Sunday, 29 March 2015



Here’s a question for you: what kind of business becomes more attractive as an investment proposition the more expensive it becomes?

The answer – apparently – is just about any business that has a strategy of acquiring other businesses.
Here’s how the logic works. Suppose you are the CEO of a company whose shares trade at a price/earnings of say 20x. That’s a robust multiple and demands a certain amount of growth. If your business doesn’t have the necessary organic growth, you will need to deliver the expected growth via acquisition. The good news is that you can buy companies in the same line of business from private sellers, and the multiples paid in the private market are much lower than 20x; perhaps even in the single digits.
This difference in multiple means that you can issue your own shares to acquire the privately held businesses, and achieve an automatic Earnings Per Share (EPS) uplift. The earnings attached to the shares you issue (at 20x) are much lower than the earnings you acquire in return, and so by the magic of arbitrage, your shareholders have achieved earnings (and presumably value) uplift.
Some acquisitions create value through synergy benefits, but for this strategy it is probably better to avoid that sort of thing. Integrating the acquired businesses and extracting the synergy benefits is troublesome, and likely to distract you from the main game. You are probably better off focusing on acquisitions that don’t require much integrating. That way you can do more acquisitions in a given space of time, and ….. achieve more EPS uplift!
This is advantageous for your strategy, as faster EPS uplift will justify a higher multiple being ascribed to your shares, and this in turn will increase the ratings differential between your shares and the businesses you are acquiring. A higher rating means a more magical arbitrage value.
In this way, you should be able to see that the more expensive your company’s shares become, the more effective your growth strategy becomes, and the whole thing becomes a kind of virtuous cycle.
…except that the logic is a tiny bit circular.
If for some reason your ratings were to fall, or private acquisition targets at low multiples were to become scarce, the whole charade might just start to unravel in the same way that it came about. A declining share price could wipe out the value creation potential of your strategy and justify an ever decreasing share price.
Here’s my tip: if you see a broker finding virtue in an elevated price/earnings multiple by pointing out that it facilitates EPS accretive acquisitions, it may be wise to count the seats between you and the exit row.
Tim Kelley is Montgomery’s Head of Research and the Portfolio Manager of The Montgomery Fund.

Thursday, 26 March 2015

Take On Risk With A Margin of Safety

When investing, it is well accepted that one of the main things you should focus on is risk. However, modern investment theory mainly focuses on the volatility of an asset in its treatment of risk. The margin of safety theory is a little different - it argues that downward spikes of volatility make stocks less risky. This is an important concept to grasp in depth, because common risk theories can lead to missed opportunities. Investing gurus Benjamin Graham and Warren Buffett were instrumental in developing margin of safety. Read on to find out how this theory helped propel their portfolios to meteoric heights.
Beta's Misgivings

In general, people do not like surprises. More precisely, people do not like adverse surprises. Because investors are assumed to be more averse to losing money than gaining it, modern investment theory views the volatility of an asset, as measured by its beta, as the main component of risk. The theory implies that investors should pay less for an asset with a higher beta.
One problem with beta is that it implies that if an asset's value suddenly drops, even due to irrational market behavior, that it becomes more risky because it will have a higher beta. We'll poke some holes in this view in moment, using an example from Warren Buffett.
An Alternate Strategy of Risk

Introduced by the father of value investing, Benjamin Graham, and notably implemented by Warren Buffett, margin of safety was presented as a different view of risk and how to protect against it. Graham's concept is not new. He first presented his investing style with David Dodd in 1934's "Security Analysis" and later with his more accessible book, "The Intelligent Investor", which was first published in 1949.
Graham characterized volatility as "Mr. Market" coming each day to buy from you or sell to you. Graham hoped to buy assets that Mr. Market would sell to him with a 50% margin of safety. This, essentially, would be like trying to buy a dollar for $0.50.
Graham discussed how companies all have an intrinsic measurable value. When Graham first pitched and practiced this idea, information on companies was not nearly as easy to access. He would search through the financial statements and look for what he called net-nets, or companies trading below their liquidation values.
Graham would take a company's current assets with considerable deductions, and subtract all of the liabilities on the balance sheet. At its heart, Graham's net-net investing is the most conservative value approach, and involves very little risk if done right.
Example - Finding A Company\'s Net-Net
ABC Company has the following balance sheet and market capitalization:
Cash $250
Cash Equivalents $50
Accounts Receivable (A/R) $100
Inventories $100
Total Liabilities $300
Share Price $62.50

Cash and cash equivalents are good to go, we have $300 there. Next, we turn to A/R, some of which will not be paid. Usually we have a net A/R number on the balance sheet, indicating the amount of receivables the company expects to recover. If we have it, this net number is based on the company's history of collecting receivables, and is a good indicator, but we would still discount it a little for added safety.
In this scenario, we have a gross A/R number. Again we don't expect to recover it all, but ABC is known to have a fairly reliable client base and we could easily anticipate recovering around 80% of A/R - to be even more conservative we will only factor in recovering 75%. Many investors may want to take a look at the company's allowance for doubtful accounts in their financial statements as a method for gauging an accurate recovery percentage, but in this case, we'll value A/R at $75 ($100 x 0.75). Finally, there is ABC's inventory. ABC has competitors, which we could assume, at the very least, would buy the inventory for half its value. So we take the inventory's value at $50 ($100 x 0.5).

