How Human Behavior Drives Investment Activity

Understanding human behavior is crucial for investors, according to Alliance Capital Management CEO Lewis A. Sanders, who talked about behavioral finance and its role in pricing anomalies and forecasting bias during a presentation last month at Wharton.

"Capital markets themselves are derivative of the biases and preferences people bring to decision-making," Sanders told his audience, adding that insights into behavioral finance hold true across fixed-income, debt or equity markets and national boundaries.

"People are people wherever you find them."

Sanders, who spoke as part of part of Wharton's Musser-Shoemaker Lecture series, has spent a career in investment research, starting as an analyst at Sanford C. Bernstein & Co., Inc. in 1968. He rose to become chairman of the firm, which merged in 2000 with Alliance, one of the world's largest investment managers. In 2003, he was named chief executive of Alliance, which has $480 billion under managementand 6.9 million mutual fund accounts.

At the moment, he said, markets are relatively calm and not generating
big price anomalies. "The world is not in a very provocative state, but something will come along. Maybe it will be oil. Maybe it will be currency. Who knows, maybe it will be broadband. I can think of any number of developments." He disputed conventional wisdom which says that superior information gives investors a leg up in making better decisions. "Everybody has the information. But are people reacting to it rationally?"

Asset prices are driven by three main human preferences, according to Sanders. The first is what he called "the overwhelming affection for things that are, or appear to be, certain." For example, he said, most household wealth is in assets that have low, or no, volatility, at the expense of earning higher returns. Another trait that plays on markets is people's tendency to ignore probability if a large payoff is at stake. "It's going for the gold. Probability is essentially irrelevant," said Sanders, who likens the behavior to lottery ticket sales that increase as the jackpot rises, even though the likelihood
of winning diminishes. "In the capital markets this is a profound phenomenon because it fuels most bubbles."

Another strong trait that plays out in markets is loss aversion. "In people's minds, losses loom larger than gains," said Sanders. "People just don't like losing money. The only thing they dislike more are money managers who lose it for them." In effect, Sanders argued, sellers fearful of losing money will wind up undercutting the price of their assets. "The sellers are paying the buyers to rid themselves of the stress of ownership that they can no longer endure." These traits are reflected in investing styles, according to Sanders.

Value investors, he said, are willing to take on the stress, but in return they spend their lives "being depressed, afraid and subject to repeated threats to their self-esteem." Growth investors seek a declining risk premium and are willing to pay more for perceived certainty. Finally, there are speculators, whom Sanders described as being often cloaked as growth investors, operating on "skewness" or extremes in price swings.

Human behavior also influences forecasting, Sanders told his audience.

Much of the bias in market forecasts derives from "mental shortcuts. Typically, we're overconfident." Forecasters seek to find an anchor or reference point to build projections, but the anchor can be based in quicksand. Many forecasters focus too much on their own, recent
experiences, Sanders noted, adding that corporate managers, too, seek anchors and will cling to business plans they have recently formulated even if the plan is not working. "All of this leads to inadequate judgments in the face of change."

The "Inertia of Regret"
Investors create price anomalies when they are slow to change course due to what Sanders called the "inertia of regret. The regret associated with taking action is considerably greater than taking no action at all, which leads to inertia."

Forecast biases are influenced by what Sanders identified as the availability heuristic - or judgments based on information that is easy-to-grasp and readily available in the decision-making environment. He pointed to the hype surrounding the stock market peaks during the Nifty Fifty craze in the early 1970s, the real estate bubble in the early 1990s and the spike in Internet stocks in 2000.

"If you look at all the peaks, they are associated with very popular wide-spread ideas about what the future held. The winners and losers were divided along a simple boundary. In the Internet bubble it was the new economy versus the old economy. There was hopelessness around the old economy companies.

"Looking back [these bubbles] seem too obvious," conceded Sanders, "but when you are in them, the ability to extrapolate what's underway is very difficult."

Sanders pointed to research indicating that consensus growth-rate forecasts for companies will remain on the same track, either fast or slow, as a cautionary sign. "People are very married to extrapolating recent success," said Sanders, noting that in fact, very few companies remain on the same course and tend to revert to the mean. Moreover, forecasters often underestimate a poorly performing company's ability to turn itself around. "An interesting bias is the inability to
imagine that someone will conjure up a way out. You don't see one and management hasn't offered one. However, the probability is that with time and pressure they will, as all those mean reversions clearly imply."

This so-called "failure of initiative" generates some of the best investment moves. He pointed to problems at Citigroup and IBM in the early 1990s that turned out to be opportunities. He also noted the forecasting danger of "misplaced concreteness." What's going on here" is the forecaster has proposed an elegant model with many variables and it fits so well you start to think you really have discovered something. People fall in love with these models."

The problem, said Sanders, is that with more variables, data and complexity introduced to a model, the greater the chances it will implode. "The message in all of this is you have to understand that as forecasters you have limitations. Things are going to get blown around by the issues of the day. You have to wager with a certain sense of humility."

Asked what psychological traits make good analysts, Sanders said drive would come first. Communication skills are also essential, not only the ability to write and articulate a position, but also to listen. "You'd be surprised how many research analysts don't really listen.
They develop a point of view and when they do an interview with someone who has knowledge, they don't really pay attention. They're more interested in supporting a preconceived view."

Finally, Sanders said that while he looks for intelligence, brilliance can be a liability. "People who are brilliant spend their entire lives never being wrong. In a forecast setting they're vulnerable. A little bit of insecurity is a good thing."

Investment managers need to consider their fiduciary responsibility when building portfolios, Sanders concluded. He pointed out that it would have been responsible to acquire Citigroup in 1991 when the company appeared to be on the edge of failure. But a move like that is often difficult to justify to clients. The problem comes "when you can't explain why you bought all this garbage … It's difficult, without the depth of research to see through the anomalies, to explain
why you will ultimately win and why you are not gambling with the client's money."

Maximum wealth "isn't all there is to life," Sanders added. "In the value world in particular, you make the most money by feeling the most insecure. Do you really want to do that with your life? Is it worth it?"

Pearls of Wisdom

" Vision without action is merely a dream. Action without vision just passes the time. Vision with action can change the world."
- Joel Barker

" The fishermen know that the sea is dangerous and the storm terrible, but they have never found these dangers sufficient reason for remaining ashore."
- Vincent Van Gogh

" No one gets an iron-clad guarantee of success. Certainly, factors like
opportunity, luck and timing are important. But the backbone of success
is found in basic concepts like hard work, determination, good planning and perseverance." -
- Merlin Olsen

"Individual commitment to a group effort - that is what makes a team work."
- Vince Lombardi

"Your talent is God's gift to you. What you do with it is your gift back to God"
- Leo Busecaglia

"It is on our failures that we base a new and different and better success."
- Havelock Ellis

"People become quite remarkable when they start thinking they can do things. When they believe in themselves, they have the first secret of success."
- Norman Vincent Peale

"If your heart acquires strength, you will be able to remove blemishes from others without thinking evil of them."
- Mohandas K. Gandhi

"Always bear in mind that your own resolution to succeed is more important than any other one thing."
- Abraham Lincoln

"Small opportunities are often the beginning of great enterprises."
- Demosthene

"Many people have a wrong idea of what constitutes true happiness. It is not attained through self-gratification, but through fidelity to a worthy purpose."
- Helen Keller

"The greatest discovery of our generation is that human beings can alter their lives by altering their attitudes of mind. As you think, so shall you be."
- William James

THE 90/10 PRINCIPLE

Have you read this before? Discover the 90/10 Principle. It will change your life (at least the way you react to situations). What is this principle? 10% of life is made up of what happens to you. 90% of life is decided by how you react. What does this mean? We really have no control over 10% of what happens to us. We cannot stop the car from breakingdown. The plane will be late arriving, which throws our whole schedule off. A driver may cut us off in traffic. We have no control over this 10%. The other 90% is different. You determine the other 90%.

How? By your reaction. You cannot control a red light., but you can control your reaction. Don't let people fool you; YOU can control how you react.

Let's use an example. You are eating breakfast with your family. Your daughter knocks over a cup of coffee onto your business shirt. You haveno control over what just what happened. What happens when the next will be determined by how you react. You curse. You harshly scold your daughter for knocking the cup over. She breaks down in tears. After scolding her, you turn to your spouse and criticize her for placing the cup too close to the edge of the table. A short verbal battle follows. You storm upstairs and change your shirt. Back downstairs, you find your daughter has been too busy crying to finish breakfast and get ready for school. She misses the bus. Your spouse must leave immediately for work. You rush to the car and drive your daughter to school. Because you are late, you drive 40 miles an hour in a 30 mph speed limit. After a 15-minute delay and throwing $60 traffic fine away, you arrive at school. Your daughter runs into the building without saying goodbye. After arriving at the office 20 minutes late, you find you forgot your briefcase. Your day has started terrible. As it continues, it seems to get worse and worse. You look forward to coming home, When you arrive home, you find small wedge in your relationship with your spouse and daughter.

Why? Because of how you reacted in the morning. Why did you have a bad day?
A) Did the coffee cause it?
B) Did your daughter cause it?
C) Did the policeman cause it?
D) Did you cause it?

