Spotting Cash Cows

Spotting Cash Cows
Posted: Aug 26, 2005

Cash cows are just what the name implies - companies that can be milked for further ongoing profits with little expense. Producing plenty of cash, these companies can reinvest in new systems and plants, pay for acquisitions and support themselves when the economy slows. They have the capacity to increase their dividend or reinvest that cash to boost returns further. Either way, shareholders stand to benefit. To help you spot cash cows that are worthy of your investment, we look at what sets these companies apart and offer some guidelines for assessing them.

The Cash Cow: An Overview
A cash cow is a company with plenty of free cash flow - that is, the cash left over after the company meets its necessary yearly expenses. Smart investors really like this kind of company because it can fund its own growth and value. A cash cow can reinvest free cash to grow its own business - thereby boosting shareholder returns - without sacrificing profitability or turning to shareholders for additional capital. Alternatively, it can return the free cash flow to shareholders through bigger dividend payments or share buybacks.

Cash cows tend to be slow-growing, mature companies that dominate their industries. Their strong market share and competitive barriers to entry translate into recurring revenues, high profit margins and robust cash flow. Compared to younger companies - which tend to reinvest their profits more aggressively to fuel future growth - more mature businesses (with less room for growth) often generate more free cash since the initial capital outlay required to establish their businesses has already been made.

Finally, a cash cow can often be a tempting takeover target. If a cash cow company seems like it can no longer use its excess cash to boost value for shareholders, it is likely to attract acquirers that can. (For more on what this means, see The Basics of Mergers and Acquisitions.)

The Life of the Cash Cow: Free Cash Flow
To see if a company is worthy of cash-cow status, you of course need to calculate its free cash flow. To do so, you take cash from operations and subtract capital expenditures for the same period:

Free Cash Flow = Cash Flow from Operations - Capital Expenditure


(For more on calculating free cash flow, see Free Cash Flow: Free, But Not Always Easy.)

The more free cash the company produces the better. A good rule of thumb is to look for companies with free cash flow that is more than 10% of sales revenue.

Consumer products giant Procter & Gamble (PG), for example, fits the cash cow mold. Procter & Gamble's brand name power and its dominant market share have given it its cash-generating power. Take a look at the company's Form 10-K 2004 Annual Report's (filed on Sept 9, 2004) Consolidated Statement of Cash Flows (scroll to sec. 39, p.166). You'll see that the company consistently generated high free cash flows - these even exceeded its reported net income: at end-2004, Procter & Gamble's free cash flow was $7.34 billion (operating cash flow - capital expenditure = $9.36B - $2.02B), or more than 14% of its $51.4 billion sales revenue (net sales on the Consolidated Statements of Earnings). In 2004, PG produced real cash for its shareholders - a lot of it.

Cows That Stand Apart from the Herd: Price and Efficiency
A Low Cash Flow Multiple
Once you've spotted a cash cow stock, is it worth buying? For starters, look for companies with a low free cash flow multiple: simply, divide the company's stock price (more precisely, its market capitalization) by its underlying free cash flow. With that calculation, you can compare how much cash power the share price buys - or, conversely, you see how much investors pay for one dollar of free cash flow.

To find PG's free cash flow multiple, we'll look at its stock price on the day it filed its 2004 10-K form, which was Sept 9, 2004. On that day, the stock closed at $56.09 (see PG's trading quote that day on Investopedia's stock research resource). With about 2.5 billion shares outstanding, Procter & Gamble's market value was about $140.2 billion.

So, at the financial year-end 2004, PG was trading at about 19 times its current free cash flow ($140.2 billion market value divided by 2004 free cash flow of $7.34 billion). By comparison, direct competitor Unilever traded at about 25 times free cash flow, suggesting that Procter & Gamble was reasonably priced.

Free cash flow multiples are a good starting point for finding reasonably priced cash cows. But be careful: sometimes a company will have a temporarily low free cash flow multiple because its share price has plummeted due to a serious problem. Or its cash flow may be erratic and unpredictable. So, take care with very small companies and those with wild performance swings.

High Efficiency Ratios
Besides looking for low free cash flow multiples, seek out attractive efficiency ratios. An attractive return on equity (ROE) can help you ensure that the company is reinvesting its cash at a high rate of return.

Return on Equity = (Annual Net Income / Average Shareholders' Equity)

You can find net income (also known as "net earnings") on the income statement (also known as "statement of earnings"), and shareholders' equity appears near the bottom of a company's balance sheet.

