How to Value a Stock like Buying a Business

How to Value a Stock like Buying a Business

Major task of a right stock market investor, especially value investor, is the valuation of stocks. There are thousands of methods available to evaluate a stock or a business to identify the best in it before taking an investment decision. For an ordinary investor, valuation is not so easy as it pronounces. Most of the stock investors or emerging investors feels stock valuation required high knowledge in numerical. It is just a myth. If you study the approach and characters of world famous investors, you could find none of them have above average numerical skills to evaluate the stocks or a business to invest. Great investor Warren Buffett can be a best example on this.

There are multiple stages to get knowledge. It begins with our school and collage study. Next level is from our experiences and final level is from the life itself. These rules are highly applicable to stock investors too. There is no investor in this world that is ahead of any mistakes or errors with their selection or investments. Success of these investors totally lies on how they avoid the same mistake not happening again to them in the rest of their investing career. In this sense, mistakes are the best tools to learn real investment and reach to maximum success.

This article highly intend to ordinary investors who have basic skills and average with numerical. Of course, numerical skills required to an extent, but not to an expert level. An ordinary investor can select a right stock same like buying a new business. It is so easy to understand and simple to apply.

Suppose you are looking for a good business to buy in your locale and receives an offer from a local business owner to buy his business.

• If you don't have any interest on his business, you will certainly reject that offer.
• But if you have interest, you will proceed with further.
• Whether buying or not, you will approach him to know more about the business to understand whether it is suitable to your interest or not.
• the next step would be preparing a set of questions to ask to the present owner to identify how much this business meets your requirements.

Below are some of the important questions if I might be the person there to buy the business.

1. When did you start this business and what is your product or service?
2. How familiar and comfortable the public is, with your product or service?
3. What was the total capital employed to start this business and what is its present status?
4. How many owners or stake holders involved into this business?
5. Do you have any loans or other debts? If yes, from where and how much?
6. Who all are your immediate competitors in the area doing same business?
7. What is their market share compare with your business?
8. What is the profit you have received from the beginning year till today?
9. Does your business have any kind of legal issues or judicial cases against?
10. How qualifies and efficient your employees are?
11. What you have done to market your products or service?
12. What is the real cost associated to manufacture each product and what would be the real profit if sell the same?
13. Why do you want to sell the business now?

Of course the above are 13 simple questions anyone can easily ask to a business owner who presently want to sell his business to you. it is not highly complicated questions or not required much efforts to prepared. Only common sense required to ask these questions because each of the answers to these questions either makes you close to buy the business or take away from the buying decisions. Another truth is, you will get answers to these questions. But it is your duty to confirm the received information are true. Slightly complicated areas like profit and spending areas that can cover using your average numerical skills.

If you are a real buyer, what would you do after getting answers to all these questions? You may buy or may not buy. Why? there would be some solid information about the company that may support your decision or take away from the decisions. If you are able to identify the same easily, then why don't apply the same skills to evaluate a stock or business to invest. It is so easy isn't it?

Answers to the above questions pointing its fingers to some of the best information about the company as follows:

• First question points its finger to the reputation of the company. How old it is and how established it is in the market.
• Second question is to understand how popular the product or services to the people or markets.
• Third is to get information about its total worth or assets.
• Fourth, information of its stake holders and how much each of them holding.
• Fifth, is the company suffering from debt or has any debt that is unmanageable.
• Sixth gives information about the competitors.
• Seventh is to understand the monopolistic position of the company.
• Eighth, year to year profit growth and thus earnings growth.
• Ninth, understand legal issues against companies that may lead to shutdown or lead to bankruptcy.
• Tenth is to the managerial efficiency of the company and work force capacity.
• Eleventh, company network information to promote the product.

Next, identifying the capability of surviving bad situations like economic recessions and related business bottlenecks and finally, understanding any critical possible situations that may drag the company out business or total loss.

I still wonder, why don't people able to pick right stocks or businesses to invest by asking these questions against them? It is so easy to identify if one spend little time to research. All the information about these questions are easily available from the company websites or stock exchange sites where companies filing their information. Along with collecting such highly useful information, add little commonsense to confirm the suitability of a stock or business for you to invest.

In this article, I have given an idea to only identify the stock. There are various article available in the data base of this blog to give you knowledge to understand the right time to buy or sell. I have simplified the buying information of a business with number of articles and you can easily collect them by clicking on the label named 'investment' under this blog.

Now it is your turn. I have given an idea and shared some experience from life on that idea to make you understandable how I am picking the stocks. I have also given the idea to you to improve much better than me and take better decisions than me by using your own sense.


http://www.investinternals.com/2010/01/stock-valuation.html

Britain is out of recession at last – but are you?

Britain is out of recession at last – but are you?

While the nation’s output of goods and services grew in the final quarter of last year, according to the latest official figures, many people will be wondering whether their own finances are actually in better shape.

By Richard Evans
Published: 9:33AM GMT 26 Jan 2010


For many the answer will be no.

Recovery can bring its own problems; for a start, rising demand tends to stoke inflation, which could prompt the Bank of England to raise interest rates – good news for savers, but not something that hard-pressed home owners would welcome.

 “The danger is that, with a return to growth, Britons will underestimate the hardships of recovery,” said Stephen Barber of Selftrade, the stockbroker.

So what are the prospects for our personal finances as the economic recovery takes hold?

Tax
With Britain borrowing record amounts of money, many expect public spending cuts or tax rises – or both – as the Government attempts to balance the books. Income tax could have to rise by as much as 5p in the pound, said Mark Dampier of Hargreaves Lansdown, the asset manager.

“We have been living through a phoney war, mainly because of the electoral cycle. No political party has the heart or the courage to tell it as it really is,” he said. “So we won’t get a real Budget until after the election and this will probably be worse than the infamous 1981 Geoffrey Howe Budget. So the real war will begin probably some time in July.

“What can we expect? I strongly suspect that the big tax takers – basic-rate tax and VAT – will rise, VAT to 20pc and basic-rate tax by 2p to 5p in the pound.”

He added: “The high level of government and consumer debt makes me feel quite pessimistic. It took over 300 years for us to have £380bn worth of public debt. It has taken this government 12 years to bring it to £850bn. Reducing it will mean a huge shock to our finances – the recession is not over for most of us.”

Adrian Shandley of Premier Wealth Management said: “After the election taxes will rise and, if this is coupled with a rise in interest rates and inflation, individuals could find themselves much worse off, with higher mortgage payments, higher taxes and a lower real value of their wages.”

Interest rates and inflation
Commentators are divided on the likelihood that interest rates will rise from their current unprecedented lows. Mr Dampier said official rates were unlikely to rise this year because a tough post-election Budget “would equate to a significant interest rate rise”.

But he pointed out that you don’t need the Bank of England to put up official rates for mortgage costs to rise. Lenders are by and large able to change their standard variable rates at will, while Skipton Building Society recently abandoned a pledge to keep its SVR within three percentage points of Bank Rate.

“Money is very expensive at the moment even though base rates are at a 311-year low,” Mr Dampier said. “While for home owners with a tracker mortgage 2009 probably proved to be rather good in terms of income, I think for the consumer who has kept their job the recession is only just about to start. I believe people are going to be in for a real shock. They have got used to a standard of living that goes up every year. I expect that standard of living for the next four or five years to fall.”

Ros Altmann, a governor of the London School of Economics, said interest rates would have to start rising at some point. “They cannot possibly stay at these low levels as the economy picks up,” she said. “But I fear that the Bank of England might keep rates too low for too long. This leads to a significant risk of rising inflation – indeed inflation is already well above the official target – and once inflation takes hold it may not be easy to bring it back under control.”

Higher interest rates might seem like good news for savers, who would finally see better returns on their money, she said. But if inflation rose faster than interest rates, pensioners’ and savers’ incomes would not keep up with increasing household bills. “Rising rates also means higher mortgage rates, which will put further pressure on many households’ incomes.”

