Tuesday, 30 June 2009

A reputation build over 30 years can be destroyed in 5 minutes.

30 Jun 09, 17:32
RR: If you don't believe, or have some doubts on him.. then just forget about ICAP.
30 Jun 09, 17:32
RR: If TTB is my real life buddy, i think i would have put 90% of my portfolio with him. Just wanna stress again, ICAP = TTB. Believe TTB, hold/buy ICAP.
30 Jun 09, 17:30
RR: cause i actually believes WB said "I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will. "
30 Jun 09, 17:30
RR: So.. so far.. I am not with ICAP yet:) I mostly invest in things that the business itself has its own edge, without really counting on the person in charge.
30 Jun 09, 17:25
RR: the only doubts will be, is TTB a person who I can really believe in? A person with integrity where I can put ALL my savings with him? I personally am not sure..
30 Jun 09, 17:22
RR: So.. my 2 cents is that, if you believe in TTB that his investing style works and he will be employing this investing method as long as he lives. I think, you should keep holding the stock.
30 Jun 09, 17:21
RR: You believe what TTB believes. We believe him, because he has been publishing his method of investing for some time. We believe that he will continue with that style.
30 Jun 09, 17:17
RR: However, it is hard to see any durable competetive advantage ICAP has over other funds. ICAP is all about TTB.. If you are buying into ICAP. You must have known TTB well.
30 Jun 09, 17:16
RR: Taking RM1.80 as current price, ICAP has around 16% compounded return since 2005. As for me, ICAP is one of the business that I can understand and its performance is easy to track.


RR, I find your reasoning interesting and would like to offer my comments here:

The track record of iCAP closed end fund is short. Yes, it has given a very good return (cumulative total return and compound annual return). This cannot be extrapolated to future years. Investment returns are often unpredictable.

Over the longer term, it is generally expected that most funds will give returns close to those of the market returns. This is based on statistics and probabilities. We know that. In fact, given the cost of some funds, most funds will give returns lower that the market return.

If you are an enterprising investor, like Leno, with a proven track record, you should continue your own investing. On the other hand, if you have been an investor who has lost money consistently or with a very poor return from your investment, you should seriously consider whether you should be doing your own investing or otherwise.

The issue of integrity of the fund manager is important and cannot be treated lightly. In the light of Madoff, one cannot be too careful. But then, how do you judge integrity in the person? Review how you judged a person to be your business partner or a lady to be your life partner. What criterias did you use? What outcomes, deemed important, did you factor into these criterias? As much as you and I like to be totally objective, often judgement is also a very subjective matter.

Warren Buffett has written on integrity. He would like his managers to have integrity, intelligence and lots of energy. Above all, integrity. Without integrity, these traits of intelligence and energy in the manager will work against the interest of the owner.

Like Warren Buffett, we should only invest in a fund manager with integrity, intelligence and a lot of energy. The managers of these funds also realise the importance of their integrity in their business and their relationship with their investors. A reputation build over 30 years can be destroyed in 5 minutes.

This assessment of the integrity of the fund manager can best be summed up as difficult, subjective and based on your personal views. This view is also influenced by your interactions with others and this fund manager in the same industry. Eventually, in the majority of situations, it is a personal opinion.

For the defensive investor, what are the options? My personal advice, don't even buy a share, if you are not familiar with equity investing and the market place. It is far too dangerous a place for someone with no investing or financial education. Therefore, park the money in FDs and be grateful for the 'safety of capital' and meagre return these offer. But the risks are those of inflation eroding the real income and capital, and also, not meeting your investing objectives.

The next best thing, is to have friends or relatives who are able to invest for you or to advice you on your investments. I was fortunate to have this guidance for many years. But beware of professionals with some knowledge. I have known of investors who ask their remisiers for some stock recommendations with varying results.

Then, you are still faced with how to invest your money safely, for higher return, over a long period. Who do you turn to now?

Here is my suggested approach to investing into icap fund or any other funds. We start with a very big assumption, that the fund we invest in will perform reasonably well under a good manager, and over the years, the manager will continues to grow the value of the investment.

For the investors of the fund, it would then be the simple matter of investing into the fund at the time when it was trading at a bargain, usually coinciding with the market at a low point. However, there is still another important factor to consider.

It was Peter Lynch (I think), who wrote that during his tenure of his fund, the majority of investors who bought and sold his fund lost money. This was despite the fund growing in value at a compound annual rate of 30% or so, for almost 30 years.

The inference, even if you have selected the right fund or fund manager, your returns may be negative due to factors unrelated to them, but to yourself.

This is what I do for a portion of my money. But then, you are not me. Your circumstances will definitely be different. So, please follow your own analysis and make your own decision. You are the better judge of yourself, always.

Also read:
Games people play
To be a winner, choose the games one wishes to play in carefully. Investing is likewise not dissimilar. One need to have the investing knowledge before "playing this game" intelligently, lest one ends up not winning but losing.

Where is your focus in your investment returns?

Are you focussed on absolute return and capital preservation?

Or, are you more focussed on relative return to a certain benchmark?

Perhaps you are more focussed on one or the other at different market environments. Certainly these are food for thoughts.

But then, it was also ridiculous to an individual investor, for his fund manager to talk about beating a certain market benchmark during the recent severe bear market when the absolute return of the fund was negative and the capital was also down by a large amount!

How To Raise A Rich Daughter

Brown Heidi,
06/29/09 19:00:10 GMT

How To Raise A Rich Daughter

Women hold half of the investable wealth in the U.S. and account for 43% of all Americans who have a net worth of $1.5 million or more. Yet only 10% of asset managers are female, says a new report from the National Council for Research on Women.

Recent studies show that, as with other areas of business, women make investment decisions differently from men. They consider contradictory information and study company fundamentals more carefully before investing. Over the long term, funds run by women, who tend to be more risk-averse in general, outperform those of men. The Hedge Fund Research Diversity Index, for example, which has 50% female managers, returned an annual average 8.21% since 2003, while the broader index returned 5.98%.

That's all well and good, until you consider that many women simply aren't going into finance. The NCRW says a major cause of the dearth of women in finance is the "pipeline"--the supply of future finance professionals. Not enough girls and young women even consider finance as a career choice, so there are fewer candidates for finance jobs and even fewer women-run funds. In part, this stems from girls' lack of interest in science and math--even though studies have shown they have the same aptitude as boys.

The problem starts early, explains Barnard College President Debora Spar, who spoke at a NCRW conference earlier this week.

Part of this might be due to computer games used in schools. Math-based games, noted Spar, are almost always of the "shoot-em-up" variety which appeal to boys; whereas games which the girls prefer such as "Dora the Explorer" are not math-based. Multimedia math tools and early learning toys that appeal to girls are needed, said Spar.

Anecdotally, she said, years ago she taught an elementary school math class; both sexes did equally well at the subject. But within eight months, she saw girls' interest in math wane, while boys remained engaged.

Once in high school, most female students "tend to focus on application-based information," she said. "They think, 'How will trigonometry help me in the real world?' A guy, by contrast, might take finance classes because his friend is doing it or his father's golf buddy is on Wall Street."

To engage girls in math, Spar thinks more female math teachers, from elementary school through college, would help enormously. The National Bureau of Economic Research released a study in May that looked at the difference in math and science performance between male and female students at the U.S. Air Force Academy and found that women who have female math professors tend to stick with the subject until graduation.

But many math departments have few, if any, women math teachers.

A brief survey of three schools show this playing out: At Caltech two of 18 math professors are women, at the University of Virginia four of 28 math professors are women and at the University of Chicago zero out of 32 math professors are women.

