Differentiating between the winners and the losers
By Clyde Rossouw, portfolio manager of the Investec Opportunity Fund and Absolute Balanced Fund
Local and international stock markets have rallied strongly. Many investors are wondering whether this is going to be sustainable or whether equity markets will plunge again. What’s most encouraging for us as long-term investors is that we still see many good opportunities locally and globally, which we are exploiting. The recovery in the equity markets does not signify the start of a long-term sustainable bull market, but there is an opportunity to make money from deeply discounted levels on really good shares. As an investor this is a fantastic time to be sowing rather than to be looking to reap. The time for reaping will come later; investors just need to be patient.
Global stock markets bottomed in March and that changed the direction of world equity market returns. Once the bottoming-out process was confirmed, investors were prepared to start taking on a lot more risk. We have seen emerging market currencies appreciating and the rand in particular has strengthened substantially – even reaching a level of below eight rand to the dollar.
Where is the recovery coming from?
There have been massive stimulus packages around the world and investors are starting to realise that the world is not going to come to an end. Emerging markets are generally in better shape than the developed world. The Chinese government has embarked on a huge spending programme to support its economy and we are starting to see more favourable economic data from China. Steel and iron ore production is increasing and China’s purchasing managers’ index (PMI) remained above the critical 50-point level in May. The Chinese stock market has done very well over the last six months, together with India, Brazil and Russia. The South Africa stock market also enjoyed excellent returns, and support from foreign investors has largely contributed to rand strength. Rising dollar prices for commodities such as copper, platinum, gold and oil signify that the world is on a recovery path and emerging markets are benefiting from this trend.
The era of a commodities super-cycle is over
The uptick in commodities has resulted in local resources shares outperforming the general market. There are a number of opportunities within the resources space, but some companies still look very risky. It is unlikely that we will ever experience a commodities super-cycle again. The super-cycle commodities trend reminds one of previous market themes such as the “new economy versus the old economy” and the “tech boom” – which are now dead and buried. When the technology bubble burst, many of the tech companies ceased to exist, but the stronger companies survived. The same scenario is likely to play out in the resources space. Some of the more marginal companies will underperform or go bust, while quality companies will power ahead. It is clear that the performance of commodities versus commodity producers will be divergent going forward.
The current environment presents many challenges, but offers good rewards for those portfolio managers who make prudent stock selections. In a bull market when a theme is strong, investors just need to ensure that they are part of that theme and ride the wave. This luxury does not exist under current market conditions. The market is going to be much more cynical and will do its homework properly in terms of differentiating between the winners and the losers.
Physical gold is more attractive than gold companies
Gold shares have been very volatile – we saw a sharp drop in April and a strong recovery in May. Gold producers’ earnings benefited from the weak rand in the first quarter, but the strength in the rand will mean that companies’ earnings will pull back again. The strength in gold shares does not seem sustainable. Since 1970 the rand gold price has outperformed gold shares. Gold production has been declining since the 1970s and it continues to bleed every year. Last year South Africa was down to 226 tons of gold from 1,000 in 1970. The gold companies are all trying to expand internationally, but their long-term health will still largely depend on the quality of reserves.
Developed market government bonds are looking very risky
The Unites States government and the US Federal Reserve (the Fed) have been on a spending spree over the last few months in a bid to support the ailing US economy. The US government has been issuing trillions of dollars worth of US treasuries (long-term government debt) to fund the fiscal stimulus packages. China has supported the US government by buying up a great deal of these government bonds that have flooded the market, together with other central banks and private investors. The Fed has also been mopping up the excess supply of bonds. Essentially, the Fed buys these government bonds by printing more money; this is known as quantitative easing. When risk aversion peaked, many investors piled into US treasuries as it was perceived to be risk-free. Consequently, US treasury yields remained very low. (When bond yields decline, bond prices increase and vice versa).
The strength in government bonds could simply not be sustained. Since March US Treasury yields have been rising, and in the last week of May the ten-year Treasury yield reached a six-month high. The weaker government bond market reflects investors’ concerns regarding the continued oversupply of bonds. More government bond auctions are on the way and with appetite for government bonds waning, the Fed will have to keep on propping the market up. The dollar has been losing value and inflationary fears have also driven Treasury yields up.
A key question is how long the Federal Reserve will be forced to support the government bond market and whether its actions will not have serious implications for inflation over the longer term? Essentially, money is being created out of nothing. This is not money that was created from people actually doing some work, performing a service or producing goods. Money has been printed without any economic activity taking place. Economics 101 would suggest that if you have more money chasing the same amount of goods, services or assets, ultimately you will have inflation.
The upside is that higher inflation could result in an improvement in company profits, which means better cash flows, enabling companies to pay off their debts. In turn, the risk of companies defaulting on their debt obligations would decrease, resulting in corporate bond yields coming down. (As corporate bond yields decline, corporate bond prices rise).
Local bonds are still pricing in risk, but listed property looks vulnerable
Local bond yields are still higher than international bond yields and because of this spread our market enjoys some protection against a sharp sell-off in international bonds. However, the local market may be too optimistic about a meaningful decline in inflation. Consumer inflation is currently running at 8% and the bond market expects this to slow to 6%. There is a risk that inflation may remain above the upper band of the Reserve Bank’s inflation target. The international environment for bonds will be one to watch closely over the next few months. Listed property would be the most at risk from a rising bond trend. The differential between the yields of listed property and government bonds in South Africa is too low, whereas in the developed world the spread is much wider. Investors are not adequately compensated for the risk of holding SA listed property.
There are many attractively valued equities available in global and local stock markets that should give strong real returns for investors with a horizon of more than three years. Some of these opportunities include MTN, which has attracted corporate buying interest and Afrox, where the market has assumed its business franchise has been decimated. We are still not finding reasonable risk-adjusted returns from either bonds or listed property, and continue to largely avoid these asset classes. Despite tough conditions, there are opportunities to outperform the market and we are confident of producing inflation-beating returns over the long term.
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Tuesday, 1 September 2009
Learn To Invest In 10 Steps
Learn To Invest In 10 Steps
Investing is actually pretty simple; you're basically putting your money to work for you so that you don't have to take a second job, or work overtime hours to increase your earning potential. There are many different ways to make an investment, such as stocks, bonds, mutual funds or real estate, and they don't always require a large sum of money to start.
Step 1: Get Your Finances In Order
Jumping into investing without first examining your finances is like jumping into the deep end of the pool without knowing how to swim. On top of the cost of living, payments to outstanding credit card balances and loans can eat into the amount of money left to invest. Luckily, investing doesn't require a significant sum to start. Gain more insight in Invest On A Shoestring Budget and Should I Invest Or Reduce Debt?.
Step 2: Learn The Basics
You don't need to be a financial expert to invest, but you do need to learn some basic terminology so that you are better equipped to make informed decisions. Learn the differences between stocks, bonds, mutual funds and certificates of deposit (CDs). You should also learn financial theories such as portfolio optimization, diversification and market efficiency. Reading books written by successful investors such as Warren Buffett or reading through the basic tutorials on Investopedia are great starting points. Get started with our Investing 101 tutorial.
Step 3: Set Goals
Once you have established your investing budget and have learned the basics, it's time to set your investing goal. Even though all investors are trying to make money, each one comes from a diverse background and has different needs. Safety of capital, income and capital appreciation are some factors to consider; what is best for you will depend on your age, position in life and personal circumstances. A 35-year-old business executive and a 75-year-old widow will have very different needs. Read more in Basic Investment Objectives and Investing With A Purpose.
Step 4: Determine Your Risk Tolerance
Would a significant drop in your overall investment value make you weak in the knees? Before deciding on which investments are right for you, you need to know how much risk you are willing to assume. Do you love fast cars and the thrill of a risk, or do you prefer reading in your hammock while enjoying the safety of your backyard? Your risk tolerance will vary according to your age, income requirements and financial goals. For more insight read Risk Tolerance Only Tells Half The Story, Personalizing Risk Tolerance and Determining Risk And The Risk Pyramid.
Step 5: Find Your Investing Style
Now that you know your risk tolerance and goals, what is your investing style? Many first-time investors will find that their goals and risk tolerance will often not match up. For example, if you love fast cars but are looking for safety of capital, you're better off taking a more conservative approach to investing. Conservative investors will generally invest 70-75% of their money in low-risk, fixed-income securities such as Treasury bills, with 15-20% dedicated to blue chip equities. On the other hand, very aggressive investors will generally invest 80-100% of their money in equities. Find your fit in Achieving Optimal Asset Allocation.
Step 6: Learn The Costs
It is equally important to learn the costs of investing, as certain costs can cut into your investment returns. As a whole, passive investing strategies tend to have lower fees than active investing strategies such as trading stocks. Stock brokers charge commissions. For investors starting out with a smaller investment, a discount broker is probably a better choice because they charge a reduced commission. On the other hand, if you are purchasing mutual funds, keep in mind that funds charge various management fees, which is the cost of operating the fund, and some funds charge load fees. Read The Lowdown On No-Load Mutual Funds.
Step 7: Find A Broker Or Advisor
The type of advisor that is right for you depends on the amount of time you are willing to spend on your investments and your risk tolerance. Choosing a financial advisor is a big decision. Factors to consider include their reputation and performance, what designations they hold, how much they plan on communicating with you and what additional services they can offer. For more tips, read Shopping For A Financial Advisor and Picking Your First Broker.
Step 8: Choose Investments
Now comes the fun part: choosing the investments that will become a part of your investment portfolio. If you have a conservative investment style, your portfolio should consist mainly of low-risk, income-producing securities such as federal bonds and money market funds. Key concepts here are asset allocation and diversification. In asset allocation, you are balancing risk and reward by dividing your money between the three asset classes: equities, fixed-income and cash. By diversifying among different asset classes, you avoid the issues associated with putting all of your eggs in one basket. Learn more in A Guide To Portfolio Construction and Introduction To Diversification.
Step 9: Keep Emotions At Bay
Don't let fear or greed limit your returns or inflate your losses. Expect short-term fluctuations in your overall portfolio value. As a long-term investor, these short-term movements should not cause panic. Greed can lead an investor to hold on to a position too long in the hope of an even higher price – even if it falls. Fear can cause an investor to sell an investment too early, or prevent an investor from selling a loser. If your portfolio is keeping you awake at night, it might be best to reconsider your risk tolerance and adopt a more conservative approach. Read When Fear And Greed Take Over for more.
Step 10: Review and Adjust
The final step in your investing journey is reviewing your portfolio. Once you've established an asset-allocation strategy, you may find that your asset weightings have changed over the course of the year. Why? The market value of the various securities within your portfolio has changed. This can be modified easily through rebalancing. Read more on this topic, and the consequences for ignoring these changes, in Rebalance Your Portfolio To Stay On Track.
http://investopedia.com/slide-show/learn-how-to-invest/
Investing is actually pretty simple; you're basically putting your money to work for you so that you don't have to take a second job, or work overtime hours to increase your earning potential. There are many different ways to make an investment, such as stocks, bonds, mutual funds or real estate, and they don't always require a large sum of money to start.
Step 1: Get Your Finances In Order
Jumping into investing without first examining your finances is like jumping into the deep end of the pool without knowing how to swim. On top of the cost of living, payments to outstanding credit card balances and loans can eat into the amount of money left to invest. Luckily, investing doesn't require a significant sum to start. Gain more insight in Invest On A Shoestring Budget and Should I Invest Or Reduce Debt?.
Step 2: Learn The Basics
You don't need to be a financial expert to invest, but you do need to learn some basic terminology so that you are better equipped to make informed decisions. Learn the differences between stocks, bonds, mutual funds and certificates of deposit (CDs). You should also learn financial theories such as portfolio optimization, diversification and market efficiency. Reading books written by successful investors such as Warren Buffett or reading through the basic tutorials on Investopedia are great starting points. Get started with our Investing 101 tutorial.
Step 3: Set Goals
Once you have established your investing budget and have learned the basics, it's time to set your investing goal. Even though all investors are trying to make money, each one comes from a diverse background and has different needs. Safety of capital, income and capital appreciation are some factors to consider; what is best for you will depend on your age, position in life and personal circumstances. A 35-year-old business executive and a 75-year-old widow will have very different needs. Read more in Basic Investment Objectives and Investing With A Purpose.
Step 4: Determine Your Risk Tolerance
Would a significant drop in your overall investment value make you weak in the knees? Before deciding on which investments are right for you, you need to know how much risk you are willing to assume. Do you love fast cars and the thrill of a risk, or do you prefer reading in your hammock while enjoying the safety of your backyard? Your risk tolerance will vary according to your age, income requirements and financial goals. For more insight read Risk Tolerance Only Tells Half The Story, Personalizing Risk Tolerance and Determining Risk And The Risk Pyramid.
Step 5: Find Your Investing Style
Now that you know your risk tolerance and goals, what is your investing style? Many first-time investors will find that their goals and risk tolerance will often not match up. For example, if you love fast cars but are looking for safety of capital, you're better off taking a more conservative approach to investing. Conservative investors will generally invest 70-75% of their money in low-risk, fixed-income securities such as Treasury bills, with 15-20% dedicated to blue chip equities. On the other hand, very aggressive investors will generally invest 80-100% of their money in equities. Find your fit in Achieving Optimal Asset Allocation.
Step 6: Learn The Costs
It is equally important to learn the costs of investing, as certain costs can cut into your investment returns. As a whole, passive investing strategies tend to have lower fees than active investing strategies such as trading stocks. Stock brokers charge commissions. For investors starting out with a smaller investment, a discount broker is probably a better choice because they charge a reduced commission. On the other hand, if you are purchasing mutual funds, keep in mind that funds charge various management fees, which is the cost of operating the fund, and some funds charge load fees. Read The Lowdown On No-Load Mutual Funds.
Step 7: Find A Broker Or Advisor
The type of advisor that is right for you depends on the amount of time you are willing to spend on your investments and your risk tolerance. Choosing a financial advisor is a big decision. Factors to consider include their reputation and performance, what designations they hold, how much they plan on communicating with you and what additional services they can offer. For more tips, read Shopping For A Financial Advisor and Picking Your First Broker.
Step 8: Choose Investments
Now comes the fun part: choosing the investments that will become a part of your investment portfolio. If you have a conservative investment style, your portfolio should consist mainly of low-risk, income-producing securities such as federal bonds and money market funds. Key concepts here are asset allocation and diversification. In asset allocation, you are balancing risk and reward by dividing your money between the three asset classes: equities, fixed-income and cash. By diversifying among different asset classes, you avoid the issues associated with putting all of your eggs in one basket. Learn more in A Guide To Portfolio Construction and Introduction To Diversification.
Step 9: Keep Emotions At Bay
Don't let fear or greed limit your returns or inflate your losses. Expect short-term fluctuations in your overall portfolio value. As a long-term investor, these short-term movements should not cause panic. Greed can lead an investor to hold on to a position too long in the hope of an even higher price – even if it falls. Fear can cause an investor to sell an investment too early, or prevent an investor from selling a loser. If your portfolio is keeping you awake at night, it might be best to reconsider your risk tolerance and adopt a more conservative approach. Read When Fear And Greed Take Over for more.
Step 10: Review and Adjust
The final step in your investing journey is reviewing your portfolio. Once you've established an asset-allocation strategy, you may find that your asset weightings have changed over the course of the year. Why? The market value of the various securities within your portfolio has changed. This can be modified easily through rebalancing. Read more on this topic, and the consequences for ignoring these changes, in Rebalance Your Portfolio To Stay On Track.
http://investopedia.com/slide-show/learn-how-to-invest/
8 Signs Of A Doomed Stock
Are Your Stocks Doomed?
Few people seem to spot the early signs of a company in distress. Remember WorldCom and Enron? Not so long ago, these companies were worth hundreds of billions of dollars. Today, they no longer exist. Their collapses came as a surprise to most of the world, including their investors. Even large shareholders, many of them with an inside track, were caught off guard. So is there any way to know that your stock may be on a crash course to nowhere? The answer is yes. Read on to find out how.
1. Negative Cash Flows
Cash flow is a company's lifeline; investors who keep an eye on it can protect themselves from ending up with a worthless share certificate. When a company's cash payments exceed its cash receipts, the company's cash flow is negative. If this occurs over a sustained period, it's a sign that the company's cash in the bank may be getting dangerously low. Without fresh injections of capital from shareholders or lenders, a company in this situation can quickly find itself insolvent. (For more insight, see The Essentials Of Cash Flow.)
2. High Debt-Equity Ratio
Interest repayments place pressure on cash flow, and this pressure is likely to be exacerbated for distressed companies. Because they have a higher risk of default, struggling companies must pay a higher interest rate to borrow money. As a result, debt tends to shrink their returns. The total debt-to-equity (D/E) ratio is a useful measure of bankruptcy risk. It compares a company's combined long- and short-term debt to shareholders' equity or book value. Companies with D/E ratios of 0.5 and above deserve a closer look.
