Showing posts with label Moolah. Show all posts
Showing posts with label Moolah. Show all posts

Tuesday 24 August 2010

Tuesday 13 April 2010

Investors and Accounting

Buffett encourages investors to develop a good knowledge of accounting.

In a Berkshire shareholders' annual meeting, a New York University MBA student asked Buffett for his advice on how to develop Buffett-like skills.  In his response, Buffett mentioned that the student should take as many accounting course as possible.  

Remember that you are a consumer and not a prepare of financial information.  Act like a detective trying to understand the company's business from reading financial statements.

Buffett reads a lot of financial reports; and for him, perhaps, that is like reading detective novels.  As a reader of financial statements, you could have fun discovering behind-the-curtain stories.

Accounting numbers are based on a large number of estimates, and hence, they are not really hard numbers.  Yet, academic  research shows that long-short investing strategies can often be developed by using accounting knowledge.  

When you study financial statements, be a skeptic.  Most accounting numbers are reliable, but you must remain vigilant.  


Related readings:



Videos-Financial Accounting by Susan Crosson

Where is Ze Moola



Visit this site to see how this blogger dissect the companies through using his accounting and other knowledge. 

Tuesday 24 November 2009

When things go wrong: No blame, as blame is counterproductive and damaging

Blame is counterproductive and damaging for several reasons:
  • it has a negative emotional impact on the person concerned, making them more likely to 'self-regulate' their future behaviour in a limiting way
  • it closes down the discussions that should result from mistakes
  • it shifts the spotlight away from analysis, learning and objectivity
  • it discourages other people in the business from taking any kind of risk, whatever the expected value.
If decisions are based on careful, objective consideration of probabilities and impacts, and the potential downside of a risk is accepted because of its positve overall value, then there should be no blame if this downside actually comes about.

Decision tools such as the decision tree create joint commitment to an action, so that no one person's position or reputation is on the line if things go wrong.  In effect, this approach transfers business risks from the individual decision maker, who has much to lose from downsides occurring, to the business as a whole, which can absorb the impacts of downsides ( both financial and reputational).

Good risk management is about being prepared for problems, which in turn helps to avoid a culture of blame.  By valuing control, analysis and objectivity, the focus can be kept on the problems that everyone in the business faces together.

Sunday 25 October 2009

"Warren Buffett" of Malaysia

http://spreadsheets.google.com/pub?key=tkb0enVog-PjOHzgbMUXi_w&output=html


The returns from iCap's winning transactions were truly fantastic. 

Are we looking at a budding "Warren Buffett" equivalent?

Wonder the 'cow' will jump over the moon?

Wednesday 8 July 2009

"Even Buffett Isn't Perfect"

Sunday, July 20, 2008
Book Review-"Even Buffett Isn't Perfect"

I am a complete sucker for investment books. My wife accuses me of owning several thousand books that have essentially the same title, usually some variant of Value Investing, valuation, or intrinsic value, or securities analysis. Of course, I have every Buffett or Munger book known to man as well as everything about or by Benjamin Graham. By the way, speaking of Graham, my good friend Geoff Gannon is putting together a series which will review Securities Analysis chapter by chapter. For those who are serious value investing students, I suspect that you will enjoy Geoff's always thorough and thoughtful posts.

Vahan Janjigian, a fellow CFA, is executive director of Forbes Investment Advisory Institute and publishes a number of newsletters with Forbes. He also has a blog and serves on the investment committee of a large RIA.

Dr. Janjigian's book gingerly attempts to criticize some of Buffett's mistaken investments and controversial points of view. I think the book is more successful with the latter than the former.

Janjigian admires Buffett's discipline and capital allocation methodologies. He admires Buffett's ability to manage executive talent. His last sentence in the book summarizes his viewpoint,"Based on the evidence, it is certainly fair to conclude that WB is one of the greatest investors-if not the greatest investor-of all time."

So where are Buffett's mistakes? Janjigian criticizes Buffett's views on taxation, especially those on estate taxes. I agree with Janjigian that there is an irony if not an artificiality or phoniness about urging the continuity of high estate taxes and concomitantly avoiding the situation through setting up trusts and foundations Evidence of avoiding income taxes is evident throughout Berkshire's life...the company and Buffett have always used the IRS Tax Code to their advantage. There is clearly nothing wrong with that but similarly. it is somewhat disingenuous to urge higher taxes after a career of avoiding them.

