A falling market provides Buffett with the best opportunities

Sunday, 25 October 2009

Warren Buffett: Crisis, what crisis?

Warren Buffet explains his deal with Goldman Sachs
By Charles Miller
Money Programme


The world's greatest investor is weathering the financial crisis by practising what he preaches.

One of Warren Buffett's favourite sayings about the market is: "be greedy when others are fearful and fearful when others are greedy".

When the market was fearful last September, Mr Buffett was greedy, putting $5bn (£3bn) into the investment bank Goldman Sachs on exceptionally favourable terms.

He says he was only able to negotiate the deal because not many people had $5bn to hand at that particular moment.

But there is no doubt Mr Buffett's public show of confidence in the company was, in itself, a valuable asset to Goldman.

Mind-boggling returns

The deal already looks like a good one for Mr Buffett, with potential profits for him in the billions.

He has always enjoyed himself in a falling market, which, as he sees it, provides him with the best opportunities.

As if to prove his fabled status as the most successful investor ever, Mr Buffett prints his fund's spectacular growth record, all the way back to 1965, in the annual report of his company, Berkshire Hathaway.

It shows he has achieved an extraordinary 20.3% average annual growth in the company's value, which - he helpfully works out - comes to a mind-boggling 336,000% over the years - 84 times that of the standard US index fund, the S&P 500.

The numbers really are off the scale.

Using Decision trees to see how probability and impact relate to each other

We can use the simple example of a dice game.  In this game, you bet $1 on the throw of a dice.  Throwing a six wins a prize; throwing any other number means you lose your $1.

In version A of this game:

A bet costs $1, but you can win $10

Faced with this game, you have two alternatives - to play or not to play.

Once playing, there is nothing you can do to affect the outcome - so your decision on whether to play has to be made on the basis of the probabilities and impacts involved. 

Because the situation is simple, the probabilities of the various possible outcomes can be objectively known.  There is no subjectivity over the probabilities.  The impacts, too, are fixed and clearly set out by the rules of the game (the prizes and the cost of playing). 

If a choice is made to play, the probability of winning is 1 in 6 (0.166 or 16.66%) and the probability of losing 5 in 6 (0.834 or 83.4%). 

If a choice is made not to play, risk is avoided (there is a single outcome that is certain) but there is also no potential benefit.


Decision tree for dice game version A:

Decision:  Play dice game with chance of winning $10?  Yes or No

NO
Decision ---->  Risky Event  ---> Possible outcomes ---->   Probability ----->  Impact

No   ----->  Nil ------>  Avoid risk, keep money in pocket ----> 1.0 (certain) ----->  Neurtral: spend ntohing, win nothing


YES
Decision ----> Risky Event ---> Possible outcomes ----> Probability -----> Impact


Yes ----->  Stake $1 on throw of dice ----> Number 6  ----> 0.166 (1 in 6) ----> Gain Spend $1 Win $10
or
Yes -----> Stake $1 on throw of dice -----> Number 1, 2, 3, 4, or 5  -----> 0.834 (5 in 6) ---->  Loss Spend $1 Win nothing


http://spreadsheets.google.com/pub?key=te9MzyHoIN6EyuoHmfDxMaw&output=html

Subjectivity and Impacts

The problem of achieving objectivity applies just as much to assessing impacts as it does to gauging probabilities.  It can be difficult to establish a basis for comparison, praticularly in the area of 'soft' impacts.  As with probabilities, the key is to express impacts numerically.  The commonest way to do this is in financial terms.

'Hard' impacts often lend themselves to quantification and comparison, making it relatively easy to express them financially.  For example, an interruption to the operation of a production line resulting from a power cut or a fire could be translated into likely impact on revenues or profits.

'Soft' impacts are much more difficult to quantify, but they can still be hugely significant for the business.  For example, falling revenues may result in disillusionment within the business - a negative cultural impact.  This may result in talented individuals leaving the business, which could lead to a self-perpetuating cycle of decline (a strategic risk).  Quantifying impacts financially helps to express the significance of 'soft' impacts in terms that everyone can understand, putting them on the same basis of credibility as 'hard' impacts.

As with probabilities, complexity also adds to subjectivity:

• range of impacts:  impacts can affect many different areas of the business, making it hard to gauge the total impact.
• interdependence:  one impact may result in another impact in a different area of the business
• lack of precedent:  the situation may be unprecedented, or the precedent may be far in the past, making it difficult to assess the likely impact today.