With so few women in the pipeline, investors are losing out by not benefiting from women's prudence and women are losing out by not gaining access to the basis of power: big money.

Keep reading at ForbesWoman.


Should you hold iCap?

"Always look at the valuation and the price.
Value a company on a long-term basis.
Many companies are still trading below its long-term valuation. "

Would you hold icap as a fund for your investment?

Let's take a look at this by seeking answers to the following questions.

How good are the fund's managers and analysts?

When investing into icap, one is effectively employing ttb and his team to pick securities for you. ttb has a investment newsletter for many years. His philosophy and strategy are known. The few model portfolios in his newsletter have outperformed the market benchmarks. However, for many investors, his truly transparent real life performance will be gauged on his performance in icap closed end fund.

What is the strategy and how well is it executed?

Using his philosophy and strategy, ttb has consistently added value to the fund he is managing. By sticking to his approach with conviction, he has delivered excellent returns to date. More importantly, there is consistency in the returns during different environment, in good and in bad times of the investing period.

Is the fund a good value proposition?

The cost is lower for this fund than other open-ended funds in the market. As many stocks are bought and held, there is less transaction costs involved too. Also, there are times when you can invest into this fund at a steep discount to its NAV.

Have the fund and its advisor been shareholder-friendly?

Some bloggers hammered ttb on this. They lament that icap should reveal its portfolio at every quarter. icap should at the least inform the shareholders of some of the transactions. If not, how can these investors make an informed decision?

icap does keep investors up to date on changes to their fund, but only once a year. Those who are subscribers of icap newsletter may get an inkling of the stocks bought or sold indirectly.

  • How critical is it for the investors to know what icap bought or sold recently?
  • How critical is it for the investors to know what icap bought or sold recently, if they have a long-term horizon?

My take on this, is that those long-term investors into icap will find it more useful and rewarding understanding the philosophy and strategy of ttb and the icap fund, than harping on this issue constantly.

icap is one of the fund with the lowest cost I know. That to me is investor friendly. Of course, being an investor into icap may make my views less objective, but I try to give an honest appraisal of these issues.

Why has the fund performed the way it has?


The short-term track record since Oct 2005 has been excellent. Perhaps, we will have a look at this in detail later.

Sunday, 28 June 2009

Ownership of Financial Assets in US

Interesting, abeit old, statistics. The distribution of wealth in the United States was, and probably is, terribly unequal.

Ownership of Financial Assets in US in the 90s.

The Very Rich (1% of the Population)

The Affluent (the Next 9%)

The Rest (90% of Americans)

Share of Income Collected by American Households

The Very Rich (1% of the Population)
1962 9.3%
1992 15.7%

The Affluent (the Next 9%)
1962 21.5%
1992 25.2%

The Rest (90% of Americans)
1962 69.2%
1992 59.1%

iCap Closed End Fund Track Record for last 2 years

Click on this busy spreadsheet.


There has been a lot of "cowshit" written on icap closed end fund. I decided to just review the performance of this fund for my personal benefit. Well, not too bad so far.

Related posts:
iCap sold Axiata and bought Astro
Morningstar's Approach to Analyzing Mutual Funds
Always buy, hold or sell based on fundamentals.

Saturday, 27 June 2009

iCap sold Axiata and bought Astro

The icap portfolio dated 11.6.2008 listed 17 stocks. VADS was taken private, leaving 16 stocks.

Let us make an (unlikely) assumption that the portfolio of 16 stocks has not changed over the last 1 year. Using the share prices of 26.6.2009 revealed some interesting figures.

Click to view:


1. 8 stocks are showing gains, 8 stocks are showing losses.

2. The winners are: Parkson, PetDag, F&N, Padini, PIE, HaiO, LionDiv, and PohKong, in descending order of gains.

The corresponding percentages of gains for each of these stocks in the same order are: 106.3%, 101.2%, 46.2%, 69.6%, 33.7%, 33.4%, 78.7%, and 2.5%.

Total of these 8 stock gains is: $49,797,470.00

3. The losers are: Boustead, TM, Swee Joo, Mieco, Integrax, Suria, Tongher and TMI, in ascending order of losses.

The corresponding percentages of losses for each of these stocks in the same order are: -5.4%, -7.9%, -46.8%, -76.7%, -23.4%, -43%, -44.1%, and -71.1%.

Total of these 8 stock losses is: $-24,278,277.00

4. The total gains exceed total losses by $25,519,193.00. Gains : Losses = 2.05 : 1.0

5. TMI (Axiata) accounts for 52% of the total losses ($12.7 million). The other 7 losing counters contribute 48% of the total losses.

6. Parkson is the top gainer; it accounts for 44.8% ($22.3m) of the total gains. The top 3 stock gainers (Parkson, PetDag and F&N) contribute 82% ($40.9m) of the total gains. The other 5 winning counters account for 18% of the total gains.

7. Of these 16 stocks, 10 can probably be considered thinly traded most of the time (illiquid).

8. TMI is the second largest stock in icap portfolio, based on cost. Here are the stocks, in descending order, based on cost: Parkson, TMI, F&N, PetDag, PIE, Boustead, Integrax, TM, Tongher, Padini, Suria, Swee Joo, Mieco, HaiO, PohKong, and LionDiv.

9. The biggest gainers are also the bigger stocks in icap, based on cost, namely, Parkson, F&N, PetDag and PIE. TMI is the big stock in icap showing a very big loss. To fathom this, the loss of TMI wipes out all the gains of PetDag.

10. The total cost of these 16 stocks is $127,425,010.00. The total market value of these 16 stocks is $145,453,495.00. Other gains not taken into account in this observation are the capital gains from stocks sold and dividends received by icap portfolio.

What are your conclusions on these observations?

In the latest report by icap, Axiata (previous TMI) was sold and Astro was bought.

Among the reasons for selling stocks would be:

  • If you need cash urgently for various reasons.
  • When the fundamental of the stock has deteriorated.
  • When you need to raise cash to invest into another stock with better potential.
  • When your stock is overpriced, reducing the potential of gain.

Why did icap sell Axiata, probably at a low price?

Well, it should be interesting to find out at the next icap AGM.

Meantime, please continue with your good work, Mr. ttb.

Related posts:

iCap Closed End Fund Track Record for last 2 years
Morningstar's Approach to Analyzing Mutual Funds

Why Invest in Stocks? An Example in Practice

If you are a newcomer to investing, you may still doubt that you are capable of building a portfolio of stocks that will make you rich.

Not all stocks are going to live up to their early promise, no matter how much time you devote to making a selection.

In the other hand, even if you pick your stocks blindfolded, you will have some winners.

An Example

Investing into Common Stocks

Let's suppose that you want to invest $100,000 in 20 stocks, or $5,000 in each. Some will work out and some won't.

So so news - 10 of 20 stocks will just plug along

Hypothetically, it does not seem unreasonable to project that 10 of these stocks will just plug along, making you neither rich nor poor. Suppose we assume that these 10 stocks will appreciate (rise in value) an average of only 7% per year over the next 10 or 20 years. Toss in a 2% annual dividend and the total return adds up to 9% per year. That is not exactly riches, since stocks over the last 75 years have averaged about 11%.

At any rate, here is what your $50,000 will be worth at the end of:

10 years - $118,368

20 years - $280,221

Good news - 3 of 20 stocks performed above your wildest dreams

Next, let's look at the 3 stocks that performed above your wildest dreams. They appreciated an average of 15% per year. Add in a modest annual dividend of only 1%, and you have a total return of 16%.

