Here’s how to invest like billionaire Warren Buffett during a volatile market

The wild swings in the stock market may have you stressed about your investments.

Yet if you took a page from self-made billionaire Warren Buffett, you shouldn’t be too concerned about daily market moves.

“You’ve got to be prepared when you buy a stock to have it go down 50% or more and be comfortable with it, as long as you’re comfortable with the holding,” the Berkshire Hathaway CEO said during the company’s 2020 annual shareholders meeting.

The 91-year-old, who is worth $109.2 billion according to Forbes, has been called the greatest investor in the world. 

In fact, of the top 10 billionaires, Buffett is the only one who gained wealth so far this year, according to the Bloomberg Billionaires Index.

When Buffett looks at the stock market he sees companies instead of stocks.

“We ignore 99.9% of what we see, although we run our eyes over them. And then every now and then we see something that looks like it’s attractively priced to us as a business,” Buffett said at Berkshire Hathaway’s 2008 meeting.

If you want to take a page from Warren Buffett, here are some of his key principles you can integrate into your investing practice.

Think long term

When Buffett buys stocks, he’s in it for the long haul.

“If there is one quality that you need in order to invest like Warren Buffett it is patience,” said Berkshire Hathaway shareholder Robert Johnson, professor of finance at Creighton University’s Heider College of Business in Omaha, Nebraska, Buffett’s hometown.

You’ve got to be prepared when you buy a stock to have it go down 50% or more and be comfortable with it, as long as you’re comfortable with the holding.

Warren Buffett

BERKSHIRE HATHAWAY CEO

Buffett has driven home this philosophy over the years.

“When we buy a stock, we would be happy with that stock if they told us the market was going to close for a couple of years. We look to the business,” he has said.

He compared it to buying a farm.

“You would not get a price on it every day and you wouldn’t ask whether the yield was a little above expectations this year or down a little bit. You’d look at what the farm was going to produce over time.”

Invest in what you know

Buffett has famously said to “never invest in a business you cannot understand.”

“You have to learn how to value businesses and know the ones that are within your circle of competence and the ones that are outside,” Buffett told CNBC’s Becky Quick during an interview on “Squawk Box” in 2019.

That doesn’t mean he thinks you have to be an expert on every company.

Investors need to have the “ability to correctly evaluate selected businesses,” he wrote in his 1996 annual shareholders’ letter.

Focus on good companies

Buffett likes to focus on companies that have a good business model that is sustainable over a very long period of time, Johnson said.

It has to be at the right price. Buffett is well known as a value investor, which is someone who chooses equities that seem to be trading for less than their intrinsic value.

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price,” he famously wrote in his annual letter to Berkshire Hathaway shareholders in 1989.

Keep learning

Buffett is a big believer in continuously learning throughout life.

By the time he was 10 years old, he read every book on investing in the Omaha public library and many of them he read twice.

And he hasn’t stopped.

“l was in his office several years ago. His desk is just piled with books and they are books on very many diverse topics,” Johnson said.

Buffett once said he reads about 500 pages a week.

“I remain very big on the idea of reading everything in sight,” Buffett said at the 2007 Berkshire Hathaway meeting.

PUBLISHED TUE, JAN 25 20223:43 PM 

Michelle Fox

https://www.cnbc.com/2022/01/25/heres-how-to-invest-like-billionaire-warren-buffett-during-a-volatile-market.html

Everything You Need To Know About Money, Inflation. How The System Works

 

Everything You Need To Know About Money, Inflation | How The System Works | Business Documentary While the world comes out of economic recession due to the pandemic, a lot of things are changing. High inflation, stimulus packages, interest rates. All these words are popping up on the news, but it’s hard to figure out how does the whole system work. In this video, we explain all of that and more. Chapters: Hyperinflation Fiat Currency System Explained What if the dollar was still pegged to gold Why we might have high inflation soon Zombie companies

Inflation and Value of Bitcoin

Peter Schiff on Biden's Dysfunctional Economy, Inflation Concerns, and the Value of Bitcoin

To select stocks yourself intelligently, please learn and understand accounting, the language of business.

 "You have to understand accounting and you have to understand the nuances of accounting.  It's the language of business and it's an imperfect language, but unless you are willing to put in the effort to learn accounting - how to read and interpret financial statements - you really shouldn't select stocks yourself."

Warren Buffett

Recognise the phenomenal long-term wealth-creating power of a company that possesses a durable competitive advantage over its competitors.

History of investment analysis

Benjamin Graham

Benjamin Graham had adopted early bond analysis techniques to common stocks analysis.

He focused primarily on determining a company's solvency and earning power for the purposes of bond analysis.  

Graham never made the distinction between a company that held a long-term competitive advantage over its competitors and one that didn't.

He was only interested in whether or not the company had sufficient earning power to get it out of the economic trouble that sent its stock price spiraling downward.  

He wasn't interested in owning a position in a company for ten or twenty years.  If it didn't move after two years, he was out of it.

Warren Buffett

Warren Buffett discovered, after starting his career with Graham,  the tremendous wealth-creating economics of a company that possessed a long-term competitive advantage over its competitors.

He realized that the longer you held one of these fantastic businesses, the richer it made you.

While Graham would have argued that these super businesses were overpriced, Warren realized that he didn't have to wait for the stock market to serve up a bargain price, that even if he paid a fair price, he could still get superrich off of those businesses.

Warren developed a unique set of analytical tools to help identify these special kinds of businesses.  

His new ways of looking at things enabled him to determine whether the company could survive its current problems (recall Washington Post at the time when he first bought into this company).

