Come and have a drink with me!

Don't Trust Anyone Who Doesn't Drink
John Carney | Jan. 14, 2010,


Why do so many social and business functions involve drinking?

Because it's one of the easiest ways to properly evaluate who is trustworthy. In vino veritas and all that.

But don't take our word for it. Here's a new economics paper making the argument.

In Vino Veritas: The Economics of Drinking:

It is argued that drug consumption, most commonly alcohol drinking, can be a technology to give up some control over one's actions and words. It can be employed by trustworthy players to reveal their type. Similarly alcohol can function as a "social lubricant" and faciliate type revelation in conversations. It is shown that both separating and pooling equilibria can exist; as opposed to the classic results in the literature, a pooling equilibrium is still informative. Drugs which allow a gradual loss of control by appropriate doses and for which moderate consumption is not addictive are particularly suitable because the consumption can be easily observed and reciprocated and is unlikely to occur out of the social context. There is a trade-off between the efficiency gains due to the signaling effect and the loss of productivity associated with intoxication. Long run evolutionary equilibria of the type distribution are considered. If coordination on an exclusive technology is efficient, social norms or laws can raise efficiency by legalizing only one drug.

(Hat tip: Larry Ribstein.)

http://www.businessinsider.com/dont-trust-anyone-who-doesnt-drink-2010-1

China Responds To Google: Go To Hell

China Responds To Google: Go To Hell

Henry Blodget |
Jan. 14, 2010,

China's initial public response to Google's threat is in, and it's what one would have expected: Go to hell.

Now the two can start negotiating quietly behind the scenes.

We still expect this war to be resolved in a compromise in which both parties declare victory and reserve the right to kill each other later. There's a substantial chance, however, that Google will be forced to actually follow through on its threat and leave the country. (Backing down at this point would be a disaster).

There's no chance, meanwhile, that the Chinese government will allow itself to appear to be pushed around by a pissant Internet company. So Google had to have expected this.

FT: One of China’s top censors on Thursday reaffirmed the state’s commitment to monitoring the internet, showing no signs of compromising in the face of Google’s threat to quit the country.

Wang Chen, head of the State Council Information Office and deputy head of the Communist party’s propaganda department, said internet media “must live up to their responsibility of maintaining internet security”, including censoring content.

“We must do our best to intensify self-discipline among internet media to guarantee internet security... Online media must treat the creation of a positive mainstream opinion environment as an important duty,” he said.

"A positive mainstream opinion environment." And we thought our media was bad.

http://www.businessinsider.com/henry-blodget-china-responds-to-google-go-to-hell-2010-1

Jim Chanos: China Is Headed For A Huge Crash

Nov. 11, 2009,

 

The China bears could be dismissed as a bunch of cranks and grumps except for one member of the group: hedge fund investor Jim Chanos. Read the whole thing >

 

Chanos is reportedly attempting to short the entire Chinese economy. What's fueling the short case against China?

 

• The $4.3 trillion Chinese economy is under-performing despite a $900 billion stimulus program.
• China seems to be cooking its books. For instance, it reports that car sales are surging while gasoline consumption is flat. Is that realistic? Or are state run Chinese companies just stock-piling cars?
• China may have too much capacity. The central planners built out productive capacity for a booming economy but China is stalling. In nearly every sector of the economy, China is in danger of producing huge quantities of goods with no buyers.
• China's economic and political posturing signals that its leaders have no idea what is in store for them. The result may be a surprising economic collapse, akin to what happened when the housing bubble popped in the US.

 

http://www.businessinsider.com/jim-chanos-china-is-headed-for-a-huge-crash-2009-11

The practicalities of growth in your business

There are many resources that need to be considered when deciding to grow the business.  Among these are:

FINANCE
It is unlikely that the business will have generated large reserves of cash that will enable expansion to be paid for from internal sources.

STAFF
Do you have sufficient staff to undertake the extra work, or will you need to employ more people?

PREMISES
Do you have sufficient rooms for the new production facilities and increased stock levels of both materials and finished parts?

MARKETING
Can your current marketing arrangements cope with increased sales and the new product or service?


Having posed some questions regarding the availability of finance, staff, and premises, it is necessary to know where to look for sources of supply of these.

The "go-it-alone" option for growth

One option for growth that falls between internal and external growth is the go-it-alone option.

1. The major benefit of this option is that the business retains full control with all profits (or losses) retained in-house, as are all designs, manufacturing and marketing knowledge.
2. It presupposes the business is in good financial and operational "health": and that it can supply all of the necessary resources to launch and supply into the market.
3. Although the title of the option suggests that all the work is carried out in-house, this will depend on the manufacturing strategy that is operating within the company.
4. Even though most businesses would like to keep control of all the processes involved in manufacturing their products or the services they offer, economics and common sense decree that some processes are best performed by outside contractors.  This is referred to as a "make or buy policy" and will determine where work is performed.
5. The work of the contractors is controlled to advantage through agreements and contracts.

Internal Growth through Diversification into other related products or services

Many small businesses can grow by diversifying into other related products or services.  For example, an office stationery supplier might decide to add a range of computer consumables to its portfolio.  This could result in existing customers now buying these items as well.

Diversification can occur in different forms, such as:

1. Selling similar or related new products to exisitng customers.
2. Selling existing products into new markets, even overseas.
3. Selling new products to new markets.

Before deciding on diversification, take the following actions:

1. Thoroughly research both markets and customers for the new product or service.
2. Decide on a clear development strategy.
3. Do a trial run with a limited output of prototypes to test the market before committing to the new product or service.
4. Ensure that the internal departments and outside suppliers can maintain a steady throughput to provide continuity.

It would be damaging if the customer orders are plentiful but the supply of the product or service is intermittent. 

In early stages, diversification will rate highly in your risk assessment program, and in order to mitigate some of the risk, it is advisable to try to secure customer orders or commitments in advance of stepping up production.

Business strategy for growth

Business strategy is ... "....the determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals."

This necessitates a thorough evaluation of a business to get a clear picture of its strengths, weaknesses, opportunities and threats (SWOT).  This will provide important insights into the type of growth strategy that best suits the business for the immediate and long-term future.


INTERNAL GROWTH

1. Are there ways in which you can improve the efficiency of the business? 
2. The use of a system of statistical process control will show if your processes are working correctly.
3. Could the quality of the product or service be improved?
4. Adopting a system of Total Quality Management (TQM) may effect a change to your end product.
5. Are costs as competitive as they can be?
6. If these checks are carried out successfully, then it is reasonable to expect that the business will grow by its organic growth.  This will make the business more competitive.

The first thing to establish is whether you can increase your share of the market.  To do this, you would have to take customers from your competitors or attract new customers.  You have to understand your customer base and that of your competitors.


CUSTOMERS

Who are your existing customers?
Are there any that you ahve not yet targeted?
Are there any that no longer do business with you?   Why?
Do any of them buy from your competitors?  Why?
Do they have instant, alternative choices?


COMPETITORS

What are their strengths?  Can you match them?
Have you lost customers to them?
What do they do better than you do?


OURSELVES

What is our sustainable competitive advantage?
What do we do that is better than our competitors?
What is our unique selling point?
How will growth affect our pricing, marketing and service levels?


Before increasing output by increasing the capacity of your processes, you need to ensure that there will be a market for your proposed additional producsts.  Many companies have increased output in the anticipation that the market will follow, only to find that there is a downturn or that a competitor has already improved performance.

Assess your options for growth in business

After you have completed a full assessment of your business in its current state and you feel confident that you have all departments and areas working efficiently and under control, it is time to look to the future.

1. What is your vision for the future?
2. Does your business plan offer a realistic guide as to your future direction?
3. Do you just want to consolidate your current position or do you want to find ways to make the business grow?

Starting a business can involve lots of hard work, courageous decisions, and not a few risks, and it may seem a good idea to just sit back, relax, and enjoy the benefits of all your efforts.