The answer is D. You had no control over what happened with the coffee. How you reacted in those 5 seconds is what caused your bad day. Here is what could have and should have happened. Coffee splashes over you. Your daughter is about to cry. You gently say, "It's ok honey, you just need,to be more careful next time". Grabbing a towel you rush upstairs. After grabbing a new shirt and your briefcase, you come back down in time tolook through the window and see your child getting on the bus. She turns and waves.You arrive 5 minutes early and cheerfully greet the staff. Your boss comments on how good the day you are having.
Notice the difference? Two different scenarios. Both started the same. Both ended different. Why? Because of how you REACTED. You really do not have any control over 10% of what happens. The other 90% was determined by your reaction.

Here are some ways to apply the 90/10 principle.

If someone says something negative about you, don't be a sponge. Let the attack roll off like water on glass. You don't have to let the negative comment affect you! React properly and it will not ruin your day. A wrong reaction could result in losing a friend, being fired, getting stressed out etc.

How do you react if someone cuts you off in traffic? Do you lose your temper? Pound on the steering wheel? A friend of mine had the steering wheel fall off) Do you curse? Does your blood pressure skyrocket? Do you try and bump them? WHO CARES if you arrive ten seconds later at work? Why let the cars ruin your drive? Remember the 90/10 principle, and do not worry about it.

You are told you lost your job. Why lose sleep and get irritated? It will work out. Use your worrying energy and time into finding another job.

The plane is late; it is going to mangle your schedule for the day. Why take out your frustration on the flight attendant? She has no control over what is going on. Use your time to study, get to know the other passenger. Why get stressed out? It will just make things worse. Now you know the 90-10 principle. Apply it and you will be amazed at the results. You will lose nothing if you try it.

The 90-10 principle is incredible. Very few know and apply this principle. The result? Millions of people are suffering from undeserved stress, trials, problems and heartache. There never seem to be a success in life. Bad days follow bad days. Terrible things seem to be constantly happening. There is constant stress, lack of joy, and broken relationships. Worry consumes time. Anger breaks friendships and life seems dreary and is not enjoyed to the fullest. Friends are lost. Life is a bore and often seems cruel. Does this describe you? If so, do not be discouraged .

You can be different! Understand and apply the 90/10 principle. It will change your life.

Courtesy : Stephen Covey

Thinking of quitting ??

A candidate for a news broadcasters post was rejected by officialssince his voice was not fit for a news broadcaster. He was also toldthat with his obnoxiously long name, he would never be famous.
He is Amitabh Bacchan, the famous Indian actor.

A small boy the fifth amongst seven siblings of a poor father, wasselling newspapers in a small village to earn his living. He was notexceptionally smart at school but was fascinated by religion androckets. The first rocket he built crashed. A missile that he builtcrashed multiple times and he was made a butt of ridicule. He is theperson to have scripted the Space Odyssey of India single handedly.

He is Dr. A P J Abdul Kalam, President of India.

In 1962, four nervous young musicians played their first recordaudition for the executives of the Decca recording Company. Theexecutives were not impressed. While turning down this group ofmusicians, one executive said, "We don't like their sound. Groups of guitars are on the way out."

The group was called The Beatles.

In 1944, Emmeline Snively, director of the Blue Book Modelling Agencytold modelling hopeful Norma Jean Baker, "You'd better learnsecretarial work or else get married."

She went on and became Marilyn Monroe.

In 1954, Jimmy Denny, manager of the Grand Ole Opry, Fired a singerafter one performance. He told him, "You ain't goin' nowhere....son.You ought to go back to drivin' a truck."

He went on to become Elvis Presley.

When Thomas Edison invented the light bulb, he tried over 2000experiments before he got it to work. A young reporter asked him how itfelt to fail so many times. He said, "I never failed once. I inventedthe light bulb. It just happened to be a 2000 step process."

When Alexander Graham Bell invented the telephone in 1876, it did notring off the hook with calls from potential backers. After making ademonstration call, President Rutherford Hayes said, "That's an amazinginvention, but who would ever want to see one of them?"

In the 1940s, another young inventor named Chester Carlson took his idea to 20 corporations, including some of the biggest in the country.They all turned him down. In 1947, after 7 long years of rejections, hefinally got a tiny company in Rochester, NY, the Haloid company, to purchase the rights to his invention an electrostatic paper copying process.

Haloid became Xerox Corporation.
A little girl the 20th of 22 children, was born prematurely and her survival was doubtful. When she was 4 years old, she contracted doublepneumonia and scarlet fever, which left her with a paralyzed left leg.At age 9, she removed the metal leg brace she had been dependent on andbegan to walk without it. By 13 she had developed a rhythmic walk, whichdoctors said was a miracle. That same year she decided to become arunner. She entered a race and came in last. For the next few yearsevery race she entered, she came in last. Everyone told her to quit,but she kept on running. One day she actually won a race. And thenanother. From then on she won every race she entered.

Eventually this little girl Wilma Rudolph, went on to win three Olympic gold medals.

A school teacher scolded a boy for not paying attention to hismathematics and for not being able to solve simple problems. She toldhim that you would not become anybody in life.

The boy was Albert Einstein.
The Moral of the above: Character cannot be developed in ease andquiet Only through experiences of trial and suffering can the soul bestrengthened, vision cleared, ambition inspired and success achieved.You gain strength, experience and confidence by every experience whereyou really stop to look fear in the face. You must do the thing youcannot do. And remember, the finest steel gets sent through the hottest furnace. In LIFE, remember that you pass this way only once! let's live life to the fullest and give it our extreme best.

"Failure is the pillar of success!" And if you know me well - you will vouch for it - every word.

Commonly Used Phrases..

Commonly Used Phrases at the Official communications and... What they really mean!(in the lighter vein..of course)

1) For your information, please. (FYI)
We don't know what to do with this, so please keep it.

2) Noted and returned.
We don't know what to do with this, so please keep it little while.

3) Review and comment.
Do the dirty work so that I can forward it.

4) Action please.
Get yourself involved for me. Don't worry, I'll claim the credit.

5) For your necessary action.
It's your headache now.

6) Copy to.
Here's a share of the headache.

7) For your approval, please.
Put your neck on the chopping board for me please.

8) Action is being taken.
Your correspondence is lost and we are still trying to locate it.

9) Your letter is receiving our attention.
We are still trying to figure out what you want.

10) Please discuss.
I don't know what this is, so please brief me.

11) For your immediate action.
Do it NOW! Or we'll all get into trouble.

12) Please reply soon.
Please be efficient. It makes me look inefficient.

13) We are investigating/processing your request with the relevant authorities.
They are causing the delay, not us.

14) Regards.
Thanks for reading all the above nonsense.

DON'T QUIT - A MANAGEMENT THOUGHT

When things go wrong, as they sometime will,
When the road you're trudging seems all uphill,

When the funds are low and the debts are high,
And you want to smile, but you have to sigh,

When care is pressing you down a bit -
Rest if you must, but don't you quit.

Life is queer with its twists and turns,
As everyone of us sometimes learns,

And many a fellow turns about
When he might have won had he stuck it out.

Don't give up though the pace seems slow -
You may succeed with another blow.

Often the goal is nearer than
It seems to a faint and faltering man;

Often the struggler has given up
When the might have captured the victors cup;

And he learned too late when the night came down,
How close he was to the golden crown.

Success is failure turned inside out -
The silver tint of the clouds of doubt,

And you can never tell how close you are,
It may be near when it seems after;

So stick to the fight when you're hardest hit -
It's when things seem worst that you mustn't quit

"Quitters never win
Winners never quit".

Courtesy - "Companies don't succeed - People do!" by Graham Roberts Phelps

HOW WILL CURRENCIES BE AFFECTED BY RISING OIL PRICES

How Will Currencies Be Affected By Rising Oil Prices

• Higher Oil Prices - USD ($↓) JPY (¥↓) EUR (€ ↑) GBP (£↑)
  

Why Are Oil Prices Rising So Sharply?

• To understand how currencies will be impacted by rising oil prices, it is important to first understand why oil prices have been rising so sharply recently. The price of oil surged through $41 a barrel recently, to its highest level in history, that key technical level seems to send a signal of even slower world economic growth to come. Widespread economic concerns continue to weigh on investors, heightened by fears that oil supplies could be disrupted by an escalation in Middle East violence. Evidence of this is clear from recent attacks on oil terminals in Saudi Arabia and Iraq as well as the latest assassination of the Iraqi Council Governing Leader. Even worse, all of this uncertainty is occurring when supplies are extremely tight and demand continues to grow at an alarming rate. A strong non-farm payrolls report catapulted the price of oil higher based on the assumption that the economy is improving and the Fed will begin raising rates. In turn it bolstered the outlook for fuel consumption in general. Thus the price broke through the key psychological and technical $40 level and has now proceeded even higher. Oil had a brief sell off on profit taking, and also on comments from OPEC members, regarding increased production. Often these are false promises that never come to pass so the market continued its run higher, causing prices to reach all time contract highs. Oil has been trading above $30 a barrel since late last year and the pump price of gasoline has been at a record high across the U.S. and Canada. The rising cost of oil has been crippling to fuel-sensitive industries such as airlines and truckers. However, motorists have shown little sign of reigning in their consumption. OPEC, which accounts for about one-third of world oil production, already exceeds its projected daily production by an estimated 2 million barrels, but it has had no impact on lowering prices. The oil cartel is now coming out again with talk of increasing production prior to their next meeting on June 3rd in Beirut. Traders are skeptical that an increase will not be of any immediate help.
  

