Money Games Information

We live in interesting times.

The investment bank Lehman Brothers has filed for bankruptcy protection, Merrill Lynch is being taken over by Bank of America and it’s predicted thousands of bank employees will be picking up their P45s by the end of the month.

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If you have money invested in ISAs and personal pensions these may be worrying times. It’s likely that you’ll have a reasonable percentage invested in the UK, US and major economies’ stockmarkets.

With the major indeces, such as the FTSE in the UK, falling, you may be wondering if you should be taking any action.

Should you leave the funds as they are?

Should you ’switch’ funds to reduce risk?

And are the funds you are invested in actually performing when compared to funds of a similar nature?

One key aspect to investing is understanding the impact that investment costs have on your overall returns.

As you’ll know, when you earn interest on your money in the bank, the return is ‘net’. That is, there are no hidden charges that you need to be wary of. If the bank offers you 5% pa gross, you know you’ll earn 4% after tax, or 3% if you’re a 40% taxpayer.

The situation is not as clear when you invest in a mutual fund.

Let’s look at equity ISAs (investing in Unit Trusts/OEICs) as an example.

The costs you need to consider are:

• Initial charge when you invest the money (could be up to 6%)
• Annual Management Charge, typically 1.5% pa
• Total Expense Ratio (TER), includes other costs including trustee fees, custodian charges, auditors, legal costs, printing and marketing, this typically adds 0.1 - 1.6% pa
• Fund Trading Costs, incurred when the fund manager buys and sells shares within the fund, can add 1 - 3% pa

The reality is that many investors are totally unaware that all these costs exist. Most will have heard of the first two as these are included in most fund marketing literature, but the last two remain a mystery to many.

The good news is that the fund managers are now required to disclose information on all these costs, which means you can now discover how much you are paying and what you are paying for.

Some investors believe that the TER includes all costs on their investment, but they are mistaken. The trading costs can, in some cases, double the ongoing costs to your investment.

When times are good and markets are rising, meaning the value of your investment is increasing, it’s all too easy to overlook how much you are paying in charges. After all, you’re making ‘free’ money so does it really matter how much they are making from you?

An easy trap to fall in to.

Now that times are not too ‘hot’ it could be the right time to question how much you are paying your fund manager. Whilst it’s prudent to take the long term view when investing, this should NOT just be an emphasis on performance.

Reducing costs really does matter and could make a big difference to what your investment is worth in the future.

You may be thinking that relatively small percentages will not make much of a difference, however compounded over time you could be incurring some considerable cost.

As an example, let’s look at a £100,000 investment over a period of 20 years growing at 7% pa. This would be worth £386,968 without

deducting any annual costs.

If we add in a TER cost of 1% pa the return would reduce to £320,713. If we increase the TER to 3% pa the return is further reduced to £219,112.

I’m sure you’ll agree that this is a massive difference!

The Financial Tips Bottom Line

At a time when we are facing a period of slower economic growth and lower returns, investment costs and charges should stand out

like a sore thumb to the savvy investor. These costs do exist and may well apply to your investment funds today. Maybe it’s time you found out the truth?

ACTION POINT

If you don’t want to go through this research yourself, or simply don’t have the time, then approach your Financial Adviser/IFA/Financial.

Planner (if you use one) and ask them to collate the information for you. Check what their charges will be for this exercise.

Once you have all the data, seriously consider what alternative investment options you have such as passive and index funds. In fact, the reality may be that you do not need to take any risk with your capital to reach your financial planning goals so it may be better for you to hold the money in cash.

Ray Prince is an Independent Financial Planner with Rutherford Wilkinson plc, and helps UK Resident Doctors and Dentists get the best deals on mortgages, protection and investments, as well as helping them achieve their financial objectives. Just visit http://www.medicaldentalfs.com to get your free retirement planning guide.

Rutherford Wilkinson plc is authorised and regulated by the Financial Services Authority.

Although it seems like fortuitous hindsight at this point, Magic Formula investors have largely been spared from the absolute calamity in the banking industry over the past year. The strategy throws out the financial industry as a matter of course, because their businesses are fundamentally different from nearly every other industry out there, and valuation techniques used by the strategy do not allow them to be accurately valued. Magic Formula investors would never have bought stocks like Bear Stearns, Lehman Brothers (LEH), Merrill Lynch (MER), or AIG (AIG) - at any price.

