Fortune Watch

Microsoft is buying when Yahoo is at its nadir rather than when it was ridiculously overvalued. Besides, when you think about it, what other company might make Microsoft’s short list to buy to stay in the game with Google. AOL? Spare me.

Microsoft founder Bill Gates offered California-based Yahoo! An unsolicited takeover offer of $44.6 billion in its boldest bid yet to challenge Google Inc.’s dominance of the lucrative online search and advertising markets.

The offer – made when Yahoo’s share price had reached a two-year low – will be hard for Yahoo’s board to resist because the company’s financial outlook doesn’t instill much confidence. Luckily for Microsoft, it is probably paying half what it would’ve had to shell out a year ago, which is the main reason we’re seeing it.

Leading members of the committee scheduled a hearing on Friday after Microsoft offer. Microsoft and Google are locked in the equivalent of an “arms race” building up computing and storage capacity to accommodate more and more of the world’s web-based computing activities.

Microsoft’s bid to acquire Yahoo! is certainly one of the largest technology mergers we’ve seen and presents important issues regarding the competitive landscape of the Internet. Indeed Yahoo needs Microsoft’s protection and resources simply to as a brand, while Microsoft needs Yahoo’s Web-savvy to help it keep up with the ever quickening metabolism of high-tech.

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Look at any bear market and even at its lowest point you will find stocks that do quite well. Similarly, in any bull market there are stocks that do poorly. It is true that market risk – the danger that a declining overall market may affect your stock – is real. However, investors who have done their homework know the difference between a general market decline and something wrong with their stock.

There’s this bit in Harry Potter and the Chamber of Secrets when Harry and his friend Ron Weasely go into the dark forest and come upon a giant spider. When Ron, who is mortally scared of spiders, looks like panicking, Harry shuts him up with a stern “Don’t Panic.” A short while later, when the duo are attacked by a huge hoard of giant spiders, Ron turns to Harry and asks matter of factly, “Can we panic now?”

That’s the question that many people are asking about the economy, the continuing credit crisis in that country and the hastening collapse of the dollar. Back in August, when the sub prime crisis first broke, there was a worldwide panic but the US Federal Reserve stopped it by lowering interest rates and generally acting like it was determined to not let things get worse.

Lately, in a testimony before the congress, many seemed to suggest that the worst is yet to come and it could be a lot worse. They admitted that the credit crisis resulting from soaring defaults of sub-prime mortgages had become worse since it first broke in August. Bernanke predicted that growth would fall sharply at least over the next two quarters. He also said the crisis would worsen in the coming months and appeared to hint that the crisis on Wall Street could spiral into a full-blown recession.

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It’s easy to look back at everything that happened in recent history and say, “I saw that coming.” But how good are you really at predicting the future?

Wall Street’s top forecasters have some good news and bad news for 2008. Many think stocks will head higher but that unemployment will rise and the overall economy will slow.

In other words, 2008 is going to look an awful lot like 2007. Despite falling housing prices and the subprime mortgage meltdown igniting fears about a broader economic slowdown. Subprime mortgage meltdown? The worst is over.

The coming year will be challenging for stock investors and you don’t need a crystal ball to make that prediction. However, since investing is always about future results, what do you think 2008 will be like for the stock market?

Odds are it will be very much like the latter part of 2007, at least through the first four to six months.

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From knowing the business you are getting into to having some “fun money” to invest with, here are some tips on getting into Stocks and Bonds.

The stock market is something we read about daily, the exchanges from New York, London, Paris, Tokyo as well as places like Bombay and Shanghai. For many investing in the stock market is an unfathomable move and it’s unclear how to begin.

Tons and tons have been written on the methods and strategies of investing in the stock market and websites to get you started in the right direction. A good stock broker can advise you on putting together a portfolio reflecting your needs whether for conservative investment or ready for a certain amount of risk.

People like billionaire Warren Buffet cautions against investing in businesses you don’t understand. If you wish to invest in individual stocks, make sure you thoroughly understand each company those stocks represent. Another option is to get into exchange-trade funds or mutual funds, letting the fund management worry about buying into or selling off a portfolio of stocks.

When putting your capital into one or more companies, you need to keep your expectations realistic in regards to the length, time and growth that each stock will encounter. Some investments require time to produce long term gains so a sort of panic buying and selling can be disastrous.

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In years of answering people’s questions about investing, I’ve come to classify two major sources of problems: One, investing without thinking enough, and two, thinking too much about investments. We all know at least a few hypochondriacs who continuously suspect themselves to be suffering from dangerous illnesses and require frequent visits to specialists and get exotic medical tests done to allay their fears.

Similarly, there are a vast number of investment hypochondriacs who suspect their asset portfolios to be suffering from some dangerous disease. Generally, they believe that this disease can only be diagnosed by having a specialist examine the portfolio and test it by applying exotic formulae that will perform some magical analysis. Somewhat like its medical version, investment hypochondria, too, is encouraged by these specialists who claim to detect and cure exotic diseases suffered by investment portfolios.

One of the most popular type of diseases in this field is a faulty asset allocation. Many people are worried sick about whether their investment portfolios have the correct amount of money allocated to debt and equity. Periodically, I get asked about what the formula for calculating asset allocation is and sometimes I’m actually asked this not by a patient but by a budding specialist.

