The Author Of The 'Rich Dad, Poor Dad' Books Has Filed For Chapter 7 Bankruptcy

Jill Krasny
Oct. 11, 2012


Robert Kiyosaki, author of the bestselling "Rich Dad, Poor Dad" series, has filed for Chapter 7 bankruptcy protection after losing a nearly $24 million court judgment to The Learning Annex, The New York Post reports.

As one of Kiyosaki's earliest backers, The Learning Annex was responsible for arranging the speaking engagements and platform that led to his massive success. 

But apparently the fame went to his head because according to court papers obtained by the Post, Kiyosaki, who published his first "Rich Dad" book in 1994, never paid the Annex its rightful share. Said founder and chairman Bill Zanker: "Oprah believed in him, and Will Smith believed in him, but he didn't keep his promise to us." 

Kiyosaki's Rich Global company was ordered by a U.S. judge in April to cough up $23,687,957.21, which in turn led him to file for corporate bankruptcy on Aug. 20.

Despite the blow to the personal finance guru's reputation, Kiyosaki probably won't feel the pinch in his wallet. Forbes pegs his net worth around a cool $80 million, and Kiyosaki, who's written 11 books, operates as many as ten other companies. Rich Global was said to be worth a few million when it went under. 

"Rich Dad, Poor Dad" became an overnight sensation when Kiyosaki made the rounds on feel-good daytime TV like "Oprah" and aired his speaking programs on PBS. Cash-strapped consumers identified with his inspirational story of learning how to manage money from one father who struck it big and another who died penniless and alone. 

Of course, not everyone bought into the schtick. As Helaine Olen's wrote in Forbes Thursday, the guru's "tips ran the gamut from ridiculous to illegal and downright hurtful and included advocating for insider trading, arguing for the purchase of multiple real estate properties with little or no money down and telling followers they could purchase stocks on margin via unfunded brokerage accounts.

Read more: http://www.businessinsider.com/the-author-of-the-rich-dad-poor-dad-books-has-filed-for-chapter-7-bankruptcy-2012-10#ixzz29bQ4Ttcz

Financial Tenet: The One-Dollar Premise

Financial Tenet:  For every dollar retained, make sure the company has created at least one dollar of market value.

An Illustration:

Public Bank Berhad

(Sen) (Sen) (Sen) (RM) (RM) Year DPS EPS Retained Price Price Earnings Low High 2002 9.5 25.5 16.0 3.02 4.20 2003 9.9 30.0 20.1 3.26 5.42 2004 42.8 36.2 -6.6 5.02 7.04 2005 48.3 40.7 -7.6 5.94 7.47 2006 37.9 47.8 9.9 5.84 7.57 2007 45.5 60.7 15.2 7.28 10.73 2008 56.7 69.5 12.8 7.52 11.50 2009 40.1 71.9 31.8 6.90 11.14 2010 37.2 87.0 49.8 10.94 13.02 2011 46.8 99.5 52.7 11.68 13.60 374.7 568.8 194.1 7.48

Since 2002, the market value of PBB has grown from RM 4.20 to RM 11.68 - an increase of RM 7.48 or 748 sen.  (Calculation:  Low Price of 2001 RM 11.68 - High Price of 2002 RM 4.20).

During these 10 years, PBB earned 568.8 sen.  It paid shareholders, in dividends, 374.7 sen and retained 194.1 sen for reinvestment.

Thus, PBB retained 194.1 sen in earnings and created 748 sen in market value for its shareholders.  That is, for every RM 1 retained earnings over the last 10 years, PBB created RM 3.85 in market value for its shareholders.

This financial accomplishment demonstrates the superior management  and the ability to reinvest shareholder's money at optimal rates.



Financial Tenet:  For every dollar retained, make sure the company has created at least one dollar of market value.

This is a quick financial test that will tell you not only about the strengths of the business but how well management has rationally allocated the company's resources.  From a company;s net income subtract all dividends paid to shareholders.  What is left is the company;s retained earnings.

1.  If the business has employed retained earnings unproductively over the 10 year period, the market will eventually catch up and will set a low price on the business.  If the change in market value is less than the sum of retained earnings, the company is going backward.

2.  But if your business has been able to earn above-average returns on retained capital, the gain in market value of the business should exceed the sum of the company's retained earnings, thus creating more than one dollar of market value for every dollar retained.  

Investment Banking

Special Situations: Spin-offs

How to invest in
‘special situations’

• Why I love company spin-offs and you should as well

Have you ever wanted to invest in a merger, acquisition, spin-off, or even a bankruptcy? It’s called special situation investing, and it can be a profitable way to take part in the stock market.

In many cases, special situations end up performing well because the businesses concerned have had a run of poor performance, and this has spurred management into drastic action to resolve the situation.

Spin-offs and other special situations are definitely high on our radar.

