Institutional and retail investors in the GCC have short time horizons compared to global benchmarks

Friday 4th, June 2010 -- 23:20 GMT
Invesco Middle East Asset Management Study finds a consistently high demand for emerging markets across the region

Posted: 26-05-2010 , 09:35 GMT

Invesco Asset Management Limited today unveiled the findings of its inaugural Invesco Middle East Asset Management Study. This regional study is the first of its kind and reveals a fascinating insight into the complex and sophisticated investment habits of this continually evolving region. The company, who opened its Dubai office in 2005, has been working with Middle East clients for decades, offering financial institutions and investment professionals access to global investment expertise.

Surveying the attitudes and behaviours of both institutional and retail markets across the six Gulf Co-operation Council (GCC) countries, the study revealed a number of key findings:
• There is currently a consistently high demand for emerging markets across all companies and territories
• Institutional and retail investors in the GCC have short time horizons compared to global benchmarks
• Investor location within the GCC has a strong influence on exposure to investment sectors


Interestingly, the study also indicated that both the institutional and retail market are becoming increasingly risk averse.

Nick Tolchard, Head of Invesco Middle East commented: “The Middle East is often portrayed as a homogenous region; this report clearly shows this is not the case, though there are some surprising similarities. The influence of investor location over asset allocation makes it quite clear that the Middle East is a highly diverse investment region.”

He continued: “We believe that this diversity is explained by access to investment products, which varies across the region. Certain markets, such as Saudi Arabia, have restricted access to international investments whereas others, such as the UAE, are dominated by offshore life wrappers with large international fund ranges.”

Investor type also plays a key role in asset allocation, according to the study. In the growing retail market, preferences vary according to distributer. Private client portfolio managers favour global equities and alternative assets, while retail banks prefer local equities and cash and IFAs opt for global equities and cash.

On the institutional side, preferences are even more diverse:
o Sovereign Wealth Funds prefer alternative investments (private equity and hedge funds)
o Institutional investors tend to invest in mainstream asset classes (equities, bonds and cash)
o Corporates (commercial banks and diversified financial services) prefer local over international assets.
o Asset managers prefer property

Commenting on these asset allocation preferences, Nick Tolchard said: “Sovereign Wealth Funds’ preference for private equity and hedge funds may align to opportunistic investment strategies to exploit any short-term market volatility and below average allocations to local securities and commodities is expected given that the source of funding for Sovereign Wealth Funds (government revenue) is heavily dependent on commodity prices and the performance of the local economy.”

In addition, one of the most striking findings is the universal preference for emerging market assets. Across all participants 82% of respondents forecast exposure to emerging markets over the next 3-5 years compared to 30% for North America, 14% for Europe and 8% for Japan. The key driver for this appears to be simply that GCC investors expect returns to exceed those in developed markets.

The Retail and institutional respondents in the GCC are also unified by their perceptions of change in risk appetite – they have indicated that 79% of institutional and 70% of retail investors have changed their attitude to risk in the last six to twelve months and in both cases, more investors have become increasingly risk averse.

In addition, the study indicated that the respondents also share similar very short-term investment time horizons, 38% of retail respondents have a time horizon of less than a year compared to 33% in the institutional market. Of those surveyed, only 12% of institutional respondents have an investment horizon beyond 5 years, significantly below global comparatives for institutional markets.* Invesco believes that the short retail time horizons in the retail market can be explained by the transient nature of retail expatriate clients, investment losses during the global financial crisis and the coverage on Dubai’s debt restructuring. Looking forward it expects retail time horizons to lengthen as markets stabilise, but to remain shorter than global retail benchmarks.

Nick Tolchard explained: “Perhaps the most surprising finding was the short term and highly volatile investment attitudes in the institutional sector. However, this could be explained by nimble and fast moving investment behaviour of Sovereign Wealth Funds in the GCC region, in contrast to other institutional markets which are typically dominated by large insurance and pension funds managing a high proportion of their assets against long-term liabilities.”

He concluded: “The Middle East is a growing investor force in the world and we see this research as part of our strategic commitment to understanding the perspective of investors, as well as the investment and savings culture of the Middle East. We intend to carry out this research on a regular basis, monitoring the retail investment market as it continues to grow, and learning even more about the behaviour and preferences of the highly sophisticated institutions operating in the GCC.”
© 2010 Mena Report (www.menareport.com)

http://www.menareport.com/en/business/316494


Summary:

This research studied the investment and savings culture of the Middle East. It highlights the growing retail investment market and the behaviour and preferences of the highly sophisticated institutions operating in the GCC.

The study indicated that the respondents share similar very short-term investment time horizons, 

• 38% of retail respondents have a time horizon of less than a year compared to 33% in the institutional market. 
• Of those surveyed, only 12% of institutional respondents have an investment horizon beyond 5 years, significantly below global comparatives for institutional markets.

* Invesco believes that the short retail time horizons in the retail market can be explained by

• the transient nature of retail expatriate clients,
• investment losses during the global financial crisis and 
• the coverage on Dubai’s debt restructuring. 

Looking forward it expects retail time horizons to lengthen as markets stabilise, but to remain shorter than global retail benchmarks.

Perhaps the most surprising finding was the short term and highly volatile investment attitudes in the institutional sector. 

• However, this could be explained by nimble and fast moving investment behaviour of Sovereign Wealth Funds in the GCC region, in contrast to other institutional markets which are typically dominated by large insurance and pension funds managing a high proportion of their assets against long-term liabilities.”

Market in Turmoil Again

Is this a healthy correction?
Is this another bear market?
Will you be seeking for shelter?
Will you be seizing this as an opportunity to buy?

Who were the sellers of Kenmark shares?

Before the recent crisis, Kenmark was trading at 83 sen per share (market capitalization of RM 148.63 million).

On 2.6.2010, Kenmark was trading at 6 sen per share (market capitalization of RM10.74 million)

Mr. Ishak bought 57.6919 million shares on 1.6.2010 and 2.6.2010 (32.36% of total market shares).

Surely this buying is based on unequal information which he possesses.

Who were the sellers of these shares?

Pity the shareholders whose shares were pledged as securities for loans which were forced sold.

How can this market be better regulated?

Here is an attempt at estimating the liquidation value of Kenmark:
http://spreadsheets.google.com/pub?key=tZ7l9at-gaLGGpM4h5RaOsw&output=html



Ref:
http://announcements.bursamalaysia.com/EDMS/edmsweb.
nsf/LsvAllByID/337D2BBAB10029B248257737003B6066?OpenDocument

Announcement Details :

Name

Date Acquired ... No. of shares ... %

BHLB Trustee Berhad for a discretionary trust

for the family of Ishak Bin Ismail

1.6.2010 ... 10,000,000 ... 5.61%

2.6.2010 ... 20,000,000 ... 11.22%

Unioncity Enterprises Ltd

2.6.2010 ... 27,691,900 ... 15.53%

Also read:
http://whereiszemoola.blogspot.com/2010/06/
more-incredible-news-flow-from-kenmark.html


----

Business Times
Ishak now a major investor in Kenmark
By Azlan Abu Bakar
alan@nstp.com.my
2010/06/04

Datuk Ishak Ismail, former KFC deputy executive chairman bought 32.36 per cent of Kenmark, a furniture maker, on June 1 and 2

DATUK Ishak Ismail, KFC Holdings (Malaysia) Bhd's former deputy executive chairman, is now a major shareholder of financially-troubled Kenmark Industrial Co (M) Bhd (7030) as he bought while others were busy dumping the stock.

