Warren Buffett's Bear Market Maneuvers

July 12 2009

In times of economic decline, many investors ask themselves, "What strategies does the Oracle of Omaha employ to keep Berkshire Hathaway on target?" The answer is that the esteemed Warren Buffett, the most successful known investor of all time, rarely changes his long-term value investment strategy and regards down markets as an opportunity to buy good companies at reasonable prices. In this article, we will cover the Buffett investment philosophy and stock-selection criteria with specific emphasis on their application in a down market and a slowing economy. (For more on Warren Buffett and his current holdings, sign up for our Coattail Investor newsletter.)

The Buffett Investment Philosophy

Buffett has a set of definitive assumptions about what constitutes a "good investment". These focus on the quality of the business rather than the short-term or near-future share price or market moves. He takes a long-term, large scale, business value-based investment approach that concentrates on good fundamentals and intrinsic business value, rather than the share price. (For further reading, seeWarren Buffett: The Road To Riches and What Is Warren Buffett's Investing Style?)

Buffett looks for businesses with "a durable competitive advantage." What he means by this is that the company has a market position, market share, branding or other long-lasting edge over its competitors that either prevents easy access by competitors or controls a scarce raw-material source. (For more insight, see Competitive Advantage Counts, 3 Secrets Of Successful Companiesand Economic Moats Keep Competitors At Bay.)

Buffett employs a selective contrarian investment strategy: using his investment criteria to identify and select good companies, he can then make large investments (millions of shares) when the market and the share price are depressed and when other investors may be selling.

In addition, he assumes the following points to be true:

• The global economy is complex and unpredictable.
• The economy and the stock market do not move in sync.
• The market discount mechanism moves instantly to incorporate news into the share price.
• The returns of long-term equities cannot be matched anywhere else.

Buffett Investment Activity

Berkshire Hathaway investment industries over the years have included:

• Insurance 
• Soft drinks 
• Private jet aircraft
• Chocolates 
• Shoes
• Jewelry 
• Publishing
• Furniture 
• Steel
• Energy 
• Home building

The industries listed above vary widely, so what are the common criteria used to separate the good investments from the bad?

Buffett Investment Criteria

Berkshire Hathaway relies on an extensive research-and-analysis team that goes through reams of data to guide their investment decisions. While all the details of the specific techniques used are not made public, the following 10 requirements are all common among Berkshire Hathaway investments:

1. The candidate company has to be in a good and growing economy or industry.
2. It must enjoy a consumer monopoly or have a loyalty-commanding brand.
3. It cannot be vulnerable to competition from anyone with abundant resources.
4. Its earnings have to be on an upward trend with good and consistent profit margins.
5. The company must enjoy a low debt/equity ratio or a high earnings/debt ratio.
6. It must have high and consistent returns on invested capital.
7. The company must have a history of retaining earnings for growth.
8. It cannot have high maintenance costs of operations, high capital expenditure or investment cash flow.
9. The company must demonstrate a history of reinvesting earnings in good business opportunities, and its management needs a good track record of profiting from these investments.
10. The company must be free to adjust prices for inflation.

The Buffett Investment Strategy

Buffett makes concentrated purchases. In a downturn, he buys millions of shares of solid businesses at reasonable prices. Buffett does not buy tech shares because he doesn't understand their business or industry; during the dotcom boom, he avoided investing in tech companies because he felt they hadn't been around long enough to provide sufficient performance history for his purposes.

And even in a bear market, although Buffett had billions of dollars in cash to make investments, in his 2009 letter to Berkshire Hathaway shareholders, he declared that cash held beyond the bottom would be eroded by inflation in the recovery.

Buffett deals only with large companies because he needs to make massive investments to garner the returns required to post excellent results for the huge size to which his company, Berkshire Hathaway, has grown. (To learn about the disadvantage of being confined to blue chip stocks, readWhy Warren Buffett Envies You.)

Buffett's selective contrarian style in a bear market includes making some large investments in blue chip stocks when their stock price is very low. And Buffett might get an even better deal than the average investor: His ability to supply billions of dollars in cash infusion investments earns him special conditions and opportunities not available to others. His investments often are in a class of secured stock with its dividends assured and future stock warrants available at below-market prices.

