Saturday, 11 July 2009
Fundamentals of Personal Financial Planning
While there is a great deal of hype and interest in investing, the more important issue is saving. Without systematic and increasing savings, investing programs will get you nowhere. Spending less than you are making is the key tactic.
University of California, Irvine
University Extension
List of Calculators for Fundamentals of Personal Financial Planning, Module 1
Click to access each calculator, or use the numbered tabs below.
1Finding a Future Value Using a Present Value and an Interest Rate When There are No Payments
2Finding a Future Value Using a Present Value and an Interest Rate When There are Payments
3Calculator for Accumulation and Savings
4Calculator for Depletion / Distribution of an Account or Payoff of a Loan
5Calculation of Payment to Accumulate a Given Amount
6Calculation of Interest to Deplete a Given Amount, or Pay Off a Loan
7Time to Deplete a Given Amount, or Pay Off a Loan
8Time to Save a Given Amount
9Calculator for Evenly Spaced Payments of Equal Amounts
10Calculator for Equally Spaced Payments of Unequal Amounts
11Accumulation / Distribution Calculator
2Finding a Future Value Using a Present Value and an Interest Rate When There are Payments
3Calculator for Accumulation and Savings
4Calculator for Depletion / Distribution of an Account or Payoff of a Loan
5Calculation of Payment to Accumulate a Given Amount
6Calculation of Interest to Deplete a Given Amount, or Pay Off a Loan
7Time to Deplete a Given Amount, or Pay Off a Loan
8Time to Save a Given Amount
9Calculator for Evenly Spaced Payments of Equal Amounts
10Calculator for Equally Spaced Payments of Unequal Amounts
11Accumulation / Distribution Calculator
University of California, Irvine
Fundamentals of Personal Financial Planning
Module 1: Goals – Preparing to Plan
List of Documents to Gather Before Preparing Your Net Worth & Cash Flow Statements
Most Recent Payroll Stub
Income Tax Returns
Personal Employment Benefit Statements
Company Benefit Plan Booklets
o Group Pension Plans
o Group Life Insurance
o Group Disability Insurance
o Medical, Dental, Vision Insurance
Insurance & Annuity Contracts
o Life Insurance
o Health Insurance
o Hospital & Major Medical
o Disability Insurance
o Automobile Insurance
o Property and Casualty
Statements of Bank Accounts, Stocks, Bonds or Other Investments
Mortgage Statements
o Primary Mortgage Statement
o Second Mortgage Statement
o Home – Equity Line of Credit Statement
o Fair Market Value
Other Real Property Information
o Mortgage Statement
o Rental Info,
o Fair Market Value
Wills/Trusts
o Business Arrangements
o Partnership Agreement
o Buy/Sell Agreements
o Deferred Compensation
o Stock Option/Bonus Plan
Fundamentals of Personal Financial Planning
Module 1: Goals – Preparing to Plan
List of Documents to Gather Before Preparing Your Net Worth & Cash Flow Statements
Most Recent Payroll Stub
Income Tax Returns
Personal Employment Benefit Statements
Company Benefit Plan Booklets
o Group Pension Plans
o Group Life Insurance
o Group Disability Insurance
o Medical, Dental, Vision Insurance
Insurance & Annuity Contracts
o Life Insurance
o Health Insurance
o Hospital & Major Medical
o Disability Insurance
o Automobile Insurance
o Property and Casualty
Statements of Bank Accounts, Stocks, Bonds or Other Investments
Mortgage Statements
o Primary Mortgage Statement
o Second Mortgage Statement
o Home – Equity Line of Credit Statement
o Fair Market Value
Other Real Property Information
o Mortgage Statement
o Rental Info,
o Fair Market Value
Wills/Trusts
o Business Arrangements
o Partnership Agreement
o Buy/Sell Agreements
o Deferred Compensation
o Stock Option/Bonus Plan
Consider this: An investment portfolio that is 60% bonds and 40% stocks would be considered quite conservative and fairly stable by most financial planners. Looking at all the ten-consecutive-year periods since 1926, we find that the median (half the cases were higher and half the cases were lower) annual rate of return is 7.5%. In money terms, that means that if you invested $100,000, you would have about $206,000 at the end of ten years.
Historically, during the periods 1926 to 2005, your $100,000 could have turned out to be as little as $144,000 or as much as $395,000. Through the wizardry of statistics we can estimate that 83% of the time, a portfolio of 60% bonds and 40% stocks would return at least 4.8%. (You may remember from some class in your distant past, that this assumes a normal distribution at one standard deviation below the median. Not perfect statistics, but about as good as there are.)
Here again, there is not much else to go on other than the historic record. The following gives you something you might want to use as a predicted rate of return when planning.
Stock / Bond Mix
75% Bonds - 25% Stocks
60% Bonds - 40% Stocks
50% Bonds - 50% Stocks
40% Bonds - 60% Stocks
25% Bonds - 75% Stocks
10% Bonds - 90% Stocks
Median Fifteen-Year Return
5.9%
7.8%
9.1%
10.2%
11.8%
12.4%
Return you can expect to be exceeded most of the time
3.3%
5.3%
6.5%
7.5%
8.7%
8.7%
Look carefully at the expected rate of return for the 90% stock portfolio, the last line in the table. The return that you can expect is the same as the 75% stock portfolio (8.7%). This is because portfolios which are high in stocks also exhibit high variability. The maximum you might get is higher, but the variability also pulls down the minimum return that you might expect.
We have provided a worksheet for you to fill out to create a basic net worth statement.
http://learn.uci.edu/oo/getDemoPage.php?course=AR0102092&lesson=10&topic=9&page=1
Arranging your affairs in ways that reduce taxes is a way of increasing your disposable income. Unfortunately, it takes a lot of time and thought.
Five D’s of tax planning[Roll your cursor over each of the D’s to read more]
Deduction: Make sure that all deductions are taken, all records are kept to support the deductions and the payments are timed to cause the deductions to have the most effect.
Diversion: Take steps to make investments from which the returns will escape taxation or be taxed at a reduced rate.
Deferral: Taking steps to defer taxes until future years.
Deflection: Take steps to transfer income to someone in a lower tax bracket.
Diminution: Diminution is a catch all category of specific ideas or concepts that can reduce taxes.
Arranging your affairs in ways that reduce taxes is a way of increasing your disposable income. Unfortunately, it takes a lot of time and thought.
Five D’s of tax planning[Roll your cursor over each of the D’s to read more]
Deduction: Make sure that all deductions are taken, all records are kept to support the deductions and the payments are timed to cause the deductions to have the most effect.
Diversion: Take steps to make investments from which the returns will escape taxation or be taxed at a reduced rate.
Deferral: Taking steps to defer taxes until future years.
Deflection: Take steps to transfer income to someone in a lower tax bracket.
Diminution: Diminution is a catch all category of specific ideas or concepts that can reduce taxes.
http://learn.uci.edu/oo/getDemoPage.php?course=AR0102092&lesson=12&topic=2&page=2
Dealing with the risk
There are generally four choices in dealing with risk. Roll over each choice to read more.
»Avoid the Risk
» Ameliorate the risk
» Retain the Risk
» Transfer or Share the Risk
Dealing with the risk
There are generally four choices in dealing with risk. Roll over each choice to read more.
»Avoid the Risk
» Ameliorate the risk
» Retain the Risk
» Transfer or Share the Risk
Investment does not always guarantee return. You can suffer investment losses as well.
Ameliorating the Risk In the individual sense, you can ameliorate risk by thoroughly understanding the investments you are making, and by buying only high quality investments.
In the aggregate sense, you can ameliorate risk by creating a well-diversified portfolio. While this might be seen as sharing the risk, you can choose to consider it as a way to ameliorate risk. This is because a well-diversified portfolio creates a “smoother ride” with less chance of placing you in an undesirable position when the funds are needed. This is a philosophical position that could be attacked by active investors. They would say you are sharing the risk because you are giving up the opportunity for higher return in exchange for a smoother ride. All investors have to decide for themselves what level of active investment they believe is correct.