He bought 32.36 per cent of Kenmark, a furniture maker, on June 1 and 2, as the stock hit record lows of between 3.5 sen and 4.5 sen. The group did not say who were the sellers.

Kenmark also did not say how much he paid for the stake but based on the closing and last traded prices of the two days, Ishak could have spent about RM6 million. He may have even paid much less, or probably half of that, if he had bought the stake at the days' lows.

Kenmark, a PN17 company, has yet to report its fourth quarter numbers for the period to March 31 2010 as its managing director and major shareholder James Hwang, a Taiwanese, went missing since last week.

From then on, the group went into a tailspin as two banks said it defaulted on loans, named a receiver to a subsidiary while all operations ground to a halt and some 400 of its workers were uncertain of their future.

Kenmark is now the subject of Securities Commission (SC) probe while Bursa Malaysia has ordered it to appoint a special auditor to ascertain if there are any irregularities.

The group has hired Messrs UHY Diong as its special auditor.

In 2001, Ishak was fined RM400,000 by the Sessions Court for giving false information to the SC.

A former politician, he was once involved in a battle with the Lau brothers for control of KFC. Ishak was firmly in control of KFC until the Asian financial crisis hit Malaysia in 1997.

Kenmark also named new directors yesterday. They are executive chairman Datuk Abd Gani Yusof, executive director Ho Soo Woon, and independent non-executive directors Ahmed Azhar Abdullah and Woon Wai En.

Kenmark's independent directors Zainabon @ Zainab Abu Bakar and Yeunh Wee Tiong have tendered their resignations yesterday.

"The new directors are currently assessing the current situation of the Kenmark Group and are in discussion with the receivers of Kenmark Paper Sdn Bhd to allow the re-activation of business operations at the business and corporate office at Port Klang soonest possible and restore market confidence," Kenmark said in a statement to Bursa Malaysia.

The new directors also stressed that all employees have been paid salaries up to May 2010 and all payments to statutory bodies have also been made.

On June 2, Kenmark said Hwang fell ill in China from May 24 and he could not be reached as his family barred all calls. The group's new directors hope that he could return by next month.

As for the other two Taiwanese directors, Chang Chin-Chuan and Chen Wen-Ling who were also said to be missing, they have made contact with Kenmark.

Shares of Kenmark have been suspended since June 2 and its last traded price was 11.5 sen.

http://www.btimes.com.my/Current_News/BTIMES/articles/kenshak/Article/index_html

The Coming Bubble of 2010, and How to Avoid It

The Coming Bubble of 2010, and How to Avoid It


Adam J. Wiederman
May 30, 2010


Even though it has been barely two years since the latest investing bubble burst, sending the stocks of Fannie Mae and Freddie Mac to their knees, there's yet another bubble forming. And I believe it will burst this year.

Don't just take my word for it; even world-renowned investor George Soros agrees.

Just ahead, I'll tell you how to completely avoid it, and I'll present an alternative strategy you can adopt instead of following the crowd into this bubble.

But first, let's take a look at this bubble and how it formed.

All that glitters
Congress has spent billions of dollars in stimulus funds to jump-start the economy. This influx of dollars was funded almost entirely with debt. As the national debt level rises, the dollar becomes weaker, because currency investors shy away from high-debt countries. This causes higher inflation, which most everyone agrees is coming.

But the consensus right now is that the best way to counteract inflation is by investing in gold.

And the consensus is dead wrong!
Alas, gold is a luxury commodity. It has no coupon rate or growth prospects, and it can rise in price only as much as demand for it grows.

It's also difficult to value. Some believe the price of gold per ounce should match the Dow Jones Industrial Average. Others believe it must reflect the price of a top-tier man's suit. Still others believe it must account for global supply and demand.

In spite of this inherent confusion, many prominent investors -- John Hathaway of the Tocqueville Gold Fund, Jim Rogers of Quantum Fund fame, and even top hedge fund managers like David Einhorn and John Paulson, to name a few -- believe gold can do well right now.

Even more shockingly, a recent Value Investors Congress was full of lectures on how to profit in precious metals.

Even the best can be fooled
The average investor is blindly following these noteworthy financial wizards. That's why more than $12 billion of new money was invested in the SPDR Gold Trust in 2009 alone. I'm the first to admit that falling prey to other investors' moves is an easy pitfall, but it can set you up for disaster.

So what exactly are all these investors -- and their followers -- overlooking? These two key facts:

1. When gold demand rises, supply does, too, which brings gold prices back down.
Fortune magazine reports that gold miners invested more than $40 billion into new projects since 2001, and they "are now bearing fruit." Bullion dealer Kitco "predicts that these new mining projects will add 450 tons annually -- or 5% -- "to the gold supply through 2014, enough to move prices lower." The demand also brings out sellers of scrap gold, which adds even more to the supply.

All this while demand for gold (other than as an investment) dropped 20% in 2009.

2. Gold is historically a poor investment.
Perhaps the most damning fact is that, from 1833 through 2005, gold and inflation had nearly perfect correlation, according to Forbes. This means that, after taxes, you would have actually lost money in gold.

Warren Buffett once quipped:

It gets dug out of the ground. ... Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.

Truth be told, the only way to get the price of gold to rise is to get other investors to buy into the idea -- like a giant Ponzi scheme. And as we know from watching the unraveling of Bernie Madoff's empire, that can't last forever.

No wonder the vice governor of the Chinese central bank recently announced that the bank is holding off on purchasing gold.

All of this explains why buying gold today is a horrible decision -- and why investors would be better off looking elsewhere.

The absolute best place to look
The best way to invest for inflation is to invest in high-yield dividend companies. Unlike gold, which has no coupon rate and no growth potential, you should be sending your investing dollars to companies that pay a dividend (which often rises) and also have both stable growth potential (which also often rises) and strong assets (in inflationary periods, assets are more valuable since they cost more to replace).

Here are six solid candidates that fit that bill, all of which have a long history of dividends -- through periods of inflation and deflation alike:

Company
Market Cap
Dividend Yield
5-Year Compounded Annual Growth Rate of Dividends
Liabilities-to-Assets Ratio
Dividends Paid Since

United Technologies (NYSE: UTX)
$64 billion
2.5%
16.2%
66%
1936

McDonald’s (NYSE: MCD)
$72 billion
3.3%
30.7%
53%
1976

Abbott Laboratories (NYSE: ABT)
$74 billion
3.7%
9.2%
61%
1926

Coca-Cola (NYSE: KO)
$118 billion
3.4%
10.1%
48%
1893

Chevron (NYSE: CVX)
$149 billion
3.9%
11.4%
44%
1912

Johnson & Johnson (NYSE: JNJ)
$163 billion
3.7%
11.4%
43%
1944

Data from Capital IQ and DividendInvestor.com.

These are exactly the sorts of dividend-paying stocks that former hedge-fund analyst and current Motley Fool Income Investor advisor James Early looks for in his market-beating service.