Warren's way also told him whether or not the company in question possessed a long-term competitive advantage that would make him superrich over the long run.  

Warren's two simple and stunning revelations:  

(1) How to identify an exceptional company with a durable competitive advantage?

(2) How to value a company with a durable competitive advantage?

KLCI MARKET PE 28.8.2021

KLCI MARKET PE  28.8.2021

Company Mkt Cap (m)    Earnings (m)     Dividend (m)

MBB 97,873.2       6,749.9       6,068.1 

PBB 81,136.7       4,858.5       2,515.2 

PCHEM 65,600.0       1,600.0 984.0 

TENAGA  59,436.8       3,602.2       4,576.6 

IHH          55,747.1 199.3 334.5 

CIMB 48,969.4       1,206.1 489.7 

PMETAL  43,369.3 457.0 173.5 

HLBANK  41,186.6       2,640.2 782.5 

AXIATA 37,057.7       3,669.1 630.0 

MAXIS 36,783.5       1,382.8       1,324.2 

DIGI 33,821.3       1,221.0       1,217.6 

PETGAS 32,174.2       2,010.9       2,509.6 

TOPGLOV  32,088.8       1,910.0 962.7 

NESTLE 31,587.2 553.2 537.0 

MISC 31,246.6 -          1,468.6 

SIMEPLT  28,838.5       1,191.7 807.5 

PPB 26,403.4       1,320.2 660.1 

IOICORP  25,643.6       1,401.3 666.7 

HARTA 24,850.1       2,889.5       1,068.6 

KLK 23,025.7 777.9 529.6 

TM          22,868.6       1,016.4 548.8 

MRDIY 22,658.5 -    -   

RHBBANK  22,416.7       2,056.6 717.3 

HAPSENG  20,988.0 749.6 629.6 

HLFG 20,770.0       1,871.2 436.2 

PETDAG  19,670.4 276.7 373.7 

GENTING  19,113.1 -             573.4 

GENM 17,337.4 -             866.9 

SIME 15,986.0       1,427.3       1,023.1 

DIALOG 15,187.0  544.3 182.2 

TOTAL        1,053,835.4     47,582.8     33,657.6 

Company PE DY Price (RM)

MBB 14.5 6.2 8.37

PBB 16.7 3.1 4.18

PCHEM 41.0 1.5 8.20

TENAGA 16.5 7.7       10.38

IHH       279.7 0.6 6.35

CIMB 40.6 1.0 4.89

PMETAL 94.9 0.4 5.37

HLBANK 15.6 1.9       19.00

AXIATA 10.1 1.7 4.04

MAXIS 26.6 3.6 4.70

DIGI 27.7 3.6 4.35

PETGAS 16.0 7.8       16.26

TOPGLOV 16.8 3.0 3.91

NESTLE 57.1 1.7     134.70

MISC 0.0 4.7 7.00

SIMEPLT 24.2 2.8 4.17

PPB 20.0 2.5       18.57

IOICORP 18.3 2.6 4.08

HARTA   8.6 4.3 7.25

KLK 29.6 2.3       21.30

TM         22.5 2.4 6.06

MRDIY   0.0 0.0 3.61

RHBBANK 10.9 3.2 5.51

HAPSENG 28.0 3.0 8.43

HLFG 11.1 2.1       18.10

PETDAG 71.1 1.9       19.80

GENTING   0.0 3.0 4.93

GENM   0.0 5.0 2.92

SIME 11.2 6.4 2.35

DIALOG 27.9 1.2 2.69

MARKET 22.1 3.2

PE and DY are based on the latest financial year accounts

28.8.2021

KLCI 1601.38

Market PE 22.1

Market DY 3.2

Here is a plan. Let us develop a strategy that helps keep us from making our mistakes.

What we must also have is a plan for HOW MUCH to invest n the stock market in the first place.

It makes sense for almost everyone to have a significant portion of their assets in stocks.  Just as important, few people should put all their money in stocks.  Whether you choose to invest 80% of your savings in stocks, or 40% in stocks depends in part on individual circumstances and in part on how human you really are.

An investment strategy where 100% of your assets are invested in the stock market can result in a drop of 30%, 40% or even more in your net worth in any given year (of course, many people learned this the hard way in recent years).   Since most of us are only human, we cannot take a drop of this size without opting for survival.  That means either panicking out or being forced to sell at just the wrong time

In fact, if we start with the premise that we cannot handle a 40% drop, then putting 100% of our money in the stock market is a strategy that is almost guaranteed to fail at some inopportune time down the road.

Obviously, if we invest only 50% of our assets in stocks, a market drop of 40% would result in losing "only" 20% of our net worth.  As painful as this still might be, if we maintain the proper long-term perspective, some of us might be better able to withstand a drop of this size without running for our lives.

Whether you choose to place 80% of your assets in stocks or 40%, that percentage should be based largely on how much pain you can take on the downside and still hang in there.

Pick a number. What percentage of your assets do you feel comfortable investing in stocks?

The important thing is to choose a portion of your assets to invest in the stock market—and stick with it!  For most people, this number could be between 40 percent and 80 percent of investable assets, but each case is too individual to give a range that works for everyone.

Whatever number you do choose, though, I can guarantee one thing: at some point you will regret your decision.  Being only human, when the market goes down you will regret putting so much into stocks. If the market goes up, the opposite will happen—you’ll wonder why you were such a chicken in the first place.  That’s just the way it is. (Actually, according to behavioral finance theory, that’s just the way you is!)