Present value of an investment is the discounted value of all its future cash flows that you derive from it.Collecting the data for life insurance needs analysis is similar to collecting for a retirement analysis. If a retirement needs analysis has already been completed, it is a good place to start. You need to consider:
Those costs you feel should not change by the loss of a spouse:
Quite probably the cost of housing
Costs of elementary and secondary school
Personal needs of the surviving spouse and children
Costs you feel are likely to increase because of the loss of a spouse:
One time costs associated with death
Child care
Education or training for the surviving spouse
Insurance costs due to loss of employer coverage
Costs you feel are likely to decrease because of loss of a spouse:
General family living costs
Medical and dental costs
Property and casualty insurance (fewer people to insure)
Costs you feel are likely to be eliminated because of loss of a spouse:
Life insurance
Disability insurance
Second automobile
Deceased spouse’s hobbies
Modification of goals because of loss of a spouse:
Change of education goals
Change of retirement goals
Change of legacy goals
Those costs you feel should not change by the loss of a spouse:
Quite probably the cost of housing
Costs of elementary and secondary school
Personal needs of the surviving spouse and children
Costs you feel are likely to increase because of the loss of a spouse:
One time costs associated with death
Child care
Education or training for the surviving spouse
Insurance costs due to loss of employer coverage
Costs you feel are likely to decrease because of loss of a spouse:
General family living costs
Medical and dental costs
Property and casualty insurance (fewer people to insure)
Costs you feel are likely to be eliminated because of loss of a spouse:
Life insurance
Disability insurance
Second automobile
Deceased spouse’s hobbies
Modification of goals because of loss of a spouse:
Change of education goals
Change of retirement goals
Change of legacy goals
http://learn.uci.edu/oo/getDemoPage.php?course=AR0102092&lesson=21&topic=2&page=3
Implicit Statement
My children will be able to attain the level of education that is most appropriate to them.
Explicit Statements
A. It is a fundamental responsibility of parenthood to provide a child with the maximum education the child can achieve. I want to do everything that I can to help my children achieve that.
B. I want to provide my children with access to at least a basic post-secondary education.
C. Getting a college education is a cooperative effort between me and my child. While I will gladly pay some of the costs, my children will need to bear some themselves.
D. College is the first real adult decision that my children will have to make. My idea is to be able to hand them $_________ and let them make their own decisions.
E. College is important but so is retirement. I do not want to sacrifice my retirement for my children’s college education. However, I am prepared to make some sacrifices in my current lifestyle.
F. College is important, but so is retirement and my current lifestyle. I do not want to sacrifice either for my children’s education. If there is extra money, then I would consider saving for their education.
G. Let’s see how things evolve. As best we can, we will pay for it out of cash flow at the time.
Implicit Statement
My children will be able to attain the level of education that is most appropriate to them.
Explicit Statements
A. It is a fundamental responsibility of parenthood to provide a child with the maximum education the child can achieve. I want to do everything that I can to help my children achieve that.
B. I want to provide my children with access to at least a basic post-secondary education.
C. Getting a college education is a cooperative effort between me and my child. While I will gladly pay some of the costs, my children will need to bear some themselves.
D. College is the first real adult decision that my children will have to make. My idea is to be able to hand them $_________ and let them make their own decisions.
E. College is important but so is retirement. I do not want to sacrifice my retirement for my children’s college education. However, I am prepared to make some sacrifices in my current lifestyle.
F. College is important, but so is retirement and my current lifestyle. I do not want to sacrifice either for my children’s education. If there is extra money, then I would consider saving for their education.
G. Let’s see how things evolve. As best we can, we will pay for it out of cash flow at the time.
Analyzing these explicit statements about college savings goals, we see that the first four (A-D) are statements about how much is needed for college and the next two (E-F) are about how much you can afford now. (The last explicit statement, of course, does not address savings goals at all, so we won’t analyze it here.)
How much is needed for college later?
How much can I afford now?
A. It is a fundamental responsibility of parenthood to provide a child with the maximum education the child can achieve. I want to do everything that I can to help my children achieve that.
B. I want to provide my children with access to at least a basic post-secondary education.
C. Getting a college education is a cooperative effort between me and my child. While I will gladly pay some of the costs, my children will need to bear some themselves.
D. College is the first real adult decision that my children will have to make. My idea is to be able to hand them $___ and let them make their own decisions.
E. College is important but so is retirement. I do not want to sacrifice my retirement for my children’s college education. However, I am prepared to make some sacrifices in my current lifestyle.
F. College is important, but so is retirement and my current lifestyle. I do not want to sacrifice either for my children’s education. If there is extra money, then I would consider saving for their education.
Clearly these two points of view require a different style of analysis.
1. The first group requires you to analyze the school(s) or school type that you might consider, create a target amount, and then analyze the amount you should save to meet that goal.
2. The second group requires you to analyze how much you think you might have and then compare it to what might be needed. Then, determine if you feel this amount is sufficient.
How much is needed for college later?
How much can I afford now?
A. It is a fundamental responsibility of parenthood to provide a child with the maximum education the child can achieve. I want to do everything that I can to help my children achieve that.
B. I want to provide my children with access to at least a basic post-secondary education.
C. Getting a college education is a cooperative effort between me and my child. While I will gladly pay some of the costs, my children will need to bear some themselves.
D. College is the first real adult decision that my children will have to make. My idea is to be able to hand them $___ and let them make their own decisions.
E. College is important but so is retirement. I do not want to sacrifice my retirement for my children’s college education. However, I am prepared to make some sacrifices in my current lifestyle.
F. College is important, but so is retirement and my current lifestyle. I do not want to sacrifice either for my children’s education. If there is extra money, then I would consider saving for their education.
Clearly these two points of view require a different style of analysis.
1. The first group requires you to analyze the school(s) or school type that you might consider, create a target amount, and then analyze the amount you should save to meet that goal.
2. The second group requires you to analyze how much you think you might have and then compare it to what might be needed. Then, determine if you feel this amount is sufficient.
http://learn.uci.edu/oo/getDemoPage.php?course=AR0102092&lesson=21&topic=3&page=2
Saving for college and paying for college may seem like two different topics and in many ways they are. However, in one important way, they are linked. The amount that you have saved often impacts the amount of financial aid that your child may be eligible to receive. This is particularly important because it is among the ways that your child can support their “share” of the cost.
There are many programs that may be available to your child. They fall into three categories:
Scholarships
Grants
Loans
All of them are considered financial aid, and applying for any of them involves an analysis of the child’s ability to pay for college. Three important factors in this analysis are your child’s savings, your savings, and your current income. The ways that colleges look at these factors differs between colleges and changes over time; therefore, we can only address this with generalizations. We will only consider the savings methods. We will not consider potential loan sources. Let’s look at types of accounts next.
Saving for college and paying for college may seem like two different topics and in many ways they are. However, in one important way, they are linked. The amount that you have saved often impacts the amount of financial aid that your child may be eligible to receive. This is particularly important because it is among the ways that your child can support their “share” of the cost.
There are many programs that may be available to your child. They fall into three categories:
Scholarships
Grants
Loans
All of them are considered financial aid, and applying for any of them involves an analysis of the child’s ability to pay for college. Three important factors in this analysis are your child’s savings, your savings, and your current income. The ways that colleges look at these factors differs between colleges and changes over time; therefore, we can only address this with generalizations. We will only consider the savings methods. We will not consider potential loan sources. Let’s look at types of accounts next.
Estate Planning
There are five primary ways in which you can make your desires known. They are all legal documents, and while some are simple enough not to need the assistance of a lawyer, using a lawyer helps assure you that your desires will be met. Used together they can provide a sufficient estate plan for even moderately substantial estates (a few million dollars).
By contract
Will
Last Medical Directive (sometimes called a Living Will)
Power of Attorney
Trust
Each of these has a slightly different context and is directed at a slightly different audience.
Earnings Yield and Earnings Growth (5)
http://spreadsheets.google.com/pub?key=tB2t3SJMRVNLsb4C8kawnlA&output=html
Company XYZA1
From 1995 to 2009:
EPS grew from 9.82 to 20 , (CAGR of 4.86% )
DPS (net of tax) grew from 2.65 to 5.2 , (CAGR of 4.6% )
DPO ratio (net DPS) averaged 24.33% , in 2009 was 26%
EY increased (decreased) from 3.47% to 9.3% , averaged 5.97% per year invested, and averaged 8.2% per 5 years invested.
DY increased (decreased) from 0.94% to 2.42% , AVERAGED 1.49% per year invested, and averaged 1.86% per 5 years invested.
Share price rose (fell) from 2.83 to 2.15 , (CAGR of -1.82% )
Total annual return averaged -0.32% (Cap. Appr of -1.82% + DY of 1.49% )
Comments:
Those who bought this stock at the high prices of 1995, 1996, and 1997 and held till today, would find that this share is today below these high prices, abeit in a bear market.
Though this is a company running a monopoly business, paying too much for a good stock can mean a negative return for the investment.
Therefore, it is always important to buy a good company when its price is obviously low, e.g. during the time when the market is obviously low, or when its price is temporarily down not related to any deterioration in its fundamentals.