Assuming you invest $5,000 in each of these stocks, that $15,000 will be worth over the next:

10 years - $66,172

20 years - $291,911

Bad news - 2 of 20 stocks skid and never recovered

So far, so good. Now, for the bad news. Two of your stocks hit the skids and never recovered. Total results for the $10,000 invested in these losers is: zero

10 years - $00,000

20 years - $00,000

Fair news - 5 of 20 stocks performed about average

Finally, 5 of your 20 stocks do about average. They appreciate an average of 9% per year and I have an average yearly dividend of 2%. That's a total return of 11%. Since you have 5 stocks in this category, your total investment is $25,000. Here is what you end up with in the next:

10 years - $70,986

20 years - $201,558

Adding Up these Returns

If we add up these various results, the final figures make you look reasonably rich:

10 years - $255,525

20 years - $ 773,690

Investing into CDs

By contrast, had you acted in a cowardly manner and invested exclusively in CDs that gave an annual return of 4%, you would have only the following at the end of the two periods:

10 years - $162,889

20 years - $265,330

One final note. If you figure in taxes, you look even better, since the capital gains (on your stocks ) are taxed at a much lower rate than ordinary income (which applies to CDs). And, you wouldn't even have to worry about capital gains on your stocks if you elected not to sell them.

(Comment: My personal guideline is this. Of 5 stocks you buy, expect 1 to do very well, 3 to be average, and 1 to do poorly.)

Read also:
Why Invest in Stocks?
Why Invest in Stocks? Look at the Facts
Why Invest in Stocks? Investing for the Long Term
Why Invest in Stocks? Some Profitable Comparisons
Why Invest in Stocks? Why Doesn't Everyone Buy Common Stocks?
Why Invest in Stocks? An Example in Practice

Why Invest in Stocks? Why Doesn't Everyone Buy Common Stocks?

Why doesn't everyone buy common stocks?

That's a good question. Let try to find some satisfactory answers.

Part of the reason may be ignorance.

Not everyone is willing to investigate the field of common stocks.

These noninvestors may be too preoccupied with their jobs, sports, reading, gardening, travel, or whatever.

Then, there are those who are heavily influenced by family members who have told them that stocks are too speculative and better left to millionaires. (Of course, that's how many of those millionaires become millionaires.)

Even if you are convinced about the potential of stocks, you are probably wondering how anyone can possibly figure out which stocks to buy, since there are tens of thousands to choose from.

That, in essence, is the purpose of all my postings in this blog - to get you excited in pursuing financial education to benefit from your investing into common stocks.

Read also:
Why Invest in Stocks?
Why Invest in Stocks? Look at the Facts
Why Invest in Stocks? Investing for the Long Term
Why Invest in Stocks? Some Profitable Comparisons
Why Invest in Stocks? Why Doesn't Everyone Buy Common Stocks?
Why Invest in Stocks? An Example in Practice

Why Invest in Stocks? Some Profitable Comparisons

Based on this study, we can say with confidence that over a lifetime of investing, an investor will reap a total annual return of 10% or more.

If you compare this with the amount you could earn by owning CDs, annuities, government bonds, or any other conservative investment, the difference is considerable.

Let's see how that difference adds up.

Suppose you invested $25,000 in a list of common stocks at the age of 40, and your portfolio built up at a 10% compound annual rate. By the time you reached 65, your common stock nest egg would be worth $270,868.

Now, let's say you had invested your money in government bonds, yielding 6%. The same $25,000 would be worth only $107,297, which is a difference of $163,571. Neither of these calculations has accounted for income taxes or brokerage commissions.

Now, let's look at the timid soul who invested $25,000 in CDs at age 40 and averaged a return of 4%. By age 65, that investment would be worth a paltry $66,646.

Read also:
Why Invest in Stocks?
Why Invest in Stocks? Look at the Facts
Why Invest in Stocks? Investing for the Long Term
Why Invest in Stocks? Some Profitable Comparisons
Why Invest in Stocks? Why Doesn't Everyone Buy Common Stocks?
Why Invest in Stocks? An Example in Practice

Why Invest in Stocks? Investing for the Long Term

Investing, however, is not a one-year endeavor.

Most investors start their programs in their 40s and 50s, which means they could be investing over a 20, 30, or 40-year period.

5-year periods

If we look at the relative returns of different investments over 5-year periods - rather than 1-year periods - the results are even more encouraging.

During the years from 1960 through 1994, there were 31 such periods.

In only 2 of 31 of those 5-year periods did the total return of the Standard & Poor's based portfolio become negative.

29 of 31 such 5-year periods gave positive total returns.

10-year periods

Let's move ahead to all 10-year holding periods.

There are 26 in that span.

Exactly 100% worked out profitably.

Average annual total returns

Equally important, the returns to the investor were impressive in all of these 1, 5, and 10-year periods.

For instance, the average annual total return:
  • for 1-year periods was 11.1%;
  • for 5-year periods, it was 10.5%, and
  • for 10-year periods, it was 10.2%.
Based on this study, we can say with confidence that over a lifetime of investing, an investor will reap a total annual return of 10% or more.

If you compare this with the amount you could earn by owning CDs, annuities, government bonds, or any other conservative investment, the difference is considerable.

Read also:
Why Invest in Stocks?
Why Invest in Stocks? Look at the Facts
Why Invest in Stocks? Investing for the Long Term
Why Invest in Stocks? Some Profitable Comparisons
Why Invest in Stocks? Why Doesn't Everyone Buy Common Stocks?
Why Invest in Stocks? An Example in Practice

Why Invest in Stocks? Look at the Facts

One persuasive study contends that common stocks will make money for you in most years.

1-year periods

This study, done by the brokerage firm Smith Barney, looked at the 35 one-year periods between 1960 and 1995.

The study computed total return, which adds capital gains and dividends.

Over that span, stocks (as represented by the Standard & Poor's 500 index) performed unsatisfactorily in only 8 of those 35 years.

In other words, you would have been better off in money-market funds during those 8 years.

Common stocks would ahve been more successful in 27 of those 35 years.

(Comment: You can expect to have 1 down year for every 5 years of your investing.)

Read also:
Why Invest in Stocks?
Why Invest in Stocks? Look at the Facts
Why Invest in Stocks? Investing for the Long Term
Why Invest in Stocks? Some Profitable Comparisons
Why Invest in Stocks? Why Doesn't Everyone Buy Common Stocks?
Why Invest in Stocks? An Example in Practice

Why Invest in Stocks?

Investing is a complex business.

But, then, so is medicine, engineering, chemistry, geology, law, philosophy, photography, history, accounting - you name it.

In fact, investing is so intimidating that many intelligent individuals avoid it.

Instead, they stash their money in CDs, annuitites, bonds, or mutual funds.

Apparently, they can't face buying common stocks.

This is too bad, because that's precisely where the money is made.

You don't make money every day, every week, or even every year.

But over the long term, you will make the most out of your investment dollars.

Read also:
Why Invest in Stocks?
Why Invest in Stocks? Look at the Facts
Why Invest in Stocks? Investing for the Long Term
Why Invest in Stocks? Some Profitable Comparisons
Why Invest in Stocks? Why Doesn't Everyone Buy Common Stocks?
Why Invest in Stocks? An Example in Practice

The Danger Lurking in Your Portfolio

I like the title of this article. It reminds us to always be aware of the danger(s) that may be overlooked in our portfolio. Therefore, in our regular rebalancing and reweighting of our stocks in our portfolio, always keep this in mind.

