How does Buffett make his picks? His 5 investment criteria.

How does Buffett make his picks? 

In short, he uses the following five investment criteria.

● Free cash flow of at least $250 million.

● Net profit margin of 15% or more.

● Return on equity of at least 15% for each of the past three years and the most recent quarter.

● One dollar’s worth of shareholder equity created for every dollar of retained earnings over the past five years.

● Market capitalization of at least $500 million.


One more criterion is added to eliminate overvalued stocks: comparing our five-year discounted cash flow estimate with the current price.

Ref:  http://www.thestockadvisors.com/Main-Section/SP-buys-that-pass-the-Buffett-test.html

"Many stock options in the corporate world have worked in exactly that fashion: they have gained in value simply because of management retained earnings, not because it did well with the capital in its hands. " ~ Warren Buffet

Warren Buffet once stated - "Unrestricted earnings should be retained only where there is a reasonable prospect - backed preferably by historical evidence or, when appropriate by a thoughtful analysis of the future - that for every dollar retained by the corporation, at least one dollar of market value will be created for owners. This will happen only if the capital retained produces incremental earnings equal to, or above, those generally available to investors." Hence for a booming business, the primary goal is to create 1$ in market for every 1$ of the retained earnings.

Read more at Buzzle: http://www.buzzle.com/articles/retained-earnings-calculation.html

The importance of understanding your own behaviours in relation to your actions in investing; once understood, you will be able to apply your preferred investing style consistently without emotional or psychological bias.

The  person capable of standing back may notice that change is the one constant.  

One might do well to stand back and consider whether a perceived truth is indeed so, or whether in fact the more things apparently change, the more some things do indeed remain the same.

Following the crowd and abandoning a commitment to a long-term approach in a business you bought into believing it to be sound could lead to a real loss, especially if, six months later, it turns out that the crowd consisted of ill-informed speculating lemmings and now the shares you sold have doubled in value as sanity returned to the market.

The importance of understanding your own behaviours in relation to your actions cannot be over-stated. 

Once understood, you will be able to apply your preferred investing style consistently without emotional or psychological bias.  Something which is easier said than done.  

"An optimist will tell you the glass is half-full;
the pessimist, half-empty; and
the engineer will tell you the glass is twice the size it needs to be."

Investing is NOT Speculation

There is a difference between speculation and investing.  

One distinction defined this by the length of time over which the investor expects to realise their investment; or to put it another way, how quickly one expects to make money.  

Speculation is high-risk-get-rich-quick territory.

Investing is managed risk over long periods of time where you can acquire wealth slowly.  

[  I am an investor by nature, not a speculator.
I am in it for the long haul, and having bought many good shares at fair or bargain prices in the past and presently, I intend to hang onto to them.
My view is that they will move yet higher over time.
Sometimes, the massive and largely unprecedented increase in the share price of my stocks over a short period was not anticipated by me or probably by many others.
So, did I get lucky?  Well, yes and no.
It was my view that the share price of these companies would rise further or eventually recover from recent corrections, whilst the past is no way of accurately predicting the future, I felt that it would rise to around a certain price in the medium term.
The difference between my expectations and what happened is that I would have been happy for it to return to that price within five years.  As it happened, it did so in less than a few months.  ]

Know-it-alls have a lot to learn. You never know as much as you think you do.

One of the biggest dangers with investing is over-confidence or the addictive nature of doing well.

This is hard-wired into human beings.

It is all about maintaining a sense of perspective, and sometimes we need to remind ourselves that we should guard against over-confidence as much as risk aversion.

You never know as much as you think you do.

Always try and see things from a new or different perspective.  It can be quite developmental.

How is market value of common stock determined?

Market value is basically determined by investor expectations of future earnings and dividend payments, although the value of assets is also important.

Prices may also be affected temporarily by large transactions creating bid-offer imbalances, by rumours of various sorts, and by public tender offers.