On the other hand, those who bought this stock at the low prices of 1997 and 1998, would have reasonable returns from this stock. This would have been a situation when the investor might wish he or she had averaged down on this stock during those times.
Let us also examine the returns from this stock from the year 1999.
http://spreadsheets.google.com/pub?key=t5B6EOYlRpP6CMU7pMQbDiA&output=html
Company XYZA1(1999-2009)
From 1999 to 2009:
EPS grew from 9 to 20 , (CAGR of 12.02% )
DPS (net of tax) grew from 2.5 to 5.2 , (CAGR of 8.48% )
DPO ratio (net DPS) averaged 23.28% , in 2009 was 26%
EY increased (decreased) from 5.86% to 9.3% , averaged 6.31% per year invested, and averaged 10.49% per 5 years invested.
DY increased (decreased) from 1.19% to 2.42% , AVERAGED 1.5% per year invested, and averaged 2.26% per 5 years invested.
Share price rose (fell) from 1.535 to 2.15 , (CAGR of 3.43% )
Total annual return averaged 4.93% (Cap. Appr of 3.43% + DY of 1.5% )
Company XYZA1
From 1995 to 2009:
EPS grew from 9.82 to 20 , (CAGR of 4.86% )
DPS (net of tax) grew from 2.65 to 5.2 , (CAGR of 4.6% )
DPO ratio (net DPS) averaged 24.33% , in 2009 was 26%
EY increased (decreased) from 3.47% to 9.3% , averaged 5.97% per year invested, and averaged 8.2% per 5 years invested.
DY increased (decreased) from 0.94% to 2.42% , AVERAGED 1.49% per year invested, and averaged 1.86% per 5 years invested.
Share price rose (fell) from 2.83 to 2.15 , (CAGR of -1.82% )
Total annual return averaged -0.32% (Cap. Appr of -1.82% + DY of 1.49% )
Comments:
Those who bought this stock at the high prices of 1995, 1996, and 1997 and held till today, would find that this share is today below these high prices, abeit in a bear market.
Though this is a company running a monopoly business, paying too much for a good stock can mean a negative return for the investment.
Therefore, it is always important to buy a good company when its price is obviously low, e.g. during the time when the market is obviously low, or when its price is temporarily down not related to any deterioration in its fundamentals.
On the other hand, those who bought this stock at the low prices of 1997 and 1998, would have reasonable returns from this stock. This would have been a situation when the investor might wish he or she had averaged down on this stock during those times.
Let us also examine the returns from this stock from the year 1999.
http://spreadsheets.google.com/pub?key=t5B6EOYlRpP6CMU7pMQbDiA&output=html
Company XYZA1(1999-2009)
From 1999 to 2009:
EPS grew from 9 to 20 , (CAGR of 12.02% )
DPS (net of tax) grew from 2.5 to 5.2 , (CAGR of 8.48% )
DPO ratio (net DPS) averaged 23.28% , in 2009 was 26%
EY increased (decreased) from 5.86% to 9.3% , averaged 6.31% per year invested, and averaged 10.49% per 5 years invested.
DY increased (decreased) from 1.19% to 2.42% , AVERAGED 1.5% per year invested, and averaged 2.26% per 5 years invested.
Share price rose (fell) from 1.535 to 2.15 , (CAGR of 3.43% )
Total annual return averaged 4.93% (Cap. Appr of 3.43% + DY of 1.5% )
BELIEVING A BULL MARKET
BELIEVING A BULL MARKET
When markets are rapidly rising, value investing invariably falls out of favor with the investing public. In an upward racing market, value stocks appear dull and stodgy as the more speculative issues rush toward new market highs. But come the correction, it all looks different. Stable value stocks seem like trusted friends.
Most bull markets have well-defined characteristics. These include:
When markets are rapidly rising, value investing invariably falls out of favor with the investing public. In an upward racing market, value stocks appear dull and stodgy as the more speculative issues rush toward new market highs. But come the correction, it all looks different. Stable value stocks seem like trusted friends.
Most bull markets have well-defined characteristics. These include:
- Price levels are historically high.
- Price to earnings ratios are high.
- Dividend yields are low compared with bond yields (or compared with a stock’s particular dividend yield pattern).
- Margin buying becomes excessive as investors are driven to borrow to buy more of the high-priced stocks that look attractive to them.
- There is a swarm of new stock offerings, especially initial public offerings (IPOs) of questionable quality. This bull market is what investment bankers and stock promoters call the “window of opportunity.” Because IPOs so often occur when Wall Street is primed to pay top dollar, seasoned investors joke that IPO stands for “it’s probably overpriced.”
Just a reminder not to be too carried away by the rising market.
THE PAUSE AT THE TOP OF THE ROLLER COASTER
There is only one strategy that works for value investors when the market is high – patience. The investor can do one of two things, both of which require steady nerves.
· Sell all stocks in a portfolio, take profits, and wait for the market to decline. At that time, many good values will present themselves. This may sound easy, but it pains many investors to sell a stock when its price is still rising.
· Stick with those stocks in a portfolio that have long-term potential. Sell only those that are clearly overvalued, and once more wait for the market to decline. At this time, value stocks may be appreciating at slow pace compared with the frisky growth stocks, but not always.
But come the correction, be it sudden or slow, the well-chosen value stocks have a better chance of holding their price.
A nice quotation: We believe in taking advantage of temporary market downturns to position our portfolios for the long term.
Earnings Yield and Earnings Growth (4)
http://spreadsheets.google.com/pub?key=tmw-xvsqNnjlMQGQrL2RXtg&output=html
Company XYZ9growth
From 2001 to 2009:
EPS grew from 6.2 to 44.5 , (CAGR of 27.94% )
DPS (net of tax) grew from 1.6 to 12 , (CAGR of 28.64% )
DPO ratio (net DPS) averaged 26.41% , in 2009 was 26.97%
EY increased (decreased) from 14.09% to 10.55% , averaged 8.18% per year invested, and averaged 44.63% per 5 years invested.
DY increased (decreased) from 3.64% to 2.84% , AVERAGED 2.13% per year invested, and averaged 11.14% per 5 years invested.
Share price rose (fell) from 0.44 to 4.22 , (CAGR of 32.66% )
Total annual return averaged 34.79% (Cap. Appr of 32.66% + DY of 2.13% )
http://spreadsheets.google.com/pub?key=tmjm_LUI2F6vHg5jI1PXFwA&output=html
Company XYZ-A0
From 1995 to 2009:
EPS grew from 4.3 to 40.5 , (CAGR of 16.13% )
DPS (net of tax) grew from 0.5 to 7 , (CAGR of 19.24% )
DPO ratio (net DPS) averaged 16.58% , in 2009 was 17.28%
EY increased (decreased) from 3.54% to 13.48% , averaged 8.74% per year invested, and averaged 24.39% per 5 years invested.
DY increased (decreased) from 0.41% to 2.33% , AVERAGED 1.33% per year invested, and averaged 4.3% per 5 years invested.
Share price rose (fell) from 1.215 to 3.005 , (CAGR of 6.22% )
Total annual return averaged 7.55% (Cap. Appr of 6.22% + DY of 1.33% )
http://spreadsheets.google.com/pub?key=t8PIM_gvYk8VkNNfNFz4k2g&output=html
Company NBG1
From 1999 to 2009:
EPS grew (shrank) from 7.8 to -15 , (CAGR of -209.37% )
DPS (net of tax) grew (shrank) from 2.9 to 0 , (CAGR of -100% )
DPO ratio (net DPS) averaged 94.1% , in 2009 was 0%
EY increased (decreased) from 5.29% to -57.69% , averaged -2.37% per year invested, and averaged -0.79% per 5 years invested.
DY increased (decreased) from 2.33% to 0% , AVERAGED 1.98% per year invested, and averaged 1.88% per 5 years invested.
Share price rose (fell) from 1.475 to 0.26 , (CAGR of -15.93% )
Total annual return averaged -13.96% (Cap. Appr of -15.93% + DY of 1.98% )
Company XYZ9growth
From 2001 to 2009:
EPS grew from 6.2 to 44.5 , (CAGR of 27.94% )
DPS (net of tax) grew from 1.6 to 12 , (CAGR of 28.64% )
DPO ratio (net DPS) averaged 26.41% , in 2009 was 26.97%
EY increased (decreased) from 14.09% to 10.55% , averaged 8.18% per year invested, and averaged 44.63% per 5 years invested.