Vicky Redwood of Capital Economics, the consultancy, said rises in interest rates looked unlikely. “So at least mortgage costs should stay low. But house prices still look overvalued and could start to fall again, leaving more households in negative equity,” she added.

Investments
While you would expect the end of a recession to be good news for the stock market, it’s worth bearing in mind that markets generally look ahead, so much of the good news will already be “in the price”. So instead of simply expecting the FTSE100 to soar, investors may have to be selective if they want to profit, experts say.

“A return to growth does not mean a return to pre-credit crunch investment strategies,” Mr Barber said. “Investors would do well to build portfolios which are both defensive and which take advantage of the new opportunities in Britain and across the world.”

Mr Dampier agreed, saying: “I think it becomes a real stock picker’s market. There are some areas of the stock market – high yielding defensives and special situations – which I think could blossom through a difficult time in the economy. But the general indices may well tread water.”

Bond investors may have to be more careful, Ms Altmann warned. “As the Bank of England begins to unwind its policy of quantitative easing, it will have to try to sell gilts. This will push bond yields up and prices down. Bond investors would lose money, while rising yields could also unsettle the stock market later on.”

Jobs
An immediate improvement in employment prospects is unlikely, experts say. Ms Redwood said: “Jobs will remain hard to find, with employers likely to remain nervous about hiring when the economic recovery is still sluggish. In fact, we expect unemployment to start rising again and it could even reach 3m.

“Even if employment holds up, that is only likely to be because firms are controlling costs by cutting or freezing pay instead. For many people, it will still feel very much like a recession.”

Ms Altmann agreed. She said: “Companies will not suddenly rush to recruit new staff until they are more confident that the recovery will last, so unemployment is likely to stay high and pay will not increase much if at all for most of us.”

Household bills
There is further bad news for consumers when it comes to council tax and household energy bills. “We can expect council tax to rise further as we are paying for the public sector pensions,” Mr Dampier said. “Utility bills will continue to rise, not only because of rises in commodity prices but also because of environmental taxes.”

http://www.telegraph.co.uk/finance/personalfinance/consumertips/7077807/Britain-is-out-of-recession-at-last---but-are-you.html?utm_source=tmg&utm_medium=TD_rec&utm_campaign=pf2701am

Forget bubble fears

Questor share tips: forget bubble fears, Templeton Emerging Markets remains a buy

Questors does not believe emerging markets have quite become a bubble yet and recommends buying Templeton Emerging Markets.

Published: 5:30AM GMT 26 Jan 2010

Are emerging markets in a bubble or not? This is the debate that has been raging for a couple of months now. Although there is the chance that a bubble may emerge, Questor feels we are not there yet – and Citigroup agrees.

“Asset price gains in emerging markets have been particularly strong recently, although we’re not convinced that it’s right to talk about bubbles just yet,” according to economist David Lubin. “There is little to suggest that the price appreciation we’ve seen in emerging equity markets exhibits the kind of characteristics seen in previous equity market bubbles,” he added

However, this does not mean it is all plain sailing. By their nature, emerging markets are volatile and risky. There is a valuation risk once stimulus packages are withdrawn later this year.

Valuations are also likely to be supported by a wave of money as investors continue to releverage into risk positions. Some commentators have suggested selling part of their holdings and running with the rest of the investment. This is a perfect strategy for cautious investors.

However, for now Questor is comfortable maintaining a buy stance on Templeton Emerging Markets Investment Trust, which was recommended on January 5 last year and is up 78pc compared with a market up 16pc.

As of January 22 the funds net asset value stood at 542.97p.


http://www.telegraph.co.uk/finance/newsbysector/epic/tem/7073100/Questor-share-tips--forget-bubble-fears-Templeton-Emerging-Markets-remains-a-buy.html

Buy and Hold vs. Market Timing: Some personal observations

Short term traders do not hold their stocks for too long.  They often take their profit.  They then plough them back into another new trade when they perceive the upside is better than the downside.  They are not the buy and hold types.  To them, rightly so, buy and hold is a very dangerous strategy, especially so too if they are not picking carefully the stocks they trade in.   Short term trends are totally unpredictable.  They react to graphs depicting volumes and prices; searching for and attributing meanings to these.

When the market is on the uptrend, everyone benefits.  Postings were similarly optimistic.  "Why I like stock XXX?"  "Why I like stock XYZ, very much?"... Blah. Blah. Blah.   Now that the market has shown some volatilites and uncertainties, the postings turned pessimistic.  "Beware the black swan..."  Blah. Blah. Blah.  Such thinking is typical of a market timer. 

Yet, the reality is:  No one can predict the market with any certainty.  If he can, he will own the world.  But one should invest with some knowledge of the probabilities of likely outcomes. Even more importantly, is knowing the consequences arising from these probabilities, however unlikely these maybe.  Nassim Taleb is right to point these "fatal downsides" of unintelligent or emotional investing in his two classic books.

Let me share with you a "well known' secret.  Do you know that the richest persons  in the world are all mostly "buy and hold" type investors?  Look at the KLSE bourse.  Who owns the major wealth in the KLSE?  Lee family of KLK, Lim family of Genting, Yeoh family of YTL, Teh family of PBB, Lim family of TopGlove, Lee family of IOI, .......  They are the major shareholders of the good quality successful companies.  Do they buy and sell their shares in their companies regularly?  Do they make more of their money from trading their shares or from holding onto their shares over a very very long period?

Buy and hold is safe.  It is very safe for those with a long term investing horizon.  However, there is one provision:  You need to be in the right stock.  You will need to be a stock-picker.  Pick the good quality successful companies and you will have few reasons to sell them. 

Buy and hold is certainly very safe for selected stocks.  Do not react emotionally to price volatilities.  Price volatility is your friend to be taken advantage of:  giving you the opportunity to buy these companies at a bargain and to sell them if they are overpriced.  Often, the price is correct and fair, and you need not do anything.   For the super-rich whose wealth are locked in a "buy and hold" mode for umpteen years in their good quality successful companies, this strategy has benefitted them immensely.  If they can grow rich, so can you.  After all, you can be a co-owner in their companies.  Think about this and you may wish to follow them too, buying into their companies at fair or bargain prices.  For this, you will need to be rewired appropriately.

The Economic Climate (12): The UNPREDICTABLE Economic Climate and the Investor

From the Great Depression to 1995, US had nine recessions.  So in your lifetime, you're likely to be subjected to a dozen or more. 

Each time it happens, you'll hear from the reporters and the TV commentators that the country is falling apart and that owning stocks is too risky. 

The thing to remember is that we've wiggled out of every recession since the one that turned into the Great Depression.

Reviewing the period from the Great Depressions to 1995 shows that

• the average recession lasts 11 months and 1.62 million jobs are lost, while
• the average recovery lasts 50 months and 9.24 million jobs are created.

The seasoned investor realizes that stock prices may drop

• in anticipation of a recession, or because
• Wall Street is worried about inflation

But there's no sense in trying to anticipate either predicament, because the economic climate is unpredictable. 

You have to have faith that inflation will cool down eventually, and that recessions will thaw out.

The Economic Climate (11): Fed and Money Supply

The agency in charge of climate control is the Federal Reserve System, also known as the Fed. 

It has a special way of heating things up and cooling things down - not by blowing on them, but by adding and subtracting money.  Given its huge importance, it's amazing how few people know what the Fed is all about.

In a survey from several years ago, some people said the Federal Reserve was a national park, while others thougth it was a brand of whiskey.

In fact, it's the central banking system that controls the money supply. (Monetary policy)



Whenever the economy is cooling off too much, the Fed does 2 things. 

(1)  It lowers the interest rates that banks must pay when they borrow money from the government. 

• This causes the banks to lower the interest rates they charge to their customers, so people can afford to take out more loans and buy more cars and more houses. 
• The economy begins to heat up.

(2)  The Fed also pumps money directly into the banks, so they have more to lend. 

