Dear Friend,
I know we just met, but I’m afraid I have some shocking news to share. Despite what you might be hearing from the talking heads on TV or the Wall Street establishment, the simple truth is…
We have just witnessed the death of investing as you knew it.
We are NEVER going back to the way things were. And the faster you face this new reality, the faster you can start to profit from it.
So many investors I talk to are waiting for the market to return to normal. Folks, this IS the new normal.
I am astounded at how many people are still sitting on the sidelines, waiting for the “right” time to invest. And I’m appalled by how many people are still losing money because they are trying to make money the same way they were when they suffered devastating losses in the market crash.
The last 18 months have shaken many people's faith in investing to the core.
First, it was the devastating bear market that destroyed people’s retirement dreams. Then a reminder that Wall Street is rigged against individual investors as Goldman Sachs came under fire. Then a European debt crisis. Then the mysterious 990-point one-day free fall.
But despite all that, most investors are missing out on the bigger picture.
You MUST change the way you are investing, or you are doomed to suffer the same crushing losses again. And you must start today.
It’s time to try a smarter way to invest—and I can show you how.
Profit No Matter What
Before we go any further, though, I should probably introduce myself. I’m Jon Markman, editor of Trader’s Advantage.
You may have read one of my many columns on MSN Money or TheStreet.com over the past dozen years, or seen me on CNBC. I’m also a co-inventor on two Microsoft patents and have been a longtime pioneer in the development of stock-rating systems and screening software.
The reason why I bring up the last point is because a few years ago I developed what has to be the most powerful and predictive stock-ranking system ever. It’s a ruthlessly objective and deadly accurate trading system that spots fast-moving price swings in the market—before stocks take off.
And it has enabled us to continuously rake in huge gains like these no matter what the market is doing:
I’m not a bear or a bull.
Look, to profit in today’s market, you must forget those old labels.
When it comes to making money, I’m an agnostic! I’m an opportunist. I’m a supreme realist. I’m a mercenary. I’m in it for the profits. I’m in it to win, and that means I’ll be on whoever’s side is winning. And I can put you on the winning side, too.
Who will win the current battle for market direction? I don’t know (you’ll never find me pretending to have a crystal ball), and frankly, I don’t care.
So please don’t waste another minute wondering whether this volatile market is headed up, down or sideways, because I’m here to tell you it doesn’t matter.
The market is moved by forces you can’t predict, let alone control. We’ve gotten PLENTY of evidence of that over the last few years.
But you are NOT at the mercy of the markets.
You can make money week in and week out no matter what the market does, as long as you are willing to do things a little differently.
Many investors have not yet accepted that the old ways of investing no longer work. That’s why during last year’s raging bull market, only 3 out of 10 individual investors made money!
Don’t let that happen to you. Every day there is an opportunity in the market to make money. Every single day. Regardless of which direction the market is headed.
But if you want to profit in today’s market, you must play by the new rules of investing.
I hate to be the one to tell you this, but “buy and hold” is a marketing slogan, not a proven investment philosophy! It was invented in the ’80s by mutual fund companies and Wall Street to lure more people into investing.
Ask any investor who used to believe that “buy and hold” was the right strategy—that good stocks would always go higher if they were only held long enough—what they have now to show for it. Mostly lots of losses.
Look at the brutal roller coaster “buy & hold” investors have been taken on over the last 10 years in the DJIA, NASDAQ, and S&P 500 indexes…
…and how the world’s best blue chip brands—companies like GE, Cisco, Intel, Coke and Microsoft—went down 30% or more over this same period.
The key to profiting in today’s market is to more actively take advantage of the market’s constant swings. Learn how.
One of the distinguishing features of the 2008 bear market was that all asset classes, industries and regions were correlated with each other.
Financial, utility, technology, energy, drugs and real estate stocks… they all went down 52%, 32%, 42%, 38%, 62% and 45%.
Diversification didn’t offer a lick of protection. Just ask the president of Harvard University, whose school’s well-diversified $37 billion endowment faced "unprecedented" losses during the downturn.
In today’s volatile market, it is critical that you take advantage of the market’s swings. We have seen—and will continue to see—plenty of big knee-jerk reactions to news that presents big profit opportunities for the nimble.
You never know what weapon will get the job done. Think Jack Bauer from the TV hit 24— not the Marquess de Queensbury.