DY increased (decreased) from 3.64% to 2.84% , AVERAGED 2.13% per year invested, and averaged 11.14% per 5 years invested.
Share price rose (fell) from 0.44 to 4.22 , (CAGR of 32.66% )
Total annual return averaged 34.79% (Cap. Appr of 32.66% + DY of 2.13% )
http://spreadsheets.google.com/pub?key=tmjm_LUI2F6vHg5jI1PXFwA&output=html
Company XYZ-A0
From 1995 to 2009:
EPS grew from 4.3 to 40.5 , (CAGR of 16.13% )
DPS (net of tax) grew from 0.5 to 7 , (CAGR of 19.24% )
DPO ratio (net DPS) averaged 16.58% , in 2009 was 17.28%
EY increased (decreased) from 3.54% to 13.48% , averaged 8.74% per year invested, and averaged 24.39% per 5 years invested.
DY increased (decreased) from 0.41% to 2.33% , AVERAGED 1.33% per year invested, and averaged 4.3% per 5 years invested.
Share price rose (fell) from 1.215 to 3.005 , (CAGR of 6.22% )
Total annual return averaged 7.55% (Cap. Appr of 6.22% + DY of 1.33% )
http://spreadsheets.google.com/pub?key=t8PIM_gvYk8VkNNfNFz4k2g&output=html
Company NBG1
From 1999 to 2009:
EPS grew (shrank) from 7.8 to -15 , (CAGR of -209.37% )
DPS (net of tax) grew (shrank) from 2.9 to 0 , (CAGR of -100% )
DPO ratio (net DPS) averaged 94.1% , in 2009 was 0%
EY increased (decreased) from 5.29% to -57.69% , averaged -2.37% per year invested, and averaged -0.79% per 5 years invested.
DY increased (decreased) from 2.33% to 0% , AVERAGED 1.98% per year invested, and averaged 1.88% per 5 years invested.
Share price rose (fell) from 1.475 to 0.26 , (CAGR of -15.93% )
Total annual return averaged -13.96% (Cap. Appr of -15.93% + DY of 1.98% )
Friday, 10 July 2009
Earnings Yield and Earnings Growth (3)
http://spreadsheets.google.com/pub?key=tM4dijzIZ-GSYae8UUHtrZw&output=html
Company XYZ6
From 1995 to 2009:
EPS grew from 125 to 275, (CAGR of 5.4% )
DPS (net of tax) grew from 84 to 266 , (CAGR of 7.99% )
DPO ratio (net DPS) averaged 99.14% , in 2009 was 96.73%
EY increased (decreased) from 5.07% to 6.18% , averaged 5.89% per year invested, and averaged 7.83% per 5 years invested.
DY increased (decreased) from 3.4% to 5.98% , AVERAGED 5.89% per year invested, and averaged 7.71% per 5 years invested.
Share price rose (fell) from 24.675 to 44.5 , (CAGR of 4.01% )
Total annual return averaged 9.9%
http://spreadsheets.google.com/pub?key=tmJjNThDyJg030tAuW1JZcA&output=html
Company XYZ7
From 1999 to 2009:
EPS grew from 10.9 to 58.5 , (CAGR of 11.85% )
DPS (net of tax) grew from 2 to 30 , (CAGR of 19.79% )
DPO ratio (net DPS) averaged 44.37% , in 2009 was 51.28%
EY increased (decreased) from 7.99% to 14.74% , averaged 7.56% per year invested, and averaged 31.43% per 5 years invested.
DY increased (decreased) from 1.47% to 7.56% , AVERAGED 3.8% per year invested, and averaged 15.67% per 5 years invested.
Share price rose (fell) from 1.365 to 3.97 , (CAGR of 7.38% )
Total annual return averaged 11.17%
http://spreadsheets.google.com/pub?key=tr5Cw9liTlNFIgUDOZBjXuw&output=html
Company XYZ8CYC
From 1999 to 2009:
EPS grew from 12.4 to 2.5 , (CAGR of -16.67% )
DPS (net of tax) grew from 5.3 to 5 , (CAGR of -0.65% )
DPO ratio (net DPS) averaged 66.01% , in 2009 was 200%
EY increased (decreased) from 9.58% to 1.28% , averaged 10.45% per year invested, and averaged 25.4% per 5 years invested.
DY increased (decreased) from 3.41% to 2.56% , AVERAGED 4.77% per year invested, and averaged 9.24% per 5 years invested.
Share price rose (fell) from 1.295 to 1.955 , (CAGR of 4.2% )
Total annual return averaged 8.98% (Cap. Appr of 4.2% + DY of 4.77% )
Company XYZ6
From 1995 to 2009:
EPS grew from 125 to 275, (CAGR of 5.4% )
DPS (net of tax) grew from 84 to 266 , (CAGR of 7.99% )
DPO ratio (net DPS) averaged 99.14% , in 2009 was 96.73%
EY increased (decreased) from 5.07% to 6.18% , averaged 5.89% per year invested, and averaged 7.83% per 5 years invested.
DY increased (decreased) from 3.4% to 5.98% , AVERAGED 5.89% per year invested, and averaged 7.71% per 5 years invested.
Share price rose (fell) from 24.675 to 44.5 , (CAGR of 4.01% )
Total annual return averaged 9.9%
http://spreadsheets.google.com/pub?key=tmJjNThDyJg030tAuW1JZcA&output=html
Company XYZ7
From 1999 to 2009:
EPS grew from 10.9 to 58.5 , (CAGR of 11.85% )
DPS (net of tax) grew from 2 to 30 , (CAGR of 19.79% )
DPO ratio (net DPS) averaged 44.37% , in 2009 was 51.28%
EY increased (decreased) from 7.99% to 14.74% , averaged 7.56% per year invested, and averaged 31.43% per 5 years invested.
DY increased (decreased) from 1.47% to 7.56% , AVERAGED 3.8% per year invested, and averaged 15.67% per 5 years invested.
Share price rose (fell) from 1.365 to 3.97 , (CAGR of 7.38% )
Total annual return averaged 11.17%
http://spreadsheets.google.com/pub?key=tr5Cw9liTlNFIgUDOZBjXuw&output=html
Company XYZ8CYC
From 1999 to 2009:
EPS grew from 12.4 to 2.5 , (CAGR of -16.67% )
DPS (net of tax) grew from 5.3 to 5 , (CAGR of -0.65% )
DPO ratio (net DPS) averaged 66.01% , in 2009 was 200%
EY increased (decreased) from 9.58% to 1.28% , averaged 10.45% per year invested, and averaged 25.4% per 5 years invested.
DY increased (decreased) from 3.41% to 2.56% , AVERAGED 4.77% per year invested, and averaged 9.24% per 5 years invested.
Share price rose (fell) from 1.295 to 1.955 , (CAGR of 4.2% )
Total annual return averaged 8.98% (Cap. Appr of 4.2% + DY of 4.77% )
Earnings Yield and Earnings Growth (2)
http://spreadsheets.google.com/pub?key=tpKxEtz8jHe2E0aYMwaMSng&output=html
Company XYZ3
From 1995 to 2009:
EPS grew from 15.6 to 72 , (CAGR of 10.73% )
DPS (net of tax) grew from 3.2 to 40.7 , (CAGR of 18.48% )
DPO ratio (net DPS) averaged 57.03% , in 2009 was 56.53%
EY increased (decreased) from 7.39% to 9.01% , averaged 6.86% per year invested, and averaged 14.58% per 5 years invested.
DY increased (decreased) from 1.52% to 5.09% , AVERAGED 3.46% per year invested, and averaged 9.38% per 5 years invested.
Share price rose from 2.11 to 7.995 , (CAGR of 9.29% )
Total annual return averaged 12.75%
http://spreadsheets.google.com/pub?key=tk868XD3Y3vG7gvY54K8sGw&output=html
Company XYZ4
From 1995 to 2009:
EPS grew from 27.6 to 44 , (CAGR of 3.16% )
DPS (net of tax) grew from 16.1 to 35 , (CAGR of 5.31% )
DPO ratio (net DPS) averaged 95.24% , in 2009 was 79.55%
EY increased (decreased) from 7.41% to 8.19% , averaged 7.49% per year invested, and averaged 8.82% per 5 years invested.
DY increased (decreased) from 4.32% to 6.51% , AVERAGED 6.81% per year invested, and averaged 8.08% per 5 years invested.
