The disconnect between economic and earnings growth

Saturday, 21 Sep 2019

By Pankaj C. Kumar

THERE has been much debate about the lacklustre performance of Malaysia’s stock market vis-à-vis other regional or North Asian markets. There are many factors that determine a market’s performance and one of the reasons is due to the poor earnings in corporate Malaysia.

However, the other side of the argument is that, why aren’t our corporates doing well and showing earnings growth as we have been having relatively stable economic growth for years now?

Indeed, this is true. But to answer this perpetual question, one needs to understand how gross domestic product (GDP) is measured while at the other end, how are earnings derived. Is the comparison between GDP and earnings growth relevant and should they be correlated?

GDP can be measured on three counts namely by expenditure, output or factor income, and all three measurements provide the same sum of value. We typically explain GDP by expenditure and output or also known as aggregate demand and aggregate supply respectively.

Measurement of GDP by factor income is not a common practice in Malaysia. GDP measured by factor income takes into consideration income (i.e. wages and salaries); profits of businesses and the third component is rental income from ownership of land.

image: https://apicms.thestar.com.my/uploads/images/2019/09/21/284546.JPG

GDP measured by expenditure or aggregate demand comprises both the public and private consumption and investment, change in value of stock and net exports. GDP measured by output or aggregate supply is measured using the output of the various economic sectors and this of course includes the services sector, the manufacturing sector, mining, agriculture and the construction sector.

In essence, GDP measures the total output generated from the economy, i.e. both the value of goods and services produced and by default, it is the measure of the size of the economy. How big is a nation’s economy in terms of the value it creates every year? When we say the economy expanded by 5%, it means the output value of both goods and services grew by 5% compared with the previous year. GDP is also measured on two counts.

One is GDP in nominal terms and the other is GDP in real terms. Of course, the difference between the two is the rate of inflation and typically GDP in real terms grows slower than GDP in nominal terms which is measured based on current values. In other words, GDP in real terms only takes into account growth of the economy while GDP in nominal terms takes into consideration not only the growth factor but the price factor as well.

GDP is also measured based on a certain base year. Today, Malaysia’s economy is measured based on the 2015 base year (from 2010 base year previously), to reflect the nation’s current economic dynamics. To get a real GDP data, the nominal GDP is adjusted by a factor called “deflator”. A deflator is a measure of inflation from the current base year of 2015. Chart 1 shows Malaysia’s GDP between 2015 and 2018. From here, we could also make a summary that deflator used for the year 2016,2017 and 2018 are 1.0166,1.0552 and 1.0627 respectively.

Earnings on the other hand, is only measured based on current prices as our accounting rules do not take into consideration inflation neither is it re-based every five years. Earnings is also a measure of profit and not revenue. Typically, for GDP, the output measure is actually revenue to the provider of goods and services and not profit. Of course, one can argue that if revenue is rising, which typically does, should it not reflect in better earnings? The straight answer, yes definitely. But, bear in mind, net profit is not cashflow and earnings are also adjusted for various accounting rules as well as non-cash items like depreciation, and amortization. So to compare GDP to earnings performance is not exactly accurate either. In addition, as defined as to what GDP actually measures, it is difficult to correlate what is spent from aggregate demand of the economy to the aggregate supply as some of this demand and supply is not captured among listed companies. Hence, there is indeed a mismatch between GDP and even revenue of our corporates.

image: https://apicms.thestar.com.my/uploads/images/2019/09/21/284583.JPG

For example, the public sector accounts for almost 20% of aggregate demand while private sector accounts for 74% of the annual GDP. On the supply side, services sector is about 57% of the economy while manufacturing sector is at about 22%. Mining, agriculture and construction makes up the balance 20%. While some of this output of goods and services is carried out by listed companies, there is a significant amount that is not represented in the market. This include large MNCs which are not listed, SMEs, which are backbone of the economy, as well as smallholders in the agriculture sector while Malaysia’s No.1 corporate, Petronas, the parent company, too is not listed. Some of the output generated from these industries or by our national oil corporation is for exports and not all our exporters are listed either.

With this, we can now see that earnings are NOT correlated to the GDP and hence poor earnings growth over the last few years had little to do with economic growth. Based on Bank Negara’s statistics as per Table 1, we can deduce the market EPS at the end of each year by taking the KLCI index level divided by the market PER at the end of each period. The EPS growth can than be calculated from these figures and we can now see the correlation between Nominal GDP growth and EPS growth as shown in Chart 2.

The chart basically shows that since the re-basing of the GDP, Malaysia’s nominal GDP expanded steadily in 2016 and 2017 but fell back in 2018. Earnings on the other hand was negative in 2015, marginally positive in 2016 and 2017 but was extremely poor in 2018.

