Strategy is the direction and scope of an organisation over the long term that achieves an advantage for the organisation through the configuration of its resources within a changing environment to meet the needs of the customers and to fulfil stakeholder expectations.
Showing posts with label investment strategy. Show all posts
Showing posts with label investment strategy. Show all posts
Tuesday, 12 January 2016
Wednesday, 17 December 2014
Strategy during crisis investment: Revisiting the recent 2008 bear market
FRIDAY, FEBRUARY 26, 2010
Strategy during crisis investment: Revisiting the recent 2008 bear market
Although we may not know where the bear bottom is, buying in a down market may still lead to losing money. This is definitely true. As long as the purchase is not at market bottom, it may still result in losses for the time being. This is likely to be a short-term loss but compensated by a probable long-term gain. Even if we cannot time the market perfectly, we are definitely better off to “buy low and sell high” then to “buy high and sell low”.
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Prices fell but value intact
Presently stock prices have fallen sharply.
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Warren Buffett, the second richest man in the world who makes his fortune from stock investment, is busy buying undervalued companies. He sees the value and he also sees prices detaching away from the intrinsic values.He said: “I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turn up.”
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Catching a falling knife
Some may argue that buying now is like catching a falling knife. If you are not careful, you may be hurt and suffer more losses from falling stock prices.There is no doubt that we may incur short-term losses as long as we do not buy at the bottom. On the other hand, who can determine where and when is the bottom. As long as there are still unknown events or hidden problems, an apparent bottom now may not be the eventual bottom.Since we do not have all the information in the market, it is almost impossible to guess where the bottom will be.
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In most cases, we only realise the bottom after it is over and by that time stock prices are running high with much improved market confidence. Market bottom could be there only for a short period. In most cases, market did not stay at the bottom waiting for investors. It will just move on.
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Since market moves ahead of the economy by about six months, the market bottoms out when the economy is still gloomy, news are still negative, analysts are still calling underweights and most investors are staying at the sidelines.
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Handling something we know is definitely much easier than dealing with the unknown risks, something which hits from behind without warning.When we invest during a crisis we actually go in with our eyes open. We know it is definitely risky but we also know it could also be very profitable. If we can handle the risk, the risk-reward trade-off will be very rewarding.
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Emphasise strategies
What we need is to buy near the bottom, not right at the bottom. Investors’ frequent question now is when to buy, that is where is the bottom? Perhaps it is more intelligent to ask how much to buy now since nobody will be able to guess where is the market bottom.
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Staggered buying is preferred over bullet purchase which is taking the risk of timing the market bottom. In staggered buying, a pre-determined amount will be set aside for investment over time, say in 10 equal portions.
One common method of staggered investment is dollar cost averaging, an investment scheme made in equal portions periodically, either by a small amount monthly or larger amount quarterly. There are also several variations of staggered investment.
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Anyway, staggered purchase is a preferred method to avoid the anxiety of market timing and the mixed feeling of fear of further downside and worry of missing the market rebound. As long as the market is undervalued, the strategy of staggered investment ensures that investors are in and are benefiting from the undervalued market.
http://klsecounters.blogspot.com/2008/11/strategy-during-crisis-investment.html
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Prices fell but value intact
Presently stock prices have fallen sharply.
- Banks are trading at 1x book value,
- property stocks sold at 50% discount from net asset value,
- utility stocks trading at single-digit price-earnings ratio providing an earnings yield of more than 10% net of tax and
- there are many good stocks trading at dividend yield of 2x bank interest rates.
----
Warren Buffett, the second richest man in the world who makes his fortune from stock investment, is busy buying undervalued companies. He sees the value and he also sees prices detaching away from the intrinsic values.He said: “I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turn up.”
----
Catching a falling knife
Some may argue that buying now is like catching a falling knife. If you are not careful, you may be hurt and suffer more losses from falling stock prices.There is no doubt that we may incur short-term losses as long as we do not buy at the bottom. On the other hand, who can determine where and when is the bottom. As long as there are still unknown events or hidden problems, an apparent bottom now may not be the eventual bottom.Since we do not have all the information in the market, it is almost impossible to guess where the bottom will be.
----
In most cases, we only realise the bottom after it is over and by that time stock prices are running high with much improved market confidence. Market bottom could be there only for a short period. In most cases, market did not stay at the bottom waiting for investors. It will just move on.
----
Since market moves ahead of the economy by about six months, the market bottoms out when the economy is still gloomy, news are still negative, analysts are still calling underweights and most investors are staying at the sidelines.
----
Handling something we know is definitely much easier than dealing with the unknown risks, something which hits from behind without warning.When we invest during a crisis we actually go in with our eyes open. We know it is definitely risky but we also know it could also be very profitable. If we can handle the risk, the risk-reward trade-off will be very rewarding.
----
Emphasise strategies
What we need is to buy near the bottom, not right at the bottom. Investors’ frequent question now is when to buy, that is where is the bottom? Perhaps it is more intelligent to ask how much to buy now since nobody will be able to guess where is the market bottom.
----
Staggered buying is preferred over bullet purchase which is taking the risk of timing the market bottom. In staggered buying, a pre-determined amount will be set aside for investment over time, say in 10 equal portions.
One common method of staggered investment is dollar cost averaging, an investment scheme made in equal portions periodically, either by a small amount monthly or larger amount quarterly. There are also several variations of staggered investment.
----
Anyway, staggered purchase is a preferred method to avoid the anxiety of market timing and the mixed feeling of fear of further downside and worry of missing the market rebound. As long as the market is undervalued, the strategy of staggered investment ensures that investors are in and are benefiting from the undervalued market.
http://klsecounters.blogspot.com/2008/11/strategy-during-crisis-investment.html
Sunday, 28 September 2014
A Very Simple and Effective Approach to Investing.
From Detergent To Driverless Cars: Stock Picking Lessons From 60 Years On (And Off) The Street
Investors, entrepreneurs and financial journalists alike are obsessed with what the rise of the Millennial generation will mean for the future of money. Yet, a conversation with an industry veteran served as a reminder that looking back can be just as important as looking forward — even in stock picking.
Gail Winslow has worked in the wealth management industry for 59 and 1/2 years — “to be exact.” She got her start as a Girl Friday — a term coined in 1940 for what we now know as an executive assistant. A Radcliff educated go-getter, Winslow quickly tired of “doing all the dirty work” at D.C. based Ferris and Company so six months in she became a Registered Representative of the New York Stock Exchange. Today, Winslow is 84 and manages close to $200 million worth of assets at RBC Wealth Management, mostly working with clients nearing retirement age (though Winslow proves that is not always synonymous with nearing retirement).
A lot has changed during her six-decade career. To name just one: the S&P 500 finished 1955 at 45.5 points. This summer it crossed 2,000 for the first time. Nevertheless, when choosing stocks Winslow continues to depend on a few faithful principles she learned long ago – many of these drawn from unexpected sources like her mother-in-law, the hair care aisle of the drug store and her washing machine.
Sometime in the early 1960s Winslow called her mother-in-law to suggest she sell some stock. The market was getting “toppy.” Her mother-in-law pulled out her portfolio and asked, “Do you think Chase Manhattan is going to cut their dividend?” Winslow said no. “Do you think General Motors is going to cut their dividend?” No again. They went through every holding before the older woman declared, “I think I’ll just continue to hold.”