The problem, of course, is that there is no formula, nor can there ever be. Asset allocation is just a fancy term for investing according to your needs.

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A big rate cut by the Federal Reserve this week, or at a hint more cuts are coming, coupled with this weeks sub prime rescue plan could lift investor confidence and inspire a pre Christmas rally.

While most investors are banking on a cut of at least a quarter percentage points in the bench mark fed funds rate, many think a deeper reduction is needed to unfreeze credit markets and boost confidence.

On Thursday, President George W. Bush announced a plan to stern US home foreclosures, sending stocks surging on optimism it would keep the economy from sliding into a recession.

“The big focus next week is on the Fed meeting” The market was pricing in an interest rate cut, there was still speculation about how big such a cut would be and whether the Fed would also cut the discount rate.

Encouraging data this week, including a resilient payrolls report on Friday, eased some concerns about the economy, decreasing the likelihood of an aggressive 50-point-basis cut in the fed funds rate.

And with just a few more weeks left in the year, the Dow is up 9.3% so far in 2007. The S&P 500 is up 6.9% for the year to date and the Nasdaq is up 12%.

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A remarkable number of investors are deeply concerned about the size of the company to invest in. Unfortunately, unlike some other kinds of prejudices, not having a prejudice about size is not good. Let me explain. A few days ago I was talking to (or rather, I was being talked to) by a group of very enthusiastic investors. These were people who had dropped in to extract investment advice from me, despite my strong protestations that I had no advice to offer about any specific stocks.

However, it did not really matter because what they were interested in was displaying the high quality of the research that their brokers had provided them with. This research consisted, in its entirety, of a list of stocks that were about to go up. No actual reasoning and logic accompanied the list. In the olden days of the stock markets, this kind of research went under the term ‘tips’ but it has been re branded now

Anyway, one of things that struck me about the research-led investment strategies that they were discussing was the utter lack of any consideration for size. They consider the stock of a large company, with a high market value, and that of a company with a lower market value as alternatives to each other. This is so because the ‘research’ they are going by says that all these are likely to rise. This is deeply misguided way of evaluating stocks.

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Many years back an elderly relative of a family friend of mine passed away. The next day, while I was at the funeral, I had a really strange experience. I noticed that a man who looked really stricken with grief was continuously staring at me, I vaguely remembered seeing him somewhere too. A few minutes later, he left the group of people he was with and came and stood next to me.

“I‘ve seen you at so and so office, you are the guy who talks Financial Services, am I correct?” he whispered. I nodded, not knowing whether I was expected to carry on a conversation. And then, having surreptitiously glanced around to make sure no one was listening, he whispered again, “Is the market going to go up?”

“I don’t know,” I said. It was an honest answer because I never do know what’s going to happen to the markets (nor, do I think does anyone else but that’s not the point). The man looked hurt and angry, perhaps because he felt that I should have done my bit to lighten his sorrow by predicting the future direction of the stock market. Once he realized that I was too heartless to oblige, he stalked off and kept glaring at me till I left.

Later, I couldn’t help thinking about this incident and wonder at the vast range of attention levels that people pay to investing. I’m not talking about those who have a legitimate professional connection with the markets like investment managers, family astrologers of stockbrokers and perhaps even editors of mutual fund magazines. I am talking instead of ordinary people who have a non-financial profession.

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“All is not golde that glistereth.”

Shakespeare is the best-known user of the idea. The original Shakespeare editions of The Merchant of Venice, 1596, have the line as all that glisters is not gold. ‘Glister’ is now usually replaced by the more commonly used ‘glitter’, which has the same meaning:

If you want to advertise an investment-related website on a major Internet-based advertising network (that of Google, for example), it will cost substantially less to advertise a mutual fund or stock research website than it will for a site on investing in gold.

Does this tempt me to transform from a mutual fund site to a gold site? Not quite, but it does make one wonder how much sense gold makes as an investment and how exactly one should invest in it.

Does it make sense to look at gold as an investment? If you look at historical gold prices over the last 70-80 years, then it does make sense to think of gold as a good asset type in which to put some proportion of your savings. Apart from an anomalous period during the late nineties, Gold has yielded around 8-10 per cent a year over most of period since around 1920.

What is bad is doing what most seem to be doing in the name of investing for gold. We have this idea that gold is a good investment for bad times and then instead of buying gold, we buy jewelery. But there’s a problem. Jewelery is not gold, at least it’s not the kind of gold that can be considered an investment.

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Stick to the rules. Believe it or not this is the hardest rule. The trader will keep breaking this one time and time again. As I have mentioned many times, every time that I have strayed away from my trading plan I have always lost money.

Diversify. Don’t have all your eggs in one basket. Buy from a couple of areas, not just the one sector.

Buy shares that suit your trading style. If you are buying shares for long term, obviously this won’t suit you if you are a short-term trader. And vice versa, shares for short term won’t suit if you are a medium to long term trader.

Know your risk tolerance. A speculative share has a different risk profile to an out-of-favor blue chip. Therefore allocate your capital according to the risk profile of the trade and your own personal risk tolerance. This is a personal decision that only you can make.

Don’t rush in. All investor’s particularly new ones should take their time and learn about the market before they start trading. A good way is to “dummy trade” first so as so as to learn the basics first. The market will still be there waiting for you for when you are ready to trade.

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