How to Determine Oil Price Impact on Specific Currencies

• Here is a framework to determine how higher oil prices will impact certain currencies: How dependent on oil is a particular country? A country’s dependency is very important in determining how its currency will be impacted by a change in oil prices. Intensive energy users (or net oil importers) will be more negatively impacted than other countries. Falling oil prices benefit consumers in the same way as tax cut, while higher oil prices act like a tax hike. For corporations, higher oil prices can translate into lower profits. Countries with alternative fuel sources, and other resources have the ability to switch from strict oil dependence to other energy sources, which helps to reduce their exposure and sensitivity. Monetary Policy Responses How reactive a country’s monetary policy authorities are to rising inflation is also very important in forecasting a currency’s reaction. Countries with inflation targets may be more aggressive at combating inflation and will adjust their monetary policies accordingly, while others who may be dealing with low inflation will keep monetary policy accommodative to guard against slower growth as a result of higher oil prices. Monetary policy and interest rates are key drivers of currency movements. Does the economy have a large oil-related market cap vs. industrial market cap? Market cap composition may also influence how the oil price affects a currency via capital flows. The currencies of countries with a low energy-related market cap, but a high industrial market cap is more likely to be hurt by higher oil prices. Investment flows may be muted by the decreased profitability of these types of industries. Countries with heavy manufacturing and high levels of oil imports will most likely have the most exposure. Key Factors Are Growth & Inflation - Oil Isn’t The Only Factor Driving Inflation... Inflation has been creeping up everywhere. The Bank of England recently raised its main interest rate by a quarter of a point, citing the need to keep inflation under control. The ECB left its interest rate on hold at 2%, signaling its concern over inflation and is calling on OPEC member countries to act responsibly on oil prices. However, inflation isn’t only driven by high oil prices. In the US, higher prices for everything from chemicals and food to industrial commodities and labor are hitting the US economy hard. As the US economy sputters trying to gain momentum, employers are faced with more and more obstacles. Costs are skyrocketing across the board. Employers are faced with rapidly rising expenses including severance, health insurance, vacation pay and referral bonuses – all of which rose 6.9 % over the past 12 months, compared with a rise of 6.1% in the prior year, according to the latest figures. The employment cost index, a gauge of labor expenses for businesses and government, climbed 0.8% in Q4 according to the Labor Department report. Benefit costs rose 2.4 % from January through March - the largest rise since Q3 of 1982. U.S. costs for labor jumped 1.1 % in the first quarter, as benefits costs rose by the most in more than two decades. Looking back from the early 70’s forward, there are observable and dramatic changes in GDP growth in relation to changes in the world oil price. The price shocks of 73-74, the late 1970s/early 1980s, and early 1990's were all followed by dramatic recessions, which have then been followed by a rebound in economic growth. The pressure of energy prices on aggregate prices in the economy created problems for the economy as a whole. The chart below of oil prices and GDP 12 months forward clearly shows the effects of higher oil prices on GDP. There have been three global recessions in the past 30 years, and all of them were pre-dated by a sharp rise in oil prices. Higher oil prices are already hurting the global economy and could further hamper growth, bolster inflation and increase unemployment over the next two years if prices stay at their present levels. According to a recent study released by the International Energy Agency (IEA): “If oil prices stay at their current level of more than $35 a barrel, more than $10 a barrel above their level of three years ago, world GDP would be at least half of 1% lower -- equivalent to about $255 billion -- in the year following a $10 oil-price increase.” So with the threat of inflation looming it’s important to consider the monetary policy reactions of the global central banks.
  

Which Currencies Will Most Likely Be Negatively Impacted By Higher Oil Prices?

• The USD ($↓) and the JPY (¥↓)
  

Dependency on Oil - The US and Japan are the world’s two largest net oil importers. Skyrocketing oil prices will have a particularly damaging effect on the economic recoveries in both countries by effectively threatening to stall growth. Fed Chairman Alan Greenspan has already warned that rising oil and gas prices could have a significant impact on the long-term development of the US economy. In the case of Japan, their lack of domestic sources of energy and their need to import vast amounts of crude oil, natural gas, and other energy resources makes them particularly sensitive to changes in oil prices. Japan also lacks the flexibility to switch to nuclear power because they are a huge net importer of uranium for their nuclear power plants. In 2001, the country's dependence on imports for primary energy stood at more than 79%. Oil provided Japan with 50% of its total energy needs, coal 17%, nuclear power 14%, natural gas 14%, hydroelectric power 4%, and renewable sources a mere 1.1%.

Monetary Policy - Aside from their high reliance on external oil, the Federal Reserve and the Bank of Japan are also more likely to focus on growth rather than inflation. Both countries have been grappling with very low levels on inflation and even what may be considered deflationary conditions. U.S. inflation is now only about 1.4 %, within range of the 2 % to 2.5 % deemed as acceptable by most economists. It's also below half the average of the last 20 years -- during which the economy was in recession a total of five quarters -- and a third of the rate during some of the most prosperous years of the 1980s. With inflation so low the Fed may refrain from increasing rates out of fear that rising oil prices will hurt deflation. In fact, some feel the economy would be well served by inflation. First, producers of goods and services could impose minor price increases that translate to higher profits and potentially higher pay for workers covering some of the increased expenses. Second, it would take the rate above its current ultra-low level. If inflation were to remain at its current level, the economy would rise then fall into deflation in the next go round. Most economists agree deflation is a more difficult problem to fix with monetary policy than inflation, because consumers hold off making purchases today anticipating prices will be lower tomorrow. Unfortunately with interest rates already at such low levels the Fed has a limited ability to combat deflation. After all, interest rates cannot be set below zero.

Which Currencies Will Most Likely Benefit From Higher Oil Prices?

- EUR (€ ↑) and the GBP (£↑)

Dependency on Oil – The United Kingdom is a net oil exporter and stands to benefit from rising oil prices. Although their oil exports are relatively small, they are not subject to the same net ramifications as oil importers such as the US or Japan. On the other hand, Germany and France, the two largest countries in the Eurozone are net oil importers. Germany's crude oil imports, especially from Iran have been climbing drastically since the year 2000. Another Eurozone country that may suffer from higher oil prices is Italy. Almost 60% of Italy's energy comes from oil, most of which is imported. Gas accounts for another 30% of energy use. So Italy is exposed to a great deal of price exposure from rising oil prices. However, according to a Eurozone source, the robustness of global growth and the expansion of international trade remain stronger than had been expected a few of months ago and thus help to soften the blow to eurozone economic growth resulting from higher oil prices. At the same time, inflationary risks are being contained in part by positive wage developments in Europe. Another windfall for the Eurozone is that the EU holds 7.3% of proven coal reserves, 16% of the world's capacity for refining crude oil into petroleum products, and 16% of the world's electric generating capacity. In addition, the Eurozone is making diligent efforts to increase the role of renewable energy sources in the EU fuel mix. In 2001, renewable energy accounted for 6% of EU energy consumption. The EU aims to derive 12% of the group's gross energy consumption from renewable fuels by 2010, according to the 2001 Directive on renewable energy sources. Renewable energy sources are defined as wind, solar, geothermal, wave, tidal, hydropower, biomass, landfill gas, sewage treatment plant gas and bio-gases.

Monetary Policy – More importantly though are the forecasted monetary policy reactions of the Bank of England and the European central bank. Both monetary policy authorities are particularly concerned with rising inflation. The minutes for the May 5/6 monetary policy meeting at which the BoE raised rates by 25bp indicates that inflation is forecasted to rise by such a quick pace over the next two years that the BoE even contemplated raising rates by 50bp in May. Should oil prices continue to rise, pushing inflation higher, the MPC would be expected to take initiatives to curb inflation. In the Eurozone, the ECB is traditionally a very active fighter of inflation and tends to take aggressive action in staving it off, far more so than the US. This may explain the ECB’s strong resistance to further rate decreases and the hawkish press conference by Trichet on May 6th. Continual rallies in oil will give ECB officials more reason to argue against the politicians advocating another rate cut to support growth.

Caveat - Changes May Be in Store for How Oil is Priced Globally

• The global oil trade is currently based in dollars. This means that US is the only country in the world that incurs no currency risk when it deals in the oil market. It is also the sole country that can print money to purchase oil. The dollar-based global oil trade gives the United States free reign to print dollars without sparking inflation – it allows the US to fund huge expenses on wars, military build-ups, and consumer spending, as well as cut taxes and run up huge trade deficits. Almost two-thirds of the world's currency reserves are kept in dollars, since oil importers pay in dollars and oil exporters tend to keep their reserves in dollars. This effectively provides the U.S. economy with an interest-free loan, as these dollars can be invested back into the U.S. economy with zero currency risk. In the euro zone things are different. Europe would prefer to see payments for oil shift from the dollar to the euro, which effectively removes the currency risk like it does currently for the US. It would also increase the demand for the euro and thus help to raise its value. Moreover, since oil is such an important commodity in global trade, in terms of value, if the pricing of oil were to shift to the euro, it would have a strong symbolic implication. There are also very strong trade links between OPEC Member Countries and the Eurozone, with more than 45 % of total merchandise imports of OPEC coming from the countries within the Eurozone. In the Baltic region, Russia is a big net exporter of oil, which means that the Russian economy is poised to benefit from higher oil prices. A move by Russia, the world's second largest oil exporter, to price its oil in euros poses a potential downside risk to the dollar as it opens the door for other oil exporters to follow suit. If oil were not priced in dollars, countries have less of a need to hold dollar reserves and may rebalance their currency holdings. The effect of this rebalancing could lead to a sharp sell-off in the dollar as countries shift a portion of their dollar holdings into euros. Iran for example, the world's 5th largest oil exporter, has also debated a move into euros. After the war in Iraq, there has been growing debate in the United States' longtime ally Saudi Arabia on possibly switching as well - though its government has not come down firmly on one side or the other. All of this talk of change could also have a negative impact for the dollar down the road if these changes take place, even on a limited basis. The bottom line is that the current record highs in the price of oil will likely have a continued global impact, with long lasting repercussions for global economic recovery.