1. Can you afford to do nothing?
2. While you do nothing, your competitors will be growing and taking your market share - this will seriously damage your business's future.
3. To ensure that your business remains a success, it is time to identify your options for growth.

Growth options can be divided into two categories, internal and external.

1.  Internal growth or growth that can be achieved within your own business will involve

• increasing market share or
• diversification.

2.  External growth will involve joining forces with another business, either

• by merging with or acquiring another company or
• by forming a partnership or joint venture with another business.

Gathering Information to create the budget

Once you have identified your objectives, you need to turn to the important process of gathering key information to enable you to create the budget.


ESTIMATING SALES AND REVENUE

As sales of products and services are the lifeblood of most companies, you will inevitably start with a projection of sales and revenue.  This can be a tricky process because it involves guessing the future, but there are certain actions you can take to make a forecast easier. 

• USE PAST SALES
• DISTINGUISH BETWEEN PRODUCTS
• LOOK AT THE COMPETITION
• ASK SUPPLIERS
• READ SECTOR REPORTS
• STUDY INNOVATIVE PRODUCTS
• MONITOR CASH FLOW

ESTIMATING EXPENDITURE

The next part of your budget should include all the costs of operation involved in producing and delivering the product or service to customers.  These are factors that need to be considered:

• DEFINE EXPENDITURE TYPES:  4 main types:-

CAPITAL COSTS
SPECIFIC PRODUCT COSTS
ONGOING COSTS
START-UP COSTS

• DEFINE EXPENDITURE TIMING
• ESTIMATE PROFITS/LOSS

CHALLENGING THE FIGURES

At this stage, you may feel confident about stating some figures (more typically expenditure because these are easier to predict) and more nervous about sales and profit figures, mainly because these are subject to

• a number of variables such as the action of competitors or
• changes in the economy that you have not foreseen. 

The following approaches may be helpful in allowing you to challenge the figures that you have initially compiled.

• "WHAT-IF" SCENARIOS:  by working on the assumption that the final result is not as favourable to the company as you had hoped.  To avoid becoming too negative, you could include two sets of figures, underlying which you place your initial set of projected figures.
• ZERO-BASED BUDGETING:  the process whereby a company decides what target it wants to achieve, how this can be achieved, and what resources it needs to implement the result; also known as bottom-down budgeting.
• ACTIVITY-BASED COSTING:  costing by activities that define any actions that a company takes regularly as part of its day-to-day operations.

Creating a cash budget

Planning for a final (commonly called master) budget will be incomplete without a cash budget.  This will show how money will be mvoed to and from the business account to make it possible to finance the company's activities.

BENEFITS

1.  PLANNING TOOL
A cash budget shows the cash effect of all plans made in the budget.  If the cash flow is negative, the company knows it either

• has to put more pressure on debtors or
• seek further sources of finance. 

For instance, disbursements are lumped together, and you need to spread your payments to creditors more evenly throughout the year.  This will lower bank credit and interest costs. 

2.  WARNING SIGNAL

A cash budget may also give management a sign of the potential problems that could emerge and gives them time to take action to avoid such problems.


An example of a cash budget
http://spreadsheets.google.com/pub?key=thlpxQ9A0KkLx27yOw9nvBQ&output=html

Start-up Budget Objectives

For start-ups, it may be useful to try to answer the following set of questions to help you make some reaonable assumptions about your business and its early days of operating and trading:

1. How many products/services do you expect to sell in the first year?
2. Can you predict a rate of sales growth for the next three years?
3. How will you price your products/services?
4. What will be the cost of producing your product/service?
5. What will your operating expenses be?
6. How many employees do you intend to hire and how much will you pay them?
7. Have you established whether your business will be a proprietorship, a partnership, or a corporatin?  The tax consequences of each form will vary considerably.
8. Will you be leasing/renting/buying an office?  What will the costs be?
9. How much finance will you need to raise?  What is the interest rate on funds that you are borrowing?
10. Will you sell on credit?  Have you established what payment terms you will get from suppliers and what you will offer customers?

Market strategy: Moving from recovery to expansion

The cyclical run in the market remains firmly intact throughout 1H2010 on three counts below:

• Market performance historically strongest when GDP accelerates
• Earnings-driven re-rating cycle never been shorter than 12 months from trough.
• Risk to earnings on upside, as economic growth accelerates.

Our economist expects GDP to expand by a robust 5.3% in 1Q10, and by 4.2% in 2Q10.  The macro growth momentum, however, is expected to decelerate, with GDP expanding by only 2.5% in 3Q10 and 2.1% in 4Q10 as the low base effect tapers off moving towards the second-half of the year.

The present rally is now coming to 10 months from lows seen in March 2009. 

Cyclicals are expected to deliver the strongest earnings rebound as end-demand and margin recovery kick in to accentuate the growth trajectory off a low base in 2009 where earnings were diluted by writeoffs and pre-emptive loss provisions.

Overweight stance maintained on the Glove sector, with buys on both Top Glove and Kossan

Despite meteoric share price appreciation for glove manufacturer stocks, valuation remains undemanding given robust earnings performance.  At current share prices, both Top Glove and Kossan are trading at PE of 11x and 10x FY10F earnings, well below its respective peaks of 30x and 18x.

Solid earnings growth as supplanted by

• capacity expansion, and
• positive newsflow

should lead to further expansion in PE multiples.

Key risks include

• a sudden surge in latex price,
• energy input costs or
• an unfavourable ringgit/US$ foregin exchange rate movement.

Benny Chew
AmResearch
Published in the Edge Jan 18, 2010

Monitoring the budget

After a budget has been written and approved, the task of monitoring the budget begins.  Inevitably, actual events will produce results that vary from the budget.  These are recommended steps to monitor the results.

1.  SET A TIME PERIOD
With an annual budget, you will have to wait a couple of months after the end of the yar.  However, most budgets allow for quarterly, if not monthly, observations based on monthly projections.

2.  REGISTER ACTUAL RESULTS
The first step is to write down the results achieved by the company and compare them with projections.  Any discrepancies are typically called variances.  When the variances are over 10 percent, it is worth looking into the reasons.

3.  CATEGORISE VARIANCES
It is easier to assess the variances that concern you by categorizing them into price, volume and timing.

4.  ANALYSE VARIANCES
With each variance, ask what could have led to the miscalculation.  The causes are usuallly budget errors, the result of poor preparation, or changes that result from external factors such as economic change.

5.  TAKE CAUTIOUS ACTION
Sometimes it's better not to take swift action.  Blaming staff for not forecasting an event, when in reality they had a few ways of predicting a result, can damage morale.  Be cautious.  If you can make amends, look at the expense and find out if there are ways of reducing overhead.

6.  REVIEW TARGETS
Some variances may be the result of overly optimistic revenue projections.  Were the sales targets unattainable?  Study performance of competitors and analyze whether targets were realistic.

7.  REVIEW PROCESS
You should review the way the budget was put together.  Were the objectives set by top management in a top-down fashion? Were middle and lower ranking directors encouraged to provide their opinions on the company goals?

Defining budget objectives

Budget are made primarily to help meet objectives. 

As a result, the type of budget you devise will vary considerably depending on the ultimate purpose of the plan.  The following steps will help you define your objectives:

1.  UNDERSTAND YOUR COMPANY
Identify your company's Strength, Weaknesses, Opportunities and Threats ( a particular technique known as SWOT) can help you amass valuable facts that will help you identify necessary action to take:

• STRENGTH:  What advantages does your company have over rivals?
• WEAKNESSES:  Where is the company underperforming and what are competitors doing better and why?
• OPPORTUNITIES:  Where are the biggest chances for growth?
• THREATS:  What are the biggest obstacles facing you:  for example, competition, or shortage of investment capital?

2.  LISTEN TO COMPANY SECTIONS
If you are a small company, it will be easier for you to identify the core strengths, weaknesses, opportunities, and threats but in a larger company, these may vary significantly. 

