How to Apply the Secret - The Stick Man

Bob Proctor uses little stick men to explain how our mind works, how we think and create our personal attitude and overall view of life.





Always Express Gratitude.

How you can create wealth

David Schirmer shows how you can create wealth and retire in after just 15 years of work or much less even if you are on a very small wage, working a normal job.

Mastering The Stock Market with David Schirmer

Dutch Lady Corporate Video

Dutch Lady Corporate Video from Willieong on Vimeo.

Capitulation – Panic Selling

Capitulation is best summarized as panic selling. Capitulation is the final phase in an extreme downtrend when stock owners are willing to sell out at any price. Capitulation is the end of a downtrend as a result of this panic selling. During capitulation, there is almost a complete lack of buyers, which creates a vacuum of selling.

Example of capitulation:



This index saw capitulation as prices moved lower and accelerated in their descent. Capitulation ends with a volume climax as price moves virtually straight down.

Capitulation is the opposite of a parabolic uptrend, and often marks a lasting low on extremely heavy volume.


http://www.thestockbandit.com/capitulation/

Read also:

Parabolic – Parabolic Uptrend Stock

http://myinvestingnotes.blogspot.com/2012/03/parabolic-parabolic-uptrend-stock.html

Parabolic – Parabolic Uptrend Stock

A stock moves parabolic at the end of extreme uptrends, and is seen when panic buying sets in and prices are driven vertical. During a parabolic uptrend, there is almost a complete absence of sellers, which creates a vacuum of buying. This occurs only in momentum stocks as traders rush to just get into the stock regardless of price, in fear of being left behind. Parabolic moves can make the largest price moves in the shortest amount of time, but are dangerous places to buy stock when you overstay your welcome. When a stock moves parabolic, it often marks the end of a move with prices not returning to the ultimate highs again for a long time.

Example of a parabolic uptrend:

This stock went parabolic and gained in volume and price move at the end of the run. What began as an uptrend quickly became panic buying, driving the stock vertically higher.

Capitulation is the opposite of panic buying and parabolic uptrends.

http://www.thestockbandit.com/parabolic/

Read also:

Capitulation – Panic Selling

http://myinvestingnotes.blogspot.com/2012/03/capitulation-panic-selling.html

Managing Risk - Some Simple Rules

Managing Risk

Investors can manage their risk in picking individual stocks by following some simple rules:

•  Require that the company have at least five years of financial history. Younger firms haven’t developed enough of a track record for assessing management performance.
•  Study only companies that have proven they can make money. Someone who invests in a company that has never reported earnings is speculating, not investing.
•  Understand the possible risk and reward of owning a stock.
•  Diversify your portfolio. Even if you’ve done your homework on every holding using all the information you need to make an informed decision, you’ll still make mistakes. If you have a good-size basket of stocks, however, you’ll also have some stocks that perform much better than expected.
 
Besides investing in high-quality growth stocks and diversifying your portfolio, two other simple principles can help you build wealth over the long term. 

• First, reinvest all your dividends and earnings. 
• Second, invest regularly in both good markets and bad; this is often called dollar-cost averaging.

 
The type of analysis outlined provides a lot of the information fundamental investors need to determine whether a stock is a suitable investment. But not everything. Reading annual reports, listening to conference calls and viewing company presentations will help you form a fuller picture of the company.
    
In today’s unpredictable, volatile market, fundamental analysis is even more important than usual. But for an investor using a simple, straightforward methodology that focuses on the long term, these are also times of great opportunity.

The Road to Building Wealth

The Four Principles

1 . Invest regularly.
You can begin by investing as little as $25, $50 or $100 a month. As your
resources grow, your monthly investment can grow. The important thing
is to invest on a set schedule over time.

2 . Reinvest earnings, dividends and profits.
If a stock pays dividends, reinvest them to buy more shares. If you sell
a stock, apply the proceeds to another investment.

3 . Invest in quality growth stocks and mutual funds.
With the right growth stocks and equity mutual funds, you can achieve
goals like doubling your money every five years with an acceptable
amount of risk.