SEE: Volatility's Impact On Market Returns

We end up with marked down current assets of $425 ($300 + $75 + $50), and total liabilities of $300. This net-net is worth $125 ($425 - $300), not even accounting for any real estate or other long-term assets the company might have. With the company selling at only $62.50 in the market, this is a net-net with a 50% margin of safety. Paying half of a company's net-net value was Graham's goal, and at most, he would pay two-thirds of a company's net-net value, for a 33% margin of safety. In our example, we have a 50% buffer between the market value of the company and our conservative valuation of the company's current assets. By only buying at a steep discount to our valuation, this margin of safety provides its own built-in measure against the risk of mistakes in our calculations.
Let Volatility Be Your Friend

This process of investing did not guarantee success, but with research and hard work, finding one of these scenarios was about as close to a sure thing as you could get. A lot has changed, and Graham's net-nets have essentially disappeared in the modern market. With the quick and widespread dissemination of information, markets have become somewhat more efficient.
While net-nets are disappearing, investors can see that the market provides sales on assets quite often. The concept of buying companies with an adequate margin of safety still remains, and has been practiced with great success by many value investors, most notably Warren Buffett.
Example - Taking the Value of Long-Term Assets Into Account
In the ABC example, we gave absolutely no value to the company\'s long term assets. Let\'s return to the example and suppose that that the company\'s share price is now at $200. We calculated its net-net worth at $125, so according to that it would not be a good value, but we note that ABC also has the following assets on its books:
Plant, Property, & Equipment $200
Long-Term Bonds $100

We notice from some research that the plants on the company's balance sheet have likely appreciated because property values have gone up in that area. However, we will remain very conservative in this example and still value it at $200. Next, with the company's long-term bonds, we may worry about the market value if the bonds need to be sold quickly. We will only accept 75% of the value, and value the bonds at $75 ($100 x 0.75). We end up with an asset value of $400 (net-net worth of $125 + $200 + $75). Again, we can buy the stock of this company with a 50% margin of safety at its current market price of $200.
This again seems like a home run of an investment. We are still being conservative, and we ignored any assets that could be off ABC's books, such as the appreciated value of its real estate. Other hidden assets are brands, exceptional management, competitive advantages, etc. There is much to be said about the market value of hidden assets, but the point will remain the same.
Don't Run From Beta

Now looking strictly at beta, let's say ABC had a beta of 1.5. After all of our work, we decide to go to bed and buy tomorrow. However, the next day, "Mr. Market" decides to take the price of ABC down to $150, while the rest of the market stays pretty flat. This sharp 25% decline in ABC stock makes it riskier according to beta.
However, according to Warren Buffett in his 1993 letter to shareholders this altered perception of risk is misleading:
"Under beta-based theory, a stock that has dropped very sharply compared to the market - as had Washington Post when we bought it in 1973 - becomes "riskier" at the lower price than it was at the higher price. Would that description have then made any sense to someone who was offered the entire company at a vastly-reduced price?"
What this means is that volatility is our friend in this scenario. We did the work to value the company, and now Mr. Market is just offering it to us at a steeper discount and a higher margin of safety. If we had already made the purchase before the decline, we might kick ourselves for bad timing, but according to our research, an investment in ABC is still worth much more than what we paid.
Take a Page From the Masters

The concept of margin of safety as practiced by Warren Buffett is not that complicated. These are fairly simple ideas, and should teach us all not to rely simply on volatility as a judge of risk. Many common theories of risk make volatility out to be a bad thing, and if a stock's sea becomes choppy, some investors may sail for calmer waters. But take a cue from Warren Buffett. He, and other value investors, get excited in volatile and down markets. If you invest carefully, and with an adequate margin of safety, Mr. Market's mood swings can lead to great opportunities.

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Tuesday, 24 March 2015

The Shrinking Ringgit

From 1980 until 2012, Malaysia GDP per capita PPP averaged US$9,336.30, reaching an all time high of US$14,774.60 in December of 2012 and a record low of US$5,063.40 in December of 1980.

Maximising your ringgit

With all these in mind, what then can you do to stretch your ringgit to its fullest? Sjimons lists eight tips to help the average consumer trim costs and spend wisely:

A. If you have savings beyond two or three times your monthly income, don’t let them sit idle in a low-interest deposit account.

1) Invest a portion of your monthly income in Amanah Saham Bumiputera/National schemes. These have provided average effective yields of 8.81 and 6.11 per cent respectively over the past three years. Although there is no upside through capital appreciation, there is no risk of capital depreciation either.

2) Invest a portion of your savings in Real Estate Investment Trusts (REITs). By law, at least 90 per cent of taxable income is required to be paid out on a quarterly basis. Some REITs even have monthly payouts to unit holders. Yields range between 4.58 per cent  to 7.52 per cent across all 14 Bursa-listed REITs. This is an especially good project for people looking to retire who want to create a regular income stream.

Saturday, 21 March 2015

3 legs of Margin of Safety

Yes, this is the single most important thing you should know in investing.

ALWAYS buy with a margin of safety. Margin of safety issues are both qualitative and quantitative.

Let me show where I look for these margin of safety factors in my stock selection. There are 3 areas where one should look for margin of safety. Let's call these the 3 legs of Margin of Safety. Here they are.