On this front, PG performed exceedingly well. The company's 2004 net earnings was $6.5 billion - see the Consolidated Statement of Earnings p.35 (p.161 in the PDF) on the 10-K - and its shareholders' equity was $17.28 billion - see the Consolidated Balance Sheets p.37 (p.163 in the PDF). That means ROE amounted to nearly 38%. In other words, Procter & Gamble was able to milk 38 cents worth of profits from each dollar invested by shareholders. (For more on evaluating this metric, see Keep Your Eyes On The ROE.)

To double check that the company is not using debt leverage to give ROE an artificial boost, you may also want to examine return on assets (ROA). (For more on this topic, see Understanding The Subtleties Of ROA Vs ROE.)

ROA = Return on Assets = (Annual Net Income / Total Assets)

Turning again to Procter & Gamble's 2004 Consolidated Statement of Earnings and Balance Sheets, you'll see that the company delivered an impressive 11.4% ROA (net earnings / total assets = $6.5B / $57.05B). An ROA higher than 5% is normally considered a solid performance for most companies. Procter & Gamble's ROA should have reassured investors that it was doing a good job of reinvesting its free cash flow.

Conclusion
Cash cows generate a heap of cash. That's certainly exciting, but not enough for investors. If they provide other attractions, such as high return on equity and return on assets, and if they trade at a reasonable price, then cash cows are worth a closer look.


by Ben McClure
Ben McClure is a long-time contributor to Investopedia.com.


Read more: http://www.investopedia.com/articles/stocks/05/cashcow.asp#ixzz1X5R2fwXM

Product portfolio - the Boston Matrix (or Boston Box)

Introduction

The business portfolio is the collection of businesses and products that make up the company. The best business portfolio is one that fits the company's strengths and helps exploit the most attractive opportunities.

The company must:

(1) Analyse its current business portfolio and decide which businesses should receive more or less investment, and

(2) Develop growth strategies for adding new products and businesses to the portfolio, whilst at the same time deciding when products and businesses should no longer be retained.

Methods of Portfolio Planning

The two best-known portfolio planning methods are from the Boston Consulting Group (the subject of this revision note) and by General Electric/Shell. In each method, the first step is to identify the various Strategic Business Units ("SBU's") in a company portfolio. An SBU is a unit of the company that has a separate mission and objectives and that can be planned independently from the other businesses. An SBU can be a company division, a product line or even individual brands - it all depends on how the company is organised.

The Boston Consulting Group Box ("BCG Box")

Using the BCG Box (an example is illustrated above) a company classifies all its SBU's according to two dimensions:

On the horizontal axis: relative market share - this serves as a measure of SBU strength in the market

On the vertical axis: market growth rate - this provides a measure of market attractiveness

By dividing the matrix into four areas, four types of SBU can be distinguished:

Stars - Stars are high growth businesses or products competing in markets where they are relatively strong compared with the competition. Often they need heavy investment to sustain their growth. Eventually their growth will slow and, assuming they maintain their relative market share, will become cash cows.

Cash Cows - Cash cows are low-growth businesses or products with a relatively high market share. These are mature, successful businesses with relatively little need for investment. They need to be managed for continued profit - so that they continue to generate the strong cash flows that the company needs for its Stars.

Question marks - Question marks are businesses or products with low market share but which operate in higher growth markets. This suggests that they have potential, but may require substantial investment in order to grow market share at the expense of more powerful competitors. Management have to think hard about "question marks" - which ones should they invest in? Which ones should they allow to fail or shrink?

Dogs - Unsurprisingly, the term "dogs" refers to businesses or products that have low relative share in unattractive, low-growth markets. Dogs may generate enough cash to break-even, but they are rarely, if ever, worth investing in.

Using the BCG Box to determine strategy

Once a company has classified its SBU's, it must decide what to do with them. In the diagram above, the company has one large cash cow (the size of the circle is proportional to the SBU's sales), a large dog and two, smaller stars and question marks.

Conventional strategic thinking suggests there are four possible strategies for each SBU:

(1) Build Share: here the company can invest to increase market share (for example turning a "question mark" into a star)

(2) Hold: here the company invests just enough to keep the SBU in its present position

(3) Harvest: here the company reduces the amount of investment in order to maximise the short-term cash flows and profits from the SBU. This may have the effect of turning Stars into Cash Cows.

(4) Divest: the company can divest the SBU by phasing it out or selling it - in order to use the resources elsewhere (e.g. investing in the more promising "question marks").

http://tutor2u.net/business/strategy/bcg_box.htm

http://en.wikipedia.org/wiki/Growth-share_matrix

How to derive the intrinsic value of an asset?

