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

Keep INVESTING Simple and Safe (KISS) ****Investment Philosophy, Strategy and various Valuation Methods**** The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.

Wednesday 16 December 2009

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

Warren Buffett's Priceless Investment Advice
By John Reeves
December 9, 2009

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

If you can grasp this simple advice from Warren Buffett, you should do well as an investor. Sure, there are other investment strategies out there, but Buffett's approach is both easy to follow and demonstrably successful over more than 50 years. Why try anything else?

Two words for the efficient market hypothesis: Warren Buffett
An interesting academic study illustrates Buffett's amazing investment genius. From 1980 to 2003, the stock portfolio of Berkshire Hathaway (NYSE: BRK-A) beat the S&P 500 index in 20 out of 24 years. During that period, Berkshire's average annual return from its stock portfolio outperformed the index by 12 percentage points. The efficient market theory predicts that this is impossible. In this case, the theory is clearly wrong.

Buffett has delivered these outstanding returns by buying undervalued shares in great companies such as Gillette, now owned by Procter & Gamble. Over the years, Berkshire has owned household names such as Walt Disney (NYSE: DIS), Office Depot (NYSE: ODP), and SunTrust Banks (NYSE: STI).

Although not every pick worked out, for the most part Buffett and Berkshire have made a mint. Indeed, Buffett's investment in Gillette increased threefold during the 1990s. Who'd have guessed you could get such stratospheric returns from razors?

The devil is in the details
Buying great companies at reasonable prices can deliver solid returns for long-term investors. The challenge, of course, is identifying great companies -- and determining what constitutes a reasonable price.

Buffett recommends that investors look for companies that deliver outstanding returns on capital and produce substantial cash profits.

He also suggests that you look for companies with a huge economic moat to protect them from competitors.
You can identify companies with moats by looking for strong brands that stand alongside consistent or improving profit margins and returns on capital.

How do you determine the right buy price for shares in such companies? Buffett advises that you wait patiently for opportunities to purchase stocks at a significant discount to their intrinsic values -- as calculated by taking the present value of all future cash flows. Ultimately, he believes that "value will in time always be reflected in market price." When the market finally recognizes the true worth of your undervalued shares, you begin to earn solid returns.

Do-it-yourself outperformance
Before they can capture Buffett-like returns, beginning investors will need to develop their skills in identifying profitable companies and determining intrinsic values. In the meantime, consider looking for stock ideas among Berkshire's own holdings.

The financial media made a big fuss over Berkshire's $44 billion acquisition of Burlington Northern Santa Fe, which has caused some of his recent stock selections to fly under the radar. For instance, Buffett just opened a position in ExxonMobil (NYSE: XOM), which joins ConocoPhillips (NYSE: COP) to comprise Berkshire's oil and gas exposure.

It's easy to see why Berkshire likes this efficient operator. ExxonMobil boasts a rock solid balance sheet and broad geographic diversification. Furthermore, Exxon should only benefit if commodity prices increase -- a theme consistent with Buffett's recent railroad purchase. And if Buffett's buying history is any guide, you can be confident that Exxon shares are trading at a discount to their intrinsic value.

So what will Buffett buy next? Unfortunately, we'll have to wait until Berkshire files its next Form 13-F to know for sure.

Of course, that's the problem with following Buffett's stock picks -- we'll never know what he's buying today until long after the fact. In the meantime, another place to find great value-stock ideas is Motley Fool Inside Value. Philip Durell, the advisor for the service, follows an investment strategy very similar to Buffett's.

He looks for undervalued companies that also have strong financials and competitive positions. Philip is outperforming the market with this approach, used since Inside Value's inception in 2004. In fact, Philip's recommendation for December is a pick that Buffett would love -- an electric utility with stable free cash flow, strong competitive advantages, and a 4.3% dividend yield. To read more about this stock pick, as well as the entire archive of past selections, sign up for a free 30-day trial today.

If investing in wonderful companies at fair prices is good enough for Warren Buffett -- arguably the finest investor on the planet -- it should be good enough for the rest of us.

Already subscribe to Inside Value? Log in at the top of this page.

This article was originally published on April 7, 2007. It has been updated.

John Reeves can't remember the last time he used a razor made by someone other than Gillette, and he wishes he'd owned shares in that company before P&G acquired it. John owns shares of Berkshire Hathaway. Berkshire Hathaway and Walt Disney are Motley Fool Inside Value and Stock Advisor recommendations. P&G is an Income Investor pick. The Motley Fool owns shares of Berkshire Hathaway and Procter & Gamble. The Fool has a disclosure policy.

http://www.fool.com/investing/value/2009/12/09/warren-buffetts-priceless-investment-advice.aspx

Picking next year's winners might be a lot tougher.

What Will Be the Best Stock for 2010?
By Dan Caplinger
December 15, 2009

During 2009, finding winning stocks was like shooting fish in a barrel. But if what goes up must come down, picking next year's winners might be a lot tougher.

Among more than 4,000 stocks with market caps above $100 million that traded on major U.S. stock exchanges, more than 700 have doubled in price this year, and 84 have managed to see their prices rise 400% or more. Some of the top gainers include:

Stock
2009 YTD Return

Diedrich Coffee (Nasdaq: DDRX)
9,578%

Human Genome Sciences (Nasdaq: HGSI)
1,247%

Pier 1 (NYSE: PIR)
1,235%

Kirkland's (Nasdaq: KIRK)
615%

Teck Resources (NYSE: TCK)
551%

Dendreon (Nasdaq: DNDN)
469%

Sirius XM Radio (Nasdaq: SIRI)
411%

Source: Capital IQ, a division of Standard and Poor's. As of Dec. 14.

No encore
With those staggering numbers almost in the record books, a repeat performance of 2009 seems unlikely for most of those stocks. Still, that doesn't mean that there won't be any great stock returns in 2010.

Nevertheless, I'm not going to try to sell you on any hot predictions for next year. After all, I'm still reeling from my pick of Diedrich as the year's scariest stock. The company went on to jump another 60% in the month or so after I made that call.

How about you?

http://www.fool.com/investing/general/2009/12/15/what-will-be-the-best-stock-for-2010.aspx

What Was Your Worst Investment Mistake in 2009?

What Was Your Worst Investment Mistake in 2009?
By Dan Caplinger
December 15, 2009

In 2008, nearly everybody made bad investments. By comparison, 2009 was a complete delight.

Still, investors made mistakes. Even with the huge rally, some stocks, including Valero Energy (NYSE: VLO), MetroPCS (NYSE: PCS), and Apollo (Nasdaq: APOL), managed to drop this year. In addition, Treasury bonds, which rode high during 2008, also knocked investors for a big loss this year.

What might have been
Personally, though, my biggest mistake this year was in cutting my winners short. The decision to take some profits on part of my positions in Starbucks (Nasdaq: SBUX) and Freeport-McMoRan (NYSE: FCX) well into the rally seemed like a no-brainer at the time, but those stocks just kept going up. Similarly, I trimmed my holdings in junk bond mutual funds and some international bonds, figuring that gains might well prove short-lived. Although that didn't cause any losses, the opportunity cost of getting out too early was extremely high.

There's a lesson in that. Plenty of investors are smart enough to buy top performers like Apple (Nasdaq: AAPL) and Green Mountain Coffee Roasters (Nasdaq: GMCR), and a good number of them earn decent profits from them. But only the most disciplined, patient investors stick with those winners for the long haul, squeezing every penny of potential gain out of their shares and turning a modest winner into a gold mine for their portfolio.

How about you?

http://www.fool.com/investing/dividends-income/2009/12/15/what-was-your-worst-investment-mistake-in-2009.aspx

Investors need to watch out for possible market corrections of at least 10%

Investors need to watch out for possible market corrections of at least 10%
By Ryan Huang/ Jonathan Peeris, Channel NewsAsia,
Posted: 14 December 2009 2054 hrs

SINGAPORE: Online financial services firm CMC Markets said investors hoping to enter the stock markets before year-end should be wary of a possible correction of about 10 per cent.