Understanding IMPACT of a decision

Probability is the likelihood that a particular outcome will occur.

Impact is the effect that a particular outcome will have if it does occur.

Impacts can be positive or negative.  We call positive impacts 'upsides' and negaive impacts 'downsides'.  A single decision may involve the potential for both upsides and downsides.

Considering impact helps us

• weigh up different possible outcomes against each other,
• to assess how bad they will be for the business (if they are downsides), or
• how much benefit they will realise (if they are upsides).

We can think of impacts as 'hard' and 'soft'. 

'Hard' impacts affect areas of the business such as:

• financial:  losing or making money; changing profit margins; changes in share price
• performance:  changes in turnover; changes in business volumes; problems with quality, or improvements; losing or gaining customers; growing the business or seeing it decline
• business continuity:  whether business operations can continue when problems arise; whether new demands, or peaks in demand, can be met; the availability of business-critical systems
• individuals and groups:  physical safety; financial status and reward; working conditions; workload; level of responsibility; status and authority; prospect for the future.

'Soft' impacts affect areas of the business including:

• reputation and brand equity:  how the business, its products or services and its actions in society are perceived in the wider world
• morale and motivation:  how people feel about working for the business
• faith in management:  whether people believe in mangement's abilities and vision for the future
• sense of community:  whether people identify with the business and its aims and fell part of the business's culture
• social standing:  people's sense of value or relevance to the business; their sense of authority or power.

Subjective Probabilities are an unavoidable part of decision making

Subjective probabilities are an unavoidable part of business decision making. 

You often have to make an opinion on strategic issues facing your business.  For example, you may be setting the five-year plan for your business.  You would have to assess all the factors which could have a big impact of the industry in which you operate in.

The situation is very complex. Your partners have different views and may not reach agreement.  On top of that, other industry leaders are making their views and this may have an impact. 

All these complexity doesn't prevent you and your partner from forming a view - maybe nothing more than an instinct or a hunch - as to what is going to happen.  Perhaps, you both agree that it is "quite likely" that a certain factor will impact the industry in the next two years.  Since this is of strategic significance to the business, you will need to accomodate this in the planning.

As you and your partner put your thoughts down on paper, what exactly does "quite likely" mean?  You may think it means "almost certain", while your partner considers it means "fifty-fifty".  In other words, you think "quite likely" equals a probability of (say) around 95%, while your partner assumes it denotes a probability of around 50%.

How can these two views be brought closer together.  Perhaps, they could use a probability that is objectively knowable - such as the throw of a dice - for comparison.  Do you think that such and such a factor is more or less likely to occur than throwing a six?  If less, the probability is lower than 1 in 6 (0.166).  If more, the probability is higher.  By discussing the issue in these terms, you and your partner can move closer to a picture of probability that you both share - and one that you can communicate with some degree of confidence.  You can both use this information to help pin down this probability - combined with your own opinions, experience and intuition. 

Let's assume you and your partner agree on a probability of 75% that a certain factor will impact on the business within the next two years.  It is important to note that just because two people have agreed a figure, the probability hasn't become any less subjective.  Using numbers adds clarity and precision but does not necessary indicate accuracy.  In your written report, you and your partner will need to explain the facts and reasoning behind your probability calculations, and stress the fact that the probability remains subjective even though it has been expressed numerically.  (You might use a range, such as '70-80%')

Some decision makers may regard this as pointless - how can that help you make a decision?  If you can't know probability objectively, why waste time trying to quantify it?  The answer is that it doesn't help you make the decision, but it does focus attention on the objective basis (if any) for assessments of probability.  It forces you to bring your information, reasoning and judgements into the open, so that others can see them. 

In the above example, you and your partner are forced to reach a shared understanding of probability so that you can communicate it and also, to others in your report.  While this doesn't necessarily makes it easier for you to make strategic decisions, it does mean that whatever decsion you take will be based on the facts that are available - or draw attention to the need for more facts.  Expressing probability numerically is also likely to focus everyone's minds on the urgency of the issue, rather than letting them adopt whatever interpretation of "quite likely" suits their own values and priorities.

Another benefit is the potential for sensitivity analysis:  to assess how the impact of a particular risk changes with respect to changes in probability of a particular factor.  Bigger changes mean higher sensitivity.

