Thursday, 25 July 2013
ALL BUSINESS: Not All Are Risk-Averse. Investing in SPACs is a blind bet, whether you're a big institution or a small shareholder.
Tuesday March 11
By Rachel Beck, AP Business Writer
ALL BUSINESS: Investors Buck Fears About Risk and Buy Share in "Blank Check" Companies
NEW YORK (AP) -- Not all investors today are running away from risk amid the financial market turmoil. There's a flood of money flowing into companies with no earnings or assets to speak of.
So-called "blank check" companies, founded by some of Wall Street's marquee names, are the hottest sector for stock offerings this year. Major stock exchanges are clamoring to list these investment shells that use their IPO proceeds to acquire other businesses.
Investing in these companies is a blind bet, whether you're a big institution or a small shareholder. Their success hinges on whether management can make deal in a specified time and the company bought is a solid investment. Some have worked, like the deal for clothing retailer American Apparel.
But let's not kid ourselves: These companies favor the executives who are running them.
The risks aren't deterring investors. Of the 19 U.S. IPOs this year, these special-purpose acquisition companies, or SPACs, account for 12 of them, raising more than $3.4 billion, according to industry tracker SPAC Analytics. In 2007, SPACs were almost a quarter of all IPOs, a dramatic rise from the one public offering for a SPAC back in 2003.
Behind some of SPACs are big name investors, like activist investor Nelson Peltz and billionaire Ronald Perelman, who is best known for owning cosmetics giant Revlon. Major investment banks such as Citigroup, Credit Suisse and Lehman Brothers are underwriting the deals.
That's raising the profile of SPACs in the marketplace. It also helps that they work like private-equity funds for the masses, giving small investors access to dealmaking that they don't generally have. SPACs also have been largely spared from the credit crisis because don't initially need to access debt to finance their acquisitions.
To get into a SPAC, investors purchase the stock at the IPO or after. Their investments are then earmarked to be used for one big acquisition that typically must be completed in about 18 to 24 months after the IPO.
Once management picks a target, shareholder approval is required. If investors vote it down, or if management can't find a suitable acquisition target, the company is dissolved and investors largely get their money back.
"Investors are taking a significant risk because they are investing in a company without any idea of what will be acquired," said Wayne State University assistant professor of law Steven Davidoff.
Thanks to scandals involving SPACs two decades ago -- when executives defrauded investors, which essentially led to SPACs disappearing from the marketplace in the early 1990s -- there are better protections in place for shareholders. Most importantly, shareholders' money is put in escrow until an acquisition is made or the company dissolved.
But that doesn't mean investors are entitled to get back every last cent. Companies often deduct the costs for seeking an acquisition from the pool of investor money.
SPACs also don't have to be transparent. Marathon Acquisition Corp. last month said that it had picked a target, but declined to disclose what it was. It also said it could take up to Aug. 30 to close the deal.
Once a deal is done, another question arises: Can management run the company it bought? Some might not have incentive since they've already made their big money already: SPAC managers typically get shares at discounted prices.
Despite the risks, stock exchanges want a piece of this fast-growing, lucrative pie. The 66 companies that listed last year raised some $12 billion, according to SPAC Analytics, and the American Stock Exchange is where most of the action happened. Now Nasdaq Stock Market and the New York Stock Exchange are seeking permission from the Securities and Exchange Commission for the ability to list.
Nasdaq's senior vice president Bob McCooey calls past problems regarding SPACs "ancient history" and notes that the Nasdaq is trying diminish risk by tightening its listing standards, including requiring a majority of independent directors to sign off on acquisitions, too.
It's too soon to tell if most SPACs live up to the current hype. A few big-name deals have claimed much of the attention in recent years, but 74 of the 156 that have come to market are still searching for an acquisition, according to SPAC Analytics. Thirteen have been liquidated, and the remaining have announced an acquisition target or have completed an acquisition.
Some investors may be willing to wait things out since SPAC shares are holding up better than the overall stock market. In the last six months, they've lost 1.47 percent versus about an 11 percent decline in the Standard & Poor's 500 index, according to Dealogic.
The trouble with that gamble is there aren't any clues about how it will pay off.
Rachel Beck is the national business columnist for The Associated Press.
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=27530861
NOTE:
Anytime you see warrants trading at significant discount - stay away or just keep it on your radar in case of the merger being consummated. Another thing to pay attention to is the price of the common - how close it is to the cash in the trust account (aka how close it is from the share price that the holder will receive in case of termination)
Performance of SPACs in the US markets
PERFORMANCE of SPACS at various stages (Summary)
The securities of the six companies still looking for a transaction are
- up 2.20% since their original offerings versus an average decrease of 7.01% for the NASDAQ Composite.
Of the 11 companies that have open deals,
- the securities of 10 of these companies are trading at or above their original offering price and 1 is trading below.
- The average company with an open transaction is up 4.72% versus an average decrease of 5.97% for the NASDAQ Composite.
Of the 80 companies that have completed transactions and have not yet been acquired,
- the securities of only 24 of these companies are trading above their original offering price and 56 are trading below.
- The average company is down 15.53% versus an average decline of 5.15% for the NASDAQ Composite.
The 7 companies that have either been acquired or are in the process of being acquired
- are down on average 75.31% versus an average increase of 17.81% for the NASDAQ Composite.
SUMMARY NOTES
Wall Street has never been bashful about recycling old products and concepts. One of the recent concepts to be recycled is the blank check IPO. Blank check companies are also known as Special Purpose Acquisition Companies (SPACS).
As of December 11, 2009, 162 SPACS have gone public since August of 2003, raising gross proceeds totaling $22,003,690,655 (give or take a buck or two). Another 67 companies currently have registration statements on file with the SEC and are looking to raise $10,787,120,608 (once again, give or take a buck or two). If you back out the companies that filed their initial registration statements on or before December 31, 2007, there are 27 companies currently in registration that are looking to raise $3,899,000,000. Another 33 companies have filed and withdrawn registration statements; two of these companies subsequently went public on London’s AIM stock exchange, where they raised gross proceeds totaling $381 million. The companies that withdrew their registration statements were looking to raise $6,401,000,000
87 companies have actually completed acquisitions, and another 11 have deals pending. Of the companies that have completed transactions, seven have either been acquired or are in the process of being acquired. There are 59 companies that have failed to close on their proposed acquisitions and have either liquidated or are currently in the process of liquidating. These companies raised a total of $7,050,111,754 in their offerings. The shareholders of ten of these liquidated companies have extended the corporate charters for nine of companies so that they could operate as a shell. One of these companies has actually closed on a transaction.
There are 5 SPACS still looking for deals.
There have been several high profile transactions. The first was the acquisition of Jamba Juice Company by Services Acquisition Corporation International. Freedom Acquisition Holdings subsequently acquired GLG Partners and Endeavor Acquisition acquired American Apparel.
The first of the new crop of blank check companies went public on August 23, 2003.
PERFORMANCE
Of the 80 companies that have completed transactions and have not yet been acquired, the securities of only 24 of these companies are trading above their original offering price and 56 are trading below. The average company is down 15.53% versus an average decline of 5.15% for the NASDAQ Composite. The 7 companies that have either been acquired or are in the process of being acquired are down on average 75.31% versus an average increase of 17.81% for the NASDAQ Composite.
Of the 11 companies that have open deals, the securities of 10 of these companies are trading at or above their original offering price and 1 is trading below. The average company with an open transaction is up 4.72% versus an average decrease of 5.97% for the NASDAQ Composite. The securities of the six companies still looking for a transaction are up 2.20% since their original offerings versus an average decrease of 7.01% for the NASDAQ Composite.
A note on methodology: When calculating the return percentages for each of the companies, I have added the current market value of the applicable common shares and warrants, subtracted the unit cost, and divided the resulting sum by the original unit cost. In those instances where companies have redeemed their warrants, for the warrant value I have used the value that was created through the exercise of the warrant. For example, in December 2007, HLS Systems International (originally Chardan China North Acquisition) redeemed its warrants. The common stock of HLS last traded at $11.97. If you assume that $6.97 of value has been created from each of the two warrants (which had a strike price of $5.00 per share), the original units, which were priced at $6.00 and are no longer trading, now have a value of $25.91 ($11.97 + $6.97 + $6.97). The computation for calculating the return on HLS: $11.97 + $6.97M+ $6.97 - $6.00 = ($19.91) divided by $6.00 yields a return of 331.83%.
I realize that the second calculation does not include the cost of exercising the warrants. If we add the exercise cost of the two warrants ($10.00) to the original cost of the unit ($6.00), our basis is $16.00. We now own three shares with a total value of $15.60. As an alternative, we could compute the return as follows: $35.91 - $16.00 = $19.91. $19.91 divided by $16.00 yields a negative return of 122.44%.
http://www.siliconinvestor.com/subject.aspx?subjectid=55438
The securities of the six companies still looking for a transaction are
- up 2.20% since their original offerings versus an average decrease of 7.01% for the NASDAQ Composite.