Courtesy: Forex Capital Markets

Do You Want Me to be Good to You, or Good for You?

One of my clients (who publish monthly real estate books that market residential properties.) had a great comment about how he takes care of his customers, the real estate agents and brokers that buy the ads in his books. He asks them, 'Do you want me to be good to you, or good for you?'

Think about that question for a moment. Being good to the customer means you take care of them, give them great service, etc. But being good for the customer is different. It is helping them or enhancing their experience.

Sometimes it is easy to enhance an experience or increase the value of your products or services by just making suggestions or helping the customer. Other times you have to sell more. Up- selling sometimes scares sales people, but it has to be done. It is a disservice not to up-sell the customer when it is appropriate and necessary to the success of the product.

As mentioned above, my client sells advertising in a book. Being good for the customer means the sales person can help design the advertisement for the customer. They may even suggest a larger advertisement, not because it brings more revenue to the company, but because it will truly create better results for the customer. The sales rep is helping the customer receive maximum impact for the advertising dollars.

How about the server at a restaurant that suggests that the guest try the new appetizer? The server could just take the food order, but instead is suggesting something that might add to the enjoyment of the meal. Yes, it adds dollars to the check, but it also enhances the experience.

Recently at a retail golf store I saw the sales person sell some expensive golf clubs. What compelled the customer to buy the clubs on the spot was when the sales person said, 'I could sell you these clubs today and I know you would be happy with them. But I won't sell them to you until I make sure they are the right clubs for your golf swing. So, let's step over to our practice facility and make sure you are comfortable with these clubs. Fifteen minutes later the customer felt like they had a golf lesson – with clubs that would help improve the game. Sold!

Let's take the question a bit further. The question is really a philosophy. There really isn't a choice. The customer deserves to have both. We should be good to and for the customer. That is what my client intends. Posing it as a question is only for the benefit of the customer.

In conclusion, don't just take care of the customer. Help the customer. Don't just be good to the customer. Be good for the customer. Show value, create an experience and always strive to exceed their expectations.

Courtesy: Shep Hyken

Immortality - The Driving Force Behind the Legend!

The closest man comes to happiness is in the ardent pursuit of his passion!

Some achievers are not satisfied at being the best in their field. They stretch the limits of the possible and then go beyond that. They don't compete. They define and run their own race. They change the realms of possibility. They set new benchmarks. They strive to the point of absurdity. Their contributions and accomplishments defy description. Their accomplishments are treasured for centuries. They are revered long after their time!

What motivates this select group? Why do they strive so hard? What drives them?

Psychologists and Scientists who study success and its roots have come up with numerous reasons and factors that help drive a person to achievement. Dominant and affectionate mothers (Jack Welch, Lance Armstrong), a slightly insecure personality characterized by some degree of introversion, and an intense deep rooted desire to be appreciated and liked, have been some of the reasons used to explain the intense drive exhibited by high-achievers.

The purpose of this article is not to study or understand the factors that drive the high-achievers of our society, but an attempt to understand the factor that is most critical in the making of legends - i.e. high achievers whose achievements transcend generations.
Right from the biblical age (the forbidden fruit!), human beings have had a tendency to long for and go after what they can't or shouldn't have.

Said or unsaid, every one of us is fearful of his own mortality - the knowledge that each of our place and role on this planet is one of impermanence; a temporary small speck in the planet's long history. As a result, we long for a state of permanence or immortality, in some form or fashion.

This longing for a state of permanence manifests itself in several forms.

For most of us, this is manifested in the form of procreation. Most men feel the need for children, to carry on the family line and name. Most women feel fulfilled by nurturing and rearing their own children. Parents, to a great degree, see themselves in their children. They want their children to "carry on" and "live up to" the family name.

It is their way of leaving a mark in the world. Their progeny is a way of satisfying their need for permanence - a way to indicate their continued existence. It gives them a sense of satisfaction that has never been and probably never will be defined. So much so that a childless couple more often than not go through deep existential pain and trauma; to a degree that life becomes dull and purposeless. Coming to terms with the hard reality of childlessness is a challenge. Most childless couples never come to terms with it.

A more simplistic manifestation of the above "want / desire for permanence" is people striving to look good in their wedding photographs, for posterity. That is also the same reason why many people indulge in writing an Autobiography - to record their life and works for future generations - yet another way of trying to achieve some form of permanence.

In summary, our frailty makes us long for permanence. We are constantly striving for immortality. Till such time that scientist can concoct the eternal youth potent, we derive satisfaction by leaving some aspect of ourselves (progeny, ideas, company, nation, philosophy, invention, art, literature, etc.) behind, as we leave the world.

While many people view progeny as leaving some aspect of themselves for posterity; there are individuals who though driven by the same desire, their manner of leaving their footprints in the sands of time is not through their progeny but through their life's vocation or passion. These individuals could be poets, craftsmen, artists, inventors, entrepreneurs, scientists, politicians, business leaders or one of a host of other professions.

These high-achievers are driven by a desire to leave a mark. Their ardent endeavor is to leave an imprint that is as deep and permanent as possible in the sands of time, though they realize that any imprint they leave, irrespective of its impact, will never be permanent. This imprint could be in one of many different forms - work of art, literary classic, company, philosophy - thoughts - ideas - writings, nation building, sport, science etc.

These individuals pursue their chosen area with intense passion and single minded devotion - they are driven by an obsessive drive for perfection - to be the best - perhaps better than the best, to create / contribute something that will be recognized as unique, something that will last long after they are gone - that will stand the test of time and provide them and their feats an elevated place in history. They dedicate their body, mind and soul to their endeavor.
This ardent pursuit of their passion gives them a strong sense of purpose and satisfaction. The satisfaction obtained from pursuing this goes way beyond any material benefits or fame that may be obtained as byproducts of their journey.

While plenty of them strive for posterity and become world famous during their life times, very few actually succeed in leaving a mark that transcends generations. A few names that come to mind include: Socrates - Logic / Philosophy, Gandhi - Non-Violent Movement / India, Albert Einstein - Theory Of Relativity / Physics, Leonardo da Vinci - Mona Lisa / Art!

Courtesy: Navin V. Nagiah

The ART of Transferring Risk

The ART of Transferring Risk From the University of Chicago: ''alternative risk transfers'' blur distinctions between insurance companies and banks.

Once upon a time, in the not-so-distant past, a finance chief could tell the difference between an insurance policy and a derivative contract.

It was really a no-brainer. An insurance policy was a signed agreement under which your company paid a premium. In exchange, the company got to transfer some of its risks — like fires or class-action lawsuits — to a property/casualty insurance company.

A derivative, on the other hand, was a security you bought from a banker or a dealer to hedge corporate financial risks or to bet on a good investment return.

In recent years, however, distinctions between the commercial insurance industry and the capital markets have blurred. Both camps are routinely lumped under the adroitly coined rubric of ART, short for "alternative risk transfer." The only common element? Risks are covered in nontraditional ways.

Indeed, it's hard to tell the players without a scorecard. Looking like investment bankers, some insurers and reinsurers now help clients issue securities — not necessarily to raise capital for a project, say, but to cover the client's risks. Carriers are also venturing into what was once exclusively capital-markets terrain by serving up hedging features in some P/C products.
For their part, some bankers can easily be mistaken for insurance executives. Like insurers, they take part in deals involving captive insurance companies — perhaps the oldest part of the ART scene. Further, capital-markets mainstays like Lehman Brothers and Goldman Sachs are players in the Bermuda reinsurance market.

Navigating such shifting — and often offshore — waters can be tough for CFOs with risks to cover and capital to protect. But if they're equipped with a coherent way to shop the ART market, they can find ways to cut risk-transfer costs, says Christopher Culp, who teaches
"Alternative Risk Transfer: The Convergence of Corporate Finance and Risk Management," an executive education course at the University of Chicago's Graduate School of Business.

What finance executives need is a methodical way to sort through the mounting numbers of alternative-risk offerings, according to Culp, an adjunct professor of finance who often consults for participants in the insurance and derivatives industries. While selecting alternative risk coverage might involve dicier decisions than choosing a breakfast cereal in a supermarket, he suggests, similar principles apply.

In the latter case, the professor asks, "wouldn't it be great if we had a more systematic way of knowing which box to go to?"

Between RAROC and a Hard Place: To be sure, the observation that corporate finance and risk management are melding is nothing new. Culp, however, says contends that his course has gained become especially important just now.

University administrators apparently agree: They began offering a version of the class as part of Chicago's regular MBA program for the first time last autumn and will offer two sections of it this fall. (Culp and a Swiss Re executive have recently taught similar courses open only to the reinsurer's client companies and its own executives, and Chicago will do the same for other interested companies.)

Convergence is an idea whose time has come, Culp believes — in part because the ART market is in the midst of a "revolution" in product offerings. Just a few years ago, the market consisted mainly of all-purpose, multiyear, multiline insurance policies and catastrophe-linked futures sold at the Chicago Board of Trade. Mainly because they were relatively pricey, the policies and the futures drew less-than-enthusiastic receptions from corporate buyers.