1. How to derive the intrinsic value of an asset?

Discounted cash flow DCF analysis can be used to value any asset, including stocks, bonds and real estate.

The present value PV of an asset is the discounted value of all its future cash flows.

This PV is also the intrinsic value of the asset.

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2. What are the steps in DCF analysis to derive intrinsic value of a stock?

DCF analysis is predicated on the premise that a share of stock must be worth the present value of all the future cash flows it is expected to generate for the investors.

This begins by estimating what those future cash flows will be. There is tremendous potential for error here.

Once the projected cash flows are estimated, they have to be discounted back to the present in order to determine what they are worth in current dollars.

The discount rate itself is a function of the general level of interest rates in the economy and the risk of an investment.

Those who are willing to apply themselves and learn how to conduct a proper DCF analysis give themselves a distinct advantage over those who do not want to bother to learn the technique.

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3. What cash flows projections are used in a DCF analysis to calculate intrinsic value of a stock?

There is more to cash flows than dividends. The cash flows do not actually have to be paid out to the investors to be included in a DCF analysis.

The shareholders have rights to the cash flows whether or not they actually receive them. These cash flow might be reinvested in the company, but technically they belong to the shareholders. Therefore, a proper DCF analysis must include all the cash flows, whether they are paid out to investors or retained within the company and reinvested.


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4. Why is the DCF analysis the preferred method Buffett uses to calculate the intrinsic values of his stocks?

Conducting a proper DCF analysis is as much art as it is science.

However, Buffett relies on this methodology because he knows that it is the only theoretically correct way to determine what a stock is worth.

The ability to make good projections is what distinguishes Buffett from other investors. Buffett excels at this game.

Buffett finds undervalued stocks using the DCF approach. Fortunately, conducting a DCF analysis is not easy. It is also one of Buffett's favorite ways to spot undervalued stocks.

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5. What is the difference between value stocks (low price multiple e.g.low PE, low P/B, low P/CF, or P/S) and undervalued stocks?

Buffett may have a general preference for value stocks over growth stocks, but only because value stocks are more likely than growth stocks to be undervalued. It would really be more accurate to call Buffett an "undervalued" investor.

The point is that when he says he likes to buy cheap stocks, he is not talking about price multiples. Instead, he is talking about discounting cash flows to find stocks with intrinsic values that are greater than what he would ahve to pay for them in the market.

Thus, Buffett is not really looking to buy cheap stocks at all. Instead, he is looking to buy stocks cheap.

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Buffett likes to control risk. He does this primarily by avoiding companies if he thinks there is too much uncertainty about their future cash flows.

Furthermore, because he believes there is little risk in buying companies that have predictable cash flows, he feels comfortable using the so-called risk-free rate to discount their projected cash flows. More specifically, he starts with the yield on U.S. Treasury bonds and makes some adjustments to it.


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A more conservative approach would argue for the use of a higher rate - in particular, one that properly reflects the stock's market-related risk. Buffett believes he does not need to account for risk in the discount rate since he consciously avoids stocks that he considers too risky.

Analysts and academics have criticized Buffett for this. They say that by using a discount rate that does not properly reflect risk, he is more likely to erroneously conclude that an overvalued stock is undervalued. Furthermore, by ignoring companies whose cash flows are difficult to understand, he is likely to miss out on great investment opportunities. Buffett stands guilty as charged, yet his track record speaks for itself.


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10 Essential Questions to Ask When Deciding What Multiple to Pay For a Stock

Buffett has correctly pointed out that the correct way to value a business is to calculate the discounted value of all its future cash flows. The concept is simple. The application is not.

For many businesses, it is difficult to calculate this with a level of precision that has much utility.

Some businesses are sufficiently predictable that a careful business analyst can make a reasonable and useful calculation of its DCF, or what Buffett calls its intrinsic value.

Also, sometimes in periods of extreme dislocation, a business will sell at such a depressed price that you can reasonably conclude that the market price is below intrinsic value, even if the range of possible DCFs is large.

The multiple at which a stock trades is nothing more than a shorthand proxy for its DCF.

In Buffett’s 1991 letter to shareholders, he concluded that, assuming a discount rate of 10%, a business earning $1 million of free-cash and with long-term growth prospects of 6% would be worth $25 million or 25 times earnings.

A no-growth business also earning $1 million would be worth about 10 times earnings.

Business 1: $1 million / (10%-6%) = $25 million

Business 2: $ 1 million / (10%) = $10 million

As a practical matter, what types of things should you be thinking about when deciding if you are dealing with a company that deserves a multiple of 25 times earnings versus one that only deserves a multiple of ten times earnings. There are many factors to consider.