4 . D i v e r s i f y.
A balanced portfolio includes companies of various sizes from different
industry segments and mutual funds from various categories. This kind of
diversification helps reduce risk and broaden investment opportunity



Also read:
Searching for Good Quality Growth Companies
http://www.investlah.com/forum/index.php/topic,23855.0.html

Stock Market Scams

As an investor, you must be aware of the stock market scams. The following are two of the most common stock scams.

1. The Pump and Dump
The pump and dump is one of the easiest and most common ways of taking money away from unsuspecting investors. Although it is illegal, the use of the pump and dump has actually increased because the Internet has made it possible to reach millions more people.

Here’s how the pump and dump works:
First, company insiders try to convince outsiders to buy a stock, usually the stock of a small over-the-counter company (Penny stocks). Investors are led to believe that this is a “once-in-a-lifetime” opportunity to make a small fortune. The fraudsters will pump up interest in the stock by sending messages through Internet chat rooms, or posting overly optimistic press releases.

Before the Internet, pump and dumpers used to call people on the telephone (often called Boiler Rooms). The idea is to artificially pump up the price of a stock by spreading false news. The stock price rises because of increased buying and speculation, not because of anything positive happening in the company.

As the stock goes higher, those with inside knowledge are prepared for the “dump.” As more people buy shares of the stock, the insiders sell all their shares for a huge profit. Eventually, the truth comes out, and the stock price falls as more people sell. Guess who is left holding the shares of the now nearly worthless stock? You guessed it – the unsuspecting investors who bought into the hype. They probably thought the price could go higher, so they never sold their shares.




The pump and dump is one of the oldest and most effective scams. Usually, pump and dumps are used on small stocks selling below $1.00 a share because it is easier for pump-and-dumpers to manipulate the stock price with smaller stocks.



2. Insider Trading
There are actually two types of insider trading: legal and illegal.

Legal insider trading is that done by company employees (insiders) who file proper paperwork with the SEC before buying and selling shares in their company. These documents are available for viewing on the SEC Web site.

On the other hand, illegal insider trading occurs when company employees buy and sell stocks based on information that is not known to the public. For example, it’s illegal for the managers of XYZ Company to buy additional shares of stock in the company if they know that a revolutionary new product is about to be released. It’s even illegal for you to buy shares of stock in that situation if company insiders (perhaps your neighbor) tell you about it.

Do you think insider trading is common?
It certainly is. It occurs a lot more often than many people think. Every once in a while the SEC catches a celebrity just to make a point that it’s watching. Nevertheless, it’s my estimate that thousands of insiders are using information gleaned from the companies they work for to make profitable transactions. It’s an open secret that those in the know are trading stocks on inside information.

Shortage of School Teachers

50 years of Chinese school problems fuels anger at rally

March 25, 2012

An angry crowd jeer at Datuk Wee Ka Siong at a rally in Kajang today. - Picture by Choo Choy May

KAJANG, March 25 — The angry reaction to Datuk Wee Ka Siong at a rally opposing the shortage of Chinese school teachers here is the result of 50 years of frustration, say protestors.

The deputy education minister was greeted with loud jeers calling for him and MCA to step down when he arrived, and someone in the crowd had allegedly tried to punch him as he was being chased out by the crowd when the rally ended. 

Dr Wong Fort Pin (picture) from Malacca said he made the two-hour drive to lend his voice to the anger over the government’s track record over the hot button issue of Chinese language education. 

“This is a 50-year-old problem,” the father of five told The Malaysian Insider. “This problem has been here all along. It feels engineered (by the government) and a calculated move.” 

He said that he was not politicising the issue but felt “fed-up” and frustrated. 

“You think I have no better things to do than to come here?” he said. “For 50 years the issue has been going on, but now the government cannot hide.” 

Chinese schools and issues that plague them are key to the hearts of many Chinese-educated Malaysians. 

The issue is also a thorny one for Umno, MCA’s senior partner in Barisan Nasional, as it has to be seen as championing the Malay language and national government schools. 

For Serdang resident Tan, the issue was that a new Chinese school had been promised for Serdang in 2008 but had yet to materialise. 

“Until now there is still no news of the location,” he said. 

Tan claimed that he had emailed Wee on the matter but had not received a reply to date. 