• You need to gather information from different deparments to ensure their needs are met by the budget. 
• For instance, marketing and advertising may be understaffed, and this could negatively affect overall sales, no matter how much time you've put into improving the core product.

3.  SUMMARIZE CORE AIMS
Summaries of the core objectives of the company and the different departments, or mission statements, could include

• "We are trying to increase revenue."
• "We want to raise market share by xx."
• "We need to focus on cutting costs."
• "We need to research new product lines."

4. SET FINANCIAL TARGETS
Make sure you have taken into account the financial targets of every department, including

• marketing and advertising
• purchasing/inventory
• personnel
• administration
• finance department
• sales
• customer service

TIMING OF A BUDGET

TIMING OF A BUDGET

1. There are no fixed time periods a budget should cover. The longest range budgets can cover a period of between three and five years, although the most typical period is one year, to coincide with the company's financial year. This is called a fixed budget.

2. Even an annual budget is typically split into quarterly or monthly statements to make the process more manageable and easier to follow. A fixed bduget that is regularly updated to keep up with rapid changes in the company's particular sector is sometimes called a rolling budget.

3. Some businesses budget on a 1-4 week cycle, but these are most effective when they work within a longer time framework.

4. For a one-year cycle, it is best to set the next budget at least three months before the end of the current budget. For a shorter-term budget (one month, for instance), the process should have started at least by the third week of the current budget.

Why budget?

The key to successful financing of daily operations is to budget.

These are some of the key benefits of a well-planned budget:

1. ANTICIPATE PROBLEMS
2. PERSUADE BACKERS
3. MEASURE RESULTS
4. IDENTIFY PROBLEMS
5. IMPROVE DECISION MAKING
6. MOTIVATE STAFF
7. SAVE TIME
8. CREATE STRATEGY

1.  ANTICIPATE PROBLEMS
The process of budgeting forces you to anticipate and prevent problems.  It demands that you estimte how much capital you are going to need for your daily operations and how you will meet these financial obligations without facing a cash flow crisis.

2.  PERSUADE BACKERS
With a budget that anticipates potential bottlenecks in your operations and delays in cash flows, you will be in a better position to make a case for a loan from your bank or investment fund.

3.  MEASURE RESULTS
A budget or plan helps you keep score:  effectively you are meeting your objectives because you have a concrete list of landmarks or targets against which you can measure results.

4.  IDENTIFY PROBLEMS
Budgets try to create the most ideal scenario for your business to follow, but they can also throw up any potential challenges or obstacles that you might otherwise have ignored in your pursuit of preferred results.

5.  IMPROVE DECISION MAKING
When you lay out a template of what the company can achieve and how much it will cost, you are in a better position to make some tricky decisions such as dropping a favourite project because the figures won't add up or to pursue a strategy that you had written off initially.

6.  MOTIVATE STAFF
A budget helps staff to understand what direction the company is going and the parameters in which it is working.  Workers can follow targets, such as sales figures or number of new customers recruited, and measure how well they are performing.

7.  SAVE TIME
While many managers feel that the research and paperwork involved in preparing a budget can cause unnecessary delays to the core operations of the business, the opposite is in fact true.  Lack of planning will inevitably lead to stalled projects while directors grapple with problems that could have been anticipated at an earlier stage.

8.  CREATE STRATEGY
You may have a clear idea of what the business needs to achieve in the short term, but you may have overlooked how the company and the sector you are working in may change in 12 months' time.  A budget can help develop a picture of the future and force you to implement relevant strategies to cope with any adverse conditions.

What is a budget?

A budget is a tool for converting plans into reality.

It covers the process of

• defining objectives;
• forecasting expectations of sales, profits, and expenses of every sort;
• deciding what actions will best help the company achieve these targets;
• determining how much money will be needed to support these actions; and,
• finally, providing a way to monitor whether the actions chosen are the most appropriate at the current time, or whether they need to be modified in some way.,

FEATURES OF A BUDGET

A budget should include the following components to be effective:

1. Clearly defined objectives, both short- and long-term.
2. Estimates of revenue amounts.
3. An analysis of revenue payments:  how far do they lag behind payment of expenses?
4. Estimates of expense amounts and timing of expense payments.
5. A list of ongoing direct and indirect costs.
6. A cash budget to predict cash flow over time.
7. Procedures to monitor the progress of the budget.

Budgeting for Future Success

Why budget?

Budgeting forces companies to anticpate and prevent problems, create strategy, measure results, motivate staff, and save time.

What is it?

A budget covers the process of :

• defining objectives;
• forecasting expectations of sales, profits, and expenses of every sort;
• deciding what actions will best help the company achieve these targets;
• deciding how much money will be needed to support these actions; and
• finally, providing a way to monitor whether the actions chosen are appropriate or whether they need to be modified.

When should a budget be created?

There are no fixed time periods a budget should cover.  The longest range budgets can cover a period of between three and five years.  A more typical period is one year, to coincide with the company's financial year.

How should a budget be created?

DEFINE OBJECTIVES by

• understanding your company,
• listening to company sections,
• summarizing core aims,
• setting financial targets, and
• defining strart-up objectives.

GATHERING INFORMATION by

• estimating sales and revenue,
• estimating expenditure,
• estimating profits/loss, and
• challenging the figures.

CREATE A CASH BUDGET.  No final (or master) budget can be complete without a cash budget that will

• show how money will be moved to and from the business bank account.

How should a budget be monitored?

SET A TIME PERIOD.  Although some companies operate on an annual budget, most allow for quarterly, if not monthly, observations.

REGISTER ACTUAL RESULTS.  Write down the results achieved by the company and compare them with projections.

CATEGORIZE VARIANCES.  Divide into price, volume, and timing.

ANALYZE VARIANCES.  Ask yourself in each of the categories, what could have led to the miscalculation.

REVIEW PROCESS.  Finally, review the way the budget was put together.  It may be that the objectives were unrealistic or not defined specifically enough.

Facing threats from market forces

Consider a small-town five-and-dime store that saw its business start to erode when the first Wal-Mart moved to town 40 years ago.  Think of the 75 year old family bookstore that started to see fewer customers when the first Barnes & Noble superstore opened at a nearby shopping center.

Even for multigenerational businesses, times change.  Most importantly, the players change, too. All business owners must keep valuation in the back of their minds when they sense that a game-changing company has moved into their marketplace.

But competitors aren't the only market forces that change a company's fortunes.  Look at what outsourcing and more modern technologies have done to established companies.  If they haven't kept up, they have three choices:

• modernise (often though for smaller companies to afford),
• put themselves up for sale (to a market that may not be ready to buy), or
• simply fade away.

Many business owners may not see the end coming, whereas the best valuation professionals do.  Valuation is not all about that final dollar figure; it's about measuring a business's short- and long-term viability as well.  A valuation expert with knowledge of your industry - or access to outsider experts who have that knowledge - is as much a central business advisor as your accountant or attorney.

Main principles of business valuation

The concept of value and some of the main principles of business valuation.

1.  Value differs from price

"Price is what you pay.  Value is what you get."  Buffett once said.

But, only if you do your homework.

Getting to the right price in any deal involves understanding what business assets are truly worth and then structuring a deal around financing and tax realities.

2.  Planning drives value

Creating value involves business planning and execution.

Creating value - long term growth in asset value in a company you've built - is something you need to focus on, because a company is the sum of real and tangible assets, investments, ideas and management talent.

If you can look at all those working parts of a business through the prism of value, the desire to determine and create value in a company can become a much more important driving force in its growth than simple profits and losses.


3.  No two valuations are exactly alike

No two businesses are exactly alike; neither are the goals and circumstances of business owners.

Valuation isn't an exact science for another reason as well:  "The risk inherent in any business situation is far from static.  Depending on the economy and the state of the industry the business operates in, the company may be under tremendous prssure to stay afloat, or it may have great opportunities for growth.  Any time the economy goes through a major convulsion, people take a fresh look at what value means and at the realities of any deal.  In 2008, US was in the grip of a worldwide credit crisis - an economic slowdown that is redefining the values of a host of assets, from companies to private homes.

