myinvestingnotes.blogspot.my (Bullbear Buffett Stock Investing Notes)

Keep 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.

Friday 29 May 2009

Remember, Nobody's Perfect

Remember, Nobody's Perfect

No investor - not even the greatest investors in the world - are right all the time.

Don't be discouraged when your system calls for you to lock in losses on a stock; not even the best investors in the world are right all the time.

Martin Zweig says:

"In the long run,
a 60% success rate translates into huge gains,
a 50% rate into solid gains, and
even a 40% rate can beat the market."

When it comes to the stock market, no one is right all the time - or even nearly all the time. Even the great Warren Buffett makes bad investments. Just read Berkshire Hathaway's annual report, and Buffett will often speak candidly about where he's gone wrong.

Some examples from a fund manager. A particular portfolio of theirs, by being right 62.7% of the time - on less than two-thirds of its picks - had more than tripled the gains of the S&P over 5 years. For the most part, their portfolios had accuracies between 50 and 60 % - far from perfect - and most had still doubled, tripled, or quadrupled the market. Being aware that no one can be right all the time, or even nearly all the time, can make it easier on your ego when your selling system calls for you to take a loss on a stock.

While you'll never be right all the time, you can be right more than you're wrong, however. In the end, the key is to develop a fundamental-based selling and rebalancing plan and stick with it, NO MATTER WHAT. When your portfolio does lose ground from time to time, you'll inevitably feel the urge to sell certain stocks and go after others on a whim or a hunch to make up ground. But if you have a detailed, quantitative selling system in place, you can help keep short-term emotions from wreaking havoc with your long-term performance.

Stay Disciplined Over the Long Haul

Stay Disciplined Over the Long Haul

1. It is essential to stick to your strategy for the long term. Even the best strategies have down periods, and it can sometimes take over a year to reap the benefits of a good method. If you try to time your use of a strategy, you'll likely miss out on some big gains.

2. Expectations shape reactions; be prepared for short-term 10 to 20 % downturns that are inevitable in the stock market - and the less frequent but also inevitable 35 to 50% downturns you'll occasionally experience. You can't predict when they'll happen, so you just have to roll with them if you want to reap the market's long-term benefits.

3. Give the Internet a rest. Checking your portfolio every day, let alone every 10 minutes, can make you want to jump in and out of the market, which hurts your long-term performance.

----

You should have the right mindset going into your market endeavors.

As you're building your portfolio, at some point, you're bound to experience a short-term 10 to 20 % drop, and that you'll also endure less frequent larger drops.

About 6 years after his retirement, Peter Lynch addressed this idea in an interview. Lynch said that 10% declines in the market had occurred in more than half the years in the twentieth century; 25% declines - a bear market - had occurred on average, every 6 years.

"They're gonna happen," Lynch said, "If you're in the market, you have to know there's going to be declines. And they're going to cap and every couple of years you're going to get a 10% correction. That's a euphemism for losing a lot of money rapidly.... And a bear market is a 20-25-30% decline. They're gonna happen. When they're gonna start, no one knows. If you're not ready for that, you shouldn't be in the stock market. I mean stomach is the key organ here. It's not the brain. Do you have the stomach for these kind of declines?"

Lynch was speaking about the broader market, but the same applies to your own portfolio. Joel Greenblatt stresses again and again that his strategy won't beat the market every year. In fact, his testing found that the formula underperformed the market one out of every four years from 1988 through 2004. But if you had used the formula for any two-year period during that time, your chances of underperforming fell to one in six. And, over three-year periods, the formula beat the market 95% of the time - and it never lost money in any of the three-year periods over that 17-year span. (Greenblatt says that even in its worst three-year period during that 17-year span, the formula actually gained 11 percent).

It's a similar story for just about any strategy you can imagine. All of the greats - Lynch, Buffett, Dreman, Graham - have had years when they failed to beat the market. But they stuck with their strategies, and that's what enabled them to post such great long-term returns.

If you acknowledge at the outset that all strategies - even great ones - go through down periods, you won't be surprised when your portfolio does take a short-term hit. As with many things in life, it's the surprise that often leads to anxiety and fear. If you're ready for those down times, you'll be amazed at how much more calm you'll remain when your portfolio takes some short-term lumps.

Unfortunately, most investors don't do that. (In fact, Lynch has supposedly said that while he was at Magellan's helm, more of the fund's investor LOST money than gained money because they would jump out of the fund when things got rought - selling low - and then jump back in when the fund was doing well - buying high.) Not being prepared for those downturns makes it all the more easy to be bowled over by emotions when times get tough. And if you give in to your emotions, you'll probably end up selling after big losses, and buying only after the market has made some big gains.

Hulbert said the newsletter (The Prudent Speculator) that his group rated as the best performer since mid-1980, has demonstrated great faith in the market's upward trend and been rewarded for it. The newsletter "has been the most buffeted by short-term market gyrations" of any he has monitored, he said. "And yet, none surpasses it in its willingness to either ignore or tolerate those gyrations." Hulbert said a testament to the newsletter's faith in the market's long-term benefits came after its model porfolio lost 57% in the crash of 1987. While others panicked, The Prudent Speculator kept its fully invested approach, and ended up winning big over the long haul. "Long-term investors need not lose sleep over the markets' short-term gyrations because the markets' long-term patterns will eventually assert themselves," Hulbert wrote.

The Key Selling Points

The Key Selling Points

1. Rebalance your portfolio at fixed intervals (i.e., every months, every quarter, every year), selling stocks that no longer meet the fundamental criteria you used to buy them in the first place. Replace them with new stocks that do meet your criteria.

2. Sell stocks immediately if they are involved in accounting or earnings scandals, or if they become a major bankruptcy concern. In these cases, do not wait until your net rebancing date to sell.

3. For tax reasons, it's generally best to sell winning positions after you've held them for a year and losing positions before you've held them for a year. If a stock you've made money no longer meets your investment criteria and you've held it for close to a year, consider holding it until you pass that one-year mark to limit taxes.

4. Don't be discouraged when your system calls for you to lock in losses on a stock; not even the best investors in the world are right all the time.

Selling Smart

Selling Smart

"Flying isn't the hard part; landing in the net is." - Mario Zacchini, one of the original "Flying Cannonballs"

How do you stave off emotion and make good, sensible "sell" decisions?

The same way that you keep emotion at bay when deciding what stocks to buy: By using a disciplined system that makes sell decisions based on cold, hard fundamentals - not emotion-driven hunches, or arbitrary price targets.

To sell smart, you have to go back to the basic premise behind our "buy" strategy. And that is that over the long term, investors gravitate toward stocks with strong fundamentals because those are the strongest companies, and that causes those stocks' prices to rise over time. We buy because of the fundamentals - not just because the price is high or low or rising or falling. Remember, the only way price comes into the decision to buy is in how it relates to the stock's fundamentals - that is, in the form of such variables as the price-sales ratio or price-earnings ratio.