Spin-offs, the special situation of choice

I like all special situations, but spin-offs are my favorite. 

In this case I’m talking about corporate spin-offs, where a larger company decides to take a small part of its business, list it separately, and distribute the shares to current shareholders, such as the 1997 British Gas spin-offs, which gave birth to BG Group (LSE: BG), Centrica (LSE: CNA), and what is now National Grid (LSE: NG).

They don’t come along often, but I believe the potential returns make it worth investigating them thoroughly. For example, so far this year, the Bloomberg Spinoff Index is up 30%, and a 2010 report from UBS also showed that the 75 European spin-offs from the past decade outperformed Europe’s top 300 companies.

Why companies pursue spin-offs

There are many reasons a company might pursue a spin-off, instead of keeping a company in-house. One of the more common reasons is that the two businesses aren’t related, and very little is gained by keeping them under one umbrella and having them share capital.

I think the Primark retail group within Associated British Foods (LSE: ABF) is a perfect example of this, though ABF has repeatedly stated it has no plans to spin-off or sell the unit. In other cases, one division is considered a good business by the investment community, while another unit is considered an anchor or dead weight that slows the good business down.

Spinning a business off to shareholders instead of selling it is generally the more shareholder-friendly action. Arguments against a spin-off are because a business is too small to list, or lacks the management talent needed to run a publicly traded company, but in many cases taxes are the ultimate deciding factor. If a business has substantially depreciated assets, the tax hit can make a sale prohibitive for the company and shareholders, while a spin-off can often allow shareholders to realise the value of the business without triggering any tax payments.

Why spin-offs tend to do well

No two spin-offs are alike, and in some cases the larger parent may outperform the business being spun-off. But, in most cases, I find it is the smaller business that tends to outperform, but this can come with some initial volatility because shareholders often must tolerate an initial dip in the share price of the spin-off. Such dips might happen because large, institutional investors or fund managers have invested in the parent to gain exposure to the larger business, and have no interest in the smaller spin-off. In some situations, fund managers simply can’t own the spin-off, because they have limits on the size of companies they can invest in. So, as soon as the shares are received, they are sold off.

I reckon these types of situations only make spin-offs juicier opportunities for astute investors, but there are other signs to look for as well. High up on the list is a management team with incentives for growing the business, earning high returns on capital and, if you can find it, an ownership stake in the business at spin-off. Any time you can find these qualities, it becomes even more likely that management is going to take advantage of its newfound ability to allocate capital and grow the business without having to worry about their former corporate overseers.

Final thoughts

I’ve shared the basic reasons behind why spin-offs tend to outperform. But if you’re hungry for more information on spin-offs and special situations in general, I recommend the excellently written – though horribly titled – You Can Be a Stock Market Genius by Joel Greenblatt. The book provides a thorough look at a few spin-offs from the past and the clues investors were given in the filings that a unique opportunity was about to unfold.

From:  Motley Fool

12th October, 2012

Tips For Avoiding Excessive Trading

By Ian Huntsley
Investopedia

Fri, Oct 12, 2012

Why do casinos provide both the winners and the losers with complimentary goods or services? Because both will continue to gamble more than the average person.

Despite the fact that the odds favor the house, the losers, desperate to recoup their losses, will try to ride out their bad luck by playing through it. The winners, convinced they're in the midst of an unstoppable streak, will try to ride it all the way to the top and invariably give much or all of their winnings back to the casino.

Professional trading is nothing like gambling, but many amateur traders act as if it is, and trade excessively for the same reasons as an ordinary gambler. Every active trader should learn to trade, instead of gamble. Here we'll take a look at traders' tendency to trade excessively and examine the way this behavior can affect a portfolio.

Evolution of a Trader
As traders develop skills, each one travels virtually the same path: initially as a discretionary trader, then as a technician and ultimately as a strategist or systematic trader. A trader first analyzes the market direction or trend, then sets targets for the anticipated move. Correctly reading or predicting the marke t then becomes the highest priority, so the trader learns as many new indicators as possible, believing they're like traffic signals. This search for a magical combination of indicators leads to the inevitable realization that multiple scenarios might exist. A trader's focus then moves to the probability of each outcome and the risk-reward ratio.

Advancement to the successful professional ranks is not achieved until emphasis is placed on strategy. Excessive trading, or the excessive buying and selling of stocks, may also be referred to as overtrading. It occurs within each step, and correcting it often enables a trader to progress to the next level. The three most common forms of overtrading are bandwagon trading, hair-trigger trading and shotgun trading. Each manifests itself differently, and to varying degrees, depending on whether the trader's style is discretionary or technical.

