Monday, 8 February 2016

The Best Video to comprehend how the Economic Machine Works.

Published on 22 Sep 2013
Economics 101 -- "How the Economic Machine Works."

Created by Ray Dalio this simple but not simplistic and easy to follow 30 minute, animated video answers the question, "How does the economy really work?" Based on Dalio's practical template for understanding the economy, which he developed over the course of his career, the video breaks down economic concepts like credit, deficits and interest rates, allowing viewers to learn the basic driving forces behind the economy, how economic policies work and why economic cycles occur.

To learn more about Economic Principles visit:

[Also Available In Chinese] 经济这台机器是怎样运行的:

Tuesday, 2 February 2016

3 Big Risks Investors Must Know About A Real Estate Investment Trust

By Stanley Lim Peir Shenq, CFA

The Singapore stock market is home to some of the largest real estate investment trusts in the region. REITs such as Ascendas Real Estate Investment Trust (SGX: A17U)CapitaLand Mall Trust (SGX: C38U)Mapletree Logistics Trust (SGX: M44U)and Mapletree Industrial Trust (SGX: ME8U) all have a market capitalisation of over S$2 billion each.

Land is a very valuable commodity in Singapore given that it is a tiny island nation. Moreover, REITs in Singapore tend to offer high yields as well, relative to the broader market.
But, REITs are far from being a risk-free investment. Investors need to understand how REITs are structured in order to gain better awareness of the risks involved. Here are three big risks that I’m watching with REITs.
Lack of a safety net
REITs are required by regulation to distribute 90% of their taxable income each year as distributions to enjoy tax-exemption. That would explain why most REITs tend to have high dividend yields.
But, this means that REITs are not able to build up a cash reserve to strengthen their balance sheets and protect themselves against any adverse economic conditions. The need to distribute most of their income would also mean that REITs lack the cash reserves to invest in more properties to grow their distribution.
Therefore, it is common to see REITs issue rights or conduct private placements as a way to raise more capital from time to time. For an investor, there’s a risk that your investment in a REIT may get diluted when it conducts such corporate exercises.
Interest rate risk
The aforementioned inability of REITs to conserve cash would also mean that they’d have to depend on debt for financing. REITs with significant debt on their balance sheets may be facing interest rate risk.
In the event that interest rates rise, this may cause a hike in a REIT’s interest expenses. In turn, the amount of distributable income that the REIT can generate might drop significantly, thus negatively impacitng the distribution yield of a REIT. When this happens, the unit price of a REIT may be affected as REIT-investors may dispose of it in search of higher yields.
Use of short-term debt
Generally speaking, the bulk of a REIT’s assets are properties that can last for decades or even centuries. In other words, a REIT’s assets are mainly long-term in nature. But, the borrowings of most REITs are relatively short-term, with typically less than 10 years to maturity.
As such, this creates a type of asset and liability mismatch, in the sense that REITs are using short-term liabilities (debt) to finance long-term assets (properties). In fact, REITs have a constant need to refinance their borrowings while holding onto the same assets.
In the event of liquidity drying up, such as during the Global Financial Crisis of 2008-09, a REIT may be caught in a dangerous position of being unable to find any refinancing options when its debt comes due. If that happens, the REIT would most likely have to undertake a huge rights issue or private placement – at a deeply discounted unit price to boot.
In this scenario, an investor in the REIT may see his or her stake diluted sharply (from a large private placement) and/or be required to fork out a large sum of money (from a rights issue) to reinvest in the REIT and save it from financial difficulties.
Foolish Summary
REITs can be great investments. But, investors should be aware that a great investment opportunity does not mean that it is risk-free. Understanding the key risks of REITs would give an investor an edge when it comes to managing his or her investment portfolio.

Monday, 1 February 2016

Secrets of Long-Term Investing Revealed

“........... long-term investing isn’t about having a great system, or a superior analytic intellect, or better access to information, or even the best advice money can buy.  Long-term investing is about character, about depth of vision and the cultivation of patience, about who you are and who you’ve made yourself to be”

What is long-term investing? 
Long-term investing is the process of buying and holding investment securities you believe will compound investor wealth indefinitely into the future.

Why You Need to Become a Long-Term Investor

There are 3 good reasons to become a long-term investor:
  1. It reduces fees
  2. It requires less of your time
  3. It is highly effective

Long-term investing is so successful is because of its beneficial psychological ramifications.  

If you invest for the long-term, you will focus on businesses with strong and durable competitive advantages that have a chance of compounding your wealth for decades, not days.

Long-Term Investing Strategy

The strategy long-term investors follow is straight-forward:
  • Identify companies with durable competitive advantages
  • Be sure these companies are in slow changing industries
  • Invest in these companies when trading at fair or better prices

  • Insurance
  • Health care
  • Food and beverage

To find if a company is trading at ‘fair or better prices’, a few metrics are important.
  • If the company is trading below the market price-to-earnings ratio, its peer’s price-to-earnings ratio, and its 10 year historical average price-to-earnings ratio, it is likely undervalued.  
  • These 3 relative price-to-earnings ratios will help to paint a picture of if a stock is ‘in favor’ or ‘out of favor’.  
As a general rule, it’s best to buy great businesses at a discount – when they are out of favor.

