US lurching towards 'debt explosion' with long-term interest rates on course to double
The US economy is lurching towards crisis with long-term interest rates on course to double, crippling the country’s ability to pay its debts and potentially plunging it into another recession, according to a study by the US’s own central bank
By Philip Aldrick, Banking Editor
Published: 5:44AM BST 06 Jul 2009
Comments 270 Comment on this article
Next Tim Geithner, the US Treasury Secretary, has faced searching question about the growing US Budget deficit
Alan Greenspan, the former chairman of the Federal Reserve, is blamed by many for keeping interest rates too low for too long
Wen Jiabao, the Chinese premier, has expressed his concern over the scale of the US deficit
The deficit is just one of the financial headaches confronting US President Obama, pictured here at the G20 Summit
The US budget deficit is expected to reach about 12pc of the country's gross domestic product this year
George Soros, the billionaire investor, has been among those to express concern about the size of the US deficit and those of other economies
Federal Reserve chairman Ben Bernanke, pictured here with Tim Geither, has acknowledged that the mountain of US debt needs to be reined in
Politicians around the world have said that the bigger deficits are a necessary consequence of keeping a global depression at bay
Bank of England Governor Mervyn King, pictured on the right, has given explicit warnings to Alistair Darling, the Chancellor, to cut the deficit
UK Prime Minister Gordon Brown is arguing that more Government spending will prop up the economy and help cut the deficit
In a 2003 paper, Thomas Laubach, the US Federal Reserve’s senior economist, calculated the impact on long-term interest rates of rising fiscal deficits and soaring national debt. Applying his assumptions to the recent spike in the US fiscal deficit and national debt, long-term interests rates will double from their current 3.5pc.
The impact would be devastating by making it punitively expensive to finance national borrowings and leading to what Tim Congdon, founder of Lombard Street Research, called a “debt explosion”. Mr Laubach’s study has implications for the UK, too, as public debt is soaring. A US crisis would have implications for the rest of the world, in any case.
Using historical examples for his paper, New Evidence on the Interest Rate Effects of Budget Deficits and Debt, Mr Laubach came to the conclusion that “a percentage point increase in the projected deficit-to-GDP ratio raises the 10-year bond rate expected to prevail five years into the future by 20 to 40 basis points, a typical estimate is about 25 basis points”.
The US deficit has blown out from 3pc to 13.5pc in the past year but long-term rates are largely unchanged. Assuming Mr Laubach’s “typical estimate”, long-term rates have to climb 2.5 percentage points.
He added: “Similarly, a percentage point increase in the projected debt-to-GDP ratio raises future interest rates by about 4 to 5 basis points.” Economists are predicting a wide range of ratios but Mr Congdon said it was “not unreasonable” to assume debt doubling to 140pc. At that level, Mr Laubach’s calculations would see long-term rates rise by 3.5 percentage points.
The study is damning because Mr Laubach was the Fed’s economist at the time, going on to become its senior economist between 2005 and 2008, when he stepped down. As a result, the doubling in rates is the US central bank’s own prediction.
Mr Congdon said the study illustrated the “horrifying” consequences for leading western economies of bailing out their banks and attempting to stimulate markets by cutting taxes and boosting public spending. He said the markets had failed to digest fully the scale of fiscal largesse and said “current gilt yields [public debt] are extraordinary low given the size of deficits”.
Should the cost of raising or refinancing public debt in the markets double, “the debt could just explode”, he said, adding that it would come to a head in “five to 10 years”.
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5754447/US-lurching-towards-debt-explosion-with-long-term-interest-rates-on-course-to-double.html
Thursday, 9 July 2009
Time for Buffett to answer some tough questions
Time for Buffett to answer some tough questions
Berkshire Hathaway shareholders are heading for the "Woodstock for capitalists" – the company's annual gathering in Omaha. Warren Buffett, the Berkshire boss, has changed the format to encourage more questions about the business. Investors should take him up on that.
By Richard Beales
Published: 6:20PM BST 01 May 2009
The legendary investor is 78 and his long-time sidekick, Charlie Munger, is 85. With his track record and public profile, Buffett is the epitome of the corporate "key man", as Fitch Ratings pointed out in knocking Berkshire's triple-A rating down a notch in March. He has, he says, chosen his successors. While their identities are undisclosed, it's a safe bet they know what they are doing. But the culture that brings 30,000-odd shareholders to Omaha every year will unavoidably change.
Another important Buffett decision of late has been to expose Berkshire to big derivatives bets – $67bn of potential exposure at the end of 2008. This is in spite of once calling such instruments "financial weapons of mass destruction".
Buffett recognises the apparent double standard, and brings to derivatives much of the common sense he applies to other investments. The contracts he has written, so far, are relatively straightforward and he has limited expected losses to an amount Berkshire could easily handle.
Berkshire shares have lost a third of their value in the past year. It is suddenly looking like what it is – a largely unhedged equity investment vehicle with a focus on the financial sector.
Its giant insurance businesses don't look so special at the moment. Large stakes in American Express, Wells Fargo and rating agency Moody's underline the finance focus. Along with the succession question, that may help to explain why Berkshire's shares appear to be trading at a discount to the market value of its holdings.
But another development should generate optimism among the Berkshire faithful: opportunities to invest on the cheap ought now to be plentiful. Buffett picked up some good deals last year, Berkshire still has strong credit and plenty of cash – and the Sage is still around.
After years in which few bargains were available and Berkshire's size made meaningful deals hard to come by, he has the chance to redeem himself.
http://www.telegraph.co.uk/finance/breakingviewscom/5258851/Time-for-Buffett-to-answer-some-tough-questions.html
Berkshire Hathaway shareholders are heading for the "Woodstock for capitalists" – the company's annual gathering in Omaha. Warren Buffett, the Berkshire boss, has changed the format to encourage more questions about the business. Investors should take him up on that.
By Richard Beales
Published: 6:20PM BST 01 May 2009
The legendary investor is 78 and his long-time sidekick, Charlie Munger, is 85. With his track record and public profile, Buffett is the epitome of the corporate "key man", as Fitch Ratings pointed out in knocking Berkshire's triple-A rating down a notch in March. He has, he says, chosen his successors. While their identities are undisclosed, it's a safe bet they know what they are doing. But the culture that brings 30,000-odd shareholders to Omaha every year will unavoidably change.
Another important Buffett decision of late has been to expose Berkshire to big derivatives bets – $67bn of potential exposure at the end of 2008. This is in spite of once calling such instruments "financial weapons of mass destruction".
Buffett recognises the apparent double standard, and brings to derivatives much of the common sense he applies to other investments. The contracts he has written, so far, are relatively straightforward and he has limited expected losses to an amount Berkshire could easily handle.
Berkshire shares have lost a third of their value in the past year. It is suddenly looking like what it is – a largely unhedged equity investment vehicle with a focus on the financial sector.
Its giant insurance businesses don't look so special at the moment. Large stakes in American Express, Wells Fargo and rating agency Moody's underline the finance focus. Along with the succession question, that may help to explain why Berkshire's shares appear to be trading at a discount to the market value of its holdings.
But another development should generate optimism among the Berkshire faithful: opportunities to invest on the cheap ought now to be plentiful. Buffett picked up some good deals last year, Berkshire still has strong credit and plenty of cash – and the Sage is still around.
After years in which few bargains were available and Berkshire's size made meaningful deals hard to come by, he has the chance to redeem himself.
http://www.telegraph.co.uk/finance/breakingviewscom/5258851/Time-for-Buffett-to-answer-some-tough-questions.html
How to invest like Warren Buffett
How to invest like Warren Buffett
The author's book on Warren Buffett, "The Midas Touch", summarises the favourite investing principles of the "Sage of Omaha".
By John Train
Published: 11:26AM BST 01 Jul 2009
Comments 12 Comment on this article
Fanatical: offered a glass of good wine at a dinner, Warren Buffett said: 'Just hand me the money' Photo: AFP/GETTY
My book on Warren Buffett, "The Midas Touch", has just been published in Britain. It contains most of his favourite investing principles. Although time has passed since its original appearance, his ideas today are much the same.
Here is a handful of the central ones. They aren't easy: this is a competitive game.
1. The key to investing is found in this rule: buy a share as though you were buying the whole company.
To do that, you have to know what the enterprise is worth. Therefore, the investor should live in the world of companies, never of mathematical formulae.
In the latest annual meeting of Berkshire Hathaway, Buffett's company, his partner Charles Munger put it this way: "The worst decisions are often made with the most formal projections. They look so professional that you begin to believe the numbers are reality.
"You are taken in by the false precision. Business schools teach this stuff because they have to teach something."
2. A recent heresy is that market volatility equals risk. Quite the contrary!
For a serious investor, volatility creates opportunity. To use my own language, investment opportunity consists of the difference between reality and perception. High volatility increases that difference, and thus increases opportunity for the knowledgeable investor.
Mr Buffett says sardonically that he favours the dotty "efficient market theory" because it creates more opportunities for him.
3. As to growth versus value, Mr Buffett observes that "value" should include projected growth, notably "growth at a reasonable price" or Garp.
He looks for companies with a business "moat" around them that should have steady, reasonably predictable growth.
Perhaps a better phraseology for the growth versus value dichotomy might be "high growth" versus "bargain hunting". The analytical techniques, and investor temperaments, in the two approaches are quite different. One calls for a futurologist, the other for an accountant.
That said, for a taxpaying investor long-term growth is more convenient and more tax-efficient than seeking one bargain after another.
4. High technology, most emerging markets, leveraged buyouts, real estate and other hard to appraise exotica might as well not exist for Mr Buffett.
He follows the safest approach: stick to what you know best. However, many approaches are valid. Your advantage will be the extent to which your knowledge of a valid situation exceeds the market's.
It makes little difference how broad your knowledge is. One correct investment decision is as valuable as another. Mr Buffett says that one should only seek a handful of really big ideas in one's investing career. The key is to be right when you do decide, not to flutter about spreading yourself thin.
5. Investing in bad industries, or turnarounds, usually doesn't work.
A skilled surgeon can excise a tumour but to revive a moribund patient requires a magician. The princess hopes that when she kisses the toad a beautiful prince will spring up. In fact, alas, she will probably end up awash in toads.
6. Businesses that generate cash that they can reinvest at high rates of return over long periods are particularly attractive holdings.
Low-margin businesses that periodically call for more cash from their investors, which they can only invest at a modest rate of return, are a dismal affair. Differently put, if all else is the same, feel free to marry an heiress rather than a pauper.
7. Don't sell a great stock just because it has doubled.
It could be better value afterwards than it was before. The greatest stocks may go up 20 or even 100 times in a generation or two.
Peter Lynch, who built up Fidelity's Magellan fund, points out that the deluded policy of "rebalancing" more or less automatically because a stock has risen is a lot like pulling out the flowers in the garden and watering the weeds. Don't do it!
8. A grave corporate folly is offering your own underpriced stock for the fully valued stock of an acquisition candidate.
In that scenario, instead of paying 50p for £1 of value, you are paying £1 for 50p of value. Lunacy! Still, such situations are often generated by the megalomania of chief executives.
9. Avoid long-term bonds.
"We are bound to have inflation, given current policies. There are a lot of incentives for politicians in all countries to inflate their currencies," Mr Buffett says.
10. To do superlatively well, an investor, like a company manager, must be a fanatic.
By relentless concentration, Mr Buffett has moved billions of dollars from other people's pockets into his own. Alas, he doesn't enjoy what money can buy. He's a miser.