Share price rose from 3.725 to 5.375 , (CAGR of 2.47% )
Total annual return averaged 9.28%
http://spreadsheets.google.com/pub?key=tmak2CPwe7UCWr6h5ZEFcww&output=html
Company XYZ5
From 1995 to 2009:
EPS grew from 7.8 to 41 , (CAGR of 11.7% )
DPS (net of tax) grew from 2.2 to 25 , (CAGR of 17.59% )
DPO ratio (net DPS) averaged 32.08% , in 2009 was 60.98%
EY increased (decreased) from 5.38% to 7.68% , averaged 7.96% per year invested, and averaged 15.97% per 5 years invested.
DY increased (decreased) from 1.52% to 4.68% , AVERAGED 2.5% per year invested, and averaged 5.88% per 5 years invested.
Share price rose from 1.45 to 5.34 , (CAGR of 9.08% )
Total annual return averaged 11.58%
Company XYZ3
From 1995 to 2009:
EPS grew from 15.6 to 72 , (CAGR of 10.73% )
DPS (net of tax) grew from 3.2 to 40.7 , (CAGR of 18.48% )
DPO ratio (net DPS) averaged 57.03% , in 2009 was 56.53%
EY increased (decreased) from 7.39% to 9.01% , averaged 6.86% per year invested, and averaged 14.58% per 5 years invested.
DY increased (decreased) from 1.52% to 5.09% , AVERAGED 3.46% per year invested, and averaged 9.38% per 5 years invested.
Share price rose from 2.11 to 7.995 , (CAGR of 9.29% )
Total annual return averaged 12.75%
http://spreadsheets.google.com/pub?key=tk868XD3Y3vG7gvY54K8sGw&output=html
Company XYZ4
From 1995 to 2009:
EPS grew from 27.6 to 44 , (CAGR of 3.16% )
DPS (net of tax) grew from 16.1 to 35 , (CAGR of 5.31% )
DPO ratio (net DPS) averaged 95.24% , in 2009 was 79.55%
EY increased (decreased) from 7.41% to 8.19% , averaged 7.49% per year invested, and averaged 8.82% per 5 years invested.
DY increased (decreased) from 4.32% to 6.51% , AVERAGED 6.81% per year invested, and averaged 8.08% per 5 years invested.
Share price rose from 3.725 to 5.375 , (CAGR of 2.47% )
Total annual return averaged 9.28%
http://spreadsheets.google.com/pub?key=tmak2CPwe7UCWr6h5ZEFcww&output=html
Company XYZ5
From 1995 to 2009:
EPS grew from 7.8 to 41 , (CAGR of 11.7% )
DPS (net of tax) grew from 2.2 to 25 , (CAGR of 17.59% )
DPO ratio (net DPS) averaged 32.08% , in 2009 was 60.98%
EY increased (decreased) from 5.38% to 7.68% , averaged 7.96% per year invested, and averaged 15.97% per 5 years invested.
DY increased (decreased) from 1.52% to 4.68% , AVERAGED 2.5% per year invested, and averaged 5.88% per 5 years invested.
Share price rose from 1.45 to 5.34 , (CAGR of 9.08% )
Total annual return averaged 11.58%
Earnings Yield and Earnings Growth (1)
http://spreadsheets.google.com/pub?key=thvY0NrrijC4gY11mjZd3PQ&output=html
Company XYZ
From 1995 to 2009:
EPS grew from 12.8 to 58.2, (CAGR of 10.62%).
DPS (net of tax) grew from 5.3 to 33.8, (CAGR of 13.15%).
DPO ratio (net DPS) averaged 39.22%, the latest in 2009 was 58.08%.
EY increased (decreased) from 4.79% to 7.53%, averaged 9.59% per year invested, and averaged 15.67% per 5 years invested.
DY increased (decreased) from 1.99% to 4.38%, AVERAGED 3.42% per year invested, and averaged 6.47% per 5 years invested.
Share price rose from 2.67 to 7.725, (CAGR of 7.34%).
Total annual return averaged 10.76%.
http://spreadsheets.google.com/pub?key=tTbLLUoeX_bs_guMAtRvqdQ&output=html
Company XYZ1
From 1995 to 2009:
EPS grew from 69 to 150 , (CAGR of 5.31% )
DPS (net of tax) grew from 53.2 to 200 , (CAGR of 9.23% )
DPO ratio (net DPS) averaged 106.18% , the latest in 2009 was 133.33%
EY increased (decreased) from 3.95% to 5.29% , averaged 4.29% per year invested, and averaged 5.61% per 5 years invested.
DY increased (decreased) from 3.05% to 7.05% , AVERAGED 4.35% per year invested, and averaged 5.63% per 5 years invested.
Share price rose from 17.45 to 28.375 , (CAGR of 3.29% ).
Total annual return averaged 7.65%.
http://spreadsheets.google.com/pub?key=t7ILk0yniC6soSLCP8gsksg&output=html
Company XYZ2
From 1995 to 2009:
EPS grew from 23.1 to 70 , (CAGR of 7.67% )
DPS (net of tax) grew from 8.1 to 42.1 , (CAGR of 11.61% )
DPO ratio (net DPS) averaged 78.57% , the latest in 2009 was 60.14%
EY increased (decreased) from 6.2% to 7.47% , averaged 5.59% per year invested, and averaged 11.6% per 5 years invested.
DY increased (decreased) from 2.17% to 4.49% , AVERAGED 4.03% per year invested, and averaged 10.87% per 5 years invested.
Share price rose from 3.725 to 9.375 , (CAGR of 6.35% )
Total annual return averaged 10.38%
Company XYZ
From 1995 to 2009:
EPS grew from 12.8 to 58.2, (CAGR of 10.62%).
DPS (net of tax) grew from 5.3 to 33.8, (CAGR of 13.15%).
DPO ratio (net DPS) averaged 39.22%, the latest in 2009 was 58.08%.
EY increased (decreased) from 4.79% to 7.53%, averaged 9.59% per year invested, and averaged 15.67% per 5 years invested.
DY increased (decreased) from 1.99% to 4.38%, AVERAGED 3.42% per year invested, and averaged 6.47% per 5 years invested.
Share price rose from 2.67 to 7.725, (CAGR of 7.34%).
Total annual return averaged 10.76%.
http://spreadsheets.google.com/pub?key=tTbLLUoeX_bs_guMAtRvqdQ&output=html
Company XYZ1
From 1995 to 2009:
EPS grew from 69 to 150 , (CAGR of 5.31% )
DPS (net of tax) grew from 53.2 to 200 , (CAGR of 9.23% )
DPO ratio (net DPS) averaged 106.18% , the latest in 2009 was 133.33%
EY increased (decreased) from 3.95% to 5.29% , averaged 4.29% per year invested, and averaged 5.61% per 5 years invested.
DY increased (decreased) from 3.05% to 7.05% , AVERAGED 4.35% per year invested, and averaged 5.63% per 5 years invested.
Share price rose from 17.45 to 28.375 , (CAGR of 3.29% ).
Total annual return averaged 7.65%.
http://spreadsheets.google.com/pub?key=t7ILk0yniC6soSLCP8gsksg&output=html
Company XYZ2
From 1995 to 2009:
EPS grew from 23.1 to 70 , (CAGR of 7.67% )
DPS (net of tax) grew from 8.1 to 42.1 , (CAGR of 11.61% )
DPO ratio (net DPS) averaged 78.57% , the latest in 2009 was 60.14%
EY increased (decreased) from 6.2% to 7.47% , averaged 5.59% per year invested, and averaged 11.6% per 5 years invested.
DY increased (decreased) from 2.17% to 4.49% , AVERAGED 4.03% per year invested, and averaged 10.87% per 5 years invested.
Share price rose from 3.725 to 9.375 , (CAGR of 6.35% )
Total annual return averaged 10.38%
Thursday, 9 July 2009
Earnings Growth, Earnings Yield and PEG
PEG relates, or normalizes, the PE to the growth rate.
Enter the practice of normalizing PE by the growth rate.
- With PEG, apparently high PE ratios are supported by forward growth.
- PEG thus becomes a better tool to compare stocks with different PEs and different underlying growth assumptions.
By itself, it's hard to tell whether a PE is good or bad.
A stock with a PE of 30 may be a better deal than another stock with a PE of 15. Why? Because of growth.
- A stock of a no-growth company with a PE of 15 will never achieve an earnings yield beyond 7.5% (1/15).
- Meanwhile, the company with a PE of 30, with a growth rate of 20%, eventually achieves an earnings yield greater than 20%.
Enter the practice of normalizing PE by the growth rate.
- To do that, we divide all PEs by the company's growth rate to create a ratio known as (Price/earnings)/growth, or PEG for short.
- G is the growth rate, expressed as a whole number (that is, the percentage times 100).
