Investments that involve risk are superior only if the return more than fully compensates for the risk

Rather than targeting a desired rate of return, even an eminently reasonable one, investors should target risk. Treasury bills are the closest thing to a riskless investment; hence the interest rate on Treasury bills is considered the risk-free rate.  Since investors always have the option of holding all of their money in T-bills, investments that involve risk should only be made if they hold the promise of considerably higher returns than those available without risk. This does not express an investment preference for T-bills; to the contrary, you would rather be fully invested in superior alternatives. But alternatives with some risk attached are superior only if the return more than fully compensates for the risk.

Most investment approaches do not focus on loss avoidance or on an assessment of the real risks of an investment compared with its return. Only one that I know does: value' investing.

Risk avoidance is the single most important element of an investment program

Another common belief is that risk avoidance is incompatible with investment success. This view holds that high return is attainable only by incurring high risk and that long-term investment success is attainable only by seeking out and bearing, rather than avoiding, risk. Why do I believe, conversely, that risk avoidance is the single most important element of an investment program? 

If you had $1,000, would you be willing to wager it, double or nothing, on a fair coin toss? Probably not.  Would you risk your entire net worth on such a gamble? Of course not. Would you risk the loss of, say, 30 percent of your net worth for an equivalent gain? Not many people would because the loss of a substantial amount of money could impair their standard of living while a comparable gain might not improve it commensurately. If you are one of the vast majority of investors who are risk averse, then loss avoidance must be the cornerstone of your investment philosophy.

Greedy, short-term-oriented investors may lose sight of a sound mathematical reason for avoiding loss: the effects of compounding even moderate returns over many years are compelling, if not downright mind boggling.

Perseverance at even relatively modest rates of return is of the utmost importance in compounding
your net worth. A corollary to the importance of compounding is that it is very difficult to recover from even one large loss, which could literally destroy all at once the beneficial effects of many years of investment success. In other words, an investor is more likely to do well by achieving consistently good returns with limited downside risk than by achieving volatile and sometimes even spectacular gains but with considerable risk of principal An investor who earns 16 percent annual returns over a decade, for example, will, perhaps surprisingly, end up with more money than an investor who earns 20 percent a year for nine years and then loses 15 percent the tenth year.

Lessons from the junk bonds debacles of the 1980s and their collapse in 1990

Contrary to the promises of underwriters, junk bonds were a poor investment. They offered too little return for their substantial risk. To meet contractual interest and principal obligations, the number of things that needed to go right for issuers was high while the margin for error was low. Although the potential return was several hundred basis points annually in excess of U.S. Treasury securities, the risk involved the possible loss of one's entire investment.

Motivated by self-interest and greed, respectively, underwriters and buyers of junk bonds rationalized their actions. They accepted claims of a low default rate, and they used cash flow, as measured by EBITDA, as the principal determinant of underlying value. They even argued that a well-diversified portfolio of junk bonds was safe.

As this market collapsed in 1990, junk bonds were transformed into the financial equivalent of roach motels; investors could get in, but they couldn't get out. Bullish assumptions were replaced by bearish ones. Investor focus shifted from what might go right to what could go wrong, and prices plummeted.

Why should the history of the junk-bond market in the 1980s interest investors today? If you personally avoided investing in newly issued junk bonds, what difference should it make to you if other investors lost money? The answer is that junk bonds had a pernicious effect on other sectors of the financial markets and on the behavior of most financial-market participants. The overpricing of junk bonds allowed many takeovers to take place at inflated valuations. The excess profits enjoyed by the shareholders of the acquired companies were about equal to the losses eventually experienced by the buyers of this junk. Cash received by equity investors from junk-bond-financed acquisitions returned to the stock market, bidding up the prices of shares in still independent companies. The market prices of securities involved in arbitrage transactions, exchange offers, and corporate reorganizations were all influenced by the excessive valuations made possible by the junk-bond market. As a result, even those who avoided owning junk bonds found it difficult to escape their influence completely.  We may confidently expect that there will be new investment fads in the future. They too will expand beyond the rational limitations of the innovation. As surely as this will happen, it is equally certain that no bells will toll to announce the excess. Investors who study the junk-bond debacle may be able to identify these new fads for what they are and avoid them. And as we shall see in the chapters that follow, avoiding losses is the most important prerequisite to investment success.