“I am so sad there was no reply,” he said but added that he was glad that Wee made the effort to attend the rally. 

Later at a press conference at a hotel away from the crowd, Wee said that he was “shocked” and “saddened” by the hostile reaction. 

Wee acknowledged that the shortage of teachers was a problem and said that the government was giving it immediate attention. 

“Of course we know this needs immediate attention, that’s why the cabinet formed a committee (to look into it)”, he said. 

“We will study each of their (Dong Zong’s) resolutions and demands and consider it. We have come up with strategies.” 

He urged patience as the solution needed to be a holistic one. 

“We need to identify the root of the problem. If we don’t know the root, how are we going to solve it? We cannot concentrate on one side and ignore the other side.”

http://www.themalaysianinsider.com/malaysia/article/demonstrators-protest-over-shortage-of-chinese-teachers-for-50-years/ 

The Art of War by Sun Tzu - Whole Book

Warren Buffett's approach to Growth. Growth on its own is not a valuable thing as a rule.

Benjamin Graham's approach.

Look first at Assets.
Then look at Earnings Power - making sure that they are protected by the assets.


Warren Buffett's approach.


Look at Assets and Earnings Power.
Only then, look to pay something for Growth.
Growth is only valuable if the return on investment in growth is greater than the cost of capital.
If not, growth can destroy value.
Growth on its own is not a valuable thing as a rule.
If you are going to buy growth, you better be sure of the franchise value.

Value Investing Process

1. Search
Cheap
Ugly
Obscene
Otherwise ignored

2. Valuation
Assets
Earnings Power
Franchise

3. Review
Key Issues
Collateral Evidence
Personal Biases

4. Risk Management
Margin of Safety
Some Diversification
Patience - Default Strategy


Important Points


- Market Irrationality creates Opportunity

- Know what you Know

• Inherent quality of information
• Circle of Competence

- Look for Margin of Safety

The Best of Value Investing

Value Investing Conference 2010 (videos)

Learning Value Investing

Simply Investing Course Outline
Module 1 - Introduction (14 minutes). Watch this module for free, here.

What Will You Learn In This Course?
My Story
Investing Myths
What is a Stock?
What is a Dividend?
What is the Stock Market?
What is Value Investing?
Module 2 – Rules of Simply Investing (65 minutes)

12 Rules of Simply Investing

Module 3 – Plan A: Do-it-Yourself, Applying the 12 Rules (27 minutes)

Plan A versus Plan B
Plan A (hands-on exercise)
Module 4 – Plan B: Do-it-Yourself With Help, Saving Time (20 minutes)

Plan B

Quality resources available to save you time and money
Module 5 – Buying, Selling, Portfolio, Risk (38 minutes)

When Should You Sell a Stock?
How Do You Buy Stocks?
5 Reasons Why Mutual Funds Fail
Building a Portfolio
Tracking a Portfolio
Managing Risk
Getting Started Right Away
Investing Myths
Investing Facts

The Fabulous Life of Billion Dollar Wall Street Ballers

The Rockefellers (Full)

Super Rich The Greed Game

Excellent Quotes by Warren Buffett

How to Pick Managed Investments

[PPT] 

How to Pick Managed Investments

www.travismorien.com/investment.ppt

The average American mutual fund investor only managed to earn 2.57%pa ..... 

How can Behavioural Economics Increase the Effectiveness of Financial Education?

http://www.oecd.org/dataoecd/47/62/45485586.pdf

Evaluate Investment Strategies under various Yield Curve Scenarios PPT

http://www.authorstream.com/Presentation/Janelle-60809-investment-strategy-Strategies-Treasury-Officer-North-Carolina-Local-stra-Business-Finance-ppt-powerpoint/

Strategies and Systems for Managing Investment Risk

http://www.slideshare.net/Ijeoma_Odeigah/CACGMTInvestors-Conf

Basics of Wealth Management PPT

http://www.slideshare.net/thadeshvar/basics-of-wealth-mgt

DOCUMENTRY- WARREN BUFFETT THE WORLDS GREATEST MONEY MAKER

A Conversation with Charlie Munger (2 hour)

Warren Buffett speaks to UGA students

Audiobook: One Up On Wall Street by Peter Lynch

Should You Bet Like Buffett?

