Saturday, September 29, 2007

Transparency International - the global coalition against corruption

Transparency International is an organization is a global civil society organisation fighting against corruption world wide. The importance of a worldwide coordinated effort to fight corruption is intuitive. Therefore I've chosen to add a link to the organisation's Homepage (also on my link list).

The following map charts the organisation's corruption perceptions index (CPI) for 2007. The countries perceived as most corrupt are brightest red:

The link between corruption and human rights, equal opportunities, democracy, higher living standards and everything we hold dear can easily be spotted.

The organisation has set 5 defined global priorities in the fight against corruption:

1. Corruption in politics
2. Corruption in public contracting
3. Corruption in the private sector
4. International anti-corruption conventions
5. Poverty and Development

Among the impacts of corruption the organisation lists the following:

1. Direct impacts - Most obvious impact of corruption portraying itself by one's need to bribe officials in order to maintain himself (whether for medicine, food or education)
2. Unfair global competition - Bribes by multinational corporations to ensure a winning contract bid which create poor standards of quality and safety, damage to the global economy and perpetuate corrupt regimes.
3. Global consequences - Perpetuation of poverty, misery and political unrest.
4. Undermining democracy.
5. Jeopardising sound governance and ethics in the private sector.
6. Threatening domestic and international security and the sustainability of natural resources.
7. Those with less power are particularly disadvantaged in corrupt systems.

The definition of corruption according to the organisation is as follows: Corruption is the abuse of entrusted power for private gain. It hurts everyone whose life, livelihood or happiness depends on the integrity of people in a position of authority.

Thursday, September 27, 2007

Stock recommendations from analysts or brokerage houses: How valuable are they?

I believe it was Warren Buffet who said “We read analyst reports only if we can’t find the satire pages of the paper”. This saying, while extreme, demonstrates how stock recommendations by brokerage houses are often treated by investment professionals.

Analysts or brokerage houses base their recommendations on research of certain companies and their stocks. More often then not there are more interests at play then meets the eye. This does not mean it is necessarily wrong to act according to these recommendations but you should always have the complete picture before acting.

Take a look at the following facts about brokerage house (or analyst) recommendations:

1) Analyst stock recommendations are always characterized by being quite optimistic. Almost 80% of recommendations are BUY recommendations.
2) An analyst’s BUY recommendation is followed by an incline in the stock’s price and a SELL recommendation by a decline in the stock’s price.
3) Approximately 15% of recommendations are made by financial mediators of various sorts who own a certain percent of the recommended stock. This holds a substantial potential of conflict of interests.
4) Analysts often make recommendations in an untimely fashion - or just too late.

Analyst recommendations are characterized by being too optimistic. Even at times of low trade volumes and strong bearish markets. Only 3%-5% of recommendations are SELL recommendations (The rest are HOLD).

The troubling thing about stock recommendations by brokerage houses is the credibility and influence attributed to them by market players. Market players often attribute knowledge and professionalism to brokerage houses. The question to ask here is: are these working for you and your way?

Market players have a hard time differentiating between brokerage houses and recommendations which have an interest in the stock which is being recommended to others who do not. The affects of recommendations in both instances is quite similar.

Analyst recommendations have been found to cause an incline of around 1.5% in the month following the recommendations. But does this last? Surprisingly, or not, target prices for stocks embody very high returns on these stocks of 10%-30% while actual performance greatly varies with some research showing -3% average performance in three years.

At times, brokerage houses recommendations and analysis does prove itself. A recent example is Goldman-Sachs’s bet against the mortgage market (which others failed to see). These are obviously hard to catch.

What is the value of brokerage house recommendations then? Obviously market players are by no means dumb. The significance attributed to these recommendations by market players has been discussed above. Players are aware of all the shortfalls of analyst recommendations and still allow them to influence their investing, why?

This influence may be attributed to one major factor: Knowledge. Market players often attribute inside information to brokerage houses. These enormous financial bodies have many things going for them:

1) A deep professional understanding of the market
2) Close ties with large corporations and people
3) Intimate knowledge of the companies behind the stocks, at time being responsible for the market offering of these stocks

Due to these factors market players make use of brokerage house recommendations. The use of recommendations may be as guidelines for investing or as a way of affirmation for decisions taken. They do not act solely on analyst recommendations. Affirmation is often achieved by looking for a consensus among analysts or in a strong recommendation by an analyst who has proved himself in the past.

