Investment is like a bet

Investment is like a bet
Tags: Ang Kok Heng | Berjaya Group | Elliott Wave | Forecasted profit | Hedge fund | HF Managers | Investment | Iskandar Development Region | MACD | management | risk management | Stochastic

Written by Commentary by Ang Kok Heng
Monday, 21 June 2010 11:23

There are risks in every investment which will result either in a profit or a loss. In a way, investment is like a bet — heads you win, tails you lose. If we hit it right we make a gain, but if we are wrong we will most likely end up with some losses.

Although investment is different from speculation, which depends more on luck rather than judgement, there is still uncertainty in every investment no matter how careful we are. Everyone will definitely want a good bet which has a higher potential for profit than loss. The job of an investor is to avoid a bad bet.

Before deciding on an investment, most people will consider various aspects of risk so as to avoid choosing a bad bet.


Investors bet on management
Management is one of the most crucial factor investors will look at, especially in emerging markets. Most Malaysian listed companies are run by the owners themselves who set up the business. The fate of the company will depend on the few key persons.

Before the company grows big, this is the way to go. This is unlike multi-national corporations which run on an established system — standard procedures, a clear work flow, internal control, risk management system, clear accountability, etc.

Serious investors who buy based on management is also betting on the management’s ability to continue to deliver what they have in the past. Management is the most crucial attribute of a good stock. Good management will be able to predict potential problems, overcome troubles, identify business opportunities, implement expansion plans, reduce costs, optimise efficiency, etc. Investing in such a company is like having a reliable member of staff who can handle most of the boss’s workload.

There are also other management risks, and we can hope that the strong track record of the past will continue into the future. Hopefully, there will be no change in the senior management, staff will remain highly motivated, there will be no internal squabbling and no resignations en bloc. One of the main challenges of the present management is to groom up the second echelon to take over the baton in order to maintain the growth of the company. Only with an equally capable manager can it be ensured that the growth of the company will not be disrupted.

Another danger of betting on management is the fall in vigour of the key drivers. When the owners become richer, they may not be as “hungry” as before. There are also other factors which may change the drive of the owners, such as health factors, family problems and less eagerness to take risks as age catches up.


Bet on business growth
Investing in a company is betting on the future earnings growth. Certain industries have stable growth — for example, power, telco, utilities, toll concessionaires, gaming and consumer-related businesses.



But there are also many industries which are very cyclical, such as plantation, property, construction and technology. It is the cyclical businesses that require more attention.

When a major up cycle comes, it will benefit all the companies in the sector. However, at a certain point in time, the cycle will turn downwards and earnings will also plunge. Attempting to catch the ups and downs of these cycles is similar to the endeavour of predicting the top and bottom of the market.

The earnings of companies are affected by many factors. Some may be related to raw material prices, foreign exchange rate, changes in government regulations, adoption of new technology, emergence of a major competitor, changes in consumer trend, etc. Whenever such events occur, the company’s profit will surge or plunge, depending whether it benefits or suffers from such changes. Such a swing in earnings can only last for a few quarters before profit stabilises at the so-called “economic profit” again, after the industry players adjust their production capacities.

Some analysts and fund managers are good at sensing such opportunities before they come. Hedge fund managers are also good at predicting business cycles by studying demographic and economic data. For long term investors, they may position themselves in a certain sector way ahead of time. For shorter-term investors, timing is crucial, as they do not want to squat on a stock for more than two quarters. In the case of punters, their time frame could even be shorter, perhaps over a month or two.


Bet on forecasted profit
Most fundamental investors rely on the earnings of a listed company to determine its value. A company that makes more profit will attract more investors.

The profit is derived based on orders received, expected revenue, cost of production, operating capacity, bad debts provision, margin, etc. Some profit forecasts are rather simple, but there are also many companies which have diversified into many lines of businesses, where their profit forecasts are more complex.

Investment based purely on forecasted earnings is like a bet placed on the reliability of the profit. It is not uncommon to see listed companies providing earnings guidance to analysts for the coming quarters.

But that is as far as it will go. Analysts who track the quarterly earnings may not be able to predict what will happen in two to three years time. As fundamental investment is a long-term commitment, earnings over the medium to longer term is more important than the quarterly profit. Many a time, analysts make a 180° turn in recommendation after realising that quarterly earnings are off track. By then, the stock price could have fallen substantially.

As such, there is no assurance that investment based purely on forecasted profit will definitely be a successful one.


Bet on a theme play
Some fund managers like to bet on a particular theme. The theme can be in terms of a business sector such as tech, auto, plantation, property, construction, power, water, banks, telco, oil and gas, etc.

The idea behind sectoral theme play is to ride the cyclical upturn in the earnings of these sectors. An improved outlook could be due to a change in business environment, favourable government policies, increased demand, surge in selling price, fall in cost of production, etc.

As cycles come and go, theme play has a finite life. Prices of stocks that were chased up will eventually come down. The bet on theme play relies on the ability to determine how long the cycle will last. The risk of riding a theme play is being caught in the middle of the cycle when prices suddenly fizzle off.

Theme play can also relate to other ideas. Some of which are related to location (for example, a Sarawak play or a play on the Iskandar Development Region), business group (for example, Berjaya Group), business activity (for example, export-oriented or domestic-oriented industry), size of company (for example, big-cap or small-cap stocks), etc. Other themes popular among fund managers include dividend play, defensive play, growth theme, etc.


Bet on specific economic/political event
It is also common for investors to be confronted with economic or political troubles from time to time. There is no single year in which the market does not encounter uncertainties. As uncertainty is part and parcel of the stock market, all of these events require certain forms of judgement as to what to do: sell, buy or hold.

How an economic or a political problem will eventually play out is not an easy guess. Not only are we limited by the required information we need, an understanding the mechanics of the problem is also very challenging. Every problem could be different, and the past pattern may not necessarily be relevant, though it is not uncommon to find analysts and economists using historical experience as a guide.

As the outcome of an economic or a political predicament will depend very much on the interference of the authorities and how the public will respond to those actions, it is very difficult to provide a good prediction. Investors who make a decisive call to buy or to sell are taking a bet on the outcome.

