Risk profile
A risk profile is a graph showing value - usually expressed in financial terms - and probability. Looking at the profile of a risk can give a more sophisticated view of it than expected value alone.
http://spreadsheets.google.com/pub?key=tHk2EpsXiBSmmV6BILRm7IA&output=html
Let's consider a third version of the dice game - version C. As before, throwing different numbers brings different outcomes. But in this version, there is the possibility of a severe downside. Thowing 5 or 6 wins $10; throwing 2, 3, or 4 wins $5; throwing 1 incurs a $10 penalty.
The different outcomes and probabilities are shown in the table above, along with the calculation of expected value for this game. As before, expected value is calculated by adding together the products of impact and probability for all possible outcomes.
At first glance, this game looks like the best so far - its expected value is far higher than that of either version A or version B. ( http://spreadsheets.google.com/pub?key=te9MzyHoIN6EyuoHmfDxMaw&output=html)
But what about the potential downside? With $5 in our pocket to play with, we could easily incur a debt that we can't pay, and have to declare ourselves bankrupt. With $20 to play with, we would be a bit safer (the wealth effect).
The key to this decision is the profile of the risk. (see the diagram of the risk profile for dice game version C above). Each vertical black coloured bar represents a possible outcome. Its position denotes its impact (negative to the left, positive to the right); its height denotes its probability. The positive side of the graph looks promising, with high probabilities for positive outcomes. But over on the left, we see the possibility of a serious negative outcome - a potentially fatal downside. The risk may have an unacceptable profile for us, despite its positive expected value.
More complex risk profiles bring in more and more possible outcomes and probabilities. They build up a picture of complex risks and their profiles that is more useful than the simple question of whether the expected value is positive or not.
Histograms plot value against probability density, to give a continuous version of the risk's profile. They are created through advanced risk anlalysis involving techniques such as Monte Carlo simulations, where a large number of probabilities is used to create the risk profile.
Saturday 21 November 2009
Making Life Decisions: appraising cost, risk and expected value, with limited information about the future
The dice games are simple parallels with the type of decision we take every day in our lives. Investments offer the most direct comparison. With a limited sum to invest, you have to evaluate the probability of making a profit, the expected value and the risk involved for each investment alternative. And, as with the dice, you hve the alternative not to play, which is 100% safe, but will not make you any money.
We make other kinds of decisions too, where the investment is not always financial:
However vaguely or subconsciously, we are appraising cost, risk and expected value, with limited information about the future, all the time - even if the only cost is our leisure time, the only expected value a fleeting enjoyment, and the only potential loss a mild feeling of irritation.
We make other kinds of decisions too, where the investment is not always financial:
- selecting a savings account (which will make you richest in the long term?)
- buying a house ( will prices fall or rise?)
- deciding which people to socialise with (who will turn out to be better company?)
- renting a film to watch (which will you enjoy the most?)
However vaguely or subconsciously, we are appraising cost, risk and expected value, with limited information about the future, all the time - even if the only cost is our leisure time, the only expected value a fleeting enjoyment, and the only potential loss a mild feeling of irritation.
Fatal downside and Wealth effect
Although the overall expected value of dice game version A is positive, there is one situation in which you should not play it - when the potential downside would be fatal or disastrous for you.
http://spreadsheets.google.com/pub?key=te9MzyHoIN6EyuoHmfDxMaw&output=html
If you had just $1 in your pocket, played the game once, and failed to throw a six, you would be bankrupt. The positive expected value of the game would be no help to you, since you would be unable to play any more - a fatal downside would have occurred. In other words, it is not enough just o look at the expected value of a decision. The probability of a fatal or disastrous worst-case scenario has to be considered too.
The presence of a fatal downside might temper your enthusiasm for a decision with a positive expected value, perhaps encouraging some kind of trade-off between expected value and the potential for exposure to a fatal downside. You might be better finding another dice game perhaps a version that cost 10 cents to play, with a prize of 50 cents. This would have the advantage of allowing you to stop playing before you went bankrupt, should you hit a bad losing streak.
By doing this, you would be spreading the risk around rather than going for an 'all or nothing' risk- trading off a better risk profile for a lower expected value. (This approach to managing risk is known as 'diversifying'.)
In business terms, this translates into considering whether the downside of a risk, if it occurred, would result in bankruptcy or any situation from which the business could not recover. The possibility of this, however remote, would have to be taken into account when contemplating a risk with positive expected value.
The fact that fatal downsides in investment loom much larger for smaller companies results in the 'wealth effect' - the relative ease with which larger companies can accumulate wealth. They can take investment risk with positive expected values but serious potential downsides, because the fear of bankruptcy is more distant for them. And the more positive-value decisions they take, the more money they accumulate and the more risks they can tolerate in their investments. They can also afford to take more risks when considering and trying out new directions. Individuals can also exhibit the wealth effect: people with more cash saved up can afford to take bigger risks with their careers, perhaps allowing them to achieve greater successes.
It is the nature of know risk probabilities that the longer the run of risk taking, the closer one gets to the delivery of expected values. This is how gambling becomes a science - with deep enough pockets (the wealth effect) and enough time, pay-offs come to reflect odds. It is in the short run that 'luck' brings fortune or disaster.
http://spreadsheets.google.com/pub?key=te9MzyHoIN6EyuoHmfDxMaw&output=html
If you had just $1 in your pocket, played the game once, and failed to throw a six, you would be bankrupt. The positive expected value of the game would be no help to you, since you would be unable to play any more - a fatal downside would have occurred. In other words, it is not enough just o look at the expected value of a decision. The probability of a fatal or disastrous worst-case scenario has to be considered too.
The presence of a fatal downside might temper your enthusiasm for a decision with a positive expected value, perhaps encouraging some kind of trade-off between expected value and the potential for exposure to a fatal downside. You might be better finding another dice game perhaps a version that cost 10 cents to play, with a prize of 50 cents. This would have the advantage of allowing you to stop playing before you went bankrupt, should you hit a bad losing streak.
By doing this, you would be spreading the risk around rather than going for an 'all or nothing' risk- trading off a better risk profile for a lower expected value. (This approach to managing risk is known as 'diversifying'.)
In business terms, this translates into considering whether the downside of a risk, if it occurred, would result in bankruptcy or any situation from which the business could not recover. The possibility of this, however remote, would have to be taken into account when contemplating a risk with positive expected value.
The fact that fatal downsides in investment loom much larger for smaller companies results in the 'wealth effect' - the relative ease with which larger companies can accumulate wealth. They can take investment risk with positive expected values but serious potential downsides, because the fear of bankruptcy is more distant for them. And the more positive-value decisions they take, the more money they accumulate and the more risks they can tolerate in their investments. They can also afford to take more risks when considering and trying out new directions. Individuals can also exhibit the wealth effect: people with more cash saved up can afford to take bigger risks with their careers, perhaps allowing them to achieve greater successes.
It is the nature of know risk probabilities that the longer the run of risk taking, the closer one gets to the delivery of expected values. This is how gambling becomes a science - with deep enough pockets (the wealth effect) and enough time, pay-offs come to reflect odds. It is in the short run that 'luck' brings fortune or disaster.
Decision making: Risk, Probability, Impact, Subjectivity, Decision trees and Expected Value
You are invited to play dice games version A and version B. In this game, you bet $1 on the throw of a dice. Throwing a six wins a prize; throwing any other number means you lose your $1.
In version A of this game, a bet costs $1, but you can win $10. Faced with this game, you have two alternatives - to play or not to play. Once playing, there is nothing you can do to affect the outcome - so your decision on whether to play has to be made on the basis of the probabilities and impacts involved. They are depicted on the decision tree here to help your decision.
http://spreadsheets.google.com/pub?key=te9MzyHoIN6EyuoHmfDxMaw&output=html
Because the situation is simple, the probabilities of the various possible outcomes can be objectively known. There is no subjectivity over the probabilities. The impacts, too, are fixed and clearly set out by the rules of the games (the prizes and the cost of playing). If a choice is made to play, the probability of winning is 1 in 6 (0.166 or 16.6%) and the probability of losing 5 in 6 (0.834 or 83.4%). If a choice is made not to play, risk is avoided (there is a single outcome that is certain) but there is also no potential benefit.
In version B of the dice game, the stake and odds remain the same, but you can only win $5. The alternative not to play remains. In each case, we have to decide whether to play or not. There is the alternative to walk away, but this offers no benefit. Is it better to play or not to play? Version A seems better than version B, but how much better? Is B worth playing as well, despite the lower prize? How can we make a decision about where to make an investment? Most people can offer answers to these questions based on an intuitive, subjective grasp of probability and impact. We make decisions all the time on this basis. But for business decisions, we need to move beyond subjectivity whenever we can. We need to quantify things wherever possible.
The concept of expected value (EV)
To compare different alternatives against each other in a quantitative way in order to determine whether a risk is worth taking, we can use the concept of expected value (EV). The expected value of a risk is obtained by multiplying probability by impact for each possible outcome, and adding all the results together. If a particular impact is negative, the value for that outcome is also negative.
The table below shows the expected value calculation for playing version A of the dice game. The expected value is 0.66. Because this is a positive value, it indicates that the game is worth playing.
http://spreadsheets.google.com/pub?key=te9MzyHoIN6EyuoHmfDxMaw&output=html
In version B, because of the reduced prize (a variation in impact), the picture is different. This is shown in the table also. Because of the reduced prize, the expected value of version B is negative. If you play it repeatedly, you will steadily lose money over time.
In this case, the alternative not to play, although it brings no benefit, has a higher expected value (zero) than playing (-0.17). You are better off keeping your $1.
Expected value helps us ascertain whether a particular alternative is worth taking, based on our knowledge of probabilities and impacts. But, unless the outcome of a decision is certain, expected value can only ever be used as a guide.
In version A, for example, the expected value of not playing is zero, and this is certain. But if you decide to play, the only possible outcomes are winning $10 or losing your $1 - in other words, values of either +9 or -1. An impact of +0.66 (the expected value) is impossible.
And, while a positive expected value of 0.66 makes the game nominally 'worth playing', the outcome of playing is not certain. You might still lose.
Conversely, the negative expected value of version B, while it indicates you should not play, doesn't necessarily mean you won't win if you do. The possible outcomes are value of +$4 or - $1. You might play once and win. You might even play three times in a row and win all three times, although the probabhility of this is 0.0046 (or less than 1%). Despite the negative expected value, a positive outcome remains possible.
The actual probability of realising the expected value as a result of a single decision is zero. However, if you played version A 100 times, you would find the average value across those many decisions tending towards 0.66 - you would have around $166 in your pocket. This would prove the accuracy of your initial calculation of expected value.
Calcuating or estimating expected value wrongly - or not wanting to calculate it at all - has serious consequences for decision making. Consider the National Lottery. Although the prize (potential upside) is enormous, the tiny probability of winning gives the game a negative expected value. But the lure of the prize outweighs the rational considerations of probability, making people mentally distort probabilities (if they consciously think in those terms at all) and decide to take an illogical risk. This is the essence of the appeal of gambling, and points the way towards the psychology of risk.
So, despite the name, we can never expect the expected value. Some may ask, in that case, why use the concept at all? The answer is to help in making decisions, rather than in predicting the future. As we've seen, there are no facts about the future, only probabilities. In this case, probabilities are known but a reliable prediction of the outcome remains impossible - the dice will decide!
We have already seen how, in most business decisions, the picture is clouded by subjectivity. Not only is it impossible to predict the future, there will also be uncertainty over impacts and probabilities.
Expected value is calculated from probability and impact information or estimates. Whatever subjectivity or imprecision is inherent in our probability and impact figures will feed through into expected values. There are only as good as the information from which they are calculated. Therefore, just as with probabilities, it is important to remember, and explain to others, when subjectivity is a factor.
In version A of this game, a bet costs $1, but you can win $10. Faced with this game, you have two alternatives - to play or not to play. Once playing, there is nothing you can do to affect the outcome - so your decision on whether to play has to be made on the basis of the probabilities and impacts involved. They are depicted on the decision tree here to help your decision.
http://spreadsheets.google.com/pub?key=te9MzyHoIN6EyuoHmfDxMaw&output=html
Because the situation is simple, the probabilities of the various possible outcomes can be objectively known. There is no subjectivity over the probabilities. The impacts, too, are fixed and clearly set out by the rules of the games (the prizes and the cost of playing). If a choice is made to play, the probability of winning is 1 in 6 (0.166 or 16.6%) and the probability of losing 5 in 6 (0.834 or 83.4%). If a choice is made not to play, risk is avoided (there is a single outcome that is certain) but there is also no potential benefit.
In version B of the dice game, the stake and odds remain the same, but you can only win $5. The alternative not to play remains. In each case, we have to decide whether to play or not. There is the alternative to walk away, but this offers no benefit. Is it better to play or not to play? Version A seems better than version B, but how much better? Is B worth playing as well, despite the lower prize? How can we make a decision about where to make an investment? Most people can offer answers to these questions based on an intuitive, subjective grasp of probability and impact. We make decisions all the time on this basis. But for business decisions, we need to move beyond subjectivity whenever we can. We need to quantify things wherever possible.
The concept of expected value (EV)
To compare different alternatives against each other in a quantitative way in order to determine whether a risk is worth taking, we can use the concept of expected value (EV). The expected value of a risk is obtained by multiplying probability by impact for each possible outcome, and adding all the results together. If a particular impact is negative, the value for that outcome is also negative.
The table below shows the expected value calculation for playing version A of the dice game. The expected value is 0.66. Because this is a positive value, it indicates that the game is worth playing.
http://spreadsheets.google.com/pub?key=te9MzyHoIN6EyuoHmfDxMaw&output=html
In version B, because of the reduced prize (a variation in impact), the picture is different. This is shown in the table also. Because of the reduced prize, the expected value of version B is negative. If you play it repeatedly, you will steadily lose money over time.
In this case, the alternative not to play, although it brings no benefit, has a higher expected value (zero) than playing (-0.17). You are better off keeping your $1.
Expected value helps us ascertain whether a particular alternative is worth taking, based on our knowledge of probabilities and impacts. But, unless the outcome of a decision is certain, expected value can only ever be used as a guide.