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In actuality, this has been a lucky break. However, those who value the economics and principles of business models know that banking is an inherently risky industry. And over the past decade, it has become even more risky as "innovative" new financial products have been made available to drive ever higher incomes for these companies, especially the investment bank variety. This article will take a look at the basic business of banking and show why these stocks are best avoided by individual investors.

Banks do not make money the way everyone else does. For traditional banks, the core of the business is simple: the bank earns money on the interest paid to it through loans, which is at a higher rate than the interest it pays to depositors. The spread between these two rates is where the bulk of revenues comes from. Because it is a pain for people and businesses to switch bank accounts, many banks also make incremental revenue by charging fees to customers (like ATM fees, maintenance fees, overdraft fees, etc.). Since banking is not capital intensive in a buildings-and-equipment sense, the cash flow generated can be put back to work into more loans, which leads to more interest spread income.

Investment banks are somewhat different. While most have a traditional banking arm, these banks earn the majority of their revenues by helping businesses raise capital by underwriting debt (usually through bonds), advising on business transactions, and buying and repackaging securities.

While most businesses are valued primarily based on revenues, earnings, and cash flow, these are not effective methods for valuing a bank. Traditional banks have little control over the interest spread, which leads to fluctuating levels of revenue and earnings. Investment banks can see business levels vary depending on the prevailing interest rate and climate for large deals. The primary way to value a bank is by looking at it’s book value, or the net value of it’s assets. Historically, the rule of thumb has been to look for banks trading at under 2 times book value. This ensures you are not paying too much for the bank’s assets, while still accounting for future growth.

The difficulty arises in determining what these assets are truly worth. For traditional banks, this primarily consists of valuing outstanding loans. In essence, the loan is worth the principal plus the interest to maturity, minus a provision for inevitable loan defaults. The assets of investment banks are largely the same, except instead of consumer loans we’re talking about corporate debt. This is a very simple way to look at things. One reason for the recent collapse is the invention of exotic debt securities that are even more difficult to value.

Before making a loan or underwriting debt, there is a process that needs to be performed to protect against default. First, the bank needs to accurately evaluate the creditworthiness of the borrower through documentation and credit history. Then it needs to ensure that the loan is collateralized by an asset that can be sold to recoup the principal amount. Lastly, it needs to put aside an allowance for revenue losses due to loan or debt defaults, which are unavoidable. That’s a lot of assumptions, and when you have to make a lot of assumptions, inevitably mistakes will be made. Which leads us to the core problem…

The problem with banks is that bad assumptions snowball into unrecoverable problems! When banks get lax on lending standards, as we saw during the real estate boom of the early decade, loans are given to non-creditworthy borrowers, asset values are overstated (leaving loans under-collateralized), but loan default allowances remain the same. As more and more loans default, the default allowances are greatly exceeded, leading to additional write-downs. Eventually, management does not have the capital to cover these write-downs.
When this bad news gets out, things snowball. The stock price falls, making raising capital through issuing equity increasingly difficult. Depositors can get spooked and rush to pull their assets, compounding the problem.

At this point, there is no way to survive outside of undesirable actions such as taking on more debt, selling assets at fire-sale prices, or diluting shareholders by selling massive amounts of equity. All of this leads to more tanking stock prices and unhappy shareholders. If the bank is unable to complete one or more of these actions, it may even go bankrupt. Perhaps the scariest part of all of this is that it can happen in a matter of months. Consider Lehman Brothers (LEH), which had never even reported a quarterly loss in nearly 160 years until June, and just 3 months later is filing for bankruptcy protection.

Even in the best of circumstances, investors have very little solid ground to stand on when valuing a financial institution. That 2x book value rule? Well, you are valuing assets that are theoretical in value. Nobody knows what a loan is really worth. When you add in the absurd amount and style of loans owned by most banks, it becomes impossible to tell which loan values are real or not. How many people really know how to value a credit swap, a collateralized debt obligation (CDO), or a mortgage-backed security that is composed of possibly thousands of real estate loans?

