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 know the seven value stocks you should be buying right now, we're currently offering a 30-day free trial to Inside Value. Click here for more information.
Fool contributor Jordan DiPietro owns shares of General Electric. Berkshire Hathaway is a Motley Fool Stock Advisor recommendation. Berkshire Hathaway, Pfizer, and Wal-Mart Stores are Inside Value recommendations. The Fool owns shares of Berkshire Hathaway. The Fool's disclosure policy is always looking for a discount.
http://www.fool.com/investing/value/2010/01/14/is-value-investing-dead.aspx
Wednesday, 20 January 2010
4 Ways to Screw Up Your Portfolio
4 Ways to Screw Up Your Portfolio
By Selena Maranjian
January 19, 2010 | Comments (0)
Sometimes, it can be easy to make money in the stock market. Dumping the bulk of your nest egg into broad-market index funds can instantly make you a part-owner of such successful companies as Apple (Nasdaq: AAPL), General Electric (NYSE: GE), and UnitedHealth (NYSE: UNH). If you'd rather fly solo, finding the right individual stock can bring you massive gains -- witness Intuitive Surgical (Nasdaq: ISRG) and its 50% average annual returns over the past five years.
Sadly, though, it can be even easier to lose money when investing. Some losses just can't be foreseen; they happen even to good investors invested in seemingly solid companies. But other times, investors make a classic error -- and pay the price for it.
Here are four blunders you'd do well to avoid:
Too few metrics
If you focus only on a single aspect of a given company, such as its price-to-earnings ratio, you could miss out on the bigger picture. Check out the different ratings our CAPS community has assigned to stocks with similarly low P/Es:
Company
CAPS Stars (out of five)
P/E
Noble (NYSE: NE)
*****
7
Merck (NYSE: MRK)
****
10
Garmin
***
12
Qwest Communications (NYSE: Q)
**
10
Data: Motley Fool CAPS.
A closer look at these companies' other metrics would likely reveal varying debt and cash levels, growth rates, profit margins, and competitive advantages. It can be useful to seek out low-P/E stocks, since they may have been overly punished and due to rebound. But a low P/E can't and shouldn't be your sole criteria for making an investment.
Tax obliviousness
Forgetting about the IRS can lead to another needless error. If you net a $5,000 gain in Home Surgery Kits (Ticker: OUCHH), but sell it less than 365 days after you bought it, you'll be the one wishing you had some anaesthetic. Short-term gains -- stocks held for less than a year -- are taxed at your standard income rate; at 28%, you'd pay $1,400 in tax on that $5,000 profit. Long-term gains -- held for more than a year -- get dinged for a much smaller 15%, or just $750 in our example.
Looking the other way
Failing to follow your investments closely enough can be another major mistake. You might buy into a biotechnology or pharmaceutical company, for example, because you're enthusiastic about the exciting drugs in its pipeline. But if one or more of those candidates fail to win FDA approval, or report poor results in clinical trials, the company's future could suddenly become less bright.
Wandering too far
Finally, we often stray beyond our circle of competence.
As you invest, focus not only on all the things you do right, or the amazing companies you come across, but also on mistakes you may be making. The more blunders you eliminate from your repertoire, the better the performance you can expect from your portfolio.
http://www.fool.com/investing/value/2010/01/19/4-ways-to-screw-up-your-portfolio.aspx
By Selena Maranjian
January 19, 2010 | Comments (0)
If you focus only on a single aspect of a given company, such as its price-to-earnings ratio, you could miss out on the bigger picture. Check out the different ratings our CAPS community has assigned to stocks with similarly low P/Es:
CAPS Stars (out of five)
P/E
*****
7
****
10
***
12
**
10
Forgetting about the IRS can lead to another needless error. If you net a $5,000 gain in Home Surgery Kits (Ticker: OUCHH), but sell it less than 365 days after you bought it, you'll be the one wishing you had some anaesthetic. Short-term gains -- stocks held for less than a year -- are taxed at your standard income rate; at 28%, you'd pay $1,400 in tax on that $5,000 profit. Long-term gains -- held for more than a year -- get dinged for a much smaller 15%, or just $750 in our example.
Failing to follow your investments closely enough can be another major mistake. You might buy into a biotechnology or pharmaceutical company, for example, because you're enthusiastic about the exciting drugs in its pipeline. But if one or more of those candidates fail to win FDA approval, or report poor results in clinical trials, the company's future could suddenly become less bright.
Finally, we often stray beyond our circle of competence.
- Do you really understand biotechnology? Or the energy industry? Or telecommunications?
- If you don't have a firm grasp of a company's industry and its position in it, you're at a great disadvantage as an investor.
- You need to be aware of developments in and threats to a given industry, and have a clear sense of its winners and losers, before you start investing there.
Relying on a single metric misses out on the bigger picture
Too few metrics
If you focus only on a single aspect of a given company, such as its price-to-earnings ratio, you could miss out on the bigger picture. Check out the different ratings our CAPS community has assigned to stocks with similarly low P/Es:
Company
CAPS Stars (out of five)
P/E
Noble (NYSE: NE)
*****
7
Merck (NYSE: MRK)
****
10
Garmin
***
12
Qwest Communications (NYSE: Q)
**
10
Data: Motley Fool CAPS.
A closer look at these companies' other metrics would likely reveal
CAPS Stars (out of five)
P/E
*****
7
****
10
***
12
**
10
- varying debt and cash levels,
- growth rates,
- profit margins, and
- competitive advantages.
3 Ways to Prepare for the Next Big Drop
3 Ways to Prepare for the Next Big Drop
By Dan Caplinger
January 19, 2010 | Comments (0)
This time last year, even a dart-throwing monkey could have made money in the stock market -- all you needed was the courage to buy at one of the scariest times in history. Now, though, financial markets of all sorts have risen sharply, and there's a lot more to making a winning investment than picking a stock ticker at random and buying shares.
It's a whole new ball game
If you're like many people, you've probably done your best to repress your memories of early 2009. Back then, the stock market was falling apart, after a failed attempt to put together a rally off the lows set during 2008's panic. Everyone was convinced that companies like MGM Mirage (NYSE: MGM) and Bank of America (NYSE: BAC) were just a few steps from bankruptcy, and even the prospects for healthier companies seemed grim.
Now, though, fear has given way to greed. Many of the stocks that seemed most likely to fail instead topped the performance charts for 2009. Stock markets around the world saw huge gains, with the U.S. market's rise relatively small in comparison to jumps in emerging markets like Brazil and China. Moreover, after a terrible end in 2008, commodities also regained much of their lost luster, as gold jumped to new highs and energy prices made a sharp recovery from their huge drop to $30 from nearly $150.
If those big gains make you nervous, you're not alone. If you think it's time for these roller-coaster markets to start another downswing and don't want to go along for the ride, then here are three things to think about for various parts of your portfolio.
1. With stocks, think quality
Amid all the big gains of last year, many stocks have gotten left behind, at least compared to the overall market. Johnson & Johnson (NYSE: JNJ), Procter & Gamble (NYSE: PG), and AT&T (NYSE: T) are among the big-name companies that haven't seen anything close to the gains of even the S&P 500, let alone the multibagger performance that dozens of stocks produced last year.
But there are two reasons to look for lagging sectors. First, as bull markets evolve, they tend to go through sector rotation, in which stocks that haven't performed as well catch up with the top performers. So if this is the beginning of a longer-term bull market, then you can expect large caps that have thus far been left behind to see some gains.
On the other hand, the stocks that have risen the most also have the furthest to fall. If the stock market's rally reverses itself soon, then you can expect stocks that are still value-priced to hold up better than highfliers without the fundamentals to back up their lofty valuations.
2. With bonds, think duration
Everyone's stretching for yield right now, as interest rates have remained low. When you need income from your portfolio to survive, times like these can lead you to take desperate measures.
But you need to resist the urge to buy longer-term bonds just to get higher yields. Rates show signs of rising soon, and if they do, falling prices could wipe out the higher interest you'll receive on long bonds. In contrast, short-term bonds won't pay as much income up front, but they also won't lose as much value per percentage-point move in a rising-rate environment.
Finally, just as speculative stocks may have gotten ahead of themselves, lower-quality corporate bonds have also jumped in front of Treasuries. Consider rebalancing your portfolio to get its risk profile back where you want it.
3. With alternative investments, be wary
Commodities and real estate are becoming more mainstream investments than ever. But while having some exposure can help your portfolio, now isn't the time to make huge bets on them.
Whether you use stocks like Freeport-McMoRan Copper & Gold (NYSE: FCX) and Precision Drilling Trust (NYSE: PDS) as proxies for metals and energy or invest in specialized ETFs with direct exposure to commodities, prices have jumped a lot over the past year. Hedging your holdings, either by selling some of those investments or with other strategies such as writing covered calls or buying puts, can take some risk off the table.
Watch your greed
Most investors are in much better shape now than they were this time last year. But you don't want to lose those hard-fought gains. By taking steps to secure your portfolio, you'll help to keep yourself from enduring the same trials you suffered through during the financial crisis.
With so many stocks seeing big gains, focusing on value stocks might seem hopelessly outdated. Jordan DiPietro takes a closer look at whether value investing is dead.
http://www.fool.com/retirement/general/2010/01/19/3-ways-to-prepare-for-the-next-big-drop.aspx
By Dan Caplinger
January 19, 2010 | Comments (0)
This time last year, even a dart-throwing monkey could have made money in the stock market -- all you needed was the courage to buy at one of the scariest times in history. Now, though, financial markets of all sorts have risen sharply, and there's a lot more to making a winning investment than picking a stock ticker at random and buying shares.
It's a whole new ball game
If you're like many people, you've probably done your best to repress your memories of early 2009. Back then, the stock market was falling apart, after a failed attempt to put together a rally off the lows set during 2008's panic. Everyone was convinced that companies like MGM Mirage (NYSE: MGM) and Bank of America (NYSE: BAC) were just a few steps from bankruptcy, and even the prospects for healthier companies seemed grim.
Now, though, fear has given way to greed. Many of the stocks that seemed most likely to fail instead topped the performance charts for 2009. Stock markets around the world saw huge gains, with the U.S. market's rise relatively small in comparison to jumps in emerging markets like Brazil and China. Moreover, after a terrible end in 2008, commodities also regained much of their lost luster, as gold jumped to new highs and energy prices made a sharp recovery from their huge drop to $30 from nearly $150.
If those big gains make you nervous, you're not alone. If you think it's time for these roller-coaster markets to start another downswing and don't want to go along for the ride, then here are three things to think about for various parts of your portfolio.
1. With stocks, think quality
Amid all the big gains of last year, many stocks have gotten left behind, at least compared to the overall market. Johnson & Johnson (NYSE: JNJ), Procter & Gamble (NYSE: PG), and AT&T (NYSE: T) are among the big-name companies that haven't seen anything close to the gains of even the S&P 500, let alone the multibagger performance that dozens of stocks produced last year.
But there are two reasons to look for lagging sectors. First, as bull markets evolve, they tend to go through sector rotation, in which stocks that haven't performed as well catch up with the top performers. So if this is the beginning of a longer-term bull market, then you can expect large caps that have thus far been left behind to see some gains.
On the other hand, the stocks that have risen the most also have the furthest to fall. If the stock market's rally reverses itself soon, then you can expect stocks that are still value-priced to hold up better than highfliers without the fundamentals to back up their lofty valuations.
2. With bonds, think duration
Everyone's stretching for yield right now, as interest rates have remained low. When you need income from your portfolio to survive, times like these can lead you to take desperate measures.
But you need to resist the urge to buy longer-term bonds just to get higher yields. Rates show signs of rising soon, and if they do, falling prices could wipe out the higher interest you'll receive on long bonds. In contrast, short-term bonds won't pay as much income up front, but they also won't lose as much value per percentage-point move in a rising-rate environment.
Finally, just as speculative stocks may have gotten ahead of themselves, lower-quality corporate bonds have also jumped in front of Treasuries. Consider rebalancing your portfolio to get its risk profile back where you want it.
3. With alternative investments, be wary
Commodities and real estate are becoming more mainstream investments than ever. But while having some exposure can help your portfolio, now isn't the time to make huge bets on them.