When you're building your portfolio, you want to pick the stocks that have the best fundamentals - because over the long run, investors gravitate toward stocks with strong fundamentals because they are the strongest companies.

What does this have to do with selling stocks?

If you're buying stocks because they have strong fundamentals, and over the long term, stocks with strong fundamentals tend to rise, you should hold on to a stock as long as it continues to meet the fundamental criteria you used to select it.

Whether the stock has dropped sharply since you bought it or whether it has skyrocketed is no matter; what matters is where the stock's fundamentals stand RIGHT NOW. Price - just as with buying - matters only in terms of how it relates to the fundamentals (what the stocks P/E or P/S ratios are, for example).

Many investors will sell a stock because its price has fallen and they think they need to cut their losses, or because the price has risen and they think the "smart" thing to do is to take the profits rather than risk the stock coming back down.

But those are arbitrary, emotional decisions. Remember, you bought the stock because its strong fundamentals make it a good bet to gain value; if its fundamentals are still strong, why wouldn't it still be a good bet to gain more value?

If the stock's fundamentals have slipped, however, so that it no longer meets the criteria you used to buy it, it's time to sell and replace it with another stock that does meet your criteria (and one that thereby has better prospects of rising in value).

The selling assessment is thus an ongoing reevalution of where a stock stands right now. You must continually reassess what the stock's prospects are going forward - not what they were a month ago, six months ago, or whenever you bought it.

Whether you use a one-month rebalancing or a different time frame that works for you, the important point is - you need to re-examine your portfolio at set intervals, to assess how your holding stand relative to the reasons you bought them. If they no longer meet the criteria you used to pick them, you should consider replacing them with new stocks that do make the grade.

You can also use your rebalancing period to reweight your portfolio in case some of your holdings have gained or lost a bunch, and now make up a disproportionate part of your portfolio. The idea here is to keep things close to equally weighted. It doesn't have to be perfect, though; if one stock gains a little ground so that it makes up a few more percentage points of your portfolio than the other stocks, you don't need to go selling a couple shares - and getting hit with trading charges - just to even things out exactly.

To keep this simple, you might want to set a reweighting target percentage. For example, anytime a holding's weight in your portfolio becomes 10 percent more or less than your target weight, you buy or sell shares of it to bring it back to that target.

By sticking to a firm rebalancing plan, you keep emotion and hype from impacting your selling decisions. You sell at regular intervals, and you sell based on fundamentals. Just as with buying stocks, there's no place for hunch-playing or knee-jerk reactions here.

When do You need to Sell Urgently?

There are a couple rare occasions, however, when you should sell a stock without waiting for the rebalancing date to arrive.

If a firm is involved or allegedly involved in a major accounting or earnings scandal, you should sell the stock immediately, because you can no longer trust its publicly disclosed financial data.
In addition, if a firm has become a serious bankruptcy risk since the last rebalancing, you should also sell its stock immediately.

Six Guiding Investing Principles

Six Guiding Investing Principles

Principle 1: Combining strategies to minimise risk and maximise returns.
Principle 2: Stick to the numbers - or the market will stick it to you.
Principle 3: Stay disciplined over the long haul.
Principle 4: Diversify, but you can't beat the market by owning it.
Principle 5: Size- and style-focused systems only limit investment possibilities.
Principle 6: You don't have to hold stocks for the long term to be a long-term investor.

Thursday 28 May 2009

Investing: Discipline, First and Foremost

Investing: Discipline, First and Foremost

"The essence of mathematics is not to make simple things complicated, but to make complicated things simple."

If you want to beat the market, you need to pick a strategy and stick with it - NO MATTER WHAT. In What Works on Wall Street, O'Shaughnessy writes that in order to beat the market, it is crucial that you stay disciplined. "Consistently, patiently, and slavishly stick with a strategy, even when it's performing poorly relative to other methods."

O'Shaughnessy believed that emotions were perhaps the greatest enemy of the investor because feelings like fear, anxiety, and excitement can cause an investor to ditch his long-term plan for hot strategies or hot stocks that turn out to be financial mirages. "We are a bundle of inconsistencies," he continues, "and while that may make us interesting, it plays havoc with our ability to invest our money successfully.... Disciplined implementation of active strategies is the key to performance."

A decade later, his thoughts about sticking with strategies haven't changed. "What always work on Wall Street is strict adherence to underlying strategies that have proven themselves under a variety of market environments."

Martin Zweig - The Conservative Growth Investor

Martin Zweig - The Conservative Growth Investor

"Nothing can stop the man with the right mental attitude from achieving his goal; nothing on earth can help the man with the wrong mental attitude." - THOMAS JEFFERSON

Martin Zweig may not have been born a great investor, but it took him less time than perhaps any other guru we follow to start making himself into one.

Thanks to a birthday gift from his uncle of 6 shares of General Motors stock, Zweig was just 13 years old in 1955 when he began following the stock market. He started tracking GM and some other stocks, and before long, he was hooked. By the time he was in high school, Zweig writes in his book, Winning on Wall Street, he had made up his mind: He was going to become a millionaire, and he would do so by investing in stocks.

Millions of people have made a similar decision over the years. But unlike the vast majority of them, Zweig followed through. He began paying more and more attention to the market. Soon he was wowing his high school teachers with his knowledge of stocks. By the time he was in college, Zweig was buying and selling stocks, and as a graduate student he performed groundbreaking research in the field of stock analysis. It wasn't long before he'd reached the goal he'd set for himself in high school. In fact, you might say he obliterated it, becoming not only a millionaire, but also the owner of what Forbes reported was the most expensive apartment in New York City and the eighth most expensive home in the world - a $70 million penthouse that sits atop Manhattan's chic Pierre Hotel.

Given how fixated he was on beating the market at such an early age, it almost seems Zweig was destined to become one of the world's best investors. "Ever since I can remember," he wrote in Winning on Wall Street, "I have had an almost overwhelming desire to learn all I could about the stock market and to play it successfully. Perhaps my urge was not too different from that attributed to the mountain climber who must assualt the mountain just because it's there... From an early age I wanted to surmount the summit of the stock market, so to speak. It was a challenge I couldn't resist."

Zweig's intense desire and ambition may have been a gift of birth but his stock market success - his stock recommendation newsletter was ranked number one based on risk-adjusted returns by Hulbert Financial Digest during the 15 years Hulbert monitored it - wasn't simply due to natural ability. His development into a great investor was marked by years of study and hard work, and the ability to adhere to a strict, thorough investment strategy.

With some hard work and discipline of your own, you can make your strategy work for you too.

Kenneth L. Fisher on How to Time the Market

Kenneth L. Fisher on How to Time the Market

"There is no end to the lengths people go to try to find the magic key to the stock market."