Discretionary Overtrader
The discretionary trader uses nonquantifiable data - such as advice from a broker or perceived expert, news reports, personal preferences, observations and intuition - to determine entry and exit points. Position sizes and leverage are flexible. Although such flexibility can have its advantages, more often that not it proves to be the trader's downfall. Discretionary traders often find inactivity the hardest part of trading; as a result, they're prepared to embrace any development that will allow another trade. This impulsive behavior, in fact, isn't trading at all - it's gambling, similar to that described earlier. And just like in the casino, the odds are not in the overtrader's favor.

Technical OvertraderTraders new to technical indicators often use them as justification for making a predetermined trade. They have already decided what position to take and then look for indicators that will back up their decision, allowing them to feel more comfortable. They then develop rules, learn more indicators and devise a system. If it's right more often than not, they believe they've finally beaten the odds, and may reason that if a solid 60% of their trades are successful, they'll improve their profitability with increased trading. Unfortunately, this is another example of overtrading, and it can have severe consequences for these traders' returns.

Hair-Trigger Trading
Hair-trigger trading is enhanced by electronic trading, which makes it possible to open or close a position within seconds of the idea forming in the trader's mind. If a trade moves slightly against the trader, it is sold immediately; if a market pundit shouts out a tip, a position can be opened before the ad break. Hair-trigger trading is easy to identify. Does the trader have many small losses and a few wins? Looking back over trade logs, did the trader overestimate his wins and conveniently dismiss his losses? Were trades exited almost as soon as they were entered? Are some positions continuously opened and closed? These are all classic, easily-identifiable signs of hair-trigger trading.

But the fix is also easy: only enter what you "know" will be a good trade (i.e., a high-probability trade according to your research and analysis, meeting all your predefined trade criteria). If there is doubt, do not make the trade. Losses are far worse than inactivity, and compounding losses are devastating.

Shotgun Trading
Craving the action, traders often develop a "shotgun blast" approach, buying anything and everything they think might be good. They might justify this by the fact that diversification lowers risk. But this logic is flawed. First, true diversity is spread over multiple asset classes. Second, multiple bad trades will never be better than just a few. If a trader has isolated a promising trade, concentrating capital on that trade makes the most sense. A telltale sign of shotgun trading is multiple small positions open concurrently. But an even more firm diagnosis can be made by reviewing trade history and then asking why that particular trade was made at the time. A shotgun trader will struggle to provide a specific answer to that question.

If you're attracted to the diversification aspect of investing, it's far better to buy and hold a blend of the market indexes. This puts the "house odds" in your favor. Be very selective when trading individual positions, and trade only the highest probability trades: a respectable success rate trading one position at a time can quickly degrade to less than 50% success with multiple positions.

Bandwagon Trading
Bandwagon trading is a deliberate attempt by discretionary traders to piggyback or mimic those they consider to be "in the know." This ploy is fundamentally flawed for two reasons. First, even experts don't have all the answers, and they can't predict the future. Their experience and talents are merely two factors among many.

The second reason is that when many traders follow the same path - led by a loudmouthed pundit, a biased stakeholder or the results of many technicians inadvertently using the same indicators - the initial move may degenerate rapidly. This is a basic economic principle: competition reduces margins. In trading, this manifests itself when bandwagon traders compete to exit identical positions as early as possible, often causing a price stall or reversal.

To make matters worse, novice traders are most likely to trade on the bandwagon and most likely to exit prematurely, exacerbating this effect. The strongest signal of bandwagon trading is adhering to someone else's recommendations, or a system devised by someone else. Is there a dependence on popular indicators with the same settings as taught to beginners? Has the "hot" new system or indicator lost its reliability?

If you find comfort in crowds and conformity, buy the index. If you want to trade, first develop your own system, do your own research, customize your indicators and finally - test, experiment and test some more before you trade.

Movers and Shakers
The market is not always smooth sailing. Instead of large trending moves, it sometimes shakes about in a choppy, sideways direction. Many novice traders will overtrade by assuming that minor market corrections are the beginning of the next trend. They'll then jump in and out as the expected trend forms and fails. They may even compound the situation by doubling their positions.

This can be the most destructive form of overtrading. Confident that the reversal is imminent, the trader doubles the size of a losing trade in the belief that he or she has averaged down to a better entry price and will therefore make a bigger profit on the move. Most often, however, this just increases losses. On the other hand, successful traders sometimes double winning trades - never losses - and are quite content to sit out the market, waiting for the right conditions under which to re-enter. An unskilled trader, however, will be continuously drawn back in.

The Bottom Line
The various forms of overtrading can be explained by the amateur's order of priorities. First and foremost, the beginner trader wants to confirm the advisability of his trade by taking profit whenever possible. Secondly, the novice trader wants to reduce his emotional discomfort either by selling as soon as a loss appears or by immediately re-entering the market after a loss or period of inactivity, hoping to "win it back" just like the casino gambler. Overtrading makes only a broker happy; the true professional's priorities will look like this: 

1. Avoid losses
2. Minimize risk
3. Minimize volatility
4. Maximize returns

Stick to these simple guidelines, and you'll be able to steer clear of overtrading.