1. QUALITY (Good to great quality growth stocks, with durable competitive advantage)

2. MANAGEMENT (Managers with integrity, intelligence and hardworking. Operational efficiency: Profit margin trends, ROE trends, and D/E trends that are good/great, maintained or improving)

3. VALUATION (Fair to bargain prices for Great companies, Big bargain prices for good companies.)

Well, choose your picks.

Yes, you can get great bargains too in foraging in gruesome companies that are selling at big bargain prices. Often, many of these remain gruesome and the prices may even continue to go down more due to fundamental deterioration in their businesses.

You have a build in margin of safety, IF you have the ability to pick good or great stocks that are selling at bargain or fair prices, especially when your investing horizon in holding these stocks are for the long term (>5 years). Warren Buffett teaches another margin of safety criteria of his own - that it is better to buy a great stock at fair price, than a fair stock at great price. Surely, he did not preach this without a basis.

If you dwell deeper into this statement, although many may look at this from the superior returns that the great stock offer over the good stock, though bought at perceived fair price (instead of bargain prices for a good stock), it is just another way of saying that the margin of safety for great stocks is better than for a good stock as you are more certain of the growth and earnings power of the great companies. This high probability of being right in projecting the earning power of the great companies is where the margin of safety lies.

In the gruesome company, they are termed gruesome because their earning power were non-existent, deteriorating or even un-predictable over the short or the long term.

I advise that if the companies you study fail in the QUALITY AND MANAGEMENT ISSUES, don't bother with the valuation. Keep the study and proceed no further with its valuation since we are only seeking to invest in stocks for the long term. There are so many other stocks to study for your LONG TERM portfolio. Your long term portfolio should only include the best quality stocks that are projected to deliver returns of > 15% or more per year (with reinvestment of the dividends).

When would you buy these stocks that have satisfied the quality and management issues (the first and second legs of the margin of safety) and that you have in your "to invest" list? Yes, you then look for a good price to buy, the third and last leg of margin of safety. This is when the price offered promises safety of capital (upside reward: downside risk of > 3:1) and a projected annualised return of > 15% per year.

Putting the 3 legs of margin of safety issues into perspective.

1. I am looking to populate or invite a company to join my esteem group of great companies in my portfolio for the LONG TERM.

2. I stress on 3 legs of margin of safety issues.

3. The first and second legs of my Margin of Safety issues look at QUALITY AND MANAGEMENT.

4. Why are they important? These qualities will allow me to predict their earning power, the most important thing that is going to deliver great returns to my portfolio.

5. The third or last leg of my Margin of Safety issues is also important. By buying at low prices, my upside: downside ratio is in my favour (I want at least >3:1, needs a lot of patience), thereby protecting my downside. A lower price gives me an additional return when the stock is revalued at its fair price.

6. One is investing for the long term, and often if the stock is a great stock with great earning power, you virtually need not have to sell. The total return after many years is mainly contributed by its earnings power, the great bargain price you bought into offer you an additional short term gain, which contributes a little only to the overall return over the long term, (though it was a big return over jthe short term.)

7. Stay focus on the long term.

Friday, 20 March 2015

Valuation in a Business Divorce

Valuation in a Business Divorce
Terry Silver, The Legal Intelligencer
March 19, 2015

My advice to lawyers and CPAs is to prepare your clients for the prospect of a business divorce. A business relationship is no different than a marital one; people change, circumstances change, and people grow (and don’t grow) in different directions. And by “preparing for a business divorce,” I am referring to the need to create an operating agreement from the outset of a business relationship to address the following issues, if and when they arise:

Death of an equity owner;
Disability of an equity owner;
Sale of an equity interest to a third party;
Termination of an equity owner’s employment; and
The subject of this article: the predetermined steps to value an equity interest.

When a new business begins, financial resources are usually devoted to its tangible needs, while intangible needs are usually delayed. An operating agreement is typically recognized as an intangible need that can wait until cash flow improves. I, however, advise both new and newer business owners to negotiate the terms of an operating agreement as early in the business life cycle as possible, as once issues develop, it will be too late to negotiate a mutually acceptable operating agreement.

To address valuation, an operating agreement typically will either provide a specific method to value the business, or will designate the means by which to value the business. For example, the operating agreement can specify a methodology such as 5 x EBITDA or 1.5 x revenue. I strongly advise against this approach for two reasons: (1) The person selecting the valuation approach is most likely not qualified in business valuation, so the method selected may be flawed; and (2) there is no one correct way to value a business. As time and circumstances change, so too may the appropriate method to value a business change.

For these reasons, a fixed valuation method, to be used for all time, is ill-advised. I recommend the operating agreement specify the business be contemporaneously and independently valued, and the valuation be binding, as to avoid time-consuming and costly litigation. I further advise the operating agreement specify the credentials of the business valuator chosen to insure a credible valuation product. Commonly accepted valuation credentials include ASA, CVA, ABV and CFA.

Lastly, there may be a dispute between owners in the selection of the business valuator. This can be avoided by incorporating a provision in the operating agreement that enables each owner to select a business valuator. These two business valuators, in turn, jointly select the final business valuator, whose valuation opinion will be binding. This is a lesser used provision, as it is almost always preferable for the parties in dispute to choose a mutually acceptable valuator.

Taking the time in the early stage of a business to address potential adversarial issues via the operating agreement will save a great deal of time, anxiety and money once problems develop between owners.