Conclusion

Buffett's strategy for coping with a down market is to approach it as an opportunity to buy good companies at reasonable prices. Buffett has developed an investment model that has worked for him and the Berkshire Hathaway shareholders over a long period of time. His investment strategy is long term and selective, incorporating a stringent set of requirements prior to an investment decision being made. Buffett also benefits from a huge cash "war chest" that can be used to buy millions of shares at a time, providing an ever-ready opportunity to earn huge returns.

http://www.investopedia.com/articles/stocks/09/buffett-bear-market-strategies.asp?utm_source=coattail-buffett&utm_medium=Email&utm_campaign=WBW-6/12/2013-b

Market Fluctuations and Your Emotions

The stock market can fluctuate widely.  Prices of stocks are determined by various factors.  It is better for you to focus on the fundamentals of the stocks.  However, the prices of stocks can be driven very high and pushed very low by sentiments of the players which may not have anything to do with the underlying fundamentals.

As a rational investor, what should you do in such situations?  Let's assume you own good quality companies with durable competitive advantage which you plan to hold for the long term.  You rightly have chosen these companies to be in your portfolio due to their earnings power, mainly gauged from their historical performances. 

Firstly, you should be able to compute the intrinsic values for the companies, using conservative estimates in your valuation.  This ability is important as it is the strength you will have over the other players.  It is not uncommon for your stock prices to fluctuate 50% above or the equivalent 1/3rd below its average market price over a 52 weeks period.  Check these out to confirm this statement in your local press of the listings of the various companies' stock prices.

If you hope to buy and sell to profit from these market fluctuations in the prices of your stocks, believe me that to make money consistently and to grow your portfolio value at a meaningful rate, though possible for a few, is not easy.  Frequent trading incurs costs and expenses, and also your time, which can be better employed to pursue some better, more productive and healthier activities.  Rather than hoping to profit from trading these prices, focus on profiting from the long term returns you can expect with a high degree of probability from holding these stocks with great earning power. 

How then should you approach these market fluctuations of the prices of your stock?

When the price of the stock is higher than your calculated intrinsic value, don't buy to add to your portfolio.  Do you sell based on valuation?  Often, you need not have to.  There are times when you may consider selling some (perhaps 20%), but not all, should the stock be too overpriced  Selling your winners to lock in a gain, may not mean that you will be able to buy the same back at lower prices in the future.  Moreover, the gain that you locked in at the time of selling, you may realise that you have missed out on the even bigger gains that these stocks deliver over the long term.   (Just to emphasize, this is different from stocks which fundamentals have deteriorated permanently.  These should be sold urgently to prevent harm to your portfolio.) 

Great companies can often be bought at fair prices and still be very profitable over the long term in your portfolio.  You should be greedy when such companies are available to you at low prices, especially during a general market correction or a bear market, when even these good stocks are sold down by the less savvy investors, due to fear, during such periods.

If you are going to invest, WHY should you think like a business owner?

“An investment in knowledge pays the best interest.” – Benjamin Franklin

It is often difficult to explain many of the mechanics which go into the investment process.

Keep at the core of your investment philosophy this fundamental premise, "Know what you own and why you own it."

This provides an investor a level of greater clarity over many investors who do not subscribe to this core premise.


If you are going to invest, WHY should you think like a business owner?

Owners of businesses have great knowledge of what they own and why they own it, including a long-term time horizon - typically three years or longer.

As an investor, this means you should at least have the ability to know what you own and why you own it if you choose a particular company.


Why is it important to know what you own and why you own it?

1.  Business owners are used to the ups and downs of their business.  Economies expand and contract over time.  However, well-run companies with great products and services will continue to grow over time.

2.  When a business owner's business goes through a downturn, do they sell their business and hope to buy it back at a cheaper price down the road?  Of course not!  Rather, in difficult times, they continue to invest in their business for future growth - a tactic of a long-term thinker!


What is commonly observed when markets are in a short-term correction or economies are in a period of contraction?  

Many investors have a tendency to become emotionally connected to the short-term noise. 