As the 1H reporting season has just ended, we have observed that based on data compiled by research houses, market earnings have contracted by 8.2% year-on-year and the current market estimate is that earnings for 2019 will be negative 1.8%. For this to materialise, corporate Malaysia’s 2H earnings has to be a strong 4.6% y-o-y growth to enable the annual earnings growth to hit the expected contraction rate of 1.8%. As inflation is probably to average about 1% this year, the 2019 nominal GDP growth too will likely mirror that of 2018 performance, i.e. at about 5.5% growth. Hence, while the economy remains on an expansionary mode, the earnings of corporate Malaysia is hardly a reflection of the strength of the economy as it is likely to remain in the doldrum, well, at least for 2019.

image: https://apicms.thestar.com.my/uploads/images/2019/09/21/284582.JPG

In addition, if we look at the composition of our 30-stock FBM KLCI, the index itself is heavily weighted towards the banking sector, which makes-up about 36% of the index, while Tenaga Nasional and the telco sector are the next heavyweights, accounting for about 21% of the index itself. Hence, with the banking sector not particularly performing well, especially with the environment where net interest margins are thinning and loan loss provisions are under pressure, the sector itself is a drag on the FBM KLCI.

The failed merger between Axiata-Digi too has now taken its toll on the index while the gaming sector (the likes of Genting and Genting Malaysia), plantation and rubber glove makers have their own issues related to governance, poor corporate results brought about by weaker commodity prices as well as stretched valuations. Hence, the poor performance of the FBM KLCI year-to-date is understandable and it is not due to the weakness or strength of the Malaysian economy but more of whether the index itself is reflective of the economy as whole or otherwise. In fact, seven companies alone represent about half the FBM KLCI weight and they are Public Bank, Tenaga Nasional, Maybank, CIMB, DiGi, Maxis and Axiata, and their market performance alone can dictate the FBM KLCI’s direction.

The views expressed here are the writer’s own.

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image: https://apicms.thestar.com.my/uploads/images/2019/09/21/284583.JPG

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image: https://apicms.thestar.com.my/uploads/images/2019/09/21/284583.JPG

Read more at https://www.thestar.com.my/business/business-news/2019/09/21/the-disconnect-between-economic-and-earnings-growth#9lGpHfbTTsxgsmQC.99




Summary:

GDP can be measured in 3 ways:  expenditure, output or factor income.

Aggregate demand:  
Public sector accounts for 20% 
Private sector accounts for 74% of the annual GDP.

Supply side: 
Service sector: 57%
Manufacturing sector 22%
Mining, agriculture and construction 20% of the annual GDP

Output of goods and services not represented in the market:
Large MNCs which are not listed
SMEs (backbone of the economy)
Smallholders in the agriculture sector
Petronas, the parent company (Malaysia's No 1 corporate)



1H reporting season (data by research houses)
Market earnings have contracted by 8.2% year-on-year
Current market estimate is earnings for 2019 will be negative 1.8%.

Earnings is a measure of profit and not revenue.  GDP, the output measure is actually revenue to the provider of goods and services and not profit.  So to compare GDP to earnings performance is not exactly accurate either.  

Some of the aggregate supply and the aggregate demand are not captured among listed companies; hence, there is indeed a mismatch between GDP and even revenue of our corporates.

The 2019 nominal GDP growth will likely be about 5.5% growth.

While the economy remains on an expansionary mode, the earnings of corporate Malaysia is hardly a reflection of the strength of the economy as it is likely to remain in the doldrum, at least for 2019.



30-stock FBM KLCI weightage

Banking sector 36% of the index
Tenaga Nasional and the telco sector  21% of the index

Banking sector not performing well especially with the environment where net interest margins are thinning and loan loss provisions are under pressure, the sector itself is a drag on the FBM KLCI.

Other issues contributing to the poor performance of the FBM KLCI:
Failed Axiata-Digi merger
Gaming sector (Genting and GENM)
Plantation & Rubber glove makers (Corporate governance issues, poor corporate results due to weaker commodity prices as well as stretched valuations).

The index is not reflective of the economy as a whole.  Seven companies alone represent about half of FBM KLCI weight and their market performance alone can dictate the FBM KLCI direction:
Public Bank
Tenaga
Maybank
CIMB
DIGI
Maxis
and Axiata

Impairment charge

"Impairment charge" is the term for writing off worthless goodwill.

These charges started making headlines in 2002 as companies adopted new accounting rules and disclosed huge goodwill write-offs.

Impairment charges will get more attention as the weak economy and faltering stock market force more goodwill charge-offs and increase concerns about corporate balance sheets.