Proper business valuation takes a lot of practice.  People with finance degrees and long experience in accounting or other numbers-related fields aren't always natural at valuation, either. You should learn the ins and outs of business valuation and know the areas in which you can handle valuation on your own - and those for which you should hire some help.

4.  Valuation isn't a one-time deal

Most tax, business, and personal finance experts say that even if you're years away from retirement - or years away from your next business idea - keeping your valuation numbers current is a good idea.  This way, you can make changes and investments in the business so you can leave the business with the highest valuation possible.

How often should you run valuation numbers?  It varies based on need. 

If you're working with a business or tax planner, discuss the creation of a valuation system for your business, whether it's something you access yourself or have an expert handle at regular intervals.

Everything has a value.

Everything has a value.  Putting value in dollar terms is the cornerstone not only of running a business but also of investing in almost any form.  Knowing how to arrive at a value for the physical and intrinsic characteristics of a business is essential to building wealth of all kinds.

People who invest in companies need to look beyond the current state of the business they own (or want to own) and consider what decisions they need to make to boost value.  People who have experience in those industries are often best equipped to make those decisions, but it often helps to engage a business valuation expert for guidance. 

Why Now's the Time to Get Defensive

Why Now's the Time to Get Defensive
By Todd Wenning
January 13, 2010

Do you hear that?

 

To steal a phrase from Simon and Garfunkel, it's the sound of silence in the market. And it's making me nervous.

 

Remember just 12 months ago, when the CBOE Volatility Index, the "VIX," was comfortably over 40, implying significant investor uncertainty? Those were indeed scary times, a few months after Lehman Brothers collapsed in September 2008, but as an investor I was actually more comfortable then than I am right now. There were a lot of great stocks on sale!

 

You haven't heard about the "VIX" for a while now because, guess what, it's back below 20 -- implying investor complacency. We haven't been this low since (gulp!) August 2008, before the Lehman Brothers debacle.

 

Scared yet?
Even though the stock market has charted a steady upward course since last March, I have a hard time believing that all is well enough in the global economy to justify complacency.

 

That's why now is the time to get defensive. That means:

 

• Having cash available to invest.
• Considering options strategies to protect your gains.
• Building a watch list of stocks you'd want to buy at 10%-15% below current prices.

Traditional defensive maneuvers would typically include increasing your bond exposure, though with yields so low and interest rates inching higher, I don't think this is a great place to put new money right now.

 

My best friends call me "Cash"
Thanks to the government's policy of low interest rates and quantitative easing, there's been (by design) little reason to hold a lot of cash. That's helped fuel both the bond and stock markets, as investors looking for even a tiny profit needed to put their cash to work somewhere.

 

Still, cash isn't trash and there's simply no substitute for quickly seizing opportunities in the market. If you're 100% invested and the market loses value, you need to sell something (at a lower price, of course) before you can buy anything else. That's a tough position to be in when stock values become much more attractive.

 

In our Motley Fool Pro portfolio, for instance, we took advantage of last year's market downturn by using our cash to pick up solid companies like Intel (Nasdaq: INTC) and Autodesk (Nasdaq: ADSK) at very attractive prices. Today, we've strategically left a large cash balance in the portfolio to grab future bargains the market may throw our way.

 

Yes, you have options
Market volatility plays a major role in the pricing of options (calls and puts). This is because investors perceive "risk" as volatility and when volatility is low there's simply less demand from options buyers (who have the right to buy and sell a stock) who seek to improve returns with big moves in stock prices.

 

All of this is to say that when options prices are low and the market's been rallying, consider protective puts on stocks and exchange-traded funds that have made you big money.

 

Let's say you bought 100 shares of SPDR Gold Trust (GLD) ETF in November 2008 for $75 -- a $7,500 investment. The ETF currently trades for about $113 -- a nice 50% gain for you. By purchasing a March $110 put for $2.75, you can lock in a sales price of $110 for your 100 shares through March 19, 2010, for $275 per contract.

 

One scenario: The ETF doesn't fall below $110 by March 19 and you're out $275 (4% of your original investment). But hey, you can still enjoy any upside left in the ETF. The other scenario: The ETF falls well below $110, but you can still sell for $110 (minus the $2.75 per-share cost) thanks to the protective put you bought.

 

Think of buying protective puts on your big winners as insurance against the chance of losing those gains in a market downturn. Even though you may grumble when you pay the premium for the put, just as with your auto insurance, you'll be glad you did if something bad happens. At the very least, it can give you some peace of mind in an uncertain market.

 

Make a list, check it twice
U.S. stocks have made a huge recovery from their March 2009 lows, and while I don't think they're anywhere near bubble territory, good values have become harder to find. That doesn't mean you should stop researching, though.

 

Here are five S&P 500 stocks with returns on equity over 15%, price-to-free cash flow ratios below 20, and manageable debt levels -- in other words, strong companies worth buying if the market does take a downturn.

 

Company
Price-to-FCF
Return on Equity
Total Debt to Equity

 

Coach (NYSE: COH)
15.9
38.7%
1.37%

 

Gilead Sciences (Nasdaq: GILD)
16.0
49.4%
24.40%

 

Cisco Systems (Nasdaq: CSCO)
18.0
15.2%
25.70%

 

Stryker (NYSE: SYK)
18.3
17.7%
0.30%

 

Automatic Data Processing (NYSE: ADP)
17.1
25.4%
0.70%

 

 

Data provided by Capital IQ, as of Jan. 12, 2010.

 

 

Great companies don't always make great investments -- they still need to be bought at the right price.

 

Cisco Systems, for instance, has doubled its net income over the past decade, but remains 50% off its January 2000 prices. That's because investors were paying too dearly for Cisco's prospects during the dot-com bubble and, even though Cisco is a much better company today than it was in 2000, its 10-year stock chart doesn't reflect this progress.

 

That's why it's so critical to buy great companies only at the right prices. Another market dip could give us that opportunity, so prepare yourself now with a good watch list.

 

Get started now
When the market grows complacent, you need to get defensive -- no matter where you think it's going. It's only a matter of time before something spooks the herd and volatility once again ensues. By having adequate cash on hand to buy solid stocks at good prices and using options strategies to protect your gains, you can set yourself up for better long-term investment success.

 

That's our aim at Motley Fool Pro, where we use stocks, ETFs, and options to help investors make money in all types of markets. If you'd like to learn more about Pro, simply enter your email address in the box below.

 

http://www.fool.com/investing/general/2010/01/13/why-nows-the-time-to-get-defensive.aspx

Feud over family company is better avoided through careful planning

Saturday January 16, 2010
Feud over Syed Kechik’s millions goes to High Court
By NURBAITI HAMDAN


KUALA LUMPUR: The children of the late Tan Sri Syed Kechik Syed Mohamed Al-Bukhary have gone to court to fight over the RM400mil estate he left behind.

The High Court granted an injunction applied by his two daughters – Sharifah Zarah and Sharifah Munira – to prevent their half-brother Syed Gamal from interfering in Syed Kechik Holdings Sdn Bhd’s affairs yesterday.

Syed Gamal, 45, who is Syed Kechik’s only son from his first marriage, is not allowed to intervene in the administration, enter the premises and access the records and accounts of the company.

He is also barred from interfering in the duties of the company directors.

The sisters, who are directors of the company, were not present but were represented by laywer Datuk Vijay Kumar.

This is the second injunction granted by a court in the family saga that started after Syed Kechik’s death last year.

Syed Gamal had obtained an ex-parte injunction at the Syariah Court on Sept 14 to stop his 44% stake in the company from being sold or liquidated.

Justice K. Anantham, who presided over the High Court case in his chambers at the Jalan Duta court complex here, ruled that the Syariah Court had no jurisdiction over the company because it is a corporate entity.