3. Interest Coverage Ratio
The debt/equity (D/E) ratio doesn't always say much on its own. It should be accompanied by an examination of the debt interest coverage ratio. For example, suppose that a company has a D/E ratio of 0.75, which signals a low bankruptcy risk, but that it also has an interest coverage ratio of 0.5. An interest coverage ratio below 1 means that the company is not able to meet all of its debt obligations with the period's earnings before interest and tax (operating income). It's also a sign that a company is having difficulty meeting its debt obligations. (For more, read Looking At Interest Coverage.)
4. Share Price Decline
Savvy investor should also watch out for unusual share price declines. Almost all corporate collapses are preceded by a sustained share price decline. Enron's share price started falling 16 months before it went bust. That said, while a big share price decline might signal trouble ahead, it may also signal a valuable opportunity to buy an out-of-favor business with solid fundamentals. Before deciding whether the stock is a buy or sell, be sure to examine the additional factors we discuss next. (Find out if your stock is on the verge of decline in Signs A Stock Is Ready To Slide.)
5. Profit Warnings
Investors should take profit warnings very, very seriously. While market reaction to a profit warning may appear swift and brutal, there is growing academic evidence to suggest that the market systematically underreacts to bad news. As a result, a profit warning is often followed by a gradual share price decline.
6. Insider Trading
Companies are required to report, by way of company announcement, purchases and sales of shares by substantial shareholders and company directors (also known as insiders). Executives and directors have the most up-to-date information on their company's prospects, so heavy selling by one or both groups can be a sign of trouble ahead. Admittedly, insiders don't always sell simply because they think their shares are about to sink in value, but insider selling should give investors pause. (To learn more, read Uncovering Insider Trading.)
7. Resignations
The sudden departure of key executives (or directors), and/or auditors can also signal bad news. While these resignations may be completely innocent, they demand closer inspection. Auditor replacement can also mean a deteriorating relationship between the auditor and the client company, and perhaps more fundamental difficulties within the client company's business. Warning bells should ring the loudest when the individual concerned has a reputation as a successful manager or a strong, independent director.
8. SEC Investigations
Formal investigations by the Securities and Exchange Commission (SEC) normally precede corporate collapses. That's not surprising; many companies guilty of breaking SEC and accounting rules do so because they are facing financial difficulties. While many SEC investigations turn out to be unfounded, they still give investors good reason to pay closer attention to the financial situations of companies that are targeted by the SEC. (For more insight, see SEC Filings: Forms You Need To Know.)
http://investopedia.com/slide-show/signs-doomed-stock/
Few people seem to spot the early signs of a company in distress. Remember WorldCom and Enron? Not so long ago, these companies were worth hundreds of billions of dollars. Today, they no longer exist. Their collapses came as a surprise to most of the world, including their investors. Even large shareholders, many of them with an inside track, were caught off guard. So is there any way to know that your stock may be on a crash course to nowhere? The answer is yes. Read on to find out how.
1. Negative Cash Flows
Cash flow is a company's lifeline; investors who keep an eye on it can protect themselves from ending up with a worthless share certificate. When a company's cash payments exceed its cash receipts, the company's cash flow is negative. If this occurs over a sustained period, it's a sign that the company's cash in the bank may be getting dangerously low. Without fresh injections of capital from shareholders or lenders, a company in this situation can quickly find itself insolvent. (For more insight, see The Essentials Of Cash Flow.)
2. High Debt-Equity Ratio
Interest repayments place pressure on cash flow, and this pressure is likely to be exacerbated for distressed companies. Because they have a higher risk of default, struggling companies must pay a higher interest rate to borrow money. As a result, debt tends to shrink their returns. The total debt-to-equity (D/E) ratio is a useful measure of bankruptcy risk. It compares a company's combined long- and short-term debt to shareholders' equity or book value. Companies with D/E ratios of 0.5 and above deserve a closer look.
3. Interest Coverage Ratio
The debt/equity (D/E) ratio doesn't always say much on its own. It should be accompanied by an examination of the debt interest coverage ratio. For example, suppose that a company has a D/E ratio of 0.75, which signals a low bankruptcy risk, but that it also has an interest coverage ratio of 0.5. An interest coverage ratio below 1 means that the company is not able to meet all of its debt obligations with the period's earnings before interest and tax (operating income). It's also a sign that a company is having difficulty meeting its debt obligations. (For more, read Looking At Interest Coverage.)
4. Share Price Decline
Savvy investor should also watch out for unusual share price declines. Almost all corporate collapses are preceded by a sustained share price decline. Enron's share price started falling 16 months before it went bust. That said, while a big share price decline might signal trouble ahead, it may also signal a valuable opportunity to buy an out-of-favor business with solid fundamentals. Before deciding whether the stock is a buy or sell, be sure to examine the additional factors we discuss next. (Find out if your stock is on the verge of decline in Signs A Stock Is Ready To Slide.)
5. Profit Warnings
Investors should take profit warnings very, very seriously. While market reaction to a profit warning may appear swift and brutal, there is growing academic evidence to suggest that the market systematically underreacts to bad news. As a result, a profit warning is often followed by a gradual share price decline.
6. Insider Trading
Companies are required to report, by way of company announcement, purchases and sales of shares by substantial shareholders and company directors (also known as insiders). Executives and directors have the most up-to-date information on their company's prospects, so heavy selling by one or both groups can be a sign of trouble ahead. Admittedly, insiders don't always sell simply because they think their shares are about to sink in value, but insider selling should give investors pause. (To learn more, read Uncovering Insider Trading.)
7. Resignations
The sudden departure of key executives (or directors), and/or auditors can also signal bad news. While these resignations may be completely innocent, they demand closer inspection. Auditor replacement can also mean a deteriorating relationship between the auditor and the client company, and perhaps more fundamental difficulties within the client company's business. Warning bells should ring the loudest when the individual concerned has a reputation as a successful manager or a strong, independent director.
8. SEC Investigations
Formal investigations by the Securities and Exchange Commission (SEC) normally precede corporate collapses. That's not surprising; many companies guilty of breaking SEC and accounting rules do so because they are facing financial difficulties. While many SEC investigations turn out to be unfounded, they still give investors good reason to pay closer attention to the financial situations of companies that are targeted by the SEC. (For more insight, see SEC Filings: Forms You Need To Know.)
http://investopedia.com/slide-show/signs-doomed-stock/
Sunday, 30 August 2009
20 Tools For Building Up Your Portfolio
1. 20 Tools For Building Up Your Portfolio
The concept of a portfolio and the birth of individual investing have opened up possibilities for everyone. The only real difference between you and Warren Buffett is a few well-chosen stocks - the billion-dollar fortune is the result. Stocks, while important, aren’t all there is to investing. Keeping your portfolio divided between the different investment vehicles reduces your overall risk while still generating returns. Here are 20 investment tools you can use to increase your portfolio’s diversity.
2. Go Global With ADRs
American Depository Receipts (ADRs) were introduced to streamline the purchase of foreign assets. ADRs are created when banks buy bundles of foreign shares and repackage them to sell on U.S. stock exchanges. Instead of having investors switch dollars for another currency to buy foreign shares and switch back to dollars when selling, banks eliminate the currency transaction. ADRs face exchange rate risks and political risks as well as the regular risks for stocks, but they offer global diversity in a convenient package. For more, see ADRs: Invest Offshore Without Leaving Home.
3. Add Annuities To Your Retirement Portfolio
Annuities are investments that provide annual payments and are usually sold by insurance companies. Although generally used as retirement vehicles, annuities come in several flavors. Deferred annuities and immediate annuities differ in when the payments begin, and fixed annuities and variable annuities have different payment structures. Disadvantages include penalties for withdrawing the principal and the ever-present drain of inflation on future returns. Despite this, annuities can be a great way for investors nearing or in retirement to enjoy the benefits of compounding because they are low risk and gains are tax deferred. (For more on this, see Personal Pensions: Repackaging The Annuity.)
4. Get In On Closed-End Investment Funds
A closed-end investment fund is similar to a mutual fund, the difference being that the price of shares in the fund are decided by demand on the open market rather than by net asset value. Basically, you are buying shares of a fund that buys shares in the market, so your fund’s share price is only as good as the management’s performance. Generally, these funds specialize according to purpose (capital appreciation, dividend income, etc.) and market (energy, technology, pharmaceuticals, etc.), so it is important to read the prospectus and check the performance history before buying in. See Open Your Eyes To Closed-End Funds.
5. Consider Collectibles
When footage of Marilyn Monroe sells for over $14,000 and a Honus Wagner card for over $1 million, it’s hard not to see an upside to collectibles. Before you make them the base of your portfolio, however, it’s important to look at the downside. Similar to precious metals, owning collectibles produces no income and gains are only realized through appreciation. Unlike precious metals, physical damage can erase all the value of a collectible, meaning that you need to factor maintenance costs against future returns. There is no doubt collectibles can produce big returns, but they’re more of a purchase than an investment and are usually best left to those with a genuine passion. For more on this, see Contemplating Collectible Investments.
6. Common Stock, Uncommon Returns
Stocks have history running in their favor, averaging 11-12% a year, and they outperform just about every type of investment. The trade-off is that stocks come with greater risk. Average market returns are no comfort if you buy at the market peak and sell during the graveyard. Still investing in stocks is no longer as mysterious or as elite an activity as it used to be. Armed with the desire to learn, you can make stocks a powerful source of returns in your portfolio. To learn more about stocks, see our Stock Basics Tutorial.
7. The Magic Of Convertible Securities
Convertible securities are the alchemists of the financial world. They can change bonds representing a company’s debt into stocks representing ownership of the company. Convertible bonds allow a company to get financing at a low interest rate without having to explicitly issue more stock - something that existing shareholders frown upon. For investors, convertible bonds offer protection in that they function as bonds if the company does poorly, but can be turned into stock if a company does well. Depending on the company, convertible bonds offer risks and rewards somewhere between true stocks and true corporate bonds, and carry an extra caveat in that they are callable. See Convertible Bonds: An Introduction for more.
8. Enter The World Of Corporate Finance
Corporate bonds are basically loans made from an investor to the corporation issuing the bond. Whereas normal people go to a bank and have to get approved, corporations set their own terms and then find investors. Bonds are evaluated by the default risk of the borrower, the interest rate offered,and the maturity date. Corporate bonds carry a higher yield - that is, they pay more to investors - than government bonds. Corporations with a high default risk have to pay even more to woo investors - these are called junk bonds. To learn more about bonds, see our Bond Basics Tutorial.
9. Buy Into The Future
At its core, a futures contract is simply a way to move the risk of price volatility off producers and onto investors, who are prepared to take on the risk in order to profit. If an egg producer needs $2/dozen to stay in business, but the market price fluctuates between $1 and $3 throughout the year, the producer can enter a futures contract at $2 to lock-in the price. The investor now holds the risk of the price of eggs plummeting and the profit if the price goes up - though in the latter case, the investor may be left with only the fee the producer paid to enter the contract rather than the profits. For more on trading in futures, see the Futures Fundamentals Tutorial.
10. Play The Game Of Life
Taking out life insurance is essentially playing the odds on your mortality. When you’re young the issuer is willing to give it to you cheap because the odds are against you dying suddenly and making them pay out your plan. As you age, however, the ante keeps going up. Life insurance is invaluable for the peace of mind it provides and can even be used as a hedge against wasting illnesses that you may not have coverage for under your health plan (dread disease rider). Although your goal should be to get into a financial situation where your assets will more than cover your obligations when you die, life insurance is an excellent stop-gap until that day. For more, see How Much Life Insurance Should You Carry?
11. Take Idle Funds To The Money Market
The money market is a basket of short-term, fixed-income securities that are meant to provide a return on idle funds without sacrificing liquidity. For example, many full service brokerages keep investors’ cash balances in money market accounts while the investor considers his or her investment options. If you need to house money for a short time and don’t have the thousands it takes to buy directly into the money market, it can be accessed through money market funds. These are basically mutual funds dealing exclusively in the money market. If you are working with a longer time horizon, however, then bonds or equities are a better bet. To learn more, see our Money Market Tutorial.
12. Give Mortgage-Backed Securities A Second Chance
The world revolves on credit. Freddie, Fannie and Ginnie are responsible for repackaging mortgages into investments so that banks can move loans off their balance sheets and offer more credit to consumers. There was a time when mortgage-backed securities (MBS) were as good as gold. That is to say that they carried little risk of default, offered both liquidity and capital appreciation, and offered better returns than bonds - all in all, an excellent investment. Unfortunately, the MBS industry took a hit in the mortgage meltdown of 2007-08 as loans were being given to less credit-worthy individuals - the MBS then became toxic. MBS will recover to provide excellent investment opportunities in the future as they have become as essential as stocks for making the market work, but they must now be approached with healthy skepticism. See Profit From Mortgage Debt With MBS for more.
13. Invest In Infrastructure
Municipal bonds are debt instruments issued by local governments to cover capital expenditures like road maintenance and other infrastructure projects. Munis carry very good tax breaks because the governments, federal and state, want to encourage private investment in infrastructure as it lessens the strain on their budgets. The interest on munis tends to be much lower than corporate bonds because of the advantageous tax breaks. You can get exposure to a pool of munis through municipal bond funds to lessen the risk of default in any one county. Although default is very rare, it has happened. See The Basics Of Municipal Bonds for more.
14. Follow The Leader
Mutual funds are the casual investors solution to research. In theory, you pay a management fee to a professional who does the due diligence for you and comes up with a portfolio that should provide above-average returns. By pooling your money with other investors, your fund manager can buy into investments that require larger amounts of capital. Sadly, funds vary widely according to the quality of the fund manager, so you will still have to do research to find a fund that fits your investment goals, and has a manager who can deliver choice returns. The upside is that a good mutual fund gives you diversity through a single investment. For more, see our Mutual Fund Basics Tutorial.
15. Take Stock Of Your Options
If you are comfortable trading stocks, there is a way to increase your gains by leveraging your bets on a stock. Options allow investors to speculate on the movement of a stock or to hedge an existing investment by using a call or a put. If you think a stock will shoot up in value, you can purchase a call option at the current price and, if it goes up, you can exercise the option and profit from the difference in prices. The price of purchasing an option is much cheaper than actually purchasing and holding the stock, but using this financial shortcut requires a high risk tolerance. It’s not unusual for the value of an option to whipsaw 30-40% within a single trading day. See our Options Basics Tutorial for more.
16. Get Preferential Treatment
Similar to convertible bonds, preferred stock takes up a middle ground between the risk and rewards of common stock and those of corporate bonds. Preferred stock holders get regular dividend payouts unlike the unpredictable dividends for holders of common stock and, in the case of a bankruptcy, rank just behind corporate bondholders on the payback list. Unfortunately the higher dividend is taxable, so the choice between common and preferred is as much a tax issue as an investment one. The purpose of preferred shares is to produce more income than bonds while only slightly increasing the risks. See A Primer On Preferred Stocks.
17. Become The Landlord
People who balk at the idea of going through a financial statement and shudder at the thoughts of scouring footnotes often make a more difficult investment without a second thought. Buying a house makes you every bit as sophisticated as a qualified investor, especially if you’re the type to check the fixtures and go to the town council for zoning laws. Real estate investing seems more comprehensible to people because buying a house is something everyone has to do at some point in his or her life. With the power of leverage, real estate investing can be an excellent source of income - providing people choose their investment as wisely as they do their own house. See Investing In Real Estate for more.
18. Team Up With The Landlord
If you want to invest in real estate but you don’t want tenants calling you at 3am with a flooding toilet, than REITs might be for you. REITs allow investors to enjoy some of the benefits of investing in real estate - income from rent paid as dividends and some tax benefits - without giving up liquidity or having to learn plumbing in your spare time. REITs come in different types: equity REITs pool investor money and buy properties to rent, mortgage REITs issue mortgages and invest in mortgage backed securities, and hybrid REITs do a bit of both. Depending on what you’re looking for, REITs offer an easy way to diversify into real estate without wielding a pipe wrench. For more, see What Are REITs?
19. Uncle Sam's IOU
Treasuries are essentially the same as munis, but issued by the federal government. The government securities are broken up into three categories: long-term treasury bonds, short-term treasury bills, and medium-term treasury notes. They may vary in the term of investment, but all of them are exempt from state and municipal taxes. Because the U.S. government specifically endorses these investments, they often become the life raft for investors when the market begins to tank. Although the rate of return won’t wow your friends, the low risk of default on treasuries makes them a safe haven in a choppy market. See Asset Allocation Within Fixed Income for more.
20. Who Needs Fund Managers?
A unit investment trust (UIT) is like a mutual fund without a fund manager. The portfolio, be it bonds or stocks, is selected by professionals and then the UIT undergoes a process similar to an IPO where investors buy into the trust. The trust buys-and-holds the securities after the IPO - the portfolio is not actively managed. Shares of the trust can be traded in secondary markets or sold back to the issuer to be resold, but the total of shares issued doesn't change. Usually a UIT remains in operation only for the life of the investments. If there is any uncertainty, as with a stock unit trust, a termination date is set beforehand. In short, UITs provide the diversity of mutual funds without the management risks.