This article touches on investing through mutual funds. What I usually will do is to look at the stocks that are in these funds. This is very important, as the performance of the fund will be dependent on what stocks are within these funds. For the less knowledgeable investors, this may be a another hurdle for them to cross. There is no better way than to start getting financially educated early in your investing career.

Another point in this article, is that having all your money in one fund or in many funds holding almost similar stocks may not ensure that you are well diversified.


The Danger Lurking in Your Portfolio
By Dan Caplinger
June 26, 2009

For years, financial experts have repeated the mantra of diversification as a way to smooth out the ups and downs of your portfolio. Yet, many people who believe that they have a diversified set of investments couldn't be more wrong -- and they're carrying much greater risk than they may think.

The benefits of mutual funds
Mutual funds have helped millions of investors diversify their holdings even with relatively small amounts of money. By pooling your money together with other investors, a typical mutual fund gives you a small piece of dozens or even hundreds of different stocks. With minimum investments as low as a few hundred dollars, you can create a portfolio that would require huge amounts of money to duplicate using 100-share lots of individual stocks.

But as useful as a single mutual fund is in helping you diversify, combining a bunch of funds into your overall portfolio won't automatically make you more diversified. If you own too many of the same general type of mutual fund, then you're going to have a more concentrated portfolio than you think -- and you could have some big gaps in your asset allocation.

Different funds, same stocks
To illustrate the point, take a look at these three different funds:

  • The Vanguard US Growth Fund (VWUSX) invests in U.S. companies with promising growth prospects.
  • The Fidelity Select Technology Fund (FSPTX) focuses on companies within the technology sector.
  • The California Investment Nasdaq 100 Index (NASDX) is an index fund that seeks to track the performance of the Nasdaq 100.

Especially to those just starting out investing, each of these three funds looks like it has a different purpose in a fund portfolio. But when you look closely at the top five holdings of each of these funds, you'll notice something peculiar:

Fund (Top 5 Holdings)

Vanguard US Growth
Google (Nasdaq: GOOG), Hewlett-Packard (NYSE: HPQ), Apple (Nasdaq: AAPL), Gilead Sciences (Nasdaq: GILD), Qualcomm (Nasdaq: QCOM)

Fidelity Select Technology
Microsoft (Nasdaq: MSFT), Hewlett-Packard, Apple, Google, Qualcomm

California Nasdaq 100
Apple, Qualcomm, Microsoft, Google, Gilead Sciences

Source: Morningstar.

Of course, more experienced investors might realize that the Nasdaq is made up largely of technology stocks, and that most tech stocks fall into the growth category. And of course, the Vanguard fund has plenty of non-tech companies further down the list, including Wal-Mart (NYSE: WMT). But without checking your holdings, you may end up with a false sense of security -- when in reality, you're dangerously overinvested in technology or some other sectors.

What to do
Luckily, once you start looking, it's not difficult to get plenty of information about mutual funds. Here are some tools you can use to make sure you're properly diversified:

Look for different asset classes. If you own several different funds, but they all concentrate on large-cap U.S. stocks, then the odds are good that you'll have a lot of overlap. Make sure you have at least one fund that covers other asset classes, including small caps and international stocks.
Use different fund companies. Sometimes, a given manager will share his stock picks and research across different funds within the same fund family. To increase the chance that you'll get a diverse set of investing ideas, seek out funds from different managers across a range of fund families.
Fill in the gaps. By looking at your fund's periodic reports, you can determine what areas a fund focuses on and which sectors it tends to avoid. If a fund is light in one particular sector, then you can get exposure either through a sector-specific fund or with a more general fund that has a focus in that sector.
Diversification is important, but just because you own a long list of funds doesn't necessarily mean you're diversified. In order to avoid the risk of owning a more concentrated portfolio than you think, be sure to look at your fund's holdings on a regular basis and make sure there's not too much overlap.

For more on smart fund investing, read about:
Could a recovery be right around the corner?
Why should you bother buying mutual funds at all?
Can "set it and forget it" investing really work?


Singapore’s rich list takes a beating

Singapore’s rich list takes a beating
SINGAPORE, June 26 — Singapore’s rich were not spared the effects of the global financial meltdown last year, with the number of millionaires here shrinking 22 per cent to 61,000 people.

A year earlier, Singapore boasted one of the world’s top 10 fastest-growing millionaires’ clubs, with a 15.3 per cent expansion to 78,000.

A millionaire is defined as a person having net assets of at least US$1 million (RM3.52 million), excluding his main residence and everyday possessions.

Observers say the sharp drop is probably because the well-heeled here were invested heavily in equities and real estate, both of which have suffered in the crisis.

The figures emerged in the 13th annual World Wealth Report released yesterday by banking group Merrill Lynch and research firm Capgemini.

On average, Singapore’s ‘high net worth individuals’ were worth about US$3 million each, said Kong Eng Huat, managing director and head of South Asia advisory at Merrill Lynch Global Wealth Management.

“A lot of these (individuals) are in the US$1 million to US$5 million range. So that’s why you find a greater drop in terms of the high net worth population because...when the market comes down and they have invested heavily in equities then they would not be a high net worth individual any more,’ he added.

Globally, the number of people in the millionaires’ club fell by about 15 per cent to 8.6 million, which is below the figure in 2005. North America, Europe and the Asia-Pacific registered the largest declines.

The total wealth of these individuals fell to US$32.8 trillion, also below the levels in 2005. However, this is forecast to recover in all regions by 2013, with Asia-Pacific leading the growth.

More than half of the world’s millionaires last year came from three countries — the United States, Japan and Germany. The proportion is a slight increase from the year before.

China climbed one rung to become the country with the fourth largest millionaires’ population of 364,000.

The World Wealth Report also indicated that the millionaires have reacted to the crisis by moving more of their assets into cash and fixed-income securities — and away from equities.

A larger proportion of wealth was allocated to art collections and jewellery, gems and watches. This category hit 47 per cent last year, up from 38 per cent in 2006.

Bhalaji Raghavan, Capgemini’s banking solutions leader for Asia-Pacific, said: “One of the reasons is that people believe that (these items) over a long period of time increase in value, so it’s a lot safer than putting their money in financial markets.”

Giving to charity was forecast to be on the decrease on average across the globe this year, especially in North America, but increasing in the Asia-Pacific region.

Private banks contacted by The Straits Times said their clients are now staying away from high-risk investment products.

“Currently, it is back to basics of investment, and we have seen that cash positions in portfolios are high,” said Rajesh Malkani, Standard Chartered Private Bank’s head of Southeast Asia.

Raj Sriram, RBS Coutts’ head of private banking in Singapore, agreed: “From a private bank perspective, the main challenge is that clients have become more risk averse due to volatility in the markets...Clients today largely prefer simpler, liquid investments.” — The Straits Times


Friday, 26 June 2009

The Four Essentials of Successful Investing

In brief, here are the four rules:
  • Start early in life to invest.

  • Invest in common stocks.

  • Be thrifty.

  • Pick the right investment.

1. Start early in life to invest

Start young. Many people wait until age 50 before they realize what has happened.

Let's assume you want to have $1 million by age 65. That may not be enough , but it is a lot more than most people ahve when they decide to retire from the world of commerce and frustration.

  • If you start at age 35 and can realize an annual return of 10% compounded, you will have to put aside $6,079 each year.

  • If you delay until you are 45, it will mean you have to set aside $17,460 each year.

  • If you start at age 55, the amount gets a little steep - $62,746!

2. Invest Mostly in Stocks, not Bonds

It takes commitment, even if you start early, to save for the future.

But if you buy bonds, CDs, or a money market fund, the task is even tougher.