Syed Gamal, who was with his cousin Syed Azman Syed Mansor Al-Bukhary, said his lawyers would appeal against the decision.

“I will continue with my struggle to pursue my rights according to Faraid law. My rights have been denied almost all my life. This is not a struggle for myself but also for my family,” he said when met outside the courtroom.

Syed Gamal was represented by his three lawyers – Atan Mustaffa Yussof Ahmad, Az-mi Tan Sri Dr Mohd Rais and Zulkifli B.C. Yong. Syed Kechik died at the age of 81 on April 10 last year.

His son-in-law is Al-Bukhary Foundation chairman Tan Sri Syed Mokhtar Al-Bukhary.

http://thestar.com.my/news/story.asp?file=/2010/1/16/nation/5483928&sec=nation

This Is What a Real Growth Opportunity Looks Like

This Is What a Real Growth Opportunity Looks Like
By Tim Hanson
January 15, 2010

If you wanted to add some growth to your portfolio, you might consider the Vanguard Growth Equity fund. After all, it's an "aggressive" fund that seeks "long-term capital appreciation." And yes, its top holdings do seem like they'd be good ways to get growth:

Stock
Weight Within Fund

Baxter International
3.2%

Cisco Systems (Nasdaq: CSCO)
3.1%

PepsiCo (NYSE: PEP)
2.6%

Walgreen
2.6%

Berkshire Hathaway
2.5%

Progressive
2.4%

Google (Nasdaq: GOOG)
2.4%

Johnson & Johnson (NYSE: JNJ)
2.3%

Oracle (Nasdaq: ORCL)
2.3%

Apple (Nasdaq: AAPL)
2.1%



Data from Vanguard.
(My Comment:  Only good quality stocks)

But now let's take a look at just how much growth analysts actually expect from these companies:

Stock
Analyst 5-Year Growth Estimate

Baxter International
11.5%

Cisco Systems
11.25%

PepsiCo
10.75%

Walgreen
14.22%

Berkshire Hathaway
5%

Progressive
6.53%

Google
21.34%

Johnson & Johnson
7.54%

Oracle
12.19%

Apple
18.16%

Average
11.85%


Data from Yahoo! Finance.

Now, we all know that securities analysts are notoriously off in their projections, but let's assume that when we average together dozens of forecasts for these high-profile stocks, we at least end up in the ballpark. Assuming that, is 11.85% really the magnitude of growth you'd like to get out of your aggressive growth stocks?

If you're happy with 11.85%, then you can stop reading and stick with your high-profile "growth" stocks. But if you're looking for more, I recommend you read on.

Still with me?
The recipe for truly high growth has a handful of necessary ingredients. They are:

• A small company
• A wide market opportunity
• Meaningful macroeconomic tailwinds.

Think, for example, of Amazon.com (Nasdaq: AMZN) when it launched in 1995. It was a tiny company, one of the first e-tailers, and it had the rising tide of the Internet -- merely the greatest development of the past 25 years -- helping it along. Now ask yourself: Do any of the companies or industry opportunities in the table above fit that profile at all?

Let me introduce you to one that does
Now consider something like the pharmaceutical industry in India. Today, on average, Indians spend $10 per person per year on drugs. Americans, on the other spend, more than $750! That means the Indian pharmaceutical market needs to grow some 7,400% in order to be as big as the U.S. market is today.

This won't happen next year, or even over the next 10 years. Furthermore, because of discrepancies in purchasing power, the Indian pharmaceutical market may never reach the size the U.S. market is today. But let's assume it takes 25 years for the Indian market to reach half the size of the U.S. market. That would mean industry tailwinds of 15.6% annual growth ... for 25 years!

As for who benefits, think about a company like Dr. Reddy's Laboratories (NYSE: RDY). Although this Indian company is earning most of its revenue today in Europe and the United States selling low-cost generics, it's positioned extremely well to benefit from sales in the Indian market as it grows. It's a domestic company, so it knows the market well, and it specializes in marketing the low-cost drugs that are likely to sell best in India.

This, in other words, is what a real growth opportunity looks like. Dr. Reddy's is a small company with a wide market opportunity that stands to benefit from meaningful macroeconomic tailwinds.

Looking for more?
At Motley Fool Global Gains, we believe that real growth opportunities are available over and over again in the world's emerging markets, simply because these markets are creating so many meaningful economic tailwinds these days.

http://www.fool.com/investing/international/2010/01/15/this-is-what-a-real-growth-opportunity-looks-like.aspx

Setting your family meeting structure

Nothing is wrong with the living room for an annual family business meeting if you're talking about your immediate family, but consider these guidelines as your business evolves:

- Always have a formal agenda that all participating memebrs contribute to in advance.  As in any business meeting, you should be prepared with facts and exhibits, if necessary.  Distribute this agenda before the meeting so everyone can review it.

- Designate a facilitator for the meeting - in small groups, the responsibility can move around (it's good training for the kids), but as the group gets larger, you may want to work with a professional facilitator or someone who can manage the event without a stake in it. 

- Appoint someone to act as the meeting secretary to keep a running history of discussion in these meetings.

- Make it a priority to increase the growth and value of the company, and devote at least part of the meeting to report on how that's going.

- Set ground rules about anger and conflict, in family businesses, emotions run high, and unchecked emotion in family meetings can derail other critical business.

- As more family memebrs join the business, consider neutral territory if doing so makes the crowd more comfortable and facilitates discussion.

So your kids are in grammar school? Plan anyway

Considering how the transfer of assets will go in a family can never start early enough. 

Your objective is to preserve the value of the business and personal assets you've created, no matter how old you and your kids are. 

The uncertainty over the estate tax exemption (US) in the next few years means that the best idea is to discuss strategy now rather than later.

Most financial experts advise that you revise your estate plan every five years or as lifestyle issues change.

Remember, the estate and valuation issues with your business don't exist in a vacuum.  To ensure that the value of your business will benefit your kids and future generations, you need to do some very prescient planning.

Succession conspiracy in family company

Does your business look like this?

Ivan Landsberg, a Yale University expert in family businesses, coined the term succession conspiracy - how business owners, their spouses, their family members, and non-family co-workers either consciously or unconsciously make damaging decisions that foil the effective succession of the busines to the next generation.

He described three general types of family business management structures back in the 1980s:

Controlling owner:  A single owner is involved in every aspect of the business and makes critical decisions.  Typically little or no planning occurs for this owner's departure.

Sibling partnership:  Siblings may share leadership, or a lead sibling may be designated - or designated by default - to make most of the business's key decisions.

Cousin consortium:  This structure is common among some of the biggest family fortunes in the world.  When the business has been passed on to the children of prior sibling owners, eventually several branches of the family share ownership, and coalitions may be formed to create blocks of stock that represent more voting power.

Aligning with any of these ownership structures doesn't mean your family company is necessary sliding off the rails.  But if you recognise yourself in any of these structures, ask yourself whether the following also applies:

• The owner has created a succession plan that not only sets benchmarks for who the next generation leadership will be but also comes with full buy-in from all family memebrs, young and old, with a stake in the business.
• The owner and top family officers have spoken with family members recently either separately or in a group about their feelings about the business and whether any conflicts or issues need to be worked out.  Better yet, is there a formal meeting structure?
• The owner has helped craft - with experienced legal and tax professionals - a quality transition plan that allows her the money and freedom to work in the family business if she's asked or to comfortably start retirement or a new phase of her career.

Facts about family-owned companies

The following statistics were collected by the Boston-based Family Firm Institute:

The leadership of 39 % of family-owned businesses changed hands by the end of 2008.

34% of family firms expected the next CEO to be a woman; 52% of participants hired at least one female family member full time, and 10% employed two female family members of  the same status.

Of CEOs age 61 or older and due to retire in 2008, 55% had not yet chosen thier replacement.