The same goes for us. We will use whatever tool gives us the best chance to win today—stocks, options, bonds, leveraged funds. If it can help us make money, it’s in our investing toolkit.
Now, I'm no raging optimist, but we're in the midst of a new bull cycle.
It may not feel like it, given recent events—investors freaked out over Greek debt, a contagion effect on Spain, speculation that U.S earnings have peaked and the great global capital machine would soon seize up. As a result, in just a week's time, the Dow shed nearly 6% while the S&P fell more than 6%.
But declines like this are normal. These declines are all about resetting the deck on valuation and blowing the froth off the top in new bull cycles. Now, don't get me wrong—there are plenty of serious problems around the world. But the amount of fiscal and monetary liquidity that flooded the global financial system over the past year should have long-lasting consequences.
The current bull cycle—just barely a year old—is still not fully established and has plenty of room to run.
Sure, it's being tested in a big way right now. In fact, by a number of metrics, the situation is very oversold: Less than 3% of stocks are above their 10-day moving average. This level of stock market compression hasn't been seen since the market was melting down into its bear-market low back in February 2009.
As part of that bottoming process, the sector and industry groups that will lead the market higher out of the oversold condition are the ones that will move higher first. I see a lot of potential in the metals and materials stocks. Nickel is turning things around, and, of course, gold could also lead a rebound.
Due to the terrific compression, the temptation will be to get long. But I am really wondering now if the psychology of market participants may have been harmed by that recent 995-point mid-day slide on the Dow. Since there are no good explanations for it, people may just stand clear of the markets.
So I think we may see a period where investors stand back and re-evaluate the markets. But if we get over this hump in the next couple of months, we'll know more about the cycle's potential longevity.
In the meantime, we're going to attack this bull cycle just as we have been for the past year—deploying our capital into strategic long trades and buying options on select names.
It's a strategy that has paid off big-time for my Trader's Advantage subscribers…
My advisory service, Trader’s Advantage, is designed specifically for markets like this.
There are a few areas I’m paying close attention to right now for our next round of profits.
7 Most Common Mistakes
In this confusing and turbulent market, many investors are getting tripped up by some costly mistakes. Here are seven common and incredibly costly mistakes investors are making today that I want you to be sure you avoid.
Cash says: “It’s a bear market, I guess.” If you have a bullish outlook, you need to be long—and stay that way until your outlook changes.
I guarantee that sitting on the fence will dent your tender parts. And I promise that if you join me at Trader’s Advantage, you will wake up every day knowing which side of the fence we’ll be making money on.
We win by buying high and selling higher, and shorting low and covering lower.
Successful investors are like mercenary soldiers who volunteer for duties on whichever side it looks like is winning. So if you see strength—rising stock prices—sign up!
Think this way every day. Do more of what's working and less of what isn't. Your top priority is the trade that’s working best.
Too many people lose money trying to “fix” problem investments. Of course, as you know, not every trade is a winner. But we have managed to limit losses in losing trades to less than 8% on average in each trade because I am committed to correcting errors as quickly as possible and refuse to sugarcoat losses or sweep them under the rug.
Ditch problems. Nurture successes.
And some of the quickest 50% profits you’ll miss are because you got out a week early.
Have you ever heard the old adage “you never go broke taking a profit”? Complete and utter hogwash. Be patient… that last 50% will be a sweet reward.
By focusing on the intermediate term at Trader’s Advantage, we don’t try to forecast too far into future. Instead, we try to thoroughly understand the here and now, and then leverage logic, history, research, experience and intuition to make our money. We think of this as a matter of predicting the present.
My goal is to help you monetize technical, fundamental, economic, thematic, cyclical and even pop culture observations by profiting from sharp movements in various investments in a relatively short amount of time. We could hold stocks a matter of days, or as long as three months.
The last few years have been a tough stretch for many investors, but our approach allows us to adapt quickly and take advantage of opportunities in all market conditions.
That’s why I stay in frequent touch with my readers via email every day, telling them which strategies we need to employ to make our money and minimize our risk, and giving them the specific trades to make it all happen. I invite you to join us today.
In espionage, you use every piece of intelligence you can lay your hands on. The technical rules are simple. We apply them rigorously. The fundamentals, likewise, are easy enough to uncover. We use both to pick winners.
Best yet, you don’t have to lift a finger. I do all the work for you when you join my service.
If your outlook is bullish and you get a down day in a profitable position, add to your position. If the next day is a down day, add to your position again. Continue to add to your position on down days as long as the market trend is still pointing higher.