1.  Many investors revert to attempting to time the market by selling their investments with the hope of buying them back at cheaper price.

2.  Other investors give up on investing in the stock market indefinitely.

3.  Other investors move their investments to another investment manager who's historical returns give the investor a sense of comfort they will achieve similar success in the future.

All three scenarios are unfortunate. 

1.  As statistics and history have clearly taught us, investors who attempt to "time the market" routinely under-perform "the market."

2.  Investors who pull out of the equities markets risk missing out on great investment opportunities for the longer term, effectively choosing to hold cash instead.

3.  Investors who chase historical returns have been left with the disappointment that the future returns they achieved did not meet the expectations of the investor.


The important message here is, the more you know about what you own and why, the less likely you will be to get emotionally attached to short-term noise or stock market corrections.  Instead, as an investor who knows what you own and why, you will look at the stock market corrections and economic slowdowns as opportunities to buy businesses on sale - to strategically cost average into the companies you want to buy.  This is similar to how a business owner behaves.

Are you going to invest like a business owner (a proven, long-term strategy to wealth creation for many people)?

Or, are you going to be someone who "guesses" at what is going to happen because you do not have the clarity of knowing what you own and why you own it?

Remember, owning a stock is an ownership interest in a business with an underlying value that does not depend on its share price.  If you invest in a stock of a company, you are and should think like a business owner in that company. 

http://investingwithclarity.com/2013/04/03/do-you-know-what-you-own-and-why/

Remember, ALWAYS be ready for a stock market correction!

Remember, ALWAYS be ready for a stock market correction!

Do not participate in the business of predicting what the stock market is going to do over short periods of time.

Very simply, you cannot predict an irrational system and emotional investors.

Warren Buffett's quote:  "The stock market is nothing more than an excuse to see what people are willing to do foolish today."

One of the keys to successful INVESTING is buying into quality companies and continuing to do so over time, not the "stock market."

Of course, there are risks when you invest in a company.  The fundamentals may change.  The value of the company may decrease over time. 

This is why one must diversify appropriately based on one's investment objectives and tolerance for market volatility and investment risk.

At the end of the day, bull market or bear market, who or why care?

A MAJOR KEY TO SUCCESSFUL INVESTING HAS ALWAYS BEEN AND WILL ALWAYS BE, THE PROCESS OF INVESTING IN QUALITY COMPANIES AND TAKING ADVANTAGE OF MARKET VOLATILITY TO CONTINUALLY INVEST IN COMPANIES ON SALE OVER TIME.

Link: investingwithclarity.com/2012/08/09/bull-bear-why-care/

Should I stay or should I go now? Five questions to ask before you quit your job.

SHOULD I STAY OR SHOULD I GO NOW? FIVE QUESTIONS TO ASK BEFORE YOU QUIT YOUR JOB

When you’re a grad, nothing sounds more appealing than landing a dream job – but what happens if it doesn’t measure up in reality?

If your job isn’t what you thought it would be, what should you do? Stay? For how long? Should you go? How quick is too quick when it comes to quitting?

First of all, it should go without saying that bullying, harassment and safety issues should always be followed up with the appropriate representative in your workplace.

But if you simply don’t like your job, brace yourself, because The Naked CEO Alex Malley believes that if you find yourself in a job you’re really not enjoying, you should stick it out – leave only when you have found something positive to take away, even if it means working out your differences with a difficult colleague, or learning to “suck it up” when given mundane tasks.

Dealing with a disappointing job rather than quitting because you don’t like it could be valuable when it comes to looking for that next job. Unless you can use the experience in a positive way on your resume and in future interviews, the time you’ve invested in it so far is just one big waste of time.

Five questions to ask yourself before you say “I quit!”:

1. Have I done everything possible to improve my current work situation?

2. Do I have a realistic plan for getting my next job?

3. Do I have living expenses covered if I quit or if my new job falls through?

4. Do I have a reasonable explanation about why I’m quitting to share with future employers?

5. Do the people whose unbiased opinions I trust agree that I should quit?

If you answered no to even one of these questions, take a moment to think it through. The best time to quit a job is when you’ve made the most of the experience. And it helps if a better opportunity has already presented itself!