(For what it is worth, in 2000, Chase merged with J.P. Morgan, forming mega bank JPMorgan Chase. The company still pays a dividend; its most recent payout was 40 cents a share. For its part, General Motors cut its long standing dividend in June 2008 part of an attempt to save money before its 2009 bankruptcy. A quarterly dividend was reinstated earlier this year at 30 cents a share.)
Looking back, Winslow says in that moment she learned that income is the difference between a speculator and an investor. “Investors say they want their stocks to go up,” says Winslow, “but they really don’t want them to go down.”
Winslow knew innately that women of the day were largely conservative, and with just one other female in the office, found herself uniquely qualified to help Washington’s high power women — researchers at the National Institute of Health, high ranking women in the military and wives of Senators (the nation had just one female senator in the 1960s). “They didn’t want to lose what they had. So I dealt early on with large American corporations that had proven track records.”
When Winslow got her start members of the Baby Boomer generation (born 1946 to 1964) were entering their teenage years. They liked, “Toni Home Permanents,” – hair perms – “bathing suits, potato chips, Frito Lay and Gillette.” Products, she says, that mothers were buying for their teens or helping them use. With 10,000 Baby Boomers now turning 65 each day Winslow is drawn to health care stocks and senior housing REITs.
These days Winslow also looks to the generation of 80 million born after 1980 for inspiration – the Millennials. With Millennials reluctant to purchase homes, Winslow is wary of housing stocks but intrigued by the rental industry. Pointing out that in her day “you put a cigarette in your mouth at 14,” she notes that young people today are health conscious, so avoids cigarette companies and looks to food companies that seem to be taking advantage of trends toward nutritious and natural.
Another thing Millennials love? Technology — and Winslow is a fan too. She has held Intel, Microsoft and IBM for decades. Apple has been in her portfolio for 15 years. (Apple shares are up 3,600% since September 1999.) Winslow is currently intrigued by driverless cars and other technologies that improve safety. For Winslow though, technology does not include just computer companies and complex software.
"Early on in the 50s new products came out and many of them were products used by women in the home – including detergent,” recalls Winslow. “Before that we used ivory soap which we squashed around and which left scum. When Tide came out I thought, ‘wow, is this great.’”
While she is still a fan of dividend payers for her contemporaries, she tells her grandchildren and their fellow Millennials to look for stocks with increasing earnings. Management, she says, should be investing profits back into company growth rather than paying out a high percentage in dividends.
An article from Forbes
http://www.forbes.com/sites/samanthasharf/2014/07/30/the-recession-generation-how-millennials-are-changing-money-management-forever/
Investors, entrepreneurs and financial journalists alike are obsessed with what the rise of the Millennial generation will mean for the future of money. Yet, a conversation with an industry veteran served as a reminder that looking back can be just as important as looking forward — even in stock picking.
Gail Winslow has worked in the wealth management industry for 59 and 1/2 years — “to be exact.” She got her start as a Girl Friday — a term coined in 1940 for what we now know as an executive assistant. A Radcliff educated go-getter, Winslow quickly tired of “doing all the dirty work” at D.C. based Ferris and Company so six months in she became a Registered Representative of the New York Stock Exchange. Today, Winslow is 84 and manages close to $200 million worth of assets at RBC Wealth Management, mostly working with clients nearing retirement age (though Winslow proves that is not always synonymous with nearing retirement).
A lot has changed during her six-decade career. To name just one: the S&P 500 finished 1955 at 45.5 points. This summer it crossed 2,000 for the first time. Nevertheless, when choosing stocks Winslow continues to depend on a few faithful principles she learned long ago – many of these drawn from unexpected sources like her mother-in-law, the hair care aisle of the drug store and her washing machine.
Sometime in the early 1960s Winslow called her mother-in-law to suggest she sell some stock. The market was getting “toppy.” Her mother-in-law pulled out her portfolio and asked, “Do you think Chase Manhattan is going to cut their dividend?” Winslow said no. “Do you think General Motors is going to cut their dividend?” No again. They went through every holding before the older woman declared, “I think I’ll just continue to hold.”
(For what it is worth, in 2000, Chase merged with J.P. Morgan, forming mega bank JPMorgan Chase. The company still pays a dividend; its most recent payout was 40 cents a share. For its part, General Motors cut its long standing dividend in June 2008 part of an attempt to save money before its 2009 bankruptcy. A quarterly dividend was reinstated earlier this year at 30 cents a share.)
Looking back, Winslow says in that moment she learned that income is the difference between a speculator and an investor. “Investors say they want their stocks to go up,” says Winslow, “but they really don’t want them to go down.”
Winslow knew innately that women of the day were largely conservative, and with just one other female in the office, found herself uniquely qualified to help Washington’s high power women — researchers at the National Institute of Health, high ranking women in the military and wives of Senators (the nation had just one female senator in the 1960s). “They didn’t want to lose what they had. So I dealt early on with large American corporations that had proven track records.”
When Winslow got her start members of the Baby Boomer generation (born 1946 to 1964) were entering their teenage years. They liked, “Toni Home Permanents,” – hair perms – “bathing suits, potato chips, Frito Lay and Gillette.” Products, she says, that mothers were buying for their teens or helping them use. With 10,000 Baby Boomers now turning 65 each day Winslow is drawn to health care stocks and senior housing REITs.
These days Winslow also looks to the generation of 80 million born after 1980 for inspiration – the Millennials. With Millennials reluctant to purchase homes, Winslow is wary of housing stocks but intrigued by the rental industry. Pointing out that in her day “you put a cigarette in your mouth at 14,” she notes that young people today are health conscious, so avoids cigarette companies and looks to food companies that seem to be taking advantage of trends toward nutritious and natural.
Another thing Millennials love? Technology — and Winslow is a fan too. She has held Intel, Microsoft and IBM for decades. Apple has been in her portfolio for 15 years. (Apple shares are up 3,600% since September 1999.) Winslow is currently intrigued by driverless cars and other technologies that improve safety. For Winslow though, technology does not include just computer companies and complex software.
"Early on in the 50s new products came out and many of them were products used by women in the home – including detergent,” recalls Winslow. “Before that we used ivory soap which we squashed around and which left scum. When Tide came out I thought, ‘wow, is this great.’”
While she is still a fan of dividend payers for her contemporaries, she tells her grandchildren and their fellow Millennials to look for stocks with increasing earnings. Management, she says, should be investing profits back into company growth rather than paying out a high percentage in dividends.
An article from Forbes
http://www.forbes.com/sites/samanthasharf/2014/07/30/the-recession-generation-how-millennials-are-changing-money-management-forever/
Tuesday, 21 December 2010
The art of picking gems
Examine a particular company in the context of the wider economy when selecting stocks.
A reasonably firm domestic economy and improving conditions overseas have led many analysts to forecast that next year will be a good one for the sharemarket.
Nevertheless, the ride for investors could be rocky.
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In particular, we appear to be developing what some are terming a two-speed economy. While the mining and energy industries boom, other sectors are mixed, with growing concerns about a slowdown in consumer spending and about the impact of the dollar's strength.
The result is that stock selection - always a significant consideration for serious investors - becomes more important than before.
What are the key ingredients of successful stock picking?
