Your Questions About Successful Traders Make

Paul asks…

What are the courses one should study to became a fund manger?

I have done by graduation in Mathematics. Currently doing my MBA in Finance through Correspondence and working as a Market Analyst in a MNC.

I want to know about the courses required and to know whether correspondence courses will have any value to pursue. Also like to know about the work experience needed to enter into a fund management company.

Please provide all the information and if any biography of successful fund manager.

John answers:

My ex husband is a “real” fund manager. He worked for a top NYC investment bank as a bond trader and established a lot of relationships and did extremely well on the job. When he left this high-stress environment, he worked for a while as a portfolio manager with a huge pay cut and then found a company that was willing to let him have the money to start his own fund.

Quite frankly, a correspondence degree is not going to look so good. You’re competing against people with finance degrees from Columbia, Wharton, etc.

My best advice would be to get your foot in the door with a large investment firm, starting out in research, analysis, or something similar. They’re generally interested in people with degrees in math and physics. Then build relationships and move up within the company. Most of what you need to know, you’ll learn on the job and you’ll be doing a lot of reading and restudying things while you work there.
Good luck.

Daniel asks…

why do people feel basketball players have to stick to the same team?

Seriously though, a player can go to as many teams as he wants and still be great. Where does folks idea of loyalty in a draft come from? Okay, so and so gets drafted to the Bucks, and will be a free agent and a couple of seasons and decides to leave to go play for another team. And all of a sudden he’s a trader.

John answers:

The idea is that if a star player stays in one spot for a long period, they can build around him and be successful for a long period of time. Look at Tim Duncan in San Antonio, Kobe in LA or Pierce in Boston. Heck, even Wade in Miami. I understand that sometimes there’s issues we don;t hear about in public, personality conflicts, coaching clashes, etc, that sometimes lead to a player wanting out of the team he’s playing for. But I, for one, think Dwight Howard is acting like a whiny little kid.

The best example of the phenomenon you described is Lebron. I’ve said before, I had no problem with him signing with Miami. I don’t even have a problem with “The Decision” since the proceeds went to charity. My reason for being upset about it was that he didn’t inform the Cavs beforehand. They found out he was leaving when the rest of us did, and I find that unprofessional.

Richard asks…

Where can I work and gain experience, without the need of a college degree?

I cannot afford university but I have a high school degree and good grades. I want a job that makes some good money and become successful by being promoted slowly. I was thinking of something in the stocks or so. Pleas help!
Thank you..
.

John answers:

Investing in stocks is not a good idea, unless you can afford to burn at least $US 5k. Most inexperienced stock traders will burn this amount within their first two years. Investing with less than an initial sum of US $5k is high risk, with improbable returns.

As for getting promoted, I hate to tell you this, but…the days when you could work hard in a company and slowly get promoted are over. This might happen with a small start-up, but for big business, forget it. You can work for 10 years, and some kid with a degree will become your boss from his first day in the company. It is unlikely that someone without a degree will be promoted beyond the supervisory level.

I’d advise you to make saving your priority. Build up that initial nest egg, and in 5 years or so, start your own business or get a degree (by then you’ll have a clear idea of whether it’s worth your time). You should:

– Work in a variety of jobs, but all in the same sector (e.g. All construction related, or all web related.)

– Network and get to know people while you are at it.

– Look around and volunteer to do extra work, so that you can learn more of how it’s done.

In time, you will have enough direct experience to run your own business. Or if you want to work for a big company, you will breeze through the degree course in the minimal time, and you will have a job waiting for you immediately after college.

Good luck!

Carol asks…

If GM appears able to consistently generate $2 billion annual profit, how much would it be worth?

GM has been restructuring and is now suffering through recession. If the economy recovers and GM’s turnaround efforts are successful and GM looks able to make $2 billion profit a year, how much would it’s market cap be? As I see it, with a p/e ratio of 15, it would be a $30 billion company, 3 times what it is currently worth. Is that correct or am I missing something?

John answers:

A company that doesn’t grow is a problem. A company that even though it makes 2 billion, if it doesn’t grow it will not have a PE of 15. So what you need to figure out is what will it grow. 5%? $2.00B… $2.10B… $2.21B or maybe 10%: $2.00B… $2.20B… $2.42B

Another thing you need to get a grip on is there are 2 PE ratios. Trailing and forward. The forward PE is what prices the stock, the trailing one is just a track record of what is reasonable and how much it can expand and contract. You are attempting to estimate the forward PE.

