The Quest for Sustainedable Earnings Growth

The Quest for Railroad-Track Growth
Often a Sign of Good Management, Sometimes Too Good to Be True

by Michael Maiello

Sustainable earnings growth is a Holy Grail sought by investors of all stripes. Value investing guru Benjamin Graham searched for it, choosing stocks based in part on a management team’s ability to generate an upward trend in earnings over many years. Graham was a bit accommodating with this requirement; he’d tolerate flat earnings for a year or two so long as it didn’t look as if earnings were about to break through the floor. He believed stock prices eventually would track growing earnings over time.

Growth investors expect more. BetterInvesting members look for companies that have a consistent history of producing better-than-average earnings growth. In innovation-based industries such as pharmaceuticals and technology, this can often mean double-digit earnings growth even as stocks in the broader market are buffeted by recession.

The managers of the U.S. Trust Focused Large-Cap Growth Fund explain the strategy this way: “Emphasis is placed on selecting high-quality companies having dominant industry positions, strong financials and consistently high earnings growth rates. Such companies tend to be brand name, globally dominant companies in open-ended growth industries such as devices/biotech/ genetics, information technology, global consumer brands and global financial companies.”

Consistent earnings growth implies that a company is in a position to maintain dominance and has the management team to do it. A good example is Johnson & Johnson. Its five-year earnings growth rate is 13.8 percent a year, creating enough steady increases to fund 14 percent growth in dividends over that time and more than 20 percent return on equity. J&J has a diversified product line across pharmaceuticals, home products and consumer goods. Its ability to distribute products around the world is difficult for competitors to match much less beat. This seems to be a company where the past growth is indicative of good management and a dominant market position. (Companies are mentioned in this article for educational purposes only. No investment recommendations are intended.)

Apple has grown earnings at well over 100 percent annually for the last five years, an amazing run as new products such as the iPod and iPhone were brought to market and then allowed to mature. These are widely acknowledged as the products of Steve Jobs’ genius, or at least of the culture of design he implemented and fostered during his tenure at the company. A lot of companies had MP3 players and smart phones before Apple, but only Apple made them cool.

But the Apple example brings us to the pitfall of this style of investing. Apple isn’t exactly like J&J. Apple has a good number of larger competitors (such as Sony and Microsoft) that can, and often do, undersell it. Also, fads change, so although Apple’s proven ability to remain in style is nice to know, investors can’t count on it. Look at what happened to The Gap, which was once a hot brand but hasn’t been in a decade.

Another concern is that consistent earnings growth is extremely hard to produce, so investors should try to learn more when seeing 15 percent growth year after year. Enron is among the most notorious examples of this principle. Between 1997 and 2000 the company’s management team somehow beat analysts’ earnings estimates more than three quarters of the time, an amazing feat we now know was made possible by accounting shenanigans that kept losses and liabilities out of the picture. Enron’s managers were also masters at inorganic growth — boosting earnings through acquisitions and asset sales rather than by improving fundamentals in its business.

Finally, watch out for “earnings smoothing,” the term academics and regulators use to describe cases in which company managers adhere strictly to the letter of generally accepted accounting principles, or GAAP, but not quite to the spirit of it. Some have charged that financial firms used loopholes and oversights in the complicated body of GAAP rules to consistently understate losses and potential losses they faced from subprime mortgage exposure early in the credit crisis. This explains why, as the crisis unfolded, there seemed to be so many new surprises from companies that had supposedly come clean.

One rule of thumb: If the earnings growth doesn’t have a simple explanation behind it, as in the case of, say, J&J, Wal-Mart or Apple, at the very least be skeptical.

BetterInvesting’s Online Tools

The Stock Selection Guide, the primary stock study tool of BetterInvesting members, helps you identify stocks with histories of sales and earnings growth. Our new online tool will walk you through evaluating a company using the SSG. Click on the Online Tools & Software link under the Tools & Resources menu on the BetterInvesting homepage. Your membership may already include access to the tool; if not, you can upgrade your membership to use it.



Michael Maiello, who wrote "Fly With the Fundamentals" for the January 2006 issue, is the author of Buy the Rumor, Sell the Fact (McGraw-Hill, 2004).

http://www.betterinvesting.org/Public/StartLearning/BI+Mag/Articles+Archives/0809fundamentalpublic.htm

Investing for Beginners

Investing for Beginners
with Joshua Kennon

One on One: Ellis Traub

If you want to take your first walk down Wall Street, Ellis Traub will be happy to show you the way

Ellis Traub
One on one

With four sons about to enter college, Ellis Traub lost everything. Today, he's a widely respected author, Chairman of the NAIC, and CEO of Investware. Learn how you can avoid the same mistakes he did - and save your pocketbook a lot of trouble.

PROFILE



Name: Ellis Traub
Occupation: Author and CEO
Location: Davie, FL
Education: Harvard, Left School to Fight in the Korean War


There are only ten terms that a person needs to know, all of them very intuitive. They can be applied to any company, whether it's General Motors or Lucy's Lemonade stand.".


-Ellis Traub




A Random Walk Down Wall Street: Ellis' Story

JK: You were an airline pilot for thirty-one years. What made you get involved in finance and investing?

Traub: I got involved in finance and investing out of necessity. I made some serious investment mistakes when I had four sons to send to college and lost nearly everything I had. That experience frightened me out of the market for a decade and a half. When I retired from the airline, I needed to take care of my pension and failed again. Fortunately, I stumbled onto the National Association of Investors Corporation (NAIC), a non-profit organization whose mission is to educate amateur investors to be successful. NAIC turned my financial life around.

I was inspired to learn and teach their methods and wrote a software program (to simplify calculations) that ultimately became the organization’s official stock analysis software. From that time forward, I've been dedicated to helping others avoid the same mistakes I made and encouraging them to find out how simple it is to invest successfully in common stocks.



JK: Your first experience with investing is something that a lot of my readers can identify with. One of your mistakes was investing on margin; could you tell us exactly what happened?

Traub: During the 1972 presidential campaign, I met a young fellow who was a broker for a major stockbrokerage firm. Concerned that I wouldn’t have enough to send the kids through school, I asked what I might do to beef up my savings. He recommended that I invest my savings in a hot stock and hold it until two weeks before the election at which time I should sell it for a huge profit. His justification was that the incumbents would continue to pump up the economy prior to the election.

I didn't have a clue and took his advice, selecting the stock that had the biggest daily gain the previous day for my "hot stock."

Needless to say, that was a bad strategy and, when half of Wall Street lost their proverbial shirts, I went along with them, not only having invested all my savings but margining as much as I could and borrowing all I could on my signature. When the dust cleared, I had a house, a car, the debt on them, and fortunately a good job flying airplanes.



JK: Very early on in the book you mention the other mistakes you made as a new investor. Everyday, people write in and they are doing the same things you mention - would you mind repeating them here?


Traub: Those mistakes largely stemmed from my mistaken belief that investing was above and beyond my ability, and the lack of basic investment knowledge.

I didn't start early enough to invest regularly and intelligently. I sought, listened to, and took the advice of someone that wasn't really qualified to offer counsel. I invested without understanding what a share of stock was and what I should expect of it. I sold it without understanding the proper reasons for selling a stock. And I stayed out of the market during my most productive years, losing the best opportunity to make money through long-term stock ownership.



JK: Your first experience with the stock market scared you away for more than fifteen years. Do you think that is a common thing with most new investors?


Traub: I think we're seeing that happening right now. This is the time people should review their holdings, keep the stocks with the best potential, sell the losers (not those with the depressed prices but those whose revenues and earnings aren't capable of growing adequately), and buy others with better potential while they're selling cheap. Instead, people are selling out and running. As simple as it is to learn how to make the right decisions, read Take Stock to find out just how easy, there's no reason for investors to go through the same experience as I did when they can make those now and prosper.



JK: In the book you mention that it was fortunate you didn’t have access to your retirement accounts, or else you would have thrown those into a hot stock as well. Does this mean you think people should have a retirement account [such as a 401k or IRA] separate from their everyday portfolio?