Talk to any group of experts and you will find they offer many varying methods. It is sometimes said that investing is not a science but an art.
Here are four considerations:
UNDERSTAND THE ECONOMY
For many professionals, the stock-selection process begins with a top-down examination of economic trends. "I like to see where I think the economy is going, both here and overseas," says a senior client adviser and strategist at Austock Securities, Michael Heffernan.
"That sets the canvas, or the foundation, on which I make my selections. Whether I expect the economy to do well or badly will influence which stocks I choose."
SEARCH FOR VALUE
Learn the fundamentals of the company in which you wish to invest. This is certainly the most important consideration for any investment decision and, while it may sound obvious, it is clear many investors have only a cursory understanding of the companies whose shares they buy.
"You need to do some legwork," says an equity analyst with the Fat Prophets market information company, Greg Fraser. "You need to know about the company, its industry and its competitors. You should understand its products or services."
This can all be seen as the qualitative side of the company. It is also important to look at the quantitative side - its financial statements. "Look at the earnings of the company, not just for this year but in a trend over time," he says. "You also need to understand the balance sheet and the cash flow statement. These can give you a feel for how highly geared the business is, its exposure to interest rates, whether it is sufficiently capitalised or not and so on.
"And once you put those things together, you then need to try and work out whether you think the company's shares are currently trading above or below what you think is a fair value."
The chief executive officer of the funds management and market data company Lincoln Indicators, Elio D'Amato, urges investors to pick stocks that are exhibiting dynamic growth.
"There are not many truisms in the sharemarket," he says. "But there is at least one - if earnings grow over the long term, the share price will follow."
This month his company released a shortlist of stocks it believes could outperform in 2011, including debt-collection agency Credit Corp Group, equipment rental finance specialist Silver Chef, engineering company Forge Group, retailer Thorn Group and internet service provider iiNet.
SPECIALISE
Select several areas of the market and develop an in-depth knowledge of these.
Controversial British businessman Jim Slater wrote a book on this theme, titled The Zulu Principle, after realising that his wife, with just a little reading, was becoming an expert in Zulus.
He advises investors to specialise in a narrow area of the market and to become an authority. He says doing this will allow recognition of small, dynamic growth stocks before most others.
RESPECT MARKET CYCLES
Author and educator Alan Hull manages the Alan Hull Books investor website (alanhullbooks.com.au). As an exercise, early in 2009 he drew up two portfolios, one comprising solid, highly rated blue chips and the other made up of "Dogs of the Dow" - large stocks that had been among the market's worst performers in the previous year.
In the rally of 2009, the blue-chip portfolio recorded a one-year return of 15 per cent. By contrast, the "Dogs of the Dow" soared more than 90 per cent.
"It was obvious that during 2009 we were in a bargain-hunter's environment," he says. "It was not a market that had reverted to fundamentals. That is not to say that fundamental analysis does not work. But it was not suited to that part of the market cycle.
http://www.brisbanetimes.com.au/money/investing/the-art-of-picking-gems-20101214-18w60.html
Friday, 3 December 2010
Top 5 Things to Do to Make Money Investing Stocks
You can read all the investing books from Amazon.com Inc (Nasdaq: AMZN, stock), attend all the seminars you can afford and ask a million investing questions because Warren Buffett is your neighbor next-door but you can never duplicate and apply all the teaching in your way of investing. So let’s start with the top 5 things you should do to make money investing stocks or trading option (in no particular order):
First Thing to Do
You Should Study the Companies’ Fundamentals
Second Thing to Do
You Should Do Technical Analysis
Third Thing to Do
You Should Read the Pulse of the Market
Fourth Thing to Do
You Should Know When to Lock Your Profit
Fifth Thing to Do
You Should Minimize Your Emotion
Read more here.
First Thing to Do
You Should Study the Companies’ Fundamentals
Second Thing to Do
You Should Do Technical Analysis
Third Thing to Do
You Should Read the Pulse of the Market
Fourth Thing to Do
You Should Know When to Lock Your Profit
Fifth Thing to Do
You Should Minimize Your Emotion
Read more here.
Sunday, 31 October 2010
Five reasons why my way works
http://www.financialiteracy.us/wordpress/2010/10/05/five-reasons-why-my-way-works/
My mission, when I started this blog, was to persuade my readers that “investing,” is not what the securities industry has spent gazillions convincing everyone it is: betting on the stock market, which is risky and unpredictable. Rather, “investing” is a simple means of earning money with your money. It can make you wealthy and is virtually risk-free.
Here are five reasons why “our” way works, and “their” way doesn’t.
The only thing “they” have going for them is excitement. There’s nothing like the rush that comes with risk! Especially when you bet your life’s savings on something as uncertain as the stock market.
Here are five reasons why “our” way works, and “their” way doesn’t.
- “We” seek to be part-owners of companies that have a proven track record of making money for their owners. “They” buy stocks because their stories sound good.
- “We” judge the quality of the companies we invest in by examining their fundamentals—their “lifeblood” and “vital signs.” “They” use technical analysis to decide when to buy and sell—a popular attempt to predict the unpredictable, with no record of consistent success.
- “We” know, from history, what multiple of profits would be reasonable to pay for shares of such companies. “They” ignore such fundamentals and can only guess at reasonable purchase price.
- “We” rely upon an increase in the actual value of our holdings over time to justify selling at a profit. “They” must rely on luck or someone else’s ignorance to profit from the transaction.
- “We” value our portfolios according to their potential—their rational value—because we own shares in companies whose operations continue profitably, regardless of the fluctuations of the stock market. “They” value shares according to their “market value”—whatever they’re selling for at the moment—because “they” don’t have a means of setting an absolute value for those shares.
The only thing “they” have going for them is excitement. There’s nothing like the rush that comes with risk! Especially when you bet your life’s savings on something as uncertain as the stock market.
Thursday, 21 October 2010
Pick the right stock at right time for returns
Investment tips: Pick the right stock at right time for returns
Picking the right stock at the right time, and booking profits, is a challenge for many small investors. With hardly any time for research and a desire to reap quick profits, many investors often rely on friends and expert advice. The risks are considerable even if you chase a rising stock, without comprehending the driving forces. How do you differentiate an overheated stock from one that has truly appreciated in its intrinsic value?
Identifying an under-valued stock
An under-valued stock is a great investment pick as it has high intrinsic value. Currently under-valued , it has immense potential to rise higher and make the investor richer.
A low price-to-earnings (P/E) ratio can be an indicator of an under-valued stock. The P/E is calculated by dividing the share price by the company's earnings per share (EPS). EPS is calculated by dividing a company's net revenues by the outstanding shares. A higher P/E ratio means that investors are paying more for each unit of net income. So, the stock is more expensive and risky compared to one with a lower P/E ratio.
Trading volume is an indicator
Trading volumes can help pick stocks quoted at prices below their true value. In case the trading volume for a stock is low, it can be inferred that it has not caught the attention of many investors. It has a long way to ascend before it touches its true value. A higher trading volume indicates the market is already aware and interested in the stock and hence it is priced close to its true value.
Debt-to-equity ratio
A company with high debt-to-equity ratio can indicate forthcoming financial hardships. If the ratio is greater than one, it indicates that assets are mainly financed with debt. If the ratio is less than one, it is a scenario where equity provides majority of the financing. Watch out for stocks that have low debt-to-equity ratio.