In version A, for example, the expected value of not playing is zero, and this is certain. But if you decide to play, the only possible outcomes are winning $10 or losing your $1 - in other words, values of either +9 or -1. An impact of +0.66 (the expected value) is impossible.
And, while a positive expected value of 0.66 makes the game nominally 'worth playing', the outcome of playing is not certain. You might still lose.
Conversely, the negative expected value of version B, while it indicates you should not play, doesn't necessarily mean you won't win if you do. The possible outcomes are value of +$4 or - $1. You might play once and win. You might even play three times in a row and win all three times, although the probabhility of this is 0.0046 (or less than 1%). Despite the negative expected value, a positive outcome remains possible.
The actual probability of realising the expected value as a result of a single decision is zero. However, if you played version A 100 times, you would find the average value across those many decisions tending towards 0.66 - you would have around $166 in your pocket. This would prove the accuracy of your initial calculation of expected value.
Calcuating or estimating expected value wrongly - or not wanting to calculate it at all - has serious consequences for decision making. Consider the National Lottery. Although the prize (potential upside) is enormous, the tiny probability of winning gives the game a negative expected value. But the lure of the prize outweighs the rational considerations of probability, making people mentally distort probabilities (if they consciously think in those terms at all) and decide to take an illogical risk. This is the essence of the appeal of gambling, and points the way towards the psychology of risk.
So, despite the name, we can never expect the expected value. Some may ask, in that case, why use the concept at all? The answer is to help in making decisions, rather than in predicting the future. As we've seen, there are no facts about the future, only probabilities. In this case, probabilities are known but a reliable prediction of the outcome remains impossible - the dice will decide!
We have already seen how, in most business decisions, the picture is clouded by subjectivity. Not only is it impossible to predict the future, there will also be uncertainty over impacts and probabilities.
Expected value is calculated from probability and impact information or estimates. Whatever subjectivity or imprecision is inherent in our probability and impact figures will feed through into expected values. There are only as good as the information from which they are calculated. Therefore, just as with probabilities, it is important to remember, and explain to others, when subjectivity is a factor.
When Was the Last Time You De-learned?
When Was the Last Time You De-learned?
05:44 PM Thursday November 19, 2009
By Vineet Nayar
Students all over the world are hard at work in school at this time of year. There's a buzz on every campus as young women and men learn the rules of life, challenge them, and try to develop their own ideas, values, and principles.
For people in business, especially those who graduated a long time ago, it's time they went back to school in order to, for want of a better phrase, de-learn and un-graduate. That's the only way we will learn to challenge all that we have so far accepted as time-tested truths.
Although it isn't easy, executives should shed their fear of the unknown and display childlike enthusiasm for radical ideas. They need to ask tough questions even if there are no answers to them — yet. In business, unlearning entails changing the manner in which markets are defined and the way companies are run. It also involves rethinking perceptions about competition and collaboration.
As it is, executives tend to gravitate toward their zones of comfort as they grow older — and then wonder why the magic has disappeared from work.
Revisit your youth and ask yourself: Was I looking for simple and practical solutions then? Or did I ask tough questions that challenged people's assumptions, beliefs, and values? History suggests that people who challenge the status quo — like Isaac Newton and Albert Einstein — often come up with great inventions.
Most important, executives have to change their approach to business and society. They usually believe they have all the answers and that their ways of doing things are the best. However, leaders must accept the fact that they don't have all the answers and re-program themselves for a world of infinite possibilities.
Great leaders are often lonely thinkers who ask uncomfortable questions, walk tough paths, and challenge popular perceptions. Only in retrospect are Mahatma Gandhi and Nelson Mandela — who faced criticism for most of their lives — regarded as great leaders who fought for the right causes. They loom large even now not because they had the answers, but because they dared to question. And by doing so, they achieved results whose value can't be questioned.
When was the last time you dared question the status quo?
05:44 PM Thursday November 19, 2009
By Vineet Nayar
Students all over the world are hard at work in school at this time of year. There's a buzz on every campus as young women and men learn the rules of life, challenge them, and try to develop their own ideas, values, and principles.
For people in business, especially those who graduated a long time ago, it's time they went back to school in order to, for want of a better phrase, de-learn and un-graduate. That's the only way we will learn to challenge all that we have so far accepted as time-tested truths.
Although it isn't easy, executives should shed their fear of the unknown and display childlike enthusiasm for radical ideas. They need to ask tough questions even if there are no answers to them — yet. In business, unlearning entails changing the manner in which markets are defined and the way companies are run. It also involves rethinking perceptions about competition and collaboration.
As it is, executives tend to gravitate toward their zones of comfort as they grow older — and then wonder why the magic has disappeared from work.
Revisit your youth and ask yourself: Was I looking for simple and practical solutions then? Or did I ask tough questions that challenged people's assumptions, beliefs, and values? History suggests that people who challenge the status quo — like Isaac Newton and Albert Einstein — often come up with great inventions.
Most important, executives have to change their approach to business and society. They usually believe they have all the answers and that their ways of doing things are the best. However, leaders must accept the fact that they don't have all the answers and re-program themselves for a world of infinite possibilities.
Great leaders are often lonely thinkers who ask uncomfortable questions, walk tough paths, and challenge popular perceptions. Only in retrospect are Mahatma Gandhi and Nelson Mandela — who faced criticism for most of their lives — regarded as great leaders who fought for the right causes. They loom large even now not because they had the answers, but because they dared to question. And by doing so, they achieved results whose value can't be questioned.
When was the last time you dared question the status quo?
Top 10 paradoxes of Warren Buffett
Top 10 paradoxes of Warren Buffett
Mr Buffett still lives within a mile or two of where he was born
Warren Buffett is different from the rest of the super-rich in many ways, large and small.
He makes investment sound simple and has a talent for explaining it to the public.
But, as his biographer, Alice Schroeder says in BBC Two's 'The World's Greatest Money Maker: Evan Davis meets Warren Buffett', his method is "simple, but it's not easy".
There's more to the billionaire investor than meets the eye. However simple he'd like to make earning $40bn (£25bn) look, the Buffett story isn't entirely straightforward.
Here are 10 paradoxes that could offer an insight:
1. Mr Buffett has managed to make more money than other investors by being less ambitious. While Wall Street whizz kids set their sights on high returns, using leverage, Mr Buffett's steady annual compounding of increases, avoiding debt, has worked better.
2. Mr Buffett uses a conservative approach to picking investments - "don't lose money" is one of his favourite rules. But much of his cash comes from insurance companies that specialise in very high risk events - catastrophe insurance.
3. Mr Buffett is famous for his analytical study of the figures and unemotional response to the market. And yet among his greatest assets are his personality and reputation - both unquantifiable - and the trust they engender in potential business partners.
4. Extremely cautious with money, Mr Buffett is nevertheless happy to make "big bets" when he likes a company or a share. Unlike most investors, he believes that, for professionals at least, diversifying one's investments only means including among them, second rate choices.
5. He has come a long way in his life, but still lives within a mile or two of where he was born.
6. Mr Buffett has made more money than almost everyone, but appears to have no use for it personally - except for the single indulgence of his private jet, which he called "The Indefensible".
7. The most acquisitive man in the world is also one of the most philanthropic. Three years ago, Mr Buffett announced he was giving away the bulk of his fortune to charity, including $31bn (£19bn) to the Bill and Melinda Gates Foundation.
8. Mr Buffett says he has "no strategy" for Berkshire Hathaway, and yet he puts endless time and energy into communicating his ideas about markets and how to run businesses.
9. The man who is famous for a simple, down-to-earth approach to money-making has been chairman of investment bank Salomon Brothers, has a huge investment in another, Goldman Sachs, and trades in currency and derivatives.
10. Mr Buffett is one of the world's best-known business people, and yet he has no use for marketing or promotion of his business, Berkshire Hathaway.
http://news.bbc.co.uk/2/hi/business/8322995.stm
Mr Buffett still lives within a mile or two of where he was born
He makes investment sound simple and has a talent for explaining it to the public.
But, as his biographer, Alice Schroeder says in BBC Two's 'The World's Greatest Money Maker: Evan Davis meets Warren Buffett', his method is "simple, but it's not easy".
There's more to the billionaire investor than meets the eye. However simple he'd like to make earning $40bn (£25bn) look, the Buffett story isn't entirely straightforward.
Here are 10 paradoxes that could offer an insight:
1. Mr Buffett has managed to make more money than other investors by being less ambitious. While Wall Street whizz kids set their sights on high returns, using leverage, Mr Buffett's steady annual compounding of increases, avoiding debt, has worked better.
2. Mr Buffett uses a conservative approach to picking investments - "don't lose money" is one of his favourite rules. But much of his cash comes from insurance companies that specialise in very high risk events - catastrophe insurance.
3. Mr Buffett is famous for his analytical study of the figures and unemotional response to the market. And yet among his greatest assets are his personality and reputation - both unquantifiable - and the trust they engender in potential business partners.
4. Extremely cautious with money, Mr Buffett is nevertheless happy to make "big bets" when he likes a company or a share. Unlike most investors, he believes that, for professionals at least, diversifying one's investments only means including among them, second rate choices.
5. He has come a long way in his life, but still lives within a mile or two of where he was born.
6. Mr Buffett has made more money than almost everyone, but appears to have no use for it personally - except for the single indulgence of his private jet, which he called "The Indefensible".
7. The most acquisitive man in the world is also one of the most philanthropic. Three years ago, Mr Buffett announced he was giving away the bulk of his fortune to charity, including $31bn (£19bn) to the Bill and Melinda Gates Foundation.
8. Mr Buffett says he has "no strategy" for Berkshire Hathaway, and yet he puts endless time and energy into communicating his ideas about markets and how to run businesses.
9. The man who is famous for a simple, down-to-earth approach to money-making has been chairman of investment bank Salomon Brothers, has a huge investment in another, Goldman Sachs, and trades in currency and derivatives.
10. Mr Buffett is one of the world's best-known business people, and yet he has no use for marketing or promotion of his business, Berkshire Hathaway.
http://news.bbc.co.uk/2/hi/business/8322995.stm
Hands up if you want investment success like Warren Buffett
Warren Buffett's best investments
Hands up if you want investment success like Warren Buffett
When Warren Buffett bought Berkshire Hathaway in the 1960s, it was a working textile mill in New England.
He later closed down production when he decided it could never be a profitable business, but retained its name for his holding company.
Berkshire Hathaway is the corporate face of Warren Buffett - the firm in which he holds his investments and the businesses he has bought.
Its constituent companies and investments provide an insight into Mr Buffett's thinking.
So how has he chosen where to put his money?
BERKSHIRE HATHAWAY (1965)
Tracing its roots to a textile factory founded in 1839, by the 1950s Berkshire Hathaway had grown to fifteen plants employing 12,000 people. From 1962, Warren Buffett began to buy stocks in Berkshire Hathaway and by 1965 he had gained a majority share.
In 1985, struggling against competition from cheaper labour in overseas factories, the textile mill was closed. He is happy to admit that Berkshire Hathaway wasn't one of his best investment decisions.
But its share price tells a different story: Mr Buffett began buying shares in Berkshire Hathaway at $7.60 a share. Today, as his investment vehicle, each share is valued at around $100,000.
GEICO (1951-1996)
Mr Buffett's involvement in Geico stretches back to 1951, when his interest was sparked by his mentor, the business writer and investor, Benjamin Graham. Mr Graham was an investor in the insurance company, and the young Warren visited the company in Washington and began to buy a few shares.
Geico's success continued throughout the fifties and sixties, but by the mid-seventies the firm had run into trouble. In 1976 Mr Buffett stepped in, and through Berkshire Hathaway bought half a million shares in the company, only to see them quadruple in value in six months.
Twenty years later, the business cycle drooped again, offering Mr Buffett a chance to buy the company outright for $2.3 billion.
The investment, along with Berkshire Hathaway's other insurance companies, provides a cash float that allows Mr Buffett and his partner Charlie Munger to invest without having to borrow money.
DAIRY QUEEN (1998)
Buffett's love of ice cream and his eye for a business opportunity came together when Berkshire Hathaway bought Dairy Queen for $585 million.
With its familiar logo, glimpsed from highways and movies alike, the soft ice-cream company founded in 1940 has in excess of 5,700 outlets from Omaha to Oman.
Dairy Queen's fare now includes hamburgers and fries and soft drinks such asg Coca-Cola - a business in which Mr Buffett also has a large stake.
Since 2005, Dairy Queen has been expanding and lately announced its intention to open 500 more outlets in China over the next few years.
As Buffett put it in his annual shareholders' letter: "We have put our money where our mouth is."
COCA-COLA (1988)
Mr Buffett says he likes businesses he can understand.
Coca-Cola's business model isn't quite as simple as you might imagine - involving separate syrup production and bottling plants - but it's not rocket science.
First produced in 1895 as a syrup, the soft drinks company's advertising and its unique bottle gave Coke global recognition.
During the 1980s, Mr Buffett believed that Coca-Cola's share price did not reflect the company's steady returns, strong brand and opportunities for growth, so he started buying its shares.
Now with an 8.6% stake in the company, Berkshire Hathaway's commitment to this once-undervalued firm has paid off - and is now worth more than $10 billion.
GOLDMAN SACHS (2008)
Warren Buffett may be best known as the Oracle of Omaha, but he became Goldman Sachs' knight in shining armour during the financial crisis which hit Wall Street last year.
On 23rd September 2008, Berkshire Hathaway invested $5 billion in the company, matching a publicly raised investment.
Within hours, Goldman's shares had risen 6%.
Mr Buffett bolstered confidence in Goldman, and, at the same time, secured a favourable deal for Berkshire, with Goldman agreeing to pay Berkshire Hathaway a 10% annual dividend on the preferred stock, irrespective of Goldman Sach's common stock price.
http://news.bbc.co.uk/2/hi/business/8322999.stm
Hands up if you want investment success like Warren Buffett
When Warren Buffett bought Berkshire Hathaway in the 1960s, it was a working textile mill in New England.
He later closed down production when he decided it could never be a profitable business, but retained its name for his holding company.
