Why I lost money in some stocks in the stock market?
Buy low, sell high = GAIN
Buy high, sell low = LOSS
Factors to consider:
Price
Company
Price
If you can have the intellect and the emotional control to buy low, you have already WON most of the time, with a high probability. (I often quote, "many a sin is forgiven when you manage to buy at a low price.)
To be able to buy a share at a low price, means you have the ability to value this share. Valuation maybe based on assets, cash flow or multiples of earnings, book etc. Do not over-project growth in your valuation. You can only be approximately right in your valuation. This is alright, as long as you are not absolutely wrong in your valuation. There are also many qualitative factors that cannot be quantified in the valuation.
At a certain price, the stock is undervalued, at another it is fairly priced or overvalued. The ability to value a stock is the most important knowledge of a value investor.
Company
Choosing the right company to invest into is very important for someone who has the buy and hold for the long term philosophy. Choose the company in a business with durable competitive advantage. Its business moat is so huge and deep, that competitors find hard to erode their growth and profits over the long haul. Therefore, looking at the quality of the company's business and the management (integrity, intelligence and hard working) are important here.
Even the best company can fail. Look at the Dow Jones Index of 30 companies over the century. The index is made up of the best companies of each period. Many have faded or disappeared into oblivion. Of the 30 original companies at the start of the last century, only 1 or 2 of these are still in the Dow Jones index.
So, you may lose money when your high quality company with good management that you bought at undervalued price deteriorated in its business fundamentals permanently. In this situation, you will need to sell urgently to minimise your loss.
Conclusion
If you have done the hard work in selecting good quality company and valuing this company, the chances of losing money are few. From the above discussion, essentially, these are: (1) buying a poor quality company with no durable competitive advantage, and (2) paying a high price for your purchase.
This approach essentially means focusing on valuation and the company, and is not influenced by the market or herd mentality. The market is there to be taken advantage of, when the prices are right to buy or to sell, and otherwise for most of the time, can be ignored.
Tuesday 17 May 2011
Monday 16 May 2011
EU paints bleak picture for PIGs
The European Union has warned the debt loads of Greece, Ireland and Portugal will be much bigger than previously forecast, adding to fears that international bailouts are failing to solve the region’s crisis.
However, the bloc’s biannual economic forecasts paints a more optimistic picture of the economy of Spain - commonly seen as the next-weakest state in the euro zone - which supports the currency union’s hope that the debt crisis won’t draw in any other countries.
For the three countries that have already received or are about to get international help, debt is expected to remain a problem for some time.
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The higher debt forecasts, combined with larger budget deficits and weak growth, boost the complaints of many economist that the bailouts are taking too hard a toll on economic activity and are not solving the debt problem.
Although Greece on Friday reported economic growth in the first quarter, its longer-term prospects remain grim, experts say.
Greece’s debt will reach 157.7 per cent of economic output this year and jump to 166.1 per cent in 2012, the European Commission, the EU’s executive, said in its forecast. That’s up from 150.2 per cent and 156 per cent respectively it predicted last autumn.
While expected, the significantly worse forecasts will likely spice up discussions among euro-zone governments on whether Greece will need a second bailout, after it was already granted 110 billion euros in rescue loans a year ago.
It will also add to calls from many economists that the country needs to restructure its debts - forcing private creditors like banks and investment funds to accept lower or lower repayments on the bonds they hold.
The situation does not look much better in Ireland, the second country to get bailed out last year. Ireland’s debt is expected to hit 112 per cent of gross domestic product this year before rising to 117.9 per cent in 2012.
That’s up from earlier forecasts of 107 per cent and 114.3 per cent. Its economy is predicted to grow a meagerly 0.6 per cent this year, while it will likely run a deficit of 10.5 per cent, up from 10.3 per cent forecast in the autumn.
The most severe revisions were made for Portugal, which at the time of the last forecast was still hoping to avoid a bailout.
However, after last year’s deficit turned out much bigger than expected and the government was defeated over austerity measures, Lisbon asked for help last month and finance ministers are expected to sign off on a 78 billion euro rescue package for the country on Monday.
Portugal’s debt will likely stand at 101.7 per cent of GDP in 2011 and increase to 107.4 per cent next year, the Commission said. That’s up from 88.8 per cent and 92.4 per cent previously.
The Portuguese economy will likely contract 4 per cent over the next two year, in line with what international exports examining the country’s books to prepare the bailout predicted last week. The deficits projections are also based on the targets set out in Portugal’s bailout program, 5.9 per cent this year and 4.5 per cent in 2012.
The bleak forecasts for the euro zone’s three weakest countries contrast with strong economic growth in the currency union’s large countries such as Germany and France, where GDP growth was revised up.
Even for Spain, the country that most economists say would seriously test the eurozone’s capacity to help its struggling members, there was some good news in Friday’s forecasts. Its debt load will reach 68.1 per cent this year and grow to 71 per cent in 2012. That’s better than the 69.7 per cents and 73 per cent predicted last autumn.
AP
Read more: http://www.smh.com.au/business/world-business/eu-paints-bleak-picture-for-pigs-20110514-1emz8.html#ixzz1MTERkRVB
Performance fees catch investors
Making sense of fee structures can be like jumping through hoops.
Deciphering complex fee structures can be like jumping through hoops, writes John Collett.