Accounting regulations that require companies to mark their goodwill to market will be a painful way to resolve the mis-allocation of assets that occurred during the exuberant business period. In several ways, it will help investors by providing more relevant financial information, but it also gives companies a way to manipulate reality and postpone the inevitable. If the economy and stock markets remain weak, many companies could face loan defaults.

Individuals need to be aware of these risks and factor them into their investing decision-making process. There are no easy ways to evaluate impairment risk, but there are a few generalizations that should serve as red flags indicating which companies are at risk:

1. Company made large acquisitions.
2. Company has high (greater than 70%) leverage ratios and negative operating cash flows.
3. Company's stock price has declined significantly.

The Quality of Companies: Practically all the value investors have gone down the same path of Buffett.

Graham was too focused on price at the expense of quality.  

However, in hindsight, it was clear that the portfolio of quality companies is the best approach to stand up to any market situations.

Indeed, past financial crises confirmed that high-quality companies at reasonable prices perform better over the long term than companies which are straight cheap.

Buffett invested in very underpriced real assets in the beginning of his investing career.   After partnering Charlie Munger, he focused on higher-quality stock, proxied by the degree of competitive advantage they enjoy.

Many investors have gone down this same path of Buffett, practically all the value investors.  The main reason is that it delivers better results over the long term, although there aren't many studies to back up this assertion, making it initially a far from obvious conclusion.



Why have practically all value investors followed Buffett, preferring quality companies?

Maybe, when they are young and start out investing, they have an excessive desire to do well and make their mark.  They tend to favour the cheapest companies, which on face value offer the greatest potential upside.

With experience and maturity, and after having stepped on a few booby and / or value traps (cheap companies in bad businesses, which languish for years, failing to create value) and their economic situation improves, their tastes tend to shift towards quality, even if they have to pay a bit more for it.

The company's growth plans: Your approach as an investor.

Good growth is exciting for any company that you own.

Growth can be through organic growth or through mergers and acquisitions.

However, as an investor, you should assign little importance to growth plans of the company in your investing decision.

It is far more important the company sets out the right strategy, since growth will follow in due course.

Many short-term growth targets get in the way of taking the right long-term decisions.

As an investor, you should be willing to ride out patchy results, considering this to be part and parcel of business.

On mergers and acquisitions, the investors should have a very clear stance: it is important to avoid the urge to grow for growth's sake; the focus should be on acquisitions that make sense and not overpaying.  It is important to avoid watering down a quality business with inferior acquisitions.

Business Quality

Business quality is defined by the return on capital employed, calculated before goodwill.

The implication is that better returns are synonymous with a better-quality business.

What is investing? My core.

Investing is all about buying a flow of earnings at an acceptable price.

The pace of earnings growth is a second-order issue.

Risk is the possible loss of long-term purchasing power.

Volatility of price is not risk.  It is the ally of the long-term investor.

The market is NOT ALWAYS efficient.  In general it is efficient, but NOT ALWAYS, and this small difference is crucial, enabling us to capitalise on it.

How do you select your stocks: Quality First, then Value.

A great company deserves a higher valuation. It is possible that you paid a slightly higher price than you wanted to pay for the stock, which lowers your overall rate of return, but time is on your side and your long holding time minimizes the impact of the higher purchase price to your overall return. Also, you will always find the opportunity to add to your position at lower valuations, though not necessarily at lower prices.


Deep value investing investors need to be cautious and aware of this approach's inherent problems. Those companies dropping and appearing in the deep-bargain screen probably deserved to be traded by low valuations. Their stock prices were likely low for the right reasons, and buying these would likely have resulted in steep losses.


How do you select your stocks: Quality First, then Value.

There are many gruesome companies in the stock market. These companies operate in very competitive environments and have to be managed well to deliver good returns. In the business world, it is often the economics of the business that eventually triumph over the skills of the managers, however superb their skills maybe.

A company that performed well for 3 years and then lose its good performance subsequently is not a great company, by definition. A great company is one that can perform well, consistently and growing its earnings over 20 to 30 years.

Not uncommonly, these gruesome companies trade at below their net tangible asset prices. This is to be expected, especially if their businesses continue to be gruesome. Their low trading prices attract some investors who are enticed by the very low price relative to their net asset value.

Here is a very important point for any investor. When the price of a company falls, all its valuation ratios become very good. Its price to book value, its price to sales and its price to earnings ratios, all fall and its dividend yield (using last year's dividends) rises.

The uninitiated may think these companies are now undervalued using these financial ratios. Here lies the risk of searching for undervalued stocks in gruesome companies.

The more intelligent investors do not solely rely on these financial ratios alone, they require a lot more analysis. As a general rule, most shares are priced appropriately most of the time. It is only some of the time, when they are mis-priced too low or too high.