Once, offered a glass of good wine at a dinner, he said: "Just hand me the money." So, it may be helpful in business terms to be that focused, but not necessarily in human terms.
Still, to preserve capital, which is difficult, one should understand the principles, and Mr Buffett's are all good ones.
"The Midas Touch" by John Train is published by Harriman House. Mr Train founded Train Smith Investment Counsel and he has written hundreds of columns for the Wall Street Journal, the New York Times and Forbes magazine. Apart from "The Midas Touch", his best-selling books include "The Craft of Investing", "The Money Masters" and "The New Money Masters".
http://www.telegraph.co.uk/finance/personalfinance/investing/5708407/How-to-invest-like-Warren-Buffett.html
Wednesday, 8 July 2009
"Even Buffett Isn't Perfect"
Sunday, July 20, 2008
Book Review-"Even Buffett Isn't Perfect"
I am a complete sucker for investment books. My wife accuses me of owning several thousand books that have essentially the same title, usually some variant of Value Investing, valuation, or intrinsic value, or securities analysis. Of course, I have every Buffett or Munger book known to man as well as everything about or by Benjamin Graham. By the way, speaking of Graham, my good friend Geoff Gannon is putting together a series which will review Securities Analysis chapter by chapter. For those who are serious value investing students, I suspect that you will enjoy Geoff's always thorough and thoughtful posts.
Vahan Janjigian, a fellow CFA, is executive director of Forbes Investment Advisory Institute and publishes a number of newsletters with Forbes. He also has a blog and serves on the investment committee of a large RIA.
Dr. Janjigian's book gingerly attempts to criticize some of Buffett's mistaken investments and controversial points of view. I think the book is more successful with the latter than the former.
Janjigian admires Buffett's discipline and capital allocation methodologies. He admires Buffett's ability to manage executive talent. His last sentence in the book summarizes his viewpoint,"Based on the evidence, it is certainly fair to conclude that WB is one of the greatest investors-if not the greatest investor-of all time."
So where are Buffett's mistakes? Janjigian criticizes Buffett's views on taxation, especially those on estate taxes. I agree with Janjigian that there is an irony if not an artificiality or phoniness about urging the continuity of high estate taxes and concomitantly avoiding the situation through setting up trusts and foundations Evidence of avoiding income taxes is evident throughout Berkshire's life...the company and Buffett have always used the IRS Tax Code to their advantage. There is clearly nothing wrong with that but similarly. it is somewhat disingenuous to urge higher taxes after a career of avoiding them.
Like any investor, Buffett has made some mistakes. This is not a game of perfect, but rather one where investors should attempt to understand the downside risks in making an investment. The outcomes can be highly uncertain...the future always is hazy and usually, initial assumptions are plain wrong, either on the optimistic or the pessimistic side of expectations.
Janjigian addresses the Buffett diversification versus concentration question. "Buffett believes that if you can't invest enough money to have some say in how the company's capital is to be deployed, you are better off diversifying your portfolio." This is simply not true. Most Buffetteers and wannabes certainly attempt to focus their portfolios. WB does not say not to diversify...in fact, for the average investor who is not inclined to do sufficient due diligence, diversification is a salvation. For many professional portfolios, the great bulk of the portfolio is indexed. But in cases where one has specialized knowledge or skills, satellite investments outside the cord index are made and should add performance. Diversification is a protection against ignorance. If one is able to do due diligence, and select successful businesses at reasonable valuations, diversification will not serve you other than to reduce volatility and an unfortunate corollary, reduce returns.
VJ does a decent job in discussing attributes of diversification in a non-mathematical approach to statistical correlation. This is one of the strongest elements in this book.
Much of the rest of the book is in my view, completely obvious. "Buffett buys stocks cheap, not cheap stocks." "Successful investors must be able to distinguish between great companies and great stocks." VJ has an amazing grasp of the obvious and adds little insight into valuation of growth stocks. There are far better sources than this book for this element.
VJ addresses the fact that value works over the long run but growth or rather momentum can work over the short run. Buffett never trashes growth but views it as a partner in helping undervalued stocks recover when growth becomes temporarily disrupted. Other than Buffett's famous comments about lemmings, he has never discussed momentum investing per se, at least to my knowledge.
VJ makes some dangerous statements about PIPE stocks indicating that WB has been successful in buying special issue "Private Investment in Public Equity" holdings such as Salomon Brothers or US Air. True, these had special terms that a large buyer can extract but it is misleading to believe that what some brokers present as PIPEs will offer the average investor better returns. Most PIPE offerings are made in very small cap, highly risky businesses. VJ does suggest that the best access to such investments is through a hedge fund or through Berkie itself.
VJ makes the point that "Unless you have access to Buffett-like resources, it is better to think of yourself as a stock buyer than a business buyer." The argument that managements will rarely listen to outside advice is humbling for both institutional and retail investors. However, retail investors and small institutional investors can be very successful in motivating and organizing larger investors to add pressure to a board. The principle of thinking long term as an owner of a business rather than a punter of stocks is an important part of any real value investor's credo. I have known many managers who "played" stocks rather than owned businesses and who were looking for trends rather than valuation rationales for stocks. They are assuredly not value managers. I have had investee company managements who have indicated that I should just sell the stock if I didn't like what they are doing. Again, these are managements who just don't get "it." If the business has a strong moat that is not being defended, get rid of the management but hang onto the business. VJ's advice is ill-conceived at best in this topic.
Swinging for the fat pitch is WB's approach. WB does not suffer from analysis paralysis and VJ believes that some of WB's recent deals have had inadequate due diligence. Sometimes the obvious should not take very long!
WB readily admits to being "dead wrong." Salomon was a mistake that took an extraordinary amount of work to escape. Gen Re was much worse with poor judgment on WB's part re underwriting discipline and the derivatives book of GenRe securities. NetJets capital intensity does not seem to fit the usual Buffett textbook. Pier One had no moat. Mistkaes all. VJ actually misses the most egregious errors that I recall, namely Dexter Shoe which gave away 1.6% of BRK or about $3.5 Billion in value for what is now a tiny fragment of H.H. Brown Shoe Group, another BRK sub. Dexter, Buffett calls his worst mistake. VJ doesn't even address this. There have been others. WB was the largest investor in Handy and Harman, the silver processor and refiner. Unfortunately, it was also an auto parts supplier and metal bender. Buffett's endless fascination with silver attracted him to H&H. H&H ultimately merged into WHX, which went chapter 11 in 2003. Berky had escaped H&H many years before this ignominious end.
VJ dislikes WB's views about corporate governance. It is incorrect to say that Buffett opposes employee stock options. It was the accounting for them that he faulted as well as the low hurdles that most company's managements clear to get them. In many cases, the only requirement for managements to achieve is respiration, and there are even cases where compensation continues into the after-life! There is nothing misleading about WB issuing options in subsidiary companies with clear performance mandates versus his public statements about employee stock options issuance.
The composition of WB's board has been controversial in the past. No it certainly was not independent historically with Warren and Charlie, Susan and Howard Buffett; Malcolm Chace, Walter Scott were old business cronies; Ron Olson was a partner in Munger's old firm. But VJ missed the most obvious point, Buffett for most of the time that he was involved in BRK owned over half the stock. It was absolutely iron clad clear that management's interests were aligned with shareholders. Unlike most public corporations, management owned most of the stock. The role of the board is not to protect minority shareholder interests but rather to ensure that shareholders' interests are protected. This point is missed by VJ.
Bottom-line, if you are looking for advice to imitate WB's investment style, this is not the best source. If you are looking for a comprehensive list of WB's mistakes in judgment, this is incomplete. If you are looking for views on taxation contra to those of WB, read Steve Forbes rather than VJ's book.
The key takeaways after each chapter provide an excellent summary of each chapter. The final chapter, "Conclusion" successfully highlights the important points.
Dr. Janjigian has attempted to provide an antidote to the usual glorious heaping of praise that most Buffett books (and CNBC coverage) provide. The reality is that nobody walks on water (or parts the sea depending on your point of view.) Even great investors frankly screw up royally. But the incidence in the case of Buffett is remarkably low, the damage is a scratch or fender bender rather than a complete wreck. Should all of us be so fortunate, or disciplined!!
posted by Rick @ 6:52 PM 3 comments
http://valuediscipline.blogspot.com/2008/07/book-review-buffett-isn-perfect.html
Book Review-"Even Buffett Isn't Perfect"
I am a complete sucker for investment books. My wife accuses me of owning several thousand books that have essentially the same title, usually some variant of Value Investing, valuation, or intrinsic value, or securities analysis. Of course, I have every Buffett or Munger book known to man as well as everything about or by Benjamin Graham. By the way, speaking of Graham, my good friend Geoff Gannon is putting together a series which will review Securities Analysis chapter by chapter. For those who are serious value investing students, I suspect that you will enjoy Geoff's always thorough and thoughtful posts.
Vahan Janjigian, a fellow CFA, is executive director of Forbes Investment Advisory Institute and publishes a number of newsletters with Forbes. He also has a blog and serves on the investment committee of a large RIA.
Dr. Janjigian's book gingerly attempts to criticize some of Buffett's mistaken investments and controversial points of view. I think the book is more successful with the latter than the former.
Janjigian admires Buffett's discipline and capital allocation methodologies. He admires Buffett's ability to manage executive talent. His last sentence in the book summarizes his viewpoint,"Based on the evidence, it is certainly fair to conclude that WB is one of the greatest investors-if not the greatest investor-of all time."
So where are Buffett's mistakes? Janjigian criticizes Buffett's views on taxation, especially those on estate taxes. I agree with Janjigian that there is an irony if not an artificiality or phoniness about urging the continuity of high estate taxes and concomitantly avoiding the situation through setting up trusts and foundations Evidence of avoiding income taxes is evident throughout Berkshire's life...the company and Buffett have always used the IRS Tax Code to their advantage. There is clearly nothing wrong with that but similarly. it is somewhat disingenuous to urge higher taxes after a career of avoiding them.
Like any investor, Buffett has made some mistakes. This is not a game of perfect, but rather one where investors should attempt to understand the downside risks in making an investment. The outcomes can be highly uncertain...the future always is hazy and usually, initial assumptions are plain wrong, either on the optimistic or the pessimistic side of expectations.
Janjigian addresses the Buffett diversification versus concentration question. "Buffett believes that if you can't invest enough money to have some say in how the company's capital is to be deployed, you are better off diversifying your portfolio." This is simply not true. Most Buffetteers and wannabes certainly attempt to focus their portfolios. WB does not say not to diversify...in fact, for the average investor who is not inclined to do sufficient due diligence, diversification is a salvation. For many professional portfolios, the great bulk of the portfolio is indexed. But in cases where one has specialized knowledge or skills, satellite investments outside the cord index are made and should add performance. Diversification is a protection against ignorance. If one is able to do due diligence, and select successful businesses at reasonable valuations, diversification will not serve you other than to reduce volatility and an unfortunate corollary, reduce returns.
VJ does a decent job in discussing attributes of diversification in a non-mathematical approach to statistical correlation. This is one of the strongest elements in this book.
Much of the rest of the book is in my view, completely obvious. "Buffett buys stocks cheap, not cheap stocks." "Successful investors must be able to distinguish between great companies and great stocks." VJ has an amazing grasp of the obvious and adds little insight into valuation of growth stocks. There are far better sources than this book for this element.