What should you do? Analyze analyst recommendations. Take the time to read analyst reports with a critical eye. You shouldn’t and you don’t have the time write another report all by yourself but you should definitely:

1) Examine the basic major assumptions made by the analyst: Growth in market share, revenues and industry or decline in expenses as a result of technological improvements, scale advantages and more. These assumptions are of critical importance to the final target price set by the analyst. Agreeing on these assumptions is half way to acknowledge the worth of the recommendation
2) Examine the analyst’s treatment of competitors. Do not take the use of multipliers in comparisons lightly. The use of multipliers may be highly misleading
3) Examine the analyst’s treatment of the company’s management.
4) Examine changes from the previous report.

To conclude, as always, one should be a knowledgeable consumer and take analyst recommendations for what they are. One should be knowledgeable of all the shortfalls as well as the strengths and make good, sound use of this tool.

Wednesday, September 26, 2007

Are we facing a recession ?

The impact of the recent sub-prime credit and housing crisis has left a relatively moderate impact on US economy. Pressures on home prices carries on as S&P/Case-Shiller U.S national home price index posts a record annual decline in the 2ND quarter of 2007.

According to a recent article by the NY Times fears of recession are growing as the decline of home prices lowers personal consumption expenditures due to a weak market for mortgages. However the global economic environment enables growth of export and a decline in unemployment rates accompanied by a growth in real hourly earnings.

According to Goldman-Sachs analysts quoted by the NY Times chances of a recession are approximately at 33%. You be the judge.

Tuesday, September 25, 2007

Tips for young investors

As many other young investors I've made my share of mistakes. These mistakes are often the result of high return on investment achieved in a short time which leaves you wanting for more (just like a casino). The following is my list of 11 tips for young investors. These are not easily learned but are crucial to success in investments:

1. What goes up might come down - Risk is inherited in investing. Higher returns require higher risks. The risk of investing is not always clear. You can actually lose money and never see it again, no matter what is you term of investment. For example take the NASDAQ index. At 2000 it peaked at level of 5,500 points. If you invested at that time you have yet to see your initial investment returned as the NASDAQ is currently at around 2,650 points.

2. Diversify - Young investors are usually exposed to astounding amounts of information at first from articles on certain stocks to analyst reports recommending other stocks. The hope of getting rich fast (or high return on investment) is usually a false one. It is possible to gain high returns in short times but very much like a casino you might also lose all your money due to the risk involved. Diversification or the purchase of a great amount of various financial assets enables investors to lower risks and smooth return on investment almost regardless of how a specific company performs. A CEO might get a heart attack or a tornado or fire might cause an investment in a specific company with specific risks to disappear.

3. Investing is a long term effort - Young investors often expect results fast and are constantly checking their investments and modifying them. It is important to understand the following facts about investing:
a. Stocks usually over perform, or generate high abnormal returns, only a few days a year - Most of the time they just sit there and move up and down horizontally. If you have no inside information you will surely miss on these days if you won't hold on to your stocks for the long term.
b. Constantly buying and selling stocks results in high commission payments to your broker or bank which is a waste of money.

4. Invest in the market, not in specific stocks - Many investors think they can beat market performance. It is a well known fact few do. Most of the mutual funds have a hard time generating returns high enough to justify the commissions paid to them. Investing in the market is done by buying ETF's and mutual funds and sitting tight.

5. Don't believe every success story you hear - People have a psychological tendency to overstress success and under stress failure. I've heard people mentioned 100% and higher returns in a few days. This is, of course, possible, but always requires taking very high risks. It is very likely this person has lost more then he wants to remember.

6. Hold on to winning stocks, don't be afraid to sell losing ones - Many young investors often sell winning stocks too early and losing stocks too late thinking either the return on investment is enough or that their losses will be regained. More often then not winning stocks will continue to generate high returns and losing ones will continue to lose.

7. For longer terms of investment buy stocks - Stocks have proved, over time, to generate the highest average returns over time. Two warnings here: First, by long term I'm referring to periods of investment of over 10 years. Secondly, buying stocks should not exceed, usually, 60% of your investment portfolio unless you are willing to expose yourself to high risk levels.