"At best, one can hope to be right about the stock market perhaps half the time. At worst, one is apt to be wrong most of the time. Stock market seers run hot for a couple of years. Then most embarrass themselves."

But there's more. Even if you COULD predict the market's major moves, Fisher says it wouldn't be worth it. He studied how an investor would have fared had he correctly called every 100-point move of the Dow Jones Industrial Average for the 5-year period ending Dec 31, 1982.

Such an investor (which of course, probably doesn't exist) would have earned a compound rate of return of 51.5%. That sounds great, but according to Fisher, it's no better than the return you could generate by buying a super stock.

And in the perfect-market-timing scenario, you also would be jumping in or out of the market 11 times during that span, resulting in significant trading costs. Plus, since the vast majority of those 100-point swings occurred in less than a year, you'd be taxed at higher short-term gains rates. Super Stocks make their gains over a three- to five-year period, generating long-term gains that are subject to lower tax rates.

Fisher does, however, offer a solution for how to time the market. His two rules:

1. When a company is selling at a (sufficiently) low PSR (Price-Sales Ratio) - BUY it.
2. If you can't find companies selling at (sufficiently) low PSRs, DON'T buy stocks.

Of course, this isn't exactly market timing in the way most people think of it, because it looks at specific stocks rather than the entire market. But whether you call it market timing or not, it's certainly a lot better plan than those used by most investors who try to time the broader market's movements.

Source: Kenneth L. Fisher, Super Stocks, reissued edition (NY: McGraw-Hill, 2008)

Peter Lynch's Pearl of Wisdom

Another One of Peter Lynch's Many Pearls of Wall Street Wisdom

Lynch once said in an interview that putting money into stocks and counting on having nice profits in a year or two is "just like betting on red or black at the casino...... What the market's going to do in one or two years, you don't know."

This is a crucial general approach shared by Lynch and many of the other gurus of investing. It's simple in theory, but in practice it is one of the hardest things for an investor. Lynch recognized that the stock market was unpredictable in the short term, even to the smartest investors. Over the long term, however, good stocks rise like no other investment vehicle. Lynch's philosophy: Use a proven strategy and stay in the market for the long term and you'll realize those gains, jump in and out an there's a good chance that you'll miss out on a chunk of them.

That, of course, means resisting the temptation to bail when the market takes some short-term hits and good stocks fall in value - no easy task. But as Lynch once said, "The real key to making money in stocks is not to get scared out of them."

How to employ buy and hold in our overall investing philosophy?

How to employ buy and hold in our overall investing philosophy?

The more you trade, the less well you do. Have a strategy and then let that strategy work.

Warren Buffett often hold stocks for years and years. But not all buy and hold strategists need to follow him.

You can choose to hold a stock for a year and then rebalances your portfolio. By doing so, you are making sure you are not holding stocks that no longer meets your criteria. While you may choose to rebalance annually, you may also rebalance your portfolio more frequently.

You are free to pick a rebalancing period - be it monthly, quarterly, semiannually, or annually. Sticking to this discipline is more important than the decision about which specific period to use.

Keep it Simple and Safe (K.I.S.S): The novice investors might expect someone emerging from a study of the different strategies and the stock market results to come out with some highly complex, esoteric formulas for how to produce the best returns. Instead, it was just the opposite.

Redefining Risk

Traditionally, investors view "risk" as being synonymous with "volatility." They believe that to get higher returns, they must be willing to stomach bigger short-term swings in a stock's price. Volatility is not risk. Avoid investment advice based on volatility.

Redefining Risk

Risk was the chance that you might not meet your long-term investment goals. And the greatest enemy of reaching those goals: inflation. Nothing is safe from inflation. It's major victims are savings accounts, T-bills, bonds, and other types of fixed-income investments.

Investors usually use Treasury bills as their benchmark for risk. These are considered risk-free because their nominal value can't go down. However, T-bills and bonds are in fact highly risky because of their susceptibility to inflation.

For example, if you buy a 10 year-T-bill that pays 3 percent in interest per year, and inflation is creeping up at, say, 2 percent per year, the real value of your investment at maturity will end up being significantly less than 3 percent greater than the price you paid for it. In the case of low-interest-paying T-bills, higher inflation could even mean that your investment loses value, in terms of real purchasing power, over its lifetime.

Realistic definition of Risk

A realistic definition of risk recognizes the potential loss of capital through inflation and taxes, and includes:

1. The probability your investment will preserve your capital over your investment time horizon.

2. The probability your investments will outperform alternative investments during the period.

Why Volatility is not Risk?

Traditionally, investors view "risk" as being synonymous with "volatility." They believe that to get higher returns, they must be willing to stomach bigger short-term swings in a stock's price.

There is no correlation between this volatility-related-risk and return.

Higher volatility does not give better results, nor lower volatility worse.
Studies have shown that there is not necessarily any stable long-term relationship between volatility-related-risk and return, and often there is no relationship between the return achieved and the volatility-related-risk taken.

Volatility is not risk. Avoid investment advice based on volatility.

So if volatility is not risk, what is?

The major risk is not the short-term stock price volatility that many thousands of academic articles have been written about. Rather it is the possibility of not reaching your long-term investment goal through the growth of your funds in real terms. To measure monthly or quarterly volatility and call it risk - for investors who have time horizons 5, 10, 15 or even 30 years away - is a completely inappropriate definition. (David Dreman)

In the short-term, stocks fluctuate unpredictably, so if you're saving to buy a house or a car within the next two years or so, bonds and T-bills are a good choice. But over the long term, stocks far more often than not outperform alternative investments like bonds or T-bills.

In fact, Dreman's research shows that inflation-adjusted returns for stocks - which, unlike bonds or T-bills have the ability to produce increasing earnings streams - have consistently outpaced those of bonds and T-bills since the start of the 1800s. The gap has widened since the mid-1920s, when inflation began to have a more significant impact.

What's more, from 1946 to 1996, according to Dreman, compound returns after inflation for stocks were better than those of bonds 84% of the time if your holding period was 5 years.

Stocks also outperformed T-bills in 82% of those 5-year periods.
Using 10-year periods, stocks beat bonds 94% of the time and T-bills 86% of the time.
When you look at 20-year holding periods, stocks beat both bonds and T-bills 100 percent of the time.

Take Home Lesson

Using Dreman's definition of risk, stocks are actually the safest investment out there over the long term.

Investors who put some or most of their money into bonds and other investments on the assumption they are lowering their risk are, in fact, deluding themselves.

"Indeed, it goes against the principle we were taught from childhood - that the safest way to save was putting our money in the bank."

Observing Long-Term Investing

Observing Long-Term Investing

Study the 2 lists of the top 30 shareholders of a particular company below.

