How to Analyze Receivables & Inventory

How to Analyze Receivables & Inventory

Thu, Feb 11, 2010

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How to Perform Inventory and Receivables Anlaysis

I wanted to go through a quick exercise that I perform during a stock analysis.

A recent stock that has come up in the Graham stock screener and forum is CONN. Conn’s Inc is a specialty retailer of home appliances such as fridges, freezers, washers, dryers and consumer electronics such as TV’s, cameras, computers etc. Think Best Buy.

The company just released their results for their 2009 4th quarter results and the stock took a 17%hit. The actual financial statements hasn’t been released but I wanted to show how these things are foreseeable by analyzing the inventory and accounts receivables. This has also been discussed in the balance sheet analysis.

Sales, Inventory and Receivables Analysis

For any company that sells products, a careful look at the correlation between sales, accounts receivables and inventories is crucial. In the above example, I’ve only compared the 3rd quarter statements but you can see that CONN does not know how to manage their assets.

From what I see, the problem began to surface in 2006 where revenue only increased 0.23% while accounts receivables increased 31% and inventory went up 8%. Before 2006, the company was able to grow revenues at a faster rate than accounts receivables and inventory but from 2006 onwards, the correlation worsened until 2008 where you can immediately see that things were bound to fall apart.

In 2008, revenues declined 3% compared to the previous comparable period while accounts receivables increased by 116% and inventories up 9%.

The same thing happened in 2009 where accounts receivables increased another 102%! The only thing waiting for CONN is trouble, and it finally surfaced in their latest quarter. It goes to show that Wall Street does not perform the proper analysis required.

Here is a graphical view of the same thing.

Whenever you see either accounts receivables of inventory increase quicker than sales, watch out. But for inventory, you need to dig deeper.

When raw materials component of inventories is advancing much  more rapidly than the work-in-progress and finished goods components, this means that the company is receiving many new orders and an inventory buildup is necessary. So the company will simultaneously ship products from its finished goods inventory while ordering raw materials in larger amounts.

But in the case of CONN, the company only sells the items so 100% of inventory is finished goods so any excessive increase is a big red warning sign.

Dirt Cheap or Value Trap

All valuations point to a cheap company. Looks like the intrinsic value is roughly $15-$16.

If I had come across CONN when I first started investing, I’m pretty sure I would have bought it. At today’s price of $4.61 it is definitely cheap and tempting but until there are signs that management is able to get a handle on inventory and accounts receivables, it is best to leave it alone.

Sure the stock can go up, but it doesn’t hide the fact that the company is struggling. CONN has also increased their accounts payables and taken on huge amounts of long term debt.

If I was to buy the stock now, I would only be speculating and hoping that things improve.

http://www.oldschoolvalue.com/stock-analysis/inventory-receivables-analysis-conn/

Earnings Made by Tax Rate Changes

Earnings Made by Tax Rate Changes
Wall Street is infatuated with EPS. If a company beats their estimates, the stock price is pushed up higher despite the fact that earnings is so easily manipulated by different accounting methods and hiding and/or delaying expenses.

Taxes also play a big role in the final EPS.

A company with a 40% tax rate one year, paying at 35% the next will create the illusion that growth has exceeded expectations, when in fact, the business did nothing but just get a tax break. The opposite is the same.

A company paying 35% in taxes and then 40% the next year will obviously report lower EPS and the consensus will be that the business is slowing down.

How to Calculate EPS Due to Tax Rate Change

Let’s use Boeing (BA: 67.24 0.00%) as an example.

1. Calculate the tax rate

To calculate the tax rate of a company, find the income tax expense on the income statement and divide by the Earnings Before Income Taxes (EBIT).



Boeing’s tax rate was 33.7%, 33.6% and 22.9% in 2007, 2008 and 2009 respectively.

2. Calculate the difference in tax rates

Just subtract the previous year tax to the next year tax rate.

3. Calculate the gain or loss due to difference in taxes

Use the difference in tax % compared to the last period and multiply it by the income before tax (EBIT) number.

In BA case for 2009, multiply 10.7% and $1,731m to determine how much of EBIT was due to a lower tax rate.



You can see that BA made $185m in EBIT due to taxes compared to $4.16m the year before. In 2007, Boeing’s tax rate increased by 2.7% which is why the % difference is negative and shows a loss due to difference in tax.

4. Divide by Shares Outstanding and Adjust the EPS

Divide the gain or loss due to tax change by the number of diluted shares.



You can now see that in 2009, of the full year diluted EPS, $0.26 was made up due to a reduction in taxes. So while the market may have seen this as a great recovery, the actual EPS was actually $1.58.

Multiply the current PE of 36 to $1.58 and the stock price should be at $56.

The above method can be applied to quarterly results for comparisons and basically any other line item including non-operating and non-recurring expenses.

Let’s wrap things up with a stock valuation summary of Boeing for those that hold the company.

Jae Jun


[www.oldschoolvalue.com]

'I bought the land for my house for £5,000. It's worth £10m now'

Stirling Moss: 'I bought the land for my house for £5,000. It's worth £10m now'

Sir Stirling Moss is said to be in good spirits as he recovers in hospital after falling down a lift shaft at his London home. Sir Stirling, 80, is still reckoned to be the greatest racing driver Britain has ever produced. He lives with his third wife Susie, 57.

 

By Mark Anstead
Published: 11:19AM GMT 09 Mar 2010

Sir Stirling Moss: 'Do I bank online? Good lord no'

How do you invest?

I endeavour to use money to my advantage by investing it in property. My father used to say there is no better hedge against inflation than bricks and mortar and I believe he was right. At the moment I have 45 tenants spread across 10 rented properties, some in bedsits accommodating eight or nine people and some in flats with just three or four sharing.

What's been your investment strategy?