Deciding What to do about the Family Company

Need to understand the followings:

Why parallel planning for the family and the business is crucial

Facts about family-owned companies

How families hurt their business's valuation without even knowing it

Ways to constructively manage family conflicts

Family friction and the need for valuation

When a founder dies

When a founder dies, families can go to war for reasons far more emotional than economical.  Relationships forged in childhood don't always translate into effective working relationships in a shared business concern.  At the same time, family members who have been longtime employees in a business may feel that they have a deeper stake in the business than cousins and siblings who have worked elsewhere.

Divorce

Likewise, divorce breaks up more than a few family businesses.  Both partie in a divorce frequently do valuation if a family business is involved as a prime asset. 

Family matters are critical drivers for valuation.

Activities boosting valuation

Numbers reveal behaviour.  So what exactly is value building behaviour in a company?  Here are some ideas:

• A strong management team with longevity.
• Hot products with plenty more in the pipeline - research and development spending that's paying off.
• Customers in a love affair with the company.
• A plant and equipment in top shape.
• Consistent upward trends in revenues and earnings - no big swings or extremes.
• Low employee turnover and high marks for its workplace.
• A wide variety of customers without anyone accounting for more than 5 percent of the company's sales or earnings.
• A history of an appropriate level of advertising.

e.g. Nestle Malaysia.

Acceptable debt

Is debt bad?  This is a controversial topic!

Although a solid credit record is a good thing for people and businesses to have, it's best for businesses to think in terms of how they can fund their operations from money they make doing what they do.

How do you know when a company has too much debt? 

Generally, if a company has solid cash flow and a  return on investment (ROI) that's significantly greater than the percentage it is paying on borrowed funds, it's probably going to be okay.

A balance sheet loaded with debt will devalue your business over time.  Therefore, if you find that you have to take on debt, treat it as a short-term expense to be extinguished quickly.  (That's not a bad idea for your personal finances, too.)

Is Value Investing Dead?

Is Value Investing Dead?
By Jordan DiPietro
January 14, 2010


Every year thousands of people make the trip to Omaha for Berkshire Hathaway's annual shareholder meeting. They come in fanatical droves -- from as far away as South Africa and Singapore -- to see the man whose extraordinary success has been largely attributed to one strategy: value investing.

Unfortunately, the original value crusaders, Benjamin Graham and David Dodd, are long gone, while Warren Buffett has become a touchstone in an investing landscape riddled with leveraged corpses, speculative traders, and overzealous CEOs.

We've squeezed almost every gem of wisdom from his meetings and transcripts, and we've analyzed his moves from every conceivable angle. All of this ultimately raises one question: Once Warren is gone, will the end of an era also mark the end of value investing?

Old school values
When Graham and Dodd's seminal piece, Security Analysis, was written in 1934, it was much easier to be a value investor.

First, the time was right. Still reeling from the Great Depression and unemployment of up to 25%, the Dow had lost about 90% of its value in three years. The tenets of Graham and Dodd -- to buy stocks for prices significantly below their intrinsic values and even their book values -- were especially applicable because prices were distorted, and many stocks were significantly undervalued.

Second, with most of the Dow 30 comprised of metal, oil, or manufacturers, balance sheets were pretty straightforward. Valuing stocks wasn't necessarily easy, but there were some pretty common elements to look for: book value, tangible assets, etc.

Third, if you look at all the value crusaders, they all share one unique attribute: tenacity. They had the doggedness to perform painstakingly tedious work, laboring over worksheets, completing arithmetic by hand. They just seemed to work, well, the hardest.

New school values
Seventy years have come and gone, and value investing has come under increasing criticism. In fact, I've seen money managers tell their clients that if their time horizon is less than two decades away, value investing is not for them.

Why? Take a look at the comparative performance of value versus growth over the last five years.

Indices
Top Holdings
2009 Return
3-Year Return
5-Year Return

Russell 1000 Value Index (IWD)
JPMorgan Chase (NYSE: JPM), General Electric (NYSE: GE)
19.2%
(7.9%)
(1%)

Russell 1000 Growth Index (IWF)
Cisco Systems (Nasdaq: CSCO), Wal-Mart (NYSE: WMT)
36.7%
(2.1%)
2.5%


What gives? Well, business is much more complex than it used to be. With intellectual property rights, patents, and licensing fees, studying balance sheets is a bit murky. Companies like Qualcomm (Nasdaq: QCOM), Pfizer (NYSE: PFE), and Merck (NYSE: MRK) are all wrapped up in intangibles, and its simply harder to predict future earnings.

In addition, the days of sweating over spreadsheets are over. Computer programs and stock screeners make it simple to find a company that fits a certain mold -- even the laymen can whittle down enormous loads of data and draw conclusions. The advantage of having the fortitude to do the "hard work" is gone, lost in a sea of statistics and a market inundated with information.

And finally, being a value investor requires a temperament few have -- especially given the above considerations. Asset manager Jean-Marie Eveillard said, in response to the question of why there aren't more value investors, given Buffett's success, "If you are a value investor, every now and then you lag, or experience what consultants call tracking error. It can be very painful. To be a value investor, you have to be willing to suffer pain."

So does this mean value investing is dead?

WWWD?
Value investing isn't dead -- but it's not going to look the same in the 21st century as it did in the 20th.

We just have to look at Buffett, who, like always, adapts to the times. As the market collapsed around us and blue chips fell by the wayside, he scooped up some $3 billion worth of General Electric, and recently invested in ExxonMobil and Nestle. He lent Goldman Sachs $5 billion and locked in 10% annual gains -- and of course negotiated an option that has already netted him close to $2.4 billion.

Deliberate, prudent, unyielding -- classic Buffett.

Today's market offers something unique to the 21st century -- a plethora of booms and busts. There have been more financial crashes in the last 30 years than in any other time period -- and that means there are price distortions that investors can take advantage of, just like Buffett has done lately. Value investing isn't dead, nor is it immaterial.

Don't get distracted by puzzling trading strategies or speculate on leveraged financials (thank you, Citigroup). Understand a business and invest in your area of competence -- when it's cheap.

And remember as well that the last five years don't dictate the future. From 1927-2005 (78 years!), value investing has outperformed both small and large cap growth stocks by a substantial margin. From 1975-2005, value stocks outperformed growth stocks in 12 out of 13 developing countries. Clearly, in both the U.S. and abroad, value reigns supreme.

So don't let the naysayers get you down -- there are still plenty of tremendous value stocks out there! Our Motley Fool Inside Value team practices what Warren preaches and scours the market for the best deals each month. This has been a difficult few years for our analysts, but they're still managing to beat the S&P 500 by over seven percentage points -- that's pretty impressive considering the challenging environment.

If you believe like we do that value investing is here to stay, and you want to...
http://www.fool.com/investing/value/2010/01/14/is-value-investing-dead.aspx

How to Fail at Investing in 5 Easy Steps

How to Fail at Investing in 5 Easy Steps
By Morgan Housel
January 14, 2010 | Comments (1)

I'm a fan of checklists. Especially the ones listing things you shouldn't be doing. It's easier to overlook what you shouldn't be doing than to focus on what you think you're doing right. If you're not humble enough to admit this, you've just proven the point accurate.

One such list I came across resides in Philip Fisher's groundbreaking 1958 book, Common Stocks and Uncommon Profits. Who is Philip Fisher? You could ask Warren Buffett, who admits, "I'm 15 percent Fisher and 85 percent Benjamin Graham." Ben Graham is Buffett's well-known, highly praised, mentor. Philip Fisher, a sort of godfather of growth investing, doesn't get enough credit.

Common Stocks and Uncommon Profits is one of the best guides for evaluating businesses ever written. Buried in the back of the book, right after "Five Don'ts for Investors," is "Five More Don't for Investors." It's quite simple. To fail at investing …

1. Overstress diversification
Diversification is usually a good thing, but Fisher cautions against blind diversification. In his own words, "Investors have been so oversold on diversification that fear of having too many eggs in one basket has caused them to put far too little into companies they thoroughly know and far too much in others about which they know nothing at all."

