ MORE - Weekend Investor: Three top 2010 sectors to own in 2011

IPO VIEW-IPO investors want LBO companies to pay down debt

Fri Jan 14, 2011 8:34pm EST
* Paying debt attractive to investors, can raise IPO value
* Nielsen, HCA and Toys R Us all using IPOs to pay debt
* Private equity could take long time to exit investments
By Clare Baldwin

NEW YORK, Jan 14 (Reuters) - Private equity firms are
finding that selling shares in a company they own is not
exactly the same as exiting the investment.

Traditionally, private equity firms sell companies they own
to public investors through an initial public offering. After
the IPO and a few follow-on offerings the firm's investment in
the company would be over.

But now, IPO investors are demanding that private equity
firms hold their stakes in the IPO and use proceeds from the
initial offering to pay down debt. That means that private
equity firms are left holding the same amount of equity, and
their only hope for exiting their investments is future
follow-on offerings.

The trend could affect some of the biggest IPOs of the
year, including Nielsen Holdings, best known for its TV
viewership ratings; hospital operator HCA Holdings Inc; and
retailer Toys R Us Inc.

Investors are looking for companies to reduce their risk by
reducing their debt -- liabilities can push a company into
bankruptcy if they can't be refinanced when they mature.
Profits also increase when a company no longer has to pay
as much in interest.

"Paying off debt is something that investors are
comfortable with," said Jay Ritter, a finance professor at the
University of Florida.

Take Nielsen, for example. Its IPO is backed by private
equity firms Carlyle Group [CYL.UL], Blackstone Group LP
(BX.N), Kohlberg Kravis Roberts & Co [KKR.UL], Thomas H. Lee
Partners, AlpInvest Partners and Hellman & Friedman, and is set
to price a roughly $1.5 billion IPO at the end of the month.
It will be the first major buyout-backed IPO of 2011, and
proceeds from the deal will go almost entirely toward paying
off debt.

Like most companies that go private, Nielsen has a lot of
debt. As of Sept. 30 it had $8.6 billion, including lease
obligations, compared with total assets of $14.4 billion.
Nielsen is not a fast-growing company, and paying down debt
is likely its best bet for boosting earnings, said Nick
Einhorn, an analyst at Connecticut-based IPO investment house
Renaissance Capital.

"Investing the IPO proceeds in the business is not going to
spur them into hyper-growth mode. As far as what can drive
earnings growth it makes more sense to pay down debt," Einhorn
said.
Source: Reuters.Com

READ MORE - IPO VIEW-IPO investors want LBO companies to pay down debt

Should Investors Ignore Monthly Sales? (WMT, M, ANF, URBN)

*Short Term*The most obvious reason why retailers should stop
reporting monthly sales is that the measure is incredibly short term
in nature and thus difficult to use to make any conclusions about the
company. Can you imagine the chaos that would result if you had to
report earnings every month?

Monthly same store sales reports encourage deviant behavior by
managements that are eager to meet the guidance and expectations that
investors have on these figures. The management team should instead
be making decisions that are best for the long term interests of the
company and should not be focused on a short term measure reported
monthly.

One game that retailers play is to get promotional on retail prices to
help boost the top line for the company. While this may help the
company meet same store sales guidance, it may also lower
profitability and impact the brand that the company has been trying to
build.

*Growth Is Overrated*The attention focused on same store sales growth
from month to month by investors also implies that growth is necessary
for a retailer to be a successful company or investment. This is not
necessarily true as growth at the expense of profitability usually
ends badly in the long term, with too much leverage and a death
spiral for the company.

*Excuses*Reporting same store sales monthly also distracts management
from other more important tasks as they spend a considerable amount of
time trying to explain away a negative report. It's always the
weather that caused the decline or a tough comparable that the company
was up against.