If I'm going to buy a new property I go to see it and work out how much I might need to spend on basic improvements and then what level of rent I think I can get. I am usually looking for at least a 7pc return, but I always buy within scooter distance of my office so if someone calls to say the washing machine is broken I can get on my bike and go over myself to try and fix it. I have properties in West Kensington, Maida Vale, Pimlico and Battersea – all within a 10-minute scooter ride of my home in Mayfair.

 

Have you ever borrowed against the value of your properties to buy more?

No, I have never done that. 'Gearing up' seems to me a foolhardy thing to do. It may sound like a good on idea on paper, but borrowing against one property to buy another seems to me like building up a house of cards – it will only come crashing down later.

How do you separate responsibility for finance with Susie?

We share everything – we don't have joint accounts, but we might as well. I can't think of an occasion when I have ever bought anything for her without her knowing what it cost. I bring the money in and she can spend it as far as I'm concerned (I'm lucky because she's more frugal than I am). Anything she wants she just gives me a cheque and I sign it.

How do you feel about the proposal to phase out the use of chequebooks?

Excuse me? I'm shocked … somehow that little piece of news had passed me by. I hate the idea – cheques are how Susie and I conduct all our affairs. I don't know what I would do without them. You've ruined my day now…

How did your childhood experience influence your attitude to money?

My father was a dentist and we lived in a small house in London until I was seven or eight, at which point we moved to a farmhouse in the country where my parents kept chickens, cows and ducks. It wasn't a working farm, more of a gentleman's retreat, but my father would commute from there and stay overnight in a flat in London during the week.
He ran 16 different surgeries in different locations around the city and he just didn't like wasting time talking to patients about the weather, he only wanted to come in at the last minute, administer the anaesthetic and do the drilling, leaving all the aftercare to the nurses.
He was very successful, so I grew up well provided for, but he taught me if there was anything I wanted in life I had to work for it. I had either to wash his car or sell something I already owned. That attitude has stayed with me – I don't like being careless with money.

How do you show your caution with it?

I don't think I live nearly as high on the hog as I could if I wanted to. When I travel, for example, I always fly club class because even though I can afford first class I can't see any benefit in it. I'm just not a wasteful person – I'm pound wise and penny foolish.

Have you learned any difficult lessons about money through mistakes?

I lost quite a lot on Australian dollars 20 years ago. I used to visit Australia quite often and I converted a lot of English pounds when the rate was about two Australian dollars per pound sterling. I thought I was getting a good deal and I put it into a bank account over there, but soon afterwards the pound strengthened. When I wanted to convert some money back it was a total disaster – I got less than 40p a dollar.

Do you have many credit cards?

I use my Coutts Visa card and that's about it. When credit cards were first introduced they sent them to everybody with a bank account and I'll never forget the way my father took out a pair of scissors and cut his up. I use them, but I am careful with them – I make sure I pay off the balance every month.

How do you tip? Are you an easy tipper or do they have to work hard with you?

I do tip, but I find it difficult to understand why it's now 15pc when it used to be 10pc for most of my life. The only difference between then and now is that the cost of food has gone up – the service hasn't got any better. If I receive exceptional service I'll add a bit more, but I refuse to use 15pc as my starting point.

What's been your greatest extravagance?

We go on long cruises every now and again, but I feel they are a deserved extravagance because I have always worked very hard. We're about to go and cruise in Singapore for our 30th anniversary and it will cost about £4,000 plus the flights.

How much did your home cost when you bought it?

It was 1961 and I bought a plot in Mayfair and built a six-storey 2,500 sq ft house on it. It was a site that had been bombed out during the war and the council originally offered me the whole corner including a derelict hotel for £40,000.
I didn't want the hotel so I asked how much they wanted for just the two plots on the end and that was just £5,000. The build cost was £25,000 – I had to tank the bottom because there was a river running under it and I installed a lot of luxury items. I have a table, for example, that goes up into the kitchen where it can be laid for dinner and then descends into the dining room below.

What has been your best buy?

My house. Even if it was still a bomb site the plot alone would be worth £10m today. But the whole thing is out of date and needs modernising this year – I want a new kitchen and air conditioning in every room.

And your worst buy?

I once won a 12-hour race in America in 1953 and as part of the prize I was given a homestead in a little place called Avon Park, Florida. The trouble was every year I had to pay tax, $107 annually. I should have defaulted and they would have confiscated it, but I kept hold of it until thankfully a friend of mine bought it from me a year or two ago for $8,000.
By then I was glad to see the back of it – $107 was worth a lot more when I started paying it and I would say if you add it up over the years it probably cost me a lot more than I sold it for.

Have you ever invested in shares?

I'm very cautious about things like that I don't understand, but when I was racing abroad after the war a friend of mine borrowed some money from me and paid me back in shares – £5,000 in Western Mining. I've still got them although I don't know what company name they are now. They've actually done quite well despite the crash because I've had them for so long.

Do you use deposit accounts?

I do. The low interest rates are a lark, but I understand why we aren't getting very good rates at the moment and in any case I think America has always had it worse. I tend to just stay with the accounts that my bank Coutts can offer because in the end any difference gained by switching would be paltry anyway.

Do you bank online?

Good lord no. I can just about get on the internet to send email and look a few things up. I'm very old fashioned when it comes to managing my money and I keep all my old printed bank statements.

How are you dealing with the increasing cost of living?

Susie looks after our energy bills and I think she has made sure we are paying the cheapest rate. When I renovate my house next year I will fill it with auto-sensing lights that come on as soon as you enter a room and go off again after you have left, so that should save energy.

Have your pension returns been disappointing for you?