Let's try the different ages again, but this time assuming a compound annual return of 6, instead of 10%.

Also, let's assume you want to have $1 million by age 65.

  • If you start at age 35 and can realize an annual return of 6% compounded, you will have to put aside $12,649 into CD each year. - that is a lot more than the first illustration.

  • If you delay until you are 45, it will mean you have to set aside $27,185 each year.

  • If you start at age 55, the amount you will forced to set aside for fixed-income vehicles will be $75,869 each year.

3. Be thrifty (Don't be a Spendthrift)

An important ingredient of successful investing is discipline.

Of course, it pays to earn an above-average salary.

If you make $30,000 a year and have 4 children, you are not likely to end up rich. Sorry about that.

On the other hand, there are plenty of people who make great incomes and still don't own any stocks. The reason: They can always find things to buy.

Successful investors not only make a good income, but they are thrifty shoppers.

For instance, do you need a new car every 2 years? I happen to be rich and I buy used cars. Not rusted-out jalopies - normally, I buy Buicks that are 3 years old.

If you want to find out how people get rich, you should get The Millionaire Next Door by Thomas J. Stanley and William D. Danko. Typically, millionaires are extremely careful how they spend their money and they invest in good-quality common stocks with very infrequent trading.
Invest enough to make it worthwhile, such as 10% of your income. You can do this if you are thrifty.

4. Picking the Right Investments

The final factor is picking the right stocks or mutual funds.

Surprisingly, this is the least important factor. That is because no one knows how to do it consistenly.

There are mutual funds with good records, but those managers are rarely able to duplicate their performance year after year. However, that shouldn't deter you from trying. You will pick your share of winners if you do your homework and exercise patience.

Finally, make sure you don't make any big bets. Diversify over a few stocks in different sectors or industries.

You will need to be financially educated and do enough reading to ensure you pick stocks that have the potential to make you rich.

Some thoughts on Analysing Stocks

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.

Keep It Simple and Safe.

Nine Mistakes that Investors Make

Nine mistakes that investors make

1. Failure to diversify

2. Paying too much for a stock

3. Buying a stock with a high payout ratio*

4. Too much trading

5. Failure to read the company's quarterly and annual reports

6. Failure to invest in stocks after a long decline

7. Failure to keep adequate records (recordkeeping)**

*Stock with high payout ratio

Most companies need to invest their retained earnings to grow their business.

A low payout ratio is preferred, since it means that the company is plowing back its profits into future growth.

Examine what percentage of earnings per share are paid out in dividend. For instance:

  • if the company earns $4 a share and pays out $3, that's too much.
  • most would much prefer a company that paid out less than 50% - 30 or 40% would be even better.

Companies that don't pay a dividend at all are often very speculative. They can be extremely volatile.


This is a common blunder. You should have a filing cabinet that holds a folder for each stock.

The first thing you should put in that file is the confirmation slip for the purchase of the stock, which should have been sent to you by your broker.

Then when you sell the stock, you will know what you paid for it so that you can tell your accountant. He will in turn tell the IRS.

The Buy-and-Hold Strategy Is Going, Going, Gone ...

The Buy-and-Hold Strategy Is Going, Going, Gone ...
By Peter Khanahmadi

June 25, 2009

It's been interesting to observe the zeal with which people have taken part in the Fool's debate about buy-and-hold investing. There have been many arguments in favor of buy and hold, some against, and some in between.

My view is that the buy-and-hold strategy is fading fast, right before our eyes. The days of holding onto a stock for 20 or 30 years and forgetting about it until retirement are over.

Thanks to technological advancements that enable far greater competition, as well as global economic uncertainty, the buy-and-hold approach just isn't effective in today's market.

For example, consider a company like Sun Microsystems (Nasdaq: JAVA), which was riding high during the tech boom of the late 1990s. Investors at the time felt Sun would be a long-term buy given its significant tailwinds -- it was providing software and Internet equipment for the ever-growing World Wide Web.

But the tech bust, along with furious competition from IBM (NYSE: IBM) and Hewlett-Packard (NYSE: HPQ), dismantled Sun and its stock price. Although this is just one admittedly extreme example (Sun is down 85% over the past decade), it serves to remind us how critical it is to actively monitor stock investments to gauge when to make appropriate decisions to sell.

Several comments from our Foolish members support the view that buy and hold is rapidly fading. Here are a few interesting ones:

"Holding anything for a long period of time has never been a good idea, and even less so today. In our economic system, money moves rapidly and constantly, so while you're sitting on your money for a long period of time, a lot of people are using/moving your money and making big profits, and in the end you'll get a few scraps back after sitting on it for ten years. If a 8-12% return on your investment after several years seems good to you, then fine, but in reality it's a very paltry sum compared to what other made with your money in the same time period. And as many of you know, after ten years you may be even be down, not up." -- IMHarvey

"I vote YES. When I became a cognizant being in the 60's and 70's, BAH had a rather concrete meaning. You bought a stalwart American company, an engine of capitalism, like AT&T or GM or a utility. You held it forever; the rest of your life; until you die. When you retire, you harvest your crop.TMF seems to quote 10 years as a horizon, but I wonder if many journalists and everyday investors are thinking of 5 years; I know I do." -- jerryguru69

"In my opinion, the buy and hold days are over. That does not mean you should become a day trader, but modern technology is changing so fast that the probability that any one company is going to be the top dog forever is very low. I now set stop losses on every stock I buy and if it drops significantly it automatically sells. If it turns out I should have kept the stock, I can buy it back again for $7 on many on line sites. I will never again let my portfolio drop significantly based on predictions from so called stock experts, that on reality don't know any more than I do." -- harry1n

As with all great debates, both sides must be heard. Although I strongly hold the view that buy and hold is fading fast, some members provided evidence to the contrary:

"Coca-Cola (NYSE: KO), a blue-chip stock anyone with a 5th grade education can understand, is up over 9,000% over the last 35 years, yet more than 97% of the population missed the run. As recently as March 2009, this simple, yet very powerful stock was trading at a very reasonable 14 times earnings, yielding 4% in dividend income. This is the same PRICE Warren Buffett paid for it in 1989! (adjusted to 4 bucks a share, post splits). Yet, there were with NO takers!!!

Truth be told, most people do NOT have the stomach, nor the patience for the stock market. You need both.

If you are reading this post, are less than 45 years old, and do not smoke, then you are likely going to live for another 30-40 years. If history has taught us anything, over that kind of time horizon, a 50-60,000 handle on the DJIA is simply inevitable.

Thus, the one thing all LONG TERM equity investors have in common is FAITH.

For without faith, I would have tossed my Dow Chemical, General Electric, Harley Davidson (NYSE: HOG), McDonald's (NYSE: MCD), and Pfizer (NYSE: PFE) stock overboard a long time ago." -- daveandrae

Wherever you fall in the debate, you cannot ignore the fact that today's market is filled with volatility and uncertainty. Knowing this, investors must stay on top of their portfolios and actively track, follow, and yes, even manage, their holdings.

What's your take? Is buy and hold quickly fading or not? Leave us a comment below and let us know!

For all our buy-and-hold coverage:
Long-Term Investing Doesn't Work
Blog: The Life and Subsequent Death of Buy-and-Hold Investing
Buy and Hold Isn't Dead. It's Just Wounded.
The Most Certain Way to Wealth in Our Uncertain World?


Know Yourself and Make More Money

Know Yourself and Make More Money
By Selena Maranjian
June 25, 2009

If you want to be a better investor, you have to know how your mind works. Not everyone thinks the same way about investing, and if you don't know your own particular quirks -- and weaknesses -- then it'll show in your results.

