How to analyze real estate developers

How to analyze real estate developers

Real estate stocks make up a significant number of companies in Asian stock exchanges and many of them are among the the most volatile stocks. Whether the real estate developer is listed or not, they are influenced by a host of cyclical factors ranging from government policies, interest rates, unemployment rates, affordability, etc. Hence, it is important to understand how real estate companies can be analyzed.


Profit Model

Real estate industry can be separated into the following sub-industries or types of real estate developers:

1. Residential real estate developers
2. Commercial and mixed use real estate developers
3. Industrial real estate developers

Profit model of residential real estate developers

Residential real estate developers are more dependent on economies of scale than ever because of increasing land prices and declining rate of increase in residential property prices. In many developing countries, developers used to be able to acquire land at cheap prices and hope for rapid increase in home prices to make huge profits. In developed countries, land prices are higher, and price increases are more muted. Hence, brands and good management are playing an increasingly important role.


Profit model of commercial real estate developers

As prime real estate for commercial developments become more scare, commercial real estate developers tend to prefer to have rental incomes rather than selling units so that they can have consistent income and manage the properties. These developers are also more likely to sell their commercial properties to real estate investment trusts to free up capital and many are REITs that also develop properties.


Profit model of industrial real estate developers

Industrial real estate developers operate more like commercial real estate developers as they seek to have stable rental incomes and also sometimes selling their properties. Some industrial estate developers might even have a fund to invest in promising industrial companies so as to achieve higher profits.



Factors that Affect Value

1.  Land bank - the value of a real estate developer is directly influenced by its land bank. As the larger the land bank, usually means the developer can make more profits from developing the land banks later. Hence, the land bank that a real estate company has is always disclosed in detail in the listed companies' reports.

2.  Inventories - Real estate inventories can be separated into a few categories. Usually increasing values of construction-in-progress and land held for development will translate to higher future earnings for the company:

• Completed developments - properties whose construction has been completed
• Construction-in-progress - means the value of properties under construction.
• Land held for development - value of land help for future developments.
• Investment properties - properties held for rent or sale

3.  Customers deposits - for residential projects, it is often that developers will collect customers deposits or even prepayments of entire houses prior to completion of the units. As these properties are pre-sold and their profit and loss have yet to be recognized in the income statement, growing customer deposits could signal increasing revenue and most likely profits in the coming years ahead.

4.  Housing prices - the profits from real estate developers that primarily sell their developments come from selling the units at above costs. Hence, the moving of housing prices have direct impact on the profitability of residential real estate developers. Usually the stock price of real estate developers have high correlation with the anticipated housing price direction.

5.  Rental rates - Rental rates are especially important for commercial and industrial real estate developers as most of them do not sell all the units that they developed but they keep these units for rental returns. Rental rates have direct bearing on stock prices of such developers and REITs.

6.  Industry consolidation - as economic difficulties mount and economies of scale becomes more important, mergers and acquisition activities will also drive prices of real estate companies as the merged entities might be more efficient given a larger land bank.

7.  Macro economic factors - government policies play a huge role in controlling property prices as the following factors will determine the direction of property prices. We have listed

Factor                 Movement      Likely Effects
Interest rates         Up                Negative
Land supply          Down            Positive on short term price but will affect future
                                                  profitability if land bank dries up
Loan Quantum      Up                 Positive
Reserve ratio         Up                Negative
GDP                     Up                Positive
Unemployment      Up                       Negative




Valuing Real Estate Developers

A common method to value real estate developers is using the Revalued Net Asset Value ("RNAV") approach which basically determines the net asset value of a real estate developer by adding up

• the change in value of the investment properties held by the company, 
• the surplus value of properties held for development using Discounted Cash Flow method and 
• the net asset value of the company with any other adjustments that are deemed necessary.

Usually a discount or premium percentage is multiplied with the RNAV base on the developers other qualities such as management capabiltiies, branding, track record, etc. A smaller developer with poor record of continuously generating consistent income is usually given a significant discount to its RNAV.

Using the RNAV approach only takes into account of what the developer can earn with the assets that it has in its books at the time of the valuation. If properly applied, it is usually more conservative than the market approach such as P/E multiples.

However, to use this method, it requires a lot of work in revaluing the properties held by the developer, making it difficult to implement by most people as information needed to determine RNAV needs some skill in obtaining.

The price earnings ratio method could also be useful to cross check the RNAV method.

Source: http://roccapitalholdings.com/content/how-analyze-real-estate-developers

How I Analyze a Bank Stock

How I Analyze a Bank Stock
A four-part framework to clarify banking.

Anand Chokkavelu (TMFBomb) Apr 29, 2014

Here's the beauty of the banking industry: Banks are similar enough that once you learn how to analyze one, you're pretty much set to analyze 500 of them.

That's about how many banks trade on major U.S. exchanges.

Now, the details get messy when you factor in complicated financial instruments, heavy regulations, byzantine operating structures, arcane accounting rules, the macro factors driving the local economies these banks operate in, and intentionally vague jargon.

But at their core, each bank borrows money at one interest rate and then lends it out at a higher interest rate, pocketing the spread between the two.

And as investors we can get far by focusing on four things:

1. What the bank actually does
2. Its price
3. Its earnings power
4. The amount of risk it's taking to achieve that earnings power

To give a concrete example, let's walk through one of the banks I've bought in the banking-centric real-money portfolio I manage for the Motley Fool: Fifth Third Bancorp (NASDAQ:FITB).

As quick background, Fifth Third is a regional bank based out of Cincinnati whose 1,300+ branches fan out across 12 states. It's large enough to be in the "too big to fail" group that gets stress tested by the Fed each year but still less than a tenth the size of a Bank of America or a Citigroup -- and much simpler.

Alright, let's start with...


1.  What the bank actually does

When you read through a bank's earnings releases, it's easy to get sidetracked by management's platitudes and high-minded promises -- guess what, EVERY bank says it's customer-focused and a conservative lender!

Words are nice, but in banking, you are your assets -- the loans you make, the securities you hold, etc. They're the things that will drive future profitability when they're chosen carefully, and they're the things that will force you to fail (or get bailed out) when you get in trouble.

Here's the asset portion of Fifth Third's balance sheet. Take a look, let your eyes glaze over, and then I'll let you know the numbers I focus on (until we get to the "Its price" section, I'm using the financials from Fifth Third's last 10-K because they're more detailed for illustrative purposes).

Loans are the heart of a traditional bank.

In my mind, the greater a bank's loans as a percentage of assets, the closer it is to a prototypical bank.

In this case, two-thirds of Fifth Third's assets are loans (87,032/130,443). This number can range far and wide, but Fifth Third's ratio is pretty typical. For context, note that Fifth Third's loan percentage is double the much more complex balance sheet of JPMorgan Chase.

If a bank isn't holding loans, it's most likely holding securities. You'll notice Fifth Third's various buckets of securities in the balance sheet lines between its cash and its loans. There are many reasons a bank could hold a high percentage of securities.

• For example, its business model may not be loan-driven, 
• it may be losing loan business to other banks, or 
• it may just be being conservative when it can't find favorable loan terms. 

In any case, looking at loans as a percentage of assets gives you questions to explore deeper.