Obviously, the reverse is true if you are short.
The fact is, many investors have turned to trading precisely because they have little confidence in the “system.” They want to play this market close to the vest.
They discount the future but can see opportunity in the very near term.
In short, no one believes this rally means that all is right for the market and the economy, but that’s not stopping smart investors from making a ton of money in it right now—including my Trader’s Advantage members!
Remember, capital preservation is key, but you must be ready to make money on rallies. Who cares if this is a “false hope recovery rally…” make money from it, then get out and spare yourself the next round of decline. Wash, rinse, repeat. We’ve done this time and again in Trader’s Advantage. Make sure you’re with us for the next round of profits!
Get Back on the
If you agree that it’s time for a different investing approach, then put my unique and powerful strategy to work for you over the next 30 days, risk-free.
You give me 10 minutes a day, and I’ll show you how to bank 50% profits month in and month out.
In fact, I’m so sure that my Trader’s Advantage service will lock in incredible profits, that I’m offering you a chance to try it for HALF the regular cost.
Give Trader’s Advantage a try today, and you’ll get:
But I’m confident that as soon as you see the spectacular profits in the days and weeks ahead, you’ll want to stay on board for the long haul with the rest of our thrilled subscribers.
So, you have a choice: You can continue to put your financial future at the mercy of the clowns in Washington and Wall Street...
Or you can take action today by grabbing your free reports and experiencing the thrill of filling your portfolio with double- and triple-digit gains in a matter of just days and weeks.
Which sounds better to you?
We have just witnessed the death of investing as you knew it.
We are NEVER going back to the way things were. And the faster you face this new reality, the faster you can start to profit from it.
So many investors I talk to are waiting for the market to return to normal. Folks, this IS the new normal.
I am astounded at how many people are still sitting on the sidelines, waiting for the “right” time to invest. And I’m appalled by how many people are still losing money because they are trying to make money the same way they were when they suffered devastating losses in the market crash.
The last 18 months have shaken many people's faith in investing to the core.
First, it was the devastating bear market that destroyed people’s retirement dreams. Then a reminder that Wall Street is rigged against individual investors as Goldman Sachs came under fire. Then a European debt crisis. Then the mysterious 990-point one-day free fall.
But despite all that, most investors are missing out on the bigger picture.
You MUST change the way you are investing, or you are doomed to suffer the same crushing losses again. And you must start today.
It’s time to try a smarter way to invest—and I can show you how.
Profit No Matter What
the Market Does
Before we go any further, though, I should probably introduce myself. I’m Jon Markman, editor of Trader’s Advantage. You may have read one of my many columns on MSN Money or TheStreet.com over the past dozen years, or seen me on CNBC. I’m also a co-inventor on two Microsoft patents and have been a longtime pioneer in the development of stock-rating systems and screening software.
 A pioneer in the development of stock-rating systems and screening software, Mr. Markman is co-inventor on two Microsoft patents and author of the best-selling books “Swing Trading”, The New Day Trader Advantage and “Online Investing.” He was portfolio manager and senior investment strategist at a multi-strategy hedge fund from 2002 to 2005; managing editor and columnist at CNBC on MSN Money from 1997 to 2002; and an editor, investments columnist and investigative reporter at The Los Angeles Times from 1984 to 1997.Mr. Markman won a Gerald Loeb Award for Distinguished Financial Journalism for his columns explaining market chicanery in 2002; Society of Professional Journalists awards for his 2001 reporting on Enron and the post-Sept. 11-investment environment; and was a news editor on Los Angeles Times staffs that won Pulitzer Prizes for spot-news reporting in 1992 and 1994. A graduate of Duke University and the Columbia University Graduate School of Journalism, he speaks frequently on investment topics at conferences nationwide as well as on TV and radio. |
And it has enabled us to continuously rake in huge gains like these no matter what the market is doing:
- Hershey: +272% in 18 days
- Gilead: +111% in 13 days
- eBay: +87% in 2 days
- Ryder: +86% in 2 days
- InterContinental Exchange: +77% in 18 days
- Newmont Mining: +65% in 3 weeks
- Apple: +50% in 1 day
- Direxion 3x Bull Technology: +43% in 3 weeks
- Teekay Shipping: +40% in 2 days
Just One Goal: Make Money
People ask me all the time, “Jon, what’s your investment philosophy?” And my answer is always the same… to make money.I’m not a bear or a bull.