Another good metric to look at for determining value is a company’s expected payback period.
  • Payback period is calculated using an expected growth rate and a stock’s current dividend yield.  
  • The higher the dividend yield and expected growth rate, the lower the payback period.  
  • The payback period is the number of years it will take an investment to pay you back.  
  • Obviously, the lower the payback period, the better.

Long-Term Investing Examples

Warren Buffett’s investment history is perhaps the best example of long-term investments.  Three of his longest running investments are below:
  • Wells Fargo (WFC) – 25% of his portfolio – First purchased in 1989
  • Coca-Cola (KO) – 15% of portfolio – First purchased in 1988
  • American Express (AXP) – 11% of portfolio – First purchased in 1964
All of these three investments are 25 years old or older.

The American Express investment is especially impressive.  Warren Buffett has held American Express for over 50 years!

Stocks for Long-Term Investors

  • Find high quality dividend growth stocks suitable for long-term investors.
  • Identify high quality dividend growth stocks trading at fair or better prices.
  • Have a brief list of blue-chip stocks worthy of long-term investors that are currently trading at fair or better prices.
For example:  One for each sector of the economy is shown:

Long-Term Investing Is Difficult

Long-term investing is not easy.
It is psychologically difficult to hold a stock when its price is declining.
Holding through price declines takes real conviction (remember the marriage analogy?).
The nearly infinite liquidity of the stock market combined with the ease of trading makes selling stocks something you can do on a whim.
But just because you can, doesn’t mean you should.
Stock Market
The constant stream of stock ticker price movements also coerces individual investors into trading unnecessarily.

  • Does it really matter that a stock is up 1% today, or down 0.3% this hour?  
  • Have the long-term prospects of the business really changed?  
Probably not.
To compound these problems even further, the financial media promotes rapid action.

  • To garner views and attention, financial pundits have become LOUD.  
  • They are always promoting the next great stock to buy, or which one MUST be sold.

The Cure:  Watch Dividends, Not Stock Prices

Stock prices lie.

  • They signal a business is in steep decline, when it isn’t.  
  • They say a company is worth 3x as much as it was 3 years ago, when the underlying business has only grown 50%.  
  • Stock prices only represent the perception of other investors.  
  • They do not and cannot show the real total returns an investment will generate.
Benjamin Graham Quote
Instead of watching stock price, avoid them completely.

Look at dividend income instead.

  • Dividend do not lie.  
  • A business simply cannot pay rising dividends for any protracted period of time without the underlying business growing as well.
Dividends are much less volatile than stock prices.

  • Dividends reflect the real earnings power of the business.  
  • As a result, it makes sense to track dividend income rather than stock price movement.  
  • After all, don’t you care what your investment pays you more than what people think about your investment?

The Difference Between Buy & Hold and Long-Term Investing

There is a difference between buy and hold (sometimes called buy and pray) investing and long-term investing.

Buy and hold investing typically means buying and holding no matter what.
That’s not what long-term investing is about.
Sometimes, there is a very good reason to sell a stock.  It just happens much less frequently than most people believe.
Two reasons to sell a stock:
  1. If it cuts or eliminates its dividend payments
  2. If it becomes extremely overvalued
The first reason to sell is intuitive.

  • When a stock cuts its dividend, it violates your reason for investing. 
The second reason to sell is in the case of an extreme overvaluation.

  • I’m not talking about when a stock moves from a price-to-earnings ratio of 15 to 25.  
  • I’m talking about when a stock is trading for a ridiculous price-to-earnings ratio; something like 40+.  
  • An important caveat to remember is to always use adjusted earnings for this calculation.  
  • If a cyclical stock’s earnings temporarily fall from $5.00 per share to $1.00 per share, and the price-to-earnings ratio jumps from 15 to 75, don’t sell.  
  • In this instance, the price-to-earnings ratio is artificially inflated because it is not reflecting the true earnings power of the business.  
Selling due to extreme valuations should only occur very rarely, during extreme bouts of irrational market exuberance.

Final Thoughts

Investing for the long run is simple, but not easy.

It is psychologically difficult.

The amazing success records of investors who believe a long-term outlook is critical for favorable investment returns lends credibility to the idea of long-term investing.
The financial media does not typically discuss the merits of long-term investing because it does not generate fees for the financial industry, and it does not lend itself to flashy headlines or catchy sound bites.
Invest in high quality dividend growth stocks for the long-run.

  • High quality dividend growths stocks with strong competitive advantages offer individual investors the best available mix of current income, growth, and stability as compared to other investment strategies and styles.
Long-term investing requires conviction, perseverance, and the ability to do nothing when others are being very active with their portfolios.