8. Use the power of compounding interest - "The most powerful force in the universe is compound interest" Einstein is often quoted for saying. Every 100$ saved for 10 years with 10% yearly interest will be worth 2.5 times more. Save for 20 years and earn 6.7 time the amount. If interest rates are high deposits can be prove a good, and more importantly, safe, investment.

9. Take the time to learn basic finance and budgeting - All the technical gibberish used by banks, insurance and investment companies, salaries and such are just that, technical. There are wonderful source for financial information on line. It doesn't take a university degree to understand these concepts. As a matter of fact, most of the technicalities aren't even taught in the university or college.

10. Learn from your mistakes - Don't miss out on the lesson the market teaches you. Failing in an investment can be seen as tuition for lessons learned.

11. Patience and self discipline are key factors to being a good investor

As I've mentioned before the market teaches us these lessons with a hefty cost at times. Implementing these tips will help you save on tuition paid to the market gods (or other investors).

Monday, September 24, 2007

Establishing your investment goals

Before investing your money it is wise to determine the goals of your investment. We are usually quite good at setting the primary goal of investment – Better retirement, college fund, buying a house and more. These ultimate goals should be carefully looked at and analyzed in order to adopt the most suitable investment strategy available. Therefore goals should be formalized and examined using the proper tools. Setting goals for your investment should be based on two major parameters (excluding the initial sum of the investment which should be known by now):

1. Risk and return (which always go hand in hand)
2. Term of investment

In setting investment goals you should ask yourself the three following questions:

1. How much of my initial investment am I willing to lose and what is the return I expect on the risk taken?

Risk, simplified, is the chance of losing some or all of your initial investment or not gaining the required return on your investment. Risk and return go hand in hand. As the risk on the investment grows so does the expected return. This is obvious and intuitive. The higher the risk you are willing to take the bigger the stock component of your portfolio should be over bonds and deposits.

2. What is my term of investment?

This question is of an utmost importance. Longer terms of investment allow for higher risk levels. This is due to the volatility in financial markets in the short term which are smoothed over in the long term (this is directly linked to diversification of investment which is treated in different articles).
Are you a young student investing for over 10 years or are you approaching retirement with a shorter investment horizon? This should directly affect the risk levels you are willing to expose yourself to. The longer the term of investment the bigger the stock component of your portfolio should be over bonds and deposits. Long term investment in stocks is considered to be over 10 years.

3. How much volatility can I tolerate? What is the level of liquidity I require?

Risk and return are often affected by volatility. High volatility is often the source of potential high returns. Your ability to tolerate volatility is mostly affected by your term of investment which is discussed above but is also affected by the chances of a financial surprise which will leave you wanting for cash. This is directly linked to the level of liquidity you require. Higher level of volatility tolerance and lower liquidity requirements allow for higher risk levels (Investing in stocks over bonds and deposits and vice versa as levels of volatility tolerance decrease).

Risk and volatility are highly connected. Conservative investors (which should allocate most of the investments to bonds and deposits) usually expose themselves to price deviations of up to 6%, more risky investors expose investments to price deviations of up to 10% and the riskiest go up to 15% and more.

After answering the questions above you can begin building a portfolio suitable for you.

Managerial decision making and the decision process

Decisions drive an organization. The theory on decision making is vast but can be summarized quite effectively by using Vroom and Yetton's normative model for decision making.
The model characterizes several types of decision making, each suitable for varying situations. These types are:

A1: Leader takes known information and then decides alone.
A2: Leader gets for information from followers, and then decides alone.
C1: Leader shares problem with followers individually, listens to ideas and then decides alone. C2: Leader shares problems with followers as a group, listens to ideas and then decides alone. G2: Leader shares problems with followers as a group and then seeks and accepts consensus agreement.

According to Vroom and Yetton each decision is influenced by two major factors:

1.Decision Quality - Is the quality of the decision measurable?

a. Does the manager have the necessary skills and information to make the decision? Do employees possess that information?
b. Does the issue at hand have a structural resolution? Is the problem structured?
c. Can the probability of decision being the correct solution be measurable?

2. Acceptance

a. Does the implementation of the decision require employee acceptance? Do employees have an interest to be involved?
b. Will the decision be accepted by employees if taken alone by the manager?
c. Is there an identity between employee and organizational goals?

The implementation of the model is rather simple. If acceptance is of importance types A1 and A2 will be less suitable. If the manager sees decision quality as important and employees do not then G2 would be less suitable.