Berkshire Hathaway is the corporate face of Warren Buffett - the firm in which he holds his investments and the businesses he has bought.
Its constituent companies and investments provide an insight into Mr Buffett's thinking.
So how has he chosen where to put his money?
BERKSHIRE HATHAWAY (1965)
Tracing its roots to a textile factory founded in 1839, by the 1950s Berkshire Hathaway had grown to fifteen plants employing 12,000 people. From 1962, Warren Buffett began to buy stocks in Berkshire Hathaway and by 1965 he had gained a majority share.
In 1985, struggling against competition from cheaper labour in overseas factories, the textile mill was closed. He is happy to admit that Berkshire Hathaway wasn't one of his best investment decisions.
But its share price tells a different story: Mr Buffett began buying shares in Berkshire Hathaway at $7.60 a share. Today, as his investment vehicle, each share is valued at around $100,000.
GEICO (1951-1996)
Mr Buffett's involvement in Geico stretches back to 1951, when his interest was sparked by his mentor, the business writer and investor, Benjamin Graham. Mr Graham was an investor in the insurance company, and the young Warren visited the company in Washington and began to buy a few shares.
Geico's success continued throughout the fifties and sixties, but by the mid-seventies the firm had run into trouble. In 1976 Mr Buffett stepped in, and through Berkshire Hathaway bought half a million shares in the company, only to see them quadruple in value in six months.
Twenty years later, the business cycle drooped again, offering Mr Buffett a chance to buy the company outright for $2.3 billion.
The investment, along with Berkshire Hathaway's other insurance companies, provides a cash float that allows Mr Buffett and his partner Charlie Munger to invest without having to borrow money.
DAIRY QUEEN (1998)
Buffett's love of ice cream and his eye for a business opportunity came together when Berkshire Hathaway bought Dairy Queen for $585 million.
With its familiar logo, glimpsed from highways and movies alike, the soft ice-cream company founded in 1940 has in excess of 5,700 outlets from Omaha to Oman.
Dairy Queen's fare now includes hamburgers and fries and soft drinks such asg Coca-Cola - a business in which Mr Buffett also has a large stake.
Since 2005, Dairy Queen has been expanding and lately announced its intention to open 500 more outlets in China over the next few years.
As Buffett put it in his annual shareholders' letter: "We have put our money where our mouth is."
COCA-COLA (1988)
Mr Buffett says he likes businesses he can understand.
Coca-Cola's business model isn't quite as simple as you might imagine - involving separate syrup production and bottling plants - but it's not rocket science.
First produced in 1895 as a syrup, the soft drinks company's advertising and its unique bottle gave Coke global recognition.
During the 1980s, Mr Buffett believed that Coca-Cola's share price did not reflect the company's steady returns, strong brand and opportunities for growth, so he started buying its shares.
Now with an 8.6% stake in the company, Berkshire Hathaway's commitment to this once-undervalued firm has paid off - and is now worth more than $10 billion.
GOLDMAN SACHS (2008)
Warren Buffett may be best known as the Oracle of Omaha, but he became Goldman Sachs' knight in shining armour during the financial crisis which hit Wall Street last year.
On 23rd September 2008, Berkshire Hathaway invested $5 billion in the company, matching a publicly raised investment.
Within hours, Goldman's shares had risen 6%.
Mr Buffett bolstered confidence in Goldman, and, at the same time, secured a favourable deal for Berkshire, with Goldman agreeing to pay Berkshire Hathaway a 10% annual dividend on the preferred stock, irrespective of Goldman Sach's common stock price.
http://news.bbc.co.uk/2/hi/business/8322999.stm
Warren Buffett's words of wisdom
Warren Buffett's words of wisdom
Warren Buffett, known to many as the Oracle of Omaha, is considered one of the world's greatest investors.
His financial success means that his words of wisdom, or Buffettisms, are treasured by many as elixirs of truth. Here's a selection:
Warren Buffett has built up a fortune estmated at $40bn
• Rule No.1: Never lose money.
Rule No.2: Never forget rule No.1
• Be fearful when others are greedy.
Be greedy when others are fearful
• It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price
• Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down
• Price is what you pay. Value is what you get
• It takes a lifetime to build a reputation and five minutes to ruin it
• Cash combined with courage in a crisis is priceless
• Never invest in a business you cannot understand
• Only buy something that you'd be perfectly happy to hold if the market shut down for ten years
• Someone is sitting in the shade today because someone planted a tree a long time ago
• Risk comes from not knowing what you're doing
• If you don't feel comfortable owning something for 10 years, then don't own it for 10 minutes
• If a business does well, the stock eventually follows
• I wouldn't mind going to jail if I had three cellmates who played bridge
• The fact that people will be full of greed, fear or folly is predictable. The sequence is not predictable
• Come to Omaha - the cradle of capitalism - in May and enjoy yourself.
The World's Greatest Money Maker
Warren Buffett, known to many as the Oracle of Omaha, is considered one of the world's greatest investors.
His financial success means that his words of wisdom, or Buffettisms, are treasured by many as elixirs of truth. Here's a selection:
Warren Buffett has built up a fortune estmated at $40bn
• Rule No.1: Never lose money.
Rule No.2: Never forget rule No.1
• Be fearful when others are greedy.
Be greedy when others are fearful
• It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price
• Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down
• Price is what you pay. Value is what you get
• It takes a lifetime to build a reputation and five minutes to ruin it
• Cash combined with courage in a crisis is priceless
• Never invest in a business you cannot understand
• Only buy something that you'd be perfectly happy to hold if the market shut down for ten years
• Someone is sitting in the shade today because someone planted a tree a long time ago
• Risk comes from not knowing what you're doing
• If you don't feel comfortable owning something for 10 years, then don't own it for 10 minutes
• If a business does well, the stock eventually follows
• I wouldn't mind going to jail if I had three cellmates who played bridge
• The fact that people will be full of greed, fear or folly is predictable. The sequence is not predictable
• Come to Omaha - the cradle of capitalism - in May and enjoy yourself.
The World's Greatest Money Maker
A falling market provides Buffett with the best opportunities
Sunday, 25 October 2009
Warren Buffett: Crisis, what crisis?
Warren Buffet explains his deal with Goldman Sachs
By Charles Miller
Money Programme
The world's greatest investor is weathering the financial crisis by practising what he preaches.
One of Warren Buffett's favourite sayings about the market is: "be greedy when others are fearful and fearful when others are greedy".
When the market was fearful last September, Mr Buffett was greedy, putting $5bn (£3bn) into the investment bank Goldman Sachs on exceptionally favourable terms.
He says he was only able to negotiate the deal because not many people had $5bn to hand at that particular moment.
But there is no doubt Mr Buffett's public show of confidence in the company was, in itself, a valuable asset to Goldman.
Mind-boggling returns
The deal already looks like a good one for Mr Buffett, with potential profits for him in the billions.
He has always enjoyed himself in a falling market, which, as he sees it, provides him with the best opportunities.
As if to prove his fabled status as the most successful investor ever, Mr Buffett prints his fund's spectacular growth record, all the way back to 1965, in the annual report of his company, Berkshire Hathaway.
It shows he has achieved an extraordinary 20.3% average annual growth in the company's value, which - he helpfully works out - comes to a mind-boggling 336,000% over the years - 84 times that of the standard US index fund, the S&P 500.
The numbers really are off the scale.
Friday 20 November 2009
Using Decision trees to see how probability and impact relate to each other
We can use the simple example of a dice game. In this game, you bet $1 on the throw of a dice. Throwing a six wins a prize; throwing any other number means you lose your $1.
In version A of this game:
A bet costs $1, but you can win $10
Faced with this game, you have two alternatives - to play or not to play.
Once playing, there is nothing you can do to affect the outcome - so your decision on whether to play has to be made on the basis of the probabilities and impacts involved.
Because the situation is simple, the probabilities of the various possible outcomes can be objectively known. There is no subjectivity over the probabilities. The impacts, too, are fixed and clearly set out by the rules of the game (the prizes and the cost of playing).
If a choice is made to play, the probability of winning is 1 in 6 (0.166 or 16.66%) and the probability of losing 5 in 6 (0.834 or 83.4%).
If a choice is made not to play, risk is avoided (there is a single outcome that is certain) but there is also no potential benefit.
Decision tree for dice game version A:
Decision: Play dice game with chance of winning $10? Yes or No
NO
Decision ----> Risky Event ---> Possible outcomes ----> Probability -----> Impact
No -----> Nil ------> Avoid risk, keep money in pocket ----> 1.0 (certain) -----> Neurtral: spend ntohing, win nothing
YES
Decision ----> Risky Event ---> Possible outcomes ----> Probability -----> Impact
Yes -----> Stake $1 on throw of dice ----> Number 6 ----> 0.166 (1 in 6) ----> Gain Spend $1 Win $10
or
Yes -----> Stake $1 on throw of dice -----> Number 1, 2, 3, 4, or 5 -----> 0.834 (5 in 6) ----> Loss Spend $1 Win nothing
http://spreadsheets.google.com/pub?key=te9MzyHoIN6EyuoHmfDxMaw&output=html
In version A of this game:
A bet costs $1, but you can win $10
Faced with this game, you have two alternatives - to play or not to play.
Once playing, there is nothing you can do to affect the outcome - so your decision on whether to play has to be made on the basis of the probabilities and impacts involved.
Because the situation is simple, the probabilities of the various possible outcomes can be objectively known. There is no subjectivity over the probabilities. The impacts, too, are fixed and clearly set out by the rules of the game (the prizes and the cost of playing).
If a choice is made to play, the probability of winning is 1 in 6 (0.166 or 16.66%) and the probability of losing 5 in 6 (0.834 or 83.4%).
If a choice is made not to play, risk is avoided (there is a single outcome that is certain) but there is also no potential benefit.
Decision tree for dice game version A:
Decision: Play dice game with chance of winning $10? Yes or No
NO
Decision ----> Risky Event ---> Possible outcomes ----> Probability -----> Impact
No -----> Nil ------> Avoid risk, keep money in pocket ----> 1.0 (certain) -----> Neurtral: spend ntohing, win nothing
YES
Decision ----> Risky Event ---> Possible outcomes ----> Probability -----> Impact
Yes -----> Stake $1 on throw of dice ----> Number 6 ----> 0.166 (1 in 6) ----> Gain Spend $1 Win $10
or
Yes -----> Stake $1 on throw of dice -----> Number 1, 2, 3, 4, or 5 -----> 0.834 (5 in 6) ----> Loss Spend $1 Win nothing
http://spreadsheets.google.com/pub?key=te9MzyHoIN6EyuoHmfDxMaw&output=html
Subjectivity and Impacts
The problem of achieving objectivity applies just as much to assessing impacts as it does to gauging probabilities. It can be difficult to establish a basis for comparison, praticularly in the area of 'soft' impacts. As with probabilities, the key is to express impacts numerically. The commonest way to do this is in financial terms.
'Hard' impacts often lend themselves to quantification and comparison, making it relatively easy to express them financially. For example, an interruption to the operation of a production line resulting from a power cut or a fire could be translated into likely impact on revenues or profits.
'Soft' impacts are much more difficult to quantify, but they can still be hugely significant for the business. For example, falling revenues may result in disillusionment within the business - a negative cultural impact. This may result in talented individuals leaving the business, which could lead to a self-perpetuating cycle of decline (a strategic risk). Quantifying impacts financially helps to express the significance of 'soft' impacts in terms that everyone can understand, putting them on the same basis of credibility as 'hard' impacts.
As with probabilities, complexity also adds to subjectivity:
'Hard' impacts often lend themselves to quantification and comparison, making it relatively easy to express them financially. For example, an interruption to the operation of a production line resulting from a power cut or a fire could be translated into likely impact on revenues or profits.
'Soft' impacts are much more difficult to quantify, but they can still be hugely significant for the business. For example, falling revenues may result in disillusionment within the business - a negative cultural impact. This may result in talented individuals leaving the business, which could lead to a self-perpetuating cycle of decline (a strategic risk). Quantifying impacts financially helps to express the significance of 'soft' impacts in terms that everyone can understand, putting them on the same basis of credibility as 'hard' impacts.
As with probabilities, complexity also adds to subjectivity:
- range of impacts: impacts can affect many different areas of the business, making it hard to gauge the total impact.
- interdependence: one impact may result in another impact in a different area of the business
- lack of precedent: the situation may be unprecedented, or the precedent may be far in the past, making it difficult to assess the likely impact today.
Understanding IMPACT of a decision
Probability is the likelihood that a particular outcome will occur.
Impact is the effect that a particular outcome will have if it does occur.
Impacts can be positive or negative. We call positive impacts 'upsides' and negaive impacts 'downsides'. A single decision may involve the potential for both upsides and downsides.
Considering impact helps us
We can think of impacts as 'hard' and 'soft'.
'Hard' impacts affect areas of the business such as:
'Soft' impacts affect areas of the business including:
Impact is the effect that a particular outcome will have if it does occur.
Impacts can be positive or negative. We call positive impacts 'upsides' and negaive impacts 'downsides'. A single decision may involve the potential for both upsides and downsides.
Considering impact helps us
- weigh up different possible outcomes against each other,
- to assess how bad they will be for the business (if they are downsides), or
- how much benefit they will realise (if they are upsides).
We can think of impacts as 'hard' and 'soft'.
'Hard' impacts affect areas of the business such as:
- financial: losing or making money; changing profit margins; changes in share price
- performance: changes in turnover; changes in business volumes; problems with quality, or improvements; losing or gaining customers; growing the business or seeing it decline
- business continuity: whether business operations can continue when problems arise; whether new demands, or peaks in demand, can be met; the availability of business-critical systems
- individuals and groups: physical safety; financial status and reward; working conditions; workload; level of responsibility; status and authority; prospect for the future.
'Soft' impacts affect areas of the business including:
- reputation and brand equity: how the business, its products or services and its actions in society are perceived in the wider world
- morale and motivation: how people feel about working for the business
- faith in management: whether people believe in mangement's abilities and vision for the future
- sense of community: whether people identify with the business and its aims and fell part of the business's culture
- social standing: people's sense of value or relevance to the business; their sense of authority or power.