The risk in buying great companies is overpaying too much to own it. However, great companies do have earning power for many years, by definition. They continue to grow their intrinsic value over time. If you can acquire these companies at bargain prices (very rarely) or at fair prices (commonly), you should do well in your long term investing. Also, it is alright to pay a little bit more to own these companies as over the long time of holding them, they will still reward you handsomely. As these great companies are few, selling them only make a lot of sense if you can find another of equal quality (very difficult indeed) that offers higher reward to downside risk with high degree of probability. Well, not unexpected, this is not easy.

Buffett says: Buying a wonderful company at a fair price is better than buying a fair company at a wonderful price. He is absolutely right. Stay with quality first, then value; and your investing over the long term should be quite safe and mistakes, if any, will be few.

Pentamaster

Pentamaster locks in RM238mil sales


Monday, 02 Sep 2019

By DAVID TAN




Pentamaster executive chairman C.B. Chuah checking out test equipment produced for the automotive and semiconductor industries


GEORGE TOWN: Semiconductor automated test equipment maker Pentamaster Corp Bhd
has locked in sales of RM238mil for the third and fourth quarters of 2019, which will boost its growth by double-digit percentage over 2018.

Group chairman CB Chuah (pic) told StarBiz that

• about 50% of the sales came from the smartphone segment, 
• while the remainder were from the automotive, factory automation and medical device industries.

The average pricing of each test equipment starts from US$500,000 onwards.

“This year, the demand for smartphones has contracted. Its contribution to group revenue is expected to shrink to about 55% from 70% previously.


“The electric vehicle (EV) and factory automation solution segments are growing, ” Chuah said.

The EV segment, for example, is expected to contribute 15% this year compared to 10% a year ago. “We expect the EV segment to generate about 25% of group revenue by 2021, ” he added.

The group is now in talks with a few EV customers interested to purchase testers from Pentamaster to test the power converters used in EVs.

“These customers are from Europe, China and the United States, ” he said.

Chuah said the group would allocate more financial resources to expand its EV business segment. “We see huge potential in the EV business. During the first six months of the year, the global sales of pure EVs increased by 92% to 765,000 units, according to Jato, a leading provider of automotive market intelligence.

“This total is the volume sold in 41 markets around the world.

“China’s commitment to electrification and Tesla’s sales growth were the main factors driving the growth in the first half of 2019, ” he added.

On the smartphone market, this is the worst slowdown in three years, according to Chuah.

“New smartphones are not equipped with fresh and innovative features, which is why sales have slowed.  Due to economic uncertainties, consumers are also not changing their phones.We expect to see a recovery in 2020, ” Chuah said.

According to the Connecticut-based Gartner Inc research house, worldwide sales of smartphones to end-users will total 1.5 billion units in 2019, a 2.5% decline year-on- year.

“Gartner analysts expect smartphone sales to grow again in 2020, driven by the broader availability of 5G models and the promotion of 5G service packages in various parts of the world by communications service providers. Analysts also expect the first 5G Apple iPhone to launch in 2020, which should entice iPhone users to upgrade, ” Gartner said.


Read more at https://www.thestar.com.my/business/business-news/2019/09/02/pentamaster-locks-in-rm238mil-sales#IwK0dJ6W85GtZ6kb.99

Value Added Statement

VALUE ADDED STATEMENT

Value added is an effective means of both measuring company performance and identifying the way in which the various interest groups involved share in the resources generated.

It is easy to develop one based on the income statement.

Value added is the difference between sales revenue and the amounts paid to external suppliers of goods and services.

SALES REVENUE – PURCHASES AND SERVICES = VALUE ADDED

S – B  =  W + I + Dd + T + Dp + R

S = sales revenue

B = bought in materials and services

W = wages

I = interest

Dd = dividends

T = tax            

Dp = depreciation

R = retained earnings

If sales revenue is expressed as 100%, the proportion of revenue being allotted to each interest group can be shown:

Sales revenue        100

Supplies      50

Employees  20

Interest          5

Tax                5

Shareholders 5

Subtotal                   85

Retained profit        15

Presenting income and expenditure in this way is popular with many companies.  The value added statement has proved to be a useful and practical means of communicating financial information to employees who find the annual report somewhat impenetrable.

A value-added statement can be displayed as a bar char to pie chart.  A pie-chart can effectively represent $1 and show how each unit of income or sales revenue received by the company in the year was shared out:  how much went to suppliers, employees, shareholders and government, and how much was left as retained profit for reinvestment into the business at the end of the year.

DISPENSING WITH PROFIT

Indeed, the word “profit” need not appear in a value-added statement.  What is left after all interest groups have received their share of the value added (the retained profit of $15) may be referred to as “amount retained for investment.”

If a value-added statement is prepared for a number of companies operating in the same business sector, it may be used for comparison and the development of benchmarks.