Venture capitalist Bill Gurley has written an excellent list of characteristics to consider when evaluating a company and determining what multiple to use when valuing its earnings.

You should carefully think about each of these and add them to your checklists for evaluating a business.

I’ve put Gurley’s characteristics in the form of a question.

1. Does the business have a sustainable competitive advantage (Buffett’s moat)?

2. Does the business benefit from any network effects?

3. Are the business’s revenue and earning visible and predictable?

4. Are customers locked in? Are there high switching costs?

5. Are gross margins high?

6. Is marginal profitability expected to increase or decline?

7. Is a material part of sales concentrated in a few powerful customers?

8. Is the business dependent on one or more major partners?

9. Is the business growing organically or is heavy marketing spending required for growth?

10. How fast and how much is the business expected to grow?

Written by Greg Speicher

Intrinsic Value Basics

Theoretically and practically, the value received for owning a business or a security is the dollar return amount received over time from your investment.

That return may come
- as a single payment at the end of the ownership period for selling the stock or business,
- as payments at regular intervals during ownership, or
- (often) as a combination of the two.

But growth and time value of money have a major impact on the final valuation of equity investment returns. In fact, intrinsic valuation is a lot about assessing the effects of future growth on future returns and then assigning a present value to those returns.


The following "how" questions can guide the appraisal of business returns.

How much?
How soon?
How long?
How consistent?
How valuable?


How much?

How many dollars of return will the business produce, either to distribute to shareholders or to invest productively in the business?

Key drivers are profitability and growth rates - and the collection of business factors that drive that profitability and growth.



How soon?

Big payoffs are nice, but if you have to wait 30 years for them, they aren't as valuable. Remember the time value of money.

If two companies produce the same return, but one does it sooner, that company has more value because those dollars can be reinvested elsewhere sooner for more return.




How long?

Although future returns have less value than current returns, they do have substantial value; and 20, 30, or 50 years of those returns can't be ignored, particularly in a profitable, growing business.



How consistent?

A company producing slow, steady growth and return is usually more valuable than one that's all over the map.

A greater variability, or uncertainty, around projected returns calls for more conservative growth and/or discounting assumptions.



How valuable?

Finally, after assessing potential returns (how much, how soon, how long, how consistent), you must assign a current value to those returns.

That value is driven by the value of the investment money as it may be used elsewhere. A return may look attractive - until the investor realizes that he or she can achieve the same return with a bond or a less risky investment.

Valuing the returns involves discounting (using a discount rate) to bring future returns back to fair current value. The discount rate is your personal cost of capital - in this case, the rate of return you expect to deploy capital here versus elsewhere.




Sooner isn't always better.

A business producing quick, short-term bucks may not be more valuable than one that produces slow, steady growth.

The quick-bucker may be cyclical and go through years of diminished or even negative returns. Even though the quick-bucker produces a lot of value in the first few years, that may not be better than sustained growth and value produced later on by the slower, steadier comapny.

The quick-bucker may be relying on a technology or some other competitive advantage that could dissipate or dissapper altogether. Likewise, a company with a long-term and sustainable advantage, sometimes known as a "moat" keeping competitors away, may beat a company with very high but only short-term returns.




Bottom line:

It's a combination of how much, how soon, how long, and how consistent.
The tortoise often beats the hare.



Present value calculator
http://www.moneychimp.com/calculator/present_value_calculator.htm

Inputs
Future Value: $
Years:
Discount Rate: %


Results
Present Value: $

Intrinsic Value Basics: Valuing a Business - Seth Klarman's 3 Methods

Valuing a Business - Seth Klarman's 3 Methods

"Price is what you pay. Value is what you get." says Buffett. Valuing a business is, therefore, a fundamental skill that every value investor must master to be able to discern the intrinsic value of a business from publicly available information.

The truth is all of us can recognize a discount when we see one. When I shop for organic fuji apples, I know they are at a discount at $2.39/lb if they normally sell for $3.99/lb. Keeping an eye on the price tags is the key. But when it comes to recognizing a business selling on a discount, the share price does not always reflect the value of a business. This is because a business is made up of people. Hence, businesses evolve for better or for worse. When a business evolve into a more valuable business, the share price must at some point reflect this change.

The trouble is no one perceives the value of a business the same way. This is why even Ian Cumming and Joseph Steinberg couldn't agree on the same intrinsic value for Leucadia. So when you throw the entire population of investors and speculators in the mix, you get a variable share price that changes by the second.

