All hands to the pumps, unless you have a yen for recession until 2018
William Pesek
December 18, 2010
In an era where forecasts by perma-bears have gotten ample attention and vindication, few are as disturbing as this: a world recession until 2018.
It comes from Eisuke Sakakibara, Japan's former top currency official. He is known as ''Mr Yen'' for his ability to move markets. Because Tokyo's revolving-door politics tends to send a new face to each G20 meeting, he is one of the few Japanese constants in market circles. Traders may not know the latest finance minister's name, but they know Sakakibara.
Japan is the master of muddling along, decade after decade, with little growth to show for it. And Sakakibara was a key player when it faced everything from the Asian crisis to the onset of deflation and the banking collapse that led to the demise of Yamaichi Securities.
So, when an economist with Sakakibara's background says ''the world is set for a long-term structural slump reminiscent of the 1870s'', when average global growth was about 1 per cent a year, I cannot help but listen. The reason for the slowdown? Governments are putting fiscal austerity ahead of restoring stable growth.
Yes, there's an eye-rolling quality to a former finance ministry mandarin giving economic advice. After all, officials there did Japan's 126 million people a disservice by punting reform far down the road. They just borrowed and borrowed, leaving Japan with the largest public debt among industrialised nations and no exit strategy in sight.
Yet recent data in the US and Japan and turbulence in Europe suggest a fresh global recession is a distinct possibility next year. If that happens, what levers are realistically available to revive demand? Interest rates are already at, or close to, zero. That leaves increased government spending as the only real way to stabilise things.
The trouble is, there's little support for opening the fiscal floodgates.
One reason is there is already loads of public debt. As of June, Japan's $US5 trillion economy had ¥904 trillion ($10.8 trillion) in debt. Too much debt is wreaking havoc in Europe, where Ireland is the latest domino to fall.
The US is starting to rattle bondholders with its borrowing binge. President Barack Obama's stimulus isn't working the magic economists hoped. Neither is the Federal Reserve, as it goes the way of Japan with quantitative easing.
Worse, in the US and other major economies, is the risk that it may be 1937 all over again. It was then that President Franklin Delano Roosevelt got stingy with stimulus, assuming that the Great Depression was over. The next year the economy was in full retreat.
If Sakakibara is right, the global economy is in deep trouble. He envisions a broad slowdown that might drag on for seven to eight years. China can live a couple of years without US and European growth, but eight?
To head it off, governments need to lift spending. And, for the most part, they aren't. Yet the US can, and should, borrow more. To do that, it just needs to become a bit more Japanese, says Richard Duncan, author of the The Corruption of Capitalism.
There is a single reason why Japan's 10-year bond yields are below 1.3 per cent and Asia's No. 2 economy isn't being downgraded. Since about 95 per cent of Japan's debt is held domestically, there's no risk of capital flight. Japan borrows from its companies and people, an arrangement that is roughly the mirror image of the US.
That so many treasuries are held in China and elsewhere makes the US vulnerable. Duncan, the chief economist at Blackhorse Asset Management, says the US needs another FDR-like new deal to restore growth. Funding one means greater borrowing and the way to do it is by tapping private sector cash, Japan-style.
Such suggestions are likely to fall with a thud on Capitol Hill, which is moving in the opposite direction. Lawmakers calling for Ben Bernanke's head forget why the Fed chairman is taking US monetary policy into uncharted territory. It is because Congress failed to pump enough money into the economy in the first place.
Japan is a cautionary tale. On the surface, the 4.5 per cent annualised increase in third-quarter gross domestic product looked promising. The detail, however, showed deflation is worsening no matter how many yen the Bank of Japan churns into the economy. This is anything but a typical recession, and world leaders are too distracted to see it.
In the US, the focus is on China's currency. While a stronger yuan would be in the best interests of the global economy, it is not the answer to all US problems. Japan is even more obsessed with exchange rates. And Europe is linearly focused on convincing investors that the euro zone won't unravel.
In our time of currency fixation, perhaps a guy called Mr Yen is the ideal messenger.
Bloomberg
Saturday, 18 December 2010
Game changer for Madoff victims: $7.3b recovered
Game changer for Madoff victims: $7.3b recovered
December 18, 2010 - 8:24AM
The widow of a Florida philanthropist who had been the single largest beneficiary of Bernard Madoff’s colossal Ponzi scheme has agreed to return $US7.2 billion ($7.3 billion) in bogus profits to the victims of the fraud.
The trustee recovering money for Madoff’s burned investors have filed court papers formalising the settlement with the estate of Jeffry Picower, a businessman who drowned after suffering a heart attack in the swimming pool of his Palm Beach, Florida, mansion in October last year.
‘‘We will return every penny received from almost 35 years of investing with Bernard Madoff,’’ Picower’s wife, Barbara, said in a written statement.
‘‘I believe the Madoff Ponzi scheme was deplorable and I am deeply saddened by the tragic impact it continues to have on the lives of its victims,’’ she said. ‘‘It is my hope that this settlement will ease that suffering.’’
US Attorney Preet Bharara called the settlement a ‘‘game changer’’ for Madoff’s victims.
A recovery of that size would mean that a sizable number could get at least half of their money back - a remarkable turnaround for people and institutions that thought two years ago they had lost everything.
‘‘Barbara Picower has done the right thing,’’ Bharara said.
Jeffry Picower, who was 67 when he died, was one of Madoff’s oldest clients. Over the decades, he withdrew about $US7 billion in bogus profits from his accounts with the schemer. That amounts to more than a third of the dollars that disappeared in the scandal.
That money was supposedly made on stock trades, but authorities said that in reality it was simply stolen from other investors.
Picower’s lawyers claimed he knew nothing about the scheme, but court-appointed trustee Irving Picard had argued in court papers he must have known the returns were ‘‘implausibly high’’ and based on fraud.
In her statement, Barbara Picower said she was ‘‘absolutely confident that my husband Jeffry was in no way complicit in Madoff’s fraud and want to underscore the fact that neither the trustee, nor the US attorney, has charged him with any illegal act’’.
Lawyers for Picower’s estate have been in negotiations with the trustee for some time.
After Picower drowned, his will revealed he had earmarked most of his fortune for charity, but his widow said in a statement that the family wished to return some of it to Madoff’s victims through ‘‘a fair and generous settlement’’.
A huge charitable foundation Picower had created with part of his fortune closed in 2009 after its assets were wiped out in the Madoff fraud.It had donated hundreds of millions of dollars to colleges, libraries and other nonprofit groups.
Thousands of people, banks and hedge funds that invested money with Madoff saw their savings wiped out when the fraud was revealed to be a hoax. Many, though, like Picower, had been drawing bogus profits from their Madoff accounts for years and wound up walking away from the scheme having taken out more money than they put in.
Picard has been involved in a two-year effort to claw back those false profits and return the stolen money to people who were net-losers in the scheme.
It is those people, who lost more than they withdrew, who could now be poised to recover half of their original investment.
The person said Picower’s estate would pay $US5 billion to settle the civil lawsuit brought by Picard and another $US2.2 billion to resolve a civil forfeiture claim by federal prosecutors investigating Madoff’s crimes. All the money will go to victims of the fraud.
Bharara called the total ‘‘a truly staggering sum that was really always other people’s money’’.
Madoff’s clients had thought, based on his fraudulent account statements, they collectively had more than $US60 billion invested in stocks through the money manager’s funds.
Investigators found, though, no investments had ever been made, and the $US20 billion in principal contributed by Madoff’s clients was simply being paid out bit by bit to other investors.
Bharara said roughly half of that lost money has been recovered.
AP
December 18, 2010 - 8:24AM
The widow of a Florida philanthropist who had been the single largest beneficiary of Bernard Madoff’s colossal Ponzi scheme has agreed to return $US7.2 billion ($7.3 billion) in bogus profits to the victims of the fraud.
The trustee recovering money for Madoff’s burned investors have filed court papers formalising the settlement with the estate of Jeffry Picower, a businessman who drowned after suffering a heart attack in the swimming pool of his Palm Beach, Florida, mansion in October last year.
‘‘We will return every penny received from almost 35 years of investing with Bernard Madoff,’’ Picower’s wife, Barbara, said in a written statement.
‘‘I believe the Madoff Ponzi scheme was deplorable and I am deeply saddened by the tragic impact it continues to have on the lives of its victims,’’ she said. ‘‘It is my hope that this settlement will ease that suffering.’’
US Attorney Preet Bharara called the settlement a ‘‘game changer’’ for Madoff’s victims.
A recovery of that size would mean that a sizable number could get at least half of their money back - a remarkable turnaround for people and institutions that thought two years ago they had lost everything.
‘‘Barbara Picower has done the right thing,’’ Bharara said.
Jeffry Picower, who was 67 when he died, was one of Madoff’s oldest clients. Over the decades, he withdrew about $US7 billion in bogus profits from his accounts with the schemer. That amounts to more than a third of the dollars that disappeared in the scandal.
That money was supposedly made on stock trades, but authorities said that in reality it was simply stolen from other investors.
Picower’s lawyers claimed he knew nothing about the scheme, but court-appointed trustee Irving Picard had argued in court papers he must have known the returns were ‘‘implausibly high’’ and based on fraud.
In her statement, Barbara Picower said she was ‘‘absolutely confident that my husband Jeffry was in no way complicit in Madoff’s fraud and want to underscore the fact that neither the trustee, nor the US attorney, has charged him with any illegal act’’.
Lawyers for Picower’s estate have been in negotiations with the trustee for some time.
After Picower drowned, his will revealed he had earmarked most of his fortune for charity, but his widow said in a statement that the family wished to return some of it to Madoff’s victims through ‘‘a fair and generous settlement’’.
A huge charitable foundation Picower had created with part of his fortune closed in 2009 after its assets were wiped out in the Madoff fraud.It had donated hundreds of millions of dollars to colleges, libraries and other nonprofit groups.
Thousands of people, banks and hedge funds that invested money with Madoff saw their savings wiped out when the fraud was revealed to be a hoax. Many, though, like Picower, had been drawing bogus profits from their Madoff accounts for years and wound up walking away from the scheme having taken out more money than they put in.
Picard has been involved in a two-year effort to claw back those false profits and return the stolen money to people who were net-losers in the scheme.
It is those people, who lost more than they withdrew, who could now be poised to recover half of their original investment.
The person said Picower’s estate would pay $US5 billion to settle the civil lawsuit brought by Picard and another $US2.2 billion to resolve a civil forfeiture claim by federal prosecutors investigating Madoff’s crimes. All the money will go to victims of the fraud.
Bharara called the total ‘‘a truly staggering sum that was really always other people’s money’’.
Madoff’s clients had thought, based on his fraudulent account statements, they collectively had more than $US60 billion invested in stocks through the money manager’s funds.
Investigators found, though, no investments had ever been made, and the $US20 billion in principal contributed by Madoff’s clients was simply being paid out bit by bit to other investors.
Bharara said roughly half of that lost money has been recovered.
AP
****Investment Valuation Ratios
This ratio analysis tutorial looks at a wide array of ratios that can be used by investors to estimate the attractiveness of a potential or existing investment and get an idea of its valuation.
However, when looking at the financial statements of a company many users can suffer from information overload as there are so many different financial values. This includes revenue, gross margin, operating cash flow, EBITDA, pro forma earnings and the list goes on. Investment valuation ratios attempt to simplify this evaluation process by comparing relevant data that help users gain an estimate of valuation.
For example, the most well-known investment valuation ratio is the P/E ratio, which compares the current price of company's shares to the amount of earnings it generates. The purpose of this ratio is to give users a quick idea of how much they are paying for each $1 of earnings. And with one simplified ratio, you can easily compare the P/E ratio of one company to its competition and to the market.
The first part of this tutorial gives a great overview of "per share" data and the major considerations that one should be aware of when using these ratios. The rest of this section covers the various valuation tools that can help you determine if that stock you are interested in is looking under or overvalued.
However, when looking at the financial statements of a company many users can suffer from information overload as there are so many different financial values. This includes revenue, gross margin, operating cash flow, EBITDA, pro forma earnings and the list goes on. Investment valuation ratios attempt to simplify this evaluation process by comparing relevant data that help users gain an estimate of valuation.