The next step of digging into the loans is looking at what types of loans a bank makes. You can see in the balance sheet that Fifth Third neatly categorizes its $88.6 billion in loans. Clearly, Fifth Third is a business lender first and foremost: When you add up "Commercial and industrial loans," "Commercial mortgage loans," "Commercial construction loans," and "Commercial leases," almost 60% of Fifth Third's loans are business-related. Also, given the almost $40 billion in "Commercial and industrial loans" (as opposed to mortgage loans), a lot of Fifth Third's loans aren't backed up by real estate (though other forms of collateral may be in play).

For simplicity, I'll stop here. The one-line summary: On the assets side, look at the loans.

Let's move on to the rest of the balance sheet:

Just as the loans tell the story on the assets side, the deposits tell the story on the liabilities side. The prototypical bank takes in deposits and makes loans, so two ratios help get a feel for how prototypical your bank is:

• 1) Deposits/Liabilities 
• 2) Loans/Deposits.

Deposits are great for banks for the same reason you complain about getting low interest rates on your checking and savings accounts. Via these deposit accounts, you're essentially lending the bank money cheaply. If a bank can't attract a lot of deposits, it has to take on debt (or issue stock on the equity side), which is generally much more expensive. That can lead to risky lending behavior -- i.e. chasing yields to justify the costs.

Fifth Third's deposit/liabilities ratio is 86%, which is quite reasonable and leads to an equally reasonable 89% loan/deposit ratio. All of this confirms what we suspected after looking at the loans on the asset side. Fifth Third is a bank that, at its core, takes in deposits and gives out loans with those deposits. If that wasn't the case, we'd want to get comfortable with exactly what it's doing instead.

We're now ready to take a quick peek at the income statement:

The big thing to focus on here is the two different types of bank income: 

1. net interest income and 
2. (you guessed it) noninterest income.

Still lost in that mess above? See the lines

1. "Net Interest Income After Provision for Loan and Lease Losses" (3,332, or $3.332 billion) and 
2. "Total noninterest income" (3,227, or $3.227 billion).

I told you earlier that at its core, a bank makes money by borrowing at one rate (via deposits and debt) and lending at another higher rate (via loans and securities). Well, net interest income measures that profit.

Meanwhile, noninterest income is the money the bank makes from everything else, such as

• fees on mortgages, 
• fees and penalties on credit cards, 
• charges on checking and savings accounts, and 
• fees on services like investment advice for individuals and corporate banking for businesses.

For Fifth Third, it gets almost as much income via noninterest means ($3.2 billion) as it does from interest ($3.3 billion).

Like most of what we've covered so far, that's not necessarily good or bad. It furthers our understanding of Fifth Third's business model. For instance, the noninterest income can smooth interest rate volatility but it can also be a risk if regulators change the rules (e.g. banks can no longer automatically opt you in to overdraft protection...meaning they get less of those annoying but lucrative overdraft fees).

There are many, many line items I'm glossing over on both the balance sheet and the income statement, but these are the main things I focus on when I'm looking over the financial statements. As you'll see, many of the things I've ignored are covered a bit by the ratios we'll look at in the other sections.

Next up is...



2.  Its price

The oversimplified saying in banking is "buy at half of book value, sell at two times book value."

Just as if I told you to "buy a stock if its P/E ratio is below 10, sell if it's over 25" there are many nuanced pitfalls here, but it at least points you in the right direction.

If you're unfamiliar with book value, it's just another way of saying equity. If a bank is selling at book value, that means you're buying it at a price equal to its equity (i.e. its assets minus its liabilities).

To get a little more conservative and advanced than price/book ratio, we can look at the price/tangible book ratio. As its name implies, this ratio goes a step further and strips out a bank's intangible assets, such as goodwill. Think about it. A bank that wildly overpays to buy another bank would add a bunch of goodwill to its assets -- and boost its equity. By refusing to give credit to that goodwill, we're being more conservative in what we consider a real asset (you can't sell goodwill in a fire sale). Hence, the price-to-tangible book value will always be at least as high as the price-to-book ratio.

In Fifth Third's case, it currently has a price-to-book value of 1.3 and a price-to-tangible book value of 1.5. In today's market that's a slight premium to the median bank.

Like any company, the reason you'd be willing to pay more for one bank than another is if you think its earning power is greater, more growth-y, and less risky.

Our first clue on Fifth Third's earnings power is also our last valuation metric: P/E ratio. Fifth Third's clocks in at just 10.7 times earnings. That's lower than its peers. In other words, although we're paying an above average amount for its book value, we're seeing that it's able to turn its equity into quite a bit of earnings.

Let's look further into that...


3.  Its earnings power

I talked a bit about how Fifth Third has a lower than average P/E ratio (high Earnings Yield) despite having a higher-than-average P/B ratio. The metric that bridges that gap is called return on equity (ROE). Put another way, return on equity shows you how well a bank turns its equity into earnings. Equity's ultimately not very useful if it can't be used to make earnings.

Over the long term, an ROE of 10% is solid. Currently, Fifth Third is at 12.3%, which is quite good on both a relative and absolute basis.

Breaking earnings power down further, you can look at

1. net interest margin and 
2. efficiency.

Net interest margin measures how profitably a bank is making investments. It takes the interest a bank makes on its loans and securities, subtracts out the interest it pays on deposits and debt, and divides it all over the value of those loans and securities. In general, it's notable if a bank's net interest margin is

• below 3% (not good) or 
• above 4% (quite good). 

Fifth Third is at 3.3%, which is currently higher than some good banks, lower than others.

While net interest margin gives you a feel for how well a bank is doing on the interest-generating side, a bank's efficiency ratio, as its name suggests, gives you a feel for how efficiently it's running its operations.

The efficiency ratio takes the non-interest expenses (salaries, building costs, technology, etc.) and divides them into revenue. So, the lower the better.

• A reading below 50% is the gold standard. 
• A reading above 70% could be cause for concern. 

Fifth Third is at a good 58%.

There are nuances in all this, of course. For instance, a bank may have an unfavorable efficiency ratio because it is investing to create a better customer service atmosphere as part of its strategy to boost revenues and expand net interest margins over the long term.

Meanwhile, ROE and net interest margins can be juiced by taking more risk.

So that brings us to...


4.  The amount of risk it's taking to achieve that earnings power

There are a lot (and I mean a LOT) of ratios that try to measure how risky a bank's balance sheet is. For example, when the Fed does its annual stress test of the largest banks, it looks at these five:

1. Tier 1 common ratio
2. Common equity tier 1 ratio
3. Tier 1 risk-based capital ratio
4. Total risk-based capital ratio
5. Tier 1 leverage ratio.

If you think that's confusing, you should see their definitions -- they're chockfull of terms like "qualifying non-cumulative perpetual preferred stock instruments."

Personally, I rely on a much simpler ratio: assets/equity.

When you buy a house using a 20% down payment (that's your equity), your assets/equity ratio is at five (your house's value divided by your down payment).

For a bank, I get comfort from a ratio that's at 10 or lower. My worry increases the farther above 10 we go. Fifth Third's is at a reasonable 8.7 after its most recent quarter (8.9 if you're doing the math on the year-end balance sheet above).

We can get more complicated by using tangible equity, but this is a good basic leverage ratio to check out. If you're looking at a bigger bank like Fifth Third, it's also a good idea to check out the results of those Fed stress tests I talked about.