I have saved into a pension most of my life and I had to buy an annuity at 75. Actually for me it has worked out fine, but I wasn't trying to buy an annuity at a time of crisis so I think I'm lucky.
Sir Stirling Moss is supporting Prostate UK to raise awareness of prostate diseases. Join the 5k run 'Pants in the Park 2010' (www.pantsinthepark.org) 

http://www.telegraph.co.uk/finance/personalfinance/fameandfortune/7404777/Stirling-Moss-I-bought-the-land-for-my-house-for-5000.-Its-worth-10m-now.html 

FAIR VALUE OF SHARES

FAIR VALUE OF SHARES

March 8, 2010 in General by paresh_singh86

The fair value of a shares is the average of the value of shares obtained by the net assets method and the one obtained by yield method. 

• Under net assets method, the value of an equity share is arrived at by valuing the assets of a company and deducting there from all the liabilities and claims of preference shareholders and dividing the resultant figure by the total number of equity shares with the same paid up value.
• Under yield method, the value of an equity share is arrived at by comparing the expected rate of return with the normal rate of return.  If the expected rate of return is more than normal rate of return, the market value of the share is increased proportionately.

The fair value of shares can be calculated by using the following formula:

Fair value of share

= value by net asset method+ value by yield method / 2

This method is also known as dual method of share valuation. 

• This method attempts to minimize the demerits of both the methods. 
• This is of course, no valuation but a compromised formula for brining the parties to an agreement. 
• However, it is recognized in government circles for valuing shares of investment companies for wealth tax purposes.

http://churmura.com/general/fair-value-of-shares/32817/

Stock Market Investing Basics to help a beginner

Stocks Investing :Stock Market Investing Basics to help a beginner

Stock Market Investing Basics to help a beginner

Considering investing in the stock market? With some basic information and helpful tips and tricks, you will be a stock market pro in no time.

Stocks are a type of investment that represents ownership in a company. In other words, when you own a stock issued by a particular company, you own a portion—or a share—of that company. That’s why stocks are often referred to as shares, and why owners of stocks are often referred to as shareholders.

How much ownership do you have? Let’s say a company has issued 1,000,000 stocks. If you were to buy 100,000 stocks of that company, you would own 10% of the company. But if you only bought one stock, you would only own 1/1-millionth of that company. Generally speaking, people who invest in stocks are interested in trying 

• to increase the value of their investment as aggressively as possible or 
• to accumulate a significant amount of money for a long-term goal.

Stocks can also be used to take control of a company, either through a buyout or a hostile takeover. In this situation, another company attempts to purchase 50.1% of the available stocks of a company to gain a majority voting position on the company’s board of directors. These events make great headlines, but unless you’re very wealthy or the CEO of a Fortune 500 company, chances are you’re using stocks to build wealth for the future.

Stocks Characteristics
One of the basics of stock market investing is that greater short-term risk has the potential for greater long-term rewards.

• For example, money markets are typically associated with the least potential for investment risk, or the chance that price swings will cause your investment to lose value. As a result, money markets are also likely to provide the lowest long-term returns.

• Stocks are on the opposite end of the risk/return spectrum. Stocks generally pose the greatest risk of short-term price volatility and loss, yet stocks have historically provided the highest long-term average annual returns.

• Bonds are in the middle: They’re typically less risky than stocks and generate lower returns than stocks, but bonds are riskier and more likely to generate better returns than money markets.

Stocks are often the investment of choice for two types of investors:

• Those willing to take a big risk in return for a potentially big short-term return, and 
• those willing to tolerate short-term price swings while they pursue important investment goals that are still many years away.

Types of stocks
Just as there are many different types of companies, there are many different types of stocks. Stocks are often categorized according to the following descriptions:

As a general rule, investments in large-cap and growth stocks tend to be less risky, while investments in small-cap and value stocks typically carry more risk. This is because a large, diversified company with a solid track record is more likely to weather rough economic times than a small company that is struggling to generate profits.

Investing in stocks
There are two ways to invest in stocks:

• by purchasing individual shares on your own or 
• by investing in mutual funds that invest in stocks. 

If you’re thinking about assembling an asset allocation of individual stocks, consider working with a financial professional who can help you make well-informed decisions.

Mutual funds, on the other hand, make it possible for individuals to invest in a well-diversified mix of stocks with just a single investment. Technically speaking, when you invest in a stock mutual fund, you own shares of the mutual fund itself, not shares of company stocks. The fund is the owner of the company stocks. Each mutual fund’s managers pool the combined assets of the fund investors and use that money to assemble a portfolio of stocks. The value of your investment in the fund is determined by the performance of the stocks owned by the fund. If the stocks in the fund generally increase in value, then the value of the fund—and your shares in the fund—can be expected to increase.

You’ll find mutual funds targeted to the different types of stocks available. Some funds invest exclusively in large-cap growth stocks, while others focus on small- or mid-cap stocks with an eye toward higher annual returns. Risk varies among stock mutual funds, so it’s important to read the prospectus for any fund you’re considering so that you’re comfortable with the potential risks and returns.

One of the easiest ways to invest in stocks is to choose an index fund. These mutual funds buy stocks that are listed on a major index, such as the Dow Jones Industrial Average or the S&P 500. The goal of stock index funds is to mirror the annual returns of the index it invests in.

Stocks in a diversified portfolio
Choosing investments among stocks, bonds and money markets for your portfolio isn’t an all-or-nothing proposition. Not only is it possible to simultaneously own a mix of stocks, bonds and money markets, it may even be a good idea, because owning a mix of different investments can be an effective strategy for managing overall investment risk in your portfolio.

For example, owning stocks and bonds simultaneously could help to limit your losses if either market experienced a downturn. Theoretically, gains in the other market could offset those negative returns.

http://www.americandetritus.com/2010/03/stocks-investing-stock-market-investing-basics-to-help-a-beginner.html

Article on Malaysia in WSJ

An institutional overhaul is long overdue in Kuala Lumpur

"The Leopard," Giuseppe di Lampedusa's celebrated novel about the crumbling feudal order in 19th century Sicily, made famous the line, "If we want things to stay as they are, things will have to change." That pretty much sums up the predicament of Malaysia's ruling elite today.