Another problem is that you state “if” they are able to turn it around. Well that means there is a risk. What are the chances they turn it around. Will they go bankrupt? Will they just wallow in anguish for several lean years? This is where a little trick that analysts seem to use all of the time. Let me give an example.

I am sure you have heard just before an FOMC meeting where the FED decides how much to cut interest rates the news guy is saying something like there is a 75% chance of a 50 point basis cut. Well, this news guy or anyone else has no idea. What they are doing is taking the price of things that are based on the interest rates. For example bonds, or options, anything where the interest rate is in the formula. Then they take the actual price, for simplicity lets say it is $50.75, and then if they plug in the current interest rate they get $50, and if they plug in the amount a 50 basis point cut affects the rate they are interested in and they get $51. They then say well its 3/4s of the way there so traders are 75% sure.

Now going back to GM, you can do the same thing. Get your hands on some analysts report and see what she predicts the earnings will be. You will also get some answer as to why. This is just to get a place to start. What you want to do is find what the traders think. According to your numbers, the consesus seems to be 1/3 of the $2B times the 15 forward PE. Now one thing uncertainty does is shrink PE ratios. If you think there is 10% chance of banruptcy and 40% chance of a 5% growth and 50% chance of back to normal 10% growth then what will you use? If you do some quick math with these ficticious numbers I made up foir the example you will see that the PE has a 50% chance of being 15, 40% of say 10ish and 10% of donutville, which works out to 11.5. This is just an example and is not right as we will see:

Lets look at some yahoo data

http://finance.yahoo.com/q/ks?s=GM

The forward PE according to the analysts data is 7.88. Now keep in mind a forward PE is sort of a guage of how steady and certain the belief is that the company will perform as expected. If a company always delivers they will get a higher score here if they are a cylclical company they will not garner such a high score as a growth company. If they surprise to the downside often they will not get any PE. The forward PE is based on the current price and the belief of future earnings and so in not a science. When yahoo posts this number is is a basis of what the analysts believe on average.

Http://finance.yahoo.com/q/ae?s=GM

The analyst info is all over the board. One thinks this fiscal year is $3.27 EPS and another thinks its -($5.50) EPS. These people are very uncertain I would say. The expected 5 year growth is about 10% for the industry and sector but only 6.5% for GM. That right there drops your PE in the tank. If you are not a leader you get no PE love.

Back to your numbers, market cap is $11.33B, this can be thought of as from 7.88 x current earnings per share combined with expected earnings per share somehow averaged out to a current value that grows at 6.5% per year. That is 11.33 / 7.88 / shares outstanding = $2.53.

If you look at the yahoo data again the consensus of all those wild numbers for next year is $2.52 EPS. So I think we are on to something here.

So now I have given you all I got and so have a question for you. If it is worth $30B then what numbers are wrong?
PE of 7.88
EPS for the next 5 years of $2.52, $2.68, $2.86, $3.04, $3.24

And the final question, are you willing to buy this stock and wait until the uncertainty is gone and proves you right?

If you want to read more on this I suggest these two books to understand about earnings and how they affect the stock price:
Rule One by Phil Town
http://www.amazon.com/Rule-Strategy-Successful-Investing-Minutes/dp/0307336840/ref=pd_bbs_1?ie=UTF8&s=books&qid=1207069378&sr=8-1
Jim Cramer’s Real Money
http://www.amazon.com/Jim-Cramers-Real-Money-Investing/dp/0743224892/ref=pd_bbs_sr_2?ie=UTF8&s=books&qid=1207069436&sr=1-2

Mandy asks…

Can you start a Career in finance after being in the army for 22 years?

because i have a degree in economics and is going to get out of the army in about 4 years…and this may sound a bit silly but is there a chance that i can be a trader in the financial sector?

John answers:

A lot of retired military veterans begin financial services careers. First, most career military tend to be fairly analytical, ethical, and dedicated to the well-being of others. Second, they have a retirement income that is far better than most 40-ish persons who are changing careers.

Only about 3% of those entering financial services practices are successful. This is often because it is extremely demanding and many lack the aptitude; but more often it is because for the first few years, one’s income is extremely low. Once most have completed 3-5 years, they’re easily into six figures, but have been living quite meagerly prior to that. Having a substantial outside income is a big advantage.

Best wishes to you.

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