How to Invest Your MONEY: 30 Key Personal Investment Opportunities

1. Annuity
2. Bond, Corporate (Interest Bearing)
3. Closed-End Fund
4. Collectibles 
5. Common Stock
6. Convertible Security
7. Exchange-Traded Funds
8. Foreign Stocks and Bonds
9. Futures Contract on a Commodity
10. Futures Contract on an Interest Rate
11. Futures Contract on a Stock Index
12. Government Agency Security
13. Life Insurance (Cash Value)
14. Money Market Fund
15. Mortgage-Backed (Pass-Through) Security
16. Municipal Security
17. Mutual Funds (Open End)
18. Option Contract (Put or Call)
19. Option Contract on a Futures Contract (Future Option)
20. Option Contract on an Interest Rate (Debt Option)
21. Option Contract on a Stock Index
22. Option Contract or Futures Contract on a Currency
23. Precious Metals
24. Preferred Stock (Nonconvertible)
25. Real Estate Investment Trust (REIT and FREIT)
26. Real Estate, Physical
27. Savings Alternatives
28. Treasury Securities (Bills, Bonds and Notes)
29. Unit Investment Trust
30. Zero-Coupon Security

"Money makes Money". Money can snowball.

You have an investment which you are now also getting a dividend yield of at least 7%, paid in regular instalments.  What do you do with the money after your tax has been paid?

What you don't do is withdraw it from your account and spend it.  You could do that, but that would be stupid because you can use dividend payments over time to start to accrue your wealth.  Over time, this can create a snowball effect as your wealth compounds.  Imagine getting to the point at which your dividend payments alone are becoming enough to make it worthwhile re-investing them alone, aside from anything you can top it up with yourself.

When you get to that stage, you will be on the verge of creating a self-sustaining money machine.  It is what is meant by the old phrase "money makes money".  In fact, it does.

Getting your money to work for you is indeed possible if you adopt some of the core principles of investing and apply them consistently and patiently over time.  The more time, the more money will compound. 

WHY NOT have a 100-year plan that would ensure that your children and grandchildren grow into very wealth people indeed.  Investing is a relay marathon, not a sprint. 

The more debt you take on, the higher the risk

The higher the net gearing figure, the riskier the investment becomes.  This is basically because debt has to be paid back no matter what happens to your sales.  Costs are generally more fixed, whilst income for most businesses is variable and can fluctuate wildly.  

For example, the manufacturer of high-end electronic consumer goods that is very heavily geared is likely to face a potentially serious problem in the event of a sudden economic downturn.  The debt, however, as a fixed cost, would remain.  This is how large numbers of businesses go under.

A business in the same sector with little or no debt and a healthy bank balance is far more likely to weather the economic storm.  Recessions are nothing new, they have happened before and will do so again.

Does any business really have an excuse for not being prepared for them?  



[So the world will almost certainly face further financial shocks and economic events that will surprise us, and whilst we can't say when it will happen or how exactly it will play out next time around, sometimes it really can feel like a little bit of history repeating as the stock market will continue to behave in both a rational and irrational manner without warning. 

That is why it is so important to think about the business, and not the share price or even what the market is really doing at all.]

Owning Your Own Business is easier than You Imagine

When you buy a share in a business, you become part-owner of that business and whether you are aware of it or not, everyone in that business from the most junior staff to the most senior is now working for you.
It is your job to remember this and to exercise your judgement in regard to the quality of the job they are doing.

You should not be silent bystanders in a business.  You have after all, parted with your hard-earned cash and invested in the enterprise and therefore you are now part-owner of all of its assets, profits and its future.  Get involved.  It is your money and your business.

Dividends can help to mitigate risk. When buying a dividend stock, the quality of the company is the number one consideration.

Let's assume that the stock stays the same or, even worse, actually goes down a little in the short term.

• If you have invested in a business that does not pay any dividends, you have no compensation for what has happened, just less money than you had when you invested.
• However, if the business pays dividends and continues to honour that commitment (in the same way that companies like Coca Cola have historically done) then it mitigates some of your risk.  

Or to put it another way, you still get some income from the investment which could be seen to offset your loss in the share price, should that have happened.

As a general principle, I tend to invest only in businesses that have a sustained track record of paying dividends.