Excluding the institutions, there are 10 individual investors who invested in this company from the year 2002 to 2008. These are certainly long-term investors.

The share price of this compay ranged 3.85 to 8.35 in 2002.

In 2008, the price ranged from 10.50 to 13.00.

It is presently priced at 10.70.

The dividend per share for the recent 6 years were 5.8c (2002), 12.8c (2003), 56c (2004), 63.2c (2005), 63.5c (2006), 63.5c (2007), giving a total of 264.8c. The DY the last 5 years ranged from 10.1% to 6.7% varying with the share price.

What lessons can we derive from the investing behaviours of these long-term "buy and hold" investors? Perhaps, you may spot my name within this list. hahaha!!

http://announcements.bursamalaysia.com/EDMS/subweb.nsf/7f04516f8098680348256c6f0017a6bf/6a8c0c56bb45fd2c48256d02000ff5d0/$FILE/DLady-AnnualReport%202002%20(950KB).pd f
Dutch Lady Annual Report 2002
30 Largest Shareholders Page 45

1. Frint Beheer IV BV* 32,074,800 50.12
2. Amanah Raya Nominees (Tempatan) Sdn Bhd* 16,008,000 25.01 %
- Skim Amanah Saham Bumiputera
3. RHB Nominees (Asing) Sdn Bhd 540,000 0.84 %
- Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A.
4. Yong Siew Lee 270,000 0.42 %
5. Kumpulan Wang Simpanan Guru-Guru 220,000 0.34%
6. Yeo Khee Bee 215,000 0.34 %
7. Employees Provident Fund Board 201,000 0.31%
8. Menteri Kewangan Malaysia Section 29 (SICDA) 189,800 0.30 %
9. Ng Lam Shen 160,000 0.25 %
10. Quek Guat Kwee 160,000 0.25 %
11. Amanah Raya Nominees (Tempatan) Sdn Bhd 157,000 0.25 %
-Dana Johor
12. Universiti Malaya 144,000 0.23 %
13. Amanah Raya Nominees (Tempatan) Sdn Bhd 128,000 0.20 %
-Amanah Saham Johor
14. Lee Sim Kuen 120,000 0.19 %
15. Tong Yoke Kim Sdn Bhd 120,000 0.19 %
16. Foo Mee Lee 117,404 0.18 %
17. Wong So-Ch’I 111,000 0.17 %
18. Soon Ah Khun @ Soon Lian Huat 110,000 0.17 %
19. Wong So Haur 109,000 0.17 %
20. Lim Teh Realty Sdn Bhd 90,000 0.14 %
21. Foo Loke Weng 80,804 0.13 %
22. HSBC Nominees (Asing) Sdn Bhd 80,000 0.13 %
- Pictet and Cie for Ace Fund Sicav (Emerging Market)
23. Mayban Nominess (Tempatan) Sdn Bhd 75,000 0.12 %
- for Goh Sin Bong
24. Lim Pin Kong 75,000 0.12 %
25. Neoh Soon Leong 72,000 0.11 %
26. See Cheng Siang 72,000 0.11 %
27. Leong Lai Meng 60,000 0.09 %
28. Looi Chin Seng 60,000 0.09 %
29. HSBC Nominees (Tempatan) Sdn Bhd 60,000 0.09 %
- for Goh Hiong Eng
30. Sak Mok @ Sak Swee Len 58,000 0.09%

http://announcements.bursamalaysia.com/EDMS/subweb.nsf/7f04516f8098680348256c6f0017a6bf/5f300a009db8aabf482575a70014e6ae/$FILE/DLADY-AnnualReport2008%20(1MB).pdf
Dutch Lady Annual Report 2008
30 Largest Shareholders Page 49

1. Frint Beheer IV BV* 32,074,800 50.12%
2. Amanah Raya Nominees (Tempatan) Sdn Bhd 12,500,000 19.53%
- Skim Amanah Saham Bumiputera
3. Kumpulan Wang Persaraan (Diperbadankan) 2,109,200 3.3%
4. Permodalan Nasional Berhad 1,843,500 2.88%
5. Public Nominees (Tempatan) Sdn Bhd 837,300 1.31%
- Pledged Securities Account for Aun Huat & Brothers
Sdn Bhd (E-IMO/BCM)
6. Aun Huat & Brothers Sdn Bhd 587,100 0.92%
7. Cartaban Nominees (Asing) Sdn Bhd 540,000 0.84%
- Exempt An For Bank Sarasin-Rabo (Asia) Limited (AC Client Frgn)
8. Yong Siew Lee 430,000 0.67%
9. Yeo Khee Bee 391,300 0.61%
10. Quek Guat Kwee 162,000 0.25%
11. Kumpulan Wang Simpanan Guru-Guru 156,300 0.24%
12. SBB Nominees (Tempatan) Sdn Bhd 144,000 0.23%
- Universiti Malaya (CAFM)
13. Citigroup Nominees (Asing) Sdn Bhd 125,700 0.20%
- CBNY For DFA Emerging Markets Small Cap Series
14. Lee Sim Kuen 120,000 0.19%
15. Wong So-Ch’i 111,000 0.17%
16. Tong Yoke Kim Sdn Bhd 110,000 0.17%
17. Wong So Haur 109,000 0.17%
18. Chow Kok Meng 99,900 0.16%
19. Lim Teh Realty Sdn Berhad 90,000 0.14%
20. Foo Yoke Keong Adrian 80,000 0.13%
21. Cartaban Nominees (Tempatan) Sdn Bhd 80,000 0.13%
- Exempt An For Kam Nominees (Tempatan) Sdn Bhd
22. Tan Pak Nang 74,000 0.12%
23. Mayban Nominees (Tempatan) Sdn Bhd 74,000 0.12%
- Affin Fund Management Berhad For CIMB Aviva Assurance
Berhad (270185)
24. Ng Lam Shen 71,300 0.11%
25. Tan Kim Onm 66,000 0.10%
26. Labuan Reinsurance (L) Ltd 62,700 0.10%
27. HSBC Nominees (Tempatan) Sdn Bhd 60,000 0.09%
- Pledged Securities Account for Goh Hiong Eng
28. Sak Moy @ Sak Swee Len 58,000 0.09%
29. Theo Chin Lian 56,000 0.09%
30. Chua Sim Hong 55,900 0.09%
Total: 53,280,000 83.27%

Wednesday 27 May 2009

Total Returns vs Total Wealth vs Total Real Returns

Total Returns

Total returns means that all returns, such as interest and dividends and capital gains, are automatically reinvested in the asset and allowed to accumulate over time.

A graph depicting the total return indexes for stocks, long- and short-term bonds, gold, and commodities from 1802 through 2001, showed that the total return on equities dominates all other assets. Even the cataclysmic stock crash of 1929, which caused a generation of investors to shun stocks, appears as a mere blip in the stock return index. Bear markets, which so frighten investors, pale in the context of the upward thrust of total stock returns.