CMC said recent rallies have run ahead of fundamentals. And there are also concerns about when central banks will withdraw stimulus measures from the global financial system.

Stock markets may have rallied and shown signs of stabilising in recent months, but CMC Markets believes there should be caution going into 2010.

For one, it said, the recent stock market rallies have been fuelled by the weakness of the US dollar and Japanese yen. And when these currencies stabilise, the stock rally may falter.

Then there is the question of how markets will react to central banks eventually pulling back the massive stimulus for the global economy.

CMC believes there are significant headwinds ahead for markets.

Ashraf Laidi, chief market strategist, CMC Markets, said: "First of all, the fallout from the Dubai story is really not over yet and just starting. The question really depends upon the extent to which these various entities that are part of the Dubai Holdings umbrella may be forced sell some of their UK and US-based property."

CMC said other problem areas include the current credit tensions inside some Eurozone countries like Greece and Spain. There are also signs of weakness in the commercial real estate sector in the UK and the US.

Mr Ashraf Laidi added: "I think currencies like the Malaysian ringgit and the Singapore dollar could be boosted by a concrete improvement in interest rates.

"I think the real estate sector in these regions probably cannot be described to be in a bubble as others can. I think that services and activity in financial services here and the demand is really taking a life of its own."

CMC also sees a bright spark in gold as a long-term investment. It said while gold prices may dip in the next two quarters, the yellow metal may hit a high of US$1,500 an ounce in the second half of next year. - CNA/vm

http://www.channelnewsasia.com/stories/corporatenews/view/1024760/1/.html

LCL Founder Loses Company After Dubai Debt Crisis

Debt and leverage are double-edged swords. You can make it big or you can be decimated. You will never be bankrupt if you are not in debt or excessively leveraged. Always be prepared for the unexpected downsides. Who would have thought that Dubai will be also mained in this financial crisis?

LCL Founder Loses Company After Dubai Debt Crisis (Update3)

By Barry Porter

Dec. 15 (Bloomberg) -- LCL Corp Bhd. Managing Director Low Chin Meng lost control of the Malaysian interior design company he founded after a debt crisis in the Gulf emirate of Dubai forced it to default on loans.

CIMB Islamic Bank Bhd. sold 16 million of Low’s LCL shares, representing his remaining 11.2 percent stake in the business, that were pledged as security against financing, Malaysian stock exchange filings show.

More than of 80 percent of Selangor-based LCL’s sales came from the United Arab Emirates last year compared to 46 percent in 2007, according to data compiled by Bloomberg, as Dubai built the world’s tallest tower and palm tree-shaped islands in a bid to lure international investors.

“When the company was growing at a fast rate it needed short-term capital to meet orders,” Nigel Foo, an analyst at CIMB Investment Bank Bhd., said in a telephone interview from Kuala Lumpur today. “To achieve this Low personally pledged his own shares.”

LCL said Dec. 10 it had been “severely” impacted by financial turmoil in Dubai and defaulted on 72 million ringgit ($21 million) of loans from Affin Bank Bhd. and Bank Islam Malaysia Bhd. because clients in the sheikhdom hadn’t paid bills. State-owned Dubai World roiled markets worldwide Dec. 1 when it said it was in talks with creditors to restructure $26 billion of debt built up during the emirate’s six-year real estate boom.

Bank Debts

LCL had 376 million ringgit of net debt as of Sept. 30, according to a Dec. 11 report by CIMB’s Foo. In addition to loans from CIMB the company borrowed from AMMB Holdings Bhd., Alliance Bank Malaysia Bhd., Bank Muamalat Malaysia Bhd., EON Capital Bhd., Public Bank Bhd., Standard Chartered Plc, Kuwait Finance House and Royal Bank of Scotland Group Plc, according to its Dec. 10 statement.

LCL jumped 8.7 percent today in Kuala Lumpur trading to close at 25 sen, giving the company a market value of 35.8 million ringgit. The stock has plunged 64.5 percent this year.

Low sold blocks of shares in the past three months, reducing his stake to 11.2 percent from 29 percent on Sept. 24, exchange filings show.

Calls to his mobile phone today weren’t answered today and officials at the company’s main office said he wasn’t there when Bloomberg called seeking comment.

Separately, the Malaysian stock exchange said today it reprimanded LCL for not submitting its annual audited accounts on time for the year ended Dec. 31 2008.

To contact the reporter responsible for this story: Barry Porter in Kuala Lumpur at bporter10@bloomberg.net

Last Updated: December 15, 2009 04:23 EST

Tuesday 15 December 2009

Another Polished Gem in Teh Hong Piow's stable of companies

10-Year Group Financial Graphical Summary (Page 62 and Page 63 of Annual Report)
http://www.lonpac.com/annualreport08/LPI08_4.pdf

Over the last 5 years, the earnings per share have increased 3x. Its share price has increased more than 2x. Dividends over the last 5 years have also grown commensurate with the earnings, though these had been flat the last 2 years.

Technicians should take note

KUALA LUMPUR: Defensive stocks may not be spared the brunt of an expected “steep correction” in the market ahead, said a technical analyst.

Maybank Investment Bank’s head of retail research, equity markets, Lee Cheng Hooi, who last Friday advised investors to liquidate their stocks, said some key FBM KL Composite Index stock constituents may lead declines in the market.

Among stocks which Lee expects will undergo a correction are YTL CORPORATION BHD [], GENTING BHD [], BAT Malaysia Bhd and PETRONAS DAGANGAN BHD [].

“Despite these stocks being defensive in nature, they don’t seem to be in great shape,” he told The Edge Financial Daily pursuant to his chart analysis of these stocks.

Lee also said banking stocks were “looking a bit high” and he did not rule out a further correction in the sector. The finance sector constitutes about 35.7% weightage on the FBM KLCI, followed by PLANTATION []s.

“The market is high, and we will likely see a snowball sell effect,” he said, adding that the local benchmark index may well fall below 1,200 since its run-up a few months ago.

In a report last Friday, Lee urged investors to liquidate their stocks in view of the “steep correction” round the corner, as the FBM KLCI hovered at a key neckline support level of the head and shoulders chart pattern.

He said the FBM KLCI may have peaked at 1,288.42 on Nov 17, 2009, and “urged investors to liquidate all their stocks on any and every rally”. He said all the FBM KLCI’s indicators (CCI, DMI, MACD, Oscillator and Stochastic) turned negative recently.

“There could be a potential steep correction very soon. Tactically, investors should liquidate all their stocks. If the FBM KLCI breaks below 1,255, the market would head down towards 1,207 (the measurement target of the dreaded head and shoulder pattern),” he said.

The head and shoulders pattern is a reversal chart pattern after a long upward trend and is recognised by technical analysts to forecast likely future trends in stock markets.

“Large local funds are distributing their massive positions, whilst maintaining the illusion that all is well with the FBM KLCI and FBM 100,” he added in the report.

Lee said weakness in most blue-chip components and mid-capped stocks would cause further market downside in the medium term, and the FBM KLCI was holding above the 50-day simple moving average for now. Lee said any US dollar’s rise would be among the factors giving downward pressure to equity markets.

FBM KLCI closed almost flat last Friday at 1,260 points with a high degree of uncertainty throughout the trading day. The benchmark index has risen about 50% from its low of 835.17 about a year ago.

There was now risk aversion to emerging markets after Dubai delayed its debt repayments, Lee further told The Edge Financial Daily, advising investors to hold cash at this point in time.

He likened the state of the world economy now to “a house of cards”.

“Dubai has started it (the correction), and these debt defaults will cause jitters in the world economy,” Lee said, referring to the latest news of debt repayment concerns in Spain and Greece.

Dubai is delaying its debt repayment, putting at risk the US$59 billion (RM200 billion) debt held by government controlled Dubai World and its property arm and an upmarket builder Nakheel.

Fitch Ratings last Tuesday announced that Latvia and Lithuania’s credit ratings were under pressure from the sharp deterioration in public finances, according to a Bloomberg report.

The same agency also cut its rating on Greek government bonds one step lower to BBB+, causing a heavy selloff on Greece’s government bond markets on fears over debt default.