For example, the most well-known investment valuation ratio is the P/E ratio, which compares the current price of company's shares to the amount of earnings it generates. The purpose of this ratio is to give users a quick idea of how much they are paying for each $1 of earnings. And with one simplified ratio, you can easily compare the P/E ratio of one company to its competition and to the market.
The first part of this tutorial gives a great overview of "per share" data and the major considerations that one should be aware of when using these ratios. The rest of this section covers the various valuation tools that can help you determine if that stock you are interested in is looking under or overvalued.
Friday, 17 December 2010
5 minute screening test to select the companies you wish to do deeper analysis
Investing is fun especially when you have a good strategy that is delivering positive returns consistently. Patience is required to maximise returns.
Do you have a quick way to select the companies you wish to do deeper analysis? It is very useful to have a good screening method that you can quickly apply to select these stocks, preferably within a short time of not more than 5 minutes.
Let me share here one of my screening methods.
1. Selecting Growth Stocks
Look at the Revenue, PBT and Earnings (or diluted EPS) over a 5 or 10 year period.
Select those companies that can deliver both topline and bottomline growths of 15% or more.
2. The earnings must translate into positive CFO and positive FCF (= CFO-Capex).
3. The debt of the company must be reasonable. Debt/Equity < 50%.
4. The PBT margin must be growing or at least maintain over these years. Gross margin of at least 50% and net margin of at least 10%.
5. Preferably the cash and cash equivalent should be more than the total debts of the company.
6. ROE of at least 15%.
7. The company should have declared dividends regularly, preferably also increasing dividends over the years.
8. DPO ratio should be less than 50% and more than 30%.
Also read:
Do you have a quick way to select the companies you wish to do deeper analysis? It is very useful to have a good screening method that you can quickly apply to select these stocks, preferably within a short time of not more than 5 minutes.
Let me share here one of my screening methods.
1. Selecting Growth Stocks
Look at the Revenue, PBT and Earnings (or diluted EPS) over a 5 or 10 year period.
Select those companies that can deliver both topline and bottomline growths of 15% or more.
2. The earnings must translate into positive CFO and positive FCF (= CFO-Capex).
3. The debt of the company must be reasonable. Debt/Equity < 50%.
4. The PBT margin must be growing or at least maintain over these years. Gross margin of at least 50% and net margin of at least 10%.
5. Preferably the cash and cash equivalent should be more than the total debts of the company.
6. ROE of at least 15%.
7. The company should have declared dividends regularly, preferably also increasing dividends over the years.
8. DPO ratio should be less than 50% and more than 30%.
Also read:
Secrets of successful investing by former king of remisiers: Prospect, Patience and Invest for Long-Term.
Those who have invested in good quality companies in the depth of the bear market of 2007 and 2008 would have enjoyed good returns in the KLSE to-date.
Getting real about returns
I have added the link below to highlight that a fund may outperforms the market in the long run and yet many of the investors may lose money due to various reasons. "After he retired at the age of 47, Lynch reported that, wonder of wonders, most of the investors in the Fidelity Magellan Fund lost money during his stellar run! They had bought into the fund when the market was doing well. Obviously, they paid a high price at that time as the market was peaking. Unfortunately, they panicked and sold out during the times the fund went south." Imagine that: the investors were actually holding a winner and yet, they lost money!
Getting real about returns
Getting real about returns
7 Red Flags That Say It's Time to Sell
By David Sterman Thursday, November 18, 2010
Few investors have an unlimited supply of money to keep buying new stocks. So to maintain a healthy dose of cash for the next stock purchase, most investors need to keep an eye out for opportunities to sell existing holdings (hopefully with a nice gain).
In some instances, you'll have a clear sense of what a stock is worth, and can simply sell your investment when shares have risen to your target price. But in most instances, no clear-cut exit exists. When that's the case, keep holding your shares as long as business is going well. Just keep monitoring these seven red flags that may signal it's time to sell.
1. Watch the insiders. From time to time, an officer or a director at a company may look to sell shares -- especially if the stock has steadily risen in recent weeks. That's perfectly understandable. But when several of them do so at the same time, you should probably follow their lead. On November 9, three separate insiders at Dreamworks Animation (Nasdaq: DWA) sold a collective 114,000 shares netting them a cool $5 million. If they don't think the stock holds value anymore, why should you?
[History shows that stocks heavily purchased by corporate insiders outperform the broader market averages by roughly 2-to-1. To learn more about this and other market timing techniques, read How to Excel at Timing the Market.]
2. The analyst disconnect. One of the most common mistakes an investor can make is holding onto a stock that seems fishy, but is still liked by analysts. As you listen to a company's quarterly conference call, you may get a sense that business is tumbling, and management is trying to put a positive spin on things. Analysts often buy into that positive spin, and will stick with their Buy ratings as a result. Go with your gut. If you think something is amiss, you are probably right.
3. Industry pressures. It's also important to hear what the competition is saying. If the management of the company in which you are invested says industry conditions are just fine, but a key rival says that business is getting tough, stick with the cautious view. Increasingly difficult conditions at a rival may simply signal company-specific execution problems, but that beleaguered rival may need to take desperate steps such as a price war to maintain sales levels. And in a price war, nobody wins.
4. SEC investigation. You'd be surprised how many investors hang on to a stock after hearing that a company is being investigated by the Securities and Exchange Commission. They're being foolish. In most instances, there is a real problem at hand even as companies typically look to downplay any investigation as seemingly minor. Even in a best case scenario where there is no wrongdoing, investigations can drag on for months, causing a stock to stay out of favor. This is a clear case where it's best to "shoot first and ask questions later."
5. Decelerating sales growth. As a young company grows larger and larger, it's inevitable that sales growth will need to slow down. It's a lot easier to boost sales +40% when you only have $25 million in sales than it is when you have $1 billion in sales. But such a slowdown should be measured and orderly. When sales growth slows sharply, or even turns negative, it could be a sign that a company has hit a serious wall. Management will likely explain any slowdown as a mere hiccup, but you'll need to dig deep to find out the root cause.
6. Shrinking profit margins. The first rule of business is that as sales grow, a company can generate leverage off of its fixed expenses. And that means that profit margins (gross, operating and net) should always be expanding. But if profit margins shrink, even as sales turn higher, then it's a clear sign that a company is losing pricing power. And once profit margins start to slip, they often keep falling as rivals fight harder and harder to steal market share.
7. An abrupt management change. We recently discussed this notion, highlighting the risks that arise when a top member of the management team suddenly departs.
It's not always a cause for alarm, (for example when someone is simply retiring), but you'll want to hear a good explanation of the change, and hopefully about a successor that has already been lined up.
As a good rule of thumb, once you own a stock, you should be looking for reasons to sell. If no such reasons emerge, then you can sit tight on that investment for an extended period. But if any of these seven red flags arise, it may be a clear sign to get while the getting is good.
http://www.investinganswers.com/a/7-red-flags-say-its-time-sell-1987
Few investors have an unlimited supply of money to keep buying new stocks. So to maintain a healthy dose of cash for the next stock purchase, most investors need to keep an eye out for opportunities to sell existing holdings (hopefully with a nice gain).
In some instances, you'll have a clear sense of what a stock is worth, and can simply sell your investment when shares have risen to your target price. But in most instances, no clear-cut exit exists. When that's the case, keep holding your shares as long as business is going well. Just keep monitoring these seven red flags that may signal it's time to sell.
1. Watch the insiders. From time to time, an officer or a director at a company may look to sell shares -- especially if the stock has steadily risen in recent weeks. That's perfectly understandable. But when several of them do so at the same time, you should probably follow their lead. On November 9, three separate insiders at Dreamworks Animation (Nasdaq: DWA) sold a collective 114,000 shares netting them a cool $5 million. If they don't think the stock holds value anymore, why should you?
[History shows that stocks heavily purchased by corporate insiders outperform the broader market averages by roughly 2-to-1. To learn more about this and other market timing techniques, read How to Excel at Timing the Market.]
2. The analyst disconnect. One of the most common mistakes an investor can make is holding onto a stock that seems fishy, but is still liked by analysts. As you listen to a company's quarterly conference call, you may get a sense that business is tumbling, and management is trying to put a positive spin on things. Analysts often buy into that positive spin, and will stick with their Buy ratings as a result. Go with your gut. If you think something is amiss, you are probably right.
3. Industry pressures. It's also important to hear what the competition is saying. If the management of the company in which you are invested says industry conditions are just fine, but a key rival says that business is getting tough, stick with the cautious view. Increasingly difficult conditions at a rival may simply signal company-specific execution problems, but that beleaguered rival may need to take desperate steps such as a price war to maintain sales levels. And in a price war, nobody wins.
4. SEC investigation. You'd be surprised how many investors hang on to a stock after hearing that a company is being investigated by the Securities and Exchange Commission. They're being foolish. In most instances, there is a real problem at hand even as companies typically look to downplay any investigation as seemingly minor. Even in a best case scenario where there is no wrongdoing, investigations can drag on for months, causing a stock to stay out of favor. This is a clear case where it's best to "shoot first and ask questions later."
5. Decelerating sales growth. As a young company grows larger and larger, it's inevitable that sales growth will need to slow down. It's a lot easier to boost sales +40% when you only have $25 million in sales than it is when you have $1 billion in sales. But such a slowdown should be measured and orderly. When sales growth slows sharply, or even turns negative, it could be a sign that a company has hit a serious wall. Management will likely explain any slowdown as a mere hiccup, but you'll need to dig deep to find out the root cause.
6. Shrinking profit margins. The first rule of business is that as sales grow, a company can generate leverage off of its fixed expenses. And that means that profit margins (gross, operating and net) should always be expanding. But if profit margins shrink, even as sales turn higher, then it's a clear sign that a company is losing pricing power. And once profit margins start to slip, they often keep falling as rivals fight harder and harder to steal market share.
7. An abrupt management change. We recently discussed this notion, highlighting the risks that arise when a top member of the management team suddenly departs.
It's not always a cause for alarm, (for example when someone is simply retiring), but you'll want to hear a good explanation of the change, and hopefully about a successor that has already been lined up.
As a good rule of thumb, once you own a stock, you should be looking for reasons to sell. If no such reasons emerge, then you can sit tight on that investment for an extended period. But if any of these seven red flags arise, it may be a clear sign to get while the getting is good.
http://www.investinganswers.com/a/7-red-flags-say-its-time-sell-1987
You've Sold Your Stocks. Now What?
We have just been through a severe market downturn in 2008. Many market players and investors cashed out of their equity portfolio when the market was going down relentlessly. Having cashed out, what did they do with their cash? Did they park it in another asset or remain in cash or its equivalent? Did they re-invest into equity when the market was lower or when the market started to turn?
Timing the market is difficult. To profit from this strategy, you need to buy (or sell) at the "right time" and to sell (or buy) at the "right time" of a particular stock. On what criteria do you determine when is the right time? A profitable trade in a particular stock requires the "timing" of these two actions to be "correct". Let us assume that you are "very good" at timing the market and that each time you buy or sell, you have a high probability of being right 80% of the time. Even with this high probability, the chance of your transaction being profitable for any particular stock is at best only slightly above that of flipping a coin (that is, 80% x 80% = 64%).
In fact, Benjamin Graham has written on this in his classic book, The Intelligent Investor. His suggestion is to abandon timing and to focus on pricing. Buy and sell based on price (valuation). This advice sounds more logical and intelligent too. Those who grasp this concept would have profited hugely.
----
You've Sold Your Stocks. Now What?
Friday, March 13, 2009
Back in the summer of 2007, Ben Mickus, a New York architect, had a bad feeling. He and his wife, Taryn, had invested in the stock market and had done well, but now that they had reached their goal of about $200,000 for a down payment on a house, Mr. Mickus was unsettled. “Things had been very erratic, and there had been a lot of press about the market becoming more chaotic,” he said.
In October of that year they sat down for a serious talk. Ms. Mickus had once lost a lot of money in the tech bubble, and the prospect of losing their down payment made Mr. Mickus nervous. “I wanted to pull everything out then; Taryn wanted to keep it all in,” he said. They compromised, cashing in 60 percent of their stocks that fall — just before the Dow began its slide.