Take, for example, what the outcome of the Greece debt crisis will be. Will it lead to a domino effect causing other southern European economies to collapse? Will it result in eventual disintegration of the European Union? Will it cause further deterioration of Eurodollar? Those who believe the rescue package is sufficient to prevent the contagious debt crisis in Europe will take the recent market selldown to buy. Investors fearing further deterioration of the debt crisis will sell on panic. Only time will tell who is right and who is wrong. Optimists who load fully on stocks now and pessimists who cut all their holdings are taking extreme risks.


Bet on situational play
From time to time, there are some situational themes which will last for a short period. Year end window dressing is an annual affair keeping investors guessing which stocks will be pushed up for the sake of “dressing” so as to provide a better valuation. On the other hand, October always reminds investors of the many mishaps that had happened in the month.The listing of a large initial public offering (IPO) will also attract the attention of investors on similar stocks in the same industry. Some investors may try to bet on the spillover effects from the large IPO.

Following the government’s intention to pare down its investment in quoted GLCs and subsequent proposed privatisation of Pos Malaysia, investors are betting on which is the next to be disposed off.


Bet on chart reading
For technical chartists — using tools like MACD, Stochastic, Elliott Wave, etc — technical readings provide the timing to buy or sell, to enter or exit a position. Technical indicators provide guides as to what to do. Some of them may also indicate the potential profit from a buy signal and at what level to get out.

Even though technical pointers act like the eyes to traders, they cannot guarantee profit for every trade. As such, traders can only bet that what happens in the past will be repeated.

Choosing reliable indicators are crucial for a successful trader. If the trader sincerely believes the technical indicators he is using and the bet is right, profit will be made. If the bet is wrong, then he will have to admit it and get out with some losses. Traders know that every trade is a bet, a calculated bet at least.


Risk and return trade off
Every trade, be it based on technical readings or fundamental reasoning, has a risk. But every trade has its corresponding potential return too. Traders and investors will have to weigh each trade by looking at the risk and return trade off. They have to determine what is the upside potential from a particular purchase and what happens if they are wrong, resulting in possible losses.

In analysing the risk and return trade off, liquidity is important — especially for institutional investors whose positions could be big, as the stocks must be liquid for them to exit if necessary. Fundamental investors have more considerations than stock traders do. Fundamentalists — basically longer-term investors — incorporate risks such as management trustworthiness, corporate governance, business predictability, pricing power, business volatility, business scalability, cashflow sustainability, fluctuation in interest rate, changes in political outlook, shift in government policies, etc.

The fundamental risk of investment encompasses a wide range of uncertainties, some foreseeable but many of which are unexpected. Despite all the various hindrances, investors will still have to bet on each stock based on the best judgement at the point of purchase.


Incorporating probability
Since investment is a game of uncertainty, it is best to incorporate probability in each and every risk-and-reward bet. What we should look for are trades which provide high profit if our forecast comes true. We will never venture into an investment which only yields low return even if we are right.


HF managers
The technique of incorporating probability in every trade is widely used by hedge fund (HF) managers, who are usually misconstrued to be high risk operators. Many HF managers are cautious traders. Each and every position they take is well calculated based on the risk involved and potential profit. To HF managers, every move is a bet. Taking a position in a stock is a risk. Holding longer than the required time frame is a risk.

HF managers screen through much data, and come up with various possible scenarios. Although not all scenarios can be converted into profitable trades, they do provide various trading ideas.

Looking for trading ideas are the challenges facing HF managers. As HF managers are not emotional, they treat each investment as a trade or a bet with the intention of making money. When a trade has served its purpose, it will be closed, regardless of whether it provides a profit or a loss. A bet is initiated when it is deemed profitable, and it is liquidated when it is deemed to be unfavourable.


Risk management
As there are risks in every position taken, risk management is crucial in investment. Good traders know that risk management is very crucial in trading. The survival of traders depends on risk management to protect their capital. They can only survive and remain in the market if their capitals are not entirely wiped off.

In this way, a single-stock portfolio has higher risk than multiple stocks portfolio. A portfolio which diversifies into several stocks is deemed to be prudent. The diversification is not about getting higher returns but about managing the risk.

Position sizing
Diversification requires investors to place a weight on each stock. The weight is the percentage of the portfolio in a single bet. Obviously, higher weightings will be placed on the more attractive bets, and a smaller proportion of the investment will be placed on trades that are less promising.

Some traders initiate each trade with 2% of the portfolio money. If a trade becomes more attractive from the risk-reward perspective, more money will be placed on the bet. Controlling the size of each trade is important and also requires lots of discipline.

Placing a certain amount of portfolio money in a single trade is known as position sizing. It is a good risk management control. Regardless of investment or trading, investors and traders should use the concept of position trading to manage risk.


Ang has 20 years’ experience in research and investment. He is currently the chief investment officer of Phillip Capital Management Sdn Bhd.


This article appeared in The Edge Financial Daily, June 21, 2010.

Reviewing my investing through some old postings

Investment Policies (Based on Benjamin Graham)

KLSE Counters on my radar screen.

My recollection of the 1997 Asian Financial Crisis

PETRONAS Dagangan Berhad

Coastal

Telling an old story

Only 37 stocks in KLSE main board are suitable for long term portfolio

Short-term gain, long-term pain

 iCap Closed End Fund Track Record for last 2 years

 Should you hold iCap?

 Where is your focus in your investment returns?

An occasional rumination

 Be shrewd

 Be very shrewd

Which one stock excites you in the glove sector?

 Multiple baggers in KLSE

 Performance of Top Glove since listing

 Did you sell when the stocks were in stratosphere?

Reviewing my Sell Transactions

KPJ Healthcare sees brighter prospects ahead

KPJ Healthcare sees brighter prospects ahead
Tags: Brokers Call | KPJ Healthcare Bhd | RHB Research

Written by Financial Daily
Friday, 18 June 2010 10:36

KPJ Healthcare Bhd
(June 17, RM3.34)
Maintain outperform at RM3.29 with higher fair value of RM4.25 (from RM3.50): For FY09, KPJ recorded a revenue growth of 14.9% year-on-year (y-o-y) largely due to higher contribution from all of its business segments.

Moving forward, we believe KPJ’s revenue growth drivers include: the opening of at least two new hospitals per annum; expansion of its existing hospitals; enhancing its presence in medical tourism; and higher utilisation rate per patient.