Of the 11 companies that have open deals,
- the securities of 10 of these companies are trading at or above their original offering price and 1 is trading below.
- The average company with an open transaction is up 4.72% versus an average decrease of 5.97% for the NASDAQ Composite.
Of the 80 companies that have completed transactions and have not yet been acquired,
- the securities of only 24 of these companies are trading above their original offering price and 56 are trading below.
- The average company is down 15.53% versus an average decline of 5.15% for the NASDAQ Composite.
The 7 companies that have either been acquired or are in the process of being acquired
- are down on average 75.31% versus an average increase of 17.81% for the NASDAQ Composite.
SUMMARY NOTES
Wall Street has never been bashful about recycling old products and concepts. One of the recent concepts to be recycled is the blank check IPO. Blank check companies are also known as Special Purpose Acquisition Companies (SPACS).
As of December 11, 2009, 162 SPACS have gone public since August of 2003, raising gross proceeds totaling $22,003,690,655 (give or take a buck or two). Another 67 companies currently have registration statements on file with the SEC and are looking to raise $10,787,120,608 (once again, give or take a buck or two). If you back out the companies that filed their initial registration statements on or before December 31, 2007, there are 27 companies currently in registration that are looking to raise $3,899,000,000. Another 33 companies have filed and withdrawn registration statements; two of these companies subsequently went public on London’s AIM stock exchange, where they raised gross proceeds totaling $381 million. The companies that withdrew their registration statements were looking to raise $6,401,000,000
87 companies have actually completed acquisitions, and another 11 have deals pending. Of the companies that have completed transactions, seven have either been acquired or are in the process of being acquired. There are 59 companies that have failed to close on their proposed acquisitions and have either liquidated or are currently in the process of liquidating. These companies raised a total of $7,050,111,754 in their offerings. The shareholders of ten of these liquidated companies have extended the corporate charters for nine of companies so that they could operate as a shell. One of these companies has actually closed on a transaction.
There are 5 SPACS still looking for deals.
There have been several high profile transactions. The first was the acquisition of Jamba Juice Company by Services Acquisition Corporation International. Freedom Acquisition Holdings subsequently acquired GLG Partners and Endeavor Acquisition acquired American Apparel.
The first of the new crop of blank check companies went public on August 23, 2003.
PERFORMANCE
Of the 80 companies that have completed transactions and have not yet been acquired, the securities of only 24 of these companies are trading above their original offering price and 56 are trading below. The average company is down 15.53% versus an average decline of 5.15% for the NASDAQ Composite. The 7 companies that have either been acquired or are in the process of being acquired are down on average 75.31% versus an average increase of 17.81% for the NASDAQ Composite.
Of the 11 companies that have open deals, the securities of 10 of these companies are trading at or above their original offering price and 1 is trading below. The average company with an open transaction is up 4.72% versus an average decrease of 5.97% for the NASDAQ Composite. The securities of the six companies still looking for a transaction are up 2.20% since their original offerings versus an average decrease of 7.01% for the NASDAQ Composite.
A note on methodology: When calculating the return percentages for each of the companies, I have added the current market value of the applicable common shares and warrants, subtracted the unit cost, and divided the resulting sum by the original unit cost. In those instances where companies have redeemed their warrants, for the warrant value I have used the value that was created through the exercise of the warrant. For example, in December 2007, HLS Systems International (originally Chardan China North Acquisition) redeemed its warrants. The common stock of HLS last traded at $11.97. If you assume that $6.97 of value has been created from each of the two warrants (which had a strike price of $5.00 per share), the original units, which were priced at $6.00 and are no longer trading, now have a value of $25.91 ($11.97 + $6.97 + $6.97). The computation for calculating the return on HLS: $11.97 + $6.97M+ $6.97 - $6.00 = ($19.91) divided by $6.00 yields a return of 331.83%.
I realize that the second calculation does not include the cost of exercising the warrants. If we add the exercise cost of the two warrants ($10.00) to the original cost of the unit ($6.00), our basis is $16.00. We now own three shares with a total value of $15.60. As an alternative, we could compute the return as follows: $35.91 - $16.00 = $19.91. $19.91 divided by $16.00 yields a negative return of 122.44%.
http://www.siliconinvestor.com/subject.aspx?subjectid=55438
Disadvantages of SPAC
SPAC disadvantages:
Other than the risks normally associated with IPOs, SPACs’ public shareholders' risks may include:
There is also potential for delay and expense attributable to the public shareholders' special rights and the costs of functioning as a registered public company.
Research coverage of SPACs has been limited. This is due to conflicts that discourage underwriters from covering the companies they are most familiar with. In addition, traditional sell side coverage is hesitant to allocate time and effort to research a company when certainty of deal completion is not known.
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=90209947
Other than the risks normally associated with IPOs, SPACs’ public shareholders' risks may include:
- limited liquidity of their securities
- low visibility on future acquisition(s) at the time of the SPAC public offering
- dilution due to management and sponsor shares (20%)
- public shareholder approval contingency may make SPAC unattractive to sellers
- potential for uncertainty associated with the SEC merger/acquisition proxy process
There is also potential for delay and expense attributable to the public shareholders' special rights and the costs of functioning as a registered public company.
Research coverage of SPACs has been limited. This is due to conflicts that discourage underwriters from covering the companies they are most familiar with. In addition, traditional sell side coverage is hesitant to allocate time and effort to research a company when certainty of deal completion is not known.
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=90209947
A "blank cheque company" also known as SPAC (Special Purpose Acquisition Company
A blank check company is a development stage company that has been formed for no specific purpose other than to complete a merger or acquisition with an operating entity, the identity of which is unknown when the company is formed. Because such transactions generally, but not always, trigger a change of control, with the shareholders of the acquired company now owning more than 50% of the combined entities, the majority of these transactions are accounted for as reverse mergers.
Blank check IPOs had a run of popularity during the 1980s. However, the abuses of that period, particularly the promotional activities of insiders looking to make a fast buck through the promotion of their stock rather than the acquisition of a viable business, led the SEC to place some significant restrictions on the practice.
The SEC has discouraged blank check IPOs with Rule 419, which regulates the issuance of “penny stock”, defined as shares priced below $5, by companies that are in the development stage. Rule 419 pertains to all companies with assets of less than $5 million. Because all of the recent offerings have been priced over $5 per unit and have each raised a minimum of $9 million in gross proceeds; the offerings have been exempt from the provisions of Rule 419.
The newly public blank check companies have been sensitive to the failures of their predecessors. To alleviate the concerns of potential investors, all of the recent offerings have voluntarily complied with most of the provisions of Rule 419 and the companies have been careful to structure the transactions so that the founders will not be in a position to enrich themselves at the expense of their new public shareholders.
Most of the funds raised in a blank check IPO are placed in a trust account and can only be released in the event that the company completes a business combination that wins approval from a majority of the company’s public shareholders. Depending on the individual company, a proposed transaction can be blocked if 20% to 40% of the non-insider shares are voted against the transaction. Regardless of the outcome of the vote on the proposed acquisition, dissenting shareholders have the option of having their shares redeemed in an amount that is equal to their pro rata share of the funds held in the trust account. If a transaction is not completed within a specified period that can range from eighteen to thirty months, the company will be liquidated with the proceeds distributed to the public shareholders. The insiders will not receive any of the proceeds.
All of these offerings have been artfully priced. Many of the early deals have been priced at $6 per unit, with each unit consisting of one share of common stock and warrants to purchase two additional shares of common stock at $5 per share.
Subsequent to the IPOs, the common shares have generally traded at a slight discount to their liquidation value. When investing in these securities, the conservative play is to invest in the common shares, which are generally trading at or near their liquidation value. The worst-case scenario: You get your money back. The more speculative route would be to buy the warrants.
I would encourage everyone to do some due diligence before purchasing any of these securities. They are speculative. Deals do crater before they are approved and there have been a lot of bad acquisitions. If you do purchase any of these securities, please do not allocate a significant portion of your investment portfolio. It might also be advisable to buy a basket of securities, rather than focusing on one company.
At the very least, the following risk factors should be taken into consideration:
-- Many reverse mergers fail. Companies that go public via this route generally do so because they would be unable to complete a traditional IPO. However, the magnitude of the dollars currently being raised in these offerings should mean that the newly public companies might be in a position to attract some decent acquisition candidates.
-- An investment in a blank check company is ultimately a bet that the management of the company will have the expertise to identify and close on the acquisition of a quality private entity. The last year has seen a significant upgrading in the management groups taking these companies public.