Look, to profit in today’s market, you must forget those old labels.
When it comes to making money, I’m an agnostic! I’m an opportunist. I’m a supreme realist. I’m a mercenary. I’m in it for the profits. I’m in it to win, and that means I’ll be on whoever’s side is winning. And I can put you on the winning side, too.
Who will win the current battle for market direction? I don’t know (you’ll never find me pretending to have a crystal ball), and frankly, I don’t care.
So please don’t waste another minute wondering whether this volatile market is headed up, down or sideways, because I’m here to tell you it doesn’t matter.
The market is moved by forces you can’t predict, let alone control. We’ve gotten PLENTY of evidence of that over the last few years.
But you are NOT at the mercy of the markets.
You can make money week in and week out no matter what the market does, as long as you are willing to do things a little differently.
Many investors have not yet accepted that the old ways of investing no longer work. That’s why during last year’s raging bull market, only 3 out of 10 individual investors made money!
Don’t let that happen to you. Every day there is an opportunity in the market to make money. Every single day. Regardless of which direction the market is headed.
But if you want to profit in today’s market, you must play by the new rules of investing.
The 4 New Rules of Investing
1. Buy and hold is dead.
I hate to be the one to tell you this, but “buy and hold” is a marketing slogan, not a proven investment philosophy! It was invented in the ’80s by mutual fund companies and Wall Street to lure more people into investing.Ask any investor who used to believe that “buy and hold” was the right strategy—that good stocks would always go higher if they were only held long enough—what they have now to show for it. Mostly lots of losses.
Look at the brutal roller coaster “buy & hold” investors have been taken on over the last 10 years in the DJIA, NASDAQ, and S&P 500 indexes…
2. Diversification won’t save you.
You’ve heard the bromide that says you can survive anything with a diversified portfolio? It’s flat-out wrong. In a down market like we just lived through, everything goes down.One of the distinguishing features of the 2008 bear market was that all asset classes, industries and regions were correlated with each other.
Diversification didn’t offer a lick of protection. Just ask the president of Harvard University, whose school’s well-diversified $37 billion endowment faced "unprecedented" losses during the downturn.
3. Speed is in.
Unfortunately, people think they lack the intestinal fortitude to trade more frequently, but what they don’t know is that it doesn’t take guts to trade. It takes flexibility and a good plan. I’ll give you both.In today’s volatile market, it is critical that you take advantage of the market’s swings. We have seen—and will continue to see—plenty of big knee-jerk reactions to news that presents big profit opportunities for the nimble.
4. Don’t take a knife to a gun fight.
In today’s market, you must use every weapon at your disposal. A mercenary uses whatever weapons work—you don’t just go into battle with your .38 caliber; you take your knife, bazooka and poison with you, too.You never know what weapon will get the job done. Think Jack Bauer from the TV hit 24— not the Marquess de Queensbury.
The same goes for us. We will use whatever tool gives us the best chance to win today—stocks, options, bonds, leveraged funds. If it can help us make money, it’s in our investing toolkit.
The Truth About the Market
Now, I'm no raging optimist, but we're in the midst of a new bull cycle.It may not feel like it, given recent events—investors freaked out over Greek debt, a contagion effect on Spain, speculation that U.S earnings have peaked and the great global capital machine would soon seize up. As a result, in just a week's time, the Dow shed nearly 6% while the S&P fell more than 6%.
But declines like this are normal. These declines are all about resetting the deck on valuation and blowing the froth off the top in new bull cycles. Now, don't get me wrong—there are plenty of serious problems around the world. But the amount of fiscal and monetary liquidity that flooded the global financial system over the past year should have long-lasting consequences.
The current bull cycle—just barely a year old—is still not fully established and has plenty of room to run.
Sure, it's being tested in a big way right now. In fact, by a number of metrics, the situation is very oversold: Less than 3% of stocks are above their 10-day moving average. This level of stock market compression hasn't been seen since the market was melting down into its bear-market low back in February 2009.
As part of that bottoming process, the sector and industry groups that will lead the market higher out of the oversold condition are the ones that will move higher first. I see a lot of potential in the metals and materials stocks. Nickel is turning things around, and, of course, gold could also lead a rebound.
Due to the terrific compression, the temptation will be to get long. But I am really wondering now if the psychology of market participants may have been harmed by that recent 995-point mid-day slide on the Dow. Since there are no good explanations for it, people may just stand clear of the markets.