A report by investment researcher Morningstar shows some fund managers have performance-fee structures so complex, they are likely to bamboozle investors, leaving them unable to compare fees and, worse, paying more than if they had flat percentage fees instead.
''There is no standard way to present the fees and it makes it difficult to make like-for-like comparisons,'' says Tom Whitelaw, a senior research analyst at Morningstar and lead author of the report.
But fund managers argue that performance fees better align the interests of fund managers and investors.
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The Morningstar report's ''Best practices in managed fund performance fees'' shows funds with performance fees also charge a flat percentage ''base'' fee that is usually no lower than the flat fees commonly charged by other managers. In other words, some funds could be said to be double-dipping on their fee take.
The typical performance fee for an Australian shares fund is between 15 per cent and 30 per cent of the fund's returns in excess of a benchmark.
Funds investing in Australian shares will typically have the sharemarket return - measured against the performance of the biggest 200 or 300 companies - as their benchmark.
Importantly, they will also have a base fee - usually just under 1 per cent, though some are much lower.
Morningstar modelled returns over the past 10 years. It used the actual performance of Australian shares during that period and the average return of the three best-performing Australian funds. The modelling assumed a performance fee of 20 per cent on returns above the fund manager's benchmark on an initial investment of $100,000.
The modelling found that over the decade, investors would pay total fees of 3.82 per cent on the most expensive fee structure and 0.97 per cent on the cheapest - a difference of $65,763 between the two funds.
Bar too low
The Morningstar report on 18 Australian share funds with performance fees found several instances where the way the fees were structured could work to the disadvantage of investors.
The single biggest problem identified in the report was a low benchmark against which the performance was measured and the performance fee paid.
One of the share funds with performance fees covered in the report had a benchmark of zero.
In other words, the manager took 20 per cent of returns above zero. The fund also had the highest base fee - 1.09 per cent - of the 18 funds.
''We do not consider the absolute benchmark approach to be best practice,'' Morningstar says. ''It is not [in] investors' best interests to reward a fund manager that can take advantage of a rising market and charge performance fees irrespective of whether or not the fund manager outperforms an appropriate market index.''
The report did not identify the fund but Weekend Money has ascertained that the fund manager referred to is the Sydney boutique fund manager PM Capital, which was funded by Paul Moore in 1998.
Its Australian Opportunities Fund has a benchmark of zero and a base fee of 1.09 per cent.
Moore says the fee structure is different to other funds because it manages money differently. Most managers have portfolios that do not differ much from the composition of the sharemarket, ensuring that their returns are similar to the market.
''We are investors, not index managers,'' Moore says.
The good performance of his fund justifies the fees, he says. Since its inception in 2000, it has returned 230 per cent, after fees, compared with the return on Australian shares of 145 per cent during the same period. ''Investors will make up their own minds whether the fee structure is fair and reasonable and, if they think it is not, they will take their money away,'' he says.
The PM Capital Australian Opportunities Fund has a ''high-water mark'', which means any earlier losses have to be recovered before the performance fee can be charged, whereas two of the 18 funds do not have high-water marks; meaning they do not have to first recover money lost before they can charge a performance fee.
If the performance is measured every 12 months, for example, managers without a high-water mark could underperform the benchmark in one year - making big losses for investors - while taking performance fees the next year.
''A high-water mark is necessary in any performance-fee structure,'' Morningstar says. ''We believe that performance-fee structures that operate without a high-water mark act against the best interests of investors,'' the researcher says.
Regulator
Morningstar says the lack of consistency in performance-fee structures stems from the lack of any clear regulatory guidelines on how the complex components should be displayed.
This makes it much more difficult for investors to compare funds.
The fee structures are so complex, Morningstar found, that even a ''number of fund managers also appear not to fully understand all the implications of their performance-fee structures''.
To protect themselves against being charged too much, investors need to make sure that any performance fee is benchmarked to an appropriate index, Morningstar says. They need to look for a low base fee because it is a constant cost, regardless of performance.
Well-structured performance fees should include a ''hurdle'' that the fund has to outperform in addition to returns of the Australian sharemarket before a performance fee is paid. ''Ensure that the fund manager has to beat a reasonable hurdle before starting to accumulate performance fees,'' Morningstar says.
Tough line balances the ledger
Regulators in the US have taken a tough line on performance fees.
If a fund manager in the US wants to charge a performance fee, it must be a "fulcrum" fee.
If the fund outperforms its benchmark, the investor pays the fund manager the agreed performance fee.
But if the fund underperforms the benchmark, the same calculation occurs in reverse and the management fee is then reduced to account for the underperformance.
An analyst at Morningstar, Tom Whitelaw, says this is the fairest type of performance fee.
Another advantage of a fulcrum fee for investors is that it is simple to understand and makes redundant the "high-water marks", "hurdles" and "resets" of performance-fee structures of Australian funds.
Morningstar says it appears US fund managers do not have much confidence in being able to consistently outperform investment markets because, after the introduction of the regulations in the US that make it mandatory to use fulcrum fees, the number of funds charging performance fees dropped dramatically.
Whitelaw says there needs to be a standard way performance fees are disclosed in Australia so investors can easily compare the different fee structures.
http://www.smh.com.au/money/investing/performance-fees-catch-investors-20110506-1ecgf.html#ixzz1MTDQN8u6
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