In his newsletter, James has put together a "core portfolio" of top dividend stocks, consisting of six dividend stocks he believes every investor should use as a platform to profitable dividend investing.

This article was originally published Nov. 6, 2009. It has been updated.

http://www.fool.com/investing/dividends-income/2010/05/30/the-coming-bubble-of-2010-and-how.aspx


Take home message:
The best way to invest for inflation is to invest in high-yield dividend companies. Unlike gold, which has no coupon rate and no growth potential, you should be sending your investing dollars to companies that pay a dividend (which often rises) and also have both stable growth potential (which also often rises) and strong assets (in inflationary periods, assets are more valuable since they cost more to replace).

Buffett's a Dividend Investor, Why Aren't You?

Buffett's a Dividend Investor, Why Aren't You?

http://www.fool.com/investing/dividends-income/2010/05/27/buffetts-a-dividend-investor-why-arent-you.aspx

Jim Royal, Ph.D.
May 27, 2010


One of the worst misconceptions about dividend investing is that it's boring. If you mean regularly increasing gobs of cash delivered to your brokerage account, then OK, it's boring. Heck, some even think dividends are dumb.

But for those of us who love it when someone deposits money into our accounts, it's the most powerful and low-risk form of investing around, I would argue. And I have.

In fact, dividend investing is so powerful that the world's greatest investor, Warren Buffett, has made it a staple of his portfolio, a good reason that you should too.

Buffett, a dividend investor?!
Sure, Buffett is known primarily as a value investor, but the Oracle of Omaha has made a career of finding businesses that pump out cash like oil from a well, a trait that makes them primed to be outstanding income stocks. Such cash-flow companies include high-quality insurers like GEICO or other well-run financials such as Wells Fargo and American Express.

One of Buffett's finest picks has been a dividend monster. The stock? Coca-Cola (NYSE: KO). Buffett first started acquiring Coca-Cola shares in 1988 and has built a position of 200 million shares as of March 2010, meaning he owns nearly 9% of the soda king. Coca-Cola forms 21% of Berkshire's investment portfolio, followed by Wells Fargo at 18%.

But in 1988 Coca-Cola wasn't the clear slam-dunk choice it appears today. Buffett was one of the first investors to see its enviable Coke brand as a serious competitive advantage. The superinvestor has now held shares for over 20 years and has repeatedly praised the efficiency of its capital-light business model, which spits out tons of free cash.

That free cash has allowed the company to consistently raise its dividend, making a small fortune for a long-term holder like Buffett.

Because Coca-Cola has raised its dividend by 12% on average over the last 21 years, Buffett now manages to get back about one-third of his original investment every year. If the company continues to increase its dividend at this historical rate, in about nine years Buffett will manage to get back his original investment in dividends every year!

Given Coca-Cola's steady economic performance and solid record of increasing dividends, there's every indication that it will continue those growing payouts. That's the power and excitement of income investing with a rock-solid company: increasing payouts for life.

And that's not all ...
As Buffett did with Coca-Cola, when screening for dividend stocks you should look for strong fundamentals such as steady profitability and increasing growth over time.

Generally, you should avoid cyclical companies, since they may be unable to maintain consistent profitability, which could endanger their ability to pay a dividend. Instead, focus on businesses whose products will be in demand regardless of the financial climate, helping to ensure a steady payout.

Here are a few that fit my criteria.

Company
Trailing Dividend Yield
5-Year Dividend Growth Rate
5-Year Earnings Growth

Procter & Gamble (NYSE: PG)
3.2%
11.9%
13.5%

McDonald's (NYSE: MCD)
3.2%
30.7%
13.3%

Microsoft (Nasdaq: MSFT)
2%
16.7%
9%

Johnson & Johnson (NYSE: JNJ)
3.6%
11.4%
8.5%

General Mills (NYSE: GIS)
2.7%
9.1%
9.7%

Nike (NYSE: NKE)
1.5%
18.2%
8.1%

Source: Capital IQ, as of May 27, 2010.

Each of these companies has a remarkably strong franchise for consumer products that we use day in and day out, as you can see in their consistent earnings growth.

While Procter & Gamble offers the detergents and shaving products we use on a daily basis, McDonald's offers the most known fast-food brand along with its famous fries. It's hard to operate a computer without using Microsoft software somewhere, and Johnson & Johnson's health products cover a wide swath, from mundane goods such as Band-Aids and Tylenol to ultra-high-tech medical devices. General Mills profitably serves up its cereals, as well as yogurt and pizzas -- in short, some of the popular foods in the grocery. And Nike is so ubiquitous that it's hard to imagine sports without this brand.

The indispensability of their products ensures that payouts from such blue chips can grow for decades, turning even a small initial investment into a dividend dynamo, just like Buffett did with Coke.

Follow these dividend stars
Like Buffett, the experts at Motley Fool Income Investor are focused on "boring" companies that mint money -- including Coca-Cola. Advisor James Early and the whole Income Investor team look for companies offering a yield of 3% or better and that are primed to increase their payouts for the long term.



Jim Royal, Ph.D. owns shares in Procter & Gamble and Microsoft. American Express, Coca-Cola, and Microsoft are Inside Value selections. Johnson & Johnson, Coca-Cola, and Procter & Gamble are Income Investor recommendations. Motley Fool Options has recommended a buy calls position on Johnson & Johnson and a diagonal call position on Microsoft. The Fool owns shares of Coca-Cola and Procter & Gamble. The Fool has a disclosure policy.

Absolute Return Investing

At the other extreme, there are funds that are not benchmarked.  Instead, their objective is to target a particular return with a given risk level and a strong focus on capital preservation.  This strategy is called "absolute return investing" and is largely adopted by hedged funds.

Absolute return managers can invest in any asset class anywhere in the world.  Therefore, if the S&P 500 is falling significantly, absolute return managers can choose to allocate their money to a more favourable market like Europe and Asia, or even raise cash, to invest in another asset classes or invest short.

In a bull market, absolute return portfolios can under-perform against relative return portfolios.  However, in the longer term when markets go through the cycle of boom and bust, absolute return portfolios tend to outperform as big losses are avoided during the bear periods.

Benchmark Investing: Relative Return Investment Strategy

Fund managers who track a benchmark closely have a relative return investment strategy.

Their asset allocation strategy and stocks picked are close to their chosen benchmarks.  They then value-add by overweighting or underweighting stocks that they feel would help the fund outperform.

Investors who question the existence of fund managers, who consistently underperform their benchmark, have been advised to invest via index funds instead as they charge lower on management fees.

There are also managers who vary quite significantly from their benchmark.  With a larger tracking error, they can outperform it by quite a wide margin especially in volatile times.

However, when a broad based market heads south significantly, a fund that is benchmarked, like the S&P 500, will usually find it difficult to avoid losses.  

• Firstly, this is because the fund is mandated to stay invested in stock under the index.
• Secondly, the fund manager cannot stay invested in only a few profitable stocks, as they typically do not invest more than 5 percent of their portfolio in a stock or a group of related companies.

Stocks That Buffett Is Unloading

Stocks That Buffett Is Unloading
Posted: June 2, 2010 9:59AM by Mark Riddix

The investing decisions of Warren Buffett are mimicked by investors worldwide. Many value investors and market experts often look to Buffett for help in navigating the murky waters of investing. Buffett has built a fortune by taking advantage of opportunities when others have been fearful and a lot can be learned by paying attention to his moves. So what exactly has the Oracle of Omaha been up to? Shockingly enough, the famed buy-and-hold investor has been dumping shares of some long-term holdings over the past few quarters.