Whether you use stocks like Freeport-McMoRan Copper & Gold (NYSE: FCX) and Precision Drilling Trust (NYSE: PDS) as proxies for metals and energy or invest in specialized ETFs with direct exposure to commodities, prices have jumped a lot over the past year. Hedging your holdings, either by selling some of those investments or with other strategies such as writing covered calls or buying puts, can take some risk off the table.
Watch your greed
Most investors are in much better shape now than they were this time last year. But you don't want to lose those hard-fought gains. By taking steps to secure your portfolio, you'll help to keep yourself from enduring the same trials you suffered through during the financial crisis.
With so many stocks seeing big gains, focusing on value stocks might seem hopelessly outdated. Jordan DiPietro takes a closer look at whether value investing is dead.
http://www.fool.com/retirement/general/2010/01/19/3-ways-to-prepare-for-the-next-big-drop.aspx
Tuesday, 19 January 2010
How investors are rebelling against professional money managers
By Edmund Conway Economics Last updated: January 18th, 2010
14 Comments Comment on this article
It is hardly headline news to say we’ve all lost rather a lot of our faith in the financial Masters of the Universe during this crisis. We all know they proved just how little they knew or understood the risks they were taking, and as we can see from the recent bonus rows, their standing has diminished considerably as a result.
What I hadn’t realised is that many of people are already putting their money where their mouth is on this one. According to analysts at Goldman Sachs, over the past year or so, people have been pulling their money out of funds managed by professional investors and fund managers, and choosing instead to invest it themselves, whether in simple shares or in exchange traded funds.
The story, according to Goldman’s chief US equity strategist, David Kostin, and as told by the chart above, is that despite the 25pc increase in the stock market over the past year or so, not one dollar went into US equity funds (in fact, there was a net outflow) – and yet over the first nine months of the year there was about $225bn of direct purchases of common shares.
It represents, according to Kostin, a “repudiation of the professional investor class by individuals, who are investing in ETFs and direct purchases of stocks.”
He prefers to frame this phenomenon (which reflects the US, but may well be mirrored over here in the UK) as a sign that people are becoming more independent when it comes to their finances, plus that they are aware that there are tax advantages of investing through exchange traded funds (which can track indices and commodities, but without having to pay a fund manager to do the legwork). However, one could just as easily see it as a sign of revulsion in professional asset managers. And for good reason.
Throughout this crisis, much of the criticism over what happened has been levelled at the banks, but far less at bank investors. And while bankers are not blameless for having done far too much in the way of slicing and dicing assets, creating toxic debt and pushing sub-prime mortgages, a semi-legitimate excuse on their part is that there was demand for these toxic assets. Which indeed there was: professional investors have been given far too easy a ride for investing in some of the dross that contributed to the crisis. They have also been given too easy a ride for not monitoring the banks fiercely enough in previous years. After all, if a few more bank shareholders (and I’m talking big pension funds and asset managers here) had scrutinised the banks (which they own), they might have realised that capital and liquidity were at paper-thin levels, leaving the banks at risk of insolvency.
Against this backdrop, and given how much wealth was lost as a result, it is hardly surprising that people are steering clear of the fund managers for the time being. That sounds like a pretty functional market reaction to me.
http://blogs.telegraph.co.uk/finance/files/2010/01/goldman.jpg
14 Comments Comment on this article
It is hardly headline news to say we’ve all lost rather a lot of our faith in the financial Masters of the Universe during this crisis. We all know they proved just how little they knew or understood the risks they were taking, and as we can see from the recent bonus rows, their standing has diminished considerably as a result.
What I hadn’t realised is that many of people are already putting their money where their mouth is on this one. According to analysts at Goldman Sachs, over the past year or so, people have been pulling their money out of funds managed by professional investors and fund managers, and choosing instead to invest it themselves, whether in simple shares or in exchange traded funds.
The story, according to Goldman’s chief US equity strategist, David Kostin, and as told by the chart above, is that despite the 25pc increase in the stock market over the past year or so, not one dollar went into US equity funds (in fact, there was a net outflow) – and yet over the first nine months of the year there was about $225bn of direct purchases of common shares.
It represents, according to Kostin, a “repudiation of the professional investor class by individuals, who are investing in ETFs and direct purchases of stocks.”
He prefers to frame this phenomenon (which reflects the US, but may well be mirrored over here in the UK) as a sign that people are becoming more independent when it comes to their finances, plus that they are aware that there are tax advantages of investing through exchange traded funds (which can track indices and commodities, but without having to pay a fund manager to do the legwork). However, one could just as easily see it as a sign of revulsion in professional asset managers. And for good reason.
Throughout this crisis, much of the criticism over what happened has been levelled at the banks, but far less at bank investors. And while bankers are not blameless for having done far too much in the way of slicing and dicing assets, creating toxic debt and pushing sub-prime mortgages, a semi-legitimate excuse on their part is that there was demand for these toxic assets. Which indeed there was: professional investors have been given far too easy a ride for investing in some of the dross that contributed to the crisis. They have also been given too easy a ride for not monitoring the banks fiercely enough in previous years. After all, if a few more bank shareholders (and I’m talking big pension funds and asset managers here) had scrutinised the banks (which they own), they might have realised that capital and liquidity were at paper-thin levels, leaving the banks at risk of insolvency.
Against this backdrop, and given how much wealth was lost as a result, it is hardly surprising that people are steering clear of the fund managers for the time being. That sounds like a pretty functional market reaction to me.
http://blogs.telegraph.co.uk/finance/files/2010/01/goldman.jpg
Investment students need only two well-taught courses
"In our view, though, investment students need only two well-taught courses -
- How to Value a Business, and
- How to Think About Market Prices."
****Constructing a Portfolio
Now that you have learned to analyse companies and pick stocks, it is time to focus on putting groups of stocks together to construct your stock portfolio.
No one answer is right for everyone when it comes to portfolio construction. It is more art than science. And perhaps that's why many believe portfolio management may be the difference that separates a great investor from an average mutual fund manager.
Famed international stock-picker John Templeton has often said that he's right about his stock picks only about 60% of the time. Nevertheless, he has accumulated one of the best track records in the business. That's because great managers have a tendency to have more money invested in their big winners and less in their losers.
The Fat-Pitch Approach
You should hold relatively few great companies, purchased at a large margin of safety, and that you shouldn't be afraid to hold cash when you can't find good stocks to buy. But why?
Most investors will discover only a few good ideas in any given year - maybe five or six, sometimes a few more. Investors who hold more than 20 stocks at a time are often buying shares of companies they don't know much about, and then diversifying away the risk by holding lots of different names. It is tough to stray very far from the average return when you hold that many stocks, unless you have wacky weightings like 10% of your portfolio in one stock and 2% in each of the other 45.
About 90% of the maximum benefit of diversification was derived from portfolios of 12 to 18 stocks. If you own about 12 to 18 stocks, you have obtained more than 90% of the benefits of diversification, assuming you own an equally weighted portfolio.
If you want to obtain a higher return than the markets, you increase your chances by being less diversified. At the same time, you also increase your risk.
If you own more than 18 stocks, you will have achieved almost full diversification, but now you will just have to keep track of more stocks in your portfolio for not much marginal benefit.
When you own too many companies, it becomes nearly impossible to know your companies really well. When you lose your focus and move outside your circle of competence, you lose your competitive advantage as an investor. Instead of playing with weak opponents for big stakes, you begin to become the weak opponent.
Non-Market Risk and a Concentrated Portfolio
Interestingly, holding a concentrated portfolio is not as risky as one may think. Just holding two stocks instead of one eliminates 46% of your unsystematic risk. Using a twist on the 80/20 rule of thumb, holding only eight stocks will eliminate about 81% of your diversifiable risk.
Unsystematic Risk and the Number of Stocks in a Portfolio
Number of Stocks Non-Market Risk Eliminated (%)
1======== 0%
2 ========46%
4 ========72%
8 ========81%
16======= 93%
32======= 96%
500====== 99%
9,000==== 100%
What about range of returns?
Joel Greenblatt in his book You Can Be a Stock Market Genius explains that during one period that he examined,
Greenblatt noted that if your portfolio is limited to only :
Portfolio Weighting
In addition to knowing how many stocks to own in your portfolio and which stocks to buy, the percentage of your portfolio occupied by each stock is just as important. Unfortunately, the science and academics behind this important topic are scarce, and therefore, portfolio weighting is, again, more art than science.
The great money managers have a knack for having a great percentage of their money in stocks that do well and a lesser amount in their bad picks. So how do they do it?
Essentially, a portfolio should be weighted in direct proportion to how much confidence you have in each pick. If you have a lot of confidence in the long-term outlook and the valuation of a stock, then it should be weighted more heavily than a stock you may be taking a flier on.
If a stock has
Weight your portfolio wisely. Don't be afraid to have some big weightings, but be certain that the highest-weighted stocks are the ones you feel the most confident about. And, of course, don't go off the deep end by having, for example, 50% of your portfolio in a single stock.
Portfolio Turnover
If you follow the fat-pitch method, you won't trade very often. Wide-moat companies selling at a discount are rare, so when you find one, you should pounce. Over the years, a wide-moat company will generate returns on capital higher than its cost of capital, creating value for shareholders. This shareholder value translates into a higher stock price over time.
If you sell after making a small profit, you might not get another chance to buy the stock, or a similar high-quality stock, for a long time. For this reason, it's irrational to quickly move in and out of wide-moat stocks and incur capital gains taxes and transaction costs. Your results, after taxes and trading expenses, likely won't be any better and may be worse. That's why many of the great long-term investors display low turnover in their portfolios. They've learned to let their winners run and to think like owners, not traders.
Circle of Competence and Sector Concentration
If you are investing within your circle of competence, then your stock selections will gravitate toward certain sectors and investment styles.
Maybe you:
However, if all your stocks are in one sector, you may want to think about the effects that could have on your portfolio. For instance, you probably wouldn't want all of your investments to be in unattractive areas such as the airline or auto industry.
Adding Mututal Funds to a Stock Portfolio
In-the-know investors buy stocks. Those less-in-the-know, or those who choose to know less, own mutual funds.
But investing doesn't have to be a choice between investing directly in stocks or indirectly through mutual funds. Investors can - and many should - do both. The trick is determining how your portfolio can benefit most from each type of investment. Figuring out your appropriate stock/fund mix is up to you.
Begin by looking for gaps in your portfolio and circle of competence.
Some funds invest in micro-caps, others invest around the globe, still others focus on markets, such as real estate. Stock investors who turn over some of their dollars to an expert in these areas gain exposure to new opportunities without having to learn a whole new set of analytical skills.
Ultimately, your choice depends on your circle of competence and comfort level. While many may feel comfortable with picking their own international stocks, others may prefer to own an international equity fund.
Our Objective
Modern Portfolio Theory has been built on the assumption that you can't beat the stock market. If you can't beat the market porfolio, then the best you can do is to match the market's performance. Therefore, academic theory revolves around how to build the most efficient portfolio to match the market.
We have taken a different approach. Our objective is to outperform the market. Therefore, we believe that our odds increase by holding (not actively trading) relatively concentrated portfolios of between 12 and 20 great companies purchased with a margin of safety. The circle of competence will be unique to every person; therefore, your stock portfolio will naturally have sector, style, and country biases. If lacking in any area, such as international stocks, a good mutual fund can be used to balance your overall portfolio.
The Fat-Pitch Approach
1======== 0%
2 ========46%
4 ========72%
8 ========81%
16======= 93%
32======= 96%
500====== 99%
9,000==== 100%
- the average return of the stock market was about 10% and
- statistically, the one-year range of returns for a market portfolio (holding scores of stocks) in this period was between negative 8% and positive 28% about two-thirds of the time.
- That means that one-third of the time, the returns fell outside this 36-point range.
- 5 stocks, the expected return remains 10%, but your one-year range expands to between negative 11% and positive 31% about two-thirds of the time.
- 8 stocks, the range is between negative 10% and positive 30%.
In other words, it takes fewer stocks to diversify a portfolio than one might intuitively think.
Portfolio Weighting
In addition to knowing how many stocks to own in your portfolio and which stocks to buy, the percentage of your portfolio occupied by each stock is just as important. Unfortunately, the science and academics behind this important topic are scarce, and therefore, portfolio weighting is, again, more art than science.