That leverage ratio gives us a good high-level footing. Getting deeper into assessing assets, we need to look at the strength of the loans. Let's focus on two metrics for this:

1. Bad loan percentage (Non-performing Loans/Total Loans)
2. Coverage of bad loans (Allowance for non-performing loans/Non-performing loans)

Non-performing loans are loans that are behind on payment for a certain period of time (90 days is usually the threshold). That's a bad thing for obvious reasons.

Like most of these metrics, it really depends on the economic environment for what a reasonable bad loan percentage is. 

• During the housing crash, bad loan percentages above five percent weren't uncommon. 
• In general, though, I take notice when a bank's bad loans exceed two percent of loans. 
• I get excited when the bad loan percentage gets below one percent (so Fifth Third's 0.8% is looking good).

Banks know that not every loan will get paid back, so they take an earnings hit early and establish an allowance for bad loans. As you've probably guessed, banks can play a lot of games with this allowance.

• Specifically, they can boost their current earnings by not provisioning enough for loans that will eventually default. 
• That's why I like to see the coverage of bad loans to be at least 100%. Fifth Third's is at a conservative-looking 202%.

Finally, I use dividends as an additional comfort point. In an industry that has periods that incent loose lending, I like management consistently taking some capital out of its own hands. I like to see banks paying at least a two percent dividend. A bigger dividend isn't a foolproof way to gauge riskiness, but I get warm fuzzies from a bank that can commit to a decent-sized dividend. As for Fifth Third, it pays out about a quarter of its earnings for a dividend yield of 2.3%.


Putting it all together

I've tried to simplify analyzing a bank as much as I can. I've left out many metrics and concepts, but you've still been bombarded with a lot of potentially boring information.

What's important to remember is that a bank (through its management) is telling you a story about itself. It's our job to figure out whether we believe the tale enough to buy it at current prices.

Because most banks share similar business models, the numbers will go a long way to help you determine if those stories hold water.

If a bank says it's a conservative lender, but half of its loans are construction loans, it has a 10% bad debt ratio, and it's leveraged 20:1, I'm trusting the numbers not the words.

Look at the numbers over the last decade or two and you'll see many clues. When a bank has been able to deliver large returns across a few economic cycles while keeping the same general business model, that's a very good thing. Even better if the same management team has been there the whole time or if the bank clearly has a conservative culture in place that stays in place between management teams.

It's easy to get lost in the minutiae of analyzing a bank, but going in with a framework helps you keep your eyes on the big picture. What I've shared today are the four tenets of my basic framework...I hope it helps clarify yours.




Anand Chokkavelu, CFA owns shares of Bank of America, Citigroup, and Fifth Third Bancorp as well as warrants in Citigroup. He swears his other articles are more interesting. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America, Citigroup, and Fifth Third Bancorp. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

http://www.fool.com/investing/general/2014/04/29/how-i-analyze-a-bank-stock.aspx

Nestle Malaysia at a Glance

http://www.thestar.com.my/business/business-news/2016/08/06/strong-following-for-consumer-stocks/

A good video to share on Value Investing (Richard H Lawrence)

The speaker has shared a lot of his experience and knowledge, and has been very generous in answering many questions in this video.



-------

1.  Invest in superior company.
2.  Good management.
3.  Buy when stocks are down.  Be a contrarian.
4.  Invest for long term capital gains.

-------

Surround yourself with the right people who share your philosophy.  (The DNA of the firm).

Discipline, procedure and process.   Set up the tools.  (e.g. monitor the 52 week low levels.  Pricing power.  Score risk.  What would you do when you meet a big bear market?)

-------

Deliver the results to the investors.

Time weighted returns (NAV return in the fund).  Capital weighted returns (Investor's return).

Must learn to manage your partnership in the bear market.  The best opportunity in bear market gives you excess return over the next 7 years.  Control the level of your asset under management to ensure his stocks have the muscle to get through a severe bear market.

Control greed.  Don't allow greed to get into your way.

-------

6 Tenets of his model:

1.   Pricing power:  

How do you calculate this?  Able to price your profit to ensure no erosion of margin irrespective of input cost rising or falling despite facing a lot of competition.   .

Look at Margins -  Gross profit margin.  Cash gross profit margin (EBITDA margin).  Low variability of cash gross profit margin.


2.   Cash flow:

Cash flow from operation:  Net Income + D&A + other non cash items.

Free cash flow = CFO - maintenance Capex  (business in steady state)

Cash flow of the corporate structure.  (e.g. Apple has all its cash in overseas countries and has to borrow in US to pay off dividends and buy backs.domestically)

Working capital cash flow:  Negative working capital cash flows.

Company must know how to manage the FCF.   Give dividends.  Reinvest for growth.


3.   Invest in High profitability company.  

600 out of 1000 companies are probably mediocre profitability companies.  Eliminate them.

Focus on the ones with the highest profitability in the 400s.

Stay with the best of the best, and you should be able to outperform.

(I don't believe in the WACC.  DCF can be difficult to use and garbage in and garbage out.)

What is an acceptable level of profitability?

Above industry average (NOT THE BEST ANSWER).

Better to look at this through the DUPONT MODEL.   Asset turnover.  Net profit margin. Financial leverage.   Can check the reasons why these factors are not high.  Very good model.

Margin gone up.  Asset turnover gone up.  Financial leverage gone down.  VERY GOOD.
Those where ROE is high due to high finanical leverage.  NOT SO GOOD.

EBIT / NET OPERATING ASSET transfer into high ROE,  allows you to look at the quality of the management.


4.   Need to be prepared for a bear market.

Don't like cyclical companies.  Volatility of margins.  Sales slow, interest cost goes up and profit margin drops.  A whole waste of time and pain to get into these stocks.

Better stay with companies with stable earnings that can get through bear markets.  Even when you invested on a wrong day, you will still be alright.

5.  Sustainability of EPS growth.  Don't invest for change of PE.  INVEST FOR EARNINGS GROWTH.

SUSTAINABILITY EPS GROWTH and DIVIDENDS - CONTRIBUTE TO 80% OF RETURNS.

Companies with EPS growth -  look for low cyclicality of business, ability to increase market share, good companies usually grow market share during a bear market or recession, low cost, large number of customers and suppliers.  All these are low risks to your investing.


6.   Valuation (Benchmarking)

His Formula:

(ROE + normalised Earnings growth over next 3 to 4 years) /4 = target PE
e.g. (30 + 14 /4) = target PE of 11. 

Comparing a group of 15 companies and score them 1 to 15, ranking them.


John Neff: (Earnings growth + Dividend yield) / PE.  Discards the stocks with the worse number.

De-emotionalise the process which is incredibly emotional.

These are powerful instruments for rebalancing your portfolio.



Track the key numbers in your portfolio.

Major Changes Seen in Warren Buffett and Berkshire Hathaway Stocks

Major Changes Seen in Warren Buffett and Berkshire Hathaway Stocks: Apple, Walmart, Phillips 66, Deere & More

By Jon C. Ogg August 15, 2016 4:57 pm EDT

Berkshire Hathaway Inc. (NYSE: BRK-A) has released its public equity holdings as of June 30, 2016. What makes this so interesting for Warren Buffett fans, outside of Buffett being one of the richest men alive, is that there have been many key changes in the Buffett stocks over the last few quarters. The Berkshire Hathaway earnings report in recent weeks showed that the total equity securities listed on the balance sheet was $102.563 billion, while the 13F filing with the SEC showed the balance as of June 30 as being $129.7 billion.