"When buying a dividend stock, the quality of the company is the number one consideration.  Given enough time, a quality company will always rise above lesser competition.  When your holding period is forever, it is inevitable that a superior stock will eventually out-perform second-tier players."  -  Warren Buffett

In an ideal situation, you will buy a share in a business which is undervalued, and over time the share will increase in value to the point at which you are very pleased with the capital gain you have seen in the share price.  Then guess what, you also receive a cash bonus in the form of a dividend payment!  Sounds like a great concept to me.  :-)

SONA PETROLEUM IPO

At 9.20 am today, the price of SONA was RM 0.395 and that of SONA-WA was RM 0.210.  The combined price of 1 SONA mother share and 1 SONA-WA share was RM 0.605.

The net asset per share of SONA at listing was RM  0.37.  At RM 0.605 for the combined 1 SONA mother and 1 SONA-WA shares, this was a premium of 63.5% above the net asset per share.

The Initial Investors and Promoters obtained their shares at RM 0.01 per share and upon listing, they own 20% of the enlarged company..

The IPO investors obtained theirs at RM 0.50 per share  and upon listing, they own 80% of the enlarged company..

Updated: Tuesday July 30, 2013 MYT 9:15:31 AM

Sona Petroleum’s warrants surge, shares flat (Update)

BY JOSEPH CHIN

KUALA LUMPUR: Sona Petroleum Bhd opened flat at 42.5 sen, which was the reference price when it made its debut on Bursa Malaysia on Tuesday.

However, the warrants saw stronger interest, surging to 23.5 sen from the reference price of 7.5 sen.

At 9am, Sona shares were down 1.5 sen to 41 sen with 118.3 million shares done. The warrant rose 16.5 sen to 24 sen with 35.87 million units done.

The FBM KLCI rose 1.11 points to 1,799.89. Turnover was 63.51 million shares valued at RM25.04mil. There were 87 gainers, 30 losers and 78 counters unchanged.

Below is the earlier story:

KUALA LUMPUR: Sona Petroleum Bhd, which is making its debut on Bursa Malaysia on Tuesday, saw bids at its reference price of 42.5 sen in pre-market trade.

At 8.33am, there were bids at 42.5 sen. However, the warrants saw stronger interest with bids at 20 sen, which was 12.5 sen above the reference price of 7.5 sen.

The initial public offer involved 141 million shares with up to 141 million warrants.

Sona Petroleum is Malaysia’s third special purpose acquisition company (SPAC) to list on Bursa Malaysia.

Sona Petroleum, which aims to eventually make the transition to an independent E&P company, had secured commitments from six institutions both local and foreign as cornerstone investors, making it the first SPAC to do so.

They are Hong Leong Asset Management Bhd, Hong Kong-based hedge fund Segantii Capital and Davidson Kempner European Partners, along with the fund management houses of the three banks backing the listing: CIMB-Principal Asset Management Bhd, Kenanga Investors Bhd and RHB Investment Management Sdn Bhd.

The cornerstones, who did not enjoy a discount to the 50 sen IPO price, were apportioned 275 million shares out of the 959 million shares for institutions.

http://www.thestar.com.my/Business/Business-News/2013/07/30/Sona-Petroleum-sees-bids-at-reference-price.aspx

Warren Buffett - The Long Term Investor

"All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies."  Warren Buffett

Patience and pricing are once again your main allies.

Warren Buffett bought into Coca Cola when its share price was at one of its lowest points, well below the average, and still holds the stock to this day.

Be realistic and you will avoid disappointment

It is worth reflecting on what your objectives are in your investment journey.

Having a clear sense of what you REALISTICALLY expect to achieve will help you to focus on what types of shares you may wish to buy, and having already considered what type of investing personality you are, what behaviours to be aware of and what your risk tolerance is, you can start to search for your investments with a clear sense of why you are going down a particular road.

If you do not have a clear sense of what you wish to achieve, it will be much more likely that you will make a less than optimum choice of investments, and that you may become disillusioned with what you achieve.