The important thing to remember is that it is just a job – it doesn’t define you as a human being – so try not to let it get you down. Learn from it and make sure the time you invested into it will be helpful when it comes to seeking your next role.

Have you found a way to deal with a negative work issue head on? Resolved the conflict you may have been having with your co-worker? Feel like you’ve learned as much as you can from this experience? We’ve just started the conversation. Share your experiences in the comments section below to help others.

- See more at: http://www.thenakedceo.com/career-building-skills/should-i-stay-or-should-i-go-now-five-questions-to-ask-before-you-quit-your-job/?utm_source=outbrain&utm_medium=cpc&utm_campaign=outbrain-july_nzasia#sthash.PLfjeQvt.dpuf

Forces Behind Interest Rates

July 18 2013

An interest rate is the cost of borrowing money. Or, on the other side of the coin, it is the compensation for the service and risk of lending money. Without it, people would not be willing to lend or even save their cash, both of which require deferring the opportunity to spend in the present. But prevailing interest rates are always changing, and different types of loans offer various interest rates. If you are a lender, a borrower or both, it's important you understand the reasons for these changes and differences.

Lenders and Borrowers
The money lender takes a risk that the borrower may not pay back the loan. Thus, interest provides a certain compensation for bearing risk. Coupled with the risk of default is the risk of inflation. When you lend money now, the prices of goods and services may go up by the time you are paid back, so your money's original purchasing power would decrease. Thus, interest protects against future rises in inflation. A lender such as a bank uses the interest to process account costs as well.

Borrowers pay interest because they must pay a price for gaining the ability to spend now, instead of having to wait years to save up enough money. For example, a person or family may take out a mortgage for a house for which they cannot presently pay in full, but the loan allows them to become homeowners now instead of far into the future. Businesses also borrow for future profit. They may borrow now to buy equipment so they can begin earning those revenues today. Banks borrow to increase their activities, whether lending or investing, and pay interest to clients for this service.

Interest can thus be considered a cost for one entity and income for another. Interest is the opportunity cost of keeping your money as cash under your mattress as opposed to lending. If you borrow money, the interest you have to pay is less than the cost of forgoing the opportunity to have the money in the present.

How Interest Rates are Determined

Supply and Demand Interest rate levels are a factor of the supply and demand of credit: an increase in the demand for credit will raise interest rates, while a decrease in the demand for credit will decrease them. Conversely, an increase in the supply of credit will reduce interest rates while a decrease in the supply of credit will increase them. The supply of credit is increased by an increase in the amount of money made available to borrowers. For example, when you open a bank account, you are actually lending money to the bank. Depending on the kind of account you open (a certificate of deposit will render a higher interest rate than a checking account, with which you have the ability to access the funds at any time), the bank can use that money for its business and investment activities. In other words, the bank can lend out that money to other customers. The more banks can lend, the more credit is available to the economy. And as the supply of credit increases, the price of borrowing (interest) decreases. Credit available to the economy is decreased as lenders decide to defer the re-payment of their loans. For instance, when you decide to postpone paying this month's credit card billuntil next month or even later, you are not only increasing the amount of interest you will have to pay, but also decreasing the amount of credit available in the market. This in turn will increase the interest rates in the economy. #1 Summer Stock Pick- LVGI Inflation Inflation will also affect interest rate levels. The higher the inflation rate, the more interest rates are likely to rise. This occurs because lenders will demand higher interest rates as compensation for the decrease in purchasing power of the money they will be repaid in the future. Government The government has a say in how interest rates are affected. The U.S. Federal Reserve(the Fed) often makes announcements about how monetary policy will affect interest rates. The federal funds rate, or the rate that institutions charge each other for extremely short-term loans, affects the interest rate that banks set on the money they lend; the rate then eventually trickles down into other short-term lending rates. The Fed influences these rates with "open market transactions", which is basically the buying or selling of previously issued U.S. securities. When the government buys more securities, banks are injected with more money than they can use for lending, and the interest rates decrease. When the government sells securities, money from the banks is drained for the transaction, rendering less funds at the banks' disposal for lending, forcing a rise in interest rates.