We understand that KPJ is investing RM200 million to build three new hospitals, purchasing of new medical equipment and expanding its existing hospitals nationwide this year.

The construction works for its three new hospitals which are located in Bandar Baru Klang, Pasir Gudang and Muar have already started and are due for completion by end of 2011.

We believe this is in line with the management’s targets to open at least two new hospitals per annum either through greenfield projects or acquisition of established hospitals which would likely be in East Malaysia, the East Coast or Iskandar region.

In FY09, over 15,000 foreigners received treatment at its hospitals and in the 1QFY10, KPJ received more than 5,000 foreigners of which 2,800 were Indonesians.



Although KPJ’s focus is on positioning itself as a community healthcare provider, the company realises that there is sizeable growth potential in medical tourism.

However, management mentioned that any significant contribution from medical tourism would only come in three to five years. Currently, medical tourism accounts for less than 10% of total group revenue.

We have revised up our FY10-12 earnings forecasts by 9.7%-14.3% largely to reflect the upward change in our revenue assumptions, and lower effective tax rate and MI (minority interest) assumptions.

The risks to KPJ’s earnings include lower-than-expected patient numbers which could be due to slower-than-expected economic recovery and serious disease outbreaks (such as SARS or swine flu) in Malaysia as well as slower-than-expected turnaround in loss-making hospitals.

Besides the earnings revision above, our indicative fair value has been raised to RM4.25 (from RM3.50) based on target FY11 PER of 16 times (10% discount to regional peers’ average) as we roll forward our valuation year (from FY10).

We believe the M&A (merger and acquisition) activity in the healthcare sector recently supports our view that there is significant growth potential for the sector in the region.

We continue to like KPJ for its leading position and its expansion plans in Malaysia’s growing healthcare market. We reiterate our outperform call on the stock. — RHB Research, June 17


This article appeared in The Edge Financial Daily, June 18, 2010.

The foundation of long-term investing is the notion that the company's earnings drives the price of a share of its stock.

The foundation of long-term investing is the notion that the company's earnings drives the price of a share of its stock. The higher the earnings, the higher the price.





Comparing the above 2 charts, I will be excited with the bottom one.  The pattern here is that of 3 lines going up "almost parallel" to each other (monotonous "tramlines").  This company's earnings have been growing consistently over many years.  It was therefore not surprising that its share price has risen in tandem.   In addition, it has given dividends consistently over the years.  This dividend too has grown in tandem with the earnings.  However, since the share price has also risen, the DY over the years hovered probably around the same range.

Click here to see more companies with "monotonous tramlines" charts.

For long term investors, the total shareholder returns are from dividend and capital appreciation.  Look at this post here:

Selected Stock Performance Review
http://spreadsheets.google.com/pub?key=0AuRRzs61sKqRdGZuWktpR2dvQUhhSmpkNElXY0NvWmc&output=html

Most of the total shareholder returns will be from capital appreciation of the stock prices.  I will concentrate on ensuring that I invest in a company's earnings.  The dividend is at best a "surrogate" indicator of this company's good earnings.

Related readings:

The story of Ellis Traub:  Investing for Beginners

Padini expects slower sales growth in fiscal 2010 (10/9/2009)

Padini expects slower sales growth in fiscal 2010


2009/09/10

Malaysian fashion retailer Padini expects annual sales growth in fiscal 2010 to slow from a year ago as it expands at a slower pace.

The pace at which the company will add retail space will fall by more than half, Padini executive director Chan Kwai Heng said.

Sales for the year to June 2009 jumped 24 per cent to RM477 million from a year ago and net profit was up 19 per cent at RM49.5 million, company data showed.

"That kind of growth could be a bit hard pressed to sustain, because for FY2010 we are not adding a lot more space," Chan said in an interview yesterday.

Padini will add about 40,000 square feet of retail space in fiscal 2010, versus 90,000 sq ft in 2009 and 140,000 sq ft in 2008, said Chan.

Malaysia, Asia's third most trade-dependent economy after Singapore and Hong Kong, shrank 3.9 per cent in the second quarter after a 6.2 per cent drop in the first quarter from a year ago.

Padini's business is growing despite the downturn and the company is rolling out new product lines and opening more outlets.

"The increase in sales is mainly generated from (new retail space)," said Chan.

A company that began as a garment manufacturer for bigger brands in 1971, Padini moved to building its own brands in the late 80's and early 90's when a booming economy boosted domestic consumption in the Southeast Asian country.

The company now sells nine brands of fashion goods ranging from garments to women's shoes and accessories in 12 countries in Southeast Asia and the Middle East.

Foreign retail brands such as Top Shop, Zara and MNG have flooded the local retail market in recent years to tap into the growing consumer market.

Chan said the company has no intention of beefing up its exports in spite of rising competition at home. Currently, overseas sales account for about 10 per cent of the total.

"We do not have a concerted plan or strategy as to what we shall do to go for the export market," said Chan.

"For us, the retail market at home is still so lucrative and it is still doing so well for us, because of that we will really pay attention to this part," he said.

Padini shares have outperformed that of its rivals so far this year but lagged the performance of the wider market.

The stock has risen 14.63 per cent so far this year, compared to the benchmark stock index's 37 per cent gain while competitor Voir is down 10.56 per cent and Bonia has fallen 12.28 per cent. - Reuters

Yet another look at Hing Yiap versus Padini

Another look at Hing Yiap versus Padini
https://spreadsheets.google.com/pub?key=0AuRRzs61sKqRdHpGNURZU29NUnVlMnNUOGQ4LUduX1E&output=html

This is a good way to compare 2 companies.

Would you prefer buying a good company at fair price or a fair company at a good price?

Which company would you choose?  For the short term?  For the long term?

Finding great companies: What you want to see on their financial statements?

If you're committed to finding great companies and investing in them, it is time to state clearly what you should actively seek out on financial statements.  Here now is what you should hope to find when you're studying the report of a company that you're considering for investment.  


What you want to see on a balance sheet?

1.  Lots of Cash

• Cash-rich companies don't have trouble funding growth, paying down debts, and doing whatever they need to build the business.  
• Increasing cash and equivalents is good.