So here’s what we’re going to do. Against my better judgment, we’re going to give you some rope to play with. Once you pick your number, let’s say 60 percent in stocks, you can adjust your exposure up or down by 10 percent whenever you want. So you can go down to 50 percent invested in stocks and up to 70 percent, but that’s it.  You can’t sell everything when things go against you, and you can’t jump in with both feet and invest 100 percent when everything is rocking and rolling your way. It’s not allowed! (In any event, doing this would put you in serious violation of our plan!)

Small investors will have a huge advantage over professionals

And here’s the big secret: if you actually follow our plan, small investors will have a huge advantage over professionals—an advantage that has only been growing larger every year. Of course, you would think that with all the newly minted MBAs heading to Wall Street each year, the proliferation of giant hedge funds over the last few decades, the growth of professionally managed mutual funds and ETFs, the increasingly widespread availability of instant news and timely company information, and the mushrooming ability to crunch massive amounts of company and economic data at an affordable price, the competition to beat the market would actually be growing fiercer with each passing year.  And in some ways it is.  But in one important way, perhaps the most important, the competition is actually getting easier.

The truth is that it is really hard to be a professional stock market investor today.  

It’s just that it’s really hard to look at returns every day and every month, to receive analysis every month or every quarter, and still keep a long-term perspective.  Most individual and institutional investors can’t do it.  They can’t help analyzing the short-term information they do have, even if it’s relatively meaningless over the long term. On the bright side, as the market has become more institutionalized and performance information and statistics have become more ubiquitous, the advantages for those who can maintain a long-term perspective have only grown.

For those investing in individual stocks, the benefits to looking past the next quarter or the next year, to investing in companies that may take several years before they can show good results, to truly taking a long-term perspective when evaluating a stock investment remain as large, if not larger, than they have ever been.  

Remember from early in our journey, the value of a business comes from all the cash earnings we expect to collect from that business over its lifetime.  Earnings from the next few years are usually only a very small portion of this value. Yet most investment professionals, stuck in an environment where short-term performance is a real concern, often feel forced to focus on short-term business and economic issues rather than on long-term value. This is great news and a growing advantage for individual and professional investors who can truly maintain a long-term investment perspective.

This focus on the short term by professionals is also a huge advantage for individual investors 

Luckily, since it’s particularly hard for most nonprofessionals to calculate values for individual stocks, this focus on the short term by professionals is also a huge advantage for individual investors who follow an intelligently and logically designed strategy.  Because value strategies often don’t work over shorter time frames, institutional pressures and individual instincts will continue to make it difficult for most investors to stick with them over the long term. For these investors, several years is simply too long to wait.

Hanging in there will be tough for us, too. But as individual investors, we have some major advantages over the large institutions. We don’t have to answer to clients. We don’t have to provide daily or monthly returns. We don’t have to worry about staying in business. We just have to set up rules ahead of time that help us stay with our plan over the long term. We have to choose an allocation to stocks that is appropriate for our individual circumstances and then stick with it. When we feel like panicking after a large market drop or ditching our value strategy after a period of underperformance, we can—but only within our preset limits. When things are going great and we want to buy more, no problem, we can—we just can’t buy too much.

So there it is. We have a strategy that beats the market. We have a plan that will help us hang in there. 

And, as individual investors, we have some major advantages over the investment professionals. All we need now is a little more encouragement. Perhaps a final visit with Benjamin Graham will help push us on our way.

In an interview shortly before he passed away, Graham provided us with these words of wisdom:

The main point is to have the right general principles and the character to stick to them.… The thing that I have been emphasizing in my own work for the last few years has been the group approach. To try to buy groups of stocks that meet some simple criterion for being undervalued—regardless of the industry and with very little attention to the individual company.… Imagine—there seems to be practically a foolproof way of getting good results out of common stock investment with a minimum of work. It seems too good to be true. But all I can tell you after 60 years of experience, it seems to stand up under any of the tests that I would make up.

After so many years, we still have an opportunity to benefit from Graham’s sage advice today.

We now have a great plan for how to invest in the stock market.

Finally, for the portion of our money that we choose to invest in the stock market, we should have a better idea 

1. of how company valuation is supposed to work, 
2. of how Wall Street professionals should work (but don't), and 
3. of how we can outperform the major market averages and most other investors.

How are we going to figure out value? How can anyone? Do we have the answer yet?

Valuing a company you are investing into.

For simplicity, we will assume that the business in question will earn $10,000 each year for the next thirty-plus years.

Intuitively, we know that collecting $10,000 each year for the next thirty years is not the same as receiving all $300,000 today.  

Present value 

=  Annual Cash Flow / Discount rate

= $10,000 / 0.06 

= $166,667

(In reality, we should look for how much cash we receive from the business over its lifetime.  For the purposes in this post, we will assume that earnings are a good approximation for cash received.)

So, earning $10,000 a year for the next thirty-plus years turns out to be worth about $166,667 today.   

In practice, predicting so far into the future is pretty hard to do.  

You will probably pay less for those estimated earnings than if they were guaranteed.

How much less?  

That's not exactly clear, but we would certainly discount that hoped-for $10,000 by more than the 6% we used when the $10,000 was guaranteed - maybe we'd use a discount of 8% or 10% or 12%, or even more. (the amount of our discount would reflect in part how confident we were in our earnings estimate).  