Business valuation is as much an art as a science. There is no one value that is the absolute right value for a company. Because of the imperfect knowledge of the future, we can only come up with a range of values for a company. Below are the three methods of business valuation that Seth Klarman postulates every value investor should have in his warchest.


1. Discounted Cash Flow / Net Present Value

In Theory of Investment Value, John Burr Williams was among the first to introduce the discounted cash flow (DCF) analysis. Seth Klarman categorizes this under the net present value (NPV) method. With a properly chosen discount rate and reasonably predictable future cash flows, the NPV method yields the closest to precise valuation of a profitable business.

DCF basically calculates the present value of all future cash flows by applying a discount rate. The discount rate is the interest that you would like to be compensated for incurring the opportunity cost of giving up alternative, less risky investments. The riskier the investment the higher the discount rate should be. Generally, the short term US Treasury securities are considered risk-free alternatives. In other words, if you are accepting a higher risk for an equity investment, you should expect to earn an interest higher than the current US Treasury yield. Don't just apply a 10% discount rate on all analysis. A smaller, less liquid company probably deserves a higher discount rate, say 12% - 15%, than its blue chip counterpart.

Despite its proximity to accuracy, DCF has a flaw: it depends on predictable future cash flows which no one can reliably estimate given the massive number of variables. Unlike a bond, the earnings of a business are not fixed every year. A one percent difference in your growth assumption can have a huge impact on the NPV. Unfortunately, most investors are overly optimistic when it comes to estimating growth. The best defense here is to err on the side of caution and always pick the more conservative estimate.


2. Liquidation

The net present value analysis works great for determining the value of a profitable business with predictable future cash flows. But when it comes to valuing an unprofitable business, the NPV analysis falls apart. Since there is no future cash flow, you can't calculate the NPV. Thus, most investors, unwilling to part with NPV, would simply pass on investing in unprofitable businesses. But this is precisely why investors who are willing to spend the time scouring the floors for cigar butts could find some wonderful bargains.

To value an unprofitable business, an investor needs to be extra conservative since many of these businesses are already troubled businesses headed for the dead pool. Typically, only tangible assets are considered. Intangibles such as brand names are assumed to be worthless. A good shortcut to evaluate the liquidation value of a business is to calculate the net-net working capital. Net-net working capital is calculated by subtracting current and long term liabilities from current assets. If the company trades below its net-net working capital and it is not depleting its net-net working capital nor does it have any off-balance sheet liabilities, the failing company could be a very successful investment.

However, there is a shortcoming with the net-net working capital analysis. Most of the time, in a liquidation, a company sells pieces of standalone operating entities too. These operating entities could very well be profitable going concerns despite its parent's fallout. The net-net working capital analysis would have underestimated the worth of these subsidiaries. Often, in this situation, investors resort to a breakup analysis to evaluate the worth of the subsidiaries. Basically, you treat the subsidiaries just like you would any company when valuing a business; applying the proper analysis. Once you have the values of each of its subsidiaries you sum them up to arrive at the total value of the parent. This is also known as the sum-of-parts analysis.


3. Market Value

The market value analysis is the best and only sensible valuation method for closed-end funds. Closed-end funds are funds that are closed to new capital after launch and their shares can be traded at any time in open market. Unlike a mutual fund, a closed-end fund usually trades at a premium or a discount to its net asset value (NAV). The NAV of a closed-end fund is the sum of all its securities. Since the value of the securities are realized when sold to the market, only a market value analysis of the securities makes sense.

Some investors make the mistake of extending the market value analysis to valuing companies. The reasoning behind this is simple, but irrational; if a similar company in the same industry trades at 12 times pretax cash flow, this company should trade at the same multiple. This is what Seth Klarman calls "circular reasoning". What if all the companies in the industry are overvalued?

A more appropriate relative valuation method for companies is the private market value analysis. The assumption here is that in a private transaction where sophisticated businessmen are involved, businesses are often bought at fair prices or at reasonable premiums. Often times, this is true. But when considering a leveraged buyout transaction for comparison, an investor has to be cautious about whether the buyer overpaid.


Conclusion

All three valuation methods are not without flaws. Therefore, it is sometimes necessary to use several methods simultaneously to arrive at a more comfortable estimate. It is important to pick the right tool for the right job lest you contract the man-with-a-hammer syndrome. As Munger would say, "To a man with a hammer, every problem looks like a nail."

What Does Net Present Value - NPV Mean?

What Does Net Present Value - NPV Mean?

The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project.

NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield.