Reports also said Standard and Poor’s shifted its outlook for Spain’s debt from stable to negative. The agency further said “reducing Spain’s sizeable fiscal and economic imbalances required strong policy actions, which have not yet materialised”.

Heavy bond selloffs have also been reported in countries like Portugal and Ireland as investors feared credit ratings for these countries may be downgraded.

This article appeared in The Edge Financial Daily, December 14, 2009.

EPF net buyer in banking stocks

EPF net buyer in banking stocks

Tags: Bank Negara Malaysia | CIMB Group Holdings Bhd | Domestic banking stocks | ECMLibra Investment Research | EON Capital Bhd | EPF | Hong Leong Bhd | Maybank | PBB

Written by Yong Yen Nie
Monday, 14 December 2009 11:41

KUALA LUMPUR: The Employees Provident Fund (EPF) has re-emerged as a net buyer in most domestic banking stocks, especially large-capped ones since November 2009, a significant shift from its net selling activities in the period prior starting in April this year.

According to latest filings on Bursa Malaysia, EPF has raised its stakes in MALAYAN BANKING BHD [] (Maybank) and CIMB Group Holdings Bhd to 808.7 million shares or 11.4% and 462.22 million or 12.9%, respectively.

A month earlier, EPF held 788.25 million shares or an 11.1% stake in Maybank and 441.68 million shares or a 12.3% stake in CIMB.

Prior to this, the statutory pension fund had pared down its holdings in Maybank and CIMB from April this year. At end-April, it had held 887.77 million shares or a 12.5% stake in Maybank and 623.48 million shares or a 17.4% stake in CIMB.

EPF also picked up PUBLIC BANK BHD [] (PBB) shares in November, raising its interests to 474.93 million shares or 13.4%, compared with 461.54 million shares or 13.1% at end-October.

EPF used to hold a 14.8% stake comprising 523.76 million shares in PBB but had pared down its stake in the banking group since end-August this year.

It also accumulated more AMMB HOLDINGS BHD [] shares and held a 13.4% stake or 405.35 million shares in the banking group as of end-November, compared with 395.38 million shares or 13.1% a month earlier.

EPF had been a net seller in AMMB shares since July. As at end-June, EPF had held 451.57 million shares or a 15% stake in AMMB.

Banking analysts said EPF was seen to be turning its focus on banking stocks, given the improved indicators in the financial sector and stronger expectations of an improved economic outlook in 2010.

A banking analyst with a local research house said several research houses had made overweight calls on the sector following banks’ better-than-expected financial results for the quarter ended Sept 30, 2009.

“With the anticipation of a stronger economy next year, EPF would want to have an investment strategy that benefits the most from the recovery,” she told The Edge Financial Daily last week.

The banking analyst added that while there was still some upside left in the banking stocks, most of them were approaching the target prices.

“(Nevertheless), we believe buying activities for banking stocks will continue for the first half of 2010, underpinned by stronger economic trends, while profit-taking would be more pronounced by June next year,” she said.

EPF had also accumulated shares in other mid-capped banking stocks, filings on Bursa Malaysia showed.

According to filings last Friday, EPF had raised its interests in HONG LEONG BANK BHD [] to 177.28 million shares or 11.2% from 171.32 million shares or a 10.8% stake at end-October.

The pension fund had also increased holdings in ALLIANCE FINANCIAL GROUP BHD [] (AFG) to 235.9 million shares or 15.24% at end-November from 226.02 million shares or 14.6% a month earlier. Filings showed EPF has been accumulating shares in AFG since end-June.

EPF slightly pared down holdings in EON CAPITAL BHD [] to 83.4 million shares representing 12.03% at end-November from 83.62 million shares or 12.06% a month earlier.

Recent Bank Negara Malaysia statistics showed that the decline in loans growth had bottomed in October, following a faster loans expansion of 7.5% year-on-year (y-o-y) compared with 7.2% in September this year.

In a report, ECMLibra Investment Research said the improving loans growth corresponded with a gradual recovery in economic conditions, as shown by a 1.2% contraction in gross domestic product (GDP) for the third quarter of 2009 (3Q09), which was healthier than 1Q09’s and 2Q09’s contraction of 6.2% and 3.9%, respectively.

“Going by the lending indicators, it would seem that there has been some pent-up demand for credit, as shown in the double-digit y-o-y changes in the applications and approval numbers.

“Net NPL (non-performing loans) ratio on a three-month basis remained unchanged at 2.1%, but has improved to 1.5% on a six-month basis (from 1.6% previously),” it said.

The research house added that the banking system’s capitalisation remained stable with risk-weighted capital ratio and core capital ratio of 14.5% and 13%, respectively.

This article appeared in The Edge Financial Daily, December 14, 2009.

Monday 14 December 2009

Value Growth Investing

Publiished by FT Prentice Hall in 2001 , 1st edition

Description of Value Growth Investing
"Drawing on the principles of some of the most successful investors of the last century, this book is both a valuable guide to the ideas of these gurus and a fascinating elucidation of the author's own investment philosophy of 'valuegrowth'." Romesh Vaitilingam, author of The Financial Times Guide to Using the Financial Pages "Glen Arnold explores and endorses all the investment concepts that I try to promote every week in the Investors Chronicle and his portraits of the great investors are right on the mark. Despite being a professor of finance, he is eminently readable." Alistair Blair, No Free Lunch column, Investors Chronicle "Market commentators and investment managers who glibly refer to growth' and value' styles as contrasting approaches to investment are displaying their ignorance, not their sophistication." Warren Buffett, 2001 Valuegrowth Investing answers the key question for investors: "What are the crucial elements leading to the successful analysis of shares?" To be a successful investor you have to be a good evaluator of businesses.
There are too many so-called investors who occupy their time analysing the stock market, identifying trends and forecasting.Valuegrowth investors understand the companies in which they buy stocks as living businesses. This book draws on the rigorous investment techniques developed by the great investors of the last 100 years, such as Peter Lynch, Benjamin Graham and Warren Buffett. These ideas are combined with modern finance frameworks and with recent developments in the field of business strategy analysis, to create a new way of valuing shares. All investors are searching for the Holy Grail of a set of sound and profitable investment principles to guide them in share selections. Valuegrowth Investing shows that the Grail has been found.Valuegrowth Investing: *draws on investment principles discovered by world-renowned investors such as Peter Lynch and Warren Buffett *combines these principles with insights provided by recent developments in the field of business strategy to provide a coherent investment philosophy for tomorrow's investment strategies *describes what the ordinary investor should focus on and then offers evaluation techniques to identify underpriced shares *provides tools for analysing key investment factors *shows that successful investing does not require great intellect, it requires great principles.

Contents of Value Growth Investing
Part One: Investment Philosophies

1. Peter Lynch's niche investing
2. John Neff's sophisticated low price-earning ratio investing
3. Benjamin Graham: The father of modern security analysis
4. Benjamin Graham's three forms of value investing
5. Philip Fisher's bonanza investing
6. Warren Buffett and Charles Munger's business perspective investing - Part 1
7. Warren Buffett's and Charles Munger's business perspective investing - Part 2

Part Two: The Valuegrowth Method

8. The Valuegrowth Investor
9. The analysis of industries
10. Competitive Resource Analysis

Friday 11 December 2009

Expensive IPOs failed due to overpricing

Expensive IPOs failed due to overpricing

3 Nov 2009, 1045 hrs IST, Supriya Verma Mishra, ET Bureau

Initial public offerings are back, so are investors who have not learnt their lessons. There is nothing more disturbing for an investor than missing More Pictures
out on potentially high returns IPO, which can be flipped in a few weeks. Some have made millions that way, but most seem to have lost money.

Most share sales since 2004 failed to deliver, thanks to robber barons and bankers who took every penny possible out of investors’ pockets, shows an ET Investor’s Guide analysis. Not that those investors were naive. It was greed, when they queued up to shell out hundreds of rupees for a share in companies with no revenues even!