Types of Loans
Of the factors detailed above, supply and demand are, as we implied earlier, the primary forces behind interest rate levels. The interest rate on each different type of loan, however, depends on the credit risk, time, tax considerations (particularly in the U.S.) and convertibility of the particular loan.

Risk refers to the likelihood of the loan being repaid. A greater chance that the loan will not be repaid leads to higher interest rate levels. If, however, the loan is "secured", meaning there is some sort of collateral that the lender will acquire in case the loan is not paid back (i.e. such as a car or a house), the rate of interest will probably be lower. This is because the risk factor is accounted for by thecollateral.

For government-issued debt securities, there is of course very little risk because the borrower is the government. For this reason, and because the interest is tax-free, the rate on treasury securities tends to be relatively low.

Time is also a factor of risk. Long-term loans have a greater chance of not being repaid because there is more time for adversity that leads to default. Also, the face value of a long-term loan, compared to that of a short-term loan, is more vulnerable to the effects of inflation. Therefore, the longer the borrower has to repay the loan, the more interest the lender should receive.

Finally, some loans that can be converted back into money quickly will have little if any loss on theprincipal loaned out. These loans usually carry relatively lower interest rates.

Conclusion
As interest rates are a major factor of the income you can earn by lending money, of bond pricing and of the amount you will have to pay to borrow money, it is important that you understand how prevailing interest rates change: primarily by the forces of supply and demand, which are also affected by inflation and monetary policy. Of course, when you are deciding whether to invest in a debt security, it is important to understand how its characteristics determine what kind of interest rate you can receive.


http://www.investopedia.com/articles/03/111203.asp

7 Controversial Investing Theories

When it comes to investing, there is no shortage of theories on what makes the markets tick or what a particular market move means. The two largest factions on Wall Street are split along theoretical lines into adherents to an efficient market theory and those who believe the market can be beat. Although this is a fundamental split, many other theories attempt to explain and influence the market - and the actions of investors in the markets. In this article, we will look at some common (and uncommon) financial theories.

Efficient Market Hypothesis
Very few people are neutral on efficient market hypothesis (EMH). You either believe in it and adhere to passive, broad market investing strategies, or you detest it and focus on picking stocks based on growth potential, undervalued assets and so on. The EMH states that the market price for shares incorporates all the known information about that stock. This means that the stock is accurately valued until a future event changes that valuation. Because the future is uncertain, an adherent to EMH is far better off owning a wide swath of stocks and profiting from the general rise of the market.

Opponents of EMH point to Warren Buffett and other investors who have consistently beat the market by finding irrational prices within the overall market.

Fifty Percent Principle
The fifty percent principle predicts that, before continuing, an observed trend will undergo a price correction of one-half to two-thirds of the change in price. This means that if a stock has been on an upward trend and gained 20%, it will fall back 10% before continuing its rise. This is an extreme example, as most times this rule is applied to the short-term trends that technical analysts and traders buy and sell on.

This correction is thought to be a natural part of the trend, as it's usually caused by skittish investors taking profits early to avoid getting caught in a true reversal of the trend later on. If the correction exceeds 50% of the change in price, it's considered a sign that the trend has failed and the reversal has come prematurely.

Greater Fool Theory
The greater fool theory proposes that you can profit from investing as long as there is a greater fool than yourself to buy the investment at a higher price. This means that you could make money from an overpriced stock as long as someone else is willing to pay more to buy it from you.

Eventually you run out of fools as the market for any investment overheats. Investing according to the greater fool theory means ignoring valuations, earning reports and all the other data. Ignoring data is as risky as paying too much attention to it; so people ascribing to the greater fool theory could be left holding the short end of the stick after a market correction.

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Odd Lot Theory
The odd lot theory uses the sale of odd lots – small blocks of stocks held by individual investors – as an indicator of when to buy into a stock. Investors following the odd lot theory buy in when small investors sell out. The main assumption is that small investors are usually wrong.

