Sibling Economics
Emmet and Jim Rosenfeld are twin brothers who earn vastly different incomes. Emmet wrote about those differences recently in the Post magazine (Family Finances, July 19). His story prompted the Color of Money Question of the Week: Does your sibling (or siblings) make significantly more or less than you and, if so, how does that play out in the family?
Here is what other siblings wrote about their economic differences:
Carrie Nelson of the District says: "While my younger sister would love to pull big figures, her line of work as a vet technician just doesn't lend itself to that. So she settles for less because she LOVES her work."
Kathleen Culberson of Fairfax, Va., got married, had kids and is now divorced. She returned to the job market after years as a stay at home mom and as a result, took a pay cut. Her sister never married.
"We both went to the same private Ivy League college. She makes three to four times what I do. She borrowed my kids when she felt the occasional need to be domestic; she voluntarily paid for one year of college for each child. I think we are both happy with our choices," wrote Culberson.
"I think it takes real effort for someone to 'overlook' the success of a sibling, especially if that someone is a male," says Ellen Mahoney of Jacksonville, Fla. "My younger brother feels some resentment toward other siblings who have more means and that comes out in pointed remarks he occasionally makes."
Carolyn Cihelka of Woodbridge, Va., wrote: "My mother had warned me that finances were a sore subject with my brother, but I mentioned something to him anyway a couple of years ago and he blew up. He said nobody deserved my good situation more than I did, but he didn't want to hear about it ever again. It makes me uncomfortable that there's this just-below the surface resentment of my situation."
Cassandra Logan of Bowie, Md., says, "I am by no means rich, but one of my siblings seems to like to incorporate me into her and my nephew's future plans. Sometimes I know she is joking but I do think there is this expectation that I will always be available as an emergency fund." Logan's nephew is in college. She sends him money monthly, "But," she says, "I don't ever want to feel obligated."
http://www.washingtonpost.com/wp-dyn/content/article/2009/07/10/AR2009071002341.html?wpisrc=newsletter
Family Finances
As brothers, they shared a birthday and Ivy League educations. Then their bank accounts parted ways.
By Emmet Rosenfeld
Sunday, July 19, 2009
On a weekend trip to visit my twin brother in New York City a year or so ago, we found time to take a run along the Hudson River. As a couple of midcareer dads each with two young sons, our lives had taken parallel paths. Except in one way.
"My bills are killing me this month," said Jim, as we skirted the driving range at Chelsea Piers.
What gee-whiz expense was it this time, I wondered -- $700 a month for off-street parking?
"I wrote 65,000 bucks worth of checks the other night."
"Huh?" I said, assuming I'd misheard.
"I couldn't believe it myself. But I'm floating two mortgages right now until we sell our place; then there's the construction loan on the brownstone, and I had to pay my quarterly taxes. That was about 30 grand right there."
I don't think I broke stride. But emotionally, at that moment, I buckled. I've come to accept over the years our disparity in income: He's a partner in a law firm, and I'm an educator. But right then it struck me just how far apart, financially, we really were.
My brother's monthly nut was almost the same as my entire year's pay.
As we ran, my eyes turned to the swirling currents of the Hudson.
"Ouch," I managed.
***
Before the financial meltdown turned the world upside down, rich wasn't that hard to figure out. Pulling down north of $350,000 a year put you in the top 1 percent of households in the United States, according to the U.S. Census Bureau. As a lawyer married to a psychiatrist, my twin and his wife are comfortably in that category. My spouse and I, both career educators, are happy to have finally cracked six figures combined after 15 years in our field.
So, how did twins who grew up playing on the same schoolyards in suburban Washington end up so many rungs apart on the income ladder? And for those of us on the schlub side, is a mid-six-figure salary truly the velvet rope between us and a thinner, tanner version of ourselves? More to the point, would I be happier with my brother's life?
Jim's journey to the courtroom and mine to the classroom began with our parents.
Mom's and Dad's upbringings fell on opposite ends of the bell curve that defined the mid-century spectrum of Jewish possibility. Dad was the son of a Pittsfield, Mass., clothier and a mother who volunteered for social organizations. He grew up playing tennis on clay courts in the family back yard, graduated from Harvard University, and eventually studied Russian at Columbia University on the way to a career as a high-profile journalist for this newspaper.
The daughter of a Providence, R.I., insurance salesman and a bookkeeper, my mother worked her way into Smith College and, later, graduate school at Radcliffe. She was a perennial PTA president whose unflagging civic participation reflected her up-by-the-bootstraps background.
My parents shared the unshakable faith that education and hard work were the bedrocks of success, and expected all four of us children to attend Ivy League schools as they had.
And so, at the public high school we attended, Jim edited the newspaper and played on the tennis team. I was student body president and a soccer midfielder. Jim added the first Yale sticker to the back window of the family wagon, while I slapped one on from Harvard.
It wasn't until after high school that our paths began to diverge. Driving an orange VW Microbus bought with tips from waiting tables, I took the road less traveled and spent part of a gap year in Colorado ski country. By the time I parked my van in Harvard Yard, my twin brother was already a sophomore in New Haven.
I continued to play grasshopper to Jim's ant. The summer after his junior year, Jim worked as an intern with the Washington, D.C., Public Defender Service. I put my formal education on hold again when a summer job teaching kids to swim in rural Alaska stretched into a stint in an Eskimo village as a substitute teacher.
As I huddled with those shivering, raven-haired children around a driftwood fire after lessons, something clicked for me. Not long after my return to Harvard, I enrolled in the School of Education to become a teacher.
Around the time I stood in front of a bunch of high school students for the first time, Jim was getting ready to take the LSATs, and he entered law school soon after. Out of college, I took a job leading outdoor trips with at-risk kids in Minnesota. By then Jim had landed a clerkship with a federal appeals court judge in Denver. My first real job was teaching ninth-grade English; his was on Wall Street.
Fast forward to today. Jim is a partner at a law firm in Manhattan, and I recently became dean of students at a private school in Falls Church, after a decade and a half of teaching in mostly public school classrooms.
I think our differing paths ultimately reflect a difference in temperament more than financial values. Sleeping under spruce trees in Alaska was part of my adolescent attempt to reject the suburban norms that my brother never had the urge to challenge. In clerking for a federal judge, he lived up to family expectations I didn't feel the need to fulfill.
As children, Jim and I embraced the mantra "You split, I choose" to prevent fights. It was absolutely fair: You didn't want to cut that last piece of cake into unequal parts because you'd be stuck with the smaller one. This Solomonic approach taught us to live with our choices. We also learned to keep an eye on the other guy's slice, and we've been doing it ever since.
***
My wife was giving the boys a bath, and I was sitting at my dining room table leafing through a stack of bills one recent evening when the phone rang.
"Did you remember we're coming down this weekend?" asked Jim. His wife, a clinical psychiatrist and researcher, had another conference in Washington.
"Sure," I replied vaguely, tearing open a Social Security statement. The column of numbers inside represented my work history. I considered how the gap between my earning power and my brother's has widened through the years.
"We got the boys into that school I was telling you about," Jim reported. For each son, the tuition is as much as my wife, Courtney, makes per year teaching preschool.
"Congrats," I mumbled. He started saying something about his sitters -- they juggle two to cover all the hours when he and his wife are at work -- but I was only half listening as I scribbled figures on the back of an envelope. There's enough coming in to cover expenses, more or less. As long as a $2,000 car repair bill doesn't hit when there's less.
"What's this check for $530?" I called upstairs to my wife as soon as I hung up.
Even before this recession, keeping a close eye on the bottom line was a depressing but necessary midmonth habit. Like most educators, our belts have always been snug.
"Didn't I ask you to wait until next week to pay the sitter?"
Perversely, while we make more today than we have in the past, things didn't always seem this tight. Before the crash, our house was a piggy bank, allowing us to go to the wine store on the corner just like the 30-something AOL retirees in the trendy neighborhood where we'd settled during the '90s.
Our first home in Del Ray was a little Cape Cod with a galley kitchen and a koi pond out back. I built a white picket fence around the patch of a front yard and planted a maple tree near the garage when our son was born. A few years and another kid later, we waded into the pounding surf of the local housing market. Back then, we got outbid by laughable sums -- once $100,000 -- before finally making an offer on a place a few blocks away for $70,000 over the asking price. Even that amount seemed like Monopoly money when our own starter home sold the next week for $500,000 more than we'd originally paid for it.
"You guys are teachers," I remember Jim saying on his first visit to our handsome, two-story farmhouse on a double lot. "How'd you get a place like this?"
***
The weekend after our phone chat, Jim steered a brand-new Subaru Outback into the driveway, parking behind my used luxury station wagon.
"Nice," I said, trying not to look too impressed. I've never owned a new car in my life.
For him, the vehicle is a practical choice: a people-mover with puke-proof leather seats, not too high-end to garage in the city. Paid for in cash.
"Thanks," he grunted, hauling out the luggage. "And remind me why you're the one with the Audi?"
Our fancy import had come to us with 60,000 miles after a neighborhood teenager deemed it not cool enough to drive to her tony private high school.
Twin math: For more than $30,000 plus a monthly parking bill double my loan payment, my brother got the outdoorsy brand I would have splurged on if I could afford to buy new. For $20,000 less, I'd picked up a used version of the ride he might have driven out of the showroom, if only he weren't strapped with a double mortgage.
"Did that come with the bike rack," I asked, "Or was it extra?"
Later, we sat out back on the deck near the grill, nursing a couple of beers as our sons, ages 4 to 8, played in the yard. I'd rebuilt the deck, enjoying the satisfaction of knowing I'd done it myself, the sort of feeling that budget-conscious teachers tend to experience a lot more than time-strapped lawyers.
We chatted as the boys made their alliances and began an assault on the woodpile. Wiffle bats littered the lawn, and a playground ball bounced toward the butterfly bush.
"Easy on the flowers," I called. "And watch out for land mines." The dogs panted under the picnic table.
"Man," said my brother, gazing around the neatly fenced area. "You don't know what a yard like this would cost in Brooklyn." There was a note of envy in his voice I couldn't help but savor, maybe because I know it all too well.
***
A month or two later, I eased into a parking space right in front of my brother's new brownstone in Brooklyn Heights.
"We made it," I declared to the kids, groggy in the back seat.
"That's it?" asked my wife, sizing up the nondescript stairs leading to a heavy wooden door. For the past year, the real estate saga had unfolded: the slow sale of the Chelsea condo, the purchase of this place complete with prickly downstairs neighbor, the dizzyingly over-budget renovation. We'd wondered along the way why anyone would buy the top three floors of anything without getting a back yard.
"There's Uncle Jimmy!" called the boys.
"I haven't gotten that parking spot since we moved in," he greeted us. "Welcome to Brooklyn."
Jim dropped our bags in a room sparsely furnished with two raspberry chairs and a foldout couch. "You'll be here," he said. "The boys are down the hall." Already, the kids were dumping bins of plastic dinosaurs onto the floor.