-- These securities are often very thinly traded. You are at the mercy of the market makers. Be very careful if you place an order.
http://www.siliconinvestor.com/subject.aspx?subjectid=55438
Blank check IPOs had a run of popularity during the 1980s. However, the abuses of that period, particularly the promotional activities of insiders looking to make a fast buck through the promotion of their stock rather than the acquisition of a viable business, led the SEC to place some significant restrictions on the practice.
The SEC has discouraged blank check IPOs with Rule 419, which regulates the issuance of “penny stock”, defined as shares priced below $5, by companies that are in the development stage. Rule 419 pertains to all companies with assets of less than $5 million. Because all of the recent offerings have been priced over $5 per unit and have each raised a minimum of $9 million in gross proceeds; the offerings have been exempt from the provisions of Rule 419.
The newly public blank check companies have been sensitive to the failures of their predecessors. To alleviate the concerns of potential investors, all of the recent offerings have voluntarily complied with most of the provisions of Rule 419 and the companies have been careful to structure the transactions so that the founders will not be in a position to enrich themselves at the expense of their new public shareholders.
Most of the funds raised in a blank check IPO are placed in a trust account and can only be released in the event that the company completes a business combination that wins approval from a majority of the company’s public shareholders. Depending on the individual company, a proposed transaction can be blocked if 20% to 40% of the non-insider shares are voted against the transaction. Regardless of the outcome of the vote on the proposed acquisition, dissenting shareholders have the option of having their shares redeemed in an amount that is equal to their pro rata share of the funds held in the trust account. If a transaction is not completed within a specified period that can range from eighteen to thirty months, the company will be liquidated with the proceeds distributed to the public shareholders. The insiders will not receive any of the proceeds.
All of these offerings have been artfully priced. Many of the early deals have been priced at $6 per unit, with each unit consisting of one share of common stock and warrants to purchase two additional shares of common stock at $5 per share.
Subsequent to the IPOs, the common shares have generally traded at a slight discount to their liquidation value. When investing in these securities, the conservative play is to invest in the common shares, which are generally trading at or near their liquidation value. The worst-case scenario: You get your money back. The more speculative route would be to buy the warrants.
I would encourage everyone to do some due diligence before purchasing any of these securities. They are speculative. Deals do crater before they are approved and there have been a lot of bad acquisitions. If you do purchase any of these securities, please do not allocate a significant portion of your investment portfolio. It might also be advisable to buy a basket of securities, rather than focusing on one company.
At the very least, the following risk factors should be taken into consideration:
-- Many reverse mergers fail. Companies that go public via this route generally do so because they would be unable to complete a traditional IPO. However, the magnitude of the dollars currently being raised in these offerings should mean that the newly public companies might be in a position to attract some decent acquisition candidates.
-- An investment in a blank check company is ultimately a bet that the management of the company will have the expertise to identify and close on the acquisition of a quality private entity. The last year has seen a significant upgrading in the management groups taking these companies public.
-- These securities are often very thinly traded. You are at the mercy of the market makers. Be very careful if you place an order.
http://www.siliconinvestor.com/subject.aspx?subjectid=55438
I have $ 50,000 to invest into stocks, what should I do?
This young lady has saved $ 50,000 since she started her first job 3 years ago. She would like to invest this money in the stock market. How will you advise her?
She should not invest the money in the stock market if she needs to use the cash for other purposes within the next 5 years. Investing in the stock market is best done with money she does not need for at least 5 years or more. The market can be very volatile in the short term and she may be cashing her stocks when the market is in a bear phase, to her detriment.
With the above provision, she can safely invest into stocks (assuming that she has acquired the necessary education or guidance). Here are probably some issues she can consider:
1. Since the market has a good run since 2009 and is at historical high levels, she would need to be careful as she will be investing in a market where the prices of most stocks are probably also too high. She should allocate 50% of her cash to fixed deposits and 50% of her cash into stocks.
2. The money she put into stocks, she can diversify these into 5 to 7 stocks. This will diversify some of the non-systemic risks associated with individual stocks. Her portfolio will still be exposed to the systemic risk of the market, which cannot be avoided.
3. She should select her stocks carefully, using a bottom up approach. Her stock selections will be guided by her investment objectives, investing time horizon, and risk tolerance.
I suppose these 3 simple steps will be an initial plan that she can implement with the help or guidance of her mentor. Hopefully, she has one or will ask for advice from one who is willing.
She should not invest the money in the stock market if she needs to use the cash for other purposes within the next 5 years. Investing in the stock market is best done with money she does not need for at least 5 years or more. The market can be very volatile in the short term and she may be cashing her stocks when the market is in a bear phase, to her detriment.
With the above provision, she can safely invest into stocks (assuming that she has acquired the necessary education or guidance). Here are probably some issues she can consider:
1. Since the market has a good run since 2009 and is at historical high levels, she would need to be careful as she will be investing in a market where the prices of most stocks are probably also too high. She should allocate 50% of her cash to fixed deposits and 50% of her cash into stocks.
2. The money she put into stocks, she can diversify these into 5 to 7 stocks. This will diversify some of the non-systemic risks associated with individual stocks. Her portfolio will still be exposed to the systemic risk of the market, which cannot be avoided.
3. She should select her stocks carefully, using a bottom up approach. Her stock selections will be guided by her investment objectives, investing time horizon, and risk tolerance.
I suppose these 3 simple steps will be an initial plan that she can implement with the help or guidance of her mentor. Hopefully, she has one or will ask for advice from one who is willing.
Wednesday, 24 July 2013
Reading an annual report of a company a day is probably the best use of your time allocated for investing.
It only takes about 2 minutes to know if a person is well versed with equity investing. The majority are not and they should rightly invest through funds run by good professional managers. They should know the limitations and costs of investing in mutual funds too.
For the few who are knowledgeable and comfortable to invest safely on their own, how can the time they allocate for their investing be optimally utilized?
Probably, an hour a day set aside to read the annual report of a company of your interest is the answer, for me. These annual reports are easily available through the internet. Through discipline and hard work, you can then develop a good knowledge on these companies and their related industries.
Over time, you will have deep understanding of many companies. These companies that are within your circle of competence are monitored to benefit your investing.
Thursday, 18 July 2013
Competitive Advantage Counts: The best indicator of a company's future success
Imagine a stock that offers the combination of high growth, a low P/E ratio, low debt levels and a high return on equity (ROE). It looks like a recipe for an unbeatable investment, and investors would be hard pressed to find a stock with better fundamentals.
But as compelling as these fundamental features might be, they still do not hold a candle to the best indicator of a company's future success: sustainable competitive advantage. While performance measures like P/E and ROE are certainly important tools for assessing a company, they are not necessarily a complete reflection of future growth and profitability. A company's long-term success is largely driven by its ability to maintain a competitive advantage - and keep it, even in the toughest, most volatile economic times. (For background reading, see Economic Moats Keep Competitors At Bay.)
The Survivors In its 2010 Value Creators Report, Boston Consulting Group analyzed the total shareholder returns(TSR) of more than 4,000 companies to identify the world's top performers and their underlying drivers of success. A recurring theme in the Boston Consulting Group's research is that firms with competitive advantage are capable of creating value for shareholders. The 2010 report focused on the importance of value creation in a corporation's strategy; the top companies in the report showed strong growth in sales and shareholder returns in the 2005-2009 period.
A good example of a business that outperformed the market in the period examined was Apple Computers (Nasdaq:AAPL), which was ranked third in the report's Large-Cap Companies with sales growth of 37% between 2005 and 2009 and total shareholder returns of 45.6%. (To learn more about what it takes for a company to be successful, see 3 Secrets Of Successful Companies and The Characteristics Of A Successful Company.)
What Does Competitive Advantage Look Like?
The trouble for investors is that, most of the time, sustainable competitive advantage is not easy to spot. For starters, it's awfully hard to measure. Unlike performance measures like return on capital employed (ROCE) and valuation metrics like P/E, competitive advantage cannot be boiled down to a formula or a ratio; furthermore, distinguishing between competitive advantage and operational efficiency is often difficult.
Harvard Business School Professor Michael Porter, in his excellent essay, "What Is Strategy?" (1996), argues that these two concepts must not be confused: operational effectiveness means a company is better than rivals at similar activities while competitive advantage means a company is performing better than rivals by doing different activities or performing similar activities in different ways. Investors should know that few companies are able to compete successfully for long if they are doing the same things as their competitors.
At the same time, gaining a sustainable competitive advantage is not as simple as just being different. When companies do eventually manage to achieve competitive advantage, more often than not the advantage is short lived. Like bees to honey, competitors are drawn to the high profits of competitive advantage; competitors work hard to develop new technologies and business techniques that can quickly upset the competitive status quo. Remember, today's competitive advantage can become tomorrow's albatross.