Visit msnbc.com for breaking news, world news, and news about the economy

WARREN BUFFETT INTERVIEW FROM INDIA (MUST WATCH)

Think and Grow Rich - Napoleon Hill

How to be Rich - Napoleon Hill

Law of Success Definiteness of Purpose EXPLAINED Napoleon Hill (Rare Recording)

An alternative solution to your household needs :-)

Benjamin Graham Interview

Benjamin Graham Interview

A short transcript of an interview with the father of value investing taken way back in 1960.

Question - Can the average manager of institutional funds obtain better results than the Dow Jones Industrial Average or the S&P Index over the years?

Answer - No. In effect, that would mean that the stock market experts as a whole could beat themselves--a logical contradiction.

Question - Do you think, therefore, that the average institutional client should be content with the DJIA results or the equivalent?

Answer - Yes. Not only that, but I think they should require approximately such results over, say, a moving five-year average period as a condition for paying standard management fees to advisors and the like.

Question - What general rules would you offer the individual investor for his investment policy over the years?

Answer - Let me suggest three such rules:

Rule1: The individual investor should act consistently as an investor and not as a speculator. This means, in sum, that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money's worth for his purchase--in other words, that he has a margin of safety, in value terms, to protect his commitment.

Rule 2: The investor should have a definite selling policy for all his common stock commitments, corresponding to his buying techniques. Typically, he should set a reasonable profit objective on each purchase--say 50 to 100 per cent--and a maximum holding period for this objective to be realized--say, two to three years. Purchases not realizing the gain objective at the end of the holding period should be sold out at the market.

Rule 3: Finally, the investor should always have a minimum percentage of his total portfolio in common stocks and a minimum percentage in bond equivalents. I recommend at least 25 per cent of the total at all times in each category. A good case can be made for a consistent 50-50 division here, with adjustments for changes in the market level


http://investorzclub.blogspot.in/2011/09/benjamin-graham-interview.html

Security Analysis by Benjamin Graham and David Dodd pdf

Security Analysis, the revolutionary book on fundamental analysis and investing, was first published in 1934, following unprecedented losses on Wall Street.

Benjamin Graham and David Dodd chided Wall Street for its myopic focus on a company's reported earnings per share (eps), and were particularly harsh on the favored "earnings trends." They encouraged investors to take an entirely different approach by estimating the rough value of the operating business that lay behind the security. They have given actual examples of the market's tendency to irrationally under-value certain out-of-favor stocks.

The book is must read for any Stock Market Investor, fundamental analyst or equity research professional.

Investment Policies (Based on Benjamin Graham)

Summary of Investment Policies

A. INVESTMENT FOR FIXED INCOME:
US Savings Bonds (FDs)

B. INVESTMENT FOR INCOME, MODERATE LONG-TERM APPRECIATION AND PROTECTION AGAINST INFLATION:
(1) INVESTMENT FUNDS bought at reasonable price.
(2) Diversified list of primary common stocks (BLUE CHIPS) bought at reasonable price. 

C. INVESTMENT CHIEFLY FOR PROFIT: 4 approaches are open to both the small and the large investors:
(1) Representative common stocks bought when the MARKET level is clearly LOW.
(2) GROWTH STOCKS, when these can be obtained at reasonable prices in relation to actual accomplishment – GROWTH INVESTING.
(3) Purchase of securities selling well BELOW INTRINSIC VALUE – VALUE INVESTING.
(4) Purchase of WELL-SECURED PRIVILEGED SENIOR ISSUES (bonds and preferred shares).
(5) SPECIAL SITUATIONS: Mergers, arbitrages, cash pay-outs.

D. SPECULATION:
(1) Buying stock in new or virtually new ventures (IPOs) .(2) TRADING in the market.
(3) Purchase of "GROWTH STOCKS" at GENEROUS PRICES.