2.  A low Flow Ratio


Flow ratio
=  (Current assets - Cash) / (Current Liabilities - Short term Debt)
=  Noncash Current Assets / Noncash Current Liabilities

Ideally, a company's flow ratio is low.  Once cash is removed from current assets, we are dealing almost exclusively with accounts receivable and inventories.  In the very best businesses, these items are held in check.  Inventories should never run high, because they should be constantly rolling out the door.  Receivables should be kept as low as possible, because the company should require up-front payments for its products and services.

So we certainly want the numerator of the equation (current assets minus cash) to be held low.

What about the denominator (current liabilities minus short-term debt)?  Rising payables indicate one of two things:

• either the company cannot meet its short-term bills and is headed for bankruptcy, or 
• the company is so strong that its suppliers are willing to give it time before requiring payment.  

You can be sure that companies in the latter category use their advantageous position to hand on to every dollar they can.   Again, think of every unpaid bill as a short-term, low-interest or interest-free loan.  If a company has plenty of cash to pay down current liabilities but doesn't, it is probably managing its money very well.  Those are the companies that we are looking for.

Ideally, we like to see this flow ratio sit low.  The very best companies have:  (1) Plenty of cash  (2)  Noncash current assets dropping (inventories and receivables are kept low) and (3)  Rising current liabilities (unpaid bills for which cash is in hand).

You'll prefer the flow to be below 1.25, which would indicate that the company is aggressively managing its cash flows.

Inventories are down, receivables are down, and payables are up.  This is a perfect mix when a company has loads of cash and no long-term debt.  Why?  Because it indicates that while the company could (1) afford to pay bills today and (2) doesn't have to worry about rising receivables, they are in enough of a position of power to hold off their payments and collect all dues up front.

When the flow ratio is high, another red light whirs on the balance sheet.

It must be noted here, however, that larger companies generally have lower flow ratios due to their ability to negotiate from strength.  Thus, don't penalize your favorite dynamically growing small-cap too much for a higher flow ratio.


3.  Manageable debt and a reasonable debt-to-equity ratio

Investors have very different attitudes toward debt.  Some shun it, choosing to not invest in companies with any or much debt.  This is fine and can result in highly satisfactory investment performance results.  But debt shouldn't be viewed as completely evil.  Used properly and in moderation, it can help a company achieve greater results than if no debt is taken on.

Debt can be good for companies too.  Imagine a firm that has a reliable stream of earnings.  Let's say that it raises $100 million by issuing some corporate bonds that pay 8 percent interest.  If the company knows that it earns about 12 percent on the money it invests in its business, then the arrangement should be a very lucrative one.

Note, though, that the more debt you take on, the greater your interest expense will be.  And this can eat into your profit margins.  At a certain point, a company can have too much debt for its own good.  Another feature of debt (or 'leverage') is that it magnifies gains and losses (just as buying stock on margin means that your gains or losses will be magnified).  Debt, like anything, is best taken in moderation.

To finance their operations, companies need sources of capital.  Some companies can survive and grow simply on the earnings they generate.  Others issue bonds, borrow from banks, issue stock, or sell a chunk of the company to a few significant investors.  The combined ways that a company finances its operations is called its "capital structure."  If you take the time to evaluate a company's debt, it could be worth your while.  Properly managed debt can enhance a company's value.

When you calculate debt-to-equity ratios for your companies, remember that there really isn't a right or wrong number.  You just want to make sure that the company has some assets on which to leverage its debt.  To that end, look for low numbers, ideally.  A debt-to-equity ratio of 0.05 isn't necessarily better than one of 0.15, but 0.65 is probably more appealing than 1.15.  You should also evaluate the quality of the debt and what it's being used for.  If you see debt levels spiking upward, make sure you research why.  Certainly, long-term debt can be used intelligently.  But in our experience, the companies in the very strongest position are those that don't need to borrow to fund the development of their business.  We prefer those companies with a great deal more cash than long-term debt.



Are any of our balance sheet guidelines hard-and-fast rules?  No.

We can imagine reasonable explanations for each.

• A company can run inventories very high relative to sales in a quarter, as they prepare for the big Christmas rush, for example.  So, inventories may be seasonally inflated (or deflated) in anticipation of great oncoming demand.
• And accounts receivable may be a tad high simply by virtue of when a company closed out its quarter.  Perhaps, the very next day, 75 percent of those receivables will arrive by wire transfer.  Here, the calendar timing of its quarterly announcement hurt your company.
• Rising payables can also be a very bad thing.  If the company is avoiding short-term bills because it can't afford to pay them, look out!
• Finally, flow ratios can run high for all the reasons listed above.

Having qualified our assertions, we still believe that the best businesses

• have such high ongoing demand that inventories race out the door, 
• product distributors pay for the merchandise upfront, 
• the company has enough cash to pay off payables immediately but doesn't, and 
• future growth hasn't been compromised by present borrowing.  

Look to companies like Coca-Cola and Microsoft to find these qualities fully realised.


What you want to see on the income statement?

1.  High Revenue Growth


You will want to see substantial and consistent top-line growth , indicating that the planet wants more and more of what your company has to offer.  Annual revenue growth in excess of 8 - 10 percent per year for companies with more than $5 billion in yearly sales is ideal.  Smaller companies ought be growing sales by 20 - 30 percent or more annually.

2.  Cost of Sales under wraps


The Cost of sales (goods) figure should be growing no faster than the Revenue line.  Ideally, your company will be meeting increasing demand by supplying products at the same cost as before.  In fact, best of all, if your company can cut the cost of goods sold during periods of rapid growth.  It indicates that the business can get its materials or provide its services cheaper in higher volume.  Where cost of goods sold rose outpacing sales growth, a red light just blinked from the income statement.


3.  Gross margin above 40%


We prefer to invest in companies with extraordinarily high gross margin - again, calculated by (a) subtracting cost of goods sold (cost of sales) from total sales, to get gross profit, then (b) dividing gross profit by total sales.

A gross margin above 40% indicates that there is only moderate material expense to the business.  It is a "light" business.  We like that.

Not all businesses are this light, of course.  Many manufacturing companies have a hard time hitting this target, as do many retailers.  Does that mean you should never invest in them?  No.  Does it mean you should have a slight bias against them in favour of higher-margin companies, all other things being equal?  Yes.