Like any investor, Buffett has made some mistakes. This is not a game of perfect, but rather one where investors should attempt to understand the downside risks in making an investment. The outcomes can be highly uncertain...the future always is hazy and usually, initial assumptions are plain wrong, either on the optimistic or the pessimistic side of expectations.

Janjigian addresses the Buffett diversification versus concentration question. "Buffett believes that if you can't invest enough money to have some say in how the company's capital is to be deployed, you are better off diversifying your portfolio." This is simply not true. Most Buffetteers and wannabes certainly attempt to focus their portfolios. WB does not say not to diversify...in fact, for the average investor who is not inclined to do sufficient due diligence, diversification is a salvation. For many professional portfolios, the great bulk of the portfolio is indexed. But in cases where one has specialized knowledge or skills, satellite investments outside the cord index are made and should add performance. Diversification is a protection against ignorance. If one is able to do due diligence, and select successful businesses at reasonable valuations, diversification will not serve you other than to reduce volatility and an unfortunate corollary, reduce returns.

VJ does a decent job in discussing attributes of diversification in a non-mathematical approach to statistical correlation. This is one of the strongest elements in this book.

Much of the rest of the book is in my view, completely obvious. "Buffett buys stocks cheap, not cheap stocks." "Successful investors must be able to distinguish between great companies and great stocks." VJ has an amazing grasp of the obvious and adds little insight into valuation of growth stocks. There are far better sources than this book for this element.

VJ addresses the fact that value works over the long run but growth or rather momentum can work over the short run. Buffett never trashes growth but views it as a partner in helping undervalued stocks recover when growth becomes temporarily disrupted. Other than Buffett's famous comments about lemmings, he has never discussed momentum investing per se, at least to my knowledge.

VJ makes some dangerous statements about PIPE stocks indicating that WB has been successful in buying special issue "Private Investment in Public Equity" holdings such as Salomon Brothers or US Air. True, these had special terms that a large buyer can extract but it is misleading to believe that what some brokers present as PIPEs will offer the average investor better returns. Most PIPE offerings are made in very small cap, highly risky businesses. VJ does suggest that the best access to such investments is through a hedge fund or through Berkie itself.

VJ makes the point that "Unless you have access to Buffett-like resources, it is better to think of yourself as a stock buyer than a business buyer." The argument that managements will rarely listen to outside advice is humbling for both institutional and retail investors. However, retail investors and small institutional investors can be very successful in motivating and organizing larger investors to add pressure to a board. The principle of thinking long term as an owner of a business rather than a punter of stocks is an important part of any real value investor's credo. I have known many managers who "played" stocks rather than owned businesses and who were looking for trends rather than valuation rationales for stocks. They are assuredly not value managers. I have had investee company managements who have indicated that I should just sell the stock if I didn't like what they are doing. Again, these are managements who just don't get "it." If the business has a strong moat that is not being defended, get rid of the management but hang onto the business. VJ's advice is ill-conceived at best in this topic.

Swinging for the fat pitch is WB's approach. WB does not suffer from analysis paralysis and VJ believes that some of WB's recent deals have had inadequate due diligence. Sometimes the obvious should not take very long!

WB readily admits to being "dead wrong." Salomon was a mistake that took an extraordinary amount of work to escape. Gen Re was much worse with poor judgment on WB's part re underwriting discipline and the derivatives book of GenRe securities. NetJets capital intensity does not seem to fit the usual Buffett textbook. Pier One had no moat. Mistkaes all. VJ actually misses the most egregious errors that I recall, namely Dexter Shoe which gave away 1.6% of BRK or about $3.5 Billion in value for what is now a tiny fragment of H.H. Brown Shoe Group, another BRK sub. Dexter, Buffett calls his worst mistake. VJ doesn't even address this. There have been others. WB was the largest investor in Handy and Harman, the silver processor and refiner. Unfortunately, it was also an auto parts supplier and metal bender. Buffett's endless fascination with silver attracted him to H&H. H&H ultimately merged into WHX, which went chapter 11 in 2003. Berky had escaped H&H many years before this ignominious end.

VJ dislikes WB's views about corporate governance. It is incorrect to say that Buffett opposes employee stock options. It was the accounting for them that he faulted as well as the low hurdles that most company's managements clear to get them. In many cases, the only requirement for managements to achieve is respiration, and there are even cases where compensation continues into the after-life! There is nothing misleading about WB issuing options in subsidiary companies with clear performance mandates versus his public statements about employee stock options issuance.