A couple of months later, with the market still falling, Ms. Mickus was convinced that her husband was right, and they sold the remainder of their stocks. Their down payment was almost completely preserved. Ms. Mickus said that in private they had “been feeling pretty smug about it.”
“Now our quandary is, what do we do going forward?” Ms. Mickus said.
Having $200,000 in cash is a problem many people would like to have. But there is yet another worry: it’s no use taking money out of the market at the right time unless it is put back in at the right time. So to get the most from their move, the Mickuses will have to be right twice.
“Market timing requires two smart moves,” said Bruce R. Barton, a financial planner in San Jose, Calif. “Getting out ahead of a drop. And getting back in before the recovery.”
It’s a challenge many investors face, judging from the amount of cash on the sidelines. According to Fidelity Investments, in September 2007 money market accounts made up 15 percent of stock market capitalization in the United States. By December 2008, it was 40 percent.
“In 2008 people took money out of equities and took money out of bond funds,” said Steven Kaplan, a professor at the Booth School of Business at the University of Chicago.
He cited figures showing that in 2007 investors put $93 billion into equity funds. By contrast, in 2008 they took out $230 billion.
Michael Roden, a consultant to the Department of Defense from the Leesburg, Va., area, joined the ranks of the cash rich after a sense of déjà vu washed over him in August 2007, as the markets continued their steep climb. “I had taken quite a bath when the tech bubble burst,” he said. “I would never let that happen again.”
With his 2002 drubbing in mind, he started with some profit taking in the summer of 2007, but as the market turned he kept liquidating his investments in an orderly retreat. But he was not quite fast enough.
“When Bear Stearns went under I realized something was seriously wrong,” he said. The market was still in the 12,000 range at that time. When the Federal Reserve announced it would back Bear Stearns in March 2008, there was a brief market rebound. “I used that rally to get everything else out,” he said.
Mr. Roden said he had taken a 6 percent loss by not liquidating sooner, which still put him ahead of the current total market loss. Now he has about $130,000, with about 10 percent in gold mutual funds, 25 percent in foreign cash funds and the rest in a money market account.
“I am looking for parts of the economy where business is not impaired by the credit crunch or changes in consumer behavior,” he said. He is cautiously watching the energy markets, he said, but his chief strategy is “just trying not to lose money.”
As chief financial officer of Dewberry Capital in Atlanta, a real estate firm managing two million square feet of offices, stores and apartments, Steve Cesinger witnessed the financial collapse up close. Yet it was just a gut feeling that led him to cash out not only 95 percent of his personal equities, but also those of his firm in April 2007.
“I spent a lot of time trying to figure out what was happening in the financial industry, and I came to the conclusion that people weren’t fessing up,” he said. “In fact, they were going the other way.”
Now, he said, “We have cash on our statement, and it’s hard to know what to do with it.”
Having suffered through a real estate market crash in Los Angeles in the early 1990s, Mr. Cesinger is cautious to the point of re-examining the banks where he deposits his cash. “Basically, I’m making sure it’s somewhere it won’t disappear,” he said.
The F.D.I.C. assurance doesn’t give him “a lot of warm and fuzzy,” Mr. Cesinger said. “My recollection is, if the institution goes down, it can take you a while to get your money out. It doesn’t help to know you’ll get it one day if you have to pay your mortgage today.”
His plan is to re-enter the market when it looks safe. Very safe. “I would rather miss the brief rally, be late to the party and be happy with not a 30 percent return, but a bankable 10 percent return,” he said.
Not everyone is satisfied just to stem losses. John Branch, a business consultant in Los Angeles, said his accounts were up 100 percent from short-selling — essentially betting against recovery. “The real killer was, I missed the last leg down on this thing,” Mr. Branch said. “If I hadn’t missed it, I would be up 240 percent.”
Mr. Branch said he had seen signs of a bubble in the summer of 2007 and liquidated his stocks, leaving him with cash well into six figures. Then he waited for his chance to begin shorting. The Dow was overvalued, he said, and ripe for a fall.
Shorting is a risky strategy, which Mr. Branch readily admits. He said he had tried to limit risk by trading rather than investing. He rises at 4:30 a.m., puts his money in the market and sets up his electronic trading so a stock will automatically sell if it falls by one-half of 1 percent. “If it turns against me, I am out quickly,” he said. By 8, he is off to his regular job.
Because Mr. Branch switches his trades daily based on which stocks are changing the fastest, he cannot say in advance where he will put his money.
And if he did know, he’d rather not tell. “I hate giving people financial advice,” he said. “If they make money they might say thank you; if they miss the next run-up, they hate you.”
http://finance.yahoo.com/focus-retirement/article/106735/You
Timing the market is difficult. To profit from this strategy, you need to buy (or sell) at the "right time" and to sell (or buy) at the "right time" of a particular stock. On what criteria do you determine when is the right time? A profitable trade in a particular stock requires the "timing" of these two actions to be "correct". Let us assume that you are "very good" at timing the market and that each time you buy or sell, you have a high probability of being right 80% of the time. Even with this high probability, the chance of your transaction being profitable for any particular stock is at best only slightly above that of flipping a coin (that is, 80% x 80% = 64%).
In fact, Benjamin Graham has written on this in his classic book, The Intelligent Investor. His suggestion is to abandon timing and to focus on pricing. Buy and sell based on price (valuation). This advice sounds more logical and intelligent too. Those who grasp this concept would have profited hugely.
----
You've Sold Your Stocks. Now What?
Friday, March 13, 2009
Back in the summer of 2007, Ben Mickus, a New York architect, had a bad feeling. He and his wife, Taryn, had invested in the stock market and had done well, but now that they had reached their goal of about $200,000 for a down payment on a house, Mr. Mickus was unsettled. “Things had been very erratic, and there had been a lot of press about the market becoming more chaotic,” he said.
In October of that year they sat down for a serious talk. Ms. Mickus had once lost a lot of money in the tech bubble, and the prospect of losing their down payment made Mr. Mickus nervous. “I wanted to pull everything out then; Taryn wanted to keep it all in,” he said. They compromised, cashing in 60 percent of their stocks that fall — just before the Dow began its slide.
A couple of months later, with the market still falling, Ms. Mickus was convinced that her husband was right, and they sold the remainder of their stocks. Their down payment was almost completely preserved. Ms. Mickus said that in private they had “been feeling pretty smug about it.”
“Now our quandary is, what do we do going forward?” Ms. Mickus said.
Having $200,000 in cash is a problem many people would like to have. But there is yet another worry: it’s no use taking money out of the market at the right time unless it is put back in at the right time. So to get the most from their move, the Mickuses will have to be right twice.
“Market timing requires two smart moves,” said Bruce R. Barton, a financial planner in San Jose, Calif. “Getting out ahead of a drop. And getting back in before the recovery.”
It’s a challenge many investors face, judging from the amount of cash on the sidelines. According to Fidelity Investments, in September 2007 money market accounts made up 15 percent of stock market capitalization in the United States. By December 2008, it was 40 percent.
“In 2008 people took money out of equities and took money out of bond funds,” said Steven Kaplan, a professor at the Booth School of Business at the University of Chicago.
He cited figures showing that in 2007 investors put $93 billion into equity funds. By contrast, in 2008 they took out $230 billion.
Michael Roden, a consultant to the Department of Defense from the Leesburg, Va., area, joined the ranks of the cash rich after a sense of déjà vu washed over him in August 2007, as the markets continued their steep climb. “I had taken quite a bath when the tech bubble burst,” he said. “I would never let that happen again.”
With his 2002 drubbing in mind, he started with some profit taking in the summer of 2007, but as the market turned he kept liquidating his investments in an orderly retreat. But he was not quite fast enough.
“When Bear Stearns went under I realized something was seriously wrong,” he said. The market was still in the 12,000 range at that time. When the Federal Reserve announced it would back Bear Stearns in March 2008, there was a brief market rebound. “I used that rally to get everything else out,” he said.
Mr. Roden said he had taken a 6 percent loss by not liquidating sooner, which still put him ahead of the current total market loss. Now he has about $130,000, with about 10 percent in gold mutual funds, 25 percent in foreign cash funds and the rest in a money market account.
“I am looking for parts of the economy where business is not impaired by the credit crunch or changes in consumer behavior,” he said. He is cautiously watching the energy markets, he said, but his chief strategy is “just trying not to lose money.”
As chief financial officer of Dewberry Capital in Atlanta, a real estate firm managing two million square feet of offices, stores and apartments, Steve Cesinger witnessed the financial collapse up close. Yet it was just a gut feeling that led him to cash out not only 95 percent of his personal equities, but also those of his firm in April 2007.
“I spent a lot of time trying to figure out what was happening in the financial industry, and I came to the conclusion that people weren’t fessing up,” he said. “In fact, they were going the other way.”
Now, he said, “We have cash on our statement, and it’s hard to know what to do with it.”
Having suffered through a real estate market crash in Los Angeles in the early 1990s, Mr. Cesinger is cautious to the point of re-examining the banks where he deposits his cash. “Basically, I’m making sure it’s somewhere it won’t disappear,” he said.
The F.D.I.C. assurance doesn’t give him “a lot of warm and fuzzy,” Mr. Cesinger said. “My recollection is, if the institution goes down, it can take you a while to get your money out. It doesn’t help to know you’ll get it one day if you have to pay your mortgage today.”
His plan is to re-enter the market when it looks safe. Very safe. “I would rather miss the brief rally, be late to the party and be happy with not a 30 percent return, but a bankable 10 percent return,” he said.
Not everyone is satisfied just to stem losses. John Branch, a business consultant in Los Angeles, said his accounts were up 100 percent from short-selling — essentially betting against recovery. “The real killer was, I missed the last leg down on this thing,” Mr. Branch said. “If I hadn’t missed it, I would be up 240 percent.”
Mr. Branch said he had seen signs of a bubble in the summer of 2007 and liquidated his stocks, leaving him with cash well into six figures. Then he waited for his chance to begin shorting. The Dow was overvalued, he said, and ripe for a fall.
Shorting is a risky strategy, which Mr. Branch readily admits. He said he had tried to limit risk by trading rather than investing. He rises at 4:30 a.m., puts his money in the market and sets up his electronic trading so a stock will automatically sell if it falls by one-half of 1 percent. “If it turns against me, I am out quickly,” he said. By 8, he is off to his regular job.
Because Mr. Branch switches his trades daily based on which stocks are changing the fastest, he cannot say in advance where he will put his money.
And if he did know, he’d rather not tell. “I hate giving people financial advice,” he said. “If they make money they might say thank you; if they miss the next run-up, they hate you.”
http://finance.yahoo.com/focus-retirement/article/106735/You
UK: Investors told forget savings accounts, think of shares
Investors told forget savings accounts, think of shares
Britain's 38 million savers have been urged to invest their money in the stock market after being warned that for many of them it is now a "waste of time" putting their cash into a savings account.
The FTSE 100 is yielding a better rate of return than most savings accounts Photo: AFP
By Harry Wallop, Consumer Affairs Editor, and Garry White 10:00PM GMT 14 Dec 2010
The warning came after official figures indicated that the cost of living had increased once again in November, making it nearly impossible to earn a real rate of return on any bank or building society savings product.
As the London stock market closed at a two-and-a-half-year high, experts said that for many savers taking the risk of abandoning a deposit account and placing it in a high-yielding collection of shares was a more sensible option.
The dearth of decent savings products was laid bare by figures from the personal finance website Moneyfacts which showed that there were just three accounts – out of a total of 2,203 on the market – that paid a real rate of return, and only one for higher-rate taxpayers.
Darius McDermott, the managing director of Chelsea Financial Services, an independent financial adviser, said: "The simple fact is if you have £1 and you invest in cash, you will lose out once you take into account tax and inflation. Most savings accounts are just a waste of time.
"But if you put that £1 into to a good high-yielding fund you will make a return. Of course your capital could increase or it could fall. That's the risk, but I would put my £1 into equities every single time."
RELATED ARTICLES
The Consumer Prices Index climbed from 3.2 per cent to 3.3 per cent, the Office for National Statistics said, while inflation, as measured by the Retail Prices Index jumped from 4.5 per cent in March to 4.7 per cent in November. The RPI is widely accepted as the truest measure of the cost of living because it includes housing costs.