VJ addresses the fact that value works over the long run but growth or rather momentum can work over the short run. Buffett never trashes growth but views it as a partner in helping undervalued stocks recover when growth becomes temporarily disrupted. Other than Buffett's famous comments about lemmings, he has never discussed momentum investing per se, at least to my knowledge.
VJ makes some dangerous statements about PIPE stocks indicating that WB has been successful in buying special issue "Private Investment in Public Equity" holdings such as Salomon Brothers or US Air. True, these had special terms that a large buyer can extract but it is misleading to believe that what some brokers present as PIPEs will offer the average investor better returns. Most PIPE offerings are made in very small cap, highly risky businesses. VJ does suggest that the best access to such investments is through a hedge fund or through Berkie itself.
VJ makes the point that "Unless you have access to Buffett-like resources, it is better to think of yourself as a stock buyer than a business buyer." The argument that managements will rarely listen to outside advice is humbling for both institutional and retail investors. However, retail investors and small institutional investors can be very successful in motivating and organizing larger investors to add pressure to a board. The principle of thinking long term as an owner of a business rather than a punter of stocks is an important part of any real value investor's credo. I have known many managers who "played" stocks rather than owned businesses and who were looking for trends rather than valuation rationales for stocks. They are assuredly not value managers. I have had investee company managements who have indicated that I should just sell the stock if I didn't like what they are doing. Again, these are managements who just don't get "it." If the business has a strong moat that is not being defended, get rid of the management but hang onto the business. VJ's advice is ill-conceived at best in this topic.
Swinging for the fat pitch is WB's approach. WB does not suffer from analysis paralysis and VJ believes that some of WB's recent deals have had inadequate due diligence. Sometimes the obvious should not take very long!
WB readily admits to being "dead wrong." Salomon was a mistake that took an extraordinary amount of work to escape. Gen Re was much worse with poor judgment on WB's part re underwriting discipline and the derivatives book of GenRe securities. NetJets capital intensity does not seem to fit the usual Buffett textbook. Pier One had no moat. Mistkaes all. VJ actually misses the most egregious errors that I recall, namely Dexter Shoe which gave away 1.6% of BRK or about $3.5 Billion in value for what is now a tiny fragment of H.H. Brown Shoe Group, another BRK sub. Dexter, Buffett calls his worst mistake. VJ doesn't even address this. There have been others. WB was the largest investor in Handy and Harman, the silver processor and refiner. Unfortunately, it was also an auto parts supplier and metal bender. Buffett's endless fascination with silver attracted him to H&H. H&H ultimately merged into WHX, which went chapter 11 in 2003. Berky had escaped H&H many years before this ignominious end.
VJ dislikes WB's views about corporate governance. It is incorrect to say that Buffett opposes employee stock options. It was the accounting for them that he faulted as well as the low hurdles that most company's managements clear to get them. In many cases, the only requirement for managements to achieve is respiration, and there are even cases where compensation continues into the after-life! There is nothing misleading about WB issuing options in subsidiary companies with clear performance mandates versus his public statements about employee stock options issuance.
The composition of WB's board has been controversial in the past. No it certainly was not independent historically with Warren and Charlie, Susan and Howard Buffett; Malcolm Chace, Walter Scott were old business cronies; Ron Olson was a partner in Munger's old firm. But VJ missed the most obvious point, Buffett for most of the time that he was involved in BRK owned over half the stock. It was absolutely iron clad clear that management's interests were aligned with shareholders. Unlike most public corporations, management owned most of the stock. The role of the board is not to protect minority shareholder interests but rather to ensure that shareholders' interests are protected. This point is missed by VJ.
Bottom-line, if you are looking for advice to imitate WB's investment style, this is not the best source. If you are looking for a comprehensive list of WB's mistakes in judgment, this is incomplete. If you are looking for views on taxation contra to those of WB, read Steve Forbes rather than VJ's book.
The key takeaways after each chapter provide an excellent summary of each chapter. The final chapter, "Conclusion" successfully highlights the important points.
Dr. Janjigian has attempted to provide an antidote to the usual glorious heaping of praise that most Buffett books (and CNBC coverage) provide. The reality is that nobody walks on water (or parts the sea depending on your point of view.) Even great investors frankly screw up royally. But the incidence in the case of Buffett is remarkably low, the damage is a scratch or fender bender rather than a complete wreck. Should all of us be so fortunate, or disciplined!!
posted by Rick @ 6:52 PM 3 comments
http://valuediscipline.blogspot.com/2008/07/book-review-buffett-isn-perfect.html
The 15 Most Important Investing Blogs For New Investors or Traders
Saturday, January 05, 2008
The 15 Most Important Investing Blogs For New Investors or Traders
As I mentioned in my last post I had a good year and have done well in my first two years investing. While it may be luck I would like to think that at least part of my success the past two yeas is due to skill. Not my own of course but rather the skills I have appropriated from reading various blogs.
In what has become a semi-annual feature I like to recognize the blogs that I feel have contributed most to my education as an investor and trader. At the end of my first year I posted on the top five blogs I read my first year investing. I followed up with an another top five blogs for the first half of 2007.
To recap the first ten are:
1. Gannon On Investing
One of the few bloggers I would actually pay to read.
2. Nodoodahs Investing
Smartest blogger I read.
3. Capital Markets & Social Equity
Best all around site to learn about every aspect of investing.
4. Trader Mike
Short term, long term, chart analysis, book reviews, educational links, reviews of trading tools; you name it Mike seems to provide it.
5. Howard Lindzon: Trends - Find Them, Ride Them, and Get Off
Part Groucho Marx and J.P. Morgan, Howard Lindzon does a great job of discussing, with humor, the underlying businesses represented by stocks.
6. Traderfeed
Read this site and you just may unleash the inner power of your mind to increase market performance while at the same time controlling the destructive mental tendencies we all have that decrease investing performance.
7. Daily Options Report
Great resource for an investor or trader looking to utilize options as a means to enhance market performance.
8. Maoxian
Think of him as the Bo Jackson of blogging. Can do it all and do it well. Insightful market commentary on all time frames and every style of investing and trading.
9. Cheap Stocks
Perhaps the best blog to read on applying the teachings of Benjamin Graham.
10. Abnormal Returns
Provides a comprehensive review, with links, to some of the best investment and economic related posts on the Internet.
Adding to the above ten are the following five blogs that I have found worthwhile reading during the second half of 2007:
11. Chris Perruna's Successful Education Through Investing
Great site that mixes different styles of investing and trading. One of the best things about this blog is that the blog does a good job of explaining why and how to have buy and sell discipline in selecting stocks.
12. Fat Pitch Financials
Great resource for the new value investor looking to learn more about value investing and how it is practiced.
13. Covered Call Writer Blog
The blog is a trading journal of an individual who has a system for writing covered calls. The blog details that system as well as the trades made using the aforementioned system. Good starting point for those interested in options.
14. Reflections on Value Investing
Best site that provides links to the best articles, blog posts, and resources for the value investor.
15. Rising Dividend Investing
Solid site that provides worthwhile market insight from a professional money management firm.
While I read a lot of great blogs, the above fifteen are those that I feel have done the most to advance my understanding of investing and trading.
Posted by Steven at 1/05/2008 01:25:00 PM
http://valueblogreview.blogspot.com/2008/01/15-most-important-investing-blogs-for.html
The 15 Most Important Investing Blogs For New Investors or Traders
As I mentioned in my last post I had a good year and have done well in my first two years investing. While it may be luck I would like to think that at least part of my success the past two yeas is due to skill. Not my own of course but rather the skills I have appropriated from reading various blogs.
In what has become a semi-annual feature I like to recognize the blogs that I feel have contributed most to my education as an investor and trader. At the end of my first year I posted on the top five blogs I read my first year investing. I followed up with an another top five blogs for the first half of 2007.
To recap the first ten are:
1. Gannon On Investing
One of the few bloggers I would actually pay to read.
2. Nodoodahs Investing
Smartest blogger I read.
3. Capital Markets & Social Equity
Best all around site to learn about every aspect of investing.
4. Trader Mike
Short term, long term, chart analysis, book reviews, educational links, reviews of trading tools; you name it Mike seems to provide it.
5. Howard Lindzon: Trends - Find Them, Ride Them, and Get Off
Part Groucho Marx and J.P. Morgan, Howard Lindzon does a great job of discussing, with humor, the underlying businesses represented by stocks.
6. Traderfeed
Read this site and you just may unleash the inner power of your mind to increase market performance while at the same time controlling the destructive mental tendencies we all have that decrease investing performance.
7. Daily Options Report
Great resource for an investor or trader looking to utilize options as a means to enhance market performance.
8. Maoxian
Think of him as the Bo Jackson of blogging. Can do it all and do it well. Insightful market commentary on all time frames and every style of investing and trading.
9. Cheap Stocks
Perhaps the best blog to read on applying the teachings of Benjamin Graham.
10. Abnormal Returns
Provides a comprehensive review, with links, to some of the best investment and economic related posts on the Internet.
Adding to the above ten are the following five blogs that I have found worthwhile reading during the second half of 2007:
11. Chris Perruna's Successful Education Through Investing
Great site that mixes different styles of investing and trading. One of the best things about this blog is that the blog does a good job of explaining why and how to have buy and sell discipline in selecting stocks.
12. Fat Pitch Financials
Great resource for the new value investor looking to learn more about value investing and how it is practiced.
13. Covered Call Writer Blog
The blog is a trading journal of an individual who has a system for writing covered calls. The blog details that system as well as the trades made using the aforementioned system. Good starting point for those interested in options.
14. Reflections on Value Investing
Best site that provides links to the best articles, blog posts, and resources for the value investor.
15. Rising Dividend Investing
Solid site that provides worthwhile market insight from a professional money management firm.
While I read a lot of great blogs, the above fifteen are those that I feel have done the most to advance my understanding of investing and trading.
Posted by Steven at 1/05/2008 01:25:00 PM
http://valueblogreview.blogspot.com/2008/01/15-most-important-investing-blogs-for.html
Dividends Are Still the Linchpin
Thursday, May 14, 2009
Dividends Are Still the Linchpin
With all of the dividend cuts of the last 18 months, many pundits are sounding the death knell for the dividend. There are lots of reasons they give:
- Companies can't afford them anymore
- They complicate capital adequacy and flexibility
- The capital they represent is too hard to raise
- Obama tax hike will make them less attractive to investors
The arguments that dividends are a relic of the past or a fatality of the credit crunch are silly. The recession we are crawling through will not last forever, and when it ends, companies will once again reinstate most of the dividend cuts as soon as they are able.
The reason is simple: almost all of the companies that have cut their dividends by any significant amount have faced a hornet's nest of angry shareholders. In addition, it is hard to find a company whose price is higher after a dividend cut. Indeed, in most cases, if a company has cut its dividend, it has been hammered.
According to Bloomberg data, dividends are very much alive. Bloomberg shows that of the 500 stocks in the S&P Index, 362 currently pay a dividend. During the past twelve months,
- 94 companies reduced their dividends,
- 115 paid the same amount as last year, and
- 130 raised their dividends.
Thus, in a year when the headlines have been full of dividend cuts, there were actually more dividend hikes than cuts.
The median dividend hike for the 130 companies that raised their dividends during the year was about 6%. Importantly, the median total return of these companies outperformed the S&P Index by nearly 8%.
There are still many great companies that are quietly raising their dividends and in doing so, reconfirming their commitment to give back to their "owners" a fair cut of the profits.