• This pumping of money also causes interest rates to go down. 

And in certain situations, the government can spend more money and stimulate the economy the same way you do every time you spend money at a store. (Fiscal policy)



If the economy is too hot, the Fed can take the opposite approach:  raising interest rates and draining money from the banks. 

This causes the supply of money to shrink , and interest rates go higher. 

• When this happens, bank loans become too expensive for many consumers, who stop buying cars and houses. 
• The economy starts to cool off. 
• Business lose business, workers lose jobs, and store owners get lonely and slash prices to attract customers.

Then at some point, when the economy is thoroughly chilled, the Fed steps in and heats it up again.  The process goes on endlessly, and Wall Street is always worried about it.

The Economic Climate (10): The Government and the Fed

The US federal government is much bigger than it was during the last Great Depression. 

Back then, it didn't have much economic clout. 

• There was no welfare, no social security, no housing department, none of the hundreds of departments that exist today. 
• In 1935, the entire federal budget was $6.4 billion, about 1/10th of the total US economy. 
• In 1995, it was $1.5 trillion, and nearly 1/4 of the total economy.

An important divide in US:  As of 1992, more people worked in local, state, and federal governments than in manufacturing.  This so-called public sector pays so many salaries and pumps so much money into the economy that it keeps the economy out of the deep freeze.  

• Whether business is bad or good, millions of government employees, social security recipients, and welfare recipients still have money to spend. 
• And when people get laid off, they get unemployment compensation for several months while they look for another job.

The dark side of this story is that the government has gotten out of whack, with huge budget deficits that

• soak up investment capital and
• keep the economy from growing as fast it as once did. 

Too much of a good thing has become a bad thing.

The agency in charge of climate control is the Federal Reserve System, also known as the Fed.

The Economic Climate (9): Goldilocks climate, the perfect situation doesn't seem to last.

The perfect situation for companies and their investors is the Goldilocks climate:  not too hot and not too cold.

But whenever we get into a Goldilocks climate, it doesn't seem to last.

Most of the time, the economy is either heating up or cooling down, although the signals are so confusing that it's often hard to tell which way we're headed.

The government can't control a lot of things, especially the weather, but it has a big effect on the economic climate. 

Of all the jobs the federal government does, from fighting wars to fighting poverty, it may be that its most important job is keeping the economy from getting too hot or too cold.  It it weren't for the government, we might have had another Great Depression by now.

The Economic Climate (8): Cold Climates and Recession

Reviewing the recessions in US since World War II to 1995:  all last an average of 11 months, and cause an average of 1.62 million people to lose their jobs.

In a recession, business goes from bad to terrible. 

Companies that sell soft drinks, hamburgers, medicines - things that people either cannot do without or can easily afford - can sail through a recession unscathed. 

Companies that sell big-ticket items such as cars, refrigerators, and houses have serious problems in recessions.  They can lose millions, or even billions, of dollars, and unless they have enough money in the bank to tide them over, they face the prospect of going bankrupt.

Many investors have learned to "recession-proof" their portfolios. 

• They buy stocks only in McDonald's, Coca-Cola, or Johnson & Johnson, and other such "consumer growth" companies that tend to do well in cold climates. 
• They ignore the likes of General Motors, Reynolds Metals, or U.S. Home Corp.  These are examples of "cyclical" companies that suffer in cold climates. 

Cyclical companies either

• sell expensive products,
• make parts for expensive products, or
• produce the raw materials used in expensive products. 

In recessions, consumers stop buying expensive products. 

The Economic Climate (7): The economy has gone from hot to cold in a matter of months.

A hot economy can't stay hot forever. Eventually, there's a break in the heat, brought about by the high cost of money. With higher interest rates on home loans, car loans, credit-card loasn, you name it, fewer people can afford to buy houses, cars, and so forth. So they stay where they are and put off buying the new house. Or they keep their old clunkers and put off buying a new car.

Suddenly, there's a slump in the car business, and Detroit has trouble selling its huge inventory of the latest models.  The automakers are giving rebates, and car prices begin to fall a bit.  Thousands of auto workers are laid off, and the unemployment lines get longer.  People out of work can't afford to buy things, so they cut back on their spending.

Instead of taking the annual trip to Disney World, they stay home and watch the Disney Channel on TV.  This puts a damper on the motel business in Orlando.  Instead of  buying a new fall wardrobe, they make do with last year's wardrobe.  This puts a damper on the clothes business.  Stores are losing customers and the unsold merchandise is piling up on the shelves.

Prices are dropping left and right as businesses at all levels try to put the ring back in their cash registers.  There are more layoffs, more new faces on the unemployment lines, more empty stores, and more families cutting back on spending.  The economy has gone from hot to cold in a matter of months.  In fact, if things get any chillier, the entire country is in danger of falling into the economic deep freeze, also known as a recession.

The Economic Climate (6): Price of Money (Interest rate) rise in hot economy

With new stores being built and factories expanding all over the place, a lot of companies are borrowing money to pay for their construction projects.  Meanwhile, a lot of consumers are borrowing money on their credit cards to pay for all the stuff they've been buying.  The result is more demand for loans at the bank.

Seeing the crowds of people lining up for loans, banks and finance companies follow in the footsteps of the automakers and all the other businesses.  They, too, raise their prices - by charging a higher rate of interest for their loans.

Soon, you've got the price of money rising in lockstep with prices in general - the only prices that go down are stock prices and bond prices. 

• Investors bail out of stocks because they worry that companies cannot grow their earnings fast enough to keep up with inflation. 
• During the inflation of the late 1970s and early 1980s, stock and bond prices took a big fall.

A hot economy can't stay hot forever.  Eventually, there's a break in the heat, brought about by the high cost of money.  With higher interest rates on home loans, car loans, credit-card loasn, you name it, fewer people can afford to buy houses, cars, and so forth.  So they stay where they are and put off buying the new house.  Or they keep their old clunkers and put off buying a new car.

The Economic Climate (5): Inflation in a hot economy

The main worry is that a hot economy and too much prosperity will lead to inflation - the technical term for prices going up. 

• Demand for goods and services is high, which leads to a shortage of raw materials, and possibly a shortage of workers. 
• Whenever there's a shortage of anything, the prices tend to go up. 
• Car manufacturers are paying more for steel, aluminum, and so forth, so they raise the prices of cars. 
• When employees begin to feel the pinch of higher prices, they demand higher wages.

One price hike leads to another, as businesses and workers take turns trying to match the latest increase. 

• Companies are paying more for electricity, raw materials, and workers. 
• Workers take home bigger paychecks but they lose the advantage because everything they buy is more expensive than it used to be. 
• Landlords are raising rents to cover their increased costs. 

Pretty soon, inflation is out of control and prices are rising at 5%, 10%, or in extreme cases, upwards of 20% a year.  From 1979 to 1981, United States had double-digit annual inflation.

The Economic Climate (4): The Hot Climate

The Hot Economic Climate

Business is booming, and people are crowding into stores, buying new cars, new couches, new VCRs, new everythings.  Merchandise is flying off the shelves, stores hire more clerks to handle the rush, and factories are working overtime to make more products. 

When the economy reaches the high-heat phase, factories are making so many products that merchandise is piling up at every level: in the stores, in the warehouses, and in the factories themselves.  Store owners are keeping more goods on hand, so they won't be caught short.

Jobs are easy to find, for anybody who's halfway qualified, and the help-wanted ads in the newspapers go on for several pages.  There's no better time for teenagers and recent college grads to enter the workforce than in the middle of a hot economy.

It sounds like the perfect situation: 

• Businesses of all kinds are ringing up big profits;
• the unemployment lines are getting shorter; and
• people feel prosperous, confident, and secure in their jobs. 
• That's why they're buying everything in sight. 

But in the world of finance, a hot economy is regarded as a bad thing.  It upsets the professional investors on Wall Street.  If you pay attention to the business news, you'll see headlines that read:  "Economy Strong, Nation Prosperous, Stock Market Drops 100 Points."