Buffett's Stock Sales
Buffett has eliminated his 2.3 million share stake in the banking firm Sun Trust Bank (NYSE: STI). He completely sold off investment positions in insurance companies Travelers Insurance (NYSE: TRV), UnitedHealth Group (NYSE: UNH) and Wellpoint Inc. (NYSE: WLP) Buffett also reduced his holdings in defensive stocks Procter & Gamble (NYSE: PG) by 9% and Johnson & Johnson (NYSE: JNJ) by 26% earlier in the year. He also trimmed his stake in ratings agency Moody's (NYSE: MCO) and banking giant M&T Bank (NYSE: MTB). Buffett sold off shares of auto retailer Carmax (NYSE: KMX), oil and gas conglomerate ConocoPhillips (NYSE: COP) and struggling newspaper firm Gannett (NYSE: GCI).

The big sale, however, was Buffett's disposal of Kraft's (NYSE: KFT) shares. He sold over 31 million shares of Kraft Food, which had a market value of approximately $1 billion dollars. He still owns a 6.3% stake in Kraft with over 106 million shares. Many of these sales came as a shock to investors. Market spectators began to wonder if Buffett was turning negative on U.S. equities. Why is the man, who was once quoted as saying his favorite long-term holding period for stocks is forever, selling stocks? (Learn more about how Buffett operates in What Is Warren Buffett's Investing Style?)

Why Buffett Is Selling
Investors shouldn't read too much into Buffett's recent sales. The answer is pretty simple: Buffett is reducing his stake in many stocks to increase the capital position at Buffett's holding company, Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B). Berkshire Hathaway has put a lot of its cash to work over the past two years. Buffett deployed substantial amounts of cash buying stock and warrants in Goldman Sachs (NYSE: GS) and General Electric (NYSE: GE). Recently, Berkshire spent a lot of cash financing its $27 billion dollar acquisition of railroad company Burlington Northern Santa Fe (NYSE: BNI). All of these purchases have caused Buffett to dispose of many stocks to replenish the coffers at Berkshire Hathaway.

The sale of Kraft, however, is a completely different animal. This move was anticipated as Buffett has continuously voiced his displeasure with Kraft management, including voicing disapproval of Kraft's $19.6 billion dollar acquisition of rival Cadbury. Buffett voted against the proposed merger, which eventually gained shareholder approval. After the merger, Buffett showed his disapproval by trimming his $4 billion dollar stake substantially. (Find out how Buffett got to where he is today. Read Warren Buffett: The Road to Riches.)

Buffett's Rationale
It should also not be overlooked that Buffett may be selling shares because he has found a better opportunity elsewhere. Buffett may be turning his attention to other sectors or looking to invest in international markets. He is famous for selling off one cheap investment in order to buy a cheaper investment.

The Bottom Line
Investors should know that if Warren Buffett is building up his cash stockpile that the legendary investor must see a better opportunity on the horizon.

Buffett's making news this week as well. Read more in this week's financial news highlights: Water Cooler Finance: Crying Over Spilled Oil, And Buffett Goes To Court.

http://financialedge.investopedia.com/financial-edge/0610/Stocks-That-Buffett-Is-Unloading.aspx?partner=ntu6

5 Steps Of A Bubble

5 Steps Of A Bubble
by Investopedia Staff, (Investopedia.com)

The term "bubble," in the financial context, generally refers to a situation where the price for an asset exceeds its fundamental value by a large margin. During a bubble, prices for a financial asset or asset class are highly inflated, bearing little relation to the intrinsic value of the asset. The terms "asset price bubble," "financial bubble" or "speculative bubble" are interchangeable and are often shortened simply to "bubble." (For a review on the South Sea Bubble, check out Crashes: The South Sea Bubble.)

Bubble Characteristics
A basic characteristic of bubbles is the suspension of disbelief by most participants during the "bubble phase." There is a failure to recognize that regular market participants and other forms of traders are engaged in a speculative exercise which is not supported by previous valuation techniques. Also, bubbles are usually identified only in retrospect, after the bubble has burst.

In most cases, an asset price bubble is followed by a spectacular crash in the price of the securities in question. In addition, the damage caused by the bursting of a bubble depends on the economic sector/s involved, and also whether the extent of participation is widespread or localized. For example, the bursting of the 1980s bubble in Japan led to a prolonged period of stagnation for the Japanese economy. But since the speculation was largely confined to Japan, the damage wrought by the bursting of the bubble did not spread much beyond its shores. On the other hand, the bursting of the U.S. housing bubble triggered record wealth destruction on a global basis in 2008, because most banks and financial institutions in the U.S. and Europe held hundreds of billions of dollars worth of toxic subprime mortgage-backed securities. By the first week of January, 2009, the 12 largest financial institutions in the world had lost half of their value. The economic downturn had caused many other businesses in various industries to either go bankrupt or seek financial assistance. (To learn more about housing bubbles, read Why Housing Market Bubbles Pop.)

The Dutch Tulip Mania
To this day, the Dutch tulip mania remains the yardstick by which speculative bubbles are measured, because of the total disconnect between the fundamental value of a tulip and the price that a prized specimen could fetch in Holland in the 1630s.

The vivid colors of tulips and the seven years it takes to grow them led to their increasing popularity among the Dutch in the 1600s. As demand for them grew, tulip prices rose, and professional growers became willing to pay increasingly higher prices for them. Tulip mania peaked in 1636-37, and tulip contracts were selling for more than 10-times the annual income of skilled craftsmen.

The tulip bubble collapsed from February 1637. Within months, tulips were selling for 1/100th of their peak prices.

Minsky's Theory of Financial Instability

The economist Hyman P. Minsky is certainly no household name. However, thanks to the credit crisis and recession of 2008-09, Minsky's theory of financial instability attracted a great deal of attention and gathered an increasing number of adherents more than a decade after his passing in 1996. Minsky was one of the first economist to explain the development of financial instability and its interaction with the economy. His book, "Stabilizing an Unstable Economy" (1986) was considered a pioneering work on this subject. (To learn more, refer to Riding The Market Bubble: Don't Try This At Home.)

Five Steps of a Bubble

Minsky identified five stages in a typical credit cycle – displacement, boom, euphoria, profit taking and panic. Although there are various interpretations of the cycle, the general pattern of bubble activity remains fairly consistent.

1. Displacement: A displacement occurs when investors get enamored by a new paradigm, such as an innovative new technology or interest rates that are historically low. A classic example of displacement is the decline in the federal funds rate from 6.5% in May, 2000, to 1% in June, 2003. Over this three-year period, the interest rate on 30-year fixed-rate mortgages fell by 2.5 percentage points to a historic lows of 5.21%, sowing the seeds for the housing bubble.

2. Boom: Prices rise slowly at first, following a displacement, but then gain momentum as more and more participants enter the market, setting the stage for the boom phase. During this phase, the asset in question attracts widespread media coverage. Fear of missing out on what could be an once-in-a-lifetime opportunity spurs more speculation, drawing an increasing number of participants into the fold.