Subjective Probabilities are an unavoidable part of decision making
Subjective probabilities are an unavoidable part of business decision making.
You often have to make an opinion on strategic issues facing your business. For example, you may be setting the five-year plan for your business. You would have to assess all the factors which could have a big impact of the industry in which you operate in.
The situation is very complex. Your partners have different views and may not reach agreement. On top of that, other industry leaders are making their views and this may have an impact.
All these complexity doesn't prevent you and your partner from forming a view - maybe nothing more than an instinct or a hunch - as to what is going to happen. Perhaps, you both agree that it is "quite likely" that a certain factor will impact the industry in the next two years. Since this is of strategic significance to the business, you will need to accomodate this in the planning.
As you and your partner put your thoughts down on paper, what exactly does "quite likely" mean? You may think it means "almost certain", while your partner considers it means "fifty-fifty". In other words, you think "quite likely" equals a probability of (say) around 95%, while your partner assumes it denotes a probability of around 50%.
How can these two views be brought closer together. Perhaps, they could use a probability that is objectively knowable - such as the throw of a dice - for comparison. Do you think that such and such a factor is more or less likely to occur than throwing a six? If less, the probability is lower than 1 in 6 (0.166). If more, the probability is higher. By discussing the issue in these terms, you and your partner can move closer to a picture of probability that you both share - and one that you can communicate with some degree of confidence. You can both use this information to help pin down this probability - combined with your own opinions, experience and intuition.
Let's assume you and your partner agree on a probability of 75% that a certain factor will impact on the business within the next two years. It is important to note that just because two people have agreed a figure, the probability hasn't become any less subjective. Using numbers adds clarity and precision but does not necessary indicate accuracy. In your written report, you and your partner will need to explain the facts and reasoning behind your probability calculations, and stress the fact that the probability remains subjective even though it has been expressed numerically. (You might use a range, such as '70-80%')
Some decision makers may regard this as pointless - how can that help you make a decision? If you can't know probability objectively, why waste time trying to quantify it? The answer is that it doesn't help you make the decision, but it does focus attention on the objective basis (if any) for assessments of probability. It forces you to bring your information, reasoning and judgements into the open, so that others can see them.
In the above example, you and your partner are forced to reach a shared understanding of probability so that you can communicate it and also, to others in your report. While this doesn't necessarily makes it easier for you to make strategic decisions, it does mean that whatever decsion you take will be based on the facts that are available - or draw attention to the need for more facts. Expressing probability numerically is also likely to focus everyone's minds on the urgency of the issue, rather than letting them adopt whatever interpretation of "quite likely" suits their own values and priorities.
Another benefit is the potential for sensitivity analysis: to assess how the impact of a particular risk changes with respect to changes in probability of a particular factor. Bigger changes mean higher sensitivity.
You often have to make an opinion on strategic issues facing your business. For example, you may be setting the five-year plan for your business. You would have to assess all the factors which could have a big impact of the industry in which you operate in.
The situation is very complex. Your partners have different views and may not reach agreement. On top of that, other industry leaders are making their views and this may have an impact.
All these complexity doesn't prevent you and your partner from forming a view - maybe nothing more than an instinct or a hunch - as to what is going to happen. Perhaps, you both agree that it is "quite likely" that a certain factor will impact the industry in the next two years. Since this is of strategic significance to the business, you will need to accomodate this in the planning.
As you and your partner put your thoughts down on paper, what exactly does "quite likely" mean? You may think it means "almost certain", while your partner considers it means "fifty-fifty". In other words, you think "quite likely" equals a probability of (say) around 95%, while your partner assumes it denotes a probability of around 50%.
How can these two views be brought closer together. Perhaps, they could use a probability that is objectively knowable - such as the throw of a dice - for comparison. Do you think that such and such a factor is more or less likely to occur than throwing a six? If less, the probability is lower than 1 in 6 (0.166). If more, the probability is higher. By discussing the issue in these terms, you and your partner can move closer to a picture of probability that you both share - and one that you can communicate with some degree of confidence. You can both use this information to help pin down this probability - combined with your own opinions, experience and intuition.
Let's assume you and your partner agree on a probability of 75% that a certain factor will impact on the business within the next two years. It is important to note that just because two people have agreed a figure, the probability hasn't become any less subjective. Using numbers adds clarity and precision but does not necessary indicate accuracy. In your written report, you and your partner will need to explain the facts and reasoning behind your probability calculations, and stress the fact that the probability remains subjective even though it has been expressed numerically. (You might use a range, such as '70-80%')
Some decision makers may regard this as pointless - how can that help you make a decision? If you can't know probability objectively, why waste time trying to quantify it? The answer is that it doesn't help you make the decision, but it does focus attention on the objective basis (if any) for assessments of probability. It forces you to bring your information, reasoning and judgements into the open, so that others can see them.
In the above example, you and your partner are forced to reach a shared understanding of probability so that you can communicate it and also, to others in your report. While this doesn't necessarily makes it easier for you to make strategic decisions, it does mean that whatever decsion you take will be based on the facts that are available - or draw attention to the need for more facts. Expressing probability numerically is also likely to focus everyone's minds on the urgency of the issue, rather than letting them adopt whatever interpretation of "quite likely" suits their own values and priorities.
Another benefit is the potential for sensitivity analysis: to assess how the impact of a particular risk changes with respect to changes in probability of a particular factor. Bigger changes mean higher sensitivity.
Thursday 19 November 2009
To measure risk we have to use probability
To manage risk, we have to be able to measure it, and to measure risk we have to use probability. Probability is the quantitative language of risk and uncertainty.
The probability of an outcome is a number expressing the likelihood of it actually happening. It can be a number between 0 and 1, where 0 indicates an impossible outcome and 1 a certain one, or it can be expressed as a percentage (a number between 0 and 100).
In some situations, probability is objective and factual. For example, the probability of calling the toss of a coin correctly is 0.5 or 50%. However, tossing a coin is a very simple event. It is easy to use past experience and real-world knowledge to assess the probability of a 'heads' or 'tails' outcome.
As situations become more complex, it becomes progressively more difficult to be objective about probabilities; they become more subjective. Business situations are extremely complex, and therefore the probabilities involved are highly subjective.
Because the decisions we make in business are so important, it is vital to try and pin down the probabilities involved, even though it may be impossible to achieve complete objectivity. The more precision we can bring to the situation, the firmer the foundation on which we make a decision. To move towards precision, we need to look at subjective probabilities.
The probability of an outcome is a number expressing the likelihood of it actually happening. It can be a number between 0 and 1, where 0 indicates an impossible outcome and 1 a certain one, or it can be expressed as a percentage (a number between 0 and 100).
In some situations, probability is objective and factual. For example, the probability of calling the toss of a coin correctly is 0.5 or 50%. However, tossing a coin is a very simple event. It is easy to use past experience and real-world knowledge to assess the probability of a 'heads' or 'tails' outcome.
As situations become more complex, it becomes progressively more difficult to be objective about probabilities; they become more subjective. Business situations are extremely complex, and therefore the probabilities involved are highly subjective.
Because the decisions we make in business are so important, it is vital to try and pin down the probabilities involved, even though it may be impossible to achieve complete objectivity. The more precision we can bring to the situation, the firmer the foundation on which we make a decision. To move towards precision, we need to look at subjective probabilities.
Wednesday 18 November 2009
Premature fiscal exit would hurt Malaysia, says World Bank
Wednesday November 18 2009.Related Articles
Premature fiscal exit would hurt Malaysia, says World Bank
KUALA LUMPUR, Nov 18 — The World Bank warned today that Malaysia should not exit its fiscal pump priming as it could choke off the country's economic recovery.
However, the bank also cautioned that extending fiscal support for too long "may hamper the credibility of medium-term fiscal consolidation, reduce room for future stimulus, increase the risk of asset price bubbles and constrain the private sector once demand picks up," the World Bank said in a country report on Malaysia.
Malaysia is expected to rack up a budget deficit of 7.4 per cent of gross domestic product this year, its biggest in over 20 years, in part due to two fiscal stimulus packages worth a total of RM67 billion.
The extra spending was aimed at offsetting a slump in global demand that has hit Asia's third-most export dependent economy hard.
The government expects the Southeast Asian country's economy to shrink 3 per cent this year and to grow by 3 per cent next year, although the World Bank was more optimistic.
"With East Asia leading the recovery and advanced economies showing progressive improvement, the Malaysian economy is projected to grow at 4.1 per cent in 2010, following a contraction of 2.3 per cent in 2009," the World Bank said. — Reuters
Premature fiscal exit would hurt Malaysia, says World Bank
KUALA LUMPUR, Nov 18 — The World Bank warned today that Malaysia should not exit its fiscal pump priming as it could choke off the country's economic recovery.
However, the bank also cautioned that extending fiscal support for too long "may hamper the credibility of medium-term fiscal consolidation, reduce room for future stimulus, increase the risk of asset price bubbles and constrain the private sector once demand picks up," the World Bank said in a country report on Malaysia.
Malaysia is expected to rack up a budget deficit of 7.4 per cent of gross domestic product this year, its biggest in over 20 years, in part due to two fiscal stimulus packages worth a total of RM67 billion.
The extra spending was aimed at offsetting a slump in global demand that has hit Asia's third-most export dependent economy hard.
The government expects the Southeast Asian country's economy to shrink 3 per cent this year and to grow by 3 per cent next year, although the World Bank was more optimistic.
"With East Asia leading the recovery and advanced economies showing progressive improvement, the Malaysian economy is projected to grow at 4.1 per cent in 2010, following a contraction of 2.3 per cent in 2009," the World Bank said. — Reuters
Malaysian economy at the cross-road
The Malaysian Insider
Wednesday November 18 2009.
Malaysia has lost edge as low-cost producer, says World Bank
KUALA LUMPUR, Nov 18 — Malaysia risks missing its goal of becoming a high-income nation as it has lost its edge as a low-cost producer and lacks the investment to compete in more advanced industries, the World Bank warned today.
In its first country report on Malaysia, the Washington-based body also said that as a trade-dependent country, Malaysia should not unwind its RM67 billion in economic stimulus as that could choke off a nascent recovery.
“The economy seems to be caught in a middle-income trap - unable to remain competitive as a high-volume, low-cost producer, yet unable to move up the value chain and achieve rapid growth by breaking into fast growing markets for knowledge and innovation-based products and services,” it said.
Private investment in Malaysia, which famously spurned advice and cash from the International Monetary Fund in 1998, is below that of virtually every other Asian country and has fallen dramatically since the Asian financial crisis.
According to World Bank data, private investment in Malaysia fell to 12 per cent of gross domestic product in 2008 compared with 30 per cent prior to the Asian crisis.
The government that has ruled this country for 52 years has announced a series of economic reforms aimed at winning back foreign investment that increasingly finds a home in neighbouring Thailand and Indonesia.
However, portfolio and direct investment flows have been negative since the second quarter of 2008 and there have been few signs that investment has picked up in response to the government measures.
The World Bank noted that while Malaysia has a high proportion of high tech exports it served as a low-skilled assembler of imported parts “rather than a creator of technological and product innovations”.
One major limitation on moving up the economic value chain is Malaysia’s education system, which churns out tens of thousands of graduates who are ill-equipped for the kind of high-value work such as biotechnology that the government has identified as growth areas.
Education in Malaysia has become mired in a deep political row as the government recently switched to Malay language instruction for math and science from English, a move critics said was designed to appease its ethnic Malay voter base.
While private investment has plummeted, the government’s spending has risen sharply. Malaysia expects to rack up its biggest budget deficit in 20 years at 7.4 per cent of gross domestic product this year.
The government expects the economy to shrink 3 per cent this year and to grow by 3 per cent next year, although the World Bank was more optimistic.
“With East Asia leading the recovery and advanced economies showing progressive improvement, the Malaysian economy is projected to grow at 4.1 per cent in 2010, following a contraction of 2.3 per cent in 2009,” it said.
The bank was, however, less optimistic on the government’s plans to slash the budget deficit in 2010 to 5.6 per cent of GDP, forecasting that it would be 6.4 per cent of GDP. - Reuters
Wednesday November 18 2009.
Malaysia has lost edge as low-cost producer, says World Bank
KUALA LUMPUR, Nov 18 — Malaysia risks missing its goal of becoming a high-income nation as it has lost its edge as a low-cost producer and lacks the investment to compete in more advanced industries, the World Bank warned today.
In its first country report on Malaysia, the Washington-based body also said that as a trade-dependent country, Malaysia should not unwind its RM67 billion in economic stimulus as that could choke off a nascent recovery.
“The economy seems to be caught in a middle-income trap - unable to remain competitive as a high-volume, low-cost producer, yet unable to move up the value chain and achieve rapid growth by breaking into fast growing markets for knowledge and innovation-based products and services,” it said.
Private investment in Malaysia, which famously spurned advice and cash from the International Monetary Fund in 1998, is below that of virtually every other Asian country and has fallen dramatically since the Asian financial crisis.
According to World Bank data, private investment in Malaysia fell to 12 per cent of gross domestic product in 2008 compared with 30 per cent prior to the Asian crisis.
The government that has ruled this country for 52 years has announced a series of economic reforms aimed at winning back foreign investment that increasingly finds a home in neighbouring Thailand and Indonesia.
However, portfolio and direct investment flows have been negative since the second quarter of 2008 and there have been few signs that investment has picked up in response to the government measures.
The World Bank noted that while Malaysia has a high proportion of high tech exports it served as a low-skilled assembler of imported parts “rather than a creator of technological and product innovations”.
One major limitation on moving up the economic value chain is Malaysia’s education system, which churns out tens of thousands of graduates who are ill-equipped for the kind of high-value work such as biotechnology that the government has identified as growth areas.
Education in Malaysia has become mired in a deep political row as the government recently switched to Malay language instruction for math and science from English, a move critics said was designed to appease its ethnic Malay voter base.
While private investment has plummeted, the government’s spending has risen sharply. Malaysia expects to rack up its biggest budget deficit in 20 years at 7.4 per cent of gross domestic product this year.