Traub: I think that folks should do anything they can to legitimately and efficiently maximize their accumulation of funds so that they can regularly invest a fixed amount. Certainly programs that offer matching funds or corporate contributions accomplish both goals and add the benefit of tax deferment as well.

The thrust of my comment is really that folks shouldn't jump into any "hot stock" without knowing what they're doing. Had I known then what I now know, I'd have done a better job of picking the company and stayed with it even if the price went down, provided that the company's fundamentals remained as sound as they were when I picked it. I’d also have continued to invest on a regular basis for the next fifteen years.



You don't have to be a genius to make money in the market



THE LONG HAUL

...sell the losers (not those with the depressed prices but those whose revenues and earnings aren't capable of growing adequately...)

- Ellis Traub


Does a person have to be well educated to do well in the stock market?

Traub: Absolutely not! Using technamental analysis as described in Take Stock, a novice can know all they need to about the quality of a company as long as they can tell the difference between a straight and crooked line and the difference between one that slopes up, down, or not at all.

There are only ten terms that a person needs to know, all of them very intuitive. They can be applied to any company, whether it’s General Motors or Lucy's Lemonade stand.



JK: You talk about technamental investing quite often. What exactly is it?


Traub: "Technamental" investing refers to the technical analysis, charting and identifying significant patterns, of the fundamentals of a company rather than the meaningless meandering of the price and volume of a stock. The movement and trends in revenues, profits, earnings per share, and profit margins tell the investor a great deal about the character and quality of a company and are predictive of the stock's price over the long term.



JK: For readers who don’t know, what is the difference between fundamental analysis and technical analysis?

Traub: Simply stated, fundamental analysis looks at the company and its track record. Technical analysis seeks to find patterns in the movement of prices and volume that will forecast the future movement of the price. There are nearly a hundred different methods of technical analysis. It would seem to me that if any were successful, there'd be only one.



JK: What about those who have their money managed by professionals? Why should they learn about investment analysis?


Traub: The obvious reason is that they can do just as good a job for themselves by understanding the salient issues and save the fees that they would have paid the pro.



JK: Why do you think most people do not invest?

Traub: Number one, they're afraid that it's a gamble and they will lose. They don't know that there's an approach that, while boring and not exciting, lets them earn money with their money.

Secondly, they don't know just how simple it really is to do just that, and how little time and effort it takes to do it right.

Thirdly, many choose to spend all they earn rather than recognize that the time will come when they'd like to be free from the necessity to work but won't be able to do so because they haven't contributed the little it takes every month to make that dream a reality.



JK: In regards to diversification, how many companies do you think is too many?


Traub: More companies than you can comfortably keep track of is too many. With software tools, you can keep track of more than 10 or fifteen comfortably; but, hey, Warren Buffett doesn't hold more than 25 . . . why should I?



The Buy-from-a-Sucker-Sell-to-a-Sucker School of Investing & How to Double your Money in Five Years

HOW MANY STOCKS ARE TOO MANY?

More companies than you can comfortably keep track of is too many. Warren Buffett doesn't own more than 25, why should I?

- Ellis Traub




JK: In the book you talk about the BFS/STS school of speculation. What is it?

Traub: The “buy from a sucker, sell to a sucker” school of speculation I refer to in the book is that for anyone to make money through the purchase and subsequent resale of a stock without the actual value of that stock increasing, she must rely upon the ignorance of either the seller or the buyer or both. The odds are definitely against not being the sucker on either one or the other end of that transaction. It's another way of expressing the "Greater Fool Theory." "I may be a fool to buy this stock at this price; but I'll find another fool to buy it from me at a higher price." This is what fueled the recently exploded "bubble."

The trading mentality relies strictly upon luck and "winning" from another "loser" in order to be successful, where buying and selling at a fair multiple of earnings, when the earnings grows, requires no loser to participate.



JK: What is the rule of five?

Traub: How one expresses it depends upon his/her personality. For the pessimist, it says, "For every five stocks you buy, one will be a loser." For the optimist, which I am, it says, "For every five stocks you buy, four will be good, one of which will do even better than you expect."



JK: What percent growth is necessary to double your money every five years?

Traub: Just under 15 percent, compounded. It's feasible to find the well-managed companies whose earnings can grow at such a rate. And, since we can easily pick those above-average companies, a portfolio of such stocks should easily beat the indexes that contain both below average and above average companies.



JK: One of the most important questions a stockholder can ask is, How long will it take me to recover my initial investment? How would they answer this?

Traub: Most who diligently and conservatively invest as we suggest can actually double their money every five years, not just make their investment back. This requires that they reinvest what they make each year and invest regularly in high quality growth companies for the long term.



JK: Some investors are paying multiples of 50, 60, 80, and 100 for stocks. What is wrong with this?

Traub: You'd have to be Methuselah to be able to get back your investment, much less to double it! Personally, I wouldn't want to have to depend upon anyone paying more than 30 times earnings, at the most, for me to profit from an investment.



JK: You tend to look down on stocks that pay dividends some would argue that it is sometimes preferable for a corporation to pay out a portion of its earnings if it cannot continue to utilize capital at the growth rate it once did. This is especially true in realty trusts and industries such as tobacco, banking, etc. What are your thoughts?

Traub: The nature of efficient investing is such that the actual value of what we own must grow in order for us to maximize the growth of our investment. If we purchase a stock at a reasonable multiple of its company's earnings, and those earnings double, we can sell that stock at any time at the same fair multiple and enjoy the doubling of its price or value. Diluting the retained earnings with which revenue-producing assets can be acquired erodes the ability of the company to produce the kind of growth we're looking for.

Peter Lynch once made the point in an article in Worth magazine that retirees would be better off continuing to invest in growth with its potential return than to hedge and allocate assets to income investing. His rationale, and mine, is that one can make up for a lot of 6 percent years with a 12 or 15 percent return, even with some down years along the way. I believe that one should invest as if she expects to live forever. The return will justify it.



JK: What about those who are approaching or are already in, retirement age?

Traub: Again, my advice is to invest as though you will live forever. Your return will be better over the long haul and you can, at least financially, live forever.



JK: I like your point that not everyone has to have an MBA or CFA behind their name to make them a good investor. If that was the case, then stock brokers would be making their living through their investments instead of commissions.


Traub: Actually, if all stockbrokers were CFA's or MBA's, they'd probably be able to do that. Many are simply salesmen who sell what they're told to sell. The serious professionals typically don't do as well as the amateur can, but not because they're not educated or intelligent enough. Mostly it's because they are burdened by constraints that the amateur isn't; and this is because they have the responsibility for handling other people's money rather than their own. You can be freer than they. You don't have to worry about moving the whole market when you get out of a stock or into it. And you don't have a company policy that keeps you out of some of the more promising, though riskier, stocks. You also don't have to churn your portfolio just to look good to your peers.



JK: Peter Lynch seems to have influenced your investment strategies. In fact, I consider his "One Up on Wall Street" one of the best books ever written.

Traub: So do I. One of his most inspirational quotes came from the first paragraph of that book where he says, "...anyone using the customary three percent of his brain can pick stocks as well or better than the average Wall Street expert." I believe it and my book tells people how to do it.



What was the turning point where you became an advocate of value investing?

Traub: Basically, it was my discovery of NAIC. The logic was irrefutable and the simplicity elegant.



JK: You talk a lot about the NAIC. Many critics would argue that this book is a thinly veiled promotion for joining. How do you counter to that?

Traub: I disagree. It's not at all thinly veiled! NAIC saved my bacon and provide me with the philosophy that enabled me to turn my financial life around. I've just taken what they've taught me and added some minor changes to things that I think could be done a little better. But their basic methodology and approach to investing has been eminently successful for more than fifty years. Why wouldn't I praise it to the heavens, express my gratitude to its founders and volunteers who mentored me and recommend to those looking to maximize what I tell them in my book that great networking and continuing education opportunities are available by joining the organization?