"And here," he said, as we followed him upstairs to the next level, "is the rest." I suddenly knew what real estate agents mean by the "wow" factor. A dining area with a dramatic two-story ceiling lay before us, an open kitchen at one end and a tastefully appointed living room at the other. White columns sprang from creamy antique pine floors, leading the eye to the level above, where glass panels hovered between stainless steel railings on the landing. The furniture was Danish modern; the sound system zoned. A brand-new flat-screen TV hung on an invisible mount beyond the Arts and Crafts mantle. Across from it, modular bookshelves floated against one wall.
Overlooking all was a glass-walled master suite with gauzy curtains. This, I thought as I took in the scene, is a sweet house.
Later, we went for a jog, just as we had a year earlier. I felt the familiar electricity of running in the city, but the landscape was new to me. "This area is called Dumbo," Jim tour-guided, "Down Under the Manhattan Bridge Overpass."
We ran past spray-painted doors and decrepit buildings where artists keep lofts, though most of the Bohemian pioneers have already been chased out by the inexorable creep of monied couples from Manhattan. Suddenly the East River appeared before us.
"That's the Brooklyn Bridge, right?" I asked.
"Yeah, and they're going to turn all these piers into parks and stuff," Jim said, waving his arm at the line of old docks that stretched to the south. I pictured the scene for a moment: hopscotching greensward packed with high-net-worth couples pushing $900 strollers.
We paused to stretch on one of the barren piers. Wall Street glittered across the water, and just downriver, with her back to us, the Statue of Liberty held her torch aloft.
"How's the new job?" asked Jim.
"Good," I grunted. "No more getting home at four in the afternoon."
Seven is closer to normal these days, at which hour I'm greeted at the door by the nuzzling of an under-exercised dog, the fried-onion smell of red sauce on the stove, and a third-grader calling for help with his homework.
"That's not so bad," lamented Jim. "If I know I can't get home for bedtime, I'll call the boys at 7:30 and then stay at work till midnight."
By this time, we were running again, circling back to the house. To the steady rhythm of our steps, I mulled the ebb and flow of anxiety over money that has come with being an educator. Was being home for bath time worth it?
I got an answer of sorts later that evening as I watched my brother thumb his BlackBerry to answer West Coast e-mails while the rest of us sat around drinking his expensive Scotch and playing our version of "Six Degrees of Separation" on Facebook. The kids were zonked, and the last dishwasher load had finally run.
"Dude, check this out," I chuckled. A friend from fifth grade popped up on the screen.
"One minute," Jim said, frowning.
A while later, I headed for the stairs, leaving Jim splayed out in a modern chair, his BlackBerry idle at last. "Don't stay up too late," I called.
It's best to go to bed with the score tied.
Emmet Rosenfeld is dean of students at the Congressional Schools of Virginia and a teacher consultant with the Northern Virginia Writing Project. He can be reached at emmet.rosenfeld@gmail.com.
Friday, 31 July 2009
Time is Money for the Young Investor
It's a great time to invest.
Time is Money
Oh, to be young again. For one, I would go back and correct some investing mistakes. When I first started investing in a 401 (k) plan I opted for mostly bonds, which was way too conservative for a young investor. Don't make the mistake I did, advises Kiplinger's Erin Burt.
Although the stock market is still scary (despite its recent upswing), if you've got decades before you retire, don't let the recession chase you away from equities. Read more in If You're Young, Rock the Recession (July 19).
http://www.washingtonpost.com/wp-dyn/content/article/2009/07/17/AR2009071703814.html?wpisrc=newsletter
If You're Young, Rock the Recession
By Erin Burt
Kiplinger.com
Sunday, July 19, 2009
If you're older than 40, you would be forgiven if you took the glass-half-empty view of the economy. After all, your retirement account has been decimated, your home's value has plummeted, your credit has dried up and your job may be teetering on a cliff.
But if you're in your 20s or 30s, you have time to rebound from any personal setback and even use the crisis to your advantage.
It's a great time to invest.
Yes, the stock market has been in the toilet lately, but that's what makes investing so attractive, especially to first-timers. As of July 8, the Standard & Poor's 500-stock index stood 44 percent below the all-time high set on Oct. 9, 2007. Yes, that's a good thing -- for you. You have 30, 40, maybe 50 years until you retire. That's plenty of time to come out ahead. The stock market has never lost money over a 30-year period. Even if you had invested in 1928, before the Great Depression, you would have earned an average annual return of about 8.5 percent over the next 30 years, according to T. Rowe Price.
You can get a deal on a home.
Median home prices have dropped about 25 percent since 2006, with some metro areas seeing values drop by more than half, according to the National Association of Realtors. Mortgage rates are also near record lows, making for smaller monthly payments. Plus, Uncle Sam is sweetening the deal with a tax credit worth up to $8,000 for first-time home buyers.
Your career options are still open.
The nation's unemployment rate topped 9.5 percent in June. And hiring for new grads has slowed significantly. But this is a minor setback when you're young, compared with the blow it would be if you were older and more established. In fact, the recession may lead you to explore life and job paths you might not have considered otherwise.
You haven't put down roots, yet.
So it's easier for you to move to where the jobs are. Job markets in big -- and pricey -- cities, such as New York, Chicago and San Francisco, have been hit hard. But look at opportunities and a more affordable lifestyle in such places as Albuquerque, Austin, Charlottesville and Huntsville, Ala.
Excessive debt is passé.
Conspicuous consumption is out. Frugality is in. In recent years, we hardly saved a dime (zero percent, actually). Now, with the economy in the dumps, Americans are saving nearly 7 percent, according to the Bureau of Economic Analysis. Getting in the habit of saving money and spending wisely in your 20s and 30s will pay dividends for a lifetime.
Time is Money
Oh, to be young again. For one, I would go back and correct some investing mistakes. When I first started investing in a 401 (k) plan I opted for mostly bonds, which was way too conservative for a young investor. Don't make the mistake I did, advises Kiplinger's Erin Burt.
Although the stock market is still scary (despite its recent upswing), if you've got decades before you retire, don't let the recession chase you away from equities. Read more in If You're Young, Rock the Recession (July 19).
http://www.washingtonpost.com/wp-dyn/content/article/2009/07/17/AR2009071703814.html?wpisrc=newsletter
If You're Young, Rock the Recession
By Erin Burt
Kiplinger.com
Sunday, July 19, 2009
If you're older than 40, you would be forgiven if you took the glass-half-empty view of the economy. After all, your retirement account has been decimated, your home's value has plummeted, your credit has dried up and your job may be teetering on a cliff.
But if you're in your 20s or 30s, you have time to rebound from any personal setback and even use the crisis to your advantage.
It's a great time to invest.
Yes, the stock market has been in the toilet lately, but that's what makes investing so attractive, especially to first-timers. As of July 8, the Standard & Poor's 500-stock index stood 44 percent below the all-time high set on Oct. 9, 2007. Yes, that's a good thing -- for you. You have 30, 40, maybe 50 years until you retire. That's plenty of time to come out ahead. The stock market has never lost money over a 30-year period. Even if you had invested in 1928, before the Great Depression, you would have earned an average annual return of about 8.5 percent over the next 30 years, according to T. Rowe Price.
You can get a deal on a home.
Median home prices have dropped about 25 percent since 2006, with some metro areas seeing values drop by more than half, according to the National Association of Realtors. Mortgage rates are also near record lows, making for smaller monthly payments. Plus, Uncle Sam is sweetening the deal with a tax credit worth up to $8,000 for first-time home buyers.
Your career options are still open.
The nation's unemployment rate topped 9.5 percent in June. And hiring for new grads has slowed significantly. But this is a minor setback when you're young, compared with the blow it would be if you were older and more established. In fact, the recession may lead you to explore life and job paths you might not have considered otherwise.
You haven't put down roots, yet.
So it's easier for you to move to where the jobs are. Job markets in big -- and pricey -- cities, such as New York, Chicago and San Francisco, have been hit hard. But look at opportunities and a more affordable lifestyle in such places as Albuquerque, Austin, Charlottesville and Huntsville, Ala.
Excessive debt is passé.
Conspicuous consumption is out. Frugality is in. In recent years, we hardly saved a dime (zero percent, actually). Now, with the economy in the dumps, Americans are saving nearly 7 percent, according to the Bureau of Economic Analysis. Getting in the habit of saving money and spending wisely in your 20s and 30s will pay dividends for a lifetime.
Financial Planning and Investment Management
If you’re visiting our Web site, chances are you’re facing critical decisions about your financial future. Perhaps you’re thinking about issues such as:
How do I preserve capital while getting the best return on my investments?
Can I maintain my lifestyle indefinitely?
How much should I spend on a second home — and what is the best way to finance it?
What is the most efficient way to fund my children’s or grandchildren's education?
When is the right time to retire?
Should I take my pension as a lump sum?
Which company stock options should I exercise, and when?
Do I have too much life insurance? What about long-term care?
How do I minimize taxes?
How can I efficiently transfer wealth to my heirs?
As you probably realize, the answers to these questions are fundamentally interrelated, which is why it’s best to seek multi-disciplined advice that is seamless and integrated. And if you prefer guidance that is very personalized, highly professional, independent, and objective, consider Brinton Eaton Wealth Advisors, a firm built upon long-term trust-based client relationships.
A full-service, fee-only, wealth management firm, Brinton Eaton Wealth Advisors provides integrated financial planning, tax advisory, and investment management services to individuals and institutions nationwide.
http://www.brintoneaton.com/
Thursday, 30 July 2009
Market Price Fluctuations
52W Hg 32.000
52W Lw 26.000
Close 32.000
Price fluctuations:
The share price showed a steady up-trend with little volatility.
At 32.00, the share price has risen 23.1% from the 52 week low price.
52W Hg 12.400
52W Lw 8.100
Close 11.300
Price fluctuations:
The share price dropped 34.7% from its 52 week high price.
At 11.30, the share price has risen 39.5% from the 52 week low price.
52W Hg 6.250
52W Lw 4.460
Close 6.200
Price fluctuations:
The share price rose steadily with some volatility to its present price which is also the 52 week high price.
At 6.20, the share price has risen 39% from the 52 week low price.
52W Hg 1.320
52W Lw 0.800
Close 1.200
Price fluctuations:
The share price dropped 39% from its 52 week high price.
At 1.20, the share price has risen 50% from the 52 week low price.
52W Hg 2.380
52W Lw 0.790
Close 1.840
Price fluctuations
The share price dropped 67% from its 52 week high price.
At 1.84, the share price has risen 133% from the 52 week low price.
How can a short-term investor profits from these market price fluctuations?
How can a long-term investor profits from these market price fluctuations?
Who gains more: those who bought and hold long term or those who sold when the market trended downwards and then bought back when the market trended upwards?
The latter group needed to get both the sell and decision correct. Some in this latter group were caught with little allocation to stocks when the market turned in March, missing the best upward returns offered by this severe bear market.
Make volatility your friend.
For an investor who will be putting in more new capital yearly into the market, an understanding of market price fluctuations is important.
It is to be expected that the price of a stock can goes down by a third and can goes up by a half, even in normal market situations.