The composition of WB's board has been controversial in the past. No it certainly was not independent historically with Warren and Charlie, Susan and Howard Buffett; Malcolm Chace, Walter Scott were old business cronies; Ron Olson was a partner in Munger's old firm. But VJ missed the most obvious point, Buffett for most of the time that he was involved in BRK owned over half the stock. It was absolutely iron clad clear that management's interests were aligned with shareholders. Unlike most public corporations, management owned most of the stock. The role of the board is not to protect minority shareholder interests but rather to ensure that shareholders' interests are protected. This point is missed by VJ.

Bottom-line, if you are looking for advice to imitate WB's investment style, this is not the best source. If you are looking for a comprehensive list of WB's mistakes in judgment, this is incomplete. If you are looking for views on taxation contra to those of WB, read Steve Forbes rather than VJ's book.

The key takeaways after each chapter provide an excellent summary of each chapter. The final chapter, "Conclusion" successfully highlights the important points.

Dr. Janjigian has attempted to provide an antidote to the usual glorious heaping of praise that most Buffett books (and CNBC coverage) provide. The reality is that nobody walks on water (or parts the sea depending on your point of view.) Even great investors frankly screw up royally. But the incidence in the case of Buffett is remarkably low, the damage is a scratch or fender bender rather than a complete wreck. Should all of us be so fortunate, or disciplined!!

posted by Rick @ 6:52 PM 3 comments



http://valuediscipline.blogspot.com/2008/07/book-review-buffett-isn-perfect.html

Sunday 28 June 2009

iCap Closed End Fund Track Record for last 2 years

Click on this busy spreadsheet.

http://spreadsheets.google.com/ccc?key=roHksSrHHyf0Roi1sJE36Wg

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 13 June 2009

Dollar Cost Averaging vs Simple Averaging

There is a difference between simple averaging and dollar cost averaging.

Tan Teng Boo averaged down on a stock and profited. Let us look at what he did.

This was taken from this week's icap newsletter:
"A stock that the i Capital Global Fund invested in plunged around 85% during the 2007-2009 bear market. However, instead of selling as it dropped, we bought so much more of this stock that the cost price plunged around 80% too. By now, the i Capital Global Fund is sitting on a gain of 175% on this particular stock. The reason why ICGF bought so much more was because if it was attractive at higher prices, it is even more attractive at depressed prices since the business fundamentals of the company have not changed. "

What ICGF did. http://spreadsheets.google.com/pub?key=r_MxUHLmwJhsKRpR7JklS1Q&output=html

Simple Averaging

The first point to clear up is actually the difference between dollar cost averaging and simple averaging. What Teng Boo did above was not DCA but simple averaging.

Buffett does not believe in DCA. "It does not make sense investing in stocks when the prices are high." However, Buffett will employ simple averaging, often buying a good stock he likes in large amount when its price is down for no good reasons.

DCA

Those employing DCA should learn its limitations too. It is a way to diversify risk, and is definitely not a strategy to optimise your returns. Various studies quoted that returns from lump sum investing beats those from DCA, 60% of the time.

There are risks too from DCA. If the stock price tanked due to deterioration in its fundamentals, using DCA equates to throwing good money after a lousy company and should not be employed. Also, remember that the same amount used for DCA into a stock is an opportunity cost, to investing in another stock.


The Only Reason to Simple Average or Dollar Cost Average

I did pick up a very important point. It was good to see this advice in print. For those who are investing in good high quality stocks, averaging down can be employed in ONE particular situation, when its price tanked for no good reasons. However, there is still the need to ensure that your good high quality stock's fundamentals have not deteriorated.



To summarise:

There is only one reason that justifies simple averaging or dollar cost averaging - when its price tanked for no good reasons. However, there is still the need to ensure that your good high quality stock's fundamentals have not deteriorated.

If you thought that a stock was undervalued at $34 and without the fundamentals of the company changing, the stock got unfairly beaten down.

An investor put it: "The company and its business have not changed. The only change is its share price got beaten down."

Tuesday 2 June 2009

Are you Mr. Market or Mr. Buffett?

Benjamin Graham's teaching on the shortsightedness of the stock market

There are certainly many opinions in the blogs. Those who visit these for "tips" maybe disappointed.

Investing should be a lonely journey, through hard work guided by your own philosophy and strategy.

Nevertheless, some of the blogs information can be useful too. One can also learn and benefit from the emotions and thought processes driving these bloggers.

You should be aware of the "noises" which are temporarily good or bad news that many bloggers get excited with. For the long term investors, the news that matters are quite different yet again.