*Exclusions*Same store sales reports also don't encompass the entirety
of the company, as the measure often doesn't contain any direct to
consumer or internet sales for retailers, which are becoming a growing
part of revenue for many companies. In the most recent quarter,


*Abercrombie & Fitch* (NYSE:ANF) reported that direct to consumer
sales increased 52% to $99.5 million. *Urban Outfitters*
(Nasdaq:URBN) also reported a large increase in these types of sales,
with direct to consumer sales up 28% for the two month period ending
December 31, 2010.

*The Bottom Line*Perhaps other retailers should follow the example of
some of the largest retailers in the United States. *Wal-Mart*
(NYSE:WMT) stopped reporting monthly sales to investors in May
2009. *Macy's* (NYSE:M) did the same starting in 2008, but later
reversed its decision and started reporting them again before the year
ended.

Investors and analysts seem to think that same store sales is the best
method of appraising a retailer. The real truth is that the measure is
short term and tends to encourage behavior by management that is not
in the long term interests of the company. (To dig deeper about retail
stocks, see _Analyzing Retail Stocks_.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in
this stock analysis, *risk free!*
Source: Investopedia.Com

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Taxation Rules For Bond Investors

Every year, bondholders receive their annual 1099-INT forms and dutifully report the numbers that are listed there on their tax returns. However, there is often more to what appears on these forms than the income that is generated from the stated rate of interest. Many fixed income investors are unaware of a number of factors that can impact the amount of taxable interest that they must report at the end of the year. This article will explore each of the major categories of bonds, as well as analyze some of the other issues that factor into what investors must report as income. 

Types of BondsAll bonds fall into one of three broad categories:

• Government
• Corporate
• Municipal

Although certificates of deposit (CD) can trade like bonds in the secondary market and are taxed in a similar manner, they are not considered to be bonds. The following is a breakdown of each type of debt.

Government BondsThe interest from Treasury bills, notes and bonds as well as U.S. government agency securities is taxable at the federal level only. Some agency securities, such as the Ginnie Mae - Government National Mortgage Association (GNMA), are also taxable at the federal level.

Taxation of Zero-Coupon BondsDespite the fact that they have no stated coupon rate, zero-coupon investors must report a prorated portion of interest each year as income, even though it has not been paid out. Zeros are issued at a discount and mature at par, and the amount of the spread is divided equally among the number of years to maturity and taxed as interest, just as any other original issue discount bond.

Savings BondsSeries E and EE savings bonds are also state and local tax free, except that the interest on them may be deferred until maturity. Series H and HH bonds pay taxable interest semiannually until maturity. Series I bonds also pay taxable interest, which may be deferred like Series E/EE bonds. The interest from Series E and I bonds may also be excluded from income if the proceeds are used to pay higher education expenses.

Municipal BondsMunicipal bonds are generally appropriate for high-income investors who are seeking to reduce their taxable investment incomes. The interest from these bonds is tax free at the federal, state and local levels as long as the investor resides in the same state or municipality as the issuer. However, if you buy municipal bonds in the secondary market and then sell them later at a gain, that gain will be taxable at ordinary long- or short-term capital gain rates. Municipal bonds pay a commensurately lower rate than other bonds as a result of their tax-free status. If you want to accurately compare the return you will receive from a municipal bond versus a taxable bond, you must compute its taxable equivalent yield. The formula is as follows:

Taxable Equivalent Yield = Tax-Free Yield / 1 - Your Tax Bracket

Example - Taxable Equivalent Yield Joe is trying to decide whether he should invest in a corporate or municipal issue. He is in the 26% tax bracket. The municipal bond is paying 5% and the corporate issue pays 8%. Which is the best choice? 8% = 5/100 - 26 8% = 5/74 8% = 0.067 or 7% In this case, the corporate obligation will pay Joe more than the municipal issue. This is true for most investors in the lower tax brackets.