The great money managers have a knack for having a great percentage of their money in stocks that do well and a lesser amount in their bad picks. So how do they do it?
Essentially, a portfolio should be weighted in direct proportion to how much confidence you have in each pick. If you have a lot of confidence in the long-term outlook and the valuation of a stock, then it should be weighted more heavily than a stock you may be taking a flier on.
If a stock has
- a 10% weighting in your portfolio, then a 20% change in its price will move your overall portfolio 2%.
- a 3% weighting, a 20% change has only a 0.6% effect on your portfolio.
Weight your portfolio wisely. Don't be afraid to have some big weightings, but be certain that the highest-weighted stocks are the ones you feel the most confident about. And, of course, don't go off the deep end by having, for example, 50% of your portfolio in a single stock.
Portfolio Turnover
If you follow the fat-pitch method, you won't trade very often. Wide-moat companies selling at a discount are rare, so when you find one, you should pounce. Over the years, a wide-moat company will generate returns on capital higher than its cost of capital, creating value for shareholders. This shareholder value translates into a higher stock price over time.
If you sell after making a small profit, you might not get another chance to buy the stock, or a similar high-quality stock, for a long time. For this reason, it's irrational to quickly move in and out of wide-moat stocks and incur capital gains taxes and transaction costs. Your results, after taxes and trading expenses, likely won't be any better and may be worse. That's why many of the great long-term investors display low turnover in their portfolios. They've learned to let their winners run and to think like owners, not traders.
Circle of Competence and Sector Concentration
If you are investing within your circle of competence, then your stock selections will gravitate toward certain sectors and investment styles.
Maybe you:
- work in the medical field and thus are familiar with and own a number of pharmaceutical and biotechnology stocks, or,
- you've been educated in the Warren Buffett school of investing and cling to entrenched, easy-to-understand businesses such as Coca-Cola and Wrigley.
However, if all your stocks are in one sector, you may want to think about the effects that could have on your portfolio. For instance, you probably wouldn't want all of your investments to be in unattractive areas such as the airline or auto industry.
Adding Mututal Funds to a Stock Portfolio
In-the-know investors buy stocks. Those less-in-the-know, or those who choose to know less, own mutual funds.
But investing doesn't have to be a choice between investing directly in stocks or indirectly through mutual funds. Investors can - and many should - do both. The trick is determining how your portfolio can benefit most from each type of investment. Figuring out your appropriate stock/fund mix is up to you.
Begin by looking for gaps in your portfolio and circle of competence.
- Do you have any foreign exposure?
- Do your assets cluster in particualr sectors or style-box positions?
Some funds invest in micro-caps, others invest around the globe, still others focus on markets, such as real estate. Stock investors who turn over some of their dollars to an expert in these areas gain exposure to new opportunities without having to learn a whole new set of analytical skills.
Ultimately, your choice depends on your circle of competence and comfort level. While many may feel comfortable with picking their own international stocks, others may prefer to own an international equity fund.
Our Objective
Modern Portfolio Theory has been built on the assumption that you can't beat the stock market. If you can't beat the market porfolio, then the best you can do is to match the market's performance. Therefore, academic theory revolves around how to build the most efficient portfolio to match the market.
We have taken a different approach. Our objective is to outperform the market. Therefore, we believe that our odds increase by holding (not actively trading) relatively concentrated portfolios of between 12 and 20 great companies purchased with a margin of safety. The circle of competence will be unique to every person; therefore, your stock portfolio will naturally have sector, style, and country biases. If lacking in any area, such as international stocks, a good mutual fund can be used to balance your overall portfolio.
PPB Group a 'buy', says Kim Eng
PPB Group a 'buy', says Kim Eng
Published: 2010/01/19
PPB Group Bhd, a Malaysian plantation and property group, was raised to “buy” from “hold” at Kim Eng Research Sdn Bhd, which said the stock is an “attractive proxy” for its palm oil trading affiliate, Wilmar International Ltd.
The share price estimate for PPB was raised to RM19.20 from RM14.68, Kim Eng said in a report today. -- Bloomberg
Published: 2010/01/19
PPB Group Bhd, a Malaysian plantation and property group, was raised to “buy” from “hold” at Kim Eng Research Sdn Bhd, which said the stock is an “attractive proxy” for its palm oil trading affiliate, Wilmar International Ltd.
The share price estimate for PPB was raised to RM19.20 from RM14.68, Kim Eng said in a report today. -- Bloomberg
Public Bank rises to new record
Public Bank rises to new record
Published: 2010/01/19
Public Bank Bhd, Malaysia’s third largest lender, rose to a new record in Kuala Lumpur trading ahead of its fourth-quarter earnings report this week.
HWANG DBS Vickers Research Sdn Bhd yesterday said the bank’s 2009 earnings may exceed market projections.
The stock rose 1.5 per cent to RM12.02 at 9:17 am local time, its fourth straight day of gains. -- Bloomberg
Published: 2010/01/19
Public Bank Bhd, Malaysia’s third largest lender, rose to a new record in Kuala Lumpur trading ahead of its fourth-quarter earnings report this week.
HWANG DBS Vickers Research Sdn Bhd yesterday said the bank’s 2009 earnings may exceed market projections.
The stock rose 1.5 per cent to RM12.02 at 9:17 am local time, its fourth straight day of gains. -- Bloomberg
****Strategies of the Greats: Graham, Fisher, Buffett and Lynch
Benjamin Graham
Born in London in 1894 as Benjamin Grossbaum, Graham emigrated to the United States when he was one year old. Graham graduated from Columbia University in 1914 and was offered a teaching position in three different Columbia departments.
Graham's Security Analysis, published in 1934, was the first book to articulate a framework for the systematic analysis of stocks and bonds. Graham later wrote The Intelligent Investor to bring many of the same concepts to the lay investor. Both books should be at the very top of the required reading list for serious value investors.
One of Graham's most successful investments was in the automobile insurer GEICO, where he served as chairman of the board.
One of Graham's favorite investment techniques was to purchase net-current-asset bargains, or net-nets. Net-net were stocks that traded for less than the value of their current assets minus all liabilities.
Graham's students, such as Warren Buffett and Bill Ruane, are among some of the best investors of the past century.
Philip Fisher
Fisher's career spanned 74 years. After training as an analyst, Fisher started his San Francisco-based investment advisory firm in 1931. His classic book on investing, Common Stocks and Uncommon Profits, was first published in 1958.
Fisher said that, "If the job has been correctly done when a common stock is purchased, the time to sell it is almost never." As an example, Fisher first purchased shares of Motorola in 1955 and held them until his death in 2004.
Fisher put all of his potentital investments through 15 step checklist in order to gauge the quality of a company.
According to Fisher, there are only three reasons to sell a stock:
1) If you have made a serious mistake in your assessment of the company;
2) If the company no longer passes the 15 points as clearly as before;
3) If you could reinvest the money in another, far more attractive company.
Warren Buffett
Buffett uses a discounted cash-flow analysis to estimate the fair value of companies.
Unless analysing a business falls within his circle of competence, Buffett does not try to value the business.
Buffett seeks companies with sustainable competitive advantages. (Companies with economic moats.)
Though Buffett believes it's important to work with competent, honest managers, the economics of a business are the most important factor.
Buffett is not swayed by popular opinion.
Since no discounted cash-flow analysis is perfect, Buffett requires a margin of safety in his purchase price.
Rather than diversify and dilute his potential returns, Buffett conccentrates his investments on his best ideas.
Peter Lynch
Lynch obtained his legendary investor status managing the Fidelity Magellan Fund. Under Lynch's leadership, the Magellan fund grew from $20 million in assets to $13 billion and achieved an average total return of 25% per year.
Despite his success as a professional money manager, Lynch believes that average investors have an edge over Wall Street experts and can outperform the market by looking for investment ideas in their daily lives.
The Lynch investment philosophy has four main components:
1. Invest only in what you understand.
2. Do your homework and research the company thoroughly.
3. Focus only on the company's fundamentals and not the market as a whole.
4. Invest only for the long run and discard short-term market gyrations.
Although he is best known for trend-spotting, Lynch's stock-picking approach mirrors that of Warren Buffett.
Born in London in 1894 as Benjamin Grossbaum, Graham emigrated to the United States when he was one year old. Graham graduated from Columbia University in 1914 and was offered a teaching position in three different Columbia departments.
Graham's Security Analysis, published in 1934, was the first book to articulate a framework for the systematic analysis of stocks and bonds. Graham later wrote The Intelligent Investor to bring many of the same concepts to the lay investor. Both books should be at the very top of the required reading list for serious value investors.
One of Graham's most successful investments was in the automobile insurer GEICO, where he served as chairman of the board.
One of Graham's favorite investment techniques was to purchase net-current-asset bargains, or net-nets. Net-net were stocks that traded for less than the value of their current assets minus all liabilities.
Graham's students, such as Warren Buffett and Bill Ruane, are among some of the best investors of the past century.
Philip Fisher
Fisher's career spanned 74 years. After training as an analyst, Fisher started his San Francisco-based investment advisory firm in 1931. His classic book on investing, Common Stocks and Uncommon Profits, was first published in 1958.
Fisher said that, "If the job has been correctly done when a common stock is purchased, the time to sell it is almost never." As an example, Fisher first purchased shares of Motorola in 1955 and held them until his death in 2004.
Fisher put all of his potentital investments through 15 step checklist in order to gauge the quality of a company.
According to Fisher, there are only three reasons to sell a stock:
1) If you have made a serious mistake in your assessment of the company;
2) If the company no longer passes the 15 points as clearly as before;
3) If you could reinvest the money in another, far more attractive company.
Warren Buffett
Buffett uses a discounted cash-flow analysis to estimate the fair value of companies.
Unless analysing a business falls within his circle of competence, Buffett does not try to value the business.
Buffett seeks companies with sustainable competitive advantages. (Companies with economic moats.)
Though Buffett believes it's important to work with competent, honest managers, the economics of a business are the most important factor.
Buffett is not swayed by popular opinion.
Since no discounted cash-flow analysis is perfect, Buffett requires a margin of safety in his purchase price.
Rather than diversify and dilute his potential returns, Buffett conccentrates his investments on his best ideas.
Peter Lynch
Lynch obtained his legendary investor status managing the Fidelity Magellan Fund. Under Lynch's leadership, the Magellan fund grew from $20 million in assets to $13 billion and achieved an average total return of 25% per year.
Despite his success as a professional money manager, Lynch believes that average investors have an edge over Wall Street experts and can outperform the market by looking for investment ideas in their daily lives.
The Lynch investment philosophy has four main components:
1. Invest only in what you understand.
2. Do your homework and research the company thoroughly.
3. Focus only on the company's fundamentals and not the market as a whole.
4. Invest only for the long run and discard short-term market gyrations.
Although he is best known for trend-spotting, Lynch's stock-picking approach mirrors that of Warren Buffett.
****Strategies of the Great Investors
Deep value - Benjamin Graham
"An investment operation is one which, upon thorough analysis, promise safety of principal and an adequate return. Operations not meeting these requirements are speculative."
The Principles of Value Investing
1. Thorough analysis
2. Safety of principal
3. Adequate return
Intrinsic Value
To succeed as an investor, you must be able to estimate a business's true worth, or "intrinsic value."
Mr. Market
"Bascially, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market."
Margin of Safety
Graham distilled the secret of sound investing into three words, "margin of safety." Any estimate of intrinsic value is based on numerous assumptions about the future, which are unlikely to be completely accurate.
Think Independently
You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right." Warren Buffett said the best advice he ever got from Graham was to think independently.
Ben's principles have remained sound- their value often enhanced and better understood in the wake of financial storms that demolished flimsier intellectual structures. His counsel of soundness brought unfailing rewards to his followers - even to those with natural abilities inferior to more gifted practitioners who stumbled while following counsels of brilliance or fashion. Investing is most intelligent when it is most businesslike, and investors who follow Graham's principles will continue to reap rewards in the market.
Holding Superior Growth - Philip Fisher
Fisher's Investment Philosophy
"Purchase and hold for the long term a concentrated porfolio of outstanding companies with compelling growth prospects that you understand very well."