To measure risk we have to use probability

To manage risk, we have to be able to measure it, and to measure risk we have to use probability.  Probability is the quantitative language of risk and uncertainty.

The probability of an outcome is a number expressing the likelihood of it actually happening.  It can be a number between 0 and 1, where 0 indicates an impossible outcome and 1 a certain one, or it can be expressed as a percentage (a number between 0 and 100).

In some situations, probability is objective and factual.  For example, the probability of calling the toss of a coin correctly is 0.5 or 50%.  However, tossing a coin is a very simple event.  It is easy to use past experience and real-world knowledge to assess the probability of a 'heads' or 'tails' outcome. 

As situations become more complex, it becomes progressively more difficult to be objective about probabilities; they become more subjective.  Business situations are extremely complex, and therefore the probabilities involved are highly subjective. 

Because the decisions we make in business are so important, it is vital to try and pin down the probabilities involved, even though it may be impossible to achieve complete objectivity.  The more precision we can bring to the situation, the firmer the foundation on which we make a decision.  To move towards precision, we need to look at subjective probabilities.

Premature fiscal exit would hurt Malaysia, says World Bank

Wednesday November 18 2009.Related Articles

Premature fiscal exit would hurt Malaysia, says World Bank
KUALA LUMPUR, Nov 18 — The World Bank warned today that Malaysia should not exit its fiscal pump priming as it could choke off the country's economic recovery.

However, the bank also cautioned that extending fiscal support for too long "may hamper the credibility of medium-term fiscal consolidation, reduce room for future stimulus, increase the risk of asset price bubbles and constrain the private sector once demand picks up," the World Bank said in a country report on Malaysia.

Malaysia is expected to rack up a budget deficit of 7.4 per cent of gross domestic product this year, its biggest in over 20 years, in part due to two fiscal stimulus packages worth a total of RM67 billion.

The extra spending was aimed at offsetting a slump in global demand that has hit Asia's third-most export dependent economy hard.

The government expects the Southeast Asian country's economy to shrink 3 per cent this year and to grow by 3 per cent next year, although the World Bank was more optimistic.

"With East Asia leading the recovery and advanced economies showing progressive improvement, the Malaysian economy is projected to grow at 4.1 per cent in 2010, following a contraction of 2.3 per cent in 2009," the World Bank said. — Reuters

Malaysian economy at the cross-road

The Malaysian Insider
Wednesday November 18 2009.

Malaysia has lost edge as low-cost producer, says World Bank

KUALA LUMPUR, Nov 18 — Malaysia risks missing its goal of becoming a high-income nation as it has lost its edge as a low-cost producer and lacks the investment to compete in more advanced industries, the World Bank warned today.

In its first country report on Malaysia, the Washington-based body also said that as a trade-dependent country, Malaysia should not unwind its RM67 billion in economic stimulus as that could choke off a nascent recovery.

“The economy seems to be caught in a middle-income trap - unable to remain competitive as a high-volume, low-cost producer, yet unable to move up the value chain and achieve rapid growth by breaking into fast growing markets for knowledge and innovation-based products and services,” it said.

Private investment in Malaysia, which famously spurned advice and cash from the International Monetary Fund in 1998, is below that of virtually every other Asian country and has fallen dramatically since the Asian financial crisis.

According to World Bank data, private investment in Malaysia fell to 12 per cent of gross domestic product in 2008 compared with 30 per cent prior to the Asian crisis.
 The government that has ruled this country for 52 years has announced a series of economic reforms aimed at winning back foreign investment that increasingly finds a home in neighbouring Thailand and Indonesia.

However, portfolio and direct investment flows have been negative since the second quarter of 2008 and there have been few signs that investment has picked up in response to the government measures.
 The World Bank noted that while Malaysia has a high proportion of high tech exports it served as a low-skilled assembler of imported parts “rather than a creator of technological and product innovations”.

One major limitation on moving up the economic value chain is Malaysia’s education system, which churns out tens of thousands of graduates who are ill-equipped for the kind of high-value work such as biotechnology that the government has identified as growth areas.
 Education in Malaysia has become mired in a deep political row as the government recently switched to Malay language instruction for math and science from English, a move critics said was designed to appease its ethnic Malay voter base.

While private investment has plummeted, the government’s spending has risen sharply. Malaysia expects to rack up its biggest budget deficit in 20 years at 7.4 per cent of gross domestic product this year.