3. Euphoria: During this phase,caution is thrown to the wind, as asset prices skyrocket. The "greater fool" theory plays out everywhere.

Valuations reach extreme levels during this phase. For example, at the peak of the Japanese real estate bubble in 1989, land in Tokyo sold for as much as $139,000 per square foot, or more than 350-times the value of Manhattan property. After the bubble burst, real estate lost approximately 80% of its inflated value, while stock prices declined by 70%. Similarly, at the height of the internet bubble in March, 2000, the combined value of all technology stocks on the Nasdaq was higher than the GDP of most nations.

During the euphoric phase, new valuation measures and metrics are touted to justify the relentless rise in asset prices.

4. Profit Taking: By this time, the smart money – heeding the warning signs – is generally selling out positions and taking profits. But estimating the exact time when a bubble is due to collapse can be a difficult exercise and extremely hazardous to one's financial health, because, as John Maynard Keynes put it, "the markets can stay irrational longer than you can stay solvent."

Note that it only takes a relatively minor event to prick a bubble, but once it is pricked, the bubble cannot "inflate" again. In August, 2007, for example, French bank BNP Paribas halted withdrawals from three investment funds with substantial exposure to U.S. subprime mortgages because it could not value their holdings. While this development initially rattled financial markets, it was brushed aside over the next couple months, as global equity markets reached new highs. In retrospect, this relatively minor event was indeed a warning sign of the turbulent times to come.

5. Panic: In the panic stage, asset prices reverse course and descend as rapidly as they had ascended. Investors and speculators, faced with margin calls and plunging values of their holdings, now want to liquidate them at any price. As supply overwhelms demand, asset prices slide sharply.

One of the most vivid examples of global panic in financial markets occurred in October 2008, weeks after Lehman Brothers declared bankruptcy and Fannie Mae, Freddie Mac and AIG almost collapsed. The S&P 500 plunged almost 17% that month, its ninth-worst monthly performance. In that single month, global equity markets lost a staggering $9.3 trillion of 22% of their combined market capitalization.

Anatomy of a Stock Bubble
Numerous internet-related companies made their public debut in spectacular fashion in the last 1990s before disappearing into oblivion by 2002. We use the example of eToys to illustrate how a stock bubble typically plays out.

In May, 1999, with the internet revolution in full swing, eToys had a very successful initial public offering, where shares at $20 each escalated to $78 on their first trading day. The company was less than three years old at that point, and had grown sales to $30 million for the year ended March 31, 1999, from $0.7 million in the preceding year. Investors were very enthusiastic about the stock's prospects, with the general thinking being that most toy buyers would buy toys online rather than at retail stores such as Toys "R" Us. This was the displacement phase of the bubble.

As the 8.3 million shares soared in its first day of trading on the Nasdaq, giving it a market value of $6.5 billion, investors were eager to buy the stock. While eToys had posted a net loss of $28.6 million on revenues of $30 million in its most recent fiscal year, investors were expecting for the financial situation of the firm to take a turn for the best. By the time markets closed on May 20, eToys sported a price/sales valuation that was largely exceeding that of rival Toys "R" Us, which had a stronger balance sheet. This marked the boom / euphoria stages of the bubble.

Shortly afterwards, eToys fell 9% on concern that potential sales by company insiders could drag down the stock price, following the expiry of lockup agreements that placed restrictions on insider sales. Trading volume was exceptionally heavy that day, at nine-times the three-month daily average. The day's drop brought the stock's decline from its record high of $86 to 40%, identifying this as the profit-taking phase of the bubble.

By March, 2000, eToys had tumbled 81% from its October peak to about $16 on concerns about its spending. The company was spending an extraordinary $2.27 on advertising costs for every dollar of revenue generated. Although the investors were saying that this was the new economy of the future, such a business model simply is not sustainable.

In July 2000, eToys reported its fiscal first-quarter loss widened to $59.5 million from $20.8 million a year earlier, even as sales tripled over this period to $24.9 million. It added 219,000 new customers during the quarter, but the company was not able to show bottom-line profits. By this time, with the ongoing correction in technology shares, the stock was trading around $5.

Towards the end of the year, with losses continuing to mount, eToys would not meet its fiscal third-quarter sales forecast and had just four months of cash left. The stock, which had already been caught up in the panic selling of internet-related stocks since March and was trading around at slightly over $1, fell 73% to 28 cents by February, 2001. Since the company failed to retain a stable stock price of at least $1, it was delisted from the Nasdaq.

A month after it had reduced its workforce by 70%, eToys let go its remaining 300 workers and was forced to declare bankruptcy. By this time, eToys had lost $493 million over the previous three years, and had $274 million in outstanding debt.

Conclusion
As Minsky and a number of other experts opine, speculative bubbles in some asset or the other are inevitable in a free-market economy. However, becoming familiar with the steps involved in bubble formation may help you to spot the next one and avoid becoming an unwitting participant in it. (Learn how to avoid stocks that deviate from the fundamentals. Read Sorting Out Cult Stocks.)

by Investopedia Staff (Contact Author | Biography)

Investopedia.com believes that individuals can excel at managing their financial affairs. As such, we strive to provide free educational content and tools to empower individual investors, including thousands of original and objective articles and tutorials on a wide variety of financial topics.
Filed Under: Economy, Stocks


http://www.investopedia.com/articles/stocks/10/5-steps-of-a-bubble.asp?partner=ntu6

Investment Strategies and Theories You Must Know for Greater Investment Success!

Warren Buffett once said, "To invest successfully over a lifetime does not require a stratospheric I.Q., unusual business insight or inside information.  What is needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework."

Posted here are some basic foundations to help you develop your own investment strategy and to help you make better investment decisions.  These are also the investment strategies and theories you must know for greater investment success!


Investment Styles
"Your 'Basic Advantage' is to be able to think for yourself."  Wisdom from Benjamin Graham.

Different Investment Styles
Value Investing
Growth Investing
Core/Blend/Market-oriented
Stock Pickers
Market Capitalisations
Value and Small Cap Stocks
Top-down Approach
Bottom-up Approach
Benchmark Investing vs Absolute Return Investing

Methods of Securities Selection
Fundamental Analysis
Technical Analysis
Techno-fundamental Analysis
Limitations of Fundamental and Technical Analysis

----

Investment Strategies and Theories
"You need a strategy and sound approach before you invest."  Anonymous

Short-term Strategies
Short Selling
Margin Investing
Momentum Investing - "Buy High, Sell Higher"
Sideway Trends

Long-term Strategies
Buy and Hold
Dollar-cost Averaging
Ladder Investing

Managing Risk 
Diversification
Danger of Owning Too Many Stocks
Modern Portfolio Theory
Limitations of the Modern Portfolio Theory
Asset Allocation
Criticism of the Asset Allocation Strategy

-----

Portfolio Management Strategies
"Successful investing is more than buy, hold and forget."  Anonymous


Static Asset Allocation
(i) Buy-and-Hold
(ii) Strategic Asset Allocation

Flexible Allocations
(i) Tactical Asset Allocation
(ii)  Dynamic Asset Allocation

