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Keep INVESTING Simple and Safe (KISS) ****Investment Philosophy, Strategy and various Valuation Methods**** The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.

Sunday, 29 March 2009

Making the correct assumptions

NST Online » Focus
2008/06/14

Business: Making the correct assumptions
By : Yap Ming Hui

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IN wealth management, you could go to three different wealth management advisers and get three completely different financial plans depending on the assumptions used in the calculations.

It boils down to the assumptions used by the wealth management advisers.

Some of the key assumptions that will result in the wide variations are: - The expected rate of return (ROI) - Rate of inflation - Marginal tax rate of the person - How long will the person live - The income the person needs to support his lifestyle in retirement

I will now highlight how different assumptions used can affect the amount required for a retirement nest egg.

Wong is 45 years old and earns RM100,000 per annum. He would like to retire at 55 and estimates that he is going to need 60 per cent of his current income (RM60,000, taking into consideration inflation value).

He would like to use two per cent as the rate of inflation and eight per cent as the rate of return.

Based on the above factors, he would need RM991,076 for his retirement by the age of 55. With this amount in place, Wong can afford to spend RM60,000 per year and finish spending his capital at the age of 80.

However, by varying the assumptions used, we can get different results.

Rate of inflation

If Wong used four per cent as the rate of inflation, then the retirement nest egg required would be RM1,465,771 instead of RM991,076.

With a difference of two per cent in rate of inflation, we have a difference of RM474,695 in the amount required for the retirement fund.

The rate of inflation experienced by any individual or family is basically dependent on two main components.

First is the basic inflation factor experienced by the general population. This rate of inflation can be projected by using the rate of consumer price index.

However, each individual and family also experiences an inflation that we term as life style inflation. Life style inflation basically refers to the inflation on those items consumed other than the common household items, for example the car, house to stay in and holiday package.

Since the different inflation rate will influence the end result of any wealth management, it is important to use a rate of inflation which is as accurate as possible.

In an era of high inflation, we need to review the assumed rate of inflation. Without adjusting the rate of inflation, you may under prepare your various financial goals.

Income needed to support retirement living

If Wong decides that 80 per cent rather than 60 per cent of his current income would be sufficient for him to enjoy a comfortable life style then he would need a retirement fund of RM1,321,435 instead of RM991,076.

With a difference of 20 per cent in the income needed for your retirement, we have a RM330,359 difference in retirement fund.

Undeniably, the figure will become more accurate as you get closer to retirement. There is a rule of thumb that suggests a person will need about 60 to 80 per cent of his pre-retirement income. To have a more accurate projection, you must continue to update the calculation as you get closer to retirement age.

How long will you live

Wong chose 80 years as his life expectancy for his retirement plan calculation. If he chooses to use 95 years, the retirement nest egg will change to RM1,166,515 from RM991,076.

It is obvious that the assumptions made on your life expectancy have a relatively smaller impact compared to the other assumptions. If you live longer than you have assumed, then you risk outliving your money.

Rate of return

When we use an eight per cent rate of return, Wong would need RM991,076 by the age of 55. If he were to assume that he could achieve 12 per cent rate of return, he would need RM730,280. With a four per cent difference in the estimated rate of return, we have a difference of RM260,796 in the retirement fund needed.

While you may want a higher rate of return, no one can guarantee what the financial market will earn eventually.

So what rate of return should be used in your financial plan? It should be the rate linked to the economic outlook, your personal asset portfolio mix, the inflation rate and the long-term historical rate of return for your investment asset, less management charges.

In order to have a more accurate financial plan, we must be cautious in deciding various assumptions used in wealth management calculation. Since the impact of using the wrong assumptions could be a financial disaster, you may want to confirm your assumptions with an independent wealth management professional.

In fact, a prudent practice would be to do more than one financial projections in each scenario so that you can see the impact of the different outcomes on your ability to achieve your financial goals.

One financial projection is certainly not enough, not when preparing a business plan, and not when doing a personal financial plan.

Yap Ming Hui is the managing director of Whitman Independent Advisors Sdn Bhd, the first multi-client family office in Malaysia.

http://www.nst.com.my/Current_News/NST/Sunday/Focus/2265087/Article

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My 18 points guide to Successfully compounding your money in Stocks

Be a good stock picker.
Think as a business owner.
Always look at value rather than the price. Do the homework.
Buy and hold is alright for selected stocks.
Compounding is your friend, get this to work its magic.
Mr. Market is there to be taken advantage of. Do not be the sucker instead. BFS;STS.
Always buy a lot when the price is low.
Never buy when the stock is overpriced.
It is alright to buy when the selected stock is at a fair price.
Phasing in or dollar cost averaging is safe for such stocks during a downtrend, unless the price is still obviously too high.
Do not time the market for such or any stocks.
By keeping to the above strategy, the returns will be delivered through the growth of the company's business.
So, when do you sell the stock? Almost never, as long as the fundamentals remain sound and the future prospects intact.
The downside risk is protected through only buying when the price is low or fairly priced.
Tactical dynamic asset allocation or rebalancing based on valuation can be employed but this sounds easier than is practical, except in extreme market situations.
Sell urgently when the company business fundamental has deteriorated irreversibly.
You may also wish to sell should the growth of the company has obviously slowed and you can reinvest into another company with greater growth potential of similar quality. However, unlike point 16, you can do so leisurely.
In conclusion, a critical key to successful investing is in your stock picking ability.