24/7 Wall St. and its founders have followed the portfolio changes from Buffett’s top stock holdings for about two decades now. We track the changes made each quarter, and ultimately these end up being quite different through time. Buffett’s addition of two more portfolio managers in recent years only makes the changes look even more extreme over time.

Investors need to keep in mind that approximately 61% of the aggregate fair value of the common equity securities is concentrated in four companies: 

1. Wells Fargo & Co. (NYSE: WFC) at $23.7 billion; 
2. International Business Machines Corp. (NYSE: IBM) at $12.3 billion; 
3. The Coca-Cola Company at $18.1 billion; and 
4. American Express Co. (NYSE: AXP) at $9.2 billion.

Again, big changes have been made. Warren Buffett also has large stakes in food-giant Kraft Heinz Co. (NYSE: KHC) and refining giant Phillips 66 (NYSE: PSX); and the March quarter showed a new $1 billion stake in Apple Inc. (NASDAQ: AAPL). Berkshire Hathaway also ended the June-2016 quarter with almost $72.7 billion in cash and cash equivalents. That figure is from a total of insurance and other, railroad utilities and energy, and finance and financial products.

Here is how the new list of Warren Buffett and Berkshire Hathaway’s public share holding looks as of June 30, 2016.

American Express Co. (NYSE: AXP) was the same 151.6+ million shares, a position which remains perpetually static whether shares rise or fall. Buffett has owned AmEx for so long it may be cheaper for him to just hold rather than pay gains.

The Coca-Cola Company (NYSE: KO) was the exact same stake of 400 million shares, a position which has also remained static for years. Buffett has defended his stake here for years.

International Business Machines Corp. (NYSE: IBM) was listed as the same 81.232 million shares in June as it was in March. Still, this Big Blue stake has been raised and raised. It was 81.03 million shares as of December 31, about 79.5 million shares as of the end of last June, and the end of 2014 position was 76.971 million IBM shares.

Wells Fargo & Co. (NYSE: WFC) is a position that Warren Buffett might add to for infinity. The June 30 stake was listed as the same 479.704 million shares listed in March. This was 470.29 million shares last September, and again it just keeps being raised. As a reminder, it was documented that Buffett has filed to be allowed to increase his stake north of the 10% threshold with the SEC. With Wells Fargo being a serial acquirer of its own stock Buffett might end up owning more than 10% of the stock even without trying.

Kraft Heinz Co. (NYSE: KHC) was listed as 325,634,818 shares, the same stake it was on March 31 and at the end of 2015. This stake is from the 3G Capital deal and is actually more important than it seems. Buffett had been suggesting that his exposure would be coming down due to his preferred shares being redeemed. The earnings report in recent weeks confirmed that. The value here as of June 30 was $28.8 billion.

Phillips 66 (NYSE: PSX) was an INCREASED STAKE to 78.782 million shares as of June 30. As of March 31, it was a 75.55 million share stake and this has risen steadily. This stake previously had been classified as an elimination in 2015 and then was shown after Buffett got the stake classified with the SEC as confidential.

Apple Inc. (NASDAQ: AAPL) was an INCREASED STAKE to 15.227 million shares as of June 30, worth some $1.455 billion. The stake in Apple was a new position back in the March quarter, listed as 9,811,747 shares worth some $1.069 billion at that time.

Axalta Coating Systems Ltd. (NYSE: AXTA) was the same stake of 23.324 million shares, after having been listed as a new position of 20 million shares.

Bank of New York Mellon Corp. (NYSE: BK) was a larger stake at 20.827 million shares, up from a prior 20.112 million. That was versus 24.6 million shares in the past.

Charter Communications Inc. (NASDAQ: CHTR) was a slightly lower stake at 9.337 million shares. This was 10.326 million shares in March but was up then from 10.281 million at the end of 2015.

Costco Wholesale Corp. (NASDAQ: COST) was the same stake at 4,333,363 shares.

DaVita Inc. (NYSE: DVA) was the same 38.565 million shares, but this had been raised in prior quarters prior to Buffett entering into a standstill agreement not to buy more than 25% of the company.

Deere & Co. (NYSE: DE) was a smaller stake at 21.959 million shares. That is down from 23.28 million shares, but that had been 22.884 million shares at the end of 2015 after some 5.83 million shares had been added at the end of last year.

General Electric Corp. (NYSE: GE) was the same stake of 10.585 million shares. This stake was raised in 2014 and had been telegraphed before because of the warrants.

General Motors Co. (NYSE: GM) was a the same stake of exactly 50 million shares, but this previously had been raised from 41 million shares last year.

Goldman Sachs Group Inc. (NYSE: GS) was the same stake of 10.959 million shares, but this had been as high as 12.631 million shares prior to the end of 2015.

Graham Holdings Co. (NYSE: GHC) remains the same tiny stake of 107,575 shares in what is just the remains of Washington Post breakup.

Johnson & Johnson (NYSE: JNJ) was the same tiny stake of only 327,100 shares, but Buffett watchers know this is a leftover bit from a much larger stake in years past.

Kinder Morgan Inc. (NYSE: KMI) was listed as 26.533 million shares as of June 30. This was the same stake as in March and was selected by one of Buffett’s portfolio managers rather than on his own.

Lee Enterprises Inc. (NYSE: LEE) was the same tiny stake of only 88,863 shares.

Liberty Media Corp. (NASDAQ: LMCA) and Liberty Global PLC (NASDAQ: LBTYA) are both again listed as Buffett and Berkshire Holdings. These are counted as Class A and Class C shares, so we will leave this stakes simplified just like that.

M&T Bank Corp. (NYSE: MTB) was the same position at 5.382 million shares — same as always.

MasterCard Inc. (NYSE: MA) was the same 4.934 million shares as in March, but this was 5,229,756 shares at the end of 2015.

Media General Inc. (NYSE: MEG) was the same-sized stake at 3.471 million shares.

Mondelez International Inc. (NASDAQ: MDLZ) is the same position again at 578,000 shares, remaining handily lower than in the past and dating back to the Kraft breakup.

Moody’s Corp. (NYSE: MCO) was the same position of 24.669 million shares yet again, but this stake is still lower than in years past.

NOW Inc. (NYSE: DNOW) was the same stake of 1.825 million shares.

Procter & Gamble Co. (NYSE: PG) is still a much lower stake of just 315,400 shares, same as in March. This had previously been listed as almost 52.8 million shares in the prior formal 13F report before the Duracell swap. P&G had once peaked at 96.3 million shares in the Buffett stocks.

Restaurant Brands International Inc. (NYSE: QSR) was the same stake at 8.438 million shares. The reality is that this is much larger if you consider the $3 billion in perpetual preferred shares pointed out previously.

Sanofi (NYSE: SNY) was the same position at 3.905 million shares.

Suncor Energy Inc. (NYSE: SU) was a lower stake at 22.275 million shares. This had been up to 30 million shares previously, but this used to be a smaller stake at 22.35 million last June.

Torchmark Corp. (NYSE: TMK) the same stake at 6.353 million shares.

Twenty-First Century Fox Inc. (NASDAQ: FOXA) was the same stake of 8.951 million shares at the end of 2015. This stake was raised from 6.228 million shares in prior reports, versus 4.747 million shares at the end of 2014.