Far too many investors approach diversification with the mindset of, "I need financials. I need tech. I need telecom. I need healthcare," etc., etc. Wrong. What you need is diversification among good, high-quality companies, not a blind selection among diverse sectors. Let me give you an example of a "diverse" portfolio gone astray:

Financials: Lehman Brothers
Telecom: WorldCom
Energy: Enron
Industrials: General Motors
Technology: GlobalCrossing

These are obviously cherry-picked. But you can see how, in an attempt to blindly diversify among sectors, you can just as easily concentrate in failure. Even slight diversification among good companies that you understand can be superior to blind, yet broad, diversification.

2. Be afraid of buying on a war scare
Fisher writes, "The fears of mass destruction of property, almost confiscatory higher taxes, and government interference with business dominate what thinking we try to do on financial matters. People operating in such a mental climate are inclined to overlook some even more fundamental economic influences."

In short, don't be scared of investing in wartime. Some might even say: Buy on the cannons, sell on the trumpets.

Fisher's more direct point regards war's ability to spread inflation through increased government spending. Again, that's quite analogous to today. "Modern war always causes governments to spend far more than they can possibly collect from their taxpayers while the war is being waged. This causes a vast increase in the amount of money … the classic form of inflation."

But rather than sell in panic, "This is the time when having surplus cash for investment becomes least, not most, desirable."

Bingo. If you're scared witless over today's policies, and many are, cash isn't your answer. There are several very high-quality companies that derive enormous revenue from abroad, enabling success in the face of ravaging domestic inflation. Philip Morris International (NYSE: PM), Coca-Cola (NYSE: KO), and Johnson & Johnson (NYSE: JNJ) are three such examples.

3. Forget your Gilbert and Sullivan

"The flowers that bloom in the spring, tra-la, have nothing to do with the case." This Gilbert and Sullivan tune confused me, too. Fisher's analogous takeaway from the example is that "there are certain superficial financial statistics which are frequently given an underserved degree of attention by many investors."

His examples include focusing on past share performance and previous years' earnings. "One reason [investors are] fed such a diet of back statistics is that if this type of material is put in a report it is not hard to be sure it is correct" he writes.

Another set of data investors give undue focus to is quarterly earnings. Lehman Brothers was announcing record quarterly earnings not much over a year before it went kablooey. Ford (NYSE: F), Citigroup (NYSE: C), and Bank of America (NYSE: BAC) announced abysmal earnings in the process of becoming multibaggers last year. The underlying value of company's shares can be far disconnected from their short-term reported earnings.

4. Fail to consider time as well as price
"When the indications are strong that [rapid growth] is coming, deciding the time you will buy rather than the price at which you will buy may bring you a stock about to have extreme further growth at or near the lowest price at which that stock will sell from that time on."

This is a hard point to understand, but Fisher apparently studied companies' prices and found they were normally lower at certain points in their business cycle -- say, about a month before a venture reaches the pilot-plant stage. I finally equated it to Buffett's rule that, "if you wait for the robins, spring will be over." Waiting for Apple (Nasdaq: AAPL) to actually release a new product like the iPhone, for example, means undoubtedly foregoing the gains that anticipation has priced in.

5. Follow the crowd
Around 2000, top-selling books included Dow 36,000 and The Roaring 2000s. Whoops. In 2006, Why the Real Estate Boom Will Not Bust was a big hit. As of late, top-sellers have included The Great Depression Ahead and The Ultimate Depression Survival Guide.

Pandering to fear and exuberance at or near the peak is nothing new. That's when it's most prevalent. That's when it sells the most. But if the history of the outcome of these extreme views is any indication, you might find optimism in visiting the business section of your local bookstore. More often than not, popular yet awe-inspiring views are dead wrong.

Tying it all together
These are five useful tips for failing at investing. Please don't follow them. Truly triumphant investing means binding together hundreds of factors successfully.


http://www.fool.com/investing/general/2010/01/14/how-to-fail-at-investing-in-5-easy-steps.aspx

Beware of buying Private Limited Companies

Wednesday January 13, 2010
Beware of buying Private Limited Companies (PLCs)
Personal Investing - By Ooi Kok Hwa

SOME investors are concerned over the shares that they own in some private limited companies (companies that are registered as “Sdn Bhd”).

Most are just minority shareholders, owning about 10%-20% of the companies’ shares, and they have not received much dividend from the companies over the past few years.

Now that they intend to sell their shares, they do not know the right price to sell. In this article, we will look at two main key issues related to owning private limited companies’ shares, namely

• lack of marketability discount (LOMD) and
• lack of control discount (LOCD). 

Assuming two similar size companies, one public listed and the other a private limited company, the discount on the LOMD is as much as 35% (based on Mergerstat Studies in the US).

Comparing a major shareholder of a public listed company (Position A) and a major shareholder of another similar size but not listed company (Position C), the discount on LOMD is about 35% ((RM100-RM65)/RM65).

Many investors do not realise that there are big differences between owning controlling interest and non-controlling interest shares. In general, if we own 50.1% of a company’s shares, we should be in a controlling position.

From the table above, whether you are in Position B, which is the non-controlling interest of a listed company or position D, which is the non-controlling position of a non-listed company, the LOCD can be as much as 35% (based on Mergerstat Studies in the US).

For example, if you own 49.9% of a private limited company (you are in Position D) and your partner is the major shareholder of the company with 50.1% interest (he is in Position C), which is 0.2% higher than you, his shares are worth RM65 each, but your shares will only worth about RM42 each, which is at a LOCD of 35% ((RM65-RM42)/RM65).

The main reason for this LOCD is that your partner, having the controlling interest, he can pay himself with very high salary, high director’s fee and enjoy all other benefits from the company.

Since you do not have the controlling position of the company, you have no control over a lot of company’s major decisions. Given that it is not a listed company, your return will depend highly on the dividend payments from the company.

If your partner does not want to share company’s profits with you by not paying out any dividend payments, you will not receive any returns for holding this company’s shares.

Nevertheless, if you own 49.9% of a listed company, which is in Position B, even though your shares is still subject to about a 35% LOCD compared with Position A ((RM100-RM65)/RM100), given that it is a public listed company on Bursa Malaysia, you can easily dispose of your shares in the open market.

The worst case is if you are holding a minority interest and it is a private limited company (Position D), your shares’ value is only at 58% discount ((RM100-RM42)/RM42) compared with a controlling interest in a public listed company (Position A) as your shares are subject to discounts due to lack of marketability and lack of control.

Therefore, when position A is worth RM100 per share, the value per share in Position B and Position C is about the same at RM65 per share.

Hence, if you intend to invest in any private limited companies, you need to be in the controlling position of the companies. Otherwise, if you are just a minority shareholder, it is more advisable for you to invest in listed companies.

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

http://biz.thestar.com.my/news/story.asp?file=/2010/1/13/business/5458529&sec=business

Applied Value Investing

Applied Value Investing: The Practical Application of Benjamin Graham and Warren Buffett’s Valuation Principles to Acquisitions, Catastrophe Pricing and Business Execution

ISBN13: 9780071628181
Condition: NEW
Notes: Brand New from Publisher. No Remainder Mark.
Product Description

Since Benjamin Graham fathered value investing in the 1930s, the method of analysis has spawned a large number of highly successful investors, such as Graham’s own former student and employee, Warren Buffett, who is regarded as one of the most successful investors of modern times.

Over the years, numerous books have been published on Benjamin Graham’s approach. Most of these books present different interpretations of value investing and are generally introductory based. Until now, there has not been an advanced hands-on guide for investors and executives who may want to apply the powerful value investing discipline outside of stocks and bonds.

Applied Value Investing takes the same time-proven approach Graham introduced with David Dodd in their 1934 masterpiece, Security Analysis, and extends it in a variety of unique and practical ways—including mergers and acquisitions, alternative investments, and financial strategy.