The main worry is that a hot economy and too much properity will lead to inflation.

The Economic Climate (3): Hot, cold and warm or Goldilocks climate

In the economic climate, there are 3 basic conditions:

• hot,
• cold and
• warm.

A hot climate makes investors nervous.

A cold climate depresses them.

What they're always hoping for is the warm climate, also known as the Goldilocks climate, when everything is just right. 

But it is hard to maintain the Goldilocks climate.  Most of the time, the economy is moving toward one extreme or another:  from hot to cold and back again.

The Economic Climate (2): Farmers and the Weather

At one time, when 80% of the population owned farms or worked on farms, the economic climate had everything to do with weather. 

If a drought burned up the crops, or they drowned in the rain, farmers couldn't make money.  And when the farmers had no money, the local general store wasn't doing any business, and neither were the suppliers to the general store.  But when the weather was favourable, farms produced a record harvest that put cash in farmers' pockers.  The farmers spent the money at the general store, which put cash in the store owner's pockets.  The store owners would restock the shelves, which put cash in the suppliers' pockets.  And so on.

No wonder the weather - and not the stock market - was the favourite topic at lunch counters and on street corners.  Weather was so important to people's livelihood that a book of homespun predictions, The Farmer's Almanc, was a perennial bestseller.  You don't see any weather books on the best-seller lists today.  But books about Wall Street make those lists quite often.

Today, with less than 1% of the population involved in farming, the weather has lost much of its influence.  In the business world, people pay less attention to the weather report and more attention to the reports on

• interest rates,
• consumer spending, and
• so forth, that come out of Washington and New York. 

These are the man-made factors that affect the economic climate.

In the economic climate, there are three basic conditions:

• hot,
• cold, and
• warm.

The Economic Climate (1): Companies live in this economic climate

Companies live in a climate - the economic climate.

They depend on the outside world for survival, just as plants and humans do. 

• They need a steady supply of capital, also known as the money supply.
• They need buyers for whatever it is they make, and
• Suppliers for whatever materials they make it from. 
• They need a government that lets them do their job without taxing them to death or pestering them to death with regulations.

When investors talk about the economic climate, they don't mean sunny or cloudy, winter or summer.  They mean the outside forces that companies must contend with, which help determine whether

• they make money or
• lose money,

and ultimately, whether they

• thrive or
• wither away. 

Maybank Research ups Hartalega’s earnings forecast

Maybank Research ups Hartalega’s earnings forecast
Written by Maybank Investment Research
Tuesday, 26 January 2010 10:00

KUALA LUMPUR: Maybank Investment Research has raised the earnings outlook for Hartalega by between 12% and 19% and lifted the target price to RM8.30.

It said on Tuesday, Jan 26 it expects 3QFY10 results are expected to again beat consensus forecasts. It has a Buy call on RM7.77.

“Strong earnings and margins should extend into FY11 before industry capacity catches up and restocking activities abate, potentially impacting ASP (average selling price) and margins in FY12.

“Nevertheless, we think that Hartalega, with its superior technical abilities, should be able to ride this out by raising operating efficiencies. Maintain Buy. Our new TP is DCF-derived,” it said.

Buy and Hold vs. Market Timing

Buy and Hold = Select your stocks for your portfolio and hold.

Stock picking is easier than timing whole market.

Nobody can predict the future.

Even a broken clock is right twice a day.

What's luck got to do with it?

Is this person skillful or lucky?

For every action, there's an opposite reaction.

Buyers & Sellers, Bulls & Bears: that is what makes the markets.

The higher the risk, the higher the expected return.

http://video.yahoo.com/watch/3913819

Chat site for local or regional stocks

There are many blogs on local and regional investing. 

Which is a good chat site(s) to visit for sharing on local or regional stocks?  Any recommendations?

Fitch upgrades Indonesia

Fitch upgrades Indonesia
Published: 2010/01/26


HONG KONG: Fitch Ratings upgraded Indonesia's sovereign rating yesterday to one notch below investment grade, giving a vote of confidence that is likely to spur further investments in Southeast Asia's biggest economy.

Indonesia's rating was raised to BB plus, with Fitch citing rising foreign exchange reserves, improving public finances and strong growth prospects as key factors behind the move. The outlook on the rating is stable.

The rupiah currency snapped back from early lows and spreads on Indonesian credit default swaps tightened after the upgrade of its long-term foreign and local currency ratings, and analysts said an investment grade rating was likely in the next few years.

"This (upgrade) reiterates what markets have been saying for a long time now, that Indonesia is a great credit story but it has some more work to do before getting that investment grade rating," said Kenneth Akintewe, a fund manager at Aberdeen Asset Management in Singapore who manages US$500 million (US$1 = RM 3.41) in assets.

Though foreign investors have been snapping up its bonds and stocks on its strong economic outlook as well as its high yield, analysts said high and volatile bouts of inflation and weak infrastructure meant its debt yields were close to those of Argentina - which has billions of US dollars in unsettled debt.

The stock market jumped over 80 per cent and bonds posted equity-like returns last year as investors have been attracted by the tantalising prospect that relatively stable politics and healthy economic growth could catapult the country to investment-grade status in a few years to stand alongside BRIC nations Brazil, Russia, India and China.

A US$2 billion Indonesian government bond sale earlier this month attracted US$4.5 billion in orders, bankers said.

Pimco, the world's biggest bond fund manager, recently said that it expects the economy to get an investment grade rating in the next three to five years.

The rupiah was the best performing Asian currency last year, gaining 17 per cent, and analysts are bullish about its prospects this year, too.

"I see capital gains for holding Indonesia's bonds with maturity above 10 years for long-term investors and the rupiah should also get a boost," Gunawan said.

Fitch now has the highest rating for Indonesia among the three major rating agencies, though it remains below its investment grade rating prior to the 1997 Asian financial crisis.

Standard & Poor's rates Indonesia's unsecured foreign currency debt at BB minus, while Moody's Investors Service has its sovereign foreign currency rating at Ba2, two notches below investment grade.

The upgrade means it is the highest ranking non-investment grade country in Asia ahead of the Philippines and Vietnam.

Fitch noted, however, that the country's relatively shallow capital markets remained vulnerable to risks surrounding a reversal of carry trades or sudden emerging-market risk aversion. It also said more reforms in its financial sector were needed.

"The concerns on the ground are the success of the reforms. To get investment grade, the reforms would have to play out," said Wellian Wiranto, Asian economist at HSBC in Singapore. - Reuters

Some Lowest P/E Stocks

LTKM 3.02
KUMPULAN FIMA 4.06
MEASAT GLOBAL 4.54
COASTAL 5.31
AJIYA 5.40
KLCC PROP 5.76
PANTECH 5.87
DXN 6.15
POH KONG 6.22

Hong Leong's offer undervalues EONCap: Chairman

Hong Leong's offer undervalues EONCap: Chairman
By Chong Pooi Koon
Published: 2010/01/26

EON Capital has sought clarification from Hong Leong 'on a range of details' in its buyout proposal, particularly on the valuation.

EON Capital Bhd (EONCap)(5266), which must decide on Hong Leong Bank Bhd's takeover offer by tomorrow, may try to remove the clause that restricts it from talking to other potential bidders while asking for a higher price.
 EONCap, the smaller of the two banks, said it has yesterday sought clarification from Hong Leong "on a range of details" in its buyout proposal, particularly on the valuation.

"The board (of directors) is evaluating this approach, but on the face of it the offer price significantly undervalues EONCap," chairman Tan Sri Syed Anwar Jamalullail said in a statement yesterday.

Hong Leong, the sixth largest local bank, last Thursday said it will offer RM7.10 cash per share to take over EONCap. The offer priced EONCap at 1.4 times book value, which falls in the lower end of the past valuations range in local banking deals.

Still, many banking analysts feel that the price offered was fair given EONCap's weaker franchise, though others argued that scarcity premiums should be attached as there are not many local lenders left available for a takeover.