Ref: Margin of Safety by Seth Klarman

Collateralized Bond Obligations - a pile of junk is still junk no matter how you stack it.

Collateralized Junk-Bond Obligations

One of the last junk-bond-market innovations was the collateralized bond obligation (CBO). CBOs are diversified investment pools of junk bonds that issue their own securities with the underlying junk bonds as collateral. Several tranches of securities with different seniorities are usually created, each with risk and return characteristics that differ from those of the underlying junk bonds themselves.

What attracted underwriters as well as investors to junkbond CBOs was that the rating agencies, in a very accommodating decision, gave the senior tranche, usually about 75 percent of the total issue, an investment-grade rating. This means that an issuer could assemble a portfolio of junk bonds yielding 14 percent and sell to investors a senior tranche of securities backed by those bonds at a yield of, say, 10 percent, with proceeds equal to perhaps 75 percent of the cost of the portfolio. The issuer could then sell riskier junior tranches by offering much higher yields to investors.

The existence of CBOs was predicated on the receipt of this investment-grade credit rating on the senior tranche. Greedy institutional buyers of the senior tranche earned a handful of basis points above the yield available on other investment grade securities. As usual these yield pigs sacrificed credit quality for additional current return. The rating agencies performed studies showing that the investment-grade rating was warranted.  Predictably these studies used a historical default-rate analysis and neglected to consider the implications of either a prolonged economic downturn or a credit crunch that might virtually eliminate refinancings. Under such circumstances, a great many junk bonds would default; even the senior tranche of a CBO could experience significant capital losses. In other words, a pile of junk is still junk no matter how you stack it.

Window Dressing

Window dressing is the practice of making a portfolio look good for quarterly reporting purposes.

Some managers will deliberately buy shares of the current quarter's best market performers and sell shares of significant under-performers in order to dress up the portfolio's appearance in the quarterly report to clients.  They also may sell positions with significant unrealized losses so that clients will not be reminded of major mistakes month after month.

Such behavior is clearly uneconomic as well as intellectually insulting to clients; it also exacerbates price movements in either direction.  Even so, as depressed issues drop further in price, attractive opportunities may be created for value investors.

Seth Klarman and Margin of Safety

Seth Klarman

Brief Biography

Seth Klarman is a leading value investor. Mr. Klarman is the President of The Baupost Group, a Boston-based private investment partnership which manages over $7bn in assets on behalf of private families and institutions. Founded in 1983, the firm has achieved investment returns of 20% compounded annually. The firm invests in equities, distressed debt, private equity and real estate. Mr. Klarman is notable for his willingness to hold significant amounts of cash in his investment portfolios, sometimes in excess of 50% of the total. In 1991, Mr, Klarman authored Margin of Safety, Risk Averse Investing Strategies for the Thoughtful Investor, which since has become a value investing classic. Now out of print, Margin of Safety has sold on Amazon for $1,200 and eBay for $2,000. Before founding Baupost, Mr. Klarman previously worked for Max Heine and Michael Price of Mutual Shares. Mr. Klarman is a graduate of Cornell University and Harvard Business School.

http://valuestockplus.wordpress.com/seth-klarman/

Click here for a pdf copy of this book.
http://www.my10000dollars.com/MS.pdf

Analysts: Poor Q1 catalyst for F&N re-rating

Thursday February 9, 2012

Analysts: Poor Q1 catalyst for F&N re-rating
By LIZ LEE
lizlee@thestar.com.my



PETALING JAYA: Fraser & Neave Holdings Bhd's (F&N) poor first quarter results could cause a re-rating of the blue chip company but analysts see its current position as a temporary recovery phase before it bounces back to solid earnings.