Terry Silver is a partner at Citrin Cooperman, a full-service accounting, tax, and consulting firm with offices located throughout the Northeast. Based in Citrin Cooperman’s Philadelphia office, Silver focuses his attention on business valuation services and mergers and acquisitions. To learn more, visit

### Attractive Buying Opportunities arise through a Variety of Causes

Attractive buying opportunities for the enterprising investor arise through a variety of causes.

The standard or recurrent reasons are
(a) a low level of the general market and
(b) the carrying to an extreme of popular disfavor toward individual issues. 

Sometimes, but much more rarely, we have the failure of the market to respond to an important improvement in the company's affairs and in the value of its stock.

Frequently, we find a discrepancy between price and value which arises from the public's failure to realise the true situation of a company - this in turn being due to some complicated aspects of accounting or corporate relationships.

It is the function of competent security analysis to unravel such complexities and to bring the true facts and values to light.

Benjamin Graham
Intelligent Investor


Attractive buying opportunities (discrepancy between price and value) occur due to various causes:
1.  low level of the general market
2.  extreme of popular disfavour towards individual stocks
3.  failure of market to respond to improvement in the company
4.  failure to realise hidden value in the company due to some complicated aspects of accounting or corporate relationships

Monday, 16 March 2015

How Many Mutual Funds Routinely Rout the Market? Zero

The bull market in stocks turned six last Monday, and despite some rocky stretches — like last week, when the market fell — it has generally been a very pleasant time for money managers, who have often posted good numbers.

Look more closely at those gaudy returns, however, and you may see something startling. The truth is that very few professional investors have actually managed to outperform the rising market consistently over those years.

In fact, based on the updated findings and definitions of a particular study, it appears that no mutual fund managers have.

I wrote about the initial findings of that study last summer. It is called “Does Past Performance Matter? The Persistence Scorecard,” and it is conducted by S.&P. Dow Jones Indices twice a year. The edition of the study that I focused on began in March 2009, the start of the bull market.

It included 2,862 broad, actively managed domestic stock mutual funds that were in operation for the 12 months through 2010. The S.&P. Dow Jones team winnowed the funds based on performance. It selected the 25 percent of funds with the best returns over those 12 months — and then asked how many of those funds actually remained in the top quarter in each of the four succeeding 12-month periods through March 2014.

The answer was remarkably low: two.

Just two funds — the Hodges Small Cap fund and the AMG SouthernSun Small Cap fund — managed to hold on to their berths in the top quarter every year for five years running. And for the 2,862 funds as a whole, that record is even a little worse than you would have expected from random chance alone.

In other words, if all of the managers of the 2,862 funds hadn’t bothered to try to pick stocks at all — if they had merely flipped coins — they would, as a group, probably have produced better numbers. Instead of two funds at the end of five years, basic probability theory tells us there should have been three. (If you’re curious, I explained how the math works in a subsequent column, “Heads or Tails? Either Way, You Might Beat a Stock Picker.”

The study seemed to support the considerable body of evidence suggesting that most people shouldn’t even try to beat the market: Just pick low-cost index funds, assemble a balanced and appropriate portfolio for your specific needs, and give up on active fund management.

The data in the study didn’t prove that the mutual fund managers lacked talent or that you couldn’t beat the market. But, as Keith Loggie, the senior director of global research and design at S.&P. Dow Jones Indices, said in an interview last week, the evidence certainly didn’t bolster the case for investing with active fund managers.

“Looking at the numbers, you can’t tell whether there is skill involved in what they do or whether their performance is just a matter of luck,” Mr. Loggie said. “I believe that many of them do have skill. But even if they do have it, based on how they’ve done in the past you really can’t predict how they will perform in the future.”

Still, those two funds did manage to perform splendidly in that study. Their stubborn persistence at the top of the heap over that five-year period suggested that there was some hope for active fund managers. If they could do it, after all, others could, too.

But we’re now about two weeks away from the completion of another 12 months since the end of that study, and it’s been a mediocre stretch, at best, for those two mutual funds. When the month is over, to borrow from Agatha Christie, it looks as though we’ll be saying: And then there were none.

Here are the dismal statistics: The SouthernSun Small Cap fund has actually lost money for investors over the 12 months through Thursday. It was down 3.2 percent, according to Morningstar, and for the nine months through December, it was in the bottom quartile of funds in the S.&P. Dow Jones study. The Hodges Small Cap fund has done better, gaining almost 6 percent through Thursday. S.&.P. Dow Jones Indices says that put it in the third quartile — or second-to-worst one — through December. While it’s mathematically possible, it is highly unlikely that either will climb to the top quartile in the next few weeks, Mr. Loggie said.

Michael W. Cook, the lead manager of the SouthernSun Small Cap fund and the founder of the firm that runs it, was traveling last week and was unavailable to comment for this column. Craig Hodges, manager of the family-run Hodges Small Cap fund in Dallas, spoke to me on the telephone and told me that he wasn’t surprised that his fund had stumbled. “We’re not that good,” he said. “It was going to happen sooner or later. We’ve never expected to outperform all of the time.” And despite disappointing recent returns, both funds are still beating the market handily over the last five years.

Late last year, Mr. Hodges said, his fund was hurt by falling energy prices, which pulled down the returns of several of its holdings. “That kind of thing will happen,” he said. “You can expect that.” Last summer, he told me that over the long run — which he said is probably 50 years or more — he expects that his fund will do better than average. And he reiterated that view last week. “We’ll come out all right in the end,” he said. “I think if you pick a good manager, someone you believe in and you think you can trust, you’ve got to stick with him for a long time, and if he’s good, he’ll perform for you.”