A sharp jump in the price of clothing and food was blamed, taking economists by surprise, many of whom expected many retailers to cut prices in the run up to Christmas. There are fears inflation will carry on climbing next year because of the incresase in VAT from 17.5 per cent to 20 per cent and higher gas and electricity bills.
Just one account, an Independent Savings Account from Santander, can beat the RPI level of 4.7 per cent, offering a return of 5.5 per cent, but this is only for customers prepared to adhere to strict conditions.
Just two further bonds – a type of fixed-term savings product – offered by the Yorkshire Building Society and Barnsley Building Society offered a real rate of return for basic rate taxpayers, with a rate of 6 per cent.
Two months ago Which?, the consumer watchdog, calculated that the average saver in Britain is missing out on as much as £322 a year because of "pitiful interest" paid by the majority of accounts.
For any investor prepared to take a risk on their capital, the stock market looked a far better option, many experts said.
Mark Dampier, head of research at stockbroker Hargreaves Lansdowne, said: “You need to keep emergency money in the bank, but it’s self-evident that UK income funds are yielding more than bank accounts and these funds look good value at the moment. I am upbeat on prospects for the stock market.”
The yield on the FTSE 100 index of leading shares – the annual rate of return that investors can receive in the form of dividend payments – is 2.9 per cent, with many individual blue chips paying a far higher rate. For example, shares in oil giant Royal Dutch Shell are currently providing a yield of 5.1 per cent, with insurance giant Aviva yielding 6.2 per cent.
If the shares are held in an Individual Savings Account, the income is almost entirely tax-free.
Mr McDermott said: "Savers have to face the truth at the moment. If they have built up a pool of capital over their lifetime and they want to live off the income, putting it cash is the wrong decision."
Last night the FTSE 100 index closed up 30.36 at 5,891.21, the highest level for two and half years, as investors good economic data from America, raising hopes the world's largest economy might avoid a double-dip recession.
Many experts, however, warned that the rising levels of inflation would eat into consumers' disposable income making it far harder to put money aside as savings, be it a bank account or in shares.
The average family will be more than £300 worse off next year, even after receiving a pay rise, because of the impact of rising inflation, a surge in energy bills and a jump in VAT, according to the Centre for Economics and Business Research (CEBR), a think tank.
However, even allowing for a 2.4 per cent pay rise, they will have only £176 to spare each week from January 2011 due to the rising cost of living, the CEBR says, down from £182 at the start of this year. The difference equates to shortfall of £312 a year.
This means that over the course of the year families will be £312 a year worse off, even though the recession has ended and experts forecast the economy to grow steadily.
Official data from the Bank of England has already indicated that savers are putting less money aside each month. The so-called savings ratio – a measure of what proportion of a family's monthly income they save – has fallen from 7.7 per cent a year ago to just 3.2 per cent.
Victoria Mayo, spokesperson for Moneyfacts, said: "Inflation continues to antagonise prudent savers who are already struggling to achieve a competitive return on their money.
"Those who rely on their savings to supplement their income have been hardest hit, many of whom are pensioners."
http://www.telegraph.co.uk/finance/personalfinance/investing/8202251/Investors-told-forget-savings-accounts-think-of-shares.html
Britain's 38 million savers have been urged to invest their money in the stock market after being warned that for many of them it is now a "waste of time" putting their cash into a savings account.
By Harry Wallop, Consumer Affairs Editor, and Garry White 10:00PM GMT 14 Dec 2010
The warning came after official figures indicated that the cost of living had increased once again in November, making it nearly impossible to earn a real rate of return on any bank or building society savings product.
As the London stock market closed at a two-and-a-half-year high, experts said that for many savers taking the risk of abandoning a deposit account and placing it in a high-yielding collection of shares was a more sensible option.
The dearth of decent savings products was laid bare by figures from the personal finance website Moneyfacts which showed that there were just three accounts – out of a total of 2,203 on the market – that paid a real rate of return, and only one for higher-rate taxpayers.
Darius McDermott, the managing director of Chelsea Financial Services, an independent financial adviser, said: "The simple fact is if you have £1 and you invest in cash, you will lose out once you take into account tax and inflation. Most savings accounts are just a waste of time.
"But if you put that £1 into to a good high-yielding fund you will make a return. Of course your capital could increase or it could fall. That's the risk, but I would put my £1 into equities every single time."
RELATED ARTICLES
The Consumer Prices Index climbed from 3.2 per cent to 3.3 per cent, the Office for National Statistics said, while inflation, as measured by the Retail Prices Index jumped from 4.5 per cent in March to 4.7 per cent in November. The RPI is widely accepted as the truest measure of the cost of living because it includes housing costs.
A sharp jump in the price of clothing and food was blamed, taking economists by surprise, many of whom expected many retailers to cut prices in the run up to Christmas. There are fears inflation will carry on climbing next year because of the incresase in VAT from 17.5 per cent to 20 per cent and higher gas and electricity bills.
Just one account, an Independent Savings Account from Santander, can beat the RPI level of 4.7 per cent, offering a return of 5.5 per cent, but this is only for customers prepared to adhere to strict conditions.
Just two further bonds – a type of fixed-term savings product – offered by the Yorkshire Building Society and Barnsley Building Society offered a real rate of return for basic rate taxpayers, with a rate of 6 per cent.
Two months ago Which?, the consumer watchdog, calculated that the average saver in Britain is missing out on as much as £322 a year because of "pitiful interest" paid by the majority of accounts.
For any investor prepared to take a risk on their capital, the stock market looked a far better option, many experts said.
Mark Dampier, head of research at stockbroker Hargreaves Lansdowne, said: “You need to keep emergency money in the bank, but it’s self-evident that UK income funds are yielding more than bank accounts and these funds look good value at the moment. I am upbeat on prospects for the stock market.”
The yield on the FTSE 100 index of leading shares – the annual rate of return that investors can receive in the form of dividend payments – is 2.9 per cent, with many individual blue chips paying a far higher rate. For example, shares in oil giant Royal Dutch Shell are currently providing a yield of 5.1 per cent, with insurance giant Aviva yielding 6.2 per cent.
If the shares are held in an Individual Savings Account, the income is almost entirely tax-free.
Mr McDermott said: "Savers have to face the truth at the moment. If they have built up a pool of capital over their lifetime and they want to live off the income, putting it cash is the wrong decision."
Last night the FTSE 100 index closed up 30.36 at 5,891.21, the highest level for two and half years, as investors good economic data from America, raising hopes the world's largest economy might avoid a double-dip recession.
Many experts, however, warned that the rising levels of inflation would eat into consumers' disposable income making it far harder to put money aside as savings, be it a bank account or in shares.
The average family will be more than £300 worse off next year, even after receiving a pay rise, because of the impact of rising inflation, a surge in energy bills and a jump in VAT, according to the Centre for Economics and Business Research (CEBR), a think tank.
However, even allowing for a 2.4 per cent pay rise, they will have only £176 to spare each week from January 2011 due to the rising cost of living, the CEBR says, down from £182 at the start of this year. The difference equates to shortfall of £312 a year.
This means that over the course of the year families will be £312 a year worse off, even though the recession has ended and experts forecast the economy to grow steadily.
Official data from the Bank of England has already indicated that savers are putting less money aside each month. The so-called savings ratio – a measure of what proportion of a family's monthly income they save – has fallen from 7.7 per cent a year ago to just 3.2 per cent.
Victoria Mayo, spokesperson for Moneyfacts, said: "Inflation continues to antagonise prudent savers who are already struggling to achieve a competitive return on their money.
"Those who rely on their savings to supplement their income have been hardest hit, many of whom are pensioners."
http://www.telegraph.co.uk/finance/personalfinance/investing/8202251/Investors-told-forget-savings-accounts-think-of-shares.html
Is it time to take a chance on shares?
Is it time to take a chance on shares?
With the banks offering pitifully low interest rates, more investors are switching their attention to the stock market, says Ian Cowie.
F&C dropped out of the FTSE 250 earlier this year Photo: AFP
By Ian Cowie 8:27PM GMT 15 Dec 2010
Most people regard inflation as a bad thing, and many may be puzzled about why the stock market is hitting new highs at the same time that inflation is accelerating. The explanation is that while inflation robs savers in bank and building society deposits by reducing the real value or purchasing power of the money they set aside, investors in shares can point to more than a century of evidence that this way of storing wealth can cope with rising inflation by increasing dividends and capital growth.
Savers have good reason to resent being punished for their thrift. Some may feel even worse when they realise that the Government is one of the beneficiaries of inflation, because it not only reduces the real value of savings but also of debts – and the Government is the biggest debtor in Britain.
With a massive deficit in public finances, gradually debauching the currency appears to offer a relatively painless way to float off the rocks of debt. Pensioners are less likely to protest about the stealthy erosion of their savings than younger people are to riot about reduced state handouts or higher interest rates. The problem is that trying to have a little bit of inflation is like trying to get a little bit pregnant; things soon get out of hand.
For example, just over a year ago – in October 2009 – the Retail Prices Index (RPI) measure of inflation was actually negative. The annual rate of change was minus 0.8 per cent and had been minus 1.4 per cent the month before. By contrast, the RPI is now rising at 4.7 per cent.
If that sounds like small beer compared with inflation seen in the 1970s, then beware: even today's rate of erosion would be enough to halve the purchasing power of money in little more than 15 years. That's much less than the 22 years and six months the average man can now expect to spend in retirement, according to the Office for National Statistics. Or the 24 years and eight months that awaits the average woman at retirement. So there is nothing theoretical about the problem inflation presents to pensioners.
Worse still, the Government plans to reduce the indexation – or statutory protection against inflation – that pensioners receive in future. From next April, all public sector pensions will be uprated in line with the Consumer Prices Index (CPI). This produces a lower measure of inflation by excluding mortgage costs and council tax and is currently rising at 3.3 per cent. From April 2012, the Basic State Pension will also switch to CPI.
Cynics argue that rising inflation should come as no surprise, since the Government's main tool for fighting the global credit crunch has been quantitative easing – akin to printing more money. The signs were also there when the Bank of England switched most of its staff pension fund into index-linked or inflation-proofed government gilt-edged stock, as reported by the Telegraph in April last year. And when National Savings & Investments abruptly ceased selling index-linked certificates in July, that removed the only risk-free way for individuals to protect their savings from inflation. Talk about taking the umbrella away, just as it started to rain.
Fortunately, history offers some comfort for those willing to accept varying degrees of risk in order to preserve the purchasing power of their money. According to Barclays Capital, shares reflecting the broad composition of the London Stock Exchange have provided greater real returns than deposits over three quarters of the periods of five consecutive years since 1899. Shares also beat fixed-interest bonds in 75 per cent of all those five-year periods during a century which, remember, included the Great Depression and two World Wars.
While the past is not a guide to the future, the historical evidence shows that the probability of shares doing better than bonds and deposits increased over longer periods. For example, over all the 10-year periods, shares delivered higher returns than deposits 92 per cent of the time, and beat bonds 80 per cent of the time. But shorter term stock market speculators took bigger risks – for example, deposits did better than shares in a third of the periods of two consecutive years.
Against all that, perennial pessimism remains the easiest way to simulate wisdom about stock markets. That's why many experts have been calling the top of this market all the way up. Despite having missed the start of this bull run, they argue that shares are now too high – even though they do not look expensive on some tried-and-tested means of assessing value. The average price of the shares that constitute the FTSE 100 index is now 12 times their average earnings per share. By contrast, the same price/earnings ratio exceeded 31 by the time the FTSE hit its all-time peak of 6,930 in December 1999.
More importantly for income-seeking savers, the average yield – or the dividends paid by shares expressed as a percentage of their price – is now slightly above 3 per cent. But, when prices soared to unsustainable levels a decade ago, the yield on the FTSE 100 slumped to less than 2 per cent.
It's worth stressing that the yield on shares is quoted net of basic rate tax, so 3 per cent net is even more attractive than it may at first appear by comparison with bank deposits, which are quoted before tax. The FTSE 100 yield is also six times Bank of England base rate and, while returns on deposits remain frozen and inflation continues to rise, there is every chance that the FTSE 100 could hit 6,000 soon.