Value Added: Market Value Added and Economic Value Added

VALUE ADDED

• MARKET VALUE ADDED
• ECONOMIC VALUE ADDED

MARKET VALUE ADDED (MVA)

Market value added (MVA) 

= Current market value or capitalisation (to which debt may be added) – Total shareholders’ equity  

Example:

Capitalisation of a company is $100

Shareholders’ equity in balance sheet is $50

For every $1 of shareholders’ equity, the company has added $1.

ECONOMIC VALUE ADDED (EVA)

Companies should be expected to produce not only an accounting profit but also one that more than covers their cost of capital.

It is argued that EVA is better than earnings per share or price/earnings ratios as these do not take account of the real cost of capital.

Example:

After the charge of $10 ($100 x 10%) representing the estimated cost of capital, the company shows an EVA of $30 for the period.

After tax profit $40

Capital Employed $100

Cost of Capital 10%

After tax profit $40

Cost of Capital $10

ECONOMIC VALUE ADDED $30

A positive EVA indicates that a company is providing investors with added value.

A company with a consistent EVA should have an increasing MVA; it will be generating a rate of return above the cost of capital so the share price should rise.

Examples:

These three companies are all generating a positive return on capital employed.

Company A

After-tax profit $50

Capital employed $200

Cost of capital (10%) $20

ROCE (%)  25

EVA ($)  $30

Company B

After-tax profit $60

Capital employed $400

Cost of capital (10%) $40

ROCE (%)  15

EVA ($)  $20

Company C

After-tax profit $50

Capital employed $600

Cost of capital (10%) $60

ROCE (%)  8

EVA ($)  -10

Although company C produces a positive 8% return on capital employed, it is actually destroying shareholder value with a negative $10 EVA.

In practice, the calculation of EVA requires several adjustments – to allow for the treatment of R&D, goodwill, and brand values, leases and depreciation – to be made to the after-tax profit figure.

It is claimed that EVA, as a single monetary figure, is better at concentrating management attention on the “real” results of running the business than are standard performance ratios such as ROTA.

EVA is often used as a basis for managers’ performance-related incentives.

Growth is often seen as the best measure of corporate success.

Growth is often seen as the best measure of corporate success.

A company growing at a rate of 15% per year is doubling in size every five years.

Rapid-growth companies can be defined as those with annual growth rates of 20% or more.

Super-growth companies show a compound growth rate of around 40% per year.

MARKET SHARE INFORMATION

Market share information can provide valuable support to the analysis and interpretation of changes in a company’s turnover.

The majority of companies provide turnover growth details in their annual report, but few offer any details of market share.

When turnover is known for several firms competing in the same market, it is possible to devise a simple alternative to market share information.

Company	A	A	B	B	C	C	D	D	TOTAL	TOTAL
Year	1	2	1	2	1	2	1	2	1	2
Sales ($bn)	2.5	2.9	16	16.3	5.9	5.5	17.2	18.8	41.6	43.5
Share (%)	6	7	39	37	14	13	41	43	100	100

How their share of the joint total market changes can readily be followed.  If this is done for a number of years, the analysis can form the basis for a performance comparison.

RAPID GROWTH COMPANY IS NOT ALWAYS A SAFE AND SOUND INVESTMENT.  RAPID GROWTH CANNOT ALWAYS BE SUSTAINED. 

A common view is that a rapid-growth company is safe and sound investment.

However evidence suggests that rapid growth cannot always be sustained.  There are of course exceptions.  

BE CAUTIOUS OF GROWTH THROUGH DIVERSIFICATION OR ACQUISITION, THROUGH INCREASING DEBT FINANCING AND THROUGH TURNOVER GROWTH WITHOUT PROFIT.

·         However, it is probably safer to assume that rapid growth, particularly if associated with diversification, often through acquisitions, will not continue.

·         If high compound growth rates are matched by increasing debt financing, extreme caution is called for.

·         For some companies, turnover growth is seen as the prime objective and measure of success, even when it is being achieved at the cost of profitability.  In the late 1990s, e-business provided many extreme examples of this.

ONE-PERSON COMPANY

• GROWTH THROUGH DIVERSIFICATION, COMMONLY THROUGH ACQUISITION.

Being pushed towards diversification to fuel continued growth is often the final challenge for the one-person company.  Having proved itself in one business sector it moves into new areas, commonly through acquisition.  More often than not its old skills prove not to be appropriate in the new business, attention is distracted from the core business, and it is viewed as having lost the golden touch.  Its survival may depend on new management and financial restructuring.

• WHEN A ONE-PERSON COMPANY’S GROWTH SLOWS AND CRITICISM MOUNTS

When a one-person company’s growth slows and criticism mounts, two scenarios may occur. 