Perhaps, this point can be better illustrated by the parable of Mr. Market made famous by Benjamin Graham.

"When Benjamin Graham was teaching Warren Buffett about the shortsightedness of the stock market, he asked Warren to imagine that he owned and operated a wonderful and stable little business with an equal partner by the name of Mr. Market.

Mr. Market had an interesting personality trait that some days allowed him to see only the wonderful things about the business. This, of course, made him wildly enthusiastic about the world and the business's prospects. On other days, he couldn't see past the negative aspects of the business, which, of course, made him overly pessimistic about the world and the immediate future of the business.

Mr. Market also had another quirk. Every morning he tried to sell you his interest in the business. On days he was wildly enthusiastic about the immediate future of the business, he asked for a high selling price. On doom-and-gloom days, when he was overly pessimistic about the immediate future of the business, he quoted you a low selling price hoping that you would be foolish enough to take the troubled company off his hands.

One other thing. Mr. Market doesn't mind if you don't pay any attention to him. He shows up to work every day - rain, sleet, or snow - ready and willing to sell you his half of the business, the price depending entirely on his mood. You are free to ignore him or take him on his offer. Regardless of what you do, he will be back tomorrow with a new quote.

If you think that the long-term prospects for the business are good and would like to own the entire busines, when do you take Mr. Market up on his offer? When he is wildly enthusiastic and quoting you a really high price? Or when he feels pessimistic and quotes you a very low price? Obviously you buy when Mr. Market is feeling pessimistic about the immediate future of the business, because that's when you would get the best price.

Graham added one more twist. He taught Warren that Mr. Market was there to benefit him, not to guide him. You should be interested only in the price that Mr. Market is quoting you, not in his thoughts on what the business is worth. In fact, listening to his erratic thinking could be financially disastrous to you. Either you will become overly enthusiastic about the business and pay too much for it, or you become overly pessimistic and miss taking advantage of Mr. Market's insanely low selling price.

Warren says that, to this day, he still likes to imagine himself being in business with Mr. Market. To his delight he has found that Mr. Market still has his eye on the short term and is still manic-depressive about what businesses are worth."

Key point: In an investment world dictated by shortsighted investment goals, where the human emotions of optimism and pessimism control investors' buy and sell decisions, it is short-sighted pessismism that creates Warren's buying opportunity.

Are you Mr. Market or Mr. Buffett?

Friday 29 May 2009

Remember, Nobody's Perfect

Remember, Nobody's Perfect

No investor - not even the greatest investors in the world - are right all the time.

Don't be discouraged when your system calls for you to lock in losses on a stock; not even the best investors in the world are right all the time.

Martin Zweig says:

"In the long run,
a 60% success rate translates into huge gains,
a 50% rate into solid gains, and
even a 40% rate can beat the market."


When it comes to the stock market, no one is right all the time - or even nearly all the time. Even the great Warren Buffett makes bad investments. Just read Berkshire Hathaway's annual report, and Buffett will often speak candidly about where he's gone wrong.

Some examples from a fund manager. A particular portfolio of theirs, by being right 62.7% of the time - on less than two-thirds of its picks - had more than tripled the gains of the S&P over 5 years. For the most part, their portfolios had accuracies between 50 and 60 % - far from perfect - and most had still doubled, tripled, or quadrupled the market. Being aware that no one can be right all the time, or even nearly all the time, can make it easier on your ego when your selling system calls for you to take a loss on a stock.

While you'll never be right all the time, you can be right more than you're wrong, however. In the end, the key is to develop a fundamental-based selling and rebalancing plan and stick with it, NO MATTER WHAT. When your portfolio does lose ground from time to time, you'll inevitably feel the urge to sell certain stocks and go after others on a whim or a hunch to make up ground. But if you have a detailed, quantitative selling system in place, you can help keep short-term emotions from wreaking havoc with your long-term performance.

Saturday 21 February 2009

Jim Cramer is laying out his case against Warren Buffett's recent stock moves.


Wednesday, 18 Feb 2009
Jim Cramer "Struggles" With Warren Buffett's Stock Moves Because He's "Selling America"

Posted By: Alex Crippen

Topics:Investment Strategy Warren Buffett
Companies:US Bancorp Conocophillips Procter & Gamble Co Johnson and Johnson Berkshire Hathaway Inc.