Value of the Company

At 6% discount rate

$10,000 /0.06 = $166,667

At 8% discount rate

$10,000 / 0.08 = $125,000

At 12% discount rate

$10,000 / 0.12 = $ 83,333

As it turns out, using a 12% discount rate, the value of the company is only $83,000.  

What is crystal clear, however, is that using different discount rates for our estimated earnings can lead to wildly different results when we try to value a business.

Figuring out the right discount rate isn't our only problem, we also have to estimate earnings. 

Many businesses grow their earnings over time, while others due to competition, a bad product, or a poor business plan, see their earnings shrink or even disappear over the years.  

Let us see how funny the math gets when we try to value a business using not only different estimates for discount rates but we throw on top of that some different guesses for future earnings growth rates!

Value of the Business

At 4% growth rate, 8% discount rate

$10,000 / (0.08 - 0.04) = $250,000

At 4% growth rate, 12% discount rate

$10,000 / (0.12 - 0.04) = $125,000

At 6% growth rate, 8% discount rate

$10,000 / (0.08 - 0.06) = $500,000.

Annual Cash Flow / (Discount Rate - Growth Rate) = Present Value

According to finance theory and logic, the value of a business should equal the sum of all of the earnings that we expect to collect from that business over its lifetime (discounted back to a value in today's dollars based upon how long it will take us to collect those earnings and how risky we believe our estimates of future earnings to be).  

Will earnings grow at 2%, 4%, 6% or not at all?  Is the right discount rate 8%, 105, 12%, or some other number?   

The math says that small changes in estimated growth rates or discount rates or both can end up making huge differences in what value we come up with!

At 2% growth rate, 12% discount rate

$10,000 / (0.12 - 0.02) = $100,000

At 5% growth rate, 8% discount rate

$10,000 / (0.08 - 0.05) = $333,333

Annual Cash Flow / (Discount Rate - Growth Rate) = Present Value

Which numbers are right?

It is incredibly hard to know.  Whose estimates of earnings over the next thirty-plus years should we trust?  What discount rate is the right one to use?

The secret to successful investing is to figure out the value of something and then - pay a lot less.  

How are we going to figure out value?  How can anyone?  Do we have the answer yet?  Hopefully, we have learned some very valuable lessons even if we cannot answer them yet.

Behavioural Finance: We are hardwired to be lousy investors.

1.  We are hardwired from birth to be lousy investors.

Our survival instincts make us fear loss much more than we enjoy gain.  We run from danger first and ask questions later.  We panic out of our investments when things look bleakest - we are just trying to survive!  We have a herd mentality that makes us feel more comfortable staying with the pack.  So buying high when everyone else is buying and selling low when everyone else is selling comes quite naturally - it just makes us feel better!

We use our primitive instincts to make quick decisions based on limited data and we weight most heavily what has just happened.  We run from managers who performed poorly most recently and into the arms of last year's winners - that just seems like the right thing to do!  We all think we are above average!  We consistently overestimate our ability to pick good stocks or to find above-average managers.  It is also this outsized ego that likely gives us the confidence to keep trading too much.  We keep making the same investing mistakes over and over - we just figure this time we will get it right!

We are busy surviving, herding, fixating on what just happened and being overconfident!  Maybe it helps explain why Mr. Market acts crazy at times.

2.  So, how do we deal with all these primitive emotions and lousy investing instincts?  

The answer is really quite simple:  we don't!

Let's admit that we will probably keep making the same investing mistakes no matter how many books on behavioural investing we read.

3.  How to invest in the stock market?

Traditionally, stocks have provided high returns and have been a mainstay of most investors’ portfolios. Since a share of stock merely represents an ownership interest in an actual business, owning a portfolio of stocks just means we’re entitled to a share in the future income of all those businesses. If we can buy good businesses that grow over time and we can buy them at bargain prices, this should continue to be a good way to invest a portion of our savings over the long term. Following a similar strategy with international stocks (companies based outside of the United States) for some of our savings would also seem to make sense (in this way, we could own businesses whose profits might not be as dependent on the U.S. economy or the U.S. currency)

4.  These words of wisdom from Benjamin Graham

In an interview shortly before he passed away, Graham provided us with these words of wisdom:

The main point is to have the right general principles and the character to stick to them.… The thing that I have been emphasizing in my own work for the last few years has been the group approach.  To try to buy groups of stocks that meet some simple criterion for being undervalued—regardless of the industry and with very little attention to the individual company.… Imagine—there seems to be practically a foolproof way of getting good results out of common stock investment with a minimum of work. It seems too good to be true. But all I can tell you after 60 years of experience, it seems to stand up under any of the tests that I would make up.

That interview took place thirty-five years ago. Yet we still have an opportunity to benefit from Graham’s sage advice today.

I wish you all—the patience to succeed and the time to enjoy it. Good luck.

Book:  Joel Greenblatt:  The Big Secret for the Small Investor (2001)

The secret to successful investing is to figure out the value of something and then pay a lot less!

Valuing a company you are investing into.

For simplicity, we will assume that the business in question will earn $10,000 each year for the next thirty-plus years.

Intuitively, we know that collecting $10,000 each year for the next thirty years is not the same as receiving all $300,000 today.  

Let us analyse and see what thirty-plus years of earning $10,000 per year are really worth to us today, using a discount rate of 6%.

Present value 

=  Annual Cash Flow / Discount rate

= $10,000 / 0.06 

= $166,667

(In reality, we should look for how much cash we receive from the business over its lifetime.  For the purposes in this post, we will assume that earnings are a good approximation for cash received.)

So, earning $10,000 a year for the next thirty-plus years turns out to be worth about $166,667 today.   