The government expects the economy to shrink 3 per cent this year and to grow by 3 per cent next year, although the World Bank was more optimistic.
“With East Asia leading the recovery and advanced economies showing progressive improvement, the Malaysian economy is projected to grow at 4.1 per cent in 2010, following a contraction of 2.3 per cent in 2009,” it said.
The bank was, however, less optimistic on the government’s plans to slash the budget deficit in 2010 to 5.6 per cent of GDP, forecasting that it would be 6.4 per cent of GDP. - Reuters
Are you an Intelligent Investor?
Do you know how to minimize the odds of suffering irreversible losses?
Do you know how to maximize the odds of achieving sustainable gains?
Do you know how to control self-defeating behaviour that keeps most from reaching their full potential in investing?
Do you know that intelligent investing does not refer to IQ but rather to being patient, disciplined and eager to learn, and able to harness your emotions and think for yourself?
Do you know that high IQ and higher education are not enought to make an investor intelligent?
Do you know that being an intelligent investor is more a matter of 'character' than 'brain'?
Do you know the investment techniques, the adoption and execution of an investment policy suitable for laymen (yourself)?
Do you know the investment principles and investors' attitudes maybe of greater importance in investing than the technique of analyzing securities?
Do you know that there is limited usefulness in reading a book on 'how to make a million', as there are no sure and easy paths to riches on the stock market here and anywhere else?
Do you know of any single person who has consistently or lastingly made money by 'following (timing) the market'?
Do you know how to guide yourself from the areas of possible substantial error and to develop policies with which you will be comfortable?
Do you know the investor's chief problem -- and even his worst enemy -- is likely to be himself?
Do you know the importance of psychology of investors and the field of behavioural finance in guiding investing?
Do you know how to measure or quantify value of business or stock?
Do you know having the habit of relating what is paid to what is being offered is an invaluable trait in investment?
Do you know that for 99 issues out of 100, you could say that at some price they are cheap enough to buy and at other price they would be so dear that they should be sold?
Do you know that the art of investment has one characteristic that is not generally appreciated; that a creditable, if unspectacular, result can be achieved by the lay investor with a minimum of effort and capability?
Do you know that to improve on this above easily attainable standard requires much application and more than a trace of wisdom?
Do you know that if you merely try to bring just a little extra knowledge and cleverness to bear upon your investment program, instead of realizing a little better than normal results, you may well find that you have done worse?
Read: The Intelligent Investor by Benjamin Graham
Do you know how to maximize the odds of achieving sustainable gains?
Do you know how to control self-defeating behaviour that keeps most from reaching their full potential in investing?
Do you know that intelligent investing does not refer to IQ but rather to being patient, disciplined and eager to learn, and able to harness your emotions and think for yourself?
Do you know that high IQ and higher education are not enought to make an investor intelligent?
Do you know that being an intelligent investor is more a matter of 'character' than 'brain'?
Do you know the investment techniques, the adoption and execution of an investment policy suitable for laymen (yourself)?
Do you know the investment principles and investors' attitudes maybe of greater importance in investing than the technique of analyzing securities?
Do you know that there is limited usefulness in reading a book on 'how to make a million', as there are no sure and easy paths to riches on the stock market here and anywhere else?
Do you know of any single person who has consistently or lastingly made money by 'following (timing) the market'?
Do you know how to guide yourself from the areas of possible substantial error and to develop policies with which you will be comfortable?
Do you know the investor's chief problem -- and even his worst enemy -- is likely to be himself?
Do you know the importance of psychology of investors and the field of behavioural finance in guiding investing?
Do you know how to measure or quantify value of business or stock?
Do you know having the habit of relating what is paid to what is being offered is an invaluable trait in investment?
Do you know that for 99 issues out of 100, you could say that at some price they are cheap enough to buy and at other price they would be so dear that they should be sold?
Do you know that the art of investment has one characteristic that is not generally appreciated; that a creditable, if unspectacular, result can be achieved by the lay investor with a minimum of effort and capability?
Do you know that to improve on this above easily attainable standard requires much application and more than a trace of wisdom?
Do you know that if you merely try to bring just a little extra knowledge and cleverness to bear upon your investment program, instead of realizing a little better than normal results, you may well find that you have done worse?
Read: The Intelligent Investor by Benjamin Graham
Tuesday 17 November 2009
Kuala Lumpur one of the worst-performing markets, in relative terms
Question marks make investors shy away from KL market
Tags: Andrew F Freris | Annual bond conference | economic recovery | Expensive valuations | FBM KLCI | Fiscal spending packages | GDP | Iskandar Malaysia | Local equity market | monetary policy | Mutted earnings revisions | RAM Holdings Bhd | stimulus packages
Written by Ellina Badri
Monday, 16 November 2009 11:36
KUALA LUMPUR: Expensive valuations, muted earnings revisions and uncertainty on the private sector’s role in driving the economy have made the local equity market unattractive relative to other regional markets, BNP Paribas Private Bank Hong Kong senior investment strategist for Asia, Andrew F Freris said.
“There is a mixture of good and some areas where investors may still have a question mark. By no means, I am not unhappy by what I’ve seen but in terms of relatives, that’s actually why some investors might prefer other markets.
“These are the reasons that have made Kuala Lumpur one of the worst-performing markets, in relative terms, because it has gone up less than other Asian markets,” Freris told The Edge Financial Daily on the sidelines of RAM Holdings Bhd’s annual bond conference here last week.
The FBM KLCI has gained 44.96% from the start of the year up to last Friday’s close. Singapore’s Straits Times Index has risen 54.82%, Hong Kong’s Hang Seng Index has gained 56.76%, and China’s Shanghai and Shenzhen indices have risen 75.07% and 108.31%, respectively. The Jakarta Composite Index has surged 79.05%.
Nonetheless, Freris said due to the government’s two stimulus packages and the liberalisation of the financial system and capital markets, things here were changing rather quickly.
He also highlighted the government’s initiatives in Iskandar Malaysia, Johor, saying the progress and effects of that project were “major”.
“Malaysia has got a strong , structurally supportive fiscal environment and monetary policy that stay cautious, but I imagine the reason the market is not performing much more strongly is the question mark about how long the government will continue to lead and when the private sector will start taking over,” he added.
Freris
On the outlook of the Malaysian market and economy, he said the FBM KLCI could continue rising until the market saw two consecutive quarters of gross domestic product (GDP) growth, which would then impact earnings and in turn signal an interest rate hike.
He said sectors likely to benefit from the economic recovery included CONSTRUCTION [] and infrastructure, mainly due to the initiatives set out in the government’s RM67 billion fiscal spending packages.
Monetary policy here was likely to remain supportive of growth and the overnight policy rate would not be raised “anytime soon”, he said.
“Second quarter GDP was also better than the first, and we reckon 3Q09 will be pretty supportive,” he added.
Meanwhile, on the performance of global stock markets going forward, he said BNP Paribas was still very cautious, adding while there still may be room for markets to make gains, the G3 markets, especially the American market, remained very “jumpy”.
Hence, the bank also remained cautious about the Asian markets, although it was positive on China and South Korea, he said.
“As a whole, we’re very cautious and conservative. We’re quite boring, really. We’re not telling our clients to dive into equities, but neither are we telling them to stay away,” he said.
He also said the bank was neutral on India, adding the Singapore, Malaysia and Hong Kong markets were not included in its investment universe.
“Equity investment is fairly globalised, equity allocation takes place across and within markets, so it is no surprise if the S&P 500 index in the US goes up, the KL market will also go up.
“As long as there is quite a degree of jumpiness in the US market, because of the uncertainty of the extent and sustainability of a recovery, that will be reflected back in KL,” he added.
This article appeared in The Edge Financial Daily, November 16, 2009.
Tags: Andrew F Freris | Annual bond conference | economic recovery | Expensive valuations | FBM KLCI | Fiscal spending packages | GDP | Iskandar Malaysia | Local equity market | monetary policy | Mutted earnings revisions | RAM Holdings Bhd | stimulus packages
Written by Ellina Badri
Monday, 16 November 2009 11:36
KUALA LUMPUR: Expensive valuations, muted earnings revisions and uncertainty on the private sector’s role in driving the economy have made the local equity market unattractive relative to other regional markets, BNP Paribas Private Bank Hong Kong senior investment strategist for Asia, Andrew F Freris said.
“There is a mixture of good and some areas where investors may still have a question mark. By no means, I am not unhappy by what I’ve seen but in terms of relatives, that’s actually why some investors might prefer other markets.
“These are the reasons that have made Kuala Lumpur one of the worst-performing markets, in relative terms, because it has gone up less than other Asian markets,” Freris told The Edge Financial Daily on the sidelines of RAM Holdings Bhd’s annual bond conference here last week.
The FBM KLCI has gained 44.96% from the start of the year up to last Friday’s close. Singapore’s Straits Times Index has risen 54.82%, Hong Kong’s Hang Seng Index has gained 56.76%, and China’s Shanghai and Shenzhen indices have risen 75.07% and 108.31%, respectively. The Jakarta Composite Index has surged 79.05%.
Nonetheless, Freris said due to the government’s two stimulus packages and the liberalisation of the financial system and capital markets, things here were changing rather quickly.
He also highlighted the government’s initiatives in Iskandar Malaysia, Johor, saying the progress and effects of that project were “major”.
“Malaysia has got a strong , structurally supportive fiscal environment and monetary policy that stay cautious, but I imagine the reason the market is not performing much more strongly is the question mark about how long the government will continue to lead and when the private sector will start taking over,” he added.
Freris
On the outlook of the Malaysian market and economy, he said the FBM KLCI could continue rising until the market saw two consecutive quarters of gross domestic product (GDP) growth, which would then impact earnings and in turn signal an interest rate hike.
He said sectors likely to benefit from the economic recovery included CONSTRUCTION [] and infrastructure, mainly due to the initiatives set out in the government’s RM67 billion fiscal spending packages.
Monetary policy here was likely to remain supportive of growth and the overnight policy rate would not be raised “anytime soon”, he said.
“Second quarter GDP was also better than the first, and we reckon 3Q09 will be pretty supportive,” he added.
Meanwhile, on the performance of global stock markets going forward, he said BNP Paribas was still very cautious, adding while there still may be room for markets to make gains, the G3 markets, especially the American market, remained very “jumpy”.
Hence, the bank also remained cautious about the Asian markets, although it was positive on China and South Korea, he said.
“As a whole, we’re very cautious and conservative. We’re quite boring, really. We’re not telling our clients to dive into equities, but neither are we telling them to stay away,” he said.
He also said the bank was neutral on India, adding the Singapore, Malaysia and Hong Kong markets were not included in its investment universe.
“Equity investment is fairly globalised, equity allocation takes place across and within markets, so it is no surprise if the S&P 500 index in the US goes up, the KL market will also go up.
“As long as there is quite a degree of jumpiness in the US market, because of the uncertainty of the extent and sustainability of a recovery, that will be reflected back in KL,” he added.
This article appeared in The Edge Financial Daily, November 16, 2009.
United Plantations 3Q net profit up 3%
United Plantations 3Q net profit up 3%
Tags: United Plantations
Written by Chong Jin Hun
Monday, 16 November 2009 18:14
KUALA LUMPUR: United PLANTATION []s Bhd's net profit rose 2.7% to RM92.37 million in the third quarter (3Q) ended Sept 2009, from RM89.95 million a year earlier, although revenue fell as palm oil production declined amid less demand and lower prices for the commodity.
In a statement to Bursa Malaysia today, the company said it also registered lower profit margins for its refinery operations, and RM10.2 milllion worth of provisions for impairment. United Plantations 3Q revenue dropped 25.6% to RM223.71 million from RM300.77 million.
Cumulative nine-month net profit fell 10.5 % to RM213.18 million from RM238.31 million while revenue was down 20 % to RM618.8 million from RM773.83 million.
Looking ahead, United Plantations said its palm oil output was expected to be lower this year compared with last year's record production. As such, its financial performance for the current financial year ending Dec 31, is anticipated to be lower compared to the year before.
The company is proposing an interim dividend of 20% per share less 25% tax or 15 sen net per share for the year ending Dec 31.
Tags: United Plantations
Written by Chong Jin Hun
Monday, 16 November 2009 18:14
KUALA LUMPUR: United PLANTATION []s Bhd's net profit rose 2.7% to RM92.37 million in the third quarter (3Q) ended Sept 2009, from RM89.95 million a year earlier, although revenue fell as palm oil production declined amid less demand and lower prices for the commodity.
In a statement to Bursa Malaysia today, the company said it also registered lower profit margins for its refinery operations, and RM10.2 milllion worth of provisions for impairment. United Plantations 3Q revenue dropped 25.6% to RM223.71 million from RM300.77 million.
Cumulative nine-month net profit fell 10.5 % to RM213.18 million from RM238.31 million while revenue was down 20 % to RM618.8 million from RM773.83 million.
Looking ahead, United Plantations said its palm oil output was expected to be lower this year compared with last year's record production. As such, its financial performance for the current financial year ending Dec 31, is anticipated to be lower compared to the year before.
The company is proposing an interim dividend of 20% per share less 25% tax or 15 sen net per share for the year ending Dec 31.
Largest prime property owner in KLCC
Largest prime property owner in KLCC
Tags: Brokers Call | HLG Research | KLCC Property Bhd
Written by Financial Daily
Monday, 16 November 2009 11:09
KLCC Property Bhd
(Nov 13, RM3.29)
Hold at RM3.39: We recently visited KLCC Property (KLCCP) and initiate coverage with a hold as its share price is in line with our RNAV-derived (revised net asset value) price target of RM3.16. Earnings catalyst will come from Lot C and Lot D1 developments, but these will be long-dated, and earnings from the hotel segment are expected to be flat until 2013.
We like KLCCP for its earnings stability and visibility. While geographical concentration is high with 88% of net lettable area (NLA) situated within the KLCC area, rental income base is diversified. Over the last three years, KLCCP’s investment PROPERTIES [] have on average enjoyed capital appreciation of 22% per year, which in turn translates to scope for rental revisions. KLCCP also has a 75% stake in 5-star hotel Mandarin Oriental KL.