Do you have what it takes to invest for the long run?



Warren Buffett
Charlie Munger
Joel Greenblatt
John Templeton
Benjamin Graham
Philip Fisher
Mohnish Pabrai
Walter Schloss
Peter Lynch
Seth Klarman

Warren Buffett (1930)

"Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down."

Warren Buffett, born on August 30, 1930 in Omaha, Nebraska, is known as the world's best investor of all time. He is among the top three richest people in the world for several years in a row now, thanks to the consistent, mind-boggling returns he managed to earn with his investment vehicle Berkshire Hathaway. The funny thing is that Buffett does not even care that much about money. Investing is simply something he enjoys doing. Buffett still owns the same house he bought back in 1958, hates expensive suits, and still drives his secondhand car.

Investment philosophy:
 Focuses on individual companies, rather than macro-economic factors
 Invests in companies with sustainable competitive advantages
 Prefers becoming an expert on a few companies over major diversification
 Does not believe in technical analysis
 Bases his investment decisions on the operational performance of the underlying businesses
 Holds on to stocks for an extremely long period, some stocks he never sells
 Uses price fluctuations to its advantage by buying when undervalued and selling when overvalued with respect to intrinsic value
 Puts much emphasis on the importance of shareholder friendly, capable management
 Beliefs margin of safety are the three most important words in investing

Charlie Munger (1924)

"All intelligent investing is value investing — acquiring more than you are paying for."

Charlie Munger is vice-chairman of Berkshire Hathaway, Warren Buffett's investment vehicle. Even though Buffett and Munger were born in Omaha, Nebraska, they did not meet until 1959. After graduating from Harvard Law School, Munger started a successful law firm which still exists today. In 1965 he started his own investment partnership, which returned 24.3% annually between 1965 and 1975, while the Dow Jones only returned 6.4% during the same period. In 1975 he joined forces with Warren Buffett, and ever since that moment Charlie Munger has played a massive role in the success of Berkshire Hathaway. While Buffett is extrovert and a pure investor, Munger is more introvert and a generalist with a broad range of interests. The fact that they differ so much from each other is probably why they complement each other so well.

Investment philosophy:
 Convinced Buffett that stocks trading at prices above their book value can still be interesting, as long as they trade below their intrinsic value
 Has a multidisciplinary approach to investing which he also applies to other parts of his life ("Know a little about a lot")
 Reads books continuously about varied topics like math, history, biology, physics, economy, psychology, you name it!
 Focuses on the strength and sustainability of competitive advantages
 Sticks to what he knows, in other words, companies within his "circle of competence"
 Beliefs it is better to hold on to cash than to invest it in mediocre opportunities
 Says it is better to be roughly right than precisely wrong with your predictions

Joel Greenblatt (1957)

“Choosing individual stocks without any idea of what you’re looking for is like running through a dynamite factory with a burning match. You may live, but you’re still an idiot.”

Joel Greenblatt definitely knows how to invest. In 1985 he started his investment fund Gotham Capital, ten years later, in 1995, he had earned an incredible average return of 50% per year for its investors. He decided to pay his investors their money back and continued investing purely with his own capital. Many people know Joel Greenblatt for his investment classic The Little Book That Beats The Market* and his website Greenblatt is also an adjunct-professor at the Columbia Business School.

Investment philosophy:
 Buys good stocks when they are on sale
 Prefers highly profitable companies
 Uses the Normalized Earnings Yield to assess whether a company is cheap
 Beliefs thorough research does more to reduce risk than excessive diversification (he often has no more than 8 companies in his portfolio)
 Largely ignores macro-economical developments and short term price movements

John Templeton (1912 -2008) 

"If you want to have a better performance than the crowd, you must do things differently from the crowd."

The late billionaire and legendary investor, John Templeton, was born in 1912 as a member of a poor family in a small village in Tennessee. He was the first of his village to attend University, and he made them proud by finishing economics at Yale and later a law degree at Oxford. Just before WWII, Templeton was working at the predecessor of the now infamous Merrill Lynch investment bank. While everyone was highly pessimistic during these times, Templeton was one of the few who foresaw that the war would give an impulse to the economy, rather than grind it to a halt. He borrowed $10.000 from his boss and invested this money in each of the 104 companies on the US stock market which traded at a price below $1. Four years later he had an average return of 400%! In 1937, in times of the Great Depression, Templeton started his own investment fund and several decennia later he managed the funds of over a million people. In 2000 he shorted 84 technology companies for $200.000, he called it his "easiest profit ever". The beauty is that despite all his wealth, John Templeton had an extremely modest lifestyle and gave much of it away to charitable causes.