U.S. Bancorp (NYSE: USB) was the same position of 85.06 million shares at the end of June but that stake had been raised slightly before the prior quarters (was 80.09 million shares at the end of 2014).

USG Corp. (NYSE: USG) was the same stake at just over 39.002 million shares, but this had been raised prior to the end of 2014.

United Parcel Service Inc. (NYSE: UPS) was the same position of just 59,400 shares, way down from 2012.

VeriSign Inc. (NASDAQ: VRSN) was slightly smaller at 12.952 million shares, after having had been a tad larger at 13.044 million shares in March. This one had previously grown in 2014.

Verisk Analytics Inc. (NASDAQ: VRSK) was the same position at 1,563,434 shares, but that is lower than in prior quarters.

Verizon Communications Inc. (NYSE: VZ) was the same stake at 15 million shares in June versus the end of March, but that had been raised a year earlier.

Visa Inc. (NYSE: V) was the same stake of 10.239 million shares at the end June, but this is up from 9.885 million shares in 2015. The Visa stake had been raised throughout 2014.

WABCO Holdings Inc. (NYSE: WBC) was the same 3.237 million shares, but this had been coming down through time. At one point the stake was over 4 million shares.

Wal-Mart Stores Inc. (NYSE: WMT) was a stake was taken down by more than 15 million shares to 40.226 million by the end of June. That was decreased by 949,430 in March to some 55,235,863 shares. That stake was 56.185 million shares at the end of 2015 and was down from 60.385 million shares at the end of June and after having been raised prior to 2015.

By Jon C. Ogg

http://247wallst.com/investing/2016/08/15/major-changes-seen-in-warren-buffett-and-berkshire-hathaway-stocks-apple-walmart-phillips-66-deere-more/

Petronas Dagangan - A Solid 2Q16

Maintain OUTPERFORM. We keep our FY16-FY18 earnings estimates unchanged for now. Price target is also maintained at RM25.40/share which is based on an unchanged valuation basis of -0.5 SD 3-year average PER of 27x. Thus, the stock is maintained at OUTPERFORM. Risks to our call include drop in business volume and a sudden plunge in MOPS within a brief period of time.

 http://klse.i3investor.com/servlets/staticfile/287212.jsp

Berkshire Hathaway: Growth at Reasonable Price (GARP)

Stock Data:
Recent Stock Performance:

1 Week 1.7%
4 Weeks 4.5%
13 Weeks 1.3%
52 Weeks 3.6%

Berkshire Hathaway Inc.
Key Data:

Current Price (8/12/2016): 221,750
(Figures in U.S. Dollars)

Ticker: BRK.A
Country: United States

Exchanges: NYSE FRA
Major Industry: Diversified Financials

Sub Industry: Fire, Marine, & Casualty Insurance
2015 Sales 210,821,000,000
(Year Ending Jan 2016).
Employees: 331,000

Currency: U.S. Dollars
Market Cap: 364,525,068,000

Fiscal Yr Ends: December
Shares Outstanding: 1,643,856

Share Type: Class A
Closely Held Shares: 438,078


Spreadsheet of financials of Berkshire Hathaway:
https://docs.google.com/spreadsheets/d/1NGeyBdgNZuoFPxDP8seY3IIALK94PoEHR3l2GggbiPo/edit#gid=0

Comments:

1. Revenue grew about 50% over the last 5 years.
2. Pretax profit and Net Income more than doubled over the last 5 years.
3. Earnings generate lots of funds from operations and net cash from operations. These suggest high quality earnings.
4. Capital expenditure is about 50% of net cash from operations.
5. Accordingly about 50% of the net cash from operations are the owners money (free cash flow).
6. Current ratio is about 3. About 80% of the current asset is cash & short term investments.
7. Total Debt of Berkshire is 75 billion and cash is 71 billion, therefore, it is net cash negative. (surprise!)
8. Equity is 259 billion and total liabilities 302 billion (75 billion debts and 227 billion other liabilities).
9. Financial leverage is about 2x. (Total Asset/Total Equity)
10.. Asset Turnover was 0.38, net Profit Margin was 11.4%, Return on Average Asset was 4.4% and Return on Average Equity was 9.6% in 2015.
11. Revenues, Pretax income, net income, profit margins, net operating cash flows, capital expenditures, total assets and total equity have grown consistently over the last 5 years.
12. At price of US 221,750 per share, its present market cap is 365 billion and is 1.4x its book value of 259 billion.
13. Free Cash Flow to Sales was 7.3% in 2015 (a cash cow).
14. Free Cash Flow yield based on the market cap price was 4.2%.

A Random Walk Down Wall Street - Part Four 4: A Practical Guide for RANDOM WALKers and other Investors

Chapter 15. Three Giant steps down Wall street

I. The no-brainer step: investing in index funds:
1. The S&P 500 index beat approximately two-thirds of professional managed portfolios in the 1980s and 1990s. Index funds have regularly produced rates of return exceeding those of active managers by close to 2%.

Two reasons:
a. Much lower management fees: public index funds typically charge a fee of 0.2%, while actively managed public mutual funds charge annual management and market expenses that on average are 1.5%.
b. Less trading costs: index funds trade only when necessary, whereas active funds typically have a turnover rate close to 100%, and often even more. Such turnover probably costs the fund at least another 0.5-1% of performance a year.

2. Index funds are also relatively predictable. When you buy an actively managed fund, you can never be sure how it will do relative to its peers. When you buy an index fund, you can be reasonably certain that it will track its index and that it is likely to beat the average manager handily.

3. The index fund has another attraction for small investors. It enables you to obtain very broad diversification with only a small investment. It also allows you to reduce brokerage charges.

4. Many people incorrectly equate indexing with a strategy of simply buying the S&P 500 index. The S&P 500 omits the thousands of small companies that are among the most dynamic in the economy. Thus, I now believe that if an investor is to buy only one U.S. index fund, the best general U.S. index to emulate is the broader Wilshire 5,000 – Stock Index – not the S&P 500.

5. Moreover, investors can reduce risk by diversifying internationally. E.g. Morgan Stanley Capital International (MSCI) index of European, Australian, and Far Eastern (EAFE) securities, and the MSCI emerging markets index.

6. There are index funds holding REITs and bonds.

7. Keep in mind: I am assuming here that you hold most if not all of your securities in tax-advantaged retirement plans. Certainly all of your bonds should be held in such accounts. Furthermore, you may want to alter the percentages somewhat depending on your personal capacity for and attitude toward risk.



II. The do-it-yourself step: potentially useful stock-picking rules

1. Indexing is the strategy I most highly recommend for individuals and institutions. For those who insist on playing the game themselves, I proposed four rules for successful stock selection.

2. Rule 1: Confine stock purchases to companies that appear able to sustain above-average earnings growth for at least five years. Consistent growth not only increases the earnings and dividends of the company but may also increase the multiples that the market is willing to pay for those earnings.

3. Rule 2: Never pay more for a stock than can reasonably be justified by  firm foundation of value. Although I am convinced that you can never judge the exact intrinsic value of a stock. I do feel that you can roughly gauge when a stock seems to be reasonably prices. The market price-earnings multiple is a good place to start: you should buy stocks selling at multiples in line with, or not very much above, this ratio. My strategy, then, is to look for growth situations that the market has not already recognized by bidding the stock’s multiple to a large premium. Some people call this a GARP (growth at a reasonable price) strategy. Buy stocks whose P/E’s are low relative to their growth prospects.