Fisher's answer is to purchase the shares of superbly managed growth companies in his book, Common Stocks and Uncommon Profits.
"The young growth stock offers by far the greatest possibility of gain. Sometimes this can mount up to several thousand per cent in a decade."
"All else equal, investors with the time and inclination should concentrate their efforts on uncovering young companies with outstanding growth prospects."
Fisher's 15 Points - What does a growth stocks look like?
To uncover the business insights described by Fisher's 15 points, investors must do their research footwork, or "scuttlebutt." You should ask questions of management, competitors, suppliers, customers, and anyone else who might have useful information.
"Go to five companies in the industry, ask each of them intelligent questions about the points of strength and weakness of the other four, and nine times out of ten a surprising detailed and accurate picture of all five will emerge."
1, Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?
2. Does the management have a determination to continue to develop products or processes that will still further increase total sales potential when the growth potentials of currently attractive product lines have largely been exploited?
3. How effective are the company's research and development efforts in relation to its size?
4. Does the company have an above average sales organisation?
5. Does the company have a worthwhile profit margin?
6. What is the company doing to maintain or improve profit margins?
7. Does the company have outstanding labour and personnel relations?
8. Does the company have outstanding executive relations?
9. Does the company have depth to its management?
10. How good are the company's cost analysis and accounting controls?
11. Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?
12. Does the company have a short-range or long-range outlook in regard to profits?
13. In the foreseeable future, will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders' benefit from this anticipated growth?
14. Does management talk freely to investors about its affairs when things are going well but "clam up" when troubles and disappointments occur?
15. Does the company ahve a management of unquestionable integrity?
Important Don'ts for Investors
1. Don't overstress diversification.
2. Don't follow the crowd.
3. Don't quibble over eighths and quarters.
By applying Fisher's methods, you too, can uncover tomorrow's dominant companies.
Great Companies at Reasonable Prices - Warren Buffett
"In our view, though, investment students need only two well-taught courses - How to Value a Business, and How to Think About Market Prices." - Warren Buffett
Buffett's central Principles of his Investment Strategy
"We select our marketable equity securities in much the way we would evaluate a business for acquisition in its entirety. We want the busines to be one:
To determine value, he estimates the company's future cash flows and discounts them at an appropriate rate. This discounted cash-flow valuation is used by countless investment professionals, so Buffett's approach to valuation is not a competitive advantage.
However, his ability to estimate future cash flows more accurately than other investors is an advantage.
Buffett succeeds largely because he focuses his efforts on companies with durable competitive advantages that fall within his circle of competence. These are key features of his investing framework.
Understanding Your Circle of Competence
If Buffett cannot understand a company's business, then it lies beyond his circle of competence, and he won't attempt to value it.
Although it might seem obvious that investors should stick to what they know, the temptation to step outside one's circle of competence can be strong.
Buffett has written that he isn't bothered when he misses out on big returns in areas he doesn't understand, because investors can do very well (as he has) by simply avoiding big mistakes.
Buying Companies with Sustainable Competitive Advantages
Even if a business is easy to understand, Buffett won't attempt to value it if its future cash flows are unpredictable. He wants to own simple, stable businesses that possess sustainable competitive advantages. Companies with these characteristics are highly likely to generate materially higher cash flows with the passage of time. Without these characteristics, valuation estimates become very uncertain.
Partnering with Admirable Managers
He has written that good managers are unlikely to triumph over a bad business, but given a business with decent economic characteristics - the only type that interests hime - good managers make a significant difference. He looks for individuals who are more passionate about their work than their compensation and who exhibit energy, intelligence, and integrity. That last quality is especially important to thim. He believes that he has never made a good deal with a bad person.
An Approach to Market Prices
Once Buffetthas decided that he is competent to evaluate a company, that the company has sustainable advantages, and that it is run by commendable managers, then he still has to decide whether or not to buy it. This step is the most crucial part of the process.
The decision process seems simple enough: If the market price is below the discounted cash-flow calculation of fair value, then the security is a candidate for purchase. The available securities that offer the greatest discounts to fair value estimates are the ones to buy.
Buffett credits his late friend and mentor, Benjamin Graham, with teaching him the appropriate attitude toward market prices. The most important thing to remember about "Mr. Market" is that he offers you the potential to make a profit, but he does not offer useful guidance. If an investor can't evaluate his business better than Mr. Market, then the investor doesn't belong in that business. Thus, Buffett invests only in predictable businesses that he understands, and he ignores the judgement of Mr. Market (the daily market price) except to take advantage of Mr. Market's mistakes.
Requiring a Margin of Safety
Although Buffett believes the market is frequently wrong about the fair value of stocks, he doesn't believe himself to be infallible. If he estimates a company's fair value at $80 per share, and the company's stock sells for $77, he will refrain from buying despite the apparent undervaluation. That small discrepancy does not provide an adequate margin of safety, another concept borrowed from Ben Graham. No one can predict cash flows into the distant future with precision, not even for stable businesses with durable competitive advantges. Therefore, any estimate of fair value must include substantial room for error.
For instance, if a stock's estimated value is $80 per share, then a purcahse at $60 allows an investor to be wrong by 25% but still achieve a satisfactory result. The $20 difference between estimated fair value and purchase price is what Graham called the margin of safety. Buffett considers this margin-of-safety principle to be the cornerstone of investment success.
Concentrating on Your Best Ideas
Buffett has difficulty finding understandable businesses with sustainable competitive advantages and excellent managers that also sell at discounts to their estimated fair values. Therefore, his investment portfolio has often been concentrated in relatively few companies. This practice is at odds with the Modern Portfolio Theory taught in business schools, but Buffett rejects the idea that diversification is helpful to informed investors. On the contrary, he thinks the addition of an investor's 20th favorite holding is likely to lower returns and increase risk compared with simply adding the same amount of money to the investor's top choices.
You can greatly boost your investment returns if you invest like Buffett. This means
Know What You Own - Peter Lynch
Lynch's mantra is that average investors have an edge over Wall Street experts. The "Street lag" of large institutions gives average investors many advantages because they can find promising investments largely ahead of the professional investors.
Lynch stated, "If you stay half-alert, you can pick the spectacular performers right from your place of business or out of the neighbourhood shopping mall, and long before Wall Street discovers them." Therefore, individual investors can outperform the experts and the market in general by looking around for investment ideas in their everyday lives.
His book, One Up on Wall Street, articulates his investment philosophy. The Lynch stock-picking approach has several key principles:
Stick to What You Know
Investing in what you know about and understand is at the core of Lynch's stock-picking approach. This particular investment principle served Lynch very well in practice.
Lynch has pointed out that you find your best investment ideas close to home. "An amateur investor can pick tomorrow's big winners by paying attention to new developments at the workplace, the mall, the auto showrooms, the restaurants, or anywhere a promising new enterprise makes its debut."
Things Lynch Looks For, and Avoid
Company Characteristics that Might Attract Lynch:
The second key principle in Lynch's investment philosophy is that you should do your homework and research the company thoroughly. "Investing without research is like playing stud poker and never looking at the cards." He recommends reading all prospectuses, quarterly reports (Form 10-Q), and annual reports (Form 10-K) that companies are required to file with the Securities and Exchange Commission.
If any pertinent information is unavailable in the annual report, Lynch says that you will be able to find it by asking your broker, calling the company, visiting the company, or doing some grassroots research, also known as "kicking the tires." After completing the research process, you should be familiar with the company's business and have developed some sense of its future potential.
The third main principle of Lynch's stock-picking approach is to focus only on the company's fundamentals and not the market as a whole. Lynch doesn't believe in predicting markets, but he believes in buying great companies - especially companies that are undervalued and/or underappreciated.
Lynch believes that investors can separate good companies from mediocre ones by sticking to the fundamentals and combing through financial statements. He suggests looking at some of the following famous numbers:
The last key principle of Lynch's investment philosophy is that you should only invest for the long run and discard short-term market gyrations. Lynch has said, "Absent a lot of surprises, stocks are relatively predictable over ten to twenty years. As to whether they're going to be higher or lower int wo or three years, you might as well flip a coin to decide." Nonetheless, Lynch sticks with his philosophy, adding: "When it comes to the market, the important skill here is not listening, it's snoring. The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them. Stand by your stocks as long as the fundamental story has not changed."
Lynch's investment philosophy is very similar to Buffett's stock picking approach. Lynch said, "And Warren Buffett, the greatest ivnestor of them all, looks for the same opportunities I do, except that when he finds them [great businesses at bargain prices], he buys the whole company."
Lynch said, "The basic story remains simple and never-ending. Stocks aren't lottery tickets. There's a company attached to every share. Companies do better or they do worse. If a company does worse than before, its stock will fall. If a company does better, its stock will rise. If you own good companies that continue to increase their earnings, you'll do well."
The Principles of Value Investing
1. Thorough analysis
2. Safety of principal
3. Adequate return
To succeed as an investor, you must be able to estimate a business's true worth, or "intrinsic value."
"Bascially, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market."
Graham distilled the secret of sound investing into three words, "margin of safety." Any estimate of intrinsic value is based on numerous assumptions about the future, which are unlikely to be completely accurate.
You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right." Warren Buffett said the best advice he ever got from Graham was to think independently.
"Purchase and hold for the long term a concentrated porfolio of outstanding companies with compelling growth prospects that you understand very well."
To uncover the business insights described by Fisher's 15 points, investors must do their research footwork, or "scuttlebutt." You should ask questions of management, competitors, suppliers, customers, and anyone else who might have useful information.
"Go to five companies in the industry, ask each of them intelligent questions about the points of strength and weakness of the other four, and nine times out of ten a surprising detailed and accurate picture of all five will emerge."
2. Does the management have a determination to continue to develop products or processes that will still further increase total sales potential when the growth potentials of currently attractive product lines have largely been exploited?
3. How effective are the company's research and development efforts in relation to its size?
4. Does the company have an above average sales organisation?
5. Does the company have a worthwhile profit margin?
6. What is the company doing to maintain or improve profit margins?
7. Does the company have outstanding labour and personnel relations?
8. Does the company have outstanding executive relations?
9. Does the company have depth to its management?
10. How good are the company's cost analysis and accounting controls?
11. Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?
12. Does the company have a short-range or long-range outlook in regard to profits?
13. In the foreseeable future, will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders' benefit from this anticipated growth?
14. Does management talk freely to investors about its affairs when things are going well but "clam up" when troubles and disappointments occur?
15. Does the company ahve a management of unquestionable integrity?
1. Don't overstress diversification.
2. Don't follow the crowd.
3. Don't quibble over eighths and quarters.
Great Companies at Reasonable Prices - Warren Buffett
"We select our marketable equity securities in much the way we would evaluate a business for acquisition in its entirety. We want the busines to be one:
- that we can understand;
- with favourable long-term prospects;
- operated by honest and competent people; and
- available at a very attractive price."
To determine value, he estimates the company's future cash flows and discounts them at an appropriate rate. This discounted cash-flow valuation is used by countless investment professionals, so Buffett's approach to valuation is not a competitive advantage.
If Buffett cannot understand a company's business, then it lies beyond his circle of competence, and he won't attempt to value it.
Although it might seem obvious that investors should stick to what they know, the temptation to step outside one's circle of competence can be strong.
Buffett has written that he isn't bothered when he misses out on big returns in areas he doesn't understand, because investors can do very well (as he has) by simply avoiding big mistakes.
Even if a business is easy to understand, Buffett won't attempt to value it if its future cash flows are unpredictable. He wants to own simple, stable businesses that possess sustainable competitive advantages. Companies with these characteristics are highly likely to generate materially higher cash flows with the passage of time. Without these characteristics, valuation estimates become very uncertain.
He has written that good managers are unlikely to triumph over a bad business, but given a business with decent economic characteristics - the only type that interests hime - good managers make a significant difference. He looks for individuals who are more passionate about their work than their compensation and who exhibit energy, intelligence, and integrity. That last quality is especially important to thim. He believes that he has never made a good deal with a bad person.
Once Buffetthas decided that he is competent to evaluate a company, that the company has sustainable advantages, and that it is run by commendable managers, then he still has to decide whether or not to buy it. This step is the most crucial part of the process.
The decision process seems simple enough: If the market price is below the discounted cash-flow calculation of fair value, then the security is a candidate for purchase. The available securities that offer the greatest discounts to fair value estimates are the ones to buy.