Investment philosophy:
 Contrarian, always going against the crowd and buying at the point of maximum pessimism
 Has a global investment approach and looks for interesting stocks in every country, but preferably countries with limited inflation, high economical growth, and a movement toward liberalization and privatization
 Has a long term approach, he holds on to stocks for 6 to 7 years on average
 Focuses on extremely cheap stocks, not necessarily on "good" stocks with a sustainable competitive advantage, like Warren Buffett
 Beliefs in patience, an open-mind, and a skeptical attitude against conventional wisdom
 Warns investors for popular stocks everyone is buying
 Focuses on absolute performance rather than relative performance
 A strong believer in the wealth creating power of the free market economy

Benjamin Graham (1894 - 1976) 

"Price is what you pay, value is what you get."

Columbia Business School professor Benjamin Graham is often called "The Father of Value Investing". He was also Warren Buffett's mentor and wrote the highly influential book The Intelligent Investor, which Buffett once described as the best book on investing ever written. Graham was born in England in 1894, but he and his family moved to the United States just one year later. His official name was Grossbaum, but the family decided to change this German sounding name to Graham during the time of the First World War. Graham was a brilliant student and got offered several teaching jobs on the University, but instead he decided to work for a trading firm and would later start his own investment fund. Due to the use of leverage, his fund lost a whopping 75% of its value between 1929 and 1932, but Graham managed to turn things around and managed to earn a 17% annualized return for the next 30 years. This was way higher than the average stock market return during that same period. In total, Graham taught economics for 28 years on Columbia Business School.

Investment philosophy:
 Focuses more on quantitative, rather than qualitative data
 First step is to look for stocks trading below 2/3rd of net current asset value (NCAV)*
 Prefers companies which pay dividends
 Looks for companies with a consistently profitable history
 Companies should not have too much long term debt
 Earnings should be growing
 Is willing to pay no more than 15 times the average earnings over the past three years
 Diversifies to spread the risk of individual positions
 Emphasizes the importance of a significant Margin of Safety
 Profits from irrational behavior caused by the manic-depressive "Mr. Market"
 Warns that emotions like fear and greed should play no role in your investment decisions

*NCAV = current assets - total liabilities

Philip Fisher (1907 - 2004) 

"I don't want a lot of good investments; I want a few outstanding ones."

Philip Fisher became famous for successfully investing in growth stocks. After studying economics degree at Stanford University, Fisher worked as an investment analyst before starting his own firm, Fisher & Co. This was in 1931, during the times of the Great Depression. Fisher's insights have had a significant influence on both Warren Buffett and Charlie Munger. Philip Fisher is also author of the powerful investment book Common Stocks and Uncommon Profits, which has a quote from Buffett on its cover which reads: "I am an eager reader of whatever Phil has to say, and I recommend him to you."

Investment philosophy:
 Dislikes technical analysis
 Does not belief in "market timing"
 Prefers a concentrated portfolio with around 10 to 12 stocks
 Emphasizes the importance of honest and able management
 Beliefs you should only invest in companies which you can understand
 Warns that you should not follow the masses, but instead have patience and think for yourself
 Companies should have a strong business model, be innovative, highly profitable, and preferably a market leader
 Has a focus on growth potential of both companies and industries
 Buys companies at "reasonable prices" but does not specify what "reasonable" is to him
 A true "buy & hold" investor who often holds on to stocks for decades
 Beliefs great companies purchased at reasonable prices and held for a long time are better investments than reasonable companies bought at great prices
 Has a "scuttlebutt" approach to doing research by asking questions to customers, employees, competitors, analysts, suppliers, and management to find out more about the competitive position of a company and its management
 Only sells when a company starts experiencing issues with its business model, competitive positioning, or management

Mohnish Pabrai (1964)

“Heads, I win; tails, I don’t lose much. “

Mohnish Pabrai has once been heralded as "the new Warren Buffett" by the prestigious American business magazine Forbes. While this seems like big words, you might start to understand why Forbes wrote this when you look at the performance of Pabrai's hedge funds, Pabrai Investment Funds, which have outperformed all of the major indices and 99% of managed funds. At least, that was before his funds suffered significant losses during the recent financial crisis because of their exposure to financial institutions and construction companies. Still, there is much we can learn from his low-risk, high-reward approach to investing, which he describes in his brilliant book The Dhandho Investor: The Low-Risk Value Method to High Returns.

Investment philosophy:
 Points out that there is a big difference between risk and uncertainty
 Looks for low-risk, high-uncertainty opportunities with a significant upside potential
 Only practices minor diversification and usually has around 10 stocks in his portfolio
 Beliefs stock prices are merely "noise"
 Used to buy reasonable companies at great prices, but now wants to focus more on quality companies with a sustainable competitive advantage and shareholder friendly management

Walter Schloss (1916 - 2012) 

"If a stock is cheap, I start buying." While Walter Schloss might not be the most well-known investor of all time, he was definitely one of the best investors of all time. Just like Buffett, Walter Schloss was a student of Benjamin Graham. Schloss is also mentioned as one of the "Super Investors" by Buffett in his must-read essay The Super Investors of Graham-And-Doddsville. An interesting fact about Walter Schloss is that he never went to college. Instead, he took classes taught by Benjamin Graham after which he started working for the Graham-Newton Partnership. In 1955 Schloss started his own value investing fund, which he ran until 2000. During his 45 years managing the fund, Schloss earned an impressive 15.3% return versus a return of 10% for the S&P500 during that same period. Just like Warren Buffett and John Templeton, Walter Schloss was known to be frugal. Schloss died of leukemia in 2012 at age 95.