So I think we may see a period where investors stand back and re-evaluate the markets. But if we get over this hump in the next couple of months, we'll know more about the cycle's potential longevity.
In the meantime, we're going to attack this bull cycle just as we have been for the past year—deploying our capital into strategic long trades and buying options on select names.
It's a strategy that has paid off big-time for my Trader's Advantage subscribers…
- Google calls, up 60% in 3 days
- Kimberly-Clark calls, up 106% in 6 days
- AT&T Calls, up 121% in 10 days
- Heinz calls, up 71% in 15 days
- Verizon calls, up 171% in 21 days
Show Me the Money
We’ll ride rolling waves of liquidity and hope in certain sectors, and exit just after they crest. Once again, investors who try to buy and hold through it all will suffer.My advisory service, Trader’s Advantage, is designed specifically for markets like this.
There are a few areas I’m paying close attention to right now for our next round of profits.
- Regional Banks and REITS.
Most people stay away from regional banks and REITS, but I think now is the time to be involved. They are so unloved, and the Fed’s easy money has made them compelling plays now—they are already on the move, but most investors don’t realize it and will miss out.
- Aerospace and Defense.
Currently, Boeing is building new fleets for emerging markets, and there will be a lot of small- and mid-caps directly in line to profit over the next few years. As our somewhat permanent state of war continues, supplies will be needed for these sectors. I think Boeing and its suppliers will be big winners over the next three to five years.
- Car Manufacturers
Car makers are finding their way back on the map. Manufacturers and parts makers are finding their footing again as consumer spending on automobiles continues to recover. In addition, auto loans are incredibly cheap right now so buyers can find great deals.
- Emerging Markets.
For the rest of the decade, emerging markets will prevail, with a period of a few months when avoiding them will be key.
Every sector has its down months. But while the skies are blue, we will play with individual companies as well as leveraged ETFs—particularly the new 3X ETFs that allow triple the profits in China or Latin America.
Markets may get ahead of themselves, so we’ll step aside or try to catch the turn with shorts or inverse funds as well.
7 Most Common Mistakes
Investors Are Making Today
In this confusing and turbulent market, many investors are getting tripped up by some costly mistakes. Here are seven common and incredibly costly mistakes investors are making today that I want you to be sure you avoid.Mistake #1: No Position Is a Position
Not being clear about the overall direction of the market is a cardinal sin. Stand in the middle of the road, and you will get run over—from both directions.Cash says: “It’s a bear market, I guess.” If you have a bullish outlook, you need to be long—and stay that way until your outlook changes.
I guarantee that sitting on the fence will dent your tender parts. And I promise that if you join me at Trader’s Advantage, you will wake up every day knowing which side of the fence we’ll be making money on.
Mistake #2: Buying Weakness
Only a fool thinks he can consistently buy low and sell high. This whole “you liked it at $15, you’ll love it at $5” shtick is utter nonsense. If you doubt me, call up a chart of Citigroup… or GM.We win by buying high and selling higher, and shorting low and covering lower.
Successful investors are like mercenary soldiers who volunteer for duties on whichever side it looks like is winning. So if you see strength—rising stock prices—sign up!Think this way every day. Do more of what's working and less of what isn't. Your top priority is the trade that’s working best.
Too many people lose money trying to “fix” problem investments. Of course, as you know, not every trade is a winner. But we have managed to limit losses in losing trades to less than 8% on average in each trade because I am committed to correcting errors as quickly as possible and refuse to sugarcoat losses or sweep them under the rug.
Ditch problems. Nurture successes.
Mistake #3: Exiting Early
Some of the best parties you missed are ones you left early; some of the best concert sets are the ones you never heard, because while the third encore played, you were beating the crowd out of the parking lot.And some of the quickest 50% profits you’ll miss are because you got out a week early.
Have you ever heard the old adage “you never go broke taking a profit”? Complete and utter hogwash. Be patient… that last 50% will be a sweet reward.
Mistake #4: Staying on the Sidelines Because of Market Uncertainty
Many investors refuse to realize that uncertainty is a natural condition. There is ALWAYS uncertainty!By focusing on the intermediate term at Trader’s Advantage, we don’t try to forecast too far into future. Instead, we try to thoroughly understand the here and now, and then leverage logic, history, research, experience and intuition to make our money. We think of this as a matter of predicting the present.