At the end of the day, it is sustainability that is so critical. Powerful competitive advantage creates a big barrier around a business, allowing it to fend off competitors and enjoy extraordinary growth and profitability. The best long-term investments are those companies whose walls are not only high but also getting higher and thicker over time. Think of Coca Cola's (Nasdaq:COKE) global brand name recognition, Microsoft's (Nasdaq:MSFT) dominance of the PC operating system, or Wal-Mart's (NYSE:WMT) advanced information technology and inventory management systems. Investors need to understand the circumstances in which a company and its business model compete and whether the model puts the company at a competitive advantage or disadvantage.
Spotting Competitive Advantage
A company's future is never certain, so how can an investor pinpoint companies with growth and profits that will be substantially higher in the years to come? In Berkshire and Hathaway's 1996 Chairman's Letter to Shareholders, Warren Buffett, one of the world's greatest investors, says that the trick is to look for firms that already have competitive strengths and that operate in areas that are not susceptible to big changes:
More than anything, Buffett looks for companies that have a sustainable competitive advantage. Here is what he says in the December 1999 issue of Fortune Magazine:
Conclusion
When it comes to determining a company's competitive advantage, there are a few important questions that investors can ask about a company: Is its strategy different from other companies in the market? Does the company's strategy position deliver superior profits? Is the strategy defensible? If investors can respond yes to these questions, the company may have good future prospects.
http://www.investopedia.com/articles/fundamental/03/040903.asp?utm_source=coattail-buffett&utm_medium=Email&utm_campaign=WBW-6/05/2013
But as compelling as these fundamental features might be, they still do not hold a candle to the best indicator of a company's future success: sustainable competitive advantage. While performance measures like P/E and ROE are certainly important tools for assessing a company, they are not necessarily a complete reflection of future growth and profitability. A company's long-term success is largely driven by its ability to maintain a competitive advantage - and keep it, even in the toughest, most volatile economic times. (For background reading, see Economic Moats Keep Competitors At Bay.)
The Survivors In its 2010 Value Creators Report, Boston Consulting Group analyzed the total shareholder returns(TSR) of more than 4,000 companies to identify the world's top performers and their underlying drivers of success. A recurring theme in the Boston Consulting Group's research is that firms with competitive advantage are capable of creating value for shareholders. The 2010 report focused on the importance of value creation in a corporation's strategy; the top companies in the report showed strong growth in sales and shareholder returns in the 2005-2009 period.
A good example of a business that outperformed the market in the period examined was Apple Computers (Nasdaq:AAPL), which was ranked third in the report's Large-Cap Companies with sales growth of 37% between 2005 and 2009 and total shareholder returns of 45.6%. (To learn more about what it takes for a company to be successful, see 3 Secrets Of Successful Companies and The Characteristics Of A Successful Company.)
What Does Competitive Advantage Look Like?
The trouble for investors is that, most of the time, sustainable competitive advantage is not easy to spot. For starters, it's awfully hard to measure. Unlike performance measures like return on capital employed (ROCE) and valuation metrics like P/E, competitive advantage cannot be boiled down to a formula or a ratio; furthermore, distinguishing between competitive advantage and operational efficiency is often difficult.
Harvard Business School Professor Michael Porter, in his excellent essay, "What Is Strategy?" (1996), argues that these two concepts must not be confused: operational effectiveness means a company is better than rivals at similar activities while competitive advantage means a company is performing better than rivals by doing different activities or performing similar activities in different ways. Investors should know that few companies are able to compete successfully for long if they are doing the same things as their competitors.
At the same time, gaining a sustainable competitive advantage is not as simple as just being different. When companies do eventually manage to achieve competitive advantage, more often than not the advantage is short lived. Like bees to honey, competitors are drawn to the high profits of competitive advantage; competitors work hard to develop new technologies and business techniques that can quickly upset the competitive status quo. Remember, today's competitive advantage can become tomorrow's albatross.
At the end of the day, it is sustainability that is so critical. Powerful competitive advantage creates a big barrier around a business, allowing it to fend off competitors and enjoy extraordinary growth and profitability. The best long-term investments are those companies whose walls are not only high but also getting higher and thicker over time. Think of Coca Cola's (Nasdaq:COKE) global brand name recognition, Microsoft's (Nasdaq:MSFT) dominance of the PC operating system, or Wal-Mart's (NYSE:WMT) advanced information technology and inventory management systems. Investors need to understand the circumstances in which a company and its business model compete and whether the model puts the company at a competitive advantage or disadvantage.
Spotting Competitive Advantage
A company's future is never certain, so how can an investor pinpoint companies with growth and profits that will be substantially higher in the years to come? In Berkshire and Hathaway's 1996 Chairman's Letter to Shareholders, Warren Buffett, one of the world's greatest investors, says that the trick is to look for firms that already have competitive strengths and that operate in areas that are not susceptible to big changes:
| "You will see that we favor businesses and industries unlikely to experience major change. The reason for that is simple: We are searching for operations that we believe are virtually certain to possess enormous competitive strength 10 or 20 years from now. A fast-changing industry environment may offer the chance for huge wins, but it precludes the certainty we seek." |
More than anything, Buffett looks for companies that have a sustainable competitive advantage. Here is what he says in the December 1999 issue of Fortune Magazine:
| "The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors." (To read more about Buffett\'s strategies and theory, see Think Like Warren Buffett andWarren Buffett\'s Best Buys.) |
Conclusion
When it comes to determining a company's competitive advantage, there are a few important questions that investors can ask about a company: Is its strategy different from other companies in the market? Does the company's strategy position deliver superior profits? Is the strategy defensible? If investors can respond yes to these questions, the company may have good future prospects.
http://www.investopedia.com/articles/fundamental/03/040903.asp?utm_source=coattail-buffett&utm_medium=Email&utm_campaign=WBW-6/05/2013
Great Investors Not Named Buffett
George SorosPerhaps it would have seemed impossible to imagine as he was living through World War II, but George Soros became one of the most successful investors in history. With a current net worth north of $14 billion, Soros is largely retired as an active investor. However, he established a remarkable record while running the Quantum Group of hedge funds.
Soros is mostly known for his successes in making large bets in the currency and commodity markets. The most famous success story of his career is most likely Britain's Black Wednesdaycurrency crisis, where Soros correctly surmised that the country would have to devalue the pound and reportedly made around $1 billion on his positions.
Whereas Buffett is famous for carefully evaluating individual companies and holding those positions for years, Soros was much more inclined to base his investment decisions on what would be considered macroeconomic factors. What's more, investments in the currency and commodity markets do not lend themselves to multi-decade (or even multi-month) commitments, so Soros was a much more active investor. (George Soros spent decades as one of the world's elite investors, and even he didn't always come out on top. But when he did, it was spectacular. Check out George Soros: The Philosophy Of An Elite Investor.)
Ronald PerelmanSome will question whether Perelman is properly called an "investor." Though no one will dispute that a net worth of approximately $12 billion entitles him to be seen as a significant success in business, Pererlman's activities have centered on acquiring businesses outright, refocusing them on core competencies (often through spin-offs) and then either selling the companies later at a profit or holding onto them for the cashflow they produce. In that latter regard, though, Perelman is not so unlike Buffett - much of Buffett's success can be tied to the prudent acquisition of value-creating businesses within Berkshire Hathaway.
While Perelman has frequently faced criticism for his acquisition tactics and management decisions, he has nevertheless had many successful transactions, including his involvement in Marvel, New World Communications and several thrifts, savings and loans and banks.
John PaulsonWith about $16 billion in net worth, John Paulson is arguably the most successful hedge fund investor today. What makes that even more impressive is that he founded Paulson & Co in 1994 with purportedly with only $2 million. Paulson really made his name during the credit crisis that marked the end of the housing bubble; reportedly shorting CDOs, mortgage backed securities and other tainted housing-related assets, as well as shorting the shares of several major British banks. Perhaps ironically, Paulson has benefited from both sides of that trade, having also taken long positions in companies like Regions Financial, Goldman Sachs, Bank of America and Citigroup.
Carl IcahnIn some respects, Carl Icahn follows an approach that is somewhat similar to Warren Buffett, as Icahn has built his fortune through a combination of equity investments and outright acquisitions. That is where the similarities end, though, as Icahn has generally pursued a much more aggressive strategy and shown no particular reticence to launch hostile offers. What's more, Icahn is not often interested in investing in business and seeing them continue to run as before; Icahn has built a reputation as a so-called activist investor who frequently pushes corporate managements to restructure, sell assets and return cash to shareholders.