4. Rule 3: it helps to buy stocks with the kinds of stories of anticipated growth on which investors can build castles in the air. People are emotional – driven by greed, gambling instinct, hope, and fear in their stockmarket decisions. This is why successful investing demands both intellectual and psychological acuteness. Stocks are like people – some have more attractive personalities than others. The key to success is being where other investors will be, several months before they get there.

5. Rule 4: Trade as little as possible. My own philosophy leads me to minimize trading as much as possible. I am merciless with the losers, however. With few exceptions, I sell before the end of each calendar year any stocks on which I have a loss. The reason for this timing is that losses are deductible for tax purposes, or can offset gains you may already have taken.

III.The substitute-player step: hiring a professional Wall street walker 
Instead of trying to pick the individual winners (stocks), pick the best coaches (investment managers). But be very careful:

1. Many fund advertisements are quite misleading. The number one ranking is typically for a self-selected specific time period and compared with a particular (usually small) group of common stock funds.

2. It is simply impossible for investors to guarantee themselves above-average returns by purchasing those funds with the best recent records because there is no consistent long-run relationship between performance in one period and investment results in the next.

3. If you have to pick a fund, use the Morningstar mutual-fund information service, which is one of the most comprehensive sources of mutual-fund information an investor can find. The reports indicate whether the fund has nay sales charges (load fees) and shows the annual expense ratios for the fund and the percentage of the fund’s asset value represented by unrealized appreciation. If you buy actively managed funds you should look for no-load, low-expense funds with little unrealized appreciated to minimize future tax liability.

4. A Primer on Mutual-fund costs. There are two broad categories of costs: “load” fee charged when you buy or sell shares and “expense charges” that are taken out of your investment returns each year.

Loading Fees:
a. Front-end load: a commission charge that is paid when you purchase fund shares. Front-end loads are often as high as 5.75%. So-called low-load funds charge only a 1 to 3% sales charge. Best of all are no-load funds, which have no front-end sales charges at all.
b. Back-end loads and exchange fee. Back-end loads are charges incurred when you redeem fund shares. The charge could be as much as 6% of the value of your redeemed shares if you sell out in the first year, with a declining percentage charge in subsequent years.

Expense charges: 
a. Operating and investment management expenses. A fund’s expense ratio expresses the total operating and investment advisory fees incurred by the fund as a percentage of the fund’s average net assets. These expense ratios range from less than 0.2% to 2%. Beware the loss leader come-on. Some new funds temporarily waive all fees to enhance the advertised current yield. Investors should be alert to the fact that they will be socked for full expenses as soon as the introductory “come-on” period ends. 
b. 12b-1 charges: these are fund-distribution expenses charged not as a front-end load but rather as a continuing annual charge against fund assets. The “12b-1” refers to an SEC rule that permits these charges. More than half of the publicly offered mutual funds have 12b-1 fees. 


IV.The Malkiel step

1. Sometimes, close-end funds have attractive discounts. During the late 1970s, the discounts ran as high as 40%. My own explanation for the discounts ran in terms of unexploited market inefficiency and I urged investors to take full advantage of the opportunity for as long as it lasted.

2. Discounts have narrowed significantly on U.S. closed-end funds. I think the fundamental reason for the narrowing is that our capital markets are reasonably efficient. The market may mis-value assets from time to time, creating temporary inefficiencies. But the financial laws of gravity will eventually take hold and true value will out.

3. If discounts of 20% or more exist, it is time to buy closed-end funds. 


A Random Walk Down Wall Street - The Get Rich Slowly but Surely Book Burton G. Malkiel
http://people.brandeis.edu/~yanzp/Study%20Notes/A%20Random%20Walk%20down%20Wall%20Street.pdf

A Random Walk Down Wall Street - Part Four 3: A Practical Guide for RANDOM WALKers and other Investors

Chapter 14. A life-Cycle Guide to Investing

The most important investment decision you will probably ever make concerns the balancing of asset categories (stocks, bonds, real estate, money-market securities, etc.) at different stage of your life.

I.Four Asset – allocation principles

1. History shows that risk and return are positively related.
2. The risk of investing in common stocks and bonds depends on the length of time the investments are held. The longer an investor’s holding period, the lower the risk.
a. Thus, your stage in the life cycle is a critical element in determining the allocation of your assets.
b. A substantial amount (but not all) of the risk of common stock investment can be eliminated by adopting a program of long-term ownership and sticking to it through thick and think (the buy-and hold strategy).
c. The longer an individual’s investment horizon, the more likely it is that stocks will outperform bonds. Over any single-year period, there is a one-out-of-three chance that bonds or money-market funds will outperform stocks. But if one looks instead at different twenty or twenty-five-year holding periods, stocks are the performance winners every time. These data support the advice that younger people should have a larger proportion of their assets in stocks than older people.

Total Annual Returns for Basic Asset Classes, 1926-2001
Average Annual Return      Risk Index (year-to-year volatility of Returns)
Small company common stocks
12.1%     35.3%
Large company common stocks
10.4        20.8
Long-term corporate bonds
5.4          8.6
U.S. Treasury bills
3.7          3.4

3. Dollar-cost averaging can be a useful, though controversial, technique to reduce the risk of stock and bond investment.
a. It means investing the same fixed amount of money in, for example, the shares of some mutual funds at regular intervals, say, every month, over a long period of time. It works because you bought more shares when they were cheap and fewer when they were dear.
b. A critical feature of the plan is that you have both the cash and the courage to continue to invest during bear markets as regularly as you do in better periods.
c. One potential drawback to dollar-cost average is that brokerage commissions are relatively high on small purchases. Thus, it is usually advisable to buy larger blocks of securities over longer time intervals. For example, it is cheaper to buy $150 worth of stock each quarter, or $300 semi-annually, than to invest $50 each month. If you pick a no-load mutual fund, this problem disappears. You can invest as little as $50 per month in most no-load funds, with no brokerage charges at all.
4. You must distinguish between your attitude toward and your capacity for risk.
a. A is a recently widowed 65 year old. B is a single 26 year old, just out of MBA program of Harvard.
b. A cannot work any more because of severe arthritis. Apart from monthly Social Security payments, all A has to live on are the earnings on a $250,000 group insurance policy of which she is the beneficiary and a $50,000 portfolio of small-growth stocks. A’s capacity to bear risk is severely constrained by her financial situation. She has neither the life expectancy nor the physical ability to earn income outside her portfolio. A portfolio of safe investments that can generate substantial income is what is appropriate for A. Bonds and high-dividend-paying stocks as from an index funds of real estate investment trusts are the kinds of investments that are suitable.
c. B has both the life expectancy and the earning power to maintain her standard of living in the face of any financial loss. Therefore, A’s portfolio of small-growth stocks would be far more appropriate for B
than for A.


II. Three guidelines to tailoring a life-cycle investment plan
1. A specific need must be funded with specific assets dedicated to that need: if you expect to need a $30,000 down payment to buy a house in one year. That $30,000 to meet a specific need should be invested in a safe security, maturing when the money is required, such as a one-year certificate of deposit.
2. Recognize your tolerance for risk (P346).
3. Persistent saving in regular amounts, no matter how small, pays off: you need to pick no-load mutual funds to accumulate your nest egg because direct investments of small sums of money would be prohibitively expensive. Also, mutual funds permit automatic reinvestment of interest, or dividends and capital gains.