However, what seems simple in theory is difficult in practice. A company's stock price typically drops when investors shun it because of bad news, so a buyer of cheap securities is constantly swimming against the tide of popular sentiment. Even investments that generate excellent long-term returns can perform poorly for years. In fact, Buffett wrote an article in 1979 explaining that stocks were undervalued, yet the undervaluation only worsened for another three years. Most investors find it difficult to buy when it seems that everyone is selling, and difficult to remain steadfast when returns are poor for several consecutive years.
Although Buffett believes the market is frequently wrong about the fair value of stocks, he doesn't believe himself to be infallible. If he estimates a company's fair value at $80 per share, and the company's stock sells for $77, he will refrain from buying despite the apparent undervaluation. That small discrepancy does not provide an adequate margin of safety, another concept borrowed from Ben Graham. No one can predict cash flows into the distant future with precision, not even for stable businesses with durable competitive advantges. Therefore, any estimate of fair value must include substantial room for error.
Buffett has difficulty finding understandable businesses with sustainable competitive advantages and excellent managers that also sell at discounts to their estimated fair values. Therefore, his investment portfolio has often been concentrated in relatively few companies. This practice is at odds with the Modern Portfolio Theory taught in business schools, but Buffett rejects the idea that diversification is helpful to informed investors. On the contrary, he thinks the addition of an investor's 20th favorite holding is likely to lower returns and increase risk compared with simply adding the same amount of money to the investor's top choices.
You can greatly boost your investment returns if you invest like Buffett. This means
- staying within your circle of competence,
- focusing on companies with wide economic moats,
- paying attention to company valuation and not market prices, and finally,
- requiring a margin of safety before buying.
Lynch's mantra is that average investors have an edge over Wall Street experts. The "Street lag" of large institutions gives average investors many advantages because they can find promising investments largely ahead of the professional investors.
Lynch stated, "If you stay half-alert, you can pick the spectacular performers right from your place of business or out of the neighbourhood shopping mall, and long before Wall Street discovers them." Therefore, individual investors can outperform the experts and the market in general by looking around for investment ideas in their everyday lives.
- First, you should invest only in what you understand.
- Second, you should do your homework and research an investment thoroughly.
- Third, you should focus more on a company's fundamentals and not the market as a whole.
- Last, you should invest only for the long run and discard short-term market gyrations.
Investing in what you know about and understand is at the core of Lynch's stock-picking approach. This particular investment principle served Lynch very well in practice.
Company Characteristics that Might Attract Lynch:
- It is boring.
- The industry is not growing.
- The business is specialized and entrenched.
- The business sounds silly.
- There is a lot of controversy surrounding the business.
- It has been spun out of a larger company.
- Wall Street doesn't follow it or care about it.
- The business supplies something people need to continually buy.
- Management is buying shares, or the company is repurchasing its stock.
- It uses technology to cut costs or add value for customers.
- Company or its industry is grabbing a lot of headlines.
- It is the hot topic of conversation at happy hour.
- It is being touted as a revolutionary company that is the next great investment.
- It has a cool, futuristic name.
- It is diversifying too much, diluting its competitive strength.
- It is a middleman and has a limited number of clients.
The second key principle in Lynch's investment philosophy is that you should do your homework and research the company thoroughly. "Investing without research is like playing stud poker and never looking at the cards." He recommends reading all prospectuses, quarterly reports (Form 10-Q), and annual reports (Form 10-K) that companies are required to file with the Securities and Exchange Commission.
If any pertinent information is unavailable in the annual report, Lynch says that you will be able to find it by asking your broker, calling the company, visiting the company, or doing some grassroots research, also known as "kicking the tires." After completing the research process, you should be familiar with the company's business and have developed some sense of its future potential.
Once you have done your research on a company, Lynch believes that it is important to set some realistic expectations about each stock's potential. He usually ranks the companies by size and then places them into one of six categories:
- Slow Growers
- Stalwarts
- Fast Growers
- Cyclicals
- Turnarounds
- Asset Plays
The third main principle of Lynch's stock-picking approach is to focus only on the company's fundamentals and not the market as a whole. Lynch doesn't believe in predicting markets, but he believes in buying great companies - especially companies that are undervalued and/or underappreciated.
Lynch advocates looking at companies one at a time using a "bottom up" approach rather trying to make difficult macroeconomic calls using a "top down" approach.
Lynch believes that investors can separate good companies from mediocre ones by sticking to the fundamentals and combing through financial statements. He suggests looking at some of the following famous numbers:
- Percent of Sales
- Year-Over-Year Earnings
- Earnings Growth
- The P/E Ratio (Lynch's favorite metric)
- The Cash Position
- The Debt Factor
- Dividends
- Book Value
- Cash Flow
- Inventories
- Pension Plans
The last key principle of Lynch's investment philosophy is that you should only invest for the long run and discard short-term market gyrations. Lynch has said, "Absent a lot of surprises, stocks are relatively predictable over ten to twenty years. As to whether they're going to be higher or lower int wo or three years, you might as well flip a coin to decide." Nonetheless, Lynch sticks with his philosophy, adding: "When it comes to the market, the important skill here is not listening, it's snoring. The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them. Stand by your stocks as long as the fundamental story has not changed."
Lynch's investment philosophy is very similar to Buffett's stock picking approach. Lynch said, "And Warren Buffett, the greatest ivnestor of them all, looks for the same opportunities I do, except that when he finds them [great businesses at bargain prices], he buys the whole company."
Lynch said, "The basic story remains simple and never-ending. Stocks aren't lottery tickets. There's a company attached to every share. Companies do better or they do worse. If a company does worse than before, its stock will fall. If a company does better, its stock will rise. If you own good companies that continue to increase their earnings, you'll do well."
Financial Education - Learning the important topics in valuation
Workshop on Equity Valuation & Financial Modeling
Host: Viftech Solutions (Pvt.) Ltd.
Start Time: Wednesday, 20 January 2010 at 09:00
End Time: Thursday, 21 January 2010 at 17:00
Location: PC Hotel, Karachi
Description
This workshop is designed for people who want to learn equity valuation and financial modeling. Participants will be taught to analyze true economic worth of a business, using various valuation techniques. This workshop is ideal for professionals related to corporate finance, investment analysis, risk management, investment banking, corporate banking, brokerage or asset management industries
Pre-requisites
Good understanding of financial statements
Learning Objectives
• Have a clear comprehension of what drives the value of a company
• Make more profitable investment decisions to enhance value
• Understand most widely-practiced and robust valuation techniques
• Know how to critically analyze an investment proposal
• Be better equipped to negotiate terms of an investment transaction
• Be able to choose a valuation method appropriate for your company
Course Outline
Day 1
• Background of company valuation
• Uses of company valuation
• Concept of TVM in financial analysis
• Prepare financial models on Microsoft Excel
• Forecast future earnings/balance sheet/cashflow
• Why accrual accounting can be misleading
• Benefits of cashflow based analysis
• Calculate free cash flow forecasts
• Calculate the enterprise and equity value of a business
• Calculate terminal value of a business
• Explain why WACC is used to discount company free cash flows
• Calculate WACC, cost of debt and cost of equity
• Calculate equity risk premium
• Calculate terminal growth rates
Day 2
• Discuss and apply various cash flow valuation techniques, including dividend discount model, free cash flow to firm and free cash flow to equity
• Discuss Relative Valuations Techniques including P/E, P/S, P/B and EV/EBITDA based valuations
• Discuss other valuation methods including CAPM and Arbitrage Pricing Theory
• Determine the optimal capital structure of a company and its dividend policy
• Work through an example on a listed company
The workshop will include a practical example of equity valuation and financial modeling on a listed company.
Trainer Profile: Mr. Ali Reimoo – National Trainer
Ali Reimoo is an Equity Research Analyst at Habib Bank (Global Treasury). Prior to his current position, Ali has worked as an Equity Analst at Foundation Securities Limited (a Fauji Foundation Company and an affiliate of Macquarie Bank in Pakistan) and BMA Capital. He has been involved in investment analysis industry for over three years, during which he has written and published several analytical reports. His major job responsibilities include; analyzing companies from the perspective of their business risk, growth prospects, investment value and financial wellbeing.
Due to his sound analytical skills, Ali has made a decent reputation for himself. He is also a regular on major TV channels like CNBC Pakistan, Business Plus, GeoTv etc, where he is regularly called as a guest to share his views on the country’s investment climate.
Apart from being an investment analyst, Ali is also a trainer and consultant. His unique skills of understanding client needs and helping them overcome their knowledge gap makes him stand apart from other trainers.
He has successfully helped various professionals develop/improve their financial and analytical skills. Some of the beneficiaries whom he has helped include professionals from reputed organizations like, State Bank of Pakistan, Faysal Bank, HSBC Bank Pakistan, National Bank of Pakistan and Johnson and Johnson Company.
His academic qualifications include; MSc in Finance & Investment from University of Edinburgh, Scotland and BBA/MBA from College of Business Management Karachi. currently he is a CFA level 2 candidate.
Workshop Schedule:
Venue: PC Hotel, Karachi.
Date: 20-21 January, 2010 | 9am to 5pm
Workshop Includes:
Training materials, certificates, tea and snacks, lunch and networking opportunities.
Workshop Investment:
Rs. 11,000/- per participant | Before Due Date
Rs. 12,000/- per participant | After Due Date
10% discount on more than 2 participants from the same organization received before due date.
Participant will bring own Laptop will get Rs. 800/- Off. (Should inform and register before due date)
Other Details
• All the cheques are required be made in favor of ‘Viftech Solutions (Pvt.) Ltd.’
• All nominations shall be confirmed on first–come-first-served basis.
• Limited Seats Available
• Due date for registration is 14 January, 2010
Click this link to Download Registration Form:
http://www.viftech.com.pk/images/Registration%20Form.doc
Further Information & Registrations
Viftech Solutions (Pvt.) Ltd.
Mr. Jahangir Sachwani
Assistant Manager Marketing & Corporate Trainings
Phone: (+92) 332 2109221 | (021) 35055379-80 - 35053480
Email: Jahangir.sachwani@viftech.com.pk
http://pakhr.blogspot.com/2010/01/workshop-on-equity-valuation-financial.html
Host: Viftech Solutions (Pvt.) Ltd.
Start Time: Wednesday, 20 January 2010 at 09:00
End Time: Thursday, 21 January 2010 at 17:00
Location: PC Hotel, Karachi
Description
This workshop is designed for people who want to learn equity valuation and financial modeling. Participants will be taught to analyze true economic worth of a business, using various valuation techniques. This workshop is ideal for professionals related to corporate finance, investment analysis, risk management, investment banking, corporate banking, brokerage or asset management industries
Pre-requisites
Good understanding of financial statements
Learning Objectives
• Have a clear comprehension of what drives the value of a company
• Make more profitable investment decisions to enhance value
• Understand most widely-practiced and robust valuation techniques
• Know how to critically analyze an investment proposal
• Be better equipped to negotiate terms of an investment transaction
• Be able to choose a valuation method appropriate for your company
Course Outline
Day 1
• Background of company valuation
• Uses of company valuation
• Concept of TVM in financial analysis
• Prepare financial models on Microsoft Excel
• Forecast future earnings/balance sheet/cashflow
• Why accrual accounting can be misleading
• Benefits of cashflow based analysis
• Calculate free cash flow forecasts
• Calculate the enterprise and equity value of a business
• Calculate terminal value of a business
• Explain why WACC is used to discount company free cash flows
• Calculate WACC, cost of debt and cost of equity
• Calculate equity risk premium
• Calculate terminal growth rates
Day 2
• Discuss and apply various cash flow valuation techniques, including dividend discount model, free cash flow to firm and free cash flow to equity
• Discuss Relative Valuations Techniques including P/E, P/S, P/B and EV/EBITDA based valuations
• Discuss other valuation methods including CAPM and Arbitrage Pricing Theory
• Determine the optimal capital structure of a company and its dividend policy
• Work through an example on a listed company
The workshop will include a practical example of equity valuation and financial modeling on a listed company.