Differences aside, Icahn's strategy has worked. Icahn has built a fortune reportedly worth in excess of $11 billion through his involvement in a range of companies including RJR Nabisco, Viacom and Time Warner. (Buying up failing investments and turning them around helped to create the "Icahn lift" phenomenon. To learn more, check out Carl Icahn's Investing Strategy.)
James SimonsIf there is an "anti-Buffett" on this list, James Simons may be a good candidate. Holding a PhD in mathematics from Berkeley, Simons founded Renaissance Technologies and uses exceptionally complicated mathematical models to analyze and evaluate trading opportunities. While Buffett is famous for having a minimal staff, Renaissance Technologies reportedly employs dozens of PhDs in fields like physics, mathematics and statistics to find previously under-used correlations and connections that can be used for better trading results.
Or at least that is as much as is known about Renaissance Technologies - while Buffett is rather open about his investment philosophies and methodologies, Simons maintains a much lower profile. Nevertheless, this heavily quantitative approach seems to work. Mr. Simons is estimated to be worth nearly $11 billion and his funds have been so successful that they can charge outsized management fees and profit participation percentages to investors.
Others Worthy Of NoteInvestors would also do well to consider the careers of other well-known investors like Jim Rogers, Mark Mobius, and Peter Lynch. While Mobius is the only one of the three still highly involved in day-to-day investment operators, all three men have become very closely associated with their particular investment philosophies. Rogers is a go-to commentator on commodities and macroeconomic investments, while Mobius may be the best known emerging-markets investor of all time.
Peter Lynch, though many years removed his tenure at Fidelity and his management of the Magellan fund, is still widely seen as a leading voice in "disciplined growth" investing. All three men have written about their investment philosophies and outlooks, and their approaches are accessible and informative. (For related reading, check Pick Stocks Like Peter Lynch.)
The Bottom LineInvestors should cast their eyes beyond Warren Buffett if they wish to really learn about all that investing can offer. There is no doubting or ignoring Buffett's exemplary record, but there is always more to learn by broadening the pool of examples. While investors like Simons and Soros may seem to focus on strategies and techniques that are beyond the means of regular investors, there are still valuable lessons to be learned about macroeconomics and the benefits of looking at the markets in new and proprietary ways.
http://www.investopedia.com/financial-edge/0511/great-investors-not-named-buffett.aspx?utm_source=coattail-buffett&utm_medium=Email&utm_campaign=WBW-7/18/2013
Soros is mostly known for his successes in making large bets in the currency and commodity markets. The most famous success story of his career is most likely Britain's Black Wednesdaycurrency crisis, where Soros correctly surmised that the country would have to devalue the pound and reportedly made around $1 billion on his positions.
Whereas Buffett is famous for carefully evaluating individual companies and holding those positions for years, Soros was much more inclined to base his investment decisions on what would be considered macroeconomic factors. What's more, investments in the currency and commodity markets do not lend themselves to multi-decade (or even multi-month) commitments, so Soros was a much more active investor. (George Soros spent decades as one of the world's elite investors, and even he didn't always come out on top. But when he did, it was spectacular. Check out George Soros: The Philosophy Of An Elite Investor.)
Ronald PerelmanSome will question whether Perelman is properly called an "investor." Though no one will dispute that a net worth of approximately $12 billion entitles him to be seen as a significant success in business, Pererlman's activities have centered on acquiring businesses outright, refocusing them on core competencies (often through spin-offs) and then either selling the companies later at a profit or holding onto them for the cashflow they produce. In that latter regard, though, Perelman is not so unlike Buffett - much of Buffett's success can be tied to the prudent acquisition of value-creating businesses within Berkshire Hathaway.
While Perelman has frequently faced criticism for his acquisition tactics and management decisions, he has nevertheless had many successful transactions, including his involvement in Marvel, New World Communications and several thrifts, savings and loans and banks.
John PaulsonWith about $16 billion in net worth, John Paulson is arguably the most successful hedge fund investor today. What makes that even more impressive is that he founded Paulson & Co in 1994 with purportedly with only $2 million. Paulson really made his name during the credit crisis that marked the end of the housing bubble; reportedly shorting CDOs, mortgage backed securities and other tainted housing-related assets, as well as shorting the shares of several major British banks. Perhaps ironically, Paulson has benefited from both sides of that trade, having also taken long positions in companies like Regions Financial, Goldman Sachs, Bank of America and Citigroup.
Carl IcahnIn some respects, Carl Icahn follows an approach that is somewhat similar to Warren Buffett, as Icahn has built his fortune through a combination of equity investments and outright acquisitions. That is where the similarities end, though, as Icahn has generally pursued a much more aggressive strategy and shown no particular reticence to launch hostile offers. What's more, Icahn is not often interested in investing in business and seeing them continue to run as before; Icahn has built a reputation as a so-called activist investor who frequently pushes corporate managements to restructure, sell assets and return cash to shareholders.
Differences aside, Icahn's strategy has worked. Icahn has built a fortune reportedly worth in excess of $11 billion through his involvement in a range of companies including RJR Nabisco, Viacom and Time Warner. (Buying up failing investments and turning them around helped to create the "Icahn lift" phenomenon. To learn more, check out Carl Icahn's Investing Strategy.)
James SimonsIf there is an "anti-Buffett" on this list, James Simons may be a good candidate. Holding a PhD in mathematics from Berkeley, Simons founded Renaissance Technologies and uses exceptionally complicated mathematical models to analyze and evaluate trading opportunities. While Buffett is famous for having a minimal staff, Renaissance Technologies reportedly employs dozens of PhDs in fields like physics, mathematics and statistics to find previously under-used correlations and connections that can be used for better trading results.
Or at least that is as much as is known about Renaissance Technologies - while Buffett is rather open about his investment philosophies and methodologies, Simons maintains a much lower profile. Nevertheless, this heavily quantitative approach seems to work. Mr. Simons is estimated to be worth nearly $11 billion and his funds have been so successful that they can charge outsized management fees and profit participation percentages to investors.
Others Worthy Of NoteInvestors would also do well to consider the careers of other well-known investors like Jim Rogers, Mark Mobius, and Peter Lynch. While Mobius is the only one of the three still highly involved in day-to-day investment operators, all three men have become very closely associated with their particular investment philosophies. Rogers is a go-to commentator on commodities and macroeconomic investments, while Mobius may be the best known emerging-markets investor of all time.
Peter Lynch, though many years removed his tenure at Fidelity and his management of the Magellan fund, is still widely seen as a leading voice in "disciplined growth" investing. All three men have written about their investment philosophies and outlooks, and their approaches are accessible and informative. (For related reading, check Pick Stocks Like Peter Lynch.)
The Bottom LineInvestors should cast their eyes beyond Warren Buffett if they wish to really learn about all that investing can offer. There is no doubting or ignoring Buffett's exemplary record, but there is always more to learn by broadening the pool of examples. While investors like Simons and Soros may seem to focus on strategies and techniques that are beyond the means of regular investors, there are still valuable lessons to be learned about macroeconomics and the benefits of looking at the markets in new and proprietary ways.
http://www.investopedia.com/financial-edge/0511/great-investors-not-named-buffett.aspx?utm_source=coattail-buffett&utm_medium=Email&utm_campaign=WBW-7/18/2013
Buffett Vs. Soros: Investment Strategies
In the short run, investment success can be accomplished in a myriad of ways. Speculators and day traders often deliver extraordinary high rates of return, sometimes within a few hours. Generating a superior rate of return consistently over a further time horizon, however, requires a masterful understanding of the market mechanisms and a definitive investment strategy. Two such market players fit the bill: Warren Buffett and George Soros.
Warren Buffett
Known as "the Oracle of Omaha," Warren Buffett made his first investment at the tender age of 11. In his early 20s, the young prodigy would study at Columbia University, under the father of value investing and his personal mentor, Benjamin Graham. Graham argued that every security had anintrinsic value that was independent of its market price, instilling in Buffett the knowledge with which he would build his conglomerate empire. Shortly after graduating he formed "Buffett Partnership" and never looked back. Over time, the firm evolved into "Berkshire Hathaway," with a market capitalization over $200 billion. Each stock share is valued at near $130,000, as Buffett refuses to perform a stock split on his company's ownership shares.
Warren Buffett is a value investor. He is constantly on the lookout for investment opportunities where he can exploit price imbalances over an extended time horizon.
Buffett is an arbitrageur who is known to instruct his followers to "be fearful when others are greedy, and be greedy when others are fearful." Much of his success can be attributed to Graham's three cardinal rules: invest with a margin of safety, profit from volatility and know yourself. As such, Warren Buffett has the ability to suppress his emotion and execute these rules in the face of economic fluctuations.