As I have said before, the root of the word dividend is dividere, which means to cut or divide. Dividends are not a bonus or a gift; dividends are the shareholders' cut of the profits. Corporate managers who ignore this may find themselves looking for a new job.
The linchpin that best ties the interests of corporate America together with its shareholders is a consistent and intelligent dividend policy. Most shareholders understand that recessions mean lower earnings and dividends. But, in my judgement, the pundits are wrong if they assume that shareholders will be less interested in dividends after the recession than they were before. I think it will be just the opposite.
More on this topic (What's this?)
The Top 40 Dividend Stocks for 2009 book review (Dividend Growth Investor, 5/15/09)
Dividend Portfolios – concentrate or diversify? (Dividend Growth Investor, 6/17/09)
The Latest In Dividend Research (Disciplined Approach to Investing, 5/24/09)
http://risingdividendinvesting.blogspot.com/2009/05/dividends-are-still-linchpin.html
Ten Principles of Dividend Growth Investing
Thursday, July 02, 2009
Ten Principles of Dividend Growth Investing
Many people forward on to me articles on dividend investing. These articles cover the waterfront from writers opposed to dividends completely to those who believe companies should pay a stated amount of their earnings in dividends. I find that I agree with very few of the articles I see. In most cases, I find it is not a theoretical objection but a practical objection: I have tried it their way and found it didn't work for me.
Elsewhere in earlier blogs I explained how I first learned of the merits of dividend investing in the 1980s and how those early ideas have evolved over time. The following is a short list of the principles of dividend investing as practiced by Donaldson Capital Management.
1. Consistent Dividend Growth is the most important element of dividend investing.
2. Beware of high dividend yields where dividend payouts are in excess of :
In three years, as the birds sing softly in the background, re-read today's duck and cover article. As you hear the band warming up in the background and the media are cautiously suggesting that things are looking up call me. Surprise me and ask me the following question: How much is Procter and Gamble overvalued?
We own Procter and Gamble.
More on this topic
(What's this?)
The Sweet Spot of Dividend Investing (Dividend Growth Investor, 5/26/09)
The Top 40 Dividend Stocks for 2009 book review (Dividend Growth Investor, 5/15/09)
6 Steps for High Yield Dividends (Investment U, 7/7/09)
Read more on Growth Investing, Dividend Investing, Dividends at Wikinvest
http://risingdividendinvesting.blogspot.com/
Ten Principles of Dividend Growth Investing
Many people forward on to me articles on dividend investing. These articles cover the waterfront from writers opposed to dividends completely to those who believe companies should pay a stated amount of their earnings in dividends. I find that I agree with very few of the articles I see. In most cases, I find it is not a theoretical objection but a practical objection: I have tried it their way and found it didn't work for me.
Elsewhere in earlier blogs I explained how I first learned of the merits of dividend investing in the 1980s and how those early ideas have evolved over time. The following is a short list of the principles of dividend investing as practiced by Donaldson Capital Management.
1. Consistent Dividend Growth is the most important element of dividend investing.
2. Beware of high dividend yields where dividend payouts are in excess of :
- 60% for industrial companies,
- 70% for utilities, and
- 90% for REITs.
3. Beware of any company that pays out more in dividends than their free cash flows.
4. Look for companies where there is at least a 70% correlation between price growth and dividend growth over the long run.
5. Companies with consistent dividend growth permit valuation using regression models. These regression models can offer an investor an educated guess at the expected total return of a stock over a future period of time.
6. It is remarkable that many so-called cyclical companies with volatile earnings will have a much lower price volatility if they employ a normalized dividend approach, instead of a lumpy approach.
7. We are always on the prowl for dividend-paying companies that the market has rewarded with a high correlation between their dividend growth and their price growth and who have temporarily fallen out of favor.
8. For almost all companies, even the most highly predictable companies in our universe, changes in interest rates will affect relative valuation.
9. Consistent dividend growing stocks seldom get highly over or undervalued. They get overvalued when the band is playing, the birds are singing, and stocks are flying high. They get undervalued when the media is shouting duck and cover.
10. Watch carefully at dividend actions in good times and in bad. In good times, dividend growth should be less than earnings growth. In bad times dividend growth should be higher than earnings growth.
In three years, as the birds sing softly in the background, re-read today's duck and cover article. As you hear the band warming up in the background and the media are cautiously suggesting that things are looking up call me. Surprise me and ask me the following question: How much is Procter and Gamble overvalued?
We own Procter and Gamble.
(What's this?)
The Sweet Spot of Dividend Investing (Dividend Growth Investor, 5/26/09)
The Top 40 Dividend Stocks for 2009 book review (Dividend Growth Investor, 5/15/09)
6 Steps for High Yield Dividends (Investment U, 7/7/09)
Read more on Growth Investing, Dividend Investing, Dividends at Wikinvest
http://risingdividendinvesting.blogspot.com/
Opportunity Cost and Opportunity Lost
A value investor's mind operates in a continuous buzz, deciding whether an investment is achieving its best possible returns or whether it should be replaced.
Value investors like cheap stocks, but if the stocks get cheap on an investor's watch, the investor should consider a serious reappraisal of a company's prospects.
Value investors continuously check for dead branches and aren't afraid to get out the pruning shears. Value investors know the cost of dead wood.
Likewise, the frugal citizens, value investors avoid squandering money that could be put to better use and always think of the best use for their capital. For Warren Buffett, a penny found on a sidewalk is "the start of the next billion."
Value investors like cheap stocks, but if the stocks get cheap on an investor's watch, the investor should consider a serious reappraisal of a company's prospects.
Value investors continuously check for dead branches and aren't afraid to get out the pruning shears. Value investors know the cost of dead wood.
Likewise, the frugal citizens, value investors avoid squandering money that could be put to better use and always think of the best use for their capital. For Warren Buffett, a penny found on a sidewalk is "the start of the next billion."
Has Mr. ttb bought his Lampo-genie?
I am pretty sure that I spelt the name of this car incorrectly. Anyway, you can see where this discussion is heading.
You are a successful value investor achieving consistent 12%, 15% or greater returns, and you have the discipline and fortitude to hang on to investments. Now even successful value investors can have fun, right? They can splurge on a new car, a vacation, a really nice outdoor barbecue. But savvy value investors also know how much this costs in the long run.
Suppose that you're a modestly successful 12% value investor. You spend $1,000 on that new barbecue today. You can see that you could have had $3,106 in 10 years, $9,646 in 20 years, $29,960 in 30 years, and $93,051 in 40 years instead. Spend $30,000 on a new car today, and forgo $289,380 20 years from now, $898,800 in 30 years, and $2.8 million in 40 years, at 12%! And if you're a better investor (an investor normally capable of 12% returns or better), the "losses" grow faster! So, the better an investor you are, the more the "good things" in life may cost. Ironic, right?
It's always right and safer to be frugal.
You are a successful value investor achieving consistent 12%, 15% or greater returns, and you have the discipline and fortitude to hang on to investments. Now even successful value investors can have fun, right? They can splurge on a new car, a vacation, a really nice outdoor barbecue. But savvy value investors also know how much this costs in the long run.
Suppose that you're a modestly successful 12% value investor. You spend $1,000 on that new barbecue today. You can see that you could have had $3,106 in 10 years, $9,646 in 20 years, $29,960 in 30 years, and $93,051 in 40 years instead. Spend $30,000 on a new car today, and forgo $289,380 20 years from now, $898,800 in 30 years, and $2.8 million in 40 years, at 12%! And if you're a better investor (an investor normally capable of 12% returns or better), the "losses" grow faster! So, the better an investor you are, the more the "good things" in life may cost. Ironic, right?
It's always right and safer to be frugal.
Pruning the Dead Branches
It isn't hard to show what happens when you hang on to losers, or even the inferior "winners."
Click here:
Compared to market returns, an investor underperforming the market by 2% (or achieving an 8% return) falls:
Click here:
Compared to market returns, an investor underperforming the market by 2% (or achieving an 8% return) falls:
- 17% behind a market performer after 10 years,
- 31% behind over 20 years, and
- 42% behind over 30 years.
- 43% to the market-performing investor over 10 years,
- 67% over 20 years, and,
- 81% over 30 years.
That's quite a price to pay for underperformance.
Now, if your investments are producing negative returns, the results can be quite ugly indeed.
There's a lesson in these numbers: Don't hang on to chronic losers! Not only do you lose, but you also lose the out on opportunities to gain. If it's broke, fix it!
Opportunity Lost
The mathematical power of compounding makes a small increase in investing return, or i, very compelling. To increase the chances of achieving a higher i, buy cheap. Buy expensive, and you'll be lucky to match market returns.
Investors should know how beating the market with even slightly higher rates of return is a shorter path to wealth.
This is especially true if the investments are left on the table to perform, and perform consistently, over time.
What about investments achieving less than market average return?
What happens when you cling to these investments?
Are they like a bad marriage, not only producing inferior returns but also consuming valuable time that you could put to work elsewhere?
From an investment perspective, the answer is yes.
Investors should know how beating the market with even slightly higher rates of return is a shorter path to wealth.
This is especially true if the investments are left on the table to perform, and perform consistently, over time.
What about investments achieving less than market average return?
What happens when you cling to these investments?
Are they like a bad marriage, not only producing inferior returns but also consuming valuable time that you could put to work elsewhere?
From an investment perspective, the answer is yes.
Quick Rules for Recognizing Value and Un-Value
This summarizes how to use PE and its "family of measures to recognize value and un-value in stocks and stock prices.
Many of these can be found in common stock screeners, so it's possible to use these factors not only for final valuation but also for stock selection.
Value
First, find sound and improving business fundamentals - improving ROE drivers and intangibles. Then:
Earnings yield > bond yield (now or soon, some compensation for equity risk)
PEG 2 or less (growth at a reasonable price)
Stock price growth potential exceeds hurdle rate (e.g. 15%, 10 years, probably better than most other investments)
P/S less than 3 and profit margin greater than 10% (good profitability at reasonable price)
P/B less than 5 and ROE greater than 15% (good overall returns at reasonable price)
Shares of companies that fit the preceding factors (the more factors, the better) are more likely to be a good value for the price.
Un-value
Earnings yield < bond yield with low growth prospects
PEG greater than 3 with low margins
Stock price growth falls short of hurdle rate (e.g., 15%)
P/S greater than 3 with low margins
P/B greater than 5 with low ROE
Many of these can be found in common stock screeners, so it's possible to use these factors not only for final valuation but also for stock selection.
Value
First, find sound and improving business fundamentals - improving ROE drivers and intangibles. Then:
Earnings yield > bond yield (now or soon, some compensation for equity risk)
PEG 2 or less (growth at a reasonable price)
Stock price growth potential exceeds hurdle rate (e.g. 15%, 10 years, probably better than most other investments)
P/S less than 3 and profit margin greater than 10% (good profitability at reasonable price)
P/B less than 5 and ROE greater than 15% (good overall returns at reasonable price)
Shares of companies that fit the preceding factors (the more factors, the better) are more likely to be a good value for the price.