Source: Vroom, V.H. and Yetton, P.W. (1973). Leadership and decision-making. Pittsburgh: University of Pittsburgh Press

Thursday, September 20, 2007

How to double investments in a month

The easiest way to double your investment in a month is in a casino. This may sound simplified but it holds an important truth. To double your investment in one month you must be willing to lose it all in the same month. If this is the case then read on (although my main point should be clear by now).

A well known rule of investment is that return is function of risk. 100% monthly return is equal to a whopping yearly return of 1300%. This sort of return on investment is available only in derivatives and derivatives based financial assets. Some examples are options, future contracts, convertible bonds and mutual funds trading options.

Investing in derivatives can actually produce greater return then merely 100% a month (Up to 1,000% and more). What's the trick then? Trading in derivatives is highly complicated and requires a deep understanding of financial assets and markets. When trading in derivatives one is actually risking the initial investment required to purchase and option, for example. If an option is not put to use the initial investment is lost.

Making big money in derivatives, as a personal investor which intends to purchase options and not sell them, requires high variability in markets. Unfortunately this variability is not always available. Actually, these levels of variability are handful each year.

Recent surveys show approximately 85% of personal investors in derivatives lose on average. As trading in derivatives is mostly performed by professional traders your chances are slim to begin with.

To conclude, for 100% monthly return pay a visit to the roulette table.

Sunday, September 16, 2007

Should government subsidize renewable energy sources such as wind, solar and ethanol?

In capitalistic societies government subsidies carry an unpleasant tone as the purpose of a government subsidy is to encourage the private sector to enter an otherwise unworthy investment. As economists often preach subsidies and government interventions in markets often lead to inefficiency. As a result capitalistic societies subsidize to promote goal and ideals other then profit.

A brief view may lead us to think renewable energy is the same as any other business and should be pursued only if it economically feasible. A more careful look may convince us otherwise. I believe the case of renewable energy is different.

According to basic finance we should evaluate the economic feasibility of a project by comparing the present value of future cash flows to the investment required. If cash flows outgrow investment in present value terms the project is worthwhile.

My claim is that only a government is able to fully evaluate a project such as renewable energy and its future benefits (even in the form of cash flows). A private sector company will not take into account in its economical valuation many important aspects such as the following:
1) Prevention of pollution related sickness which is costly in terms of social security and healthcare

2) Prevention or reversal of global warming and its effects such as disastrous weather, catastrophic changes in climate and more

3) Control over foreign political influence as a result of control over resources results in increased political power

4) Renewable energy is infinite

5) Local economy derivative benefits

Only governments have the complete point of view required to make the real economic valuation for renewal energy projects. As a result governments should subsidize these projects. These subsidies should embody future benefit at the government level over private sector benefit.

Another aspect of renewable energy is the enormous investment required in infrastructures. As major infrastructure investments are often the same case as discussed above in terms of economic valuations these investment are often undertaken by governments and later leased to the private sector.

Writing at Helium - Can it be profitable ?

I've actually stared writing at Helium for supplementary income. I've been writing at helium for some time now and I've published 8 articles (ranging from 450-800 words) mostly regarding personal finance issues.

Helium is a site which enables everyone to write on almost any topic and be rated by community members. Helium pays writers according to article views which are obviously affected by quality and quantity. As your articles stay on Helium "forever" they continue to generate earnings for a long term, dependent on popularity of course.

As much as money making goes Helium has not proven, as of yet, to be a profitable venture for myself. Minimum payout is at 25$ and I've made almost 33 cents so far. But the joys of writing are also a sort of compensation.

I've been writing mostly on personal finance issues.

My tips for writing on Helium:

1) Write often - From my earning experience for a long term residual income from Helium you need to write often and by that I mean very often. I think 30 new articles a month will eventually help you achieve minimum payment at the end of each month. That is a lot of articles. This brings me to my second tip.

2) Sometimes quantity is preferable to quality - By this I mean publish quality articles but if money is your objective use the Pareto tool. 80% Quality in 20% of the time. Getting that 100% quality is time consuming and very costly.

3) Rate - Helium uses a rating system. The more you rate the more your articles will be subjected to rating. From there on it's up to you.

4) Write about things you know something about - Don't go posting on the wildlife of the African bush beetle. If you're ignorant in that subject it will show.

5) Try to be consistent in your writing - A great way to get to good articles is view what the writer of one article has also written on that same subject.