Be modest in your ambitions and realistic about what can be achieved. 
-  Do not expect to be right 100% of the time.  Anything over 50% of the time and you are doing well.
-  One of the key skills to learn is a little about how to understand and appreciate a business, and not the share price.  This approach will serve you well.



You should be realistic about your goals.

"In this business if you're good, you're right six times out of ten.  You're never going to be right nine times out of ten."  Peter Lynch

"It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong."   George Soros

"If you took our top 15 decisions out, we'd have a pretty average record.  It wasn't hyperactivity, but a hell of a lot of patience.  You stuck to your principles and when opportunities came along, you pounced on them with vigor."  Charlie Munger.



Expect some of your share to go down, and some to go up.  The more you do your research and the more you learn over time, the relative proportion of the latter in relation to the former should increase.  If it does not, you may want to step back and reflect on what might be going wrong.  

A tolerance for ambiguity will serve you well as an investor, as will an inquiring mind.

Are the earnings of the business relatively predictable or highly volatile?

A couple of important points worth considering in understanding a potential investment is whether the earnings of the business are relatively predictable or likely to be highly volatile.  

It is relatively easier to invest in something where the projected earnings are likely to have a strong element of stability about them.  

Earnings should preferably be consistent, sustainable and predictable.  "The past is so much easier to predict."

Learn from the past and look to the future, as that is where we are all going

The key point is to learn from the past and whilst it is no prediction of future patterns and behaviour, it can help in working out whether something is likely to be over-priced in relation to wider trends and intelligence.

These are some of the initial key factors you may wish to look into in assessing a business, and represent just the tip of the iceberg.  The more you look into and research a business, the more you will understand where it has come from and get a feel for where you think it might be going.    

[For example, how long it will be before we see the re-emergence of sub-prime lending, albeit under a new badge and from a new breed of banks?  Who knows, but once again, when it happens, will you be investing?]

One of the biggest dangers with Investing is Overconfidence

Quote:   

Re: uyafr selection October 2010 batch
« Reply #45 on: October 27, 2010, 10:16:15 AM »
Reply with quoteQuote
Quote from: smartinvestor on October 27, 2010, 10:09:42 AM
Agree with Uyfar...
GenY...please tell the MANY company that also doing well too...
DIGI? KPJ? Genting?
Here is the place we share information and earn $$$ together

yep, do u know how much is DIGI, KPJ Gentings ? hehehe if suddenly those counter drop.. kena kaw kaw, if go up.. the most 5-10%

BUT LCTH, I dont see how it can drop much, but if go up... even if go up 100% it is still cheap and good. So think for yourself, is it worth risking on those counter already too high up or buy a counter which is still rock bottom and rock solid.

http://www.investlah.com/forum/index.php/topic,11510.msg195753.html#msg195753


The above was a post in October 2010 in a blog that I participate.

Here are the 5 Years charts of DIGI, KPJ, Gentings and LCTH performance.



Digi Share Price
Oct 2010  RM 2.50
July 2013  RM 4.70
Capital Gain 88%




KPJ  Share Price
Oct 2010  RM 3.80
July 2013  RM 6.50
Capital Gain 71%



Genting Share Price
Oct 2010  RM 10.50
July 2013 RM 10.50
Capital Gain 0%

versus



LCTH Share Price
Oct 2010  RM 0.28
July 2013  RM 0.18
Capital Loss  - 35.7%

From October 2010 to July 2013:
1.  The prices of the shares of Digi, KPJ have performed very well.
2.  Genting share price remained relatively unchanged over this period.
3.  The share price of LCTH has tanked significantly.


Questions I pose:
1.  Are higher priced stocks more risky than penny shares?
2.  Are higher priced stocks more risky because they have a longer way to drop?
3.  Are penny shares less risky because should their prices correct, the drop will be less?
4.  Why are higher priced stocks priced such, and why are penny stocks priced such?
5.  What are the fears that kept this "investor" away from Digi, KPJ and Genting?  Are these fears rational or irrational?
6.  What drives his enthusiasm to penny stocks?  Greed?  Ability?  Confidence?  Past gains?   Are these emotions rational or irrational?
7.  What single characteristic, if any, distinguishes the gains in Digi, KPJ and no loss in Genting, compared with LCTH?