• ·         In one, the individual running the company begins to take increasingly risky decisions in the hope to returning to previous levels of profit growth. 
• ·         In the other, recognising that there is little that can be done immediately to improve operating performance, the individual steps outside the law and accepted business practice to sustain his or her personal image and lifestyle.  Often in these companies other executives are reluctant to rock the boat and go along with the deception.

Free Cash Flow

FREE CASH FLOW

An important factor in Shareholder Value Added analysis is the free cash flow (FCF) generating capability of a company.

This is the cash flow available after allowing for capital maintenance and interest payments.  FCF is calculated as:

Operating profit

Plus depreciation

Less cash tax paid

= Cash profits

Less investment in non-current assets and investment in working capital

= Free Cash Flow

FCF is useful in providing an indication of the level of a company’s cash flow generation.  

It also measures the amount of cash potentially available to cover the financing costs of the business after all necessary investment has been made.  Can the company safely consider raising more finance or making a major capital investment?

Companies often provide figures for their FCF, but there is no standard definition of the term so be cautious in using them.

If all interest payments are deducted, the resultant “levered free cash flow” indicates the amount of cash potentially available for dividends and future growth.

It is useful to compare the growth in free cash flow with that of earnings.  If the trends are significantly different, is it possible to find the reason?

RISK DISCLOSURE

RISK DISCLOSURE

Risk relates to future events that are quantifiable.

Uncertainties are future events that are indeterminate and non-quantifiable.  

In the 1990s, companies began to move from simple risk analysis to more proactive risk management.

Companies should disclose their risk management practices.

IFRS 7 deals with the risks associated with financial instruments.

There should also be discussion of the major risks and uncertainties facing the company and how these are being dealt with.  

The main classes of risk are identified as:

• -          Market risk:  exchange rate, interest rate or other price movements;
• -          Liquidity risk:  possible problems in making cash available.
• -          Credit risk:  customers fail to pay.

If there is an existing or potential liability, this is fully disclosed in the annual report as you need to know about this in order to properly assess the company.

RISK FACTORS

The risk factors are normally listed in order of significance.  

These provide some insight into management’s view of the risks seen to be facing the business.  

These may be related to a country’s economy, or a company’s industry or geographic location.  

Market risk includes interest rates, foreign exchange and commodity price risk.

“New” measure of risk.

An alternative approach to company risk assessment has been offered,  It is suggested that the number of times the word “new” appears in the annual report may provide a measure of risk.

Future Profit overrides Current Liquidity. Success or failure?

Ideally, a company can be expected to focus on 2 principal objectives:

1.  Future Profit:  To provide an acceptable and continuing rate of return to investors.
2.  Current Liquidity:  To maintain an adequate level of financial resources to support current and planned future operations and growth.



Future Profit and Current Liquidity

A company can survive without profit as long as it has access to cash.

A profitable company with no cash faces difficulties.

No company can survive for more than a few days with neither profit nor cash.



Future Profit overrides Current Liquidity

A profitable company is less likely to fail than an unprofitable one.

The overriding factor in deciding whether to allow a company to continue in business is its profit potential, which is more important than its current liquidity.

A company with low liquidity and a high profit potential will almost certainly be helped to overcome what may be regarded as a temporary problem.  

A highly liquid company with declining or no profit potential is unlikely to survive for long.   Why should investors leave their funds to dwindle?   The only decision facing such a company is 

• whether to end operations  immediately or 
• to continue and see liquidity and profitability decline until matters are taken out of management's hands.

7 signs you're building wealth faster than you think

• If you're maxing out a retirement plan and being mindful of your investments, you may be on the fast track to building wealth.
• To be sure, most people don't get rich overnight. But, if you avoid high-interest debt, are focused on increasing your income, and have clear goals and a plan to achieve them, you're doing better than you think.

You have to commit to building wealth — it rarely happens by accident.

But if you're mindful and deliberate about saving, investing, spending, and earning money, you may be building wealth faster than you think.




Below, seven signs you could be rich sooner than you realize.

1. You max out your retirement accounts every year

IRAs and 401(k)s are two of your greatest allies in setting yourself up for a comfortable retirement.

If you can afford to put the full $19,000 into your 401(k) this year — or you're moving closer to that limit — you're accomplishing a few things.

First, you multiply your earning potential in the market. Second, if your company offers to "match" your 401(k) contributions, you score that free money. And lastly, you shelter a sizable chunk of your income from income taxes (you'll pay those taxes later, but for now your money grows tax-free).

You can also contribute up to $6,000, or $7,000 if you're over age 50, to an IRA in 2019. The tax savings are set up differently than a 401(k), but the fundamental strategy is the same: The more money you put in the market now, the more you stand to earn.