The frenzy among retail investors is not back to where it was in January 2008, but is rearing its head. A risk-return analysis of past IPO’s suggested that investors need caution in a market, which is to see a flood of IPOs. About 20 companies are set to raise Rs 20,000 crores in the next 2-6 months (depending on SEBI clearance).

Legendary investor Warren Buffett is wary of IPOs. Shouldn’t retail investors walk his path? “It’s almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller to a less-knowledgeable buyer,” Buffett reportedly said on IPOs.

Check out the IPOs that failed to deliver

Methodology

Out of the 277 odd companies that raised funds through an IPO since 2004, we short-listed those that raised more than Rs 100 crore. It led to choosing 114 companies. We then calculated the returns from these investments at IPO price and their current market price. We compared with the returns the Sensex provided from the date the stock listed till Friday. Having done this, we worked out the shortfall, or gains in the returns posted by stock vis-àvis the Sensex starting from the period the stock began trading.

Out of the 114 companies; a little over one-fourth (30) bettered the Sensex return during the period and another half a dozen were in line with the broader market. In a majority of the IPOs, however, investors lost their capital, leave alone getting returns. About two-thirds of all IPO companies (65) are trading below their offer price out of which nearly 60% of them are at half their initial sale price. Investors might have been better off with bank deposits.

The analysis

But why did majority of the IPOs fail to deliver? The usual answer from the companies and bankers will be “that’s the way market is”. Although there’s no single reason, a dominant one is the pricing as sellers try to get the maximum, which, at times may be even higher than their traded peers by sugar-coating prospects. Broadly speaking, the companies that debuted with high valuations compared to their listed peers failed miserably.

A company which has a nascent business and asking for a valuation 60-100 times its latest annual earnings is almost robbery, but have happened. In order to support such a pricing, it will have to more than double its earnings every year on consistent basis. This is well nigh impossible in best of circumstances, not surprisingly most of these high fliers fail to deliver.

Most of the IPOs in our sample however failed to deliver simply because they were priced too aggressively. This includes initial public offers of Suzlon Energy (priced 55 times its preceding year’s earnings), jewellery maker Gitanjali Gems (112x), and multiplex operator PVR (140x) among others. Besides the company specific reasons, the common factor among them was their high price to earnings (P/E) multiple that they were asking.

At a P/E of 140x, PVR would have to grow at least 70-80% to justify such rich valuations. However given the unreasonable valuations and too much expectation built into the price, these stocks were the first ones to be slaughtered at the hint of first trouble in the market.

Other cases of irrational exuberance include Reliance Power and Mundra Port. In Jan’ 08, Reliance Power raised Rs 11,700 crore from the market at More Pictures
five digit earnings multiple and no revenue from operations. It is yet to generate any revenues form electricity. For the year ended March’ 09 it had other income of Rs 360 crore.

The company’s gross block remains at a miniscule Rs 295 crore (on consolidated basis) and the market capitalisation it still has is Rs 38,000 crore, a far cry from the more than 84,000 crore at the IPO price. Similarly for Mundra Port, out of Rs 1,770 crore raised, close to half of the funds still remain unutilised after two years.

Financial services were the worst hit during the last year’s market meltdown. Future Capital listed in 2007 at a price to book value (P/BV) of 35. The company had priced the stock so aggressively that it is down 69%. Today it is trading at a P/BV of 2.5x. Being a new player, this is steep when compared to bigger players like Motilal Oswal (2.98x) and M&M Financial (1.72x). Precisely for this reason Future Capital’s daily compounded return is –33 % as compared to M&M’s 7%.

There are some who were battered by the economic circumstances. Like in case of Jet Airways, which was the only listed airliner. With Rs 400 crore profit in its first year of listing, the stock was reasonably priced at 26 times its trailing year earnings. But within two years of its IPO, its finances were shattered due to a price war and record high crude oil prices. It is struggling.

There were some IPOs where investors made money too, like the public sector companies, which usually don’t price aggressively. Public sector units such as Power Finance Corp (13.2x) and Rural Electrification (15x) were reasonably priced. Undergarments maker Page Industries (27x), and Tulip Telecom (13.9x) were attractively priced and have returned at least 38 %daily annualised returns. Besides pricing, their business model was very unique.

Like Page Industries is the sole manufacturer and marketer for the innerwear brand ‘Jockey’ for the last ten years. Thus it not only plays the role of a contract manufacturer but also actively creates brand awareness for the foreign brand. They raised funds for expanding their business and not setting up a business from scratch, so their gestation time to generate returns was very low.

While it is may not be appropriate to paint all the IPOs with the same brush, investors should be cautious that the majority are over-priced and may choose the ones that are priced at a discount to their listed peers, or wait for the market to arrive at a price, possibly lower than the IPO one.

http://economictimes.indiatimes.com/Features/Investors-Guide/Expensive-IPOs-failed-due-to-overpricing/articleshow/5187660.cms?curpg=1

Valuing bonds and dollar not easy anymore

Valuing bonds and dollar not easy anymore

9 Nov 2009, 0722 hrs IST, Bloomberg

"In price is knowledge," one editor used to scream at me. Whether or not you believed in efficient markets, you could be sure the price of a bond, a currency or a commodity was trying to tell you something about the outlook for growth, inflation or monetary policy; all you had to do was listen and translate. Not anymore. The ad-hoc combination of quantitative easing, government stimulus packages and zero-interest-rate policies has distorted markets beyond recognition.

In short, it is almost impossible to make a coherent argument for what a 10-year Treasury should yield, what a dollar or euro is worth, or whether to buy or sell copper or gold. Following are examples of markets driven mad by the recent enthusiasm for government intervention.

Unshackled from Bondage, Unhinged from Reality

The 10-year US government bond yields about 3.5 per cent, down from a five-year average of 4.14 per cent and its 20-year average of 5.57 per cent. Today's level, though, is about as reliable as the price of a collateralized-debt obligation in the depths of the credit crunch.

The combination of US authorities keeping the fixed- income market on life support by buying debt, plus commercial banks filling their balance-sheet holes with top-quality government securities, makes the Treasury yield an exercise in marking-to-myth.

$12.1 Trillion With bonds as your guide, you would never guess that the US Treasury plans to borrow a net $276 billion for the October-December period and a further $478 billion in the first quarter of next year, or that it expects to hit its $12.1 trillion debt ceiling some time next month.

If anyone is worried that the multi-trillion-dollar global Keynesian experiment we're in the middle of might backfire and ignite inflation, they haven't told the Treasury market. Maybe they have been whispering instead to the gold market. Gold has reached a record $1,095 per ounce this week after a 25 per cent gain so far this year. You know markets have gone mad when the 10-year Treasury couldn't care less that gold is at a record.

Credit Where It Isn't Due

Investors who own European corporate bonds have made more than 15 per cent this year on a total-return basis, according to figures compiled by Deutsche Bank AG. Subordinated debt sold by financial companies has delivered more than 26 per cent. In Europe's high-yield market, junk debt has returned a spectacular 67 per cent. You will struggle, though, to find anyone who trusts the rally. Too much money, with nothing better to buy, indiscriminately rushing back into the credit markets - that seems to be the culprit.

Never mind that the default rate among high-yield companies in Europe reached 9.3 per cent at the end of the third quarter, up from 6.4 per cent in the previous three months, according to Moody's Investors Service. The rating company is predicting speculative grade bond failures will peak at 10.9 per cent this quarter, before almost halving to 6 per cent a year from now. That seems way too optimistic, given the economic carnage wreaked by the credit crunch on corporate creditworthiness.

You know markets have gone mad when corporate bonds promise equity-style returns. It can mean only one thing: Investors should brace themselves for the equity-style risk of losing all of their money, not the security of regular interest payments.

Currency Carnage

The Japanese economy has been a basket case for years, with a second-quarter gross-domestic-product performance that was downgraded to an anemic 2.3 per cent pace from an initial 3.7 per cent estimate. The US economy, meantime, is lauded for its flexibility and endurance, as proven by its bounce out of recession to post 3.5 per cent growth in the third quarter. Nevertheless, the currencies of both countries currently seem yoked together in the hive-mind of the investment community. When risk aversion rises, the yen and the dollar climb, and we're told that investors are seeking the safety of havens. When risk appetite improves, the dollar and the yen both get trashed, unwanted and unloved. Moreover, the US currency is now talked about as a carry-trade favorite, something you borrow because it's cheap and easy, and you want to invest somewhere more lucrative.