Reader Questions

SPENDING YOUR WEALTH AWAY

Many people choose to spend all they earn rather than recognize that the time will come when they'd like to be free from the necessity to work; but won't be able to do so because they haven't contributed the little it takes every month to make that dream a reality...

- Ellis Traub



Question: What does it mean when stocks are held in a street name?
- Caroline Douglas


Traub: It simply means that stockbroker through which you purchased the stock has actual possession of the stock certificates that make you a shareholder and that they hold them for you. You still have the opportunity to vote those shares; but you don't have the certificates to show for it.



Question: What do you think you would be doing today if you hadn’t dropped out of Harvard during the Korean War?
- Amanda S.

Traub: Goodness knows! I certainly wouldn't have been a pilot.



Question: Why do you think the P/E Ratio is important for investors to consider?
- Michael Wells

Traub: The foundation of long-term investing is the notion that the company's earnings drives the price of a share of its stock. The higher the earnings, the higher the price. The PE is an expression of the price of the stock, expressed as a multiple of those earnings. And it's important to consider that relationship when considering the value issues (the stock's price). You can tell a great deal about that price by considering the PE. If the stock is selling at a very low PE (lower than it typically has sold for), it's a signal that suggests that you need to find out what the current investors know that you don't that makes them unwilling to pay as high a price has they have before. If it's higher than average, it's best to wait until the price comes down before you spring for it.



JK: Related to that; what is the PEG ratio and do you think it is an important factor in considering an investment?

Traub: Where the PE ratio is a measure of investor confidence -- by that I mean that the greater the investor's confidence that the company can produce strong earnings into the future, the higher the price she will pay -- the PEG ratio is kind of the second derivative of that confidence. The actual ratio is the Price divided by projected earnings growth; and, the higher the growth
rate of earnings, the greater the investor confidence.

It's most often used to suggest a limitation on the estimated future PE of a company. Many will limit their PE forecast to a PEG ratio of 1.5 or one and a half times the projected earnings growth. If earnings are projected to grow at 15 percent, then a PEG of 1.5 would suggest that the highest reasonable PE would be 22.5 percent or one and a half times the growth the moment rate.



Question: Is reinvesting your earnings really important?
- E. Rogers

Traub: It sure is. It spells the difference between being able to double your money in five years and not being able to. The "magic of compounding" is what enables you to achieve a 15 percent appreciation in your portfolio. If you were to take out your earnings each year, assuming 15 percent growth, you'd achieve only 15 percent growth each year on your original amount which equals a dollar seventy-five for every dollar invested over a five year period. If, however, you leave your earnings in, then the five-year result would be about 2.01 for every dollar, since the additional 15 percent would grow at 15 percent each year as well.



Copyright © 2001 Joshua Kennon
http://beginnersinvest.about.com

http://beginnersinvest.about.com/library/weekly/nellist.htm

Value Investing: Bargains With Caveats

Value Investing: Bargains With Caveats

Focusing on a Company’s Intrinsic Value

by Virginia B. Morris

BetterInvesting methodology relies on studying a company’s revenues, earnings and other fundamentals in a search for quality growth companies whose stocks are selling at reasonable prices. Another type of fundamental investing seeks so-called value stocks.

Investors in value stocks typically look for bargains in the stock market that will allow to them to capitalize on the most basic of all investment dictums: Buy low and sell high. But this isn’t as easy as it sounds, despite the fact that Warren Buffett — perhaps the world’s most famous current practitioner of this approach — has amassed a financial empire through value investing.

The initial challenge in becoming an effective value investor is to recognize that many other investors, including those with deep pockets such as managers of mutual funds and pension funds, are also seeking substantial returns using this same strategy. These professional investors aren’t looking at today’s performance stars or at the long-term winners often considered the backbone of an investment portfolio. Rather, they’re trying to find the wallflowers nobody is asking to dance because they’re perceived as unattractive, ungraceful or just plain dull.

Once they’ve been discovered, however, these investments draw a great deal of attention and are wallflowers no more. The potential they offered as bargains disappears, and value investors begin the search again.

Companies that might fall into this category include well-known retailers that have been overshadowed by the competition, respected manufacturers that haven’t substantially updated their products in a generation and even financial services companies that have been buffeted by miscalculating the market.

Picking Through the Bargains

As a value investor, you need a long-term perspective and the conviction to wait out short-term downturns. This doesn’t mean, however, that value investing is always a buy-and-hold strategy. Instead, some value investors establish a target when they buy, and they sell off a portion—perhaps 50 percent — of each holding when its price has increased by a set percentage. This approach not only protects profits that have been realized but also frees up cash for new opportunities.

As with any investment strategy, the key challenge for value investors is to find appropriate investments. The place to start is by assembling a list of undervalued securities. Undervalued stocks, by definition, have price-earnings and price-to-book-value ratios that are lower than average as well as dividend yields that are higher than average as compared with comparable companies in their industry.

These are typically companies most investors aren’t buying and may be actively selling. Investors may be reacting logically to recent negative news about the company. Or they may be behaving inexplicably: Remember that emotions, including irrational ones, often play a significant role in the decisions investors make.

After you identify several candidates, you’ll need to narrow the field. One way to begin is to take a closer look at each company: Do you understand its business, and does the information you have about it tell a clear story? Do the long-term prospects seem promising, perhaps because the company has competitive advantages? Has the company been making money consistently over the long term, or are the financial results erratic?

You must also develop a set of criteria and a methodology that will help you determine a corporation’s intrinsic value, or what it’s really worth regardless of its current stock price. This approach is essential because value investing isn’t about buying cheap. It’s about paying a low cost for something of potentially long-term value.

Sticking With the Fundamentals

The fundamental information you’ll want to focus on in evaluating companies as value investments includes profit margins, the number of consecutive years a company has been profitable, patterns of revenues and earnings, and dividend payouts to see whether they’ve been consistent, steadily increasing or fluctuating considerably. And it’s always important to look at a company’s level of debt, particularly relative to its assets: Are they in balance, or does the level of debt seem burdensome?

Other fundamentals you might want to evaluate include a company’s current assets in relation to its total liabilities, or what’s known as the current ratio, and the company’s discounted cash flow — the estimated present value of cash it expects to receive in the future.

A Word of Caution

When it comes to value investing, there’s also one caveat to keep in mind: The same factors that make a stock a probable candidate for a value investor can also be the signs of imminent meltdown. That’s why it always pays to do your homework. It can protect you from companies whose business is smoke and mirrors while helping you identify firms whose stock is undervalued and worth considering for your portfolio.



Virginia B. Morris is the Editorial Director for Lightbulb Press.

http://www.betterinvesting.org/Public/StartLearning/BI+Mag/Articles+Archives/0208abpublic.htm

Your Brain and Investing

Your Brain and Investing


by Adam Ritt

Most investors are their own worst enemy. They buy high and sell low, allow the herd to dictate their decision-making and get caught up in the day-to-day movements of the market. The relatively new field of neuroeconomics, which studies how people make choices, helps explain why the market is anything but rational.

BetterInvesting recently spoke with Jason Zweig, author of the new book Your Money & Your Brain, about his research on neuroeconomics and what we can do to keep our worst impulses in check. Zweig is a senior writer for Money magazine and was also the editor of the revised edition of Benjamin Graham’s The Intelligent Investor. He serves on the editorial boards of Financial History magazine and The Journal of Behavior Finance.

How did researching this book change your views of investing?

The first and most important thing that came out of this is that it’s very comforting to find new proof of old truths. There’s very little I’ve changed about my own investing approach and not much I’ve changed about the investing advice I continue to give people.

The second principle that I took away from it is that people are unaware of how great an influence the unconscious mind holds over our decisions. I tell the story in the book about a doctor who buys a stock just because it has the same ticker symbol as his initials. There’s actually a whole field of research into this area, which psychologists call implicit egotism. It’s the idea that completely unconsciously, people favor things that are closely associated with themselves.