Corporate BondsCorporate bonds are the simplest type of bond from a tax perspective, as they are fully taxable at all levels. Because these bonds typically contain the highest level of default risk, they also pay the highest rates of interest of any major category of bond. Therefore, an investor who owns 100 corporate bonds at $1,000 par value each paying 7% annually can expect to receive $7,000 of taxable interest each year.

Capital GainsRegardless of the type of bonds that are sold, any debt issue that is traded in the secondary market will post either a capital gain or loss, depending on the price at which the bonds were bought and sold. This includes government and municipal issues as well as corporate debt. Gains and losses on bond transactions are reported the same as with any other type of security, such as stocks or mutual funds, for the purposes of capital gains.

Amortization of Bond PremiumAs discussed previously, when a bond is issued at a discount, a prorated portion of the discount is reported as income by the taxpayer each year until maturity. When bonds are purchased at a premium (greater than $1,000 per bond), a prorated portion of the amount over par can be deducted yearly on the purchaser's tax return. For example, if you buy 100 bonds for $118,000 and hold them for 18 years until they mature, you can deduct $1,000 each year until maturity. You also have the option of deducting nothing each year and simply declaring a capital loss when you redeem the bonds at maturity or sell them for a loss.

However, it is not necessary to amortize premium in the year that you buy the bond; you can begin doing so in any tax year. One important rule to remember is that if you elect to amortize the premium for one bond, then you must also amortize the premium for all other similar bonds, both that year and going forward. Another caveat is that if you do decide to amortize the premium from a bond, you must reduce the cost basis of your position by an equivalent amount.

ConclusionFor further information on bond taxation, download IRS Publication 1212: Guide to OID Instruments. If taxable bond income is a major component of your annual taxes, consider hiring a certified public accountant to assist you in annual tax planning strategies. 

by Mark P. Cussen,CFP®, CMFC 

Mark P. Cussen has more than 15 years of experience in the financial industry, which includes working with investments, insurance, mortgages, taxes and financial planning. He has two years of experience in writing and editing insurance and securities test training manuals, as well as other financial topics. He has also worked in retail, discount and bank brokerage systems and been involved in a venture capital enterprise in the oil and gas sector. Cussen has a Bachelor of Science in English from the University of Kansas and completed his CFP coursework at the Bloch School of Business at the University of Missouri-Kansas City in August of 2001.

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What is an accredited investor? Accredited investor definition

Hedge fund managers can only admit certain investors into their hedge funds. Most hedge funds are structured as private placements relying on the Regulation D 506 offering rules. Under the Reg D rules, investors must generally be “accredited investors.” Many hedge funds have additional requirements.

With regard to individual investors, the most common of the below requirements is the $1mm dollar net worth (which does include assets such as a personal residence). With regard to institutional investors, the most commonly used category is probably #3 below, an entity with at least $5mm dollars in assets. Please note that there may be additional requirements for your individual hedge fund so you should discuss any questions you have with your attorney.

The accredited investor definition can be found in the Securities Act of 1933. The definition is:
Accredited investor shall mean any person who comes within any of the following categories, or who the issuer [the hedge fund] reasonably believes comes within any of the following categories, at the time of the sale of the securities [the interests in the hedge fund] to that person:


1. Any bank as defined in section 3(a)(2) of the [Securities] Act, or any savings and loan association or other institution as defined in section 3(a)(5)(A) of the Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to section 15 of the Securities Exchange Act of 1934; any insurance company as defined in section 2(a)(13) of the Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small Business Investment Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in section 3(21) of such act, which is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors;

2. Any private business development company as defined in section 202(a)(22) of the Investment Advisers Act of 1940;

3. Any organization described in section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000;

4. Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer;

5. Any natural person whose individual net worth, or joint net worth with that person’s spouse, at the time of his purchase exceeds $1,000,000;

6. Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;

7. Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in Rule 506(b)(2)(ii) and

8. Any entity in which all of the equity owners are accredited investors.
By Hedge Fund Lawyer

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