2. You're thoughtful, but not obsessive, about your investment choices

If you've made thoughtful choices about where to invest the money you put into your 401(k), you're head and shoulders above the rest.

Too many people make the mistake of treating their 401(k) like a savings account and don't touch the money once it's in there, certified financial planner Eric Roberge previously told Business Insider.

Some 401(k) plans have a fine default investment selection, but you should always double-check to make sure it matches your own time horizon and risk tolerance, Roberge says.

You're in good shape so long as you choose investments that diversify your portfolio — i.e. a mix of stocks and bonds — and don't levy too many fees. Roberge recommends choosing either an all-in-one target date fund, which automatically rebalances itself, or building a portfolio of individual funds that provide appropriate diversification.

Checking on your asset allocation periodically to ensure it matches your overall risk tolerance is smart, but obsessing over the details could easily lead to emotion-fueled mistakes.


3. You're focused on the 'big wins'

Spending less than you make may be the golden money rule — but it's not the only rule.

Yes, it's important to cut your spending "mercilessly" on the things that don't add value to your life, says financial expert and bestselling author Ramit Sethi. But people who are good with money know that $2 here and $10 there won't make you rich, he says.

"There are a few Big Wins in life where — if you simply get them right — you almost never have to worry about the small things. If you can focus on the 5-10 Big Wins, rather than 50 little things, you can have an insurmountable edge in life," Sethi says.

For example, paying down debt, saving automatically, negotiating a higher salary, and investing early will have a much greater impact — and in a shorter time frame — than forgoing your morning coffee or weekly brunches.

4. You don't keep too much cash

If you understand the power of compound interest, chances are you never keep more than you need in cash or sitting in a checking account.

The best way to multiply your money is to invest it in the market, but that's not always an option. You can still grow the money you need in the short-term by storing it in a high-yield savings account or certificate of deposit (CD).

Any savings account or CD with an interest rate above 2% is worth considering. At the very least, your money won't lose value to inflation. At best? You'll boost your savings by a few hundred dollars, with zero effort required.


5. Your income is higher than last year, but your spending hasn't changed

If you're bringing home more money than you did at this time last year, congrats! That's a huge sign of progress, particularly if you haven't increased your spending along with it.

Whether you scored a raise, landed a better-paying job, or created a second or third income stream, increasing your earnings is a form of leverage that can never be exhausted.

"If you can take the cap off of that and increase your income — it's not always easy to do that, which is probably why people don't pay attention to it — but if you can do that, it gives you a lot more room to both spend and save," Roberge said on an episode of his podcast, Beyond Finances.

6. You have no high-interest debt

Consumer debt is a proverbial wealth killer.

The stock market returns an average of 7% to 8% each year, adjusted for inflation. Meanwhile, the average credit card charges an APR of 17%. Carrying a balance at that rate would mean you have to invest twice as much money just to break even.

The bottom line: It's not worth it. When you avoid high-interest debt, you can optimize each and every dollar you have coming in.

As Robert Kiyosaki writes in the personal finance classic, " Rich Dad Poor Dad," "Most people fail to realize that in life, it's not how much money you make. It's how much money you keep."


7. You have financial goals and a plan to achieve them

There's no problem with aiming high.

But if you have a road map to getting there — and you actually put it into action — your chances of achieving your goals increase greatly.



You don't have to seek professional help for managing your money or coming up with a plan, but it could be worth it if you're feeling stuck. According to a Northwestern Mutual report, people who work with a financial adviser are more likely to know how to balance spending now and saving for later; set specific goals and feel confident that they will achieve those goals; and have a plan in place to weather economic ups and downs.


Tanza Loudenback Aug. 17, 2019

https://www.businessinsider.com/signs-building-wealth-faster-than-you-think-2019-8?IR=T&fbclid=IwAR3gsdUEuB3um8AFsHXwzugprcrOEWgjcqnvb1KwSvKAHKiTHCTzW7al1c4

The Biggest Lie In Investing That You Believe In | TEDx Talk

"Be greedy when others are fearful."  Warren Buffett

"The way to MAKE MONEY is to buy when blood is running in the streets."  John D. Rockefeller.



So, how to PROFIT from a or the next crisis?

If a hurricane storm (OR FINANCIAL STORM) was heading your way, what would you do?

It is about BEING PREPARED!



The BIGGEST LIE.

There are 2 types of information:
1.  Information for the MASSES, and
2.  Information for the CLASSES.

Here is the lie:  "The economy is doing better, so the stock market should do better, too."

IT IS ACTUALLY THE OPPOSITE.

There is NO CORRELATION between the economy and the Stock Market!


Warren Buffett does NOT waste time thinking about the economy when investing:

• GDP
• Unemployment,
• interest rates,
• housing numbers,
• bankruptcies.