_______________


For DEFENSIVE INVESTORS: Portfolio A & B
(Portfolio A: Cash, FDs, Bonds Portfolio B: Mutual funds, Blue chips)

For ENTERPRISING INVESTORS: Portfolio A & B & C
(Portfolio C: Buy in Low Market, Buy Growth stocks at fair value, Buy value stocks i.e. bargains, High grade bonds and preferred shares, Arbitrages)

For SPECULATORS: Portfolio D
(Should set aside a sum for this separate from their money in investing.)

________________
________________


Types of Investors

Graham felt that individual investors fell into two camps : "defensive" investorsand "aggressive" or "enterprising" investors.

These two groups are distinguished not by the amount of risk they are willing to take, but rather by the amount of "intelligent effort" they are "willing and able to bring to bear on the task."

Thus, for instance, he included in the defensive investor category professionals (his example--a doctor) unable to devote much time to the process and young investors (his example--a sharp young executive interested in finance) who are as-yet unfamiliar and inexperienced with investing.

Graham felt that the defensive investor should confine his holdings to the shares of important companies with a long record of profitable operations and that are in strong financial condition. By "important," he meant one of substantial size and with a leading position in the industry, ranking among the first quarter or first third in size within its industry group.

Aggressive investors, Graham felt, could expand their universe substantially,but purchases should be attractively priced as established by intelligent analysis. He also suggested that aggressive investors avoid new issues.


Click and read also:

****My Investment Philosophy, Strategy and various Valuation Methods

Are You an Intelligent Investor?

Knowing Yourself and Keep Investing Simple and Safe

Sorry, the links below are no longer available.

Use the link to directly download the ebook in PDF format

http://books.expect-us.net/dl/Graham%20&%20Dodd%20-%20Security%20Analysis%20(6th%20ed).pdf

http://myinvestingnotes.blogspot.com/2013/09/security-analysis-benjamin-graham-and.html

One up on Wall Street by Peter Lynch pdf

The New York Times best seller "one up on wall street by Peter Lynch" has more than one million copies sold through out the world. Peter Lynch, the world's greatest and the most successful fund manager, was undoubtedly the best stock picker of his time. Anise C. Wallace of The New York Times says "Mr. Lynch investment record puts him in a league by himself ".

Any investor should pay heed to what Mr. Lynch has to say and this book is full of advises by Mr. Lynch himself. He has shared loads of his own personal experiences of stock picking during his tenure at Fidelity Magellan Fund, which is truly a priceless treasure for any equity investor.

Use the following link to download this fabulous book in pdf format: One up on Wall Street by Peter Lynch

The Magic of Compounding

Warren Buffett Investing Secrets.

Warren Buffett Investing Secrets.pdf

Free e-book

The 7 Habits of Highly Effective People

TSM Global (At a Glance)