- So, a company with a PE of 30 and a growth rate of 20% has a PEG of 1.5.
This gives a standard for comparison.
- Company A with a PE of 18 and a growth rate of 12% has the same PEG as Company B with a PE of 30 and a growth rate of 20%.
- Are the two PEs the same? 30 versus 18?
- Clearly not - until the underlying growth fundamentals are identified, apply PEG, and find out they are indeed priced equally.
The table below shows the relationship between future earnings yield, PE, and PEG. Watch what happens to PEG and future earnings yields as growth assumptions rise.
http://spreadsheets.google.com/ccc?key=toPlORpn7n23_xeRq2vYALQ
Low PEG ratios (less than 2) correspond to high future earnings yields.
You can see:
PEG = 2 scenario corresponds to a future earnings yield of 13%.
PEG = 1.30 correlates to 20%, and,
PEG = 1 correlates to a future earnings yield of 31% on today's investment price.
On the other hand, if:
PEG = 4, the implied future earnings yield is only 8.1%.
So, what is a "good" PEG ratio?
It all depends on the implied future rate of return you're looking for, which depends on
- (1) investment objectives,
- (2) risk tolerance, and
- (3) current risk-free (bond) interest rates.
A PEG of 2.7 or less: implies a future earnings yield of 10% or more.
A PEG of 2.7 or more: implies a future earnings yield of 10% or less. This is probably less return at more risk than most investors desire.
As a guide:
A PEG of 1 or less: this is great (but hard to find)
A PEG between 1 and 2: this is good.
A PEG between 2 and 3: this is marginal.
A PEG over 3: should probably be avoided.
Earnings Yield
A greater revelation occurs when the PE ratio is turned upside down. The inverse ratio, known as earnings yield, tells the annual percentage rate of return implied by the PE. It is simply 1/(PE).
How to be a long term investor?
Those with a long term portfolio giving positive returns to date are probably reacting to the market differently to those without a long term portfolio. These should be distinguished from those also having a long term portfolio with negative returns to date.
Unlike the former, the latter holds many stocks with "paper" losses. Holding onto these stocks, especially those with poor fundamentals, and with no potential for "recovery" for many years, probably make little or no sense at all.
On the other hand, those lucky investors in the former group have portfolios holding gainers. The gains are probably significant due to the effect of compounding. Moreover, this is a buffer that these investors enjoy, giving them the ability and the courage to ride the volatilities in the market.
Unlike the former, the latter holds many stocks with "paper" losses. Holding onto these stocks, especially those with poor fundamentals, and with no potential for "recovery" for many years, probably make little or no sense at all.
On the other hand, those lucky investors in the former group have portfolios holding gainers. The gains are probably significant due to the effect of compounding. Moreover, this is a buffer that these investors enjoy, giving them the ability and the courage to ride the volatilities in the market.
The "cake test" checklist when considering companies as investments
The "cake test"
Some of you may be familiar with the technique of sticking a toothpick into a cake to determine whether it's done. Try it a few times in different parts of the cake to verify your conclusion.
Especially for time-constrained investors, the "cake test" approach makes sense to review financial statements. Poke here, poke there, read some of the notes, get a favour for financial reporting quality. If you're Warren Buffett, ready to commit $2 billion to a company, you may want to take a closer look. But for most of us, the following will help.
A checklist
The following are a few places to test when considering companies as investments.
Earnings consistent with cash flow
These two things won't be equal but should march side by side. If earnings consistently grow faster than cash flow, that's a bad sign.
Growing current assets other than cash
Watch for increasing inventories or account receivable, particularly in proportion to sales.
Straight-line depreciation and amortizatizion, long time periods
Asset recovery may be delayed through deferring depreciation and amortizaton in order to boost earnings. Understand what practice the company uses, and whether it’s consistent with others in the industry – and common sense.
Understand asset impairments
Note which assets are “impaired” or on the block for possible write-downs, and understand why.
LIFO versus FIFO
LIFO is a more conservative approach to measuring cost of goods sold and inventory levels, as most of the recent (and more expensive) stock is assumed to be consumed first. Note that this may not be true in every industry.
Reserves against bad debts change dramatically
Watch for bad debt and other reserves as a sign of deterioration in current asset quality.
Accounting policy change
Note 1 should be simple and straightforward. Look at revenue and cost recognition. Complex, unexplained changes may spell trouble.
10-K report is longer than 100 pages
Something complex is going on. Opportunity knocks for accounting fiction and other things that are hard to understand.
Persistent, poorly explained write-offs
If the write-offs are large or repetitive, try to understand why.
Big gap between pro forma and GAAP
Understand why and what the company is trying to tell you by reporting both.
Understand where the revenues come from – if the company tells you
What are the major revenue “segments”? Does the company have a few big customers? Who are they? Are their business fundamentals sound? Does the company have channel partners? What are their selling arrangements with those partners? Do they provide financing? What are the other incentives? Are services broken out separately?
Stay with those who explain best.
Better corporate financial statements explain changes in their business and changes in their accounting policies. It’s worth reading their explanations carefully. Remember, companies that explain things better are probably better investments.
Some of you may be familiar with the technique of sticking a toothpick into a cake to determine whether it's done. Try it a few times in different parts of the cake to verify your conclusion.
Especially for time-constrained investors, the "cake test" approach makes sense to review financial statements. Poke here, poke there, read some of the notes, get a favour for financial reporting quality. If you're Warren Buffett, ready to commit $2 billion to a company, you may want to take a closer look. But for most of us, the following will help.
A checklist
The following are a few places to test when considering companies as investments.
Earnings consistent with cash flow
These two things won't be equal but should march side by side. If earnings consistently grow faster than cash flow, that's a bad sign.
Growing current assets other than cash
Watch for increasing inventories or account receivable, particularly in proportion to sales.
Straight-line depreciation and amortizatizion, long time periods
Asset recovery may be delayed through deferring depreciation and amortizaton in order to boost earnings. Understand what practice the company uses, and whether it’s consistent with others in the industry – and common sense.
Understand asset impairments
Note which assets are “impaired” or on the block for possible write-downs, and understand why.
LIFO versus FIFO
LIFO is a more conservative approach to measuring cost of goods sold and inventory levels, as most of the recent (and more expensive) stock is assumed to be consumed first. Note that this may not be true in every industry.
Reserves against bad debts change dramatically
Watch for bad debt and other reserves as a sign of deterioration in current asset quality.
Accounting policy change
Note 1 should be simple and straightforward. Look at revenue and cost recognition. Complex, unexplained changes may spell trouble.
10-K report is longer than 100 pages
Something complex is going on. Opportunity knocks for accounting fiction and other things that are hard to understand.
Persistent, poorly explained write-offs
If the write-offs are large or repetitive, try to understand why.
Big gap between pro forma and GAAP
Understand why and what the company is trying to tell you by reporting both.
Understand where the revenues come from – if the company tells you
What are the major revenue “segments”? Does the company have a few big customers? Who are they? Are their business fundamentals sound? Does the company have channel partners? What are their selling arrangements with those partners? Do they provide financing? What are the other incentives? Are services broken out separately?
Stay with those who explain best.
Better corporate financial statements explain changes in their business and changes in their accounting policies. It’s worth reading their explanations carefully. Remember, companies that explain things better are probably better investments.
How to invest in a bear market
How to invest in a bear market
The FTSE All Share Index lost 29pc in 12 months and there is more pain in store.
By David Stevenson, manager of the Ignis Cartesian UK Opportunities Fund
Published: 10:32PM BST 15 Jun 2009
UK equity investors have had a torrid time of it in the last year. The FTSE All Share Index lost 29pc in the 12 months to the end of March and there is more pain in store. Recent stock market rallies should be taken for what they were, short-term technical bounces rather than the market bottoming on improved fundamentals.
That said, for investors who are able to stomach the volatility and take a longer term view, there are positives. The UK stock market is at one of its lowest points in the last ten years.
In the coming 12 to 18 months, it is likely to fall further taking valuations to levels of 'cheapness' that only present themselves once or twice in a lifetime. Making the most of these opportunities, however, requires a suitable investment approach and there are key considerations for investors in a bear market.
Companies are under considerable pressure and investors need to look in detail at what they are potentially buying into.
This requires careful balance sheet analysis as heavily indebted businesses may not survive the coming years. This may seem extreme but is a reality of economic cyclicality. Companies with low or sustainable levels of borrowing, and which therefore have a degree of control over their future, are relatively attractive, especially when combined with a secure dividend yield.