Mr. Loggie and his crew are continuing their regular monitoring of mutual fund performance. Right on schedule, they did another winnowing of mutual funds through the five years that ended in September — and they will do another one for the five years ending this month.

The September performance derby produced more funds that ended up consistently in the top quartile — nine of them, Mr. Loggie said. “That’s not surprising,” he said. “Some periods you have more funds, some periods you have less.”

But what you never have, he said, is any indication that past performance predicts future returns. “It’s possible that any one of these funds will beat the market over the long term,” he said. “Some of them will do that. But the problem is that we don’t know which of them will do that in advance.” And that, in a nutshell, is the kernel of the argument for buying index funds.

Warren Buffett’s Awesome Feat at Berkshire Hathaway, Revisited

Warren Buffett is taking a victory lap, and on the 50th anniversary of his reign at Berkshire Hathaway he is entitled to it. From a failing New England textile company, Berkshire became the vehicle for one of capitalism’s greatest investing feats.

Mr. Buffett is one of the world’s richest men — and he has made his shareholders an astounding amount of money. How much, exactly? He cast a spotlight on that question in his annual letter to shareholders, issued on Feb. 28. In a break with tradition, the letter included a table on its second page that enumerates the market return of Berkshire shares, year by year.

Until now, he has favored another method for measuring success: the change in the book value of the shares. That’s an accounting metric. It is, basically, net assets, and he has said it is better than Berkshire’s transitory market price at tracking the company’s true worth.

However you analyze it, Berkshire’s long-term performance has been awesome. Using market value, he says, its shares gained 21.6 percent annually compared with 19.4 percent for book value and 9.9 percent for the Standard & Poor’s 500-stock index, with dividends. Using market returns, the shares gained a cumulative 1,826,163 percent since he took control.

Consider that at the end of 2014, an investment of $100 in the 1965 Berkshire shares would be worth $1,826,163. For the same period, $100 in the index, with dividends, would have grown to $11,196. That’s not shabby. But it’s a lot less than the Berkshire investment — $1,814,967 less.

So it may seem churlish to quibble. But it’s worth raising some questions, if only because Mr. Buffett has invited them. Performance is critical. He says that if he doesn’t outperform the market, investors shouldn’t trust him with their money.

Until this year, he has invoked book value: Page 2 of his letter would include the book value return, the S.&P. return and a third column, “relative results,” which showed how he was doing in comparison with the index. Now that comparison is gone. If that column existed in the current report, it would show that he trailed the S.&.P. again, using book value.

In fact, counting 2014, Mr. Buffett has underperformed the S.&P. 500, using book value, in five of the last six years. That hasn’t happened before. His 2010 letter to shareholders showed Berkshire’s returns over five-year rolling periods. In every single such period until then, he had outperformed the S.&.P., using book value.

By shifting to the market value metric — for the first time in 50 years — his returns look better. Would he have added a table on his golden anniversary showing market value if it had been a bad year for Berkshire in the stock market, whose judgment he has often disdained? I don’t know. Mr. Buffett declined to comment.

In the current letter, Mr. Buffett says that book value and intrinsic value — his estimate of the true value of the company, which he will not publicly reveal — have diverged since Berkshire’s early years. (Intrinsic value, which is at the core of his investing, represents “the discounted value of the cash that can be taken out of a business during its remaining life,” in his words. That calculation is subjective, depending on judgments about factors like a business’s prospects, its management’s ability now and in the future, and the likely path of interest rates and the economy.)

In that letter, he says: “Our emphasis has shifted in a major way to owning and operating large businesses. Many of these are worth far more than their cost-based carrying value. But that amount is never revalued upward no matter how much the value of these companies has increased. Consequently, the gap between Berkshire’s intrinsic value and its book value has materially widened.”

That makes sense. Berkshire’s subsidiaries, like See’s Candies, Geico, the Burlington Northern Santa Fe Railway and Berkshire Hathaway Energy Company, are being carried on Berkshire’s books at a fraction of their real value, he says. On the other hand, retained earnings from those companies, which are reinvested, do, in large part, show up elsewhere in the ledger. That’s why, over the long run, he has said, book value is a worthwhile metric.

His long-term performance is remarkable, using book value, too. He has handily beaten the market over a long career. Still, in a column last year, relying primarily on a rigorous statistical analysis by Salil Mehta, a statistician, author and blogger, I pointed out that Mr. Buffett’s market-beating heroics had dimmed. Last week Mr. Mehta did preliminary crunching of the new numbers. He still found that Mr. Buffett’s performance had declined.

“The new numbers don’t change my probability analysis,” Mr. Mehta said. “Warren Buffett has been an extraordinary investor. But he hasn’t been doing as well recently.”

Mr. Mehta’s calculations show that over his first 25 years at Berkshire, Mr. Buffett’s average annual return was 24 percent using book value and 30 percent using market value, compared with 10 percent for the S.&P. 500. Over his second 25 years, his performance was still outstanding: 15 percent for book value, 14 percent for market value and 10 percent for the index. The last six years reveal a different picture: 13 percent for book value, 15 percent for market value and 17 percent for the index. That’s no disaster, but Mr. Buffett didn’t meet his own standard: He frequently underperformed the market.