Investment philosophy:
 Practiced the pure Benjamin Graham style of value investing based on purchasing companies below NCAV
 Generally buys "cigar-butt" companies, or in other words companies in distress which are therefore trading at bargain prices
 Regularly used the Value Line Investment Survey to find attractive stocks
 Minimizes risk by requiring a significant Margin of Safety before investing
 Focuses on cheap stocks, rather than on the performance of the underlying business
 Diversified significantly and has owned around 100 stocks at a time
 Keeps an open mind and even sometimes shorts stocks, like he did with Yahoo and Amazon just before the Dot-Com crash
 Likes stocks which have a high percentage of insider ownership and which pay a dividend
 Is not afraid to hold cash
 Prefers companies which have tangible assets and little or no long-term debt 10

Peter Lynch (1944)

"Everyone has the brain power to make money in stocks. Not everyone has the stomach."

Peter Lynch holds a degree in Finance as well as in Business Administration. After University, Lynch started working for Fidelity Investments as an investment analyst, where he eventually got promoted to director of research. In 1977, Peter Lynch was appointed as manager of the Magellan Fund, where he earned fabled returns until his retirement in 1990. Just before his retirement he published the bestseller One Up On Wall Street: How To Use What You Already Know To Make Money In The Market. Just as many of the other great investors mentioned in this document, Lynch took up philanthropy after he amassed his fortune.

Investment philosophy:
 You need to keep an open mind at all times, be willing to adapt, and learn from mistakes
 Leaves no stone unturned when it comes to doing due diligence and stock research
 Only invests in companies he understands
 Focuses on a company's fundamentals and pays little attention to market noise
 Has a long-term orientation
 Beliefs it is futile to predict interest rates and where the economy is heading
 Warns that you should avoid long shots
 Sees patience as a virtue when it comes to investing
 Emphasizes the importance of first-grade management
 Always formulates exactly why he wants to buy something before he actually buys something

Seth Klarman (1957) 

“Once you adopt a value-investment strategy, any other investment behavior starts to seem like gambling.“

Billionaire investor and founder of the Baupost Group partnership, Seth Klarman, grew up in Baltimore and graduated from both Cornell University (economics) and the Harvard Business School (MBA). In 2014 Forbes mentioned Seth Klarman as one of the 25 Highest-Earning hedge funds managers of 2013, a year in which he generated a whopping $350 million return. Klarman generally keeps a low profile, but in 1991 he wrote the wrote a book Margin of Safety: Risk Averse Investing Strategies for the Thoughtful Investor, which became an instant value investing classic. This book is now out of print, which has pushed the price up to over $1500 for a copy!

Investment philosophy:
 Is extremely risk-averse and focuses primarily on minimizing downside risk
 Does not just look for cheap stocks, but looks for the cheapest stocks of great companies
 Writes that conservative estimates, a significant margin of safety, and minor diversification allow investors to minimize risk despite imperfect information
 Warns that Wall Street, brokers, analysts, advisors, and even investment funds are not necessarily there to make you rich, but first and foremost to make themselves rich
 Often invests in "special situations", like stocks who filed for bankruptcy or risk-arbitrage situations
 Suggests to use several valuation methods simultaneously, since no method is perfect and since it is impossible to precisely calculate the intrinsic value of a company
 Is known for holding a big part of its portfolio in cash when no opportunities exist
 Beliefs investors should focus on absolute performance, rather than relative performance
 Emphasizes that you should find out not only if an asset is undervalued, but also why it is undervalued
 Is not afraid to bet against the crowd and oppose the prevailing investment winds
 Discourages investors to use stop-loss orders, because that way they can't buy more of a great thing when the price declines

Final words 

I hope you enjoyed reading how some the best investors in the world think about investing. You might have noticed some common themes, like buying companies for less than they are worth. And while they all practice this value investing approach, there are also notable differences between the strategies of these masters of investing. Where Warren Buffett runs a concentrated portfolio and focuses on "good" companies with a sustainable competitive advantage, Walter Schloss managed to earn impressive returns by simply buying a diverse set of extremely cheap companies. As Bruce Lee once said: "Adapt what is useful, reject what is useless, and add what is specifically your own.”

Thursday, 21 January 2016

Experts reveal their investment tips for volatile times

'Don't panic': Experts reveal their investment tips for volatile times
January 21, 2016 - 9:53AM

China fears! Billions of dollars lost! Unprecedented volatility!