You know markets have gone mad when the yen is perceived to be a refuge and the dollar is the catalyst of choice for re- inflating a global bubble.

http://economictimes.indiatimes.com/features/investors-guide/Valuing-bonds-and-dollar-not-easy-anymore/articleshow/5210524.cms

Mark Mobius eyes Gulf stocks

Mark Mobius eyes Gulf stocks

3 Dec 2009, 1215 hrs IST, Bloomberg
SINGAPORE: The worst plunge in Dubai stocks in a year and record retreat for Abu Dhabi are luring Mark Mobius to “bombed out” Emaar Properties PJSC while investors say phone companies, airlines and port operators have become bargains.

Dubai isn’t likely to go bankrupt and will be “bailed out,” Mobius, who oversees more than $30 billion of developing-nation assets as chairman of Templeton Asset Management, told Bloomberg Television in Hong Kong on Wednesday. “From a longer-term perspective, you’ve got to look at these really bombed out sectors.”

Emirates Telecom, the biggest operator in the United Arab Emirates, is attractive after falling to its cheapest level since July, said hedge-fund firm Gulfmena Alternative Investments. Dubai-based courier Aramex will rally after a 7.4% drop the past two days left shares at a 32% discount to the average price-to-earnings ratio since 2006, according to Duet Mena.

Abu Dhabi’s ADX General Index sank 12% and the Dubai Financial Market Index fell 13% since Dubai said November 25 it would seek a “standstill” agreement on debt owed by state-run Dubai World. The measures are now the cheapest after Nigeria’s among 71 benchmark indexes tracked by Bloomberg. Dubai-based Emaar, the UAE’s largest developer, plunged 19%.

“I particularly like companies like Emaar, property companies,” said Mobius. “There are many of those properties that are cash-flow rich, that are doing quite well. Not all of the properties are in trouble. If you ever tried to stay at a hotel in Dubai you realise what the prices are, which should come down, but even with half the prices that they’re charging, they can make money.”

STOCKS REBOUND

Qatar’s DSM 20 Index led gains globally today, climbing 5.3%, as Commercial Bank of Qatar, the Gulf country’s second-biggest bank by assets, said it has no exposure to Dubai World or its unit Nakheel. Dubai and Abu Dhabi markets are closed until December 6 for the UAE National Day. The MSCI Emerging Markets Index rose for a third day, extending its longest rally in three weeks.

The cost of credit-default swaps protecting Dubai debt against a government default fell 9 basis points to 451, extending the steepest decline in nine months on Tuesday, according to prices from CMA Datavision. The contracts decline as perceptions of credit quality improve, with one basis point equivalent to $1,000 a year to insure $10 million of debt.

ARAMEX, AIR ARABIA

Mobius predicted on November 27 that Dubai’s attempt to delay debt payments may spur a “correction” in developing-nation equities, adding that a 20% slide is “quite possible.” “Now as the dust settles, a few companies in the UAE stand out,” said Rabih Sultani, a fund manager at Duet Mena in Dubai, a unit of Duet Group, which oversees about $2.1 billion. Sultani said he favours shares of Emirates Telecom, known as Etisalat, Aramex and Air Arabia, the UAE’s largest low-cost carrier. While Mobius expects Dubai property shares to lead a recovery, some areas in China and India may become the “next Dubai” because of too much spending and borrowing, Mobius said, citing the cities of Shanghai and Mumbai.

“It wouldn’t be a country-wide situation, isolated pockets of disaster because of over-spending and over-leveraging,” Mobius said. “It’s not going to happen tomorrow but with the kind of money supply that’s coming in, with the IPO activity that we’re seeing, that’s definitely in the cards.”

http://economictimes.indiatimes.com/markets/global-markets/Mark-Mobius-eyes-Gulf-stocks/articleshow/5293887.cms

Common mistakes that careless investors make

11 Dec 2009, 0128 hrs IST,
Lovaii Navlakhi,

Last week, on a road trip from Bangalore to Puducherry, I wondered why investors do not plan the same way as holiday-makers. After all, they are the same individuals. We normally think about where we wish to reach and at what time. Which mode of transport to use and where to stay? And most importantly, the total budget for the holiday? This gave rise to the first list of common mistakes that investors make.

Not having a planned financial goal
If we do not know where we wish to reach, we’ll never know when we have. There are speed breakers on our journey, traffic lights and ‘dashing’ pedestrians. We may be a bit delayed in reaching, with a higher fuel consumption (investments may not deliver the desired returns), but we should never lose sight of the final destination.

Taking more risks than that are necessary: It is imprudent to budget three hours to complete a 300 km road journey on Indian roads, where the maximum speed limit is 80 km/hour. There is a possibility that you may reach faster, conversely, you may not reach at all. Keep a close watch on your asset allocation.

Targeting maximum returns on all investments at all times
How often have we changed lanes to the ‘faster-moving’ one in city, driving only to realise that our original ‘investment’ was better! It will be unwise to bet the savings that we need for a committed payment in the next three months in the equity market, irrespective of the euphoria prevailing. Equities are only meant for the long-term.

Aiming for maximum safety
October 2008 was as close to doomsday as we may possibly imagine. We proceed albeit at a slower pace when the road is dotted with potholes; but we do not abandon driving altogether. For financial goals, that are some distance away (three years or plus), we need to benchmark investments suitably, rather than compare them on a weekly basis. Keep in mind your returns post-tax and the net of inflation.

Relying on tips & neighbours
When one of my colleagues boasted of his conquests in trading, I was at first envious of him. Then I wanted to emulate him. As I grew wiser, I realised that he would only publicise his successes, and never his failures. Don’t we get tips of what to buy and when, but never when to sell? And that’s how dud stocks adorn our demat statements.

Do-it-Yourself Mania
Ever wondered where India would have been if the world did not seek outsourcing? Handing over what you can’t do best to an expert is an accepted norm. But with the recent media explosion, we do feel that we have the ammunition to manage finances on our own.

My mantra is that three conditions need to co-exist:

detailed understanding of finance;
(full) time at our disposal; and
ability to remove our emotions from our investment decisions (can sell poor selections at a loss)

—only then can we do without a qualified financial advisor. Each one of us believes he is unique. Yet, we are checking if our list of investment mistakes matched that of others. And therein lies the next common mistake. With the New Year around the corner, it seems a good time to discard this baggage and start afresh.

(The author is the managing director and chief financial planner of International Money Matters Pvt Ltd)

http://economictimes.indiatimes.com/markets/analysis/Common-mistakes-that-careless-investors-make/articleshow/5324722.cms

John Burr Williams Stock Valuation Calculator

John Burr Williams Stock Valuation Calculator
By Stock Research Pro • September 4th, 2009

John Burr Williams (1900 – 1989) was one of the first economists to advocate the need to arrive at a stock’s “intrinsic” value when considering it for investment. Williams believed that, due to the inherent volatility of the stock market, investors should consider the ability of the company to pay dividends over the long-term. It was Williams who popularized the dividend discount model (DDM) as a conservative approach to stock valuation; discounting future cash flows (dividends) to a present day value to arrive at the real value of a stock.

Who was John Burr Williams?

John Burr Williams was a student of chemistry and mathematics at Harvard University. He then went on to graduate from Harvard Business School in 1923. After graduation, Williams went to work as a security analyst before returning to Harvard to earn a Ph.D in economics in 1940. William’s work, The Theory of Investment Value, provides mathematical models case studies regarding stock valuation and is considered a much-underappreciated work on the subject. Williams spent his entire professional life working in the management of security analysis and privately-held investment portfolios. He was also a visiting professor of economics at the University of Wisconsin-Madison.