In fact, when the market is being sold down, the long term value investor gets excited and enthused.
The risk is not in the price volatility.
- The risk is in oneself, reacting "stupidly" to price fluctuations.
- The other risk of course is making a wrong assessment of the future earnings and future earnings growth of the business of the company you bought.
iCap poses a challenge to active investors - Is it time for a re-think?
I started a new portfolio in October 2005. This coincided with the inception of iCap. closed ended fund.
Let us look at some data.
In Oct 2005:
KLCI was around 900
iCap NAV was $1.00 ($0.99 after deducting expenses)
23.7.2009 (after 45 months of investing = 3.75 years)
KLCI is around 1200, giving a cumulative total return of about 33% or a CAGR of 8%.
iCap NAV is $1.87, giving a cumulative total return of 86% or a CAGR of 18%. These are net of all expenses incurred by the fund. iCap in its latest report held 15.6% cash (41 m) with the rest invested in equity.
For the same period:
Savings in FD would have given a cumulative return of 15.84% at the generous annual interest rate of 4%.
My portfolio has a cumulative return of 45% or a CAGR of 10.4% for the same period.
Further observations:
At no period did the portfolio give a negative return, even during the recent severe bear market.
Of course, the return was very small at the depth of the severe bear market, threatening the loss of invested capital.
(However, as a long term investor, one can be comforted that the intrinsic value of the portfolio was definitely much higher than its market valuation.)
The time when the disparity between these two values of the portfolio was the biggest was also the best time to look for bargains. This called for courage and conviction on the part of the investor who has the capital to invest.
The cumulative total return of 45% for this portfolio, as of today, is made up of:
o dividend return of 12.2%,
o realised capital gain of 18.8% and
o unrealised capital gain of 13.9%.
Just like iCap, the calculations for this portfolio were based as if the investment was a lump sum at the start of the period (in reality, this was not the case), with dividends and realized capital gains reinvested. No cash was held in this portfolio, as this was the portion of my asset allocated to equity.
The Big Question.
Given the vastly superior performance of iCap closed ended fund, the question posed is: 'Should I continue to actively manage my own portfolio or should I turn into an even bigger investor into iCap fund?'
But then, this is a happy problem I can live with for a while yet.
Let us look at some data.
In Oct 2005:
KLCI was around 900
iCap NAV was $1.00 ($0.99 after deducting expenses)
23.7.2009 (after 45 months of investing = 3.75 years)
KLCI is around 1200, giving a cumulative total return of about 33% or a CAGR of 8%.
iCap NAV is $1.87, giving a cumulative total return of 86% or a CAGR of 18%. These are net of all expenses incurred by the fund. iCap in its latest report held 15.6% cash (41 m) with the rest invested in equity.
For the same period:
Savings in FD would have given a cumulative return of 15.84% at the generous annual interest rate of 4%.
My portfolio has a cumulative return of 45% or a CAGR of 10.4% for the same period.
Further observations:
At no period did the portfolio give a negative return, even during the recent severe bear market.
Of course, the return was very small at the depth of the severe bear market, threatening the loss of invested capital.
(However, as a long term investor, one can be comforted that the intrinsic value of the portfolio was definitely much higher than its market valuation.)
The time when the disparity between these two values of the portfolio was the biggest was also the best time to look for bargains. This called for courage and conviction on the part of the investor who has the capital to invest.
The cumulative total return of 45% for this portfolio, as of today, is made up of:
o dividend return of 12.2%,
o realised capital gain of 18.8% and
o unrealised capital gain of 13.9%.
Just like iCap, the calculations for this portfolio were based as if the investment was a lump sum at the start of the period (in reality, this was not the case), with dividends and realized capital gains reinvested. No cash was held in this portfolio, as this was the portion of my asset allocated to equity.
The Big Question.
Given the vastly superior performance of iCap closed ended fund, the question posed is: 'Should I continue to actively manage my own portfolio or should I turn into an even bigger investor into iCap fund?'
But then, this is a happy problem I can live with for a while yet.
CAGR: The Good, The Bad And The Ugly
CAGR: The Good, The Bad And The Ugly
by Rick Wayman (Contact Author Biography)
Compound annual growth rate, or CAGR, is a term that gets used when investment advisors tout their market savvy and funds promote their returns. But what does it really show? This article will define CAGR and discuss its good and bad points.
CAGR Defined
The CAGR is a mathematical formula that provides a "smoothed" rate of return. It is really a pro forma number that tells you what an investment yields on an annually compounded basis; it indicates to investors what they really have at the end of the investment period. For example, let's assume you invested $1,000 at the beginning of 1999 and by year-end your investment was worth $3,000, a 200% return. The next year, the market corrected, and you lost 50% and ended up with $1,500 at year-end 2000.
What was the return on your investment for the period? Using the average annual return does not work. The average annual return on this investment was 75% (the average of 200% gain and 50% loss), but in this two-year period you ended up with $1,500 not $3,065 ($1,000 for two years at an annual rate of 75%). To determine what your annual return was for the period, you need to calculate the CAGR.
To calculate the CAGR you take the nth root of the total return, where "n" is the number of years you held the investment. In this example, you take the square root (because your investment was for two years) of 50% (the total return for the period) and get a CAGR of 22.5%. Table 1 illustrates the annual returns, CAGR, and average annual return of this hypothetical portfolio. The lower portion of the table illustrates how applying the CAGR gives the number that equates the ending value of the initial investment.
Table 1
Figure 1 is a graphical representation of Table 1 and illustrates the smoothing effect of the CAGR. Notice how the lines vary but the ending value is the same.
Table 2
Because we have treated the five-year bond like a savings account (ignoring the market price of the bond), the average annual return is equal to the CGAR. The risk of not achieving the expected return was 0.0 because the expected return was "locked in". The standard deviation is zero also because the CAGR was the same as the annual returns.
General Electric (GE) shares were more volatile than the five-year bond, but not as much as YHOO's. The CAGR for GE was slightly less than 20%, but was lower than the average annual return of 23.5%. Because of this difference, the standard deviation was 0.32.
Yahoo (YHOO) outperformed GE by posting a CAGR of 65.7%, but this investment was also more risky because the stock's price fluctuated more than GE's. This volatility is shown by the high standard deviation of 3.07.
The following graphs compare the year-end prices to the CAGR and illustrates two things. First, the graphs show how the CAGR for each investment relates to the actual year-end values. For the bond, there is no difference (so we didn't display its graph for the CAGR comparison) because the actual returns do not vary from the CAGR. Second, the difference between the actual value and the CAGR value illustrates investment risk.
Figure 3
Figure 4
In order to compare the performance and risk characteristics between investment alternatives, investors can use a risk-adjusted CAGR. A simple method for calculating a risk-adjusted CAGR is to multiply the CAGR by one minus the standard deviation. If the standard deviation (risk) is zero, the risk-adjusted CAGR is unaffected. The larger the standard deviation, the lower the risk-adjusted CAGR. For example, here is the risk-adjusted CAGR comparison for the bond, GE and YHOO:
Bond: 6.21%
GE: 13.6% (instead of 19.96%)
YHOO: -136% (instead of 65.70%)
This analysis shows two things:
•While the bond holds no investment risk, the return is below that of the stocks.
•GE appears to be a preferable investment than YHOO. YHOO's CAGR was much greater than GE's (65.7% versus 19.9%), but because YHOO shares were more volatile, its risk-adjusted CAGR is lower than GE's.
by Rick Wayman (Contact Author Biography)
Compound annual growth rate, or CAGR, is a term that gets used when investment advisors tout their market savvy and funds promote their returns. But what does it really show? This article will define CAGR and discuss its good and bad points.
CAGR Defined
The CAGR is a mathematical formula that provides a "smoothed" rate of return. It is really a pro forma number that tells you what an investment yields on an annually compounded basis; it indicates to investors what they really have at the end of the investment period. For example, let's assume you invested $1,000 at the beginning of 1999 and by year-end your investment was worth $3,000, a 200% return. The next year, the market corrected, and you lost 50% and ended up with $1,500 at year-end 2000.
What was the return on your investment for the period? Using the average annual return does not work. The average annual return on this investment was 75% (the average of 200% gain and 50% loss), but in this two-year period you ended up with $1,500 not $3,065 ($1,000 for two years at an annual rate of 75%). To determine what your annual return was for the period, you need to calculate the CAGR.
To calculate the CAGR you take the nth root of the total return, where "n" is the number of years you held the investment. In this example, you take the square root (because your investment was for two years) of 50% (the total return for the period) and get a CAGR of 22.5%. Table 1 illustrates the annual returns, CAGR, and average annual return of this hypothetical portfolio. The lower portion of the table illustrates how applying the CAGR gives the number that equates the ending value of the initial investment.
Table 1
Figure 1 is a graphical representation of Table 1 and illustrates the smoothing effect of the CAGR. Notice how the lines vary but the ending value is the same.
Figure 1
The Good
CAGR is the best formula for evaluating how different investments have performed over time. Investors can compare the CAGR in order to evaluate how well one stock performed against other stocks in a peer group or against a market index. The CAGR can also be used to compare the historical returns of stocks to bonds or a savings account.
The Bad
When using the CAGR, it is important to remember two things:
- the CAGR does not reflect investment risk
- you must use the same time periods.
Investment returns are volatile, meaning they can vary significantly from one year to another, and CAGR does not reflect volatility. CAGR is a pro forma number that provides a "smoothed" annual yield, so it can give the illusion that there is a steady growth rate even when the value of the underlying investment can vary significantly. This volatility, or investment risk, is important to consider when making investment decisions.
Investment results vary depending on the time periods. For example, amazon.com (AMZN) could be viewed as a great investment if you were smart enough to buy it in December 1997 at $4.52 and sell it in April 1999 at $105.06 for a 2,224% gain. If you bought the stock in September 1998 at $13.28 and still have it in your portfolio today, you would be about even. If you bought AMZN in late 2000 and still have it today, you would have lost 88% (from $115 to $13).
To demonstrate both CAGR and volatility risk, let's look at three investment alternatives: a blue chip (General Electric), a dotcom (Yahoo) and the five-year Treasury bond. We will examine the CAGR and average growth rate for each investment (adjusted for dividends and splits) for the five years ending December 31, 2001. We will then compare the volatility of these investments by using a statistic called the standard deviation.
Standard deviation is a statistic that measures how annual returns might vary from the expected return. Very volatile investments have large standard deviations because their annual returns can vary significantly from their average annual return. Less volatile stocks have smaller standard deviations because their annual returns are closer to their average annual return. For example, the standard deviation of a savings account is zero because the annual rate is the expected rate of return (assuming you don't deposit or withdraw any money). In contrast, a stock's price can vary significantly from its average return, thus causing a higher standard deviation. The standard deviation of a stock is generally greater than the savings account or a bond held to maturity.