The government expects the economy to shrink 3 per cent this year and to grow by 3 per cent next year, although the World Bank was more optimistic.

“With East Asia leading the recovery and advanced economies showing progressive improvement, the Malaysian economy is projected to grow at 4.1 per cent in 2010, following a contraction of 2.3 per cent in 2009,” it said.

The bank was, however, less optimistic on the government’s plans to slash the budget deficit in 2010 to 5.6 per cent of GDP, forecasting that it would be 6.4 per cent of GDP. - Reuters

Are you an Intelligent Investor?

Do you know how to minimize the odds of suffering irreversible losses?
Do you know how to maximize the odds of achieving sustainable gains?
Do you know how to control self-defeating behaviour that keeps most from reaching their full potential in investing?
Do you know that intelligent investing does not refer to IQ but rather to being patient, disciplined and eager to learn, and able to harness your emotions and think for yourself?
Do you know that high IQ and higher education are not enought to make an investor intelligent?
Do you know that being an intelligent investor is more a matter of 'character' than 'brain'?
Do you know the investment techniques, the adoption and execution of an investment policy suitable for laymen (yourself)?
Do you know the investment principles and investors' attitudes maybe of greater importance in investing than the technique of analyzing securities?
Do you know that there is limited usefulness in reading a book on 'how to make a million', as there are no sure and easy paths to riches on the stock market here and anywhere else?
Do you know of any single person who has consistently or lastingly made money by 'following (timing) the market'?
Do you know how to guide yourself from the areas of possible substantial error and to develop policies with which you will be comfortable?
Do you know the investor's chief problem -- and even his worst enemy -- is likely to be himself?
Do you know the importance of psychology of investors and the field of behavioural finance in guiding investing?
Do you know how to measure or quantify value of business or stock?
Do you know having the habit of relating what is paid to what is being offered is an invaluable trait in investment?
Do you know that for 99 issues out of 100, you could say that at some price they are cheap enough to buy and at other price they would be so dear that they should be sold?
Do you know that the art of investment has one characteristic that is not generally appreciated; that a creditable, if unspectacular, result can be achieved by the lay investor with a minimum of effort and capability?
Do you know that to improve on this above easily attainable standard requires much application and more than a trace of wisdom?
Do you know that if you merely try to bring just a little extra knowledge and cleverness to bear upon your investment program, instead of realizing a little better than normal results, you may well find that you have done worse?

Read:  The Intelligent Investor by Benjamin Graham

Kuala Lumpur one of the worst-performing markets, in relative terms

Question marks make investors shy away from KL market
Tags: Andrew F Freris | Annual bond conference | economic recovery | Expensive valuations | FBM KLCI | Fiscal spending packages | GDP | Iskandar Malaysia | Local equity market | monetary policy | Mutted earnings revisions | RAM Holdings Bhd | stimulus packages

Written by Ellina Badri
Monday, 16 November 2009 11:36

KUALA LUMPUR: Expensive valuations, muted earnings revisions and uncertainty on the private sector’s role in driving the economy have made the local equity market unattractive relative to other regional markets, BNP Paribas Private Bank Hong Kong senior investment strategist for Asia, Andrew F Freris said.

“There is a mixture of good and some areas where investors may still have a question mark. By no means, I am not unhappy by what I’ve seen but in terms of relatives, that’s actually why some investors might prefer other markets.

“These are the reasons that have made Kuala Lumpur one of the worst-performing markets, in relative terms, because it has gone up less than other Asian markets,” Freris told The Edge Financial Daily on the sidelines of RAM Holdings Bhd’s annual bond conference here last week.

The FBM KLCI has gained 44.96% from the start of the year up to last Friday’s close. Singapore’s Straits Times Index has risen 54.82%, Hong Kong’s Hang Seng Index has gained 56.76%, and China’s Shanghai and Shenzhen indices have risen 75.07% and 108.31%, respectively. The Jakarta Composite Index has surged 79.05%.

Nonetheless, Freris said due to the government’s two stimulus packages and the liberalisation of the financial system and capital markets, things here were changing rather quickly.

He also highlighted the government’s initiatives in Iskandar Malaysia, Johor, saying the progress and effects of that project were “major”.

“Malaysia has got a strong , structurally supportive fiscal environment and monetary policy that stay cautious, but I imagine the reason the market is not performing much more strongly is the question mark about how long the government will continue to lead and when the private sector will start taking over,” he added.