Williams’ Approach to Stock Valuation

Williams’ writings and teachings did not attempt to teach investors to beat the stock market or obtain great wealth from stock investing. Instead, they served as a wake-up call to stock investors by encouraging them to take a less speculative approach to the market and focus instead on investment value. In Williams’ view, reported earnings were far too imprecise to be trusted and the only thing an investor could count on was a check in the mail.

The John Burr Williams Formula

Williams’ equation for discounting future dividends accounts for current dividends, a target rate of return defined by the investor, and a projected growth rate for company dividends over an infinite time period.

The formula can be written as:

Intrinsic Value = D / (I – G)

Where:

D = current dividend
I = required rate of return
G= growth rate

For this formula to work, the growth rate cannot exceed the investor’s target rate of return.

Click here to use the calculator:
John Burr Williams Stock Valuation Calculator
http://www.stockresearchpro.com/john-burr-williams-stock-valuation-calculator

Valuation: Case Overview

Valuation: Case Overview

How do you value the family business? This is an issue that comes up in various ways and is a topic I anticipate discussing in future postings. Probably the largest number of cases reporting on valuations are those dealing with estate and gift tax issues. However, the issue comes up in shareholder disputes, divorces, and an election of a spouse to take his or her statutory share rather than that provided under the will. Generally the method of valuation will be selected by the appraiser. A critical question will be whether a marketability and/or minority discount should be applied.

A recent case out of the Kansas Supreme Court provides an interesting discussion on the topic. The case is In the Estate of Norman B. Hjersted, deceased, 175 P. 810 (2008).

http://www.jerrysblawg.com/2009/07/valuation-case-overview.html

A nice graphical method to display value of stocks

http://www.covestor.com/mbr/jjun0366/blog/42783

http://www.scribd.com/doc/23362141/Forbes-2009-200-Small-Companies

Business Valuations [Methods and Approaches]

The three top associations for valuation professionals — the American Society of Appraisers (ASA), the Institute of Business Appraisers (IBA), and the National Association of Certified Valuation Analysts (NACVA) — agree on three major approaches to business valuation:

The Asset Approach
The Market Approach
The Income Approach

Although you may never put pen to paper [or finger to calculator] in working business valuation’s mathematical and analytical formulas, you want to understand them, particularly if you’re working with a qualified expert. No two businesses are exactly alike, even those in the same business operating across the street from one another. Having said that comparing similar companies can help you identify efficiencies and best practices that boost long-term value. Larger, more complex companies — and the increasing number of companies that consider intangible, intellectual assets the number one source of their value — may need to apply slightly different valuation methods and non-numerical analysis to get to the bottom of things. Not all companies need to go through a detailed valuation process. Generally, the smallest of small companies (businesses with less than $1 million in annual revenues is a guideline most valuation experts agree on) can rely on database information and rule-of-thumb measurements that go a long way to setting a range to negotiate price on any business.

http://accounting-financial-tax.com/2009/11/business-valuations-methods-and-approaches/

How to value a young startup?
http://blog.qrce.org/how-to-value-a-young-startup/

The 4 Basic Elements Of Stock Value

No Element Stands Alone

P/E, P/B, PEG, and dividend yields are too narrowly focused to stand alone as a single measure of a stock. By combining these methods of valuation, you can get a better view of a stock's worth. Any one of these can be influenced by creative accounting - as can more complex ratios like cash flow. As you add more tools to your valuation methods though, discrepancies get easier to spot.

In investing, however, these four main ratios may be overshadowed by thousands of customized metrics, but they will always be useful stepping stones for finding out whether a stock's worth buying.

http://www.investopedia.com/articles/fundamental-analysis/09/elements-stock-value.asp?viewed=1

Buffet's success doesn't just lie in mathematical models.

"Buffettology" by Mary Buffet.

In my opinion, the secret of Buffet's success doesn't just lie in mathematical models.

The secret also lies in his ability to identify businesses that have exceptionally strong positions in their respective industries and geographies.

The biggest advantage of choosing such businesses, is that the investor can afford to go wrong on growth projections.

Coca Cola is no different.

You can make a better tasting product, but it is very difficult to create a brand like Coca Cola.

Not all of Buffet's picks are mega-brands, but most of them have strong positions in their respective industries.

Are You Paying Too Much For Stocks?

Are You Paying Too Much For Stocks?
By Joe Bechtel

Market Value Not Equal to Actual Value

If you are a lemming investor, please don't use small loans to finance your lack of creativity. You'll be shocked at how much it can cost you.

A small loan can help you if you are short of cash until your next payday, but if you invest in the stock market and follow the crowd in their buying and selling habits, you may end up with many more liabilities than assets. Why is that?

Have you ever noticed how much the stock market fluctuates over the course of a day, and how much the share prices go up and down?
Does that mean that the companies’ values goes up and down as much as the share price, or does that mean that there may be some other force at work here?

As you will see, the market value of the share does not equal actual value of the same share in terms of a company’s value.

Market Price Based on Emotions, Not Logic
One of the pioneers in value investing, Benjamin Graham, believed that many people rely too much on their emotions when investing rather than their logic. This explains why the market fluctuates so much, and why so many people claim that the stock market is risky. What makes it risky is the constant buying and selling that goes on day after day, hour after hour. This constant buying and selling is what either drives the share price up or down, and it’s what creates the risk.

Ben Graham suggested in his book “The Intelligent Investor” that if you want to build your wealth from the stock market, you need to use a “dollar cost averaging” technique, meaning to consistently buy more shares at a lower price over time. As inflation and company values grow over time, your investments will be worth more in the long run. It’s also known as the “buy low and sell high” technique. Unfortunately, most people tend to bring their emotions into their investing, and will panic and sell when the price is going down, because they are afraid to lose any more money on their investments, leaving them open to take out a small loan to survive.

Beyond the Smoke and Mirrors
The stock market is riddled with confusing terms, acronyms and policies, making it very difficult for the average investor to understand. All this is just smoke and mirrors designed to keep most people in the dark and dependent on high-priced brokers to navigate the investing maze for them. However, if you were to peek behind the curtain, you would see that all the confusion is just smoke and mirrors.

Inflated Price? Inflated Value!
In an effort to control the market prices, brokers and fund managers will either buy or sell enough shares to drive the price back up or down, depending on where the prices are going. Maybe it’s because a company got some bad news, or even good news, and investors are trying to position themselves to either make or avoid losing a lot of money. However, this tends to skew the value of the share price, making the market unbalanced.

Therefore, if a share price is going up too high, brokers or fund managers will sell several million shares to drive the price back down.
Likewise, if a share price is going down too fast, they will buy as many shares to make it even.

So, if you see share prices inflated, don’t make the mistake of thinking it is worth that much. In fact, they may not be worth much at all!

P/E Ratio Tells it All
There is a very simple way to determine if a certain share price is on target or not—look at the Price per Earnings ratio. This is a valuation method that takes the company’s current share price on the market divided by the per-share earnings over a certain time frame, usually one year. So, if a company’s share price is $24 and the earnings per share over the past 12 months have been $2, the P/E ratio is 12. Generally, the higher the P/E ratio, the higher the expectations of investors for company growth. This means that you will be able to see higher earnings within the next year with this company. However, the lower the ratio, the slower the growth regardless of what the market is doing.

Buy Low, Sell High
When you can learn how to find the correct value of a company or share, you will know when the share price is at its lowest, and when you can buy. After the share price tops out, you can sell your shares and pocket the difference without needing a small loan. If you do this, you will be able to make money on the stock market when everyone else is losing money.

http://personalmoneystore.com/moneyblog/2009/12/08/small-loan-value-investing/

Stocks are composed of two major valuations

Stocks are composed of two major valuations.

First, a cash flow is created using fundamental analysis, cash flow or sales.
The second one is determined by how much the investor is willing to pay for a specific share of stock and how much his fellow investors are willing to sell stock (supply and demand).

As investors alter the way they analyze the stock then the occurrence of the changes in these types of valuations is definite. Fundamental valuation is used to justify stock prices while the other depends on supply and demand; the more the buyers the higher the prices of the stock and vise versa.

When to invest in stocks?

So make sure you do what everyone else will do before they do it.

When to Invest in Stocks?