The annual returns, CAGR, average annual return, and standard deviation (StDev) of each of the three investments are summarized in Table 2. We will assume that the investments were made at the end of 1996 and that the five-year bond was held to maturity. The market priced the five-year bond to yield 6.21% at the end of 1996, and we show the annual accrued amounts, not the bond's price. The stock prices are those of the end of the respective years.
Table 2
Because we have treated the five-year bond like a savings account (ignoring the market price of the bond), the average annual return is equal to the CGAR. The risk of not achieving the expected return was 0.0 because the expected return was "locked in". The standard deviation is zero also because the CAGR was the same as the annual returns.
General Electric (GE) shares were more volatile than the five-year bond, but not as much as YHOO's. The CAGR for GE was slightly less than 20%, but was lower than the average annual return of 23.5%. Because of this difference, the standard deviation was 0.32.
Yahoo (YHOO) outperformed GE by posting a CAGR of 65.7%, but this investment was also more risky because the stock's price fluctuated more than GE's. This volatility is shown by the high standard deviation of 3.07.
The following graphs compare the year-end prices to the CAGR and illustrates two things. First, the graphs show how the CAGR for each investment relates to the actual year-end values. For the bond, there is no difference (so we didn't display its graph for the CAGR comparison) because the actual returns do not vary from the CAGR. Second, the difference between the actual value and the CAGR value illustrates investment risk.
Figure 2
Figure 3
Figure 4
In order to compare the performance and risk characteristics between investment alternatives, investors can use a risk-adjusted CAGR. A simple method for calculating a risk-adjusted CAGR is to multiply the CAGR by one minus the standard deviation. If the standard deviation (risk) is zero, the risk-adjusted CAGR is unaffected. The larger the standard deviation, the lower the risk-adjusted CAGR. For example, here is the risk-adjusted CAGR comparison for the bond, GE and YHOO:
Bond: 6.21%
GE: 13.6% (instead of 19.96%)
YHOO: -136% (instead of 65.70%)
This analysis shows two things:
•While the bond holds no investment risk, the return is below that of the stocks.
•GE appears to be a preferable investment than YHOO. YHOO's CAGR was much greater than GE's (65.7% versus 19.9%), but because YHOO shares were more volatile, its risk-adjusted CAGR is lower than GE's.
While historical performance is not a 100% indicator of future results, it does provide the investor with some valuable information.
The Ugly
Things get ugly when the CAGR is used to promote investment results without incorporating the risk factor. Mutual fund companies emphasize their CAGRs from different time periods in order to get you to invest in their funds, but they rarely incorporate a risk adjustment. It is also important to read the fine print in order to know what time period is being used. Ads can tout a fund's 20% CAGR in bold type, but the time period used may be from the peak of the last bubble, which has no bearing on the most recent performance.
Conclusion
The CAGR is a good and valuable tool to evaluate investment options, but it does not tell the whole story. Investors can analyze investment alternatives by comparing their CAGRs from identical time periods. Investors, however, also need to evaluate the relative investment risk. This requires the use of another measure such as standard deviation.
by Rick Wayman, (Contact Author Biography)
'Stockmarkets climbing wall of worry'
'Stockmarkets climbing wall of worry'
The market action we have seen unfolding so far is very similar to the recovery from the March 2003 lows at the end of the ‘dotcom’ bear market.
By Jeff Hochman, director of technical analysis, Fidelity
Published: 2:49PM BST 29 Jul 2009
If that analogy holds, we can expect to see some market gyrations in the short term as investors wait for further evidence of economic and corporate improvement, which may be a few months away. Markets always have to climb this wall of worry and the fear of being left behind will become increasingly strong.
There is a risk that markets could fall by around 5pc, however this should be seen as a buying opportunity.
The alternative scenario is that markets stay fairly flat, within a trading range, before trending higher as each piece of new data adds weight to the evolving recovery story.
Renewed investor interest has helped emerging markets to move up strongly, so much so that they may see some short-term consolidation in what remains a strong secular story.
There is a considerable amount of money waiting on the sidelines in money market funds. This missed the first stage of the rally but it can be committed to the market once conditions improve.
Around two thirds of the money is institutional and some of it will be specifically allocated to cash, but a big chunk of it is cash that it is likely to be used for reallocating to equities.
By any historical standards, investors are currently holding extreme levels of cash at a time when the yield is modest. In the past, when cash levels have either met or exceeded the value of the equity market, this has marked a significant low.
The market action we have seen unfolding so far is very similar to the recovery from the March 2003 lows at the end of the ‘dotcom’ bear market.
By Jeff Hochman, director of technical analysis, Fidelity
Published: 2:49PM BST 29 Jul 2009
If that analogy holds, we can expect to see some market gyrations in the short term as investors wait for further evidence of economic and corporate improvement, which may be a few months away. Markets always have to climb this wall of worry and the fear of being left behind will become increasingly strong.
There is a risk that markets could fall by around 5pc, however this should be seen as a buying opportunity.
The alternative scenario is that markets stay fairly flat, within a trading range, before trending higher as each piece of new data adds weight to the evolving recovery story.
Renewed investor interest has helped emerging markets to move up strongly, so much so that they may see some short-term consolidation in what remains a strong secular story.
There is a considerable amount of money waiting on the sidelines in money market funds. This missed the first stage of the rally but it can be committed to the market once conditions improve.
Around two thirds of the money is institutional and some of it will be specifically allocated to cash, but a big chunk of it is cash that it is likely to be used for reallocating to equities.
By any historical standards, investors are currently holding extreme levels of cash at a time when the yield is modest. In the past, when cash levels have either met or exceeded the value of the equity market, this has marked a significant low.
Wednesday, 29 July 2009
KAF-Seagroatt returns to RM12m profit in fourth quarter
KAF-Seagroatt returns to RM12m profit in fourth quarter
Tags: fourth quarter KAF-Seagroatt & Campbell Bhd
Written by Financial Daily
Friday, 24 July 2009 09:53
KUALA LUMPUR: KAF-SEAGROATT & CAMPBELL BHD [] returned to profitability, with a net profit of RM12.12 million in its fourth quarter (4Q) ended May 31, 2009 versus a net loss of RM37,000 in the previous three months to Feb 28, 2009 due to higher volume of transactions and writeback in allowance for the diminution in the value of equity.
Revenue jumped 129% to RM6.78 million from RM2.96 million. No final dividend was proposed.
For the year ended May 31, 2009 (FY09), KAF-Seagroatt posted a net loss of RM2.96 million versus a net profit of RM17.49 million in FY08, while revenue fell 53% to RM19.73 million from RM42.54 million.
The group’s financial year-end was changed from March to May, starting with the 14-month period ended May 31, 2008. The stock was untraded yesterday, while it closed at RM1.18 on Wednesday.
This article appeared in The Edge Financial Daily, July 24, 2009
----
Tough times ahead but KAF won't cut jobs
By Chong Pooi Koon
Published: 2008/11/12
There's no way any brokers are going to maintain the 2007 or 2008 earnings into 2009, says KAF-Seagroatt's managing director Datuk Khatijah Ahmad
STOCKBROKING firm KAF-Seagroatt & Campbell Bhd (5096) will make a smaller profit in the year to May 2009 as market volume dwindles, but it will not cut jobs even as it anticipates the next three years to be tough.
Instead, managing director Datuk Khatijah Ahmad sees an opportunity to hire and strengthen the staff force of the research-driven broking house as other global banks start to retrench amid the financial crisis.
"There're no job cuts or pay cuts although the bonus may not be as good as last year's. We want to retain good people," Khatijah said after a shareholder meeting in Kuala Lumpur yesterday.
KAF-Seagroatt made RM17.5 million net profit in the 14 months to May 31 2008 on revenue of RM42.5 million.
Khatijah said, however, that such earnings would not be sustained this year.
"The foreign investors are leaving or have left, the volume has dropped in the equity market. There's no way any brokers are going to maintain the 2007 or 2008 earnings into 2009," she said.
The global financial market is in unchartered waters and, until the foreign investors return to Malaysia, there's little catalyst for the stock market.
"One should be prepared for a very slow market. As long as we are not losing money and can maintain the business, we should be fine," Khatijah said.
KAF-Seagroatt is a low-cost operator and can ride out the market trough in the next few years through earnings from its solid balance sheet, she added.
As at May this year, its total current assets were more than double its current liabilities and the broker has had no borrowings.
Khatijah is also not too concerned over the investment revaluation loss after its asset prices were marked-to-market, which dragged the company to a first quarter net loss of RM4.7 million.
"These are blue-chip shares that pay good dividend. It'll be silly to liquidate in this bottoming market," she said.
http://www.btimes.com.my/Current_News/BTIMES/articles/kafo-2/Article/
Tags: fourth quarter KAF-Seagroatt & Campbell Bhd
Written by Financial Daily
Friday, 24 July 2009 09:53
KUALA LUMPUR: KAF-SEAGROATT & CAMPBELL BHD [] returned to profitability, with a net profit of RM12.12 million in its fourth quarter (4Q) ended May 31, 2009 versus a net loss of RM37,000 in the previous three months to Feb 28, 2009 due to higher volume of transactions and writeback in allowance for the diminution in the value of equity.
Revenue jumped 129% to RM6.78 million from RM2.96 million. No final dividend was proposed.
For the year ended May 31, 2009 (FY09), KAF-Seagroatt posted a net loss of RM2.96 million versus a net profit of RM17.49 million in FY08, while revenue fell 53% to RM19.73 million from RM42.54 million.
The group’s financial year-end was changed from March to May, starting with the 14-month period ended May 31, 2008. The stock was untraded yesterday, while it closed at RM1.18 on Wednesday.
This article appeared in The Edge Financial Daily, July 24, 2009
----
Tough times ahead but KAF won't cut jobs
By Chong Pooi Koon
Published: 2008/11/12
There's no way any brokers are going to maintain the 2007 or 2008 earnings into 2009, says KAF-Seagroatt's managing director Datuk Khatijah Ahmad
STOCKBROKING firm KAF-Seagroatt & Campbell Bhd (5096) will make a smaller profit in the year to May 2009 as market volume dwindles, but it will not cut jobs even as it anticipates the next three years to be tough.
Instead, managing director Datuk Khatijah Ahmad sees an opportunity to hire and strengthen the staff force of the research-driven broking house as other global banks start to retrench amid the financial crisis.
"There're no job cuts or pay cuts although the bonus may not be as good as last year's. We want to retain good people," Khatijah said after a shareholder meeting in Kuala Lumpur yesterday.
KAF-Seagroatt made RM17.5 million net profit in the 14 months to May 31 2008 on revenue of RM42.5 million.
Khatijah said, however, that such earnings would not be sustained this year.
"The foreign investors are leaving or have left, the volume has dropped in the equity market. There's no way any brokers are going to maintain the 2007 or 2008 earnings into 2009," she said.
The global financial market is in unchartered waters and, until the foreign investors return to Malaysia, there's little catalyst for the stock market.
"One should be prepared for a very slow market. As long as we are not losing money and can maintain the business, we should be fine," Khatijah said.
KAF-Seagroatt is a low-cost operator and can ride out the market trough in the next few years through earnings from its solid balance sheet, she added.