For the first quarter ended Dec 31, 2011, the company recorded a 61% drop in net profit to RM41.75mil from RM107.08mil in the last corresponding quarter, a situation CIMB Research sees as a re-rating catalyst.

The two main factors pulling F&N's earnings down included the disengagement from its Coca-Cola business and operating losses caused by the Thailand floods last year. Coca-Cola contributed 30% to F&N's earnings.

The results were below CIMB Research's expectation at 14% of it's full-year forecast. The research house said a 20% to 25% achievement would be considered “within expectation”.

An analyst with a bank-backed brokerage said that he would be negative on the counter for the next one to two quarters, and had given a “sell” call.

“Their Thai dairy plant will begin operation in phases in March and it would take two to three months to ramp up production. I expect the sales volume to be on the lower side until May or June,” he said.

“The company is making the effort to plug its financial leakages with new soft drinks but at the expense of its margin as it spent a lot on advertising and promotion,” he said. F&N made a 9% increase in soft drinks revenue during the first quarter.

He noted that while F&N might have ways to support its operations over the longer term through the mixed development of its land in Section 13, Petaling Jaya, the outlook was not rosy in the near term.

The land, where the old factory used to be, is slated for development in 2013.


http://biz.thestar.com.my/news/story.asp?file=/2012/2/9/business/10699680&sec=business

Introduction to StockTouch

http://stocktouchapp.com/

Apple Selects StockTouch as Top Finance iPad App for 2011

7 Important Stock Investing Advice from Warren Buffett!

Summarized Overview

In this article, you’ll find information on the stock investing ideas that Warren Buffet wants all stock investors to know, strategy he uses to maximize return, price of stocks that he willing to pay, key financial ratio that is so important to him, type of managers he loves, and kind of management he trusts.

7 Stock Investing Advices for Beginners

This stock market investing advice will help you on how to pick stocks Warren Buffet way.

Stock Investing Advices #1: Simple Business Model

You must understand the business itself or at least like and use it. Warren Buffett likes to patronize/use Nike, Coke and Gillette products and he is a believer of his investments. Have time to read and study the business model and the financial reports that takes only 2-3 hours per day. Invest as if you will buy the business.

Do you know why this is so important?

When come to investing, predicting what will happen tomorrow is something that you can’t live without. Forecasting what the future will be is the only way you can estimate how much return you’ll be getting later on. So, if you really understand the business inside out, you can project how the company performs 30 years down the road; take into consideration the national economy, competition from others and change in customers’ lifestyle.

Most companies here in Philippines have investor relation’s page in their websites where you can browse their financial reports.

Stock Investing Advices #2: Wide Economic Moat

In simple terms, it must dominate its market and can somehow dictate its product’s prices. Warren Buffet himself avoids regulated industries, commodity businesses as well as capital intensive industries. Look out Nike, it has its own market around the world and it can dictate its own product prices regardless of its competition because people buy Nike for its brand. Further, company should finance its capital from operating cash flow and not depending on borrowings. That is why, Warren Buffet love ‘franchise’, for example, Furniture Mart (the lowest cost in the industry), The Washington Post (market dominance and leader), Coke (strong brand name) and Candies (premium priced and high quality products that serve niche market).

How about Jollibee or Meralco here in our country?

Stock Investing Advices #3: Sustainable Growth

Serving the existing niche market is not enough. Instead, Warren Buffet wants the company to grow continuously and exponentially. Therefore, he looks for managements that have the ability to widen their economic moat consistently over the past years. Their businesses must be positioned where the demand able to grow continuously; Gillette is his best example. In the same time, always be ready for any possible trouble to the business, and most importantly back up your investment plan!

Have you heard of the recent plans of San Miguel Corporation and Metro Pacific Investment Corporation?