Answer to this question is very very short. NOW!

So when to invest in stocks?

Invest when you will get the most stocks for your money!

http://www.sayeconomy.com/when-to-invest-in-stocks/

But back to our economic cycles. I will now try to explain economic growth cycles through movements of stocks.

Let’s start our story when the prices are low. For example Company X has its stock value of €100 for one stock.

The price is very low so many people start buying.
Because everyone is buying the price goes up.
And because price is going up and up and up more and more people are buying.
This is a positive growth part of the cycle.

But as everyone could guess this cannot go on forever.

Sooner or later people are happy with what they have earned from stocks and they start selling.
And when one of the big stock investors sell their share, the stock price drops.
Of course it doesn’t drop for much but it drops enough that more people get scared.
Once more people get scared those people sell as well because they’re trying to protect their investment.
That then cause that the price drops a little bit more and once the price drops a little bit more and more people get scared, more people sell and price drops a little bit more, again more people get scared and so on and so on.
As you might have figured it out already we have entered the negative economic growth part of the cycle.
The prices are dropping and dropping and dropping and this is what we are looking right now on our socks every day.

However the good news is that the economy is not just one cycle. There is whole bunch of economic growth cycles and that cycle that is going on at the moment will end sooner or later as well.

The prices are going down and once they’re down enough people decide to buy again.
Once one of the bigger investors decide that the price is low enough to buy and buys a big share of stocks the price goes up a little bit.
That is a signal for smaller investors that the cycle has turned and the time of positive economic growth is coming.

Because many investors are now expecting that the prices will go up they start buying stocks.

And as everyone knows when a lot of people are buying stocks prices of stocks are going up.
Because prices are going up more and more people are buying stocks.
That then causes that prices are going up a little bit more and as you have noticed we are again in the part of the cycle of positive economic growth.
Our cycle has ended and the new one has began.

I hope I managed to explain the logic of economic growth cycles. The most important thing to know about economic growth cycles is that when investing you must not do what everyone else is doing. Because once everyone else is doing it there is not much time left before the whole cycle will change and turn around. So make sure you do what everyone else will do before they do it. That will give you a head start and a chance to earn lots and lots of money.

Economic Growth Cycle
http://www.sayeconomy.com/economic-growth-cycle/

Stock Valuation by Dividends

Stock Valuation by Dividends
Posted by Matt on Nov 10, 2009 • (0)

There are two reasons why people by stocks. First one is investing to earn money from dividends and the second one is buying stocks out of speculations to make profit on capital gains. Now how do we value stocks? I will show you how to value stocks and I will try to show you why should stocks be valued by dividends.

So one decides to buy stocks in order to raise his value of capital, to make profit. He buys it by 100$ and he sells it after one year. Now how did he make money from it? One source of profit are dividends, which are the most important ones. Let’s first tell what dividends actually are and then I will tell you why are the dividends the only source of profit when investing in stocks that matters.

Companies make profit (at least they should) and this profit can go into many places. Let’s split those places into two groups. First one is “Stays in company” and second one is “Goes to stock owners”. Now the profit that goes out of a company and is splited onto all stocks and then payed to stock owners is named dividends. So dividends are nothing but profit of a company payed to stockholders.

Now the other source of income for out investor is the capital gain. Capital gain is the price that he sold the stock for minus the price that he bought the stock for. As you might have figured it out already, he can earn money if he buys cheaper then he sells and he can lose money if he sells cheaper than he bought. Becouse we cannot know how much stocks will be worth after one year (when we decide to sell) we valuate stocks only by its dividends. We can assume a certain amount of growth in value, since the companies usually grow with time, but this is higher valuation and I will speak about it in a different article coming out soon. Let’s tell a little bit more about how to value stocks by dividends.

First we need to know how much we want to make out of buying a stock for one year. This is usually given in a percent, like 5% profit in one year. We then turn this into koeficient (5% - 0.05) and they move on to predicting the dividend that will come to us by owning the stock for one year. Let’s assume that the dividend will be the same as it was last year and we know that last year it was 7 $. We then calculate the price of the stock we are willing to pay for by this formula:

Price=Dividend/r

, where r is koeficient of our wanted profit (0.05 in our case). If we do the math for our example, we get that the valuation of this stock shows 140 $ worth. So if we can buy this stock for 140 $ or less, we are going to buy it.

Now the interpretation of this stock valuation by dividends. If we know we are going to get 7 $ in dividend and if we want this 7 $ to be 5% return on our investment then we are willing to invest 140 $ into this stock.

Hope this gave you a brief idea on how to valuate stock and I hope you now understand why stocks should be valuated only by its dividends and not its capital gains as well.

http://www.sayeconomy.com/stock-valuation-by-dividends/

3 Simple Techniques to Value Stock

Stock Valuation Model – 3 Simple Techniques to Value Stock
28. Nov, 2009

Stock valuation models are methods to value stocks. Everybody knows the stock price but only few understand how much it worth and the other investors do not even care. The reason can be due to

different strategies,
do not know how to value stock or
just do not care how much it worth as long as the price increase the next day.

If you are one of the intelligent investors, consider these valuation models in your next purchase.

Discounted Cash Flow (DCF)

This is probably the most common model that you ever heard when it comes to stock valuation. However, I found it a bit tough to do it. Simply because the discounted cash flow model have to consider revenue growth and the escalated cost at the same time, which can be too difficult to estimate and forecast as an outside investor.

Nevertheless, you can use this method in valuing stock by projecting future cash flow; from the sales and costs, and discount back to current value with Weighted Average Cost of Capital (WACC).

Dividend Discount Model (DD)

This model suits best for income investors. The idea is to project future dividend distribution based on the average historical dividend payout ratio and discount it back to present value. Although this is the simplest among all, it works best for high dividend yield stocks.

Nonetheless, the stocks must have very strong business performances that can guarantee the dividend payments 10 years down the road. And normally, penny stocks cannot be evaluated this way.

Earnings Growth Model (EG)

This is my favourite method as it is very practical and easy to do. Initially, I project its future earnings using constant or variable growth rate. Either constant or variable growth rate is depends on the expectation of its business performance within that period. Often than not, I normally use the historical business performance as a baseline provided its fundamental value remain intact. Then, I discount the future earnings with the expected return on investment (ROI).

I found this model as highly valuable since the stock price is easily reflected by its earnings. For example, the stock price will reflect its earnings and earnings growth. Assuming the P/E is the same throughout the year, you can expect the stock price to increase the same rate as the company’s growth rate.

So, before buying anymore shares in the future, put some efforts to value the stock. You can reduce the risk of losing money significantly if you buy the stock at much cheaper price than its intrinsic value.

http://www.moneyhelpyou.com/stock-valuation-model-3-simple-techniques-to-value-stock/

How Laura's loss was Glenn's gain

How Laura's loss was Glenn's gain

The stock began to climb. Last Friday, it looked like we had a clean shot at walking away with a 100%-plus gain.

But there was no announcement.

The company waited until Monday morning before market open to sneak out a release that the FDA had withheld approval. We sent out an alert to sell the stock for the best price our readers could get.

The stock opened dramatically lower: Instead of taking a triple-digit gain, we had to mark our closed positions portfolio with a 50% loss.

(The problem with a stop loss in this situation was the dramatic drop in the stock's valuation right off the bat! If a stock opens 60% below the previous trading day's close, your chances of selling at your 20% trailing stop are almost nil.)

http://investmentsthatwork.blogspot.com/2009/12/how-lauras-loss-was-glenns-gain.html

How to Value Stocks using DCF

Valuing a Stock with the DCF Method

You may have found a great company that you feel has outstanding potential but always end up getting stuck at what price you should purchase the company. Finding the value of a stock is a critical part of investing successfully. Valuing stocks is not hard, but it does require logic and practice.

Calculating stock values surprising should not consist of lengthy and complicated formulas. If you understand the concepts of how to go about thinking through a stock valuation, you will understand that you don’t need to understand the derivation of the formula to apply it well and to achieve profits off your investments.

Let me give you an example.