KLCCP’s prime assets provide a strong tenants base; blue-chip tenants include Petroliam Nasional Bhd (Petronas), ExxonMobil, Tanjong City Centre Property Management Sdn Bhd, Parkson, Isetan and Cold Storage. These quality tenants are expected to be prompt in payments and maintain a long-term presence in their current locations, while rental revision agreements will ensure sustained growth in rental income.
KLCCP’s investment properties have varying rental rates, with the iconic Petronas Twin Towers fetching the highest rental rates for office space (fixed at RM9.50 psf under the head lease agreement with Petronas). Rental revisions typically occur every three years, allowing sustainable income growth over the long term.
Crucially, KLCCP has been able to secure long-dated lease agreements with key tenants such as Petronas (15 years), Isetan (24 years), ExxonMobil (12 years) and Tanjong Group (15 years). Also, Menara ExxonMobil’s rental rate was previously below the market rate at RM5.25psf but has now been revised to RM7.45psf.
KLCCP enjoys not only stability of rental income, but also upside from capital appreciation of its properties. With more than 100 acres of land and 5.8 million sq ft of NLA in the super-prime KLCC area, KLCCP is well-poised to benefit from rising commercial property valuations and rentals in the heart of KL.
RCULS (redeemable convertible unsecured loan stock), however, is a complicated issue for the company and minority shareholders. KLCCP has issued RM714 million of RCULS to KLCCH, which if converted could lead to a heavy 38% earnings per share dilution. The conversion would also likely trigger a general offer which it wishes to avoid. Full conversion is mandatory on the 10th anniversary in 2014/2015. However, the RCULS provides cheap source of financing for KLCCP (1% interest per annum). Management has until 2014 to come up with a solution that balances the interests of the various parties involved. — HLG Research, Nov 13
This article appeared in The Edge Financial Daily, November 16, 2009.
Tags: Brokers Call | HLG Research | KLCC Property Bhd
Written by Financial Daily
Monday, 16 November 2009 11:09
KLCC Property Bhd
(Nov 13, RM3.29)
Hold at RM3.39: We recently visited KLCC Property (KLCCP) and initiate coverage with a hold as its share price is in line with our RNAV-derived (revised net asset value) price target of RM3.16. Earnings catalyst will come from Lot C and Lot D1 developments, but these will be long-dated, and earnings from the hotel segment are expected to be flat until 2013.
We like KLCCP for its earnings stability and visibility. While geographical concentration is high with 88% of net lettable area (NLA) situated within the KLCC area, rental income base is diversified. Over the last three years, KLCCP’s investment PROPERTIES [] have on average enjoyed capital appreciation of 22% per year, which in turn translates to scope for rental revisions. KLCCP also has a 75% stake in 5-star hotel Mandarin Oriental KL.
KLCCP’s prime assets provide a strong tenants base; blue-chip tenants include Petroliam Nasional Bhd (Petronas), ExxonMobil, Tanjong City Centre Property Management Sdn Bhd, Parkson, Isetan and Cold Storage. These quality tenants are expected to be prompt in payments and maintain a long-term presence in their current locations, while rental revision agreements will ensure sustained growth in rental income.
KLCCP’s investment properties have varying rental rates, with the iconic Petronas Twin Towers fetching the highest rental rates for office space (fixed at RM9.50 psf under the head lease agreement with Petronas). Rental revisions typically occur every three years, allowing sustainable income growth over the long term.
Crucially, KLCCP has been able to secure long-dated lease agreements with key tenants such as Petronas (15 years), Isetan (24 years), ExxonMobil (12 years) and Tanjong Group (15 years). Also, Menara ExxonMobil’s rental rate was previously below the market rate at RM5.25psf but has now been revised to RM7.45psf.
KLCCP enjoys not only stability of rental income, but also upside from capital appreciation of its properties. With more than 100 acres of land and 5.8 million sq ft of NLA in the super-prime KLCC area, KLCCP is well-poised to benefit from rising commercial property valuations and rentals in the heart of KL.
RCULS (redeemable convertible unsecured loan stock), however, is a complicated issue for the company and minority shareholders. KLCCP has issued RM714 million of RCULS to KLCCH, which if converted could lead to a heavy 38% earnings per share dilution. The conversion would also likely trigger a general offer which it wishes to avoid. Full conversion is mandatory on the 10th anniversary in 2014/2015. However, the RCULS provides cheap source of financing for KLCCP (1% interest per annum). Management has until 2014 to come up with a solution that balances the interests of the various parties involved. — HLG Research, Nov 13
This article appeared in The Edge Financial Daily, November 16, 2009.
A steadier ride for UMW in 3Q
A steadier ride for UMW in 3Q
Tags: Brokers Call | UMW Holdings (M) Bhd | UOB Kay Hian research
Written by Financial Daily
Tuesday, 17 November 2009 11:02
UMW Holdings (M) Bhd
(Nov 16, RM6.32)
Hold at RM6.30: We expect UMW to post sequentially stronger 3Q09 results, with core pre-tax profit rising by over 10% quarter-on-quarter (q-o-q), lifted by the gradual recovery of auto sales volumes.
We expect to see continued improvement in the overall total industry volume (TIV) as consumer sentiment and spending gradually recover after the steep contractions experienced in Jan-Apr 2009.
Toyota’s unit sales rose 8.9% q-o-q in 3Q09 to just over 22,000 units with a recovery in sales of the Vios and Altis models (although Toyota’s overall 3Q09 sales were still down 15.5% year-on-year).
Year to date, sales are down 24.8% y-o-y after an exceptionally strong 2008.
UMW’s 38%-owned associate Perodua’s upcoming entry into the multi-purpose vehicle (MPV) segment on Nov 23 should mildly lift its contributions to UMW’s bottom line. Perodua commands a 31% market share of the overall auto industry and accounted for just under 5% of UMW’s pre-tax profit in 2008.
Priced at RM56,000 to RM64,000 for a 1.5-litre engine, the MPV marks Perodua’s entry into the fast-growing segment, which already accounts for almost 12% of TIV, year to date.
Perodua’s entry into the MPV segment will also mitigate market share losses experienced by Toyota’s models in the segment following the launch of Proton’s Exora in April 2009.
We expect 22%-owned associate WSP Holdings Ltd to also post a better 2H09 as improving prospects of the oil equipment industry in China should mitigate any weakness in the North American OCTG (oil country tubular goods) market.
2010 should be a recovery year with group earnings to recover by 34%, driven particularly by the auto and oil and gas (O&G) division, with the latter’s growth driven by sales and margin recovery at WSP, full impact contribution from 34%-owned Zhongyou BSS (China).
The positive impact of the US dollar’s weakness against the ringgit will begin filtering through to UMW’s bottom line starting 4Q09.
To recap, we estimate that every 1% depreciation of the US dollar theoretically raises net income by 2% (taking into consideration savings from dollar-denominated costs at UMW-Toyota, translation gains from US dollar debt, offset by some dollar-denominated earnings from the O&G division and associate companies).
However, associate Perodua will be hurt by the strengthening yen (which is up around 10% versus the ringgit since this year’s lows). We estimate that every 1% rise in the yen rate would cause a 0.7% decline in UMW’s earnings.
While we are optimistic about the group’s prospects across all divisions, we do not see much near-term upside to valuation, which is already at 14 times 2010F price earnings (PE). This is at par with the peak valuations reached in 2007 when oil prices were at record highs.
We maintain hold and sum-of-the-parts valuation of RM6.56. A good entry price would be at the RM6 level. Meanwhile, the potential listing of the O&G division, which may materialise only in 2H10, is neutral to the stock unless crude oil prices spike significantly higher. — UOB Kay Hian Research, Nov 16
This article appeared in The Edge Financial Daily, November 17, 2009.
Tags: Brokers Call | UMW Holdings (M) Bhd | UOB Kay Hian research
Written by Financial Daily
Tuesday, 17 November 2009 11:02
UMW Holdings (M) Bhd
(Nov 16, RM6.32)
Hold at RM6.30: We expect UMW to post sequentially stronger 3Q09 results, with core pre-tax profit rising by over 10% quarter-on-quarter (q-o-q), lifted by the gradual recovery of auto sales volumes.
We expect to see continued improvement in the overall total industry volume (TIV) as consumer sentiment and spending gradually recover after the steep contractions experienced in Jan-Apr 2009.
Toyota’s unit sales rose 8.9% q-o-q in 3Q09 to just over 22,000 units with a recovery in sales of the Vios and Altis models (although Toyota’s overall 3Q09 sales were still down 15.5% year-on-year).
Year to date, sales are down 24.8% y-o-y after an exceptionally strong 2008.
UMW’s 38%-owned associate Perodua’s upcoming entry into the multi-purpose vehicle (MPV) segment on Nov 23 should mildly lift its contributions to UMW’s bottom line. Perodua commands a 31% market share of the overall auto industry and accounted for just under 5% of UMW’s pre-tax profit in 2008.
Priced at RM56,000 to RM64,000 for a 1.5-litre engine, the MPV marks Perodua’s entry into the fast-growing segment, which already accounts for almost 12% of TIV, year to date.
Perodua’s entry into the MPV segment will also mitigate market share losses experienced by Toyota’s models in the segment following the launch of Proton’s Exora in April 2009.
We expect 22%-owned associate WSP Holdings Ltd to also post a better 2H09 as improving prospects of the oil equipment industry in China should mitigate any weakness in the North American OCTG (oil country tubular goods) market.
2010 should be a recovery year with group earnings to recover by 34%, driven particularly by the auto and oil and gas (O&G) division, with the latter’s growth driven by sales and margin recovery at WSP, full impact contribution from 34%-owned Zhongyou BSS (China).
The positive impact of the US dollar’s weakness against the ringgit will begin filtering through to UMW’s bottom line starting 4Q09.
To recap, we estimate that every 1% depreciation of the US dollar theoretically raises net income by 2% (taking into consideration savings from dollar-denominated costs at UMW-Toyota, translation gains from US dollar debt, offset by some dollar-denominated earnings from the O&G division and associate companies).
However, associate Perodua will be hurt by the strengthening yen (which is up around 10% versus the ringgit since this year’s lows). We estimate that every 1% rise in the yen rate would cause a 0.7% decline in UMW’s earnings.
While we are optimistic about the group’s prospects across all divisions, we do not see much near-term upside to valuation, which is already at 14 times 2010F price earnings (PE). This is at par with the peak valuations reached in 2007 when oil prices were at record highs.
We maintain hold and sum-of-the-parts valuation of RM6.56. A good entry price would be at the RM6 level. Meanwhile, the potential listing of the O&G division, which may materialise only in 2H10, is neutral to the stock unless crude oil prices spike significantly higher. — UOB Kay Hian Research, Nov 16
This article appeared in The Edge Financial Daily, November 17, 2009.
Stocks Pickers Vs Index Funds: The Debate Rages On
Stocks Pickers Vs Index Funds: The Debate Rages On
Published: Wednesday, 28 Oct 2009 | 11:19 AM ET Text Size
By: Chris Taylor,
Special to CNBC.com
In the investing world, the rivalry is akin to the Capulets and the Montagues. In one corner, active stockpickers and their belief in talented fund managers who can outperform the market; in the other, passive investors who prefer less-risky portfolios of low-cost broad market indices.
It’s a question that will be debated forever on trading-room floors and investor chat rooms, but what investors want to know: Who has the best approach for right now, after a quick post-collapse runup that has the Dow Jones Industrial Average breaking the magical 10,000 level?
The answer might be different than you expect. Conventional wisdom holds that active management performs best in a declining market, when stockpickers can sidestep the dogs like a Lehman Brothers or an AIG [AIG 35.75 -0.64 (-1.76%) ]. But here’s a secret: It’s a total myth.
“Everyone believes that active investors do well in bad markets,” says Srikant Dash, global head of research and design for S&P Index Services. “But when we looked at the bad markets of 2002 and 2008, we showed conclusively that it’s not true.”
What Dash found in his SPIVA scorecard that compares active and passive investing: Then—and over any five-year time horizon you’d care to mention—about two-thirds of fund managers underperform the stock market. In other words, over the long term, plain-vanilla index funds clobber many of the best minds in the business.
Complete Stock Market Coverage
For right now, though, there’s some evidence that active investors could be coming into their moment. After all, the Dow was up an eye-popping 15 percent last quarter, as investors regained their confidence and money rushed back in from the sidelines. That’s the Dow’s best performance since 1998, rebounding smartly from a low of around 6,500.
If one assumes that such a rapid ascent won’t be replicated in the near-term, and that we can expect a relatively flat, range-bound market in coming months, then broad indices won’t be going anywhere. Active managers, on the other hand, could thrive with their more judicious stockpicking.
Just ask George Athanassakos. The chair of the Ben Graham Centre for Value Investing in London, Ontario, Athanassakos ran a study comparing a stockpicking approach to the performance of market indexes. He discovered that in straight bull markets, when a rising tide lifted all boats, his value-oriented stock selections were almost exactly aligned with the broader market.
But in flat or zig-zag markets, his active style destroyed the indices, beating them by almost 50 percent. If that’s the kind of market we’re entering, then active investors should take heart.
“When the market goes up, then everyone is doing well,” says Athanassakos, a finance professor and author of the book "Equity Valuation." “It’s hard to buy low and sell high when there’s a straight line up. So active management becomes especially important when the market moves within a band.”
Moreover, it’s usually in the aftermath of a big market move, like the one we’ve just experienced, that you discover a few glaring market inefficiencies.
“When prices have all moved in one direction, there’s more opportunity for mispricing to emerge,” says Josh Peters, an equities analyst with Chicago-based research firm Morningstar.
And a continued bull run looks unlikely, Peters suggests, since underlying fundamentals like corporate revenues and abysmal employment figures mean the economy’s not out of the woods yet.
If that’s the case—that the general market takes a breather, and some relative values begin to stick out—then where should stockpickers place their bets? Active investors would do well to focus on yields, Peters advises.
After all, if stock prices remain range-bound, then it’s dividend payouts that will largely be determining your returns. High-yielding, blue-chip firms tend to be resilient, without a huge downside, because investors are attracted to the stability and income they provide.