Stock Investing Advices #4: Excellent Capital Management

The Management should utilize the available resources for the highest return to the company and to its shareholders. Shareholders should be benefited for their investments thru dividends. Management carries the trust of the shareholders, thus, they should act and think as owners too. Moreover, it is better if the management holds a huge number of stocks too, since they will act as true owners and will not think short term but instead, will make sure that the company earns in the next 20 years or more!

Stock Investing Advices #5: Effective Management Team

Invest in company that has honest and capable managers. They should be so capable that Warren Buffet himself admires the way the managers do things. In Berkshire Hathaway Annual Meeting year 2000, he once said, “we want managers who tell the truth and tell themselves the truth, which is more important”. He loves cost conscious and frugal type of managers who are honest and integrity as well.

Stock Investing Advices #6: Superior ROE

The general rule that it is above 15! Why ROE, and not the other financial ratios? Well,return on equity indicates how effective the management team converts the reinvested money into cash. The higher the return, the more profitably the company can reinvest its earnings. The faster the company able to turn the reinvested earnings into profits, the faster its value increases from one year to another. And mind you, it is a big challenge to the management to consistently create value for every penny they spend. To prove this, not many stocks that has 15 per cent ROE consistently for the past 20 or 30 years, worldwide.

Stock Investing Advices #7: Buy at Discount Price

After the process of selection, now is the time to buy them! But of course make sure it is below the intrinsic value and you must have the margin safety of 80% discount from the calculated intrinsic value. Warren Buffet has to make sure he buys the stock at the lowest price possible. Have you heard the recent investment of Mr. Buffett on IBM and in these times of Euro and US Debt Crisis? In the same time, he has to be real that not to set very low price till he misses the golden opportunity. Even if the stocks are so profitable but the price is too high, he will just passes the opportunity to somebody else.

If you want to be as successful as Warren Buffet in stock investing, study each point thoroughly. Ignoring either one advice is enough to make you broke in stock market; simply because, in stock investing, due diligence counts.

Intentionally not following the advice proves that you are not ready for investing;perhaps you are just looking for fast cash.



http://www.investorluranski.com/2011/11/7-important-stock-investing-advices.html#more

Warren Buffett - An Outstanding Allocator of Capital

Warren Buffett

Warren Buffett was born in 1930 in Omaha, Nebraska. 

He took his first degree at the University of Nebraska and then completed a Master's degree in economics at Columbia Business School in 1951. He was supervised and mentored at Columbia by stock-investing guru Benjamin Graham, author of Security Analysis. 

Buffett received the only mark of A+ Benjamin Graham ever awarded in his security analysis class. From this it's clear that Buffett had an extraordinary ability in stock analysis from the very beginning of his career. 

Making Money

Warren Buffett grew obsessed with numbers and money from an unusually early age. It wasn't an obsession founded upon the lifestyle or the wordly goods money could buy. It was a collecters' obsession. Some boys in the 1930s and 1940s collected stamps. Some collected bird's eggs. Warren Buffett collected money. 

He started at the age of five, selling gum and lemonade in the street and he later set up a business, renting pinball machines to local barbers. By his mid-teens, he had made enough money from these earlier efforts and paper rounds to buy land - which he rented to farmers. 

Making More Money

Investing In Stocks

Warren Buffett bought his first shares at the age of eleven - his father was a stockbroker - and stock trading gave the young Buffett a natural outlet for his twin obsessions with numbers and money. 

After completing his master's degree, Buffett worked as a salesman in his father's brokerage. Between 1954 and 1956 Buffett worked for his old mentor, Benjamin Graham, then returned to Omaha, ready to begin his own investing business. 

Making Even More Money

Investing Other People's Money In Stocks

Warren Buffett's progress towards almost unimaginable wealth accelerated in 1957 when he pursuaded friends and family to invest $105,000 in his limited partnership. Then he began the process he is famous for, the process of annually compounding the money he manages extraordinary rapidly.




http://www.warren-buffett.net/