Some other pointers
Historical data of stocks that have performed consistently and yielded good returns are reliable. A higher profit margin indicates a more profitable company that has better control over its costs compared to its contenders in the same sector.
Weeding out over-heated stocks
Avoiding over-priced stocks that could plunge anytime is as critical as picking the right stocks. Buying over-heated stocks and losing money in a bubble burst is not an uncommon phenomenon in the markets. Stocks that have moved up the ladder very quickly are potentially risky. The sudden spurt could be based on a rumour or event not backed by strong fundamentals.
Good market conditions or bull runs do not last forever. Investors, who believe that good times are here to stay often burn their fingers. On a similar note, an over-valued stock has little scope or space for upward movement and could lose its momentum anytime.
A little bit of research and analysis will help investors make prudent investment choices even in bear market conditions.
http://economictimes.indiatimes.com/features/financial-times/Investment-tips-Pick-the-right-stock-at-right-time-for-returns/articleshow/6759442.cms
Friday, 8 October 2010
Six Principles of Share Investing
Here is a relatively hassle-free and low-risk investment strategy that should provide good profitability with shares over the long term. The strategy is outlined here as the six principles of investing and they are:
- Compound your share investment
- Diversify your investment
- Invest in shares with good fundamentals
- Trade at the right price
- Trade at the right time
- Monitor and review regularly.
Thursday, 22 July 2010
The Importance of Sound Execution of Sound Strategy
Is Timing Really Everything ?
Timing is indeed very important but it doesn't have to be "Everything".
Timing can be further categorized into (1) timing the exact moment and (2) timing a general period. For example, is current market just over its peak now vs generally the market is still rather high now. While it seems impossible to predict the exact future but its always simpler to get a sense of what may happen next.
I predict that The sun will rise tomorrow morning
vs
The sun will be seen at 7:23am after the clouds are cleared off in 13 minutes
If an investor is Correct All The Time, focusing solely on timing would be a smart thing to do. Otherwise, timing become a variable that can help you as much as killing you. As a matter of fact, it will always help you sometimes and it will always kill you some other time. Hence,knowing what to do when your timing is right or wrong becomes even more important especially when you can't be Correct All The Time. Namely the profit take and cut lost strategies.
It takes 2 timings to get one complete transaction. Buying at the lowest today does not guarantee anything yet if it goes lower tomorrow. Selling (short) at the highest today may still have a higher tomorrows. Hence a perfect transaction that is built by 2 perfect timings can only be justified as an after event. In probability study, even if you can guarantee getting the timing Correct, but there is only half the chance you can get it Correct again twice in a row. In other words, even if you know 100% correct timing when to buy low, but there is only 50% chance that you can also sell high at the perfect timing.
So no matter which ways you look at it, "Timing is Everything" is Not a Guaranteed method. It can make you one in a million, but most people will not get anything positive out of this strategy especially long term wise.
Hence you may need to form an investment strategy that can cater for any timings and events. That would be a rock solid personal finance. If there are certain timings or events that your current profile cannot handle yet, then just temporary exclude investing during those timings and events. Until one day you learn enough to build a more solid personal finance to cater for those timings and events. Thats how malpf's wealth pyramid was introduced earlier, you start with something you don't really need to know like Fix Deposit and slowly learn more before handling mutual funds and stock investment.
However one of the positive human nature is to pursue greatness. Everyone want to hit jackpot no matter how slim the chances are. Timing may not be Everything but it is the Ultimate investment skill. Until today, there is no one formula for Guarantee Exact Timing (GET) in investment yet. And the person who come up with one will sit in the same hall with Newton and Einstein, most probably above all of them.
Hence, totally abandon timing an investment is as ignorant as adhere solely to it, if not worse. What should we do then ?
Build a rock solid personal finance first, then leave a 5% room in it as play money for you to practice timing in real life. This way, overall you will still have a good life ahead of you while not giving up any chances that you can be great! When you find out you are really good at timing, slowly increase your 5%. Otherwise lower the 5% or totally eliminate it especially when your 95% are not even earning more than 5%.
How about you ? How much are you relying on Timing in your life ?
Sunday, 6 June 2010
Historical Investment Data of KLSE 1993 to 2010 (6.6.2010)
Historical Investment Data of KLSE 1993 to 2010
http://spreadsheets.google.com/pub?key=tVCJOWP_2GLeToC9ioAeuZw&output=html
Here are some interesting observations:
KLCI Index
Beginning of 1994: 1275.32
Beginning of 2010: 1259.16 :-(
Market Returns
During the period, the average annual capital appreciation of the stock market was 4.26%. Assuming a DY of 3%, the total return of the market was 7.26%.
Of the 17 years from 1994 to 2010:
What can we learn from studying the KLCI?
What investment strategies can be employed to safeguard your investments in the local stock market? What investment strategies can be used to maximise your investment gains?
http://spreadsheets.google.com/pub?key=tVCJOWP_2GLeToC9ioAeuZw&output=html
Here are some interesting observations:
KLCI Index
Beginning of 1994: 1275.32
Beginning of 2010: 1259.16 :-(
Market Returns
During the period, the average annual capital appreciation of the stock market was 4.26%. Assuming a DY of 3%, the total return of the market was 7.26%.
Of the 17 years from 1994 to 2010:
- There were 5 Bear Markets when the market index went down >20% from the beginning of the year.
- There were 4 Bull Markets when the market went up > 20% from the beginning of the year.
- The rest of the period (8 years), the market fluctuated between +/- 20%; there were 6 positive years and 2 negative years.
- The market was very volatile at times. For example, the KLCI was down 53.19% in 1997 and was up 55.91% in 1999. In the year 2008, it was down 36.52% and in 2009, it rebounded 42.37%.
What can we learn from studying the KLCI?
What investment strategies can be employed to safeguard your investments in the local stock market? What investment strategies can be used to maximise your investment gains?
Saturday, 29 May 2010
Investors learned the lessons of the recent recovery a bit too well
COMMENTARY
May 27, 2010, 5:00PM EST
The Sun Also Sets
Investors learned the lessons of the recent recovery a bit too well
By Roben Farzad
Who could blame an investor today for feeling a tad nostalgic for the Panic of 2008? There was a simplicity to the thing. It was such a brutal and impartial rout—slaying just about every asset class—that it made you want to swear off all markets forever. There was comfort to be found in stashing a shoebox full of $50 bills in the freezer. No paperwork. No jabberwocky from your broker. Just the reassuring face of Ulysses S. Grant juxtaposed with your cold, raw fear.
By March 2009, with U.S. stocks at 1996 levels, equities had returned less than Treasuries over the previous 10-, 20-, and 30-year periods—debunking the equity-risk premium so central to Econ 101. Until, of course, the market reversed course and surged 80 percent in 13 months, reminding investors that it was at least theoretically possible to make money in equities. That change of mood edged out fear just in time for the 2010 edition of the credit crisis, an international production that began with Greece's near-collapse and soon spread to Portugal, Ireland, Italy, Spain, and beyond. The Standard & Poor's 500-stock index has now fallen 12 percent in a month, its first official correction since the new bull began last spring.