Un-value
Earnings yield < bond yield with low growth prospects
PEG greater than 3 with low margins
Stock price growth falls short of hurdle rate (e.g., 15%)
P/S greater than 3 with low margins
P/B greater than 5 with low ROE
STOCK HaiO C0DE 7668
8.7.2009
STOCK HaiO C0DE 7668
Price $ 4.66 Curr. PE (ttm-Eps) 7.48 Curr. DY 9.01%
Rec. qRev 132845 q-q % chg 30% y-y% chq -1%
Rec. qPbt 22957 q-q % chg 24% y-y% chq 20%
Rec. qEps 17.80 q-q % chg 22% y-y% chq -29%
ttm-Eps 62.30 q-q % chg -11% y-y% chq -5%
Using VERY CONSERVATIVE ESTIMATES:
EPS GR 5% Avg.H PE 7.48 Avg. L PE 5.00
Current price is at Middle 1/3 of valuation zone.
RISK: Upside 47% Downside 53%
One Year Appreciation Potential 6% Avg. yield 12%
Avg. Total Annual Potential Return over next 5 years 17%
CPE/SPE 1.20 P/NTA 2.34 Sig. PE 6.2 Sig. Pr 3.86
STOCK HaiO C0DE 7668
Price $ 4.66 Curr. PE (ttm-Eps) 7.48 Curr. DY 9.01%
Rec. qRev 132845 q-q % chg 30% y-y% chq -1%
Rec. qPbt 22957 q-q % chg 24% y-y% chq 20%
Rec. qEps 17.80 q-q % chg 22% y-y% chq -29%
ttm-Eps 62.30 q-q % chg -11% y-y% chq -5%
Using VERY CONSERVATIVE ESTIMATES:
EPS GR 5% Avg.H PE 7.48 Avg. L PE 5.00
Current price is at Middle 1/3 of valuation zone.
RISK: Upside 47% Downside 53%
One Year Appreciation Potential 6% Avg. yield 12%
Avg. Total Annual Potential Return over next 5 years 17%
CPE/SPE 1.20 P/NTA 2.34 Sig. PE 6.2 Sig. Pr 3.86
Comment on meritocracy and bumiputra quota system
Wednesday July 8, 2009
Comment on meritocracy and bumiputra quota system
Plain Speaking - A column by Yap Leng Kuen
MERITOCRACY, it appears, is going to be the name of the game from now onwards.
Only time will tell if we have firmly put the ancient practices of the quota systems behind us.
For the time being, words to that effect have been sounded and decisions put in place to reinforce the bold ideas for change.
Announcements have been made progressively, starting from April 22 when the 30% bumiputra equity quota was scrapped on 27 service sub-sectors and subsequently on initial public offerings (June 30).
The participation of bumiputras in the newly set-up private equity fund, Ekuiti Nasional Bhd (Ekuinas), is also to be premised on merit.
In his speech at Invest Malaysia 2009, Prime Minister Datuk Seri Najib Razak hoped that through investment funds such as Ekuinas, “the ambitions of the best and brightest amongst bumiputras can be supported and nurtured.’’
Scholarships based on merit is another hot issue. Following Najib’s announcement that starting next year, a new class of scholarships would be based on merit and not racial background, letters to the editor have indicated strong hopes of a better system for the future generations.
Countries that are run on merit-based systems and policies have made rapid strides in terms of competitiveness, attracting the best talents and moving up the value chain.
For Malaysia to hit that high note, it has to scale up the ladder much faster and look into an overall incentive scheme that is robust and, at the same time, practical.
Its leaders should never be bogged down by politics but march ahead resolutely, in full conviction that this is the best path to the future. They must not flip flop but adhere to their medium or long-term plan. In other words, they must really prove that all these announcements are not “gimmicks” to pull in the sentiment.
That does not mean that they operate within their own space but they must have a communication strategy to engage the masses, especially those who are likely to oppose. It should be explained to them what sort of “goodies’’ and help they can still obtain from the Government within a timeframe that is based on reducing amounts.
With higher awareness and exposure to global systems of governance, all Malaysians are becoming increasingly independent and proud to be able to stand on their feet.
Talking to high achievers within the bumiputra community, one gets a sense that they truly want to be associated with merit and individual capability.
Sensing that new wave, Najib has rightly pointed out in the same speech: “The world is changing quickly and we must be ready to change with it or risk being left behind ... It is not a time for sentiment or half measures but to renew our courage and pragmatism to take the necessary bold measures.’’
In our quest to achieve higher standards, there is actually no other way forward but through meritocracy. Rhetorics and politics aside, let’s make the switch and quantum leap as fast as we can to make up for lost time.
Senior business editor Yap Leng Kuen believes Malaysians are a resilient lot and can still fight for a better future. In the aftermath of the global financial crisis, many countries are still struggling to find a new footing and this can be an opportune moment for Malaysia to rise and shine.
http://biz.thestar.com.my/news/story.asp?file=/2009/7/8/business/4275563&sec=business
Comment on meritocracy and bumiputra quota system
Plain Speaking - A column by Yap Leng Kuen
MERITOCRACY, it appears, is going to be the name of the game from now onwards.
Only time will tell if we have firmly put the ancient practices of the quota systems behind us.
For the time being, words to that effect have been sounded and decisions put in place to reinforce the bold ideas for change.
Announcements have been made progressively, starting from April 22 when the 30% bumiputra equity quota was scrapped on 27 service sub-sectors and subsequently on initial public offerings (June 30).
The participation of bumiputras in the newly set-up private equity fund, Ekuiti Nasional Bhd (Ekuinas), is also to be premised on merit.
In his speech at Invest Malaysia 2009, Prime Minister Datuk Seri Najib Razak hoped that through investment funds such as Ekuinas, “the ambitions of the best and brightest amongst bumiputras can be supported and nurtured.’’
Scholarships based on merit is another hot issue. Following Najib’s announcement that starting next year, a new class of scholarships would be based on merit and not racial background, letters to the editor have indicated strong hopes of a better system for the future generations.
Countries that are run on merit-based systems and policies have made rapid strides in terms of competitiveness, attracting the best talents and moving up the value chain.
For Malaysia to hit that high note, it has to scale up the ladder much faster and look into an overall incentive scheme that is robust and, at the same time, practical.
Its leaders should never be bogged down by politics but march ahead resolutely, in full conviction that this is the best path to the future. They must not flip flop but adhere to their medium or long-term plan. In other words, they must really prove that all these announcements are not “gimmicks” to pull in the sentiment.
That does not mean that they operate within their own space but they must have a communication strategy to engage the masses, especially those who are likely to oppose. It should be explained to them what sort of “goodies’’ and help they can still obtain from the Government within a timeframe that is based on reducing amounts.
With higher awareness and exposure to global systems of governance, all Malaysians are becoming increasingly independent and proud to be able to stand on their feet.
Talking to high achievers within the bumiputra community, one gets a sense that they truly want to be associated with merit and individual capability.
Sensing that new wave, Najib has rightly pointed out in the same speech: “The world is changing quickly and we must be ready to change with it or risk being left behind ... It is not a time for sentiment or half measures but to renew our courage and pragmatism to take the necessary bold measures.’’
In our quest to achieve higher standards, there is actually no other way forward but through meritocracy. Rhetorics and politics aside, let’s make the switch and quantum leap as fast as we can to make up for lost time.
Senior business editor Yap Leng Kuen believes Malaysians are a resilient lot and can still fight for a better future. In the aftermath of the global financial crisis, many countries are still struggling to find a new footing and this can be an opportune moment for Malaysia to rise and shine.
http://biz.thestar.com.my/news/story.asp?file=/2009/7/8/business/4275563&sec=business
Two fined for involvement in multiple IPO share applications
Wednesday July 8, 2009
Two fined for involvement in multiple IPO share applications
KUALA LUMPUR: The Kuala Lumpur Session Courts yesterday fined Yunus M. Haniff and Ramly Hussain RM25,000 each for using third party names in a multiple initial public offering (IPO) share application scheme.
In a statement, the Securities Commission (SC) said both Yunus and Ramly were fined after having pleaded guilty to offences under Section 9 (1) of the Securities Industry (Central Depositories) Act 1991 for failing to comply with Rule 26.02 of the Malaysian Central Depository Sdn Bhd rules.
The said rule provides that no person shall maintain more than one CDS account at any authorised depository agent/stockbroking company, the SC said.
The prosecution against Yunus and Ramly was initiated in 2005 after their failure to pay a compound meted by the SC, it added. — Bernama
Two fined for involvement in multiple IPO share applications
KUALA LUMPUR: The Kuala Lumpur Session Courts yesterday fined Yunus M. Haniff and Ramly Hussain RM25,000 each for using third party names in a multiple initial public offering (IPO) share application scheme.
In a statement, the Securities Commission (SC) said both Yunus and Ramly were fined after having pleaded guilty to offences under Section 9 (1) of the Securities Industry (Central Depositories) Act 1991 for failing to comply with Rule 26.02 of the Malaysian Central Depository Sdn Bhd rules.
The said rule provides that no person shall maintain more than one CDS account at any authorised depository agent/stockbroking company, the SC said.
The prosecution against Yunus and Ramly was initiated in 2005 after their failure to pay a compound meted by the SC, it added. — Bernama
Investors must analyse data, mere headline numbers may deceive
Wednesday July 8, 2009
Investors must analyse data, mere headline numbers may deceive
The Real Matter - By Pankaj Kumar
WHAT is the difference between a stock that is down 90% versus a stock that was down 80%, then halved? If you were quick enough, you would have the answer right away.
Yes, they are both the same! Some readers would have thought that the stock which was down 90% is in a worse situation compared with the stock which was down 80% earlier but later halved in value.
However, there could be readers who would have thought that the stock which was down 80% and then halved was worse than a stock that is down 90%. In any case, we all now know that the answer is the same and perhaps it is how the question or statement is phrased that matters.
It is also similar to looking at a glass of water and whether it is half full or half empty depends on one’s confidence level, when in actual fact if the glass was exactly 50% filled, it is either half empty or half full.
Moving towards the current economic indicators, it is also interesting to note how one economic figure can be misconstrued as good by some and bad by others when in reality it may well be saying something else.
The issue here is that as most fund managers are busy keeping track of economic data out of the US, Europe and Asia practically on a daily basis, are we seeing the trees from the forest or mainly just looking at headline numbers?
Most economic data are measured either on a month-on-month or year-on-year basis. There are two ways to measure the data points; either by absolute difference (for example consumer confidence data), which to me is more reflective of the real situation, or by percentage change, which can sometimes be misconstrued by investors.
For example, let’s take the durable goods order data out of the US.
The latest reading for May suggests that total durable goods orders stood at US$163.38bil, which compared with the preceding month was higher by 1.8%.
Of course, the headline that we see in the media as well as economic research reports is on the month-on-month change, i.e. the rise of 1.8% and we have seen how positive the market takes these data point as signs that the worst economic recession in living memory is indeed over.
However, if we were to analyse the data deeper, there are several other observations that we can make.First, on a year-on-year basis, the durable goods order contracted by 23.5% and in terms of absolute level, the May total orders were still hovering at levels last seen in 2002/2003!
They say a picture tells a thousand words. Now, let’s look at the above data points in terms of charts.
The chart on the left is the total durable goods orders in absolute form and the chart on the right is based on the widely accepted, month-on-month change. The two charts clearly show two different pictures of the same time frame!
While it can still be argued whether the durable goods orders are recovering or otherwise, it is noteworthy to take into account what a particular chart really means.
Hence, it is imperative for investors to dissect data before coming to a conclusion whether the economic data points released by regulators are in actual fact telling the right story or otherwise.
This is what we call a numbers game and how these data points are communicated to the market has very different interpretations.
