Thursday 20 January 2011

Market Behaviour: The Least You Need to Know

Warren Buffett mentioned that an intelligent investor will require good knowledge in two subjects.  These are:
  1. having a good understanding of market behaviour and 
  2. mastering the valuation of different assets.
Understanding market behaviour is important as this allows the intelligent investors to take advantage of and not to fall victim to it.
  • What are the types of market behaviour the intelligent investors may encounter?  
  • How should you approach these market conditions?  
  • How can you take advantage of these through your buying and selling of shares?
As a value investor, understanding the market behaviour can be rewarding.  At least you need to know:
  • Bull markets tend to be good times to take profits on stocks you're ready to sell.
  • Bear markets tend to be good times to find great buys because so many stocks are on sale.
  • Get yourself under control and learn to move at your own pace, not the pace of the crowd.

Related topics:


Market Behaviour: Control Yourself (Patience)

Patience is a virtue you must learn in order to excel as a value investor.  You must think outside the box and move in a direction the crowd likely is not following.

If you want to invest intelligently according to the basics established by value investing master guru Benjamin Graham, you must control the following:

  1. Your brokerage costs
  2. Your ownership costs
  3. Your expectations
  4. Your risk
  5. Your tax bills
  6. Your own behaviour

----

1.  Your Brokerage Costs

Find yourself a good broker who doesn't charge too much to handle your stock trades.  If you feel confident that you know how to handle stock trading, do it yourself with an Internet discount broker.

We don't recommend full-service brokers because you don't need their research services and you certainly won't want to follow their advice - unless by some lucky break you find a broker who truly believes in value investing.

Also, don't trade too often and waste your money jumping in and out of stocks.  Most value investing gurus hold on to stocks for four to five years.

Learn to be patient and give a stock you've picked time to recover.  Its price may go down after you buy the stock, so don't get discouraged.  Few people can actually buy at the absolute lowest price.  Most value investors choose a stock on its way down.

But don't be so patient that you end up losing all your money.  Sometimes, you will make a mistake when picking a stock.  Just admit your mistake, accept your losses and move on.

2.  Your Ownership Costs

If you decide to invest using mutual funds, be sure to buy no-load funds with very low management fees.  Few funds are worth the cost if their management fees are more than 1 percent.

Remember, for a mutual fund manager to meet the returns of a stock market index, he or she must beat the index by at least the cost of the mutual fund's management fees.  Management fees are a drain on all mutual funds.  

Unless for some reason you've picked a particular mutual fund manager you want to follow, your best bet is to invest using an index fund.  Fees for many index funds are just 0.15 to 0.35 percent.

3.  Your Expectations

Always be realistic about the returns you want to get out of a stock purchase.  Even if you decide to follow some newsletters that specialise in value investing, don't get caught up in someone else's hype.  You'll never be disappointed if you carefully assess the true value of a stock and are conservative about the cash flows you can expect from the stock purchase.

4.  Your Risk.

Keep a close eye on the amount of risk you can tolerate.  Determine the asset allocation that best manages your risk tolerance.  

Periodically re-balance your portfolio so you know that you're maintaining your portfolio at a risk tolerance level that you can tolerate.

Determine how much of your portfolio you can afford to put at risk.  Stock investing is a risky business.  You can afford to take more risk if you have a longer time frame before you need the money.  

For example, if you won't need the money for 10 years or more, you can take on the greatest amount of risk. If you plan to use the money in two years, put that money in a cash account.

5.  Your Tax Bills

Each time you sell a stock, you may have to pay taxes on the amount of profit you make from the transaction. If you hold a stock for less than 12 months, the taxes you pay are based on your current tax rate.  

If you hold a stock for more than 12 months, your tax bill could be as little as 5 percent for capital gains, if you are in the 10 percent or 15 percent tax brackets.  You'll pay 15 percent capital gains tax if your tax bracket is 25 percent or higher.

Unless you've made a terrible mistake picking a stock, you should always hold it for more than a year, to minimize the tax hit on any gain.  The only exception to this rule is fi you have a significant profit in a stock and you're afraid the stock could take a tumble.