Earnings provide a barometer of corporate health and are under pressure across the market. Investors can, however, mitigate that risk by targeting certain types of companies.
Defendable earnings are important and are typically generated by companies with big franchises, large market shares and leverage over competitors or suppliers, allowing them to eke out more market share or a better margin. Thinking big is generally a sensible approach.
Big brands have a footprint that will allow them to survive through a difficult environment. Companies like Vodafone, Centrica and Unilever are all likely to outperform, operating in areas where spending remains necessary. Food retailers and pharmaceutical companies are also attractive.
Investors should also focus on sectors that offer predictable growth, rather than those dependent on support from the economic cycle.
Secular trends currently include the long-term growth of outsourcing, both in the public and private sector, and the maintenance and operation of critical infrastructure, such as utility and telecommunication networks and transport links. Both of these should offer resilience in a downturn and will benefit if the government's stimulus plans come to fruition.
It pays for investors to be sceptical in all market conditions but particularly during a downturn. It is important to think independently and not be fooled by consensus views.
Fundamental analysis of balance sheets and earnings will give a clearer picture of companies' future prospects. This then allows a portfolio to be built 'bottom-up' without necessitating a 'top-down' view on overarching macroeconomic, consensus or benchmark themes.
For investors seeking exposure to the market via mutual funds it is important to analyse the investment approach of fund managers. There is a temptation for managers to alter their process when short-term performance numbers disappoint, as can happen in volatile markets.
This, however, tends to be detrimental. Proper analysis of a manager's track record is therefore important, paying particular attention to longevity, consistency of approach and performance during previous downturns.
Certain managers are suited to a rising market, others, typically those able to best identify potential balance sheet holes and signs of earnings weakness, fare better when business models come under increased pressure, as is currently the case.
Another point to consider is the level and type of trading in a fund. Fund managers are generally not good short-term traders. Investment views need to be made on at least a one year basis, and a bear market does not change that.
A sharp pickup in turnover within a portfolio may indicate panic trades or a fundamental shift in strategy. In a bear market the number of attractive stock ideas tends to fall.
This may justify holding a more concentrated portfolio, and then adding new positions when opportunities arise. The important point is to make sure a fund manager is not holding low conviction stocks for the sake of diversification.
Finally, it will pay to be patient. The UK stock market will recover, but not overnight. At the moment market conditions remain challenging and it would be foolish to invest expecting the market to bounce back straightaway.
Equities tend to move before economic data picks up but with the current levels of volatility it is prudent to wait for clear signs that leading indicators are improving and government stimulus packages have laid solid foundations for growth.
This is likely to be some way off but by reinforcing a portfolio based on the points above, and taking advantage of increasingly attractive valuations, long-term investment opportunities in the UK can be exploited.
http://www.telegraph.co.uk/finance/personalfinance/investing/5545094/How-to-invest-in-a-bear-market.html
The FTSE All Share Index lost 29pc in 12 months and there is more pain in store.
By David Stevenson, manager of the Ignis Cartesian UK Opportunities Fund
Published: 10:32PM BST 15 Jun 2009
UK equity investors have had a torrid time of it in the last year. The FTSE All Share Index lost 29pc in the 12 months to the end of March and there is more pain in store. Recent stock market rallies should be taken for what they were, short-term technical bounces rather than the market bottoming on improved fundamentals.
That said, for investors who are able to stomach the volatility and take a longer term view, there are positives. The UK stock market is at one of its lowest points in the last ten years.
In the coming 12 to 18 months, it is likely to fall further taking valuations to levels of 'cheapness' that only present themselves once or twice in a lifetime. Making the most of these opportunities, however, requires a suitable investment approach and there are key considerations for investors in a bear market.
Companies are under considerable pressure and investors need to look in detail at what they are potentially buying into.
This requires careful balance sheet analysis as heavily indebted businesses may not survive the coming years. This may seem extreme but is a reality of economic cyclicality. Companies with low or sustainable levels of borrowing, and which therefore have a degree of control over their future, are relatively attractive, especially when combined with a secure dividend yield.
Earnings provide a barometer of corporate health and are under pressure across the market. Investors can, however, mitigate that risk by targeting certain types of companies.
Defendable earnings are important and are typically generated by companies with big franchises, large market shares and leverage over competitors or suppliers, allowing them to eke out more market share or a better margin. Thinking big is generally a sensible approach.
Big brands have a footprint that will allow them to survive through a difficult environment. Companies like Vodafone, Centrica and Unilever are all likely to outperform, operating in areas where spending remains necessary. Food retailers and pharmaceutical companies are also attractive.
Investors should also focus on sectors that offer predictable growth, rather than those dependent on support from the economic cycle.
Secular trends currently include the long-term growth of outsourcing, both in the public and private sector, and the maintenance and operation of critical infrastructure, such as utility and telecommunication networks and transport links. Both of these should offer resilience in a downturn and will benefit if the government's stimulus plans come to fruition.
It pays for investors to be sceptical in all market conditions but particularly during a downturn. It is important to think independently and not be fooled by consensus views.
Fundamental analysis of balance sheets and earnings will give a clearer picture of companies' future prospects. This then allows a portfolio to be built 'bottom-up' without necessitating a 'top-down' view on overarching macroeconomic, consensus or benchmark themes.
For investors seeking exposure to the market via mutual funds it is important to analyse the investment approach of fund managers. There is a temptation for managers to alter their process when short-term performance numbers disappoint, as can happen in volatile markets.
This, however, tends to be detrimental. Proper analysis of a manager's track record is therefore important, paying particular attention to longevity, consistency of approach and performance during previous downturns.
Certain managers are suited to a rising market, others, typically those able to best identify potential balance sheet holes and signs of earnings weakness, fare better when business models come under increased pressure, as is currently the case.
Another point to consider is the level and type of trading in a fund. Fund managers are generally not good short-term traders. Investment views need to be made on at least a one year basis, and a bear market does not change that.
A sharp pickup in turnover within a portfolio may indicate panic trades or a fundamental shift in strategy. In a bear market the number of attractive stock ideas tends to fall.
This may justify holding a more concentrated portfolio, and then adding new positions when opportunities arise. The important point is to make sure a fund manager is not holding low conviction stocks for the sake of diversification.
Finally, it will pay to be patient. The UK stock market will recover, but not overnight. At the moment market conditions remain challenging and it would be foolish to invest expecting the market to bounce back straightaway.
Equities tend to move before economic data picks up but with the current levels of volatility it is prudent to wait for clear signs that leading indicators are improving and government stimulus packages have laid solid foundations for growth.
This is likely to be some way off but by reinforcing a portfolio based on the points above, and taking advantage of increasingly attractive valuations, long-term investment opportunities in the UK can be exploited.
http://www.telegraph.co.uk/finance/personalfinance/investing/5545094/How-to-invest-in-a-bear-market.html
'Money in the bank? You're better off having it under the pillow and hoping for the tooth fairy'
Michel Roux: 'Money in the bank? You're better off having it under the pillow and hoping for the tooth fairy'
Fame & fortune: Michel Roux Jr, 49, is chef patron at the internationally famous Le Gavroche, the restaurant his father Albert and uncle Michel made the first British eatery ever to win three Michelin stars. Michel Jr lives with his wife Giselle, 52, and daughter Emily in Clapham.
By Mark Anstead
Published: 3:05PM BST 17 Jun 2009
Michel Roux: 'Banking has become terribly impersonal' Photo: ROGER TAYLOR
How did your childhood experience influence your attitude to money?
We didn't have much money – my father and mother had only just arrived on these shores from France. He became private chef to the Queen Mother's horse trainers and we lived in Kent, near Pembury.
We were surrounded by opulence, but we led a simple country life in a small pink cottage. As a child it seemed large but I have since been back to see it and it was only tiny. We grew our own vegetables and reared rabbits and pigeons, which my father slaughtered to eat.
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I am very cautious – throughout my childhood I was taught not to squander anything. To this day I like to recycle and use every last morsel in the kitchen, putting everything to use. For example, I never throw away potato peelings – you can fry them up and they make good French fries for staff lunch. And orange peelings can be made into petit fours – simply cook the peel in sugar.
There are some chefs who are brilliant at cooking, but when it comes to controlling their costs they are absolutely useless. That's why we've been seeing a lot of good chefs closing their doors because they cannot make ends meet.
Part of making ends meet is avoiding waste – I buy top quality meat on the bone so I can cut it myself instead of using a butcher because I believe I can get more from it myself. I use lamb trimmings for individual shepherd's pies, for example, and the bones to make my own stock or soup. Nothing should go in the bin.
Now that you are better off, are you happier?