BY ALICE LLOYD GEORGE, Wall Street Journal

The sodomy trial of Anwar Ibrahim drags on in Kuala Lumpur, with the opposition leader's freedom and political career hanging in the balance. But the true significance of this anachronistic case does not depend on the outcome in the courtroom. The political assassination of Mr. Anwar aside, Malaysia is witnessing the death throes of a political machine that has run the country for over five decades. Mr. Anwar is a skilled politician who holds together an unlikely alliance of opposition parties—his conviction would certainly be a blow for the prospect of real political pluralism in Malaysia. But he also serves as a vessel for wider social forces and a disenchantment with the country's leadership. Another figure would surely take his place at the head of the reform movement.

The ruling coalition was founded on the principle that the three main races—Malays, Chinese and Indians—participate in politics through their own parties. Coupled with an elaborate system of affirmative action, this has allowed the United Malays National Organization to maintain a lock on power by protecting Malays from the winds of competition. After the opposition made unprecedented gains in the March 2008 elections, desperate tactics were called for, hence a rather tired repeat of the homosexuality charge first brought against Mr. Anwar a decade ago, now dubbed "Sodomy II" by a skeptical public. The government has denied that the trial is politically motivated.

That the political system and patronage network are under increasing stress is clear, but the prognosis is not yet apparent to all. Some in UMNO, like Prime Minister Najib Razak, think they can maintain the old system by merely tinkering around the edges. Mr. Najib has gestured toward loosening long-standing affirmative-action policies, but any good intentions are obstructed by entrenched interests in UMNO's conservative wing—to date the repeals have been cosmetic at best. Others are coming to a different realization—Malaysian society has matured and even Malays now recognize that outdated and discriminatory policies must give way to a more transparent and accountable system.

One such leader is Tengku Razaleigh Hamzah, a former finance minister of royal blood. Mr. Razaleigh has re-emerged as an outspoken critic of the government in recent weeks, though he strongly denies any intention of switching to the opposition. The 73-year-old party veteran has a history of challenging the leadership; in 1988 he left UMNO and formed a rival Malay party before returning to the fold in 1996.

Sitting in his Kuala Lumpur home—a remarkably exact replica of the White House's Oval Office—Mr. Razaleigh argues that UMNO politicians have not been responsive to calls for reform. "The young want to see a really multiracial organization, fighting on egalitarian issues, without having to fall back on race," he explains. "Unless the party system and the political system are reformed exhaustively, I think we are going to be pulled back into the same boat we have been in for the last 50 years."

Mr. Razaleigh believes that Malaysians want to move beyond identity politics, but UMNO is unable to break away from its Malay nationalist roots. Most recently, the government appealed a court ruling that allowed the use of the word "Allah" by non-Muslims. Though UMNO called for calm, the prime minister's statement that he couldn't stop protestors from expressing their opinions only served to fan the flames. The ruling was followed by a spate of desecration and arson attacks on churches and mosques. Mr. Najib further undermined the government's response to the crisis when he flew across the world for a 10-day tour of Saudi Arabia, the UAE and India, taking key cabinet ministers and senior officials with him.

By contrast, in a milestone decision, the opposition Islamic party PAS—which only 10 years ago campaigned to create a theocratic state with Sharia law—took a more moderate stance, urging Malaysians to respect the court ruling. The irony is that while UMNO continues to play race politics to out-Islam its opponents, PAS is appealing to a more progressive voter base.

Part of the reason for the electorate's change of heart is the realization that Malaysia risks being left behind economically if it doesn't climb out of its middle-income trap and eliminate the inefficiencies inherent in racial policies. These policies were formulated in the 1970s, when Malaysia was a tiger economy. Now its growth lags behind Southeast Asian neighbors like Indonesia—the new "i" in BRIC—and China and India increasingly pose competitive challenges.

The country has suffered from an acute brain drain over the last decade, as individuals seek education and employment in countries where talent is better rewarded. Now it faces capital flight, too, with foreign direct investment dropping to $2.7 billion in 2009 from $8.1 billion the previous year, according to United Nations Conference on Trade and Development estimates. One reason is the fear that UMNO will continue to play the race card and stir up tensions to keep itself in power. Another is the government's failure to undertake much-needed institutional reforms and address issues such as corruption, civil liberties and judicial independence. Malaysia's risk index, as calculated by Hong Kong-based Political and Economic Risk Consultancy, rose to 5.4 in January from 5.24 in December on a 10-point scale.

If there is a silver lining here, it is that even as UMNO has stoked tensions, by and large Malaysians have refused to be provoked—a stark contrast to the May 13 Incident in 1969, when rumors of ethnic slights quickly snowballed into massive riots and emergency rule. And that is one more indication that leaders like Mr. Anwar and Mr. Razaleigh are right that Malaysian society is ripe for change. If the current UMNO elite is to stand any chance of remaining in power, it needs to focus on remedying the very real challenges on its doorstep, rather than felling the opposition. Societal reform based on equality of opportunity is a change that is long overdue.


Ms. Lloyd George is a Princeton in Asia fellow at The Wall Street Journal Asia

DIS Technology - Check List: What can we learn from this ugly saga?

As with Transmile, it is sad that the investors are again caught in such a fraud.  There must be heavy penalties for those involved, not least, to emphasize the seriousness of this matter and to deter future such happenings.

Could this fiasco, of false accounting, be predicted looking at the latest quarterly reported results?  Often the answer is NO, though it was obvious that the company's business was deteriorating and the balance sheet was not good quality. 