With investment markets in full blown panic mode, two listed investment company stalwarts are advising investors to keep cool heads as they wade through some of the most volatile times on record.

Tom Millner, chief executive of the $900 million BKI Investment Company, urges investors not to see red despite nearly $120 billion wiped off the Australian share market since the start of this year.

Around $120 billion has been wiped off local shares in 2016.

Ross Barker, managing director of the $6.2 billion Australian Foundation Investment Company (AFIC), believes now is a great time for investors to cherry pick where to put their funds.

These are their investment tips for navigating through the volatility in 2016:

1. Don't jump

"It's about buying good, quality companies that have strong businesses through cycles," Ross Barker, managing director of AFIC, said.

As the markets yo-yo with gains and losses throughout the trading day, Mr Barker has this to say to investors: "Don't panic."

Herd or mob mentality often permeates the market when investors dump stock in a state of panic, resulting in the overselling of companies.

Australian shares tumbled to a 2 1/2-year low on Wednesday as investors worry about China's growth prospects and slowing global commodity markets.

China's sharemarkets are as volatile as ever, but AFIC managing director Ross Barker believes the country's growth prospects are still strong.

"People get caught up in the mentality of the moment and they can often sell good things when they shouldn't be selling," Mr Barker said.

"There's concerns about China but we're still confident about the growth prospects of the economy."

2. Take your time

Blue-chip stocks such as BHP and Rio have been two of the biggest market casualites, shedding 40 per cent and 24 per cent respectively since last year.

"Be patient."

That is Mr Millner's response to the panicked selling since the start of this year that has spared few companies on the ASX.

Casualties such as BHP Billiton and Rio Tinto, two of the largest resources stock on the sharemarket, have shed 40 per cent and 24 per cent respectively since last year.

But Mr Millner remains confident major Australian resources companies exposed to commodities such as oil, coal and copper in particular will bounce back as the imbalance between supply and demand is adjusted and the Australian dollar continues its descent.

He believes large resources companies may rebound over the next 12 to 18 months.

"It's just short term noise - so be patient," he said.

3. Buy quality

If a company is temptingly cheap but there's little basis for future growth, don't buy it.

"Stick with quality is my advice," Mr Barker said about picking stocks amid the market downturn.

Healthcare and diversified financial stocks are AFIC's picks thanks to an ageing population, while companies that source their revenue from overseas markets are also attractive.

The LIC has bought stakes in companies such as annuities giant Challenger and Macquarie Group.

"It's about buying good, quality companies that have strong businesses through cycles," he said.

4. Stay for the long haul

"We tend to try and hold a stock for at least 10 years," Mr Millner said.

While the thought of clinging to a company for a decade might not be every retail investor's cup of tea, holding a stock for a few years rather than dumping them at the first sign of trouble could yield strong growth potential.

Investors who bide their time and reap the dividends from blue chip companies or businesses with strong fundamentals will benefit through the volatility.

"We're in this for this for the long haul, and we do like the thematics of healthcare in particular with an ageing population."

BKI has been buying stock in Ramsay Healthcare and Sonic Healthcare as part of their long term investment strategy.

The company returned 10.9 per cent for the year to December, beating the S&P/ASX300 Index's 2.8 per cent over the same period.

Read more:

Tuesday, 19 January 2016

When to Buy? FIVE powerful forces having extremely powerful influence on the general level of stock prices either by influencing mass psychology or by direct economic operation..

All types of common stock investors might well keep one basic thought in mind; otherwise, the financial community's constant worry about and preoccupation with the danger of downswings in the business cycle will paralyze much worthwhile investment action.

This thought is the current phase of the business cycle is but one of at least five powerful forces.  

All of these forces, either by influencing mass psychology or by a direct economic operation, can have an extremely powerful influence on the general level of stock prices.

The other four influences are:

  1. the trend of interest rates,
  2. the overall governmental attitude toward investment and private enterprise,
  3. the long-range trend to more and more inflation, and 
  4. possibly most powerful of all - new inventions and techniques as they affect old industries.

These forces are seldom all pulling stock prices in the same direction at the same time.

Nor is any one of them necessarily going to be of vastly greater importance than any other for long periods of time.

#  So complex and diverse are these influences that the safest course to follow will be the one that at first glance appears to be the most risky or riskiest.

#  This is to take investment action when matters you know about a specific company appear to warrant such action.

#  Be undeterred by fears or hopes based on conjectures, or conclusions based on surmises.

When to buy? You have some money to invest. Should you completely ignore the future trend of the business cycle?


# Does this mean that if a person has some money to invest he should completely ignore what the future trend of the business cycle may be and invest 100% of this fund the moment he has found the right stocks and located a good buying point, as indicated above?

A depression might strike right after he has made his investment.