During the hard insurance markets of 2001 to 2003, however, traditional insurance made alternative products look cheap by comparison. As a result, the ART market took off. Among the most successful products, says Culp, are "multitrigger," business-interruption policies that pay off for a disaster only if one or more other bad things occur. One example of an added trigger might be a 20 percent drop in net cash flows.

Another hot product: "Finite risk" insurance and reinsurance policies. Under such policies, buyers typically plunk down premiums big enough to cover most expected losses over a period of as long as 10 years. Buyers often get rebates if losses are less than expected. It's the insurer for whom the risk is "finite," since the policyholder ponies up a hefty sum to help cover the risk.
Even though prices for traditional coverage have softened over the last year or so, the demand for ART products hasn't slowed, Culp observes. According to the professor, many commercial insureds have become accustomed to a more "holistic" way of financing risk and favor it over the "silo by silo" approach involved in purchasing a variety of insurance policies.

Besides the burgeoning of the ART market, executives' increasing caution about how to disperse capital has brought risk management and corporate finance closer together, says Culp. Senior managers have simply grown wary of making investments without having some idea of what the downside might be.

Using metrics like risk-adjusted return on capital (RAROC), executives are factoring operational risk into their calculations of the cost of capital projects, the professor adds. When companies deploy capital in new areas, he explains, they "demand a high risk-adjusted return."

In the course, Culp tries to show how deft ART-buying choices can help companies make more efficient use of such scarce capital. Normally, he notes, a corporation short on funds might issue stock or corporate bonds, for instance. But if the shortfall is triggered by a negative event like a drop in product demand, it might be hard to find willing investors or lenders.

In such cases, companies might more wisely have tapped the ART market beforehand and bought "contingent capital," according to Culp. Offered by insurers and reinsurers, the product enables a company to pick up quick capital by selling securities to the insurer at a preset price if a specified bad event happens.

That could make raising capital a whole lot cheaper. "Instead of having to issue common stock, you get it from a contingent-capital insurer that knows you better than the investor community does — and thus gives you a better price," he explains.

Hacking Through the Hype: To make such moves, however, finance executives need to know what the various ART products actually do. That's tricky, says Culp, since the products are often ill-named.

Among his examples of flashy, though unhelpful, terms of ART: "earnings-per-share insurance" (a policy including a number of different kinds of coverage) and "adverse-development coverage" (insurance for that part of a loss that exceeds what the buyer has self-insured).

Indeed, Culp thinks that much of his task in teaching the course is to help executives sort through puffery. To be astute consumers, they need to be able to "look at what the product itself is," he says, "rather than what somebody calls it in the marketing department."

Courtesy: David M. Katz, CFO.com

What advice did the CEO give?

Morris had just been hired as the new CEO of a large high tech corporation.
 
The CEO who was stepping down met with him privately and presented him with three numbered envelopes....#1,#2,#3.
 
"Open these if you run up against a problem you don't think you can solve," the departing CEO said.
 
Well, things went along pretty smoothly, but six months later, sales took a downturn and Morris was really catching a lot of heat. About at his wit's end, he remembered the envelopes. He went to his drawer and took out the first envelope.
 
The message read, "Blame your predecessor."
 
Morris, the new CEO called a press conference and tactfully laid the blame at the feet of the previous CEO. Satisfied with his comments, the press -- and Wall Street -- responded positively, sales began to pick up and the problem was soon behind him.
 
About a year later, the company was again experiencing a slight dip in sales, combined with serious product problems. Having learned from his previous experience, the CEO quickly opened the second envelope.
 
The message read, "Reorganize."
 
This he did, and the company quickly rebounded. After several consecutive profitable quarters, the company once again fell on difficult times.
 
Morris went to his office, closed the door and opened the third envelope.
 
The message said, ..."Prepare three envelopes."

How Tax system works?

You've heard the cry in the past "It's just a tax cut for the rich!", and it is accepted as fact. But what does that really mean?
 
The following explanation may help.
 
Suppose that every day, 10 men go out for dinner. The bill for all 10 comes to $100. They decided to pay their bill the way we pay our taxes, and it went like this:*
 
The first four men (the poorest) paid nothing.*
The fifth paid $1.*
The sixth $3.*
The seventh $7.*
The eighth $12.*
The ninth $18.*
The tenth man (the richest) paid $59.
 
All 10 were quite happy with the arrangement, until one day, the ownersaid: "Since you are all such good customers, I'm going to reduce the costof your daily meal by $20."
 
So now dinner for the 10 only cost $80. The group still wanted to pay their bill the way we pay our taxes.
 
The first four men were unaffected. They would still eat for free. But how should the other six, the paying customers, divvy up the $20 windfall so that everyone would get his "fair share"?They realised that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth and sixth men would each end up beingpaid to eat.
 
The restaurateur suggested reducing each man's bill by roughlythe same percentage, thus:
* The fifth man, like the first four, now paid nothing (100% saving).
* The sixth paid $2 instead of $3 (33% saving).
* The seventh paid $5 instead of $7 (28% saving).
* The eighth paid $9 instead of $12 (25% saving).
* The ninth paid $14 instead of £18 (22% saving).
* The tenth paid $49 instead of $59 (16% saving).
 
Each of the six was better off, and the first four continued to eat forfree, but outside the restaurant, the men began to compare their savings
 
."I only got a dollar out of the $20," declared the sixth man. He pointed to the tenth man "but he got $10!"
 
"That's right," exclaimed the fifth man. "Ionly saved a dollar too. It's unfair that he got ten times more than me!"
 
"That's true!" shouted the seventh man. "Why should he get $10 back when Igot only $2? The wealthy get all the breaks!"
 
"Wait a minute," yelled the first four men in unison. "We didn't getanything at all. The system exploits the poor!"
 
The nine men surrounded the tenth and beat him up.
 
The next night the tenth man didn't show up for dinner. The nine sat downand ate without him, but when they came to pay the bill, they discovered that they didn't have enough money between all of them for evenhalf of it.
 
That, boys and girls, journalists and college professors, is how our taxsystem works.
 
The people who pay the highest taxes get the most benefit froma tax reduction. Tax them too much, attack them for being wealthy, and theyjust may not show up at the table anymore.
 
There are lots of good restaurants in Monaco and the Caribbean(tax saving havens)
 
Courtesy - David R. Kamerschen, Professor of Economics, University ofGeorgia.

Executive Charisma: Can It Be Learned?

Ask for adjectives describing a finance chief,and ''charismatic'' doesn't normally leap to mind.

When hiring, companies tend to value the candidate "who is appropriately serious and sober, and a big listener at the right time in the conversation," says John Wilson, whose San Francisco-based recruit firm, J.C. Wilson Associates, San Francisco-based recruiting firm, J.C. Wilson Associates, specializes in finance executives. That's true even more these days, perhaps, when "personal magic"—part of Webster's definition of charisma—could get a CFO into trouble in the boardroom.

But in a world where finance-department executives have become strategic corporate players and must communicate their goals to executives in other departments, some management experts suggest that a little leadership magnetism and charm are qualities CFOs should nurture. And a few think that charisma can be taught, at least to some degree.

With the right approach, all executives can up their charisma quotients, says Debra A. Benton, a Fort Collins, Colorado-based executive career counselor. "Technical brilliance is necessary, but what will take you farther is an understanding of how to deal with people," she says. "It might require learning to do more with your natural personality."

The challenge is tougher in finance, where executives are often pegged as quiet types. "I don't think their training encourages" charisma, she says. "And they can get away with not having it," since solid finance ability is indeed the traditional bedrock of most positions in the field. Yet those finance officers who have both the technical skills and a compelling persona can stand out from their generally reserved peers—in a good way, according to Benton.

Her recent book, Executive Charisma: Six Steps to Mastering the Art of Leadership (McGraw-Hill), presents a game plan for developing one's ability to command loyal troops. Benton quotes one executive who describes a bell curve in which executive charisma is found between temerity on one side and uncontrolled hubris on the other. "You want to be in the center and high on that scale," says the executive. Benton names such qualities for the midpoint as confident (but not arrogant) and tough (but not bullying). Her six steps, while often pretty obvious ("stand tall, straight, and smile"), are supposed to map out a route to the peak of that curve.

Over at Harvard Business School, though, assistant professor Rakesh Khurana shudders at the idea that charisma is a key to business success. He traces the word back to its roots as a religious term meaning "the gift of grace" or "the ability to speak with God." And therein lies its danger, says Khurana. "Charisma has always been attractive to people," he says, "because it offers a simple answer: suspend disbelief and follow blindly, and everything will be all right."

A Vision Salesman
Professor Khurana, author of last year's Searching for a Corporate Savior: The Irrational Quest for Charismatic CEOs (Princeton University Press), proposes that loyalty to a charismatic leader may be among the explanations for why Enron employees followed the lead of former CFO Andrew Fastow. "What we're looking for in a CFO is trust and rationality," says Khurana. "The CFO is supposed to be a counterbalance to the charismatic CEO."

