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

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

Sunday, 7 April 2013

Investment Decisions and Fundamentals of Value

@ 6.47 min
Managers should invest in real assets and should not be involved in investing in financial assets which the shareholders can do on their own.

What is a Valuable Investment Opportunity?

An investment worth more than it costs.
An investment with a return greater than its opportunity cost of capital.

Why does an asset have value?

An asset provides a return on investment in the form of future cash payments.
When we make an investment, we are buying a cash flow stream.
When we assess the value of an asset, we assess the value of its cash flow stream.

Asset valuation is the answer to the following question:

What is the PRESENT VALUE of a Future Cash Flow Stream?

@ 13 min

What determines the present value of a cash flow stream?

Magnitude
Timing
Risk

@ 15 min

Risk of the cash flow stream

Consider 2 cash flows streams A and B

A pays $100 for certain.

B may pay as much as $100 but may pay as little as $60.

Choice: Choose A

We are risk adverse. A SAFE dollar is worth more than a RISKY dollar.

@ 17 min

Time Value of Money

Time value of money is the rate of exchange between present dollars and future dollars established in the financial market.

Time value of money is reflected in the rates of return available to all investors in the financial markets.

@ 18.30

Risk and Return Relationship

Safe dollars are more valuable than risky dollars

Risk averse investors prefer safe investments.

How do you induce risk averse investors to take a risky investment?

Risky investments must promise higher returns to induce investors to undertake them.

In the financial markets, investments are priced so that the higher the risk, the higher the expected return.

Risky investment's rate of return reflects a risk premium that rewards investors for taking on the investment's risk.

Investment's opportunity cost of capital is the return forgone on an investment in the financial market of comparable risk.

Riskier investments have higher opportunity costs of capital.

Rate of Return = Time Value of Money + Risk Premium

Rate of Return = Risk Free Rate + Risk Premium

@ 21.30

Value of an asset:

1. Forecast the magnitude and timing of the cash flow stream over its economic life.

2. Assess the risk of the cash flow stream.

3. Value the cash flow stream given its magnitude, timing, and risk at its opportunity cost of capital.

Market Value and Rate of Return

@ 23 min

The cash flow stream's value is determined by the amount of money needed today to recreate its magnitude, timing, and risk in the financial market at its opportunity cost of capital.

@ 24.50

What is the investment's opportunity cost of capital?

PV = FV / (1+r)

The value of an investment asset is the money needed today to recreate its future cash flow stream in the financial market at its opportunity cost of capital (r).

The value of an investment asset is the present value of its future cash flow stream.

How much is the asset worth, and how much does it cost?

What is the value of the asset's future cash flow stream today, and how much does it cost?
What is its PRESENT VALUE, and how much does it cost?
What is the prevent value net of cost?
What is its NET PRESENT VALUE?

NPV = PV of Investment - Cost

A valuable investment opportunity is worth more than it costs.

@ 31 min

NPV > 0, investment is worth more than it costs

NPV < 0, investment costs more than it is worth.

NPV =0, investment costs as much as it is worth.

NPV is the absolute dollar change in wealth from the acceptance of an investment opportunity.

Look for investment opportunities in those with positive NPV projects.

What is a valuable investment opportunity?

An investment with a net present value greater than zero.
An investment with a return greater than its opportunity cost of capital.

Investment Decision Rules

Accept all investments with Net Present Values greater than Zero.
Accept all investments with rates of return greater than their opportunity costs of capital.

@ 34 min

Example using the Net Present Value Rule

NPV = PV - Cost

> 0, therefore we accept the project.

@ 35 min

Example using the Rates of Return greater than their Opportunity Cost of Capital

Rate of Return = 20%.

Opportunity cost of capital = 12%.

Therefore, accept the project.

@ 36.50

You are considering an investment opportunity that costs $100,000 and promises to return 10%.

A comparable investment in the financial market returns 15%.

A bank offers to lend you $100,000 at 8% with no conditions.

Do you invest $100,000 in the investment opportunity? NO.

Financing cost = 8%.

What is the investment's cost of capital? 15%.

The cost of capital is the return on comparable investments in the financial market, that is 15%.

The cost of capital is not the cost of raising the money to finance the investment. That is a financing decision and not an investment decision.

That return in the financial market is the standard against which other investment opportunities are evaluated.

The financing by the bank loan is irrelevant to the investment decision.

Investment decision and financing decision are separate and independent decisions.

First make the investment decision, after that, then make the financing decision.

Thanks for pointing this video out to me.
< I found these very helpful : https://www.youtube.com/watch?v=ZtQKrPBz3XA https://www.youtube.com/watch?v=4q2Xcbrazhw on Financial Ratio Tutorial Anonymous on 4/7/13 >

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My 18 points guide to Successfully compounding your money in Stocks

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

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

11 Lessons From Peter Lynch

Peter Lynch taught me:

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

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

Capital Expenditure

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

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

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

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

Less is better.

Benjamin Graham's 113 Wise Words

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

Philip Fisher's Wise Words

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

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

(Common Stocks and Uncommon Profits)

The Ultimate Hold-versus-Sell Test

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

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

No equivocation. Yes or no?

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

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

Some thoughts on Analysing Stocks (KISS)

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

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

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

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

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

A single quote by Graham on page 516 struck me:

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

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

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

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

Sunday, 7 April 2013

Investment Decisions and Fundamentals of Value

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All equity security investments present a risk of loss of capital

The Ultimate Hold-versus-Sell Test

Some thoughts on Analysing Stocks (KISS)

Benjamin Graham

Sell the losers, let the winners run.

Investment Style

Warren Buffett

Political and Economic News

Interesting Blogs