6) Make use of Helium Market Place - If your articles are good this is a good way to make extra money as publishers are looking for quality articles for their needs and are willing to pay for them. Same goes for Helium Contests

How to improve morale and boost profitability in your organization

Very few companies give proper attention to morale among workers in their organization. This is of course a mistake. High morale in the organization may not directly affect productivity but it has been shown high morale among workers improves work satisfaction greatly and thus increases the profitability of the organization.

Morale can be regarded as team spirit or attitude. Improving morale in an organization should thus affect those concepts. In today's competitive and goal oriented environment companies are usually goal driven and managed and as a result workers are focused on increased efficiency, better procedures and keeping up with competitors. This behavior has its price in worker morale which needs to be balanced.

The balance or improvement in morale can be achieved in many ways. Boosting morale is often done by concentrating on: employee appreciation, employee involvement, management concern and accountability and working environment. The following are some of the ways to improve morale among workers in an organization:

1) Organizational Transparency - Employees are not stupid. They can sense trouble (or good news) a mile away. Transparency in an organization is extremely important whether it is good news such a recent success, troubling news such as an upcoming merger or bad news such as personnel lay offs.

2) Feedback (and more importantly positive feedback)- Take the time to give positive feed back to employees. This should be regarded narrowly. A positively oriented meeting to analyze a recent success what have we done right is also important and contributes to moralee in the organization. Feedback should be implemented regularly and consistently.

3) Milestone parties - Take note of important mile stones achieved. Party! It is important to dwell on success as well as on failure

4) Take time off to think about organizational surroundings - A two day workshop about "Our Department" can do wonders. Let employees express feelings, opinions and thoughts.

5) Hire solution over problem oriented employees - Problem oriented employees are just that, problem oriented. These employees infect organizations with almost negative energies.

6) Make horizontal movement possible - Allow employees to move horizontally in your organization. It is very important to show employees there are other ways open to them.

7) Adjust decision taking strategy to the organization - Consult with employees and listen whenever possible (not always).

8) Create organization fidelity - High organizational and management credibility are highly important as employees can be reassured and can trust management.

9) Working environment - Improve working environment as much as possible. From office design to office supplies.

Studies have shown improving morale improves employee satisfaction and thus improving profitability. Just take a look at successful corporations such as Google Inc. or IBM which are famous for employee moral and satisfaction.

Wednesday, September 12, 2007

Diversifying your risk in the stock market

Think about betting 10,000$ on one coin toss with the possibility of winning 25,000$ and loosing everything. Now think about betting 1$ on each of 10,000 coin tosses with the possibility of wining 2.5$ and loosing 1$ each time. That is diversification in a nutshell. While participating in both bets yield, on average, the same gain (7,500$) the second bet seems much more inviting. The appeal of the second bet is due to the fact each one of the 10,000 bets is a small version of the large one thus reducing risk of losing everything in one big bet.

Same principal goes for investing in financial assets. Each financial asset has a risk factor that should be taken into account. If simplified each financial asset yields a certain return with certain odds. Think of biotech company which has a chance of 1/100 of succeeding and yielding 100,000% return on investment and 99/100 chance of loosing the initial investment. This is a risky investment although profitable on average. The problem is getting to that average.

As demonstrated above a financial asset's risk is influenced by the variability attributed to the various return on investment scenarios this financial asset is thought to have. Ranking financial assets by risk is usually done as follows: Derivatives will be ranked highest, growth and small company stocks next (high possible return and a considerable chance of failure), blue-chip company stocks, company bonds, government bonds and last a bank deposit where the outcome of the investment is almost 100% certain.

Simply put, a diversified portfolio is a portfolio which has many "bets", each with a relatively low investment when compared to the sum of the portfolio. The risk level of the entire portfolio can still be high (all stock for example) but a diversified risky portfolio is, of course, better then having just a risky portfolio.

Diversification can be and should be achieved across various variables as each variable has its own specific risks. Specific risk, in finance, is the variability in the return on a security due to exposure to risks relating to that security in isolation (bankruptcy of a certain company for example). Good diversification eliminates specific risks. Each variable of investment carries its own specific risk and should be diversified. By variables I'm referring to:

1) Industry It is important to diversify across various industries as each industry has specific risks (Sub-prime crisis for example might affect one sector to under perform while another to over perform).
2) Geography As industries, a certain region can be affected by a war or crisis. 3) Various other variables such as financial asset types, investment terms and more.