4.  Research and Development costs on the rise

Yes, we actually want our companies to spend more and more on research every year, particularly those in high technology and pharmaceuticals.  This is the biggest investment in the future that a company can make.  And the main reason businesses spend less on R&D one year than the last is that they need the money elsewhere.  Not a desirable situation to be in.  Look for R&D costs rising.  Of course, though, not all companies spend much on R&D.  A kiss is still a kiss, a Coke is still a Coke.

Generally, the best way to go about measuring R&D is as a percentage of sales.  You just divided R&D by revenue.  You want to see this figure trend upward, or at least hold steady.

5.  A 34% plus tax rate


Make sure that the business is paying the full rate to the government (Uncle Sam).  Due to previous earnings losses, some companies can carry forward up to a few years of tax credits.  While this is a wonderful thing for them, it can cause a misrepresentation of the true bottom-line growth.  If companies are paying less than 34% per year in taxes, you should tax their income at that rate, to see through to the real growth.

6.  Net profit margin above 7% and rising.

How much money is your company making for every dollar of sales?  The profit margin - net income dividend by sales - tells you what real merit there is to the business.

We prefer businesses with more than $5 billion in sales to run a profit margin above 7 percent, and those with less than $5 billion to sport a profit margin of above 10 percent.  Why go through all the work of running a business if out of it you can't derive substantial profits for your shareholders?

Another way of thinking about this is that in a capitalistic world, high margins - highly profitable businesses - lure competition.  Others will move in and attempt to undercut a company's prices.  So companies that can post high margins are winning; competition is failing to undercut them.  As with gross profits above, some industries do not lend themselves to a high profit margin.   For example, a certain company is unlikely to ever show high profits, but it remains a wonderful company.


What you want to see on the cash flow statement?

Net cash provided by (used in) operating activities is positive or negative.

If a company is cash flow negative, it means that these guys are burning capital to keep their business going.  This is excusable over short periods of time, but by the time companies make it into the public marketplace, they should be generating profits off their business.

If a company you are studying is cash flow negative, it's critical that you know why that's occurring.

• Perhaps it has to ramp up  inventories for the quarter, or had a short, not-to-be-repeated struggle with receivables.  
• Some companies are best off burning capital for a short-term period, while they ramp up for huge business success in the future.  
• But if the only reason you can find is that their business isn't successful and doesn't look to be gaining momentum, you should steer clear of that investment.

Summary

You now have a fine checklist of things to look for (and hope for) on the balance sheet, income statement, and statement of cash flows.  Few companies are ideal enough to conform to our every wish.

The best businesses show financial statements strengthening from one quarter to the next.

For smaller companies with great promise and for larger companies hitting a single bad bump in the road, shortcomings in the financial statements can be explained away for a brief period.

But when you do accept these explanations, be sure you're getting the facts.  You want to thoroughly understand why there has been a slipup and do your best to assess whether or not it's quickly remediable.

We have, up to until now,  merely outlined the ideal characteristics, without ever putting a price tag on them.  Make sure you've mastered these basic concepts before fishing for some companies.

Do you want to take your knowledge of investing to the next level?

Learning to invest can be an enjoyable pastime for those inclined toward it.  It is not a mystery that has to be left to the professionals.  Do you want to take your knowledge of investing to the next level?

You can do it as successful investing relies primarily on the proper understanding of basic mathematics and basic principles of business.

You want to learn about business.  

You want to learn how to value individual stocks.

You want to determine whether or not to buy more of the stock of your employer.

You want to own the greatest companies on the planet, hold them for decades, and turn a couple of thousand dollars into a couple of million dollars by the time you retire, or your kids retire, or their kids.

To get there, you need only add 6 + 17 successfully (23).  You need only multiply 12 X 2.6 (31.2).  You need only divide 178 by 14 (12.7).

Mostly, you'll just need to keep your eyes and mind open.  

The future of your financial situation rests more on these abilities than on working triple overtime next month or inheriting a whole mess of money from your great-uncle.


So, let's ask again:  is it time for you to step beyond the index fund and start investing in individual stocks?

Why invest in individual stocks?  

Because if you're methodical, you may beat the index funds that beat the majority of managed funds.  

Chances are you won't make much money at all in your first year of investing.

You'll still be learning and you'll probably make plenty of mistakes.

And there certainly are other alternatives to common stock.  Index funds are a great way to begin investing.

With method and resolve, private investors can manage to outperform the market over the long term.

Which type of Company would you rather own?

Would you prefer to own:

A.  One that consistently posts better earnings and whose stocks plows steadily higher?

or

B.  One that made the same amount of money for six years but was (a) profitable and (b) disciplined in paying hefty dividends back to investors?  (Note:  These companies are harder to find, but in such situations, a no- or low-growth company may actually be OK.)

or

C.  One that has made the same amount of money for six straight years, has little sense of enterprise, and has a stock that is trading at the same price it was ten years ago?


Related:

Be a stock picker: Buy GREAT companies and hold for the long term until their fundamentals change

Examples of companies in:

A - PetDag, PBB, LPI, PPB

B - Nestle, Guinness, DLady

C - Too many in this group in the KLSE.

China signals plans for stronger yuan

China signals plans for stronger yuan
June 20, 2010 - 9:11AM

China said it will allow a more flexible yuan, signaling an end to the currency's two-year-old peg to the US dollar a week before a Group of 20 summit.

The decision was made after the world's third-largest economy improved, the central bank said in a statement on its website, without indicating a timeframe for the change. It ruled out a one-time revaluation, saying there is no basis for ``large-scale appreciation,'' and kept the yuan's 0.5 per cent daily trading band unchanged.

``The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability,'' the People's Bank of China said. ``It is desirable to proceed further with reform of the renminbi exchange-rate regime and increase the renminbi exchange-rate flexibility.''

The move may help deflect criticism from President Barack Obama and other G-20 leaders, who have blamed China for relying on an undervalued currency to promote exports. It also affirms Treasury Secretary Timothy F. Geithner's policy of encouraging China to loosen restrictions on the yuan while resisting calls in Congress for trade sanctions. Geithner in April delayed a report to lawmakers assessing whether China or any other country is unfairly manipulating its exchange rate.

``This is another small victory for Tim Geithner,'' Goldman Sachs's Chief Global Economist Jim O'Neill said in an interview with Bloomberg Television in St. Petersburg, Russia.