If that sounds far-fetched, here's what I wrote in The Daily Telegraph in August 2009, while the index still languished below 5,000: "After all the worldly-wise men's warnings of a double-dip recession, it should be no surprise to see the FTSE 100 soar. If anything, the continued consensus among most market observers that this remarkable rally has 'gone too far, too fast' should boost our hopes the index will breach 5,000 soon.
"The reason is that economies tend to grow over time and shareholders own the companies that create this wealth. So, medium to long-term savers – like those of us saving toward paying off the mortgage or funding retirement – need not worry too much if share prices fall next month. That might be a problem for fund managers, who must answer to a board of directors every few weeks, and an opportunity for the rest of us.
"Finally, it is worth considering the personal anxiety of many professionals who are now 'short of the market' or holding cash rather than shares. They can only afford to sit and watch prices rise for so long before they feel compelled to join the fun and keep their jobs."
Shares and share-based funds are not as cheap as they were in August last year. But, as more people have come to feel that the credit crunch is not the end of the world after all, the penny has dropped and inflows of capital from bank deposits into the stock market have pushed prices up.
That raises the risk that buyers today could lose money if prices fall. This is a real danger with shares, which means nobody should invest cash they cannot afford to lose in the stock market – and, as mentioned earlier, the shorter your time horizon, the bigger the risks.
Two ways to diminish these risks are to commit funds for five years or more and to diversify.
By contrast, frozen interest rates and rising inflation mean most supposedly risk-free bank and building society deposits are now a certain way to lose money slowly.
There is little point saving if returns fail to match the rate at which inflation erodes the purchasing power of money. So, while shares and share-based funds offer no capital guarantee, rising numbers of people who must live off their savings or use them to supplement pensions should consider some long-term exposure to shares and share-based funds.
http://www.telegraph.co.uk/finance/personalfinance/comment/iancowie/8204914/Is-it-time-to-take-a-chance-on-shares.html
With the banks offering pitifully low interest rates, more investors are switching their attention to the stock market, says Ian Cowie.
By Ian Cowie 8:27PM GMT 15 Dec 2010
Most people regard inflation as a bad thing, and many may be puzzled about why the stock market is hitting new highs at the same time that inflation is accelerating. The explanation is that while inflation robs savers in bank and building society deposits by reducing the real value or purchasing power of the money they set aside, investors in shares can point to more than a century of evidence that this way of storing wealth can cope with rising inflation by increasing dividends and capital growth.
Savers have good reason to resent being punished for their thrift. Some may feel even worse when they realise that the Government is one of the beneficiaries of inflation, because it not only reduces the real value of savings but also of debts – and the Government is the biggest debtor in Britain.
With a massive deficit in public finances, gradually debauching the currency appears to offer a relatively painless way to float off the rocks of debt. Pensioners are less likely to protest about the stealthy erosion of their savings than younger people are to riot about reduced state handouts or higher interest rates. The problem is that trying to have a little bit of inflation is like trying to get a little bit pregnant; things soon get out of hand.
For example, just over a year ago – in October 2009 – the Retail Prices Index (RPI) measure of inflation was actually negative. The annual rate of change was minus 0.8 per cent and had been minus 1.4 per cent the month before. By contrast, the RPI is now rising at 4.7 per cent.
If that sounds like small beer compared with inflation seen in the 1970s, then beware: even today's rate of erosion would be enough to halve the purchasing power of money in little more than 15 years. That's much less than the 22 years and six months the average man can now expect to spend in retirement, according to the Office for National Statistics. Or the 24 years and eight months that awaits the average woman at retirement. So there is nothing theoretical about the problem inflation presents to pensioners.
RELATED ARTICLES
Worse still, the Government plans to reduce the indexation – or statutory protection against inflation – that pensioners receive in future. From next April, all public sector pensions will be uprated in line with the Consumer Prices Index (CPI). This produces a lower measure of inflation by excluding mortgage costs and council tax and is currently rising at 3.3 per cent. From April 2012, the Basic State Pension will also switch to CPI.
Cynics argue that rising inflation should come as no surprise, since the Government's main tool for fighting the global credit crunch has been quantitative easing – akin to printing more money. The signs were also there when the Bank of England switched most of its staff pension fund into index-linked or inflation-proofed government gilt-edged stock, as reported by the Telegraph in April last year. And when National Savings & Investments abruptly ceased selling index-linked certificates in July, that removed the only risk-free way for individuals to protect their savings from inflation. Talk about taking the umbrella away, just as it started to rain.
Fortunately, history offers some comfort for those willing to accept varying degrees of risk in order to preserve the purchasing power of their money. According to Barclays Capital, shares reflecting the broad composition of the London Stock Exchange have provided greater real returns than deposits over three quarters of the periods of five consecutive years since 1899. Shares also beat fixed-interest bonds in 75 per cent of all those five-year periods during a century which, remember, included the Great Depression and two World Wars.
While the past is not a guide to the future, the historical evidence shows that the probability of shares doing better than bonds and deposits increased over longer periods. For example, over all the 10-year periods, shares delivered higher returns than deposits 92 per cent of the time, and beat bonds 80 per cent of the time. But shorter term stock market speculators took bigger risks – for example, deposits did better than shares in a third of the periods of two consecutive years.
Against all that, perennial pessimism remains the easiest way to simulate wisdom about stock markets. That's why many experts have been calling the top of this market all the way up. Despite having missed the start of this bull run, they argue that shares are now too high – even though they do not look expensive on some tried-and-tested means of assessing value. The average price of the shares that constitute the FTSE 100 index is now 12 times their average earnings per share. By contrast, the same price/earnings ratio exceeded 31 by the time the FTSE hit its all-time peak of 6,930 in December 1999.
More importantly for income-seeking savers, the average yield – or the dividends paid by shares expressed as a percentage of their price – is now slightly above 3 per cent. But, when prices soared to unsustainable levels a decade ago, the yield on the FTSE 100 slumped to less than 2 per cent.
It's worth stressing that the yield on shares is quoted net of basic rate tax, so 3 per cent net is even more attractive than it may at first appear by comparison with bank deposits, which are quoted before tax. The FTSE 100 yield is also six times Bank of England base rate and, while returns on deposits remain frozen and inflation continues to rise, there is every chance that the FTSE 100 could hit 6,000 soon.
If that sounds far-fetched, here's what I wrote in The Daily Telegraph in August 2009, while the index still languished below 5,000: "After all the worldly-wise men's warnings of a double-dip recession, it should be no surprise to see the FTSE 100 soar. If anything, the continued consensus among most market observers that this remarkable rally has 'gone too far, too fast' should boost our hopes the index will breach 5,000 soon.
"The reason is that economies tend to grow over time and shareholders own the companies that create this wealth. So, medium to long-term savers – like those of us saving toward paying off the mortgage or funding retirement – need not worry too much if share prices fall next month. That might be a problem for fund managers, who must answer to a board of directors every few weeks, and an opportunity for the rest of us.
"Finally, it is worth considering the personal anxiety of many professionals who are now 'short of the market' or holding cash rather than shares. They can only afford to sit and watch prices rise for so long before they feel compelled to join the fun and keep their jobs."
Shares and share-based funds are not as cheap as they were in August last year. But, as more people have come to feel that the credit crunch is not the end of the world after all, the penny has dropped and inflows of capital from bank deposits into the stock market have pushed prices up.
That raises the risk that buyers today could lose money if prices fall. This is a real danger with shares, which means nobody should invest cash they cannot afford to lose in the stock market – and, as mentioned earlier, the shorter your time horizon, the bigger the risks.
Two ways to diminish these risks are to commit funds for five years or more and to diversify.
By contrast, frozen interest rates and rising inflation mean most supposedly risk-free bank and building society deposits are now a certain way to lose money slowly.
There is little point saving if returns fail to match the rate at which inflation erodes the purchasing power of money. So, while shares and share-based funds offer no capital guarantee, rising numbers of people who must live off their savings or use them to supplement pensions should consider some long-term exposure to shares and share-based funds.
http://www.telegraph.co.uk/finance/personalfinance/comment/iancowie/8204914/Is-it-time-to-take-a-chance-on-shares.html
Thursday, 16 December 2010
Secrets of successful investing by former king of remisiers: Prospect, Patience and Invest for Long-Term.
Secrets of successful investing by former king of remisiers
Peter Lim, also know as former King of Remisier.
His secrets are...... Prospect, Patience and Invest for Long-Term.
He looks at sectors.
If palm oil is good, then invest in palm oil sector.
Another key reason for his success, according to him, is Patience.
He does not subscribe to buying one day and selling the next to cash in.
His advice is to invest with a longer-term mindset. Buy a good stock and leave it for 10 years, the return can be many times.
His minimum length of investments are five to six years, or even 10 to 12 years.
Palm oil giant Wilmar International,, which he invested with US$10 millions in the early '90s. It is worth some US$700m now.
He is a Singaporean, and popularly known as the former king of remisiers, made his fortune as a successful stockbroker in Singapore in the 1980s..
Recently he made headline in UK football arena by offering to buy Liverpool football club which he failed. Subsequently the club was bought by American.
Peter Lim, also know as former King of Remisier.
His secrets are...... Prospect, Patience and Invest for Long-Term.
He looks at sectors.
If palm oil is good, then invest in palm oil sector.
Another key reason for his success, according to him, is Patience.
He does not subscribe to buying one day and selling the next to cash in.
His advice is to invest with a longer-term mindset. Buy a good stock and leave it for 10 years, the return can be many times.
His minimum length of investments are five to six years, or even 10 to 12 years.
Palm oil giant Wilmar International,, which he invested with US$10 millions in the early '90s. It is worth some US$700m now.
He is a Singaporean, and popularly known as the former king of remisiers, made his fortune as a successful stockbroker in Singapore in the 1980s..
Recently he made headline in UK football arena by offering to buy Liverpool football club which he failed. Subsequently the club was bought by American.
Wednesday, 15 December 2010
Top Glove Corporation Berhad
Date announced 15-Dec-10
Quarter 30/11/2010 Qtr 1 FYE 31/08/2011
STOCK TOPGLOV C0DE 7113
Price $ 5.45 Curr. PE (ttm) 15.33 Curr. DY 2.94%
LFY Div 16.00 DPO ratio 39%
ROE 18.7% PBT Margin 9.0% PAT Margin 7.3%
Rec. qRev 491509 q-q % chg -9% y-y% chq 4%
Rec qPbt 44405 q-q % chg 5% y-y% chq -49%
Rec. qEps 5.83 q-q % chg -20% y-y% chq -47%
ttm-Eps 35.56 q-q % chg -13% y-y% chq 5%
Using VERY CONSERVATIVE ESTIMATES:
EPS GR 5% Avg.H PE 13.00 Avg. L PE 9.00
Forecast High Pr 5.90 Forecast Low Pr 4.25 Recent Severe Low Pr 4.25
Current price is at Upper 1/3 of valuation zone.
RISK: Upside 27% Downside 73%
One Year Appreciation Potential 2% Avg. yield 3%
Avg. Total Annual Potential Return (over next 5 years) 5%
CPE/SPE 1.39 P/NTA 2.87 NTA 1.90 SPE 11.00 Rational Pr 3.91
Decision:
Already Owned: Buy Hold Sell Filed Review (future acq): Filed Discard: Filed
Guide: Valuation zones Lower 1/3 Buy Mid. 1/3 Maybe Upper 1/3 Sell
Aim:
To Buy a bargain: Buy at Lower 1/3 of Valuation Zone
To Minimise risk of Loss: Buy when risk is low i.e UPSIDE GAIN > 75% OR DOWNSIDE RISK <25%
To Double every 5 years: Seek for POTENTIAL RETURN of > 15%/yr.
To Prevent Loss: Sell immediately when fundamentals deteriorate
To Maximise Gain & Reduce Loss: Sell when CPE/SPE > 1.5, when in Upper 1/3 of Valuation Zone & Returns < 15%/yr
Stock Data: Recent Stock Performance:
Current Price (12/10/2010): 5.52
(Figures in Malaysian Ringgits)
1 Week -1.4% 13 Weeks 0.7%
4 Weeks -2.8% 52 Weeks 20.0%
Top Glove Corporation Berhad Key Data:
Ticker: TOPGLOV Country: MALAYSIA
Exchanges: KUL Major Industry: Apparel & Textiles
Sub Industry: Apparel Manufacturers
2010 Sales 2,079,432,000
(Year Ending Jan 2011). Employees: 11,500
Currency: Malaysian Ringgits Market Cap: 3,413,203,680
Fiscal Yr Ends: August Shares Outstanding: 618,334,000
Share Type: Ordinary Closely Held Shares: 267,967,762
Day's Range: 5.35 - 5.40
52wk Range: 4.98 - 14.54
Volume: 758,200
The 5 Most Dangerous Places to Get Investing Advice
By Hans Wagner Tuesday, November 16, 2010
Where do you get your stock investing ideas? Inspiration can come from many places, and while some resources make a lot of sense, others are a sure path to financial ruin. Here is my list of the five most dangerous places to get your investing advice.