Hong Leong has also set strict conditions in its proposal, one of which requires EONCap to deal with it exclusively on the sale.

"In evaluating the Hong Leong Bank offer, we will consider all alternatives open to us in order to fulfil our responsibility to shareholders," Syed Anwar said yesterday.

Meanwhile, EON Banking Group chief executive officer Michael Lor was quoted by Bernama news agency as saying that EONCap's board was also looking into other offers as there were interested parties.

"If there are better opportunities, why not pursue all the alternatives?" he told reporters in Petaling Jaya yesterday. Lor, however, said that he did not know whether other banks had submitted their applications to Bank Negara Malaysia to participate in the negotiations.

EONCap said it had launched a three-year transformation programme in October 2007, which sharply improved the bank's performance despite difficult economic conditions in 2009.

"In the past year, we have seen our transformation programme succeeding. As Malaysia emerges from the economic downturn, EONCap is well positioned for future value creation," Syed Anwar said.

Public Bank lowered to 'sell' at Citi

Public Bank lowered to 'sell' at Citi
Published: 2010/01/26

Public Bank Bhd, Malaysia’s third biggest lender, was downgraded to “sell” from “hold” at Citigroup Inc. amid the bank’s lower dividend outlook.

Citigroup also cut Public Bank’s share price estimate to RM10.90 from RM11.67. -- Bloomberg

Hartalega gains as target price raised

Hartalega gains as target price raised
Published: 2010/01/26

Hartalega Holdings Bhd, a Malaysian rubber-glove maker, rose to a record after Maybank Investment Bank Bhd increased the share price forecast, saying fiscal third-quarter earnings due on January 28 will exceed consensus forecasts.

The stock gained 1.7 per cent to RM7.90 at 9:38 am local time, set for the highest level since it went public on April 17, 2008.

Maybank raised the target price for the stock to RM8.30 from RM6.50. -- Bloomberg

The Company When It's Young: Long on expectations and short on experience. Can grow very fast and High Risk.

The young company is full of energy, bright ideas, and hope for the future.  It is long on expectations and short on experience. 

It has the cash that was raised in the offering, so chances are it doesn't have to worry about paying its bills at this point.  It expects to be earning a living before the original cash runs out, but there's no guarantee of that.

In its formative years, a company's survival is far from assured.  A lot of bad things can happen. 

• It may have a great idea for a product but spend all its money before the product is manufactured and shipped to the stores. 
• Or maybe the great idea turns out not to have been so great after all. 
• Or maybe the company gets sued by people who say they had the great idea first, and the company stole it.  If the jury agrees with the plaintiffs, the company could be forced to pay millions of dollars it doesn't have. 
• Or maybe the great idea becomes a great product that fails a government test and can't be sold in this country. 
• Or maybe another company comes along with an even greater product that does the job better, or cheaper, or both.

In industries where the competition is fierce, companies knock each other off all the time.  Electronics is a good example. 

• Some genius in a lab in Singapore invents a better relay switch, and six months later it's on the market, leaving the other manufacturers with obsolete relay switches that nobody wants.

It is easy to see why 1/2 of all new businesses are dissolved within 5 years, and why the most bankruptcies happen in competitive industries.

Because of the variety of calamities that can befall a company in the high-risk juvenile phase of its life, the people who own the shares have to protect their investment by paying close attention to the company's progress. 

• You can't afford to buy any stock and then go to sleep and forget about it, but young companies, especially, must be followed every step of the way. 
• They are often in the precarious position where one false step can put them into bankruptcy and out of business. 
• It's especially important to assess their financial strength - the biggest problem with young companies is that they run out of cash.

When people go on vacation, they tend to take twice as many clothes as they're going to need, and half as much money.  Young companies make the same mistake about money.  They start out with too little.

Now for the good part: 

• Starting from scratch, a young company can grow very fast. 
• It's small and its restless, and it has plenty of room to expand in all directions. 

That's the key reason young companies on the move can outdistance the middle-aged companies that have had their growth spurt and are past their prime.

The Company in Middle Age (2): Midlife crisis of Apple

The company in middle age can have a midlife crisis. 

Whatever it's been doing doesn't seem to be working anymore.  It abandons the old routines and thrashes around looking for a new identity.  This sort of crisis happens all the time.  It happened to Apple.

1980:  In late 1980, just after Apple went public, it came out with a lemon:  the Apple III.  Production was halted while the problems were ironed out, but then it was too late.  Consumers had lost faith in Apple III.  They lost faith in the whole company.

There's nothing more important to a business than its reputation.  A restaurant can be 100 years old and have a wall full of awards, but all it takes is one case of food poisoning or a new chef who botches the orders, and a century's worth of success goes out the window.  So to recover from its Apple III fiasco, Apple had to act fast.  Heads rolled in the front office, where several executives were demoted.

The company developed new software programs, opened offices in Europe, installed hard disks in some of its computers.  On the plus side, Apple reached $1 billion in annual sales in 1982, but on the minus side, it was losing business to IBM, its chief rival.  IBM was cutting into Apple's territory: personal computers.

Instead of concentrating on what it knew best, Apple tried to fight back by cutting in on IBM's territory:  business computers.  It created the Lisa, a snazzy machine that came with a new gadget:  the mouse.  But in spite of the muse, the Lisa didn't sell.  Apple's earnings took a tumble, and so did the stock price - down 50% in a year.

Apple was less than 10 years old, but it was having a full-blown midlife crisis.  Investors were dismayed, and the company's management were feeling the heat.  Employees got the jitters and looked for other jobs.  Mike Markkula, Apple's president, resigned.  John Sculley, former president of Pepsi-Co, was brought in for the rescue attempt.  Sculley was no computer experts, but he knew marketing.  Marketing is what Apple needed.

Apple was split into 2 dividsions, Lisa and Macintosh.  There was spirited rivalry between the two.  The Macintosh had a mouse like the Lisa and was similar in other respects, but it cost much less and was easier to use.  Soon, the company abandoned the Lisa and put all its resources into the Macintosh.  It bought TV ads and made an incredible offer:  Take one home and try it out for twenty-four hours, for free.

The orders poured in and Apple sold 75,000 Macintoshes in 3 months.  The company was back on track with this great new product.  There was still turmoil in the office, and Jobs had a falling out with Sculley.

This is another intersting aspect of corporate democracy:  Once the shares are in public hands, the founder of the company doesn't necessarily get what he wants.

Sculley changed a few things around and solved a few more problems, and the Macintosh ended up doing what the Lisa was supposed to do:  It caught on with the business crowd.  New software made it eary to link one Macintosh to another in a network of computers.  By 1988, more than a million Macintoshes had been sold.

A company's midlife crisis puts investors in a quantdary.  If the stock has already dropped in price, investors have to decide whether

• to sell it and avoid even bigger losses or
• hold on to it and hoe that the company can launch a comeback. 

In hindsight, it's easy to see Apple recovered, but at the time of the crisis, the recoverry was far from assured.

The Company in Middle Age (1): Still growing but not as fast. Occasional Midlife crisis

Companies that manage to reach middle age are more stable than young companies.

They have made a name for themselves and they've learned from their mistakes.  They have a good business going, or they wouldn't have gotten this far.  They've got a proven record of reliability.  Chances are they've got money in the bank and they've developed a good relationship with the bankers, which comes in handy if they need to borrow more.

In other words, they have setled into a comfortable routine.  They're still growing, but not as fast as before.  They have to struggle to stay in shape, just as the rest of us do when we reach middle age.  If they allow themselves to relax too much, leaner and meaner competitors will come along to challenge the. 

A company can have a midlife crisis, the same as a person.  Whatever it's been doing doesn't seem to be working anymore.  It abandons the old routines and thrashes around looking for a new identity.  This sort of crisis happens all the time. It happened to Apple.