Trainer Profile: Mr. Ali Reimoo – National Trainer
Ali Reimoo is an Equity Research Analyst at Habib Bank (Global Treasury). Prior to his current position, Ali has worked as an Equity Analst at Foundation Securities Limited (a Fauji Foundation Company and an affiliate of Macquarie Bank in Pakistan) and BMA Capital. He has been involved in investment analysis industry for over three years, during which he has written and published several analytical reports. His major job responsibilities include; analyzing companies from the perspective of their business risk, growth prospects, investment value and financial wellbeing.
Due to his sound analytical skills, Ali has made a decent reputation for himself. He is also a regular on major TV channels like CNBC Pakistan, Business Plus, GeoTv etc, where he is regularly called as a guest to share his views on the country’s investment climate.
Apart from being an investment analyst, Ali is also a trainer and consultant. His unique skills of understanding client needs and helping them overcome their knowledge gap makes him stand apart from other trainers.
He has successfully helped various professionals develop/improve their financial and analytical skills. Some of the beneficiaries whom he has helped include professionals from reputed organizations like, State Bank of Pakistan, Faysal Bank, HSBC Bank Pakistan, National Bank of Pakistan and Johnson and Johnson Company.
His academic qualifications include; MSc in Finance & Investment from University of Edinburgh, Scotland and BBA/MBA from College of Business Management Karachi. currently he is a CFA level 2 candidate.
Workshop Schedule:
Venue: PC Hotel, Karachi.
Date: 20-21 January, 2010 | 9am to 5pm
Workshop Includes:
Training materials, certificates, tea and snacks, lunch and networking opportunities.
Workshop Investment:
Rs. 11,000/- per participant | Before Due Date
Rs. 12,000/- per participant | After Due Date
10% discount on more than 2 participants from the same organization received before due date.
Participant will bring own Laptop will get Rs. 800/- Off. (Should inform and register before due date)
Other Details
• All the cheques are required be made in favor of ‘Viftech Solutions (Pvt.) Ltd.’
• All nominations shall be confirmed on first–come-first-served basis.
• Limited Seats Available
• Due date for registration is 14 January, 2010
Click this link to Download Registration Form:
http://www.viftech.com.pk/images/Registration%20Form.doc
Further Information & Registrations
Viftech Solutions (Pvt.) Ltd.
Mr. Jahangir Sachwani
Assistant Manager Marketing & Corporate Trainings
Phone: (+92) 332 2109221 | (021) 35055379-80 - 35053480
Email: Jahangir.sachwani@viftech.com.pk
http://pakhr.blogspot.com/2010/01/workshop-on-equity-valuation-financial.html
Growth stocks regain favor after value's long run
January 15, 2010
Growth stocks regain favor after value's long run
Mark Jewell
Growth is in, value is out. And it's likely to stay that way this year.
Investors who loaded their portfolios with growth stocks were rewarded in 2009. Those stocks gained an average 37 percent, nearly twice as much as value stocks.
Growth's notable performance was largely fueled by technology stocks, the biggest part of the growth category. Experts say those companies will continue to prosper as customers ramp up tech spending coming out of the recession. But experts caution a tech rally as big as last year's is unlikely.
There's no pat definition for growth stocks, but typically they generate revenue and earnings at an above-average rate. Examples are Apple and Google. Value stocks generally produce steady earnings, often pay out dividends and are considered cheap based on their price-to-earnings ratios. Companies like Bank of America, McDonald's and Wal-Mart fall into this category.
The leadership shift to growth from value marks a break from historical patterns. All told, the annual performance of growth stocks surpassed value stocks just twice in the last decade. Also, value stocks normally do much better coming out of a recession, as more economically sensitive stocks like banks and utilities rebound at the earliest signs that the economy is expanding.
"Typically, the bigger the contraction during a recession, the bigger the snapback when the economy turns," says Stephen Wood, chief market strategist of Russell Investments. "That hasn't happened this time."
This recovery has been tepid. The economy is growing about half as fast as it usually does exiting a recession, says Wood. Though the stock market has climbed 70 percent since last March, unemployment remains at 10 percent.
Still it's clear that growth stocks were hot in 2009. Growth stocks within the Russell 3000, a broad index covering 98 percent of the U.S. stock market, surged 37 percent last year. Value stocks ended with a more modest 20 percent gain.
That big gap was reminiscent of the late 1990s, when growth had its last big run. Of course that fizzled in early 2000 as the dot-com bust pummeled technology companies.
"What happened in 2009 is not what we should expect going forward," says Jim Swanson, chief market strategist at MFS Investment Management, which manages nearly $188 billion. "We need to look at it as an extraordinary year."
The reality is that certain industries play a pivotal role in driving the performance of growth and value stocks.
Tech stocks are the biggest part of growth, accounting for 30 percent of the value of all that category's stocks in the Russell 3000. Last year those tech stocks finished up an average 59 percent — tops among 11 sectors — boosting growth's overall performance. Two of tech's biggest names put up especially strong results: Shares of Apple and Google more than doubled.
On the value side, financial services stocks are the biggest piece, making up one-quarter of the Russell 3000's value component. While many large banks came back from the brink of failure, their stocks haven't returned to pre-plunge levels. In 2009, financials trailed the broader market despite finishing up 17 percent.
Utility stocks, another value staple, also weighed down the overall performance of the category. They gained just 12 percent last year, less than any other segment of the stock market.
Ultimately, investors trying to forecast whether growth or value will lead the market should closely watch the economy.
In each of the past four recessions since 1980, growth stocks fared better than value as the economy shrank, a Russell Investments study found.
That's because growth companies' competitive advantages — think of Google's search engine dominance, for example — tend to hold up even if the economy is lousy. Value stocks tend to fall more sharply because many are in industries that are unusually sensitive to economic cycles — think of banks that see loan losses multiply in a bad economy, or energy companies that see demand from industrial customers shrink.
When the economy began expanding coming out of past recessions, value stocks began rising faster than growth stocks, the study found.
That's not the case now, so the current market is breaking with the norms. Still, after value stocks led the market nearly all the past decade, Wood, of Russell Investments, figures growth stocks could be in favor for a long while.
But even if they are, don't rush in. Individual stocks don't neatly follow the trend of their broader category. And, perhaps more importantly, Wood says the performance advantage for either growth or value is likely to be narrow.
"2010," Wood says, "will probably surprise us in how normal it will be."
http://www.realclearmarkets.com/news/ap/finance_business/2010/Jan/15/growth_stocks_regain_favor_after_value_s_long_run.html
Growth stocks regain favor after value's long run
Mark Jewell
Growth is in, value is out. And it's likely to stay that way this year.
Investors who loaded their portfolios with growth stocks were rewarded in 2009. Those stocks gained an average 37 percent, nearly twice as much as value stocks.
Growth's notable performance was largely fueled by technology stocks, the biggest part of the growth category. Experts say those companies will continue to prosper as customers ramp up tech spending coming out of the recession. But experts caution a tech rally as big as last year's is unlikely.
There's no pat definition for growth stocks, but typically they generate revenue and earnings at an above-average rate. Examples are Apple and Google. Value stocks generally produce steady earnings, often pay out dividends and are considered cheap based on their price-to-earnings ratios. Companies like Bank of America, McDonald's and Wal-Mart fall into this category.
The leadership shift to growth from value marks a break from historical patterns. All told, the annual performance of growth stocks surpassed value stocks just twice in the last decade. Also, value stocks normally do much better coming out of a recession, as more economically sensitive stocks like banks and utilities rebound at the earliest signs that the economy is expanding.
"Typically, the bigger the contraction during a recession, the bigger the snapback when the economy turns," says Stephen Wood, chief market strategist of Russell Investments. "That hasn't happened this time."
This recovery has been tepid. The economy is growing about half as fast as it usually does exiting a recession, says Wood. Though the stock market has climbed 70 percent since last March, unemployment remains at 10 percent.
Still it's clear that growth stocks were hot in 2009. Growth stocks within the Russell 3000, a broad index covering 98 percent of the U.S. stock market, surged 37 percent last year. Value stocks ended with a more modest 20 percent gain.
That big gap was reminiscent of the late 1990s, when growth had its last big run. Of course that fizzled in early 2000 as the dot-com bust pummeled technology companies.
"What happened in 2009 is not what we should expect going forward," says Jim Swanson, chief market strategist at MFS Investment Management, which manages nearly $188 billion. "We need to look at it as an extraordinary year."
The reality is that certain industries play a pivotal role in driving the performance of growth and value stocks.
Tech stocks are the biggest part of growth, accounting for 30 percent of the value of all that category's stocks in the Russell 3000. Last year those tech stocks finished up an average 59 percent — tops among 11 sectors — boosting growth's overall performance. Two of tech's biggest names put up especially strong results: Shares of Apple and Google more than doubled.
On the value side, financial services stocks are the biggest piece, making up one-quarter of the Russell 3000's value component. While many large banks came back from the brink of failure, their stocks haven't returned to pre-plunge levels. In 2009, financials trailed the broader market despite finishing up 17 percent.
Utility stocks, another value staple, also weighed down the overall performance of the category. They gained just 12 percent last year, less than any other segment of the stock market.
Ultimately, investors trying to forecast whether growth or value will lead the market should closely watch the economy.
In each of the past four recessions since 1980, growth stocks fared better than value as the economy shrank, a Russell Investments study found.
That's because growth companies' competitive advantages — think of Google's search engine dominance, for example — tend to hold up even if the economy is lousy. Value stocks tend to fall more sharply because many are in industries that are unusually sensitive to economic cycles — think of banks that see loan losses multiply in a bad economy, or energy companies that see demand from industrial customers shrink.
When the economy began expanding coming out of past recessions, value stocks began rising faster than growth stocks, the study found.
That's not the case now, so the current market is breaking with the norms. Still, after value stocks led the market nearly all the past decade, Wood, of Russell Investments, figures growth stocks could be in favor for a long while.
But even if they are, don't rush in. Individual stocks don't neatly follow the trend of their broader category. And, perhaps more importantly, Wood says the performance advantage for either growth or value is likely to be narrow.
"2010," Wood says, "will probably surprise us in how normal it will be."
http://www.realclearmarkets.com/news/ap/finance_business/2010/Jan/15/growth_stocks_regain_favor_after_value_s_long_run.html
Growth stocks regain favor after value's long run
Originally published Saturday, January 16, 2010 at 12:01 PM
Growth stocks regain favor after value's long run
Growth stocks within the Russell 3000, a broad index covering 98 percent of the U.S. stock market, surged 37 percent last year. Value stocks ended with a more modest 20 percent gain.
The Associated Press
BOSTON — Growth is in, value is out. And it's likely to stay that way this year.
Investors who loaded their portfolios with growth stocks were rewarded in 2009. Those stocks gained an average 37 percent, nearly twice as much as value stocks.
Growth's notable performance was largely fueled by technology stocks, the biggest part of the growth category. Experts say those companies will continue to prosper as customers ramp up tech spending coming out of the recession. But experts caution a tech rally as big as last year's is unlikely.
Typically growth stocks generate revenue and earnings at an above-average rate. Examples are Apple and Google.
Value stocks generally produce steady earnings, often pay out dividends and are considered cheap based on their price-to-earnings ratios. Companies like Bank of America, McDonald's and Wal-Mart fall into this category.
Historical patterns
The leadership shift to growth from value marks a break from historical patterns. All told, the annual performance of growth stocks surpassed value stocks just twice in the last decade.
Growth stocks within the Russell 3000, a broad index covering 98 percent of the U.S. stock market, surged 37 percent last year. Value stocks ended with a more modest 20 percent gain.
That big gap was reminiscent of the late 1990s, when growth had its last big run. Of course that fizzled in early 2000 as the dot-com bust pummeled technology companies.
"What happened in 2009 is not what we should expect going forward," says Jim Swanson, chief market strategist at MFS Investment Management, which manages nearly $188 billion. "We need to look at it as an extraordinary year."
In each of the past four recessions since 1980, growth stocks fared better than value as the economy shrank, a Russell Investments study found.
Advantage holds up
That's because growth companies' competitive advantages — think of Google's search-engine dominance, for example — tend to hold up even if the economy is lousy. Value stocks tend to fall more sharply because many are in industries that are unusually sensitive to economic cycles — think of banks that see loan losses multiply in a bad economy.