We have just figured out something incredibly important.  

A business guaranteed to earn us $10,000 each year for the next thirty-plus years or so, is worth the same as having $166,667 cash in our pocket today!

If we could be guaranteed that all of our assumptions were correct and someone offered to sell us the company for $80,000, should we do it?  If someone offered to give us $166,667 right now in exchange for $80,000, should we do it?  

Given all of our assumptions, the answer is easy:  of course we should do it!  

This is an incredibly important concept.  

If we can really figure out the value of a business, investing becomes very simple!  

The secret to successful investing is to figure out the value of something and then - pay a lot less!  

In fact, it couldn't be simpler:  $166,667 is a lot more than $80,000.

In practice, predicting so far into the future is pretty hard to do.

Are you really going to trust my predictions about what earnings will be over the next thirty years?

But will earnings actually shrink over those years?

Will they grow?

Will the company even be around in another thirty years?

In practice, predicting so far into the future is pretty hard to do.  In addition, many businesses are actually more complicated.

In fact, forget thirty years - it turns out that Wall Street analysts are actually pretty bad at predicting earnings for even the next quarter or the next year.  

You will probably pay less for those estimated earnings than if they were guaranteed.

Since no one rally knows for sure what earnings will be over the next thirty-plus years, whatever we use for estimated earnings during that time is just going to be a guess.   Even if this guess is made by a very smart, informed "expert", it will still be a guess.  

In practice, investors discount the price they will pay for future earnings that are based only on estimates.  

If there is no guarantee that you will actually collect that $10,000 after the first year of owning the business, you will probably pay less for those earnings than if they were guaranteed.  

In the above example, where next year's earnings of $10,000 were guaranteed, we discounted that payment by 6%, reflecting the fact that we had to wait a year to collect our $10,000.  Now, with only an estimated $10,000 coming in at the end of the first year, we will pay less.

How much less?  

That's not exactly clear, but we would certainly discount that hoped-for $10,000 by more than the 6% we used when the $10,000 was guaranteed - maybe we'd use a discount of 8% or 10% or 12%, or even more. (the amount of our discount would reflect in part how confident we were in our earnings estimate).  

But when we apply that higher discount to the next thirty-plus years of earnings estimates, that's when things really start to get silly (yes, it's true, math can be hilarious).

Value of the Company

At 6% discount rate

$10,000 /0.06 = $166,667

At 8% discount rate

$10,000 / 0.08 = $125,000

At 12% discount rate

$10,000 / 0.12 = $ 83,333

As it turns out, using a 12% discount rate, the value of the company is only $83,000.  We are starting to get in trouble!  It is no longer so obvious that a purchase price of $80,000 is such a bargain!

Figuring out the right discount rate isn't our only problem, we also have to estimate earnings. 

What is crystal clear, however, is that using different discount rates for our estimated earnings can lead to wildly different results when we try to value a business.   But figuring out the right discount rate isn't our only problem.  For simplicity, we have made some other assumptions that don't really hold up in the real world.  

For instance, as you might intuitively guess, most companies don't earn the same amount each year for thirty straight years.  Also, many businesses grow their earnings over time, while others due to competition, a bad product, or a poor business plan, see their earnings shrink or even disappear over the years.  

Let us see how funny the math gets when we try to value a business using not only different estimates for discount rates but we throw on top of that some different guesses for future earnings growth rates!

Value of the Business

At 4% growth rate, 8% discount rate

$10,000 / (0.08 - 0.04) = $250,000

At 4% growth rate, 12% discount rate

$10,000 / (0.12 - 0.04) = $125,000

At 6% growth rate, 8% discount rate

$10,000 / (0.08 - 0.06) = $500,000.

Annual Cash Flow / (Discount Rate - Growth Rate) = Present Value

According to finance theory and logic, the value of a business should equal the sum of all of the earnings that we expect to collect from that business over its lifetime (discounted back to a value in today's dollars based upon how long it will take us to collect those earnings and how risky we believe our estimates of future earnings to be).  

Will earnings grow at 2%, 4%, 6% or not at all?  Is the right discount rate 8%, 105, 12%, or some other number?   

The math says that small changes in estimated growth rates or discount rates or both can end up making huge differences in what value we come up with!

At 2% growth rate, 12% discount rate

$10,000 / (0.12 - 0.02) = $100,000

At 5% growth rate, 8% discount rate

$10,000 / (0.08 - 0.05) = $333,333

Annual Cash Flow / (Discount Rate - Growth Rate) = Present Value

Which numbers are right?

It is incredibly hard to know.  Whose estimates of earnings over the next thirty-plus years should we trust?  What discount rate is the right one to use?

The secret to successful investing is to figure out the value of something and then - pay a lot less.  

How are we going to figure out value?  How can anyone?  Do we have the answer yet?  Hopefully, we have learned some very valuable lessons even if we cannot answer them yet.

Summary:

1.  The secret to successful investing is to figure out the value of something and then pay a lot less!

2.  The value of a business is equal to the sum of all of the earnings we expect to collect from that business over its lifetime (discounted back to a value in today's dollars).  Earnings over the next twenty or thirty years are where most of this value comes from.  Earnings from next quarter or next year represent only a tiny portion of this value.

3.  The calculation of value in #2 above is based on guesses.  Small changes in our guesses about future earnings over the next thirty-plus years will result in wildly different estimates of value for our business.  Small changes in our guesses about the proper rate to discount those earnings back into today's dollars will also result in wildly different estimates of value for our business.  Small changes in both will drive us crazy.