Core-satellite Portfolio Management

Alternative Strategy - A Trader's Approach
Short Term Trading

----

Limit Your Losses
"Survive first and make money afterwards."  George Soros


The Evolution of Buy-and-Hold Advice
Efficient Market Hypothesis
Random Walk Theory
Merits of the Buy-and-Hold Method
Weaknesses of the Buy-and-Hold Method

Forgotten History of a Sideways Market
Futile Asset Allocation Strategies

The Easy Way Out?
Transaction Costs
Limitation of Traditional Investment Funds

Market Anomalies
Value Investing
Neglected Stocks
Low-priced Stocks
Small Cap Stocks
Investors' Irrationality

How to Prevent Big Losses
Rule No. 1 - Set and Apply Stop-Loss Rules
Rule No. 2 - Do Your Homework
Rule No. 3 - Look for Margin of Safety
Rule No. 4 - Do Not Bet Too Much at One Go
Rule No. 5 - Do Not Over Diversify
Rule No. 6 - The Trend is Your Friend, Until It Bends
Rule No. 7 - Avoid Deadly "Price Bubbles" When They Pop


Ref:  How to Be a Successful Investor by William Cai

The New Millionaires - When a million is not enough

When a million is not enough

GEORGINA ROBINSON
May 28, 2010


In a time when a television network can afford to run a game show called Who Wants To Be a Millionaire but the average Sydney house costs $600,000, it's time to re-assess the value of $1 million dollars.

Can it still guarantee you financial freedom when whole residential blocks in Sydney are lined with homes carrying million-dollar plus price tags?

Do you need something closer to $10 million or $20 million to attain the symbolic separation from the masses a million once bought?

“You were generally considered to be rich if you had $1 million in the 1950s and now nobody would say you were seriously rich unless you had $10 million,” author and sociologist Michael Pusey says.

“But if you're talking about a sum of money that leaves you without economic insecurity then probably no sum will do it because expectations have risen and the multimillionaires themselves are at risk of going bankrupt and they want more and more … in order to feel safe.”

The professor of Public Ethics at Charles Sturt University, Clive Hamilton, agrees that the noughties' equivalent of a 1950s millionaire is someone with between $10 million and $20 million to burn.

And Eddie Maguire's television show is his proof.

“We now have a television program called Who Wants To Be A Millionaire, that would have been impossible 30 years ago because no television company would have been willing to stump up prize money of a million dollars, it would have sent them broke if anybody had won,” Professor Hamilton said.

“So now $1 million dollars is perhaps not chicken feed … but it just doesn't have the punch that it used to have.”

The magic million may not have the same cache it once did but that will be little comfort to the many Australians who found themselves kicked out of the club during the GFC.

A study compiled by financial research company CoreData found nearly a quarter of the 1700 Australians with investment assets of more than $1 million were pushed out of the $1 million-plus bracket by the global financial crisis.

Another survey in the Boston Consulting Group's latest global wealth report, reported a 40 per cent drop in the numbers of millionaire households in Australia.

The survey excluded individuals' businesses, homes and luxury goods, a key differentiator in the wealth race.

“It's about money that you could use, money is hard to use if it's tied up in your house,” wealth researcher Simon Kelly says.

“If you talk about people having $2 million to spend that's quite a different sort of person to one that's just worth $2 million.”

Professor Kelly, working at the University of Canberra's National Centre for Social and Economic Modelling, says international benchmarks have declared US$2 million to be “the new $1 million dollars”.

“And that's excluding houses … because particularly in places like Sydney, there'd be whole suburbs where the value of each house is worth $1 million dollars and they take that out.”

A Sydney-based funds management specialist, who wanted to remain anonymous, says $10 million – split just about evenly between property and income-generating assets – would have him sleeping soundly at night.

“Enough to form a stash to generate comfortable annuity for a period of 30 years,” he says.

But Professor Pusey says it is impossible in today's economic, political and social climate to confidently predict what “enough” might look like.

“In the baby boomer times

• we assumed that we would be able to buy a house on one income; 
• we assumed that we would have quality health care for nothing; 
• we assumed we'd have enough education as we wanted or needed for nothing; 
• we assumed that the pension with our own savings would support us in our retirement and 
• we assumed that we would have the resources to set up our children with those things,” he says.

“Today you would need vastly more than $1 million to achieve those ends for yourself.”

Professor Pusey says incomes are much more volatile these days, people enter the full-time labour market later and are often forced out earlier but live for much longer.

“The good news is you're going to live until you're 82-and-a-half, the bad news is you get pushed out of the labour market in your 50s if you can make it that long,” he says.

"There is no economic security and [people] need vastly more money to get it because their incomes are insecure and because debt levels are much higher than they were."

 http://www.smh.com.au/executive-style/luxury/when-a-million-is-not-enough-20100528-wkkp.html

US probe takes aim at ratings agencies - and Buffett

US probe takes aim at ratings agencies - and Buffett
June 3, 2010 - 7:13AM

Credit rating agencies came under fire for their role in the global financial crisis on Wednesday, as senior industry figures -- including mega-investor Warren Buffett -- were grilled by US investigators.

Answering allegations that rating firms helped propel the sale of risky investments that poisoned the global financial system, senior officials from Moody's admitted mistakes were made, but denied any wrongdoing.

Buffett, who holds a major stake in Moody's, said the agency had "made the wrong call" in assessing some complex financial products but firms that failed after buying dodgy products should shoulder most blame.

"Financial institutions that have failed and have required the assistance of the federal government... the CEOs should basically go away broke, and I have said I think his spouse should go away broke," he said.

The powerful "big three" raters -- Moody's, Standard & Poor's and Fitch -- have been accused of blithely awarding mortgage-backed securities their lucrative "AAA" investment ratings simply to net more business.

These top ratings are often seen as a seal of approval by investors and a sign that a company, country or debtor will pay back borrowed cash on time and in full.

"The picture is not pretty," said Phil Angelides, the chairman of the Congress-appointed panel.

"From 2000 through 2007, Moody's slapped its coveted triple-A rating on 42,625 residential mortgage backed securities," he added. "Moody's was a Triple-A factory."

Raymond McDaniel, Moody's chief executive, told the commission it was "deeply disappointing" that the firm misjudged how risky mortgage-backed investments were, but said steps had been taken to improve the system.

"Moody's is certainly not satisfied with the performance of these ratings," he said, facing questions about why he had not resigned.

"There has been an intense level of self evaluation within our organisation," he said.

The rating agencies have come under fire from US lawmakers who are putting the final touches to financial reforms that would see stiffer curbs on how the firms do business.

Criticism has focused on the fact that agencies are paid by the same firms they rate.

Eric Kolchinsky, a whistleblower who once worked for Moody's, said the industry was largely unregulated and "given a blank check" to pursue profits over sound assessments.

"Rating agencies faced the age-old and pedestrian conflict between long-term product quality and short-term profits. They chose the latter," Kolchinsky said in prepared testimony.

He accused Moody's of lying about the influence that banks -- which packaged and sold the securities -- had over the ratings process.

"Banker requests to keep certain analysts off of their deals were granted," he said.

He also accused banks of concealing the worst-performing parts of bonds that banded together mortgage debt.

"I have had cases where bankers were, I believe, lying to me about where those were being placed and there's nothing that I could do about it. You know, there's no penalty for lying to a rating agency analyst," he said.