In particular, think about some of your not-so-wonderful investing habits. Even if they don't come to mind right away, odds are that you'll find a whole host of examples if you dig out some of your old brokerage statements and review some of your bone-headed investments. Try to figure out what led you to make those mistakes. Here are some possibilities:

Do you get swayed by an exciting detail or two? For instance, both Google (Nasdaq: GOOG) and Intuitive Surgical (Nasdaq: ISRG) have had amazing revenue growth in recent years, with average annual rates of 72% and 57%, respectively. But don't invest without filling out the picture much more. There's simply no way those growth rates are sustainable in the long run. In the current recession, demand for Intuitive's expensive robotic surgery equipment has slowed. Even companies that enter a slower-growth phase can make profitable investments, though, as Wal-Mart (NYSE: WMT) shareholders can attest.

Do you get too impatient? Did you maybe invest in Diamond Offshore (NYSE: DO) or Adobe Systems (Nasdaq: ADBE) a year ago, based partly on their robust margins, revenue growth, and return on equity? Are you thinking of selling them just because they're down over 30% in the past year? Well, next time you look at them and your trigger finger starts itching, be patient -- that's a key trait of great investors. As long as you remain confident of their strength and promise, holding can be the best thing to do.

Conversely, are you sometimes pigheaded? If you're holding on to companies just because they're down, even though you've lost faith in them, that's not such a good idea. Maybe, for example, you lost money on Capital One Financial (NYSE: COF) or Bank of America (NYSE: BAC), and are worried about new regulations in the credit card industry and the chance of increased loan defaults in the recession. If so, at least think about moving your money into a company you feel more confident about.

Do you focus much more on a stock's positives than its negatives? Are you eager to buy a stock after hearing someone on TV rave about it, without looking into his track record or the stock itself? If those traits haven't gotten you in trouble already, they certainly will in the future.

Discover your unproductive tendencies, so that you can notice and avoid them when they rear their ugly heads. Your portfolio might thank you for it.


Learn more:
Mr. Market's 3 Biggest Weaknesses
4 Ways to Destroy Your Retirement
8 Common Investing Mistakes
Not-so-wonderful investing habits

The Best Place to Find Promising Stocks

The Best Place to Find Promising Stocks
By Motley Fool Staff
June 25, 2009

Everybody loves getting in on a secret. It doesn't matter what it's about, whether it's who some politician went hiking the Appalachian Trail with or the identity of the leaker in the Watergate scandal. While some secrets cost you only the price of a grocery-store tabloid, some people will try to collect quite a bit more information.

Consider how much you would pay to learn the secrets of successful investing. Many well-known financial gurus have written books that try to explain their winning recommendations; several, such as Peter Lynch's One Up on Wall Street, have become best-sellers. Even now, many fund managers define their aspirations for success by seeking to become the next Peter Lynch or Bruce Berkowitz.

It turns out, however, that the secret of how successful fund managers pick investments isn't much of a secret at all. You don't have to buy a book or a magazine to find it. In fact, it doesn't take a lot of effort to find out all sorts of things about how the best fund managers are investing.

The worst-kept secrets of successful fund managers
Sounds like a good book title, doesn't it? In truth, fund managers aren't allowed to keep their investment choices secret for long because mutual funds are required to fully disclose their holdings. The Investment Company Act of 1940, which governs mutual funds, requires funds to disclose several types of information to fund shareholders at least twice a year, including financial statements of income and capital flows, fees charged by management, and lists of securities held. The SEC has considered requiring more frequent disclosure, and many funds voluntarily release information on a more frequent basis.

This means that if you identify a fund manager whose style you like, and whose results have been good, you can look at what investments have contributed the most to the manager's success. There are a few different ways of doing so.

Analyzing fund holdings
Some mutual fund managers choose to take large positions in a relatively small number of individual stocks. If the fund performs well, it's usually because those large positions do well. So, by looking at the largest holdings in a particular fund, you often identify individual stocks that have performed well.

For instance, in looking at the market-beating performance of the Fairholme Fund, you'll find that the top 10 holdings constitute over 60% of the entire fund. You can see that many of these holdings, including Sears Holdings (Nasdaq: SHLD), Pfizer (NYSE: PFE), and Forest Labs (NYSE: FRX), have held up relatively well over the past year, which helped contribute to the fund's overall performance.

Not all of a fund's top holdings have to be winners for the fund to perform well. For instance, a look at Longleaf Partners (LLPFX) shows that while investments in Sun Microsystems (Nasdaq: JAVA) and Level 3 Communications (Nasdaq: LVLT) have done well so far in 2009, the fund's shares of FedEx (NYSE: FDX) and Berkshire Hathaway (NYSE: BRK-A) have held the fund back from an even stronger performance. Sometimes, the best-performing choices won't even be among the top holdings.

If you're willing to do a little more research, you can look from quarter to quarter to see what changes a fund manager is making in the fund's holdings. If a company drops off the holdings list, then you know that the manager has lost confidence in that company. Similarly, if a new company appears, or holdings in an existing company increase dramatically, then the manager believes that company will do well.

Building your own fund
By looking at the best investments of successful fund managers, you can create your own portfolio, including the best of the best.
One excellent way to build a well-diversified portfolio is to pick a few companies from each of your favorite funds in a variety of asset classes, thus quickly putting together a portfolio that includes companies across a wide spectrum of company sizes, regions, and industries.

Limitations of using fund data
But, like other investment strategies, using fund holdings data doesn't guarantee success.
For one thing, many funds buy and sell stocks frequently, so a stock that appears on a list of holdings one day may be sold from the fund the next. As a result, you may buy a stock at exactly the time the fund has sold it. For funds with high turnover ratios, it's important to identify core holdings that the fund has owned for a long time.

Also, many funds own stock in a huge number of companies, so even the top holdings don't represent a large percentage of the portfolio. When such funds outperform their peers, it's more likely a result of more subtle differences in allocating money among similar companies. For instance, a fund might have 4% of its assets in a stock, while the index gives it only a 3% weighting. So, if that company does well, the fund will benefit from the larger position. You may not notice the impact of these subtle differences simply by looking at a fund's list of holdings.

However, if you're looking to understand how your favorite fund manager thinks, or if you're looking for good companies to consider, looking at a fund's list of holdings isn't a bad place to start. Keep in mind that you can always just buy the fund and let the manager do the work for you.

This article was originally published Sept. 1, 2006. It has been updated by Dan Caplinger, who owns shares of Berkshire Hathaway. Fairholme Fund is a Champion Funds recommendation. Berkshire Hathaway and FedEx are Motley Fool Stock Advisor recommendations. Berkshire Hathaway, Pfizer, and Sears Holdings are Motley Fool Inside Value picks. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy tells all.


Bargain Stocks Are Everywhere

Bargain Stocks Are Everywhere
By Morgan House
June 25, 2009

Bet against the masses. Don't be the lemming. Be fearful when others are greedy.

Follow these simple rules, and you'll probably be a successful investor.

With those rules of thumb in mind, you'd be forgiven for thinking now is a terrible time to buy stocks. The S&P 500 is up more than 30% over the past three months or so, which is typically consistent with a market flooded with unrestrained optimism. Sure enough, some investors are preaching of an overvalued market that's gotten way ahead of itself.

Oh really?
And maybe they're right. But perspective is in order: When stocks bottomed out in early March, a better part of the investment community thought the world was about to explode. Companies like Bank of America (NYSE: BAC) and Citigroup (NYSE: C) traded for trivial valuations because, quite literally, their deaths looked imminent.