Total Returns vs Total Wealth

However, the total wealth in the stock market, or in the economy, does not accumulate as fast as the total return index. This is so because investors consume most of their dividends and capital gains, enjoying the fruits of their past saving.

It is rare for anyone to accumulate wealth for long periods of time without consuming part of his or her return.

The longest period of time investors typically plan to hold assets without touching principal and income is when they are accumulating wealth in pension plans for their retirement or in insurance policies that are passed on to their heirs.
Even those who bequeath fortunes untouched during their lifetimes must realize that these accumulations often are dissipate in the next generation.

The stock market has the power to turn a single dollar into millions by the forbearance of generations - but few will have the patience or desire to let this happen.

Total Returns vs Total Real Returns

The focus of every long-term investor should be growth of purchasing power - monetary wealth adjusted for the effect of inflation. The growth of purchasing power in equities not only dominates all other assets but also shows remarkable long-term stability. Despite extraordinary changes in the economic, social and political environments over the past two centuries, stocks have yielded between 6.6 and 7.0 percent per year after inflation in all major subperiods.

The wiggles on the stock return line represent the bull and bear markets that equities have suffered throughout history. The long-term perspective radically changes one's view of the risk of stocks. The short-term fluctuations in the stock market, which loom so large to invetors when they occur, are insignificant when compared with the upward movement of equity values over time.

In contrast to the remarkable stability of stock returns, real returns on fixed-income assets have declined markedly over time. From 1802 to 1926, the annual real returns on bonds and bills, although less than those on equities, were significantly positive. However, since 1926, and especially since World War II, fixed-income assets have returned little after inflation.

Volatility is the friend of the Value Investor (2)

Volatility is the friend of the Value Investor (2)

September 3, 1929:
DJIA hit a historical high of 381.17
Seven weeks later, stocks crashed. The next 34 months saw the most devastating decline in share values in U.S. history.

July 8, 1932:
The carnage was finally over. DJIA stood at 41.22.
The marke value of the world's greatest corporations had declined an incredible 89%.
Millions of investors' life savings were wiped out.
Thousands of investors who borrowed money to buy stocks were forced into bankruptcy.
America was mired in the deepest economic depression in its history.

LESSONS FOR THE LONG-TERM VALUE INVESTOR

In summer of 1929, a journalist interviewed John J. Raskob, a senior financial executive at General Motors, about how the typical individual can build wealth by investing in stocks. Raskob claimed that America was on the verge of a tremendous industrial expansion. He maintained that by putting $15 a month into good common stocks, investors could expect their wealth to grow steadily to $80,000 over the next 20 years. Such a return - 24% per year - was unprecedented, but the prospect of effortlessly amassing a great fortune seemed plausible in the atmosphere of the 1920s bull market. Stocks excited investors, and millions of people put their savings into the market seeking a quick profit.

On September 3, 1929, a few days after Raskob's ideas appeared, the Dow Jones Industrial Average hit a historic high of 381.17. Seven weeks later, stocks crashed. Raskob's advice was ridiculed and denounced for years to come. It was said to represent the insanity of those who believed that the market could rise forever and the foolishness of those who ignored the tremendous risks inherent in stocks.

Conventional wisdom holds that Raskob's foolhardy advice epitomizes the mania that periodically overruns Wall Street. However, is this verdict fair? The answer is a decidedly no.

If you were to calculate the value of the portfolio of an investor who followed Raskob's advice, patiently putting $15 a month into stocks, you would find that:

his or her accumulation would exceed that of someone who placed the same money in Treasury bills after less than 4 years!
after 20 years, his or her stock portfolio would have accumulated to almost $9,000, and
after 30 years, over $60,000.

Although not as high as Raskob had projected, $60,000 still represents a fantastic 13% return on invested capital, far exceeding the returns earned by conservative investors who switched their money to Treasury bonds or bills at the market peak. Those who never bought stock, citing the great crash as the vindication of their caution, eventually found themselves far behind investors who had patiently accumulated equity.

An important theme in the history of Wall Street is not the prevalence of foolish optimism at market peaks; rather, it is that over the last century, accumulations in stocks have always outperformed other financial assets for the patient investor. Even such calamitous events as the great stock crash of 1929 did not negate the superiority of stocks as long-term investments.

Volatility is the friend of the Value Investor

Volatility is the friend of the Value Investor

May 1994
Dow Jones Industrial Average 3,700
Interest rates rising rapidly. Worst year in the history of the bond market.
Stocks already up 60% from their October 1990 low. Few forecasters predicted further gains for equities.
Just 7 months later, stocks would embark on the greatest bull market run in history.

March 1998
Dow was at 8,800
The world stock market had been rolled the previous October by collapse of the Asian markets.
This precipitated a record 550-point drop in the Dow and closure of the New York Stock Exchange.
Few months later, the markets were shaken by collapse of the huge hedge fund Long-Term Capital Management.
From July to early Septermber 1998, Dow fell 20%.
The trillions of dollars of contracts held by this fund on the verge of bankruptcy threatened the functioning of financial markets, causing an unprecedented intervention by the Federal Reserve to restore liquidity.
Three quick rate cuts by the Fed restored investor confidence.
With the uncertainty surrounding Y2K less than 2 years away, few envisioned that October 1998 would begin one of the most spectacular bull markets in history.

March 2000
The technology-laden Nasdaq more than tripled, crossing 5000.
Prices of the world's largest equities surpassed 100 times earnings for the first time in the history of the markets.
Investors optimism was rife.
The Internet launched a gold rush that made instant millionaires of many workers in start-up companies who were paid with stock options.
John Doerr, a venture capitalist, called the run-up of Internet stocks the largest legal act of wealth creation in world history.
And many who missed the first round were lured into a bull market that appeared to ensure profits to all who participated.
This domestic exuberance was matched by a feeling that liberal democracies built on free markets had triumphed as a model for international development.
The entire world seemed to stand at the threshold of unprecedented economic growth, where U.S. based corporations would lead the way.
The communications revolution confirmed that the world was getting smaller and that national boundaries were shrinking.
Communism had been replaced by democracies in eastern Europe, apartheid was peacefully eliminated in South Africa, and even the Israelis and Palestinians were close to a historic peace accord.

Post March 2000
Then it all came crashing down.
The Nasdaq, which had peaked in March 2000 at over 5,000, fell by more than 70% in the next 18 months.
Internet stocks declined even further, and international terrorists launched a successful full-scale attack on the United States.
From March 2000 - September 2001, stock values, as measured by the broad Wilshire 5000 Index, fell 40% and wiped about $5 trillion from market values.