George Soros
Another 21st century financial titan, George Soros was born in Budapest in 1930, fleeing the country after WWII to escape communism. Fittingly, Soros subscribes to the concept of "reflexivity" social theory, adopting a "a set of ideas that seeks to explain how a feedback mechanism can skew how participants in a market value assets on that market."
Graduating from the London School of Economics some years later, Soros would go on to create the Quantum Fund. Managing this fund from 1973 to 2011, Soros returned roughly 20% to investors annually. The Quantum Fund decided to shut down based on "new financial regulations requiring hedge funds to register with the Securities and Exchange Commission." Soros continues to take an active role in the administration of Soros Fund Management, another hedge fund he founded.
Where Buffett seeks out a firm's intrinsic value and waits for the market to adjust accordingly over time, Soros relies on short-term volatility and highly leveraged transactions. In short, Soros is a speculator. The fundamentals of a prospective investment, while important at times, play a minor role in his decision-making.
In fact, in the early 1990s, Soros made a multi-billion dollar bet that the British pound would significantly depreciate in value over the course of a single day of trading. In essence, he was directly battling the British central banking system in its attempt to keep the pound artificially competitive in foreign exchange markets. Soros, of course, made a tidy $1 billion off the deal. As a result, we know him today as the man "who broke the bank of England."
The Bottom Line
Warren Buffett and George Soros are contemporary examples of the some of the most brilliant minds in the history of investing. While they employ markedly different investing strategies, both men have achieved great success. Investors can learn much from even a basic understanding of their investment strategies and techniques.
http://www.investopedia.com/financial-edge/0912/buffet-vs.-soros-investment-strategies.aspx?utm_source=coattail-buffett&utm_medium=Email&utm_campaign=WBW-7/18/2013
Warren Buffett
Known as "the Oracle of Omaha," Warren Buffett made his first investment at the tender age of 11. In his early 20s, the young prodigy would study at Columbia University, under the father of value investing and his personal mentor, Benjamin Graham. Graham argued that every security had anintrinsic value that was independent of its market price, instilling in Buffett the knowledge with which he would build his conglomerate empire. Shortly after graduating he formed "Buffett Partnership" and never looked back. Over time, the firm evolved into "Berkshire Hathaway," with a market capitalization over $200 billion. Each stock share is valued at near $130,000, as Buffett refuses to perform a stock split on his company's ownership shares.
Warren Buffett is a value investor. He is constantly on the lookout for investment opportunities where he can exploit price imbalances over an extended time horizon.
Buffett is an arbitrageur who is known to instruct his followers to "be fearful when others are greedy, and be greedy when others are fearful." Much of his success can be attributed to Graham's three cardinal rules: invest with a margin of safety, profit from volatility and know yourself. As such, Warren Buffett has the ability to suppress his emotion and execute these rules in the face of economic fluctuations.
George Soros
Another 21st century financial titan, George Soros was born in Budapest in 1930, fleeing the country after WWII to escape communism. Fittingly, Soros subscribes to the concept of "reflexivity" social theory, adopting a "a set of ideas that seeks to explain how a feedback mechanism can skew how participants in a market value assets on that market."
Graduating from the London School of Economics some years later, Soros would go on to create the Quantum Fund. Managing this fund from 1973 to 2011, Soros returned roughly 20% to investors annually. The Quantum Fund decided to shut down based on "new financial regulations requiring hedge funds to register with the Securities and Exchange Commission." Soros continues to take an active role in the administration of Soros Fund Management, another hedge fund he founded.
Where Buffett seeks out a firm's intrinsic value and waits for the market to adjust accordingly over time, Soros relies on short-term volatility and highly leveraged transactions. In short, Soros is a speculator. The fundamentals of a prospective investment, while important at times, play a minor role in his decision-making.
In fact, in the early 1990s, Soros made a multi-billion dollar bet that the British pound would significantly depreciate in value over the course of a single day of trading. In essence, he was directly battling the British central banking system in its attempt to keep the pound artificially competitive in foreign exchange markets. Soros, of course, made a tidy $1 billion off the deal. As a result, we know him today as the man "who broke the bank of England."
The Bottom Line
Warren Buffett and George Soros are contemporary examples of the some of the most brilliant minds in the history of investing. While they employ markedly different investing strategies, both men have achieved great success. Investors can learn much from even a basic understanding of their investment strategies and techniques.
http://www.investopedia.com/financial-edge/0912/buffet-vs.-soros-investment-strategies.aspx?utm_source=coattail-buffett&utm_medium=Email&utm_campaign=WBW-7/18/2013
If you know the true value of something, buy these only when they're on sale
The basic concept behind value investing is so simple that you might already do it on a regular basis. The idea is that if you know the true value of something you can save a lot of money if you only buy things when they're on sale.
Buying stocks at bargain prices gives you a better chance at earning a profit later when you sell them. It also makes you less likely to lose money if the stock doesn't perform as you hope. This principle, called the margin of safety, is one of the keys to successful value investing.
Unlike speculative stocks whose price can plummet, it is less probable that value stocks will continue to experience price declines.
Value investors don't buy the most popular stocks of the day (because they're typically overpriced), but they are willing to invest in companies that aren't household names if the financials check out. They also take a second look at stocks that are household names when those stocks' prices have plummeted. Value investors believe companies that offer consumers valuable products and services can recover from setbacks if their fundamentals remain strong.
Value investors only care about a stock's intrinsic value. They think about buying a stock for what it actually is - a percentage of ownership in a company. They want to own companies that they know have sound principles and sound financials, regardless of what everyone else is saying or doing.
Value investing is a long-term strategy - it does not provide instant gratification. You can't expect to buy a stock for $66 on Tuesday and sell it for $100 on Thursday. In fact, you may have to wait years before your stock investments pay off. (The good news is that long-term capital gains are taxed at a lower rate than short-term investment gains.)
What's more, value investing is a bit of an art form - you can't simply use a value-investing formula to pick the right stocks which fit the desired criteria. Like all investment strategies, you must have the patience and diligence to stick with your investment philosophy even though you will occasionally lose money.
Also, sometimes you'll decide that you want to invest in a particular company because its fundamentals are sound, but you'll have to wait because it's overpriced. Think about when you go to the store to buy toilet paper: you might change your mind about which brand to buy based on which brand is on sale. Similarly, when you have money saved up to invest in stocks, you won't want to buy a stock just because it represents a share of ownership in your favorite company - you'll want to buy the stock that is most attractively priced at that moment. And if no stock is particularly well priced at the moment, you might have to sit on your hands and avoid buying anything.
(Thankfully, stock purchases, unlike toilet paper purchases, can be postponed until the time is right.)
Buying stocks at bargain prices gives you a better chance at earning a profit later when you sell them. It also makes you less likely to lose money if the stock doesn't perform as you hope. This principle, called the margin of safety, is one of the keys to successful value investing.
Unlike speculative stocks whose price can plummet, it is less probable that value stocks will continue to experience price declines.
Value investors don't buy the most popular stocks of the day (because they're typically overpriced), but they are willing to invest in companies that aren't household names if the financials check out. They also take a second look at stocks that are household names when those stocks' prices have plummeted. Value investors believe companies that offer consumers valuable products and services can recover from setbacks if their fundamentals remain strong.
Value investors only care about a stock's intrinsic value. They think about buying a stock for what it actually is - a percentage of ownership in a company. They want to own companies that they know have sound principles and sound financials, regardless of what everyone else is saying or doing.
Value investing is a long-term strategy - it does not provide instant gratification. You can't expect to buy a stock for $66 on Tuesday and sell it for $100 on Thursday. In fact, you may have to wait years before your stock investments pay off. (The good news is that long-term capital gains are taxed at a lower rate than short-term investment gains.)
What's more, value investing is a bit of an art form - you can't simply use a value-investing formula to pick the right stocks which fit the desired criteria. Like all investment strategies, you must have the patience and diligence to stick with your investment philosophy even though you will occasionally lose money.
Also, sometimes you'll decide that you want to invest in a particular company because its fundamentals are sound, but you'll have to wait because it's overpriced. Think about when you go to the store to buy toilet paper: you might change your mind about which brand to buy based on which brand is on sale. Similarly, when you have money saved up to invest in stocks, you won't want to buy a stock just because it represents a share of ownership in your favorite company - you'll want to buy the stock that is most attractively priced at that moment. And if no stock is particularly well priced at the moment, you might have to sit on your hands and avoid buying anything.
(Thankfully, stock purchases, unlike toilet paper purchases, can be postponed until the time is right.)