How do we achieve a diversified portfolio then? We participate in many bets with changing variables with relatively low sums of investment:

1) Buy a large number of promising' stocks For diversification purposes one could buy a large number of stocks (over 10) in a portfolio. This method of diversification is not recommended. Many researches have shown beating market performance by choosing specific stocks is not easy. There is another disadvantage in buying many specific stocks as buy/sell commissions can be quite high.
2) Invest in mutual funds Mutual funds are run by professional who do exactly what we are trying to achieve. Diversify. Mutual funds purchase many, thought to be promising, stocks and use them to diversify our investment in them. There are many types of mutual funds. Some specialize in certain markets while some are more general. Even though mutual funds diversify our investment we should still minimize specific risks and diversify our investment in mutual funds as well. Buying various mutual funds, with various specializations in industry and geography is a good way of diversifying.
3) Invest in ETF's mimicking market indices As aforementioned even professional brokers have a hard time beating market performance by choosing specific stocks as mutual funds do. Why not invest in market indices then? An ETF is a good way to do that and with lower commissions. There are many ETF's which mimic market indices (such as QQQQ for NASDAQ). Buying ETF's is easy and relatively cheap. As before further diversification is still required. 4) Invest in bonds and deposits investing in bonds and deposits is a good way of diversifying as the source of return in these financial assets is debt and not ownership. When a market under performs corporations still have to pay interest on bonds.

To conclude, diversification is one of the most basic tools of investors. Diversification will enable your portfolio to minimize specific risk (Not to be confused with market risk of the portfolio), lower the portfolio's variability and change over time and help generate better return on investment.

Saturday, September 8, 2007

Adding Digg and Hotlinks for your blog

In order to increase traffic to my blog I've decided to add social bookmarks such as Digg! and as probloggers recommend.

I've found an easy automated solution after having added each link by hand.

Hopefuly these help: and Digg hotlinks for your beta blog
Adding Digg and links to your footer

Should you Rent or Buy a Home ?

There are many psychological aspects to the question of rent or buy. While these may be debated in length it is important to get the financial part of the question right.

In this article I will examine the financial aspects of the decisions in the form of the alternative 'loss' in each option (Rent Vs. Buy). We are not always aware of the entire financial picture. There is also one more very unique psychological motivation that I think should be discussed.
When addressing a financial question we should isolate those variables which can be measured and compared. We should regard a house as every other asset and ask ourselves which way to purchase the asset is most desirable financially.

In order to compare the two options we must first have a basis of comparison. Evaluating rent or buy, financially can only be made by considering the same asset, of course. Thus, we shall look at two alternative paths to own a house in a certain period of time":

Option A: Buy the house today and live in it for that period. Henceforth the BUY option.
Option B: Rent the house today and buy it in the end of the period. Henceforth the RENT option.

Option A:
Let us look at the expenses at the BUY option or option A. Let's assume our future home owner buys a house with the common combination of equity and mortgage. His 'losses' would include:

1) The most obvious would be the interest part of the monthly mortgage payment which is 'throwing' money away the same as when paying rent.
2) A bit less obvious would be the optional return on investment on his equity. Say our home owner would have invested his money in stock. This alternative investment could have potentially yielded return which is lost when invested in a house (to be gained, possibly, by a rise in house prices).
3) The costs of the house purchase deal itself (Real estate agent's commission, lawyer etc.)
4) Home maintenance and improvement expanses during the period in which he lives in the house.

What about his potential gain ? In the BUY option our home owner has a great potential gain as his investment in the house is a leveraged investment (An investment made with a combination of equity and debt). His possible gain extends to funds he didn't have in the first place. Lets look at an example: Say our home owner had invested his equity of 100K US$ in stock which yielded a 5% return of 5,000$. Now let us assume his house has yielded the same return (5%) but was purchased with a combination of equity (the same 100K US$ as before) and mortgage (say another 100K US$). His return on investment is now 10,000 US$ (with some paid as mortgage interest but in a relatively low interest rate). Notice the return on his house is gained also on the debt or mortgage part of it (Higher absolute return).

It is important to note that this potential gain is also a source for potentially greater loss since in the case of loss on his investment our home owner is left with mortgage payments unaffected by the devaluation of his property.