There’s no shame in that. Virtually everyone underperforms the market sometimes. To outperform it consistently, as Mr. Buffett has done over most of his career, is exceedingly rare. That’s worth celebrating, even if it’s also worth asking why the recent years haven’t been extraordinary.

Buffett's remarkable performance over the last 50 years.

“The new numbers don’t change my probability analysis,” Mr. Mehta said.
 “Warren Buffett has been an extraordinary investor. But he hasn’t been doing 
as well recently.”

Mr. Mehta’s calculations show that

over his first 25 years at Berkshire, Mr. Buffett’s average annual return was
24 percent using book value and 30 percent using market value, compared 
with 10 percent for the S.&P. 500. 

Over his second 25 years, his performance was still outstanding:
15 percent for book value, 14 percent for market value and 10 percent 
for the index.

The last six years reveal a different picture:
-  13 percent for book value, 15 percent for market value and 17 percent for 
the index.

That’s no disaster, but Mr. Buffett didn’t meet his own standard: He frequently
underperformed the market.

Saturday, 14 March 2015

Saved $1 million and living my dream retirement

Roy Nash long dreamed of retiring at the age of 55.

A self-taught investor, he diligently stashed all the savings he could in stocks and mutual funds. So by 2009, when he did turn 55, he says he had more than $800,000 saved -- enough to step away from his nearly three decade long career at a natural gas distributor in St. Louis.  

Now Nash is 61 and his smart investment choices have helped him grow his retirement savings to more than $1 million.
This sizable nest egg allows him to live the lifestyle he wants. He takes four trips a year to places like Chile and Jamaica and, during the rest of the time, he's volunteering around town, driving the elderly to doctor's appointments or helping poor families file their income taxes.  Now Nash is 61 and his smart investment choices have helped him grow his retirement savings to more than $1 million.
How did he do it?
Nash said he learned about the importance of saving from his mother, who raised him in Marianna, Ark.
"My mom told me when I was real small I should learn how to save some money, because my father was a spendthrift," said Nash. "I took it to heart and went beyond saving. I became an investor."

At the age of 22, he moved to St. Louis and eventually went to work as a controller for the largest natural gas distributor there.

During his free time, he taught himself to invest by reading Money and SmartMoney magazines. That's how he learned to love dividend stocks, high-yield, closed-end funds and mutual funds. He also invests in open-end funds and index funds.
Every year, he socked away between 10% and 15% of his income into his 401(k) plan. Additionally, he also saved another $300 a month in investing accounts with Fidelity.
"I wouldn't consider my savings a sacrifice. I had a good paying job and a budget," Nash said. "I disciplined myself."
And he was mindful about looking after his money and reinvesting gains back into funds and stocks.
"I always reinvested my capital gains," Nash said.
In the beginning, he worked with a brokerage to invest his money. But now he manages his own portfolio.
Nash said he's in an informal retirement club, mostly other retired friends from the office, who he loves teasing about their money managers.
Roy Nash on vacation with his family

"They're paying these guys 1.2% to 2% in fees!" Nash said.
Nash said he collects a healthy sum each year in dividend payouts from his investments in high-yield closed-end mutual funds and preferred stocks.
But still he keeps things simple, living on around $50,000 a year.
Too young for Medicare, Nash gets health insurance through Obamacare, "which has been fantastic," he said.
His retirement income is also enough to satisfy his lust for travel. He takes several trips each year. Often it's just visiting family and friends in Arkansas. But this year, he went to Mardi Gras in New Orleans. He's going to Jamaica in the spring and Santiago, Chile later in the year.
Most days, Nash fills his time by offering his services to the community. During the tax season, he helps the poor prepare their tax forms. And he volunteers for the county, driving housebound elderly residents on much-needed medical errands to doctor's appointments and the pharmacy.
He also plays golf and likes to go fishing, hunting and boating. And he works out at least five days a week, either on a treadmill or a bicycle for between 20 and 30 minutes a day.
"The most important thing I do, is live an active lifestyle," Nash said. "That keeps my doctor bills down."
He has two kids and six grandchildren, ages 3 to 15. Lately, he's become his family's go-to, back-up childcare for sick grandkids.
"If the kids are sick, I go and pick them up, so it doesn't disrupt their parents' work," he said.
And he takes pride in telling his story throughout the community, to help young people learn the importance of saving regularly and early.
"If your income is equal to your expenses, you're not going to save anything," Nash said. "I think anyone making $40,000 a year should be able to save money in St. Louis."

Wednesday, 11 March 2015

Author of “The Millionaire Next Door” dies — 7 key insights from his book

You may not know the name Thomas Stanley, but chances are you’ve heard of “The Millionaire Next Door,” the blockbuster book Stanley cowrote in the mid-1990s.
Wealthy couple watching polo
The book sold more than two million copies and spawned a slew of spin-offs, including “Millionaire Minds” and “Millionaire Women Next Door.” Sadly, Stanley died last week at the age of 71 in a car accident near his home in Marietta, Ga. At the time of his death, he and his daughter, Sarah Fallaw, a psychologist, were working together on the latest iteration of the “Millionaire” series, with a fresh look at millionaires in post-recession America, according to the Atlanta Journal-Constitution.  
Although Fallaw said she would continue her father’s work posthumously, it will be a while before the results of their research are published.
In the meantime, we decided to crack open “The Millionaire Next Door” and revisit some of Stanley and co-author William D. Danko’s findings.
When the duo set out to create a composite of the modern American millionaire, they conducted their own survey of 1,000 high-net-worth individuals. At the time, Stanley was a professor of marketing at Georgia State University and Danko was Stanley’s former research assistant who would go on to become a marketing professor in his own right. What they found was that most millionaires shared seven key traits in common, all of which create a lifestyle “conducive to accumulating money,” they write:  
1. They live well below their means.