21. Bonds Gone Wild
Zero-coupon bonds are bonds that have been stripped of their coupons. In layman’s terms, this means a brokerage has taken a bond and split it into two parts. One part is the interest payments, or coupons, and the other part is the face value of the bond (the size of the loan it represents). On a $1,000 bond, the face value is simply $1,000. You can buy that bond for less than $1,000, however, because it no longer pays interest. This means you might pay $800 for a bond worth $1,000, but you have to wait until the bond matures to see your $200 profit. Basically, stripping bonds is a way for banks and brokerages to free up credit faster, but investors also benefit from the returns that come from buying theses bonds at a deep discount. To learn more about this, see What is the difference between a zero-coupon bond and a regular bond?
22. Conclusion: Divide and Conquer
While putting all the eggs in one basket has worked for exceptional stock pickers, real estate investors and other specialists, most people benefit from diversifying their portfolios away from a single type of investment. It is extremely unlikely that you'll own all of these investments at the same time, but a well-diversified portfolio doesn't need to have everything, but rather a mix that suits your investing needs. As your needs change, so will your tools. You may find that stocks are for your salad days while treasury bonds and annuities keep you warm in old age. That's why it's important to be aware of what's out there already and what new financial tools are being created - even if they're not the proper investment for you right now, they may be in the future.
http://investopedia.com/slide-show/investments-build-portfolio/
The concept of a portfolio and the birth of individual investing have opened up possibilities for everyone. The only real difference between you and Warren Buffett is a few well-chosen stocks - the billion-dollar fortune is the result. Stocks, while important, aren’t all there is to investing. Keeping your portfolio divided between the different investment vehicles reduces your overall risk while still generating returns. Here are 20 investment tools you can use to increase your portfolio’s diversity.
2. Go Global With ADRs
American Depository Receipts (ADRs) were introduced to streamline the purchase of foreign assets. ADRs are created when banks buy bundles of foreign shares and repackage them to sell on U.S. stock exchanges. Instead of having investors switch dollars for another currency to buy foreign shares and switch back to dollars when selling, banks eliminate the currency transaction. ADRs face exchange rate risks and political risks as well as the regular risks for stocks, but they offer global diversity in a convenient package. For more, see ADRs: Invest Offshore Without Leaving Home.
3. Add Annuities To Your Retirement Portfolio
Annuities are investments that provide annual payments and are usually sold by insurance companies. Although generally used as retirement vehicles, annuities come in several flavors. Deferred annuities and immediate annuities differ in when the payments begin, and fixed annuities and variable annuities have different payment structures. Disadvantages include penalties for withdrawing the principal and the ever-present drain of inflation on future returns. Despite this, annuities can be a great way for investors nearing or in retirement to enjoy the benefits of compounding because they are low risk and gains are tax deferred. (For more on this, see Personal Pensions: Repackaging The Annuity.)
4. Get In On Closed-End Investment Funds
A closed-end investment fund is similar to a mutual fund, the difference being that the price of shares in the fund are decided by demand on the open market rather than by net asset value. Basically, you are buying shares of a fund that buys shares in the market, so your fund’s share price is only as good as the management’s performance. Generally, these funds specialize according to purpose (capital appreciation, dividend income, etc.) and market (energy, technology, pharmaceuticals, etc.), so it is important to read the prospectus and check the performance history before buying in. See Open Your Eyes To Closed-End Funds.
5. Consider Collectibles
When footage of Marilyn Monroe sells for over $14,000 and a Honus Wagner card for over $1 million, it’s hard not to see an upside to collectibles. Before you make them the base of your portfolio, however, it’s important to look at the downside. Similar to precious metals, owning collectibles produces no income and gains are only realized through appreciation. Unlike precious metals, physical damage can erase all the value of a collectible, meaning that you need to factor maintenance costs against future returns. There is no doubt collectibles can produce big returns, but they’re more of a purchase than an investment and are usually best left to those with a genuine passion. For more on this, see Contemplating Collectible Investments.
6. Common Stock, Uncommon Returns
Stocks have history running in their favor, averaging 11-12% a year, and they outperform just about every type of investment. The trade-off is that stocks come with greater risk. Average market returns are no comfort if you buy at the market peak and sell during the graveyard. Still investing in stocks is no longer as mysterious or as elite an activity as it used to be. Armed with the desire to learn, you can make stocks a powerful source of returns in your portfolio. To learn more about stocks, see our Stock Basics Tutorial.
7. The Magic Of Convertible Securities
Convertible securities are the alchemists of the financial world. They can change bonds representing a company’s debt into stocks representing ownership of the company. Convertible bonds allow a company to get financing at a low interest rate without having to explicitly issue more stock - something that existing shareholders frown upon. For investors, convertible bonds offer protection in that they function as bonds if the company does poorly, but can be turned into stock if a company does well. Depending on the company, convertible bonds offer risks and rewards somewhere between true stocks and true corporate bonds, and carry an extra caveat in that they are callable. See Convertible Bonds: An Introduction for more.
8. Enter The World Of Corporate Finance
Corporate bonds are basically loans made from an investor to the corporation issuing the bond. Whereas normal people go to a bank and have to get approved, corporations set their own terms and then find investors. Bonds are evaluated by the default risk of the borrower, the interest rate offered,and the maturity date. Corporate bonds carry a higher yield - that is, they pay more to investors - than government bonds. Corporations with a high default risk have to pay even more to woo investors - these are called junk bonds. To learn more about bonds, see our Bond Basics Tutorial.
9. Buy Into The Future
At its core, a futures contract is simply a way to move the risk of price volatility off producers and onto investors, who are prepared to take on the risk in order to profit. If an egg producer needs $2/dozen to stay in business, but the market price fluctuates between $1 and $3 throughout the year, the producer can enter a futures contract at $2 to lock-in the price. The investor now holds the risk of the price of eggs plummeting and the profit if the price goes up - though in the latter case, the investor may be left with only the fee the producer paid to enter the contract rather than the profits. For more on trading in futures, see the Futures Fundamentals Tutorial.
10. Play The Game Of Life
Taking out life insurance is essentially playing the odds on your mortality. When you’re young the issuer is willing to give it to you cheap because the odds are against you dying suddenly and making them pay out your plan. As you age, however, the ante keeps going up. Life insurance is invaluable for the peace of mind it provides and can even be used as a hedge against wasting illnesses that you may not have coverage for under your health plan (dread disease rider). Although your goal should be to get into a financial situation where your assets will more than cover your obligations when you die, life insurance is an excellent stop-gap until that day. For more, see How Much Life Insurance Should You Carry?
11. Take Idle Funds To The Money Market
The money market is a basket of short-term, fixed-income securities that are meant to provide a return on idle funds without sacrificing liquidity. For example, many full service brokerages keep investors’ cash balances in money market accounts while the investor considers his or her investment options. If you need to house money for a short time and don’t have the thousands it takes to buy directly into the money market, it can be accessed through money market funds. These are basically mutual funds dealing exclusively in the money market. If you are working with a longer time horizon, however, then bonds or equities are a better bet. To learn more, see our Money Market Tutorial.
12. Give Mortgage-Backed Securities A Second Chance
The world revolves on credit. Freddie, Fannie and Ginnie are responsible for repackaging mortgages into investments so that banks can move loans off their balance sheets and offer more credit to consumers. There was a time when mortgage-backed securities (MBS) were as good as gold. That is to say that they carried little risk of default, offered both liquidity and capital appreciation, and offered better returns than bonds - all in all, an excellent investment. Unfortunately, the MBS industry took a hit in the mortgage meltdown of 2007-08 as loans were being given to less credit-worthy individuals - the MBS then became toxic. MBS will recover to provide excellent investment opportunities in the future as they have become as essential as stocks for making the market work, but they must now be approached with healthy skepticism. See Profit From Mortgage Debt With MBS for more.
13. Invest In Infrastructure
Municipal bonds are debt instruments issued by local governments to cover capital expenditures like road maintenance and other infrastructure projects. Munis carry very good tax breaks because the governments, federal and state, want to encourage private investment in infrastructure as it lessens the strain on their budgets. The interest on munis tends to be much lower than corporate bonds because of the advantageous tax breaks. You can get exposure to a pool of munis through municipal bond funds to lessen the risk of default in any one county. Although default is very rare, it has happened. See The Basics Of Municipal Bonds for more.
14. Follow The Leader
Mutual funds are the casual investors solution to research. In theory, you pay a management fee to a professional who does the due diligence for you and comes up with a portfolio that should provide above-average returns. By pooling your money with other investors, your fund manager can buy into investments that require larger amounts of capital. Sadly, funds vary widely according to the quality of the fund manager, so you will still have to do research to find a fund that fits your investment goals, and has a manager who can deliver choice returns. The upside is that a good mutual fund gives you diversity through a single investment. For more, see our Mutual Fund Basics Tutorial.
15. Take Stock Of Your Options
If you are comfortable trading stocks, there is a way to increase your gains by leveraging your bets on a stock. Options allow investors to speculate on the movement of a stock or to hedge an existing investment by using a call or a put. If you think a stock will shoot up in value, you can purchase a call option at the current price and, if it goes up, you can exercise the option and profit from the difference in prices. The price of purchasing an option is much cheaper than actually purchasing and holding the stock, but using this financial shortcut requires a high risk tolerance. It’s not unusual for the value of an option to whipsaw 30-40% within a single trading day. See our Options Basics Tutorial for more.
16. Get Preferential Treatment
Similar to convertible bonds, preferred stock takes up a middle ground between the risk and rewards of common stock and those of corporate bonds. Preferred stock holders get regular dividend payouts unlike the unpredictable dividends for holders of common stock and, in the case of a bankruptcy, rank just behind corporate bondholders on the payback list. Unfortunately the higher dividend is taxable, so the choice between common and preferred is as much a tax issue as an investment one. The purpose of preferred shares is to produce more income than bonds while only slightly increasing the risks. See A Primer On Preferred Stocks.
17. Become The Landlord
People who balk at the idea of going through a financial statement and shudder at the thoughts of scouring footnotes often make a more difficult investment without a second thought. Buying a house makes you every bit as sophisticated as a qualified investor, especially if you’re the type to check the fixtures and go to the town council for zoning laws. Real estate investing seems more comprehensible to people because buying a house is something everyone has to do at some point in his or her life. With the power of leverage, real estate investing can be an excellent source of income - providing people choose their investment as wisely as they do their own house. See Investing In Real Estate for more.
18. Team Up With The Landlord
If you want to invest in real estate but you don’t want tenants calling you at 3am with a flooding toilet, than REITs might be for you. REITs allow investors to enjoy some of the benefits of investing in real estate - income from rent paid as dividends and some tax benefits - without giving up liquidity or having to learn plumbing in your spare time. REITs come in different types: equity REITs pool investor money and buy properties to rent, mortgage REITs issue mortgages and invest in mortgage backed securities, and hybrid REITs do a bit of both. Depending on what you’re looking for, REITs offer an easy way to diversify into real estate without wielding a pipe wrench. For more, see What Are REITs?
19. Uncle Sam's IOU
Treasuries are essentially the same as munis, but issued by the federal government. The government securities are broken up into three categories: long-term treasury bonds, short-term treasury bills, and medium-term treasury notes. They may vary in the term of investment, but all of them are exempt from state and municipal taxes. Because the U.S. government specifically endorses these investments, they often become the life raft for investors when the market begins to tank. Although the rate of return won’t wow your friends, the low risk of default on treasuries makes them a safe haven in a choppy market. See Asset Allocation Within Fixed Income for more.
20. Who Needs Fund Managers?
A unit investment trust (UIT) is like a mutual fund without a fund manager. The portfolio, be it bonds or stocks, is selected by professionals and then the UIT undergoes a process similar to an IPO where investors buy into the trust. The trust buys-and-holds the securities after the IPO - the portfolio is not actively managed. Shares of the trust can be traded in secondary markets or sold back to the issuer to be resold, but the total of shares issued doesn't change. Usually a UIT remains in operation only for the life of the investments. If there is any uncertainty, as with a stock unit trust, a termination date is set beforehand. In short, UITs provide the diversity of mutual funds without the management risks.
21. Bonds Gone Wild
Zero-coupon bonds are bonds that have been stripped of their coupons. In layman’s terms, this means a brokerage has taken a bond and split it into two parts. One part is the interest payments, or coupons, and the other part is the face value of the bond (the size of the loan it represents). On a $1,000 bond, the face value is simply $1,000. You can buy that bond for less than $1,000, however, because it no longer pays interest. This means you might pay $800 for a bond worth $1,000, but you have to wait until the bond matures to see your $200 profit. Basically, stripping bonds is a way for banks and brokerages to free up credit faster, but investors also benefit from the returns that come from buying theses bonds at a deep discount. To learn more about this, see What is the difference between a zero-coupon bond and a regular bond?
22. Conclusion: Divide and Conquer
While putting all the eggs in one basket has worked for exceptional stock pickers, real estate investors and other specialists, most people benefit from diversifying their portfolios away from a single type of investment. It is extremely unlikely that you'll own all of these investments at the same time, but a well-diversified portfolio doesn't need to have everything, but rather a mix that suits your investing needs. As your needs change, so will your tools. You may find that stocks are for your salad days while treasury bonds and annuities keep you warm in old age. That's why it's important to be aware of what's out there already and what new financial tools are being created - even if they're not the proper investment for you right now, they may be in the future.
http://investopedia.com/slide-show/investments-build-portfolio/
Saturday, 29 August 2009
Cash in a Clunker
Stock has moved up higher by 50% the last few months. Many who cashed out of the market during the downturn are paralysed. Some termed them as "paralysed investors".
However, cash is a clunker. Cash is earning nothing and its value is eroded by inflation. Also, the US dollar has fallen 20% in value relative to most other currencies. Moreover, when one is using one's cash savings, one is effectively dipping into or spending your capital.
There is always uncertainties in the market. Should you get in now? Why? You might be missing on more upsides. Should you get out now? Why? You might the miss a sell off, after all the market has risen 50% over the recent months. Perhaps, should you be selling out on some of your stocks? Why? To lock in some gains on stocks that have risen above "intrinsic" value.
Few months ago, shares were being sold at WHOLESALE PRICES. Now they are selling at RETAIL PRICES. Effectively, those "paralysed investors" who will be entering the market at this time are paying retail prices for their shares. How then can they re-employ some capitals into stocks? How can they get back into stocks?
Stay with high quality high dividend yield stocks which are likely to grow their dividend over time. Then start an investment program to buy into these on a systematic basis over time, for example, over the next 10 months. This is akin to cost averaging. As long as you stay with high quality high dividend yield stocks, even if the market were to have another sell down, these stocks should be quite resilient and the selldown may even be a good opportunity to buy at cheaper prices. More importantly, is by having an investment program in place, one can regain one's confidence to invest back into stocks; getting out of cash which is earning next to nothing at present.
The market is unpredictable. The less productive question to ask of oneself is "Is the market going down tomorrow?". The more productive and appropriate question is "Where will the market be in 3 or 5 years from today?"
However, cash is a clunker. Cash is earning nothing and its value is eroded by inflation. Also, the US dollar has fallen 20% in value relative to most other currencies. Moreover, when one is using one's cash savings, one is effectively dipping into or spending your capital.
There is always uncertainties in the market. Should you get in now? Why? You might be missing on more upsides. Should you get out now? Why? You might the miss a sell off, after all the market has risen 50% over the recent months. Perhaps, should you be selling out on some of your stocks? Why? To lock in some gains on stocks that have risen above "intrinsic" value.
Few months ago, shares were being sold at WHOLESALE PRICES. Now they are selling at RETAIL PRICES. Effectively, those "paralysed investors" who will be entering the market at this time are paying retail prices for their shares. How then can they re-employ some capitals into stocks? How can they get back into stocks?
Stay with high quality high dividend yield stocks which are likely to grow their dividend over time. Then start an investment program to buy into these on a systematic basis over time, for example, over the next 10 months. This is akin to cost averaging. As long as you stay with high quality high dividend yield stocks, even if the market were to have another sell down, these stocks should be quite resilient and the selldown may even be a good opportunity to buy at cheaper prices. More importantly, is by having an investment program in place, one can regain one's confidence to invest back into stocks; getting out of cash which is earning next to nothing at present.
The market is unpredictable. The less productive question to ask of oneself is "Is the market going down tomorrow?". The more productive and appropriate question is "Where will the market be in 3 or 5 years from today?"
Friday, 28 August 2009
Maybank: After writedowns, time to log profits
After writedowns, time to log profits
By Adeline Paul Raj
Published: 2009/08/27
With the issue of impairment charges settled, Malayan Banking management's focus for the current fiscal year would be earnings deliverance, says an analyst with AmResearch
MALAYAN Banking Bhd (Maybank) (1155), the country's top lender, must focus on delivering earnings at its newly-acquired banks, particularly Bank Internasional Indonesia (BII), now that it has gotten the issue of impairment charges out of the way, analysts said.