4.  If our estimate of value can change dramatically with even small changes in our guesses about the proper earnings growth rate to use or the proper discount rate, how meaningful can the estimates of value made by "experts" really be?

5.  The answer to #4 above is - "not very."

Additional notes:

These concepts involve a discussion of the time value of money and discounted cash flow.  

In reality, we should look for how much cash we receive from the business over its lifetime.  For the above purposes, we will assume that earnings are a good approximation for cash received.

The Big Secret for the Small Investor

This is the third book by Joel Greenblatt.  It is well worth reading.  He shares many good investing points in a short and easy to read book.  It was published in 2011, 1st edition.

What have I gathered from this book.

It is important to know how to value an asset.  Equally, it is important to pay much less than its fair value to own it.  Those are the fundamentals of investing safely.

He spent many good paragraphs on how valuation is indeed difficult, both for the professionals and the novice.  After spending a great deal explaining the many ways to value stocks (discount cash flow value, acquisition value, liquidation value and relative value), he concludes that these are difficult and not easy.  He gives many good reasons of how small changes in your judgements of various factors can lead to big changes in the valuation.  Also, one is often faced with a lot of uncertainties in many of your assumptions.  

I particularly like his section on earnings yield.   Buy using the earnings yield.  A company with a higher earnings yield is a better one than the other, assuming all else being equal.  He asks his readers to compare this with the risk free investment return, using the bond rate of the 10 years treasury bond.  Stick to a minimum of 6%, even if the present rate is much lower.  If the 10 years treasury bond rate is higher than 6%, for example, 8%, you should use the higher rate in your comparison.  He advises investors to aim for returns higher than the 6% in their investments.  Search for a company, a good company with a good business, that is available at a bargain and from your analysis can give a return of greater than 6%.  Find a second company using similar criteria.  Now you have 2 companies which you think are better than the treasury bond.   Compare the two companies to each other and invest into the better one.  This method is simple and practical; and it rhymes with the earnings yield method of Buffett where he treats his stocks as bond equity equivalents.

Another chapter on how much money to invest was particularly useful too.   How much money do you wish to have in stocks?   If you have 100% of your assets in stocks, will you be able to "stomach' a 40% decline in your portfolio value?  Perhaps, you should only have 50% of your assets in stocks and the rest in other different assets.  Then a 50% decline in your stock portfolio value will only caused a 20% decline in your overall total asset value, assuming your other assets were not similarly affected.  Maybe you can "stomach" this 20% decline without selling out of the stock market in panic.  The author advise each investor to decide on the percentage of their total asset to be in stocks, perhaps 40% to 80%.   For example, an investor may have 60% of his total asset in stock; at certain times he may increase this to 70% and at other times reduce this to 50%.  He caution that this adjustment should infrequent, preferably occur not more than once a year.  Also, no one should be completely out of the stock market at any time, as in the long run, stocks offer the best returns of all investable assets. 

Joel Greenblatt shares a good chapter on Behavioural Finance, another very important topic indeed.  All investors are wired poorly for investing, he mentioned.  They tend to panic and they tend to follow the herd for comfort.  Reading this chapter will certainly benefit many readers in their investing.

There are also many sections on investing in mutual funds, ETF, index funds and others.  Also, he has described well the different types of indexes which are market weighted, equal weighted and value weighted, giving their advantages and disadvantages.  Those who invest in funds will find this segment useful.

There are many valuable lessons I have learned from this book and hope you will find it likewise.  It is a small readable book.  It can be completed a few hours for a fast reader with some basic understanding of investing.

Not inappropriately, Joel Greenblatt is sometimes referred to as our modern day Benjamin Graham, the Benjamin Graham of the 21st Century.

Please read a good summary of this book here:

https://frankploegman.blog/2011/10/30/the-big-secret/

To STOP the transmission of Covid-19: Test, test, test, trace, trace, trace, vaccinate, vaccinate and vaccinate.

Very important to know what to do

If you are symptomatic or have been identified to be a close contact to a positive case, please undergo immediate medical screening and testing.

While waiting for the test results, please self-quarantine at home responsibly.

Notify the health ministry through self-notification in the MySejahtera application and the nearby District Health Office or CAC, if you are found to be positive either through the RT-PCR or RTK Antigen test.

Immediately report any "warning signs" and seek treatment at a nearby health facility.  Warning signs are symptoms that signal that a Covid-19 patient's condition is getting worse.

Contact your regular doctor too (hopefully you have a regular doctor ) to let him/her know of your condition so that he/she may advise you accordingly also, over this period of your illness.

Vaccinate as soon as this is available.

-----------

Malaysia sees exponential rise in brought-in-dead Covid-19 cases

By Tharanya Arumugam - July 2, 2021 @ 8:31pm

Health director-general Tan Sri Dr Noor Hisham Abdullah advised people to be more vigilant in monitoring their health, especially when they have tested Covid-19 positive and are undergoing home quarantine or self-isolation. - NSTP/SYAFEEQ AHMAD

KUALA LUMPUR: Malaysia is seeing an exponential rise in brought-in-dead (BID) cases due to Covid-19 complications, particularly in the Klang Valley region involving those aged 50 and above.

Health director-general Tan Sri Dr Noor Hisham Abdullah advised people to be more vigilant in monitoring their health, especially when they have tested Covid-19 positive and are undergoing home quarantine or self-isolation.

He said an analysis by the National Crisis Preparedness and Response Centre (CPRC) found that there has been a sevenfold increase in BID cases from April (35 cases) to June 2021 (246 cases).