The Australian dollar is buying about 5.9 yuan. A stronger yuan may slow the Chinese economy as its exports become less competitive in international markets. On the other hand, China is likely to import more, and its currency will make overseas investments by Chinese companies - such as in Australia's resources and property - more attractive.

`China bashing'

``It makes it a lot more difficult for Washington and Congress to do China bashing,'' O'Neill said. ``The Chinese are increasingly confident they can make this adjustment to a domestic-driven economy rather than the one relying on exporting low-value-added stuff to the rest of the world.''

Geithner, in a statement, praised China's decision and added that ``vigorous implementation would make a positive contribution to strong and balanced global growth.'' The Obama administration received advance notice of the announcement, US officials said.

China, by moving on its currency ahead of the G-20 meeting June 26-27 in Toronto, has shifted attention to the budget deficits of developed nations, said Eswar Prasad, a senior fellow at the Brookings Institution in Washington.


``It can now argue that the G-20 leaders should focus on the major determinants of global imbalances, especially the buildup of debt in advanced economies,'' said Prasad, a former head of the China division at the International Monetary Fund. The move ``also serves to acknowledge that they have an important responsibility to the international community.''

Helping exporters

Chinese authorities have prevented the currency from strengthening since July 2008 to help exporters cope with sliding demand triggered by the global financial crisis.

The currency appreciated 21 per cent in the three years after a peg to the US dollar was scrapped in July 2005 and replaced by a managed float against a basket of currencies including the euro and the Japanese yen. The yuan is a denomination of China's currency, the renminbi.

``This move is a vote of confidence in the global recovery and a reaffirmation of Beijing's longstanding commitment to a flexible currency regime,'' Stephen Roach, chairman of Morgan Stanley Asia Ltd., said in an e-mail. ``This shift, however, is not a panacea for an unbalanced global economy. Surplus savers like China still need to take additional actions to stimulate internal private consumption.''

Import costs

Companies focused on the Chinese market, including Beijing-based computer maker Lenovo and Shanghai-based China Eastern Airlines, said in March that they would gain from lower import costs and stronger consumer purchasing power should the yuan appreciate. Textiles makers would stand to lose the most and some would ``face bankruptcy'' with profit margins as low as 3 per cent, Zhang Wei, vice chairman of the China Council for the Promotion of International Trade, said in March.

A more flexible currency would give China more freedom to decide on monetary policy and reduce inflationary pressures by lowering import costs, the World Bank said in a report last week.

China's inflation rate jumped to a 19-month high of 3.1 per cent in May, higher than the government's full-year target of 3 per cent. Central-bank dollar buying has left the nation with $US2.4 trillion in currency reserves, the world's largest holding.

`Crisis mode'

``China has ended its crisis-mode exchange-rate policy as the economy recovers strongly and inflationary pressure continues to build,'' Li Daokui, an adviser on the People's Bank of China's policy board, said in an interview. ``The yuan's future trend depends on the euro's movement, and the trends of other major currencies.''

Yuan 12-month forwards rose the most this year two days ago, gaining 0.5 per cent to 6.7125 per US dollar. The contracts reflect bets the currency will appreciate 1.7 per cent from the spot rate of 6.8262. They had been pricing in appreciation of 3.2 per cent on April 30 before a slump in the euro and a worsening of Europe's debt crisis eased pressure for appreciation.

``The central bank's statement means China's exit from the dollar peg,'' said Zhao Qingming, an analyst in Beijing at China Construction Bank, the nation's second-biggest bank by market value. ``If the euro continues to remain weak, it could also mean that the yuan may depreciate against the dollar.''

Deadline postponed

Geithner postponed an April 15 deadline for a semiannual review of the currency policies of major US trading partners, which might have resulted in China being labeled a currency manipulator. China owned $US900 billion of US Treasuries as of April, the largest foreign holdings.

China's exports jumped 48.5 per cent in May from a year earlier, the biggest gain in more than six years, according to customs bureau data June 10. Exports exceeded imports by $US19.5 billion, from $US1.68 billion in April and a deficit of $US7.24 billion in March that was the first in six years.

China's narrowing balance-of-payments gap indicates that there's no basis for ``large-scale appreciation'' by the yuan, the central bank said in the English version of its statement. The Chinese version said no ``large-scale volatility.''

Twelve of 19 respondents surveyed by Bloomberg in April predicted the central bank would allow the currency to float more freely this quarter, while the rest saw a move by year-end. Eleven ruled out a one-time revaluation, while 15 predicted a wider daily trading range.

``Continued emphasis would be placed to reflecting market supply and demand with reference to a basket of currencies,'' the statement said. That suggests a looser link to the dollar, said Ben Simpfendorfer, chief China economist at Royal Bank of Scotland Group Plc, in Hong Kong.

``China has to offer something ahead of the G-20,'' he said. ``Greater flexibility allows them the option to appreciate against the dollar, perhaps during periods of dollar weakness.''

Bloomberg News

Review: Apple iPad for business

The Apple iPad has plenty of affordable and useful business applications but it may be worth waiting for the iPad version 2

Techbyte
Published: 11:43AM BST 16 Jun 2010

Apple iPad

Of course, you’ve read a lot about the iPad, but here we’re concerned with business and gadgets that make our professional lives easier. Could Apple’s iPad really have a useful impact?

Ignore, then, the indisputable good looks, silent operation and sleek styling. These are good for showing off, and the iPad is certainly a pleasure to use because of how it sits in the hand, but these factors score no points for improved business use.

The iPad is a blank slate, designed to perform the tasks you set it. There are 5,000 iPad-specific applications (apps) along with 200,000 iPhone apps, many of which have strong business uses. The iPhone apps don’t look as good as dedicated iPad versions, marooned in the centre of the screen or enlarged to the point that they look blocky.

But many of these apps are gaining iPad versions, often free and achieved simply by updating your iPad. Most are free or inexpensive, such as PayRecord (£1.79) which is good for road warriors eager to keep a record of time worked and calculate payment earned. This info can be emailed to an employer client or accounts department. There are many more of these, almost certainly enough to make an iPad useful – just check out the Business category of iPad apps in iTunes if you’re not sure.

But what else is the iPad good for? It’s not great for typing – there’s no feedback to let you know you’ve hit a key, so touch typists will want the optional Bluetooth keyboard. This is not ideal as it compromises portability. Even so, Pages (£5.99), Apple’s own word processor built for the iPad, is sophisticated, elegant and capable, not to mention very cheap. Pages, which creates Word-compatible documents, goes a long way to redress the iPad’s keyboard deficiencies.