1) Internet Message Boards
If you're currently turning to an online message board for investing advice, stop right now. The people posting on these web forums are notorious for making over-the-top predictions with little, if any, rationale supporting their claims.
The majority of posts can be broken down into a few categories: baseless claims, bragging, spam, and name-calling.
But the biggest problem with online investing message boards is the rampant manipulation. Some users post comments to purposefully manipulate the trading activity in their favor. For many companies, especially those lightly traded, it might be possible for the right comments to move the stock price in one direction or the other.
There are even cases where executives of companies use the message boards to influence the price of a stock by making inappropriate comments. Papers filed by the FTC revealed that for several years Whole Foods Market (NASDAQ: WFMI) CEO John Mackey posted highly opinionated comments under the pseudonym "Rahodeb" on a Yahoo! Finance message board.
Investors who make buy and sell decisions based on the message boards are playing a dangerous game.
2) Penny Stock Spammers
Right up there with the internet message boards are those annoying emails claiming that some new discovery (still widely unknown to the media) is about to send this $1.00 stock soaring into the stratosphere, quickly making millionaires out of anyone who buys shares.
That'd be fine, except for there's never very much information to substantiate the claim. But these emails are still going around, so someone must be taking the bait.
3) Hot Stock Tips
These aren't quite as bad as the penny stock spam emails, but that's not really saying a lot. These messages, usually filled with exciting language and testimonials from other investors, claim to have some inside information that, once disclosed, will make the stock double in price. According to the "researchers," only a crazy person would turn down such a sure-fire offer.
But the reality is if they did have inside information then someone has broken the law by disclosing it. Yet just like the penny stock spam, these hot tips don't ever seem to stop finding their ways into people's inboxes and mailboxes. While hot stock tips might be interesting, do yourself a favor and carry out the necessary research before making a commitment.
4) The Inexperienced Advisor Making a Commission on Their Sales
Would you take the advice of someone who was just beginning to understand stocks and the stock market? Can a newly minted broker address all of your questions in a thorough and complete manner? I know each broker must start somewhere, just be careful of the newbie who is selling what the firm is pushing.
Any time you rely on a broker's advice (regardless of their experience), remember to ask yourself if their suggestions are really right for your portfolio. This is especially true if the broker receives a commission each time he or she makes a sale. In Little White Lies from Your Broker, Amy Calistri urges investors to be wary whenever a broker is pushing a stock. "...Sometimes, a firm decides that its traders hold too much of a certain stock. And guess who has been told to help get rid of those shares? The broker." [Even the most well-intentioned brokers don't always deliver the straight scoop. Read Little White Lies from Your Broker to find out if your broker is watching your back.]
If you want to use a broker or advisor, be sure their interests align with yours. Many quality advisors do a commendable job. Most of them structure their compensation around your success, whether it is a straight fee or based on performance.
5) Financial News Networks
Don't get me wrong, I like CNBC and Bloomberg. They provide a quality product that includes views from each side of an investing issue. Many of their guests are very successful investors who deserve attention.
The problem arises whenever they recommend a stock -- many investors enter orders immediately. In some cases, you can see the price jump up on the ticker at the bottom of the TV. With millions of viewers, any comment on a stock can move the market.
Just because a noted investment advisor thinks a particular company has potential to appreciate, does not mean it is right for you. The traders buying the stock do not understand the fundamentals nor do they have a good entry or exit strategy.
Jim Cramer's Mad Money show is a good example. Jim features several stocks during his show. In each case, he exhorts his listeners to do their homework and not to buy immediately. Yet you can see the price leap up as many followers try to get in on each stock he commends.
The Bottom Line
Consider where your investing advice comes from. Is it from a reliable source? One with a proven track record of accomplishment? Does it fit with your personal view of the market? If you can answer "yes" to each question, AND you've already done your own homework, pat yourself on the back -- you've managed to navigate through the muddy waters of dangerous investing advice.
http://www.investinganswers.com/a/5-most-dangerous-places-get-investing-advice-1980
Where do you get your stock investing ideas? Inspiration can come from many places, and while some resources make a lot of sense, others are a sure path to financial ruin. Here is my list of the five most dangerous places to get your investing advice.
1) Internet Message Boards
If you're currently turning to an online message board for investing advice, stop right now. The people posting on these web forums are notorious for making over-the-top predictions with little, if any, rationale supporting their claims.
The majority of posts can be broken down into a few categories: baseless claims, bragging, spam, and name-calling.
But the biggest problem with online investing message boards is the rampant manipulation. Some users post comments to purposefully manipulate the trading activity in their favor. For many companies, especially those lightly traded, it might be possible for the right comments to move the stock price in one direction or the other.
There are even cases where executives of companies use the message boards to influence the price of a stock by making inappropriate comments. Papers filed by the FTC revealed that for several years Whole Foods Market (NASDAQ: WFMI) CEO John Mackey posted highly opinionated comments under the pseudonym "Rahodeb" on a Yahoo! Finance message board.
Investors who make buy and sell decisions based on the message boards are playing a dangerous game.
2) Penny Stock Spammers
Right up there with the internet message boards are those annoying emails claiming that some new discovery (still widely unknown to the media) is about to send this $1.00 stock soaring into the stratosphere, quickly making millionaires out of anyone who buys shares.
That'd be fine, except for there's never very much information to substantiate the claim. But these emails are still going around, so someone must be taking the bait.
3) Hot Stock Tips
These aren't quite as bad as the penny stock spam emails, but that's not really saying a lot. These messages, usually filled with exciting language and testimonials from other investors, claim to have some inside information that, once disclosed, will make the stock double in price. According to the "researchers," only a crazy person would turn down such a sure-fire offer.
But the reality is if they did have inside information then someone has broken the law by disclosing it. Yet just like the penny stock spam, these hot tips don't ever seem to stop finding their ways into people's inboxes and mailboxes. While hot stock tips might be interesting, do yourself a favor and carry out the necessary research before making a commitment.
4) The Inexperienced Advisor Making a Commission on Their Sales
Would you take the advice of someone who was just beginning to understand stocks and the stock market? Can a newly minted broker address all of your questions in a thorough and complete manner? I know each broker must start somewhere, just be careful of the newbie who is selling what the firm is pushing.
Any time you rely on a broker's advice (regardless of their experience), remember to ask yourself if their suggestions are really right for your portfolio. This is especially true if the broker receives a commission each time he or she makes a sale. In Little White Lies from Your Broker, Amy Calistri urges investors to be wary whenever a broker is pushing a stock. "...Sometimes, a firm decides that its traders hold too much of a certain stock. And guess who has been told to help get rid of those shares? The broker." [Even the most well-intentioned brokers don't always deliver the straight scoop. Read Little White Lies from Your Broker to find out if your broker is watching your back.]
If you want to use a broker or advisor, be sure their interests align with yours. Many quality advisors do a commendable job. Most of them structure their compensation around your success, whether it is a straight fee or based on performance.
5) Financial News Networks
Don't get me wrong, I like CNBC and Bloomberg. They provide a quality product that includes views from each side of an investing issue. Many of their guests are very successful investors who deserve attention.
The problem arises whenever they recommend a stock -- many investors enter orders immediately. In some cases, you can see the price jump up on the ticker at the bottom of the TV. With millions of viewers, any comment on a stock can move the market.
Just because a noted investment advisor thinks a particular company has potential to appreciate, does not mean it is right for you. The traders buying the stock do not understand the fundamentals nor do they have a good entry or exit strategy.
Jim Cramer's Mad Money show is a good example. Jim features several stocks during his show. In each case, he exhorts his listeners to do their homework and not to buy immediately. Yet you can see the price leap up as many followers try to get in on each stock he commends.
The Bottom Line
Consider where your investing advice comes from. Is it from a reliable source? One with a proven track record of accomplishment? Does it fit with your personal view of the market? If you can answer "yes" to each question, AND you've already done your own homework, pat yourself on the back -- you've managed to navigate through the muddy waters of dangerous investing advice.
http://www.investinganswers.com/a/5-most-dangerous-places-get-investing-advice-1980
Tuesday, 14 December 2010
I Will Tell You How to Become Rich: "Be fearful when others are greedy, and greedy when others are fearful."
I Will Tell You How to Become Rich
By Dan Dzombak
December 6, 2010
Wait! Don’t buy yet…
Successful investing starts with a smart watchlist.
"Be fearful when others are greedy, and greedy when others are fearful."
Warren Buffett gave that timeless advice in his 20s while getting his MBA at Columbia, and he's gone on to do very well with it. He avoided the tech-stock bubble of the late '90s, when everyone and their brother got greedy. And in this past downturn, he was able to snap up preferred shares of Goldman Sachs and GE on the cheap while other large investors ran for the hills.
What are investors greedy for now?
Three areas of the stock market have the majority of investors salivating at present:
Tech stocks. This sector holds many examples of bloated valuations. Chinese search giant Baidu (Nasdaq: BIDU) trades for an extraordinary 93 times trailing earnings! While I think the company is unbeatable, I worry about its valuation as an investment.
Dividend stocks. With interest rates low, people are clamoring for anything with high yields. Stocks such as Chimera (NYSE: CIM) and Annaly (NYSE: NLY) now have a fanatical following. While I've seen the case made for why they could be good investments, I still worry. When people are this greedy, disaster's usually not far off. My colleague Matt Koppenheffer believes dividend investing is a fad, but I'd say a more worrisome fad is...
Bonds. Investors are greedy for safety. They're worried about volatility and the markets, and they just want something safe. They couldn't be more wrong. If interest rates rise, they'll be slaughtered as bond prices fall. In fact, fellow fool Amanda Kish is wondering whether the bond bubble just popped. Intelligent investors should be fearful of the herd's lust for safety.
What do investors fear most now?
The best investment opportunities arise when investors are scared. Europe, especially Ireland, seems to top investors' list of phobias today. That said, Fools should tread carefully here, since Ireland has some serious issues with its economy.
I recommend that interested investors look at Ryanair (Nasdaq: RYAAY), Europe's leading discount airline. The firm paid its first dividend in October, and it has a great management team led by the outspoken Michael O'Leary.
After learning that competitor Aer Lingus had turned down a lowball bid from Ryanair for the company, O'Leary said, "It is doubtful that Ryanair will waste any further management time or resources making another offer for Aer Lingus, as its scale and losses will continue to render it increasingly irrelevant in Europe's airline landscape." That's a relatively mild comment, as far as statements from the outspoken CEO go, but it shows O'Leary's commitment to running his company with his own maverick style.
A world of uncertainty
A strange situation arises when investors are both greedy and fearful, as penny stocks can demonstrate. These equities are tiny for good reason -- feared because the companies behind them usually have a real chance of going out of business. Since they are priced so low, though, people's greed sometimes gets the best of them, and many investors decide to purchase "a lottery ticket."
Every now and then, this gamble pays off. Folks who bought Sirius XM (Nasdaq: SIRI) when it languished between $0.05 and $0.10 a share are sitting pretty now. But the verdict's less clear for YRC Worldwide (Nasdaq: YRCW). While it's no longer a "penny stock" in the traditional sense ,after a 1-for-25 reverse split in October, the company still meets the SEC's definition of a penny stock, which "generally refers to low-priced (below $5), speculative securities."
Be wary! For every Sirius, there are 100 carcasses of dead penny stocks like Ambac, Motors Liquidation (bankrupt GM), and Enron.
"... And invest with a margin of safety"
While Buffett didn't say this last part, "margin of safety" is known as the three most important words in investing. It's a very simple concept. Give your assumptions some breathing room, so if they prove wrong, you don't lose much. If you think a stock is worth $20, for example, and it's trading at $18, that's not much of a margin.