The issue of how much impairment charges Maybank would have had to make, particularly for BII, had been one of the biggest things weighing the stock in recent months.
In the end, the charges - which is the difference between what it paid for the banks and their actual fair value - came in within, albeit at the higher end of, analysts' expectations.
Maybank had decided to "bite the bullet" by taking a huge RM1.97 billion impairment charge for its investments in BII and MCB Bank in Pakistan.
This pushed the group into the red in its final quarter, and re-duced earnings for the full year ended June 30 2009 to just RM692 million, its lowest annual profit in a decade.
With that issue out of the way, AmResearch upgraded its call on Maybank's stock to a "hold" from "sell" previously, and raised the target price to RM7.10 from RM4.60.
"With the issue of impairment charges settled, management's focus for (the current fiscal year) would be earnings deliverance," its banking analyst Fiona Leong said in a research note yesterday.
The stock's share price performance, however, is likely to track the FTSE Bursa Malaysia KLCI index until there is a firm uptrend in operating profits, she added.
She expects Maybank's net profit to rise 18 per cent to RM2.56 billion in the current year and RM2.83 billion in the next. This is after factoring in better-than-expected non-interest income from the treasury operations and capital market-related businesses.
Analysts, however, expect Maybank's return-on-equity (ROE), a measure of how well its re-invested earnings are used to generate additional earnings, to be "sub-par" over the next two to three years following its expen-sive acquisitions.
They said the management had indicated that it would take a few years before ROE, which stood at just 10 per cent last year, could go back up to pre-acquisition levels of about 14 per cent.
The bank is targeting an ROE of 11 per cent for the current year.
Analysts are also concerned that the group may have to do more cleaning up of its loan books, particularly for BII, in the current year. It already set aside large loan loss provisions of about RM1.7 billion last year compared with RM810 million previously.
"In view of its sub-par ROEs and relatively long gestation period for expensive overseas acquisitions to start contributing meaningfully, we prefer Public Bank and Bumiputra-Commerce for cheaper valuations and comparatively higher ROEs among the larger banks," OSK Research's analyst Keith Wee said.
OSK maintained its "neutral" call on the stock, but raised the target price to RM6.20 from RM5.15.
Maybank closed at RM6.47 yesterday, five sen lower than the previous day.
By Adeline Paul Raj
Published: 2009/08/27
With the issue of impairment charges settled, Malayan Banking management's focus for the current fiscal year would be earnings deliverance, says an analyst with AmResearch
MALAYAN Banking Bhd (Maybank) (1155), the country's top lender, must focus on delivering earnings at its newly-acquired banks, particularly Bank Internasional Indonesia (BII), now that it has gotten the issue of impairment charges out of the way, analysts said.
The issue of how much impairment charges Maybank would have had to make, particularly for BII, had been one of the biggest things weighing the stock in recent months.
In the end, the charges - which is the difference between what it paid for the banks and their actual fair value - came in within, albeit at the higher end of, analysts' expectations.
Maybank had decided to "bite the bullet" by taking a huge RM1.97 billion impairment charge for its investments in BII and MCB Bank in Pakistan.
This pushed the group into the red in its final quarter, and re-duced earnings for the full year ended June 30 2009 to just RM692 million, its lowest annual profit in a decade.
With that issue out of the way, AmResearch upgraded its call on Maybank's stock to a "hold" from "sell" previously, and raised the target price to RM7.10 from RM4.60.
"With the issue of impairment charges settled, management's focus for (the current fiscal year) would be earnings deliverance," its banking analyst Fiona Leong said in a research note yesterday.
The stock's share price performance, however, is likely to track the FTSE Bursa Malaysia KLCI index until there is a firm uptrend in operating profits, she added.
She expects Maybank's net profit to rise 18 per cent to RM2.56 billion in the current year and RM2.83 billion in the next. This is after factoring in better-than-expected non-interest income from the treasury operations and capital market-related businesses.
Analysts, however, expect Maybank's return-on-equity (ROE), a measure of how well its re-invested earnings are used to generate additional earnings, to be "sub-par" over the next two to three years following its expen-sive acquisitions.
They said the management had indicated that it would take a few years before ROE, which stood at just 10 per cent last year, could go back up to pre-acquisition levels of about 14 per cent.
The bank is targeting an ROE of 11 per cent for the current year.
Analysts are also concerned that the group may have to do more cleaning up of its loan books, particularly for BII, in the current year. It already set aside large loan loss provisions of about RM1.7 billion last year compared with RM810 million previously.
"In view of its sub-par ROEs and relatively long gestation period for expensive overseas acquisitions to start contributing meaningfully, we prefer Public Bank and Bumiputra-Commerce for cheaper valuations and comparatively higher ROEs among the larger banks," OSK Research's analyst Keith Wee said.
OSK maintained its "neutral" call on the stock, but raised the target price to RM6.20 from RM5.15.
Maybank closed at RM6.47 yesterday, five sen lower than the previous day.
Landmark case in Singapore on rigging the market
SINGAPORE, Aug 28 — A landmark legal action by the authorities against a prominent Singapore fund manager who handles more than US$1 billion (RM3.5 billion) of assets got under way in the High Court yesterday.
The Government of Singapore Investment Corporation (GIC) is among the manager's major clients.
Dr Tan Chong Koay, one of Singapore's pioneering boutique fund managers, is founder and chief executive of the Singapore unit, Pheim Asset Management (Asia), and Pheim Asset Management (Malaysia). The market-rigging lawsuit against Tan and the Malaysian unit has been brought by the Monetary Authority of Singapore (MAS).
It is being closely watched in the investment community, as Tan is well-known in fund management circles. Also, the case touches on the practice of “window-dressing” where big investors may try to ramp up or push down share prices — a key concern at the year-end when the value of a fund is determined.
MAS has accused Tan and Pheim Malaysia of market rigging and market manipulation and is asking for civil penalties such as monetary payments. Under the Securities and Futures Act, Section 197 (1) (b), a person should not create or do anything intended or likely to create a false or misleading appearance over the market or price of securities.
In Pheim Malaysia's case, MAS says it created a false market in the shares of China water player United Envirotech, a company which listed on the Singapore Exchange in April 2004. The case centres on the three days from Dec 29 to Dec 31 in 2004 when Tan and Pheim Malaysia allegedly instructed Tang Boon Siah, then a broker at UOB Kay Hian, to buy United Envirotech shares.
On Dec 29, Pheim Malaysia bought 65,000 shares at 38.4 cents. The next day, 210,000 shares were bought at 42.9 cents. On Dec 31, 85,000 shares were bought at 43.9 cents. Over the three days, the share price had jumped about 17 per cent.
MAS said: “This was not the conduct of a genuine buyer seeking to buy shares at the lowest possible price. They 'saturated the market for United Envirotech shares with 88 per cent of the purchases in the last three trading days of 2004.”
The trades occurred towards the end of each trading day, except for the trade on Dec 30, which allowed Pheim to “fix the closing prices at significantly higher prices than the previous day”.
MAS added that Tan and Pheim “are not naive individual investors. They are experienced professionals who knew full well... the effect that such targeted trading would have on the market”.
The regulator said that with the rise in the share price at the year-end, Pheim Singapore was able to exceed certain benchmarks for its fund.
Pheim Malaysia's case is it had already invested in the company when it was floated on the stock exchange earlier in the year. Its investment committee was keen to buy more United Envirotech shares, on the back of its success in investing in Hyflux.
There were three funds in question — but under Malaysian rules, each fund could not hold more than 10 per cent of foreign (non-Malaysian) stocks.
So it was only after these three funds had sold off some Singapore stocks on Dec 28, that the firm was able to buy into United Envirotech. Pheim Malaysia argues that it was a genuine investor, believing the shares were undervalued in 2004.
Tan says it was not he who told the broker to buy the shares, but another staff member.
This point was raised at the hearing yesterday, before Justice Lai Siu Chiu. MAS is arguing that there were phone calls from Tan to Tang at the time the trades were supposed to have been done. MAS' lawyer, Senior Counsel Cavinder Bull from Drew & Napier, called a StarHub representative to give evidence of this.
Tan is represented by Senior Counsel Michael Hwang, and Pheim by Foo Maw Shen of Rodyk & Davidson. Foo cross-examined a witness from SingTel who said numbers dialled from a landline such as the broker's could not be retrieved unless the subscriber had signed up for itemised billing.
Tan has not yet taken the stand while the broker, Tang, is expected to take the stand today.
This is only the second time that MAS has taken civil action in the courts against players in the financial industry, and the first under this section.
Earlier this year, for the first time, MAS took a civil suit, on insider trading against former WBL Corp executive Kevin Lew. That case is ongoing. — Straits Times
The Government of Singapore Investment Corporation (GIC) is among the manager's major clients.
Dr Tan Chong Koay, one of Singapore's pioneering boutique fund managers, is founder and chief executive of the Singapore unit, Pheim Asset Management (Asia), and Pheim Asset Management (Malaysia). The market-rigging lawsuit against Tan and the Malaysian unit has been brought by the Monetary Authority of Singapore (MAS).
It is being closely watched in the investment community, as Tan is well-known in fund management circles. Also, the case touches on the practice of “window-dressing” where big investors may try to ramp up or push down share prices — a key concern at the year-end when the value of a fund is determined.
MAS has accused Tan and Pheim Malaysia of market rigging and market manipulation and is asking for civil penalties such as monetary payments. Under the Securities and Futures Act, Section 197 (1) (b), a person should not create or do anything intended or likely to create a false or misleading appearance over the market or price of securities.
In Pheim Malaysia's case, MAS says it created a false market in the shares of China water player United Envirotech, a company which listed on the Singapore Exchange in April 2004. The case centres on the three days from Dec 29 to Dec 31 in 2004 when Tan and Pheim Malaysia allegedly instructed Tang Boon Siah, then a broker at UOB Kay Hian, to buy United Envirotech shares.
On Dec 29, Pheim Malaysia bought 65,000 shares at 38.4 cents. The next day, 210,000 shares were bought at 42.9 cents. On Dec 31, 85,000 shares were bought at 43.9 cents. Over the three days, the share price had jumped about 17 per cent.
MAS said: “This was not the conduct of a genuine buyer seeking to buy shares at the lowest possible price. They 'saturated the market for United Envirotech shares with 88 per cent of the purchases in the last three trading days of 2004.”
The trades occurred towards the end of each trading day, except for the trade on Dec 30, which allowed Pheim to “fix the closing prices at significantly higher prices than the previous day”.
MAS added that Tan and Pheim “are not naive individual investors. They are experienced professionals who knew full well... the effect that such targeted trading would have on the market”.
The regulator said that with the rise in the share price at the year-end, Pheim Singapore was able to exceed certain benchmarks for its fund.
Pheim Malaysia's case is it had already invested in the company when it was floated on the stock exchange earlier in the year. Its investment committee was keen to buy more United Envirotech shares, on the back of its success in investing in Hyflux.
There were three funds in question — but under Malaysian rules, each fund could not hold more than 10 per cent of foreign (non-Malaysian) stocks.
So it was only after these three funds had sold off some Singapore stocks on Dec 28, that the firm was able to buy into United Envirotech. Pheim Malaysia argues that it was a genuine investor, believing the shares were undervalued in 2004.
Tan says it was not he who told the broker to buy the shares, but another staff member.
This point was raised at the hearing yesterday, before Justice Lai Siu Chiu. MAS is arguing that there were phone calls from Tan to Tang at the time the trades were supposed to have been done. MAS' lawyer, Senior Counsel Cavinder Bull from Drew & Napier, called a StarHub representative to give evidence of this.
Tan is represented by Senior Counsel Michael Hwang, and Pheim by Foo Maw Shen of Rodyk & Davidson. Foo cross-examined a witness from SingTel who said numbers dialled from a landline such as the broker's could not be retrieved unless the subscriber had signed up for itemised billing.
Tan has not yet taken the stand while the broker, Tang, is expected to take the stand today.
This is only the second time that MAS has taken civil action in the courts against players in the financial industry, and the first under this section.
Earlier this year, for the first time, MAS took a civil suit, on insider trading against former WBL Corp executive Kevin Lew. That case is ongoing. — Straits Times
Thursday, 27 August 2009
Maybank sees much better FY10
Maybank sees much better FY10
Tags: An Binh Bank Bank Internasional Indonesia BII commercial banking Corporate banking Datuk Seri Abdul Wahid Omar FY10 Impairment charge LEAP30 Maybank MCB Bank Ltd NPLs Overseas acquisitions SME
Written by Ellina Badri
Wednesday, 26 August 2009 11:01
KUALA LUMPUR: MALAYAN BANKING BHD [] (Maybank) is looking forward to a better performance in the financial year ending June 30, 2010 (FY10), driven by its domestic commercial banking business and its international operations, especially in its 97.5%-owned Bank Internasional Indonesia (BII).
This follows a 76% year-on-year decline in net profit to RM691.88 million in FY09, mainly due to impairment charges stemming from its overseas acquisitions.
Revenue grew 8.92% to RM17.59 billion in FY09, while earnings per share fell to 12 sen from 53.32 sen. It declared a final dividend of eight sen per share less tax.
Maybank president and CEO Datuk Seri Abdul Wahid Omar said the group’s management was confident of a significantly improved performance in FY10, driven by the economic recovery and broad-based growth.
“FY09 was a challenging year for Maybank for three reasons. Firstly, we had to deal with the global financial crisis, which ultimately affected the global economy and to that extent, Malaysia has not been spared from an economic perspective.
“Secondly, we had to deal with various issues surrounding our three major acquisitions, in BII, MCB Bank Ltd and An Binh Bank.
Abdul Wahid (left) and CFO Khairussaleh Ramli at the press conference to announce Maybank’s financial results yesterday. Photo by Mohd Izwan Mohd Nazam
“Thirdly, we had to raise significant long-term capital, both in the form of debt and equity, totalling some RM15.1 billion, in a very challenging environment,” Maybank president and CEO Datuk Seri Abdul Wahid Omar told reporters here yesterday.
In 4QFY09, the bank posted a RM1.12 billion net loss, against a RM703.21 million net profit in 4QFY08. Revenue rose 8.24% to RM4.86 billion.
The bank had acquired BII, a 20% stake in Pakistan’s MCB Bank and 15% in Vietnam’s An Binh Bank last year. Wahid said Maybank was awaiting approval from Vietnam’s prime minister for it to raise its stake in An Binh Bank to 20%, which could be forthcoming in the next two weeks.
The group’s FY09 performance was hit by an impairment charge of RM1.62 billion on goodwill of the group from BII’s operations and an impairment loss of RM353 million in MCB.
However, Wahid said based on its purchase price allocation exercise undertaken in accordance with Financial Reporting Standard 3 (FRS3, for business combination), and FRS 138 (intangible assets guidelines), in relation to its BII and MCB acquisitions, Maybank did not expect to make any further impairments on the acquisitions.
On why the banking group’s core net profit for FY09 was lower than FY08’s RM2.93 billion, even after stripping out the impairment charges, Wahid said this was due to a RM445 million interest charge on its issuance of RM9.1 billion in capital securities and subordinated debt, higher loan loss provisions, slower capital market activities and lower income from its insurance arm.
Its loan loss provisions were 109.7% higher, at RM1.7 billion, due to higher provisions of RM401.4 million at Maybank, RM121.2 million at its subsidiaries, and from the consolidation of BII’s loan loss provisions for the first time in FY09, by RM366.2 million.
Despite the higher provisions, the group achieved higher loan loss coverage in FY09, which stood at 112.9% as at June 30, compared with 101.1% in FY08.
Also, notwithstanding its various setbacks, the banking group posted a 9% higher net interest income of RM5.92 billion in FY09, driven by higher loans growth and improved lending margins in BII. Its net interest margins, meanwhile, remained relatively stable at 2.72%.
Non-interest income grew to RM3.38 billion in FY09 from RM3.17 billion in FY08. Overhead costs, however, grew to RM5.56 billion from RM4.25 billion, which also included RM584 million overhead costs from BII.
Loans growth at its Malaysian operations rose 6.4%, while overseas loans grew 28.9%. Asset quality continued to improve, with its net non-performing loan (NPL) ratio declining to 1.64% as at June 30, from 1.92% in June 2008.
Wahid said while Maybank had braced for a deterioration in asset quality, it had also taken steps to ensure it did not occur or worsen. He added that while it remained cautious on any uptick in NPLs, it was expected to be manageable.
He also said it could see higher NPLs from small and medium-sized enterprises, but the ratio was not expected to go beyond 2%.
Its core capital ratio and risk-weighted capital ratio, after deducting dividend payable, stood at 10.81% and 14.81%, respectively.
Of its international portfolio, the Singapore operations accounted for 61.9% of total loans, followed by Indonesia with 19.6%.
Pre-tax profit at its Singapore arm grew 5.9% to S$247.7 million, driven by a 24.2% increase in fund-based income. Provisions there rose 42.7%, but the gross NPL ratio decreased to 1%.