The odd lot theory is contrarian strategy based off a very simple form of technical analysis – measuring odd lot sales. How successful an investor or trader following the theory is depends heavily on whether he checks the fundamentals of companies that the theory points toward or simply buys blindly. Small investors aren't going to be right or wrong all the time, so it's important to distinguish odd lot sales that are occurring from a low-risk tolerance from odd lot sales that are due to bigger problems. Individual investors are more mobile than the big funds and thus can react to severe news faster, so odd lot sales can actually be a precursor to a wider sell-off in a failing stock instead of just a mistake on the part of small-time investors.

Prospect Theory (Loss-Aversion Theory)
Prospect theory states that people's perceptions of gain and loss are skewed. That is, people are more afraid of a loss than they are encouraged by a gain. If people are given a choice of two different prospects, they will pick the one that they think has less chance of ending in a loss, rather than the one that offers the most gains. For example, if you offer a person two investments, one that has returned 5% each year and one that has returned 12%, lost 2.5%, and returned 6% in the same years, the person will pick the 5% investment because he puts an irrational amount of importance on the single loss, while ignoring the gains that are of a greater magnitude. In the above example, both alternatives produce the net total return after three years.

Prospect theory is important for financial professionals and investors. Although the risk/reward trade-off gives a clear picture of the risk amount an investor must take on to achieve the desired returns, prospect theory tells us that very few people understand emotionally what they realize intellectually. For financial professionals, the challenge is in suiting a portfolio to the client's risk profile, rather than reward desires. For the investor, the challenge is to overcome the disappointing predictions of prospect theory and become brave enough to get the returns you want.

Rational Expectations Theory
Rational expectations theory states that the players in an economy will act in a way that conforms to what can logically be expected in the future. That is, a person will invest, spend, etc. according to what he or she rationally believes will happen in the future. By doing so, that person creates a self-fulfilling prophecy that helps bring about the future event.

Although this theory has become quite important to economics, its utility is doubtful. For example, an investor thinks a stock is going to go up, and by buying it, this act actually causes the stock to go up. This same transaction can be framed outside of rational expectations theory. An investor notices that a stock is undervalued, buys it, and watches as other investors notice the same thing, thus pushing the price up to its proper market value. This highlights the main problem with rational expectations theory: it can be changed to explain everything, but it tells us nothing.

Short Interest Theory
Short interest theory posits that a high short interest is the precursor to a rise in the stock's price and, at first glance, appears to be unfounded. Common sense suggests that a stock with a high short interest – that is, a stock that many investors are short selling – is due for a correction. The reasoning goes that all those traders, thousands of professionals and individuals scrutinizing every scrap of market data, surely can't be wrong. They may be right to an extent, but the stock price may actually rise by virtue of being heavily shorted. Short sellers have to eventually cover their positions by buying the stock they've shorted. Consequently, the buying pressure created by the short sellers covering their positions will push the share price upward.

The Bottom Line
We have covered a wide range of theories, from technical trading theories like short interest and odd lot theory to economic theories like rational expectations and prospect theory. Every theory is an attempt to impose some type of consistency or frame to the millions of buy and sell decisions that make the market swell and ebb daily. While it is useful to know these theories, it is also important to remember that no unified theory can explain the financial world. During certain time periods, one theory seems to hold sway only to be toppled the next instant. In the financial world, change is the only true constant.

Invest like Buffett - The Limited 20 Holes Punch Card of His Investing (The Buffett Way)

When opportunity comes within your strike zone/buying zone ONLY then invest(Science Of hitting-Ted Williams)

Historical PE ratio & S&P 500

Special-purpose acquisition company (Wikipedia)

From Wikipedia, the free encyclopedia

A special-purpose acquisition company (SPAC) is a collective investment scheme that allows public stock market investors to invest in private equity type transactions, particularly leveraged buyouts. SPACs are shell or blank-check companies that have no operations but go public with the intention of merging with or acquiring a company with the proceeds of the SPAC's initial public offering (IPO).