This isn't a hard-and-fast rule. The quality of the business and the brand, the strength of the balance sheet, and the size of its future growth opportunity all affect a stock's margin of safety.
WD-40 (Nasdaq: WDFC) is one quality business that many investors often overlook. Everyone knows WD-40; you probably have it on a shelf in your garage or under your sink right now. Here are three reasons why I like it:
Its products are basically the same as the competition's, but its strong brand allows it to charge more for comparable products, earning high returns on equity.
It's a very dependable business. WD-40 has a place in Americans' minds as being dependable and cheap. This is reflected in WD-40's 80% share of the U.S. consumer oil & lubricants market.
The balance sheet is rock solid. WD-40 has been paying down debt since 2002, leaving nearly none left. Once the debt is gone, the business will be able to reinvest the extra cash or increase its dividend, which currently stands at a healthy 2.7% yield.
http://www.fool.com/investing/general/2010/12/06/i-will-tell-you-how-to-become-rich.aspx
By Dan Dzombak
December 6, 2010
Wait! Don’t buy yet…
Successful investing starts with a smart watchlist.
"Be fearful when others are greedy, and greedy when others are fearful."
Warren Buffett gave that timeless advice in his 20s while getting his MBA at Columbia, and he's gone on to do very well with it. He avoided the tech-stock bubble of the late '90s, when everyone and their brother got greedy. And in this past downturn, he was able to snap up preferred shares of Goldman Sachs and GE on the cheap while other large investors ran for the hills.
What are investors greedy for now?
Three areas of the stock market have the majority of investors salivating at present:
Tech stocks. This sector holds many examples of bloated valuations. Chinese search giant Baidu (Nasdaq: BIDU) trades for an extraordinary 93 times trailing earnings! While I think the company is unbeatable, I worry about its valuation as an investment.
Dividend stocks. With interest rates low, people are clamoring for anything with high yields. Stocks such as Chimera (NYSE: CIM) and Annaly (NYSE: NLY) now have a fanatical following. While I've seen the case made for why they could be good investments, I still worry. When people are this greedy, disaster's usually not far off. My colleague Matt Koppenheffer believes dividend investing is a fad, but I'd say a more worrisome fad is...
Bonds. Investors are greedy for safety. They're worried about volatility and the markets, and they just want something safe. They couldn't be more wrong. If interest rates rise, they'll be slaughtered as bond prices fall. In fact, fellow fool Amanda Kish is wondering whether the bond bubble just popped. Intelligent investors should be fearful of the herd's lust for safety.
What do investors fear most now?
The best investment opportunities arise when investors are scared. Europe, especially Ireland, seems to top investors' list of phobias today. That said, Fools should tread carefully here, since Ireland has some serious issues with its economy.
I recommend that interested investors look at Ryanair (Nasdaq: RYAAY), Europe's leading discount airline. The firm paid its first dividend in October, and it has a great management team led by the outspoken Michael O'Leary.
After learning that competitor Aer Lingus had turned down a lowball bid from Ryanair for the company, O'Leary said, "It is doubtful that Ryanair will waste any further management time or resources making another offer for Aer Lingus, as its scale and losses will continue to render it increasingly irrelevant in Europe's airline landscape." That's a relatively mild comment, as far as statements from the outspoken CEO go, but it shows O'Leary's commitment to running his company with his own maverick style.
A world of uncertainty
A strange situation arises when investors are both greedy and fearful, as penny stocks can demonstrate. These equities are tiny for good reason -- feared because the companies behind them usually have a real chance of going out of business. Since they are priced so low, though, people's greed sometimes gets the best of them, and many investors decide to purchase "a lottery ticket."
Every now and then, this gamble pays off. Folks who bought Sirius XM (Nasdaq: SIRI) when it languished between $0.05 and $0.10 a share are sitting pretty now. But the verdict's less clear for YRC Worldwide (Nasdaq: YRCW). While it's no longer a "penny stock" in the traditional sense ,after a 1-for-25 reverse split in October, the company still meets the SEC's definition of a penny stock, which "generally refers to low-priced (below $5), speculative securities."
Be wary! For every Sirius, there are 100 carcasses of dead penny stocks like Ambac, Motors Liquidation (bankrupt GM), and Enron.
"... And invest with a margin of safety"
While Buffett didn't say this last part, "margin of safety" is known as the three most important words in investing. It's a very simple concept. Give your assumptions some breathing room, so if they prove wrong, you don't lose much. If you think a stock is worth $20, for example, and it's trading at $18, that's not much of a margin.
This isn't a hard-and-fast rule. The quality of the business and the brand, the strength of the balance sheet, and the size of its future growth opportunity all affect a stock's margin of safety.
WD-40 (Nasdaq: WDFC) is one quality business that many investors often overlook. Everyone knows WD-40; you probably have it on a shelf in your garage or under your sink right now. Here are three reasons why I like it:
Its products are basically the same as the competition's, but its strong brand allows it to charge more for comparable products, earning high returns on equity.
It's a very dependable business. WD-40 has a place in Americans' minds as being dependable and cheap. This is reflected in WD-40's 80% share of the U.S. consumer oil & lubricants market.
The balance sheet is rock solid. WD-40 has been paying down debt since 2002, leaving nearly none left. Once the debt is gone, the business will be able to reinvest the extra cash or increase its dividend, which currently stands at a healthy 2.7% yield.
http://www.fool.com/investing/general/2010/12/06/i-will-tell-you-how-to-become-rich.aspx
At the end of these 700 words you will all be able to value your business, your shares, your investment property, even your spouse.
Doing the sums is is easy, but it's still a value judgment
December 11, 2010
YOU may have heard of a discounted cash-flow valuation. You should have. It is core to life, the financial industry and everything else. But, of course, half of us haven't and the other half are too afraid to ask.
So in a mild attempt to educate you, let me take you gently through it so you'll never have to nod cluelessly again. At the end of these 700 words you will all be able to value your business, your shares, your investment property, even your spouse.
Let's start with this. What is the value of a dollar? Well it's a dollar, of course. OK. So what is the value of a dollar in a year's time? Ah, well, it's not a dollar. And this is the issue. Thanks to inflation, a dollar in a year's time is only worth about 97¢ because, by the time you get the dollar, prices will have gone up by about 3 per cent, so the dollar in a year's time will only buy you about 97¢ worth of the goods that you could buy today.
We can now use this to value a company, an asset or an individual. All you have to do is work out how much money they are going to earn and, using inflation, turn those future dollars back into today's money, add them all up, add in the value of any other assets they have and that's what they are worth.
Here's the root calculation: A dollar earned in a year's time is worth $1 divided by 1.03 (1 plus the inflation rate). That's 97¢ in today's money (97.08¢, actually). To work out the current value of a dollar earned in two years you divide by 1.03 and divide by 1.03 again. Which gives us 94.26¢. So 94.26¢ is all you would want to pay for a dollar someone is going to give you in two years' time. So to bust a bit of jargon, the net present value (NPV) of a dollar earned in two years' time, discounted at the rate of inflation, is 94.26¢.
So now let's value a company.
So you can see that by forecasting future profits and discounting the value of future profits back to today's money you can value almost any income-producing company, asset, property, or person. You can even work out what your own net present value is. If you spend more than you earn, it's zero.
So this is what research analysts do with shares. They forecast profits, discount those profits back to today's money, add them all up, account for any other assets, divide by the number of shares on issue and come up with what a share is worth. A lot of them call that a ''target price''.
Of course, it's not quite this simple. In the real world they don't use inflation. They calculate a ''discount rate'' and the arguments over what discount rate to use are endless, but basically, rather than inflation, it is what you could have earned investing your money somewhere else. It is the opportunity lost, not the inflation cost. So if you could have put the money in a bond for 10 years and earned 5.5 per cent you'd use that instead of inflation.
So that's it. How to value a company or share. Nice concept.
But before you go out and value your spouse you should know that it's all complete bollocks. Of course it is. Because, in the end, there are so many forecasts, assumptions and subjective opinions integrated into the calculation of value that it ceases to be a science and ends up an imperfect art. A basis for the negotiation of price at best. A starting point for an argument between buyer and seller. May the best negotiator win. And that's the sharemarket.
Marcus Padley is a stockbroker with Patersons Securities and the author of sharemarket newsletter Marcus Today. For a free trial visit marcustoday. com.au
His views do not necessarily reflect the views of Patersons.
http://www.theage.com.au/business/doing-the-sums-is-is-easy-but-its-still-a-value-judgment-20101210-18swe.html
December 11, 2010
YOU may have heard of a discounted cash-flow valuation. You should have. It is core to life, the financial industry and everything else. But, of course, half of us haven't and the other half are too afraid to ask.
So in a mild attempt to educate you, let me take you gently through it so you'll never have to nod cluelessly again. At the end of these 700 words you will all be able to value your business, your shares, your investment property, even your spouse.
Let's start with this. What is the value of a dollar? Well it's a dollar, of course. OK. So what is the value of a dollar in a year's time? Ah, well, it's not a dollar. And this is the issue. Thanks to inflation, a dollar in a year's time is only worth about 97¢ because, by the time you get the dollar, prices will have gone up by about 3 per cent, so the dollar in a year's time will only buy you about 97¢ worth of the goods that you could buy today.
We can now use this to value a company, an asset or an individual. All you have to do is work out how much money they are going to earn and, using inflation, turn those future dollars back into today's money, add them all up, add in the value of any other assets they have and that's what they are worth.
Here's the root calculation: A dollar earned in a year's time is worth $1 divided by 1.03 (1 plus the inflation rate). That's 97¢ in today's money (97.08¢, actually). To work out the current value of a dollar earned in two years you divide by 1.03 and divide by 1.03 again. Which gives us 94.26¢. So 94.26¢ is all you would want to pay for a dollar someone is going to give you in two years' time. So to bust a bit of jargon, the net present value (NPV) of a dollar earned in two years' time, discounted at the rate of inflation, is 94.26¢.
So now let's value a company.
- Step one: Forecast how much profit it will make each year between now and eternity.
- Step two: Use our calculation to ''discount'' all those future profits and price them in today's money.
- Step three: Add up all those discounted profits.
- Step four: Add any other assets (cash and buildings). That's the current value of the company and what someone buying the company should be prepared to pay today.
So you can see that by forecasting future profits and discounting the value of future profits back to today's money you can value almost any income-producing company, asset, property, or person. You can even work out what your own net present value is. If you spend more than you earn, it's zero.
So this is what research analysts do with shares. They forecast profits, discount those profits back to today's money, add them all up, account for any other assets, divide by the number of shares on issue and come up with what a share is worth. A lot of them call that a ''target price''.
Of course, it's not quite this simple. In the real world they don't use inflation. They calculate a ''discount rate'' and the arguments over what discount rate to use are endless, but basically, rather than inflation, it is what you could have earned investing your money somewhere else. It is the opportunity lost, not the inflation cost. So if you could have put the money in a bond for 10 years and earned 5.5 per cent you'd use that instead of inflation.
So that's it. How to value a company or share. Nice concept.
But before you go out and value your spouse you should know that it's all complete bollocks. Of course it is. Because, in the end, there are so many forecasts, assumptions and subjective opinions integrated into the calculation of value that it ceases to be a science and ends up an imperfect art. A basis for the negotiation of price at best. A starting point for an argument between buyer and seller. May the best negotiator win. And that's the sharemarket.
Marcus Padley is a stockbroker with Patersons Securities and the author of sharemarket newsletter Marcus Today. For a free trial visit marcustoday. com.au
His views do not necessarily reflect the views of Patersons.
http://www.theage.com.au/business/doing-the-sums-is-is-easy-but-its-still-a-value-judgment-20101210-18swe.html
Monday, 13 December 2010
Don't Be Misled By the P/E Ratio. It's actually growth that determines value.
By Nathan Slaughter Thursday, March 25, 2010
You might know the name Bill Miller. Aside from Warren Buffett, he could be the closest thing the investment world has to a rock star.
Every year, millions of investors set out with one goal in mind: to outperform the S&P 500. Miller's Legg Mason Value Trust did that for an impressive 15 years in a row.