MCB reported a pre-tax profit of RM92.4 million, as total income grew 34.5% while its gross NPL ratio stood at 7.6%.
BII has yet to announce its results for the period ended June 30, 2009, but Wahid said the Indonesian bank had made a small contribution to the group’s FY09 results.
On Maybank’s plans for BII, he said with its full management team and growth strategies now in place, it was expected to be profitable in the future.
Wahid said after the bank had turned around its motor financing business this year, it could focus on strengthening its consumer, SME and corporate banking segments.
Meanwhile, on the group’s LEAP30 transformation plan embarked upon last year, he said as at end-June, total financial benefits from the initiatives amounted to RM40 million in pre-tax profit contribution, in addition to RM143 million cost savings.
Wahid said Maybank would launch four more initiatives before year-end, following the 16 launched earlier.
The new measures were the upgrading of its commercial banking model, strengthening of its equity capital markets, brokerage and merger and acquisition capabilities, establishing governance and operating model for its international businesses, and capturing value from BII, he said.
He added that beyond its domestic operations, it would focus on driving performance at BII, with particular emphasis on loans growth in the fast-growing Indonesian economy. He noted that the banking industry there had traditionally grown at a faster rate than the gross domestic product.
http://www.theedgemalaysia.com/business-news/148087-maybank-sees-much-better-fy10.html
Tags: An Binh Bank Bank Internasional Indonesia BII commercial banking Corporate banking Datuk Seri Abdul Wahid Omar FY10 Impairment charge LEAP30 Maybank MCB Bank Ltd NPLs Overseas acquisitions SME
Written by Ellina Badri
Wednesday, 26 August 2009 11:01
KUALA LUMPUR: MALAYAN BANKING BHD [] (Maybank) is looking forward to a better performance in the financial year ending June 30, 2010 (FY10), driven by its domestic commercial banking business and its international operations, especially in its 97.5%-owned Bank Internasional Indonesia (BII).
This follows a 76% year-on-year decline in net profit to RM691.88 million in FY09, mainly due to impairment charges stemming from its overseas acquisitions.
Revenue grew 8.92% to RM17.59 billion in FY09, while earnings per share fell to 12 sen from 53.32 sen. It declared a final dividend of eight sen per share less tax.
Maybank president and CEO Datuk Seri Abdul Wahid Omar said the group’s management was confident of a significantly improved performance in FY10, driven by the economic recovery and broad-based growth.
“FY09 was a challenging year for Maybank for three reasons. Firstly, we had to deal with the global financial crisis, which ultimately affected the global economy and to that extent, Malaysia has not been spared from an economic perspective.
“Secondly, we had to deal with various issues surrounding our three major acquisitions, in BII, MCB Bank Ltd and An Binh Bank.
Abdul Wahid (left) and CFO Khairussaleh Ramli at the press conference to announce Maybank’s financial results yesterday. Photo by Mohd Izwan Mohd Nazam
“Thirdly, we had to raise significant long-term capital, both in the form of debt and equity, totalling some RM15.1 billion, in a very challenging environment,” Maybank president and CEO Datuk Seri Abdul Wahid Omar told reporters here yesterday.
In 4QFY09, the bank posted a RM1.12 billion net loss, against a RM703.21 million net profit in 4QFY08. Revenue rose 8.24% to RM4.86 billion.
The bank had acquired BII, a 20% stake in Pakistan’s MCB Bank and 15% in Vietnam’s An Binh Bank last year. Wahid said Maybank was awaiting approval from Vietnam’s prime minister for it to raise its stake in An Binh Bank to 20%, which could be forthcoming in the next two weeks.
The group’s FY09 performance was hit by an impairment charge of RM1.62 billion on goodwill of the group from BII’s operations and an impairment loss of RM353 million in MCB.
However, Wahid said based on its purchase price allocation exercise undertaken in accordance with Financial Reporting Standard 3 (FRS3, for business combination), and FRS 138 (intangible assets guidelines), in relation to its BII and MCB acquisitions, Maybank did not expect to make any further impairments on the acquisitions.
On why the banking group’s core net profit for FY09 was lower than FY08’s RM2.93 billion, even after stripping out the impairment charges, Wahid said this was due to a RM445 million interest charge on its issuance of RM9.1 billion in capital securities and subordinated debt, higher loan loss provisions, slower capital market activities and lower income from its insurance arm.
Its loan loss provisions were 109.7% higher, at RM1.7 billion, due to higher provisions of RM401.4 million at Maybank, RM121.2 million at its subsidiaries, and from the consolidation of BII’s loan loss provisions for the first time in FY09, by RM366.2 million.
Despite the higher provisions, the group achieved higher loan loss coverage in FY09, which stood at 112.9% as at June 30, compared with 101.1% in FY08.
Also, notwithstanding its various setbacks, the banking group posted a 9% higher net interest income of RM5.92 billion in FY09, driven by higher loans growth and improved lending margins in BII. Its net interest margins, meanwhile, remained relatively stable at 2.72%.
Non-interest income grew to RM3.38 billion in FY09 from RM3.17 billion in FY08. Overhead costs, however, grew to RM5.56 billion from RM4.25 billion, which also included RM584 million overhead costs from BII.
Loans growth at its Malaysian operations rose 6.4%, while overseas loans grew 28.9%. Asset quality continued to improve, with its net non-performing loan (NPL) ratio declining to 1.64% as at June 30, from 1.92% in June 2008.
Wahid said while Maybank had braced for a deterioration in asset quality, it had also taken steps to ensure it did not occur or worsen. He added that while it remained cautious on any uptick in NPLs, it was expected to be manageable.
He also said it could see higher NPLs from small and medium-sized enterprises, but the ratio was not expected to go beyond 2%.
Its core capital ratio and risk-weighted capital ratio, after deducting dividend payable, stood at 10.81% and 14.81%, respectively.
Of its international portfolio, the Singapore operations accounted for 61.9% of total loans, followed by Indonesia with 19.6%.
Pre-tax profit at its Singapore arm grew 5.9% to S$247.7 million, driven by a 24.2% increase in fund-based income. Provisions there rose 42.7%, but the gross NPL ratio decreased to 1%.
MCB reported a pre-tax profit of RM92.4 million, as total income grew 34.5% while its gross NPL ratio stood at 7.6%.
BII has yet to announce its results for the period ended June 30, 2009, but Wahid said the Indonesian bank had made a small contribution to the group’s FY09 results.
On Maybank’s plans for BII, he said with its full management team and growth strategies now in place, it was expected to be profitable in the future.
Wahid said after the bank had turned around its motor financing business this year, it could focus on strengthening its consumer, SME and corporate banking segments.
Meanwhile, on the group’s LEAP30 transformation plan embarked upon last year, he said as at end-June, total financial benefits from the initiatives amounted to RM40 million in pre-tax profit contribution, in addition to RM143 million cost savings.
Wahid said Maybank would launch four more initiatives before year-end, following the 16 launched earlier.
The new measures were the upgrading of its commercial banking model, strengthening of its equity capital markets, brokerage and merger and acquisition capabilities, establishing governance and operating model for its international businesses, and capturing value from BII, he said.
He added that beyond its domestic operations, it would focus on driving performance at BII, with particular emphasis on loans growth in the fast-growing Indonesian economy. He noted that the banking industry there had traditionally grown at a faster rate than the gross domestic product.
http://www.theedgemalaysia.com/business-news/148087-maybank-sees-much-better-fy10.html
Wednesday, 26 August 2009
Malaysia Food and Drink Report Q4 2009
Malaysia Food and Drink Report Q4 2009
Malaysia Food and Drink Report Q4 2009 - new market report recently published
www.companiesandmarkets.com/Summary-Market-Report/malaysia-food-
..
Malaysia continues to feel the effects of the current global economic crisis and as such the report has revised down its 2009 GDP growth forecast from an expansion of 0.5% to a contraction of 1.9%. Amid this tough economic climate many companies are feeling the pressure from weakening private consumption and declining consumer confidence and it is therefore not surprising that this quarter has seen little significant merger and acquisition activity and only minimal expansion activity .
Despite the weak economic outlook, many of the country’s food and beverage manufacturers continue to invest in the country indicating that Malaysia is still seen as a key market. One such company is Nestlé Malaysia, which unveiled plans this quarter to dramatically increase capital expenditure to MYR320mn for 2009, to enable it to put in place a strategy aimed at protecting market share and sales throughout the economic downturn. KFC Holdings (M) Bhd (KFCH) and Berjaya Krispy Kreme Doughnuts Sdn Bhd also continue to invest in the country, the former announcing in Q309 that despite the downturn it would spend MYR32mn on opening new outlets this year, while the latter opened the first of 20 planned Krispy Kreme doughnut shops in Malaysia .
Elsewhere in the drinks industry, Malaysia’s second largest brewer Guinness Anchor Berhad (GAB) reported that for Q309 revenue had slipped 4.2% to MYR314.8mn and pre-tax profit had fallen 11.3% to MYR43.6mn. Despite these disappointing results, Managing Director Charles Ireland stated that he is confident that full year revenue and profit figures will exceed those reported for FY08. Fraser and Neave are also confident of satisfactory FY09 results following positive results for H109, revenue increased 1.3% to MYR1.83bn while operating profit rose 12.5% to MYR158.5mn. This quarter has also seen Carlsberg Malaysia announce that it hopes to take advantage of the weak domestic economy to search for favourable acquisition targets .
Moving to the mass grocery retail sector, both Aeon Malaysia and Tesco Malaysia announced plans to expand in 2009. Aeon Malaysia is to invest approximately MYR150mn on expansion activities while Tesco Malaysia has stated that it will open at least five more stores this year. While BMI is forecasting MGR sales growth to stand at 2.1% in 2009, in the longer term we are expecting sales through modern retail outlets to increase by 35% to MYR18.3bn in 2013 .
However, not all producers are riding out the current downturn with positivity; Yeo Hiap Seng (Malaysia) has announced a pre-tax loss of MYR8.91mn for Q109. This serves to highlight the pressures food and drink manufacturers are under in the current financial climate.
Malaysia Food and Drink Report Q4 2009 - new market report recently published
www.companiesandmarkets.com/Summary-Market-Report/malaysia-food-
..
Malaysia continues to feel the effects of the current global economic crisis and as such the report has revised down its 2009 GDP growth forecast from an expansion of 0.5% to a contraction of 1.9%. Amid this tough economic climate many companies are feeling the pressure from weakening private consumption and declining consumer confidence and it is therefore not surprising that this quarter has seen little significant merger and acquisition activity and only minimal expansion activity .
Despite the weak economic outlook, many of the country’s food and beverage manufacturers continue to invest in the country indicating that Malaysia is still seen as a key market. One such company is Nestlé Malaysia, which unveiled plans this quarter to dramatically increase capital expenditure to MYR320mn for 2009, to enable it to put in place a strategy aimed at protecting market share and sales throughout the economic downturn. KFC Holdings (M) Bhd (KFCH) and Berjaya Krispy Kreme Doughnuts Sdn Bhd also continue to invest in the country, the former announcing in Q309 that despite the downturn it would spend MYR32mn on opening new outlets this year, while the latter opened the first of 20 planned Krispy Kreme doughnut shops in Malaysia .
Elsewhere in the drinks industry, Malaysia’s second largest brewer Guinness Anchor Berhad (GAB) reported that for Q309 revenue had slipped 4.2% to MYR314.8mn and pre-tax profit had fallen 11.3% to MYR43.6mn. Despite these disappointing results, Managing Director Charles Ireland stated that he is confident that full year revenue and profit figures will exceed those reported for FY08. Fraser and Neave are also confident of satisfactory FY09 results following positive results for H109, revenue increased 1.3% to MYR1.83bn while operating profit rose 12.5% to MYR158.5mn. This quarter has also seen Carlsberg Malaysia announce that it hopes to take advantage of the weak domestic economy to search for favourable acquisition targets .
Moving to the mass grocery retail sector, both Aeon Malaysia and Tesco Malaysia announced plans to expand in 2009. Aeon Malaysia is to invest approximately MYR150mn on expansion activities while Tesco Malaysia has stated that it will open at least five more stores this year. While BMI is forecasting MGR sales growth to stand at 2.1% in 2009, in the longer term we are expecting sales through modern retail outlets to increase by 35% to MYR18.3bn in 2013 .
However, not all producers are riding out the current downturn with positivity; Yeo Hiap Seng (Malaysia) has announced a pre-tax loss of MYR8.91mn for Q109. This serves to highlight the pressures food and drink manufacturers are under in the current financial climate.
Monday, 24 August 2009
The Three Golden Rules of Investing
The Three Golden Rules of Investing
First of all you need to know your capabilities.
First Golden Rule of Investing: Know who you are before you start investing in assets that have risk—don’t use the marketplace to find out.
Second Golden Rule of Investing: Know why you are buying a particular stock—don’t wait until its price goes up or down to think about it.
Third Golden Rule of Investing: Take your time—you are investing for the rest of your life.
John Price, PhD
Perhaps you have recently been walking in the forest. Or maybe you went on a picnic. Or even went swimming in a river; all wonderful, refreshing activities. In each case, however, you have to know what you are doing. Otherwise you could walk into a patch of poison ivy, get swept by the current, or even get seriously injured.
The same applies to the marketplace. If you treat it in a casual way without proper planning and preparation, you could get hurt. Financially, not physically. Of course, the marketplace is not something natural like a forest or an ocean. Quite the opposite—it is an extreme example of something structured by humans. Nevertheless, there is an important similarity. It is so huge and complex, with so many facets and nuances that, just like nature, no single individual can fully understand it.
When it comes to walking in a forest or swimming in a river, we have grown up with simple rules such as ‘stay on the path’ or ‘don’t swim beyond your depth.’ As we become more experienced, we may strike off into the trees or swim across a river. Even here, there are rules or principles, and it is these that I want to examine to see if they can help us in the marketplace.
First of all you need to know your capabilities. For example, how far can you walk—or swim? You don’t start on 20 mile hike if you have never walked more that a mile or two. So my first golden rule is:
First Golden Rule of Investing: Know who you are before you start investing in assets that have risk—don’t use the marketplace to find out.
Some questions you can ask yourself include: Do I like to work things out for myself or do I prefer to rely on other people? Do I like getting information by talking to people or by reading? What type of information do I prefer, technical or expository? What is my risk tolerance? How would I feel if stock I bought for $20 went to $10 overnight? What if it stayed there for a week? a month? a year?
Coming back to walking and swimming, you don’t want to find yourself halfway across a one-mile lake and then start asking yourself why are you there. Yet the same thing happens repeatedly with investors. They buy a particular stock but don’t have any clear reason for doing so. Their brother-in-law said it was a sure thing. Or they read something in the Wall Street Journal. Or the stock had a low p/e ratio, or a high return on equity. In the right context, each one of these might be a perfectly good reason for making a purchase. However, frequently it is the case that people buy a stock because of a vague combination of a whole lot of reasons such as these. Then, when the market conditions change, they have no framework for deciding what to do next because they are not sure why they made the purchase in the first place.
When you know why you bought Intel, for example, you will have a stronger basis for knowing what to do when its price goes up, or down, or even stays the same. For instance, if Intel starts to go down in price and you bought it as a momentum play, then you will probably want to sell as quickly as possible. But if you bought it as an undervalued stock, and if the fundamentals have not changed, then you might want to buy more.
This brings me to my second golden rule.
Second Golden Rule of Investing: Know why you are buying a particular stock—don’t wait until its price goes up or down to think about it.
In my investment workshops I teach people how to analyze companies and then make a two-minute presentation to the whole group on their suitability as a stock purchase. This helps them to focus on substantial issues regarding these companies and gives a sound basis for making a buy/pass decision. They are also encouraged to maintain a stock book in which they list the pros and cons of each stock they are interested in.
Warren Buffett said that when he looked back over his investments in his early partnerships, the larger investments always did better than his smaller ones. He attributed this to a "threshold of examination and criticism and knowledge that has to be overcome or reached in making a big decision that you can get sloppy about on small decisions."
Finally, we know that to enjoy nature we shouldn’t be in a rush. This is also very true with the marketplace. So my final golden rule is:
Third Golden Rule of Investing: Take your time—you are investing for the rest of your life.
Buffett said recently that he doesn’t get paid for activity, just for being right. "As to how long we’ll wait," he continued, "we’ll wait indefinitely." No one makes you buy a stock. If you know what type of investor you are, and why you would buy a particular stock, then you will be better able to determine a reasonable price to pay for it. Then you can quietly wait until Mr. Market offers it to you at your price. Wishing you happy and successful investing!
http://www.conscious-investor.com/articles/articles/article0009.asp
First of all you need to know your capabilities.
First Golden Rule of Investing: Know who you are before you start investing in assets that have risk—don’t use the marketplace to find out.
Second Golden Rule of Investing: Know why you are buying a particular stock—don’t wait until its price goes up or down to think about it.
Third Golden Rule of Investing: Take your time—you are investing for the rest of your life.