III. The life-cycle investment guide
Please refer to the chart!

a. For those in their twenties, a very aggressive investment portfolio is recommended. The portfolio is not only heavy in common stocks but also contains a substantial proportion of international stocks including the higher risk emerging markets.
b. As investors age, they should start cutting back on riskier investments and start increasing the proportion of the portfolio committed to bonds and stocks that pay generous dividends such as REITs. By the age of 55, investors should start thinking about the transition to retirement and moving the portfolio toward income production. The proportion of bonds increases and the stock portfolio becomes more conservative and income-producing and less growth-oriented. In retirement, a portfolio heavily weighted in a variety of bonds is recommended. Nevertheless, even in one’s late sixties, 25% of the portfolio is committed to regular stocks and 15% to real estate equities (REITs) to give some income growth to cope with inflation.
c. For most people, I recommend broad-based total stock-market index funds rather than individual stocks for portfolio formation. Do make sure that any mutual funds you buy are truly “no-load” and pick safer, income-producing funds later in life.
d. Everyone should attempt to own his or her own home. I believe everyone should have substantial real estate holdings and, therefore, some part of one’s equity holdings should be in REIT index mutual
funds.



A Random Walk Down Wall Street - The Get Rich Slowly but Surely Book Burton G. Malkiel
http://people.brandeis.edu/~yanzp/Study%20Notes/A%20Random%20Walk%20down%20Wall%20Street.pdf

A Random Walk Down Wall Street - Part Four 2: A Practical Guide for RANDOM WALKers and other Investors

Chapter 13. Handicapping the Financial Race: A Primer in Understanding and Projecting Returns form Stocks and Bonds.

1. Very long-run returns from common stocks are driven by two critical factors: the dividend yield at the time of purchase, and the future growth rate of earnings and dividends.

2. The long-run total return for either an individual stock or the market:
Long-run equity return = Initial dividend yield + Growth rate

3. Over shorter periods, say, several years, a third factor is critical in determining returns. It is the change in valuation relationship – specifically, the change in the price-dividend or price-earnings multiple.

4. The multiples vary widely from year to year. They are affected by interest rate and mass psychology among many things.

5. Estimating bond returns becomes murky when bonds are not held until maturity. Bond investors who don’t hold to maturity will have their return increased or decreased depending on what happens to interest rates in the interim.

6. Inflation is the dark horse in any handicapping of financial returns. In principle, common stocks should be an inflation hedge and stocks are not supposed to suffer with an increase in the inflation rate. In theory at least, if the inflation rate rises by 1%, all prices should rise by 1%, including the values of factories, equipment, and inventories. Consequently, the growth rate of earnings and dividends should rise with the rate of inflation, so will the required return on common stocks. However, very high inflation rates are very bad for economy. When price rise by 10%, all prices do not rise by the same amount. Rather, relative prices are far more variable at higher levels of inflation. Furthermore, the higher the rate of inflation, the more variable and unpredictable inflation becomes. Thus, more volatile levels of real output and higher inflation rates, as well as the accompanying greater volatility of interest rates, increased uncertainty throughout the economy.

A Random Walk Down Wall Street - The Get Rich Slowly but Surely Book Burton G. Malkiel
http://people.brandeis.edu/~yanzp/Study%20Notes/A%20Random%20Walk%20down%20Wall%20Street.pdf

A Random Walk Down Wall Street - Part Four 1: A Practical Guide for RANDOM WALKers and other Investors

Chapter 12. A Fitness manual for RANDOM WALKers

I. Exercise 1: cover Thyself with Protection

1. Disraeli once wrote that “patience is a necessary ingredient of genius.” It’s also a key element in investing; you can’t afford to pull your money out at the wrong time. You need staying power to increase your odds of earning attractive long-run returns. Therefore, you have to have non-investment resources, such as medical and life insurance, to draw on should any emergency strike you or your family.

2. Two categories of life insurance:
a. High-premium policies that combine an insurance scheme with a type of savings plan. They do have some advantages. Earnings on the part of the insurance premiums that go into the savings plan accumulate tax-free. But they entail high sales charges.
b. Low premium term insurance that provides death benefits only, with no buildup of cash value. Malkiel’s advice: buy term insurance for protection – invest the difference yourself. To buy renewable term insurance. You can keep renewing your policy without the need for a physical examination. So-called decreasing term insurance, renewable for progressively lower amounts, should suit many families best, because as time passes, the need for protection usually diminishes. However, term-insurance premiums escalate sharply when you reach the age of sixty or seventy.

3. Take the time to shop around for the best deal. You do not buy insurance from any company with an A.M. Best rating of less than A.

4. In addition, you should keep some reserves in safe and liquid investments. Every family should have a reserve of several months of living expenses to provide a cushion during an emergent/hard time.


II. Exercise 2: Know your investment Objectives

You must decide at the outset what degree of risk you are willing to assume and what kinds of investments are most suitable to your tax bracket.

1. J.P. Morgan once had a friend who was so worried about his stock holdings that he could not sleep at night. The friend asked, “What should I do about my stocks?” Morgan replied, “Sell down to the sleeping point.” Every investor must decide the trade-off he is willing to make between eating well and sleeping well. High investment rewards can be achieved only at the cost of substantial risk-taking.

2. Step One: find your risk-tolerant level. a sleeping scale on investment risk and expected rate of return (P282-3): bank account Æ money market deposit accounts Æ Money-market funds Æ special six-month certificates Æ Treasury inflation-protection securities (TIPS) Æ high-quality corporate bonds (prime-quality public utilities) Æ Diversified portfolios of blue-chip US or developed foreign country common stocks Æ Real estate Æ Diversified portfolios of relative risky stocks of smaller growth companies Æ Diversified portfolios of emerging market stocks.

3. It is critical that you understand yourself before choosing specific securities for investment. Perhaps the most important question to ask yourself is how you felt during a period of sharply declining stock markets. If you became physically ill and even sold out all your stocks rather than staying the course with a diversified investment program, then a heavy exposure of common is not for you.

4. Step Two: identify your tax bracket and income needs. You have to check how much tax you have to pay for your investment returns. For those in a high marginal tax bracket there is a substantial tax advantage from tax-exempt (e.g. municipal) bonds and stocks that have low dividend yields but promise favorably taxed long-term capital gains. If you are in a low tax bracket and need a high current income, you will be better off with taxable bonds and high-dividend-paying common stocks, so that you don’t have to incur the heavy transactions charges involved in selling off shares periodically to meet current income needs.


III. Exercise 3: dodge uncle Same whenever you can

One of the best ways to obtain extra investment funds is to avoid taxes legally. You pay no income taxes on the earnings from money invested in a retirement plan until you actually retire and use the money.

1. Pension plans and IRAs: check to see if your employer has a pension or profit-sharing plan, such as a 401(k) or 403(b)7 savings plan. If so, you are home free. If not so, you can contribute up to $3000 a year to an Individual Retirement Account if your are single. Contribution limits are scheduled to rise in subsequent years. Although the contribution to your IRA is not tax deductible if your income is high, the IRA account is still a good deal because the interest earnings on your contributions compound free of tax.