Formula:

In addition to the formula, net present value can often be calculated using tables, and spreadsheets such as Microsoft Excel.

Watch: Understanding Net Present Value

Investopedia explains Net Present Value - NPV
NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. If the NPV of a prospective project is positive, it should be accepted. However, if NPV is negative, the project should probably be rejected because cash flows will also be negative.

For example, if a retail clothing business wants to purchase an existing store, it would first estimate the future cash flows that store would generate, and then discount those cash flows into one lump-sum present value amount, say $565,000. If the owner of the store was willing to sell his business for less than $565,000, the purchasing company would likely accept the offer as it presents a positive NPV investment. Conversely, if the owner would not sell for less than $565,000, the purchaser would not buy the store, as the investment would present a negative NPV at that time and would, therefore, reduce the overall value of the clothing company.

 http://www.investopedia.com/terms/n/npv.asp?partner=basics090211#ixzz1WtS9g5kS

Interview: Sir John Templeton and Peter Lynch

Peter Lynch - Finance and Investing

Company business should be the focus, not the price.

Peter Lynch on Stock Market

A lot of good advice on these topics:

Upsides of a downmarket.
Historical market rebounds.
Timing the market is not a Winning Strategy.
Why it's important to stay the course.
Don't listen to background noise.
Know your Time Horizon, stay invested.
Benefit of Regular Investing for Retirement.
Portfolio Diversification
Be comfortable with what you own.
How can Fidelity financial planning help you?

Nature of the Stock Market
Market went down 1% per month and 2% per month regularly in the past.
Once in 2 years, market went down 10% per month.
Every 18 months, some market somewhere was down 10% per month.
Once every 5 or 6 years, the stock market declined 20% to 25% per month.

Historical market rebounds
Over the last 15 years, there were 13 months when the market went down 8% or more.
Of these, 11x out of these 13, the market was higher subsequently.

Stay fully invested. Know your time horizon.
The market went down 10 to 12 x, I went down 10 to 12 x.
When market went up I went up.
The upside is more than the downside.
Need to know your own time horizon.

Timing the market is not a winning strategy
All the wealthy people in the world are not market timers.
You might be right to miss some declines.
However, market turned up very fast.
Over the last 15 years, missing the best 15 months (that is 1 month per year) ..
.. meant a fall of portfolio return from 11% to 3%.

Portfolio Diversification
As long as it makes sense.

Peter Lynch Induction and Speech - Academy of Distinguished Bostonians

Peter Lynch talks about bottom-fishing on Wall Street

http://multibaggersindia.blogspot.com/2010/11/investing-strategies-from-peter-lynch.html

Peter Lynch: Market Prediction

Market ought to be irrelevant to your investing.
I made money in lousy market and I lose money in good market.

Investing strategy of Peter Lynch
http://multibaggersindia.blogspot.com/2010/11/investing-strategies-from-peter-lynch.html

Magic of Investing = Compounding

The market is designed for the majority to give to the Minority

The Magic Money Machine

MSCI World P/E ratio

http://www.pimco.com/EN/Insights/Pages/ValueInvestingHumanNatureandtheLastGreatAnomaly.aspx

Public belief about best long term investment

Public beliefs about long term investment returns from different asset classes

Staggering (to me anyway) study out from Gallup a couple of weeks ago about the public’s beliefs about which asset classes offer the best long term investing returns.

 

When asked “which of the following do you think is the best long term investment?” 34% of the 1000-odd telephone interviews picked savings accounts with 33% picking real estate. Stocks and mutual funds crept in at a lowly 15% (see below).

http://www.selfmanagedsuperfund.com/tag/long-term-returns/

Long Term Investing by Uncle8888

http://createwealth8888.blogspot.com/2011/08/investing-made-simple-by-uncle8888-22.html

Tuesday, 9 August 2011

Investing Made Simple by Uncle8888 (22)

Read? Investing Made Simple by Uncle8888 (21)

ST, Tuesday, August 9, 2011

S'pore retail investors make flight to safety. Massive volumes of stocks traded as many prefer cash to equity.

Engineer Sun Weixin, 28, liquidated his entire portfolio of mainly bank and blue-chip shares yesterday, worth less than $40,000. He suffered a loss but did not want to disclose the amount - but said he felt there is too too much uncertainty to stay invested.

Read? investors flock to low-risk assets, with focus on cash

Read? Should I sell all my equities and stay sideline?

Should Uncle8888 also sell out all equities and stay sideline?