"As of July 2, the ministry recorded a total of 5,327 deaths (0.7 per cent) since the Covid-19 pandemic hit our country.

"A total of 4,856 (91.2 per cent) deaths were reported in 2021. Of the total deaths in 2021, 670 (13.8 per cent) deaths were reported before arrival at the hospital (BID)," he said in a statement today.

He said most BID cases involved victims aged 50 to 70 years (76.7 per cent) with at least a comorbidity (64.5 per cent).

"The highest number of BID cases concerned those aged between 60 and 69 (170), followed by the 50 to 59 age group (130), 70 to 79 (106), 80+ (107), 40 to 49 (85), 30 to 39 (46), 20 to 29 (20) and aged below 20 (six cases)."

Selangor, he said clocked the highest number of BID cases this year at 181 (27 per cent), followed by Kuala Lumpur (78 cases or 11.6 per cent) and Sabah (85 cases or 12.7 per cent).

Other states with BID cases this year were Sarawak (45), Labuan (31), Johor (23), Kelantan (18), Melaka (14), Negri Sembilan (14), Penang (13), Pahang (12), Perak (11), and Kedah (four).

Perlis and Putrajaya registered no BID cases from Jan to July 2, this year.

Dr Noor Hisham advised the public to undergo immediate medical screening and testing if they were symptomatic or have been identified to be a close contact to a positive case.

He also reminded people who were waiting for their test results and calls from the District Health Office (PKD) and Covid-19 Assessment Center (CAC) to self-quarantine at home responsibly.

"Notify the health ministry through self-notification in the MySejahtera application and the nearby District Health Office or CAC if they are found to be positive either through the RT-PCR or RTK Antigen test.

"Immediately report any 'warning signs' and seek treatment at a nearby health facility. Warning signs are symptoms that signal that a Covid-19 patient's condition is getting worse."

Among the warning signs that require immediate treatment, he said, are prolonged fever; breathing difficulties; chest pain; lack of appetite to eat or drink; worsening fatigue; lack of consciousness and confusion; coughing, vomiting and worsening diarrhoea; less urination; lips or fingers becoming bluish; and oxygen saturation

"Family members or housemates are advised to be concerned and sensitive to the condition and health of Covid-19 patients by utilising communication technology to monitor the health of patients throughout the home quarantine monitoring period."

Dr Noor Hisham further said the ministry is also working to improve the monitoring process by CACs nationwide to enable a comprehensive initial assessment to be done immediately on positive cases.

These cases, he said will then be determined whether they can undergo isolation and self-monitoring at home, need to be admitted to the Covid-19 Low-Risk Treatment Center (PRKC) or referred to a hospital.

"With the strengthening of the CAC, better case monitoring can be carried out and immediate referrals can be made if necessary."

Additionally, he said the ministry is working with various parties to increase the capacity of daily SARS-CoV-2 virus detection tests which consist of RT-PCR and RTK-Ag tests.

To increase the capacity of RT-PCR testing, the ministry, he said is collaborating with laboratories from various ministries - Higher Education; Science, Technology and Innovation; Defense - and private laboratories.

RTK-Ag testing is conducted by private clinics and hospitals either individually or by mass screening, he said.

"Cooperation between these agencies and sectors has enabled case detection activities and other public health actions to be implemented promptly."

Dr Noor Hisham added that the ministry would implement a smart device initiative at several CACs including by issuing pulse oxymeters to monitor the current condition of Covid-19 patients while at home.

"As announced by the health ministry, this initiative aims to strengthen the management of Covid-19 patients. With this initiative, the health of patients tested positive, especially those who are undergoing isolation at home, can be better monitored so that any deterioration of symptoms can be detected more quickly."

Source:

Malaysia sees exponential rise in brought-in-dead Covid-19 cases

https://www.nst.com.my/news/nation/2021/07/704592/malaysia-sees-exponential-rise-brought-dead-covid-19-cases

Malaysia's richest tycoons and the billions in dividends they earned in the final quarter of 2020

 Bees for the honey

Cows for the milk

And, stocks for the dividends!

KUALA LUMPUR (March 18): Eight of Malaysia's top 10 richest tycoons — based on Forbes' 2020 billionaires list — earned a whopping RM1.99 billion worth of dividends from the recently announced financial results for the quarter ended Dec 31, 2020, based on their known shareholdings in Bursa Malaysia-listed firms.

Among them, Public Bank Bhd founder Tan Sri Dr Teh Hong Piow is expected to receive the biggest dividend payout totalling RM668.18 million from his shareholdings in the bank and insurer LPI Capital Bhd.

Public Bank, the third largest banking group in the country by asset size, declared an interim dividend of 13 sen (payable on March 22) for its fourth quarter of financial year 2020 (4QFY20) ended Dec 31, 2020. Public Bank also undertook a four-for-one bonus share issue to reward shareholders last year, which enlarged the number of Public Bank's outstanding shares to 4.2 billion.

Teh holds a 22.78% stake in Public Bank through his private investment vehicle — Consolidated Teh Holdings Sdn Bhd. He has another direct stake of 0.64%.

LPI Capital, meanwhile, announced a second interim dividend of 44 sen per share for its 4QFY20, which amounted to a payout of RM175.3 million. Based on Teh's 44.15% stake in the company, his share of the dividend payout will be about RM77.39 million.

After Teh is Hong Leong Group's Tan Sri Quek Leng Chan, who is estimated to get RM296.05 million worth of dividends through his holdings in Hong Leong Financial Group Bhd (HLFG) and Hong Leong Bank Bhd (HLB).