As at May this year, its total current assets were more than double its current liabilities and the broker has had no borrowings.
Khatijah is also not too concerned over the investment revaluation loss after its asset prices were marked-to-market, which dragged the company to a first quarter net loss of RM4.7 million.
"These are blue-chip shares that pay good dividend. It'll be silly to liquidate in this bottoming market," she said.
http://www.btimes.com.my/Current_News/BTIMES/articles/kafo-2/Article/
Kossan owns up to wrong judgment
Kossan owns up to wrong judgment
Tags: forex hedging Kossan Lim Kuang Sia
Written by Tony C H Goh
Monday, 27 July 2009 11:05
KUALA LUMPUR: KOSSAN RUBBER INDUSTRIES BHD [] chief executive officer Lim Kuang Sia has owned up to making a wrong judgment in carrying out speculative foreign exchange (forex) hedging.
“It is not the company’s policy to engage in speculative hedge, and we assure our investors that this kind of wrong judgment call will not happen again,” he told The Edge Financial Daily in a telephone interview last Friday.
Lim was responding to analysts’ reports that the glove maker may incur an estimated forex loss of RM8 million to RM9 million in the second quarter ended June 30, 2009 (2QFY09), after having written off RM12 million in similar losses in 1QFY09.
The losses spilled over from last year when Kossan hedged its receivables at an average contract of RM3.37 to the US dollar in anticipation of further weaknesses in the US currency. Instead, the dollar strengthened against the ringgit.
Lim said he did not expect any major impact from the forex losses this year.
“We are confident that the forex losses will fizzle out by the end of this financial year. In fact, a turnaround is expected to begin from the second half of this year and what happened was something that is common for industries that are involved in exports,” he said.
OSK Research said in its latest update on the company that FY09 would be a challenging year for Kossan, as it had to deal with unforeseen events such as a factory fire in May that disrupted much-needed production and the slowdown in the automotive sector that dampened demand for its technical gloves.
However, the research house said the problem of forex losses was not unique to Kossan, citing the example of ADVENTA BHD [] which incurred a forex loss of RM4.3 million in 1QFY09 and also in 2QFY09, which wiped out more than 50% of its quarterly net profit.
Other major glove makers such as Top Glove Corp Bhd, Supermax Corp Bhd and HARTALEGA HOLDINGS BHD [] were also believed to have suffered forex losses although their hedging exposure was less significant, according to OSK Research.
Lim said Kossan’s business strategies, including capacity expansion and a better product mix, were paying off. He anticipated supply to remain tight this year but said the positive results of its measures would be reflected in the next fiscal year, as the company’s internal projections were on track.
Kossan’s plant is running at around 95% of capacity and it expects to produce 9.3 billion to 9.5 billion gloves this year, an increase of 8%-10% from 8.5 billion last year. About a quarter of its total production would consist of higher-end nitrile gloves.
Nitrile gloves fetch a better selling price of US$27.50-US$28.50 per 1,000 pieces, compared with US$24-US$25 for natural rubber gloves. It also offers 10% to 15% higher margin than conventional rubber gloves.
OSK Research is maintaining a buy call on Kossan with a target price of RM4.48, in anticipation of the turnaround next year and the overall favourable view on the glove industry. The research house added that it was keeping Kossan’s FY09 forecast of RM62.5 million in net profit on revenue of RM964.7 million unchanged, until confirmation on the actual amount of forex loss.
“We believe investors would be buying the stock now for next year rather than 2009. There should also be recovery in the automotive sector, which will spur demand for its technical rubber products, and the overall recovery in the global economy should boost the demand for gloves, especially from the non-medical segment,” said OSK Research.
It said some of the growth catalysts for FY10 would include the commissioning of all its 22 new lines, which should be running at optimum level, thus enlarging its nitrile contribution to 40% from 25% now.
This article appeared in The Edge Financial Daily, July 27, 2009.
Tags: forex hedging Kossan Lim Kuang Sia
Written by Tony C H Goh
Monday, 27 July 2009 11:05
KUALA LUMPUR: KOSSAN RUBBER INDUSTRIES BHD [] chief executive officer Lim Kuang Sia has owned up to making a wrong judgment in carrying out speculative foreign exchange (forex) hedging.
“It is not the company’s policy to engage in speculative hedge, and we assure our investors that this kind of wrong judgment call will not happen again,” he told The Edge Financial Daily in a telephone interview last Friday.
Lim was responding to analysts’ reports that the glove maker may incur an estimated forex loss of RM8 million to RM9 million in the second quarter ended June 30, 2009 (2QFY09), after having written off RM12 million in similar losses in 1QFY09.
The losses spilled over from last year when Kossan hedged its receivables at an average contract of RM3.37 to the US dollar in anticipation of further weaknesses in the US currency. Instead, the dollar strengthened against the ringgit.
Lim said he did not expect any major impact from the forex losses this year.
“We are confident that the forex losses will fizzle out by the end of this financial year. In fact, a turnaround is expected to begin from the second half of this year and what happened was something that is common for industries that are involved in exports,” he said.
OSK Research said in its latest update on the company that FY09 would be a challenging year for Kossan, as it had to deal with unforeseen events such as a factory fire in May that disrupted much-needed production and the slowdown in the automotive sector that dampened demand for its technical gloves.
However, the research house said the problem of forex losses was not unique to Kossan, citing the example of ADVENTA BHD [] which incurred a forex loss of RM4.3 million in 1QFY09 and also in 2QFY09, which wiped out more than 50% of its quarterly net profit.
Other major glove makers such as Top Glove Corp Bhd, Supermax Corp Bhd and HARTALEGA HOLDINGS BHD [] were also believed to have suffered forex losses although their hedging exposure was less significant, according to OSK Research.
Lim said Kossan’s business strategies, including capacity expansion and a better product mix, were paying off. He anticipated supply to remain tight this year but said the positive results of its measures would be reflected in the next fiscal year, as the company’s internal projections were on track.
Kossan’s plant is running at around 95% of capacity and it expects to produce 9.3 billion to 9.5 billion gloves this year, an increase of 8%-10% from 8.5 billion last year. About a quarter of its total production would consist of higher-end nitrile gloves.
Nitrile gloves fetch a better selling price of US$27.50-US$28.50 per 1,000 pieces, compared with US$24-US$25 for natural rubber gloves. It also offers 10% to 15% higher margin than conventional rubber gloves.
OSK Research is maintaining a buy call on Kossan with a target price of RM4.48, in anticipation of the turnaround next year and the overall favourable view on the glove industry. The research house added that it was keeping Kossan’s FY09 forecast of RM62.5 million in net profit on revenue of RM964.7 million unchanged, until confirmation on the actual amount of forex loss.
“We believe investors would be buying the stock now for next year rather than 2009. There should also be recovery in the automotive sector, which will spur demand for its technical rubber products, and the overall recovery in the global economy should boost the demand for gloves, especially from the non-medical segment,” said OSK Research.
It said some of the growth catalysts for FY10 would include the commissioning of all its 22 new lines, which should be running at optimum level, thus enlarging its nitrile contribution to 40% from 25% now.
This article appeared in The Edge Financial Daily, July 27, 2009.
Running ahead of fundamentals?
Running ahead of fundamentals?
Written by Ellina Badri, Isabelle Francis & Surin Murugiah
Tuesday, 28 July 2009 23:51
KUALA LUMPUR: Regional markets continued to rise on July 28, driven by high liquidity but some analysts caution that equities may have run ahead of fundamentals.
Some hint of profit-taking emerged as Japan’s Nikkei 225 snapped its nine-day run and dipped 0.01% to 10,087.26 points. European markets turned negative in early trade on July 28, dragged down by losses in energy stocks.
Hong Kong’s Hang Seng Index gained 1.84% to 20,624.54, Shanghai’s Composite Index added 0.09% to 3,438.37, South Korea’s Kospi rose 0.13% to 1,526.03, Taiwan’s Taiex Index advanced 1.62% to 7,142.63 and Singapore’s Straits Times Index was up 1.84% to 2,624.04.
Macquarie Research, in a report titled When depositors become investors on Monday, said liquidity was returning to Asia and global emerging markets.
It said the fund flow numbers for the week ended July 22 showed that liquidity returned to Asia, ex-Japan and global emerging markets with net weekly inflows of US$973.2 million (RM3.41 billion) and US$1.1 billion, respectively.
This reversed the net outflow trend of the past four weeks, it said.
It said Greater China (China, Hong Kong and Taiwan) funds saw their biggest inflows since December 2007 (US$213.3 million), adding that sentiment towards China remained positive, with investors looking to achieve a broad and diversified exposure.
“In our view, the market conditions continue to be driven by liquidity rather than fundamental factors. Importantly, foreign investors are not the only source of liquidity,” it said, adding that domestic sources were also playing an important role, as depositors were switching from time deposits to demand deposits.
“Interest rate differentials between time and demand deposits are narrowing. With the opportunity cost of liquidity low, a greater proportion of funds are moving to liquid assets (demand deposits),” it said.
The research house also said while liquidity conditions were often a function of economic fundamentals, in the very near term there was the obvious potential for more money to chase equities despite what it viewed as elevated valuations.
“The yield gap between the earnings yield and the deposit rate expanded to an historical high. Despite elevated valuations, the significant yield differential between equities and bank deposits could induce investors to continue to switch from bank deposits to equities.
“Retail participation could rise further. The low returns on alternative investments, such as bank deposits, as well as the strong market momentum, were two likely drivers of the increase in retail investor participation,” it said.
Macquarie said the strong liquidity was pushing Asian equities to stretched valuation levels.
“We think a strong recovery in global final demand is now priced in.
“While hard signs of demand recovery are absent, we would ‘lean into’ the current rally, progressively reducing beta as equity markets move further and further away from levels justified by economic fundamentals,” it said.
On Malaysia, Macquarie said the yield gap, which it defined as 12-month forward earnings yield minus demand deposit rate, had widened further. “Admittedly, the domestic monetary base could be the next potential source of liquidity driving up the market,” it said.
Scott Lim, MIDF Asset Management chief executive and chief investment officer, agreed that the market was liquidity-driven, and valuations were getting stretched.
“The bulk of the rally has reflected liquidity more than fundamentals. Apart from liquidity and efforts by governments to increase access to financing, there is nothing much else driving the market.
“Investors have grounds to be cautious. Either fundamentals have to catch up with valuations, or valuations have to come down to meet it. Either one has to give,” he said.
Lim added that the liquidity was trying to rebuild a bubble, potentially the biggest one of all, but certain markets such as China were showing they were ready to stage a fierce formation of a stock market bubble.
However, Merrill Lynch Global Wealth Management Asia-Pacific investment strategist Stephen Corry said the next six months would still present buying opportunities in equities, regardless of it being an extended bear market rally or the start of a new bull market.
Corry was bullish on emerging market stocks, driven by recovery numbers in terms of car sales, while financial stocks remained favourites.
However, he cautioned that strong corporate earnings growth would need to be supported by equities’ current valuations.