Option B:
Let us now examine the 'losses' in the rent option: In this case there is the obvious 'loss' of the rent paid each month. But there is also the 'loss' of the potential gain on the house as an asset. The potential gains for the rent option are:
1) Return on equity not invested in a house but in stock or bond.
2) Return on funds not paid as mortgage payments (Balance part of the payment) and saved to purchase the house at the end of the period.

When comparing the two alternative we should always compare them for the same asset and for a set period of time in order to achieve true comparison.
Finally we should always take into account the psychological aspects of house ownership vs. periodical rent. I'd like to dwell on one unique psychological aspect: The motivation to save. In the buy option our home owner is forced to save in the form of timely mortgage payments. In the rent option our home owner needs some discipline in order to save the money for future house ownership. As available money always has its uses the mandatory part of the mortgage is an excellent motivator for the less disciplined savers.

Was Israel's decision to unilaterally withdraw from the Gaza Strip wise?

As "Kasam" rockets continue to rain on the Israeli city of Sderot and the kibutzim near by and as the radical Islamic Palestinian terror group "Hamas" and "Islamic Jihad" take control over Gaza asking whether the unilateral withdraw from the Gaza Strip was wise is ever more justified. To answer this question I believe we should look at the bigger long term picture.

The Israeli settlements in the Gaza Strip housed over 1,400 families. These settlements were strategically located and enabled the Israeli army to maintain some control over the Gaza strip and the refugee camps within it which house terror infrastructure and are used a base for terror activities and terrorists.

The Israeli public opinion regarding the settlements in the Gaza strip where mixed. Many objected to the heavy military presence required to defend these settlements, the price paid in human life, the suffering of the Palestinian civilian population and the enormous budgets that had to be invested in civilian and military infrastructure.

There was little doubt of the settlements strategic contribution and, by looking back, the contribution of the Israeli military presence to sustain the Palestine moderates in power but the price to be paid was high. Israel was on low moral ground, the supposed oppressor of 1.5 million Palestinians. The defense of these settlements took it's toll from the Israelis and Palestinians in life, suffering and budgets. Justifying the presence of 1,400 Israeli families among 1.5 million Palestinians was nearly impossible for the word public opinion justifiably tends to emphasize the civilian suffering regardless of circumstances such as terror activities carried out in its name. Another, very important aspect, was the military presence as perceived by the Palestinian population having to face roadblocks and ID checks constantly perpetuated the notion of occupation.

The logic and rational behind the unilateral withdraw is still sound. Israel is on higher moral ground having withdrawn with out conditions from the Gaza strip and allowed the Palestinians full control over it. Road blocks and military outposts vanished from the population's sight and envying Israeli settlements as well will allow a generation of Palestinians to grow independently.
It is true the Palestinians, as always it seems, have missed yet another chance to establish a foundation for a nation based on growth and success and have chosen, it seems, to wallow in the hatred manifested by radical Islamic organizations. The taking over of Hamas over the Gaza strip has enabled Israel to demonstrate to the world it's impossible position and day to day struggle with terror.

Israel has failed to convince the public opinion of the lack of its responsibility for the Gaza strip and continues to provide it with gas, electricity, water and food ironically keeping "Hamas" in power. Israel is facing increasing military build up in the gaza strip and the import of weapons and munitions to the gaza strip which is slowly but surely on its way to become another southern Lebanon. However, the unilateral withdraw will prevail to be one the better more justified decisions taken by Israel for the moral basis on which it stands.

7 Tips on Saving Money

"How to save money" tips and guides often contain the same old advice. Most of these articles are focused on expenses generated by day to day activities and ways to minimize those expenses. While these do indeed help to save money and lower expenses the money saved is usually a small (though always meaningful) percent of our monthly income.

In this article I will focus on a different part of "How to save money", a much more effective and meaningful one: The financial part. Simple budgeting, as mentioned above, does indeed help to lower expenses. But it is not an empowering tool. Using finance wisely in our lives can have a stronger and more meaningful effect then ever expected.

The following are 7 tips for better personal finance understanding and management:
1) Use the power of compounding interest - "The most powerful force in the universe is compound interest" Einstein is often quoted for saying. Every 100$ saved for 10 years with 10% yearly interest will be worth 2.5 times more. Save for 20 years and earn 6.7 time the amount.