We often don’t know the real reason we’re doing things, and that can lead us to think we understand our decisions when in fact they never really were decisions in the first place. They were just ideas that came to us, and we didn’t really know why, but they felt right and we acted on them. This is what (author) Malcolm Gladwell calls “blink.” That’s a very good idea if you’re in a battle and you’re being shot at. If you think you should duck, you should. But it’s probably not such a good idea when you’re investing.

One of the main points of the book is that investors can solve a lot of the problems they’ll have to overcome by shutting out the noise. What are some of the negative effects of the instant availability of information?

If you’re hooked up to a machine that monitors your bodily functions and you watch an online stock ticker going down with a lot of red arrows, or you watch some CNBC show with some funny-looking man waving his arms and screaming, your blood pressure will go up, your pulse will climb, you’ll start breathing faster. Your temperature will rise, you’ll turn red in the face, you’ll sweat. Depending on how severe it is, you might be aware of the anxiety you’re feeling. Or it might not register in your conscious mind; it might just be a slight uptick in your body tension. But all it takes is a tiny change in your normal body state to skew your response.

If we take someone who’s mildly upset and ask him to sell a stock, he’ll accept a lower price than someone who’s in a neutral or positive mood. The evidence is overwhelming that paying attention to negative news does change your body, and when your body changes, your brain changes with it. This naturally inclines you toward making short-term-oriented decisions, panicky decisions and bad decisions.

It’s hard to say what the single worst thing an investor can do is, but my vote would probably be to pay close attention to the market news. Even if it’s good news, it will prompt you into doing things that are bad for you. And if it’s bad news, it will prompt you into doing things that are terrible.

Your underlying message seems to be to just follow a company’s fundamentals.

You really have to ask yourself, “What is the information that I would get from instantaneous sources that no one else would get before I got it?” Everyone else is watching CNBC, too. Everyone else can click on the same market website that I can.

There are a few reasons people feel the urge to do this. First, we all believe that being informed is better than being uninformed and that information must be inherently a good thing, because we know ignorance is bad.

Second, we tend to ignore what other people are doing. It’s very hard to remember that when you turn on CNBC, there are hundreds of thousands of other people watching at the same time.

We’re also afraid of what will happen if we don’t stay current. But there are experiments showing that when people do stay closely informed on what’s going on in their company, they actually earn lower returns. Because whenever you get news, you assume that it’s worth knowing, and because it’s worth knowing, it must be worth acting on. So if the news is good, you buy, and if the news is bad, you sell, when you actually would be much better off buying and holding (because of all the transaction costs from trading).

The thing to remember is that for the typical large-cap stock, the kind of company likely to be owned by BetterInvesting readers, through any market website you’ll see the price change three to 10 times a minute. Those one- or two-penny changes will register with you, and any time you see motion, your brain is designed to extrapolate from it.

So if a stock has two upticks in a row, you will expect a third. It’s the watching that tends to lead to doing.

Think back to the days when our parents were investing. Unless people lived in a major city, or unless they subscribed to The Wall Street Journal, they often would go for an entire week without being able to update a stock price. I distinctly remember in the 1970s, my dad buying a stock and awaiting the following Friday’s newspaper, because that was the one with the stock prices.

Here’s a simple test: If more information were good for people, then clearly, the returns of the average investor should go up as more information becomes available. But in fact, that’s not what we’ve seen.

In my opinion, the single biggest advantage individual investors have over professionals is that they don’t have to play that game. They can choose to say, “It’s 1:13 in the afternoon, and I don’t care what my stock price is.” If you run a mutual fund, you can’t do that.

Does having a system help us avoid the pitfalls you describe in the book?

Absolutely. Probably the best sentence ever written on investing is Benjamin Graham’s old saying, “The investor’s chief problem — and even his worst enemy — is likely to be himself.” That’s really true. Emotion isn’t always bad, but emotion that’s unchecked by reason usually is bad. It’s nice to have some emotional input into your decisions ... but if all you’re doing is going on your gut feeling, you’re highly likely to be making a mistake. You need to mix your emotions with some analysis.

The way you prevent yourself from being your worst enemy is by putting some policies and procedures in place. What you can do is say, “Well, it’s Jan. 1 or July 1, that’s the time of year when I do my rebalancing, and my target allocation of stocks is 70 percent to 80 percent. Right now I’m feeling nervous, so I’m going to go to the low end of my range.” If your gut feeling tells you the market is cheap, then you can go to the high end of your range.

But the important thing is that you have a range and you honor your own procedures; you don’t break your own rules. Because any time you break your own rules, you’re probably making a mistake.

But at some point, you have to go with your gut, because no system can tell you everything you need to know about a stock.

That’s true, but the key here is to make as few decisions as possible.

It must be hard to maintain discipline when you see the market rewarding stocks that you won’t buy.

It’s very hard. That’s why it’s important to have an investing policy statement, which is the starting point. This essentially explains what your money is for and how in general terms you’ll go about achieving those goals.

But you also need something more specific, a contract with yourself. It needs to be in the form of a checklist, and it needs to say, “I will do this” and “I won’t do that.” You should have it witnessed by a family member or a friend, and you should try to form a little support group of like-minded people.

The important thing is to track your decisions. If — heaven forbid — you break any of your rules, at the time you’re breaking it you have to write down why you’re doing it. Later on, whether the result is good or bad, you have to go back and look at what you said you were trying to accomplish and see whether breaking the rule was worth the trouble.

My prediction is that at least 80 percent of the time, you’ll be sorry you broke your rule.

Common Errors in Decision-Making

The following are some common biases people have, as identified by Max Bazerman of the Harvard Business School. This is adapted from a Babson Staff Letter of Nov. 11, 2005. For the complete article, see BetterInvesting’s February 2006 issue.

Availability: Making decisions on the vividness and recency of information.

Irretrievability: Failing to think beyond a preconceived notion.

The confirmation trap: Unconsciously searching for supporting evidence that we made the right decision.

Insufficient anchor adjustment: Seeing a situation very similar to a past event and interpreting it to mean the same thing will happen this time around.

Hindsight: Changing our evaluation of something or someone after events play out, when we have perfect knowledge.

Regret avoidance: Tending to feel more regret in an act of commission vs. omission. Buyers feel much more remorseful about committing to a purchase and having to live with the decision (be it a good decision or not).

Internal escalation of commitment: Increasing the support of an initial decision over time.

Keys to a Balanced Investing Life

Take the global view. Use a spreadsheet that emphasizes your total net worth — not the changes in each holding.

Hope for the best, but expect the worst. Diversify and learn from market history to help keep you from panicking.

Investigate, then invest. A stock is a piece of a living corporate organism. Study the company’s financial statements.

Never say always. No matter how sure you are that an investment is a winner, don’t put too much of your portfolio in it.

Know what you don’t know. Don’t believe you are already an expert. Ask what might make an investment go down; find out if the people pushing it have their own money in it.

The past is not prologue. Never buy a stock just because it has been going up.

Weigh what they say. Before trying any strategy, gather objective evidence on the performance of others who have used it in the past.

If it sounds too good to be true, it probably is. Anyone who offers high return at low risk in a short time is probably a fraud.

Costs are killers. If you want to get rich, comparison-shop for trading costs and trade at a snail’s pace.

Eggs go splat. So never put all your eggs in one basket.

Adapted from Your Money & Your Brain (Simon & Schuster, 2007) by Jason Zweig.


Adam Ritt, Editor, BetterInvesting Magazine.

http://www.betterinvesting.org/Public/StartLearning/BI+Mag/Articles+Archives/1007cspublic.htm

Dividend Growth: the Hidden Fundamental

Dividend Growth: the Hidden Fundamental

Yield Tells Only Part of the Story

by Michael C. Thomsett

Many investors, even the most conservative ones devoted to fundamentals, tend to overlook or ignore dividend yield as a primary indicator. One reason is that current yield — dividend per share divided by the stock’s price — is somewhat misleading.