Wednesday, 17 July 2013
Construction stocks on my radar screen
Construction stocks on my radar screen
1. Hock Seng Lee
2. Mudajaya
3. Pintaras Jaya
HSL
ROE 18.90%
EPS CAGR 5 Yrs 19.4%
DY High 2.1% - Low 1.3%
D/E 0.00
Revenues Growing last 3 Years
Earnings Growing last 3 Years
LFY Revenues 603.27 m
LFY Earnings 90.69 m
Gross Margin 21.51%
Market Cap RM 1177.01 m
Shares (m) 582.68
Per Share price RM 2.02
P/E 12.98
Mudajaya
ROE 21.28%
EPS CAGR 5 Yrs 47.8%
DY High 3.3% - Low 1.8%
D/E 0.00
Revenues Growing last 3 Years
Earnings Growing last 3 Years
LFY Revenues 1655.72 m
LFY Earnings 237.10 m
Gross Margin 16.35%
Market Cap RM 1485.04 m
Shares (m) 543.97
Per Share price RM 2.73
P/E 6.26
Pintaras Jaya
ROE 15.09%
EPS CAGR 5 Yrs 15.6%
DY High 8.1% - Low 5.7%
D/E 0.00
Revenues Growing last 3 Years
Earnings Growing last 3 Years
LFY Revenues 185.17 m
LFY Earnings 35.83 m
Gross Margin 29.18%
Market Cap RM 389.09 m
Shares (m) 80.06
Per Share price RM 4.86
P/E 10.86
DCA = durable competitive advantage
1. Hock Seng Lee
2. Mudajaya
3. Pintaras Jaya
HSL
ROE 18.90%
EPS CAGR 5 Yrs 19.4%
DY High 2.1% - Low 1.3%
D/E 0.00
Revenues Growing last 3 Years
Earnings Growing last 3 Years
LFY Revenues 603.27 m
LFY Earnings 90.69 m
Gross Margin 21.51%
Market Cap RM 1177.01 m
Shares (m) 582.68
Per Share price RM 2.02
P/E 12.98
Mudajaya
ROE 21.28%
EPS CAGR 5 Yrs 47.8%
DY High 3.3% - Low 1.8%
D/E 0.00
Revenues Growing last 3 Years
Earnings Growing last 3 Years
LFY Revenues 1655.72 m
LFY Earnings 237.10 m
Gross Margin 16.35%
Market Cap RM 1485.04 m
Shares (m) 543.97
Per Share price RM 2.73
P/E 6.26
Pintaras Jaya
ROE 15.09%
EPS CAGR 5 Yrs 15.6%
DY High 8.1% - Low 5.7%
D/E 0.00
Revenues Growing last 3 Years
Earnings Growing last 3 Years
LFY Revenues 185.17 m
LFY Earnings 35.83 m
Gross Margin 29.18%
Market Cap RM 389.09 m
Shares (m) 80.06
Per Share price RM 4.86
P/E 10.86
DCA = durable competitive advantage
It’s More Difficult to Build a Successful Business than Own a Share of it
It’s More Difficult to Build a Successful Business than Own a Share of it
It doesn’t take a genius for you to know how hard it is to make a profitable business. Initially, businessmen work day and night. Their efforts are sometimes based on risks – trial and errors. Ultimately, if you already have an established business, the rewards are endless. What I want to reiterate is that starting your own business warrants substantial effort, money, time, common sense and great sacrifices.
Now, comparing the amount of hardships and risks it would take to build a corporation than buying a share of an already successful business, I know one thing. Imagine how easy it is to buy a stock of a profitable business in your country. Think about the comforts of not being required to be present in the company’s office every day; of not having the need to make reports or fix business problems that may arise. No long, boring meetings. No discussions with the boards. You stay in the comforts of your own home or office cashing in dividend cheques. Even that miniscule task can be taken care of if you’re using a pledged account.
http://www.intellecpoint.com/2013/07/the-real-deal-in-stock-investing.html
Sunday, 14 July 2013
6 Rules From 6 Of The World's Top Investors
Investors don't agree on much, but they do agree that making money in the market comes with a steadfast strategy that is built around a set of rules. Think for a moment about your early days as an investor. If you're like many, you jumped in with very little knowledge of the markets. When you bought, you didn't even know what a spread was and you sold either too early if you saw a gain or too late if your stock dropped in value. If your only investing rule has been to not follow any rules, you're probably disappointed with your results so far.
TUTORIAL: Advanced Financial Statement Analysis
If you don't have your own carefully crafted suite of investing rules, now is the time to do it and the best place to start is to ask the people who have had success in their investing careers. We not only found people who can claim success, we found six of the most successful investors in history. (So you've finally decided to start investing. But what should you put in your portfolio? Find out here. SeeHow To Pick A Stock.)
"Be patient with winning trades; be enormously impatient with losing trades. Remember it is quite possible to make large sums trading/investing if we are 'right' only 30% of the time, as long as our losses are small and our profits are large." – Dennis Gartman
Dennis Gartman began publishing The Gartman Letter in 1987. It is a daily commentary of global capital markets that is delivered to hedge funds, brokerage firms, mutual funds, and grain and trading firms around the world each morning. Mr. Gartman is also an accomplished trader and a frequent guest on financial networks.
His rule above addresses a wealth of mistakes that young investors make. First, let winning trades run. Don't sell at the first sign of profits. Second, don't let a losing trade get away. Investors who make money in the markets are OK with losing a little bit of money on a trade but they're not OK with losing a lot of money.
As Mr. Gartman points out, you don't have to be right a majority of the time. What is more important is to let a winning trade run and get out of a losing trade quickly. The money you make on the winning trades will far outpace the losing trades.
"It's Far Better to Buy a Wonderful Company at a Fair Price than a Fair Company at a Wonderful Price" – Warren Buffett
Warren Buffett is widely considered the most successful investor in history. Not only is he one of the richest men in the world but also has had the financial ear of numerous presidents and world leaders around the world. When Mr. Buffett talks, world markets move based on his words.
Mr. Buffett is also known as being a prolific teacher. His yearly letter to investors in his company,Berkshire Hathaway, is used in college finance classes in the largest and most prestigious universities.
Mr. Buffett gives two key pieces of advice to the investor: When evaluating a company, look at the quality of the company and the price. The quality of the company is most important and requires that you understand balance sheets, listen to conference calls and have confidence in the management. Only after you have confidence in the quality of the company should the price be evaluated. According to Mr. Buffett, if the quality of the company is high, don't expect to buy it at bargain bin prices. If the company isn't a quality company, don't buy it because the price is low. Bargain bin companies often produce bargain bin results. Sometimes good companies have bad stock and when you see that, dig deeper into your research. If the company still looks good, buy it. (To learn more, refer to What is Warren Buffett's Investing Style.)
"Do you really like a particular stock? Put 10% or so of your portfolio on it. Make the idea count. Good [investment] ideas should not be diversified away into meaningless oblivion." – Bill Gross
Bill Gross is the co-chief investing officer of PIMCO and manages the PIMCO Total Return Fund, one of the largest bond funds in the world.
Mr. Gross' rule speaks about portfolio management. A universal rule that most young investors know is diversification or not putting all of your investing capital into one name. Diversification is a good rule of thumb but it also diminishes your profits when one of your picks makes a big move while other names don't. Making money in the market is also about taking chances based on exhaustive research. Always keep some cash in your account for those opportunities that need a little more capital and don't be afraid to act when you believe that your research is pointing to a real winner.
"We're getting hurt, but I'm a long-term investor"- Prince Alwaleed Bin Talal
You may have never heard of Prince Alwaleed Bin Talal, but he's well known in the investing world. An investor from Saudi Arabia, he founded the Kingdom Holding Company. If anybody had reason to panic, it is him. Prior to the Great Recession, he owned a 14.9% stake in Citigroup at a price much higher than its post-recession price. In addition to that, his real estate investments in India lost considerable value after the 2009 recession.
When others may have sold, Prince Alwaleed Bin Talal has done what many of the best investors have done to amass their riches: Hold the stock for a long period of time, taking large market events out of the picture and collecting a dividend while they wait.
It's OK to trade stocks on a short or medium term basis, but the bulk of your portfolio should be invested in longer term holdings.
"You learn in this business … If you want a friend, get a dog." – Carl Icahn
Carl Icahn is a private equity investor and modern day corporate raider, buying large stakes in companies and attempting to get voting rights to increase shareholder value. Some of his holdings have included Time Warner, Yahoo, Clorox and Blockbuster Video.
Mr. Icahn has made his fair share of enemies over the years, but investors shouldn't take his advice strictly in terms of interpersonal relationships. How many times in your investing past have you read an article, watched a news report or took a tip from a trusted friend about the next hot stock and lost money? (Hopefully you never acted on an unsolicited e-mail sent to you about a big-moving penny stock.)
