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.

Showing posts with label earnings growth. Show all posts

Tuesday 26 May 2009

Long-Term Earnings Growth and Economic Growth (2)

Long-Term Earnings Growth and Economic Growth (2)

Long-Term Growth of GDP, Earnings and Dividends, 1871 -2001
Real GDP Growth 3.91%
Real Per-Share Earnings Growth 1.25%
Real Per-Share Dividend Growth 1.09%
Dividend Yield (median) 4.54%
Payout Ratio (median) 58.75%

The above shows the summary statistics for dividends per share, earnings per share (EPS), and stock returns from 1871 through September 2001. The data show that real per-share earnings growth over the entire 130 years has been a paltry 1.25%, considerably below the nearly 4% growth rate of real GDP. Because of the funding requirement, EPS growth does not match aggregate economic growth over the long run.

Long-Term Growth of GDP, Earnings and Dividends, 1871-1945
Real GDP Growth 4.51%
Real Per-Share Earnings Growth 0.66%
Real Per-Share Dividend Growth 0.74%
Dividend Yield (median) 5.07%
Payout Ratio (median) 66.76%

Long-Term Growth of GDP, Earnings and Dividends, 1946-2001
Real GDP Growth 3.11%
Real Per-Share Earnings Growth 2.05%
Real Per-Share Dividend Growth 1.56%
Dividend Yield (median) 3.53%
Payout Ratio (median) 51.91%

The data before and after World War II also show that the acceleration of earnings growth since World War II is associated with the drop in the dividend yield. Greater retained earnings allow firms to buy back shares and reinvest for growth. John Williams' contention that dividends withheld today spur earnings growth in the future is strongly supported by the data.

Also read:
Long-Term Earnings Growth and Economic Growth (1)
Long-Term Earnings Growth and Economic Growth (2)

Long-Term Earnings Growth and Economic Growth (1)

Long-Term Earnings Growth and Economic Growth (1)

How do you value stock?

Stock prices are the present value of future dividends.

What are the determinants of stock prices?

These are earnings and dividends on a PER-SHARE basis.

Is economic growth an important factor influencing future dividends and hence stock prices?

Not necessarily. Although economic growth may influence AGGREGATE earnings and dividends favourably, economic growth does not necessarily increase the growth of per-share earnings or dividends. It is earnings per share (EPS) that is important to Wall Street because per-share data, not aggregate earnings or dividends, are the basis of investor returns.

What is the reason economic growth does not necessarily increases EPS?

Economic growth requires increased capital expenditures and this capital does not come freely. Implementing and upgrading technology requires substantial firm investment. These expenditures mus tbe funded either by borrowing in the debt market (through banks or trade credit or by selling bonds) or by floating new shares. The added interest costs and the dilution of profits that this funding involves place a burden on the firm's bottom line.

Can earnings increase without increasing capital expenditures?

Yes, in the short run, this may occur, but the long-run historical evidence suggests that it will not. One of the signal characteristics of long-term historical data is that the level of the capital stock - the total value of all physical capital such as factories and equipment, as well as intellectual capital, that has accumulated over time - has grown in proportion to the level of aggregate output. In other words, a 10% increase in output requires a 10% increase in the capital stock.

Will investment in productivity-enhancing technology spur earnings growth to permanently higher levels?

"Cost-saving investments" frequently touted as a source of increasing profit margins, only temporarily affect bottom-line earnings. As long as these investments are available to other firms, competition will force management to reduce product prices by the amount of the cost savings, and extra profits will quickly be competed away. In fact, capital expenditures often are undertaken not necessarily to ENHANCE profits but rather to PRESERVE profits when other firms have adopted competitive cost-saving measures.

Also read:
Long-Term Earnings Growth and Economic Growth (1)
Long-Term Earnings Growth and Economic Growth (2)

Thursday 28 August 2008

Understanding Stock Market Return

Stock market return

= fundamental return + speculative return

= (earnings growth + dividend yield) + (change in PE ratio)

http://turtleinvestor888.blogspot.com/2008/03/is-there-such-thing-call-value_19.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)

Tuesday 26 May 2009

Long-Term Earnings Growth and Economic Growth (2)

Long-Term Earnings Growth and Economic Growth (1)

Thursday 28 August 2008

Understanding Stock Market Return

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

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