2. Keogh plans: For self-employed people, they can contribute as much as 20% of their income, up to $30000 annually. The money paid to Keogh is deductible from taxable income. My advice is to save as much as you can through these tax-sheltered means. You can’t touch IRA or Keogh funds before turning fifty-nine and a half or becoming disabled. If you do, the amount withdrawn is taxed, and you must pay an additional 10% penalty on it.  But even with this catch, I believe IRAs and Keoghs are a good deal.

3. What can Keogh and IRA funds be invested in? Your choice should depend on your risk preferences as well as the composition of your other investment holdings. My own preference would be stock and bond funds.

4. Roth IRAs- for those whose income is below certain levels. The traditional IRA offers “jam today” in the form of an immediate tax deduction. Once in the account, the money and its earnings are only taxed when taken out at retirement. The Roth IRA offers “jam tomorrow” – you don’t get an upfront tax deduction, but your withdrawals are tax-free. In addition, you can Roth and roll. You can roll your regular IRA into a Roth IRA if you are within the certain income limits. You will need to pay tax on all the funds converted, but
then neither future investment income nor withdrawals at retirement will be taxed. Which IRA is best for you is dependent on: whether you are likely to be in a higher or lower tax bracket at retirement, whether you have sufficient funds outside your IRA to pay conversion taxes, your age and life expectancy.

A rule of thumb: if you are close to retirement and your tax bracket is likely to be lower in retirement, you probably shouldn’t convert, especially if conversion will push you into a higher bracket now. But if you are young and are in a lower tax bracket now, you are very likely to come out well ahead with a Roth IRA.

5. Tax-deferred annuities: it is useful if you have exceeded the limitations involved in other tax-advantaged savings programs. It is a contract between you and an insurance company, purchase with one or more payments; the funds deposited accumulate tax-deferred interest, and the money is used to provide regular income payments at some later time. The insurance company guarantees return of your original deposit at any time. But do check the fee tables. In general, annuities are more expensive than IRAs and Keogh invested in mutual funds. Therefore, you should invest in an annuity only after you have placed the maximum amount in a regular retirement plan, such as a 410(k), 403(b)7, Keogh, or IRA.


IV. Exercise 4: Let the Yield on your cash reserve keep pace with inflation

Four short-term investment instruments that can at least help you stand up to inflation.

1. Money-market mutual funds: in my judgment, they provide the best instrument for many investors’ needs. They combine safety, high yields, and the right to withdraw money with no penalty attached. Most funds allow you to write large checks against your fund balance, generally in amounts of at least $250.

2. Money-market deposit accounts: provided by banks. Money funds’ yields tend to higher than the bank accounts. In addition, the money funds allow an unlimited number of checks to be written against balances.

3. Bank Certificates: you need at least $10,000 before you can buy. And you can’t write checks against the certificates. There is a substantial penalty for premature withdrawal. Finally, the yield on bank certificates is subject to state and local taxes.

4. Tax-exempt money-market funds: they are useful for investors in high tax brackets.


V. Exercise 5: Investigate a Promenade through bond county

There are four kinds of bond purchases you may want to consider.
1. Zero-coupon bonds: the purchaser is faced with no reinvestment risk. The main disadvantage is that IRS required that taxable investors declare annually as income a pro rata share of the dollar difference between the purchase price and the par value of the bond.
2. No-load bond funds: because bond markets tend to be at least as efficient as stock markets. I recommend low-expense bond index funds, which generally outperform actively managed bond funds. In no event should you even buy a load fund. For investors who are very risk averse, I favor GNMA funds. These funds invest exclusively in GNMA (Ginnie Mae) mortgage pass-through securities. Mortgage bonds have one disadvantage in that when interest rates fall, many homeowners refinance their high-rate mortgages and some high-yielding mortgage bonds get repaid early. It is that potential disadvantage that makes the yield on government-guaranteed mortgage bonds so high.
3. Tax-exempt bonds are useful for high-bracket investors. If you buy bonds directly (rather than indirectly through mutual funds), I suggest that you buy new issues rather than already outstanding securities. New-issue yields are usually a bit sweeter than the yields of seasoned outstanding bonds and you avoid paying transactions charges on new issues. And you should keep your risk within reasonable bounds by sticking with issues rated at least A.
To protect yourself, make sure your bonds have a ten-year call-protection provision that prevents the issuer from calling your bonds to issue new ones at lower rates. If you have substantial funds to invest in tax-exempts ($25000 or more), you should buy tax-exempt bonds directly. If you only have several thousand, buy through a fund.
4. Inflation-indexed bonds: TIPS (Treasury inflation protection securities).
Although stocks have bestowed generous long-run returns, they usually suffer during inflationary periods. TIPS will offer higher nominal returns, whereas stock and bond prices are likely to fall. But TIPS are taxable. They are not ideal for taxable investors and are best used only in tax-advantaged retirement plans.


VI. Exercise 6: Renting leads to flabby investment muscles

1. A good house on good land keeps its value no matter what happens to money.  The long-run returns on residential real estate have been quite generous.
2. Interest payments on your mortgage and property taxes – are fully deductible;
3. Realized gains in the value of your house up to substantial amounts are tax exempt. Own your own home if you can possibly afford it.


VII. Exercise 7: Beef up with real estate investment trusts (REITs)

1. Ownership of real estate has produced comparable rates of return to common stocks over the past 30 years.
2. Real estate is an excellent vehicle to provide the benefits of diversification.  Because real estate returns have relatively little correlation with other assets, putting some share of your portfolio into real estate can reduce the overall risk of your investment program.
3. Real estate is probably a more dependable hedge against inflation than come stocks in general.
4. Most REITs have generous dividends and in some cases the dividends are partially tax exempt.
5. I believe all investors should have a portion of their portfolios invested in REITs.


VIII. Exercise 8: Tiptoe through the fields of gold, collectibles, and other investments.

1. The problem is these things often don’t yield a stream of benefits, such as dividend returns. I am slightly more positive about gold as an investment, but far from enthusiastic. Small gold holdings can easily be obtained now by purchasing shares in one of the specialized mutual funds concentrating on gold.
2. My advice for buying collectibles: buy those things only because you love them, not because you expect them to appreciate in value.


IX. Exercise 9: Commission Costs Are not random; some are cheaper than others

1. Many brokers today will execute your stock orders at discounts of as much as 90% off the standard commission rates charged by the leading brokerage houses. The discount broker usually provides a plain-pipe-rack service. If you want opinions on individual stocks and general portfolio advice and investment suggestions, the discount broker may not be for you.
2. If you know exactly what you want to buy, the discount broker can get it for you at much lower commission rates than the stand full-service house. Some discounters do the transactions off the exchange and the net price you end up paying is actually higher than that charged by a full-service broker. Purely for the execution of stock-market orders, you can use an honest discounter.

In sum, I believe common stocks should form the cornerstone of most portfolios. High returns can be achieved only through higher risk-taking.  The amount of risk you can tolerate is partly determined by your sleeping point. Risk is also significantly influenced by your age and by the sources and dependability of your noninvestment income.

A Random Walk Down Wall Street - The Get Rich Slowly but Surely Book Burton G. Malkiel
http://people.brandeis.edu/~yanzp/Study%20Notes/A%20Random%20Walk%20down%20Wall%20Street.pdf