John Price, PhD
Perhaps you have recently been walking in the forest. Or maybe you went on a picnic. Or even went swimming in a river; all wonderful, refreshing activities. In each case, however, you have to know what you are doing. Otherwise you could walk into a patch of poison ivy, get swept by the current, or even get seriously injured.
The same applies to the marketplace. If you treat it in a casual way without proper planning and preparation, you could get hurt. Financially, not physically. Of course, the marketplace is not something natural like a forest or an ocean. Quite the opposite—it is an extreme example of something structured by humans. Nevertheless, there is an important similarity. It is so huge and complex, with so many facets and nuances that, just like nature, no single individual can fully understand it.
When it comes to walking in a forest or swimming in a river, we have grown up with simple rules such as ‘stay on the path’ or ‘don’t swim beyond your depth.’ As we become more experienced, we may strike off into the trees or swim across a river. Even here, there are rules or principles, and it is these that I want to examine to see if they can help us in the marketplace.
First of all you need to know your capabilities. For example, how far can you walk—or swim? You don’t start on 20 mile hike if you have never walked more that a mile or two. So my first golden rule is:
First Golden Rule of Investing: Know who you are before you start investing in assets that have risk—don’t use the marketplace to find out.
Some questions you can ask yourself include: Do I like to work things out for myself or do I prefer to rely on other people? Do I like getting information by talking to people or by reading? What type of information do I prefer, technical or expository? What is my risk tolerance? How would I feel if stock I bought for $20 went to $10 overnight? What if it stayed there for a week? a month? a year?
Coming back to walking and swimming, you don’t want to find yourself halfway across a one-mile lake and then start asking yourself why are you there. Yet the same thing happens repeatedly with investors. They buy a particular stock but don’t have any clear reason for doing so. Their brother-in-law said it was a sure thing. Or they read something in the Wall Street Journal. Or the stock had a low p/e ratio, or a high return on equity. In the right context, each one of these might be a perfectly good reason for making a purchase. However, frequently it is the case that people buy a stock because of a vague combination of a whole lot of reasons such as these. Then, when the market conditions change, they have no framework for deciding what to do next because they are not sure why they made the purchase in the first place.
When you know why you bought Intel, for example, you will have a stronger basis for knowing what to do when its price goes up, or down, or even stays the same. For instance, if Intel starts to go down in price and you bought it as a momentum play, then you will probably want to sell as quickly as possible. But if you bought it as an undervalued stock, and if the fundamentals have not changed, then you might want to buy more.
This brings me to my second golden rule.
Second Golden Rule of Investing: Know why you are buying a particular stock—don’t wait until its price goes up or down to think about it.
In my investment workshops I teach people how to analyze companies and then make a two-minute presentation to the whole group on their suitability as a stock purchase. This helps them to focus on substantial issues regarding these companies and gives a sound basis for making a buy/pass decision. They are also encouraged to maintain a stock book in which they list the pros and cons of each stock they are interested in.
Warren Buffett said that when he looked back over his investments in his early partnerships, the larger investments always did better than his smaller ones. He attributed this to a "threshold of examination and criticism and knowledge that has to be overcome or reached in making a big decision that you can get sloppy about on small decisions."
Finally, we know that to enjoy nature we shouldn’t be in a rush. This is also very true with the marketplace. So my final golden rule is:
Third Golden Rule of Investing: Take your time—you are investing for the rest of your life.
Buffett said recently that he doesn’t get paid for activity, just for being right. "As to how long we’ll wait," he continued, "we’ll wait indefinitely." No one makes you buy a stock. If you know what type of investor you are, and why you would buy a particular stock, then you will be better able to determine a reasonable price to pay for it. Then you can quietly wait until Mr. Market offers it to you at your price. Wishing you happy and successful investing!
http://www.conscious-investor.com/articles/articles/article0009.asp
Sunday, 23 August 2009
To Invest or Not to Invest: That is NOT the Question
To Invest or Not to Invest: That is NOT the Question
John Price, Ph.D.
Sorry Mr. Shakespeare. There is just no question about this one. And by invest, I mean investing for the long-term in quality companies.
Let's start by looking at some alternatives. Suppose you think that stocks are too much of a gamble and you like plain old fashioned CDs or treasury bonds. Perhaps you remember the good times from 1979 to 1981 when the average 3-month CD rate was 13.4%. Just ask yourself, why did banks back then pay such a high rate? The simple answer is that they had to because inflation at the time was at a record high. For the years just mentioned the average inflation rate was 11.58%. And don't forget the tax you would have paid on your interest.
In fact, when you include income tax and factor in the inflation rates for each year, you find that the annual return on investing in 3-month CDs is negative, around -1%. CDs may be fine as a temporary parking place for cash held for emergencies. But they are a non-starter for building long-term wealth.
How about real estate? There is no question that if you bought at the right time in the right location, you made a lot of money. But the stakes are high when you buy investment property and you really have to know what you are doing.
No matter how you do the calculations, I think that the best return for the average investor is going to be in a portfolio of stocks in great companies with proven records. Of course, there are risks. To get a handle on these, suppose we try something very simple and just invest in an index fund based on the S&P 500. But perhaps I invest at the wrong time, you might be thinking. Perhaps I will always invest when the market is at its peak. Well, let's have a look at that.
Consider two friends, Mr. High and Mrs. Low. For the past eleven years they have invested $10,000 each year in an S&P 500 index fund. Mr. High had the misfortune of investing when the index was at the highest point for the year. In contrast, Mrs. Low was much more fortunate. Each time she invested the index was at its lowest annual point.
Their wealth will increase over the years. And, of course, the average annual return of Mrs. Low is going to exceed that of Mr. High. But by how much? Before reading on, have a guess at what is going to be the difference.
Let's make a start. The high point for 1987 was 336.75 and occurred on August 25. By the end of the year it had dipped to 247.10 which means that Mr. High's $10,000 would be reduced to $7,337.79. Not an auspicious start.
In contrast, Mrs. Low would have invested on December 4 when the index 223.90. This converted her investment to $11,036.18, a much better result. The difference is even more stark when you annualize their returns. The annualized return for Mr. High is a dismal -58.63% whereas that of Mrs. Low, because it is over such a short period, is a whopping 279.18%.
In the following year Mr. High would have invested his next $10,000 on October 21 when the index was at a high of 283.65. By the end of the year it had dropped to 277.70. Using the $7,337.79 from the end of the previous year, his cumulative wealth at the end of 1988 would be $18,036.71. This gives him an annualized return of -12.5%. Similar calculations for Mrs. Low give her an annualized return of 19.0%.
Notice how the annualized returns become closer together. For example, repeating this for 1989 we would find that their returns are now 7.1% and 24.0%.
In fact, it is always the case that the difference between investing regularly at the market lows or at the market highs becomes less and less. Jumping forward to the end of 1998, the annualized return for Mr. High would be 15.77% and that for Mrs. Low would be 18.17%. You can think of these as the two extremes and you can see that there is not a lot of difference between them. Most regular investment strategies would be somewhere in the middle. But even Mr. High would have a portfolio of over $300,000 at the end of 11 years growing from his outlay of $120,000. (Please e-mail me if you would like a spreadsheet with the calculations.)
We all know that the last ten years has been a boom time in the stock market. Can we be confident of another ten years of record highs? Of course we can't. But we can be confident that the stock market will outperform CD rates. Remember the -1% mentioned above.
For a truly rosy picture I recommend the book "The Roaring 2000s" by Harry Dent. Basing his argument on the fact that the baby boomers are just reaching their peak spending years, he predicts that the Dow will continue to soar and will eventually reach at least 21,500, and possibly 35,000, by 2008.
So, with all respects to Mr. Shakespeare, the question is not whether to invest or not, but just how soon you can set up and follow through on a regular investment plan.
http://www.conscious-investor.com/articles/articles/article0007.asp
John Price, Ph.D.
Sorry Mr. Shakespeare. There is just no question about this one. And by invest, I mean investing for the long-term in quality companies.
Let's start by looking at some alternatives. Suppose you think that stocks are too much of a gamble and you like plain old fashioned CDs or treasury bonds. Perhaps you remember the good times from 1979 to 1981 when the average 3-month CD rate was 13.4%. Just ask yourself, why did banks back then pay such a high rate? The simple answer is that they had to because inflation at the time was at a record high. For the years just mentioned the average inflation rate was 11.58%. And don't forget the tax you would have paid on your interest.
In fact, when you include income tax and factor in the inflation rates for each year, you find that the annual return on investing in 3-month CDs is negative, around -1%. CDs may be fine as a temporary parking place for cash held for emergencies. But they are a non-starter for building long-term wealth.
How about real estate? There is no question that if you bought at the right time in the right location, you made a lot of money. But the stakes are high when you buy investment property and you really have to know what you are doing.
No matter how you do the calculations, I think that the best return for the average investor is going to be in a portfolio of stocks in great companies with proven records. Of course, there are risks. To get a handle on these, suppose we try something very simple and just invest in an index fund based on the S&P 500. But perhaps I invest at the wrong time, you might be thinking. Perhaps I will always invest when the market is at its peak. Well, let's have a look at that.
Consider two friends, Mr. High and Mrs. Low. For the past eleven years they have invested $10,000 each year in an S&P 500 index fund. Mr. High had the misfortune of investing when the index was at the highest point for the year. In contrast, Mrs. Low was much more fortunate. Each time she invested the index was at its lowest annual point.
Their wealth will increase over the years. And, of course, the average annual return of Mrs. Low is going to exceed that of Mr. High. But by how much? Before reading on, have a guess at what is going to be the difference.
Let's make a start. The high point for 1987 was 336.75 and occurred on August 25. By the end of the year it had dipped to 247.10 which means that Mr. High's $10,000 would be reduced to $7,337.79. Not an auspicious start.
In contrast, Mrs. Low would have invested on December 4 when the index 223.90. This converted her investment to $11,036.18, a much better result. The difference is even more stark when you annualize their returns. The annualized return for Mr. High is a dismal -58.63% whereas that of Mrs. Low, because it is over such a short period, is a whopping 279.18%.
In the following year Mr. High would have invested his next $10,000 on October 21 when the index was at a high of 283.65. By the end of the year it had dropped to 277.70. Using the $7,337.79 from the end of the previous year, his cumulative wealth at the end of 1988 would be $18,036.71. This gives him an annualized return of -12.5%. Similar calculations for Mrs. Low give her an annualized return of 19.0%.
Notice how the annualized returns become closer together. For example, repeating this for 1989 we would find that their returns are now 7.1% and 24.0%.
In fact, it is always the case that the difference between investing regularly at the market lows or at the market highs becomes less and less. Jumping forward to the end of 1998, the annualized return for Mr. High would be 15.77% and that for Mrs. Low would be 18.17%. You can think of these as the two extremes and you can see that there is not a lot of difference between them. Most regular investment strategies would be somewhere in the middle. But even Mr. High would have a portfolio of over $300,000 at the end of 11 years growing from his outlay of $120,000. (Please e-mail me if you would like a spreadsheet with the calculations.)
We all know that the last ten years has been a boom time in the stock market. Can we be confident of another ten years of record highs? Of course we can't. But we can be confident that the stock market will outperform CD rates. Remember the -1% mentioned above.
For a truly rosy picture I recommend the book "The Roaring 2000s" by Harry Dent. Basing his argument on the fact that the baby boomers are just reaching their peak spending years, he predicts that the Dow will continue to soar and will eventually reach at least 21,500, and possibly 35,000, by 2008.
So, with all respects to Mr. Shakespeare, the question is not whether to invest or not, but just how soon you can set up and follow through on a regular investment plan.
http://www.conscious-investor.com/articles/articles/article0007.asp
Wealth Eroding Companies
Wealth Eroding Companies
The Conscious Investor® selection process starts by eliminating risky stocks. Stocks that have high levels of debt, poor cash flow and unpredictable earnings growth. For example, consider the earnings history below of the two companies, the Celadon Group (low stability stock ) and Bed bath and Beyond Inc (high stability stock ).
Example of a High Stability Stock
Example of a Low Stability Stock
One of the primary things that Conscious Investor does is to identify companies with growth and stability like Bed bath and Beyond on the right and avoid companies like Celadon on the left.
Many high profile companies – that you may be investing in now – are potentially wealth eroding! The Demo Videos will show you the high price you pay for being a part of the “crowd”.
The demonstration will show you how you can avoid “cash-poor” and wealth eroding companies, including those that are promoted heavily by brokers and the media.
You will also learn simple, common sense tests to determine the financial health of thousands USA, Canadian and Australian listed companies.
Most significantly, you will learn how proprietary intellectual property within Conscious Investor® allows our clients to forecast earnings growth (and therefore future stock prices). Conscious Investor allows you to forecast earnings with five times the accuracy of Analysts Forecasts ... [ more details ].
By avoiding wealth destroying companies, $10,000 invested in the USA Conscious Investor Model Portfolio in March 2003 would have would now have a value of $16,940.81 as of August 2005.. The same investment in the Australian portfolio would have a value of $15,991.
Something that is perhaps even more important. Just imagine how much enjoyable your life would be if you didn’t have to be continually worrying whether you have been landed with a stock that is gong to turn out to be a series of disasters.
How Do You Select Your Stocks?
Recent research by Brad Barber and Terrence Odean of the University of California shows that individual investors tend to purchase stocks on the days after there is some sort of attention-grabbing activity. Specifically, they tend to purchase stocks on the days after there was high trading volume, when there were extreme movements in the price whether up or down, and when the stocks were in the news.
Earlier studies by Barber and Odean showed that investors were systematically reluctant to sell their stocks for a loss. We hate to have to admit that we have made a mistake. So we hang on to losers even though from a tax perspective it is better to declare our losses as soon as possible. Even more significant is the fact that by hanging on to their losers, investors were hurting their overall performance.
In this recent study the authors set out to look at the other side. Why do investors choose to buy particular stocks? This is a formidable problem for investors. In the USA there are over 10,000 stocks to choose from. In Australia, over 1,500.
They looked at the trading accounts of over 700,000 individual investors and 43 professional money managers. The results show that there is a difference between methods used by individual investors and professional investors. It seems that professional investors are less likely to invest in attention-grabbing stocks. Possibly this is because they have more time and resources, including computer programs such as Conscious Investor, for monitoring a larger range of companies.
In contrast, individual investors with limited resources are more likely to purchase stocks that capture their attention in the ways mentioned above such as stocks that are in the news.
Of course, there is nothing wrong with this approach if their choices turn out to be profitable. Alas, on average this does not turn out to be the case. Consider momentum investors who believe that if a stock rises in price, it is likely to keep rising. The researchers found that more people bought a stock when there was an abnormally high return on the previous day. Yet this resulted in underperformance over the next month against the stocks that were sold and against the overall market.
A similar result held for contrarian investors who believe that if there is an abnormal dip in price, then there will be a profitable rebound. Once again the outcome was underperformance over the following month.
You can see the details in the following chart for the four attention-grabbing categories: high volume, abnormally high return, abnormally low return and news releases.
BETTING ON THE WRONG HORSE
Underperformance Over the Following Year
Share Category: High Volume / High Return / Low Return / News
Underperformance: -4.27% / -6.10% / -7.77% / -2.82%
Source: Brad Barber and Terrance Odean. We assume the strategy is rolled over each month.
When these results are looked at in the context of research by Daniel Kahneman, the 2002 Nobel Prize winner in economic sciences, we shouldn’t be surprised. Kahneman showed that we make evaluations of an extended experience based on the most extreme component of the experience and by the most recent component. Everything else is given less importance. He refers to it as the peak/end rule.
An extremely painful surgical procedure will be reported as less severe if a less painful period is added at the end. The painful period can even be extended by the medical practitioner so long as the end is less painful.
In the case of the stock market, suppose we are thinking of making a purchase. The peak/end rule would bias us towards those stocks that have drawn our attention most strongly or about which we have the most recent news. And if these happen to be the same event such as recent high volume, then the relevant stock will be even more dominant in our mind as a stock to buy.
Not everyone believes that investors can be so easily influenced or that share prices are so rubbery. One of these is Myron Scholes, the Nobel Prize-winning economist, a supporter of the school that teaches that the share price always describes the true value of the company.
When he expressed this opinion to Bill George, the former CEO of the billion dollar company Medtronic, George replied, “Myron, I sit in the CEO’s chair, and I can tell you how easy it is to raise our stock price in the short term… We can go out and hype the stock.” The story goes that Scholes flung his pencil down on the table.
The point is that whatever the short-term effect, Barber and Odean’s research shows that any resulting price rises are not likely to stay for long. All in all, investors would be well to take heed of the saying known to the old prospectors—all that glitters is not gold.
http://www.conscious-investor.com/whatis/eroding.asp
The Conscious Investor® selection process starts by eliminating risky stocks. Stocks that have high levels of debt, poor cash flow and unpredictable earnings growth. For example, consider the earnings history below of the two companies, the Celadon Group (low stability stock ) and Bed bath and Beyond Inc (high stability stock ).
Example of a High Stability Stock
Example of a Low Stability Stock
One of the primary things that Conscious Investor does is to identify companies with growth and stability like Bed bath and Beyond on the right and avoid companies like Celadon on the left.