This in-depth guide shows financially sophisticated readers how to use value investing in a macroinvesting framework and how to apply it to the emerging area of super catastrophe valuation. It illustrates how to put value investing to use with case studies on:

Eddie Lampert’s acquisition of Sears
Warren Buffett’s acquisitions of GEICO and General Reinsurance Corporation
The recent “new economy” boom and bust, and its aftermath
The underwriting of the Pepsi Play for a Billion sweepstakes
Applied Value Investing also demonstrates how to incorporate the cornerstones of valuation into an integrated business framework that can be used to assess and manage a franchise (or a firm operating with a sustainable competitive advantage).

In addition to its cutting-edge applications of value investing principles, Applied Value Investing sets itself apart by drawing on material published in leading academic journals to form the foundation of its presentation. However, value investing is inherently practical, and this comprehensive resource provides helpful guidance for successfully implementing value investing strategies in the real world.

To profit like the masters you have to think like them. Applied Value Investing can open new doors to value creating opportunities.

Applied Value Investing: The Practical Application of Benjamin Graham and Warren Buffett’s Valuation Principles to Acquisitions, Catastrophe Pricing and Business Execution

http://www.pdxpole.com/applied-value-investing-the-practical-application-of-benjamin-graham-and-warren-buffetts-valuation-principles-to-acquisitions-catastrophe-pricing-and-business-execution/

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." - Benjamin Graham

Are Malaysian rubber glove makers overstretched?

Are Malaysian rubber glove makers overstretched?
Published: 2010/01/14

Bulls say rally still has legs, valuations not outrageous while bears say stocks run ahead of fundamentals, correction due

While the first wave of the H1N1 infections has ebbed, Malaysian rubber glove makers continue to see their share prices soar, raking in double-digit gains in the first two trading weeks of 2010.

The sharp gains have raised eyebrows after share prices skyrocketed last year as demand for rubber gloves surged following the global H1N1 pandemic.

Shares of Top Glove, the world’s biggest rubber glove maker by production capacity, jumped by about 156 per cent over the past 12 months, and second-ranked Supermax has surged 560 per cent.

Malaysia supplies more than 60 per cent of world’s rubber latex gloves, widely used for infectious disease control purposes.

Can the H1N1 flu, a sticky issue for countries, help rubber glove stocks defy the law of gravity?

STILL CHEAP

It may be to some extent.

“The rubber glove industry is not cyclical. Unlike commodities, it’s not affected by the business cycle. This is a very good, long-term business,” said Ang Kok Heng, who helps manage about US$125 million at Phillip Capital Management in Kuala Lumpur.

“The surge in demand is not a one-off thing. The glove industry tends to have a very good retention ratio, that means new customers added because of the H1N1 flu will likely become long-term customers for glove makers,” he said.

Ang said he would only consider to switch out from glove makers when valuations become too expensive. In the case of mid-cap stocks, such as Kossan and Adventa, that means a price-to-earnings (PE) ratio of more than 15 times, he said.

The rally still has legs, said Choo Swee Kee, chief investment officer of TA Investment Management which has about US$200 million asset under management.

“Good earnings growth has put down valuations. The PE ratio for glove makers ranges between 8 to 15 times, that’s not like way above the market PE,” said Choo.

This week, five out of 14 analysts on Top Glove have revised their annual earnings per share forecasts, hiking them by 9.1 per cent on average, according to StarMine. StarMine’s SmartEstimate shows a predicted earnings surprise of 10.8 per cent for the year to August 2010.

SmartEstimates predict future earnings more accurately than consensus estimates by putting more weight on the recent forecasts of StarMine’s top-rated analysts.

“We expect another 10 to 15 per cent upside. We are holding on to our shares and we will accumulate those with the lowest PE,” Choo said.

Malaysia’s benchmark share index trades at around 15 times 2010 earnings, higher than Top Glove’s 13.5 times and Supermax’s 11.3 times, Thomson Reuters data showed.

Kossan and Adventa, which are smaller in both market share and size than Top Glove and Supermax, trade at single-digit PEs.

“VERY OVERBOUGHT"

Malaysian rubber glove makers are “very overbought, the bull will have to pause a bit,” said Stephen Soo, senior technical analyst at TA Securities.

On technical charts, the Relative Strength Indicator (RSI) for all Malaysian rubber glove makers are hovering around 90, way above the 70 level that marks the overbought territory.

Share prices of rubber glove makers may drop one-third over a period of two weeks when a correction takes place, said Soo.

“The share price gains have run ahead of 2010 earnings,” said a chief investment officer from a bank-backed fund management firm whose company policy does not allow him to be quoted.

While demand was strong, it remained to be seen if glove makers could ramp up production capacity fast enough to meet it. There was also a risk that surging raw material costs could dent profit margins, he said.

Infrastructure constraints, such as natural gas shortages, could derail companies’ expansion plans, industry players have said.

And the price of rubber latex, from which gloves are made, has risen by more than two-thirds since last July. -- Reuters

Quek makes voluntary takeover offer for Hume

Quek makes voluntary takeover offer for Hume
Published: 2010/01/15

Tycoon Tan Sri Quek Leng Chan has made a voluntary takeover offer for Hume Industries (Malaysia) Bhd, with the aim of taking the manufacturer of concrete products private.

Hong Leong Co (Malaysia) Bhd's (HLCM) wholly-owned unit, Spectrum Arrangement Sdn Bhd, is offering RM4.30 cash per share in Hume.

Quek is HLCM's director and substantial shareholder.

Spectrum directly holds 118.8 million Hume shares, representing 64.94 per cent of the issued capital.

In a letter by Hong Leong Investment Bank to Hume, Spectrum said the offer is not conditional upon any minimal level of acceptance of the offer shares as it already owns more than 50 per cent of the voting shares in Hume.

Spectrum also plans to delist Hume from Bursa Malaysia if it receives acceptance in aggregate of more than 75 per cent of Hume shares.

Hume shares were placed on a trading halt yesterday, pending the release of the announcement.

Its shares rose 15 sen to RM4.15 before the suspension. Trading in the shares will resume from 10am today.

Malaysians’ biggest money worries: Cost of living, salary and debt

 

Published: Thursday January 14, 2010 MYT 8:55:00 PM
Malaysians’ biggest money worries: Cost of living, salary and debt
By IZATUN SHARI

 

 

PETALING JAYA: The cost of living, salary changes and personal debt are the top three financial worries for Malaysians, a survey by global payment firm Visa found.

 

In the survey conducted between Aug 21 and Sept 23 last year,

• 69% of respondents said they were extremely concerned about the cost of living expenses
• while 62% were worried about salary changes and
• 59% about personal debt respectively.

“Malaysians were less worried about the value of their retirement fund and portfolio, and fluctuating interest rates,” the company said in a statement here Thursday.

 

However, 25% of those surveyed also said they were more confident about their personal financial situation as compared with six months earlier although 52% felt there would be no change.

 

Only 23% indicated they were less confident than earlier.

 

Sixty-six per cent of Malaysians also said they were more concerned about the impact of the global financial crisis on the local economy while 27% felt the same.

 

The survey involved 5,520 respondents aged between 18 and 65 years, of whom 500 were from Malaysia. The rest were from Australia, China, Hong Kong, India, Indonesia, Japan, Korea, New Zealand, Singapore and Taiwan.

 

Visa country manager Stuart Tomlinson said Malaysians were being practical during the current economic climate by focusing on managing their concerns, providing themselves with a level of security and peace of mind.

 

“For Malaysians, potential changes in salary levels are also of concern,” he said, adding that across the region, consumers were looking to see how they could manage their expenses, savings and job security, rather than macro-economic conditions such as exchange and interest rates.

 

http://thestar.com.my/news/story.asp?file=/2010/1/14/nation/20100114205945&sec=nation