Perhaps economists and market analysts need to be more detailed in analysing data points as mere headline numbers may not tell the real story.
Pankaj C Kumar is chief investment officer at Kurnia Insurans (M) Bhd. Readers’ feedback to this article is welcome. Please e-mail to
starbiz@thestar.com.my
S'pore bans 10 brokers from structured notes sales
Published: Wednesday July 8, 2009 MYT 9:05:00 AM
S'pore bans 10 brokers from structured notes sales
SINGAPORE: Singapore's central bank banned 10 financial institutions from selling structured notes for improperly marketing US$655 million of the bonds that were linked to U.S. brokerage Lehman Brothers Holdings Inc.
The banks and brokerages can't sell structured notes for between six months and two years, the central bank, known as the Monetary Authority of Singapore, said in a statement late Tuesday.
The bank said some of the financial institutions assigned risk ratings that were inconsistent with warnings stated in the notes' prospectus, and salespeople were ill-trained to sell the notes.
The structured notes were linked to the risk of a bankruptcy occurring to one of the reference entities, such as Lehman.
The Lehman collapse last fall led to a default on the dividend payment of some of the bonds, most of which had a maturity of 5 to 7 years and a yield of about 5 percent.
About 10,000 investors bought the notes, and financial institutions have compensated about 4,000 of them, the bank said.
Similar structured notes were sold in Hong Kong, Taiwan and Indonesia.
The 10 financial institutions banned by the central bank are DBS Group, UOB Kay Hian, OCBC Securities, ABN AMRO's Singapore branch, Maybank Singapore, CIMB-GK Securities, Hong Leong Finance, DMG & Partners, Phillip Securities and Kim Eng Securities. - AP
S'pore bans 10 brokers from structured notes sales
SINGAPORE: Singapore's central bank banned 10 financial institutions from selling structured notes for improperly marketing US$655 million of the bonds that were linked to U.S. brokerage Lehman Brothers Holdings Inc.
The banks and brokerages can't sell structured notes for between six months and two years, the central bank, known as the Monetary Authority of Singapore, said in a statement late Tuesday.
The bank said some of the financial institutions assigned risk ratings that were inconsistent with warnings stated in the notes' prospectus, and salespeople were ill-trained to sell the notes.
The structured notes were linked to the risk of a bankruptcy occurring to one of the reference entities, such as Lehman.
The Lehman collapse last fall led to a default on the dividend payment of some of the bonds, most of which had a maturity of 5 to 7 years and a yield of about 5 percent.
About 10,000 investors bought the notes, and financial institutions have compensated about 4,000 of them, the bank said.
Similar structured notes were sold in Hong Kong, Taiwan and Indonesia.
The 10 financial institutions banned by the central bank are DBS Group, UOB Kay Hian, OCBC Securities, ABN AMRO's Singapore branch, Maybank Singapore, CIMB-GK Securities, Hong Leong Finance, DMG & Partners, Phillip Securities and Kim Eng Securities. - AP
Book value and Intrinsic value
Warren Buffett observed that book value is the sum of what investor put into (or leave in) the business, while intrinsic value is what investors can take out of the business.
Book value or net worth is a key component of a company's intrinsic value.
But another and perhaps the more important component of intrinsic value is the net present and future income stream that a company can earn for the investor.
Therefore, the importance of looking at the balance sheet and also looking closely at income and income reporting, in your intrinsic valuation.
-----
Here is another Warren Buffett observation.
Apparently tired of answering questions about how to use book value to make investment decisions. Buffett pointed out the differrence between book value and intrinsic value: "Book value is what the owners put into the business, intrinsic value is what they take out of it."
In another explanation offered in a 1996 Berkshire Hathaway annual report, he likened book value to college tuition paid, with intrinsic value being the income resulting from the education. The education and the dollars spent on an education mean ntohing unless there is a resulting financial return.
The point: It is easy for investors to put too much emphasis on book value and not enough on intrinsic value.
Book value or net worth is a key component of a company's intrinsic value.
But another and perhaps the more important component of intrinsic value is the net present and future income stream that a company can earn for the investor.
Therefore, the importance of looking at the balance sheet and also looking closely at income and income reporting, in your intrinsic valuation.
-----
Here is another Warren Buffett observation.
Apparently tired of answering questions about how to use book value to make investment decisions. Buffett pointed out the differrence between book value and intrinsic value: "Book value is what the owners put into the business, intrinsic value is what they take out of it."
In another explanation offered in a 1996 Berkshire Hathaway annual report, he likened book value to college tuition paid, with intrinsic value being the income resulting from the education. The education and the dollars spent on an education mean ntohing unless there is a resulting financial return.
The point: It is easy for investors to put too much emphasis on book value and not enough on intrinsic value.
What to look for: Quality
Important attributes to look for in an earnings statement - QUALITY
As the market exerts ever-increasing pressure on companies to perform to a stringent set of expectations, the idea of accounting "stretch" enters the picture.
Even in complying with the rules, companies have latitude to apply accounting principles in ways that make performance look better.
This lattitude can affect the quality of earnings reports.
Recent legislation and standardizations like the Sarbanes-Oxley Act, have brought financial reporting generally more in line with reality.
As the market exerts ever-increasing pressure on companies to perform to a stringent set of expectations, the idea of accounting "stretch" enters the picture.
Even in complying with the rules, companies have latitude to apply accounting principles in ways that make performance look better.
This lattitude can affect the quality of earnings reports.
Recent legislation and standardizations like the Sarbanes-Oxley Act, have brought financial reporting generally more in line with reality.
What to look for: Healthy Components in the Earnings Statement
Important attributes to look for in an earnings statement - HEALTY COMPONENTS: COMPARATIVE and TRENDS
Value investors look at individual lines in the earnings statement, not just the bottom line.
Improving gross margins - especially sustained improvement - signal strong business improvement.
Costs are under control, and the company is improving its market position.
Likewise, improving operating margins can show better cost control, greater efficiency, and rewards from earlier expansion cycles.
And value investors constantly compare companies in similar industries.
Gross margins of competing computer manufacturers, for instance, tell a lot about who has the
Value investors look at individual lines in the earnings statement, not just the bottom line.
Improving gross margins - especially sustained improvement - signal strong business improvement.
Costs are under control, and the company is improving its market position.
Likewise, improving operating margins can show better cost control, greater efficiency, and rewards from earlier expansion cycles.
And value investors constantly compare companies in similar industries.
Gross margins of competing computer manufacturers, for instance, tell a lot about who has the
- best market position,
- production and delivery process, and
- business model.
Comparing the incomparable is an all-too-common investing pitfall. With earnings statements, this error takes three forms:
1. Earnings statements are not always broken down the same way.
- Although the bottom line is the bottom line, the intermediate steps may be different.
- One company's operating earnings may include marketing costs, while another's may not.
- Typically, statements from firms in the same industry are comparable, but not always.
- Commercial and industrial suppliers, such as Honeywell, have consumer divisions, while consumer businesses, such as Procter & Gamble, have industrial divisions.
- Many businesses supply a mix of products in a mix of categories to a mix of customers.
- "Pure plays" in a business or industry are not always easy to find.
- The upshot: You must understand businesses before comparing them.
- Before comparing operating or net profit numbers, consider whether there have been write-offs for discontinued businesses or impaired assets that may be causing one-time distortions in the numbers.
What to look for: Consistency
Important attributes to look for in an earnings statement - CONSISTENCY
Long-term growth should be sustainable and consistent.
Look for sustained growth across business cycles.
A big pop in earnings one year followed by malaise for the next two does not paint a pretty picture. Long, consistent successful earnings track records get the A grades.
Beyond earnings, consistency is a desired feature for other parts of the earnings statement.
Consistency is highly prized in:
Long-term growth should be sustainable and consistent.
Look for sustained growth across business cycles.
A big pop in earnings one year followed by malaise for the next two does not paint a pretty picture. Long, consistent successful earnings track records get the A grades.
Beyond earnings, consistency is a desired feature for other parts of the earnings statement.
Consistency is highly prized in:
- sales and sales growth,
- profit margins and margin growth, and
- operating expense and expense trends.
The less consistency, the more difficult to predict the future five or ten years and beyond, and the less attractive a company looks to value investors.
What to look for: Growth
Important attributes to look for in an earnings statement - GROWTH
After all is said and done, the long-term growth of a stock price is driven by growth in the business.
Growth in the business means growth in the earnings - there is no other way to sustain business growth without infusions of additional owner capital.
Sure, you can acquire, merge, or sell more stocks to make a business larger by common definitions, but has the business really "grown"?
The value investor works to obtain a deep understanding of business growth, growth trends, and the quality of growth.
A business' ability to grow on its own, through its own success and resulting earnings, is known as organic growth.
Growth through acquisition or other capital infusions are not "organic" and thus does not suggest growth in true business value.
After all is said and done, the long-term growth of a stock price is driven by growth in the business.
Growth in the business means growth in the earnings - there is no other way to sustain business growth without infusions of additional owner capital.
Sure, you can acquire, merge, or sell more stocks to make a business larger by common definitions, but has the business really "grown"?
The value investor works to obtain a deep understanding of business growth, growth trends, and the quality of growth.
- Is reported growth based on internal core competencies?
- Or is it acquired or speculative growth based on unproven ventures?
A business' ability to grow on its own, through its own success and resulting earnings, is known as organic growth.
Growth through acquisition or other capital infusions are not "organic" and thus does not suggest growth in true business value.
The Importance of Earnings
Business and economic activity are undertaken with the idea of generating a profit.
Profit is simply the gross revenue of an enterprise, minus the cost of producing that income, over a defined period of time. For businesses, it's important to measure the profit and allocate capital resources in such a way as to maximise it.
It is the earnings that make the world go round.
So much is made of earnings and earnings reports. Do you hear much about a company's cash balance, accumulated depreciation, or owner's equity during CNBC and other financial shows?
Does everyone salivate four times a year for "asset season?"
No, but there's a definite "earnings season" at the end of each calendar quarter, giving financial analysts, journalists, and pundits plenty to talk about.
On an ongoing basis, earnings are the driving force and "macro" indicator of a company's success.
If a company is earning money, and particularly if it earns it at a growing rate, that's a good thing. As Warren Buffett says, "If the business does well, the stock always follows."
Earnings tell us how well a business manages its operations, while the balance sheet tells us how well it manages its resources.
Profit is simply the gross revenue of an enterprise, minus the cost of producing that income, over a defined period of time. For businesses, it's important to measure the profit and allocate capital resources in such a way as to maximise it.
It is the earnings that make the world go round.
So much is made of earnings and earnings reports. Do you hear much about a company's cash balance, accumulated depreciation, or owner's equity during CNBC and other financial shows?
Does everyone salivate four times a year for "asset season?"
No, but there's a definite "earnings season" at the end of each calendar quarter, giving financial analysts, journalists, and pundits plenty to talk about.
On an ongoing basis, earnings are the driving force and "macro" indicator of a company's success.
- If earnings are growing, the financial press doesn't worry much about the other stuff.
- Conversely, serve up a couple of double faults on the earnings front, and everybody is all over asset impairment, write-offs, debt, weak cash positions, and the other similar "disasters."
If a company is earning money, and particularly if it earns it at a growing rate, that's a good thing. As Warren Buffett says, "If the business does well, the stock always follows."
Earnings tell us how well a business manages its operations, while the balance sheet tells us how well it manages its resources.
Stick to what you need to know as an investor, avoiding deep accounting technicalities
Just as life cannot be measured or evaluated by a single snapshot, neither can a business.