And if you want to travel light, you can carry hundreds of books in the iPad, though the glossy screen’s backlight is not as easy on the eye as paper.

The iPad lacks extensive connectivity, though you can connect USB devices with a suitable add-on, and there’s no camera on board to power augmented reality apps. What’s more, a front-facing camera that would allow video conferencing is also absent.

The iPad is a highly desirable piece of kit, with exceptional capabilities and a fast-increasing number of brilliant apps. So the blank slate Apple has created has enormous potential and will change its purpose quickly. Even so, you may want to hold off until the inevitable second edition which may have improved connectivity and extra capabilities – if you can wait a whole year.

iPad
3 stars
From £429
www.apple.com/uk

http://www.telegraph.co.uk/finance/yourbusiness/7832342/Review-Apple-iPad-for-business.html

Investors ignore signs and pile into property

Investors ignore signs and pile into property

Peter Martin
June 16, 2010 - 1:00AM

AUSTRALIANS are diving into negatively geared property even as the Reserve Bank signals that another interest rate rise could be only weeks away.

Figures from the Bureau of Statistics show that while lending to buy homes in which to live fell a seasonally adjusted 10 per cent in the first four months of the year, lending to property investors rose 11 per cent. In the past year lending to investors rose 30 per cent nationwide, and 20 per cent in NSW.

''These investors aren't concerned about interest rates,'' said a BIS Shrapnel analyst, Angie Zigomanis. ''They can see prices rising and real estate looks a safer bet than the stockmarket.''

While some of the new real estate investors were taking money out of the sharemarket, most were using funds they had been keeping on the sidelines.

''You've got people who have still got their jobs and have been fiscally conservative - and potentially money is burning a pocket,'' he said.

''If you stick money in a term deposit it faces tax. A lot of people are averse to putting it in the sharemarket, given how it's been going, and residential property has bottomed out and been climbing for 12 months. That's given people confidence to jump back in.''

Mr Zigomanis said a key factor for some would have been the government's decision not to move against negative gearing after the Henry tax review.

Tax Office figures show a record 1.2 million investors said they spent more money on their rental properties than they earned in 2007-08. One in every 10 taxpayers owned negatively geared property.

Reserve Bank figures released yesterday show that in other respects we are being more careful with our money. Credit card cash advances are down 5.5 per cent over the year and the proportion of those withdrawing cash from their bank's ATMs rather than another banks' has risen to a record 62 per cent.

The minutes of the Reserve's board meeting this month suggest it will leave rates on hold next month but consider lifting them in August in response to inflation figures to be released next month.

The minutes identify international developments and the outlook for inflation as the key drivers of rates and, unusually, nominate the next month's figures as the ones to watch.

The Reserve's deputy governor, Ric Battellino, told a conference he was unconcerned about household debt, noting that since 2006 it had stayed steady relative to disposable income.

Claims that house prices were high compared with income did not differentiate between city and regional salaries.

This story was found at:
http://www.watoday.com.au/business/investors-ignore-signs-and-pile-into-property-20100615-ydds.html

Wealth and happiness from the power of 10

Wealth and happiness from the power of 10

Marcus Padley
June 19, 2010 - 3:00AM

You don't have to be a genius to work out that if only we could avoid the losses, we would all be winners. The first rule of making it is not losing it. So here are my top 10 tips on not losing money.

1 Inside information. A colleague has professionally traded all his life. It's what he does. He says: ''If I had never been given any inside information … I would be a million pounds better off than I am today.''

2 IPOs. The golden rule of IPOs is that if it's any good, it won't be offered to you. If you get offered it … then you don't want it.

3 Pretending to be Warren Buffett. The concept that Buffett can be emulated has cost investors more than it has ever made them. No one has ever managed to replicate his performance. The idea that you can is the biggest drawcard the equity market has and it is a lie. We all keep buying the dream.

4 Gurus. Go to any rainforest, discover any tribe and you will find them huddling under some concept of god and creed. It is a human need to be able to answer the unanswerable questions and we do it by deifying someone or something. In our search for answers to the stockmarket's unanswerable questions, we credit our commentators with vastly more powers than they could possibly deserve or possess. And dangerously, he who guesses the boldest guesses the longest.

5 Greed. The biggest killer of them all. Approaching the stockmarket with greed is like running onto a battlefield in bright orange. We'll get you.

6 Leverage. The mechanism of greed. Leverage is marketed one way, but it works both ways. You lose much faster as well. That means it only works for some of the time and not all of the time.

It only works when you are right. And with average equity returns after interest, transaction costs, inflation and tax of less than zero, man, you had better be right, and right at the right time. You cannot habitually use leverage to ''invest''. Only trade and trade at the right time, not all the time. That's a big ask for someone with a day job.

7 Confidence. What's the core skill of the finance industry?

I'll tell you: it's marketing. And oh, do we have some material to work with. The finance industry is never short of a success story to free your wallet from your pocket. But we cannot all be successful, and of course we aren't. But the concept of success from mere participation in the financial markets is sold and endures because of one convenient fact of life. Crappy cars and small houses don't attract attention. The winners stay, and we raise them up. The losers, conveniently, go away. Thank goodness for that. Imagine how much product we'd sell if we raised them up.

8 Expectations. The root of all happiness. The root of all unhappiness. Expect the unexpectable and expect the inevitable. Best you expect the expectable.

9 Laziness. The nucleus of many of the stockmarket's very large and public losses. There has been more money lost through laziness than through effort - in particular, from putting your future in the hands of financial products you haven't taken the time to understand (Opes Prime, Storm Financial), from ''investing'' without investigating (otherwise known as gambling), from relying on someone else's grand declaration rather than taking responsibility yourself. Let's get this straight. There is no easy route to riches in the stockmarket and there is no free lunch, so participation without effort is not enough.

10 Life. My mum used to say there are three foundations for spiritual and financial happiness and success: your relationship, your job and where you live. Get one of those wrong, and all three will go wrong. Note there's no mention of the stockmarket in there. The stockmarket is not life. It is a side issue. The biggest financial decisions you will make in your life have nothing to do with the stockmarket - such as getting married, getting divorced, having kids, investing in your home, committing to your career or your business. These are the biggest financial decisions you'll ever make. Focus on them. The stockmarket is not a priority.

