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http://www.topyields.nl/Top-dividend-yields-of-KLCI30.phpKeep INVESTING Simple and Safe (KISS) ****Investment Philosophy, Strategy and various Valuation Methods**** The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.
Monday 23 April 2012
Sunday 22 April 2012
Who is a Value Investor?
Morningstar is a widely used source of mutual fund information, and it
categorized 38 percent of mutual funds as value funds in 2001. But how
did it make this categorization? While it did look at the way these funds
described themselves in their prospectus, the ultimate categorization was
based on a far simpler measure. Any fund that invested in stocks with low
price-to-book value ratios or low price earnings ratios, relative to the market, was categorized as a value fund. This categorization is fairly conventional, but we believe that it is too narrow a definition and misses the
essence of value investing.
Another widely used definition of value investors suggests that they are investors interested in buying stocks for less than what they are worth. But that is too broad a definition, because you could potentially categorize most active investors as value investors on this basis. After all, growth investors (who are often viewed as competing with value investors) also want to buy stocks for less than what they are worth.
So, what is the essence of value investing? To understand value investing, we have to begin with the proposition that the value of a firm is derived from two sources—
Even with this definition of value investing, there are three distinct strands that we see in value investing.
Another widely used definition of value investors suggests that they are investors interested in buying stocks for less than what they are worth. But that is too broad a definition, because you could potentially categorize most active investors as value investors on this basis. After all, growth investors (who are often viewed as competing with value investors) also want to buy stocks for less than what they are worth.
So, what is the essence of value investing? To understand value investing, we have to begin with the proposition that the value of a firm is derived from two sources—
- investments that the firm has already made (assets in place) and
- expected future investments (growth opportunities).
Even with this definition of value investing, there are three distinct strands that we see in value investing.
- The first and perhaps simplest form of value investing is passive screening, where companies are put through a number of investment screens—for example, low PE ratios, marketability, and low risk—and those that pass the screens are categorized as good investments.
- In its second form, you have contrarian value investing, where you buy assets that are viewed as untouchable by other investors because of poor past performance or bad news about them.
- In its third form, you become an activist value investor who buys equity in undervalued or poorly managed companies but then uses the power of your position (which has to be a significant one) to push for change that will unlock this value.
3 Stages of a Bull Market and 3 Stages of a Bear Market
2011 Value Investing Congress Notes
http://www.scribd.com/doc/54958483/2011-Value-Investing-Congress-Notes
o Constantly going between greed and fear, risk tolerance and risk aversion, and optimism and pessimism
o In theory, the pendulum should be at the happy medium
On average it is in the middle
But it spends little time there
Excesses constitute the errors of herd behavior
3 stages of a bull market
Few people feel things are getting better
Most people realize improvement is taking place
Everyone thinks things will get better forever
"What the wise man does in the beginning, the fool does in the end."
o The last buyer pays the price
3 stages of a bear market
Few people realize that things are overpriced and dangerous
Most people see the decline is underway
Everyone believes that things will get worse forever
o Great opportunity to buy if we can behave counter-cyclically - Importance of being a contrarian.
Ben Claremon: The Inoculated Investor http://inoculatedinvestor.blogspot.com/
Assessing Buffett. Is Warren Buffett worthy of his reputation?
It might be presumptuous of us to assess an investor who has acquired mythic status, but is Warren Buffett worthy of his reputation? If so, what accounts for his success, and can it be replicated? We believe that
his reputation is well deserved and that his extended run of success cannot be attributed to luck. While he has had his bad years, he has always bounced back in subsequent years. The secret to his success seems to rest on the long view he brings to companies and his discipline—the unwillingness to change investment philosophies even in the midst of short-term failure.
Much has been made of the fact that Buffett was a student of Graham at Columbia University and their adherence to value investing. Warren Buffett’s investment strategy is more complex than Graham’s original passive screening approach. Unlike Graham, whose investment strategy was inherently conservative, Buffett’s strategy seems to extend across a far more diverse range of companies, from high-growth firms like Coca-Cola to staid firms such as Blue Chip Stamps. While Graham and Buffett both might use screens to find stocks, the key difference as we see it between the two men is that Graham strictly adhered to quantitative screens whereas Buffett has been more willing to consider qualitative screens. For instance, Buffett has always put a significant weight on both the credibility and the competence of top managers when investing in a company.
In more recent years, he has had to struggle with two byproducts of his success.
- Buffett’s record of picking winners has attracted a crowd of imitators who follow his every move and buy everything be buys, making it difficult for him to accumulate large positions at attractive prices.
- At the same time, the larger funds at his disposal imply that he is investing far more than he did two or three decades ago in each of the companies that he takes a position in, which makes it more difficult for him to be a passive investor. It should come as no surprise, therefore, that he is a much more activist investor than he used to be, serving on boards of The Washington Post and other companies and even operating as interim chairman of Salomon Brothers during the early 1990s
BUFFETT'S TENETS
Roger Lowenstein, in his excellent book on Buffett, suggests that Buffett’s success can be traced to his adherence to the basic notion that when you buy a stock, you are buying an underlying business.
Business Tenets:
The business the company is in should be simple and understandable. In fact, one of the few critiques of Buffett was his refusal to buy technology companies, whose business he said was difficult to understand.
The firm should have a consistent operating history, manifested in operating earnings that are stable and predictable.
The firm should be in a business with favorable long-term prospects.
Management Tenets:
The managers of the company should be candid. As evidenced by the way he treated his own stockholders, Buffett put a premium on managers he trusted. Part of the reason he made an investment in The Washington Post was the high regard that he had for Katherine Graham, who inherited the paper from her husband.
The managers of the company should be leaders and not followers. In practical terms, Buffett was looking for companies that mapped out their own long-term strategies rather than imitating other firms.
Financial Tenets:
The company should have a high return on equity, but rather than base the return on equity on accounting net income, Buffett used a modified version of what he called owner earnings:
Owner Earnings Net income Depreciation and Amortization – Capital Expenditures
This concept is very close to a free cash flow to equity.
The company should have high and stable profit margins and a history of creating value for its stockholders.
Market Tenets:
In determining value, much has been made of Buffett’s use of a risk-free rate to discount cash flows. Because he is known to use conservative estimates of earnings and because the firms he invests in tend to be stable firms, it looks to us like he makes his risk adjustment in the cash flows rather than the discount rate.
In keeping with Buffett’s views of Mr. Market as capricious and moody, even valuable companies can be bought at attractive prices when investors turn away from them.
http://media.wiley.com/product_data/excerpt/32/04713450/0471345032.pdf
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