More From Investopedia 

• Cheap Stocks Or Value Traps?
• Companies Built On A Single Product
• 8 Ways To Survive A Market Downturn

http://finance.yahoo.com/news/tips-avoiding-excessive-trading-195101131.html

Average Savings for EPF Members by Age, 2011

Average Savings for EPF Members by Age, 2011

Click here:

http://mystockfolio.blogspot.com/2012/10/average-savings-for-epf-members-by-age.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MyMalaysiaStockfolio+%28My+Stockfolio%29

The Myth of 'Good' Debt

By David Francis
Apr 27, 2012

The economic crisis and the tepid pace of the recovery have left millions of Americans deep in debt. And amid this slow recovery, many are struggling to make minimum payments to keep ahead of creditors.

The amount of debt the average American holds is staggering, compared with the average American salary. In its latest findings in 2010, the Social Security Administration calculated the average American wage index to be $41,673.83.

According to Creditcards.com, a website that tracks the credit card industry, the average American household holds $15,956 in credit card debt. The Census Bureau has determined than 60 percent of Americans own their homes; many of these people still owe money to a bank for mortgage payments. Estimates on the size of these payments vary, but most organizations say the majority of monthly payments fall between $700 and $1,700 per month.

[Related: Is A College Degree Worth It?]

On top of that, most Americans have to borrow money to buy a car. According to the auto website Edmunds.com, monthly car payments should average between 8 and 11 percent of monthly income, although many people pay more. College students are also forced to take out loans to pay for education. The Project on Student Debt has found that the average graduate of a four-year nonprofit university carries more than $25,000 in loans.

Based on these numbers, it seems almost impossible for the average American to be debt-free. But there are steep variations among these loans. Paying off some loans should be a priority. Others, while burdensome, can wait.

Better debt vs. worse debt.
Prior to the Great Recession, many financial experts differentiated between "good" debt and "bad" debt. The former included loans with low interest rates, such as a home loan. Because the value of a home presumably appreciated over time, the debt helped the borrower work toward building wealth. "Bad" debt included credit card loans, or loans taken out to pay for things that current cash reserves couldn't cover. The value of the product purchased with the credit card immediately depreciates upon purchase, while the money placed on the credit card immediately begins to accrue interest.

But according to David Bach, author of the Finish Rich book series and founder of www.FinishRich.com, the financial downturn changed these perceptions. "Good debt and bad debt is almost a myth that we were sold for 20 years," Bach says. "There's just debt. For the most part, debt is basically bad and difficult. It comes down to the interest rate."

Debt now seems to fall into two new categories: better debt and worse debt. Better debt is a loan with a low interest rate used to purchase something that adds value. Worse debt is used to buy a depreciating asset or debt used as a substitute for cash. A home loan, according to Bach, is an example of better debt.

"For the most part, most people have to borrow money to buy a home. The key is if you borrow money to buy a home, the faster you pay that loan off, the faster you're free," Bach says.

[Related: How to Use the IRS as a Credit Card]

The Catch-22 of debt is that one needs to go into debt to be considered a credit-worthy borrower with the ability to pay off large loans. Rod Ebrahimi, founder and CEO of ReadyforZero, a website that helps people plan to get out of debt, says establishing a good credit score is imperative for transitioning out of college. "A good debt you could have had through college is a credit card you had going into college and never carried a large balance," he says. "It may actually make sense to have some history."

However, Bach warns that this kind of debt can quickly become burdensome if the cardholder doesn't manage it responsibly. "If you're going to borrow money on your credit card, the goal should to be pay it off in full at the end of the month," Bach says. "Don't get stuck in the trap of paying minimum payments. Pay off these cards as fast as possible."

Making sound education decisions.
Ebrahimi says the growing student loan burden and the poor state of the economy, especially for young people, means students must approach student loans differently. They are often necessary, but one needs to be strategic in how they are used. He warns against using loans at for-profit universities, which promise much but often fail to deliver jobs that allow students to pay off their loans.

"At for-profit schools, you can get all kinds of degrees and you end up with six-figure debt, then can't find a job that allows you to pay them," he says.

He adds that loans should also be used strategically at nonprofit universities. "There can be good and bad students loans" at nonprofit universities, Ebrahimi says. "Many people believe they can pay at any university," but often, payments at state school are easier to manage.

http://finance.yahoo.com/news/myth-good-debt-170611202.html

Bursa Stock Prices (October 15, 2012)

http://www.btimes.com.my/data/Portfolio/16btbm1a.pdf
October 15, 2012

How Buffett determined the combined value of Capital Cities and American Broadcasting

Murphy was named president of Capital Cities in 1964.  