Indeed, those who do see charisma as a valuable commodity believe it could help turn today's finance leader into a chief executive. "What separates the cream from the rest of the crop is the ability to sell a vision, and to get people working for you," says Natalie Laackman, Chicago-based senior finance officer and vice president of the ConAgra Foods Deli division of ConAgra Foods Inc. She cites the ability to relate personally to staffers as another aspect of charisma—a characteristic she associates with Jack Greenberg, the recently retired McDonald's Corp. chairman and CEO who once served as the company's CFO. Laackman worked closely with Greenberg at McDonald's before arriving at ConAgra in April. "He'll focus on the person who's talking to him, not just on the business agenda, and that has really endeared him to people and caused them to be very loyal," says Laackman. "He treats you like you're the most important person in the room."

Any list of charisma-blessed executives in the CFO arena is likely to include names of some who have moved on to lead companies or take positions of responsibility outside finance, like Hilton Hotels CEO Stephen Bollenbach; former Dell Computer CFO Tom Meredith, now an angel investor and philanthropist; Continental Airlines president and COO Larry Kellner; and PepsiCo president and CFO Indra K. Nooyi.

"The CFO will always be the numbers guy or gal," says Craig Watson, CEO of Opti-Pay Technologies LLC, an electronic-payment management company, and former CFO at Pepsi Central Co., which ran PepsiCo's Midwest beverage unit. "But I think it's up to CFOs to break the mold and demonstrate that they are first and foremost effective businesspeople." Watson, who has worked with Benton to improve his own style, believes her suggestions are especially helpful in promoting interdisciplinary contacts.

"The CFO really needs to cultivate the respect and support of the line managers," he says. "To do that, you have to have the capability to interact with people."

While Watson agrees that some executives can become too involved in creating a dynamic persona, he doesn't think there's much danger for finance officers. "What helps save a CFO from being hung up on his or her charisma," he says, "is that at the end of the day, the numbers have to make sense."

Courtesy - Kate O'Sullivan, CFO Magazine

Manage Your Suppliers as a Resource

Jonathan Byrnes says you should invite your best suppliers to suggest innovative ways to develop new customer-supplier business efficiencies. by Jonathan Byrnes
Several years ago, I visited Camco, GE's appliance manufacturing and distribution business unit in Canada. Camco was the site of one of the earliest, most successful, make-to-order manufacturing systems in the world. Through insight and innovation, Camco's managers developed a manufacturing process that was widely followed.

I recall the manager of the manufacturing unit telling me that their suppliers were one of their most valuable resources, but they had not realized it until they engaged them in the new system. To the surprise of Camco's managers, many of their most important suppliers quickly adopted the make-to-order system in their own businesses, significantly compressing cycle time throughout the channel, and offered powerful new process innovations that helped Camco in its own business.

This discussion came to mind recently when I met with the purchasing group of a major equipment manufacturer. They had identified a number of opportunities to coordinate with their suppliers in mutually beneficial ways. They felt stuck, however, because they did not have the resources to develop these initiatives to the point where they could engage the suppliers in the many opportunities they identified.

During the course of the meeting, the purchasing group came to realize that they were not using their suppliers as a resource. Instead, they were tacitly assuming that they would have to create projects to develop ways to instruct the suppliers on how to coordinate with them.

By the end of the meeting, a more powerful alternative became clear. Rather than developing their own intercompany processes for their suppliers, they could manage the suppliers and use them as a resource. This involved focusing their efforts on defining clearly what their needs were, and what flexibility they had in their own internal processes. Then, they could invite their best suppliers to engage with them, having the suppliers suggest innovative ways to develop new customer-supplier business efficiencies.

This equipment manufacturer was a very important account for many of its most significant suppliers. The suppliers had ample resources to devote to improving their operating ties with this important customer. By using these suppliers as a resource, the company gained an opportunity to leverage its limited supplier management resources, and both the company and its suppliers faced new possibilities for huge mutual gain.

Many companies have supplier relationships that are tacitly adversarial. Some have developed supplier management programs which specify expected supplier performance in areas such as on-time deliveries and order-fill rate. These typically involve penalties for deficient performance. But few companies are willing to go through the process of identifying and removing obstacles to efficient joint business processes on both sides of the relationship.

Innovative supplier management, using your suppliers as a resource, allows both companies to move past the traditional adversarial relationship toward a partnership with deep mutual value creation.

Innovative supplier management
In Japan, supplier management is viewed as an essential management function. Suppliers are viewed as the "hidden factory." This perspective is largely missing in all too many companies.

In many companies, the cost of materials and components exceeds the internal value-added through manufacturing or assembly. Yet the fundamental nature of staffing and process improvement for internal projects versus external, supplier-related projects is often hugely different.

Few companies are willing to go through the process of identifying and removing obstacles to efficient joint business processes on both sides of the relationship.
Internal process improvement projects are generally well staffed, and develop knowledge systematically through techniques like process mapping. Supplier management projects, by contrast, tend to be inadequately staffed, somewhat ad hoc, and rife with assumptions rather than systematic knowledge development.

In a few industries, such as those that provide consumer products to major retailers, innovative suppliers have stepped up to the challenge. (See Supply Chain Management in a Wal-Mart World.) These innovative suppliers have even gone a step further, offering different levels of customer integration to different sets of accounts, depending on account importance and account willingness and ability to innovate.

In these sophisticated relationships, the best suppliers implicitly penalize accounts that are stuck in adversarial mode and favor those that are adept at creating win-win relationships. The best suppliers seek situations where they can be managed as a resource, creating innovations that benefit both customer and supplier; they shun situations where supplier management is a one-sided affair.

Key success factors
Three factors are especially important in developing an effective supplier management process: partner selection, relationship-building, and contracting.

Many supplier management projects fail because adequate care is not taken in selecting the right supplier partners. In order for a deep, innovative partnership to develop, five key factors must be present:

Real new value—this value must be measured, observed by both companies, and fairly divided, a process that is essential to keep the partnership vital, even if the original sponsoring managers exit.
Complementary specialties and capabilities—there must be a good fit and adequate flexibility that will endure over a considerable period of time.
Strategic alignment—developing a deep partnership with a major supplier often changes the relationship with competing suppliers, and the converse is true for the supplier.
Willingness to partner—there must be a lack of internal organizational conflict on both sides of the relationship.
Ability to implement—both companies need to qualify each other to ensure that they both have the ability to follow through on their intentions over a significant period of time.
All too often, companies actually initiate supplier partnership programs with the first supplier that approaches them, whether the supplier fits and is well-qualified to follow through or not. Partner selection is far too important not to be managed proactively.

Relationship-building requires finesse. Often, it takes a few months to get past festering old issues. A channel map is a key analytical instrument at this stage. It provides a broad view of the customer-supplier product flow patterns, and actual channel performance by tracing the product flow through the channel.

A channel map has three components: (1) a diagram of the information and product flow at each channel stage, including handling, storage, moving, processing, etc.; (2) a quantitative analysis, or representative model, of product accumulation and movement over a typical time period; and (3) rough estimates of the costs at each stage.

With the view that a channel map provides, you and your supplier can identify the biggest obstacles to efficient product flow between the companies. This is important because a few well-designed intercompany process links usually can provide a large portion of the potential benefits.

"Showcase" projects are particularly effective at this stage. These differ from pilot projects in important ways. A showcase offers the opportunity to experiment with a program that is only roughly defined, learning by doing in the process. A pilot project, on the other hand, is designed to "try out" a program that was previously analyzed and approved. Once you develop a working model of a new customer-supplier relationship in showcase mode, it is much easier to sell it into both organizations.

Start small
Often, managers think first of developing supplier innovations with their most important suppliers. This is generally a mistake. The most effective place to start is to work with a relatively small, very capable, innovative supplier for whom your company is an extremely important customer. This situation has the conditions most favorable for creating new innovations that can later be scaled throughout your supplier base. Major suppliers, on the other hand, often are more difficult to work with and innovation is more risky with so much at stake.

Once an innovation is developed, contracting is very important. This is a complex topic, but a few underlying principles provide directional guidance. A good contract will have effective incentives for both parties to continue to deepen the relationship and to find new ways to create mutual value over time. In addition, the contract should have a "migration out" provision that will specify how to restore the status quo if the relationship ends and a new partner needs to be obtained.

Developing an effective contract is as much an art as a science, because a productive relationship should and will evolve in new, mutually-beneficial ways. Effective contracts are liberating, not confining.

Your suppliers can be your most valuable hidden resource. If your supplier management function is adversarial in tone, your suppliers will respond in kind. But, if your supplier management function sets its sights on innovation and value creation, you can find a clear pathway to success.

Courtesy - In HBS Working Knowledge by Jonathan Byrnes is a Senior Lecturer at MIT and President of Jonathan Byrnes & Co., a focused consulting company. He earned a doctorate from Harvard Business School in 1980 and can be reached at jlbyrnes@mit.edu.

Why do talented employees leave companies, often despite good salaries?

Early this year, Arun, an old friend who is a senior software designer, got an offer from a prestigious international firm to work in its India operations developing a specialised software. He was thrilled by the offer. He had heard a lot about the CEO of this company, a charismatic man often quoted in the business press for his visionary attitude. The salary was great. The company had all the right systems in place - employee-friendly
human resources (HR) policies, a spanking new office, the very best technology, even a canteen that served superb food. Twice Arun was sent abroad for training. "My learning curve is the sharpest it's ever been," he said soon after he joined. "It's a real high working with such cutting edge technology."

Last week, less than eight months after he joined, Arun walked out of the job. He has no other offer in hand but he said he couldn't take it anymore. Nor, apparently, could several other people in his department who have also quit recently. The CEO is distressed about the high employee turnover. He's distressed about the money he's spent in training them. He's distressed because he can't figure out what happened.