When the economy began to expand coming out of past recessions, value stocks began to rise faster than growth stocks, the study found.
But the market now is breaking with the norms. Still, after value stocks led the market nearly all the past decade, Wood, of Russell Investments, figures growth stocks could be in favor for a long while.
But even if they are, don't rush in. Individual stocks don't neatly follow the trend of their broader category. And, perhaps more importantly, Wood says the performance advantage for either growth or value is likely to be narrow.
"2010," Wood says, "will probably surprise us in how normal it will be."
http://seattletimes.nwsource.com/html/businesstechnology/2010797412_investgrowth17.html?syndication=rss
Growth stocks regain favor after value's long run
Growth stocks within the Russell 3000, a broad index covering 98 percent of the U.S. stock market, surged 37 percent last year. Value stocks ended with a more modest 20 percent gain.
The Associated Press
BOSTON — Growth is in, value is out. And it's likely to stay that way this year.
Investors who loaded their portfolios with growth stocks were rewarded in 2009. Those stocks gained an average 37 percent, nearly twice as much as value stocks.
Growth's notable performance was largely fueled by technology stocks, the biggest part of the growth category. Experts say those companies will continue to prosper as customers ramp up tech spending coming out of the recession. But experts caution a tech rally as big as last year's is unlikely.
Typically growth stocks generate revenue and earnings at an above-average rate. Examples are Apple and Google.
Value stocks generally produce steady earnings, often pay out dividends and are considered cheap based on their price-to-earnings ratios. Companies like Bank of America, McDonald's and Wal-Mart fall into this category.
Historical patterns
The leadership shift to growth from value marks a break from historical patterns. All told, the annual performance of growth stocks surpassed value stocks just twice in the last decade.
Growth stocks within the Russell 3000, a broad index covering 98 percent of the U.S. stock market, surged 37 percent last year. Value stocks ended with a more modest 20 percent gain.
That big gap was reminiscent of the late 1990s, when growth had its last big run. Of course that fizzled in early 2000 as the dot-com bust pummeled technology companies.
"What happened in 2009 is not what we should expect going forward," says Jim Swanson, chief market strategist at MFS Investment Management, which manages nearly $188 billion. "We need to look at it as an extraordinary year."
In each of the past four recessions since 1980, growth stocks fared better than value as the economy shrank, a Russell Investments study found.
Advantage holds up
That's because growth companies' competitive advantages — think of Google's search-engine dominance, for example — tend to hold up even if the economy is lousy. Value stocks tend to fall more sharply because many are in industries that are unusually sensitive to economic cycles — think of banks that see loan losses multiply in a bad economy.
When the economy began to expand coming out of past recessions, value stocks began to rise faster than growth stocks, the study found.
But the market now is breaking with the norms. Still, after value stocks led the market nearly all the past decade, Wood, of Russell Investments, figures growth stocks could be in favor for a long while.
But even if they are, don't rush in. Individual stocks don't neatly follow the trend of their broader category. And, perhaps more importantly, Wood says the performance advantage for either growth or value is likely to be narrow.
"2010," Wood says, "will probably surprise us in how normal it will be."
http://seattletimes.nwsource.com/html/businesstechnology/2010797412_investgrowth17.html?syndication=rss
Interpreting Financial Information
1. WHY INTERPRETE FINANCIAL DATA?
It helps to know your markets, measure growth, and make authoritative decisives.
2. WHAT ARE COMMON BENCHMARKS?
Sales revenues, profits, number of stores, and customers.
3. HOW DO YOU EVALUATE PERFORMANCE?
COST-BENEFIT ANALYSIS
WHAT IS IT? You weigh the expected costs of launching or running a business against the expected benefits. The costs involved are variable (diretly involved with the new activity) and fixed (these remain more or less the same, regardless of the new business).
RETURN ON INVESTMENT
WHAT IS IT? A method used to measure the benefits of the project over the length of time of a project (when this is time specific).
You divide the net profit expected for the first year by the amount of expenditure and express it as a percentage of the outlay.
BREAKEVEN ANALYSIS
WHAT IS IT? It provides a way of finding out how many sales are necessary to recoup the capital spent on the original investment. You need to know your contribution margin (the percentage of each sales dollar left over after variable costs are taken aways from overall profits).
TIME VALUE OF MONEY
WHAT IS IT? It describes the concept that a dollar received today is worth more than a dollar received at some point in the future because the dollar received today can be invested to earn interest. The harsh reality is that future benefits may be worth less dollar for dollar than if the capital outlay was put in an investment fund.
4. WHAT ARE THE WAYS TO VALUE A COMPANY?
HARD NUMBERS. These are based on existing figures and include equity book value (assets minus liabilities) and fair market value (the value established between a willing buyer and a willing seller).
SOFT NUMBERS. These are based on estimates of future benefits and therefore contain an element of subjectivity.
INTANGIBLE ASSETS. These include people, knowledge, relationships, intellectual property, brand names, loyal customer base, copyrights or trademarks, mailing lists, long-term contracts, and franchises.
It helps to know your markets, measure growth, and make authoritative decisives.
2. WHAT ARE COMMON BENCHMARKS?
Sales revenues, profits, number of stores, and customers.
3. HOW DO YOU EVALUATE PERFORMANCE?
COST-BENEFIT ANALYSIS
WHAT IS IT? You weigh the expected costs of launching or running a business against the expected benefits. The costs involved are variable (diretly involved with the new activity) and fixed (these remain more or less the same, regardless of the new business).
RETURN ON INVESTMENT
WHAT IS IT? A method used to measure the benefits of the project over the length of time of a project (when this is time specific).
You divide the net profit expected for the first year by the amount of expenditure and express it as a percentage of the outlay.
BREAKEVEN ANALYSIS
WHAT IS IT? It provides a way of finding out how many sales are necessary to recoup the capital spent on the original investment. You need to know your contribution margin (the percentage of each sales dollar left over after variable costs are taken aways from overall profits).
TIME VALUE OF MONEY
WHAT IS IT? It describes the concept that a dollar received today is worth more than a dollar received at some point in the future because the dollar received today can be invested to earn interest. The harsh reality is that future benefits may be worth less dollar for dollar than if the capital outlay was put in an investment fund.
4. WHAT ARE THE WAYS TO VALUE A COMPANY?
HARD NUMBERS. These are based on existing figures and include equity book value (assets minus liabilities) and fair market value (the value established between a willing buyer and a willing seller).
SOFT NUMBERS. These are based on estimates of future benefits and therefore contain an element of subjectivity.
INTANGIBLE ASSETS. These include people, knowledge, relationships, intellectual property, brand names, loyal customer base, copyrights or trademarks, mailing lists, long-term contracts, and franchises.
Monday, 18 January 2010
Valuing the company
Valuing a business is never an exact sceience with no one right away of determining a company's price. These are the common ways of appraising a business:
A. Hard numbers
B. Soft numbers
C. Intangible assets
D. Market competition
A. HARD NUMBERS
These are based on existing financial figures and include:
1. EQUITY BOOK VALUE
The simple formula is to subtract a company's liabilities from its assets based on historical records.
2. ADJUSTED BOOK VALUE
This is the same formula but takes into account the fair market value of assets and liabilities, which may produce a more accurate picture as historical records may be very out-of-date.
3. LIQUIDATION VALUE
This is another variation on the balance sheet theme that calculates how much money is left when assets are sold quickly and debts are paid off.
4. FAIR MARKET VALUE
This is simply the value established between a willing buyer and a willing seller.
5. MARKET VALUE
This applies to a publicly traded company.
B. SOFT NUMBERS
Soft numbers are based on estimates of future benefits and therefore contain an element of subjectivity.
1. INCOME METHOD
This is a measurement of the future benefits such as sales, profits, or cost savings.
2. DISCOUNTED CASH FLOW APPROACH
This approach brings future anticipated income to present value.
3. INVESTMENT VALUE
This takes into account the special benefits that a buyer accrues from acquiring the new entity.
C. INTANGIBLE ASSETS
Increasingly, prospective buyers are putting a greater onus on a company's intangible assets, which include people, knowledge, relationships, intellectual property, brand names, loyal customer base, copyrights or trademarks, proprietary mailing lists, long-term contracts, and franchises.
Some intangible assets can be priced using traditional approaches such as:
1. COST-BASED VALUATION
How much would it cost you to duplicate some of these assets today?
2. MARKET-BASED VALUATION
What were the sale transactions of brand-named goods in the sector?
3. CUSTOMER-DRIVEN VALUATION
What is the value of a loyal customer? What does the average customer spend per purchase a year? How long has he been a customer?
D. MARKET COMPETITION
Research into the company and its place in its sector are also relevant. Is your business in a growth industry or a declining one?
A. Hard numbers
B. Soft numbers
C. Intangible assets
D. Market competition
A. HARD NUMBERS
These are based on existing financial figures and include:
1. EQUITY BOOK VALUE
The simple formula is to subtract a company's liabilities from its assets based on historical records.
2. ADJUSTED BOOK VALUE
This is the same formula but takes into account the fair market value of assets and liabilities, which may produce a more accurate picture as historical records may be very out-of-date.
3. LIQUIDATION VALUE
This is another variation on the balance sheet theme that calculates how much money is left when assets are sold quickly and debts are paid off.
4. FAIR MARKET VALUE
This is simply the value established between a willing buyer and a willing seller.
5. MARKET VALUE
This applies to a publicly traded company.
B. SOFT NUMBERS
Soft numbers are based on estimates of future benefits and therefore contain an element of subjectivity.
1. INCOME METHOD
This is a measurement of the future benefits such as sales, profits, or cost savings.
2. DISCOUNTED CASH FLOW APPROACH
This approach brings future anticipated income to present value.
3. INVESTMENT VALUE
This takes into account the special benefits that a buyer accrues from acquiring the new entity.
C. INTANGIBLE ASSETS
Increasingly, prospective buyers are putting a greater onus on a company's intangible assets, which include people, knowledge, relationships, intellectual property, brand names, loyal customer base, copyrights or trademarks, proprietary mailing lists, long-term contracts, and franchises.
Some intangible assets can be priced using traditional approaches such as:
1. COST-BASED VALUATION
How much would it cost you to duplicate some of these assets today?
2. MARKET-BASED VALUATION
What were the sale transactions of brand-named goods in the sector?
3. CUSTOMER-DRIVEN VALUATION
What is the value of a loyal customer? What does the average customer spend per purchase a year? How long has he been a customer?
D. MARKET COMPETITION
Research into the company and its place in its sector are also relevant. Is your business in a growth industry or a declining one?
Sources of Finance for financing growth
WHAT CHOICES DO YOU HAVE TO RAISE FUNDS?
1. DEBT FINANCING involves a loan that will accumulate future interest.
2. EQUITY FINANCING involves accepting a lump sum in exchange for selling the future benefits and profits of your business to investors.
WHAT MIX OF DEBT/EQUITY IS USED IN A BUSINESS LIFE CYCLE?
1. SEED STAGE
WHAT IS IT? When your business is just a thought or an idea
FINANCIAL SOURCES:
2. START-UP STAGE
WHAT IS IT? When the company has officially launched.
FINANCIAL SOURCES:
3. GROWTH-STAGE
WHAT IS IT? When a business has successfully traded for a period.
FINANCIAL SOURCES:
4. MATURE STAGE
WHAT IS IT? When its business has an established place in the market.
FINANCIAL SOURCES:
Key terms
Angel investor: a wealthy individual, often a retired business owner or executive, who hands over capital to a new business in return for ownership equity.
Venture capitalists: commonly large institutions seeking to invest considerable amounts of capital into growing businesses through a series of invesmtent vehicles that include state and private pension funds, university endowments, and insurance companies.
Commercial paper: a money market secuirty issued by large banks and corporations for short term investments (maximum nine months) such as purchases of inventory. These unsecured IOUs are consideed safe, but returns are small.
Factoring: describes a loan by a third party (factor) given in the form of cash (often within 24 hours) for accounts receivable. The borrower pays a percentage of the invoice.
1. DEBT FINANCING involves a loan that will accumulate future interest.
2. EQUITY FINANCING involves accepting a lump sum in exchange for selling the future benefits and profits of your business to investors.
WHAT MIX OF DEBT/EQUITY IS USED IN A BUSINESS LIFE CYCLE?