Many high profile companies – that you may be investing in now – are potentially wealth eroding! The Demo Videos will show you the high price you pay for being a part of the “crowd”.
The demonstration will show you how you can avoid “cash-poor” and wealth eroding companies, including those that are promoted heavily by brokers and the media.
You will also learn simple, common sense tests to determine the financial health of thousands USA, Canadian and Australian listed companies.
Most significantly, you will learn how proprietary intellectual property within Conscious Investor® allows our clients to forecast earnings growth (and therefore future stock prices). Conscious Investor allows you to forecast earnings with five times the accuracy of Analysts Forecasts ... [ more details ].
By avoiding wealth destroying companies, $10,000 invested in the USA Conscious Investor Model Portfolio in March 2003 would have would now have a value of $16,940.81 as of August 2005.. The same investment in the Australian portfolio would have a value of $15,991.
Something that is perhaps even more important. Just imagine how much enjoyable your life would be if you didn’t have to be continually worrying whether you have been landed with a stock that is gong to turn out to be a series of disasters.
How Do You Select Your Stocks?
“Neon stocks not the best buys”
[Australian Financial Review, 3/10/2003. Author: John Price, Executive Chairman, Conscious Investing Pty Ltd]
"How do Mr and Mrs Average Investor choose their stocks? Careful analysis of reports from stockbrokers? No time. Interviewing members of the board and senior management of the company? It's unlikely their calls would be returned.
How about looking at stocks with extreme price changes? Now you're getting closer.
If you add the "glitter" stocks that are in the news or have abnormally high trading volume, you'll have the bases well covered." [read the entire article]
[Australian Financial Review, 3/10/2003. Author: John Price, Executive Chairman, Conscious Investing Pty Ltd]
"How do Mr and Mrs Average Investor choose their stocks? Careful analysis of reports from stockbrokers? No time. Interviewing members of the board and senior management of the company? It's unlikely their calls would be returned.
How about looking at stocks with extreme price changes? Now you're getting closer.
If you add the "glitter" stocks that are in the news or have abnormally high trading volume, you'll have the bases well covered." [read the entire article]
Recent research by Brad Barber and Terrence Odean of the University of California shows that individual investors tend to purchase stocks on the days after there is some sort of attention-grabbing activity. Specifically, they tend to purchase stocks on the days after there was high trading volume, when there were extreme movements in the price whether up or down, and when the stocks were in the news.
Earlier studies by Barber and Odean showed that investors were systematically reluctant to sell their stocks for a loss. We hate to have to admit that we have made a mistake. So we hang on to losers even though from a tax perspective it is better to declare our losses as soon as possible. Even more significant is the fact that by hanging on to their losers, investors were hurting their overall performance.
In this recent study the authors set out to look at the other side. Why do investors choose to buy particular stocks? This is a formidable problem for investors. In the USA there are over 10,000 stocks to choose from. In Australia, over 1,500.
They looked at the trading accounts of over 700,000 individual investors and 43 professional money managers. The results show that there is a difference between methods used by individual investors and professional investors. It seems that professional investors are less likely to invest in attention-grabbing stocks. Possibly this is because they have more time and resources, including computer programs such as Conscious Investor, for monitoring a larger range of companies.
In contrast, individual investors with limited resources are more likely to purchase stocks that capture their attention in the ways mentioned above such as stocks that are in the news.
Of course, there is nothing wrong with this approach if their choices turn out to be profitable. Alas, on average this does not turn out to be the case. Consider momentum investors who believe that if a stock rises in price, it is likely to keep rising. The researchers found that more people bought a stock when there was an abnormally high return on the previous day. Yet this resulted in underperformance over the next month against the stocks that were sold and against the overall market.
A similar result held for contrarian investors who believe that if there is an abnormal dip in price, then there will be a profitable rebound. Once again the outcome was underperformance over the following month.
You can see the details in the following chart for the four attention-grabbing categories: high volume, abnormally high return, abnormally low return and news releases.
BETTING ON THE WRONG HORSE
Underperformance Over the Following Year
Share Category: High Volume / High Return / Low Return / News
Underperformance: -4.27% / -6.10% / -7.77% / -2.82%
Source: Brad Barber and Terrance Odean. We assume the strategy is rolled over each month.
When these results are looked at in the context of research by Daniel Kahneman, the 2002 Nobel Prize winner in economic sciences, we shouldn’t be surprised. Kahneman showed that we make evaluations of an extended experience based on the most extreme component of the experience and by the most recent component. Everything else is given less importance. He refers to it as the peak/end rule.
An extremely painful surgical procedure will be reported as less severe if a less painful period is added at the end. The painful period can even be extended by the medical practitioner so long as the end is less painful.
In the case of the stock market, suppose we are thinking of making a purchase. The peak/end rule would bias us towards those stocks that have drawn our attention most strongly or about which we have the most recent news. And if these happen to be the same event such as recent high volume, then the relevant stock will be even more dominant in our mind as a stock to buy.
Not everyone believes that investors can be so easily influenced or that share prices are so rubbery. One of these is Myron Scholes, the Nobel Prize-winning economist, a supporter of the school that teaches that the share price always describes the true value of the company.
When he expressed this opinion to Bill George, the former CEO of the billion dollar company Medtronic, George replied, “Myron, I sit in the CEO’s chair, and I can tell you how easy it is to raise our stock price in the short term… We can go out and hype the stock.” The story goes that Scholes flung his pencil down on the table.
The point is that whatever the short-term effect, Barber and Odean’s research shows that any resulting price rises are not likely to stay for long. All in all, investors would be well to take heed of the saying known to the old prospectors—all that glitters is not gold.
http://www.conscious-investor.com/whatis/eroding.asp
The Hidden Desire of Investors
The Hidden Desire of Investors
John Price, PhD
What is the most important question for a stockmarket investor?
Whether the market is undervalued or overvalued? No!
Whether interest rates will go up or down? No!
Whether a particular company is undervalued or overvalued? No!
Whether you should buy ABC or XYZ? No!
Whether Joe Bloggs, the famous analyst, says it is a great buy? No!
Tempting as it is to look for answers to these, we will soon see that they are misleading.
Yet, there are whole office buildings full of people pumping out answers to these questions. from their side they are not trying to mislead you. They are just trying to supply answers to these questions because people keep asking them and are willing to pay large amounts of money for the answers.
Even if they could be answered, the answers will not help you reach your financial goals. Why? Because they are the wrong questions.
Focusing on these questions will give you the illusion that you are a serious investor. Long hours reading all the articles and books, perhaps even poring over charts and financial reports, will only keep you locked in the system of struggle and mediocre success.
For others, the questions will give you an illusion of confidence and comfort because you are acting on the advice the latest Wall Street hotshot.
But illusions hold you in bondage. As Morpheus in the film The Matrix explains, "Like everyone else, you were born into bondage. Born into a prison that you cannot taste or smell or touch. A prison ... for your mind."
Chasing answers to these questions will keep you in this prison. At best you may from time to time do better than the S&P500 or some other index. At worst you will see your money slipping away with poor returns and excessive fees.
Consider the case of trying to determine whether a company is undervalued or overvalued. It may turn out to be undervalued using some academic model. And there are hundreds of books describing such models. But if it stays undervalued for the next 10 years it is not going to be much of an investment.
Even the whole notion of what is value is flawed. Suppose you go into a jewelry store and decide to buy an emerald ring for $2,000. The jeweler assures you that it is really worth a lot more and even arranges to get an insurance certificate for $4,000. Great! You are now congratulating yourself for buying something that is valued at 100% more than you paid for it.
What if you split up with the person you were going to give the ring to. No worries, you are thinking. "I'll just sell it back to the store." But when you go back in you are told that they will only pay $1,000 to buy it back. What you thought you were getting for 50% of its true value turns out to be overvalued by 100%.
All the other questions asked above can be dealt with in a similar manner. For example, Warren Buffett said that he has no idea what the market is going to do and whether it is undervalued or overvalued, whatever that may mean. What is more, he is not interested in knowing.
The same applies to interest rates. Buffett once said, "If the Federal Reserve Chairman Alan Greenspan were to whisper to me what his monetary policy was going to be over the next two years, it wouldn't change one thing I do."
There is only one question. Underneath it all, there is only one question. What is my profit rate or percentage return going to be?
The core activity of an investor is to estimate with confidence the percentage return over a specified holding period when buying stock in a company. And you want to be able to do this based on reliable numbers and information.
When you can do this with a range of companies you have a rational basis to decide when to buy stock in a particular company, when to hold, and when to sell. You can decide between companies. You can even decide between investing in a particular company or in bonds.
You are in control. The market is now working for you instead of against you. Because you know the expected return on a range of quality companies, you can wait until Mr. Market offers to sell you stock in one of these companies that will give you the return that you want.
You can do this and more in a few minutes with the Conscious Investor Investment System.
http://www.conscious-investor.com/articles/articles/article0005.asp
John Price, PhD
What is the most important question for a stockmarket investor?
Whether the market is undervalued or overvalued? No!
Whether interest rates will go up or down? No!
Whether a particular company is undervalued or overvalued? No!
Whether you should buy ABC or XYZ? No!
Whether Joe Bloggs, the famous analyst, says it is a great buy? No!
Tempting as it is to look for answers to these, we will soon see that they are misleading.
Yet, there are whole office buildings full of people pumping out answers to these questions. from their side they are not trying to mislead you. They are just trying to supply answers to these questions because people keep asking them and are willing to pay large amounts of money for the answers.
Even if they could be answered, the answers will not help you reach your financial goals. Why? Because they are the wrong questions.
Focusing on these questions will give you the illusion that you are a serious investor. Long hours reading all the articles and books, perhaps even poring over charts and financial reports, will only keep you locked in the system of struggle and mediocre success.
For others, the questions will give you an illusion of confidence and comfort because you are acting on the advice the latest Wall Street hotshot.
But illusions hold you in bondage. As Morpheus in the film The Matrix explains, "Like everyone else, you were born into bondage. Born into a prison that you cannot taste or smell or touch. A prison ... for your mind."
Chasing answers to these questions will keep you in this prison. At best you may from time to time do better than the S&P500 or some other index. At worst you will see your money slipping away with poor returns and excessive fees.
Consider the case of trying to determine whether a company is undervalued or overvalued. It may turn out to be undervalued using some academic model. And there are hundreds of books describing such models. But if it stays undervalued for the next 10 years it is not going to be much of an investment.
Even the whole notion of what is value is flawed. Suppose you go into a jewelry store and decide to buy an emerald ring for $2,000. The jeweler assures you that it is really worth a lot more and even arranges to get an insurance certificate for $4,000. Great! You are now congratulating yourself for buying something that is valued at 100% more than you paid for it.
What if you split up with the person you were going to give the ring to. No worries, you are thinking. "I'll just sell it back to the store." But when you go back in you are told that they will only pay $1,000 to buy it back. What you thought you were getting for 50% of its true value turns out to be overvalued by 100%.
All the other questions asked above can be dealt with in a similar manner. For example, Warren Buffett said that he has no idea what the market is going to do and whether it is undervalued or overvalued, whatever that may mean. What is more, he is not interested in knowing.
The same applies to interest rates. Buffett once said, "If the Federal Reserve Chairman Alan Greenspan were to whisper to me what his monetary policy was going to be over the next two years, it wouldn't change one thing I do."
There is only one question. Underneath it all, there is only one question. What is my profit rate or percentage return going to be?
The core activity of an investor is to estimate with confidence the percentage return over a specified holding period when buying stock in a company. And you want to be able to do this based on reliable numbers and information.
When you can do this with a range of companies you have a rational basis to decide when to buy stock in a particular company, when to hold, and when to sell. You can decide between companies. You can even decide between investing in a particular company or in bonds.
You are in control. The market is now working for you instead of against you. Because you know the expected return on a range of quality companies, you can wait until Mr. Market offers to sell you stock in one of these companies that will give you the return that you want.
You can do this and more in a few minutes with the Conscious Investor Investment System.
http://www.conscious-investor.com/articles/articles/article0005.asp
Identify the Right Company
How Conscious Investor Helps You Identify the Right Company
-- and What Price to Pay for It.
Conscious Investor® is a sophisticated, yet user-friendly, analysis tool that has been designed to allow all investors to follow a systematic, business-like approach to buying and selling stocks.
Until now, selecting outstanding companies and calculating what price to pay for them has been excessively challenging and time consuming, if not downright impossible.
Conscious Investor® completely changes the face of the selection process, and gives you an edge that has never before been available to ordinary investors. You will quickly gain immunity from all the conflicting opinions expressed daily by the talking heads, the gurus, the newsletters, and even your neighbors.
1. The first step is to scan individual sectors, or even the whole market, to find the small minority of stocks that meet our stringent “Buffett-style” criteria. This scanning combines crucial company information with proprietary tools to estimate future profitability of an investment in any of the companies.
These scanners alone will save you literally hours of time researching potentially wealth-eroding companies.
2. The second step is to perform more analyses on any of the companies that have been passed through the initial filters.
3. The third step is calculating the right price to pay. This is where the power of Conscious Investor really comes to the fore. It is not a question of whether a stock is undervalued or overvalued according to some theoretical model. Rather, what Conscious Investor does is calculate precisely what return you can expect under your own margin of safety.
http://www.conscious-investor.com/whatis/identify.asp
The next step is to use Conscious Investor to do further analysis on the companies that have lasted to this point. This is followed by the third step to determine if now is the time to buy stock in the remaining companies or to sell them if they are already in your portfolio.
If the current price is still too high to make a purchase (remember Warren Buffett says that you can pay too much for even the best of companies), then Conscious Investor will help you calculate a target price . This is the maximum price that you can pay to get your desired return under your margin of safety.
Similarly, if you are thinking of selling the stock, but the price is still too low, Conscious Investor will help you calculate a target price for selling.
-- and What Price to Pay for It.
Conscious Investor® is a sophisticated, yet user-friendly, analysis tool that has been designed to allow all investors to follow a systematic, business-like approach to buying and selling stocks.
Until now, selecting outstanding companies and calculating what price to pay for them has been excessively challenging and time consuming, if not downright impossible.
Conscious Investor® completely changes the face of the selection process, and gives you an edge that has never before been available to ordinary investors. You will quickly gain immunity from all the conflicting opinions expressed daily by the talking heads, the gurus, the newsletters, and even your neighbors.
1. The first step is to scan individual sectors, or even the whole market, to find the small minority of stocks that meet our stringent “Buffett-style” criteria. This scanning combines crucial company information with proprietary tools to estimate future profitability of an investment in any of the companies.
These scanners alone will save you literally hours of time researching potentially wealth-eroding companies.
2. The second step is to perform more analyses on any of the companies that have been passed through the initial filters.
3. The third step is calculating the right price to pay. This is where the power of Conscious Investor really comes to the fore. It is not a question of whether a stock is undervalued or overvalued according to some theoretical model. Rather, what Conscious Investor does is calculate precisely what return you can expect under your own margin of safety.
http://www.conscious-investor.com/whatis/identify.asp
The next step is to use Conscious Investor to do further analysis on the companies that have lasted to this point. This is followed by the third step to determine if now is the time to buy stock in the remaining companies or to sell them if they are already in your portfolio.
If the current price is still too high to make a purchase (remember Warren Buffett says that you can pay too much for even the best of companies), then Conscious Investor will help you calculate a target price . This is the maximum price that you can pay to get your desired return under your margin of safety.
Similarly, if you are thinking of selling the stock, but the price is still too low, Conscious Investor will help you calculate a target price for selling.
Earnings Forecasts Made Easy
Earnings Forecasts Made Easy
John Price, PhD
This article describes research on a new test that is included in the Conscious Investor Investment System. The result is that we can provide earnings forecasts on selected stocks that are five times more accurate than the average of analysts' forecasts.
In the long run, the value of a stock is the discounted value of the cash that can be taken out of the company during its remaining life. The usual analysis requires two inputs.
John Price, PhD
This article describes research on a new test that is included in the Conscious Investor Investment System. The result is that we can provide earnings forecasts on selected stocks that are five times more accurate than the average of analysts' forecasts.
In the long run, the value of a stock is the discounted value of the cash that can be taken out of the company during its remaining life. The usual analysis requires two inputs.
- Firstly, a forecast of how much cash the company is going to generate year by year. This is generally written as a percentage growth rate starting with the current cash.
- Secondly, a rate at which this cash should be discounted.
There are two extra ingredients that are often pushed to the background.
- The first is what do we mean by the cash that can be taken out of the company. The simple answer is the earnings. A better answer is one of the variations of free cash flow. I’ll talk about this in a later article. To keep things straightforward, here I will just use earnings.
- The second extra ingredient is confidence. How confident are we with the earnings forecasts? I have seen investors' eyes glaze over as they started imagining the yacht they were going to buy. They had found a stock and forecast its earnings to grow at 30% per annum. The market had missed it and now our starry-eyed investors were ready to make a killing. Alas, even though this was the forecast, what are the odds of it being accurate?