HLFG declared an interim dividend of 10.8 sen per share while HLB announced an interim single-tier dividend of 14.78 sen per share. Quek holds a direct interest of 0.47% and an indirect interest of 77.88% in HLFG, while he controls an indirect interest of 64.51% in HLB.

Next is telecommunications tycoon T Ananda Krishnan, who will receive RM276.04 million from his stake in Maxis Bhd and Astro Malaysia Holdings Bhd. Ananda is the largest shareholder in Maxis with an indirectly held 62.34% stake. In Astro, he holds an indirect stake of 41.29%.

Maxis declared a fourth interim dividend of five sen per share in its 4QFY20 ended Dec 31, 2020, while Astro announced a payout of 1.5 sen per share in its 3QFY20 ended Oct 31, 2020.

Ananda also holds a 34.86% stake in Bumi Armada Bhd, Asia's biggest offshore supporting vessel operator. The company, however, did not declare any dividends in 2020.

Robert Kuok's dividend cheque from PPB Group Bhd for the final quarter of last year is estimated to be RM274.65 million — the fourth highest sum among the ultra-rich.

PPB Group announced a dividend of 38 sen, comprising a final dividend of 22 sen and a special payout of 16 sen, in its 4QFY20 ended Dec 31, 2020. Kuok holds a 50.81% stake in the diversified conglomerate through his private investment vehicle, Kuok Brothers Sdn Bhd. He also holds a stake in Shangri-La Hotels (Malaysia) Bhd, though the latter did not declare any dividends for its FY20.

The fifth largest dividend gainer among the top 10 Malaysian billionaires is the founder and chairman of Hartalega Holdings Bhd, Kuan Kam Hon, who received RM162.47 million from the rubber glove maker, which recently announced a record high net profit of RM1 billion, and a second interim dividend of 9.65 sen for its 3QFY21 ended Dec 31, 2020, which was paid in February.

Based on the latest bourse filings, Kuan holds a direct interest of 0.795% in the group and a 48.32% indirect interest via Hartalega Industries Sdn Bhd. The glove manufacturer recently announced a record high net profit of RM1 billion for its 3QFY21 ended Dec 31, 2020 and declared a second interim dividend of 9.65 sen.

Next comes gaming tycoon Tan Sri Lim Kok Thay, who likely earned RM148.73 million in dividends from his shareholdings in the Genting group of companies listed on Bursa, despite the group facing challenges in operating its casino and resorts amid the pandemic.

This is based on the RM146.54 million Genting Bhd paid to Kok Thay's private investment company, Kien Huat Realty Sdn Bhd, and the dividends declared by Genting Plantations Bhd and Genting Malaysia Bhd.

Genting Malaysia declared a dividend payout of 8.5 sen per share for its 4QFY20 ended Dec 31, 2020, while Genting Plantations announced a 15 sen dividend — comprising a final dividend of four sen per share and a special dividend of 11 sen per share.

Kok Thay holds a direct interest of 0.44% in Genting Malaysia and a direct interest of 0.05% in Genting Plantations.

After Kok Thay is Datuk Lee Yeow Chor, who earned RM141.28 million in dividends from his holding in IOI Corp Bhd. Lee holds a direct interest of 0.16% and an indirect interest of 49.94% in the group.

Meanwhile, Press Metal Aluminium Holdings Bhd's Tan Sri Koon Poh Keong garnered RM20.22 million through his holdings in Press Metal and PMB Technology Bhd. Press Metal declared a fourth interim single-tier dividend of 1.25 sen per share in its 4QFY20 ended Dec 31, 2020 while PMB Technology declared a one sen dividend to its shareholders.

Two of the top 10 tycoons, however, did not appear to have gained any dividend payments from their shareholdings in Bursa-listed companies. They are gaming tycoon Tan Sri Chen Lip Keong and Tan Sri Lau Cho Kun, the largest shareholder in Hap Seng Consolidated Bhd.

What the glove maker billionaires take home

Though not on the list of Malaysia's top 10 richest tycoons based on Forbes 2020 list — which was published in March 2020 — Top Glove Corp Bhd's founder and executive chairman Tan Sri Dr Lim Wee Chai earned about RM460.45 million in dividend in end-2020, thanks to the interim dividend of 16.5 sen that the world's largest rubber glove maker declared in its 1QFY21 ended Nov 30, 2020.

The group also announced an interim dividend payment of 25.2 sen per share for its 2QFY21 ended Feb 28, 2021, payable on April 6 this year. Based on the announcement, Wee Chai stands to gain another dividend payout of RM710.12 million before mid-2021.

That means just for the first two quarters of Top Glove's FY21, Wee Chai has accumulated a total of RM1.17 billion in dividends, based on his total shareholdings of 35.22% in Top Glove, comprising a direct stake of 26.56% and an indirectly held stake of 8.65%.

Datuk Seri Stanley Thai of Supermax Corp Bhd, on the other hand, accumulated dividends of RM38.17 million, while Tan Sri Lim Kuang Sia of Kossan Rubber Industries Bhd earned RM132.99 million.

Including Kwan, the billionaires from the big four glove makers on Bursa earned RM794.07 million worth of dividends in end-2020, as their companies' earnings continued to scale new highs following the surge in glove demand amid the Covid-19 outbreak.

 

https://www.theedgemarkets.com/article/malaysias-richest-tycoons-and-billions-dividends-they-earned-final-quarter-2020