Balance sheet gives a snapshot view of business resources (assets) and how they are contributed to the business (liabilities and owner's equity). Comparison of one snapshot to another tells you something changed. But what happened between shots, and why?
This is where earnings and cash flow statements come in. The balance sheet is critical in evaluating the financial state of a business; the income and cash flow statements together measure business activity and results.
Earnings and cash flow statements show the pulse of the business and explain changes in balance sheet snapshots. With these statements, the business analyst or investor can assemble a complete moving picture showing flows into and out of the business, successes and failures, growth and decline.
You need to stick to what you need to know as an investor, avoiding deep accounting technicalities.
Balance sheet gives a snapshot view of business resources (assets) and how they are contributed to the business (liabilities and owner's equity). Comparison of one snapshot to another tells you something changed. But what happened between shots, and why?
This is where earnings and cash flow statements come in. The balance sheet is critical in evaluating the financial state of a business; the income and cash flow statements together measure business activity and results.
Earnings and cash flow statements show the pulse of the business and explain changes in balance sheet snapshots. With these statements, the business analyst or investor can assemble a complete moving picture showing flows into and out of the business, successes and failures, growth and decline.
You need to stick to what you need to know as an investor, avoiding deep accounting technicalities.
Tuesday, 7 July 2009
Bottom lines and other lines
Revenue
less COGS
-----------
Gross Profit
less Operating Expenses
-SGA
-R&D
-Depreciation & Amortization
-Impairment, Investments & Write Downs
-Goodwill amortization
-----------
less or add interest
-----------
PBT
less tax
-----------
Operating Income or Income from continuing operations
less or add extraordinaries
-----------
Net Income
The bottom line, refers to the net earnings or income after all expenses, taxes, and extraordinary items are factored in. The bottom line is the final "net" measure of all business activity.
----
Gross profit:
This is simply the sales less the direct cost of producing the company's product or service.
Direct cost includes:
Gross profit, often called gross margin, is the purest indicator of business productivity, because each cost dollar is directly generated by production and sale of the product.
Value investors closely watch gross margin trends as an indicator of market dominance, price control, and future profitability.
----
Operating Income:
This term refers to gross profit less period expenses, such as overhead or marketing costs not directly attributable to product production.
Selling, general, and administrative expenses (SG&A) usually cover all headquarters functions, information technology, marketing, and other indirect costs.
It generally includes financing costs, such as interest, and taxes.
Amortization is usually included, because cost recovery for property, plant and equipment is part of operating expense.
Items deemed extraordinary are not included.
Operating profit gives a more complete picture of how the business is performing on a day-to-day basis.
It sometimes appears as operating income, earnings from operations, or something similar.
----
Net Income:
This represents the net result of all revenues, expenses, interest, and taxes.
----
There are other supplemental earnings measures, such as free cash flow and "EBITDA."
The point is that there are many ways to measure income.
Each reveals an important layer of business performance, both for determining intrinsic value and also for comparing companies.
less COGS
-----------
Gross Profit
less Operating Expenses
-SGA
-R&D
-Depreciation & Amortization
-Impairment, Investments & Write Downs
-Goodwill amortization
-----------
less or add interest
-----------
PBT
less tax
-----------
Operating Income or Income from continuing operations
less or add extraordinaries
-----------
Net Income
The bottom line, refers to the net earnings or income after all expenses, taxes, and extraordinary items are factored in. The bottom line is the final "net" measure of all business activity.
----
Gross profit:
This is simply the sales less the direct cost of producing the company's product or service.
Direct cost includes:
- labor,
- material, and
- expenses directly attributable to producing it.
Gross profit, often called gross margin, is the purest indicator of business productivity, because each cost dollar is directly generated by production and sale of the product.
Value investors closely watch gross margin trends as an indicator of market dominance, price control, and future profitability.
----
Operating Income:
This term refers to gross profit less period expenses, such as overhead or marketing costs not directly attributable to product production.
Selling, general, and administrative expenses (SG&A) usually cover all headquarters functions, information technology, marketing, and other indirect costs.
It generally includes financing costs, such as interest, and taxes.
Amortization is usually included, because cost recovery for property, plant and equipment is part of operating expense.
Items deemed extraordinary are not included.
Operating profit gives a more complete picture of how the business is performing on a day-to-day basis.
It sometimes appears as operating income, earnings from operations, or something similar.
----
Net Income:
This represents the net result of all revenues, expenses, interest, and taxes.
----
There are other supplemental earnings measures, such as free cash flow and "EBITDA."
The point is that there are many ways to measure income.
Each reveals an important layer of business performance, both for determining intrinsic value and also for comparing companies.
Cash Flow from Financing Activities
Investing activities tell what a firm does with cash to increase or decrease fixed assets and assets not directly related to operations.
Financing activities tell where a firm has obtained capital in the form of cash to fund the business.
Bottom line: Company X is using surplus cash generated from operations to give something back to shareholders. That's a good thing.
Financing activities tell where a firm has obtained capital in the form of cash to fund the business.
Source of cash for financing: Proceeds from the:
- sale of company shares or
- sale of bonds (long-term debt).
Use of cash for financing: If a company:
- pays off a bond issue,
- pays a dividend, or
- buys back its own stock.
A consistent cash flow from financing activities indicates excessive dependence on credit or equity markets. Typically, this figure oscillates between negative and positive.
A big positive spike reflects a big bond issue or stock sale. In such a case, check to see whether the resulting cash is used:
- for investments in the business (probably okay) or
- to make up for a shortfall in operating cash flow (probably not okay), or,
- if the generated cash flows straight to the cash balance, you should wonder why a company is selling shares or debt just to increase cash, although often the reasons are difficult to know. Perhaps an acquisition?
An illustration:
Company X's statement shows a happy story for investors:
- $15.4 m paid to investors as dividends
- $8.2 m paid out in "Sale Purchase of Stock" (- this is most likely for a share buyback. In fact, the company X actually repurchased $17.2 million in its own stock on the market; then issued $8.9 million in stock, most likely for employee stock options ESOS, and compensation.)
Bottom line: Company X is using surplus cash generated from operations to give something back to shareholders. That's a good thing.
Free Cash Flow
Free cash flow is a good indication of what a company really has left over after meeting obligations, and thus could theoretically return to shareholders.
Free cash flow is sometimes called "owners' earnings."
Free cash flow is defined as net after tax-earnings, plus depreciation and amortization and other noncash items, less annual capital expenditures, less (or plus) changes in working capital (current assets and liabilities).
It is surplus cash that is really free, not waiting for a bill to come for a big capital purchase or inventory increase.
Earn income, pay for costs of doing business, and what's left over is yours to keep as an owner.
Free cash flow is a much more realistic long-term view of business success and potential owner proceeds than EBITDA and is used by many value investors as the basis for calculating intrinsic value.
Free cash flow is sometimes called "owners' earnings."
Free cash flow is defined as net after tax-earnings, plus depreciation and amortization and other noncash items, less annual capital expenditures, less (or plus) changes in working capital (current assets and liabilities).
It is surplus cash that is really free, not waiting for a bill to come for a big capital purchase or inventory increase.
Earn income, pay for costs of doing business, and what's left over is yours to keep as an owner.
Free cash flow is a much more realistic long-term view of business success and potential owner proceeds than EBITDA and is used by many value investors as the basis for calculating intrinsic value.
Cash Flow from Investing Activities
Cash flow from operations tells what cash was generated in the normal course of business and by changes in current asset and liability (working capital) accounts on the balance sheet.
This section shows, among other things: cash used for investments in the business, including
Why? Because growing companies need more physical investments - property, plant, and equipment (PP&E) - to sustain growth.
It is possible to generate positive cash flows in this part of the statement either
TIP: By comparing net cash flows from operations and net cash flows from investing activities, you can get a first glance at whether a business is productive and healthy.
If positive CFO > negative CFI, then the business produces more cash than it consumes.
But don't jump to a favourable conclusion too quickly - you may be looking at an airline (e.g. Air Asia ?) that's about to pay for five new jets in the next quarter. A surplus cash situation must be sustained to be meaningful.
- But what about cash used to invest in the business?
- Invest in other businesses?
- What about cash acquired by selling investments in other businesses?
This section shows, among other things: cash used for investments in the business, including
- capital expenditures for plant, equipment, and
- other longer-term product assets.
Why? Because growing companies need more physical investments - property, plant, and equipment (PP&E) - to sustain growth.
It is possible to generate positive cash flows in this part of the statement either
- by selling PP&E or
- by selling investments owned by the company.
TIP: By comparing net cash flows from operations and net cash flows from investing activities, you can get a first glance at whether a business is productive and healthy.
If positive CFO > negative CFI, then the business produces more cash than it consumes.
But don't jump to a favourable conclusion too quickly - you may be looking at an airline (e.g. Air Asia ?) that's about to pay for five new jets in the next quarter. A surplus cash situation must be sustained to be meaningful.
How changes in Working Capital affect Cash
How changes in Current Liabilities affect cash
Increase in accounts payable (a bigger liability) generates cash.
Increase in accounts payable (a bigger liability) generates cash.
- Suppose the company you're watching has a $45 million increase in cash from accounts payable.
- There is $45 million in cash floating around in the business that didn't show up in net income.
- Let's suppose that one large item was purchased for $45 million. An accounting expense was incurred when the payable was created, but no cash has yet been used to pay the bill. It's still in the bank.
- So while the expense was incurred, reducing earnings, the cash wasn't paid and, at least for now, there's more cash in the business.
Increase in current liabilities provide cash.
Decrease in current liabilities use cash.
How changes in Current Assets affect cash
In different financial statements, it is common to see account receivable, inventories and accounts payables either providing or using cash.
Increases in current assets (other than cash) use cash.
Decreases in current assets (as in a net decrease in inventory) provide cash.
Cash Flow from Operations
Net Income
----------
Operating Activities, Cash Flows Provided By or Used In:
Depreciation
Adjustment to Net Income
Changes in Accounts Receivable
Changes in Liabilities
Changes in Inventories
Changes in Other Operation Activities
----------
Total Cash Flow from Operating Activities
Cash flow from operations, CFO, tells what cash is generated from, or provided by, normal business operations, and what cash is consumed, or used in the business.
Net income from continuing operations is the starting point, to which cash adjustments are made.
To that figure, add (or subtract) what was called the "adjustments to reconcile net income to net cash provided by operating activities."
The first adjustment item is depreciation.
Finally, you arrive at a total "Total Cash Flow from Operating Activities," derived by netting the adjustments to toal income.
----------
Operating Activities, Cash Flows Provided By or Used In:
Depreciation
Adjustment to Net Income
Changes in Accounts Receivable
Changes in Liabilities
Changes in Inventories
Changes in Other Operation Activities
----------
Total Cash Flow from Operating Activities
Cash flow from operations, CFO, tells what cash is generated from, or provided by, normal business operations, and what cash is consumed, or used in the business.
Net income from continuing operations is the starting point, to which cash adjustments are made.
To that figure, add (or subtract) what was called the "adjustments to reconcile net income to net cash provided by operating activities."
The first adjustment item is depreciation.
- For example, depreciation in Company X was $24 million. So, we known that without other adjustments, $24 millionn more in cash was generated than reported as net income, because depreciation was subtracted from net income, but not from cash flow because it isn't a cash expense.
Then a catch-all "Adjustments to Net Income" category.