The revenues and earnings were manipulated in the accounting.  However, the cash flow statement would have indicated that not all is well with the company.  The CFO was strongly negative.

http://spreadsheets.google.com/pub?key=tZmdsnrXUbsFVCAmAaQRW4g&output=html

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Blogger Wisdom Wise has written a nice article on reading the annual report which I have copied and paste here:

Tuesday, March 09, 2010

Reading the Annual Report

When you look at a woman, which part of her anatomy do you look at first? Is it her face, her bosom or her bottom? It is all a matter of choice. It doesn't matter so long as you get to look at the whole picture. Now, when you look into an annual report, it is the same. Which statement do you prefer to see first. Is it the income statement, the cash flow statement or the balance sheet? Personally, I go straight for the balance sheet to find out what the company has and what it owes others. If I don't find things attractive there, I will just close the report, avoid the stock and move on.
The things that I pay attention in the balance sheet are: Paid-up capital, par value per share, retained earnings, current assets, and current liabilities. I pay special attention to its cash position and how much debt it has. If its debt is too high, when compared to its equity, I will normally lower the grading of the stock. Don't forget that all companies that folded are those with very high debt.
From the balance sheet, I go to the income statement , the cash flow statement, and then the CEO's statement, or Chairman's statement. If both are available, I'll read them both and also the notes in the annual report to ascertain that the company is not involved in any litigation. Lastly, I will go to the page that shows the names of the majority shareholders. A strong major shareholder is a advantage. Take the case of YTL Cement whose major shareholder is YTL Corp.
Things to consider when assessing a company are as follows: a) Calibre of management; b) Modal of business; c) Earnings per share; d) Dividend yield; e) Cash and debt position; f) Barrier of entry; and g) sustainability of profit.

FBM KLCI was at a two-year high of 1324.22 on 8.3.2010.

On 8.3.2010:

FBM KLCI was at a two-year high of 1324.22. It rose 1.9% that day. (Since March 10th 2009, it had risen 469 points (55%) from the FBM KLCI's low of 855.24.)

The FBM SmallCap Index, which tracks the performance of 98% of listed stocks outside the top 100 companies, advanced at 1.16%.

The broader FBM Emas Index climbed 1.7%.


Therefore, while the top counters saw heavy buying interest on 8.3.2010, the smaller-sized firms trailed behind.

Technical analysts consider the market to be 80% psychological and 20% logical.

Technical analysts consider the market to be 80% psychological and 20% logical. Fundamental analysts consider the market to be 20% psychological and 80% logical. 

Psychological or logical may be open for debate, but there is no questioning the current price of a security. After all, it is available for all to see and nobody doubts its legitimacy. 

The price set by the market reflects the sum knowledge of all participants, and we are not dealing with lightweights here. These participants have considered (discounted) everything under the sun and settled on a price to buy or sell. These are the forces of supply and demand at work. 

By examining price action to determine which force is prevailing, technical analysis focuses directly on the bottom line: 

• What is the price? 
• Where has it been? 
• Where is it going?

Even though there are some universal principles and rules that can be applied, it must be remembered that technical analysis is more an art form than a science. As an art form, it is subject to interpretation. However, it is also flexible in its approach and each investor should use only that which suits his or her style. Developing a style takes time, effort and dedication, but the rewards can be significant.

*****Long term investing based on Buy and Hold works for Selected Stocks

It sure beats FD rates and it is safe too.
http://spreadsheets.google.com/pub?key=tWENexpUrXS_RMxB7k73RgQ&output=html

Click: Dividend Yield Investing - Stock Selection is still the Key
http://myinvestingnotes.blogspot.com/2010/03/dividend-yield-investing.html

Click also:
How can the average investor improves his investment returns in stocks?

and here too:

Dividend-paying companies: major shareholders must be willing to share their profits with their investors through good dividend payments.

Chart Analysis: Technical analysis can be as complex or as simple as you want it.

Chart Analysis

Technical analysis can be as complex or as simple as you want it. The example below represents a simplified version. Since we are interested in buying stocks, the focus will be on spotting bullish situations.




Overall Trend: The first step is to identify the overall trend. This can be accomplished with trend lines, moving averages or peak/trough analysis. As long as the price remains above its uptrend line, selected moving averages or previous lows, the trend will be considered bullish.

Support: Areas of congestion or previous lows below the current price mark support levels. A break below support would be considered bearish.

Resistance: Areas of congestion and previous highs above the current price mark the resistance levels. A break above resistance would be considered bullish.

Momentum: Momentum is usually measured with an oscillator such as MACD. If MACD is above its 9-day EMA (exponential moving average) or positive, then momentum will be considered bullish, or at least improving.

Buying/Selling Pressure: For stocks and indices with volume figures available, an indicator that uses volume is used to measure buying or selling pressure. When Chaikin Money Flow is above zero, buying pressure is dominant. Selling pressure is dominant when it is below zero.

Relative Strength: The price relative is a line formed by dividing the security by a benchmark. For stocks it is usually the price of the stock divided by the S&P 500. The plot of this line over a period of time will tell us if the stock is outperforming (rising) or under performing (falling) the major index.

The final step is to synthesize the above analysis to ascertain the following:

• 
  
  Strength of the current trend.
• 
  
  Maturity or stage of current trend.
• 
  
  Reward to risk ratio of a new position.
• 
  
  Potential entry levels for new long position.
  

http://www.stockcharts.com/school/doku.php?id=chart_school:overview:technical_analysis

Technical Analysis is the forecasting of future financial price movements based on an examination of past price movements.

Technical Analysis:  Techniques for predicting market direction based on

• (1) historical price and volume behaviour and 
• (2) investor sentiment.

Learn more here:
www.stockcharts.com
Select "Chart School."
www.e-analytics.com
Glossary of technical terms

www.prophet.net
The number one website on technical analysis according to Forbes and Barron's.

and:
www.chartpatterns.com
www.stockta.com


Technical analysts:  These investors essentially search for bullish or bearish signals, meaning positive or negative indicators about stock prices or market direction.


Dow Theory:  Method for predicting market direction that relies on the Dow Industrial and the Dow Transportation averages.

Learn more here:
www.dowtheory.com
www.thedowtheory.com


Support level:  Price or level below which a stock or the market as a whole is unlikely to fall.