Why did this talented employee leave despite a top salary? Arun quit for the same reason that drives many good people away. The answer lies in one of the largest studies undertaken by the Gallup Organisation. The study surveyed over a million employees and 80,000 managers and was published in a book called First Break All The Rules. It came up with this surprising finding: If you're losing good people, look to their immediate supervisor. More than any other single reason, he is the reason people stay and thrive in an organisation. And he's the reason why they quit, taking their knowledge, experience and contacts with them. Often, straight to the competition. "People leave managers not
companies," write the authors Marcus Buckingham and Curt Coffman. "So much money has been thrown at the challenge of keeping good people - in the form of better pay, better perks
and better training - when, in the end, turnover is mostly a manager issue." If you have a turnover problem, look first to your managers. Are they driving people away? Beyond a point, an employee's primary need has less to do with money, and more to do with how he's treated and how valued he feels. Much of this depends directly on the immediate manager. And yet, bad bosses seem to happen to good people everywhere. A Fortune magazine survey some years ago found that nearly 75 per cent of employees have suffered at the hands of difficult superiors. You can leave one job to find - you guessed it, another wolf in a pin-stripe suit in the next one.

Of all the workplace stressors, a bad boss is possibly the worst, directly impacting the emotional health and productivity of employees. Here are some all-too common tales from the battlefield: Dev, an engineer, still shudders as he recalls the almost daily firings his boss subjected him to, usually in front of his subordinates. His boss emasculated him with personal, insulting remarks. In the face of such rage, Dev completely lost the courage to speak up. But when he reached home depressed, he poured himself a few drinks, and magically, became as abusive as the boss himself. Only, it would come out on his wife and children. Not only was his work life in the doldrums, his marriage began cracking up too. Another employee Rajat recalls the Chinese torture his boss put him through after a minor disagreement. He cut him off completely. He bypassed him in any decision that needed to be taken. "He stopped sending me any papers or files," says Rajat. "It was humiliating sitting at an empty table. I knew nothing and no one told me anything." Unable to bear this corporate Siberia, he finally quit.

HR experts say that of all the abuses, employees find public humiliation the most intolerable. The first time, an employee may not leave, but a thought has been planted. The second time, that thought gets strengthened. The third time, he starts looking for another job.

When people cannot retort openly in anger, they do so by passive aggression. By digging their heels in and slowing down. By doing only what they are told to do and no more. By omitting to give the boss crucial information. Dev says: "If you work for a jerk, you basically want to get him into trouble. You don't have your heart and soul in the job." Different managers can stress out employees in different ways - by being too controlling, too suspicious, too pushy, too critical, too nit-picky. But they forget that workers are not fixed assets, they are free agents. When this goes on too long, an employee will quit - often over a seemingly trivial issue. It isn't the 100th blow that knocks a good man down. It's the 99 that went before. And while it's true that people leave jobs for all kinds of reasons - for better opportunities or for circumstantial reasons, many who leave would have stayed - had it not been for one man constantly telling them, as Arun's boss did: "You are dispensable. I can find dozens like you." While it seems like there are plenty of other fish especially in today's waters, consider for a moment the cost of losing a talented employee. There's the cost of finding a replacement. The cost of training the replacement. The cost of not having someone to do the job in the meantime. The loss of clients and contacts the person had with the industry. The loss of morale in co-workers. The loss of trade secrets this person may now share with others. Plus, of course, the loss of the company's reputation. Every person who leaves a corporation then becomes its ambassador, for better or for worse. We all know of large IT companies that people would love to join and large television companies few want to go near. In both cases, former employees have left to tell their tales.

"Any company trying to compete must figure out a way to engage the mind of every employee," Jack Welch of GE once said. Much of a company's value lies "between the ears of its employees". If it's bleeding talent, it's bleeding value. Unfortunately, many
senior executives busy travelling the world, signing new deals and developing a vision for the company, have little idea of what may be going on at home. That deep within an organisation that otherwise does all the right things, one man could be driving its best people away.

Battling the Bears

A year ago, an article advising you to ignore a few market-timing bears that had crept out of the woods following a 12% rise in the Standard & Poor's 500 in five months. A 12% rise, mind you, that was fresh on the heels of a 23% loss in 2002.

However, a year after the article appeared, the Dow and S&P 500 are up about 15%, and the Nasdaq is pushing a 25% gain.

So what?
I bring this up not to say "I told you so," because I didn't. As it was explained then, the fact is that no one had any idea where the market was going in the near term. Instead, I'm calling this to your attention to remind you of a basic investing tenet: We buy companies with the intention of holding them for a very long time. Stories can change, of course, and we may very well sell after a short period.

Over your investing lifetime, you'll have several losers and several marginal winners. If you've chosen well, however, you'll also have a small handful of massive, multiyear outperformers, and if you follow the "buy right, sit tight" strategy and hang on to those winners, your chances of significantly beating the market are greatly enhanced.

If you've sworn off individual stocks and invest only in an index fund, you have even more reason to ignore the pundits and gurus trying to scare you out of the market. As I said a year ago, it's perfectly valid to discuss the valuations. But the total market is a different issue entirely.

Take a look at this logarithmic chart of the Dow Jones Industrial Average from 1929 to present. It beautifully points out both the risks and rewards involved in stock investing. It's hard to pick a random point that does not see the chart higher 10 years later, and, of course, the entire 75-year period shows average returns of about 10% per year. Yet nothing is risk-free, and those who first entered the market with a lump sum in 1929 had to endure many years before they earned back their principal.

And yet, as Benjamin Graham pointed out in his classic "The Intelligent Investor", a person who began dollar-cost averaging into the market in 1929 would have earned more than 8% compounded annually by 1948 -- despite the fact that the Dow's value fell from 300 to 177 during that period!

Invest through thick and thin, my dear Friend. Don't bother timing the market.

Different paths to victory
Keep Dollar-cost averaging. Consistently buying. Holding on to those securities. Some may wind up like the legendary Shelby Davis, owning hundreds of stocks worth millions of dollars.

Don't let that scare you. Although a fine way to invest, that type of diversification isn't for everybody. Perhaps you'd rather own very few stocks at any one time -- similar to the Warren Buffett punch card strategy. That's valid also, especially for the more experienced.

But whatever your preference, we encourage you to start investing if you're not yet doing so and continue investing if you have. Years later, you'll be glad you did.

Courtesy - By Rex Moore (Fool.com)

Tight Fiscal Policy Not the Cure for India's Economy

The stunning defeat of Prime Minister Vajpayee's National Democratic Alliance (NDA) government in India's recent general elections has opened the door to significant changes in the country's economic policy. Multilateral lenders, foreign analysts and investors universally believe that fiscal consolidation should be the centerpiece of economic policy changes implemented by India's new government headed by Prime Minister Manmohan Singh. The call for fiscal consolidation is supported by the mistaken conviction that reduction of the fiscal deficit will accelerate long-term economic growth in India. As proven in Latin America over the past 15 years, fiscal consolidation in India will lead to slower economic growth and political and social instability. If the Singh government hopes to quicken the pace of economic growth it must increase public sector investment and government subsidies. India should use, to the fullest advantage, the economic policy latitude it enjoys as a result of the very limited leverage multilateral lenders hold over the country.

The electoral drubbing dealt on the NDA government by the India National Congress (INC) and India's leftist political parties shocked both government cadres and outside observers. After all, India was enjoying the fruits of strong economic growth and booming asset markets. That the incumbent should lose the elections under such positive circumstances was almost unthinkable. However, the electoral demise of the Vajpayee government was obvious to anyone acquainted with India's increasingly unstable social environment - a product of rising unemployment, declining wages and deteriorating social conditions. India was not shining for millions of voters. These voters used their ballots to register their opposition to economic reforms first implemented in the early 1990's and modestly accelerated by the Vajpayee government. These reforms, which included reduction of public sector investment and government subsidies, trade liberalization and accelerated privatization of public sector companies, benefited only a small proportion of India's population as well as foreign investors. For the bulk of the population these reforms were deleterious.

India's electorate has given the INC-led government, along with its leftist allies, a strong mandate for a revision of economic policy. Inherent to the electorate's expectations are greater government focus on social development through increased public sector investment and government subsidies. In sharp contrast to the electorate, multilateral lenders, foreign analysts and investors expect changes in economic policy to include tighter fiscal policy, implicit to which is further reduction of public sector investment, expenditure on subsidies and the continued decline of social development. In the face of irrefutable evidence to the contrary, these lenders, analysts and investors glibly believe that tight fiscal policy will lead to accelerated economic growth in India. Argentina and Brazil, which have long followed IMF-directed fiscal adjustment policies, provide excellent examples of the negative impact tight fiscal policy has on economic growth and social and political stability.

Over the past 15 years the IMF has conditioned credit for Argentina and Brazil on the maintenance of tight fiscal policy. The IMF assumed that tight fiscal policy would lead to steady decline of the debt burden in these countries, thus supporting accelerated economic growth and underpinning foreign and domestic investor confidence. However, the outcome has been much different. Tight fiscal policy in both Argentina and Brazil undermined economic growth, leading to rapidly increasing debt burdens in both countries. Between 1989 and 2003 the average annual rate of GDP growth was 2.9 percent and 2.3 percent in Argentina and Brazil, respectively. Over the same period, the ratio of public sector debt to GDP increased from 28 percent to 140 percent in Argentina and 26 percent to 91 percent in Brazil. In addition to reducing economic growth and pushing the debt burden much higher, tight fiscal policy produced unprecedented political and social instability and the largest ever sovereign default in Argentina. The probability is high that Brazil will also be forced into default as continued economic weakness leads to further political and social instability, undermining investor confidence.