Freris


On the outlook of the Malaysian market and economy, he said the FBM KLCI could continue rising until the market saw two consecutive quarters of gross domestic product (GDP) growth, which would then impact earnings and in turn signal an interest rate hike.

He said sectors likely to benefit from the economic recovery included CONSTRUCTION [] and infrastructure, mainly due to the initiatives set out in the government’s RM67 billion fiscal spending packages.

Monetary policy here was likely to remain supportive of growth and the overnight policy rate would not be raised “anytime soon”, he said.

“Second quarter GDP was also better than the first, and we reckon 3Q09 will be pretty supportive,” he added.

Meanwhile, on the performance of global stock markets going forward, he said BNP Paribas was still very cautious, adding while there still may be room for markets to make gains, the G3 markets, especially the American market, remained very “jumpy”.

Hence, the bank also remained cautious about the Asian markets, although it was positive on China and South Korea, he said.

“As a whole, we’re very cautious and conservative. We’re quite boring, really. We’re not telling our clients to dive into equities, but neither are we telling them to stay away,” he said.

He also said the bank was neutral on India, adding the Singapore, Malaysia and Hong Kong markets were not included in its investment universe.

“Equity investment is fairly globalised, equity allocation takes place across and within markets, so it is no surprise if the S&P 500 index in the US goes up, the KL market will also go up.

“As long as there is quite a degree of jumpiness in the US market, because of the uncertainty of the extent and sustainability of a recovery, that will be reflected back in KL,” he added.


This article appeared in The Edge Financial Daily, November 16, 2009.

United Plantations 3Q net profit up 3%

United Plantations 3Q net profit up 3%
Tags: United Plantations

Written by Chong Jin Hun
Monday, 16 November 2009 18:14

KUALA LUMPUR: United PLANTATION []s Bhd's net profit rose 2.7% to RM92.37 million in the third quarter (3Q) ended Sept 2009, from RM89.95 million a year earlier, although revenue fell as palm oil production declined amid less demand and lower prices for the commodity.

In a statement to Bursa Malaysia today, the company said it also registered lower profit margins for its refinery operations, and RM10.2 milllion worth of provisions for impairment. United Plantations 3Q revenue dropped 25.6% to RM223.71 million from RM300.77 million.

Cumulative nine-month net profit fell 10.5 % to RM213.18 million from RM238.31 million while revenue was down 20 % to RM618.8 million from RM773.83 million.

Looking ahead, United Plantations said its palm oil output was expected to be lower this year compared with last year's record production. As such, its financial performance for the current financial year ending Dec 31, is anticipated to be lower compared to the year before.

The company is proposing an interim dividend of 20% per share less 25% tax or 15 sen net per share for the year ending Dec 31.

Largest prime property owner in KLCC

Largest prime property owner in KLCC
Tags: Brokers Call | HLG Research | KLCC Property Bhd

Written by Financial Daily
Monday, 16 November 2009 11:09

KLCC Property Bhd
(Nov 13, RM3.29)
Hold at RM3.39: We recently visited KLCC Property (KLCCP) and initiate coverage with a hold as its share price is in line with our RNAV-derived (revised net asset value) price target of RM3.16. Earnings catalyst will come from Lot C and Lot D1 developments, but these will be long-dated, and earnings from the hotel segment are expected to be flat until 2013.

We like KLCCP for its earnings stability and visibility. While geographical concentration is high with 88% of net lettable area (NLA) situated within the KLCC area, rental income base is diversified. Over the last three years, KLCCP’s investment PROPERTIES [] have on average enjoyed capital appreciation of 22% per year, which in turn translates to scope for rental revisions. KLCCP also has a 75% stake in 5-star hotel Mandarin Oriental KL.

KLCCP’s prime assets provide a strong tenants base; blue-chip tenants include Petroliam Nasional Bhd (Petronas), ExxonMobil, Tanjong City Centre Property Management Sdn Bhd, Parkson, Isetan and Cold Storage. These quality tenants are expected to be prompt in payments and maintain a long-term presence in their current locations, while rental revision agreements will ensure sustained growth in rental income.

KLCCP’s investment properties have varying rental rates, with the iconic Petronas Twin Towers fetching the highest rental rates for office space (fixed at RM9.50 psf under the head lease agreement with Petronas). Rental revisions typically occur every three years, allowing sustainable income growth over the long term.