LESSONS AND CHALLENGES FOR THE LONG-TERM VALUE INVESTOR

The public, once universally regarded as fickle and quick to abandon stocks in difficult times, stuck with equities.
There was remarkably little panic selling by investors, and surveys showed that few lost their faith that stocks were still the best long-term investment.
Long-term real returns on equities have averaged about 7% per year over all long-term periods.
Even counting the bear market of 2000 - 2001, real returns averaged 11.3% per year in the 8 years since 1994.
From the beginning of grand bull market in August 1982 through March 2000, real returns averaged 15.6% per year.
These stock returns were significantly above the long-term average.
Be cautious of bull market that drove investor expectations too high.
During the bear market, many investors should not have un-realistic expectations of what the stock market can deliver.
The lure of short-run gains, the attraction of various paradigm, and the relentless pressure to keep pace with hot sectors and hot stocks caused many investors to abandon their long-term principles.
Real returns of 7% per year, even though doubling wealth every 10 years, is too slow for many who tasted the spectacular gains made in the bull market.
Investment based on genuine long-term expectation is so difficult today as to be scarcely practicable. (John Maynard Keynes 1937)
Although future stock returns may be diminished from the past, there is overwhelming reason to believe that stocks will remain the best investment for all those seeking steady, long term gains. (Jeremy J. Siegel, Stocks for the Long Run)

Tuesday 26 May 2009

PE Ratio and Future Stock Returns

PE Ratio and Future Stock Returns

Although the PE ratio can be a very misleading indicator of future stock returns in the SHORT RUN, in the LONG RUN, the PE ratio is a very useful predictor. The reasons may be understood by analysing how stock and bond returns are calculated.

Current yield of a bond
= interest received / the price paid

This is a good measure of future return if the bond is not selling at a large premium or discount to its maturity value.

Earnings yield of a stock
= EPS / Price
= 1 / (PE)

Bonds vs Stocks

Stocks

Since the underlying assets of a firm or stock are real, the earnings yield is a REAL, or inflation-adjusted, return.
Over time, inflation will raise the cash flows from the underlying assets, and the assets themselves will appreciate in value.

Bonds

In contrast, the NOMINAL return earned from fixed-income assets, where all the coupons and the final payment are fixed in money terms and do not rise with inflation.

The long-run data bear out the contention that the earnings yield is a good long-run estimate of real stock returns.

The average PE ratio of the market over the past 130 years has been 14.45, so the average earnings yield on stocks has been 1/14.45, or 6.8%.
This earnings yield exactly matches the 6.8% real return on equities from 1871.

Predicting Future Short-term Stock Returns using PE ratio

There are limitations to using the PE ratio to predict future short-term stock returns.

For example, future returns will be higher than predicted by the earnings yield if the economy is emerging from a recession.

And in the short run, there are many other sources of market movement, such as:

changes in interest rates or
the risk premium demanded by stockholders.

Valuing the Market - Market PE Ratio

Valuing the Market - Market PE Ratio

The Price-to-Earnings Ratio

The most basic and fundamental yardstick for valuing stocks is the PE ratio. It is simply the ratio of the price of a share of stock to the annual EPS and measures how much an investor is willing to pay for a dollar's worth of current earnings.

The single most important variable determining the PE ratio of an individual stock is the expectation of future earnings growth.

If investors believe that earnings growth is going to accelerate, they will pay a higher price relative to current earnings than if they expect earnings to stagnate or decline.

However, earnings growth is not the only variable influencing the PE ratio. PE ratio are also influenced by other factors such as:

interest rates,
risk attitudes of investors,
taxes, and
liquidity among others.

Market PE Ratio

The PE of the entire Market =
Total market value of all stocks / aggregate earnings of all stocks

The historical average value of Market PE since 1870 is 14.5.

High Market PE due to drop in Earnings

Peaks in the Market PE ratio are not always bad omens for investors.

If a sharp drop in earnings cause the PE ratio to spike upward, such as occurred in the 1894, 1921, 1938, and 1990 - 1991 recessions, real returns following these spikes have averaged a robust 9.7% annually over the subsequent 5 years.

These returns are high because sharp declines in earnings always have been temporary, caused by recession or other special circumstances, and earnings as well as stock prices have rebounded subsequently.

Nevertheless, the PE ratio associated with the 2000-2001 recession is so high that investors should not expect above average returns to prevail.

High Market PE due to High Stock Prices

When surges in stock prices cause Market PE ratios to rise, as occurred in September 1929, July 1933, June 1946, November 1961, and August 1987, 5-year future real returns have averaged only 1.1%.

Surging stock prices often reflect undue optimism about future earnings growth. When faster earnings growth is not realized, stock prices fall, and returns suffer.

Certainly the Market PE spike that occurred in late 1999 and early 2000 accurately foretold poor future returns.

Long-Term Earnings Growth and Economic Growth (2)

Long-Term Earnings Growth and Economic Growth (2)

Long-Term Growth of GDP, Earnings and Dividends, 1871 -2001
Real GDP Growth 3.91%
Real Per-Share Earnings Growth 1.25%
Real Per-Share Dividend Growth 1.09%
Dividend Yield (median) 4.54%
Payout Ratio (median) 58.75%

The above shows the summary statistics for dividends per share, earnings per share (EPS), and stock returns from 1871 through September 2001. The data show that real per-share earnings growth over the entire 130 years has been a paltry 1.25%, considerably below the nearly 4% growth rate of real GDP. Because of the funding requirement, EPS growth does not match aggregate economic growth over the long run.

Long-Term Growth of GDP, Earnings and Dividends, 1871-1945
Real GDP Growth 4.51%
Real Per-Share Earnings Growth 0.66%
Real Per-Share Dividend Growth 0.74%
Dividend Yield (median) 5.07%
Payout Ratio (median) 66.76%

Long-Term Growth of GDP, Earnings and Dividends, 1946-2001
Real GDP Growth 3.11%
Real Per-Share Earnings Growth 2.05%
Real Per-Share Dividend Growth 1.56%
Dividend Yield (median) 3.53%
Payout Ratio (median) 51.91%

The data before and after World War II also show that the acceleration of earnings growth since World War II is associated with the drop in the dividend yield. Greater retained earnings allow firms to buy back shares and reinvest for growth. John Williams' contention that dividends withheld today spur earnings growth in the future is strongly supported by the data.

Also read:
Long-Term Earnings Growth and Economic Growth (1)
Long-Term Earnings Growth and Economic Growth (2)

Long-Term Earnings Growth and Economic Growth (1)

Long-Term Earnings Growth and Economic Growth (1)

How do you value stock?

Stock prices are the present value of future dividends.

What are the determinants of stock prices?

These are earnings and dividends on a PER-SHARE basis.

Is economic growth an important factor influencing future dividends and hence stock prices?

