From the category archives:

Investing

The last fortnight has seen a BP continue the attempt to prevent oil pouring into the sea after their Deepwater Horizon oil rig exploded on 20th April. Since the rig exploded and subsequently sank, an estimated 5,000 barrels of oil have been finding their way into the seas of the Gulf of Mexico every single day.

The oil is now drifting towards the US coast and threatens not only wildlife but also thousands of peoples’ livelihoods dependent on fishing and tourism.

BP’s latest move, the ‘top kill’ operation, saw them attempt to plug the spill by pumping 30,000 barrels of mud into the well over a period of three days. The operation failed as oil continued to leak into the Gulf of Mexico, forcing BP to start the process of digging a relief well and pumping concrete into the well shaft. Although this is likely to stop the leak, it will take around 8 weeks to complete, meaning the workers will be out there well into the areas’ hurricane season.

So as you would imagine, BP’s market value has taken a monumental pounding; dropping 36% since the disaster in April. This translates to a hefty £45bn drop for the petrol giant, and BP’s share price now sits at just 417p per share.

Things got even worse for the company this week as US authorities announced they are launching a criminal investigation into the disaster, adding even more pressure on the company and making life more difficult for Tony Hayward (BP’s Chief Executive).

So is there any sense in investing with BP? Some experts believe that actually, the answer may be yes. Several analysts are suggesting that BP’s stock should now be a ‘buy’, thinking that the stock has dropped so low it may be worth a punt as they attempt to move forward from the disaster.

So let’s have a look at the pros and cons of buying BP.

Firstly, BP is a major supplier to the US Military; not that this will get them off any hooks, but it certainly will carry weight in America and should provide some leverage when it comes to keeping the company out of trouble with the US government. A lot of people are speculating that given BP’s past form, they might start to get banned from US government contracts – this might be more believable if the US wasn’t currently engaged in a major international war. I can’t see BP receiving a ban like this, which should help them achieve their annual dividend target.

BP’s dividend is another major point, accounting for a massive £1 in every £6 in FTSE 100 dividends paid; making it integral to the health of Britain’s pension fund. Tony Hayward has assured investors (and will do again this week) that the BP annual dividend won’t be cut.

Having said that, the cost of the disaster for BP may well rise considerably and it’s been suggested that their statistics released since the disaster are vastly under-estimated. For example, BP suggested that the cleanup cost had reached £930 million, but this doesn’t include claims from fisherman and tourism industries affected by the oil spill.

BP’s insurance costs could also be another prohibitively expensive cost in the aftermath of the catastrophe. Insurers will be well aware of the potential risks of getting themselves involved with BP, and premium costs will reflect this (if they manage to find substantial cover at all).

On the one hand, I genuinely can’t see BP losing their major US contracts, nor can I see their dividend being substantially cut, which should result in their share price beginning to climb again within a few months.

At the same time, confidence in BP is at an all time low and there’s no guarantee that the petroleum giant will come out of this with their Chief Executive or their dividend intact.

I would suggest that their will be a relief rally and that the stock will eventually climb again, but I’d only really advise sticking the BP stock if you’re already a shareholder. For those wanting to get in to the oil market I’d recommend Chevron, a major US oil stock. Chevron have around a 4% prospective yield and practically no debt to the company, making them a far safer option than the troubled BP; and should BP get a band from US contract, the share price for Chevron will rise considerably.

This is a guest post by John, John is a financial advisor working with a UK based company specialising in share dealing, spread betting and forex trading. He’s a keen blogger and contributes regularly to the financial blogosphere.

photo: (NOAA via uscgd8)

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For the average investor you can’t, and shouldn’t, think like a day trader. I am a youngish guy. I have a lot of time before I retire so my investing outlook is extremely long term. I put the majority of my funds into my 401k and my wifes Roth IRA as long term investments for our future. i am not a day trader, or really an investor by any means. I have only recently opened my first non-tax advantaged investment account. Even this one account is still a long term investment in my mind, I am not trying to turn a quick buck it is still a relatively long term investment for me.

What gets me is these huge swings in the market. Don’t get me wrong, they are real bad but how do they really affect your outlook. I had a conversation with a relative the other day about that crazy drop in the market that seemed to scare the pants off of everyone. He and I looked at it the same way. 1.) it was a fluke and 2.) we both missed out on an opportunity to make some quick money. While that was an exception this recent recession fits the same play for me.