Dividend yield is an oddity because the yield increases as the stock price falls. So you could be getting an ever-growing percentage of an ever-shrinking pot. Think back to 2008, for example. When prices of many stocks declined broadly, what happened to a stock falling by $5 a month and paying an annual dividend of $1 per share? As the price fell, the yield rose (see table, below).

In this case, the dividend yield doubled over six months. Good news by itself, but over the same period you lost half your value per share in the stock. This is one of the many reasons investors discount dividend yield as an indicator; it doesn’t reflect the relationship between fundamental value and current price. Whenever the market’s technical side is down — from late 2008 through early 2009, for example — yield is going to be misleading. If a company’s stock price has fallen because of inherent weakness of the company, its sector or the larger economy, the yield isn’t as sound a fundamental indicator as other tried-and-true metrics, such as revenue and earnings trends and the current, debt and price-earnings ratios.

Making Dividends a Reliable Indicator

But there’s another way to analyze dividends to identify exceptional opportunities, even in depressed markets. This requires analyzing dividends as part of a long-term trend and in conjunction with other key indicators. This not only improves the accuracy of the review but also helps narrow the list of viable investment candidates.

As of late April 2009, for example, it was quite difficult to select high-quality stocks based on the traditional analysis of revenue and earnings. So many companies — more than usual by most standards — were available at bargain prices, but were all of these exceptional long-term, buy-and-hold investments? A study of revenues and net earnings doesn’t reveal the distinctions between two types of companies: those most likely to bounce back once the recession ends and those suffering long-term degeneration in value.

Unfortunately, many firms honored in the past as safe and sound blue chips haven’t always endured. For example, General Motors and Eastman Kodak, two of the shining stars of the 20th century, have today become low-value, high-risk has-been investments.

They’re hardly alone. A few years ago, the financial sector was considered among the safest and most promising of long-term investment sectors. Companies such as Washington Mutual, Citigroup and Bank of America were held in high esteem. Today, however, the financial sector is in very poor shape and many companies — including Citigroup — will probably never recover fully.

We need to carefully quantify the popular belief that after prices fall, smart investors should gobble up bargain-priced companies. Investors look for companies that combine demonstrated long-term growth and prospects for stock price appreciation. But revenues and net earnings don’t tell the whole story after a down year. For example, consider these three well-known companies: Johnson & Johnson (ticker: JNJ), Coca-Cola (KO) and General Electric (GE). Which of these hold promise for growth in coming months, and which aren’t as likely to recover? (Companies are mentioned in this article for educational purposes only. No investment recommendation is intended.)



Click image to enlarge

Let’s begin by comparing 10 years of results for three popular indicators: revenues, net income and dividends per share (see tables, above). A glance at only the revenues and net income seems to place all three companies on the same footing. All have shown a decade of growth, the only major slip being GE’s net income decline in 2008. But the differences are more significant when you compare dividend history. Over the past decade, both Johnson & Johnson and Coca-Cola increased their dividend every year without fail. GE reduced its 2008 dividend for the first time in 10 years.

By itself, the dividend history doesn’t condemn GE. But when viewed with other important indicators, an investor likely will conclude that GE is the least promising of these three companies. For example, the price range for General Electric in 2008 was from $38 down to $12 per share, a drop of 68 percent. (In comparison, Johnson & Johnson ranged between $72 and $52, a 28 percent difference, and Coca-Cola ranged from $65 down to $40, a change of 38 percent.)

Another important difference is found in the debt ratio, the portion of total capitalization represented by long-term debt. Although Johnson & Johnson (15.6 percent) and Coca-Cola (11.5 percent) have kept long-term debt at the same level for the decade, GE’s has increased to 74 percent (not unusual for a company with a financial services arm) from 55 percent 10 years ago.


Click image to enlarge

Dividend Achiever Status as a Primary Test

Dividend yield is virtually useless as a trend indicator, especially compared with the more meaningful revenue, net profit and debt ratio changes over time. But companies that have increased their dividend every year for at least 10 years — the so-called dividend achievers — tend to be better-managed companies with lower-than-average price volatility, little or no core earnings adjustments and more capability to weather recessionary times. By definition, a company able to increase its dividends has to be in control of its cash flow.

Mergent Corporation follows dividend achievers and has created an index of companies meeting this criterion. In its most recent report, fewer than 300 companies met this important test. (Standard & Poor’s compiles a separate index called the Dividend Aristocrats.)

Increasing dividends every year without fail is a good test of working capital and quality of management. The dollar value of dividends is relatively small. Johnson & Johnson’s dividend of $180 annually for 100 shares is peanuts. But as a symptom of quality, the dividend achiever company is exceptional.

Growth in dividends also is important if you reinvest your dividends automatically through a dividend reinvestment plan, or DRIP. When Johnson & Johnson credits your account with dividends, you can let the cash ride or earn about 1 percent in your brokerage cash account, or you can reinvest it in more shares of Johnson & Johnson and get 3.6 percent on the growing share total. Dividend reinvestment is a smart idea, and with dividend achievers, the compound yield goes up every year.

Dividends by themselves are a small piece of the bigger puzzle. But limiting your search to the very small group of companies that have grown their dividends every year helps cut down the list of potential investments. Combined with analysis of revenue, net income, P/E, debt ratio and other key fundamental tests, dividend trends help you decide whether depressed-price companies are never going to come back — or are the most promising candidates for a strong rebound.


Michael C. Thomsett of Nashville, Tenn., is author of over 70 books. His latest is Winning With Stocks (Amacom Books), which includes practical suggestions for picking stocks based on fundamental analysis. Thomsett is also author of Annual Reports 101 (Amacom Books), Getting Started in Fundamental Analysis (Wiley) and Investment and Securities Dictionary (McFarland).

http://www.betterinvesting.org/Public/StartLearning/BI+Mag/Articles+Archives/0909linespublic.htm

Cautiously, Small Investors Edge Back Into Stocks

Cautiously, Small Investors Edge Back Into Stocks

By JACK HEALY
Published: September 10, 2009

Like millions of ordinary investors, Cindy and Eric Canup are still recovering from Wall Street’s big downturn. Their portfolio is off by 25 percent. They are mindful of their spending. And their dreams of buying land in Northern California or Oregon have been delayed five to 10 years, until they can rebuild their retirement accounts.

Joe Mancini of Fredericksburg, Va., has losses on his portfolio of around 30 percent and has had to put off his retirement.

Mr. Mancini with his wife, Patricia, and their dog, Joshua. He has sold some financial stocks and become more conservative.

Yet with no guarantee they will ever be made whole again, individual investors like the Canups, who live in Oakland, Calif., are sticking with the stock market. Recently, with help from their financial adviser, they nudged some of their cash into mutual funds and took on riskier investments. They have even stopped tossing unopened 401(k) statements into a filing cabinet.

“This time last year it was doom and gloom and dire,” said Ms. Canup, 48, who works for the health care provider Kaiser Permanente. “I’m kind of amazed that we’re able to get back in as quickly as we are.”

When the financial crisis hit, some of Wall Street’s prophets warned that individual investors would be lost for years. The gospel of building a diversified portfolio, buying regularly and holding on till retirement, appeared dead. But despite a rout that erased fortunes and upended retirement plans, few smaller investors have folded their portfolios or cashed out: While they are poorer today and still leery of the markets’ returns, many are still chasing the gilded promise of profits and wealth.

“It’s got a track record,” Linda Blay, a bookkeeper in Orange County, Calif., said of the stock market. While her portfolio is still off by 30 percent, she said that “it outperforms any investment. I think it’ll come back.”

Participation in 401(k) plans held steady in 2008, even as the average account lost 28 percent of its value, according to Hewitt Associates, which tracks retirement plans. More people moved their money into cash or bonds for safety, but they did so at the margins. Over all, the contribution rate dropped less than half a percentage point.

And in the first half of 2009, when stocks hit their worst levels and then pivoted higher, only 9 percent of investors made trades in their 401(k) accounts, according to Vanguard. At the same time, alternative investments like real estate have suffered mightily, while interest rates on certificates of deposit or even high-yield savings accounts have plunged, making them less attractive.