There is only one piece of advice to act upon: Your own exhaustive research based on facts (not opinions) obtained from trusted sources. Other advice can be considered and verified but it shouldn't be a sole reason to commit money.
"I am convinced that all this poverty in Mexico and in Latin America, like it's happening in China is the opportunity to grow. It's an opportunity for investment" –Carlos Slim
Another of the richest men in the world, Carlos Slim, owns hundreds of companies and has an employee base of more than 250,000. His quote above represents a mindset that the best investors possess. They don't look at what's happening now. By studying the momentum of a company or an entire economy and how it interacts with its competitors, great investors invest now for what will happen later. They are always forward thinking. If you're looking at now or trying to jump on the bandwagon of an investment that has already had short term gains, you've probably missed the big move. Try to find the next big winner but always anchor your portfolio with great companies that have a long track record of steady growth.
The Bottom Line
Now that you've read about one of each of these investors' rules, it's time to become a student of these investors and learn from their experiences. Each of these investors is known for being students of the markets, as well as leaders. As you begin to apply your new rules and commit to following them even when your mind tells you no, you'll see the profits start rolling in. Maybe you will make this list of legendary investors someday. (These five qualitative measures allow investors to draw conclusions about a corporation that are not apparent on the balance sheet. Check out Using Porter's 5 Forces To Analyze Stocks.)
https://mail.google.com/mail/u/0/#search/coatail+investor/13fcf24fdfc69349
TUTORIAL: Advanced Financial Statement Analysis
If you don't have your own carefully crafted suite of investing rules, now is the time to do it and the best place to start is to ask the people who have had success in their investing careers. We not only found people who can claim success, we found six of the most successful investors in history. (So you've finally decided to start investing. But what should you put in your portfolio? Find out here. SeeHow To Pick A Stock.)
"Be patient with winning trades; be enormously impatient with losing trades. Remember it is quite possible to make large sums trading/investing if we are 'right' only 30% of the time, as long as our losses are small and our profits are large." – Dennis Gartman
Dennis Gartman began publishing The Gartman Letter in 1987. It is a daily commentary of global capital markets that is delivered to hedge funds, brokerage firms, mutual funds, and grain and trading firms around the world each morning. Mr. Gartman is also an accomplished trader and a frequent guest on financial networks.
His rule above addresses a wealth of mistakes that young investors make. First, let winning trades run. Don't sell at the first sign of profits. Second, don't let a losing trade get away. Investors who make money in the markets are OK with losing a little bit of money on a trade but they're not OK with losing a lot of money.
As Mr. Gartman points out, you don't have to be right a majority of the time. What is more important is to let a winning trade run and get out of a losing trade quickly. The money you make on the winning trades will far outpace the losing trades.
"It's Far Better to Buy a Wonderful Company at a Fair Price than a Fair Company at a Wonderful Price" – Warren Buffett
Warren Buffett is widely considered the most successful investor in history. Not only is he one of the richest men in the world but also has had the financial ear of numerous presidents and world leaders around the world. When Mr. Buffett talks, world markets move based on his words.
Mr. Buffett is also known as being a prolific teacher. His yearly letter to investors in his company,Berkshire Hathaway, is used in college finance classes in the largest and most prestigious universities.
Mr. Buffett gives two key pieces of advice to the investor: When evaluating a company, look at the quality of the company and the price. The quality of the company is most important and requires that you understand balance sheets, listen to conference calls and have confidence in the management. Only after you have confidence in the quality of the company should the price be evaluated. According to Mr. Buffett, if the quality of the company is high, don't expect to buy it at bargain bin prices. If the company isn't a quality company, don't buy it because the price is low. Bargain bin companies often produce bargain bin results. Sometimes good companies have bad stock and when you see that, dig deeper into your research. If the company still looks good, buy it. (To learn more, refer to What is Warren Buffett's Investing Style.)
"Do you really like a particular stock? Put 10% or so of your portfolio on it. Make the idea count. Good [investment] ideas should not be diversified away into meaningless oblivion." – Bill Gross
Bill Gross is the co-chief investing officer of PIMCO and manages the PIMCO Total Return Fund, one of the largest bond funds in the world.
Mr. Gross' rule speaks about portfolio management. A universal rule that most young investors know is diversification or not putting all of your investing capital into one name. Diversification is a good rule of thumb but it also diminishes your profits when one of your picks makes a big move while other names don't. Making money in the market is also about taking chances based on exhaustive research. Always keep some cash in your account for those opportunities that need a little more capital and don't be afraid to act when you believe that your research is pointing to a real winner.
"We're getting hurt, but I'm a long-term investor"- Prince Alwaleed Bin Talal
You may have never heard of Prince Alwaleed Bin Talal, but he's well known in the investing world. An investor from Saudi Arabia, he founded the Kingdom Holding Company. If anybody had reason to panic, it is him. Prior to the Great Recession, he owned a 14.9% stake in Citigroup at a price much higher than its post-recession price. In addition to that, his real estate investments in India lost considerable value after the 2009 recession.
When others may have sold, Prince Alwaleed Bin Talal has done what many of the best investors have done to amass their riches: Hold the stock for a long period of time, taking large market events out of the picture and collecting a dividend while they wait.
It's OK to trade stocks on a short or medium term basis, but the bulk of your portfolio should be invested in longer term holdings.
"You learn in this business … If you want a friend, get a dog." – Carl Icahn
Carl Icahn is a private equity investor and modern day corporate raider, buying large stakes in companies and attempting to get voting rights to increase shareholder value. Some of his holdings have included Time Warner, Yahoo, Clorox and Blockbuster Video.
Mr. Icahn has made his fair share of enemies over the years, but investors shouldn't take his advice strictly in terms of interpersonal relationships. How many times in your investing past have you read an article, watched a news report or took a tip from a trusted friend about the next hot stock and lost money? (Hopefully you never acted on an unsolicited e-mail sent to you about a big-moving penny stock.)
There is only one piece of advice to act upon: Your own exhaustive research based on facts (not opinions) obtained from trusted sources. Other advice can be considered and verified but it shouldn't be a sole reason to commit money.
"I am convinced that all this poverty in Mexico and in Latin America, like it's happening in China is the opportunity to grow. It's an opportunity for investment" –Carlos Slim
Another of the richest men in the world, Carlos Slim, owns hundreds of companies and has an employee base of more than 250,000. His quote above represents a mindset that the best investors possess. They don't look at what's happening now. By studying the momentum of a company or an entire economy and how it interacts with its competitors, great investors invest now for what will happen later. They are always forward thinking. If you're looking at now or trying to jump on the bandwagon of an investment that has already had short term gains, you've probably missed the big move. Try to find the next big winner but always anchor your portfolio with great companies that have a long track record of steady growth.
The Bottom Line
Now that you've read about one of each of these investors' rules, it's time to become a student of these investors and learn from their experiences. Each of these investors is known for being students of the markets, as well as leaders. As you begin to apply your new rules and commit to following them even when your mind tells you no, you'll see the profits start rolling in. Maybe you will make this list of legendary investors someday. (These five qualitative measures allow investors to draw conclusions about a corporation that are not apparent on the balance sheet. Check out Using Porter's 5 Forces To Analyze Stocks.)
https://mail.google.com/mail/u/0/#search/coatail+investor/13fcf24fdfc69349
Saturday, 13 July 2013
"I finally had a profit, so I sold that investment."
There is nothing wrong with taking profits, but keep in mind that investors are constantly fearing regret and seeking pride. This is what is called the "disposition effect."
It is a result of the pain of an investment loss hurting much worse than the pleasure of a gain. Academic research has shown that investment losses hurt about two and a half times more than the positive feeling you get from an equivalent investment gain.
Net of taxes, whether you have a gain or a loss in an investment says absolutely nothing about its future prospects.
In a new bull market this bias causes investors to sell winners too early (seeking pride). Also, the painful regret associated with taking losses can keep investors from selling past bear market losers to buy new bull market leaders.
To help yourself avoid this bias, make sure that you have a process for buying and selling investments that is disciplined, fundamentally sound and repeatable. The bragging rights associated with quick gains are great, but the future profits you may miss could have been even better.
It is a result of the pain of an investment loss hurting much worse than the pleasure of a gain. Academic research has shown that investment losses hurt about two and a half times more than the positive feeling you get from an equivalent investment gain.
Net of taxes, whether you have a gain or a loss in an investment says absolutely nothing about its future prospects.
In a new bull market this bias causes investors to sell winners too early (seeking pride). Also, the painful regret associated with taking losses can keep investors from selling past bear market losers to buy new bull market leaders.
To help yourself avoid this bias, make sure that you have a process for buying and selling investments that is disciplined, fundamentally sound and repeatable. The bragging rights associated with quick gains are great, but the future profits you may miss could have been even better.
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