17.3.2012
TSM Global
Income Statement	9M	9M
	31.10.2011	31.10.2010	Absolute Chg	Change
Revenue	272.46	288.92	-16.46	-5.70%
Gross Profit			0.00	#DIV/0!
Operating Profit	31.194	45.847	-14.65	-31.96%
Financing costs	-0.273	-0.655	0.38	-58.32%
PBT	34.795	52.596	-17.80	-33.84%
PAT	26.279	41.7	-15.42	-36.98%
EPS (basic) sen	12.73	20.73	-8.00	-38.59%
Balance Sheet	31.10.2011	31.1.2011
NCA	91.007	75.462	15.55	20.60%
CA	250.299	176.154	74.15	42.09%
Total Assets	341.306	251.616	89.69	35.65%
Total Equity	284.042	300.543	-16.50	-5.49%
NCL	3.965	2.319	1.65	70.98%
CL	53.3	48.753	4.55	9.33%
Total Liabilities	57.265	51.072	6.19	12.13%
Total Eq + Liab	341.307	351.615	-10.31	-2.93%
Net assets per share	1.370	1.540	-0.17	-11.04%
Short term Investm	41.089	37.869
Cash & Eq	91.433	96.833	-5.40	-5.58%
LT Borrowings	0.316	0.516	-0.20	-38.76%
ST Borrowings	19.002	9.104	9.90	108.72%
Net Cash	113.204	125.082	-11.88	-9.50%
Inventories	54.093	42.26	11.83	28.00%
Trade receivables	63.685	64.693	-1.01	-1.56%
Trade payables	33.918	25.237	8.68	34.40%
Working capital	196.999	127.401	69.60	54.63%
Quick Ratio	3.68	2.75	0.93	34.04%
Current Ratio	4.70	3.61	1.08	29.97%
Cash flow statement	31.10.2011	31.1.2011
PBT	34.795	52.596	-17.80	-33.84%
OPBCWC	71.386	81.839	-10.45	-12.77%
Cash from Operations	87.630	49.731	37.90	76.21%
Net CFO	70.241	34.237	36.00	105.16%
CFI	-58.578	-11.998	-46.58	388.23%
CFF	-2.893	-36.286	33.39	-92.03%
Capex	-23.846	-16.860	-6.99	41.44%
FCF	46.395	17.377	29.02	166.99%
Dividends paid	-6.370	-3.132	-3.24	103.38%
DPS (sen)	5.01	2.46	2.55	103.38%
No of ord shares (m)	127.213	127.213	0.00	0.00%
Financial Ratios
Gross Profit Margin	0.00%	0.00%	0.00%	#DIV/0!
Net Profit Margin	9.64%	14.43%	-4.79%	-33.17%
Asset Turnover *	1.06	1.53	-0.47	-30.48%
Financial Leverage	1.20	0.84	0.36	43.53%
*annualised
ROA	10.27%	22.10%	-11.83%	-53.54%
ROC	12.40%	19.55%	-7.15%	-36.56%
ROE	12.34%	18.50%	-6.16%	-33.32%
Valuation	6.3.2012	4.3.2011
Price	1.22	1.65	-0.43	-26.06%
Market cap (m)	155.20	209.90	-54.70	-26.06%
P/E**	5.91	5.03	0.87	17.33%
P/BV	0.55	0.70	-0.15	-21.77%
P/FCF	3.35	12.08	-8.73	-72.31%
P/Div	24.36	67.02	-42.65	-63.65%
DPO ratio	0.24	0.08	0.17	222.73%
EY**	16.93%	19.87%	-2.93%	-14.77%
FCF/P	29.89%	8.28%	21.62%	261.09%
DY	4.10%	1.49%	2.61%	175.07%
Cash per share RM	0.89	0.98	-9.34%	-9.50%
**9M Earnings

TOP GLOVE NET PROFIT SURGED BY 109%

Financial results for the second quarter ended February 29, 2012 (“2QFY12”)

Klang, Thursday, March 15, 2012 –Top Glove Corporation Bhd (Top Glove) today announced sales revenue of RM549.0 million and net profit of RM54.2 million in 2QFY12 for the financial year ending 31 August 2012.

Revenue for 2QFY12 recorded a growth of 13% to RM549.0 million from RM485.2 million in the corresponding quarter last financial year, and net profit surged 109% to RM54.2 million from RM25.9 million.

On a six month cumulative (September to February) comparison between 1HFY12 and 1HFY11, revenue rose 13% to RM1,103.8 million from RM976.7 million and net profit improved 39% to RM86.7 million from RM62.3 million. The improved performance was attributed to an increase in glove demand, improved operational efficiency and a downtrend in latex prices which reduced from an average of RM8.14/kg in 1HFY11 to RM7.58/kg in 1HFY12.

Top Glove’s Group Chairman, Tan Sri Lim Wee Chai commented “The stronger US dollar and lower latex prices gave us better net profit for 2QFY12. We have learnt from past experience on excessive increases in latex prices and shall remain cautious to continue with our planned strategy for a more balanced product mix of latex and nitrile gloves to cater to on-going customer preference.”

Rare Earth Issues

Points of Maximum Financial Risk and Financial Opportunity

 

Nestle - Projecting its future

Nestle					CAGR	CAGR
	15.3.12	31.12.10	31.12.06		2006-2010	2006-2011
	2011	2010	2006		4 Years	5 Years
Market Price $	56.3	43.34	24.8		17.82%	14.98%
Turnover $	4,700,994	4,026,319	3,275,541		7.49%	5.29%
Earnings (sen)	194.58	166.91	112.67		11.55%	10.32%
Div (sen)	180	165	100		12.47%	13.34%
P/E	28.9	26.0	22.0
EY	3.46%	3.85%	4.54%
DY	3.20%	3.81%	4.03%

Projections of Nestle using the following assumptions:
- EPS GR of 8% per year, that is, its earnings double in 9 years from 2011.
- At the end of the 9 year period in 2020, its intrinsic value was at PE of 22x.