A company's midlife crisis puts investors in a quandary.  If the stock has already dropped in price, investors have to decide whether

• to sell it and avoid even bigger losses or
• hold on to it and hope that the company can launch a comeback. 

In hindsight, it's easy to see that Apple recovered, but at the time of the crisis, the recovery was far from assured.

OSK Research maintains Buy on KPJ, target price RM2.95

OSK Research maintains Buy on KPJ, target price RM2.95
Written by OSK Investment Research
Friday, 22 January 2010 09:12

KUALA LUMPUR: OSK Investment Research is maintaining its forecast and BUY recommendation on KPJ Healthcare at an unchanged target price of RM2.95 based on 18.5 times price-to-earnings on FY10 EPS.

It said on Friday, Jan 22 that it likes KPJ’s business model as well as its promising growth potential in a defensive sector, on top of its on-going expansion.

"We would like to reiterate our view that KPJ is an excellent choice for portfolio balancing as well as long-term investment in view of its relatively recession-proof business and steady dividend payout," it said.

It added KPJ’s management had stated it sees the growth momentum in 2009 continuing into 2010, supported by a higher number of patients and higher utilization rate per patient.

"To expand its hospital network, KPJ has identified several potential candidates with focus on areas with untapped and growing demand for private healthcare such as Johor and East Malaysia," it said.

Rubberex 4Q net profit up 55% to RM5.61m

Rubberex 4Q net profit up 55% to RM5.61m
Written by Joseph Chin
Friday, 22 January 2010 16:03

KUALA LUMPUR: Rubberex Corp (M) Bhd posted net profit of RM5.61 million for the fourth quarter ended Dec 31, 2009, up 55.5% from the RM3.61 million a year ago due to sales contribution from its China subsidiaries and better profit margins and the company expects China to provide the bulk of the earnings this year.

It said on Friday, Jan 22 revenue rose 16.2% to RM91.72 million from RM78.9 million. Earnings per shares were 6.71 sen compared with 4.56 sen.

For the financial year ended Dec 31, 2009, net profit nearly doubled to RM16.56 million from RM8.63 million a year ago. Revenue was RM325.44 million compared with RM274.51 million.

"Such commendable achievement is mainly contributed by the strong demand of disposable gloves produced by its China operations. The board and management foresee that demand for disposable gloves will show further growth in 2010," it said.

Rubberex said additional production capacity has been installed in China which would increase the output by more than 25% to 5.6 billion pieces annually.

"Even though the industrial gloves segment of our Malaysian operation is showing improvement in orders intake amid encouraging signs of an economic recovery in the US, the management foresees that overall group's earnings growth for this year will continue to be derived mainly from its China operations.

"Barring any unforeseen circumstances, the group’s performance for financial year 2010 will be significantly better than the previous year," it said.

Pantech's 3Q net profit down 32% to RM11.7m

Pantech's 3Q net profit down 32% to RM11.7m

Tags: Pantech Group Holdings Bhd | third quarter

Written by The Edge Financial Daily
Monday, 25 January 2010 22:23

KUALA LUMPUR: Pipemaker PANTECH GROUP HOLDINGS BHD [] posted a 32% drop in net profit to RM11.7 million for its third quarter ended Nov 11, 2009 (3QFY10) from RM17.3 million a year earlier mainly due to lower sales volume from the trading division and lower output from manufacturing.

Revenue fell 30.6% to RM92.2 million from RM132.8 million, while basic earnings per share (EPS) dropped to 3.14 sen from 4.6 sen. It declared a special second interim single-tier dividend of 1.5 sen per share share versus eight sen per share a year earlier.

For the nine months to Nov 30, 2009, the group's net profit fell 21% to RM40.1 million from RM50.9 million a year earlier mainly due to lower contribution from the manufacturing division.

Revenue fell 9.8% to RM335.5 million from RM371.8 million. EPS fell to 10.71 sen from 13.57 sen while dividends declared rose to three sen from two sen in the same period in FY09.

On its prospects, Pantech said while there were signs of economic recovery, economic conditions continued to be challenging for the group.

“The board will continue its cautious approach undertaken to monitor, mitigate and respond to any negative economic headwinds through diligent administration of operational cost controls and cash flows.

“Barring any unforeseen circumstances, the board believes that the performance of the group for the current financial year will remain satisfactory while the long-term outlook of the oil and gas industry continues to be positive.”

EON Cap reviewing HL Bank offer

EON Cap reviewing HL Bank offer
Written by Darlene Liew
Monday, 25 January 2010 12:18

KUALA LUMPUR: EON Bank chief executive officer Michael Lor says EON CAPITAL BHD [] board is still reviewing HONG LEONG BANK BHD []'s RM7.10 share offer.

He said on Monday, Jan 25 that the board should be making announcement in a few days to meet the deadline of seven days set by Hong Leong Bank earlier.

Hong Leong Bank had on Jan 21 announced it was offering RM7.10 per share to acquire EONCap, which owns EON Bank Bhd.

The offer, to be fully satisfied in cash, translates to 1.4 times book valued based on a shareholders’ fund of RM3.49 billion as at Sept 30, 2009.

http://www.theedgemalaysia.com/business-news/158277-flash-eon-cap-reviewing-other-offers.html

CIMB Research maintains Outperform on Public Bank (TP: RM14.20)

CIMB Research maintains Outperform on Public Bank
Written by CIMB Equities Research
Monday, 25 January 2010 09:48

 

KUALA LUMPUR: CIMB Equities Research is maintaining its outperform on Public Bank at RM11.98 and a target price of RM14.20, still pegged to a 10% premium over its DDM (dividend discount model) value.

 

CIMB Research said on Monday, Jan 25 the DDM parameters remain intact, including a cost of equity of 14.3% and dividend growth rates of 15.7% in the interim growth phase and 6% in the long-term growth phase.

 

"In the event of a rights issue, our target price would be reduced to RM13.30, which may lead to a review of our recommendation," it said.

 

The research house said Public Bank’s management confirmed that it does not have any immediate plans for a rights issue unless it has to meet a minimum equity capital ratio of 9-10%.

 

"We rate the chances of this worst-case scenario happening as low. Furthermore, we estimate that the EPS dilution of such a rights issue would only be about 5%-6%. As such, we retain our positive stance on the stock, which is underpinned by the favourable earnings outlook," it said.

 

CIMB Research said the stock remains an Outperform based on the potential re-rating catalysts of

• (1) stronger ROEs of 28-30% for FY10-12, as per the company’s target,
• (2) increased contributions from Greater China, and
• (3) new growth avenue in the bancassurance business.

 

http://www.theedgemalaysia.com/business-news/158255-cimb-research-maintains-outperform-on-public-bank.html

The Company when It's Old (3): Why you might invest in these?

By now you might be wondering what's the point of investing in a stodgy old company such as IBM, GM, or US Steel? 

There are several reasons you might do this. 

• First, big companies are less risky, in that they generally are in no danger of going out of business.
• Second, they are likely to pay dividend.
• Third, they have valuable assets that might be sold off at a profit.

These corporate codgers have been everywhere and seen it all, and they've picked up all sorts of valuable property along the way.  In fact, studying an old company and delving into its finances can be as exciting as rummaging through the attic of a rich and elderly aunt.  You never know what amazing stuff you'll find stuck in a dark corner.

Whether it's land, buildings, equipment, the stocks and bonds they keep in the bank, or the smaller companies they've acquired along the way, old companies have a substantial "break-up value."  Shareholders act like the relatives of that aged rich aunt, waiting to find out who will get what.

There's always the chance an old company can turn itself around, as Xerox and American Express have been doing in the past couple of years.

On the other hand, when an old company falters or stumbles as badly as these companies did, it may take 20 or 30 years before it can get itself back on track.  Patience is a virtue, but it's not well rewarded when you own stock in a company that's past its prime.

The Company when It's Old (2): Alcoa, GM & IBM

There's a lesson here that may save you some grief in the future.  No matter how powerful it may be today, a company won't stay on top forever.  Being called a "blue-chip" or a "world-class operation" can't save a company whose time is past, any more than Great Britain was saved by having the word "Great" in its name.