Like I said I am still youngish so at this point it is actually beneficial for me to have the markets hitting new lows. Last time I checked it is better to buy things when they are cheaper an sell them when they are higher. Right? Sure you may have bought some of it back when prices were high but now they aren’t and you are still buying. At the height of the markets we saw the DOW reach 14,000+ which then dropped to 6,600ish. We all bled a lot during those months but for those of us who didn’t give up we were buying into a market valued at half of what it was. My confidence in the US economy is pretty high so to me this kind of situation is an unfortunate occurrence the presents unprecedented opportunity.

I know there is probably some people out there who disagree with my though process. They are probably much closer to retirement and lost a ton of money. That is why general wisdom is that the older you get the safer you make your investments. Moving more and more away from stocks and more and more into bonds. The idea here is to keep your money safe as it gets closer to time to need it. I won’t say I buy 100% into it but it makes good sense right. You don’t just want that money to be there when you retire, you need it to be there. The people whose retirements were hurt the most by the recession were those people closest to retirement who were riding the high of the market and not thinking of the possibilities. The biggest thing to remember about investing, saving, living, working, and any decision you make is to remember.. it depends. Everyone’s situation is different so don’t buy into the hype, or think because my neighbor is doing it it must be right. You need to do what is right for and comfortable for you.

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PBS is poised to run a NOVA special tonight at 8PM ET/PT titled Mind Over Money. The show seeks to explore the differences between conventional economics and behavioral economics. They try to understand how emotions play a role in economics and show various experiments that were conducted to “prove” emotions influence your decisions. This emotional influence contrasts to conventional economics which says that people will always perform rationally when dealing with money. The theory is that you will work out exactly what something is worth to you and don’t allow your emotions to influence your decision.

Now I am not an actual economist so I can’t refute any of these theories on economics, it makes sense to me though that people will be influenced by their emotions. The show uses bubbles as an example of people acting irrationally. We convince ourselves that the value of something is considerably higher than it really is and start jumping on the bandwagon, right up until it pops like an overinflated balloon.

One of the “experiments” they used as an example of people acting irrationally was the auctioning of a $20 bill to a group of students. One student ended up paying$28 for a $20 bill. This is supposedly an irrational measure. What they don’t explain well enough is that the second place bidder also has to pay their bid and gets nothing. The bidding goes up above $20 in an effort to win and cut your losses, the person who lost the bidding war still had to pay $27 while the winner was only out $8. Of course had they stopped at the $20 mark the second place bidder would have been out $19 which is more than the $8 extra he paid for the $20. They artificially forced the price above $20 by instituting a penalty for the second place bidder. To me it would have been rational to continue to bid if I was sitting in second place.

Experiments aside I think you would be hard pressed to say people are always going to act rationally when it comes to money. The rational method of reducing debt would be to pay off your highest interest debt first to cut down the amount of money your debt is costing you. Dave Ramsey has made his career by encouraging you to act emotionally not rationally when it comes to debt reduction. This process makes sense and it works. You get the little wins up front which encourage you to continue to reduce debt by building on your snowball. This isn’t rational but it makes sense. Looking back at the housing boom can we think that the epic rise in house prices was the result of rational thinking or irrational actions.

NOVA quotes Robert Schiller, author of Irrational Exuberance as an example of someone who believed the markets were overvalued and didn’t support the prices being seen at the time. Other economists were shown discounting his claims. Shiller’s theory was that while the booming markets were initially based on solid reasoning it converted to emotional excitement and envy which further fed the building bubble until it burst. Emotions are a big part of how we handle money, whether or not that proves conventional economics is wrong is up to you.

If you are interested in learning more check out the NOVA special tonight on PBS at 8pm ET/PT and/or visit their site at http://www.pbs.org/nova/money for more information.

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Your Retirement Is a Tree, not a Garden

April 13, 2010

Sensationalism is something the news media is known for. They take the most miniscule tidbdsits of information and make it into something that sounds like it is the greatest thing since sliced bread. One of the most recent things to be taken by the media and run to the ground has been the DOW breaking […]

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Investing Locally

March 31, 2010

This is a guest post by Rob Stretch. Robert Stretch is an experienced blogger and online marketer. He thrives on marketing to competitive financially-based niches. Currently, he works for VA Mortgage Center.com targeting VA Loans and helping military veterans. Buy Local and Invest Local “Buy Local” is a popular battle cry these days when it […]

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