Since 2001 he has been thinking very hard each time a Bear market arrived whether he should sell out all his equities and stay sideline until certainty come back to the stock market before reinvesting. This time is no different and he is thinking very hard too.

So actually what has happened to him during the past Bear markets for being stubborn or stupid?

He has been holding the following stocks across several bear markets:

1. Kep Corp since 2001
2. Semb Corp since 2002
3. DBS since 2003

The last Great Bear of 2008/09 didn't crash down Kep Corp and Semb Corp down anyway near his initial purchase price. In fact, his initial purchase for Kep Corp is now cheaper by 10% after 10:1 bonus share issue; and plus a small capital gain and small additional dividends coming from K-Green (dividend in specie).

His initial DBS holding is also cheaper by 16% after the 2:1 right issue; and internally price adjusted for all unit shares based on theoretical fair value of  right issue shares.

There was no corporate action on Semb Corp. :-(

TSR as on Monday closing, 8 Aug 2011
  

For the coming Bear market, he is even more stupid to slide with the Bear with more members on board.

Will Uncle8888 survive this Bear to write more stories on short-term trading and long-term investing using his Pillow stocks strategy and finding Touch Stones?

http://wincrt.blogspot.com/2011/08/create-wealth-through-long-term_09.html

Never Sell A Winner and you end up being a long term investor

I will regularly add to my winners (at ever higher prices), and I will cull the losers from the portfolio during market corrections. But most importantly, it is my intention to never sell my winners.

Warren Buffett didn’t get rich by selling 10% gains on his stocks and companies. He (and his investors) have gotten rich by making “permanent” investments. His timeframe is famously “forever.”

I expect my “forever” to be a very long time. If my investments are in companies that are consistently earning money and growing their businesses, and I stick with them through thick and thin, do you think I’ll be able to outperform the 1% APR I’m earning on my savings account these days? I think so.

http://www.chicagosean.com/2011/03/06/never-sell-a-winner/

Long-term Investing: An Insight

http://www.marinisgroup.com.au/articles/long-term-investing.pdf


This is the first paper in an annually updated series that gives investors an
insight into longer-term returns from various asset classes. It is aimed at
helping investors think carefully about their portfolio decisions. Investors should
understand their personal time horizons for their various investment portfolios
so that sensible, wealth-enhancing decisions can be made. Simplistically, an
investor saving for a home deposit in one year’s time will be focused on capital
preservation, whereas an investor saving for retirement in 30 years’ time will
place greater importance on capital growth and long-term returns. This paper
should be read alongside another Perennial paper, The Wisdom of Great
Investors, which brings together the principles of investing from some of the
world’s greatest investors.


http://www.marinisgroup.com.au/articles/the-wisdom-of-great-investors.pdf


The Wisdom of Great Investors
“If you can keep your head when all about you are losing theirs . . . yours is the Earth and everything
that’s in it.” And what’s more, you’ll be a successful investor!
(Apologies to Rudyard Kipling


The Wisdom of Great Investors brings together the principles of investing from some of the world’s
greatest investors who have not only lived through but also prospered in diffi cult times.
Though each of these great investors offers a different perspective, the common theme is that
a disciplined, patient, emotionally detached investment approach can help you to reach your
long-term fi nancial goals.
At Perennial, we believe their collective thoughts are an invaluable insight into long-term investing
and may help you in preparing your own mindset to successfully build and preserve long-term
wealth.




http://www.marinisgroup.com.au/

Cash Flow Model of Households

Invest long-term ... it can reduce risk

Overview of long-term investors and their key constraints

Are you a landlord?

“Landlording and long-term investing go hand-in hand. Being a landlord isn’t for everyone, but if you have the right personality and decision making skills then it’s a snap.”

Share of income - For Decades, the Richest Pulled Away

Range of Stock Market Annual Returns

Market crash 'could hit within weeks', warn bankers

A more severe crash than the one triggered by the collapse of Lehman Brothers could be on the way, according to alarm signals in the credit markets.

The cost of insuring RBS bonds is now higher than before the taxpayer was forced to step in and rescue the bank in October 2008 Photo: Alamy

By Harry Wilson, and Philip Aldrick

9:50PM BST 24 Aug 2011

Insurance on the debt of several major European banks has now hit historic levels, higher even than those recorded during financial crisis caused by the US financial group's implosion nearly three years ago.

Credit default swaps on the bonds of Royal Bank of Scotland, BNP Paribas, Deutsche Bank and Intesa Sanpaolo, among others, flashed warning signals on Wednesday. Credit default swaps (CDS) on RBS were trading at 343.54 basis points, meaning the annual cost to insure £10m of the state-backed lender's bonds against default is now £343,540.