Moody's CEO McDaniel denied that "misleading or manipulative" information was used in ratings.

He also said that some proposals to regulate the market would "likely have a positive impact," but that other measures were "contradictory."

Rating agencies have returned to the spotlight in recent weeks as a string of European countries have seen their credit ratings downgraded, pushing the cost of borrowing ever-higher.

European Union officials on Wednesday called for a centralised monitoring of rating agencies, accusing them of sparking "attacks" by speculators.

Standard & Poor's and Fitch were not asked to testify, according to a panel spokesperson.

AFP


http://www.smh.com.au/business/world-business/us-probe-takes-aim-at-ratings-agencies--and-buffett-20100603-x05j.html

A quick look at Kenmark (2.6.2010)

A quick look at Kenmark (2.6.2010)
http://spreadsheets.google.com/pub?key=tyT8o3UdiCxgyUhc6ph3flg&output=html

Securities Commission probes Kenmark


Could I have predicted what would happen to Kenmark from its accounts?
Definitely NO

However, it is most unlikely that Kenmark will be a stock I would have in my portfolio based on my investment criterias.  Therein, lies my protection against buying such a stock.

Interestingly, here are the comments in the latest SPG (Dynaquest) in its recently released latest edition of March 2010 on Kenmark:

Kenmark is engaged in the manufacturing of wooden furniture which are mainly exported to the West.  In FY 08, it expanded from the LCD TV trading and distribution into the assembly of LCD TV.  Its 9M 10 results exceeded our expectations with earnings soared by 129.6% yoy.  We saw significant improvement in the Wood-based manufacturing segment although Trading segment is not doing so well.  Looking forward, improving business environment and better margin are going to fuel Kenmark's profit growth.

It was obvious that those in Dynaquest did not and could not forsee what was coming in Kenmark then.  ;-(

Padini versus Hing Yiap

From the above chart:
The EPS has grown from less than 10 sen to 40 sen since 2005. (3x)
Its dividend has increased from less than 5 sen to above 10 sen since 2005. (2x)
It share price has increased from about RM 1 to just below RM 4 since 2005. (3x)
Financial strength:  Excellent
Its PE is about 10.

Share price is RM 3.49 per share.
Its annualised EPS is 49.59 sen (est.)
Its dividend yield is 3.44%.
Its P/B is 1.9

----

From the above chart:

The EPS has grown from negative 5 sen to just below 25 sen since 2005. (5x)

Its dividend has increased from just above 0 sen to about 5 sen since 2005. (2x)

It share price has increased from just above RM 0.50 to RM 1 since 2005. (2x)
Financial strength:  Good

Its PE is about 4.

Share price is MR 1.09 per share.

Its annualised EPS is 37.29 sen (est.)

Its dividend yield is 7.64%. 

Its P/B is 0.49

----

The growth in EPS of Padini is due to its increasing revenue over the years.
The growth in EPS of Hing Yiap is due to its better profit margins with little increase in its top line revenue.
Padini is trading at higher P/E and higher P/B ratio compared with Hing Yiap.
Which company will grow its EPS at a faster rate in the future?
Which company will give a higher total shareholder return in the next 2 to 5 years?

Which company will you choose to invest into?

Would you invest into these companies today or wait for a more opportune time?

My subjective assessment:

Quality:   Padini > Hing Yiap
Management:  Padini (Great) > Hing Yiap (Good)
Value:  Padini is anticipated to grow its EPS at faster rate, therefore, it is not a surprise that its P/E is higher.  Hing Yiap may surprise on the upside, but it will need to be monitored.

20 Questions to Focus the Hold versus Sell Decision

Key to Investment Success
20 Questions to focus the hold versus sell decision
http://spreadsheets.google.com/pub?key=txuLCrK4TZX_7uR7KDlLE7A&output=html

Panic-Resilient Stocks

There are several groups of stocks that tend to act well in a post panic environment, especially if the crash itself drives prices to incredible levels.  Of course, the more unusual the values created, the quicker is the upside correction.  Some of the groups most likely to snap back are:

1. Recession-resistant industries (foods, drugs, utilities).
2. Noncyclical blue chips driven well down (oils).
3. Big names with corporate staying power (AT&T, Exxon, General Electric and General Motors).
4. Fortune 100 and similar companies with good yields.
5. Trade-down concepts like low-cost restaurants and discount retailers (recession "beneficiaries").
6. Companies with low P/Es or low price/cash flow ratios not in the first list here.
7. Companies selling below book value and with positive earnings estimates for the coming year (implying credibly sustainable book values).
8. Companies with low debt/equity ratios.
9. Unleveraged closed-end, non-junk bond funds.
10. Panic-trigger beneficiaries (e.g., oil-service and insulation stocks after OPEC raised oil prices in 1973).

All of these stocks are recession-resistant or perceived as among the most likely to survive hard times.  They retain market sponsorship and regain enthusiastic buyers soonest.  Related positively to the trigger event, they have high visibility because investors remember the concept vividly.

It is important to make hold/sell calls in the light of prevailing market expectation and not personal judgement of what may happen.  If the (correct) bet is no recession, the reward is smaller and slower than if the (correct) bet is market expectation of a recession (whether it comes or not).  The investor must subject his ego to the realities of the emotional climate.  It is better to be rich than to be vindicated slowly.

Stocks that don't fare well in a post-crash environment

Stocks that don't fare well in a post-crash environment

Stocks that tend to be sub-par performers in a post-crash environment are:

1. OTC issues
2. Low-priced stocks
3. Small total-capitalization issues
4. Thinly-traded, under- or non-covered stocks
5. Industry laggards
6. Recession-sensitive by industry
7. Discredited groups
8. Panic-trigger related groups

Because of fear, nervousness and lack of speculative appetite after a crash or panic, the first five groups (some of which overlap) lack sponsorship.  

In addition, because market panics generate immediate scare headlines in the media, there is talk of recession and parallels drawn with 1929.  So recession-sensitive stocks by industry do not bounce back much for a period of time.

There may, in fact, be no recession following the market's downmove (as in 1988), but perception and expectation drive prices near-term more than facts do.  So cyclicals like steels, chemicals, paper and capital-good producers are not solid choices for participating in the bounce.  Similarly, vacation and luxury stocks fare poorly.

The discredited groups vary from one market period to another.  Their identity depends on what was in the headlines in recent months.

• Basic industry stocks were taboo in the early 1980s, known as the 'rust-belt' period.  
• High-tech stocks suffered through a private, one-industry recession in the mid-1980s.  
• Banks were whipping boys in the early era of bad third-world loans.  
• Most recently, savings and loans have been in the doghouse due to bailout legislation and highly visible failures and scandals.

Again in a longer-term perspective, the facts may prove that the fear about leading companies in discredited groups was unfounded.  But in the short term after a crash there are few who have the courage to sponsor tarnished-image stocks with either money or written advice.  Such issues are early recovery laggards.

The final category should be off the hold list for similar reasons.  Sometimes there is an industry or category of stocks related to the news that triggers the panic selling.  

• In 1962, it was steel stocks sensitive to pricing confrontation with the Kennedy administration.  
• Brokerage stocks would have been poor choices to hold after the 1987 crash because of all the controversy surrounding program trading.  
• The 1989 crash was triggered by the collapse of the propose buyout of UAL, Inc., so airlines and other proposed leveraged buyout candidates were identifiable as the trigger-related group at that time.