Since a decline of 40 to 50% from its peak is not at all uncommon for even the best stock in a normal business depression, is not completely ignoring the business cycle rather a risky policy?

1.   For those in the happy position of having a backlog of well-chosen investments bought comfortably below present prices.


This risk may be taken in stride by the investor who, for a considerable period of time, has already had the bulk of his stocks placed in well-chosen situations.

If properly chosen, these should by now have already shown him some fairly substantial capital gains.

But now, either because he believes one of his securities should be sold or because some new funds have come his way, such an investor has funds to purchase something new.

UNLESS it is one of those rare years when speculative buying is running riot in the stock market and major economic storm signals are virtually screaming their warnings (as happened in 1928 and 1929), this class of investor should ignore any guesses on the coming trend of general business or the stock market.

# Instead, he should invest the appropriate funds as soon as the suitable buying opportunity arises.

2.  For those NOT in the happy position of having a backlog of well-chosen investments bought comfortably below present prices.


Perhaps this maybe the first time they have funds to invest.

Perhaps they may have a portfolio of bonds or relatively static non-growth stocks which at long last they desire to convert into shares that in the future will show them more worthwhile gains.

If such investors get possession of new funds or develop a desire to convert to growth stocks after a prolonged period of prosperity and many years of rising stock prices, should they, too, ignore the hazards of a possible business depression?

Such an investor would not be in a very happy position if, later on, he realized he had committed all or most of his assets near the top of a long rise or just prior to a major decline.

This does create a problem.  However, the solution to this problem is not especially difficult - as in so many other things connected with the stock market, it just requires an extra bit of patience.

# This group should start buying the appropriate type of common stocks just as they feel sure they have located one or more of them.

# However, having made a start in this type of purchasing, they should stagger the timing of further buying.

# They should plan to allow several years before the final part of their available funds will have become invested.

By so doing, if the market has a severe decline somewhere in this period, they will still have purchasing power available to take advantage of such a decline.  

If no decline occurs and they have properly selected their earlier purchases, they should have at least a few substantial gains on such holdings.

This would provide a cushion so that if a severe decline happened to occur at the worst possible time for them - which would be just after the final part of their funds had become fully invested - the gains on the earlier purchases should largely, if not entirely, offset the declines on the more recent ones.

No severe loss of original capital would, therefore, be involved.

Additional notes:

There is an equally important reason why investors who have not already obtained a record of satisfactory investments, and who have enough funds to be able to stagger their purchases should do so.

#  This is that such investors will have had a practical demonstration, prior to using up all their funds, that they or their advisors are sufficient masters of investment technique to operate with reasonable efficiency.

In the event that such a record had not been attained, at least, all of an investor's assets would not be committed before he had had a warning signal to revive his investment technique or to get someone else to handle such matters for him.

When to buy? Great companies that ran into temporary corporate troubles and those with yet to be recognised worthwhile improvement in earnings, maybe buying opportunities.

1.  Great companies that ran into temporary corporate troubles maybe buying opportunities.

In short, the company into which the investor should be buying is the company which is doing things under the guidance of exceptionally able management.

A few of these things are bound to fail.

Others will from time to time produce unexpected troubles before they succeed.

The investor should be thoroughly sure in his own mind that these troubles are temporary rather than permanent.

# Then if these troubles have produced a significant decline in the price of the affected stock and give promise of being solved in a matter of months rather than years, he will probably be on a pretty safe ground in considering that this is a time when the stock may be bought.

2.  Buying the right sort of company with a worthwhile improving  in earnings that has not yet produced an upward move in its price.

All buying points do not arise out of corporate troubles.

Another type of opportunity sometimes occurs.

What is the common denominator?

# It is that a worthwhile improvement in earnings coming in the right sort of company, but that this particular increase in earnings has not yet produced an upward move in the price of that company's shares.

Whenever this situation occurs the right sort of investment may be considered to be in a buying range.

Conversely, when it does not occur, an investor will still in the long  run make money if he buys into outstanding companies.

However, he had then better have a somewhat greater degree of patience for it will take him longer to make this money and percentage-wise it will be a considerably smaller profit on his original investment.


Additional notes:


Does this mean that if a person has some money to invest he should completely ignore what the future trend of the business cycle may be and invest 100% of this fund the moment he has found the right stocks and located a good buying point, as indicated above?

A depression might strike right after he has made his investment.

Since a decline of 40 to 50% from its peak is not at all uncommon for even the best stock in a normal business depression, is not completely ignoring the business cycle rather a risky policy?

When to Buy? When to Sell? Learning from Philip Fisher describing a fund's investment into American Cyanamid share.

When to Buy?