My goal is to help you monetize technical, fundamental, economic, thematic, cyclical and even pop culture observations by profiting from sharp movements in various investments in a relatively short amount of time. We could hold stocks a matter of days, or as long as three months.
The last few years have been a tough stretch for many investors, but our approach allows us to adapt quickly and take advantage of opportunities in all market conditions.
That’s why I stay in frequent touch with my readers via email every day, telling them which strategies we need to employ to make our money and minimize our risk, and giving them the specific trades to make it all happen. I invite you to join us today.
Mistake #5: Not Using Technicals AND Using Fundamentals
Fundamental investors hate technicals; chart traders laugh at investors who rely on fundamentals. Both are wrong to exclude the other.In espionage, you use every piece of intelligence you can lay your hands on. The technical rules are simple. We apply them rigorously. The fundamentals, likewise, are easy enough to uncover. We use both to pick winners.
Best yet, you don’t have to lift a finger. I do all the work for you when you join my service.
Mistake #6: Getting Scared Off by One-Day Moves
Do not panic and bail out because of a few days that go against the primary trend. We’re going to see a lot of continued volatility in the market. Use those days to your advantage.If your outlook is bullish and you get a down day in a profitable position, add to your position. If the next day is a down day, add to your position again. Continue to add to your position on down days as long as the market trend is still pointing higher.
Obviously, the reverse is true if you are short.
Mistake #7: This Is Not an Investors’ Market!
Confidence remains extremely fragile, not just for long-term investors but for traders, too.The fact is, many investors have turned to trading precisely because they have little confidence in the “system.” They want to play this market close to the vest.
They discount the future but can see opportunity in the very near term.
In short, no one believes this rally means that all is right for the market and the economy, but that’s not stopping smart investors from making a ton of money in it right now—including my Trader’s Advantage members!
Remember, capital preservation is key, but you must be ready to make money on rallies. Who cares if this is a “false hope recovery rally…” make money from it, then get out and spare yourself the next round of decline. Wash, rinse, repeat. We’ve done this time and again in Trader’s Advantage. Make sure you’re with us for the next round of profits!
Get Back on the
Winning Side of Investing
If you agree that it’s time for a different investing approach, then put my unique and powerful strategy to work for you over the next 30 days, risk-free.You give me 10 minutes a day, and I’ll show you how to bank 50% profits month in and month out.
In fact, I’m so sure that my Trader’s Advantage service will lock in incredible profits, that I’m offering you a chance to try it for HALF the regular cost.
Give Trader’s Advantage a try today, and you’ll get:
 | Daily Updates. Each day, you’ll get an email that updates you on all of our positions, shares my market analysis and tells you how we’re making money that day no matter what the market does. Let me help you capture profits of 25% to 100% in less than 30 days. And all you have to do is spend 10 minutes a day following my simple buy and sell recommendations. |
| Unlimited Flash Alerts. The moment I have a buy or sell signal for you, I’ll alert you via email so you can take immediate advantage of the trend and profit from powerful and sudden swings in the market. |
| My Complete Buy List containing all of my current recommendations, with buy limits, targets and other quick reference information, so you can act immediately. |
| 24/7 Access to My Private Website, with unlimited access to our complete archive of past Trader’s Advantage issues, stock quotes and a wealth of other reference material that can help your profits skyrocket. |
| Guaranteed Profits. I stake my reputation on every trade I make. If my trades don’t give you at least 50% gains in the next 30 days, you won’t pay a dime! |
And I almost forgot…
Remember, even if you decide that Trader’s Advantage isn’t for you, the priceless information contained in your free report is yours to keep no matter what.But I’m confident that as soon as you see the spectacular profits in the days and weeks ahead, you’ll want to stay on board for the long haul with the rest of our thrilled subscribers.
So, you have a choice: You can continue to put your financial future at the mercy of the clowns in Washington and Wall Street...
Or you can take action today by grabbing your free reports and experiencing the thrill of filling your portfolio with double- and triple-digit gains in a matter of just days and weeks.
Which sounds better to you?
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Các liên kết với bài này
Các liên kết với bài này Thứ ba, ngày 22 tháng sáu năm 2010
How Do You Calculate A Company's Cost of Capital?
In the tutorial on Present Value, we demonstrated that the greater the "riskiness" of a future cash flow, the lower its present value. We also explained that "riskiness" is measured by the percentage return expected from an alternative investment with the same amount of risk. The "Cost of Capital" calculation quantifies that risk.