Crucially, KLCCP has been able to secure long-dated lease agreements with key tenants such as Petronas (15 years), Isetan (24 years), ExxonMobil (12 years) and Tanjong Group (15 years). Also, Menara ExxonMobil’s rental rate was previously below the market rate at RM5.25psf but has now been revised to RM7.45psf.

KLCCP enjoys not only stability of rental income, but also upside from capital appreciation of its properties. With more than 100 acres of land and 5.8 million sq ft of NLA in the super-prime KLCC area, KLCCP is well-poised to benefit from rising commercial property valuations and rentals in the heart of KL.

RCULS (redeemable convertible unsecured loan stock), however, is a complicated issue for the company and minority shareholders. KLCCP has issued RM714 million of RCULS to KLCCH, which if converted could lead to a heavy 38% earnings per share dilution. The conversion would also likely trigger a general offer which it wishes to avoid. Full conversion is mandatory on the 10th anniversary in 2014/2015. However, the RCULS provides cheap source of financing for KLCCP (1% interest per annum). Management has until 2014 to come up with a solution that balances the interests of the various parties involved. — HLG Research, Nov 13


This article appeared in The Edge Financial Daily, November 16, 2009.

A steadier ride for UMW in 3Q

A steadier ride for UMW in 3Q
Tags: Brokers Call | UMW Holdings (M) Bhd | UOB Kay Hian research

Written by Financial Daily
Tuesday, 17 November 2009 11:02

UMW Holdings (M) Bhd
(Nov 16, RM6.32)
Hold at RM6.30: We expect UMW to post sequentially stronger 3Q09 results, with core pre-tax profit rising by over 10% quarter-on-quarter (q-o-q), lifted by the gradual recovery of auto sales volumes.

We expect to see continued improvement in the overall total industry volume (TIV) as consumer sentiment and spending gradually recover after the steep contractions experienced in Jan-Apr 2009.

Toyota’s unit sales rose 8.9% q-o-q in 3Q09 to just over 22,000 units with a recovery in sales of the Vios and Altis models (although Toyota’s overall 3Q09 sales were still down 15.5% year-on-year).

Year to date, sales are down 24.8% y-o-y after an exceptionally strong 2008.

UMW’s 38%-owned associate Perodua’s upcoming entry into the multi-purpose vehicle (MPV) segment on Nov 23 should mildly lift its contributions to UMW’s bottom line. Perodua commands a 31% market share of the overall auto industry and accounted for just under 5% of UMW’s pre-tax profit in 2008.

Priced at RM56,000 to RM64,000 for a 1.5-litre engine, the MPV marks Perodua’s entry into the fast-growing segment, which already accounts for almost 12% of TIV, year to date.

Perodua’s entry into the MPV segment will also mitigate market share losses experienced by Toyota’s models in the segment following the launch of Proton’s Exora in April 2009.

We expect 22%-owned associate WSP Holdings Ltd to also post a better 2H09 as improving prospects of the oil equipment industry in China should mitigate any weakness in the North American OCTG (oil country tubular goods) market.

2010 should be a recovery year with group earnings to recover by 34%, driven particularly by the auto and oil and gas (O&G) division, with the latter’s growth driven by sales and margin recovery at WSP, full impact contribution from 34%-owned Zhongyou BSS (China).

The positive impact of the US dollar’s weakness against the ringgit will begin filtering through to UMW’s bottom line starting 4Q09.

To recap, we estimate that every 1% depreciation of the US dollar theoretically raises net income by 2% (taking into consideration savings from dollar-denominated costs at UMW-Toyota, translation gains from US dollar debt, offset by some dollar-denominated earnings from the O&G division and associate companies).

However, associate Perodua will be hurt by the strengthening yen (which is up around 10% versus the ringgit since this year’s lows). We estimate that every 1% rise in the yen rate would cause a 0.7% decline in UMW’s earnings.

While we are optimistic about the group’s prospects across all divisions, we do not see much near-term upside to valuation, which is already at 14 times 2010F price earnings (PE). This is at par with the peak valuations reached in 2007 when oil prices were at record highs.

We maintain hold and sum-of-the-parts valuation of RM6.56. A good entry price would be at the RM6 level. Meanwhile, the potential listing of the O&G division, which may materialise only in 2H10, is neutral to the stock unless crude oil prices spike significantly higher. — UOB Kay Hian Research, Nov 16


This article appeared in The Edge Financial Daily, November 17, 2009.