In comparison to Argentina and Brazil, fiscal policy has been easier in India over the past 15 years. Apart from a short period in the early 1990's following the country's balance of payments crisis, India has not been subject to IMF-directed fiscal adjustment policies. India's endemically large fiscal deficit, which averaged 8.4 percent of GDP between 1990 and 2003, supported GDP growth, which averaged 5.6 percent annually over the same period. Despite the large fiscal deficit, the ratio of public sector debt to GDP has risen modestly from 60 percent in 1989 to 75 percent in 2003.

Strong economic growth, underpinned by easy fiscal policy, prevented Latin-style runaway buildup of public sector debt in India. Economic growth in India could have been even faster over the past 15 years if public sector investment had not been sharply reduced after the country's balance of payments crisis in 1991. In that year, Finance Minister, Manmohan Singh, implemented fiscal reforms that included the reduction of public sector investment as well as rationalization of public sector employment - reductions and rationalizations that were deepened by the Vajpayee government.

The case for increased public sector investment in India is compelling. Between 1989 and 2003, capital outlays by the public sector have plummeted from 6 percent of GDP to 2.5 percent of GDP. Coinciding with this decline in investment has been the reduction of government subsidies, particularly food subsidies. The consolidation of public sector investment and subsidy payments has had an enormous negative impact on rural India. This has encouraged rural-urban migration, overwhelming the capacity of urban public utilities. In addition, the steady reduction of import tariffs has further contributed to deteriorating social conditions by subjecting both the agricultural and manufacturing sectors to imports that are often heavily subsidized in their home countries.

Doubling the rate of public sector investment, targeting agricultural infrastructure in particular, would sharply increase long-term economic growth in India. Investment in agricultural infrastructure, as well as increased food subsidies, would benefit a very large portion of the population, promoting political and social stability. Such an increase of investment and subsidies could be financed by a hike in import tariffs. Admittedly, this perspective is quite unconventional, but conventional methods of increasing economic growth, namely fiscal deficit reduction, have proven unworkable. To avoid Latin-style political, social and economic instability, the Singh government should take advantage of the very limited leverage multilateral lenders and foreign investors have over India and act unconventionally.

Courtesy - Jephraim Gundzik - Condor Advisers

10 Tips for the Successful Long-Term Investor

While it may be true that in the stock market there is no rule without an exception, there are some principles that are tough to dispute. In this article, we'll review 10 general principles that can help investors get a better grasp of how to approach the market from a long-term perspective. Keep in mind that these guidelines are quite general, and each will have a different application depending on the circumstance. But every point embodies some fundamental concept that will make you a more knowledgeable investor.

1) Sell the losers and let the winners ride! - Time and time again, investors take profits by selling their appreciated investments, but they hold onto stocks that have declined in hopes of a rebound. If an investor doesn't know when it's time to let go of hopeless stocks, he or she can, in the worst case cenario, see the stock sink to the point where it is almost worthless. Of course, the idea of holding onto high quality investments while selling the poor ones is great in theory, but hard to put into practice. The following information might help:

Riding a Winner – Peter Lynch was famous for talking about his "tenbaggers," his investments that increased tenfold in value. The theory is that much of his overall success was due to a small number of stocks in his portfolio that returned big. If you have a personal policy to sell after a stock has increased by a certain multiple--say three, for instance--you may never fully ride out a winner. No one in the history of investing with a "sell-after-I-have-tripled-my-money" mentality has ever had a tenbagger. Don't underestimate a stock that is performing well by sticking to some rigid personal rule--if you don't have a good understanding of the potential of your investments, your personal rules may end up being arbitrary and too limiting.

Selling a Loser – There is no guarantee that a stock will bounce back after a protracted decline. While it's important not to underestimate good stocks, it's equally important to be realistic about investments that are performing badly. Recognizing your losers is hard because it's also an acknowledgement of your mistake. But it's important to be honest when you realize that a stock is not performing as well as you expected it to. Don't be afraid to swallow your pride and move on before your losses become even greater!

In both cases, the point is to judge companies on their merits according to your research. In each situation, you still have to decide whether a price justifies future potential. Just remember not to let your fears limit your returns or inflate your losses.

2) Don't chase the "hot tip" - Whether the tip comes from your brother, cousin, neighbor, or even broker, no one can ever guarantee what a stock will do. When you make an investment, it's important you know the reasons for doing so: do your own research and analysis of any company before you even consider investing your hard earned money. Relying on a tidbit of information from someone else is not only an attempt at taking the easy way out, it's also a type of gambling. Sure, with some luck, tips may sometimes pan out. But they will never make you an informed investor, which is what you need to be to be successful in the long run.

3) Don't sweat the small stuff – In tip #1, we explained the importance of realizing when your investments are not performing as you expected them to--but remember to expect short-term fluctuations. As a long-term investor, don't panic when your investments experience various movements within shorter time periods. When tracking the activities of your investments, you should look at the big picture, or the long-term. Remember to be confident in the quality of your investments rather than nervous about the inevitable volatility of the short term. Also, don't overemphasize the few cents difference you might save from using a limit versus market order.
Granted, active traders will use these day-to-day and even minute-to-minute fluctuations as a way to make gains. But the gains of a long-term investor come from a completely different market movement--the one that occurs over many years--so keep your focus on developing your overall investment philosophy by educating yourself.

4) Do not overemphasize the P/E ratio – Investors often place too much importance on the P/E ratio. Because it is one important tool among many, using only this ratio to make buy or sell decisions is dangerous and ill-advised. The P/E ratio must be interpreted within a context, and should be used in conjunction with other analytical processes. So, a low P/E ratio doesn't necessarily mean a security is undervalued, nor does a high P/E ratio necessarily mean a company is overvalued.

5) Resist the lure of penny stocks - A common misconception is that there is less to lose in buying a low priced stock. But whether you buy a $5 stock that plunges to $0 or a $75 stock that does the same, either way you'd still have a 100% loss of your initial investment. A lousy $5 company has just as much downside risk as a lousy $75 company. In fact, a penny stock is probably riskier than a company with a higher share price, which would have more regulations placed on it.

6) Pick a strategy and stick with it – Different people use different methods to pick stocks and fulfill investing goals. There are many ways to be successful and no one strategy is inherently better than any other. However, once you find your style, stick with it. An investor who flounders between different stock picking strategies will probably experience the worst, rather than the best, of each. Constantly switching strategies effectively makes you a market timer, and this is definitely territory most investors should avoid. Take Warren Buffett's actions during the dotcom boom of the late '90s as an example. Buffett's value-oriented strategy had worked for him for decades and, despite criticism from the media, it prevented him from getting sucked into the new tech companies that had no earnings and eventually crashed.

7) Focus on the future –The tough part about investing is that we are trying to make informed decisions based on things that are yet to happen. It's important to keep in mind that even though we use past data as an indication of things to come, it's what happens in the future that matters most.
A quote from Peter Lynch's One Up on Wall Street about his experience with Subaru demonstrates this: "If I'd bothered to ask myself, 'How can this stock go any higher?' I would have never bought Subaru after it already went up twenty fold. But I checked the fundamentals, realized that Subaru was still cheap, bought the stock, and made seven fold after that." The point is to base a decision on future potential rather than on what has already happened in the past.

8) Investors adopt a long-term perspective - Large short-term profits can often entice those who are new to the market. But adopting a long-term horizon and dismissing the "get in, get out, make a killing" mentality is a must for any investor. This doesn't mean that it's impossible to make money by actively trading in the short term. But, as we already mentioned, investing and trading are very different ways of making gains from the market. Trading involves very different risks that buy-and-hold investors don't experience. As such, active trading requires certain specialized skills.
Neither investing style is necessarily better than the other--both have their pros and cons. But active trading can be wrong for someone without the appropriate time, financial resources, education, and desire. (For more on this, check out "Defining Active Trading".) Most people don't fit into this boat.

9) Be open-minded when selecting companies – Many great companies are household names, but many good investments are not household names (and vice versa). Thousands of smaller companies have the potential to turn into the large blue chips of tomorrow. In fact, historically, small-caps have had greater returns than large-caps: over the decades from 1926-2001, small-cap stocks in the U.S. returned an average of 12.27% while the S&P 500 returned 0.53%.
This is not to suggest that you should devote your entire portfolio to small-cap stocks. Rather, understand that there are many great companies beyond those in the Dow Jones Industrial Average (DJIA), and that by neglecting all these lesser-known companies, you could also be neglecting some of the biggest gains.

10) Taxes are important, but not that important – Putting taxes above all else is a dangerous mentality, as it can often cause investors to make poor, misguided decisions. Yes, tax Implications are important, but they are a secondary concern.
The primary goals in investing are to grow and secure your money. You should always attempt to minimize the amount of tax you pay and maximize your after-tax return, but the situations are rare where you'll want to put tax considerations above all else when making an investment decision.

Conclusion
In this article, we have covered 10 solid tips for long-term investors. We started off saying that there is an exception to every rule, and we can’t overemphasize this point. Depending on your circumstances, you might even disagree with something in this article! However, we hope that the common sense principles we’ve discussed benefit you overall and provide some insight into how you should think about investing.

Courtesy - Investopedia.com