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

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

Managing wealth

YAP MING HUI: Managing wealth like a business
By YAP MING HUI

2008/09/20

MANAGING and maximising wealth is a vastly different kettle of fish from creating wealth. However, all entrepreneurs and business owners who have successfully mastered the art of creating wealth will need to know how to maximise their created wealth, or risk losing it. Managing created wealth becomes even more challenging when it grows tremendously, usually due to the sale or listing of a business.

When business owners sell their enterprises or take their companies public, they will have a huge amount of cash to manage.

Indeed, the task of managing such wealth is similar to managing a company. In other words, you might have sold one business, but as a direct result, you have now gone into the business of managing your wealth, with the goal of maximising it.

Being in the "wealth maximisation business" involves more than simply hiring investment fund managers to invest in listed shares, bonds, real estate, commodities or hedge funds.

In addition to investment, this business involves other critical components like developing a family philosophy concerning the goals for the wealth, establishing an investment policy, selecting good professional advisers and getting family members interested in and educated about the process.

As with any other business, you need proper planning and effective execution for your wealth maximisation.

Where should you start? It makes sense to go over some general issues. Since your family will be directly affected by any decision you make, make sure you get input from your family through family meetings when asking questions like those below:

- What are the goals for your wealth maximisation? Figure out your priorities and take all the financial, mental, physical, family, social and spiritual dimensions into account when formulating your goals. Clearly defining your core values for the family and goals for the shared wealth are critical elements for sustaining the family legacy. Where do you envision your family a generation from now? What are your goals for the wealth?

- Do you want to preserve the "purchasing power" of your assets, striving for returns that outstrip inflation and taxes? What level of risk are you willing to face to gain these higher returns?

- Which ownership structure is appropriate for you? Structuring assets properly has a greater long-term impact on your wealth. At times, its impact is greater than some of your investment decisions. How will the decisions you make about asset ownership structure today affect your children's grandchildren?

- How do you diversify your wealth so that not all your eggs are put in the same basket? What dimensions and levels of diversification should you consider? What alternatives are available out there for you to effectively and efficiently diversify and preserve your wealth? Is your current wealth allocation well diversified?

- Every family faces its own unique set of risks that may deplete or even wipe out its hard-earned wealth. Discussing, identifying, documenting and developing measures to address the risk factors prepare the family with the necessary competencies to weather distressing events.

- How active can you and other family members be in the wealth maximisation process? Documenting the family's mission and a process for decision-making are critical first steps in developing a wealth maximisation framework. How involved will family members be in the wealth maximisation process? Who will make important decisions and how will these important decisions be communicated to the rest of the family?

- How will you ensure the financial education of younger family members? Great wealth carries great responsibility. Family members who are taught that they are stewards or protectors of the family wealth are usually far-sighted in making decisions that are best for the family in the long-term.

- What positive changes do you want to affect in society? Is it important for your family to create a foundation or to develop a philanthropic programme to support your social aspirations? How do you involve your family members and align your family values with your charitable goals?

- What are the benchmarks of successful wealth maximisation? It is important to periodically assess actual performance relative to wealth maximisation goals and the family mission. How does your family incorporate the latest changes in the family and environment to achieve mid-term and long-term goals? How often and how should an assessment be conducted?

- Where can you find professional advisers with the expertise and integrity to work on your behalf and to represent your interests? The most critical issue is to find intelligent, strategic thinkers whose judgment you can trust in advising you about financial decisions. They can facilitate the setting of objectives, the formulation of a strategy and plan, and the correct choice of structures and people to implement and monitor the plan effectively.

How do you identify, engage and motivate the professionals you need to pursue the family's agenda?

According to Sara Hamilton from the Family Office Exchange (FOX), managing wealth successfully, like managing a business, requires thoughtful planning, diligent research and the construction of a fully-integrated plan to coordinate all the components of the process. The steps include documenting a family mission statement, articulating investment goals, and providing beneficiaries of the wealth with the financial information needed to make good decisions. Managing wealth properly is as complicated as managing a business properly.

The ultimate challenge is to synchronise the goals of family members with the necessary strategies and structures required to maximise wealth.

To achieve this, you will need to coordinate a team of experienced professionals to ensure that decisions are made with the goals of the family in mind.

To succeed in your new business of wealth maximisation, it is important that you take enough time to think through the important issues listed above, learn from the experiences of other families who have gone through the experience with success and get your family members to be involved in the process.

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

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© Copyright 2009 The New Straits Times Press (M) Berhad. All rights reserved.

http://www.nst.com.my/Current_News/NST/Sunday/Focus/2354018/Article/pppull_index_html

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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

Managing wealth

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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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