Long after Great Britain had lost its empire, the British people continued to think of their country as stronger and mightier than it really was, the same as the shareholders of US Steel.

International Harvester, the dominant force in farm equipment for an entire half-century, peaked in 1966 and never came back, even though it tried to change its luck by changing its name to Navistar.  Johns-Manville, once number one in insulation and building supplies, topped out in 1971. 

The Aluminium Company of America, better known as Alcoa, a Wall Street darling of the 1950s when the country was discovering aluminium foil, aluminium siding, and aluminium boats, rose to $23 a share in 1957 (adjusted for splits), a price it didn't see again until the 1980s.

General Motors, the dominant car company in the world and the bluest of the automotive blue chips, reached a peak in October 1965 that it wouldn't see again for nearly 30 years.  Today, GM is still the largest company in the US, and first in total sales, but it's far from the most profitable.  Sometime in the 1960s, its reflexes began to slow.

The Germans came ashore with their Volkswagens and their BMWs, and the Japanese invaded with their Toyotas and Hondas.  The attack was aimed directly at Detroit and GM was slow to react.  A younger, more aggressive GM might have risen to this challenge more quickly, but the older GM was set in its ways.

It continued to make big cars when it could see that small foreign cars were selling like crazy.  Before it could build new models that could compete with the overseas models, it ad to overhalul its outmoded factories.  This cost billions of dollars, and by the time the overhaul was complete, and small cars were rolling off the GM assembly lines, the public had switched back to bigger cars.

For three decades the largest industrial company in the US has not been largely profitable.  Yet if you had predicted this result in 1965, when GM was riding the crest of its fame and fortune, nobody would have believed you.  People would sooner have believed that Elvis was lip-synching.

Then there's IBM, which had reached middle age in the late 1960s, about the time GM was in decline.  Since the early 1950s, IBM was a spectacular performer and a great stock to own.  It was a top brand name and a symbol of quality - the IBM logo was getting to be as famous as the Coke bottle.  The company won awards for how well it was managed, and other companies studied IBM to learn how they should run their operations.  As late as the 1980s, it was celebrated in a best selling book, In Search of Excellence.

The stock was recommended by stockbrokers everywhere as the bluest of the blue chips.  To mutual fund managers, IBM was a "must" investment.  You had to be a maverick not to own IBM.

But the same thing happened to IBM that happened to GM.  Investors were so impressed with its past performance that they did not notice what was going on in the present.  People stopped buying the big mainframe computers that wer the core of IBM;s business.  The mainframe market wasn't growing anymore.  IBM's personal computer line was attacked from all sides by competitors who made a less-expensive product.  IBM's earnings sank, and as you probably can guess by now, so did the stock price.

By now you might be wondering what's the point of investing in a stodgy old company such as IBM, GM, or US Steel? 

The Company when It's Old (1): Woolworth & US Steel

Companies that are 20, 30, 50 years old have put their best years behind them. 

You can't blame them for getting tired.  They'd done it all and seen it all, and there's hardly a place they can go that they haven't already been.

Take Woolworth.  It's been around for more than 100 years - several generations of Americans grew up shopping at Woolworth's.  At one point, there was a Woolworth's outlet in every city and town in America.  That's when the company ran out of room to grow.

Recently, Woolworth has suffered a couple of unprofitable years.  It can still make a profit, but it will never be the spectacular performer it was when it was younger.  Old companies that were great earners in the past can't be expected to keep up the momentum.  A few of them have - Wrigley's, Coca-Cola, Emerson Electric, and McDonald's come to mind.  But these are exceptions.

US Steel, General Motors, and IBM are 3 prime examples of former champions whose most exciting days are behind them - although IBM and GM are having a rebound.  US Steel was once an incredible hulk, the first billion-dollar company on earth.  Railroads needed steel, cars needed steel, skyscrapers needed steel, and US Steel provided 60% of it.  At the turn of this century, no company dominated its industry the way US Steel dominated steel, and no stock was as popular as US Steel stock. It was the most actively traded issue on Wall Street.

When a magazine wanted to illustrate America's power and glory, it ran a picture of a steel mill, with the fire in the furnaces and the liquid metal poureing like hot lava into the waiting molds.  We are a nation of factories then, and a good deal of our wealth and power came from the mill towns of the East and the Midwest.

The steel business was a fantastic business to be in, and US Steel prospered through both world wars and six different presidents.  The stock hit an all-time high of $108 7/8 in August 1950.

This was the beginning of the electronic age and the end of the industrial age and the glory of steel, and it would ahve been the perfect time for investors to sell their US Steel shares and buy shares in IBM.  But you had to be very farsighted and unsentimental investor to realize this.  After all, US Steel was classed as a blue chip, Wall Street's term of endearment for pretigious companies that are expected to excel forever.  Hardly anyone would have predicted that in 1995, US Steel stock would be selling for less than it sold for in 1959.

To put this decline in perspective, the DJIA was bumping up against the 500 level in 1959, and it's gone up more than 4000 points since.  So while stocks in the Dow have increased in value more than 8 times over, US Steel has gone downhill.  Loyal shareholders have died and gone to heaven waiting for US Steel to reclaim its lost glory.

Extinct Companies: Some die young, some in middle age. Bankruptcies and Takeovers

Companies die every year. 

Some die young.  They try to go too far too fast on borrowed money they can't pay back, and they crash. 

Some die in middle age because their products turn out to be defective, or too old-fashioned, and people stop buying.  Maybe they're in:

• the wrong business, or
• the right business at the wrong time, or
• worst of all, the wrong business at the wrong time.

Big companies can die right along with smaller and younger companies.

American Cotton, Laclede Gas, American Spirits, Baldwin Locomotive, Victor Talking Machine, and WRight Aeronautical were once big enough and important enough to be included in the Dow Jones Industrial Average, but they're gone now, and who remembers them?  The same goes for Studebaker, Nash, and Hudson Motors, Remington Typewriter, and Central Leather.

Takeover

There's one way a company can cease to exist without actually dying.  It can be swallowed up by some other company in a takeover. 


Bankruptcy:  Chapter 11 protection and Chapter 7

Chapter 11:  And often, a company can avoid dying a quick death by seeking protection in a bankruptcy court. Bankruptcy court is the place where companies go when they can't pay their bills, and they need time to work things out.  So they file for Chapter 11, a form of bankruptcy that allows them to stay in business and gradually pay off their debts.  The court appoints a trustee to oversee this effort and make sure everyone involved is treated fairly.

Chapter 7:  If it's a terminal case and the company has no hope of restoring itself to profitability, it may file for Chapter 7.  That's when the doors are closed, the employees sent home, and the desks, lamps and word processors are carted off to be sold.

Often in these bankruptcies, the various groups that have a stake in the company (workers, vendors, suppliers, investors) fight each other over who gets what. 

• These warring factions hire expensive lawyers to argue their cases. 
• The lawyers are well-paid, but rarely do the creditors get back everything they're owed. 

There are no funerals for bankrupt companies, but there can be a lot of sorrow and grief, especially among workers, who lose their jobs and bondholders and stockholders, who lose money on their investments.

Companies are so important to the health and prosperity of the country that it is too bad there isn't a memorial someplace to the ones that have passed away.  Or perhaps the state historic preservation deparments should put up plaques on the sites where these extinct companies once did business.  There ought to be a book that tells the story of interesting companies that have disappeared from the economic landscape, and describes how they lived, how they died, and how they fit into the evolution of capitalism.

The Bulls and the Bears

In a normal day of trading, many stocks will go up in price, while otheres will go down.

But occasionally, there's a stampede when the prices of thousands of stocks are running in the same direction, like bulls at Pamplona.  If the stampede is uphill, we call it a "bull market."