6.  Your Own Behaviour

It's human nature to get excited and follow the crowd in feeling good about a stock.  The crowd shows its enthusiasm when it bids the price up so high that the P/E ratio tops 20.  Learn to resist these feelings.

It;s also human nature to get frightened when everyone is running from the stock market.  Get your emotions under control and start to take a look for good buys when everyone else thinks it's time to escape.


Market Behaviour: Irrational Exuberance

When a bull run goes on for too long, it can morph into irrational exuberance.  People tend to think that the market has changed and that stock will continue to go up forever.  In reality, it won't - instead, a stock market bubble is gradually inflating.

Unfortunately, most people get caught in the hype and continue to buy while the bubble continues to inflate.  Then that bubble bursts without warning, sending shares of stock down 50 percent and more.  Asset bubbles have formed repeatedly over time, but most people can't recognize a bubble until after it bursts.

The most recent stock bubble was the Internet stock bubble, which inflated in the 1990s and burst in the early 2000s.  Many people who got caught up in Internet stocks lost 50% to 70% on their portfolio - and some lost as much as 90%.

Value investors such as Warren Buffett didn't play in that market.  Value investors will not buy a stock that doesn't have a proven cash flow.  Internet stocks were losing money every year.  Most hadn't even figured out how they would make a profit.  Yet analysts recommended them based on future earnings projections.

If you can't figure how a company will generate its cash flow, walk away from it.  Don't ever get caught up in promises of future earnings that have not yet materialized.



Related topics:

Market Behaviour: Pendulum Swings (Volatility)

Your work isn't finished once you own a stock.  You must be psychologically ready to deal with the pendulum swings (volatility) of the market.  Any stock you buy will go up and will go down.  The trick is to not get caught up in these ups and downs, but to stick to the plan you had for the stock when you picked it.

Don't watch CNBC and the other news shows that follow the market as though it's a sports game.  that will just make it harder for you to stick to your plan.  You don't have to know exactly what the price of your stock is each day.  Watching your stocks that closely will just make you nervous and most likely lead you to make the wrong choices.

Your best bet is to not watch the financial news on TV.  Read the respected financial press, such as The Wall Street Journal and the Financial Times, to stay up on the critical news about the companies you follow and get ideas for new possible investments.

You'll find much more serious, in-depth stories in the financial press.  These stories will help you make the best choices in building your portfolio.





Related topics:

Market Behaviour: Bear Stalls

When you hear commentators say the bears are in control and the market is stalled, it's time for some serious bargain shopping.  

When this mood strikes the market, most investors run for hills and sell stock at whatever price they can get.  That;s why, as an intelligent investor, you can find some great buys.

Be careful, though.  Don't just buy a stock because you think it's cheap.  Make sure:

  1.  you've tested the financial fundamentals and key ratios (sales growth rates, profit margins, market prices of assets, capital expenditure requirements, EPS, P/E, P/B, current ratio,  and operating ratios - inventory turnover, accounts receivable turnover, and accounts payable turnover.); and 
  2. that you've determined it's time to exit the stock based on YOUR time schedule - not the time schedule of the crowd.  

Just because a stock is beaten down doesn't make it a good buy.

Assess the plans the management team (QVM) has for the company, as well as the numbers.



Related topics:

Market Behaviour: Bull Runs

Sometimes you'll hear commentators say the bulls are running.  When you hear that, be very cautious.  Stocks are likely overpriced.

A bull run is the best time to sell stocks you own and take your profits, but only if you're ready to sell your stake in the company.  If you plan to hold a stock for years, don't feel obligated to sell it just because the bulls are running.

You'll be watching a lot of people just starting to get into a market.  People who are not intelligent investors tend to get caught up in the excitement of the market and think it's safe to get their feet wet.  Unfortunately, these folks buy stocks at the high and, when the bears return, sell stocks at the low when they get scared.

As a value investor, you've likely bought your stock on sale and now you're seeing some great profits.  You may or may not want to sell.  Run a quarterly analysis of the stock you hold, and be sure it still fits with your criteria for holding a stock.   You can design a strategy that works best for your based on your goals, your risk tolerance and your financial resources.