That streak was finally broken in 2006, but his reputation was firmly cemented at that point. From his fund's inception in April 1982 until 2006, Miller steered his fund to annualized gains of +16%. That was good enough to turn a $10,000 investment into $395,000 -- about $156,000 more than a broad index fund would have returned.
After a long overdue slump, Miller's fund is back on top of the charts again. In fact, his fund's +47% gain during 2009 was 1,200 basis points ahead of the S&P 500.
Here's what you might not know. Miller achieved stardom and ran circles around other value fund managers by taking large stakes in companies like eBay (Nasdaq: EBAY), Google (Nasdaq: GOOG), and Amazon.com (Nasdaq: AMZN) -- highfliers that value purists wouldn't touch because of their high P/E ratios.
The message is clear: If P/E ratios are your only value barometer, then get ready to let some profits slip through your fingers. In fact, Investor's Business Daily has found that some of the market's biggest winners were trading at prices above 30 times earnings before they made their move.
All too often, novice investors buy into preconceived notions of what's cheap and what's expensive. A stock with a P/E below 10 may be a better deal than another trading at a P/E above 20. But then again it might not. These figures might get you in the ballpark -- but biting hook, line and sinker can cost you big.
Putting aside the fact that earnings can be inflated by asset sales, deflated by one-time charges, and distorted in other ways, let's remember that today is just a brief snapshot in time.
The point is, when you become a part owner in a company, you have a claim not just on today's earnings, but all future profits as well. The faster the company is growing, the more that future cash flow stream is worth to shareholders.
That's why Warren Buffett likes to say that "growth and value are joined at the hip."
You can't encapsulate the inherent value of a business in a P/E ratio. Take Amazon, for example, which has traded at 66 times earnings on average during the past five years. On occasion, the stock has garnered multiples above 80. Many looked at that figure and immediately dismissed the company as exorbitantly overpriced. And for most companies that would be true.
But as it turns out, the shares were actually cheap relative to what the e-commerce giant would soon become. In fact, the "expensive" $35 price tag from March 2005 is only about 12 times what the company earns per share now -- and guys like Bill Miller that spotted the firm's potential have since enjoyed +230% gains.
Digging into the annual report archives, I see where CEO Jeff Bezos applauded Amazon's sales of $148 million in 1997. Today, the firm rakes in that amount every 2.2 days. Clearly, that type of hyper-growth deserves a premium price.
And that's exactly why price-conscious value investors shouldn't automatically fear growth stocks -- growth is simply a component of value.
Let me show you an example. The table below depicts the impact of future cash flow growth assumptions on Company XYZ which trades today at $10. For the sake of consistency, we will keep all other variables constant.
If free cash flow climb at a modest +6% annual pace during the next five years, then your $10 investment in Company XYZ would be worth about $13.30 per share or a +33.0% return. If cash flow grows even faster, its projected value quickly ramps up to returns of +46.9%, +101.1% or even +148.8%.
We've been taught to believe there's an invisible velvet rope separating value stocks from growth stocks. But as you can see with Company XYZ, it's actually growth that determines value. So don't be blinded to the possibility that the market's most promising growth stocks can sometimes be the cheapest.
Many analysts choose to use the Price/Earnings to Growth (PEG) ratio in addition to the P/E ratio. PEG is a simple calculation -- (P/E) / (Annual Earnings Growth Rate).
The PEG ratio is used to evaluate a stock's valuation while taking into account earnings growth. A rule of thumb is that a PEG of 1.0 indicates fair value, less than 1.0 indicates the stock is undervalued, and more than 1.0 indicates it's overvalued. Here's how it works:
If Stock ABC is trading with a P/E ratio of 25, a value investor might deem it "expensive." But if its earnings growth rate is projected to be 30%, its PEG ratio would be 25 / 30 PEG.83. The PEG ratio says that Stock ABC is undervalued relative to its growth potential.
It is important to realize that relying on one metric alone will almost never give you an accurate measure of value. Being able to use and interpret a number of measures will give you a better idea of the whole picture when evaluating a stock's performance and potential.
http://www.investinganswers.com/education/dont-be-misled-pe-ratio-1115
You might know the name Bill Miller. Aside from Warren Buffett, he could be the closest thing the investment world has to a rock star.
Every year, millions of investors set out with one goal in mind: to outperform the S&P 500. Miller's Legg Mason Value Trust did that for an impressive 15 years in a row.
That streak was finally broken in 2006, but his reputation was firmly cemented at that point. From his fund's inception in April 1982 until 2006, Miller steered his fund to annualized gains of +16%. That was good enough to turn a $10,000 investment into $395,000 -- about $156,000 more than a broad index fund would have returned.
After a long overdue slump, Miller's fund is back on top of the charts again. In fact, his fund's +47% gain during 2009 was 1,200 basis points ahead of the S&P 500.
Here's what you might not know. Miller achieved stardom and ran circles around other value fund managers by taking large stakes in companies like eBay (Nasdaq: EBAY), Google (Nasdaq: GOOG), and Amazon.com (Nasdaq: AMZN) -- highfliers that value purists wouldn't touch because of their high P/E ratios.
The message is clear: If P/E ratios are your only value barometer, then get ready to let some profits slip through your fingers. In fact, Investor's Business Daily has found that some of the market's biggest winners were trading at prices above 30 times earnings before they made their move.
All too often, novice investors buy into preconceived notions of what's cheap and what's expensive. A stock with a P/E below 10 may be a better deal than another trading at a P/E above 20. But then again it might not. These figures might get you in the ballpark -- but biting hook, line and sinker can cost you big.
Putting aside the fact that earnings can be inflated by asset sales, deflated by one-time charges, and distorted in other ways, let's remember that today is just a brief snapshot in time.
The point is, when you become a part owner in a company, you have a claim not just on today's earnings, but all future profits as well. The faster the company is growing, the more that future cash flow stream is worth to shareholders.
That's why Warren Buffett likes to say that "growth and value are joined at the hip."
You can't encapsulate the inherent value of a business in a P/E ratio. Take Amazon, for example, which has traded at 66 times earnings on average during the past five years. On occasion, the stock has garnered multiples above 80. Many looked at that figure and immediately dismissed the company as exorbitantly overpriced. And for most companies that would be true.
But as it turns out, the shares were actually cheap relative to what the e-commerce giant would soon become. In fact, the "expensive" $35 price tag from March 2005 is only about 12 times what the company earns per share now -- and guys like Bill Miller that spotted the firm's potential have since enjoyed +230% gains.
Digging into the annual report archives, I see where CEO Jeff Bezos applauded Amazon's sales of $148 million in 1997. Today, the firm rakes in that amount every 2.2 days. Clearly, that type of hyper-growth deserves a premium price.
And that's exactly why price-conscious value investors shouldn't automatically fear growth stocks -- growth is simply a component of value.
Let me show you an example. The table below depicts the impact of future cash flow growth assumptions on Company XYZ which trades today at $10. For the sake of consistency, we will keep all other variables constant.
If free cash flow climb at a modest +6% annual pace during the next five years, then your $10 investment in Company XYZ would be worth about $13.30 per share or a +33.0% return. If cash flow grows even faster, its projected value quickly ramps up to returns of +46.9%, +101.1% or even +148.8%.
We've been taught to believe there's an invisible velvet rope separating value stocks from growth stocks. But as you can see with Company XYZ, it's actually growth that determines value. So don't be blinded to the possibility that the market's most promising growth stocks can sometimes be the cheapest.
Many analysts choose to use the Price/Earnings to Growth (PEG) ratio in addition to the P/E ratio. PEG is a simple calculation -- (P/E) / (Annual Earnings Growth Rate).
The PEG ratio is used to evaluate a stock's valuation while taking into account earnings growth. A rule of thumb is that a PEG of 1.0 indicates fair value, less than 1.0 indicates the stock is undervalued, and more than 1.0 indicates it's overvalued. Here's how it works:
If Stock ABC is trading with a P/E ratio of 25, a value investor might deem it "expensive." But if its earnings growth rate is projected to be 30%, its PEG ratio would be 25 / 30 PEG.83. The PEG ratio says that Stock ABC is undervalued relative to its growth potential.
It is important to realize that relying on one metric alone will almost never give you an accurate measure of value. Being able to use and interpret a number of measures will give you a better idea of the whole picture when evaluating a stock's performance and potential.
http://www.investinganswers.com/education/dont-be-misled-pe-ratio-1115
Price-to-Earnings Ratio (P/E)
What It Is:
A valuation method of a company’s current share price compared to its per-share earnings.
How It Works/Example:
The market value per share is the current trading price for one share in a company, a relatively straightforward definition. However, earnings per share (EPS) may not be as intuitive for most investors. The more traditional and widely used version of the EPS calculation comes from the previous four quarters of the price-to-earnings ratio, called a trailing P/E. Another variation of the EPS can be calculated using a forward P/E, estimating the earnings for the upcoming four quarters. Both sides have their advantages, with the trailing P/E approach using actual data and the forward P/E predicting possible outcomes for the stock. Calculated as the following;
Price-to-Earnings Ratio (P/E) = Market value per share / Earnings Per Share (EPS)
Moving on from the basics, let us do a sample calculation with company XYZ that currently trades at $100.00 and has an earnings per share (EPS) of $5.00. Using the previously mentioned formula, you can calculate that XYZ’s price-to-earnings ratio is 100 / 5 = 20.
For more explanation of how to use the P/E ratio in conjunction with other valuation ratios, please read our educational article Don't Be Misled By the P/E Ratio
Why It Matters:
The price-to-earnings ratio is a powerful, but limited tool. For investors, it allows a very quick snapshot of the company’s finances without getting bogged down in the details of an accounting report.
Let us use our previous example of XYZ, and compare it to another company, ABC. Company XYZ has a P/E of 20, while company ABC has a P/E of 10. Company XYZ has the highest P/E ratio of the two and this would lead most investors to expect higher earnings in the future than from company ABC (which possesses a lower P/E ratio).
As noted earlier, the P/E ratio is limited. It does not paint the entire picture for the potential investor; rather it is a complementary tool in your financial toolbox. Be wary of forward EPS measures, (remember, EPS is an essential aspect of calculation of the P/E ratio) as they are matters of prediction and are only estimates of projected earnings. Further, trailing P/E ratios can only tell you what happened to a company in the previous time periods.
http://www.investinganswers.com/term/price-earnings-ratio-pe-459
A valuation method of a company’s current share price compared to its per-share earnings.
How It Works/Example:
The market value per share is the current trading price for one share in a company, a relatively straightforward definition. However, earnings per share (EPS) may not be as intuitive for most investors. The more traditional and widely used version of the EPS calculation comes from the previous four quarters of the price-to-earnings ratio, called a trailing P/E. Another variation of the EPS can be calculated using a forward P/E, estimating the earnings for the upcoming four quarters. Both sides have their advantages, with the trailing P/E approach using actual data and the forward P/E predicting possible outcomes for the stock. Calculated as the following;
Price-to-Earnings Ratio (P/E) = Market value per share / Earnings Per Share (EPS)
Moving on from the basics, let us do a sample calculation with company XYZ that currently trades at $100.00 and has an earnings per share (EPS) of $5.00. Using the previously mentioned formula, you can calculate that XYZ’s price-to-earnings ratio is 100 / 5 = 20.
For more explanation of how to use the P/E ratio in conjunction with other valuation ratios, please read our educational article Don't Be Misled By the P/E Ratio
Why It Matters:
The price-to-earnings ratio is a powerful, but limited tool. For investors, it allows a very quick snapshot of the company’s finances without getting bogged down in the details of an accounting report.
Let us use our previous example of XYZ, and compare it to another company, ABC. Company XYZ has a P/E of 20, while company ABC has a P/E of 10. Company XYZ has the highest P/E ratio of the two and this would lead most investors to expect higher earnings in the future than from company ABC (which possesses a lower P/E ratio).
As noted earlier, the P/E ratio is limited. It does not paint the entire picture for the potential investor; rather it is a complementary tool in your financial toolbox. Be wary of forward EPS measures, (remember, EPS is an essential aspect of calculation of the P/E ratio) as they are matters of prediction and are only estimates of projected earnings. Further, trailing P/E ratios can only tell you what happened to a company in the previous time periods.
http://www.investinganswers.com/term/price-earnings-ratio-pe-459
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