When the bulls are having their run, sometimes 9 out of 10 stocks are hitting new highs every week.  People are rushing around buying as many shares as they can afford.  They talk to their brokers more often than they talk to their best friends.  Nobody wants to miss out on the good thing.

As long as the good thing lasts, millions of shareholders go to bed happy, and wake up happy.  They sing in the shower, whistle while they work, help old ladies across the street, and count their blessings every night as they put themselves to sleep reviewing the gains in their portfolios.

But a bull market doesn't last forever.  Sooner or later, the stampede will turn downhill.  Stock prices will drop, with 9 out of 10 stocks hitting new lows every week. People who were anxious to buy on the way up will become more anxious to sell on the way down, on the theory that any stock sold today will fetch a better price than it would fetch tomorrow.

Are you strategized to gain from a correction or a bear market?

Correction:  When stock prices fall 10% from their most RECENT peak.
Bear market:  When stock prices fall 25% or more from their most RECENT peak.

Statistics:

• There were 53 corrections during the last century.
•  That is, 1 correction occurred every 2 years. (1:2)
• 1 in 3 corrections have turned into bear markets.(1:3)
• That is, 1 bear market appeared every 6 years.(1:6)

Nobody knows who coined the term "bear market."

You can make a better case for calling a bear market a lemming market, in honour of the investors who sell their stocks because everybody else is selling.

Though financial losses are linked with the appearance of the bear market, there are also those who gained from the bear market.  Are you strategized to gain from a correction or a bear market?

1929:  Papa Bear market
1973-74:  Momma Bear market, average stock was down 50%.
1982: Bear market
1987:  Crash of 1987, Dow dropped over 1000 points in 4 months; 508 of those points in 1 day.
1990:  Saddam Hussen bear market when investors worried about the Gulf War,
1997:  Asian Financial Crisis Bear market
2001:  Technology Bust Bear market
2008:  Credit crunch Bear market

Anxious to buy and anxious to sell

A bull market doesn't last forever.  Sooner or later, the stampede will turn downhill.

Are you one who is anxious to buy on the way up?
Are you one who is anxious to sell on the way down?

People who were anxious to buy on the way up will become more anxious to sell on the way down, on the theory that any stock today will fetch a better price than it would fetch tomorrow.

An EXTENDED bear market can test everybody's patience and unsettle the most experienced investors.

An extended bear market can test everybody's patience and unsettle the most experienced investors.
Small bears were easier to handle than the big (extended) bears of 1929 and 1973 - 74.

No matter how good you are at picking stocks, your stocks will go down, and just when you think the bottom has been reached, they will go down some more.  If you own stock mutual funds, you won't do much better, because the mutual funds will go down as well.  Their fate is tied to the fate of the stocks they own.

1929:  People who bought stocks at the high point in 1929 (this was a small group, fortunately) had to wait 25 years to break even on the prices.  Imagine your stocks being in the red for a quarter-century! 

1973-74:  From the high point in 1969 before the crash of 1973-74, it took 12 years to break even. 

Perhaps we'll never see another bear market as severe as the one in 1929 - that one was prolonged by the Depression.  But we cannot ignore the possibility of another bear of the 1973-74 variety, when stock prices are down long enough for a generation of children to get through elementary, junior high and high school.

Investors can't avoid corrections and bear markets any more than northerners can avoid snowstorms.

Predicting the market is difficult: Chorus of "experts" claiming to see bears that never show up.

It would be nice to be able to get a warning signal, so you could sell your stocks and your mutual funds just before a bear marekt and then scoop them up later on the cheap.  The trouble is nobody has figured out a way to predict bear markets.  The record on that is no better than the record on predicting recessions.

Once in a while, somebody calls a bear and becomes a celebrity overnight - a stock analyst named Elaine Garzarelli was celebrated for predicting the Crash fo 1987. (Roubini for the recent bear market of 2008).  But you never hear of somebody prediting two bear markets in a row. 

What you do hear is a chorus of "experts" claiming to see bears that never show up.

Since we are all accustomed to taking action to protect ourselves from snowstorms and hurricanes, it's natural that we would try to take action to protect ourselves from bear markets, even though this is one case in which being prepared like a Boy Scout does more harm than good.  Far more money has been lost by investors trying to anticipate corrections than has been lost in all the corrections combined.

http://myinvestingnotes.blogspot.com/2010/01/another-telling-statistics.html
Another telling statistics on Market Timing:  Missing the chance to run with the bulls
Great Timing versus Lousy Timing

Investors can't avoid corrections and bear markets

Investors can't avoid corrections and bear markets any more than northerners can avoid snowstorms. 
In 50 years of owning stocks, you can expect

• 25 corrections, of which
• 8 or 9 will turn into bears.

You can expect 1 correction every 2 years, on average.

You can expect 1 bear every 6 years, on average, that is, every 3 corrections turned into bear markets.

Another telling statistics on Market Timing: Missing the chance to run with the bulls

Great Timing versus Lousy Timing
(Performance difference = 1.6% difference)

Investment returns from 1970 to 1995

Starting in 1970, if you were unlucky and invested $2,000 at the peak day of the market in each successive year, your annual return was 8.5%.

If you timed the market perfectly and invested your $2,000 at the low point in the market in each successive year, your annual return was 10.1%. 

So the difference between great timing and lousy timing is 1.6%.

Of course, you'd like to be lucky and make that extra 1.1%, but you'll do just fine with lousy timing, as long as you stay invested in stocks.  Buy shaes in good companies and hold on to them through thick and thin. 

There's an easy solution to the problem of bear markets.  Set up a schedule of buying stocks or stock mutual funds so you're putting in a small amount of money every month, or four months, or six months.  This will remove you from the drama of the bulls and bears.


Missing the chance to run with the bulls

One of the worst mistakes you can make is to switch into and out of stocks or stock mutual funds, hoping to avoid the upcoming correction.  It's also a mistake to sit on your cash and wait for the upcoming correction before you invest in stocks.  In trying to time the market to sidestep the bears, people often miss out on the chance to run with the bulls.

A review of the S&P 500 going back to 1954 shows how expensive it is to be out of stocks during the short stretches when they make their biggest jumps. 

• If you kept all your money in stocks throughout these four decades, your annual return on investment was 11.5%. 
• Yet if you were out of stocks for the fourty most profitable months during these fourty years, your return on investment dropped to 2.7%..

The real story is in the numbers - get the necessary training to read them

Four times a year, you'll get the report card that tells you

• how the company is doing,
• how its sales are going, and
• how much money it has made or lost in the lastest period. 

Once a year, the company sends out the annual report that sums up the year in great detail.  Most of these annual reports are printed on fancy paper with several pages of photographs.  It's easy to mistake them for an upscale magazine.

In the front, there's a personal message from the head of the company, recounting the year's events, but the real story is in the numbers. 

• These run for several pages, and unless you are trained to read them, they will surely strike you as both confusing and dull. 
• You can get the necessary training from a good accounting course. 
• Once you do, these dull numbers can become very exciting, indeed. 
• What could be more exciting than learning to decipher a code that could make you a prosperous investor for life?

Companies that intentionally mislead their shareholders (this rarely happens) face severe penalties, and the perpetrators can be fined or sent to jail.  Even if it is unintentional (a more common occurrence), a company that misleads shareholders is punished in the stock market. 

• As soon as they realize it hasn't told them the whole truth, many big-time investors will sell their shares at once. 
• This mass selling causes the stock price to drop. 
• It's not unusual for share prices to fall by half (50%) in a single day after the news of the scandal gets out.

When a stock loses half its value overnight, that disturbs all the investors, including the corporate insiders, from the chief executive on down, who are likely to own large numbers of shares.  That's why it is in their best interest to make sure the company sticks to the facts and doesn't exaggerate. 

• They know the truth will come out sooner or doesn't exaggerate. 
• They know the truth will come out sooner or later, because companies are watched by hundred, if not thousands of shareholders. 
• A company can't brag about its record-breaking earnings if the earnings aren't there - too many investors are paying close attention.