Corrections are routine and even healthy events; they come along about once every 11 months on average and wring out the excesses and false expectations that rallies inevitably bring. "To the extent that current worries squeeze long positions, extinguish optimism, or even lead policymakers to pursue courses of action that are more supportive—not more punitive—for markets, the selloff may be creating more favorable entry points for investors to buy into a still recovering global economy," writes Stuart Schweitzer, global markets strategist for JPMorgan Private Bank, in a May 24 note to clients. That may all turn out to be true—provided investors don't panic, rush for the exits, and help turn a routine recovery into the second leg of a double-dip recession.
If the lesson of March 2009 is that the sun comes up—the most brutal selloff is just a prelude to the next rally—then the lesson of the recent runup is that the sun can shine too brightly, blinding us to boulders in the road. And then it can set.
With payrolls still slack and credit still tight, the contours of these peculiar economic times are becoming apparent. Last year's snapback is not going to bring a garden-variety, V-shaped recovery. Instead, investors are again having to confront the messy unfolding of a long and overly generous credit cycle, global in nature and marked by a spate of bank and business failures. How the economies of the world digest it is anyone's guess. When the next leg up begins, though, it will mark a critical milestone for a stock market that still needs to rally by almost half to revisit its 2007 high. Getting there despite profound economic challenges is going to take some hard traveling.
"In the U.S., we have no living precedent for this," says Donald Luskin, chief investment officer at strategy firm Trend Macrolytics, whose search for domestic parallels to this credit crisis took him all the way back to 1907. "We have had a living laboratory for it in Japan for the past 15 years. But in the U.S., we're all attuned to the little upticks in metrics that don't necessarily inform much." In other words, we seek auguries where there are none by comparing traditional business cycle statistics such as payrolls and housing starts to once-in-a-lifetime lows from late 2008 and early 2009. Luskin predicts the market will be range-bound for at least five more years as companies and consumers shed debt. "This is not a particularly bearish view," he says. "It's just the expansion-less, low-return world we're now in."
Luskin's unenthusiastic outlook—which contrasts with the prevailing optimism among Wall Street strategists in a May 25 Bloomberg survey—brings to mind the "new normal" paradigm coined last year by Bill Gross and Mohamed El-Erian at Pimco, the bond giant. The idea is that a bitter confluence of deleveraging and reduced consumption and employment will necessarily bring a long period of low growth and low returns. In the absence of a healthy consumer, the neo-normalists point out, there is no other driver to magically propel the economy.
All of which is reasonable—and has largely been ignored amid a recent rush to riskier, less stable sectors at the expense of large-cap companies. This rush was less than rational; if returns are negligible and credit is tight, one would have expected investors to move into big, stable equities that pay dividends. But they didn't, even though the private equity feeding frenzy and promiscuous lending that made small-cap company buyouts all the rage a few years back are long gone. Small companies today are less likely to be self-financed and far more likely to be dependent on volatile-rate bank debt (assuming it is offered to them at all). Even so, the S&P's small-cap index has returned 3.6 percent so far this year—almost 10 points better than the 5.8 percent loss registered by the S&P 100 (the bluest of blue chips, including IBM (IBM) and ExxonMobil (XOM)). Going back to the market's low last spring, the excess return is hardly inconsequential: 90 percent for small stocks, vs. 50 percent for the mega-caps.
The lesson? The financial conflagrations of the past three years did not signal a permanent flight to quality. Appetite for the high-risk/high-reward trade is alive if not well. The resurgence of large-cap equities has, again and again, been exaggerated. According to Leuthold, a Minneapolis fund management firm, small-cap stocks now sell at a "very fat" valuation premium of 20 percent relative to large caps, an all-time record disparity. Nobody seems to care that Johnson & Johnson (JNJ), with a $165 billion market cap and impeccable financials, pays a 3.62 percent dividend—more than 10-year Treasuries. AT&T (T), the country's largest phone company, an inveterate booster of its dividend over 26 years, yields almost twice that, but its shares have badly lagged the broader market this year. All this as banks believe they are doing you a favor by advertising 1 percent for your cash.
To some, any case for U.S. stocks—small, large, whatever—is also exaggerated. Pimco is now lumping the U.S. together with Japan, France, Spain, and Greece in what it calls a sovereign debt risk "ring of fire"—an ignominious league of nations that will increasingly have problems paying their debts. That association would suggest a lot more downside for U.S. shares, whose aggregate 4 percent drop so far in 2010 is but a sliver compared with the S&P Euro Index's 12.5 percent plunge.
Everywhere you look in the U.S. and Europe is another investing dead end. Together, they make the case for aggressive allocation away from developed markets and into emerging markets—yesteryear's financial basket cases turned today's paragons of growth. According to the International Monetary Fund, the developing world has catapulted itself from 18 percent of global GDP in 1994 to 31 percent last year, with its share still gaining at the expense of Japan, Western Europe, and the U.S.
That sort of growth means it is now far too prudish to allocate a mere 10 percent of one's portfolio to developing powers such as Brazil and India. "U.S. investors should move from a U.S.-centric worldview and toward a larger allocation to emerging market economies," says John West of Research Affiliates, an index strategy shop, also of Newport Beach. "They don't face the hurricane-like headwinds of deficit, debt, and demographics that developed markets, including the U.S., do." Since the market's low, the MSCI Emerging Markets index has shot up 77 percent—20 full percentage points better than the S&P 500. Not that no one has noticed: Emerging-market stock funds have consistently taken in multiples of their U.S. counterparts for five years. And while the U.S. and Europe have swooned in the past month, the emerging markets have fallen 15 percent, a resilient showing for a category that has historically been incapable of handling contagion. West thinks that investors in emerging markets amid this global risk realignment will be disproportionately rewarded over the coming decade.
If you don't have the stomach for increasing volatility, you might just take the old advice to sell in May and go away. Or you might park your dollars in gold, which is trading at an all-time high and is certain to go higher, unless it doesn't. Or you might go to cash, which the Federal Reserve is deliberately pegging at all-time low yields, guaranteeing that inflation eats away at what you have.
The sun will rise again, but in the meantime, no one is saying anything about sleeping well tonight.
Bloomberg Businessweek Senior Writer Farzad covers Wall Street and international finance.
http://www.businessweek.com/magazine/content/10_23/b4181064685899.htm
May 27, 2010, 5:00PM EST
The Sun Also Sets
Investors learned the lessons of the recent recovery a bit too well
By Roben Farzad
Who could blame an investor today for feeling a tad nostalgic for the Panic of 2008? There was a simplicity to the thing. It was such a brutal and impartial rout—slaying just about every asset class—that it made you want to swear off all markets forever. There was comfort to be found in stashing a shoebox full of $50 bills in the freezer. No paperwork. No jabberwocky from your broker. Just the reassuring face of Ulysses S. Grant juxtaposed with your cold, raw fear.
By March 2009, with U.S. stocks at 1996 levels, equities had returned less than Treasuries over the previous 10-, 20-, and 30-year periods—debunking the equity-risk premium so central to Econ 101. Until, of course, the market reversed course and surged 80 percent in 13 months, reminding investors that it was at least theoretically possible to make money in equities. That change of mood edged out fear just in time for the 2010 edition of the credit crisis, an international production that began with Greece's near-collapse and soon spread to Portugal, Ireland, Italy, Spain, and beyond. The Standard & Poor's 500-stock index has now fallen 12 percent in a month, its first official correction since the new bull began last spring.