Related topics:

Market Behaviour: Can You Beat the Market?

The best answer to this question is, sometimes - but don't count on it.

Generally, the market does a pretty good job of pricing stocks, but when the crowd is acting irrationally, you can find your best and worst buys.

Don't try to beat the market.  

Instead, focus on building the best portfolio you can.  

Buy stocks when they're cheap and sell them when they recover.  

Do not worry about missing the highest highs because you rarely can sell at just the right time to avoid the steep drop-off when the price of a stock plummets.

MOST PEOPLE GET CAUGHT UP IN THE EMOTIONAL HIGHS THEY FEEL AS STOCKS CLIMB AND DON'T ACT TO TAKE PROFITS BEFORE IT'S TOO LATE.  DON'T GET CAUGHT UP IN THAT TYPE OF BEHAVIOUR.

Market Behaviour: Unjustifiable Pessimism - Time to Find Your Best Opportunities (Gems in the Rough)

You will find your best buys when the market is unjustifiably pessimistic about a sector.

It is in such situations that one can find incredible buys among the beaten-down stocks in the sector. You do have to be patient and hold on to the stocks for a while until the crowd realized its mistakes.

If you believe the market has beaten down this sector UNJUSTIFIABLY, start looking for good buys in this sector.

Do not look for the cheapest stock; instead find the stock of a company with financial results that meet your criteria and a solid management team (QVM).

Look at the new daily lows in the financial press. Find a stock that has been beaten down for two or three years and has already taken its big fall.

Research the candidates you've found. You'll find a lot of stocks that have been beaten down JUSTIFIABLY - just move on.

But start watching those gems in the rough as you research them further to determine whether they are a good buy for you.



Related topics:

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.

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?

So how is value investing different from other investing?

So how is value investing different from other investing?

I think the distinction lies in your objective. Where others might select investments to achieve growth, or income, or political correctness, or stability, balance etc, etc, the "value investor" looks for stocks that have a special feature that translates into "objective" (meaning quantitatively measurable & predictable) financial results in Sales, Expenses, Profits, Cash flow, etc.

The value investor does more research into the target company and understands the target in depth. The value investor is a fundamental analyst. He does not base decisions on trends of the past, ie he is not a technical analyst.

The distinction also lies in how you select your investments. Buffet and Graham define the term "intrinsic value" which is the present value of future cash generated by the business. If the investor does the research and the math needed to calculate intrinsic value, then the investment's value is the difference of intrinsic value per share less market price per share and less asafety margin, or moat which means an allowance for error and lack of perfect knowledge about the company.

And the distinction also lies in the time horizon of the investor. Value Investors tend to be holders rather than in and out traders. Value investors tend to take more time in to analyze and selet their investments. They are not in the game for the quick score, but for a long term winning record covering decades or forever.

http://myinvestingnotes.blogspot.com/2010/10/mark-perkins-on-mon-2007-03-12-0003.html

Wednesday 19 January 2011

“There is no country in this modern world that can survive if its people are segregated and broken into classes like what we are practising today."