CNBC's Mad Money host Jim Cramer is laying out his case against Warren Buffett's recent stock moves.
Last night (Tuesday), after Berkshire Hathaway's fourth quarter portfolio snapshot, Cramer warned on CNBC that investors should not follow Buffett's lead because they will not profit "within the time frame they care about." (Transcript and video clip are in the WBW post Jim Cramer Warns Investors: Don't Follow Warren Buffett This Time.)
This morning, on his TheStreet.com site, Cramer goes into greater detail, explaining why he's "struggling with some of the things that Warren Buffett is doing with his cash these days."
Cramer's prime complaint: Warren Buffett was "selling America" last fall when Berkshire reduced its stakes in Johnson & Johnson, Procter & Gamble, ConocoPhillips, and U.S. Bancorp. "What's more American than these stocks?" he asks. (The post notes that Cramer is currently long Johnson & Johnson and ConocoPhillips.)
Cramer draws a contrast with Buffett's "now-fated" October 16 New York Times op-ed piece that argued it was time to buy American stocks. Since then, the major market indexes have continued to plunge, so "those who bought America that day are feeling ... well, downright un-American. Or at least they're feeling poorer."
Cramer says that he is "sensitive" to that Times piece because at the same time he was advising an exit from stocks if investors needed to keep their money safe for a major purchase in the next year.
And he argues that while rich people can afford to buy for the long term as Buffett advises, everyone else can't.
"As long as Buffett was buying and not selling, or as long as he was at least holding, you couldn't knock him. But now it turns out he's putting a terminal value on something we thought we were to hold forever."
While Buffett is "obviously a tremendous investor" and "doesn't have to answer for anything," Cramer continues, "It is fair to say that many, many people relied on his judgment to buy stocks just like the quintessential American names of Procter & Gamble and Johnson & Johnson. To them, what can I say? 'Don't worry about it.'"
Cramer concludes that Buffett's "actions should be scrutinized just like anyone else's," so TheStreet.com is starting its own Buffett Watch. (He cites his friend Doug Kass, "who has been on this case for months now" and who has his own questions today about Berkshire's portfolio.)
"We need to know what's happening. Buffett's firm is too big, and he is too important to ignore. We need to know daily and some institution has to have the guts to do it. Glad it's us."

Current stock prices:

Berkshire Class A: [US;BRK.A 77000.0 -1600.00 (-2.04%) ]

Berkshire Class B: [US;BRK.B 2387.0 -129.50 (-5.15%) ]

Johnson & Johnson:[JNJ 54.65 -1.28 (-2.29%) ]

Procter & Gamble: [PG 50.25 -0.88 (-1.72%) ]

ConocoPhillips: [COP 39.44 -2.35 (-5.62%) ]

U.S. Bancorp: [USB 10.58 -0.30 (-2.76%) ]




For more Buffett Watch updates follow alexcrippen on Twitter.



http://www.cnbc.com/id/29258337/site/14081545


Comment:

Sounds familiar. Cramer vs Buffett, Moolah vs Teng Boo :)

Friday 28 November 2008

Sustainability of business performance

Sustainability of business performance

Charlie Munger once said:
Frequently, you'll look at a business having fabulous results, and the question is: ' How long can this continue?' Well, there's only one way I know to answer that, and that's to think about why the results are occurring now - and then to figure out the forces that could cause those results to stop occurring.

We have learnt that there is no mystery to measuring business performance. The numbers will tell you whether the business is good, fair or bad. Neither is there any point in hopng that things will change.

Buffett makes the point with some humour: Think of it in terms of marrying some gal that's the girl of your dreams, and having another one and saying, 'If I send her to the psychotherapist for five years and hve some plastic surgery, well maybe it will work'.

A business may have a fabulous track record of performance, and the value based on it may make the price look cheap. However, the price will only be cheap if the performance criteria used to determine the value are sustainable. We must, as Charlie suggests, 'think about why the results are occurring now - and figure out the forces that could cause those results to stop occurring'.

When researching a company, the positive glare of the highlights tends to obscure the dim glow of the negatives. We must be aware not only of the positive manner in which a company's history and prospects are protrayed by management, but also our inherent desire to encourage optimistic expectations by placing excessive weight on positives.

Conversely, one should not become paranoid about negatives. For instance, if you were looking at two great businesses such as McDonald's and The Coca-Cola Company, you might be deterred by all the publicity about how fast food and carbonated drinks are major contributors to obesity and heart problems. These are not new concerns, so examination of the accounts will tell you whether they have had any effect on revenue.

Also visit: http://whereiszemoola.blogspot.com/