1. SEED STAGE
WHAT IS IT? When your business is just a thought or an idea
FINANCIAL SOURCES:
- Family and friends
- Private savings
- Credit cards: usually much quicker than waiting for a loan approval.
2. START-UP STAGE
WHAT IS IT? When the company has officially launched.
FINANCIAL SOURCES:
- Banking, typically the first option of small business owners.
- Small, community banks.
- Leasing: paying a monthly payment for renting assets like equipment or office space.
- Factoring: paying an advance rate to a third party (factor) in exchange for cash.
- Trade credit: when a supplier allows the buyer to delay payment.
3. GROWTH-STAGE
WHAT IS IT? When a business has successfully traded for a period.
FINANCIAL SOURCES:
- Angel investor: a wealthy individual who hands over capital in return for ownership equity.
- Venture capital funds: large institutions seeking to invest considerable amounts of capital into growing businesses through a series of investment vehicles.
- Initial public offering (IPO): the sale of equity in a company, generally in the form of shares of common stock, through an investment banking firm.
4. MATURE STAGE
WHAT IS IT? When its business has an established place in the market.
FINANCIAL SOURCES:
- Capital market securities such as common stock, dividends, voting rights.
- Bonds - loans that take the form of a debt security where the borrower (known as the issuer) owes the holder (the lender) a debt and is obliged to repay the principal and interest (the coupon).
- Commercial paper - a money market security issued by large banks and corporations for short-term investments (maximum nine months) such as purchases of inventory
Key terms
Angel investor: a wealthy individual, often a retired business owner or executive, who hands over capital to a new business in return for ownership equity.
Venture capitalists: commonly large institutions seeking to invest considerable amounts of capital into growing businesses through a series of invesmtent vehicles that include state and private pension funds, university endowments, and insurance companies.
Commercial paper: a money market secuirty issued by large banks and corporations for short term investments (maximum nine months) such as purchases of inventory. These unsecured IOUs are consideed safe, but returns are small.
Factoring: describes a loan by a third party (factor) given in the form of cash (often within 24 hours) for accounts receivable. The borrower pays a percentage of the invoice.
External Form of Growth: Could your business benefit from these?
Business can grow by:
EXTERNAL FORMS OF GROWTH
Could your business benefit from an acquisition or a merger?
Again, you need to take a good look at the business to understand just where it is at the present time.
SOME OF THE QUESTIONS TO ASK ARE:
FACTORS TO CONSIDER
So what would be the reasons for considering growth either through a merger or by an acquisition?
Among the forms of external growth are:
- Internal growth: By paying attention to the internal affairs of the company, and diversifying into new products and new markets.
- Go-it-alone option:
- External growth: Through mergers and acquisitions.
EXTERNAL FORMS OF GROWTH
Could your business benefit from an acquisition or a merger?
Again, you need to take a good look at the business to understand just where it is at the present time.
- What are the strengths that you can build on?
- What do you have that would make your company attractive to other companies?
- Are there areas of weakness in the business?
- Could these be strengthened by acquiring another company or merging your business with another?
SOME OF THE QUESTIONS TO ASK ARE:
- Should we obtain more quality staff with different skils?
- What do we know about our sector of the industry or service? Could we improve our business intelligence to our advantage?
- Is our business underperforming and, if so, in which area(s)?
- Can we access funds for further development without endangering the normal business cash flow?
- Could we access a wider customer base and increase our market share without outside help? How much would it cost in extra resources?
- Could we diversify into other products or service areas? What would be the long-term effects?
- Can we reduce our cost and overhead structure without damaging our product, service, or customer base? Would there be an adverse effect on performance and quality?
- What would be the effect if we could reduce the competition?
- Would "organic growth" take too long?
FACTORS TO CONSIDER
So what would be the reasons for considering growth either through a merger or by an acquisition?
- Bigger is better?
- Image enhancement?
- Market expansion?
- Product range expansion?
- Diversification?
Among the forms of external growth are:
- Mergers
- Acquisitions
- Joint ventures
- Partnerships
- Collaborations
Mergers and Acquisitions: When not to?
When not to merge or acquire?
- When a review of the business shows that internal processes can be improved and that growth can be achieved internally.
- When the costs of either option would not be commensurate with the increased turnover and profits.
- When the cost of raising finance for an acquisition would not be covered by the sale of unwanted assets.
- When there is a danger of losing the identity of your company in either option.
- When there would be no chance of creating a working management structure for the enlarged business.
- When the market would not be able to support the planned increase in production.
- When the merger or acquisition would lead to the danger of a loss of intellectual property.
Successful Mergers and Acquisitions
- Do a company "health check." Examine every possible facet of the business.
- Discover if there any areas for improvement and prune out any waste.
- Complete an up-to-date SWOT analysis.
- Ensure that your strengths and opportunities support an external growth strategy.
- Weigh up the likely contenders for a merger/acquisition.
- Decide which strategy will be best for the company, bearing in mind that an acquisition can be a costly and sometimes bitter affair.
- Try to prevnet plans for either form of growth being made public too soon; this could build resistance.
- Decide on the future direction of the enlarged organisation and management strategies before any move is made.
- On acquiring another company, there may be parts that do not fit into future plans; have a policy for disposal.
- Decide in advance the financial limits.
Merger and Acquisitions - What can go wrong?
What can go wrong?
The extent and the quality of planning and research done before the merger or acquisition deal is done will largely determine the outcome. Thee are occasions when situations will arise that are outside your control. It is worthwhile to consider the following situations and to prepare for them.
THE DEAL COULD FAIL OR PROVE TO BE VERY EXPENSIVE IF:
1. Agreement cannot be reached on who should run the business in the case of a merger or, in the case of an acquisition, how long the previous management team will continue to remain involved.
2. Word gets out in the press that you are interested in merging or acquiring a particular business and a "bidding war" breaks out in which other determined parties are interested in buying into the business.
3. Your own business performance suffers because you have to spend too long on the deal and the transition stages.
4. Key people in either organization leave because of uncertainty.
5. The expected savings in costs do not materialize.
In 1999, the management group KPMG studied 700 mergers and acquisitions. Their conclusions found that:
In 2003, a report issued by another group, Towers Perrin, indicated that there was a considerable increase in merger and acquisition activity, but surveys of companies concerned "still admit to a high failure rate."
In 1999, the management group KPMG studied 700 mergers and acquisitions. Their conclusions found that:
- 53% reduced the value of the companies.
- 17% produced no added value.
- Most "mergers" were acquisitions in disguise.
- 57% of "doomed deals" were caused by incompatible cultures in the companies involved.
- In 42% of cases, a clash of management styles or egos was responsible for the failure.
External growth - Acquisition
What is an acquisition?
Meaning "to gain possession of," the acquisition of all parts of another business is an alternative method to develop or expand your own business.
1. An acquisition is the most apposite option where you need specialist skills and knowledge or facilities for your own future development.
2. This is a way of filling "holes" in a company's current or future straegy; it can be very successful as long as there is a good understanding of what the knowledge gaps are and how they cna be filled effectively.
3. As is the case with mergers, the relevant questions should be asked and answered, and the correct business fit must be achieved.
Most acquisition involve businesses of unequal size with, usually, the larger or more powerful company purchasing or acquiring the smaller. In recent times, this has not always been the case, and examples can be found of relatively small companies buying out much larger ones, either to obtain resources or to gain additional assets to supplement those currently owned.
Such deals are usually financed quite heavily with loasn and other deals and are often followed by a very vigorous pruning of parts of the acquisition to repay the financing involved. This is known as asset stripping and is rarely intended to achieve growth of an established business, but rather functions as a financial dealing that will generate cash for further enlargement.
HOSTILE ACQUISITIONS OR TAKEOVERS
Many acquisitions are known as "hostile takeovers" where the management of the company being purchased actively resists the unwanted overtures of the predator company.
When talking about mergers, such phrases as: "teamwork," "sharing," and "mutual benefit" are appropriate; some expressions used when considering hostile takeovers might be:
Before any acquisition (or merger) it is essential to establish that what you think you are acquiring is real and worthwhile and to use a process such as due diligence. This includes complete studies of the business you seek to acquire, which should be carried out by specialist, univolved, third parties, who look at every part of the business and report on its viability to meet the requirements you have set before you take irrevocable action.
VALUING THE ACQUISITION
There are several valuation methods that can be used, and it is always best to seek professional expert advice before making the final decision. You will need to consider many relevant factors to obtain an overview of how healthy the business might be, these include:
THE FINANCIAL STRUCTURE OF AN ACQUISITION IS:
Company "C" shares ----> ----> ----> Company "A" shares ---->> Larger company "A" shares
Meaning "to gain possession of," the acquisition of all parts of another business is an alternative method to develop or expand your own business.
1. An acquisition is the most apposite option where you need specialist skills and knowledge or facilities for your own future development.
2. This is a way of filling "holes" in a company's current or future straegy; it can be very successful as long as there is a good understanding of what the knowledge gaps are and how they cna be filled effectively.
3. As is the case with mergers, the relevant questions should be asked and answered, and the correct business fit must be achieved.
Most acquisition involve businesses of unequal size with, usually, the larger or more powerful company purchasing or acquiring the smaller. In recent times, this has not always been the case, and examples can be found of relatively small companies buying out much larger ones, either to obtain resources or to gain additional assets to supplement those currently owned.
Many acquisitions are known as "hostile takeovers" where the management of the company being purchased actively resists the unwanted overtures of the predator company.
- "We have bought you."
- "Do as you are told."
- "Our way is best."
Before any acquisition (or merger) it is essential to establish that what you think you are acquiring is real and worthwhile and to use a process such as due diligence. This includes complete studies of the business you seek to acquire, which should be carried out by specialist, univolved, third parties, who look at every part of the business and report on its viability to meet the requirements you have set before you take irrevocable action.
Using the due diligence procedure to arrive at incisive answers to the many questions needed, to making the decision to acquire, represents the exemplary use of due diligence.
There are several valuation methods that can be used, and it is always best to seek professional expert advice before making the final decision. You will need to consider many relevant factors to obtain an overview of how healthy the business might be, these include:
- The history of the business
- The current performance
- The financial situation
- The condition of the premises
- Intangible assets
- Employees
- how much you think the business is worth, and
- how much you are prepared to offer, if you decide to proceed.
THE FINANCIAL STRUCTURE OF AN ACQUISITION IS:
External growth - Merger
What is a merger?
The dictionary definition of a merger in the business or commercial context is "the combination of two or more companies, either by the creation of a new organization or by absorption by one of the others."
The underlying logic of mergers is that the resulting enterprise will be stronger than the combined resources of the individual companies. This is described as synergy, and it offers more business possibilities. It also has the advantage that there will be less competition as a result of the merger, although this depend on the guidelines of a monopoly commission.
WHAT ARE THE MAJOR ATTRIBUTES OF A TRUE MERGER?
1. TEAMWORK
2. SHARING
3. NONDOMINATION
4. MUTUAL BENEFIT
THE FINANCIAL STRUCTURE FOR A MERGER IS:
Company "A" Shares -----> COMPANY "C" SHARES
Company "B" Shares -----> COMPANY "C" SHARES
IS THE TIME RIGHT FOR A MERGER?
Ascertaining whether the time is right for a merger depends on the state of your business relative to the market and to the competition.
The dictionary definition of a merger in the business or commercial context is "the combination of two or more companies, either by the creation of a new organization or by absorption by one of the others."
The underlying logic of mergers is that the resulting enterprise will be stronger than the combined resources of the individual companies. This is described as synergy, and it offers more business possibilities. It also has the advantage that there will be less competition as a result of the merger, although this depend on the guidelines of a monopoly commission.
WHAT ARE THE MAJOR ATTRIBUTES OF A TRUE MERGER?
1. TEAMWORK
2. SHARING
3. NONDOMINATION
4. MUTUAL BENEFIT
THE FINANCIAL STRUCTURE FOR A MERGER IS:
Company "A" Shares -----> COMPANY "C" SHARES
Company "B" Shares -----> COMPANY "C" SHARES
IS THE TIME RIGHT FOR A MERGER?
Ascertaining whether the time is right for a merger depends on the state of your business relative to the market and to the competition.
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