Light crude oil rose nine cents per barrel to US$68.47 as at 6.20pm. Crude palm oil futures for third-month delivery gained RM42 per tonne to RM2,140.
At Bursa Malaysia, the FBM KLCI jumped 1.38% or 15.95 points to 1,172.38, its highest level since July 1 last year, led by gains by blue chips.
TA Securities technical analyst Stephen Soo said the immediate resistance level was 1,188 with the next level at 1,200. He said the respective support levels would be 1,165 and 1,148.
Turnover rose to 1.12 billion shares valued at RM1.63 billion. Gainers led losers by 491 to 194, while 249 counters traded unchanged. Market capitalisation over the last 12 trading days increased by RM60.48 billion to RM876.75 billion. The FBM100 [] gained 100.83 points to 7,689.37 and the FBM Emas added 103.69 points to 7,905.20.
Among the major gainers, SIME DARBY BHD [] and UMW HOLDINGS BHD [] added 25 sen each to RM8.15 and RM6.30, IOI CORPORATION BHD [] was up 22 sen to RM5 and GENTING BHD [] gained 15 sen to RM6.70.
MALAYAN BANKING BHD [], BUMIPUTRA-COMMERCE HOLDINGS [] Bhd and PUBLIC BANK BHD [] rose 10 sen each to RM6.55, RM10.20 and RM10.40, respectively, while Genting Malaysia Bhd added 12 sen to RM3.
PPB GROUP BHD [] was the top loser, shedding 20 sen to RM14.30; KFC HOLDINGS (M) BHD [] fell 15 sen to RM7.35, TALIWORKS CORPORATION BHD [] lost 13 sen to RM1.61, while LOH & LOH CORPORATION BHD [] and LEBAR DAUN BHD [] fell 12 sen each to RM4.18 and 60 sen.
KNM GROUP BHD [] was the most actively traded stock with 56.8 million shares done. It fell one sen to 89.5 sen.
From the Edge Malaysia
Written by Ellina Badri, Isabelle Francis & Surin Murugiah
Tuesday, 28 July 2009 23:51
KUALA LUMPUR: Regional markets continued to rise on July 28, driven by high liquidity but some analysts caution that equities may have run ahead of fundamentals.
Some hint of profit-taking emerged as Japan’s Nikkei 225 snapped its nine-day run and dipped 0.01% to 10,087.26 points. European markets turned negative in early trade on July 28, dragged down by losses in energy stocks.
Hong Kong’s Hang Seng Index gained 1.84% to 20,624.54, Shanghai’s Composite Index added 0.09% to 3,438.37, South Korea’s Kospi rose 0.13% to 1,526.03, Taiwan’s Taiex Index advanced 1.62% to 7,142.63 and Singapore’s Straits Times Index was up 1.84% to 2,624.04.
Macquarie Research, in a report titled When depositors become investors on Monday, said liquidity was returning to Asia and global emerging markets.
It said the fund flow numbers for the week ended July 22 showed that liquidity returned to Asia, ex-Japan and global emerging markets with net weekly inflows of US$973.2 million (RM3.41 billion) and US$1.1 billion, respectively.
This reversed the net outflow trend of the past four weeks, it said.
It said Greater China (China, Hong Kong and Taiwan) funds saw their biggest inflows since December 2007 (US$213.3 million), adding that sentiment towards China remained positive, with investors looking to achieve a broad and diversified exposure.
“In our view, the market conditions continue to be driven by liquidity rather than fundamental factors. Importantly, foreign investors are not the only source of liquidity,” it said, adding that domestic sources were also playing an important role, as depositors were switching from time deposits to demand deposits.
“Interest rate differentials between time and demand deposits are narrowing. With the opportunity cost of liquidity low, a greater proportion of funds are moving to liquid assets (demand deposits),” it said.
The research house also said while liquidity conditions were often a function of economic fundamentals, in the very near term there was the obvious potential for more money to chase equities despite what it viewed as elevated valuations.
“The yield gap between the earnings yield and the deposit rate expanded to an historical high. Despite elevated valuations, the significant yield differential between equities and bank deposits could induce investors to continue to switch from bank deposits to equities.
“Retail participation could rise further. The low returns on alternative investments, such as bank deposits, as well as the strong market momentum, were two likely drivers of the increase in retail investor participation,” it said.
Macquarie said the strong liquidity was pushing Asian equities to stretched valuation levels.
“We think a strong recovery in global final demand is now priced in.
“While hard signs of demand recovery are absent, we would ‘lean into’ the current rally, progressively reducing beta as equity markets move further and further away from levels justified by economic fundamentals,” it said.
On Malaysia, Macquarie said the yield gap, which it defined as 12-month forward earnings yield minus demand deposit rate, had widened further. “Admittedly, the domestic monetary base could be the next potential source of liquidity driving up the market,” it said.
Scott Lim, MIDF Asset Management chief executive and chief investment officer, agreed that the market was liquidity-driven, and valuations were getting stretched.
“The bulk of the rally has reflected liquidity more than fundamentals. Apart from liquidity and efforts by governments to increase access to financing, there is nothing much else driving the market.
“Investors have grounds to be cautious. Either fundamentals have to catch up with valuations, or valuations have to come down to meet it. Either one has to give,” he said.
Lim added that the liquidity was trying to rebuild a bubble, potentially the biggest one of all, but certain markets such as China were showing they were ready to stage a fierce formation of a stock market bubble.
However, Merrill Lynch Global Wealth Management Asia-Pacific investment strategist Stephen Corry said the next six months would still present buying opportunities in equities, regardless of it being an extended bear market rally or the start of a new bull market.
Corry was bullish on emerging market stocks, driven by recovery numbers in terms of car sales, while financial stocks remained favourites.
However, he cautioned that strong corporate earnings growth would need to be supported by equities’ current valuations.
Light crude oil rose nine cents per barrel to US$68.47 as at 6.20pm. Crude palm oil futures for third-month delivery gained RM42 per tonne to RM2,140.
At Bursa Malaysia, the FBM KLCI jumped 1.38% or 15.95 points to 1,172.38, its highest level since July 1 last year, led by gains by blue chips.
TA Securities technical analyst Stephen Soo said the immediate resistance level was 1,188 with the next level at 1,200. He said the respective support levels would be 1,165 and 1,148.
Turnover rose to 1.12 billion shares valued at RM1.63 billion. Gainers led losers by 491 to 194, while 249 counters traded unchanged. Market capitalisation over the last 12 trading days increased by RM60.48 billion to RM876.75 billion. The FBM100 [] gained 100.83 points to 7,689.37 and the FBM Emas added 103.69 points to 7,905.20.
Among the major gainers, SIME DARBY BHD [] and UMW HOLDINGS BHD [] added 25 sen each to RM8.15 and RM6.30, IOI CORPORATION BHD [] was up 22 sen to RM5 and GENTING BHD [] gained 15 sen to RM6.70.
MALAYAN BANKING BHD [], BUMIPUTRA-COMMERCE HOLDINGS [] Bhd and PUBLIC BANK BHD [] rose 10 sen each to RM6.55, RM10.20 and RM10.40, respectively, while Genting Malaysia Bhd added 12 sen to RM3.
PPB GROUP BHD [] was the top loser, shedding 20 sen to RM14.30; KFC HOLDINGS (M) BHD [] fell 15 sen to RM7.35, TALIWORKS CORPORATION BHD [] lost 13 sen to RM1.61, while LOH & LOH CORPORATION BHD [] and LEBAR DAUN BHD [] fell 12 sen each to RM4.18 and 60 sen.
KNM GROUP BHD [] was the most actively traded stock with 56.8 million shares done. It fell one sen to 89.5 sen.
From the Edge Malaysia
Tips for retail investors to stop losing money in stock market
Wednesday July 29, 2009
Tips for retail investors to stop losing money in stock market
IN the stock market, there are two main types of investors – smart investors and retail investors. While smart investors have been able to make money from the stock market, the majority of retail investors suffer losses most of the time.
As the market saying goes, only one out of 10 investors can make money from the stock market. The rest always incur losses in the stock market.
Some retail investors believe they can make quick money from the stock market. They believe that investing in the stock market is one of the best ways to accumulate wealth in a short period of time.
However, due to lack of proper financial training, investing knowledge and intelligence, they always find themselves at the losing end. When they are excited about investing, the stock market may be nearing to the peak.
On the other hand, when they are suffering losses, losing patience about investing and intending to cut their losses in the stock market, the market may be touching the bottom, and that, in fact, is supposed to be the best time to invest.
A majority of retail investors seldom pay attention to the stock market. They will only start doing so when newspapers or TV news headlines show that the market is touching a new high.
Driven by greed and the thought of making fast money, they will follow their friends or tips from their brokers to invest without paying much attention to the fundamentals of the stocks.
Due to lack of discipline to cut losses, more often than not, they find themselves holding on to a lot of poor quality stocks when the market collapses to a very low level.
(My comment: By sticking to high quality stocks, one hardly ever have to sell or to cut loss. However, it is extremely important to buy these stocks at bargain prices. Buying them at high prices may mean holding these stocks at a loss in the early years and also accepting a potentially lower compound annual return over the long term.)
We believe that the majority of retail investors do buy a mixture of good and poor quality stocks. However, they tend to hold on to poor quality stocks and sell the good ones when the stock market collapses.
This is because when the stock market crashes, poor quality stocks will drop much faster than good fundamental stocks.
Most retail investors find it difficult to sell poor quality stocks as the stocks may drop far lower their buying prices within a short period of time.
As retail investors refuse to admit their mistakes, they will hold on to these stocks, hoping to break even again in the future.
Unfortunately, they overlook one important market saying, which is: What goes up may come down, what goes down may never go up.
We may have emotional feelings about stocks but we should not refer to our purchase prices to determine whether we can cut our losses.
Our purchase prices are only important to us; they mean nothing to the overall market.
As our purchase prices may be much higher than those of other investors, even though we may not be able to sell the stocks, other investors, especially the company owners, can still liquidate their stocks.
We need to be careful when trading in speculative stocks especially those with prices that are much higher than the book values of the companies. The book value of a company reflects the owners’ costs in the company.
Hence, even though the stock prices tumble to a very low level, as long as the prices are still higher than the book values, a lot of company owners can still liquidate the stocks as their market prices are still higher than the cost invested.
For example, assuming the stock of a company is at the book value of only 30 sen and the stock price before the rally is 50 sen.
Due to the bullish sentiment and speculative play, the stock price may be pushed up to RM3. If our purchase price in the company is RM2, selling lower than RM2 means cutting a loss.
However, unfortunately, a lot of retail investors, instead of cutting losses continue to average down their purchase prices.
They may start averaging down their purchase prices at RM1.50, RM1, 80 sen and 50 sen.
If the company has poor fundamentals and has been incurring huge losses over a long period of time, averaging down our purchase prices this way means we will be incurring more losses.
While we are doing this, the owner of company can still sell the stock at 50 sen as his investment cost is only 30 sen!