Sector Watch Performance
They’ve also been lagging the broader market recently, as the hottest stars have been previously left-for-dead firms like MGM. That discrepancy makes for some juicy values. Some of Peters’ picks: Johnson & Johnson [JNJ 62.19 0.76 (+1.24%) ], Abbott Labs [ABT 53.63 0.68 (+1.28%) ], and Altria [MO 19.34 0.08 (+0.42%) ], all overlooked giants that continue to throw off cash.
“They’re not trading at unreasonable valuations, those stocks don’t need a quick V-shaped recovery,' he says. "And you don’t need a whole lot to go right for those investments to work.”
© 2009 CNBC.com
http://www.cnbc.com/id/33289460
Published: Wednesday, 28 Oct 2009 | 11:19 AM ET Text Size
By: Chris Taylor,
Special to CNBC.com
In the investing world, the rivalry is akin to the Capulets and the Montagues. In one corner, active stockpickers and their belief in talented fund managers who can outperform the market; in the other, passive investors who prefer less-risky portfolios of low-cost broad market indices.
It’s a question that will be debated forever on trading-room floors and investor chat rooms, but what investors want to know: Who has the best approach for right now, after a quick post-collapse runup that has the Dow Jones Industrial Average breaking the magical 10,000 level?
The answer might be different than you expect. Conventional wisdom holds that active management performs best in a declining market, when stockpickers can sidestep the dogs like a Lehman Brothers or an AIG [AIG 35.75 -0.64 (-1.76%) ]. But here’s a secret: It’s a total myth.
“Everyone believes that active investors do well in bad markets,” says Srikant Dash, global head of research and design for S&P Index Services. “But when we looked at the bad markets of 2002 and 2008, we showed conclusively that it’s not true.”
What Dash found in his SPIVA scorecard that compares active and passive investing: Then—and over any five-year time horizon you’d care to mention—about two-thirds of fund managers underperform the stock market. In other words, over the long term, plain-vanilla index funds clobber many of the best minds in the business.
Complete Stock Market Coverage
For right now, though, there’s some evidence that active investors could be coming into their moment. After all, the Dow was up an eye-popping 15 percent last quarter, as investors regained their confidence and money rushed back in from the sidelines. That’s the Dow’s best performance since 1998, rebounding smartly from a low of around 6,500.
If one assumes that such a rapid ascent won’t be replicated in the near-term, and that we can expect a relatively flat, range-bound market in coming months, then broad indices won’t be going anywhere. Active managers, on the other hand, could thrive with their more judicious stockpicking.
Just ask George Athanassakos. The chair of the Ben Graham Centre for Value Investing in London, Ontario, Athanassakos ran a study comparing a stockpicking approach to the performance of market indexes. He discovered that in straight bull markets, when a rising tide lifted all boats, his value-oriented stock selections were almost exactly aligned with the broader market.
But in flat or zig-zag markets, his active style destroyed the indices, beating them by almost 50 percent. If that’s the kind of market we’re entering, then active investors should take heart.
“When the market goes up, then everyone is doing well,” says Athanassakos, a finance professor and author of the book "Equity Valuation." “It’s hard to buy low and sell high when there’s a straight line up. So active management becomes especially important when the market moves within a band.”
Moreover, it’s usually in the aftermath of a big market move, like the one we’ve just experienced, that you discover a few glaring market inefficiencies.
“When prices have all moved in one direction, there’s more opportunity for mispricing to emerge,” says Josh Peters, an equities analyst with Chicago-based research firm Morningstar.
And a continued bull run looks unlikely, Peters suggests, since underlying fundamentals like corporate revenues and abysmal employment figures mean the economy’s not out of the woods yet.
If that’s the case—that the general market takes a breather, and some relative values begin to stick out—then where should stockpickers place their bets? Active investors would do well to focus on yields, Peters advises.
After all, if stock prices remain range-bound, then it’s dividend payouts that will largely be determining your returns. High-yielding, blue-chip firms tend to be resilient, without a huge downside, because investors are attracted to the stability and income they provide.
Sector Watch Performance
They’ve also been lagging the broader market recently, as the hottest stars have been previously left-for-dead firms like MGM. That discrepancy makes for some juicy values. Some of Peters’ picks: Johnson & Johnson [JNJ 62.19 0.76 (+1.24%) ], Abbott Labs [ABT 53.63 0.68 (+1.28%) ], and Altria [MO 19.34 0.08 (+0.42%) ], all overlooked giants that continue to throw off cash.
“They’re not trading at unreasonable valuations, those stocks don’t need a quick V-shaped recovery,' he says. "And you don’t need a whole lot to go right for those investments to work.”
© 2009 CNBC.com
http://www.cnbc.com/id/33289460
Stocks Overvalued, Recession Will Return: Meredith Whitney
Stocks Overvalued, Recession Will Return: Meredith Whitney
Published: Monday, 16 Nov 2009 | 4:51 PM ET
By: CNBC.com
Stocks are overvalued and the US economy is likely to fall back into a recession next year, well-known analyst Meredith Whitney told CNBC.
"I haven't been this bearish in a year," she said in a live interview. "I look at the board and every single stock from Tiffany to Bank of America to Caterpillar is up. But there is no fundamental rooting as to why these names are up—particularly in the consumer space."
In a wide-ranging interview, Whitney, CEO of the Meredith Whitney Advisory Group, also said:
She was disappointed that Fed Chairman Ben Bernanke didn't spell out how the Federal Reserve planned to exit "the biggest Fed program to date, which is the mortgage-backed purchase program." In a speech earlier Thursday, Bernanke said the central bank was watching the dollar's decline but is likely to keep interest rates low.
The US consumer was going through the biggest credit contraction ever—even bigger than that during the Great Depression. "That credit contraction is accelerating," she said. "There's nowhere to hide at this point."
The banking sector is not adequately capitalized and will need to raise more capital in the coming year.
The residential real estate market is likely to worsen and remains a much bigger threat than the commercial property market. The government's mortgage modification program won't result in any major improvement in homeowners' ability to stay above water, she added.
"I don't know what's going on in the market right now because it makes no sense to me," she said.
"The scariest thing about the Fed's program is that the money on the sidelines isn't going to support that asset class," she added. "So the trillion dollars of Fannie (Mae), Freddie (Mac) and mortgage-backed securities that the Fed is holding—there's no substitute buyer there."
© 2009 CNBC.com
Published: Monday, 16 Nov 2009 | 4:51 PM ET
By: CNBC.com
Stocks are overvalued and the US economy is likely to fall back into a recession next year, well-known analyst Meredith Whitney told CNBC.
"I haven't been this bearish in a year," she said in a live interview. "I look at the board and every single stock from Tiffany to Bank of America to Caterpillar is up. But there is no fundamental rooting as to why these names are up—particularly in the consumer space."
In a wide-ranging interview, Whitney, CEO of the Meredith Whitney Advisory Group, also said:
She was disappointed that Fed Chairman Ben Bernanke didn't spell out how the Federal Reserve planned to exit "the biggest Fed program to date, which is the mortgage-backed purchase program." In a speech earlier Thursday, Bernanke said the central bank was watching the dollar's decline but is likely to keep interest rates low.
The US consumer was going through the biggest credit contraction ever—even bigger than that during the Great Depression. "That credit contraction is accelerating," she said. "There's nowhere to hide at this point."
The banking sector is not adequately capitalized and will need to raise more capital in the coming year.
The residential real estate market is likely to worsen and remains a much bigger threat than the commercial property market. The government's mortgage modification program won't result in any major improvement in homeowners' ability to stay above water, she added.
"I don't know what's going on in the market right now because it makes no sense to me," she said.
"The scariest thing about the Fed's program is that the money on the sidelines isn't going to support that asset class," she added. "So the trillion dollars of Fannie (Mae), Freddie (Mac) and mortgage-backed securities that the Fed is holding—there's no substitute buyer there."
© 2009 CNBC.com
Retail Investors Can Take A Worldly Approach To the Dollar
Retail Investors Can Take A Worldly Approach To the Dollar
Published: Wednesday, 28 Oct 2009 | 11:41 AM ET Text Size
By: Chris Taylor,
Special to CNBC.com
If you’re getting a little queasy about the sagging U.S. dollars in your savings account, join the club.
With deficits high and interest rates low, one potential outcome is high inflation, which would eat away at the value of the greenback.
Now it seems banks are sharing the unease: They’re putting almost two-thirds of their new cash into the euro and the Japanese yen, according to Barclay’s Capital. Compare that to a decade ago, when it was the U.S. dollar that garnered two-thirds of that cash. Global reserve currency? Not so much.
So what’s an investor to do about the shakiness of the dollar? Enter currency exchange-traded funds (ETFs), which let even casual investors put a little foreign spice in their cash holdings. There are now a total of 35 on the market, covering everything from the Indian rupee to the Brazilian real.
Other People's Money
“What currency ETFs provide are democratization,” says Bradley Kay, an ETF analyst with research firm Morningstar. “Previously foreign currencies were largely inaccessible to individuals, because of things like minimum investments. ETFs have opened that all up.”
Complete Currency Coverage
In fact they now hold more than $4.5 billion in assets, up $500 million in the third quarter of this year alone. The first currency ETF only opened at the end of 2005. Whereas currency trading used to be the province of institutions and private banks catering to the ultra-wealthy, any investor can now bet heavily on, say, the Chinese yuan or the Swedish krona.
But that doesn’t mean you should put your life savings into foreign currencies, just because you can. When it might make the most sense for investors: If you have significant cash holdings, and want to hedge some of it against a potential fall of the greenback. With the U.S. government massively increasing its balance sheet, a spike in inflation in the next few years is a distinct possibility, which would eat away at the value of the dollar.
In a worst-case scenario there could be a loss of faith among major debt-holders like China and Korea, who could decide to shift their central bank reserves to other currencies.
It’s not so far-fetched: The dollar’s already slid to a 14-month low, partly thanks to such worries.
“If you’re concerned about the dollar, by all means hold some of your cash in another currency,” says Morningstar’s Kay. “Or if you’re going to have major expenses abroad—like a big family trip, or you’re relocating to work in another country—you can fix those costs now, for the $8 cost of a brokerage fee.”
Currencies, however, should not be a core, long-term holding for investors.
“They belong in the trading-risk end of a portfolio,” says Joe Trevisani, chief market analyst for Saddle River, N.J.-based FX Solutions. “They’re not investments in the classic buy-and-hold sense.” Instead, speculative plays should be—as FX Solutions’ own disclaimer says—“conducted with risk capital you can afford to lose."
Remember that big, bad currencies banks have been the undoing of major funds and banks over the years. Do Barings Bank and Nick Leeson ring a bell?
Rules Of The Road
A few caveats about currency investing. Remember that you’re buying cash, not asset-backed vehicles like stocks, bonds or real estate. As such, it’s a zero-sum game—other currencies have to fall, in order for your investment to rise—and appreciation potential is limited.
And if it’s the U.S. dollar you’re worried about, you can reduce your exposure in other ways, such as buying stock in large multinational firms or broad international-equity funds, particularly small-caps, which are very tied to local currencies.
For solid long-term bets, consider baskets of currencies to reduce your risk, suggests Morningstar’s Kay. Make a single bet like the Mexican peso, and you’re taking your chances.
But buy a broad ETF, and you spread your risk appropriately. Consider the PowerShares DB US Dollar Bearish [UDN 28.63 0.13 (+0.46%) ], a basket of developed-market currencies dominated by the euro, or WisdomTree Dreyfus Emerging Currency [CEW 22.40 0.105 (+0.47%) ], a geographically-diversified collection of currencies in emerging-market economies.
For investors looking for a more direct play, there are a number of online trading platforms. GAIN Capital's Forex.com, GFTForex.com, CMS Forex, for example, allow investors to open trading accounts. Minimum investments and other requirements vary, but one thing is always the same. Currency markets trade around the clock and are very liquid, so price swings can be fast and furious.
Of course, the dollar’s slide isn’t guaranteed, since a double-dip world recession, or another international crisis—political or financial—could see investors flooding back to the relative safety of the greenback.
“But it’s primarily the dollar’s weakness that is driving currency markets now,” says FX Solutions’ Trevisani. “This will continue until the Fed makes clear its intention to begin raising rates—and I don’t think that’s likely until the second half of 2010.”
© 2009 CNBC.com
http://www.cnbc.com/id/33289478
Published: Wednesday, 28 Oct 2009 | 11:41 AM ET Text Size
By: Chris Taylor,
Special to CNBC.com
If you’re getting a little queasy about the sagging U.S. dollars in your savings account, join the club.
With deficits high and interest rates low, one potential outcome is high inflation, which would eat away at the value of the greenback.
Now it seems banks are sharing the unease: They’re putting almost two-thirds of their new cash into the euro and the Japanese yen, according to Barclay’s Capital. Compare that to a decade ago, when it was the U.S. dollar that garnered two-thirds of that cash. Global reserve currency? Not so much.
So what’s an investor to do about the shakiness of the dollar? Enter currency exchange-traded funds (ETFs), which let even casual investors put a little foreign spice in their cash holdings. There are now a total of 35 on the market, covering everything from the Indian rupee to the Brazilian real.
Other People's Money
“What currency ETFs provide are democratization,” says Bradley Kay, an ETF analyst with research firm Morningstar. “Previously foreign currencies were largely inaccessible to individuals, because of things like minimum investments. ETFs have opened that all up.”
Complete Currency Coverage
In fact they now hold more than $4.5 billion in assets, up $500 million in the third quarter of this year alone. The first currency ETF only opened at the end of 2005. Whereas currency trading used to be the province of institutions and private banks catering to the ultra-wealthy, any investor can now bet heavily on, say, the Chinese yuan or the Swedish krona.
But that doesn’t mean you should put your life savings into foreign currencies, just because you can. When it might make the most sense for investors: If you have significant cash holdings, and want to hedge some of it against a potential fall of the greenback. With the U.S. government massively increasing its balance sheet, a spike in inflation in the next few years is a distinct possibility, which would eat away at the value of the dollar.
In a worst-case scenario there could be a loss of faith among major debt-holders like China and Korea, who could decide to shift their central bank reserves to other currencies.