What lessons can we derive from the above observations?
Please feel free to post your comments.

Investing in REITS

Investing in REITS

Value investors strive to identify investments trading at valuations below intrinsic value. 

The objective is to identify REITS with potential for significant appreciation relative to risk. 

Because REITS are generally regarded as hedges or defensive investments, they may be overlooked during bull markets.

Most recently, REITS in healthcare and industrial sectors have done well because they have both a real estate and a business component.

• Prologis, a REIT with worldwide logistics facility interests and a logistics business to go with it, is a good example.

And during weak economic times, REITS are fairly defensive and often hold up well because of the underlying stability of real estate prices and rent returns.

• That isn't to say they're immune, as has certainly been seen with mortgage REITS and some leveraged residential REITS recently.

REITS and Returns

REITS and Returns

Funds from operations (FFO) is an important measure of a REIT's operating performance. 

FFO includes all income after operating expenses, but before depreciation and amortization.

Growth in FFO typically comes from:

• higher revenues,
• lower costs, and,
• management's effective recognition of new business opportunities.

REITs with a growing FFO are generally more desirable,because this is a demonstration of an ability

• to raise rents and
• keep occupancy stable.

Beware of dividends that are being paid out of profit from the sale of property or from cash reserves; these payments may not be sustainable.

The National Association of REal Estate Trusts (NAREIT at www.nareit.com ) defines FFO as net income (excluding gains or losses from sales of property or debt restructuring) with the depreciation of real estate added back. 

• Most commercial real estate holds its value longer and more fully than other tangible equipment that a business may possess, such as tools or vehicles.
• The depreciation that the accounting process records each year is often overstated.

Current accounting processes may call for depreciation of a building (according to a certain formula) even though the real value of the building may have increased due to outside forces like

• increased demand or
• low supply of vacancies

in the area where the building is located. For this reason, adding back the depreciation is a clearer way to measure the operating profits of one REIT against another.

FFO is more like the cash flow measures used to evaluate other businesses, and in most cases more completely demonstrates annual performance.

Understanding the expected trade off between potential capital appreciation and yield across classes of REITS.

Different classes of REITS
1.  Retail/Mall
2.  Office/Commercial
3.  Hospitality
4.  Industrial
5.  Health Care


Comparison of yield across various REITS
1 < 2 < 3 < 4 < 5

Comparison of Potential for Capital Appreciation across various REITS
1 > 2 > 3 > 4 > 5



Understanding the expected trade off between potential capital appreciation and yield across classes of REITS.

The retail or mall REITS tend to favour capital appreciation in the value of the underlying assets.

• Malls are hard to duplicate and scarce.  
• In an asset inflation situation, the underlying mall property would increase in value faster than other classes of REIT with the attendant appreciation in the price of the REIT share.  
• The trade off would be lower distribution yield.  
• Since malls REITS are highly demanded, the price of the REIT share often increases to such an extent to reduce the yield on the REIT.

On the other end, the health care REIT seems to give the highest yield but trades off its potential for capital appreciation.

• It is easy to conceive that a health care REIT will not have much capital appreciation in its assets if it has a 15 year fixed lease with an operator for its assets.  
• For example, in a particular such REIT, any increase in rent is undertaken only once and year and only at the same rate as the CPI to keep track with inflation.  Even if the asset increases in value substantially, the REIT will not receive any additional income for the increase since it has signed fixed long term leases with the operator.  As such capital appreciation is capped.  
• On the other side of the equation, the health care REIT is able to pay very consistent and high yields to the unit-holders.  
• Health care REITS are as close to being recession proof as any other class of REIT would allow (assuming the operator does not default).  
• Since health care is by its nature also less prone to cycles compared to offices or industrial business, health care REITS are well recommended in period of grave economic uncertainty.  

Ref:
Value Investing in REITS by Attlee Hue

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.

Try Currency Trading Risk-Free at FOREX.com  

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