Marcus Padley is a stockbroker with Patersons Securities and the author of the daily stockmarket newsletter Marcus Today.



This story was found at: http://www.smh.com.au/business/wealth-and-happiness-from-the-power-of-10-20100618-ymsd.html

Foreign Investment funds now also 'surfing' (Vietnam News)

Foreign investment funds now also ‘surfing’

13:42' 10/12/2009 (GMT+7)

VietNamNet Bridge – Foreign investment funds, generally considered to be long term investors, have been observed making ‘surfing investments’ inVietnam’s stock market, according to a report in Dau Tu Chung Khoan. A lot of investment funds have been set up over the last two years Though on average, trading by foreign investors on Vietnam’s stock market just accounts for just seven percent of the market’s volume, their moves have always attracted attention.  That’s because the foreign investors are mainly investment funds – reputed to be professional, experienced and only rarely money-losers. In two years, over 300 new foreign funds In the early part of this decade, the first years of Vietnam’s stock market, only a few investment funds were active in Vietnam, among them Vietnam Dragon Fund, VinaCapital and Mekong Capital.  Because then there were only a few dozen companies listed on the bourse, it was easy to guess what the investment funds purchased and what they sold. A lot of domestic investors followed the  funds’ lead, hoping for a bigger profit. As Vietnam’s stock market boomed, the number of foreign investment funds increased rapidly.  By 2007, there were 70, including Sumitomo Mitsui VN, Fullerton Vietnam Fund, Tong Yang VN, Maxford Growth - VN Focus, Vietnam Resource Investments (VRI) and Credit Agricole Fund, which mostly came from Japan, South Korea, Singapore and Malaysia. The rapidly growing stock market prompted fund management companies to set up more funds. Dragon Capital, for example, added two more funds, VinaCapital spawned Vinaland and Jaccar launched three funds. According to the Ministry of Finance, by November 2009, Vietnam had had 46 fund management companies and 382 foreign investment funds. The figure is a five-fold increase over 2007. Foreign funds also dabble in short-term buys The investment strategies of new funds in Vietnam are not so clear yet. What is clear that there are some changes in the investment strategies of the longer-established funds. The director of a well known foreign fund in Vietnam, who requested anonymity, commented that in view of the big gap between the VN Index’s highs and lows, no investment institution will dedicate all its investment capital to a buy and hold strategy. The VN Index crested 1,000 in late 2007, only to plunge to 200 in early 2009.  It is now hovering around 500. Khong Van Minh, Director of the Jaccar Vietnam Fund, stresses that long term investment will remain the strategy of the fund.  However, in order to get adapted to Vietnam’s stock market’s conditions, investment funds will use part of their capital to make short term, profit-maximizing investments. The 382 investment funds make different moves on the market.  What they have in common is ample capital, which allows them to purchase shares continuously in many trading sessions and then sell shares in many trading sessions The managing director of the SAM Investment Fund says that “value investors” investors do not care if the market is rising or falling. They simply purchase shares when they find the prices reasonable.  He says that a reasonable range for the VN Index now is 500-550 points. VietNamNet/DTCK http://english.vietnamnet.vn/biz/200912/Foreign-investment-funds-now-also-‘surfing’-883488/

Be a stock picker: Buy GREAT companies and hold for the long term until their fundamentals change

All the above are GREAT companies.

NEVER buy these GREAT companies at HIGH prices.

You can often buy them at FAIR prices.

On certain occasions, you have the chance to buy them at slightly BARGAIN prices.

Rarely, for example during the recent 2008 Crash, you had the chance to buy them at GREAT prices.

It is better to buy a GREAT company at a FAIR price than to buy a FAIR company at a GREAT price.

It is safe to hold these stocks for the long term since these companies have competitive advantages, selling only when their fundamentals change.

The present prices of these stocks are near or above their previous high prices.

Those who bought regularly into these stocks would have capital gains, through dollar-cost averaging.

Further comments:

1. Warren, on the other hand, after starting his career with Graham, discovered the tremendous wealth-creating economics of a company that possessed a long-term competitive advantage over its competitors.  
2. Warren realized that the longer you held one of these fantastic businesses, the richer it made you.  
3. While Graham would have argued that these super businesses  were all overpriced, Warren realized that he didn't have to wait for the stock market to serve up a bargain price, that even if he paid a fair price, he could still get superrich off of those businesses.  
4. In the process of discovering the advantages of owning a business with a long-term competitive advantage, Warren developed a unique set of analytical tools to help identify these special kinds of businesses.  
5. Though rooted in the old school Grahamian language, his new way of looking at things enabled him to determine whether the company could survive its current problems.  
6. Warren's way also told him whether or not the company in question possessed a long-term competitive advantage that would make him superrich over the long run.  
7. By learning or copying Warren, you can make the quantum leap that Warren made by enabling you to go beyond the old school Grahamian valuation models and discover, as Warren did, the phenomenal long-term wealth-creating power of a company that possesses a durable competitive advantage over its competitors.
8. In the process you'll free yourself from the costly manipulations of Wall Street and gain the opportunity to join the growing ranks of intelligent investors the world over who are becoming tremendously wealthy following in the footsteps of this legendary and masterful investor.

Related:

The Evolution of Warren Buffett

Learning and Understanding the Evolution of Warren Buffett
Li Lu sharing his Value Investing Strategies (Video)
The Three Gs of Buffett: Great, Good and Gruesome

The GREAT company has long-term competitive advantage in a stable industry.  This company:

• takes a one time investment capital and 
• pays you a very attractive return (dividend + capital appreciation), 
• which will continue to increase as years pass by;

Here are the golden words of Buffett on the GREAT businesses to own:

1.  On 'Great' businesses, Buffett says, "Long-term competitive advantage in a stable industry is what we seek in a business.

• If that comes with rapid organic growth, great. 
• But even without organic growth, such a business is rewarding. 
• We will simply take the lush earnings of the business and use them to buy similar businesses elsewhere. 
• There's no rule that you have to invest money where you've earned it. 
• Indeed, it's often a mistake to do so: Truly great businesses, earning huge returns on tangible assets, can't for any extended period reinvest a large portion of their earnings internally at high rates of return."