Resistance level: Price or level above which a stock or the market as a whole is unlikely to rise.

Relative strength:  A measure of the performance of one investment relative to another.

Moving average: An average daily price or index level, calculated using a fixed number of previous days' prices or levels updated each day.

Hi-lo-close chart:  Plot of high, low and closing prices.

Candlestick chart:  Plot of high, low, open, and closing prices that shows whether the closing price was above or below the opening price.

Point-and-figure chart:  Technical analysis chart showing only major price moves and their direction.

'All cash' versus '80% cash and 20%' stock portfolio

When the market turned downwards recently, some bloggers declared that they had cashed out and were 100% in cash.  Yes, the market did turn down further, but then it rebounded quickly and to a higher level.

"When the market goes down, people think it will continue to go down."

"After the stock market has gone up, people think that the probability of the market continuing to go up is high."

If we slashed our stock-market exposure every time we felt uneasy, we would buy high, sell low and garner disastrous investment results.

Also these short-term events that we react to need to take into consideration two desirable yet conflicting goals - one goal is to avoid being poor and the other goals is having a shot at being rich. Each goal is desirable. The question is, how do you allocate your portfolio between these two goals.

Is being 100% in cash at any time a sensible action? Experts are unlikely to suggest an all-cash (or all-bond) portfolio. After all, a mix of 80% cash (or bonds/ and 20% stocks will have comparable portfolio gyrations, but with a significantly higher expected return. At the other extreme, advisers probably won't recommend an all-stock portfolio. They will plunk at least some money in conservative investments (cash or bonds), to temper the stock portfolio's price swings and provide money in an emergency.

Knees of Jelly or Nerves of Steel: Fixating on Risk Can Sink Your Investment Portfolio

As we settle on our portfolio's stock allocation, maybe we should forget about risk tolerance and instead focus on four other factors.

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As you decide how much to invest in stocks, a lot supposedly rides on whether you have knees of jelly or nerves of steel. But this notion of risk tolerance is a dangerous idea.  For proof, look no further than our reaction to recent market movements.

Our tolerance for risk, it seems, has plunged along with the market. But clearly, that doesn't mean we should cut back on stocks. If we slashed our stock-market exposure every time we felt queasy, we would buy high, sell low and garner disastrous investment results.

• "After the stock market has gone up, people think that the probability of the market continuing to go up is high."  
• "When the market goes down, people think it will continue to go down." 

What to do? As we settle on our portfolio's stock allocation, maybe we should forget about risk tolerance and instead focus on four other factors.

1. Taking Aim: "This fixation on risk isn't getting us any-place. Instead, people should think about the goals they have." You might want a cash reserve to cover emergencies and help you sleep better at night. But you also want to amass enough for retirement, which means buying stocks in the hope of notching high returns. "One goal is to avoid being poor. The other goal is having at being rich. Each goal is desirable. The question is, how do we allocate our portfolio between these two goals?"

2. Hitting the Target: "People don't understand risk very well. Most people will underestimate the risk of bond investments, because they don't understand interest-rate risk. And even after the great performance of the past few years, they'll overestimate the risk of a diversified stock portfolio over the long term."

It is better for you to be educated about risk and figuring out what sort of investment returns you need to meet your goals. You then have a mix of stocks and conservative investments that you think will generate the returns you need. "At that point, you typically change your professed tolerance for risk, rather than changing your goals. You can see the tie-in between the portfolio's risk and the accomplishment of your goals. It provides the motivation to take risk and stay invested when things look grim." Still there is a downside to this approach. "Once you have the portfolio that is most likely to meet their future needs is an aggressive portfolio, you tend to ignore short-term risks. But the problem is, it's these short-term events that you react to."

3. Biding Time: As you decide how to divvy up your money between stocks and more-conservative investments, time is a critical factor. Even if you are an aggressive investor and you need high returns to meet your goals, stocks may not be a wise choice if you have a short-time horizon. "Any money needed in three years or less should be saved rather than invested, and that means Treasury bills, money-market funds and certificates of deposit. But your time horizon is longer than you think. Your kid may be three years from college. But you won't pay the last bill for seven years."

4. Pick a Reasonable Range: No matter what your age or professed risk tolerance, experts typically recommend that long-term investors have 50% to 90% in stocks. Sound like a lot in equities? Initially, you may not be comfortable with such hefty stock exposure. But with time, you should get used to the market swings. And the fact is, without the stocks, you may not amass enough to reach your goals. "You may indicate that you are very risk averse, but then you may not be able to afford to be that conservative."


Source: Jonathan Clements, The Wall Street Journal, June 6, 2000.

Mar 6, 2010

The Australia property fair

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Yong: ‘We have excellent choices for landed properties with prices ranging from AUD350,000 onwards’.

If you are onsidering property investment in Australia, the ONE Australia Property Fair 2010 at Cititel Mid Valley, Kuala Lumpur, is the place to be this weekend.
There are a fine selection of residential and commercial units available for interested investors and property hunters.
Those coming to the show will also benefit from free consultation and be enlightened by knowledgable speakers at the property seminar.
It will showcase over 15 new prime projects in major cities such as Melbourne, Sydney, Perth as well as Queensland by established and reputable developers.
Various types of property will be presented, ranging from luxury waterfront projects to affordable students’ apartments as well as townhouses, landed properties and commercial units.
A special seminar titled “ONE Australia Property Seminar” will be held and will feature a series of interesting topics like Investing In Australia-Your Choice of State, Property Investment in Western Australia, Australia-Your Migration Options, Living & Studying In Australia as well as Transparencies and Clarity in Understanding Australian Property Investment & Finance.
Cyan Event Management had brought in a group of established developers and real estate agencies from Australia to showcase their property projects to Malaysian investors last July at the ONE Australia Property Fair in Kuala Lumpur and Penang.
Cyan Management managing director Charles Yong said Australian properties were much sought after by Asian investors, including Malaysians.
He said most local businessmen perceived the foreign property investment as ideal.
Decision factors include proximity, value, capital growth, currency exchange, living standards, education system and political stability.
It was highlighted recently that the number of Malaysians migrating or going to Australia for tertiary education and career opportunities has increased over the past year.
This is a good indication for the demand in Australian properties remaining strong in years to come.
“We have excellent choices for landed properties with prices ranging from AUD350,000 onwards as well as affordable units in Melbourne below AUD180,000. “Parents can check out good accommodation units for their children from the list of developers, who among them will be releasing a new phase residential project for Malaysian investors at the fair,” said Yong.
He said the exhibitors would be able to provide assistance and useful information during the fair.
For enquiries on the fair, contact Cyan Event Management at 03-7981 1725, 7980 8950 or email at oneaustproperty@gmail.com or visit www.oneaustraliapropertyfair.com.