(My comment: Therefore the importance of cutting loss early should your stock fundamentals suddenly deteriorated or should you realise that you have made a mistake in buying a stock.)
(My comment: Another reason why buying a share at a bargain price is important. The margin of safety is there, ensuring that any loss to your capital is minimised. Buying at a low or bargain price ensures the probability of upside is greater than that of downside. Also, the potential for greater reward should the upside be realised, and the minimisation of loss should the downside be realised.)
Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting
http://biz.thestar.com.my/news/story.asp?file=/2009/7/29/business/4407802&sec=business
Be a shrewd investor
- For individual stocks: buy low and sell high.
- For the portfolio of stocks, through the strategy of rebalancing and asset allocation: buy when the market is obviously low and sell when the market is obviously high.
- Refrain from buying when the stock or market, is obviously highly priced.
- Even in a high market, you may be able to seek and buy undervalued stocks.
- A beaten down stock maybe worth a look. The price may have discounted all the negatives making it undervalued, provided its long term fundamentals are intact.
- It is common for stock price to fluctuate; prices can go down by a third from the high and go up by 50% from its low. A true investor cannot hope to profit from this on a consistent basis. He invests for the long term dividends and long term appreciation in the stock price.
Tuesday, 28 July 2009
Business Valuations versus Stock-Market Valuations: Summary
- The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements.
- The speculator's primary interest lies in anticipating and profiting from market fluctuations.
- The investor's primary interest lies in acquiring and holding suitable securities at suitable prices.
- Market movements are important to him in a practical sense, because they alternately create low price levels at which he would be wise to buy and high price levels at which he certainly should refrain from buying and probably would be wise to sell.
- It is far from certain that the typical investor should regularly hold off buying until low market levels appear, because this may involve a long wait, very likely the loss of income, and the possible missing of investment opportunities.
- On the whole it may be better for the investor to do his stock buying whenever he has money to put in stocks, except when the general market level is much higher than can be justified by well-established standards of value.
- If he wants to be shrewd he can look for the ever-present bargain opportunities in individual securities.
- Aside from forecasting the movements of the general market, much effort and ability are directed on Wall Street toward selecting stocks or industrial groups that in matter of price will "do better" than the rest over a fairly short period in the future.
- Logical as this endeavor may seem, we do not believe it is suited to the needs or temperament of the true investor - particularly since he would be competing with a large number of stock-market traders and first-class financial analysts who are trying to do the same thing.
- As in all other activities that emphasize price movements first and underlying values second, the work of many intelligent minds constantly engaged in this field tends to be self-neutralizing and self-defeating over the years.
- The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances.
- He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ignored.
- He should never buy a stock because it has gone up or sell one because it has gone down.
- He would not be far wrong if this motto read more simply: "Never buy a stock immediately after a substantial rise or sell one immediately after a substantial drop."
An Added Consideration: Average market prices and managerial competence.
- Something should be said about the significance of average market prices as a measure of managerial competence.
- The shareholder judges whether his own investment has been successful in terms both of dividends received and of the long-range trend of the average market value.
- The same criteria should logically be applied in testing the effectiveness of a company's management and the soundness of its attitude toward the owners of the business.
- This statement may sound like a truism, but it needs to be emphasized. For as yet there is no accepted technique or approach by which management is brought to the bar of market opinion.
- On the contrary, managements have always insisted that they have no responsibility of any kind for what happens to the market value of their shares.
- It is true, of course, that they are not accountable for those fluctuations in price which, as we have been insisting, bear no relationship to underlying conditions and values.
- But it is only the lack of alertness and intelligence among the rank and file of shareholders that permits this immunity to extend to the entire realm of market quotations, including the permanent establishment of a depreciated and unsatisfactory price level.
- Good managements produce a good average market price, and bad managements produce bad market prices.
Ref: Intelligent Investor by Benjamin Graham
Business Valuations versus Stock-Market Valuations: The True Investor
- The true investor is in a special position when he owns a listed common stock.
- He can take advantage of the daily market price or leave it alone, as dictated by his own judgement and inclination.
- He must take cognizance of important price movements, for otherwise his judgment will have nothing to work on.
- Conceivably they may give him a warning signal which he will do well to heed - this in plain English means that he is to sell his shares because the prices has gone down, foreboding worse things to come.
- In our view such signals are misleading at least as often as they are helpful.
- Basically, price fluctuations have only one significant meaning for the true investor.
- They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal.
- At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.
Ref: Intelligent Investor by Benjamin Graham
Business Valuations versus Stock-Market Valuations: Critics of the value approach to stock investment
- Critics of the value approach to stock investment argue that listed common stocks cannot properly be regarded or appraised in the same way as an interest in a similar private enterprise, because the presence of an organized security market "injects into equity ownership the new and extremely improtant attribute of liquidity."
- But what this liquidity really means is, first, that the investor has the benefit of the stock market's daily and changing appraisal of his holdings, for whatever that appraisal may be worth, and second, that the investor is able to increase or decrease his investment at the market's daily figure - if he chooses.
- Thus the existence of a quoted market gives the investor certain options that he does not have if his security is unquoted.
- But it does not impose the current quotation on an investor who prefers to take his idea of value from some other source.
In these 113 words Graham sums up his lifetime of experience
- Let us return to our comparison between the holder of marketable shares and the man with an interest in a private business.
- We have said that the former has the option of considering himself merely as the part owner of the various businesses he has invested in, or as the holder of shares which are salable at any time he wishes at their quoted market price.
- But note this important fact: The true investor scarcely ever is forced to sell his shares, and at all times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more.* Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgement.
- (This may well be the single most important paragraph in Graham's entire book. In these 113 words Graham sums up his lifetime of experience. You cannot read these words too often; they are like Kryptonite for bear markets. If you keep them close at hand and let them guide you throughout your investing life, you will survive whatever the markets throw at you.)
- Incidentally, a widespread situation of this kind actually existed during the dark depression days of 1931-1933. There was then a psychological advantage in owning business interests that had no quoted market.
- For example, people who owned first mortgages on real estate that continued to pay interest were able to tell themselves that their invesmtents had kept their full value, there being no market quotations to indicate otherwise.
- On the other hand, many listed corporation bonds of even better quality and greater underlying strength suffered severe shrinkages in their market quotations, thus making their owners believe they were growing distinctly poorer.
- In reality, the owners were better off with the listed securities, despite the low prices of these.
- For if they had wanted to, or were compelled to, they could at least have sold the issues - possibly to exchange them for even better bargains.
- Or they could just as logically have ignored the market's action as temporary and basically meaningless.
- But it is self-deception to tell yourself that you have suffered no shrinkage in value merely because your securities have no quoted market at all.
A&P was the largest retail enterprise in America, if not in the world, with a continuous and impressive record of large earnings for many years. Yet in 1938 this outstanding business was considered on Wall Street to be worth less than its current assets alone - which means less as a going concern than if it were liquidated.
- Returning to our A&P shareholder in 1938, we assert that as long as he held on to his shares he suffered no loss in their price decline, beyond what his own judgment may have told him was occasioned by a shrinkage in their underlying or intrinsic value.
- If no such shrinkage had occurred, he had a right to expect that in due course the market quotation would return to the 1937 level or better - as in fact it did the following year.
- In this respect his position was at least as good as if he had owned an interest in a private business with no quoted market for its shares.
- For in that case, too, he might or might not have been justified in mentally lopping off part of the cost of his holdings because of the impact of the 1938 recession - depending on what had happened to his company.
Ref: Intelligent Investor by Benjamin Graham
* "Only to the extent that it suits his books" means "only to the extent that the price is favourable enough to justify selling the stock."
Business Valuations versus Stock-Market Valuations: The A & P Example
The A. & P. Example.
This was one of Graham's original examples, which dates back many years but which has a certain fascination because it combines so many aspects of corporate and investment experience. Here is the story:
There are two chief morals to this story.
This was one of Graham's original examples, which dates back many years but which has a certain fascination because it combines so many aspects of corporate and investment experience. Here is the story:
- It involves the Great Atlantic and Pacific Tea Co.
- A&P shares were introduced to trading on the "Curb" market, now American Stock Exchange, in 1929 and sold as high as 494.
- By 1932 they had declined to 104, although the company's earnings were nearly as large in that generally catastrophic year as previously.
- In 1936 the range was between 111 and 131.
- Then in the business recession and bear market of 1938 the shares fell to a new low of 36.
- That price was extraordinary. It meant that the preferred and common were together selling for $126 million, although the company had just reported that it held $85 million in cash alone and a working capital (or net current assets) of $134 million.
- A&P was the largest retail enterprise in America, if not in the world, with a continuous and impressive record of large earnings for many years.
- Yet in 1938 this outstanding business was considered on Wall Street to be worth less than its current assets alone - which means less as a going concern than if it were liquidated.
- Why? First, because there were threats of special taxes on chain stores; second, because net profits had fallen off in the previous year; and third, because the general market was depressed.
- The first of these reasons was an exaggerated and eventually groundless fear; the other two were typical of temporary influences.
- Let us assume that the investor had bought A&P common in 1937 at, say, 12 times its five-year average earnings, or about 80.
- We are far from asserting that the ensuing decline to 36 was of no importance to him.
- He would have been well advised to scrutinize the picture with some care, to see whether he had made any miscalculations.
- But if the results of his study were reassuring - as they should have been - he was entitled then to disregard the market decline as a temporary vagary of finance, unless he had the funds and the courage to take advantage of it by buying more on the bargain basis offered.
Sequel and Reflections
- The following year, 1939, A&P shares advanced to 117 1/2, or three times the low price of 1938 and well above the average of 1937.
- Such a turnabout in the behaviour of common stocks is by no means uncommon, but in the case of A&P it was more striking than most.
- In the years after 1949 the grocery chain's shares rose with the general market until in 1961 the split-up stock (10 for 1) reached a high of 70 1/2 which was equivalent to 705 for the 1938 shares.
- This price of 70 1/2 was remarkable for the fact it was 30 times the earnings of 1961.
- Such a price/earnings ratio - which compares with 23 times for the DJIA in that year - must have implied expectations of a brilliant growth in earnings.
- This optimism had no justification in the company's earnings record in the preceding years, and it proved completely wrong.
- Instead of advancing rapidly, the course of earnings in the ensuing period was generally downward.
- The year after the 70 1/2 high the price fell by more than half to 34. But this time the shares did not have the bargain quality that they showed at the low quotation in 1938.
- After varying sorts of fluctuations the price fell to another low of 21 1/2 in 1970 and 18 in 1972 - having reported the first quarterly deficit in its history.
We see in this history how wide can be the vicissitudes of a major American enterprise in little more than a single generation, and also with what miscalculations and excesses of optimism and pessimism the public has valued its shares.
- In 1938 the busines was really being given away, with no takers; in 1961 the public was clamoring fo the shares at a ridiculously high price.
- After that came a quick loss of half the market value, and some years later a substantial further decline.
- In the meantime the company was to turn from an outstanding to a mediocre earnings performer; its profit in the boom-year 1968 was to be less than in 1958; it had paid a series of confusing small stock dividdends not warranted by the current additions to surplus; and so forth.