After this, comes:
- "Changes In Accounts Receivables"
- "Changes in Liabilities"
- "Changes in Inventories"
Finally, you arrive at a total "Total Cash Flow from Operating Activities," derived by netting the adjustments to toal income.
- This is a very important figure. Essentially, this is cash generated by ongoing day-t0-day business activities.
- If this amount is negative, that's bad, because it means that the business isn't even supporting itself on a day-to-day basis and requires an infusion of cash.
- If it's positive - we're still not out of the woods yet - capital investments may still require more cash than the business is producing.
A bit of EBITDA
EBITDA measures operating cash generated before:
In a sense, EBITDA is operating income before:
- non-operating interest,
- taxes, and,
- noncash depreciation & amortization.
In a sense, EBITDA is operating income before:
- bankers (non-operating interest), and
- government (taxes), and
- accountants (noncash depreciation & amortization).
EBITDA is also sometimes looked at as a liquidity measure:
- Positive-EBITDA companies can service their debt, while
- Negative-EBITDA companies must borrow more.
Income from continuing operations versus EBITDA
Revenue
less COGS
-----------
Gross Profit
less Operating Expenses
-SGA
-R&D
-Depreciation & Amortization
-Impairment, Investments & Write Downs
-Goodwill amortization
-----------
less or add interest
-----------
PBT
less tax
-----------
Operating Income or Income from continuing operations
less or add extraordinaries
-----------
Net Income
----
EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortization
EBITDA measures operating cash generated before:
less COGS
-----------
Gross Profit
less Operating Expenses
-SGA
-R&D
-Depreciation & Amortization
-Impairment, Investments & Write Downs
-Goodwill amortization
-----------
less or add interest
-----------
PBT
less tax
-----------
Operating Income or Income from continuing operations
less or add extraordinaries
-----------
Net Income
----
EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortization
EBITDA measures operating cash generated before:
- non-operating interest,
- taxes and
- noncash depreciation and amortization.
Income from Continuing Operations
Operating income is simply sales less cost of goods sold, less operating expenses.
Because it includes noncash amortizations, it is a "fully loaded" view of operating performance in the business. (Depreciation and amortization expenses are usually broken out on the earnings statement, but may also be buried in a consolidated SG&A, or other operating expense line.)
If you closely observe the effects of amortizations, special write-downs, and accounting changes, you can better understand operating income and operating income trends.
Income from continuing operations tell shareholders, in total, what their investment is returning, after everyone, including Uncle Sam and his brethren, is paid.
Income from continuing operations is a good indicator of total business performance, but be aware of truly extraordinary events driving expenses or income.
Because it includes noncash amortizations, it is a "fully loaded" view of operating performance in the business. (Depreciation and amortization expenses are usually broken out on the earnings statement, but may also be buried in a consolidated SG&A, or other operating expense line.)
If you closely observe the effects of amortizations, special write-downs, and accounting changes, you can better understand operating income and operating income trends.
Income from continuing operations tell shareholders, in total, what their investment is returning, after everyone, including Uncle Sam and his brethren, is paid.
Income from continuing operations is a good indicator of total business performance, but be aware of truly extraordinary events driving expenses or income.
Monday, 6 July 2009
Earnings Yield: Bond versus Growth Stock
PE Ratio and Growth
It would be nice if looking at price, P/E, and earnings yield was all there is to it. Find an earnings yield of 6% (PE of 17), beat the bond, and move on.
But you're buying equities, not bonds, right?
Less risk.
----
But suppose the $5 earnings "coupon" grows at 10% per year. What happens at the end of year 10?
If the price were to stay the same, your $100 investment would be returning $12.97 in year 10, which is almost 13% earnings yield, or an implied PE of 7.7 at today's price.
A pretty nice yield, which really means the price of your investment should go up, because it's worth more.
This spreadsheet shows future earnings yields realized in the case of a bond with no growth versus a stock with a 10% earnings growth.
http://spreadsheets.google.com/ccc?key=0AuRRzs61sKqRcjdfd19OVTZrVVRlTUJnb05naGo3TWc&hl=en
So you can see that assessing growth is a major factor in analysing a stock price through PE.
Above all else, earnings growth drives stock price growth.
So value investors look closely at what the earnings yield is today and what will it be in the future.
It would be nice if looking at price, P/E, and earnings yield was all there is to it. Find an earnings yield of 6% (PE of 17), beat the bond, and move on.
But you're buying equities, not bonds, right?
- Because you want to participate in company growth and success.
- Because, simply, you want to leave that static bond yield in the dust - if not today, sometime in the near future.
- And you want to keep up with - or better yet, beat - inflation.
- So to do that, you assume some risk that earnings won't happen, but you are hanging your hat on growth and a stock price that keeps up with it.
- Buy a bond for $100; receive $5 per year for 10, 20, 30 years; never look back.
or
- Buy a stock for $100, earnings per share constant at $5 for 10, 20, or 30 years with no change.
Less risk.
----
But suppose the $5 earnings "coupon" grows at 10% per year. What happens at the end of year 10?
If the price were to stay the same, your $100 investment would be returning $12.97 in year 10, which is almost 13% earnings yield, or an implied PE of 7.7 at today's price.
A pretty nice yield, which really means the price of your investment should go up, because it's worth more.
This spreadsheet shows future earnings yields realized in the case of a bond with no growth versus a stock with a 10% earnings growth.
http://spreadsheets.google.com/ccc?key=0AuRRzs61sKqRcjdfd19OVTZrVVRlTUJnb05naGo3TWc&hl=en
So you can see that assessing growth is a major factor in analysing a stock price through PE.
Above all else, earnings growth drives stock price growth.
So value investors look closely at what the earnings yield is today and what will it be in the future.
Risk - the most difficult to quantify element (II)
If you reflect on Buffett's approach, you realize that the risk isn't inherent in the stock's price, but rather on the clarity and consistency of a company's future prospects.
The more unpredictable (hard to understand) the company and its future, the greater the risk.
There is no way to easily quantify this kind of risk.
Generally, business risks are accounted for in the discount rate by making a conservative assumptions - a high discount, or hurdle, rate - to provide a margin of safety.
The more unpredictable (hard to understand) the company and its future, the greater the risk.
There is no way to easily quantify this kind of risk.
Generally, business risks are accounted for in the discount rate by making a conservative assumptions - a high discount, or hurdle, rate - to provide a margin of safety.
Risk - the most difficult to quantify element (I)
Risk is perhaps the most debated, theoretical, difficult to quantify element of all. There are many types of risk in the business and investing world.
Investment books mention high beta stocks are riskier and low beta stocks are safer. However, beta is relatively meaningless for value investors. Why?
Investment books mention high beta stocks are riskier and low beta stocks are safer. However, beta is relatively meaningless for value investors. Why?
- Because it measures the fluctuation of stock prices.
- As a value investor, you aren't concerned with stock price fluctuation, only whether the stock price is a bargain compared to long-term value.
- Value investors ignore the type of risk measured by beta.
- They're more interested in how the company performs, not how the stock performs relative to other stocks.
Beta is useful only in the sense that higher price volatility for an issue may reflect underlying uncertainty in the company itself, such as with many of the higher flying tech stocks in 2000 and 2001. But the risks associated with these stocks become apparent long before you examine beta.
Who is Mr. Market?
Who is Mr. Market?
Mr. Market is the character Benjamin Graham uses to explain illogical mindset of traders . The story goes something like this:
Imagine that you own 50% of a business, which you purchased for RM3,600 mil. Mr. Market approaches everyday to tell you what he thinks the business is worth based on latest news. And everyday, he offers to either buy your business for a price which he forms in his head, or, to sell you his share of the business for that price.
Each day, however, he quotes you a different price from the day before. Sometimes the price he quotes sounds about fair. Sometimes it’s high. Sometimes it’s low.
Let’s say the whole business is producing on average, RM 1,200 mil free cash flow with net profit of RM 600 mil. What is the value of the business to you?
By owning 50% of the business, you own RM 600 mil FCF and net profit of RM 300 mil per annum.You paid around RM 3,600 mil for this business a year ago. Hence, you bought this business for 6 times its FCF and 12 x earnings.Let’s say the nature of the business is stable and you anticipate the FCF and net profit will increase over time,you might not want to sell it unless Mr. Market offers you a ridiculously high price.
One day, Mr. Market offers you an additional 40% extra of what you paid a year ago. He offers RM 5,040 mil to for your holdings.Most of us will let go after making 40% profit per annum.
But if you are a sensible businessperson, you won’t let Mr. Market’s daily communication determine your view of the value of 50% interest in the business. He is a sweet talker and convince you with various economic prediction,charts,information and etc to create doubt and fear in you.
Most of us will be swayed by Mr Market ’s offer.
But as a sensible business owner, you may be happy to sell out to him when he quotes you a ridiculously high price, and equally happy to buy from him when his price is low. But the rest of the time you will be wiser to form your own ideas of the value of your holdings, based on full reports from the company about its operations and financial position.
Remember, fluctuations in the market price for a given business don’t really affect the fundamental value of that business. If you own a share in a company, the value of each share is a function of the business ’s profitability/cash flow/management/branding and not a related to the price quoted in Bursa M’sia.
So, as long you understand the business you’re buying, today’s market price is totally irrelevant.
Ref:
Who is Mr. Market?
http://boyboycute.wordpress.com/2009/03/29/who-is-mr-market/
Mr. Market is the character Benjamin Graham uses to explain illogical mindset of traders . The story goes something like this:
Imagine that you own 50% of a business, which you purchased for RM3,600 mil. Mr. Market approaches everyday to tell you what he thinks the business is worth based on latest news. And everyday, he offers to either buy your business for a price which he forms in his head, or, to sell you his share of the business for that price.
Each day, however, he quotes you a different price from the day before. Sometimes the price he quotes sounds about fair. Sometimes it’s high. Sometimes it’s low.
Let’s say the whole business is producing on average, RM 1,200 mil free cash flow with net profit of RM 600 mil. What is the value of the business to you?
By owning 50% of the business, you own RM 600 mil FCF and net profit of RM 300 mil per annum.You paid around RM 3,600 mil for this business a year ago. Hence, you bought this business for 6 times its FCF and 12 x earnings.Let’s say the nature of the business is stable and you anticipate the FCF and net profit will increase over time,you might not want to sell it unless Mr. Market offers you a ridiculously high price.
One day, Mr. Market offers you an additional 40% extra of what you paid a year ago. He offers RM 5,040 mil to for your holdings.Most of us will let go after making 40% profit per annum.
But if you are a sensible businessperson, you won’t let Mr. Market’s daily communication determine your view of the value of 50% interest in the business. He is a sweet talker and convince you with various economic prediction,charts,information and etc to create doubt and fear in you.
Most of us will be swayed by Mr Market ’s offer.
But as a sensible business owner, you may be happy to sell out to him when he quotes you a ridiculously high price, and equally happy to buy from him when his price is low. But the rest of the time you will be wiser to form your own ideas of the value of your holdings, based on full reports from the company about its operations and financial position.
Remember, fluctuations in the market price for a given business don’t really affect the fundamental value of that business. If you own a share in a company, the value of each share is a function of the business ’s profitability/cash flow/management/branding and not a related to the price quoted in Bursa M’sia.
So, as long you understand the business you’re buying, today’s market price is totally irrelevant.
Ref:
Who is Mr. Market?
http://boyboycute.wordpress.com/2009/03/29/who-is-mr-market/
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