Having a concrete plan to financial freedom

Saturday March 6, 2010
Having a concrete plan to financial freedom
By FINTAN NG


fintan@thestar.com.my

Financial freedom is a distant dream for the vast majority of working people, it is made almost unattainable by the generally low wages and inflationary pressure that many here have to struggle with.

An observer says it has become increasingly difficult to rely on just a day job to achieve that freedom as wages here have not kept up with inflation.

This person has a day job and several side incomes including running a dragon fruit farm and being involved as an agent in the Malaysia My Second Home programme.

Some, like Ginger Leong, say “forced savings” is their path to financial freedom. However, she acknowledges that whatever is saved now may not be enough due to inflation and other commitments.

Many also find it hard to even start on the path to financial freedom as they are confronted by a plethora of investment instruments available as well as the endless numbers of books and blogsites on financial management.

What most people need is guidance on how to sift through all the information out there and come up with what Whitman Independent Advisors Sdn Bhd managing director Yap Ming Hui says should be a “down-to-earth” and sensible view on achieving these goals.

He tells StarBizweek that most people “dream of achieving financial freedom” but “they don’t have a workable or concrete plan”.

Yap, who wrote a book, Roadmap to Financial Freedom, says defining goals – a “self-defined good life” for attaining financial freedom – is important.

“Not everyone can become wealthy but everyone can achieve financial freedom, however those who want to achieve it must have a roadmap as a guide to know what is the optimum investment that needs to be made,” he says, adding that even people with average assets and incomes can attain their financial goals.

Yap defines financial freedom generally as “an optimum financial position whereby your wealth is optimised to match your optimum financial needs and wants”. In this respect, “wealth” can also be defined as “assets”.

He realises that individuals have different goals, needs and wants but says this can be simplified to two components for the purpose of mapping out a roadmap - optimisation of assets and identifying and managing financial needs and wants.

Yap says needs and wants should not be viewed strictly from the financial context alone but from a bigger picture - the higher context of life.

“Most people will just concentrate on optimising their wealth but just concentrating on making more money is not true financial freedom if needs and wants are not defined,” he says.

Yap says when a person embark on the path to achieving financial freedom, some of the questions to ask are: How far is that person from their goals? If situations come around that will impact finances, what will that person do? What’s a person’s next move suppose to be?

Standard Financial Planner Sdn Bhd chief executive officer Alfred Sek says that freedom has been achieved as long as there is no stress from financial problems or commitments.

“Achieving it is a gradual process, people adjust as they go along, so if they earn more then they adjust their goals, similarly if they earn less than they adjust too,” he says.

Sek says in his experience advising clients on their finances, flexibility is important. “There are no real yardsticks, personal situations and needs are different,” he says.

http://biz.thestar.com.my/news/story.asp?file=/2010/3/6/business/5757178&sec=business

By YVONNE TAN | Mar 6, 2010

PPB to expand flour mill, property businesses

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yvonne@thestar.com.my

KUALA LUMPUR: Diversified company PPB Group Bhd hopes to utilise its RM1.29bil in proceeds from the sale of its sugar business to expand its existing businesses of flour milling and property.


Its managing director Tan Gee Sooi said after paying its shareholders about RM600mil in special dividends from the total sum, the remaining would be used to build more flour mills overseas as well as to enlarge its landbank here.

“Out of Malaysia, for example in Indonesia where the population is huge and consumption is growing, there are a lot of opportunities for the flour milling business while for property, we will look for suitable landbank here,” Tan said after chairing a press and analyst briefing here yesterday.

Based on the group’s latest financial results for the year ended Dec 31, 2009, 20.71% of operating profit came from its grains trading, flour & feed milling segment while the property segment contributed a mere 2.77%.

The largest contributor to operating profit was the sugar and cane segment, coming in at 62.85%.
PPB Group proposed last October to sell its entire stake in two sugar units and land used for sugar cane cultivation to Federal Land Development Authority for RM1.29bil.

At the same time, its 49%-owned associate Grenfell Holdings Sdn Bhd also said it would sell its stake in plantation group and sugar refiner Tradewinds (M) Bhd for RM207.53mil.

With the sugar business out of the group’s operations, Tan expects this year’s financial performance to be “satisfactory”, backed by contributions from its grains trading, flour & feed milling segment, particularly from its Indonesia operations which Tan said “has expanded very fast”.

PPB recently commissioned a 1,000-tonne flour mill there. Tan said production capacity for the plant was expected to reach 65% by year-end and that the company had plans to establish more mills there.

Analysts are generally positive on the company’s Indonesia plan given that wheat prices have come off 40% from its peak and there is no controlled pricing in Indonesia.

On new downstream activities, Tan said PPB expected to commission a RM105mil bakery in Pulau Indah by the end of this year, producing loaf bread and subsequently a variety of buns.

It also hoped to form joint ventures to go into the frozen food business in Japan, Tan said.