What Does "Cost of Capital" Mean?
More specifically, "cost of capital" is defined as "the opportunity cost of all capital invested in an enterprise."
Let's dissect this definition:
1. "Opportunity cost" is what you give up as a consequence of your decision to use a scarce resource in a particular way.
2. "All capital invested" is the total amount of cash invested into a business.
3. "In an enterprise" refers to the fact that we are measuring the opportunity cost of all sources of capital which include debt and equity.
How Do We Calculate a Company's Weighted Average Cost of Capital?
We calculate a company's weighted average cost of capital using a 3 step process:
1. Cost of capital components. First, we calculate or infer the cost of each kind of capital that the enterprise uses, namely debt and equity.
A. Debt capital. The cost of debt capital is equivalent to actual or imputed interest rate on the company's debt, adjusted for the tax-deductibility of interest expenses. Specifically:
The after-tax cost of debt-capital = The Yield-to-Maturity on long-term debt x (1 minus the marginal tax rate in %)
We enter the marginal tax rate in cell C10 of worksheet "Inputs."
B. Equity capital. Equity shareholders, unlike debt holders, do not demand an explicit return on their capital. However, equity shareholders do face an implicit opportunity cost for investing in a specific company, because they could invest in an alternative company with a similar risk profile. Thus, we infer the opportunity cost of equity capital.
We can do this by using the "Capital Asset Pricing Model" (CAPM). This model says that equity shareholders demand a minimum rate of return equal to the return from a risk-free investment plus a return for bearing extra risk. This extra risk is often called the "equity risk premium", and is equivalent to the risk premium of the market as a whole times a multiplier--called "beta"--that measures how risky a specific security is relative to the total market.
Thus, the cost of equity capital = Risk-Free Rate + (Beta times Market Risk Premium).
2. Capital structure. Next, we calculate the proportion that debt and equity capital contribute to the entire enterprise, using the market values of total debt and equity to reflect the investments on which those investors expect to earn a minimum return.
3. Weighting the components. Finally, we weight the cost of each kind of capital by the proportion that each contributes to the entire capital structure. This gives us the Weighted Average Cost of Capital (WACC), the average cost of each dollar of cash employed in the business.
Case Study: Gateway, Inc., as of April 21, 2000
To demonstrate how to calculate a company's cost of capital, we will use the Gateway case study developed in the book. Readers who want to calculate the Weighted Average Cost of Capital (WACC) may wish to download the accompanying spreadsheet.
1. Cost of capital components. Gateway draws upon two major sources of capital from the capital markets: debt and equity.
A. Cost of Gateway's debt capital. As of the end of 1999, Gateway only had debt of $8.5 million. Enter this figure in cell C25 of worksheet "Inputs." Because this amount is so small, it will not significantly affect our Weighted Average Cost of Capital calculation. For the purposes of this tutorial, however, let's run the numbers.
Our first step in calculating any company's cost of capital is to consult the relevant annual 10-K regulatory filings with the Security and Exchange Commission (SEC). For this case study, we can click here to see Gateway's 1999 10-K. This document tells us that Gateway has two components to its total debt of $8.488 million:
1. Regular debt. Gateway has $8.415 million of "Notes payable through 2002 with interest rates ranging from 3.9% to 5.5%." We can calculate that the middle of this range equals 4.7%. We can also calculate that Gateway's Notes Payable of $8.415 million comprises 99.14% of the company's total debt of $8.488 million.
2. Capital leases. Gateway also has $73, 000 in "capital leases." A capital lease is a debt-like agreement in which a firm agrees to pay fixed amounts to someone who leases them land or equipment. Gateway's SEC filing tells us that this debt-equivalent capital lease has a "fixed rate of 6.5%" We can calculate that Gateway's $73,000 of capital leases comprises 0.86% of the company's total debt of $8.488 million.
Because there are two kinds of debt with different interest rates, we have to weight the different interest rates associated with each kind of debt by the relevant proportion of debt that each comprises. In this case, the pre-tax cost of debt would be equivalent to (4.7% x 99.14%) + (6.5% x 0.86%), or 4.72%. Enter the pre-tax cost of debt in cell C5 of worksheet "Inputs."