http://myinvestingnotes.blogspot.com/2012/07/my-18-points-guide-to-successfully.html

11 Lessons From Peter Lynch

Peter Lynch taught me:

1. Behind every stock is a company. Find out what it’s doing.
2. Never invest in any idea you can’t illustrate with a crayon.
3. Over the short term, there may be no correlation between the success of a company’s operations and the success of its stock. Over the long term, there’s a 100% correlation.
4. Buying stocks without studying the companies is the same as playing poker – and never looking at your cards.
5. Time is on your side when you own shares of superior companies.
6. Owning stock is like having children. Don’t get involved with more than you can handle.
7. When the insiders are buying, it’s a good sign.
8. Unless you’re a short seller, it never pays to be pessimistic.
9. A stock market decline is as predictable as a January blizzard in Colorado. If you’re prepared, it can’t hurt you.
10. Everyone has the brainpower to make money in stocks. Not everyone has the stomach.
11. Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested.

Lynch’s advice had a profound effect on my stock market approach. He taught me that investment success isn’t the result of developing the right macro-economic view or deciding when to jump in or out of the market. Success is about researching companies to identify those that are likely to report positive surprises.

Capital Expenditure

A great company with a Durable Competitive Advantage will have a ratio of Capital Expenditures to Net Income of less than 25%. Less is better.

Capital Expenditures are expenses on:
- fixed assets such as equipment, property, or industrial buildings
- fixing problems with an asset
- preparing an asset to be used in business
- restoring property
- starting new businesses

A good company will have a ratio of Capital Expenditures to Net Income of less than 50%.

A great company with a Durable Competitive Advantage will have a ratio of less than 25%.

Less is better.

Benjamin Graham's 113 Wise Words

The true investor scarcely ever is forced to sell his shares, and at all times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgement."

Philip Fisher's Wise Words

"The refusal to sell at a loss, while completely natural and normal, is probably one of the most dangerous in which we can indulge ourselves in the entire investment process.

More money has probably been lost by investors holding a stock they really did not want until they could 'at least come out even' than from any other single reason. If to these actual losses are added the profits that might have been made through the proper reinvestment of these funds if such reinvestment had been made when the mistake was first realized, the cost of self-indulgence becomes truly tremendous."

(Common Stocks and Uncommon Profits)

The Ultimate Hold-versus-Sell Test

Here is the overriding primary test, followed by observations on why it is so critically important:

Knowing all that you now know and expect about the company and its stock (not what you originally believed or hoped at time of purchase), and assuming that you had available capital, and assuming that it would not cause a portfolio imbalance to do so, would you buy this stock today, at today's price?

No equivocation. Yes or no?

Answers such as maybe or probably are not acceptable since they are ways of dodging the issue. No investor probably buys a stock; they either place an order or do not.

Here is the implication of your answer to that critical test: if you did not answer with a clear affirmative, you should sell; only if you said a strong yes, are you justified to hold.

Some thoughts on Analysing Stocks (KISS)

Ideally a stock you plan to purchase should have all of the following charateristics:

• A rising trend of earnings dividends and book value per share.
• A balance sheet with less debt than other companies in its particular industry.
• A P/E ratio no higher than average.
• A dividend yield that suits your particular needs.
• A below-average dividend pay-out ratio.
• A history of earnings and dividends not pockmarked by erratic ups and downs.
• Companies whose ROE is 15 or better.
• A ratio of price to cash flow (P/CF) that is not too high when compared to other stocks in the same industry.

Margin of Safety Concept: Stocks should be bought like groceries, not like perfume

The high CAGR in the early years of the investing period, due to buying at a discount, tended to decline and approach that of the intrinsic EPS GR of the companies over a longer investment time-frame.

Chapter 20 - “Margin of Safety” as the Central Concept of Investment

A single quote by Graham on page 516 struck me:

Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions.

Basically, Graham is saying that most stock investors lose money because they invest in companies that seem good at a particular point in time, but are lacking the fundamentals of a long-lasting stable company.

This seems obvious on the surface, but it’s actually a great argument for thinking more carefully about your individual stock investments. If most of your losses come from buying companies that seem healthy but really aren’t, isn’t that a profound argument for carefully studying any company you might invest in?

myinvestingnotes.blogspot.my (Bullbear Buffett Stock Investing Notes)

Sunday, 29 March 2009

Making the correct assumptions

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All equity security investments present a risk of loss of capital

The Ultimate Hold-versus-Sell Test

Some thoughts on Analysing Stocks (KISS)

Benjamin Graham

Sell the losers, let the winners run.

Investment Style

Warren Buffett

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