By sticking to the Magic Formula, we automatically stick to companies that have real assets, predictable revenues, and stable cash flows. By sticking with MagicDiligence, you are buying companies that can maintain those attributes over the long term. Steven Alexander is the founder and voice behind MagicDiligence (http://www.magicdiligence.com), a website dedicated to researching stocks appearing in Joel Greenblatt’s Magic Formula Investing screen.

Let’s face it compounding is amazing to investors. It is the holy grail and getting returns upon returns is the point if investing. Take for example having just $100 dollars and making a 100% return each month for 14 months. The result at the end of the 14 compounding events is $1.4 million dollars!

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Many investors are highly conservative and are quite delighted with 30% per year. This is certainly a sensible approach especially if you have a lot of money to lose, you may be a lot more aversive to risks. But these types of institutional investments cannot make you rich if you already are not. They are too small and the time frame is too long, for young turks, it is necessary to be more aggressive with your funds.

Smaller investments can deliver striking returns and by doing many of them, you can literally make amazing compounding gains with this style of income production. Fast cycle investments are often overlooked by institutional investors as they typically have those large seed capital accounts to defend from risk. However, fast cycle investments can pay off well if the investment is prudently small.

In the above example we required 14 compounding events to turn $100 into $1.4 million dollars. But there is no law that says those events have to be yearly. What if they were monthly. It may be hard to find a small investment that will give you a 100% return. But if you shortened the cycle and said, ok…4 weeks in a month, all I require is 20% per week or just a couple of percent per day. This type of thinking opens amazing opportunities for people that are usually excluded from investing due to not having enough money, but if you focus on short cycle investments, things change markedly.

Imagine doubling your money every week with no or little risk! To discover a verified list of Million Dollar Corporations offering you their products at 75% commission to you. Click the link below to learn HOW you will begin compounding your capital towards your first Million Dollars at the easy corporate money program.

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Walk into any casino and you are likely to see rows upon rows of slot machines dotting the landscape. These twirling, spinning machines are the most popular attraction to be found in a betting arena. There is something quite thrilling about handing over a dollar only to be rewarded by winning two dollars. There are people who’s entirely livelihood is tied to a casino’s handle.

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As Megabucks says, "One pull can change your life." Does it really happen this way? To some people this actually does happen. One pull and suddenly they find themselves a whole lot richer.

For others it is a constant feeding of money into the machine that yields them nothing but heartbreak and frustration. It is a game of chance that always favors the house. But if you are wondering how slot machines work and think you can take them on, this article is for you.

How do slot machines work?

Slot machines are a game of chance. There really is no skill involved. Whether or not you win is based on the number of drums inside the machine and the variety of combinations that can occur based on these drums and symbols.

You simply insert money in the form of coins, cash or the new bar coded ticket system and you either pull the handle of the machine or you push a button. The machine will have a print out of its possible winning combinations on the face of the machine to tell you what the payout is.

What other names are slot machines called?

Well you have probably heard slot machines called one-armed bandits because of the look of the lever to the side of the machine. This may also be in reference to the fact that more often than not players will lose their money to the machine.

In Britain slot machines are called fruit machines. This is probably due to the fact that most slot machines use symbols of fruit to make winning matches. In Australia the slot machine is known as a poker machine.

How much money does a slot machine make?

The amount of money that a slot machine makes is involved with the pay out system. The slot machine is programmed electronically to pay a certain pay out such as 95%.

The typical pay out is around 82-98% of the money that is put into the machine. A certain percentage of the money played is given to the house and the rest is returned to the person playing the machine. The machine usually keeps 50% for itself and the house.

What is a Random Number Generator?

A Random Number Generator, or RNG, is how the machine selects the positions of the reels. The RNG is always being used to generate new combinations and positions for the payout.

When a person presses the button or pulls the lever a new set of numbers is generated. Is there an obvious sequence to the numbers? Theoretically yes the numbers of a sequence could come up again after a certain amount of pulls on the machine.

Enrich your knowledge further about the slot machines from Mike Selvon portal. We appreciate your feedback at our gambling blog where a free gift awaits you.