Weathering a Panic

The central concept applicable to the 'buy and hold until fundamental changes' investor is the occasional need to play when it is painful.  But this concept specifically and only means to hold stocks that are being affected just by the overwhelming negative psychological forces that occasionally cause selling routs or panics in the whole market.

To put this very important limiting caveat another way:  when a crash or panic occurs, stocks should be 

• held only if they are going down because of market factors and 
• not if they are being affected by company factors.  

This should relate to only a few issues, however, because investors following a disciplined selling methodology (see related article below) already should have weeded out the bad performers and taken profits on the stellar performers well before a bear market reaches climax proportions.

So when appropriate selling has left an investor with only a few, high quality stocks, he can and should hold onto the gems and play through the difficult experience of a panic or crash.  He will be holding only a relatively small portfolio (having followed the other cashing-in suggestions well before the bottom nears), so his level of pain will be no worse than moderate.  And his cash holdings will give emotional comfort and provide the resources for acquiring stocks advantageously when prices get really low.

Some investors may see a contradiction in this advice because they were usually counseled that avoiding losses is the first priority and the best reason for selling.  But taking a short-term dose of paper losses in a crash - by holding quality issues - is a lesser risk than selling out during the fury, and hoping to have the courage and good executions to get back in at lower prices shortly afterward.

If an investor is down to just a few core holdings anyway, he is better advised to tough it out.   The very experience of playing in pain through a temporary crash (think of the October 1987 and October 1989 bashings) is of enormous instructional value despite the modest monetary cost involved.  The process of crisis-thinking and the need to make wrenching decisions that prove valid in short order will serve him well for the rest of his investment career.

Once he has successfully navigated the worst of the choppy investment seas, he will have learned survival lessons and will have internalized feelings and taken in an experience that will be forever his.  That experience deepens his understanding of the way the market works.  Probably most of all, having won at a different game, he develops the wisdom and courage to succeed in similar circumstances in the future.  And that provides the opportunity to make big profits in the handful of similar opportunities that will occur throughout the rest of his investing career.  He will know beyond any shadow of a doubt that the contrarian philosophy of investing works.

When caught in a panic, the central question is whether capitalism in the United States and major Western democracies will continue to function after the panic ends.  If the answer is yes, then there is no reason to sell at foolish levels.  In fact, the only rational thing to do is take courage and make buys.  Being gutsy enough to act on the contrarian test - refusing to sell good stocks cheap because Wall Street and Main Street have lost faith for a few days - insures appropriate selling.  It is difficult to buy in a panic.  Those who can do so are rational enough to sell with discipline as highs approach.

There is one more qualifier on whether to hold or sell after a panic has passed.  Once the panic subsides, there is a lift in the market.  But the effect is significantly different on various kinds of stocks.

• For some issues, there is a sharp snap-back rally; 
• for others, there is very little improvement.  

Just as it is not advisable to sell into the panic, it is prudent to reassess positions after the selling frenzy has subsided and the lift in prices has begun.

The object, as always, is to decide what to sell and what to hold.  Selling should not be urgent because pre-bear-phase tactics will have raised a lot of cash, so there's no need to sell to raise cash for margin calls or buying.  But because the goal is always to maximise return on capital and to take advantage of the time value of money, look closely at what to hold and what to sell after the panic has cleared.


Related:

To hold or to sell? Holding should occur only if no tests for selling are failed.

To hold or to sell? Holding should occur only if no tests for selling are failed.

To hold or to sell?

In any discussion of holding versus selling stocks, the circumstances under which it is best to sell should be outlined first.  Holding should occur only if no tests for selling are failed.

The company-related reasons to sell are:

1. Sell if the news cannot get any better.
2. Sell if things did not go as planned.
3. Sell when the broker's advice goes from 'buy' to 'hold.'
4. Sell if company fundamentals are getting sick.
5. Sell on the rebound in the aftermath of material, unexpected or discrete bad news.
6. Sell in certain cases when expected news is delayed.

The market-action reasons to sell are:

1. Sell when the stock reaches the target.
2. Sell on an unsustainable upward price spike on big volume.
3. Sell when a portfolio shows all gains.
4. Sell if the stock is lazy money and likely to stay that way.
5. Sell using above-market limit orders, letting the market come to the investor.
6. Sell with a stop-loss order, but never remove or lower it.

Investor-related reasons to sell are:

1. Sell if the stock would not be bought again today.
2. Sell after gloating or counting the chips.
3. Sell rather than hope against hope for a 'maybe' bailout.
4. Sell and step aside on a personal losing streak.

If an investor sells stocks in a disciplined manner using the signal above, he is likely to end up with a good deal of cash before the market moves into a bear cycle.  Relatively few of his holdings will fail to hit one of  the 16 triggers noted in those lists above.  Those stocks that do survive will tend to be high-quality growth issues that have continued to perform fundamentally and have not run up to unreasonable price levels.  Some experts refer to these as core holdings or 'businessman's risk' foundation stocks.  They are stocks that have given consistent indications they can be held through good and bad in the market.

All other stocks will have become sales before a panic bottom because:

1. They worked as planned.
2. They acted too well for a brief period of time.
3. They got unreasonably priced.
4. They were wasting the time value of money by going nowhere.
5. They developed significant fundamental problems. 

Very few stocks can escape all those screens for a long period.  So if an investor is cashing in as prescribed and if his buying discipline rejects new positions when valuations get too pricey, he ends up still holding very few stocks as the market get toppy.  That, of course, protects his capital.

There are two major price-driving forces:

• fundamentals (which control the long term) and 
• psychology (which rules the short and medium term).

The fundamental and psychological factors affect stocks in both directions.  And as an overlay, understand that they can affect a stock either

• directly (because of the company behind the stock itself) or
• indirectly (because the market trend is so strong that virtually no stocks can buck it).  

However, the indirect effect is much stronger on the downside than on the upside:  fear is a more powerful driver than greed.

A quick look at Tongher (1.6.2010)

A quick look at Tongher (1.6.2010)
http://spreadsheets.google.com/pub?key=t2X6FmxNNj1TdVzbILYWisw&output=html

Benjamin Graham Checklist for Tongher (1.6.2010)
http://spreadsheets.google.com/pub?key=tKx4P-KOukcZSbwh7AABKiA&output=html

Plantation workers’ permit extended for five more years

Plantation workers’ permit extended for five more years
May 31, 2010

KUALA LUMPUR, May 31 — The government has given the green light for the extension of the permit for foreign workers who have worked for five years in the oil palm plantation sector, Deputy Prime Minister Tan Sri Muhyiddin Yassin said.

He said the extension, for five more years, was to address the shortage of workers in the sector.

“The government is concerned over the shortage of workers in the plantation sector, especially in the oil palm sub-sector.

“The government is aware that if drastic measures are not taken to address the problem, it will affect the productivity and competitiveness of this sub-sector,” he said in a statement.

He said plantations were among the sectors which relied heavily on foreign workers due to the lack of interest among the locals workers. — Bernama

http://www.themalaysianinsider.com/malaysia/article/plantation-workers-permit-extended-for-five-more-years/