Corrections are routine and even healthy events; they come along about once every 11 months on average and wring out the excesses and false expectations that rallies inevitably bring. "To the extent that current worries squeeze long positions, extinguish optimism, or even lead policymakers to pursue courses of action that are more supportive—not more punitive—for markets, the selloff may be creating more favorable entry points for investors to buy into a still recovering global economy," writes Stuart Schweitzer, global markets strategist for JPMorgan Private Bank, in a May 24 note to clients. That may all turn out to be true—provided investors don't panic, rush for the exits, and help turn a routine recovery into the second leg of a double-dip recession.
If the lesson of March 2009 is that the sun comes up—the most brutal selloff is just a prelude to the next rally—then the lesson of the recent runup is that the sun can shine too brightly, blinding us to boulders in the road. And then it can set.
With payrolls still slack and credit still tight, the contours of these peculiar economic times are becoming apparent. Last year's snapback is not going to bring a garden-variety, V-shaped recovery. Instead, investors are again having to confront the messy unfolding of a long and overly generous credit cycle, global in nature and marked by a spate of bank and business failures. How the economies of the world digest it is anyone's guess. When the next leg up begins, though, it will mark a critical milestone for a stock market that still needs to rally by almost half to revisit its 2007 high. Getting there despite profound economic challenges is going to take some hard traveling.
"In the U.S., we have no living precedent for this," says Donald Luskin, chief investment officer at strategy firm Trend Macrolytics, whose search for domestic parallels to this credit crisis took him all the way back to 1907. "We have had a living laboratory for it in Japan for the past 15 years. But in the U.S., we're all attuned to the little upticks in metrics that don't necessarily inform much." In other words, we seek auguries where there are none by comparing traditional business cycle statistics such as payrolls and housing starts to once-in-a-lifetime lows from late 2008 and early 2009. Luskin predicts the market will be range-bound for at least five more years as companies and consumers shed debt. "This is not a particularly bearish view," he says. "It's just the expansion-less, low-return world we're now in."
Luskin's unenthusiastic outlook—which contrasts with the prevailing optimism among Wall Street strategists in a May 25 Bloomberg survey—brings to mind the "new normal" paradigm coined last year by Bill Gross and Mohamed El-Erian at Pimco, the bond giant. The idea is that a bitter confluence of deleveraging and reduced consumption and employment will necessarily bring a long period of low growth and low returns. In the absence of a healthy consumer, the neo-normalists point out, there is no other driver to magically propel the economy.
All of which is reasonable—and has largely been ignored amid a recent rush to riskier, less stable sectors at the expense of large-cap companies. This rush was less than rational; if returns are negligible and credit is tight, one would have expected investors to move into big, stable equities that pay dividends. But they didn't, even though the private equity feeding frenzy and promiscuous lending that made small-cap company buyouts all the rage a few years back are long gone. Small companies today are less likely to be self-financed and far more likely to be dependent on volatile-rate bank debt (assuming it is offered to them at all). Even so, the S&P's small-cap index has returned 3.6 percent so far this year—almost 10 points better than the 5.8 percent loss registered by the S&P 100 (the bluest of blue chips, including IBM (IBM) and ExxonMobil (XOM)). Going back to the market's low last spring, the excess return is hardly inconsequential: 90 percent for small stocks, vs. 50 percent for the mega-caps.
The lesson? The financial conflagrations of the past three years did not signal a permanent flight to quality. Appetite for the high-risk/high-reward trade is alive if not well. The resurgence of large-cap equities has, again and again, been exaggerated. According to Leuthold, a Minneapolis fund management firm, small-cap stocks now sell at a "very fat" valuation premium of 20 percent relative to large caps, an all-time record disparity. Nobody seems to care that Johnson & Johnson (JNJ), with a $165 billion market cap and impeccable financials, pays a 3.62 percent dividend—more than 10-year Treasuries. AT&T (T), the country's largest phone company, an inveterate booster of its dividend over 26 years, yields almost twice that, but its shares have badly lagged the broader market this year. All this as banks believe they are doing you a favor by advertising 1 percent for your cash.
To some, any case for U.S. stocks—small, large, whatever—is also exaggerated. Pimco is now lumping the U.S. together with Japan, France, Spain, and Greece in what it calls a sovereign debt risk "ring of fire"—an ignominious league of nations that will increasingly have problems paying their debts. That association would suggest a lot more downside for U.S. shares, whose aggregate 4 percent drop so far in 2010 is but a sliver compared with the S&P Euro Index's 12.5 percent plunge.
Everywhere you look in the U.S. and Europe is another investing dead end. Together, they make the case for aggressive allocation away from developed markets and into emerging markets—yesteryear's financial basket cases turned today's paragons of growth. According to the International Monetary Fund, the developing world has catapulted itself from 18 percent of global GDP in 1994 to 31 percent last year, with its share still gaining at the expense of Japan, Western Europe, and the U.S.
That sort of growth means it is now far too prudish to allocate a mere 10 percent of one's portfolio to developing powers such as Brazil and India. "U.S. investors should move from a U.S.-centric worldview and toward a larger allocation to emerging market economies," says John West of Research Affiliates, an index strategy shop, also of Newport Beach. "They don't face the hurricane-like headwinds of deficit, debt, and demographics that developed markets, including the U.S., do." Since the market's low, the MSCI Emerging Markets index has shot up 77 percent—20 full percentage points better than the S&P 500. Not that no one has noticed: Emerging-market stock funds have consistently taken in multiples of their U.S. counterparts for five years. And while the U.S. and Europe have swooned in the past month, the emerging markets have fallen 15 percent, a resilient showing for a category that has historically been incapable of handling contagion. West thinks that investors in emerging markets amid this global risk realignment will be disproportionately rewarded over the coming decade.
If you don't have the stomach for increasing volatility, you might just take the old advice to sell in May and go away. Or you might park your dollars in gold, which is trading at an all-time high and is certain to go higher, unless it doesn't. Or you might go to cash, which the Federal Reserve is deliberately pegging at all-time low yields, guaranteeing that inflation eats away at what you have.
The sun will rise again, but in the meantime, no one is saying anything about sleeping well tonight.
Bloomberg Businessweek Senior Writer Farzad covers Wall Street and international finance.
http://www.businessweek.com/magazine/content/10_23/b4181064685899.htm
Thursday, 27 May 2010
****Eight lessons of investing
Eight lessons of investing
I believe the fundamentals of equity investing remain unscathed and investors should learn eight key lessons.
By Kevin Murphy
Published: 7:31AM BST 26 May 2010
During the past 18 months we have seen unprecedented economic events, but I believe the fundamentals of equity investing remain unscathed and investors should learn eight key lessons.
LESSON ONE: PATIENCE IS A VIRTUE
Market sentiment can create exceptional opportunities for investors with patience. At times of market ''panic'', share prices fluctuate far more than underlying fundamentals of many businesses warrant. This creates great opportunities.
There have been many bargains over the past 18 months, Next is a particularly good example. The retailer saw share prices fall from £24 at the peak, to £8 at the trough.
This reflected investors' fears about global recession, but Next seemed a robust company with low net debt and unlikely to go bust. With shares seemingly trading at a low of four times normalised earnings this was a chance to acquire a quality business at a low price. Shares have shot back to more than £20.