- A&P was a larger company in 1961 and 1972 than in 1938, but not as well-run, not as profitable, and not as attractive.
There are two chief morals to this story.
- The first is that the stock market often goes far wrong, and sometimes an alert and courageous investor can take advantage of its patent errors.
- The other is that most businesses change in character and quality over the years, sometimes for the better, perhaps more often for the worse. The investor need not watch his companies' performance like a hawk; but he should give it a good, hard look from time to time.
Ref: Intelligent Investor by Benjamin Graham
The more recent history of A&P is no different. At year-end 1999, its share price was $27.875; at year -end 2000, $700; a year later, $23.78; at year-end 2002, $8.06. Although some accounting irregulariteis later came to light at A&P, it defies all logic to believe that the value of a relatively stable business like groceries could fall by three-fourths in one year, triple the next year, then drop by two-thirds the year after that.
Business Valuations versus Stock-Market Valuations
- The impact of market fluctuations upon the investor's true situation may be considered also from the standpoint of the shareholder as the part owner of various businesses.
- The holder of marketable shares actually has a double status, and with it the privilege of taking advantage of either at his choice.
- On the one hand his position is analogous to that of a minority shareholder or silent partner in a private business. Here his results are entirely dependent on the profits of the enterprise or on a change in the underlying value of its assets. He would usually determine the value of such a private-business interest by calculating his share of the net worth as shown in the most recent balance sheet.
- On the other hand, the common-stock investor holds a piece of paper, an engraved stock certificate, which can be sold in a matter of minutes at a price which varies from moment to moment - when the market is open, that is - and often is far removed from the balance sheet value.
- The development of the stock market in recent decades has made the typical investor more dependent on the course of price quotations and less free than formerly to consider himself merely a business owner.
- The reason is that the successful enterprises in which he is likely to concentrate his holdings sell almost constantly at prices well above their net asset value (or book value, or "balance-sheet value").
- In paying these market premiums the investor gives precious hostages to fortune, for he must depend on the stock market itself to validate his commitments.
- This is a factor of prime importance in present-day investing and it has received less attention tha it deserves.
- The whole structure of stock-market quotations contains a built-in contradiction. The better a company's record and prospects, the less relationship the price of its shares will have to their book value.
- But the greater the premium above book value, the less certain the basis of determining its intrinsic value - i.e., the more this "value" will depend on the changing moods and measurements of the stock market.
- Thus, we reach the final paradox, that the more successful the companyl, the greater are likely to be the fluctuations in the price of its shares.
- This really means that, in a very real sense, the better the quality of a common stock, the more speculative it is likely to be - at least as compared with the unspectacular middle-grade issues.
- (What we have said applies to a comparison of the leading growth companies with the bulk of well-established concerns; we exclude from our purview here those issues which are highly speculative because the businesses themselves are speculative.)
- The argument made above should explain the often erratic price behaviour of our most successful and impressive enterprises.
- Our favourite example is the monarch of them all - International Business Machines. The price of its shares fell from 607 to 300 in seven months in 1962-63; after two splits its price fell from 387 to 219 in 1970.
- Similarly, Xerox - an even more impressive earnings gainer in recent decades - fell from 171 to 87 in 1962-63, and from 116 to 65 in 1970.
- These striking losses did not indicate any doubt about the future long-term growth of IBM or Xerox; they reflected instead a lack of confidence in the premium valuation that the stock market itself had placed on these excellent prospects.
- The previous discussion leads us to a conclusion of practical importance to the conservative investor in common stocks.
- If he is to pay some special attention to the selection of his portfolio, it might be best for him to concentrate on issues selling at a reasonably close approximation to their tangible-asset value - say, at not more than one-third above that figure.
- Purchases made at such levels, or lower, may with logic be regarded as related to the company's balance sheet, and as having a justification or support independent of the fluctuating market prices.
- The premium over book value that may be involved can be considered as a kind of extra fee paid for the advantage of stock-exchange listing and the marketability that goes with it.
- A caution is needed here. A stock does not become a sound investment merely because it can be bought at close to its asset value. The investor should demand, in addition, (1) a sastisfactory ratio of earnings to price, (2) a sufficiently strong financial position, and (3) the prospect that its earnings will at least be maintained over the years.
- This may appear like demanding a lot from a modestly priced stock, but the prescription is not hard to fill under all but dangerously high market conditions.
- Once the investor is willing to forgo brilliant prospects - i.e., better than average expected growth - he will have no difficulty in finding a wide selection of issues meeting these criteria.
- More than half of the DJIA issues met our asset-value criterion at the end of 1970. The most widely held investment of all - American Tel. & Tel. - actually sells below its tangible-asset value as we write. Most of the light-and-power shares, in addition to their other advantages, are now (early 1972) available at prices reasonably close to their asset values.
- The investor with a stock portfolio having such book values behind it can take a much more independent and detached view of stock-market fluctuations than those who have paid high mutlpliers of both earnings and tangible assets.
- As long as the earning power of his holdings remains satisfactory, he can give as little attention as he pleases to the vagaries of the stock market.
- More than that, at times he can use these vagaries to play the master game of buying low and selling high.
Ref: Intelligent Investor by Benjamin Graham
Net asset value, book value, balance-sheet value, and tangible-asset value are all synonyms for net worth, or the total value of a company's physical and financial assets minus all its liabilities. It can be calculated using the balance sheets in a company's annual and quarterly reports; from total shareholders' equity, subtract all "soft" assets such as goodwill, trademarks, and other intangibles. Divide by the fully diluted number of shares outstanding to arrive at book value per share.
Graham's use of the world "paradox" is probably an allusion to a classic article by David Durand, "Growth Stocks and the Petersburg Paradox," which compares investing in high-priced growth stocks to betting on a series of coin flips in which the payoff escalates with each flip of the coin. Durand points out that if a growth stock could continue to grow at a high rate for an indefinite period of time, an inestor should (in theory) be willing to pay an infinite price for its shares. Why, then, has no stock ever sold for a price of infinity dollars per share? Because the higher the assumed future growth rate, and the longer the time period over which it is expected, the wider the margin for error grows and the higher the cost of even a tiny miscalculation becomes.
NTPM
28.7.09
FY ended 30.4.2009
No of ordinary shares: 1,123,200
Recent Price per share: 52c
Market cap: 584.06m
Earnings: 46.305m
Dividend: 38.413m
DPO: 83%
diluted EPS: 4.1c
DPS: 3.4c
NTA: 18c
PE = 12.7
DY = 6.58%
P/B = 2.9x
Historical PE range: (last 5 years) 7.3 - 9.9
Historical DY range: (last 5 years) 8.6% - 6.4%
Cash flow:
CFO: 58m
CFI: 24m
FCF: 34m
PBT/Revenue: 58.7 / 358.6 = 16.4%
STL: 36.4m
LTL: 8.4m
Equity: 203.9m
D/E: 0.22
Over the course of 5 years, the eps of NTPM grew from 2.5 sen (in 2004) to 4.1 sen (in 2009), its compound annual growth rate is 10.40%. (I usually like to study stocks giving an eps growth rate of > 15% per year.)
PEG = PE/EPS GR = 12.7/10.4 = 1.22
Quality and Management indicators are good. A good stock to look further into.
How to value this stock?
It is presently trading higher than its historical PE. Also, its DY has been at the lower end of its historical DY. From the above graph, you can visualise that the rate of growth of its share price has outpaced the rate of growth of its earnings.
Keep this company on your radar screen. Be patient.
Market Fluctuations of the Investor's Portfolio
- Every investor who owns common stocks must expect to see them fluctuate in value over the years.
- The behaviour of the DJIA since our last edition of Intelligent Investor was written in 1964 probably reflects pretty well what has happened to the stock portfolio of a conservative investor who limited his stock holdings to those of large, prominent, and conservatively financed corporations.
- The overall value advanced from an average level of about 890 to a high of 995 in 1966 (and 985 again in 1968), fell to 631 in 1970, and made an almost full recovery to 940 in early 1971.
- (Since the individual issues set their high and low marks at different times, the fluctuations in the Dow Jones group as a whole are less severe than those in the separate components.)
- We have traced through the price fluctuations of other types of diversified and conservative common-stock portfolios and we find that the overall results are not likely to be markedly different from the above.
- In general, the shares of second-line companies fluctuate more widely than the major ones, but this does not necessarily mean that a group of well-established but smaller companies will make a poorer showing over a fairly long period.
- (Today's equivalent of what Graham calls "second-line companies" would be any of the thousands of stocks not included in the Standard & Poor's 500-stock index. A regularly revisited list of the 500 stocks in the S & P index is available at http://www.standardandpoors.com/. )
- In any case, the investor may as well resign himself in advance to the probability rather than the mere possibility that most of his holdings will advance, say, 50% or more from their low point and decline the equivalent one-third or more from their high point at various periods in the next five years.
- (Note carefully what Graham is saying here. It is not just possible, but probable, that most of the stocks you own will gain at least 50% from their lowest price and lose at least 33% from their highest price - regardless of which stocks you own or whether the market as a whole goes up or down. If you can't live with that - or you think your portfolio is somehow magically exempt from it - then you are not yet entitled to call yourself an investor.)
- (Graham refers to a 33% decline as the "equivalent one-third" because a 50% gain takes a $10 stock to $15. From $15, a 33% loss [or $5 drop] takes it right back to $10, where it started.)
- A serious investor is not likely to believe that the day-to-day or even month-to-month fluctuations of the stock market make him richer or poorer.
- But what about the longer-term and wider changes? Here practical questions present themselves, and the psychological problems are likely to grow complicated.
- A substantial rise in the marke is at once a legitimate reason for satisfaction and a cause for prudent concern, but it may also bring a strong temptation toward imprudent action.
- Your shares have advanced, good! You are richer than you were, good! (1) But has the price risen too high, and should you think of selling? (2) Or should you kick yourself for not having bought more shares when the level was lower? (3) Or - worst thought of all - should you now give way to the bull-market atmosphere, become infected with the enthusiasm, the overconfidence and the greed of the great public (of which, after all, you are a part), and make larger and dangerous commitments?
- Presented thus in print, the answer to the last question is a self-evident no, but even the intelligent investor is likely to need considerable will power to keep from following the crowd.
- It is for these reasons of human nature, even more than by calculation of financial gain or loss, that we favour some kind of mechanical method for varying the proportion of bonds to stocks in the investor's portfolio.
- The chief advantage, perhaps, is that such a formula will give him something to do.
- As the market advances he will from time to time make sales out of his stockholdings, putting the proceeds into bonds; as it declines he will reverse the procedure. These activities will provide some outlet for his otherwise too-pent-up energies.
- If he is the right kind of investor he will take added satisfaction from the thought that his operations are exactly opposite from those of the crowd.
- (For today's investor, the ideal strategy for pursuing this "formula" is rebalancing.)
Ref: Intelligent Investor by Benjamin Graham
Subscribe to:
Posts (Atom)