However, we are not done yet. We noted above that we have to adjust for the tax-deductibility of interest expenses, which lowers the cost of debt according to the following formula:
After-Tax Cost of Debt Capital = The Yield-to-Maturity on long-term debt x (1 minus the marginal tax rate)
Given Gateway's marginal tax rate of 35%, the company's after-tax cost of debt equates to 4.72% x (100% minus 35%), or 3.1%. We see this calculation in cell C6 of worksheet "WACC."
Notably, Gateway has both near-zero debt levels and a near-zero after-tax cost of debt, which means it will have virtually no effect on the company's weighted average cost of capital. Thus, the purpose of this cost-of-debt calculation is purely instructional.
Also, plese note that in this example, we have used a company's actual cost of debt as a proxy for its marginal cost of long-term debt. A company's marginal cost of long-term debt may be better estimated by summing the risk-free rate and the "credit spread" that lenders would charge a company with a specific credit rating.
B. Cost of Gateway's equity capital. We noted above that:
Cost of Equity Capital = Risk-Free Rate + (Beta times Market Risk Premium).
To calculate any company's cost of equity capital, we need to find a reliable source for each of these inputs:
1. Risk-free Rate. We suggest using the rate of return on long-term (ten-year) government treasury bonds as a proxy for the risk-free rate. We enter this data point in cell C4 of worksheet "Inputs."
Sources for this include:
* CBS Marketwatch. Even unregistered users can use CBS MarketWatch's free bond quotes by clicking here.
* New York Times. Any user can see the "10yr. Tres. Yield" on the front page of the New York Time's web site by clicking here. To get further details, you can register free of charge.
* Wall Street Journal. Paid subscribers to the WSJ's online service can find quotes for key interest rate measures (including the ten-year T-Bond) by clicking here.
2. Beta coefficient. We enter this data point in cell C8 of worksheet "Inputs."
There are a variety of sources available for obtaining the beta coefficient for a particular company.
* Value Line Investment Survey. Paid subscribers to this service can obtain Value Line's estimates of a company's beta coefficient. Value Line can be accessed either online or offline through a paid subscription, as well as at most public libraries. Click here to see how to read a company-specific Investment Survey using Value Line. Arrow #1 points to where you can find Value Line's Beta estimate.
* Yahoo. Yahoo offers free beta estimates through its Company Profile service. Click here to see Gateway's Company Profile on Yahoo.
* Bloomberg. Free beta estimates from Bloomberg can be accessed online. Bloomberg's estimate of Gateway's current beta can be accessed here.
* Barra. Barra publishes the Barra Beta Book monthly to suscribers. You may be able to find this resource in a good business library. Click here to see the company's web site.
3. Equity Risk Premium. Forward looking approaches, as well as more recent historical data, suggest an equity risk premium in the 3 to 5 percent range. We use an Equity Risk Premium estimate of 3.2%. We enter this data point in cell C7 of worksheet "Inputs."
For those interested in looking at historical equity risk premia, we refer you to the following online resources:
* Ibbotson Associates. Ibbotson sells a report on historical risk premia over time on its website. The report can be purchased by clicking here.
* Aswath Damodaran. Valuation expert Professor Damodaran of NYU's Stern School of Business has published an informative article on equity risk premia that can be downloaded free of charge.
To continue with our Gateway case study, we used the following estimates for these three factors as of April 21, 2000:
o Risk-free rate of 5.85%.
o Beta coefficient of 1.3.
o Equity risk premium of 3.2%.
Using these estimates, Gateway's cost of equity capital = Risk-Free Rate + (Beta times Market Risk Premium).= 5.85% + (1.3 x 3.2%), or 10%. We see this calculation in cell G7 of worksheet "WACC."
3. Weighting the components. Finally, we weight the cost of each kind of capital by the proportion that each kind of capital contributes to the entire enterprise. This gives us the Weighted Average Cost of Capital (WACC), the average cost of each dollar of cash employed in the business.
To review, Gateway's after-tax cost of debt is 4.72% and its cost of equity is 10%. As of April 21, 200, the market value of Gateway's debt is equal to $8.5 million and the market value of Gateway's equity approaches $17 billion. We enter the shares outstanding and share price for this calculation in cells C12 and C13 in worksheet "Inputs."
Thus, debt contributes virtually 0% of Gateway's capital while equity contributes virtually 100%.
Gateway's weighted average cost of capital is thus 4.72% x 0% + 10% x 100%, or 10%. You can see this calculation in cell J13 of worksheet "WACC."
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