Not necessarily. Although economic growth may influence AGGREGATE earnings and dividends favourably, economic growth does not necessarily increase the growth of per-share earnings or dividends. It is earnings per share (EPS) that is important to Wall Street because per-share data, not aggregate earnings or dividends, are the basis of investor returns.

What is the reason economic growth does not necessarily increases EPS?

Economic growth requires increased capital expenditures and this capital does not come freely. Implementing and upgrading technology requires substantial firm investment. These expenditures mus tbe funded either by borrowing in the debt market (through banks or trade credit or by selling bonds) or by floating new shares. The added interest costs and the dilution of profits that this funding involves place a burden on the firm's bottom line.

Can earnings increase without increasing capital expenditures?

Yes, in the short run, this may occur, but the long-run historical evidence suggests that it will not. One of the signal characteristics of long-term historical data is that the level of the capital stock - the total value of all physical capital such as factories and equipment, as well as intellectual capital, that has accumulated over time - has grown in proportion to the level of aggregate output. In other words, a 10% increase in output requires a 10% increase in the capital stock.

Will investment in productivity-enhancing technology spur earnings growth to permanently higher levels?

"Cost-saving investments" frequently touted as a source of increasing profit margins, only temporarily affect bottom-line earnings. As long as these investments are available to other firms, competition will force management to reduce product prices by the amount of the cost savings, and extra profits will quickly be competed away. In fact, capital expenditures often are undertaken not necessarily to ENHANCE profits but rather to PRESERVE profits when other firms have adopted competitive cost-saving measures.

Also read:
Long-Term Earnings Growth and Economic Growth (1)
Long-Term Earnings Growth and Economic Growth (2)

Valuation of Cash Flows from Stocks

Valuation of Cash Flows from Stocks

Stocks have value only because of the potential cash flows that investors receive. These cash flows can come from any distribution (such as dividends or capital gains realized on sale) that stockholders expect to receive from their share of ownership of the firm, and it is by forecasting and valuing these expected future cash flows that one can judge the investment value of shares.

The value of any asset is determined by the discounted value of all expected future cash flows.

Future cash flows from assets are DISCOUNTED because cash received in the future is not worth as much as cash received in the present. The reasons for discounting are:

1. the innate TIME PREFERENCES of most individuals to enjoy their consumption today rather than wait for tomorrow,

2. PRODUCTIVITY, which allows funds invested today to yield a higher return tomorrow, and

3. INFLATION, which reduces the future purchasing power of cash received in the future.

4. UNCERTAINTY associated with the magnitude of future cash flows.

These factors 1, 2, and 3 also apply to both stocks and bonds and are the foundation of the theory of interest rates. Factor 4 applies primarily to the cash flows from equities.

The fundamental sources of stock valuation are the dividends and earnings of firms.

Fed Model of Stock Market Valuation

Fed Model of Stock Market Valuation

Greenspan's testimony in his semiannual address to Congress in 1997 suggested that the central bank regarded the stock market as overvalued whenever this earnings yield fell below the bond rate and undervalued whenever the reverse occurred.

The basic idea behind this Fed model is that bonds are the chief alternative for stocks in investors' portfolio.

The return on a bond can be termed the interest yield.
The return on stocks is termed the earnings yield.
When the interest yield rises above the earnings yield, stock prices fall because investors shift their portfolio from stocks to bonds.
On the other hand, when the interest yield falls below the stock yield, investors move into stocks, boosting their price.

Institutions have been using the relation between interest yields and stock yields to determine their asset allocations for many years.

What is unique about the Fed model is that it directly compares these two yields rather than just noting a correlation between them.

The Fed model appears to have worked fairly well since 1970. When interest rates fell, stocks rallied to bring the earnings yield down, and the opposite occurred when interest rates rose.

What is surprising is that this relation holds despite the fact that stocks and bonds are very different assets. The reason why the Fed model works is that the market rates these two advantages as approximately of equal value when inflation is an important factor.

There is no question that both bonds and stocks do badly when inflation increases.

Bond prices fell in the late 1960s and 1970s because rising inflation forced interst rates up to offset the depreciating value of money.
Inflation was accompanied by an increase in energy costs, poor productivity growth and poor monetary policy. Therefore, inflation depresses corporate profits and real stock returns.
Finally, inflation increases uncertainty and raises the threat of central bank tightening of money policy to halt rising consumer prices. This is also negative for stocks.

Falling interest rates boosted both stock and bond prices as economic growth increased. The 1980s amd 1990s were good decades for both stocks and bonds as inflation declined from its record high levels.

However, both history and theory suggest that the Fed model breaks down when inflation is very low or when consumer prices are stagnant and deflation threatens. In such circumstances, bonds (especially risk-free government bonds) will do very well, but stocks returns will be ambiguous.

Given that interest rates and inflation have now shrunk to their lowest level in four decades, stock investors should be wary of using the Fed model.

Stocks still will welcome any Fed reduction in interest rates, but declines in long-term government bond rates often signal strong deflationary or recessionary forces. It will be harder under these circumstances for firms to raise their output prices to cover costs. Deflation undermines firms' pricing power, and this cuts into profit margins.
Moreover, because it is extremely difficult for firms to negotiate nominal wage cuts, deflation increases real wage costs and reduces profits. Thus nominal assets such as bonds will shine under deflation, whereas real assets often suffer.

Unless inflation heads upward again, it is unlikely that the tight correlation experienced over the past two decades between these two yields will continue.

In a low-inflation world, pricing power and earnings potential will dominate stock valuations, whereas bonds will be valued for their ability to hedge deflationary risk.
Rising and falling interest rates still will be very important determinants of stock prices in the very short run but long-run patterns are apt to diverge as investors recognize the fundamental differences in the assets.

Additional notes:
Present market PE of KLSE is around 15, giving an earnings yield of 6.7%.
The interest rate is about 3%.

Monday 25 May 2009

Does the value of stocks depend on dividends or earnings?

Does the value of stocks depend on dividends or earnings?

Management determines its dividend policy by evaluating many factors, including:

the tax differences between dividend income and capital gains,
the need to generate internal funds to retire debt or invest, and,
the desire to keep dividends relatively constant in the face of fluctuating earnings.

Since the price of a stock depends primarily on the present discounted value of all expected future dividends, it appers that dividend policy is crucial to determining the value of the stock.

However, this is not generally true. It does not matter how much is paid as dividends and how much is reinvested AS LONG AS the firm earns the same return on its retained earnings that shareholders demand on its stock. The reason for this is that dividends not paid today are reinvested by the firm and paid as even larger dividends in the future.

Dividend Payout Ratio

Management's choice of dividend payout ratio, which is the ratio of cash dividends to total earnings, does influence the timing of the dividend payments.

The lower the dividend payout ratio (that is more earnings are retained), the smaller the dividends will be in the near future. Over time, however, dividends will rise and eventually will exceed the dividend path associated with a higher payout ratio.