The real formula to perform a discounted cash flow is:

DCF = CFo x SUM[(1 + g)/(1 + r)]^n (for x = 0 to n)

Now this formula will excite a few, but for the rest, my advice is to just understand what a DCF calculation is and what variables you need to include and adjust.

I won’t explain what a DCF or discounted cash flow is as you can follow the link for a fuller discussion.

How to Value a Stock with DCF

DCF Discount Rate

The purpose of a discounted cash flow is to find the sum of the future cash flow of the business and discount it back to the present value. To do this you need to decide upon a discount rate.

Simply put, a discount rate is another phrase for “rate of return”. i.e. what is your return requirement for this investment to be worth the risk?

You wouldn’t expect a return of 3% off your stock investment because you could easily get that from a Certificate of Deposit (CD) or even just your normal bank account. A treasury bond will probably give you a better return.

If the bank and fed are risk free investments at 3%, then why bother using 3% as a discount rate?

So what would be a good rate?

Considering that the “average” market return is about 9-10%, a minimum discount rate should be set to 9%. I use 9% as a minimum for stable and predictable companies such as KO while 15% is a good return for less predictable companies such as NTRI.

A somewhat more difficult and confusing definition of discount rate would be, how much emphasis you place on the future cash in terms of today’s dollars rather than the future dollars.

E.g. What price would you pay for an investment today if company XYZ future cash flow is worth $100 after 1 year?

Discount Rate: 5% = 100/1.05 = $95.24
Discount Rate: 10% = 100/1.1 = $90.90
Discount Rate: 15% = 100/1.15 = $86.96
Discount Rate: 30% = 100/1.3 = $76.92

As you can see the higher the discount rate, the cheaper you have to purchase the stock because your required rate of return is much higher. This means that since you are willing to pay less now, you are placing more emphasis on the current cash flows of the company.

DCF Growth Rate
Growth rate is going to be the Achilles heel to any stock calculation. By growth rate, I mean the FCF growth rate.

I prefer to value stocks based on the present data rather than what will happen in the future. Anything could happen even in 1 year, and if the growth rate is too high and the company cannot meet those expectations, there is no where to go but down.

The best practice is to keep growth rates as low as possible. If the company looks to be undervalued with 0% growth rate, you have more upside than downside. The higher you set the growth rate, the higher you set up the downside potential.

Look at what happened to SPWR and FSLR. Solar energy was the rage in 2008 and growth was estimated to be at 50% and above, but these lofty expectations only make the fall harder.

Growth rates doesn’t have to be accurate. Just be reasonable and use common sense.

On most of the stocks I value, I rarely go above 20%, and that’s only for something like AAPL.

Adjusting Numbers
What I failed to do in the beginning when I started valuing stocks was to adjust the FCF numbers for cycles and one time events.

If you start a discounted cash flow calculation based on either a year with higher than normal FCF or much lower FCF, as is the case in 2008, the stock calculation will also be wrong.

Be sure to consider taking the median or average for the past few years to determine the normalized free cash flow.

The point of the stock valuation is to be realistic, not pessimistic or optimistic.

Margin of Safety

Whatever rate you choose, never, never forget to apply a margin of safety. This is the equivalent of a kill switch on the treadmill. It’s there to prevent you from getting hurt.

An important point is to not confuse a high discount rate for a margin of safety.

For lower discount rates it is advised that you use at least 50% margin of safety while for discount rates of 15%, a 25% margin of safety may be adequate.

This is because since you are requiring a higher return immediately off your investment, you are trying to pay much less than a discount rate of 9%. So by placing more emphasis on a higher return, you are in fact reducing the risk of the investment which is why a 25% margin of safety may be enough.

Practice your valuation with the free dcf stock analysis spreadsheet with all the things discussed.

Summary

A discount rate is your rate of return. Higher discount rate means you are trying to pay less for the future cash flows at the present time.
Growth rates are the fuzziest aspect of valuing stocks and should be applied conservatively.
Adjust numbers to remove one time events and cycles. Always consider a normal operating environment.
Never for a big margin of safety. The best of us get it wrong as well.

http://www.oldschoolvalue.com/valuation-methods/how-value-stocks-dcf/?source=rss&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+OldSchoolValue+%28Old+School+Value%29

How To Value A Stock With Benjamin Graham’s Formula

How To Value A Stock With Benjamin Graham’s Formula

http://www.oldschoolvalue.com/investment-tools/benjamin-graham-formula-valuation-spreadsheet/

http://www.oldschoolvalue.com/valuation-methods/value-stocks-benjamin-graham-formula/

Benjamin Graham Formula
The original formula from Security Analysis is

where V is the intrinsic value, EPS is the trailing 12 month EPS, 8.5 is the PE ratio of a stock with 0% growth and g being the growth rate for the next 7-10 years.

However, this formula was later revised as Graham included a required rate of return.

Go ahead, be creative.

Decorate your room. Make living pleasant.

Geithner Warns of ‘Headwinds’ on Road to Recovery

Geithner Warns of ‘Headwinds’ on Road to Recovery

Published: December 10, 2009

WASHINGTON (Reuters) — The United States economy is struggling against “headwinds” that mean the government must retain the ability to respond to unexpected crises, even as it starts to wind down emergency programs, the Treasury secretary, Timothy F. Geithner, said on Thursday.

Geithner Statement to Oversight Panel Testifying before a Congressional panel that oversees the Troubled Asset Relief Program, or TARP, Mr. Geithner took credit for having averted a complete financial disaster but warned against becoming too optimistic about a rebound.

“The financial and economic recovery still faces significant headwinds,” he said, citing high unemployment and home foreclosure rates, tight credit and impaired securitization markets, especially for mortgage-backed securities.

Mr. Geithner laid out a strategy for winding down the bank bailout program but also defended his decision on Wednesday to extend it past a scheduled year-end expiration, until next Oct. 3, as a necessary guard against a sudden economic relapse.

“History suggests that exiting too soon from policies designed to contain a financial crisis can significantly prolong an economic downturn,” he said.

The relief money was approved by Congress last year as a $700 billion program to buy impaired assets from banks but was immediately converted into a fund for the Treasury Department to make capital injections into ailing banks.

Big banks now are eager to exit the program by repaying their bailout money, partly to free themselves from pay restrictions.

Bank of America sent Treasury a $45 billion check on Wednesday to do so. Citicorp also is talking to Treasury about a repayment.

Mr. Geithner said it was “a good thing for the country that banks are eager to get out” of the program but it has to be done with care. “We are not prepared to have this money come back in a way that would leave the system or these institutions without adequate capital to face their challenges ahead.”

Citigroup got $45 billion of relief money last year.

Mr. Geithner said the investments made in banks were returning more money sooner than thought and the next few weeks will bring ”substantial income” from more sales of warrants to buy stock in banks that are repaying bailout money.

He said he was extending the program, on a modified basis, through next October because he did not want a repeat of the situation in which the government potentially faces a crisis without having adequate tools on hand to deal with it.

The Congressional Oversight Panel on Wednesday released its assessment of the program, conceding that while it had helped stabilize the financial system it had not succeeded in bolstering lending.

In addition, the panel said, it failed to resolve the issue of too-big-to-fail financial institutions and created an implicit guarantee that the government would again bail them if necessary.

Mr. Geithner said not all relief investments would be returned.

“There is a significant likelihood that we will not be repaid for the full value of our investments in A.I.G., G.M. and Chrysler,” he said, though some $15 billion more might come back than originally projected

http://www.nytimes.com/2009/12/11/business/economy/11tarp.html?ref=business

My 18 points guide to Successfully compounding your money in Stocks

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

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

11 Lessons From Peter Lynch

Peter Lynch taught me:

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

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

Capital Expenditure

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

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

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

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

Less is better.

Benjamin Graham's 113 Wise Words

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

Philip Fisher's Wise Words

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

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

(Common Stocks and Uncommon Profits)

The Ultimate Hold-versus-Sell Test

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

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

No equivocation. Yes or no?

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

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

Some thoughts on Analysing Stocks (KISS)

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

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

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

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

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

A single quote by Graham on page 516 struck me:

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

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

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