Today, it looks like we've skirted most of those calamitous end-of-the-world threats. It's still terrible, mind you, just not as terrible as many thought. Naturally, stocks have sprung back to levels that reflect a deep recession, rather than a total Mad Max scenario.

This is an incredibly important distinction to make: Markets haven't risen to levels reflective of future optimism, but to levels consistent with a world that isn't about to fall into mass insolvency.

This is evident by looking at the biggest winners over the past few months. By and large, the stocks that have risen the most are ones you wouldn't recommend to your worst enemy. Have a look:

3-Month Return
2009 EPS Estimates

Dollar Thrifty Automotive

Avis Budget Group


Data from Yahoo! Finance and Google Finance.

Are these companies destined for greatness? Did they announce a new blockbuster product? Are they the next Google (Nasdaq: GOOG), revolutionizing the way we access information in our everyday lives? Goodness, no. Not even close. Their huge gains are simply a reflection that they'll live to see another day.

This is a rally built on canceling out past pessimism, not pricing in future optimism. The biggest gains have been concentrated in very low-quality companies that are simply being given a second shot at life.

Not all gains are created equal
The idea that a stock is overvalued after a massive run-up is contingent on the idea that it was properly priced to being with.
But this was hardly the case when the market bottomed in March. More importantly, some of the highest-quality companies in the world have largely been left out of the rally and still trade at attractive prices.

Here are three in particular:

3-Month Return
Forward P/E Ratio (FY 2009)

Berkshire Hathaway (NYSE: BRK-A)

Procter & Gamble (NYSE: PG)

Altria (NYSE: MO)

Data from Yahoo! Finance.

What's to like about these three? Glad you asked:

We gab about the awesomeness of Warren Buffett enough here at the Fool, so I won't bore you with warm and fuzzy stories. I'll just give you the numbers: Over the past 15 years, Berkshire Hathaway has traded for an average of 1.91 times book value; today it trades for 1.30 times book value. I find that very intriguing, and think you should, too.

Whether you know it or not, you probably use several Procter & Gamble products. Its strong brands -- which range from Gillette to Cascade to Tide -- are in your bathroom, kitchen, and laundry room. Since 1994, P&G shares have traded at an average of more than 26 times earnings. Today, you can pick them up for 13 times earnings. That's the kind of opportunity that makes investing in recessions such a blast.

Altria -- maker of Marlboro cigarettes -- is a staggeringly simple business that generates huge amounts of cash. Investors are nervous about new regulations that put tobacco under the watch of the Food and Drug Administration and restrict tobacco advertising. But oddly enough, the new regulations may actually benefit Altria substantially. Limits on tobacco advertising make it harder for other cigarette makers to challenge Altria’s dominant market share. This would be a huge moat that few other businesses have -- the government is, in effect, limiting competition. If you're looking for international diversification, global sibling Philip Morris International (NYSE: PM) offers a lower yield but more growth opportunity.

Perspective can be a powerful thing: One year ago, Dow 8,500 would have been associated with the end of the world. Today, some want to treat it like it symbolizes irrational exuberance simply because we've bounced so far off the March lows. This is inherently flawed thinking. Focusing on a stock's percentage change over a short period of time is utterly meaningless. Drilling down on a company's intrinsic value and buying bargains like we haven't seen in decades is what's important.

And that's why our Motley Fool Inside Value team of analysts is having a field day digging through the rubble and finding cheap stocks like never before.

Fool contributor Morgan Housel owns shares of Berkshire, Altria, Procter & Gamble, and Philip Morris International. Google is a Motley Fool Rule Breakers recommendation. Berkshire Hathaway is both a Motley Fool Stock Advisor and Motley Fool Inside Value pick. Procter & Gamble is a Motley Fool Income Investor recommendation. Philip Morris International is a Motley Fool Global Gains pick. The Fool owns shares of Procter & Gamble and Berkshire Hathaway and has a disclosurepolicy.


How Low Can Stocks Go?

How Low Can Stocks Go?
By Morgan Housel
January 23, 2009

Between Jan. 6 and Jan. 20, the Dow Jones Industrial Average dropped more than 1,000 points. If it kept plunging at that rate, the index would hit zero in a matter of months.

Of course, we won't see zero. No matter how ugly the markets get, the pain we saw over these past few months can't continue for long.

But here's the bad news: Even though zero is out of the question, that doesn't mean stocks won't plummet from here. In fact, they could fall much, much further.

And history agrees.

What goes up...
The history of long-term market downturns is pretty abysmal. When times are bad, markets don't just get drunk with fear -- they start downing entire vodka shots of it.

At times like this, nobody wants to own stocks. Investors' palms begin to sweat every time they watch CNBC. They hide their heads in the hope that the pain will go away. They throw in the towel and sell stocks indiscriminately. In short, everything gets ugly.

Just how ugly? Have a look at the average price-to-earnings ratio of the entire S&P 500 index over these three periods of market mayhem:

Average S&P 500 P/E Ratio




Compare that to the average P/E ratio today of 19.59 (as calculated by Standard & Poor's) and a seven-year average of more than 24, and it's apparent that stocks could fall much, much further than they already have, just by returning to the lows around which they historically hover during downturns.

Assuming that earnings stay flat, revisiting those historically low levels could easily mean a nearly 50% decline from here. For the Dow Jones Industrial Average, that'd correlate to roughly Dow 5,000 -- give or take. Of course, I'm not predicting, warning, or forecasting -- I'm just taking a long look at history.

But what if it did happen?
What would happen to individual stocks? Here's what a few popular names would look like trading at P/E ratios of 8:

One-Year Return
Decline From Current Levels With P/E of 8

PepsiCo (NYSE: PEP)

Oracle (Nasdaq: ORCL)

Microsoft (Nasdaq: MSFT)

Yahoo! (Nasdaq: YHOO)

Amazon.com (Nasdaq: AMZN)

Monsanto (NYSE: MON)

Walgreen (NYSE: WAG)

Look scary? It is. And it could easily happen.

But here's the silver lining: Every one of those stocks -- heck, the overwhelming majority of stocks -- is worth much more than a measly eight times earnings. The only thing that pushes the average stock to such embarrassing levels is an overdose of panic, rather than a good reading on what the company might actually be worth.

Be brave
As difficult as it is right now, following the "this too will pass" philosophy really does work. No matter how bad it gets, things will eventually recover. Those brave enough to dive in when no one else dares to touch stocks will end up scoring the multibagger returns.

Need proof? Think about the best times you could have bought stocks in the past:
  • after the economy recovered from oil shocks in the '70s,

  • after the magnificent market crash of 1987,

  • after global financial markets seized up in 1998, and

  • after the 9/11 attacks that shook markets to the core.

As plainly obvious as it is in hindsight, the best buying opportunities come when investors are scared out of their wits and threaten to give up on markets altogether.

And that's exactly where we are today.

Pick what side you'd like to be on
The next few years are likely to be quite a ride. On the other hand, the history of the market shows that gloomy, volatile periods also provide once-in-a-lifetime opportunities that can earn ridiculous returns as rationality gets back on track.

This article was originally published on Oct. 18, 2008. It has been updated.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article PepsiCo is a Motley Fool Income Investor selection. Microsoft is an Inside Value pick. Amazon.com is a Stock Advisor recommendation. The Motley Fool is investors writing for investors.


Asset Allocation is not the same as Diversification

Asset allocation is not the same as diversification.

Rather, it refers to the strategy of allocating your investment funds among different types of investments, such as stocks, bonds, or money-market funds.