  • In their research, Stanley and Danko found most millionaires weren’t heavy spenders. 
  • The majority spent less than $200 on shoes and only half could justify paying more than $235 for a wristwatch. 
  • Another surprising finding: two-thirds of the millionaires they surveyed said they followed a household budget.
2. They allocate their time, energy and money efficiently, in ways conducive to building wealth. 

  • For example, the authors found that millionaires were more likely to invest time planning their household finances than, say, shopping for a car. 
  • On the flipside, most people would have a lot more fun allocating time comparing car prices than sitting down with a financial planner and figuring out how much more money they have to save to be able to stop working at a certain age.
3. They believe that financial independence is more important than displaying high social status

  • “They inoculate themselves from heavy spending by constantly reminding themselves that many people who have high-status artifacts, such as expensive clothing, jewelry, cars, and pools, have little wealth,” the authors wrote.  
4. Their parents did not provide “economic outpatient care.”

  • Millionaires rarely become millionaires in their own right if their parents are constantly financing their lives. 
  • Otherwise, they risk becoming too financially dependent to make their own way.
5. Their adult children are financially self-sufficient.

  • Teaching kids to be self-sufficient not only encourages them to create their own financial security but ensures that they won’t be draining their parents’ finances later on.
6. They are proficient in targeting market opportunities.

  • Essentially, the wealthy become wealthy often by targeting occupations that serve other wealthy people (that’s their “market”). 
  • That’s where the real money is, Stanley and Danko argue. Jobs that serve the wealthy — for example, estate planning, law, accounting — often come with bigger paychecks.
7. They chose the right occupation. 

  • The authors found that roughly half of the millionaires they interviewed owned a business of some sort, but the vast majority said they would not encourage their children to follow in their footsteps. 
  • Millionaire couples with children were five times more likely to send their children to medical school than other parents in America and four times more likely to send them to law school, according to their findings.

Stanley and Danko’s findings may still ring true today, but the audience couldn’t be more different. When the book was published in 1996, the economy was booming and most people we were blissfully unaware of the pending dot-com bubble and bust. And no one knew that in just over a decade, the Great Recession would squeeze the middle class beyond recognition and deeply divide the rich and the poor.
“The Millionaire Next Door” encourages the view that the real millionaires of America — the frugal spenders, the self-made entrepreneurs, the savers “next door” who don’t seek attention or flaunt their wealth — haven’t actually done anything all that extraordinary to achieve financial success.
But, if we learned anything from the Great Recession, it’s that unanticipated setbacks — a job loss, an unlucky diagnosis, a bad mortgage loan, a spouse’s unexpected death — can send anyone’s personal finances teetering. Not to mention factors beyond most people’s control, such as lagging wage growth and rapidly increased fixed costs like housing, health care and education. Despite all we’ve been through, however, the message that anyone can accumulate wealth if they put the work in is one that still sells in America. Books like Stanley's can help inspire good financial habits, but the reality facing most workers today is that they’ll need much more than a seven-step guide to get them there.

Wednesday, 4 March 2015

The Most Successful Dividend Investors of all time

The Most Successful Dividend Investors of all time

Dividend investing is as sexy as watching paint dry on the wall. Defining an entry criteria that selects quality dividend stocks with rising dividends over time and then patiently reinvesting these dividends while sitting on your hands is not exciting. While active traders have a plethora of hedge fund managers on the covers of Forbes magazine there are not many well-publicized successful dividend investors. Even value investing has its own superstars – Ben Graham and Warren Buffett.

I did some research and uncovered several successful dividend investors, whose stories provide reassurance that the traits of successful dividend investing I outlined in a previous post are indeed accurate.

The first investor is Anne Scheiber, who turned a $5,000 investment in 1944 into $22 million by the time of her death at the age of 101 in 1995. Anne Scheiber worked as an IRS auditor for 23 years, never earning more than $3150/year. The one important lesson she learned auditing tax returns was that the surest way to become rich in America is by accumulating stocks. She accumulated stocks in brand name companies she understood andthen reinvested dividends for decades. She never sold, in order to avoid paying taxes and commissions. She also never sold even during the 1972-1974 bear market as well as the 1987 market crash because she had high conviction in her stocks picks. She also held a diversified portfolio of almost 100 individual securities in brand names such as Coca-Cola (KO), PepsiCo (PEP), Bristol-Myers (BMY), Schering Plough (acquired by Pfizer in 2009). She read annual reports with the same inquisitive mind she audited tax returns during her tenure at the IRS and also attended annual shareholders meetings. Anne Scheiber did her own research on stocks, and was focusing her attention on strong franchises which have the opportunity to increase earnings and pay higher dividends over time.

In her later years she reinvested her dividends into tax free municipal bonds, which is why her portfolio had a 30% allocation to fixed income at the time of her death. At the time of her death, her portfolio was throwing off $750,000 in dividend and interest income annually. She donated her whole fortune to Yeshiva University, even though she never attended it herself.