Peter Lynch says:  "If you spend 13 minutes thinking about economic forecasts, you have wasted 10 minutes."



Stock Market vs. Economy

In year 2009, there were a lot of negative news around and everybody hated stocks and dumping them.  There was blood in the street.  But at that time, the insiders (the classes) were buying.  At the peak of unemployment in 2009, the stock prices gone up 60%.



What is REALLY going on?

There are about 20 funds that do 80% of World's trading.
They have between $50 - $100 billion under management.
They employ smartest individuals to figure out what the economic trends will be (e.g. unemployment).
Example:  if these Funds believe that in 3 month, job figures will improve, they will decide to buy (& vice versa).


What to buy?

We only want QUALITY STOCKS.

Would you rather buy a BENTLEY at a 75% discount to a KIA at the same discount?



What are QUALITY BUSINESSES?

= Quality Stocks

1.  Solid earnings growth
2   Undervalued
3.  Cash rich
4.  Low Debt
5.  Growing sales.

Examples: Apple, Microsoft, Intel, Coca Cola, Walmart, Rolls Royce, Caterpillar



So WHEN do we buy them?

We want to buy our stocks when NOBODY wants them.

When are stocks hated, feared and unpopular ...?

Recall what John D. Rockefeller said, "The way to MAKE MONEY is to buy when blood is running in the streets."



WARNING!  STOP.

To invest successfully, you must do the psychologically impossible ...

And this is the hardest part.

BUY .. when everyone is afraid.

SELL .. when others are excited with greed.

The Biggest Lie In Investing That You Believe In

https://m.youtube.com/watch?v=B5-IpSYbeiQ&feature=youtu.be

Property counters: How are shareholders rewarded? How exciting are property counters in terms of investment returns?

Property counters

1. Land held for development.

2. Land being developed and properties for sale.

3. Investment properties held for rental income.



How are shareholders rewarded?

After successful development and realisation of profits from the projects, the property counter may choose to reward the shareholders by paying half their earnings as dividends.

The investment income from properties held as investment can also be partially disbursed as dividends.

[How exciting are property counters in terms of investment returns?]

Compound interest is the most powerful force in the universe.

Intelligent investment is rewarding over the long run.

Intelligent investor should recognise the force of the axiom:  compound interest is the most powerful force in the universe.


1.  The reinvestment of returns over a long period has dramatic consequences.

Over 10 years, $100 invested at 1% rate of compound interest over a decade, would become $110.  At compounding interest of 8% per year , $100 becomes $216 in a decade.

Over 40 years, the difference between a 1% return and one of 8% is the difference between $149 and $2,172,


2.  Reinvested dividends play a large role in long-term capital accumulation.

While many amateur investor tend to be attracted by capital gains and attach little weight to dividends, reinvested dividends play a large role in long-term capital accumulation.

If your target 8% return were made up of 3% dividends and 5% capital gain, your $100 would accumulate to $2,172 within reinvested dividends and $704 without them over 40 years..

Why do retail mutual fund investors do so badly?

Why do retail mutual fund investors do so badly?

1.  Charges are part of the explanation.

Mutual fund investors pay not only management fees but also the trading costs within the funds they hold.

They also pay further trading costs when they themselves buy and sell, which they do too often.


2.  But the principal explanation is bad timing.

Retail investors buy high, and sell low.  They are late into fashionable sectors, and late out of unfashionable ones. 

There is probably no worse investment strategy than following the conventional wisdom with a time lag, and that is precisely what many small investors do - often with the encouragement of their advisers.

Understanding Economic Cycles and Market Valuation.

Understanding the economic cycles and market valuation will not help anyone predict the direction of the market in the short term or even in midterms like a year or two.  However,

• it keeps investors from looking in the rear-view mirror, and 
• they will have a clearer view of the future and be able to stay rational when the market gets euphoric or sinks into fear again.

For analyzing individual companies, having a good knowledge of business cycles and the likely future market returns can be useful in evaluating

• management's capital allocation decisions, 
• their aggressiveness in accounting and 
• the quality of earnings related to pension-fund return assumptions.

Buffett is a bottom-up value investor and rarely talks about the general market.  But he has a tremendous understanding of 

• business cycles, 
• the role of interest rates, 
• market valuations and 
• the likely future returns and risks.

Over the long term, investors should always be optimistic.  They should focus their investments on the quality companies that not only can pass the test of bad times, but also can come out stronger.

Now, more than any other time, it is vital to invest only in good companies.

Look for three things in a person - Intelligence, Energy and Integrity.

“You’re looking for three things, generally, in a person – Intelligence, Energy, and Integrity. And if they don’t have the last one, don’t even bother with the first two.”

Buffett

Sourced from Farnam Street