	Projections			EPS GR 8%		Projections
	PE 22	15.3.12		CAGR		Using Historical Price
Year	2020	2011				2020
Market Price $	85.6152	56.3		4.77%		56.3
Turnover $		4700994
Earnings (sen)	389.16	194.58		8.01%		389.16
Div (sen)	360	180		8.01%		360
P/E	22.0	28.9				14.5
EY	4.55%	3.46%				6.91%
DY	4.20%	3.20%				6.39%

Using the above 2 CONSERVATIVE assumptions, you can expect a total return per year of about 9.6% if you were to invest into Nestle today.  This return is derived thus:  about 4.77% from capital appreciation and about  4.8% from dividends.

The more enterprising investor may wish to look for investments with a higher return of 15% or more.  Nevertheless, a return of 9.6% is good for many.

Please note that the projections are over a long period of 9 years.  Over the short term, the price of Nestle can be volatile too and your return may even be negative depending on the price you paid to own it.

Graham defined investment thus: An INVESTMENT OPERATION is one which, upon THOROUGH ANALYSIS, promises SAFETY OF PRINCIPAL and a SATISFACTORY RETURN. Operations NOT meeting these requirements are speculative. 

Nestle revisited

In the year 2001, the after tax EPS of Nestle was 87 sen. and its share price was trading between $19.30 to $21.20, with a P/E ranging from 22.2 to 24.4.

For someone who bought Nestle in 2001, where was the margin of safety of this company?

Margin of safety in a company comes from various sources.  Among these are the qualitative factors which are difficult to quantify mathematically.  Nestle has durable competitive advantage and economic moat.  The only assessment for the investor is to "guess intelligently" what its earnings growth will be over the next few years.  

Margin of safety concept can be applied in two ways.  One that is obvious is buying a company at a big discount to its intrinsic value.  Of course, intrinsic value is not easy to determine and does vary widely depending on the assumptions one makes in deriving this value.  Another method that is not obvious, is the margin of safety that exists too when the present price that you are paying is at a discount to its intrinsic value based on its growth projections, conservatively estimated.

Let's look at Nestle.  In 2001, you were paying 22.2 times for $1 of its after tax earnings.  Was this underpriced, fair price or overpriced relative to its intrinsic value, conservatively estimated based on its growth potential?  Growth projections are at best intelligent guesstimates.  Nestle was projected to grow its business profit at 8% per year at that time.  Therefore in 9 years from 2001, it was projected then to have an EPS of 2 x 87 sen = 174 sen.  

Assuming that Nestle in 2010 had the same PE of 22.2, its share price in 2010 should be 22.2 x 174 sen = $.38.63, or CAGR of 8%.  The average DY of Nestle was 4%.  Nestle paid out virtually all its earnings as dividends.  Therefore, its DY in 2001 based on historical cost was 4% but in 2010, its DY based on historical cost was 8% (dividend paid had also doubled).  This was an average dividend yield of about 6% per year for that period.  Should you have reinvested all the dividends back into Nestle, you would probably be able to compound your initial investment at more than 14% per year.

So, in 2001, Nestle's PE was 22.2x.  Yet, knowing its earning growth potential, conservatively estimated, there was margin of safety even buying at this price, with a reasonable degree of probability.  Using a conservative growth estimate in earnings of 8% per year, its earnings was projected to double in 2010.  Based on this EPS projection, its (future) intrinsic value would be higher and herein was the margin of safety demanded by the value investor.  

Such way of investing may not appeal to some investors.  It is too difficult for them to realise that growth creates value.  One should be happy to pay a higher PE to own a stock of higher quality, better earnings growth, lesser risk and greater certainty of a positive sustainable return.

Buying a wonderful company at a fair price has made those who know how, very rewarding and rich indeed.  There is no reason to change something that has worked consistently over 2 decades of investing.