I don't think so because I have some fantastically fond memories of my childhood sitting in the countryside with Mum and Dad. As soon as we moved to London my father worked every hour under the sun at Le Gavroche and I hardly ever saw him, so I realised then that being better off has its downsides.
Are you good with money or irresponsible?
I save religiously into a pension pot and I have money put aside for a rainy day. Is that being good?
How much have you been contributing to your pension?
I've been putting away more than 10pc of what I earn for the last 25 years and I tell all my staff to do the same. Many of them say they are too young to worry about it, but I tell them they are never too young. It doesn't matter what people say about how badly pension funds have performed – a stock market crash is only bad news if you need to take your money out now. They won't need it for another 30 years and it will be worth a lot more then.
But aren't you disappointed at the poor performance of your own pension funds?
Yes I'm disappointed, but I've got quite a few more years of my working life left for it all to turn around. I'm more disappointed that the Government has been tinkering with tax relief on pensions – they should keep the incentives for people to put money away because for too long we have been acting as if tomorrow will never come, and that's part of the reason for our crisis.
How do you prefer to pay for things – by cash, card or cheque?
Credit card, which I prefer to debit card because then I can earn points and air miles. I'm with NatWest Private Banking and am fairly happy with them, but not with their MasterCard division.
I went over my limit two years ago by £1.20 when purchasing three business class tickets to fly to South Africa. Bear in mind I been with NatWest since I was 16 and I have never been over my £15,000 limit before, but they sent me a very nasty letter saying I would be charged £20.
I phoned and told them I wanted the fee waived and that they should increase my limit because my wife had a higher ceiling and she isn't even working. I wanted an apology for the letter, but I didn't get one – I just got a very curt phone call saying they would waive the £20 but wouldn't increase my limit.
This is an example of how banking has become terribly impersonal. I switched to a Visa with another bank, who happily gave me a higher limit, but I kept my card open with NatWest waiting for an apology. You'd think they'd care that they have now lost between £4,000 and £5,000 spending each month from me.
How do you tip? Are you an easy tipper or do they have to work hard with you?
I always tip and I tip generously if I feel people have done a good job. I believe in tipping wholeheartedly. We pay our staff the going rate and our service charge is a voluntary extra.
Staff don't have to pay on tips, but the Government is trying to close this loophole by saying a discretionary service charge cannot go towards the minimum wage. The only winner out of changing the law will be the Government – the restaurateur will have to pay National Insurance and so will the employee.
Ultimately the customer will be footing the bill and everyone loses except the Inland Revenue.
Does talking about money embarrass you?
I feel I deserve my salary so I am happy to talk about what I earn with friends if they ask me. I don't want to say how much exactly in this interview, but I'll admit I will be affected by the new rate of income tax when it comes in in October.
How do you separate responsibility for finance with Giselle?
We have one joint account and separate bank accounts as well. There's no particular reason – it's just how it happened. I pay for the holidays and other big stuff and Giselle looks after all the shopping. She runs a very tight ship and never squanders money – she's not afraid to shop in cheaper outlets and gets great pleasure in finding bargains.
What has been your best buy?
My house in France. It's a beautiful five-bedroom old stone house that cost me €700,000 four years ago when the euro was at 1.55. When the euro reached parity I realised I'd made a massive saving.
Worst buy?
A white leather jacket I bought in the Asprey in Bond Street a few years ago for £500. It had a lovely purple lining and fitted me particularly well, but I've never had occasion to wear it.
What's been your greatest extravagance?
I have just bought a 1959 bottle of Chateau d'Yquem for £800. It's my birthday present for next year. I also tend to buy business class on long-haul flights, but I'm happy to fly Ryanair and easyJet as well for short trips.
How much did your home cost when you bought it?
I bought my three-bedroom flat in Clapham in 1989 for £120,000. I think the value must be not far off six times that now.
Have you ever invested in shares?
I have a little portfolio of shares and unit trusts and Isas. It's a managed fund – I sat down with my advisers to work out if I was a cautious or risky investor and now they make their own decisions from there.
Do you use high-interest savings accounts?
What's the point of having money in the bank? You're better off having it under the pillow and hoping for the tooth fairy. I took money out when the bank crisis started and used it to pay off some of my mortgage. I still have some money in deposit accounts because there is nowhere else to put it, but I am now almost completely mortgage free. I had a fairly good mortgage deal anyway – I was paying 4.25pc – but now I'm saving having to pay that, which is a lot better than getting just 1pc.
Do you bank online?
No I don't. I can just about switch computers on – my wife handles our emails.
How are you coping with the recession in your restaurant?
It is obviously having an effect. People are spending a bit less money, but we are doing very well. When times are hard I think people want brands they can rely upon and I believe that Le Gavroche falls into that category.
Join Michel Roux and other top chefs at the Taste Festival in Regents Park June 18-21, www.tastefestivals.com/london
http://www.telegraph.co.uk/finance/personalfinance/fameandfortune/5559650/Michel-Roux-Money-in-the-bank-Youre-better-off-having-it-under-the-pillow-and-hoping-for-the-tooth-fairy.html
How the rich are different – and becoming more so
Comment: How the rich are different – and becoming more so
It falls to Nick Carraway in F Scott Fitzgerald's novel The Great Gatsby to observe: "The rich are different from you and me." To which the sensible reply must surely be: "Yes, they have more money."
By Ian Cowie
Published: 11:55AM BST 02 Jul 2009
Another, more topical, difference is that there are far fewer of them than there were a year ago. Given the scale of the credit crisis, perhaps that is one of the less surprising conclusions of the 2009 World Wealth Report issued last week by Merrill Lynch and Capgemini.
But what caught my eye was the marked change in the geographical location of these lucky plutocrats. Far fewer of them are British. For the first time, the number of millionaires in China has overtaken those in Britain.
Merrill Lynch Global Wealth Management, an arm of America's biggest stockbroker, and Capgemini, the global consulting services firm, disdain to use such a vulgar word as "rich". Instead, they prefer to count "high net worth individuals", by which they mean people with more than $1m (£615,000) of "investable assets" – that is, excluding the value of their home.
Whatever you call them, there were 491,000 of these millionaires in Britain the last time Merrill counted them but only 362,000 this year. China also felt the credit crunch – but less so – with its headcount of millionaires falling from 413,000 to 364,000.
It would be wrong to make too much of such a marginal difference, although it does dislodge Britain from its long established place as the fourth richest country in the world on the Merrill Lynch measure. America, Japan and Germany still account for 54pc of all millionaires but how long will it be before China overtakes those in third and second positions?
This largely overlooked report may remind unit and investment trust investors who are keen to gain exposure to economies that are growing rather than shrinking that the sun sets in the west but rises in the east.
http://www.telegraph.co.uk/finance/personalfinance/comment/iancowie/5682336/Comment-How-the-rich-are-different---and-becoming-more-so.html
It falls to Nick Carraway in F Scott Fitzgerald's novel The Great Gatsby to observe: "The rich are different from you and me." To which the sensible reply must surely be: "Yes, they have more money."
By Ian Cowie
Published: 11:55AM BST 02 Jul 2009
Another, more topical, difference is that there are far fewer of them than there were a year ago. Given the scale of the credit crisis, perhaps that is one of the less surprising conclusions of the 2009 World Wealth Report issued last week by Merrill Lynch and Capgemini.
But what caught my eye was the marked change in the geographical location of these lucky plutocrats. Far fewer of them are British. For the first time, the number of millionaires in China has overtaken those in Britain.
Merrill Lynch Global Wealth Management, an arm of America's biggest stockbroker, and Capgemini, the global consulting services firm, disdain to use such a vulgar word as "rich". Instead, they prefer to count "high net worth individuals", by which they mean people with more than $1m (£615,000) of "investable assets" – that is, excluding the value of their home.
Whatever you call them, there were 491,000 of these millionaires in Britain the last time Merrill counted them but only 362,000 this year. China also felt the credit crunch – but less so – with its headcount of millionaires falling from 413,000 to 364,000.
It would be wrong to make too much of such a marginal difference, although it does dislodge Britain from its long established place as the fourth richest country in the world on the Merrill Lynch measure. America, Japan and Germany still account for 54pc of all millionaires but how long will it be before China overtakes those in third and second positions?
This largely overlooked report may remind unit and investment trust investors who are keen to gain exposure to economies that are growing rather than shrinking that the sun sets in the west but rises in the east.
http://www.telegraph.co.uk/finance/personalfinance/comment/iancowie/5682336/Comment-How-the-rich-are-different---and-becoming-more-so.html
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