“Inertia has really ruled,” said Pamela Hess, director of retirement research at Hewitt. “The vast majority of participants have changed nothing — not if they save, not how much they save. Nothing.”

Now, some of the money that fled stocks for safe harbors like money-market funds and government bonds last year is beginning to return. Even with trillions still sheltered on the sidelines, some $56 billion has poured into equity funds since April, according to the Investment Company Institute.

Of course, making money again can do a lot to bolster anybody’s confidence.

Over all, the average Vanguard 401(k) balance grew by $3,300 through the end of June, up about 6 percent for the year — not a great return, but better than before, according to the firm’s most recent numbers. In the first six months of 2008, the average Vanguard account lost $6,898, or nearly 9 percent, of its value.

As of Thursday the Standard & Poor’s 500-stock index was up about 10 percent for the year. But the index is still down a third from its peak, and investors are uncertain whether stocks will continue to rise in a fitful recovery hampered by high unemployment and sluggish consumer spending. Even with 10 percent annual returns, it would take typical stock investors close to three years to recoup the funds they had at the beginning of 2008.

Daniel Kelhoffer, 67, an investor in Georgia, visited his son in Germany this summer and cruised the lake near his house in his wooden 1959 Chris-Craft motorboat, encouraged by the steady rise in his monthly account statements. Joseph Fredrick, an investor in Cincinnati, exulted that, largely because of his financial adviser, his portfolio had fallen only 12 percent since the market tanked.

In North Carolina, a retired Wachovia executive, Robert Paynter, lost tens of thousands of dollars when his stock options and Wachovia shares hit the skids. In October, he told The New York Times that he felt as if he were witnessing his own death with each plunge of the stock market. This summer, he bought a year-old Corvette convertible. And while he and his wife canceled a trip to Europe, they are contemplating a Mediterranean cruise next year.

“I’m feeling a whole lot better,” he said. “As ugly as it got, I never got to a point where I thought I was going to have to go back to work or miss a meal. I can take a lot bigger hit than I thought I could.”

After the crash, Gil Livingston, a retired Hewlett-Packard manager from suburban Detroit, decided he would manage his own money instead of letting asset managers at UBS handle his portfolio. He missed the bottom of the market in early March, but has made money from well-timed purchases of technology stocks and investments in emerging markets.

“I’m slowly sticking my head back out of the ground,” he said. “I’m doing fairly well. My equities are up.”

Mr. Livingston, 67, and his wife still have a winter home in Cape Canaveral, Fla., and say they have not been forced to curtail their lifestyles. With their portfolio off by 20 percent, though, they have put off traveling and are considering whether to raise some cash by trading in their Michigan home for something smaller.

But many are more deeply scarred from the financial and psychological effects of their losses.

Last autumn, as his retirement account was plummeting in value, Joe Mancini decided to sell some financial stocks and seek more conservative investments like bonds, gold and metals funds. Even though he was able to cut his losses, he and his wife are still down about 30 percent.

“A few years ago I was hoping to retire when I got close to 60,” said Mr. Mancini, who is 58 and works for an electronics equipment distributor. “I can’t even put a date on it now.”

If thriftier consumers become a legacy of the recession, Wall Street’s plunge may have created a generation of more cautious individual investors.

Robert Furey, who works at a computer company in Naples, Fla., said he had followed all of the conventional rules of investing: he planned for the future, bought a diverse array of stocks, bonds and index funds and never tried to time the markets. He lost a decade’s worth of gains when the stock market plunged, and said he did not know whether he would ever trust the markets again.

“I was a deer in the headlights,” he said.

As Wall Street raced higher in the last few years, Ben Silbert, 38, a corporate lawyer in Manhattan, said he tried to talk his wife into funneling more of their money into stocks. But now, with their portfolio down 15 percent since last August, Mr. Silbert said he wanted to make a shift toward fixed-income investments.

“I’ve seen what can happen,” he said. “It’s been a good lesson. It’s been an eye opener for me.”


http://www.nytimes.com/2009/09/11/business/11investors.html?_r=1&ref=business

Start by Investing in Yourself

http://www.betterinvesting.org/demo/GS-Stock-v1.0-ps.htm

How to Invest in Today's Turbulent Stock Market

How to Invest in Today's Turbulent Stock Market

Location: BlogsAsk Doug!
Posted by: Doug Gerlach 10/1/2008 1:25 PM

With all of the uncertainty in today's markets, it can be a confusing time to be an investor.

On Monday, September 29, 2008, investors saw the largest point drop in the Dow Jones Industrial Average in its 102-year history.

On Tuesday, two-thirds of that loss was recovered.

On Wednesday, who knows what could happen?

But looking back at the stock market over time, it's clear that it's seen worse and has always recovered. There's no reason to believe that the market won't come back around -- given time, that is. Those investors who put their confidence in the resiliency of the U.S. stock markets will be rewarded, as long as they maintain the proper perspective. In five years, investments made at today's bargain basement stock prices will quite possibly be seen as smart moves.

Here are a few points to consider as you plan your moves in the weeks and months ahead:

1. Remember that the market always operates in cycles, expanding and contracting over time, but on a completely unpredictable schedule. Investing regularly throughout the peaks and valleys is key to a successful long-term investing approach. In fact, wealth is often created in greater scale as the result of investing during down markets. Of course, this requires courage and the conviction that the markets and your holdings will rebound.

2. Most certainly, don't stop investing in the stock market. Many stocks that you study will be offered at or near historically low valuations, and if you try to wait for the market to reach its absolute low, or if you wait for a "clear sign" that the market is rebounding, you'll miss plenty of opportunities. I've been increasing the monthly contributions that I make to both of my investment clubs, and expect to reap the rewards from the regular investments that my clubs will continue to make in the coming months.

3. Focus on quality companies, now more than ever. It's likely that the interest rates will rise and access to debt will tighten, so companies that are highly dependent on borrowed capital to finance growth or operations may struggle. Companies with low credit ratings should be avoided. Consider the trend of a company's debt-to-equity ratio over the past few years, as in Section 2C of Toolkit 6's Stock Study form. Look to the Complete Roster of Quality Companies on StockCentral for ideas to study.

4. Consider carefully before investing or continuing to hold financial companies. There's no doubt that the regulatory climate will change in the coming months and years, with big changes in government oversight of financial markets and the structure of financial companies. I expect continuing consolidation of financial companies, with mega-firms swallowing up smaller concerns, leading to a general state of uncertainty about the financial sector. With so much being stirred up at present, it may be some time before the dust settles and the winners in the sector become apparent.

5. Re-evaluate existing holdings in light of their exposure to the credit markets, the housing market, and their levels of debt. Companies that don't pass muster are prime candidates for replacement. With the high number of bargains available now in the market, chances are good that you can find stocks with higher quality and higher total return prospects than your questionable current holdings. Don't lose sleep over stocks that don't inspire confidence -- upgrade your portfolio by swapping out these stocks with better prospects.

As you invest in your personal or investment club portfolio in the next few months, always remember your long-term focus. ICLUBcentral's tools are designed to help you build wealth in the stock market over a five-year and longer horizon. Patience and confidence go hand in hand with successful investing.


http://www.stockcentral.com/learn/blog/tabid/159/EntryID/43/language/en-US/Default.aspx

Buffett dwells on book value

Over long periods, a stock will move in tandem with company's performance. In the short term, there may be no correlation between the two.

Stock price movements are so fickle. You cannot and should not measure a CEO's performance based on how much the stock has gained from year to year.

Earnings are pliable and a CEO can manipulate them in dozens of ways to inflate a company's bottom line fro several years. Using restructuring charges, asset sales, write-offs, employee layoffs, or "asset impairment" charges, corporations can generously, and legally, cook their books and give the impression they are functioning on all cyclinders, when, in fact, they could be throwing their profits down the drain.

For all the reasons above, Buffett dwells on book value. Understanding changes in book value is key to assessing whether a company is truly worth owning, in Buffett's view.