2) Make long term diversified investments in stocks - the stock market has proved to provide the highest available return on investment - not without risk of course. This is where long term and diversification come to play. In long term I'm referring to periods longer then 10 years. By diversification I'm referring to investments across various industries, geographies and financial assets (stock, bond, ETF etc.). Further reading in these subjects is highly recommended.

3) Save early and often - Tips #1 and #2 above lead to tip #3. Start early and enjoy the full power of compounding and long term investments. These two forces of finance really kick in in the long term. For example: Saving 1,000$ annually between the ages of 19-25 (for a total of 7,000$) with an yearly 8% return will be worth approximately 30,000$ by the age of 41. If you start saving the same annual amount when you're 26 it will take you 2.3 times the time, or 16 years to reach the same amount. Saving and investing early will enable you to invest in stocks for longer terms. It's not easy saving in an early age but a consistent monthly deposit can help discipline you to save routinely and postpone satisfactions.

4) Plan and budget - Manage your personal finance and budget. Don't be managed by the circumstances. Plan multi-yearly, yearly and monthly as much as possible (Things aren't always under our control). Set ambitious goals. Managing personal finance is like micro managing a small firm financially wise. There's profit and loss, a balance, cash flow report and capital investment changes.

5) Take the time to learn basic finance and budgeting - All the technical gibberish used by banks, insurance and investment companies, salaries and such are just that, technical. There are wonderful source for financial information on line. It doesn't take a university degree to understand these concepts. As a matter of fact, most of the technicalities aren't even taught in the university or college.

6) Implement all those other "How to save money" tips - Compare prices, postpone satisfactions, drive a bit slower, buy economic vehicles, think before you act and more. All common budgeting tips help achieve that periodical savings goal we set for ourselves.

7) Enjoy the fruits of your labor - Money is a means to an end. Never forget the end. Saving forever may amount to a small fortune but don't forget to rip the rewards.

Comparing Bonds Vs. Stock as an investment

Investing in stocks is owning a part of the company while investing in bonds is owning a part of the company's debt. This difference may sound intuitive and straight forward but it is far from it.

Both stock and bond are means of corporations to raise capital in capital markets. A stock is a financial asset which a corporation issues in order to raise capital by giving up a certain percent of ownership over the corporation. A bond is a certificate of debt issued by a corporation or country which is required, usually, to pay a fixed sum annually until maturity and a fixed sum to repay the Principal.

The basis for comparing both financial assets is derived from the aforementioned difference:

1) Risk and return - The most notable difference between stock and bond is the risk involved in the investment and, of course, the expected return. As a stock holder an investor is investing in the corporation's future worth expecting it to grow. The corporation has not assured the investor in any way this scenario will take place. It is more then possible the corporation's worth in the future will be lower. As a result of the risk taken stocks are expected to yield higher returns on investment. Investing in bond is investing in a company's debt with the assurance of the company to repay the investor both the interest and the principal. The risk the investor is taking here is that of bankruptcy on the side of the company, a scenario in which the company will be unable to pay it's debts. This risk, is of course, lower then that of the stock owner. As a result the yield on bonds is lower then that of stocks. For the same reason the return of government bonds is lower then that on corporate bonds (A government is more likely to make pay its debt to investors). There are further risks to investing in bonds besides the risk of bankruptcy:
a) Interest rates as a risk in bonds - As interest rates rise bond value decreases. This is a result of the fixed interest rate bonds carry (As payment is fixed it is discounted using a higher market interest rate).
b) Risk of falling ratings - Rating companies rate bonds issued by governments and corporations. In case the ability of the corporation to repay its debt is considered lower then it used to be the price of the bond will fall to express this added risk.
It is important to note that even though the risk portrayed in a. and b. above effect the price of the bond holding on to the bond until maturity guarantees the original yield expected at the time of investment.

2) Market Players - As bonds are mostly bought by institutional investors such as pension funds, insurance companies, mutual funds and banks the market for bonds is less volatile and less flammable. These bodies of investment usually have more conservative profit goals. This is one more reason why investing in bonds is considered relatively safe.

3) Term of investment - There is a conses among investors that for the short term an investment in bonds offers greater security and sometimes return. When considering long term investments (Over 10 years) stocks consistently outperform bonds (significantly).
To conclude, there is a proper place for both stock and bond in a portfolio depending on the risk one is willing to take, the expected return and the term of investment.