Murphy agreed to sell Buffett 3 million shares of Capital Cities/ABC for $172.50 per share.

How Buffett determined the combined value of Capital Cities and American Broadcasting

Approximate yield of the thirty-year US government bond in 1985 = 10%.

Cap Cities had 16 million shares = 13 million shares outstanding plus 3 million issued to Buffett.

Market cap = 16 million x $172.50 = $ 2760 million

The present value (intrinsic value) of $ 2760 million of this business would need to have earnings power of $276 million.  ($2760 x 10%)

1984

Capital Cities earnings net after depreciation and capital expenditures = $ 122 million. 

ABC net income after depreciation and capital expenditures = $ 320 million.

Combined earnings power of these two companies = $ 442 million.

However, the combined company would have substantial debt:  the approximately $ 2.1 billion that Murphy was to borrow would cost the company $ 220 million a year in interest.

So, the net earnings power of the combined company = approximately $200 million.

Additional considerations

Capital Cities’ operating margins were 28%.

ABC’s operating margins were 11%. 

If Murphy could improve the operating margins of the ABC properties by one-third to 15%, the company would throw off an additional $125 million each year, and the combined earnings power would

= $ 200 million + $ 125 million

= $ 325 million annually.

The present value of a company earning  $ 325 million annually discounted at 10%

= ($325 million / 10%)

= $3250 million.

The per share present value of a company earning $ 325 million with 16 million shares outstanding

= $ 325 million / 16 million

=  $ 203 per share.

This gives a 15% margin of safety over Buffett’s $ 172.50 purchase price. 

The margin of safety that Buffett received buying Capital Cities was significantly less compared with other companies he had purchased.  So why did he proceed?

Murphy was Buffett’s margin of safety.   When Capital Cities purchased ABC, Murphy’s talent for cutting costs was badly needed.  With the help of carefully selected committees at ABC, Murphy pruned payrolls, perks, and expenses.  Once a cost crisis was resolved, Murphy depended on his trusted manager to manage operating decisions.  He concentrated on acquisitions and shareholders assets.

Appendix

The margin of safety that Buffett accepted could be expanded if we make certain assumptions.

1.  Buffett says that conventional wisdom during this period argued that newspapers, magazines, or television stations would be able to forever increase earnings at 6% annually - without the need for any additional capital.  The reasoning, explains Buffett, was that capital expenditures would equal depreciation rates and the need for working capital would be minimal.  Hence, income could be thought of as freely distributed earnings.  This means that an owner of a media company possessed an investment, a perpetual annuity, that would grow at 6% for the foreseeable future without the need for any additional working capital. 

Media company

Earned $ 1 million

Expected to grow at 6%.

The appropriate price to pay would be $25 million dollars for this business.

Calculation: 

Present value 

=  $ 1 million / (risk free rate of 10% - 6% growth rate)

=  $ 1 million / 4%

=  $ 25 million

Compare that, Buffett suggests, to a company that is only able to grow if capital is reinvested.  

Another business

Earned $ 1 million

Could not grow earnings without reinvested capital

The appropriate price to pay would be $ 10 million dollars for this business.

Calculation:

Present value 

=  $ 1 million / risk free rate of 10%

=  $ 10 million.

Apply the above to Cap Cities

Calculations:

6 million outstanding shares

Earned $325 million or $ 203 per share

Growth 6%

Risk free rate 10%

Present value = $325 million / (10% - 6%) = $ 8125 million

Per share value = $ 507 per share.

Present value increases from $ 203 per share to $ 507 per share.

Buffett paid $ 172.50 per share.  ($172.50 / $ 507 = 34%).  Therefore, he enjoyed a 66% margin of safety over the $172.50 price that Buffett agreed to pay.

But there are a lot of "ifs".

However, the margin of safety that Buffett received buying Capital Ciies was significantly less compared with other companies he had purchased. 

His ability to obtain a significant margin of safety in Capital Cities was complicated by several factors.  

1.  The stock price of Cap Cities had been rising over the years.  Murphy was doing an excellent job of managing the company, and the company's share price reflected this.  (So, unlike GEICO, Buffett did not have the opportunity to purchase Cap Cities cheaply because of a temporary business decline.  

2.  The stock market didn't help, either.  And, because this was a secondary stock offering, Buffett had to take a price for Cap Cities' shares that was close to its then-trading value.

How Investing has Changed Our Lives

The $5,000 Invest Better Video Contest Winner!
By Motley Fool Staff
October 11, 2012

We received many inspiring entries for our first annual Invest Better Video Contest, but one rose to the top to win the $5,000 grand prize.