Buy Points

http://spreadsheets.google.com/pub?key=tyzNUux1KuWALlyinFp1h8g&output=html

Did you sell when the stocks were in stratosphere?

Following my previous posting on "Did you buy when the stocks were on sale?", I thought it would be interesting to write something related.

The severe bear markets of October 1987, the Asian Financial Crisis of 1997, the SARS crisis, and the recent severe bear market were preceded by bull markets. Did you sell at the peak of these bull markets? Did you get out of stocks before the onset of the bear?

In 1987, I was not in the stock market. In the 1997 bullmarket, I continued to hold stocks in my portfolio. When the Asian Financial Crisis started, I did not sell these stocks. What were the consequences?

One counter went "kaput" - 100% loss. The prices of the other stocks were beaten down badly. Many remained lowly priced for multiple years. However, gradually the prices recovered. From then to now, this portfolio registered a reasonable gain. What saved or protected this portfolio from loss?

There are many factors. Firstly, investing for the long term is safe. The risk is in misjudging the business prospects of the companies you have in your portfolio. The risk is not in the price volatility. Secondly, by buying good quality stocks regularly at a fair or bargain price (a form of cost averaging). Thirdly, a gutsy move to add stocks to your portfolio in a bear market. I bought some stocks when the index was 600, only to see these stocks decimated when the index fell towards 300. Finally, by not selling during the depth of the bear market. To be able to do so, one need to know the difference between price and value and the conviction and ability to hold.

The present bear market started in 2007. This was preceded by a strong bull market when the KLCI reached a high of 1500. Did you sell during at the height of the bull market? What did you do then when the bear took hold? What lessons have you learned from your actions?

Selling is often a more difficult decision than buying. A stock with deteriorating fundamentals should be sold, sometimes urgently. For others, a relative reason for selling would be if the price of the stock has risen too high (overpriced) not in keeping with its underlying fundamentals.

Peter Lim is 7th on S'pore rich list

This remarkable chap made his money from investing in stocks. To emulate him:

1. You would need to have accumulated a large capital to invest.
2. You would need to have the opportunity to invest a large amount into Wilmar or a similar vehicle at the opportune time.
3. You would need to stay invested in the stock long term to savour the gains.

----

7. Peter Lim
(Up) US$1.5 billion INVESTMENTS
56. Married, 2 children
Former stockbroker, now full-time investor gets bulk of fortune from stake in Wilmar, started by former client Kuok Khoon Hong (No 3). Other stakes in fashion retailer FJ Benjamin, brewery restaurant Brewerkz.

http://www.theedgemalaysia.com/business-news/149108-update-robert-kuoks-nephew-3rd-on-spore-rich-list.html

Did you buy when the stocks were on sale?

Did you take advantage of the best investing periods Mr. Market offered the last 20 years? Did you take advantage of Mr. Market or did you fall victim to Mr. Market during these times?

My first recollection was 1987. It would have been wonderful to have invested then, but my priorities were elsewhere and not in stocks then. I recalled the big fall in October 1987. Those invested in the stock market were stunned by the rapidity of its fall in a day. Many predicted the collapse of brokers and investment bankers. But the recovery was quick. Those who sold would have lost. Those who held or bought more were better off.

The next period was in 1997. It was the Asian Financial Crisis. It started with the Thai Baht being sold down. In its initial phase, it was thought that this could be contained to Thailand. Soon it spread to Indonesian rupee, and very soon after, Malaysian ringgit. The tremendous bull run of the decade had created a huge bubble which popped. The shares in many companies were trading at ridiculously high valuations at the peak of the bull market prior to the crisis. By 1998, the stock market had lost by a huge amount. The index plummeted to a low of just above 300. There were panic sellings by big investors, above all, the foreign funds. What did you do as an investor during this period?

Another fantastic period was in 2001. This was when the SARS epidemic hit Singapore. The broad market was sold down. Those who bought during this period would have profited.

This brings us to the present period. The best prices were seen during the October 2008 to March 2009 following the post-Lehman crash. By then, the bear market has been in place for more than a year and a half. Many stocks were already lowly priced and the post-Lehman crash led to even lower prices of these stocks. What did you do during this investing period?

These were the 4 periods from 1987 to 2009 when the market sold off by a huge amount. Many stocks were priced at low valuations. What did you do during these markets?

Did you buy?
Did you sell?
Did you hold?

Buffett is right. "Be greedy when everyone is fearful and be fearful when everyone is greedy."

What further lessons can you learn from these four periods?

How to screen overseas stocks

Wednesday August 12, 2009
How to screen overseas stocks
Personal Investing - By ooi Kok Hwa


Four criteria to look at when choosing counters that are suitable for long-term investment


LATELY, interest has grown in overseas stock investment. Given the foreign markets’ relatively high volatility of returns compared with the local market, a lot of retail investors find it more exciting to invest in overseas stocks.

However, a common problem most investors face is how to filter, from among all the listed companies in the respective markets, the right stocks that are suitable for long-term investment.

Market capitalisation

One of the most important selection criteria is buying stocks with big market capitalisation. The market cap of a listed company can be computed by multiplying the number of its outstanding shares with the current share price.

In general, we should buy stocks with big market cap because they are normally well-established blue-chip stocks with higher turnover and widely-accepted products and services.

Even though some academic research shows that buying into small market cap stocks can provide higher returns compared with big market cap companies, unless we are quite familiar with the stocks available in those overseas markets, it is safer to put our money into bigger market cap stocks.


It is not difficult to find out which companies have the largest market cap in any stock exchange.

Such information is available in most major newspapers in that particular country or the stock exchanges themselves.

For example, if we intend to buy some Singapore stocks, we should pay attention to companies that are ranked in the top 30 in terms of market cap. One can get the rankings by market cap for the Singapore Exchange in StarBiz monthly.

Price/earnings ratio

Once we have filtered out the blue-chip stocks, the next selection criteria is the price/earnings ratio (PER), which should be lower than the overall market PER. This is computed by dividing the current stock price by the earnings per share (EPS) of the company. It represents the number of years that we need to get back our money, assuming the company maintains identical earnings throughout the period.

Even though some published PER may use historical audited EPS compared with forecast EPS, given that our key objective is to do stock screening, the PER testing will provide us with a quick check on the top 30 companies – whether they are profitable and selling at reasonable PER compared with the overall market PER.

If we cannot get access to the overall market PER, we may want to consider Benjamin Graham’s suggestion of buying stocks with PER of lower than 15 times.

Dividend yield

A good company should pay dividends. We strongly believe that this is one of the most important ways for the investors to get any returns from the companies that they invest in.

Our rule of thumb is that a good company should have a dividend yield that at least equals or is higher than the risk-free return, which is usually based on the fixed deposit rates.

The dividend yield is computed by dividing the dividend per share by the current share price. In general, most blue-chip stocks do have a fixed dividend payout policy and reward investors with a consistent and growing dividend returns.

Based on our observation, most smaller companies may not be able to pay good dividends as they may need the capital for future expansion programmes.

Price-to-book ratio

Most investors would like to invest at a market price lower than the owners’ costs in the company. The book value of a company represents the owners’ costs invested in it.

In a normal business environment, unless the company has some problems that the general public may not be aware of, it is quite difficult to find stocks selling at a price lower than the book value of the company.

As a result, we may need to purchase at a market price higher than the book value. According to Graham, the maximum price one should pay for any stock is the price which gives a price-to-book ratio no greater than 1.5 times. This means that we should not pay more than 1.5 times the owners’ costs invested in the company.

Lastly, the above four selection criteria are merely a preliminary quick stock screening process. Even though investors may be able to find stocks that fit the criteria, we suggest investors check further the fundamentals of the company, such as the balance sheet strength, its gearing, future business prospects and the quality of the management before deciding to invest.

● Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.

http://biz.thestar.com.my/news/story.asp?file=/2009/8/12/business/4499990&sec=business

Keep it Simple and … Smart

Keep it Simple and … Smart
By Benny Lee, Chief Market Strategist, NextView Investors Education Group

You would be surprised find that many successful traders do not have advanced knowledge or a PHD in analyzing charts to make trading decisions. Many traders who have acquired professional certificates or degrees in finance and investing may be good analysts but failed when they start to trade. Many are engrossed in techniques and ideas and have forgotten the bottom line – making money from trading.

The objective of every trader (including investors) is to make money on a consistent basis. Many traders still think that their trading decisions should be correct all the time. Of course, not every trade or trading day or even trading month is going to be profitable. This is simply the nature of trading. There is no one successful trader who has not lost any money before in their trades. Keeping it simple can go a long way toward changing the traders’ mindsets about trading so that they can start to trade successfully and make money consistently.

A trader can make hundreds of possible trades during the course of a trading day or week. However, how many of these are your setups. A setup is a set of rule or rules to make the trading decision. How many of these setups have you traded in the past and how many are you intimately familiar with? Getting familiar with the set ups means that you know the characteristics of the set up, i.e. its advantages and disadvantages.

Your set up should be easy to understand and not complicated. Many traders think that putting in more rules and advanced ideas makes a better setup. Most of the time, it leads to confusion. Have simple trading rules in your setup, as long as the rules are able to minimize your trading decision risk by getting a clear picture of what the market is telling you.

Trade only a few setups, 1 to 3 is plenty. You cannot possibly trade every setup or even identify them in a real-time environment, unless you have programmed your setups in automated trading systems. Even that said, you may not have the money to trade all the setups. Furthermore, many setups can also be in opposing directions leading to even greater confusion.

Choose a few setups that you are most comfortable with and profitable (with the highest reward to risk ratio and low drawdowns). Stick with those and ignore all the others. Trade the setups that provide clear and obvious visual recognition. When choosing the setups that you want to trade, select the ones that can easily be identified visually.

Become intimately familiar with your setups. Reducing the number of setups of your trade will allow you to understand how they act, when they are likely to set up and when they are likely to fail. You will have an idea of the expected outcome whenever you make that trading decision. A good trader knows why he lose a trade.

Many traders often let their emotions take over their trading decisions. I have experienced losing a trade and then wanting to take revenge by trying to trade using my instinct. Of course, that will eventually lead to more losing trades. If you do not have a setup, wait. If your setup does not trigger, wait for the next one, even if it takes hours, days or even weeks, depending on the setup that you have. Exercise patience and discipline while waiting for your setup to trigger.

Losses often occur not because of a poor entry, but because the trader did not have the confidence of what he or she saw and allowed a small volatility in the market to take him or her out or, even worse, refused to take the stop loss that the trader had set because of a failed setup.

By trading fewer setups and becoming comfortable with them, you will be able to plan the trade ahead of time and develop much greater confidence in your trading.

The Advantages to Keeping It Simple… and Smart
First, good entries become profitable trades because the trader has confidence in the setup and will not be shaken out at the first bit of market noise. The trader understands the consequences of making that trading decision and would expect how the trade will react to these market noises because of the previous experience.

Second, the trader has become familiar with the setups so that the trader can quickly and easily identify when the setup has failed, exit and limit losses. The trader is able to accept losses because he or she knows that this is part of the plan and if he or she continues to follow the plan using the set ups, he or she will eventually make money from the market after a period of time.

Third, with this newfound trust and confidence that comes with following fewer setups, the trader is less inclined to chase setups that he or she is not familiar with and does not fully understand because the trader knows “his” or “her” setups will be profitable.

The Bottom Line for Your Trading
If your trading method is complicated or requires too much evaluation in real time, you will hesitate before entering and not trust it while in the trade. In the end, you will not follow your own method, which is equivalent to having no trading method at all.

Do not analyze during the market. Sometimes when a setup is triggered, the trader starts to analyze further using other indicators or setups because he or she just do not have enough confidence and do not want to lose on that trade.

Simple strategies work best because they allow you to trade with confidence, and, if you trade with confidence, you are one step closer to eliminating the emotion of fear in your trading.


Benny Lee is a trainer, trader and practitioner of technical analysis. He conducts Technical Analysis workshops, seminars and courses for private and professional investors, traders, remisiers and fund managers in Malaysia, Singapore and Thailand. For more of his articles, please visit: Benny Lee's column )


http://investasiaonline.com/forum/view_topic.php?id=64

Comments: Any investing system should be simple and easy to follow and implement. The system should be applied consistently and can be shown to be productive over a long period. The above article has so many ifs and buts.

China alarmed by US money printing

China alarmed by US money printing

The US Federal Reserve's policy of printing money to buy Treasury debt threatens to set off a serious decline of the dollar and compel China to redesign its foreign reserve policy, according to a top member of the Communist hierarchy.

By Ambrose Evans-Pritchard, in Cernobbio, Italy
Published: 9:06PM BST 06 Sep 2009


Cheng Siwei, former vice-chairman of the Standing Committee and now head of China's green energy drive, said Beijing was dismayed by the Fed's recourse to "credit easing".

"We hope there will be a change in monetary policy as soon as they have positive growth again," he said at the Ambrosetti Workshop, a policy gathering on Lake Como.

"If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies," he said.

China's reserves are more than – $2 trillion, the world's largest.

"Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets," he added.

The comments suggest that China has become the driving force in the gold market and can be counted on to buy whenever there is a price dip, putting a floor under any correction.

Mr Cheng said the Fed's loose monetary policy was stoking an unstable asset boom in China. "If we raise interest rates, we will be flooded with hot money. We have to wait for them. If they raise, we raise.

"Credit in China is too loose. We have a bubble in the housing market and in stocks so we have to be very careful, because this could fall down."

Mr Cheng said China had learned from the West that it is a mistake for central banks to target retail price inflation and take their eye off assets.

"This is where Greenspan went wrong from 2000 to 2004," he said. "He thought everything was alright because inflation was low, but assets absorbed the liquidity."

Mr Cheng said China had lost 20m jobs as a result of the crisis and advised the West not to over-estimate the role that his country can play in global recovery.

China's task is to switch from export dependency to internal consumption, but that requires a "change in the ideology of the Chinese people" to discourage excess saving. "This is very difficult".

Mr Cheng said the root cause of global imbalances is spending patterns in US (and UK) and China.

"The US spends tomorrow's money today," he said. "We Chinese spend today's money tomorrow. That's why we have this financial crisis."

Yet the consequences are not symmetric.

"He who goes borrowing, goes sorrowing," said Mr Cheng.

It was a quote from US founding father Benjamin Franklin.


http://www.telegraph.co.uk/finance/economics/6146957/China-alarmed-by-US-money-printing.html

FTSE 100 hits 5,000 level for first time since October

FTSE 100 hits 5,000 level for first time since October

The FTSE 100 has touched the 5,000 level for the first time since the height of the banking crisis last October as investors seize on better news from the economy.

Published: 3:17PM BST 09 Sep 2009

The index of blue-chip companies has rallied more than 40pc since slumping to its low for the year in early March. The move to 5,000, a level last touched on October 3, comes as a new survey from Nationwide showed that British consumers are feeling more confident than at any point in the past 12 months.

Home Retail Group, the owner of Argos, was up 1pc, and Tesco, Britain's biggest supermarket, also added 1pc. Beyond retailing, BG Group was one of the biggest risers after telling shareholders that it had discovered a deepwater field off the coast of Brazil that contains between 1 billion and 2 billion barrels of oil.

"Difficult as it is to buy up here, the bulls will be taking confidence from the lack (just yet) of a reaction pull back," said Simon Denham, managing director of Capital Spreads. "The big hope is that all this spending does not just build a short term bubble."

Stock markets around the world have recovered from their lows as investors anticipate a recovery in the global economy. However, given the scale of the rally some analysts question whether the momentum can be sustained.

The six-month rally has driven the price-to-earnings ratio on the FTSE 100 to 70.9, the most expensive level in seven years, according to Bloomberg.

http://www.telegraph.co.uk/finance/markets/6162632/FTSE-100-hits-5000-level-for-first-time-since-October.html