  • In the long run, you will be better off with all of your assets concentrated in common stocks.
  • In the short run, this may not be true, since the market occasionally has a sinking spell.
  • A severe one, such as that of 2000-2002, can cause your holdings to decline in value 20% or more.
  • To protect against this, most investors spread their money around.

They may for instance,

  • allocate 50% to stocks, 40% to bonds, and 10% to a money-market fund, or,
  • a more realistic breakdown might be 70% in stocks, 25% in bonds, and 5% in a money-market fund.

Related posts: Some Simple Formulas for Asset Allocation
How Much Should You Invest in Stocks?
Asset Allocation is not the same as Diversification
A Simple Approach to Asset Allocation
Forget about Everything Else and Buy Only Stocks
Some asset allocation options to consider
A favourite Formula for Asset Allocation

Thursday, 25 June 2009

Virtues of Major Stocks (Blue Chips)

- Blue chip companies are not likely to go bankrupt.

- They have their troubles, but they are big enough to hire a CEO who can bring them back to life. Among the 30 companies in the DJIA, for instance, such companies as IBM, Eastman Kodak, AT&T, Sears, United Technologies, and Allied Signal were restructured in recent years by a few dynamic executives.

- Major corporations are also found in most institutional portfolios such as mutual funds, pension plans, bank trust departments, and insurance companies. One reason they like these big-capitalization stocks is liquidity.
  • Since institutions have huge amounts of cash to invest, they feel comfortable with these stocks. The reason: The number of shares outstanding is huge, which means they won't disturb the market when they buy or sell.
  • By contrast, if a major institution tries to invest a million dollars in a tiny Nasdaq company, the stock will shoot up several points before they complete their investing. It could be just as disruptive when they try to get out.
  • As a consequence, major companies are in demand and are not left to drift.
  • On the other hand, there are thousands of small companies that no one ever heard of. The only investors who can push them up are individuals - not institutions.

- Big companies can afford to hire top-notch executives and they have the resources to allocate to research and marketing.

- Also, their new products, acquisitions, management changes, and strategies are discussed frequently in such publications as the Wall Street Journal, the New York Times, Barron's, Fortune, Forbes, and Business Week, all of which are easily available.

Shortcomings of Bonds

A bond is a contractual agreement that means you have loaned money to some entity, and that entity has agreed to pay you a certain sum of money (interest) every six months until that bond matures. At that time, you will also get back the money you originally invested - no more, no less.

The two advantages of bonds are safety and income.

If you wait until the maturity date, you will be assured of getting the face value of the bond.

In the meantime, however, the bond will fluctuate, because of
  • changes in interest rates, or
  • the creditworthiness of the corporation.
Long-term bonds, moreover, fluctuate far more than short-term bonds.

Bonds don't have a particularly impressive record.
  • Except for a year here or there, common stocks have always been a better place to be.
  • Furthermore, the return on bonds today is not much better than the rate you can get on a money-market fund.

Also, bonds, even U.S. Treasuries, have an element of risk.

  • They decline in value when interest rates go up.
  • Long-term bonds, moreover, slide precipitously when rates shoot up.

A Simple Approach to Asset Allocation

Serious investors spend a lot of time deciding which stocks or mutual funds to buy. This is appropriate. If you are going to invest your money, you shouldn't do it without some research and thought.

On the other hand, some financial gurus maintain that it is far more important to make an effort to achieve an effective approach to asset allocation. They believe that you should place your emphasis on how much of your portfolio is invested in such sectors as:

Government bonds
Corporate bonds
Municipal bonds
Convertible bonds
Preferred bonds
Large-cap domestic stocks
Small-cap domestic stocks
Foreign stocks
Foreign bonds
Certificates of deposit
Money-market funds

There are probably a few other categories you could include in your portfolio, and examining this list gives you an idea of what is meant by asset allocation.

The importance of asset allocation is in understanding how it can help or hurt you during certain investment periods.

A Simple Approach to Asset Allocation

From the above, you can see that asset allocation, like everything else in the world of finance, can get rather complex and confusing. It is no wonder that many people don't delve into this too much.

Here is one such approach by an investor.

"My idea of investing is to make it simple. There are just so many hours in the day. If you are still gainfully employed, you probably work eight hours in the day making a living. In the evenings, you may spend a few hours a week reading journals and other material so that you don't get fired. Obviously, that doesn't leave much time for studying the stock market.

For my part, I don't invest in many small-cap stocks, foreign stocks, bonds, convertibles, preferred stocks, or most of the other stuff on this list. I prefer to invest mostly in big-cap stocks (such as ExxonMobil, GE, Merck, IBM, Procter & Gamble, and Johnson & Johnson) and money-market funds (a safe alternative to cash).

This reduces my categories to two (2), not a dozen. All you have to do is decide what percentage of your portfolio is in stocks. The rest is in the money-market fund. Of course, the percentage is vitally important."

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Forget about Everything Else and Buy Only Stocks

Believe it or not, there are some investors who are convinced that common stocks - and common stocks alone - are the royal road to riches.

"A good friend of mine has never bought anything but stocks, and he's been doing it for many years. He even went through the severe bear market of 1973 - 1974, when stocks plunged over 40 percent. He wasn't exactly happy to see his stocks being ground to a pulp, but he hung on. Today, he is a millionaire many times over. He's now 60 years old, still a comparatively young investor. His name is David A. Seidenfeld, a businessman in Cleveland."

David Seidenfeld got his start by listening to the late S. Allen Nathanson, a savvy investor who wrote a series of magazine articles on why common stocks are the best way to achieve great wealth. David Seidenfeld recently collected these essays and published them as a hardcover book, Bullishly Speaking.

If you start investing early, such as in your forties, this method can work. If you systematically invest, setting aside 10 or 15 percent of your earnings each year and doing it through thick and thin, you won't need any bonds, money-market funds, or any of the other alternatives that financial magazines seem to think you must have. You will arrive at retirement with a large portfolio that will enable you to live off the dividends.

However, if you arrived late to the investment party - let's say in your late 50s or early 60s - you may not be able to sleep too well if you rely entirely on common stocks. After all, stocks have their shortcomings, too. They tend to bounce around a lot, and they can cut their dividends when things turn bleak.

Read also:

The story of Uncle Chua
Uncle Chua's Portfolio & Dividend Income


Related posts: Some Simple Formulas for Asset Allocation
How Much Should You Invest in Stocks?
Asset Allocation is not the same as Diversification
A Simple Approach to Asset Allocation
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Some asset allocation options to consider
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Some asset allocation options to consider

For the ultraconservative investor, a suggestion is for you to invest only 55% of your portfolio in common stocks. To be sure, when the stock market is marching ahead, as it has in the 90s, you won't be able to keep pace. But if it falters and heads south for a year or two, like recently, your cautious approach will keep you out of the clutches of insomnia.

Generally, such an approach is considered timid, and is not the best way to approach asset allocation. However, many are using this formula and are not complaining.

A better way to handle the uncertainty is to invest 70% in stocks, with the rest in a money-market fund. Once you decide on a particular percentage, stick with it. Don't change it every time someone makes a market forecast.

These market forecasts don't work often enough to pay any attention to them. No professional investor has a consistent record in forecasting. Every once in a while, one of these pundits makes a correct call at a crucial turning point, and from that day on, every one listens intently to the pronouncements of this person - until the day the pronouncement is totally wrong. That day always come.

Related posts:Some Simple Formulas for Asset Allocation
How Much Should You Invest in Stocks?
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A Simple Approach to Asset Allocation
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A favourite Formula for Asset Allocation