Meet Edward Bautista and his family, who share their story of how investing took them from sleeping on the floor and eating ramen noodles every day to paying for their daughter's college education. Edward's video inspired us because it shows how even when starting small, patient, long-term investing provides financial security and opens up our options. For example, Edward and his family can now afford to escape their Maui home for trips to snowy spots like Idaho!

And see the honorable mentions below:

• Susan Olson: "Meet Emily Collins, an 8-year-old investor"
• Lydia Cline: "A family's investing journey" (video no longer available)
• Dan Lamoureux: "Investing connects you to the world"
• The Carnett Family: "Creating a vision for the future"

http://www.fool.com/investing/general/2012/10/11/the-5000-invest-better-video-contest-winner.aspx?source=ihpdspmra0000002&lidx=5

How Warren Buffett valued Washington Post Company

Washington Post Company (WPC)

1973: 
Total Market cap $ 80 million.
Most security analysts, media brokers, and media executives estimated WPC's intrinsic value at $400 to $500 million.


Here was Buffett's reasoning.

1. Owner's earnings for that year:
Owner's earnings =
net income $13.3 million
+ depreciation & amortisation $3.7 million
- capital expenditure $ 6.6 million

Owner earnings = $10.4 million

Long-term U.S. government bond yield 6.81%.

The value of WPC = $10.4 / 6.81% = $ 152.7 million; this is almost twice the market value of the company but well short of Buffett's estimate.


Buffett's further reasoned that:

Over time, the capital expenditures of a newspaper = depreciation and amortization charges.

Therefore, net income = approximately to owner earnings.

Knowing this, the value of WPC
= net income / risk-free rate
= $ 13.3 million / 6.81%
= $ 195 million.


His other assumptions:

1. The increase in owner earnings will equal the rise of inflation.
2. However, newspapers in the 1970s have unusual pricing power; because most are monopolies in their community, they can raise their prices at rates higher than inflation.
3. If it is assumed that WPC has the ability to raise real prices by 3%, the value of the company is
= net income / (risk-free rate - 3%)
= $ 13.3 million / (6.81% - 3%)
= about $ 350 million.
4. WPC's pretax margins were 10%, which were below its 15% historical average margins. If pretax margins improved to 15%, the present value of the company would increase by $135 million, bringing the total intrinsic value to $ 485 million.



Buffett bought WPC at an attractive price.

Market cap $ 80 million.

Based on the above calculations, Buffett bought the WPC for at least half of its intrinsic value.

However, Buffett maintained that he bought the company at less than one-quarter of its value.

Either way, he clearly bought the company at a significant discount to its present value.

Buffett satisfied Ben Graham's premise that buying at a discount creates a margin of safety.

Different strategies for investing available cash.

Different strategies for investing available cash. WHY KEEP CASH?

One significant difference between many investors is evident in the different strategies for investing available cash.

Some investors will typically choose to be fully invested at all times, since cash balances would likely cause them to lag behind a rising market.  

Other investors, by contrast, are willing to hold cash reserves (for the short term) when no bargains are available.  Among the reasons offered are:

1.  Cash is liquid and provides a modest, sometimes attractive nominal return, usually above the rate of inflation.
2.  The liquidity of cash affords flexibility, for it can quickly be channeled into other investment outlets with minimal transaction costs.
3.  Finally, unlike any other holding, cash does not involve any risk of incurring opportunity cost (losses from the inability to take advantage of future bargains) since it does not drop in value during market declines.

Definition of 'Tenbagger'

Definition of 'Tenbagger'

A stock whose value increases 10 times its purchase price. This expression was coined by Peter Lynch, one of the greatest investors of all time, in his book "One Up On Wall Street" (1989).

Investopedia explains 'Tenbagger'

These types of returns are considered once-in-a-lifetime investments. Some of the most famous examples of tenbaggers include now blue-chip stocks like Wal-Mart, Hewlett-Packard and General Electric. Many investors are constantly in search of the elusive tenbagger, but there isn't an exact science to discover tenbagger stocks. Generally, these explosive companies are smaller companies (market cap under $1 billion) with large potential markets. Over time, these companies grow into their potential markets, providing patient investors with handsome returns.

Read more: http://www.investopedia.com/terms/t/tenbagger.asp#ixzz29TLSeRzN



Where did the term "tenbagger" originate?

On February 15, 1989, Peter Lynch's investing book, "One Up On Wall Street", made its debut. At the core of the book was a call to arms for individual investors. Lynch believed that individual investors could outperform highly educated Wall Street stock pickers by keeping their eyes open during their daily life and learning basic research skills. Lynch pointed out that, as consumers, workers, mothers and fathers, individual investors are much closer to the market than the people in Wall Street's ivory towers. When new products are introduced or new businesses opened up, consumers get first-hand information that Wall Street firms wait months for analysts to come up with.