First, lets consider how well the professional do. In 1997 Lawrence Brown published a study in the Financial Analysts Journal looking at 130,000 forecasts by analysts from 1985 to 1996. He found that the average absolute error was a whopping 91.6 percent.
The difficulty is that analysts are starting behind the eight ball. They are assigned a group of companies and told to forecast their earnings. Unfortunately the earnings of companies such as Chiquita Brands and the Venator Group have more ups and downs and twists and turns than The Beast roller coaster in Cincinnati.
But we do not have this problem. No one tells us which companies to analyze. We have 10,000 companies to choose from so why not turn the problem around and focus on those companies about which we can have confidence?
One way to do this is to eyeball the historical earnings of companies and pick out those companies with earnings that grew smoothly. Next, extrapolate the data for these companies to forecast future earnings. This works to some extent, but I wanted to automate the selection/forecasting process.
This is where STAEGR™ enters, a new test I developed for my investment software Conscious Investor. It measures the stability of earnings growth from year to year and expresses it as a percentage. The maximum figure of 100% represents earnings that go up, or down, by the same percentage each year. The calculations are based on fitting an exponential curve to the historical data with more emphasis on the stability of the growth of recent earnings. Special adjustments are made for negative earnings, for extreme outliers, and for earnings near zero.
Using Value Line data, I considered all the companies with eleven years of earnings data from 1988 to 1998 inclusive. Next I divided the companies into ten groups ranging from those with the highest STAEGR over the ten years from 1988 to 1997 to those with the lowest STAEGR over this period. Each group contained 115 companies.
The next step was to calculate the earnings growth over the ten-year period using another Conscious Investor function. Earnings in 1998 were forecast using 1997 data and this historical growth figure. Finally the forecasted earnings were compared with the actual earnings in 1998.
The result of most interest to us was that the forecasted earnings of the high STAEGR group were extremely accurate. For the technically minded, the forecasted earnings explained 98 percent of the variation of the actual earnings. This can be seen in the accompanying chart.
The points represent the earnings figures, forecast and actual, of the companies in the group. Most of the points lie on or near a straight line which means that actual earnings were very close to the forecasts using historical earnings. The STAEGR of this group of 115 companies was 93% and up.
Another way of describing the results is that the average absolute error for this group of was 16 percent compared to the analyst error of 91.6 percent for all stocks. The difference is even more significant than it appears since the forecasts for the STAEGR method were for a full year whereas those of the analysts were only for the next quarter.
The results for the second group of stocks was similar. Their STAEGR ranged from 90% to 93%. This means that when we focus on stocks with the highest levels of STAEGR, say 90% and up, then the past growth or earnings is a statistically reliable predictor of earnings for the following year.
The accompanying chart shows the data for group of stocks with the lowest STAEGR.
In contrast, to the previous chart, clearly the dispersion of the data points is much higher. Notice that for some of the points the forecast is negative while the actual earnings are positive and for other points the opposite holds, positive forecasts resulting in negative outcomes.
The way these points are scattered is typical of the groups of stocks with lower STAEGR. In each case, the accuracy of the predictions using historical data was lower in two ways. Firstly the data points were more dispersed. Secondly the line of best fit had slopes further away from 1 and in many cases it was negative.
The study shows that you can have more confidence that earnings will continue to grow as in the past for stocks with a high level of STAEGR.
Here are some of the companies with the highest levels of STAEGR.
Company Ticker STAEGR
William Wrigley Jr. WWY 99.80%
Trustco Bank Corp TRST 97.20%
Bed Bath & Beyond Inc. BBBY 98.90%
Westamerica Bancorporation WABC 98.90%
Harley-Davidson, Inc. HDI 98.60%
Matthew's International MATW 98.50%
Johnson & Johnson JNJ 98.50%
C.H. Robinson Worldwide, Inc. CHRW 98.20%
Quality Systems, Incorporated QSII 97.50%
Old Second Bancorp, Inc. OSBC 97.30%
FactSet Research Systems, Inc. FDS 97.20%
Companies with the lowest levels of STAEGR were Chiquita Brands CQB (1.0%) and the Venator Group Z (0.8%).
Of course, just because we have confidence in our forecasts of future earnings of a company does not mean that we should rush out and buy it. But it does provide a solid basis for any buy/sell/hold analysis. Sorting stocks with the high levels of STAEGR for earnings as well as sales is another of the unique features of Conscious investor.
http://www.conscious-investor.com/articles/articles/article0008.asp
Is finding undervalued stocks still a mystery for you?
Is finding undervalued stocks still a mystery for you?
Do you know the story of the person looking under a street lamp for a coin that he lost? A passerby offered to help and asked where he lost it. The answer he received was that it was further up the street but there was no light there to search properly!
It is much the same in the stock market. People look for value amongst the arcane models and methods put out by academics and copied by the investment professionals. But they are looking in the wrong place.
They are searching for value in terms of trying to answer questions such as whether or not a particular stock is 30 percent undervalued or 20 percent overvalued. Then they wonder why their performance is mediocre at best. Remember that around 70-80 percent of fund managers, the main people who use these methods, actually under perform the market.
The problem is that they are confusing various static definitions of value with value in terms of performance. No wonder finding undervalued stocks is a mystery for most people.
The aim of successful investing boils down to one thing—being confident that you will get a healthy return. In other words value for an investor needs to be tied to future performance and not whether it appears to be a bargain at the moment.
A key quote from Warren Buffett explains how he approaches this.“Unless we see a very high probability of at least 10% pre-tax returns," he wrote, "we will sit on the sidelines.” You might be thinking, “Wait a minute, Buffett gets a much higher return than this.” You would be right in thinking this.
The point is that this is really his worst case scenario. It is like locking in a minimum of 10 percent and leaving open the possibility of much higher returns which in Buffett’s case is an average of over 20 percent per year.
In other words, a true undervalued stock is first of all a quality company and secondly it is selling at a price so that under a margin of safety you can be confident of receiving a strong return.
This is precisely what Conscious Investor® does.
Do you know the story of the person looking under a street lamp for a coin that he lost? A passerby offered to help and asked where he lost it. The answer he received was that it was further up the street but there was no light there to search properly!
It is much the same in the stock market. People look for value amongst the arcane models and methods put out by academics and copied by the investment professionals. But they are looking in the wrong place.
They are searching for value in terms of trying to answer questions such as whether or not a particular stock is 30 percent undervalued or 20 percent overvalued. Then they wonder why their performance is mediocre at best. Remember that around 70-80 percent of fund managers, the main people who use these methods, actually under perform the market.
The problem is that they are confusing various static definitions of value with value in terms of performance. No wonder finding undervalued stocks is a mystery for most people.
The aim of successful investing boils down to one thing—being confident that you will get a healthy return. In other words value for an investor needs to be tied to future performance and not whether it appears to be a bargain at the moment.
A key quote from Warren Buffett explains how he approaches this.“Unless we see a very high probability of at least 10% pre-tax returns," he wrote, "we will sit on the sidelines.” You might be thinking, “Wait a minute, Buffett gets a much higher return than this.” You would be right in thinking this.
The point is that this is really his worst case scenario. It is like locking in a minimum of 10 percent and leaving open the possibility of much higher returns which in Buffett’s case is an average of over 20 percent per year.
In other words, a true undervalued stock is first of all a quality company and secondly it is selling at a price so that under a margin of safety you can be confident of receiving a strong return.
This is precisely what Conscious Investor® does.
- It starts by identifying great companies in terms such as management performance, strong and consistent growth and minimum debt.
- Once you have decided on a particular company, the second step is to calculate the expected return over your investment period under your margin of safety. For example, you can calculate your performance over the next five years if the growth in earnings dropped by 50 percent from its past rate.
In this way Conscious Investor helps you hone in on companies that give you true value as an investor.
http://www.conscious-investor.com/whatis/findingvalue.asp
Maladies of get-evenitis and consolidatus profitus.
Get-Evenitis and Other Investor Maladies
By John Price, Ph.D.
What happens when you buy a stock and it drops by 30 percent? Do you sell or do you hang on hoping that it will come back to its original price? If you usually hang on, then you may be suffering from get-evenitis, a highly contagious disease particularly among males.
If you buy XYZ for $20 and it drops to $12, you now own a $12 stock. It does not matter how it arrived at this price. The question now becomes, "If I had $12, would I buy a unit of XYZ or would I buy something else?" If the answer is to buy XYZ, then hang on to it. Otherwise sell it. Unfortunately our ego will goad us into all sorts of rationalizations why we should not sell at a loss.
We want to be able to say, "It's only a paper loss. Don't worry. It will come back." Worse than having our teeth pulled is being forced to utter "I made a mistake." Even "There was a downturn in the market which caused XYZ to go south" is hard for most of us to say. Just as in real life, sometimes we have to face our mistakes and accept a loss before we can move on.
In 1995 Nicholas Leeson became famous for causing the collapse of Barings Bank, his employer. Over the previous years he had some serious losses. Instead of admitting them, in his own words, he "gambled on the stock market to reverse his mistakes and save the bank." But things just got worse and he ended up losing $1.4 billion.
It is unlikely that any of us are going to catch such an acute case of get-evenitis. More likely it will be a low-grade infection that eats away at our investing profits.
Get-evenitis has an associated disease called consolidatus profitus. Where you see one, you usually see the other. Sufferers of consolidatus profitus are often heard intoning "You can't lose money by taking a profit."
You may not lose money for that particular stock, but in the end what makes the difference is what we do with our profits. What if we put the money from the sale into a stock that is a major underperformer? We may be able to say that we made a profit on a particular stock. What we are not saying is that our portfolio went down because of the way we spent the profits.
If ABC goes from $20 to $30, then you now own a $30 stock. In the same way that you examined the loser above, think what you would do with $30. If you would buy ABC for $30, then keep the stock. If not, then sell it.
Of course, in real life things are a bit more complicated since we have to take into account transaction costs and taxes. But I think the general idea is clear-evaluate your stocks on what return you expect to get from them in the future, not on what they have done in the past.
Just how wide-spread are these diseases follows from a large-scale study carried out by Terrance Odean of the University of California in Davis. Reporting in the Journal of Finance, 1998, he found that people tended to trade out of winners into stocks that performed less well. Overall he found that people would have been better to sell their losers and keep their winners. Instead, they did the opposite, namely keep their losers and sell their winners.
To get a rough idea of the size of the losses, imagine an investor that has two stocks to sell, one a past winner and the other a past loser. Using data from Odean's study, the average return on the past winner over the next year was 2.4 percent above the market average compared to a 1 percent loss on the past loser.
This means that holding on to your winner would put you 2.4 percent ahead of the market during the next year. In contrast, holding on to the loser would put you 1 percent behind the market. But this is just what the average investor did. On average, investors choose to sell their winners more often than their losers.
The difference between the two strategies is even more marked when taxes are taken into account. When you claim a loss you are getting a tax rebate and so you want this as early as possible. In contrast, with a profit you are paying tax so you want to delay this as long as possible. But, as we just learned, the average investor tends to take profits early and losses late ending up on the wrong side of the taxman.
Actually, some investors are aware of these tax consequences. The above findings are actually for the months of January to November. In December, there was a slight tendency in the opposite direction with losers being sold more often than winners.
There are two primary explanations as to why investors sell winners more often than losers. The first explanation is what was described above, the aversion to having to admit that you made a loss is greater than the joy of being able to announce a success.
The second explanation is that investors generally believe in mean reversion for stock prices. This is the concept that over the longer term, stocks that go down will move back up to their original price whereas stocks that go up will come back down to their original price. Alas, if only the stock market was so simple. The results of Odean's study indicate that the opposite is more likely to happen, stocks that have gone up will go up even more, and stocks that have gone down will go down even more.
Of course, none of the above would come as a surprise to people familiar with the world of trading where the maxim "cut your losses short and let your profits run" is a basic tenet. In his famous book How to Make Money in Stocks, William O'Neil wrote, "If you want to make money in the stock market, you need a specific defensive plan for cutting your losses quickly and you need to develop the decisiveness and discipline to make these tough, hard-headed decisions without wavering."
The moral is to take a hard look at the stocks in your portfolio using objective criteria such as contained in Conscious Investor. Make your buy/hold/sell decisions on a careful appraisal of the profit you expect from them in the future and not on emotional attachment or pride. If you do this you will have inoculated yourself against the maladies of get-evenitis and consolidatus profitus.
http://www.conscious-investor.com/articles/articles/article0020.asp
By John Price, Ph.D.
What happens when you buy a stock and it drops by 30 percent? Do you sell or do you hang on hoping that it will come back to its original price? If you usually hang on, then you may be suffering from get-evenitis, a highly contagious disease particularly among males.
If you buy XYZ for $20 and it drops to $12, you now own a $12 stock. It does not matter how it arrived at this price. The question now becomes, "If I had $12, would I buy a unit of XYZ or would I buy something else?" If the answer is to buy XYZ, then hang on to it. Otherwise sell it. Unfortunately our ego will goad us into all sorts of rationalizations why we should not sell at a loss.
We want to be able to say, "It's only a paper loss. Don't worry. It will come back." Worse than having our teeth pulled is being forced to utter "I made a mistake." Even "There was a downturn in the market which caused XYZ to go south" is hard for most of us to say. Just as in real life, sometimes we have to face our mistakes and accept a loss before we can move on.
In 1995 Nicholas Leeson became famous for causing the collapse of Barings Bank, his employer. Over the previous years he had some serious losses. Instead of admitting them, in his own words, he "gambled on the stock market to reverse his mistakes and save the bank." But things just got worse and he ended up losing $1.4 billion.
It is unlikely that any of us are going to catch such an acute case of get-evenitis. More likely it will be a low-grade infection that eats away at our investing profits.
Get-evenitis has an associated disease called consolidatus profitus. Where you see one, you usually see the other. Sufferers of consolidatus profitus are often heard intoning "You can't lose money by taking a profit."
You may not lose money for that particular stock, but in the end what makes the difference is what we do with our profits. What if we put the money from the sale into a stock that is a major underperformer? We may be able to say that we made a profit on a particular stock. What we are not saying is that our portfolio went down because of the way we spent the profits.
If ABC goes from $20 to $30, then you now own a $30 stock. In the same way that you examined the loser above, think what you would do with $30. If you would buy ABC for $30, then keep the stock. If not, then sell it.
Of course, in real life things are a bit more complicated since we have to take into account transaction costs and taxes. But I think the general idea is clear-evaluate your stocks on what return you expect to get from them in the future, not on what they have done in the past.
Just how wide-spread are these diseases follows from a large-scale study carried out by Terrance Odean of the University of California in Davis. Reporting in the Journal of Finance, 1998, he found that people tended to trade out of winners into stocks that performed less well. Overall he found that people would have been better to sell their losers and keep their winners. Instead, they did the opposite, namely keep their losers and sell their winners.
To get a rough idea of the size of the losses, imagine an investor that has two stocks to sell, one a past winner and the other a past loser. Using data from Odean's study, the average return on the past winner over the next year was 2.4 percent above the market average compared to a 1 percent loss on the past loser.
This means that holding on to your winner would put you 2.4 percent ahead of the market during the next year. In contrast, holding on to the loser would put you 1 percent behind the market. But this is just what the average investor did. On average, investors choose to sell their winners more often than their losers.
The difference between the two strategies is even more marked when taxes are taken into account. When you claim a loss you are getting a tax rebate and so you want this as early as possible. In contrast, with a profit you are paying tax so you want to delay this as long as possible. But, as we just learned, the average investor tends to take profits early and losses late ending up on the wrong side of the taxman.
Actually, some investors are aware of these tax consequences. The above findings are actually for the months of January to November. In December, there was a slight tendency in the opposite direction with losers being sold more often than winners.
There are two primary explanations as to why investors sell winners more often than losers. The first explanation is what was described above, the aversion to having to admit that you made a loss is greater than the joy of being able to announce a success.
The second explanation is that investors generally believe in mean reversion for stock prices. This is the concept that over the longer term, stocks that go down will move back up to their original price whereas stocks that go up will come back down to their original price. Alas, if only the stock market was so simple. The results of Odean's study indicate that the opposite is more likely to happen, stocks that have gone up will go up even more, and stocks that have gone down will go down even more.
Of course, none of the above would come as a surprise to people familiar with the world of trading where the maxim "cut your losses short and let your profits run" is a basic tenet. In his famous book How to Make Money in Stocks, William O'Neil wrote, "If you want to make money in the stock market, you need a specific defensive plan for cutting your losses quickly and you need to develop the decisiveness and discipline to make these tough, hard-headed decisions without wavering."
The moral is to take a hard look at the stocks in your portfolio using objective criteria such as contained in Conscious Investor. Make your buy/hold/sell decisions on a careful appraisal of the profit you expect from them in the future and not on emotional attachment or pride. If you do this you will have inoculated yourself against the maladies of get-evenitis and consolidatus profitus.
http://www.conscious-investor.com/articles/articles/article0020.asp
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