It’s not so far-fetched: The dollar’s already slid to a 14-month low, partly thanks to such worries.
“If you’re concerned about the dollar, by all means hold some of your cash in another currency,” says Morningstar’s Kay. “Or if you’re going to have major expenses abroad—like a big family trip, or you’re relocating to work in another country—you can fix those costs now, for the $8 cost of a brokerage fee.”
Currencies, however, should not be a core, long-term holding for investors.
“They belong in the trading-risk end of a portfolio,” says Joe Trevisani, chief market analyst for Saddle River, N.J.-based FX Solutions. “They’re not investments in the classic buy-and-hold sense.” Instead, speculative plays should be—as FX Solutions’ own disclaimer says—“conducted with risk capital you can afford to lose."
Remember that big, bad currencies banks have been the undoing of major funds and banks over the years. Do Barings Bank and Nick Leeson ring a bell?
Rules Of The Road
A few caveats about currency investing. Remember that you’re buying cash, not asset-backed vehicles like stocks, bonds or real estate. As such, it’s a zero-sum game—other currencies have to fall, in order for your investment to rise—and appreciation potential is limited.
And if it’s the U.S. dollar you’re worried about, you can reduce your exposure in other ways, such as buying stock in large multinational firms or broad international-equity funds, particularly small-caps, which are very tied to local currencies.
For solid long-term bets, consider baskets of currencies to reduce your risk, suggests Morningstar’s Kay. Make a single bet like the Mexican peso, and you’re taking your chances.
But buy a broad ETF, and you spread your risk appropriately. Consider the PowerShares DB US Dollar Bearish [UDN 28.63 0.13 (+0.46%) ], a basket of developed-market currencies dominated by the euro, or WisdomTree Dreyfus Emerging Currency [CEW 22.40 0.105 (+0.47%) ], a geographically-diversified collection of currencies in emerging-market economies.
For investors looking for a more direct play, there are a number of online trading platforms. GAIN Capital's Forex.com, GFTForex.com, CMS Forex, for example, allow investors to open trading accounts. Minimum investments and other requirements vary, but one thing is always the same. Currency markets trade around the clock and are very liquid, so price swings can be fast and furious.
Of course, the dollar’s slide isn’t guaranteed, since a double-dip world recession, or another international crisis—political or financial—could see investors flooding back to the relative safety of the greenback.
“But it’s primarily the dollar’s weakness that is driving currency markets now,” says FX Solutions’ Trevisani. “This will continue until the Fed makes clear its intention to begin raising rates—and I don’t think that’s likely until the second half of 2010.”
© 2009 CNBC.com
http://www.cnbc.com/id/33289478
Monday 16 November 2009
What determines the share price changes?
Some of the stocks have gained hugely and some have not moved upwards significantly. A few actually went lower in price.
What determines these share price changes?
Changes in these 3 areas influence the share prices of these stocks the last few months (from March 2009). Let me, based on my rule of thumb assessment, post these below.
Observations:
The market cycle has turned upwards since March 2009. The impact of the market cycle on individual stock prices is not uniform.
The individual stock price is driven mostly, upwards or downwards, by the changes in its underlying business fundamentals.
Though certain sectors may have a negative outlook, some individual stocks within these sectors perform well due to their good business fundamentals.
What determines these share price changes?
Changes in these 3 areas influence the share prices of these stocks the last few months (from March 2009). Let me, based on my rule of thumb assessment, post these below.
HaiO
Business fundamental change +++
Sector change +/-
Market cycle change ++
Market cycle change ++
PBB
Business fundamental change +
Sector change +
Market cycle change ++
HLB
Business fundamental change +
Sector change +
Market cycle change ++
Tong Herr
Business fundamental change ---
Sector change --
Market cycle change ++
LionDiv
Business fundamental change ---
Sector change --
Market cycle change ++
Maybulk
Business fundamental change --
Sector change --
Market cycle change ++
Coastal
Business fundamental change +++
Sector change --
Market cycle change ++
KNM
Business fundamental change -
Sector change -
Market cycle change ++
Nestle
Business fundamental change +
Sector change +/-
Market cycle change ++
Dutch Lady
Business fundamental change +
Sector change +/-
Market cycle change ++
PPB
Business fundamental change ++
Sector change +/-
Market cycle change ++
Top Glove
Business fundamental change +++
Sector change ++
Market cycle change ++
Latexx
Business fundamental change +++
Sector change ++
Market cycle change ++
KLK
Business fundamental change +
Sector change +/-
Market cycle change ++
PetDag
Business fundamental change +
Sector change +/-
Market cycle change ++
Parkson
Business fundamental change +
Sector change +/-
Market cycle change ++
UMW
Business fundamental change +/-
Sector change +/-
Market cycle change ++
Observations:
The market cycle has turned upwards since March 2009. The impact of the market cycle on individual stock prices is not uniform.
The individual stock price is driven mostly, upwards or downwards, by the changes in its underlying business fundamentals.
Though certain sectors may have a negative outlook, some individual stocks within these sectors perform well due to their good business fundamentals.
Sunday 15 November 2009
Fundamentally10 Years Later, a Much Less Expensive Dow 10,000
Fundamentally10 Years Later, a Much Less Expensive Dow 10,000
By PAUL J. LIM
Published: November 14, 2009
INVESTORS may take some comfort now that the Dow Jones industrial average is back above 10,000 after slipping to around 9,700 at the end of October.
But the return to 10,000 also serves as a bitter reminder that stocks have gone virtually nowhere, on balance, for more than a decade. It was in March 1999 that the Dow first climbed above 10,000, before soaring as high as 14,164 two years ago and plummeting as low as 6,547 this past March.
Of course, the Dow gauges only stocks in the United States, and a fairly narrow band of the market at that. And while domestic shares have appeared to run in circles for more than a decade, many global stock markets have prospered.
Look a bit deeper, though, and you’ll find that there have been some changes in the domestic market, too, in the last 10 years — and largely for the better. Some of them, however, are hard to see at first glance.
For example, a majority of sectors have actually posted positive returns since the end of 1999 — in some cases sizable gains. On average, including dividends, energy stocks have returned nearly 150 percent, shares of consumer staples companies (like Procter & Gamble and others that sell necessities) have gained nearly 65 percent and utility stocks have risen nearly 50 percent.
“That’s hardly what I would call a lost decade,” said James W. Paulsen, chief investment strategist at Wells Capital Management in Minneapolis.
Market valuations are another consideration. By almost every measure, stocks are far cheaper at Dow 10,000 today than at Dow 10,000 in March 1999.
Back then, the price-to-earnings ratio for domestic stocks stood at a very high 41.4. That’s based on 10-year average earnings, a conservative measure that smoothes out short-term swings in corporate profits. Since then, using the same measure, the market’s P/E has fallen to 18.9. While that’s not necessarily a screaming bargain — the market’s long-term average is closer to 16 — stocks are trading at a discount of more than 50 percent to their 1999 prices.
“The reality is that stocks are like any other asset,” said Robert D. Arnott, chairman of Research Affiliates, an investment consulting firm in Newport Beach, Calif. “If you buy them cheap, there’s a good chance you’ll be happy very quickly. But if you buy them at expensive prices, you’ll have to wait a long, long time to get rewarded. That’s what investors have learned in the past decade.”
Perhaps the most important change is the one that has occurred in many portfolios. Investors are generally more diversified today than they were a decade ago — and that has helped many households make money in an equity market that has been in neutral over all.
Consider that in 1999, four economically sensitive sectors — technology, financial services, telecommunications and consumer discretionary stocks (which include automakers) — made up nearly two-thirds of the overall market.
Those four areas also happened to be the four worst-performing groups over the last 10 years. Since the end of 1999, tech and telecom shares have lost nearly 8 percent, annualized, according to Standard & Poor’s. Financial shares, meanwhile, have fallen almost 3 percent a year, on average, and consumer discretionary stocks are down nearly 2 percent, annualized, S.& P. says.
Today, these four sectors make up less than half of the market.
At the same time, weightings have grown modestly in traditionally defensive areas of the market like health care, consumer staples and utilities. In fact, those three sectors now make up nearly a third of the S.& P. 500-stock index, up from less than 19 percent in 1999.
DIVERSIFICATION goes well beyond just sectors. Back in the late ’90s, investors held about $1 in foreign stocks for every $8 held in domestic equities — not counting their own company’s stock — within their 401(k) retirement accounts. That isn’t terribly surprising, in that the domestic stock market back then was routinely delivering 20-percent-plus annual returns.
Today, that ratio of foreign stocks to domestic shares stands at 1 to 3.
Why is that important?
In a decade when domestic stocks ended up going nowhere, foreign shares actually gained a decent amount of ground. In fact, the Vanguard Total International Stock Index fund, a diversified index portfolio that serves as a proxy for all overseas equities, returned more than 4 percent, annualized, from March 1999 through October this year. And the Vanguard Emerging Markets Stock Index fund, which invests in companies based in developing economies abroad, fared even better, climbing more than 12 percent, annualized, during this stretch.
If you diversified with, say, 75 percent domestic stocks and 25 percent foreign shares, your overall equity portfolio would have grown slightly — by more than 1 percent, annualized, since March 1999.
What’s more, foreign assets are now more important in global portfolios. In the last 10 years, emerging markets have gone from 4 percent of the world’s market capitalization to 26 percent, said Sam Stovall, chief investment strategist at S.& P.
Despite the Dow’s lackluster performance, Mr. Stovall added, “You can’t say that things haven’t changed.”
Paul J. Lim is a senior editor at Money magazine. E-mail: fund@nytimes.com.
http://www.nytimes.com/2009/11/15/business/economy/15fund.html?_r=1&ref=business
By PAUL J. LIM
Published: November 14, 2009
INVESTORS may take some comfort now that the Dow Jones industrial average is back above 10,000 after slipping to around 9,700 at the end of October.
But the return to 10,000 also serves as a bitter reminder that stocks have gone virtually nowhere, on balance, for more than a decade. It was in March 1999 that the Dow first climbed above 10,000, before soaring as high as 14,164 two years ago and plummeting as low as 6,547 this past March.
Of course, the Dow gauges only stocks in the United States, and a fairly narrow band of the market at that. And while domestic shares have appeared to run in circles for more than a decade, many global stock markets have prospered.
Look a bit deeper, though, and you’ll find that there have been some changes in the domestic market, too, in the last 10 years — and largely for the better. Some of them, however, are hard to see at first glance.
For example, a majority of sectors have actually posted positive returns since the end of 1999 — in some cases sizable gains. On average, including dividends, energy stocks have returned nearly 150 percent, shares of consumer staples companies (like Procter & Gamble and others that sell necessities) have gained nearly 65 percent and utility stocks have risen nearly 50 percent.
“That’s hardly what I would call a lost decade,” said James W. Paulsen, chief investment strategist at Wells Capital Management in Minneapolis.
Market valuations are another consideration. By almost every measure, stocks are far cheaper at Dow 10,000 today than at Dow 10,000 in March 1999.
Back then, the price-to-earnings ratio for domestic stocks stood at a very high 41.4. That’s based on 10-year average earnings, a conservative measure that smoothes out short-term swings in corporate profits. Since then, using the same measure, the market’s P/E has fallen to 18.9. While that’s not necessarily a screaming bargain — the market’s long-term average is closer to 16 — stocks are trading at a discount of more than 50 percent to their 1999 prices.
“The reality is that stocks are like any other asset,” said Robert D. Arnott, chairman of Research Affiliates, an investment consulting firm in Newport Beach, Calif. “If you buy them cheap, there’s a good chance you’ll be happy very quickly. But if you buy them at expensive prices, you’ll have to wait a long, long time to get rewarded. That’s what investors have learned in the past decade.”
Perhaps the most important change is the one that has occurred in many portfolios. Investors are generally more diversified today than they were a decade ago — and that has helped many households make money in an equity market that has been in neutral over all.
Consider that in 1999, four economically sensitive sectors — technology, financial services, telecommunications and consumer discretionary stocks (which include automakers) — made up nearly two-thirds of the overall market.
Those four areas also happened to be the four worst-performing groups over the last 10 years. Since the end of 1999, tech and telecom shares have lost nearly 8 percent, annualized, according to Standard & Poor’s. Financial shares, meanwhile, have fallen almost 3 percent a year, on average, and consumer discretionary stocks are down nearly 2 percent, annualized, S.& P. says.
Today, these four sectors make up less than half of the market.
At the same time, weightings have grown modestly in traditionally defensive areas of the market like health care, consumer staples and utilities. In fact, those three sectors now make up nearly a third of the S.& P. 500-stock index, up from less than 19 percent in 1999.
DIVERSIFICATION goes well beyond just sectors. Back in the late ’90s, investors held about $1 in foreign stocks for every $8 held in domestic equities — not counting their own company’s stock — within their 401(k) retirement accounts. That isn’t terribly surprising, in that the domestic stock market back then was routinely delivering 20-percent-plus annual returns.
Today, that ratio of foreign stocks to domestic shares stands at 1 to 3.
Why is that important?
In a decade when domestic stocks ended up going nowhere, foreign shares actually gained a decent amount of ground. In fact, the Vanguard Total International Stock Index fund, a diversified index portfolio that serves as a proxy for all overseas equities, returned more than 4 percent, annualized, from March 1999 through October this year. And the Vanguard Emerging Markets Stock Index fund, which invests in companies based in developing economies abroad, fared even better, climbing more than 12 percent, annualized, during this stretch.
If you diversified with, say, 75 percent domestic stocks and 25 percent foreign shares, your overall equity portfolio would have grown slightly — by more than 1 percent, annualized, since March 1999.
What’s more, foreign assets are now more important in global portfolios. In the last 10 years, emerging markets have gone from 4 percent of the world’s market capitalization to 26 percent, said Sam Stovall, chief investment strategist at S.& P.
Despite the Dow’s lackluster performance, Mr. Stovall added, “You can’t say that things haven’t changed.”
Paul J. Lim is a senior editor at Money magazine. E-mail: fund@nytimes.com.
http://www.nytimes.com/2009/11/15/business/economy/15fund.html?_r=1&ref=business
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