Malays given enough privileges to excel, says Zaid

January 19, 2011

Party president Zaid Ibrahim said Kita would not espouse the belief that the Malay community deserves more rights than other races.
KUALA LUMPUR, Jan 19 – Kita president Datuk Zaid Ibrahim claimed today that his party would help save the Malays from complacency, pointing out that the community already has sufficient rights and privileges to excel.
The former Umno politician said in his keynote address at Kita’s grand launch this morning that the party would not condone the belief that the community deserved more rights than other races simply because of its constitutional position.
“For the Malays, Kita will not mislead you with a false sense of security by making you believe that you have more rights than the other races.
“We will tell you that you already have enough rights and privileges to excel; what you need is to improve your skills and competitiveness to face this 21st century,” he said when outlining Kita’s ideals during the launch.
He pledged that Kita would adhere to Article 153 of the Federal Constitution which underscores the special positions of the Malays but warned that the provision should not be used as a tool to discriminate against others.
“There is no country in this modern world that can survive if its people are segregated and broken into classes like what we are practising today.
“Kita will not allow the provision to be abused and steps needed to achieve the objective of the provision will be presented to Parliament,” he said.
Zaid, who recently quit PKR, added that Kita could help the Malays protect the community’s name by granting equal education opportunities to all and offering the best teachers to help them hone their skills.
“You will become successful individuals in the true meaning of the word. You will not need to unsheathe your keris so that others fear you or champion your origins in order to seem special.
“You will no longer be a mere definition in the Federal Constitution. You will be a true Malay in the Malaysian community at large,” he said.
Zaid also claimed Kita would ensure that Muslims achieved spiritual excellence as promised in Islam, pointing out that no one could strip a person of his or her religion.
“Islam must be led and nurtured by Islamic intellectuals and scholars with honest hearts and are merciful and compassionate as Islam is a caring religion.
“Bureaucrats, those who merely work for salaries and politicians are only able to pollute the good name of Islam by implementing regulations that curb and confuse and bring harm to religious harmony and tolerance in the country,” he said.
Zaid added that if the nation truly accepted the sovereignty of the Federal Constitution as its driving principle, it would be easier to find solutions to the many racial and religious conflicts faced by the country.
“Issues involving houses of worship, conflict over the jurisdictions of the civil and Syariah courts and many other matters continue to remain unresolved today.
“Islam, as the official religion, will continue to be respected and be restored to its rightful position if it is no longer politicised,” he said.

A Brief Look at KAF

KAF-Seagroatt & Campbell Berhad

Business Description:
KAF-Seagroatt & Campbell Berhad is a Malaysia-based investment holding company. The Company, through its subsidiaries, is engaged in the stock broking, futures broking, fund management, money broking and discount house activities in Malaysia. Its subsidiaries are KAF-Refco Futures Sdn. Bhd., KAF-Seagrott & Campbell Securities Sdn. Bhd., KAF Nominees (Tempatan) Sdn. Bhd. and KAF Nominees (Asing) Sdn. Bhd.


Current Price (14/1/2011): 1.53
2010 Sales 32,691,000
Employees: 106
Market Cap: 183,600,000
Shares Outstanding: 120,000,000
Closely Held Shares: 106,000,000


Announcement
Date
Financial
Yr. End
QtrPeriod EndRevenue
RM '000
Profit/Lost
RM'000
EPSAmended
19-Jan-1131-May-11230-Nov-109,3037,1575.96-
28-Oct-1031-May-11131-Aug-1010,4067,4756.23-
20-Jul-1031-May-10431-May-108,6194,7933.99-
20-Apr-1031-May-10328-Feb-106,6322,3831.99-
At 1.53, it is trading at a forward PE of 8.4 x
Estimated EPS (ii) = 2*(5.96 + 6.23) = 2*(12.19) = 24.38 sen
At 1.53, it is trading at a forward PE of 6.3 x
It proposes a dividend of 7.5 sen.
At 1.53, its DY is 4.9%.
At 1.53, its P/B = 1.53 / 1.9467 = 0.79 = 79%

Historical
5 Yr
PE range 8.6 - 13.5
DY range 9.2% - 5.2%

10 Yr
PE range 15.5 - 24.5
DY range 7.2% - 4.4%

Year      DPS    EPS
2003      5.4        7.9
2004      6.3      12.6
2005      5.4      13.7
2006      5.4      13.7
2007    30.1      15.8
2008      5.6      12.5
2009      5.6       -2.5
2000      7.50    17.28     NTA 1.8248
1H11     7.5       12.2      NTA  1.9467




Capital Changes
2005  1/1 Bonus


Date





May 3, 20100.075 Dividend
Nov 19, 20090.075 Dividend
Jun 5, 20080.0375 Dividend
Nov 15, 20070.0375 Dividend
Aug 20, 20070.0375 Dividend
Feb 26, 20070.25 Dividend
Aug 28, 20060.0375 Dividend
Nov 18, 20050.0375 Dividend
Sep 13, 20050.075 Dividend
Sep 1, 20040.075 Dividend
Aug 30, 20040.075 Dividend
Dec 12, 20030.10 Dividend
Aug 28, 20030.075 Dividend
Close price adjusted for dividends and splits.