Eleven Surprising Stock Market Indicators

http://www.cnbc.com/id/29257460

Stocks Pickers Vs Index Funds: The Debate Rages On

Stocks Pickers Vs Index Funds: The Debate Rages On

Published: Wednesday, 28 Oct 2009 | 11:19 AM ET Text Size
By: Chris Taylor,
Special to CNBC.com

In the investing world, the rivalry is akin to the Capulets and the Montagues. In one corner, active stockpickers and their belief in talented fund managers who can outperform the market; in the other, passive investors who prefer less-risky portfolios of low-cost broad market indices.

It’s a question that will be debated forever on trading-room floors and investor chat rooms, but what investors want to know: Who has the best approach for right now, after a quick post-collapse runup that has the Dow Jones Industrial Average breaking the magical 10,000 level?

The answer might be different than you expect. Conventional wisdom holds that active management performs best in a declining market, when stockpickers can sidestep the dogs like a Lehman Brothers or an AIG [AIG 35.75 -0.64 (-1.76%) ]. But here’s a secret: It’s a total myth.

“Everyone believes that active investors do well in bad markets,” says Srikant Dash, global head of research and design for S&P Index Services. “But when we looked at the bad markets of 2002 and 2008, we showed conclusively that it’s not true.”

What Dash found in his SPIVA scorecard that compares active and passive investing: Then—and over any five-year time horizon you’d care to mention—about two-thirds of fund managers underperform the stock market. In other words, over the long term, plain-vanilla index funds clobber many of the best minds in the business.

Complete Stock Market Coverage
For right now, though, there’s some evidence that active investors could be coming into their moment. After all, the Dow was up an eye-popping 15 percent last quarter, as investors regained their confidence and money rushed back in from the sidelines. That’s the Dow’s best performance since 1998, rebounding smartly from a low of around 6,500.

If one assumes that such a rapid ascent won’t be replicated in the near-term, and that we can expect a relatively flat, range-bound market in coming months, then broad indices won’t be going anywhere. Active managers, on the other hand, could thrive with their more judicious stockpicking.



Just ask George Athanassakos. The chair of the Ben Graham Centre for Value Investing in London, Ontario, Athanassakos ran a study comparing a stockpicking approach to the performance of market indexes. He discovered that in straight bull markets, when a rising tide lifted all boats, his value-oriented stock selections were almost exactly aligned with the broader market.


But in flat or zig-zag markets, his active style destroyed the indices, beating them by almost 50 percent. If that’s the kind of market we’re entering, then active investors should take heart.

“When the market goes up, then everyone is doing well,” says Athanassakos, a finance professor and author of the book "Equity Valuation." “It’s hard to buy low and sell high when there’s a straight line up. So active management becomes especially important when the market moves within a band.”

Moreover, it’s usually in the aftermath of a big market move, like the one we’ve just experienced, that you discover a few glaring market inefficiencies.

“When prices have all moved in one direction, there’s more opportunity for mispricing to emerge,” says Josh Peters, an equities analyst with Chicago-based research firm Morningstar.

And a continued bull run looks unlikely, Peters suggests, since underlying fundamentals like corporate revenues and abysmal employment figures mean the economy’s not out of the woods yet.

If that’s the case—that the general market takes a breather, and some relative values begin to stick out—then where should stockpickers place their bets? Active investors would do well to focus on yields, Peters advises.

After all, if stock prices remain range-bound, then it’s dividend payouts that will largely be determining your returns. High-yielding, blue-chip firms tend to be resilient, without a huge downside, because investors are attracted to the stability and income they provide.

Sector Watch Performance
They’ve also been lagging the broader market recently, as the hottest stars have been previously left-for-dead firms like MGM. That discrepancy makes for some juicy values. Some of Peters’ picks: Johnson & Johnson [JNJ 62.19 0.76 (+1.24%) ], Abbott Labs [ABT 53.63 0.68 (+1.28%) ], and Altria [MO 19.34 0.08 (+0.42%) ], all overlooked giants that continue to throw off cash.

“They’re not trading at unreasonable valuations, those stocks don’t need a quick V-shaped recovery,' he says. "And you don’t need a whole lot to go right for those investments to work.”

© 2009 CNBC.com

http://www.cnbc.com/id/33289460