The second investor is Grace Groner, who turned a small $180 investment in 1935 into $7 million by the time of her death in 2010. Ms Groner, who worked as a secretary at Abbott Laboratories for 43 years invested $180 in 3 shares of Abbott Laboratories (ABT) in 1935. She then simply reinvested the dividends for the next 75 years. She never sold, but just held on to her shares.

She was frugal, having grown up in the depression era, and was the classical millionaire next door type of person who was not interested in keeping up with the Joneses. Grace Groner left her entire fortune to her Alma Mater. Her $7 million donation is generating approximately $250,000 in annual dividend income. 

The reason why dividend investors are not highly publicized is because dividend investing is not sexy enough to be featured in the financial mainstream media. In addition to that, it is not profitable for Wall Street to sell you into the idea that ordinary investors can invest on their own. Compare this to mutual funds, annuities and other products which generate billions in commissions for Wall Street, despite the fact that they might not be in the best interest of small investors.

The third dividend investor is Warren Buffett, the Oracle of Omaha himself. In a previous article I have outlined the reasoning behind my belief that Buffett is a closet dividend investor. He explicitly noted in his 2009 letter that "the best businesses by far for owners continue to be those that have high returns on capital and that require little incremental investment to grow". His investment in See's Candy is the best example of that.

Some of Buffett's best companies/stock that he has owned such as Geico, Coca Cola , See's Candy are exactly the types of investments mentioned above. He has mentioned that at Berkshire he tries to stick with businesses whose profit picture for decades to come seems reasonably predictable. Per Buffett the best businesses by far for owners continue to be those that have high returns on capital and that require little incremental investment to grow. In addition, his 2011 letter discussed his dividend income from all of Berkshire Hathaway investments, including his prediction that Coca Cola dividends will keep on increasing, based on the pattern of historical dividend increases.

In this article I outlined three dividend investors, who managed to turn small investments into cash machines that generated large amounts of dividends. They were able to accomplish this through identifying quality dividend growth companies at attractive valuations, patiently reinvesting distributions and in two out of three cases maintaining a diversified portfolio of stocks. These are the lessons that all investors could profit from.

Sunday, 1 March 2015

How Anne Scheiber Amassed $22 Million From Her Apartment

How Anne Scheiber Amassed $22 Million From Her Apartment

By Joshua Kennon
Investing for Beginners

In the mid 1940’s, Anne Scheiber retired from the IRS where she worked as an auditor. Using a $5,000 lump sum she had saved, and a pension of roughly $3,150, over the next 50+ years, she built a fortune from her tiny New York apartment that exceeded $22,000,000 upon her death in 1995 when she left the funds to Yeshiva University for a scholarship designed to help support deserving women. Here are some of the lessons we can learn from this ordinary woman that achieved extraordinary wealth.

1. Do your own research

Sheiber was burnt by brokers during the 1930’s so she resolved to never rely on anyone for her own financial future. Using her experience with the Internal Revenue Service, she analyzed stocks, bonds, and other assets. The result: She owned only companies with which she was comfortable. When markets collapse, one of the best ways to stay the course and maintain your investment program is to know why you own a stock, how much you think it is worth, and if the market is undervaluing it in your opinion.

2. Buy shares of excellent companies

When you’re really in this for the long-haul, you want to own excellent businesses that have durable competitive advantages, generate lots of cash, high returns on capital, have owner-oriented management, and strong balance sheets. Think about everything that has changed in the past one hundred years! We went from horse and buggies to cars to space travel, the Internet, nuclear knowledge, and a whole lot more. Yet, people still drink Coca-Cola. They still shave with Gillette razors. They still chew Wrigley gum. They still buy Johnson & Johnson products.

3. Reinvest your dividends

One of the biggest flaws with both professional and amateur investors is that they focus on changes in market capitalization or share price only. With most mature, stable companies, a substantial part of the profits are returned to shareholders in the form of cash dividends . That means you cannot measure the ultimate wealth created for investors by looking at increases in the stock price.

Famed finance professor Jeremy Siegel called reinvested dividends the “bear market protector” and “return accelerator” as they allow you to buy more shares of the company when markets crash. Over time, this drastically increases the equity you own in the company and the dividends you receive as those shares pay dividends; it’s a virtuous cycle. In most cases, the fees or costs for reinvesting dividends are either free or a nominal few dollars. This means that more of your return goes to compounding and less to frictional expenses.

4. Don’t be afraid of asset allocation

According to some sources, Anne Scheiber died with 60% of her money invested in stocks, 30% in bonds, and 10% in cash. For those of you who are unfamiliar with the concept of asset allocation , the basic idea is that it is wise for non-professional investors to keep their money divided between different types of securities such as stocks, bonds, mutual funds, international, cash, and real estate. The premise is that changes in one market won’t ripple through your entire net worth.

5. Add to your investments regularly

Regular saving and investing is important because it allows you to pick up additional stocks that fit your criteria. In addition to the first investment Scheiber made, she regularly contributed to her portfolio from the small pension she received.

6. Let your money compound uninterrupted for a very long time

Probably the biggest reason Anne Scheiber was able to amass such as substantial fortune was that she allowed the money to compound for of half a century. No, that doesn’t mean you have to live the life of a monk or deny yourself the things you want. What it means is that you learn to let your money work for you instead of constantly striving to scrape by, barely meeting expenses and maintaining your standard of living.

To learn about the power of compounding, read Pay for Retirement with a Cup of Coffee and an Egg McMuffin. With only small amounts, time can turn even the smallest sums into princely treasures.