LESSON TWO: IGNORE ECONOMISTS
While fund managers are frequently asked their economic views, macro-forecasting is notoriously difficult. The process relies on predicting a range of interrelated variables.
The number of economists proven wrong during this crisis highlights the scale of the challenge. There is little point forecasting economic outlook or using macro-forecasts to determine company values.
Economic growth often has an inverse relationship with subsequent stock market performance.
Research from the London Business School shows stock market returns are no higher in countries with high GDP growth and countries with low GDP growth can exhibit the best stock market performance.
This is an intuitive trend. Stock markets are discounting mechanisms that always look forward and equity markets can rally even while economic growth remains low.
LESSON THREE: CHEAP IS BEST
If macro trends are not the best indicator of stock market returns, valuation remains the surest guide to future investment performance and data illustrates that buying securities on low valuations gives the best opportunity for future returns.
Buying shares at around 5-10 times earnings, would usually see annualised returns for the next 10 years of more than 10pc. In contrast, buying shares on 25-30 times would see extremely disappointing future returns.
LESSON FOUR: GOOD COMPANIES ARE NOT ALWAYS A ''BUY''
Buying a ''good'' company at the wrong price can seriously affect overall returns.
GlaxoSmithKline, a very good company, generated earnings per share of about 50p in 1999-2000 and was trading at around £20 – equivalent to 40 times earnings.
Despite good earnings growth, it did not offer good value at that price. Ten years on, earnings have doubled while the share price has halved. The stock is more attractive now.
LESSON FIVE: IT IS THE AVERAGE THAT COUNTS
Peaks and troughs are part of operating and share price performance, but there is a tendency to revert to averages.
Companies with high profits are unlikely to generate that growth forever and companies with low profits are unlikely to be stuck in long-term ruts.
When valuing companies, strip out peaks and troughs and look at average long-term earnings potential – the intrinsic value or ''normalised'' profit potential.
Barclays' share price was about 700p in 2007, with earnings per share (EPS) of 70p. However, EPS looked unsustainably high given a ''normalised'' earnings estimate of 45p per share.
Mean reversion worked its magic and by April 2009 earnings forecasts dropped to 12p per share and shares to 50p.
Barclays faced obvious pressures, but this seemed a good company whose long-run earnings potential did not appear to have changed. The shares seemed to be trading at just one times normalised earnings – a low valuation that has corrected significantly in the past year.
LESSON SIX: DIVIDEND HISTORY IS KEY
As investors search hard for yield, it is important to note companies' long-term ability to pay dividends, rather than being swayed by short-term distributions.
Some utility companies need to increase their debt every year in order to maintain their dividend at its current level.
Conversely, a company such as AstraZeneca looks to be generating £8-9bn net cash each year, and is paying around £4bn in dividends. This is clearly sustainable and also gives the company flexibility.
LESSON SEVEN: SIZE DOESN'T MATTER
Tracking error (how different a fund looks from its benchmark index) is a widely used ''risk'' measure, but it is inappropriate to assess portfolios on this alone. Not owning a large FTSE All-Share constituent like British American Tobacco results in a higher tracking error and, theoretically, a higher 'risk'.
However, is it more or less 'risky' for investors to buy a company simply because it accounts for a large proportion of the index, and potentially overpay?
It is preferable to assess investments in terms of absolute risk, looking at
valuation risk (the risk of overpaying),
earnings risk (the risk earnings decline over time) and
financial risk (the risk of insolvency).
If an investment's potential returns significantly outweigh the balance of risks, it should be viewed as an attractive long-term opportunity, regardless of index size.
LESSON EIGHT: DON'T FOLLOW THE HERD
Willingness to go against the crowd (and for your fund to look different to the index) is fundamental for generating superior long-term returns.
Given ongoing search for yield and the disappearance of the banks as major dividend payers, many income funds have been forced into a smaller set of high yielding stocks. In many cases, these are among the biggest stocks in the market – names like BP, Royal Dutch Shell, BHP Billiton and Tesco.
This trend has left many funds in the income sector clustered in just a handful of stocks. This is not the way to produce superior performance.
Kevin Murphy is the manager of the Schroder Income Fund
http://www.telegraph.co.uk/finance/personalfinance/investing/shares-and-stock-tips/7765851/Eight-lessons-of-investing.html
Eight lessons of investing
I believe the fundamentals of equity investing remain unscathed and investors should learn eight key lessons.
By Kevin Murphy
Published: 7:31AM BST 26 May 2010
During the past 18 months we have seen unprecedented economic events, but I believe the fundamentals of equity investing remain unscathed and investors should learn eight key lessons.
LESSON ONE: PATIENCE IS A VIRTUE
Market sentiment can create exceptional opportunities for investors with patience. At times of market ''panic'', share prices fluctuate far more than underlying fundamentals of many businesses warrant. This creates great opportunities.
There have been many bargains over the past 18 months, Next is a particularly good example. The retailer saw share prices fall from £24 at the peak, to £8 at the trough.
This reflected investors' fears about global recession, but Next seemed a robust company with low net debt and unlikely to go bust. With shares seemingly trading at a low of four times normalised earnings this was a chance to acquire a quality business at a low price. Shares have shot back to more than £20.
LESSON TWO: IGNORE ECONOMISTS
While fund managers are frequently asked their economic views, macro-forecasting is notoriously difficult. The process relies on predicting a range of interrelated variables.
The number of economists proven wrong during this crisis highlights the scale of the challenge. There is little point forecasting economic outlook or using macro-forecasts to determine company values.
Economic growth often has an inverse relationship with subsequent stock market performance.
Research from the London Business School shows stock market returns are no higher in countries with high GDP growth and countries with low GDP growth can exhibit the best stock market performance.
This is an intuitive trend. Stock markets are discounting mechanisms that always look forward and equity markets can rally even while economic growth remains low.
LESSON THREE: CHEAP IS BEST
If macro trends are not the best indicator of stock market returns, valuation remains the surest guide to future investment performance and data illustrates that buying securities on low valuations gives the best opportunity for future returns.
Buying shares at around 5-10 times earnings, would usually see annualised returns for the next 10 years of more than 10pc. In contrast, buying shares on 25-30 times would see extremely disappointing future returns.
LESSON FOUR: GOOD COMPANIES ARE NOT ALWAYS A ''BUY''
Buying a ''good'' company at the wrong price can seriously affect overall returns.
GlaxoSmithKline, a very good company, generated earnings per share of about 50p in 1999-2000 and was trading at around £20 – equivalent to 40 times earnings.
Despite good earnings growth, it did not offer good value at that price. Ten years on, earnings have doubled while the share price has halved. The stock is more attractive now.
LESSON FIVE: IT IS THE AVERAGE THAT COUNTS
Peaks and troughs are part of operating and share price performance, but there is a tendency to revert to averages.
Companies with high profits are unlikely to generate that growth forever and companies with low profits are unlikely to be stuck in long-term ruts.
When valuing companies, strip out peaks and troughs and look at average long-term earnings potential – the intrinsic value or ''normalised'' profit potential.
Barclays' share price was about 700p in 2007, with earnings per share (EPS) of 70p. However, EPS looked unsustainably high given a ''normalised'' earnings estimate of 45p per share.