Moreover, assuming that the firm earns the same rate on investment as the investors require from its equity (for example, ROE of 15%), the present value of these dividend streams will be identical no matter what payout ratio is chosen.

How to value Stocks?

Note that the price of the stock is always equal to the present value of ALL FUTURE DIVIDENDS and not the present value of future earnings.

Earnings not paid to investors can have value only if they are paid as dividends or other cash disbursements at a later date. Valuing stock as the present discounted value of future earnings is manifestly wrong and greatly overstates the value of a firm. (Note: Firms that pay no dividends, such as Warren Buffett's Berkshire Hathaway, have value because their assets, which earn cash returns, can be liquidated and disbursed to shareholders in the future.)

John Burr Williams, one of the greatest investment analysts of the early part of the centrury and author of the classic The Theory of Investment Value, argued this point persuasively in 1938. He wrote:

"Most people will object at once to the foregoing formula for valuing stocks by saying that it should use the present worth of future earnings, not future dividends. But should not earnings and dividends both give the same answer under the implicit assumptions of our critics? If earnings not paid out in dividends aree all successfully reinvested at compound interest for the benefit of the stockholder, as the critics imply, then these earnings should produce dividends later; if not, then they are money lost. Earnings are only a means to an end, and the means should not be mistaken for the end."

Ref: Stock for the Long Run, by Jeremy Siegel

My 18 points guide to Successfully compounding your money in Stocks

Be a good stock picker.
Think as a business owner.
Always look at value rather than the price. Do the homework.
Buy and hold is alright for selected stocks.
Compounding is your friend, get this to work its magic.
Mr. Market is there to be taken advantage of. Do not be the sucker instead. BFS;STS.
Always buy a lot when the price is low.
Never buy when the stock is overpriced.
It is alright to buy when the selected stock is at a fair price.
Phasing in or dollar cost averaging is safe for such stocks during a downtrend, unless the price is still obviously too high.
Do not time the market for such or any stocks.
By keeping to the above strategy, the returns will be delivered through the growth of the company's business.
So, when do you sell the stock? Almost never, as long as the fundamentals remain sound and the future prospects intact.
The downside risk is protected through only buying when the price is low or fairly priced.
Tactical dynamic asset allocation or rebalancing based on valuation can be employed but this sounds easier than is practical, except in extreme market situations.
Sell urgently when the company business fundamental has deteriorated irreversibly.
You may also wish to sell should the growth of the company has obviously slowed and you can reinvest into another company with greater growth potential of similar quality. However, unlike point 16, you can do so leisurely.
In conclusion, a critical key to successful investing is in your stock picking ability.

http://myinvestingnotes.blogspot.com/2012/07/my-18-points-guide-to-successfully.html

11 Lessons From Peter Lynch

Peter Lynch taught me:

1. Behind every stock is a company. Find out what it’s doing.
2. Never invest in any idea you can’t illustrate with a crayon.
3. Over the short term, there may be no correlation between the success of a company’s operations and the success of its stock. Over the long term, there’s a 100% correlation.
4. Buying stocks without studying the companies is the same as playing poker – and never looking at your cards.
5. Time is on your side when you own shares of superior companies.
6. Owning stock is like having children. Don’t get involved with more than you can handle.
7. When the insiders are buying, it’s a good sign.
8. Unless you’re a short seller, it never pays to be pessimistic.
9. A stock market decline is as predictable as a January blizzard in Colorado. If you’re prepared, it can’t hurt you.
10. Everyone has the brainpower to make money in stocks. Not everyone has the stomach.
11. Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested.

Lynch’s advice had a profound effect on my stock market approach. He taught me that investment success isn’t the result of developing the right macro-economic view or deciding when to jump in or out of the market. Success is about researching companies to identify those that are likely to report positive surprises.

Capital Expenditure

A great company with a Durable Competitive Advantage will have a ratio of Capital Expenditures to Net Income of less than 25%. Less is better.

Capital Expenditures are expenses on:
- fixed assets such as equipment, property, or industrial buildings
- fixing problems with an asset
- preparing an asset to be used in business
- restoring property
- starting new businesses

A good company will have a ratio of Capital Expenditures to Net Income of less than 50%.

A great company with a Durable Competitive Advantage will have a ratio of less than 25%.

Less is better.

Benjamin Graham's 113 Wise Words

The true investor scarcely ever is forced to sell his shares, and at all times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgement."

Philip Fisher's Wise Words

"The refusal to sell at a loss, while completely natural and normal, is probably one of the most dangerous in which we can indulge ourselves in the entire investment process.

More money has probably been lost by investors holding a stock they really did not want until they could 'at least come out even' than from any other single reason. If to these actual losses are added the profits that might have been made through the proper reinvestment of these funds if such reinvestment had been made when the mistake was first realized, the cost of self-indulgence becomes truly tremendous."

(Common Stocks and Uncommon Profits)

The Ultimate Hold-versus-Sell Test

Here is the overriding primary test, followed by observations on why it is so critically important:

Knowing all that you now know and expect about the company and its stock (not what you originally believed or hoped at time of purchase), and assuming that you had available capital, and assuming that it would not cause a portfolio imbalance to do so, would you buy this stock today, at today's price?

No equivocation. Yes or no?

Answers such as maybe or probably are not acceptable since they are ways of dodging the issue. No investor probably buys a stock; they either place an order or do not.

Here is the implication of your answer to that critical test: if you did not answer with a clear affirmative, you should sell; only if you said a strong yes, are you justified to hold.

Some thoughts on Analysing Stocks (KISS)

Ideally a stock you plan to purchase should have all of the following charateristics:

• A rising trend of earnings dividends and book value per share.
• A balance sheet with less debt than other companies in its particular industry.
• A P/E ratio no higher than average.
• A dividend yield that suits your particular needs.
• A below-average dividend pay-out ratio.
• A history of earnings and dividends not pockmarked by erratic ups and downs.
• Companies whose ROE is 15 or better.
• A ratio of price to cash flow (P/CF) that is not too high when compared to other stocks in the same industry.

Margin of Safety Concept: Stocks should be bought like groceries, not like perfume

The high CAGR in the early years of the investing period, due to buying at a discount, tended to decline and approach that of the intrinsic EPS GR of the companies over a longer investment time-frame.

Chapter 20 - “Margin of Safety” as the Central Concept of Investment

A single quote by Graham on page 516 struck me:

Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions.

Basically, Graham is saying that most stock investors lose money because they invest in companies that seem good at a particular point in time, but are lacking the fundamentals of a long-lasting stable company.

This seems obvious on the surface, but it’s actually a great argument for thinking more carefully about your individual stock investments. If most of your losses come from buying companies that seem healthy but really aren’t, isn’t that a profound argument for carefully studying any company you might invest in?