Philip Fisher wrote:

"Immediately prior to the 1954 congressional elections, certain investment funds took advantage of this type of situation.  For several years before this time, American Cyanamid shares had sold in the market at a considerably lower price-earnings ratio than most of the other major chemical companies.  I believe this was because the general feeling in the financial community was that, while the Lederle division represented one of the world's most outstanding pharmaceutical organizations, the relatively larger industrial and agricultural chemical activities constituted a hodge-podge of expensive and inefficient plants flung together in the typical "stock market" merger period of the  booming 1920's.  These properties were generally considered anything but a desirable investment."

"Largely unnoticed was the fact that a new management was steadily but without fanfare cutting production costs, eliminating dead wood, and streamlining the organization.  What was noticed was that this company was'making a huge bet' - making a major capital expenditure, for a company its size, in a giant new organic chemical plant at Fortier, Louisiana.  So much complex engineering was designed into this plant that it should have surprised no one when the plant lagged many months behind schedule in reaching the break-even point.  As the problems at Fortier continued, however, the situation added to the generally unfavourable light in which American Cyanamid shares were then being regarded.  At this stage, in the believe a buying point was at hand, the funds to which I have already referred acquired their holdings at an average price of 45 3/4.  This would be 22 7/8 on the present shares as a result of a 2 for 1 stock split which occurred in 1957."

"What has happened since?  Sufficient time has elapsed for the company to begin getting the benefits of some of the management activities that were creating abnormal costs in 1954.  Fortier is now profitable.  Earnings have increased from $1.48 per (present) common share in 1954 to $2.10 per share in 1956 and promise to be slightly higher in 1957, a year in which most chemical (though not pharmaceutical) profits have run behind those of the year before.  At least as important, 'Wall Street; has come to realize that American Cyanamid's industrial and agricultural chemical activities are worthy of institutional investment.  As a result, the price-earnings ratio of these shares has changed noticeably.  A 37 percent increase in earnings that has taken place in somewhat under 3 years has produced a gain in market value of approximately 85 percent."

Since writing these words, the financial community's steady upgrading of the status of American Cyanamid appears to have continued.  With earnings for 1959 promising to top the previous all-time peak of $2.42 in 1957, the market price of these shares has steadily advance.  It now is about 60, representing a gain of about 70 percent in earning power and 163 percent in market value in the five years since the shares referred to were acquired.

In 1954 Cyanamid stock was purchased by "certain funds" referred to by Philip Fisher in his original edition.  These funds are no longer retaining the shares, which were sold in the spring of 1959 at an average price of about 49.  This was of course significantly below the current market (60) but still represented a profit of about 110 percent.

When to Sell?

The size of the profit had nothing whatsoever to do with the decision to sell.

There were two motives behind the decision.

1.  One was that the long-range outlook for another company appeared even better.  While not enough time has yet passed to give conclusive proof one way or the other, so far comparative market quotations for both stocks appear to have warranted this move.

2.  There was a second motive behind this switch of investments which hindsight may prove to be less credible.  This was concern that in relation to the most outstanding of competitive companies, American Cyanamid's chemical (in contrast to its pharmaceutical) business was not making as much progress in broadening profit margins and establishing profitable new lines as had been hoped.  Concern over these factors was accentuated by uncertainty over the possible costs of the company's attempt to establish itself in the acrylic fiber business in the highly competitive textile industry.  This reasoning may prove to be correct and still could turn out to have been the wrong investment decision, because of bright prospects in the Lederle, or pharmaceutical division.  These prospects have become more apparent since the shares were sold.  The possibilities for a further sharp jump in Lederle earning power in the medium-term future center around (1) a new and quite promising antibiotic, and (2) in time a sizable market for an oral "live" polio vaccine, a field in which this company has been a leader.  These developments make it problematic and a matter that only the future will decide as to whether this decision to dispose of Cyanamid shares may not have been an investment mistake.  


Additional Notes:


Contrary to Buffett, Fisher is looking for companies that "will have spectacular growth in their per-share earnings." (Buffett is primarily concerned with consistent and handsome returns on equity.) Buffett and Fisher do agree on the worthlessness of macroeconomic forecasting. Fisher writes, "The conventional method of timing when to buy stocks is, I believe, just as silly as it appears on the surface to be sensible. This method is to marshal a vast mass of economic data…I believe that the economics which deal with the forecasting business trends may be considered to be about as far along as was the science of chemistry during the days of alchemy in the Middle Ages." Fisher prefers to buy into outstanding companies when their earnings are temporarily depressed, and so consequently is the share price, because of a new product or process launch. "In contrast to guessing which way general business or the stock market may go, he should be able to judge with only a small probability of error what the company into which he wants to buy is going to do in relation to business in general."

Stock monitoring and when to sell
• Use a three-year rule for judging results if a stock is
underperforming but no fundamental changes have
• Hold stock until there is a fundamental change in its
nature or it has grown to a point where it will no longer
be growing faster than the overall economy.
• Don’t sell for short-term reasons.
• Sell mistakes quickly, once they are recognized.
• Don’t overdiversify—10 or 12 larger companies is
sufficient, investing in a variety of industries with different