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.

Wednesday, 29 February 2012

'I've bought more shares in Lloyds and RBS'

'I've bought more shares in Lloyds and RBS'
Leading UK fund manager Richard Buxton on why he favours financials.

Richard Buxton, fund manager at Schroders

By Emma Wall

2:00PM GMT 28 Feb 2012

Comment

This June, Richard Buxton will have been managing the £2.5bn Schroder UK Alpha Plus fund for 10 years.

Launched to combat "sideways" markets, Mr Buxton's fund has met its mandate handsomely. If you had invested three years ago you would have doubled your money. We get his views below.

You said you 'couldn't wait' for 2011 to be over. What is your current market outlook?

If the market is particularly stressed, as it was in the second half of last year, any cyclical or long-term holding tends to go down.

The turnover on our fund is extremely low – we are looking at least a three to five-year view for all our holdings – and as a result we had a bad year. Clearly the moves by the European Central Bank in December have been a bit of a game-changer. We were concerned that a major European bank, or two, could end up in severe difficulties. It is no surprise given how depressed sentiment was at the tail end of last year that the removal of that risk has led to happier markets.

We have not repositioned the fund after a bad 2011, but we did add to the badly performing positions – Lloyds and Royal Bank of Scotland, for example. This year, the mood music has changed – we have had a better start. We knew there would eventually be stimulus, I just couldn't believe how long it took the ECB to do what they needed to do.

How long will this positivity continue?

We think it will be better this year, but it's still a mixed picture. There is recovery and dividend growth but we're not out of the woods yet; there are still issues to face and much scope for policy error. After the financial crisis we are in an environment where there are shorter economic cycles. We are going to have to live with shorter mini-cycles, but I think that is all part of the post-crisis recovery. It may well last another three to seven years.

Which sectors will thrive in this environment?

Sectors where valuations are weakest, because there is the greatest uncertainty and maximum fear. Ten years ago, big tobacco companies were risky. But they've had a fabulous decade of re-rating, going from pariahs to being well-loved. Today, few people invest in banks because of uncertainty around them, so they are trading at half book value. But on a five to 10-year view, they may actually do very well.

How do you respond to the accusation that all UK equity funds are the same?

Rest assured, my fund looks very different from others. It is a concentrated portfolio that is not built in relation to the index: I don't hold big companies just because they are big.

We set it up almost 10 years ago with the view that the index was going nowhere, so you did not want to invest in index trackers or actively managed closely correlated funds.

There are fewer winners in this environment, but if you can identify them you can do well.

What has changed since you started in the City 26 years ago?

I joined in the middle of a 20-year bull market. Back then, making money was a lot easier. It is harder now. I can see huge value but I can equally see reasons why it will take a while for that value to be realised. You can still find fabulous companies capable of achieving year-on-year growth or value companies that have been poorly managed and new management has gone in. But you have to be patient.

What has been your best investment decision?

I only invest in my own fund, so I don't have separate personal stock holdings. I have been very proud of [technology stock] Autonomy. It was hugely controversial, with many non-believers, but we continued to ride the volatility and were vindicated last year with the £7.1bn takeover by Hewlett Packard.

And your worst?

As a house, Schroders is very balance sheet-focused so we haven't generally suffered because of a stock having too much leverage.

For that reason we are big shareholders in Home Retail, which owns Argos and Homebase, and which has had a dreadful performance. But we know it is a survivor. It is not going the way of HMV and Woolworths. So we're sticking with it.

http://www.telegraph.co.uk/finance/personalfinance/investing/9110405/Ive-bought-more-shares-in-Lloyds-and-RBS.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)

Wednesday, 29 February 2012

'I've bought more shares in Lloyds and RBS'