The cost of insuring RBS bonds is now higher than before the taxpayer was forced to step in and rescue the bank in October 2008, and shows the recent dramatic downturn in sentiment among credit investors towards banks.

"The problem is a shortage of liquidity – that is what is causing the problems with the banks. It feels exactly as it felt in 2008," said one senior London-based bank executive.

"I think we are heading for a market shock in September or October that will match anything we have ever seen before," said a senior credit banker at a major European bank.

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Despite this, bank shares rebounded on Wednesday, showing the growing disconnect between equity and credit investors. RBS closed up 9pc at 21.87p, while Barclays put on 3pc to 149.6p despite credit default swaps on the bank hitting a 12-month high. This mirrored the US trend, with Bank of America shares up 10pc in late Wall Street trade after a hitting a 12-month low on Tuesday over fears that it might have to raise as much as $200bn (£121bn). As with the European banks, the rebound in the share price was not reflected in the credit markets, where its CDS reached a 12-month high of 384.42 basis points.

European stock markets joined in the rally. The FTSE closed up 1.5pc at 5,206 on hopes the chance of a global recession had diminished. European shares hit a one-week high, with Germany's DAX closing up 2.7pc and France's CAC 1.8pc higher. The Dow Jones index edged higher on strong durable goods orders data as markets began to accept that the US Federal Reserve is unlikely to signal fresh stimulus at Jackson Hole this Friday.

Even Moody's decision to downgrade Japan's sovereign credit rating by one notch to Aa3 did little to damage global sentiment, although Tokyo's Nikkei closed down just over 1pc.

As stock market nerves settled, gold - which has recorded steady gains recently as investors seek a safe haven - fell 5.3pc to $1,777 in London.

"But I thought Greed was Good"

US Home Prices and Income, 1987 – 2008

Home Prices and Income, 1987 – 2008, Nominal [top] and Real [bottom]

As the bottom chart of inflation-adjusted home prices and income demonstrates, even as real household income meandered along a relatively flat path, home prices exploded after 2001. This was due, in part, to:

• A steep yield curve;
• The widespread use of ARMS;
• Flexible mortgage underwriting standards; and
• Mortgage product innovations (subprime, Alt-A, Option ARMs).

All of the above encouraged home ownership. By 2006, prices had peaked, and began to correct.

http://mortgagenewsclips.com/2009/04/15/ira-artmans-sterling-slivers-greed-fear-and-loathing-whats-next-for-home-prices/

Greed kills, and pigs get slaughtered.

Risk versus Safety

Greed versus Fear

Greed leads to losses

Is Alan Greenspan Really Alan Greed-Scam? (Infographic)

http://wallstcheatsheet.com/economy/is-alan-greenspan-really-alan-greed-scam-infographic.html/

Consequences must dominate Probabilities

Benefiting from Investor Over-reaction in major market crisis

Many investors overreact during times of crises. Retail investors especially tend to panic and sell out at the bottom and then buy at the top when the market rebounds. The fear of losing out on a rally and recoup some of their losses forces them to act this way. This classic scenario occurred in the aftermath of the recent financial crisis.After seeing their portfolio values decline consistently for many months some investors threw in the towel and sold out right when the market was hitting the lows in March 2009. These investors couldn’t be more wrong. From the lows of March 10, 2009 the S&P 500 rallied a spectacular 80% by April of 2010. The moral of the story here is that investors should not panic and sell out when the market is already down significantly. The market rewards patient investors who hold investments for the long-term as opposed to trying to time the market in the short-term for a quick profit.

In general, how does the markets perform post major crises?

The chart below shows the 1-year and 2-year returns of Dow Jones Industrial Average(DJIA) after 12 major post-war crises:

The returns assume reinvestment of dividends and distributions. Similar to the S&P 500, the Dow Jones Index gained 65% and 95% in 1 year and 2 years respectively after the 2008-09 global financial crisis. Overall the index was up by double digits in the periods mentioned after each of the crises shown in the chart above.

http://topforeignstocks.com/2011/06/25/stock-market-performance-post-major-crises/

Phrases of Market Phases

Investing in the markets is not suitable for everyone.One should have a strong stomach when markets dive and not get carried away with greed when markets soar.The chart shows the various stages of emotions that most investors experience with investing in equities.


http://topforeignstocks.com/category/strategy/page/2/

"Fear and Greed" Index

Patience and Due Diligence

Long term real growth in US Stocks

Beyond Greed and Fear

Greed versus Fear comparisons

Irrational Exuberance