Lynch explained that once a stock becomes noticeable enough to make the institutional approved list, most of the gains have already happened. He coined the term tenbagger to describe a stock that returns ten times the money that you put into it and gave numerous examples of ten, twenty, and even fortybaggers that individual investors could've spotted before Wall Street jumped in. These include everything from Dunkin' Donuts, Wal-Mart, The Limited and Stop & Shop. Lynch showed that Wall Street funds came in late on the majority of multi-baggers, seeing only a small percentage of the overall gains.

Boiled down to two precepts, "One Up On Wall Street" tells investors to invest where they have an edge in knowledge and keep up with the "story" of their stocks. Lynch didn't want investors to blindly buy companies that they encountered in their daily lives, but he suggested that those companies were the best place to start looking for great stocks rather than searching in an industry that they knew nothing about. He also emphasized the need to create a storyline for a company and keep up with any changes in that story so that investors can eliminate the market noise before deciding to buy or sell. The mixture of real world examples and practical advice made Lynch's book a classic and it continues to be a source of inspiration and instruction for individual investors today.

For more, read Pick Stocks Like Peter Lynch.

This question was answered by Andrew Beattie.

Read more: http://www.investopedia.com/ask/answers/09/tenbagger-peter-lynch.asp#ixzz29TOJzaAi

How do you value company DEF?

Company DEF

This company is in a business sector with durable competitive advantage and economic moat.  Its management has delivered many years of consistently good performance.  Its long term shareholders have been richly rewarded.


Financial data

ttm-Earnings $ 367 million
DPO 48%
Dividends paid $ 177 million
Market cap $ 5100 million


PBT Margin 36%
PAT Margin 27.3%
ROE  22.1%

ttm-PE 13.9x

EY  7.2%
DY 3.47%

Risk free interest rate 4%


How much would you pay to own this company?

Based on earnings stream:   Asset value = $ 9175 million
Based on dividends stream:  Asset value = $ 4425 million

At present market capitalization of $ 5100 million, the reward: risk ratio is as follows:

Upside = $ 4075 million
Downside = $ 675 million

Upside reward :  Downside risk = 6 : 1


Now, this company has been growing its earnings at 15% per year for the last 10 years.  It has also paid growing dividends over these years.  It is also predicted to a high degree of confidence that this company can continue to deliver such growth.

For those with a long term horizon in their investing, is this company under-valued, fairly valued or over-valued?

Present Value is the discounted value of all its future cash flows, and remember that growth is a factor in the calculation of Present Value.

Remember also the three important words in investing - Margin of Safety.

Do you have a margin of safety in your investing into this company at today's price?

Do You Invest Like a Grasshopper or an Ant?

When it comes to retirement planning, are you Aesop’s grasshopper or ant?

Like the ant in the fable, should you hoard and invest as much money as you can now, depriving yourself of little luxuries and gambling that you’ll live to a grand old age? Or should you have a bit of fun, like the grasshopper, spend that cash and then end up in your 90s living on Ramen noodles?

Jim Miller’s article posted earlier on this blog— “How Much Should You Save?” — underlines the challenge everyone working without the backup of a pension faces.

A recent Bloomberg.com article (see article posted below) suggests that more of us may be grasshoppers, but caving into immediate gratification may give our finances as much as a six-figure hit. The article notes that a “unique challenge for retirement planning is that the end goal is so far away that it’s hard to see how actions we take or don’t take today will have a huge impact on our older selves.”

Bloomberg further references a contract created by the Allianz Global Investors Center for Behavioral Finance. The contract, written to help financial advisers hold their clients to the investing course, includes this passage: “Should the portfolio value decline by 25 percent, we commit to avoid the urge to panic and sell the portfolio. Similarly, should the portfolio value increase by 25 percent, we commit to avoid the urge to chase the hottest investments.”

If you really want a look at how your savings will pile up if invested in a retirement plan, it’s worthwhile to play around with the 401(k) savings calculator at Bankrate.com. Then tinker with the retirement income calculator at the same website — a fascinating, but also scary, numbers game that may have you joining the ant farm.

http://blog.betterinvesting.org/?p=2836&utm_source=MailingList&utm_medium=email&utm_campaign=BI+Weekly_10-15-12

Retrain Your Brain for Financial Success
By Carla Fried - Oct 9, 2012

Dismal market returns haven’t exactly created a tailwind for 401(k) and IRA portfolios over the last decade or so, but an equally pernicious -- and more entrenched -- problem is that our brains are messing with our retirement plans.

“We are wired for financial defeat,” says Rapid City, South Dakota, certified financial planner Rick Kahler. “Whatever has the most emotional juice right now is what gets our attention. Invest $5,000 in your IRA for a retirement that is 10, 20, 30 years away? Or spend the $5,000 for a vacation to the Bahamas?” All too often, the Bahamas wins out.