PPB Group Bhd’s net profit for the fourth quarter Dec 31, 2009 fell 3.2% year-on-year to RM351.53mil as lower selling prices of flour resulted in lower revenue contribution from its grains trading, flour and feed milling segment.

However, net profit for the entire year rose 25.6% to RM1.62bil mainly due to higher contribution of RM1.21bil from its 18.4% associate Singapore-listed Wilmar International Ltd.

Dividend Yield Investing - Stock Selection is still the Key

Mr has left a new comment on your post "Dutch Lady posts 4Q net profit of RM16.05m, warns ...":

Dear Mr bullbear,

Sorry to write to you here, but I don't know how to reach you.

....I want to ask you if you can recommend say 5 stocks with High Dividend Yield that you can recommend to invest for long time.

I am a 43 year old family man with a full time job and no interest nor time to monitor the market. Maybe once or twice a month.

My goal is to just beat the fixed term deposit rate. Now is so low, only 2% to 2.5%. Very hard to earn passive income like this.

I need some real solid recommendation, stocks that I can hold for a long time. A friend swears by PBBANK. But I am concerned the price may be too high now.

I plan to start with RM50k first. Maybe split into 5 stocks with RM10k each.

What do you think of PBBANK? What is a good entry price? Can you recommend a few others that pay high dividend for me to consider? I appreciate the final decision is mine and mine alone, and I will not blame you for any losses. But please explain your reasons.

Thanks and kindest regards,

Mr Teoh

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Dear Mr. Teoh,

It is not easy to give you advice other than some very general ones.  You will find enough materials in this blog to answer your questions.

Since you asked, I thought a better approach would be for me to collate some examples to help you answer your own questions. 

Click here:  It sure beats FD rates and it is safe too.
http://spreadsheets.google.com/pub?key=tWENexpUrXS_RMxB7k73RgQ&output=html

Warren Buffett often looks at the stock he buys as equivalent to a bond.  The cost price for the stock is the 'equivalent' to the price paid for a bond.  The earning yield of the stock is the 'equivalent' to the coupon rate of a bond.

He likened his stock as equity bond.  Unlike a bond that pays a fixed coupon rate for its lifespan and repayment of the initial invested capital, an equity bond (stock) if chosen well, can deliver increasing earnings (and dividends) over many years.  Its share price likewise will appreciate with its increasing earnings.

The trick in dividend yield investing is still to focus on the earnings and earnings growth potential of the company.  All these are embodied in a simple phrase, that is, choose and only invest in good high quality companies bought at bargain or fair prices.

Regards.


Click:

Dividend-paying companies: major shareholders must be willing to share their profits with their investors through good dividend payments.

http://dividendsvalue.com/

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How can the average investor improves his investment returns in stocks?

How can you improve your investment returns in stocks?

The adage, "Buy low and Sell high" and pocket the profit, is well known. I like to also remember it this way: "Never buy high and Never sell low".
The subsequent discussion applies to investing in high quality good stocks bought at a bargain only.

How can the average investor improves his investment returns in stocks? More specifically how can an average investor improves his return to 10% annually? Even better, to above 15% annually and consistently? Let us examine some factors affecting investment returns.


1. Stock selection
This is important. You wish to have a stock that gives you a good total sustainable return over many years. You will need to invest in those stocks with a high ROE of at least 15% or more. Also, these stocks should have good earnings growth (EPS growth) that is consistent and sustainable. Such companies run businesses with a huge competitive advantage over their competitors with a large moat.


2. Buy when the selected stock is selling at a low price.
This is the better way to get superior return - the potential return is higher with concomitant lower risk. Invest in "value stocks". A good portfolio should always have cash available to benefit from a bear market or a correction or panic sell in a bull market/or a specific stock.


3. Taking profit
Profit should be realised from sales of stocks in the following situations:
(I) when the stock is obviously overpriced, or
(II) when the sale of the stock frees the capital to be reinvested into another stock with potentially better return.

Not taking profit in the above situations can harm your portfolio and compromise its returns. In other circumstances, let the winners run.

Underperforming stocks should also be sold early. Hanging onto underperforming stocks is costly too. There is the opportunity cost that the capital can be better employed for higher return. Also, hanging onto these lack-lustre stocks reduces the overall return of your portfolio.


4. Reducing serious loss
When the fundamentals of a stock have deteriorated, sell to protect your portfolio. This decision should be make quickly based on the facts and situations, in order to keep your losses small.


5. Diversify, but not overdoing it
According to Buffett, adding the 7th stock to the portfolio reduces the return without reducing the overall non-systemic risk. of the portfolio. Select the best 6 stocks. If you need to add money to your portfolio, buy more of these preexisting stocks when they are offered at a good or bargain price. If you identify a better stock to invest, perhaps, this should replace one of the preexisting stocks in the portfolio.


6. Asset allocate according to your risk taking ability

It is perplexing to know of investors whose days are affected by the swings in the market. You should not bet your total networth into the stock market. Allocate the amount that you are willing to risk.

Many long-term investors are always riding on a significant amount of gains. This means that they will only lose their capital in very unlikely extreme situations.


7. So far so good. The hardest part: getting wired like Buffett!

To invest like what Buffett, you need to be knowledgeable and able to execute 'coldly' (or cooly) without being affected by emotions. These are among the harder skills to master. Have you wondered what drives this blogger to write on investing? Through writing, rather than lurking, you can focus on the facts and solidify your knowledge, philosophy and strategy.

Admittedly, there is no single philosophy or strategy; but you should have one to guide your investing. It prevents you from over-reacting to emotions and circumstances, that may harm your portfolio and investing returns. As this discussion assumes the portfolio contains only good quality stocks, it prevents you from "Buying high and Selling low" due to falling prices in the market. It may allow you to benefit hugely from the volatilities and follies of the market; making volality your friend.

Understanding and mastering this field of behavioural finance is yet another challenge to higher investment returns for the investors.