Characteristics

Offerings

SPACs were traditionally sold via an initial public offering (IPO) in $6 units consisting of one common share and two "in the money" warrants to purchase common shares at $5 a common share at a future date usually within four years of the offering. Today, SPAC offerings are more commonly sold in $8–10 units which consist of one common share and one warrant. SPACs trade as units and/or as separate common shares and warrants on the OTC Bulletin Board and/or the American Stock Exchange (both the Nasdaq and the New York Stock Exchange have announced plans to list SPACs in 2008) once the public offering has been declared effective by the U.S. Securities and Exchange Commission (SEC), distinguishing the SPAC from a blank check company formed under SEC Rule 419. Trading liquidity of the SPAC's securities provide investors with a flexible exit strategy. In addition, the public currency enhances the position of the SPAC when negotiating a business combination with a potential merger or acquisition target. The common share price must be added to the trading price of the warrants to get an accurate picture of the SPAC's performance.

By market convention, 85% to 100% of the proceeds raised in the IPO for the SPAC are held in trust to be used at a later date for the merger or acquisition. Today, the percentage of gross proceeds held in trust pending consummation of a business combination has increased to 98% to 100%.
The SPAC must sign a letter of intent for a merger or an acquisition within 12 to 18 months of the IPO. Otherwise it will be forced to dissolve and return the assets held in the trust to the public stockholders. However, if a letter of intent is signed within 12 to 18 months, the SPAC can close the transaction within 24 months. Today, SPACs are incorporated with 24-month limited life charters that require the SPAC to automatically dissolve should it be unsuccessful in merging with or acquiring a target prior to the second anniversary of its offering.

In addition, the target of the acquisition must have a fair market value that is equal to at least 80% of the SPAC’s net assets at the time of acquisition and a majority of shareholders voting must approve this combination with usually no more than 20% to 40% of the shareholders voting against the acquisition and requesting their money back.

Governance

In order to allow stockholders of the SPAC to make an informed decision on whether or not they wish to approve the business combination, full disclosure of the target business, including complete audited financials for it, and terms of the proposed business combination via an SEC merger proxy statement is provided to all stockholders. All common share stockholders of the SPAC are granted voting rights at a shareholder meeting to approve or reject the proposed business combination. A number of SPACs have also been placed on the London Stock Exchange AIM exchange; these SPACs do not have the aforementioned voting thresholds.

As a result of the voting and conversion rights held by SPAC shareholders, only well-received transactions are typically approved by the shareholders. When a deal is proposed, a shareholder has three options. The shareholder can approve the transaction by voting in favor of it, elect to sell their shares in the open market, or vote against the transaction and redeem their shares for a pro-rata share of the trust account. (This is significantly different from the blind pool - blank check companies of the 1980s, which were a form of limited partnership that did not specify what investment opportunities the company plans to pursue.) The assets of the trust are only released if a business combination is approved by the voting shareholders, or a business combination is not consummated within 24 months of the initial offering. This guarantees a minimum liquidation value per share in the event that a business combination is not effected.

Management

The SPAC is usually led by an experienced management team composed of three or more members with prior private equity, mergers and acquisitions and/or operating experience. The management team of a SPAC typically receives 20% of the equity in the vehicle at the time of offering, exclusive of the value of the warrants. The equity is usually held in escrow for 2–3 years and management normally agrees to purchase warrants or units from the company in a private placement immediately prior to the offering. The proceeds from this sponsor investment (usually equal to between 3% to 5% of the amount being raised in the public offering) are placed in the trust and distributed to public stockholders in the event of liquidation.

No salaries, finder's fees or other cash compensation are paid to the management team prior to the business combination and the management team does not participate in a liquidating distribution if it fails to consummate a successful business combination. In many cases, management teams agrees to pay for the expenses in excess of the trusts if there is a liquidation of the SPAC because no target has been found. Conflicts of interest are minimized within the SPAC structure because all management teams agree to offer suitable prospective target businesses to the SPAC before any other acquisition fund, subject to pre-existing fudiciary duties. The SPAC is further prohibited from consummating a business combination with any entity which is affiliated with an insider, unless a fairness opinion from an independent investment banking firm states that the combination is fair to the shareholders.


 http://en.wikipedia.org/wiki/Special-purpose_acquisition_company

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.  


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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%.

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Disadvantages of SPAC

 SPAC disadvantages:

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.


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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.


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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. 

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.  

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: 

"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. 


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