Mean reversion worked its magic and by April 2009 earnings forecasts dropped to 12p per share and shares to 50p.
Barclays faced obvious pressures, but this seemed a good company whose long-run earnings potential did not appear to have changed. The shares seemed to be trading at just one times normalised earnings – a low valuation that has corrected significantly in the past year.
LESSON SIX: DIVIDEND HISTORY IS KEY
As investors search hard for yield, it is important to note companies' long-term ability to pay dividends, rather than being swayed by short-term distributions.
Some utility companies need to increase their debt every year in order to maintain their dividend at its current level.
Conversely, a company such as AstraZeneca looks to be generating £8-9bn net cash each year, and is paying around £4bn in dividends. This is clearly sustainable and also gives the company flexibility.
LESSON SEVEN: SIZE DOESN'T MATTER
Tracking error (how different a fund looks from its benchmark index) is a widely used ''risk'' measure, but it is inappropriate to assess portfolios on this alone. Not owning a large FTSE All-Share constituent like British American Tobacco results in a higher tracking error and, theoretically, a higher 'risk'.
However, is it more or less 'risky' for investors to buy a company simply because it accounts for a large proportion of the index, and potentially overpay?
It is preferable to assess investments in terms of absolute risk, looking at
If an investment's potential returns significantly outweigh the balance of risks, it should be viewed as an attractive long-term opportunity, regardless of index size.
LESSON EIGHT: DON'T FOLLOW THE HERD
Willingness to go against the crowd (and for your fund to look different to the index) is fundamental for generating superior long-term returns.
Given ongoing search for yield and the disappearance of the banks as major dividend payers, many income funds have been forced into a smaller set of high yielding stocks. In many cases, these are among the biggest stocks in the market – names like BP, Royal Dutch Shell, BHP Billiton and Tesco.
This trend has left many funds in the income sector clustered in just a handful of stocks. This is not the way to produce superior performance.
Kevin Murphy is the manager of the Schroder Income Fund
http://www.telegraph.co.uk/finance/personalfinance/investing/shares-and-stock-tips/7765851/Eight-lessons-of-investing.html
I believe the fundamentals of equity investing remain unscathed and investors should learn eight key lessons.
By Kevin Murphy
Published: 7:31AM BST 26 May 2010
During the past 18 months we have seen unprecedented economic events, but I believe the fundamentals of equity investing remain unscathed and investors should learn eight key lessons.
LESSON ONE: PATIENCE IS A VIRTUE
Market sentiment can create exceptional opportunities for investors with patience. At times of market ''panic'', share prices fluctuate far more than underlying fundamentals of many businesses warrant. This creates great opportunities.
There have been many bargains over the past 18 months, Next is a particularly good example. The retailer saw share prices fall from £24 at the peak, to £8 at the trough.
This reflected investors' fears about global recession, but Next seemed a robust company with low net debt and unlikely to go bust. With shares seemingly trading at a low of four times normalised earnings this was a chance to acquire a quality business at a low price. Shares have shot back to more than £20.
LESSON TWO: IGNORE ECONOMISTS
While fund managers are frequently asked their economic views, macro-forecasting is notoriously difficult. The process relies on predicting a range of interrelated variables.
The number of economists proven wrong during this crisis highlights the scale of the challenge. There is little point forecasting economic outlook or using macro-forecasts to determine company values.
Economic growth often has an inverse relationship with subsequent stock market performance.
Research from the London Business School shows stock market returns are no higher in countries with high GDP growth and countries with low GDP growth can exhibit the best stock market performance.
This is an intuitive trend. Stock markets are discounting mechanisms that always look forward and equity markets can rally even while economic growth remains low.
LESSON THREE: CHEAP IS BEST
If macro trends are not the best indicator of stock market returns, valuation remains the surest guide to future investment performance and data illustrates that buying securities on low valuations gives the best opportunity for future returns.
Buying shares at around 5-10 times earnings, would usually see annualised returns for the next 10 years of more than 10pc. In contrast, buying shares on 25-30 times would see extremely disappointing future returns.
LESSON FOUR: GOOD COMPANIES ARE NOT ALWAYS A ''BUY''
Buying a ''good'' company at the wrong price can seriously affect overall returns.
GlaxoSmithKline, a very good company, generated earnings per share of about 50p in 1999-2000 and was trading at around £20 – equivalent to 40 times earnings.
Despite good earnings growth, it did not offer good value at that price. Ten years on, earnings have doubled while the share price has halved. The stock is more attractive now.
LESSON FIVE: IT IS THE AVERAGE THAT COUNTS
Peaks and troughs are part of operating and share price performance, but there is a tendency to revert to averages.
Companies with high profits are unlikely to generate that growth forever and companies with low profits are unlikely to be stuck in long-term ruts.
When valuing companies, strip out peaks and troughs and look at average long-term earnings potential – the intrinsic value or ''normalised'' profit potential.
Barclays' share price was about 700p in 2007, with earnings per share (EPS) of 70p. However, EPS looked unsustainably high given a ''normalised'' earnings estimate of 45p per share.
Mean reversion worked its magic and by April 2009 earnings forecasts dropped to 12p per share and shares to 50p.
Barclays faced obvious pressures, but this seemed a good company whose long-run earnings potential did not appear to have changed. The shares seemed to be trading at just one times normalised earnings – a low valuation that has corrected significantly in the past year.
LESSON SIX: DIVIDEND HISTORY IS KEY
As investors search hard for yield, it is important to note companies' long-term ability to pay dividends, rather than being swayed by short-term distributions.
Some utility companies need to increase their debt every year in order to maintain their dividend at its current level.
Conversely, a company such as AstraZeneca looks to be generating £8-9bn net cash each year, and is paying around £4bn in dividends. This is clearly sustainable and also gives the company flexibility.
LESSON SEVEN: SIZE DOESN'T MATTER
Tracking error (how different a fund looks from its benchmark index) is a widely used ''risk'' measure, but it is inappropriate to assess portfolios on this alone. Not owning a large FTSE All-Share constituent like British American Tobacco results in a higher tracking error and, theoretically, a higher 'risk'.
However, is it more or less 'risky' for investors to buy a company simply because it accounts for a large proportion of the index, and potentially overpay?
It is preferable to assess investments in terms of absolute risk, looking at
- valuation risk (the risk of overpaying),
- earnings risk (the risk earnings decline over time) and
- financial risk (the risk of insolvency).
If an investment's potential returns significantly outweigh the balance of risks, it should be viewed as an attractive long-term opportunity, regardless of index size.
LESSON EIGHT: DON'T FOLLOW THE HERD
Willingness to go against the crowd (and for your fund to look different to the index) is fundamental for generating superior long-term returns.
Given ongoing search for yield and the disappearance of the banks as major dividend payers, many income funds have been forced into a smaller set of high yielding stocks. In many cases, these are among the biggest stocks in the market – names like BP, Royal Dutch Shell, BHP Billiton and Tesco.
This trend has left many funds in the income sector clustered in just a handful of stocks. This is not the way to produce superior performance.
Kevin Murphy is the manager of the Schroder Income Fund
http://www.telegraph.co.uk/finance/personalfinance/investing/shares-and-stock-tips/7765851/Eight-lessons-of-investing.html
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