William Meyer, founder of Social Security Solutions, notes that our thirst for immediate gratification can easily take a six-figure toll. More than two-thirds of folks opt to claim a lower Social Security benefit starting as early as age 62. For a married couple, than can mean leaving as much as $100,000 on the table. “If you wait to claim until age 70, you’re locking in a benefit that is 76 percent larger," says Meyer.

More productive planning

Forever tweaking your asset allocation probably won’t get you near the retirement payoff that tweaking your brain will achieve. Consider these strategies for engaging your brain in more productive retirement planning:

Get Thee to a Calculator, Pronto: OK, you know you probably should be saving more for retirement. And when life keeps intervening -- that Bahamas vacation you and yours really really need, or the realization that the kid’s orthodontia isn’t covered by insurance -- you tell yourself that next year, you’ll ramp up your savings rate. You’ve got plenty of time, right?

What you may not realize is how expensive that time is. Research conducted by Craig McKenzie, a psychology professor at the University of California, San Diego, shows that we have a tendency to “massively underestimate the cost of waiting to save. It’s difficult to appreciate the difference between giving yourself 20 years to save and 40 years.”

For example, a 30-year-old who is saving $10,000 a year and earning an annualized 6 percent will have $1.2 million at age 65. Care to guess what someone starting at 45 will have? About $390,000. The younger saver invests $150,000 more than the 45-year-old does, and in return has an ending balance that's $800,000 larger. Even if you’re already past your 20s and 30s, you might find it eye-opening to see how extending your investment timeline by delaying retirement on the back end of the calculation can help matters. Your company retirement plan probably has an online calculator you can play with; or try this one.

Make it Personal: How you frame retirement savings decisions can help boost your ability to delay gratification. When individuals were asked if they'd prefer to have $3,400 in one month or $3,800 in two months, 57 percent chose the latter. When the same scenario was framed in terms of one’s personal age -- “when you are 2 months older” -- 83 percent chose to wait for the bigger payoff.

How does that translate to better retirement planning? Yale School of Management marketing professor Shane Frederick, one of the study’s authors, says a 50-year-old who frames a savings goal as “when I am 65” will likely be more patient to focus on that delayed gratification, than someone who frames it as a more generic “in 15 years.”

Time Travel: Another unique challenge for retirement planning is that the end goal is so far away that it’s hard to see how actions we take or don’t take today will have a huge impact on our older selves. When researchers showed individuals doctored photos of their future selves, the human guinea pigs said they would save more than twice as much for retirement, compared to a control group that wasn’t given a glimpse of their older self.

Work is afoot to bring this visual exercise to a 401(k) plan near you. In the meantime, Hal Hershfield, who led the research, says he wouldn’t recommending using apps that age your face. “They're just not accurate enough, and I think seeing a strange-looking version of your future self may actually have the perverse effect of causing you to identify less.”

Hershfield, an assistant professor of marketing at New York University’s Stern School of Business, says new research that has yet to be published shows that simply writing a letter to your future self can help you become more invested in the welfare of that older person. “In a way, this task is a very low-tech version of the age-progression [photo morphing] techniques: Both have the same goal of creating a more vivid image of the future self.” Hershfield says hanging out with older folks -- parents, grandparents, volunteering with an organization for the elderly -- can also have a beneficial impact on your resolve to save more today.

Channel Ulysses. Most of us suffer from a bad case of recency bias, the tendency to extrapolate that whatever is happening today will keep happening. That’s why it’s so hard to buy low and sell high. If your recent experience is a falling market and bad returns, it’s not exactly easy to belly up to the bar and buy stocks, or simply stay committed to what you already own.

A Ulysses Contract -- a one-page statement that lays out your long-term strategy and the fact that you’re committed to staying the course -- can be a line of defense against over-reacting to current events. Like the Greek warrior, you are pre-planning for how you will circumvent alluring emotional sirens that can thwart your retirement plan.

For example, a sample Ulysses contract -- created by the Allianz Global Investors Center for Behavioral Finance for financial advisers to use with clients -- includes this passage: “Should the portfolio value decline by 25 percent, we commit to avoid the urge to panic and sell the portfolio. Similarly, should the portfolio value increase by 25 percent, we commit to avoid the urge to chase the hottest investments.”

Another useful step is to include a clause in your contract saying that before you ever deviate from your plan, you will write down your rationale. As Nobel Laureate Daniel Kahnemann explained in his book, "Thinking, Fast and Slow," you don’t want to cede all power to the quick-twitch intuitive part of your brain. Slowing down and simply writing down why you want to change course triggers more deliberate rational thinking. That’s the key to getting ahead and staying ahead.

(Carla Fried is a freelance writer based in California.)

http://www.bloomberg.com/news/2012-10-05/retirement-planning-2-0-retrain-your-brain-for-financial-success.html